Split (1)

train · 534k rows

url stringlengths 53 59	text stringlengths 0 917k	downloaded_timestamp stringclasses 1 value	created_timestamp stringlengths 10 10
https://www.courtlistener.com/api/rest/v3/opinions/4625682/	Mark Kleeden v. Commissioner.Kleeden v. CommissionerDocket No. 1715.United States Tax Court1944 Tax Ct. Memo LEXIS 70; 3 T.C.M. (CCH) 1122; T.C.M. (RIA) 44345; October 25, 194470 A. E. Hill, Esq., 534 Commerce Exchange Bldg., Oklahoma City, Okla., for the petitioner. E. G. Sievers, Esq., for the respondent. TURNER Memorandum Findings of Fact and Opinion TURNER, Judge: Respondent has determined an income tax deficiency against petitioner in the amount of $1,668.25 for the taxable year 1939. The question presented is whether petitioner realized taxable income in the amount of $10,000 when his obligation on certain personal notes in the aggregate face amount of $15,000, plus interest, was discharged, pursuant to an agreement under which certain suits that had been instituted against him were settled and dismissed with prejudice upon the payment by a corporation of which petitioner was president and the largest single shareholder of $2,500 in cash and the execution of its own corporate notes, endorsed by petitioner, in the aggregate face amount of $7,500. Findings of Fact Petitioner is a resident of Oklahoma City, Oklahoma, and is president and general manager of the Black Gold Petroleum Company, an Arizona corporation doing business in Oklahoma. He made his income tax return for 1939 on the cash basis and filed it with the Collector of Internal Revenue for71 the District of Oklahoma. In 1929 he lived in Texas and was in the oil business. On June 10, 1929, he executed his note for $11,000 in favor of D. Oberholz, payable within 90 days and bearing interest at the rate of 8 percent per annum after maturity until paid. As security for payment of the note, petitioner gave Oberholtz a chattel mortgage on certain property. The mortgage was dated June 6, 1929, signed June 10, 1929, and filed July 16, 1930, in the chattel mortgage records, Jasper County, Texas. Included in the mortgaged property were certain oil well equipment, 5,000 barrels of oil in storage and all additional oil produced from a certain lease. It was provided that the oil in storage and the oil to be produced could be sold provided the checks for payment thereof were made jointly tooberholz and petitioner until the $11,000 was paid. On June 15, 1929, petitioner executed and delivered another note to D. Oberholz in the amount of $4,000 payable within one year bearing interest at the rate of 10 percent per annum from date until paid. Shortly thereafter, in 1929, petitioner moved to Oklahoma. On or about June 1, 1931, Oberholz died. On July 12, 1933, Peter Bos, administrator72 of the estate of Oberholz, deceased, filed a suit in the District County Court, State of Oklahoma, No. 81,051, against petitioner and others, including the Black Gold Petroleum Company to collect the $11,000 note and the interest thereon. On July 17, 1933, an amended petition was filed. It was alleged first that no part of the principal or interest had been paid. It was further alleged that the oil and other property covered by the chattel mortgage had been disposed of in violation of the terms of the mortgage, that the money borrowed from Oberholz and the proceeds received by petitioner from the sale of the mortgaged property went into the business of petitioner and an associate, that the relation between petitioner and his associate were concealed from Oberholz, that they conspired to defraud Oberholz of his money, that the Black Gold Petroleum Company eventually had received a portion of the original consideration for the note or some of the property pledged as collateral for payment thereof, and that the company was liable to the holders of the note because of a resulting trust. Petitioner and the other defendants filed separate answers on August 29, 1938. Petitioner admitted 73 executing the note for $11,000 but alleged that a usurious rate of interest had been charged. He specifically denied the allegations with respect to the property covered by the mortgage and the claims as to the use of the borrowed money. The other defendants in their answer also specifically denied the allegations. On June 14, 1934, the administrator of the Oberholz estate also filed a suit, No. 83,992, against petitioner to enforce collection of the $4,000 note, plus interest, alleging that no part of the principal or interest had been paid. Petitioner filed his answer July 31, 1934, in which he admitted executing the note but alleged that a usurious rate of interest had been charged. In 1939 the heirs of the Oberholz estate and their attorneys went to Oklahoma City in the interest of the suits that had been filed. Henry Oberholz and Johanna Oberholz Roberts, the heirs, were substituted as plaintiffs in the suits. M. W. McKenzie, attorney for Black Gold Petroleum Company, after talking with the attorneys for the heirs and getting all the facts he could from petitioner and the secretary of the company, held a conference with the attorneys looking to a settlement. He thought that if74 it could be proved that the borrowed money and the proceeds from the mortgaged property could be traced into the properties of the company, a lien might be obtained upon an operating oil well of the company. On October 13, 1939, he submitted a proposal of settlement to the heirs and their attorneys. The proposal provided that the Black Gold Petroleum Company would pay to the heirs the total sum of $10,000, $2,500 in cash and three separate promissory notes executed by the company in the sum of $2,500 of even date of the letter, each bearing interest at 6 percent per annum and payable in one, two and three years after date, respectively. In return the heirs would sign a dismissal with prejudice of the two suits filed in Oklahoma and of another suit on the two notes which had been filed in Texas against petitioner. It further provided that the proposal be submitted to the board of directors at a special meeting and that petitioner and secretary of the company would endeavor to have it approved by the board. An escrow arrangement was provided for and it was understood that if the settlement was consummated the petitioner would personally endorse and guarantee the payment of each of 75 the notes. Petitioner was also to pay the costs in each of the Oklahoma suits while the heirs were to pay the costs of the action filed in Texas. At the foot of the proposal appear the signatures of acceptances of the heirs and their attorneys and of petitioner. On October 20. 1939, a Waiver of Notice and Call of a Special Meeting of the Board of Directors of Black Gold Petroleum Company for the purpose of considering the proposed settlement was signed by the five directors of the company, and on October 26, 1939, the five directors held a special meeting in Oklahoma City, Oklahoma, considered and adopted the proposal and authorized the president to carry out the provisions of the agreement. Because of the absence of McKenzie from the city, there was a delay in carrying out the terms of the agreement. The Black Gold Petroleum Company made the $2,500 cash payment to the parties on December 12, 1939, in two checks, one of $500 and the other of $2,000, and on the same date delivered to them its three corporate notes of $2,500 each, dated October 26, 1939, payable one, two and three years from date, and endorsed by petitioner as an individual, in accordance with the terms of the agreement. 76 The suits in Oklahoma and Texas were dismissed with prejudice. Payments were made by the corporation on the first note as follows: November 18, 1940$1,250.00January 20, 1941625.00March 20, 1941625.00 On February 19, 1941, a payment of $500 was made which was applied on the second note as follows: Interest to October 26, 1941$ 300.00Interest to February 19, 1942,at 10 percent on $2,80087.89Applied on the principal112.11Balance of principal due$2,387.89In 1943 the heirs and their attorneys brought suit against the company and petitioner to enforce payment of the balance, plus interest due, on the second and third corporate notes. Petitioner negotiated with the parties and the suit was settled by a cash payment of $2,500 which payment was made by the Black Gold Petroleum Company. The Black Gold Petroleum Company, in 1939, had 1,087,494 1/2 shares of capital stock, $1 par value, outstanding. Petitioner owned the largest block of stock, 179,326 1//2 shares. The other four directors owned stock as follows: James K. Gaylord1,597 1/4 sharesW. C. Noll5,010 sharesC. E. Beck6,665 1/4 sharesMilo R. Meredith16,255 3/4 shares During 193977 there were about 2,200 stockholders scattered throughout the United States. Petitioner became president of the company in 1936 and was its active manager. After the company had made the settlement, it set up on its books a notes payable account, showing a liability of $10,000. It charged the account with the cash payment of $2,500 and the other payments as they were made on the notes. In 1939 the company also charged the $10,000 to its profit and loss account and treated the amount as an expense in its income tax return for that year. However, the amount was disallowed as such by the Bureau of Internal Revenue. No entry was set up on the books charging petitioner with any part of the liability with respect to the settlement. The following is a summary of the assets and liabilities of the Black Gold Petroleum Company for the year 1939: BLACK GOLD PETROLEUM COMPANY OKLAHOMA CITY, OKLAHOMA Comparative Balance Sheets AssetsDec. 31, 1938Dec. 31, 1939Accounts Receivable$ 50,073.10$ 95,244.71Oil Leases610,593.48448,506.95Machinery & Equipment523,954.06283,313.43Stocking Subsidiaries54,500.0054,500.00Notes Receivable36,306.6536,306.65Bank and Cash3,176.99284.49Deferred Expenses3,617.60180.82Warehouse50,508.0328,781.02Special Deposits2,202.79760.24Undeveloped Leaseholds36,218.1540,235.67Total Assets$1,371,150.85$988,113.98LiabilitiesNotes Payable$ 247,739.75$118,338.45Accounts Payable19,136.4327,129.95Surplus272,129.79110,455.03Reserve for Depletion337,167.27323,498.63Reserve for Depreciation244,689.92166,009.85Capital Stock237,354.37233,666.89Federal Taxes1,489.151,515.18Reserve Disputed Taxes11,444.17Deferred Settlement7,500.00Total Liabilities$1,371,150.85$988,113.9878 Respondent, in his determination of deficiency, added as taxable income to petitioner the $10,000 paid and to be paid by Black Gold Petroleum Company in settlement of the above suits brought by the Oberholz estate on the promissory notes of petitioner. Opinion The question here is whether the petitioner realized income in 1939 in the amount of $10,000, which amount represented the payments made and to be made by Black Gold Petroleum Company, and accepted by the Oberholz estate as full satisfaction of the estate's claim against the petitioner on his two promissory notes, in the principal amounts of $11,000 and $4,000. The respondent has made no determination or claim with respect to the remaining $5,000 of principal of the two notes and that amount is not here involved. Of the $10,000 in question, $2,500 was paid in cash by Black Gold Petroleum Company in 1939, the taxable year, while the remainder, evidenced by notes, was to be paid at the rate of $2,500 in each of the three succeeding years. As a condition to the settlement, however, the Oberholz estate specified that the petitioner must personally endorse the notes evidencing the $7,500 yet to be paid. It thus appears that 79 without payment or cost to him petitioner was relieved of any obligation on his part to repay $7,500 of the $15,000 which he had previously borrowed from Oberholz, the $5,000 not here in issue being canceled by the estate as a part of the settlement and $2,500 being paid in cash by the Black Gold Petroleum Company. The facts further show that the petitioner was president and the largest single stockholder of the Black Gold Petroleum Company, and there is no showing or claim that he was to be indebted to that company by reason of the said $2,500 payment. Further, there is no contention or showing that the Black Gold Petroleum Company did not have earnings from which a distribution or payment of $2,500 could be made to or for the benefit of its stockholders. We accordingly conclude and hold that by reason of the $2,500 payment the petitioner received in 1939 taxable income in that amount, which income was in character a dividend from the Black Gold Petroleum Company. With respect to the remaining $7,500, however, there was no payment and the heirs of the Oberholz estate had made it a condition to the 1939 settlement that the petitioner remain liable as personal endorser of the notes*80 of the Black Gold Petroleum Company for that amount, which notes were not due until in later years. The petitioner was to be completely relieved from liability with respect to the $7,500 only when the notes had been paid. There was no such payment in 1939, and it may not be said therefore that the petitioner received income in respect thereto in the taxable year. , and , cited and relied on by the petitioner, are distinguishable both as to parties and facts. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625683/	C. WILDERMANN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.C. Wildermann Co. v. CommissionerDocket No. 8289.United States Board of Tax Appeals8 B.T.A. 771; 1927 BTA LEXIS 2802; October 11, 1927, Promulgated 2802 1. During the taxable years the petitioner corporation under an arrangement with a bank paid certain amounts to a trustee for the bank in liquidation of certain indebtedness of the president of the petitioner corporation to the bank. Held, that the amount paid constituted additional compensation for the services of the president and is deductible from gross income. 2. The petitioner corporation paid a pension to its retired president. Held, that the amount is legally deductible from gross income. 3. The action of the Commissioner in deducing invested capital by $40,000 for good will was in error. Walter H. Dodd, Esq., for the petitioner. W. F. Gibbs, Esq., for the respondent. SMITH 771 This is a proceeding for the redetermination of deficiencies in income and profits tax for the fiscal years ended June 30, 1920, and June 30, 1921, in the respective amounts of $2,461.96 and $2,821.39. The petitioner alleges as errors, (1) disallowance as expenses of payments to Herbert E. Benjamin as trustee pursuant to a contract with the Second National Bank of Hoboken, N.J., (2) disallowance as expense of pensions paid to a retired employee, 2803 and (3) reduction of invested capital by $40,000 for good will. At the hearing counsel for the Commissioner moved to increase the deficiency for the fiscal year ended June 30, 1920, to conform to the proof and to disallow $1,500 of the salary allowed as a deduction for Herbert E. Benjamin, since the proof showed that he was paid a salary of only $500 during the year. FINDINGS OF FACT. Petitioner is a New York corporation, organized in 1901 to take over the business of Charles Wildermann, which was established in 1883. Charles Wildermann, prior to immigrating to the United States in 1882, had been engaged in the business of buying and selling 772 church goods. In 1883 he established a similar business on Barclay Street, in New York City, and began dealing in Catholic Church supplies, religious articles, prayer books, bibles, etc. He made certain European connections and imported some of these goods. He also took orders for church vestments which were manufactured in Europe. In 1901 Charles Wildermann visited Europe, but before doing so organized the petitioner corporation to continue his business in the United States. The corporation was organized with a capital2804 stock of $100,000. The minute book of the corporation, under date of June 19, 1901, shows as follows: The Secretary then reported: That there have been issued to Mr. Charles Wildermann five hundred ten (510) shares of the capital stock of said Company, calculated at the rate of One Hundred ( $100) Dollars per share, for which said Charles Wildermann has paid in cash. That there have been issued to Jean Weil ten (10) shares of the capital stock of said Company, for which said Jean Weil has paid by draft on Bowery Savings Bank, signed by Josephine Weil, on account No. 490,999, of said bank, in favor of Charles Wildermann, for One Thousand ($1,000) Dollars. That there have been issued to Ferdinand Wildermann two hundred forty (240) shares of the capital stock of said Company, calculated at the par value of One Hundred ( $100) Dollars each, for which said Ferdinand Wildermann has paid as follows: Ten Thousand ($10,000) Dollars in cash; and Fourteen Thousand ($14,000) Dollars in one hundred forty (140) shares of said Company issued to said Ferdinand Wildermann and by said Ferdinand Wildermann to said Charles Wildermann delivered, together with a written order upon Frederick2805 Huffer and Anton Huffer, of Munster, Westphalia, Germany, said Charles Wildermann to surrender to said Frederick Huffer and Anton Huffer the said one hundred forty (140) shares of stock upon the receipt by him of said sum of Fourteen Thousand ($14,000) Dollars, in money of the United States. That there have been issued to Clement Vonnegut two hundred forty (240) shares of the capital stock of the said C. Wildermann Company, calculated at the par value of One Hundred ( $100) Dollars each, for which there was paid Five Thousand ($5,000) Dollars and one hundred ninety (190) shares of stock of said Company, which said Charles Wildermann agrees to deliver to Felix Vonnegut, at Munster, Westphalia, Germany, upon receipt by said Charles Wildermann of the sum of Nineteen Thousand ($19,000) Dollars, calculated in currency of the United States, or other consideration agreeable to said Charles Wildermann. Furthermore resolved that said Charles Wildermann be, and he hereby is authorized to collect said One Thousand ($1,000) Dollars upon said draft No. 490,000, issued by Jean Weil in payment of the ten (10) shares of stock, the balance of Fourteen Thousand ($14,000) Dollars due upon the two2806 hundred forty (240) shares of stock issued to Ferdinand Wildermann; and the balance of Nineteen Thousand ($19,000) Dollars due upon the shares issued to Clement Vonnegut; and to apply the same on the sum of One Hundred Thousand ($100,000) Dollars due from said C. Wildermann Company to said Charles 773 Wildermann for the transfer by said Charles Wildermann to said C. Wildermann Company, made in pursuance to said agreements of August 18, 1900, and the 19th day of June, 1901, and that the Treasurer be directed to pay to said Charles Wildermann the balance remaining unpaid of said One Hundred Thousand ($100,000) Dollars. The Secretary further reported that in accordance with the agreement entered into on the 18th day of August, 1900, between Charles Wildermann, Ferdinand Wildermann and Clement Vonnegut, and the agreement entered into on the 19th day of June, 1901, between Charles Wildermann, Ferdinand Wildermann, Clement Vonnegut and Jean Weil, the said Charles Wildermann had transferred to said C. Wildermann Company, the good will of the business of said Charles Wildermann, and all the trade-marks, copyrights, and all his right, title and interest in and to a lease of the premises2807 No. 17 Barclay Street, in the Borough of Manhattan, City of New York, and all transferable agencies, rights and privileges to said business belonging, in the sum of Forty Thousand ($40,000) Dollars, the fair and reasonable value thereof; and the stocks, fixtures, plates, outstanding accounts and choses in action of the business of said Charles Wildermann, as the same appears by the inventory of said business of said Charles Wildermann, as in said agreement provided, of the reasonable value of Sixty Thousand ($60,000) Dollars. Upon motion made, seconded and carried, it was unanimously Resolved that the said report be adopted and said transfer and bill of sale be placed on file, ratified and accepted. In the absence of the Secretary, Mr. Ferdinand Wildermann reported that Elise Wildermann and said Charles Wildermann have permitted to remain in said business, as per said inventory, the additional sum of $45,764.97. On motion made by Mr. Ferdinand Wildermann and seconded by Mr. Jean Weil, it was unanimounsly Resolved that the said inventory, up to the amount of Sixty Thousand ($60,000) Dollars be accepted by said C. Wildermann Company, in fulfillment of said agreement. 2808 On motion made by said Ferdinand Wildermann and seconded by Jean Weil, it was unanimously Resolved that the said sum of $45,764.97 appearing in excess upon said inventory, be, in accordance with said proposition accepted by said C. Wildermann Company as a loan and placed to the credit of Elise Wildermann, said loan from said Elise Wildermann to carry six per cent. interest, and that said C. Wildermann Company will give to said Elise Wildermann a note for the sum of $5,764.97, dated the 19th of June, 1901, and payable seven months after date, with six per cent. interest, and the balance of $40,000 as a loan in the business, in compliance with the correspondence heretofore had between said Charles Wildermann, Ferdinand Wildermann and Clement Vonnegut. The notes of the corporation to the extent of $40,000 which were given in payment of good will were paid off as follows: July 15, 1903$2,500January 15, 19042,500January 15, 19055,000January 15, 19065,000January 15, 19075,000January 15, 19085,000April 1, 1909$2,500January 17, 19102,500December 1, 19105,000January 12, 19125,00040,000774 Although at organization the2809 capital stock of the petitioner was $100,000, a stock dividend of $50,000 was later paid and $50,000 of capital stock was sold for cash at par. By reason of losses sustained by the corporation the capital stock was later reduced to $150,000 to wipe out the deficit. In 1917 the petitioner was in a desperate financial condition because of its inability to procure funds with which to conduct its business. Its indebtedness to many of its merchandise creditors was long overdue and they were threatening suit. Manufacturers in France refused to ship any more goods until their past shipments had been paid for and their refusal was a particular hardship to the company because the very goods ordered had already been sold to the company's customers in America to be paid for on delivery. Other merchandise which the company had ordered from European suppliers had been shipped to New York, but was being held there in bond because the company had not sufficient funds with which to pay the customs duties. The rent of the company's store and office was in arrears and the salary of its president was unpaid. It was indebted to banks for loans already made and practically all of its accounts2810 receivable had been pledged to the banks and others to secure these loans. Although its stock of merchandise on hand had cost about $60,000, the amount for which it could have been disposed of at the time was only about $25,000 and constituted a most doubtful asset upon which to negotiate a loan. Its liabilities were greatly in excess of its assets. In this situation it endeavored to obtain credit from two banks but credit was denied on its financial statement. Ferdinand Wildermann, the then president of the corporation, was indebted to the Second National Bank of Hoboken, N.J., for approximately $25,700, and Fritz Wildermann, the son of Charles Wildermann and president of the corporation during the taxable years, was indebted to the same bank to the extent of approximately $9,600. The only securities which the bank had for these loans were shares of stock of the petitioner corporation and life insurance policies, upon which the insured had borrowed money. This bank was finally induced to extend credit to the petitioner, but only upon condition that the company would make as its vice president one Herbert E. Benjamin, who was to act as the bank's representative, and pay to2811 Benjamin, as trustee for the bank, the amount of $115 per week. The corporation was to retire Ferdinand Wildermann as president and cease paying him a salary of $6,000. In lieu of this payment the $115 per week was to be paid to Benjamin as trustee for the bank. A part of this weekly payment was to be used in paying premiums upon the policies of insurance held by the bank as collateral and interest upon the loans made by the 775 insurance company to the insureds, another part to pay interest upon the bank's loans to the individuals, and the balance to be used to reduce the principal of the loans to the individuals. This agreement was entered into on August 10, 1917, and immediately thereafter the bank advanced money to the corporation to enable it to continue in business. Ferdinand Wildermann ceased to be president in October, 1917, and Fritz Wildermann was made president in his stead. During the taxable years involved herein Fritz Wildermann's salary was $400 per month, plus $100 Christmas bonus, or a total annual salary of $4,900. Of the $115 paid weekly to Benjamin as trustee during the fiscal years ended June 30, 1920, and June 30, 1921, $2,177.88 was used to pay2812 premiums and interest for the fiscal year ended June 30, 1920, and to reduce the principal of the indebtedness of Fritz Wildermann, and for the succeeding year $1,952.91 was paid in his behalf and applied in similar manner. In his individual tax returns Fritz Wildermann accounted for the money thus paid in his behalf as additional compensation paid to him for services rendered to the corporation. In its income-tax returns for the fiscal year ended June 30, 1920, the petitioner deducted from gross income as salary of its president $4,875 and an additional $6,810.01 representing amounts paid to Herbert E. Benjamin as trustee and as salary for services performed by him as vice president. The amount paid to him for services rendered was $500. The excess amount of $6,310.01 was paid to him as trustee. The Commissioner disallowed the deduction of $4,810.01, but allowed the deduction of $2,000 paid as compensation to Benjamin. In its return for the fiscal year ended June 30, 1921, the petitioner deducted from gross income $4,900 for salary of its president, $2,000.04 as salary of Herbert E. Benjamin, and $5,980 representing the amount paid to Benjamin as trustee for the bank. Of2813 this amount the Commissioner disallowed the deduction of $5,980 as not representing an ordinary and necessary expense deductible from gross income. On August 21, 1912, the board of directors of the petitioner corporation adopted the following resolution: RESOLVED, that after July 1st, 1912, an annuity of $100.00 per month be paid to each and every member of the Wildermann family who shall have been for the term of fifteen years continuously employed by The C. Wildermann Company, or in the business which was carried on by C. Wildermann in his lifetime and was taken over by The C. Wildermann Company, or his widow or eldest child after he dies. Said annuity shall be payable monthly, commencing with the expiration of said term of fifteen years, but not before July 1st, 1912, and shall be paid to 776 said member thereafter during the remainder of his or her natural life and shall be in addition to any other income which he or she might be then receiving from The C. Wildermann Company or elsewhere * * . FURTHER RESOLVED, that these resolutions shall be construed to be an obligation on the part of The C. Wildermann Company which shall continue in force for the period of2814 fifty years from and after July 1st, 1912. During each of the taxable years the petitioner paid $100 per month to Ferdinand Wildermann under authority of the resolution above referred to and claimed the same as a deduction from gross income in its income-tax returns. In determining the deficiencies for the taxable years the Commissioner disallowed the deduction of $1,200 for each year. The balance sheets of the petitioner for the fiscal years ended June 30, 1919, and June 30, 1920, were as follows: June 30, 1919June 30, 1920ASSETSFurniture and fixtures and book plates$9,110.84$4,455.51Good will40,000.0040,000.00Inventory, merchandise and catalogues78,459.7681,365.75Cash on hand and in banks3,084.244,950.95Accounts receivable99,497.78113,806.22Liberty bonds and War Savings stamps460.15719.15Other assets1,926.671,144.83Total232,539.44246,442.41LIABILITIES AND CAPITALCapital stock150,000.00150,000.00Accounts payable28,335.3026,601.75Notes payable62,417.1153,550.78Surplus8,212.9716,289.88Total232,539.44246,442.41In determining invested capital for each of the taxable2815 years the Commissioner excluded from assets $40,000 for good will on the ground that there was no proof that the good will had any value at the time it was paid into the corporation for shares of stock. The invested capital shown by the deficiency letter for the year ended June 30, 1920, is $110,000. OPINION. SMITH: 1. Petitioner claims the right to deduct from gross income in its tax returns the amounts paid to Herbert E. Benjamin as trustee of the Second National Bank of Hoboken, N.J., to be applied on the indebtedness to that bank of Ferdinand Wildermann and Fritz Wildermann. It is claimed that these amounts represent additional compensation to the officers of the corporation and as such are deductible from gross income as ordinary and necessary expenses. The evidence is to the effect that Fritz Wildermann, president of the corporation, reported in his individual income-tax returns the amounts 777 paid on his behalf by the corporation to the bank. He testified as follows: Q. And were these amounts that were paid by you, by the company, rather, the $115 a week disbursed by Mr. Benjamin for the purpose of paying the insurance premiums and interest on your individual2816 indebtedness and on account of principal? A. Yes, sir. Q. They were? A. Yes. Q. The amounts that were paid for the account of your indebtedness to the bank which were paid by Mr. Benjamin, were they reported by you in your income tax returns during these years? A. They were. Q. Every year in your individual return? A. Yes, everything that Mr. Benjamin paid for my loan or insurance premium, I included as regular income in my income-tax returns. There is no evidence that Fritz Wildermann returned in his income-tax returns the amounts paid to Benjamin on his behalf. And if they were it does not appear that they would be deductible from gross income in the corporation's tax returns for the reason that Ferdinand Wildermann rendered no services to the corporation during the taxable years and we can not consider that the amounts paid to Benjamin as trustee were ordinary and necessary expenses. We are, therefore, of the opinion that the only amounts paid to Benjamin as trustee which are deductible from gross income for the fiscal years ended June 30, 1920, and June 30, 1921, are $2,177.88 and $1,952.91, respectively, which constituted additional compensation2817 paid to Fritz Wildermann. In the determination of the deficiencies the respondent permitted the corporation to deduct from gross income in its return for the fiscal year ended June 30, 1920, $2,000 as salary for Herbert E. Benjamin, vice president of the corporation. The evidence discloses that the only amount paid to him as salary during such fiscal year was $500. The motion of the respondent to disallow the deduction of $1,500 of the amount allowed by the respondent in determining the deficiency is allowed. 2. The evidence shows that the petitioner paid during each of the taxable years $1,200 as a pension to its retired president. The payments were made pursuant to a resolution of the board of directors of the corporation in 1912. The amounts are clearly allowable as deductions from gross income as ordinary and necessary expenses. 3. The respondent disallowed $40,000 claimed as the value of good will acquired by the corporation from Charles Wildermann, the vendor of the business. The facts appear to be that Wildermann turned over his business, consisting of tangibles of $105,764.97 and 778 good will and intangibles of an estimated value of $40,000 for $100,0002818 cash and promissory notes of $45,764.97. The predecessor business appears to have been profitable. Charles Wildermann had accumulated a considerable fortune from the conduct of the business and he had persuaded a number of individuals to purchase stock in the corporation at par upon the basis that the good will had a cash value of $40,000 at the date acquired by the corporation. We are satisfied by the evidence that the Commissioner was in error in disallowing any amount from invested capital for good will. It was acquired for $40,000 cash. The notes given therefor were paid prior to the taxable years in the amount of $40,000, representing good will, and the $40,000 should therefore be included in invested capital. Judgment will be entered on 15 days' notice, under Rule 50.Considered by LITTLETON and LOVE.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625684/	ESTATE OF JAMES H. LOCKHART, DECEASED, CHARLES LOCKHART, GEORGE D. LOCKHART, JAMES H. LOCKHART, JR. AND JOHN L. WALKER, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lockhart v. CommissionerDocket No. 92375.United States Board of Tax Appeals46 B.T.A. 426; 1942 BTA LEXIS 865; February 25, 1942, Promulgated 865 During the year 1935 original petitioner made gifts of certain insurance policies, some of which were fully paid up and some of which were not paid up. He included them in his gift tax return at their cash surrender value. Held, replacement cost is the proper criterion of value of the policies for gift tax purposes. Guggenheim v. Rasquin,312 U.S. 254">312 U.S. 254; United States v. Ryerson,312 U.S. 260">312 U.S. 260; Houston v. Commissioner, 124 Fed.(2d) 518; Margaret R. Phipps,43 B.T.A. 790">43 B.T.A. 790. J. Merrill Wright, Esq., for the petitioners. William S. Schmitt, Esq., for the respondent. VAN FOSSAN 427 Respondent determined a deficiency of $27,909.96 in gift taxes of James H. Lockhart for the calendar year 1935. Petitioners contend that respondent erred in increasing the value of certain insurance policies which were the subject of gifts during the taxable year. FINDINGS OF FACT. The majority of the facts are stipulated. We hereby adopt as our findings of fact the stipulation of facts, together with certain exhibits which were filed at the hearing. They may be summarized as follows: 866 Petitioners are the duly appointed executors under the will of James H. Lockhart, deceased, the original petitioner herein, who died testate at Pittsburgh, Pennsylvania, on May 16, 1936. Present petitioners were substituted as petitioners in this proceeding by an order entered June 25, 1941. During all times material hereto decedent resided in Pittsburgh, Pennsylvania, and had his principal office at 1502 Union Bank Building, Pittsburgh, Pennsylvania. He filed his gift tax return for the year 1935 with the collector of internal revenue for the twenty-third district of Pennsylvania. During the taxable year 1935 decedent made gifts of certain insurance policies which he valued in his gift tax return at $1,835,747.36. The actual cash surrender value of the policies as returned by the issuing companies was $1,830,583.07. Respondent increased the valuation of the insurance policies to $1,936,323.78, thereby increasing the valuation of total gifts (other than charitable) from $1,867,421.15, as returned by decedent to $1,967,997.57. Prior to 1935 the original petitioner had taken out upon his own life various annual premium policies of life insurance, the proceeds of which867 were payable, upon the original petitioner's death, in a lump sum to his wife or, should she not survive, to his sons, Charles Lockhart, George D. Lockhart, and James H. Lockhart, Jr. Decedent had retained in those policies certain legal incidents of ownership such as the right to change the beneficiary, the right to surrender for cash, the right to borrow upon the security of the loan or cash surrender render value of the policies, and the right to assign the policies. On November 12, 1935, he executed a deed of trust assigning these policies to Charles Lockhart, George D. Lockhart, and John L. Walker, as trustees, for the benefit of various individuals. At the same time he surrendered all legal incidents of ownership which he had reserved to himself in the policies. Some of the policies were paid up at the time decedent made the gift to the above trustees. Others were not paid up at that time. On his return original petitioner valued the paid up policies at $856,848.82. Those same policies had a cash surrender value as reported by the insurance companies of $854,985.89. They 428 were valued by Commissioner at $912,707.11. The policies which were not paid up were868 returned by the original petitioner at a value of $511,202.96. They had a cash surrender value as reported by the insurance companies of $509,550.92 and were valued by the Commissioner at $515,533.56. Prior to 1935 the original petitioner had taken out upon his own life various annual premium policies of life insurance, the proceeds of which were payable in installments upon original petitioner's death to his wife for life, or, if she should not survive, to his sons, Charles Lockhart, George D. Lockhart, and James H. Lockhart, Jr., for a period of twenty years certain. Prior to 1935 the original petitioner had taken out upon his own life various annual premium policies of life insurance, the proceeds of which were payable in installments to his three sons for a period of twenty years certain. Prior to 1935 he had also taken out upon his own life an annual premium policy of life insurance, the proceeds of which were payable in a lump sum to his sister-in-law, Pauline Dilworth Edwards. In all of these policies original petitioner retained various incidents of ownership, such as the right to change the beneficiary, the right to surrender for cash, the right to borrow upon the security869 of the loan or the cash surrender value, and the right to assign the policies. On November 12, 1935, the original petitioner executed a declaration of gift assigning these policies to the respective beneficiaries thereof. At the same time he surrendered all incidents of ownership which had been reserved by him. All of the policies the proceeds of which were payable in installments to petitioner's three sons were paid up policies. They were included in original petitioner's gift tax return at a value of $104,769.66, which was the same as the cash surrender value as reported by the insurance companies. They were valued by the Commissioner at $143,108.93. The remainder of the policies which were assigned to the beneficiaries thereof were not paid up. Those policies the proceeds of which were payable in installments to petitioner's wife were included in the gift tax return at a value of $229,741.24. They had a cash surrender value as reported by the insurance companies of $228,091.92 and were valued by Commissioner at $230,838.46. The policy the proceeds of which were payable to petitioner's sister-in-law was included in the return at a value of $111,457.59, which was the870 same as the cash surrender value as reported by the insurance companies. Commissioner valued the policy at $111,866.75. Prior to 1935 the original petitioner had taken out upon the lives of each of his three sons certain annual payment policies of life insurance wherein in each policy the insured's mother, if living, was named beneficiary. Otherwise, certain individuals were designated as beneficiaries. 429 The original petitioner retained various incidents of ownership in these policies. On April 13, 1935, the policies upon the life of James H. Lockhart, Jr., were modified so as to vest all incidents of ownership in the insured. On December 16, 1935, policies upon the life of George D. Lockhart and upon the life of Charles Lockhart were also modified so as to vest all incidents of ownership in the insured. One of these policies was paid up and was included in the gift tax return at a value of $5,184.30, the same as the cash surrender value as reported by the insurance company. It was valued by the Commissioner at $5,702.70. The remaining policies were not paid up and were returned by the original petitioner at a value of $16,542.79, which was the same as the cash871 surrender value reported by the insurance company. They were valued by the Commissioner at $16,566.27. All of the life insurance policies which were made the subject of gift by James H. Lockhart during 1935 were of the type requiring the annual payment of premiums either during the life of the insured or for a stated number of years. Original petitioner had from the dates of issuance of each of the policies paid all of the premiums as and when due. None of the policies were single premium policies. James H. Lockhart, the original petitioner, was born on September 25, 1863, and was more than 72 years of age on November 12, 1935, the date of transfer as gifts of the various life insurance policies as mentioned above. Insurance policies of the kind, type, and class which were assigned by James H. Lockhart in 1935 could not have been purchased by him after he reached the age of 70 years and 6 months, which would have been on March 25, 1934. OPINION. VAN FOSSAN: The question for determination is the value for purposes of section 506 of the Revenue Act of 1932, relating to gift tax, of the insurance policies which James H. Lockhart transferred in 1935. The cited section872 reads: "If the gift is made in property, the value thereof at the date of the gift shall be considered the amount of the gift." Petitioner included the policies in his gift tax return at the cash surrender value, according to his computation. Respondent valued the policies in accordance with article 19(9) of Regulations 79, thereby increasing the valuation. In , the Supreme Court rejected cash surrender value as a measure of value of a single premium policy. Cost was used as the measure of value in that case. In , and , decided the same day as the Guggenheim case the Court adopted replacement cost as the proper criterion of value of single premium 430 insurance policies for gift tax purposes. The doctrine of those cases was expanded by the Circuit Court of Appeals for the Third Circuit in , to cover a gift of 20-payment life policies which were fully paid up. Finally, in *873 , this Board applied the rationale of the Supreme Court cases and held with respect to policies which are not paid up at the time of the gift that the cost of duplicating the policies is the proper criterion of value. Petitioner has not contested the accuracy of respondent's computation under article 19(9) of Regulations 79 (1936 Edition). It appearing that such computations are in accordance with rules of valuation laid down in the above cited cases, the action of the respondent is affirmed. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625685/	GEORGE W. MASON AND HAZEL B. MASON, HIS WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mason v. CommissionerDocket No. 97350.United States Board of Tax Appeals41 B.T.A. 1287; 1940 BTA LEXIS 1072; May 29, 1940, Promulgated 1072 Where a taxpayer enters into a contract of employment providing, together with other compensation, a bonus, measured in money, computed upon net earnings of the employer, and an inseparable provision of that same contract obligates the taxpayer to exchange such money, concurrently with its receipt, for stock of the employing company at a fixed value, held, the taxpayer realizes taxable income in the amount of the fair market value of such stock when he receives it. Thomas S. Forward, C.P.A., for the petitioners. W. W. Kerr, Esq., for the respondent. LEECH1288 OPINION. LEECH: Respondent determined a deficiency of $10,827.57 in petitioners' income tax for the calendar year 1935. The issue presented is the propriety of the action of respondent in including in income an amount representing the fair market value of certain stock acquired by the petitioner, George W. Mason, in the taxable year. The facts are stipulated. Petitioners are husband and wife and filed a joint return for the taxable year. The word "petitioner", as hereinafter used, will refer to the petitioner, George W. Mason. On September 7, 1933, the petitioner entered1073 into the following contract: MEMORANDUM OF AGREEMENT, made this 7th day of September, 1933, by and between KELVINATOR CORPORATION, a corporation organized and existing under the laws of the State of Michigan, having its principal office in the City of Detroit, County of Wayne, in said State, party of the first part, hereinafter called the "corporation", and GEORGE W. MASON, of said City of Detroit, party of the second part, hereinafter called "Mason", WITNESSETH: WHEREAS, Mason has a contract of employment with this corporation expiring December 10, 1934, and WHEREAS, the parties hereto desire to terminate such contract as of October 1, 1933 and to enter into a new contract extending such employment upon the terms hereinafter set forth, IT IS HEREBY AGREED, as follows: FIRST: The corporation hereby employs Mason upon the following terms and conditions; and Mason accepts said employment upon the following terms and conditions: (1) The term of employment shall be four (4) years from and after the first day of October, 1933; (2) The rate of compensation shall be (a) Fifty thousand dollars ($50,000) per annum payable in equal semimonthly installments; (b) One thousand1074 two hundred and fifty (1250) shares of full paid stock of the corporation to be delivered on January 1, 1934, and quarterly thereafter to and including October 1, 1937. (3) The corporation further agrees as further compensation to Mason to pay him on January 15, 1935, 1936, 1937 and 1938, a sum equal to ten per cent (10%) of the net earnings of the preceding fiscal year, determined as hereinafter set forth after deducting therefrom an amount equal to five per cent (5%) upon the capital and surplus of the corporation determined as hereinafter set forth. The corporation agrees to sell and Mason agrees to purchase at Ten Dollars ($10.00) per share on January 15th of each year as above set forth a number of shares of fully paid stock of the corporation equal to the sum, if any, payable to Mason on such date pursuant to the preceding section of this paragraph (3); provided, that hereunder the corporation will not pay in excess of $400,000 nor may Mason purchase in excess of 40,000 shares of such stock during the term of the contract; and provided further that the corporation will not pay in excess of $100,000 nor may Mason purchase in excess of 10,000 shares of such stock in any one1075 year except that (a) for any year of this contract the corporation may and will pay Mason such an amount as will make the total payment to Mason under this paragraph (3) $100,000 per annum for each year of this contract theretofore expired in case 1289 10% of the net earnings since October 1, 1933 computed under the formula therein set forth shall equal or exceed $100,000 per annum for the years already expired and (b) Mason may and will purchase such number of shares as will make the total number of shares purchased by him under this paragraph at $10.00 per share equal the amount paid him under the above exception (a). (a) Net earnings as herein used shall be the amount of the net earnings of the company and its subsidiaries as determined by the Auditors of the company and approved by the board, after all necessary charges including depreciation and income taxes but before deducting the amount of this special compensation for the fiscal years ended September 30, 1934 to September 30, 1937. Net earnings shall not include any profits or losses arising from the extraordinary sale of capital assets having particular reference to the sale of any of the plants or properties1076 of the corporation or its subsidiaries. The term subsidiaries shall mean all corporations owned in full by the corporation or its subsidiaries, and all corporations so owned in part to the extent of the earnings or losses attributable to the stock owned by the corporation. (b) The capital and surplus of the corporation as used herein shall mean the capital and surplus and undivided profits of the corporation at the beginning of the fiscal year for which the determination of profits shall be made plus the amount of any new capital added during the year (except by way of earnings) reduced by a percentage equal to the number of months for which such capital was not contributed in relation to the whole fiscal year. (c) In case the fiscal year of the corporation shall be modified, the provisions of this paragraph (3) shall be deemed to be modified and readjusted accordingly. (4) In case there shall be any rearrangement of the capital structure of the corporation which shall affect the number or kind of shares of capital stock, the purchase price per share fixed herein at Ten Dollars ($10.00) shall be adjusted accordingly. (5) This agreement shall not be affected by the disability1077 by reason of illness or otherwise of Mason to perform his duties for a period of not exceeding six (6) consecutive months, but it is mutually agreed that in the event of the death of Mason or his total disability for a period of time exceeding six (6) consecutive months, this agreement may be terminated as to the unexpired term thereof, except as to the provisions of paragraph (3) of this Article First, by the corporation, by resolution of its board of directors, by giving notice in writing to Mason or his personal representatives fixing a date not less than thirty days after the date of said notice, upon which this agreement shall terminate as to the unexpired term thereof, and thereupon the agreement shall so terminate on the date mentioned in the notice. In the event that the corporation shall so terminate this agreement for the unexpired term thereof, then. (a) As to the further compensation granted to Mason by paragraph (3) of this Article First, the corporation shall pay Mason or his personal representatives when provided therein, that proportion of said further compensation as his term of actual service under this contract in said fiscal year shall bear to the entire year. 1078 (b) The corporation shall, within thirty (30) days after the date mentioned in said notice for the termination of this agreement, pay to Mason or his personal representatives the sum of One Hundred thousand dollars (100,000) in cash. (6) The corporation shall provide all stamps required in connection with the issue and delivery to Mason of all shares of stock under this agreement provided to be delivered to him or to his personal representatives. 1290 SECOND: Mason hereby agrees to devote his entire time and attention to the business of the corporation and to the performance of his duties hereunder, and as an officer of the corporation, during such periods of the term hereof as he shall be an officer, except the ordinary duties of a director in other corporations not in a competitive business. THIRD: The parties hereto mutually agree that Mason subject to the powers by law vested in the board of directors and executive committee, shall have, as general manager, the full control and management of the business and affairs of the corporation, including, without limiting the generality of the foregoing, the power and authority to manage and conduct all manufacturing1079 operations, the engineering, designing and development of the product, the sale of all products, and all details of the business, the purchase of all materials, supplies, machinery, the equipment and appliances required in the business, all work of accounting under and in accordance with the rules and methods prescribed by the board of directors or executive committee; and employ, fix the compensation of, and discharge all assistants, agents and employes. He shall make reports to the board and executive committee, and shall not be subject to any other officer or authority in the corporation. FOURTH: The corporation agrees that it will adopt all necessary resolutions to make the foregoing provisions of this contract effective. FIFTH: The corporation hereby agrees, as an independent covenant, to use its best endeavors to cause Mason to be continued in the office of director and chairman of the board and/or president during the term of this contract; and Mason agrees to accept the offices of director, chairman of the board, and/or president, and to perform the duties thereof if so elected. SIXTH: The agreement dated May 14, 1931, between the parties hereto is hereby terminated1080 and cancelled effective as of October 1, 1933; provided, however, that Mason shall have all rights accruing to him thereunder for the fiscal year ending September 30, 1933; and in consideration for Mason's consenting to such cancellation the Corporation agrees to deliver to him on October 2, 1933, Five thousand (5000) shares of its full paid stock. The amount determined as payable to George W. Mason on January 15, 1935, computed upon net earnings of the corporation for the preceding year under section (3) of the foregoing contract, was $49,891.69. Pursuant to the provisions of that section, he acquired 4,989 shares of the capital stock of Kelvinator Corporation on that date, having a then fair market value of $84,189.38. On September 7, 1933, when the above contract was executed, the stock in question had a fair market value of $11.4375 per share. Petitioner devoted his entire time to the affairs of Kelvinator Corporation during the taxable year. In making their return for the calendar year 1935, petitioners included in income the amount of $49,891.69. In determining the deficiency respondent increased the reported income by the difference between this amount and $84,189.38, 1081 the fair market value of the stock acquired. Respondent contends that the contract for purchase of the stock by petitioner was an inseparable part of the contract of employment, that the stock which was received thereunder constituted compensation for services performed and, consequently, income to the extent 1291 of its fair market value when received. Petitioner insists that the agreement in the contract obligating him to purchase common stock of the company at $10 per share with the bonus payable to him under the contract for services rendered is separate and distinct from the contract of employment. It is argued that, under the employment contract, petitioner received a money bonus which was compensation for services and therefore taxable income, and with this income, under the contract to convert it into common stock of the company, he purchased stock at the agreed price of $10 per share. Petitioner relies on , and . See also 1082 . These cases hold that stock acquired by employees under stock purchase plans, with credits from earnings of the company on the purchase price, was purchased at the agreed price and that the employee is taxable only on the amount of the credits granted. The facts here are clearly distinguishable from those in the cited cases and do not support, we think, the reasoning or conclusion in those cases. In those cases the contract under which the right to acquire the stock and the right to the credit arose was distinct and separate from the contract of employment, and the stock was acquired voluntarily, under the former. Here the petitioner has not subscribed for a definite number of shares of stock for which he is obligated to pay nor has he been granted merely a right to purchase. He has executed a binding contract to render certain service, one of the considerations for which is a bonus, measured in money, computed upon the net earnings of the employer. He, in turn, by that same contract, obligates himself to convert this money, concurrently with its receipt, into stock of the employing company at $10 per share. The1083 obligation which he assumes is a part of his contract of employment. He has no liability with respect to the so-called stock purchase except under that contract and the entire amount which he contends is the purchase price of the stock moves to him under that contract for service rendered. When received, it is impressed with the obligation that it be immediately surrendered for shares of stock. See ; ; . The only thing which he could or did receive, free to his "unfettered use", under the bonus provision of his employment contract, restricted by his agreement thus to convert, was stock of the employing company, and all that company could or would be forced to surrender ultimately was stock. If a money payment of the bonus 1292 was actually made to petitioner, and on this point the record is silent, it was only a gesture, an incident in the transaction, the result of which would leave petitioner with stock of the company which constituted his compensation for services1084 rendered. The bonus was stated in terms of money but, under the agreement, we think, that medium had no significance as such but was merely a measure to determine the number of shares of stock which petitioner was entitled to receive. We do not agree with respondent that the question is controlled by . In that case, as in the cases of ; ; ; ; , and , for services to be rendered, the taxpayer was granted an option to purchase stock which had a definite value when exercised. Here there was no option. We think that in the present case, under the contract executed, the petitioner has in fact agreed to render service for certain considerations. One of these was a bonus consisting of shares of stock of the employing corporation, the number of which was to be measured by the net earnings of the company during the year. This stock, in consequence, constitutes a payment for services. *1085 Petitioner has therefore realized income to the extent of its fair market value when received. Reviewed by the Board. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625688/	First Security Bank of Utah, N.A., et al., 1 v. Commissioner. First Sec. Bank v. CommissionerDocket Nos. 1190-63, 1191-63, 1216-63. .United States Tax CourtT.C. Memo 1967-256; 1967 Tax Ct. Memo LEXIS 4; 26 T.C.M. (CCH) 1320; T.C.M. (RIA) 67256; December 27, 1967Alonzo W. Watson, Jr., C. Preston Allen, Stephen H. Anderson, Suite 400, Deseret Bldg., 79 S. Main St., Salt Lake City, Utah, for the petitioners. James Booher, for the respondent. FAYMemorandum Findings of5 Fact and Opinion FAY, Judge: Respondent determined deficiencies in the petitioners' income taxes as follows: DocketTaxableNo.PetitionerYearDeficiency1190-63First Security Bank1954$ 68,250.00of Utah, N. A.195528,775.81195654,526.56195777,862.911958159,371.461959109,166.601191-63First Security Com-195695,997.48pany1957126,400.831958262,124.101959179,550.341216-63First Security Bank195468,250.00of Idaho, N.A.195526,139.851957160,392.561958102,752.67During the trial, respondent stated that he would not pursue one of the issues raised in the pleadings. We therefore conclude that he has abandoned it. The issues remaining for decision are: (1) Whether respondent erred in allocating, pursuant to sections 61 and 482, 2 to petitioners First Security Bank of Utah, N.A., and First Security Bank of Idaho, N.A., a portion of the income which First Security Life Insurance Company of Texas received from January 1, 1955, to December 31, 1959, for reinsuring credit life, health, and accident insurance, 3 or in the alternative, whether he erred in6 allocating, pursuant to said sections, to petitioner First Security Company a portion of said income which First Security Life Insurance Company of Texas received from January 1, 1956, to December 31, 1959; and (2) whether respondent properly put section 482 in issue, and, if so, whether he should have the burden of proof. Findings of Fact Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference. Petitioner First Security Bank of Utah, N.A. (hereinafter referred to as Utah Bank), is a national bank incorporated in 1882. It filed its Federal income tax returns for the taxable years involved herein on a calendar year basis with the district director of7 internal revenue, Salt Lake City, Utah. Its principal place of business was Salt Lake City, Utah, when it filed its petition in this case. Petitioner First Security Bank of Idaho, N.A. (hereinafter referred to as Idaho Bank), is a national bank, incorporated as such in 1941 after operating since 1865 as a state bank. It filed its Federal income tax returns for the taxable years involved herein on a calendar year basis with the district director of internal revenue, Boise, Idaho. Its principal place of business was Boise, Idaho, when it filed its petition in this case. Petitioner First Security Company (hereinafter referred to as Management Company) is a corporation organized under the laws of Utah in 1929. It filed its Federal income tax returns for the taxable years involved herein on a calendar year basis with the district director of internal revenue, Salt Lake City, Utah. Its principal place of business was Salt Lake City, Utah, when it filed its petition in this case. Petitioners are wholly-owned subsidiaries of the First Security Corporation (hereinafter referred to as Holding Company). It is the oldest bank holding company in existence. It is under the supervision and8 control of, and is regularly examined by, the Federal Reserve System. It is qualified under and subject to the Bank Holding Company Act, 12 U.S.C. sections 1841 et seq. From 1954 through September 15, 1959, Holding Company had approximately 1,044,963 shares of common voting stock outstanding and from 2,000 to 3,000 shareholders residing in various states and foreign countries. Holding Company has had a policy of business expansion and acquisition throughout its existence. The banking offices of its subsidiaries extend from the Canadian border to the Arizona border. Moreover, it has entered into diversified enterprises other than banking. From 1954 to September 15, 1959, Holding Company had the following whollyowned subsidiaries, in addition to petitioners: (a) The First Security Life Insurance Company of Texas (hereinafter referred to as Security Life), a corporation organized and licensed as an insurance company pursuant to the laws of Texas. (b) Ed. D. Smith and Sons (hereinafter referred to as Smith), a Utah corporation. It had approximately twenty employees and sold life and casualty insurance. It had a yearly premium volume of approximately $800,000. 9 (c) First Security Insurance Agency, Inc. (hereinafter referred to as Agency), an Idaho corporation. It sold insurance and had a yearly premium volume of about $175,000. (d) Western Investment Corporation, an Idaho corporation holding various assets. (e) First Security State Bank, a Utah State bank. (f) First Security Bank, a Wyoming State bank. (g) Security Savings and Loan Association, a Utah State savings and loan association; and (h) First Security Savings and Loan Association, an Idaho State savings and loan association. On September 15, 1959, Holding Company underwent a reorganization pursuant to the Bank Holding Company Act, supra. The banking subsidiaries, including the three petitioners herein, were placed in a newly-organized bank holding company. The shareholders of Holding Company received the stock of the new bank holding company. The nonbanking subsidiaries, including Security Life, remained in the old holding company. 410 Utah Bank and Idaho Bank have numerous banking offices. Both are subject to supervision, inspection, and control by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency and are regularly examined by them. The articles of incorporation of the banks limit them to the business of banking under the laws of the United States. Under the national banking laws, the members of the boards of directors of the banks are responsible for the proper operation of the banks. During the years in issue, Utah Bank had 141,000 to 192,000 depositors and $217,000,000 to $292,000,000 in deposits. During the same years, Idaho Bank had 113,000 to 131,000 depositors and $183,000,000 to $205,000,000 in deposits. Management Company provides accounting and other management services to the other subsidiaries of Holding Company. Management Company is subject to control, supervision, and inspection by the Board of Governors of the Federal Reserve System and is regularly examined by it. In 1948 Utah Bank and Idaho Bank began making available credit life, health, and accident insurance (hereinafter referred to as credit insurance) 11 5 to their customers. They did this for several reasons, including (1) to offer a service increasingly supplied by competing financial institutions, (2) to obtain the benefits of the additional collateral which credit insurance provides by repaying loans upon the death, injury, or illness of the borrower, and (3) to provide an additional source of income - part of the premiums from the insurance - to Holding Company or its subsidiaries. From 1948 through 1952, Credit Life Insurance Company of Springfield, Ohio, wrote the credit insurance which Utah Bank and Idaho Bank had available for their customers. Credit Life Insurance Company and Smith entered into agency agreements designating Smith as Credit Life's agent in writing the insurance. Pursuant to the agreements, Credit Life paid commissions to Smith as follows: Amount of Payment toCharacterization of Pay-Smith per Agencyment in AgencyPeriodAgreementAgreement9/24/48 through 6/ 1/5040% to 50% of net premiumsCommissionscollected, based on volume6/ 1/50 through 12/31/5255% of premiums45% commission,10% expense reimbursement12 From January 1, 1953, through April 1, 1954, American Bankers Life Assurance Company of Florida wrote the credit insurance which Utah Bank and Idaho Bank had available for their customers. American Bankers Life Assurance Company and Smith entered into an agency agreement designating Smith as American Bankers' agent in writing the insurance. Pursuant to the agreement, American Bankers paid commissions to Smith of 55 percent of the net premiums collected on life insurance and 50 percent of the net premiums collected on health and accident insurance. Late in 1953, American National Insurance Company of Galveston, Texas (hereinafter referred to as National), 6 approached Holding Company with a plan whereby National would write the credit insurance which Utah Bank and Idaho Bank made available to their customers. The plan called for Holding Company to create a life insurance subsidiary. The subsidiary's business would be to reinsure the risks of the credit insurance policies written by National for the customers of the two Banks. Profits from the business could be retained in the subsidiary for investment. In its initial years, the subsidiary would utilize National's established and13 experienced operating services - actuarial, accounting, etc. - on a fee basis. If the plan proved successful, the new insurance subsidiary could grow into a full-line, direct-writing insurance company. Holding Company was one of many financial institutions which National approached with such a plan. During 1953 National concluded that lending institutions would soon begin to form their own life insurance companies to write the credit insurance which they made available to their customers. They based their conclusion upon the facts that writing credit insurance was proving to be a very profitable business and that there were considerable tax savings on premium income. 7 This potential move by lending institutions would ultimately deprive National and other independent insurance companies of their credit insurance business. To salvage what it could from the situation, National decided to encourage lending institutions to develop their own life insurance companies by utilizing the operating services which National had developed for writing credit14 insurance. By charging a fee for the services, National would recoup something from its investment in the credit insurance business. Holding Company decided to adopt National's plan. It did so for numerous reasons, including its policy of business expansion. To implement the decision, Holding Company incorporated Security Life in June 1954. Security Life was incorporated under the laws of Texas and approved by the Texas State Board of Insurance Commissioners. It had an initial capital of $25,000 8 and an initial paid-in surplus of $12,500. 9National began writing credit insurance for the customers of Utah Bank and Idaho Bank in April 1954. The insurance was reinsured with Security Life under contracts called reinsurance treaties. Under the treaties National15 received approximately 15 percent of the premium dollar for its managerial services and Security Life received the balance of the premium dollar for its assumption of 100 percent of the risk under the insurance policies. 10From April 1954 through 1959, National maintained Security Life's books and records and computed its required reserves. By purchasing the services of National, Holding Company effected considerable savings over what would have been the case had it attempted to launch a full-line, direct-writing company from the outset. It is a common practice to begin an insurance company by reinsuring risks and, if successful, grow into a full-line, direct-writing company. 11 There is no basic actuarial or business difference between an insurance company which reinsures and a direct-writing company. Utah Bank and Idaho Bank had a routine procedure for making credit insurance available to customers. A loan officer explained the availability and function of credit insurance to a customer.if the16 customer desired the insurance, the loan officer gave him application forms. The customer then filed in the application. After examining the application, Bank personnel filed in a certificate of insurance and either collected the premium from the customer or added it to his loan. As the final step, Bank personnel forwarded the completed forms to Management Company for further handling. Utah Bank and Idaho Bank did not require customers to purchase credit insurance. During the years in issue, less than onehalf of the Banks' installment loan customers elected to take insurance and less than 13 percent of the Banks' real estate loan customers elected to take insurance. The cost to Utah Bank and Idaho Bank of processing the insurance was negligible. For the five years in issue, the total cost to Utah Bank was $8,929.30 and the total cost to Idaho Bank was $9,826.43. 12Management Company's role in processing the credit insurance was in the nature of bookkeeping. It had no contact with the public with respect to writing credit insurance. It received the forms, duplicate17 certificates, and premiums from Utah Bank and Idaho Bank. It then made records of insurance purchased and forwarded premiums to National. It also did the paper work when claims had to be filed under the policies. The cost to Management Company of processing the insurance was negligible. For the five years in issue, the total cost was $10,150.34. 13 Idaho Bank, Utah Bank, and Management Company were not parties to the legal relationships and obligations of the insurance policies. National wrote the insurance and the Banks' customers were its policyholders. Under the terms of the policies, National was responsible for payment of claims. Under the reinsurance treaties, Security Life was obligated to reimburse National for claims it paid. Other than group policies, there were no contracts, agency agreements, or other legal connections between National and Idaho Bank, Utah Bank, or the employees of both. There were no contracts, agency agreements, or other legal connections between National and Management Company or its employees. From 1948 through 1959, the credit insurance which Idaho18 Bank and Utah Bank made available to their customers was priced at the uniform rate of $1 per $100 coverage per year on a decreasing term basis. This was the rate commonly charged in the industry. It was accepted by the insurance commissioners of the states involved herein - Utah, Idaho, and Texas. During the years in issue, Security Life paid state and Federal taxes, used its own stationery, made deposits and withdrawals from bank accounts in its own name, and invested in its own name. Its sole source of business income was reinsurance premiums. Its business expenses were primarily bank charges, taxes, and claims settlement expenses. Security Life's credit insurance business was very profitable. Its yearly operations for the period 1955 through 1959 are reflected in the following table: ReinsurancePremiumClaims andNational'sReceived byClaimsNet Profit toYearNet Premium 1FeeSecurity LifeExpensesSecurity Life1955$ 145,927.55$ 24,765.65$ 121,161.90$ 45,340.38$ 75,821.521956277,437.4543,695.72233,741.7397,609.66136,132.071957367,612.6255,590.64312,021.98114,014.49198,007.491958 2647,874.9062,954.22584,920.68118,874.46466,046.221959477,389.4371,608.43405,781.00149,948.92255,832.08Total$1,916,241.95$258,614.66$1,657,627.29$525,787.91$1,131,839.38Less closing Life Reserve, 12/31/59(110,806.00)Less general expenses for period 1/1/55 through 12/31/55(16,339.00)TOTAL PROFIT$1,004,694.3819 Security Life's operation for the years in issue are summarized in the following table in terms of percentages of total net premiums received. Percent of TotalNet PremiumsItemReceivedFee paid to National13.5Claims paid27.4Life reserve on 12/31/59 and generalexpenses6.6Balance52.5Total100.00Security Life's balance sheets for the period January 1, 1955, through December 31, 1959, are summarized in the following table: 195519561957Assets$161,370.52$390,286.87$648,586.43Liabilities (including reserves)$ 13,076.98$ 22,295.00$ 30,277.60Capital25,000.00100,000.00100,000.00Surplus: Paid-in12,500.0012,500.0012,500.00Unassigned35,099.41Earned110,793.54220,392.46505,808.83$161,370.52$390,286.87$648,586.4319581959Assets$1,204,424.45$1,050,220.71Liabilities (including reserves)$ 271,479.06$ 197,687.00Capital100,000.00100,000.00Surplus: Paid-in12,500.0012,500.00UnassignedEarned820,445.39740,033.71 1$1,204,424.45$1,050,220.7120 Although Security Life's business proved to be successful, there was no way to judge at the outset whether it would succeed. In relation to its capital structure, Security Life reinsured a large amount of risk. The following table shows the number of policies reinsured, the amount of risk it assumed, and the number of extra maximum claims which would have eliminated its surplus at the end of the year: No. of ExtraMaximumAmount ofClaims whichNo. ofRisk atwould havePoli-End ofEliminatedYearciesYearSurplus195412,500$ 6,483,0003195527,59413,360,0009195634,38821,105,00028195729,59125,570,00028195832,15536,761,00050195936,41641,350,00097Furthermore, there were several aspects of Security Life's business which could have invited high mortality rates. Customers of the two Banks could obtain credit insurance without a health examination and there was no waiting period before the insurance went into effect. In addition, Security Life was a relatively small insurance company and its policyholders21 lived in a relatively limited geographical area. Since Utah Bank and Idaho Bank began making available credit insurance to their customers in 1948, the officers of Holding Company and of the two Banks have held the belief that it would be contrary to Federal banking law for the two Banks to receive income resulting from their customers' purchase of credit insurance. They based the belief on the advice of legal counsel. Pursuant to the belief, the two Banks have never received or attempted to receive commissions or reinsurance premiums resulting from their customers' purchase of credit insurance. Petitioners Idaho Bank and Utah Bank reported no income from sales of credit insurance on their Federal income tax returns for the years 1955 through 1959. Petitioner Management Company reported no income from sales of credit insurance on its Federal income tax returns for the years 1956 through 1959. In his statutory notices of deficiency, respondent allocated to petitioners Utah Bank and Idaho Bank the reinsurance premiums received by Security Life from 1955 through 1959. He also, alternatively, allocated to petitioner Management Company the reinsurance premiums received by Security22 Life from 1956 through 1959. 14 The pertinent explanatory material in each notice of deficiency is as follows: It is determined that the insurance premiums It is determined that the insurance [premiumss] and/or commission income reported as income by the First Security Life Insurance Company of Texas, a corporation, the stock of which is owned by The First Security Corporation, the same corporation which owns your stock, should have been reported by you. Therefore, your taxable income is increased as indicated for each of the taxable years 1955 [1956] through 1959. In a different case than the one at bar, respondent has asserted a deficiency against Security Life for the years 1955 through 1959. More than three years before the trial of the present case, 23 Security Life filed a sworn protest with the district director of internal revenue, Salt Lake City, Utah, contesting the asserted deficiency. Counsel for petitioners herein prepared Security Life's protest. To explain the difference between Security Life's case and the case at bar, the protest contains the following language: The issues involved are not at all related; each turns on its own set of facts and its own section of the Internal Revenue Code. The issue involved in the bank cases is whether the banks were the true earners of the income, and hence taxable under Section 482. The issue in this case is whether the reserves were established and maintained on an actuarial basis as required by Section 801(a). In the case at bar, respondent never filed any document prior to the pretrial conference formally notifying petitioners that he intended to rely on section 482. Two days prior to the trial herein, respondent filed a motion for a pretrial conference pursuant to Rule 28, Rules of Practice of the Tax Court. In the motion, respondent stated that he would rely on section 482 as well as section 61. Opinion The first issue is whether respondent has properly put section 48224 in issue. Petitioners argue that because respondent did not specifically mention section 482 in his notices of deficiency, and because he did not otherwise specifically and formally notify petitioners prior to the pretrial conference that he would rely on section 482, he is barred from relying on that section. Alternatively, petitioners argue that if we permit respondent to rely on section 482, he should bear the burden of proof because the determination with respect to the section 482 issue in the statutory notices does not contain sufficient legal and factual grounds. We do not agree with either argument. Petitioners' counsel knew three years in advance of the trial that respondent would rely on section 482. Moreover, petitioners do not allege surprise or suggest that they were prejudiced in any way by respondent's alleged omissions. It is clear from the record that petitioners' counsel were well prepared with an extensive and thorough case on the section 482 issue. In view of these circumstances, the cases which petitioners cite on this point are distinguishable. We hold that respondent has properly put section 482 in issue and that petitioners have the burden of proof. The25 second issue is whether respondent erred in allocating, pursuant to sections 61 and 482, either to Utah Bank and Idaho Bank or to Management Company 40 percent of the net premiums which Security Life received during the years in issue for reinsuring credit insurance. In all essential respects, the facts of the case at bar are the same as those in Local Finance Corporation, 48 T.C. 773">48 T.C. 773 (1967). Because of our decision in that case, most of petitioners' arguments on this issue are untenable. Petitioners do, however, make two arguments concerning the actuarial soundness of respondent's allocations which are not foreclosed by our earlier decision. 15Petitioners' main actuarial argument is based upon the testimony of their expert actuary. The crux of the testimony is the opinion contained in the following exchange: Q. What is your opinion? A. The size and nature of the risk assumed by this company [Security Life] in relationship to its capital structure required it to retain every dollar that it could possibly do so. Q. To stay on an actuarially sound basis? A. Yes. Petitioners' actuary based26 his opinion upon the amount of risk which Security Life reinsured and upon factors in its insurance operation which might have invited high mortality rates. Petitioners claim that their actuarial evidence demonstrates that Security Life would have been actuarially unsound if it had paid an insurance commission to the Banks equal to what respondent now allocates to them. It follows, petitioners argue, that respondent's allocation pursuant to sections 61 and 482 is unreasonable. We do not agree. The central fact upon which petitioners' actuary based his testimony was Security Life's initial capital structure of $37,500. In the above-quoted passage he said that Security Life assumed great risk "in relationship to its capital structure." Respondent's actuary pointed out that Security Life's initial capitalization was unusually low for an insurance company. Petitioners' actuary corroborated this with the following testimony: Now, within the life insurance industry there is a very much used rule of thumb for new life insurance companies that is to establish it with capital and surplus of approximately 100 times its maximum risk on one life. This is arbitrary and a rule of thumb, 27 but it is also true that throughout the industry the amount that companies will retain on one life is closely in that neighborhood. The maximum risk on one life under the policies reinsured by Security Life was $5,000. Using the formula suggested by petitioners' actuary, Security Life's initial capitalization should have been $500,000, not $37,500. If its initial capitalization had been $500,000 rather than $37,500, petitioners' actuarial evidence would be meaningless. The validity of the evidence, in other words, hinges upon the fact that Security Life began business as an undercapitalized insurance company. This evidence does not persuade us that respondent's allocation pursuant to sections 61 and 482 is unreasonable. Petitioners make another actuarial argument based upon the fact that respondent, during trial and on brief, did not allocate to them Security Life's income from reinsuring risks on lines of insurance other than what we herein refer to as credit insurance. Petitioners contend that respondent ignored these lines because Security Life had a much higher claims experience with them than with credit insurance. Petitioners argue that this omission by respondent is a concession28 that a 40 percent allocation on the other lines of insurance would be unreasonable. They conclude that what is unreasonable for the other lines of insurance is also unreasonable for credit insurance. We do not agree. Petitioners did not attempt to prove any business or actuarial similarities between Security Life's reinsurance of credit insurance and its reinsurance of other lines. It follows that we cannot draw inferences between the two lines. We do not decide that meaning, if any, attaches to the fact that respondent did not allocate Security Life's income from reinsuring the other lines of insurance. Neither of petitioners' actuarial arguments persuades us that respondent's allocation pursuant to sections 61 and 482 is unreasonable. The arguments do not, therefore, distinguish the present case from Local Finance Corporation, supra. It follows that we must uphold as reasonable respondent's allocation of part of Security Life's income. One problem remains - to which taxpayer should we allocate the income in question. Respondent, in his notices of deficiency, allocates the income either to Utah Bank and Idaho Bank or to Management Company. Petitioners argue that*29 the only taxpayers to which we can properly allocate the income are Smith and Agency, neither of which is a party herein. Their theory is based upon the facts that from 1948 through 1954 insurance commissions for the sale of credit insurance in the two Banks were payable to Smith and that during the years here in issue Smith and Agency held licenses to sell insurance. Because insurance commissions have never been payable to petitioners, and because none of the petitioners has ever held a license to sell insurance, they argue that it is logical to allocate the income to Smith and Agency, rather than to them. We do not agree. Petitioners performed services with regard to the sale of credit insurance during the years in issue. Smith and Agency did not. Therefore, it is not proper to allocate the income to Smith and Agency. See concurring opinion in Local Finance Corporation, supra, at 797. Among the petitioners, we allocate the income to Utah Bank and Idaho Bank. Our decision in Local Finance Corporation dictates this result. Decisions will be entered under Rule 50. Footnotes1. Proceedings of the following petitioners are consolidated herewith: First Security Company, Docket No. 1191-63, and First Security Bank of Idaho, N.A., Docket No. 1216-63.↩2. All statutory references are to the Internal Revenue Code of 1954, unless otherwise specified. ↩3. The statutory notice received by petitioner First Security Bank of Idaho, N.A., contained adjustments to certain net operating loss carrybacks. Because of these adjustments, this Court has jurisdiction under section 6214(b) to determine the correctness of respondent's allocations to this petitioner for the years 1956 and 1959.↩4. Although the new holding company received the name of the old one - First Security Corporation - while the old one changed its name to First Security Investment Company, the term "Holding Company" will continue to refer to the pre-reorganization holding company.↩5. For a description of the credit insurance industry, see Local Finance Corporation, 48 T.C. 773">48 T.C. 773↩ (1967), at 776 et seq. 6. National is a leading nationwide insurance company. It is independent of and unrelated to Holding Company and its subsidiaries.↩7. The Life Insurance Company Income Tax Act of 1959 in large part eliminated the tax savings. See generally Mertens, sec. 44A.01 et seq.↩8. Security Life's capital was increased to $100,000 in 1956 through a $75,000 stock dividend. ↩9. This was an unusually low capitalization with which to begin an insurance company. In 1954 Texas had low minimum capitalization requirements for incorporating insurance companies.↩10. The maximum risk on one life under the the policies which Security Life reinsured was $5,000.↩11. Security Life never developed into a fullline, direct-writing company.↩12. These figures are derived from an extensive time-cost study prepared by an employee of Management Company.↩13. This figure is derived from the time-cost study described in footnote 12, supra.↩1. Gross premium less cancellations and adjustments. ↩2. Includes 1958 reserve adjustment.↩1. Security Life paid a dividend of $389,821.61 to Holding Company during 1959.↩14. During the trial and on brief, respondent only urged the allocation of 40 percent of the net premiums which Security Life received from reinsuring credit insurance. He did not allocate any income which Security Life received for reinsuring risks on mortgage, twindollar, and borrow-by-check insurance, three types of insurance which Security Life reinsured in addition to what we refer to herein as credit insurance.↩15. See Local Finance Corporation, supra, at 791↩.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625689/	HENRY J. WARD, BELVIA W. WARD, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentWard v. CommissionerDocket No. 3984-75.United States Tax CourtT.C. Memo 1976-79; 1976 Tax Ct. Memo LEXIS 323; 35 T.C.M. (CCH) 344; T.C.M. (RIA) 760079; March 16, 1976, Filed 323 Petitioner Henry J. Ward, a pipe fitter, drove his car to work each day and returned home at night. No public transportation was available between petitioner's home and his job site. He received $5.00 a day travel allowance from his employer because of a provision in his union contract regarding job assignments in excess of twenty miles beyond his union headquarters. During 1973, he received $1,225.00 under this arrangement, included this amount in gross income, but then deducted an equal amount as employee business expenses. Held, petitioner's expenses are nondeductible commuting expenses under section 262, I.R.C. 1954. Henry J. Ward, 324 pro se. Randolph D. Mason, for the respondent. WILESMEMORANDUM FINDINGS OF FACT AND OPINION WILES, Judge: Respondent determined a deficiency in petitioners' income taxes for 1973 of $392.04. The only issue is whether certain expenses which Henry J. Ward (hereinafter petitioner) incurred are deductible under section 162 as ordinary and necessary business expenses. 1FINDINGS OF FACT Some facts were stipulated and are found accordingly. Petitioner and his wife, Belvia, lived in Huntingtown, Maryland, when they filed their joint 1973 income tax return and when they filed their petition in this case. Petitioner is a pipe fitter and a member of Pipe Fitters' Union Local No. 602 in Washington, D.C. On October 20, 1970, petitioner was hired as a pipe fitter for the Bechtel Corporation, the contractor building the Calvert Cliffs Atomic Energy Plant for Baltimore Gas and Electric Company. Bechtel employed petitioner at Lusby, Maryland which is seventeen miles from petitioner's home in Huntingtown, Maryland. Each day petitioner drove his car to the job site at325 Lusby and returned home at night. During 1973, petitioner received $5.00 a day as a travel allowance from Bechtel because of a provision in his union contract regarding job assignments in excess of twenty miles beyond his union headquarters. Lusby, Maryland is forty-nine miles from union headquarters in Washington, D.C. Under this arrangement, petitioner received $1,225.00 in travel allowance during 1973 from Bechtel. Petitioner included this amount in gross income but deducted an equal amount as employee business expenses. Bechtel employed petitioner at Lusby between October 20, 1970, and February 5, 1974. He was removed from the payroll on February 5, 1974, after a period of absence because of an injury. Petitioner was rehired one week later, on February 12, and was employed by Bechtel at the time of trial. During 1973, no public transportation was available to petitioner between his home and the Lusby job site. Although the duration of his employment was not specified when Bechtel originally hired him, petitioner knew that he would probably only work at Lusby for a few years because of the nature of the construction project. OPINION The only issue 2 is whether certain326 expenses which petitioner incurred are deductible under section 162 as ordinary and necessary business expenses. 3, governs this issue. 4 In that case, taxpayer lived a great distance from his principal place of business. Nevertheless, the Supreme Court found that the cost of traveling that distance was a nondeductible, commuting expense. 5 The distance traveled did not alter the character of the expense. Accordingly, 327 Decision will be entered for the respondent.Footnotes1. Statutory references are to the Internal Revenue Code of 1954, unless otherwise indicated.↩2. Respondent also argues that petitioner improperly computed the amount of his deduction. In light of our holding, we need not reach this issue. ↩3. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General.--There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including-- * (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business * ↩4. The record does not indicate that petitioner carried any tools to work, , nor does there appear to be any other way to distinguish Flowers.↩5. Sec. 1.262-1(b)(5). * * The taxpayer's costs of commuting to his place of business or employment are personal expenses and do not qualify as deductible expenses. * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625690/	Donald R. DiBona and Randi I. DiBona v. Commissioner.Di Bona v. CommissionerDocket No. 3563-66.United States Tax CourtT.C. Memo 1968-214; 1968 Tax Ct. Memo LEXIS 86; 27 T.C.M. (CCH) 1055; T.C.M. (RIA) 68214; September 24, 1968. Filed 86 Facts: Petitioner, a candidate for a Ph.D. degree, performed services under a teaching assistantship for which he received monthly payments from Iowa State University. He excluded these payments from his gross income as a scholarship or fellowship grant pursuant to section 117, I.R.C. 1954. Held: The amounts received by petitioner do not represent payments under a scholarship or fellowship grant since these payments were primarily for the purpose of compensating petitioner for services rendered rather than for the primary purpose of furthering his own education and training. Held, further: In order for section 117(b) to be applicable, there must first be a scholarship or fellowship grant, neither of which petitioner held. Lioyd Karr and Clara Mann Judisch, for the petitioners. James T. Finlen, Jr., for the respondent. IRWINMemorandum Findings of Fact and Opinion IRWIN, Judge: The respondent determined a deficiency in petitioners' income tax for the taxable year 1964 in the amount of $322.41. The parties have made concessions which can be given effect in a Rule 50 computation. The sole issue remaining for our decision is whether the sum of $520 received by petitioner is excludable 87 from gross income under section 117(a) (1), Internal Revenue Code of 1954, 1 as a "scholarship or fellowship" grant. Findings of Fact Some of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is hereby incorporated by this reference. Donald R. DiBona (hereinafter petitioner) and Randi I. DiBona, husband and wife, were residents of Ames, Iowa, on the date they filed their petition in this proceeding. They timely filed a joint Federal income tax return for the calendar year 1964 with the district director of internal revenue at Des Moines, Iowa. Petitioner received a bachelor of science degree from Harvard University in 1960. After completing his undergraduate education he was employed for three years by Massachusetts General Hospital as a technician in electronic microscopy. Petitioner was admitted to and first enrolled at the Graduate College of Iowa State University of Science and Technology (hereinafter ISU) in September 1963. In his application for admission thereto, petitioner indicated that he would seek a Doctor of Philosophy degree (hereinafter Ph.D.) 88 with major emphasis in cell biology and that he intended to pursue a career in biological research. Petitioner received the Ph.D. from ISU in August 1966. His major emphasis during his graduate work there was in cell biology. ISU does not require a master's degree in order to receive the Ph.D. There are three types of financial assistance available to graduate students at ISU. They are using ISU's nomenclature: (1) fellowships and traineeships, which are outright grants to "superior" students requiring no duties by the respective recipients and which are financed generally by government and industry (although generally administered by the university); (2) assistantships, both teaching and research, which are appointments to the university staff requiring 1056 services which are financed out of the regular university budget for employees; and (3) part-time labor available to any student. In ISU's nomenclature the term "scholarship" is restricted to undergraduate grants. Petitioner at no time applied for or held a fellowship or traineeship. Nor when he first enrolled at ISU was he eligible for an assistantship since he had to first prove his capabilities as a graduate student. However, 89 in 1964 petitioner was granted a teaching assistantship for which he received $130 per month for the months of September, October, November, and December 1964, or a total of $520 for that period. His appointment was for the nine-month academic year beginning September 1964. During 1964 petitioner received additional amounts from ISU for research which was not related to his teaching assistantship and, therefore, is not in issue here. An academic year at ISU is divided into four quarters consisting of three months to each quarter. The fall quarter embraces the months of September, October, and November; the winter quarter the months of December, January, and February; the spring quarter the months of March, April, and May; and the summer quarter the months of June, July, and August. The course petitioner was responsible for teaching during the period of his teaching assistantship, which began with the fall quarter of 1964, deals with the use of the electronic microscope in biological research and was officially listed in ISU's catalog as "Biochemistry and Biophysics 575." It is among those normally taught graduate students. Petitioner fully understood at the beginning of the fall quarter 90 that the $130 monthly payments were for teaching. However, petitioner did not actually first teach this course in electronic microscopy until the winter quarter beginning in December 1964. Nevertheless, he would have taught it during the fall quarter as well if there had been a demand for the course, which there was not since not enough students were interested or qualified to take the course that quarter, even though it was listed in the catalog for all quarters during the academic year. A prerequisite course was given during the fall quarter to qualify students for the course petitioner was to teach. Even though petitioner did not actually teach the course that he was paid and responsible for during the fall quarter, he began preparations during that period to teach it the following quarter. Furthermore, petitioner during the fall quarter occasionally gave demonstrations and performed services with regard to other formal courses. When he began teaching the course during the winter quarter, it met for two afternoons a week in the laboratory. In 1964 ISU did not impose a minimum teaching requirement on every graduate student who pursues a Ph.D. However, this did not preclude a department 91 head or the student's major professor from requiring teaching as a prerequisite to obtaining a degree. In 1964 petitioner's major professor, Dr. L. Evans Roth, had made it understood that all students under his supervision and control would have to teach at least one quarter. Thus, any student under his direction generally had to teach at least one quarter whether or not the department itself imposed any teaching requirement. However, the record does not indicate whether all students under his direction actually did teach at least one quarter. Nor does the record indicate whether those students who did teach for one quarter were paid anything at all if they were not on a teaching assistantship or even whether or not all students had to hold an assistantship in order to teach. Finally, the record does not indicate that petitioner had any knowledge at the time he was informed that he received the assistantship that he would be required to teach at least one quarter as a condition to receiving his Ph.D. degree. Petitioner took his written preliminary examination for his degree in late spring 1965 and his oral preliminary examination about a month later in July. The teaching experience 92 gained as a result of the assistantship was of "some benefit" to him in preparing for and taking these examinations. Federal income taxes were withheld by ISU from the compensation received by petitioner as a graduate teaching assistant and ISU duly paid the social security taxes due the Federal Government as a result of the payments made to petitioner. ISU also made up "personnel action sheets" on petitioner. However, ISU maintains no such sheets for fellowship grantees nor does it withhold Federal income taxes from the amounts received by fellowship grantees. During the spring quarter of the 1966-67 academic year (beginning in September 1057 1966) there were approximately 2,500 graduate students at ISU. Of this total 934 held assistantships (of which about two-thirds were research assistantships) while 214 were on fellowships. Of the remaining graduate students all but about 300-400 received some form of financial assistance. While neither 1966 nor 1967 is in issue, these figures are not significantly different from the latter part of 1964, which year is in issue herein. It is expected by ISU's administration that all teaching assistants will render services to the university; it 93 would be improper for a student to hold such an assistantship and not render services therefor. The fact that some students may hold such an assistantship and not render services is probably the result of administrative error; the administrativee officers would not knowingly approve such an arrangement. Not all teaching assistants are required to be in charge of teaching a particular course; many fulfill their obligation under the assistantship by simply assisting in the teaching function and in other ways performing services. The amounts received by graduate teaching assistants teaching part time is no greater than the amounts regular staff instructors would receive for the same services. The source of funds used to pay graduate teaching assistants is from general university funds which are used to pay all professors and instructors. ISU does not have authority to grant fellowships from these funds and it does not do so. The principal source of revenue for ISU's general budget is derived from state appropriations and matriculation and course fees from students. ISU's administrative officers believe that an employer-employee relationship exists between each graduate teaching assistant 94 and the university as far as his teaching function is concerned. The teaching assistant, like a regular staff member, is subject to his department chairman when his performance is not adequate as a teacher. If, however, his academic performance is unsatisfactory, then his major professor also has authority over him. A student-teacher relationship exists between each student and his major professor. If ISU did not employ teaching assistants, it would be necessary to hire other teachers or instructors to perform the teaching. Generally, the department chairman of each department requests a spedific number of teaching assistants for the ensuing academic year and his request is approved by the University if there is a demonstrated need for teaching services and if sufficient funds are available. There are normally more applicants than positions avilable. A person is appointed as a teaching assistant only if there is a need for teaching to be done and if he appears qualified for the position. Petitioner was chosen as a teaching assistant because of a need for assistance in the course that he taught and because he had the best experience in this area. No one may hold an assistantship at 95 ISU unless he is also an enrolled graduate student. Although the graduate programs at ISU are designed to prepare the students for careers in research, ISU recognized no difference in status between a research assistantship and a teaching assistantship, other than the fact that the latter is paid $10 per month more. Nor does the business office of ISU make any distinction in the treatment of the two types of assistantships for its purposes. Teaching assistants, unlike full-time professors and instructors, generally are not listed officially as members of the faculty staff. If a regular instructor is also taking courses toward a Ph.D., he may be officially both a member of the faculty staff as well as a graduate student, but he is not classified as a teaching assistant. As a staff member, even though he may also be taking courses, he is entitled to all prerogatives of that status that teaching assistants are not entitled to. Some of the privileges not accorded to teaching assistants that instructors and other regular staff members are entitled to include: parking privileges, participation in retirement programs, use of certain university resources and facilities, and tenure. On the 96 other hand, the tuition paid by assistants is reduced below the amount paid by graduate students who are not also teaching or research assistants. Even though a teaching assistant is not officially a member of the faculty staff, he is nevertheless a part-time employee and as such comes under some but not all of the regulations and employment policies applicable to other employees. If he has been teaching for a while, he may be given a raise in recognition of his additional experience. He may be required by his department head to attend regular instructional staff meetings. As a graduate student, however, if he gets into difficulty, he is subject to the disciplinary action of the dean of students. If a teaching assistant's academic work necessitates his placement on probation or is otherwise unsatisfactory, his assistantship 1058 would probably be terminated. One reason for this is that the student will then have more time to concentrate on his studies. If a student is relieved of the assistantship for academic reasons, the assistantship could terminate at the end of the current quarter, although normally it is continued through the academic year unless the student is doing very poorly. 97 Petitioner excluded from his gross income in 1964 the $520 paid by ISU for his four months in the position of a teaching assistant in 1964. Respondent determined that such an amount was not excludable. Ultimate Findings of Fact The amounts paid to petitioner constituted compensation for services rendered. The primary purpose of the payments pursuant to the assistantship was to compensate petitioner. Petitioner did not hold a scholarship or fellowship grant during the taxable year. Opinion Petitioner herein contends that the payments he received from ISU as a teaching assistant should be excluded from his income by virtue of section 117(a) which in pertinent part reads as follows: SEC. 117. SCHOLARSHIPS AND FELLOWSHIP GRANTS. (a) General Rule. - In the case of an individual, gross income does not include - (1) any amount received - (A) as a scholarship at an educational institution (as defined in section 151(e) (4)), or (B) as a fellowship grant, * * * It is quite apparent upon an initial reading of this section that it shall not be applicable unless there is first a "scholarship" or "fellowship grant." Whereas generally it is a perfunctory determination whether or not certain payments 98 represent either a scholarship or fellowship grant, a stumbling block is quite frequently encountered when the recipient of the payments is required to perform services for the payor. In such a case, we have often been faced, as we are here, with the question of whether the payments in question represented compensation on the one hand or a scholarship or fellowship grant on the other. Only in the latter case could the payments therefor be excludable. See Elmer L. Reese, Jr., 45 T.C. 407">45 T.C. 407 (1966), and Stephen L. Zolnay, 49 T.C. 389">49 T.C. 389 (1968), and the cases cited therein. Thus, our initial inquiry should be into the question of whether or not the payments petitioner received herein constituted "compensation for services." Ethel M. Bonn 34 T.C. 64">34 T.C. 64 (1960). However, a determination that the payments represented compensation for services would not, without more, mean that the payments petitioner received should be included in his gross income. To be included in income, the arrangement between the parties must be primarily one of employment and the payments, even though for study or research, must be primarily payments of compensation rather than for the primary purpose of enabling the recipient 99 to carry on the studies or research in furtherance of his own education and training. [Emphasis added.] [Aileene Evans], 34 T.C. 720">34 T.C. 720, 726-7 (1960).] Thus, if payments are made primarily to compensate the recipient, they do not represent a scholarship or fellowship grant. This "primary purpose" test has been applied in other decided cases wherein we have attempted to determine whether the payments in question constituted a scholarship or fellowship. See Reese and Zolnay, both supra, and the cases cited therein. The Reese case and Ussery v. United States, 296 F. 2d 582 (C.A. 5, 1961), contain an exhaustive analysis of the historical and legislative background to section 117.2100 Since generally there is a dual or mutual purpose in these cases, the primary purpose in a particular case is usually difficult to resolve and is dependent upon the facts and circumstances of that case. See Zolnay, supra, at p. 395. In the case at bar, however, we believe the record clearly shows both that (1) petitioner was compensated for services that he rendered to ISU and 1059 that (2) the primary purpose of the payments was to compensate petitioner. It is quite clear that petitioner taught courses and was paid therefor. The only apparent basis on which he could argue that he was not compensated for services is that he did not teach during the fall quarter of the taxable year. However, the record clearly shows that both petitioner and ISU expected that he would perform services and that he actually did perform some services. Furthermore, he would have taught the course he was appointed to teach if there had been enough enrolled students to warrant it. In addition, ISU does not generally permit a student to hold an assistantship without performing 101 services. The fact that one performs no services or less than originally contemplated in no way changes the compensation characteristics of the payments that he receives therefor, absent the donative intent requisite for a gift. The intent of the parties, not the services actually performed, is controlling. Likewise, we believe that the record clearly shows that the primary purpose of the payments was to compensate petitioner. This conclusion is based primarily on the way the teaching assistantships were determined and assigned at ISU. The number of teaching assistantships was not dependent upon the number of qualified nonfellowship students in need of financial assistance. Rather, the number was dependent upon the need for teachers and the availability of funds to pay teachers. If a graduate student were not available to teach a course, a "regular" staff member would be hired to teach it. If there were no teaching positions open, an otherwise qualified student would not receive a teaching assistantship; apparently no teaching positions would be added merely to accommodate a student in need of financial assistance. The only conclusion that we draw from this is that when ISU needed 102 teachers, qualified graduate students were selected therefor when available. While it is true that payments for the teaching might enable the student to further his own education and training, it is equally clear that the primary purpose of such payments is to compensate the recipient. Any benefit to the recipient, whether in substantive knowledge, self-confidence, or economical (such as tuition reduction) appears to be strictly incidental. Other factors which we have used in our determination that the primary purpose of ISU's teaching assistantship was to compensate petitioner include the fundamental fact that petitioner understood from the beginning of the fall quarter that he was to be paid for services rendered. In addition, the source of funds used to pay teaching assistants is from the general university budget which is used to pay all professors and instructors; ISU does not have authority to grant fellowships from these funds and it does not do so. Furthermore, the department chairman generally treats all teaching assistants in his department as employees and ISU believed that an employer-employee relationship exists between each teaching assistant and the University. 3 In 103 this regard ISU withheld Federal income tax from their "salary" payments, while this was not done in distributing the funds administered by ISU to the fellowship recipients. 4 While it is true that a student-teacher relationship existed between each teaching assistant and his major professor with regard to the student's graduate studies and also in some respects with regard to his teaching, this in no way diminishes the predominant or primary relationship of employer-employee of ISU to each teaching assistant. An employer-employee relationship and a student-teacher relationship, contrary to petitioner's contention, are not mutually exclusive. Petitioner also points to several differences in the privileges accorded regular staff members not generally accorded teaching assistants and vice versa. He concludes from this that the teaching 104 assistants could not be employees. While it is true that these differences existed, this in no way precludes our finding that an employer-employee relationship existed between the teaching assistant and ISU. Any proposition that an organization may not have several categories of employees each with different privileges is without merit and does not warrant further discussion. In addition, petitioner stresses the fact that ISU administratively trated teaching assistants no different from the manner it treated research assistants. Since, petitioner concludes, ISU research assistants can exclude payments under their assistantships by virtue of section 117, a fortiorari teaching assistants should also be permitted to exclude amounts they receive under their 1060 assistantships. We find little merit in this reasoning. In the first place, we are aware of no case which holds that an ISU research assistant may take advantage of the general rule of section 117(a). Secondly, this case deals with a teaching assistant, not a research assistant; how we might treat an ISU research assistant for purposes of section 117 is irrelevant to the case at bar. Since the issue herein is factual, we confine 105 our holding strictly to the facts of this case. Although both fellowships and assistantships at ISU provide financial assistance to its students, petitioner erroneously assumes that the primary purpose of both forms of financial assistance is to enable the recipients to further their own education and training. An ISU fellowship, which petitioner admits he did not hold during the taxable years, 5106 is a form of financial assistance for "superior" students from whom no services are required. If the primary purpose of both forms of financial assistance is to enable students to help pay for their graduate studies, why differentiate between fellowships and assistantships? Why should not ISU give every qualified student a fellowship? The answer to these questions lies in the inherent difference between an ISU fellowship and an ISU teaching assistantship: whereas the primary purpose of the former is to enable the recipient to further his own education and training, the primary purpose of the latter, we conclude, is to compensate the recipient. Finally, petitioner contends that the exclusionary rule of section 117(a) should apply because a teaching requirement was imposed on all candidates for the degree petitioner sought irrespective of whether or not they held teaching assistantships. He bases this argument on his interpretation of section 117(b)6107 which he believes establishes a mechanical test wherby payment for services required of all degree candidates would automatically fall within the exclusionary rule of 117(a). Even assuming that the record in this case clearly indicated that teaching was required of all Ph.D. candidates, which it does not, we would disagree. The limitation and the exception thereto in section 117(b) is inapplicable unless we first determine that there is a scholarship or fellowship, and we have held herein that petitioner held neither. As we stated in Reese, supra, at p. 413: We think that a proper reading of the statute requires that before the exclusion comes into play there must be a determination that the payment sought to be excluded has the normal characteristics associated with the term "scholarship." Only if the "amount received" is a "scholarship" does the limitation and the exception thereto become operative. [Emphasis added.] In other words, we turn to section 117(a) and the limitations in 117(b) only after we decide that there is a scholarship or fellowship involved. If, on the other hand, the payments do not have the "normal characteristics" of a scholarship or fellowship, then it is not necessary to look at section 117 and the mechanical *108 tests therein. Reese and Zolnay, both supra. The Third Circuit has followed this approach in Johnson v. Bingler, 396 F. 2d 258 (C.A. 3, June 5, 1968). Therefore, any finding that teaching was required of all candidates for the degree sought by petitioner would be irrelevant since we have held that petitioner was not a recipient of either a scholarship or fellowship grant as a result of his failure to show that the primary purpose of the payments was to further his education and training rather than to compensate him for services rendered or to be rendered. See Reese, supra, p. 416. The payments petitioner received as a teaching assistant are, therefore, taxable as compensation for services rendered. To reflect the concessions of the parties. Decision will be entered under Rule 50. 1061 Footnotes1. All statutory references are to the Internal Revenue Code of 1954.↩2. Our application of the "primary purpose" test as it is used herein is inherent in the legislative and judicial history of the scholarship area and exists wholly independent from any such test in respondent's regulation section 1.117-4(c), the validity of which has been questioned. See Johnson v. Bingler, 396 F.2d 258">396 F. 2d 258(C.A. 3, June 5, 1968); 1 Mertens, Law of Federal Income Taxation, sec. 7.42, pp. 106-118; and 46 Taxes 485">46 Taxes 485-493 (August 1968). Since we too have found this regulation somewhat cumbersome, we await the fulfillment of respondent's announced intention to revise his regulations under sec. 117. See Reese, supra, p. 416↩, footnote No. 6.3. We recognize that even though ISU considers an employer-employee relationship to exist, this does not necessarily establish such a legal relationship. ↩4. We also recognize that this factor, considered alone, is not determinative of an employer-employee relationship. See Chander P. Bhalla, 35 T.C. 13">35 T.C. 13, 17-18 (1960); and Stephen L. Zolnay, supra, at p. 398↩.5. Petitioner contends that he held a "scholarship" rather than a "fellowship." While we agree with his contention that we should not be bound by ISU's application of that term only to undergraduate grants, we feel the distinction is immaterial in this case.6. The general rule of section 117(a) providing for exclusion from gross income of scholarship or fellowship grants is limited by the first sentence of section 117(b) which provides that 117 (a) shall not apply to that portion of any amount received by a degree candidate which represents payment for part-time employment services required as a condition to receiving the grant. However, the last sentence of section 117 (b) is an exception to the general limitation in the first sentence of 117(b). It provides that if services are required of all candidiates for a particular degree as a condition to receiving such degree, such services shall not be considered as part-time employment for purposes of the first sentence of 117(b).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625691/	APPEAL OF HUGH WALLACE CO.Hugh Wallace Co. v. CommissionerDocket No. 1274.United States Board of Tax Appeals2 B.T.A. 1072; 1925 BTA LEXIS 2177; October 28, 1925, Decided Submitted February 12, 1925. 2177 1. Depreciation claimed by taxpayer allowed. 2. Amounts credited to profit and loss on taxpayer's books, which represent its undistributed proportion as a stockholder in the profits of other corporations, should be excluded in computing invested capital. 3. The deduction of certain items as expenses disallowed for want of proof. 4. The amount by which capital has been impaired by the payment of dividends to be computed for the purpose of determining invested capital. Floyd G. Arms for the taxpayer Benjamin H. Saunders, Esq., for the Commissioner. MARQUETTE 1073 Before IVINS, 1 KORNER, and MARQUETTE. This is an appeal from the determination of a deficiency in income and profits taxes for the year 1918 in the amount of $9,807.56. FINDINGS OF FACT. The taxpayer is a Michigan corporation engaged in the manufacture of robes, with its principal office at Detroit, and it appeals from the determination of the Commissioner as set forth in a deficiency letter mailed November 4, 1924. In the year 1905 the taxpayer made and entered into a contract with the2178 Berlin Robe Co., a Canadian corporation, hereinafter called the Robe Company, whereby it agreed to manage and operate that company, and as compensation therefor was to receive 4 per cent of the net profits. Under the contract the taxpayer had the right to and did purchase one-third of the capital stock of the Robe Company, which it retained until 1917, when it sold its stock and ceased the management and direction of the Robe Company. During the period of its operations, at the end of each fiscal period, it received the percentage of the profits under the contract for its services in the management of the Robe Company, and also set up on its books each year as a credit to profit and loss one-third of the net earnings of the Robe Company, after deduction of the 4 per cent operating compensation, as its share of the net profits by reason of its ownership of the one-third of the capital stock of the Robe Company. No dividends were declared or paid by the Robe Company, and the net profits remained in the business of that company. In the year 1910 the taxpayer purchased a robe factory and caused it to be incorporated under the name of the American Buffalo Robe Co., hereinafter called2179 the Buffalo Company, and owned the entire capital stock of that company. The profits made by the Buffalo Company were carried into the profit and loss account of the taxpayer for each fiscal period until 1914, when the taxpayer sold all its stock in the Buffalo Company. No dividends were ever declared or paid by the Buffalo Company and the net profits remained in the business of the company. 1074 During the period January 1, 1913, to December 31, 1917, the taxpayer paid dividends in the amount of $62,000 on its common and preferred stock. The examining revenue agent, in his audit, recomputed depreciation from 1905 and accumulated $39,269.47 thereof to January 1, 1918. The profits of the Robe Company and the Buffalo Company were excluded from surplus and with the additional depreciation and the dividends paid during the period January 1, 1913, to December 31, 1917, an impairment of capital was disclosed. Upon review the Commissioner reversed the action of the revenue agent with respect to the accumulated depreciation and reduced the deficit. In the deficiency letter it appears that the accumulated depreciation was restored as of January 1, 1918, and was first applied2180 against an operating deficit of $29,614.50. The excess of the accumulated depreciation over the operating deficit was then applied to reduce the impairment of capital in the amount of $62,000, occasioned by the payment of the dividends hereinbefore referred to, leaving, according to the deficiency letter, a deficit of $52,345.13 on January 1, 1918. The taxpayer's original invested capital was accordingly reduced by the amount of the alleged impairment of capital. The Commissioner also increased the taxpayer's income for the year 1918 by the amount of $5,095.53, in order to bring depreciation claimed by the taxpayer on its original return in harmony with its books, and also added to the taxpayer's income the amount of $1,594.33 on account of expense items applicable to the year 1917, and $629.16 on account of a paving improvement tax paid in 1918 and charged to expense. Upon the basis of the adjustments made by the Commissioner as herein set forth, additional tax was determined to be due for the year 1918 in the amount of $9,807.56. At the hearing, however, the Commissioner conceded that the taxpayer is entitled to depreciation for the year 1918 in the amount of $8,800 and is2181 also entitled to an adjustment of invested capital for the year 1918 on account of the accumulated depreciation hereinbefore referred to and that the deficiency involved herein should be reduced to $3,984.95. DECISION. The amount of the deficiency to be assessed should be computed in accordance with the following opinion and will be settled on consent or on 10 days' notice, under Rule 50. OPINION. MARQUETTE: It appears from the evidence in this appeal that when the Commissioner reversed the action of the examining revenue agent in accumulating depreciation, and thereby increased the depreciation 1075 reserve and reduced surplus, he restored the amount of such accumulated depreciation as of January 1, 1918, and first applied it against an alleged operating deficit. The excess of the accumulated depreciation over the alleged operating deficit was then applied to reduce an impairment of capital caused by the payment of dividends in the amount of $62,000 during the period January 1, 1913, to December 31, 1917, leaving, according to the deficiency letter, an impairment of capital in the amount of $52,345.13 on January 1, 1918. That there was on January 1, 1918, an2182 impairment of capital is established by the evidence in this appeal, as hereinafter set forth, but it is not clear that the amount was as set forth in the deficiency letter. In fact, the Commissioner so conceded at the hearing. The adjustment on account of the accumulated depreciation should be made over the period of January 1, 1913, to December 31, 1917, taking into consideration the dividends paid and the earnings or operating losses for that period as the case may be, in order to determine the true amount by which the capital was impaired as of January 1, 1918. The Commissioner conceded at the hearing that the taxpayer is entitled to a deduction for depreciation in the amount of $8,800 for the year 1918. This leaves for consideration only the question as to the exclusion from the taxpayer's invested capital for the year 1918 of the amounts set up on its books as credits to profit and loss on account of the earnings of the Robe Company and the Buffalo Company, the items of alleged expense disallowed by the Commissioner and added to its income for the year 1918, and whether or not the payment of dividends during the period January 1, 1913, to December 31, 1917, constituted2183 an impairment of capital. We are satisfied from the evidence that the Commissioner's action in excluding from the taxpayer's invested capital the amounts carried on its books as profits of the Robe Company and the Buffalo Company was correct and should be approved. These profits were represented on the taxpayer's books by mere bookkeeping entries and the taxpayer never at any time received the money they were alleged to represent. Neither the Robe Company nor the Buffealo Company ever paid dividends during the time the taxpayer owned stock therein. Therefore, the entries did not represent actual assets belonging to the taxpayer. They represented nothing, in fact, and were properly excluded by the Commissioner from the taxpayer's capital. With reference to the items of alleged expense for the year 1919 which the Commissioner has disallowed, the taxpayer has introduced no evidence to support its claim that they were proper deductions 1076 from income, and therefore the Commissioner's action with respect thereto is approved. The record in this appeal discloses, relative to the impairment of capital, that on January 1, 1913, the taxpayer's books of account showed apparent2184 undivided profits and surplus of $66,126.65. These undivided profits and surplus, however, included $55,318.07, representing the amounts carried by the taxpayer on its books as profits accruing to it on account of its ownership of stock in the Robe Company and the Buffalo Company. Excluding that amount from the apparent book surplus and undivided profits, there would be left, as of January 1, 1913, undivided profits and surplus in the amount of $10,808.58. In February, 1913, the taxpayer paid dividends of $34,000. The payment of these dividends, therefore, constituted an impairment of capital in the amount of $23,191.42. So far as the record discloses, this deficit in capital was not subsequently wiped out. In February, 1916, dividends were paid in the amount of $14,000, and in November, 1917, dividends were again paid in the amount of $14,000. It is clear, therefore, that capital was impaired by the payment of these dividends. However, the exact amount by which capital was impaired on January 1, 1913, and by which amount the taxpayer's original invested capital must be reduced as of that date, can not be accurately determined from the evidence before the Board. It should, *2185 however, be adjusted as hereinbefore set forth. Footnotes1. This decision was prepared during Mr. Ivins's term of office. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625692/	Barretville Bank & Trust Co. v. Commissioner.Barretville Bank & Trust Co. v. CommissionerDocket No. 68791.United States Tax CourtT.C. Memo 1958-148; 1958 Tax Ct. Memo LEXIS 77; 17 T.C.M. (CCH) 749; T.C.M. (RIA) 58148; July 31, 195877 Edgar A. Ryerson, C.P.A., 99 North 3rd Street, Memphis, Tenn., for the petitioner. Lester R. Uretz, Esq., for the respondent. TIETJENSMemorandum Opinion TIETJENS, Judge: The Commissioner determined deficiencies in income tax for the years 1954 and 1955 in the amounts of $23,717.37 and $21,495.01, respectively. The question for decision is whether the petitioner is entitled to deductions for depreciation in the taxable years of 10 per cent of the cost of depreciable property in addition to depreciation on a straight line method. [Findings of Fact] All of the facts are stipulated and are so found. Petitioner is a Tennessee banking corporation operating a bank and five branches in Shelby County, Tennessee. Its income tax returns were filed with the director of internal revenue at Nashville, Tennessee. In a report to the petitioner from the State Bank Examiners, State of Tennessee, Division of Banking, dated November 15, 1954, the following excerpt appears: "An examination of the total fixed assets carried on the books at date of this examination represents a heavy capital investment and as directed in prior examinations special attention should be given78 to reduce the book value to more conservative proportions. Since the regular annual depreciation in effect will reduce the investment slowly, it is believed and so, ordered that it should be additionally depreciated annually not less than 10% of its original investment." In a report to the petitioner from the State Bank Examiners, State of Tennessee, Division of Banking, dated November 26, 1955, the following excerpt appears: "An examination of the total fixed assets carried on the books at the date of current examination represents a heavy investment and as directed in prior examinations special attention should be given to reduce the book value to a more conservative figure. Since the regular annual depreciation in effect will reduce this investment slowly, it is believed and so ordered that it should be additionally depreciated annually not less than 10% of its original investment." In its corporation income tax returns for the calendar years 1954 and 1955 the petitioner claimed deductions for depreciation computed on the straight line method, plus additional depreciation of 10 per cent of the original cost of all depreciable property. [Opinion] The respondent in the79 statutory notice of deficiency determined that the petitioner was not entitled to depreciation of 10 per cent of the cost of depreciable property in addition to depreciation computed by the straight line method for the taxable years involved. The petitioner's argument is succinct. The issue is stated to be "Whether the petitioner should be allowed the amount of depreciation ordered written off by the Bank Examiners." After summarizing the stipulated facts, the petitioner concludes on brief that the deficiencies for "Both years were based on an increase of adjusted net income by the disallowance of depreciation written off in obedience to the Bank Examiners. "It follows that the deficiency determined by the respondent in this proceeding is in error." The petitioner cites no authorities for its position. As a matter of fact, the courts have consistently held that rules of accounting forced on taxpayers by regulatory agencies or bodies are not binding upon the Commissioner of Internal Revenue in determining income tax liability. ; ; ;80 , affd. (C.A. 9, 1951). The petitioner has introduced no evidence to show that depreciation by the straight line method employed by the petitioner and allowed by the Commissioner was in any way unreasonable. Neither has any evidence been introduced to show that the 10 per cent additional depreciation ordered by the state bank examiners had a more reasonable basis for Federal income tax purposes than the straight line depreciation. The petitioner has failed to show error in the Commissioner's determination. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625694/	UNITED BUSINESS CORPORATION OF AMERICA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.United Business Corp. v. CommissionerDocket No. 32742.United States Board of Tax Appeals33 B.T.A. 83; 1935 BTA LEXIS 808; September 25, 1935, Promulgated 808 1. Petitioner corporation was availed of during the taxable years for the purpose of preventing the imposition of the surtax on its stockholders through the medium of permitting the gains and profits to accumulate instead of being divided or distributed. 2. Since the application of section 220 of the Revenue Act of 1921 in any taxable year is wholly dependent on the facts and circumstances of that particular year, the fact that provisions of the section in question have been applied by the Board and affirmed by the Circuit Court of Appeals as to a previous year does not justify the application of the doctrine of res judicata for a later year. James P. Quigley, Esq., and Robert J. Heberle, Esq., for the petitioner. Harold Allen, Esq., and R. H. Transue, Esq., for the respondent. VAN FOSSAN 83 OPINION. VAN FOSSAN: This proceeding seeks redetermination of income tax deficiencies in the amounts of $15,399.97 and $38,657.74 for the calendar years 1922 and 1923, respectively. The asserted deficiencies include the additional tax at 25 percent of petitioner's net income for each of those years, assessed by respondent 84 809 pursuant to his certification that in his opinion petitioner's accumulation of gains and profits and additions to surplus for 1922 and 1923 were unreasonable for the purposes of its business and his determination that such unreasonable accumulations of profits were for the purpose of preventing the imposition of surtaxes upon petitioner's stockholders, within the ambit of section 220 of the Revenue Act of 1921. 1810 Petitioner having waived its assignment of error involving a claimed deduction for alleged obsolescence of buildings and equipment, the sole issue is whether, for the years 1922 and 1923, petitioner is subject to the additional tax at 25 percent under section 220, supra, as determined by the respondent. A portion of the facts were stipulated, including numerous schedules of figures and other exhibits. Such stipulation is included herein by reference. Also, a portion of the facts were adduced by testimony. A brief resume of the facts will suffice. Petitioner is a Washington state corporation with its principal office at Syracuse, New York. It has an authorized capital stock of $6,000,000, divided into 60,000 shares of common stock of the par value of $100 each. Petitioner was organized on or about April 1, 1920, by Burns Lyman Smith and his advisors, for the purpose of transferring to it certain properties owned by Smith, particularly his large real estate holdings in Seattle, so that in the event of an emergency he would be able to sell a portion of his stock more readily than an interest in his real estate, consisting of large office buildings, and, further, so that811 in the event of his death the stock of the petitioner corporation could be more readily distributed among his heirs, including two minor children. The corporation was authorized to purchase, sell, and deal in real and personal property and to borrow 85 and lend money. All of its issued capital stock has been held by Smith, except for three qualifying shares. In 1910 Smith inherited real and personal properties, of great value, from his father, and in 1920 he inherited additional similar properties from his mother. During the period April 1, 1920, to December 31, 1923, he paid into or transferred to the corporation cash, land, buildings, stocks, bonds, and securities, and received therefor the corporation's capital stock and/or credits to his personal account as follows: Properties transferred Amount enteredShares of stockCreditedCredited toby Smith to petitioner on booksissued to Smithto surplusSmith's$ 100 par valuepersonalaccount1920Land, two office building equipment (subject to $ 700,000 mortgage) net equity$1,947,527.8919,475$27.89Cash1,312.581312.58Securities449,075.004,49075.001921Cash25,000.00250Securities390,667.003,903367.001922Securities860,072.565,862$273,872,561923One-half interest in two office buildings117,500.001,175Securities203,770.002,03770.00Total3,994,925.0337,205482.47273,942.56812 All of the securities paid into or transferred to the corporation consisted of shares of stock of numerous domestic corporations, except for five different issues of bonds having a total face value of $10,700. The corporation's balance sheets disclose the following: Apr. 1, 1920Dec. 31, 1920Dec. 31, 1921AssetsCash$912.58$3,622.39$31,349.51Notes receivable232,625.00345,637.17Accounts receivable4,512.17286,305.74Stocks and bonds466,369.28885,612.85Land603,473.00603,473.00603,473.00Buildings1,674,763.721,674,763.721,676,408.22Equipment369,291.17372,011.02384,848.32Restaurant equipmentLaw library484.56144.2654.26Total2,648,925.033,358,020.844,213,689.07Liabilities and capitalNotes payable165,000.00456,651.86Accounts payable484.5613,073.135,312.09Mortgages payable700,000.00650,000.00600,000.00Reserve for depreciation53,832.16126,402.69Capital stock1,948,400.002,397,800.002,813,100.00Surplus40.4778,315.55212,222.43Total2,648,925.033,358,020.844,213,689.07Dec. 31, 1922Dec. 31, 1923AssetsCash$43,613.95$41,098.78Notes receivable515,288.84648,688.84Accounts receivable6,818.02213,653.58Stocks and bonds1,629,183.041,894,963.12Land662,223.00662,223.00Buildings1,735,158.221,735,158.22Equipment384,848.32384,848.32Restaurant equipment23,247.78Law library46.7646.76Total4,977,180.155,603,928.40Liabilities and capitalNotes payable345,327.00471,906.64Accounts payable102,831.45Mortgages payable600,000.00550,000.00Reserve for depreciation201,198.24277,314.47Capital stock3,399,300.003,720,500.00Surplus328,523.46584,207.29Total4,977,180.155,603,928.40813 86 Of the corporation's notes payable, the amounts of $189,000 for 1921, $115,090 for 1922, and $110,169.64 for 1923 represent those made payable to Smith, who discounted them at various banks and paid the proceeds over to the corporation. Also, of the corporation's notes payable, the amounts of $50,000 for 1921, $103,500 for 1922, and $50,000 for 1923 represent notes payable to various banks, and endorsed by Smith, but none of such notes were in default. The corporation's books and records further disclose the following: Apr. to 192119221923Dec. 1920Taxable net income$ 72,042.28$76,659.3854,248.59$149,539.05Nontaxable corporation dividends received8,040.0057,490.5070,047.50109,492.53Loans by corporation to Smith, unpaid end of year236,137.17599,394.90452,788.84774,624.40Debts of corporation to Smith in open account484.56102,831.45No salary was paid to Smith by the corporation during 1920 to 1923, inclusive. No dividends were declared by petitioner during any of the years 1920 to 1923, inclusive. A 3 percent dividend was declared for each of the years 1924 and 1925. From April 1, 1920, to814 the close of the year 1923, the following payments were made by Smith on account of his demand notes given to the corporation: Date of notesPrincipalInterestTotal paymentDate of paymentOct. 14, 1920$ 4,500$ 812.25$5,312.25Oct. 18, 1923Apr. 13, 19212,000304.332,304.33Oct. 18, 1923May 17, 19211,500241.501,741.50Oct. 18, 1923During the years 1922 and 1923 Smith was worth approximately three quarters of a million dollars in addition to his interest in the corporation, and had the financial ability to meet his obligations to the corporation. For each of the years 1917 to 1923, inclusive, Smith, as an individual, sustained a net loss (exclusive of dividends received), received dividends, had taxable income or loss, and paid taxes, as follows: YearNet loss Dividends Taxable incomeTotal tax paidexclusive of receivedof (loss)dividends received 1917($117,236.70)1 $82,545.30($34,691.40)$481.20 (excess profits tax).1918(63,664.14)87,466.3623,802.221,067.22 (surtax).1919(92,183.70)81,580.75(10,602.95)None.1920(32,175.93)70,876.7538,700.823,173.15 (surtax).1921(5,562.94)3,474.00(2,088.94)None.1922(7,673.78)448.00(7,225.78)None.1923(3,204.85)2,657.25(547.60)None.815 87 Petitioner contends that its large annual additions to surplus were for the purpose of building up that account or fund to an amount equal to the outstanding mortgage, so as to insure itself a strong financial position. Such mortgage represented a $700,000 encumbrance in 1920 on the office buildings (in which the corporation had a net equity of approximately $2,000,000) paid in by Smith for stock in that year. The mortgage was for a long term and called for annual curtailments of $50,000. The record reveals no necessity for building up a surplus equal to the principal amount of the outstanding long term mortgage. Nor does the record substantiate the alleged purpose underlying the large annual additions to surplus. In our opinion it establishes the very purpose proscribed by the statute. While increasing its surplus beyond its ordinary business needs, by failing to declare dividends, the corporation was increasing greatly its liabilities in notes payable, apparently by borrowing from banks to make loans to Smith, the corporation's sole stockholder. Smith had the816 use of the corporation's funds in an amount greatly in excess of its surplus from 1920 to 1923, inclusive, and, so far as the record discloses, made no payments of interest thereon except for the very small amount paid in 1923, as shown above. Thus it can not be contended that the corporation's loans to Smith constituted real investments by the former. Furthermore, the corporation received as nontaxable income large amounts in dividends on domestic corporation stocks which had been paid in or transferred to it by Smith, who prior thereto had received the dividends on such stocks, as taxable income. We conclude that the respondent was correct in holding that the petitioner corporation was availed of during 1922 and 1923 for the purpose of preventing the imposition of the surtax upon its stockholders by permitting its gains and profits to accumulate beyond the reasonable needs of its business, instead of distributing them. Cf. ; affd., ; certiorari denied, 817 , wherein the Board had before it the same question as to the taxable year 1921 and the basic facts and circumstances therein closely parallel those in this proceeding. The respondent's contention that such prior decision, involving this same taxpayer, is res judicata, as to the present proceeding, is without merit. The application of section 220, supra, in any particular taxable year is wholly dependent upon whether the facts and circumstances pertaining to that year bring the taxpayer within the scope of that section - that is, was the corporation availed of for the prohibited purpose during the taxable year in question, irrespective of a finding by the Board and the courts that it was so availed of in 88 a prior taxable year. We do not deem it necessary to enter into a discussion of the principle of res judicata, when clearly such principle is not applicable here. Petitioner contends that the presumption of correctness, ordinarily attaching to the respondent's determination of a deficiency in income tax liability, is not available to respondent and that, moreover, since this proceeding involves not an ordinary deficiency, but*818 an additional tax imposed by section 220, supra, in the nature of a penalty, the burden of proof rests on respondent. These contentions, raised on brief, have not been properly pleaded so as to raise issues of law calling for the Board's decision thereon. However, the Board's determination of the sole issue, namely, whether petitioner is subject to the additional tax imposed by section 220, supra, is not based on the failure of petitioner's proof to overcome the presumption of correctness of respondent's determination, but is an affirmative finding upon careful consideration of all the evidence of record. Reviewed by the Board. Decision will be entered for the respondent.Footnotes1. SEC. 220. That if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its stockholders or members through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for each taxable year upon the net income of such corporation a tax equal to 25 per centum of the amount thereof, which shall be in addition to the tax imposed by section 230 of this title and shall be computed, collected, and paid upon the same basis and in the same manner and subject to the same provisions of law, including penalties, as that tax: Provided,↩ That if all the stockholders or members of such corporation agree thereto, the Commissioner may, in lieu of all income, war-profits and excess-profits taxes imposed upon the corporation for the taxable year, tax the stockholders or members of such corporation upon their distributive shares in the net income of the corporation for the taxable year in the same manner as provided in subdivision (a) of section 218 in the case of members of a partnership. The fact that any corporation is a mere holding company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape the surtax; but the fact that the gains and profits are in any case permitted to accumulate and become surplus shall not be construed as evidence of a purpose to escape the tax in such case unless the Commissioner certifies that in his opinion such accumulation is unreasonable for the purposes of the business. When requested by the Commissioner, or any collector, every corporation shall forward to him a correct statement of such gains and profits and the names and addresses of the individuals or shareholders who would be entitled to the same if divided or distributed, and of the amounts that would be payable to each. 1. In addition thereto, Smith received dividends of $40,824.16 in 1917, but earned in 1916. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625697/	L. BRACKETT BISHOP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bishop v. CommissionerDocket No. 35205.United States Board of Tax Appeals19 B.T.A. 1108; 1930 BTA LEXIS 2257; May 26, 1930, Promulgated 2257 Held that amounts received by petitioner's wife under instruments executed by petitioner, assigning to her one-third of certain renewal commissions then due and which might thereafter accrue to him on insurance business secured by him, are taxable to the assignor. L. Brackett Bishop pro se. Arthur H. Murray, Esq., for the respondent. ARUNDELL1108 The respondent has determined deficiencies in income taxes for the years 1923, 1924, and 1925 in the amounts of $1,309.81, $851.14, and $837.81, respectively. The petitioner assigns as error the action of respondent in including in petitioner's income for each of the years 1923, 1924, and 1925 the sum of $7,500, which sum represented commissions received on renewal premiums, the right to receive which was assigned by petitioner to his wife. The facts were stipulated. 1109 FINDINGS OF FACT. Prior to and during the taxable years the petitioner was the manager of the Chicago Branch of the Massachusetts Mutual Life Insurance Co., hereinafter called the company. On February 26, 1915, the petitioner executed the following instrument: KNOW ALL MEN BY THESE PRESENTS, That I, L. Brackett2258 Bishop, of Chicago, Cook County, Illinois, in consideration of the sum of One Dollar and in further consideration of the love and affection which I have for my wife hereinafter named, do hereby sell, assign, transfer, and set over unto my wife, Minnie R. Bishop, of said City, County and State, all my right, title and interest in and to one-third of any and all renewal commissions due to hereafter become due to which I may be entitled by virtue of my General Agency contract with the Massachusetts Mutual Life Insurance Company, of Springfield, Massachusetts, dated September 6, 1906, and all amendments thereto, upon business secured thereunder on or before December 31, 1914. It is expressly understood and agreed, however, that this assignment is subject to all of the terms and conditions of said contract and amendments thereto, and that said renewal commissions shall not in any event be payable to said assignee unless and until they become due and payable to me under the terms and provisions of the aforesaid contract; and the said Insurance Company shall not be bound to pay the said assignee said renewal commissions in any other way or manner or at any other time than as set forth2259 in said contract and amendments thereto. Thereafter petitioner executed similar assignments in favor of his wife upon business secured by him in years subsequent to 1914. Pursuant to the provisions of the assignments just referred to, the company paid to petitioner's wife in each of the taxable years commissions of $7,500, which amount she reported in her returns for the respective years as income to her. The respondent in computing the deficiencies in controversy transferred the commissions of $7,500 per year paid direct to petitioner's wife to the returns of petitioner for the taxable years. OPINION. ARUNDELL: The assignments executed by the petitioner merely gave his wife the right to receive direct from the Massachusetts Mutual Life Insurance Co. one-third of such renewal commissions as were then due or might thereafter become due and payable to him under his contract with the company. The effect of the instruments was to assign a right to receive future income. The amount becomes taxable income to the assignor in such cases before the assignee receives the money. The action of the respondent in taxing the petitioner on the amounts returned by his wife is sustained. 2260 ; ; . Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625698/	STEVEN M. HOMICK AND DOLORES HOMICK, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentHomick v. CommissionerDocket No. 1075-79.United States Tax CourtT.C. Memo 1981-317; 1981 Tax Ct. Memo LEXIS 437; 42 T.C.M. (CCH) 196; T.C.M. (RIA) 81317; June 22, 1981. H. Bruce Cox, for the petitioners. Leo A. Reinikka, Jr., and Dianne Crosby, for the respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION DAWSON, Judge: This case was assigned to and heard by Special Trial Judge Darrell D. Hallett pursuant to section 7456(c), Internal Revenue Code of 1954, 1 and Rules 180 and 181 of the Tax Court Rules of Practice and Procedure.2 The Court agrees with and adopts his opinion which is set forth below. 438 OPINION OF THE SPECIAL TRIAL JUDGE HALLETT, Special Trial Judge: Respondent determined deficiencies in petitioners' 2a Federal income tax of $ 3,279.72 for 1975 and $ 2,435 for 1976, and an addition to tax under section 6653(a) for 1976 in the amount of $ 121.75. The issues for decision are (1) What was the amount of tokes received by petitioner during the years 1975 and 1976 in connection with petitioner's employment as a "21" dealer at the MGM Grand casino (hereinafter MGM or MGM Grand) in Las Vegas; and (2) whether petitioner is liable for the addition to tax under section 6653(a) for 1976. This case was tried with 12 other cases which were consolidated for purposes of trial only and which involve similar issues. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner Steven M. Homick was a resident of Law Vegas, Nevada, at the time the petition was filed. He worked as a "21" dealer at the Las Vegas MGM Grand casion duruing the calendar years 1975 and 1976. He worked approximately 2,064439 regular hours and 627 overtime hours during 1975, and 1,904 regular hours and 306 overtime hours during 1976. Petitioner normally worked an eight-hour shift. The MGM Grand is located on the corner of the Las Vegas Strip. It is adjacent to Caesar's Palace, the Dunes, and the Flamingo Hilton Hotel. During the years in question, the MGM casino was almost as large as a footabll field. It had 930 slot machines, 10 crap tables, 6 roulette wheels, 2 baccarat tables, 3 big six wheels, and a 200-seat keno lounge with closed-circuit TV to other areas. The casino also had a 16-table poker parlor and 4 casino bars. In addition, the casino had 60 "21" tables, each with a seven-player capacity. Approximately 200 dealers were employed during a 24-hour shift to service these tables (not all tables would be in operation at any particular time). Approximately 80 percent of the "21" tables in operation had a $ 2 minimum betting limit. Other tables had higher limits, such as $ 5 and $ 25. Petitioner and the other "21" dealers spent their shifts, except for brief relief periods, playing "21" as the dealers with patrons of the casino. There was a constant turnover of patrons during each440 shift. The number of players at a table varied throughout the shifts, depending upon such things as the time of day or night, the season of the year, and the relationship to the beginning or ending of a show being held at the MGM Grand. Some patrons, but by no means all or necessarily even a majority, left a tip, which is referred to in the industry as a "toke", for the dealer during or at the completion of the patron's play. Tokes were received either directly from the patron in the form of cash or chips, or they were received as a consequence of a winning bet placed for the dealer by the player. Tokes received as a consequence of a winning bet resulted from the player's stating when the bet was placed that the winnings, if any, were "for the dealer." If the bet was lost, then the dealer got nothing. If the bet was won, he usually, but not always, received the winnings. The "21" dealers were required to place all of the tokes received by them in a box kept near the tables. These boxes containing the tokes were periodically picked up by a designated individual and taken to a central place in the casino. The total tokes collected during each 24-hour shift were counted by designated441 dealers serving as an informal group referred to as the "toke committee." The toke committee obtained a dealer sign-in sheet, which each dealer working during the shift was required to sign, and determined by reference to that sheet the number of dealers working during the shift. Committee members divided the total number of tokes equally among all of the dealers, except that each dealer working overtime received an additional one-eighth share for each hour of overtime worked, and members of the committee would often receive an extra $ 5 or $ 10 per day for their work on the committee. The result of the count and distribution normally was written on the back of the sign-in sheet and was provided to an employee working in the casino cage. This employee checked the count of the total tokes, resolved any discrepancies, and placed each dealer's determined share in an envelope. The dealers would then pick up the envelope at the main bank cashier's window and sign a payroll sheet signifying receipt of the tokes. Tokes were always whole dollar amounts, i.e., no small change was ever included in the envelopes. The records reflecting the daily determination and distribution of tokes for442 the years 1975 and 1976 were requested by respondent's agents by summonses served upon responsible MGM officials. The records were not available at the time the summonses were served. The records were destroyed by an MGM employee as a matter of convenience shortly after the daily distribution was made. On February 11, 1975, an opinion was issued by the United States District Court for the District of Nevada in Olk v. United States, 388 F. Supp. 1108 (D. Nev. 1975), which held that tokes received by casino dealers were nontaxable gifts for Federal income tax purposes. This opinion was well publicized and well known among the casino employees in the State of Nevada. The decision was appealed to the United States Court of Appeals for the Ninth Circuit. By opinion issued on June 1, 1976, Olk v. United States, 536 F.2d 876 (9th Cir. 1976), the Court of Appeals reversed the District Court and held that tokes are taxable income to dealers. Plaintiff's motion for rehearing in the Olk case was denied by the Ninth Circuit on July 14, 1976, and certiorari was denied by the Supreme Court of the United States, 429 U.S. 920">429 U.S. 920 (1976). In443 1977, respondent's agents in the State of Nevada undertook a project to determine the toke income of MGM "21" dealers for the years 1975 and 1976. In this respect, respondent's agent Joe Page, the project coordinator, arranged for approximately 300 returns covering the years 1975 and 1976 and involving individuals who were dealers at the MGM Grand during those years to be selected for examination. Of the 300 returns, approximately 30 were selected for detailed analysis. Mr. Page made some effort to obtain information from the taxpayers involved and from available public records concerning the income and expenditures of the individuals in this group. After some analysis of public records information and personally meeting with approximately 23 or 24 of the group, Mr. Page concluded that he could "complete" a detailed financial analysis of six out of the group. This detailed financial analysis consisted of what is commonly referred to as a "source and applications of funds analysis." Source and applications of funds analyses considered complete by Mr. Page related to three of the petitioners in the cases consolidated with this case for trial, Mr. Keen, Mr. Chappell, and Mr. Kozloff, 444 and to three other taxpayers whose cases were not involved in these consolidated proceedings. However, the results of the source and applications of funds analyses with respect to two of the non-petitioning taxpayers, as well as Mr. Page's worksheets concerning these two taxpayers, were admitted into evidence with deletions to protect the confidentiality and identity of these taxpayers. These taxpayers are referred to in the record as taxpayer "F" and taxpayer "A". 3In connection with the445 source and applications of funds analyses for the five dealers referred to above, the total hours worked by each dealer during the year 1975 were adjusted by a reduction of 5 percent to allow for shifts for which the dealer may have been paid a salary but received no tips because of sick leave or lack of business, and to allow for possible error in the records of the MGM Grand. For the year 1976, respondent made an additional 10 percent reduction in hours to account for the culinary strike that year and a change in the employer's method of accounting for holidays worked. The resulting figure, divided by eight, is referred to as "adjusted shifts." Respondent determined the total sources of funds and the total applications of funds for each of the five taxpayers for the year 1975. The excess of total applications of funds over total sources of funds for each dealer was determined by respondent to represent the dealer's taxable tokes for the year 1975. That figure, divided by the number of the dealer's adjusted shifts for the year, produced respondent's determination as to the tokes received per adjusted shift. The following is a summary of respondent's determination in this regard: 446 UnaccountedAdjustedRate Par AdjustedTaxpayerFunds (Tokes)ShiftsShiftsKozloff$ 14,888.68252.58$ 58.95Chappell10,150.52248.4240.86Keen10,518.83265.2939.65"F"6,601.47261.0125.29"A"9,376.58254.6036.83Based upon the results of the source and applications of funds analyses and other information respondent determined that petitioner and all other MGM dealers whose returns were examined for the years 1975 and 1976 received tokes for these years totaling $ 44 per adjusted shift. Petitioner Steven Homick kept no records of his toke income during the years 1975 and 1976. Petitioner declared no tokes to his employer, MGM Grand, for 1975 and 1976. No toke income was reported on petitioner's 1975 or 1976 return. Petitioner's adjusted shifts for 1975 and 1976, determined by making the reductions to total shifts referred to above, are 319.56 and 234.81, respectively. Respondent's source and applications of funds analysis for Mr. Keen included as an application of funds $ 3,389.68 for food. This figure was an estimate by respondent based upon the United States Bureau of Labor Statistics estimates as to the national447 average cost of food for a family of three individuals. (Mr. Keen is married and has one child). This figure must be adjusted, however, to reflect the fact that Mr. Keen, unlike the "average" breadwinner presumably included in the Bureau of Labor Statistics estimate, was provided two meals per shift by his employer at no cost. A reasonable adjustment for this item is $ 5 per shift or $ 1,395. Respondent also included as an application of funds in Mr. Keen's analysis an item for "entertainment" of $ 886.42. This figure too was based upon the Bureau of Labor Statistics estimate. However, respondent included in Mr. Keen's applications of funds checks totaling $ 633.45 which were paid by Mr. Keen to Western Airlines in connection with vacations taken during 1975. To this extent, respondent's determination involves a duplication, and the applications of funds determined by respondent should be reduced by $ 633.45. Likewise, respondent based Mr. Keen's automobile expenses on estimates, and arrived at a figure of $ 1,212.78. However, included in numerous checks used by respondent in determining the total applications of funds for Mr. Keen was $ 743.12 in checks representing automobile448 expenses. A further adjustment should be made to Mr. Keen's source and applications of funds by reducing applications of funds by $ 743.12 to account for this item. Mr. Keen testified that he had $ 3,000 cash on hand at the beginning of 1975, and that this "cash hoard" was used to purchase a therapy spa, the cost of which was included in respondent's application of funds. The evidence does not establish, however, that Mr. Keen's "cash hoard" was any more or less at the end of 1975 than it was at the beginning of 1975. Adjusting respondent's source and applications of funds analysis for Mr. Keen for food, entertainment, and automobile expenses, as referred to above, results in an adjusted shift toke rate of $ 31.07. 4Respondent's source and applications of funds for Mr. Chappell must also be adjusted based upon the evidence adduced at trial. In this regard, the evidence establishes that Mr. Chappell received a veteran's disability pension of $ 80 per month, totaling $ 960 for the year 1975. This amount was not included by respondent as a source of funds of Mr. Chappell. Mr. Chappell testified449 at trial that he believed he and his wife received cash gifts from his mother during 1975 totaling $ 3,000. However, a supplemental stipulation and Mr. Chappell's mother's Federal gift tax returns disclose that there were substantial cash gifts to Mr. Chappell and his wife during 1976, but no gifts during 1975. Adjustment of Mr. Chappell's source and applications of funds analysis for the disability pension results in an indicated toke rate per adjusted shift for Mr. Chappell of $ 36.99. Respondent's source and applications of funds analysis for Mr. Kozloff should be adjusted with respect to total sources to reflect an addition of at least $ 3,400 for cash on hand as of January 1, 1975. This sum represents a January 3, 1975, currency deposit to a bank account of Mr. Kozloff as well as two other extraordinary currency deposits made by Mr. Kozloff in April 1975. Mr. Kozloff's source and applications of funds analysis, as determined by the respondent, should be further adjusted by at least $ 1,329 because the Bureau of Labor Statistics estimate for food expenditures used by respondent does not reflect that Mr. Kozloff, like Mr. Keen, was provided two free meals per shift by his450 employer. These two adjustments to respondent's source and applications of funds analysis result in an indicated toke rate per shift of $ 40.22 for Mr. Kozloff. The source and applications of funds analysis for taxpayer "F" includes as an application of funds for food and entertainment only actual check or documented cash expenditures by the taxpayer during the year. No amounts have been estimated for these amounts or other expenditures. The source and applications of funds analysis for taxpayer "A" includes an estimate for food based upon the Bureau of Labor Statistics figures. Therefore, the same adjustment as was made in the cases of Mr. Keen and Mr. Kozloff to reflect the fact that taxpayer "A" did not expend money for two of his three meals during working days is necessary. This adjustment amounts to a reduction in applications of funds in the amount of $ 1,272.50, which results in a revised indicated rate of tokes per adjusted shift of $ 31.78 for taxpayer "A". Mr. Frank Martins was a "21" dealer at the MGM Grand during the years 1975 and 1976. For the year 1976, he reported tokes on his 1976 return amounting to $ 40 per day. Mr. Martins kept no records as to his451 actual tips for the year 1976, and the amount he reported on his 1976 return was based upon an estimate made at the time the return was prepared. Mr. Martins' accountant advised him in connection with the preparation of the 1976 return to report tokes of $ 40 per day. ULTIMATE FINDING OF FACT Petitioner's toke income for the years 1975 and 1976 was $ 32 per adjusted shift. OPINION The issue for decision here is purely a factual one, namely, what was the amount of tokes received by petitioner during 1975 and 1976. In view of the Ninth Circuit's decision in Olk v. United States, 536 F.2d 876">536 F.2d 876 (9th Cir. 1976), there is now no question that tokes are taxable income. 5452 Several material facts are undisputed. Petitioner actually received tokes throughout the tax years 1975 and 1976. He kept no contemporaneous records reflecting the amount of these tokes, nor were records maintained and preserved by petitioner's employer, MGM Grand, showing the actual amount of tokes distributed to petitioner and the other "21" dealers. In these circumstances, there is no question that the respondent can resort to indirect methods of proof to reconstruct the amount of petitioner's unreported income. Mendelson v. Commissioner, 305 F.2d 519">305 F.2d 519 (7th Cir. 1962), affg. a Memorandum Opinion of this Court, cert. denied 371 U.S. 877">371 U.S. 877 (1962); see section 446(b). Further, the source and applications of funds method of income reconstruction has long been accepted by this Court. Vassallo v. Commissioner, 23 T.C. 656">23 T.C. 656 (1955). The method is based on the assumption that the amount by which the taxpayer's application of funds during a period exceeds his known sources of funds for the same period is taxable income. Of course, just as in any case involving an indirect method of proof, it is open to petitioner to point out areas or specific453 instances in which the method used by the respondent failed to reflect true income. See Meneguzzo v. Commissioner, 43 T.C. 824 (1965). In particular, the respondent's source and applications of funds analysis should be adjusted where evidence is submitted showing that it does not reflect as sources of income nontaxable items, such as funds accumulated at the beginning of the year, and used during the year, and/or amounts included as applications of funds which do not truly reflect expenditures made by a taxpayer during the year. Petitioner contends, however, that the evidence concerning the source and applications of funds analyses of other taxpayers cannot be used as a basis to reconstruct petitioner's toke income. We disagree. There is clearly an element of commonality among petitioner and the other MGM "21" dealers who worked on a full-time basis during the years in question which makes evidence as to toke income received by one dealer relevant in determining the income received by others. This is so because the evidence is clear that tokes were, throughout both tax years in question, distributed evenly among all the dealers working during a 24-hour shift.454 Accordingly, there is not the likelihood that each dealer's daily tokes would vary substantially, depending upon such things as the location of a dealer's table assignment, the 8-hour period during which the dealer worked within a 24-hour shift, and the whim of the individual player the dealer happened to draw. In addition, this petitioner and others involved in the cases consolidated with petitioner's case for trial did not contend or testify that the total tokes received for the full year 1975 and 1976 varied significantly among individual dealers, because of different days on and off duty. Indeed, the evidence is virtually undisputed that whatever the toke income of petitioner should be, the amount should be substantially the same for the other dealers. This being the case, the evidence as to toke income received by other dealers, consisting of the source of applications of funds analyses of those individuals, is relevant and was properly utilized by the respondent in determining petitioner's toke income. In reaching these conclusions, we have considered petitioner's contention that a portion of the "overtime hours" which he worked and for which he was paid his regular salary455 were actually hours he worked for other dealers, and that he gave part of his share of tokes for the shifts including these hours to the other individuals. However, petitioner has no records whatsoever to corroborate this contention or to even provide a reasonably accurate estimate as to the amounts he was paid but turned over to others. Further, petitioner's testimony is not supported by that of the individuals who were involved in the determination and distribution of tokes during the years in question. Accordingly, we conclude that petitioner has not provided sufficient evidence to establish that his average toke rate for 1975 and 1976 should be any different than that of the other full time dealers. In theory, a source and applications of funds analysis should show precisely the amount of a taxpayer's unreported income. In fact, since it is almost always necessarily based upon estimates and assumptions, it is at best a reasonable indication of the amount of unreported income. In these cases the source and applications of funds analyses do not more than indicate a range within which the average amount of toke income should lie. In this respect, respondent's calculations for456 the five individuals, unadjusted for items in controversy, show the range from a low of $ 25.29 to a high of $ 58.95. This is so even though the evidence is virtually uncontradicted that these individuals should have approximately the same toke income for the year 1975. Because of these factors, we believe that undue emphasis should not be placed upon the results of any one particular source and applications of funds analysis. We have adjusted each individual analysis for items we believe clearly warrant adjustment. After making these adjustments, the analyses indicate the following: TaxpayerRateKozloff$ 40.22Chappell$ 36.99Keen$ 31.07"F"$ 25.29"A"$ 31.78In arriving at our conclusion as to the appropriate rate for petitioner, we have considered both the range of rates indicated by the five analyses and the relative weight which should be afforded each individual analysis. For example, we believe the analysis of Mr. Kozloff should be afforded relatively less weight than that of the other individuals, because of the considerable uncertainty that exists in determining the amount of increase or decrease in cash accumulations by Mr. Kozloff457 during the year, as well as in determining his cash expenditures. Further, we reject respondent's argument on brief that the analyses regarding taxpayers "F" and "A" should be afforded "little weight," apparently on the grounds these two individuals were not called to testify at trial. We find this argument somewhat surprising in view of the fact that the results of respondent's source and applications of funds analyses regarding these two taxpayers, as well as Mr. Page's detailed workpapers supporting the results, were introduced into evidence by respondent over petitioner's objection. We overruled petitioner's objection to the admission of these analyses based upon Rule 803(8), Federal Rules of Evidence, which permits admission of a government investigative report, even though it constitutes hearsay, unless the Court finds the report lacks "trustworthiness." Respondent not only vouched for the trustworthiness of the reports regarding taxpayers "F" and "A", but introduced no evidence regarding adjustments, if any, that should be made to Mr. Page's computations for these taxpayers. We have also considered the testimony of Mr. Martins, who458 was a "21" dealer throughout the year and who voluntarily reported toke income based upon $ 40 per shift. However, we do not believe that his testimony alone warrants a finding that petitioner's toke income for the year 1976 was at least $ 40 per shift.We must consider that Mr. Martins, like petitioner, kept no contemporaneous records of his income during the year 1976, and he based the amount reported solely upon an estimate arrived at between him and his accountant. Simply because the estimate favors the respondent's determination in this case more than it does petitioner's contention does not mean it should be accepted as any better evidence than it is, namely, an estimate. Finally, we have considered respondent's determination and our opinion upholding that determination with respect to the toke income of dealers at the Las Vegas Hilton for the years 1972 and 1973. See Williams v. Commissioner, T.C. Memo 1980-494">T.C. Memo. 1980-494. Because respondent determined the same rate per shift ($ 44) for the dealers involved in this case and for the dealers in the Williams case, and based the determination in this case at least in part upon the determination with respect to the459 Hilton dealers, particular emphasis at trial was placed by the parties upon a comparison of the Hilton and the MGM Grand. The evidence in this case establishes that the average amount of tokes received by the dealers at the Hilton was greater than that received by the dealers at the MGM Grand. This is because the MGM Grand has a substantially higher percentage of "low stake" tables than does the Hilton, and has significantly more tables and more dealers who share in the toke pool than the Hilton does. Likewise, respondent relied upon the determination of dealer's toke income in the Golden Nugget for the years 1972 and 1973, which was upheld by our opinion in Hannifin v. Commissioner, T.C. Memo 1980-482">T.C. Memo. 1980-482. It should be noted that respondent's determination and our opinion in Hannifin were based upon actual contemporaneous records of toke income for the years involved (covering approximately six months of each year). The determined toke income involving the dealers in the Golden Nugget ranged from $ 17 and $ 21. However, the evidence in this case establishes that the toke income of the Golden Nugget dealers was less than that of MGM Grand dealers, laregly because*460 of the differences in clientele and betting practices. We have considered the petitioner's toke income for each year 1975 and 1976. We conclude that the evidence in this case establishes that the amount of toke income did not significantly vary between those two years. Considering the evidence as a whole, we conclude and have found as an ultimate fact that petitioner's toke income was $ 32 per adjusted shift. Respondent asserted the penalty provided by section 6653(a) for the year 1976. In view of the fact that the uncertainty in the law as to whether tokes are taxable income was resolved well before petitioner signed his 1976 return on April 14, 1977, and that petitioner failed to include any amount whatsoever as estimated toke income on his return, we believe petitioner was clearly negligent and disregarded the rules and regulations. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated. ↩2. The Court has concluded that the post-trial procedures of Rule 182, Tax Court Rules of Practice and Procedure↩, are not applicable in these particular circumstances. This conclusion is based on the authority of the "otherwise provided" language of that rule.2a. Dolores Homick is a party to this action only because she filed a joint return with Steven M. Homick, hereinafter petitioner.↩3. Respondent offered into evidence the conclusions regarding Mr. Page's source and applications of funds analysis of the sixth taxpayer, referred to as taxpayer "E". The detailed workpapers concerning the support for the final figures used by Mr. Page were unavailable at the time of trial, such that neither the petitioners nor the Court could determine the treatment of such matters as cash on hand and living expenses, which, as subsequently discussed herein, require adjustments to Mr. Page's figures for the other source and applications of funds analyses. Accordingly, the Court concluded that the "bottom line figures" with respect to taxpayer "E" should not be admitted into evidence.↩4. This figure also reflects the addition of reported tips to unreported tips.↩5. There was some contention at trial that to the extent tokes were received as a result of a winning bet placed by the player, they constitute gambling winnings and can be offset by gambling losses. However, there was no evidence submitted as to what portion of the tokes received were the result of a bet placed by the player, and what portion were simply cash or chipts left by the player on the table. Moreover, for the reasons fully discussed in our opinion in Williams v. Commissioner, T.C. Memo. 1980-494↩, which involved the identical argument, we conclude that all tokes received by the dealers are taxable gratuities.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625699/	John B. Rives and Lois W. Rives v. Commissioner.Rives v. CommissionerDocket No. 21635.United States Tax Court1949 Tax Ct. Memo LEXIS 5; 8 T.C.M. (CCH) 1094; T.C.M. (RIA) 49287; December 27, 19495 John B. Rives, pro se. S. Earl Heilman, Esq. for the respondent. DISNEYMemorandum Opinion DISNEY, Judge: This case involves income tax for the calendar year 1947. Deficiency was determined in the amount of $114, with interest in the amount of $5.70. Two issues were formed by the pleadings and tried: (a) Whether the petitioners' minor son was properly claimed by them as a dependent; and (b) whether the Commissioner properly disallowed business expense of $195.40. The petitioners are husband and wife, residents of Birmingham, Alabama. They have a minor son, John E. Rives, aged 14 in the taxable year. During the taxable year the minor son was employed as a delivery boy for a drug store and had a newspaper route and earned gross income in the amount of $500approximately, the difference between the parties being whether the amount was slightly more or slightly less than $500. Section 25 (b) (1) (D), Internal Revenue Code. He earned a total of $500.37 but had expenses of $2.50 for repairs on the bicycle used by him in his work. The boy was an independent contractor. The petitioners in their joint return claimed $195.40 for union dues and assessments, 6 tools, work clothes, local taxes, and depreciation on tools, all of which was disallowed by the respondent for failure to show that the petitioners were not reimbursed therefore by the employer. Section 22 (n) (3) of the Internal Revenue Code. The respondent has now, by letter in the nature of brief filed with the Court, specifically conceded the right of petitioners to claim the minor son as a dependent. The record upon trial is not altogether clear whether the petitioners waived error on the part of the respondent as to the $195.40, but in any event petitioners do not brief the point and we, therefore, consider it waived. Moreover, no evidence was adduced with reference to the $195.40. We, therefore, conclude and hold that the petitioners are entitled to claim their minor son, John E. Rives, as a dependent, but are not entitled to the deduction of the $195.40 expenses as claimed in the return. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625700/	Gilken Corporation, a Michigan Corporation, Petitioner, v. Commissioner of Internal Revenue, RespondentGilken Corp. v. CommissionerDocket No. 11212United States Tax Court10 T.C. 445; 1948 U.S. Tax Ct. LEXIS 242; March 17, 1948, Promulgated 242 Decision will be entered for the respondent. 1. The petitioner, prior to April 1, the date of incidence of taxes later paid by it on real estate and personal property, had an executory contract, without possession, as to purchase of the property. It received conveyance and possession upon June 1. Held, the petitioner was not owner on April 1, and may not deduct the taxes paid.2. After recovering title to the property, petitioner leased it for ten years, the lease, original and as amended, providing for certain payments to be held as security for performance, and for rent on the final period of the lease, and an equivalent amount to be applied upon purchase price upon an option given for three years by the lease. Held, the payments were for rent and taxable when received. Frank W. Donovan, Esq., for the petitioner.Philip J. Wolf, Esq., for the respondent. Disney, Judge. Black, J., dissenting. Arundell and Murdock, JJ., agree with this dissent. DISNEY445 Involved in this case are deficiencies in income and declared value excess profits tax liability for the fiscal years ended in 1940 and 1941, determined as follows:Declared valueFiscal year ended --Income taxexcess profitsdeficiencytax deficiency7-31-40$ 478.09$ 257.367-31-411,436.38967.61243 Two issues are presented: (a) Whether petitioner properly deducted from income certain taxes paid by it on real estate and personal property purchased by it (the amount depending on whether it was owner before the date of tax incidence); and (b) as to when certain sums, received by petitioner in connection with a lease of property, constitute income to it.The facts were in part stipulated, and we adopt the stipulation by reference and find the facts therein set forth, which will be set forth so far as necessary to examination of the above issues, along with other evidence adduced by deposition, in our findings of fact.FINDINGS OF FACT.The petitioner is a corporation, organized under Michigan law on August 4, 1939. Its returns for the taxable years, computed on the cash basis, were filed with the collector for the district of Michigan at Detroit, Michigan. On June 1, 1940, it received a deed for, and possession of, an apartment hotel located in Detroit. This was pursuant to an offer made by letter by the petitioner through its representative on February 27, 1940, to one Moorman, trustee for the owners, accepted 446 subject to conditions by letter on March 2, 1940. The 244 conditions were agreed to by petitioner's representative. The letter of February 27, 1940, in pertinent part, specified the property and the price ($ 115,000, payable $ 2,000 with the offer and balance upon closing), and provided for good merchantable title, free of all encumbrances of every kind. It required acceptance by Moorman as trustee, subject only to approval of the beneficiaries of the trust, as provided in the declaration of trust, by March 6, 1940, required that Moorman give notice to all beneficiaries, as provided by the declaration, of his acceptance of the offer, and required that upon beneficiaries' approval thereof he deliver an abstract of title showing good merchantable title in him as trustee. It provided for 60 days for correction of any defects in title. The acceptance of March 2, 1940, proposed that "since ninety days' notice is required for cancellation of the present lease," the vendor should have 120 days for final closing, and further stated that immediately upon consent to the modifications, "and unless the proposal is rejected by trust beneficiaries as provided in the declaration of trust, we shall be prepared to complete the transaction as set forth245 herein and in your offer." Consent to the modification was endorsed on the letter by petitioner's representative.The petitioner had earlier, on or about February 1, 1940, made arrangements in writing for a loan upon the apartment hotel and furnishings, subject to making of certain improvements and to approval of petitioner's title, and closing within 60 days. After acquisition of title to the property by petitioner, it secured a mortgage loan pursuant to the earlier arrangements.On July 10, 1940, petitioner, in writing, leased the property for a period of ten years. The lease provided, so far as here pertinent, that the lessee pay a monthly rental of $ 1,600, totaling $ 192,000; that he would keep the premises and the personal property thereon in good condition; that he would pay water rates and other public utility charges and deliver receipts therefor to the lessor; that he would carry public liability insurance in amounts and with insurers satisfactory to the lessor, and covering accidents in or about the premises, and fire insurance on personal property, to be payable to lessor or lessee, as their interests should appear; and that he would make the repairs and improvements, 246 decorating and rehabilitation required by the mortgage and would pay $ 500 per month for the $ 6,000 balance of purchase price of certain carpets upon the premises. The lease further provided:10. It is further understood and agreed that upon the execution of this lease the Lessee has deposited with the Lessor the sum of Three Thousand Two Hundred ($ 3,200.00) Dollars, receipt of which is hereby confessed and acknowledged by the Lessor, which sum shall be held by the Lessor as security for the full performance by the Lessee of his obligations hereunder, and shall 447 apply upon the last two months of the last year's rent accruing hereunder, providing the Lessee shall not be in default in any of the terms, conditions or covenants herein contained. * * 11. It is further covenanted and agreed that at any time within a period of three (3) years after the date of this lease, the Lessee shall have the option of purchasing the said premises and the Lessor hereby agrees to sell to the Lessee the said premises, including all improvements thereon, whether made by the Lessee, or by any other person in fee simple, together with all personal property, furniture, furnishings and fixtures247 in use on said premises and owned by the Lessor for the sum of One Hundred Twenty-Five Thousand ($ 125,000.00) Dollars * * . Lessor further agrees, provided the Lessee has faithfully performed all the conditions of said lease, and provided Lessee desires to exercise the option to purchase said premises as herein provided, to give credit and allow Lessee as payment upon the stipulated purchase price of One Hundred Twenty-Five Thousand ($ 125,000.00) Dollars, the sum of Three Thousand Two Hundred ($ 3,200.00) Dollars, which represents a sum equal to that paid by Lessee as security and for the last two months' rental of said term; * * This option shall terminate upon foreiture of the lease.On January 3, 1941, the lease was amended, the instrument reciting in material part that whereas the lessee agrees to pay $ 5,000 additional "as additional security on the lease and as payment upon the option to purchase said premises if exercised by the Lessee as provided for in said lease," it is agreed ("to express their said intention and agreement") that the lessee has deposited $ 5,000 over and above the original $ 3,200, "which sum shall be applied along with the Three Thousand Two Hundred248 ($ 3,200.00) Dollars upon the last five months of the last year's rent * "; also that in case the option to purchase is exercised the $ 5,000 "shall be credited to and allowed the Lessee as payment upon the price of said property in addition to and in the same manner * " as the $ 3,200; also that in case of exercise of option to purchase, the price shall be $ 300 less for each month, from January 1, 1941, until exercise; and that in case the lessee elects not to exercise the option, on July 1, 1943, the rental shall be reduced to $ 1,500 a month. The $ 5,000 was paid petitioner.As of April 29, 1942, the lease was again amended, to provide for expiration on December 31, 1942, instead of June 30, 1950, and that the $ 8,200 "heretofore deposited with the Lessor as security under said lease, shall be applied upon and used for the payment of the rent for the last five months of the term as shortened herein as and when the rent becomes due for said months." The lease was forfeitable for nonpayment of rent for one month.On July 25, 1940, and December 18, 1940, petitioner paid in equal installments of $ 2,153.38, a total of $ 4,306.76 general property taxes on the premises to the249 city of Detroit for the fiscal year July 1, 1940, to June 30, 1941. It paid personal property tax to the city for the same period on July 24, 1941, in the amount of $ 260.48.The city charter of the city of Detroit makes the tax a debt of the 448 owner from the time of the listing of the property for assessment by the board of assessors on April 1, and makes the tax due and payable on July 15, on which date it becomes a lien upon the property taxed.The $ 8,200 was included in petitioner's gross income in its income tax return for the taxable year ended July 31, 1942. The $ 8,200 was paid to the petitioner for rent.OPINION.The first question is whether petitioner is entitled to deduct certain taxes paid by it upon property, both real and personal, in the city of Detroit. The taxes were paid after July 25, 1940. There is no essential disagreement as to the facts involved. Petitioner received conveyance of the property on June 1, 1940. This was prior to the time when the taxes became a lien on the property on July 15, but it was after the date when, on April 1, 1940, the taxes were assessed and thereby became a debt from the owner of the property. Since under Magruder v. Supplee, 316 U.S. 394">316 U.S. 394,250 a vendor who is personally liable for taxes is the person entitled to deduct such taxes, and since the petitioner did not acquire the property until after April 1, 1940, the answer here depends upon whether by virtue of an executory contract purchase, executed on March 2, 1940, the petitioner became the owner and personally responsible for such taxes. Petitioner agrees that it did not, on March 2, 1940, obtain legal title, stating, "Petitioner's only contention in this respect is that it obtained an equitable interest in the premises on that date"; and the petitioner contends, under Ernst Kern Co., 1 T.C. 249">1 T. C. 249, and Pacific Southwest Realty Co., 45 B. T. A. 426 (as well as other cases not necessary of discussion), its rights were such as to support the deduction.We have examined these cases and many others not cited by either petitioner or respondent, as well as the provisions of the charter of Detroit, the situs of this matter and under which the taxation took place. After a thorough review of the problem, we come to the conclusion that the cases cited by the petitioner do not control here, and that it is not entitled251 to the deduction sought. The parties stipulate the charter provisions of the city of Detroit. Inter alia, the charter provides for assessment of property, the listing thereof in the name of "the owner or occupant thereof"; that the assessors may demand of every person owning or having charge as agent, of any taxable property, a list of such property; that the taxes shall be ratably assessed "to each person named"; that all city taxes "shall become a debt against the owner from the time of the listing of property for assessment by the board of assessors"; that taxes shall be due on July 15 and on that date shall become a lien on the property taxed and that "The owners or occupants or parties in interest of any real estate 449 assessed hereunder shall be liable to pay such taxes * * . The owners or persons in possession of any personal property shall pay all taxes assessed thereon"; that in case any person by agreement or otherwise ought to pay such tax, the person in possession who shall pay the same, may recover from the person who ought to have paid; and that all city taxes upon personal property and real estate "shall become a debt against the owner from the time of252 the listing of the property for assessment * * ."Although an executory contract for the purchase and sale of the property here involved was executed on March 2, 1940, and although in the Ernst Kern Co. and Pacific Southwest Realty Co. cases mention is made of beneficial ownership and of equitable title, consideration of the above provisions of the city charter and statute, with cases hereinafter referred to, convinces us that the Ernst Kern Co. and Pacific Southwest Realty Co. cases are clearly distinguishable, and that the petitioner here was not on April 1, 1940, in such relation to the property as to be personally liable for the taxes thereon, and therefore that it may not deduct same.26 R. C. L., on the subject of taxation, § 315, p. 358, says: * * The owner of property for the purpose of taxation is the person having legal title or estate thereto, or therein, and not one who by contract or otherwise has a mere equity therein or a right to compel a conveyance of such legal title or estate to himself. * * To the same effect see Tracy v. Reed, 38 Fed. 69. A mere executory interest in property does not, without more, entitle253 the holder thereof to be considered in the position of owner of the property for tax purposes. In re Wenatchee Heights Orchard Co., 212 Fed. 787. In Sloan Shipyards Construction Co. v. Thurston Co., 111 Wash. 361">111 Wash. 361; 190 Pac. 1015, there was involved a contract to sell property to the Shipping Board, it to become owner upon payment. It was held that the vendor was the person liable for taxes. Steiff v. Tait, 26 Fed. (2d) 489; affd., 31 Fed. (2d) 1020, is to the effect that one having legal title is ordinarily liable for the payment of taxes. See also Barde Steel Products Corporation, 14 B. T. A. 209; Brown Lumber Co., 9 B. T. A. 719; Old Farmers Oil Co., 12 B. T. A. 203. It will be noted that the property here involved had not passed to the possession of the proposed vendee on April 1, 1940. Assuming, without deciding, that a vendee in possession has an equitable interest or even an equitable title, in our opinion the mere executory agreement254 without possession, here involved, is not sufficient to satisfy the statute imposing the tax upon the owner and occupant. We have said, in Eugene W. Small, 27 B. T. A. 1219, citing authorities, that in order to be entitled to deduction for payment of taxes, petitioner must show not only the payment, but that "the taxes were imposed upon him by the taxing authority." It is clear, we think 450 that though the Detroit charter itself imposed a tax upon the owner and occupant, the petitioner was not, on April 1, 1940, the occupant of the premises, but had a mere right to purchase, not amounting to ownership for the present purpose of taxation. Gamble v. Ross, 88 Mich. 315">88 Mich. 315 (holding that the holder of an executory contract without possession had no right except to purchase certain land within a given time, for a certain sum, i. e., an equitable interest entitling him to legal title upon performance of conditions). In North Texas Lumber Co., 7 B. T. A. 1193, we held that a contract to sell property does not pass title to the property, and in the absence of delivery of possession of the255 property does not pass the title or permit the vendor to accrue the purchase price for tax purposes.We note that in Pacific Southwest Realty Co. the vendee was in possession of the property. In the Ernst Kern Co. case, the statement relied upon by the petitioner as to equitable title vesting is based upon the fact that the petitioner purchased "under a land contract," from which it is probable, from the ordinary connotation of that expression, that the vendee was in possession. The case, of course, decides that the personal liability of the vendor on April 1, in Michigan, required denial of deduction by the vendee. The mere mention of equitable title is, under such circumstances, of little or no weight for petitioner here.We can not find in the facts here involved, that is to say, a mere agreement of purchase without possession delivered, and subject to perfection of title (including removal of a lease), an interest approaching that which under the Detroit charter would impose personal liability for the tax. In J. T. Wurtsbaugh, 8 T. C. 183, we held that profit from the sale of timber and lease of land was not realized in 1940, where at256 the end of that year there existed only an executory agreement to sell at a prescribed price, the prospective form of conveyance had been in general accepted and the abstract of title had been found as a whole sufficient, but where it was not until 1941 that title was finally approved, the deed of conveyance was signed and the consideration passed and the right of possession passed. We said:* * * Under these circumstances, we do not think the sale constituted a closed transaction or that either the benefits or the burdens of ownership passed to the vendee in 1940 * * .So here we think that neither the benefits nor the burdens of ownership had passed to the petitioner, the vendee, prior to April 1, 1940, within the intendment of the Michigan law, or the general law of vendor and purchaser, and that therefore the deduction for taxes paid was properly denied. In arriving at this conclusion, let it be noted that we have not considered the fact that the petitioner offered no proof that a condition provided by the contract (in substance that the beneficiaries 451 of the trust which owned the property must give their approval), had been complied with.The petitioner filed a 257 motion, after filing of respondent's brief, raising the point, for the first time, that it be allowed to take a deposition to make such proof. The motion has been denied, for the reason that upon consideration of the whole case, we have, as above set forth, concluded that, regardless of the performance of such condition, the petitioner was not the owner on March 2, 1940, or April 1, 1940. Nor have we considered the apparently inadvertent failure to prove that modifications made on March 2, 1940, to the offer to purchase of February 27, 1940, were in fact accepted by the petitioner on March 2, or at any time prior to April 1. On brief, petitioner states that the endorsement on the letter of March 2, 1940, accepting the modification by petitioner, was executed on March 2, but there is no proof whatever as to the date when this was done. The only proof is the letter of March 2, from the trustee, stating the modifications of petitioner's offer of February 27, with an endorsement at the bottom thereof of acceptance of the modifications by the petitioner; and by deposition the evidence that the acceptance of modifications (on the letter of March 2) was pursuant to the instructions of258 one Stevens, petitioner's representative. Nevertheless, under the above conclusions, the date of acceptance of the modifications is immaterial, since, in any event, in our opinion, petitioner was not the owner of the property prior to April 1.There remains for our consideration the question whether the $ 3,200 received on July 1, 1940, and the $ 5,000 received on January 3, 1941, are taxable to the petitioner, when received, as the respondent contends, or in the petitioner's year ended July 31, 1942, when applied on the last five months' rent, by the agreement of April 29, 1942, as contended by the petitioner. The answer depends upon whether the payments were for rent, as respondent argues. There are various cases involving the general situation and problem here. Thus it is established that where payments are made merely as rent and made at the beginning of a lease, though for the final period thereof, they are, there being no other conditions, taxable as income at the time they are received. Renwick v. United States, 87 Fed. (2d) 123; Astor Holding Co. v. Commissioner, 135 Fed. (2d) 47; Commissioner v. Lyon, 97 Fed. (2d) 70.259 Another line of cases is to the effect that if money is merely deposited by the lessee with the lessor as security for the performance by the lessee of the covenants and provisions of the lease, with no present right or claim of full ownership by the lessor, the payment is not taxable to the lessor at the time of receipt, but when the happening of some event causes such deposit to become his property. Warren Service Corporation v. Commissioner, 110 Fed. (2d) 723; Clinton Hotel 452 v. Commissioner, 128 Fed. (2d) 968. We have here a case where there are not only provisions as to application of payment received at the beginning (and later at amendment) of the lease upon rents for the final period thereof, but also provisions with reference to the amounts deposited to be held as security for performance of lessee's obligations; and, to complicate the matter further, there is provision for application of an amount equal to the payments upon an agreed purchase price, if an option granted in the lease is exercised.In substance, the respondent contends that the payments fall within the rule announced260 in Hirsch Improvement Co. v. Commissioner, 143 Fed. (2d) 920; certiorari denied, 323 U.S. 750">323 U.S. 750; and Edwin B. DeGolia, 40 B. T. A. 845, which cases, in effect, lay down the rule that, even though money paid upon the making of a lease is to be held for security for the performance of the conditions of the lease, if it is also provided that the payment should be applied as rent for the final period of the lease, and the circumstances under which it was to be repaid might never occur, or there was no provision for repayment to the lessee, then it is to be considered as income when received. In the Hirsch Improvement Co. case, it was to be applied as rent for the last year, except that upon default by the lessee, under the conditions of the lease, it could be retained for that reason; and the lessor should repay proportionately, in case of destruction of the property; while in the DeGolia case there was not even a contingent liability to return the money to the lessee (so far as shown), though the lease had recited that it was deposited to secure performance by the lessee, and in case of261 faithful performance, upon the last ten months' rent due.The petitioner, on the other hand, affirms that the money was received as security for performance by the lessee, also as option payments to be applied against purchase price, if the option were exercised, and the lessee had fully performed under the lease, and would be applied as rent on the final period of the lease only if the lessee had not defaulted under the terms and conditions of the lease, and the option had not been exercised, so that the payments may not be considered rent. Petitioner contends also, in effect, that interest was to be paid upon the deposits (indicating them to be such ) because in case the lessee exercised the option, the purchase price was to be reduced by $ 300 a month, and under the amendment of January 3, 1941, if the lessee elected not to exercise the option, the rental from July 1, 1943, should be reduced from $ 1,600 to $ 1,500 per month. We find nothing whatever in the record to justify the contention as to interest. No mention of interest on the money deposited is anywhere made in the lease. The arrangement has no characteristic of a loan. The petitioner argues that, under Clinton Hotel Realty Corporation v. Commissioner, 453 ,262 and Warren Service Corporation v. Commissioner, supra, the deposits bore interest when received. The Clinton Hotel case, however, is clearly distinguishable on the point of interest, because there the lessor was definitely to account for $ 1,000 per year as interest, whereas as above stated no showing is made here as to interest being paid upon the deposits. In the Clinton Hotel case the court emphasizes the element of interest. The Warren Service case is likewise inapplicable as to the interest element. The petitioner, in fact, suggests no reason why it is applicable thereto, and examination discloses that interest was not there to be paid upon the money paid to the lessor as security for lessee's performance.The Clinton Hotel and Warren Service cases are, of course, as above indicated, authoritative on the general proposition that money deposited with the lessor as mere security is not at that time income. However, our problem here, in that regard, is to determine whether the security deposit or the payment of rent, is the determinative factor. After examination of all helpful authorities, we have concluded that under263 the Hirsch Improvement and DeGolia cases, the payments were payments of rent, rather than mere deposits for security of lessee's performance. The payments were subject to petitioner's unrestrained control. Brown v. Helvering, 291 U.S. 193">291 U.S. 193. They were to be held as security "and shall apply upon the last two months * * rent" (as to the $ 3,200) -- the expression being twice used, though in slightly different language, in the original lease. The $ 5,000 later paid was "to be applied along with the Three Thousand Two Hundred ($ 3,200.00) Dollars upon the last five months of the last year's rent accruing under the terms of said lease," that language appearing in the "Therefore" paragraph where the parties "express their said intention and agreement," and the reference to additional security and payment upon option appearing only in the "Whereas" clause. The Hirsch Improvement and DeGolia cases both considered the situation here presented -- provisions that payments be applied both on security for performance, and upon rent. We conclude that, in that respect, the rent payment element controls here.What, however, of the provision264 here appearing, but not found in those cases, or in those relied on by the petitioner, that the payments were to be applied on purchase price if the option should be exercised? Are the payments rent, as opposed to purchase price? Virginia Iron, Coal & Coke Co. v. Commissioner, 99 Fed. (2d) 919; certiorari denied, 307 U.S. 630">307 U.S. 630 (affirming 37 B. T. A. 195), relied upon by the petitioner, is not helpful, for it involved merely an option to buy bonds, and money paid therefor, with no question of application of the money as rents. Nor is Edward E. Haverstick, 13 B. T. A. 837, of assistance, for there no provision for application of rents upon option price 454 appears. Such cases as Indian Creek Coal & Coke Co., 23 B. T. A. 950, and Rotorite Corporation, 40 B. T. A. 1304; reversed, 117 Fed. (2d) 245, only approach analogy to this one; for there in both cases though the lease provided that royalties would be applied upon purchase price in case of purchase under option, and 265 we held that the payments retained their characteristic as royalties, current payments; that is, payments made for the periods when made were there involved. Here, the payments were to be applied as rentals for the closing period of the lease. In one sense, if the option was earlier exercised, they would not be rents at all, but payments upon purchase price. In Goldfields of America, Ltd., 44 B. T. A. 200, we held payments made as minimum royalties before production under a contract for the optional purchase and operation of mines, belonging at once to the vendor and to be applied to the purchase price, were not deductible as ordinary and necessary business expense. We said that the payment "remains part of the purchase price until the taxpayer decides not to exercise its option to purchase or terminate the contract"; also, "When made, the payments are primarily part of the purchase price; the possibility of their being royalties is contingent upon petitioner's future election not to acquire the property. The conception of the contract as one of sale and purchase pervades its entire duration." The case is, of course, somewhat distinguishable in fact, 266 and in question presented, from this matter.The solution of this question requires that we view the lease and the modifications thereof in their entirety, Hirsch Improvement Co. v. Commissioner, supra; and it depends upon all of the facts involved in the lease and modifications, Astor Holding Co. v. Commissioner, supra.After study of every case, we think, covering this question, which is novel and not heretofore squarely presented, we have come to the conclusion that the payments should be regarded as rent when received, notwithstanding the existence of an option to purchase and applicability of payments on purchase price. Under the cases, we should ascertain, if possible, the primary purpose of the payments, and here we think they were, in line with the thought expressed in the Hirsch Improvement Co. and DeGolia cases (though they are not controlling and are distinguishable to some extent on the facts) primarily intended as rent, and that the applicability upon purchase price is so secondary as not to require a different conclusion. Though it is true that if the option was exercised and the property267 purchased the amounts would not have been utilized as rent, the same could be said in the DeGolia and Hirsch Improvement Co. cases with reference to application upon broken covenants in the lease, for if covenants had been broken the payments would have first been utilized to their repair. 455 In the Hirsch Improvement case, after stating that the question is whether the payment is basically rent in the year received, the court stated, "That it was rent for a future year would be unimportant." Though there no option for purchase was involved, nevertheless the statement is not without weight, since we are endeavoring here to ascertain the practical effect of the particular lease here involved by determining the primary purpose involved. We think that primary purpose was the payment of rent. It will be noted that the lease was for a period of ten years. The option, however, must be exercised within a period of three years, or indeed a shorter term if the lease should be forfeited prior to that time. Obviously, therefore, the option was the less important consideration. It will be noted also that the payments were applicable upon the stipulated purchase price 268 only in case the lessee had faithfully performed all the conditions of the lease. Since in the DeGolia and Hirsch Improvement cases the payments were held rent, though they were first applicable as security for improvements of the conditions of the lease, the interposition here of an option exercisable only after faithful performance of such conditions does not seem to require a different conclusion than in those cases expressed. That the payments here were primarily for rent, within the general purview of those cases, is clear, for they were made for security and for rent, in the terms of the original lease, while in the first amendment the intention and agreement are stated to be that the $ 5,000 shall be applied upon the last five months of the last year's rent, though in the "Whereas" clause the $ 5,000 is referred to as additional security and as payment upon the option to purchase, if exercised; and in the final modification we find that the "amount heretofore deposited with the Lessor as security * , shall be applied upon and used for the payment of the rent for the last five months of the term as shortened herein as and when the rent becomes due for said months." 269 We note, also, that the option terminates upon forfeiture of the lease. The lease was forfeitable for nonpayment of rent for one month.The option is in the nature of a condition subsequent; that is, if the lease is fully performed and if the option is exercised, then the moneys paid, or rather their equivalent, shall be deductible from the purchase price. In strict fact, the amounts paid are nowhere by the lease or its modifications required to be repaid to the lessee in case the option is exercised, or under any other circumstances, but only the equivalent thereof is to be applied upon purchase price if the option is exercised. We consider the difference of little weight, yet it is not altogether to be overlooked as an indication that the payments were made under the lease, and only their equivalent entered into the matter of option. We think they were so paid, and, as we held in Indian 456 , they did not lose their characterization because possibly eventually to be applied upon purchase price. Though there current royalties were involved, we think, under all of the facts in this case, that the principle is here270 applicable. Rotorite Corporation, supra, was reversed and royalty payments were held to be purchase price, but the grounds for the reversal were, in substance, that the year of royalty payments involved was the year in which the option to purchase was exercised; that the major portion of the sum was paid with the taxpayer's full knowledge that the manufacturer would exercise the option; that at the very first of that year it was certain that the option would be exercised; and that the Commissioner had treated the payments as advances on purchase price. Here, the option apparently never was exercised; at least no showing thereof is made, and during the taxable years nothing indicates that it was likely to be exercised. The court stated that, "Taxation * * * is eminently practical"; that it must look through form to substance of the transaction, and concluded that the payments were purchase money. So here, equally as a practical matter, we think that the option element does not determine the nature of the payments, and that in intent and fact they were rent.We conclude and hold that the $ 3,200 and the $ 5,000 were taxable when received.Decision271 will be entered for the respondent. BLACK Black, J., dissenting: I dissent from the majority opinion wherein it holds that $ 3,200 deposited with petitioner by its lessee on July 10, 1940, at the time the lease was executed and $ 5,000 deposited with petitioner by its lessee on January 3, 1941, when the lease was amended, were income to the petitioner in the years when such amounts were so deposited. The majority bases its holding upon the proposition that these amounts were received by petitioner as advanced rentals.Of course, if these payments were in fact received as advanced rentals and could definitely be so identified, then there would be no doubt that petitioner would be taxable thereon in the year of receipt. Astor Holding Co. v. Commissioner, 135 Fed. (2d) 47. And this would be true even though the contract of lease provides that such sums shall act as security for the performance of the lease covenants. Hirsch Improvement Co. v. Commissioner, 143 Fed. (2d) 920. But I do not think this rule applies where, as here, the lease contract provides: * * that at any time within a period of three (3) 272 years after the date of this lease, the Lessee shall have the option of purchasing the said premises * . Lessor further agrees, provided the Lessee has faithfully performed all 457 the conditions of said lease, and provided Lessee desires to exercise the option to purchase said premises as herein provided, to give credit and allow Lessee as payment upon the stipulated purchase price * * , the sum of Three Thousand Two Hundred ($ 3,200.00) Dollars, which represents a sum equal to that paid by Lessee as security and for the last two months' rental of said term; * The $ 5,000 deposited with petitioner on January 3, 1941, was deposited under similar terms and conditions. Thus the two payments are in the same category. The majority opinion, after discussing certain cases which have dealt with this general subject, poses the following question as to these two payments: "Are the payments rent as opposed to purchase price?" It then goes on to hold that such payments were rents. In my opinion the question could not be answered during the years which we have before us.Petitioner did not know and could not know whether it would ultimately have to apply these payments as rentals273 for the last five months of the lease or whether it would have to apply them as payments of part of the purchase price in case the lessee exercised its option to purchase within three years from the date of the lease. Until petitioner knew definitely how it would have to apply such payments, it could not determine its taxability thereon. Such an option to purchase is not a probability so remote as to require no consideration in determining when the amounts received should be taken into income. Such view it seems to me is in harmony with our decision in Virginia Iron Coal & Coke Co., 37 B. T. A. 195; affd. (C. C. A., 4th Cir.), 99 Fed. (2d) 919. In that case we held that payments received in 1930 and 1931 under an option to purchase stock or land and mineral rights which were to be applied upon the purchase price in case the option was exercised, but which were to be retained in case the option was not exercised, were income in the year in which the option was surrendered.In holding against the contention of the taxpayer that the payments, if taxable at all, were taxable in the years when received under the option, we said: 274 The petitioner argues that the payments were either income when received, or were a return of capital which should have been irrevocably applied as a recovery of a part of the basis of the property, so that in neither event would the payments represent income in 1933. Neither of these arguments offers a proper solution of this case. It was impossible to tell in 1930 and 1931, when the payments were received, whether they would ultimately represent income to the petitioner or a return of capital. They were to be applied against the purchase price in case of the exercise of the option. Had the option been exercised, they would have represented a return of capital, that is, a recovery of a part of the basis for gain or loss which the property had in the hands of the seller. In that event they would not have been income and their return as income when received would have been improper. Cf. Higgins Estate, Inc., 30 B. T. A. 814. * *458 In Virginia Iron Coal & Coke Co. v. Commissioner, supra, the court, in affirming our decision, said:The year 1933 was the year in which the Texas Company notified the taxpayer275 that it surrendered all rights under the option and was the year in which the tax attached to the payments. The situation is in no way affected by the fact that the money became the property of the petitioner when received.It is undoubtedly true that the $ 8,200 here in controversy became the property of petitioner in the years 1940 and 1941 when it was received, but under the principles approved by us and the Circuit Court of Appeals for the Fourth Circuit in the Virginia Iron Coal & Coke Co. case, such sums did not become taxable income to petitioner until in the year when it was definitely ascertained that such payments would not be used as a part of the purchase price of the leased property under the option to purchase it. Clearly, this did not happen in either of the taxable years which we have before us. Therefore, I dissent from the majority opinion, which taxes petitioner on these amounts in the years when they were received.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625701/	MOLINE PROPERTIES, INC., A FLORIDA CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Moline Properties, Inc. v. CommissionerDocket No. 103862.United States Board of Tax Appeals45 B.T.A. 647; 1941 BTA LEXIS 1095; November 7, 1941, Promulgated 1095 Petitioner was organized in 1928 to take title to certain mortgaged real property on which the mortgagee agreed to advance further funds on condition that the petitioner should be organized. The stock was pledged with the mortgagee. In 1933 the mortgages were discharged with funds secured from a new mortgage loan. The property was sold in three parcels in 1934, 1935, and 1936. Held, petitioner functioned as a mere agent and its existence must be disregarded in taxing gain on the sale of the property. Douglas D. Felix, Esq., for the petitioner. F. L. Van Haaften, Esq., for the respondent. ARUNDELL647 This proceeding is brought for redetermination of the following deficiencies: Calendar yearIncome taxExcess profits tax1935$1,067.19$388.0619363,926.633,956.89The respondent has added a 10 percent delinquency penalty for the year 1936 in the amount of $788.35. The issue here is whether the petitioner's sole stockholder is entitled to report the income of the petitioner from the sale of real property as his income, treating the petitioner as a corporation without substance. FINDINGS OF FACT. 1096 The petitioner is a corporation, organized under the laws of Florida in 1928. Its president and sole stockholder, with the exception of those holding qualifying shares, throughout the period from the time of its organization down through the taxable years, was Uly O. Thompson. Tax returns for the years in question were filed with the collector for the district of Florida. On August 17, 1920, Thompson acquired four lots of unimproved realty situated in Dade County, Florida, which he mortgaged in 1923 648 to William F. Whitman for a $20,000 debt. On March 18, 1926, he gave a second mortgage to the Miami Beach Bank & Trust Co. to secure an additional indebtedness of $20,000. Subsequently the mortgaged land did not prove profitable to Thompson and he allowed taxes due on the property to remain unpaid. In 1928 back taxes were owing in the sum of $6,500. At this time Thompson was told by the second mortgagee that the taxes must be paid to prevent loss of the property and the following agreement was reached whereby this was accomplished: The Bank of Bay Biscayne, an affiliate of the Miami Beach Bank & Trust Co., agreed to loan Thompson $6,750 for the payment of taxes provided1097 he convey title to the property to a corporation organized by the bank to hold such title. Stock of the corporation was to be issued to Thompson but was to be pledged as collateral for the loan and be placed by him in a voting trust of which an officer of the bank should be trustee with power to vote the stock for all purposes. The trust was to cease either on the payment of the loan or on the sale of the stock pledged as collateral. Pursuant to this agreement Thompson, on June 5, 1928, conveyed the property to the petitioner corporation, which had been organized also pursuant to the agreement, and received in return all of the petitioner's stock, with the exception of qualifying shares. He thereupon executed a trust agreement conveying that stock to the voting trustee. The corporation assumed and agreed to pay the mortgages on the property. The Bank of Bay Biscayne closed during the year 1930 and thereafter its powers under the voting trust were exercised by the liquidator of the bank. During this period a suit was instituted to remove certain restrictions imposed on the property by a prior deed. Expenses connected with this suit in the sum of $4,005.39 were paid by Thompson1098 in 1933 and subsequent years. The petitioner was also required to defend certain condemnation proceedings during this period. The petitioner on October 1, 1929, purchased from the Bank of Bay Biscayne a note of Uly O. Thompson, together with a mortgage securing it, in the amount of $43,000, on which interest of $9,703.14 was due, at its par value plus accrued interest. The petitioner gave its note for the purchase money, securing it with Thompson's mortgage which it received on the purchase of the note. On July 29, 1933, the petitioner discharged and satisfied the two mortgages which were outstanding on the property owned by it, each in the amount of $20,000. Funds for these discharges were obtained by Thompson through a loan which he negotiated with the National Investment Holdings, Inc. This loan was secured by a mortgage on a portion of the property in question. The debt of $6,750 owed to the Bank of Bay Biscayne was settled by the petitioner during 1933. Control of the petitioner corporation was returned to Thompson in 1933. The mortgage debt owed to the National Investment Holdings, Inc., 649 was paid in 1936 through the sale of a portion of the mortgaged1099 property. The petitioner did not keep books of account or maintain a bank account during the period of its existence. It owned no assets other than the real estate described above. It leased a portion of its properties in 1934 for a parking lot, from which it received rental of $1,000. Thompson owned other extensive real property in Miami, title to all of which was in his name individually. The real property held by the petitioner was sold in three separate parcels, on in each of the years 1934, 1935, and 1936. Proceeds of these sales were received by Thompson and deposited in his bank account. The sales made in 1934 and 1935 were reported in the returns of the petitioner, which were prepared by an auditor retained by Thompson. A loss of $698.11 was reported for 1934 and a gain of $5,851.94 for 1935. Subsequently, Thompson was advised by his auditor that, due to the circumstances of the petitioner's organization, gain on these sales might be reported by Thompson and a claim for refund of tax was accordingly filed on the petitioner's behalf for 1935. In a delinquent return filed on December 2, 1938, Thompson reported the 1935 gain as his individual gain. Gain on the 19361100 sale was reported by Thompson in the amount of $3,829.14. Thompson was, during the year 1934 and a part of the year 1935, a circuit judge of the State of Florida. His salary was his principal source of income. When his office was abolished in 1935 he returned to the practice of law. The petitioner corporation has not been dissolved; however, it has transacted no business since the sale of its property in 1936. OPINION. ARUNDELL: The petitioner here seeks to be relieved from reporting gain on the sale of real property to which it held title, and to have that gain taxed to its sole stockholder. It argues that the purpose for which it was established and the limited scope of its function render it so unsubstantial as to require us to disregard it in fixing tax liability. The answer to this argument, the respondent contends, is that the original limited purpose for which the petitioner was organized was terminated in 1933 and that during the taxable years it must be regarded as an ordinary taxable corporation, especially in view of its activities in renting and selling its realty holdings. There is some substance in the latter contentions and in the presence of evidence1101 of additional activity on the petitioner's part in 1935 and 1936 we should perhaps incline to the respondent's view. However, as we regard the issue, it reduces to a question of whether limited activities involving the sale of vacant property and the rental 650 of a portion of it during a part of the interim, carried through by a corporation of the type we have consistently disregarded, after the reasons for its organization have lapsed, can convert the petitioner into a substantial concern which must be taxed separately. The answer is to be found in the facts. The organization of the petitioner was undertaken at the suggestion of Thompson's creditors as a means of protecting their investments and of saving his equity in certain Florida real estate. Control of the corporation was placed in the bank. It had no activities from that time until 1933 except one transaction of somewhat dubious character whereby the bank apparently sought to charge the petitioner with an additional debt of Thompson. During the year 1933 the creditors instigating its organization were paid by Thompson and control of the petitioner was returned to him. Settlement of the indebtedness was made1102 with borrowings from other sources. The corporation continued to exist down through the taxable years, sales of its holdings being made in each of the intervening years. No other activities were carried on by it except rental of a portion of the property in 1934 for use as a parking lot. It maintained none of the equipment or paraphernalia ordinarily associated with the corporate form, including offices, employees, books, or other records. From this review of the circumstances before us it must be apparent that the petitioner existed for very limited purposes. The primary purpose, the protection of the stockholders' creditors, was one which we have considered before. . There we held that a corporation, organized to hold title to mortgaged property, to protect the mortgagees and to secure an equitable distribution of the proceeds when the land was condemned, should be disregarded in taxing any gain resultant on the condemnation. See also . The limited activities for which it was maintained thereafter do not alter its essential nature. It continued merely as a holder1103 of title. Full beneficial ownership was in Thompson, who continued to manage and regard the property as his own individually. We have frequently held that a corporation which existed merely to facilitate the passage of title to real estate, where its stockholders acted without regard for the corporate entity, was a mere figmentary agent which should be disregarded in the assessment of taxes. ; ; affd., ; . These cases give adequate answer to the respondent's chief contentions. It is true that the petitioner was not organized originally for the purpose for which it was maintained during the taxable years. Both purposes, however, fall within the holdings wherein we have 651 disregarded the corporate entity to effect a more realistic assessment of taxes. The final circumstance of rentals collected in 1934 falls in the category of a limited incidental operation which was undertaken without disturbing the essential functioning of the petitioner. Its minor character renders it of no effect on our conclusion. *1104 The case of , relied on by the respondent, is not applicable here, where it is plain that Thompson did not organize the petitioner as a "shield against judgment creditors." Cf. also . The petitioner must accordingly be sustained. Decision will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625702/	EDWARD MALLINCKRODT, JR., AND ST. LOUIS UNION TRUST COMPANY, A MISSOURI CORPORATION, TRUSTEES UNDER INDENTURE OF TRUST MADE APRIL 17, 1918, BY EDWARD MALLINCKRODT, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JANE HOLDING CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mallinckrodt v. CommissionerDocket Nos. 79138, 87240, 87339.United States Board of Tax Appeals38 B.T.A. 960; 1938 BTA LEXIS 802; October 21, 1938, Promulgated 802 1. Where over a period of years a trust, the sole stockholder of a corporation, loaned money to the corporation and the corporation, reporting on an accrual basis, accrued and deducted interest on the loan without paying any of the interest to the sole stockholder, which reports on the cash basis and has not returned any of the accrued interest as income, and during the taxable year 1933 the sole stockholder canceled and forgave the interest indebtedness thus accrued and deducted from income by the corporation, and the corporation at the time of cancellation was thoroughly solvent, it is held:(1) That the cancellation and relinquishment of the interest indebtedness did not result in income to the stockholder trust. (2) That the cancellation and relinquishment of the interest indebtedness by the sole stockholder to the debtor corporation did not result in taxable income to the corporation, but resulted in a capital contribution by the stockholder to the corporation under Treasury Regulations 77, article 64. AutoStrop Safety Razor Co.,28 B.T.A. 621">28 B.T.A. 621; affd., 74 Fed.(2d) 226, followed. 2. Where a solvent corporation with large resources credited803 a year's interest on its books to its sole stockholder-creditor in 1932 on its current indebtedness to the stockholder, and took the amount so deducted as a deduction from its own income returned on an accrual basis, but the stockholder on a cash basis did not return as income the amount of the interest so credited to it but not actually received in cash, held, under the facts, that the stockholder-creditor's failure to collect the interest was due to a matter of its own choice and not from necessity and the interest was constructively received in 1932 by the stockholder-creditor and should be taxed as income to it for that year. Harry W. Kroeger, Esq., and Daniel N. Kirby, Esq., for the petitioners. Frank M. Thompson, Jr., Esq., for the respondent. BLACK 961 These proceedings, which have been consolidated, involve income tax and excess profits tax deficiencies as follows: DeficienciesPetitionerDocket No.YearIncome taxExcess profits taxEdward Mallinckrodt, Jr., and St. Louis Union Trust Co., a Missouri Corporation, Trustees Under Indenture of Trust Made April 17, 1918, by Edward Mallinckrodt791381932$103,198.18Do8733919331,544,305.8819325,122.31Jane Holding Corporation872401933349,184.61$120,726.22804 The question in issue in Docket No. 79138 is whether the Commissioner erred in holding that the Mallinckrodt trust actually or constructively received interest in 1932 in the amount of $171,249.36 from the Jane Holding Corporation. The question at issue in Docket No. 87339 is whether the Commissioner erred in adding $2,510,222.07 to income of the Mallinckrodt trust for 1933, representing the amount of the cancellation on December 30, 1933, of an indebtedness due the trust covering the interest accrued and deducted from gross income of prior years of the Jane Holding Corporation, the debtor, the capital stock of which was wholly owned by the trust. The questions presented in Docket No. 87240 are (1) whether the Commissioner erred in the computation of the allowance for depreciation for each of the years 1932 and 1933, and (2) whether the Jane Holding Corporation derived taxable income of $2,510,222.07 from the cancellation on December 30, 1933, of the liability of the Jane Holding Corporation to the Mallinckrodt trust for interest which had been accrued and deducted from the gross income of the corporation in its tax returns for prior years. The depreciation issue has been805 settled by agreement, and effect thereto will be given under Rule 50. It, therefore, becomes unnecessary to make special findings as to depreciation. 962 FINDINGS OF FACT. By an indenture of trust dated April 17, 1918, in which the St. Louis Union Trust Co. and Edward Mallinckrodt, Jr., were named as trustees, Edward Mallinckrodt transferred in trust, among other things, all the outstanding shares of stock (originally 500 shares but later increased to 12,500) of the Jane Holding Corporation. Edward Mallinckrodt, Jr., and his wife and children were named by the trustor as the beneficiaries of the trust. The primary purpose of creating the trust was to finance the construction and operation of the Arcade Building in St. Louis. At all times since April 17, 1918, the trustees have held all the shares of capital stock of the Jane Holding Corporation. During the period 1918 to 1931, the trustees and the trustor made loans to the Jane Holding Corporation for the financing of the Arcade Building, and other purposes. On May 9, 1922, Edward Mallinckrodt transferred to the trustees his claims for direct advances theretofore made by him to the corporation. The loans when806 made were credited on the books of the corporation to an open account with the trustees. The total amount so credited to the account of the trustees on the books of the Jane Holding Corporation from 1918 to 1931, inclusive, was $3,842,131.65. The Jane Holding Corporation kept its books of account and filed its income tax returns for the years 1919 to 1933, inclusive, on the accrual basis. During the years 1922 to 1931, inclusive, the Jane Holding Corporation and the Finance & Mortgage Corporation filed consolidated returns. The single returns of the Jane Holding Corporation for the years 1919, 1920, 1921, 1932, and 1933, and the consolidated returns for the years 1922 to 1931, inclusive, showed accrued interest deductions, net losses, and net incomes as follows: Accrued interestYearJane Holding CorporationFinance & Mortgage CorporationNet lossNet income1919$149,350.02$85,410.511920255,840.34107,417.191921282,605.2179,481.071922283,006.88$18,507.5031,052.301923312,059.2318,507.506,410.991924287,210.0918,507.50$33,624.351925273,283.7718,507.5031,796.481926265,041.5918,507.5076,210.341927240,088.8718,507.5076,468.841928232,632.2518,507.50191,279.821929230,400.0418,507.50249,321.791930199,542.3118,507.5027,723.821931172,658.6315,422.9234,824.221932187,243.00130,193.3619335,631.5616,895.20807 963 The books of account of the trustees were kept and their income tax returns for the years 1920 to 1933 were made on a cash receipts and disbursements basis. Each year from 1919 to 1932, inclusive, the Jane Holding Corporation set up on its books of account liability for accrued interest on the money advanced to it as set out above, the total to December 31, 1932, being $2,510,222.07. The accruals of interest were claimed as deductions from gross income on the income tax returns filed by the Jane Holding Corporation for the years 1919 to 1932, inclusive, and allowed as claimed. The amounts received by the Jane Holding Corporation as rentals during those years against which such deductions were applied varied from $134,004.73 to $561,762.01. Beginning in 1920, the Jane Holding Corporation made payments to the trustees on the indebtedness. These payments were treated by the payor as being on account and no designation was made on the books of the corporation as to whether such payments were to apply to principal or to interest. The trust treated the payments as payments of principal. The trustees did not include any of the amounts received by them from the808 Jane Holding Corporation on the income tax returns of the trustees for any year. The amounts of interest accrued each year on the indebtedness of the corporation to the trustees and credited on the books of the corporation to the trust as interest and deducted on the tax returns of the Jane Holding Corporation, and the payments by it to the trustees on account of its indebtedness, are as follows: YearAccrued interestPayments to trustees1919$23,940.561920106,469.81$48,000.001921129,148.00155,000.001922178,371.3077,000.001923232,312.281924221,657.421925243,334.37500,000.001926235,933.59275,000.001927213,100.00570,000.001928$208,821.42$362,003.891929204,351.32250,000.001930184,366.58675,000.001931157,166.06290,000.001932171,249.36160,000.001933100,000.002,510,222.073,462,003.89There were no substantial limitations or restrictions as to the time or manner of the payment of the $171,249.36 interest which the Jane Holding Corporation credited on its books to the trust in the year 1932. The trust's failure to collect and receive such interest in cash in the year 1932 was809 due to its own choice and was not a matter of necessity. In accordance with the trust's method of handling the payments received by the trustees from the Jane Holding Corporation by May 27, 1933, all of the advances of principal, totaling $3,842,131.65, except $380,127.76, had been returned to the trust so that the amount 964 due on account of the indebtedness at that time was $2,890,349.83, consisting of $380,127.76 representing principal, and $2,510,222.07 representing accrued interest. In 1933 Edward Mallinckrodt, Jr., who had prior to that time received none of the income of the trust estate, approached James H. Grover, the president of the Jane Holding Corporation and also of the St. Louis Union Trust Co., and requested that the trustees make disbursements to Elizabeth E. Mallinckrodt, the wife of Edward Mallinckrodt, Jr., and himself of the income of the trust estate, stating that he desired some money to make a donation to an educational institution. Grover expressed doubt as to whether the trustees had any authority to make a distribution under the trust instrument of April 17, 1918, at a time when the Jane Holding Corporation remained indebted to the trustees810 for moneys advanced toward the Arcade Building enterprise, in view of the provisions of clause fourth of the trust indenture, which specified that only after the repayment in full of the amount borrowed on the credit of the Jane Holding Corporation for the purpose of financing the Arcade Building enterprise were the trustees authorized to disburse the income to Edward Mallinckrodt, Jr., and his wife. Upon reference of this matter to counsel the latter concurred in the opinion of Grover. Edward Mallinckrodt, Jr., however, was insistent in his demand, and, upon request for advice as to how the trustees might make the income of the trust estate available to the beneficiaries without violation of the trust instrument, it was recommended that the open account on the books of the Jane Holding Corporation in favor of the trustees be canceled. No other consideration excepting the demand of Edward Mallinckrodt, Jr., for the income of the trust estate and the effort to make such income available to him entered into the motive or reason for making the cancellation. The trustees, acting upon the recommendations of counsel, thereupon executed the following instrument of cancellation: DECEMBER 30, 1933. 811 The undersigned, Edward Mallinckrodt, Jr., and St. Louis Union Trust Company, as Trustees of the trust created by Trust Indenture of Edward Mallinckrodt, Sr., dated April 17, 1918, being the owners of all of the shares of stock of Jane Holding Corporation and being also the owners of a debt owed to us by said Jane Holding Corporation on open account in the sum of Two Million, Eight Hundred Ninety Thousand, Three Hundred Forty-Nine Dollars and Eighty-Three Cents, ($2,890,349.83), do hereby cancel and forgive to Jane Holding Corporation, this said debt evidenced by said book account. [Signed] EDWARD MALLINCKRODT, JR., AND ST. LOUISUNION TRUST COMPANY. By JAMES A. GROVER, President. Trustees of the trust created by Indenture of Trust made by Edward Mallinckrodt, Sr., dated April 17, 1918.965 Thereupon there was an entry made on the journal of the Jane Holding Corporation under date of December 30, 1933, consisting of a debit to the account of the trustees in the amount of $2,890,349.83, and a credit of a like amount to surplus. The capital stock of the Jane Holding Corporation is $1,250,000. A recapitulation of its balance sheets as of December 31, 1932 and812 1933, is as follows: Dec. 31, 1932Dec. 31, 1933ASSETS:Real estate, leases, and buildings$7,574,184.74$7,574,184.74Less depreciation thereon1,806,333.561,940,524.89Depreciated balance5,767,851.185,633,659.85Cash43,907.1325,139.18Insurance paid in advance7,914.266,121.70Ground rent paid in advance832.771,332.69Arcade Building suspense account32,052.9534,566.31Total5,852,558.295,700,819.73LIABILITIES AND CAPITAL:Woolf Bros$59,005.40$24,472.16Participation cert. (primary)345,600.00345,600.00Participation cert. (additional)128,000.00128,000.00Mallinckrodt trust2,990,349.83NothingDeposit to secure lease2,500.002,500.00Capital Stock1,250,000.001,250,000.00Surplus1,077,103.063,950,247.57Total5,852,558.295,700,819.73In Docket No. 79138 the respondent has increased the income reported by the trustees for 1932 by the addition thereto of $171,249.36, the amount of interest, accrued December 31, 1932, by the Jane Holding Corporation on its books on its indebtedness to the trustees and credited to the trustees on that date and deducted by the corporation on its return for813 that year. In Docket No. 87339 the respondent has increased the income reported by the trustees for 1933 by the addition thereto of $2,510,222.07, the amount of accrued interest canceled in that year. In Docket No. 87240 the Commissioner has increased the income reported by the Jane Holding Corporation for 1933 by the addition thereto of $2,510,222.07, the amount of its indebtedness canceled by the trustees representing interest previously accrued on its books and deducted on its returns. OPINION. BLACK: Although the respondent in his several deficiency notices has determined that, in connection with the transactions between the Mallinckrodt trust and the Jane Holding Corporation as set out in our findings, the trust received income in 1932 and 1933 in the amounts of $171,249.36 and $2,510,222.07, respectively, and that the Jane Holding Corporation also realized income in 1933 in the amount of $2,510,222.07, the respondent in his brief now contends primarily that the trust received income in 1933 in the amount determined; that, 966 as a first alternative contention, the Jane Holding Corporation realized income in 1933 in the amount determined; and that, as a second814 alternative contention, the trust received income in 1932 in the amount of $171,249.36 as interest, either actually or constructively received. We shall first discuss respondent's main contention and the one upon which he lays the most emphasis. Did the Mallinckrodt trust, by virtue of the cancellation and forgiveness to the Jane Holding Corporation on December 30, 1933, of an open account in the amount of $2,890,349.83, receive in legal contemplation the accrued interest in the account in the amount of $2,510,222.07, which accrued interest the corporation over a period of years had deducted from its gross income in determining its net income? The indebtedness was canceled in order that thereafter the corporation might distribute all its net income annually to the trustees, who in turn could distribute it to the beneficiaries of the trust. Under the terms of the trust indenture, the trustees were forbidden to distribute income to the beneficiaries as long as there was any outstanding indebtedness connected with the construction of the Arcade Building. In a statement attached to the deficiency notice in Docket No. 87339, the respondent said in part: Your contention that no815 taxable income was realized by the Trust upon cancellation of indebtedness to Jane Holding Corporation in 1933 has been denied. * * * It is contended that the effect of the cancellation of the indebtedness was simply to convert what had been a debt owing to the trustees from the corporation into an additional contribution by the trustees to the surplus account of the corporation and that it had become paid-in surplus and, further, that it was "a mere bookkeeping transaction in the nature of a capital readjustment." It is held that the Trust received $2,510,222.07 in payment of the interest due to it from the Jane Holding Corporation in 1933 and that it represents taxable income in 1933. On December 31, 1933, in lieu of demanding or receiving cash in payment of the interest obligation the Trust elected to accept in payment something other than cash, that is, other property in the form of increased value of its stock in the Jane Holding Corporation. The effect is the same as though the corporation had paid the interest to the Trust in cash which was immediately returned to the corporation as paid-in surplus. The fact that instead of actual cash the payments were by-passed could816 not change the result as was stated by the Court in the case of Commissioner v. S. A. Woods Machine Company,57 Fed.2d. 635, certiorari denied 53 Supreme Court 15. "The transaction involved in this case was equivalent to the payment of a debt in cash and the investment of the proceeds by the corporation in its own stock. If that had been done, clearly, the cash received would have been taxable income. The transaction was not changed in its essential character by the fact that, as the debtor happened also to own this stock, the money payment and the purchase of the stock were by-passed, and the stock was directly transferred in payment of the debt. The stock was the medium in which the debt was paid. The wide door to the evasion of taxes, opened by the decision of the Board, is an additional reason and quite a weighty one, against it." 967 Counsel for respondent continues to press in his brief the above views and cites, as one of the principal authorities in support of his contention, 817 Commissioner v. Woods Machine Co., 57 Fed.(2d) 635. The petitioners, on the other hand, contend that the true nature of the transaction is to be defined by the word "relinquishment" and not by the words "payment" or "receipt"; that no artificialities or magic words such as "by-passing" can disguise the transaction as one of gain on the part of the trustees; that by canceling the debt, the trustees divested themselves of the right to enforce payment of $2,890,349.83 of their accumulated investment in the Jane Holding Corporation through the remedies of a creditor and allowed that investment to change from the category of debts to the category of net worth; that the constructive receipt doctrine is wholly inapplicable; that as a corollary from the doctrine of Commissioner v. AutoStrop Safety Razor Co., 74 Fed.(2d) 226, the cancellation in question was simply a capital transaction giving rise to no income to the sole stockholder; that the transaction in question has none of the attributes requisite to the creation of income within the meaning of the Sixteenth Amendment; and that the case of 818 Commissioner v. Woods Machine Co., supra, cited and urged by the Commissioner as an authority in point is here inapplicable. The Mallinckrodt trust and the Jane Holding Corporation are separate and distinct taxable entities under sections 161 and 13, respectively, of the Revenue Act of 1932, and we do not understand it to be the contention of any of the parties here involved that these entities should be treated otherwise. Cf. Burnet v. Commonwealth Improvement Co.,287 U.S. 415">287 U.S. 415. Of course, where the relationships between the taxable entities are as close as is the relationship here, namely, that of sole stockholder and corporation, the transactions between the two require close analysis in order that no injustice may be done either to the taxable entities or to the revenue provided for by Congress. We have made this close analusis and we do not think that it can be held that the cancellation and forgiveness by the trust of its $2,890,349.83 indebtedness against the Jane Holding Corporation resulted in $2,510,222.07 taxable income to the trust by way of a collection of interest. It is undoubtedly true that, if the trust had received819 cash or other property in consideration for the cancellation of this indebtedness, the trust would have been taxable on the interest to the extent it was collected, either in cash or other property. No citation of authority is necessary to support that proposition. But the trust received no property in consideration of the cancellation of its indebtedness against the corporation. It is entirely too far fatched we think to treat the act of cancellation or relinquishment 968 the same as if the corporation had actually paid in cash the entire amount of its indebtedness to the trust and then the trust as a separate and independent transaction had paid in the amount thus collected as paid-in surplus to the corporation. That is the way the Commissioner wants to treat the transaction, but that is not what happened. If that had happened, then of course the trust would have been taxable on the $2,510,222.07 interest thus collected and thereafter, when it paid the $2,510,222.07 into the corporation as paid-in surplus, that amount, though recently collected as interest, would have become capital paid in and would have been immediately added to the trust's cost basis of its stock820 in the Jane Holding Corporation. But the trust in this particular transaction did not pay cash to the corporation. What it did was to cancel an account against the corporation which, although $2,890,349.83 in amount, had a cost basis to the trust of only $380,127.76 (the remaining amount of the unpaid principal of the account). One of the arguments which the Commissioner strongly urges in support of his view that we should hold the $2,510,222.07 as taxable income in 1933, is that if it is not taxed in that year, it will never be taxed. We do not agree with that view. It would be so, if the trust were entitled to add to its basis of cost of stock which it owned in the corporation, the full amount of the canceled debt, but it is not entitled so to do. All the cost which the trust had in the debt against the corporation was the $380,127.76 unpaid principal. The balance of the account represented interest which had never gone into the trust's income (aside from the $171,249.36 which we shall later discuss), and therefore represented unrealized appreciation of the account, and this unrealized appreciation petitioner trust can not add to its basis of cost of the stock of the corporation. 821 Cf. King v. United States, 79 Fed.(2d) 453. In the latter case the Gramophone & Securities Corporation of Virginia was organized to take over certain stocks of inventor Emile Berliner and the sole consideration of the transfer of the securities from Berliner to the corporation was the stock of the newly organized corporation. He was the sole stockholder except as to two qualifying shares. This was clearly a nontaxable transfer under section 203(b)(4) of the Revenue Act of 1926, and this was not disputed by either party in the case. Later, however, Berliner transferred 1,200 shares of Victor Talking Machine Co. stock to the corporation without receiving any stock for it, and the corporation set up the stock on its books as paid-in surplus to the extent of the fair market value of the stock at the time it was transferred to the corporation. Some months thereafter the corporation sold the Victor Talking Machine Co. stock for $1,302,000 and sought to use, as a basis for determining gain or loss on the sale, $1,200,000, which was the fair 969 market value of the stock when Berliner transferred it to the corporation. The court denied the use of the $1,200,000822 basis and held that the correct basis for determining gain or loss upon the sale was $720,000, that being the March 1, 1913, value in the hands of Berliner, which was greater than his cost. The grounds of the court's decision were that, because of section 203(b)(4) of the Revenue Act of 1926, which has its counterpart in section 112(b)(5) of the Revenue Act of 1932, no gain or loss was recognized to Berliner when he transferred the Victor Talking Machine Co. stock to the corporation, and, therefore, the cost basis to the corporation of the securities transferred was their cost to Berliner, and this was by reason of section 204(a)(8) of the Revenue Act of 1926, which has its counterpart in section 113(a)(8) of the Revenue Act of 1932. A necessary corollary to the above holding of the court in King v. United States, supra, is that the cost basis to Berliner of the 19,998 shares of stock which he owned in the Gramophone & Securities Corporation was only increased by $720,000, the March 1, 1913, value of the Victor Talking Machine Co. stock, rather than by $1,200,000, its fair market value when it was transferred to the Gramophone & Securities Corporation as823 paid-in surplus. The reason for this is that the appreciation in value of the stock in Victor Talking Machine Co., which had taken place in Berliner's hands prior to the transfer to the corporation, was not recognized for tax purposes because of section 203(b)(5), and therefore his basis of cost was not increased by the difference between $720,000 and $1,200,000. For the same reason, in principle, the trust's cost basis of its stock holdings in the Jane Holding Corporation is not increased by the interest item of $2,510,222.07 (except as to the $171,249.36 interest for 1932, hereinafter discussed). The interest has not come in by the door of income. Therefore, it is not added to the trust's basis of cost of its stock in the Jane Holding Corporation. When and if the trust disposes of its stock in the Jane Holding Corporation, presumably it will realize, by means of an increase in the sale price of the stock or an increase in the amount received from liquidation, the increase in net worth which has resulted from the cancellation of the indebtedness. The mere appreciation in the value of its stock in the Jane Holding Corporation which undoubtedly resulted from its cancellation824 of the indebtedness in question is no more taxable as income to the trust than a depreciation in the value of the stock of the Jane Holding Corporation would result in a deductible loss. It is with realized gains and realized losses that the income statutes deal. The only cost basis that the trust will be entitled to use in arriving at gain or loss on the subsequent sale or liquidation of its stock in the 970 Jane Holding Corporation will be its original cost, plus $380,127.76 principal canceled, plus $171,249.36 interest for 1932, hereinafter discussed. In that manner, at some time in the future presumably, the trust will have taxable gain equal to the untaxed interest canceled, and therefore the interest will be eventually taxed, but in another form. Of course, it is perfectly true that the $2,510,222.07 assets in the Jane Holding Corporation which were released by the cancellation of the interest liability may be subsequently lost in the business and never be realized as income to the trust. As a matter of fact, its entire investment in the Jane Holding Corporation may some day become entirely worthless. But that is always a possibility to an investor when he leaves825 something at the risk of the business. But the mere fact that the canceled interest, in such a transaction as we have in the instant case, may ultimately be lost through a dissipation of the assets which the cancellation freed, would not be sufficient grounds to tax the canceled interest to the stockholder on a cash basis, who has never actually or constructively received it. For reasons above stated, we reject the Commissioner's contention that, by its act of cancellation and relinquishment in 1933 of the $2,510,222.07 interest included in the $2,890,349.83 debt canceled, the trust realized in that year income to the extent of $2,510,222.07. On this issue, the Commissioner is reversed. The next issue which we must decide is whether the $2,510,222.07 interest canceled and relinquished by the trust in 1933 was income to the Jane Holding Corporation. The Commissioner has so determined and that is the only issue we have to decide in Docket No. 87240. We think that issue must be decided against the Commissioner on the authority of 826 AutoStrop Safety Razor Co.,28 B.T.A. 621">28 B.T.A. 621; affd. (C.C.A., 2d Cir.), 74 Fed.(2d) 226. It is our opinion that under the AutoStrop Safety Razor Co. decision the cancellation and forgiveness of the $2,510,222.07 of accrued interest liability must be held to amount to a contribution of capital to the corporation as well as the cancellation and forgiveness of the $380,127.76 of remaining principal, which respondent concedes was a capital contribution. The only difference between the two amounts, as we see it, is, as we have already endeavored to point out, that the trust is entitled to add to its basis of cost of its stock in the Jane Holding Corporation the $380,127.76 unpaid principal canceled, but is not entitled to add the $2,510,222.07 unpaid interest canceled. In the AutoStrop Safety Razor Co. case the Government had argued on appeal that the AutoStrop Safety Razor Co. was on an accrual basis and had deducted the amount of the debt, which consisted 971 of unpaid royalties and interest and loans, in previous returns; that the AutoStrop Co. was on the cash basis and had reported only the income actually received; and that therefore the827 deficiency was correctly determined. The Circuit Court of Appeals disposed of this contention by saying: Should we assume that the claimed facts were before us, viz., that Auto Strop Safety Razor Company was on an accrual basis and deducted from its income the indebtedness as it was accrued on its books and that the Auto Strop Company was on a cash basis and so reported only what income it actually received, we do not think that would change the result. In doing what they did these two companies complied with the law. So far as now appears, their returns were correct and their taxes assessed and paid accordingly. When the indebtedness was cancelled, whether or not it was a contribution to the capital of the debtor depends upon considerations entirely foreign to the question of the payment of income taxes in some previous year. Since the cancelation, under the circumstances shown, did not make it income to Auto Strop Safety Razor Company in the year the debt was cancelled, it can not be taxed as its income in that year. The effect of the cancellation of the debt in question by the corporation's sole stockholder seems to clearly fall within the last sentence of article 64 of828 Treasury Regulations 77, which reads as follows: Forgiveness of indebtedness. - The cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation. [Emphasis supplied.] The trust, the sole stockholder of the corporation, as we have already endeavored to point out, gratuitously canceled and relinquished its indebtedness against the corporation. There was no property passing from the corporation to the trust in consideration of the cancellation and forgiveness of the indebtedness. That being829 true, the transaction resulted in a capital contribution to the corporation under the provisions of the foregoing regulation and the dectrine of the AutoStrop Safety Razor Co. case. The cases which respondent cites in support of his contention, such as B. F. Avery & Sons, Inc.,26 B.T.A. 1393">26 B.T.A. 1393, and United States v. Kirby Lumber Co.,284 U.S. 1">284 U.S. 1, are not in point. They did not deal with a contribution by a stockholder to the corporation, which, under the doctrtine of King v. United States, supra, and AutoStrop Safety Razor Co., supra, is a capital transaction and is nontaxable. On this issue the Commissioner is reversed. 972 We shall next consider the question presented in Docket No. 79138, which the Commissioner designates in his brief as his second alternative contention. He freely conceded at the hearing and on brief that if the Board should hold that the $2,510,222.07 in question was income either to the trust or to the corporation in 1933, then the $171,249.36 which the corporation accrued on its books in 1932 as interest due the trust and credited to the account of the trust and deducted from its830 own income tax return in 1932, was not income to the trust in 1932. Since we have held against the Commissioner on his first two contentions we must now decide his third contention. The trust did not include the $171,249.36 in question as income in its income tax return for the year 1932. The Commissioner in his determination of the deficiency against the trust added this $171,249.36 to the trust's income, and in explanation of his action stated in the deficiency notice, among other things, as follows: * * In the year 1932 the corporation made an entry on its books charging profit and loss and crediting the account of Edward Mallinckrodt Trust with $171,249.36, representing the accrued interest. This office holds that $171,249.36 was constructively received, representing taxable income to the trust even though not actually received. Article 322, Regulations 77, states in part: "Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must831 be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, * ." It appears that the trustees could have withdrawn the interest without jeopardizing the credit or financial standing of the corporation inasmuch as the corporation had tangible assets and investments which were not needed in the operation of its business. It appears that the corporation was under the absolute control of the trustees and payment of the interest was entirely within their control. In this connection the decision of the United States Board of Tax Appeals in the case of John A. Brander,3 B.T.A. 231">3 B.T.A. 231 and in the case of Albert J. Sullivan,16 B.T.A. 1347">16 B.T.A. 1347 are referred to. We think respondent must be sustained in his contention that the failure of the trust to collect the $171,249.36 interest due it from the corporation in the taxable year 1932 was a matter of its own free choice and not due to any inability on the part of the corporation to pay the interest. The corporation had large832 and valuable assets and abundant resources with which it could have paid the interest. It had receipts from interest and rents during the taxable year of $209,044.83 and operating expenses, including taxes, of only $17,112.57. It owed comparatively no debts outside of the indebtedness 973 which it owed to the trust, its sole stockholder. During the period of 1920 to 1932, inclusive, the corporation had paid the trust $3,362,003.89 which the trust applied to principal and nothing to interest. We have none of these years before us except 1932, but we do have that year before us, and for the trust to contend that it did not collect its interest because the corporation was not financially able to pay it, is altogether unreasonable. A much more reasonable conclusion, when all the facts are considered, is that the trust did not collect the $171,249.36 interest in question because as the sole stockholder of the corporation it deliberately chose not to do so. Therefore in such a situation the doctrine of constructive receipt applies and we affirm the Commissioner in adding to the trust's income for the year 1932 the interest item of $171,249.36. Cf. 833 John A. Brander,3 B.T.A. 231">3 B.T.A. 231; Albert J. Sullivan,16 B.T.A. 1347">16 B.T.A. 1347; Security First National Bank of Los Angeles et al., Executors,28 B.T.A. 289">28 B.T.A. 289; Jacobus v. United States,9 Fed.Supp. 41. It may be argued that we are inconsistent in applying the doctrine of constructive receipt to the annual interest due the trust in 1932, and not applying it to the full amount of $2,510,222.07 unpaid interest canceled in 1933, but we do not think so. We think the Commissioner, for the same reasons as we have applied to 1932, might well have applied the doctrine of constructive receipt for those prior years when the corporation accrued and deducted it from its gross income and credited to the account of the trust the amount of the current year's interest and the trust did not return it as income, although collecting more than the amount of the interest and applying it to principal. But we think we would not be justified in applying the doctrine of constructive receipt to the entire $2,510,222.07 in 1933. It is a very different thing we think to hold that the trust could have readily and easily collected the $171,249.36 interest834 due it for the year 1932 and that its failure to do so was by choice rather than necessity, than to hold that the trust could have readily collected from the corporation $2,510,222.07 in 1933 and that its failure to do so was by choice rather than necessity. This latter fact we are unable to find from the evidence in the case. In this connection we may add in further continuance of the discussion under issue 1, that this $171,249.36 having now, by our decision in the instant case, been taken into the trust's taxable income, it will have a right to add it to the basis of its cost of its stock in the Jane Holding Corporation, along with the $380,127.76 unpaid principal which was canceled in 1933. The balance of the $2,510,222.07 interest canceled in 1933 would not, for reasons we have already stated, be added to the trust's cost of the stock of the Jane Holding Corporation because it has never gone into the trust's taxable income. If we had before us the question of the trust's 974 right to add this uncollected interest of prior years, aside from the $171,249.36 here in question, to its basis of cost of its stock in the Jane Holding Corporation, the trust would not, we think, 835 be permitted to contend that although it did not actually receive the interest, it constructively received it and should have been taxed with it in prior years. Cf. Raleigh v. United States,5 Fed.Supp. 622; Moran v. Commissioner, 67 Fed.(2d) 601. While, as we have stated, we do not have before us the question of deciding how the basis of cost of the trust's stock in the Jane Holding Corporation was affected by the cancellation and relinquishment of the indebtedness in 1933, including interest of $2,510,222.07, and anything we have said herein on that subject is dicta, nevertheless it seems necessary to give some discussion to that phase of the matter in order to make all the more plain our reasons for holding that the cancellation by the trust in 1932 of $2,510,222.07 interest due it by the corporation was not taxable income in that year to the trust. Reviewed by the Board. Decision will be entered under Rule 50.SMITH, STERNHAGEN, HILL, TURNER SMITH, dissenting: I dissent from the Board's holding in this case that the Mallinckrodt trust, Docket No. 79138, is liable to income tax upon $171,249.36 interest credited836 to it upon the books of the Jane Holding Corporation for 1932. The trust and the corporation are separate taxable entities. The trust made its returns upon a cash receipts and disbursements basis in accordance with its books of account. It clearly was authorized by the law and the regulations of the Treasury Department to make its returns upon such basis. The taxpayer on a cash receipts and disbursements basis is not required to account for income unless it has been "received." Cf. Avery v. Commissioner,292 U.S. 210">292 U.S. 210. The only cash which it received from the Jane Holding Corporation in 1932 was $160,000 paid by the Jane Holding Corporation "on account." The trust accounted for the payment as being a receipt of a part of the loan made by the trust to the corporation. I think it might be held that the trust erroneously so treated the receipt of $160,000. In its income tax return for 1932 the Jane Holding Corporation had credited the trust with an accrual of $171,249.36 interest. It claimed the deduction from gross income of an accrual of interest in the amount of $187,243, thereby showing a net loss for the year of $130,193.36. I think it might properly be837 held that the payment made by the Jane Holding Corporation in 1932 to the trust of $160,000 was in reality a payment of interest and that the trust is taxable upon the receipt of that interest, even though on its books of account it shows the receipt as being a return of principal. But I can not see any justification for taxing the trust 975 on the receipt in 1932 of $171,249.36 interest received from the Jane Holding Corporation. It is held in the majority opinion that the trust could have received the payment of $171,249.36 interest from the Jane Holding Corporation if it had desired to receive it. In my opinion there is no justification for such a statement. It is true that the Jane Holding Corporation had in its treasury at December 31, 1932, cash in the amount of $43,907.13. But there is no evidence of record that the trust could have received from the Jane Holding Corporation in 1932 a payment of interest in the amount of $171,249.36 if it had elected to receive it. STERNHAGEN, dissenting: I find myself unable to accept the decision in Docket No. 87240, to the effect that the Jane Holding Corporation realized no income through the cancellation in 1933 by its838 creditor, the trustee, of the accumulated interest of $2,510,222.07. The decision is rested entirely upon Commissioner v. AutoStrop Safety Razor Co., 74 Fed.(2d) 226, affirming 28 B.T.A. 621">28 B.T.A. 621, and the last sentence of article 64 of Regulations 77. It is important to remember that the nature of so much of the canceled indebtedness as is now in issue was accumulated accrued interest and did not represent the principal of a loan of money which had been made by the trustee to the corporation. I think that this fact is of primary importance in considering whether it can properly be said that the trustee shareholder made a contribution to the corporation's capital, as he might have done when he made the original loan upon which the interest was computed. As I read the regulations and the AutoStrop case, they were intended to deal with such principal indebtedness and not with accrued interest. Certainly the three illustrations of the article of the regulations indicate that accrued interest was not in the draftsman's mind. When the Board and the court came to decide the AutoStrop case the dominant indebtedness which was thought of was that described839 in the instrument of cancellation as "royalties of commissions or on account of moneys loanded or advanced or otherwise." The word "interest", which appears but once in the findings and nowhere in the opinion, was entirely lost sight of. I think, therefore, that both the Board's opinion and the court's opinion should be regarded as dealing entirely with the question whether the principal of an indebtedness owing by a corporation to its shareholder becomes a contribution to capital when it is canceled. That case held that it does, and that the corporation thereby realizes no taxable income. In the present case there is nothing to support a finding that the creditor, being the sole shareholder, intended a contribution of capital. On the contrary, the cancellation was made in order that 976 the trustee might distribute to one of its beneficiaries. The creditor corporation seems to me to have "made a clear gain" and "realized within the year an accession to income", to use the Supreme Court's language in United States v. Kirby Lumber Co.,284 U.S. 1">284 U.S. 1. Any thought of hardship which might result from this view is dispelled by the fact that the debtor corporation840 has for many years accrued interest on its books and deducted it on its returns, thus indicating that no contribution of capital was in contemplation. As I understand, there was a credit by the corporation to surplus and undivided profits, and thus the amount which he theretofore been definitely obligated to be paid as a debt was now freed of that obligation and was distributable or not to the shareholders entirely in the discretion of the directors. The trustee's position was changed from that of a creditor with a right against the corporation to that of a shareholder with no such right. As a debtor, the corporation had been firmly bound and the amount of the debt had been a true liability; with the forgiveness of the debt the liability ended, notwithstanding that the accounting item "surplus" may still appear on the liability side. HILL, dissenting: I disagree with the opinion of the majority of the Board in Docket No. 87240. It is my opinion that Jane Holding Corporation is taxable in the year 1933 on the amount of accrued interest canceled in that year by the Mallinckrodt trust, to the extent of deductions of such accrued interest taken by the corporation in its income841 tax returns for previous taxable years. The principal upon which the interest obligations were accrued by the corporation represented loans to it by its sole shareholder for use in its business operations. The only justifiable theory upon which a taxpayer may deduct interest or ordinary and necessary business expenses accrued but not paid is that, for the purposes of taxation, such accrual is treated as payment. Of course, in order to subject the payee of such accruals to income tax on the amounts thereof, where the payee is on a cash basis, the amount of such accruals must be actually or constructively paid to him, notwithstanding the fact that as to the payor the accruing of such obligations, for the purposes of taxation, is tantamount to their payment. Where I refer hereinafter to accruals as payments it is to be understood that such expression is employed in the sense and in the connection above indicated. In the present proceeding the accruals of interest were, to the extent of their deductions in the several taxable years, payments out of gross income and were not capital investments or paid out of capital. Taxable net income was reduced by the amounts of such deductions842 on the theory that so much of gross income as was necessary 977 to meet such accrued obligations for interest must be taken and set apart for that purpose. Therefore, to the extent of such deductions, the corporation did not receive taxable income in the years of such deductions. It received the amounts of such deductions as gross income but lost such amounts to taxable income through their appropriation to meet the accrual of interest obligations. The cancellation of the accrued interest obligations by the trust operated as a refundment in 1933 of such amounts lost to taxable income in the previous years and constituted income to the corporation in 1933. Such cancellation was a refundment of expenditures out of earnings and not out of capital of the corporation. The fact that from the standpoint of the trust as sole shareholder of the Jane Holding Corporation such cancellation constituted a contribution to capital of the corporation does not alter the fact that from the standpoint of the corporation itself the cancellation constituted a restoration to it of taxable income to the extent of the amount of accruals which it deducted from its gross income in previous taxable843 years. The capital contribution by the trust was not of itself income to the corporation, but through such contribution by cancellation of interest obligations previously deducted by Jane Holding Corporation from its gross income an amount of income equal to the amount of such deductions was restored to the corporation's taxable income. Such restoration occurred in 1933 and constituted taxable income of the corporation in the year here involved. I think my views herein are in harmony with the principal of the Board's decision in South Dakota Concrete Products Co.,26 B.T.A. 1429">26 B.T.A. 1429, which has been frequently cited with approval by the Board. I think, also, that my views are supported by the principle upon which the Supreme Court based its opinion in Burnet v. Sanford & Brooks Co.,282 U.S. 359">282 U.S. 359. In that case the taxpayer, who was engaged in business for profit and in carrying out a dredging contract entered into with the United States, expended in the taxable years 1913, 1915, and 1916 as expenses more than was received in each of those years as compensation under its contract, and on its income tax return for those years reported net losses844 by reason of the deductions of such expenditures. As a result of a suit against the United States for the recovery of such excess expenditures the taxpayer recovered from the United States in 1920 the amount of such excesses but did not return the amount of such recovery in its income tax return for the year 1920. The Commissioner determined a deficiency against the taxpayer based upon the amount of such recovery. The taxpayer petitioned the Board for a redetermination, contending that such recovery did not constitute income but a return of capital 978 and hence the deficiency based thereon was erroneous. The Supreme Court in its opinion said: That the recovery made by respondent in 1920 was gross income for that year within the meaning of these sections cannot, we think, be doubted. The money received was derived from a contract entered into in the course of respondent's business operations for profit. While it equalled, and in a loose sense was a return of, expenditures made in performing the contract, still, as the Board of Tax Appeals found, the expenditures were made in defraying the expenses incurred in the prosecution of the work under the contract, for the purpose845 of earning profits. They were not capital investments, the cost of which, if converted, must first be restored from the proceeds before there is a capital gain taxable as income. See Doyle v. Mitchell Brothers Co., supra, page 185 of 247 U.S., 38 S.Ct. 467. [Emphasis added.] I think, also, that my views are in harmony with the principle adopted and adhered to by the Board and the courts that, when a deduction for a bad debt is taken in a given taxable year and such debt is paid in a subsequent taxable year, the amount thereof becomes taxable income in the year received notwithstanding the fact that the amount received in payment of the debt is or may be a return of capital. In such case the taxpayer is not taxed on capital but upon restored net income lost in the taxable year when the deduction for the bad debt was, for tax purposes, allowed from gross income. I am aware that in Commissioner v. AutoStrop Safety Razor Co., 74 Fed.(2d) 226, on facts similar to those here, the Circuit Court of Appeals for the Second Circuit held: When the indebtedness was cancelled, whether or not it was a contribution to the capital of the debtor846 depends upon considerations entirely foreign to the question of the payment of income taxes in some previous year. Since the cancellation, under the circumstances shown, did not make it income to Auto Strop Safety Razor Company in the year the debt was cancelled, it cannot be taxed as its income in that year. I find it difficult to distinguish the facts in the instant case from those in the AutoStrop Safety Razor Co. case, supra, but with due deference to the court rendering the opinion in that case, I am impelled to the belief that its opinion therein is out of harmony with the principle underlying the opinion of the Supreme Court in the Sanford & Brooks Co. case, supra.For the reasons assigned it is my opinion that the Jane Holding Corporation is taxable in 1933 on an amount equal to the amount of the deductions taken by it from gross income in previous taxable years for accrued interest obligations canceled by the Mallinckrodt trust in 1933. TURNER, dissenting: In my opinion the conclusion reached in Docket No. 87339 can not be reconciled with that reached in Docket No. 87240. In the case first mentioned it is concluded that the accrued 979 interest847 due and owing from the corporation to the trust, the payment of which was waived or canceled by the trust, did not constitute taxable income to the trust for the reason that the trust, being on the cash receipts basis, never received it actually or constructively; while at the same time it is concluded in the latter case that the interest so waived or canceled by the trust did not constitute income to the corporation because it was received by the corporation from the trust, its sole stockholder, as a payment or contribution to capital. I have been unable to think of any situation or arrangement whereby it might probably be said that the one entity can make a payment or contribution of any sum to another without first receiving, actually or constructively, the money so paid or contributed. The situation here does not involve a normal and ordinary relationship between a stockholder and a corporation, and it is unlikely that the events which took place could have happened unless the interests of the sole stockholder and of the corporation were so nearly the same that it would make little if any difference, except for income tax purposes, whether the interest, so-called, was paid848 over to the stockholder or retained by the corporation. As I understand the facts, the Jane Holding Corporation was organized and maintained solely for the purpose of carrying on under corporate form certain enterprises of the trust, and particularly to erect a substantial office or business building, and the trust was to furnish such amounts as were needed for completion for the project. The income of the corporation was to be derived almost if not wholly from the rents to be obtained on the building. Assuming the separate entities of the trust and the corporation, the facts, as I understand them, are that as rents began to come in the Jane Holding Corporation from time to time made cash payments on the open account which it had set up to cover the loans or advances from the trust, which account covered not only the sums which had been advanced but interest thereon as it accrued from year to year. In making these payments there was no designation by the Jane Holding Corporation that these payments constituted a payment of interest or capital, and they were entered on the corporate books merely as payments on account. Normally under such circumstances there would be no occasion849 to designate the application of such payment to interest or principal, because it seems to me fundamental that where, in the absence of prior agreement or understanding, payments are made in respect of advances or loans, the amount so paid is to be regarded as the payment of interest to the extent of the interest then due and then as to any balance as a payment on principal. The only fact which could in any way indicate that such was not the case here is the fact that upon receiving these sums the trust, for some 980 reason which it has not seen fit to explain, made entries on its books designating the amounts received as payments of principal, leaving the interest to accumulate from year to year. In my opinion that fact alone should not be sufficient to justify either a conclusion of fact or a conclusion of law that the amounts dealt with in 1933 constituted interest and not principal. It seems to me therefore that the correct conclusion on the facts as I understand them would be that the interest accrued on the advances had been actually paid by the corporation over the period of years and actually received in cash by the trust to the extent of the cash payments, limited850 only to the amount of the interest which had accrued but remained unpaid at the time any particular payment was received. Under such circumstances, if that conclusion is correct, the only manner in which income tax may now be collected in respect of such interest payments would be through the adjustment of trust income for the years in which the prior payments were made, unless, by reason of the act of the trust in treating the payments as the return of principal and in failing to report in income as interest the payments made, some form of estoppel may be spelled out so as to justify the inclusion of a corresponding amount in income for 1933, when payment of the balance due on the account was waived. According to my understanding of the report herein, however, all parties in interest, including the trust, the corporation, and the respondent, have either agreed, or have proceeded to the trial of the issues in the two cases on the assumption, that the amounts which were actually paid by the corporation to the trust during the preceding years were in truth and in fact the payments of principal and that in the year 1933 interest accrued on that principal actually remained unpaid in851 the amount of $2,510,222.07, and to that extent the payment waived by the trust was in fact interest. On the basis of such an understanding, assumption, or agreement of fact, I am of the view that the only reasonable and logical conclusion that may be reached is that the interest so accrued and unpaid was constructively received by the trust at the time payment was waived and by it paid into the corporation as a contribution to capital. In that view of the case the conclusion of the majority in Docket No. 87339 is in error and the conclusion reached in Docket No. 87240 is correct. There seems to be no question that if the amount waived had been admitted to be principal, cancellation of the indebtedness would have been accepted by all parties as a payment to capital. While I do feel that the reasoning in Burnet v. Sanford & Brooks Co.,282 U.S. 359">282 U.S. 359, and South Dakota Concrete Products Co.,26 B.T.A. 1429">26 B.T.A. 1429, referred to in the dissent of Mr. Hill, is persuasive, I am convinced that the situation in those cases, as in the case of the recovery of a bad debt, is quite different from that in the cases 981 before us. In each of the cases mentioned*852 and in the case of a bad debt recovery, the recovery of funds was an antual realization on rights which existed in the person or corporation sought to be taxed, while here the acquisition of or the freeing of the sum of $2,510,222.07 from liability to the trust was not a realization on any right existing in the Jane Holding Corporation but the result of a voluntary act or gratuity of its sole stockholder, and, being a sum received or retained at the will of the stockholder, for which the corporation gave nothing, it constituted paid in capital. I am unable to see any analogy between a transaction such as we have in the cases before us and a transaction between a corporation and a stranger, as distinguished from a stockholder, such as took place in United States v. Kirby Lumber Co.,284 U.S. 1">284 U.S. 1. For the reasons set forth, I respectfully express my dissent. OPPER agrees with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625703/	WILLIAM H. WANAMAKER, JR., AND BESSIE D. BREMER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wanamaker v. CommissionerDocket Nos. 11136, 12689.United States Board of Tax Appeals9 B.T.A. 557; 1927 BTA LEXIS 2555; December 12, 1927, Promulgated 2555 1. OBSOLESCENCE. - Evidence respecting a building structure maintained for the purpose of producing fixed carrying charges of city land found to be insufficient to support a determination of when such structure may become obsolete. 2. LOSS. - A deductible loss arising from the sale of household furniture determined and allowed. Joseph H. VanDorn, C.P.A., and Randolph W. Child, Esq., for the petitioners. Frank W. Gibbs, Esq., for the respondent. TRUSSELL 558 These actions, which by agreement of counsel were tried and submitted together, involve deficiencies in income taxes in the case of Bessie D. Bremer for the year 1920 in the amount of $2,429.08, and for the year 1921 in the amount of $238.14, and in the case of William H. Wanamaker, Jr., for the year 1920 in the amount of $1,818.07, and for the year 1921 in the amount of $711.61. The main issue presented and common to both cases is the alleged failure of the Commissioner to allow adequate depreciation and obsolescence on a building property owned by the two petitioners. In the case of Bessie D. Bremer there is the additional claim for a loss on the sale of household furniture. 2556 The facts respecting the property upon which depreciation and obsolescence are claimed are stipulated. FINDINGS OF FACT. The cost of the land and building in 1920 was $525,000. The present value of the land, exclusive of the building, is from $720,000 to $797,500. The building is two stories in front with an addition on the rear of one story, the addition measuring 40 by 50 feet, making a total floor space of approximately 13,600 square feet, the building being located on a lot 39.4 feet by 145 feet 6 inches. The walls of the building are of brick construction and the floors are wood over hollow tile. The property is insured for $110,000 on an 80 per cent basis, or a valuation of $137,500. This valuation was allowed by the examining officer. The building was constructed in 1911 and purchased in 1920. The assessed valuation of the land and building in 1920, 1921, 1922, and 1923 was $480,000 and this was increased to $500,000 for 1924 and 1925. The property was owned in the years 1920-1921 jointly by taxpayers William H. Wanamaker, Jr., and Bessie D. Bremer, each on a 50 per cent basis. The results of operations for the five years from 1920 to 1924 are as follows: 2557 YearRental incomeExpensesNet1920$65,000.00$39,237.26$25,762.74192150,000.0044,717.765,282.24192250,000.0043,393.146,606.86192350,000.0043,699.486,300.52192450,000.0045,623.984,376.02The property was rented to Wanamaker & Brown, Inc., for $65,000 per annum for the year 1920, but it was found that this was more than the corporation could afford to pay, taking into consideration the size of the building, location and character of the business; 559 the business consisting of men's clothing and furnishings. The rental was therefore reduced to $50,000 for the year 1921 and subsequent years. The average net return for the above five years was $9,665.67 or 1.84 per cent on $525,000, the cost of the property. If the rental for 1920 had been $50,000 the average return would have been $6,665.67 or 1.27 per cent on $525,000, the cost of the property. During the year 1920 Bessie D. Bremer sold certain household furniture acquired after March 1, 1913, which had cost $1,689. During the year 1919 this furniture had been contained in and rented with a house, and in adjusting her income-tax for the year 1919 she2558 was allowed depreciation upon this furniture in the amount of $375. The furniture was sold in the year 1920 for $1,000. The deductible loss sustained in the year 1920 is $314. OPINION. TRUSSELL: These cases have been presented and argued on the theory that the building maintained by the petitioners on land located at 1217-1219 Chestnut Street, Philadelphia, was a temporary building maintained only for the purpose of producing such an amount as would meet the fixed carrying charges upon the land and building, and that as such a building its useful economic life should be estimated as not more than 11 years from the time the petitioners acquired it in 1920. It has been argued on behalf of the petitioner that the practice of maintaining temporary buildings on land in the larger cities only for purposes of producing a sufficient amount to pay taxes and fixed carrying charges on the land is a well established practice and must be given consideration in the adjustment of exhaustion allowance under the income-tax acts. In this case the Commissioner has allowed an exhaustion deduction based on a life of 40 years. Petitioners appear to concede that that allowance is fair and reasonable2559 if ordinary wear and tear alone is considered but that it is not reasonable when considered in connection with obsolescence. Much stress has been laid upon the admitted facts that the income produced by this property is a wholly inadequate return upon the investment. This may be readily conceded. We believe, however, that owners of land located as is the land here under consideration, are not looking to the net rents from property for their return upon their investment but are looking to the increased value of the land, when the same may be sold at a satisfactory profit or its uses changed, and there is nothing in this record and we know of no basis upon 560 which to estimate when a satisfactory profitable sale of this property may become probable or when business and financial conditions may appear to warrant the present owners in so improving their property as to produce adequate money return upon their investment. The record shows the total of expenses which the owners have charged against the rents of this property but it does not show what items are included in that total and whether there are other items than local taxation and ordinary building repairs. The*2560 record also shows that during the years 1920 to 1923, inclusive, the assessed valuation of this property was $480,000, and for the years 1924 and 1925 it was $500,000, but petitioners have failed to furnish any other evidence respecting any gradual increase of assessed valuations or whether the tax rate upon assessed valuations is stationary, increasing, or diminishing. And, if it may be argued that this building were to become obsolete at the time when its gross rentals will cease to meet the necessary carrying charges, we are furnished with no basis upon which we can make a finding as to whether that time will arrive at the end of 11 years as estimated by the petitioners or at some other undetermined date. We are, therefore, of the opinion that upon the present record the exhaustion allowance of 2 1/2 per cent allowed by the Commissioner can not be determined to be inadequate. The deficiencies should be recomputed in accordance with the foregoing findings of fact and this opinion. Judgment will be entered upon 15 days' notice, pursuant to Rule 50.Considered by LITTLETON, SMITH, and LOVE.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625704/	MOLINE DISPATCH PUBLISHING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Moline Dispatch Publishing Co. v. CommissionerDocket No. 9235.United States Board of Tax Appeals11 B.T.A. 934; 1928 BTA LEXIS 3677; May 2, 1928, Promulgated 3677 1. March 1, 1913, value of petitioner's printing machinery and equipment held to be $35,000, which is the proper basis upon which depreciation should be computed. 2. Bonuses paid to petitioner's employees in the years 1919, 1920, and 1921 held to be a proper deduction as an ordinary and necessary expense. 3. Reserve for Bad Debts. Held, that the amount of reserve allowed by the Commissioner is fair and reasonable for the year 1921, such reserve as allowed being above petitioner's average for several years of the percentage of bad debts to accounts receivable and also bad debts to gross income. 4. Additional compensation for officers in the form of automobiles purchased by petitioner in 1917, disallowed as a deduction in the year 1919 for lack of evidence showing in what year and for what year the additional compensation was paid. 5. Deduction for automobile expense as allowed by Commissioner held to be reasonable in amount for a part of the total expense was for personal use of the cars and the evidence makes no segregation. 6. Ordinary and necessary business expense, held to include the expense to petitioner of maintaining telephones in the3678 homes of two of its officers for night calls relative to petitioner's business. 7. Reduction of petitioner's invested capital by proration of prior years' taxes held to be correct under section 1207 of the Revenue Act of 1926. 8. Refund in the amount of $1,798.31 determined by Commissioner to be due petitioner for year 1917, should be included in its invested capital for 1919, 1920, and 1921. 9. Bad debts in the amount of $5,772.77 claimed to have been disallowed as deductions in years prior to 1921 but not written off until 1921, held said amount should not be added to invested capital as determined by Commissioner for the reason that the evidence does not disclose just what the facts are. 10. Invested Capital. Petitioner purchased two Cadillac cars in 1920 at a cost of $9,700 for the use of its officers in the business. Held, that said amount should be included in petitioner's invested capital for 1920 and 1921. 11. (a) Invested Capital. Upon incorporation petitioner acquired for its capital stock the assets of a partnership including two accounts receivable aggregating $7,380 as due from the two partners who became the sole stockholders of petitioner. 3679 The evidence establishes that the so-called accounts were not, in fact, accounts receivable, but that the said amount was distributed in 1911 as a cash dividend and that entry on the books was erroneous. Held, that said amount should not be included in invested capital for the years 1919, 1920, and 1921. (b) Claim for inclusion in invested capital of value over cost of "Other Assets Acquired," at incorporation, disallowed for lack of evidence. 12. Petitioner's alternative claim that if items 4 and 5 above be disallowed, the amount should be included in invested capital, disallowed as no basis therefor has been shown. William R. Conklin, Esq., Edward S. Bentley, Esq., and Clifford Yewdall, C.P.A., for the petitioner. James A. O'Callaghan, Esq., for the respondent. TRUSSELL 935 Respondent in computing this petitioner's income and profits tax liability for the calendar years 1918 to 1921 has determined, as set forth in his letter dated September 23, 1925, an overassessment of $1,723.67 for 1918; and deficiencies in the amounts of $5,370.20 for 1919; $482.83 for 1920; and $7,821.46 for 1921. Petitioner herein appeals from respondent's3680 determination for the years 1919, 1920, and 1921, and alleges that respondent erred as follows: (1) By disallowing in each of the said years a deduction claimed by petitioner as depreciation on an alleged increase in the value of certain assets from the date of purchase to March 1, 1913; (2) By disallowing in each of said years a deduction claimed as an expense for alleged bonuses paid to petitioner's employees; (3) By disallowing for 1921 deductions as expenses claimed by petitioner, (a) for bad debts aggregating $5,772.77, and (b) a reserve of $4,500 set up for bad debts (at the close of the hearing petitioner was allowed to amend its petition so as to claim a deduction for 1921 of an aggregate of $20,500 set up on its books as a reserve for bad debts); (4) By disallowing as an expense deduction in 1919, $3,556.74 claimed as additional compensation voted to officers in that year; (5) By disallowing in each of the years a deduction as an expense the alleged cost of operation of cars purchased by petitioner for the use of its editor and publisher in petitioner's business; (6) By disallowing in each of the years a deduction as an expense the amount of $112, paid by petitioner3681 for telephone connections to the homes of its editor and publisher; 936 (7) By reducing petitioner's invested capital in each of the years by its income and profits taxes; (8) By not including in petitioner's invested capital for each of the years the amount of a refund of $1,798.31 alleged to be due for the year 1917 as determined by the Commissioner in his letter of October 28, 1925; (9) By excluding from petitioner's invested capital for each of the years the sum of $5,772.77 as bad debts disallowed in prior years; (10) By excluding from invested capital for the year 1920 the sum of $9,700 alleged to be the cost of two automobiles used by petitioner's editor and publisher in the conduct of petitioner's business; (11) By excluding from petitioner's invested capital for each of the years (a) the sum of $7,380, representing certain accounts receivable acquired by petitioner upon incorporation and for which alleged assets it issued stock and (b) the value over cost of "other assets acquired" at the time of incorporation; and (12) By excluding from invested capital for 1920 the sum of $3,668.78 and for 1921 the sum of $4,210.40, the said amounts representing items3682 Nos. 4, 5, and 6 above and alleged to be due petitioner by its officers if items 4, 5, and 6 should be disallowed as deductions for expense. Subsequent to a brief sketch of the history of petitioner and its business the findings of fact will be set forth in paragraphs numbered in relation to the above allegations of error. FINDINGS OF FACT. The Moline Dispatch Publishing Co. is an Illinois corporation and is engaged in the publication of The Moline Daily Dispatch, a newspaper, at the City of Moline. The Moline Daily Dispatch has been published at Moline, Ill., as a daily paper since 1878. Prior to 1891, it was owned and published by a partnership and subsequent to that year by The Moline Dispatch Publishing Co., an Illinois corporation, which ceased to exist in January, 1911, by limitation of its charter. The said corporation was duly dissolved and its assets divided equally between its two equal shareholders, P. S. McGlynn and Mrs. Myra C. Eastman. The business was continued without any change, first by P. S. McGlynn and Myra C. Eastman and later by McGlynn and John Sundine who acquired Mrs. Eastman's interest in the paper. On April 17, 1911, this petitioner was3683 incorporated under the laws of Illinois for a term of 99 years, for the purpose of taking over the business of publishing the Moline Daily Dispatch newspaper. The authorized capital stock of petitioner was 800 shares of $100 par value each, aggregating $80,000. On or about April 20, 1911, petitioner duly acquired all the assets of the business of the Moline 937 Daily Dispatch from McGlynn and Sundine to each of whom it issued 400 shares of its capital stock. Pursuant to the Illinois law, P. S. McGlynn, John Sundine, and Harry A. Sward were issued a "license" as commissioners to open the books for subscriptions to the petitioner's capital stock and they filed a written report with the Secretary of the State of Illinois, that the said stock was fully subscribed and that the amount actually paid in was $80,000. The said report also contained a description and an appraisal of the value of all the assets of the business at $10,000 for real estate and an aggregate of $70,000 for personal property. The assets thus acquired by petitioner were set up as the opening entry on its books, as follows: Real estate and buildings$10,000.00Cash on hand and in bank3,332.38Accounts receivable:Regular display$10,449.64Miscellaneous992.67Legals1,154.0112,596.32Accounts receivable - Suspense842.12Circulation accounts2,735.50P. S. McGlynn3,640.00John Sundine3,740.00Inventories (premiums, supplies, paper)1,926.77Machinery and equipment22,352.70Furniture and fixtures2,829.75Unexpired insurance277.33Goodwill, trade-marks, trade names, etc17,646.2981,919.16Less: Accounts payable1,919.16Balance80,000.003684 (1) Petitioner's machinery and equipment used in the mechanical work of producing the newspaper was set up on its books at an aggregate value of $22,352.70 at or about May 1, 1911, which was the value placed upon the machinery and equipment when it was paid in for stock. The said machinery and equipment was of standard make in use all over the country, and it was kept in a highly efficient condition at all times, which was necessary because the newspaper had to be printed at a certain time every day except Sundays. Petitioner could produce a twenty-page newspaper on March 1, 1913, which required the use of certain machinery and equipment. The machinery and equipment, consisting of a large press, five linotype machines, motors, trimmers, a shaver, a saw, cabinets, chases, turtles, galleys, composing sticks, melting pots, several tons of stereotype metal and linotype metal, proof presses, etc., installed in the composing and press rooms on March 1, 1913, had a total value of $35,000 on that date. The machinery and equipment in question which was 938 acquired prior to March 1, 1913, was in use daily during the years 1919, 1920, and 1921, for producing petitioner's newspaper. 3685 (2) Since about the year 1914 petitioner has followed a policy of paying to each of its employees a small bonus at the end of each year. For the years in question the aggregate amounts of the bonuses paid to petitioner's employees were $658 for 1920 and $395 for 1921. The bonuses were paid as additional compensation and for the purpose of securing the good will of petitioner's personnel who were referred to by the people of Moline as the Dispatch family. (3) On January 1, 1921, petitioner set up on its books an account "Reserve for Bad Accounts" in the sum of $6,500. During 1920 and 1921, due to the general deflation in business conditions, the main sources of employment for the people of Moline, a city of 30,000 population, the John Deere Plow Co., the Moline Plow Co., the Velie Motor Co., and the Rock Island Arsenal, laid off a great many of their employees and many small establishments went out of business. At the close of the year 1921 the petitioner's officers carefully went over its accounts receivable and after efforts to collect the accounts and after due consideration of the attending circumstances relative to each account, made up a list, too voluminous to set forth3686 herein, totaling $20,262.77 of accounts which they believed to be probably worthless. As a result, on December 31, 1921, there was added to the reserve for bad accounts the amount of $14,000, making a total reserve of $20,500 for the year 1921, against which there was charged for that year $7,697.50, of which $1,469.84 represented items accruing in 1921 and $6,227.66 represented items accruing in 1920 and prior years. The accounts totaling $20,262.77 and considered by petitioner to be bad accounts, numbered approximately 200, of which about half were paid in full or in part during 1922 and 1923 and subsequent years. The following schedule shows the amounts deducted in years prior to 1921 for bad debts, the amount added to reserve for bad debts in 1921 and thereafter, and other relative accounts: Year.Accounts receivable on Dec. Amount actuallyAmount added Gross in come.31, after deducting amount charged off forto reserve.written off for bad debts.bad debts.1919$35,215.21$2,470.70$267,529.69192041,718.054,515.47328,347.81192140,583.157,697.50$20,500.00302,027.33192255,589.485,333.7415,996.24302,140.14192341,447.256,933.396,246.84326,193.39192451,095.9814,337.826,826.86(1)192561,116.334,671.074,626.03(1)192657,347.742,348.571,406.43(1)Total384,113.1948,309.26Average48,014.156,038.633687 939 Petitioner's reserve for bad debt accounts was terminated on December 31, 1926, with a balance of $14,336.94. For the year 1921 the Commissioner has allowed petitioner a deduction of $7,770.15 for bad debt reserve. (4) In 1914 petitioner purchased a Midland automobile for $1,500 for the use of John Sundine in his work as business manager of petitioner. In 1917 that car was traded in and a cash payment of $1,490.84 was made by petitioner for a Velie car for Sundine. At the same time petitioner purchased for $1,120 a Velie car for McGlynn. The cars were used by Sundine and McGlynn to ride between their homes and the office, but were parked in front of the office and were used each day by reporters or other employees. Sundine used the car purchased for him to make collections; to make exchanges of advertising copy, plates, and mats between other newspapers and some times for the delivery of newspapers to outlying districts. McGlynn did not get out of the office during the day as much as Sundine did, but his car was used by employees most every day and in the evenings McGlynn drove his car to various places to cover the reporting of social events, lectures, concerts, 3688 receptions, etc. On October 29, 1919, the following resolution was adopted by the board of directors of petitioner: A resolution was adopted declaring that the charge of $1,120 dated March 24, 1917, against P. S. McGlynn, Managing Editor of the Moline Daily Dispatch for Velie automobile and that the charge of $945.50 dated January 23, 1914, for Midland automobile, and $1,490.84 dated March 16, 1917, for Velie automobile against John Sundine, Advertising Manager of the Moline Dispatch be charged on the books of the Publishing Company as expense for services to the editorial and advertising departments, respectively, of the Moline Dispatch Publishing Company. This will make both Mr. McGlynn and Mr. Sundine square on the books of the Moline Dispatch Publishing Company. Both Sundine and McGlynn used their respective cars for their personal pleasure whenever they so desired. At times they took trips in their cars on which occasions they purchased the gasoline and oil used. Petitioner claims as a deduction for 1919 the sum of $3,556.34 as additional compensation voted to Sundine and McGlynn. For the vears 1919 to 1922, inclusive, salaries for petitioner's officers totaled $20,8003689 per annum. The Commissioner disallowed the claimed deduction. (5) Petitioner paid the cost of operatiton of the cars purchased for McGlynn and Sundine except the expenses of any pleasure trips taken by them. Such expenses amounted to $1,389.08 for the year 1920 and $2,211.34 for the year 1921. Petitioner deducted those amounts on its returns for the respective years as ordinary and necessary business expenses and the Commissioner disallowed $429.66 and $728.75 for the respective years on the ground that the two cars 940 were used for a portion of the time for the personal use of McGlynn and Sundine. (6) Prior to the years here in question petitioner had a telephone installed in McGlynn's home and Sundine's home and petitioner paid the total cost of $112 for both phones for each of the years 1919, 1920, and 1921. The telephones were listed in the telephone book as follows: Moline Dispatch Publishing Co(number)Night calls:P. S. McGlynn, editor(number)John Sundine, business manager(number)The Dispatch office closed at 8 o'clock, p.m., and it was necessary for McGlynn and Sundine to have telephones over which they could transact petitioner's3690 business after the office was closed. Both McGlynn and Sundine made and received many night calls as to advertising matters and also as to news items. Petitioner deducted $112 on its return for each of the years in question as an ordinary and necessary business expense and the Commissioner disallowed the deduction in each of the years on the ground that it was a personal item of expense for McGlynn and Sundine. (7) Petitioner alleged in its petition that the Commissioner erred in reducing its invested capital by income and profits taxes, but no evidence nor argument has been submitted upon this issue. (8) As evidenced by his letter of October 28, 1925, the Commissioner determined that a refund in the amount of $1,798.31 was due petitioner for the year 1917, but he excluded said amount from petitioner's invested capital for the years here in question. The Commissioner now admits that such amount should properly be included in petitioner's invested capital for the years 1919, 1920, and 1921. (9) Petitioner has alleged that the Commissioner erred in excluding from its invested capital for the years 1919, 1920, and 1921, the sum of $5,772.77, being bad debts disallowed in prior3691 years. The Commissioner determined that certain accounts receivable totaling $5,772.77 became worthless prior to 1919, but that inasmuch as such debts had not been written off in those prior years he refused to allow deductions therefor as claimed by petitioner in amended returns for the years 1911 to 1918. The debts in question were actually charged off in 1921. (10) In March, 1920, the two Velie cars purchased for McGlynn and Sundine were traded in on two Cadillac cars for which petitioner paid $9,700. The two Cadillac cars were used during 1920 and 1921 in the same manner as the Velie cars had been used and the cost was set up on petitioner's automobile account as a capital item. Petitioner included the said $9,700 in its invested capital for the year 1920 and the Commissioner excluded the said amount. 941 (11a) At the time petitioner was incorporated it acquired all of the assets of the partnership business of McGlynn and Sundine as set forth hereinbefore and issued its capital stock in the amount of $80,000 therefor. Among the assets so acquired were two accounts receivable, namely, P. S. McGlynn, $3,640, and John Sundine, $3,740. In 1911 McGlynn and Sundine3692 drew those respective amounts from the partnership's surplus cash against which there was no outstanding obligations and at the time considered them to be cash dividends or a distribution of profits, but they were erroneously entered upon the books of the Moline Dispatch as accounts receivable. The said accounts were included at their face value among the assets totaling $80,000 transferred to the petitioner corporation in 1911. The opening entry on the petitioner's books included the said accounts receivable as assets and included them in its invested capital until 1918 when they were written off. In 1919 petitioner restored said accounts receivable to invested capital. McGlynn and Sundine were at all times solvent and able to pay the said amounts but they had always considered that those amounts were received by them as cash dividends. (11b) The Commissioner excluded the two accounts totaling $7,380 from petitioner's invested capital for the years 1919, 1920, and 1921, on the ground that the said accounts having been written off could not be restored to surplus for invested capital purposes. OPINION. TRUSSELL: Due to the number of separate issues each one will be decided3693 separately. (1) The first issue relates to the proper basis for depreciation on petitioner's composing room and press room machinery and equipment acquired prior to March 1, 1913, and in constant use during the years 1919, 1920, and 1921. Respondent claimed that the March 1, 1913, value has not been proven and he allowed depreciation on the basis of cost. At the hearing petitioner produced two witnesses who had been for many years in the business of selling machinery and equipment such as used by petitioner and who were familiar with the machinery and equipment owned and used by petitioner. Those two witnesses had sold petitioner machinery and equipment, had visited the plant, knew the condition of it and valued it, by separate items, at an aggregate March 1, 1913, value slightly in excess of $35,000. Petitioner also produced a witness, the chief mechanic of the composing room of the Washington Evening Star, who during the past 34 years has sold, bought, and inspected all kinds and sizes of printing equipment. The said witness stated what machinery and equipment was necessary to produce a twenty-page newspaper, that the machinery and equipment was all standard 942 3694 make and used throughout the country, that he knew the March 1, 1913, fair market values of the various items of equipment required for the production of a twenty-page paper even though he had not inspected it because the machinery would have to be kept in good condition to maintain its production and he valued petitioner's machinery and equipment at an aggregate of $35,000 on March 1, 1913. Without setting forth the values of the numerous items of equipment we have found as a fact that the March 1, 1913, value of petitioner's machinery and equipment was $35,000 which should be used as the basis for computing depreciation on said assets for the years 1919, 1920, and 1921. There is no dispute as to the rates of depreciation as used by respondent. (2) Petitioner had a policy of paying its employees a bonus as additional compensation at the end of each year. For the years in question the bonuses aggregated $658 for 1919, $678 for 1920, and $395 for 1921. The said amounts should be allowed as deductions in the respective years as ordinary and necessary business expenses under section 234(a)(1) of the Revenue Acts of 1918 and 1921. (3) Petitioner claims by its amended petition3695 that it is entitled to a deduction for 1921, in the amount of $20,500, as a reserve for bad debts. The evidence shows that at the close of the year 1921 petitioner went over its accounts receivable and made up a list of about 200 accounts which were considered to be probably bad at that time. Because of the general depression in business conditions many of petitioner's debtors could not pay their debts during 1921 and petitioner considered the debts bad. However, a large percentage of those same debts were running accounts for advertisements, and during 1922 and 1923 petitioner collected a fair percentage of the debts contracted during 1921. Although a reserve of $20,500 was set up only $7,697.50 was actually charged against it. For the years 1919 to 1926, inclusive, petitioner's accounts receivable averaged $48,013.15 and its bad debts actually charged off during the same years averaged $6,038.63, which amounts to 12.5 per cent. The percentage of bad debts to accounts receivable as allowed by the Commissioner for 1921 is about 18 per cent. For the years 1919 to 1923, inclusive, the petitioner's gross income averaged $305,247.67 and its bad debts charged off during the same3696 years averaged $5,390.16, which amounts to 1.7 per cent. The percentage of bad debts to gross income as allowed by the Commissioner for 1921 is about 2.5 per cent. The amounts of bad debts charged against petitioner's reserve for the years 1922 to 1926, inclusive, indicate that the large reserve set up in 1921 was not warranted. On December 31, 1926, the reserve account as set up on petitioner's books was terminated with a balance of over $14,000. The deduction of $7,770.15 943 as allowed by the Commissioner for bad debts for 1921 is reasonable and should be sustained. (4) Petitioner claims that it is entitled to a deduction for the year 1919 of $3,556.34 as additional compensation voted to Sundine and McGlynn. The said sum represents the cost of cars purchased by petitioner for the use of its two officers. The resolution dated October 29, 1919, is the basis for petitioner's claim, but that resolution does not indicate when the services were rendered, nor does it indicate the period of time, one or more years, for which the additional compensation was voted paid in the form of cars purchased by petitioner in 1917. The testimony sheds no light upon the matter and in3697 the absence of evidence showing in what year and for what year the additional compensation was paid, it may not be allowed as a deduction for 1919. (5) The facts show that during the years in question McGlynn and Sundine used their cars for personal use as well as for the conduct of petitioner's business. There is no evidence as to what portion of the total operating expenses paid by petitioner were expended for such personal expenses which may not be allowed as an ordinary and necessary business expense and we are of the opinion that the amounts allowed by the Commissioner as petitioner's business expense for operation of officers' cars are reasonable and proper. (6) We are satisfied from the testimony that it was necessary for petitioner to install the two telephones in question. The Moline Daily Dispatch was not a large newspaper and it was quite necessary for petitioner's customers and reporters to have a direct means of communication with the two men, McGlynn and Sundine, who directed all the affairs of petitioner. The two phones were used regularly for business night calls and the expense of maintaining such means of communication was an ordinary and necessary business3698 expense for this petitioner. Petitioner should be allowed a deduction of $112 from gross income for each of the years 1919, 1920, and 1921. (7) Apparently petitioner has waived the issue relative to the reduction of its invested capital by income and profits taxes. It appears from the deficiency letter appealed from that the Commissioner has prorated petitioner's prior years' taxes in accordance with his regulations, which action must be considered as correct under the provisions of section 1207 of the Revenue Act of 1926. (8) The amount of $1,798.31 refund determined by the Commissioner to be due this petitioner for the year 1917, should be included in petitioner's invested capital for each of the years 1919, 1920, and 1921. (9) The evidence is not all clear as to the ninth issue and we are unable to determine exactly what the facts are as to the inclusion or 944 exclusion of an amount of $5,772.77 accounts receivable in petitioner's invested capital. This issue seems to have become merged into petitioner's claim for a reserve of $20,500 for bad debts for the year 1921. The claim for the inclusion of $5,772.77 in invested capital for 1919, 1920, and 1921, must3699 be disallowed for lack of proof. (10) In March, 1920, petitioner purchased two Cadillac cars at a cost to it of $9,700 which cars were used by the officers and employees of petitioner in the conduct of its business. The cost of the cars was set up on the books in petitioner's automobile account and carried as a capital item for 1920 and also 1921. The purchase of the cars certainly entailed a capital expenditure and the amount of $9,700 should be included in petitioner's invested capital for the years 1920 and 1921. (11a) The two accounts receivable, totaling $7,380, may not be included in petitioner's invested capital for the years 1919, 1920, and 1921, for the facts establish that the two so-called accounts receivable from McGlynn and Sundine were not in fact accounts receivable having any actual cash value. In 1911 the amounts in question were distributed as cash dividends and neither McGlynn nor Sundine ever intended to repay those amounts to the petitioner. They did not give petitioner their notes nor any other evidence of an indebtedness. McGlynn testified that the cash which represented accumulated profits, was distributed as dividends and that he did not understand3700 how it got on the books as accounts receivable. The Commissioner properly excluded the said amount of $7,380 from petitioner's invested capital. (11b) No evidence has been submitted as to the value, if any, over cost of "Other Assets Acquired" by petitioner at the time of its incorporation which alleged value petitioner claims should be included in its invested capital. This claim by petitioner must be denied. (12) The claim made by the twelfth issue must be denied as no basis has been shown for the inclusion of any of those amounts in petitioner's invested capital. Judgment will be entered upon 15 days' notice, pursuant to Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625705/	Guy C. Earl, Jr., Petitioner, v. Commissioner of Internal Revenue, RespondentEarl v. CommissionerDocket No. 582United States Tax Court4 T.C. 768; 1945 U.S. Tax Ct. LEXIS 227; February 13, 1945, Promulgated 227 Decision will be entered under Rule 50. In 1927 petitioner was controlling stockholder and general manager of a newspaper publishing company which organized a separate corporation to operate its radio station. The publishing company and petitioner each acquired stock therein. Later petitioner was married. In 1931 the publishing company got into financial difficulties and all of its stock was sold to new interests. Petitioner acquired the publishing company's stock in the radio corporation from the new owners for a nominal amount, paid with community funds, and developed the station by means of his own efforts. During the period 1931 to 1936 petitioner received only a nominal salary as compensation for his services. In 1936 the station was sold and petitioner made a large profit on his stock. The proceeds were invested and petitioner and his wife reported the income from these investments as community income. Held, that petitioner's control of the publishing company is not sufficient to impute ownership to him of its radio corporation stock and that the stock, having been purchased with community funds subsequent to his marriage, is community property; held, further228 , that the stock in the radio corporation acquired by petitioner prior to his marriage was his separate property, but that that part of the increase in its value due to uncompensated services of petitioner subsequent to his marriage is community property. Dana Latham, Esq., for the petitioner.Byron M. Coon, Esq., and Harold D. Thomas, Esq., for the respondent. Hill, Judge. Murdock, J., dissenting. Disney and Harron, JJ., agree with this dissent. HILL 768 This proceeding involves income tax deficiencies for the years 1940 and 1941 in the amounts of $ 3,618.52 and $ 1,052.65, respectively. Petitioner and his wife filed separate income tax returns for these years. They divided the income from certain investments and claimed expense deductions from that income on the ground that the investments were a part of their community property. The respondent determined deficiencies in petitioner's tax by adding to his reported income the amount reported by his wife, ruling that the investments and the income therefrom were petitioner's separate property. The question to be decided is the ownership of the investments that produced the income for these years. 229 The correctness of other adjustments made by respondent turns on the ownership of this property.FINDINGS OF FACT.Petitioner is a native of California and was married in 1927. He has resided continuously since that time with his wife in the city of Los Angeles. His Federal income tax returns for 1940 and 1941 were 769 filed with the collector of internal revenue for the sixth collection district of California.Prior to 1927 petitioner was the president, general manager, and controlling stockholder of the Los Angeles Express Publishing Co., which published the Los Angeles Evening Express, a daily newspaper, hereinafter referred to as Express. In 1924 that company's predecessor had begun operating a radio broadcasting station with the call letters KNX. The radio broadcasting business was in its infancy. Petitioner took an active part in the radio station from the very beginning and took a keen interest in attempting to work out the various problems that confronted this new venture.In 1927 petitioner caused to be organized on behalf of Express a California corporation named the Western Broadcasting Co., hereinafter called Western, to operate the radio station. A separate230 organization was regarded as desirable by petitioner in order (1) to take advantage of a reassignment about to be made of channels, frequencies, and power for radio broadcasting and (2) to facilitate the raising of working capital for development of the business. Petitioner's associates and fellow stockholders in Express did not share petitioner's enthusiasm over the future of radio and desired that the radio station be operated and financed as a separate entity. Also, the radio business was ready for increased Government regulation and control and petitioner felt that it would receive more favorable treatment if the radio business were conducted separately. At the time Western was organized Express had invested $ 5,986.21 in the radio station. KNX was transferred to Western for 1,500 shares of capital stock of the par value of $ 100. Express retained 760 shares and the balance was sold for cash. Subsequently these shares were deposited by Express with the trustee under a bond issue as an additional security. Prior to his marriage in 1927 petitioner acquired 390 shares of Western as his separate property, at the cost of $ 49,000.From the very outset Western operated under 231 severe handicaps. There were two other radio stations in the Los Angeles area and in 1928 the Federal Radio Commission forced Western to move its transmitter from Hollywood because of the power of the station Western wished to license. Eventually, the Radio Commission approved a location in the San Fernando Valley and Western commenced operations with a power of 5,000 watts on a national frequency. The hills separating North Hollywood and the San Fernando Valley area from downtown Los Angeles weakened the KNX signal in Los Angeles. As a result local advertisers were not inclined to patronize KNX and the station operated at a loss. Petitioner and Express made up the deficit each year. Western's financial position remained precarious and shaky until 1934.770 During the period 1927 to 1931 the radio broadcasting industry generally was at war with the newspaper publishers throughout the country. The radio stations had entered the advertising field and were making appreciable inroads in newspaper revenues from this source. Newspaper advertising and magazine advertising had fallen off in this depression period, but radio advertising had increased. Other newspapers in Los 232 Angeles owning radio stations had disposed of them and by 1931 the Express was the only Los Angeles paper with a radio station affiliate.In 1929 the Express ranked third in the matter of circulation of the Los Angeles papers. The resulting business depression caused it to be the first to feel the loss of advertising revenues. Advertisers tended to concentrate their expenditures in the larger papers and those newspapers with the smaller circulation were the first to feel the pinch. By late 1930 Express was unable to pay the principal on a $ 1,000,000 bond issue and owed $ 300,000 for newsprint to the Crown Paper Co. Its owners, including petitioner, were faced with the problem of raising new capital or attempting to sell the paper in order to salvage something from their investments. The Crown Paper Co., as the largest creditor, was instrumental in forcing the Express to take steps for a sale. On January 30, 1931, petitioner, as president of Express, had just about concluded a deal for the transfer of the paper to the representatives of the Crown Paper Co. and the bondholders. On that day these creditors and petitioner had arranged for a final meeting the following morning to233 consummate the deal. A Mr. Salisbury, one of the attorneys for Crown Paper Co. was a friend of petitioner and a neighbor of the attorney for the Hearst interests. On leaving the conference on that day petitioner suggested to Salisbury that he communicate with the Hearst attorney to see if Hearst would be interested in buying the paper for $ 2,000,000 in order to prevent eastern interests from coming into Los Angeles and making the paper a rival of Hearst's Los Angeles paper. Salisbury was promised a commission by petitioner if the deal went through. That evening Hearst's representatives, having received the approval of Hearst, met with petitioner and negotiated for the purchase of all the outstanding stock of Express for the sum of $ 2,000,000, less outstanding liabilities. Lawyers and auditors were called in to prepare the contract and go over the books of account so that the deal could be consummated before the creditors' meeting the following morning. While the contract was being written up and stock options from remaining stockholders of Express were being secured, petitioner asked the Hearst representatives what disposition was to be made of Western stock. He knew that234 Hearst was one of the leaders of newspaper opposition to the 771 radio business and pointed out that he was going to be out of a job, that he owned several hundred shares of Western stock and would like very much to acquire this stock, stating that, whatever price was paid, Express would benefit by just that much. Western had been losing money and there were continual demands on Express for more money to meet operating expenses. Express owned a membership in the Annandale Country Club which had cost $ 1,000. The membership and Western stock were carried on its books under the item "Stock & Club Membership," with a value of $ 77,000. The club membership was regarded as a definite liability because under local custom it was impossible to resign, and dues and other assessments kept piling up. It was finally agreed that petitioner should have the 760 shares of Western stock for $ 10 on the condition that he take the membership in the country club. Petitioner was not a golfer and the only reason he took the membership was that he could thereby acquire the Western stock. The new owner of Express had no interest in the radio station and felt that it was a losing proposition 235 and a definite liability. The new manager of Express was one of the leaders of newspaper opposition to radio. The Hearst interests were glad to dispose of these assets, which were regarded as worthless. Both of these transactions were completed. The purchase price of $ 10 was paid by petitioner that evening from community funds. The $ 10 was full and complete consideration for the transfer, Western stock having no value in the open market. The 760 shares of Western stock were subsequently transferred to petitioner by the trustee of the bond issue.During the interval from 1931 to 1936 petitioner devoted all his time and energies to the operations of Western. New and original programs were developed. Power was increased. Petitioner organized a firm to solicit advertising and made a definite bid for its share of the national advertising business, which gradually came its way. By 1936 KNX was one of the leading independent stations in the country. It operated on 50,000 watts, a power reserved for only the largest stations. It had large and loyal audiences for its programs in all the Pacific Coast states. Petitioner's aggressive management and original ideas publicized the236 activities of KNX and revenues from advertising increased rapidly from year to year. During the period from 1931 to 1934 the business still lost money because of the continuous efforts by petitioner and his staff to enlarge, expand, and improve its programs and service. During 1934 Western earned $ 54,686.55 and in 1935 it earned $ 138,160.13. During this period dividends of $ 1 a share per month were paid.Prior to 1935 petitioner received no salary from Western for his services. During 1935 and 1936 he received a total of $ 5,500 as compensation, 772 which was not adequate or reasonable. At least one of the executives working with him received as high as $ 35,000 annually, and several others received salaries over $ 10,000. For reasons of his own, he preferred to see his efforts rewarded by an increase in the value of stock rather than by taking money out of the business in the form of compensation for services. This philosophy of petitioner had its origin in his early newspaper days and he carried it over into the radio broadcasting business.National Broadcasting Co. had an outlet in Los Angeles, but Columbia Broadcasting System, the other major network, had none. 237 In March 1936 petitioner consummated a series of negotiations with Columbia whereby it was agreed that Columbia was to buy all of the outstanding stock in Western for approximately $ 1,200,000. Petitioner owned 1,150 shares of 1,500 and received $ 913,897.59 for his shares.The money received by petitioner from this sale was invested in properties which produced the income reported by petitioner and his wife in 1940 and 1941 as community property income, which income respondent determined to be petitioner's separate property.In addition to the 760 shares of Western acquired by petitioner in 1931, he owned 390 shares which were his separate property.The increase in value of Western's stock from a nominal amount in 1931 to almost $ 800 a share in 1936 was primarily due to petitioner's services and his management of the business. Reasonable compensation for his services during the years 1931 to 1935 would be as follows:1931$ 25,000193225,000193335,000193435,0001935, Jan., Feb., March, 193650,000Total170,000OPINION.In order to decide the single issue presented it is necessary to trace the ownership of the investments which produced the income reported238 by petitioner and his wife for the years 1940 and 1941. It is solely a question of fact and the legal principles involved are few. The sale of Western stock to Columbia in 1936 produced these investments, and the first question to decide is whether the 760 shares of Western's stock acquired in 1931 were separate or community property and the second is what part, if any, of the proceeds of the sale of the 390 shares acquired before marriage is community property.773 Respondent has determined that the 760 shares were petitioner's separate property and that the investments made with the proceeds of the sale to Columbia are petitioner's alone and the income therefrom is taxable to him. Respondent is asking us to hold that the 760 shares acquired by Express in 1927 in exchange for its radio business were in reality the separate property of petitioner and acquired by him prior to his marriage. His argument is ingenious and clever. However, the conclusion is inescapable that respondent is really demanding that we ignore the corporate entity of Express and declare that Express held this stock in trust for petitioner. We see no sound reason for so holding. There is no question239 here of fraud or tax evasion. The "doctrine of corporate entity fills a useful purpose in business life." . In the case before us it should not be disregarded, and we so hold. It is unnecessary to review the lengthy testimony, much of which we have set out in our findings. We have found that these shares were acquired by petitioner in 1931 for $ 10, paid with community funds, and that at the time $ 10 was a fair price for the stock. Western had lost money since it commenced operations, it was a continuous financial drain on Express. The Hearst interests were hostile to the radio business, along with the other newspaper publishers of the country. They were glad to be rid of Western stock and the Annandale Country Club membership. At the time the deal for the transfer of KNX was worked out on January 30, petitioner was so eager to unload the Express on Hearst that there were no restrictions on its sale. It was only after the deal was made and petitioner had personally received Hearst's approval that he began to negotiate for the stock. At all times prior to sale to petitioner in 1931 title240 to the stock was in Express. The proceeds of the sale attributable to these shares are community property, and investments made and the income therefrom belong to the community.The 390 shares owned by petitioner prior to 1931 were his separate property. We have found that some of the increase in value of such stock during the period 1931-1936, prior to the sale to Columbia, was due to petitioner's excellent management and his services. Had he been adequately paid for such services, the total proceeds of the sale to Columbia would have been the separate property of petitioner. ; . Cf. . However, it is conceded that the compensation which petitioner received for such services was grossly inadequate. We have found that the reasonable value thereof for the year 1931 and subsequently through March 1936 aggregated $ 170,000 and that he was paid only $ 5,500. It follows that the unpaid balance of the amount of such reasonable compensation, or 774 $ 164,500, constituted241 a contribution by the marital community of petitioner and his wife to the increase in value of the entire 1,500 shares of Western's outstanding capital stock realized as gain in the sale to Columbia. That portion of such gain realized on the sale of the 390 shares attributable to the community contribution of $ 164,500 was community property and mathematically is 390/1500 of $ 164,500. The remainder of the realized gain on the sale of the 390 shares was petitioner's separate property.Since the income with which we are concerned was produced from property purchased with the proceeds of the sale of the stock in question, the proportion of separate and community interest in such income is the same as that obtaining with respect to the proceeds of sale of such stock as hereinabove determined.Decision will be entered under Rule 50. MURDOCK Murdock, J., dissenting: The findings of fact in this case show that the radio corporation stock was practically worthless, or at most worth only a nominal amount, in 1931, so that the separate property which the petitioner had in the 390 shares of stock of that corporation was worth little or nothing at that time. The petitioner devoted*242 all of his time and energies to the operation of the radio corporation from 1931 to 1936. It is found as a fact that the increase in value of the stock from a nominal amount in 1931 to almost $ 800 a share in 1936 was due primarily to the petitioner's services and his management of the business. He was a member of the community during that period. Thus, this increase in value was due primarily to the industry, skill, and activities of the community, and under the community property law of California proceeds of the sale of the 76 percent of the stock of the corporation owned by Earl and his wife would all be community property except that Earl should have returned to him as separate property the value of his 390 shares at the time the community took over management of the property in 1931, plus a reasonable return on that amount, including any natural increase in the value of those shares not due to the activities of the community. This, I think, would be a different amount of separate property than is determined under the majority opinion in this case, in which undue emphasis is placed upon the source of the few dollars representing the cost and value of the shares in 1931.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625706/	Cluett, Peabody & Co., Inc., Petitioner, v. Commissioner of Internal Revenue, RespondentCluett, Peabody & Co. v. CommissionerDocket No. 112444United States Tax Court3 T.C. 169; 1944 U.S. Tax Ct. LEXIS 204; January 31, 1944, Promulgated 204 Decision will be entered under Rule 50. The disposition to its shareholders of treasury shares among new shares in a readjustment of the corporation's capital, which treasury shares had been acquired in a prior year as a step in an employee profit-sharing plan which had not been carried out, held under the circumstances not to be a transaction the real nature of which was similar to a sale of the shares of another corporation, and the corporation did not realize a taxable gain. Regulations 94, art. 22 (a)-16. Norris Darrell, Esq., for the petitioner.Harold D. Thomas, Esq., for the respondent. Sternhagen, Judge. Opper, J., dissenting. Hill, J., agrees with this dissent. STERNHAGEN 170 A deficiency of $ 40,699.02 in 1937 income tax was determined as the result of several adjustments. The taxpayer assails only a determination that gain was realized on the sale of treasury stock. The case was submitted on a stipulation of facts, and they are found substantially as requested by the Commissioner.FINDINGS OF FACT.Petitioner is a corporation organized under the laws of the State of New York, with its principal office in Troy, New York.From October205 1931 to and including March 1933, by authorization of its board of directors, petitioner purchased through brokers 4,100 shares of its own common stock for the purpose of utilizing them under a profit-sharing plan pursuant to which certain officers and employees were to receive a share of annual net profits in excess of a stipulated amount, payable at taxpayer's election in its own common stock. The net profits never exceeded the specified amount and no bonus distributions were ever made. The 4,100 shares purchased as aforesaid, together with one additional share subsequently purchased, remained in the petitioner's treasury at the time of the plan referred to below.In 1937 petitioner amended its charter and put through a plan whereby its 250,000 authorized common shares without par value were split three-for-one into 750,000 shares without par value, and the holders of the 564,870 new shares (188,290 old shares) outstanding in the hands of the public were offered rights to subscribe to one additional share for each five shares held. Such offering totaled 112,974 of the new shares, of which 100,671 shares represented authorized but unissued stock and the remaining 12,303 shares, 206 treasury stock. The offer was evidenced by transferable printed warrants issued to the stockholders. The sale of the unsubscribed portion of the common shares so offered to the stockholders was underwritten by bankers.In connection with the above plan and stock offering, a form letter dated May 11, 1937, signed by petitioner's president, was directed to all the stockholders, the material part of which was as follows:The Board of Directors of your Company has approved and recommended to the stockholders that each share of Common Stock without par value of the Company be subdivided into three shares of the same class without par value and, in that connection, that the statement respecting the capital of the Company contained in its Certificate of Incorporation, as amended, be changed appropriately.At the present time, the Company has 250,000 shares of Common Stock without par value authorized, of which 188,290 shares are issued and outstanding in the hands of the public and 4,101 shares are owned by the Company and held in its treasury. Upon subdivision of the shares of Common Stock as proposed, the Company will have 750,000 shares of the Common Stock without par value authorized, 207 of which 564,870 shares will be outstanding in the hands of the public and 12,303 shares will be owned by the Company and held in its treasury. In connection with the foregoing change, the capital of the Company in respect of the 171 shares of Common Stock is to be changed from an amount equal to $ 19.45 per share, as now provided in the Certificate of Incorporation, to an amount equal to $ 6.50 per share, after subdivision, or an aggregate of $ 3,751,624.50, which will represent a slight increase to avoid an awkward fraction.* * * As soon as practicable after the stockholders have authorized the proposed changes in the Certificate of Incorporation, the Company will give effect to the subdivision by distributing to stockholders certificates for two additional shares of Common Stock for each share at the time held. * * As a result of the continued improvement in its business which has already been reflected in reports to stockholders, the Company requires additional working capital to provide for the corresponding increases in inventories and accounts receivable, as well as for certain necessary additions to plant facilities. In view of the undistributed profits tax, your208 Directors believe that the expense to the Company of providing these funds solely from profits would be prohibitive. Accordingly, after the above mentioned changes in the Common Stock have become effective, the Company proposes to offer to its Common stockholders the privilege of purchasing additional shares of new Common Stock in the ratio of one share for each five shares of Common Stock held of record. The Company is taking steps to register this stock under the Federal Securities Act, and no offering of additional shares can lawfully be made until such registration statement becomes effective. According to present plans, it is expected that the registration statement will become effective, and the offering of the additional shares of Common stock will be made, during the latter part of June. Common stockholders will be informed of the details of the proposed offering in due course after they have been determined. The Company proposes to make arrangements with a group of investment bankers, headed by Goldman, Sachs & Co., whereby they will agree to purchase such of the additional shares offered to Common stockholders as are not subscribed for by them.On June 15, 1937, a form209 letter signed by the president was directed to the common stockholders advising that the stockholders had approved the proposed division of each share of no par common stock, both issued and unissued, into three shares of common stock without par value, that the certificate of amendment necessary for effecting the change, providing for two additional shares for each share then held, would be filed in the office of the Secretary of State of New York on or about June 18, 1937, and that the certificates for additional shares would be mailed promptly thereafter. The letter also recited:At a meeting held Monday, June 14, 1937, your Board of Directors determined to sell 112,974 shares of Common Stock (after the three-for-one subdivision of the Common Stock has become effective), such shares first to be offered to Common Stockholders of the Company in the ratio of one (1) share for each five (5) shares held of record at 3 o'clock P. M., Eastern Daylight Saving Time, on Friday, June 25, 1937 at the price of $ 22.00 per share, which, of course, means the shares after their subdivision. The right of subscription will expire at 3 o'clock P. M., Eastern Daylight Saving Time, on Thursday July210 15 1937.A registration statement with respect to the shares thus to be offered has been filed with the Securities and Exchange Commission and, subject to its becoming effective and the completion of certain other formalities, subscription warrants exercisable on or before 3 P. M., Eastern Daylight Saving Time, on 172 Thursday, July 15, 1937, together with a copy of the Prospectus relating to the shares, will be mailed on or about June 25, 1937.By letter of instruction dated June 25, 1937 from the president to the common shareholders each holder of common stock was furnished with a printed "Warrant to Subscribe for Shares of Common Stock without Par Value," which stated the number of shares for which the stockholder was "entitled to subscribe * * upon the terms and conditions herein set forth and pursuant to the offer contained in the Prospectus."The letter of June 25 advised that the registration statement filed with the Securities and Exchange Commission became effective June 21, 1937, and recited that the warrants "are sent to you in connection with the offering of 112,974 shares * * * notice of which was given you by letters dated May 11, 1937, and June 15, 1937." The211 letter of June 25 also contained the following:The offering of the above shares under such Registration Statement is made solely by the Prospectus, a copy of which is enclosed, and upon the information contained therein.The prospectus which was enclosed with the letter of June 25 set forth the business and history of the corporation, its "Properties," "Management," "Proceeds and Purpose of Financing," "Capitalization," "Earnings and Dividends," "Description of Capital Stock," and other provisions, including a statement that the underwriters had agreed to purchase at $ 22 a share the "unsubscribed portion" of the 112,974 shares of common stock. The prospectus contained the following recital:Of the consideration to be received by the Company for 100,671 out of the 112,974 shares of common stock, $ 6.50 per share, being the stated value thereof, is to be credited to capital, pursuant to the provisions of the Certificate of Incorporation, as amended, and the remainder is to be credited to capital surplus. The remaining 12,303 shares are now carried as treasury stock at their aggregate cost of $ 56,607.05 and are also included in the capital account at their stated value of $ 6.50212 per share. Accordingly, of the consideration to be received for these 12,303 shares, $ 56,607.05 will be credited to the treasury stock account and the remainder to capital surplus.On the balance sheet of December 31, 1936, the treasury shares did not appear as an asset.Relative to the proceeds and purpose of financing, the prospectus recited:The net proceeds to be received by the Company from the sale of the 112,974 shares of common stock, after deducting estimated expenses in connection therewith, are estimated at a maximum of $ 2,388,669.70 and a minimum of $ 2,332,182.70, depending upon the number of shares subscribed for by warrant holders. The proceeds from the exercise of the warrants will be received by the Company on or before July 15, 1937, the expiration date of the warrants. The period within which the Company will receive the proceeds from any unsubscribed shares of 173 common stock which may be purchased by the Underwriters is set forth under the caption, "Underwriting Arrangements."Approximately $ 550,000 of the net proceeds is to be used for additions and betterments to plant facilities, as described more fully below. The remainder, estimated at a maximum213 of $ 1,838,669.70 and a minimum of $ 1,782,182.70, is to be used as additional working capital, principally for the purposes of carrying increased inventories and accounts receivable, necessitated by increased volume of business, and for the repayment of short term notes payable, outstanding as of June 1, 1937 in the amount of $ 1,350,000, which were incurred within one year for similar purposes. Of the notes payable, $ 750,000 consisted of commercial paper purchased and resold by Goldman, Sachs & Co.In addition to common stock, petitioner's capitalization also consisted of authorized preferred stock of 38,000 shares, of which 33,990 shares were outstanding in the hands of the public at the beginning of the taxable year.The underwriting agreement was with Goldman, Sachs & Co. of New York. Such agreement included a recital of the necessary acts to be accomplished, the agreement of the underwriters to purchase at $ 22 a share all of the 112,974 shares not taken by the stockholders, and a statement of the commissions payable to the underwriters.All of the 112,974 shares of common stock offered were subscribed for by stockholders in accordance with the terms of the offering, excepting214 1,874 shares which the underwriters were called upon to take up. The net proceeds of the offering were intended to be and were used for the purposes specified in the prospectus.In delivering certificates for the 112,974 shares purchased under the offering, petitioner included the 12,303 trasury shares into which the above mentioned 4,101 shares had been converted, and took 100,671 shares out of authorized but theretofore unissued stock. At that time petitioner had 172,827 authorized but theretofore unissued shares.Of the consideration received by petitioner for 100,671 out of the 112,974 shares of common stock so offered, $ 6.50 per share, being the stated value thereof, was credited to capital, pursuant to the provisions of the certificate of incorporation, as amended, and the remainder was credited to capital surplus. Of the consideration received for the remaining 12,303 shares, which had been carried as treasury stock at their aggregate cost of $ 56,607.05 and also included in capital account at their stated value of $ 6.50 per share (after the three-for-one split), $ 56,607.05 was credited to the treasury stock account and the remainder to capital surplus.Respondent has215 included in petitioner's gross income for 1937 the amount of $ 206,369.57 representing the difference between the cost of the 4,101 shares of petitioner's stock purchased by it and the sale price of the 12,303 shares of petitioner's treasury stock disposed of.174 Petitioner in 1937 incurred a liability in the amount of $ 5,046.77 to its common stock transfer agent, Manufacturers Trust Co. of New York, for services rendered in connection with the issuance and sale of the stock described in the above transactions. No portion thereof has been allowed by respondent as a deduction from gross income for 1937. The portion of the $ 5,046.77 attributable to the shares of treasury stock involved in the transfer is $ 549.60.Petitioner's income tax return for the year 1937 was filed with the collector of internal revenue for the fourteenth district of New York, Albany, New York. Of the total deficiency of $ 40,699.02 asserted in the deficiency letter annexed to the petition herein as Exhibit A, $ 8,986.56 was paid to the said collector after the mailing of said notice of deficiency, to wit, on August 21, 1942. No part of the deficiency of $ 40,699.02 has been assessed.OPINION.The216 excess ($ 206,369.57) over cost ($ 56,607.05) received by the taxpayer corporation for 12,303 shares among the 112,974 shares disposed of by it in 1937 to subscribing shareholders is treated by the Commissioner as taxable gain, and this the taxpayer challenges as contrary to Regulations 94, article 22 (a)-16. Both parties recognize that this article of the regulations is controlling. Cf. ; ; . The question for decision is therefore confined to whether the "real nature of the transaction" disposing of the 12,303 shares, "under all the facts and circumstances," was a dealing by the corporation in its own shares "as it might in the shares of another corporation." .Except for the fact that the corporation disposed of the shares for money, there is no similarity between this disposition and a sale of shares of another corporation. The corporation was not "dealing" in217 its own shares. Neither the acquisition of the shares nor their disposition, although both were under different circumstances and with different motives and under different plans, could or would have been considered or carried out in the shares of another corporation. Profit was not behind the impulse to acquire these shares in the first place or behind the later impulse to distribute them to shareholders. The first was a step in a profit-sharing plan for employees, whereby the employees might acquire or enlarge their proprietor interest in the business. This could not have been achieved by acquiring the shares of another corporation. The profit-sharing plan was inoperative only because the necessary earnings upon which it was conditioned had not been realized. The disposition in 1937 was likewise not actuated by a motive to sell at a profit, but by the new general plan 175 to restate the corporation's capital and issue more shares as a method of procuring additional funds for capital purposes.The accounting for both these transactions manifests this absence of a profit motive as an explanation of the transactions. The shares were not carried as an asset. The cost was218 kept in the treasury stock account and the excess received from the shareholders' subscriptions allocable to 12,303 shares was assigned to the capital and the capital surplus accounts, none of the proceeds being accounted for as earnings or profits or posted to the earned surplus account. If, however, the corporation had been dealing in the shares of another corporation, they would have been carried as an asset, the acquisition in the first place could not have appeared in the treasury stock account, and the proceeds of sale, whether to its shareholders, employees, or to outsiders, would have been credited to earnings and profits and posted to earned surplus. These bookkeeping matters are, of course, not controlling as to the legal or real nature of the transaction, but they are not without significance in considering whether the corporation was dealing in its own shares as it might in the shares of another corporation.The disposition of these shares may not be treated as if it were a separate and isolated transaction whereby 12,303 treasury shares were sold for cash. The regulations say that the characterization for tax purposes depends upon the real nature of the transaction. 219 The real nature of this transaction in so far as it relates to these 12,303 shares is that it was an incident of the adjustment of the corporation's capital stock as a means of getting new funds needed for capital purposes. Nothing in the record indicates that the 12,303 shares were being dealt with by themselves or that they would have been dealt with as a disposition of treasury shares if there had been no program of recapitalization. It was but part of a method of getting larger investments from the shareholders, after which the further capital needs were to be procured by selling additional new shares to bankers. To say that the whole refinancing is to be regarded as a means of selling these treasury shares at a profit and escaping tax upon the gain is to misplace the emphasis. The corporation might, to be sure, have accomplished its refinancing purpose without using these treasury shares, and if it had done so, the present controversy would not have arisen; but it seems to us unreasonable to say that the disposition of the treasury shares was a cleverly devised means of realizing a gain and avoiding tax upon it. The reference in the May 11, 1937, letter to the undistributed220 profits tax has no more significance here than in the Dr. Pepper case. It simply meant that since the corporation could not avoid the undistributed profits tax by using its existing earned surplus for plant and equipment it might better procure its new working capital by the method of issuing new shares. This rationale does not 176 affect the characterization of the disposition of the 12,303 treasury shares as a step in that method.The real nature of the disposition of all the 112,974 shares was a means to procure additional capital, and in this the use of the treasury shares was a part. We hold that the corporation thereby realized no gain, and that the Commissioner's determination was incorrect.The facts and circumstances in the present case lead as directly to the conclusion that this was not a realization of gain as did those in the Dr. Pepper Bottling case, where the Commissioner's determination of gain was reversed. The purpose of the purchase of the corporation's shares, in that case, was a redistribution of shares among the shareholders; here it was a plan for profit sharing among the officers and employees. The purpose of the sale, in that case, of the221 treasury shares although it was a departure from the original purpose was a readjustment of capital, and the undistributed profits tax threatened if the earnings were used for capital purposes instead of being distributed; the same is true in the present case. In both cases, the threefold criterion of the real nature of the transaction is present. See also . The cases of ; ; , and , are all cases where the sale of the corporation's treasury shares was merely a sale, albeit, in the three earlier cases to employees, and there were no circumstances which gave it a character or effect different from a sale of the shares of another corporation. In none of them were the circumstances such as to establish that the sale was not a mere sale but was instead an element in the 222 readjustment of the corporation's capital.The taxpayer, as a precautionary second point, pleaded the deductibility of a payment of transfer agent's fees of $ 5,046.77, but concedes that if it is successful in overcoming the determination as to the $ 206,369.57 such a deduction is not available to it.Decision will be entered under Rule 50. OPPEROpper, J., dissenting: If we were free to follow our own judgment on this subject, I should be more inclined to accept the Court's disposition of the present proceeding. But it seems to me the prevailing opinion can not be reconciled with the principle established by the decisions of the five Circuits which have now considered the question; and I do not think we are at liberty to disregard those decisions. See Commissioner v. Woods Machine Co. (C. C. A., 1st Cir.), 57 Fed. (2d) 635; certiorari denied, 287 U.S. 613">287 U.S. 613; Allen v. National Manufacture 177 (C. C. A., 5th Cir.), 125 Fed. (2d) 239; certiorari denied, 316 U.S. 679">316 U.S. 679.Had petitioner adhered to its original program, no taxable income223 would have resulted, and the present question would not have arisen. But that would have been the effect of the provisions of the plan which made it impossible for petitioner to realize any gain, since the stock was to be distributed at or below cost. It would not have followed from the character of the transaction. If the original program had been changed merely to the extent of permitting distributions to employees at a profit, instead of at cost, the result would have fallen squarely within the decisions of the Second and Eighth Circuits in , and Brown Shoe Co. v. and 575, respectively. Certainly, the mere purpose of employee stock participation does not mark the operation as an adjustment of capital. Cf. Judge Learned Hand's dissent in Commissioner v. Air Reduction Co. The further change culminating in the sale of the stock, not only at a profit but to different distributees, makes the petitioner's case even weaker and brings it within the recent decision of224 the Sixth Circuit in , where, also, the ultimate sale took place because the taxpayer "found itself in need of additional capital to finance an expansion program."The situation is only superficially like that in . The adjustment of capital which the petitioner there accomplished by the original purchase of its stock was completed according to plan. It was not subsequently changed, and it did not contemplate an ultimate disposition as did the original plan of this petitioner. We were able to say in that case that there was "no inference that it was significant whether the stock was retained in the corporation's treasury or definitively retired." Here the stock would never be retired while the original plan persisted; and when that plan was abandoned in mid-course because petitioner needed cash, it was transmuted into one for handling the same shares in a manner comparable to any other property or to those of any other corporation -- one which readily could and actually did result in unmistakable profit.Petitioner was 225 not compelled by the terms of its employee participation plan to acquire the stock in the first place, for, unlike the situation in the Brown Shoe Co. case, for example, it could have discharged the obligation to its employees by the payment of cash. Thus, its purchase must have been due, it seems to me, like that in Dow Chemical Co. v. Kavanaugh, to the fact that petitioner "having idle funds not needed in its operations, and knowing the value of its own stock, *178 did what any other prudent investor would have done -- bought it when its price was low."I conclude, at least under the now outstanding decisions, that when a corporation buys its stock with a view to future distribution and, in fact, engages in that future distribution at a profit, whether originally so designed or not, it has dealt in its stock as it would in other property and has subjected itself to tax. I respectfully dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669088/	NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3. SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-4907-18 PHH MORTGAGE CORPORATION, Plaintiff-Respondent, v. YVETTE LABOSSIERE, MR. LABOSSIERE, husband of YVETTE LABOSSIERE, Defendants-Appellants. ________________________ Argued March 1, 2021 – Decided March 18, 2021 Before Judges Fasciale and Mayer. On appeal from the Superior Court of New Jersey, Chancery Division, Camden County, Docket No. F-013704-12. Yvette Labossiere, appellant pro se.1 1 Defendant was notified that oral argument was scheduled to commence at 10:15 a.m. The court and counsel waited until 10:37 a.m. but defendant did not appear. Staff attempted to contact defendant by phone and email, unsuccessfully. Michael Eskenazi argued the cause for respondent (Friedman Vartolo, LLP, attorneys; Michael Eskenazi, on the brief). PER CURIAM Defendant appeals from June 6, 2019 order denying her motion to vacate an order providing that PHH Mortgage Corporation (PHH) had standing to maintain its foreclosure action and reinstating a June 19, 2017 final judgment of foreclosure (Second Final Judgment of Foreclosure). She also appeals from the Second Final Judgment of Foreclosure and a November 12, 2014 order suppressing her answer with prejudice. We have carefully considered defendant's contentions and affirm. On November 17, 2007, defendant obtained a mortgage loan from PHH and in return executed a security agreement to Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for PHH. On November 27, 2009, defendant and PHH entered into a loan modification agreement, which provided "[i]f applicable, [defendant's] total mortgage payment may change due to changes in [defendant's] escrow account." On June 7, 2010, PHH learned that defendant had failed to pay property taxes and that the property would go to a tax sale by the end of the month. PHH paid the overdue property taxes, exercised its contractual right to escrow the loan, and in January 2011, notified defendant that A-4907-18 2 her loan would be escrowed, and her monthly payments would increase beginning in March 2011. Thereafter, defendant defaulted on her mortgage. On July 19, 2012, PHH initiated the underlying foreclosure action. Defendant defaulted by failing to respond to the complaint, which resulted in a default judgment. On April 30, 2013, Judge Paul Innes issued a final judgment of foreclosure (First Final Judgment of Foreclosure) and permitted the sheriff's sale to proceed. In September 2013, defendant filed a motion to vacate the entry of default judgment and First Final Judgment of Foreclosure. On September 6, 2013, Judge Mary Eva Colalillo stayed the sheriff's sale, and on October 25, 2013, vacated the default judgment and permitted defendant to file an answer to plaintiff's complaint. On October 1 and November 6, 2014, Judge Nan S. Famular presided over the foreclosure trial. On November 13, 2014, Judge Famular suppressed defendant's answer and defenses with prejudice and returned the matter to the Office of Foreclosure. Defendant filed a motion to vacate the order, which Judge Famular denied on January 9, 2015. On June 19, 2017, Judge Innes issued the Second Final Judgment of Foreclosure and permitted the sheriff's sale to proceed. Defendant filed a motion to vacate the Second Final Judgment of A-4907-18 3 Foreclosure, which Judge Famular denied on October 17, 2017. Effective December 21, 2017, PHH transferred its interest in the mortgaged property to Selene Finance, LP (Selene) who collected payments on behalf of BlueWater Investment Holdings, LLC. (BlueWater). In January 2018, defendant filed a second motion to vacate the Second Final Judgement of Foreclosure. The next month she filed for bankruptcy. On September 10, 2018, following the lifting of the bankruptcy stay, Judge Famular again entered an order denying the second motion to vacate the Second Final Judgment of Foreclosure. Defendant then filed a motion to stay the sheriff's sale, which Judge Famular denied on September 12, 2018. The following March, defendant moved to stay the sheriff's sale and vacate the Second Final Judgment of Foreclosure. On March 12, 2019, Judge Famular denied the motion to stay the sheriff's sale, but scheduled oral argument on whether to vacate the Second Final Judgment of Foreclosure. Judge Famular conducted oral argument on April 26, 2019. Then-attorney for defendant argued that the Final Order of Foreclosure should be vacated because "new evidence presented to the bankruptcy court" showed that PHH had repeatedly transferred its interest in the mortgage. Judge Famular requested that both parties file supplemental briefs addressing whether PHH retained standing A-4907-18 4 to foreclose the mortgage despite transferring its interest after instituting the foreclosure action. On June 6, 2019, after reviewing the parties' submissions, Judge Famular concluded that PHH retained standing to foreclose, denied defendant's motion to vacate the Second Final Judgment of Foreclosure, reinstated the Second Final Judgment of Foreclosure, and returned the file to the Office of Foreclosure. On July 12, 2019, defendant filed a notice of appeal of the June 6, 2019 order. The following February, defendant filed an amended notice of appeal adding the Second Final Judgment of Foreclosure and the November 13, 2014 order dismissing her answers and claims with prejudice. On appeal, defendant raises the following arguments for this court's consideration: POINT I THE TRIAL [JUDGE] ERRED BY RULING IN PLAINTIFF'S FAVOR DESPITE DEFENDANT'S EVIDENCE OF NO DEFAULT UNDER THE SUBJECT MODIFICATION AGREEMENT, NOTE AND MORTGAGE AND PLAINTIFF'S UNCONSCIONABLE PRACTICES TO FALSIFY A DEFAULT. POINT II THE TRIAL [JUDGE] ERRED UPON FAILING TO REMAIN NEUTRAL BY CREATING AN A-4907-18 5 EXPLANATION FOR PLAINTIFF AND ITS WITNESSES WHO WERE UNABLE TO EXPLAIN, JUSTIFY AND PROVE THE DEFAULT AND AMOUNTS DECLARED DUE AND OWING UNDER THE SUBJECT MODIFICATION AGREEMENT, NOTE AND MORTGAGE. POINT III THE TRIAL [JUDGE] ERRED UPON DECLARING THAT PLAINTIFF'S CLAIMS OF AGENCY WITH [MERS] AS ITS ALLEGED "NOMINEE" WERE NOT RELEVANT DESPITE EXISTING LAWS OF AGENCY AND PLAINTIFF'S ASSERTIONS MADE TO CLAIM STANDING BELOW. POINT IV THE TRIAL [JUDGE] ERRED BY ALLOWING AN INSTRUMENT PRESENTED AS AN "ASSIGNMENT" OF THE SUBJECT MORTGAGE TO BE PRESENTED AT TRIAL THAT WAS CREATED BY PHELAN HALLINAN SCHMIEG, P.C. / PHELAN HALLINAN DIAMOND & JONES, P.C., DISPLAYS THE NAME AND SIGNATURES OF THE FIRM'S ATTORNEY AS AN OFFICER OF THE ALLEGED ASSIGNOR BEFORE A NOTARY PUBLIC ALSO EMPLOYED BY THE FIRM(S), AND CONSTITUTES (AT BEST) A CONFLICT OF INTEREST. POINT V THE TRIAL [JUDGE] ERRED BY ALLOWING PLAINTIFF TO PROCEED WITH [THE] SHERIFF['S] SALE TO PRESENT DATE MORE THAN TWO YEARS AFTER PLAINTIFF RECEIVED CONSIDERATION FOR THE SUBJECT A-4907-18 6 NOTE AND MORTGAGE FROM A THIRD-PARTY, AND PLAINTIFF ABSOLVED ITSELF OF ANY INTEREST IN THE SUBJECT MODIFICATION AGREEMENT, NOTE, MORTGAGE, AND PROPERTY. POINT VI THE TRIAL [JUDGE] ERRED BY IGNORING PLAINTIFF'S COMMUNICATION MADE PURSUANT TO FEDERAL LAW, NOTIFYING DEFENDANT OF PLAINTIFF BECOMING THE "NEW OWNER" OF THE SUBJECT NOTE AND MORTGAGE AFTER THE MATTER BELOW WAS COMMENCED. In her reply, defendant raises the following additional arguments, which we have renumbered: [POINT VII] CONTRARY TO PLAINTIFF'S . . . REPEATED CLAIM, THE DEFAULT ALLEGED WITHIN THE UNDERLYING FORECLOSURE COMPLAINT AND SUBJECT OF FINAL JUDGMENT IS FALSE, FABRICATED, UNPROVEN AND CONTRADICTORY. [POINT VIII] FALSE, UNSUBSTANTIATED AND CONTRADICTORY AFFIDAVIT OF AMOUNT DUE IN SUPPORT OF FINAL JUDGMENT. A-4907-18 7 [POINT IX] THE SCALES OF EQUITY FAVOR DEFENDANT'S . . . APPEAL IN RETROSPECT OF THE NEW JERSEY CONSENT JUDGMENT ENTERED AGAINST PLAINTIFF . . . AND THE LATTER'S CONTINUED ENGAGEMENT IN UNFAIR, DECEPTIVE AND UNLAWFUL SERVICING AND FORECLOSURE PRACTICES BELOW AND FAILURE TO REMEDIATE. [POINT X] A MISCARRIAGE OF JUSTICE WILL OCCUR ABSENT RELIEF TO DEFENDANT[.] Defendant has not established a basis for vacation of the June 6, 2019 order, and her arguments pertaining to the Second Final Judgment of Foreclosure and November 12, 2014 order are untimely under Rule 2:4-1(a) and unpersuasive on the merits. I. We first address defendant's contention that the motion judge erred in denying the motion to vacate the Second Final Judgment of Foreclosure. Where a party seeks to vacate a final judgment or order, they must meet the standard of Rule 4:50-1: On motion, with briefs, and upon such terms as are just, the [judge] may relieve a party or the party's legal representative from a final judgment or order for the following reasons: (a) mistake, inadvertence, surprise, A-4907-18 8 or excusable neglect; (b) newly discovered evidence which would probably alter the judgment or order and which by due diligence could not have been discovered in time to move for a new trial under R[ule] 4:49; (c) fraud . . . , misrepresentation, or other misconduct of an adverse party; (d) the judgment or order is void; (e) the judgment or order has been satisfied, released or discharged, or a prior judgment or order upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment or order should have prospective application; or (f) any other reason justifying relief from the operation of the judgment or order. A trial judge's determination on a motion to vacate a final judgment "warrants substantial deference, and should not be reversed unless it results in a clear abuse of discretion." US Bank Nat'l Ass'n v. Guillaume, 209 N.J. 449, 467 (2012). An abuse of discretion is a decision "made without a rational explanation, inexplicably departed from established policies, or rested on an impermissible basis." Ibid. (quoting Iliadis v. Wal-Mart Stores, Inc., 191 N.J. 88, 123 (2007)). Rule 4:50-1(a) permits vacation of a final judgment as a result of "mistake, inadvertence, surprise, or inexcusable neglect." Our Court has recognized that these words were meant to "encompass situations in which a party, through no fault of its own, has engaged in erroneous conduct or reached a mistaken judgment on a material point at issue in the litigation." DEG, LLC v. Twp. of Fairfield, 198 N.J. 242, 262 (2009). That conduct must be the type of "litigation A-4907-18 9 errors that a party could not have protected against." Id. at 263 (citation and internal quotation marks omitted). Rule 4:50-1(b) permits vacation of a final judgment where a party demonstrates "that the evidence would probably have changed the result, that it was unobtainable by the exercise of due diligence for use at the trial, and that the evidence was not merely cumulative." Id. at 264 (quoting Quick Chek Food Stores v. Twp. of Springfield, 83 N.J. 438, 445 (1980)). All three of these requirements must be met to justify vacatur. Ibid. "'[N]ewly discovered evidence' does not include an attempt to remedy a belated realization of the inaccuracy of an adversary's proofs." Ibid. (quoting at Posta v. Chung-Loy, 306 N.J. Super. 182, 206 (App. Div. 1997)). A. Defendant argues that the Second Final Judgment of Foreclosure should be vacated because of defendant's failure to include evidence at trial due to innocent mistake, R. 4:50-1(a), and "new evidence presented to the bankruptcy court," R. 4:50-1(b), which defendant contends demonstrates plaintiff does not have standing to foreclose on the subject property. Defendant asserts that because the mortgage was assigned multiple times prior to the commencement of the foreclosure, and because plaintiff transferred the mortgage to BlueWater A-4907-18 10 after plaintiff commenced the foreclosure action, PHH does not have standing to maintain the foreclosure action. "Standing is not a jurisdictional issue in New Jersey." Capital One, N.A. v. Peck, 455 N.J. Super. 254, 259 (App. Div. 2018) (citing Deutsch Bank Nat'l Tr. Co. v. Russo, 429 N.J. Super. 91, 101 (App Div. 2012)). Instead, standing "is an element of justiciability" that "affects whether a matter is appropriate for judicial review rather than whether the court has the power to review the matter." Russo, 429 N.J. Super at 102 (quoting New Jersey Citizens Action v. Riviera Motel Corp., 296 N.J. Super. 402, 411 (App. Div. 1997)). To have standing, "a party must have 'a sufficient stake and real adverseness with respect to the subject matter of the litigation.'" Triffin v. Somerset Valley Bank, 343 N.J. Super. 73, 81 (App. Div. 2001) (quoting In re Adoption of Baby T., 160 N.J. 332, 340 (1999)). Additionally, "[a] sufficient likelihood of some harm visited upon the plaintiff in the event of an unfavorable decision is needed[.]" Ibid. "Standing has been broadly construed in New Jersey as '[the] courts have considered the threshold for standing to be fairly low.'" Ibid. (quoting Reaves v. Egg Harbor Twp., 277 N.J. Super. 360, 366 (App. Div. 1994)). To have standing in a foreclosure action, "a party seeking to foreclose a mortgage must own or control the underlying debt." Wells Fargo Bank, N.A. v. A-4907-18 11 Ford, 418 N.J. Super. 592, 597 (App. Div. 2011) (quoting Bank of N.Y. v. Raftogianis, 418 N.J. Super. 323, 327-28 (Ch. Div. 2010)). If a party does not have ownership or control of the underlying debt, the complaint must be dismissed. Ibid. However, "possession of the note or an assignment of the mortgage that predated the original complaint confer[s] standing." Deutsche Bank Tr. Co. Americas v. Angeles, 428 N.J. Super 315, 218 (App. Div. 2012) (citing Deutsche Bank Nat. Tr. Co. v. Mitchell, 422 N.J. Super. 214, 216 (App. Div. 2011)). Defendant has not established under Rule 4:50-1(a) any facts or circumstances that would warrant vacating the Second Final Judgment of Foreclosure. Nor has defendant established under Rule 4:50-1(b) that new evidence which was unobtainable through due diligence would have changed the outcome of the trial. MERS, as nominee for PHH, recorded the mortgage on December 5, 2007, and conveyed its beneficial interest in the mortgage to defendant on March 3, 2009. Plaintiff later commenced this action in July 2012. Plaintiff controlled the mortgage on the date of the filing of the complaint and therefore had standing to maintain the foreclosure action. PHH's transfer of its interest to Selene is of no moment, and PHH retains standing to maintain the foreclosure action. And even if it were the case that plaintiff did not have A-4907-18 12 standing, the judgment would still not be void under Rule 4:50-1(d). See Russo, 429 N.J. Super. at 101 (noting that "a foreclosure judgment obtained by a party that lacked standing is not 'void' within the meaning of Rule 4:50-1(d)"). B. Defendant additionally argues that the sheriff's sale cannot proceed because she submitted a loss mitigation application to Selene in September 2018, but Selene has not issued a decision. While not directly addressed, this argument appears to be based on provisions of the Real Estate Settlement Procedures Act (RESPA) and its accompanying regulations. Defendant does not point to a particular subsection of Rule 4:50-1 as the basis for vacation as to the loss mitigation application, so we will address each basis. See F.B. v. A.L.G, 176 N.J. 201, 208 (2003). RESPA was enacted to protect borrowers from "certain abusive practices that have developed in some areas of the country." 12 U.S.C. § 2601(a). Congress authorized the Consumer Financial Protection Bureau (CFPB) to promulgate rules and regulations in furtherance of RESPA's goals. 12 U.S.C. § 2617(a). Pertinent to this appeal, 12 C.F.R. § 1024.41(g) provides: [i]f a borrower submits a complete loss mitigation application after a servicer has made the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process but more than [thirty- A-4907-18 13 seven] days before a foreclosure sale, a servicer shall not . . . conduct a foreclosure sale, unless: (1) The servicer has sent the borrower a notice pursuant to paragraph (c)(1)(ii) of this section that the borrower is not eligible for any loss mitigation option and the appeal process in paragraph (h) of this section is not applicable, the borrower has not requested an appeal within the applicable time period for requesting an appeal, or the borrower's appeal has been denied; (2) The borrower rejects all loss mitigation options offered by the servicer; or (3) The borrower fails to perform under an agreement on a loss mitigation option. Although borrowers have a private right of action to enforce the procedural requirements set forth 12 C.F.R. § 1024.41, RESPA authorizes only mone tary damages for any violations. 12 U.S.C. § 2605(f)(1)(A). Defendant states that she completed and submitted a loss mitigation application to Selene on September 7, 2018, but Selene has yet to respond to the application. Defendant submits a confirmation email purporting to show that she submitted the loss mitigation application, but it is unclear what documents were provided; the confirmation page states that sixteen pages were delivered, but only provides eleven pages of documents as part of the exhibit. Even if it A-4907-18 14 were the case that defendant submitted a complete loss mitigation application to Selene within the regulatory timeframe and Selene failed to respond, or if defendant submitted an incomplete loss mitigation application and Selene failed to notify defendant of additional documents needed to make the application complete, 12 C.F.R. § 1024.41(b)(2)(i)(B), defendant's relief would be monetary damages and not equitable relief, as defendant now seeks. Defendant failed to establish that the motion judge abused her discretion in denying the motion to vacate the Second Final Judgment of Foreclosure. Whether or not defendant filed a loss mitigation application, defendant has not demonstrated "mistake, inadvertence, surprise, or inexcusable neglect" which would warrant vacation under Rule 4:50-1(a). There is no new evidence that would have altered the outcome because defendant's property would still be foreclosed and if Selene improperly failed to respond to defendant's loss mitigation application, defendant would only be entitled to monetary damages and not a stay of the sheriff's sale. Defendant does not allege that the PHH or Selene made false representations to induce defendant's reliance. The Second Final Judgement of Foreclosure is not void, nor has there been a change in circumstances after the entry of the Final Judgment of Foreclosure that would result in an extreme or unexpected hardship for defendant. A-4907-18 15 II. Defendant asserts numerous arguments on appeal relating to her mortgage, the validity of the default, and the institution of the escrow account because of the alleged failure to pay property taxes, which fall outside the issues addressed in the June 6, 2019 order. Defendant is procedurally barred from raising such arguments. "An appeal from a final judgment must be filed with the Appellate Division within forty-five days of its entry[.]" Lombardi v. Masso, 207 N.J. 517, 540 (2011) (citing Rule 2:4-1(a)). Where an appeal is filed beyond the time limit, "the court normally lacks jurisdiction over the matter and it must be dismissed." In re Christie's Appointment of Perez as Public Member 7 of Rutgers Univ. Bd. of Governors, 436 N.J. Super. 575, 584 (App. Div. 2014). However, even in circumstances where appeals have not been timely filed, o ur courts may decide issues presented which touch upon "issues of genuine public importance[.]" Id. at 585. Defendant appealed the June 6, 2019 order on July 12, 2019, which is within the forty-five days required by Rule 2:4-1(a). That order provided that PHH did have standing, reinstated the Second Final Judgment of Foreclosure against defendant, and transferred the file back to the Office of Foreclosure. On A-4907-18 16 February 2, 2020, defendant filed an amended notice of appeal and case information statement which added that she was appealing the Second Final Judgment of Foreclosure and the November 13, 2014 order, as well as the June 6, 2019 order. Both the Second Final Judgment of Foreclosure and the November 13, 2014 order are well beyond the forty-five-day time limit, and there is nothing to suggest that the issues raised are "of genuine public importance[.]" In re Christie, 436 N.J. Super. at 585; see Jacobs v. N.J. State Highway Auth, 54 N.J. 393, 396 (1969) (addressing compulsory retirement policy of the State Highway Authority because of "the importance of the public question involved"); In re Rodriguez, 423 N.J. Super. 440, 447-48 (App. Div. 2011) (addressing "allegations of correctional officers' use of excessive force" despite being time-barred because it was "a matter of public importance and interest"). As a result, this court does not have jurisdiction to address the specific arguments raised pertaining to the Second Final Judgment of Foreclosure and the November 13, 2014 order dismissing defendant's answer and claims with prejudice, nor do they present a basis for vacating the June 6, 2019 order. We nevertheless add the following remarks on the merits of defendant's contentions. A-4907-18 17 Defendant asserts that MERS was unable to assign the mortgage to PHH because it was not an agent of PHH, and that MERS could not be an agent without a power of attorney. This court has recognized in previous circumstances that MERS's role as a nominee creates an agency relationship. See Raftogianis, 418 N.J. Super. 347 (noting that MERS, as nominee, "does not have any real interest in the underlying debt, or the mortgage which secured that debt. It acts simply an agent or 'straw man' for the lender"). A power of attorney is not necessary in this case. Defendant asserts that the trial judge overlooked the December 4, 2013 Consent Order between New Jersey and PHH. However, there is no evidence in the record to suggest that defendant fell within any of the borrower categories provided for in the Consent Order which would entitle her with relief. And even if it were the case that defendant was identified as one of the borrowers that fell within the categories proscribed by the Consent Order, the Consent Order only provides that those borrowers would receive restitution payment, not that defendant would have been shielded from her default or that the sheriff's sale would have been stayed. Affirmed. A-4907-18 18	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4625709/	EDWARD MALLINCKRODT, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mallinckrodt v. CommissionerDocket No. 11031.United States Board of Tax Appeals14 B.T.A. 194; 1928 BTA LEXIS 3005; November 14, 1928, Promulgated 3005 A sale of stocks to an irrevocable trust created by the seller and of which he was a trustee, held, under the circumstances, to result in a deductible loss. Daniel N. Kirby, Esq., for the petitioner. James A. O'Callaghan, Esq., for the respondent. SIEFKIN194 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1921 of $2,471.45. The error alleged is that the respondent erred in holding that the petitioner did not sustain a deductible loss by reason of the transfer of certain securities to a trust estate. FINDINGS OF FACT. The petitioner is a resident of St. Louis, Mo. On June 6, 1921, he made a voluntary trust, by means of a written Indenture of Trust, as follows: THIS INDENTURE OF TRUST, Made and entered into this 6th day of June, 1921, by and between EDWARD MALLINCKRODT, JR., hereinafter designated at the "Donor," and EDWARD MALLINCKRODT, JR., and the ST. LOUIS UNION TRUST COMPANY, a Missouri Corporation, hereinafter designated as the "Trustees," WITNESSETH: That, The Donor, in consideration of his affection for the several beneficiaries hereinafter named, has sold, assigned, transferred3006 and set over unto the Trustees, and does hereby sell, assign, transfer, set over and deliver unto the Trustees all the personal property described in Exhibit "A" hereunto attached and made a part hereof, and which for convenience will hereinafter be designated as the "trust estate"; in trust, however, for the uses and purposes, upon the terms and conditions and with the powers and duties hereinafter set forth: (a) The trustees shall hold and manage the trust estate and shall have power and authority at any time and from time to time to sell, transfer and convey the trust estate or any part or portion thereof upon such terms and conditions as in their judgment may seem to be for the best interest of the beneficiaries of this trust; to invest the proceeds of any such sale and any other money forming a part of the trust estate by lending the same upon good security 195 or by expending the same in the purchase of any property which in their opinion will yield a safe and regular return; to change investments from time to time either by the sale and purchase of securities or by the exchange of the same for others; to decide whether any dividend or other increment of value accruing3007 from any shares of stock or other personal property held by them is principal or income or partly one and partly the other; and in general to do all such other acts in connection with the care and management of the trust estate as may from time to time seem to them necessary or proper. (b) The Trustees shall collect all income and profits accruing from the trust estate, shall pay therefrom all legal and proper charges and all expenses of administering this trust, and distribute the remainder as follows: So long as she shall remain the wife or the widow of the Donor the Trustees shall pay to Elizabeth Elliot Mallinckrodt, in monthly installments as nearly equal as practicable, the entire net income from the trust estate, subject, however, to limitation upon her right to receive the same hereinafter set forth. When she shall cease to be the Donor's wife or his widow the net income from the trust estate shall be divided, in equal shares, per stirpes, among his children and other descendants until the expiration of the life of this trust. This trust shall continue in full force and effect until the death of the survivor of the wife and present living children of the Donor, and3008 at its expiration the estate shall be divided, in equal shares, per stirpes, among the descendants of the Donor; provided, that if at such time any such descendant shall be under the age of twenty-one years his or her share shall be held in trust by the Trustees until he or she shall have reached such age; provided, further, that if any child of the Donor shall then have died having left a last will, the share of the income and of the principal which would be distributed to him or her under the foregoing provision, if living, shall be disposed of in the manner appointed or directed by such last will. (c) If at any time during the existence of the trust and thereafter from time to time there shall, in the opinion of the Trustees, exist an emergency then requiring the expenditure of any portion of the principal of the trust estate for the benefit of either the wife of the Donor or any of his children, the Trustees are authorized to use such amount as in their judgment will be necessary to relieve such emergency, and if the person for whose benefit such principal shall be used, or any descendant of such person, shall be thereafter entitled to enjoy any part of the income or3009 principal of the trust estate, his, her or their right of participation therein shall be reduced proportionately. If at any time or from time to time the Trustees shall decide that it is either necessary or for any reason desirable to increase the principal of the trust estate or to make up any shrinkage or diminution thereof, they are hereby authorized and empowered to withhold from the beneficiaries hereunder any portion of the income accruing from the trust estate, for such period or periods of time as they may fix. (d) If the individual trustee shall die during the life of this trust or if either of the trustees shall resign or become disqualified to act the other trustee shall have all the powers and responsibilities hereinabove respectively conferred and imposed upon them jointly. (e) No interest of any of the above mentioned beneficiaries in the principal or income of the trust estate shall be liable for his or her debts or be subject to levy or seizure under any writ of execution or attachment or other process of law, nor shall any beneficiary have the right to sell, transfer, mortgage or hypothecate or otherwise alienate, encumber or anticipate any interest in the income3010 or principal of the trust estate, and every such attempted disposition, hypothecation or anticipation of such interest shall be null and void. 196 IN TESTIMONY WHEREOF the said parties have caused this indenture to be duly executed the day and year first above written. The property covered by "Exhibit A" mentioned in the trust indenture and delivered to the trustees consisted of preferred stock of the Houston Oil Co. of the par value of $295,800 and cash of $159,606.50. On the date the trust indenture was executed the petitioner informed the then president of the St. Louis Union Trust Co. that he, the petitioner, had some stocks that he was going to sell if the St. Louis Union Trust Co. as trustee would approve them. The petitioner was told that if they were good stocks, the trust would buy them at current prices. On the same day the trust indenture was executed the petitioner executed and delivered to the St. Louis Union Trust Co. a letter as follows: ST. LOUIS, Mo., June 6, 1921.ST. LOUIS UNION TRUST COMPANY, City.GENTLEMEN: As Donor in a certain Trust Indenture executed by me on June 6th, 1921, and as your co-Trustee therein, I hereby authorize3011 and direct you to invest the cash this day deposited with you, to be invested under the terms of the said Indenture, and referred to in Exhibit "A" in the following described securities, to be held for the account of the trust estate: 450 shares Missouri Portland Company stock at 70$31,500.00218 shares St. Louis Union Trust Company stock at 20043,600.00136 shares National Bank of Commerce at 12917,544.0050,000.00 N.O. T. & M. Ry. Co. 1st 6's (bonds) at 90 and accrued interest45,058.33$25,000.00 Dallas Automatic Telephone Company, 1st 6's (bonds) at 85 and accrued interest21,904.17Total$159,606.50Very truly yours, (Signed) ED. MALLINCKRODT, Jr. The petitioner's financial secretary, Adolph H. Stille, who handled all his financial transactions, on June 7, 1921, consulted G. H. Walker & Co., an established brokerage house in St. Louis, with reference to disposing of certain securities of the petitioner. Stille delivered the securities to G. H. Walker & Co. Stille and an official of G. H. Walker & Co., checked to market price and agreed upon the price at which they might be sold. Stille advised G. H. Walker & Co. that if they would talk to3012 the St. Louis Union Trust Co. they probably could sell the whole block there. G. H. Walker & Co. did talk with the St. Louis Union Trust Co. and sold all the stocks to that company. G. H. Walker & Co. did not know who the Trust Company was buying the securities for. The securities involved, the 197 cost and/or March 1, 1913, value thereof and the net amounts received were as follows: Date acquiredSecurityCostMarket value, Mar. 1, 1913BasisReceivedMar. 18, 1910, to Apr. 10, 1910.450 shares stock, Mo. Portland Cement Co.$36,000.00$33,750.00$33,750$31,378.50Dec. 13, 1920218 shares stock, St. Louis Union Trust Co.44,472.0044,47243,486.65June 4, 1906, to Sept. 14, 1908.136 shares stock, National Bank of Commerce.32,393.7520,332.0020,33217,473.28June 10, 1915$25,000 bonds, Dallas Autom. Tel. Co23,500.0023,50021,187.50Oct. 27, 1916$50,000 bonds, N.O.T. & M. Ry49,250.0049,25044,925.00The St. Louis Union Trust Co., Trustee, issued its check dated June 8, 1921, to G. H. Walker & Co. for $159,606.50 and received the securities. G. H. Walker & Co. rendered its reports of sale to the3013 petitioner on June 8, 1921, showing the following: Number of sharesDescriptionPriceAmountCommission and taxNet amount450Missouri Portland Cement $70$31,500$121.50$31,378.50218St. Louis Union Trust Co20043,600113.3543,486.65136National Bank of Commerce12917,54470.7217,473.2892,338.43$25,000Dallas Automatic Tel. 1st 6s8521,25062.5021,187.50Accrued interest from Jan. 1 to June 8, 157 days654.1721,841.67$50,000N.O.T. & M. 1st 6s9045,00075.0044,925.00Accrued interest from June 1 to June 8, 7 days58.3344,983.33On June 8, 1921, G. H. Walker & Co. issued to the petitioner its check for $159,163.43, the amount of the net proceeds of said sale. The prices at which the securities were sold to the trust estate were the market values of the respective securities on the date of sale. OPINION. SIEFKIN: It is contended by the petitioner that the facts in this case closely parallel those which we considered in 3014 , in which we held that a transfer to a trust resulted in a deductible loss. The trust indenture in that proceeding was created by Edward Mallinckrodt, Sr., as donor, and the trustees were his son, Edward Mallinckrodt, Jr., and the St. Louis Union Trust Co. In this proceeding Edward Mallinckrodt, Jr., is the donor under the trust agreement and he is also a cotrustee with the St. Louis Union Trust Co. Except for this difference and 198 the resulting question that it raises, i.e., whether the petitioner, as a trustee, does not still retain some interest in the trust assets as an individual, it is clear that the provisions of the trust indenture effectually sever the legal and beneficial interest in the property from the petitioner. Thus the situation is the same as that considered in the previous case. If it once be granted that the trust is a valid one and that its terms govern the trustees, then it can make no difference that the petitioner is both donor and a trustee since, in the latter capacity, he can act only in accordance with the terms of the instrument. We have not had a brief from the respondent or any statement3015 of the reasons for his position. On the record before us, however, we can not see any position which he could successfully urge which would justify us in denying the deduction as a loss. Reviewed by the Board. Judgment will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4669078/	USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 1 of 18 [PUBLISH] IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT ________________________ No. 19-10950 ________________________ D.C. Docket No. 1:18-cv-20818-DPG PDVSA US LITIGATION TRUST, Plaintiff - Appellant, versus LUKOIL PAN AMERICAS, LLC, LUKOIL PETROLEUM, LTD., COLONIAL OIL INDUSTRIES, INC., COLONIAL GROUP, INC., GLENCORE, LTD., et al., Defendants - Appellees. ________________________ Appeal from the United States District Court for the Southern District of Florida ________________________ (March 18, 2021) Before JORDAN, TJOFLAT, and ANDERSON, Circuit Judges. JORDAN, Circuit Judge: USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 2 of 18 This lawsuit involves an alleged multi-billion-dollar conspiracy to defraud Petróleos de Venezuela, S.A., the Venezuelan state-owned oil company known as PDVSA. The scheme purportedly involved computer hacking and payment of bribes by numerous corporations and individuals to obtain PDVSA’s proprietary oil trading information, and the use of that information to manipulate the pricing of crude oil and hydrocarbon products. But PDVSA, the purported victim of the fraudulent scheme, did not sue the alleged perpetrators. Instead, an entity called the PDVSA U.S. Litigation Trust filed suit, alleging that it had authority to do so as an assignee of PDVSA pursuant to a trust agreement which, through a choice-of-law clause, is governed by New York law. Following some discovery, the district court adopted in part the report and recommendation of the magistrate judge and dismissed the action without prejudice under Rule 12(b)(1) of the Federal Rules of Civil Procedure for lack of Article III standing. See PDVSA U.S. Litigation Trust v. Lukoil Pan Americas LLC, 372 F. Supp. 3d 1353, 1359–61 (S.D. Fla. 2019). The court ruled that the Litigation Trust did not properly authenticate the trust agreement—it failed to authenticate three of the five signatures in the agreement—and without an admissible agreement it lacked standing. The court also concluded that, even if the trust agreement were authenticated and admissible, it was void as champertous under New York law, 2 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 3 of 18 specifically N.Y. Judiciary Law § 489. As a result, the Litigation Trust did not have standing. See generally MSPA Claims 1, LLC v. Tenet Florida, Inc., 918 F.3d 1312, 1318 (11th Cir. 2019) (an assignee has standing “if (1) its . . . assignor . . . suffered an injury-in-fact, and (2) [its] claim arising from that injury was validly assigned”); Kenrich Corp. v. Miller, 377 F.2d 312, 314 (3d Cir. 1967) (if an assignment is champertous under state law, and therefore “legally ineffective,” the assignee lacks standing to sue). The Litigation Trust appealed. With the benefit of oral argument, we now affirm. I Rule 901 of the Federal Rules of Evidence entails a two-step process for determining authenticity. A “district court must first make a preliminary assessment of authenticity . . . , which requires a proponent to make out a prima facie case that the proffered evidence is what it purports to be.” United States v. Maritime Life Caribbean Ltd., 913 F.3d 1027, 1033 (11th Cir. 2019) (involving the authenticity of an assignment) (citation and internal quotation marks omitted). “If the proponent satisfies this ‘prima facie burden,’ the inquiry proceeds to a second step, in which the evidence may be admitted, and the ultimate question of authenticity is then decided by the [factfinder].” Id. (citation and internal quotation marks omitted). At the first step of the process, it is inappropriate for the district court to place on the 3 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 4 of 18 proponent of the evidence the burden of showing authenticity by a preponderance of the evidence. See id. (“By requiring Maritime to prove authenticity by ‘the greater weight of the evidence,’ the district court compressed the two steps of the inquiry under Rule 901 into one and conflated the issue of authenticity with [the merits].”). The magistrate judge stated that the Litigation Trust had the “burden of proving” the authenticity of the trust agreement and concluded that it had not carried that burden because it failed to authenticate the signatures on the agreement. See D.E. 636 at 11, 18. The district court noted the burden of proof used by the magistrate judge and agreed that the trust agreement was inadmissible: “The [c]ourt finds that [the Litigation Trust] has failed to establish the admissibility of the [t]rust [a]greement.” PDVSA, 372 F. Supp. 3d at 1360. We have not addressed whether or how the two-step authenticity process described in cases like Maritime Life should be applied in a Rule 12(b)(1) context where the defendant’s attack on subject-matter jurisdiction is factual, and where the district court is permitted to act as the ultimate decision-maker on jurisdictional facts. Some district courts have ruled that on a motion to dismiss for lack of subject- matter jurisdiction they “may only consider evidence which would be of testimonial value at trial.” Dr. Beck & Co. G.M.B.H v. General Electric Co., 210 F. Supp. 86, 92 (S.D.N.Y. 1962), aff’d, 317 F. 2d 338 (2d Cir. 1963). Others have said that, at the Rule 12(b)(1) stage, a court cannot consider evidence which has “not been 4 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 5 of 18 authenticated in some proper manner.” Research Inst. for Medicine and Chemistry, Inc. v. Wis. Alumni Research Found., Inc., 647 F. Supp. 761, 773 n.8 (W.D. Wis. 1986). It is difficult to know from the short discussions in these cases whether the district courts were speaking of authentication in a prima facie sense or in a final admissibility sense. And the few treatises that speak to the matter are not very helpful because they focus on the evidence’s ultimate admissibility at trial. See, e.g., 61A Am. Jur. 2d, Pleading § 495 (Feb. 2021 update) (“[I]n some [cases], it has been decided that the court may consider only evidence which would be admissible at trial.”). We need not address the interplay between Rule 901 and Rule 12(b)(1) today, for we assume without deciding that the Litigation Trust made out a prima facie case of authenticity for the trust agreement at the Rule 12(b)(1) proceedings, and that this prima facie showing was sufficient. Cf. Itel Capital Corp. v. Cups Coal Co. Inc., 707 F.2d 1253, 1259 (11th Cir. 1983) (“[U]nder Rule 901, proving the signature of a document is not the only way to authenticate it.”). We therefore also assume, again without deciding, that the district court erred by ruling that the trust agreement was inadmissible. That leaves the district court’s alternative champerty ruling, to which we now turn. II 5 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 6 of 18 Our cases hold that claims “should not be dismissed on motion for lack of subject-matter jurisdiction when that determination is intermeshed with the merits of the claims and there is a dispute as to a material fact.” Lawrence v. Dunbar, 919 F.2d 1525, 1531 (11th Cir. 1990). “When the jurisdictional basis of a claim is intertwined with the merits, the district court should apply a Rule 56 summary judgment standard when ruling on a motion to dismiss which asserts a factual attack on subject-matter jurisdiction.” Id. at 1530. Cf. Culverhouse v. Paulson & Co., Inc. 813 F.3d 991, 994 (11th Cir. 2016) (“[I]n reviewing the standing question, the court must be careful not to decide the questions on the merits for or against the plaintiff, and must therefore assume that on the merits the plaintiff would be successful in their claims.”) (citation and internal quotation marks omitted).1 Based on our review of the record, the district court may have erred procedurally in definitively resolving the question of champerty at the Rule 12(b)(1) stage because that question likely implicated the merits of the Litigation Trust’s claims. As it turns out, however, the Litigation Trust does not make this procedural argument on appeal. A 1 The magistrate judge put the parties on notice of our precedent at one of the hearings in the case. See D.E. 423 at 22 (explaining that “very frequently issues related to standing are intertwined with issues related to the merits”). 6 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 7 of 18 Rule 8(c) of the Federal Rules of Civil Procedure provides that “illegality” is an affirmative defense. And New York law treats champerty as an affirmative defense. See, e.g., Justinian Capital SPC v. WestLB AG, 65 N.E.3d 1253, 1255 (N.Y. 2016); Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 731 N.E.2d 581, 582 (N.Y. 2000); Krusch v. Affordable Housing, LLC, 698 N.Y.S. 2d 674, 674 (App. Civ. 1st Dept. 1999); Phoenix Light SF Ltd. v. U.S. Bank Nat’l Ass’n, ___ F. Supp. 3d ___, 2020 WL 1285783, at *11 (S.D.N.Y. 2020). Indeed, if an assignment or agreement is champertous under New York law it is null and void and cannot be enforced or sued upon. See, e.g., Bluebird Partners, 731 N.E. 2d at 587; Elliott Assoc., LP v. Republic of Peru, 948 F. Supp. 1203, 1208 (S.D.N.Y. 1996). Because champerty likely implicated the merits of the claims brought by the Litigation Trust, there is a strong argument that the district court should have used the Rule 56 standard in addressing whether the trust agreement was champertous under New York law. See, e.g., Morrison v. Amway Corp., 323 F. 3d 920, 927–30 (11th Cir. 2003). But we do not reverse on this ground because the Litigation Trust does not raise any procedural objections to the district court’s handling of the champerty question. The Litigation Trust argued to the magistrate judge that champerty is a fact- intensive issue which must be decided by a jury. See D.E. 636 at 23 n.16. Yet on appeal the Litigation Trust does not contend that the district court committed 7 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 8 of 18 procedural error by failing to employ the Rule 56 standard in addressing the affirmative defense of champerty. Instead, although it acknowledges that champerty is an affirmative defense, it takes the champerty ruling head on and asks us to hold that the assignment was not champertous under New York law. See Appellant’s Br. at 32–33 & n. 13 (arguing that the district court committed clear error in finding that the clear purpose of the trust agreement was to bring this lawsuit). We normally decide cases and issues as framed by the parties, and the Litigation Trust has abandoned any procedural objections to the champerty ruling by not raising them in its brief. See Sapuppo v. Allstate Floridian Ins. Co., 739 F.3d 678, 680 (11th Cir. 2014) (collecting several Eleventh Circuit cases holding that a party abandons an issue by not briefing it). In a case like this one—involving sophisticated litigants represented by able counsel—there is no reason to depart from the general principle of party presentation, and we decline to take up sua sponte the district court’s failure to apply the Rule 56 standard. See United States v. Sineneng- Smith, 140 S. Ct. 1575, 1579 (2020) (“In our adversarial system, we follow the principle of party presentation . . . . [W]e rely on the parties to frame the issues for decision and assign to courts the role of neutral arbiter of matters the parties present.”) (citation and internal quotation marks omitted). Like the district court, then, we address champerty on the merits. B 8 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 9 of 18 The Litigation Trust was created in 2017 by PDVSA, as both the grantor and beneficiary under New York law, so that the litigation efforts to hold the defendants “accountable could proceed without interference from the political and economic instability and rampant corruption in Venezuelan government and society.” Appellant’s Br. at 2–3. The Litigation Trust has two New York trustees (appointed by the Trust’s counsel) and one Venezuelan trustee. All costs and expenses of the litigation against the defendants are borne by the Trust’s counsel. Any recoveries or proceeds will be divided between PDVSA (which receives 34%) and the Trust’s counsel, investigator, and financier (who collectively receive the remaining 66%). The trust agreement, dated July of 2017, was purportedly executed in August of 2017. Under the terms of the trust agreement, PDVSA assigned its claims against the defendants to the Litigation Trust so that they could be pursued by the Trust in the United States. PDVSA’s president and board of directors did not approve the trust agreement. The signatories of the agreement were two Venezuelan government officials, Nelson Martinez (a former Venezuelan oil minister) and Reynaldo Muñoz Pedrosa (an attorney general for civil matters); Alexis Arellano, a PDVSA- designated trustee; and Edward Swyer and Vincent Andrews, two American trustees. The Venezuelan government officials who signed the trust agreement were members 9 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 10 of 18 of the administration of President Nicolas Maduro, which the United States had formally recognized as Venezuela’s government at the time. 2 As relevant here, N.Y. Judiciary Law § 489(1) provides that “no corporation or association . . . shall solicit, buy, or take an assignment of . . . a bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon[.]” The New York Court of Appeals recently explained that the “statue prohibits the purchase of notes, securities, or other instruments or claims with the intent and for the purpose of bringing a lawsuit.” Justinian Capital, 65 N.E.3d at 1254. Whether an agreement is champertous “is a mixed question of law and fact,” 14 C.J.S., Champerty and Maintenance § 26 (Feb. 2021 update), and a number of New York cases have reversed summary judgment rulings on champerty because there were underlying disputes of material fact (usually regarding the transaction’s “primary purpose”). Take, for example, the decision of the New York Court of Appeals in Bluebird Partners, 731 N.E.2d at 587: “We are satisfied that the record here does not support a finding of champerty as a matter of law for summary disposition. It cannot be determined on this record and in this procedural posture 2 President Trump later recognized Juan Guaidó, the President of the Venezuelan National Assembly, as the Interim President of Venezuela. 10 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 11 of 18 that champerty was the primary motivation, no less the sole basis, for all this strategic jockeying and financial positioning.” But, as noted, the Litigation Trust does not make any Rule 56-type arguments on appeal. So we treat the champerty ruling as one made by the district court as the ultimate decision-maker, and review any underlying factual findings for clear error (as the Litigation Trust asks us to do). See generally Cooper v. Harris, 137 S. Ct. 1455, 1465 (2017) (explaining that, under the clear error standard, “[a] finding that is ‘plausible’ in light of the full record—even if another is equally or more so—must govern”). On this basis, we affirm the district court’s conclusion that the trust agreement was champertous under New York law. The district court found, on the evidence before it, that the primary purpose of the trust agreement was to “facilitate the prosecution and resolution” of the assigned claims and to liquidate the Litigation Trust’s “assets with no objective to continue or engage in the conduct of a trade or business.” PDVSA, 372 F. Supp. 3d at 1360. This factual finding was not clearly erroneous. First, the trust agreement’s own language states in the same words that this was the primary purpose. See D.E. 517-4 at § 2.5(a). Second, one of the Litigation Trust’s lead attorneys testified at his deposition that the trust agreement was executed by the parties for “purposes of pursuing claims that are the subject matter of this litigation, among others.” D.E. 573-1 at 11. Third, the Litigation Trust was not a pre-existing entity with a separate 11 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 12 of 18 commercial existence. Fourth, only 34% of any recovery goes to PDVSA, with the remaining amount divided between the Litigation Trust’s attorneys, investigator, and financier. Contrary to the Litigation Trust’s argument, the fact that some of the ultimate beneficiaries of the litigation (at least to the tune of 34% of the recovery) may be the Venezuelan people does not detract from the fact that the trust agreement was created to allow a third party—the Trust—to sue on claims that belonged to PDVSA. And even if one accepts that the trust agreement also served the facilitation of cooperation with law enforcement and the engagement of investigators to look further into other improper conduct (as one of the Litigation Trust’s lead attorneys testified) that does not make the district court’s finding clearly erroneous. The same goes for the Litigation Trust’s contention that the 34%-66% fee structure is reasonable. See Cooper, 137 S. Ct. at 1465. “Where there are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985). The district court also correctly applied New York law. We come to that conclusion based on Justinian Capital, 65 N.E.3d at 1258–59. In that case, the New York Court of Appeals confronted a similar arrangement and concluded on summary judgment that it was champertous under N.Y. Judiciary Law § 489(1). 12 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 13 of 18 In Justinian Capital, a company called DPAG purchased from two special purposes companies (whom we’ll collectively call Blue Heron) notes worth approximately € 180 million. DPAG’s portfolio was managed by WestLB, a bank partly owned by the German government. When the notes lost most of their value, DPAG—which was receiving financial support from the German government—did not want to sue WestLB because of a concern that the German government might end its support for DPAG. So DPAG turned to Justinian Capital, a Cayman Islands company with few or no assets. See Justinian Capital, 65 N.E.3d at 1254. Justinian Capital proposed a business plan in which it would purchase the notes from DPAG, commence litigation (by partnering with law firms) to recover the losses on the investment, and remit the recovery from the litigation to DPAG “minus a [20%] cut[.]” See id. at 1254–55. DPAG subsequently entered into a sale and purchase agreement by which it assigned the notes to Justinian Capital, which in turn agreed to pay DPAG a base purchase price of $1 million. The assignment of the notes, however, was not contingent on Justinian Capital’s payment of the purchase price, and failure to pay did not constitute a breach or default of the agreement. The only consequences of Justinian Capital’s failure to pay the $1 million by the due date were that interest would accrue on the purchase price and that Justinian Capital’s share of the proceeds of litigation would decrease from 20% to 15%. At the time Justinian Capital instituted suit against WestLB, it had not paid 13 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 14 of 18 any portion of the $1 million and DPAG had not demanded payment. See id. at 1255. The New York Court of Appeals held that the assignment from DPAG to Justinian Capital was champertous because the impetus was DPAG’s desire to sue WestLB for the decline in the value of the shares and not be named as a plaintiff in the action. And Justinian Capital’s business plan was to acquire investments that suffered major losses in order to sue on them. There was no evidence, the Court of Appeals concluded, that Justinian Capital’s acquisition of the notes from DPAG “was for any purpose other than the lawsuit it initiated almost immediately after acquiring the notes[.]” Id. at 1257. Significantly, the Court of Appeals dismissed as speculative the testimony of Justinian Capital’s principal that there might be other possible sources of recovery on the notes: “Here, the lawsuit was not merely an incidental or secondary purpose of the assignment, but its very essence. [Justinian Capital’s] sole purpose in acquiring the notes was to bring this action and hence, its acquisition was champertous.” Id. The same is true here. As the district court found, the Litigation Trust’s primary purpose in acquiring PDVSA’s claims was to bring this action. C Trying to avoid the force of Justinian Capital, the Litigation Trust makes a number of arguments. We find them unpersuasive. 14 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 15 of 18 The Litigation Trust says that it is closely related to PDVSA, and therefore not a stranger or “officious intermeddler.” See FragranceNet.com, Inc. v. FragranceX.com, 679 F. Supp. 2d 312, 319 n.9 (E.D.N.Y. 2010) (explaining, in the context of a parent and subsidiary, that champerty bars the “acquisition of a cause of action by a stranger to the underlying dispute”). It describes itself as a fiduciary of PDVSA which does not stand to profit from the litigation. On this record, the argument fails. The Litigation Trust was a new entity created for the purpose of obtaining and litigating PDVSA’s claims, and as a result was a stranger to the underlying disputes with the defendants. See BSC Assoc., LLC v. Leidos, Inc., 91 F. Supp. 3d 319, 328 (N.D.N.Y. 2015) (“Here, Plaintiff—which did not exist prior to February 2014 and was formed solely to ‘retain’ this cause of action from BSC Partners—clearly did not have a proprietary interest in the Subcontract underlying this action that predates the transfer of claims to Plaintiff.”). And there is no claim that PDVSA—the purported assignor of claims—owns or controls the Litigation Trust or that the Trust is a subsidiary or related entity of PDVSA. Finally, given that the Litigation Trust is a pass-through for 64% of the proceeds to go to its counsel, investigator, and financier, it matters little that the Trust itself is not going to reap an economic benefit from the litigation. The Litigation Trust also asserts that § 489(1) does not apply because it is not a collection agency or a corporation, and does not qualify as an “association.” We 15 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 16 of 18 reject this argument, as the New York Court of Appeals has explained that “association” is a “broad term which may be used to include a wide assortment of differing organizational structures including trusts, depending on the context.” Mohonk v. Bd. of Assessors of Town of Gardiner, 392 N.E.2d 876, 879 (N.Y. 1979). Given that § 489(1) lists “trustees” as one of the persons or entities who can violate the statute’s general prohibition on champerty, the context here permits the application of the champerty bar to the trust agreement. Finally, the Litigation Trust argues that it comes within § 489(2), the champerty statute’s “safe harbor” provision. This provision states that the champerty bar in § 489(1) is inapplicable if the “aggregate purchase price” of a claim is at least $500,000. The Litigation Trust says that it was prevented from presenting evidence that its counsel had spent over $500,000 in fees and costs, for the benefit of PDVSA, even before the assignment of claims. The magistrate judge and the district court rejected the Litigation Trust’s “safe harbor” argument because there was no evidence of any payment from the Litigation Trust to PDVSA. See PDVSA, 372 F. Supp. 3d at 1361; D.E. 636 at 22–23. We come to the same conclusion. In Justinian Capital, the New York Court of Appeals held that the “phrase ‘purchase price’ in [§] 489(2) is better understood as requiring a binding and bona fide obligation to pay $500,000 or more of notes or securities, which is satisfied by 16 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 17 of 18 actual payment of at least $500,000 or the transfer of financial value worth at least $500,000 in exchange for the notes or other securities.” 65 N.E.3d at 1258. The expenditure by the Litigation Trust or its counsel of fees and costs for the litigation, even if they exceeded $500,000, did not constitute a contractual “purchase price.” There were no underlying instruments or claims valued at or transferred for more than $500,000, and there was no obligation on the Litigation Trust or its counsel to spend $500,000 or more for the costs of litigation. Moreover, none of the Litigation Trust’s expenditures for litigation costs flowed to PDVSA. As an entity, PDVSA was no better off financially due to the footing of litigation costs by the Litigation Trust or its counsel, and it still had to wait until the Trust succeeded on the assigned claims to reap any contingent monetary benefit. Cf. id. at 1259 (“[B]ecause Justinian [Capital] did not pay the purchase price or have a binding and bona fide obligation to pay the purchase price of the notes independent of the successful outcome of the lawsuit, [it] is not entitled to the protections of the safe harbor.”). We also think the defendants may be correct in asserting that the Litigation Trust’s interpretation of § 489(2) could threaten to swallow much of § 489(1). An otherwise-champertous transaction, no matter the value of the assigned instruments or the lack of a binding obligation to pay a purchase price of $500,000 or more, 17 USCA11 Case: 19-10950 Date Filed: 03/18/2021 Page: 18 of 18 would be immunized under New York law if the assignee simply spent over $500,000 in litigation expenses. III This appeal might have come out differently had it been argued differently. But on the issues presented to us, we affirm the district court’s dismissal of the Litigation Trust’s complaint without prejudice for lack of standing. AFFIRMED. 18	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669089/	NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3. SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-2097-19 MICHAEL MILLER, Plaintiff-Appellant, v. MAYOR AND TOWNSHIP COUNCIL OF THE TOWNSHIP OF LIVINGSTON, THE TOWNSHIP OF LIVINGSTON, and THE LIVINGSTON PLANNING BOARD, Defendant-Respondents, and LIVINGSTON MALL VENTURE, Intervenor-Respondent. ______________________________ Argued February 26, 2021 – Decided March 18, 2021 Before Judges Mayer and Susswein. On appeal from the Superior Court of New Jersey, Law Division, Essex County, Docket No. L-7590-16. Thomas P. Scrivo argued the cause for appellant (O'Toole Scrivo, LLC, attorneys; Thomas P. Scrivo and Lawrence S. Cutalo, of counsel and on the briefs; James H. Leckie, on the briefs). James T. Bryce argued the cause for respondents (Murphy McKeon PC, attorneys; James T. Bryce, on the brief). James M. Hirschhorn argued the cause for intervenor- respondent (Sills Cummis & Gross, PC, attorneys; Mark S. Olinsky, James M. Hirschhorn, and Jason L. Jurkevich, of counsel and on the brief). PER CURIAM Plaintiff Michael Miller appeals from a December 13, 2019 final judgment in favor of defendants Mayor and Township Council of the Township of Livingston (Council) and the Township of Livingston (Township), and defendant-intervenor Livingston Mall Venture (LMV) dismissing his complaint in lieu of prerogative writs in its entirety. We affirm for the reasons set forth in comprehensive twenty-four page written decision issued by Judge Bahir Kamil. We briefly summarize Judge Kamil's thirty-four paragraph findings of fact. In September 2016, the Council adopted an ordinance, modifying the zoning regulations in the Township's D-S District, to allow construction of a four-story hotel and a one-story freestanding restaurant within the municipality. The Livingston Mall, consisting of eighty-three-acres of property, is located in A-2097-19 2 the D-S District. A seven-acre vacant lot within the D-S District, owned by LMV, is tear drop shaped and paved.1 The tear drop property is adjacent to an existing Sears store and parking areas for the Livingston Mall and Sears. LVM's property was primarily used as a "storage and staging area" and rarely used for parking even during the peak shopping season. The D-S District is adjacent to an R-1 residential district with existing single family-homes. These homes are located across from the Livingston Mall. A four-lane highway and berms with mature vegetation screen the Livingston Mall from the homes. Many of these homes have existed near the Livingston Mall for more than thirty years. Plaintiff resides in a home near the D-S District. In December 2007, the Livingston Planning Board (Board) adopted a Reexamination and Comprehensive Revision of the Master Plan (2007 Master Plan). The 2007 Master Plan sought "to preserve and enhance the primarily residential character of the community; . . . maintain a balance of residential, business and public uses; and . . . preserve and improve the quality of life." The document recommended exploring alternative uses for the tear drop property in the D-S District. 1 We refer to LMV's seven-acre lot as the tear drop property because it is "triangular in shape . . . ." The tear drop property is "removed and remote from the main mall building and . . . the rest of the parking fields." A-2097-19 3 In 2015, LMV approached the Township seeking to amend the D-S District's zoning regulations to allow a hotel and restaurant. The Township's first proposal, Ordinance 1-2016, met with public backlash because objectors believed the proposed ordinance did not comport with the neighboring residential areas and would increase traffic in the area. The Township then commissioned a traffic study to consider the impact of future development within the D-S District. The study examined traffic at various intersections and projected the potential impact of ten proposed development projects within the D-S District, including plans for a hotel and restaurant. While the traffic study found the cumulative effects of such developments would increase traffic, congestion, and delays, the study concluded any detrimental traffic impacts could be offset by low-cost improvement strategies, totaling approximately $30,000. According to the study, the Township's existing traffic levels would be maintained or improved even in the event all ten proposed development projects were constructed. Based on the traffic study, and considering the public comments related to Ordinance 1-2016, the Township proposed Ordinance 27-2016 (Ordinance) to address future development within the D-S District. The proposed Ordinance A-2097-19 4 provided any restaurant within the zone would be a "full-service establishment" rather than a fast-food chain. On August 17, 2016, the Board determined the Ordinance was consistent with the 2007 Master Plan. On September 19, 2016, the Council unanimously voted in favor of the Ordinance, concluding LMV's project would positively impact the municipality. On November 3, 2016, plaintiff filed a complaint in lieu of prerogative writs against defendants alleging the Ordinance constituted illegal spot zoning, was inconsistent with the 2007 Master Plan, and was arbitrary, capricious, and unreasonable. LMV moved to intervene, which the judge granted. The Council and Township answered the complaint. After completion of discovery, Judge Kamil conducted a bench trial over the course of four trial dates. Plaintiff's planning expert, Jeffrey D. Stiles, and defendants' planning expert, Paul A. Phillips, presented testimony regarding the validity of the Ordinance. At the conclusion of the hearing, after reviewing the testimony and evidence presented, Judge Kamil issued a thorough opinion, finding the defense expert "more credible, authoritative, and persuasive as to the matter before the court." The judge addressed at length the reasons he found defendants' planning expert more credible than plaintiff's planning expert, A-2097-19 5 referring to the defense expert's "extensive knowledge and expertise in [m]unicipal land use development including his prior experience with malls." The judge found the defense expert admitted "there is always some impact" with zoning ordinances but concluded the challenged Ordinance had "no significant impact, substance impact 'substantially detrimental in nature.'" Defendants' expert opined the Ordinance "was [a] reasonable exercise of Township power to regulate." Even during cross-examination, the judge noted the defense planning expert "was not shaken, he evaded no questions, and he was very fluid in his responses." Thus, Judge Kamil concluded the defense expert's his testimony was "credible, truthful and straightforward." The judge then identified several instances where he found the testimony of plaintiff's planning expert less credible and inconsistent. The judge recited the many concessions made by plaintiff's planning expert during his testimony. For example, plaintiff's expert admitted the 2007 Master Plan was "conceptual in nature and fairly broad and fairly vague" and recommended the municipality "explore alternatives to the teardrop section of the mall . . . ." Plaintiff's planner even "conceded that there was probably a need for a hotel" in the municipality. However, in reviewing the testimony of plaintiff's planning expert, the judge found "most incredulous" the expert's opinion that the vacant tear drop property A-2097-19 6 was not underutilized. The judge determined the opinions offered by plaintiff's expert "with regard to destabilization and disinvestment in the residential community [was] unsupported by any test, study or empirical data." Instead, the judge found the opinions expressed by plaintiff's expert were based on "his gut instinct and professional judgment . . . ." Based on his credibility determinations regarding the expert testimony, the judge found plaintiff "failed to establish that Ordinance 27-2016 [was] arbitrary, capricious, or unreasonable" to invalidate the Ordinance. The judge agreed with the Council's determination "the development of a hotel and freestanding restaurant in the tear-drop area in accordance with the specifications set forth in Ordinance 27-2016 is an 'appropriate use or development of land' and promotes the general welfare of Livingston." He also concluded "Ordinance 27-2016 [was] substantially consistent with the 2007 Master Plan." In addition, the judge rejected plaintiff's argument that the Ordinance violated the uniformity clause of the Municipal Land Use Law (MLUL), N.J.S.A. 40:55D-1 to -163, finding "[t]he development of a hotel and freestanding restaurant simply would not be possible in any lot other than the lot housing the Livingston Mall . . . ." The judge elaborated by explaining "this was a rational regulation based on the different conditions of the lots within the A-2097-19 7 D-S District and did not treat 'similarly situated property' differently, as no other lot was similarly situated to house a hotel and freestanding restaurant." Judge Kamil also rejected plaintiff's contention the Ordinance constituted illegal spot zoning. He concluded "the Township's desire to develop the underutilized teardrop area of the D-S District was well documented and supported by the competent and credible evidence at trial." While the judge acknowledged "LMV may have simultaneously benefitted from the adoption of Ordinance 27-2016, this court finds the Ordinance was [a] reasonable exercise of authority and adopted consistent with and in furtherance of the 2007 Master Plan scheme to develop the tear-drop section of the D-S District largely comprising Livingston Mall." After rendering detailed findings of fact and setting forth conclusions of law, the judge entered a final judgment in favor of defendants and dismissed plaintiff's complaint in lieu of prerogative writs. On appeal, plaintiff argues the judge erred in determining he failed to overcome the presumption of validity of the Ordinance by demonstrating the Ordinance was arbitrary, capricious, or unreasonable. He also claims the judge's dismissal of his complaint in its entirety was erroneous. Specifically, plaintiff renews the same arguments presented to the trial court regarding the Ordinance, including the Ordinance constituted illegal spot zoning, violated the uniformity A-2097-19 8 clause, and was inconsistent with the purposes of the MLUL and the 2007 Master Plan. In addition, plaintiff challenges the judge's credibility determinations regarding the planning experts. Our role in reviewing a zoning ordinance is narrow. Zilinsky v. Zoning Bd. of Adjustment of Verona, 105 N.J. 363, 367 (1987). Courts recognize that because of familiarity with their communities, local officials "are best suited to make judgments concerning local zoning ordinances." Pullen v. Twp. of S. Plainfield Planning Bd., 291 N.J. Super. 1, 6 (App. Div. 1996). Thus, we presume a governing body's action in adopting an ordinance is valid. Jayber Inc. v. Mun. Council of W. Orange, 238 N.J. Super. 165, 173 (App. Div. 1990). We defer to a municipal governing body's judgment "so long as its decision is supported by the record and is not so arbitrary, unreasonable or capricious as to amount to an abuse of discretion." Ibid. A party challenging an ordinance must overcome its presumption of validity. Riggs v. Long Beach, 109 N.J. 601, 611 (1988). We may not substitute our judgment for that of the municipal body unless there is a clear abuse of discretion. Cell S. of N.J., Inc. v. Zoning Bd. of Adjustment of W. Windsor Twp., 172 N.J. 75, 82 (2002) (citing Med. Realty Assocs. v. Bd. of Adjustment of Summit, 228 N.J. Super. 226, 233 (App. Div. 1988)). A-2097-19 9 In evaluating whether a zoning ordinance is arbitrary, capricious, or unreasonable, a court "will not evaluate the enactment nor review the wisdom of any determination of policy which the legislative body might have made." Singer v. Twp. of Princeton, 373 N.J. Super. 10, 20 (App. Div. 2004) (citing Hutton Park Gardens v. W. Orange Township Council, 68 N.J. 543, 565 (1975)). The "fundamental question . . . is whether the requirements of the ordinance are reasonable under the circumstances." Pheasant Bridge Corp. v. Twp. of Warren, 169 N.J. 282, 290 (2001) (quoting Vickers v. Twp. Comm., 37 N.J. 232, 245 (1962)). Having reviewed the record, including the hearing transcripts and exhibits, we affirm for the reasons stated by Judge Kamil. We add only the following comments. Based on our review, the Ordinance did not constitute impermissible spot zoning. Spot zoning refers to a zoning ordinance that "benefit[s] particular private interests rather than the collective interests of the community." Taxpayers Ass'n of Weymouth Twp. v. Weymouth Twp., 80 N.J. 6, 18 (1976), cert. denied, 430 U.S. 977 (1977). "An ordinance enacted to advance the general welfare by means of a comprehensive plan is unobjectionable even if the ordinance was initially proposed by private parties and these parties are in fact A-2097-19 10 its ultimate beneficiaries." Gallo v. Mayor & Twp. Council of Lawrence Twp., 328 N.J. Super. 117, 127 (App. Div. 2000) (quoting Taxpayers Ass'n of Weymouth Twp., 80 N.J. at 18). Here, Judge Kamil concluded the Ordinance benefitted the entire municipality, not just LMV. The judge found the municipality lacked a hotel facility and therefore it would be a benefit to all residents if a hotel were to be constructed on the underutilized tear drop property. Nor did the Ordinance violate the uniformity clause as argued by plaintiff. The uniformity clause, N.J.S.A. 40:55D-62(a), "does not prohibit classifications within a district so long as they are reasonable and so long as all similarly situated property receives the same treatment.'" Rumson Estates, Inc. v. Mayor & Council of Fair Haven, 177 N.J. 338, 344 (2003). As stated by Judge Kamil, the tear drop property was the only viable lot for a hotel and restaurant in the D- S District and thus it was permissible for the Ordinance to be drafted in contemplation of such development of that parcel without violating the uniformity clause. We also agree with Judge Kamil's finding the Ordinance was not inconsistent with the 2007 Master Plan. The requirement that an ordinance be "substantially consistent" with the master plan "permits some inconsistency, A-2097-19 11 provided it does not substantially or materially undermine or distort the basis provisions and objectives of the Master Plan." Riya Finnegan, LLC v. Twp. Council of S. Brunswick, 197 N.J. 184, 192 (2008) (quoting Manalapan Realty, L.P. v. Twp. Comm. of Manalapan, 140 N.J. 366, 384 (1995)); see also N.J.S.A. 40:55D-62(a). Judge Kamil found "the 2007 Master Plan identified the tear- drop section of the D-S District as underutilized and recommended alternative uses should be explored." He also determined a hotel and freestanding restaurant in the D-S District, which "already houses a regional mall [was] appropriate and minimize[d] disruptive impacts to those . . . surrounding areas and constitutes a reasonable exercise of Council authority." Based on our review of the record, we are satisfied Judge Kamil's findings were supported by sufficient credible evidence, particularly his credibility determinations regarding the planning experts. The probative weight to be accorded to "an expert's opinion depends not only upon the expert's analysis, but also upon the facts offered in support of the opinion." E. Orange City v. Livingston Tp., 15 N.J. Tax 36, 47 (Tax 1995) (citing Dworman v. Tinton Falls, 1 N.J. Tax 445 (Tax 1980), aff'd o.b., 180 N.J. 366 (App. Div. 1981)). Here, Judge Kamil provided a detailed statement of reasons why the opinions and analyses provided by the defense planning expert were factually supported and A-2097-19 12 more credible than the opinions and analyses offered by plaintiff's planning expert. In sum, the dismissal of plaintiff's complaint in lieu of prerogative writs was proper for the reasons explained in Judge Kamil's through and well- reasoned written decision. Affirmed. A-2097-19 13	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4669090/	NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3. SUPERIOR COURT OF NEW JERSEY APPELLATE DIVISION DOCKET NO. A-2418-19 COUNTY OF CUMBERLAND and ROBERT AUSTINO in his official capacity as Sheriff of County of Cumberland, Plaintiffs-Respondents, v. POLICEMEN'S BENEVOLENT ASSOCIATION LOCAL 299, Defendant-Appellant. ___________________________ Argued March 1, 2021 – Decided March 18, 2021 Before Judges Fasciale and Mayer. On appeal from the Superior Court of New Jersey, Law Division, Cumberland County, Docket No. L-0779-19. Donald C. Barbati argued the cause for appellant (Crivelli & Barbati, LLC, attorneys; Donald C. Barbati, on the brief). John Gilman Carr, Cumberland County Counsel, argued the cause for respondents (Theodore E. Baker, Assistant County Counsel, on the brief). PER CURIAM Defendant Policemen's Benevolent Association Local 299 (PBA 299) appeals from a February 12, 2020 order granting plaintiff County of Cumberland's and Robert Austino's, in his official capacity as Cumberland County Sheriff (the County), order to show cause vacating an arbitration award rendered by Arbitrator Philip L. Maier (the arbitrator) sustaining a grievance filed by PBA 299 against the County. On appeal, PBA 299 raises the following points for this court's consideration: POINT I THE [JUDGE] ACTED ARBITRARILY, CAPRICIOUSLY, AND UNREASONABLY IN GRANTING THE [COUNTY'S] ORDER TO SHOW CAUSE AND VACATING THE ARBITRATION AWARD. AS SUCH, THE [JUDGE'S ORDER] MUST BE REVERSED. POINT II IN ESSENCE, THE [JUDGE] CONCEDED [THE ARBITRATOR]'S ARBITRATION AWARD WAS "REASONABLE DEBATABLE." AS A RESULT, THE ARBITRATION AWARD SHOULD HAVE BEEN CONFIRMED IN ACCORDANCE WITH THE APPLICABLE LAW. A-2418-19 2 POINT III THE [JUDGE'S] DECISION WAS IMPROPERLY AND PRIMARILY PREMISED UPON HYPOTHETICAL AND SPECULATIVE SCENARIOS. POINT IV [THE ARBITRATOR]'S DETERMINATION THAT THE COUNTY VIOLATED THE MEMORANDUM OF AGREEMENT [MOA] BETWEEN THE PARTIES WAS NOT DEFICIENT ON ITS FACE. POINT V [THE ARBITRATOR]'S DETERMINATION THAT THE COUNTY VIOLATED THE [MOA] WAS A "REASONABLY DEBATABLE" INTERPRETATION OF THE AGREEMENT AND WELL-SUPPORTED BY THE RECORD EVIDENCE. AS SUCH, THE [JUDGE] ERRONEOUSLY VACATED THE SAME. Because the arbitrator did not exceed the scope of his authority, the award is not contrary to existing law or public policy, and his decision is a reasonably debatable interpretation of the MOA, we conclude that the judge's vacation of the arbitrator's award was arbitrary and capricious. We therefore reverse and reinstate the award. The County and PBA 299 were parties to a collective bargaining agreement (CBA) effective from January 1, 2011 through December 31, 2015. A-2418-19 3 Following the expiration of that agreement, the County and PBA 299 commenced negotiations for a new CBA for the period between January 1, 2016 through December 31, 2019. Due to a dispute as to interpretation, the parties never executed a formal successor agreement. The only document memorializing an agreement between the parties was the MOA dated September 27, 2017. Attached to the MOA was a document titled "PBA 299 Step Guide 2016-2020" (the Step Guide) which intended to demonstrate the salaries from the previous contract to run through the end of 2019, as well as demonstrate what the step structure would look like in 2019. 1 The County also provided a Cost Calculation Sheet to PBA 299 and the arbitrator, which demonstrated the actual salaries for the contract term for each individual PBA member. The document was not attached or incorporated into the MOA. Following the execution of the MOA, a dispute between the County and PBA 299 arose, resulting in PBA 299 filing a grievance in January 2019. The grievance emanated from a dispute regarding the interpretation of the MOA as 1 The County notes that there was a notation included by counsel as to the Step Guide as follows: "Paragraph [Four] from Step Guide in 1/1/11 to 12/31/15 contract shall be incorporated herein." Paragraph Four from the Step Guide states as follows: "[m]andatory [s]tep [m]ovement – [t]here shall be automatic salary step movement surviving the expiration of the contract (each employee shall continue to move one step per year on the [s]alary [s]cale below until he or she reaches the maximum step)." A-2418-19 4 it relates to step progression of the officer's salaries. 2 Specifically, the County was advancing PBA 299 members diagonally on the salary guide, but to the same step they were previously at on the guide.3 The crux of the dispute between the parties was whether the MOA provided for additional step progression for existing officers based upon the increase of salaries for new hires. PBA 299 maintained, and the arbitrator agreed, that officers hired between 2017 and 2019 should be advanced a step so that no officers who were hired after an earlier hire are paid less. The County maintained that there should only be single step progression, that PBA 299's stance is wholly unsupported by the parties' negotiations and the MOA, and that PBA 299's purported outcome would not be feasible from a financial 2 The salary step progression is ambiguous. The old step guide in effect at the end of the old CBA in December 2015 contained eleven total steps. The new guide effective 2017 contained twenty-one steps. There is no discussion in the MOA about how officers would progress from an eleven-step guide to a twenty-one-step guide. The guide for 2018 and 2019 is also staggered, and it is evident that new hires in 2019 would start at step one, which is effectively step three for officers hired in 2017. 3 PBA 299 grieved that officers hired in 2017 and 2018 were not compensated properly because they were being paid less than new hires in 2019 and argued that officers hired in 2017 and 2018 would need to progress through twenty - three or twenty-four steps instead of twenty-one like new hires. The County responded that it was raising the starting salary to help attract and retain new recruits. A-2418-19 5 perspective. After it was determined that a response was unable to be rendered under the applicable grievance procedure, the grievance was denied. Thereafter, PBA 299 filed a request for submission to a panel of arbitrators with the Public Employment Relations Commission (PERC), alleging the County's actions in failing to properly advance and compensate officers violated the express terms of the MOA. In August 2019, a grievance arbitration hearing was conducted. In a written decision, the arbitrator sustained the grievance against the County and awarded relief accordingly. The arbitrator issued a decision and award in this matter on October 24, 2019. The parties agreed to all issues submitted for purposes of being considered. The arbitrator articulated the following specific issues would be addressed: (1) Was there a meeting of the minds regarding Article [Twenty-Four] of the collective negotiations agreement? (2) Did the [County] violate Article [Twenty-Four] of the collective negotiations agreement and/or [MOA] when it failed to advance members on the negotiated step guide; thereby causing certain members to be compensated improperly in that they were paid at the same rate as recruits and/or officers with less experience with the Department? (3) If the grievance is sustained, what shall be the remedy? A-2418-19 6 The arbitrator addressed, discussed, and analyzed the parties' specific arguments in support of their respective positions. As to whether the County violated the MOA by not correctly advancing members on the negotiated salary guide, the arbitrator found merit to PBA 299's argument and stated the officers already employed did not progress from the lowest to the highest step since they are remaining at the lowest step level, which correlates with the lowest salary. It is also the step at which new hires are placed. By remaining at the lowest step level which is associated with the lowest salary, the County is not advancing officers from the lowest to the highest step .... I find the PBA's arguments in its brief in this respect to be persuasive. The County's argument if accepted would lead to the conclusion an officer would need to be on step for [Twenty-Four] years to reach the top step. There is no evidence that the parties discussed this or that it was intended by the parties to change Article [Twenty-Four] in this regard. The County's position would also lead to the conclusion that while it would take an officer hired in 2017 twenty-four . . . years of steps to reach top step, it would take an officer hired in 2019 only twenty-two . . . years or steps to achieve the same result . . . . .... I also do not find that both parties intended to enter into an agreement in which officers already employed would be on the same salary step as those newly hired. I credit [PBA 299 President Joseph] Dragotta's A-2418-19 7 testimony that the parties never discussed that a new hire would be placed on the same salary rate as an officer with more tenure. While [County CFO Gerry] Seneski and [County Human Resources Director Craig] Atkinson testified that they explained how the step system would work, Seneski also testified that it was never explicitly stated that new hires would be at the same salary rate as officers already on the job. As to the County's arguments and the issue of whether there was a meeting of the minds regarding Article Twenty-Four, the arbitrator explained The Step Guide used during the negotiations does not establish the County's position. It lists steps on the left side of the guide beginning with step [one]. There is no step [one] salary indicated for 2018 and no step [one] or [two] salary indicated for 2019. Seneski testified that there [were] no step levels indicated for 2018 and 2019 since the point was to raise the recruit rate. This, however, does not mean that [PBA 299] agreed, or that it is clear, that that was the level at which the officers already on the schedule would also be placed. This would be contrary to the manner in which officers already employed had advanced under the prior contracts . . . . The County presented as an issue whether there was a meeting of the minds regarding Article [Twenty-Four] of the agreement . . . . The parties' intended to enter into an agreement consisting, in part, of the [S]alary [S]chedule and the [W]age [G]uide. [The parties] have different interpretations of how the agreement relating to only part of the [S]alary [S]chedule and [W]age [G]uide should operate. The fact that there is a disagreement about the meaning of one of the terms of the agreement . . . does not mean that a binding agreement does not exist. A-2418-19 8 The arbitrator ultimately sustained PBA 299's grievance. The arbitrator awarded the following: (1) The parties executed a [MOA] incorporating Article [Twenty-Four] which is subject to the parties' grievance dispute resolution system and I find that there was a meeting of the minds to do so; (2) The [County] violated Article [Twenty-Four] of the collective negotiations agreement and/or [MOA] when it failed to advance members on the negotiated [S]tep [G]uide[.] (3) As a remedy, the affected members should be retroactively placed on the step guide in accordance with the advancement required by Article [Twenty- Four] and shall be made whole for any and all losses suffered as a result of the County's violation of Article [Twenty-Four]. Thereafter, on December 19, 2019, the County filed a lawsuit seeking to set aside the arbitration award. The judge heard oral argument, rendered a written decision detailing his reasoning, and entered the order under review vacating the arbitration award. First, the judge highlighted the "stark differences as to how the respective parties interpret the [S]tep [G]uide" and noted that there was a difference "of over [eleven] percent" in what each party believed the officers should be paid. The judge stated that "[i]f the decision is left to stand, grievances are coming" and the impact "could devastate the County budget as A-2418-19 9 [PBA 299's] demands would clearly violate the [two percent] cap both sides agree was in effect at the time of these negotiations." Second, the judge stated that the arbitrator ignored a substantial piece of evidence presented by the County—the Contract Cost Calculation Sheet (the Cost Calculation Sheet) which set forth in detail what each officer would make through the contract term—and instead gave weight to Article Twenty-Four, "an unsigned unadopted document" with "no legal meaning," unlike the Cost Calculation Sheet. Third, the trial judge found that "in application, the arbitrator['s] award violates N.J.S.A. 2A:24-8(d) as its implementation would violation the [two percent] cap." Having ruled that the arbitrator's decision needed to be vacated, the judge directed the parties to renegotiate the disputed terms. I. Our review of a judge's decision to vacate a labor arbitration award is guided by certain well-established principles. Because the decision to vacate an arbitration award is a matter of law, we review a trial judge's decision de novo. See Yarborough v. State Operated Sch. Dist. of City of Newark, 455 N.J. Super. 136, 139 (App. Div. 2018) (citing Minkowitz v. Israeli, 433 N.J. Super. 111, 136 (App. Div. 2013)). "The public policy of this State favors arbitration as a means of settling disputes that otherwise would be litigated in a court." Badiali v. N.J. A-2418-19 10 Mfrs. Ins. Group, 220 N.J. 544, 556 (2015) (citing Cty. Coll. of Morris Staff v. Cty. Coll. of Morris Staff Ass'n, 100 N.J. 383, 390 (1985)). To ensure the finality and the expeditious and inexpensive nature of binding arbitration, there is "a strong preference for judicial confirmation of arbitration awards," particularly in public-sector labor disputes. Borough of E. Rutherford v. E. Rutherford PBA Local 275, 213 N.J. 190, 201 (2013) (quoting Middletown Twp. PBA Local 124 v. Twp. of Middletown, 193 N.J. 1, 10 (2007)). "Judicial review of an arbitration award is very limited[.]" Linden Bd. of Educ. v. Linden Educ. Ass'n ex rel. Mizichko, 202 N.J. 268, 276 (2010). "An arbitrator's award is not be cast aside lightly. It is subject to being vacated only when it has been shown that a statutory basis justifies that action." Kearny PBA Local No. 21 v. Town of Kearny, 81 N.J. 208, 221 (1979). "In the public sector, an arbitrator's award will be confirmed 'so long as the award is reasonably debatable.'" Linden Bd. of Educ., 202 N.J. at 276 (quoting Middletown Twp. PBA Local 124, 193 N.J. at 11). An award is "reasonably debatable" if it is "justifiable" or "fully supportable in the record." Policemen's Benevolent Ass'n, 205 N.J. at 431 (quoting Kearny PBA Local No. 21, 81 N.J. at 223-24). Under this standard, we "may not substitute [our] own judgment for that of the arbitrator, regardless of [our] view of the correctness of the arbitrator's A-2418-19 11 interpretation." N.J. Transit Bus Ops., Inc. v. Amalgamated Transit Union, 187 N.J. 546, 554 (2006) (citing State v. Int'l Fed'n of Prof'l & Technical Eng'rs, Local 195, 169 N.J. 505, 514 (2001)). N.J.S.A. 2A:24-8 sets forth the grounds for vacating an arbitration award. Pertinent to this appeal, a judge may vacate an arbitration award "where the arbitrator . . . exceeded or so imperfectly executed [his or her] powers that a mutual, final and definite award upon the subject matter submitted was not made." N.J.S.A. 2A:24-8(d). That legislatively granted authority to vacate awards serves as a check on whether the arbitration award "draw[s] its essence from the bargaining agreement." Cty. College of Morris, 100 N.J. at 392. It is the party seeking to vacate an arbitration award that "bears the burden of demonstrating 'fraud, corruption, or similar wrongdoing on the part of the arbitrator[].'" Minkowitz, 433 N.J. Super. at 136 (alteration in original) (quoting Tretina Printing, Inc. v. Fitzpatrick & Assocs., 135 N.J. 349, 357 (1994)). An arbitrator exceeds his or her authority where they ignore "the clear and unambiguous language of the agreement[.]" City Ass'n of Supervisors & Adm'rs v. State Operated Sch. Dist. of City of Newark, 311 N.J. Super. 300, 312 (App. Div. 1998). "Thus, an arbitrator may not disregard the terms of the parties' A-2418-19 12 agreement, nor may he [or she] rewrite the contract for the parties." Cty. Coll. of Morris, 100 N.J. at 391 (citations omitted). "If contract terms are unspecific or vague, extrinsic evidence may be used to shed light on the mutual understanding of the parties." Hall v. Bd. of Educ. of Twp. of Jefferson, 125 N.J. 299, 305 (1991). Although the arbitrator is not free to contradict the express language of a contract, "an arbitrator may 'weav[e] together' all those provisions that bear on the relevant question in coming t o a final conclusion." Policemen's Benevolent Ass'n, 205 N.J. at 430 (alteration in original) (quoting N.J. Transit Bus Operations, 187 N.J. at 555). "[S]o long as the contract, as a whole, supports the arbitrator's interpretation, the award will be upheld." Ibid. Additionally, when reviewing an arbitrator's interpretation of a public- sector contract, "a [judge] 'may vacate an award if it is contrary to existing law or public policy.'" Middletown Twp. PBA Local 124, 193 N.J. at 11 (quoting N.J. Tpk. Auth. v. Local 196, I.F.P.T.E., 190 N.J. 283, 294 (2007)). Heightened scrutiny is required "when an arbitration award implicates 'a clear mandate of public policy[.]'" N.J. Tpk. Auth., 190 N.J. at 294 (quoting Weiss v. Carpenter, Bennett & Morrissey, 143 N.J. 420, 443 (1996)). However, "[r]eflecting the narrowness of the public policy exception, that standard for vacation will be met A-2418-19 13 only in rare circumstances." Id. at 294 (internal quotation marks omitted) (quoting Tretina Printing, Inc. 135 N.J. at 364). The arbitrator's award—"and not the conduct or contractual provision prompting the arbitration"—is the focus of that review. Id. at 296. Public policy is ascertained by "reference to the laws and legal precedents and not from general considerations of supposed public interests." Weiss, 143 N.J. at 434-35 (quoting W.R. Grace & Co. v. Local Union 759, Int'l Union of United Rubber, Cork, Linoleum & Plastic Workers , 461 U.S. 757, 766 (1983)); Middletown Twp. PBA Local 124, 193 N.J. at 11. And, even when the award implicates a clear mandate of public policy, the deferential "reasonably debatable" standard still governs. Weiss, 143 N.J. at 443. Thus, "[i]f the correctness of the award, including its resolution of the public -policy question, is reasonably debatable, judicial intervention is unwarranted." Ibid. As the Court explained in Weiss, [a]ssuming that the arbitrator's award accurately has identified, defined, and attempted to vindicate the pertinent public policy, [judges] should not disturb the award merely because of disagreements with arbitral fact findings or because the arbitrator's application of the public-policy principles to the underlying facts is imperfect. [Ibid.] A-2418-19 14 II. We first reject the County's contention that the judge properly vacated the award because the arbitrator's finding that Article Twenty-Four of the draft CBA was incorporated into the MOA was contrary to the authority vested in him and fatal to the viability of the award. N.J.S.A. 2A:24-8(d) states that a judge shall vacate an award "where the arbitrator[] exceeded or so imperfectly executed [his or her] powers that a mutual, final and definite award upon the subject matter was not made." "[L]imits [to the arbitrator's authority] are defined by statute, N.J.S.A. 2A:24-8, and by the [MOA] between the parties" as well as "by the questions framed by the parties in a particular dispute." Local No 153, Office of Prof'l Employees Int'l Union v. Tr. Co. of N.J., 105 N.J. 442, 449 (1987). Indeed, an arbitrator's award "should be consonant with the matter submitted. Otherwise, the determination is contrary to the authority vested in him [or her]." Grover v. Universal Underwriters Ins. Co., 80 N.J. 221, 231 (1979). In the underlying arbitration, the issue to be decided was whether the County was properly advancing PBA members on the negotiated salary step guide in accordance with the MOA. The dispute between the parties pertained to the interpretation and, more specifically, the step progression provided for A-2418-19 15 PBA 299 members, in the MOA executed by the parties. Clearly, the arbitrator addressed the seminal issue and the questions framed by the parties based on the evidence presented. The arbitrator considered and rejected the argument regarding Article Twenty-Four, raised again by the County on appeal: The County presented as an issue whether there was a meeting of the minds regarding Article [Twenty-Four] of the agreement and asserts that the doctrines of unilateral mistake or mutual mistake are applicable to this matter. This issue is more properly presented as a defense or theory as to whether there is a contract violation or even whether a contract exists. The parties have a grievance dispute resolution system in the event a disagreement arises under the contract and this matter was submitted for my determination. In this matter there is no mistake as to the purpose of the agreement. The County agreed with the [PBA 299] to compensate officers pursuant to the terms of the agreement . . . . The parties' intended to enter into an agreement consisting, in part, of the [S]alary [S]chedule and the [W]age [G]uide. They have different interpretations of how the agreement relating to only part of the [S]alary [S]chedule and [W]age [G]uide should operate. The fact that there is a disagreement about the meaning [of] one of the terms of the agreement . . . does not mean that a binding agreement does not exist . . . . I find that . . . [t]he parties executed a [MOA] incorporating Article [Twenty-Four] which is subject to the parties' grievance dispute resolution system and I find that there was a meeting of the minds to do so[.] A-2418-19 16 In rendering his final determination, the arbitrator found that the County violated Article 24 and/or the MOA. PBA 299 emphasizes this semantic choice. The arbitrator stated the following in various places of his award: Did the Cumberland County Sheriff's office and/or the County of Cumberland violate Article [Twenty-Four] of the collective negotiations agreement and/or [MOA] ...? For the reasons set forth below, I find that the County violated Article [Twenty-Four] of the parties' CBA and[/]or MOA by not advancing members on the step guide as argued by [PBA 299] and sustain the grievance. The Cumberland County Sheriff's Office and/or the County of Cumberland violated Article [Twenty-Four] of the collective negotiations agreement and/or [MOA] when it failed to advance members on the negotiated step guide as argued by [PBA 299] and as set forth in this Opinion and Award . . . . The judge, however, concluded that the arbitrator's reliance on Article Twenty - Four of the draft collective negotiations meant he exceeded or imperfectly executed his authority. As to this issue, the judge stated: The first is the arbitrator concluded that Article [Twenty-Four] of the unratified, unexecuted draft of the CBA cover[ing] the period from 2016 through 2019 controls the issue in dispute, and was violated by the County in this case. Clearly, this cannot be the case. Article [Twenty-Four] has no legal authority in this matter. It is a provision in the contract not signed by either side. It cannot be controlling, and it cannot be A-2418-19 17 violated. Any reliance on Article [Twenty-Four] is clearly misplaced . . . Any reliance on Article [Twenty- Four] as a basis for a decision is a violation of subsection (d). Having determined that the arbitrator addressed the seminal issue, the question posed to this court is whether his allegedly improper reliance on Article Twenty-Four meant that a "mutual, final and definite award upon the subject matter was not made." We conclude that one was. Article Twenty-Four is not referenced in the MOA and only existed as part of the draft CBA, which the parties never formally executed. It refers to a salary schedule and simply suggests that officers will generally progress along the steps. While reliance on this unsigned document at this juncture many have been mistaken, the parties agreed to the various issues to be resolved by the arbitrator, one of which was whether there was a meeting of the minds as to Article Twenty-Four for purposes of the grievance arbitration. The arbitrator found that there was a meeting of the minds and rejected the argument the County now makes again on appeal. Article Twenty-Four only generally indicated that PBA 299 members move progressively from the lowest step to the highest step of the salary guide at a rate of one step per year and did not bear on whether the County was, in fact, providing a step to PBA 299 members (which was the issue grieved by PBA 299). Further, the arbitrator concluded that the A-2418-19 18 County violated both Article Twenty-Four and the MOA by not progressing officers along the steps based on the cumulative evidence presented. Therefore, the arbitrator's reliance on Article Twenty-Four does not provide grounds under N.J.S.A. 2A:24-8(d) for the judge to vacate the award. III. The County also argues that during the time that negotiations were ongoing when the MOA was signed, contracts for law enforcement officers were subject to the restrictions of the public interest cap law as authorized in N.J.S.A. 40A:4-45.1(a) and applied pursuant to N.J.S.A 34:13A-16, -16.9. The County therefore argues that the arbitrator had no authority to award such a contract and failed to acknowledge the applicability of or comply with the cap guidelines here. The Legislature enacted N.J.S.A. 34:13A-16.7(b), commonly known as the "two percent salary cap," in 2010 and later extended its life to 2017. At the time of the arbitration of this matter, the Act prohibited an interest arbitrator from rendering a salary award which, on an annual basis, increases base salary items by more than [two] percent of the aggregate amount expended by the public employer on base salary items for the members of the affected employee organization in the twelve months immediately preceding the expiration of the collective negotiation agreement A-2418-19 19 subject to arbitration; provided, however, the parties may agree, or the arbitrator may decide, to distribute the aggregate monetary value of the award over the term of the collective negotiation agreement in unequal annual percentages. [N.J.S.A. 34:13A-16.7(b) (2010).] "This cap, limited to interest arbitration, is the Legislature's link between the Act and the two percent tax levy cap or efforts at controlling the size of municipal budgets." In re County of Atlantic, 445 N.J. Super. 1, 14 (App. Div. 2016) (emphasis added). Under N.J.S.A. 34:13A-16(g)(6), an element, among many, arbitrators must take into account in resolving salary negotiations is the effect of an award on the employers' budget. On the issue of public policy, the judge stated: If this decision is left to stand, these grievances are coming. The impact of this could devastate the County budget as [PBA 299's] demands would clearly violate the [two percent] cap both sides agree was in effect at the time of these negotiations. The judge's assertion that PBA 299's demands would violate the cap lacks a proper legal basis. The two percent cap is only applicable if the parties avail themselves of interest arbitration. In re County of Atlantic, 445 N.J. Super. at 14. The restrictions of the two percent cap are not applicable when parties voluntarily reach an agreement on a MOA. The interest arbitration statute's A-2418-19 20 legislative history, L. 2010, c. 105, explicitly states that the Legislature did not intend to place a cap on negotiated agreements, like the one at issue here. See Assembly Law & Public Safety Comm. Statement to Assembly Comm. Substitute for A. 3393 (Dec. 9, 2010) ("[A]greements arrived at through independent negotiation between the parties, and agreements reached with the assistance of a mediator or factfinder are not subject to the contractual cap."). The parties do not contest that this matter was submitted for grievance arbitration, not interest arbitration. The two percent cap is therefore inapplicable here. The judge's determination is also factually incorrect. Regarding the County's two percent cap argument, the arbitrator specifically stated that the restrictions of the cap did not support the County's interpretation that officers hired in previous years would be making the same amount as recruits . The arbitrator also found that such a result would be contrary to how officers previously advanced under prior CBAs and undermines the parties' agreement to have PBA 299 members advance one step each year. Moreover, the parties did expressly agree —and do not dispute in their merits briefs—that they had agreed to exceed the cap. The County maintains that it "was willing to pay slightly in excess of the [two percent] cap" but the arbitrator's award would have A-2418-19 21 "made the contractual award grossly in excess of that." Such willingness to exceed the cap in arbitration cuts against the County's argument that the arbitrator's authority was constrained by it. The County further contests that "even though this matter proceeded as a grievance arbitration, the [judge] was well within [his] right . . . to consider the [two percent] cap restriction because tax payer funding is called upon to pay for law enforcement salaries." PBA 299 contends that judge erred when he vacated the arbitration award "largely premised upon hypothetical and/or speculative scenarios if the arbitration award were to be confirmed." Although it is true that judicial scrutiny in public interest arbitration is more stringent that in general arbitration because public funds are at stake, Division 540, Amalgamated Transit Union AFL-CIO v. Mercer Cnty. Improvement Auth., 76 N.J. 245, 253 (1978), public policy considerations cannot be ascertained "from general considerations of supposed public interests," Weiss, 143 N.J. at 434-35 (quoting W.R. Grace & Co., 461 U.S. at 766). Moreover, while N.J.S.A. 34:13A-16(g)(6), requires that arbitrators consider the effect of an award on the employers' budget, the judge's determination that the two-step movement would "devastate the [C]ounty budget" is speculative and unsupported by evidence in the record. Thus, while A-2418-19 22 the judge could consider the fiscal impact of the award, his conclusions were improper. IV. Finally, we conclude that the award was a "reasonably debatable" interpretation of the MOA. An award is "reasonably debatable" if it is "justifiable" or "fully supportable in the record." Policemen's Benevolent Ass'n, 205 N.J. at 431 (quoting Kearny PBA Local No. 21, 81 N.J. at 223-24). "Under the reasonably debatable standard, a court reviewing [a public-sector] arbitration award may not substitute its own judgment for that of the arbitrator, regardless of the court's view of the correctness of the arbitrator's position." Borough of E. Rutherford, 213 N.J. at 201-02 (alteration in original) (citations and internal quotation marks omitted). Here, the arbitrator thoroughly considered the positions of the parties and the arguments raised and his award sets forth detailed findings and reasoning for his decision to sustain the grievance. It is both justifiable and well-supported by the record. The arbitrator properly determined based on the evidence presented and the testimony given that it was not PBA 299's expectation, nor the intention of the MOA, that PBA members would be on the same step and compensated at the same rate as officers who were hired later. Rather, it was A-2418-19 23 that PBA members would be advanced to the next step, not diagonally with a slight pay increase. The arbitrator's award properly provided PBA 299 with one step advancement in years 2017, 2018, and 2019 so that certain PBA 299 members no longer would reach the top step, or "off guide" salary later than those officers hired after them. The arbitrator's determination that the step advancement would proceed in this manner is consistent with the parties' intentions, prior practices of how the County typically advances PBA 299 members, and effectively maintains the advancement and payment hierarchy based on seniority. As such, and for the reasons set forth above, there exists no reason for us to second guess the arbitrator's determination or substitute our own judgment. Reversed; the arbitrator's award is reinstated. A-2418-19 24	01-04-2023	03-18-2021
https://www.courtlistener.com/api/rest/v3/opinions/4625710/	BENJAMIN I. DAVIS AND MOLLIE M. (MYRTLE S.) DAVIS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDavis v. CommissionerDocket No. 3557-70.United States Tax CourtT.C. Memo 1972-235; 1972 Tax Ct. Memo LEXIS 22; 31 T.C.M. 1155; T.C.M. (RIA) 72235; November 27, 1972, Filed W. Stuart McCloy and P. K. Seidman, for the petitioners. John B. Harper, for the respondent. DAWSONMEMORANDUM OPINION DAWSON, Judge: Respondent determined deficiencies in petitioners' 1972 Tax Ct. Memo LEXIS 22">23 Federal income taxes for the years 1966 and 1967 in the respective amounts of $22,402.38 and $65,282.88. The only issue to be decided is whether certain proceeds from the sale of rights to a patent application should be treated as ordinary income under section 1239, Internal Revenue Code of 1954, or should be taxed as capital gains. All of the facts have been stipulated. The stipulation of facts, together with the attached exhibits, are incorporated herein by this reference and are adopted as our findings. The pertinent facts are set out below. Benjamin I. Davis (herein called Davis) and Mollie M. (Myrtle S.) Davis are husband and wife who resided in Ellendale, Tennessee, at the time their petition was filed in this case. They filed their joint Federal income tax returns for 1966 and 1967 with the district director of internal revenue at Nashville, Tennessee. They reported their income on the cash receipts and disbursements method of accounting. Sometime prior to April 22, 1965, Davis acquired by oral agreement from Don Q. Garey (Garey), an inventor, all of that inventor's rights to an invention called an "Apparatus for Skinning Linked Sausages and the1972 Tax Ct. Memo LEXIS 22">24 Like." The oral agreement was evidenced by a written assignment dated April 22, 1965, which was filed in the United States Patent Office on May 6, 1965. The invention was represented by an application for United States Letters Patent, Serial No. 453,319, dated April 22, 1965, and filed in the Patent Office on May 5, 1965. The invention was further identified in the Patent Office as File No. 65,040. Davis paid Garey $15,000 for the assignment on September 12, 1966. As additional consideration Davis had paid, prior to December 31, 1965, Garey's attorney's fees of $1,055.61 incurred in connection with the patent application. Under the oral agreement between Davis and Garey, Davis was assigned all rights, title and interest to any modification and improvements which Garey might subsequently make on the invention. Garey made improvements in the second assembly which became the final working model between April 22, 1965, and August 10, 1965, the date the final working model was placed in actual commercial production at the Nat Buring Packing Company, Memphis, Tennessee. This model, which was the first assembled production unit, was sold to Nat Buring Packing Company for $3,395. On October 8, 1965, Davis1972 Tax Ct. Memo LEXIS 22">25 filed a trademark application with the United States Patent Office for the registration of the mark "Ranger IX" for a "Machine for Skinning or Peeling Linked Sausages, Frankfurters, Weiners, and the Like." The Ranger IX name was chosen because of the contemporaneous publicity being given the United States Government Aerospace Ranger Program. Registration of the trademark in the Patent Office on the principal register was granted December 6, 1966. The trademark "Ranger IX" was first used on August 10, 1965, the date the first assembled production unit was sold to the Nat Buring Packing Company. The Ranger IX is a machine invented to meet the needs of the meat packing industry. It peels and removes the nonedible cellulose casing from cooked frankfurters of any size or length in a fast, efficient manner. It is designed to process 12,000 pounds of frankfurters per hour which would otherwise require the employment of 75 persons per hour to handle the same volume. When Ranger IX was first reduced to practice, there were competitive machines on the market attempting to accomplish the same result. As of the date of these proceedings, all but one of these competitive machines have been withdrawn. 1972 Tax Ct. Memo LEXIS 22">26 The one remaining is called a cartridge pack stripper and was developed by and primarily for a large meat packing processor. Ranger claims its machine, the Ranger IX, is more versatile than competitive machines in that it will peel frankfurters of a greater variety of sizes, is more economical to maintain, and is sold at a lower retail price. From August 10, 1965, the date of the first commercial sale of the Ranger IX, to February 2, 1966, Davis operated a sole proprietorship known as Ranger Tool Company, which engaged in the manufacture and distribution of meat packing and processing equipment under the "Ranger IX" trademark at Ellendale, Tennessee. On his 1966 income tax return Davis reported $29,130 in gross receipts from sales of the Ranger IX during January 1966. On February 2, 1966, Davis organized Ranger Tool Company, Inc. (Ranger), a Tennessee corporation, with an authorized capital of 2,000 shares of common stock having no par value. Davis subscribed to all of the common stock, transferring to the corporation assets and cash of his sole proprietorship valued at $50,126.36. The articles of incorporation provide that: The general nature of the business to be transacted1972 Tax Ct. Memo LEXIS 22">27 by this corporation is to manufacture, produce, buy, sell, distribute and generally deal in and service sausage and meat packing equipment, fixtures, machinery and appliances of all kinds; to apply for, obtain, register, lease, purchase or otherwise acquire and hold, own, use, operate, develop, introduce and sell, assign, grant licenses in respect of or otherwise turn to account or dispose of patents, trademarks, trade names, secret processes and all inventions, improvements and processes used in connection therewith. On March 1, 1966, Davis made gifts of 300 shares of Ranger stock each to his wife and two children. During the years in question the common stock of Ranger was held as follows: Number ofPercentageShareholderSharesof SharesBenjamin I. Davis1,10055%Mollie M. Davis30015%Jerry Wayne Davis (son)30015%Eleanor Faye Davis (daughter) 30015%Total2,000100%At the time of these gifts of stock, Jerry Wayne Davis was 20 years old and Eleanor Faye Davis was 26 years old. Jerry Wayne Davis was born on April 27, 1945, and reach his majority (age 21) under Tennessee law on April 27, 1966. On March 4, 1966, Davis, his wife1972 Tax Ct. Memo LEXIS 22">28 and minor son owned more than 80% in value of the common stock of Ranger. On April 27, 1966, Davis and his wife owned less than 80% in value of the common stock of Ranger, his minor son having become of age on that date. The Ranger IX machine was manufactured by Davis as a sole proprietor from August 10, 1965, until February 2, 1966, and after that date by Ranger. It proved to be marketable because of its versatility, its economy of operation and its lower sale price as compared to competitive machines. Therefore, Davis was advised by his accountants and attorneys to sell all of his rights to the invention and all improvements therein to Ranger. At a special meeting of the Board of Directors of Ranger held on March 4, 1966, the sale of the invention, as well as the maximum purchase price thereof, was thoroughly discussed. The minutes of that meeting disclose as follows: The Chairman next announced that the success of the business was dependent in large measure upon the improved design of the company's products and the protection afforded such design by the patent application now pending before the United States Patent Office. He stated that it was important for the corporation1972 Tax Ct. Memo LEXIS 22">29 to acquire all rights in the design as established by the pending patent application, Serial No. 453,319, together with current modifications in the process of being submitted to the Patent Office, and that he, as the owner thereof, was willing to sell the entire patent to the corporation for its immediate use if a proper value therefor could be agreed upon. Because of the importance of its immediate acquisition by the company, Mr. Davis said that both Mr. Seidman and the company enter into an agreement for the purchase by the company of all patent interests presently held by Mr. Davis and all future patents which would accrue therefrom. Mr. Davis stated that in his opinion the patents have a value of probably $750.00 to $1,000.00 per unit and that the potential market for the apparatus for skinning linked sausage should be approximately 3,000 units. On this basis, Mr. Davis stated that he would be willing to sell and transfer his patents to the corporation for a price of $2,250,000.00, subject to a reduction in such price if an independent appraisal based upon a firm offer to purchase from a reliable company or individual in the industry indicated that the value per unit was something1972 Tax Ct. Memo LEXIS 22">30 less than $750.00. A discussion was had as to whether or not the purchase price should be stated in terms of a per unit cost or a percentage of sales, but Mr. Davis insisted that a fixed price be attached to the contract so that he might know on the front end what he might expect to receive from this disposition of valuable rights. After a full discussion, the following resolution was unanimously adopted: RESOLVED: That the Directors believe it to be in the best interest of the corporation to acquire by absolute assignment, the unrestricted ownership in and to the patent or patents now pending before the United States Patent Office and covering the design and modifications thereof of the equipment and apparatus now being produced by the company, and in furtherance thereof, hereby authorize the Vice President and Secretary of the corporation to execute a purchase agreement in the name of the corporation for all such patent rights at an agreed price of $2,250,000.00, payable in installments of not less than 10% a year or $750.00 per unit, whichever is the greater amount, and subject to a downward adjustment in purchase price in the event an independent appraisal discloses a value1972 Tax Ct. Memo LEXIS 22">31 per unit less than $750.00. RESOLVED FURTHER: That an independent appraisal or offer to purchase be obtained in order to establish an independent value for the patent rights and that after a final determination of value, the President and Secretary of the corporation are hereby authorized to file for record in the United States Patent Office a formal shortform assignment reflecting the transaction entered into and approved this date. On March 4, 1966, Davis and Ranger entered into an agreement for the sale of all of Davis' rights, title and interest in the invention. The agreement provided: WHEREAS, Benjamin I. Davis is the owner of the entire right, title and interest in and to a certain apparatus for skinning linked sausage and the like, and in and to application for United States Letters Patent thereon, Serial No. 453,319, filed May 5, 1965, and any patent or patents which may mature therefrom and in and to all rights relative to said invention, including the right to file applications and obtain patents thereon in countries foreign to the United States; and WHEREAS, Ranger Tool Company, Inc., desires to obtain and Benjamin I. Davis to sell, assign and transfer to Ranger1972 Tax Ct. Memo LEXIS 22">32 Tool Company, Inc., on the terms and conditions set forth herein, all of Seller's right, title and interest in and to said invention and all applications or patents relating thereto. NOW, THEREFORE, in consideration of One ($1.00) Dollar, receipt of which is hereby acknowledged, and of the mutual covenants and undertakings hereinafter set forth, the parties hereto have agreed and do hereby agree as follows: I Seller hereby sells, assigns and transfers to Purchaser his entire right, title and interest in and to said invention and said United States patent application thereon and any patent or patents which may issue therefrom. Seller agrees to cooperate with Purchaser in obtaining patent protection on said invention by signing any necessary papers and performing other necessary acts without compensation in addition to that provided herein, but at the expense of Purchaser. II Seller agrees to assign to Purchaser improvements in the linked sausage skinning apparatus of the type disclosed and claimed in said application, Serial No. 453,319, which he may hereafter make or acquire and which are of the same general type as the devise [sic] disclosed in said application and come1972 Tax Ct. Memo LEXIS 22">33 within a claim or claims of said application of any patent or patents maturing therefrom. III In consideration of Seller transferring all his right, title and interest in and to said invention, said patent application and any patent or patents which may mature therefrom, Purchaser agrees to pay to Seller the sum of Two Million Two Hundred Fifty Thousand ($2,250,000.00) Dollars, payable in the following manner: On or before December 31, 1966, Twenty-Nine (29%) percent thereof, or Seven Hundred and Fifty ($750.00) Dollars per unit sold, whichever shall be the lesser amount, and for each succeeding calendar year, on or before December 31st thereof, a sum equal to ten (10%) percent of the purchase price of Seven Hundred and Fifty ($750.00) Dollars per unit sold for such year, whichever shall be the greater amount, until such time as the purchase price hereof shall have been paid in full. Each payment made against the principal obligation deferred hereunder until a year subsequent to the year of closing, 1966, shall bear simple interest at four (4%) percent per annum from the date hereof, and any unpaid installment of interest shall itself bear interest at six (6%) percent per annum1972 Tax Ct. Memo LEXIS 22">34 from the date due. The parties hereto agree that the installment sales provisions of the Internal Revenue Code are intended to apply to the sale herein provided for, and under no circumstances shall the Purchaser pay to Seller in the year of sale, 1966, more than Twenty-Nine (29%) percent of the agreed purchase price above stated. It is further expressly agreed that this agreement of sale and contract shall be nontransferable and nonassignable by Seller, and the promises to pay hereunder shall be nonnegotiable until January 3, 1967. Subject to the foregoing limitations, from and after January 3, 1967, Purchaser shall pay to Seller for the granting of any licenses in the United States and in countries foreign to the United States, for the use of this invention, fifty (50%) percent of the royalties received by it under any license agreement, but in no event shall the purchase price paid to Seller hereunder be less than the amount established in the manner hereinabove prescribed. IV Purchaser agrees to keep and to require its licensees to keep adequate records and accounts showing information necessary for computing payments due to Seller and to permit Seller to inspect such records1972 Tax Ct. Memo LEXIS 22">35 and accounts at reasonable times during business hours. On December 31st of each year during the continuation of this agreement, Purchaser agrees to furnish to Seller a statement showing the amounts due to Seller in accordance with this agreement for the calendar year to date and to accompany each such statement with a payment of the amounts shown thereby to be due to Seller. V The parties hereto acknowledge that the relationship of Seller to Purchaser requires scrupulous adherence to an independent determination of fair value for the rights herein conveyed. For this reason, the parties agree that within one hundred and twenty (120) days from the date hereof, they shall secure such appraisal and if same shall establish a per unit value for the patent rights herein conveyed of less than Seven Hundred and Fifty ($750.00) Dollars, the parties hereby agree that the purchase price herein provided for shall be adjusted downward proportionately, retroactive to the effective date hereof. Notwithstanding the foregoing, no increase in the agreed purchase price shall result from any appraised value in excess of Seven Hundred and Fifty ($750.00) Dollars per unit. VI Within sixty (60) days1972 Tax Ct. Memo LEXIS 22">36 after securing the aforesaid independent appraisal, Seller agrees to make, execute and deliver to Purchaser a formal short-form transfer and assignment of his interest in the above described invention and patent application thereon and will cause same to be recorded and entered on the records of the United States Patent Office. VII As security for the full performance of Purchaser's obligations hereunder, Purchaser hereby grants to Seller and Seller expressly reserves a first lien against the invention, United StatesPatent application thereon, and any patent or patents which may issue therefrom all as above described, to the end that should Purchaser fail to make the payments as required hereby or default in the performance of any of its obligations hereunder, and shall fail or refuse to cure any such default within theirty (30) days of written notification thereof from Seller, Seller may cancel and terminate the agreement, cause the interest herein conveyed to be sold at public or private sale, and the proceeds thereof, less the expenses incurred in connection with such sale, to be applied against the balance of payments due from Purchaser hereunder, and if the same shall be1972 Tax Ct. Memo LEXIS 22">37 insufficient to liquidate such obligation, then to take judgment against the Purchaser for the deficiency. In any such public or private sale, Seller shall have the privilege of purchasing for his own account. VIII This agreement and the rights and liabilities hereunder shall inure to the benefit of and be binding upon the heirs, executors, administrators, successors or assigns of both parties hereto. After the agreement dated March 4, 1966, was executed, Ranger contacted Townsend Engineering Company, Des Moines, Iowa, and requested a proposal for the use of and patent rights to the Ranger IX, including the exclusive rights to manufacture and sell the Ranger IX. In a letter dated June 17, 1966, Townsend Engineering offered Ranger a price of $1,000 per unit for all of the rights to the invention. This offer was not accepted by Ranger. Immediately after this offer was received, a special meeting of the Board of Directors of Ranger was held on June 21, 1966. The offer of Townsend Engineering Company dated June 17, 1966, was presented to the Board, and the purchase price of the patent rights was confirmed without adjustment as required by the agreement of March 4, 1966. The pertinent1972 Tax Ct. Memo LEXIS 22">38 minutes of this meeting show that: The Chairman announced that the meeting had been called for the purpose of reviewing a written offer to purchase Mr. Davis' patent rights which had recently been received from Townsend Engineering Company, of Des Moines, Iowa, designers and manufacturers of meat packing equipment. Mr. Davis explained that this bona fide offer to purchase patent rights at $1,000.00 per unit manufactured and sold constituted an independent appraisal of the value of the patent rights sold to the company by agreement dated March 4, 1966, which agreement required that such an independent appraisal be made and that if the estimated per unit value of the patent were found to be less than $750.00, then an adjustment in the overall purchase price would have to be made. Mr. Davis stated that because the appraisal indicated a value in excess of that which he had estimated in March, no adjustment in the $2,250,000.00 purchase price would be required. Mrs. Davis suggested that the letter offer from Townsend Engineering Company be filed with the minutes of the meeting and suggested that it would now be appropriate for Mr. Davis to record in the United States Patent Office a1972 Tax Ct. Memo LEXIS 22">39 short form of assignment to the company in order that record title to the patent might now stand in the company's name. Mr. Davis agreed to call upon the company's attorneys to prepare such a form suitable for filing and to execute same at the earliest possible date. After further discussion, the following resolution was unanimously adopted: RESOLVED: That the purchase price of $2,250,000.00 for the patent rights purchased from Benjamin I. Davis on March 4, 1966, is hereby confirmed by independent appraisal as required by the purchase agreement with respect to said patent rights. Thereafter, an assignment was drafted and executed by Davis on August 30, 1966, assigning all rights to the invention to Ranger. The assignment was filed with the United States Patent Office on September 6, 1966. This assignment was made pursuant to the terms of the March 4, 1966, agreement between Davis and Ranger, in accordance with the minutes of the special meeting of the Board of Directors of Ranger held on June 21, 1966. On September 19, 1966, Garey executed an application for Letters Patent, Serial No. 584,621, as a continuation-in-part of the earlier application for Letters Patent, Serial No. 1972 Tax Ct. Memo LEXIS 22">40 453,319, describing the invention as an "apparatus for skinning a chain of linked sausages and the like," and on the same date executed an assignment thereof to Davis. The continuation application and the assignment were filed in the United States Patent Office on September 29, 1966. All the improvements represented by the application for Letters Patent were reduced to practice on or before August 10, 1965, the date of the sale of the final working model, to Nat Buring Packing Company, Memphis, Tennessee. On January 3, 1967, in a telephone conversation with the United States Patent Office, John Walker, III, patent attorney handling matters for Garey, Davis, and Ranger, was orally informed that if certain conditions were met, a notice of allowance would be issued. The conditions pertained solely to the language used in the application for United States Letters Patent except for the cancellation of claim 5. The conversation was confirmed in writing by the patent examiner on January 19, 1967. The conditions being met on January 27, 1967, notice of allowance of Patent Application Serial No. 584,621 was sent to the attorney. On April 11, 1967, United States Letters Patent No. 3,312,9951972 Tax Ct. Memo LEXIS 22">41 were issued on the above applications to Ranger as assignee by mesne assignments from Garey, Bartlett, Tennessee, assignor. Of the 14 claims made on the invention, with improvements, 13 were patented. The Letters Patent stated in pertinent part: The apparatus of the present invention is substantially mechanically simple, with a minimum number of intricate and complicated mechanisms to get out of order; it requires minimum maintenance and adjustment, and is easy to operate. The apparatus performs rapidly, consistently and accurately, and many sausage links or chains can be processed in a given time. In summary, the present invention provides a very practical apparatus for skinning the sausage links of a chain of linked sausages. Ranger, or its predecessor proprietorship, has been the sole manufacturer of the Ranger Peeler. Sales are handled exclusively by Ranger and Townsend Engineering Company, Des Moines, Iowa, the latter receiving a commission based upon the retail sales price established by Ranger. In fiscal 1967, Ranger sold 241 units of the invention; in fiscal year 1968, 116 units. Ranger reported gross receipts and taxable income for the two fiscal years as follows: Fiscal YearGross ReceiptsTaxable Income1967$801,775.00$281,813.001968559,887.00170,518.001972 Tax Ct. Memo LEXIS 22">42 In the calendar year ended December 31, 1966, Davis received $164,250 from Ranger in accordance with the agreement dated March 4, 1966. This amount was reported on petitioners' joint Federal income tax return for 1966 as long term capital gain on an installment basis under section 453(b)(1)(B). In the calendar year ended December 31, 1967, petitioner Davis received $225,000 from Ranger in accordance with the agreement dated March 4, 1966. This amount was reported on petitioners' joint Federal income tax return for 1967 as long term capital gain on the installment basis under section 453(b)(1)(B) of the Code. In both of these returns petitioners reported the sale of the patent on the Ranger IX as having occurred on March 4, 1966. Similarly, the depreciation schedule on Ranger's United States corporation income tax return for fiscal year 1967 showed the acquisition date of the patent on the Ranger IX as "March 1966." The issue confronting us is whether, under the above-recited facts, the amounts received by Davis in 1966 and 1967 from the transfer of all of his rights in the patent applications on the Ranger IX sausage skinning device to Ranger Tool Company, Inc., are taxable as1972 Tax Ct. Memo LEXIS 22">43 ordinary income under section 1239, 1 Internal Revenue Code of 1954, or as long term capital gain. 21972 Tax Ct. Memo LEXIS 22">44 Respondent argues that section 1239 is applicable to the transaction in question because (1) on the date of the transfer, March 4, 1966, Davis, his wife, and minor son, owned more than 80% in value of Ranger Tool Company's outstanding stock and (2) Davis' patent applications constituted property which in the hands of Ranger, the transferee, was property of a character which is subject to the allowance for depreciation. Petitioners, to the contrary, contend that the sale transaction was not actually closed until after June 21, 1966, when the purchase price was confirmed by Ranger and Davis and his wife owned less than 80% in value of the outstanding stock of Ranger Tool Company. Petitioners also assert that respondent's characterization of the property transferred to Ranger as property of a character subject to the allowance for depreciation is in error. Petitioners first urge that the agreement of March 4, 1966, is executory. 3 As a result, it is argued the sale by Davis to Ranger was not completed until June 21, 1966, at which time he and his spouse owned less than 80% in value of the outstanding stock of Ranger, thus making section 1239 inapplicable to the transfer. Petitioners1972 Tax Ct. Memo LEXIS 22">45 contend that the agreement of March 4, 1966, merely bound the parties to perform specific future acts, i.e., determine a purchase price for arm's length and installment sales purposes and transfer the property to close the sale. It is our view that this contention should not be sustained. The March 4, 1966, Agreement specifically provides: "Seller [Davis] hereby sells, assigns and transfers to Purchaser [Ranger] his entire right, title and interest in and to said invention and said United States patent application thereon and any patent or patents which may issue therefrom." This same agreement further provides: "The parties hereto acknowledge that the relationship of Seller to Purchaser requires scrupulous adherence to an independent determination of fair value for the rights herein conveyed. For this reason, the parties agree that within one hundred and twenty (120) days from the date hereof, they shall secure such appraisal." [Emphasis supplied.] This language indicates to us that1972 Tax Ct. Memo LEXIS 22">46 although the agreement permitted the purchase price of $750 per unit to be adjusted downward on the basis of the appraisal to be obtained and the actual execution of the formal short-form transfer and assignment of Davis' interest in the patent application transferred was not to be recorded with the United States Patent Office until after this appraisal was obtained, the intent of the parties was to effect a transfer of the patent rights on March 4, 1966. 4 It is this intent which determines the rights and obligations of the parties and is controlling as to the agreement's efficacy. Deaton v. Vise, 210 S.W.2d 665">210 S.W.2d 665, 186 Tenn. 364">186 Tenn. 364 (1948); Real Estate Management, Inc. v. Giles, 293 S.W.2d 596, 41Tenn. Appeals Reports 347 (1956); Omar Construction Co. v. Tennessee Central Ry. Co., 375 S.W.2d 563, 212 Tenn. 556">212 Tenn. 556 (1963). 1972 Tax Ct. Memo LEXIS 22">47 Petitioners also argue that the provision in the agreement regarding the applicability of the installment sales provisions of the Internal Revenue Code indicates that the March 4, 1966, agreement remained open. This provision is at best merely a neutral factor. It does not in any way indicate the lack of an absolute transfer. See Rude v. Wescott, 130 U.S. 152">130 U.S. 152 (1889); Boesch v. Graff, 133 U.S. 697">133 U.S. 697 (1890); Green v. LeClair, 24 F.2d 74">24 F.2d 74 (C.A. 7, 1928); Universal Winding Co. v. Gibbs Machine Co., 179 F. Supp. 394">179 F. Supp. 394 (M.D.N.C. 1959). The second and far more significant question to be resolved is whether the property transferred by Davis to Ranger is property in the hands of Ranger of a character which, under section 1239(b), is subject to the allowance for depreciation provided in section 167. The issue has been examined by this Court on several prior occasions. In Estate of William F. Stahl, 52 T.C. 591">52 T.C. 591 (1969), affirmed in part and reversed in part, 442 F.2d 324">442 F.2d 324 (C.A. 7, 1971), the taxpayer had transferred 8 patents and 5 patent applications to his controlled corporation. Relying upon our previous decisions in1972 Tax Ct. Memo LEXIS 22">48 Hershey Manufacturing Co., 14 B.T.A. 867">14 B.T.A. 867 (1928), affd. 43 F.2d 298">43 F.2d 298 (C.A. 10, 1930) and United States Mineral Products Co., 52 T.C. 177">52 T.C. 177 (1969), we concluded that the five patent applications were not "depreciable property" nor "property of a character subject to the allowance for depreciation." On appeal, the Court of Appeals for the Seventh Circuit engrafted certain conditions upon this holding. That Court pointed out that the taxpayer-assignor had received formal notices of allowance from the Patent Office with respect to two of the patent applications transferred and notification that two of the claims presented in a third patent application appeared allowable. The remaining two applications were rejected. The Court of Appeals concluded that the two patent applications as to which official notices of allowance had been received and the application as to which there had been notification that two of its claims appeared allowable "were sufficiently matured applications as to require that they be treated as patents for purposes of section 1239." The Court of Appeals added that ignoring such action was unwarranted and too mechanistic an application1972 Tax Ct. Memo LEXIS 22">49 of the provisions of section 1239(b). In the instant case the stipulated facts disclose that the first indication from the Patent Office with respect to the allowability of the claims here involved was January 3, 1967, some 10 months after the transfer to Ranger had taken place. Respondent argues that despite the absence of such notification the patent applications were sufficiently matured applications as to require that they be treated as patents for purposes of section 1239. In support of this contention respondent states that the invention was obviously patentable because of its novelty and superiority to competing equipment; Davis' actions in connection with the production and sales of Ranger IX units indicated his recognition that the patent applications would ripen into patents; and, the placing of a $2,250,000 purchase price on the patent applications indicated more clearly than any other action the valuable interest which was being transferred and the virtual certainty that these rights would mature into depreciable patents. Unlike the Stahl case, into whose mold respondent seeks to squeeze this case, there had been no formal or informal notices of allowance regarding1972 Tax Ct. Memo LEXIS 22">50 these patent applications at the time of the transfer to Ranger. Solely because the patent applications had greatly appreciated in value, as a result of the successful marketing of the Ranger IX during their pendency, respondent would conclude that the issuance of the patents was a virtual certainty. This is not necessarily so. As long as the patent applications were pending and patents could ultimately be issued, Ranger's competitors could copy its machine only if they were willing to risk the costs of tooling up for production which could later be enjoined after issuance of the patents and an infringement suit for damages on further production after such patents were issued. Therefore, while certainly more valuable as a patented invention, Ranger still received, at the very worst, a highly marketable, efficient non-infringing machine with a head start in its industry on the sale of such equipment. Ranger's risk was real. However, since its royalty obligation was on a per unit basis and in favor of one of its principal shareholders it could strike such a bargain where others could not. These peculiar facts do not, however, alter the character of the property transferred. Accordingly, 1972 Tax Ct. Memo LEXIS 22">*51 we conclude the patent applications here involved are neither depreciable property nor property of a character subject to the allowance for depreciation nor sufficiently matured applications as to require treatment as such property. See Lan Jen Chu, 58 T.C. 598">58 T.C. 598 (1972). Decision will be entered under Rule 50. Footnotes1. SEC. 1239. GAIN FROM SALE OF CERTAIN PROPERTY BETWEEN SPOUSES OR BETWEEN AN INDIVIDUAL AND A CONTROLLED CORPORATION. (a) Treatment of Gain as Ordinary Income.--In the case of a sale or exchange, directly or indirectly, of property described in subsection (b)-- (1) between a husband and wife; or (2) between an individual and a corporation more than 80 percent in value of the outstanding stock of which is owned by such individual, his spouse, and his minor children and minor grandchildren; any gain recognized to the transferor from the sale or exchange of such property shall be considered as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. (b) Section Applicable Only to Sales or Exchanges of Depreciable Property.--This section shall apply only in the case of a sale or exchange by a transferor of property which in the hands of the transferee is property of a character which is subject to the allowance for depreciation provided in section 167. ↩2. Respondent makes no argument that the amounts in issue constitute ordinary income under section 1235, I.R.C. 1954, even though Davis' interest in Ranger Tool Co., Inc., exceeded the requirements contained in section 1235(d). He proceeds here entirely on the theory that the amounts received by Davis are taxable as ordinary income under section 1239. See Lan Jen Chu, 58 T.C. 598">58 T.C. 598, 58 T.C. 598">608↩ (1972), footnote 1.3. See Williston on Contracts, §14, pp. 27-28, where that treatise indicates all contracts to a greater or less extent are executory. when they cease to be so, they cease to be contracts.↩4. It is significant with respect to the question of intent that, as candidly mentioned in a footnote contained in petitioners' reply brief, "It is fair to state that on March 4, 1966, the petitioners considered the applicability of section 1239↩ to a non-depreciable asset under the existing law so remote that the age of his minor son was unimportant. The whole issue could otherwise have been avoided by delaying the contract date until April 27, 1966." In this regard we have also considered the petitioners' action in reporting the sale as having occurred on March 4, 1966, on their respective joint Federal income tax returns for 1966 and 1967.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625711/	Estate of Herbert B. Miller, Deceased, The United States National Bank of Portland (Oregon), Administrator, d. b. n., c. t. a., Petitioner, v. Commissioner of Internal Revenue, RespondentEstate of Miller v. CommissionerDocket Nos. 28582, 31063United States Tax Court24 T.C. 923; 1955 U.S. Tax Ct. LEXIS 114; August 23, 1955, Filed 1955 U.S. Tax Ct. LEXIS 114">114 Decisions will be entered for the respondent. Three equal partners determined to operate their business in corporate form. Pursuant to a prearranged plan they paid a nominal amount for all the stock, which was no par and of a nominal declared value, of a newly organized corporation, and thereafter transferred to it substantially all the operating assets of the partnership plus $ 50,000 in cash. The corporation issued notes purportedly in exchange for such assets and cash. Held, the sum representing the declared value of the stock was grossly inadequate to operate the business and the low stated value was a fiction; the risk capital actually contributed to the corporation was represented by the operating assets and cash; no bona fide indebtedness was created by the notes; and the true consideration for the cash and operating assets was the stock alone. Payments which the corporation subsequently made purportedly with respect to the notes constituted in fact distributions of taxable dividends to the extent of available earnings and profits, section 115 (a), I. R. C. 1939.Held, further, the above transaction constituted a transfer within section 112 (b) (5), I. R. C. 1955 U.S. Tax Ct. LEXIS 114">115 1939. No gain was recognized to the transferors, and the basis to the transferee corporation of the assets received by it is the same as that in the hands of the transferors immediately prior to the exchange, section 113 (a) (8), I. R. C. 1939. George W. Miller, Esq., and David S. Pattullo, Esq., for the petitioner.John H. Welch, Esq., for the respondent. Raum, Judge. RAUM24 T.C. 923">924 The respondent determined deficiencies in the income tax of Herbert B. Miller for 1946 and 1947 in the amounts of $ 1,882.27 and $ 3,982.35, respectively. The issues are, first, whether certain corporate distributions constituted taxable dividends, and, second, whether the purported sale of various assets to a corporation together with a contribution of cash constituted in reality a transfer governed by the nonrecognition provisions of section 112 (b) (5)1955 U.S. Tax Ct. LEXIS 114">116 and the basis provisions of section 113 (a) (8) of the Internal Revenue Code of 1939.FINDINGS OF FACT.Some of the facts have been stipulated by the parties. Such facts are incorporated herein by this reference as part of our findings.Herbert B. Miller (hereinafter sometimes called decedent) died on February 13, 1948, a resident of Milwaukee, Oregon. His individual income tax returns for the calendar years 1946 and 1947 were filed on the cash basis with the collector of internal revenue for the district of Oregon at Portland, Oregon.The United States National Bank of Portland (hereinafter called petitioner) was duly appointed as executor of decedent's will. Pursuant to the will, the decedent's entire residuary estate, after minor specific bequests, was distributed to petitioner as trustee. Petitioner is still trustee and in possession of the estate. On October 9, 1950, the Circuit Court of the State of Oregon for the County of Multnomah reopened the estate, and petitioner was duly appointed administrator de bonis non, cum testamento annexo. At the time of the trial of this case petitioner was still acting in its capacity as such administrator.Prior to June 1, 1946, decedent1955 U.S. Tax Ct. LEXIS 114">117 and his two brothers, Ernest Miller, Jr. (hereinafter sometimes called Ernest), and Walter M. Miller (hereinafter sometimes called Walter), were equal partners in the paint manufacturing and marketing business in Portland, Oregon, doing business as Miller Paint Co. (hereinafter sometimes called the firm). The assets of the firm consisted of personal property, accounts receivable and cash. The real estate occupied by the firm was rented 24 T.C. 923">925 from Miller Paint and Wallpaper Co., another copartnership composed of the same three persons.Blanche M. Miller is the widow of the decedent. Sometime in 1943 or 1944 she was informed by a physician that her husband had cancer, and could live only a few years longer. Ernest and Walter were informed of this, but none of them told the decedent, and it is not apparent whether he ever became aware of his condition.Ernest and Walter became concerned over the problem of continuity of the business in case of the death or incapacity of a partner. Without revealing anything to the decedent relative to his physical condition, they convinced him that some steps should be taken to insure such continuity.Decedent was the only partner with children. 1955 U.S. Tax Ct. LEXIS 114">118 Ernest was married but had no children, while Walter was unmarried. The three brothers desired an arrangement whereby death or incapacity of a partner would not affect the continuity of the business, the business could carry on free of interference in case of possible complications in the eventual probate of an estate, and an estate could be created for the benefit of a decedent's family in case of his death. In addition, Ernest wished to leave his share of the business to some employees without disturbing management and control.In late 1945 the partners conferred with trust officers of the petitioner as to the best method to accomplish the ends sought, and were advised that a trust could be created. Independent counsel, however, was also consulted, and advised that the corporate form would best serve their purposes. They decided to form a corporation and transfer to it assets necessary to carry on the business, but to take the cash of the firm into their hands individually. In the years immediately prior to June 1, 1946, earnings had been high, and no evidence was presented suggesting any doubts at that time that the prosperous condition of the business would continue.In 1955 U.S. Tax Ct. LEXIS 114">119 accordance with the plan to incorporate the business, Miller Paint Co., Inc. (hereinafter called the corporation), was organized pursuant to the laws of the State of Oregon on or about May 13, 1946. The charter was received on May 18, 1946. Total authorized capital consisted of 300 shares of no-par stock. Each partner subscribed for 100 shares at a stated value of $ 3.50 per share. The shares were issued on May 20, 1946. Oregon law requires that a corporation with no-par stock have a capital investment of at least $ 1,000. Each partner paid the stated value of the stock subscribed for by him in cash from his respective personal bank account.The first meeting of the board of directors was held on May 20, 1946. It was resolved that the corporation borrow $ 50,000 from the three partners and execute a 3-year promissory note therefor bearing interest at 5 per cent per annum. This resolution was carried out 24 T.C. 923">926 on June 1, 1946. At another meeting, held on June 3, 1946, it was resolved that the corporation purchase from the partners at inventory value substantially all the operating assets of the firm. The fair market value of such assets was $ 86,622.49, and a note in such1955 U.S. Tax Ct. LEXIS 114">120 amount was issued, payable in annual installments of no less than $ 20,000, and bearing interest at 5 per cent per annum.Another resolution called for the purchase by the corporation of certain intangible assets of the firm, subject to liabilities. The net fair-market value thereof was $ 37,948.77, and a note in that amount was given to the partners. The note bore interest at 5 per cent per annum and was payable 6 years from date.Each of the foregoing notes was issued to the partners in their joint names. The partners at all times considered their interests in the assets and in the notes received therefor to be equal.The corporation executed and delivered a chattel mortgage encumbering its personal property as security for the notes in the amounts of $ 86,622.49 and $ 37,948.77, which had been issued in exchange for the tangible and intangible assets, respectively, of the firm.As a result of the foregoing, the corporation acquired a substantial amount of cash and the business assets of the firm, and succeeded to the latter's business. The tangible assets so acquired were as follows:Fair market value onItemJune 1, 1946Inventory$ 60,122.49Machinery and equipment15,000.00Furniture and fixtures3,000.00Delivery equipment7,500.00Office equipment1,000.00Total$ 86,622.491955 U.S. Tax Ct. LEXIS 114">121 The adjusted basis of the firm in the above assets on June 1, 1946, was less than the fair market value thereof. The firm reported a gain in the amount of $ 6,683.68, which was proportionally reflected and reported as a long-term capital gain on the individual income tax returns of the partners.Other assets of a net fair-market value of $ 37,948.77 acquired by the corporation were as follows:ItemAmountPetty cash and change fund$ 598.00Accounts receivable89,328.54Unexpired insurance636.40Total $ 90,562.94Less: Accounts payable52,614.17Balance $ 37,948.7724 T.C. 923">927 At a meeting of the board of directors on July 31, 1946, it was resolved that the foregoing three notes be canceled, and that in lieu thereof new notes be issued separately to each partner in the amount of his one-third interest.Pursuant to the above resolution, the notes for $ 50,000 and $ 37,948.77 were canceled, and a note in the face amount of $ 29,316.26 was issued to each partner. At the same time the note for $ 86,622.49 was canceled and each partner received a note for $ 28,874.16. Of the new notes issued, the latter were payable in annual installments of no less than $ 1955 U.S. Tax Ct. LEXIS 114">122 6,666.66, while the former were payable 6 years from date. All bore interest at 5 per cent per annum. By resolution of the board of directors, the previously executed chattel mortgages were made to stand as security for the payment of the new notes. The books of the corporation have at all times carried the amounts of these notes as a "Notes Payable" liability.In 1946 and 1947 decedent received amounts designated as payments upon the principal of the note held by him in the face amount of $ 28,874.16. These payments amounted to $ 7,500 in 1946 and $ 10,000 in 1947. Equal amounts were paid to Ernest and Walter on their respective notes, and a corresponding reduction in the "Notes Payable" account was taken on the books of the corporation. No dividend has ever been formally declared by the corporation despite substantial earnings.The principal purpose in forming the corporation was to transfer to it the business conducted up to that time by the firm together with a substantial amount of cash. No material change in the investment of the partners was contemplated, except that they would now be carrying on the same business in corporate form.The initial creation of the corporation1955 U.S. Tax Ct. LEXIS 114">123 with stock of a declared value of $ 1,050 was viewed by the partners as merely the first step in a single plan, the over-all objective whereof was to transfer the paint business to the corporation so that they could continue to operate the business in a new form. The several transfers set forth above, though occurring on different days, were in fact parts of a single integrated transaction.The cash and all other assets transferred to the corporation in May and June of 1946 were intended by the partners as a permanent investment. There was no bona fide intention to effect a sale or dispose of the business in any other manner. The total cash and total value of assets transferred to the corporation is the true measure of the capital investment of the partners in the corporation, and was the actual consideration paid for the stock in substance, though not in form. The notes did not create a bona fide debtor-creditor relationship. No business reason dictated the formal method of capitalization undertaken. The payments at issue were received by decedent 24 T.C. 923">928 as a stockholder, not as a creditor, and constituted taxable dividends to the extent of available earnings and profits. 1955 U.S. Tax Ct. LEXIS 114">124 The foregoing transaction was in substance a transfer of property solely in exchange for stock of the transferee corporation, and is governed by the provisions of section 112 (b) (5) of the Internal Revenue Code of 1939. No gain was recognizable to the transferors and the basis to the corporation is the same as that in the hands of the transferors prior to the exchange, pursuant to section 113 (a) (8) of the Internal Revenue Code of 1939.OPINION.While two issues have been separately stated, they are actually different aspects of the same question. Both depend upon the reality of the purported indebtedness evidenced by the notes.It should be noted at the outset that this is not a case involving "hybrid securities," a term generally used to describe corporate instruments bearing indicia both of evidence of indebtedness and of capital investment, where the problem is one of determining whether the terms of the instrument as read create an effect more like that of an investment or more like that of a debt. See, e. g., Universal Oil Products Co. v. Campbell, 181 F.2d 451, 476-477 (C. A. 7), certiorari denied 340 U.S. 850">340 U.S. 850;1955 U.S. Tax Ct. LEXIS 114">125 Commissioner v. J. N. Bray Co., 126 F.2d 612 (C. A. 5); Commissioner v. Palmer, Stacy-Merrill, Inc., 111 F.2d 809 (C. A. 9); Commissioner v. Proctor Shop, 82 F.2d 792 (C. A. 9); Mullin Building Corporation, 9 T.C. 350, affirmed per curiam 167 F.2d 1001 (C. A. 3); Charles L. Huisking & Co., 4 T.C. 595.The form of the notes in the instant case presents no such problem. These notes, standing by themselves, are clear evidences of indebtedness. As we understand respondent's position, it is that there was no genuine indebtedness underlying the notes, that the consideration purportedly given for the notes was in fact the true risk capital of the corporation and must be treated as reflected in the stock rather than the notes which must be disregarded. In short, it is another way of saying that substance must prevail over form, and the substance of the transaction at issue was that of a capital investment for stock and not a sale for notes. Our analysis of the facts forces us to agree with1955 U.S. Tax Ct. LEXIS 114">126 the conclusions of the respondent.The form of a transaction has some evidentiary value, but it is not conclusive. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465. The same is true of bookkeeping entries. Doyle v. Mitchell Brothers Co., 247 U.S. 179">247 U.S. 179. The crucial factor here is not the formal characterization of these notes, but, rather, the proper characterization of the underlying transaction and the relationship in fact created thereby. Cf. 24 T.C. 923">929 Gooding Amusement Co., 23 T.C. 408, on appeal (C. A. 6); Kraft Foods Co., 21 T.C. 513, on appeal (C. A. 2); 1432 Broadway Corporation, 4 T.C. 1158, affirmed per curiam 160 F.2d 885 (C. A. 2). In Kraft Foods Co., supra, we said (21 T. C. at p. 594):we do not have here a case in which the instruments involved had some of the characteristics of both debentures and certificates of stock * . In the instant case, all of the requirements of form and ritual necessary to make the instruments debentures1955 U.S. Tax Ct. LEXIS 114">127 were meticulously met. They were either evidences of indebtedness and effective as such, or, being purely ritualistic and without substance, were futile and ineffective to make the annual payments interest.The intention of the parties is controlling, and such intention is a fact to be gleaned from the entire record. Cf. Tribune Publishing Co., 17 T.C. 1228; Ruspyn Corporation, 18 T.C. 769; Isidor Dobkin, 15 T.C. 31, affirmed per curiam 192 F.2d 392 (C. A. 2); Lansing Community Hotel Corporation, 14 T.C. 183, affirmed per curiam 187 F.2d 487 (C. A. 6); Sam Schnitzer, 13 T.C. 43, affirmed per curiam 183 F.2d 70 (C. A. 9), certiorari denied 340 U.S. 911">340 U.S. 911; Cleveland Adolph Mayer Realty Corporation, 6 T.C. 730, reversed on another issue 160 F.2d 1012 (C. A. 6); Joseph B. Thomas, 2 T.C. 193.In United States v. Title Guarantee & Trust Co., 133 F.2d 9901955 U.S. Tax Ct. LEXIS 114">128 (C. A. 6), where it was held that under the facts of that case the intention of the parties was to create a true debtor-creditor relationship, the court said at page 993:The essential difference between a stockholder and a creditor is that the stockholder's intention is to embark upon the corporate adventure, taking the risks of loss attendant upon it, so that he may enjoy the chances of profit. The creditor, on the other hand, does not intend to take such risks so far as they may be avoided, but merely to lend his capital to others who do intend to take them. * * [Italics in original.]Applying the foregoing criteria to the facts before us, we must conclude that we have here no bona fide intention to effect a true debtor-creditor relationship. The partners at all times intended to be investors in the corporate business, as they had been in the firm business, to the full extent of all value contributed by them. The cash and other property transferred to the corporation was deemed by them and was in fact necessary for the successful operation of that business. Cf. Hilbert H. Bair, 16 T.C. 90, affirmed 199 F.2d 5891955 U.S. Tax Ct. LEXIS 114">129 (C. A. 2). The contributions which petitioner contends created an indebtedness constituted substantially everything the corporation owned 1 and which it required in order to commence doing business 24 T.C. 923">930 and to remain in business. It was at all times intended that the value of such contributions should remain indefinitely at the risk of the going business as part of its permanent capital structure. To be sure, the partners undoubtedly expected, as contended by petitioner, earnings to be sufficiently high that in a relatively short time they would be able to withdraw sums approximating in amount their original capital investment without impairing necessary capital; and subsequent events seem to prove this expectation to have been justified. This, however, does not alter the fact that everything transferred to the corporation in May and June of 1946 was intended to remain therein as part of its permanent capital structure; only surplus earnings, to be subsequently acquired as a result of successful operations of the business, were in fact intended to be withdrawn. Cf. Gregg Co. of Delaware, 23 T.C. 170, on appeal (C. A. 2). Indeed, petitioner's1955 U.S. Tax Ct. LEXIS 114">130 contention proves too much. It demonstrates plainly to us that the partners intended to use the notes as a device to siphon subsequent earnings from the enterprise while leaving the basic business assets with the corporation. Purported payments upon the notes in such circumstances would be in substance nothing more than the distribution of dividends to the stockholders, who held the notes in the same proportion as their stockholdings.Although the notes in form are absolute, and call for fixed payments, we have no doubt, from a reading of the entire record, that no payment 1955 U.S. Tax Ct. LEXIS 114">131 was ever intended or would ever be made or demanded which would in any way weaken or undermine the business. As we said in Gooding Amusement Co., supra, 23 T. C. at page 418:There is nothing reprehensible in casting one's transactions in such a fashion as to produce the least tax * * . On the other hand, tax avoidance will not be permitted if the transaction or relationship on which such avoidance depends is a "sham" or lacks genuineness. The concept that substance shall prevail over form has likewise been enunciated in numerous cases. * In the instant case, in the matter of form, the notes in question present no problem of interpretation. The formal criteria of indebtedness are unquestionably satisfied. The notes on their face are unconditional promises to pay at a fixed maturity date a sum certain and the payment of interest thereon is not left to anyone's discretion. The instruments in form are pure evidences of indebtedness.But we are not limited in our inquiry to the instruments themselves. We may look at all the surrounding circumstances to determine whether the real intention of the parties is consistent with the purport of the instruments. 1955 U.S. Tax Ct. LEXIS 114">132 * * The most significant aspect of the instant case, in our view, is the complete identity of interest between and among the three note holders, coupled with their control of the corporation * . It is * * unreasonable to ascribe to the husband petitioner * * * an intention at the time of the issuance of the notes ever to enforce payment of his notes, especially if to do so would either 24 T.C. 923">931 impair the credit rating of the corporation, cause it to borrow from other sources the funds necessary to meet the payments, or bring about its dissolution * In Mullin Building Corporation, supra, we said (9 T. C. at p. 355):If the debenture stockholders are entitled to enforce payment * * upon default * * * and should do so, petitioner's only income-producing asset * * * would either have to be liquidated or encumbered * * . If the [asset] should be liquidated, the flow of * * income therefrom would cease; or, if the [asset] should be mortgaged * * * petitioner would pay out a large part of its earnings in interest and for retirement of principal to its mortgage creditor * * . Such a course would be too irrational1955 U.S. Tax Ct. LEXIS 114">133 * * * to merit * * * contemplation * * . Such a course is not within the realm of sane business practice and we are convinced that it was not intended.Similarly, in the case at bar, in the light of all the surrounding facts and circumstances, it is not reasonable to accept the absoluteness in form of the notes at face value. To do so would be to impute a willingness on the part of the partners to endanger their chief source of livelihood.And see 1432 Broadway Corporation, supra, where we said (4 T. C. at p. 1164):The debentures are in approved legal form, and, if their legal attributes alone were determinative of the character of the interest accruals, there would be little room for doubt that they were the indebtedness they purport to be. [Citing.] But, for tax purposes, their conformity to legal forms is not conclusive. Although a taxpayer has the right to cast his transactions in such form as he chooses, * * the Government is not required to acquiesce in the taxpayer's election of form as necessarily indicating the character of the transaction upon which his tax is to be determined. * * * The Government is not1955 U.S. Tax Ct. LEXIS 114">134 bound to recognize as the substance or character of a transaction a technically elegant arrangement which a lawyer's ingenuity has devised. * The record before us satisfies us that the partners were in fact investing, and not selling their business for notes. Formal capital was nominal in amount, and grossly inadequate in view of the normal needs of the business operations anticipated. The partners had been in the same business for many years, and we are satisfied that they were well aware of this inadequacy.We do not have to decide here whether inadequate capitalization standing alone justifies the treatment of amounts alleged to represent indebtedness as invested capital. Cf. Erard A. Matthiessen, 16 T.C. 781, affirmed 194 F.2d 659 (C. A. 2). At any rate, it at least invites close scrutiny. Alfred R. Bachrach, 18 T.C. 479, affirmed per curiam 205 F.2d 151 (C. A. 2). Here the purported indebtedness arose as a result of pro rata advances by all the shareholders; it was created at the time of incorporation when the need for substantial additional permanently1955 U.S. Tax Ct. LEXIS 114">135 invested capital was apparent to the stockholders; all of the stock of the corporation was closely held 24 T.C. 923">932 by three brothers who had also been partners in the business which was being incorporated; and we can find no business purpose other than hoped-for avoidance of taxes necessitating a predominant debt structure and capital stock of a nominal declared value. Isidor Dobkin, supra;Swoby Corporation, 9 T.C. 887; Edward G. Janeway, 2 T.C. 197, affirmed 147 F.2d 602 (C. A. 2). Cf. Ruspyn Corporation, supra;Clyde Bacon, Inc., 4 T.C. 1107.In the Dobkin case, supra, we said (15 T. C. at p. 32):Ordinarily contributions by stockholders to their corporations are regarded as capital contributions that increase the cost basis of their stock, * * Especially is this true when the capital stock of the corporation is issued for a minimum or nominal amount and the contributions which the stockholders designate as loans are in direct proportion to their shareholdings. Edward G. Janeway, supra.1955 U.S. Tax Ct. LEXIS 114">136 When the organizers of a new enterprise arbitrarily designate as loans the major portion of the funds they lay out in order to get the business established and under way, a strong inference arises that the entire amount paid in is a contribution to the corporation's capital and is placed at risk in the business * The State of Oregon requires that corporations with no-par stock have at least $ 1,000 formally designated as invested capital. Ore. Comp. Laws, sec. 77-228. Petitioner admits on brief that one of the purposes of the partners was to "limit the capital of the company to a bare minimum allowed by the corporation laws of the State of Oregon." While we would have so concluded independently, the above admission makes it even more apparent that the amount of $ 1,050 formally designated as invested capital was totally unrelated to any estimate of the actual need for capital investment, and was selected as the lowest round figure conveniently divisible into three equal parts which would satisfy State law. That amount bore no relation to the amount the partners knew would have to be permanently tied up in the business, and is not a bona fide measure of their capital investment. 1955 U.S. Tax Ct. LEXIS 114">137 As we said in Sam Schnitzer, supra, 13 T. C. at page 62:The testimony of petitioner's witnesses, * * * that the shareholders never intended to invest more than $ 187,800 in stock is intelligible only as showing an agreement about mere form.Petitioner has attempted to convince the Court that the denominated capitalization was not in fact inadequate by emphasizing the prior history of high earnings and the promising future that faced the business in 1946. The answer to this argument is also found in Sam Schnitzer, supra, where we said at page 61:Petitioners argue that large operation profits were reasonably anticipated * * . In support they stress the mill's substantial earnings in recent years and the unexpected difficulties which they encountered in erecting it. This argument lacks persuasive force. Even if the corporation had paid off 24 T.C. 923">933 the balance in its open account with [the partnership] from earnings, such payment would still have partaken of the character of dividend distributions on risked capital invested in the plant. A corporation's financial structure in which a wholly inadequate part of the1955 U.S. Tax Ct. LEXIS 114">138 investment is attributed to stock while the bulk is represented by bonds or other evidence of indebtedness to stockholders is lacking in the substance necessary for recognition for tax purposes, and must be interpreted in accordance with realities * We do not deem it a distinguishing feature that in the Schnitzer case the expectation of high earnings was initially disappointed whereas in the case at bar it was fully satisfied. The language of that case indicates that such fact would have made no difference, and we agree that it should not.Petitioner has cited John Kelley Co. v. Commissioner, 326 U.S. 521">326 U.S. 521. That case, however, is of no aid to petitioner, for the very important factor of inadequate capitalization was found to be absent there. The Court did allude to just the situation we have here, however, in language which can be of no comfort to petitioner, saying at page 526:As material amounts of capital were invested in stock, we need not consider the effect of extreme situations such as nominal stock investments and an obviously excessive debt structure.See also Ruspyn Corporation, supra, 18 T. C. at p. 777;1955 U.S. Tax Ct. LEXIS 114">139 Swoby Corporation, supra, 9 T. C. at p. 893; Erard A. Matthiessen, supra, 16 T. C. at p. 785; Edward G. Janeway, supra, 2 T. C. at p. 202; R. E. Nelson, 19 T.C. 575, 579; Sheldon Tauber, 24 T.C. 179, is distinguishable, in that the Court there was of the opinion that the facts showed no undercapitalization.The record in the instant proceeding satisfies us that there was no valid business purpose which dictated the gross undercapitalization here present. There seems to be no question that sound reasons existed for forming a corporation to carry on the business, which had been operating up to that time as a copartnership, but every advantage sought through incorporation, except that of the avoidance of taxes, could have been accomplished with equal facility and assurance of success by the more normal method of the issuance of capital stock of a par or declared value more nearly commensurate with the total amount permanently contributed to the corporation, and with which it was expected thereafter to conduct its affairs. In Mullin Building Corporation, supra,1955 U.S. Tax Ct. LEXIS 114">140 the point was disposed of by saying (9 T. C. at p. 358):Petitioner claims that the purpose * * was to satisfy James Mullin's desire to establish a steady income for his family and improve the sales company's credit position. The creation of petitioner accomplished these purposes just as fully by treating the debenture stock as an investment creating a proprietary interest as by treating it as an evidence of debt. * * * It was not necessary to create a 29 to 1 debt to capital ratio * * * to accomplish these ends. * * 24 T.C. 923">934 It may be quite true that the discovery of cancer in the decedent motivated the formation of the corporation so as to provide for continuity of the business in the event of death of one of the three brothers or in other circumstances. There was thus adequate business reason for incorporating the enterprise. But there was no business reason apparent on this record that called for such an absurdly low capitalization as petitioner asks us to accept at face. The argument that there was a business reason for incorporating the enterprise is merely a smoke screen that may be calculated to hide the absence of any business reason for1955 U.S. Tax Ct. LEXIS 114">141 attempting to achieve the result in the form that was employed.It has not escaped our attention that the notes in question are secured, and were not expressly subordinated to obligations of other creditors. Viewing, however, as we must, all the surrounding facts, this circumstance is not impressive. This, in our opinion, is again a matter of perfection of form, wherein what was in fact capital investment has been garbed in the raiment of indebtedness. In addition, we have serious doubts as to the extent to which such security would be upheld as against the claims of outside creditors, should the attempt to do so ever have to be made, as in bankruptcy. In Arnold v. Phillips, 117 F.2d 497 (C. A. 5), certiorari denied 313 U.S. 583">313 U.S. 583, a deed of trust was made in favor of the dominant stockholder as security for advances already made and to be made in the future. The stockholder later foreclosed on his security. Subsequently, the deed of trust and foreclosure were set aside by the bankruptcy court, even in the absence of fraud, on the ground that there was an inadequacy of original capital, of which the stockholder was1955 U.S. Tax Ct. LEXIS 114">142 aware. The advances were treated as stock subscriptions, and payments thereon, designed as interest, were held to constitute dividends.Since we have concluded that there was no indebtedness, it must follow that all payments purportedly made on the notes, including those denominated as payments of principal, must in fact constitute taxable dividends within section 115(a) of the Internal Revenue Code of 1939 to the extent of available earnings and profits. As we said in Gooding Amusement Co., supra, 23 T. C. at page 421:Since the notes did not, in reality, represent creditor interests, the payments made to the stockholders * * * must be considered not as payments of a bona fide indebtedness of the corporation, but as distributions of corporate profits to the stockholders as stockholders and not as creditors. Therefore, we conclude that they constituted dividends under the broad language of Section 115(a) * * * The fact that the corporation, or rather the petitioner, may have had no intention of distributing earnings under the guise of discharging debts is immaterial.For the foregoing reasons and on the strength of the above authorities, we decide1955 U.S. Tax Ct. LEXIS 114">143 the first issue in favor of the respondent.24 T.C. 923">935 The second issue is the applicability of section 112 (b) (5) of the Internal Revenue Code of 1939. This issue must be resolved in favor of the respondent for reasons that have already been set forth as determinative of the first issue. We have previously concluded that there was no true debt, and that all the assets transferred to the corporation in May and June of 1946 represented invested capital. The true consideration for this transfer consisted of the shares of capital stock of the corporation, all of which were issued to the transferors in proportion to their respective interests in the property transferred by them. The notes are a mere sham, and have no reality. The transaction, thus viewed, falls squarely within the provisions of section 112 (b) (5). "Since we have found * * * the notes * * * in fact representative of risk capital invested in the nature of stock, the 'solely in exchange for stocks or securities' requirement of section 112 (b) (5) was, in our considered judgment, satisfied." Gooding Amusement Co., supra, at p. 423."Property" includes money, so the fact that cash as well1955 U.S. Tax Ct. LEXIS 114">*144 as business assets were contributed cannot affect this result. Halliburton v. Commissioner, 78 F.2d 265 (C. A. 9); George M. Holstein, III, 23 T.C. 923.Section 112(b)(5) is applicable, and the basis of the assets transferred to the corporation is, pursuant to section 113 (a) (8) of the Internal Revenue Code of 1939, the same as that in the hands of the transferors, no gain having been properly recognized with respect thereto on the transfer. Accordingly, the amount of earnings and profits available for distribution as a dividend, and the amount of the deficiency are as asserted by the respondent in his notice.Decisions will be entered for the respondent. Footnotes1. In form, the $ 50,000 cash appeared to come from the partners personally. However, the evidence discloses that the partnership had a substantial amount of cash and that such cash was taken out by the partners prior to the transfer of partnership assets to the corporation. It seems quite clear that the $ 50,000 cash represented in substance that portion of the partnership cash that the partners regarded as necessary to operate the business.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625714/	APPEAL OF JULIUS and REBECCA B. SHAFER.Shafer v. CommissionerDocket No. 1817.United States Board of Tax Appeals2 B.T.A. 640; 1925 BTA LEXIS 2323; September 28, 1925, Decided Submitted June 20, 1925. 1925 BTA LEXIS 2323">2323 Where partners, who invested separate property in a mercantile business, have agreed upon salaries which are reasonable in amount, held, under the laws of the State of Washington, that the distributive share of the partnership profits, in excess of such salaries, is not community property. Harold Preston, Esq., for the taxpayers. A. Calder Mackay, Esq., for the Commissioner. PHILLIPS, 2 B.T.A. 640">641 Before PHILLIPS, GRAUPNER, and TRAMMELL. Taxpayers appeal from the determination by the Commissioner of deficiencies in income tax as follows: YearJulius ShaferRebecca B. Shafer1919$6,274.62$200.00192016.421 11.561921824.211 631.417,115.251 442.97Taxpayers allege that the Commissioner erred in holding that the distributive share received from Shafer Bros., a partnership, is the separate income of Shafer and not community property, as claimed by the taxpayers. No part of the deficiency for 1919 asserted against Mrs. Shafer is due to this ruling, and the effect of disallowing the determination of the Commissioner would be to increase the deficiency due from her while decreasing1925 BTA LEXIS 2323">2324 the amount determined to be due from Shafer. FINDINGS OF FACT. For many years prior to 1919 Shafer and his brother were partners engaged in the retail clothing business in Seattle. The taxpayers were married on February 9, 1919. At that time the capital invested in the partnership was over $150,000 in excess of indebtedness and Shafer had a two-thirds interest. The partnership had been in business in a good location for about 20 years, had built up a good clientele and business reputation, and its credit was good. It purchased most of its goods on trade acceptances due in from 30 to 90 days. The opening inventories, purchases, and sales for the years in question were reported in its tax returns as follows: YearOpening inventoryPurchasesSales1919$152,336.67$260,524.16$502,804.511920155,848.70169,363.70352,100.741921100,024.00162,065.15431,933.06The business was closed out in December, 1921, and there was no closing inventory for that year. In its income-tax returns for 1919 and 1920 the partnership claimed as a deduction for salaries to the partners $12,000 paid to Julius Shafer and $9,000 to his brother. The net1925 BTA LEXIS 2323">2325 profit after deducting these salaries and the other expenses is divided on the returns 2 B.T.A. 640">642 on the basis of two-thirds to Julius Shafer and one-third to his brother. In filing his original return for 1919 Shafer set out such sum of $12,000 as salary and reported his share in the balance of the partnership profits as a separate item of income. In an amended return, verified in April, 1921, for the purpose of setting out income on a community basis, the distinction between salary and partnership profits was preserved. In 1920 the item of salary was again reported by taxpayer separately from the balance of the partnership income, both items being reported on a community property basis. In 1921 the profits of the partnership were small and no salaries were claimed in the partnership return or reported on the return of Shafer. During 1919 Mrs. Shafer spent considerable time with her husband at the store, especially in the evenings, checking over stock on hand, invoices of goods sold and purchased, consulting and advising with him concerning purchases to be made, quality and quantity of particular lines of goods to be purchased and otherwise assisting in the management of the1925 BTA LEXIS 2323">2326 business. During 1920 her participation in the business was small, but during 1921 she again devoted considerable time and effort to the business. Prior to her marriage Mrs. Shafer had six years of merchandising and commercial experience. The Commissioner permitted the taxpayers to report the so-called salary as community income, and concerning this no question has been raised. Shafer's share in the balance of the partnership profits has been included by the Commissioner as the separate income of Shafer, and the deficiency was determined upon that basis. DECISION. The determination of the Commissioner is approved. OPINION. PHILLIPS: This appeal presents a most interesting question under the community property laws of the State of Washington. For several years prior to 1919 Shafer and his brother were partners conducting a retail clothing business in Seattle and had built up a valuable business. Aside from the good will, the partners had an equity of over $150,000, represented by net assets in excess of liabilities. Julius Shafer had a two-thirds interest in the business. Shafer married in 1919; thereafter, his wife contributed her parttime services to the business1925 BTA LEXIS 2323">2327 in addition to the full-time services rendered by Shafer. Taxpayer claims that thereafter all, or an unseverable part, of the profits of the business arose from the efforts 2 B.T.A. 640">643 of Shafer and his wife; that such profits are community property and taxable equally to husband and wife. Taxpayer goes further and contends that whether Mrs. Shafer's services contributed to the income is immaterial; that since the profits, or an unseverable part of them, arose from the services of Shafer, such profits are community property. The latter contention we are not called upon to decide, for we are of the opinion that Mrs. Shafer's services to the partnership were valuable and contributed, at least to some extent, to its earnings. Nor are we called upon to decide whether husband and wife who are residents of the State of Washington may make separate returns, including one-half of the community income in each return. This is conceded by the Commissioner, who has ruled that a payment of $12,000 made by the partnership to Shafer, and entered on the partnership books as salary, is community property and should be so returned. The sole question is whether Shafer's portion of the balance1925 BTA LEXIS 2323">2328 of the profits, in excess of amounts taken out of the business by the partners as salaries, so to be deemed community property. The Washington statutes provide: Property and pecuniary rights owned by the husband before marriage, * * with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of his wife, and he may manage, lease, sell, convey, encumber, or devise by will, such property without the wife joining in such management, alienation, or encumbrance, as fully and to the same effect as though he were unmarried. The next section provides likewise with respect to the wife's separate property: Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a like power of disposition as he has of his separate personal property, except he shall not devise by will more than one-half thereof. A number of rules have been established by the Supreme Court of Washington for determining whether property is separate or community. These are stated in1925 BTA LEXIS 2323">2329 , as follows: (1) The presumption is that property acquired during coverture is community property; * * and the burden is upon the person claiming it to be separate property to establish that as its character. (2) The status of property is to be determined as of the date of its acquisition. (3) If property is once shown to have been separate property, the presumption continues that it is separate until overcome by evidence. 2 B.T.A. 640">644 (4) The rents, issues, and profits of separate property remain separate property and profits resulting from money borrowed on separate credit are separate property. (5) Separate property may lose its identity as such by being consolidated with community property. These rules appear to be well established, but it is the application to particular facts which proves difficult. Taxpayer contends that, since the profit from the partnership business resulted in part from the capital employed and from the good will, both admittedly the separate property of Shafer, and in part from the services rendered by Shafer and his wife, which is community property, this appeal falls within rule (1) 1925 BTA LEXIS 2323">2330 set out above and that, as the Commissioner has failed to show how much of such profits was separate property, it must all be considered as earnings of the community. The Commissioner, on the other hand, relies upon rules (3) and (4) set out above. An examination of the decisions of the Supreme Court of Washington cited by counsel shows three which have a direct bearing upon the question involved. In , it appeared that James Buchanan invested $400 and his wife $500 in stock of a lumber company of which Buchanan became active manager. In the 10-year period from the date of investment to the death of Mrs. Buchanan, the investment increased twenty-fold in value. The court found that although he received a salary, the growth of the business and the accumulation of profits was the result of the personal efforts of Buchanan, and much more so than the result of the small amount of capital invested at the beginning. In holding the stock to be community property the court said: But, where a small original investment of separate funds is united with the personal efforts of a member of the community, and therefrom profits and gains1925 BTA LEXIS 2323">2331 to the extent of some twentyfold are returned, the property being personal and undergoing many changes, we know of no rule by which the question of such gains being community or separate property can be determined, other than by taking into account the relative contributing force of the original investment and the personal efforts of a member of the community. * * These observations * * * lead to the conclusion that the gains and profits produced by the personal efforts of appellant, though added to, in a measure, by the original investment, become community property. We agree, however, with the trial court that the funds, though at the beginning separate property of appellant and Sarah A. Buchanan, in the proportion of four-ninths and five-ninths, which purchased the stock in the first instance, have during the ten years of coverture become so intermingled with community property and lost their identity as separate property that all the stock and interest * * * became community property. , was an action by a creditor to subject certain property to a judgment against Hoitt, collectible only 2 B.T.A. 640">645 from his separate property. 1925 BTA LEXIS 2323">2332 It appeared that in 1918, prior to his marriage, Hoitt borrowed $8,000 from his mother and established a bakery. Immediately thereafter he married and, with the aid of Mrs. Hoitt, he so conducted his business that by July 1, 1919, he repaid his mother the amount of her loan. He thereafter purchased new equipment for $6,000, and out of the business paid the expenses of himself and family and had in the bank $4,000, which had been garnisheed in that action. The court says: The complication arises in this case from the fact that the separate property did not produce in and of itself all the profits which accrued to the business. These profits were increased by the labor and efforts of the husband and wife, whose earnings after their marriage of course constituted community property. The difficulty here is to apportion those profits between the original separate property and the subsequent community earnings. The court apportioned eight-fourteenths of the value of the plant and equipment as the separate property of Hoitt. It found it impossible to apportion the bank account and held it to be community property. Commenting on its decision in the Buchanan case, supra,1925 BTA LEXIS 2323">2333 the court says: As we read it, that decision merely holds that in the case before the court it was impossible to say with any degree of certainty what proportion of the income of the community had been contributed by the original separate property. In the case before us, although the exact ratio between the return from the separate property investment and the return from the community efforts is not subject to mathematical determination, yet we are satisfied that at least the amount which we have found was used in paying off the separate indebtedness was the earning from the separate property, and the division between the separate and community nature of the present business is subject to what appears to us a mathematical determination. In , it appeared that decedent purchased all the stock of a corporation from his separate funds and through this corporation he bought and sold property, borrowed money, and generally conducted his business during his lifetime. It was held that the value of the stock represented his original separate investment, together with the rents, issues, and profits thereon. The court distinguished the 1925 BTA LEXIS 2323">2334 Buchanan case on the ground that in that case the original separate investment was so small that it could be ignored, while in the present case there was an original investment of $70,000. "In the Buchanan case the question was asked as to what was the source of the profits and gains; in this case the answer is apparent that it was the separate property of Mr. Brown at the time of his marriage." As we understand these decisions of the Supreme Court of Washington, they lay down the rule that where business income was produced in part by the separate property and in part by the efforts of 2 B.T.A. 640">646 the community, and each of these two factors was substantial, the court will attempt to allocate such earnings; but if it appears that the income is to be attributed primarily to one element, the other element may be disregarded. In this appeal it appears that the income was derived from the purchase and sale of merchandise, purchased with the separate property of Shafer or on the credit of the business. The services rendered were incidental to the profits. Upon this basis there can be no presumption that the profits are to be attributed entirely to the services rendered by1925 BTA LEXIS 2323">2335 the community; that presumption has been overcome by the evidence, and if there is now any presumption it would be that this appeal fell within the decision in , that it was the separate property which was the primary source of the profits. But it is clear that neither presumption reflects the true character of the earnings. If possible, the earnings of the business should be apportioned. Taxpayer has himself fixed an apportionment which the Commissioner has adopted, and we believe correctly. Prior to 1919 Shafer and his brother each took a salary of $10,000 from the business. In 1919 and subsequent years Shafer's salary was $12,000 and that of his brother $9,000. Shafer had a two-thirds interest in the business, and this distribution of salary being on a different basis from earnings, in the absence of proof to the contrary we must assume that it represented the judgment of the two partners of the value of the services rendered, including those rendered by Shafer's wife. Prior to the marriage of Shafer his brother and he each received the same amount; thereafter Shafer received $3,000 more than his brother, which would appear to1925 BTA LEXIS 2323">*2336 be adequate compensation for the services rendered by Mrs. Shafer. Taxpayer also urges that a part of such income was the result of a pledge of the community credit; but since the partnership creditors would be required to first proceed against the partnership assets, and these assets were in all instances sufficient, this contention assumes that a part of such partnership assets must be community property, which is the question we are here called upon to determine. Summarizing our decision, it is that, under the laws of the State of Washington, income arising in part from separate property and in part from community effort should be apportioned; that where an apportionment has been made by the taxpayer which the Commissioner accepts and which appears to be reasonable, such apportionment will not be disturbed. ARUNDELL not participating. Footnotes1. Overassessments. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625716/	WILLIAM TILDEN PELTON HAZARD, KATHARINE HAZARD MOSS AND JESSIE HAZARD LEONARD, EXECUTORS OF THE ESTATE OF LAURA PELTON HAZARD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. IRVING TRUST COMPANY, TRUSTEE UNDER AN INDENTURE OF TRUST OF LAURA PELTON HAZARD, DATED NOVEMBER 27, 1928, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hazard v. CommissionerDocket Nos. 89684, 89685.United States Board of Tax Appeals40 B.T.A. 204; 1939 BTA LEXIS 884; June 30, 1939, Promulgated 1939 BTA LEXIS 884">884 The grantor executed a trust with discretionary power in the trustee to pay the net income therefrom to the grantor, and apply the excess on certain debts of the grantor. Upon liquidation of the debts, all of the net income was distributable to the grantor. The trustee could use corpus to pay off existing, but not future, debts of the grantor. Upon the death of the grantor, corpus was to be held in trusts for the benefit of some of the grantor's children, with remainders over. Held, that the trust was irrevocable and that the value of the corpus does not constitute a part of the grantor's gross estate, within the meaning of section 302(c) and (d) of the Revenue Act of 1926, as amended. Orrin G. Judd, Esq., for the petitioners. Frank M. Thompson, Jr., Esq., for the respondent. DISNEY40 B.T.A. 204">204 These proceedings, consolidated for hearing and report, in Docket No. 89684 involve the redetermination of a deficiency in estate tax in the amount of $46,838.51, and in Docket No. 89685 involve liability for the tax as a transferee. Aside from the transferee liability 40 B.T.A. 204">205 of the petitioner in Docket No. 89685, the sole issue in the proceedings1939 BTA LEXIS 884">885 is whether there should be included in gross estate of the petitioners' decedent the value of the corpus of a certain trust, all other issues raised by the petitioners having been abandoned or settled by stipulation. FINDINGS OF FACT. The petitioners in Docket No. 89684 are the duly qualified executors of Laura Pelton Hazard, who died September 3, 1934, at the age of 71 while a resident of New York City. The petitioner in Docket No. 89685 is the trustee under a certain trust indenture executed by the decedent, Laura Pelton Hazard, on November 27, 1928, the value of the corpus of which at the time of her death being the question in controversy. In 1922 the decedent had property of a value of about $737,500. By the fall of 1928 she had spent about 60 percent of the principal, in addition to income each year of between $55,000 and $75,000, and had incurred a large amount of debts, all principally for general living expenses and advances to some of her children. The rate of her spending would have rendered the decedent destitute within a few years, unless action was taken to preserve her assets from the effects of her own extravagance. In the fall of 1928 the decedent consulted1939 BTA LEXIS 884">886 an attorney for the purpose of securing a loan on a country estate located at Cedarhurst, Long Island. The discussion had on the subject revealed that the decedent's property at that time consisted principally of 16,000 shares of common stock of the Sterling Salt Co., a closely held corporation, all of which, except 100 shares, was pledged as security for various bank loans; 350 shares of stock of the Halite & Northern Railroad Co.; a demand note of the Michiga Salt Works of the face amount of $249,845.93; the country estate in Cedarhurst, which the decedent had endeavored to sell without success; and an inerest in a trust known as the Tilden trust. All of the assets were unmarketable. Only $19,006.21 was eventually realized on the note. After an investigation into, and consideration of, the decedent's financial predicament, the attorney advised her to transfer her property in trust for the liquidation of her debts if she wished to avoid insolvency. The decedent accepted his advice. On November 27, 1928, the decedent executed an instrument transferring the stocks and note to the petitioner in docket No. 89685 in trust for the purpose of holding, managing, investing, and reinvesting1939 BTA LEXIS 884">887 the assets, and any other property transferred to it thereunder, collecting the income therefrom, and: * * * to apply to the use of the Grantor during her life, from time to time, out of the net income such amounts as the Trustee in its sole, absolute and 40 B.T.A. 204">206 uncontrolled discretion may deem necessary or advisable for the best interests of the Grantor, and to apply to the use of the Grantor any balance of such net income by the payment of the debts and obligations set forth in said Schedule "A" or any interest thereon or expenses incidental thereto, and thereafter, when all the debts and obligations set forth in said Schedule "A" have been paid or extinguished, to apply to the use of the Grantor, from time to time, all of the net income therefrom; * * Upon the death of the grantor the corpus was to be divided in equal shares and transferred in trust for the benefit of four of decedent's six children during their lifetime, with provision for other division in the event any child predeceased the decedent, and further distribution upon the termination of the trusts in favor of the children. The trustee was authorized in its discretion to discharge any part or all of the1939 BTA LEXIS 884">888 debts of the decedent set forth in schedule "A" of the trust "by applying the proceeds of the sale, pledge or other disposition of any part or all of the corpus of this trust, notwithstanding any other provision in this agreement inconsistent hereto." Other provisions of the trust deed read as follows: The Trustee is hereby expressly authorized and empowered in its discretion at any time and from time to time to borrow such sums of money as it may deem proper for any purpose or purposes it deems proper as well as for the purpose of paying off, in whole or in part, or otherwise liquidating, the debts and obligations set forth in Schedule "A" hereof, or hereafter incurred by the Trustee, or any interest thereon or expenses incidental thereto; to renew existing or future loans whether contracted by the Grantor or by the Trustee; to these ends to pledge as collateral security any part or all of the principal of the trust fund, including any or all principal redeemed by the payment, liquidation or other disposition of prior loans. * * This agreement and any and all of the provisions thereof and the trust hereby created shall be and are hereby declared to be irrevocable. The1939 BTA LEXIS 884">889 debts set out in schedule "A" of the trust consisted of bank loans in the amount of $157,600 secured by 15,900 shares of common stock of the Sterling Salt Co., unsecured loans of $1,500, and numerous other items aggregating $51,274.68, a total indebtedness of $210,374.68. The provision respecting the renewal of loans was inserted in the trust instrument for the purpose of joining the decedent in case it was necessary to make a new loan to take up an existing loan and her signature was required in connection therewith. Thereafter the real property in Cedarhurst was sold and the proceeds of sale were added to the corpus of the trust. The debts listed in schedule "A" of the trust agreement were paid by the trustee out of principal and income of the trust. No debts incurred by the decedent after the creation of the trust were paid by the trustee out of principal of income of the trust. 40 B.T.A. 204">207 The trustee did not at any time after the execution of the trust deed renew any loans contracted by the decedent or borrow money for the payment of loans other than those listed in the trust. In December 1930 the trustee informed the decedent, in response to a request for about $29,0001939 BTA LEXIS 884">890 to pay debts accumulated by her since the execution of the trust, that it could not provide her with funds in excess of the amount of income of the trust. The decedent enjoyed excellent health at the time the trust was created and thereafter, except for a mild attack of bronchial pneumonia in February 1929, until shortly before her death. In his determination of the deficiency the respondent found that the executors had $24,835.43 available in the estate for the payment of debts and charges, and included the corpus of the trust in gross estate at a value of $432,740.68. OPINION. DISNEY: The respondent concedes that in view of , the grantor's reservation of income does not alone constitute a ground for including the value of the trust property in gross estate and that the fact need only be considered in connection with other evidence of record as indicating a transfer in trust to take effect in possession or enjoyment at or after death. His position is that the trust instrument, read in the light of evidence in connection therewith, indicates a testamentary disposition of property subject to use of income therefrom and1939 BTA LEXIS 884">891 the proceeds of sale of corpus to pay indebtedness of the grantor existing at the time of, and arising subsequent to, the creation of the trust. On this point he contends that any desire on the part of the grantor to protect her property from her own extravagance might furnish a motive for the creation of a trust for her lifetime, but that the accomplishment of such a purpose furnishes no motive for the transfer of the remainder of the trust after her death. Disposition of the corpus of the trust after her death would, he argues, appear to be without a motive, lacking which the natural presumption is that it was in contemplation of death, within the meaning of section 302(d). "The mere purpose to make provision for children after a donor's death is not enough conclusively to establish that action to that end was 'in contemplation of death.'" . Nothing else is relied upon to show that the transfer was made in contemplation of death and the evidence of record establishes that the transfer resulted from motives associated with life, and was not made in contemplation of death. To prevent further spending of principal1939 BTA LEXIS 884">892 in excess of such amount as the trustee in his sole discretion regarded as necessary to satisfy the debts listed in the deed and to conserve what remained of the 40 B.T.A. 204">208 corpus for the production of income for distribution from time to time to the grantor for the remainder of her life, may be said to have been the predominating motive for the creation of the trust. In short, the trust was a means adopted to save the grantor from her own extravagance. The grantor expressly declared the provisions of the deed to be irrevocable. While admitting that the object of the trust was to so arrange the grantor's property as to relieve it from her indebtedness as it then existed and to maintain her without further inroads into the principal, but without any attempt to answer the force of the provision declaring the trust to be irrevocable, the respondent argues that access to the corpus was available to both the trustee and the grantor. The alleged ability of the trustee and the grantor to use the principal of the trust is relied upon by the respondent for inclusion of the value of the trust property in gross estate under section 302(c) upon the ground that the transfer was intended to1939 BTA LEXIS 884">893 take effect in possession or enjoyment at or after death or under the provisions of section 302(d) because of an alleged reservation of power to alter, amend, or revoke the deed. The provision of the indenture, quoted in full in our findings of fact, giving the trustee power to "renew existing or future loans whether contracted by the Grantor or by the Trustee" is said by the respondent to clearly evidence such an intention. We can not agree with his construction of the provision when read with the remainder of the instrument, as he agrees it must be, and other evidence of record. The construction urged by the respondent is not only directly contrary to the provision against revocation, but to the predominating motive for the creation of the trust. Obviously, if the grantor had a right to withdraw corpus to pledge as security for loans, she could by such action, in effect, revoke the trust by bringing the loan value within her reach and thus remove from the trust property with which to produce income to pay debts existing at the time of the creation of the trust, and for her support. We said in 1939 BTA LEXIS 884">894 , that: * * * When the trust instrument was declared to be irrevocable we think that meant irrevocable by any means whatever, whether by a direct revocation or by the exercise of a power reserved under the instrument coupled with the operation of a rule of law such as the rule regarding resulting trusts. * * * The trust empowers the trustee to apply the proceeds of the sale, pledge, or other disposition of corpus in payment of such debts of the grantor as were set forth in the instrument and to borrow, in its discretion, money for any purpose it deemed proper, including the payment of debts of the grantor listed in the trust or thereafter incurred by the trustee. The right given the trustee to renew future loans is consistent with this power. No provision of the deed expressly 40 B.T.A. 204">209 authorizes the grantor to remove corpus from the trust for sale, pledge, or other disposition. The provision authorizing the trustee to "renew existing or future loans whether contracted by the Grantor or by the Trustee" was inserted in the instrument to obtain the grantor's signature on new loans to replace the bank loans outstanding1939 BTA LEXIS 884">895 at the time the trust was created, for the payment of which a substantial part of the corpus was pledged as security. If, as the respondent contends, the trust provision gave the grantor power to pledge corpus as security for future loans, the deed is ambiguous, for such a right to invade principal would be equivalent to a right to revoke and, therefore, directly opposed to the express trust provision against revocation. A reservation by the grantor of a right to use corpus would have defeated the purpose for which the trust was created. In 1930 the grantor sought to have the trustee apply some of the corpus to the payment of debts incurred by her since the creation of the trust and was advised by it that the trusteed property could not be used for that purpose. The attorneys who drafted the trust deed concurred in this interpretation of he instrument. No income or principal was ever used by the trustee to pay debts incurred by the grantor after the execution of the trust. The construction thus placed upon the instrument is entitled to weight in determining its intent, 1939 BTA LEXIS 884">*896 ; ; , and substantiates the construction we have given the deed. The respondent erred in including the value of the corpus of the trust in decedent's estate under the provisions of section 302(c) and (d) of the Revenue Act of 1926, as amended. Without the value of the corpus of the trust, decedent's gross estate was less than debts of the estate, which the parties agree are deductible in computing the net estate. It follows that there is no deficiency in estate tax, and no liability on the part of the trustee as a transferee. Accordingly, Decision will be entered for the petitioners.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625717/	EDWIN J. MARSHALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Marshall v. CommissionerDocket Nos. 52938, 62311, 70430.United States Board of Tax Appeals29 B.T.A. 1075; 1934 BTA LEXIS 1428; February 13, 1934, Promulgated 1934 BTA LEXIS 1428">1428 1. In a former proceeding between the same parties, reported at 19 B.T.A. 1260">19 B.T.A. 1260; affd., 57 Fed.(2d) 633 (so far as material here); certiorari denied, 287 U.S. 621">287 U.S. 621, the point or question litigated and finally determined was whether petitioner made valid gifts to his wife of certain corporate stocks prior to 1926. Held, as to the same stocks involved in the present proceedings, no evidence having been offered to establish a subsequent gift, our original decision is res judicata and the parties are concluded thereby. Tait v. Western Maryland Ry. Co.,289 U.S. 620">289 U.S. 620. 2. As to the corporate stocks not embraced in the former proceeding, which stood in petitioner's name on the books of the issuing corporations, held, the evidence is insufficient to establish that petitioner made valid gifts thereof to his wife subsequent to 1926, and the dividends paid thereon during the taxable years were properly included in petitioner's income. Thomas O. Marlar, Esq., for the petitioner. John H. Pigg, Esq., for the respondent. TRAMMELL 29 B.T.A. 1075">1075 OPINION. TRAMMELL: These are consolidated proceedings1934 BTA LEXIS 1428">1429 for the redetermination of deficiencies in income tax as follows: Docket No.YearDeficiency529381927$1,635.2452938192818,031.776231119294,086.397043019304,238.0529 B.T.A. 1075">1076 The issue, broadly stated, involves the question whether petitioner made a completed gift to his wife of certain corporate stocks prior to or during the taxable years. In the returns of petitioner's wife for these years, she reported dividends received on the stocks in question, together with capital gain derived from the sale of certain stocks, and deducted capital loss sustained on the sale of other stocks. In computing the deficiencies respondent treated the stocks as belonging to the petitioner, including in his income the dividends and capital net gain and allowing the capital net loss as a deduction. Petitioner assails the determinations of the respondent on the ground that in or prior to the taxable years he had made valid gifts of all of said stocks to his wife. Certain stocks involved in the present proceedings were also involved in a former proceeding, and as to these respondent contends that our former decision is res judicata and that petitioner1934 BTA LEXIS 1428">1430 is concluded thereby. In respect of the balance of the stocks involved in controversy here, respondent contends that the acts of the petitioner fell measurably short of effecting completed gifts to his wife. We will therefore consider the issued as it relates to the two classifications of stock indicated. Our report in the prior proceeding was promulgated May 29, 1930, at . The taxable years were 1923, 1924, 1925, and 1926, while the taxable years in the present case are 1927, 1928, 1929, and 1930. The parties in both cases are the same. In the earlier case the petitioner contended that he had made a valid gift of certain corporate stocks to his wife, the dividends from which respondent had included in petitioner's income and taxed to him. We there held that the evidence was insufficient to establish that the petitioner had made a completed gift to his wife of the stocks in controversy. and approved respondent's determination. The petitioner prosecuted an appeal from our decision, which was affirmed in part and reversed in part by the 1934 BTA LEXIS 1428">1431 United States Circuit Court of Appeals for the Sixth Circuit on April 5, 1932, at (certiorari denied, ). The court held that, as to those stocks which had been transferred on the books of the respective corporations from petitioner to his wife, valid gifts had been made and that dividends on such stocks were properly taxable to her. The record disclosed that dividends were paid by the Champion Spark Plug Co., the Richardson Co., and the Fifty Associates Co. upon stocks standing in the name of petitioner's wife. In all other respects our decision was affirmed. Both the petitioner and his wife had stocks of the following companies standing in their names: Richardson Co., Fifty Associates Co., and Commerce Guardian Trust & Savings Bank. Respondent alleged in his pleadings, and the petitioner does not deny, that in 29 B.T.A. 1075">1077 computing the deficiencies involved in these proceedings respondent did not transfer from the wife's returns and include in petitioner's income dividends on any stocks standing in the wife's name. On the contrary, petitioner alleges that the transferred dividends in respect to which he complains were paid1934 BTA LEXIS 1428">1432 by checks of the respective corporations drawn to his order, and that he endorsed such checks and deposited them in his wife's savings account. We must assume, therefore, that all dividends involved in the present case were paid on stocks standing in the name of the petitioner, and that dividends on stocks of the corporations above mentioned, in which corporations both petitioner and his wife held stocks of record in their names, were in fact paid on the stocks standing in the petitioner's name. In Docket No. 52938 petitioner alleges that the respondent erroneously included in his income dividends paid on stock of the Champion Spark Plug Co., which dividends were reported in the wife's return for 1927. However, the record discloses that respondent determined that the stocks on which said dividends were paid stood in the wife's name, and they were not transferred from the wife's return and included in petitioner's income. Stocks of the following companies involved in the present proceedings, exclusive of stocks standing in the name of petitioner's wife, were also embraced in the former proceeding hereinabove referred to: J. D. Insulator Co., Tiedeman Glove Co., National Supply1934 BTA LEXIS 1428">1433 Co., Reserve Building Co., Commerce Guardian Trust & Savings Bank, Fifty Associates Co., American Rolling Mills Co., Richardson Co., Maumee Collieries Co., and Larrowe Milling Co. These are all the companies involved in the prior case except the Champion Spark Plug Co., which is not in the present case for the reason that the dividends paid on the stock of this corporation, standing in the wife's name and reported in her return for 1927, were not transferred to the petitioner. The first question for consideration is whether or not our former decision is res judicata and conclusive in respect of dividends paid during the taxable years on stocks of the above named companies, of record in the name of the petitioner, which stocks petitioner contends, nevertheless, he had given to his wife. In , the Supreme Court held that the doctrine of res judicata is applicable in actions concerning Federal income tax, notwithstanding 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. In this connection, the Court pointed out1934 BTA LEXIS 1428">1434 that, 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 29 B.T.A. 1075">1078 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. Since the claim or demand in the first proceeding before us concerned taxes for the years 1923-1926, and the claims or demands in the present proceedings embrace taxes for 1927-1930, the case at bar falls within the second class above mentioned, and the inquiry is whether the point or question to be determined here is the same as what litigated and determined in the former proceeding. Petitioner argues in the instant case that the dividends paid during the taxable years 1927-1930 on stocks of the corporations above named should not be taxed to him because he had given those stocks to his wife prior to 1927. The acts which he contends effected valid gifts are the same acts which he urged in the former proceeding1934 BTA LEXIS 1428">1435 respecting the same stocks. None of those stocks, which then stood in petitioner's name, was transferred from petitioner to his wife on the records of the corporations subsequent to 1926 and prior to the close of 1930. No new act or circumstance has been alleged or proved to establish a subsequent gift, but petitioner here relies upon substantially the same facts which we considered in the former proceeding and held insufficient to constitute completed gifts. Our decision on this point was approved by the Circuit Court of Appeals in the following language, "As to the shares of stock not transferred upon the books of the issuing companies, we are of the opinion that the decision of the Board of Tax Appeals was correct." Thus, the point or question to be determined in the case at bar, in so far as concerns dividends paid on the stocks of the corporations above set out, is precisely the same as that litigated and finally determined in the original proceedings. We hold, therefore, on authority of , that our former decision is res judicata in respect of the stocks of the corporations involved therein and above set1934 BTA LEXIS 1428">1436 out, and that the parties are concluded thereby. See also ; ; . The present proceedings embrace stocks of the following companies which were not considered in the prior case: Airway Electric Appliance Co., Toledo Trust Co., Toledo Steel Products Co., Toledo Mortgage Co., Morris Plan Bank, First National Bank-Toledo, Defiance Machine Co., Citizens Necessities Co., and American Reserve Insurance Co. ,Whether the dividends paid during the taxable years 1927 - 1930 on the stocks of the companies last above named, and whether the 29 B.T.A. 1075">1079 capital gains and losses resulting from sales of some of said stocks should be reflected in the computation of petitioner's tax liability, depends upon whether or not petitioner made valid and completed gifts of the stocks to his wife subsequent to 1926, as contended by him. As to such alleged subsequent gifts, our former decision, of course, is not res judicata, and the issue must be decided on the evidence before us. However, the evidence submitted by the petitioner in the present record to1934 BTA LEXIS 1428">1437 show that he made gifts to his wife of the stocks here in question subsequent to 1926 is substantially the same as that offered to establish gifts of the stocks embraced in the original proceeding, and the reasons which impelled us in that case to hold the evidence insufficient leads to the same conclusion here in respect of the alleged later gifts. All the stock alleged to have been given to the wife after 1926 stood in petitioner's name on the books of the corporations. They were transferred of record from petitioner to his wife some time subsequent to April 5, 1932, more than a year after the close of the last taxable year now before us. The circumstances which petitioner contended constituted the making of valid gifts to his wife of the stocks embraced in the former proceeding were stated by us in our report at , as follows: From time to time at undetermined dates, the petitioner endorsed certificates of stock which he owned in various corporations, and also executed powers of attorney and attached to other certificates of stock, all of which he turned over to his confidential secretary, Gertrude M. Reswick, with instructions that the said documents1934 BTA LEXIS 1428">1438 should be placed in a safety box in the Commerce Guardian Trust and Savings Bank under the name of his wife, Helen B. Marshall. The petitioner was a director of some of the corporations referred to, and continued as the record owner of the stock on the records of all the corporations. The dividend checks received on the stock so endorsed and placed in the safety box of his wife, as well as the dividend checks received on certain other stocks not so placed in said box, were endorsed by the petitioner or by his secretary acting for him, and were deposited in a savings account carried in the name of his wife, as above set forth. The petitioner did not deliver any stock certificates to his wife personally, but merely told her in a general way what he was doing. Mrs. Marshall did not make deposits in or withdrawals from the savings account in which the said dividend checks were deposited. Concerning the stocks alleged to have been given to his wife subsequent to 1926 petitioner testified in the present case as follows: THE WITNESS: Every certificate was either endorsed in blank or there was a legal power for transfer. You are familiar with the little form, properly signed and1934 BTA LEXIS 1428">1439 fastened to the certificate and delivered to Miss Reswick, and, I believe, put in Mrs. Marshall's safe deposit box. Q And all that occurred prior to 1927? A As to the stocks then owned? Q Yes. 29 B.T.A. 1075">1080 A And all stocks since acquired have been handled in exactly the same way, in so far as, from any circumstances, they happen to be in my name. Q Or any split-up? A Yes, any split-up. Since the circumstances surrounding the making of the alleged gifts subsequent to 1926 are the same as those disclosed in the former proceeding, we hold, for the reasons there set forth, that the evidence in the case at bar is insufficient to establish balid gifts of the stocks here in controversy. Accordingly, respondent's determinations are approved. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625718/	HENDERSHOT & SMITH, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentHendershot & Smith, Inc. v. CommissionerDocket No. 8931-72.United States Tax CourtT.C. Memo 1975-183; 1975 Tax Ct. Memo LEXIS 190; 34 T.C.M. 788; T.C.M. (RIA) 750183; June 11, 1975, Filed H. Guy Hardy, for the petitioner. John P. Graham, for the respondent. IRWINMEMORANDUM FINDINGS OF FACT AND OPINION IRWIN, Judge: Respondent determined deficiencies in petitioner's income tax as follows: Taxable year endedDeficiencyJune 30, 1969$2,386.28June 30, 19701,316.04 The sole question presented is whether section 267 (a)(2) 1 applies to the factual situation herein so as to disallow interest deductions claimed by petitioner. FINDINGS OF FACT Some of the facts have been stipulated and these facts are found accordingly. Petitioner, Hendershot & Smith, Inc., is an Ohio corporation having its principal place1975 Tax Ct. Memo LEXIS 190">192 of business in Wickliffe, Ohio. During the years in issue petitioner kept its books on the accrual method employing a fiscal year ending June 30. Corporate income tax returns were filed with the district director of internal revenue, Cleveland, Ohio, for each of these years. On November 5, 1968, petitioner's board of directors adopted the following resolution: RESOLVED, that the corporation purchase 232 common shares of the Corporation from Robert J. Hendershot at a purchase price of $508.29 per share, or an aggregate purchase price of $117,923.28; that the Treasurer execute and give to Robert J. Hendershot a check as of this date in the amount of $2,923.28 to apply against such aggregate purchase price; that the Treasurer is hereby authorized and directed to execute a cognovit promissory note of the corporation in the face amount of $115,000.00, providing for principal payments of $13,000.00 each January 1, beginning with the year 1970 and ending with the year 1977, with the balance of $11,000.00 to be payable on January 1, 1978, together with interest at the rate of 5% per annum, payable annually on January 1 on the unpaid balance; and the Treasurer is hereby authorized and directed1975 Tax Ct. Memo LEXIS 190">193 to retire and cancel such shares. Pursuant to this resolution, the 232 shares of common stock were redeemed in November 1968 and petitioner delivered to Robert J. Hendershot (hereinafter sometimes referred to as Robert), a calendar year cash method taxpayer, a check for $2,923.28 and a cognovit promissory note for $115,000. The note is set forth in the margin. 2 After the redemption, Robert ceased to be a shareholder of petitioner. He did, however, remain as a director and a vice president. 1975 Tax Ct. Memo LEXIS 190">194 The ownership of petitioner's stock during the years in issue is set forth below: RelationshipShares OwnedShares Owned to RobertNameon 6-30-69on 6-30-70BrotherHarold Hendershot, Sr.442380BrotherWalter Hendershot8087NephewHarold Hendershot, Jr.7687NephewJames Hendershot5465NephewRichard Hendershot4253NieceNancy Collins4253SonJohn Hendershot3030Sister-in-lawHelen Hendershot213Total shares outstanding768768Petitioner's officers and directors during the years in issue were as follows: Chairman of the BoardHarold Hendershot, Sr.PresidentHarold Hendershot, Jr.Vice PresidentRobert J. HendershotVice PresidentJames HendershotVice PresidentRichard RossSecretaryWalter HendershotTreasurerHarold H. HendershotFor the period January 1, 1969 through June 30, 1969, petitioner accrued interest in the amount of $2,875 on the promissory note issued to Robert and deducted this amount on its income tax return for the fiscal year ended June 30, 1969. For the period January 1, 1970, through June 30, 1970, interest was accrued in the amount of $2,5501975 Tax Ct. Memo LEXIS 190">195 on the promissory note and petitioner deducted this amount on its income tax return for the fiscal year ended June 30, 1970. With respect to the years in issue petitioner made the following payments on the note by check to Robert: DateInterestPrincipalJanuary 2, 1970$5,570$13,000January 4, 19715,10013,000 The above payments were reported on Robert's income tax returns for the respective years 1970 and 1971. During the period in issue Robert had the authority to sign checks requiring only one signature on petitioner's commercial checking account with the Lake County National Bank of Painesville. At the end of each fiscal year in issue and during the 2-1/2 months immediately thereafter the balance on deposit in this account was in excess, on a majority of days, of the amount needed to pay the interest accrued on the note to Robert. In the notice of deficiency, respondent disallowed petitioner's deduction for accrued interest in the amounts of $2,875 and $2,550 for the respective fiscal years ended June 30, 1969 and June 30, 1970, stating that these amounts "were not paid within two and one-half months after the close of your taxable years, and1975 Tax Ct. Memo LEXIS 190">196 were not otherwise constructively received by Robert Hendershot during that time" as required by section 267. This case involves the applicability of section 267(a)(2) 3 to the factual situation herein. The major point of contention between the parties is whether there has been a constructive payment 4 within 2-1/2 months following the close of each fiscal year in issue. The question is purely one of fact. F. D. Bissett & Son, Inc.,56 T.C. 453">56 T.C. 453 (1971). The parties are in agreement that all the other requirements requisite to the applicability of section 267(a)(2) have been met. 1975 Tax Ct. Memo LEXIS 190">197 Petitioner's primary basis in claiming the inapplicability of section 267(a)(2) rests upon the allegation that Robert was in constructive receipt of the accrued interest within 2-1/2 months following the close of each fiscal year in issue even though payment was not in fact made until the following January of each fiscal year. It is submitted that even though the interest was not due nor paid 5 until January following the close of each fiscal year, it was in fact payable at any time after the accrual. Respondent, on the other hand, argues that the January 1 due dates, as set forth on the note and corporate resolution, impose a substantial limitation on payment, and that consequently there could be no constructive receipt by Robert within the 2-1/2 month period following the close of each fiscal year. Upon reviewing the record it is our opinion that there has been no constructive payment within the prescribed time period and that, therefore, respondent's determination must be sustained. 1975 Tax Ct. Memo LEXIS 190">198 Compare Fetzer Refrigerator Co. v. United States,437 F.2d 577 (C.A. 6., 1971), and 56 T.C. 453">F. D. Bissett & Son, Inc.,supra, with Young Door Co., Eastern Division,40 T.C. 890">40 T.C. 890 (1963). 6In support of its contention petitioner points out the good relationship between Robert and the rest of the directors and officers, Robert's authority to write checks on petitioner's account, the ample balance in such account, and petitioner's president's stated willingness to have made the payments early if Robert had so requested. Petitioner's evidence only indicates that Robert had the power to receive payment. Petitioner had no duty to pay prior to the due date and Robert had no right to an early payment under the terms of the note. Without the right to receive income, there cannot be constructive receipt. 56 T.C. 453">F. D. Bissett & Son, Inc.,supra at 463.1975 Tax Ct. Memo LEXIS 190">199 While nothing in the evidence before us would have prevented an early payment, the fact remains that there was no early payment and no indication of any formal or informal authorization for such payment. Without such evidence we cannot find a constructive receipt. 7Petitioner further contends that since the January 1 due date was selected only as a matter of convenience we should give it little weight. This we cannot do. Petitioner has selected the due date and with respect to the years in issue its action was entirely consistent with such date. It is bound by its choice. Petitioner finally argues that the January 1 due date is the date the payment must be made, not the first date which it may be made. Be that as it may, section 267(a)(2) still requires a payment, either actual or constructive. The evidence1975 Tax Ct. Memo LEXIS 190">200 of this case clearly precludes the finding of a constructive payment. See section 1.451-2, Income Tax Regs. (footnote 4, supra.) Petitioner has also contended that Congress did not intend section 267(a)(2) to apply to the type of situation herein since there was no intention of tax manipulation. We have reviewed the relevant legislative history and find no merit to this contention. As we so recently stated in Kenneth Farmer Darrow, 64 T.C. , (May 14, 1975), (a case involving section 563): When the congressional language is so clear, arguments such as petitioner's are in effect requesting us to reqrite a section of the Code, an action we simply cannot take in the instant situation. In Summary, even though it has been shown that petitioner accrued the interest and that Robert had the authority to write checks on the company account, it has not been demonstrated that Robert had the right to draw the interest prior to the due dates. Petitioner did not issue the payments to Robert until the due dates with respect to the years in issue and no objective manifestation of any intent to allow early payment was presented to this Court. Petitioner's hypotheticals 8 cannot1975 Tax Ct. Memo LEXIS 190">201 supplant the reality of this situation. In this instance petitioner has fallen within the grasp of section 267(a)(2) which compels disallowance of the interest deductions. Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩2. $115,000.00 COGNOVIT PROMISSORY NOTECleveland, OhioNovember 5, 1968 For value received, the undersigned hereby promises to pay Robert J. Hendershot or order the sum of One Hundred Fifteen Thousand Dollars, with interest at the rate of 5% per annum payable on January 1 of each year on the unpaid balance hereof. Payments of principal shall be made according to the following schedule: January 1, 1970$13,000.00January 1, 1971$13,000.00January 1, 1972$13,000.00January 1, 1973$13,000.00January 1, 1974$13,000.00January 1, 1975$13,000.00January 1, 1976$13,000.00January 1, 1977$13,000.00January 1, 1978$11,000.00The payments made hereunder shall apply first on the accrued interest and second on principal. If any installment on this note be not paid when due, and within ten days after written notice that it is due and unpaid, then the entire unpaid principal hereof shall at once become due and payable, at the option of the holder hereof, and the undersigned does hereby authorize any Attorney at Law to appear for it in an action on the above note, at any time after said note becomes due, in any Court of record in Cuyahoga County, Ohio, to waive the issuing and service of process, and confess a judgment in favor of the legal holder of the above against it, for the amount that may then be due thereon, with interest at the rate therein mentioned, and costs of suit, and to waive and release all errors in said proceedings and the right of appeal from any judgment rendered. HENDERSHOT & SMITH, INC.By ↩3. SEC. 267. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS BETWEEN RELATED TAXPAYERS. (a) Deductions Disallowed.--No deduction shall be allowed-- * * * * (2) Unpaid expenses and interest.--In respect of expenses, otherwise deductible under section 162 or 212, or of interest, otherwise deductible under section 163,-- (A) If within the period consisting of the taxable year of the taxpayer and 2-1/2 months after the close thereof (i) such expenses or interest are not paid, and (ii) the amount thereof is not includible in the gross income of the person to whom the payment is to be made; and (B) If, by reason of the method of accounting of the person to whom the payment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and (C) If, at the close of the taxable year of the taxpayer or at any time within 2-1/2 months thereafter, both the taxpayer and the person to whom the payment is to be made are persons specified within any one of the paragraphs of subsection (b). (b) Relationships.--The persons referred to in subsection (a) are: * * * (2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; * * * (c) Constructive Ownership of Stock.-- For purposes of determining, in applying subsection (b), the ownership of stock-- * * * (2) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family; * * * (4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; * * ↩4. See sec. 1.267(a)-1(b)(1)(iii), Income Tax Regs., which provides as follows: (iii) If, within the taxpayer's taxable year within which such items are accrued by the taxpayer and 2-1/2 months after the close thereof, the amount of such items is not paid and the amount of such items is not otherwise (under the rules of constructive receipt) includible in the gross income of the payee. Constructive receipt guidelines are set forth in sec. 1, 451-2, Income Tax Regs., which provide in part: (a) General Rule.↩ Income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions. Thus, if a corporation credits its employees with bonus stock, but the stock is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute receipt. * * *5. We note that with respect to years subsequent to the years in issue petitioner was apprised of the section 267 problem and consequently made the interest payments within the 2-1/2 month period.↩6. Contrary to petitioner's assertion, we do not believe that the Sixth Circuit (to which an appeal would lie) has viewed unfavorably 40 T.C. 890">Young Door Co., Eastern Division,supra.↩ In any event, the issue herein is purely factual; each case must be decided upon its own merits.7. Although we note that the accrued interest may have been credited on petitioner's books to Robert, there is no evidence that he had a right to draw this amount out prior to the January 1 due dates. Petitioner's books were not produced at trial. However, there was testimony indicating that the interest was accrued on the books and designated as for Robert.↩8. E.G., as alluded to previously, petitioner's president, during his testimony, hypothesized that if Robert had requested early payment, petitioner would↩ have been willing to make it.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625719/	Estate of Frank M. Gordon, Deceased, the First National Bank of Chicago, Administrator with the Will Annexed v. Commissioner.Estate of Frank M. Gordon v. CommissionerDocket No. 22923.United States Tax Court1950 Tax Ct. Memo LEXIS 191; 9 T.C.M. 424; T.C.M. (RIA) 50130; May 31, 1950Harry B. Sutter, Esq., One North LaSalle St., Chicago 2, Ill., for the petitioner. Paul Levin, Esq., for the respondent. MURDOCKMemorandum Opinion MURDOCK, Judge: The Commissioner determined a deficiency of $5,995.33 in estate tax. The issue for decision is whether he erred in including any amount in the gross estate under section 811 (c) to represent the value of the widow's right to receive a pension from The First National Bank of Chicago. The facts have been stipulated. [The Facts] Frank M. Gordon died on November 28, 1946. The estate tax return was filed with the collector of internal revenue for the first district of Illinois. Gordon was employed by The First National Bank of Chicago from 1892 until his retirement on1950 Tax Ct. Memo LEXIS 191">*192 January 1, 1942. He was required to contribute 3 per cent of his salary to the employer's pension fund beginning in 1899. His total contribution was $23,276.75 and that of the bank by reason of his employment was $55,463.50. He received, after retirement and until his death, $29,500 as a pension at the rate of $6,000 per year. The pension plan provided that the widow would receive a pension of $3,000 annually after the decedent's death. There were time limitations on her right and the pension would cease upon her remarriage. The decedent had no choice as to the pension to be paid his widow. The Commissioner included $27,789.69 in the gross estate under section 811 (c) representing the value of the pension to be paid the widow. [Opinion] The stipulation facts in this case show that the terms of the pension plan are so similar to those considered in Estate of William S. Miller, 14 T.C. 657">14 T.C. 657, (April 21, 1950), as to make the two cases indistinguishable for present purposes and, following that case, this point is decided for the petitioner. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625720/	JOHN HENRY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Henry v. CommissionerDocket No. 6375.United States Board of Tax Appeals6 B.T.A. 131; 1927 BTA LEXIS 3597; February 10, 1927, Promulgated 1927 BTA LEXIS 3597">3597 1. On the evidence held that husband and wife were domiciled in the State of Washington during the taxable year. 2. Under the statutes of Washington a wife has a vested interest in community property, and where the husband reported one-half of the income from community property as taxable to him the Commissioner is precluded by section 1212 of the Revenue Act of 1926 from taxing the whole of such income to the husband. Ralph W. Smith, Esq., for the petitioner. George E. Adams, Esq., for the respondent. ARUNDELL6 B.T.A. 131">131 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1923 in the amount of $1,429.69. The questions for decision are whether the petitioner was domiciled in California or Washington during the year 1923 and whether the income from community property acquired while residing in the latter State was correctly reported by dividing such income between petitioner and his wife. The entire deficiency arises from the action of the Commissioner in increasing petitioner's income by the amount theretofore reported by his wife. 6 B.T.A. 131">132 FINDINGS OF FACT. The petitioner is an individual1927 BTA LEXIS 3597">3598 and during the calendar year 1923 resided in California. He resided in the State of Washington from April, 1901, to August 21, 1921. On the latter date he and his wife went to California for the primary purpose of visiting relatives. They have ever since remained in the latter State and since August, 1922, the petitioner has engaged in business there. At the time of leaving the State of Washington the petitioner owned certain property there, including a residence occupied by himself and his family. He still retains all of that property. Since leaving the State of Washington the petitioner and his wife have always intended to return. The petitioner has never voted in any local, State, or presidential election in the State of California. The petitioner and his wife were married in Seattle, Wash., in 1902. At that time neither of them possessed any property and since then neither has acquired any property by gift or devise. The property owned in 1923, and from which income was received, was acquired by the joint efforts of petitioner and his wife during coverture and while both resided in and were domiciled in the State of Washington. For the calendar year 1923 the petitioner1927 BTA LEXIS 3597">3599 and his wife filed separate returns. In the petitioner's return he reported the income from his business in California as his separate income, and reported one-half the income from property acquired while residing in Washington on the ground that such income was income from community property. The petitioner's return was filed with the collector of internal revenue for the sixth district of California. OPINION. ARUNDELL: The evidence satisfies us that the petitioner's domicile was in the State of Washington during the calendar year 1923. When the petitioner went to California he had no intention of remaining, and during and prior to the period here involved he had not abandoned his intention of returning to Washington. The general rule as to loss of domicile at one place and the acquisition at another is stated in 9 R.C.L. 542, as follows: The general rule is that domicil is changed from one place to another, or one state to another, only by the abandonment by a person of his first place of domicil with the intention not to return, and by taking up his residence in another place with the intention of permanently residing in that place. 6 B.T.A. 131">133 The rule is stated1927 BTA LEXIS 3597">3600 in 19 C.J. 401, as follows: Domicile of choice is entirely a question of residence and intention, or, as it is usually put, of factum and animus. Both must concur in order that the domicile may be deemed established. All of the property which was the source of the income here involved was acquired while petitioner and his wife were domiciled in the State of Washington. A part of it was personal property and part real property located in that State. In this situation the respective rights of the spouses in this case in both their real and personal property must be determined in the light of the laws of Washington. It seems clear that there is a presumption arising under the laws of the State of Washington that all property acquired by either spouse during coverture is community property. ; , and cases there cited, and the more recent case of ; . No evidence has been introduced to rebut this presumption. As the petitioner and his wife were domiciled in the State of Washington during the taxable year and the income in question1927 BTA LEXIS 3597">3601 was from property acquired during coverture and while both were residents of and domiciled in that State, our inquiry is limited to the question of whether the action of the petitioner in dividing the income from such property between himself and his wife for income-tax purposes is permitted under the revenue acts. The pertinent section of the Revenue Act is section 1212 of the Revenue Act of 1926, which reads as follows: Income for any period before January 1, 1925, of a marital community in the income of which the wife has a vested interest as distinguished from an expectancy, shall be held to be correctly returned if returned by the spouse to whom the income belonged under the State law applicable to such marital community for such period. Any spouse who elected so to return such income shall not be entitled to any credit or refund on the ground that such income should have been returned by the other spouse. The decision depends, therefore, upon whether under the laws of Washington the wife has a vested interest in the community income. The statutes of Washington (Remington's Comp. Stats., 1922), after defining what constitutes the separate property of the husband (section1927 BTA LEXIS 3597">3602 6890), and the separate property of the wife (section 6891), provide as follows: § 6892. [5917.] Community Property Defined - Husband's Control of Personalty. Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a like power of disposition as he has of 6 B.T.A. 131">134 his separate personal property, except he shall not devise by will more than one-half thereof. § 6893. [5918.] Community Realty, Conveyance of, etc. The husband has the management and control of the community real property, but he shall not sell, convey, or encumber the community real estate, unless the wife join with him in executing the deed or other instrument of conveyance by which the real estate is sold, conveyed, or encumbered, and such deed or other instrument of conveyance must be acknowledged by him and his wife: Provided, however, that all such community real estate shall be subject to the liens of mechanics and others for labor and materials furnished in erecting structures and improvements thereon as1927 BTA LEXIS 3597">3603 provided by law in other cases, to liens of judgments recovered for community debts, and to sale on execution issued thereon. In an early case, ; , it is said of the marital community that - In it, the proprietary interests of husband and wife are equal, * . Management and disposition may be vested in either one or both of the members. If in one, then that one is not thereby made the holder of larger proprietary rights than the other, but is clothed in addition to his or her proprietary rights, with a bare power in trust for the community. The case of ; , was a suit by the husband to recover an automobile which had been sold by the wife. After sustaining the finding of the lower court that the automobile was community property, the court in its opinion said: Now, a wife's rights in family personalty are not of the contingent sort, like dower or survivorship, but a present estate. True, by our statute the husband is made manager, with full power to sell and dispose of this. But it does not follow that he can give it1927 BTA LEXIS 3597">3604 away. He is, so to speak, only the head of a firm. The personal property is just as much hers as his. * * * Her property right in it is as great as his. The case of ; , describes the rights of husband and wife in community personal property as follows: To hold that the whole substance of the term "Community property" as applied to personalty consists in a mere contingent expectancy of the wife would make of the term "community personal property" a palpable misnomer. It would take away every community element except the fact that the wife's labors and sacrifices had helped to earn it. It would destroy that equality which it is the obvious purpose of our community property law to conserve. These considerations make it plain that the statute, in conferring upon the husband the management and control of the community property, though giving him the absolute power of disposition of community personalty, intends no more than to make him the statutory agent of the community. 1927 BTA LEXIS 3597">3605 . That part of the decision in , holding the husband to be no more than a statutory agent of the community, is followed in ; , and ; . 6 B.T.A. 131">135 These decisions of the Washington courts indicate a recognition in that State of a rule of property under which the wife's interest in community property is regarded as a present vested right. This being so, and the petitioner having returned the community income for 1923 as being taxable to him only upon his one-half thereof, the Commissioner, in view of section 1212 of the Revenue Act of 1926, may not now tax the whole of such income to the husband. No issue is raised as to the income from the petitioner's business enterprise in California which he reported as his own income, and we express no opinion as to the correctness of the method of reporting that income. Judgment will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625721/	APPEAL OF WILLIAM SCHOLES & SONS, INC.William Scholes & Sons, Inc. v. CommissionerDocket No. 3196.United States Board of Tax Appeals3 B.T.A. 598; 1926 BTA LEXIS 2620; February 4, 1926, Decided Submitted August 22, 1925. 1926 BTA LEXIS 2620">2620 Under the circumstances of this appeal, capital expenditures made by a tenant at will on leased premises are not deductible as ordinary and necessary expenses, but must be prorated over the useful life of the property covered thereby. Jay C. Halls, L. Dana Latham and Richard S. Doyle, Esqs., and Thomas W. Evers, C.P.A., for the taxpayer. Blount Ralls, Esq., for the Commissioner. MORRIS3 B.T.A. 598">598 Before MARQUETTE and MORRIS. This appeal is from the determination of a deficiency in income and profits taxes for the years 1918 to 1920, inclusive, in the amount of $10,043.11. Taxes for 1920 only are in controversy, as all claim of error with respect to those for 1918 and 1919 was waived at the hearing. The question is whether the taxpayer, as lessee under a tenancy at will, is entitled to deduct the cost of improvements to the real estate, made in 1920, from its income of that year. FINDINGS OF FACT. The taxpayer is a Pennsylvania corporation, with principal office located in Philadelphia. It was organized in 1906, when it succeeded to the business previously done by two Scholes brothers as partners. The business was that of1926 BTA LEXIS 2620">2621 manufacturing woolen and worsted yarns. At the time of the transfer to the corporation, the individuals retained their title to the real estate as tenants in common and leased the same to the corporation. The lease was not in writing and no written lease was thereafter executed. The original arrangement between the owners of the real estate and the taxpayer was that the taxpayer should pay a rental of 5 per cent of the cost of the land and building in 1885, and there was an understanding that the taxpayer should bear the expense of all taxes, insurance, and repairs. No definite period for the occupancy was ever agreed upon. In 1920 it was agreed that the taxpayer should pay rental at the rate of 7 per cent, and rental of $6,444 was paid in that year, instead of the $4,296 paid in 1918 and 1919. Upon the incorporation of the business in 1906, John Scholes and Joseph Scholes owned 51 and 49 per cent of the stock and a two-thirds and one-third interest in the real estate, respectively. John Scholes died in 1910, leaving his stock and interest in the realty to his three children. Joseph Scholes died in 1920, his interest in the real estate and one-half of his stock passing to1926 BTA LEXIS 2620">2622 his son Joseph 3 B.T.A. 598">599 Scholes, who held the balance of the stock in trust for some nieces and nephews. During 1920 the four individuals owning the real estate owned stock in the corporation. The taxpayer has occupied the leased premises from the date of incorporation to the present time. The fair rental for the property in 1920 was about $20,000. The taxpayer in 1920 made the following expenditures, which it deducted in its return for that year: New boiler$6,709.56Building of second floor office and alterations1,783.06Installing wiring, lights, phones, and switches in office throughout plant947.99Alterations to building1,045.73Total10,486.34The Commissioner disallowed the same and determined a deficiency for 1920. DECISION. The determination of the deficiencies for 1918 and 1919 are approved. The deficiency for the year 1920 should be computed in accordance with the following opinion. Final determination will be settled on 10 days' notice, under Rule 50. OPINION. MORRIS: It was argued on behalf of the taxpayer that, whether the improvements were ordinary and necessary expenses or capital expenditures, the cost thereof1926 BTA LEXIS 2620">2623 was deductible in 1920. From the designation of the items, and in the absence of evidence to the contrary, we conclude that they were capital expenditures, the cost of which is not deductible in the return for 1920, unless the nature of the lease under which the property was held justifies such deduction. . Counsel has submitted ample authority to convince us that the taxpayer was a tenant at will and that the tenancy was subject to termination by the lessors at any time. On the record in this appeal, it does not follow, however, that these capital expenditures are deductible as ordinary and necessary expenses. The ownership of the stock of the corporation and of the real estate was vested in the Scholes family, all the members thereof having an interest in the real estate being stockholders of the corporation. The business of the corporation has been conducted on the leased property continuously from 1906 to the present time. We have already considered a similar contention based on a similar state 3 B.T.A. 598">600 of facts in the 1926 BTA LEXIS 2620">2624 , except that, in that appeal, the tenancy was from year to year. The decision in that appeal is controlling here. Accordingly, the cost of the improvements made by the taxpayer in 1920 should be prorated over their useful life. See also ; .	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625722/	Horace Mill and Ruby A. Mill, Petitioners, v. Commissioner of Internal Revenue, RespondentMill v. CommissionerDocket No. 5582United States Tax Court5 T.C. 691; 1945 U.S. Tax Ct. LEXIS 88; September 11, 1945, Promulgated 1945 U.S. Tax Ct. LEXIS 88">88 Decision will be entered under Rule 50. Petitioner's business was operating slot machines in club rooms of various lodges of the Loyal Order of Moose in the State of Ohio. Under agreement with the lodge officials the lodges received 75 percent of the "take" from the slot machines, the Ohio State Moose Association received 5 percent, and the petitioner received 20 percent. Held, that petitioner is not taxable on the income which belonged to and was received by the Ohio State Moose Association. Clarence K. Snyder, Esq., and Roger A. Zucker, Esq., for the petitioners.Lawrence R. Bloomenthal, Esq., for the respondent. Smith, Judge. SMITH 5 T.C. 691">691 This proceeding involves a deficiency of $ 5,727.35 in petitioners' income tax for 1940. Petitioners allege that the respondent erred in including in their gross1945 U.S. Tax Ct. LEXIS 88">89 income for 1940 $ 8,768.78 of income which they did not receive beneficially, and in disallowing the deduction of entertainment expenses of $ 1,409.10 and an attorney's fee of $ 100.FINDINGS OF FACT.Petitioners are husband and wife and are residents of Akron, Ohio. They filed a joint income tax return for 1940 with the collector of internal revenue for the eighteenth district of Ohio, at Akron.During 1940 and prior years Horace Mill, hereinafter referred to as petitioner (his wife, Ruby A. Mill, being a party to this proceeding only by reason of the fact that they filed a joint return for 1940), was engaged in the business of operating slot machines in the club rooms of various lodges of the Loyal Order of Moose and other fraternal groups in the State of Ohio, including the Elks, Eagles, and 5 T.C. 691">692 Veterans of Foreign Wars. The controversy in this proceeding relates only to the operation of the slot machines installed in the lodge rooms of the Loyal Order of Moose.Petitioner had informal agreements with the officials of the individual lodges of the Loyal Order of Moose permitting him to install the slot machines in their club rooms on condition that the lodges should receive1945 U.S. Tax Ct. LEXIS 88">90 a percentage of the "take" from the slot machines. Prior to 1935 the lodges received 80 percent of the take and petitioner 20 percent. At the National Convention of the Loyal Order of Moose held in Akron in July 1935, the officials of the national organization and those of most of the individual lodges agreed informally upon a plan to have a portion of the proceeds from the slot machines installed in the various lodge rooms paid over to the Ohio State Moose Association.The Ohio State Moose Association, hereinafter referred to as the state association, was created in 1929 for the purpose of promoting the Loyal Order of Moose in the State of Ohio. It maintained a group of paid employees who traveled about the state organizing new lodges and assisting those already organized in maintaining membership and uniform standards of operation.Prior to 1935 the state association was financed by quota assessments made against the individual lodges. In July of that year, pursuant to the plan agreed upon at the national convention, most of the individual lodges agreed to have 5 percent of their share of the slot machine proceeds go to the state association in lieu of their quota assessments, 1945 U.S. Tax Ct. LEXIS 88">91 and resolutions to that effect were adopted by their directors. Petitioner was informed of the arrangements and he agreed, as a matter of convenience, to transmit to the state association its share of the proceeds if the individual lodges would give him written authorization to do so. The Barberton, Ohio, lodge wrote to the petitioner on July 27, 1935, as follows:Starting August 1st 1935 you are hereby authorized to deduct 5% of our slot machine money (5 cent & 10 cent machines only) and send same to The Ohio State Moose Association c/o Lawrence Grove State Secretary in Cleveland to further the work of the Moose throughout the State.Similar letters were written to petitioner by the other lodges.All collections of money from the slot machines were made by petitioner or some of his employees. They would visit the club rooms of the lodges usually about once a week, and, with the assistance of some official of the lodge, would open the slot machines, count and wrap the money, and make out a collection slip which both would sign. The lodge officials would retain their 75 percent and petitioner would keep the balance. At the end of each month petitioner would remit to the state 1945 U.S. Tax Ct. LEXIS 88">92 association by check the 5 percent which it was 5 T.C. 691">693 entitled to receive under the agreement. Accurate accounts of all of these transactions were kept by petitioner. The total amount remitted to the state association in 1940 was $ 8,768.78.Some of the lodges which first agreed to share their proceeds with the state association later abandoned the plan and instructed petitioner to discontinue the remittances to the state association. On April 10, 1942, the Warren, Ohio, lodge wrote petitioner as follows:Our Lodge has made new arrangements with the Ohio State Moose Association in reference to the payment of funds to the Association. As of April 15, we will stop contributing to the Ohio State Moose Association 5% of the gross receipts of our machines, and, instead, will pay a quota assessment.You are therefore requested, on and after April 15, 1942, to stop taking from our share of the machines the 5% which you have heretofore deducted; and you will therefore turn over to the Lodge 80% of the income of these machines.It was customary for petitioner and his employees to buy drinks or cigars for the lodge officials, and other lodge members who happened to be present, whenever1945 U.S. Tax Ct. LEXIS 88">93 the slot machine money was collected. Since the collections were not made at regular times it was often necessary to call the officials from their work or their homes to assist in the counting. The custom of "treating" was partly to compensate them for these inconveniences and partly to build up and retain the good will of the lodge officials. Such gratuities did not increase the amount of "play" on the slot machines or directly increase petitioner's income. During 1940 a total of $ 1,409.10 was expended in this manner by petitioner and his employees.In 1940 petitioner paid an attorney a fee of $ 100 for services in protesting a ruling of the Commissioner in respect of his income tax for 1938.In his return for 1940 petitioner claimed the deduction of both of the above amounts of $ 1,409.10 and $ 100 as ordinary and necessary business expenses. The respondent disallowed the deduction of both items.Petitioner reported a net income for 1940 of $ 54,666.62, over $ 50,000 of which was from his slot machine business. With the adjustments referred to above and others not here material the respondent has increased petitioner's net income to $ 65,394.14.The operation of slot machines1945 U.S. Tax Ct. LEXIS 88">94 was unlawful in the State of Ohio in 1940.OPINION.Petitioner contends that the $ 8,768.78 representing the 5 percent of the slot machine income for 1940 which he paid over to the state association in that year was not his income, but was the income of the state association.5 T.C. 691">694 We think that the evidence supports petitioner's contention on this point. Petitioner could place his slot machines in the club rooms of the various lodges only with the consent of the lodge officials and on condition that the lodge should receive a large portion of the slot machine proceeds. In 1935 the lodges agreed that 5 percent of such proceeds should be paid to the state association and that their share should be reduced accordingly, to 75 percent instead of 80 percent. The state association agreed to accept that portion of the slot machine income in lieu of the quota assessment which they had been receiving from the lodges.The 5 percent which petitioner paid to the state association was no more his income than was the 75 percent which went to the local lodges. The respondent does not contend that that was income to the petitioner.The most practical view of the situation, perhaps, is that1945 U.S. Tax Ct. LEXIS 88">95 petitioner and the individual lodges and the state association all participated in the slot machine business and divided the "take" among themselves.Regardless of the fact that the operation of slot machines was unlawful in the State of Ohio, we think that petitioner is taxable only upon the income which he received beneficially. The 5 percent which he remitted to the state association was never his income.We think that the respondent properly disallowed the deduction of both the $ 1,409.10 item claimed as entertainment expenses and the attorney's fee of $ 100. The evidence does not show that it was necessary for petitioner and his employees to buy drinks and cigars for the lodge officials or that it was of any substantial benefit to his business. Petitioner was not selling any commodity to the lodges and he admitted that these expenditures did not increase the "play" on the slot machines or his own income. There is no evidence that his slot machine business was in any way dependent upon the gratuities. We think that such expenditures were of a personal nature and not a business expense, as the respondent has determined.There is no evidence of record as to the nature of the1945 U.S. Tax Ct. LEXIS 88">*96 services for which the attorney fee was paid except that it was for protesting an income tax ruling by the Commissioner. In the absence of further evidence, we can not determine that the expenditure was paid "in carrying on any trade or business" or "for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income," within the meaning of section 23 (a) of the Internal Revenue Code.Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625723/	MORRIS BELOWSKY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Belowsky v. CommissionerDocket No. 9656.United States Board of Tax Appeals7 B.T.A. 424; 1927 BTA LEXIS 3185; June 18, 1927, Promulgated 1927 BTA LEXIS 3185">3185 In each of the taxable years the petitioner filed an income-tax return which showed his correct income-tax liability for that year. T. Ellis Allison, Esq., for the petitioner. J. K. Moyer, Esq., for the respondent. MURDOCK 7 B.T.A. 424">424 The Commissioner made the following determination in regard to the petitioner's income-tax liability for the following calendar years: YearDeficiency in taxPenalty1919$1,963.00$490.751920538.00134.50192228.007.00Total2,529.00632.25The deficiency letter indicates that the penalty was assessed because the petitioner had not filed any returns for these years and the letter states that an investigation of the petitioner's books of account and records disclosed that he received income of $20,500 in 1919, $10,500 in 1920, and $8,500 in 1922. The petitioner contests the correctness of any and every part of the deficiency and penalty. He alleges that he filed returns which correctly stated his income. FINDINGS OF FACT. The petitioner is an individual residing at 605 Sixth Street, Brooklyn, N.Y. He can neither read nor write any English, except his signature. Petitioner1927 BTA LEXIS 3185">3186 came to this country from Russia in 1904 and purchased a grocery store in Brooklyn. Six months later his wife came with the proceeds of the sale of their property in Russia. She kept this money as her own and added to it from time to time. In 1908, the petitioner sold his grocery store and moved to a newly purchased 7 B.T.A. 424">425 farm in Connecticut. In 1912, he sold the farm, returned to Brooklyn with about $7,500 in cash and mortgages, and purchased another grocery business for $2,500. He conducted this business in a rented store room. The sales from this store were made mostly to ships and barges. Stock consisted of canned and dried goods suitable for the ship trade, but not much in demand by resident trade. He carried stock worth about $8,000. This grocery business was successful until in the year 1919, when sales fell off due to the fact that there were fewer ships and barges in the vicinity. The petitioner then ceased to purchase new stock, closed out his old stock, tried to collect his accounts, sold his store fixtures at auction for $2,500 in August, 1920, and went out of business. He did not again engage in business during the taxable years. In October, 1919, 1927 BTA LEXIS 3185">3187 the petitioner, in partnership with a man named Hanford, bought an apartment house in Montrose Extension, Brooklyn, N.Y. The total purchase price was $75,000, of which $58,000, was represented by mortgages. For a while Hanford collected the rents, gave the petitioner his share and then collected from the petitioner his share of all expenses. After four or five months the petitioner purchased Hanford's share in this property. This building accommodated 40 tenants. The gross income from it amounted to about $12,000 a year. Taxes on it amounted to $1,700 a year. In October, 1920, he purchased his residence at 605 Sixth Street, Brooklyn. He paid $7,000 in cash and executed mortgages for $10,000. He owns no other real estate. His wife owns an interest in a property on Third Avenue, Brooklyn. She paid $5,000 or $6,000 for her share in 1916. During the taxable years she received about $1,200 net income from this property. The gross rents amounted to about $7,250 a year. During 1920, the petitioner's property consisted of the Montrose property, two automobiles, $2,000 in the State Bank, $500 in Liberty bonds, $300 in War savings stamps, and his residence. He kept no1927 BTA LEXIS 3185">3188 books or records, except his bank account in the State Bank. While in business he cashed many checks for customers. He loaned money to different people and at times borrowed money. Frequently people gave him money for safe keeping. In every such instance he deposited the cash and gave his check for the amount. His brother-in-law sometimes gave him as much as $1,000 in this way. An Italian woman also gave him substantial sums for safe keeping. The proceeds from sales of groceries were deposited in this account. During all of the taxable years he lived with his wife and supported his 7 daughters. The latter were all under 18 years of 7 B.T.A. 424">426 age during all 3 years, except that the oldest reached 18 before the end of the year 1922. On or about March 8, 1920, the petitioner went to the second floor of the post office at Brooklyn, to make his income-tax return for 1919. He got in line and finally came to a man who asked him questions in regard to his business and his income. He answered these questions to the best of his ability and the man wrote as he answered. The man then gave him a paper on which the former had been writing. It was a work sheet of Form 1040-A "For1927 BTA LEXIS 3185">3189 individual income tax return for net incomes of not more than $5,000 for calendar year 1919." Omitting blank spaces it showed the following entries and answers in ink: WORK SHEET FOR INDIVIDUAL INCOME TAX RETURN (1919) Page 1. Name, Morris Belowsky. Street and number, 823 Third Ave., Brooklyn. 1. Did you make a return for 1918? Yes. 3. To what collector's office was it sent? Brooklyn Post Office Bldg. 4. Were you married and living with wife Dec. 31, 1919? Yes. 6. How many dependent persons under 18 (or mentally or physically defective) were receiving their chief support from you on Dec. 31, 1919? 7 children. 8. Did you pay during the calendar year to any individual rent, wages, salaries or other fixed or determinable income amounting to $1,000 or over? Yes. Rent of $1,080 for store to Mr. Spiro, same address. 9. Did your wife or minor child make a separate return? No. 10. Did you, your wife or minor children receive any interest on U.S. Liberty Bonds or any other income not reported elsewhere in this return or in a separate return? No. 12. Enter in this table details concerning repairs, wear and tear, and property losses, claimed as1927 BTA LEXIS 3185">3190 deductions in Schedules A, E and I on page 2 of return (see instructions): If property was acquired prior to March 1, 1913, attach statement explaining how value as of that date was determined. 1. Refer to "A," "E" or "I"2. Kind of property (if buildings, state also material of which constructed)3. Date acquired4. Cost or market value 3/1/13, if acquired prior thereto5. Repairs ordinary and incidentalAuto truck1918 $500Calculation of taxM. Net income shown on page 2, Item J$3,940.00N. Less personal exemption (See Instruction VII)3,400.00Q. Balance (income taxable at 4%)540.00p. Tax due (4% on amount of Item O)21.60Q. Less normal tax of 2% on amount of Item FR. Balance of tax dueS. Amount of tax paid on submission of return$21.60Page 2.A. Income from business or profession:1. Kind of business, Retail Grocer.2. Business address, 823 Third Ave., Brooklyn.3. Total sales and income from business or professional services$48,000Cost of goods sold - 4. Labor$1,560.005. Material & supplies6. Merchandise bought for sale39,840.007. Other costs8. Plus inventories at beginning of year9. Total$41,400.0010. Less inventories at end of year11. Net Cost of Goods SoldOther business deductions:12. Salaries and wages not reported as "Labor" under "Cost of Goods sold"13. Rent on business property in which taxpayer has no equity$1,260.0014. Interest on business indebtedness to others15. Taxes on business and business property16. Repairs, wear and tear, and property losses (for auto)500.0017. Bad debts arising from sales or professional services305.0018. Other expenses (attach classified statement) Electricity & Insurance & Telephone595.0019. Total (Items 12 to 18 inclusive)$2,660.0020. Net Cost Plus Total Deductions (Item 11plus Item 19)44,06021. Net Income from Business or Profession (Item 3 minus Item 20)$3,9401927 BTA LEXIS 3185">3191 7 B.T.A. 424">427 He then paid the tax of $21.60 and received a mimeographed paper of which the following is a copy: Form 1107 U.S. Internal Revenue NOTICE TO TAXPAYER Before presenting payment to cashier enter on this form (a) Name (b) Address (c) Form number of return (d) Amount of tax paid TAXPAYER'S RECEIPT FOR INCOME AND PROFITS TAX FOR 1919 OFFICE COLLECTOR INTERNAL REVENUE Form No. of return, 1040 A Tax, $21.60 Name, Morris Belowsky Address, 823 3rd Ave., Brooklyn, N.Y. (Stamped PAID 1 Mar 8 9 HH 2 1st Dist. 0 n.Y. At about the same time the next year he returned to the same place and in the same way received a work sheet Form 1040-A "Individual Income Tax Return for Net Incomes of Not More than $5,000 or Joint Return of Husband and Wife if Combined Net 7 B.T.A. 424">428 Income Does Not Exceed $5,000 for Calendar Year 1920." Omitting the blank spaces it showed the following entries and answers: INDIVIDUAL INCOME TAX RETURN FOR CALENDAR YEAR 1920Name, Morris BelovskyStreet and number, 605 6th St., Brooklyn, Kings County, N.Y.1. Are you a citizen of the United States? Yes.2. If not, are you a resident of the United States? Yes.4. Did you file a return for 1919? Yes.5. If so, what address did you give on that return? 823 Third Ave., Brooklyn.6. To what Collector's office was it sent? Brooklyn.7. Were you married and living with wife on the last day of your taxable period?Yes.9. How many dependent persons under 18 (or if 18 or over, incapable of selfsupportbecause mentally or physically defective) were receiving theirchief support from you on the last day of your taxable period? 7.10. Was a separate return filed by your wife? No.11. Write "R" if you kept no books, or books on a cash basis; or "A" if youkept books on an accrual basis. R.A.14. Net loss (from page 2, Schedule L)$2,896.0015. Less personal exemption3,400.0016. Balance (income taxable at 4%)1927 BTA LEXIS 3185">3192 Enter in this table datails concerning repairs, wear and tear, property losses, etc., claimed as deductions in schedules A, E, and I, on page 2 of return. 1. Refer to "A," "E" or "I"2. Kind of property (if buildings, state also material of which constructed)3. Date acquired4. Age when acquired5. Cost, or if acquired prior to 3/1/13, the fair market value on that date6. Repairs, ordinary and incidentalEBrick 6 story tenement houseOct. 19197$75,000$1,070Schedule A. Income from Business or Profession: 1. Kind of business, Retail Grocer.2. Business address, 823 Third Ave., Brooklyn.3. Total sales and income from business or professional services - During 8 months and sold in auction$12,850Cost of goods sold: 4. Labor5. Material and supplies$160.006. Merchandise bought for sale15,000.007. Other costs8. Plus inventory, etc9. Total$15,160.00Other business deductions:12. Salaries and wages not reported as "Labor" under "Cost of Goods Sold"846.0013. Rent on business property in which taxpayer has no equity840.0014. Interest on business indebtedness to others15. Taxes on business and business property27.0016. Repairs, wear and tear, obsolescence, depletion, and property losses17. Bad debts arising from sales or professional services600.0018. Other expenses (list principal items and amounts at foot of page)355.0019. Total (Items 12 to 18, inclusive)$2,668.0020. Net Cost Plus Total Deductions (Item 11 plus Item 19)17,82821. Net Income from business or Profession (Item 3 minus Item 20)(Loss)$4,9781927 BTA LEXIS 3185">3193 Schedule E. Income from Rents and Royalties: 1. Kind of Property2. Name and address of tenant, lessee, etc.6 story tenemTenants at 11-15 New Montrose Ave., Brooklyn3. Amt. received4. Repairs, etc.5. Other expenses$11,760.00$1,070.00$8,608Net Income from Rents and Royalties (total of column 3 minus total of columns 4 and 5)$2,082Schedule H. Total Net Income from Above Sources. (Total net income less total deficits, shown in above Schedules)(Loss) $2,896Explanation of Deductions claimed in Schedule A, Items 7 and 18; Schedule B, Column 5; Schedule E, column 5; Schedule I, Item 4; and Schedule K.E-5 Ins. 546.; % on 1st and 2nd mort. loan 4080; Tax 1877; fuel and electr1005; Janitor 1000; small expense 100.A-18 fuel & elect 120; phone 64; Ins. 40; carfare & post. 96; tips etc. 35.7 B.T.A. 424">429 He paid no tax at that time but later he was notified to and did appear at the post office, was again interrogated, and was told that, as he had used groceries from the store to supply his family, he owed additional tax of $40. A blank check was produced, and filled out and he signed it. The following is1927 BTA LEXIS 3185">3194 a copy of that check with its endorsement: MAY 11, 1921. STATE BANKWilliamsburg Branch Graham Av. & Vaset St. Bklyn. Pay to the order of Collector of Internal Revenue Forty and No/ Dollars (signed) MORRIS BELOWSKY $40.00 (Perforated "Paid 5-14-21") Endorsed: Pay to the Order of Federal Reserve Bank of N.Y. Income and Excess Profits Tax Account. This check is in payment of an obligation of the United States and must be paid. NO PROTEST. T May 13 192 BERTRAM GARDNER Collector of Internal Revenue First District of New York.Pay to the Order of Any Bank, Banker or Trust Co. Prior endorsements guaranteed. FEDERAL RESERVE BANK OF N.Y.L. H. HENDRICKS, Cashier.Also stamped on back - Received Payment through the New York Clearing House. Prior Endorsements guaranteed. May 14 1921 1 xxx FEDERAL RESERVE BANK OF NEW YORK E L. H. HENDRICKS, Comptroller of Collections.In 1923, he had an accountant make up his return for 1922. This return was signed and sworn to and was mailed to the Collector of Internal Revenue, Custom House, New York City, prior to March 15, 1923. The accountant retained a copy which shows on a joint return a1927 BTA LEXIS 3185">3195 net income of $2,962 before the deduction of personal exemption and credit for dependents, and no tax due after deducting $3,200 for these two items. 7 B.T.A. 424">430 OPINION. MURDOCK: This case presents two questions of fact in relation to each of the three years involved. The first is, Was a return filed for the year by the petitioner?; the second, What was the petitioner's taxable income for the year? Without any hesitation we decide the first question in the affirmative. The petitioner and an accountant both testified that a return for 1922 was filed before March 15, 1923. The petitioner alone testified that he filed a return for 1920 and offered the work sheet in evidence to corroborate his statement. If the evidence in regard to these two years stood alone we might have some doubt about it. But it does not stand alone. The proof in regard to the filing of a return for 1919 is so convincing that it lends credence to the evidence relating to the other two years. The petitioner testified that he filed a return for 1919, and again he produced the corroborating work sheet, but as to this year he also produced a tax receipt stamped "paid" with the stamp of the collector. 1927 BTA LEXIS 3185">3196 The respondent offered no evidence in the case, but has made the same determination in regard to each year. Clearly he was in error as to the failure to file a return for 1919 and under all of the evidence we hold that each of the penalties was erroneously assessed. The evidence is not so satisfactory in regard to the correct taxable income for these three years. The petitioner had no books of account or records, except his bank account. The latter was no criterion of his income. Yet the deficiency letter states that an examination of his books of account and records disclosed income of $20,500 for 1919, $10,500 for 1920, and of $8,500 for 1922. We are satisfied that the Commissioner's determination of the petitioner's income-tax liability for each of these years was incorrect, but before we can cast aside that determination we must be shown something better to tie to. The only other available figures in this case are the taxable incomes for 1919 and 1920, as disclosed by the work sheets, and for 1922 as shown on the accountant's copy of the 1922 return. The work sheets were made while the matters recorded thereon were fresh in the petitioner's mind. They were made by1927 BTA LEXIS 3185">3197 an agent of the respondent as the petitioner replied to his questions. We think that he then knew about what his true expense and income items were and that he correctly stated them. Considering the circumstances surrounding the origin of these figures and testing them in connection with all of the testimony and the reasonableness or unreasonableness of the entire situation we are inclined to believe that the income as disclosed by these sheets represented approximately this petitioner's taxable income for the respective years. 7 B.T.A. 424">431 We are mindful of the fact that in 1919 there were fewer ships and barges to give this petitioner their trade, that consequently he allowed his stock to be depleted and in the latter half of 1920 he closed his store. He testifies that his average weekly sales from this store during his good years did not run over $700, which would make yearly gross sales of $36,400. The 1919 sheet shows gross sales of $48,000. Applying the respondent's average percentage table to the latter amount of gross sales, merely as a text, we get a probable net income from the grocery business of $1,900.80, whereas the work sheet shows a net profit from this source1927 BTA LEXIS 3185">3198 of $3,940. The apartment on Montrose Avenue brought in gross yearly rentals of about $12,000. During 1919 the petitioner owned a one-half interest only. The purchase price was $75.000. There were mortgages against this property drawing interest on $58,000. Taxes were $1,700 a year. There were many other expenses to be paid before a net income was realized from the gross rents. Depreciation at a minimum rate would reach a substantial amount. During 1920, this building was the chief source of the petitioner's income. He then owned the entire equity in it. In addition to the taxes, interest and expenses of this building he had to pay other taxes and interest as indicated in our findings of fact. His personal exemption and credits amounted to at least $3,400 in each of these years and in 1922, they amounted to at least $4,400. His wife received about $1,200 rent from her Third Avenue property which does not appear on either the 1919 or 1920 sheets and there are certain other inconsistencies between the sheets and the testimony. Nevertheless, if we use the proven expenditures and minimum amounts where we have no proof of the proper expenditures or deductions, we find that1927 BTA LEXIS 3185">*3199 our results are within the amount of net taxable income as shown by the sheets. Therefore, we hold that this petitioner has no unpaid income tax liability for the three years here in question. Judgment will be entered for the petitioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625724/	Thomas J. Wessel and Jane H. Wessel, et al., Petitioners 1 v. Commissioner of Internal Revenue, RespondentWessel v. CommissionerDocket Nos. 2778-75, 2779-75, 2780-75, 2781-75, 2782-75, 2783-75, 2784-75, 2785-75, 2786-75United States Tax Court65 T.C. 273; 1975 U.S. Tax Ct. LEXIS 35; November 10, 1975, Filed 1975 U.S. Tax Ct. LEXIS 35">35 Held: Notices of deficiencies approved and signed by an Acting Chief, Review Staff, in the Audit Division of the District Director's Office at Columbia, S. C., were valid. The Acting Chief performed as "designate" for the Chief, Review Staff, to which latter officer authority to issue notices of deficiency had been validly delegated by the District Director. Such delegation was not in contravention of sec. 1224(2) of the Internal Revenue Manual. The Court has jurisdiction, and petitioners' motions to dismiss for lack of jurisdiction on the asserted ground of invalid notices of deficiencies will be denied. Irvin J. Slotchiver and Gedney M. Howe, Jr., for petitioners.Howard J. Kalson, for the respondent. Dawson, Chief Judge. Caldwell, Commissioner. DAWSON; CALDWELL65 T.C. 273">273 OPINIONThe motions to dismiss these consolidated cases were assigned to and heard by Commissioner Randolph F. Caldwell, Jr. The Court agrees with and adopts his opinion which is set forth below. 21975 U.S. Tax Ct. LEXIS 35">36 OPINION OF THE COMMISSIONERCaldwell, Commissioner: This case is presently before the Court on petitioners' motions to dismiss and for summary judgment filed with the Court on March 26, 1975. Oral arguments on petitioners' motions were heard on May 28, 1975. Memoranda of law were thereafter filed by the parties. Since these cases are not at issue under Rule 38, Tax Court Rules of Practice and Procedure, petitioners' motions are in effect motions to dismiss on the ground that the notices of deficiency upon which theses cases are based are invalid. They will be so treated.65 T.C. 273">274 After concluding that petitioners would not consent to an extension of the assessment period, respondent on December 31, 1974, issued and mailed notices of deficiency to petitioners. The notices were issued by the Office of the District Director of Internal Revenue, Columbia, S. C. William W. Wharton, Jr., was on December 31, 1974, the Chief of the Review Staff of the Audit Division for the Columbia District. Wharton was absent from the office on annual leave beginning at 12:45 p.m. on Tuesday, December 31, 1974. The notices of deficiency were signed in his absence by Fred E. Wood, a senior reviewer1975 U.S. Tax Ct. LEXIS 35">37 on the Review Staff of the Audit Division. The notices were all issued on preprinted Internal Revenue Service L-21 forms with the words "Chief, Review Staff" type-printed below the space allotted for signature. The word "Acting" was affixed in handwriting thereto so that under the signature of Fred E. Wood, are the words "Acting Chief, Review Staff."Prior to his departure that Tuesday, Wharton orally instructed Wood that it would be Wood's responsibility to sign the above-mentioned notices of deficiency and to see that they were mailed by certified mail before the expiration of the business day.Simply stated, it is petitioners' position that neither Wharton nor Wood had the requisite authority to issue the notices of deficiency, thereby rendering the notices invalid. It is respondent's position that those individuals did have such authority and that the notices are valid. Both parties have made lengthy argument based upon extensive written memoranda and orders internal to respondent. We have considered them all.It is the thrust of petitioners' position, in reliance upon United States v. Heffner, 420 F.2d 809 (4th Cir. 1969), that any agency 1975 U.S. Tax Ct. LEXIS 35">38 of the Government -- the Internal Revenue Service included -- must scrupulously observe its own internal rules and procedures and that respondent simply has not done so in this instance. Petitioners argue that Wharton as Chief, Review Staff, is directly involved in the examination of returns and, as such, cannot validly be delegated the authority to issue notices of deficiency under respondent's own criteria. 3 Furthermore, 65 T.C. 273">275 assuming Wharton could be delegated the authority to issue the notices, petitioners argue that he could not validly "delegate" it to a senior reviewer on his staff. Petitioners also appear to attack the sufficiency of Wood's signature on the ground that he had no written authorization to sign.1975 U.S. Tax Ct. LEXIS 35">39 Respondent counters that the "delegation" of authority to Wharton to issue the notices of deficiency and the oral "designation" of Wood to act in his stead in his absence were appropriate within the scope of the Internal Revenue Manual.First, as to the propriety of the delegation to Wharton, we are not persuaded that he was one of those "employees who directly conduct or participate in the examination of returns." As we see it, section 1224(2) of Part I of the Internal Revenue Manual, quoted in part in footnote 2, requires that the ultimate decision for issuance of a notice of deficiency be not placed within the province of the examining revenue agent, but rather with some person further up in the line of authority whose judgment is calculated to be more detached and responsible. We do not see that purpose frustrated by the Columbia District Director's delegating the authority to issue notices of deficiency to his Chief, Review Staff (and that was Wharton on December 31, 1974), which he had done in his Delegation Order No. 60 (Rev. 5) on August 1, 1972. The Review Staff is organizationally independent of the Field Audit branch and the Office Audit branch in the Audit Division of1975 U.S. Tax Ct. LEXIS 35">40 the District Director's office. The ultimate decisions with respect to any irreconcilable differences of opinion between the chiefs of the audit branches and the Chief, Review Staff, lay with the Chief, Audit Division, and not with the Chief, Review Staff. It is the function of the Review Staff, as its name connotes, to review from a technical, managerial, procedural, and policy standpoint, the work of the examining revenue agent. (See Part I, sec. 1118.42, Internal Revenue Manual.) Of course Wharton was not totally isolated from the examination of tax returns. Neither, for that matter, was the District Director himself. However, we do not find that 65 T.C. 273">276 degree of personal involvement on Wharton's part sufficient to conclude that he, as Chief, Review Staff, was directly involved in the examination of tax returns. We hold that the delegation to him was proper.Next, we consider the propriety of Wood's actions, and that turns upon whether those actions were performed as Wharton's "designate" or as Wharton's "delegate." If they were as the latter, they would have been invalid, since the Chief, Review Staff, could not redelegate the authority which he had received under the1975 U.S. Tax Ct. LEXIS 35">41 District Director's Delegation Order No. 60 (Rev. 5). However, we are convinced that Wood's actions were performed as Wharton's "designate" and hence were proper and authorized.Part of Wood's job description, as senior reviewer, states that he acts as Chief of Review, "as designated." If Wood acted in the capacity of Chief, Review Staff, on the afternoon of December 31, 1974, he assumed the full authority vested in, or delegated to, that position -- including, of course, the authority to issue the notices of deficiency here involved. Wharton was absent on annual leave on that afternoon, and was therefore unavailable. Before his departure, he instructed Wood to supervise the issuance of the notices of deficiency to the petitioners. Wood did so, and signed each of those notices personally over the words "Acting Chief, Review Staff." Under the circumstances, we find that Wood filled Wharton's shoes and acted as Wharton's designate in the capacity of Chief, Review Staff, in issuing the notices. Nor do we find his authority flawed by the fact that the designation was oral, rather than written. If written designation was necessary for Wood to act in Wharton's absence, we find sufficient1975 U.S. Tax Ct. LEXIS 35">42 written designation to be contained in Wood's job description. In any event, we are not prepared to exact the burdensome formalistic detail of requiring a written designation to acting supervisory personnel each time the incumbent of the position temporarily absents himself.Petitioners make much of the statement in paragraph 13 of Wharton's affidavit, filed at the hearing on May 28:13. The signing of the notices of deficiency by Fred E. Wood, Acting Chief, Review Staff was fully within the authority delegated to him as Acting Chief, Review Staff. [Emphasis supplied.]Petitioners assert, correctly, that Wharton could not "delegate" to Wood the authority to issue the notice of deficiency. However, 65 T.C. 273">277 considering other portions of that affidavit, particularly paragraphs 5, 8, and 10, we are convinced that Wharton's use of the verb "delegated" in paragraph 13 was incorrect and did not accord with what actually happened.The foregoing serves, we think, to dispose of petitioners' motions, but we believe it might be well to append a few words in support of yet another ground. The notices to petitioners were in the usual form when issued. They were mailed to petitioners1975 U.S. Tax Ct. LEXIS 35">43 and received and acted upon by them as determinations of deficiencies in income tax by the Commissioner of Internal Revenue. Petitioners timely filed petitions with this Court, indicating that they were aware that respondent had determined the deficiencies which are the subject matter of these lawsuits. In these circumstances, we think that what we said in Ben Perlmutter, 44 T.C. 382">44 T.C. 382, 44 T.C. 382">400 (1965), bears repeating:It is axiomatic that the intent and purpose of the statutory requirement for the issuance of deficiency notices is to inform the taxpayer that the Commissioner means to assess additional taxes against him, and to provide time for the taxpayer to petition this Court for a redetermination if he is so advised. Here the taxpayers knew, and indeed admitted, that the respondent meant to assess deficiencies in income taxes against them; they received the notices issued in respondent's name and promptly invoked our jurisdiction to redetermine the deficiencies in question. To paraphrase the language of Judge Learned Hand in Olsen v. Helvering, 88 F.2d 650, 651 (C.A. 2, 1937), affirming a Memorandum Opinion of this 1975 U.S. Tax Ct. LEXIS 35">44 Court, their petitions here made it perfectly plain that they were not misled and enjoyed every privilege which a notice formally correct and issued * * would have given them. This being true, we are unwilling to construe even a tax statute in the archaic spirit necessary to defeat these levies; the notices are only to advise the person who is to pay the deficiency that the Commissioner means to assess him; anything that does this unequivocally is good enough.Cf. Michael Pendola, 50 T.C. 509">50 T.C. 509, 50 T.C. 509">513 (1968). Indeed, the case of Commissioner v. Oswego Falls Corp., 71 F.2d 673, 677 (2d Cir. 1934), affg. 26 B.T.A. 60">26 B.T.A. 60 (1932), is authority for the proposition that a notice of deficiency need not be signed at all. The fact that those here involved were signed by Wood would not serve to invalidate them.In sum, we hold that the notices were valid and accordingly that this Court has jurisdiction. Petitioners' motions will be denied.An appropriate order will be entered. Footnotes1. The cases of the following petitioners are consolidated herewith for purposes of this opinion: Hay Oil Company, Inc., docket No. 2779-75; Hay Oil Distributors, Inc., docket No. 2780-75; Frank S. Hay and Jane C. Hay, docket No. 2781-75; Tire Distributors, Inc., docket No. 2782-75; Lewis S. Hay and Carol J. Hay, docket No. 2783-75; Qualeco, Inc., docket No. 2784-75; Hooper Alexander III and Emmie H. Alexander, docket No. 2785-75; Frank S. Hay, Jr., and Ruth L. Hay, docket No. 2786-75.↩2. Since these are pretrial motions directed to the Court's jurisdiction, the Court has concluded that the posttrial procedures of Rule 182, Tax Court Rules of Practice and Procedure↩, are not applicable in these circumstances. This conclusion is based on the authority of the "otherwise provided" language of that rule. The parties have been afforded full opportunity to present their views.3. Part I, sec. 1224(2), Internal Revenue Manual, provides in material part:(2) Delegation Orders should be issued without restrictions on redelegation only when the authority being delegated may properly be exercised at any organizational level within the Service. In all other instances, the Delegation Order should establish either the lowest practicable level for exercise of the authority, the lowest practicable level for redelegation of the authority, or restrict authority to redelegate to key officials so as to avoid inappropriate redelegation by delegates of such key officials. For example, it would be inappropriate to redelegate authority to issue statutory notices of deficiency to employees who directly conduct or participate in the examination of returns↩. Accordingly, authority may be delegated to Service officials without authority to redelegate; or authority may be delegated to Service officials with authority to redelegate not lower than to a specified position. * * * [Emphasis supplied.]	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625725/	RALPH EDWARD NIEMAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentNieman v. CommissionerDocket No. 1094-93United States Tax CourtT.C. Memo 1993-533; 1993 Tax Ct. Memo LEXIS 540; 66 T.C.M. 1340; November 17, 1993, Filed 1993 Tax Ct. Memo LEXIS 540">540 Ralph Edward Nieman, pro se. For respondent: John W. Duncan. GOLDBERGGOLDBERGMEMORANDUM OPINION GOLDBERG, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1 This case is before the Court on respondent's Motion For Summary Judgment. Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1990 in the amount of $ 2,374 and an addition to tax under section 6651(a) in the amount of $ 246. Respondent determined that petitioner, an individual domiciled in Illinois, failed to file an individual Federal income tax return for taxable year 1990, and failed to report taxable income as follows: G.T. Construction Specialties - Wages$ 19,939U.S. Department of Agriculture382Illinois Bureau of Employment - Unemployment Comp.244Country Life Insurance Co. - Interest151993 Tax Ct. Memo LEXIS 540">541 In arriving at the deficiency, respondent subtracted from total income the applicable amount for an exemption and standard deduction, and credited against the tax the amount of $ 1,389, which was withheld from petitioner's wages. At the time his petition was filed, petitioner resided at Effingham, Illinois. Petitioner contends that respondent erred in determining the deficiency and addition to tax because: All "gross income" received by Ralph Edward Nieman, for the tax years in question is/was "gross income" as that term is defined in 26 CFR 1.862-1, and that all said "gross income", as defined at 26 CFR 1.862-1 was received "without the United States", as that phrase is defined in Subchapter N of 26 CFR 1.861-1 et seq. See attached AFFIDAVIT IN SUPPORT OF AMENDED PETITION.In an affidavit attached to his amended petition, petitioner sets forth numerous, tax-protester type legal arguments, including, in petitioner's words, the following propositions: That the Republic of Illinois is "without the United States"; That "Citizens of the United States" are those people who are freeborn, or naturalized inhabitants of the freely associated compact states; That "U.S.1993 Tax Ct. Memo LEXIS 540">542 Citizens" are those people that are citizens of the District of Columbia; that U.S. citizens and/or inhabitants of the Territories, Possessions, or Federal States, may or may not be citizens of the United States (Union States); That Congress excludes the 50 States from the definition of "United States", for the purposes of 26 U.S.C., Subtitle A, and defines all "income" from these 50 States as "income from sources without the United States", at 26 U.S.C. Subtitle N, Section 862, 26 CFR 1.862-1; That Ralph Edward Nieman is not a "U.S. Citizen", for purposes of Subtitle A, 26 U.S.C.; neither is he a resident, as that term is defined at 26 CFR 1.1-1, nor an inhabitant of the District of Columbia or any of the Territories, Possessions, or Federal States, (UNITED STATES); That All income received by Ralph Edward Nieman is/was income from sources "without the United States", as that term is defined, supra, and listed by Congress at 26 U.S.C. Section 862(a)(3) as: "compensation for labor or personal services performed without the United States"; That Ralph Edward Nieman is a "nonresident of the United States", as that term is defined at 26 U.S.C., Section 8651993 Tax Ct. Memo LEXIS 540">543 (g)(1)(B); That Ralph Edward Nieman did not knowingly, willingly, or voluntarily enter into any agreement, or contract, to be made partially liable for the National Debt, or "elected" to be treated as a resident of the United States, pursuant to 26 CFR 5h; 26 U.S.C. 6013(g)(h) or 7 CFR Part 3; That any such unknown contract was entered into with deception and constructive fraud by the Federal Government, and is null and void under the provisions of the Uniform Commercial Code.Petitioner attempts to argue an absurd proposition, essentially that the State of Illinois is not part of the United States. His hope is that he will find some semantic technicality which will render him exempt from Federal income tax, which applies generally to all U.S. citizens and residents. Suffice it to say, we find no support in any of the authorities petitioner cites for his position that he is not subject to Federal income tax on income he earned in Illinois. Like the Fifth Circuit in the case of another tax protester, "We perceive no need to refute these arguments with somber reasoning and copious citation of precedent; to do so might suggest that these1993 Tax Ct. Memo LEXIS 540">544 arguments have some colorable merit." Crain v. Commissioner, 737 F.2d 1417">737 F.2d 1417 (5th Cir. 1984). Petitioner's arguments are no more than stale tax protester contentions long dismissed summarily by this Court and all other courts which have heard such contentions. See Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403, 82 T.C. 403">406-407 (1984); Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111 (1983); Martin v. Commissioner, T.C. Memo. 1990-560; Everett v. Commissioner, T.C. Memo. 1989-605. Section 1 imposes an income tax on the income of every individual who is a citizen or resident of the United States. During the year at issue, petitioner resided in Illinois and therefore was a resident of the United States and subject to tax under section 1. A Federal income tax return must be filed by all individuals receiving gross income in excess of certain minimum amounts. Sec. 6012; sec. 1.6012-1(a), Income Tax Regs. Petitioner's gross income in each year exceeds the minimum amount. In short, petitioner is a taxpayer subject to the income tax laws. Rule 121 provides that1993 Tax Ct. Memo LEXIS 540">545 either party may move, with or without supporting affidavits, for a summary adjudication in the moving party's favor upon all or any part of the legal issues in controversy. Once the motion is filed and served, an opposing written response, with or without supporting affidavits, shall be filed. A decision shall thereafter be rendered if the pleadings and any other acceptable material, together with the affidavits, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. When a motion is made, an adverse party may not rest upon the mere allegations or denials of such party's pleadings, but the response must set forth specific facts showing that there is a genuine issue for trial. See Rule 121(a), (b), (d). Petitioner filed no written response to respondent's Motion For Summary Judgment, and set forth no facts at the hearing on the motion showing an issue for trial. We find that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. Therefore, respondent's Motion For Summary Judgment will be granted. The final matter we consider is whether we should, on our own motion, 1993 Tax Ct. Memo LEXIS 540">546 award a penalty to the United States under section 6673. Section 6673, as amended by the Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, sec. 7731(a), 103 Stat. 2106, 2400, provides, in pertinent part: (1) PROCEDURES INSTITUTED PRIMARILY FOR DELAY, ETC. -- Whenever it appears to the Tax Court that -- (A) proceedings before it have been instituted or maintained by the taxpayer primarily for delay, (B) the taxpayer's position in such proceeding is frivolous or groundless, or * * the Tax Court, in its decision, may require the taxpayer to pay the United States a penalty not in excess of $ 25,000.The record in this case establishes that petitioner had no interest in disputing either the deficiency or the addition to tax determined by respondent. Furthermore, it is clear that petitioner instituted this action to delay the assessment and collection of Federal income tax rightfully due. Rather, petitioner has raised only the tired, discredited arguments which are characterized as tax protester rhetoric. A petition to the Tax Court is frivolous if it is contrary to established law and unsupported by a reasoned, colorable argument for change in the law. 1993 Tax Ct. Memo LEXIS 540">*547 Coleman v. Commissioner, 791 F.2d 68">791 F.2d 68, 791 F.2d 68">71 (7th Cir. 1986), affg. in part an unreported order of this Court. Based upon the established law, petitioner's position is frivolous and groundless. Moreover, petitioner has previously asserted similar frivolous and groundless arguments in this Court. 2 Petitioners with genuine controversies were delayed while we considered this case. Accordingly, we will require petitioner to pay a penalty to the United States in the amount of $ 1,000. Coulter v. Commissioner, 82 T.C. 580">82 T.C. 580 (1984); Abrams v. Commissioner, 82 T.C. 403">82 T.C. 403 (1984). An appropriate order and decision will be entered. Footnotes1. All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩2. An Order of Dismissal and Decision for respondent was entered and petitioner's Motion to Vacate Order of Dismissal and Decision was denied in docket No. 3335-92 prior to the time the petition in the instant case was filed.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625727/	American Steel & Pump Corporation v. Commissioner.American Steel & Pump Corp. v. CommissionerDocket No. 66844.United States Tax CourtT.C. Memo 1962-24; 1962 Tax Ct. Memo LEXIS 284; 21 T.C.M. 109; T.C.M. (RIA) 62024; February 7, 19621962 Tax Ct. Memo LEXIS 284">284 George R. Sheriff, Esq., for the petitioner. Clarence P. Brazill, Jr., Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The Commissioner determined a deficiency in income and excess profits tax of $45,802.27 for 1951. Petitioner claims an overpayment of $93,964.01 for the same year. The questions presented are: (1) Whether the basis of assets obtained by petitioner in the liquidation of certain corporations should be ascertained by allocating petitioner's cost of acquiring the stock of the liquidated corporations among the various assets acquired; (2) whether petitioner is entitled to a worthless stock deduction in 1951; and (3) whether certain amounts of interest and bonuses should be treated as abnormal deductions in computing average base period net income for excess profits tax purposes pursuant to section 433(b)(10)(C)(i) and (ii), 1939 Code. Findings of Fact Some of the facts have been stipulated and are incorporated herein by reference. Petitioner filed its corporate income and excess profits tax return for the fiscal year ended November 30, 1951, on an accrual basis with the collector of internal revenue for1962 Tax Ct. Memo LEXIS 284">285 Lower Manhattan District, New York. The return filed was a consolidated return on behalf of petitioner and its affiliated corporations, Oklahoma Steel Castings Co., Incorporated, FitzSimons Steel Company, and Lawrenceburg Corporation (name changed from A. D. Cook, Incorporated on April 27, 1951). Petitioner was organized on January 30, 1947, under the laws of Delaware as OklahomaIndustrial Corporation. With capital of $150,000 it hoped to acquire profitable going businesses. On February 5, 1947, petitioner's name was changed to All American Industries, Inc. and on November 12, 1947, petitioner's name was changed to American Steel and Pump Corporation. During the period at issue petitioner was a holding company and owned all the authorized and outstanding capital stock of three operating subsidiaries. In 1947 finders located the Oklahoma Steel Castings Company, hereinafter referred to as Old Oklahoma, a Delaware corporation engaged in the business of manufacturing small and medium sized steel castings, both carbon and high and low alloy grades, by the electric furnace process. In order to acquire the business, Robert C. Hardy, one of the organizers of petitioner, arranged for the1962 Tax Ct. Memo LEXIS 284">286 purchase of the stock of Old Oklahoma. The acquisition of such stock was completed on March 26, 1947. In order to purchase the stock of Old Oklahoma petitioner borrowed $1,054,240 from American Business Credit Corporation payable June 30, 1947. To procure this loan petitioner paid a bonus of $75,000 to American Business Credit Corporation. The stock of Old Oklahoma was temporarily pledged to secure the indebtedness for the purchase price. The cost of acquiring the stock of Old Oklahoma and the allocation of this cost between the fixed assets and other assets was as follows: Cost of Capital Stock$1,054,240.00Add: Salary deemed excessive inamount of $18,000, whichamount is added to cost ofstock18,000.00Add: Consultants and finders fees$ 58,437.75Total cost of capital stock$1,130,677.75Less: Net Assets other than FixedAssets700,810.47Cost Basis of Fixed Assets$ 429,867.28The fixed assets cost of $429,867.28 was allocated by petitioner among the various fixed assets as follows: Fixed AssetsPercentageAmountBuildings34.0170$146,227.95Foundry Equipment50.9026218,813.62Office Furn. & Fixtures3.229513,882.56Autos and Trucks1.45766,265.75Flasks7.452932,037.58Land2.940412,639.82Totals100.0000$429,867.281962 Tax Ct. Memo LEXIS 284">287 Immediately following the stock acquisition, Old Oklahoma was liquidated and merged into petitioner. Petitioner retained the cash and other assets aggregating $391,539.37 to satisfy partially the indebtedness incurred in the stock purchase. The operating assets consisting of the land, buildings, machinery equipment, tools, furniture and inventory were transferred by petitioner to a new corporation known as Oklahoma Steel Castings Company, Inc. (hereinafter referred to as New Oklahoma) in exchange for all the stock of New Oklahoma. An appraisal of the fixed assets as of June 1, 1947 for insurance and public financing purposes was as follows: Property and facilities on plant site$ 984,845Property and facilities on scrapsteel storage site19,176Other property20,435Total Fixed Assets$1,024,456At a meeting of the petitioner's board of directors on June 16, 1947, $237,852.81 which represented the excess of the amount paid for the stock of Old Oklahoma over the net assets as shown on its books on March 31, 1947, was allocated 30 percent to the buildings account and 70 percent to the foundry equipment account. Shortly after it had acquired the stock1962 Tax Ct. Memo LEXIS 284">288 of Old Oklahoma, petitioner negotiated for the acquisition of the going business of the FitzSimons Company, (hereinafter referred to as Old FitzSimons) an Ohio corporation engaged in the business of drawing steel into bars. The acquisition was effected by a sale of the Old FitzSimons stock to petitioner followed by a liquidation of the acquired corporation. Petitioner was authorized by its board of directors to borrow $600,000 from American Business Credit Corporation in order to purchase the stock of Old FitzSimons. Later an additional $300,000 was borrowed from American Business Credit Corporation in order to effectuate the purchase. This loan was to be secured by a mortgage on Old FitzSimons' real estate as soon as the stock was purchased and Old FitzSimons liquidated. The cost of the stock of Old FitzSimons and the allocation of such cost between the fixed assets and the other assets was as follows: Cost of Capital Stock$ 900,000.00Add: Payment of tax liabilitiesof Old FitzSimons, plusinterest thereon to 3/31/47117,416.58Add: Consultants and finders fees37,000.00Total Cost of Capital Stock$1,054,416.58Less: Net Assets other thanFixed Assets688,092.28Cost Basis of Fixed Assets$ 366,324.301962 Tax Ct. Memo LEXIS 284">289 The seller of the Old FitzSimons stock held petitioner's note for $300,000 and petitioner upon acquisition of the stock was to liquidate Old FitzSimons and give a first mortgage on the real estate and fixed assets as security for the note. FitzSimons was liquidated and immediately thereafter petitioner borrowed $300,000 from the Union National Bank which loan was secured by a mortgage on the real estate and other fixed assets received in the liquidation. Certain accounts receivable received by petitioner upon liquidation were purchased by the sellers of the stock of Old FitzSimons for $139,858.47. Petitioner after reducing the fixed assets value of $366,324.30 by $63,500 which represented the book value of land it sold, allocated the remainder to the fixed assets as follows: Fixed AssetsPer CentAmountBuildings42.2045$127,805.48Machinery & Equipment55.9534169,440.49Office Furniture & Fix-tures1.84215,578.33100.0000$302,824.30On May 5, 1947, an appraisal of the fixed assets of Old FitzSimons as of February 15, 1947, was as follows: Buildings and Building Fixtures$200,020.00Machinery and Equipment234,050.00Dies$ 31,130.00Office Furniture and Fixtures8,730.00Total$473,930.001962 Tax Ct. Memo LEXIS 284">290 The operating assets of Old FitzSimons subject to the mortgages executed by petitioner were transferred to the Wilson Avenue Steel Corporation, a new corporation formed by petitioner. The name of the corporation was later changed from the Wilson Avenue Steel Corporation to The FitzSimons Steel Company (hereinafter referred to as New FitzSimons). New FitzSimons sold its open accounts receivable to the American Business Credit Corporation under a contract guaranteed by petitioner. Petitioner was also interested in acquiring the going business of A. D. Cook, Inc. by purchasing its stock and then liquidating the corporation. A. D. Cook, Inc. (hereinafter referred to as Old Cook) was an Indiana corporation engaged in the manufacture of deepwell turbines, water well strainers, water well supplies and automatic water supply systems. Consistent with its aim of acquiring Old Cook, petitioner formed the Lawrenceburg Corporation which contracted to purchase the stock of Old Cook for $350,000 cash and $850,000 in notes. An appraisal of the assets of Old Cook as of December 31, 1946 was as follows: Land$ 124,178.00Land Improvements17,161.00Buildings614,866.47Equipment1,087,223.42Water supplies25,183.03Total$1,868,611.921962 Tax Ct. Memo LEXIS 284">291 The stock of Old Cook was acquired on September 2, 1947 by Lawrenceburg and the seller was paid $350,000 in cash. Old Cook was liquidated and its assets transferred to Lawrenceburg. In accord with its contract Lawrenceburg delivered to the seller a note for $250,000 secured by United States Government bonds and another note for $600,000 secured by a mortgage on the real property, plant, machinery and equipment received upon the liquidation of Old Cook. Petitioner purchased the unissued 995 shares of Lawrenceburg stock for $600,000. This enabled Lawrenceburg to pay the $350,000 in cash to the seller at the time of the purchase and also enabled Lawrenceburg to purchase Government bonds for $250,000 to secure its note in that amount. Petitioner borrowed $600,000 with an additional charge of $40,000 from American Business Credit Corporation and executed a note bearing 12 percent interest secured by a pledge of the Lawrenceburg stock. Lawrenceburg then changed its name to A. D. Cook Incorporated (hereinafter referred to as New Cook). The cost of acquiring the stock of Old Cook and the allocation of the assets between fixed assets and other assets was as follows: Cost of Capital Stock$1,200,000.00Add: Salary deemed to be addi-tional cost of the capitalstock46,666.67Add: Consultants and finders fees37,000.00Total Cost of Capital Stock$1,283,666.67Less: Net Assets other thanFixed Assets738,585.06Cost Basis of Fixed Assets$ 545,081.611962 Tax Ct. Memo LEXIS 284">292 After reducing the fixed assets cost of $545,081.61 by items not appearing in the appraisal of $4,150.79, petitioner allocated such cost among the various fixed assets as follows: Percent-Fixed AssetsageAmountLand6.6455$ 35,947.56Buildings33.8234182,961.19Machinery & Equipment59.5311322,022.07100.0000$540,930.82Substantially all of the assets of New Cook were sold by authority of the board of directors in February 1951. The remaining assets were not sufficient to satisfy its liabilities. On May 5, 1951, New Cook ceased operations. On December 22, 1955, petitioner filed a claim for refund with the director of internal revenue for the lower Manhattan district. In the claim for refund petitioner maintained that On examination of the consolidated income tax returns of the taxpayer and its subsidiaries, by the Internal Revenue Service, depreciation on said physical properties was improperly computed on the basis of the cost of such properties to the predecessor companies * * Petitioner also contended that it "did not in fact realize a gain * * * but sustained a loss" on the sale of certain assets in 1951 when the correct basis1962 Tax Ct. Memo LEXIS 284">293 for the assets is utilized in computing the gain or loss. On January 23, 1957, the Commissioner sent petitioner a statutory notice of deficiency for 1951 in which the Commissioner stated: If a petition to The Tax Court of the United States is filed against the deficiency proposed herein, the issues set forth in your claims for refund should be made a part of the petition to be considered by The Tax Court in any redetermination of your tax liability. If a petition is not filed, the claims for refund will be disallowed and official notice will be issued by registered mail in accordance with Section 3772 of the Internal Revenue Code of 1939. Included in the statutory notice of deficiency was a determination by the Commissioner that petitioner was not entitled to restore to its base period net income for 1947 and 1948 any portion of claimed abnormal deductions for interest and bonuses on borrowings. This determination was explained as follows: It is held that you are not entitled to restore to your base period net income for the fiscal years ended November 30, 1947 and November 30, 1948 any portion of the claimed abnormal deductions of $191,038.13 and $63,991.21, respectively, 1962 Tax Ct. Memo LEXIS 284">294 for bonuses and interest on extensive borrowings under the provisions of Section 433(b)(10)(C)(i) and Section 433(b)(10)(C)(ii) of the Internal Revenue Code of 1939. In its petition to this Court petitioner claimed a deduction for the worthlessness of the stock of New Cook arising from the termination of New Cook's business. Opinion It is apparent from the evidence presented that petitioner through finders was attempting to locate profitable going businesses for acquisition. As a result of petitioner's limited initial capital position, due consideration in each contemplated acquisition was given to the cash and accounts receivable available and the amount that could be borrowed on the remaining assets. To effectuate each purchase petitioner worked in concert with a finance company which dictated the procedure to be employed in acquiring such going businesses. Under the plan formulated petitioner purchased the stock which was then temporarily pledged to secure the indebtedness for the purchase price. The acquired corporation was immediately liquidated and the cash and accounts receivable were applied to satisfy partially the indebtedness incurred in purchasing the stock. The operating1962 Tax Ct. Memo LEXIS 284">295 assets were transferred to a new corporation encumbered by mortgages to secure the remaining indebtedness. The new subsidiaries continued to conduct the businesses of the liquidated corporations. The question presented concerns the basis of the depreciable property in the hands of the new corporations. The Commissioner claims that the facts indicate petitioner intended to purchase stock and not assets and consequently the so-called Kimbell-Diamond rule is not applicable. Kimbell-Diamond Milling Co., 14 T.C. 74">14 T.C. 74 (1950), affd., 187 F.2d 718 (C.A. 5, 1951); Commissioner v. Ashland Oil & Refining Co., 99 F.2d 588 (C.A. 6, 1958). And the basis of the property in the liquidated corporations carries over to the new corporations. Although the Commissioner does not clearly disclose the theory upon which such a contention is predicated it appears from the tenor of his arguments that it is premised on the theory that the liquidations were within the purview of section 112(b)(6), I.R.C. 1939, i.e., a nontaxable liquidation of a subsidiary, and under the provisions of section 113(a)(15), I.R.C. 1939, the basis of the property acquired from the liquidated1962 Tax Ct. Memo LEXIS 284">296 subsidiary corporation is a substituted basis in the hands of the parent. Petitioner asserts that the basis of the depreciable property is an allocable portion of the amount which it paid for the stock of each corporation and not a substituted basis, citing United States v. M.O.J. Corporation, 274 F.2d 713 (C.A. 5, 1960), and our decision in North American Service Co., 33 T.C. 677">33 T.C. 677 (1960). In 14 T.C. 74">Kimbell-Diamond Milling Co., supra, and Commissioner v. Ashland Oil & Refining Co., supra, the taxpayer was allowed a "stepped up" basis for assets obtained in the liquidation of a subsidiary because it was found that the taxpayer's acquisition of the stock and the subsequent liquidation were intermediate steps in a unitary plan to acquire the underlying assets of the subsidiary. The assets obtained in the liquidation were then integrated into the continuing business of the taxpayer. In United States v. M.O.J. Corporation the Court of Appeals had occasion to consider the situation in which the Taxpayers' witnesses testified that "the intention was to have the business continue to operate with as little impact from change of ownership1962 Tax Ct. Memo LEXIS 284">297 as possible" and that it was their desire to continue to trade on the good will which had been created by the old companies in their long history. Instead of acquiring an asset to be utilized in the business of a parent corporation, this taxpayer was created for the purpose of stepping as unobtrusively and effectively as possible, and with all the old organizations intact, into the shoes of the existing going businesses. In M.O.J. Corporation, the Commissioner maintained that the Kimbell-Diamond rule was not applicable as the taxpayer admitted that it did not intend to integrate the assets into a continuing business but instead the purpose of the stock purchase was to acquire a going business which the taxpayer intended to operate in a new corporate shell by liquidating the acquired corporations. The court rejected the Commissioner's contention by saying that: If, in fact, the stock in a corporation must be bought in order to obtain that corporation's assets, there is no more justification for treating the acquisition of the stock and dissolution of the corporation as two steps giving rise to tax incidence where it is desired to continue the business of the original corporation1962 Tax Ct. Memo LEXIS 284">298 than where the acquisition of the stock and dissolution are for the purpose of obtaining the property or assets for their own separate intrinsic value. The essential thing is that here is a corporation that wishes to acquire the assets of another corporation; it does not want the intervening corporate structure; it never intends to keep it in existence for any of the many reasons that one corporation may desire to operate a wholly owned subsidiary as a separate entity; it therefore never intends for it to be a real subsidiary and it never is, in fact, except just long enough to be dissolved. Assuming the correctness of the decision of all of the courts that when this situation exists as a part of a plan to buy specific property the purchase of the stock and liquidation of the corporation owning the property is disregarded we perceive no difference conceptually when it exists as a part of a plan to buy a going business. Similarly in 33 T.C. 677">North American Service Co., supra, this Court said: We are convinced that the Kimbell-Diamond rule is not necessarily made inapplicable simply because a going business is continued in a new corporate form. The rule itself was developed1962 Tax Ct. Memo LEXIS 284">299 on the principle that substance, not form, should govern the tax consequences of a particular transaction. In determining whether, in substance, the objective of the transaction was the acquisition of property, it is necessary to consider all the relevant evidence, of which the failure to integrate the purchased assets into the business of the acquiring taxpayer may well be an important element. However, to make such failure conclusive of the determination, as contended by respondent, would introduce a new artificiality of form and create a rigidity of application inconsistent with the underlying purpose of the rule. In an attempt to distinguish the instant case from M.O.J. Corporation, the Commissioner points out that petitioner was a holding company, as the assets obtained in the liquidations were transferred to new subsidiaries, whereas in M.O.J. Corporation the assets were liquidated into the acquiring corporation which operated the businesses of the acquired corporations. As we view it, this factual deviation is not significant in determining the applicability of the principle enunciated1962 Tax Ct. Memo LEXIS 284">300 by the court in M.O.J. Corporation. We realize that the procedure employed, namely, transferring the assets to new subsidiaries with corporate names and trademarks which varied only slightly from those of the acquired corporations probably enabled petitioner to utilize any good will which attached to such corporate names and trade marks. However, in M.O.J. Corporation it was apparent to the court that the taxpayer "[desired] to continue to trade on the good will which had been created by the old companies in their long history." And we believe petitioner's attempt in the case before us to take full advantage of any good will generated by the acquired corporations does not distinguish this case from M.O.J. Corporation, but instead presents the question of whether any portion of the amounts paid for the stock of the various corporations was referable to or should be allocated to good will. In 33 T.C. 677">North American Service Co., supra, at page 695, we said that "The mere fact that a predecessor business possesses goodwill does not constitute proof that an acquiring corporation has purchased1962 Tax Ct. Memo LEXIS 284">301 that goodwill." And petitioner here introduced testimony that there was no intent to purchase good will and in the negotiations to acquire the respective corporations no consideration was given to good will. A valuation engineer testifying on behalf of the Commissioner stated that his computations under A.R.M. 34, 2 C.B. 31, a formula frequently utilized to value good will and other intangible assets, revealed that Old Oklahoma had good will of $359,825 but that neither Old FitzSimons nor Old Cook possessed good will. Inasmuch as the Commissioner's own witness agreed with petitioner's claim that Old FitzSimons and Old Cook had no good will, the only remaining question to be decided insofar as good will is concerned, is whether any part of the amount paid for the stock of Old Oklahoma should be allocated to good will. The parties stipulated that New Oklahoma had a cost basis for fixed assets of $429,867.28. Under the valuation engineer's computations only $70,042.28 ($429,867.28 - $359,825) represents fixed assets other than good will. However, an analysis of the fixed assets reveals that they included land, buildings, foundry equipment, autos and trucks, office1962 Tax Ct. Memo LEXIS 284">302 furniture and equipment, and flasks. Although we agree with the Commissioner that the evidence pertinent to this point indicates that a part of the amount paid for the stock of Old Oklahoma should be allocated to good will in valuing the assets of New Oklahoma, we do not believe after a thorough examination of all the evidence with respect to the value of the above enumerated fixed assets that the amount ascribed to good will by the valuation engineer is correct. Based on a consideration of the entire record we conclude that the amount allocable to good will should not exceed $100,000 and the "stepped up" basis of the fixed assets for depreciation should be adjusted accordingly. The next question involves the claim by petitioner that it is entitled to a worthless stock deduction in 1951 for the stock of New Cook. The question of whether stock became worthless during a given taxable year is a question of fact. Boehm v. Commissioner, 326 U.S. 287">326 U.S. 287 (1945). There is no partial deduction for worthless stock as in the case of a bad debt, accordingly the deduction must be taken in1962 Tax Ct. Memo LEXIS 284">303 the year in which the stock becomes worthless or the deduction is lost. Cooley Butler, 45 B.T.A. 593">45 B.T.A. 593 (1941). In Sterling Morton, 38 B.T.A. 1270">38 B.T.A. 1270, 38 B.T.A. 1270">1278 (1938) this Court, discussing the problem of ascertaining the year of worthlessness of stock said: that stock may not be considered as worthless even when having no liquidating value if there is a reasonable hope and expectation that it will become valuable at some future time, and that such hope and expectation may be foreclosed by the happening of certain events such as the bankruptcy, cessation from doing business, or liquidation of the corporation, or the appointment of a receiver for it. Such events are called "identifiable" in that they are likely to be immediately known by everyone having an interest by way of stockholdings or otherwise in the affairs of the corporation; but, regardless of the adjective used to describe them, they are important for tax purposes because they limit or destroy the potential value of stock. Our findings show that the operating assets of New Cook were sold in 1951 and the remaining assets were not sufficient to satisfy the outstanding liabilities. It follows from these1962 Tax Ct. Memo LEXIS 284">304 findings that the stock had no liquidating value in 1951 and in addition in that year any "reasonable hope and expectation" that the stock would become valuable at some future time was "foreclosed" by New Cook's "cessation from doing business." Accordingly, we conclude that petitioner has sustained its burden of proving that an "identifiable" event occurred in 1951 and we hold the stock became worthless in that year. The last question concerns petitioner's contention that the interest and bonuses paid in 1947 and 1948 with respect to the short-term borrowings necessary to acquire the stock of the various corporations constituted abnormal deductions in those years which should be eliminated in computing the average normal base period net income for excess profits tax purposes. In Gulf States Utilities Co., 16 T.C. 1381">16 T.C. 1381, 16 T.C. 1381">1391 (1951) we stated that: In order for a taxpayer to be entitled to have abnormal deductions disallowed in the computation of its base period net income, each requirement of the appropriate sections of the Internal Revenue Code must be satisfied. In the1962 Tax Ct. Memo LEXIS 284">305 event the taxpayer fails to satisfy any one of the provisions of the Code, his contentions for relief must fail. The Commissioner maintains that in the instant case the interest and bonuses cannot be disallowed under section 433(b)(9) inasmuch as petitioner has not established under section 433(b)(10)(C) that the deductions were not "a consequence of an increase in the gross income * " or "a change * * in the type, manner of operation, size, or condition of the business * * " We considered the burden trrust upon the taxpayer in this type situation in William Leveen Corporation, 3 T.C. 593">3 T.C. 593 (1944) and said: Perhaps the proof is best made by proving affirmatively that the abnormal deduction is a consequence of something other than the increase in gross income and that such proven cause is the converse or opposite of an increase in gross income and could not be identified with an increase in gross income. * * Petitioner has introduced evidence showing that its original capital was not sufficient to enable it to purchase the stock of the various corporations which necessitated extensive short-term borrowing. As set forth in our findings, petitioner in order1962 Tax Ct. Memo LEXIS 284">306 to procure such loans had to pay the lender a bonus in addition to a high interest rate. We are convinced that the evidence does establish that these deductions were abnormal and neither the "consequence of an increase in the gross income" nor "a change * * in the type, manner of operation, size, or condition of business * * *". In light of this affirmative proof we hold that such amounts should be disallowed as deductions in 1947 and 1948 in computing the average base period net income for excess profits tax purposes. Arrow-Hart & Hegeman Electric Co., 7 T.C. 1350">7 T.C. 1350 (1946). Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625756/	The Kentucky Distributing Company, Petitioner, v. Commissioner of Internal Revenue, RespondentKentucky Distributing Co. v. CommissionerDocket No. 25496United States Tax Court17 T.C. 312; 1951 U.S. Tax Ct. LEXIS 93; September 20, 1951, Promulgated 93 Decision will be entered under Rule 50. 1. Respondent determined that during the fiscal year ended June 30, 1944, petitioner received additional unreported income from the sales of whiskey in excess of O. P. A. ceiling prices. Held: During the period involved petitioner did not charge nor receive payments in excess of O. P. A. ceiling prices, and respondent erred in his determination.2. Deductible travel expenses incurred by petitioner during the fiscal year ended June 30, 1944, determined.3. Respondent's determination of fair and reasonable salary for personal services rendered petitioner by its president during the fiscal year ended June 30, 1945, approved. Leo Weinberger, Esq., Jerome Frank, Esq., and H. W. Vincent, Esq., for the petitioner.Hugh F. Culverhouse,94 Esq., for the respondent. Van Fossan, Judge. VAN FOSSAN 312 The Commissioner made certain adjustments and determined deficiencies in income, declared value excess profits, and excess profits taxes for the following years in the following amounts:DeclaredExcessFiscal year endedIncome taxvalue excess-profitsprofits taxtax6-30-1943$ 742.426-30-19442,470.66$ 22,318.25$ 126,055.946-30-19451,383.30The questions presented for our consideration and disposition are:1. Did the respondent err in increasing petitioner's reported income for the taxable year ended June 30, 1944, by the amount of prices charged in excess of O. P. A. ceilings?2. Did the respondent err in disallowing the travel expenses claimed by petitioner for the fiscal year ended June 30, 1944?3. Did the respondent err in disallowing as excessive a portion of the salary paid to petitioner's president and controlling stockholder for the fiscal year ended June 30, 1945?The petitioner has acquiesced in all other adjustments made by the Commissioner.The issue concerning the deficiency for the fiscal year ended June 30, 1943, is not in dispute.FINDINGS OF FACT.Petitioner, 95 The Kentucky Distributing Company, is a Kentucky corporation, having been incorporated in 1935. Its present mailing 313 address is 602 Second National Bank Building, Cincinnati, Ohio. The various tax returns for the taxable years involved were filed with the collector of internal revenue for the first district of Kentucky.During the years 1943, 1944, and part of 1945, petitioner engaged in the wholesale liquor business in Kentucky. David Fabe was its president, general manager, and sole stockholder. He directly supervised the sales, did all of the buying and negotiating with the distillers, and handled all transactions pertaining to banking. He did not directly supervise deliveries or the receipt and deposit of money. Petitioner's books were kept under Fabe's general supervision.Petitioner had two salesmen during the fiscal year ended June 30, 1944. There had been others, but only these two remained after the fall of 1943. Shortly prior to this time, petitioner had removed all salesmen from the road. Whiskey was scarce, and petitioner could dispose of any it could purchase without the services of such salesmen. In the spring of 1943, petitioner was advised by the96 distillers that a certain amount of whiskey would be allocated to it, and would be shipped at irregular intervals whenever it was available.When a shipment of whiskey was received, each customer was called and advised of the quantity to which he was entitled. The order and the invoice were then made up and turned over to the shipping clerk for delivery. Local deliveries were made in petitioner's own truck. Each such order was packed and the tickets affixed. The truck driver was then given the name and address of the consignee, and the amount to be collected. As required by Kentucky law, collection was made on delivery, and later turned in at petitioner's office.The same general procedure was followed by the common carrier in connection with non-local orders except that the invoices were usually mailed, and the payments collected by the common carriers were mailed by it to petitioner. In either case, the amounts collected were those shown on the invoices which had been made up in compliance with current O. P. A. price ceilings.On June 1, 1943, petitioner executed an application to the Department of Revenue of the Commonwealth of Kentucky for the renewal of its wholesale liquor97 license for the year commencing July 1, 1943. This application was refused and petitioner allowed 30 days in which to dispose of the merchandise on hand.By letter dated July 20, 1943, the administrator of the Distilled Spirits Unit advised petitioner that its stock must be disposed of by midnight August 11, 1943, at which time petitioner must cease business. Disposal was to be under the supervision of the Distilled Spirits Administrator of Kentucky and a record of sales submitted to him each three days.On August 11, 1943, the Distilled Spirits Administrator extended the time for disposing of the stock of merchandise until the closing 314 of business August 20, 1943. Between July 1, 1943, and August 20, 1943, petitioner disposed of its entire stock of whiskey.On August 19, 1943, the Kentucky Alcohol Beverage Control Board issued an order granting petitioner a special temporary wholesale liquor license until December 31, 1943.When this temporary permit was granted, petitioner remained in business, continuing to receive whiskey and selling it to its customers. It followed the same business procedure, having the salesmen contact the customers from the office, writing out98 the orders, shipping the whiskey, making out the invoices and collecting on delivery. During this interval strenuous efforts were made to get the license renewed.All of the whiskey was not disposed of by December 31, 1943, when the temporary license expired. Some of the stock had been deliberately held back so that shipment could be resumed should petitioner's permit be renewed. The holding back of whiskey in this manner continued until the latter part of January 1944. During the earlier part of that month petitioner still received its allocation of whiskey and made shipments to its customers as before.On January 6, 1944, the Distilled Spirits Administrator notified the petitioner that, in accordance with the Kentucky law, it must, by January 31, 1944, liquidate all of its merchandise under the supervision of the administrator. The administrator thereupon made an inventory of the merchandise on hand.During the month of January 1944, petitioner still felt that it would receive its license. Not until near the end of January was petitioner definitely advised that its permit would not be renewed and that it would have to dispose of its merchandise by January 31st, or such would99 be confiscated. Petitioner had about a day and one-half to dispose of approximately 2,000 cases.During this period of time petitioner bottled certain barrel whiskey belonging to Mrs. David Fabe, the president's wife. Also, certain customers would purchase negotiable warehouse receipts for whiskey and have it bottled through petitioner. Each such transaction was approved by the State of Kentucky before the order was sent to the distillery for bottling. When each such order had been bottled it was shipped to petitioner's warehouse, billed and delivered by petitioner as explained above. Payment was required on delivery. The payment so collected was always the amount shown on the invoice.Petitioner had disposed of all of its whiskey on or before January 31, 1944, and sold no whiskey after that date. All checks received after that date were for whiskey shipped on or before January 31, 1944.The sum reported as gross sales on petitioner's income tax returns for the fiscal year ended June 30, 1944, corresponds to that recorded in petitioner's general ledger for such period.315 During the fiscal year ended June 30, 1944, petitioner's president, Fabe, traveled extensively relative100 to petitioner's business. Two such trips were made to the New York office of National Distillers, seeking to increase petitioner's allocation of merchandise and to purchase same. The cost of these trips, including entertainment, traveling expenses, and railroad fare, was estimated to be $ 250 each. The entertainment expenses served no particular business purpose. On neither trip did Fabe stay at a hotel.One trip was made to the Jacksonville, Florida, office of National Distillers, which also pertained to the allocation of additional merchandise. The expense of this trip was also estimated to be $ 250. An additional trip was made to Jacksonville that "could have been done without" so far as the business was concerned.Fabe further made approximately 15 trips to Ashland, Kentucky, 20 trips to Frankfort, Kentucky, and several trips to Lexington, Kentucky, in connection with petitioner's attempt to acquire a renewal of its permit.The expenses incurred in connection with the above traveling were not supported by itemized records. In each instance, Fabe made the expenditures incident to the trip from his own funds. Upon his return from a particular trip, he would tell the bookkeeper101 the total amount of such expenditures. He was then reimbursed and the amount thereof entered on petitioner's books. The amounts so paid out by petitioner during the fiscal year ended June 30, 1944, totaled $ 4,710.18.Petitioner's ordinary and necessary business expense for traveling in the fiscal year ended June 30, 1944, totaled $ 2,500.Petitioner paid Fabe a salary of $ 6,650 for the fiscal year ended June 30, 1945. Prior to this year, Fabe had been paid $ 18,000 per year. This amount had been determined by respondent to be excessive and, accordingly, reduced to $ 13,000 per year.During the year under review, Fabe's duties included disposing of petitioner's lease which had 2 years to run and thereby acquiring petitioner's release from liability thereunder, taking care of correspondence, answering inquiries of revenue agents and, with few exceptions, being present in the office each day.Respondent determined that the amount so paid Fabe for performing the foregoing duties was unreasonable and disallowed $ 5,450 thereof.OPINION.This case presents three purely factual questions. The first and major one concerns the fiscal year ended June 30, 1944, and involves the question102 of whether petitioner derived additional 316 unreported income from the alleged sale of whiskey at prices in excess of O. P. A. ceilings.The regular wholesale liquor license held by petitioner expired on June 30, 1943. Its renewal was refused by the Commonwealth of Kentucky. Thereafter, several temporary permits were issued petitioner to allow for a liquidation of its stock. Throughout the period commencing July 1, 1943, and ending January 31, 1944, petitioner's business was continued under such temporary permits, and strenuous efforts were made to acquire the reissuance of its license. All efforts failed, and petitioner's operations ceased on January 31, 1944.Respondent determined that during the year involved, petitioner realized additional unreported income from its sales of whiskey in excess of O. P. A. ceiling prices, and that this excess is includible in petitioner's taxable income under the provisions of section 22 (a) of the Internal Revenue Code. 1103 Petitioner has introduced evidence consisting of the testimony of several witnesses. This evidence was to the effect that no overceiling prices were charged during the period under review and that no such payments were received by any employee of petitioner.In support of his determination, respondent has introduced the testimony of five witnesses. While there was some evidence adduced which lent a measure of support to the government charges, it was exceedingly vague. In some instances, it was not definitely fixed as to time. Several witnesses testified that they made a cash payment they understood to be in excess of the ceiling price appearing on the invoice, but they were unable to state that they ever knew the ceiling price, to identify the person to whom such payment was made, or to remember the amount so paid. Only on one occasion was that person definitely identified, and he categorically denied receiving anything above the invoice price. Moreover, this particular witness was unable to give more than a hazy, uncertain approximation of the alleged excess payment.When taken as a whole, the most that can be said for respondent's evidence is that it evokes suspicion. In104 reaching a conclusion, we are limited to the record made. We may not go outside thereof and indulge in speculation.317 After giving due consideration to all the evidence adduced by both parties, we feel that petitioner has met its burden of proof and should prevail on this issue.The second issue raises the question of whether respondent correctly disallowed the travel expenses claimed as a deduction by petitioner for the fiscal year ended June 30, 1944.The pertinent portion of the Internal Revenue Code is section 23 (a) (1) (A). 2105 And that section allows a deduction for travel expenses incurred during the taxable year " * * in the pursuit of a trade or business; * * ." Any portion of such expenses that may be categorized as personal are not so deductible. Section 24 (a) (1), Internal Revenue Code. 3After considering the trips made and the expenses incurred by Fabe, in the light of the circumstances known then to exist, we are convinced that some part, but not all, of such travel expenses was prompted by strictly business considerations and should be allowed as a deductible expense.Consequently, we have applied the rule of Cohan v. Commissioner, 39 F. 2d 540, and have come to the conclusion that $ 2,500 fairly represents the amount of such expenses as is properly deductible.There remains the question of whether respondent erred in disallowing, as excessive, part of the amount paid Fabe by petitioner for personal services rendered it during the fiscal year ended June 30, 1945. The applicable statute is section 23 (a) (1) (A), supra.Petitioner contends that the presumption of correctness attached to respondent's determination was overcome and disappeared when it introduced106 evidence on the question under consideration through the testimony of Fabe, that respondent has offered no evidence nor discredited such testimony, that it has, therefore, established a prima facie case, and that a decision must be reached on the testimony as it appears. We do not agree.318 Here, we have little evidence as to the services actually rendered and the value to be placed thereon other than Fabe's self-serving, sketchy, and uncorroborated testimony. It did not establish petitioner's contention as to amount or value of his services. We have no alternative to sustaining respondent's determination as to this issue.Decision will be entered under Rule 50. Footnotes1. SEC. 22. GROSS INCOME.(a) General Definition. -- "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * ↩2. SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(a) Expenses. -- (1) Trade or business expenses. -- (A) In General. -- All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.↩3. SEC. 24. ITEMS NOT DEDUCTIBLE.(a) General Rule. -- In computing net income no deduction shall in any case be allowed in respect of -- (1) Personal, living, * * expenses, * * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625757/	Estate of Charles H. Thieriot, Frances T. Thieriot, as Executrix, and Charles H. Thieriot, Jr., as Executor, Petitioners, v. Commissioner of Internal Revenue, RespondentThieriot v. CommissionerDocket No. 8573United States Tax Court7 T.C. 1119; 1946 U.S. Tax Ct. LEXIS 40; November 8, 1946, Promulgated 40 Decision will be entered under Rule 50. 1. Where a certificate of overassessment was issued by the Commissioner, but no final statutory closing agreement was entered into between the Treasury Department and taxpayer, the Commissioner was not estopped from reopening the case within the statutory period and making such adjustments as he deemed proper.2. Decedent took out a policy of insurance on his own life, naming his wife the life beneficiary, and death beneficiary if she survived the insured. The life beneficiary had the right to borrow money on the policy, to receive the cash or surrender value, and to change the beneficiary. The policy provided that if the death beneficiary did not survive the insured the proceeds were to be paid to the executors, administrators, and assigns of the insured. This provision was in effect at the decedent's death. Held, the proceeds of insurance in excess of $ 40,000 are includible in decedent's gross estate under section 811 (g) of the Internal Revenue Code. Helvering v. Hallock, 309 U.S. 106">309 U.S. 106; Goldstone v. United States (1945), 325 U.S. 687">325 U.S. 687. Eugene L. Bondy, Esq., for the petitioners.J. Frost Walker, Jr., Esq., for the respondent. Harlan, Judge. Arundell and Leech, JJ., dissent. HARLAN 1119 This proceeding is for the redetermination of a deficiency in the Federal estate tax liability of the estate of Charles H. Thieriot, deceased, in the amount of $ 22,947.49. Petitioners claim an overpayment in the amount of $ 6,821.21.The notice of deficiency was dated March 26, 1945.Three questions are raised by the pleadings:1. Were the proceeds of a certain policy of life insurance, issued on the life42 of the decedent by the Aetna Life Insurance Co., includible in the gross estate of the decedent, pursuant to the provisions of section 811 (g) of the Internal Revenue Code?2. Was the value of a certain life insurance policy, issued on the life of the decedent by the Aetna Life Insurance Co., includible in the gross estate of the decedent pursuant to the provisions of section 811 (c) of the Internal Revenue Code as a transfer intended to take effect in possession or enjoyment at or after death?3. Was the Commissioner estopped from asserting the deficiency herein?The case was submitted on a stipulation of facts and documentary evidence admitted at the hearing.FINDINGS OF FACT.Charles H. Thieriot, the decedent herein, and hereinafter referred to as such, a resident of Nassau County, Long Island, New York, died 1120 testate at 2:30 o'clock in the morning of January 10, 1941. His will was proved and admitted for administration in the Surrogate's Court of Nassau County on January 22, 1941. He was survived by his wife, Frances T. Thieriot, and two children, Charles H. Thieriot, Jr., and Lucille Thornton Thieriot Walker.The petitioners were appointed executors under the last43 will and testament of Charles H. Thieriot, deceased, qualified as such, and have since January 22, 1941, been acting as such executors. They filed the said estate tax return for the estate of Charles H. Thieriot with the collector of internal revenue for the first district of New York on April 10, 1942.On January 9, 1922, the Aetna Life Insurance Co. issued a policy of life insurance, No. N 308890, upon the life of the decedent in the sum of $ 100,000. All premiums on this policy were paid by the decedent.As originally drawn the policy provided that the sum payable upon the death of the decedent should be paid to Frances T. Thieriot, wife of the insured, if she survived the insured, otherwise to the executors, administrators, or assigns of the insured.The policy provided for two types of beneficiaries, a so-called "death beneficiary" and a "life beneficiary." The death beneficiary was designated to receive all payments due from the insurance company resulting from the death of the insured. The life beneficiary was entitled to all of the privileges granted by the policy, effective during the life of the insured. These privileges included the right to borrow money on the policy, 44 to receive the cash or surrender value thereof, and to change the designated beneficiary of the policy.By endorsement dated March 24, 1925, the death beneficiary clause was changed to read as follows:Death Beneficiary:Subject to any assignment hereof, the amount becoming due from the Company under this policy by reason of the death of the insured is hereby made payable to the insured's wife, Frances T. Thieriot, if she survives the insured and is living at the expiration of Forty-eight (48) hours after the death of the insured; otherwise to the children of the insured and the children of any deceased child of the insured who are then living, the children of the insured to share equally with each other and the children of any deceased child of the insured to take per stirpes the share such deceased child of the insured would have taken if living; if none of said beneficiaries is then living, to the executors, administrators, or assigns of the insured.No change was made in the death beneficiary clause after March 24, 1925, and the endorsement as of that date was in force upon the death of the insured on January 10, 1941.The life beneficiary clause as originally issued on January45 9, 1922, provided that the cash value or loan value should be payable to the life 1121 beneficiary, "Frances T. Thieriot, wife of the insured, if living when such value becomes payable, otherwise to the insured."By endorsement dated March 20, 1939, the life beneficiary clause was changed to read as follows:Life Beneficiary:Until the death of Frances T. Thieriot, wife of the insured, said wife shall be the life beneficiary.After the death of said wife and until the death of the survivor of Charles H. Thieriot, Jr., and Lucille Thornton Thieriot Walker, children of the insured, said children, jointly, or the survivor, shall be the life beneficiary.After the death of the last survivor of said wife and said children, the insured shall be the life beneficiary.The life beneficiary clause was not changed after March 20, 1939, and remained in force upon the death of the insured on January 10, 1941.The policy contained the following provision for change of beneficiary:Subject to any assignment hereof, the beneficiary of this policy may be changed as often as desired, and such change shall take effect on receipt at the Home Office of the Company, before the sum insured or any46 instalment thereof becomes due, of a request signed by the life beneficiary accompanied with the policy for proper endorsement.The endorsements on the policy dated March 24, 1925, and March 20, 1939, respectively, as set out above, were made upon the request signed in each case by the life beneficiary and the decedent.The annual premium on the policy was $ 2,653, payable January 9 in each and every year during the life of the insured. The amount paid the beneficiary on decedent's death was $ 97,347.The policy provided that after the payment of three full premiums the company would lend up to the cash value of the policy, but the request for such loan and the required assignment for that purpose could be executed by the life beneficiary alone.The policy also provided for automatic premium loans at the request of the life beneficiary, and "if requested by the life beneficiary" the policy could be surrendered to the company and converted into a paid up policy, payable at the death of the insured. It was further provided that upon request of the life beneficiary the policy might be surrendered by her and the company would pay to her the total cash value. The life beneficiary had47 the right to prescribe the method of payment of the benefit under the policy and to assign it. If the insured became permanently disabled within the definition of the contract, the benefits provided for such event would be paid to him only on the request duly executed of the life beneficiary.In the estate tax return filed by the executors Aetna Life Insurance Co. policy No. N 308890 was duly reported, but its proceeds in the 1122 amount of $ 97,347 were not included in the gross estate of the decedent, the executors claiming that they were exempt. The Commissioner contested the executors' claim and took the position that the proceeds were to be included in the gross estate. After hearing and negotiations between the parties, the internal revenue agent in charge, Brooklyn, New York, sent the following letter, dated April 14, 1944, to the executors:Referring to the hearings had on the protest filed in the above named estate, there is enclosed a statement of the basis upon which it is proposed to adjust the tax liability of this estate. If you will signify acceptance, in writing, of the settlement as proposed, further consideration will be given with a view to a closing of48 this case on that basis. Page 1244, "Acceptance of Proposed Overassessment", is enclosed for your signature in the foregoing connection.The statement enclosed with the letter showed an overassessment of $ 3,047.84.On April 20, 1944, Frances T. Thieriot, as executrix, signed and delivered Treasury Department Form 1244, accepting the proposed determination and settlement of the Commissioner as indicated in the statement of April 14, 1944. The form, as executed, read as follows:The proposed determination of the following overassessment or overassessments of tax, as indicated in the statement furnished the undersigned under date of April 14, 1944 is hereby accepted as correct:Estate TaxEstate of Charles H. Thieriot, deceasedAmount of overassessment$ 3,047.84This acceptance contemplates that when executors' commissions and attorneys' fees have been paid in full, the estate will file a claim for refund due to the tentative disallowance at this time of $ 3,526.23 of said commissions and $ 12,000.00 of said attorneys' fees, which were the respective balances remaining unpaid as of January 1st, 1944. The claim for refund to be hereafter filed will also cover appropriate49 additional deductions for expenses of the estate accountant, including the final accounting, and such other incidental expenses as may be properly chargeable in the administration of the estate.On August 4, 1944, the Treasury Department issued its certificate of overassessment, showing a credit to the estate of $ 3,047.84. On February 23, 1945, petitioners filed a claim for refund in the amount of $ 6,821.21, setting forth reasons for the allowance of the increased claim as follows:The "Acceptance of Proposed Over-Assessment," dated April 20, 1944 -- upon the Estate of Charles H. Thieriot, deceased -- determined the Total Tax due as $ 459,528.89, and recognized an over-payment of $ 3,047.84, which was refunded on August 4, 1944, as stated above; the said "Acceptance", by its terms, contemplated an additional claim for refund based upon the deductible payments, aggregating $ 22,306.15, evidenced by the attached affidavit of S. Clive Greaves, dated February 14th, 1945, made a part hereof -- with the following results: 1123 Tax already paid as assessed by Audit Certificate of August 4,1944$ 459,528.89Total net Tax payable as re-assessed under this claim452,707.68Refund hereby claimed (with interest to be added)6,821.2150 Petitioners' claim for refund was rejected by the Commissioner and the executors were notified of such rejection by letter, as follows:Reference is made to the claim on Form 843 filed on February 27, 1945, for the refund of $ 6,821.21 representing a portion of the Federal estate tax paid in the above-named estate.The claim seeks allowance as additional deductions of $ 3,526.23 for executors' commissions, $ 12,000.00 for attorneys' fees, and $ 6,779.92 for accountants' fees.Upon the merits, the estate is entitled to the deductions claimed. However, the claim opens up the entire case and the question arises as to the includibility for estate tax of policy No. N-308890, issued by the Aetna Life Insurance Company. Upon a consideration of the provisions of said policy it appears that the decedent had a contingent interest which gave him a legal incident of ownership, rendering the policy taxable within the meaning of section 811 (g) of the Internal Revenue Code. The inclusion of the policy at a value of $ 97,347.00 results in a deficiency of estate tax.Under the circumstances, and since there is in fact not an overassessment of estate tax but a deficiency in estate tax, the claim51 filed on February 27, 1945, for the refund of $ 6,821.21 is rejected in its entirety.OPINION.The petitioners allege in the petition that the respondent is estopped from including in gross estate the proceeds from the Aetna Life Insurance Policy in the amount of $ 97,347 because of a claimed settlement agreement entered into in 1944, on the faith of which they distributed assets and changed their position to their detriment. On brief they contend that the respondent erred in asserting the deficiency in question after the executors had agreed to adjust the tax liability of the estate on the basis of an overassessment in the amount of $ 3,047.84 and certain expenses of administration to be paid thereafter, and the Commissioner had issued a certificate of overassessment in the amount of $ 3,047.84, which amount was arrived at by excluding proceeds of insurance in the amount of $ 97,347.We have examined all the facts in the record and we find nothing to warrant an estoppel. The petitioners admit that section 3760 of the Internal Revenue Code specifically provides for a formal method of arriving at a final closing agreement and that such a method was not adopted here. The fact that52 petitioners chose to regard the certificate of overassessment as a final settlement agreement does not bring it within the terms of the statute, nor does it preclude the Commissioner from reopening the case within the statutory period and making such adjustments as he may deem proper. After the issuance of the certificate of overassessment the way was open for the petitioners to negotiate a final closing agreement with the Commissioner, as provided 1124 in section 3760 of the Internal Revenue Code, 1 before further distribution of the assets of the estate. Their failure to do so does not bind the Commissioner in the performance of his duties nor estop him from redetermining the tax liability of the estate.53 The Commissioner included in the gross estate the proceeds from policy No. N 308890 paid at the decedent's death in the amount of $ 97,347, on the ground that they were taxable within the meaning of section 811 (g) of the code. He now contends that they were also properly includible under the provisions of section 811 (c)2 as a transfer intended to take effect in possession and enjoyment at or after death.54 The petitioners contend that, under the rule in force at the time of the decedent's death, January 10, 1941, the test of whether the proceeds of a policy of insurance taken out by the decedent on his own life, but payable to another, was includible in the gross estate of the decedent, was whether the insured at the time of his death possessed any "legal incidents of ownership" in the policy. He argues that the surviving wife was from the inception of the contract its sole and unrestricted owner; that the decedent at the time of his death possessed none of the incidents of ownership in the policy and, therefore, the proceeds from the policy are not includible in the gross estate either under section 811 (c) or section 811 (g) of the Internal Revenue Code.The language of section 811 (g) is very broad. If strictly construed, it would include in the gross estate the proceeds of all insurance 1125 in excess of $ 40,000 payable to beneficiaries other than the decedent's representatives whenever the policy was "taken out by the decedent upon his own life." But Treasury regulations and the courts have never construed this sentence literally, cf. Chase National Bank v. United States, 116 Fed. (2d) 625-627,55 and, while no change was made in the statute from its appearance in the Revenue Act of 1918 as section 402 (f) (subsequently changed to 302 (g) -- section 811 (g), Internal Revenue Code) until the Revenue Act of 1942, numerous amendments were made to the regulations occasioned by court decisions.The issue here is whether the proceeds from the insurance policy on decedent's life, payable to the beneficiary at decedent's death, minus the statutory exemption of $ 40,000, are properly includible in the gross estate. The parties agree that they are so includible if the decedent possessed at the time of his death any "legal incidents of ownership" in the policy, but they are not in agreement as to what constituted "legal incidents of ownership" on January 10, 1941, when decedent died.The petitioner argues that the "legal incidents of ownership" are to be determined from Regulations 80 (1937 Ed.), arts. 25 and 27, as amended by T. D. 4729, March 18, 1937, C. B. 1937-1, pp. 284-288, which remained unchanged from that date to January 10, 1941, when it was again amended by T. D. 5032, C. B. 1941-1, p. 427. The respondent argues that 56 Regulations 105, approved February 18, 1942, which includes the pertinent provisions of T. D. 5032, is applicable here.The statute, as construed by the regulations, requires the inclusion in the gross estate of the decedent of the proceeds of any insurance in excess of $ 40,000 receivable by beneficiaries other than the decedent's representatives if the decedent possessed at the time of his death any of the legal incidents of ownership. Prior to March 18, 1937, Regulations 80 (1934 Ed.), article 25, provided in part as follows: * * Insurance is considered to be taken out by the decedent in all cases, whether or not he makes the application, if he pays the premiums either directly or indirectly, or they are paid by a person other than the beneficiary, or decedent possesses any of the legal incidents of ownership in the policy. Legal incidents of ownership in the policy include, for example: The right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value57 of the policy, etc. The decedent possesses a legal incident of ownership if the rights of the beneficiaries to receive the proceeds are conditioned upon the beneficiaries surviving the decedent.Following the decisions of the Supreme Court in Helvering v. St. Louis Union Trust Co., 296 U.S. 39">296 U.S. 39, and Bingham v. United States, 296 U.S. 211">296 U.S. 211, Regulations 80 was amended by T. D. 4729 (approved March 18, 1937), which deleted the phrase "The decedent possesses a 1126 legal incident of ownership if the rights of the beneficiaries to receive the proceeds are conditioned upon the beneficiaries surviving the decedent." Thereafter the only criterion provided in the regulations as to whether insurance was taken out by the decedent and the proceeds were includible in the gross estate was the "legal incidents of ownership," which included "for example the right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the58 surrender value of the policy, etc." No further amendment was made to the regulations construing section 811 (g) until January 10, 1941.On January 29, 1940, the Supreme Court decided Helvering v. Hallock, 309 U.S. 106">309 U.S. 106. This case repudiated the basis of the decision in Helvering v. St. Louis Union Trust Co., supra, and related cases, and established the principle that if in an inter vivos transfer of property there is a provision for a reversion to the grantor in the event the grantee predeceases him, the value of the property is includible in the gross estate of the decedent grantor. On March 4, 1940, the Court of Claims decided Bailey v. United States, 31 Fed. Supp. 778; certiorari to the Supreme Court dismissed September 27, 1940. This case involved policies of life insurance assigned by the insured so as to make his wife and son life owners, and the survivor unconditionally entitled to the proceeds upon the death of the insured, provided the beneficiaries survived the insured, but if the insured survived both, he became the life owner of the policies and the proceeds 59 of insurance were payable to his representatives. The Court of Claims held, on the authority of Helvering v. Hallock, supra, that the proceeds in excess of $ 40,000 were includible in the gross estate. On December 23, 1940, the Circuit Court of Appeals for the Second Circuit, in Chase National Bank v. United States, supra, held, on authority of Helvering v. Hallock, supra, that, where the proceeds of a life insurance policy and of paid up additional insurance, purchased with dividends, were payable to the insured's wife if she survived the insured, otherwise to the insured's estate, and the power to revoke the policy or change the beneficiary was not expressly retained by the insured, the death of the insured terminated the possibility of reverter in the insured in the event that the wife predeceased him and fixed the right to the proceeds unalterably in the wife, hence the proceeds were includible in insured's gross estate subject to estate tax. Thereafter on January 10, 1941, the Treasury Department, in T. D. 5032, supra, amended its Regulations60 80 to conform to these decisions. Article 27 was amended to read:Art. 27. Insurance receivable by other beneficiaries. -- The amount in excess of $ 40,000 of the aggregate proceeds of all insurance on the decedent's life not 1127 receivable by or for the benefit of his estate must be included in his gross estate as follows: (1) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) after January 10, 1941, the date of Treasury Decision 5032, and(2) To the extent to which such insurance was taken out by the decedent upon his own life (see article 25) on or before January 10, 1941, and with respect to which the decedent possessed any of the legal incidents of ownership at any time after such date or, in the case of decedent dying on or before such date, at the time of his death.Legal incidents of ownership in the policy include, for example, the right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, 61 etc. The insured possesses a legal incident of ownership if his death is necessary to terminate his interest in the insurance, as, for example if the proceeds would become payable to his estate, or payable as he might direct, should the beneficiary predecease him.These amendments were carried into Regulations 105.It is clear that the amendment of Regulations 80, article 27, by T. D. 5032 was for the purpose of conforming its construction of section 811 (g) to the decisions of the courts, Helvering v. Hallock, supra;Bailey v. United States, supra; and Chase National Bank v. United States, supra, after the former regulations had fallen with the cases on which they were based. Certainly the amendment to Regulations 80 by T. D. 4729 (March 18, 1937), whereby reversionary interests were excluded as an incident of ownership, did not have any higher dignity than the decisions of the Supreme Court on which it was bottomed, evidently Helvering v. St. Louis Union Trust Co., supra. When such decisions62 were overruled by the Supreme Court in Helvering v. Hallock, supra, the amendment to the regulations founded thereon ceased to be authoritative as a construction of the statute. When the Commissioner again on January 10, 1941, by T. D. 5032, restored a reversionary interest as an incident of ownership in a life insurance policy, he was reflecting the existing and established law as laid down in the Hallock, Bailey, and Chase National Bank cases.We think that under the rationale of the three preceding cases the decedent possessed a legal incident of ownership if, as here, his death was necessary to terminate his interest in the insurance, "as, for example if the proceeds would become payable to his estate, or payable as he might direct, should the beneficiary predecease him," regardless of when Treasury Regulations 80 was amended. Cf. Hock v. Commissioner, 152 Fed. (2d) 574.Petitioners rely on a memorandum opinion of this Court. 3 If this opinion is authority for the legal propositions submitted by petitioners, 1128 it is obvious that those propositions have been repudiated63 in principle by Hock v. Commissioner (1945), supra;Goldstone v. United States (1945), 325 U.S. 687">325 U.S. 687; Liebmann v. Hassett (1945), 148 Fed. (2d) 247; and Schongalla v. Hickey, 149 Fed. (2d) 687.Petitioners argue that under the terms of the contract the wife was the absolute owner of the policy, with power to change the beneficiary, surrender or cancel the policy, assign it, pledge it for a loan, or obtain a loan against the surrender value; that she made certain changes as indicated in our findings of fact to the end that she changed the "possibility of reversion" to contingent remainder; and that technically the decedent had no "possibility of reversion which was cut off by his death." While it is true that the decedent's wife, as life beneficiary, made certain changes by endorsement on the policy in both64 the death and the life beneficiaries which extended to her son and daughter, she did not change the provision for reversion to the insured. She only postponed the reversion until after the death of the survivor. We think the observation made by the lower court in Goldstone v. United States, 52 Fed. Supp. 704, in a somewhat similar situation, is pertinent. "The plaintiffs have placed too much importance on the word 'reverter' * * if any interest therein could come to him by reason of any contingency, then it comes squarely within the doctrine of Helvering v. Hallock." It is plain that, while the life beneficiary had the power to erase the decedent's reversionary interest, she did not exercise it. In Goldstone v. United States, 325 U.S. 687">325 U.S. 687, the Supreme Court said:* * * Whatever the likelihood of the exercise of this power, it is a fact that the wife did not change the beneficiaries or surrender the contracts so as to destroy decedent's reversionary interest. The string that the decedent retained over the proceeds of the contract until the moment of his death was no less real or significant, because65 of the wife's unused power to sever it at any time.Moreover, the fact that the life beneficiary had absolute control over the policy and could surrender it and take the cash value is not controlling. Since the power to surrender was not in fact exercised before the death of the insured, then the death of the insured was the intended event which cut the string by which the proceeds of the policy might be brought back to the insured and brought them into the possession and enjoyment of the beneficiary. Hock v. Commissioner, supra.There is no doubt that the policy here was a contract of insurance and involved an actual "insurance risk" within the import of section 811 (g) of the Internal Revenue Code. Cf. Helvering v. Le Gierse, 312 U.S. 531">312 U.S. 531. It was so treated by the Commissioner in the deficiency notice, where, in the statement attached thereto, the following explanatory statement is made:1129 InsurancePolicy No. N-308890 issued by Aetna Life Insurance Co. -- included for Federal estate tax, since the contingent interest decedent had therein gave him a legal incident of ownership which renders the66 policy taxable within the meaning of section 811 (g) of the Internal Revenue Code.We hold that the amount here in question is properly includible in the gross estate of the decedent under section 811 (g) as proceeds of life insurance taken out by the decedent, Helvering v. Hallock, supra; Goldstone v. United States, supra; Hock v. Commissioner, supra;Schongalla v. Hickey, supra;Chase National Bank v. United States, supra.In computing the deficiency the entire amount of the proceeds of life insurance under policy No. N 308890 was included in the gross estate, but the respondent in his brief states that "the estate has been allowed the full exemption of $ 40,000, provided by section 811 of the Code with respect to insurance other than that involved here." This statement may be verified in the recomputation of the estate tax liability under Rule 50.This opinion supplants the former opinion promulgated herein September 19, 1946.Decision will be entered under Rule 50. Footnotes1. SEC. 3760. CLOSING AGREEMENTS.(a) Authorization. -- The Commissioner (or any officer or employee of the Bureau of Internal Revenue, including the field service, authorized in writing by the Commissioner) is authorized to enter into an agreement in writing with any person relating to the liability of such person (or of the person or estate for which he acts) in respect of any internal revenue tax for any taxable period.(b) Finality. -- If such agreement is approved by the Secretary, the Under Secretary, or an Assistant Secretary, within such time as may be stated in such agreement, or later agreed to, such agreement shall be final and conclusive, and, except upon a showing of fraud or malfeasance, or misrepresentation of a material fact --(1) The case shall not be reopened as to the matters agreed upon or the agreement modified, by any officer, employee, or agent of the United States, and(2) In any suit, action, or proceeding, such agreement, or any determination, assessment, collection, payment, abatement, refund, or credit made in accordance therewith shall not be annulled, modified, set aside, or disregarded.↩2. SEC. 811. GROSS ESTATE. * * (c) Transfers in Contemplation of, or Taking Effect at Death. -- To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * ** * * *(g) Proceeds of Life Insurance. -- To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $ 40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.↩3. Estate of James W. Henry↩ (Docket No. 109513), entered Jan. 16, 1943.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477315/	OPINION. Black, Judge: In computing decedent’s gift tax on the December 13,1951, transfers in trust of Hotel Company and Garage Company stock, petitioners calculated the value of each beneficiary’s right to income from that trust on the basis of the life expectancy of such beneficiary (see Eegs. 108, sec. 86.19 (g), Table A, column 2), and applied the statutory annual exclusion1 to the figure thus arrived at for each beneficiary. Eespondent disallowed the claimed exclusions. Section 1003 (b) (3) provides that gifts of present interests are ex-cludible to the extent of $3,000 per donee in determining taxable gifts for any calendar year after 1942. Eespondent concedes that the beneficiaries’ rights to income from the trust constituted gifts of present interests. He contends, however, that the statutory exclusions are inapplicable becausé those present interests are incapable of valuation. The issue thus presented is whether our decisions in Sylvia H. Evans, 17 T. C. 206, affd. (C. A. 3) 198 F. 2d 435, and Jennie Brody, 19 T. C. 126, are (as respondent maintains) applicable to the facts of the instant case. We think they are. In Evans, supra, the settlor established a separate trust for each of her children, giving the beneficiary of each trust income therefrom for life and giving the trustees uncontrolled discretion to distribute corpus to the beneficiary for his (or his spouse’s or children’s) education, comfort, and support. In Brody, supra, the settlors established a separate trust for each child and grandchild giving the beneficiary of each trust income therefrom for life and corpus on a specified distribution date, but providing that the trustees may, in their uncontrolled discretion, distribute the corpus to the beneficiary prior to the specified distribution date. In both cases we held that the statutory exclusion for gifts, of present interests was inapplicable because each beneficiary’s right to income, although a present interest, was incapable of valuation since the trustees could, in their uncontrolled discretion, terminate that right at any time by accelerating the gift of corpus, and that this result must follow even though it was the income beneficiaries themselves who were the designated recipients of any accelerated corpus. The issue here is one of valuation, i. e., whether petitioners have reasonably proved the value of the gifts of income — which they must do in order to establish, the amount of the statutory exclusion to which the donor is entitled. As the Court of Appeals for the Eighth Circuit said in affirming our opinion in William Harry Kniep, 9 T. C. 943, affd. (C. A. 8) 172 F. 2d 755, which case we relied on in Evans and Brody, both supra: The taxpayer has the burden of proving not only his right to the claimed exclusion, but also the amount of it. * * * The insuperable difficulty with which the petitioner is confronted is that it is impossible for him to prove that the principal of the trust estate, and thus the income from it, will not be decreased by the.exercise of the discretionary power of invasion granted to the trustees; or to prove the amount by which the principal, upon which the present worth of the right to receive income must be computed, may be reduced by the exercise of the trustees’ power of invasion. See also Willis D. Wood, 16 T. C. 962, 967. In the instant case distribution of the corpus of decedent’s December 13,1951, inter vivos trust could be accelerated to the income beneficiaries (and their rights to income thus expunged) by termination of the trust upon motion of a majority in interest of those beneficiaries. The fact that the power of acceleration was in the beneficiaries, rather than the trustees, is a distinction from the above-cited cases which, if anything, strengthens respondent’s conclusion. See Willis D. Wood, supra. However, petitioners argue that this case must be distinguished from those we have cited because here the beneficiaries’ power of termination was not exercisable unless and until the trust under the will of A. J. Casey (Patrick’s brother) disposed of the shares it held in the Hotel Company It is true that the beneficiaries’ power of termination here is conditioned upon precedent action by the A. J. Casey trust and, therefore, was not, as was the trustees’ acceleration powers in Evans and Brody, both supra, absolute or uncontrolled at the date of the gifts. In fact, as petitioners point out, the beneficiaries might never be in a position to exercise their power of termination if the A. J. Casey trust chose not to dispose of its Hotel Company stock. Those circumstances, however, do not by themselves aid petitioners. When decedent made, her gifts in trust there was no restriction on the right of the A. J. Casey trust to dispose of the Hotel Company stock it held. It was free to do so at any time, either alone or in conjunction with a sale of the Hotel Company shares held in decedent’s trust. Petitioners have not shown us, nor are we aware of, any recognized method of evaluating the chances that such a sale would not take place. Robinette v. Helvering, 318 U. S. 184. The instant case is not like Commissioner v. Maresi, (C. A. 2) 156 F. 2d 929, affirming 6 T. C. 582, cited by petitioners, where it was held that the possibility of a divorced wife remarrying could be gauged by accredited actuarial tables. We are here referred to no such index of probabilities nor to any other evidence bearing on the chance of sale. ' For all we know the A. J. Casey trust could have, and might yet, sell its Hotel Company stock at any moment, and immediate termination of decedent’s trust could follow on the heels of such a sale, thus canceling the income rights of the beneficiaries thereunder. We must hold, therefore, that although the income rights of the beneficiaries of decedent’s trust were present interests, they were, just as in Evans and Brody, both supra, incapable of valuation and, consequently, the statutory exclusion is inapplicable to them. We are aware, as petitioners point out, that section 2503 (b) of the 1954 Code provides for a different result in cases such as this where the same persons are the beneficiaries of both the income and any accelerated corpus. But that section is applicable only to gifts made after 1954 and has no bearing upon the facts of the instant case. The final issue for our determination is whether decedent’s December 13, 1951, transfers in trust of the Hotel Company and Garage Company shares were made in contemplation of death, with the result that those shares are includible in her gross estate for Federal estate tax purposes. Sec. 811 (c) (1) (A), (1), 1939 Code;2 Regs. 105, sec. 81.16. The principles applicable to the resolution of this question are stated in United States v. Wells, 283 U. S. 102, as follows: The words “in contemplation of death” mean that the thought of death is the impelling cause of the transfer, and while the belief in the imminence of death may afford convincing evidence, the statute is not to. be limited, and its purpose thwarted, by a rule of construction which in place of contemplation of death makes the final criterion to be an apprehension that death is “near at hand.” If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. * * * * * * There is no escape from the necessity of carefully scrutinizing the circumstances of each case to detect the dominant motive of the donor in the light of his bodily and mental condition, and thus to give effect to the manifest purpose of the statute. * * * [Transfers are not made in contemplation of death if] the motive for the transfers brought them within the category of those which, * * * are intended, by the donor “to accomplish some purpose desirable to him if he continues to live.” * * * [Emphasis added.] Resort to decided cases is of little value since determining a decedent’s “dominant, controlling or impelling motive is a question of fact in each case.” Allen v. Trust Co. of Georgia, 326 U. S. 630. We have found as a fact that the transfers here in issue were not made in contemplation of death. In our findings we have carefully set forth all of the pertinent data in evidence bearing upon that ultimate factual finding. At first blush it would appear that the transfers were made in contemplation of death. Decedent suffered a severe heart attack on December 12,1951, and the facts clearly indicate that she then knew death was not very far away. On December 13, she executed the. trust instrument of transfer and 4 weeks later, on January 9, 1952, she died. But this is only part of the story. Decedent acquired the subject of the gifts, i. e., the Hotel Company and Garage Company shares, in 1941 as partial settlement of a claim she held against her husband’s estate for money which she had loaned him. Her husband actually intended those shares to pass to a trust established under his will and, realizing this, decedent wished to renounce her claim and give up her right to the shares. However, some of decedent’s children, who in fact were beneficiaries of the testamentary trust established by her husband, advised her against either renouncing the claim or making an immediate gratuitous re-transfer of the shares to the testamentary trust because of possible adverse income or estate tax consequences to her husband’s estate. At all times decedent stood ready and willing to transfer the shares to her husband’s testamentry trust whenever her children said that such a transfer would be advisable. Her son Laurence felt that there was no particular need to rush such a transfer and, in fact, her children initially lost nothing by the failure of such a transfer since the shares produced no dividends until 1947. The transfers were also delayed by the fact that from 1942-1946 three of her sons were in military service and therefore could not partake in discussions regarding the disposition of the shares. When dividends were paid on the shares, in 1947 and thereafter, decedent was even more concerned about her retention of the shares and wished her children to have the benefit of that income. The record certainly supports the conclusion that the dividend income was not needed by her at all; she was given a $15,000 a year annuity under her husband’s testamentary trust and, in fact, her income from all sources other than those dividends exceeded $21,000 in each year 1947 through 1950. Life motives impelling her to transfer the shares were, in addition to the desires to carry out her husband’s testamentary intention and to give her children the benefit of the dividend income, the wish to stabilize her family’s position in the Hotel Company by providing for unified voting control and the wish to assure unity and cooperation both among her children and between them and A. J. Casey’s heirs. Continued harmony and cooperation between the Patrick and Á. J. Casey families was also one of her husband’s testamentary desires. In 1947, decedent suffered a stroke which paralyzed her right side and compelled her to remain in a bed or wheelchair, with a registered nurse in constant attendance, until her death. We think it an important fact that this precipitated no rush to effectuate transfers of the shares. During the winter of 1950-1951, decedent’s son Joseph, who derived his income from executive employment in the Hotel Company and wished to stabilize the family’s position therein, urged Laurence to formulate a plan for decedent to transfer the shares. This was done and decedent approved the suggestion that the shares be transferred to an inter vivos trust to be established by her rather than to the testamentary trust set up by her husband in his will. For various reasons, none of which relate at all to decedent, who never did anything to delay the preparation or execution of the inter vivos trust instrument, the final draft of that instrument was not ready until December 6, 1951. On that date decedent approved it. Preparation of the documents for her signature "were completed on the afternoon of December 12, before she had her heart attack. Were an analysis made at this point, we think the conclusion would be inescapable that the motives impelling decedent’s transfers were those life motives which we have mentioned above. The question is, therefore, did the intervention of decedent’s severe heart attack prior to her actually signing the trust instrument on December 13, and her knowledge that death was not very far away, result in a change of motives for the transfers so that, at the time of signature of the trust instrument, such motives were testamentary? We think not. As stated in United States v. Wells, supra, “apprehension that death is ‘near at hand’ ” does not by itself compel the conclusion that the transfer was in contemplation of death. For years decedent wished to make transfers of this nature solely for life motives and was prevented from, doing so only by advice of her children, the intended donees. She was ready and willing to make the transfers whenever her children gave the .word, and were she in perfect health on December 13, rather than severely ill, we have no doubt that she woidd have unhesitatingly completed the transfers, the substance of which was approved by her on December 6. Under these circumstances we are convinced, to paraphrase United States v. Wells, supra,. that the transfers were intended by the donor to accomplish purposes desirable to her if she continued to live and, therefore, that they were not made in contemplation of death. For reasons heretofore stated, Decisions will be entered imder Bule 50. SEC. 1003. NET GIFTS. (b) Exclusions from Gifts.— • •• (3) Gifts after 1942. — In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year 1943 and subsequent calendar years, the first $3,000 of such gifts to such person, shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year. SEC.-811. GROSS ESTATE. The value of the gross estate of the decedent shall be determined by Including the value at the time of his death of all property, real or personal, tangible or Intangible, wherever situated, except real property situated outside of the United States— (c) Transfers in Contemplation of, or Taking Effect at, Death.— (1) General rule. — To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise— (A) in contemplation of his death; * * * ******* (1) Contemplation of Death. — If the decedent within a period of three years ending with the date of his death (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth) transferred an interest in property, * * * such transfer * * * shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of subsections (c), (d) and (Í) ; but no such transfer * * * made prior to such three-year period shall be deemed or held to have been made in contemplation of death.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477316/	OPINION. Harron, Judge: Petitioner seeks excess profits tax relief under section 722 (b) (4), Internal Eevenue Code of 1939, for the years 1942, 1943, and 1944. It claims that its average base period net income is an inadequate standard of normal earnings because of changes which took place during the base period in its management, its products, and its capacity for production. The facts, we think, clearly establish petitioner’s qualification for relief under subsection (b) (4), both by reason of a change in management and a change in capacity for production. Whether there was also a sufficient change in the products manufactured by petitioner, that is, a change from the standard orstock boxes to specials, to afford independent grounds for relief, we need not decide. These changes were all so closely interrelated that they must be considered together in any reconstruction of normal, base period earnings. See Victory Glass, Inc., 17 T. C. 381, and Bardons & Oliver, Inc., 25 T. C. 504. The change in management came about when Aaron and Morris Blum withdrew from the business and a new slate of officers and directors was installed to operate the business. The new management took over about the end of July 1938, and immediately set about to modernize and expand the business. Their principal aim was to ul-erease the production of specials to meet the growing demand for boxes of that type. This required additional floor space and equipment. The old management had been opposed to this change. Asa consequence of the change, there was a steady increase in the percentage production of specials over several years. The figures for the month of March, which were selected as representative of the full year’s operations for comparative purposes, show an increase of specials from 54.45 per cent of total production in 1938 to 69.79 per cent in 1941. The production of specials requires the services of a full-time artist to design the boxes, more and better machinery for cutting and printing (particularly for the color printing), and more skilled labor than had been employed theretofore. Petitioner’s capacity for production was substantially increased by the expansion and modernization of its plant. In September 1939, it enlarged its floor space approximately 55 per cent, and in each of the years 1939 and 1940 it purchased additional production equipment at a cost of over $17,000. Its average yearly purchases of equipment for the 3 next preceding years was less than $5,000. Compare in this respect Farmers Creamery Co. of Fredericksburg, Va., 18 T. C. 241. We do not consider it detrimental to petitioner’s claims, as respondent argues, that it may have been required to make the changes which it made in order to maintain its competitive position in the industry. The statute imposes no conditions as to the underlying causes for the qualifying changes. It is the importance of the changes and their effect upoñ the taxpayer’s independent business with which the statute is concerned. The full effect of petitioner’s base period changes, and particularly of the increase in plant capacity, was not realized by the end of the base period, so that the application of the push-back rule is required. While, as we have said,, petitioner’s qualifications for relief because of base period changes have been established to our satisfaction, the evidence leaves considerable uncertainty as to what would be a fair and just amount representing normal earnings to be used as a constructive average base period net income. Petitioner contends that $50,492 is a fair and just amount representing normal base period earnings. To arrive at this figure petitioner increased its net sales for 1939 by approximately 20 per cent over actual 1939 net sales, under the 2-year push-back rule, and reconstructed its expenses for that year so as to yield a profit of approximately 7.88 per cent on ■ such sales. The reconstructed 1939 profit is then adopted as the constructive average base period net income. Petitioner’s actual average base period net income is $7,406.77. Its excess profits credits, computed under the invested capital method, are $12,177.84 for 1942, $13,110.30 for 1943, and $14,825.49 for 1944. It is true, as respondent points out, that both the increase in net sales and the reconstructed expenses proposed by the petitioner, are based largely on conjecture. But as we have, said, the statute calls for “a prediction and an estimate of what earnings would have been under assumed circumstances, an approximation when an absolute is not available and not expected.” Victory Glass, Inc., supra. The petitioner, in our opinion, has considerably overestimated its constructive base period earnings. After a careful evaluation of the evidence before us we have determined that $22,500 is a fair and just amount representing normal earnings to be used as a constructive average base period net income. While this amount is- considerably greater than petitioner’s profits for any of the prior, years of its. operations, we think that it is a conservative estimate of what might have been expected with a 2-year development of the base period changes. There is no merit in respondent’s argument that because petitioner’s average base period net income was greater than its average for the preceding 18-year period, or for any interim period, it cannot claim that its business was depressed during the base period. Belief under subsection (b) (4) of section 722 is not predicated on a “depressed” base period income. That term is used only in subsections (2) and (3). Under, subsection (b) (4), a taxpayer has first to meet the general requirements of subsection (a), that is, a taxpayer must show that the excess profits tax computed without the benefits of the relief provisions is “excessive and discriminatory.” A taxpayer must show further that, as the result of having commenced business or changed the character of its business during or immediately prior to the base period, its average base period net income does not reflect the normal operation of the entire base period and is, therefore, an “inadequate standard” of normal earnings. It must show further what would be a fair and just amount representing normal base period earnings. We conclude that the facts adequately demonstrate that petitioner qualifies for relief. Reviewed by the Special Division. Decision will be entered under Buie 60.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477317/	OPINION. Harron, Judge: The petitioner claims relief from excess profits tax under the provisions of Code sections 722 (a) and 722 (b) (2), (b) (3) (A),(b) (3) (B),and (b) (5). The claim in this proceeding is for relief from excess profits tax for 1941. The years 1940 and 1942 are also involved because petitioner claims unused constructive excess profits credit carryover and carry-back. Petitioner’s chief contention is that it meets all of the qualifying factors set forth in section 722 (b) (3) (A). Petitioner contends also that it qualifies for relief under subsections (b) (3) (B), (b). (2), and (b) (5). On the basis of the facts found we conclude that petitioner does not meet any of the qualifying requirements of subsections (b) (3) (A), (b) (3) (B), (b) (2),or(b) (5), and is not entitled to use a constructive average base period net income for the purpose of computing its excess profits tax. At the outset, it is concluded that petitioner’s claim for relief under section 722 (b) (5) must be denied because it is not based on “any other factor” than those to which subsections (b) (2), (b) (3) (A), and (b) (3) (B) are specifically directed. Clermont Groves, Inc., 17 T. C. 1616; Gulf Coast Broadcasting Co., 24 T. C. 1094. The petitioner has made computations designed to show a constructive average base period net income. We have not included in tbe findings the facts upon which petitioner relies in making its computations, and we do not give consideration to petitioner’s contentions in support of its computations because of our conclusion that petitioner has not shown that it qualifies for relief under the requirements of section722 (b). We need consider, therefore, only whether the petitioner qualifies for relief under subsections (b) (2), (b) (3) (A), and (b) (3) (B) of section 722. The provisions of section 722 which are involved under the remaining contentions of the petitioner appear in. the margin.6 Applicable also are various provisions of Regulations 109 and of the Treasury Department’s Bulletin on Section 722, Excess Profits Tax Relief, hereinafter referred to as the Bulletin. The petitioner contends that its business was depressed in the base period. It claims that it meets the requirement in section 722 (b) (2), namely, that the depression was because of the fact that an industry of which it was a member was depressed by reason of temporary economic events unusual in the case of such industry. Petitioner also contends, under section 722 (b) (3), that its business was depressed in the base period by reason of conditions generally prevailing in an industry of which it was a member subjecting petitioner either to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) to sporadic and intermittent periods of high production and profits which periods were inadequately represented in the base period. The petitioner has undertaken to establish that it meets all of the above qualifying factors although petitioner relies in the alternative upon the provisions set forth above of (b) (2), (b) (3) (A), and (b) (3) (B). In attempting to meet the requisites of (b) (2) and (b) (3), the petitioner presented a vast amount of economic data relating to the nationwide construction industry of which it claims it is a member; and, in rebuttal, the respondent presented a substantial amount of economic data relating to the record of profits of all corporations in the United States as well as all corporations carrying on business within petitioner’s sales area. There is in the record before us a great quantity of expert testimony, statistical tables and charts, and exhibits. The record contains a great deal of data which is overlapping and which is pertinent to consideration of the questions arising under both (b) (2) and (b) (3). This is because under both (b) (2) and (b) (3) a taxpayer must establish the identity of an industry of which it is a member as well as that the taxpayer’s business was depressed in the base period. At the outset, it is noted also that the nature of the provisions of subsection (b) (3) (A) necessitates consideration of periods of years other than the base period years. Likewise, determir nation of the question of whether there is depression in the base period requires comparison with prior years; and comparison of cycles involves consideration of facts and factors over a longer period than the base period. Part IV (B) of the Bulletin. Since we are confronted with having to analyze the proof with respect to petitioner’s contentions that it meets various qualifying factors, it is convenient, if not necessary, to consider the evidence, relating to qualifying factors, such as, for example, base period depression, petitioner’s industry, conditions in the industry, and the comparison of cycles, rather than to consider the evidence adduced under each of the subsections of section 722 (b) on which petitioner relies. See Waldorf System, Inc., 21 T. C. 252, 267, 268, 269, 270, where this approach was followed. Industry. The parties are in sharp disagreement over the question involving determination of the industry of which petitioner, is a member. Briefly, petitioner contends that it is either a member of the construction industry (nationwide in scope), or of an industry, wholesalers of plumbing and heating supplies and equipment, which is closely related to and economically dependent upon the construction industry. On brief petitioner states its contentions in the following way: At all times the petitioner was a member of the construction industry, being a member of the sub-division thereof embracing wholesalers of plumbing and heating supplies and equipment; or, in the alternative, petitioner was a member of an industry embracing some or all of the wholesalers of plumbing and heating supplies and equipment, either in the entire United States, or in its general geographic portion thereof, which industry was so closely related tó and dependent economically upon the construction industry that its profit cycle was affected and controlled by the profit or volume cycle, or both, of the construction industry. Petitioner, also argues that, at least, it is— so dependent upon and subject to and controlled by the same economic influences as is the construction industry (using this term in the sense of contractors and others actually doing installation and construction work), that its volume and profits cycle is influenced and controlled by the volume and profits cycle of the construction industry. Respondent contends that petitioner is a member of an industry in the area within which petitioner made sales which is engaged in the wholesale distribution of broadly diversified lines of plumbing and heating equipment and supplies. In advancing this argument, respondent admits that to the extent that petitioner made sales to those éngagéd in actual construction, it was to a limited extent related to the construction industry. Respondent points out that because of the diversity of the line of products which petitioner sells, it appears to fall into several subindustry classifications according to the classifications of industries in both the Census of Manufacturers and the Census of Wholesalers, and that the diversified line of goods sold by petitioner includes materials which are used not only in new construction but also in repairs, replacements, maintenance, plant equipment, and manufacturing processes. The statute does not define industry. In Part I (F) of the Bulletin, the concept of “industry” is discussed as follows: In most general terms an “Industry” comprises a group of business concerns sufficiently homogeneous in nature of production or operation, type of product or service furnished, and type of customers, so as to be subject to roughly the same external economic circumstances affecting tlieir prices, volume and profits. Stated otherwise, an industry will generally consist of all of the producers which compete with each other in selling essentially the same products or services in the same market. * * * Regulations 109, section 30.722-2 (b) (8), states as follows: (8) For the purposes of section 722 and of section 80.722-3 (b) and (e), no exclusive definition of the concept “industry” can be constructed. In general an industry may be said to include a group of enterprises engaged in producing- or marketing the same or similar products or services under analogous conditions which are essentially different from those encountered by other enterprises. The mere similarity of product and marketing methods, however, is not enough of itself to comprehend taxpayers satisfying such conditions within the same industry. Factors such as geographical location, character and location' of markets, availability and character of raw material supply, and other conditions under which operations are carried on must be considered. Regard may be had to trade custom and practice in determining whether a group of enterprises constitutes an industry. In Pabst Air Conditioning Corporation, 14 T. C. 427, 438, we expressed the view tbat these concepts of industry are sound. Under the facts of this case, these concepts do not permit the industry which embraces wholesale distributors of plumbing and heating supplies and equipment to be regarded as the same as the general construction industry or the building and construction industry. Paraphrasing our reasoning in Pabst Air Conditioning Corporation, supra, it seems plain that the construction industry (or the building and construction industry) and the industry of .wholesale distributors of plumbing and heating supplies and equipment do not “compete with each other in selling essentially the same products or services in the same market.” The petitioner has failed to establish that its business was closely associated with the building and construction industry and that the largest part of its sales was used in new construction. Petitioner did not maintain records over a long period of years showing the end uses made of the goods it distributed. Such records as petitioner maintained show that its customers were engaged in various businesses which indicates various end uses of the goods sold by petitioner. Furthermore, petitioner was unable to produce satisfactory statistics about concerns comparable to petitioner in its sales area. The record does not establish that wholesale distributors of plumbing and heating supplies and equipment compete with the entire construction, or building and construction industry, or with the building and construction industry within petitioner’s sales region. The record contains no substantial evidence upon which reliable comparison can be made with petitioner. Petitioner attempted to obtain evidence about the sales data of plumbing and heating wholesalers through the records of a trade association, Central Supply Association, but such factual material as petitioner was able to obtain is limited to the years 1927-1930, and 1934-1939; it is fragmentary; and it relates to concerns which operated outside of petitioner’s sales region in 20 States. Petitioner’s sales area is restricted to the 4 States, Montana, Minnesota, North and South Dakota, and to portions of Wyoming, Michigan, and Wisconsin. Upon the entire record, it is concluded that the industry of which petitioner is a member comprises wholesale distributors of plumbing and heating equipment and supplies who operate in the same region and markets as petitioner operates; i. e., wholesalers of essentially the same products and services as petitioner sells, operating in the same market as petitioner. In determining whether petitioner meets the requirements of subsections (b) (2) and (b) (3) (A) and (B), we shall consider, therefore, the industry of which petitioner is a member as is concluded above. Base Period, Depression. Petitioner’s average net profit during the base period years exceeded its average net profit over the long period 1922-1939. During the base period years, average earnings were $199,913, or 110.7 per cent of $180,560, the 1922-1939 average. The petitioner was well established in its business prior to the base period and was not in a developmental stage during the base period. Cf. Ainsworth Manufacturing Corporation, 23 T. C. 372, 376. It is concluded that petitioner’s business was not depressed during the base period years. Foskett & Bishop Co., 16 T. C. 456, 462; Industrial Yarn Corporation, 16 T. C. 681, 689; Granite Construction Co., 19 T. C. 163, 170-171; A. B. Frank Co., 19 T. C. 174, 181; Pratt & Letchworth Co., 21 T. C. 999, 1005; Edgewater Steel Co., 23 T. C. 613, 626-627. The petitioner contends that its base period earnings were depressed when comparison is made with its average earnings during the period 1918-1933. It is true that petitioner’s average base period earnings were below the 1918-1933 average. However, we have held that the fact that average base period earnings were not as large as the average for a prior period does not necessarily mean that a taxpayer’s business was depressed during the base period. See Toledo Stove & Range Co., 16 T. C. 1125, 1130; Marian Bourbon & Wine Co., 14 T. C. 97, 104. On the basis of the entire record, we are satisfied that the petitioner’s average profit in the period 1922-1939 is a more appropriate standard by which to measure petitioner’s base period earnings for depression than petitioner’s average profit in the period 1918-1933. The period 1918-1933 includes the years 1918,1919, and 1920, which the evidence establishes were years of abnormally high profits due to the influence on the economy of. the first World War. Also, petitioner underwent a substantial change in the nature of its business during the early twenties, when it changed from a debtor corporation using borrowed capital to a creditor corporation lending a substantial portion of its net worth to Crane of Illinois. (See Table 6.) Of equal significance is the fact that average profits during the base period years were lower than the 1918-1933 average not only in petitioner’s case, but also in the case of all corporations in the United States and all corporations in petitioner’s sales area. (See Table 27.) Inasmuch as the base-period years have been determined by Congress to constitute a period of normal profits for general corporate business, the fact that petitioner’s base period earnings,, like those of all corporations, were below the 1918-1933 average does not establish that petitioner’s earnings were depressed during the base period years. Upon the basis of the entire record, we must reject petitioner’s contention that its business was depressed during the base period years. Depression i/n Petitioner's Industry. The petitioner has failed to establish that the industry of which it was a member, wholesalers of plumbing and heating supplies and equipment competing with petitioner in petitioner’s sales area, was depressed during the base period. The petitioner was unable to produce any evidence pertaining to its competitors. Nevertheless, petitioner cannot be excused from its burden of proving a fact essential to its contentions. El Campo Rice Milling Co., 13 T. C. 775, 786, 788. Petitioner also has failed to establish that the construction industry in its sales area, of which it claims to be a member, was depressed during the base period years. The evidence shows that construction activity in petitioner’s sales area was at approximately the same level as, or above, average construction activity in the same area during the period 1922-1939. The F. W. Dodge Corporation and Federal Reserve Board statistics show that the average value of construction contract awards in petitioner’s sales area for the base period years was 101.8 per cent and 99 per cent, respectively, of the 1922-1939 average value of construction contract awards, and that the average volume of construction contract awards in petitioner’s sales area during the base period years was 106.2 per cent and 100.8 per cent,-respectively, of the average volume during the period 1922-1939. It is concluded that petitioner has not established that the industry of which it was a member was depressed during the base period years. Petitioner has also failed to establish that its business was depressed during the base period years. Accordingly, it is held that petitioner fails to qualify for relief under the provisions of section 722 (b) (2). Conditions in Petitioner's Industry. Under section 722 (b) (3), the petitioner must establish that its business was depressed during the base period years by reason of conditions generally prevailing in its industry. It has been pointed out, above, that petitioner has failed to establish that its business was depressed during the base period years. Petitioner has also failed to establish that conditions generally prevailed in its industry which exerted a depressing effect in petitioner’s business. The record before us contains no statistics relating to the business of wholesalers of plumbing and heating supplies and equipment in petitioner’s sales area, and we are unable to determine what conditions prevailed in that industry during the base period years. One of petitioner’s witnesses testified generally that business conditions among plumbing and heating wholesalers in petitioner’s sales area were poor during the base period years because of the lack of construction activity in that area. However, this testimony is in conflict with the evidence relating to construction activity in petitioner’s sales area during the base period years. This evidence, which is discussed above, establishes that construction activity in petitioner’s sales area was not depressed during the base period. On this state of the record, we cannot find that conditions generally prevailed among plumbing and heating wholesalers in petitioner’s sales area, or in the construction .industry in petitioner’s sales area, which might have depressed petitioner’s business during the base period years. It is concluded that petitioner’s business was not depressed during the base period years by reason of conditions generally prevailing in an industry of which it was a member. Variant Profits Oyóle. Cycles can be regarded as including four phases, which may be designated as prosperity, decline, depression (or recession, if slight), and improvement or recovery. Each of these phases changes gradually into the next phase.7 The meaning of the terms “length” and “amplitude” are not in dispute. For the purposes of this proceeding, we aecept the definitions contained in the Bulletin on Section 722, Part IV (B): The length of the cycle is the period of time between corresponding stages of two successive cycles. The amplitude of the cycle refers to the violence of fluctuation and is measured by the vertical distance between high and low stages. The evidence shows that the pattern of petitioner’s profits during the period 1922 to 1939 was decidedly similar to the pattern of the profits, less tax-exempt income, of all corporations in the United States. The only point of divergence between the two profits patterns occurred in 1926, when general corporate profits fell slightly whereas petitioner’s earnings increased. Apart from 1926, the lengths of the movements and the turning points in both series of earnings data are the same. It is concluded that the movements in petitioner’s profits pattern did not vary materially in length from the movements in the profits pattern of all corporations in the United States. To the extent that the upturns and downswings in both series of profits can be segregated into cyclical patterns, the lengths of the movements in both profits cycles are virtually identical. It is true that the profits pattern for all corporations in the United States experienced a greater amplitude than did petitioner’s profits. However, under the statute, petitioner must prove a material variance in both length and amplitude. Avey Drilling Machine Co., 16 T. C. 1281, 1296. It is concluded that petitioner has failed to establish that its profits cycle varied materially in length and in amplitude from the profits cycle of all corporations in the United States. Petitioner’s profits pattern also is decidedly similar to the profits pattern of all corporations filing returns in the principal part of its sales area, namely, in Minnesota, Montana, North Dakota, and South Dakota. As set forth in the findings, the only difference noted is that in three instances in which both series of profits indices experienced a decline in profits, the duration of decline in petitioner’s profits was 1 year shorter than the period of decline for all corporations in its sales area. However, even in these instances, both series of profits indices reached troughs and entered recovery phases at the same time. Apart from this difference, both series of indices demonstrate the same upward and downward movements. It is concluded that the pattern of petitioner’s profits does not vary materially in length and amplitude from the profits pattern oí corporations in its sales area. The differences noted above between the profits indices of petitioner and of all corporations in its sales area are quite different from those which appeared in Waldorf System, Inc., supra, where the taxpayer was held to have been subject to a variant profits cycle. In that proceeding, the taxpayer’s earnings reached their peak in 1930. Earnings in 1931, although slightly below those of 1930, were well above average and higher than earnings in any other year in the entire period 1923-1939, with the exception of 1930. The taxpayer’s earnings did not fall sharply until 1932, and reached their trough in 1934, with 1935 as the first year of upturn. Thus, the taxpayer demonstrated that both the depression and recovery of its profits lagged 1 or 2 years behind the profits of all corporations. Furthermore, the taxpayer’s earnings did not experience any measure of recovery subsequent to the trough in 1934. Its earnings had reached a temporary high point in 1936, but thereafter fell again to a point where earnings during the period 1937 to 1939 were lower than in the prior low period of 1933 to 1935. Unlike the taxpayer in Waldorf System, Inc., supra, petitioner’s profits did not experience a lag in the timing of its recoveries from downturns, in comparison either with all corporations in the United States, or with the corporations in its sales area. Also, petitioner’s base period profits, measured quantitatively, did not fail to recover from the low period of 1931-1933, as was the case in the Waldorf System case. The record does not support petitioner’s contention that it experienced complete profits cycles, measured trough to trough, in the periods 1918-1933 and 1900-1918. Under petitioner’s contention, the year 1918 would be a trough year in both alleged cycles. Yet, the evidence shows that petitioner’s profits in 1918 were far greater than its average profits during either alleged cycle. Petitioner’s profits in 1918 were 195 per cent of average profits during the period 1918-1933 and 227.8 per cent of average profits during the period 1900-1918. Also, average profits for the 2 years 1919 and 1920 amounted to 292 per cent of the 1918-1933 average, although earnings in these 2 years would have been below the average for 1918-1933 if 1918 was a trough year. Similarly, average profits for the 2 years 1916 and 1917 amounted to 274.4 per cent of the 1900-1918 average, although earnings in these 2 years would have been below the 1900-1918 average if 1918 was a trough year. Petitioner’s contention that it experienced variant profits cycles, measured trough to trough, in the periods 1918-1933 and 1900-1918, must be rejected. It is concluded that petitioner was not subject to a profits cycle which differed materially in length and amplitude from the general business cycle, within the meaning of section 722 (b) (3) (A). It is held that the petitioner fails to qualify for relief under section722 (b) (3) (A). Sporadic Periods of High Profits. The provisions of section 722 (b) (3) (B), relating to “sporadic and intermittent periods of high production and profits,” are intended to apply in the case of a taxpayer experiencing prosperous years at irregular and unpredictable intervals, and having an earnings experience which cannot be segregated into cyclical patterns.8 It has been pointed out above that petitioner’s earnings experience can be segregated into the same profits cycles as the profits of all corporations in the United States and the profits of all corporations in petitioner’s sales area. It is held that petitioner does not qualify for relief under the provisions of section 722 (b) (3) (B). Under all the facts and circumstances of this case, it is concluded that petitioner’s average base period net income is not an inadequate standard of normal earnings for the petitioner. Reviewed by the Special Division. Decision will be entered for the respondent. SEC. 722. GENERAL RELIEF — CONSTRUCTIVE AVERAGE BASE PERIOD NET , INCOME. . (b) Taxpayers using Average Earnings Method. — The tax computed under this sub-chapter (without the benefit of this section) shall be considered to be excessive and discriminatory in the case of a taxpayer entitled to use the excess profits credit based on Income pursuant to section 718, if its average base period net income is an inadequate standard of normal earnings because— *** • • (2) the business of the taxpayer was depressed in the base period because of temporary economic circumstances unusual in the case of such taxpayer, or because of the fact that an industry of which such taxpayer was a member was depressed by reason of temporary economic events unusual in the case of such industry. (3) the business of the taxpayer was depressed in the base period, by reason of. conditions generally prevailing in .an Industry of which the taxpayer was a member, subjecting such taxpayer to (A) a profits cycle differing materially in length and amplitude from the general business cycle, or (B) sporadic and intermittent periods of high production and profits, and such periods are Inadequately represented in the base period Riggleman and Erisbee, Business Statistics (3d ed., 1951), 332, 334. Regs. 109. Sue. 30.722-3. Determination of Excessive and Discriminatory Tax ; Tax-payee Entitled to Excess Pbopits Cbbdit Based on Income.— (o) Business depression in base period because of variant profits cycle or sporadic and inadequately represented profits periods.— »**»» (2) Sporadic profits inadequately represented in the base period. — The characteristic distinguishing the type of case described in section 722 (b) (3) (B) from that In section 722 (b) (3) (A) is that In the latter case the taxpayer has an earnings experience which can be segregated into definite cycles, whereas in the former case (the type of case described in this paragraph) no such cyclical segregation can be made. In case the taxpayer is subjected to intermittent periods of high production and profits, the prosperous years of the taxpayer will occur at irregular and unpredictable intervals, and may depend upon fortuitous combinations of advantageous circumstances, as for example the juxtaposition of a good crop and a good market. If the base period of the taxpayer does not Include these prosperous years, its earnings during such period wiU not be an adequate measurement of average normal earnings.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477319/	Rice, Judge: These consolidated proceedings involve deficiencies in income tax determined by the respondent under the provisions of the 1939 Code and refunds claimed by the petitioners as follows: [[Image here]] The issues to be decided are: (1) Whether the deficiency notice in Docket No. 38302 for the period January 1 to June 30,1948, is a valid deficiency notice for the year 1948; (2) whether the testamentary trust in Docket No. 38302 sustained a net operating loss in 1948, because of diversions of its funds, which can be carried back to 1946 and 1947; (3) if so, were distributions to the beneficiaries of such trust in 1946, 1947, and 1948 distributions of corpus rather than distributions of income as originally reported; (4) whether a recovery by the testamentary trust of $10,000 in 1948, which represented a diversion of trust funds in that amount in 1932, constituted taxable income or a return of capital; (5) whether the petitioners in Docket No. 38308 are entitled to report trustee fees received by Douglas F. Schofield in 1946,1947, and 1948 under the provisions of section 107 (d) of the 1939 Code; (6) if so, are such petitioners entitled to deduct from the fees so reported the amounts paid to Josephine Schofield Thompson in the years when payments were made to her; and (7) whether the petitioner in Docket No. 38309 is an association taxable as a corporation for the taxable period July 1,1948, to December 31,1948. Concessions have been made with respect to other issues which will be taken into account under Hule 50 computations. Some of the facts were stipulated. GENERAL FINDINGS OF FACT. The stipulated facts are so found and are incorporated herein by this reference. All of'the petitioners except those in Docket No. 38304 were residents of Cleveland, Ohio, during the years in issue and filed their returns with the collector of internal révenue in that city. Roy C. Demmon and Mary Scofield Demmon, the petitioners in Docket No. 38304, were residents of the State of Illinois during the year 1948. Such docket was consolidated with those of the other petitioners in this proceeding. Issues 1,2,3, and 1¡,. FINDINGS OF FACT. Levi T. Scofield built the Schofield Building in the city of Cleveland in 1901 and 1902. He died on February 25, 1917. He was survived by two sons, William M. Scofield and Sherman W. Scofield; a daughter, Harriet E. Scofield Bushnell; and two grandchildren, Douglas F. Schofield and Josephine Schofield Thompson, who were the children of his son Douglas, who died in 1912. Douglas’ widow married William M. Scofield in 1916. Of that marriage, a daughter, Mary Jane Scofield, was born after Levi T. Scofield’s death. The principal asset of Levi T. Scofield’s estate was the Schofield Building which he left in trust for his children and grandchildren. His will provided that William was to be the trustee of the trust and that each of his three surviving children was to be one-fourth beneficiary of the trust income and that each of his two grandchildren and the widow of Douglas were to be one-twelfth beneficiaries of such trust income. The trust corpus was to vest in his children and grandchildren on September 14,1942, when Josephine Schofield, his youngest grandchild at the time of his death, attained the age of 30. Levi T. Scofield’s will was duly admitted to probate. His son, William, was appointed executor, filed his final account as such on March 8, 1918, and was discharged as executor on April 1 of that year. William did not file an application for appointment as trustee of the testamentary trust until March 15, 1926, on which day the Probate Court of Cuyahoga County entered an order appointing him trustee of such trust to serve without bond. William, in fact, served as trustee from the time of Levi T. Scofield’s death until April 22,1935, when his resignation as testamentary trustee was filed with and accepted by the Probate Court. Sherman W. Scofield had acted as manager of the Schofield Building prior to his father’s death and continued to act in that capacity until 1932. From May 1,1928, until September 12, 1935, Carlton Schultz, Inc., acted as the real operating manager of the building. Levi T. Scofield opened a bank account for the Schofield Building with the Cleveland Trust Company (hereinafter referred to as the bank) on May 3,1909. Checks on such account were signed by Sherman and countersigned by his father. On January 29, 1917, Levi T. Scofield executed a power of attorney to his son William, authorizing him to sign checks on such account during his illness. After Levi T. Scofield’s death, the bank was furnished with a copy of his will, and, on March 2,1917, the bank was advised by Sherman and William that checks on the Schofield Building account in the future would be •signed by either or both of them. The account with the Cleveland Trust Company was the only account maintained by William and Sherman for trust funds, and all deposits or disbursements of such funds by them were made in and from such account. From June 2, 1928, until September .1935, all rents from the Scho-field Building collected by Carlton Schultz, Inc., were deposited by it in two checking accounts which it opened with the bank. Signature cards authorizing Carlton Schultz, Inc., or its employees to withdraw funds from such accounts were filed with the bank. At the time of Levi T. Scofield’s death, the Northwestern Mutual Life Insurance Company (hereinafter referred to as Northwestern) held a mortgage on the Schofield Building in the amount of $504,000. Late in 1934, Douglas F. Schofield was asked to approve the testamentary trust’s application for an additional mortgage loan from Northwestern for the purpose of installing new elevators in the building. Douglas had graduated from law school that year and had been admitted to practice before the Ohio bar. His investigation as to the need for an additional mortgage loan led to his discovery that large amounts of trust income had been used by his uncles for non-trust purposes. He discovered that during the period from 1917 to 1932 a total of $453,939.10 of testamentary trust funds had been disbursed by William and Sherman for non-trust purposes as follows: (a) $134,001.26 was used from 1921 to 1932 to operate the Self-Clasp Envelope Company, most of whose stock William and Sherman owned personally. (b) $150,933.83 was used from 1917 to 1932 for the personal use and benefit of Sherman Scofield of which $65,564 was deposited in his personal checking account at the Cleveland Trust Company, frequently to cure his overdrafts. The balance consisted either of checks drawn to pay his personal bills or of checks which he cashed and the proceeds of which he spent for personal uses. (c) $75,808.89 was used from 1917 to 1931 to finance and develop a real estate allotment in which William and Sherman Scofield had personal financial interests and to pay operating expenses of a real estate firm engaged in promoting such allotment, in which firm Sherman Scofield was a partner. Levi T. Scofield had drafted a plan of the lots for said allotment, but had incurred no debts in connection therewith. (d) $30,948.47 was used from 1920 to 1930 to finance the operations of J. B. LaKue in his attempts to develop a process for extracting aluminum from sand, in which operations Sherman Scofield had a 55 per cent interest. (e) $11,583.43 was used from 1919 to 1932 to finance the operations of. M. W. Muelhauser in his attempt to develop a coal mining machine and safety engineering devices and obtain patents thereon, in which operation Sherman Scofield had a 50 per cent interest. (f) $5,293.83 was used from 1925 to 1928 to grubstake John T. Wertz in the development of gold mining claims in Wyoming, in which Sherman had a financial interest. (g) $2,021.08 was used from 1917 to.1926 for the personal use and benefit of William Scofield and consisted of checks drawn to pay his personal bills or checks deposited in his personal checking account at the Union Trust Company. (h) $18,000 was used from 1917 to 1932 as gifts to Mrs. Lydia Brown, Mrs. Altie Philips, and Mrs. Mabel McCallipe, who were aunts of William and Sherman Scofield, and who had received regular monthly checks from Levi T. Scofield before his death. (i) -The remaining $25,348.31 was used from 1917 to 1932 for a variety of personal purposes, including loans to friends of William and Sherman Scofield, payment of debts of their business associates, payment of debts of Sherman’s college fraternity, payments for relatives and for storage of furniture from a residence, none of which disbursements were for trust purposes. Such funds were disbursed by 3,968 checks drawn by them on the Schofield Building account which they maintained in the Cleveland Trust Company. Of the total diversions described above, the amount of $31,606,11 had been withdrawn by William and Sherman by checks from trust funds on deposit with the Cleveland Trust Company to repay their personal loans at such bank or to cover overdrafts in their accounts there. Douglas also discovered that from September 1, 1922, until April 30, 1935, additional mortgages to Northwestern had been executed by William and that during such period William, Sherman, and Carlton Schultz, Inc., disbursed a total of $350,454.90 of testamentary trust funds to Northwestern as interest payments on outstanding mortgage loans. Upon discovering the aforementioned diversions of trust funds, Douglas advised Northwestern that there appeared to be no authority under his grandfather’s will for any of the mortgage transactions which had taken place since 1917, nor for the proposed new mortgage transaction for the purpose of obtaining funds for the installation of new elevators. He further advised Northwestern that he objected to the trust’s obtaining additional funds from Northwestern for such purpose. Northwestern thereupon, on February 13,1935, commenced an action in the Court of Common Pleas of Cuyahoga County, Ohio, to foreclose on the outstanding mortgages executed by William which secured his notes as trustee in the total amount of $660,000. On April 25, 1935, Douglas qualified as the successor testamentary trustee to William. After qualifying as successor trustee, Douglas filed an answer to Northwestern’s foreclosure suit denying the validity of the notes and mortgages sued upon. He, in addition, filed a cross-petition against Northwestern claiming a recovery of $796,773.05 for interest wrongfully paid to Northwestern and for damages as a result of other breaches of trust in which Northwestern had allegedly participated. On December 13,1935, Douglas filed an action against William and Sherman Scofield seeking recovery from them in the amount of $1,066,320.02 for alleged diversions of trust funds. At that time, neither William nor Sherman had assets of any importance other than their contingent interest in the trust corpus which would vest in them if they lived until September 14,1942. On December 5,1935, Douglas filed an action against the Cleveland Trust Company alleging that it participated with William and Sherman in breaches of the testamentary trust with notice and knowledge of its participation in the diversion of trust funds. Such action sought recovery from the bank in the amount of $1,069,306.08. In March and April 1936, Douglas filed a total of 62 separate complaints against that many persons for withholding assets of the testamentary trust which they had received as a result' of the alleged diversion of trust funds. The aggregate amount claimed in such suits was $48,128.84. Trial of the Northwestern foreclosure action was held in December 1936 and resulted in a settlement agreement reached by the parties, in January 1937. Such settlement agreement provided for the execution of a new mortgage in the amount of $655,000. In 1940, judgments were entered against William and Sherman on their confessed liability in the respective amounts of $2,541,939.31 and $2,464,928.70. Neither William nor Sherman possessed any assets on the date of the judgment. William died on July 3,1942, and Sherman died on August 4, 1942, prior to the time when their interest in the trust corpus vested in them. Sherman Scofield died insolvent; the net assets of William’s estate in the amount of $1,788.74 were paid over to Douglas as successor testamentary trustee in 1946. Trial of the action against the Cleveland Trust Company was held in March and April 1942, and the trial court entered its opinion on March 31, 1943. The court rendered judgment against the bank in the principal amount of $10,000, which was a full recovery on the claimed diversion of trust funds in that amount represented by two checks of $5,000 each paid by the Standard Drug Company, a tenant in the Schofield Building, as advance rent.- Such payment had been made by the Drug Company to William in 1932 under the following circumstances: William and Sherman were makers of a promissory note in the amount of $10,070.41, which had been given in payment of machinery purchased by the Self-Clasp. Envelope Company. The Cleveland Trust Company entered into a trust agreement' with the promisee of the note to collect the amount due. The bank made demand on William and Sherman; and to prevent the sale of patents belonging to The Self-Clasp Envelope Company, which secured the note, they obtained two checks from the Standard Drug Company made payable to the order of “Wm. M. Scofield, Trustee of the Estate of Levi T. Scofield,” which the Drug Company gave as advance rental for premises which it occupied in the Schofield Building. The bank, through an officer in its corporate trust department, accepted the two checks from William in payment of his and Sherman’s personal indebtedness to the promisee of the note. The court held the bank liable for the amount of checks drawn by William and Sherman on trust funds and used by them to pay their personal loans at the bank or to cover overdrafts in their personal bank accounts, in the additional amount of $31,606.11, but denied recovery of such sum because of the bar of the statute of limitation. In the course of its opinion, the court stated: We now take up one of the chief questions in this case. There is a line of authority which follows the case of Bischoff v. Yorkville Bank, 218 N. Y. 106, which holds, in effect, that if a fiduciary makes a deposit to his personal account from trust funds by way of a cheek drawn to him and then from his personal account pays his indebtedness to the bank, that the bank is chargeable with notice to all misapplications of trust funds thereafter made by him by withdrawals from the trust fund. The plaintiff contends that in the case at bar the Bank received checks of the fiduciary and applied the same in payment of the personal indebtedness of William and Sherman, and since, among the first checks drawn on the fiduciary account after the death of Levi, was a check covering an overdraft of Sherman’s account with the Bank, that thereafter the Bank had a continuing notice and is liable for any subsequent diversions. If we adopt the theory of the Bischoff case, the Bank is liable for practically all of the diversions of the Trustee. We are satisfied that the Bischoff case does no£ announce the rule at common law nor the majority rule. We prefer the rule announced in the Massachusetts case of Allen v. Puritan, 211 Mass. 409, where it is held, in a similar case, that the bank was liable only for the amount of the diversions used to pay its own indebtedness. The Ohio courts have not spoken on this phase of the law. The whole question largely resolves itself into one of notice. The answer to this question must be determined from the facts in every case. The Bischoff case did not pass upon the facts precisely similar to the case at bar, and the Court said so in its opinion. It is for us to determine, therefore, whether or not, from all the facts and circumstances in this case, the Bank had notice of such conduct on the part of the Trustee as would render it liable for the diversion of trust funds for non-trust purposes. While in retrospect we see many irregularities and much to criticize, we must remember that “hindsight” is better than “foresight” and that these irregularities in themselves were not vicious and do not affect the real cause of this lawsuit. ******* After a careful examination of all of the evidence, we have reached the conclusion that except as hereinafter set forth the notice to the Bank of the irregularities of the Trustee and of the diversions of the trust funds cannot be said to be actual notice. There is no evidence that the Bank violated any established banking practices. In this case, unlike many other cases involving questions of the liability of depository, there is no element of bad faith involved on the part of the Bank. There was no deceit or any evidence of fraudulent conduct on the part of the Bank. Whatever knowledge the Bank had must, in our opinion, be based upon the theory of constructive notice. It is for this reason, no doubt, that the plaintiff places so much confidence in the Bisehoff case, because unless the doctrine of that case is followed in the case at bar, there is no evidence of notice to the Bank of most of the diversions of the Trustee. One of the reasons why the Bischoff case has been criticized is that it imposes too great a burden of inquiry upon the depository. It seems to us that this is true. If the rule in the Bischoff case is followed in the case at bar, it not only imposes an unreasonable burden upon the Bank, but it also has the effect of practically nullifying the wishes of the testator, because to carry out the theory which the plaintiff urges, the Bank would, in effect, become the Trustee. * * * Douglas appealed the decision of the trial court which was affirmed by the Court of Appeals of Cuyahoga County. He further appealed the decision to the Supreme Court of Ohio, which, in 1948, disagreed with the lower court’s application of the statute of limitation and granted an additional judgment against the bank in the amount of $31,606.11, together with interest in the amount of $56,152.85, and costs of $2,567.56. The bank paid $76,308.96 of such judgment in March 1948, and the balance in August of that year. In 1948, after the decision of the Supreme Court in the Cleveland Trust Company case, Douglas proceeded against the 62 defendants against which he had filed complaints in 1936. In 1948, he recovered $5,465.99 on 58 of such claims. The 4 remaining claims in the amount of $18,080.01 were turned over to attorneys for further prosecution, and 2 of such claims were settled in 1949 for $1,750. One was settled in 1953 for $500, and the remaining claim was abandoned in 1953. The testamentary trust was in existence throughout 1948, and was still in existence at the date of the hearing. On its income tax return for the taxable year January 1, 1948, to December 31,1948, the testamentary trust claimed a loss in the amount of $949,968.17 because of diversion of its funds which occurred prior to 1935, and reported a net operating loss for the year of $919,807.87. It distributed $53,900 to its beneficiaries during such year. In 1949, .the trust filed claims for refund of income taxes paid by it in 1946 and 1947, based on a carryback of the loss sustained in 1948 to the two previous years. In a deficiency notice dated October 9, 1951, the respondent determined deficiencies against the testamentary trust for 1946 and 1947 and for the period January 1 to June 30, 1948. The deficiencies so determined were based on the disallowance of the $949,968.17 loss claimed in 1948 and the loss carryback to the 2 previous years. A part of the deficiency determined for the period January 1 to June 30, 1948, was based on the grounds that the $10,000 recovery against the Cleveland Trust Company on the Standard Drug Company’s checks constituted additional income during such period. The petitoners in Docket Nos. 38303, 38304, 38305, 38306, and 38307 claim that the distributions made to them by the testamentary trust in 1946, 1947, and 1948, which they originally reported as their distributive share of trust income, were distributions of trust corpus since the trust itself sustained a net operating loss in 1948 which, when carried back, resulted in a loss for all three years. The testamentary trust failed to establish that it sustained a deductible loss in 1948 because of diversions of trust funds which occurred prior to 1935. OPINION. The first issue raised herein is whether the deficiency notice in Docket No. 38302, in which the respondent determined a deficiency against the Estate of Levi T. Scofield for the fiscal period January 1 to June 30, 1948, is a valid deficiency notice. The petitioner claims that such notice is invalid because it determined a deficiency for only a portion of its taxable year when it was in existence throughout the year, received income and incurred expenses throughout the year, and filed its return for the entire calendar year 1948. We think the petitioner’s objection to the deficiency notice is well taken. We have long followed the rule that the respondent has no authority to determine a deficiency for a fractional part of a taxpayer’s correct taxable year, and that where the respondent does so determine a deficiency for an unauthorized period, there is no deficiency, and that a decision accordingly will be entered for the taxpayer. Columbia River Orchards, Inc., 15 T. C. 253 (1950); Oklahoma Contracting Corporation, 35 B. T. A. 232 (1937); Pittsburgh & West Virginia Railway Co., 32 B. T. A. 66 (1935); Elgin Compress Co., 31 B. T. A. 273 (1934); and Mrs. Grant Smith, 26 B. T. A. 1178 (1932). We find nothing in the instant case which distinguishes it from the above-cited cases. We, therefore, conclude that the respondent’s notice of deficiency for the period J anuary 1 to J une 30,1948, in Docket No. 38302 was invalid and that there is no deficiency in income tax for the Estate of Levi T. Scofield for that period. Although our determination with respect to the first issue raised herein eliminates the only deficiency determined against the testamentary trust for 1948, we nevertheless have to decide whether the trust did, in fact, sustain a net operating loss for that year because of the deficiency determined against it in 1946 and 1947 as a result of respondent’s disallowance of the carryback of such 1948 net operating loss to those two previous years. The petitioner now claims that the amount of the net operating loss sustained by it in 1948 was $414,917.35. The parties apparently agree that the nature of the diversions which resulted in the loss which petitioner sustained are more closely analogous to an embezzlement of its funds than to any other type of loss. The year in which a taxpayer may claim a loss as the result of embezzlement depends upon when the loss was, in fact, sustained. This is a factual question which must be decided on the basis of all the relevant circumstances. Treasury Regulations 111, section 29.43-2 provides that an embezzlement loss is to be taken ordinarily in the year when the embezzlement occurred. “Ordinarily” does not mean always; and, hence, in some instances, embezzlement losses are deductible in the year in which the taxpayer discovers the embezzlement. Alison v. United States, 344 U. S. 167 (1952). The record before us indicates that the extent of the diversions of trust funds was fully disclosed sometime in 1985. The two persons principally responsible for the diversion were William and Sherman Scofield. They had no assets of any importance in 1935 other than their contingent interest in the corpus of the trust which would vest in them if they lived until September 14,1942. In 1940, the successor trustee secured a judgment by confession against them. They had no assets at that time other than their contingent interest in the trust corpus. Both men died before such trust corpus vested in them. Even in view of those facts, the petitioner argues that the extent of the loss which it sustained as a result of William’s and Sherman’s diversion of trust funds was not ascertainable until its suit against the Cleveland Trust Company was finally settled; and, that because it was not ascertainable until that time it was not “sustained” until then. We cannot agree with the petitioner’s position for the reason that the possibility of recovery against the bank was too remote to render the extent of the diversion loss incapable of valuation prior to the time such suit was settled. The principal hope of recovery against the bank depended upon the petitioner’s persuading the Ohio courts to adopt a minority view with respect to the liability of a depository of trust funds. The common law and the majority rule of law followed in many States did not place on banks or other depositories of fiduciary funds the degree of responsibility which the petitioner hoped to impute to the bank in question here. At this' date we, of course, have the benefit of the trial court’s opinion, twice affirmed, with respect to this question. But examining that opinion for nothing more than a statement as to existing Ohio law at the time the suit was filed, it seems clear from a reading of it that there should have been little doubt in anyone’s mind at that time that any hope of recovery against the bank was largely problematical. This is not a case where the taxpayer sustaining a loss sued to recover on some type of indemnity contract. See Allied Furriers Corporation, 24 B. T. A. 457 (1931); Commissioner v. Harwick, 184 F. 2d 835 (C. A. 5, 1950). All that the petitioner had here was an unadjudicated claim against a third party which it alleged had participated with the principal malf actors in diverting its funds.. The time when embezzlement losses or losses of any other kind are to be deducted calls for practical, realistic tests. The Supreme Court long ago said that the statute does not require a taxpayer to be an incorrigible optimist.2 Neither, we think, does it permit him to be one. The essence of the income tax is that it should produce revenue ascertainable and payable to the Government at regular annual intervals which, of course, presupposes that income in fact received, and losses in fact sustained, in any given taxable year, will be accounted for during such year. It means that deductions for losses may not be postponed until some future date to suit the convenience, whim, or exagger-rated optimism of a particular taxpayer. We think that the petitioner herein deducted its loss only after the last possible hope of recoupment expired with the mandate of the Supreme Court of Ohio in 1948. Any reasonable taxpayer, we think, would have claimed its loss long before. See Commissioner v. Highway Trailer Co., 72 F. 2d 913 (C. A. 7, 1934), certiorari denied 293 U. S. 626 (1935). We therefore hold, on these facts, that the Estate of Levi T. Scofield has failed to prove it sustained a deductible loss in 1948 and, hence, it had no net operating loss in that year which could be carried back to its two previous taxable years. The third issue raised herein is whether distributions which the beneficiaries received from the testamentary trust were distributions of income or distributions of corpus. This issue arises because of refunds claimed by the petitioners in Docket Nos. 38303, 38304, 38305, 38306, and 383073 on the grounds that because the testamentary trust sustained a net operating loss in 1948 which it should be entitled to carry back to 1946 and 1947, the distributions received by them in all of those years and originally reported as income should have been reported as distributions of corpus. Having determined that the trust sustained no net operating loss in 1948, it follows that the beneficiaries correctly reported distributions made by the trust to them in 1946, 1947, and 1948 as taxable income. Since we have held that the deficiency notice in Docket No. 38302 was invalid, we do not decide the fourth issue as to whether a $10,000 recovery by the testamentary trust in 1948 constituted taxable income to it in that year. Issues 5 and 6. FINDINGS OF FACT. The foreclosure suit which Northwestern filed in February 1935 prayed that a receiver be appointed to take possession of the Schofield Building, collect its rents, and apply the net rents to the mortgage indebtedness owed to Northwestern. At the time the suit was filed, Carlton Schultz, Inc., was managing the Schofield Building. In August 1935, Douglas F. Schofield, as successor testamentary trustee, forcibly removed all of the books and,records pertaining to the Scho-field Building from the possession of Carlton Schultz, Inc., and advised all of the building’s tenants that thereafter they were to pay their rent to him. Northwestern objected to Douglas’ management of the building; and, on September 26, 1935, an agreement was reached between Northwestern and Douglas whereby Douglas was to have general supervisory control over Carlton Schultz, Inc.’s management of the building. Northwestern approved a payment to Douglas as the successor trustee of $200 per month out of the rents collected by Carlton Schultz, Inc., which payments were to apply on trust fees to which Douglas might be entitled. The settlement of the Northwestern foreclosure suit in February 1937 permitted payment of trustee’s fees to Douglas of 7 per cent of the building’s gross income less other management expenses. The remaining rents were to be applied on the outstanding mortgage. Not until November 23, 1946, when a new mortgage extension agreement was executed with Northwestern, was the restriction on the amount of fees to be paid Douglas, out of rents from the Schofield Building, lifted. Bents from the building were the only source of trust income during the period from 1935 to 1946 from which Douglas could have been paid fees. Douglas, as successor trustee, filed seven partial accounts with the Probate Court covering the receipt and disbursement of trust funds from May 1,1935, through December 31,1948, each of which was approved by the court. In conjunction with such partial accounting, he filed an application for compensation for services rendered during the period covered by the accounts. The court allowed compensation for the period in which services were rendered in the following amounts, on dates indicated: [[Image here]] Set forth below are the amounts actually received by the successor trustee during the indicated years: [[Image here]] On the joint returns which Douglas and his wife, Mary, filed for 1946,1947, and 1948, he computed the tax on the amounts of trustee fees received by him in those years for services rendered in earlier years under the provisions of section 107 of the 1939 Code. Before allocating such amounts to the years in which earned, he deducted from the total amount of such trustee fees the amounts paid to his sister, Josephine Schofield Thompson, for services which she had rendered in connection with trust business from June 1935 to March 1944. He now claims that the payments made to Josephine should be deducted after allocation of such fees under section 107. The respondent determined that petitioner was not entitled to the benefits of section 107 in computing the tax on trustee fees received by him in 1946, 1947, and 1948, after deducting the amounts paid to his sister Josephine. OPINION. The petition in Docket No. 38308 alleges that the trustee fees which Douglas received in 1946 for services performed in prior years should be taxed under the provisions of section 107 (d). The respondent’s principal objection to the applicability of subsection (d) to the fees in question is that a trustee is not an “employee” within the meaning of that subsection; and, hence, that the trustee fees which Douglas received did not constitute “back pay” within the meaning of the statute. Section 107 (a) and (d) is set forth in the margin.4 In proceedings before this Court involving the applicability of section 107 to fees received by trustees, the claims that such section is applicable have been made under the provisions of subsection (a). Civiletti v. Commissioner, 152 F. 2d 332 (C. A. 2, 1945), affirming 3 T. C. 1274 (1944), certiorari denied 327 U. S. 804 (1946); Smart v. Commissioner, 152 F. 2d 333 (C. A. 2, 1945), affirming 4 T. C. 846 (1945), certiorari denied 327 U. S. 804 (1946); Estate of W. P. McJunkin, 25 T. C. 16 (1955); W. Harold Warren, 20 T. C. 378 (1953); Gordon S. Wayman, 14 T. C. 1267 (1950); and Ralph E. Lum, 12 T. C. 375 (1949). In Cowan v. Henslee, 180 F. 2d 73 (C. A. 6, 1950), and Wardall v. United States, 125 Ct. Cl. 128, 111 F. Supp. 885 (1953), trustees argued that their fees were “back pay” within the meaning of subsection (d). In both of those cases, the courts disallowed the application of that subsection to the fees there in question, but did not decide whether trustees’ fees, as such, were, in fact, “back pay” within the meaning of the statute. We agree with the respondent, however, that the trustee fees here in issue are not “back pay” within the meaning of subsection (d). We think that the legislative history clearly explains the purpose of Congress in adding subsection (d) to section 107. The subsection was proposed by the House in its version of the Revenue Act of 1943.5 The report of the Committee on Ways and Means6 explained the proposed addition as follows: As a result of an alleged unfair labor practice of his employer under the National Labor Relations Act, an alleged violation of section 6 or 7 of the Fair Labor Standards Act of 1938, or a retroactive wage increase provided for by the National War Labor Board, an individual taxpayer may receive during the taxable year back pay which is in part attributable to one or more prior years. In this event the back pay may be subject to a greater income tax than if it had been received in the years from which it arises. Section 113 of the bill adds a new section 110 to the Code to limit the tax in this event. * * * The Senate Finance Committee7 rejected the House proposal with the following explanation: The House adopted a provision relating to the taxes on back pay received by an individual for services rendered in a prior year because of alleged unfair labor practice under the National Labor Relations Act, or a violation of the Fair Labor Standards Act, or a retroactive increase approved by the National War Labor Board. Your committee was unable to agree with this provision because of its limited application and it has, therefore, been omitted from the bill. A conference committee8 agreed on subsection (d) as it first appeared in the 1943 Act. The committee explained its provisions as follows: Amendment No. 30: This amendment eliminates the provision of the House bill adding a new section to the Code to limit the tax attributable to back pay received or accrued by an individual during the taxable year. The House recedes with a change in section number and with the following amendment: There is added to section 107 of the Code a new subsection (d), which expands the definition of “back pay” to include all compensation received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer, which would have been paid prior to the taxable year but for the occurrence of one of the following events: (1) Bankruptcy or receivership of the employer; (2) dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings; (3) if the employer is the United States, a State, a Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the foregoing, lack of funds appropriated to pay such remuneration; or (4) any other event determined to be similar in nature under regulations prescribed by the Commissioner with the approval of the Secretary. The term also includes retroactive wage or salary increases, received in respect of services performed in a prior taxable year, which have been ordered, recommended, or approved by any Federal or State agency. “Back pay” also covers payments arising out of an alleged violation by an employer of any State or Federal law (such as the National Labor Relations Act or the Fair Labor Standards Act of 1938) relating to labor standards or practices, to the extent such payments are determined to be attributable to a prior year. Any amount which is not includible in gross income under Chapter 1 of the Code shall not constitute back pay. Remuneration for personal services, including pensions, retirement pay, bonuses, or commissions, which are paid in the current year in accordance with the usual practice or custom of the employer, are not “back pay,” even though such amounts are received in respect of services performed in a prior year (or prior years). The term refers only to remuneration the payment of which has been deferred by reason of the unusual circumstances of the type specified in the definition. The new subsection provides that if the amount of such back pay exceeds 15 percent of the gross income of the individual for the taxable year, the part of the tax for such year which is attributable to the inclusion of the back pay in gross income shall not exceed the sum of the increases in the taxes which would result from the inclusion of the respective portions of the back pay in gross income for the taxable years to which such portions are respectively attributable, as determined under regulations prescribed by the Commissioner with the approval of the Secretary. We think the provisions of subsection (d) must be read in conjunction with the provisions of subsection (a). It is apparent to us that Congress meant to confine the special, treatment provided by subsection (d) to the back pay or back wages of employees in the commonly accepted meaning of th^t term, which is to say, those persons who are wage earners, salaried employees, or employees who are compensated by commissions for services performed for, and under the direction and control of, an employer. Subsection (a), on the other hand, covers a much broader group of persons, including self-employed persons and persons who' act in a fiduciary capacity, responsible in their accounting only to a court. If subsection (d) included all those persons to whom subsection (a) is applicable, it would mean that such persons would have “two bites at the apple.” We cannot believe that Congress ever intended such liberal treatment for all persons who received lump-sum compensation for personal services extending over a period of years. We think what the Court of Appeals said in Smart v. Commissioner, supra, at p. 335, with reference to subsection (a) is equally applicable to all parts of section 107: the section is an exemption and as such must submit to close scrutiny; and— what is more important — Congress has been sparing in the relief given. * * * we have to deal with a statute which not only has been amended, but amended with a precision which, it seems to us, should forbid any assumption that it is infused with a broad purpose, which we should ramify as the occasion may demand. * * * Hence, we conclude that the trustee fees here m question did not constitute “back pay” within the meaning of section 107 (d). Having so determined, it is unnecessary to decide the sixth issue as to whether the amounts paid to Josephine Schofield Thompson are deductible by Douglas before or after allocation of the trustee fees received by him is made under section 107. Issue 7. FINDINGS OF FACT. Early in 1942, Douglas F. Schofield, as the successor testamentary trustee, felt that the beneficiaries of the trust should give some consideration to a plan for holding and operating the principal asset of the trust, the Schofield Building, when the beneficiaries’ interest therein vested on September 14, 1942. "With that consideration in mind, Douglas wrote to the attorney for his aunt, Harriet E. Scofield Bushnell, in February 1942, suggesting that some type of a land trust might be formed to take over the building from the testamentary trust for the following reasons: The suggested solution presents a minimum of change in the present plan of building ownership and control. From a tax viewpoint, considerable economies would be retained in comparison with the only probable alternative — the establishment of a corporation. These economies would be particularly noticeable in .respect to the interest of the beneficiaries, none of whom would enjoy paying personal property taxes on stock with uncertain and unlikely dividends. Douglas was inducted into the Army in May 1942, and it was decided by the beneficiaries to leave the Schofield Building in the testamentary trust until some future time. On September 14, 1942, the beneficiaries of the testamentary trust succeeded to vested interests in the Schofield Building as follows: Harriet E. Scofield Bushnell- % Mary Jane Scofield (daughter of William M. Scofield)_ % Douglas F. Schofield- % Josephine Schofield- % The building contained 123,000 square feet of rentable space. It has had as many as 150 to 250 tenants and from 35 to 45 full-time employees. In 1948, Douglas again proposed the creation of a land trust to take title of the Schofield Building and discussed that proposal with the other beneficiaries. It was decided that Harriet would sell her interest in the building to the other beneficiaries. In March 1948, the remaining beneficiaries, Douglas F. Schofield, Mary Jane Scofield Demmon, and Josephine Schofield Thompson signed an agreement and declaration creating a land trust. Harriet transferred her interest in the Schofield Building to the remaining beneficiaries, and the land trust agreement with the building as its corpus was made effective as of July 1,1948. The Schofield Building has thereafter been operated pursuant to the provisions of the land trust agreement effective on that date. The agreement provided, in part, as follows: The interest of the beneficiaries of the land trust was to be represented by land trust certificates of beneficial ownership divided into 8,000 indivisible equal shares; the trustee was to keep a register of the names and interest of the beneficiaries and a proper transfer book showing receipts and disbursements of the trust estate; the land trust certificates could be assigned and transferred by the holders thereof-; no beneficiary had any legal title to the trust property, real or personal, and had no right to call for a partition of the trust estate during the continuance of the land trust; no transfer by operation of law of the interests of a beneficiary could terminate the trust nor could any legal representative of a deceased beneficiary have an accounting of the trust or take any court action against the trust estate or the trustee; no assessment could ever be made on the beneficiaries and the trustee had no power to bind such beneficiaries personally; anyone contracting with the trustee could look only to the funds and property of the trust for payment under such contract or for the payment of any debt; neither trustee nor beneficiaries were, in any event, personally liable for the obligations of the trust; beneficiaries possessing 2,001 or more shares of equitable ownership could change the trustee; the trustee had full and ample powers to control and manage the Schofield Building as if he were dealing with his own property except that he could not tear down or destroy the building without the consent of beneficiaries holding 2,001 or more shares of equitable ownership; the land trust was to terminate upon the sale of all of its real assets and payment of all of its debts and obligations and the disposition of the proceeds among the beneficiaries; and before a sale of all assets could be made, beneficiaries holding 2,001 shares of equitable ownership were required to consent to such sale. Douglas F. Schofield was named the trustee of the land trust. In asserting the deficiency here in issue, the respondent made the following determination: Your income tax return for the period ended December 31, 1948 was filed on Form 1041 as a fiduciary return and the income and tax was computed as that of a trust. It is held that the income is that of an association and is subject to tax applicable to a corporation. OPINION. Section 3797 of the 1939 Code defines corporations as including associations. The substance of the respondent’s determination herein is that the trust agreement between the beneficiaries who held a vested beneficial interest in the Schofield Building created an association of such beneficiaries which is taxable as a corporation and not as a pure trust. He argues that this is so because the trust ágreement in question created an association of the beneficiaries to carry on a business and divide the profits therefrom with centralized management of such business activities being in the trustee. The petitioner, on the other hand, argues that it was a pure trust which was created and existed solely for the purpose of preserving, holding, and managing the trust corpus for the benefit of the beneficiaries. This is a question which has been before the courts on a number of occasions. We think the respondent’s determination here was correct and that the facts of the instant case bring it well within the scope of the following decisions wherein trusts, markedly similar to the one before us here, have been held to be taxable as corporations: Morrissey v. Commissioner, 296 U. S. 344 (1935); Swanson v. Commissioner, 296 U. S. 362 (1935); Helvering v. Coleman-Gilbert, 296 U. S. 369 (1935); Hecht v. Malley, 265 U. S. 144 (1924); Main-Hammond Land Trust v. Commissioner, 200 F. 2d 308 (C. A. 6, 1952), affirming 17 T. C. 942 (1951); Sherman v. Commissioner, 146 F. 2d 219 (C. A. 6, 1944), affirming a Memorandum Opinion of this Court, entered August 4, 1943; Title Insurance & Trust Co. v. Commissioner, 100 F. 2d 482 (C. A. 9, 1938), affirming a Memorandum Opinion of this Court, entered March 31,1938. We think the holding, renting, and managing of the Schofield Building constituted the conduct of a business activity, Hecht v. Malley, supra. The beneficiaries, by virtue of the land trust agreement, reaped the profits from their association and secured the centralized management of their undertaking through a designated representative, Helvering v. Coleman-Gilbert, supra. Such cases as Lewis & Co. v. Commissioner, 301 U. S. 385 (1937); Cleveland Trust Co. v. Commissioner, 115 F. 2d 481 (C. A. 6, 1940), certiorari denied 312 U. S. 704 (1941); Myers v. Commissioner, 89 F. 2d 86 (C. A. 7, 1937); George I. Fullerton, 22 T. C. 372 (1954); Royalty Participation Trust, 20 T. C. 466 (1953); and Sears v. Hassett, 45 F. Supp. 772 (D. Mass., 1942), cited by the petitioner in support of its argument that it was an ordinary trust which did nothing more than conserve property, are distinguishable from the above-cited cases. We feel that no purpose would be served by a detailed analysis comparing the facts of the cases relied on by the petitioner with those cited above which we think are controlling here. In this case, as in others where the Government has sought to tax a trust as a corporation, it is obvious that many ordinary attributes of a true trust bear marked similarity to the attributes of corporate organization. But as tbe Supreme Court said in Morrissey v. Commissioner, supra, pp. 359-360: It is no answer to say that these advantages flow from the very nature of trusts. Por the question has arisen because of the use and adaptation of the trust mechanism. The suggestion ignores the postulate that we are considering those trusts which have the distinctive feature of being created to enable the participants to carry on a business and divide the gains which accrue from their common undertaking, — trusts that-thus satisfy the primary conception of association and have'the attributes to which we have referred, distinguishing them from partnerships. In such a case, we think that these attributes make the trust sufficiently analogous to corporate organization to justify the conclusion that Congress intended that the income of the enterprise should be taxed in the same manner as that of corporations. Decisions will be entered v/nder Bule 50. United States v. White Dental Co., 274 U. S. 398 (1927). Douglas F. Schofield transferred a part of his beneficial interest in the testamentary trust to a trust created by him for his children. Such trust is, therefore, a petitioner herein. SEC. 107. COMPENSATION FOR SERVICES RENDERED POR A PERIOD OP THIRTY-SIX MONTHS OR MORE AND BACK PAY. .(a) Personal Services. — If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual. ******* (d) Back Pay.— (1) In general.. — If the amount of the back pay received or accrued by an individual during the taxable year exceeds 15 per centum of the gross income of the individual for such year, the part of the tax attributable to the inclusion of such back pay in gross income for the taxable year shall not be greater than the aggregate of the increases in the taxes which would have resulted from the inclusion of the respective portions of such back pay in gross income for the taxable years to which such portions are respectively attributable, as determined under regulations prescribed by the Commissioner with the approval of the Secretary. (2) Definition op back pay. — For the purposes of this subsection, “back pay” means (A) remuneration, including wages, salaries, retirement pay, and other similar compensation, which is received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and which would have been paid prior to the taxable year except for the intervention of one of the following events; (i) bankruptcy or receivership of the employer; (ii) dispute as to the liability of the employer to pay such remuneration, which is determined after the commencement of court proceedings; (iii) if the employer is the united States, a State, a Territory, or any political subdivision thereof, or the District of Columbia, or any agency or instrumentality of any of the foregoing, lack of funds appropriated to pay such remuneration ; or (iv) any other event determined to be similar in nature under regulations prescribed by the Commissioner with the approval of the Secretary; and (B) wages or salaries which are received or accrued during the taxable year by an employee for services performed prior to the taxable year for his employer and which constitute retroactive wage or salary increases ordered, recommended, or approved by any Federal or State agency, and made retroactive to any period prior to the taxable year; and (C) payments which are received or accrued during the taxable year as the result of an alleged violation by an employer of any State or Federal law relating to labor standards or practices, and which are determined under regulations prescribed by the Commissioner with the approval of the Secretary to be attributable to a prior taxable year. Amounts not includible in gross income under this chapter shall not constitute “back pay.” 58 Stat. 21. H. Rept. No. 871, 78th Cong., 1st Sess. (1943), p. 48. S. Kept. No. 627, 78th Cong., 1st Sess. (1943), p. 22. H. Kept. No. 1079, 78th Cong., 26 Sess. (1944), pp. 44-45.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477320/	OPINION. Tietjens, Judge: Respondent seeks to include in the estate of Mary Lois K. McIntosh the value of the property transferred in trust in 1929, on the ground that decedent was in reality the settlor of the trust and its only beneficiary, and as such she had the power to revoke the trust. Sec. 811 (d) (2), I. R. C. 1939.1 Another ground for inclusion asserted by respondent is that decedent’s relinquishment of the power given her in the deed of trust, of naming in her will the parties to receive the trust property on her death (power of appointment), was in contemplation of death. Sec. 811 (d) (2). In opposition petitioner contends that (a) decedent was not the settlor of record of the trust and therefore under Missouri law could not exercise any of the rights of a settlor, and (b) even if petitioner were to be regarded, as the settlor, the trust property is not includible in her estate as a revocable transfer under section 811 (d), citing Helvering v. Helmholz, 296 U. S. 93 (1935). There is no question that the property placed in trust belonged solely to the decedent, and the parties have stipulated that Boland was a nominal settlor. The purpose of using Boland was to avoid the prohibition under the law of Missouri against a settlor’s establishing a spendthrift trust for- his own benefit. Under these circumstances there is little room for seriously contesting that decedent was the real settlor of the trust set up in 1929 (1 Scott, The Law of Trusts (1989), sec. 156.3; Griswold, Spendthrift Trusts (2d ed., 1947), sec.-487), and that for purposes of applying a Federal taxing statute the transfer in trust should be considered as having been made by decedent. Newberry's Estate v. Commissioner, (C. A. 3, 1953) 201 F. 2d 874, 876, 877; Estate of Grace D. Sinclaire, 13 T. C. 742 (1949). Whether the trust was revocable depends on the law of the place of its creation — Missouri. Blair v. Commissioner, 300 U. S. 5 (1937). The revocability of a spendthrift trust of which the settlor was also the beneficiary was in question in Stephens v. Moore, 298 Mo. 215 (1923), 249 S. W. 601. In that case the plaintiff’s mother being concerned lest plaintiff mismanage his inheritance arranged for his setting up a spendthrift trust upon reaching majority. Plaintiff transferred certain real and personal property to a trustee, who was to hold the property for the benefit of the settlor and was to have complete control and management of it. The net proceeds from the trust property were to be paid over to the settlor annually. The deed of trust contained no express power of revocation. The disposition of the trust property after the settlor’s death was provided in the following terms: Eleventh. Upon my death this trust shall terminate and the trust shall pass to and vest in my legal heirs, or as may be directed in my will. About 2p2 years after the creation of the trust the settlor brought an action in equity to revoke the trust and to compel a reconveyance of the trust property. The Supreme Court of Missouri in holding the trust revocable by the settlor reaffirmed its adherence to the principle that “a completely executed trust, even though it be a voluntary one, without reservation of power of revocation, can only be revoked by consent of all the beneficiaries.” In ascertaining who the beneficiaries of the trust were the court sought to determine whether the settlor had disposed of the entire fee in the trust property by disposing of the interest remaining after his death. It held that the trustee did not take an estate of inheritance under the deed of trust, since such an estate was not necessary to enable him to carry out his duties which consisted of managing the trust property; and no remainder interest, vested or contingent, was created in the settlor’s heirs by the provision of the trust deed relating to the disposition of the trust property upon the settlor’s death. On the latter point the court said (p. 604) : It is the generally accepted rule that, where there is a grant to one for life, with remainder to the heirs of the grantor, there is in fact no remainder; for the limitation, though denominated a remainder, continues in the grantor as his old reversion, and does not devolve upon his heirs as purchasers, as it would if it were a remainder, but as his heirs. 23 R. C. L. 516; Akers v. Clark, supra. [184 Ill. 136, 56 N. E. 296.) Considering tbe whole deed of trust the court could find no indication of an intention on the settlor^ part of making a disposition of his estate to take effect at his death. It therefore concluded that the settlor was the only beneficiary of the trust, and that consequently the trust was revocable. Further, the court felt that the nature of the trust was such, it granted the trustee the powers only of an agent, and as the grant was not coupled with an interest or supported by independent consideration, it was revocable at the grantor’s pleasure. Stephens v. Moore was subsequently cited with approval for the principle that a trust may be revoked with the consent of all the beneficiaries in Ketcham v. Miller, 37 S. W. 2d 635, 640 (1931), and in Krause v. Jeannette Inv. Co., 333 Mo. 509 (1933), 62 S. W. 2d 890, 895. See generally 3 Scott, The Law of Trusts (1939), secs. 338, 339; 2 Restatement of the Law of Trusts (1935), sec. 337. As to the nature of the interests created by language like that in paragraph eleventh of the deed of trust in Stephens v. Moore, the law of Missouri, so far as we can ascertain, continues to be that in the absence of a showing of a contrary intention no interest is created in the grantor’s heirs. Davidson v. Davidson, 350 Mo. 639 (1943), 167 S. W. 2d 641; and note: “The Doctrine Of Worthier Title In Missouri,” 1952 Washington University Law Quarterly 117. See generally 1 Scott, The Law of Trusts (1939), sec. 127.1; I American Law of Property (1952), sec. 4.19. Insofar as the revocability of the trust in question here, we see no material difference between this case and Stephens v. Moore, supra. Here, as we see it, the trustees took no estate of inheritance; their interest as trustees was to last only during the life of the settlor, except as to any portion of the trust property going to minor heirs of the settlor. This they were to continue to administer as trustees during the minority of such heirs. Provision for the disposition of the trust property upon the settlor’s death was made in the following language: The quoted language of itself created no interest in the trust property in the settlor’s heirs (Stevens v. Moore, supra); and there does not otherwise appear an intention on the decedent’s part to provide her heirs with such an interest at the time the trust was created. It is apparent from the circumstances of the creation of the trust that her primary purpose was to put certain of her property out of her power to deal with it in order to protect it from claims of creditors. While this purpose is not inconsistent with an intention to provide her heirs with an interest in the trust property, the only indication we have of decedent’s intention, at the time the trust was created, as to the disposition of the trust property upon her death is the language used in the deed of trust; and this, as we have already pointed out, did not have the effect under Missouri law of creating an interest in her heirs. On the death of said Mary Lois K. Perry, the trust hereby created shall end, and the entire trust estate created by this instrument, together with any and all accumulated and undistributed income therefrom, shall go to such parties and under such terms and conditions as the said Mary Lois K. Perry may, by her last will, direct. In the event that the said Mary Lois K. Perry shall die intestate, or should fail to exercise said power by her last will, then, on her death, the entire trust estate hereby created, together with any and all accumulated and undistributed income therefrom, shall go and pass to the then heirs at law of the said Mary Lois E. Parry [sic], under the statutes of descent and distribution of the State of Missouri, free of any trust, whatever, * * * We therefore hold that decedent was the only beneficiary under the trust created in effect by her in 1929, and consequently she had the power to revoke the trust under Missouri law. The value of the trust property is therefore includible in her estate under section 811 (d) (2). Vaccaro v. United States, (C. A. 5, 1945) 149 F. 2d 1014; Howard v. United States, (C. A. 5, 1942) 125 F. 2d 986; Estate of Felicie Gumbel Keiffer, 44 B. T. A. 1265 (1941), petition for review dismissed on motion, C. A. 5, October 14, 1942. Petitioners point to the fact that the deed of trust made provision for keeping in trust any portion of the trust property passing to decedent’s minor heirs during their minority, as an indication of an intention on decedent’s part to create an interest in the trust property in her son at the time the trust was created. We fail to see in this provision an indication of the intention sought to be derived from it by petitioners. To us it indicates no more than that petitioner wanted to be certain that if any of the trust property should go to a minor heir, it would be properly cared for during minority. This is not to say that at the time the trust was created decedent wanted to put out of her power of disposition the interest in the trust property remaining after her death by then creating an interest in her son or heirs. Another circumstance pointed to by petitioners as indicative of decedent’s intention to provide her heirs with an interest in the trust property is her relinquishment of her power of appointment in 1943. This argument, it seems to us, avails petitioners nothing. The relinquishment was made in the hope of preventing the value of the trust property from being included in decedent’s estate at death and thereby to save estate taxes. Even if we should conclude that at this time, in 1943, decedent intended that she should not during her lifetime have a power of disposition of the interest in the trust property remaining after her death, we should also have to conclude that in giving up her power of appointment decedent also gave up the power of revocation she had prior to that time, and that this was in contemplation of death within the meaning of section 811 (d) (2), since, as we shall later point out, under our decisions a transfer motivated solely by a desire to avoid estate taxes is in contemplation of death. Finally, petitioners contend that the Supreme Court’s ruling in Helvering v. Helmholz, 296 U. S. 93 (1935), requires the conclusion here that the trust was not revocable by petitioners. In that case the trust instrument provided that the trust could be terminated upon delivery to the trustee of a written declaration, signed by all of the then beneficiaries, declaring the trust at an end. The Commissioner contended that this provision gave the decedent, who was one of the settlors of the trust and an income beneficiary of it during her life, a power to revoke or amend the trust which she could exercise with others within the meaning of section 302 (d) of the Eevenue Act of 1926. The Supreme Court denied the Commissioner’s contention. It held that his argument overlooks the essential difference between a power to revoke, alter or amend, and a condition which the law imposes. The general rule is that all parties in interest may terminate the trust.3 The clause in question added nothing to the rights which the law conferred. Congress cannot tax as a transfer intended to take effect in possession or enjoyment at the death of the settlor a trust created in a state whose law permits all the beneficiaries to terminate the trust. Applying Helvering v. Helmholz here petitioners argue that if we determine the trust was revocable by decedent under Missouri law, such a power of revocation is one conferred by law and hence not one that requires inclusion of the value of the trust property in decedent’s estate. We think this contention is best answered by the following quotation from Commissioner v. Allen, (C. A. 3, 1939) 108 F. 2d 961, 965, certiorari denied 309 U. S. 680 (1940), explaining the meaning of the above holding in Helvering v. Helmholz, supra. The respondent misinterprets the meaning of the Helmholz case where the court said that the Government’s “argument overlooks the essential difference between a power to revoke, alter, or amend, and a condition which the law imposes”. [296 U. S. 93, 56 S. Ct. 70, 80 L. Ed. 76.] What the court was there pointing out was that the power in the beneficiaries, as such, to revoke a trust was a legal right8 which they also enjoyed without any grant in the premises from the settlor. .The power, therefore, could not be one reserved to the settlor, as such, within the contemplation of Sec. 302 (d) of the Estate Tax Act of 1926. Otherwise, Congress would be attempting to tax, as a part of a deceased settlor’s estate, in States where beneficiaries have the legal right to terminate a trust, property with which the settlor had irrevocably parted in his lifetime, so far as any power, on his part as settlor, to terminate the trust was concerned. This, of course, Congress could not do without violating the Fifth Amendment of the Constitution, U. S. C. A.; and, an intent so to do was not to be imputed to Congress by adopting tbe construction of Sec. 302 (d) of tbe Estate Tax Act of 1926 for which tbe Government Was contending in tbe Helmholz case. Tbe thing of importance in tbe Helmholz case was that tbe power of revocation there rested with the beneficiaries and not vñth the settlor as such. Tbe ruling in the Poor case [White v. Poor, 296 U. S. 98 (1935)] so implies. In tbe latter case, the trustees did not have a power to revoke conferred by law as did tbe beneficiaries in tbe Helmholz case. The trustees’ power to revoke in tbe Poor ease came from tbe trust indenture alone. Yet, tbe result in tbe Poor case was the same as in tbe Helmholz case. Neither the Helmholz case nor the Poor case distinguishes between a settlor’s power to revoke when imposed by law and a settlor’s like power when reserved by his trust indenture. [Emphasis supplied. ] An additional reason asserted by respondent for including tbe value of tbe trust property in decedent’s estate is that decedent’s release in 1943 of tbe power to name tbe ultimate beneficiaries of the trust property was in contemplation of death within tbe meaning of section 811 (d) (2). We have found as a fact that decedent’s dominant motive in releasing her power of appointment was to save estate taxes. The circumstances of the release amply support this conclusion. By letter of May 27, 1943, decedent was advised by the St. Louis Union Trust Company, one of the trustees under the trust, that because of recent changes in the Federal tax law her possession of a power of appointment could cause the value of the trust property to be included in her estate for estate tax purposes. Subsequently, by letter of June 23, 1943, decedent’s husband was advised by a lawyer that decedent would have to give up the power of appointment to keep the value of the trust property from being included in her estate under the amendments to section 811 (f) of the Internal Revenue Code of 1939 made by the Revenue Act of 1942, and acting on this advice she executed the release dated November 4,1943. We have previously held that a transfer motivated solely by a desire to avoid estate taxes was in contemplation of death. Estate of Frank A. Vanderlip, 3 T. C. 358 (1944), affd. (C. A. 2, 1946) 155 F. 2d 152, certiorari denied 329 U. S. 728 (1946). See also Slifka v. Johnson, (C. A. 2, 1947) 161 F. 2d 467, certiorari denied 332 U. S. 758 (1947); Commormedlth Trust Co. of Pittsburgh v. Driscoll, (W. D., Pa., 1943) 50 F. Supp. 949, affirmed per curiam (C. A. 3, 1943) 137 F. 2d 653, certiorari denied 321 U. S. 764 (1944); First Trust & Deposit Co. v. Shaughnessy, (C. A. 2, 1943) 134 F. 2d 940, certiorari denied 320 U. S. 744 (1943); Farmers’ Loan & Trust Co. v. Bowers, (C. A. 2, 1938) 98 F. 2d 794, certiorari denied 306 U. S. 648 (1938). The foregoing cases require the same result here. The fact that decedent thought her relinquishment of the power would result in nontaxability does not, of course, alter this result.2 Nor does the fact found by us that decedent in 1948 was in good health and not particularly concerned with the prospect of death alter this result. The test is to be found in her motive, which must be of the sort that leads to testamentary disposition. United States v. Wells, 283 U. S. 102, 117 (1931). A settlor’s reservation of a power to change the ultimate beneficiaries of trust property is sufficient to cause the value of the property to be included in the settlor’s estate upon death as a power to alter or amend the transfer in trust, under section 811 (d) (2). Bank of New York & Trust Co., Administrator (Estate of A. B. Hunt), 20 B. T. A. 677 (1930); Laird v. Commissioner, 29 B. T. A. 196 (1933), affirmed on other grounds (C. A. 3, 1935) 85 F. 2d 598, modified and remanded on other grounds on rehearing 85 F. 2d 600. Cf. Porter v. Commissioner, 288 U. S. 436 (1936). (The foregoing cases involve section 302 (d) of the Bevenue Acts either of 1924 or 1926, whose wording, insofar as material here, is the same as section 811 (d) (2), I. B. C. 1939.) Where the settlor relinquishes this power in contemplation of death, section 811 (d) (2) specifically requires the inclusion of the value of the trust property in his estate. Petitioners in attempting to fit their case into the Supreme Court’s holding in Allen v. Trust Co. of Georgia, 326 U. S. 630 (1946), contend that decedent’s purpose in releasing her power of appointment in 1943 was to accomplish what she thought she had done in making a new will in 1941 (in which she specifially refrained from exercising her power of appointment), that is, to make certain that her son receive the trust assets free of tax. We think the analogy is misplaced. Allen v. Trust Co. of Georgia, supra, involved the creation of a trust by decedent in 1925 to provide for his children, both of whom were then in need of funds. His purpose in placing the money in trust was to protect his children against any misadventures that might result in the loss of the money, since prior gifts had been lost in unsuccessful business ventures. Decedent retained a power to amend the trust, which he released in 1937 upon being advised that his retention of the power of amendment would cause the value of the trust property to be included in his estate. The Court held that decedent’s release in 1937 was not in contemplation of death because in making the release he was merely doing what he had intended to do in 1925, which was “to make complete and absolute gifts to his children, freed of all claims, including taxes.” (p. 636.) The cases are analogous insofar as the decedent here was attempting to do in 1943 what she intended to do in 1941, but her intention in the latter year was simply to save estate taxes. The record does not support a finding that decedent in 1941 intended to make a complete and absolute gift to her son. The remaining question relates to the respondent’s disallowance of part of the amount claimed for support of a dependent (decedent’s husband) under section 812 (b) (5) of the Internal Revenue Code of 1939. On the estate tax return $15,000 was claimed by decedent’s estate, and this amount was increased by amendment to the petition to $18,000. Respondent in his notice of deficiency allowed $12,000. Section 812 (b) (5)3 provides that for purposes of the estate tax the value of the net estate shall be determined by deducting from the value of the gross estate-amounts that are “reasonably required and actually expended for the support during the settlement of the estate of those dependent upon the decedent, as are allowed by the jurisdiction * * * under which the estate is being administered.” In our view petitioners have failed to show that under the circumstances here an amount in excess of $12,000 was reasonably necessary for the support of decedent’s husband during the settlement of the estate, (Respondent does not question that decedent’s husband was dependent on her for support, that the amount of $18,000 was actually expended, and that such payment was allowed under the laws of Connecticut.) As set forth in our Findings of Fact decedent’s husband received pursuant to orders of a probate court of Connecticut payments of $1,000 a month as a support allowance for the period from the date of decedent’s death, May 1949, until November 1950, a total of $18,000. In July 1949, 2 months after his wife’s death, decedent’s husband was paid a bequest of $10,000 as provided for in decedent’s will. In addition, in November 1950 he received $4,000, representing payments of $1,000 a month from June through September 1950, under the residuary trust created by decedent’s will. While it is apparent from the whole record here that decedent was well-to-do and that she and her husband enjoyed a high standard of living, petitioners have not demonstrated why, in light of the circumstances set out above, the additional $6,000 contended for was reasonably required for decedent’s husband’s support. Cf. Mary M. Buck et al., Executors, 25 B. T. A. 780 (1932), affirmed on this point sub nom. Buck v. Helvering, (C. A. 9, 1934) 73 F. 2d 760; Estate of Charles C. Hanch, 19 T. C. 65 (1952). The fact that the support payments amounting to $18,000 were authorized by the Connecticut Probate Court is not binding on us in our determination of whether such amounts were “reasonably required” within the meaning of a Federal taxing statute. Buck v. Helvering, supra; Estate of Charles C. Hanch, supra. Decisions will be entered under Rule 50. SEC. 811..GROSS ESTATE. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside of the United States— • *••• (d) Revocable Tbansfees.— ***** (2) Tbansfees on oe prior to june 22, 1936. — To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Except in the case of transfers made after June 22, 1930, no interest of the decedent of which he has made a transfer shall be included in the gross estate under paragraph (1) unless it is includible under this paragraph ; Restatement of the Law of Trusts, Secs. 337, 338. We are referred to no authority to the contrary in Wisconsin, the place of the transaction. Restatement of the Laws of Trusts, Sees. 337, 338. Section 403 (d) (3) of the Revenue Act of 1942 (56 Stat. 944). and section 2 (a) of the “Powers of Appointment Act of 1951” (65 Stat. 91). permit the tax-free release only of donated powers of appointment, not of reserved powers. See Conf. Rept. No. 2586, 77th Cong., 2d Sess., p. 71 (Amendment No. 418) ; H. Rept. No. 2333, 77th Cong., 2d Sess., p. 57 (defining a power of appointment) ; S. Rept. No. 382, 82d Cong., 1st Sess., p. 6 (specifically stating that the amendments made to section 811 (f) by the “Powers of Appointment Act of 1951” do not limit the scope of section 811 (a), (c), and (d)). Section 812 (b) (5) was repealed by section 502 (c) of tbe Revenue Act of 1950 (64 Stat. 962). The change was effective with respect to estates of decedents dying after September 23, 1950, the date of the enactment of the Revenue Act of 1950.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625758/	FRANCIS WARD PAINE, ROBERT H. GROSS, MORRIS F. LACROIX, STEPHEN PAINE AND ISAIAH R. CLARK, EXECUTORS OF THE ESTATE OF WILLIAM A. PAINE, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Paine v. CommissionerDocket No. 34113.United States Board of Tax Appeals25 B.T.A. 764; 1932 BTA LEXIS 1475; March 2, 1932, Promulgated 1475 1. INCOME - INTEREST. Corporate notes were received in 1920 in an amount equal to the preexisting indebtedness of a partnership and the interest accrued thereon. The notes in the aggregate were worth not more than the principal of the debt and the amount of the notes representing interest was not entered on the creditor's books as income in 1920. Held that the interest was income in 1922 when the notes were paid. 2. Id. PROFIT ON SALE OF BONDS. Partnership agreed to buy new issues of corporate bonds and stock at specified prices. The agreement was reduced to writing in which the method of payment was specified. In this contract the payment to be made upon delivery of each bond was less than the agreed cost and also less than the value of the bond, and the payment to be made upon delivery of each share of stock was greater than the agreed cost and also greater than the value of the stock. The bonds were received and sold by the partnership in 1922. Held that the proper basis for determining the profit realized in 1922 is the actual cost of the bonds rather than the amount set out in the contract specifying the method of payment, and, the tax having been reported1476 on that basis, there is no deficiency for 1922 attributable to the bond transaction. Sidney P. Simpson, Esq., A. C. Rearick, Esq., John K. Watson, Esq., and Henry B. Fernald, C.P.A., for the petitioners. Arthur Carnduff, Esq., and Samuel L. Young, Esq., for the respondent. ARUNDELL764 The respondent has determined a deficiency for 1922 in the amount of $8,937.11. The petitioners seek a redetermination, claiming (1) that an item of $104,721.43 interest collected by a certain partnership was income to the partnership in 1920 and therefore the petitioners' share thereof, $57,596.79, should not be included in income 765 for 1922; (2) an item of $153,000 was profit to the said partnership in 1926, since it was properly profit on a transaction in certain notes and not profit on bonds sold in 1922, and therefore the petitioners' share thereof, $84,150, should not be included in income for 1922; (3) if the respective costs to the partnership of said bonds and notes can not be allocated satisfactorily, then no profit to the partnership and the partners should be reported until 1926, when all transactions were completed, and consequently1477 no profit should be reported by the petitioners in 1922 arising out of the partnership income from this source. FINDINGS OF FACT. The decedent, William A. Paine, was, from 1880 until his death in 1929, a partner in the firm of Paine, Webber and Company, hereinafter sometimes referred to, for convenience, as the partnership, which firm was engaged in the business of investment banking and brokerage, with principal office at Boston, Massachusetts. During the taxable year the decedent held an interest of 55 per cent in the partnership and was entitled to a distributive share of 55 per cent of its profits. The partnership kept its books by the double-entry system. Prior to October, 1916, the partnership had become interested in the development of hydroelectric properties on the Chippewa River in the State of Wisconsin. As part of this development the partnership desired to obtain control of a dam site property known as the Jim Falls site, on the Chippewa River, which site was owned by the Davis Falls Land Company, a corporation. However, prior to October 15, 1916, Kelsey, Brewer & Company, a partnership, had obtained from the Davis Falls Land Company, an option on the Jim1478 Falls site. On October 15, 1916, John H. Blodgett, a partner in Paine, Webber and Company, acquired and afterward held an interest of 41 1/4 per cent in Kelsey, Brewer & Company, for Paine, Webber and Company. On October 25, 1916, Kelsey, Brewer & Company and the Davis Falls Land Company entered into a written option agreement whereby Kelsey, Brewer & Company acquired the right to purchase the Jim Falls dam site and this right was exercised on January 25, 1917, the purchase being effected for a consideration of $605,000, payable $200,000 on February 1, 1918; $200,000 on February 1, 1919; and $205,000 on February 1, 1920, with interest at the rate of 6 per cent per annum from October 25, 1916, payable annually. As the payments thus required to be made became due, the funds therefor were advanced by Paine, Webber and Company in exchange for the demand notes of Kelsey, Brewer & Company, all of which were interest-bearing, some at the rate of 7 766 per cent per annum and others at the rate of 8 per cent per annum. On June 12, 1918, Kelsey, Brewer & Company assigned to Paine, Webber and Company its interest in the said dam site and also in 4,750 shares of the common stock of1479 the Eastern Wisconsin Electric Company, as security for advances previously made or to be made, and they agreed to execute and deliver demand notes bearing interest at the rate of 7 per cent per annum for further advances. Kelsey, Brewer & Company owned various utility stocks and the utility companies were indebted to them in a large sum on management contracts. The security was retained until 1928. On January 2, 1919, the interest of John H. Blodgett in Kelsey, Brewer & Company, held by him for Paine, Webber and Company, was increased, with respect specifically to the Jim Falls dam site, to 75 per cent. On January 20, 1920, Kelsey, Brewer & Company was dissolved and all of its assets were assigned to William A. Paine (the decedent) and Joseph Brewer as liquidating trustees. The total advances by Paine, Webber and Company, to August 6, 1920, to or for the account of Kelsey, Brewer & Company, amounted to $711,179.16, all evidenced by demand notes of that aggregate face amount. At that time, and for several years prior thereto, Kelsey, Brewer & Company were and they had been without funds available for the discharge of their indebtedness, both as to principal and interest, 1480 to Paine, Webber and Company. On August 5, 1920, the liquidating trustees of Kelsey, Brewer & Company agreed to transfer to the Chippewa Power Company, a newly organized Wisconsin corporation, all of the interest of Kelsey, Brewer & Company in the Jim Falls dam site property in consideration of the issuance to them of all of the common stock of the Chippewa Power Company save five shares held for qualifying purposes, the assumption by the Chippewa Power Company of all of the indebtedness of Kelsey, Brewer & Company to Paine, Webber and Company (including interest thereon) and of any indebtedness of Kelsey, Brewer & Company to Davis Falls Land Company, and the reimbursement of Kelsey, Brewer & Company for its expenditures in connection with the Jim Falls dam site property. This agreement was carried out by the parties. The Chippewa Power Company issued all of its remaining common stock, 1,995 shares, to said liquidating trustees, who in turn distributed 1,500 thereof, or 75 per cent of the total issue, to Paine, Webber and Company, and the remainder to Joseph H. Brewer and Charles McPherson. The Chippewa Power Company assumed the indebtedness of Kelsey, Brewer & Company to Paine, 1481 Webber and Company, which stood on September 28, 1920, at an amount of $711,179.16 767 principal and $104,721.43 accrued interest, of which $900.59 was thereupon charged upon the books to the open account of the Chippewa Power Company, and for the balance the Chippewa Power Company gave to Paine, Webber and Company demand notes aggregating $815,000 face amount and bearing interest at the rate of 7 per cent per annum. The Jim Falls dam site property was transferred to the Chippewa Power Company subject to the previous deed of trust. The demand notes in the face amount of $815,000 were entered upon the books of Paine, Webber and Company in an amount of $710,278.57; the balance of the face amount, $104,721.43, was not entered upon their books until 1922. The usual method of accounting followed by Paine, Webber and Company was to enter notes in the full amount of their face value and notes given for interest were usually credited to income in the year the notes were received. The interest in the amount of $104,721.43 was not accrued on the books as income in 1920 because Paine, Webber and Company in that year regarded the collectibility of the amount as doubtful. The value1482 of $710,278.57 assigned to the notes on the books of Paine, Webber and Company equaled their fair market value when received and the Chippewa Power Company was, in 1920, without funds available for payment of said notes. During 1921 Paine, Webber and Company advanced $110,975 to the Chippewa Power Company, receiving therefor demand notes of the power company bearing interest at the rate of 7 per cent per annum. These notes were entered upon the partnership books at their full face value. In 1921 the partnership also received notes of the power company in an aggregate of $60,025 for interest accrued on the outstanding indebtedness of the power company. These notes were not accrued on the partnership books as income in 1921, the year received, but in 1922, the year in which the notes were paid. In determining the income of the partnership for 1921 the respondent included the item of $60,025 as income from interest accrued. In 1922 business conditions improved and a public financing of the power project became feasible. During the spring of 1922 negotiations were opened looking to the improvement of the property of the Chippewa Power Company by the construction of a power house1483 and the leasing of the entire property to the Wisconsin-Minnesota Light & Power Company, a Wisconsin corporation. An oral understanding was arrived at in the latter part of May, 1922, in whicn the money necessary for constructing the plant and for reorganizing the financial structure of Chippewa Power Company was to be furnished by the partnership through the purchase of $1,800,000 par value of 6 per cent mortgage bonds of the power company at 90 per cent of the par value and of $1,000,000 par value of 7 per cent 768 cumulative preferred stock of the power company at 85 per cent of the par value. On May 31, 1922, a lease agreement was entered into between the Wisconsin-Minnesota Light & Power Company and Chippewa Power Company, providing for the construction by the latter of a power plant and transmission line and for the lease of the entire property to the former for a period of 30 years from the time when construction was completed, at a rental of $245,000 per annum for the first 7 years, $255,000 for the next 10 years, and $265,000 for the remaining 13 years, with option of purchase at a fixed consideration. The oral understanding between the power company and the1484 partnership referred to above was never reduced to writing, due to the advice of counsel respecting the requirements of Wisconsin State law. An agreement in writing between the Chippewa Power Company and Paine, Webber and Company was executed on June 1, 1922, providing, so far as material to the issue here, as follows: JUNE 1ST, 1922. CHIPPEWA POWER COMPANY, 82 Devonshire Street,Boston, Mass.GENTLEMEN: We understand that your Company is about to issue (a) $1,800,000 face value of 6% First Mortgage Bonds, to be secured by a mortgage to The National Shawmut Bank of Boston and Ralph W. Hill, Trustees, covering all property now owned and hereafter acquired by your Company, said mortgage and bonds to be in substantially the form set forth in copy hereto attached and marked "Schedule A," and (b) $1,000,000 par value of 7% cumulative preferred stock, said stock to have such preferences and provisions as may be permitted by law and as shall be satisfactory to us. We further understand that prior to the execution and delivery of said mortgage your Company will make a lease of all its property for the term of thirty years from the completion of the first unit of the1485 hydroelectric development referred to in said lease, which lease shall be substantially in the form set forth in the copy hereto annexed and marked "Schedule B." and that your Company will at the same time enter into a contract with some responsible contractor for the construction of the hydro-electric development referred to in said lease. Subject to the performance on the part of your Company of the matters above recited and to the fulfillment of the conditions hereinafter set forth, we agree to purchase the bonds and preferred stock above mentioned for the sum of $2,467,000 plus accrued interest and dividends, upon the following conditions: * * * 2. You are to deliver to us at our office in Boston, Massachusetts, on August 1, 1922, or on such earlier date as we may untually agree upon, the bonds which are the subject of this agreement, in either temporary or permanent form, and at that time and place we will make payment to you for the bonds as follows: For each $1,000 face value of bonds we will pay $815 plus accrued interest upon the face amount of the bond at 6% per annum for the period from June 769 1, 1922, to the date of delivery of our interim receipt, 1486 if an interim receipt shall previously have been delivered on account of such bond, plus interest at the rate of 3% per annum on 96% of the face amount of the bond from the date of issue of our interim receipt to the date of delivery of the bond to us; or, if no interim receipt shall have been issued on account of such bond, then accrued interest at the rate of 6% per annum upon the face amount of the bond from June 1, 1922, to the date of delivery of the bond to us. All amounts paid to your Company up to an aggregate equal to the principal and interest then due and unpaid upon the then outstanding indebtedness of your Company as listed in the schedule hereto attached and marked "Schedule C" shall be forthwith applied in payment of such due and unpaid principal and interest. As soon as said indebtedness shall have been paid in full, your Company is to cause any mortgage indenture securing the same to be discharged of record. Any balance of the proceeds of the sale of said bonds to us shall be deposited by us in a special account to be opened by us in our Banking Department, to be entitled "Chippewa Power Company Construction Account." 3. You are to deliver to us at our1487 office in Boston, Massachusetts, from time to time on such date or dates (not later than January 1, 1924) as you may have been able to comply with all the conditions of this agreement and as you may require the funds, certificates, in either permanent or temporary form, for the stock which is the subject of this agreement, and upon such deliveries we are to pay you for them at par and accrued dividend. All amounts so paid to your Company shall be deposited by us for account of your Company in said Chippewa Power Company Construction Account. * * 5. We agree to advance the Company such amounts in cash from time to time as it may require to pay for the cost of construction of said hydro-electric development to the extent that the proceeds of the bonds and preferred stock already sold and paid for hereunder may be insufficient therefor. The Company shall give us therefor its 7% unsecured demand notes to a face amount equal to the amount of such advances. * * * 8. Unless your Company shall be able to tender delivery to us of said bonds and stock subject to all the conditions hereof, on or before the final dates above prescribed for such deliveries respectively, we1488 shall have the right to terminate this agreement, in which case all our obligations to you hereunder shall cease, but you shall be under obligation to reimburse us for all legal and other expenses which we may have incurred in the matter and for all interest which we shall be obliged to pay to our customers upon our interim receipts, a reasonable time thereafter to be allowed us for getting in said receipts. Your acceptance signed below shall constitute this a valid contract between us. Yours very truly, PAINE, WEBBER AND COMPANY, By A. P. EVERTS. Accepted:CHIPPEWA POWER COMPANY, By MORRIS F. LACROIX. Secty. & Treas.770 The $1,800,000 par value first mortgage bonds of the power company were issued to the partnership on June 28, 1922, and were all sold to the public on or before June 30, 1922. Upon the books of the partnership the power company was credited, for the bonds, an amount of $1,467,000, being at the rate of $815 per $1,000 par value in accordance with the contract, plus an amount of $6,899.94 representing accrued interest upon the bonds when delivered to the partnership. The proceeds of the sales of the bonds received by the partnership1489 aggregated $1,767,682.44. By a separate journal entry the book cost of the bonds was increased to $1,626,899.94, the increase of $153,000 being carried to an account opened for the purpose and headed "Chippewa Power Company, Preferred, Reserve," with the explanation that the entry was for the purpose of recording the purchase price as 90 instead of 81 1/2. This amount of $153,000 was not carried into income on the partnership books until 1926, when this reserve account was closed out. The credit to the account of Chippewa Power Company was offset against demand notes of the power company in an aggregate of $986,000, held by the partnership and comprising the aggregations of $815,000, $60,025, and $110,975 hereinbefore described. The amount of the open account of the power company, $183,247.74, which was inclusive of the item of $900.59 carried to it in 1920, was also offset against the credit, and the remainder of the credit was made available for the construction of the planned hydroelectric plant. In July, 1922, the Railroad Commission of Wisconsin, upon its own initiative, instituted an investigation into the reasonableness of the terms and conditions of the lease agreement1490 of May 31, 1922, with the Wisconsin-Minnesota Light and Power Company. Resulting from this situation it was considered impracticable to issue the preferred stock as provided in the agreement of June 1, 1922, and the contract was modified by oral agreement, the partnership continuing the advances of cash during 1922 and 1923, to an amount of $1,000,000, and accepting therefor 7 per cent demand notes of the Chippewa Power Company. A stock dividend of 150 per cent upon the common stock was distributed in 1923, of which the partnership received 2,250 shares of additional common stock of the Chippewa Power Company. It was part of the oral understanding that the demand notes should be convertible at face value into preferred stock at par value if and when issued. However, the preferred stock was never issued during the period from organization until the partnership parted with control of the power company in 1926. Further advances to enable completion of the development were made by the partnership in 1923 and 1924, aggregating $250,000, for 771 which 7 per cent demand notes of the power company were accepted. The hydroelectric plant was completed by the end of 1923, and operation1491 and rental payments under the lease agreement were begun. In November, 1925, the Wisconsin Supreme Court decided that the Chippewa Power Company was not a public utility, whereupon the State Railway Commission found it was without jurisdiction to continue further with its proceedings relative to the lease agreement and its action was terminated. Closely following thereafter an agreement was entered into, on December 1, 1925, with parties who had acquired control of the Wisconsin-Minnesota Light and Power Company looking to the exercise of the option of purchase provided in the lease agreement, and in 1926 the purchase was accomplished through the medium of the transfer of the capital stock of the Chippewa Power Company. In this deal the partnership, among other things, sold out its entire holdings of the common stock at par value and within 1926 was paid in full the face value of the demand notes of the power company and the accrued interest thereon. Previous to the transfer of the stock a dividend at the rate of 23.27 per cent was paid out of undivided profits. The decedent was entitled, as a partner in Paine, Webber and Company, to receive 55 per cent of the net profits of1492 all partnership transactions relating to the Jim Falls dam site and the Chippewa Power Company. The return for 1922 executed and filed by the decedent, William A. Paine, reported net income in the amount of $421,655.42 and a tax liability of $203,656.84, which tax was duly assessed and paid. Included in the income reported on the return was an item of $57,596.79, being the decedent's distributive share of the item of $104,721.43 interest reported by the partnership as realized in 1922, and an item of $77,430.37, being the decedent's distributive share of the book profit of $140,782.50 reported by the partnership as having been realized in 1922 from the sale of the said bonds. In determining the deficiency the respondent accepted as a proper income item the decedent's distributive share of interest, $57,596.79, and has increased his distributive share of the profit from sale of bonds to $161,580.37, thus increasing income from this source by $84,150, being 55 per cent of $153,000. While these proceedings were pending, the original petitioner, William A. Paine, died testate. Francis Ward Paine, Robert H. Gross, Morris F. LaCroix, Stephen Paine and Isaiah R. Clark were, on1493 October 17, 1929, duly appointed executors of his estate, and such executors have been substituted petitioners in the place of William A. Paine. 772 OPINION. ARUNDELL: Petitioners contend that the interest item of $104,721.43 became taxable income in 1920, when the notes of the Chippewa Power Company were received, rather than in 1922, when the notes were liquidated. They urge that under the laws of both Wisconsin and Massachusetts the presumption is that a negotiable promissory note of a third person is given in satisfaction of a preexisting debt, rather than as mere evidence of the debt. See ; ; ; ; . Whatever the rule may be as between the maker and holder of the notes, it is not necessarily controlling in deciding the question of when income is realized. . But granting that the rule urged is correct, the notes would be income in the year of their receipt only to the extent of their value. 1494 ; . The evidence in this case is to the effect that the accounting practice of the partnership was to enter interest notes as income in the year of receipt, but in this instance they were not so entered because of the doubt as to their collectibility. The maker of the notes was without funds to pay them, and the value of the group of notes, covering both principal and interest, was not more than the amount of the principal. Under these circumstances we think it was proper not to record or report the interest notes as income in 1920 and that it was proper to include in income for 1922 the amount received in payment of them. Whether the item of $153,000 was taxable income in 1922 depends upon whether the cost of the Chippewa Power Company bonds to the partnership was $900 per $1000 bond, as contended by petitioners, or $815 as contended by respondent. Petitioners contend, (1) that the oral agreement of May, 1922, fixed the price at $900 and that that agreement was not superseded by the written agreement, and (2) that, if the written agreement controls the transaction, if fixed a lump-sum1495 consideration for both bonds and stock and an equitable apportionment should be made, based on the relative values of the two classes of securities. Respondent argues that the written contract provides for a cost price of $815 for each bond, and as a matter of fact that was all that the partnership paid for the bonds. Our view of the matter is that the written contract should be construed as providing for a lump sum to be paid for the bonds and stock and that the agreement to pay specified sums upon the delivery of each bond and each certificate of stock was merely a method of payment. The evidence is clear that such was the intent of the parties to the agreement, and, in so far as the bonds were concerned, 773 it was carried out in that manner and so recorded on the partnership books. Due to unforeseen circumstances the preferred stock could not be issued, but in lieu thereof the Chippewa Company issued its notes, which, the evidence shows, were of the same value in relation to the bonds as the stock originally contemplated. It is clearly established that the bonds were worth at least 90 and the stock not more than 85. In the face of this evidence it seems obvious1496 that to hold that the cost of the bonds to the partnership was at the rate of 81 1/2, as contended by respondent, would be to do violence to the intent and the agreement of the parties. Petitioners do not contend that the $153,000 was never income. On the contrary, they admit that it was, but they say that it was realized in 1926, when the transaction between the partnership and the Chippewa Company was brought to a conclusion. We are not called upon to determine whether it was income in 1926, but we are satisfied that it was not income in 1922. Even if it be conceded that the figures of $815 and $100 set out in the written agreement were designed to represent "cost" of the bonds and stock, respectively, we could not say, in the light of the evidence, that they were bona fide figures. Tax liability may not be fixed or evaded by means of inserting fictitious prices in contracts. Had the agreement provided, for example, that the partnership was to pay a sum considerably in excess of the face amount of the bonds, we clearly could not say, in view of the relation of the partnership and corporation and the evidence as to values, that a bona fide loss had been sustained upon the sale1497 within a day or two at less than the face amount of the bonds. We accordingly hold that the interest item of $104,721.43 was properly included in income in 1922, and that the amount of $153,000 income from the sale of bonds was not realized by the partnership in 1922. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625762/	Appeal of HUTTERISCHE BRUDER GEMEINDE.Hutterische Bruder Gemeinde v. CommissionerDocket No. 2257.United States Board of Tax Appeals1 B.T.A. 1208; 1925 BTA LEXIS 2614; May 23, 1925, decided Submitted April 20, 1925. 2614 A corporation established for religious purposes is not entitled to exemption from income tax unless its business operations and income are exclusively for religious purposes. Edmund B. Quiggle, Esq., for the taxpayer. Willis D. Nance, Esq., for the Commissioner. LANSDON 1208 Before GRAUPNER, LANSDON, and GREEN. This appeal is from an asserted deficiency in income tax for the calendar year 1919 in the amount of $1,884.37, all of which is in controversy. From a stipulation read into the record, the Board makes the following FINDINGS OF FACT. 1. The taxpayer was incorporated under the laws of the State of South Dakota in August, 1905. The purposes of the corporation, as expressed in the preamble of its articles of incorporation, were as follows: For the purposes of promoting, engaging in and carrying on the Christian religion, Christian worship, and religious education and teachings, according to our religious belief that all members should act together as one being, and have, hold, use, possess and enjoy all things in common, we all being of one mind, heart and soul, according to the word of God revealed to us. 2. The taxpayer2615 was incorporated by descendants and followers of a religious order which was founded in Europe several hundred years ago and which had as one of its chief principles the leading of a communistic life by its members in accordance with precepts contained in the New Testament, as interpreted by them. The practice of this religion in the United States was inaugurated by certain colonists who came from Europe and settled in what is now Bon Homme County, S. Dak., in the year 1874. Shortly thereafter they formed a corporation under the laws of the Territory of South Dakota, which held the land and other property used in the communistic life of the members. Some of the land was acquired by the members by preemption and homestead rights under the public land laws of the United States and transferred by them to the taxpayer, and some of it was acquired by purchase. The Hutterische Bruder Gemeinde was incorporated in August, 1905, as above stated, and succeeded to the lands and other property of the predecessor owners. 3. The taxpayer had no capital stock and no stockholders. Its members consisted only of those who subscribed to the religious beliefs and practices of its organizers. 2616 4. Every person upon joining the taxpayer was required to transfer and renounce to it any property then owned or thereafter acquired by him, which property was to be owned, used, and held by the taxpayer for the common use, interest, and benefit of all its members. 1209 No member, or heir or representative of any member, was entitled to have or receive any part of any property owned or acquired by the taxpayer, whether upon severance of his membership or upon his death, or upon dissolution of the taxpayer, or otherwise. 5. All members were required to give all their time and services to the taxpayer for the purposes for which it was formed, and to have their husbands, wives, and children who were nonmembers reside with and be supported and instructed by the taxpayer, according to its requirements and beliefs, so long as they should obey its rules, but such persons were required also to give their entire time and services to the taxpayer for the purposes thereof. 6. No member of the taxpayer or any nonmember husband, wife, or child of a member, received or was entitled to receive any compensation for services to the taxpayer other than the necessities of life, namely, 2617 clothing, food, and lodging of a plain and simple character, and medical attention when required. 7. The property of the taxpayer consisted of agricultural lands, buildings, machinery, and equipment for the raising and manufacturing of farm products, and buildings used for religious worship and educational instruction, and for living purposes by members and their families. During the year 1919 the taxpayer owned about 9,597 acres of agricultural lands, which were situated in Bon Homme County, S. Dak. The value of all the property owned by the taxpayer was estimated by it in its income and profits-tax returns for the year 1919 to be $1,184,000. 8. The taxpayer maintained its own church and school in a building owned and constructed by it for the purpose. The members and their families lived in dormitories and each family occupied from one to four rooms according to the size of the family; all dined in one dining room and had one kitchen. The members held regular church services on Sundays. On week days they had general church services each evening and each member was required to have individual prayer before retiring. A public school was conducted in a building owned by2618 the taxpayer, according to the State requirements, and every morning before school commenced and again in the afternoon after school was dismissed religious services were conducted in German. 9. The taxpayer produced farm products such as grain, livestock, butter, cream, milk, eggs and poultry, fruit and vegetables. It also owned and operatef facilities for converting agricultural raw materials into finished products. During 1919 it owned and operated two grist mills, a broom factory, corncribs, machine shop, creamery, carpenter shop, shoemaker shop, and ferryboat. The products from the above sources were used to provide subsistence for the members of the taxpayer and their families. The taxpayer also sold products from the above sources, including grain, dairy products, fruit, cattle, brooms, hides and furs, flour, and services of the carpenter shop, machine shop, shoemaker shop, and ferryboat to the public at large at the market prices. The greater part of such sales to the public was in the form of farm and dairy products and livestock. In 1919 the gross income of the taxpayer from its sales of products to the public amounted to $96,264.05. After subtracting allowable2619 expenses, including deductions for ordinary and necessary business expenses, interest, taxes, depreciation, and losses, the net income of the taxpayer 1210 for 1919, as reported in its income-tax return for that year, amounted to $25,933.46. 10. The income of the taxpayer, above what was needed by the members and their families and for maintaining its operations, was used to purchase additional lands, buildings, and equipment for the purposes of the corporation. The taxpayer had no investments in stocks, bonds, or other securities, but kept its spare funds invested in lands. At the beginning of the year 1919 it had on hand cash in the amount of approximately $1,293. The taxpayer borrowed money from outsiders at various times, and during the year 1919 its outstanding interest-bearing indebtedness was $72,000. The borrowed funds were used to maintain the operations of the taxpayer. During the year 1919 the taxpayer had about 122 members, not including those of their families who were not members, and its net taxable income for the year as determined by the Commissioner was $20,843.73. Based on this net income the Commissioner has determined a deficiency against the2620 taxpayer for the year 1919 in the sum of $1,884.37, which deficiency is disclosed in a deficiency letter dated January 12, 1925. 11. The taxpayer was dissolved on November 2, 1923, and all of its real and personal property was transferred to certain trustees in trust for the members and for carrying out the purposes for which the corporation was formed. The taxpayer and the Commissioner agree that if the taxpayer is properly taxable upon its income for the year 1919, under the Revenue Act of 1918, the deficiency of $1,884.37, as determined by the Commissioner, is the correct deficiency in tax. DECISION. The determination of the Commissioner is approved. OPINION. LANSDON: In this appeal the only question to be determined by the Board is whether the facts as stipulated entitled the taxpayer to exemption from the payment of income taxes under the provisions of section 231(6) of the Revenue Act of 1918, which is as follows: Sec. 231. That the following organizations shall be exempt from taxation under this title - * * * (6) Corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty2621 to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual. * * The leading decided case covering the sole issue involved in this appeal is , which is cited by the taxpayer in support of its contention. To our minds there is a clear distinction between the facts of the cited case and of the instant appeal. Sagrada Orden de Predicadores is a religious corporation that devotes all its income to the purposes for which it was established. It sells only inconsiderable quantities of its products and makes such sales only to persons or institutions within its own organization. In discussing this phase of the business of that corporation, the court said: 1211 As respects the transactions in wine, chocolate and other articles, we think they do not amount to engaging in trade in any proper sense of the term. It is not claimed that there is any selling to the public or in competition with others. The articles are merely bought and supplied for use within the plaintiff's own organization and agencies, - some of them for strictly religious2622 use and the others for uses which are purely incidental to the work which the plaintiff is carrying on. That the transactions yield some profit is in the circumstances a negligible factor. Financial gain is not the end to which they are directed. The facts in the appeal at bar disclose a situation wholly different from that so clearly set forth in the quoted excerpt from the cited decision. Here we have a corporation operating nearly 10,000 acres of farm lands and from such operations producing a volume of agricultural products far in excess of the needs of its members. Some of the surplus production is sold as raw materials; some is converted into finished products and sold in that form. All sales are to the general public at prevailing prices. The taxpayer also operates a ferryboat, a machine shop, and a carpenter shop for the sale of services to the public, and realizes a portion of its income in that way. Here are varied activities carried on for profit and in direct competition with other citizens of the Republic engaged in similar occupations. From the sale of its products and services to the public the taxpayer received a gross return in the amount of $96,264.052623 for the year involved in this appeal. Statutory deductions reduced the gross income to a net taxable income of $20,843.73. The stipulation discloses the fact that it is the practice of the taxpayer to invest all surplus earnings in additional lands and operating facilities and that none of such income is ever distributed to individuals for their personal use or profit. There is no evidence that any of the funds of the taxpayer have ever been used to spread the doctrines of the Hutterische Bruder Gemeinde beyond the boundaries of the taxpayer's property or devoted to any service valuable to the general public. The statutory exemption of religious corporations from the payment of Federal taxes is based on the assumption that all the income of such organizations shall be used for the purposes of their foundation and that the public interests will be served by such uses. This is recognized by the court in the case above cited, which said: Evidently the exemption is made in recognition of the benefit which the public derives from corporate activities of the class named, and is intended to aid them when not conducted for private gain. It is difficult to discover any benefit to2624 the public flowing from the activities of this taxpayer. It sells its commodities and services on the open market in direct competition with other producers who are of the general public. It excludes the public from all participation in the results of such sales. While it does not distribute its annual profits to its individual members for their private use, it does hold and invest such profits for their common benefit. The results of these practices are that all members of the taxpayer corporation enjoy a greater degree of security from necessity than would be possible if the profits were distributed to them as individuals. The members of the taxpayer have elected, as is their right under the laws of the Republic, to lead a communistic life. They constitute, 1212 in effect, a single family with two principal purposes - the one to lead the sort of religious life that is pleasing and acceptable to them; the other to conduct business operations for the twofold purpose of supplying their own simple physical needs and enlarging their communal possessions. Like every other family living within the law, this taxpayer has the protection and security that is its right under2625 the Constitution and statutes of the United States. Public policy requires that it shall contribute its share of the revenues necessary to sustain the Government which protects it in its rights and privileges. In this appeal the taxpayer claims exemption from provisions of the tax laws that are of general application. The rule in such cases reverses the general rule that all doubts in construing taxing statutes must be resolved strongly in favor of the taxpayer. The Hutterische Bruder Gemeinde may have been established for religious objects, but it has failed to prove to the satisfaction of the Board that it is operated exclusively for those purposes, and therefore the relief prayed for is denied.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625763/	A. Rhett du Pont and Gertrude du Pont, Petitioners, v. Commissioner of Internal Revenue, RespondentDu Pont v. CommissionerDocket No. 35469United States Tax Court19 T.C. 377; 1952 U.S. Tax Ct. LEXIS 29; December 3, 1952, Promulgated 29 Decision will be entered for the respondent. The agreement by which the partnership du Pont took over a stock brokerage branch office in Elmira, New York, constituted a sale of a going business, Held, therefore, that the payments pursuant to the sale were a capital expenditure and not deductible expenses under section 23 (a) (1) (A), I. R. C.William S. Gaud, Jr., Esq., and John N. Stull, Esq., for the petitioners.Robert R. Blasi, Esq., for the respondent. Black, Judge. BLACK 377 Respondent has determined a deficiency in petitioners' income tax for the calendar year 1948 in the amount of $ 3,680.38. The only adjustment which is contested is explained by respondent as follows:(1) It is held that the payment of $ 12,423.37, a portion of its profits, by the partnership of Francis I. du Pont & Company to Paine, Webber, Jackson & Curtis, does not constitute an ordinary and necessary expense of carrying on a trade or business. Hence, the deduction claimed by the partnership is disallowed and your distributive share of its profits increased accordingly.FINDINGS OF FACT.Some of the facts have been stipulated and are found accordingly.Petitioners are 30 husband and wife who filed a joint return for the period in question with the collector for the second district of New York.At all times pertinent herein the petitioner A. Rhett du Pont was a general partner with a 30 per cent interest in the firm of Francis I. du Pont & Co. (hereinafter called "du Pont"), a partnership under the laws of the State of New York. du Pont was and still is a member firm of the New York Stock Exchange (hereinafter called the "Stock Exchange") and carries on a business as brokers and dealers in securities and commodities. du Pont carries on its business through its main office located at 1 Wall Street, New York 5, New York, and through a number of branch offices located throughout the United States.Petitioners included the distributive share of 30 per cent of the income and expenses of the partnership du Pont in their 1948 income tax return. At all times pertinent herein petitioners kept their records and reported their income for Federal income tax purposes on the cash method of accounting, while du Pont kept its books and reported its income for Federal income tax purposes on the accrual method of accounting. At all times pertinent herein the taxable31 year of both petitioners and of du Pont was the calendar year.Prior to February 1, 1948, du Pont had no office in Elmira, New York, but Paine, Webber, Jackson & Curtis, hereinafter called "Paine 378 Webber," also a member firm of the Stock Exchange, had a branch office there. The brokerage firm of Paine Webber was formed by the merger of two firms, Paine, Webber and Jackson and Curtis, in 1942. The Elmira office which was a well established branch office of Jackson and Curtis, having been in existence with different firms since 1926, was taken over by the new company in the 1942 merger.The business of the Elmira, New York, branch office of Paine Webber was conducted by a manager and several registered representatives with the aid of a small force of clerical assistants.Throughout the period between 1942, when Paine Webber was formed, and 1948, that firm had two representatives (hereinafter referred to as "outside representatives") soliciting business in the Elmira area. While these outside representatives were primarily concerned with the solicitation of investment business, they handled brokerage business, they solicited customers of Paine Webber's Elmira office, and 32 the employees of that office did not participate in any of the commissions earned by these outside representatives. The activities of these outside representatives were a source of irritation to the Elmira office. In the latter part of 1947, Paine Webber put into effect a new schedule of commissions which resulted in decreasing the compensation of the men in the Elmira office. On behalf of the office, the manager had protested the activities of the outside representatives and revised commissions, but got nowhere. The manager and registered representatives considered leaving Paine Webber and discussed the possibility of an Elmira office with other stock exchange firms, including du Pont. The desire on the part of the manager and certain of the registered representatives of the Elmira office to enter the employ of du Pont was made known to Paine Webber. The manager and two of the registered representatives of the Elmira office resigned from the employ of Paine Webber on January 17, 1948. The resignation preceded and was independent of the negotiations for the sale of the Elmira office by Paine Webber to du Pont.At all times pertinent herein, Rule 439 of the Rules of the Board33 of Governors of the Stock Exchange provided as follows:Except as may otherwise be permitted by the Exchange, a member firm establishing any office other than a main office shall not employ within six months thereafter any person who is, or who during the three months preceding such proposed employment has been, in the employ of another member or member firm in an office in the same vicinity, without the consent of the former employer, unless such person has been released voluntarily by such former employer.At a conference held on January 19, 1948, attended by petitioner A. Rhett du Pont and Charles Moran, Jr., partners of du Pont, and Lloyd W. Mason, a partner of Paine Webber, the projected sale of the Elmira office by Paine Webber to du Pont was discussed for the first time. The terms of sale were worked out at that meeting. It was agreed that the furniture and fixtures would be bought for the 379 appraised fair market value. It was also agreed that du Pont would pay to Paine Webber 10 per cent of the gross earnings of the Elmira office for the first year and 5 per cent the second year. The entire office staff and facilities were taken over by du Pont when it acquired34 the Elmira office from Paine Webber. The terms of sale were reduced to writing in a letter dated January 20, 1948, from Paine Webber to du Pont, which included the following provisions:In accordance with our conference Monday morning, January 19, attended by yourself and your partner, Mr. Charles Moran, Jr., and your subsequent telephone call on the same day, it seems best that we reduce to writing our understanding of the arrangement between Francis I. du Pont & Co. and Paine, Webber, Jackson & Curtis with reference to your taking over our Elmira office as of February 1, 1948.Assuming the transfer is consummated by February 1, 1948, you agree to pay us 10% of the gross income of the office from all sources for one year ending January 31, 1949, and 5% of such income for the second year ending January 31, 1950, plus a reasonable amount for furniture, fixtures and equipment, this amount to be negotiated between ourselves when we have had an opportunity to appraise its value. We would like to effect periodical settlements with your firm as of June 30 and December 31 in each year, the month of January 1950 to constitute final settlement.We wish to assure you of our complete cooperation35 in effecting the transfer of the office and also that in this transaction the goodwill existing between your good firm and ours has suffered no deterioration.Such letter is the only written instrument evidencing the terms of sale agreed upon by the purchaser and seller. It was also tacitly understood that Paine Webber would not open a competitive office in Elmira, New York, during the term of the agreement.After the above agreement had been entered into, the Stock Exchange was advised by Paine Webber that it had no objection to du Pont's employing certain of its Elmira employees as of February 1, 1948. Thereafter the Stock Exchange advised du Pont that it had no objection to du Pont's doing so.At the time of the proposed sale of the brokerage business, there were 287 open customers' accounts, in addition to cash accounts, on the books of Paine Webber's Elmira branch office. In the open accounts there were debit balances of $ 230,272.87, free credit balances of approximately $ 82,000 and secured credit balances of approximately $ 2,000. The debit and credit balances on the accounts which transferred to du Pont were settled by the exchange of the long and short securities belonging36 to the individual customers. The debit balances were paid to Paine Webber by du Pont and, in turn, Paine Webber paid the credit balances to du Pont. Brokerage accounts are the property of the brokerage firm dealing with the customer and not the property of the registered representatives that service them.du Pont and Paine Webber agreed that the then value of the furniture and fixtures in the latter's Elmira office was $ 2,500. du Pont 380 paid Paine Webber this sum and on February 1, 1948, took over the furniture and fixtures for use in its new office. The lease covering the premises occupied by Paine Webber in Elmira expired on or before December 31, 1947. Thereafter, Paine Webber's occupancy of those premises was on a month-to-month basis. du Pont entered into a 3-year lease covering those premises for a term commencing February 1, 1948, and took possession on or about that date. The Elmira month-to-month employees of Paine Webber who continued with du Pont were employed on a similar basis.On February 1, 1948, Paine Webber closed its Elmira office and du Pont opened its Elmira office. The respective closing and opening of these offices was announced in the Stock 37 Exchange weekly bulletin of January 30, 1948. du Pont announced the opening of its Elmira office by local newspaper advertisements and cards. On the opening of the office, letters signed by du Pont's Elmira employees were sent to former customers of Paine Webber, including those who had debit or credit balances with that firm or for whose securities Paine Webber had acted as custodian. Paine Webber sent the following letter to its Elmira customers:TO OUR CUSTOMERS:We have just concluded negotiations for the transfer of our Elmira office to the firm of Francis I. du Pont & Co., Members of the New York Stock Exchange and other Principal Stock and Commodity Exchanges.On February 2, 1948 the entire staff and facilities of our office located in the Keeney Theatre Building will be taken over by them. If you decide to transfer your account to them, we assure you that your investment problems will be serviced promptly and efficiently.On the other hand, if you wish to continue your account with Paine, Webber, Jackson & Curtis, it will be welcome.Any instructions with respect to your account or contemplated transactions, subsequent to January 31, 1948, should be addressed to our office38 at 25 Broad Street, New York 4, N. Y.As a matter of fact, most of the Elmira customers transferred their accounts to du Pont. The gross income of du Pont's Elmira office for the duration of the agreement was as follows:PeriodAmountFeb. 1, 1948 to Dec. 31, 1948$ 124,233.70Jan. 1. 1949 to Dec. 31, 1949113,046.19Jan. 1, 1950 to Jan. 31, 195013,904.00The payments made by du Pont to Paine Webber in respect of each of the above periods amounted to $ 12,423.37, $ 6,088.88, and $ 695.20, respectively.In computing its net income for the taxable year ended December 31, 1948, du Pont deducted as an expense the sum of $ 12,423.37 representing the entire amount accruing during that taxable year 1948 to Paine Webber, and petitioners received the benefit of this deduction to the extent of a 30 per cent distributive interest.381 We hold as an ultimate fact the agreement for the sale of the Elmira, New York, brokerage office between Paine Webber and du Pont constituted an agreement for the purchase of a well established and going brokerage business, and the payments in question constituted a capital expenditure.OPINION.The sole question for determination is whether39 the accrual of payments to be made by du Pont to Paine Webber in 1948, pursuant to the percentage arrangement agreement for the sale of the branch office, constitutes deductible expenses under section 23 (a) (1) (A), Internal Revenue Code, or a capital expenditure. The question is essentially a factual one.We have concluded from all the facts that the payments in question were made essentially to purchase a going brokerage business. Petitioner contends that du Pont made the payments in question only (1) to acquire the immediate services of Paine Webber's former employees in accordance with the Stock Exchange rule, (2) to retain friendly relations with Paine Webber, and (3) the understanding that Paine Webber would not open an office in Elmira during the term of the agreement. We cannot agree that the payments in question were made for such limited purposes. By "taking over our [Paine Webber] Elmira office" under the sale agreement, du Pont obtained a brokerage office which had been in operation for over 20 years. The sale included the good will of well established customers, a familiar location, a coordinated and working office and organization, tradition, habit, etc. When 40 a going business entity is purchased as a unit, it frequently has an intangible value independent of the value of its separate component parts. That seems to be true in the instant case. The customers accustomed to dealing with the Elmira office might have continued dealing with Paine Webber -- but only through the New York City Office -- or the two outside representatives who had unsuccessfully competed with the branch office when operated by Paine Webber. The great majority of the accounts of the branch office in fact transferred to the du Pont firm.The instant case is somewhat similar to Frank L. Newburger, Jr., 13 T. C. 232. In the Newburger case, among other things, we said:The petitioner and his associates acquired a going business to which they were not theretofore entitled. The evidence does not show error on the part of the Commissioner. Cf. Home Trust Co. v. Commissioner, 65 Fed. (2d) 532; Newark Milk & Cream Co. v. Commissioner, 34 Fed. (2d) 854.Much the same can be said here as was said above in the Newburger case. We hold, therefore, that the payments in41 question were capital expenditures and not deductible under section 23 (a) (1) (A).Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625765/	Doris E. Stansbury, Transferee, Petitioner v. Commissioner of Internal Revenue, Respondent; Leland D. Stansbury, Transferee, Petitioner v. Commissioner of Internal Revenue, RespondentStansbury v. CommissionerDocket Nos. 7025-92, 7026-92United States Tax Court104 T.C. 486; 1995 U.S. Tax Ct. LEXIS 24; 104 T.C. No. 24; April 18, 1995, Filed 24 Decisions will be entered under Rule 155. Ps were officers and 100-percent owners of ABC corporation. After ABC agreed to the assessment and collection of taxes and additions to tax owed by ABC, but prior to payment thereof, all of ABC's remaining assets were transferred to Ps, and ABC was dissolved. Ps agree that they are liable as transferees to the extent of the value of the assets received from ABC and that they are liable for interest under sec. 6601, I.R.C., from the date they received notices of transferee liability. Ps argue, however, that they are not liable, under either Federal or State law, for interest prior to the date of the notices. Held, Ps' liability for interest for the period prior to the issuance of the notices of transferee liability is to be determined under State law. Held, further, Ps are liable for interest at the statutory rate provided in Colorado from the date of the transfers to the date the notices of transferee liability were sent. Randall M. Willard, for petitioners.Bruce A. Anderson, Cynthia J. Olson, and Thomas J. Kane, for respondent. GerberGERBER487 GERBER, Judge: Respondent, by means of separate notices of transferee liability, 25 determined that petitioners Doris E. Stansbury and Leland D. Stansbury are liable as transferees of property from ABC Real Estate, Inc. (hereinafter referred to as ABC or transferor), for the following deficiencies in income tax and additions to tax: 1Additions to taxSec.Sec.Sec.Sec.AccruedYearDeficiency6651(a)(1)6653(a)66556661(a)interest1980$ 7,227$ 1,806.75$ 361.35$ 418.65---$ 18,305.60198111,4902,872.50574.50749.95---25,339.6619825,3301,332.50266.50478.28---9,173.02198314,9963,749.00749.80934.83$ 1,50023,119.1919842,741685.25137.05------3,186.49Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years involved herein, and all Rule references are to this Court's Rules of Practice and Procedure.Respondent also26 determined that petitioners' liability as transferees is limited to the value of the assets received from ABC plus interest applicable thereon.The parties have agreed that petitioners are liable as transferees, that the values of the assets transferred to Mrs. Stansbury and Mr. Stansbury were $ 50,000 and $ 25,000, respectively, and that these amounts are less than the tax liability of the transferor. On brief, petitioners have conceded that they are liable for interest pursuant to section 6601 from the date of the notices of transferee liability. The remaining issue is whether petitioners are liable for interest for the period prior to the issuance of the notices of transferee liability.488 FINDINGS OF FACT 2Petitioners, who were married at all relevant times, resided in Fort Collins, Colorado, at the time their petitions were filed. ABC was incorporated under the laws of the State of Colorado on or about October 10, 27 1973, for the purpose of purchasing and selling real estate. Petitioners owned 100 percent of ABC's stock. Mr. Stansbury and Mrs. Stansbury were president and secretary-treasurer of ABC, respectively, and they also served, along with Victoria Hays, as directors of the company.Petitioners conducted real estate activities by and through ABC from at least 1973, including the purchase, on or about December 20, 1973, of 47 residential lots known as the Pleasant Acres subdivision in Larimer County, Fort Collins, Colorado.On or about November 1981, the Internal Revenue Service (IRS) commenced an examination of ABC's 1979 through 1981 taxable years. No returns had been filed for 1979, 1980, or 1981. The examination of ABC was later expanded to include the taxable years 1982 through 1984.Sometime prior to March 1986, as a result of its continuing investigation of ABC, the IRS determined that ABC was liable for income tax deficiencies and additions to tax for the years 1980 through 1984. In March 1986, ABC, through its president Mr. Stansbury, agreed to the assessment and collection of tax and penalties determined by the IRS by executing Forms 4549 for the years 1980 through 1984, as follows: 28 YearAdjustment to taxPenalties1980$ 7,227$ 2,586.75198111,4904,196.9519825,3302,077.28198314,9966,933.6319842,741685.25The liabilities set forth in the Forms 4549 were assessed on June 30, 1986; however, payments by ABC were not forthcoming. On or about October 20, 1986, still having failed to make payments to the IRS on its agreed tax liabilities, ABC, through its president Mr. Stansbury, made the following 489 transfers of residential property from the company's remaining holdings in the Pleasant Acres subdivision:Property locationTransferee(s)604 Riverbend Dr.Doris E. Stansbury713 Riverbend Dr.Leland D. Stansbury/Doris E. Stansbury716 Riverbend Dr.Doris E. Stansbury713 Rene Dr.Doris E. Stansbury736 Rene Dr.Doris E. Stansbury737 Rene Dr.Betty M. Stansbury 1On December 3 and 4, 1986, the IRS filed separate Notices of Federal Tax Lien with the State of Colorado and the clerk and recorder of Larimer29 County, Colorado, against all of ABC's property for the tax liability, penalties, and interest due for the years 1980 through 1984. ABC retained no assets from which to satisfy the liens subsequent to the transfers of the six Pleasant Acres lots to petitioners and their daughter.The IRS's collection efforts were further stymied on March 3 and April 13, 1987, when petitioners and ABC, respectively, filed for protection under chapters 11 and 7, respectively, of the Bankruptcy Code. Petitioners' bankruptcy case was dismissed without a discharge having been received on February 15, 1989, and the ABC bankruptcy estate was closed for lack of assets on April 13, 1989. On or about January 1, 1991, ABC's corporate status was dissolved in the State of Colorado.The IRS determined transferee liability against petitioners and mailed notices of such liability on January 2, 1992, which date was within the applicable period for assessment.OPINIONPursuant to section 6901, respondent may collect from a transferee of assets the unpaid income tax liability of the transferor. Phillips v. Commissioner, 283 U.S. 589">283 U.S. 589, 592, 593-594 n.3 (1931) (discussing the Revenue Act30 of 1926, ch. 27, sec. 280, 44 Stat. 9, 61, which was a predecessor to section 6901); Gumm v. Commissioner, 93 T.C. 475">93 T.C. 475, 479 (1989), affd. without published opinion 933 F.2d 1014">933 F.2d 1014 (9th Cir. 1991). Section 6901 does not, however, create or define the transferee's substantive tax liability but merely provides respondent with 490 the procedural remedy to collect the transferor's existing liability from the transferee. Commissioner v. Stern, 357 U.S. 39">357 U.S. 39, 42-43 (1958) (interpreting then section 311, a predecessor to section 6901).Respondent has the burden of proving all of the elements necessary to establish petitioners' liability as transferees, but not to show that the transferor was liable for the tax. Sec. 6902(a); Rule 142(d). If respondent meets this burden of proof, the transferee is liable for the transferor's taxes due as of the time of the transfer, as well as any additions to tax, to the extent of the value of the assets transferred. Estate of Glass v. Commissioner, 55 T.C. 543">55 T.C. 543, 575 (1970), affd. 453 F.2d 1375">453 F.2d 1375 (5th Cir. 1972).31 In the present case, petitioners have conceded that they are liable as transferees, that the value of the assets transferred from ABC was $ 75,000, and that they are liable under section 6601 for interest after January 2, 1992, the date each was sent a notice of transferee liability. 3 The only remaining question is whether petitioners are liable for interest for the period from the date the property was transferred to the date the notices were sent.Petitioners argue that Federal law applies to the determination of their liability for interest prior to the date of the notices, and that the holding of the Court of Appeals for the Tenth Circuit in Voss v. Wiseman, 234 F.2d 237">234 F.2d 237 (10th Cir. 1956) (Voss), is directly32 applicable to this case. 4 The Voss case concerned a transferee's liability for interest where the value of the assets received was less than the tax deficiency of the transferor. The court indicated that section 311 (the predecessor of section 6901) provided the "statutory authority for pursuing transferred assets", and stated that[section 311] does not impose any new obligations on the transferee of the taxpayer's property and may be used only to enforce a liability already existing in law or in equity. * ** * * The statute does not require the transferee to respond in interest except that which is due from the transferor. * [Id. at 239-240.]491 Although interest was denied respondent on the theory of res judicata, the court stated:the right of the Commissioner to interest must be predicated upon the theory of damages for delay in making payment. * * * If the transferee * * * [after receiving notice] retained possession or refused to pay, the Commissioner was damaged and could recover interest to the same extent as might be awarded by a court of law or equity. [Id. at 240; citations omitted.]33 Petitioners argue that the court's interpretation of transferee liability under section 311 precludes their liability for interest prior to January 2, 1992, the date they were issued notices of transferee liability. Respondent contends that petitioners' liability for interest is to be determined under State law and that the court's reliance on Federal law is not controlling. We agree with respondent.While Voss recognizes that respondent has authority to collect the transferor's unpaid tax liability from the transferee to the extent of the assets received, the case does not consider the possible relevance of State law in determining the transferee's liability for interest. Respondent argues that the Supreme Court's opinion in Commissioner v. Stern, supra, which was issued 2 years after Voss, directs us to apply State law to that determination. The Court stated:Prior to the enactment of * * section 311, 34 the rights of the Government as creditor, enforceable only by bringing a bill in equity or an action at law, depended upon state statutes or legal theories developed by the courts for the protection of private creditors, as in cases where the debtor had transferred his property to another. * * since section 311 is purely a procedural statute we must look to other sources for definition of the substantive liability. Since no federal statute defines such liability, we are left with a choice between federal decisional law and state law for its definition.* * * we think that the creation of a federal decisional law would be inappropriate in these cases. * * Accordingly, we hold that, until Congress speaks to the contrary, the existence and extent of liability should be determined by state law.[Commissioner v. Stern, supra at 43-45.]We discussed the application of State law to the determination of a transferee's liability for interest in Estate of Stein v. Commissioner, 37 T.C. 945">37 T.C. 945, 961 (1962):492 In cases where the transferred assets exceed the total liability of the transferor, the interest being charged35 is upon the deficiency, and is therefore a right created by the Internal Revenue Code. However, where, as here, the transferred assets are insufficient to pay the transferor's total liability, interest is not assessed against the deficiencies because the transferee's liability for such deficiencies is limited to the amount actually transferred to him. Interest may be charged against the transferee only for the use of the transferred assets, and since this involves the extent of transferee liability, it is determined by State law. Commissioner v. Stern, supra.Since Voss, the Court of Appeals for the Tenth Circuit has not addressed the issue present here--transferee liability for interest when the value of the assets received is less than the transferor's tax deficiency. In United States v. Floersch, 276 F.2d 714">276 F.2d 714 (10th Cir. 1960), however, the court discussed the effect of Stern on transferee liability cases generally:The federal law does not define the liability of a transferee other than stating that it is the liability at law or in equity. We look to the state law to determine what the liability of a transferee36 for the debts of the transferor is. This subject was fully explored and discussed by the Supreme Court in the late case of Commissioner of Internal Revenue v. Stern, 357 U.S. 39">357 U.S. 39 * . The effect of the decision is that if, under state law, the assets of a transferor, who becomes insolvent by virtue of such transfer, can be reached in the hands of his transferee by his creditors, they can be reached by the federal government for the purpose of subjecting them to the tax liability of the transferor. * * [Id. at 717.]In the wake of the Supreme Court's indication in Stern that State law is to be used in determining the "existence and extent" of transferee liability, and considering the Court of Appeals for the Tenth Circuit's parallel comments in this regard in Floersch, we conclude that Voss does not preclude us from applying State law to the determination of petitioners' liability for interest in the present case. Although "better judicial administration requires us to follow a Court of Appeals decision which is squarely in point where appeal from our decision lies to that Court of Appeals and to that court alone", Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742, 757 (1970)37 (fn. refs. omitted), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), we need not do so where "it is not clear that the * * [Court of Appeals] would disagree with our conclusion" and "Accordingly * * * we are obliged to decide this case as we think right", Lardas v. Commissioner, 99 T.C. 490">99 T.C. 490, 498 (1992). We note our comments in Lowy v. Commissioner, 35 T.C. 393">35 T.C. 393, 395493 (1960), supporting the application of State law to the present case:The confusion engendered by petitioner's position grows out of a situation where the amount of the transferred assets is less than the amount of the creditor's claim, and where, in order to make the creditor whole, it may be necessary to find some liability against the transferee for interest in respect of the transferred assets. Such interest, by its very nature, can arise only under State law, and must comply in every respect with applicable State law not only as to rate, but also as to the starting point. Thus, if the transferred assets herein had been equal to only $ 100,000, substantially less than the amount of the basic deficiencies, they would plainly38 have been insufficient to satisfy the Government's claim. However, in such circumstances, the transferee would have had the use of the transferred assets over a period of time, and it is quite possible that he would be liable, under State law, for interest, not on the Government's claim against the transferor, but on the amount of the transferred assets, measured from a point of time that would not be earlier than the date of the transfer.Since the value of the assets transferred to petitioners was less than ABC's tax liability, the present case is no different from the situation described in the above excerpt from Lowy. As we stated in Estate of Stein v. Commissioner, supra at 960, respondent in these cases "is in the position of a creditor of the transferor under State law, and if such creditor cannot collect interest under State law, respondent cannot do so here." Accordingly, in the present case, we must determine whether respondent would be entitled to interest as a creditor under State law.As the property transfers occurred in Colorado, respondent's remedies would be subject to Colorado law regarding whether petitioners are liable for interest39 and when any interest would commence. Respondent argues that the transfers of the Pleasant Acres properties to petitioners at a time when ABC's tax liability was due and owing constitutes a "wrongful withholding" within the meaning of Colo. Rev. Stat. sec. 5-12-102(1) (1992). 5 Under that statute, interest 494 accrues from the date money or property is wrongfully withheld. Thus, if petitioners' receipt of property from ABC constitutes a wrongful withholding, petitioners will be liable for interest from the date of the transfers.40 While Colo. Rev. Stat. sec. 5-12-102 does not contain a definition of "wrongful withholding", it is clear that the term is not to be strictly construed. Isbill Associates v. City and County of Denver, 666 P.2d 1117">666 P.2d 1117, 1121 (Colo. Ct. App. 1983). Tortious conduct is not required to establish a wrongful withholding. Cooper v. Peoples Bank & Trust Co., 725 P.2d 78">725 P.2d 78, 81 (Colo. Ct. App. 1986); Benham v. Manufacturers & Wholesalers Indem. Exch., 685 P.2d 249">685 P.2d 249, 254 (Colo. Ct. App. 1984). Nor is it necessary that a demand for payment be made for a wrongful withholding to occur where such a demand is not an element of the creditor's claim. Deacon v. American Plant Food Corp., 782 P.2d 861">782 P.2d 861, 864 (Colo. Ct. App. 1989), revd. on another issue sub nom. Stone's Farm Supply, Inc. v. Deacon, 805 P.2d 1109 (Colo. 1991). 641 In Mesa Sand & Gravel Co. v. Landfill, Inc., 776 P.2d 362">776 P.2d 362, 364 (Colo. 1989), the Supreme Court of Colorado upheld a broad interpretation of the State's wrongful withholding statute and stated the following:The purpose of section 5-12-102 is to discourage a person responsible for payment of a claim to stall and delay payment until judgment or settlement. Section 5-12-102 recognizes the time value of money. It represents a legislative determination that persons suffer a loss when they are deprived of property to which they are legally entitled. [Citations omitted.]In the present case, petitioners' transferee liability stems from ABC's failure to pay Federal income tax for the years 1980 through 1984. Federal tax liabilities, though unassessed, are obligations deemed due and owing at the close of the taxable year. Updike v. United States, 8 F.2d 913">8 F.2d 913 (8th Cir. 1925); Hagaman v. Commissioner, 100 T.C. 180">100 T.C. 180, 185495 (1993). We also note that Mr. Stansbury, acting on behalf of ABC, executed Forms 4549 in March 1986 agreeing to the assessment and collection of tax and penalties for the years42 1980 through 1984 and that the agreed liabilities were assessed on June 30, 1986. Thus, petitioners were aware that ABC's tax liabilities were due and owing prior to the transfer of the Pleasant Acres properties in October 1986. In summary, petitioners, as 100-percent shareholders, controlled ABC's actions, were aware of ABC's Federal tax liabilities, and, nevertheless, caused the transfer of ABC's remaining assets in contravention of respondent's collection efforts. We hold that petitioners' actions constitute a "wrongful withholding" of property within the broad meaning of Colo. Rev. Stat. sec. 5-12-102. Thus, petitioners are liable as transferees for interest from the date the property transfers occurred.On brief, petitioners argue that interest is not due from the date of transfer absent a finding that the properties were fraudulently conveyed, which is defined in Colo. Rev. Stat. sec. 38-10-117 (1982) as a transfer "made with the intent to hinder, delay, or defraud creditors". Petitioners argue that ABC's transfer of the Pleasant Acres properties in October 1986 was not fraudulent "owing to consideration the transferor received for the transfer." The record before us, however, 43 contains insufficient evidence of such consideration, including only (1) a notation on petitioners' bankruptcy petition that the Pleasant Acres properties were transferred "In payment of some past loans", and (2) copies of several canceled checks and deposit slips purporting to represent payments from petitioners to ABC. Petitioners introduced no other loan documentation, repayment schedules, or any other evidence of the enforceability of the alleged loans. Additionally, we note that the presence or absence of valuable consideration is not determinative of fraud under Colo. Rev. Stat. sec. 38-10-117 (1982); rather, the relevant inquiry is whether the debtor intended to hinder or delay a creditor's recovery. See Fish v. East, 114 F.2d 177">114 F.2d 177, 183 (10th Cir. 1940); cf. Colo. Rev. Stat. sec. 38-10-120 (1982). Consequently, given petitioners' knowledge of ABC's tax liabilities and their control over the company's actions, we find that the 496 transfers were fraudulent within the meaning of Colo. Rev. Stat. sec. 38-10-117 (1982). 744 Finally, since petitioners are liable under State law for interest from the date of the transfers, the rate of interest to be applied must also be determined under State law. Under Colo. Rev. Stat. sec. 5-12-102(1) (1992), the rate of interest on a wrongful withholding is either "an amount which fully recognizes the gain or benefit realized by the person withholding * * [the] money or property", or, at the election of the claimant, 8 percent compounded annually. Respondent argues that ABC's transfer of its remaining assets to petitioners delayed the payment of taxes due and owing, and that ABC thereby "benefited" by avoiding the payment of interest at the Federal underpayment rates established under section 6601 and section 6621. Respondent concludes that petitioners are therefore liable under Colo. Rev. Stat. sec. 5-12-102(1)(a) (1992) for interest at the Federal underpayment rates avoided by ABC. We disagree.The statutory provision for interest on a wrongful withholding under Colo. Rev. Stat. sec. 5-12-102(1)(a) (1992) stems from the common law doctrine of moratory interest--that is, interest by way of damages. Great Western Sugar Co. v. KN Energy, Inc., 778 P.2d 272">778 P.2d 272, 276 (Colo. Ct. App. 1989).45 Noting that "Moratory interest has been allowed in Colorado for more than 100 years", Davis Cattle Co. v. Great Western Sugar Co., 393 F. Supp. 1165">393 F. Supp. 1165, 1188 (D. Colo. 1975), affd. 544 F.2d 436">544 F.2d 436 (10th Cir. 1976), the District Court in Davis Cattle Co. summarized the principles of Colorado law supporting the moratory interest doctrine as follows:1. Even where statutory interest may not be allowed, interest by way of damages can be awarded.2. The measure of damages is the guilty party's gain rather than the victim's loss.497 3. In the absence of proof as to the amount of the guilty party's gain, the statutory rate should be awarded, but if there is proof of the amount of benefit to the guilty party, that amount should be awarded as damages.[Id. at 1191.]Under Colo. Rev. Stat. sec. 5-12-102(1)(a) (1992), as under the State's moratory interest doctrine outlined in Davis Cattle Co., respondent must show the amount actually gained by petitioners from their receipt and wrongful withholding of ABC's assets. See Great Western Sugar Co. v. KN Energy, Inc., supra at 274;46 Alfred Brown Co. v. Johnson-Gibbons & Reed, 695 P.2d 746">695 P.2d 746, 749 (Colo. Ct. App. 1984). In the present case, petitioners' transferee liability commenced under State law on the date of the transfers. It is from this date that petitioners', rather than ABC's, "gain or benefit realized" must be determined. Respondent has offered no evidence of actual gain or benefit realized by petitioners from their receipt and use of the Pleasant Acres properties, nor can it be said that petitioners benefited by avoiding interest at the Federal underpayment rates, since their liability is established under State, rather than Federal, law and the Colorado statutes nowhere apply Federal interest rates to liabilities determined under State law. 8 Accordingly, since we find no proof of benefit to petitioners, interest shall be applied pursuant to the statutory rate provided in Colo. Rev. Stat. sec. 5-12-102(1)(b) (1992)--8 percent per annum from the date of the transfers. See Alfred Brown Co. v. Johnson-Gibbons & Reed, supra at 749.47 We have considered all other arguments made by petitioners and find them to be without merit.To reflect the foregoing,Decisions will be entered under Rule 155. Footnotes1. Respondent determined that Mr. Stansbury was liable as transferee only for the deficiencies and additions to tax for the years 1980 and 1981.↩2. The stipulation of facts and accompanying exhibits are incorporated by this reference.↩1. Betty M. Stansbury is petitioners' daughter.↩3. Federal law provides for interest subsequent to the issuance of the notice of transferee liability. Estate of Stein v. Commissioner, 37 T.C. 945">37 T.C. 945, 959 (1962); Patterson v. Sims, 281 F.2d 577">281 F.2d 577, 580↩ (5th Cir. 1960).4. This case is appealable to the Court of Appeals for the Tenth Circuit.↩5. Colo. Rev. Stat. sec. 5-12-102 (1992) provides in relevant part:Statutory interest. (1) * * * when there is no agreement as to the rate thereof, creditors shall receive interest as follows:(a) When money or property has been wrongfully withheld, interest shall be an amount which fully recognizes the gain or benefit realized by the person withholding such money or property from the date of wrongful withholding to the date of payment or to the date judgment is entered, whichever first occurs; or, at the election of the claimant,(b) Interest shall be at the rate of eight percent per annum compounded annually for all moneys or the value of all property after they are wrongfully withheld or after they become due to the date of payment or to the date judgment is entered, whichever first occurs.↩6. The court's holding in Deacon v. American Plant Food Corp., 782 P.2d, 861, 864 (Colo. Ct. App. 1989), revd. on another issue sub nom. Stone's Farm Supply, Inc. v. Deacon, 805 P.2d 1109">805 P.2d 1109 (Colo. 1991), contrasts with petitioners' argument that transferee liability does not commence until a notice of such liability has been sent. Petitioners' reliance on Voss v. Wiseman, 234 F.2d 237">234 F.2d 237 (10th Cir. 1956), for their claim is misplaced. As previously noted, the determination of the existence and extent of transferee liability depends upon State law. Commissioner v. Stern, 357 U.S. 39">357 U.S. 39, 42-43 (1958). The court's decision in Voss, which preceded Stern↩, does not address State law, and, thus, does not provide a basis for a determination, under State law, as to when a transferee's liability for interest begins to run.7. As noted earlier, petitioners have conceded that they are liable as transferees and that they are subject to the procedural collection provisions of sec. 6901. We have also noted above that the existence and extent of transferee liability is determined by State law. Commissioner v. Stern, supra at 42-43. Petitioners argue on brief, however, that their receipt of all of ABC's remaining assets was neither a wrongful withholding under Colo. Rev. Stat. sec. 5-12-102 nor a fraudulent conveyance under Colo. Rev. Stat. sec. 38-10-120↩ (1982), yet they have failed to offer an alternative Colorado statute upon which their liability is based. We cannot agree with petitioners' attempt to avoid the consequences of their conceded liability as transferees which, pursuant to our review of the facts of this case and the relevant Colorado statutes cited by the parties, includes liability for interest from the date of the transfers.8. We recognize that petitioners, as 100-percent owners of ABC, may benefit indirectly from any taxes or interest avoided by ABC; however, we must view petitioners and ABC as separate entities for purposes of determining petitioners' independent liability for interest as transferees under Colorado law.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625766/	ELSTON COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. GADIAN COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. STANART COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Elston Co. v. CommissionerDocket Nos. 96604, 96605, 96606.United States Board of Tax Appeals42 B.T.A. 208; 1940 BTA LEXIS 1039; June 25, 1940, Promulgated 1039 1. Petitioners, foreign corporations, realized gains from sales of certain bonds in the taxable year. Held, that on the evidence, the bonds were sold and delivered to dealers in Canada and that such gains were not gross income from sources within the United States, under section 119 of the Revenue Act of 1934. 2. Petitioners also realized gains from the redemption of certain other bonds in the taxable year in the United States. Held, that such gains were gross income from sources within the United States, under section 119 of the Revenue Act of 1934. Daniel B. Priest, Esq., for the petitioners. W. Frank Gibbs, Esq., for the respondent. HARRON 209 In these proceedings, which were consolidated for hearing and decision, respondent determined deficiencies in income tax and in personal holding company surtax for the fiscal year ending April 30, 1935, as follows: PetitionerIncome taxSurtaxElston Co., Ltd$38,739.27$28,788.68Gadian Co., Ltd36,768.3721,272.32Stanart Co., Ltd34,403.3417,598.95The main questions are whether gains realized by petitioners in the taxable year from the sale of certain1040 bonds and from the redemption of certain other bonds constituted gross income from sources within the United States under section 119 of the Revenue Act of 1934. FINDINGS OF FACT. Petitioners Elston Co., Ltd., Gadian Co., Ltd., and Stanart Co., Ltd., are foreign corporations, which were incorporated under the laws of Canada in December 1933. Petitioners are engaged in the business of buying and selling investment securities for their own accounts. Since their incorporation, petitioners' only office and place of business has been in Montreal, Canada, and petitioners' officers and stockholders have been nonresident aliens. Petitioners keep their books on the basis of a fiscal year ending April 30 and on the cash receipts and disbursements basis. For the fiscal year ended April 30, 1935, petitioners each filed a corporation income and excess profits tax return and a personal holding company surtax return with the collector of internal revenue at Baltimore, Maryland. On April 30, 1934, petitioners each owned substantial amounts of bonds of United States municipalities, railroads, utilities, and industrial companies, hereinafter referred to as American bonds, and of bonds1041 of the Imperial Japanese Government, hereinafter referred to as Japanese bonds. All of the bonds owned by petitioners were held in custodian accounts with Canadian banks in Canada. During the period from July 16 to September 21, 1934, petitioners each sold certain American bonds to vendees in the United States and realized gain therefrom as follows: Elston Co., Ltd$34,332.18Gadian Co., Ltd30,468.97Stanart Co., Ltd23,124.65These sales of American bonds in the United States were made for the account of each petitioner, in large part, by O'Brien & Williams, a firm of brokers and dealers in securities of Montreal, and in small part, by Laidlaw & Co., a firm of brokers of New York City. The 210 sales through O'Brien & Williams were made to Wood, Struthers & Co., a firm of brokers and dealers in securities of New York City, and were transacted as follows: From time to time petitioners would instruct O'Brien & Williams to take delivery of certain bonds from the banks in which they were held and to sell the bonds for petitioners' respective accounts. The bonds would be delivered to O'Brien & Williams by the banks free of counter-value. O'Brien & 1042 Williams would sell the bonds to Wood, Struthers & Co., receive the proceeds of the sale, and credit petitioners' respective open accounts on the books of O'Brien & Williams with the proceeds of the sale. These open accounts were closed out on or about September 21, 1934, when payment of the entire credit balance in each petitioner's open account was made by O'Brien & Williams to the respective petitioner. In connection with these sales O'Brien & Williams charged petitioners a commission of $2.50 per thousand dollar bond; the normal rate of commission was $3 per thousand dollar bond. On or about September 15, 1934, L. Peter Candler, the president of each petitioner, received instructions from the beneficial owners of petitioners to make a large reduction in petitioners' investments in American bonds. Candler consulted a member of the firm of O'Brien & Williams as to whether the sales of the American bonds, which were listed on the New York market, could be effected in Canada instead of in the United States, and was advised that O'Brien and Williams were in a position to purchase some of the American bonds for their own account. Thereafter, Candler also consulted a member of1043 the firm of Craig, Ballantyne & Co., a firm of brokers and dealers in securities of Montreal, as to whether it would be possible to sell some of the American bonds to that firm, and was advised that Craig, Ballantyne & Co. would be able to purchase some of the American bonds. During the period from October 30, 1934, to April 30, 1935, inclusive, petitioners each sold certain American bonds in Canada to O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation, a Canadian corporation organized by O'Brien & Williams to trade in bonds, and realized gain therefrom as follows: Elston Co., Ltd$245,854.83Gadian Co., Ltd233,033.75Stanart Co., Ltd223,906.88The sales which each petitioner made to O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation, as dealers, during the period from October 30, 1934, to April 30, 1935, were transacted as follows: From time to time petitioner would write one of the above dealers to take certain bonds at current market prices and at the same time would write the bank in which the 211 bonds were held to deliver the bonds to the dealer against payment by accepted check 1 drawn1044 to the order of the petitioner "as per contracts approved by us." The dealer would instruct Wood, Struthers & Co. to sell the bonds offered by petitioner at approximate market prices for the dealer's own account and to confirm the sale by wire. Wood, Struthers & Co. would confirm by wire and by notice the purchase from the dealer of some or all of the bonds at a specified price for delivery on a certain date. In the confirmation notice sent to the dealer, Wood, Struthers & Co. would add to the specified price for the bonds the interest on the bonds from the date of the payment of the last coupon to the settlement date. The dealer would then compute the price at which it would offer to purchase the bonds from petitioner. The dealer would convert the net amount to be received in American money from Wood, Struthers & Co. into Canadian money in accordance with the prevailing rate of exchange, and would subtract from the result the amount of a stamp tax due the Province of Quebec on the sale of the bonds from the dealer to Wood, Struthers & Co., the amount of the charges involved in transmitting the bonds to Wood, Struthers & Co., the amount of the interest on the bonds from the date1045 of the payment of the last coupon to the settlement date stated in the confirmation notice sent by Wood, Struthers & Co., and a profit of $2.50 per thousand dollar bond. After computing the price at which it would offer to purchase the bonds from petitioner, the dealer would prepare a confirmation notice which was addressed to petitioner and which stated "We confirm that we have this day BOUGHT from you" the particular bonds. The settlement date stated in the confirmation notice sent to petitioner was the same as the settlement date stated in the confirmation notice sent by Wood, Struthers & Co. to the dealer. In the confirmation notice sent to petitioner the dealer would add to the price at which it offered to purchase the bonds, the amount of the interest on the bonds from the date of the payment of the last coupon to the settlement date, and would subtract from the result amounts for provincial and Federal tax. After the confirmation notice to petitioner was prepared, the dealer would have a check drawn payable to the order of petitioner for the net amount to be received by petitioner and have the check accepted by the bank of deposit. The dealer would take the accepted check1046 and the confirmation notice to Candler. Candler would initial a copy of the confirmation notice and have the accepted check endorsed for deposit. The dealer would present the initialed confirmation notice and the accepted check to the bank in which the bonds were held. 212 The bank would release the bonds to the dealer and retain the accepted check. In the case of O'Brien & Williams or the Monetary Bond Corporation, the dealer would hand the bonds to the Bank of Montreal for delivery to Wood, Struthers & Co., would receive a sight draft payable in United States funds issued by the Bank of Montreal in the net amount of the purchase price to be paid by Wood, Struthers & Co., and would guarantee payment to the Bank of Montreal of the net amount of the purchase price by Wood, Struthers & Co.; the dealer would sell or deposit the draft and receive Canadian funds therefor; the Bank of Montreal would deliver the bonds to Wood, Struthers & Co. on the settlement date, and Wood Struthers & Co. would issue a check in the net amount of the purchase price and deliver the check to the Bank of Montreal; thereupon the dealer would be released from its guarantee to the bank of Montreal. 1047 In the case of Craig, Ballantyne & Co., the dealer would, hand the bonds to the Bank of Montreal for delivery to Wood, Struthers & Co., together with a sight draft payable in United States funds in favor of Craig, Ballantyne & Co.; the Bank of Montreal would credit the amount of the draft in Canadian funds to Craig, Ballantyne & Co., and would deliver the bonds to Wood, Struthers & Co. on the settlement date against payment of the amount of the draft. During the period from January 4 to April 30, 1935, inclusive, petitioners each sold certain Japanese bonds in Canada to the Bank of Montreal, Montreal, and realized gain therefrom as follows: Elston Co., Ltd$10,045.53Gadian Co., Ltd10,066.79Stanart Co., Ltd10,043.04The sales of Japanese bonds were made for the respective accounts of petitioners by the Royal Trust Co., Montreal, as broker, and were transacted as follows: On or about January 4, 1935, the Royal Trust Co. notified the Bank of Montreal that certain Japanese bonds were for sale, and the Bank of Montreal indicated that it expected to be able to purchase1048 blocks of these bonds. Thereafter, from time to time the Bank of Montreal would notify the Royal Trust Co. that the Bank of Montreal desired to purchase a certain block of Japanese bonds at specified prices. The Royal Trust Co. would then write a letter to The Bank of Montreal in which the trust company offered to sell the desired block of Japanese bonds at the prices specified by the Bank of Montreal. The Bank of Montreal would accept the offer on the letter and would send a notice of confirmation which stated "Confirmation of: - Purchase from the Royal Trust Company." Thereafter, the Bank of Montreal would send Canadian funds in the amount of the net purchase price to the Royal Trust Co., which funds were either forwarded to, or 213 deposited to the credit of, the respective petitioner. In connection with the sales of the Japanese bonds the Royal Trust Co. charged petitioners a commission. On May 1, 1934, certain bonds of the New York Central & Hudson River Railroad Co. which were owned by petitioners were redeemed at maturity. Petitioners each realized gain from the redemption of the bonds as follows: Elston Co., Ltd$16,000Gadian Co., Ltd16,000Stanart Co., Ltd15,0001049 According to their terms, these bonds were redeemable in United States funds at the office of the obligor's fiscal agent in New York City. The bonds were held in custodian accounts with the Bank of Montreal and were, in ordinary course, presented by the bank for redemption at the office of the obligor's fiscal agent in New York City; the proceeds were received by the bank in United States funds, converted into Canadian funds, and credited to petitioners' respective accounts with the bank in Canada. During the taxable year each petitioner incurred ordinary and necessary expenses in the conduct of its business, as follows: Elston Co., Ltd$29,093.65Gadian Co., Ltd27,465.22Stanart Co., Ltd27,160.69None of the petitioners took a deduction for any part of said expenses in its income tax return for the taxable year. OPINION. HARRON: The first question is whether the gains realized by petitioners during the taxable year from sales of American and Japanese bonds were gross income from sources within the United States, under section 119 of the Revenue Act of 1934. As foreign corporations, petitioners were taxable only on gross income from sources within1050 the United States, under section 231(a) of the Revenue Act of 1934, the provisions of which are set forth in the margin. 2In their income tax returns for the taxable year petitioners reported the gains realized during the taxable year from sales of American and Japanese bonds as gross income from sources without the United States and did not include the gains in taxable gross income. Respondent determined that the gains were gross income from sources within the United States and included the gains in taxable gross income. 214 The provisions of section 119 of the Revenue Act of 1934, insofar as they are pertinent to the question here presented, are as follows: SEC. 119. INCOME FROM SOURCES WITHIN UNITED STATES.. (a) GROSS INCOME FROM SOURCES IN UNITED STATES. - The following items of gross income shall be treated as income from sources within the United States: * * * (6) SALE OF PERSONAL PROPERTY. - For gains, profits, and income from the sale of personal property, see subsection (e). 1051 (e) INCOME FROM SOURCES PARTLY WITHIN AND PARTLY WITHOUT UNITED STATES. - * * Gains, profits, and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from sources within the country in which sold * * . The words "the country in which sold", as used in subsection (e) mean the country in which title to the personal property passes from the vendor to the vendee. ; affd., ; certiorari denied, ; ; . Here, the personal property was ordinary coupon bonds payable to bearer, and title to the bonds passed where the bonds were delivered from the vendors to the vendees. ; ; 1052 ; . Petitioners concede that the bonds which they sold during the period from April 30 to October 30, 1934, inclusive, were sold and delivered to vendees in the United States through O'Brien & Williams and Laidlaw & Co., as brokers, and that the gains realized therefrom were income from sources within the United States. Therefore, respondent correctly included in each petitioner's taxable gross income for the taxable year the gains realized by it from sales of bonds during the period from April 30 to October 30, 1934, inclusive. Petitioners contend that the bonds which they sold during the period from October 30, 1934, to April 30, 1935, inclusive, were sold and delivered in Canada to O'Brien & Williams, Craig, Ballantyne & Co., the Monetary Bond Corporation, and the Bank of Montreal, as dealers, and that, thus, the gains realized from the bonds sold during that period were income from sources outside the United States. On the other hand, respondent contends that the bonds which petitioners sold during that period were sold and delivered to vendees in the United States through O'Brien & Williams, 1053 Craig, Ballantyne & Co., the Monetary Bond Corporation, and the Bank of Montreal, as brokers, and that, thus the gains realized from the bonds sold during that period were income from sources within the United States. Therefore, the basic question is whether the relationship between 215 petitioners, on the one hand, and O'Brien & Williams, Craig, Ballantyne & Co., the Monetary Bond Corporation, and the Bank of Montreal with respect to the sales of bonds during the period from October 30, 1934, to April 30, 1935, inclusive, was that of customer and dealer or that of customer and broker. There is little dispute as to the facts. Since the facts underlying the sales of American bonds are somewhat different from the facts underlying the sales of Japanese bonds, the relationship between petitioners and O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation with respect to the sales of American bonds, and the relationship between petitioners and the Bank of Montreal with respect to the sales of Japanese bonds will be considered separately. The facts clearly show that with respect to the sales of American bonds during the period from October 30, 1934, to1054 April 30, 1935, inclusive, the relationship between petitioners, on the one hand, and O'Brien & Williams, the Monetary Bond Corporation, and Craig, Ballantyne & Co., on the other hand, was that of customer and dealer, or, in other words, that of vendor and vendee. O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation used the language "we have * * BOUGHT from you" in the confirmation notices sent to petitioners; they charged no commission to petitioners; and they bought from petitioners at a lower price that that at which they resold to Wood, Struthers & Co. These particular facts are strong evidence that the relationship was that of customer and dealer, rather than that of customer and broker. 3 Furthermore, the fact that O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation paid for the bonds by accepted checks before receiving delivery of the bonds from petitioners, and before being paid for the bonds by Wood, Struthers & Co., shows that the relationship was that of customer and dealer. 1055 The conclusion that the relationship was that of customer and dealer is established conclusively by the testimony of officers of the dealers to the effect that the parties intended that the relationship was to be that of customer and dealer and that after delivery of the bonds to the dealers they understood that the risk of loss was to fall on them and not on petitioners. In the last analysis, the nature of the relationship is governed by the intention of the parties. 4There is little evidence in the record to support respondent's contention that the relationship between petitioners, on the one hand, and O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond 216 Corporation, on the other hand, was that of customer and broker with respect to the sales of American bonds during the period from October 30, 1934, to April 30, 1935, inclusive. The mere fact that prior to October 30, 1934, O'Brien & Williams acted as brokers with respect to the sales of the American bonds does not compel the conclusion that subsequent to October 30, 1934, the relationship1056 of customer and broker continued. 5 Is should be noted that the Monetary Bond Corporation never acted as broker, but always as dealer, and that there is no evidence that Craig, Ballantyne & Co. even acted as brokers for petitioners either prior to or subsequent to October 30, 1934. Nor does the mere fact that O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation contracted to resell the bonds before they purchased the bonds from petitioners tend to show that the relationship between petitioners and the dealers was that of customer and broker. There is no evidence to show that the sales to the dealers were colored by any secret understanding between the parties or that petitioners knowingly were connected in any way with the resales by the dealers to Wood, Struthers & Co.There is little merit to the arguments urged by respondent in support of the contention that the relationship between petitioners, on the one hand, and O'Brien & Williams, Craig, Ballantyne & Co., and the Monetary Bond Corporation, on the other hand, was that of customer and1057 broker. Respondent's main argument is that the manner in which each of the dealers computed the price at which it offered to purchase a block of bonds from the respective petitioner shows that the relationship was that of customer and broker. Respondent points, first, to the fact that each dealer converted into Canadian funds the net amount to be received from Wood, Struthers & Co. for a block of bonds and then subtracted from the result the amount of a stamp tax due the Province of Quebec on the resale of the block of bonds to Wood, Struthers & Co. and the cost of transmitting the block of bonds to Wood, Struthers & Co. These computations were necessary in order to enable the dealer to offer the respective petitioner a price for the block of bonds at which the dealer could realize a profit, and clearly do not support respondent's contention that the relationship was that of customer and broker. Respondent points, next, to the fact that the dealer also subtracted from the net amount to be received from Wood, Struthers & Co. for the block of bonds a profit at the rate of $2.50 per thousand dollar bond, which rate of profit was 50 cents less than the normal rate of commission and1058 was the same as the rate of commission charged by O'Brien & Williams with respect to the sales of bonds from April 30 to October 30, 1934, 217 inclusive. The mere fact that the dealers' rate of profit was approximately the same as the normal rate of commission and the same as the rate of commission charged by O'Brien & Williams when it acted as broker for petitioners does not warrant an inference that the relationship was that of customer and broker. See ; . It should be pointed out that the record shows that the dealers each decided that a profit at the rate of $2.50 per thousand dollar bond was a reasonable profit in view of the large quantity of transactions, and that petitioners had no knowledge as to the rate of profit realized by the dealers. Respondent points with special emphasis to the fact that although petitioners delivered the bonds to, and received payment from, the dealers prior to the settlement date provided in the confirmation notices sent by Wood, Struthers & Co. to the dealers, petitioners received from the dealers the interest on the bonds from the last coupon date up to the settlement1059 date provided in the confirmation notices sent by Wood, Struthers & Co. to the dealers. However, the confirmation notices sent by the dealers to petitioners also contained the same settlement date which was contained in the confirmation notices sent by Wood, Struthers & Co. to the dealers, and thus, the fact that petitioners received from the dealers the interest on the bonds from the last coupon date up the settlement date provided in the confirmation notices sent by Wood, Struthers & Co. to the dealers does not give rise, per se, to any inference that the relationship was that of customer and broker. Likewise, the facts clearly show that with respect to the sales of Japanese bonds during the period from January 4 to April 30, 1935, inclusive, the relationship between petitioners and the Bank of Montreal was that of customer and dealer, or, in other words, that of vendor and vendee. The Bank of Montreal used the language "Confirmation of: - Purchase from the Royal Trust Company" in the confirmation notices sent to the Royal Trust Co. which acted as petitioners' broker; and though the Royal Trust Co. charged a commission to petitioners, there is no evidence to show that the1060 Bank of Montreal charged a commission to petitioners. 6 Furthermore, an officer of the Royal Trust Co. testified that it was understood and intended that the relationship between petitioners and the Bank of Montreal was to be that of customer and dealer. Even if the relationship between petitioners and the Bank of Montreal were that of customer and broker, there is no evidence to show that the Japanese bonds were sold in the United States either in the taxable year or at any other time. 218 Respondent concedes that there is no direct evidence which tends to show that the relationship between petitioners and the Bank of Montreal was that of customer and broker or that the Japanese bonds were sold by the Bank of Montreal in the United States. However, respondent points to the fact that the Japanese bonds were not listed on any Montreal exchange and to the fact that the Bank of Montreal paid slightly different prices for lots contained in each block of Japanese bonds purchased from petitioners. From these facts respondent attempts to draw the inference that the1061 Bank of Montreal, as broker, sold the Japanese bonds in the United States for petitioners' respective accounts. The inference is too strained to warrant further consideration. Since the American and Japanese bonds which petitioners sold during the period from October 30, 1934, to April 30, 1935, inclusive, were sold and delivered to dealers in Canada, the gains realized therefrom were income from sources outside the United States, and respondent erred in including such gains in petitioners' taxable gross income for the taxable year. The second question is whether the gains realized by petitioners during the taxable year from the redemption of bonds of the New York Central & Hudson River Railroad were gross income from sources within the United States within the meaning of section 119 of the Revenue Act of 1934. In their income tax returns for the taxable year petitioners reported the gains realized from the redemption of the bonds as gross income from sources outside the United States and did not include the gains in taxable gross income. Respondent determined that the gains realized from the redemption of the bonds were gross income from sources within the United States and1062 included the gains in taxable gross income. Subsection (a) of section 119 provides that the following items of gross income shall be treated as gross income from sources within the United States: (1) Interests; (2) dividends; (3) compensation for personal services; (4) rentals and royalties; (5) gains, profits, and income from the sale of real property; (6) and gains, profits, and income from the sale of personal property. In subsection (f) of section 119 it is provided that the word "sale" as used in section 119 includes the word "exchange." Subsection (e) of section 119 provides in part that items of gross income other than those specified in subsection (a) shall be allocated or apportioned to sources within or without the United States, under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Petitioners contend that the gains from the redemption of bonds were not gross income from sources within the United States because gross income from sources within the United States is limited 219 to the six items of gross income specifically mentioned in subsection (a) and because such gains were not gains from the sale or "exchange" of1063 personal property within the scope of item sixth, subsection (a). On the other hand, respondent contends that the gains from the redemption of the bonds were gross income from sources within the United States because gross income from sources within the United States is not limited to the six items of gross income specifically mentioned in subsection (a) and because such gains were gains from the "exchange" of personal property, as provided by section 117(f) of the Revenue Act of 1934, the pertinent provisions of which are set forth in the margin. 7Gross income from sources within the United States is not limited to the six items of gross income specifically mentioned in subsection (a). , in which the Circuit Court stated that the comprehensive language of subsection (e) shows that Congress intended "to cover items of income other than those specifically mentioned1064 in the previous subsections" and "to include in taxable income all income derived from sources within the United States." Moreover, the Board has held that gains from the redemption of bonds in the United States constitute gross income from sources within the United States. , in which the Board stated with reference to section 217 of the Revenue Act of 1926, which corresponds to section 119 of the Revenue Act of 1934, in part as follows: Counsel for the petitioner argues, * * * that the profits arising from these transactions are not taxable to the petitioner under the provisions of section 217(a) of the Revenue Act of 1926, which defines income from sources within the United States, but does not include profits such as arose in this case. However, the provisions of section 217(a) are not an all inclusive definition of income from sources within the United States for the purpose of determining the net income of nonresident alien individuals. This is apparent from section 217(e), which provides that items of gross income, other than those specified in subdivision (a), shall be allocated or apportioned to sources within or without1065 the United States, under rules and regulations prescribed by the Commissioner, with the approval of the Secretary. Subdivision (e) contains also some specific provisions in regard to gains from the purchase and sale of personal property. When section 217 is read as a whole and the rules and regulations prescribed by the Commissioner with the approval of the Secretary considered, articles 324 and 328 of Regulations 69, it is apparent that the profit from the transactions in question in this case must be considered to be income from sources within the United States. Since the New York Central & Hudson River Railroad bonds were redeemed in the United States, the De Stuers case is controlling. 220 Thus, the gains realized from the redemption of the bonds were gross income from sources within the United States, and respondent correctly included such gains in petitioners' taxable gross income for the taxable year. In view of this conclusion, it is not necessary to pass upon respondent's contention that the gains from the redemption of the bonds were gains from the "exchange" of personal property, as provided in subsection (f) of section 117 of the Revenue Act of 1934. 1066 The final question is whether petitioners are subject to the surtax on personal holding companies imposed by section 351 of the Revenue Act of 1934. Petitioners filed personal holding company returns for the taxable year. As the result of the credit of 20 percent of adjusted net income and the credit for dividends paid during the taxable year, which credits are allowed by section 351, the returns each disclosed no undistributed adjusted net income and thus no liability for surtax under section 351. 8 Respondent determined deficiencies in surtax under section 351 as the result of including in petitioners' taxable gross income for the taxable year the gains realized from the sales of American and Japanese bonds and from the redemption of the bonds of the New York Central & Hudson River Railroad Co. In an amended petition each petitioner alleges that during the taxable year it was a foreign corporation, having no office and transacting no business in the United States, and that during the taxable year all of its stock was owned by nonresident aliens; that Congress did not intend that a foreign corporation whose stock was owned entirely by nonresident aliens was to be subject to1067 the surtax imposed by section 351; and that, therefore, the Commissioner erred in determining that it was subject to the surtax imposed by section 351. In view of the conclusion that the gains realized by petitioners from the sales of American and Japanese bonds during the period from October 30, 1934, to April 30, 1935, inclusive, were not income from sources within the United States, it is not necessary to pass upon the question as to whether Congress intended that a foreign corporation 221 whose stock1068 was owned entirely by nonresident aliens was to be subject to the surtax imposed by section 351. Even if Congress intended, as respondent contends, that a foreign corporation whose stock was owned entirely by nonresident aliens was to be subject to the surtax imposed by section 351, the credit of 20 percent of adjusted net income and the credit for dividends paid during the taxable year would exceed the adjusted net income of each petitioner, and would result in no undistributed adjusted net income subject to surtax, under section 351, and thus, in no surtax liability. This was conceded by respondent at the hearing and is pointed out by petitioners in their reply brief. During the taxable year petitioners each incurred certain ordinary and necessary expenses in the conduct of their businesses, a ratable part of which expenses were deductible under section 232 of the Revenue Act of 1934 and article 119-10 of Regulations 86, the pertinent provisions of which are set forth in the margin. 9 None of the petitioners took a deduction for a ratable part of its expenses in its income tax return for the taxable year. In determining the deficiencies respondent allowed each petitioner a1069 deduction for a ratable part of its expenses, and in computing the ratable part of expenses respondent included the gains realized from the sales of the American and Japanese bonds during the period from October 30, 1934, to April 30, 1935, inclusive, as gross income from sources within the United States. In view of the conclusion that the gains realized from the sale of the American and Japanese bonds during the period from October 30, 1934, to April 30, 1935, inclusive, were not gross income from sources within the United States, the ratable part of expenses allowed each petitioner as a deduction should be recomputed, as requested by respondent in an amended answer and also urged by petitioners in their briefs. 1070 Decision will be entered under Rule 50.Footnotes1. An accepted check is a certified check. See Ballantine, Law Dictionary (1930). ↩2. SEC. 231. GROSS INCOME. (a) GENERAL RULE. - In the case of a foreign corporation gross income includes only the gross income from sources within the United States. ↩3. See Meyer, The Law of Stockbrokers and Stock Exchanges, 1933 Cumulative Supplement, sec. 43-a, pp. 33-35. See also Geo. S. Bates and Wm. O. Douglas, Stock "Brokers" As Agents and Dealers, 43 Yale Law Journal, pp. 46, 59-61. ↩4. See Meyer, The Law of Stockbrokers and Stock Exchanges, 1933 Cumulative Supplement, sec. 43-a, p. 35. ↩5. See Meyer, The Law of Stockbrokers and Stock Exchanges, 1933 Cumulative Supplement, sec. 43-a, p. 33. ↩6. See Meyer, The Law of Stockbrokers and Stock Exchanges, 1933 Cumulative Supplement, sec. 43-a, p. 34. ↩7. SEC. 117. CAPITAL GAINS AND LOSSES. * * * (f) RETIREMENT OF BONDS, ETC. - For the purposes of this title, amounts received by the holder upon the retirement of bonds * * * shall be considered as amounts received in exchange therefor. ↩8. SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES. (a) IMPOSITION OF TAX. - There shall be levied, collected, and paid, for each taxable year, upon the undistributed adjusted net income of every personal holding company a surtax * * * * * * (b) DEFINITIONS. - As used in this title - * * * (2) The term "undistributed adjusted net income" means the adjusted net income minus the sum of: (A) 20 per centum of the excess of the adjusted net income over the amount of dividends received from personal holding companies which are allowable as a deduction for the purposes of the tax imposed by section 13 or 204; * * * (C) Dividends paid during the taxable year. ↩9. SEC. 232. DEDUCTIONS. In the case of a foreign corporation the deductions shall be allowed only if and to the extent that they are connected with income from sources within the United States; and the proper apportionment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 119, under rules and regulations prescribed by the Commissioner with the approval of the Secretary. ART. 119-10. Apportionment of deductions.↩ - From the items specified in articles 119-1 to 119-6 as being derived specifically from sources within the United States there shall be deducted the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any other expenses, losses, or deductions which can not definitely be allocated to some item or class of gross income. The remainder shall be included in full as net income from sources within the United States. The ratable part is based upon the ratio of gross income from sources within the United States to the total gross income.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625768/	JAMES H. O'HAGAN, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentO'Hagan v. CommissionerDocket No. 20242-92.United States Tax CourtT.C. Memo 1995-409; 1995 Tax Ct. Memo LEXIS 406; 70 T.C.M. (CCH) 498; August 22, 1995, Filed 406 Decision will be entered under Rule 155. James H. O'Hagan, pro se. John C. Schmittdiel, for respondent. SCOTT, Judge SCOTTMEMORANDUM OPINION SCOTT, Judge: Respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1989 in the amount of $ 436,057, and an addition to tax under section 6651(a) 1 in the amount of $ 113,836. Respondent has conceded that petitioner is not liable for the addition to tax under section 6651(a), leaving for decision whether the amounts repaid by petitioner in 1989 for clients' funds misappropriated in prior years is a reduction in petitioner's 1989 income or a deduction under section 165(c)(2), which is not deductible for alternative minimum tax purposes. All of the facts have been stipulated and are found accordingly. At the time of the filing of the petition407 in this case, petitioner resided in St. Paul, Minnesota. Petitioner timely filed his Federal income tax return for the taxable year 1989. In January 1990, petitioner was charged with eight counts of theft in violation of Minn. Stat. section 609.52, subds. 2(1), 2(5)(a) (by temporary control) and nine counts of theft in violation of Minn. Stat. section 609.52, subd. 2(4) (by swindle). Petitioner was convicted on the eight counts of theft by temporary control and found not guilty on the nine counts of theft by swindle. Petitioner appealed his conviction of theft by temporary control. His conviction was affirmed. State v. O'Hagan, 474 N.W.2d 613">474 N.W.2d 613 (Minn. Ct. App. 1991). The appellate court in its opinion summarized the facts substantially as follows. Between 1963 and 1989, petitioner practiced law with the firm of Dorsey & Whitney in Minneapolis, Minnesota (Dorsey & Whitney or the firm). Although petitioner was a senior partner in the firm and handled many litigation matters, he enjoyed considerable independence, and, to some extent, operated his own practice in the firm. From 1986 to 1988, petitioner was one of the top two producers of the firm, billing408 in excess of $ 2 million annually. From the late 1970's through November 1989, petitioner defended Northrup King & Co. (Northrup) and its parent corporation, Sandoz, Inc., in a class action suit referred to as the "Boose" litigation. In October 1986, the parties reached an oral agreement to settle the Boose litigation, and on October 29, 1986, Northrup wired $ 1 million to the Dorsey & Whitney general trust account. On that same day, at petitioner's direction, $ 500,000 was transferred into a separate interest-bearing account known as the Northrup account. Petitioner was the sole authorized signer on the Northrup account. On the following day, at petitioner's direction, two checks were drawn on the remaining $ 500,000 in the Dorsey & Whitney general trust account. These two checks were used by petitioner to pay off personal outstanding loans. On January 7, 1987, three checks were drawn at petitioner's direction on the $ 500,000 that had been previously transferred to the Northrup account. On February 27, 1987, again at petitioner's direction, a check in the amount of $ 250,000 was drawn on the Northrup account made payable to Dakota County State Bank. The four checks were used for409 petitioner's personal purposes. In August 1988, the court in the Boose litigation approved payments to the plaintiffs and, thereafter, substantially all of the $ 1 million was paid out to the plaintiffs and their counsel. By this time, petitioner had transferred nearly all of the $ 1 million back into the Northrup account. In the fall of 1989, when questions arose as to who had received the interest on the escrow funds, Dorsey & Whitney audited the account and discovered petitioner's diversion. Petitioner subsequently reimbursed Dorsey & Whitney for the interest due Northrup during the period that the funds were in Dorsey & Whitney's control. During 1987, petitioner represented the Mayo Clinic (Mayo) in certain medical malpractice litigation. In January 1987, petitioner settled a lawsuit brought against Mayo for $ 270,000. Petitioner informed Mayo that the case had settled for $ 595,000. Mayo then deposited $ 595,000 into an interest-bearing account on which petitioner was the sole signer. Petitioner used the excess $ 325,000 to pay off various personal loans. Petitioner settled a second lawsuit on behalf of Mayo for $ 25,000, yet informed Mayo that the settlement was for $ 250,000. 410 Petitioner again diverted the excess funds from the Mayo account. In December 1987, petitioner informed Mayo that a third case had been settled, and Mayo sent petitioner a check for $ 1.5 million, which was put into a client trust fund. From December 31, 1987, through March 17, 1988, petitioner withdrew $ 1,384,050.54 from this trust account for personal purposes. In October 1989, petitioner and Mayo concluded that the cases would not be settled in the near future. Unaware that petitioner had withdrawn any money from the trust account, Mayo requested that the money be returned. Within several days, petitioner sent Mayo's representative a check for $ 1.7 million. Six of the eight counts charging petitioner with theft by temporary control and nine counts charging petitioner with theft by swindle were with respect to the Mayo funds. Petitioner filed a Federal income tax return for 1986 reporting adjusted gross income of $ 318,680 and taxable income of $ 77,913. Petitioner subsequently filed an amended return reporting additional gross and taxable income of $ 500,000. Petitioner in explanation of the increase stated: Upon review of the prior years returns it was discovered an 411 error was made in the determination of income and that amounts previously considered to be loans may be classified as income by the IRS.Petitioner's Federal income tax return for 1987 reported adjusted gross income of $ 323,054 and taxable income of $ 135,876. Petitioner subsequently filed an amended return for 1987 reporting additional gross and taxable income of $ 1,457,474. The amended return for 1987 contained the same explanation as the amended return for 1986. Petitioner's Federal income tax return for 1988 reported adjusted gross income of $ 4,372,959 and taxable income of $ 3,890,443. Petitioner also filed an amended return for 1988 reporting additional gross and taxable income of $ 115,680 and included the same explanation as in the 2 prior years. Petitioner filed his amended returns for 1986, 1987, and 1988 prior to being contacted by a revenue agent regarding examination of his income tax liabilities for those years. Petitioner's Federal income tax return for 1989 reported adjusted gross income of $ 875,973, and taxable income of "none". On his 1989 return, in arriving at the $ 875,973 of adjusted gross income, petitioner deducted $ 2,073,154 as "repayment of loans412 previously reported as income." On Form 8275, Disclosure Statement Under Section 6661, petitioner stated: Taxpayer previously reported loans construed to be income in adjustment gross income. Taxpayer believes that the repayment of the loans should be a deduction in computing adjusted gross income.Respondent in her notice of deficiency determined that petitioner was entitled to no deduction under section 1341 for repayments of misappropriated funds of clients' in the amount of $ 2,073,154, but that petitioner was entitled to miscellaneous itemized deductions computed as follows: Miscellaneous itemized deductions$ 8,914per returnRepayment of misappropriated2,073,154fundsTotal2,082,068Less: 2% of corrected adjusted58,983gross incomeAllowable deduction2,023,085Respondent determined that miscellaneous itemized deductions were not allowable deductions in computing petitioner's alternative minimum tax for 1989. The entire amount of the deficiency which is in dispute results from an increase in petitioner's alternative minimum tax. Petitioner contends that the proceeds reported in years prior to the one in issue were actually loan proceeds and, 413 therefore, should not have been reported as income. Petitioner further contends that this Court should use the doctrine of equitable recoupment to give him the full benefit of the deduction and to mitigate the effect of the increased tax rates in the years the income was reported. In the alternative, petitioner contends that he is entitled to a deduction under section 1341 for repayment of the loan proceeds. In the second alternative, if we find that petitioner properly reported the amounts as income, petitioner argues that the deduction for repayment of misappropriated funds should not be characterized as a miscellaneous itemized deduction. It is respondent's position that petitioner properly reported as income the misappropriated funds and that the deduction for repayment of these funds is properly characterized as a miscellaneous itemized deduction. Initially we point out that the only year before us is 1989. Therefore, whether petitioner properly reported the amounts of clients' funds he used in prior years is before us only as it might affect petitioner's claim to application of section 1341, or his claim to equitable recoupment. However, since the parties discuss the issue414 of whether petitioner properly reported the amounts of clients' funds he used in prior years as income, we will consider that question as background to the issue of the nature of petitioner's deduction for repayment in the year here in issue. Section 61 broadly defines gross income as "all income from whatever source derived", unless otherwise provided. It has long been held that amounts obtained by a taxpayer through various types of illegal means are included in taxable income in the year obtained, even though the taxpayer may be potentially liable to reimburse the victim. James v. United States, 366 U.S. 213 (1961) (embezzlement); Rutkin v. United States, 343 U.S. 130">343 U.S. 130 (1952) (extortion); Briggs v. United States, 214 F.2d 699 (4th Cir. 1954) (fraud); McSpadden v. Commissioner, 50 T.C. 478">50 T.C. 478 (1968) (false mortgage scheme); Leaf v. Commissioner, 33 T.C. 1093">33 T.C. 1093 (1960), affd. per curiam 295 F.2d 503">295 F.2d 503 (6th Cir. 1961) (fraud). In James v. United States, supra, the Supreme Court415 held that embezzled funds are to be included in the taxable income of an embezzler in the year in which the funds are misappropriated. The Supreme Court stated: When a taxpayer acquires earnings, lawfully or unlawfully, without the consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition, "he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent." * * * In such case, the taxpayer has "actual command over the property taxed--the actual benefit for which the tax is paid," * * * This standard brings wrongful appropriations within the broad sweep of "gross income"; it excludes loans. * * James v. United States, supra at 219. It is the control which the taxpayer has over the amounts illegally obtained that causes such amounts to be taxable income to the recipient, and the possibility that at some later date the taxpayer may be required to make restitution does not cause receipts from an illegal activity not to be income in the year416 the amounts are received. McSpadden v. Commissioner, supra at 490. Petitioner contends that the transactions here involved should be properly characterized as loans for Federal income tax purposes. As opposed to unlawful economic gains, bona fide loans are not included in income because the temporary economic benefit is offset by the corresponding obligation to repay them. Moore v. United States, 412 F.2d 974">412 F.2d 974, 978 (5th Cir. 1969); United States v. Rochelle, 384 F.2d 748">384 F.2d 748, 751 (5th Cir. 1967). Whether a transaction for Federal income tax purposes constitutes a loan is a factual question. However, a distinguishing characteristic of a loan is the knowledge of each party to the transaction that there is a loan and the intention of each party that the money advanced be repaid. Moore v. United States, supra; Commissioner v. Makransky, 321 F.2d 598">321 F.2d 598, 600 (3d Cir. 1963), affg. 36 T.C. 446">36 T.C. 446 (1961). Courts have looked at whether there was an express or implied consensual recognition of the obligation to repay, 417 and whether each party views the transaction as a loan. Collins v. Commissioner, 3 F.3d 625">3 F.3d 625, 631 (2d Cir. 1993), affg. T.C. Memo. 1992-478; In re Diversified Brokers Co., 487 F.2d 355">487 F.2d 355, 357-358 (8th Cir. 1973); United States v. Rosenthal, 470 F.2d 837">470 F.2d 837, 842 (2d Cir. 1972); Moore v. United States, supra at 979-980. Based on the facts in this case, we conclude that the transactions here involved should not be considered bona fide loans for Federal income tax purposes. Petitioner took money from his clients' trust funds without their knowledge or consent and maintained control over these funds until repayment. 2 The fact that petitioner repaid the money before criminal charges were brought against him is irrelevant to a determination of petitioner's taxable income in the year in which the illegal taking occurred. There was no agreement, express or implied, between petitioner and his clients that petitioner could borrow the clients' funds, and, hence, the amounts were properly includable in petitioner's income for the years in which418 petitioner appropriated the funds for his own benefit. Since petitioner on his amended returns properly reported the appropriated clients' funds as income for those years, petitioner is entitled to a nonbusiness deduction under section 165(c)(2) in the year of repayment. It would be incumbent on petitioner to show a basis other than the fact of repayment in order to be entitled to a deduction in the year of repayment under some section of the Code other than section 165(c)(2). Petitioner has made no such showing. Mannette v. Commissioner, 69 T.C. 990">69 T.C. 990, 992 (1978); Yerkie v. Commissioner, 67 T.C. 388">67 T.C. 388, 390 (1976); Fox v. Commissioner, 61 T.C. 704">61 T.C. 704, 715 (1974). 419 It is petitioner's alternate contention that the repayment of the illegally obtained funds entitles him to a deduction under section 1341. Section 1341 3 provides relief to taxpayers who receive income in one year under a claim of right and are required to make refunds in a later year in excess of $ 3,000 when the tax benefits of the repayment are less than the tax paid in the earlier year. Section 1.1341-1(a)(2), Income Tax Regs., defines "income included under a claim of right" as an item that is included in gross income because it appeared from all the facts available in the year of inclusion that the taxpayer had an unrestricted right to such item. 420 In the instant case, it is clear that petitioner is not entitled to a deduction under section 1341. In Yerkie v. Commissioner, supra, this Court held that section 1341 did not apply to the restoration of illegally obtained funds. This is in accord with other courts that have decided this issue. McKinney v. United States, 574 F.2d 1240 (5th Cir. 1978), Herzog v. United States, 89-2 USTC par. 9418 (D. Minn. 1989); Perez v. United States, 553 F. Supp. 558">553 F. Supp. 558 (M.D. Fla. 1982). Therefore, we uphold respondent's determination on this issue. Petitioner contends that, if we decide that the income was properly reportable in prior years, we should reject respondent's characterization of petitioner's repayment in 1989 as a miscellaneous itemized deduction. The net result of considering the repayment as a miscellaneous itemized deduction is that petitioner is subject to $ 436,057 of tax, since for alternative minimum tax purposes, the deduction is disallowed. Section 55(a) imposes a tax equal to the excess, if any, of the tentative minimum tax for the taxable year over421 the regular tax for the taxable year. For individuals, the tentative minimum tax, under section 55(b)(1), for the taxable year is 21 percent of so much of the alternative minimum taxable income for the taxable year as exceeds the exemption amount, reduced by the alternative minimum tax foreign tax credit for the taxable year. Section 55(b)(2) defines alternative minimum taxable income as the taxable income of the taxpayer for the taxable year determined with the adjustments provided in sections 56 and 58, and increased by the amount of the items of tax preference described in section 57. Section 56(b)(1)(A)(i) provides that in determining the amount of alternative minimum taxable income of any taxpayer other than a corporation, no deduction is allowed for miscellaneous itemized deductions. Section 67(b) defines miscellaneous itemized deductions as itemized deductions other than those specifically listed in section 67(b)(1) through (13), none of which include a deduction for the repayment of illegally received funds. Under section 63(d), itemized deductions are all deductions except the deductions allowable in arriving at adjusted gross income, and the deduction for personal exemptions. 422 Deductions allowable in arriving at adjusted gross income are generally within the scope of ordinary and necessary business expenses, including trade and business deductions, losses from the sale or exchange of property, and deductions attributable to royalties. Sec. 62(a). Repayment of illegally received income is not included in these deductions, and is generally not considered an ordinary and necessary business expense. See Mannette v. Commissioner, 69 T.C. at 992; Yerkie v. Commissioner, 67 T.C. at 390; Fox v. Commissioner, 61 T.C. at 715. Without further analysis, it is clear from a reading of the statute that the only deductions that are not characterized as miscellaneous itemized deductions are ordinary and necessary business expenses, and those deductions specifically enumerated in sections 67(b) and 62(a). Petitioner argues that to consider the repayment of funds illegally received in a prior year as an itemized miscellaneous deduction treats a taxpayer who has illegal receipts differently from a taxpayer who repaid income received legally. However, any taxpayer who has income in423 one year offset by a deduction under section 165(c)(2) will have this same treatment for alternative minimum tax purposes. See, e.g., Wallach v. United States, 800 F.2d 1121 (Fed. Cir. 1986). We, therefore, uphold respondent's determination that the deduction for repayment of the clients' funds used by petitioner for his own benefit is properly characterized as a miscellaneous itemized deduction on petitioner's 1989 return. Finally, petitioner argues that even if this Court finds that the illegally borrowed funds were properly taxable in the year of receipt, we should use the doctrine of equitable recoupment to allow him to recover the entire amount in controversy, plus a refund of $ 348,344 because the tax rates in the year the income was reported were higher than in 1989. "[A] claim of equitable recoupment will lie only where the Government has taxed a single transaction, item, or taxable event under two inconsistent theories." United States v. Dalm, 494 U.S. 596">494 U.S. 596, 605 n.5 (1990). Here, there has been no inconsistent treatment of a single transaction, item, or event. Petitioner's claim of equitable recoupment is based424 on the assumption that he properly paid tax on amounts which he improperly took from client trust funds in prior years. His repayment of these amounts in 1989 was a separate transaction and, as we have held, was properly deductible as a miscellaneous itemized deduction for 1989. There is simply no inconsistency between the treatment of these transactions and, therefore, no basis for petitioner's equitable recoupment claim. See McCarthy Trust v. Commissioner, 86 T.C. 781">86 T.C. 781 (1986), affd. 817 F.2d 558">817 F.2d 558 (9th Cir. 1987). Accordingly, we hold for respondent on this issue. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, unless otherwise indicated.↩2. The Minnesota statute under which petitioner was convicted provides in pertinent part: Whoever does any of the following commits theft * * * (1) intentionally and without claim of right takes, uses, transfers, conceals, or retains possession of moveable property of another without the other's consent and with * * * (5) * * * intent to exercise temporary control only and; (a) the control exercised manifests an indifference to the rights of the owner or the restoration of the property to the owner.Minn. Stat. Ann. sec. 609.52, subds. 2(1), 2(5)(a)↩ (West 1987).3. SEC. 1341(a) General Rule.--If-- (1) an item was included in gross income for a prior taxable year (or years) because it appeared that the taxpayer had an unrestricted right to such item; (2) a deduction is allowable for the taxable year because it was established after the close of such prior taxable year (or years) that the taxpayer did not have an unrestricted right to such item or to a portion of such item; and (3) the amount of such deduction exceeds $ 3,000,then the tax imposed by this chapter for the taxable year shall be the lesser of the following: (4) the tax for the taxable year computed with such deduction; or (5) an amount equal to-- (A) the tax for the taxable year computed without such deduction, minus (B) the decrease in tax under this chapter (or the corresponding provisions of prior revenue laws) for the prior taxable year (or years) which would result solely from the exclusion of such item (or portion thereof) from gross income for such prior taxable year (or years).↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625769/	Modestina Cercone v. Commissioner. Estate of Julius Cercone, Deceased, Modestina Cercone, Administratrix v. Commissioner.Cercone v. CommissionerDocket Nos. 90567, 90568.United States Tax CourtT.C. Memo 1964-166; 1964 Tax Ct. Memo LEXIS 169; 23 T.C.M. (CCH) 969; T.C.M. (RIA) 64166; June 18, 1964H. L. Libby, Stambaugh Bldg., Youngstown, Ohio, for the petitioners. John P. Graham, for the respondent. SCOTT Memorandum Findings of Fact and Opinion SCOTT, Judge: Respondent determined deficiencies in income tax and additions to tax of Modestina Cercone and Estate of Julius Cercone, Deceased, Modestina Cercone, Administratrix, for the years and in the amounts as follows: ModestinaAdditions to TaxCercone.Sec. 6653(b),Sec.Sec. 6654294(d)(1)(A),YearTaxDeficiency1954 Code1939 Code1954 Code1954Income$ 5,641.63$ 2,820.82$ 521.731955Income2,162.061,081.03$ 56.761956Income2,998.691,499.3578.711957Income2,833.361,416.6874.38$13,635.74$ 6,817.88$ 521.73$209.85170 Estate of Julius Cercone, Deceased Modestina Cercone, Administratrix Additions to TaxSec. 293(b),Sec. 294(d)(2),Sec. 294(d)(1)(A),YearTaxDeficiency1939 Code1939 Code1939 Code1951Income$ 556.00$ 278.00$ 30.361952Income2,961.951,480.98169.861953Income3,818.231,909.11241.70Sec. 6653(b),1954 Code1954Income3,111.581,555.79313.021955Income2,878.971,439.491956Income1,037.81518.91$14,364.54$ 7,182.28$ 441.92313.02 The issues for decision are: (1) Whether there are deficiencies in the income tax of the Estate of Julius Cercone, Deceased, Modestina Cercone, Administratrix, for the years 1951, 1952, 1953, 1954, 1955 and 1956 and of Modestina Cercone for the years 1954, 1955, 1956 and 1957, (2) If there are deficiencies in such tax of the Estate of Julius Cercone, whether assessment and collection thereof for the years 1951, 1952 and 1953 is barred by the statute of limitations which is applicable absent proof that Julius Cercone for each of these years filed false and fraudulent income tax returns with intent to evade tax or for the years 1952171 and 1953 omitted from his returns more than 25 percent of his gross income; and (3) Whether any part of the deficiencies or underpayment in income tax, if any, of the Estate of Julius Cercone for each of the years 1951 through 1956 and of Modestina Cercone for the years 1954 through 1957 is due to fraud with intent to evade tax. Findings of Fact Julius Cercone (hereinafter referred to as Julius) was born June 15, 1917 in Italy. He came to this country with his parents Modestina and Ralph Cercone about 1925. He died on February 15, 1957. Julius was unmarried and resided with his mother Modestina Cercone at 700 Poland Avenue, Youngstown, Ohio until his death. His returns for the years 1951 through 1955 and the return of his estate for 1956 were filed on a calendar year basis with the district director at Cleveland, Ohio. The Estate of Julius Cercone was probated in Mahoning County, Ohio, and Julius' mother Modestina Cercone (hereinafter referred to as Modestina) was appointed Administratrix on February 27, 1957, and thereafter has served as administratrix. Julius' income producing activities included the ownership of various rental properties which are listed below, the operation172 of a retail grocery store known as McAllister Dairy Store at 514 Gibson Street, Youngstown, Ohio, and operation of an electric welding and car repair business in a garage behind 700 Poland Avenue (lot 2552-Poland), where Julius and Modestina lived. Julius purchased and improved real estate in Youngstown, Ohio, at the location and in the years and at the cost as follows: LocationDate PurchasedCostLandBuildingsLot No. 2551 (Poland Ave.)7/23/43$ 1,000.00Lot No. 3379 (Hayes Ave.)1/22/45400.00(Hayes Ave.)1/22/45$ 5,513.00Improvements Hayes Ave.1/ 1/526,900.00Lot No. 3379 (Erie)1/22/45300.00Lot No. 3379 (Erie)1/22/452,387.00Lot No. 31190 (Wolf St.)5/15/51375.00Lot No. 6861 (Glenwood)6/20/51810.001,690.00Lot No. 3815 (Poland)8/28/51490.001,885.00Lot No. 52810 (Rosewood)11/21/51590.00Lot No. 52798 (Stocker)11/21/51295.001,240.00Lot No. 31979 (Florida)12/26/511,040.004,960.00Improvements220.00Lot No. 52777 (Stocker)12/ 4/51235.00Lot No. 28219 (Garland)6/ 2/52700.002,825.00Lot No. 3633 (Gibson)8/19/521,500.004/ 1/5310,500.00Lot No. 23544 (Indianola)4/17/532,050.0022,950.00Improvements1/20/55550.00Lot No. 4375 (Franklin)2/ 2/54275.00Lot No. 5855 (Poland)7/30/55485.001,415.001,625.00Lot No. 4376 (Franklin)9/ 3/55185.002,315.00Lot No. 2961 (Ridge)10/ 6/551,050.002,850.00Lot No. 2962 (Ridge)10/ 6/551,050.005,050.00Lot No. 4260 (Arlington)5/ 4/56740.001,010.00Lot No. 732 (Blaine)2/13/571,176.0028,824.00173 All of the above listed real estate was held by Julius until his death except two parcels. One of these two parcels sold by Julius was lot No. 52810, a vacant lot on Rosewood Avenue, with a cost basis to Julius of $590 which was sold by him on June 13, 1956, for $1,000. The other parcel sold by Julius was a part of lot No. 3379 on Hayes Avenue (643 Hayes Avenue) with a cost basis for the land of $400, for the apartments of $5,513, and for improvements of $6,900, all of which was sold by Julius to the Salvation Army on January 16, 1953, for $20,000. Depreciation allowed Julius on this property from the date of purchase to the date of sale amounted to $1,530.12. The remaining part of Lot No. 3379 on Hayes Avenue not sold by Julius contained two frame houses fronting on Erie Street and is hereafter referred to as lot 3379-Erie. Rental units owned by Julius as of the end of each year from 1951 through 1956, were as follows: 1951195219531954195519566 apartment6 apartment6 apartment6 apartment6 apartment6 apartmentunitsunitsunitsunitsunitsunits5 single5 single5 single5 single8 single8 singlehouseshouseshouseshouseshouseshouses1 double1 double1 double1 double2 double3 doublehousehousehousehousehouseshouses1 flat and1 flat and1 flat and2 flats and2 flats andstorestorestorestoresstores5 garages5 garages174 The 1951 tax return of Julius was filed March 17, 1952. It shows a net loss of $490.06 for the year with no tax due. The return shows gross receipts from a trucking business in the amount of $4,808.02, expenses of $6,181.46, resulting in a net loss of $1,373.44. The return also shows net rental income of $868.38 from a "Frame Apart.", reflecting gross rents of $2,016, depreciation of $256.07, based on a straight-line 30-year-life and a cost of $7,700, and other rental expenses of $890.95. The same return reflects $15 income from "odd jobwelding." Julius' 1951 income tax return was filled out by Internal Revenue Agent Polas in the course of his duties while assisting taxpayers in filling out their 1951 tax returns. Polas' procedure in assisting taxpayers in filling out their returns was always to ask each of them: "Do you have any other income that was not reported?" Polas filled out Julius' 1951 return from the information supplied him by Julius. The 1952 tax return of Julius was filed March 13, 1953. It shows a net loss of $625.72 with no tax due. It shows a loss from the trucking business in the amount of $1,497.93, resulting from gross receipts of $1,411.20 and expenses of175 $2,909.13. It shows net rental income of $872.21 from "Frame Apartment-643 Hayes Ave.", reflecting gross rental receipts of $2,280, depreciation on the building of $256.67 based on a straight-line 30-year life and a cost of $7,700, depreciation on improvements of $345, and other rental expenses of $806.12. The improvements for which depreciation was taken are a heating unit, new siding, and storm windows, all acquired on January 1, 1952, at a total cost of $6,900, and all having a claimed useful life of 20 years. Julius' 1952 income tax return was prepared by Internal Revenue Agent Cappelli in the course of his duties of assisting taxpayers in filling out their 1952 income tax returns. Cappelli filled out Julius' 1952 return from oral information supplied him by Julius, together with the retained copy of the 1951 return. The cost basis to Julius of the apartment house at 643 Hayes Avenue without the improvements in 1952 was $5,513. The 1953 tax return of Julius was filed March 16, 1954. It shows adjusted gross income of $2,788.14, with a tax due of $441.16. The return shows net income from the grocery store operated by Julius during part of the year in the amount of $768.50176 and net rental income from a "Frame Apt. House-Indianola Ave." in the amount of $430.46, representing gross rental income of $1,960 and expenses and depreciation of $799.54 and $730, respectively. The $730 depreciation was computed on the basis of a $25,000 cost basis and a 20-year useful life. 1 Although Julius paid $25,000 for the Indianola property, $2,050 was allocable to the land. The 1953 return also reported the sale on January 10, 1953 of the frame apartment house property at 643 Hayes Avenue with a gross sale price of $17,000, cost of $14,600, depreciation allowed of $1,628.35 and expenses of sale of $850 resulting in $3,178.35 capital gains reported. In fact, the property was sold for $20,000, its cost was $12,813, allowed depreciation was $1,530.12, 2 and known expenses of the sale were $1,263.87, resulting in a capital gain of $7,453.25. In connection with the sale Julius hired an attorney. 177 On the escrow statement covering the sale, $482.23 of the $20,000 purchase price was charged to an item entitled "OPA-Judgment, Interest and Costs," and $10.10 was charged to an item entitled "Clerk of Courts, costs in case No. 137391." The 1953 return listed total receipts from the grocery business of $14,640 less cost of goods sold of $12,557, and less business expenses of $1,314.50, including depreciation of $450 claimed for the store building and $442.50 claimed for store fixtures. Depreciation on the building was computed on the basis of a $12,000 cost and a 20-year useful life, and depreciation on the fixtures was computed on the basis of a $2,950 cost and a 5-year useful life. 3 To the contrary, the store building was constructed at a cost of $10,500, the land having been purchased at a cost of $1,500. 178 The 1954 return of Julius was filed April 18, 1955. The return shows adjusted gross income of $2,538.65 with tax due of $380.26. It reports net income from the grocery store of $1,441.85, resulting from gross receipts of $27,295.85, cost of goods sold of $24,110.71 and expenses of $1,743.29, and it reports net rental income from the apartment house at 2707 Indianola Avenue of $1,096.80, resulting from gross rentals of $2,520, depreciation of $730 and other expenses of $693.20. No other rental income is reported on the return. The depreciation claimed on the return for the Indianola Avenue property, the grocery store, and the grocery store fixtures were the same amounts as were claimed in the 1953 return, i.e., $730, $450, 3 and $442.50, respectively. The 1955 tax return of Julius was filed April 16, 1956, and reflects adjusted gross income of $2,882.24 with tax179 of $445.44. It reflects net income from the grocery store of $1,514.76 resulting from gross receipts of $28,330.46, cost of goods sold of $24,947.17, and expenses of $1,868.53 and it reflects net rental income from the apartment house at 2707 Indianola of $1,367.48, resulting from gross rentals of $2,880, depreciation of $840, including $110 depreciation for gas conversion units added to the property in 1955, and expenses of $672.52. The same amounts for depreciation are claimed for the year 1955 for the Indianola Avenue property without the gas conversion units, the grocery store, and the grocery store fixtures as were claimed in the years 1953 and 1954, i.e., $730, $450 and $442.50, respectively. The 1953, 1954 and 1955 tax returns of Julius were prepared by a third party upon the basis of oral information furnished him by Julius and without books or records. On July 15, 1957, an income tax return was filed for the Estate of Julius. It reflects adjusted gross income of $2,586.25, with tax of $388.49. It was prepared by W. R. Machuga, Attorney, and signed by Modestina Cercone, Administratrix. The return shows net receipts from the grocery business of $1,416.25, resulting from180 gross receipts of $28,500, cost of goods sold of $24,995.75 and expenses of $2,088 and it reflects net rental income of $1,170 from the Indianola property resulting from gross rental income of $2,880, depreciation of $1,360, and expenses of $350. Depreciation for the Indianola Avenue property, the grocery store, and the grocery store fixtures was claimed in the respective amounts of $1,250, $600 and $590, based on the same cost basis and useful life for each of the assets as were claimed in the earlier years 1953, 1954, and 1955. No rental income from properties other than the Indianola apartments was reported. Machuga prepared this return primarily from the retained copy of Julius' 1955 return which was given to him by Modestina and after discussing the matter with Modestina. He attached a letter to the return as filed noting that there were not sufficient records of Julius' income and expenses available from which to make an accurate return and stated that if additional records appeared, a corrected return would be filed. No corrected return for 1956 for the Estate of Julius has ever been filed. During the first half of 1951 and during 1952, 1953 and 1954 Julius received a monthly181 rental of between $45 and $65 for a two-story wood house located at 640 Erie Street (Lot No. 3379-Erie). Sometime during the period 1952 to 1954 Julius added a front porch to the 640 Erie Street house and also during this period the tenants had the interior of the house painted at their own expense. The tenants paid utilities for the property. Julius also received a rent of $40 a month, or a yearly total of $480, for the house at 642 Erie Street which was occupied by two bachelors during the years 1951 through 1954. Julius also received a monthly rental of $65 or a yearly total of $780 for the 821 East Florida Avenue property from April 1952 through the end of 1956. Julius did not report any receipts from the 640 or 642 Erie Street or 821 East Florida Avenue properties on any of his returns. During all of 1956, the tenant at 821 East Florida made the $65 monthly payments to Julius; after Julius' death in February 1957, the tenant made the $65 payments to Modestina and obtained signed receipts of such payments from Modestina. The tenant moved out of the property in 1958. At some time between 1952 and February 1957, Julius purchased for the property a second-hand water tank, a thermostat182 for the furnace, and paint for the outside of the house. The tenant did considerable repairs to the property including, at some time during 1957 or 1958, painting the whole interior of the house, and installing a new top on the sink in the kitchen, a wall in the bathroom, a back to the sink in the kitchen, and new piping under the kitchen sink. The tenant paid all utilities for the property. Real estate taxes for 821 East Florida Avenue for the years 1953 to 1957, inclusive, were paid in the respective amounts of $75.50, $74.64, $37.75, $118.91 and $96.72, and interest on the mortgage on this property for the years 1952 to 1955, inclusive was paid in the respective amounts of $125.48, $125.33, $107.28, and $60.53. During the period from October 1955 to July 1957, gross rent of $3,076.69, consisting of $521.55, $1,579 and $976.14 for the respective years 1955, 1956 and 1957, was received by the real estate agent who handled the rental property at lots 2961, 2962 Ridge Avenue owned by Julius. No receipts from the Ridge Avenue properties were reported on any of Julius' tax returns. For this same period the real estate agent made disbursements as follows: DISBURSEMENTS1/5/56Insurance$ 146.854/4/56Labor-remove grape arbor5.005/1/56Payments to Julius Cercone515.702/15/57Insurance177.876/19/57Plumbing Expense9.165/17/57Insurance25.177/31/57Management Charges307.671,189.42Mortgage Payments15 payments $100.001,500.00BALANCE2,689.42INCOME$3,076.69Expenses$2,689.42Escrow Acct.387.27$3,076.69$3,076.69183 No books or records of Julius were furnished to the agents who examined Julius' tax returns for the years 1951 through 1956. Modestina through her attorney made the representation that books and records were maintained by Julius but were taken in a burglary approximately 1 month after Julius' death. In the investigation of this burglary, Modestina represented to the police that two cigar boxes, one containing a number of United States Savings bonds and the other containing a number of old watches, jewelry, and personal papers, were missing. A box full of assorted wrist watches, lockets, bracelets and four bank books on the Union National Bank bearing Julius' name was subsequently recovered and returned by the police to Modestina. Julius was killed in a robbery of his grocery store on February 15, 1957. An individual was convicted of a crime arising from the occurrence and sent to the penitentiary. Earnings of Julius for the period of April 1, 1937 through September 30, 1950, as based upon reports to Social Security by the specified employer, are as follows: AmountPeriodReportedEmployer1937 - 2nd Quarter$ 71.50American Bridge Co.1937 - 2nd Quarter503.64Truscon Steel Co.19381,608.07Truscon Steel Co.19391,719.30Truscon Steel Co.19401,788.52Truscon Steel Co.19412,684.89Truscon Steel Co.19423,000.00Truscon Steel Co.1943 - 1st, 2nd, 3rd Quarters1,756.99Truscon Steel Co.1944 - 1st Quarter315.54MacKenzie Muffier Co., Inc.1945 - 3rd Quarter5.01Commercial Shearing & Stamping Co.1945 - 4th Quarter0.33Commercial Shearing & Stamping Co.1945 - 4th Quarter530.97Carnegie Illinois Steel Corp.1946 - 1st Quarter236.68Carnegie Illinois Steel Corp.1946 - 2nd Quarter165.73Ohio Steel Work & Furnaces1947 - 3rd Quarter331.40Charles L. Radcliff1947 - 4th Quarter289.50Girard Tank Welding Co.1947 - 4th Quarter16.00Herman Holmes1947 - 4th Quarter472.00Blaw Knox Construction Co.1948 - 2nd Quarter531.85United Engineering and Foundry1948 - 3rd Quarter982.80United Engineering and Foundry1948 - 4th Quarter757.91United Engineering and Foundry1949 - 3,000.00United Engineering and Foundry1950 - 1st, 2nd, 3rd Quarters1,457.84United Engineering and Foundry$22,226.47184 Income taxes were paid during the following years in the following amounts by Julius: YearAmountYearAmount1951$ 42.351954$341.161952None1955584.261953100.001956479.44Modestina gave Julius $2,200 in 1951, $4,250 in 1952, and loaned Julius $5,000 in 1953. The garage in which Julius conducted his electric welding and car repairing activities, in the rear of 700 Poland Avenue, was built by Modestina in 1950 for $8,000. The Probate Court in 1957 allowed a claim of Modestina Cercone for a $5,000 loan against the Estate of Julius Cercone. The Probate Court file for this estate was missing as of May 14, 1963, and could not be found by that Court. Julius filed income tax returns for the years 1939 to 1941, and 1944 to 1955, inclusive, showing no income tax liabilities for any years except 1941, 1944, 1946, 1948, 1949, 1950, 1953, 1954 and 1955 for which liabilities in the amounts of $63, $81.31, $22.77, $1.60, $150, $98.25, $441.16, $380.26 and $445.44, respectively were shown. Julius is entitled to a reserve for depreciation for his rental and business properties in the amounts and computed as follows: DateEstimatedPropertyAcquiredLifeCost12/31/5012/31/51Lot 3379 (Erie St.)1/22/4522$2,387.00$ 651.00$ 759.50Lot 3379 (Hayes Ave.)1/22/45225,513.001,503.541,754.13Improvements1/ 1/52156,900.00Lot 6861 (315 Glenwood6/20/51221,690.0038.41Ave.)Lot 3815 (Poland Ave.)8/28/51221,885.0028.56Lot 52798 (Stocker1/21/51221,240.004.70Ave.)Lot 31979 (827 FloridaAve.including12/26/5133-1/35,180.00improvements)Lot 28219 (10126/ 2/52222,825.00Garland Ave.)Lot 3633 (514 Gibson4/ 1/532210,500.00St.)Lot 23544 (27034/17/532222,950.00Idlewood St.)Improvements1/20/5520550.00Lot 5855 (1249 Poland2/15/55221,415.00Ave. No. 1)(1249 Poland Ave. No.2/15/55221,625.002)Lot 4376 (709 Franklin9/ 3/55222,315.00Ave.)Lot 2961 (559 Ridge10/ 6/55222,850.00Ave.)Lot 2962 (553-55510/ 6/55225,050.00Ridge Ave.)Lot 4260 (7224/10/56221,010.00Arlington St.)Ford tractor and2/ 1/5134,320.001,440.00trailerStore fixtures4/ 1/53102,950.00Totals$2,154.54$4,025.30185 Property12/31/5212/31/5312/31/5412/31/5512/31/56Lot 3379 (Erie St.)$ 868.00$ 976.50$1,085.00$1,193.50$ 1,302.00Lot 3379 (Hayes Ave.)2,004.72Improvements460.00Lot 6861 (315 Glenwood115.22192.03268.84345.65422.46Ave.)Lot 3815 (Poland Ave.)114.24199.92285.60371.28456.96Lot 52798 (Stocker61.06117.42173.78230.14286.50Ave.)Lot 31979 (827 FloridaAve.including155.40310.80466.20621.60777.00improvements)Lot 28219 (101274.90203.30331.70460.10588.50Garland Ave.)Lot 3633 (514 Gibson357.95835.221,312.491,789.76St.)Lot 23544 (2703695.451,738.632,782.363,826.09Idlewood St.)Improvements25.2152.71Lot 5855 (1249 Poland58.95123.26Ave. No. 1)(1249 Poland Ave. No.67.78141.742)Lot 4376 (709 Franklin35.07140.27Ave.)Lot 2961 (559 Ridge32.38161.92Ave.)Lot 2962 (553-55557.15285.78Ridge Ave.)Lot 4260 (72234.50Arlington St.)Ford tractor and2,880.00trailerStore fixtures221.25516.25811.251,106.25Totals$6,733.54$3,274.62$5,701.22$8,404.92$11,495.70186 Julius had assets, liabilities, and net worth for each year 1950 through 1956 as follows: 12/31/5012/31/5112/31/5212/31/53Cash on Hand$ 100.00$ 100.00$ 100.00$ 100.00Cash in Banks4,125.301.0033.912,548.24Real Estate9,600.0023,210.0035,355.0058,042.00Account Receivable6,921.59Ford Tractor andTrailer4,320.004,320.00Store Fixtures2,950.002,000.00Store InventoryTotal Assets$20,746.89$27,631.00$39,808.91$65,640.24LiabilitiesAccount PayableGolden Dawn Foods608.32McAllister Dairy238.51Home Savings & LoanNo. 173772,801.162,591.232,429.48Dollar Savings & Trust6,616.79Modestina Cercone5,000.00McEvey StevensonAgentReserve fordepreciation2,154.544,025.306,733.543,274.62Total Liabilities2,154.546,826.469,324.7718,167.72Net Worth$18,592.35$20,804.54$30,484.14$47,472.5212/31/5412/31/5512/31/56Cash on Hand$ 100.00$ 100.00$ 2,850.00Cash in Banks11,824.5911,208.5214,116.22Real Estate61,367.0076,642.0076,052.00Account ReceivableFord Tractor andTrailerStore Fixtures2,950.002,950.002,950.002,100.001,995.751,995.75Store InventoryTotal Assets$78,341.59$92,896.27$97,963.97LiabilitiesAccount PayableGolden Dawn Foods608.32608.32608.32McAllister Dairy238.51238.51238.51Home Savings & LoanNo. 173772,239.77Dollar Savings & Trust5,735.322,480.611,647.45Modestina Cercone5,000.005,000.005,000.00McEvey StevensonAgent6,900.006,089.62Reserve fordepreciation5,701.228,404.9211,495.70Total Liabilities19,523.1423,632.3625,079.60Net Worth$58,818.45$69,263.91$72,884.37187 Julius had understatements of income for each of these years computed as follows: Understatement of Income - Julius Cercone.12/31/5012/31/5112/31/5212/31/53NET WORTH$18,592.35$20,804.54$30,484.14$47,472.52Less: Net Worthprior year18,592.3520,804.5430,484.14Change in net worth2,212.199,679.6016,988.38Adjustments for: Cost of living1,200.001,200.001,200.00Income taxes paid42.35100.00TOTAL3,454.5410,879.6018,288.38Less Adjustments For: Gifts from Modestina2,200.004,250.00Nontaxable portion oflong-term capitalgain3,963.92Adjusted gross income1,254.546,629.6014,324.46Less income per return2,788.14Understatement ofincome1,254.546,629.6011,536.32Understatement of Income - Julius Cercone.12/31/5412/31/5512/31/56NET WORTH$58,818.45$69,263.91$72,884.37Less: Net Worthprior year47,472.5258,818.4569,263.91Change in net worth11,345.9310,445.463,520.46Adjustments for: Cost of living1,200.001,200.001,200.00Income taxes paid341.16584.26479.44TOTAL12,887.0912,229.725,199.90Less Adjustments For: Gifts from ModestinaNontaxable portion oflong-term capitalgain205.00Adjusted gross income12,887.0912,229.724,994.90Less income per return2,538.652,882.242,586.25Understatement ofincome10,348.449,347.482,408.65188 Consents under section 275(c) of the Internal Revenue Code of 1939 fixing the period of limitation upon assessment of income tax (Form 872) were executed by the Estate of Julius Cercone, Deceased, Modestina Cercone, Administratrix, and the district director of internal revenue, Cleveland, Ohio, for the taxable years and on the dates, as follows: Taxable YearDate or Dates Form872 Executed1952March 14, 1958February 11, 1959March 10, 19601953February 11, 1959March 10, 19601954March 14, 1958February 11, 1959March 10, 19601955February 11, 1959March 10, 19601956March 10, 1960Modestina Cercone was born in the town of Pacentro, Italy, in 1892. Her father was a bricklayer or artisan. While in Italy, Modestina attended school for 1 year and learned to read Italian. She married when she was 16 years old. Her husband, Ralph Cercone, came to the United States sometime before 1925. In about 1925 Ralph Cercone brought Modestina and their two children, Julius and Mario, to the United States. Modestina has lived in Youngstown, Ohio, since about 1936. Her husband Ralph who was a shoemaker resided in California from about 1935 until189 his death in 1952. One son Julius resided with Modestina until his death in 1957 and one daughter Betty, born in the United States, resided with her until the daughter's marriage in 1946. Modestina has never filed a United States income tax return as to her income except an estimate filed in 1958. Modestina owned the land and building on Lot No. 2552 (700 Poland Avenue), purchased at a cost of $3,700. Modestina added additional rooms to the building subsequent to 1943 and prior to 1948 at an estimated cost of $4,000. She added a cement block garage to the same property during 1950 at an estimated cost of $8,000. Modestina and Julius lived at this address and on these premises Modestina operated a bar or tavern during 1955 through 1957 and a store or confectionery in 1954. Previous to 1954 and dating back to approximately 1943 when she first acquired the property, Modestina had operated either a store or bar of some type on the property. The agent who examined the income tax returns of Modestina Cercone for the years 1954 through 1957 was never furnished any books or records reflecting any of Modestina's business transactions, income, or disbursements. The records of Mahoning190 County, Ohio, reflect that no real estate was owned by Modestina prior to 1943. Real estate purchased after 1942 owned by Modestina includes the following: LocationDate PurchasedCostLandBuildingLot No. 2552 (Poland)12/ 1/43$ 740.00$2,960.00Lot No. 19126 (Cypress)3/13/4495.00905.00Lot No. 19510 (Alpine)10/14/44146.001,054.00Lot No. 19511 (Alpine)10/30/4493.00907.00Lot No. 3472 (Prospect)5/24/4693.00407.00Lot No. 3470 (Prospect)5/24/46351.001,659.00Lot No. 12760 (Himrod)2/24/541,390.00Lot No. 3424 (Himrod)2/24/541,390.003,720.00Part of Lot No. 11131 and part ofLot 11136, (Wilson Ave.)9/ 9/54407.001,404.00Part of Lot No. 11131(Rigby Street)9/ 9/5476.001,113.00Lot No. 12158 (Evergreen)10/29/541,923.006,777.00Lot No. 31183 (Gibson)10/ 3/55540.002,960.00Lot No. 9858 (Franklin)8/16/56483.003,017.00Lots Nos. 4354 and 4355 (Kyle)8/30/56357.002,518.00All the properties listed above except lot 2552, Poland Avenue and lot 12158, Evergreen were owned by Modestina according to the deed records of Mahoning County from their respective dates of191 purchase there shown through December 31, 1957. The property lot 2552, Poland Avenue, was owned by Modestina from December 1, 1943, to December 23, 1957 and was sold by Modestina during 1957 to the City of Youngstown by deed dated December 23, 1957, for $18,000. The taxable gain on the sale was $3,936.29, resulting from a cost basis of $15,700 and allowable depreciation of $1,636.29. Title to lot 12158, Evergreen, was transferred by Modestina to her daughter Betty in 1957 without consideration. The Evergreen property was purchased by Modestina on October 29, 1954. The property included land with a building thereon, the land having a cost basis of $1,923 and the building having a cost basis of $6,777. The purchase price included a note payable and mortgage in the amount of $2,500 to the seller, executed by Modestina and paid off on March 4, 1955. Modestina purchased the property with funds furnished by her daughter Betty. Lot 19510, Alpine, was purchased by Modestina through a land contract dated July 31, 1936, final payment on which was made during 1944 and deed then issued on October 14, 1944, to Modestina for this property. During 1957, Modestina inherited all of the real192 estate owned by Julius at the date of his death. On December 31, 1957, Modestina owned real estate inherited from Julius during 1957 with a total basis to her of $133,200 which is the total value of such property as of the date of Julius' death, according to probate records. The properties inherited are as follows: Basis 12/31/57LocationLandBuildingLot 2551 (Poland)$3,000.00Lot 3379 Hayes (Erie)782.00$ 6,218.00Lot 31190 (Wolf St.)1,300.00Lot 6861 (Glenwood)1,458.003,042.00Lot 3815 (Poland)722.002,778.00Lot 52798 (Stocker)500.002,100.00Lot 31979 (Florida)1,170.005,830.00Lot 52777 (Stocker)400.00Lot 28219, Garland(Gayland)894.003,606.00Lot 3633 (Gibson)1,625.0011,375.00Lot 23544 (Indianola)$2,406.00$27,594.00Lot 4375 (Franklin)700.00Lot 5855 (Poland)825.005,175.00Lot 4376 (Franklin)444.005,556.00Lot 2961 (Ridge)1,077.002,923.00Lot 2962 (Ridge)1,205.005,795.00Lot 4260 (Arlington)1,142.001,558.00Lot 732 (Blaine)1,176.0028,824.00$20,826.00$112,374.00The Probate Court of Mahoning County, Ohio allowed the claim filed in the Estate of Julius Cercone, 193 Deceased for funeral expenses in the amount of $2,604.52 which amount was paid to Fortunato Funeral Home in 1957. Additional expenses were incurred in connection with the disinterment of Julius Cercone and with the reburial of Julius during 1957 by Modestina Cercone which amounted to $2,850 paid to Calvary Cemetery in 1957 by Modestina Cercone; no claim for the additional amount of $2,850 has been presented to or allowed by the Probate Court in the Estate of Julius Cercone, Deceased. Modestina Cercone understands figures and simple arithmetic, and she understands spoken English. Rental income on lot 732 (Blaine Avenue) for 1957 amounted to $4,460, and the net rental profit after applicable expenses but before depreciation on the property was $2,309.38. During 1957 the Blaine Avenue property was handled by a real estate agent who collected the rents and paid expenses. The agent did not remit any amount of income to Modestina in 1957 but did make payments on a mortgage which was on the property. During Julius' lifetime a real estate agent received the rental payments and paid expenses for the Ridge Avenue property. Following Julius' death the agent continued to collect the rents194 and, at Modestina's direction, had the payments applied against the mortgage on the property. In about July 1957, Modestina's son Mario took over the management of the Ridge Avenue property. Modestina entered into a land contract with Kenly and Idella Graham on December 16, 1953, for the sale of the south part of Lot 3472-Prospect, 25 feet width fronting on Prospect and 160 feet in length. This contract provided for a purchase price of $5,000, with $850 down and the balance with 6 percent interest on the unpaid balance to be paid at the rate of $55 per month. Modestina entered into a land contract with Robert and Catherine Smith on December 16, 1953, for the sale of Lot 3470-Prospect. This contract provided for a purchase price of $7,500 with $1,500 down and the balance with 6 percent interest on the unpaid balance to be paid at the rate of $65 per month. Modestina entered into a land contract with John and Mildred Wesleymoore and Louise Jackson on October 29, 1953, for the sale of the north part of Lot 3472-Prospect, 25 feet width fronting on Prospect and 160 feet in length. This contract provided for a purchase price of $4,000 with $900 down and the balance with 6 percent interest195 on the unpaid balance to be paid at the rate of $45 per month. Payments on the three above mentioned land contracts were still being made in 1963. Although in 1953 the Ohio law made no provision for the recording of land contracts, each of these three land contracts was recorded among the lease records of Mahoning County, Ohio. Modestina received during 1954, 1955, 1956 and 1957 from land contracts with Kenly and Idella Graham, and with John and Mildred Wesleymoore and Louise Jackson interest income of $435, $390, $340 and $290, respectively, and long-term capital gains of $765, $810, $860, and $910, respectively. She received during the same years from a land contract with Robert and Catherine Smith interest income of $360, $335, $310 and $280, respectively, and long-term capital gains for the years 1955, 1956 and 1957 of $335, $470 and $500, respectively. Modestina received rental income from George Figuly during 1957 and from Frank Hudick during 1955, 1956, and 1957 in the amount of $20 a month for each individual. Modestina furnished Hudick with food during the years 1955 through 1957 and Hudick gave her money for so doing. She received additional rental income during 1957196 from known tenants which were deposited in particular savings accounts. The total rent deposits plus credits for interest earned on these accounts during 1957 was $1,795.35. Modestina as Administratrix signed and filed a sworn inventory and appraisements on April 18, 1957, for the estate of her son Julius in the probate proceeding listing the real property inherited by her from Julius. This document contained a waiver of notice of hearing on inventory signed by William R. Machuga as attorney for Fiduciary as well as by Modestina. On October 2, 1957, as administratrix, she signed and filed a sworn Schedule of Debts owed by the estate in the probate proceeding. The schedule showed debts in the amounts and dates allowed as follows: Name and Address of ClaimantAmount ClaimedDate AllowedMary McEvey Stevenson, Agent$ 5,993.095/16/57Mortgage on21 E. Dewey Ave.Lot No. 2962Youngstown, OhioMetropolitan Savings & Loan12,100.003/ 7/57Mortgage onCo., Youngstown, OhioOutlet No. 732Dollar Savings & Trust Co.,1,661.175/ 7/57Mortgage onYoungstown, OhioLot No. 23544Golden Dawn Foods608.323/ 6/57Sharon, PennsylvaniaMcAllister Dairy238.514/ 1/57Warren, OhioFortunato Funeral Home2,604.523/11/57Youngstown, OhioModestina Cercone5,000.009/13/57(Approved by700 Poland Ave.Probate Court)Youngstown, OhioUnited States InternalRevenue ServiceUnliquidatedclaim for priorincome taxes.Mahoning County Treasurer2,090.98((Re) Estate Taxes)197 Anthony Pacella, an attorney consulted by Modestina, prepared an income tax return for Modestina for the year 1957 after he was contacted in the tax investigation of Julius. He obtained information from Modestina, mostly estimates as to rent, expenses and real estate taxes for various properties she owned and rented out. He obtained rent income figures from real estate agents who were handling the Ridge and Blaine Avenue properties, and he obtained income figures on the Indianola property from a bank which maintained a special account wherein the Indianola tenants deposited their rent. He discussed each property with Modestina and ascertained its condition and whether it was occupied. He discussed these matters with her in Italian, and she understood him. He spent 5 afternoons with Modestina in preparing the return and then handed Modestina the return, told her she owed the taxes and told her to file the return. Modestina did not file that return or any return for the year 1957. Gross rental income reported on the proposed 1957 return was as follows: East Florida$ 650.00Idlewood (Indianola)2,440.00Ridge Ave.1,400.14Glenwood500.00Erie540.00Blaine Apts.4,459.50709 Franklin480.00Arlington600.00Garland650.00Stocker210.00Himrod600.00Rigby600.00Gibson680.00Franklin274.00Kyle$ 204.00Cypress390.00612 Alpine350.00Cement Block Garage600.00(Poland Avenue)Storeroom. (512 Gibson)675.00712 Poland240.00642 Poland314.431249 Poland420.00$17,277.07198 Julius helped his mother Modestina with financial matters and in taking care of her property. A friend of Modestina's, Carolyn Augell, was a public accountant in the business of preparing income tax returns for others. The internal revenue agent who investigated the tax liability of Julius and subsequently of Modestina told Modestina during the course of his investigation of Julius' liabilities that she was required to file returns. Modestina is entitled to reserve for depreciation for her rental properties in the amounts and for the years as follows: EstimatedCostUsefulorDescription of PropertyAcquiredLifeBasis12/31/53Lot 2552 (700 Poland Ave)12/ 1/4322$ 4,000.00$1,090.86Lot 19126 (Cypress St.)3/13/4422905.00400.00Lot 3472 (39 Prospect St.)5/24/4625407.00122.10Lot 3470 (35 Prospect St.)5/24/46251,659.00497.70Lot 3424 (806 Himrod Ave.)2/22/54253,720.00Lot 11131 (Wilson Ave.)9/ 9/54201,404.00Lot 11136 (1031 Rigby St.)9/ 9/54201,113.00Lot 31183 (Gibson St.)10/ 3/55222,960.00Lot 9858 (801 Franklin Ave.)8/16/56223,017.00Lots 4354 & 4355 (239-239-1/2Kyle St.)8/30/56222,518.00Lot 19510 (Alpine St.)10/14/44251,054.00Lot 19511 (Alpine St.)10/30/4425907.00Lot 3379 (Erie St.)2/17/57206,218.00Lot 6861 (315 Glenwood Ave.)2/17/57183,042.00Lot 3815 (Poland Ave.)2/17/57182,778.00Lot 52777 (Stocker Ave.)2/17/57182,100.00Lot 31979 (827 Florida Ave.)2/17/57285,830.00Lot 28219 (1012 Garland Ave.)2/17/57203,606.00Lot 3633 (514 Gibson St.)2/17/572011,375.00Lot 23544 (2703 Idlewood St.)2/17/572027,594.00Lot 5855 (1249 Poland Ave.)2/17/57185,175.00Lot 4376 (709 & 709-1/2 FranklinAve.)2/17/57205,556.00Lot 2961 (559 Ridge Ave.)2/17/57182,923.00Lot 2962 (553 & 555 Ridge Ave.)2/17/57185,795.00Lot 4260 (722 Arlington St.)2/17/57181,558.00Lot 732 (Blaine Ave.)2/17/572028,824.00$2,110.66199 Description of Property12/31/5412/31/5512/31/5612/31/57Lot 2552 (700 Poland Ave)$1,272.67$1,454.48$1,636.29$Lot 19126 (Cypress St.)441.13482.265,123.39864.52Lot 3472 (39 Prospect St.)138.38154.66170.94187.22Lot 3470 (35 Prospect St.)564.06630.42696.78763.14Lot 3424 (806 Himrod Ave.)124.00262.80411.60560.40Lot 11131 (Wilson Ave.)23.4093.60163.80234.00Lot 11136 (1031 Rigby St.)18.5574.20129.85185.50Lot 31183 (Gibson St.)33.63168.17302.71Lot 9858 (801 Franklin Ave.)45.71182.84Lots 4354 & 4355 (239-239-1/2Kyle St.)38.15152.60Lot 19510 (Alpine St.)42.1684.32126.48168.64Lot 19511 (Alpine St.)36.2872.56108.84145.12Lot 3379 (Erie St.)259.09Lot 6861 (315 Glenwood Ave.)140.84Lot 3815 (Poland Ave.)128.61Lot 52777 (Stocker Ave.)147.22Lot 31979 (827 Florida Ave.)173.51Lot 28219 (1012 Garland Ave.)150.25Lot 3633 (514 Gibson St.)473.96Lot 23544 (2703 Idlewood St.)1,149.75Lot 5855 (1249 Poland Ave.)239.59Lot 4376 (709 & 709-1/2 FranklinAve.)231.50Lot 2961 (559 Ridge Ave.)135.32Lot 2962 (553 & 555 Ridge Ave.)268.29Lot 4260 (722 Arlington St.)72.13Lot 732 (Blaine Ave.)1,201.00$2,660.63$3,342.93$4,230.00$8,227.75200 Modestina had assets, liabilities, net worth, increase in net worth, and unreported income for each year as follows: 12/31/5312/31/5412/31/5512/31/5612/31/57Assets$$$$$Cash on hand3,250.003,250.003,250.003,250.003,250.00Cash in Banks4.061,608.145,307.4023,662.22Real Estate21,410.0039,610.0043,110.0049,485.00158,285.00Account with RealEstateAgent (Rubenstein)2,309.38Loan Receivable(JuliusCercone)5,000.005,000.005,000.005,000.005,000.00TOTAL ASSETS29,660.0047,864.0652,968.1463,042.40192,506.60LiabilitiesMortgage (Lois2,500.00McClain)Reserve for2,110.662,660.633,342.934,230.008,227.75depreciationTotal Liabilities2,110.665,160.633,342.934,230.008,227.75Net Worth27,549.3442,703.4349,625.2158,812.40184,278.85Prior year net worth27,549.3442,703.4349,625.2158,812.40Increase in net worth15,154.096,921.789,187.19125,466.45Adjustments for: Living Expenses2,000.002,000.002,000.003,600.00Burial expenses paidbyModestina2,850.00Gift of Evergreen toBetty8,700.00Total17,154.098,921.7811,187.19140,616.45Less Adjustments for: Gifts from Betty6,200.002,500.00Nontaxable portion ofcapital gains on Lot2552(Poland)1,968.14Recovery of cost basisonRobert and CatherineSmith contract420.0090.00Nontaxable capitalgains ofpayments on land382.00582.00665.00705.00contractsNontaxable receipt133,200.00from estate of JuliusCerconeTotal downward7,002.003,172.00665.00135,873.14adjustmentUnderstatement of10,152.095,749.7810,522.194,743.31income201 Respondent in his notice of deficiency determined the deficiencies in tax of the Estate of Julius Cercone for each of the years 1951 through 1956 and of Modestina Cercone for each of the years 1954 through 1957 upon the basis of taxable income computed by increase in net worth during each such taxable year with adjustments for personal and other nondeductible amounts and in the case of Modestina Cercone for inheritances with the explanation in each instance that taxable net income was so computed "in the absence of adequate records." Respondent determined additions to tax for fraud in each year in which a deficiency was determined both for the Estate of Julius Cercone and for Modestina Cercone. Respondent also determined the additions to tax under sections 294(b)(2), 294(b)(1)(a) and 294(d)(1)A of the Internal Revenue Code of 1939 and section 6654 of the Internal Revenue Code of 1954 as heretofore set forth. Ultimate Facts There is a deficiency in income tax due from the Estate of Julius Cercone for each of the years 1952 and 1953 and a part of such deficiency in each such year is due to fraud with intent to evade tax. There was an underpayment of income202 tax by Julius Cercone for each of the years 1954 and 1955 and a part of such underpayment is due to fraud with intent to evade tax. There is an underpayment of income tax by the Estate of Julius Cercone for the taxable year 1956 but respondent has failed to prove by clear and convincing evidence that any part of such underpayment is due to fraud with intent to evade tax. Julius Cercone filed false and fraudulent income tax returns for each of the years 1952 and 1953 with intent to evade tax. Respondent has failed to establish by clear and convincing evidence that Julius Cercone filed a false and fraudulent income tax return for the year 1951 with intent to evade tax. The assessment and collection of any deficiency from the estate of Julius Cercone for the year 1951 is barred by the Statute of Limitations. The estate of Julius Cercone is subject to additions to tax under the provisions of section 294(d)(2) of the Internal Revenue Code of 1939 for each of the years 1952 and 1953. The estate of Julius Cercone is subject to an addition to tax under the provisions of section 294(d)(1)(A) of the Internal Revenue Code of 1939 for the year 1954. No part of the underpayment of203 income tax by Modestina Cercone for any one of the years 1954, 1955, 1956, and 1957 is due to fraud with intent to evade tax. Modestina Cercone is subject to an addition to tax under the provisions of section 294(d)(1)(A) of the Internal Revenue Code of 1939 for the year 1954. Modestina Cercone is subject to additions to tax under the provisions of section 6654 of the Internal Revenue Code of 1954 for each of the years 1955, 1956, and 1957. Opinion The two basic issues in these cases are whether there are deficiencies in each petitioner's income tax for the years in issue, and if so, whether any portions of such deficiencies or underpayments are due to fraud. In the case of the estate of Julius Cercone, there is also the issue of whether Julius filed false and fraudulent income tax returns for the years 1951, 1952, and 1953, and if not, whether there was omitted from his returns for 1952 and 1953 over 25 percent of his gross income. Petitioner has the burden of proving error in respondent's determinations of deficiencies, but respondent has the burden of proof as to the omission of over 25 percent of gross income and respondent must prove fraud by204 clear and convincing evidence. Respondent computed each petitioner's income for each year by the net worth plus expenditures method. No books and records for either Julius or Modestina were offered or made available to respondent. Consequently, respondent's use of the net worth plus expenditures method in computing understatements of income for petitioners is justified. We have set forth in our findings net worth computations of each petitioner which show that Julius reported less than his correct taxable income in each year here in issue and that Modestina, who filed no income tax returns, had taxable income in each year in issue. In determining the taxable income of each petitioner for each year we have considered the various items of the net worth of each petitioner as determined by respondent with which petitioners disagree. There is no disagreement between the parties as to many items. The primary contention of each petitioner is that respondent has allowed insufficient depreciation on his or her rental properties and has not allowed for cash on hand and gifts. The depreciation adjustment for which each petitioner contends is sufficient to eliminate approximately one-half205 of the deficiencies determined by respondent, and the claims of cash on hand, gifts, and accrued expenses would eliminate the balance as to the estate of Julius, and cash on hand, gifts, and a claimed reduction in cost of living for Modestina would eliminate the balance of the income for her shown by respondent's net worth statement. Respondent determined economically useful lives for most of the real estate held by Julius and that held by Modestina, of 33 1/3 years for the periods here in issue. Petitioners contend that these properties have useful lives generally varying from 8 years to 20 years. We have made findings of the economically useful lives for each of the business properties owned by Julius and of each of those owned by Modestina, both at the date of acquisition and, as to the properties Modestina inherited from Julius, as of February 17, 1957. In reaching our conclusion as to the useful life of each property, we have considered all the evidence including the useful life shown by Julius on the return be filed for the properties reported thereon, the useful lives of the properties shown on a return prepared by a lawyer for Modestina for the year 1957 after discussion206 with her, which return she did not file, and the testimony of petitioners' expert witnesses. One of petitioners' expert witnesses gave his opinion as to the useful lives of the properties at the date of their acquisition and the other his opinion of the useful lives of these properties as of the date of his inspection thereof in April 1963 but in some instances the life expectancies given by this expert from 1963 were approximately the same as those given by petitioners' other expert witness from the acquisition date. We have considered the testimony of these witnesses as to the type of neighborhood in which these properties were located, the prospects of the properties being condemned because of public uses of the land in the neighborhood and the type and condition of the properties. Each petitioner contends that for certain properties depreciation on the 150 percent declining balance method is proper. The 150 percent declining balance method, however, was neither elected by either petitioner in a first return filed in which depreciation was sustained, nor has respondent granted permission for petitioners to use the declining balance method of computing depreciation, one of which207 is required under respondent's ruling in order for a taxpayer to be entitled to use the 150 percent declining balance method. See Revenue Ruling 57-352, 2 C.B. 150">1957-2 C.B. 150. However, we need not discuss the validity of respondent's ruling since the testimony of petitioners' expert witnesses is to the effect that the declining balance method of computing depreciation would be inappropriate. One of the witnesses stated that the neighborhoods in which the properties were located were deteriorating at a constant rate and the other expert stated that the neighborhoods were deteriorating at an increasing rate. Both statements are inconsistent with the use of the declining balance method of computing depreciation. Modestina has claimed depreciation on the $8,000 cement block garage addition to her property at 700 Poland Avenue. The evidence is that Julius, until the time of his death, operated a welding and car repair business in the garage, although petitioners tend to diminish the importance of this business. However, there is no showing that any income arising from the garage accrued to Modestina's benefit. The evidence shows that Modestina did not hold the garage as an income208 producing asset but merely allowed Julius to use the garage in his business enterprise rent free. Depreciation has been allowed for 1957 because in that year Modestina received rental income from the garage. We have allowed depreciation on the 700 Poland Avenue property for the $4,000 addition made to the property subsequent to purchase. Modestina and Julius lived at this address and Modestina operated a confectionery store and later a bar on the premises. The $4,000 is the portion of the cost of this property which we consider applicable to its business use. Petitioners contend that respondent failed to take into consideration amounts which Julius owed at the end of the net worth period. Petitioners state that in order to properly reflect his net worth, expenses that are owing but unpaid, such as real estate taxes, accounts payable, payroll, electric, and the like should be deducted as liabilities from Julius' assets in determining his net worth. Julius was a cash basis taxpayer, and therefore, must report income and expenses for tax purposes when they are actually received or paid. He may not deduct accrued but unpaid operating expenses any more than he need include accrued but209 unpaid income. When income is computed on the net worth plus expenditures method, this distinction between the cash and accrual method of accounting should be maintained. Therefore, in a net worth computation for a cash basis taxpayer, accrued but unpaid items of income are not includable assets and accrued but unpaid operating expenses are not includable liabilities. However, if a liability is related to an asset appearing on the net worth computation, such liability should be known. Scanlon v. United States, 223 F. 2d 382 (C.A. 1, 1955). We have made an adjustment to Julius' net worth computation by including therein as liabilities two items totaling $846.83 which we have concluded are applicable to assets which we have included in the net worth computation. These two items appear on a schedule of debts filed for Julius' estate and were allowed during the Probate proceedings. The two claimants or creditors are Golden Dawn Foods, Sharon, Pennsylvania and McAllister Dairy, Warren, Ohio. Although there is no precise evidence on the point, it is clear that these liabilities relate to the grocery business carried on by Julius at 512 Gibson Street. We have concluded that210 these liabilities represent purchases of inventory merchandise by Julius for his store. Our net worth computation includes the store inventory as an asset in Julius' net worth, and it is only consistent that these liabilities incurred to create this asset should be reflected in the net worth statement as liabilities. The record does not show when these liabilities were incurred by Julius, but they were outstanding at the time of his death. We have concluded that Julius bought on credit and consistently had liabilities against his inventory of approximately this amount since his inventories were relatively constant in amount. Therefore, we have included in Julius' net worth computation liabilities of $846.83 for each of the years 1953 through 1956, during which period Julius operated the store. It is contended on behalf of the Estate of Julius that much of the increase in Julius' net worth was due to his receipt of nontaxable gifts before and during the net worth period made by various individuals. It is asserted that Julius had $2,000 cash on hand (as opposed to cash in the bank) on December 31, 1950, the result of a gift made to him by an individual named George Figuly. Figuly testified211 he sold a house located in Carnegie, Pennsylvania in 1949 for $2,300, and that he turned $2,000 of this money over to Julius in 1950. Respondent determined that Julius had no cash on hand as of December 31, 1950. Respondent based his zero determination on a computation showing that Julius' expenditures equalled his income prior to December 31, 1950, thus eliminating the possibility of Julius' having any accumulated funds at that time. Respondent's computation omits reference to any amount being received by Julius from Figuly. Respondent also put in evidence the bank records of a savings account belonging to Figuly. These records reflect no sizeable deposits made in 1949 when Figuly testified that he sold the Carnegie property, and this fact, respondent asserts, shows that Figuly did not receive the $2,300 during that period. Most of Figuly's testimony was confusing and some of it unintelligible. The evidence is insufficient to enable us to make a finding of fact either that Figuly did nor did not give Julius $2,000 in 1950. We have therefore not included the $2,000 in Julius' net worth statement and will further discuss the bearing of this contention of petitioner on our conclusion212 on the fraud issues. Petitioners also contend that Figuly gave Julius $480 annually for the years 1951 through 1953. Figuly testified that he gave Julius monthly amounts in excess of the $20 onthly rental that he was paying Julius. The purpose of these transfers was not made clear. Figuly also testified that when he was hospitalized for 18 months in 1955, with tuberculosis, Julius paid for all his expenses. On the testimony offered we have been unable to determine what amounts Figuly gave Julius or whether they were gifts or merely amounts Julius was to safekeep for Figuly. Consequently, we have not made any adjustment in Julius' net worth for these alleged transfers to Julius from Figuly. Petitioners assert that Julius received $11,450 in gifts from his mother Modestina during the net worth period which amounts were used by Julius to purchase various properties. Modestina also testified to this effect. We have found as a fact that $11,450 was transferred to Julius by Modestina during Julius' net worth period, $6,450 as gifts and $5,000 as a loan. Modestina maintained she made gifts of $11,450 to Julius even at a time when her statements were to her financial detriment. The making213 of the gifts was asserted in a protest filed on behalf of the Estate of Julius with respondent on October 25, 1958, which was approximately 10 months prior to the issuance of a 30-day letter to Modestina but at a time when such action by respondent was anticipated by Modestina. Also, there is evidence that Modestina, prior to 1950, had a large amount of cash hidden in the building where she lived. A friend of Modestina's, Carolyn Augell, testified that in 1946 she saw Modestina count up $20,000 in cash of all denominations which Modestina kept in a bag hidden in a wall at her residence on Poland Avenue. While this witnesses testimony that the amount of cash was $20,000 is subject to question since she was not actually involved in the counting of the money, there is collateral support for the existence of such cash in excess of $5,000. Carolyn Augell stated that Julius lent her now deceased brother $5,000 to start into the trucking business which amount was to be returned when her brother received a Reconstruction Finance Corporation loan. The witness testified that the loan was repaid during the following year. The witness was the bookkeeper of her brother's business and produced an214 executed agreement with respect to obtaining a loan from the Reconstruction Finance Corporation dated in February 1946 which supported her testimony as to the time when she saw the cash. The fact that the $5,000 loan was an arrangement made by Julius also supports either some joint ownership of the funds by Julius or Modestina's willingness to let Julius use her money. Also in 1950 Modestina spent $8,000 adding a cement block garage to her Poland Avenue property which she allowed Julius to use rent free for his welding and repair business. While we do not accept Modestina's testimony as to the source of the cash she had available in 1946, we are convinced that she had a substantial amount of cash hidden in her living quarters at that time. We have concluded that of the $11,450 Modestina transferred to Julius during 1951 through 1953, $6,450 was in the form of gifts and $5,000 was in the form of loans. Petitioners contend the whole $11,450 represents gifts and that a $5,000 claim made by Modestina and allowed by the Probate Court against Julius' estate relates to a loan transaction separate from the aforementioned transfers totalling $11,450. The evidence, however, does not bear out215 this contention. We have found that the $5,000 loan was made by Modestina to Julius in 1953. Modestina testified that the $5,000 loan to Julius came from the sale proceeds of the Prospect Street property which was sold in 1953. Apparently, according to Modestina, the sale proceeds were put in a bank account or in two accounts in separate banks, the account or accounts being in the names of Julius and Modestina, and that Julius used the money to purchase the Blaine Avenue property in 1957. The evidence shows that Julius and Modestina had no joint accounts at the time of the purchase of the Blaine Avenue property. Testimony that Julius used the money in 1957 to purchase the Blaine Avenue property is inconsistent with the making of the loan in 1953 without any showing as to where the funds were held until 1957. It is more likely that the $5,000 loan related to two transfers Modestina admittedly made to Julius in 1953, enabling Julius to build his store and purchase store inventory, which transfers totaled $5,000. It is also claimed that Julius received $11,000 from a relative, Uncle Amadeo, in 1954. Edmund Cercone, a cousin of Julius, testified he was present in either late 1953 or216 early 1954 at the home of Julius and Modestina when Amadeo handed Julius $11,000 cash in bills of various large denominations. Edmund stated the transaction occurred in a backroom of the building at 700 Poland Avenue. Modestina testified that she was also present during this transaction. The testimony of Edmund was that he first saw Amadeo in 1950 and that the time the counting of the money occurred was the first and only time either he or Julius saw Amadeo. Edmund also testified that Modestina was not present when Amadeo gave Julius the money. We have not found that Amadeo gave Julius $11,000 in 1953 since we do not consider any testimony as to this gift to be reliable. Edmund's testimony was to the effect that Julius wanted money to go into a real estate venture, that Julius approached Edmund's father for a loan, and that Edmund's father recommended that Julius approach Amadeo. Edmund stated that Julius first met Amadeo at the meeting when Amadeo handed the $11,000 to Julius. Amadeo lived in Denver, Colorado, and had operated a shoe repair shop in Denver. He was married but his wife had died prior to June 1, 1954, the date of Amadeo's death. Amadeo had a brother also living in217 Denver. It is not only incrediblee that Amadeo would make such a large transfer of money to Julius, a virtual stranger, but also incredible that Amadeo possessed this amount of money. Amadeo received oldage pension payments from the state of Colorado from November 1950, until his death in June 1954. In a pension application dated April 21, 1950, Amadeo listed ownership of assets totaling only $2,064.12, including the home in which he lived. This application was rejected because upon investigation the authorities discovered he had cash or its equivalent of a little over $1,000. A similar application filed in October 1950 was made and no cash assets discovered so that the application was granted. There is in evidence a letter dated August 15, 1954 written by one of Modestina's relatives to Modestina stating that Amadeo had $11,000, all in $1,000 bills which Amadeo had kept at home in cash in order not to lose his old-age pension but after Amadeo's death his relatives could not find the money although they made a thorough search of Amadeo's home. The letter is hearsay with respect to the facts therein recited. The writer of the letter did not testify and the letter does not show the218 basis of her assumption that Amadeo had $11,000 he was concealing from the Colorado State authorities. Certainly if in fact Amadeo had left $11,000 with Julius for Julius to invest for him in real estate, which was the purpose of the transfer according to each witness who testified to such transfer, Julius should have promptly returned the money to the legal representatives of Amadeo's estate upon receipt of the letter since he had at the date of the letter invested only $275 in real estate since the middle of 1953 and did not make any further real estate investments until July 30, 1955. Since Julius is unavailable to explain any transaction he might have had with his Uncle Amadeo, we are unwilling to assume that he embezzled his Uncle's fund and have therefore assumed that if in fact Amadeo gave any funds to Julius in early 1954 to invest for him in real estate, Julius returned such funds to Amadeo's executor or administrator after Amadeo's death and before the end of 1954 so that the receipt and return would cancel each other and the transaction would have no effect on the net worth computation of Julius for the year 1954. From Edmund's statement that he first saw Amadeo in 1950219 and that he saw the money given to Julius the first time he ever saw Amadeo the inference is that if Amadeo did give Julius any money in order to hide it from the pension authorities of Colorado, it was a much less amount than $11,000 and was given to Julius in 1950, a year not in issue here. It is contended that Julius received $475 from a Frank Hudick in 1955. Hudick testified he gave Julius $475 but did not state the year in which he made the gift. According to Hudick's testimony he has been closely associated with the Cercones since 1946. We have omitted the $475 from Julius' net worth statement because we are not able to determine whether such a gift was made and if there was such a transfer whether it was made during the years here in issue and if so, in which year. Petitioners claim that Julius is entitled to a $1,000 reduction in the gain resulting from his sale of real estate in 1953. The $1,000 amount represents a real estate agent's commission on the sale. Respondent allowed $850 as expenses of this sale but apparently was unaware of the $1,000 commission. The record does not show what items comprised the $850 amount allowed by respondent. On brief respondent has allowed220 expenses of sale of $1,263.85, which includes the $1,000 amount. There is in evidence an escrow statement covering the expenses of the subject sale which lists expenses of $1,263.87, plus additional expenses of $492.33 which relate to a lawsuit not related to the sale. These latter expenses may not be attributed to the sale of the property. Petitioners have offered no proof showing that the $1,000 commission should be added to the $850, originally allowed by respondent in computing the expenses of the sale. There was testimony that Julius hired an attorney in conjunction with the sale. However, neither the function the attorney played nor the amount paid to him is shown. Respondent included in Julius' net worth for December 31, 1956, the amount of $3,843.19, as cash on hand. This amount represents the difference between the $29,500 4 price paid by Julius for the Blaine Avenue property, purchased February 13, 1957, and $25,656.81 which represents the total of the mortgage given on the property and cash withdrawals from Julius' known bank accounts. There is no direct evidence that Julius had $3,843.19 as cash on hand on December 31, 1956. Respondent concluded that he did have such221 cash on hand on December 31, 1956, from the fact that there is no other source apparent for this amount of the purchase price put up for the Blaine Avenue property in February 1957. We have concluded Julius had $2,850 as cash on hand on December 31, 1956, and that the balance of $993.19 represents income received by Julius in 1957 prior to the date of the property purchase. To sustain his determination for additions to tax for fraud, respondent must prove by clear and convincing evidence that a portion of the deficiency or underpayment in Julius' income tax for each year was due to fraud. M. Rea Gano, 19 B.T.A. 518">19 B.T.A. 518 (1930). Julius filed returns for the years 1951 through 1955, and Modestina filed a return for the Estate of Julius for 1956. Julius never listed receipts from more than one of his rental properties on the returns he filed for 1951 through 1955, although throughout the period he owned six apartment units, five single houses and one double house, and owned other rental properties during part of this period. Receipts from only one such property222 were listed on the return filed for his estate by Modestina. The net worth plus expenditures computation for Julius set forth in our findings reveals income substantially in excess of the amounts reported on the returns for all years except 1951. The record shows that Julius was born in Italy, and was brought to this country at approximately age 8 years. He was a welder by trade and served in the Army during World War II. He bought, sold, and owned a considerable amount of real estate. He also carried on a trucking business and an auto repair and welding business. Julius was handy at making repairs to his rental property. He apparently had no difficulty conversing in the English language. Without precisely so stating, each witness who had known Julius well gave the impression that Julius was an intelligent and shrewd businessman. Carolyn Augell who is a public accountant and prepared tax returns for others, made several references to Julius that gave the impression that Julius understood general business relationships. She referred to a loan to help her brother go into the trucking business and Julius' consideration of going into such a business with her brother. She also referred223 to asking Julius to let her make out his income tax returns and Julius' reply that he could get that done free at the Internal Revenue Service. Other of the witnesses including Modestina stated in effect that they consulted Julius about their financial problems or ventures. We have concluded that Julius filed false and fraudulent income tax returns for each of the years 1952, 1953, 1954, and 1955 with intent to evade tax and that a part of the deficiencies or underpayments in each such year is due to fraud with intent to evade tax. Repeated and substantial understatements of income evidence a fraudulent intent. Holland v. United States, 348 U.S. 121">348 U.S. 121 (1954) and Bryan v. Commissioner, 209 F. 2d 822 (C.A. 5, 1954), certiorari denied 348 U.S. 912">348 U.S. 912, affirming a Memorandum Opinion of this Court. Julius deliberately omitted listing receipts from certain of his rental properties on his returns. Petitioners contend that Julius did not make any net income after expenses on his properties other than the properties, the receipts from which he reported. The increase in Julius' net worth suggests that rentals of these other properties were profitable. On224 his 1951 and 1952 income tax returns Julius reported losses in each year of over $1,000 on his trucking business which he offset against rental income. This shows that Julius understood that his reported income was offset by business losses and the inference is clear that Julius would have taken advantage of any losses from his rental business. The understatements for each of the years 1952 through 1955 are well in excess of the amount of taxable income which Julius would have had if he had been entitled to the greater depreciation deductions which are claimed for him on brief. We have found no fraud for the year 1951. The net worth computation set out in our findings shows an understatement of only $1,254.54. This increase could be explained if Julius had $2,000 cash on hand as of December 31, 1950, and if he spent the $2,000 on assets appearing in his net worth statement for December 31, 1951. There is evidence that Julius might have been given $2,000 during 1950 by George Figuly, an amount representing part of the proceeds from the sale of a house owned by Figuly. This evidence constitutes a relevant lead to a nontaxable source of income which the respondent could have run down. 225 The record shows that Figuly represented to respondent's agent during the course of the investigation that he had given part of the proceeds of the sale of a house in Carnegie, Pennsylvania to Julius. Cf. Holland v. United States, supra. We hold respondent did not satisfactorily run down this lead. Presumably records could have been consulted to determine whether or not Figuly did, in fact, own a house in Carnegie, Pennsylvania, and whether or not he sold the house in 1949 for $2,300, as he testified. Therefore, for purposes of the fraud issue we have concluded respondent has failed to establish that Figuly did not give Julius $2,000 in 1950. Having concluded that respondent has failed to show that Julius did not have $2,000 cash on hand as of December 31, 1950, it follows that the evidence fails to show that when Julius purchased real estate in excess of his other cash funds in 1951, such purchases were not made with this $2,000 of cash. In the absence of proof of fraud by respondent, the statute of limitations bars the assessment or collection of any deficiency for the year 1951. Since Modestina filed the 1956 income tax return for Julius' Estate, a portion of the deficiency226 of Julius' estate for the year 1956 is due to fraud if Modestina's action as administratrix in filing such return was false and fraudulent with intent to evade tax. Modestina, in her capacity as administratrix, was acting as agent for Julius' estate and the fraud of an agent, acting in the capacity of agent, will be imputed to the principal. Cf. Irving S. Federbush, 34 T.C. 740">34 T.C. 740 (1960), affirmed per curiam 325 F. 2d 1 (C.A. 2, 1963) and the cases cited therein on page 749. The 1956 return which Modestina filed for Julius' estate reported receipts from only the properties, receipts from which had been reported on Julius' 1955 income tax return. Modestina, at the trial, claimed a lack of understanding of income tax and other business affairs. The 1956 return for Julius' estate was made out by the lawyer who was representing Modestina as administratrix of Julius' estate. This lawyer had signed the waiver of notice of hearing on inventory filed in the Probate proceeding of Julius' estate on April 18, 1957, which was prior to the date that the return for Julius' estate was prepared and filed, an extension of time for filing such return having been obtained. Therefore, 227 the lawyer who prepared the return for Julius' estate for Modestina must have known of Julius' other properties but there is no evidence in the record to show that he in any way informed Modestina that the receipts from rentals of these properties should be included in the gross income shown on the return. The inference from the record is that because of Modestina's emotionally disturbed condition as a result of the shock of her son's untimely death, he did not discuss the items in the return with her to any appreciable extent. From observing Modestina as a witness and considering all her statements, we concluded that she attempts to give the impression of far less understanding than she actually has. From time to time in her testimony her true ability to understand would be reflected but she quickly became aware of the situation and resumed her role of lack of understanding. While the lack of reliability of much of Modestina's testimony at the trial plus the fact that she knew of the properties owned by Julius at the date of his death and of at least some of the rents being received arouse the suspicion that she might have known that the return she filed for Julius' estate for 1956228 understated Julius' income, this is not the clear and convincing evidence required of respondent to prove fraud when considered in conjunction with the fact that Modestina relied upon an attorney who also knew of the property owned by Julius to prepare the return for her. The 1956 return filed for Julius' estate was based on Julius' 1955 return. There is no clear or convincing evidence in the record that Modestina knew that Julius' 1955 return was false and fraudulent or even that it did not reflect his true income. We hold that respondent has failed to establish that any part of the deficiency in tax of the estate of Julius for the year 1956 was due to fraud. Respondent determined deficiencies and additions to tax for fraud against Modestina using the net worth plus expenditures method. In addition to Modestina's contention that respondent in his computation of her net worth, did not allow her sufficient depreciation, she also claims that respondent failed to credit her with cash on hand and land contracts receivable held at the start of the net worth period and improperly included in her net worth computation two properties, Himrod and Evergreen, which were owned by her daughter229 Betty. We have already discussed the depreciation issue respecting Modestina's rental properties. Modestina claims respondent failed to credit her with cash on hand at the start of the net worth period of $23,250. This sum is composed of $20,000 which she claims was a cash hoard held over the years and $3,250 which was the total amount received by her as down payments on three land contracts entered into by her at the end of the year 1953. Modestina testified she brought $18,000 to $20,000 to the United States from Italy about 1925. She stated she subsequently received gifts from her husband and received other amounts on the sale of property owned by her family in Italy. We find Modestina's testimony that she brought a large amount of cash in United States currency from Italy when she came to this country in 1925 inherently incredible. We also do not believe that she received any amount of money as distinguished from the Italian bond which is in evidence from her family in Italy. We do believe that by 1946 she had accumulated from undisclosed sources a substantial amount of cash. It is possible that some of this cash was an accumulation of the amounts Betty gave to Modestina when230 Betty was unmarried and living with Modestina. Also, the record does not account for any business or occupation in which Modestina might have herself engaged from 1925 until 1943 when she began operating the store or bar on Poland Avenue. Modestina was extremely frugal and over a period of 18 years might well have hoarded a substantial amount of cash even with a rather meager income. It is also, of course, possible that her husband did send her some funds a part of which she was able to save. We have concluded that although Modestina may have had a large amount of money eached away in 1946, she spent it prior to December 31, 1953. Modestina contends, and we have accepted the fact that she transferred $11,450 to Julius during the years 1951 through 1953. The record also shows that Modestina spent $8,000 erecting a cement block garage in 1950 and spent $4,000 making improvements on the Poland Avenue property at some time during the years 1944 through 1947. These expenditures would deplete the $20,000 cash hoard to which Carolyn Augell testified even if in 1946 the cash she had was in this amount. For the purpose of contesting the deficiencies determined by respondent, it is incumbent231 upon Modestina to show how her depleted cash hoard was replenished by 1953. This she has failed to do for she has insisted that in 1953 she still had the cash she brought from Italy without accounting for the source of her gifts to Julius and her other large expenditures. Except for the $3,250 which Modestina contends she had on hand on December 31, 1953, from down payments on three land contracts she had entered into late in 1953, we have concluded that she had failed to establish that she had any cash on hand on December 31, 1953. The evidence shows that Modestina received $3,250 in cash from two land contract sales late in 1953 and we have accepted as true her testimony that she had this cash on hand on December 31, 1953. On brief, Modestina contends that she retained the $3,250 as cash on hand throughout the net worth period and there is nothing in the record to show to the contrary. Consequently, the existence of this cash on hand will have no effect on the computation of understatement of income for any of the years here in issue. Modestina claims her opening net worth of December 31, 1953, should contain an asset representing amounts receivable on four land contracts then232 outstanding. The amount she claims should be treated as an asset is stated variously at $17,364.39 and $13,598.50. The $17,364.39 figure represents the total amounts due on four land contracts in existence as of Decembef 31, 1953, and the $13,598.50 represents the total amount due less Modestina's total cost basis for the properties. In computing her change in net worth for each of the succeeding years, Modestina reduces the initial amount of the contracts receivable by payments made during the current year which are chargeable to the principal amounts due under the contracts. Respondent made no special provision for the existence of these land contracts. Respondent determined, and petitioner agrees, that the land contracts had no ascertainable fair market value on December 31, 1953, and he thus included the properties subject to the land contracts in his net worth computation for each year at their cost basis to Modestina. Neither respondent's nor petitioner's treatment of the amounts received from the land contract sales is entirely correct. By including the properties subject to the land contracts in the net worth computation for each year at Modestina's cost, the payments received233 on the contracts made during the years here in issue will appear as income on the net worth computation in the year the payment is received to the extent that such amounts take form in increased assets. If the money were cached away but not included as cash in the net worth statement, this is merely an error in such statement as prepared by respondent which petitioner has failed to show. Petitioner's method of including the total unpaid balance on the contracts as an asset in opening net worth and by reducing this asset as payments on the contracts are made has the effect, under a net worth plus expenditures computation, of making the entire gain on the land contracts appear in the opening year of the computation, 1953. However, the parties agree the land contracts had no ascertainable value on December 31, 1953, and that the gain on the land contracts is taxable only as the payments which exceed cost basis are received. Harold W. Johnston, 14 T.C. 560">14 T.C. 560 (1950). We have made adjustments to respondent's computation respecting the land contracts to reflect the fact of the time the cost basis on each of these properties was recovered since the basis of one of the properties234 was not recouped by Modestina until 1954, to treat the payments as partly interest and partly payments on the unpaid principal balances, and to treat the gains on these sales as capital gains. The parties are agreed as to the amounts of the payments made during the years here involved and there is no indication that the payments do not appear as assets in Modestina's net worth. Modestina contends that the Evergreen and Himrod properties should be excluded from her net worth statement since they actually belonged to her daughter Betty who, according to Modestina, supplied the funds used to purchase these properties. We have found as a fact that Betty did furnish the funds to purchase the Evergreen property and have thus excluded the Evergreen property from Modestina's net worth. Betty testified that she provided the funds to pay both the $6,200 cash payment and the $2,500 mortgage for the Evergreen property, that the reason the property was placed in Modestina's name was the existence of discord between Betty and her husband and that the title to the property was transferred to Betty in 1957 because of concern that Betty might not receive the property in the event of Modestina's death. 235 It is noted that the transfer of title to Betty occurred within 6 months after Julius' death. Modestina testified that when the Himrod property, where Betty was living, proved unsatisfactory as a home, Betty gave Modestina money and Modestina then purchased the Evergreen property. Betty and her family have since occupied the Evergreen property and Betty has paid all real estate taxes thereon. Betty's payment for the property is confirmed by $2,000 in bank withdrawals made by Betty at the time of purchase and by a $3,000 receipt given Betty as the deposit made by her on the purchase of the Evergreen property. The transfer of title to the Evergreen property to Betty in 1957 was without consideration. We have found as a fact that Betty was not the equitable owner of the Himrod property. Neither Betty nor Modestina clearly stated that Betty provided Modestina with funds for the express purpose of enabling Modestina to purchase the Himrod property. Their testimony is that before Betty was married in 1946 and when she was working and living at home with Modestina, Betty gave money to Modestina. This was 8 years before the Himrod property was purchased, and the extent of these payments236 by Betty is not shown. The payments have more of the nature of a family living arrangement than of an obligation which would affect Modestina's net worth computation. Modestina has never transferred title to the Himrod property to Betty. We also note that on Modestina's proposed 1957 income tax return she reported rental income and claimed deductions for repairs and taxes for the Himrod property. In his net worth computation respondent has charged Modestina with a cost of living of $3,600 per year. Petitioner contends $1,800 is a more nearly correct amount. The evidence shows Modestina lived frugally. She lived rent free in her own apartment building. Her apartment was furnished simply and inexpensively. She made her own dresses. She did not operate an automobile. We have concluded that during each of the years 1954, 1955 and 1956 she spent $2,000 a year as living expenses for herself. There are indications in the record that Modestina was ill during the year 1957 subsequent to Julius' death and that her son Mario and his wife and children came and lived with her for most of that year. The record does not show the family living arrangement. If Modestina were paying all the living237 expenses, certainly the $3,600 of living expenses determined by respondent for the year 1957 is a minimum amount. Since petitioner has the burden of showing error in respondent's computation and has failed to do so as to the 1957 living expenses, we hold that Modestina's living expenses for the year 1957 were $3,600. Modestina claims she is entitled to a $2,500 credit for each of the years 1954 through 1957 for gifts made to her by Frank Hudick. The evidence shows that Hudick retired from his job in 1955, and before that he earned $50 a week. Modestina testified Hudick gave her various unspecified amounts of money and that she supplied him with food and gave him spending money, $15 or $20 a month, when he needed it. On the evidence we are unable to determine the amount of the transfers to Modestina and whether such transfers, if any, in excess of the cost of his food and the amounts returned to him by Modestina, were gifts to Modestina, a profit from food furnished to him, or merely to be held by her for safekeeping for Hudick. Consequently, we have made no adjustment for these possible transfers. A final adjustment which we have made is to show as an asset the $2,309 of profit238 before depreciation on the Blaine Avenue apartments which were managed by Modestina's agent. This amount was used in part to defray the principal amount of a mortgage indebtedness on the property which mortgage indebtedness had been allowed as a debt of Julius' estate and the balance was held by the agent for Modestina's account. The mortgage is not shown as a liability of Modestina's on the net worth statement and therefore its reduction does not show as an increase in net worth. We have allowed an addition to the reserve for depreciation for this apartment to Modestina for 10 months of the year 1957. Respondent has determined additions to tax for fraud against Modestina. The net worth computation does show sizeable amounts of unreported income for each of the years here in issue. However, much of this increase arises not because of proven items but because of petitioner's failure to prove error in respondent's determination. Respondent has shown some omissions of specific items of income consisting of rent payments and gain on the sale of various pieces of real estate. The actual omissions of rental receipts are minor for all years prior to 1957. Modestina professed not to understand239 that gains on the sale of real estate represented income. Modestina and her lawyer prepared a return for the year 1957 which showed adjusted gross income of $5,312.32. Modestina's lawyer told her to file this return. She did not do so and explained her failure to do so by the fact of lack of understanding and that she did not actually get the money from the rents. This explanation is plausible considering that $4,460 of the reported rental receipts were from Blaine Avenue and were not turned over to Modestina during the year. In fact respondent overlooked adjusting for this item in his net worth computation. Most of the other rentals were paid by the tenants into building and loan accounts which Modestina did not draw out during the year. Modestina never filed an income tax return for herself although she filed a 1956 income tax return for Julius' estate. However, she had little if anything to do with the preparation of that return. Because we believe from the evidence that Modestina had more knowledge of business and of the necessity of filing Federal income tax returns than she professed to have, we consider her failure to file grossly negligent. However, her failure to file returns240 does not cause her underpayment of tax to be due to fraud unless respondent shows by clear and convincing evidence that Modestina knew she had taxable net income and was attempting to evade tax thereon. This showing respondent has not made. If Modestina, in fact, had cash on hand as of December 31, 1953 of $20,000 in addition to the amount we have held she has established that she had, most of these increases in her net worth over the years here involved would be accounted for, the balance being primarily due to allowing her less depreciation reserve than she claims. While Modestina has not proven that she did have such cash on hand, there is no convincing evidence that she did not. There is no showing of the amounts of money that petitioner's husband might have sent her from California from 1935 until his death. The record contains no showing of his income. The record shows that Modestina's husband died in December 1952 leaving an estate valued at not in excess of $10,000 consisting primarily of four residence lots and five houses in the city of Delano, California. This, however, does not show what his earnings were and what he might have sent Modestina through the years. Modestina241 was a very frugal person and could save much of very little. There is reference in the record in the testimony of respondent's own agent of visits to Modestina by her family from California and to Mario and his family coming from California to live with Modestina for the balance of 1957 after Julius died. This is some indication that Modestina's husband and children in Caliornia may have sent her money. Except for the showing that Modestina never filed Federal income tax returns, there is no showing of her own income for years prior to 1953. During the years prior to 1940, a person of Modestina's frugal nature may have saved a substantial portion of income too small to require the filing of a Federal tax return. We have sustained respondent's determination of deficiencies to a large extent because of petitioner's failure of proof. However, this is not sufficient basis for holding that respondent has shown fraud by clear and convincing evidence. Even gross negligence, in failing to file Federal income tax returns does not per se show fraud. We have concluded that respondent has failed to show by clear and convincing evidence that any part of the underpayment in Modestina's income*242 tax for any one of the years 1954, 1955, 1956 and 1957 was due to fraud with intent to evade tax. Our decision on the fraud issue as to Julius' estate makes it unnecessary for us to discuss respondent's alternative argument that Julius omitted over 25 percent of his gross income from his returns for 1952 and 1953. Petitioners have not contested the additions to tax under sections 294(d)(1)(A) and 294(d)(2) of the Internal Revenue Code of 1939 or section 6654 of the Internal Revenue Code of 1954 other than to assert that no tax is due. The amounts of such additions for the years 1952 through 1956 for the Estate of Julius and for 1954 through 1957 for Modestina may be computed under Rule 50. Since there are no deficiencies due from the Estate of Julius for 1951, because of the bar of the Statute of Limitations, there are no additions to tax under these sections for this year. Decisions will be entered under Rule 50. Footnotes1. The record does not explain why only $730 was deducted for depreciation when, according to the cost basis and useful life claimed on the property, Julius would be entitled to a depreciation deduction of $1,250 a year or $833 for the 8-month period he owned the apartment in 1953.↩2. Under the depreciation issue we have decided the allowable depreciation for 643 Hayes Avenue was $2,004.72, thus resulting in a capital gain on the sale of $7,927.85.↩3. The record does not show why the above amounts were claimed as depreciation deductions for the store and the fixtures when, according to the cost basis and useful life claimed for each of the two assets, Julius was entitled to depreciation deductions of $600 and $590 for the store and the fixtures, respectively.↩3. The record does not show why the above amounts were claimed as depreciation deductions for the store and the fixtures when, according to the cost basis and useful life claimed for each of the two assets, Julius was entitled to depreciation deductions of $600 and $590 for the store and the fixtures, respectively.↩4. The parties have stipulated the purchase price for the Blaine Avenue property variously at $29,500 and $30,000.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625773/	MOTOR CAR SUPPLY CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Motor Car Supply Co. v. CommissionerDocket No. 2088.United States Board of Tax Appeals9 B.T.A. 556; 1927 BTA LEXIS 2554; December 12, 1927, Promulgated 2554 Depreciation allowable under section 234(a)(7) of the Revenue Act of 1918, is that accumulated in the taxable year alone and does not include depreciation accumulated in prior years and not deducted in prior income-tax returns. S. F. Beach, for the petitioner. John W. Fisher, Esq., for the respondent. TRUSSELL 556 By letter of January 12, 1925, the Commissioner served notice of deficiency upon the Motor Car Supply Co. of Chicago, Ill., in the amount of $540.93 for the calendar year 1919, and the 11-month period ending November 30, 1920. Petitioner appeals from only so much of the deficiency thus determined as pertains to the calendar year 1919, in the sum of $480.86. The deficiency in question arises from the disallowance by the Commissioner of $991.49 of depreciation charged off by petitioner and deducted in its tax return for that year. The issue presented is whether or not, under section 234(a)(7) of the Revenue Act of 1918, depreciation may be computed by deducting from the decrease in value of the property, as determined by an appraisal, the total depreciation charged off and deducted in income-tax returns for the three preceding2555 years. 557 FINDINGS OF FACT. The petitioner, an Illinois corporation, purchased for its business certain used automobiles and carried them during 1916, 1917, and 1918 on its books in a "Furniture and Fixture" account and charged off and deducted in its income-tax returns for those years depreciation on these assets at the rate of 10 per cent. A reasonable rate of depreciation on these used automobiles was 25 per cent. During the calendar year 1919 petitioner had an appraisal made of the value of this property and deducted this from the original cost and the total loss in value thus established, less the depreciation deducted in the prior three years, it charged off and deducted in its income-tax return for 1919. The amount thus charged off in the sum of $2,600.80 was almost 50 per cent of the original cost of the property. The Commissioner allowed 25 per cent depreciation on this property, or $1,609.31 of this amount. OPINION. TRUSSELL: The allowable depreciation for the taxable year in question was depreciation sustained in that year alone. The method of computation used resulted in the inclusion of depreciation accumulated in prior years and not deducted*2556 in prior income-tax returns. . The action of the Commissioner must, therefore, be affirmed. Judgment will be entered for the respondent.Considered by LITTLETON, SMITH, and LOVE.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625751/	EAGLE TRADING OPPORTUNITIES, LLC, SENTINEL ADVISORS, LLC, TAX MATTERS PARTNER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.Eagle Trading Opportunities, LLC v. Comm'rDocket No. 9733-05United States Tax Court2009 U.S. Tax Ct. LEXIS 46; January 23, 2009, Entered2009 U.S. Tax Ct. LEXIS 46">46 John O. Colvin, Chief Judge.John O. ColvinDECISIONPursuant to Tax Court Rule 248(b), it isORDERED AND DECIDED: That the following statement shows the adjustments to the partnership items of Eagle Trading Opportunities, LLC, for the taxable year 2000:Partnership ItemAs ReportedAs DeterminedDistributions of Property$274,544.00$-0-Other than MoneyDistributions of Money$54,582.00$-0-Other Income (Loss)($515,433.00)$-0-Other Deductions($24,748.00)$-0-It is determined that the foreign currency options, purportedly contributed to or assumed by Eagle Trading Opportunities, LLC, are treated as never having been contributed to or assumed by said partnership and any gains or losses purportedly realized by said partnership on the options are treated as having been realized by its partners.It is determined that a 40 percent gross valuation misstatement penalty under I.R.C. §§ 6662(a), (b)(3), (e) and (h) applies to any underpayment of tax attributable to overstating the capital contributions claimed to have been made to the purported partnership.It is determined that a 20 percent penalty applies to any additional underpayment of tax not attributable to any gross valuation misstatement, as such 2009 U.S. Tax Ct. LEXIS 46">47 underpayment is attributable to negligence or disregard of rules or reuglations under I.R.C. §§ 6662(a), (b)(1) and (c) or a substantial understatement of income tax under I.R.C. §§ 6662(a), (b)(2) and (d).(Signed) John O. ColvinChief JudgeEntered: JAN 23 2009	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625729/	ALEXANDER J. SZILAGYI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentSzilagyi v. CommissionerDocket No. 29158-81.United States Tax CourtT.C. Memo 1982-656; 1982 Tax Ct. Memo LEXIS 94; 45 T.C.M. 88; T.C.M. (RIA) 82656; November 15, 1982. Alexander J. Szilagyi, pro se. Joan J. Fahlgren, for respondent. DAWSONMEMORANDUM FINDINGS OF FACT AND OPINION1982 Tax Ct. Memo LEXIS 94">95 DAWSON, Judge: This case was assigned to Special Trial Judge Randolph F. Caldwell, Jr., for trial in accordance with General Order No. 6, 69 T.C. XV (1978). The Court agrees with and adopts his report which is set forth below. OPINION OF THE SPECIAL TRIAL JUDGE CALDWELL, Special Trial Judge: Respondent determined a deficiency in petitioner's 1978 Federal income taxes in the amount of $414.00. After concessions by the parties, the sole issue for decision is whether petitioner received taxable income under section 402 upon a distribution of stock from the Chrysler Thrift-Stock Ownership Program. 1 Eight days prior to the trial, petitioner filed a multipartite motion for summary judgment and other relief. That motion was denied at the trial. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner resided in Lake Orion, Michigan, at the time of the filing of the petition in this case. Petitioner was employed as an engineer with the Chrysler Corporation. For the benefit of its employees, Chrysler sponsored a1982 Tax Ct. Memo LEXIS 94">96 Thrift-Stock Ownership Program which qualified as an employees' trust under section 401(a). The program consisted of two different plans, the Savings Thrift Plan and the Retirement Thrift Plan. Petitioner chose to participate in the Savings Thrift Plan. According to the provisions of that plan, an employee could contribute each class year (May 1-April 30) an amount up to ten percent of his base salary toward the purchase of Chrysler securities. For each class year that the employee contributed, Chrysler would contribute to the employee's account, also in the form of Chrysler securities, an amount equal to fifty percent of the amount that the employee contributed. Three years after the close of each class year, the employee would receive everything in his account for that class year. This would include the stock purchased by the employee and the stock contributed by the employer, plus any dividends earned on those shares. At the time of distribution, the plan's administrators would prepare a Form 1099R which was sent to the employee designating a portion of the distribution as taxable income. On his 1978 Federal income tax return, petitioner did not include any portion of1982 Tax Ct. Memo LEXIS 94">97 the distribution in his gross income. Respondent determined that $1,069, the amount listed as taxable income on Form 1099R, should be included in petitioner's gross income under section 402. OPINION Qualified pension, profit-sharing, and stock bonus plans are defined in section 401(a). The program that the petitioner participated in, the Chrysler Thrift-Stock Ownership Program, falls within this section. Section 402(a)(1) provides that the amount distributed by any plan described in section 401(a) shall be taxable to the distributee in the year distributed under section 72 (relating to annuities). Section 402(a)(1) further provides that the amount distributed shall not include net unrealized appreciation in securities, as defined in section 1.402(a)-1(b)(1)(ii), Income Tax Regs., of the employer corporation attributable to the amount contributed by the employee. In other words, any appreciation in the value of stock purchased by the employee is not taxable until the employee disposes of this stock. Section 1.402(a)-1(b), Income Tax Regs. The remainder of the fair market value of the securities distributed is includable in the employee's gross income to the extent it exceeds1982 Tax Ct. Memo LEXIS 94">98 his contributions. Section 72(e)(1)(B). See also Rev. Rul. 67-165, 1967-1 C.B. 89. These code sections and regulations apply to the instant case. Petitioner received a distribution of stock from a 401(a) qualified plan, the entire amount of which is taxable except for petitioner's contributions and the net unrealized appreciation in the securities attributable to petitioner's contributions. Petitioner has relied on dictum in several cases to support his argument that the distribution is nontaxable. However, petitioner's reliance is clearly misplaced. Each case cited is factually distinguishable from the instant case. Commissioner v. Lobue,351 U.S. 243">351 U.S. 243 (1956 (stock option); Commissioner v. Smith,324 U.S. 177">324 U.S. 177 (1945) (stock option); United States v. Phellis,257 U.S. 156">257 U.S. 156 (1921) (corporate reorganization); Eisner v. McComber,252 U.S. 189">252 U.S. 189 (1920) (stock dividend); Lynch v. Turrish,247 U.S. 221">247 U.S. 221 (1918) (asset sale); Hirsh v. Commissioner,115 F.2d 656">115 F.2d 656 (7th Cir. 1940) (forgiveness of debt); Staples v. United States,21 F. Supp. 737">21 F. Supp. 737 (E.D. Pa. 1937)1982 Tax Ct. Memo LEXIS 94">*99 (lessee's improvements on lessor's property). On the Form 1099R, $1,069 of the amount distributed by the Program in 1978 was listed as ordinary income. It is this amount that respondent has determined shall be includable in petitioner's gross income. Petitioner did not offer any evidence to persuade us that this amount was incorrectly determined. Petitioner has the burden of proof on this issue. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure. Since petitioner has not satisfied his burden, respondent must be sustained. Decision will be entered for respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625730/	Frank E. McDevitt v. Commissioner.Frank E. McDevitt v. CommissionerDocket No. 41903.United States Tax Court1954 Tax Ct. Memo LEXIS 284; 13 T.C.M. 193; T.C.M. (RIA) 54068; March 5, 19541954 Tax Ct. Memo LEXIS 284">284 Dependency credits denied petitioner for failure to show actual cost of children's support in 1948. Frank E. McDevitt, 617 35th Street, Rock Island, Ill., pro se. Merl B. Peek, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: The respondent determined a deficiency in income tax of $313, with interest, against Frank E. McDevitt for the calendar year 1948. The only question for our determination is whether the petitioner is entitled to claim his three children as dependents in the calendar year 1948. The petitioner's income tax return for 1948 was filed with the collector of internal revenue for the district of Iowa. Findings of Fact Petitioner is an individual residing in Rock Island, Illinois. During 1948 he resided in Davenport, Iowa. He and Margaret McDevitt were married for 15 years prior to 1948. They had three children: Doris, Wayne, and Joyce, whose ages in 1948 were 12, 8, and 6, respectively. While living with his wife and three children immediately prior to his divorce, the petitioner spent $50 each week for family living expenses. Of this amount $25 a month went to pay off a loan on the family house1954 Tax Ct. Memo LEXIS 284">285 in Davenport, Iowa. During 1948 the petitioner and his wife jointly owned the house in which petitioner's wife and three children lived. The house had an estimated rental value of $50 a month. On February 14, 1948, the petitioner's wife obtained a divorce from him. The divorce decree awarded custody of their three children to the wife and required the petitioner to pay for the support of the children $25 a week from February 21 until September 1, 1948, and $20 a week thereafter. As each child became 16 years old the payments were to be reduced by one-third. The divorce decree required also that the wife pay off the mortgage on the family house out of the petitioner's support payments. A further requirement of the divorce decree was that petitioner pay off an improvement loan on the family house in the amount of $160. During January and a part of February 1948, the petitioner lived with his wife and three children and provided the children's support. After their parents' divorce the three children lived with their mother in the family house. During the rest of 1948 the petitioner made the weekly payments required by the divorce decree and paid $128.52 on the loan for improvements1954 Tax Ct. Memo LEXIS 284">286 to the family house. For 1948 the petitioner's gross income was $3,470.55. For the same year his former wife earned $1,881.90. In his return for 1948 the petitioner claimed his three children as dependents. The respondent disallowed the claimed dependencies and asserted a deficiency against the petitioner of $313 plus interest. Opinion To be entitled to dependency credits for his three children the petitioner has the burden of showing that he contributed over one half their support in 1948, and that each child's gross income for the year was less than $500. 1 The respondent contends that the petitioner has failed to sustain this burden of proof because he has not shown what the actual cost of the children's support was in 1948. The petitioner estimated the cost of his children's support in 1948 on the basis of what it cost him to support his whole family in years prior to 1948. He testified that prior to 1948 he spent $50 a week for the living expenses of his family (petitioner, his wife, and three children). Of this amount $25 a month was used to pay a loan on the family house. The petitioner showed also that after his divorce his three children continued to live with their1954 Tax Ct. Memo LEXIS 284">287 mother in the family house, and he stated that, as far as he knew, no hospital bills or unusual expenses were incurred on the children's behalf in 1948. His payments for the upkeep of his children, as required by the divorce decree, totalled approximately $1,000 in 1948. A part of this money was to be used by his former wife to meet the payments on a mortgage on their jointly owned home, but we are uninformed as to whether any of these payments were made. The petitioner also supported his children during January and a part of February 1948. We consider this evidence insufficient to sustain the burden of proof required of the petitioner. Evidence of support costs in prior years is inadequate to show what was actually expended for the children's support in 1948. We are well aware of the petitioner's difficulty in showing the actual cost in 1948 for the upkeep of his three children when they lived during most of that year with their mother, who also claims to be their chief1954 Tax Ct. Memo LEXIS 284">*288 support. However, we cannot substitute our own estimate based on costs in prior years for the required showing of actual cost of support in 1948. Decision will be entered for the respondent. Footnotes1. Section 25 (b) (1) (D) and (b) (3) (A), Internal Revenue Code↩. Section 310 of the Revenue Act of 1951, 65 Stat, 487, increased to $600 the amount of gross income permitted a dependent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625731/	GEORGENE THROOP, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentThroop v. CommissionerDocket No. 20643-92United States Tax CourtT.C. Memo 1994-10; 1994 Tax Ct. Memo LEXIS 8; 67 T.C.M. 1946; 73 A.F.T.R.2d (RIA) 417; January 10, 1994, Filed 1994 Tax Ct. Memo LEXIS 8">8 Decision will be entered under Rule 155. Georgene Throop, pro se. For respondent: Ladd C. Brown, Jr.DINANDINANMEMORANDUM OPINION DINAN, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined deficiencies in petitioner's Federal income tax and additions to tax as follows: Additions to TaxYearDeficiencySec. 6651(a)(1)Sec. 6653(a)(1)(A)1986$ 2,571$ 338.25$ 128.5519873,858549.90192.9019884,914842.00--19896,454500.00--Additions to TaxYearSec. 6653(a)(1)(B)Sec. 6653(a)(1)Sec. 6654(a)19861----19871----1988--$ 245.70$ 204.201989----101.69Some of the facts1994 Tax Ct. Memo LEXIS 8">9 have been stipulated and are so found. The stipulations of fact and attached exhibits are incorporated herein by this reference. After concessions by the parties, the issues remaining for decision are: (1) Whether petitioner is liable for the section 6651(a)(1) additions to tax for the years 1986 through 1989; (2) whether petitioner is liable for the section 6653(a)(1)(A) and (B) additions to tax for the years 1986 and 1987, and the section 6653(a)(1) addition to tax for the year 1988; and (3) whether petitioner is liable for the section 6654(a) additions to tax for the years 1988 and 1989. Petitioner resided in Pembroke, Florida, on the date the petition was filed in this case. At the time of trial, petitioner stated she still had not filed Federal income tax returns for the years in issue. In fact, petitioner claimed that she has never filed a Federal income tax return. Petitioner testified that she is a single mother and has been since her son's birth. The boy's father divorced petitioner while she was pregnant. According to petitioner, since her son's birth, she has been too busy and preoccupied with raising her son; merely trying to survive financially leaves no time 1994 Tax Ct. Memo LEXIS 8">10 to worry about filing a Federal income tax return. To make ends meet, petitioner stated that she has always had to work at more than just one job. Specifically, during the years in issue, petitioner worked three jobs: she worked as a secretary, a respiratory therapist, and a real estate broker. The parties stipulated that petitioner received income in the amount of $ 19,031 in 1986, $ 25,143 in 1987, $ 27,514 in 1988, and $ 35,052 in 1989. The first issue for decision is whether petitioner is liable for section 6651(a)(1) additions to tax. Section 6651(a)(1) imposes an addition to tax for failure to timely file a return, unless the taxpayer establishes: (1) The failure did not result from "willful neglect"; and (2) the failure was "due to reasonable cause". "Willful neglect" has been interpreted to mean a conscious, intentional failure, or reckless indifference. . "Reasonable cause" requires the taxpayer to demonstrate that he exercised ordinary business care and prudence and was nonetheless unable to file a return within the prescribed time. ;1994 Tax Ct. Memo LEXIS 8">11 Sec. 301.6651-1(c)(1), Proced. and Admin. Regs. The addition to tax equals 5 percent of the tax required to be shown on the return for the first month, with an additional 5 percent for each additional month or fraction of a month during which the failure to file continues, not to exceed a maximum of 25 percent. Sec. 6651(a)(1). Although petitioner concedes that she did not file tax returns for the years in issue, she maintains that she had been too busy and preoccupied with raising her son and working to file a return. While general incompetence, mental illness, alcoholism, or other incapacity may excuse a taxpayer from filing, a taxpayer's general disregard of her duty to file does not excuse her failure to file. See ; ; ; ; . During the years in issue, petitioner was able to perform three jobs at once. 1994 Tax Ct. Memo LEXIS 8">12 She appears to be a responsible person, and she was aware of her statutory obligation to file returns. There is no evidence that she was incapable of fulfilling that obligation -- if she had desired to do so. Merely being a single mother or parent, while admittedly a difficult task, is certainly in and of itself not reasonable grounds for failure to file a return. Therefore, respondent's determination is sustained. The second issue for decision is whether petitioner is liable for the section 6653 additions to tax. For returns due before 1990, if any part of the underpayment of tax is due to negligence or intentional disregard of rules or regulations, a tax equal to 5 percent of the underpayment is added. For returns due before 1989, there is an amount added equal to 50 percent of the interest payable under section 6601 on the portion of the underpayment attributable to negligence. Respondent's determination of negligence is presumed to be correct, and petitioner bears the burden of proving that the addition does not apply. Rule 142(a); . Negligence under these sections is defined as the failure1994 Tax Ct. Memo LEXIS 8">13 to do what a reasonable and ordinarily prudent person would do under the circumstances. , affg. ; . A taxpayer has a statutory duty to timely file a Federal income tax return, and the breach of this duty is evidence of negligence. , affd. . Petitioner has not proved that her failure to file was reasonable or that she acted with ordinary prudence. We found petitioner to be an intelligent person and that based on her employment record, she is being compensated for her intelligence and industry. Petitioner's generalizations about being preoccupied and too busy to file income tax returns do not establish that she was not negligent. Therefore, respondent's determination is sustained. The last issue for decision is whether petitioner is liable for the section 6654(a) addition to tax. Section 6654 imposes an addition to tax where payments of 1994 Tax Ct. Memo LEXIS 8">*14 the tax, either through withholding or by making quarterly payments during the course of the year, do not equal the percentage of total liability required by the statute. Sec. 6654(a). The addition to tax under section 6654(a) is mandatory unless the taxpayer can establish that one of several exceptions listed in section 6654(e) applies. , affd. in part and revd. in part ; . Petitioner has not shown that any of the exceptions listed in section 6654(e) apply. Therefore, respondent's determination is sustained. Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the taxable years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩1. 50 percent of the interest due on the underpayment of tax attributable to negligence↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625733/	DENHOLM AND MCKAY COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Denholm & McKay Co. v. CommissionerDocket No. 89606.United States Board of Tax Appeals41 B.T.A. 986; 1940 BTA LEXIS 1113; April 30, 1940, Promulgated 1940 BTA LEXIS 1113">1113 Held, an amended petition raising a new issue, filed more than three years after the payment of the tax, does not relate back to the time of filing of the original petition for the purpose of applying section 322(d) of the Revenue Act of 1934, as amended by section 809(a) of the Revenue Act of 1938. Commissioner v. Rieck, 104 Fed.(2d) 294, and Commissioner v. Dallas, 110 Fed.(2d) 743, followed. Howe P. Cochran, Esq., for the petitioner. E. L. Updike, Esq., for the respondent. VAN FOSSAN 41 B.T.A. 986">986 OPINION. VAN FOSSAN: On July 24, 1939, on consideration of alternative computations filed pursuant to report promulgated April 14, 1939 (), and in reliance on the decisions of the Board in , and , and notwithstanding the reversal of the Board's decision in the Rieck case in , decision was entered in this proceeding as follows: This proceeding was called from the Day Calendar of July 5, 1939, for hearing on settlement1940 BTA LEXIS 1113">1114 under Rule 50, and after argument same was taken under submission with leave to the petitioner to file a revised recomputation within ten days. Petitioner having filed a revised recomputation on July 11, 1939, and after due consideration, it is ORDERED AND DECIDED: That there is an overpayment in income tax for the fiscal year ended January 31, 1935, in the amount of $821.37, which was paid within less than three years before the filing of the original petition. On September 8, 1939, respondent filed a motion to vacate the decision and for reconsideration, which motion was duly entertained by the Board, final action thereon being postponed pending action of the Supreme Court of the United States on application for a writ of certiorari in the case of Rieck v. Helvering. Certiorari was denied November 6, 1939, . Action was further postponed to await decision of the Circuit Court of Appeals for the Second Circuit in Commissioner v. Estate of George M. Dallas.On March 25, 1940, the United States Circuit Court of Appeals for the Second Circuit, in 1940 BTA LEXIS 1113">1115 , reversed a memorandum opinion of the Board which had held to the same effect as The court pointed out that its decision was in accord with the decision of the Third Circuit in 41 B.T.A. 986">987 On consideration of the opinions of the Circuit Courts of Appeal in the two cited cases, we hold that an amended petition raising a new issue, filed more than three years after the payment of the tax, does not relate back to the time of filing of the original petition for the purpose of applying section 322(d) of the Revenue Act of 1934, as amended by section 809(a) of the Revenue Act of 1938. Reviewed by the Board. Decision will be entered under Rule 50.BLACKBLACK, dissenting: I respectfully dissent from the majority opinion for reasons which I shall state presently. Before entering upon any discussion of the majority opinion, I think it would be well to have before us a brief statement of the facts which concern the point at issue. The motion of the Commissioner asking the Board to vacate its1940 BTA LEXIS 1113">1116 former decision and enter one in conformity with the court's opinion in , seems to correctly and fully state the pertinent facts and I quote from it, as follows: On April 18, 1935 taxpayer paid the sum of $821.37 as income tax for the fiscal year ended January 31, 1935. No claim for refund has been filed by the taxpayer in respect to its income tax liability for the fiscal year ended January 31, 1935. "The original petition" in this proceeding was filed with the Board on June 24, 1937. In the original petition the assignments of error were: "(a) The Cmmissioner of Internal Revenue erred in adding to the income shown by the return an item of $36,150.50, described by him as 'Realty Company dividends'. "(b) The Cmmissioner of Internal Revenue erred in adding to the income shown by the return an item of $7,429.37, described by him as 'Received from Mutual Insurance Companies.'" On May 6, 1938, an amended petition was lodged with the Board and pursuant to leave granted filed on May 7, 1938. In the amended petition the assignments of error were: "(a) The Commissioner of Internal Revenue erred in adding to the1940 BTA LEXIS 1113">1117 income shown by the return an item of $36,150.50, described by him as 'Realty Company dividends.' "(b) The Commissioner of Internal Revenue erred in adding to income shown by the return an item of $7,429.37, described by him as 'Received from Mutual Insurance Companies.' "(c) The Commissioner of Internal Revenue erred in failing to allow a deduction in the amount of $56,222.08 city property taxes accrued on January 1, 1935." There is no allegation in the original or the amended petitions in respect to the date and amount of the payment by the taxpayer of any income tax for the fiscal year ended January 31, 1935. In the prayer of the amended petition it is prayed that the Board allow as deductions the three amounts mentioned in 41 B.T.A. 986">988 the assignments of error and that "the Board may find that this petitioner has overpaid its taxes for the year ended January 31, 1935 and that the recovery of the overpayment is not barred by the statute of limitations". The taxpayer's Federal income tax liability for the fiscal year ended January 31, 1935, computed in accordance with the report promulgated by the Board on April 14, 1939, is as follows: "Net income shown in notice of deficiency$54,182.08Less:(a) Amount of preferred dividends of the Denholm and McKay Realty Company allowed by the Board as rent$36,150.50(b) Insurance premiums overpayments7,429.37(c) Taxes accrued on January 1, 1935 allowed by the Board as rent56,222.0899,801.95Net taxable income as adjustedNoneIncome tax liabilityNoneTax assessed (Account # XX0636)$821.37Tax paid (April 18, 1935)$821.37Income tax liabilityNoneOverpayment$821.37"1940 BTA LEXIS 1113">1118 The issue with respect to the deductibility of the item of $56,222.08 taxes accrued on January 1, 1935, was first presented in the amended petition lodged with the Board on May 6, 1938, and filed pursuant to leave granted on May 7, 1938. No portion of the income tax paid by this taxpayer for the fiscal year ended January 31, 1935 was paid within three years before the filing of the amended petition. The entire overpayment of $821.37 is due to the allowance by the Board of the $56,222.08 taxes accrued on January 1, 1935, in that without such allowance there would be a deficiency rather than the stated overpayment. In dissenting from the majority opinion I, of course, recognize that the opinion is in accord with , and . With all due respect to the opinions of these learned courts, I think they are wrong in applying the same rule to amended petitions filed with the Board of Tax Appeals as is applied to claims for refund which are filed with the Commissioner of Internal Revenue. If in the matter or permitting amendments to petitions filed with the Board by taxpayers1940 BTA LEXIS 1113">1119 it is governed by the same rules as govern the Commissioner of Internal Revenue in matters pertaining to amendments to claims for refund filed with him, then undoubtedly under the Supreme Court's decision in , and , the amended petition in the instant case was filed too late to be the 41 B.T.A. 986">989 basis of a refund of the overpayment found by the Board. But it is my view that the rules governing the Board of Tax Appeals in the matter of permitting amendments to petitions filed with it by taxpayers are altogether different from the rules which the Commissioner has prescribed in his regulations for amending claims for refund. My views in that respect were rather fully stated in , and I respectfully refer to what I said there to save repetition here. It is true, of course, that the Board of Tax Appeals is not a court. Congress was content to establish the Board as a "legislative inferior tribunal, having judicial powers within its limited jurisdiction and capable of handing down not merely administrative determinations1940 BTA LEXIS 1113">1120 but judicial decisions." ; affirmed on this point and reversed on another point, . The Supreme Court, notwithstanding its statement that the Board is not a court, recognizes the judicial character of its jurisdiction and powers. ; ; cf. . The Board of Tax Appeals has rules of practice, promulgated pursuant to authority of section 907(a) of the Revenue Act of 1924, as amended by section 601 of the Revenue Act of 1928, which provide in part that "The proceedings of the Board and its divisions shall be conducted in accordance with such rules of practice and procedure (other than rules of evidence) as the Board may prescribe and in accordance with the rules of evidence applicable in courts of equity of the District of Columbia." Rule 17 of the Board's Rules of Practice relates to amended and supplemental pleadings and reads as follows: The petitioner may, as of course, amend his petition at any time before1940 BTA LEXIS 1113">1121 answer is filed. After answer is filed, a petition may be amended only by consent of the Commissioner or on leave of the Board. All motions to amend, made prior to the hearing, must be accompanied by the proposed amendments or amended pleading. Upon motion made, the Board may, in its discretion, at any time before the conclusion of the hearing, permit a party to a proceeding to amend the pleadings to conform to the proof. When motions to amend are granted at the hearing, the amendment or amended pleading shall be filed at the hearing or with the Board within such time as the Division may fix. [See Rules 4 and 19.] It was under this rule that petitioner was granted leave on May 7, 1938, to file an amended petition setting up in addition to the grounds of error assigned in the original petition a new assignment of error, reading as follows: "(c) The Commissioner of Internal Revenue erred in failing to allow a deduction in the amount of $56,222.08, city 41 B.T.A. 986">990 property taxes accrued on January 1, 1935," The Board in its opinion promulgated 1940 BTA LEXIS 1113">1122 April 14, 1939, , sustained this new assignment of error contained in the amended petition, as well as the first assignment of error, and the Commissioner conceded the second assignment of error. Unless the Board abused its discretion in granting petitioner permission to file the amendment in question, I think it is effective for all purposes. I have heard no suggestion that the Board abused its discretion in granting such an amendment. The effect of the decisions of the court in the Rieck case, supra, and the Dallas case, supra, it seems to me is to hold that when such an amended petition is filed setting up an entirely new assignment of error, a new cause of action is begun and is tantamount to the filing of a new original petition. It that is true, then it would seem to me to follow that the Board would be without authority to grant a petitioner permission to amend his petition by setting up an entirely new assignment of error, unrelated to errors already assigned, even in cases where no overpayment is involved, after the 90-day period prescribed by the statute for appeal to the Board has expired. If a new and unrelated assignment1940 BTA LEXIS 1113">1123 of error pertaining to the same tax liability is held to raise a new cause of action, then the Board would be without jurisdiction to hear it if filed after the 90-day period for appeal to the Board has expired. If that is the correct rule of law, then a petitioner to the Board of Tax Appeals must raise in his original petition every ground upon which he relies at the peril of never being able to raise them; after the 90-day period has expired he may amend only in the way of perfecting amendments to the grounds of error already assigned; and he may not file an amended petition which raises an entirely new ground of error on the part of the Commissioner, for to do so would, under the rule laid down by the courts in the Rieck and Dallas cases, be raising a new cause of action. For a discussion of the problem as to when an amendment set up a new cause of action in pleadings generally, see Justice Cordozo's discussion in . See also , in which the court, among other things, said: A single tax was assessed and a single tax was paid. Because1940 BTA LEXIS 1113">1124 the tax assessed and paid was in excess of what was legally due the government, it was obligated to repay the entire excess; but the cause of action for the recovery of the whole excess arose out of one transaction and was a single cause of action, regardless of the number of grounds upon which the tax was excessive. [Emphasis supplied.] I prefer to believe that such an amendment as we have here, filed with the permission of the Board, does not raise a new cause of a action, 41 B.T.A. 986">991 but merely perfects and enlarges the one already before the Board, and, as we said in , relates back to the time of the filing of the original petition. Cf. . Therefore, I think the decision of the Board in the instant case should be that "There is an overpayment in petitioner's income tax for the fiscal year ended January 31, 1935, in the amount of $821.37, which amount was paid within three years before the filing of the petition on June 24, 1937." LEECH, HARRON, and KERN agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625734/	Bert C. Cochran and Edythe L. Cochran v. Commissioner.Cochran v. CommissionerDocket No. 6394-67.United States Tax CourtT.C. Memo 1972-15; 1972 Tax Ct. Memo LEXIS 239; 31 T.C.M. 36; T.C.M. (RIA) 72015; January 19, 1972, Filed. William T. Brandlin, 611th W. 6th, Los Angeles, Calif. for the petitioners. H. Lloyd Nearing, for the respondent. FEATHERSTONMemorandum Findings of Fact and Opinion FEATHERSTON, Judge: Respondent determined a deficiency in petitioners' Federal income tax for 1965 in the amount of $9,147.86. The issues for decision are: (1) Whether a sum equal to the difference between the fair market value of an apartment building and the price paid for it by petitioner Bert C. Cochran constitutes a commission for his services as a real estate broker; and, if so, (2) what was the fair market value of1972 Tax Ct. Memo LEXIS 239">240 the apartment building in 1965. Findings of Fact Petitioners, Bert C. Cochran and Edythe L. Cochran, were husband and wife during 1965. They filed their joint income tax return for that year with the district director of internal revenue, Los Angeles, California. At the time their petition was filed herein, Bert C. Cochran was a legal resident of Los Angeles, California, and Edythe L. Cochran was a legal resident of Monterey Park, California. Edythe L. Cochran (hereinafter Edythe) is a petitioner in this case solely by virtue of having filed a joint income tax return with her husband. Subsequent to 1965, Edythe and Bert C. Cochran (hereinafter petitioner) were divorced. At the time of the divorce, he was awarded, as his sole property, the apartment building located at 1815 North Bronson Avenue, Los Angeles, California. In addition, he was ordered to hold Edythe harmless from liability for any deficiency in Federal income tax for 1965. Respondent has conceded that, pursuant to section 6013(e), Internal Revenue Code of 1954, 1 Edythe is not liable for any deficiency determined herein. 1972 Tax Ct. Memo LEXIS 239">241 During 1964 and 1965, petitioner was a self-employed real estate broker, licensed by the State of California, doing business as Bert Cochran Associates. In 1964, he approached Lawrence Dexter Long (hereinafter Long), who owned an 89-unit apartment complex known as the Kona Kai Apartments, located in Torrance, California, with a view to obtaining the right to list the apartment for sale and to serve as the broker. Long agreed to list the buildings with petitioner on a net conversion listing. This meant that the seller, Long, wished to obtain a specified amount as the net selling figure. In August 1964, petitioner, in his capacity as real estate broker, arranged for a partnership, composed of himself and his wife, Iras M. Fine (hereinafter Fine) and his wife, and Arthur M. Gameral (hereinafter Gameral) and his wife, to offer to buy the Kona Kai Apartments. Although negotiations were held between the prospective buyers and Long, an agreement could not be reached, and the sale did not take place. Shortly thereafter, Long was killed in an airplane crash, and the Kona Kai Apartments passed to his estate. In October 1964, petitioner approached Long's widow to ascertain whether Long's1972 Tax Ct. Memo LEXIS 239">242 Estate (hereinafter referred to as the 37 Estate) was still interested in selling the Kona Kai Apartments. After receiving a positive response, petitioner, in his capacity as real estate broker on behalf of the Estate, negotiated another deal for the sale of the apartment buildings and certain personal property located therein. The prospective buyers were to be Gameral, Fine, and petitioner, acting through a new partnership. The partnership was formed in January 1965; however, on March 3, 1965, the deal was not consummated, and the partnership was dissolved as of its inception. Upon the dissolution, petitioner received $10,000 from Fine and Gameral for his 1/6 interest. On March 17, 1965, the Estate, through the efforts of petitioner, sold the Kona Kai Apartments and certain personal property to Gameral for $901,500. One of the items of consideration which Gameral gave in exchange for the Kona Kai Apartments was a 10-unit apartment located at 1815 North Bronson Avenue in Los Angeles (hereinafter this property will be referred to as the Bronson property). In addition, Gameral assumed an existing trust deed on the buildings held by the Home Savings & Loan Association, and executed1972 Tax Ct. Memo LEXIS 239">243 a second trust deed to be held by the seller. In consideration for the transfer of the personal property, Gameral assumed an existing encumbrance and paid a specified amount of cash. The following table summarizes the consideration and value thereof received by the seller, the Estate, from the buyer, Gameral, pursuant to the negotiated sale of the apartment buildings and the related personal property: ConsiderationValueAssumption of existing trust deed$680,000.00Second trust deed64,500.00Bronson property70,000.00Assumption of existing encumbrance on personalty17,000.00Cash 70,000.00Total$901,500.00The escrow instructions to the Crocker-Citizens National Bank, the escrow agent, covering the sale of the apartments provided for the purchase of title insurance with a liability of $70,000 covering the Bronson property. In addition, $77 worth of internal revenue stamps were placed on the deed covering this property. These stamps represented a value for the property of $70,000. Other documents filed with the probate court reflect that the Bronson property had a value of $70,000. As compensation for petitioner's services as broker, the Estate1972 Tax Ct. Memo LEXIS 239">244 concluded that $35,000 was a fair and reasonable broker's commission. As a result of negotiations and subject to the approval of the probate court administering the Estate, petitioner and the Estate agreed that petitioner would purchase the Bronson property for $35,000. The balance of the value on the property, $35,000, was to be treated as the commission for his services in arranging the sale of the Kona Kai Apartments. The probate court approved the transaction, and in the "Order Confirming Sale of Real Property" summarized the transaction as follows: The Administratrix of the decedent's estate entered into a contract with * * [petitioner], to procure a purchaser for the property, which contract provided for the payment to the agent out of the proceeds of sale made and confirmed by the Court to any purchaser secured by the agent, of a commission, the amount of which and nature of which to be fixed and allowed by this Court upon confirmation of the sale. The agent procured the purchaser to whom the real property was sold, and the sum of $35,000.00 is a reasonable amount to be allowed as such commission to such broker. Said $35,000.00 to be paid to broker by conveying to him1972 Tax Ct. Memo LEXIS 239">245 by Grant Deed executed by Administratrix * * [the Bronson property] having a total value of $70,000.00, after said broker pays to the Estate by way of a Deed of Trust secured by promissory note in the sum of $35,000.00, * * * the balance of the purchase price: $35,000.00. * * * 2. The sum of $35,000.00 is fixed and allowed by the Court as a commission to * * * [petitioner] for securing the purchaser * * * and the Administratrix hereby is authorized and directed to convey to said broker * * * upon receipt from said broker of his Deed of Trust secured by promissory note for $35,000.00 * * . Petitioner thus received the Bronson property, which had a value of $70,000, in exchange for a note in the amount of $35,000. The $35,000 balance of the value of the property constituted his commission for his services in procuring a purchaser for the Kona Kai Apartments. Petitioner, in his 1965 joint income tax return, did not report as income the difference between the fair market value of the Bronson property and the price paid by him. 38 In his notice of deficiency, respondent determined that petitioner received commission income of $35,000 from the Estate of Long by purchasing1972 Tax Ct. Memo LEXIS 239">246 the Bonson property for $35,000 less than its fair market value. Ultimate Findings of Fact (1) The difference between the fair market value of the Bronson property and the price paid for it ($35,000) constitutes petitioner's commission for his services in procuring a purchaser for the Kona Kai Apartments. (2) The fair market value of the Bronson property at the time of the sale to him by the Estate of Long in 1965 was $70,000. Opinion The principal issue is whether petitioner received a commission for his services as broker for the Estate measured by the difference between the price he paid for the Bronson property and the fair market value of that property. Petitioner contends that the only commission he received for his services was the 1/6 interest in the partnership which was formed in 1965 for the purpose of purchasing the Kona Kai Apartments but which was dissolved before the purchase occurred. Petitioner argues that upon dissolution he received $10,000 for his interest from the other two partners and that this was the full extent of his commission. He maintains that any difference between the fair market value of the Bronson property and the price he paid therefor1972 Tax Ct. Memo LEXIS 239">247 merely represents "a good buy." Respondent contends that the difference is a commission for petitioner's services and, as such, is income to him. 2 Resolution of the issue framed by the contentions of the parties depends entirely upon the facts of the case. In support of his contentions, petitioner introduced evidence attempting to show that: (1) The agreement between the parties called for a net listing of $866,5001972 Tax Ct. Memo LEXIS 239">248 with no commission to be paid to petitioner; (2) The agreement provided for a commission to petitioner from the buyers; and (3) The value for the Bronson property was artificially inflated in the negotiations in order to satisfy the holder of the first trust deed, Home Savings & Loan Association, that the purchasers had sufficient equity in the property to justify consent to their assumption of the first deed of trust. The evidence introduced by petitioner consisted almost exclusively of his own oral testimony. He did not present any documents signed by both parties which showed the actual terms of the agreement, and he introduced no evidence to corroborate his oral testimony with regard to the equity requirements of the Home Savings & Loan Association for the assumption of the deeds of trust. Furthermore, there is substantial evidence refuting petitioner's position. Several documents which were filed with the probate court in connection with the administration of the Estate recite that the consideration received by the Estate included the Bronson property valued at $70,000. These documents include the escrow instructions to the Crocker-Citizens National Bank on the Kona Kai1972 Tax Ct. Memo LEXIS 239">249 Apartments property, signed by both the Estate and the purchasers; the "Return of Sale of Real Property and Petition for Order Confirming Sale," signed by the Administratrix of the Estate; and the "Order Confirming Sale of Real Property." In addition, in a document, entitled "Acceptance by Personal Representative of Bid for Purchase of Real Property," signed by petitioner and filed with the probate court, it was recited that the Estate of Long would pay petitioner for his services from the proceeds of the sale in the following manner: The balance of the consideration of Thirty-Five Thousand ($35,000.00) Dollars over and above the Thirty-Five Thousand ($35,000.00) Dollars to be received by the estate in the form of a thirty (30) day note * * is being waived in lieu of commission payable to * * * [petitioner] as commission on the entire transaction, including the sale of the personal property * * . There is also in evidence testimony from the attorney representing the administratrix of the Long Estate to the effect that the Estate was prepared to pay petitioner 39 his commission in cash in lieu of the Bronson property, but that petitioner told him that he did not want cash. 1972 Tax Ct. Memo LEXIS 239">250 3In summary, we are confronted with evidence which is conflicting. Petitioner's position is supported almost exclusively by his oral testimony; respondent's position is supported by written documents and the oral testimony of the attorney for the estate. In light of the clear and unequivocal recitals in the documents and the supporting testimony, we must find that the difference between the fair market1972 Tax Ct. Memo LEXIS 239">251 value of the Bronson property and the price paid by petitioner represents a commission to him and is therefore includable in his income for 1965. The remaining issue involves a determination of the fair market value of the Bronson property at the time petitioner purchased it from the Estate of Long. Petitioner testified that the value recited in the numerous documents relating to the sales transaction as artificially inflated to satisfy the equity requirements of the Home Savings & Loan Association. He introduced no evidence, however, to support this contention. In fact, by his own admission, the property had a value in excess of $35,000 at the time he purchased it. In addition, the evidence showed that petitioner secured a $49,000 loan on the Bronson property shortly after acquiring it. Since the law of California4 does not permit a savings and loan association to make a secured loan on real property in an amount in excess of 70 percent of the appraised value, we conclude that the property had an appraised value of at least $70,000. 1972 Tax Ct. Memo LEXIS 239">252 In light of all the evidence surrounding the value of the Bronson property at the time of the sale, including the value of revenue stamps placed on the deed of transfer, the value of the property shown in all the papers documenting the sale, and the testimony of the witnesses, we are convinced that the fair market value of the Bronson property at the time petitioner purchased it from the Estate was $70,000. The difference of $35,000 between the fair market value and what petitioner paid for the property, consequently, represents his commission for his services as broker in arranging the entire transaction. Decision will be entered for the respondent. Footnotes1. Section 6013(e)(1) provides, in part, that if: (A) a joint return has been made under this section for a taxable year and on such return there was omitted from gross income an amount properly includable therein * * * in excess of 25 percent of the amount of gross income stated in the return. (B) the other spouse establishes that in signing the return he or she did not know of, and had no reason to know of, such omission, and (C) * * * it is inequitable to hold the other spouse liable for the deficiency in tax for such taxable year attributable to such omission, then the other spouse shall be relieved of liability for tax * * * to the extent that such liability is attributable to such omission from gross income.↩2. Sec. 1.61-2(d)(2), Income Tax Regs., provides, in part, that: if property is transferred to an independent contractor, as compensation for services for an amount less than its fair market value, then regardless of whether the transfer is in the form of a sale or exchange, the difference between the amount paid for the property and the amount of its fair market value at the time of the transfer is compensation and shall be included in the gross income of the * * * independent contractor. See also: Glenn E. Edgar, 56 T.C. 717">56 T.C. 717, 56 T.C. 717">746↩ (1971). Petitioner does not challenge the applicability of this principle, assuming a finding is made that the value of the property exceeded the price paid and that this excess value represented a commission to him.3. Paul Mast, attorney for the Estate of Long, testified as follows with respect to a telephone conversation he had with petitioner concerning the sale of the Bronson property to petitioner: I spoke to him on the telephone, and I told him that the estate in lieu of giving him the Bronson property for $35,000. would pay him his commission of $35,000 in cash. Mr. Cochran replied to that that he did not want the $35,000 in cash, because if he received the $35,000 in cash, he would have to pay tax on it. I told Mr. Cochran, that it didn't make any difference whether he received it in cash or in property, that he would still have to pay tax on it. Mr. Cochran then advised me that this was up to him, and I shouldn't concern myself with it, but he would not accept the cash.↩4. West Ann. Cal. Code, Financial, sec. 7152 provides: An association may make amortized loans upon the security of improved real property in an amount not in excess of 70 percent of the appraised value of such property.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625735/	Estate of Robert A. Axelson, Deceased, Isabel K. Axelson and Arthur L. Jones, Executors v. Commissioner. Isabel M. Axelson v. Commissioner.Estate of Robert A. Axelson v. CommissionerDocket Nos. 6140, 6141.United States Tax Court1946 Tax Ct. Memo LEXIS 181; 5 T.C.M. 414; T.C.M. (RIA) 46122; May 27, 19461946 Tax Ct. Memo LEXIS 181">181 James E. Bennett, Esq., and Arthur L. Jones, C.P.A., 1211 Mahoning Bank Bldg., Youngstown 3, Ohio, for the petitioners. Lawrence R. Bloomenthal, Esq., for the respondent. DISNEYMemorandum Findings of Fact and Opinion DISNEY, Judge: These cases duly consolidated for trial, involve income tax of both petitioners for the calendar years 1940 and 1941. Deficiencies were determined as follows: YearPetitionerAmount1940Isabel M. Axelson$ 1,959.041940Estate of Robert A. Axelson2,584.771941Isabel M. Axelson10,151.101941Estate of Robert A. Axelson10,347.55The questions presented are (a) whether the petitioners' minor children were partners with them in the taxable years in the Federal Finance Co.; (b) whether the Commissioner erred in disallowing additions to a reserve for bad debts, in determining distributive income of Federal Finance Co.; and (c) whether the Commissioner erred in disallowing deduction of compensation paid by Federal Finance Co. to the two minor children and Marion E. Trueman, an adult child of the petitioner. A stipulation of facts was filed, which we adopt as a part of our findings of fact, setting forth, 1946 Tax Ct. Memo LEXIS 181">182 with other facts found from evidence adduced only such parts thereof as deemed material to examination of the issues. Findings of Fact Robert A. Axelson, the original petitioner in docket No. 6140, (hereinafter sometimes referred to as a petitioner) died February 18, 1945, and the executors of his estate have been substituted. He resided until his death with his wife, Isabel M. (also known as Isabel K. and I.M.) Axelson, petitioner in docket No. 6141, in Youngstown, Ohio. Their returns for the taxable years were filed with the collector for the 18th district of Ohio. Facts as to Partnership The petitioners had three children, Marion E. Trueman, born July 2, 1915, and an adult at all times here involved, and two minor children, Mildred L. who attained the age of majority on March 15, 1941, and Robert K. Axelson who will attain the age of majority on November 28, 1946. The father and mother were since April 1, 1931, partners in equal shares, in a chattel loan and finance business called Federal Finance Co. After December 30, 1938, Marion E. Trueman was also a partner. The respondent does not question the partnership among the father, mother and daughter Marion. The father, Robert1946 Tax Ct. Memo LEXIS 181">183 A. Axelson, was the partner managing the business at all times until about the time of his death. The parents wished the children to become interested in and learn the business, and later to become a part of it, and the children, during high school and college (military school as to the son) vacations, worked in the Federal Finance Co. office. After graduation from college the two girls began to work full time in the business. Marion E. Trueman stopped work in April 1941. A child was born to her in August 1941. She has helped at times, when help was scarce, since then. On December 30, 1938, each of the parents gave each child $5,000 of their capital interest in the partnership. The gift to Marion E. Trueman was absolute, those to Mildred and Robert K. being in irrevocable trusts, their mother being trustee. Each trust provided, in pertinent part, that the trustee should, during minority of each child, hold and manage the partnership interest given. and pay partnership income to the children. or retain it for accumulation or investment, or use it for the welfare, comfort and education of the child-beneficiary, all in her discretion; that at majority of the child the trust should cease, 1946 Tax Ct. Memo LEXIS 181">184 and the partnership interest and accumulated income be paid to the child; and that in case of death of either or both child-beneficiaries the interest should go in equal shares to the survivor or survivors of the three children. On December 30, 1938, the parents individually, Marion E. Trueman, and the mother as trustee for Mildred and Robert, executed "Articles of Partnership," setting forth, so far as here material, that the parents had been in the chattel loan and finance business as Federal Finance Co., that Marion E. Trueman, and Isabel M. Axelson as trustee for Mildred L. and Robert K. have acquired partnership interests by gift; that all are desirous of continuing business under new articles; that the business shall be in charge of Robert A. Axelson as before, he to have full and complete authority to manage and carry it on; that at the end of each year a full accounting shall be made and the interest of each shown and net profits credited to each; that the net profits will be apportioned among the parties in proportion to capital interest, and losses borne in the same proportions; and that each partner shall each year be entitled to draw from profit from the business such1946 Tax Ct. Memo LEXIS 181">185 sums as determined by Robert A. Axelson, considering the needs of the business and its sound operation and expansion; and that death of any party shall not dissolve the partnership, but it shall be carried on by the survivors. Certificate of partnership was filed with the Clerk of the Common Pleas Court of Mahoning County, Ohio, showing all the above named as partners, the mother as trustee for the minors. On January 2, 1939, the father and mother each gave each child $4,000 additional capital interest, absolute to Marion E. Trueman, and to the mother in trust for the two minors, as on December 30, 1938. Again on January 2, 1940, $8,000 was credited to each child's partnership account on the journal of Federal Finance Co., and on January 29, 1940, $29.09 was added to the partnership account of each of Robert K. and Mildred, and $188.42 to that of Marion E. Trueman. On January 2, 1941, $8,000 and on June 27, 1941, $4,763.08 was credited to each minor's partnership account on the journal of Federal Finance Co. Entries were made on the journal for December 1938, and for January 1939, to record the gifts to the children on those dates as above described, they being referred to therein1946 Tax Ct. Memo LEXIS 181">186 as irrevocable gifts of partnership interest, under the partnership agreement. Profits of the business were added to the capital accounts of each of Mildred and Robert on the partnership books, as follows: $2,570.91, $3,636.92, $6,156.94 - total $12,364.77. The following entries on the books of Federal Finance Co. relate to the distribution of profits for 1939, 1940, and 1941: Journal - December, 1939 - Pages 109-110 DebitsCreditsGen. LedgerGen. Ledger$38,200.78Profit and Loss Year 1939Partnership - R. A. Axelson$15,123.69Partnership - I. M. Axelson15,123.69Partnership - Marion E. Trueman2,811.58Partnership - Mildred L. Axelson2,570.91Partnership - Robert K. Axelson2,570.91(To Transfer Profit and Loss a/c to Partnership accounts)Profit distributed on basis of averageInvestment as shown on next pageJournal - December, 1940 - Page 154 DebitsCreditsGen. LedgerGen. LedgerProfit and Loss - Year 1940.Profit of $40,749.78 transferred to Partnership as follows: R. A. Axelson $14,523.22I. M. Axelson 14,523.22Marion E. Trueman 4,429.50Robert K. Axelson 3,636.92Mildred L. Axelson 3,636.921946 Tax Ct. Memo LEXIS 181">187 Journal - December, 1941 - Page 120 Profit and Loss (Year 1941)Profit $56,074.16 transferred to PartnershipPartnership - R. A. Axelson$17,887.66Partnership - I. M. Axelson19,283.90Partnership - Marion E. Trueman6,588.72Partnership - Mildred L. Axelson6,156.94Partnership - Robert K. Axelson6,156.94For the years 1940 and 1941, the books of Federal Finance Co. indicate no withdrawals of capital or profit by any of the purported partners of the firm except certain withdrawals made by Robert A. Axelson. The respective capital interest of the alleged partners is stated on the books of Federal Finance Co. as follows: 12-31-40Capital12-31-41Capital AccountsDistributiveAccountsDistributiveDec. 31,Dec. 31,SharesDec. 31,Shares'39'40'41Robert A. Axelson$109,123.69$128,723.2235.640%$138,887.6631.90%Isable M. Axelson109,123.69128,723.2235.640%154,283.9034.39%Marion E. Trueman25,811.5840,429.5010.870%58,588.7211.75%Mildred L. Axelson20,570.9132,236.928,925%51,156.9410.98%Robert K. Axelson20,570.9132,236.928.925%51,156.9410.98%TOTAL NET WORTH$285,200.78$362,349.78100.000%$454,074.16100.00,1946 Tax Ct. Memo LEXIS 181">188 The net profits of the Federal Finance Co. as shown by its books for the years 1934 to 1939, inclusive, are as follows: Year 1934$16,119.72Year 193524,589.46Year 193627,275.13Year 193733,062.50Year 193842,849.25Year 193938,200.78In December 1938, Robert K. was about 14 years of age, and Mildred L. 18 years of age. Both were then in school. Mildred attended college during 1940-1941, and he attended school. They worked in the Federal Finance Co. office during vacations. They had more privileges than other help and could leave when they wished. The Commissioner in the deficiency notice determined that Robert K. and Mildred "were not partners in the Federal Finance Company * * * by reason of purported gifts to them in trust or otherwise and that the income of the trusts created by you for their benefit is taxable" to the petitioners. Facts as to Addition to Reserve Federal Finance Co. reported net income of $44,949.78, and additions to bad debt reserve of $11,588.90 for 1940 and for 1941 reported net income of $63,774.16 and additions to bad debt reserve of $22,750.10. The Commissioner in the deficiency notice increased net income as1946 Tax Ct. Memo LEXIS 181">189 reported for 1940 by disallowing deduction of $5,222.98 as reserve for bad debts less bad debts recovered, $1,591.69, net adjustment $3,621.29 and for 1941 by disallowing deduction of $15,357.23 as reserve for bad debts, less $1,682.10 bad debts recovered. The reserve for bad debts for 1940, as determined by the company and by respondent, is as follows: FederalFinanceRespond-CompanyentBalance of Reserve1/1/40$ 5,385.40$ 5,385.40Miscellaneous credits574.80Additions in 194011,588.906,365.92Recoveries on Bad Debtsin 19401,591.69Total$17,549.10$13,343.01Charges to Reserve in19406,406.906,406.90Balance of Reserve12/31/40$11,142.20$ 6,936.11Reserve for bad debts at December 31, 1940, of $11,142.20, as used by Federal Finance Co. is 1.52 per cent of outstanding receivables aggregating $731,356.06 and the reserve of $6,936.11 as used by respondent is 1 per cent of receivables aggregating $693,611.35 as at December 31, 1940. The outstanding receivables of Federal Finance Co. as at December 31, 1940, are as follows: Dealers Retail Loans$520,994.20Loans Receivable172,617.15$693,611.35Floor Plan Loans (not includedby respondent37,744.71TOTAL$731,356.061946 Tax Ct. Memo LEXIS 181">190 Federal Finance Co. has treated 1940 recoveries on bad debts as an addition to taxable net income and respondent treats such recoveries as an addition to reserve for bad debts. The reserve for bad debts for 1941, as determined by the company, and by the respondent, is as follows: FederalFinanceRespond-CompanyentBalance of Reserve 1/1/41$11,142.20$ 6,936.11Miscellaneous Credits483.93Additions in 194122,750.107,392.87Recoveries in 19411,682.10Total$34,376.23$16,011.08Charges to Reservein 19416,607.346,607.34Balance of Reserve12/31/41$27,768.89$ 9,403.74Reserve for bad debts at December 31, 1941, of $27,768.89 as used by Federal Finance Co. is 2.67 per cent of outstanding receivables aggregating $1,036,162.76 and the reserve of $9,403.74 as used by respondent is 1 per cent of receivables aggregating $940,374.07 as at December 31, 1941. The outstanding receivables of Federal Finance Co. as at December 31, 1941, are as follows: Dealers Retail Loans$ 765,580.71Loans Receivable174,793.36$ 940,374.07Floor Plan Loans (not includedby Respondent)95,788.69TOTAL$1,036,162.761946 Tax Ct. Memo LEXIS 181">191 Federal Finance Co. has treated 1941 recoveries on bad debts as addition to taxable net income and respondent treats such recoveries as addition to reserve for bad debts. The condition of the bad debts charged off, additions to reserve, outstanding receivables, and new business written by the company, is shown in the following table: RESERVE FOR DOUBTFUL ACCOUNTS Bad DebtsAdditionsYearCharged OffTo Reserve1942$16,782.21$13,592.0119436,475.8410,714.8519449,145.888,721.18OUTSTANDING RECEIVABLES LoansNotesDateReceivableReceivableTotalsDec. 31, 1942$175,308.72$293,217.53$468,526.25Dec. 31, 1943186,093.29147,678.89333,772.18Dec. 31, 1944189,494.36142,069.59331,563.95NEW BUSINESS WRITTEN LoansNotesYearReceivableReceivableTotals1940$345,722.19$ 746,627.07$1,092,349.261941274,407.051,158,964.431,433,371.481942301,394.14364,252.98665,647.121943379,502.90272,155.65651,658.551944420,459.01231,979.98652,438.99The above figures do not include Floor Plan Loans. Federal Finance Company's average loss through1946 Tax Ct. Memo LEXIS 181">192 bad debts was 0.9185 per cent of new business written based on the three calendar years 1940, 1941, and 1942, and was 0.9752 per cent of new business written based on the five calendar years, 1940-1944, inclusive. The Federal Finance Co. made three classes of loans, classified as follows: (a) Loans receivable, consisting of small loans made to individuals subject to rules and regulations of the State of Ohio; (b) notes receivable, being notes purchased principally from automobile dealers and based upon automobile sales and the agreements to pay; (c) floor plan loans, being wholesale loans to automobile dealers for purchase of cars from factories, and secured by pledge of automobile. Federal Finance Co. has had no losses from floor plan loans. "Loans receivable" outstanding on January 31, 1940, were $61,990.51, consisting of 540 loans, an average of $114.79; on January 31, 1941, they averaged $162.23; on November 30, 1941, they averaged $169.07. "Notes receivable" on January 31, 1940, were $453,449.49, consisting of 1,758 loans, an average of $257.93; on January 31, 1941, the average was $343.14, and on November 30, 1941, it was $314.76. The losses of Federal Finance Co. through1946 Tax Ct. Memo LEXIS 181">193 bad debts were 0.9185 per cent of new business written based on the years 1940, 1941, and 1942, and was 0.9752 per cent of new business written, based on 1940-1944, inclusive. The average life of notes receivable purchased in 1940 was about 14 1/3 months; and the average life of "loans receivable" purchased in the same year was about 12 months. The average life as to new business in 1941 was: "notes receivable," about 14 months; "loans receivable," 13 1/2 months. Federal Finance Company's experience ratio of bad debts charged off to aggregate liquidation of loans for the years 1940 to 1942, inclusive, is an average of 0.91853 per cent; for 1940-1944, inclusive, the average ratio of bad debts charged off to liquidation of loans is 0.9952 per cent. Facts as to Salary Deductions The distributions of net income for 1940 as determined by the company and the respondent, showing salaries paid, are as follows: FEDERAL FINANCE COMPANY - DETERMINATIONRemaining Net IncomeSalaryAmountsPer CentTotalR. A. Axelson$ $14,523.2235.6409%$14,523.22I. M. Axelson14,523.2235.6409%14,523.22Marion E. Trueman4,200.004,429.5010.8670%8,629.50Mildred L. Axelson3,636.928.9256%3,636.92Robert K. Axelson3,636.928,9256%3,636.92TOTALS$4,200.00$40,749.78100.0000%$44,949.781946 Tax Ct. Memo LEXIS 181">194 RESPONDENT'S DETERMINATIONRemaining Net IncomeSalaryAmountsPer CentTotalR. A. Axelson$ $22,118.9145.5299%$22,118.91I. M. Axelson22,118.9145.5299%22,118.91Marion E. Trueman4,343.258.9402%4,343.25Mildred L. AxelsonRobert K. AxelsonTOTALS$ $48,581.07100.0000%$48,58107Federal Finance Co. allowed Marion E. Trueman, a partner, salary in the amount of $4,200.00 for the year 1940 and treated such amount as a deduction from distributable net income, but respondent disallows any salary or compensation to partners as a deduction from distributable net income of Federal Finance Co. for the year 1940. For 1941 the determination of each, as to distribution of net income, is as follows: FEDERAL FINANCE COMPANYSalaryInsuranceF.F.C.Per CentF.F. CO.IncomeTotalR. A. Axelson$ 31.90%$17,887.66$ 5,614.00$23,501.66I. M. Axelson34.39%19,283.906,258.2025,542.10Marion E. Trueman5,000.0011.75%6,588.722,413.0014,001.72Mildred L. Axelson1,650.0010.98%6,156.942,087.909,894.84Robert K. Axelson1,050.0010.98%6,156.942,087.909,294.84$7,700.00100.00%$56,074.16$18,461.00$82,235.161946 Tax Ct. Memo LEXIS 181">195 RESPONDENTPer CentAmountR. A. Axelson43.9450%$41,884.02I. M. Axelson46.5972%44,411.83Marion E. Trueman9.4578%9,014.24Mildred L. AxelsonRobert K. Axelson100.0000%$95,310.09Federal Finance Co. allowed Marion E. Trueman, Mildred L. Axelson, and Robert K. Axelson aggregate amounts of $7,700.00 as salary for the year 1941, and treated such amounts as a deduction from distributable net income, but respondent disallows any salary or compensation to Marion E. Trueman for the year 1941 and allows salary of $375.00 to Mildred L. Axelson and $225.00 to Robert K. Axelson. Opinion 1. We first examine the question whether the children, Robert K., a minor throughout both taxable years 1940 and 1941, and Mildred, a minor until March 15, 1941, should be considered partners with their parents and their older sister Marion. A great many cases have been cited by both parties, but only the petitioners' reply brief was filed after the recent decisions of the Supreme Court in Commissioner v. Tower, 327 U.S. 280">327 U.S. 280 (Feb. 25, 1946), and Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293, decided the same date. We regard it unnecessary1946 Tax Ct. Memo LEXIS 181">196 to discuss the various cases cited. We have here a father and mother, with an established business, making gifts of partnership interests therein to minors. The minors, during vacations from school and college, contributed some services, for which they received compensation. They contributed no capital, except the subject matter of the gifts. In short, they contributed no capital originating with them, contributed services of only minor character, and nothing to the management or control of the business - for the partnership agreement specifically provides not only that the father shall "manage and carry on said business and do all things necessary and incidental to the operation thereof," but also that the partners could draw only such profits as he "shall determine, considering the needs of said business and its sound operation and expansion." Yet, in the Tower case we find the Court stating as to a wife-partner: * * * If she either invests capital originating with her, or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things she may be a partner as contemplated by 26 U.S.C. §§ 181,1946 Tax Ct. Memo LEXIS 181">197 182. The Tax Court has recognized that under such circumstances the income belongs to the wife. A wife may become a general or a limited partner with her husband. But when she does not share in the management and control of the business, contributes no vital additional service, and where the husband purports in some way to have given her a partnership interest, the Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal revenue laws. [Italics supplied.] When we further consider here the fact that the children never received distribution of the partnesrhip income ascribed to them on the books, that is, that there was no actual withdrawal by them, the fact that the minors appear to have done no more, in the way of work in the partnership, than parents might reasonably require of them, even if there was no partnership, the rather obvious intent to divide income involved in payments to the children of salaries of $1,650 to Mildred L. and $1,050 to Robert K., though it is herein stipulated that the reasonable value of their services was $375 to Mildred and $225 to Robert, for 1941 (and mothing1946 Tax Ct. Memo LEXIS 181">198 in 1940), the fact that Marion was allowed $4,200 in 1940 and $5,000 in 1941, as against a stipulation that $110 a month was a reasonable salary, and she worked only about three months in 1941, and the fact that neither father nor mother drew salaries, it becomes apparent, we think, that we may not reasonably sustain the position of the petitioners in this regard. That the parents wished the children to be trained for the future of the business is urged, and is not without some weight - though shortly before Marion E. Trueman, the older daughter, became a mother, she ceased to work in the business, and has since worked therein only when they were shorthanded. Yet, in our opinion, this does not, compared with the other facts presented, establish that reality of partnership which is necesary, when a family relation is to be closely scrutinized, as has often been said, nor convince that division of family income was not the primary object. That Marion, the older daughter, had been recognized by the Commissioner as a partner, we consider of no material importance or assistance in this case. In the light of the Tower and Lusthaus cases, we think the entire aspect of the arrangement is1946 Tax Ct. Memo LEXIS 181">199 that no material change, except in the division of the family income (not even divided except upon the books) was effected by the "partnership" and trust; and we conclude and hold that the Commissioner did not err in disregarding the two minors as "partners" in taxation of the income. 2. It follows from our conclusion above that moneys paid to the two children for services may not be denied because of their being partners, and since the parties have agreed that $225 in 1941, and nothing in 1940, for Robert, and $375 in 1941, and nothing in 1940, for Mildred, are reasonable amounts of compensation, those amounts are approved as deductions for expense in 1941. As to Marion, the stipulation as to reasonableness was subject to the question as to whether such a partner can be allowed a salary. There is no proof of any agreement or article of partnership providing for payment of salaries to partners. In general, they are required to contribute reasonable services without compensation, and may therefore, in the absence of agreement for compensation, not receive for such services. 47 C.J. 786. Ohio cases are cited for the text. Though it is also true, as argued by the petitioners, citing1946 Tax Ct. Memo LEXIS 181">200 47 C.J. 787, that agreement need not be express, we find nothing in the record here to justify a deduction of a salary to Marion E. Trueman. The family relationship, the large amounts allowed against much smaller earnings, indicate unreality in the arrangement, and lack of agreement, express or implied, is not overcome. No error is found in disallowance of the salary to Marion E. Trueman. 3. This leaves for consideration the question of the proper amount of deduction for reserve for bad debt. Though originally claiming $11,588.90 for 1940 and $22,750.10 for 1941, as against the Commissioner's allowance of $6,365.92 and $7,392.87, respectively, the petitioners now ask for $10,923.49 for 1940 and $14,333.71 for 1941. These figures are 1 per cent of gross new business in loans receivable and notes receivable. The Commissioner's figures are 1 per cent of outstanding notes receivable and loans receivable. The question is one of fact. We have considered the experience of the petitioners not only in the taxable years, but the later years including 1944, for indications as to what is a fair allowance for reserve. Regulations 103, section 19.23(k)-5. The determination has been made that1946 Tax Ct. Memo LEXIS 181">201 1 per cent of outstanding loans receivable and notes receivable is a fair reserve, and it is incumbent upon the petitioners to prove otherwise. Imperial Type Metal Co. v. Commissioner, 106 Fed. (2d) 302. In our opinion such showing has not been made. The question being one of fact and the facts being set forth above (though petitioners requested findings of only a small portion thereof), we need not repeat them in detail here. Suffice it to say that the petitioners' idea of a fair reserve being based on gross new business in loans receivable and notes receivable, instead of on the amount of such notes receivable and loans receivable outstanding at the end of the year, does not convince us that the former method produces a fairer result in a reserve than does the latter. We have extended our examination even to 1944 to determine this question. Among other data and factors considered are: The petitioners' average loss of Federal Finance Co. through bad debts was 0.9185 per cent of new business written based on 1940-1942, and based on 1940-1944, inclusive, was 0.9752 per cent of new business written. The ratio of bad debts charged off to aggregate liquidation of loans, on1946 Tax Ct. Memo LEXIS 181">202 petitioners' own computation, is an average of 0.91853 per cent, for 1940-1942, inclusive, and for 1940-1944, inclusive, is 0.9952 per cent. Considering all of the facts submitted, we conclude, and hold, that error has not been shown in the Commissioner's determination that one per cent of loans receivable and notes receivable is a fair addition to reserve for the taxable years. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625736/	HUG & SARACHEK ART CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hug & Sarachek Art Co. v. CommissionerDocket No. 12752.United States Board of Tax Appeals14 B.T.A. 990; 1929 BTA LEXIS 3006; January 4, 1929, Promulgated 1929 BTA LEXIS 3006">3006 Having priced its inventory as of December 31, 1920 at cost, the petitioner, in order to reduce the value of shop worn, obsolete, and damaged pictures, frames and mirrors, deducted from the total a percentage thereof. Held, for failure to adduce sufficient evidence to overcome the prima facie correctness of the respondent's determination his findings are approved. Mastine E. Geschwind, C.P.A., for the petitioner. C. H. Curl, Esq., for the respondent. MORRIS14 B.T.A. 990">990 This proceeding is for the redetermination of a deficiency in income and profits taxes of $853.97 for the calendar year 1920. While two issues were raised by the pleadings, one was expressly waived by counsel for the petitioner at the hearing of this proceeding, leaving for our consideration the sole question of whether the respondent erred in his rejection of the December 31, 1920, inventory as returned by the petitioner, resulting in an increase in said inventory, and a consequent increase in net income as reported for that year. FINDINGS OF FACT. The petitioner, a corporation, organized and incorporated under the laws of the State of Missouri in 1917, succeeded to the1929 BTA LEXIS 3006">3007 business of the Finley Art Co., which was organized in or about 1914. It is engaged in buying and selling at retail, various objects of art, consisting principally of prints, sheet pictures in oils and water colors, art etchings and engravings, mirrors, mouldings and mirror and picture frames. The petitioner's inventory at December 31, 1920, aggregating $23,817.97 in amount, included framed pictures, mirrors and mirror frames, miscellaneous frames, sheet pictures, mezzotints, water colors, color etchings, black and white etchings, oil paintings, and mouldings, all of which were priced at cost. Included in that inventory were of great number of pictures, prints, mirrors, picture and mirror frames which had been rendered obsolete by changed conditions and demands for works of art or had become damaged due to shop wear. The petitioner's officers surveyed the various obsolete and damaged articles, and after having sought the advice of its accountants, who were charged with the duty of preparing its income and excess-profits-tax return for 1920, and having been 14 B.T.A. 990">991 granted permission by the respondent to reprice its inventory to reflect cost or market, whichever was lower, 1929 BTA LEXIS 3006">3008 the total value of the inventory as determined in the first instance, to wit, $23,817.97, was reduced by 10 per cent, or $2,381.79, making the inventory, as reported for that year, $21,436.18. The amount by which the petitioner reduced its inventory was restored to income for 1920 by the respondent. Those damaged or obsolete items, which had been in stock for a number of years, were on hand in 1919 and in substantially the same condition at that time as they were in when the inventory in controversy was computed. It has been the custom of the petitioner to conduct regular sales of its stock in each year, at which time the normal reduction in selling price is 25 per cent off, while on damaged and obsolete goods the reduction is usually 33 1/3 per cent off. The various damaged and obsolete items were repriced and shortly after December 31, 1920, placed on sale at reductions of 33 1/3 to 50 per cent off, and, although a diligent effort was made to dispose of them at those prices, some of them are still on hand. OPINION. MORRIS: The petitioner's counsel, on direct examination, developed to our satisfaction the cost of the various obsolete and damaged articles included in1929 BTA LEXIS 3006">3009 the petitioner's inventory at December 31, 1920, and also that these articles had not been sold because of their damaged condition or obsoleteness. We are not satisfied, however, that the market value, which purports to be lower than cost, has been properly evidenced. We are told that these items were repriced at figures ranging from 33 1/3 to 50 per cent off, and that a diligent effort was made to sell them at a sale which took place shortly after December 31, 1920. We learn on cross-examination that the sale which took place after December 31, 1920, was not merely for the purpose of disposing of the damaged or obsolete stock, but was a general sale which was held every year. Of course, the witness testified that the reduction at that sale in 1921 on saleable articles was only 25 per cent instead of 33 1/3 to 50 per cent, but these factors do not, without more, establish the true market values so that we may find as a fact just exactly what those values were. As to such items in the inventory as the petitioner alleges were unsaleable due to their damaged or obsolete condition, the evidence is that this condition existed prior to the taxable year. These items had been in stock1929 BTA LEXIS 3006">3010 for a number of years, were on hand in 1919, and as the witness, Hug, himself, testified "were in the same condition in 1919 as they were at the end of 1920." This being the case, any 14 B.T.A. 990">992 loss in respect thereto was sustained in a prior taxable year, when the items became unsaleable and should have been accounted for by the exclusion of these items from the inventory of such year. Under the facts of the case we are of the opinion that the petitioner has not adduced sufficient evidence to overcome the prima facie correctness of the respondent's determination. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625738/	ALEXANDER M. BING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Bing v. CommissionerDocket No. 59590.United States Board of Tax Appeals30 B.T.A. 429; 1934 BTA LEXIS 1327; April 19, 1934, Promulgated 1934 BTA LEXIS 1327">1327 The amount paid by this petitioner in connection with a transaction in which a corporation procured the loan of money and in which he became the owner of one half of its capital stock is not deductible as an ordinary and necessary business expense, but such payment is in the nature of additional cost of the capital stock so acquired, and, furthermore, there is a failure to show that the expenditure, if an "expense" at all, was one connected with the petitioner's individual "trade or business." Lewis M. Isaacs, Esq., for the petitioner. Ralph E. Smith, Esq., for the respondent. MORRIS30 B.T.A. 429">430 OPINION. MORRIS: This proceeding is for the redetermination of a deficiency in income tax of $7,624.80 for the calendar year 1929, presenting for consideration the respondent's allegedly erroneous disallowance of a claimed deduction of $35,000, representing an amount paid by this petitioner in connection with the organization and financing of the A. M. Bing & Son Realty Corporation, as an ordinary and necessary business expense. The petitioner, appearing here individually, is a resident of New York City. In or about the month of December 1928, the1934 BTA LEXIS 1327">1328 Leonard S. Gans Co., engaged in the real estate brokerage business in the city of New York, duly licensed to conduct such business in the State of New York, through Leonard S. Gans of that company, brought the petitioner into contract with the Goldman Sachs Trading Co., for the purpose of negotiating a deal whereby funds of the Trading Co. should be employed in real estate operations. Following upon such introduction, the petitioner negotiated an agreement with the Goldman Sachs Trading Co. providing for the formation of a corporation to enter into certain real estate operations. The Leonard S. Gans Co. participated in the preliminary conversations and negotiations. The agreement between the petitioner and the Trading Co. was consummated on or about February 4, 1929, and a corporation known as the A. M. Bing & Son Realty Corporation was organized with a paid-in capital of $10,000, against which 1,000 shares of no par value stock were issued, 500 thereof being subscribed for by the petitioner, and 500 by the Trading Co., each paying $5,000 therefor. The Trading Co. advanced to the Corporation $5,000,000, and the corporation executed a series of notes for the face amount thereof, 1934 BTA LEXIS 1327">1329 repayable with interest over a period ranging from five to ten years from the date of advance. Simultaneously the petitioner agreed to devote time and attention to the operations of the company, and individually guaranteed the Trading Co. against any loss on the notes up to an aggregate of 25 percent of the face thereof. After the consummation of the agreement, the petitioner paid to the Leonard S. Gans Co. the sum of $35,000 (one payment of $15,000 being made on February 19, 1929, and the balance of $20,000 being paid on March 26, 1929), in full satisfaction for the services rendered in the above described transaction. The payment to the Leonard S. Gans Co. by the petitioner was not shared in by the Trading Co., nor charged against the A. M. Bing & Son Realty Corporation. This payment was made by the petitioner, and neither directly nor indirectly was he reimbursed by 30 B.T.A. 429">431 the A. M. Bing & Son Realty Corporation, the Trading Co., or anyone else, for such payment. At the time of the negotiations with the Goldman Sachs Trading Co., the petitioner was, and had been for upwards of 25 years, actively and extensively engaged in the real estate business in the city of New1934 BTA LEXIS 1327">1330 York. He paid the commission personally, charging the item in his books as an expense in the ordinary course of his business, and not as part of the cost of the stock of A. M. Bing & Son Realty Corporation. The petitioner accepted the services of the Leonard S. Gans Co. with the understanding that they were to be paid for if successful; but there was no agreement between the petitioner and Leonard S. Gans prior to the consummation of his agreement with the Trading Co. as to the compensation to be received by the Leonard S. Gans Co. should the transaction be closed. The amount paid to the Leonard S. Gans Co. was fixed by the petitioner with Leonard S. Gans after the consummation of the agreement with the Goldman Sachs Trading Co. The certificate of incorporation of the A. M. Bing & Son Realty Corporation was filed on February 5, 1929. The organization meeting of the corporation was held on February 8, 1929. The stock was issued and paid for on February 11, 1929. The first advance on account of the $5,000,000 by the Trading Co. to the A. M. Bing & Son Realty Corporation was made on February 19, and amounted to $500,000. The aggregate payments by the Trading Co., making up1934 BTA LEXIS 1327">1331 the total of $5,000,000, were made from time to time during the year, the last payment, completing the aggregate of $5,000,000, being $335,000, paid on February 27, 1930. The petitioner filed an individual income tax return for the calendar year 1929, and in that return he deducted $35,000 as "commissions." This deduction the respondent disallowed for the reason, as stated in his deficiency notice, that it was "a capital expenditure to be added to cost of stock of the C. M. [A. M.] Bing and Son [Realty] Corporation and recovered upon final liquidation of the corporation." In addition to the foregoing facts taken from stipulations entered into between the parties and other documentary evidence, the petitioner offered oral testimony, practically all of which duplicates matters already stipulated. One fact stipulated between the parties - the fact that the petitioner had, for a great many years, been actively and extensively engaged in the real estate business - should be supplemented by facts developed from such oral testimony showing that although he was so engaged it was through the medium of corporate enterprises and not in any individual or proprietary capacity. For instance, 1934 BTA LEXIS 1327">1332 it is shown that his business embraced 30 B.T.A. 429">432 the purchase and sale of real estate, the construction of buildings, the management of realty properties, etc., and that a separate corporation was organized for each of these separate enterprises and, furthermore, that whenever it became necessary to employ outside capital this was accomplished through some profit or loss sharing arrangement and that separate corporations were formed for participation in each of such transactions. The petitioner testified that he was not engaged in the business of a promoter - nor was he engaged in the business of forming new corporations except where such became necessary in order to carry out the purposes of his other corporate interests. Our sole question is whether or not the $35,000 payment by the petitioner to Gans, under the circumstances hereinbefore related, constituted an "ordinary and necessary" expense "paid or incurred during the taxable year in carrying on any trade or business" within the purview of section 23 of the Revenue Act of 1928. Two factors stand out boldly in this proceeding in opposition to the petitioner's cause. We know nothing of the private considerations that1934 BTA LEXIS 1327">1333 passed between the petitioner and Gans respecting the bringing together of the two factions, one seeking to borrow and the other seeking to lend; consequently we do not know why the petitioner, rather than the corporation, assumed the payment of this so-called commission. After all the corporation was the first to directly benefit by reason of the loan and, normally, would have been expected to bear any expenses necessitated thereby. Since, however, the petitioner, a stockholder of the corporation, bore the payment himself, such payment cannot be logically associated with the procurement of the loan itself, the loan having been made to the corporation, not to him, but must be classified consistently with the interests of the petitioner in the matter entirely apart from the corporate entity. Hence, it is reasonable to conclude from the circumstances, in view of the fact that the arrangements for the loan, the organization of the corporation, and the issuance of the capital stock were all bound up in a single plan, that the payment of the $35,000 was in furtherance of his ultimate plan to become a stockholder of the corporation and, therefore, that such payment was a part of the cost1934 BTA LEXIS 1327">1334 of so doing. It is also reasonable to assume that in making this large payment personally, without direct reimbursement from the corporation, he was confident that by becoming a stockholder the amount would be returned to him in dividends or through enhancement in the value of his stock. In other words we feel, as the respondent did, that the $35,000 payment was in no sense an expense, but was a part of the cost of his capital stock, for if such payment had not been made the chances are that the corporation 30 B.T.A. 429">433 would never have come into being and he would never have become a stockholder therein. The other factor to which we have referred is that, while the petitioner was engaged in the real estate business, the record shows not a single instance where he, on his own account, ever consummated or attempted to consummate a realty transaction. On the contrary the record shows that such realty transactions as were carried out were through the medium of corporate enterprises of which he no doubt was an officer and stockholder. But this cannot be said to be his, but the corporation's trade or business. 1934 BTA LEXIS 1327">*1335 . So that, even if we were to classify this item as an expense rather than as a capital expenditure, we would be unable, on the record before us, to hold that it was incurred in a "trade or business" in which the petitioner was individually engaged. For the above and foregoing reasons we are of the opinion that the respondent's determination should be approved. Judgment will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625739/	Louise Strother Sims v. Commissioner.Sims v. CommissionerDocket Nos. 111451, 1338.United States Tax Court1944 Tax Ct. Memo LEXIS 228; 3 T.C.M. 508; T.C.M. (RIA) 44182; May 30, 19441944 Tax Ct. Memo LEXIS 228">228 Homer L. Bruce, Esq., for the petitioner. Frank B. Appleman, Esq., for the respondent. TURNER Memorandum Opinion TURNER, Judge: The respondent determined the following deficiencies in income tax against the petitioner: Docket No.YearDeficiency13381937$15,085.6411145119387,569.49133819396,171.94133819409,232.67The principal issue raised by the pleadings is whether dividends and interest received by petitioner from a trust of which she was the beneficiary were her separate income or were the community income of herself and her husband. [The Facts] All the facts have been stipulated and are found as stipulated. The petitioner filed her income tax returns for the years involved in this proceeding with the Collector at Dallas, Texas. At all times during those years, and continuously since, the petitioner and her husband, Hoytt De Sha Sims, have been residents and citizens of, and domiciled in, the State of Texas. Prior to 1937 the petitioner was domiciled in Oklahoma, and her husband was domiciled in a non-community property state. The petitioner is the daughter of Oscar D. Strother, who died testate, and a citizen and resident of Oklahoma, 1944 Tax Ct. Memo LEXIS 228">229 on March 17, 1926. Under his will, which was probated in Oklahoma, Strother left one-half of his residuary estate to J. C. Greer, a citizen of Virginia and a resident of Martinsville in that state, in trust for the petitioner. Greer was directed to use the income from the trust and so much of the principal as he might deem proper for the use and benefit of the petitioner, and to pay to her one-half of the existing principal when she reached 30 years of age, and the remainder when she became 35 years of age. In event of petitioner's death prior to the termination of the trust, the remaining trust property was to go to others. In pursuance of the will, the executor thereof delivered a valuable estate to Greer, as trustee. Throughout the years here involved, Greer administered the trust property in Virginia, except certain real estate located in Oklahoma and Louisiana. All distributions of income by Greer were made by checks drawn on a bank in Virginia, and were deposited by petitioner in her account in banks in Texas. During the taxable years involved herein, the trust distributed to the petitioner certain dividends received on corporate stocks owned by it as well as certain interest1944 Tax Ct. Memo LEXIS 228">230 received on notes, corporate bonds and government obligations which it also owned. In their separate income tax returns, the petitioner and her husband treated said items as community income and reported one-half of the amounts thereof in their respective returns. The respondent determined that such income was the separate income of the petitioner and that the entire amount thereof was taxable to her. The petitioner contends that under the laws of Texas said dividends and interest were community income and were properly reported as such by her and her husband. In support of her position she relies on our decision in Gladys C. Porter, 2 T.C. 1244">2 T.C. 1244. That case involved dividends and interest distributed by trusts created and administered in New York State and received by a wife, who, with her husband, was domiciled in Texas. We there held that such income was community income under Texas law and that on her separate return the wife was taxable on only one-half. The respondent concedes that the decision in the Porter case is contrary to his position here. The petitioner is accordingly sustained. The remaining issues are disposed of by stipulation1944 Tax Ct. Memo LEXIS 228">231 of the parties. Decisions will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625740/	William B. Steinhardt v. Commissioner. Milton Steinhardt, Annette Steinhardt v. Commissioner. Milton Steinhardt v. Commissioner. William B. Steinhardt, Ada K. Steinhardt v. Commissioner.Steinhardt v. CommissionerDocket Nos. 16043, 16044, 16045, 16046.United States Tax Court1948 Tax Ct. Memo LEXIS 68; 7 T.C.M. 752; T.C.M. (RIA) 48209; October 18, 19481948 Tax Ct. Memo LEXIS 68">68 Jay O. Kramer, Esq., 19 Rector St., New York, N. Y., and Maurice Lebauer, Esq., for the petitioners. W. A. Schmitt, Esq., for the respondent. DISNEYMemorandum Findings of Fact and Opinion DISNEY, Judge: These cases were consolidated for hearing and involve the following deficiencies in income taxes: DocketDocketDocketDocketNo. 16043No. 16044No. 16045No. 160461943$7,231.85$8,416.691944$ 1,644.32$ 1,134.62194522,686.1213,191.81The issue as to 1943 is whether a certain debt became worthless in the taxable year, and if so, the amount of the deduction. The issue for 1944 and 1945 is whether respondent erred in denying deductions for net operating loss carry-overs in 1943, arising from deductions taken in that year for worthlessness of the debt. The facts set forth in a stipulation are found as stipulated. Portions thereof necessary for consideration of the issues will be incorporated with facts found from other evidence, in our Findings of Fact Petitioners Milton Steinhardt and Annette Steinhardt, and William B. Steinhardt and Ada K. Steinhardt are, respectively, husband and wife, and filed joint1948 Tax Ct. Memo LEXIS 68">69 returns for 1943 with the collector for the second district of New York. Petitioners William B. Steinhardt and Milton S. Steinhardt, hereinafter sometimes referred to collectively as the Steinhardts, likewise filed their returns for 1944 and 1945 with that collector. During the years 1929 to 1938 petitioner William B. Steinhardt and petitioner Milton Steinhardt, his brother, were partners engaged in a general brokerage and commission business and as specialists on the New York Curb Exchange under the name of Steinhardt & Co. At all times since 1922 they have been members of the Curb Exchange. The activities of the partnership consisted of (a) buying and selling stock for outsiders for commissions, known as a commission business; (b) acting under clearance accounts on a fee basis, as brokers for other brokers who receive orders from other brokers; (c) executing on the floor of the Exchange for other brokers for part of their commission, orders for stocks in which the firm specialized; and (d), as required by rules of the Exchange for the creation of markets, trading as specialists in stocks in which the firm specialized. Benjamin K. Kallen, a brother-in-law of William B. Steinhardt, 1948 Tax Ct. Memo LEXIS 68">70 was a member of the Curb Exchange from about 1922 to 1929 on the seat of another member, but did not clear any stock through the partnership. In 1929 the partnership agreed to finance, by supplying cash and endorsing notes, the purchase by Kallen of a seat on the Curb Exchange for $234,000. Thereafter to 1934, the partnership advanced cash to Kallen for that purpose and paid part of the notes given by him in connection with the purchase. The advances and payments were charged to Kallen in a special account set up on the books of the partnership. No other debts of Kallen to the partnership were charged to the account. The last charge to the account was made in June 1934. No payments were received on the account, including interest, prior to 1943. During the years 1929 to 1934 Kallen became indebted to the partnership in the sum of $152,189.15, on account of payments made for the purchase of the seat on the Curb Exchange, and interest thereon. During that time Kallen rented desk space in the office of the partnership. It is not unusual for a member of the Curb Exchange to loan money for the purchase of a seat on the Exchange to place the borrower in a position to "clear" stock through1948 Tax Ct. Memo LEXIS 68">71 the lending broker. At all times after the partnership agreed to finance the purchase of a seat on the Curb Exchange for him, Kallen gave to the partnership such business as he had in stocks in which the partnership specialized. In 1929 the partnership had clearance accounts with about fourteen other brokers. In 1934 the partnership discontinued its clearance accounts but continued to act as specialists and traders. From 1934 to 1943, Kallen did a commission business on the floor of the Curb Exchange. On February 7, 1938, the partnership was dissolved and its assets were distributed to the partners. The fair market value of the assets of the partnership was $22,877.93, including $13,066.33 as value of the indebtedness of Kallen in the sum of $152,189.15, incurred for the purchase of a seat on the Curb Exchange, and $1,532.40 for other transactions, a total of $153,721.55. Thereafter to 1943, inclusive, the Steinhardts continued to do a commission business and operate as traders and specialists on the Curb Exchange under a joint account. In about July 1938, the Steinhardts, at the request of Kallen, agreed to consider an offer of settlement of his indebtedness. Negotiations1948 Tax Ct. Memo LEXIS 68">72 resulted in the drafting in July 1938 of an agreement providing for settlement of the indebtedness for $30,000, payable $5,000 on January 1, 1939, $1,250 on July 1, 1939, and a like sum quarter-annually commencing January 1, 1940, subject to additional amounts in the event Kallen sold his seat on the Curb Exchange for a price in excess of certain amounts. The basis for the amount of the settlement was the amount of money Kallen thought he would be able to obtain to pay the obligation. The agreement was not executed because of inability of Kallen to obtain funds with which to make the payments. Kallen informed them that he had an opportunity to become president of a transportation business to be financed by one of his clients and that if the venture was as successful as he expected it to be, that he might be able to pay the debt in full. During 1939 and 1940 he was president of a bus company engaged in the transportation of passengers from Radio City to the World's Fair. At some undisclosed time after 1938 a daughter of the individual who financed the transportation business in which Kallen was engaged in 1939 and 1940, informed the Steinhardts that if she and Kallen married each1948 Tax Ct. Memo LEXIS 68">73 other, that she would see to it that Kallen's debt to them was paid in full. Kallen discontinued seeing the lady in 1941 or 1942. The Steinhardts never asked Kallen to give them a note for or security for the payment of the indebtedness, or obtained a financial statement from him prior to 1943. Including the indebtedness to them, they considered Kallen to be a bankrupt in 1939 and 1940. Regulations of the Curb Exchange gave the Steinhardts the right to assert a lien on the seat of Kallen on the Curb Exchange for the amount of the indebtedness. Kallen was prohibited from engaging in the specialist business on the floor of the Exchange from April 1, 1938, to July 15, 1941. During that period he was permitted to transact a commission business and trade for his own account on the floor of the Exchange but did not derive any taxable net income from the activities. On May 21, 1942, the membership of Kallen on the Curb Exchange was suspended for nonpayment of dues and the suspension continued until February 9, 1943, when he resumed his activities on the floor of the Exchange. During the suspension period, Kallen could not conduct any business on the Curb Exchange. Kallen borrowed $7501948 Tax Ct. Memo LEXIS 68">74 to pay his dues in the Curb Exchange. During the period of prohibition and suspension, Kallen was not in a position to give the Steinhardts any business. Upon the reinstatement of his membership, in February 1943, Kallen resumed activities on the Curb Exchange. By that time the war had the effect of increasing the volume of general business on the exchange. The Steinhardts observed that Kallen was not transacting as much business as he handled before his suspension or should be doing. Such knowledge and the fact that Kallen had been in previous years given sufficient opportunity to settle caused the Steinhardts, in May 1943, to confer with Kallen with regard to the settlement of his indebtedness to them. The Steinhardts concluded from a financial statement submitted to them in May 1943 by Kallen, at their request, that Kallen was practically bankrupt at that time. The Steinhardts offered to accept $5,000 in settlement of their claims. Later Kallen informed them that he could not raise such an amount but would be able to raise $2,000 and would pay one-half of it to each for the debt. Settlement was made on that basis on October 13, 1943. Kallen borrowed, from other than the Steinhardts, 1948 Tax Ct. Memo LEXIS 68">75 $2,000 with which to make the payment. In May 1943, Kallen settled for $250 a debt of $25,000 for money borrowed from an individual. In 1938, after the partnership was dissolved, and in subsequent years to 1942, inclusive, William B. Steinhardt reported income from his business of $1,251.28, $184.12, $316.46, $204.13 and $4,061.69, respectively. In 1943 he reported a loss of $3,523.91 from his business and $27,315.46 as income from partnerships, fiduciary income and other income, including $2,357.41 from the joint account with his brother, Milton Steinhardt. In his returns for 1938 to 1941, inclusive, Milton Steinhardt reported as income from trading, the amounts of $88.74, $106.80 (loss), $380.64 (loss) and $350.47, respectively. In 1942 he reported gross income of $4,670.44, consisting of $608.74 net gain and $4,061.70 as income from partnerships, fiduciary income and other income. In 1943 he reported gross income of $21,890.97, consisting of $2,224.77 as income from his business as a broker and $24,115.74 as income from partnerships, fiduciary income and other in-income, including $2,357.42 from the joint account with William B. Steinhardt. From 1938 to 1943 the high, low1948 Tax Ct. Memo LEXIS 68">76 and average selling price for seats on the Curb Exchange were as follows: 193819391940194119421943High$17,500.00$12,000.00$7,250.00$2,600.00$1,700.00$8,500.00Low8,000.007,000.006,900.001,000.00650.001,600.00Average13,042.109,107.147,025.001,300.00890.555,355.55 In 1942 the Curb Exchange purchased fifty seats for $1,000 each. Stocks received by members of a partnership engaged in the brokerage business upon its dissolution and then distributed in a new partnership with one or more new partners, are generally entered in the books of the new firm at cost or market, depending upon the practice of the old partnership. In their joint returns for 1943, each of the Steinhardts claimed a bad debt deduction of $75,860.78 on the debt of Kallen. In his determination of the deficiencies the respondent disallowed the deductions upon the ground that the debt became worthless and uncollectible prior to January 1, 1942. In connection with the determination he held that the statutory basis of the debt in the hands of William B. and Milton Steinhardt was $46,916.19 and $47,624.76, respectively, instead of $76,860.78, 1948 Tax Ct. Memo LEXIS 68">77 as shown in the returns, and that the debt was a non-business debt within the meaning of section 23 (k) (4) of the Internal Revenue Code. In his determination of the deficiencies for 1944 and 1945, the respondent held that William B. and Milton Steinhardt did not sustain operating losses in 1943, and, accordingly, disallowed as a deduction taken by the former, a carry-over loss of $45,820.63 in 1944 and $38,249.46 in 1945, and by the latter $47,020.57 in 1944 and $41,545.13 in 1945. Opinion The statute allows as deductions "Debts which become worthless within the taxable year". Section 23 (k) (1), Internal Revenue Code. Petitioners had the burden of proving that the uncollected portion of the debt became worthless within 1943, the taxable year. The respondent disallowed the deduction upon the ground that the debt became worthless prior to January 1, 1942, and his determination in that regard must stand in the absence of proof that the uncollected portion of the debt did not become worthless until 1943. The parties stipulated that the debt, totaling $153,721.55, had a fair market value of $13,066.33, at the time of dissolution of the1948 Tax Ct. Memo LEXIS 68">78 partnership on February 7, 1938. Substantially all of the debt, $152,189.15 in amount, was incurred for the purchase of a seat on the Curb Exchange, and interest thereon. Until the settlement in 1943, Kallen never made a payment on the primary debt and it does not appear that until then, that he paid anything on his other obligations to the Steinhardts. As early as July 1938, the Steinhardts, who testified that at that time they "pretty well knew his [Kallen's] financial condition", were willing to settle their claims for $30,000, payable in installments over a period of about five years, subject to payment of an additional amount in case Kallen sold his seat on the Curb Exchange for a specific amount. The Steinhardts considered Kallen to be bankrupt in 1939 and relied upon the latter's venture into the transportation business and prospects of marriage to a woman of wealth for sources of payment. Kallen was president of the transportation company in 1939 and 1940; otherwise the evidence tells us nothing of the success of the enterprise. His prospects of a rich marriage apparently ended in 1941 or 1942, when he ceased courting the alleged wealthy lady. In the meantime Kallen's use1948 Tax Ct. Memo LEXIS 68">79 of his seat on the Exchange was restricted for three years and three and one-half months, commencing April 1, 1938, and his membership was suspended for about nine months, commencing in May, 1942, for non-payment of dues. During the first of such periods, Kallen's right to use his seat on the Exchange was curtailed and during the second period he was denied the right to use his seat for any purpose. Aside from the position he held in 1939 and 1940 as president of a bus company, it does not appear that Kallen had any other source of income. The net worth of Kallen, if anything, at material times, is not shown. The value of his seat on the Curb Exchange dropped to a low of $1,000 in 1941 and to $650 in 1942, in which year the Exchange itself purchased fifty seats for $1,000 each. Reinstatement of his membership on the Exchange was accomplished in 1943 by use of borrowed funds. The record discloses no other asset of Kallen at any time. Further discussion of the facts would serve no useful purpose. From a consideration of all of the evidence we conclude that the respondent did not err in determining that the debt became worthless prior to January 1, 1942. In view of the conclusion1948 Tax Ct. Memo LEXIS 68">*80 reached on the primary issue, it follows that respondent committed no error in disallowing the deductions claimed in 1944 and 1945 for net operating loss carry-overs in 1943. Decision will be entered for the Respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625742/	S. PETER LEBOWITZ AND THERESA LEBOWITZ, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentLebowitz v. CommissionerDocket No. 27543-82United States Tax CourtT.C. Memo 1991-344; 1991 Tax Ct. Memo LEXIS 399; 62 T.C.M. 249; T.C.M. (RIA) 91344; July 29, 1991, Filed 1991 Tax Ct. Memo LEXIS 399">399 Decisions will be entered in the amounts previously computed. Thomas S. Carles, Alan Scott Laufer, and John L. Pritchard, for the petitioners. Ismael Gonzales, for the respondent. COHEN, Judge. COHENMEMORANDUM OPINION This case is before the Court on remand from the Court of the Appeals for the Second Circuit in , revg. and remanding our prior opinion, . Petitioners were limited partners in a partnership (Fenwick) formed in 1976 to mine coal in West Virginia. The partnership subleased certain property (the Hewitt tract) for $ 1,200,000 cash and a $ 4,150,000 nonrecourse note. In our prior opinion, we held, among other things, that the amount attributable to the nonrecourse note was not deductible as advance royalties because the note was contingent. Our holding was based on our conclusions that petitioners failed to establish that the value of the coal on the leased tract approached the $ 5,350,000 paid for the rights; that it was infeasible to generate profits to match the price paid for the rights; and that the purchase price of the property1991 Tax Ct. Memo LEXIS 399">400 unreasonably exceeded its true value. The Court of Appeals reversed, concluding "that the proper inquiry is between the amount of indebtedness and the value of the underlying collateral." . The Court of Appeals stated that it was remanding the case to us "for a determination of the value of the coal rights as of October 1976, as we believe there is sufficient evidence in the record to support a finding that the value of the rights at that time was at least equal to the face obligation of the nonrecourse note." . Petitioners argue that the value of the coal rights should be computed by estimating the amount of coal in tons recoverable from the property, multiplied by either a dollar amount or by the sum of the market price of coal in 1976 less the cost of extraction. Petitioners contend that there were at least 3 million tons of recoverable coal on the property, that the cost of extracting the coal was not more than $ 20 per ton, and that the value of the coal should be computed at a net of $ 8 per ton. Petitioners rely on expert testimony presented at trial and discussed in our prior opinion. Petitioners also contend1991 Tax Ct. Memo LEXIS 399">401 that the above-quoted conclusion of the Court of Appeals shifts to respondent the burden of proving that the value of the coal rights in which the partnership had an interest was less than the amount of the note. Respondent attacks petitioners' experts' testimony and points to other facts indicating that the value of the coal rights was far less than the amount of the note. Respondent relies on the history of transactions in the leased property, including a 1975 transaction in which a parcel including the 1,886-acre parcel subsequently subleased by the partnership was transferred for $ 19,600 cash and an agreement to assume a minimum royalty obligation. Respondent also relies on his experts' testimony that disputed petitioners' experts' evidence of the likelihood that coal would be recovered from the leased property. Respondent persists in arguing that petitioners have not satisfied their burden of proof as to the value of the coal rights. We are not bound by the opinion of any expert witness when that opinion is contrary to our judgment, and we may embrace or reject expert testimony. , and cases there cited. 1991 Tax Ct. Memo LEXIS 399">402 In this case, however, none of the experts expressed an opinion of the fair market value of the coal rights. Petitioners' expert Steven G. Breeding expressly declined to estimate the appropriate royalty for the lease, citing his own lack of qualifications. There is no direct evidence in the record of the price at which the property in question would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. See . (We do not consider the Fenwick transaction to be evidence of fair market value, of course, because the tax benefits emphasized in promoting it suggest that the price was distorted by tax considerations. Cf. , affg. a Memorandum Opinion of this Court; .) The parties' briefs also ignore this standard definition of fair market value. In our prior opinion, we did not make a specific finding of fair market value. In view of the remand by1991 Tax Ct. Memo LEXIS 399">403 the Court of Appeals, however, we are compelled here to do the best that we can on the evidence in the record. Our conclusion is not based on the burden of proof but on the following factors. First, it is apparent from the record that qualified experts substantially disagree about the amount of coal recoverable from the property and the probable total revenue to be derived from the coal. A prospective buyer would be likely to encounter such variations of opinion and would discount substantially the most optimistic predictions about the recoverable coal reserves. Second, a prospective buyer would not be likely to disregard the consideration accepted by a knowledgeable party for a parcel including that transferred to petitioners' partnership. Notwithstanding disagreement about the comparability of the 1975 transaction in which lease rights in 2,000 acres were transferred for $ 19,600, this transaction is the only one in the record reflecting an independent price for the property that is to be valued. Third, the Court of Appeals stated that "events subsequent to the time of purchase that affect the value of the security are irrelevant; rather, the valuation test is applicable at1991 Tax Ct. Memo LEXIS 399">404 the time of purchase." . The Court of Appeals indicated that the decline in the value of the coal rights subsequent to the year in issue should not be considered in determining whether the value of the rights equals the face amount of the nonrecourse note. That decline and other subsequent events were mentioned in our prior opinion, however, only in explaining the failure of the venture, thus supporting our determination that petitioners had an actual and honest objective of making a profit even though coal was never mined on the tract. We described the preparations for operations and the external forces, including a worsening economy, foreign competition, and a miners strike, that interfered with operations. We did not rely on those facts in our conclusion that the value of the rights did not approach the amount paid. In any event, in view of the clear statement by the Court of Appeals, which is consistent with our view of applicable valuation principles, petitioners cannot now rely on post-acquisition events to bolster their claims of value. Petitioners' brief on remand argues: the Joyce report made use of a very small number of reference1991 Tax Ct. Memo LEXIS 399">405 points which were known in 1976. Numerous other reference points dated after 1976 were available to Joyce Associates, but they were all ignored by Joyce and Jaron in constructing the isopach map. Ex. AQ at 17. Had they used the newer reference points, and applied the same method, Joyce and Jaron would have computed a higher estimate of coal reserves. * Similarly, petitioners assert that "at the time of trial [in 1987], the Westridge Coal Co. and the Tanner Coal Co. were profitably mining coal in these same areas." Petitioners also rely on subsequent removal of 292,000 tons of coal and payments of more than $ 600,000 on the note given by the partnership. None of these facts are properly considered in determining the value as of October 26, 1976. Fourth, the offering memorandum provided to the Fenwick investors included the Casteel report dated October 8, 1976, which estimated that there were 1.795 million recoverable tons of coal on the Hewitt tract. Subsequent estimates by petitioners' experts that there were 4.5 or 5 million recoverable tons would not have been considered by a prospective purchaser as of October 1976. The offering memorandum purported to set forth1991 Tax Ct. Memo LEXIS 399">406 relevant facts known prior to the date of acquisition. The offering memorandum gave only a cursory review of the industry, the contracts for the Fenwick project, and the risk of investment, emphasizing instead the potential tax opportunities. The offering memorandum and the Casteel report, however, are the best indication that we have of information available to prospective buyers at the valuation date. The information set forth in those materials, therefore, must be given the most weight in our analysis. The offering memorandum stated that "the Partnership will enter into agreements with contract miners to both strip mine and deep mine the Coal at a cost of $ 20 per ton, and will also enter into an agreement to sell the Coal (unwashed) on an exclusive basis to Coats for $ 28 per ton." Multiplying the recoverable tons estimated in the offering memorandum, 1.795 million times a projected net profit of $ 8 per ton, would lead to projected revenues of $ 14,360,000. The rights that we are to value have been described by the Court of Appeals as a "perpetual interest," and the gross revenues obviously would be derived over a period of years and must be discounted to reflect that fact. 1991 Tax Ct. Memo LEXIS 399">407 (The note was payable at 6-percent interest over a period of 12 years.) In addition, a substantial discount must be applied for the inherent risks of mining. Such risks were described in the offering memorandum as including extreme volatility of the market price of coal, potential cancelations of the mining contracts, and changing Government regulations and international market conditions. Finally, the offering memorandum noted that the Hewitt lease provided that Coats would be permitted to purchase the property for a fixed price of $ 100,000 after payment in full of the advance royalty. Under these circumstances, we do not believe that a prospective buyer determining the fair market value of the partnership's perpetual rights to coal would have paid more than $ 1,400,000, or approximately 10 percent of the projected revenues to be received from the property over an indefinite period of time if none of the identified risks materialized. Although we have little confidence that this amount is not still an exaggeration of what could be obtained in the marketplace, it is our best judgment on the evidence, consistent with the strictures of the remand. The Court of Appeals stated 1991 Tax Ct. Memo LEXIS 399">408 that "If the obligation of the note unreasonably exceeds the value of the underlying security, the transaction lacks economic substance." . Because the maximum fair market value that we have determined is approximately one-third of the amount of the note, the note unreasonably exceeds the value of the security. We reaffirm our prior conclusion that the note cannot be recognized or given effect for tax purposes prior to the time that payments are made. Decision will be entered in the amounts previously computed.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625743/	SALT LAKE HARDWARE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Salt Lake Hardware Co. v. CommissionerDocket Nos. 46911, 56901.United States Board of Tax Appeals27 B.T.A. 482; 1932 BTA LEXIS 1059; December 30, 1932, Promulgated 1932 BTA LEXIS 1059">1059 1. Petitioner, a domestic corporation, received from another domestic corporation stock dividends which were later redeemed at par for cash. Held, such redemption was not equivalent to the distribution of taxable dividends under section 201(g) of the Revenue Act of 1926. Held, further, the amounts paid to redeem the stock constituted amounts distributed in partial liquidation, under section 201(c) and (h) of the Revenue Act of 1926. 2. Respondent's determination of the basic value of the stock sustained. Paul E. Shorb, Esq., and Harold C. Anderson, C.P.A., for the petitioner. Frank B. Schlosser, Esq., for the respondent. MARQUETTE 27 B.T.A. 482">483 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income taxes asserted by the respondent for the years 1926 and 1927 in the amounts of $1,399.90 and $1,484.58, respectively. It is alleged that respondent erred in determining that retirements of preferred stock of another company, issued to petitioner as stock dividends, resulted in taxable income to petitioner. At the hearing it was further contended that respondent erred in basing the1932 BTA LEXIS 1059">1060 value of the preferred stock so retired upon the March 1, 1913, value of the common stock of the same company. Respondent contended that his computation of the basic value of the preferred stock was incorrect and made claim for any increased deficiency which might result from the Board's decision respecting the correct valuation. FINDINGS OF FACT. Petitioner is a corporation. During the year 1909 it purchased 2,000 shares of the common stock of the Strevell-Paterson Hardware Company, all the outstanding capital stock, at a cost of $219,564.73. The par value was $200,000. Subsequently in that year the Strevell-Paterson Hardware Company issued to petitioner 500 shares of common stock as a stock dividend. That company has continued in business up to the present and no liquidation has ever been contemplated. Petitioner owned the 2,500 shares of common stock on December 31, 1912, and on March 1, 1913. The Strevell-Paterson Company paid cash dividends on its stock amounting to $20,000 in 1909, $25,000 in 1911, and $15,000 in 1912. Both companies are domestic corporations, located in Salt Lake City, Utah. In addition to its outstanding capital stock, the liabilities of1932 BTA LEXIS 1059">1061 the Strevell-Paterson Company at the close of each year from 1908 to 1913, and interest paid, were as follows: YearAccounts payableNotes payableInterest paid1908$12,422.01$135,000190910,940.52167,500$11,446.50191024,293.20108,50012,318.54191117,050.24110,00010,465.47191229,248.53130,00010,212.79191324,736.41120,00012,347.5527 B.T.A. 482">484 Exclusive of any good will, the Strevell-Paterson Company's books showed, as of December 31: YearShares of stock outstandingSurplus1912250,000$59,483.611916250,000142,144.431 250,00019192 60,000229,092.94The earnings of the Strevell-Paterson Hardware Company, according to its books, from 1909 to 1916, were: 1909$28,016.44191024,050.51191118,024.91191233,056.301913$32,409.17191430,771.78191542,596.36191699,383.51On January 30, 1917, the Strevell-Paterson Company declared and issued to petitioner a stock dividend of 600 shares of 7 per cent preferred stock of the par value of $60,000. On January 2, 1920, it declared and issued to petitioner another1932 BTA LEXIS 1059">1062 stock dividend of 900 shares of 7 per cent preferred stock, par value $90,000. All of the preferred stock so issued was authorized but not issued or outstanding on March 1, 1913. Although the Strevell-Paterson Company had sufficient surplus with which it might have paid each dividend in cash, the other method was adopted, first, to keep the surplus cash available for growth of the business and, second, to stimulate the managers of the business to greater efforts for earning larger dividends. It was fully intended, at the times the preferred stocks were issued, to retire them just as soon as the company's cash account justified such action. On or about April 23, 1926, the 600 shares issued in 1917 were redeemed and retired by the payment of $60,000 to petitioner. On March 31, 1927, 400 shares of the stock dividend issued in 1920 were redeemed and retired by the payment of $40,000 to petitioner. Seven per cent dividends have always been promptly paid on the preferred stock since its issuance. The Strevell Company was organized, under another name, in the year 1890. Its reputation and standing in its community and in trade circles were high. By March 1, 1913, it had acquired1932 BTA LEXIS 1059">1063 substantial good will, but that was not carried on the books of the company at any amount. When the preferred shares were issued in 1917 and 1920 they were worth somewhat more than par. Prior to and including the year 1922 the petitioner and the Strevell-Paterson Hardware Company filed consolidated income tax returns. 27 B.T.A. 482">485 That practice was discontinued after 1922 and petitioner's returns thereafter did not include the income or deductions of any other company with which it may have been affiliated. In determining the deficiencies in question the respondent treated the amounts paid to redeem the Strevell-Paterson Company's preferred stock as distributions in partial liquidation, and in computing taxable gain from the redemption of this stock he used the following values as shown by the books of that company as of December 31, 1912 (the nearest balance sheet to March 1, 1913): capital stock, $250,000; surplus, $59,483.61; total, $309,483.61. As the book value of the Strevell-Paterson Company at the close of 1916 was: capital stock, $250,000; surplus, $142,144.13, he found that the preferred stock dividend of 600 shares issued in January, 1917, was worth par, $60,000. 1932 BTA LEXIS 1059">1064 He then used the following computations: Mar. 1, 1913, value of 2,500 shares common stock$309,483.6183.761%Par value of 600 shares preferred stock, January, 191760,000.0016.239%100% * * Per share.2,500 shares common stock 83.761% of $309,483.61 = $259,226.57, or$103.69600 shares preferred stock 16.239% of $309,483.61 = $50,257.04, or$83.76* * * Realized in 1926, par value of 600 shares preferred stock$60,000.00Cost, as determined above50,257.04Taxable gain9,742.96By the same method respondent determined the cost to petitioner of the 900 shares of preferred stock dividend issued in 1920 to be $74.25 per share, with a resulting taxable gain of $10,300 on 400 shares redeemed in 1927. OPINION. MARQUETTE: The petitioner contends that the payment to it of $60,000 in 1926 and of $40,000 in 1927, in redemption of preferred stock issued as dividends, was "essentially equivalent to the distribution of taxable dividends" under section 201(g) of the Revenue Act of 1926. If that contention is correct, then such dividends are not taxable income to the petitioner by virtue of section 234(a)(6) 1932 BTA LEXIS 1059">1065 of the act. The respondent takes the position that, as dividends received by a corporation are not taxable as such, therefore the term "taxable dividend" as used in section 201(g) was not intended to apply to corporate stockholders. Respondent further contends that the payments 27 B.T.A. 482">486 in question constitute "amounts distributed in partial liquidation" under section 201(c) and (h) of the Revenue Act of 1926. The statutes in question, so far as here applicable, read as follows: Sec. 201. (c) * * * amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202 * * . Sec. 201. (h) As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. Sec. 201. (g) If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and1932 BTA LEXIS 1059">1066 in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. * * * Not all dividend distributions come within the purview of the section quoted. It applies only to "taxable dividends," that is, such dividends as are subject to income tax. It can not apply in the case before us, for the reason that both petitioner and the Strevell-Paterson Hardware Company are domestic corporations and dividends received by one from the other are not taxable, under section 234(a)(6) of the Revenue Act of 1926. Petitioner argues that, as there was never any intention to liquidate the Strevell-Paterson Company, payments by that company in redemption of part of its stock can not be considered as a partial liquidation under section 201(c) and (h), supra. That argument can have persuasive force only by using the word "liquidation" in the sense of winding up the affairs of the company. 1932 BTA LEXIS 1059">1067 Admittedly, that is the usual meaning given to the word. But here we can not ignore the fact that Congress has established a different meaning for income tax purposes. As set forth in the statute, section 201, supra, a partial liquidation takes place whenever a corporation distributes money or assets in complete cancellation or redemption of a part of its capital stock. No particular portion is mentioned, nor is the word "part" in any way limited. Whether the amount so redeemed be all of a series or class, or only a part thereof, apparently makes no difference under the definition adopted by Congress. Subdivision (h) is supplemental to subdivision (c) of section 201, which provides that amounts so distributed are to be considered as payments in exchange for the stock, upon which gain or loss to the stockholder is to be determined. It is our opinion that the payments here involved 27 B.T.A. 482">487 constitute distributions in partial liquidation within the meaning of the Revenue Act of 1926. What, then, is the proper basis upon which to determine the amount of gain or loss resulting from those transactions? Section 204(a) of the Revenue Act of 1926 provides: The basis for1932 BTA LEXIS 1059">1068 determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property, * * Then follow a number of exceptions, none of which apply here. Subdivision (b) of the section reads: The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be (A) the cost of such property * * * or (B) the fair market value of such property as of March 1, 1913, whichever is greater. * * * The parties agree that the fair market value as of March 1, 1913, is the proper basis for determining gain or loss. Respondent has taken the book value of the common stock as of March 1, 1913, as being the fair market value on that date. Although good will does not appear on the books as an asset item, respondent has considered it in his computations to the extent of offsetting probable shrinkage of asset values in the event of dissolution. Petitioner does not challenge the accuracy of the computations, but insists that the method is wrong and that Strevell-Paterson Company preferred stock, if issued March 1, 1913, would have been worth par on the market. To support1932 BTA LEXIS 1059">*1069 that contention several witnesses testified that in their opinions the preferred stock would have been worth par if issued March 1, 1913. All of those witnesses, except two, are or have been officers of either the petitioner or the Strevell-Paterson Company. The other two were experienced bankers in Salt Lake City, but their opinions were in response to hypothetical questions which did not include any detail of assets nor of accounts respecting their fluid condition. With all due respect to their opinions, we do not consider them sufficient, under the circumstances, to overthrow the presumption that respondent's determination is correct. But we are not impressed with his argument that the basic value of the preferred stock should be further depressed by using the surplus of December 31, 1916, and of December 31, 1919, to increase the value of the common stock. We therefore sustain that determination as set forth in the deficiency notices. Reviewed by the Board. Decision will be entered for the respondent.Footnotes1. Common. ↩2. Preferred. ↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625744/	WORKINGMAN'S COOPERATIVE ASSOCIATION OF THE UNITED INSURANCE LEAGUE OF NEW YORK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Workingman's Cooperative Asso. v. CommissionerDocket No. 9067.United States Board of Tax Appeals9 B.T.A. 385; 1927 BTA LEXIS 2603; November 28, 1927, Promulgated 1927 BTA LEXIS 2603">2603 Commissioner's determination approved for lack of evidence. H. B. Salisbury, for the petitioner. D. D. Shepard, Esq., for the respondent. MURDOCK 9 B.T.A. 385">385 MURDOCK: The Commissioner has determined that there is a deficiency of $4,970.30 in the petitioner's income and profits taxes for the calendar year 1920. The petitioner contended in its original petition that it was exempt from taxation by section 231 of the Revenue Act of 1918. We have already decided this same contention adversely to the petitioner in its appeals from the Commissioner's determinations of its tax liability for the years 1918 and 1919. See . The petitioner admits that the reasoning of that decision would apply with equal force as to the same question for the year 1920. It therefore moved and was permitted to amend its petition. Although the petition and the amended petition do not clearly set forth the petitioner's contention, from a consideration of these papers and the argument presented at the hearing and in the brief, we believe that the petitioner is seeking to deduct some amount from its1927 BTA LEXIS 2603">2604 gross income by virtue of the provision of section 234(a)(11) of the Revenue Act of 1918, which allows the following deduction: In the case of corporations issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan continuing for life and not subject to cancellation, in addition to the above, such portion of the net addition (not required by law) made within the taxable year to reserve funds as the Commission finds to be required for the protection of the holders of such policies only. The petitioner also contends that it did not have gross income within the meaning of section 213(a) of the Revenue Act of 1918, and in its brief it quotes a portion of that section to support its contention. 9 B.T.A. 385">386 We are satisfied that the section, read in its entirety, completely refutes the petitioner's argument. The by-laws of the corporation provide that its funds, "after the payment of all claims remaining in the hands of the treasurer, shall be credited to the guaranty fund and shall be held in reserve and may be invested by the board of directors on bond and mortgage and keep so invested without declaring a dividend1927 BTA LEXIS 2603">*2605 so long as the board shall deem best and for the best interests of the company." A witness stated that no dividend had ever been declared and that all surplus was held in a reserve fund. It appears that some, but not all, of the petitioner's policies covered life, health, and accident insurance combined in one policy. The petitioner's books were not produced or offered in evidence and we do not know what amount was added to its reserve funds during 1920. But were we to assume that all of the income of the year was added to its reserve funds, still we would not be justified in disturbing the determination of the Commissioner, because we do not know what amount, if any, the latter allowed as a deduction under section 234(a)(11) and we have before us no satisfactory evidence of any amount which would be a proper deduction under this provision of the Act. Judgment will be entered for the respondent.Considered by MORRIS and SIEFKIN.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625745/	Estate of Willard V. King, Deceased, The Chase Manhattan Bank, Formerly The Chase National Bank of the City of New York, Executor, Petitioner, v. Commissioner of Internal Revenue, RespondentKing v. CommissionerDocket No. 78430United States Tax Court37 T.C. 973; 1962 U.S. Tax Ct. LEXIS 190; February 21, 1962, Filed 1962 U.S. Tax Ct. LEXIS 190">190 Decision will be entered under Rule 50. The decedent in 1935 created three trusts, transferring securities to a named trustee, the trust indenture providing that the income should be paid to certain designated beneficiaries for life, with remainders over to designated remaindermen. The indenture provided among other things that any principal of the trust might be invested or reinvested in any type of property even though speculative, extrahazardous, and unproductive, and that during the lifetime of the grantor the trustee should exercise the rights of management and investment only in accordance with directions of the grantor. Held, that such right reserved by the grantor was reserved in a fiduciary capacity; that it did not constitute a right to designate the persons who should possess or enjoy the property or the income therefrom, within the meaning of section 2036(a)(2) of the Internal Revenue Code of 1954; that the enjoyment of the trust property was not, by virtue of such retained power, subject at the date of the decedent's death to any change through the exercise of a power by the decedent to alter, amend, or revoke, within the meaning of section 2038 of the Code; 1962 U.S. Tax Ct. LEXIS 190">191 and that the value of the trust property is not includible in the gross estate of the decedent. John L. Gray, Jr., Esq., and Howard Carter, Jr., Esq., for the petitioner.William F. Fallon, Esq., for the respondent. Atkins, Judge. ATKINS37 T.C. 973">973 OPINION.The respondent determined a deficiency in estate tax in the amount of $ 341,369.15 which resulted1962 U.S. Tax Ct. LEXIS 190">192 from several adjustments made by him, but principally from the inclusion in the decedent's gross estate, at a value of $ 795,395.02, of assets of three trusts which the decedent had created during his lifetime. By agreement between the parties all issues have been settled except that relating to the respondent's inclusion of the amount of $ 795,395.02 in the gross estate, and the amount of additional deductions for expenses of administration incurred subsequent to the filing of the estate tax return. It has been agreed that the amount of deductible administration expenses 37 T.C. 973">974 will be determined in connection with the recomputation under Rule 50.The facts have been stipulated and are so found. They are set forth herein to the extent necessary to an understanding of the case.Willard V. King died testate on May 1, 1955, a resident of Convent, New Jersey, leaving three surviving children, Willard V. King, Gordon V. King, and Mary King Ruhtenberg. An estate tax return was filed by the executor with the district director of internal revenue, Newark, New Jersey, on July 16, 1956.All of the decedent's professional life was spent in the banking business, with specialization in1962 U.S. Tax Ct. LEXIS 190">193 the investment field. Among the positions he held were vice president of the New York Trust Company from 1903 to 1909, president of the Columbia Trust Company from 1909 until 1923 (at which time a merger took place with Irving Bank), and a director of Irving Bank-Columbia Trust Company from the time of the merger through 1926. He was also a trustee of New York Life Insurance Company from 1912 to 1915 and a director of that company from 1915 until 1952. He was a member of that company's finance committee from 1912 to 1931. He was a trustee of Columbia University for many years, serving on its finance committee for 14 years at various periods between 1910 and 1934. The duties of the above finance committees included the supervision and making of all investments. Decedent retired from active business in 1928.On December 31, 1935, decedent executed a trust indenture with the Chase National Bank of the City of New York (now the Chase Manhattan Bank) as sole trustee, stating therein that he desired to create an irrevocable trust. Under the trust indenture three trusts were created, one for each of decedent's above-named three children. At that time the decedent transferred to the1962 U.S. Tax Ct. LEXIS 190">194 trustee as original corpus of the three trusts certain stocks and bonds having a value at that time of $ 199,990. The trust's holdings of each of these securities and each of the securities subsequently purchased by the trustee during decedent's life were at no time significant from the point of view of control of the particular companies involved.Under the terms of the trust indenture 38 percent of the assets was set aside for the trust for Mary King Ruhtenberg, 31 percent was set aside for the trust for Willard V. King, and 31 percent was set aside for the trust for Gordon V. King. Each such beneficiary was to receive the income of his trust for life and upon his death the principal was to be paid in equal parts to the children of such life beneficiary (or to the issue of any children), per stirpes. If the life beneficiary should die leaving no issue surviving then the trustee was to pay over the principal of that trust in equal parts to the surviving sister, brother, or brothers of the life beneficiary or to his or her issue per stirpes. Should the life beneficiary die leaving no brother or sister 37 T.C. 973">975 or issue of any brother or sister surviving him or her, then the trustee1962 U.S. Tax Ct. LEXIS 190">195 was directed to pay the principal of the trust according to the will of the life beneficiary, or if there should be no will, or if the life beneficiary failed to exercise the power of appointment, then the principal was to be paid to the intestate heirs of the life beneficiary. The indenture further provided that should the grantor, by reason of the laws of intestacy, be entitled to any share of the trust, he renounced such right and directed that such share be given to the other legal heirs of the life beneficiary or if there should be none, then to the trustees of Columbia University.Article Second of the indenture provides as follows:Subject to the limitation hereinafter contained in this Article, the Trustee, in addition to the powers vested in fiduciaries by law, shall have the following powers:(a) To hold and retain the securities and other property received by the Trustee without liability of any kind by reason of such holding or retention.(b) To purchase or subscribe for any securities or other property with any moneys at any time held by it in the principal of the Trust Estate or to retain such moneys in the form of cash.(c) To sell, lease, mortgage or otherwise dispose1962 U.S. Tax Ct. LEXIS 190">196 of all or any part of the securities or other property which may at any time comprise the Trust Estate; and to make sales of the said securities and other property at either public or private sales at such prices and on such terms as the Trustee may determine and to make, execute, acknowledge and deliver to the purchasers thereof good and sufficient deeds of conveyance therefor and all assignments, transfers or other legal instruments either necessary or convenient.No purchasers upon any sale by the Trustee shall be bound to see to the application of the purchase money arising therefrom or to inquire into the validity, expediency or propriety of any such sale.(d) To register any securities or other property in the name of the Trustee or of a nominee or nominees or to take and keep the same in bearer form.(e) To vote in person or by proxy upon all securities or other property held by it, and to execute and deliver all necessary proxies and powers of attorney.(f) To join in or become a party to any agreement or reorganization, readjustment, merger, consolidation or exchange, to deposit any such securities or other property thereunder, to exchange any stocks, bonds, securities or1962 U.S. Tax Ct. LEXIS 190">197 other evidences of indebtedness for other stocks, bonds, securities or evidences of indebtedness, to exercise any conversion privileges or to exercise rights to subscribe to new securities, and to pay and charge the principal or the income of the trust, whichever in its opinion shall be appropriate, for any sums which may be required thereby, and to receive and hold any new securities or other property, including real estate or an undivided interest in real estate, issued or allotted as a result thereof.(g) To borrow funds when advisable for the benefit of the Trust Estate and to pledge any of the assets of the Trust Estate as collateral for the payment of any such loans.(h) To do generally all and every other act as in its good judgment shall seem to be for the benefit of the Trust Estate.Anything herein contained in this Article Second to the contrary notwithstanding, the powers set forth in the sections lettered (a), (b), (c), (e), (f), (g) and (h) of this Article Second may be exercised by the Trustee during the 37 T.C. 973">976 lifetime of the Grantor only as, if and when directed in writing to do so by the Grantor. It shall be the duty of the Trustee to act strictly in accordance1962 U.S. Tax Ct. LEXIS 190">198 with such directions and the Trustee shall be under no liability, responsibility or accountability for any loss of any kind which may result by reason of any action taken by it in accordance with any such direction or by reason of its failure to exercise any power given to it hereby because of the failure of the Grantor to give such direction, it being the intention of the Grantor that with respect to the exercise or nonexercise of said powers, the Trustee shall be under no duty whatsoever, except to act in accordance with such directions.The phrase "securities or other property" as used in this agreement, shall be deemed to refer to mortgages, real estate, stocks, either common or preferred, bonds, notes or other securities and any other property of whatsoever kind and nature, although the same may not be legal investments for a trustee under the laws applicable hereto, and even though speculative, extrahazardous and unproductive. The Trust Estate may be constituted entirely of preferred stock, or of the common and/or preferred stock, bonds, securities or other evidences of indebtedness of any one corporation, and securities or other property may be acquired with a view to the 1962 U.S. Tax Ct. LEXIS 190">199 future increase of the principal. After the death of the Grantor the Trustee is authorized to retain any securities or other property held by it at the time of his death.Article Third provides in part that "Insofar as permitted by law, all stock dividends and liquidating dividends which shall be received by the Trustee hereunder shall be added to principal and no portion thereof shall be distributed to the beneficiaries of the income." It further provides that "All other cash dividends shall be deemed income and distributed as such."Article Tenth provides that "Any and all income including accrued interest and regular cash dividends declared but unpaid which may have accrued on securities or other property transferred to the Trustee in pursuance of any provision hereof at the time of delivery thereof shall be considered as income and disposed of as such."The indenture provides in Article Twelfth that the trust instrument is made under and is to be construed, interpreted, and given effect in accordance with the laws and statutes of the State of New York. It provides in Article Fourteenth that the trustee shall have the right to resign at any time and that in such event the grantor1962 U.S. Tax Ct. LEXIS 190">200 shall appoint a new trustee to act in its place and stead.At the time of the creation of the three trusts the ages of the named income beneficiaries were: Willard V. King, 30 years; Gordon V. King, 25 years; and Mary King Ruhtenberg, 28 years.At the time of the death of the decedent his son Willard V. King had two children, aged 7 and 2; his son Gordon V. King had two children, aged 16 and 13; and his daughter Mary King Ruhtenberg had two children, aged 24 and 19.During the lifetime of the decedent 8 sales of securities aggregating $ 89,921.84 and 16 purchases aggregating $ 107,865.48 were made on behalf of the three trusts. Each trust had gross income in each of the years 1936 through 1955 ranging from about $ 3,500 in 1936 to about 37 T.C. 973">977 $ 9,200 for 1955 in the Willard V. King trust, from about $ 3,500 in 1936 to about $ 9,500 for 1955 in the Gordon V. King trust, and from about $ 4,300 in 1936 to about $ 11,500 for 1955 in the Mary King Ruhtenberg trust.At the date of the death of the decedent, May 1, 1955, the aggregate fair market value of the principal of the three trusts was $ 792,509.20. The value of the corpus of each of the trusts at the end of 1936 (1 year after1962 U.S. Tax Ct. LEXIS 190">201 the creation of the trusts) and at the time of the death of the decedent was as follows:Value atValue atDec. 31, 1936May 1, 1955Willard V. King trust$ 71,256$ 241,620.38Gordon V. King trust69,847248,888.44Mary King Ruhtenberg trust85,619302,000.38Total226,722792,509.20In the estate tax return filed by the executor, although the existence of the trust indenture was reported in Schedule G, no value was included in the gross estate on account of the three trusts created thereby.In the notice of deficiency the respondent determined that the aggregate value, as of the date of death, of the assets of three trusts created on December 31, 1935, was $ 795,395.02, and he increased the value of the gross estate by that amount on the ground that "the decedent reserved rights to control the enjoyment of the income" from such trusts during his lifetime.On brief the respondent contends that due to the broad powers retained by the grantor, the value of the principal of each trust is includible in the gross estate under the provisions of sections 2036(a)(2) and 2038 of the Internal Revenue Code of 1954. 11962 U.S. Tax Ct. LEXIS 190">202 37 T.C. 973">978 Here the trust was, by the terms of the indenture, irrevocable, and the indenture clearly defined the persons who were to receive whatever income might be derived upon the trust property and the persons who were to take whatever trust corpus might be in existence at the end of the life estates. The grantor did not specifically retain the right either alone or in conjunction with any person to designate the person who should possess or enjoy the property or the income therefrom. Literally, therefore, it would seem that section 2036 would not operate to require the inclusion of the trust property in the gross estate. 2 Furthermore, the grantor did not specifically reserve any power either alone or in conjunction with any person to alter, amend, or revoke any provision of the trust indenture relating to the enjoyment of the property, and it would seem that section 2038, literally, would have no application.1962 U.S. Tax Ct. LEXIS 190">203 However, on brief the respondent contends that since in the indenture the grantor retained for his life the right to direct the trustee with respect to the management and investment of the trust property and retained the right to direct the sale of any properties and the reinvestment in any type of property which he might determine, even though speculative, extrahazardous, and unproductive, the grantor had retained the power to increase the interests of the life income beneficiaries to the detriment of the remaindermen, or vice versa. He contends that the decedent could require the investment of the entire trust estate in unproductive securities, thereby eliminating any payments to the life beneficiaries, or conversely, could require that the estate be invested entirely in high-yield though extrahazardous securities, and thereby dissipate in whole or in part the corpora of the trusts so that the remaindermen would ultimately receive little or nothing. It is his position that the right thus retained by the grantor constituted a right to designate the persons who should possess or enjoy the property or the income therefrom, within the meaning of section 2036(a)(2), inasmuch as it 1962 U.S. Tax Ct. LEXIS 190">204 permitted him to shift the economic benefits of the corpora of the three trusts. He also contends that since the grantor could direct the trustee to sell, lease, mortgage, or "otherwise dispose of" all the trust property, he retained the right to dispose of the property for little or no consideration; that since he could cause the assets of the trusts to be sold at either public or 37 T.C. 973">979 private sales at such prices and on such terms as he might determine, he could direct the trustee to sell the trust estate to him; that since he could direct the trustee to exchange securities for other securities or property, he had the unlimited right of substitution of assets of unequal value; that all these retained powers require inclusion of the trust property in the gross estate under section 2036(a)(2); and that all these retained powers also bring the case within the ambit of section 2038.It is the respondent's contention that since these rights were specifically retained by the grantor in the trust indenture, any action he might cause to be taken would not be subject to the control of the equity courts of the State of New York. His main reliance is upon State Street Trust Co. v. United States, (C.A. 1) 263 F.2d 635,1962 U.S. Tax Ct. LEXIS 190">205 affirming 160 F. Supp. 877">160 F. Supp. 877.The petitioner, on the other hand, contends that such powers as were retained by the grantor were exercisable only in a fiduciary capacity, subject to the scrutiny of a court of equity; that under New York law the grantor was under a duty to act impartially as between successive beneficiaries; that, therefore, he did not retain any right to designate the persons who should possess or enjoy the property or the income therefrom, within the meaning of section 2036(a)(2); and that the enjoyment of the property was not subject to any change through the exercise of a power to alter, amend, or revoke, within the meaning of section 2038.The trust indenture provides that it is made under and is to be construed, interpreted, and given effect in accordance with the laws and statutes of the State of New York. In Carrier v. Carrier, 226 N.Y. 114">226 N.Y. 114, 123 N.E. 135">123 N.E. 135, the Court of Appeals of New York had under consideration trust provisions somewhat analogous to those involved herein. There the grantor of the trust retained for life the power to direct the trustee as to investment and management1962 U.S. Tax Ct. LEXIS 190">206 of the fund, and it was provided that his discretion should be absolute and uncontrolled. The court held that the grantor was in effect the trustee since the duties of the trust company were merely formal, and stated:It is true that the creator of this trust had reserved to himself the broadest rights of management. His discretion was to be "absolute and uncontrolled." That does not mean, however, that it might be recklessly or willfully abused. He had made himself a trustee; and in so doing he had subjected himself to those obligations of fidelity and diligence that attach to the office of trustee. He had power to "invest" the moneys committed to his care. He had no power, under cover of an investment, to loan them to himself. His discretion, however broad, did not relieve him from obedience to the great principles of equity which are the life of every trust. * * See also Osborn v. Bankers Trust Co., (Sup. Ct.) 5 N.Y.S. (2d) 211. And in Stix v. Commissioner, (C.A. 2) 152 F.2d 562, affirming 4 T.C. 1140">4 T.C. 1140 (a case involving income tax rather than estate tax), it was stated:1962 U.S. Tax Ct. LEXIS 190">207 37 T.C. 973">980 Nevertheless, we agree that no language, however strong, will entirely remove any power held in trust from the reach of a court of equity. After allowance has been made for every possible factor which could rationally enter into the trustee's decision, if it appears that he has utterly disregarded the interests of the beneficiary, the court will intervene. Indeed, were that not true, the power would not be held in trust at all; the language would be no more than a precatory admonition. Collister v. Fassitt, 163 N.Y. 281">163 N.Y. 281, 57 N.E. 490">57 N.E. 490, 79 Am. St. Rep. 586">79 Am. St. Rep. 586; In re Van Zandt's Will, 231 A.D. 381, 247 N.Y.S. 441">247 N.Y.S. 441: Commissioner v. Dravo, 3 Cir., 119 F.2d 97, 100; Phipps v. Commissioner, 2 Cir., 137 F.2d 141; Restatement of Trusts § 187, Comment K; § 125. * It is our conclusion that insofar as the management of the trust in the instant case was concerned, the grantor had in effect made himself a fiduciary, and that under the law of New York he was not at liberty to administer the trust 1962 U.S. Tax Ct. LEXIS 190">208 for his own benefit or to ignore the rights of the beneficiaries, even though he no doubt would be permitted wide latitude in the exercise of his discretion as to the types of investments to be made.Under the trust indenture all stock dividends and liquidating dividends were to be added to principal and no portion thereof distributed to the beneficiaries of the income; all other cash dividends were to be deemed income and distributed as such; and any investments in securities or other property were to be made only out of principal of the trust estate. There was, therefore, no retained right or power in the decedent to divert any of the corpus to the income beneficiaries or to divert any income to the remaindermen. Corpus and income were to go in accordance with the provisions made in the indenture, and there was no provision in the indenture whereby the decedent might alter, amend, or revoke the trust.Under these circumstances we think that although the decedent, under his broad discretionary powers with respect to investment, might invest in properties producing either a high or a low return of income, such powers would have to be exercised in good faith in accordance with his1962 U.S. Tax Ct. LEXIS 190">209 fiduciary responsibility and could not be used for the purpose of attempting to favor any beneficiary or class of beneficiaries to the detriment of the other beneficiaries. It is our conclusion that the right retained by the grantor was not the right to designate the persons who should possess or enjoy the property or the income therefrom within the intendment of section 2036(a)(2).The case of State Street Trust Co. v. United States, supra, cited by the respondent, is distinguishable from the instant case in that the grantor retained far greater powers than were retained in the instant case. There the grantor, as cotrustee, in addition to having broad powers with respect to investment, had the power to determine, without limitation, which trust assets, accretions, and receipts should be allocated to corpus or income, to make deductions from income for 37 T.C. 973">981 depreciation, amortization, or waste in whatsoever amounts he saw fit, and generally to do all things in relation to the trust fund which he could have done had the trust not been executed.We have heretofore held that the retention by the grantor of a trust of the right to direct the trustee1962 U.S. Tax Ct. LEXIS 190">210 to invest and reinvest the trust property in such manner as the grantor might direct does not amount to the retention of a power to alter, amend, or revoke, within the meaning of the provisions of prior revenue Acts corresponding to section 2038 of the Internal Revenue Code of 1954. Estate of Henry S. Downe, 2 T.C. 967">2 T.C. 967 (petition for review (C.A. 2) dismissed); Estate of George W. Hall, 6 T.C. 933">6 T.C. 933; and Estate of John W. Neal, 8 T.C. 237">8 T.C. 237. It is accordingly our conclusion that the enjoyment of the trust property was not subject, at the date of the decedent's death, to any change through the exercise of a power by the decedent to alter, amend, or revoke, within the meaning of section 2038.We hold that the respondent erred in including the value of the assets of the trusts in the gross estate.Decision will be entered under Rule 50. Footnotes1. Section 2036 provides in part as follows:SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.(a) General Rule. -- The value of the gross estate shall include the value of all property (except real property situated outside of the United States) to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death -- (1) the possession or enjoyment of, or the right to the income from, the property, or(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.Section 2038 provides in part as follows:SEC. 2038. REVOCABLE TRANSFERS.(a) In General. -- The value of the gross estate shall include the value of all property (except real property situated outside of the United States) -- * * (2) Transfers on or before June 22, 1936. -- To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death. * ↩2. Section 20.2036-1 of the Estate Tax Regulations provides in part as follows:(3) The phrase "right * * to designate the person or persons who shall possess or enjoy the transferred property or the income therefrom" includes a reserved power to designate the person or persons to receive the income from the transferred property, or to possess or enjoy nonincome-producing property, during the decedent's life or during any other period described in paragraph (a) of this section. * * * The phrase, however, does not include a power over the transferred property itself which does not affect the enjoyment of the income received or earned during the decedent's life. (See, however, section 2038↩ for the inclusion of property in the gross estate on account of such a power.) * * *	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625746/	FITCHBURG RAILROAD CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fitchburg R. Co. v. CommissionerDocket No. 8849.United States Board of Tax Appeals8 B.T.A. 495; 1927 BTA LEXIS 2862; October 4, 1927, Promulgated 1927 BTA LEXIS 2862">2862 1. Many years prior to the taxable year petitioner leased its railroad and property for a term of years, the lessee agreeing to pay all Federal income taxes imposed upon the lessor with reference to the rental. The lessee paid the Federal tax upon the net income returned by petitioner for each year subsequent to the lease. Held, the amount of tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid. 2. No portion of premiums at which bonds were issued, which bonds were outstanding at the close of the taxable year, represented income within the taxable year. J.S.Y. Ivins, Esq., and O. R. Folsom-Jones, Esq., for the petitioner. N. M. Fisher, Esq., and P. J. Rose, Esq., for the respondent. LITTLETON8 B.T.A. 495">495 The Commissioner determined a deficiency in income and profits tax of $96,855.82 for the fiscal period January 1 to November 30, 1919. The issues involved are (1) whether the payments, under the term of a lease, of the lessor's income tax by the lessee constitutes additional income to the lessor, and (2) whether the premiums received upon the sale of bonds prior to March 1, 1913, should1927 BTA LEXIS 2862">2863 be spread over the life of the bonds and treated as income accrued ratably over that period. FINDINGS OF FACT. During the taxable period petitioner was a Massachusetts corporation with principal office at Boston. It was the owner of a railroad which it had leased to the Boston & Maine Railroad under a lease which provided, inter alia, that the lessee would pay the Federal income tax of the lessor. The income tax of the petitioner for each year was payable and was paid by the lessee in the following year. The Commissioner computed a Federal income tax of $88,050.75 upon petitioner's income, as revised by him, for the period January 1 to November 30, 1919, and added the said amount of $88,050.75 to petitioner's taxable income for the said fiscal period. 8 B.T.A. 495">496 The income-tax return of the petitioner for the calender year 1918 showed a tax liability of $112,910.58, computed upon the income of petitioner for that year without the inclusion therein of any amount on account of tax paid by petitioner's lessee. This tax of $112,910.58 was paid by the Boston & Maine Railroad, petitioner's lessee, during the year 1919. Petitioner kept its books and rendered its return1927 BTA LEXIS 2862">2864 upon an accrual basis. Petitioner was merged with the Boston & Maine Railroad December 1, 1919. Prior to March 1, 1913, petitioner issued bonds in the amount of $9,935,000 and sold them at premiums aggregating $362,207.75. The Commissioner added to petitioner's net income for the fiscal period January 1 to November 30, 1919, $16,601.18, as being that proportion of the premium so realized which he claimed to be taxable income to the petitioner for said period. OPINION. LITTLETON: In , the Board held that the amount of tax upon the income of the lessor and paid by the lessee, under the terms of a lease such as we have here, constituted additional taxable income to such lessor in the year in which such tax was paid by the lessee. On the authority of that decision petitioner's tax for the fiscal period January 1 to November 30, 1919, should be recomputed by including in income the amount of $112,910.58 representing the tax upon petitioner's income for 1918 and paid by the lessee in 1919. The second issue is governed by the decision of the Board in 1927 BTA LEXIS 2862">2865 . On the authority of the decision in that proceeding it is held that no portion of the premium at which bonds which were outstanding at the close of each of the taxable years involved were issued constituted income during the taxable years. Reviewed by the Board. Judgment will be entered on 15 days' notice, under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625747/	THE LIMITED, INC., AND CONSOLIDATED SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentThe Limited, Inc. v. Comm'rNo. 26618-95United States Tax Court113 T.C. 169; 1999 U.S. Tax Ct. LEXIS 40; 113 T.C. No. 13; September 7, 1999, Filed An appropriate order will be issued. P's subsidiary, D, a domestic corporation, is a credit card bank, issuing private label credit cards to customers of P. F1 is a controlled foreign corporation with respect to P. F2 is a foreign subsidiary of F1. F1 funded F2, which purchased certificates of deposit (CDs) from D. HELD: The CDs are U.S. property within the meaning of sec. 956(b)(1), I.R.C., and not deposits with persons carrying on the banking business within the meaning of sec. 956(b)(2)(A), I.R.C. HELD, FURTHER, the CDs are attributed to F1 pursuant to sec. 1.956-1T(b)(4), Temporary Income Tax Regs., 53 Fed. Reg. 22163, 22165 (June 14, 1988). HELD, FURTHER, P must include the increase of investment in U.S. property in gross income pursuant to sec. 951(a)(1)(B), I.R.C.Joel V. Williamson, Roger J. Jones, Frederic L. Hahn, Daniel A. Dumezich, Russel R. Young, Neil B. Posner, James P. Fuller, Kenneth B. Clark, Ronald B. Schrotenboer, William F. Colgin, Jr., and Patricia A. Yurchak, for petitioner.Kristine A. Roth, James E. Kagy, Donald K. Rogers, and John Budde, for respondent. Halpern, James 1999 U.S. Tax Ct. LEXIS 40">41 S. HALPERN113 T.C. 169">170 HALPERN, JUDGE: Petitioner is the common parent corporation of an affiliated group of corporations making a consolidated return of income (the affiliated group). By notice of deficiency dated September 29, 1995 (the notice), respondent determined deficiencies in Federal income tax for the affiliated group for its taxable years ended February 1, 1992, and January 30, 1993 (1992 and 1993, respectively), in the amounts of $ 72,040,547 and $ 95,836,934, respectively. Many of the adjustments giving rise to the deficiencies determined in the notice have been settled, and this report addresses only whether certain transfers during 1993 were investments in U.S. property for purposes of those provisions of the Internal Revenue Code dealing with controlled foreign corporations. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue.FINDINGS OF FACTINTRODUCTIONSome of the facts have been stipulated and are so found. The stipulations of facts filed by the parties, with accompanying exhibits, are incorporated herein by this reference. Petitioner has its principal place of business in Columbus, Ohio. 11999 U.S. Tax Ct. LEXIS 40">42 BUSINESS OF PETITIONERPetitioner is one of the largest specialty retailers in the United States. During the years at issue, it sold its merchandise both in its own stores and by catalog. Among the well-known stores owned by petitioner were The Limited, Lane Bryant, Lerner New York, Victoria's Secret, and Abercrombie 113 T.C. 169">171 & Fitch. Petitioner earned its income primarily from the sale of garments. A foreign subsidiary of petitioner manufactured many of those garments or contracted with others for their manufacture.PAYMENTS BY CUSTOMERSMerchandise sold by petitioner is paid for with cash, by check, or by credit card. Petitioner accepts two types of credit cards: (1) petitioner's private-label credit card, which is honored only in one or more of petitioner's stores, and (2) a credit card issued by a third-party bank or other financial institution and honored by many merchants.PETITIONER'S PRIVATE-LABEL CREDIT CARDSPrior to 1982, petitioner 1999 U.S. Tax Ct. LEXIS 40">43 issued no credit cards.In 1982, petitioner acquired two retailers of women's clothing that had preexisting open-end credit plans: i.e., credit plans providing for repeated extensions of credit with no fixed dates for repayment. Petitioner organized two new subsidiary corporations to take over the operation of those credit plans. Those two corporations were Limited Credit Services, Inc. (Limited Credit), a Delaware corporation, and World Financial Network, Inc. (WFN), also a Delaware corporation. Limited Credit administered petitioner's open- end credit operations. WFN funded the consumer credit associated with the open-end credit systems through a receivables financing facility. Eventually, Limited Credit and WFN came to operate credit plans for some of petitioner's other stores.The credit plans operated by Limited Credit were established under the retail installment sales acts enacted in each of the 50 States, the District of Columbia, and Puerto Rico. Limited Credit was required to comply on a State-by-State basis with varying limitations on interest rates, minimum finance charges, delinquency charges, uncollectible check fees and methods for calculating the average daily balance 1999 U.S. Tax Ct. LEXIS 40">44 of accounts.ORGANIZATION OF WORLD FINANCIAL NETWORK NATIONAL BANKIn 1986, Ralph E. Spurgin (Spurgin) joined petitioner's organization and became president of Limited Credit. Spurgin believed that petitioner could increase the profitability 113 T.C. 169">172 of its credit card operations if it could avoid the various States' retail installment sales acts. In particular, he believed that, if petitioner could avoid setting interest rates on a State-by-State basis, and charge a uniform rate, it could earn an additional $ 10 million dollars in revenue. Spurgin believed that a way to avoid the States' retail installment sales acts was, in some manner, to employ a national bank to extend credit to customers of the stores (a bank that would not be subject to the various States' retail installment sales acts). 21999 U.S. Tax Ct. LEXIS 40">45 The Bank Holding Company Act of 1956 (BHCA), ch. 240, 70 Stat. 133, currently codified at 12 U.S.C. secs. 1841-1850 (1994), concerns the ownership of banks. In general, BHCA prohibits companies that own banks from engaging in any business other than banking or a business closely related to banking. See 12 U.S.C. sec. 1841 (1994). In 1987, in part to deal with the problem of "nonbank banks" (institutions regulated as banks but exempt from key provisions of BHCA because of their failure to meet the definition of a bank under BHCA), Congress amended BHCA. See the Competitive Equality Banking Act of 1987 (CEBA), Pub. L. 100-86, sec. 1004(b), 101 Stat. 552, 659. 31999 U.S. Tax Ct. LEXIS 40">47 1999 U.S. Tax Ct. LEXIS 40">48 CEBA broadened the definition of a bank for purposes 113 T.C. 169">173 of BHCA but excluded from that definition institutions engaging only in credit card transactions (credit card banks). 4 Thus, a company like petitioner, which was engaged 1999 U.S. Tax Ct. LEXIS 40">46 in neither banking nor a banking related business, could own a credit card bank without violating BHCA. CEBA cleared the way for petitioner to own a bank that could charge a uniform rate of interest on credit card sales. 5As of March 15, 1989, World Financial Network National Bank (WFNNB) was organized under the National Bank Act, see 12 U.S.C. sec. 24 (1994). On May 1, 1989, the 1999 U.S. Tax Ct. LEXIS 40">49 Comptroller of the Currency issued a charter certificate to WFNNB authorizing it to commence the business of banking as a National Banking Association. The articles of association of WFNNB (the articles) state that the association is organized to carry on the business of banking under the laws of the United States. The articles incorporate in full the CEBA credit card institution restrictions. See supra note 3. In pertinent part, Article THIRD provides:The association(i) will engage only in credit card operations;(ii) will not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others;(iii) will not accept any savings or time deposit of less than $ 100,000;(iv) will maintain no more than one office that accepts deposits;(v) will not engage in the business of making commercial loans; * Petitioner subscribed to 175,000 shares of the common stock of WFNNB (par value $ 17.5 million). In consideration of receipt of those shares, petitioner contributed all of the stock of Limited Credit and WFN to WFNNB, which corporations 113 T.C. 169">174 were thereafter liquidated and dissolved. 1999 U.S. Tax Ct. LEXIS 40">50 WFNNB is a wholly owned subsidiary corporation of petitioner.CREDIT OPERATIONS OF WORLD FINANCIAL NETWORK NATIONAL BANKUpon receipt of its charter, WFNNB entered into agreements (the merchant agreements) with the stores. The merchant agreements concerned credit cards to be issued by WFNNB to customers of the stores and embodied the contractual relationship between WFNNB and the stores with respect thereto. Among other things, the merchant agreements entitled WFNNB to issue credit cards bearing the name and logo of each store to customers of that store.Also upon receipt of its charter, WFNNB sent notices (change of terms notices) to holders of the credit cards previously issued under the credit plans operated by Limited Credit and WFN. The change of terms notices, among other things, informed such credit card holders that WFNNB would be the extender of credit on their account and, for credit card holders in certain States, there would be an increase in the interest rate on their accounts.As of January 30, 1993, WFNNB had opened 12.9 million credit card accounts, and it had outstanding credit card loans in excess of $ 757 million.WFNNB: CAPITALIZATION AND LIQUIDITY NEEDSWFNNB had cash 1999 U.S. Tax Ct. LEXIS 40">51 (liquidity) needs that could not be met without borrowing. Limited Service Corp. (Limited Service), another member of the affiliated group, performed the "treasury function" for WFNNB. That function included assisting WFNNB in meeting its liquidity needs. Limited Service had access to funds generated by petitioner's sale of its commercial paper. Initially, WFNNB's liquidity needs were met from within the affiliated group. On May 1, 1989, Limited Service granted WFNNB a line of credit in the amount of $ 500 million. On December 1, 1993, Limited Service increased to $ 1 billion the line of credit it granted to WFNNB. At various times, WFNNB obtained funds from Limited Service pursuant to various other long- and short-term loan agreements. WFNNB also borrowed money from, and was granted lines of credit by, various unrelated, outside lenders. On December 4, 1992, WFNNB was granted a $ 280 million line of credit by a syndicate 113 T.C. 169">175 of 17 banks. WFNNB never drew on that line of credit because it could obtain funds less expensively from Limited Service.CERTIFICATES OF DEPOSITWFNNB first issued (sold) a certificate of deposit (CD) on May 1, 1989. That CD was sold to Limited Service for $ 100,000, 1999 U.S. Tax Ct. LEXIS 40">52 the minimum acceptable time deposit pursuant to the CEBA restrictions incorporated in the articles.On November 19, 1992, by letter agreement (the letter agreement), WFNNB appointed Merrill, Lynch, Pierce, Fenner & Smith, Inc. (Merrill Lynch), as its agent for its customers who desired to purchase CDs. The letter agreement provided that the CDs would be sold in denominations of $ 100,000 or integral multiples thereof.During December 1992 and January 1993, WFNNB, acting through its agent, Merrill Lynch, sold 17 CDs, receiving $ 26.3 million. Those 17 CDs comprised 263 "transferable individual time deposit accounts" of $ 100,000 each. Each of those accounts was insured by the Federal Deposit Insurance Corp.MFE (Netherlands Antilles) N.V. (MFE N.V.), is a Netherlands Antilles corporation. On January 28, 1993, MFE N.V. purchased eight CDs from WFNNB in the total amount of $ 174.9 million (the MFE N.V. CDs). Each MFE N.V. CD was for a term of 1 year, showed an annual interest rate of 3.1 percent (annual yield of 3.14 percent), and provided that it was a "non-negotiable and non- transferable time deposit". Each also provided: "This Time Deposit shall renew automatically for a like term unless 1999 U.S. Tax Ct. LEXIS 40">53 and until notice of withdrawal is presented at the Bank within * * seven calendar days after the maturity date".REDUCTION OF INDEBTEDNESS TO LIMITED SERVICEOn January 28, 1993, WFNNB transferred the $ 174.9 million received from MFE N.V. on the sale of the CDs to Limited Service to reduce the balance outstanding under the line of credit extended to WFNNB by Limited Service.113 T.C. 169">176 PETITIONER'S INDIRECT OWNERSHIP OF MFE N.V.MFE N.V. is a fourth tier subsidiary of petitioner. The relationship of MFE N.V. to petitioner, as well as the relationship of WFNNB, Limited Service, and the stores to petitioner is shown in the following diagram.SIMPLIFIED CORPORATION ORGANIZATIONAL STRUCTUREJANUARY 1993[Diagram is omitted from TNT but it is available thru Access Service]113 T.C. 169">177 ORGANIZATION AND OPERATION OF MFE AND MFE N.V.In 1970, Mast Industries, Inc. (MII) organized Mast Industries (Far East) Ltd. (MFE) as a Hong Kong corporation. At all times here pertinent, MFE had its headquarters and principal place of business in Hong Kong. MFE is a "controlled foreign corporation" (of petitioner) within the meaning of section 957(a).MFE is a contract manufacturer for petitioner. It operates throughout 1999 U.S. Tax Ct. LEXIS 40">54 Asia, manufacturing or contracting for the manufacture of garments to be sold by petitioner's stores.MFE declared no significant dividends from the early 1980s through 1993, resulting in accumulated earnings and profits in excess of $ 330 million at the end of 1993.On January 12, 1993, the directors of MFE resolved to organize and capitalize MFE N.V. Among the stated purposes were: "engaging in group financing activities and providing for a means of investing and reinvesting liquid assets and funds." The directors of MFE further resolved to make a capital contribution to MFE N.V. of $ 175 million. MFE N.V. had no employees during January 1993. On January 28, 1993, MFE transferred $ 175 million by wire to MFE N.V. That $ 175 million was used to purchase the MFE N.V. CDs.OPINIONI. INTRODUCTIONWorld Financial Network National Bank (WFNNB), a national banking association, is a wholly owned subsidiary of petitioner. In 1989, WFNNB was organized (and today operates) as a credit card bank to issue credit cards to customers of petitioner's stores. Mast Industries (Far East), Ltd. (MFE), a Hong Kong corporation, also is a wholly owned subsidiary of petitioner. MFE is a controlled foreign corporation 1999 U.S. Tax Ct. LEXIS 40">55 within the meaning of section 957 and, with respect to MFE, petitioner is a U.S. shareholder within the meaning of section 951(b). MFE (Netherlands Antilles) N.V. (MFE N.V.), a Netherlands Antilles corporation, is a wholly owned subsidiary of MFE. On January 28, 1993, MFE N.V. purchased eight certificates of deposit (CDs) from WFNNB in the total amount of $ 174.9 million (the MFE N.V. CDs). We must determine whether, as a result of those purchases, petitioner must 113 T.C. 169">178 include $ 174,127,665 in gross income under section 951(a)(1)(B) on account of the investment by MFE of its earnings in U.S. property. 6 See sec. 956.II. INTERNAL REVENUE CODE AND REGULATIONSThe principal provisions of the Internal Revenue Code at issue are sections 951 and 956. Sections 951 and 956 are found in subpart F of part III, subchapter N, chapter 1 of the Internal Revenue Code (subpart F). Subpart F concerns itself with controlled foreign corporations. The term "controlled foreign corporation" is defined in section 957(a). 7Section 951 provides that each U.S. shareholder of 1999 U.S. Tax Ct. LEXIS 40">56 a controlled foreign corporation shall include in gross income certain amounts, including "his pro rata share (determined under section 956(a)(2)) of the corporation's increase in earnings invested in United States property".In pertinent part, section 956 provides:(a) General Rules. -- For purposes of this subpart --(1) Amount of investment. The amount of earnings of a controlled foreign corporation invested in United States property at the close of any taxable year is the aggregate amount of such property held, directly or indirectly, by the controlled foreign corporation at the close of the taxable 1999 U.S. Tax Ct. LEXIS 40">57 year, to the extent such amount would have constituted a dividend (determined after the application of section 955(a)) if it had been distributed.(2) Pro rata share of increase for year. * ** * (b) United States property defined. --(1) In general. -- For purposes of subsection (a), the term "United States property" means any property acquired after December 31, 1962, which is --(A) tangible property located in the United States;(B) stock of a domestic corporation;(C) an obligation of a United States person; or113 T.C. 169">179 (D) any right to the use in the United States of --(i) a patent or copyright,(ii) an invention, model, or design (whether or not patented),(iii) a secret formula or process, or(iv) any other similar right, which is acquired or developed by the controlled foreign corporation for use in the United States.(2) Exceptions. -- For purposes of subsection (a), the term "United States property" does not include --(A) obligations of the United States, money, or DEPOSITS WITH PERSONS CARRYING ON THE BANKING 1999 U.S. Tax Ct. LEXIS 40">58 BUSINESS;(B) property located in the United States which is purchased in the United States for export to, or use in, foreign countries;(C) any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time during the taxable year exceeds the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing transaction and the United States person had the sale or processing transaction been made between unrelated persons;(D) any aircraft, railroad rolling stock, vessel, motor vehicle, or container used in the transportation of persons or property in foreign commerce and used predominantly outside the United States; (E) an amount of assets of an insurance company equivalent to the unearned premiums or reserves ordinary and necessary for the proper conduct of its insurance business attributable to contracts which are not contracts described in section 953(a)(1);(F) the stock or obligations of a domestic corporation which is neither 1999 U.S. Tax Ct. LEXIS 40">59 a United States shareholder (as defined in section 951(b)) of the controlled foreign corporation, nor a domestic corporation, 25 percent or more of the total combined voting power of which, immediately after the acquisition of any stock in such domestic corporation by the controlled foreign corporation, is owned, or is considered as being owned, by such United States shareholders in the aggregate;(G) any movable property (other than a vessel or aircraft) which is used for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or under such waters when used on the Continental Shelf of the United States;[Emphasis added.]In pertinent part, section 1.956-1T(b)(4), Temporary Income Tax Regs. 53 Fed. Reg. 22163, 22165 (June 14, 1988), provides:Treatment of certain investments of earnings in United States property. (i) Special Rule. For purposes of 1.956-1(b)(1) of the regulations [which, as pertinent, paraphrases section 956(a)(1)], a controlled foreign corporation will be considered to hold indirectly * * * at the discretion of the District Director, investments in U.S. property acquired 1999 U.S. Tax Ct. LEXIS 40">60 by any other foreign corporation that is controlled by the controlled foreign corporation, if one of 113 T.C. 169">180 the principal purposes for creating, organizing, or funding (through capital contributions or debt) such other foreign corporation is to avoid the application of section 956 with respect to the controlled foreign corporation. * * )III. SUMMARY OF ARGUMENTS OF THE PARTIESA. RESPONDENT'S ARGUMENTSMFE controls MFE N.V., and respondent argues that a principal purpose for creating, organizing, or funding MFE N.V. was to avoid the application of section 956. Thus, respondent would exercise his discretion to consider MFE as owning (indirectly) any investment in U.S. property acquired by MFE N.V. See sec. 1.956- 1T(b)(4), Temporary Income Tax Regs. Respondent considers the MFE N.V. CDs to be U.S. property within the meaning of section 956(b)(1)(C) (U.S. property). Thus, respondent concludes that (1) MFE, a controlled foreign corporation, increased its earnings invested in U.S. property and (2) petitioner, the sole U.S. shareholder of MFE, must include $ 174,127,665 in gross income pursuant to section 951(a)(1)(B).Respondent has numerous arguments why the MFE N.V. CDs 1999 U.S. Tax Ct. LEXIS 40">61 are not deposits with persons carrying on the banking business within the meaning of section 956(b)(2)(A) (sometimes, section 956 deposits). Principally, respondent argues that (1) to be in the banking business for purposes of section 956(c)(2)(A), an institution must first be a "bank" within the meaning of section 581 (definition of bank for purposes of rules of general application to banking institutions), and (2) since WFNNB does no more than operate a private label credit card business, its activities are too narrow to put it into "the banking business". Respondent also argues that the MFE N.V. CDs did not constitute deposits as that term is used in section 956(b)(2)(A).Alternatively, respondent argues that, because, in substance, the MFE NV CDs are the repatriation of earnings of a controlled foreign corporation, they should be treated as such no matter what steps petitioner took to color them as something else.113 T.C. 169">181 B. PETITIONER'S ARGUMENTSPetitioner denies that MFE N.V. was created, organized, or funded to avoid the application of section 956. Moreover, petitioner argues that the MFE N.V. CDs do not constitute U.S. property since they qualify for an exception to that term as "deposits 1999 U.S. Tax Ct. LEXIS 40">62 with persons carrying on the banking business" pursuant to section 956(b)(2)(A). Petitioner argues that the term "the banking business" has no special meaning and that WFNNB was organized as a bank, is operated as a bank, is regulated as a bank, and is considered a bank by various experts in banking, finance, and economics. Petitioner likewise argues that the term "deposits" has no special meaning and the MFE N.V. CDs are deposits both in form and substance.IV. DISCUSSIONA. INTRODUCTIONAs will be explained below, the provisions of subpart F here in question were enacted to tax as dividends the repatriated earnings of controlled foreign corporations. An exception was made for deposits with persons carrying on the banking business. Given the limited purpose of WFNNB (to issue credit cards to customers of the stores), we find that the MFE N.V. CDs are not "deposits with persons carrying on the banking business", as Congress used those words in section 956(b)(2)(A). We independently reach the same conclusion based on the relationships between and among petitioner, WFNNB, MFE, and MFE N.V. Therefore, we find that the $ 174,127,665 in question was invested in U.S. property. The details of 1999 U.S. Tax Ct. LEXIS 40">63 our reasoning are as follows.B. DEPOSITS WITH PERSONS CARRYING ON THE BANKING BUSINESSIn arguing whether the MFE N.V. CDs constitute section 956 deposits, the parties expend considerable effort addressing whether WFNNB is a bank. Respondent would have us define the term "bank" as it is defined in section 581, and argues that WFNNB cannot qualify under that definition since taking deposits from unrelated parties does not constitute a substantial part of its business. Petitioner's argument is 113 T.C. 169">182 somewhat more elaborate. Petitioner argues that, since banks are in the business of banking, and WFNNB is a bank, WFNNB must be in the business of banking. Petitioner supports its minor premise (WFNNB is a bank) by showing that WFNNB was organized to carry on the business of banking, is authorized by the Comptroller of the Currency to do business as a national banking association, and derives its authority from, and is governed by, the National Bank Act (currently codified in Title 12 U.S.C.). Petitioner points out that WFNNB may not legally engage in any activity but the business of banking. Petitioner concludes: "The language enacted by Congress is unambiguous. WFNNB is a bank. It is therefore 1999 U.S. Tax Ct. LEXIS 40">64 a priori engaged in the banking business. As a matter of law, it can do nothing else."We do not accept either party's argument that we can determine whether WFNNB is in the banking business simply by determining whether WFNNB is a bank. The question is NOT whether WFNNB is a bank. Congress did not provide an exception for deposits with "banks"; it provided an exception for "deposits with persons carrying on the banking business". Congress did not define the term "banking business", and, although petitioner presented expert testimony with respect to banks and banking, none of petitioner's experts claim that the term "banking business" is a term of art or has a well-defined meaning. Indeed, petitioner's expert, Robert L. Clarke, Comptroller of the Currency from December 1985 through February 1992, testified: "During the time I served as Comptroller of the Currency, the issues of what it means to be a 'bank' and exactly what constitutes the 'banking business' regularly confronted the Office of the Comptroller of the Currency ('OCC'), Congress and the court system, including the Supreme Court." We conclude that the term "deposits with persons carrying on the banking business" is ambiguous. 1999 U.S. Tax Ct. LEXIS 40">65 8 Cf. NationsBank, N.A. v. Variable Annuity Life Ins. Co., 513 U.S. 251">513 U.S. 251, 513 U.S. 251">258, n.2, 130 L. Ed. 2d 740">130 L. Ed. 2d 740, 115 S. Ct. 810">115 S. Ct. 810 (1995) (determining that Comptroller of the Currency may determine what is an "incidental powe[r] * * * necessary to carry on the business of banking" for purposes 113 T.C. 169">183 of 12 U.S.C. sec. 24: "We expressly hold the 'business of banking' is not limited to the enumerated powers in section 24 Seventh and that the Comptroller therefore has discretion to authorize activities beyond those specifically enumerated.")C. COURT'S FUNCTION IN INTERPRETING THE INTERNAL REVENUE CODEThis Court's function in interpreting the Internal Revenue Code is to construe the statutory language to effectuate the intent of Congress. See United States v. Am. Trucking Associations, 310 U.S. 534">310 U.S. 534, 310 U.S. 534">542, 84 L. Ed. 1345">84 L. Ed. 1345, 60 S. Ct. 1059">60 S. Ct. 1059 (1940); 1999 U.S. Tax Ct. LEXIS 40">66 Merkel v. Commissioner, 109 T.C. 463">109 T.C. 463, 109 T.C. 463">468 (1997); Fehlhaber v. Commissioner, 94 T.C. 863">94 T.C. 863, 94 T.C. 863">865, affd. 954 F.2d 653">954 F.2d 653 (11th Cir. 1992); U.S. Padding Corp. v. Commissioner, 88 T.C. 177">88 T.C. 177, 88 T.C. 177">184, (1987), affd. 865 F.2d 750">865 F.2d 750 (6th Cir. 1989). Both a textual analysis of the statute and a consideration of Congress' purpose in enacting Subpart F are warranted and appropriate to determine whether deposits with WFNNB, whose activities were predominantly limited to credit card transactions, and which is a wholly owned subsidiary of petitioner, are section 956 deposits. See Public Citizen v. United States Dept. of Justice, 491 U.S. 440">491 U.S. 440, 105 L. Ed. 2d 377">105 L. Ed. 2d 377, 109 S. Ct. 2558">109 S. Ct. 2558 (1989). We begin by considering Congress' purpose in enacting subpart F.D. TAX REFORM ACTS OF 1962 AND 1976Subpart F was added to the Internal Revenue Code of 1954 by section 12 of the Revenue Act of 1962, Pub. L. 87-834, 76 Stat. 960. H.R. 10650, 87th Cong., 2d Sess. (1962) (H.R. 10650), is the bill that, when enacted, became the Revenue Act of 1962. The committee reports accompanying H.R. 10650, both in the House of Representatives (the House) and in the Senate, discuss the impetus for subpart F: to wit, to end the "tax deferral" 1999 U.S. Tax Ct. LEXIS 40">67 resulting from the failure of our income tax system to tax the foreign source income of American controlled foreign corporations until such income is distributed to the corporation's American shareholders as dividends. H. Rept. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 461; S. Rept. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707, 784. The committees did not attempt to eliminate such tax deferral completely, but they did address certain "tax haven" devices. See S. Rept. 1881, supra, 1962-3 113 T.C. 169">184 C.B. at 784. With respect to that portion of subpart F dealing with investments in U.S. property (the repatriation provision), the Committee on Finance said: "Generally, earnings brought back to the United States are taxed to the shareholders on the grounds that this is substantially the equivalent of a dividend being paid to them." S. Rept. 1881, supra, 1962-3 C.B. at 794. Accord H. Rept. 1447, supra, 1962-3 C.B. at 469. With respect to the exceptions to U.S. property for section 956 deposits (which both tax writing committees referred to as "bank accounts") and the other items contained in section 956(b)(2), the Committee on Finance explained: "The exceptions * * * however, are believed 1999 U.S. Tax Ct. LEXIS 40">68 to be normal commercial transactions without intention to permit the funds to remain in the United States indefinitely (except in the case of the last category where full U.S. corporate tax is being paid)." 9 S. Rept. 1881, supra, 1962-3 C.B. at 794; accord H. Rept. 1447, supra, 1962-3 C.B. at 469.Because U.S. property was defined to include, in general, all tangible and intangible property located in the United States, the scope of the repatriation provision proved too broad for Congress, which, in 1976, limited it. See Tax Reform Act of 1976, Pub. L. 94-455, sec. 1021(a), 90 Stat. 1525 (adding section 956(b)(2)(F) and (G)). H.R. 10612, 94th Cong., 2d Sess. (1975), is the 1999 U.S. Tax Ct. LEXIS 40">69 bill that, when enacted, became the Tax Reform Act of 1976. The committee reports accompanying H.R. 10612, both in the House and the Senate, state the committees' views that the scope of the repatriation provision is too broad. H. Rept. 94-658 (1975), 1976-3 C.B. (Vol. 2) 701, 908; S. Rept. 94-938 (1976), 1976-3 C.B. (Vol. 3) 57, 226. Both reports state that the repatriation provision may have encouraged foreign corporations to invest their profits abroad, with a detrimental effect upon the U.S. balance of trade: "For example, a controlled foreign corporation looking for a temporary investment for its working capital is, by this provision, induced to purchase foreign rather than U.S. obligations." H. Rept. 94-658, supra, 1976-3 C.B. (Vol.2) at 908; S. Rept. 94-938, supra, 1976-3 C.B. (Vol. 3) at 226.113 T.C. 169">185 The Committee on Finance explained:In the committee's view a provision which acts to encourage, rather than prevent, the accumulation of funds offshore should be altered to minimize any harmful balance of payments impact while not permitting the U.S. shareholders to use the earnings of controlled foreign corporations without payment of tax.In the committee's view, since 1999 U.S. Tax Ct. LEXIS 40">70 the investment by a controlled foreign corporation in the stock or debt obligations of a related U.S. person or its domestic affiliates makes funds available for use by the U.S. shareholders, it constitutes an effective repatriation of earnings which should be taxed. The classification of other investments in stock or debt of domestic corporations as the equivalent of dividends is, in the committee's view, detrimental to the promotion of investments in the United States. Accordingly, the committee's amendment provides that an investment in U.S. property does not result when the controlled foreign corporation invests in the stock or obligations of unrelated U.S. persons.S. Rept. 94-938, supra, 1976-3 C.B. (Vol. 3) at 226; see also, H. Rept. 94-658, supra, 1976-3 C.B. (Vol. 2) at 908. By the Tax Reform Act of 1976, Congress added subparagraph (F) to section 956(b)(2). 10 Subparagraph (F) of section 956(b)(2) provides that U.S. property does not include stock or debt of a domestic corporation (unless the corporation is itself a U.S. shareholder of the foreign controlled corporation) if the U.S. shareholders of the controlled foreign corporation have less than 25-percent 1999 U.S. Tax Ct. LEXIS 40">71 control of the domestic corporation.E. ANALYSIS1. THE BANKING BUSINESSThe repatriation provision was enacted in 1962 on the theory that the repatriation of previously untaxed (by the United States) earnings by a controlled foreign corporation was substantially the equivalent of a dividend being paid to the U.S. shareholders of that corporation (dividend equivalency theory). Excepted were a group of transactions that the tax writing committees believed were "normal commercial transactions without intention to permit funds to remain in the United States indefinitely". S. Rept. 1881, supra, 1962-3 C.B. at 794; accord H. Rept. 1447, supra, 1962-3 C.B. at 469. One such exception is for "deposits with persons carrying 113 T.C. 169">186 on the banking business". The phrase "carrying on the banking business" is a phrase modifying (and, thus, describing or limiting) the noun "persons". The phrase expresses an action required of such persons. That action is to carry on "the banking business". Congress' use of the definite article "the" to 1999 U.S. Tax Ct. LEXIS 40">72 modify the subordinate term "banking business" indicates a purpose to particularize the activity or activities required of such persons. Such persons must do something in particular: They must carry on (i.e., conduct) a business. Not any business, but the banking business; not a banking business (which would suggest a variety of businesses that would qualify) but the banking business. Our textual analysis convinces us that Congress did not intend that the term "persons carrying on the banking business" apply to every person that is conducting one or more of the activities that are considered to be part of a banking business by any statute, agency, or industry. Therefore it is not sufficient for petitioner to prove that the activities and business that WFNNB carried on were a banking business. Rather, the issue is whether WFNNB was "carrying on the banking business", as those terms are used in section 956(b)(2)(A). (Emphasis added.)From the context of the term "the banking business" we infer that Congress meant a group of activities carried on to aid the domestic business activities of controlled foreign corporations. For example, section 956(b)(2)(B) and (C) except, from the definition 1999 U.S. Tax Ct. LEXIS 40">73 of U.S. property, property that is purchased for export and loans to U.S. sellers or processors of the controlled foreign corporation's property. We believe that a person carrying on the banking business, for purposes of section 956(b)(2)(A), must, at the very least, provide banking services useful to a controlled corporation engaging in business activities in the United States. Our conclusion that Congress had a group of business-facilitating activities in mind is bolstered by the tax writing committees' stated belief that the exceptions to the definition of U.S. property were for "normal commercial transactions without intent to permit the funds to remain in the United States indefinitely". Both tax writing committees used the term "bank accounts" to describe the deposits exception. A dictionary definition of the term "bank account" is: "an account with a bank created by the deposit of money or its equivalent and subject to withdrawal 113 T.C. 169">187 of money (as by check or passbook)". Webster's 3d New International Dictionary 172 (1993) (similar in second edition, 1934). While not dispositive of Congressional intent, the use of the term "bank accounts", as defined in the dictionary for many years, 1999 U.S. Tax Ct. LEXIS 40">74 is yet another indication that the deposit exception was meant to encompass banking functions (e.g., the ability to write checks) that would facilitate the controlled foreign corporation's business.In H. Rept. 1447, the Committee on Ways and Means reported: "Certain exceptions * * * [to the House's definition of U.S. property] are made but these apply only where the property located within the United States is ordinary and necessary to the active conduct of the foreign corporation's business or substantially the same trade or business". H. Rept. 1447, supra, 1962-3 C.B. at 469 (emphasis added). H.R. 10650 as passed by the House (the House bill) dealt more strictly with a controlled foreign corporation's investment of its earnings than did the provision substituted by the Senate (which substitute was accepted by the House). To escape tax, the House bill would have required earnings invested outside of the United States (and the few exceptions for domestic investments) to be invested in money or property "ordinary and necessary for the active conduct of a qualified trade or business" (the active conduct restriction). H.R. 10650, 87th Cong., 2d Sess., sec. 13(a) (1962). The Senate eliminated 1999 U.S. Tax Ct. LEXIS 40">75 that restriction. It retained virtually unchanged, however, the language of the House bill describing the few permitted domestic investments. Since the House undoubtedly understood that language to describe investments satisfying the active conduct restriction, it can be inferred by the Senate's nearly verbatim adoption of the same language that it also understood that language to describe investments satisfying the active conduct restriction, notwithstanding its elimination of that restriction with respect to all foreign investments and U.S. investments of earnings that had been subjected to U.S. taxation.We are mindful that the exceptions to the definition of U.S. property provided in section 956(b)(2)(A) include an exception for "obligations of the United States", which, of course, could include a long-term investment, such as a 30-year Treasury bond. This fact does not alter our conclusion that Congress intended to limit section 956(b)(2)(A), in general, and the section 113 T.C. 169">188 956 deposit exception, in particular, to business facilitating activities. It was only natural for Congress to encourage any form of deposit of offshore earnings with the U.S. Government.Given our conclusion as 1999 U.S. Tax Ct. LEXIS 40">76 to the meaning of the term "the banking business", we are satisfied that the activities of WFNNB do not satisfy it. WFNNB's articles of association significantly limit its banking activities:The association(i) will engage only in credit card operations;(ii) will not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others;(iii) will not accept any savings or time deposit of less than $ 100,000;(iv) will maintain no more than one office that accepts deposits;(v) will not engage in the business of making commercial loans; * WFNNB is a special purpose institution that is not of much use to a foreign business customer seeking banking services to aid its domestic business activities except as the issuer of a private-label credit card or as the recipient of large deposits of funds that are not needed immediately. Those are insufficient services for us to conclude that WFNNB was "carrying on the banking business" as Congress used that phrase in section 956(b)(2)(A).2. DIVIDEND EQUIVALENCEAs originally enacted, in 1962, the repatriation provision classified as U.S.1999 U.S. Tax Ct. LEXIS 40">77 property virtually all investments by a controlled foreign corporation of its earnings in the United States. There was little, if any, reason for Congress to include a related-party restriction in the exception for section 956 deposits. 111999 U.S. Tax Ct. LEXIS 40">80 By 1976, however, the tax writing committees 113 T.C. 169">189 of Congress had recognized that the repatriation provisions had discouraged investments that would be favorable to the U.S. balance of payments. Congress addressed that problem by adding two additional exceptions to the definition of U.S. property: subparagraphs (F) (certain stock or debt investments) and (G) (certain oil drilling rigs). The subparagraph (F) exception is limited to stock or debt of UNRELATED domestic corporations. The Committee on Finance cautioned that it did not wish the law to be changed to permit the U.S. shareholders of a controlled foreign corporation to use the earnings of the corporation without payment of tax. H. Rept. 94-658, supra. S. Rept. 94-938, supra. Congress did not amend the section 956 deposit exception to except only deposits with unrelated persons. That is understandable, however, since BHCA prohibited nonbank holding companies from owning banks. 12 Petitioner has 1999 U.S. Tax Ct. LEXIS 40">78 offered no policy reason why Congress would permit deposits (particularly deposits for an indefinite period) with a related bank but prohibit investments in a related corporation. In response to petitioner's argument that the phrase "deposits with persons carrying on the banking business" has a plain meaning (an argument we reject), we note that, when the adherence to the "plain meaning" of a statute produces an unreasonable result "plainly at variance with the policy of the legislation as a whole", it is proper to follow that purpose, rather than the literal words. United States v. Am. Trucking Associations, Inc., 310 U.S. 534">310 U.S. 534, 310 U.S. 534">543-544, 84 L. Ed. 1345">84 L. Ed. 1345, 60 S. Ct. 1059">60 S. Ct. 1059 (1940)(internal quotation omitted); see also United States v. Ron Pair Enter., 489 U.S. 235">489 U.S. 235, 489 U.S. 235">242, 103 L. Ed. 2d 290">103 L. Ed. 2d 290, 109 S. Ct. 1026">109 S. Ct. 1026 (1989). Further, "[w]e may then look to the reason of the enactment and inquire into its antecedent history and give it effect in accordance with its decision and purpose, sacrificing, if necessary, the literal meaning in order that the purpose may not fail." U.S. Padding Corp. v. Commissioner, 88 T.C. 177">88 T.C. 184 (quoting Ozawa v. United States,260 U.S. 178">260 U.S. 178, 260 U.S. 178">194, 67 L. Ed. 199">67 L. Ed. 199, 43 S. Ct. 65">43 S. Ct. 65 (1922)). 1999 U.S. Tax Ct. LEXIS 40">79 We believe that a related party prohibition is implicit in the exception for section 956 deposits. Such a prohibition is necessary to give effect to the dividend equivalence theory that 113 T.C. 169">190 underlies the repatriation provision. 131999 U.S. Tax Ct. LEXIS 40">81 1999 U.S. Tax Ct. LEXIS 40">82 If we find that the purchase of the MFE N.V. CDs amounts to the use of the earnings of a controlled corporation by a U.S. shareholder, we believe that such purchase must be regarded as an increase of earnings invested in U.S. property (and not a section 956 deposit).On January 28, 1993, MFE N.V. purchased the (eight) MFE N.V. CDs from WFNNB for $ 174.9 million, Each CD was for a term of 1 year, showed an annual interest rate of 3.1 percent, and provided that it was a "nonnegotiable and nontransferable time deposit". Each also provided: "This Time Deposit shall renew automatically for a like term unless and until notice of withdrawal is presented at the Bank within * * seven calendar days after the maturity date". On January 28, 1993, WFNNB transferred the $ 174.9 million received from MFE N.V. to Limited Services to reduce the balance outstanding under a line of credit extended to WFNNB by Limited Services.WFNNB is a wholly owned subsidiary of petitioner, and, therefore, the reduction of WFNNB's line of credit balance to Limited Service directly benefited petitioner. As we shall explain in the next section of this report, we find that respondent did not abuse his discretion in attributing the MFE N.V. CDs to MFE. We therefore view the purchase 1999 U.S. Tax Ct. LEXIS 40">83 of the MFE N.V. CDs as a repatriation of the earnings of MFE. Because that repatriation made the earnings of MFE (a controlled foreign corporation) available for use by its only U.S. shareholder (petitioner), we find that the repatriation was 113 T.C. 169">191 substantially the equivalent of a dividend being paid by MFE to petitioner. The purchase of the MFE N.V. CDs was an investment in U.S. property. The exception for section 956 deposits is unavailable.F. SECTION 1.956-1T(b)(4), TEMPORARY INCOME TAX REGS. Section 1.956-1T(b)(4), Temporary Income Tax Regs., 53 Fed. Reg. 22165 (June 14, 1988), empowers respondent to attribute to MFE the MFE N.V. CDs if one of the principal purposes for creating, organizing, or funding MFE N.V. was to avoid the application of section 956 with respect to MFE.Petitioner argues that the purpose of organizing MFE N.V. was to inject an additional corporate layer between MFE and the deposits to WFNNB "to improve the efficacy of the deposits as protection against expropriation" by the People's Republic of China, which was scheduled to take over Hong Kong in 1997. That was the testimony of Kenneth B. Gilman, petitioner's executive vice president-finance and chief financial 1999 U.S. Tax Ct. LEXIS 40">84 officer. When asked, however, why that was the case, Mr. Gilman replied that he was not exactly sure. Timothy B. Lyons is and, during the years in issue, was petitioner's vice president-tax. His responsibilities include compliance, tax planning, and administration of the tax function at petitioner. He is intimately familiar with the business activity of MFE. Like Mr. Gilman, he also testified that the purpose of forming MFE N.V. was to protect against expropriation. Indeed, he testified that it was the "sole" purpose for organizing MFE N.V. On cross- examination, Mr. Lyon was asked why no consideration had been given to forming a domestic (United States) subsidiary of MFE to protect against expropriation. He responded: "It didn't really accomplish anything from the asset protection side * * but * * * there is no question it would have been deemed a dividend or something at that point." 14 Further, petitioner decided to invest MFE's funds in WFNNB before MFE N.V. was organized. Whether MFE N.V. was organized for asset protection purposes we need not say. We do believe, however, that that was not the sole purpose of organizing MFE N.V. We believe that a principal purpose of organizing 1999 U.S. Tax Ct. LEXIS 40">85 and funding MFE N.V. was to avoid having the 113 T.C. 169">192 $ 174.9 million capital contribution result in subpart F income pursuant to section 956. Further, we believe that another principal purpose was to limit any subpart F income imposed pursuant to section 956 to MFE N.V.'s earnings and profits, which were negligible. Thus, we find that a principal purpose for creating, organizing, and funding MFE N.V. to purchase the MFE N.V. CDs, rather than using a domestic corporation or having MFE purchase the CDs directly, was to avoid the application of section 956. Mr. Lyon's testimony supports that conclusion. Accordingly, the MFE N.V. CDs are attributed to MFE pursuant to section 1.956-1T(b)(4), Temporary Income Tax Regs., supra.G. CONCLUSIONSAt the close of 1993, MFE held the MFE N.V. CDs. The MFE N.V. CDs were U.S. property and not section 956 deposits.V. CONCLUSIONTo the extent respondent determined a deficiency in tax on the basis that petitioner must 1999 U.S. Tax Ct. LEXIS 40">86 include $ 174,127,665 in gross income under section 951(a)(1)(B), that deficiency in tax is sustained.An appropriate order will be issued. Footnotes1. In the stipulations, the parties have adopted the convention of referring to the affiliated group as "petitioner"; hereafter, we will use the term "petitioner" to refer both to the affiliated group and to any member, so long as specific identification of that member is unnecessary.2. A national banking association is permitted to charge interest for any extension of credit at the rate permitted by the State in which it is located or, alternatively, a rate 1 percent greater than the 90-day discount rate in effect in the Federal Reserve district in which the national banking association is located, whichever is higher. 12 U.S.C. sec. 85 (1994), 12 C.F.R. sec. 7.4001 (1999); Marquette Natl. Bank v. First of Omaha Serv. Corp., 439 U.S. 299">439 U.S. 299, 58 L. Ed. 2d 534">58 L. Ed. 2d 534, 99 S. Ct. 540">99 S. Ct. 540 (1978). Prior to the decision in Marquette, the majority of analysts assumed that a national bank was not permitted to export the interest rate permitted by the State in which it was located, but, rather, was subject to the usury restrictions imposed by each of the States in which its credit card customers resided.3. S. Rept. 100-19 (1987) accompanied S. 790, 100th Cong. 1st Sess. (1987), which, substantially as passed by the Senate, became Pub. L. 100-86, 101 Stat. 552 (Competitive Equality Banking Act of 1987 (CEBA), Pub. L. 100-86, 101 Stat. 552). See H. Conf. Rept. 100- 261 (1987). Immediately prior to CEBA, the Bank Holding Company Act of 1956 (BHCA), ch. 240, 70 Stat. 133, currently codified at 12 U.S.C. secs. 1841-1850 (1994), defined a "bank" as an institution that both accepted demand deposits and made commercial loans. 12 U.S.C. 1841(c)(1) and (2) (1982). The Senate Comm. on Banking, Housing, and Urban Affairs (the Committee) believed that that definition created a loophole (the "nonbank loophole") for a bank that refrained from one of those two activities and, thus, was not considered a bank for purposes of BHCA. For instance, the Committee believed that a nonbank bank could offer interest bearing NOW accounts rather than demand deposits and escape regulation under BHCA. S. Rept. 100-19, supra at 5-6. The Committee found:The impetus for nonbank banks stems primarily from large diversified companies wanting to invade the banking business while avoiding the regulatory restraints of the Bank Holding Company Act. Thus some of the nation's largest retailing, securities, and insurance companies have been able to enter the banking business through the nonbank loophole while banks are prevented from entering those businesses by the Bank Holding Company Act. [Id. at 6.] The Committee believed that a failure to close the nonbank loophole would cause a number of problems in the banking system, including creating new competitive inequalities for bank holding companies, whose activities, under BHCA, must be closely related to banking. Id. at 7-9. To close the nonbank loophole, Congress expanded the definition of the term "bank" in BHCA to include any bank whose deposits are insured by the Federal Deposit Insurance Corp., as well as any institution that (1) accepts demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties and (2) engages in the business of making commercial loans. See 12 U.S.C. sec. 1841(c)(1) (1994), as amended by CEBA, sec. 101, 101 Stat. 554-557. Congress maintained certain express exclusions from the definition of the term "bank" and provided certain, additional limited exceptions for, among other institutions, credit card banks. See 12 U.S.C. sec. 1841(c)(2) (1994); S. Rept. 100-19 supra at 11. An institution qualifies as a credit card bank if it (1) engages only in credit card operations, (2) does not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties or others, (3) does not accept any savings or time deposits of less than $ 100,000 (except for certain deposits held as collateral), (4) maintains only one office that accepts deposits, and (5) does not engage in the business of making commercial loans. 12 U.S.C. sec. 1841(c)(2)(F) (1994)↩.4. See supra note 3.↩5. In 1986, Ralph E. Spurgin believed that the Comptroller of the Currency had put a moratorium on the organization of nonbank banks that would issue credit cards.↩6. The record does not explain the discrepancy between the $ 174.9 million purchase price and the $ 174,127,665 adjustment to gross income.↩7. Sec. 957(a) provides:General Rule. -- For purposes of this subpart, the term "controlled foreign corporation" means any foreign corporation if more than 50 percent of --(1) the total combined voting power of all classes of stock of such corporation entitled to vote, or(2) the total value of the stock of such corporation, is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation.↩8. The parties dispute not only the meaning of the term "deposits with persons carrying on the banking business" but also the meanings of the subordinate terms "deposits" and "banking business". We conclude that the subordinate term "banking business" is ambiguous. That is sufficient for us to conclude that the superior term, "deposits with persons carrying on the banking business", is ambiguous.↩9. As originally enacted, sec. 956(b)(2) contained only the exceptions set out as secs. 956(b)(2)(A) through (E) plus an exception for assets of the controlled foreign corporation equal to certain accumulated earnings and profits already subject to income taxation in the United States (i.e., the "last category" referred to in the quoted language from the report of the Committee on Finance). The exception set out as sec. 956(b)(2)(F)↩ was added by the Tax Reform Act of 1976, Pub. L. 94-455, sec. 1021(a), 90 Stat. 1520.10. Congress also added subparagraph (G) to sec. 956(b)(2)↩, which deals with certain oil drilling rigs used on the U.S. continental shelf and is not relevant to our discussion.11. From the enactment of the Bank Holding Company Act of 1956 (BHCA), Pub. L. 91-607, ch. 240, 70 Stat. 133, currently codified at 12 U.S.C. secs. 1841-1850 (1994), until its amendment by the Bank Holding Company Act Amendments of 1970 (BHCA 1970 Amendments), Pub. L. 91-607, 84 Stat. 1760, a bank holding company was defined as a company having control over two or more banks. The BHCA would, thus, not have impeded a nonbanking company, such as petitioner, from owning a single bank. Nevertheless, petitioner has failed to show us that, in 1962 (when subpart F was enacted), that possibility was any more than theoretical. See S. Rept. 91-1084 (1970), 1970 U.S.C.C.A.N., p. 5519, 5522 (accompanying H.R. 6778, which was enacted as BHCA 1970 Amendments, and describing "the theoretical freedom of a one-bank holding company to engage in any business, or acquire anything it desires (subject to antitrust laws)"; Conf. Rept. 91-1747 (1970), 1970 U.S.C.C.A.N., p. 5561, 5562 (also accompanying H.R. 6778 and stating that, "[i]n the late 1960's", nonbank corporations began acquiring one bank, "thus mixing banking and nonbanking in complete contravention of the purpose of both Federal banking laws going back to the 1930's and the Bank Holding Company Act of 1956.")12. Undoubtedly, Congress believed that it had foreclosed that possibility in 1970 when it enacted BHCA 1970 Amendments. See supra note 11. By 1987, nonbank companies had found a loophole (the nonbank loophole) in BHCA, which Congress enacted CEBA to close. See supra note 3. Commercial firms, however, did not begin to exploit the nonbank loophole until the early 1980s.↩13. Petitioner argues that a limitation of the sec. 956 deposits exception to unrelated-party deposits would render that exception "superfluous" in light of sec. 956(b)(2)(F). According to petitioner, because sec. 956(b)(2)(F) permits a controlled foreign corporation's earnings to escape U.S. taxation when invested in the obligations of an unrelated U.S. corporation, it would serve no purpose to interpret the sec. 956 deposits exception as accomplishing the same result with respect to obligations in the form of deposits with a domestic corporation carrying on the banking business. The sec. 956(b)(2)(A) exception, however, applies to "deposits with persons carrying on the banking business", whereas the sec. 956(b)(2)(F) exception applies to "obligations of a domestic corporation." A person carrying on the banking business need not be a corporation. See, e.g., Mass. Gen. Laws Ann. ch. 167, sec. 1 (1997) defining "Bank" to include "any individuals, association, partnership or corporation * * doing a banking business in the commonwealth"; see also N.D. Cent. Code sec. 6-01-02 (1995) defining the terms "banking association" and "state banking association" to include "limited liability companies, partnerships, firms, or associations whose business in whole or in part consists of the taking of money on deposit". Although our interpretation of the sec. 956 deposits exception narrows its scope, we conclude that it cannot be interpreted to permit deposits by controlled foreign corporations with a related person carrying on the banking business to go untaxed and still remain consistent with the clear overall legislative intent to tax investments in related U.S. persons.14. It is possible that Mr. Lyon's concern related to sec. 956(b)(1)(B)↩, pursuant to which MFE's increase in earnings invested in the stock of a domestic corporation would have resulted in subpart F income to petitioner to the extent of such increase.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625748/	THE BROOK, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentBrook, Inc. v. CommissionerDocket No. 9116-82.United States Tax CourtT.C. Memo 1985-614; 1985 Tax Ct. Memo LEXIS 18; 51 T.C.M. 133; T.C.M. (RIA) 85614; December 17, 1985. Charles T. Crawford, for the petitioner. Elizabeth M. Fasciana, for the respondent. KORNERSUPPLEMENTAL MEMORANDUM OPINION KORNER, Judge: On September 4, 1985, the Court released its Memorandum Findings of Fact and Opinion in this case, T.C. Memo. 1985-462, and decision was entered in accordance therewith on the same day. In that earlier opinion, we held that petitioner, a social club exempt under the provisions of section 501(c)(7), 1 was not entitled to offset the net losses which it incurred in providing food and beverage service to nonmembers against the net income which it had from investments, for the purpose of computing its unrelated business taxable income under the provisions of section 512(a)(3), as determined by respondent. Thereafter, petitioner timely filed a motion under Rule 161 to reconsider our opinion, and a further motion under under Rule 162 to vacate the decision previously entered, and respondent filed an opposition to both motions. We1985 Tax Ct. Memo LEXIS 18">20 consider both motions together.In its motions, petitioner continues to urge that the excess of its expenses over income with respect to nonmember food and beverage service can properly be aggregated with its net income from investments so as to arrive at a net total of unrelated business taxable income within the meaning of section 512(a)(3). In making this argument, petitioner relies upon its interpretation of respondent's proposed regulation section 1.512(a)-3, 36 Fed. Reg. 8808 (1971). Petitioner further urges that, contrary to what we said in our first opinion, this case is not controlled by Ye Mystic Krewe of Gasparilla v. Commissioner,80 T.C. 755">80 T.C. 755 (1983). In Krewe, petitioner urges, the expenses in question - the cost of staging a mock invasion and parade - were expenses of an exempt function of the taxpayer, rather than a nonexempt function. The Court's holding in Krewe that such expenses could not be offset against nonexempt1985 Tax Ct. Memo LEXIS 18">21 function income, from concession stands and the like, therefore provides, says petitioner, no precedent for our holding in the instant case that the excess expenses from one nonexempt activity cannot be offset against the income from another unrelated nonexempt activity. In his opposition to petitioner's motions, respondent agrees in part with petitioner's position, in that respondent agrees that all the allowable expenses of one nonexempt function activity should be brought into hotchpot and should be allowable against any and all other unrelated business taxable income, from whatever source. Respondent urges, however, that such items of expense are allowable as deductions only where the nonexempt function activity in which the expenses are incurred constitutes the carrying on of a trade or business within the meaning of section 162. Where that is not the case, respondent argues, no such expenses are allowable at all as deductions in arriving at unrelated business taxable income, and since petitioner in the instant case concededly did not operate its food and beverage service with the purpose of making a profit, there was therefore no trade or business with respect to this1985 Tax Ct. Memo LEXIS 18">22 activity, and thus no allowable deductions with respect to such activity. We have examined the arguments of both sides but, since we disagree with them, we adhere to our original opinion. First, with regard to the precedential weight of Krewe in the instant situation: it is not entirely clear whether this Court, in Krewe, considered the staging of the mock invasion and parade by the taxpayer to be an exempt function of the taxpayer club, directly related to its social and exempt purposes, within the meaning of section 501(c)(7), or whether it considered such activities to be unrelated to its exempt function, and therefore outside the scope of the exemption. Although the Court's findings of fact indicated that members of the taxpayer club were heavily involved in the invasion and subsequent parade, it seems reasonably clear that such participation was not exclusive to club members, and that there was significant participation by nonmembers also. 2 In either case, however, the holding of the Court was clear - that only the expenses directly connected to the production of income from an unrelated activity could be offset against the income from such activity. As we said1985 Tax Ct. Memo LEXIS 18">23 in Krewe,80 T.C. 755">80 T.C. 767: Moreover, the adoption of the interpretation urged by the Krewe would frustrate the purpose of section 512(a)(3). The purpose of that provision is to tax the income which a social club receives from nonmember sources; thus, such income cannot be used to subsidize the activities of the members without being subject to taxation. If the position of the Krewe were adopted, the concession income would wholly avoid taxation. Such income could be used to subsidize the staging of the invasion and parade without being subjected to taxation. To carry out the purpose of section 512(a)(3), the production of the concession income must be viewed as a separate activity, and in determining the amount subjected to taxation, only the expenses directly connected with the production of such income are deductible. Hence, we hold that the Krewe is not entitled to deduct the expenses of staging the invasion and parade. 1985 Tax Ct. Memo LEXIS 18">24 The above statement fits the facts in the instant case just as well as it did the facts presented in Krewe. The prices which petitioner charged for food and beverage service to its members were the same as prices charged to nonmembers. As conceded by petitioner, such prices were not intended to produce a profit, and in fact they did not. To the extent that the excess expenses resulting from nonmember food and beverage service, a nonexempt activity, were applied to reduce the taxable income from petitioner's investments - another and unrelated nonexempt activity - such investment income was shielded from taxation and was available to subsidize the operations of petitioner for the benefit of its membership. The legislative history of section 512(a)(3) makes it clear that this was precisely the result which Congress intended to prevent. 3 Thus, we think the principle enunciated in Krewe is applicable to the facts of the instant case and controls the result, as we have indicated. In arguing that the excess1985 Tax Ct. Memo LEXIS 18">25 of expenses over income with respect to petitioner's nonmember food and beverage operations can properly be used to reduce its unrelated business taxable income from its investments (an otherwise unrelated activity), petitioner relies on the language of respondent's proposed regulation section 1.512(a)-3(b)(3), which provides: (3) Income from more than one source. In the case of a social club or an employees' association which derives gross income (excluding exempt function income) from two or more sources, its unrelated business taxable income is computed by aggregating its gross income from all such sources and by aggregating its deductions allowed with respect to such gross income. The same proposed regulation, section 1.512(a)-3(b)(2)(i), however, provides, in part: (2) Directly connected -- (i) In general. An item of deduction otherwise allowable under chapter 1 of the Code will be allowed as a deduction for purposes of computing unrelated business taxable income only if it is both directly connected with the income and incurred in the production of such income. * * * [Emphasis supplied.] We think that the words which we have emphasized in the last of the1985 Tax Ct. Memo LEXIS 18">26 above quotations are significant and remove what might otherwise be considered a contradiction, or at least an ambiguity in the proposed regulations. The addition of the emphasized words means to us that what was intended was that expenses directly connected to the production of unrelated business taxable income are to be allowed as deductions against such income only, and not against any other income to which such expenses are not directly related. In other words, expenses are to be confined as deductions to the particular income to which they relate, and any excess thereof may not be used to offset other unrelated business taxable income from another source. The totals of the net income from each such source are then to be aggregated in arriving at the total amount of unrelated business taxable income, and we think this interpretation, in turn, harmonizes with the language of the statute, section 512(a)(3)(A), which decrees that "the term 'unrelated business taxable income' means the gross income (excluding any exempt function income), less the deductions allowed by this chapter which are directly connected with the production of the gross income (excluding exempt function income) 1985 Tax Ct. Memo LEXIS 18">27 * * ." Respondent, while agreeing with petitioner's interpretation of the proposed regulation, as above, then attempts to scuttle petitioner's whole argument by urging that none of petitioner's expenses in connection with the nonmember food and beverage service are allowable, since such nonmember food and beverage service was concededly not a trade or business, and since the only deductions which are allowable would be those which qualify under section 162, applicable only to deductions incurred in the conduct of a trade or business. Like petitioner, respondent relies on his proposed regulation, and specifically proposed regulation section 1.512(a)-3(b)(1), which reads, in pertinent part: To be deductible in computing unrelated business taxable income, expenses, depreciation, and similar items not only must qualify as deductions under chapter 1 of the Code, but also must be directly connected with production of gross income (excluding exempt function income). We think that respondent's interpretation is both unreasonable and unwarranted by the statute. Section 512(a)(3) itself (the pertinent part of which we have quoted above) is clear that Congress intended to include within1985 Tax Ct. Memo LEXIS 18">28 the rubric of "unrelated business taxable income" all income which a section 501(c)(7) organization receives, other than exempt function income, and from whatever source derived, whether or not the conduct of a trade or business is involved. The legislative history of the Act, quoted in greater detail in our prior opinion herein, makes that perfectly clear, as does respondent's proposed regulation itself, section 1.512(a)-3(a), which provides in pertinent part: In general, section 512(a)(3) is designed to impose a tax on all income from nonmember sources. * * * To accomplish this result, subparagraph (A) of section 512(a)(3) provides that the unrelated business taxable income of a social club or an employees' association includes all gross income, less all allowable deductions directly connected with the production of that income, except that gross income for this purpose does not include any "exempt function income. " * * * To adopt respondent's construction in this case is to impute to Congress an intention to tax a social club's nonmember source income, regardless of whether a trade or business was being carried on, but then to allow directly related expenses as deductions1985 Tax Ct. Memo LEXIS 18">29 against such income only if a trade or business was being carried on in such activity. We will not impute any such capricious intention to Congress. Rather, we think that a reasonable reading of section 512(a)(3)(A) is that Congress, having decreed that a social club's income from all sources (other than member sources) was to be treated as business income, then intended that the deductions allowed by chapter 1 with respect to business income should be allowable as deductions against the income produced by each unrelated activity, whether in fact such activity constituted the carrying on of a business or not. We note further, as we did in our original opinion herein, that respondent's position here is inconsistent with his own statutory notice of deficiency, in which respondent allowed to petitioner all the expenses directly connected with the production of the gross income from nonmember food and beverage service, to the point of eliminating such unrelated business taxable income entirely, but refused to allow only the excess of such expenditures over income as a further offset to petitioner's investment income. 1985 Tax Ct. Memo LEXIS 18">30 Although he has argued as indicated herein, both in his briefs and in his subsequent opposition to petitioner's motions for reconsideration, respondent has never sought to amend his answer so as to claim a larger deficiency, which would be implicit in his present position. Quite aside from the fact that we think respondent's position has no merit, as we have indicated, we would not consider it here, since we think that, by raising this point for the first time on brief, rather than in his pleadings, respondent has raised a new matter which would, even if properly pleaded, shift the burden of proof to him on such issue. Achiro v. Commissioner,77 T.C. 881">77 T.C. 881, 77 T.C. 881">890 (1981); Tauber v. Commissioner,24 T.C. 179">24 T.C. 179, 24 T.C. 179">185 (1955); Rule 142(a). This Court will not consider issues not properly pleaded. Markwardt v. Commissioner,64 T.C. 989">64 T.C. 989, 64 T.C. 989">997 (1975); Rule 36(b). Finally, and with respect to the arguments of both parties, to the extent that each side relies on respondent's proposed regulations under section 512(a)(3), we note that we have held more than once that proposed regulations carry no more weight than a position or argument advanced on1985 Tax Ct. Memo LEXIS 18">*31 brief. See Freesen v. Commissioner,84 T.C. 920">84 T.C. 920, 84 T.C. 920">939 (1985) and cases cited therein. The instant proposed regulation was issued in May 1971, over 14 years ago, and has never been promulgated in final form. We would hesitate to accuse respondent, or the Treasury, of negligence in delaying the promulgation of final regulations in this area, which would be of considerable assistance to taxpayers, such as the instant petitioner, in governing their affairs under a new statute, where there is no guidance from prior authority.4 We can only infer that respondent and/or the Treasury have some continuing uncertainty of the correctness of their interpretation of section 512(a)(3), as expressed in the proposed regulation, and have as yet been unable to resolve the problem. For all the above reasons, we adhere to the position in our prior opinion. It follows that petitioner's motions to reconsider that prior opinion, as well as to vacate our decision, must be denied. Appropriate orders will be entered.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, as in effect in the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure, except as otherwise noted.↩2. Note, for example, that in the parade and invasion staged by Krewe, there were involved "40 to 50 floats, 18 to 20 bands, a number of horse units, drill teams, and 'special feature' units." Ye Mystic Krewe of Gasparilla v. Commissioner,80 T.C. 755">80 T.C. 755, 80 T.C. 755">757↩ (1983).3. See the quoted excerpts from the Reports of the House Ways and Means Committee and the Senate Finance Committee, reproduced at footnote 8 of our prior opinion.↩4. Sec. 512(a)(3)↩ was added to the Code by Pub. L. 91-172, sec. 121(b)(1), 83 Stat. 487, 537 and was effective on January 1, 1970.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625749/	Daniel T. Cooney and Eleanor M. Cooney v. commissioner.Cooney v. CommissionerDocket No. 2656-69.United States Tax CourtT.C. Memo 1971-201; 1971 Tax Ct. Memo LEXIS 133; 30 T.C.M. 845; T.C.M. (RIA) 71201; August 16, 1971, Filed Emil Sebetic, 233 Broadway, New York, N. Y. , for the petitioners. John D. Shuff, for the respondent. QUEALYMemorandum Findings of Fact and Opinion QUEALY, Judge: Respondent determined a deficiency of $1,741.68 in petitioners' Federal income taxes for the year 1967. The sole issue before us is whether payment of $12,322 1 to Liberty Mutual Insurance Company, pursuant to the settlement of a tort action by the petitioners against certain other parties, was allowable as a medical expense deduction under section 213. 21971 Tax Ct. Memo LEXIS 133">134 Findings of Fact All of the facts have been stipulated and are found accordingly. At the time the petition herein was filed, petitioners, Daniel T. Cooney and Eleanor M. Cooney, were husband and wife with legal residence in Massapequa, New York. They filed their joint Federal income tax return for the taxable year 1967 with the district director of internal revenue, Brooklyn, New York. On October 29, 1963, Daniel T. Cooney (hereinafter referred to as petitioner), an employee of Union Camp Corporation, was injured in the course of his employment. The accident occurred on a golf course located in Flemington, New Jersey. As a result of the accident, which involved a golf cart, petitioner incurred injuries to his head, body and arms and legs, including a broken back, left ankle and right ribs. He required hospitalization and extensive treatment for a period extending over fifteen months. The Liberty Mutual Insurance Company (hereinafter referred to as Liberty Mutual), who was the insurance carrier for petitioner's employer, paid the hospitalization and medical expenses (hereinafter reference to "medical expenses" shall refer to hospitalization and medical expenses) as 8461971 Tax Ct. Memo LEXIS 133">135 they were incurred by petitioner during his recovery from his injuries. These expenses totaled $12,322. In March, 1965, petitioner instituted a tort action in the United States District Court, Newark, New Jersey District, against the golf cart manufacturer, the golf cart owner and the golf course owner. In the suit, he asked for damages of $500,000 for personal injuries, medical expenses and other related damages resulting from his accident. No specific amount was alleged in his complaint as hospitalization or medical expense, or any other items of damage. Under section 29 of the New York Workmen's Compensation Law, Liberty Mutual was given a lien on any recovery by petitioner in his action for damages, whether by judgment, settlement or otherwise, after the deduction of reasonable and necessary expenditures, including attorney's fees, for the amounts paid by it on his behalf. On June 6, 1967, petitioner's suit for damages was settled by a Stipulation of Dismissal with prejudice and without costs to any party. Under the terms of the settlement, the petitioner received the sum of $60,000, in exchange for which he executed general releases, dated June 9, 1967, to the defendants. 1971 Tax Ct. Memo LEXIS 133">136 No part of the $60,000 settlement was identified or allocated by the parties as payment or reimbursement for petitioner's medical expenses. On June 8, 1967, petitioner signed an authorization of payment of the $60,000 settlement to his attorneys. His attorneys in turn satisfied the claim of Liberty Mutual for reimbursement under its statutory lien over any proceeds of the tort action. That portion was $12,322, the amount attributable to the prior payment of petitioner's medical expenses by Liberty Mutual. Opinion Section 213 provides in part: SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES. (a) Allowance of Deduction. - There shall be allowed as a deduction the following amounts, not compensated for by insurance or otherwise - * * The issue is whether petitioners incurred an expense allowable as a deduction under section 213 by virtue of the payment of $12,322 by the petitioner's attorneys to Liberty Mutual. This payment was made pursuant to section 29 of the New York Workmen's Compensation Law, which provides in pertinent part as follows: In such case [referring to the case where "* * * such injured employee * * * take or intend to take compensation, and medical benefits1971 Tax Ct. Memo LEXIS 133">137 in the case of an employee, under this chapter and desire to bring action against such other * "], the state insurance fund, if compensation be payable therefrom, and otherwise the person, association, corporation or insurance carrier liable for the payment of such compensation, as the case may be, shall have a lien on the proceeds of any recovery from such other, whether by judgment, settlement or otherwise, after the deduction of the reasonable and necessary expenditures including attorney's fees, incurred in effecting such recovery to the extent of the total amount of compensation awarded under or provided or estimated by this chapter for such case and the expenses for medical treatment paid or to be paid by it and to such extent such recovery shall be deemed for the benefit of such fund, person, association, corporation or carrier. * * Sec. 29-1, Workmen's Compensation Law, ch. 64. It is clear that this law works to subrogate the claim of the insurer to that of the employee. See , where the court said: Section 29 does not vest absolutely in plaintiff a cause of action for medical expenses1971 Tax Ct. Memo LEXIS 133">138 which were not paid by him. Neither does it vest absolutely in him a cause of action for moneys already paid to him as compensation, yet, we think that section 29 gives him the right to bring an action against the third party for both of these. Section 29 allows him to bring this action in a sort of representative or trust capacity. The purpose of the action is to create a fund in which the plaintiff has a residuary interest. The insurance carrier or employer, as the case may be, has first claim after attorney's fees, etc., have been paid, for compensation paid, and to be paid, and for medical expenses. There would be no reason for the legislature to give the carrier the right to a lien for medical expenses unless it intended that the plaintiff could first prove such expenses on the trial and recover therefor. Such a right must necessarily be implied from the wording of the statute giving the carrier the right to be paid such expenses out of the fund. Otherwise plaintiff would be the loser and the carrier could make a double 847 recovery. The statute gives the injured employee the first chance to bring the third party action and thus to create the fund. If he fails to bring the1971 Tax Ct. Memo LEXIS 133">139 action within the statutory time then the carrier can bring it. In either event the statute provides how the fund shall be administered and provides in either case that the carrier be reimbursed for medical expenses out of the fund. It follows that Liberty Mutual was subrogated to the claim of petitioner up to $12,322. As to this amount, the insurance carrier was, in effect, a third party beneficiary. Consequently, Liberty Mutual was not paid by petitioner. It was paid as a direct result of the settlement incurred by petitioner. This is no different in substance than the situation of . There the petitioner, a New York police officer, incurred medical expenses of $3,857.50 as the result of an accident suffered in the line of duty. He sued the city, and a consent judgment was entered for the petitioner in the sum of $17,000. The judgment contained a stipulation that $3,857.50 of the judgment would be paid by the city for the medical expenses incurred by the petitioner as a result of the accident. We held that the petitioner was not entitled to a deduction under section 213 because he had suffered no out-of-pocket expenses. Petitioners1971 Tax Ct. Memo LEXIS 133">140 point out that in Morgan there was a stipulation attached to the settlement which provided for the payment of medical expenses, while here neither the settlement nor the suit contains a stipulation or an allocation to that effect. However the petitioners fail to note that, under New York law, the lien by Liberty Mutual produced the same effect as a stipulation. The petitioner did not incur an out-of-pocket expense. As in Morgan, he was "compensated for his expenses through the settlement * ." . As a result, we find , to be dispositive of this case. The medical expenses of $12,322 incurred by petitioner as a result of his accident were " * * compensated for by insurance or otherwise * * *." Consequently, they were not allowable to the petitioners as a deduction under section 213. Decision will be entered for the respondent. Footnotes1. The amount disallowed in the statutory notice is $12,402. However, petitioners are only disputing disallowance of the $12,322 paid to Liberty Mutual. ↩2. All statutory references are to the Internal Revenue Code of 1954, as amended.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625776/	ESTATE OF SILVIO RAVETTI, DECEASED, DONNA LOGAN, EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Ravetti v. CommissionerDocket Nos. 2913-87, 2914-87United States Tax CourtT.C. Memo 1994-260; 1994 Tax Ct. Memo LEXIS 260; 67 T.C.M. (CCH) 3064; June 7, 1994, Filed 260 For petitioner: Richard H. Foster. For respondent: Paul J. Krug. CHIECHICHIECHIMEMORANDUM FINDINGS OF FACT AND OPINION CHIECHI, Judge: Respondent determined the following deficiencies in, additions to, and increased interest on petitioner's Federal income tax: Increased Additions to TaxInterestSection Section Section Section YearDeficiency1 6653(a) 6653(a)(1)6653(a)(2)6621(d) 1979$ 114,255.64$ 5,713.00----1980178,738.608,937.00----198155,242.80--$ 2,762.00**261 The issues remaining for decision in these consolidated cases are: 21. Are the notices of deficiency (notices) valid? We hold that they are. 2. Is the amount of the distributive share of Silvio E. Ravetti (Mr. Ravetti) of a claimed partnership loss attributable to C & M Ltd. (C & M) an allowable deduction for each of the years at issue? We hold that it is not. 3. Is the amount of the distributive share of Mr. Ravetti of a claimed partnership loss attributable to M & M Properties Ltd. (M & M) an allowable deduction for each of the years at issue? We hold that it is not. 4. Are the investment interest expenses claimed for 1979 and the Schedule C losses attributable to Mr. Ravetti's film and tape distribution activity claimed for 1979 and 1980 allowable deductions? We hold that they are not. 5. Are the travel expenses claimed by Mr. Ravetti for 1981 an allowable deduction? We hold that they are not. 6. Is the parties' stipulation of partial agreement (partial agreement) relating to Glenstall Peltroleum Ltd. (Glenstall Petroleum) to be given effect? We hold that it is. 7. Is a deduction allowable for 1980 for a claimed theft loss with respect to Mr. Ravetti's investment262 in the Harding Company partnership (Harding)? We hold that it is not. 8. Are the additions to tax for negligence to be imposed on any underpayment for each of the years at issue? We hold that they are. 9. Is any underpayment for each of the years at issue to bear interest at the increased rate provided by section 6621(c) 3 for a substantial underpayment attributable to tax-motivated transactions? We hold that it is to the extent stated herein. 263 FINDINGS OF FACT The instant cases were submitted fully stipulated. All of the facts that have been stipulated are so found. 4At the time of the filing of the petitions in the instant cases, Donna Logan (Ms. Logan), the executrix of the estate, resided in California. 1. General BackgroundMr. Ravetti married Martha Ravetti (Ms. Ravetti) on July 8, 1950. (Where appropriate, we will refer to Mr. Ravetti and Ms. Ravetti as the Ravettis.) The Ravettis were divorced on March 8, 1982. During the years at issue, Mr. Ravetti was a financial planner and tax shelter promoter. Mr. Ravetti died on June 9, 1986. On August 4, 1986, Ms. Logan, Mr. Ravetti's daughter, was appointed executrix of his estate. Ms. Ravetti also is deceased. The Ravettis filed joint income tax returns for 1979 and 1980. Mr. Ravetti filed a separate return for 1981. Mr. Ravetti executed the264 1979 return on June 15, 1980, the 1980 return on June 18, 1981, and the 1981 return on October 11, 1982. On or around May 16, 1988, respondent and Ms. Ravetti entered into a settlement agreement that allowed her innocent spouse relief for 1979 and 1980. 2. Claimed Deductions Relating to C & MC & M is a limited partnership that was organized in the State of California in October 1978. Film Services Corp. (Film Services), a California corporation, acted as the general partner of C & M. Limited partnership interests in C & M were solicited by the general partner in a private offering that called for a purchase price of $ 150,000 for each of the 10 units that were being offered. Mr. Ravetti purchased one of those units. The purchase price for each unit was payable as follows: $ 15,000 cash in 1978, a note for $ 15,000 due on December 31, 1979 ($ 15,000 note), and a note for $ 120,000 due on or before December 31, 1985 ($ 120,000 note). The $ 120,000 note was payable only from film rental proceeds and could be renewed indefinitely for periods of seven years. A limited partnership interest in C & M entitled an investor to 10 percent of the profits and losses of the partnership265 for each unit acquired. In addition, the limited partners received a 75-percent interest in the capital of the partnership. The general partner was not required to contribute any capital to C & M and was not allowed to participate in C & M's profits and losses. The general partner was, however, entitled to a 25-percent interest in capital and a management fee equal to 3 percent of the partnership's net cash flow. C & M was formed for the purpose of purchasing a feature length motion picture originally titled "Cruise Missile" (film or movie). The name of the film was subsequently changed to "Teheran Incident". C & M purchased the United States and Canadian (except for French Canadian) film rights from 21st Century Film Management Corporation (21st) for a total purchase price of $ 1,500,000, payable to 21st as follows: $ 150,000 in cash before December 31, 1978, a short-term note for $ 150,000 due on or before December 31, 1979, and a note for $ 1,200,000 payable on December 31, 1985 ($ 1,200,000 note) only out of the proceeds received from rentals of the movie. The purchase price for the film rights was not determined by arm's-length negotiations and was inflated to provide 266 C & M's limited partners with substantial tax benefits for their relatively small cash investments. Executed simultaneously with the purchase of the film rights were (1) an agreement under which C & M was to help in the purchase of release prints for the film by providing up to $ 160,000 in cash or notes and (2) an agreement under which C & M was to provide up to $ 200,000 in cash or notes to be applied towards advertising the movie. Pursuant to those agreements, two notes (Ora notes) were executed by Film Services, the general partner of C & M, in favor of Ora Advertising and Marketing (Ora). One note called for the payment of $ 155,000 on or before December 31, 1985, and related to the purchase of release prints. The other note was in the principal sum of $ 200,000 ($ 200,000 note) and related to advertising the film. The Ora notes were payable only out of film rental proceeds and were renewable indefinitely at seven-year intervals. At the time the limited partners agreed to acquire their interests in C & M, they purportedly executed guaranty agreements (guaranty agreements) with respect to their proportionate share of the $ 1,200,000 note and the $ 200,000 note. Like the 267 $ 120,000 note, the $ 1,200,000 note, and the Ora notes, the guaranty agreements were payable only out of film rental proceeds. Thus, the limited partners were not personally liable with respect to their obligations under those notes or the guaranty agreements. Mr. Ravetti made no payments on the $ 120,000 note, the Ora notes, or the guaranty agreements. The film was originally produced by Noble Productions, Inc. (Noble) in coproduction with several foreign producers. Without taking into account contingent compensation arrangements with the actors, Noble's production costs approximated $ 400,000. The movie, which was filmed primarily in Iran and France, starred Peter Graves, Kurt Jurgens, Michael Dante, and John Carradine. Once completed, Noble assigned all United States and Canadian (except for French Canadian) rights in the film to 21st for a total consideration of $ 113,000. The movie received its first United States booking on December 7, 1979, at the Capri Theatre in Florence, Alabama. Thereafter, only three other bookings were secured at theaters in Georgia, Iowa, and Texas. Total box office receipts for the film were $ 1,062. Nontheatrical showings of the movie through268 January 1981 grossed approximately $ 6,740. All distribution rights for the film were assigned by 21st to Ika Panajotovic, the film's producer and sole owner of Noble. For 1978 and 1979, C & M filed partnership returns (Forms 1065) showing the following receipts, expenses, and net losses: 19781979Gross Receipts$ 0 $ 0 Interest Income0 4,216 Less: Depreciation(83,332)(500,000)Net Loss$ 83,332 $ 495,784 The interest income reported by C & M for 1979 represented interest paid by the limited partners on the portion of their capital investment that was deferred by their $ 15,000 notes payable in 1979. C & M computed the depreciation expense with respect to the movie using the straight-line method and a useful life of three years. The basis of the film claimed for purposes of depreciation was $ 1,500,000. For 1978, the partnership used a basis of $ 1,892,500 for purposes of claiming an investment tax credit. In the opinion of qualified appraisers, the fair market value of the film in December 1978 was approximately $ 36,500 to $ 46,500. 3. Claimed Deductions Relating to M & MM & M is a limited partnership that was organized269 in the State of California in December 1978. Film Services acted as M & M's general partner. Mr. Ravetti subscribed to a limited partnership certificate of M & M. On September 28, 1978, Mr. Ravetti paid $ 11,340 to Film Services. Mr. Ravetti executed a promissory note, dated September 25, 1978, and payable to "Meet Me After Midnight" Limited Partnership in the principal amount of $ 62,140. In 1978, Mr. Ravetti executed a document entitled "GUARANTY" which stated that it was for the purpose of inducing 21st to sell a film entitled "Meet Me After Midnight" to "Meet Me After Midnight" Limited Partnership. In 1980, an advertisement for a film entitled "Running Hot" was published in Variety. 4. Claimed Deductions Relating to Investment Interest Expenses and Film and Tape Distribution LossesA deduction for investment interest expenses in the amount of $ 19,306 was claimed in the Ravettis' 1979 return. In their 1979 and 1980 returns, Schedule C losses were claimed in the amounts of $ 78,000 and $ 5,850, respectively, from Mr. Ravetti's film and tape distribution activity. 5. Claimed Deduction Relating to Travel ExpensesIn September 1981, Mr. Ravetti purchased airline270 tickets costing $ 2,292 from Henderson Travel for Steve Beacher (Mr. Beacher) and himself. Those tickets were for round trip travel from San Francisco through Miami to the Cayman Islands. A deduction for travel expenses in the amount of $ 3,200 was claimed in a Schedule C of Mr. Ravetti's 1981 return with respect to an activity identified as metals mining. 6. Claim of Theft Loss Relating to HardingThe Ravettis claimed in their 1976 return a deduction for $ 48,315 for the distributive share of Mr. Ravetti's claimed partnership loss attributable to Harding. Harding was one of 296 Cal-Am Coal Tax Shelter Partnerships (Cal-Am partnerships) promoted and sold by the Cal-Am Corporation in 1976 and addressed by this Court in Hawley v. Commissioner, T.C. Memo 1988-77">T.C. Memo. 1988-77. In that case, we held that the activities of the Cal-Am partnerships were devoid of economic substance. At the trial of Hawley, Joseph R. Laird (Mr. Laird), general partner of Harding, admitted, inter alia, that it was not intended that the Cal-Am partnerships would become involved in the actual mining of coal. On or around September 1980, Laird was indicted under (1) 18 U.S.C. sec. 1341271 (1988) for mail fraud, (2) 18 U.S.C. sec. 371 (1988) for conspiracy to commit securities fraud and to defraud the United States, and (3) section 7206(1) and (2) for filing false tax returns and aiding in the filing of false tax returns. See United States v. Crooks, 804 F.2d 1441">804 F.2d 1441, 1444 (9th Cir. 1986). Mr. Laird was acquitted of the mail fraud charges by a jury. In a second trial, after the trial judge struck securities fraud as an object of the conspiracy alleged in the indictment, Mr. Laird was convicted of conspiracy to defraud the United States and aiding and abetting the filing of false tax returns. See id.7. Mr. Ravetti's Mental ConditionOn November 10, 1980, Mr. Ravetti was admitted to the Medical Psychiatric Unit of St. Mary's Hospital (hospital) for neuropsychiatric investigation of increased activity, pressured speech, and hypersexuality. While medical examination indicated signs of presenile dementia and depression, Mr. Ravetti was still able to function in his work. Mr. Ravetti was discharged from the hospital on December 5, 1980. During 1983, Mr. Ravetti corresponded with the Internal272 Revenue Service (the Service) concerning a Form 872-A executed by him as well as the Service's audit of the returns for the years at issue. During that year, Mr. Ravetti also corresponded with others concerning his business and tax affairs. On February 4, 1985, Raymond M. Bolton (Mr. Bolton) was appointed conservator of Mr. Ravetti's estate. 8. Respondent's DeterminationsRespondent made and explained the following determinations in the notices. Respondent disallowed Mr. Ravetti's distributive share of claimed losses attributable to certain partnerships, as follows: Partnership YearAmountC & M 1979$ 49,579198050,100198120,884M & M 197928,002198028,433198113,102Glenstall Petroleum198146,828Respondent disallowed $ 19,306 of claimed investment interest expenses for 1979 and $ 78,000 and $ 5,850 of claimed losses with respect to film and tape distribution for 1979 and 1980, respectively. Respondent disallowed $ 3,200 of claimed travel expenses with respect to the "Gold for Tax Dollars" tax shelter promoted by the International Monetary Exchange (IME) for 1981. Respondent disallowed $ 94,000 and $ 144,000 of claimed273 mining development expenses relating to IME's "Gold for Tax Dollars" promotion for 1979 and 1980, respectively. 5Respondent disallowed claimed274 charitable contribution deductions of $ 11,884 and $ 5,942 for 1980 and 1981, respectively, and a claimed medical expense deduction of $ 412 for 1980. 6Respondent determined that the additions to tax for negligence applied to the underpayment for each of the years at issue and that each of those underpayments is to bear interest at the increased rate provided by section 6621(c) for substantial underpayments attributable to tax-motivated transactions. 9. Partial Agreement Relating to Glenstall PetroleumIn the partial agreement filed August 28, 1992, the estate conceded 75 percent of the deficiency attributable to the disallowance of all deductions and/or credits with respect to275 Mr. Ravetti's investment in Glenstall Petroleum. Respondent conceded that the deficiency resulting from the partial agreement was not to be subject to the additions to tax for negligence imposed by section 6653(a)(1) and (2). The estate also conceded that the deficiency was to bear interest at the rate imposed by section 6621(c). The partial agreement further provided: 7. This agreement is solely intended to resolve the question of the amount of deductions to which petitioner is entitled from the GLENSTALL PETROLEUM partnership but does not preclude petitioner from raising other issues which would affect the deficiency resulting from the adjustment to said partnership. 8. Respondent reserves the right to object to the raising of any issues by petitioner not previously pleaded.The parties subsequently entered into a closing agreement under section 7121 to the same effect as the partial agreement. OPINION The estate bears the burden of showing error in respondent's determinations. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933); Rockwell v. Commissioner, 512 F.2d 882">512 F.2d 882, 885 (9th Cir. 1975), affg. T.C. Memo. 1972-133.276 The fact that the instant cases have been fully stipulated does not change the burden of proof or the effect of a failure of proof. Rule 122(b); Borchers v. Commissioner, 95 T.C. 82">95 T.C. 82, 91 (1990), affd. 943 F.2d 22">943 F.2d 22 (8th Cir. 1991). 1. The Estate's Contentions with Respect to the Noticesa. The Estate's Contentions with Respect to the Validity of the NoticesThe estate challenges the validity of the notices, relying on Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), revg. 81 T.C. 855">81 T.C. 855 (1983). In Scar, the United States Court of Appeals for the Ninth Circuit held that the Commissioner of Internal Revenue (Commissioner) "must consider information that relates to a particular taxpayer before it can be said that the Commissioner has 'determined' a 'deficiency' in respect of that taxpayer." Id. at 1368 (footnote ref. omitted). Where the notice of deficiency does not disclose on its face that the Commissioner failed to make a determination, a presumption arises that a determination was made. See Campbell v. Commissioner, 90 T.C. 110">90 T.C. 110, 113-114 (1988).277 In the instant cases, the notices contain specific information relating to the Ravettis. They include, inter alia, the exact amounts of Mr. Ravetti's distributive share of partnership loss and investment interest expense deductions claimed in the returns at issue, the exact amounts of taxable income reported in those returns, and the exact amount of the travel expense deduction claimed in the 1981 return. The notices refer to C & M, M & M, and Glenstall Petroleum, the partnerships identified in the returns at issue that gave rise to certain of the claimed deductions. They also specify the years and amounts of the deficiencies determined by respondent against the Ravettis for 1979 and 1980 and Mr. Ravetti for 1981. On the instant record, we conclude that the notices are valid. See Clapp v. Commissioner, 875 F.2d 1396">875 F.2d 1396, 1399-1400, 1402 (9th Cir. 1989), affg. an Order of this Court; Campbell v. Commissioner, supra at 115. The estate also contends that the notices do not explain the reasons for respondent's determinations and therefore are arbitrary. We disagree. The estate is wrong in asserting that the notices278 do not explain the grounds for respondent's determinations; they do. In any event, even Scar v. Commissioner, supra at 1367, on which the estate relies, indicates that a notice of deficiency need not explain the deficiencies determined in order to be valid. The notices are not arbitrary. b. The Estate's Contention with Respect to the Period of LimitationsThe estate attempts to argue that the period of limitations has expired and that therefore assessment of the deficiencies determined in the notices is barred. Specifically, the estate asserts that the notices were issued more than three years after the filing of the returns for the years at issue and that certain consents to extend the time allowed for assessment (consents) that were executed by Mr. Ravetti in March and September 1983 were invalid because Mr. Ravetti was incompetent at those times, and the Service was aware of Mr. Ravetti's mental condition at those times. The bar of the period of limitations is an affirmative defense that the estate bears the burden of pleading and proving. Mecom v. Commissioner, 101 T.C. 374">101 T.C. 374, 382 (1993); Coleman v. Commissioner, 94 T.C. 82">94 T.C. 82, 89 (1990).279 If a taxpayer fails to plead properly the bar of the period of limitations, it is deemed waived. See Robinson v. Commissioner, 12 T.C. 246">12 T.C. 246, 248 (1949), affd. 181 F.2d 17">181 F.2d 17 (5th Cir. 1950). The estate did not plead the bar of the period of limitations in the instant cases. The estate moved for leave to plead the bar of the period of limitations in docket No. 2913-87. The Court denied the estate's motion. Estate of Ravetti v. Commissioner, T.C. Memo 1992-697">T.C. Memo. 1992-697. The estate did not seek to amend its petition to plead the bar of the period of limitations in docket No. 2914-87. Accordingly, we will not consider the estate's argument in these cases regarding the period of limitations. Assuming arguendo that the estate were allowed to raise an affirmative defense with respect to the period of limitations, we would not find in its favor. The estate argues that Mr. Ravetti was incompetent at the time the consents were executed and that the Service was on notice of Mr. Ravetti's mental disease, which it claims rendered him incapable of making rational judgments. 7 There is nothing in the record that280 shows that Mr. Ravetti was in fact incompetent or that the Service was on notice that he was incompetent when the consents were executed in March and September 1983. The fact that Mr. Ravetti had been hospitalized for neuropsychiatric investigation during 1980 does not establish that he was incompetent at those times. The March 1983 correspondence from Mr. Ravetti that is in the record indicates that he was able to manage his affairs in March 1983. The record of a Service employee's telephone conversation with Mr. Ravetti in September 1983 concerning the audit of his returns indicates that he was still able to manage his affairs. It is also significant that a conservator for Mr. Ravetti's estate was not appointed until February 4, 1985, well after the consents at issue were executed. 281 The estate previously attempted to argue in Estate of Ravetti v. Commissioner, T.C. Memo 1993-343">T.C. Memo. 1993-343, which concerned the Ravettis' 1976, 1977, and 1978 tax years, that Mr. Ravetti's mental condition invalidated certain consents to extend the time to assess tax that he executed. Under the circumstances presented in the instant cases, our conclusion in that prior case applies with equal force here: "respondent was reasonably entitled to place reliance upon the waivers which were in all respects regular in form." Id.2. Claimed Deductions Relating to C & MThe contentions of the parties concerning the allowability of the deductions claimed for losses attributable to C & M seem to focus on whether the transactions relating to C & M and the movie were shams. Consequently, before turning to the arguments of the parties here, we will describe the sham analysis used by the United States Court of Appeals for the Ninth Circuit, the court to which appeals in the instant cases would lie. In deciding whether a transaction is a tax-motivated sham, that Court of Appeals considers both the objective economic substance of and a taxpayer's subjective business282 purpose for the transaction. Casebeer v. Commissioner, 909 F.2d 1360">909 F.2d 1360, 1363 (9th Cir. 1990), affg. T.C. Memo. 1987-628, Moore v. Commissioner, T.C. Memo. 1987-626, Sturm v. Commissioner, T.C. Memo 1987-625">T.C. Memo. 1987-625, and affg. on this issue Larsen v. Commissioner, 89 T.C. 1229">89 T.C. 1229 (1987); Sochin v. Commissioner, 843 F.2d 351">843 F.2d 351, 354 (9th Cir. 1988), affg. Brown v. Commissioner, 85 T.C. 968">85 T.C. 968 (1985). The objective economic substance factor focuses on whether the transaction has economic substance beyond the creation of tax benefits. Casebeer v. Commissioner, supra at 1365. The subjective business purpose factor focuses on whether the taxpayer has a business purpose for engaging in the transaction other than tax avoidance. Id. at 1363. The inquiry under the subjective business purpose factor, like the inquiry under section 183, is whether the taxpayer had a profit objective. See Collins v. Commissioner, 857 F.2d 1383">857 F.2d 1383, 1385 (9th Cir. 1988),283 affg. Dister v. Commissioner, T.C. Memo 1987-217">T.C. Memo. 1987-217. As we held in Estate of Ravetti v. Commissioner, T.C. Memo 1993-418">T.C. Memo. 1993-418, and Estate of Ravetti v. Commissioner, T.C. Memo 1993-343">T.C. Memo. 1993-343, the question whether a profit objective exists is decided at the partnership level. See Karr v. Commissioner, 924 F.2d 1018">924 F.2d 1018, 1023 n.4 (11th Cir. 1991), affg. Smith v. Commissioner, 91 T.C. 733 (1988); Fox v. Commissioner, 80 T.C. 972">80 T.C. 972, 1006-1008 (1983), affd. without published opinion 742 F.2d 1441">742 F.2d 1441 (2d Cir. 1984), affd. sub nom. Barnard v. Commissioner, 731 F.2d 230">731 F.2d 230 (4th Cir. 1984), affd. without published opinion sub nom. Hook v. Commissioner, Kratsa v. Commissioner, Leffel v. Commissioner, Rosenblatt v. Commissioner, Zemel v. Commissioner, 734 F.2d 5">734 F.2d 5, 6-7, 9 (3d Cir. 1984); Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 503-505 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984).284 Objective economic substance and subjective business purpose "are simply more precise factors to consider in the application of this court's traditional sham analysis; that is, whether the transaction had any practical economic effects other than the creation of income tax losses." Sochin v. Commissioner, supra.The estate makes two arguments in an effort to establish the allowability of the losses claimed with respect to C & M. In order to demonstrate objective economic substance, it contends that the movie had a "great cast". The estate previously made this argument in Estate of Ravetti v. Commissioner, T.C. Memo 1993-343">T.C. Memo. 1993-343. We rejected it there, and we reject it here. The fact that the movie itself was made by well-known figures in the entertainment industry has little, if any, bearing on the economic substance of the transactions in which C & M engaged. Put simply, the intent of those who made and produced the movie does not establish that C & M's involvement had economic substance. [Id.]In order to satisfy the subjective business purpose factor, the estate contends that Mr. Ravetti's mental 285 condition during the years at issue did not permit him to form the "tax evasion motivation" required for disallowance of the losses. We previously rejected the estate's argument in Estate of Ravetti v. Commissioner, T.C. Memo. 1993-418, which concerned Mr. Ravetti's 1982 tax year. There, in discussing whether the estate had established the existence of an actual and honest profit objective under section 183 with respect to another partnership (Glenstall Petroleum) in which Mr. Ravetti had an interest, we stated: It is well established that the determination of whether a partnership is engaged in a trade or business or in an activity with the requisite profit objective is made at the partnership level. Fox v. Commissioner, 80 T.C. 972">80 T.C. 972 (1983), affd. without published opinion 742 F.2d 1441">742 F.2d 1441 (2d Cir. 1984); Brannen v. Commissioner, 78 T.C. 471">78 T.C. 471, 503-505 (1982), affd. 722 F.2d 695">722 F.2d 695 (11th Cir. 1984). Petitioner seems to be arguing that decedent's mental state prevented him from having the requisite profit objective. If correct, petitioner286 would nevertheless lose because, to fall outside section 183 (deductions from an activity "not engaged in for profit"), petitioner must prove that the general partner engaged in activities in issue with an actual and honest profit objective. Dreicer v. Commissioner, 78 T.C. 642">78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205">702 F.2d 1205 (D.C. Cir. 1983). Petitioner misunderstands both who has the burden (petitioner) and what must be shown. Petitioner failed to meet its burden of proof that the general partners in the partnership possessed the necessary profit objective. See BJR Corp. v. Commissioner, 67 T.C. 111">67 T.C. 111, 130 (1976). * * * the decedent's mental competency or lack thereof is neither relevant nor determinative. See Estate of Ravetti v. Commissioner, T.C. Memo. 1993-343 (involving tax years 1976-1978). Even if we somehow took into account petitioner's lack of mental capacity in making the investment, our determination would remain unchanged. Petitioner has failed to otherwise prove the allowability of the partnership deductions. Specifically, no evidence287 regarding the profit objective of the general partner was offered. [Id.]The foregoing reasoning and conclusions are equally applicable here. Accordingly, we reject the estate's argument. In support of her determinations to disallow deductions claimed in respect of Mr. Ravetti's distributive share of partnership losses attributable to C & M for 1979, 1980, and 1981, respondent contends on brief that the transactions relating to C & M and the film were devoid of economic substance and were not entered into for profit. In essence, respondent argues that the transactions were tax-motivated shams. In Estate of Ravetti v. Commissioner, T.C. Memo 1993-343">T.C. Memo. 1993-343, we applied the sham analysis used by the Court of Appeals for the Ninth Circuit to the transactions relating to C & M and the film. There, we concluded: The nature of the dealings between the parties, the disparity between the purchase price and the fair market value of the property acquired by Ravetti, and the illusory nature of the financing transaction establish that the transaction lacked economic substance, and that the partnership had no other purpose than tax avoidance. [Id.288 ]Nothing in the record in the instant cases causes us to alter the foregoing conclusion we reached with respect to C & M. In particular, we note that the parties here have stipulated that (1) the purchase price for the film was not determined by arm's-length length negotiations, (2) the purchase price for the movie was inflated to provide C & M's limited partners with substantial tax benefits for their relatively small cash investment, (3) the limited partners were not personally liable with respect to the $ 120,000 note, the $ 1,200,000 note, which represented the bulk of the purchase price of the film, the Ora notes, or the guaranty agreements because those obligations were payable only out of rental proceeds, and (4) for depreciation and investment tax credit purposes, C & M used bases of $ 1,500,000 and $ 1,892,500, respectively, whereas the fair market value of the film was approximately $ 36,500 to $ 46,500. On the instant record, including specifically the foregoing facts, we find that the transactions relating to C & M and the movie lacked economic substance and that that partnership had no purpose other than the avoidance of taxes. See Independent Elec. Supply, Inc. v. Commissioner, 781 F.2d 724">781 F.2d 724, 728 (9th Cir. 1986),289 affg. Lahr v. Commissioner, T.C. Memo. 1984-472 (inflated purchase price relative to fair market value of property); Helba v. Commissioner, 87 T.C. 983">87 T.C. 983, 1005-1007 (1986), affd. without published opinion 860 F.2d 1075">860 F.2d 1075 (3d Cir. 1988) (absence of arm's-length dealing). We therefore sustain respondent's disallowance of Mr. Ravetti's distributive share of partnership losses claimed with respect to C & M. See LaVerne v. Commissioner, 94 T.C. 637">94 T.C. 637, 649-651 (1990), affd. without published opinion 956 F.2d 274">956 F.2d 274 (9th Cir. 1992), affd. without published opinion sub nom. Cowles v. Commissioner, 949 F.2d 401">949 F.2d 401 (10th Cir. 1991); Ferrell v. Commissioner, 90 T.C. 1154">90 T.C. 1154, 1198-1199 (1988). 3. Claimed Deductions Relating to M & MThe estate concedes that it has very little information concerning M & M; indeed, the evidence provided by the estate with respect to this partnership is sparse. It consists, inter alia, of the limited partnership certificate filed in 1978, Mr. Ravetti's canceled290 check to Film Services in the amount of $ 11,430, and a letter to M & M investors dated May 7, 1980, from the promoter of M & M. Respondent contends, and the estate does not dispute, that a promissory note in the principal amount of $ 62,140, a document entitled "GUARANTY", and an advertisement published in Variety on May 7, 1980, also relate to M & M. 8 Consequently, we find that those documents relate to M & M. 291 Respondent contends that the evidence relating to M & M is not adequate to support the deductions claimed by Mr. Ravetti. We agree. The estate has the burden of proof. It therefore must bear the consequences of its inability to produce sufficient evidence to establish entitlement to the deductions claimed with respect to M & M. 9 See Burnet v. Houston, 283 U.S. 223">283 U.S. 223, 228 (1931). On the instant record, we sustain respondent's determination relating to Mr. Ravetti's interest in M & M. 292 4. Claimed Deductions Relating to Investment Interest Expenses and Film and Tape Distribution LossesThe estate claims that the passage of time has scattered witnesses and dimmed memories and that Mr. Ravetti did not keep organized records. The estate's inability to produce evidence does not affect its burden of proof. See Malinowski v. Commissioner, 71 T.C. 1120">71 T.C. 1120, 1125 (1979). Although the estate contends that the claimed deductions for investment interest expenses and film and tape distribution losses relate to other unidentified investments by Mr. Ravetti with respect to which evidence is in the record, our review of the record leads us to conclude that the estate has provided no evidence that establishes entitlement to those claimed deductions. 10293 On the instant record, the estate has failed to carry its burden of proof. We therefore conclude that respondent's disallowance of the claimed deductions for investment interest expenses and film and tape distribution losses must be sustained. See Burnet v. Houston, supra;Hradesky v. Commissioner, 65 T.C. 87">65 T.C. 87, 89-90 (1975), affd. per curiam 540 F.2d 821">540 F.2d 821 (5th Cir. 1976). 5. Claimed Deduction Relating to Travel ExpensesThe only substantiation the estate has provided for the claimed deduction for travel expenses is two credit card charge forms for the purchase of airline tickets from Henderson Travel in September 1981. Those tickets were for round trip travel from San Francisco through Miami to the Cayman Islands. One set of tickets was purchased for Mr. Ravetti and the other for Mr. Beacher. The cost of each set of tickets was $ 1,146. 11294 On brief, the estate contends that the travel expenses "obviously" were incurred to investigate the French Guiana mine. 12295 IME's "Gold for Tax Dollars" promotion was tied to gold mining concessions in Panama and French Guiana. Gray v. Commissioner, 88 T.C. 1306">88 T.C. 1306, 1309 (1987), affd. sub nom. Becker v. Commissioner, 868 F.2d 298">868 F.2d 298 (8th Cir. 1989), affd. without published opinion sub nom. Armstrong v. Commissioner, 869 F.2d 1496">869 F.2d 1496 (9th Cir. 1989), affd. sub nom. Adkins v. Commissioner, 875 F.2d 137">875 F.2d 137 (7th Cir. 1989), affd. sub nom. Kennedy v. Commissioner, 876 F.2d 1251">876 F.2d 1251 (6th Cir. 1989). We thus conclude that the estate admits that the claimed travel expenses were incurred in connection with that promotion. In the Gray case, we held IME's "Gold for Tax Dollars" promotion to be a "fraudulent factual sham". 13Id. at 1322.Ordinary and necessary expenses of travel away from home may be deducted when incurred in the pursuit of a trade or business. Sec. 162(a). Ordinary and necessary travel expenses also may be deducted when incurred for, inter alia, the management, conservation, or maintenance of property held for the production of income. See sec. 212(2). The travel expenses at issue were paid in connection with an activity that we have held to be a fraudulent factual sham. Gray v. Commissioner, supra at 1322. They therefore are not deductible under either section 162 or section 212. Even assuming arguendo that the travel expenses at issue were otherwise allowable under section 162 or section 212, section 274(a) precludes the deduction of expenses when incurred with respect to an activity generally considered to constitute, inter alia, entertainment unless the taxpayer establishes that the item was directly related296 to the active conduct of the taxpayer's trade or business. 14 Vacation and similar travel can constitute entertainment for purposes of section 274. Walliser v. Commissioner, 72 T.C. 433">72 T.C. 433, 439-440 (1979); sec. 1.274-2(b)(1), Income Tax Regs. In addition, section 274(d) precludes the deduction of travel expenses under either section 162 or 212 unless a taxpayer substantiates by adequate records or sufficient evidence corroborating his own statement, inter alia, the business purpose of the travel and the business relationship to the taxpayer of the persons entertained.The estate has not offered any evidence of the business purpose of the travel to the Cayman Islands or any explanation as to why Mr. Beacher accompanied Mr. Ravetti on that trip. The airline tickets in evidence are not sufficient to carry petitioner's burden under section 274. Sec. 274(d); see Meridian Wood Products Co. v. United States, 725 F.2d 1183">725 F.2d 1183, 1188-1190 (9th Cir. 1984).297 On the instant record, the estate has failed to carry its burden with respect to the travel expense deduction claimed for 1981. We therefore sustain respondent's determination disallowing that deduction. 6. Partial Agreement Relating to Glenstall PetroleumOn August 28, 1992, the parties filed their executed partial agreement relating to respondent's disallowance of a loss claimed in 1981 with respect to Glenstall Petroleum. The partial agreement states, in pertinent part, as follows: 2. For the taxable year ending December 31, 1981 Petitioner concedes 75% of the deficiency attributable to the full disallowance of all of petitioner's deductions and/or credits with respect to petitioner's investment in the Oil and Gas Partnership. * * 7. This agreement is solely intended to resolve the question of the amount of deductions to which petitioner is entitled from the GLENSTALL PETROLEUM partnership but does not preclude petitioner from raising other issues which would affect the deficiency resulting from the adjustment to said partnership. 8. Respondent reserves the right to object to the raising of any issues by petitioner not previously pleaded.Pursuant298 to paragraph 7 of the partial agreement, the estate raises the same arguments with respect to the validity of the notices relating to Glenstall Petroleum and Mr. Ravetti's mental condition that we considered above. We rejected those arguments above and reject them here. On the instant record, none of the issues raised by the estate otherwise affects the concessions relating to Glenstall Petroleum in the partial agreement. 7. Claim of Theft Loss Relating to HardingIn its trial memorandum, the estate seeks to claim for 1980 a theft loss relating to Harding, one of the Cal-Am partnerships that we found to be coal mining tax shelters devoid of economic substance in Hawley v. Commissioner, T.C. Memo 1988-77">T.C. Memo. 1988-77. Respondent objects to the estate's effort to raise this issue, contending that it has not been pleaded and is not properly before the Court. 15 We thus must first decide whether the estate may raise this issue. 299 We may refuse to consider an issue raised by a party for the first time in its trial memorandum where doing so would surprise or prejudice the opposing party. See 508 Clinton Street Corp. v. Commissioner, 89 T.C. 352">89 T.C. 352, 353 n.2 (1987). If a party has not been afforded an adequate opportunity to prepare to address a new issue, consideration of it would prejudice that party's ability to present its case. See Estate of Horvath v. Commissioner, 59 T.C. 551">59 T.C. 551, 555-556 (1973). The absence of evidence in joint exhibits and stipulations of the parties concerning a new issue indicates that a party may be prejudiced by consideration of an issue where such evidence is different from that relevant to other issues in the case. See Fox Chevrolet, Inc. v. Commissioner, 76 T.C. 708">76 T.C. 708, 735-736 (1981). Respondent's chief complaint to the raising of the theft loss issue by the estate is that the issue could not properly be raised in the estate's trial memorandum. However, we have allowed new issues to be raised in trial memoranda where no surprise or prejudice to the opposing party is shown. E.g., 508 Clinton Street Corp. v. Commissioner, supra.300 Even though the estate's trial memorandum was dated September 14, 1993, approximately one week prior to the submission of these cases on September 20, 1993, respondent does not claim surprise or prejudice. Although respondent also complains that the estate's trial memorandum does not set forth the factual basis for its claim of a theft loss, the parties' stipulation of facts filed with the Court on September 20, 1993, contains some information relating to Harding and the Cal-Am partnerships. Respondent does not contend that she will be prejudiced by consideration of the theft loss issue and has stipulated facts relevant to the estate's claim. Consequently, we conclude that the theft loss issue is property before the Court. We will now decide whether those stipulated facts establish entitlement to a theft loss deduction. The stipulated facts relating to Harding and the Cal-Am partnerships are insufficient to establish entitlement to a deduction for a theft loss. In Estate of Ravetti v. Commissioner, T.C. Memo 1993-343">T.C. Memo. 1993-343, the estate also attempted to claim a theft loss with respect to Harding. There, we held that the estate had failed to establish301 either the amount of the loss or the year in which it was discovered, as required by section 165. In the instant cases, the estate attempts to establish that the alleged theft was discovered in 1980, the year Mr. Laird was indicted. Even assuming arguendo that the estate has established the year in which the claimed theft was discovered, it has not established, and has not even attempted to establish, the amount of the alleged theft loss beyond showing the amount claimed with respect to Harding in the Ravettis' 1976 return. In Estate of Ravetti v. Commissioner, T.C. Memo 1993-343">T.C. Memo. 1993-343, we stated that: the record establishes that Ravetti claimed a loss of $ 48,315 on his 1976 return. * * * the amount of a claimed tax shelter deduction generally involves an amount substantially greater than the investor's outlay to acquire the investment; e.g., his allocable share of depreciation, investment credit, and the like, so that in the case before us the $ 48,315 loss claimed is meaningless in the context of a theft loss deduction. [Citation omitted.]Even though our prior opinion should have alerted the estate that showing the amount claimed as a deduction302 in the 1976 return was insufficient to establish the amount of the theft loss that Mr. Ravetti purportedly suffered in connection with Harding, the estate has not attempted to introduce other evidence showing the amount of that loss. Therefore, the estate has not carried its burden of showing entitlement to a deduction for any such loss. 8. Additions to Tax for NegligenceRespondent determined that the underpayment for each of the years at issue was attributable to negligence. 16 For 1979 and 1980 and for 1981, section 6653(a) and section 6653(a)(1), respectively, impose an addition to tax of five percent on the entire underpayment if any part of it was due to negligence or intentional disregard of rules and regulations. For 1981, if the addition to tax under section 6653(a)(1) applies, a further addition to tax under section 6653(a)(2) is imposed in an amount equal to 50 percent of the interest payable with respect to the portion of the underpayment that is attributable to negligence or intentional disregard of rules and regulations. 303 Respondent does not contend that the underpayments for the years at issue are attributable to intentional disregard of rules and regulations. Consequently, we decide only whether they are attributable to negligence. Negligence is defined as a lack of due care or failure to do what a reasonable and prudent person would do under similar circumstances. Allen v. Commissioner, 925 F.2d 348">925 F.2d 348, 353 (9th Cir. 1991), affg. 92 T.C. 1">92 T.C. 1 (1989); see Crocker v. Commissioner, 92 T.C. 899">92 T.C. 899, 916 (1989); Neely v. Commissioner, 85 T.C. 934">85 T.C. 934, 947-948 (1985). The estate's only argument concerning the additions to tax for negligence is that Mr. Ravetti's mental disease precludes their imposition. While a taxpayer's lack of mental competence may relieve him of liability for additions to tax under certain circumstances, 17 as discussed above, the estate has not established that any mental disease of Mr. Ravetti affected his ability to manage his affairs during the years at issue. Mr. Ravetti's hospitalization from November 10, 1980, to December 5, 1980, does not establish that he was304 incompetent at that time. Although a medical examination of Mr. Ravetti revealed signs of presenile dementia and depression, he was still able to function in his work. Each of the returns at issue includes wage income from Select Income Management Co., indicating that Mr. Ravetti was able to continue his business as a financial planner and tax shelter promoter.None of the returns at issue was signed during the period of Mr. Ravetti's hospitalization. Various letters in the record authored by Mr. Ravetti in 1983 indicate that he had not become incapacitated by that time. Finally, Mr. Bolton, the conservator of Mr. Ravetti's estate, was not appointed until February 4, 1985, over two years after the return for 1981 was signed by Mr. Ravetti on October 11, 1982. Based on our consideration of the record in the instant cases, we conclude, as we did in Estate of Ravetti v. Commissioner, T.C. Memo. 1993-343,305 that "petitioner has not established at what point Ravetti may be deemed to have been incompetent to manage his affairs prior to the appointment of a conservator on February 4, 1985." We therefore sustain respondent's determinations with respect to the additions to tax for negligence. 9. Increased Interest under Section 6621(c)In the notices, respondent determined that the entire underpayment for each of the years at issue is to bear interest at the increased rate provided under section 6621(c). After concessions, 18 the applicability of the increased rate of interest remains in dispute only with respect to the underpayments attributable to (1) $ 94,000 and $ 144,000 of claimed mining development expenses relating to IME's "Gold for Tax Dollars" promotion claimed in the Ravettis' 1979 and 1980 returns, respectively, (2) the deduction for losses claimed with respect to C & M for each of the years at issue, and (3) the deduction for losses claimed with respect to M & M for each of the years at issue. 306 Section 6621(c) provides that the interest payable on a substantial underpayment attributable to tax-motivated transactions is to be computed at 120 percent of the rate otherwise applicable. 19 This increased rate is applicable to interest accruing after December 31, 1984, even though a transaction giving rise to an underpayment was entered into prior to the date of enactment of section 6621(c). Ewing v. Commissioner, 91 T.C. 396">91 T.C. 396, 422 (1988), affd. without published opinion 940 F.2d 1534">940 F.2d 1534 (9th Cir. 1991). The term "substantial underpayment attributable to tax motivated transactions" means any underpayment of income tax in excess of $ 307 1,000 attributable to one or more tax-motivated transactions. Sec. 6621(c)(2). Section 6621(c)(3)(A) defines the term "tax motivated transaction" to mean, inter alia, any valuation overstatement as defined in section 6659(c), any loss disallowed by reason of section 465(a), and any sham or fraudulent transaction. Section 6621(c)(3)(B) authorizes the Secretary to prescribe regulations specifying other types of transactions that are to be treated as tax motivated for purposes of section 6621(c). Section 301.6621-2T Q&A-4, Temporary Proced. & Admin. Regs., 49 Fed. Reg. 50392 (Dec. 28, 1984), provides that deductions disallowed under section 183 or 165(c)(2) with respect to an activity or transaction not engaged in for profit are also considered to be attributable to tax-motivated transactions. The estate makes no argument directed expressly to the applicability of the increased rate of interest under section 6621(c) to the underpayments of income tax for the years at issue. The estate argues generally that Mr. Ravetti's mental condition should preclude application of any "penalties" to the underpayments for the years at issue. We rejected this argument308 above and do not find it persuasive here. Even assuming arguendo that lack of mental competence were to excuse a taxpayer from liability for interest at the increased rate provided under section 6621(c), the estate has not established when Mr. Ravetti became incompetent to manage his own affairs prior to the appointment of the conservator on February 4, 1985. On the present record, we conclude that respondent's determination under section 6621(c) with respect to the three transactions remaining at issue must be sustained. Mr. Ravetti's mining activity during the years at issue related to IME's "Gold for Tax Dollars" promotion that we held was a "fraudulent factual sham" 20 in Gray v. Commissioner, 88 T.C. at 1322. We held above that the transactions relating to C & M and the film lacked economic substance and that C & M had no other purpose than tax avoidance. A transaction that lacks economic substance or business purpose is considered a sham for purposes of section 6621(c). McCrary v. Commissioner, 92 T.C. 827">92 T.C. 827, 857 (1989); Cherin v. Commissioner, 89 T.C. 986">89 T.C. 986, 1000 (1987). The estate309 has failed to carry its burden of proving that the underpayment resulting from the claimed deductions relating to M & M was not attributable to a tax-motivated transaction. Accordingly, we sustain the application of the increased rate of interest under section 6621(c) to the underpayments attributable to IME's "Gold for Tax Dollars" promotion, C & M, and M & M. To reflect the foregoing and the concessions of the parties, Decisions will be entered under Rule 155.Footnotes1. Unless otherwise noted, all section references are to the Internal Revenue Code in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure.↩. Interest at 120 percent of the underpayment rate provided by sec. 6621 on the portion of the deficiency constituting a substantial underpayment attributable to tax-motivated transactions. Respondent determined that the entire underpayment was attributable to tax-motivated transactions. On brief, respondent concedes that only a portion of the underpayment was so attributable.↩*. 50 percent of the interest due on the portion of the underpayment attributable to negligence. Respondent determined that the entire underpayment was attributable to negligence.↩2. The parties stipulated that $ 1,451 of income received in 1980 was not reported in the return for that year. The Estate of Silvio Ravetti (the estate) makes no argument on brief concerning this issue. We therefore consider it to have been conceded. Rybak v. Commissioner, 91 T.C. 524">91 T.C. 524, 566↩ (1988).3. Although the notices referred to sec. 6621(d), which was added to the Code as sec. 6621(d) by sec. 144(a) of the Deficit Reduction Act of 1984, Pub. L. 98-369, 98 Stat. 682, sec. 6621(d) was redesignated sec. 6621(c) by sec. 1511(c) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2744. We shall refer herein to the redesignated subsection.↩4. Respondent objected to the admission into evidence of certain statements contained in one of the exhibits. We address this objection below.↩5. In Gray v. Commissioner, 88 T.C. 1306">88 T.C. 1306, 1322 (1987), affd. sub nom. Becker v. Commissioner, 868 F.2d 298">868 F.2d 298 (8th Cir. 1989), affd. without published opinion sub nom. Armstrong v. Commissioner, 869 F.2d 1496">869 F.2d 1496 (9th Cir. 1989), affd. sub nom. Adkins v. Commissioner, 875 F.2d 137">875 F.2d 137 (7th Cir. 1989), affd. sub nom. Kennedy v. Commissioner, 876 F.2d 1251">876 F.2d 1251 (6th Cir. 1989), we held IME's "Gold for Tax Dollars" promotion to be a "fraudulent factual sham". By order dated Oct. 18, 1991, this Court ruled that the Gray↩ case was controlling with respect to the claimed mining development expenses for 1979 and 1980 that relate to IME's "Gold for Tax Dollars" promotion. Accordingly, we sustain respondent's disallowance of those expenses.6. On brief, respondent states that the determinations in the notices with respect to charitable contributions and medical expenses are purely mathematical. Those determinations, which are not addressed by either party, are to be taken into account by the parties in connection with the Rule 155 computations in the instant cases.↩7. To support its claim that the consents are invalid, the estate sought to introduce into evidence a statement in a Service case history worksheet in which a Service employee recorded a telephone conversation with an unidentified woman during which that woman stated that Mr. Ravetti suffered from Alzheimer's disease. The estate sought to admit that statement for the purpose of showing that the Service was on notice concerning Mr. Ravetti's mental condition. Respondent objected to the introduction of that statement into evidence on the ground that it was irrelevant and hearsay. Because we do not reach the period of limitations argument advanced by the estate, we will not admit the statement in question into evidence. We note that, even if we were to have considered the estate's argument, the statement, while relevant, would be inadmissible hearsay. Even assuming arguendo that we were to admit the statement, it would not lead us to conclude that respondent was on notice that Mr. Ravetti was incompetent when he executed the consents. The entry recording the statement was dated September 13, 1983, after the first consent was signed by Mr. Ravetti and apparently before the second consent was signed by him. The statement would not establish that respondent was on notice of Mr. Ravetti's mental condition when he signed the first of the consents at issue in March 1983. Moreover, the statement would not necessarily have put the Service on notice either at the time Mr. Ravetti signed the first consent in question or the second consent in question that Mr. Ravetti was not competent. This is because the other contacts with Mr. Ravetti recorded in the exhibit show that he was able to take care of matters connected with the audit of his returns. There also is nothing in the statement that shows whether the declarant was in a position to communicate reliable information to the Service concerning Mr. Ravetti's mental condition.↩8. One of the stipulated exhibits consists of a letter signed by Mr. Ravetti protesting proposed adjustments for 1979 that contains various representations concerning, inter alia, M & M. The estate does not contend that those representations constitute evidence of Mr. Ravetti's entitlement to the deductions claimed with respect to M & M or the other deductions disallowed by respondent. In any event, we are not obligated to accept those uncorroborated statements. See Davis v. Commissioner, 88 T.C. 122">88 T.C. 122, 141 (1987), affd. 866 F.2d 852">866 F.2d 852↩ (6th Cir. 1989).9. Relying on Scar v. Commissioner, 814 F.2d 1363">814 F.2d 1363 (9th Cir. 1987), revg. 81 T.C. 855">81 T.C. 855↩ (1983), the estate argues that respondent's disallowance of the deductions attributable to M & M is arbitrary because respondent did not give a reason for her determination in the notices. We rejected this argument above. The estate also argues that respondent's determination with respect to M & M is an "accusation" of "misconduct" that respondent has not supported with any evidence. This argument is not well taken and suggests a misunderstanding of the nature of respondent's determination. Respondent has simply determined that the estate has not established entitlement to the deductions claimed with respect to M & M.10. For instance, the parties stipulated various documents relating to World Marketing Films and Tapes, Inc., with which Mr. Ravetti was involved in 1979. The estate does not contend that those documents establish the deductibility of the investment interest expenses or the film and tape distribution losses at issue. Rather, those documents appear to relate to Mr. Ravetti's activities in syndicating motion picture tax shelters.↩11. A deduction of $ 3,200 was claimed in the 1981 return. The only evidence in the record concerning this deduction accounts for only $ 2,292 of the amount claimed. Thus, the estate has not even attempted to carry its burden of proving entitlement to the balance of that amount.↩12. In support of this contention, the estate offers no evidence other than the suggestion that "An examination of any map of the Caribbean will make clear the connection."↩13. The parties incorporated into their stipulation of facts this Court's findings of fact in Gray v. Commissioner, 88 T.C. 1306">88 T.C. 1306↩ (1987).14. For purposes of this test, an activity described in sec. 212 is treated as a trade or business. Sec. 274(a)(2)(B).↩15. The estate contends that respondent should have been aware of this issue because it was raised and considered in Estate of Ravetti v. Commissioner, T.C. Memo. 1993-343↩. The fact that a taxpayer has raised an issue in another proceeding involving different tax years does not necessarily put respondent on notice that the same issue is to be raised in a later case involving different years.16. Respondent stipulated in the partial agreement that the additions to tax for negligence will not be imposed with respect to that portion of the underpayment attributable to the estate's concession of the disallowance of deductions claimed with respect to Glenstall Petroleum.↩17. Estate of Ravetti v. Commissioner, T.C. Memo. 1993-418↩.18. The estate concedes that the underpayment resulting from its concession of a portion of the claimed losses attributable to Glenstall Petroleum is to bear interest at the increased rate provided under sec. 6621(c). Respondent concedes that the adjustments in the notices not discussed herein are not to bear interest at the increased rate provided under sec. 6621(c).↩19. The increased interest provision was repealed prospectively for returns due (without regard to extensions) after December 31, 1989. Sec. 7721(b), (d), Omnibus Budget Reconciliation Act of 1989, Pub. L. 101-239, 103 Stat. 2399, 2400. Accordingly, it is still applicable to the underpayments at issue in the instant cases.↩20. By order dated Oct. 18, 1991, we ruled that the allowability of deductions claimed for the years at issue with respect to mining development expenses is controlled by Gray v. Commissioner, 88 T.C. 1306">88 T.C. 1306 (1987). In the Gray case, we sustained application of the increased rate of interest to the underpayments attributable to IME's "Gold for Tax Dollars" promotion. Id.↩ at 1328-1329.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625778/	MICHAEL JOSEPH AIELLO, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentAiello v. CommissionerDocket No. 16811-93United States Tax CourtT.C. Memo 1995-40; 1995 Tax Ct. Memo LEXIS 53; 69 T.C.M. (CCH) 1765; January 30, 1995, Filed 53 Decision will be entered under Rule 155. Michael Joseph Aiello, pro se. For respondent: David Sorenson. WOLFEWOLFEMEMORANDUM OPINION WOLFE, Special Trial Judge: This case was heard pursuant to the provisions of section 7443A(b)(3) and Rules 180, 181, and 182. 1Respondent determined a deficiency of $ 4,698 in petitioner's Federal income tax for 1991 and additions to tax for that year in the amount of $ 804 under section 6651(a) for failure to file a timely Federal income tax return and in the amount of $ 51 under section 6654 for failure to make estimated tax payments. The issues for decision with respect to petitioner's 1991 Federal income tax are: (1) Whether petitioner is liable generally for Federal income taxes on wages, tips, and interest that he received in 1991; (2) whether petitioner received taxable tip income54 in 1991 in the amount determined by respondent; (3) whether petitioner is liable for the addition to tax under section 6651(a) for failure to file his return timely; and (4) whether petitioner is liable for the addition to tax under section 6654(a) for failure to make estimated tax payments. Some of the facts have been stipulated and are so found. Petitioner resided in Las Vegas, Nevada, when his petition was filed. During 1991, petitioner was employed as a craps dealer on the swing shift at Bally's Grand Resorts (Bally's) in Las Vegas, Nevada. Petitioner was paid for 1,871 hours of work at Bally's during 1991. 2 During 1991, petitioner received wages from Bally's in the amount of $ 8,588 and tips (tokes) from the patrons of Bally's for his services as a craps dealer. The tokes received by the craps dealers on each swing shift were pooled and divided up evenly among all of the craps dealers who worked that shift. Petitioner reported receipt of $ 5,000 in tokes to Bally's during 1991. In addition, petitioner received $ 84 in interest during 1991. 55 Petitioner did not file a 1991 Federal income tax return. Based upon information contained on a Form W-2 submitted to respondent by Bally's, respondent determined that in 1991 petitioner received taxable wage income in the amount of $ 13,588 ($ 8,588 in wages from Bally's and $ 5,000 in tokes). Respondent also determined that in 1991 petitioner received additional taxable tokes in the amount of $ 18,107 and taxable interest in the amount of $ 84. Pursuant to section 6211, respondent determined the deficiency for 1991 without taking prepayment credits into account. The parties stipulated that if petitioner is liable for Federal income tax on his wages, tips, and interest, he is entitled to the following Schedule A itemized deductions in lieu of the standard deduction allowed in the notice of deficiency: (1) A home mortgage interest deduction in the amount of $ 5,958.12; (2) a property tax deduction in the amount of $ 371.54; and (3) a hazard insurance deduction in the amount of $ 516. Respondent's determinations as to petitioner's tax liability are presumed correct, and petitioner bears the burden of proving otherwise. Rule 142(a); Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 115 (1933).56 It is undisputed that petitioner received wages, tips, and interest during 1991. However, petitioner contends that he is not liable for Federal income taxes on his receipt of that income. Petitioner contends that it is unconstitutional to tax a citizen of the United States on income derived from his labor. He argues that working for wages is a right secured by the U.S. Constitution and that the Constitution forbids the taxation of that right. The Federal income tax is imposed on the money petitioner receives for his services, not on the performance of those services. Rowlee v. Commissioner, 80 T.C. 1111">80 T.C. 1111, 1120 (1983). Petitioner's contention has no merit. Petitioner also contends that no Federal statute imposes a tax on the income of citizens or residents of the United States that is derived from sources within the United States. Instead, petitioner asserts that Federal income taxes are excise taxes imposed only on the privilege of nonresident aliens and foreign corporations to receive income from sources within the United States. Petitioner's argument is unclear. Apparently, petitioner believes that the only sources of income for purposes 57 of section 61 are listed in section 861, that income from sources within the United States is taxed only to nonresident aliens and foreign corporations pursuant to sections 871, 881, and 882, and that section 1461 is the only section of the Internal Revenue Code that makes anyone liable for the taxes imposed by sections 1 and 11. Section 61(a) defines gross income generally as "all income from whatever source derived," including, but not limited to, compensation for services and interest. Sec. 61(a)(1), (4). Section 63 defines and explains the computation of "taxable income". Section 1 imposes an income tax on the taxable income of every individual who is a citizen or resident of the United States. Sec. 1.1-1(a)(1), Income Tax Regs.; see Habersham-Bey v. Commissioner, 78 T.C. 304">78 T.C. 304, 309 (1982). Under section 61(a)(1) and (4), petitioner clearly is required to include his wages, tokes, and interest in gross income. It is well established that compensation for services, in whatever form received, is includable in gross income. Commissioner v. Duberstein, 363 U.S. 278">363 U.S. 278 (1960). The Court of Appeals for the Ninth Circuit, 58 to which any appeal in this case will lie, has stated, "Compensation for labor or services, paid in the form of wages or salary, has been universally held by the courts of this republic to be income, subject to the income tax laws currently applicable." United States v. Romero, 640 F.2d 1014">640 F.2d 1014, 1016 (9th Cir. 1981). It is also well established that tokes constitute compensation for services rendered and are includable in gross income under section 61. Catalano v. Commissioner, 81 T.C. 8">81 T.C. 8, 13 (1983), affd. without published opinion sub nom. Knoll v. Commissioner, 735 F.2d 1370 (9th Cir. 1984). Petitioner is liable for Federal income taxes on the wages, tokes, and interest he received during 1991. Respondent determined that in 1991 petitioner received taxable interest in the amount of $ 84 and taxable income from his employment as a craps dealer at Bally's in the amount of $ 31,695, consisting of $ 8,588 in wages and $ 23,107 in tokes. Petitioner concedes that he received interest in the amount of $ 84 and wages in the amount of $ 8,588 during 1991. Petitioner must include this income in 59 his 1991 gross income pursuant to section 61(a). Respondent determined that petitioner received $ 23,107 in tokes during 1991. Petitioner contends that he received only $ 20,212 in tokes during 1991. Taxpayers are required to maintain sufficient records to establish their correct tax liability. Sec. 6001. When taxpayers fail to keep records or to keep adequate records of income, respondent may calculate the taxpayers' income in any manner that clearly reflects the income. Sec. 446; Meneguzzo v. Commissioner, 43 T.C. 824">43 T.C. 824, 831 (1965). Respondent's method of reconstructing a taxpayer's income need only be reasonable in light of all the surrounding circumstances. Schroeder v. Commissioner, 40 T.C. 30">40 T.C. 30, 33 (1963). Because petitioner did not keep contemporaneous records of the tokes he received during 1991, respondent reconstructed petitioner's toke income. Using Bally's records of daily toke splits for the swing shifts for 1992, respondent computed average hourly toke rates for 1992 of $ 13.50 for blackjack dealers, $ 11.75 for craps dealers on the day and grave shifts, and $ 11.38 for the craps dealers on the swing 60 shifts. Respondent estimated the number of hours that petitioner worked during 1991 by dividing his salary by an hourly rate of $ 5 per hour and arrived at 1,711.6 hours. 3 Respondent then multiplied the estimated number of hours that petitioner worked by the highest 1992 hourly toke rate to arrive at estimated toke income for petitioner in the amount of $ 23,107 (1,711.6 hours times $ 13.50). In her notice of deficiency, respondent determined that petitioner realized $ 23,107 in toke income during 1991, $ 5,000 of which was reported and $ 18,107 of which was not reported. On brief, petitioner stated that he received $ 20,212 of toke income for 1991. He contends that his estimate of his 1991 toke income should be used by this Court. Petitioner estimated his 1991 toke income solely by relying upon a rental application that he completed on December 3, 1991. In that rental application, 61 petitioner reported that he received a monthly salary of $ 2,400. Petitioner calculated his estimated 1991 toke income by multiplying $ 2,400 times 12 to arrive at an annual salary of $ 28,800. Petitioner then deducted his 1991 salary from Bally's, $ 8,588, from that amount to arrive total toke income in the amount of $ 20,212 for 1991. We do not accept petitioner's calculation of his 1991 toke income because he offered no evidence to support the statement on the rental agreement. Petitioner contends that respondent's method of calculating his 1991 toke income was arbitrary, unreasonable, and without foundation because (1) respondent used records from 1992 to determine an average hourly toke rate for 1991, (2) toke rates vary from day and day, (3) respondent failed to prove the toke rates for the days petitioner actually worked, and (4) respondent failed to show that the daily toke records are accurate. Utilizing a determinable rate for a given year, and applying it to a prior year where there is no evidence to establish the rate in that prior year, is an acceptable and reasonable method of reconstructing income. Tomburello v. Commissioner, T.C. Memo 1991-482">T.C. Memo. 1991-482,62 affd. without opinion 988 F.2d 122">988 F.2d 122 (9th Cir. 1993). In addition, the record indicates that petitioner's hourly toke rate for 1990 is approximately the same as the toke rate for craps dealers on the swing shifts for 1991 as computed from Bally's records. Petitioner worked as a craps dealer on the swing shift at Bally's during 1990. He filed a 1990 Federal income tax return in which he reported wages from Bally's in the amount of $ 7,618.15 and toke income in the amount of $ 19,000. Petitioner's average hourly salary during 1991 was approximately $ 4.59 ($ 8,588 divided by 1,871 hours). During 1990, petitioner received a salary from Bally's in the amount of $ 7,618.15. By applying petitioner's average hourly salary for 1991 to 1990, we calculate that petitioner worked approximately 1,660 hours during 1990 ($ 7,618.15 divided by $ 4.59 average hourly rate). He reported tokes in the amount of $ 19,000 for 1990, or approximately $ 11.45 per hour. Figures supplied by Bally's indicate that the average hourly toke rate for craps dealers on the swing shift in 1992 was $ 11.38 per hour. As the rates for 1992 and 1990 are reasonably consistent, we hold that63 application of an hourly rate of $ 11.38 for 1991 is reasonable. In this case respondent has used a reasonable method of calculating the amount of petitioner's toke income for the year in issue. We adjust the computation, however, by reducing petitioner's unreported toke income from $ 18,107 to $ 16,292 to conform to the toke rate for craps dealers on the swing shift and the actual number of hours worked by petitioner in 1991 ($ 11.38 hourly tip rate multiplied by 1,871 hours less $ 5,000 in reported tips). Petitioner has otherwise failed to satisfy his burden of proving error in respondent's determination of his tip income for 1991. Respondent determined that petitioner is liable for the addition to tax under section 6651(a). Section 6651(a)(1) imposes an addition to tax for failure to file a required return timely unless the taxpayer shows that such failure was due to reasonable cause and not due to willful neglect. Reasonable cause for the failure to file a return timely exists if the taxpayer exercised ordinary business care and prudence but, nevertheless, was unable to file the return within the time prescribed by law. Niedringhaus v. Commissioner, 99 T.C. 202">99 T.C. 202, 220-221 (1992);64 sec. 301.6651-1(c)(1), Proced. & Admin. Regs. Willful neglect means "a conscious, intentional failure or reckless indifference." Boyle v. United States, 469 U.S. 241">469 U.S. 241, 245 (1985). The burden of proof is on petitioner. Rule 142(a). Petitioner did not file a 1991 Federal income tax return. Petitioner offered no plausible explanation for his failure to file. We therefore hold that petitioner is liable for the addition to tax under section 6651(a)(1) for 1991. Respondent determined that petitioner was liable for the addition to tax under section 6654 for failure to pay estimated income tax for 1991. Where payments of tax, either through withholding or by making estimated quarterly tax payments during the course of the year, do not equal the percentage of total liability required under the statute, imposition of the addition to tax under section 6654 is automatic, unless petitioner shows that one of the statutory exceptions applies. Niedringhaus v. Commissioner, supra at 222; Grosshandler v. Commissioner, 75 T.C. 1">75 T.C. 1, 20-21 (1980). Petitioner bears the burden to show qualification for*65 such exception. Habersham-Bey v. Commissioner, 78 T.C. at 319-320. Petitioner has not sustained this burden. He is liable for the addition to tax under section 6654. To reflect the foregoing and recognizing that petitioner shall receive the benefit of any prepayment credits, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code in effect for the year at issue, unless otherwise stated. All Rule references are to the Tax Court Rules of Practice and Procedure.↩2. Of this 1,871 hours, petitioner was physically present at Bally's for at least 1,775 hours. Records provided by Bally's indicate that petitioner was reimbursed for 1,775 hours during which he was physically present at Bally's and 16 hours for holiday and sick pay. The additional 80 hours are labeled as VACH, but not explained. Petitioner was reimbursed at an hourly rate of $ 4.375 for those 80 hours.↩3. Respondent erroneously used a salary of $ 8,558, instead of $ 8,588, to estimate the number of hours that petitioner worked during 1991.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625779/	AL HAKEEM ABDUL RASHEED, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentRasheed v. CommissionerDocket No. 12653-79.United States Tax CourtT.C. Memo 1985-310; 1985 Tax Ct. Memo LEXIS 327; 50 T.C.M. (CCH) 225; T.C.M. (RIA) 85310; June 25, 1985. Al Hakeem Abdul Rasheed, pro se. Neil O. Abreu, for the respondent. HAMBLEN MEMORANDUM FINDINGS OF FACT AND OPINION HAMBLEN, Judge: Respondent determined a deficiency in the amount of $1,702.973.72 in petitioner's 1978 Federal Income taxes. The issues for decision328 are: (1) whether funds converted by petitioner to his own use from a "church" are includible in petitioner's gross income; and (2) whether the maximum tax rate on petitioner's income is limited to 50 percent under section 1348. 1FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. 2 The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner resided in Alameda County, California, when he filed his petition in this case. In 1977, petitioner incorporated the Church of Hakeem, Inc. ("Church") as a California non-profit corporation. Petitioner personally drafted the articles of incorporation and by-laws, which provided that the organization's specific and primary purpose was to operate as a church for religious purposes. In March of 1977, petitioner329 applied on behalf of the Church for an exemption under section 501(c)(3). Based upon the information he supplied, respondent determined that the Church was exempt from Federal income tax under section 501(c)(3). In 1980, respondent retroactively revoked this determination. Petitioner served as a director and president of the Church. Although other individuals ostensibly served as officers and directors of the Church in 1978, petitioner exercised complete control over all Church affairs, including membership and finances. The by-laws required annual meetings of the members of the Church. No such annual meetings were ever held. The only requirement to join the Church was the payment of an initial membership fee, which gradually increased from $25.00 to $500.00. In 1977, the Church instituted the "Dare to be Rich" program. The Church distributed brochures which stated: You Can Turn $25 into $100 in 70 Days $250 into $1000 in 90 Days $25,000 into $100,000 in 9 months The brochures made the following representation: The Church of Hakeem, Inc. is an international as well as a national church function. International and national investments return "Profits" 330 which the Church does not choose to keep. So it distributes its "Profits" to its active ministers only. These "Profits" we call an "Increase of God." Your 400% return on "Donation" comes out of church "Profits." So in effect the Church of Hakeem doesn't "profit" -- it "serves." The Church had no investments, and the "increases" paid to early donors were paid with the funds received from later donors. The Church conducted "celebrations", where prospective donors could contribute funds. At these "celebrations" there was a money room, where money was received and receipts given. After the "celebrations", a Brink's truck brought the money back to the Church offices. The Church owned numerous luxury automobiles, including a white 1974 Rolls Royce that petitioner drove daily. The Church purchased a 1978 red Cornische Rolls Royce on December 7, 1978, for $105,000. Petitioner had wanted such a car, and he signed all the documentation in connection with its purchase. Petitioner acquired expensive jewelry, including a fine watch, rings and gold chains. He also purchased a mink coat in 1978. On July 10, 1978, petitioner purchased a diamond cluster ring for $9,729.00. 331 During the latter half of 1978, petitioner opened four bank accounts in his own name. He was the sole authorized signatory on these accounts. He deposited $2,055,479.10 into these accounts in 1978. These accounts earned interest amounting to at least $4477.21. 3 Petitioner made no withdrawals from these accounts in 1978. From January 10, 1979, through January 17, 1979, petitioner deposited $1,102,500 into twelve separate personal bank accounts. Of this amount, $1,000,000 was transferred from one of the four accounts he opened in 1978. In 1978, petitioner discussed his desire to purchase a yacht with members of the Church. In October of 1978, petitioner purchased a yacht for $918,583.25. Petitioner personally executed the yacht sales agreement and the boat berthing agreement. Subsequently, petitioner executed five seperate Coast Guard forms in his own name, reflecting that he was the owner of the boat. On January 17, 1979, respondent made two termination assessments against petitioner332 in the amounts of $623,853 and $910,000. After the termination assessments, respondent levied upon two of petitioner's bank accounts, and seized the yacht and the 1978 Rolls Royce. The amount collected and credited to petitioner's account, after collection costs, totaled $1,465,416.70. A class action wrongful levy suit was instituted by members of the Church in the United States District Court. The suit was settled and the class received a judgment against the United States in the principal amount of $1,104,166.32. The judgment was satisfied and petitioner's account debited by the amount of the judgment. In May of 1979, petitioner filed his individual Federal income tax return for the taxable year 1978. Petitioner reported total income of $19,200. He stated that this represented his net "minister's rental allowance." Petitioner was indicted in the District Court of the Northern District of California on six counts of mail fraud arising out of his activities with the Church. Petitioner was convicted on all counts of mail fraud and his conviction was affirmed. 4333 In the notice of deficiency, respondent determined petitioner's additional unreported income by totaling: (1) the amount expended by petitioner in purchasing the yacht; (2) the amount expended by petitioner in purchasing the diamond ring; (3) the amounts petitioner deposited in the four bank accounts; and (4) the interest income on the bank accounts. OPINION Section 61 states the general rule that gross income includes all income from whatever source derived. This phrase encompasses all "accessions to wealth, clearly realized, and over which the taxpayers have complete dominion." Commissioner v. Glenshaw Glass Co.,348 U.S. 426">348 U.S. 426, 431 (1955). A gain constitutes taxable income when the recipient of the gain has such control over it that, as a practical matter, he derives a readily realizable economic value from it. Rutkin v. United States,343 U.S. 130">343 U.S. 130, 137 (1952). It is well settled that gains from illegal activities are includible in gross income. 5 See James v. United States,366 U.S. 213">366 U.S. 213 (1961); Rutkin v. United States,supra;334 United States v. Rochelle,384 F.2d 748">384 F.2d 748, 751 (5th Cir. 1967). In the instant case, respondent's determination is presumptively correct and petitioner bears the burden of proving it is incorrect. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933); Rule 142(a). Petitioner has failed to carry this burden. The record makes it plain that petitioner was engaged in an illegal pyramid scheme. Since petitioner had total control over its operations, the Church simply functioned as petitioner's alter ego in implementing the "Dare to be Rich" swindle. Petitioner used the proceeds he received to lead a life of comfort and luxury. Petitioner argues that: (1) he placed the funds in the four bank accounts as a "trustee" of the Church and he did not own or control this money; and (2) he purchased the yacht while acting as an agent of the Church. Petitioner presented no credible evidence to support these assertions. His own testimony was incredible and self-serving. Petitioner's control over the funds he expended or placed in the bank accounts was absolute. Petitioner335 moved these funds at will. We find, therefore, that these amounts were includible in petitioner's 1978 gross income. Petitioner asserts that his maximum tax should be limited by the provisions of section 1348. This section limited the tax on personal service income to fifty percent. 6 Personal service income was defined in Section 1348(b)(1)(A) as "any income which is earned income within the meaning of * * * section 911(b)." Under section 911(b), earned income is defined as "wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered * * ." Petitioner failed to show that he received these funds as personal service income. These funds were gained through his "Ponzi" scheme and they were not wages, salaries or professional fees.These funds were clearly not received for any services "actually rendered" by petitioner. Since petitioner did not receive the funds as earned income, we find that his tax liability is not limited by section336 1348. Petitioner failed to show any error in respondent's determination of his income. We, therefore, sustain the deficiency as computed by respondent for petitioner's 1978 taxable year. We have considered petitioner's other arguments and find them unpersuasive. 7Based on the foregoing, Decisions will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all rule references are to the Tax Court Rules of Practice and Procedure.↩2. Because petitioner refused to enter into a stipulation, respondent's proposed stipulation of facts was accepted as established under Rule 91(f).↩3. In his notice of deficiency, respondent determined petitioner only received interest income of $3,920.21. Respondent, however, did not assert an increase in the deficiency.↩4. See United States v. Rasheed,663 F.2d 843">663 F.2d 843 (9th Cir. 1981), cert. denied subnom. Phillips v. United States,454 U.S. 1157">454 U.S. 1157↩ (1982).5. See also O'Sheeran v. Commissioner,T.C. Memo. 1983-702↩.6. Sec. 1348↩ was repealed for taxable years beginning after December 31, 1981.7. We have considered and rejected petitioner's unsupported assertions that he "donated" the bank accounts and the yacht to the Church.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625780/	Ruth Curry Brooks v. Commissioner.Brooks v. CommissionerDocket No. 16651.United States Tax Court1948 Tax Ct. Memo LEXIS 99; 7 T.C.M. (CCH) 635; T.C.M. (RIA) 48173; August 31, 194899 Expenses for room and board paid by petitioner while in Philadelphia, at which place she was employed in the Immigration and Naturalization Service, are not deductible as traveling expenses even though petitioner retained a residence in Washington, D.C., from which place her office had been transferred. Railroad expenses from Philadelphia to Washington and return were incurred for petitioner's personal convenience and likewise are not deductible as traveling expenses. Ruth Curry Brooks, pro se. Elmer L. Corbin, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion Deficiencies were determined against petitioner for the taxable years 1943, 1944, and 1945 in the respective amounts of $492.78, $452.13, and $475.37. The question raised in this proceeding is whether the petitioner, a government employee, is entitled to deduct her expenses for room and board at her post of duty and official headquarters in Philadelphia, Pennsylvania, and, also, whether she is entitled to deduct her transportation expenses between Philadelphia and Washington where she maintained a home, or whether these expenses constitute personal living expenses and therefore100 are not deductible. Findings of Fact The petitioner has been an employee of the Immigration and Naturalization Service of the United States Government since June 23, 1926. On July 2, 1927, the petitioner married and set up a residence with her husband in an apartment at the Annapolis Hotel, Washington, D.C. The petitioner's husband is a contractor and builder with offices in the Woodward Building at 15th and H Streets, Northwest, Washington, D.C. During the period involved in this proceeding, he maintained his business in Washington, D.C., and his residence at the Annapolis Hotel, Washington, D.C. On January 9, 1942, the petitioner received a copy of a "Notice to the Personnel of the Central Office" of the Immigration and Naturalization Service, Washington, D.C., stating in part as follows: "Notice to the Personnel of the Central Office "The Central Office of this Service will be moved to Philadelphia. It is expected that the move will be made during February. The precise date will be announced as soon as possible. "It is confidently hoped that every employee, except those where circumstances make it actually impossible, will move with the office. This country is at101 war and personal inconvenience and even hardship must be cheerfully accepted by everyone. "You are aware of the Presidental Order on the Decentralization of Government Agencies to make room for those who must function in Washington during the war. * * * * " * * Transportation for employees will be paid in accordance with standardized travel regulations and moving costs for their household goods will be paid by the Government * * * and each employee will be allowed a per diem of $5.00 in lieu of subsistence for each day not exceeding 15 days from the time of departure from Washington until such time as living accommodations are found. * * " On February 25, 1942, the Immigration and Naturalization Service, Washington, D.C., issued a "Notice to All Employees of the Central Office", stating in part as follows: "Notice to All Employees of the Central Office "1. As you were informed on January 9, 1942, transportation for employees moving from Washington, D.C. to Philadelphia, Pennsylvania, will be provided at the expense of the government, and a special per diem allowance will be granted at the rate of $5.00. * "5. a. * * "b. An employee who has no dependents102 living with him, or an employee who does not move his dependents will be allowed per diem at the rate of $5.00 for 4 days. * "6. Employees will not be furnished individual transfer of official station letters as all transfers will be covered under a blanket order." * On February 26, 1942, the Immigration and Naturalization Service, Washington, D.C., issued a blanket order, stating in part as follows: "February 26, 1942 "To the Officers and Employees of the Immigration and Naturalization Service Indicated on the Attached List "This is to advise you that your headquarters are hereby changed from Washington, D.C., to Philadelphia, Pennsylvania. "This change is being made for official reasons and not for your personal convenience. You will accordingly be allowed your necessary expenses of travel in connection therewith as indicated below:" * In March of 1942 the petitioner was employed in the office in Charge of the Certification Branch of the Immigration and Naturalization Service, Washington, D.C., which office was ordered to move to Philadelphia, Pennsylvania, on Monday, March 2, 1942. The petitioner had no control over the moving of the Immigration103 and Naturalization Service to Philadelphia and, unless she went with her office to Philadelphia, she would have lost the position which she she with the said office since June 23, 1926. The petitioner, who was transferred from Washington, D.C., to Philadelphia, Pennsylvania, pursuant to blanket order issued February 26, 1942, left Washington, D.C., on March 3, 1942, and reported to the office of the Immigration and Naturalization Service, Philadelphia, Pennsylvania, at 9:30 a.m. on March 4, 1942. The United States Government paid the petitioner's transportation from Washington, D.C., to Philadelphia, Pennsylvania. The Immigration and Naturalization Service of the United States Government maintained offices in the Franklin Trust Building, Philadelphia, Pennsylvania, from March 4, 1942, to April 1, 1948, when it was ordered to return to Washington, D.C. During the period March, 1942, to April, 1948, the petitioner maintained a room at the Sylvania Hotel, Philadelphia, Pennsylvania. The petitioner paid the following amounts as rental to the Sylvania Hotel for use of her room: YearAmount1943$1,053.5019441,099.0019451,092.00The cost of the petitioner's104 meals, computed at $1.50 per day on a six-day basis for 52 weeks each year, was: YearAmount1943$468.001944468.001945468.00The cost of the petitioner's transportation from Philadelphia, Pennsylvania, to Washington, D.C., and return, computed on the basis of 15 yearly round trips at $5.85 each, was: YearAmount1943$87.75194487.75194587.75 These trips were made for petitioner's personal convenience. During the period March 4, 1942, to December 31, 1945, inclusive, the petitioner was employed by the Immigration and Naturalization Service at Philadelphia, Pennsylvania, and her post of duty was Philadelphia, Pennsylvania. During the period the Office of Immigration and Naturalization Service was in Philadelphia from March, 1942, until April, 1948, the petitioner did not remove any of her household effects from her home which she maintained with her husband in the District of Columbia. When the Immigration and Naturalization Service of the United States Government, Philadelphia, Pennsylvania, was ordered back to Washington, D.C., on April 1, 1948, the petitioner received a letter, stating in part as follows: "March 31, 1948 105 "Ruth Curry Brooks, Examiner "Central Office "Immigration and Naturalization Service "Philadelphia, Pennsylvania"Your official station is changed to Washington, D.C., such change to become effective upon your entrance on duty at that point." * * Opinion ARUNDELL, Judge: Petitioner in this proceeding seeks to deduct as traveling expenses, under section 23 (a) (1) (A) 1 of the Internal Revenue Code, her board and room while employed in Philadelphia, and her railroad fare covering various trips from that city to Washington, D.C. Respondent urges that these expenses are personal living expenses which are specifically made non-deductible by section 24 (a) (1) 2 of the Internal Revenue Code. 106 As stated by the Supreme Court in Commissioner v. Flowers, 326 U.S. 465">326 U.S. 465, three conditions must be satisfied before a travel expense deduction may be made under section 23 (a) (1) (A) - (1) the expense must be a reasonable and necessary traveling expense as that term is generally understood; (2) the expense must be incurred "while away from home", and (3) the expense must be incurred in pursuit of business, and there must be a direct connection between the expenditure and the carrying on of the trade or business. Petitioner since 1926 has been an employee of the Immigration and Naturalization Service, U.S. Department of Justice. In February, 1942, the headquarters of this service was moved from Washington, D.C., to Philadelphia, Pennsylvania, where it continued to be so located until March 31, 1948. That petitioner's principal place of business was Philadelphia after the Immigration and Naturalization Service was moved to that place we think cannot be gainsaid, and the fact that the change of location was prompted by the exigencies of war would appear to be of no moment. A person stationed at one point for a period of six years can hardly be regarded as in a travel107 status. We have repeatedly held that section 23 (a) (1) (A), supra, may not be availed of to secure a deduction from gross income for travel expenses paid or incurred by a taxpayer while at his principal place of business, post of duty, or principal place of employment. John Henry Chapman, 9 T.C. 619">9 T.C. 619; S. M. R. O'Hara, 6 T.C. 841">6 T.C. 841; Mort L. Bixler, 5 B.T.A. 1181">5 B.T.A. 1181; Barnhill v. Commissioner, 148 Fed. (2d) 913; George W. Lindsay, 34 B.T.A. 840">34 B.T.A. 840; Jennie A. Peters, 19 B.T.A. 901">19 B.T.A. 901; William Lee Tracy, 39 B.T.A. 578">39 B.T.A. 578. We think it is equally clear that the expenses in question were not incurred in pursuit of the business of her employer, the Immigration and Naturalization Service. Hence, the expenditures in question do not appear to meet the test of having been incurred in pursuit of a trade or business. Petitioner spent a greater sum than if the place of her employment had remained in Washington solely because she saw fit to maintain her home in Washington rather than at her place of employment, but this she did as a matter of personal convenience and in no sense in the interest of her employer's business. 108 Her trips back and forth between Philadelphia and Washington, D.C., likewise were purely personal in their nature and they had no relationship to the carrying on of any business and, particularly, they were in no wise connected with the carrying on of the business of her employer. The respondent is sustained in his disallowance of the deductions. Decision will be entered for the respondent. Footnotes1. Internal Revenue Code: SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: (a) Expenses. - (1) Trade or Business Expenses. - (A) In General. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; * * . ↩2. SEC. 24. ITEMS NOT DEDUCTIBLE. (a) General Rule. - In computing net income no deduction shall in any case be allowed in respect of - (1) Personal, living, or family expenses, except extraordinary medical expenses deductible under section 23(x); * *↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625781/	ROY & TITCOMB, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Roy & Titcomb, Inc. v. CommissionerDocket No. 29138.United States Board of Tax Appeals24 B.T.A. 969; 1931 BTA LEXIS 1563; November 27, 1931, Promulgated 1563 In 1923 the petitioner sold to outside interests its stockholdings in a corporation that prior to, but not during, 1923 was affiliated with the petitioner. Upon the consolidated returns for such prior years the net income of petitioner had been offset by the net losses of the affiliated company. Held, that the loss sustained by the petitioner upon the sale of the stock in 1923 is not affected by the net losses of the affiliated company during the period of affiliation. Theodore B. Benson, Esq., for the petitioner. Maxwell E. McDowell, Esq., and Frank B. Schlosser, Esq., for the respondent. SMITH 970 The Commissioner determined a deficiency of $2,234.87 in the petitioner's income tax for 1923. The only issue for our determination is whether petitioner realized gain or loss upon the sale of certain stock. Upon motion of both parties to the proceeding and the submission of an amended stipulation of facts, the opinion in the above-entitled proceeding promulgated May 1, 1931 (), was vacated and set aside and the same is superseded by this report. FINDINGS OF FACT. The petitioner is a corporation, organized1564 under the laws of the State of Arizona in 1900, with its principal office and place of business in Nogales, Ariz.For the taxable years 1918 to 1922, inclusive, the petitioner, the Arizona & Sonora Manufacturing Company, and the Nogales Electric Light & Power Company were affiliated, and consolidated income-tax returns were filed by the group for those years. The petitioner and the Arizona & Sonora Manufacturing Company were affiliated in and filed a consolidated return for 1923. During the taxable year 1923 petitioner sold to outside interests its stockholdings in the Nogales Electric Light & Power Company for a net consideration of $291,428.57. The cost to the petitioner of this stock was $45,825. At the time of the sale the Nogales Electric Light & Power Company was indebted to the petitioner for actual cash advances in the net amount of $272,678.54, which, as a part of the sales agreement, was canceled. For the years prior to 1923 the Nogales Electric Light & Power Company sustained net losses aggregating $55,141.30, which losses were offset against the net income of the petitioner in the consolidated returns filed for said prior years. The petitioner claims a net1565 loss of $27,074.97 on the transaction, representing the difference between the cost of the stock or $45,825 and $18,750.03, the excess of the consideration received over the indebtedness canceled ($291,428.57 - $272,678.54). The Commissioner disallowed the deduction of the loss claimed and determined a profit of $28,066.33 by reducing the basis for the determination of gain or loss by the losses of the Nogales Electric Light & Power Company in the amount of $55,141.30 which had been used to reduce the petitioner's net income for prior years. OPINION. SMITH: The respondent contends that under our decision in , the petitioner must reduce the basis for the determination of gain or loss upon the sale of its stockholdings 971 in the Nogales Electric Light & Power Company by the amount of the losses of that company during the period of affiliation, said losses having been used to reduce the petitioner's net income for prior years. In , the taxpayer sustained a loss of $94,949.07 on its investment in a subsidiary bank upon the liquidation of the subsidiary. Prior to liquidation1566 the subsidiary had an operating loss which reduced the taxpayer's net income for the period of the taxable year 1922 during which the two banks were affiliated. The liquidation of the subsidiary bank was effected by the taxpayer taking over the assets of the subsidiary, said assets having a value at the time of $94,949.07 less than the cost of the Riggs National Bank's investment in the subsidiary. We held that the deductible loss was the amount of the investment loss less the operating loss of the subsidiary bank for the first part of 1922. Cf. . It is to be noted that the Riggs National Bank and the subsidiary bank were affiliated up to the time the Riggs National Bank, in effect, absorbed the subsidiary - that event terminating the affiliation. In the instant case the affiliated status of the petitioner and the Nogales Electric Light & Power Company ended with the year 1922. In 1923 the petitioner sold to outside interests its stockholdings in the NogalesElectric Light & Power Company. Prior to that event the affiliated status of the two companies had ceased. On similar facts we distinguished 1567 , in , and held that, where stock purchased in 1918 by the parent company became worthless in 1924, in which year the two companies were not affiliated, the 1924 deductible loss of the parent company should not be reduced by losses of the affiliated company that had been used to reduce the net income of the parent company during the prior years when the two companies were affiliated. In , we said: * * it has been held that the disposition of stock by a member of an affiliated group which results in termination of the affiliation may give rise to gain or loss, on the theory that the disposition occurred outside of the affiliated group. ; ; . In the Riggs National Bank case we cited the Remington Rand case with approval, but reached the conclusion that under the peculiar facts present in the Riggs case the amount of the loss would be limited by excluding1568 the operating losses sustained by the subsidiary company during the period of affiliation. It appears that the Riggs Bank owned 100 per cent of the stock of the Hamilton Bank and by reason thereof filed a consolidated return in which the operating losses of its affiliated company, the Hamilton Bank, were used as an offset against the profits of the Riggs Bank. When within the year the Hamilton Bank was liquidated and the Riggs Bank took over its assets, we held that the 972 Riggs Bank could not take a loss on the stock of the Hamilton Bank without first taking into account the losses of the Hamilton Bank of which it had already had the benefit for tax purposes. In the instant case the King Company and the Conwell Company were not affiliated during the taxable year 1924 though they had been for several years prior thereto. The facts on which the affiliation was based in those prior years are not disclosed by the stipulation which is the basis for our decision. The 1924 Revenue Act permitted affiliation of two or more companies only when there was a 95 per cent ownership of stock. The test under the Revenue Acts of 1918 and 1921 was ownership and/or control of substantially1569 all of the stock of two or more companies, and this difference in the requirements of the several revenue acts may account for the fact that the companies were not held to be affiliated in 1924. In any event the liquidation of the Conwell Company occurred at a time when the two companies were not affiliated, and on the stipulated facts it is apparent that the King Company suffered a loss of its entire investment of $25,500 and this amount constitutes a deduction within the meaning of the Revenue Act of 1924. This proceeding is on all fours with . The facts are succinctly stated in the opinion, which in so far as pertinent here, is as follows: In the period 1917-1921 the plaintiff acquired the entire capital stock of Journal of Commerce Company at an aggregate price of $180,226.50. During the year ending April 30, 1922, it advanced to this subsidiary $80,865.35. In May, 1922, it sold its entire holdings in the subsidiary to outside interests. The consideration received was $100,000, but as part of the bargain the plaintiff canceled and released the $80,865.35 debt owed by the subsidiary. In substance1570 and effect, therefore, the net amount received on the sale of the shares was only $19,134.65. It further appears that during the years ending April 30, 1919, to April 30, 1922, inclusive, the plaintiff filed consolidated income tax returns wherein were included the operations of this subsidiary. The total losses of the subsidiary for these four years had been deducted from the plaintiff's gross income for these years. In principle this case cannot be distinguished from , certiorari denied in L.Ed. . It was there held that where a parent corporation sold its stockholdings in a subsidiary, the excess of the selling price over the cost of the stock was taxable as a profit realized by the parent. The fact that the parent had for several years filed consolidated returns was held immaterial, as was also the fact that the subsidiary had accumulated earnings during these years, which earnings had been included in the consolidated earnings and thus taxed. The government's contention was upheld in both respects. Here we have the exact converse. 1571 Here the sale of the stock was at a loss, and the operations of the subsidiary had been conducted at a loss over the years when consolidated returns were filed. The taxpayer is therefore warranted in insisting: First, that upon the sale of the Journal of Commerce stock it suffered a loss of $161,091.85, to the same effect as upon the sale of any other property; and, second, that the fact that the Journal of Commerce Company's operating losses had been taken advantage of by the plaintiff in its payment of taxes on the consolidated basis is of no consequence. 973 The sale upon which the petitioner claims a deductible loss did not occur within the period of affiliation (see ); nor did it terminate the affiliation (see , and compare ); it occurred after affiliation had terminated and the petitioner thereby sustained a deductible loss in the amount claimed. Manatee Crate Co. et al., supra;*1572 Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625782/	GERALD H. GLASER AND CAROL J. GLASER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentGlaser v. CommissionerDocket No. 1701-83.United States Tax CourtT.C. Memo 1984-342; 1984 Tax Ct. Memo LEXIS 330; 48 T.C.M. (CCH) 447; T.C.M. (RIA) 84342; July 9, 1984. Gerald H. Glaser, pro se. 331 Mark A. Pridgeon, for the respondent. WILBURMEMORANDUM FINDINGS OF FACT AND OPINION WILBUR, Judge: Respondent determined a deficiency in petitioners' Federal income tax and an addition to tax in the following amounts: Addition to TaxYearDeficiencyUnder Section 6653(a) 11980$2,611.95$130.59The issues remaining for our determination are: (1) Whether petitioners are entitled to deductions in excess of their rental income for renting a part of their home to petitioner Carol J. Glaser's mother; (2) Whether petitioners can substantiate deductions claimed for an alleged construction business in excess of the amounts conceded by respondent; and (3) Whether petitioners are liable for the addition to tax under section 6653(a). FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation of facts and the attached exhibits are incorporated herein by this reference. Petitioners resided in Bloomer, Wisconsin at the time they filed their petition in this proceeding. They332 filed a joint Federal income tax return for the taxable year 1980. Petitioners derived $1480 in gross receipts from a variety of part-time construction and repair services provided by petitioner Gerald H. Glaser, sometimes with the use of a back hoe he owned and operated. Petitioners claimed a variety of deductions on a Schedule C attached to their return. All of these deductions were disallowed by respondent in his statutory notice of deficiency for lack of substantiation. Subsequently, petitioners submitted their records to respondent and respondent now concedes that the amounts listed below are deductible as business expenses: Amount ClaimedAmount ConcededExpense Itemper Schedule Cby RespondentBank Charge$ 6.58$ 6.65Car and Truck2613.21152.23Depreciation866.88809.75Dues and Publ.15.37Insurance105.2925.40Interest635.02305.18Laundry14.36Legal-Prof.20.00Office Supp.33.82Postage13.805.00Repairs120.6362.52Supplies887.28Telephone370.9517.76Food451.95Utilities190.3670.51Helpers 2801.6625.00TOTAL$7147.16$1480.00333 Petitioner Carol J. Glaser's mother lived with petitioners in their residence during 1980 and paid rent of $100 a month during that year for a total of $1,200. Petitioners deducted the expenses listed below, all of which respondent disallowed for lack of substantiation. After examining petitioners' records, respondent concedes that the expenses listed below are deductible as related to petitioners' rental activity: Amount ClaimedAmount ConcededExpense Itemper Returnby RespondentInsurance$ 20.84$ 16.93Interest113.9192.61Mileage1,000.20180.78Elec. and Water115.63105.76Supplies47.3167.18Heat49.2144.99Food-In294.47391.75Depreciation300.00300.00TOTAL$1,941.57$1,200.00OPINION We first must decide whether petitioners may deduct amounts in excess of income they received from Mrs. Glaser's mother for renting a room in their four bedroom house. Unless an activity is engaged in for profit, section 183 limits deductions applicable to the activity to the income derived therefrom. 3 Petitioners bear the burden of proving error in respondent's determination. Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933);334 Rule 142(a), Tax Court Rules of Practice and Procedure. Plainly on the record before us, petitioners were not engaged in the trade or business of renting real estate or undertook such activity with a profit objective. There is nothing in the record to indicate that the rental charge was anything more than a cost sharing arrangement whereby Carol J. Glaser's mother reduced the additional costs the couple incurred as a result of her living with them. The record contains no information as to the proportion of the total square footage of the house occupied by the "tenant", or the fair market value of her right to use one room and her access to the remaining portion of the dwelling. There is no indication that there was either a written or oral lease, or that any of the other arrangements were conducted on a business rather than a family basis. Respondent was clearly correct in designating this as a family rather than a business relationship and disallowing expenses to the extent that they exceeded the income. 335 The next question presented is whether petitioners may deduct over $7,000 in claimed Schedule C expenses allegedly incurred in earning $1480 from Gerald's construction and repair services. Petitioners' records were fragmentary and inconclusive, to put it generously. The checks introduced do not indicate that the expenditures were for business purposes, and the sheet allegedly logging Gerald's travel activities was more an exercise in creative writing than bookkeeping. By way of example, we note that two of the large expenditures listed were $2613 for car and truck expenses, and $801 for "helpers". Petitioners submitted a matrix on legal size paper as a record of travel expenditures during the year. The vertical axis listed months in sequence (January through December), while the horizontal axis listed the days of the month. Each box of the matrix, corresponding to a month and date during the year, contained entries by symbol showing various trips Gerald took. Gerald entered 430 trips during the year to Bloomer, ostensibly for supplies totaling $887, although he admitted on cross examination that some of the trips were to take his mother-in-law shopping. Gerald also made336 entries showing he made as many as four trips a day to the garage where his back hoe was stored, even though many of these trips were during times of the year when the ground was frozen and use of the back hoe for digging was impractical. In other instances, Gerald's explanation of the matrix was vague at best. Additionally, he did some work for his brother on various occasions under circumstances suggesting a family rather than a business relationship. As to the $801 for "helpers", petitioner again was extremely vague. It is clear, however, that significant payments were made to his seven year old son for doing various chores, and also some payments were made to his mother-in-law for her assistance around the house. We find these expenses, to the extent they were made, to be nondeductible personal expenses. Section 262. Petitioner was equally vague as to other items on the list. He first testified that he deducted 100% of his phone bill, and then later speculated that he only deducted long distance calls attributable to his construction business. In view of the inconclusive nature of Gerald's limited records, and his vague and inconsistent explanations, we conclude that respondent*337 was generous in allowing the deductions that he did. Rule 142(a), supra. Therefore we also sustain respondent on this issue. Finally, we must determine whether petitioners are liable for the addition to tax for negligence as determined by respondent. Petitioners are liable for such addition to tax under Section 6653(a) unless they prove that the underpayment of tax for 1980 was not due to negligence or intentional disregard of rules and regulations. Petitioners have not introduced any evidence on this issue and thus we assume it to be conceded. Enoch v. Commissioner,57 T.C. 781">57 T.C. 781, 803 (1972); Rule 142(a), supra.Decision will be entered under Rule 155.Footnotes1. All statutory references are to the Internal Revenue Code of 1954 as in effect during the years in issue.↩2. The item for "helpers" reflects payments to petitioners' son (then age 7) for cleaning the garage and other chores, and to Carol J. Glaser's mother for various services.↩3. Section 183 as relevant to these proceedings provides: SEC. 183. ACTIVITIES NOT ENGAGED IN FOR PROFIT. (a) GENERAL RULE.--In the case of an activity engaged in by an individual or an electing small business corporation (as defined in section 1371(b)), if such activity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. (b) DEDUCTIONS ALLOWABLE.--In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed-- (1) the deductions which would be allowable under this chapter for the taxable year without regard to whether or not such activity is engaged in for profit, and (2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year exceeds the deductions allowable by reason of paragraph (1). (c) ACTIVITY NOT ENGAGED IN FOR PROFIT DEFINED.--For purposes of this section, the term "activity not engaged in for profit" means any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625783/	MURRY JEROME WRIGHT, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentWright v. CommissionerDocket No. 7942-70 SC.United States Tax CourtT.C. Memo 1973-8; 1973 Tax Ct. Memo LEXIS 277; 32 T.C.M. (CCH) 31; T.C.M. (RIA) 73008; January 15, 1973, Filed Murry Jerome Wright, pro se. Lawrence G. Becker, for the respondent. INGOLIAMEMORANDUM FINDINGS OF FACT AND OPINION INGOLIA, Commissioner: The respondent determined a deficiency in the petitioner's Federal income tax for the calendar year 1968 in the amount of $194. Concessions having been made, the only issue before the Court is whether education expenses incurred by the petitioner278 in attending law school are deductible under section 162(a) or section 212 of the Code. 1 2 FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The petitioner, Murry Jerome Wright, resided in San Francisco, California, at the time his petition was filed. He filed his Federal income tax return for the year 1968 with the District Director of Internal Revenue at San Francisco, California. The petitioner began his college education at Brigham Young University in September of 1960. After two years, he transferred to Arizona State University, where he remained until June of 1964, when he obtained a Bachelor of Arts degree in Education, with a major in Industrial Arts. From September of 1964 until June of 1965, the petitioner taught Industrial Arts in a secondary school in Phoenix, Arizona, under a "temporary" certification. In order to qualify as a full time teacher in Arizona, an individual needed a Bachelor of Arts in Education and had to complete 30 semester hours of graduate work in Education or in other specific areas of interest. In279 the summer of 1965, the petitioner took six hours of graduate courses in Industrial Arts at Arizona State University. From September of 1965 until June of 1966, the petitioner taught Mathematics in a secondary school in Reno, Nevada. In order to obtain certification as a teacher in Nevada, an individual had to have a Bachelor of Arts degree in Education, and 3 every five years thereafter have six hours of courses which would be helpful in his work and not a duplication. On or about April 15, 1966, the petitioner submitted an application to the Golden Gate College School of Law in San Francisco, California. He also applied to William Mitchell Law School in Minnesota. He attended William Mitchell at night from September, 1966 until June, 1967. He testified that his purpose in going to law school was to make more money as a teacher, stating that for every 15 credit hours he completed, he would receive a raise. He further testified that he chose law rather than another area because he "found dissatisfaction in the number of papers you have to write in the education courses" and because in law school "The courses you take are interesting." While at William Mitchell, the petitioner280 took the usual first year law school courses. From September, 1966 until June, 1967, the petitioner taught Industrial Arts at a secondary school in St. Paul, Minnesota. In order to be certified as a teacher in Minnesota, an individual had to obtain a Bachelor of Arts degree in an approved education program. In September of 1967, the petitioner began teaching Industrial Arts at a junior high school in San Francisco. He has been continually so employed up to the present time. He had applied to teach school in California before attending law school in Minnesota. In order to obtain a permanent teaching certificate (Clear Credential) in California, the 4 State requires an individual to have a Bachelor's degree and to complete 30 postgraduate hours of upper division (courses given in junior or senior years of undergraduate work) or graduate level course work. Alternatively, a teacher may teach in California without a Clear Credential if he obtains a Standard Teaching Credential on partial fulfillment from the State of California. In order to obtain this credential, an individual must have a Bachelor of Arts degree in Education, including 15 upper division hours in his major281 plus six postgraduate hours of study. The credential is continually renewable if the individual completes 12 hours of upper division or postgraduate hours of study every two years. At the same time the petitioner began to teach in California, he entered the degree program of the night school of the Golden Gate College School of Law which is an accredited school for teaching education purposes. In the fall semester of 1967, he completed 12 hours of legal education, taking the normal first year courses. In the spring semester of 1968, he completed an additional 10 hours. The 22 hours were credited by the State of California, Department of Education toward the petitioner's fulfillment of the 30 graduate hour requirement for obtaining a Clear Credential in California. Also, petitioner testified that he and his superior had discussed the petitioner's advancement to an administrative position. In August of 1968, the petitioner was academically disqualified 5 from Golden Gate. The petitioner deducted $600 as an education expense on his 1968 income tax return. In September of 1969, the petitioner enrolled at the University of San Francisco School of Law, evening division. He282 then took 10 course hours of study. In the spring of 1970, he took 10 more hours; in the summer of 1970, he took 7 more hours; in the fall of 1970, he took 11 hours; and in the spring of 1971, he took 10 hours. On March 29, 1970, the petitioner registered as a law student with the Committee of Bar Examiners of the State of California. Such registration was required of anyone desiring to practice law in California. OPINION Section 212 provides in part that "there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year - (1) for the production or collection of income." The petitioner argues that even if his claimed education expense deduction is not allowable under section 162(a), it must be allowed under section 212. We cannot agree. Section 212 relates to nontrade or nonbusiness expenses. It was placed in the Code in 1942 to liberalize the narrow "trade or business" rule that Courts had adopted. When the petitioner asks us to allow the law school education expense under section 212 he, in effect, is in the same position as any other taxpayer who seeks to deduct education expenses 6 generally on the ground that283 acquiring an education increases his earning capacity. Such expenses are nondeductible personal expenses under section 262. 2 See Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Louis Drill, 8 T.C. 902">8 T.C. 902 (1947); Richard Walter Drake, 52 T.C. 842">52 T.C. 842 (1969). So here, the petitioner cannot deduct the claimed expense under section 212. As to section 162(a), the petitioner advances two arguments. He argues the law school expenses are deductible because (1) the courses were taken to meet the express requirements of his employer and did not "necessarily" lead to a new trade or business; and because (2) the regulations are unconstitutional and violate the equal protection clause of the 14th Amendment. With regard to the first argument, even if we agree that the courses were taken to meet the express requirements of his employer, we would still be compelled to deny the deduction because under the regulation the petitioner's attendance at law school in a degree program "will284 lead to qualifying him in a new trade or business." (Underlining 7 supplied.) 3 There is no question as to whether it will "necessarily" lead to the petitioner's actual practice of law for the regulation makes it clear that it does not matter whether or not the petitioner ever actually practices law. Cf. Ronald F. Weiszmann, 52 T.C. 1106">52 T.C. 1106 (1969), affd. per curiam 443 F.2d 29">443 F.2d 29 (C.A. 9, 1971); David N. Bodley, 56 T.C. 1357">56 T.C. 1357 (1971). 285 8 As to the argument that the regulation is unconstitutional, it should be noted that if there is a constitutional violation, it will be of the due process clause of the 5th Amendment and not the equal protection clause of the 14th Amendment. The 5th Amendment is applicable to Federal tax statutes, Heiner v. Donnan, 285 U.S. 312">285 U.S. 312 (1932), while the equal protection clause of the 14th Amendment is not. Allen F. Labay, 55 T.C. 6">55 T.C. 6, 14 (1970). In so stating, we recognize that the due process clause of the 5th Amendment may well involve overlapping considerations that also apply to questions of equal protection. The 5th Amendment provides in pertinent part that no person "shall be deprived of life, liberty, or property, without due process of law." Under it a regulation may be set aside if it is arbitrary or unreasonable, Commissioner v. Clark, 202 F.2d 94">202 F.2d 94 (C.A. 7, 1953); however, there is no requirement that there be the type of equal treatment the petitioner seeks here in the imposition of taxes. Morris Inv. Corporation v. Commissioner, 134 F.2d 774">134 F.2d 774 (C.A. 3, 1943); Neuss, Hesslein & Co. v. Edwards, 30 F.2d 620">30 F.2d 620 (C. 286 A. 2, 1929), cert. den. 279 U.S. 872">279 U.S. 872; Swallow v. United States, 325 F.2d 97">325 F.2d 97 (C.A. 10, 1963), cert. den. 377 U.S. 951">377 U.S. 951. Here, we must decide whether or not the regulation is so arbitrary and discriminatory that it violates the due process clause of the 5th Amendment when it attempts to define and differentiate the "trade or business" of being a teacher and 9 specifically sets forth certain parameters of deductibility and nondeductibility. For example, is it unconstitutional to provide that a teacher can deduct the cost of changing from a teacher to a guidance counselor and yet deny the deduction when he seeks to make the change by pursuing a course of study which also "will lead to qualifying him in a new trade or business"? We think not. It is a reasonable attempt to differentiate between deductible expenses which relate to an existing trade or business and nondeductible personal expenses which relate to a taxpayer's desire to prepare himself for a new profession. Here then, we hold that the regulation if valid. 4287 Reviewed and adopted as the report of the Small Tax Case Division. Decision will be entered under Rule 50. Footnotes1. All section references are to the Internal Revenue Code of 1954, unless otherwise indicated. ↩2. SEC. 262. PERSONAL, LIVING, AND FAMILY EXPENSES. Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses. ↩3. Sec. 1.162-5(b) (3). Qualification for new trade or business. (i) The second category of nondeductible educational expenses within the scope of subparagraph (1) of this paragraph are expenditures made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business. In the case of an employee, a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as is involved in the individual's present employment. For this purpose, all teaching and related duties shall be considered to involve the same general type of work. The following are examples of changes in duties which do not constitute new trades of businesses: (a) Elementary to secondary school classroom teacher. (b) Classroom teacher in one subject (such as mathematics) to classroom teacher in another subject (such as science).(c) Classroom teacher to guidance counselor. (d) Classroom teacher to principal. (ii) The application of this subparagraph to individuals other than teacher may be illustrated by the following examples: Example (1). A, self-employed individual practicing a profession other than law, for example, engineering, accounting, etc., attends law school at night and after completing his law school studies receives a bachelor of laws degree. The expenditures made by A in attending law school are nondeductible because this course of study qualifies him for a new trade or business. Example (2). Assume the same facts as in example (1) except that A has the status of an employee rather than a self-employed individual, and that his employer requires him to obtain a bachelor of laws degree. A intends to continue practicing his nonlegal profession as an employee of such employer. Nevertheless, the expenditures made by A in attending law school are not deductible since this course of study qualifies him for a new trade or business. ↩4. See James A. Carroll, 51 T.C. 213">51 T.C. 213 (1968), affd. 418 F.2d 91">418 F.2d 91 (C.A. 7, 1969); Jeffry L. Weiler, 54 T.C. 398">54 T.C. 398 (1970); and Ronald F. Weiszmann, supra↩, which generally hold the regulation to be valid insofar as the "qualification for new trade or business" provision is concerned.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625784/	Louis Nuta and Elizabeth Nuta, Husband and Wife v. Commissioner.Nuta v. CommissionerDocket No. 31007.United States Tax Court1952 Tax Ct. Memo LEXIS 82; 11 T.C.M. (CCH) 954; T.C.M. (RIA) 52283; September 24, 1952James Knight, Esq., for the petitioners. Francis L. Van Haaften, Esq., for the respondent. TIETJENSMemorandum Findings of Fact and Opinion TIETJENS, Judge: This is a proceeding for redetermination of a deficiency in income tax of $21,404.26 of the petitioners for the year 1948. The only question for decision is whether the profit made on a sale of Government surplus airplane engines, parts, and tools owned by petitioners constituted ordinary income or long-term capital gain. Findings of Fact The petitioners, hereinafter called the taxpayers, are husband and wife. They filed their joint income tax return for 1948 with the collector for the Jacksonville Division of Florida. For many years prior to and including 1948, the taxpayer, Louis83 Nuta, operated a ship or boat yard on a tract of land which, during the year in question, consisted of about 20 acres. His wife, during the period involved in this proceeding, also was connected with the business and supervised the office work. The business at the boat yard consisted primarily of servicing, repairing, and storing ships and boats, but also was concerned with the sale of new and used marine parts to customers. From the time the business was started it had been customary for its proprietors to buy surplus marine parts from Government agencies and Louis was on the mailing list of various Federal agencies for that purpose. Over the period from 1926 to the time of the hearing these purchases totaled many thousands of dollars. The surplus parts so bought were used in making repairs and many were resold to customers of the boat yard. The surplus parts were sometimes inventoried, but most of the time they were so numerous that no inventory was made. They were put "on the shelf" and sold, or junked when they became outdated. Louis was an airplane pilot and shortly after the war in 1945 he began the purchase of surplus aircraft parts from the Government. Most of these parts84 were purchased already boxed and packed in marked cases. They were for military planes for the most part and were purchased in job lots. After purchases of aircraft parts were made they were shipped to the boat yard and there sorted. Until they were sorted taxpayers were unable to tell exactly what they had bought. Some parts could be used in the boat business. Storage space for the aircraft parts required several acres. The parts were not inventoried and were not segregated on the books of the taxpayers from the "surplus" marine parts kept for sale at the boat yard. A summary made from the taxpayers' books shows that between January 1, 1945 and March 31, 1947, a total of 26 separate purchases of surplus parts, including airplane parts, were made from the Government aggregating $27,340.73. During the same period 39 sales of these parts were made totaling $35,165.37. The taxpayers did not advertise surplus airplane parts for sale, but customers of the boat yard could and did buy such parts at the yard. Many people knew that the taxpayers had surplus aircraft parts for sale. In 1947, after accumulating a substantial quantity of surplus aircraft parts, the taxpayers got the idea85 of starting an aviation school or going "in the aviation business". For that purpose the taxpayers leased a suitable tract of land in April 1947 for a period of five years, the lease terminable after 90 days by either party. The lease recited that the land was to be used "for general airport purposes, and for any type of aeroplane, automobile or motorcycle racing, and for the storage of aeroplanes and aeroplane parts". The taxpayers' plan in connection with the field was to use the surplus aircraft parts for sale and for repair parts in the same way that marine parts were used at the boat yard. A substantial part of the surplus aircraft parts was removed from the boat yard to the leased tract. No accurate records were kept of these parts and it is impossible to tell just what was moved there. The taxpayers did not know at the time of removal just what parts would be needed for "school" purposes or which would be sold. During the period April 1, 1947 to August 9, 1948 the taxpayers' records show 18 purchases of Government surplus parts, including airplane parts, aggregating $8,099.67. During the same period 32 sales were made totaling $147,599.71. All of the taxpayers' purchases86 of Government surplus material were carried on their books in one account labeled "Inventory Salvage - Old Inventory". No distinction was made between aircraft and marine surplus material purchases. Entries did not indicate whether purchases were of aircraft or marine surplus. All of the taxpayers' sales of Government surplus material were carried on their books in one account labeled "Gov't Surplus, Sales - Salvage Material (at Cost)". No distinction was made between aircraft and marine surplus sales. Entries did not indicate whether sales were of aircraft or marine surplus. The taxpayers sold all surplus parts to anyone who came along if they could get the price they wanted. Negotiations for the requisite permits to operate the airport were unsuccessful. On August 9, 1948, the taxpayers sold to American Airmotive, a firm represented by Benjamin Epstein, for $100,000, all aircraft surplus parts on hand with certain exceptions not here important. Epstein had known Louis Nuta since the 1920's. He first discovered that the taxpayers had aircraft parts for sale when someone told him. Louis Nuta first set a price of $125,000 on the parts, but finally reduced this to $100,000. 87 The sale was made because the parts were starting "to get bad". The materials sold to Epstein had been purchased in lots on a number of occasions during the years 1945 through 1948. The sale was entered on the taxpayers' records in the same manner as other sales of surplus parts. The taxpayers treated the sale to American Airmotive as ordinary income on their records and so reported the profit on their income tax return for 1948. They here question such treatment. Opinion In arguing that the surplus aircraft parts sold by them were neither "property of a kind which would properly be included in the inventory of the (taxpayers)" nor "property held by the (taxpayers) primarily for sale to customers in the ordinary course of his trade or business" and so excluded from the definition of "capital assets" appearing in section 117(a) of the Internal Revenue Code, the taxpayers contend that they were not in the business of selling aircraft surplus or of running an airport, but were solely in the boat yard business. The facts do not support this contention. The taxpayers had purchased surplus marine parts from the Government for many years and had held them for88 sale. Since about 1945 this custom of purchasing surplus material branched out to include aircraft or airplane parts. These surplus parts were also sold from time to time in substantial quantities over the years to any customer of the taxpayers who would pay the price. These sales were continuously made from 1945 when Louis first began to purchase such parts right up through 1948 when the largest bulk sale to American Airmotive was concluded. The record discloses no other purpose of the taxpayers in acquiring these parts than for resale to customers of the boat yard. The fact that they were sold at a "boat yard" rather than some other place of business of the taxpayers is of no significance. Nor is the fact that the taxpayers did not "advertise" that they had aircraft parts for sale. It was well known to many persons that the parts could be bought at the yard and many customers did make purchases there. Epstein, their biggest customer, learned that the taxpayers had such parts for sale by word of mouth. We think the facts conclusively show that the taxpayers' business of buying and selling surplus marine parts was inextricably tied in with the business of buying and selling surplus89 airplane parts, at least from 1945 through 1948, the year here involved. No segregation of the two facets of the business was attempted on the taxpayers' books and we find no basis for making any differentiation. Even if we were to segregate, as suggested in the taxpayers' brief, the business at the boat yard from what was "intended" to be done at the airport, but was not done there because of permit troubles, we do not see how that would help. The evidence is that the taxpayers still would have held the bulk of the parts at the airport primarily for sale, and as a matter of fact, there is where the bulk of the parts was sold in the transaction at issue in this case. The question here is principally one of fact. Its answer depends to a large extent upon the intent of the taxpayers and full consideration of the surrounding evidentiary facts. Greene v. Commissioner, (C.A. 5), 141 Fed. (2d) 645. Under all the circumstances here we conclude that the surplus airplane parts sold to American Airmotive in 1948 were not capital assets, that they were held primarily for sale to customers in the ordinary course of business, and that the gain derived from that sale was ordinary90 income. Decision will be entered for the respondent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625787/	Alan J. Bayley and Barbara F. Bayley, Petitioners v. Commissioner of Internal Revenue, RespondentBayley v. CommissionerDocket No. 8992-73United States Tax Court69 T.C. 234; 1977 U.S. Tax Ct. LEXIS 25; November 15, 1977, Filed 25 Decision will be entered for the respondent. Petitioner held 5,000 shares of GRT stock issued to him for services to that corporation and pursuant to a permit of the California Commissioner of Corporations, which permit imposed restrictions that had a significant effect on the stock's value. Held, petitioner's stock is stock subject to restrictions significantly affecting its value, rather than a second class of unrestricted stock, for purposes of secs. 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs.Held, further, restrictions imposed by the Commissioner of Corporations pursuant to California securities laws, are "restrictions" within the meaning of secs. 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs.Frank v. Commissioner, 54 T.C. 75">54 T.C. 75 (1970), affd. 447 F.2d 552">447 F.2d 552 (7th Cir. 1971), distinguished on the ground that the securities law restrictions involved therein did not have a significant effect on value. Held, further, on the facts of the instance case, all restrictions imposed by the permit were terminated during 1968. Lawrence A. Aufmuth and Arthur C. Rinsky, for the petitioners.Eugene H. Ciranni, for the respondent. Forrester, Judge. FORRESTER234 Respondent has determined a deficiency in petitioners' Federal income tax for the taxable year 1968 in the amount of $ 16,922.95. There are two issues for our decision: (1) Whether the stock issued to petitioner Alan J. Bayley in 1966 as compensation for promotional services was subject to restrictions27 which had a significant effect on its value; and, if so, (2) whether such restrictions were removed, or ceased to have a significant effect on such stock's value during 1968.235 FINDINGS OF FACTSome of the facts have been stipulated and are so found.Petitioners Alan J. and Barbara F. Bayley, husband and wife, resided in Los Altos, Calif., at the time they filed the petition herein. Petitioners filed a joint Federal income tax return, and amended joint return, for the taxable year 1968 with the Office of the Internal Revenue Service at San Francisco, Calif.Since 1966, petitioner Alan J. Bayley (Bayley) has been president and a member of the board of directors of General Recorded Tape, Inc. (GRT), which is engaged in the business of producing and selling prerecorded music tapes. Pursuant to a permit issued by the California Commissioner of Corporations (Commissioner of Corporations), dated August 11, 1965, GRT issued to Bayley a certificate for 5,000 shares of its stock (1965 stock) as compensation for his organizational efforts and other services rendered to or on behalf of GRT. The conditions of the August 11, 1965, permit required Bayley (1) to deposit in escrow the 28 1965 stock issued directly to him pursuant to that permit and (2) to enter into an agreement with GRT providing that the 1965 stock would be subject to limitations on its liquidation, dividend, and voting rights. Bayley complied with both of these requirements (hereinafter collectively referred to as promotional restrictions).The August 11, 1965, permit was amended by a permit dated March 16, 1966, in which the Commissioner of Corporations authorized the issuance of a new stock certificate for 5,000 shares of GRT stock (1966 stock) to Bayley in consideration for his cancellation of the certificate for the 1965 stock. The same promotional restrictions were continued in force and Bayley complied with these conditions.No further permits or other orders affecting Bayley's promotional shares were issued by the Commissioner of Corporations until he issued a permit dated July 25, 1968, authorizing GRT to issue shares in accordance with an application filed by it on June 14, 1968. The July 25, 1968, permit provided, in part, as follows:This PERMIT is issued upon the following conditions:(a) That none of the shares issued in exchange for shares authorized by paragraph 2 of the permit29 dated March 16, 1966, as amended, shall be sold or issued unless and until NEWELL ASSOCIATES, INC., and ALAN J. BAYLEY shall have executed an agreement with applicant in writing, and 236 filed a copy thereof with the Commissioner of Corporations, whereby they shall agree, for themselves, their successors, assigns, heirs, administrators and executors, that all shares issued pursuant to said paragraph shall be subject to the following disabilities unless and until the Commissioner shall, by an amendment to this permit, delete this condition, the Commissioner of Corporations reserving at all times the power to amend the provisions of this condition and this permit:1. Such shares shall not participate in any cash, shares or property dividend paid by the applicant.2. Such shares shall not participate in any distribution of assets by the applicant to its shareholders.3. From and after July 2, 1973, such shares shall not be entitled to vote unless or until the Commissioner has amended this permit to delete the provisions of this condition.Neither the applicant nor any holder of shares issued pursuant to said paragraph shall be deemed entitled to have this permit amended to delete30 this condition unless an application shall have been filed with the Commissioner showing, by means of audited and certified financial statements prepared in accordance with generally accepted accounting principles, that applicant is in sound financial condition and has had aggregate annual earnings averaged over a period of three successive years of not less than 15% on the average invested capital as computed for such period.Neither applicant nor any other person shall take or solicit waivers of all or part of this condition, or any agreement executed pursuant thereto, unless the written authorization of the Commissioner so to do first shall have been obtained.(b) That when issued all documents evidencing any of the securities referred to in condition (a) hereof authorized by paragraph 1 hereof shall be forthwith deposited with the escrow holder heretofore selected by applicant and approved in writing by the Commissioner of Corporations, to be held as an escrow pending the further written order of said Commissioner; that the receipt of said escrow holder for said documents shall be filed with said Commissioner; and that the owner or persons entitled to said securities shall not31 consummate a sale or transfer of said securities, or any interest therein, or receive any consideration therefor, until the written consent of said Commissioner shall have been obtained so to do.(c) That all certificates evidencing any of the securities authorized by paragraph 1 hereof (except those referred to in conditions (a) and (b) hereof), shall at all times bear upon their face and reverse sides a legend, clearly and prominently stamped thereon and in capital letters of not less than ten-point type, reading as follows:"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, NAMING BOTH TRANSFEROR AND TRANSFEREE, EXCEPT THAT TRANSFERS MAY BE EFFECTED WITHOUT SUCH CONSENT TO THE TRANSFEROR'S PARENTS, CHILDREN, GRANDCHILDREN, 237 SPOUSE, AND CUSTODIANS OR TRUSTEES FOR THEIR ACCOUNT, OR TO HOLDERS OF SECURITIES OF THE SAME CLASS OF THE ISSUER OF THIS SECURITY, ON CONDITION THAT ANY CERTIFICATE EVIDENCING THIS SECURITY ISSUED TO SUCH TRANSFEREE, SHALL CONTAIN THIS LEGEND CONDITION."Bayley complied32 with conditions (a) and (b) of the July 25, 1968, permit.On August 22, 1968, the Commissioner of Corporations issued an Order Terminating Escrow (hereinafter Order) of "the issued and outstanding shares for which provision was made" in the July 25, 1968, permit. On August 22, 1968, the Commissioner of Corporations also issued an Amendment to Permit (hereinafter Amendment) which specifically deleted conditions (b) and (c) from the July 25, 1968, permit. No other permits or orders have ever been issued by the Commissioner of Corporations affecting the July 25, 1968, permit.The promotional restrictions imposed upon Bayley's stock were typical of the kind of promotional restrictions which the Commissioner of Corporations imposed on promotional stock during 1966. Prior to 1969, the Commissioner of Corporations enforced promotional restrictions solely by means of an escrow whereby the restricted stock could not be transferred by the escrow agent without the order of the Commissioner of Corporations, and he never terminated an escrow without terminating the other promotional restrictions at the same time. Aside from the instant case, there has never been another instance in which the33 Commissioner of Corporations provided for the removal of the limitations on the liquidation, dividend, and voting rights of restricted stock solely by an amendment to permit. A person with substantial experience in dealing with the application and removal of promotional restrictions, such as those involved in this case, would be likely to conclude after an examination of the GRT file that the Order of August 22, 1968, removed all of the restrictions on petitioner's stock.The Commissioner of Corporations maintains that the Order and the Amendment "inartfully" terminated all of the promotional restrictions on petitioner's stock. If asked to do so, the Commissioner of Corporations would issue an order, or amendment to permit, specifically deleting condition (a) from the July 25, 1968, permit.The Commissioner of Corporations' file pertaining to GRT 238 (file No. 5000502) consists of both a public and private file. The public file contains applications filed with the Commissioner of Corporations as well as the responses, orders and permits issued by him in response to such applications. The private file contains internal memoranda of the Commissioner of Corporations' office34 with respect to applications. All public files more than 4 years old are routinely destroyed to that the original public file pertaining to GRT has been destroyed, but microfilm copies of the permits and orders, but not applications, from such file have been retained.The private file pertaining to GRT contains a memorandum dated August 21, 1968, which reads, in part, as follows:Amendment to the following permits:PERMIT dated July 25, 1968, by deleting conditions [at this point the letters (a) and (b) have both been typed on top of one another] and (c) therefrom, together with ORDER TERMINATING ESCROW* * * MEMORANDUM OF FINDINGS * * Applicant also seeks an amendment to the permit dated July 25, 1968, to delete the escrow condition, as the analysis of Mr. Mattes shows applicant's financial condition warrants the removal of the escrow and legend condition.Recommended.Mr. Mattes' analysis relates to the propriety of removing the limitations on liquidation, dividend, and voting right from petitioner's stock.John Freidenrich (Freidenrich) is an attorney who has practiced law since 1964. He has specialized in corporate securities and business transactions and has had frequent35 dealings with the Commissioner of Corporations so that he was familiar with his policies, procedures, and rules during the period in question. Freidenrich has served as an assistant secretary of GRT and, in 1968, he was involved with obtaining the Federal securities registration and California registration of a public offering of GRT stock. On September 1, 1970, Freidenrich wrote a letter stating, in part, as follows:4. On August 22, 1968, the Commissioner of Corporations issued his Order Terminating Escrow and his Amendment to Permit dated the same date under the terms of which he removed the shares of common stock from the escrow 239 conditions and released the shares from all of the restrictions and conditions previously imposed thereon.He believed such to be the case because an order terminating escrow was the typical way in which such restrictions were removed by the Commissioner of Corporations during the relevant period.In 1966, there was a significant difference in value between GRT stock subject to the promotional restrictions and unrestricted GRT stock. The fair market value in 1966 of 5,000 shares of GRT stock that were not subject to promotional restrictions36 such as those imposed on the 1966 stock by the March 16, 1966, permit was $ 10 per share, or $ 50,000. The fair market value in 1966 of 5,000 shares of GRT stock that were subject to such promotional restrictions was $ 0.509 per share, or $ 2,545. The fair market value on August 22, 1968, of 5,000 shares of GRT stock that were not subject to such promotional restrictions was at least $ 10 per share, or $ 50,000. None of the 1966 stock was sold or otherwise transferred by Bayley prior to January 1, 1969. In 1969 Bayley transferred some of the 1966 stock. As long as the promotional restrictions were in force, petitioner's stock could be transferred, but only subject to such restrictions.All of the promotional restrictions imposed on the 1966 stock were imposed by the Commissioner of Corporations pursuant to the administrative discretion granted to him under California law. The removal of such promotional restrictions remained in his discretion at all times relevant to this case.Petitioners filed a timely 1966 joint Federal income tax return, and in such return the receipt of the 1966 stock by Bayley was reported as a short-term capital gain in the amount of $ 2,545. 1 In his37 statutory notice, respondent determined that, during the taxable year 1968, Bayley realized $ 50,000 of ordinary income from the GRT stock which he had received in 1966.OPINIONPetitioner argues that sections 1.61-2(d)(5)238 and 1.421-6(d)240 (2), 3 Income Tax Regs., are inapplicable for two reasons: (1) The 1966 stock issued to petitioner represented a second class of stock rather than stock subject to restrictions; and (2) since the restrictions on the 1966 stock were imposed by the Commissioner of Corporations, rather than by a contract between petitioner and GRT, they are not "restrictions" as that term is used in the regulations.39 Petitioner cites Rev. Rul. 71-522, 2 C.B. 316">1971-2 C.B. 316, and Paige v. United States, an unreported case ( C.D. Cal. 1975, 36 AFTR 2d 75-5408, 75-2 USTC par. 9587) 4 in support of his argument that the 1966 stock represents a second class of stock, rather than restricted stock. Unfortunately, petitioner's argument misses the point. We have repeatedly stated that the purpose of the section 1371(a)(4) 5 requirement that a "small business corporation" have only one class of stock is to make the passthrough provisions of subchapter S workable and to avoid the complications inherent in passing the earnings of a corporation through to shareholders who hold stock with different rights. Parker Oil Co. v. Commissioner, 58 T.C. 985">58 T.C. 985, 990 (1972); Stinnett v. Commissioner, 54 T.C. 221">54 T.C. 221, 235 (1970); Gamman v. Commissioner, 46 T.C. 1">46 T.C. 1, 7-8 (1966). It is clear that such purpose is irrelevant to the question posed herein as to whether petitioner's stock was 241 subject to a "restriction which has a significant effect 40 on its value," secs. 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs. In Stinnett v. Commissioner, supra, we decided that certain advances to a corporation, designated as debt and evidenced by installment notes, did not result in the corporation having more than one class of stock even though such notes might have represented equity interests for other pruposes. In Stinnett, we said (54 T.C. at 232):We do not have to decide whether the notes involved in this case might nevertheless be treated as "equity" for other purposes. We are not here concerned with the treatment of interest paid on those notes. In fact, no interest was paid. Nor are we concerned with characterizing the transaction to determine whether petitioners might have a bad debt loss in the event of worthlessness. We are not even concerned with the question whether such debt may not be treated differently under other provisions of the tax laws, even in the case of a corporation which has elected to be taxed under subchapter S. For example, there might be situations in which earnings accumulated prior to qualification under subchapter S are sought to41 be distributed to a stockholder-creditor of the corporation in the "guise" of repayment of debt.All we are called upon to decide is whether the corporation (International Meadows) had outstanding more than "one class" of stock within the meaning of section 1371 of the Code. * Sections 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs., apply broadly to any property "which is transferred * * to an employee or independent contractor as compensation for services, and which is subject to a restriction which has a significant effect on its value." In the instant case, the parties anticipated that the promotional restrictions would be terminated by the Commissioner of Corporations if the corporation were financially successful, 42 and the permits included provisions specifying the procedure by which the promotional restrictions could be terminated. Of course, when such termination occurs, the "second class of stock" concept which petitioner urges will terminate and all of the stock issued pursuant to the July 25, 1968, permit will become the same type and class of stock. This situation is clearly within the reach of sections 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs. Accordingly, we hold that petitioner's stock is stock received as compensation for services, and is subject to a restriction significantly affecting its value, rather than a second class of unrestricted stock.Petitioner relies upon Frank v. Commissioner, 447 F.2d 552 (7th Cir. 1971), affg. 54 T.C. 75">54 T.C. 75 (1970), in arguing that the 242 promotional restrictions were not "restrictions" within the meaning of sections 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs., because such restrictions were imposed by the Commissioner of Corporations pursuant to California securities laws rather than by private contract.In Hirsch v. Commissioner, 51 T.C. 121">51 T.C. 121, 135-137 (1968),43 we held the possibility that a sale of Hirsch's shares would violate the Securities Act of 1933 to be a restriction within the meaning of sections 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs. In such case, the employer corporation had made a public offering before Hirsch acquired his stock in the corporation, but Hirsch's stock was not part of such public offering. Hirsch's stock was issued in reliance upon the private offering exemption from registration under the Securities Act of 1933 (Securities Act). To qualify for such exemption, Hirsch represented that he took such shares for investment and not with a view to distribution. The SEC twice refused to allow the public sale of Hirsch's shares without registration. The SEC first refused because such a sale would destroy the private offering exemption relied upon in issuing Hirsch's stock and a second time because Hirsch was a "control" person of the employer corporation. In Hirsch we found as a fact (51 T.C. at 130) the following:Had Ira attempted to sell his shares of Pacific at any time from the date of issue, he would have had quite a difficult time. Under his peculiar circumstances44 , there would have been few buyers willing to purchase his shares. Any buyer willing to purchase his shares, assuming that this could be done legally, would have demanded a discount of at least 15 to 20 percent from the quoted over-the-counter prices. Even if Ira could have registered his shares under regulation A of the Securities Act of 1937, it would have cost him a minimum of $ 3,000 to $ 6,000 to do so. [Emphasis supplied.]Therefore, it was clear that the Securities Act restrictions applicable to Hirsch's stock had a significant effect on its value.In Frank v. Commissioner, 54 T.C. 75">54 T.C. 75 (1970), we distinguished Hirsch v. Commissioner, supra, as follows (54 T.C. at 96):we do not find the Hirsch doctrine to be controlling in the instant case. Unlike the taxpayer in Hirsch, petitioner acquired freely transferable stock which was not subject to investment letter restrictions. Furthermore, in Hirsch the Court was comparing the taxpayer's unregistered shares to outstanding registered shares. In this case, approximately 83 percent of the outstanding stock was not registered45 with the SEC and the remainder was subject to investment letter restriction. Thus, in the marketplace petitioner's stock would not be considered inferior to the outstanding shares, and there would not be a discount based upon 243 dissimilarity of petitioner's shares from those outstanding as was the case in Hirsch. [Emphasis supplied.]In addition to their other requirements which are not involved herein, section 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs., are applicable only if (1) the transferred property is subject to a "restriction" within the meaning of such regulations and (2) such restriction has a "significant effect on its value." In Frank, we distinguished Hirsch with respect to requirement (2) because under the facts of that case we believed the Securities Act restrictions did not have a significant effect on the value of Frank's shares. 6 In Frank, we found only two factors, the large size of Frank's holdings and the impact of rapid price fluctuations on prospective purchasers in a private placement sale, to have an effect on the value of Frank's stock and we held that those factors did not constitute "restrictions." Since we found that46 the Securities Act restrictions had no significant effect on value, we did not reach the question of whether securities law restrictions were "restrictions" for purposes of sections 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs., and, accordingly, did not attempt to distinguish Hirsch with respect to that issue.Since the parties in the instant case have stipulated that in 1966 there was a significant difference in value between GRT stock subject to promotional restrictions and similar stock which was unrestricted, the instant47 case is distinguishable from Frank because the promotional restrictions did have a significant effect on the value of Bayley's stock. With respect to whether restrictions imposed by governmental agencies are "restrictions" within the meaning of sections 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs., our decision in Hirsch v. Commissioner is controlling.We realize that in affirming our decision in Frank, 447 F.2d 552 (1971), the majority of the Seventh Circuit Court of Appeals held that Frank and Hirsch were indistinguishable and that the decision in Hirsch was erroneous "in that we do not believe restrictions on transferability arising by operation of securities law were intended to be included within the meaning of the 244 applicable Treasury Regulation." 447 F.2d 556">447 F.2d 556. As stated above, supra at pp. 241-243, we believe Frank and Hirsch to be validly distinguishable upon the ground that the securities law restrictions in Frank did not significantly affect the value of his stock.After carefully considering both the majority and dissenting opinions of the Seventh Circuit Court48 of Appeals in the Frank case, we are convinced that Hirsch was correctly decided. The majority, in holding that Hirsch was incorrectly decided, relied entirely upon (1) Rev. Rul. 68-286, 1 C.B. 185">1968-1 C.B. 185, which states that the provisions of section 16(b) of the Securities Exchange Act of 1934 7 do not constitute restrictions significantly affecting the value of stock held by an "insider," and (2) the fact that all of the examples of the operation of section 1.421-6(d)(2)(i), Income Tax Regs., which are given in section 1.421-6(d)(2)(ii), Income Tax Regs., involved contractual limitations.We do not believe that Rev. Rul. 68-28649 is contrary to our decision in Hirsch since we believe it was based on the premise that section 16(b) restrictions do not "significantly" affect value rather than that the section 16(b) restrictions are not "restrictions" within the meaning of the applicable regulations. A buyer (unless he, too, is an "insider") will take an "insider's" stock free from the restrictions of section 16(b) so that such restrictions do not affect the value of such stock in the eyes of the purchaser. The value of such stock to the selling "insider" will be reduced, not because its market value is reduced, but only because he must return any "insider profit" to his company. In contrast, petitioner's stock could only be transferred subject to the promotional restrictions so that its market value was significantly affected.We also are unpersuaded that securities law restrictions are outside the scope of sections 1.61-2(d)(5) and 1.421-6(d)(2)(i) Income Tax Regs., merely because all of the examples given in section 1.421-6(d)(2)(ii), Income Tax Regs., involved contractual limitations. As the dissenting opinion in Frank v. Commissioner, 447 F.2d 552">447 F.2d 552, 561 (7th Cir. 1971),50 stated:it appears to me that a restriction which has a significant effect on its value is not limited as to source and if the Securities Act of 1933 in its operation restricts the ready sale of a security then it is squarely a restriction within the 245 meaning of the regulation. 1 Examples are merely illustrative and are not controlling where the language is clear and explicit as it is here.To hold that securities law restrictions are not restrictions within the meaning of the applicable regulations would create a potential for abuse under such regulations. A corporation could issue stock, subject to securities law restrictions significantly affecting its value, as compensation to employees who would only be required to include the value of such stock, as reduced by such restrictions, 8 in their ordinary income. Thus, any appreciation resulting when the corporation later caused such restrictions to be removed (by registration for instance) would only be taxed at capital gains rates upon the subsequent disposition of such stock. In this way, a corporation would give its 51 employees valuable stock as compensation for services but such employees would be required to report only a portion of its value as ordinary income. Accordingly, we hold that the promotional restrictions are "restrictions" having a significant effect on the value of petitioner's stock for purposes of sections 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs.Having decided that the promotional restrictions are restrictions having a significant effect on the value of petitioner's stock within the meaning of the applicable regulations, we must now decide if such promotional restrictions lapsed in 1968, or if the restrictions on the liquidation, dividend, and voting rights of petitioner's stock no longer had a significant effect on its value after the termination of the escrow. The Order and the Amendment clearly terminated 52 the escrow of petitioner's stock, and we find that the restrictions on liquidation, dividend, and voting rights no longer had a significant effect on the value of petitioner's stock after such termination.The Commissioner of Corporations intended to terminate all of the promotional restrictions on petitioner's stock by virtue of the Order and the Amendment. Prior to 1969, the Commissioner of Corporations did not enforce promotional restrictions by any means other than the escrow requirement and he never terminated an escrow without also terminating the other 246 promotional restrictions at the same time. Moreover, the Commissioner of Corporations' position with regard to petitioner's stock is that all the promotional restrictions were terminated, although "inartfully," by the Order and the Amendment and that if asked he would issue an order or amendment to the permit in order to clarify his position on the subject.The private memorandum relating to the Amendment supports our conclusion that the Commissioner of Corporations intended to terminate all of the promotional restrictions on petitioner's stock. Such memorandum states:Applicant also seeks an amendment to the permit53 dated July 25, 1968, to delete the escrow condition, as the analysis of Mr. Mattes [relating to the propriety of removing the restrictions on the liquidation, dividend, and voting rights of the stock] shows applicant's financial condition warrants the removal of the escrow and legend condition.Such private memorandum also contains a typeover of the letters "a" and "b" making it unclear whether the Amendment recommended therein should delete condition (a) or condition (b) of the July 25, 1968, permit. Such ambiguity plausibly explains why the Commissioner of Corporations' intent to remove all of the promotional restrictions from petitioner's stock was not artfully consummated and why the Order and the Amendment when taken together, terminate the escrow restriction twice.The July 25, 1968, permit was atypical in that it did not provide for the termination of the restrictions on liquidation, dividend, and voting rights upon the termination of the escrow, but instead required an amendment to the permit. In the typical case, the Order would have terminated all of the promotional restrictions, so that an attorney experienced in California corporate securities law would have concluded54 upon a routine examination of the Commissioner of Corporations' public file relating to petitioner's stock that all promotional restrictions on such stock had been removed. In fact, petitioner's own attorney, who was experienced in California securities law, did conclude, in a letter dated September 1, 1970, that:4. On August 22, 1968, the Commissioner of Corporations issued his Order Terminating Escrow and his Amendment to Permit dated the same date under the terms of which he removed the shares of common stock from the escrow conditions and released the shares from all of the restrictions and conditions previously imposed thereon.Assuming arguendo that all of the promotional restrictions 247 were not effectively terminated by the Order and Amendment, the restrictions which remained upon termination of the escrow clearly did not significantly affect the value of petitioner's stock because the Commissioner of Corporations intended that such restrictions be terminated, he had terminated the escrow which was the only means he ever used to enforce such restrictions, he was of the opinion that the restrictions had been terminated "inartfully," he stood ready to issue an order55 or amendment to permit clarifying the fact that they were terminated and, attorneys with substantial experience in California securities law would be and were unaware, upon a routine examination of the relevant documents, that such restrictions had not been terminated. Accordingly, we hold that upon the issuance of the Order and the Amendment, all restrictions significantly affecting the value of his stock lapsed so that petitioner realized ordinary income at such time in accordance with sections 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs.Decision will be entered for the respondent. Footnotes1. Petitioner timely filed a claim for refund so that if respondent prevails in the instant case, he will be entitled to a refund equal to the amount of taxes paid on such amount.↩2. Sec. 1.61-2(d)(5). Property transferred subject to restrictions. Notwithstanding any other provision of this paragraph, with respect to any property, other than an option to purchase stock or property, which is transferred by an employer to an employee or independent contractor as compensation for services, and which is subject to a restriction which has a significant effect on its value, the rules of paragraph (d)(2) of section 1.421-6↩ shall be applied in determining the time and the amount of compensation to be included in the gross income of the employee or independent contractor. * * * This subparagraph is applicable only to transfers after September 24, 1959. [Emphasis supplied to clarify that it is the "option" regulation which is applicable in the instant case.]3. Sec. 1.421-6(d). Options without a readily ascertainable fair market value. If there is granted an option to which this section applies, and if the option does not have a readily ascertainable fair market value at the time it is granted, the employee in connection with whose employment the option is granted is considered to realize compensation includible in gross income under section 61 at the time and in the amount determined in accordance with the following rules of this paragraph:* * * (2)(i) If the option is exercised by the person to whom it was granted but, at the time an unconditional right to receive the property subject to the option is acquired by such person, such property is subject to a restriction which has a significant effect on its value, the employee realizes compensation at the time such restriction lapses or at the time the property is sold or exchanged, in an arm's length transaction, whichever occurs earlier, and the amount of such compensation is the lesser of --(a) The difference between the amount paid for the property and the fair market value of the property (determined without regard to the restriction) at the time of its acquisition, or(b↩) The difference between the amount paid for the property and either its fair market value at the time the restriction lapses or the consideration received upon the sale or exchange, whichever is applicable. * *4. These authorities deal with the question of whether stock subject to promotional restrictions is a second class of stock for purposes of subch. S of the Internal Revenue Code of 1954.↩5. Unless otherwise indicated, all statutory references are to the Internal Revenue Code of 1954.↩6. We did not decide in Frank v. Commissioner, 54 T.C. 75">54 T.C. 75(1970), affd. 447 F.2d 552">447 F.2d 552 (7th Cir. 1971), and do not decide in the instant case, that restrictions can never significantly affect value in the absence of dissimilarity of the taxpayer's shares from other outstanding shares. There may be instances where restrictions placed on all↩ outstanding stock of a corporation significantly affect the value of all such stock.7. Under sec. 16(b) of the Securities Exchange Act of 1934, if an "insider" sells any equity security of his employer within a period of less than 6 months before or after the date that he received it, then he may be required to return to his company the "insider profit" realized on the purchase and sale.↩1. To paraphrase an oft-quoted aphorism, a restriction is a restriction is a restriction.↩8. Of course, secs. 1.61-2(d)(5) and 1.421-6(d)(2)(i), Income Tax Regs., do not apply to transactions to which sec. 83, I.R.C. 1954↩, which was added by the Tax Reform Act of 1969, is applicable.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477353/	OPINION. TURNER, Judge: Under section 102 of the Internal Revenue Code of 1939,1 a surtax is imposed upon the net income of a corporation, if such corporation “is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders * * * through the medium of permitting earnings or profits to accumulate instead of being divided or distributed.” And by subsection (c) thereof, it is provided that the “fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid surtax upon shareholders.” The respondent has determined such surtax deficiencies against petitioner for the years herein, on the ground that it was availed of for the purpose of preventing the imposition of the surtax upon its shareholders, through the medium of permitting its earnings and profits to accumulate beyond the reasonable needs of its business, and the case has been submitted and argued by the parties on that premise. The evidentiary facts as shown of record have been found .in considerable detail, and, in our opinion, no discussion or elaboration thereof is needed to justify the ultimate finding that petitioner did not accumulate its earnings or profits beyond the reasonable needs of its business, or to sustain the conclusion that petitioner was not availed of for the purpose of preventing the imposition of the surtax upon its shareholders, within the meaning of section 102. It is, of course, patent that petitioner was not formed for that purpose, and there has been no claim or determination that it was. The respondent’s determination of section 102 liability is accordingly rejected. See and compare Helvering v. National Grocery Co., 304 U. S. 282; Helvering v. Chicago Stock Yards Co., 318 U. S. 693; Crawford County Printing & Publishing Co., 17 T. C. 1404; J. L. Goodman Furniture Co., 11 T. C. 530; L. R. Teeple Co., 47 B. T. A. 270; Cecil B. De Mille, 31 B. T. A. 1161, affd. 90 F. 2d 12, certiorari denied 302 U. S. 713; and William G. De Mille Productions, Inc., 30 B. T. A. 826. Decision will be entered wader Rule 50. SEC. 102. SURTAX ON CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS. (a) Imposition of Tax. — There shall be levied, collected, and paid for each taxable year (in addition to other taxes imposed by this chapter) upon the net income of every corporation (other than a personal holding company as defined in section 501 or a foreign personal holding company as defined in Supplement P) if such corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of the surtax upon its shareholders or the shareholders of any other corporation, through the medium, of permitting earnings or profits to accumulate instead of being divided or distributed, a surtax equal to the sum of the following: 27 ⅛ per centum of the amount of the undistributed section 102 net income not in excess of $100,000, plus 38⅜ per centum of the undistributed section 102 net income in excess of $100,000. ******* (e) Evidence Determinative of Purpose. — The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid surtax upon shareholders unless the corporation by the clear preponderance of the evidence shall prove to the contrary.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477355/	OPINION. Bice, Judge: This proceeding involves the following deficiencies in income tax: Year Deficiency 1945_$542.19 1946- 983.52 1947- 501.74 The issues to be decided are: (1) The proper basis for computing the amount of loss sustained on the sale of property acquired from an inter vivos trust; and (2) whether the loss sustained was a capital or an ordinary loss. All of the facts were stipulated, are so found, and are incorporated herein by this reference. Petitioner is a resident of Huntington, New York, and .filed her returns for the years 1945 and 1946 with the former collector of internal revenue for the first district of New York. She filed her return for the year 1947 with the former collector of internal revenue for the third district of New York. On November 28, 1928, Henry K. S. Williams transferred certain real property known as 18 Beaver Street, in the city of New York, in trust for the benefit of the children of his nephew, Thomas Kesolved Williams, of whom petitioner was one. The grantor retained a life income from the trust corpus. The trust indenture also provided: The Grantor hereby reserves the right during his life to alter any and all of the terms and provisions of this trust deed, including the making of changes in the beneficiaries and the amounts they are to receive, but the Grantor shall have no power to revoke this trust deed in whole or in part or to revest in himself or to vest in his estate any part of the principal of the trust estate. Any such alteration shall be by indenture executed and delivered by the Grantor and the trustee. The grantor died on May 16,1944, without having changed the beneficiaries of the trust. Petitioner, at that time, received an undivided one-fifth interest in the Beaver Street property. From that time until February 1,1945, she and the other co-owners rented the property for the purpose of producing income. The property was managed by an agent which maintained it, collected the rents, paid necessary taxes, insurance, the cost of repairs, and other expenses. On February 1, 1945, petitioner joined with the other owners in a sale of the property for $35,000, less expenses of sale in the amount of $191.95. Petitioner’s share of the proceeds was $6,961.61. The adjusted basis of the Beaver Street property on November 28, 1928, in the hands of the grantor, was $87,024.39. The fair market value of the property at that time was $155,000, of which amount $25,000 was allocable to the building and $130,000 to the land. The Beaver Street property was properly included in the gross estate of the grantor for Federal estate tax purposes at a value of $35,000. On her income tax return for 1945, the petitioner claimed a long-term capital loss on the sale of the property using as a basis therefor the basis of the property in the hands of the grantor, $87,024.39. One thousand dollars of such capital loss was deducted in that year and $1,000 of such loss was carried .forward to each of the years 1946 and 1947. On July 21,1950, petitioner filed a timely claim for refund of income tax paid for 1945 on the ground that the loss sustained in that year on the sale of the Beaver Street property should have been reported as an ordinary loss rather than as a long-term capital loss. The respondent determined that the proper basis for computing the amount of loss sustained on the sale of the Beaver Street property was the fair market value of such property on the date of the grantor’s death, $35,000, and that the loss sustained was a capital loss. Petitioner herein resists the respondent’s determination and renews her claim that the loss sustained on the sale of the Beaver Street property was an ordinary rather than a long-term capital loss. Petitioner argues that section 113 (a) (2)1 of the 1939 Code is controlling here for the purpose of determining the basis of the Beaver Street property. She argues that the gift was made in 1928 and that the proper basis for determining a loss on the sale of the property is the grantor’s basis since such basis was lower than the fair market value of the property on the date of the gift. In support of his determination that the Beaver Street property had a basis of $35,000, for purposes of computing a loss on its sale in 1945, the respondent argues that the basis for computing such loss should be determined under the provisions of section 113 (a) (5),2 and, in the alternative, if not so determined under that section, then under section 113 (a) (2); but, he argues that the date of the gift under that subsection was not the date on which the trust was created but the date of the grantor’s death. Hence, he claims that the proper basis for computing the loss under either that subsection or subsection (a) (5) is $35,000, the fair market value of the property at the time of the grantor’s death. We think it clear from even a cursory reading of the trust indenture that subsection (a) (5) is not the applicable statute under which the basis of the Beaver Street property is to be determined. That subsection provides that if property was acquired by a transfer in trust under which the income therefrom is paid for life to the grantor who reserves the right to revoke the trust, the basis of such property in the hands of the beneficiaries shall be the same as if the trust instrument had been a will executed on the day of the grantor’s death, which means that the basis of the property would be the fair market value on the date of the grantor’s death. Such treatment of property acquired through an inter vivos trust, in which the grantor reserved the power of revocation, was first provided in the Revenue Act of 1928, 45 Stat. 791. The Conference Report3 which accompanied the Act stated that: In view of the complete right of revocation * * * on the part of the grantor at all times between the date of creation of the trust and his death, it is proper to view the property for all practical purposes as belonging to the grantor rather than the beneficiaries and to treat the property as vesting in the beneficiaries according to the terms of the trust instrument, not at the date of creation of the trust, but rather on the date of the grantor’s death, for the purpose of determining gain or loss on sale or other disposition of the property * * * by a beneficiary. * * * [Emphasis added.] Here the grantor reserved the right to alter any and all of the terms and provisions of the trust except that those powers could not be used to revoke the trust or to revest in him or his estate, in whole or in part, any part of the principal of the trust estate. Clearly, his powers to alter and amend were not the “complete right of revocation” which the statute contemplates. The respondent’s argument here seems similar to the argument he advanced in Minnie M. Fay Trust “A”, 42 B. T. A. 765 (1940), and that advanced by the taxpayer in Commonweatlth Trust Co. of Pittsburgh v. United States, 96 F. Supp. 712 (W. D., Pa., 1951). In those cases the courts held that anything less than a clear power of complete revocation would not bring an inter vivos trust within the purview of section 113 (a) (5). We so hold here. Cf. Edith Hilles Dewees, 1T. C. 791 (1943). See 3 Mertens, Law of Federal Income Taxation, sec. 21.78. If Congress had meant to include such powers to amend and alter the terms of the trust as the grantor retained here, as well as the power of complete revocation, within the meaning of section 113 (a) (5), it surely could have done so, as in fact it did do in the Technical Changes Act of 1953, 67 Stat. 615. Respondent argued in the alternative that even if the basis of the property were not to be determined under section 113 (a) (5), its basis determined under section 113 (a) (2) would still be $35,000 because the gift took place in 1944 when the grantor died and not in 1928 when the trust was created. The basis of the Beaver Street property must, of course, be determined pursuant to section 113 (a) (2). However, we cannot accept the respondent’s position that the gift was made in 1944 rather than in 1928. We think the petitioner is clearly correct in arguing that the gift took place in 1928 when the grantor irrevocably parted with the corpus of the trust by placing it in the hands of the trustee. Although the petitioner’s interest in the Beaver Street property at that time was obviously contingent upon the grantor’s not naming someone else as a beneficiary in her place, her interest, nevertheless, began at that time. J. Kiefer Newman, Jr., 4 T. C. 226 (1944); Scranton Lackawanna Trust Co., Trustee, 29 B. T. A. 698 (1934), affd. 80 F. 2d 519 (C. A. 3, 1935), certiorari denied 297 U. S. 723 (1935). See Helvering v. Reynolds, 313 U. S. 428 (1941). The respondent’s own regulations are to the same effect and plainly contrary to the position he takes here. Regulations 111, section 29.113 (a) (2)-1, provide: Section 113 (a) (2) applies to all gifts of whatever description, whenever and however made, perfected, or talcing effect; whether in contemplation of or intended to take effect in possession or enjoyment at or after the donor’s death; or whether made by means of the exercise (other than by will) of a power of appointment or revocation, or any other power. Section 113 (a) (2) applies whether the gift was made by a transfer in trust or otherwise. [[Image here]] All titles to property acquired by gift relate back to the time of the gift, even though the interest of him who takes the title was, at the time of the gift, legal, equitable, vested, contingent, conditional, or otherwise. Accordingly, all property acquired by gift is acquired at the time of the gift. In the hands of every person acquiring property by gift, the basis is always the same, whether such person receives the property immediately upon the transfer by the donor, or as remainderman under the instrument of gift, or whether such person is any other person to whom such uniform basis is applicable. Such uniform basis applies to the property in the hands of the trustee or the beneficiary under a gift instrument, both during the term of the trust and after the distribution of the trust corpus. Adjustments to basis, as required by section 113 (b), are to be made as respects the period prior to the gift, and the period after the gift. With respect to the latter period, the adjustments to the uniform basis- are to be made in accordance with subsection (e) of section 29.113 (a) (5)-l. The time of the gift is the time when the gift is consummated. Delivery, actual or constructive, is requisite to a gift. In determining the time of the gift, the passing of title by the donor is not decisive; the time when the donor relinquishes substantial dominion over the property is decisive. Respondent cites only Estate of Sanford v. Commissioner, 308 U. S. 39 (1939), in support of his argument that the gift to petitioner took place at the time of the grantor’s death in 1944. That case is obviously distinguishable from the facts here. It concerned the date of a gift, as that question is involved in the estate and gift taxes and not the income tax. As the Court noted in that case, the gift and estate tax provisions of the Code are in pari materia and must be construed together. That is not true of those provisions of the Code and the income tax provisions. J. Kiefer Newman, Jr., supra. We therefore conclude that the proper basis for computing the loss sustained on the sale of the Beaver Street property was the basis of such property in the hands of the grantor, $87,024.39, since such value was less than the fair market value of the property at the time of the gift on November 28,1928. We do not understand why, at this late date, the respondent should dispute the petitioner’s claim that the Beaver Street property was real property used in her trade or business of deriving rental income. Gilford v. Commissioner, 201 F. 2d 735 (C. A. 2, 1953), affirming a Memorandum Opinion of this Court dated February 27, 1952; Adolph Schwarcz, 24 T. C. 733 (1955); Anders I. Lagreide, 23 T. C. 508 (1954); Leland Hazard, 7 T. C. 372 (1946). Since he has determined that the loss here in question was from the sale of a capital asset, he must see some distinction in the above-cited and many similar cases which we do not see. We think it clear that the petitioner was engaged in the business of renting the Beaver Street property along with the other co-owners thereof. The property was, therefore, realty used in her trade or business. As such, the loss on its sale is governed by section 117 (j)4 which provides that if there are net losses from the sale of such property, they shall not be treated as losses from the sale or exchange of capital assets, but as ordinary losses. Decision will be entered under Bule 50. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that— [[Image here]] (2) Gifts after December 31, 1920. — If the property was acquired by gift after December 31, 1920, the basis shall be the same as It would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that If such basis (adjusted for the period prior to the date of the gift as provided in subsection (b)) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. * * * SEC. 113. ADJUSTED 'BASIS FOR DETERMINING GAIN OR LOSS. (a) Basis (Unadjusted) of Pbopbbty. — The basis of property shall be the cost of such property; except that— ******* (5) Pbopbbty Teansmittbd at Death. — If the property was acquired by bequest, devise, or Inheritance, or by the decedent’s estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death. * * * H. Rept. No. 1882, 70th Cong., 1st Sess. (1928). SBC. 117. CAPITAL GAINS AND LOSSES. (3) Gains and Losses Fbom Involuntaby Convebsion and Ebom the Sale ob Exchange or Cebtain Pbopebty Used in the Tbade ob Business.— (1) Definition of pbopebty used in the tbade ob business. — For the purposes of this subsection, the term “property used In the trade or business” means property used In the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (1), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. * * * (2) Gbnebal bulb. — If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business * * * exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. If such gains do not exceed such losses, such gains and losses shall not be considered as gains and losses from sales or exchanges of capital assets. For the purposes of this paragraph: (A) In determining under this paragraph whether gains exceed losses, the gains and losses described therein shall be included only if and to the extent taken into account in computing net income, except that subsections (b) and id) shall not apply.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477356/	OPINION. Withet, Judge: Eespondent has determined that the trust and profit-sharing plan of petitioner were neither formed nor operated for the exclusive benefit of its employees within the meaning of section 165 (a) of the 1939 Code,1 and therefore that amounts contributed by petitioner to the trust during 1949 and 1950 are not deductible under section 23 (p) of the 1939 Code.2 Petitioner contends that its employees’ trust and profit-sharing plan were formed for the exclusive benefit of its employees and that it is entitled to deduct its cash contributions to the trust in the amounts of $30,466.86 and $88,269.27 for 1949 and 1950, respectively. Petitioner contends in the alternative that it is entitled to deduct the face amounts of the promissory notes contributed to the trust during 1949 and 1950. In support of its position, petitioner relies on the decision of the United States Court of Appeals for the Sixth Circuit in H. S. D. Co. v. Kavanagh, 191 F. 2d 831. There, as here, the taxpayer established a profit-sharing plan for its employees, submitted the plan to the Commissioner, and obtained a ruling approving the plan as exempt within the provisions of section 165 (a) of the 1939 Code. Subsequently, a succeeding Commissioner reexamined the plan and, on the same facts as originally presented, ruled that the plan discriminated in favor of officers and higher-paid employees of the company, was not operated for the exclusive benefit of the employees, and did not qualify under section 165 (a). Consequently, the Commissioner determined that the amounts contributed by the taxpayer to the plan were not deductible from its gross income in the computation of its income tax liability. The Court of Appeals first found that the plan was not discriminatory in its operation as the Commissioner had determined and further held, at page 846: Under the foregoing circumstances, and especially because of the fact that the Commissioner was given the unusual power by Congress to approve the plan and trusts and did so at various times during the course of the years, with full knowledge of all details relating to them and their operations, we are of the opinion that the Commissioner, in this ease, was bound by the prior decisions of his predecessor that the plan complied with Section 165 (a) of the Internal Revenue Code, as amended, and that the trusts were exempt. Inasmuch as the Commissioner’s decision in H. S. D. Co., supra, to revoke the earlier ruling of his predecessor in office was not based on an examination of newly discovered evidence relating to the actual operation of the taxpayer’s profit-sharing plan, but represented simply a reconsideration of the identical facts originally furnished by the taxpayer, we are of the opinion that the decision of the Court of Appeals for the Sixth Circuit in H. S. D. Co., supra, is distinguishable from the situation here in issue. That a stock bonus and profit-sharing plan must qualify in its operation as well as in its formation in order to be exempt under section 165 (a) of the 1939 Code is clear from the House Committee Eeport accompanying the amendment of that section by the Eevenue Act of 1942.3 Accordingly, it is incumbent upon petitioner herein to demonstrate that the trust and profit-sharing plan here in question were operated exclusively for the benefit of its employees. The facts, that petitioner’s plan requires the investment of 80 per cent of the trust assets in the securities of petitioner, if available, that the trust is controlled and administered by petitioner’s officials, and that from the face of the trust instrument it appears that the creation of the plan was motivated by tax considerations, were known to the respondent prior to the issuance of his ruling on May 28,1945, approving the plan. However, a trust which is so formed must be administered with scrupulous care and with the utmost good faith toward the employees if it is to continue to qualify as a trust operated exclusively for the benefit of petitioner’s employees. The record discloses that the administration of petitioner’s trust and profit-sharing plan was deficient in several particulars and that the terms of the plan, as set forth in the instrument executed on May 14,1945, were violated in a number of instances. The trustees were required by the plan to keep accurate and detailed records of the administration of the trust and to make such records available for inspection at all reasonable times. However, the trustees failed to keep books and accounts during the first 2 years after the commencement of the plan. Moreover, they were not aware of the benefits which had become payable to terminated employees as of December 31, 1949, until they were so notified by their public accountant on November 18, 1950. Further, no distributions were made to such employees until June 16, 1955, approximately 60 days prior to the hearing herein. Petitioner was required by the plan to contribute to the trust each year an amount equal to 25 per cent of its net income for that year but not to exceed 15 per cent of the aggregate compensation of all participating employees. Such contributions were to be either in the form of preferred stock of petitioner or cash. However, for the years ended November 30,1947, and December 31,1948, no cash or preferred stock contributions were made to the trust. Instead, petitioner delivered to the trust 2 promissory notes payable on demand, in the amounts of $30,466.86 and $66,342.82, for 1947 and 1948, respectively. The contribution of such notes to petitioner’s profit-sharing plan, in violation of the terms of the plan, does not constitute a payment to the employees’ trust, deductible under section 23 (p) of the 1939 Code. Logan Engineering Co., 12 T. C. 860; Slaymaker Lock Co., 18 T. C. 1001, revd. 208 F. 2d 313. On August 8,1950, when it became apparent to the trustees that it would be impossible to invest $87,710 (approximately 80 per cent of the value of the 2 notes previously delivered to the trust during that year) in cumulative preferred stock of petitioner, that amount was retained by petitioner, thus diverting for the use of petitioner a portion of the corpus of the trust. The trust investments consisted entirely of petitioner’s securities. Dividends earned by the trust on its investment in petitioner’s stock for 1945, 1946, and 1947 were not paid to the trust until April 12,1948. The deductions claimed by petitioner as payments to the employees’ trust in the amounts of $109,636.45 and $88,269.27 for 1949 and 1950, respectively, are substantially in excess of 15 per cent of the aggregate compensation of all participating employees during those years. None of the aforementioned facts relating to the operation of petitioner’s profit-sharing plan were known to the respondent at the time of the issuance on May 28,1945, of the ruling approving the plan. In view of the foregoing developments in the administration of the plan, we are of the opinion that it was not operated exclusively for the benefit of petitioner’s employees. We therefore hold that none of the payments made by petitioner to the employees’ trust during 1949 and 1950 are deductible from gross income under section 23 (p) of the 1939 Code. Decision will be entered wider Bule 50. SEC. 165. EMPLOYEES’ TRUSTS. (a) Exemption From Tax. — A trust forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries shall not be taxable under this supplement and no other provision of this supplement shall apply with respect to such trust or to its beneficiary— (1) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees or their beneficiaries the corpus and income of the fund accumulated by the trust in accordance with such plan ; (2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees or their beneficiaries; SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: *•••• (p) Contribution op an Employer to an Employees’ Trust or Annuity Plan and Compensation Under a Deferred Payment Plan.— (1) General rule. — If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, » * * such contributions or compensation » * * shall be deductible, if deductible under subsection (a) without regard to this subsection, under this subsection but only to the following extent: ******* (C) In the taxable year when paid, if the contributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 165 (a), in an amount not in excess of 15 per centum of the compensation otherwise paid or accrued during the taxable year to all employees under the stock bonus or profit-sharing plan. H. Rept. No. 2333, 77th Cong., 2d Sess. (1942), pp. 103, 104 : In order to Insure that stock bonus, pension, or profit-sharing plans are operated for the welfare of employees in general, and to prevent the trust device from being used for the benefit of shareholders, officials, or highly paid employees, * * * [Emphasis added.]	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4477357/	OPINION. PieRce, Judge: Petitioner has not challenged the deficiencies. He disputes only the imposition of the several additions to- the tax; and even as to these, he waived in his petition any question respecting those imposed under section 291 (a) for failure to file returns, and he indicated at the hearing that he does, not seriously question those imposed under section 294 (d) (1) (A) for failure to file declarations of estimated tax. His principal objection is to the additions to the tax for fraud, under section 293 (b). But he further contends that, in any event, the additions under section 293 (b) for fraud and those under section 291 (a) for failure to file returns, cannot be imposed concurrently; that, similarly, the additions under section 294 (d) (1) (A) for failure to file declarations of estimated tax, and under section 294 (d) (2) for substantial underestimate of estimated tax, cannot be imposed concurrently; and, finally, that if all the additions to tax determined by the respondent are imposed concurrently, then these, together with the criminal penalty imposed upon him, would result in the infliction of “cruel and unusual punishments” in violation of the Eighth Amendment to the Constitution of the United States. /. As to the additions to the tax for fraud, imposed under section 293 (b), petitioner’s basic position is that, not having filed a return, he made no affirmative misrepresentation of any material fact; that the making of such a misrepresentation is generally regarded to be an essential element of fraud at common law; and that the same should be true here. In short, he contends that where no return has been filed, there can be no “fraud with intent to evade tax,” within the meaning of section 293 (b) ; and that the only addition to the tax which can be applied in such situation is that provided by section 291 (a) for failure to file a return. We do not agree. Here, we are not dealing with common law fraud; but rather with the statutory concept of “fraud with intent to evade tax” — an offense for which Congress has provided one of the several sanctions that are embodied in the Internal Revenue Code for the purpose of promoting the orderly and punctual administration of the Federal income tax system. In Spies v. United States, 317 U. S. 492, the Supreme Court said: The United States has relied for the collection of its income tax largely upon the taxpayer’s own disclosures * * . This system can function successfully only if those within or near taxable income keep and render true accounts. In many ways taxpayers’ neglect or deceit may prejudice the orderly and punctual administration of the system as well as the revenues themselves. Congress has imposed a variety of sanctions for the protection of the system and the revenues. * * The penalties imposed by Congress to enforce the tax laws embrace both civil and criminal sanctions. Invocation of one does not exclude resort to the other. Helvering v. Mitchell, 303 U. S. 391. The most severe of the civil sanctions is that imposed under section 293 (b) for fraud. A taxpayer’s failure to perform any of his duties incident to the system, even through negligence, may bring into play one or more of the lesser sanctions; but when such breach of duty is combined with a willful and positive attempt to defeat the statute or evade tax, in any manner or by any means, then there exists an offense of much more serious character, which Congress has designated in section 298 (b) by the term “fraud with intent to evade tax.” The sanction imposed for this offense, by which, there is added to the tax an amount equal to 50 per cent of the total amount of the deficiency, is the capstone of the system of civil sanctions. 1 Such willful attempt to defeat the statute or evade tax may be inferred from any conduct calculated tó mislead or conceal; and it may be found not only in a situation where one of the methods employed was to file an intentionally false return, but also where the method involved a willful failure to make any return whatever. This Court has, in a number of cases, approved the imposition of the sanction under section 293 (b), where no return was filed. See, for example, A. Raymond Jones, 25 T. C. 1100; Arthur M. Slavin, 43 B. T. A. 1100, 1110; Ollie V. Kessler, 39 B. T. A. 646; Pincus Brecher, 27 B. T. A. 1108. In the. instant case, after hearing petitioner’s testimony and considering all the evidence, we have no doubt that respondent correctly applied the provisions of section 293 (b). Petitioner is an alert, intelligent, and well educated man. He was, during the years involved, an attorney at law, and also an officer or principal partner in several business organizations. He had a good working knowledge of accounting; was familiar with the Federal income tax laws; and was fully aware of his duties and obligations thereunder. He knew and concedes that he knew that, at least as early as the year 1939 and for each of the 10 years thereafter, his gross income was sufficient to require the filing of an income tax return, and that for each of the years here involved he had taxable net income in respect of which he was obligated to, but did not, make any self-disclosure or pay any income tax. At the hearing before this Court, he said: The record is also clear that in 1939, ’40, ’41, ’42, ’43, ’44, ’46, ’46, ’47, ’48 and ’49,1 made enough gross income to have at least * * * filed a return. ******* The record shows that I have taxable income in 1941, very small amount; [and] in ’45 and ’46; and while it is only stated generally in the record, I had taxable income in ’47, ’48 and ’49. * * * ******* now it can be admitted that I knew that March 16 was here in each one of these years, and that I consciously, knowingly and deliberately let it pass by. He also testified: if I made a return, for instance, in 1944 I had to say when I made my last return and I was deeply conscious that when I had set the die in 1939 when 1 had that taxable income, that being a human being I knew 1 was in danger, and like any human being I shrug from danger, but I nevertheless persisted on principle. * * * This statement is, in itself, an admission that one of. the reasons for his continued failure to file returns was to conceal his prior years’ defalcations. We reject petitioner’s assertion that his motive for such willful conduct was not to evade tax, but merely to give effect to a deep-seated conviction, previously expressed in after-dinner speeches, that the rates for income taxes as fixed by the statute were confiscatory and unconstitutional. There is no indication that he at any time took any action, either in this Court or in any other court, to contest the amount of his tax; and the fact is that he did not take even the preliminary step of disclosing his income, so that the applicable rates could be determined and applied as a basis for any such contest. Likewise, in the present proceeding, he has not contested the deficiency or the rates used in computing the amount thereof. Moreover, the evidence shows that this excuse was not asserted until nearly 5 years after respondent’s representatives had begun their examination. We regard it to be a mere afterthought. We reject, also, petitioner’s further contention that he cannot be regarded as having intended to evade tax, because he knew that respondent’s representatives probably would discover his defalcations sooner or later, and that he then would be compelled to pay the tax. It is no defense that he realized that his concealment might not be complete, and that his attempt to defeat the statute might fail. He was relying on the hope that, by not filing returns, discovery would be less likely and perhaps less complete; and that, in any event, he could in the meantime continue to employ for his own personal or business uses, the amounts which he knew should have been paid for taxes". Each year he attempted to conceal his misconduct of the prior .years by again not filing a return; and even after respondent’s representatives began their examination, he repeatedly refused to make any return or self-determination of his income for any year; We are convinced, from an examination of all the evidence, that petitioner did willfully attempt, in respect of each of the years involved, to defeat the statute and evade tax; and that at least a part of the deficiency for each of such years “is due to fraud with intent to evade tax.” We recognize that the burden of proof wi th respect to this issue was on the respondent; and we hold that such burden has been met. Also, we find no evidence in the record of any irregularity or impropriety on the part of the respondent in determining the additions to tax under section 293 (b), as suggested in petitioner’s pleading. Said determinations of the respondent are approved. II. As regards respondent’s determinations with respect to the several other additions to the tax, these also are approved. Section 291 (a) provides an addition to the tax for failure to make and file an income tax return, unless it is shown that such failure is due to reasonable cause and not due to willful neglect. The petitioner, as before stated, has waived any question with respect to the application of such sanction. The offense is separate from that provided for under section 293 (b) ; and we have heretofore held, contrary to the petitioner’s contention, that sanctions under both of these sections may be imposed concurrently. Pincus Brecher, 27 B. T. A. 1108. We here reaffirm that holding. Section 294 (d) (1) (A) provides an addition to the tax for failure to make and file a declaration of estimated tax, unless such failure is shown to be due to reasonable cause and not to willful neglect. Petitioner, as before stated, has indicated that he does not seriously object to the imposition of this sanction; and we believe there is no ground on which such an objection could properly be based, for petitioner’s failure was willful and not due to any reasonable cause. Section 294 (d) (2) provides an addition to the tax for substantial underestimate of estimated tax. In G. E. Fuller, 20 T. C. 308, we approved the regulation (Begs. Ill, sec. 29.294-1 (5) (3) (A)), which provides that in the event of a failure to file the required declaration, the amount of the estimated tax for the purposes of the above-mentioned section is zero; and we there approved also the imposition of sanctions under both section 294 (d) (2) and section 294 (d) (1) (A). We here follow our decision in the Fuller case. We hold also, contrary to petitioner’s contention, that respondent is not precluded from imposing the sanctions provided under section 294, concurrently with the sanction provided under section 291 (a). Cf. Pincus Brecher, supra. III. Finally, petitioner contends that imposition of all the additions to tax determined by respondent would, when added to the interest on the deficiencies and his imprisonment pursuant to the criminal statute, violate the Eighth Amendment to the Constitution. Such contention is without merit. The Eighth Amendment provides that “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.” This Amendment is directed only to courts of the United States exercising criminal jurisdiction. Ex Parte Watkins, 7 Pet. 568, 573. The Tax Court does not exercise criminal jurisdiction; and proceedings before it are civil in character. Charles E. Mitchell, 32 B. T. A. 1093. Moreover, additions to the tax are remedial in character, not penal or punitive; they are provided primarily as a safeguard for the protection of the revenue and to reimburse the Government for the expense of investigation and the loss resulting from taxpayers’ neglect or deceit. Spies v. United States, supra; Helvering v. Mitchell, supra. In the light of the evidence here presented, we do not regard the additions to the tax here involved to be excessive, or their imposition to be inequitable. Decision will be entered for the respondent. At the hearing before the Senate Finance Committee on the Revenue Act of 1921, Dr. T. S. Adams, an advisor to the Treasury Department, testified that what “is really meant to be provided for [by section 205 (b) of the 1921 Revenue Act, which was similar to section 293 (b) of the 1939 Code] is, attempts to defeat or evade the statute.” Hearings, Revenue Act of 1921, Senate Finance Committee, 67th Cong., 1st Sess., p. 255. See also Spies v. United States, supra.	01-04-2023	01-16-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625789/	Victor Pechtel, Charles Pechtel and Dwight H. Chester, Co-Partners Doing Business Under the Name and Style of Island Machine Tool Company, Petitioners, v. United States of America, RespondentPechtel v. United StatesDocket No. 750-RUnited States Tax Court18 T.C. 851; 1952 U.S. Tax Ct. LEXIS 125; August 7, 1952, Promulgated 1952 U.S. Tax Ct. LEXIS 125">125 1. Held, the petitioners' partnership and a corporation, which was owned and operated by two of the partners, were under common control and since both enterprises were subcontractors during the fiscal year here involved and since their combined renegotiable sales exceeded $ 500,000, petitioners' partnership profits are subject to renegotiation.2. Held, that on the basis of the facts presented petitioners received excessive profits from the partnership in the amount herein determined. Meyer Bernstein, Esq., for the petitioners.John F. Wolf, Esq., and James D. Lynch, Esq., for the respondent. Hill, Judge. HILL 18 T.C. 851">852 During the period May 1, 1944, through April 30, 1945, the three petitioners herein were general and equal partners in a business known as the Island Machine Tool Company, a subcontractor within the meaning of the Renegotiation Act.The respondent unilaterally determined that for the fiscal year ended April 30, 1945, the partnership's profits were excessive to the extent of $ 110,000 and that, after proper adjustment on account of taxes, other than Federal taxes, measured by income, the amount of excessive profits which should be eliminated was $ 108,267.Two issues are presented. The first issue concerns the question whether within the meaning of section 403 (c) (6) of the Renegotiation Act the partnership, the Island Machine Tool Company, and the Island Stamping Company, Inc., a corporation, were under common control. The other issue concerns the question of the amount, if any, of excessive profits 1952 U.S. Tax Ct. LEXIS 125">127 realized by the partnership during the fiscal period ended April 30, 1945.FINDINGS OF FACT.Part of the facts have been stipulated and they are so found.During the fiscal year here involved, May 1, 1944, through April 30, 1945, petitioners herein, Victor Pechtel, Charles Pechtel and Dwight H. Chester, were general and equal partners doing business under the firm name of Island Machine Tool Company, hereinafter referred to as the partnership. All of the partnership's activities were carried on in a two-story brick and frame building located at 132-6 Front Street, Farmingdale, New York. These premises, as well as a garage used for storage purposes, were rented by the partnership. During the period here involved the partnership was engaged in the business of machining tools and parts for aircraft. Most of its work was performed on castings and forgings supplied by outside companies. All of the products it sold during the period were for war-end use and it was a subcontractor within the meaning of the Renegotiation Act.The fiscal year here involved was the first year of the partnership's operations. The partnership agreement was entered into on April 30, 1944, and the partnership1952 U.S. Tax Ct. LEXIS 125">128 commenced operations on May 1, 1944. The three individuals who made up the membership of the partnership were all closely related. Victor Pechtel was the father of Charles Pechtel and the father-in-law of Dwight H. Chester.The partnership agreement provided, among other things, that the three members were to be general and equal partners and that the partnership was to continue for the duration of the war (World War 18 T.C. 851">853 II), plus 6 months thereafter, and/or until all obligations of the partners each to the other, if any, were paid. The functions of each partner were set out in the fifth paragraph of the agreement, which reads as follows:5. That the parties hereto agree that the party of the first part [Victor Pechtel] shall be employed on a weekly salary basis at a sum to be agreed upon by the parties hereto in exchange for which the party of the first part shall advise, consult and shall have the general managerial duties of the partnership business and the parties hereto further agree that the party of the second part [Dwight H. Chester] and the party of the third part [Charles Pechtel] shall likewise be employed on a weekly salary basis at a sum to be agreed upon by 1952 U.S. Tax Ct. LEXIS 125">129 the parties hereto in exchange for which the party of the second part shall have the general duties of salesman and consulting engineer for the partnership business, and the party of the third part shall have the duties of production manager for said partnership business.This division of authority and of functions was, in fact, followed in the operation of the business. Victor Pechtel was in over-all charge of operations, and during the fiscal year ended April 30, 1945, he was the only person authorized to sign checks for the partnership.The capital of the partnership amounted to $ 45,000, consisting of machinery set up on the books of the partnership at a value of $ 30,000 and the intangible asset of good will in the amount of $ 15,000. The machinery was that formerly used by Victor Pechtel in his business operated as a sole proprietorship. No cash was invested. The partnership obtained working capital in the early weeks of its operations through advances or loans made to it by Victor Pechtel. The capital contributions of Charles Pechtel and Dwight Chester were in fact furnished by Victor Pechtel, and during the period here involved Charles Pechtel and Dwight Chester each1952 U.S. Tax Ct. LEXIS 125">130 paid to Victor Pechtel $ 15,000 from their share of the profits of the partnership.For the fiscal year here involved the partnership's net profit from operations amounted to $ 175,569.39, and the profit for the year before any allowance for partners' salaries and Federal income taxes was $ 175,194.27.The partnership's total sales per its books for the fiscal year ended April 30, 1945, were as follows:Eastern Aircraft$ 355,063.78Tennessee Aircraft, Inc11,610.98Measurements Corp17,485.85Glen Cove Welding Works277.24S. Pulitzer300.00Roof Structures3.50Island Stamping Co111.28Long Island Can Co83.00Glenn L. Martin Co16.25$ 384,951.88Discount on sales$ 4,339.76Total sales per books$ 380,612.1218 T.C. 851">854 The sales made to the Eastern Aircraft Division of the General Motors Corporation (hereinafter referred to as Eastern Aircraft), in the amount of $ 355,063.78, as shown by the books of the partnership, was understated by an amount of $ 93,588.74 due to an error in bookkeeping; however, due to the partnership's method of keeping its books, this error did not affect the amount of its profit on sales.Following is a summary of the partnership1952 U.S. Tax Ct. LEXIS 125">131 accounts for the fiscal year ended April 30, 1945:Dwight H.Victor PechtelCharles PechtelChesterOpening balance, per books$ 15,000.00$ 15,000.00$ 15,000.00Checks charged to partners'accounts during year ended4/30/4513,000.0013,000.0013,000.00Balance$ 2,000.00$ 2,000.00$ 2,000.00Profit share for year ended4/30/4568,759.1249,109.1150,419.11Total$ 70,759.12$ 51,109.11$ 52,419.11LessTransfer from laboraccounts:Management26,200.00Superintendence6,550.00Engineering7,860,00Balance 4/30/45$ 44,559.12$ 44,559.11$ 44,559.11Salaries other than those of the partners wre as follows:Direct labor$ 90,441.43Indirect labor20,508.77Office and engineering payroll7,751.63Total$ 118,701.83The partnership employed an average of 50 men.Drawings for the fiscal year, which were designated as salaries on the partnership's books, amounted to $ 40,610, made up as follows:Victor Pechtel$ 26,200Charles Pechtel6,550Dwight Chester7,860Total$ 40,610During the year here involved none of the partnership's investment was covered by a certificate of1952 U.S. Tax Ct. LEXIS 125">132 necessity, and increased production schedules were met with its own capital without such a certificate. The books and records of the partnership show that no capital equivalent or financial assistance of any kind was received by the partnership 18 T.C. 851">855 from the Government or any source other than the individual partners. None of the partnership's sales were made under cost plus fixed fee contracts. All of its sales were made either by bid or negotiated contracts, and no accelerated depreciation was allowed which affected the partnership's assets.From time to time the partnership was called upon by its principal customer, Eastern Aircraft, to furnish parts in addition to the quantities called for by its regular orders when other suppliers had fallen down or were unable to meet their requirements. The partnership complied with such requests. The machine work performed by the partnership was basically the same as that performed by other suppliers of Eastern Aircraft but this work called for high tolerances and the partnership had a low rate of rejection on its parts. In its contract with Eastern Aircraft the partnership had an escalator clause to cover any possible rise in material1952 U.S. Tax Ct. LEXIS 125">133 costs.All three partners were experienced and capable men. Victor Pechtel, who had experience in machine shops in Germany, came to the United States in 1914. He worked at various plants in the United States, including the American Can Company. He became a superintendent in that company after many years and was in charge of the tooling, stamping and hand press departments. Due to differences of opinion as to policy, he left this company about 1925 or 1926 and started a small machine shop. He operated his machine shop as a sole proprietorship until the partnership was formed.Charles Pechtel, the son of Victor Pechtel, was a shop man who had worked in various machine shops as tool maker and a foreman. He had worked with the American Can Company and Fairchild Aircraft. Just prior to World War II he conducted a small plumbing and steam fitting business. He had about 15 years' experience as foreman and machinist. He was in charge of production in his father's company prior to the time the partnership was formed.Dwight Chester, the third partner, had for many years worked as an engineer for various aircraft companies and had a reputation in his trade as an outstanding engineer. 1952 U.S. Tax Ct. LEXIS 125">134 Over a period of years he worked with many different aircraft companies in the capacity of an engineer, and also did some work with respect to the production and selling end of the business.During the fiscal year here involved, Victor Pechtel and Dwight Chester were engaged in a second business. This was a corporation known as the Island Stamping Company, Inc. It was incorporated in July 1943. The stock of this company was owned as follows:Victor Pechtel60%Dwight Chester20%Mrs. Dwight (Matilda) Chester20%18 T.C. 851">856 Mrs. Dwight (Matilda) Chester was the daughter of Victor Pechtel, sister of Charles Pechtel, and wife of Dwight Chester.The Island Stamping Company, Inc., hereinafter referred to as the corporation, during the year involved (the 12-month period ended April 30, 1945) was engaged primarily in welding with incidental machine operations on the parts being welded and, like the partnership, was a subcontractor within the meaning of the Renegotiation Act. Its operations were carried on at 620 Fulton Street, Farmingdale, which location was approximately seven-tenths of a mile from the premises where the business of the partnership was carried on. Some of1952 U.S. Tax Ct. LEXIS 125">135 the books of the corporation were kept at the partnership's office on Front Street. The corporation was organized as the direct result of a conversation between officials of Eastern Aircraft and Dwight Chester, during the course of which the officials of Eastern Aircraft stated that they desired additional subcontractors for the production of welded assemblies.Dwight Chester was the operating head of the corporation. He was its president and general manager. Victor Pechtel was the treasurer and the sole officer designated to disburse the corporation's funds. Charles Pechtel was not associated with the corporation in any capacity. During the 12-month period ended April 30, 1945, Dwight Chester devoted about 85 per cent of his time to the corporation's business. He solicited orders, contacted various customers, and did the greater portion of the engineering work with the help of hired personnel.During the 12-month period ended April 30, 1945, the partnership made loans and advances to the corporation totaling $ 21,043.17. As of the end of the same period the partnership had been paid on account $ 9,181.91, leaving a balance owing from the corporation in the amount of $ 11,861.26. 1952 U.S. Tax Ct. LEXIS 125">136 The only other intercompany transaction between the partnership and the corporation was an item of repair work performed by the partnership for the corporation in the amount of $ 111.28. This service was included in the total sales of the partnership set out above.During the 12-month period ended April 30, 1945, the corporation had sales subject to renegotiation within the meaning of the Renegotiation Act in an amount of not less than $ 400,000.The partnership and the corporation were not jointly operated; however, they were under common control of a single family unit.A reasonable salary allowance for the three partners for the 12-month period here involved is $ 45,000, and for the same period the petitioners, Victor Pechtel, Charles Pechtel and Dwight Chester, doing business as a partnership under the firm name of Island Machine Tool Company, had excessive profits within the meaning of the Renegotiation Act in the amount of $ 80,000.18 T.C. 851">857 OPINION.The first issue concerns the question whether some form of common control existed between the partnership, Island Machine Tool Company, and the corporation, Island Stamping Company, Inc., so that the sales of each (about $ 400,0001952 U.S. Tax Ct. LEXIS 125">137 for each company) may be combined to equal sales in excess of $ 500,000, thereby subjecting the partnership to renegotiation. 11952 U.S. Tax Ct. LEXIS 125">138 The question whether or not any two or more business ventures are under common control is a question of fact which must be determined on the basis of all the evidence presented. 2Petitioners contend that their partnership was not under common control with the corporation and that since its renegotiable sales were in fact less than $ 500,000, it is not subject to renegotiation for the year here involved. The evidence introduced indicates that while the partnership was engaged in machining tools for aircraft, the corporation was engaged in welding assemblies for aircraft; that the business of each was conducted in separate buildings seven-tenths 1952 U.S. Tax Ct. LEXIS 125">139 of a mile apart; that while Victor Pechtel was the head man of the partnership, Dwight Chester was in charge of the corporation; and that with the exception of a minor repair item neither company performed work for the other or subcontracted any work to the other. We believe that such evidence indicates that the two firms were not jointly operated; however, we are convinced by the evidence that they were under common control.The corporation was a close corporation, whose stock was held by three parties. The controlling interest, 60 per cent, was held by Victor 18 T.C. 851">858 Pechtel. 3 Of the remaining 40 per cent of the stock, 20 per cent was held by Dwight Chester, the son-in-law of Victor Pechtel, and 20 per cent was held by Matilda Chester, the daughter of Victor Pechtel and the wife of Dwight Chester. Dwight Chester was the president and acted in the capacity of general manager of the corporation. He was in fact its operating head. However, Victor Pechtel was the treasurer and was in charge of the very important function of disbursing funds needed by the corporation.1952 U.S. Tax Ct. LEXIS 125">140 The partnership was under the control of the same family. It consisted of three general and equal partners, Victor Pechtel, Charles Pechtel, the son of Victor, and Dwight Chester. Victor Pechtel was in fact the operating head of this venture.There were only four people involved in both ventures and two of the partners held 80 per cent of the stock in the corporation. In addition, the partnership made a substantial loan to the corporation in the amount of $ 21,043.17, and at the end of the period here involved the balance due on this loan amounted to $ 11,861.26.In view of the foregoing facts we have found that common control was exercised over both ventures. To find otherwise would require us to turn our backs on the reality of the situation. We hold that since the combined renegotiable sales of the partnership and the corporation exceeded the jurisdictional minimum of $ 500,000, the partnership is subject to renegotiation.The second and main issue concerns the amount, if any, of excessive profits realized by the partnership for the fiscal year ended April 30, 1945. Petitioners maintain that they had no excessive profits during this period. In support of this position the1952 U.S. Tax Ct. LEXIS 125">141 argument was made that the respondent did not make adequate allowance in its computation for salaries of the three partners. Petitioners also argue generally that respondent did not properly take into consideration the factors mentioned in section 403 (a) (4) (A) of the Renegotiation Act 4 so far as they related to petitioners' business.1952 U.S. Tax Ct. LEXIS 125">142 18 T.C. 851">859 In this proceeding the petitioners have the burden of proving their position that the partnership received no excessive profits. Cohen v. Secretary of War, 7 T.C. 1002.With respect to the question of reasonable salaries, section 403 (a) (4) (B) of the Renegotiation Act provides for recognition of deductions allowed for income tax purposes. Of course, a partnership is not allowed any deduction for income tax purposes on account of compensation of active partners; however, the renegotiating authorities have recognized, and we have held, that allowance should be made for reasonable compensation for services actually rendered by them. Larrabee v. Stimson, 17 T.C. 69; Beeley v. W. C. P. A. B., 12 T.C. 61; Grob Brothers v. Secretary of War, 9 T.C. 495; Stein Brothers Manufacturing Co v. Secretary of War, 7 T.C. 863.While the record does not indicate what allowance for such salaries was made by the respondent in its determination, it is apparent from the statement of counsel at the hearing and the1952 U.S. Tax Ct. LEXIS 125">143 arguments on brief that the respondent considers the amount claimed as reasonable salaries for the partners as set out in the petition ($ 75,000) to be excessive and argues that a reasonable salary allowance is $ 25,000. At the hearing there was introduced evidence with respect to the ability, experience, training, and reputation of the three partners and the nature of the work they performed. A witness testified as to a reasonable amount of salary for the work performed. After due consideration of all the evidence, we have found that a reasonable amount of the salary allowance for the partners is $ 45,000.After consideration of all the evidence presented to us, including the total business done by the partnership, the amount of capital invested, the capital risk involved, the efficiency of the partnership work, its contribution to the war effort, its ability to carry on without Government aid, the extent to which the partnership's business was competitive, the extent of risk with respect to increased costs and the amount of a reasonable salary allowance, we have concluded, as is evidenced in our findings of fact, that during the fiscal year here involved the three petitioners, 1952 U.S. Tax Ct. LEXIS 125">144 doing business as a partnership under the firm name of Island Machine Tool Company, realized excessive profits in the amount of $ 80,000.An order will be issued in accordance herewith. Footnotes1. Section 403 (c) (6) of the Renegotiation Act:Sec. 403 (c) (6). This subsection shall be applicable to all contracts and subcontracts, to the extent of amounts received or accrued thereunder in any fiscal year ending after June 30, 1943, whether such contracts or subcontracts were made on, prior to, or after the date of the enactment of the Revenue Act of 1943, and whether or not such contracts or subcontracts contain the provisions required under subsection (b), unless (A) the contract or subcontract provides otherwise pursuant to subsection (i), or is exempted under subsection (i), or (B) the aggregate of the amounts received or accrued in such fiscal year by the contractor or subcontractor and all persons under the control of or controlling or under common control with the contractor or subcontractor, under contracts with the Departments and subcontracts (including those described in clause (A), but excluding subcontracts described in subsection (a) (5) (B)) do not exceed $ 500,000 and under subcontracts described in subsection (a) (5) (B) do not exceed $ 25,000 for such fiscal year . If such fiscal year is a fractional part of twelve months, the $ 500,000 amount and the $ 25,000 amount shall be reduced to the same fractional part thereof for the purposes of this paragraph.↩2. With respect to the purpose of the common control clause, we stated in Moening v. W. C. P. A. B., 14 T.C. 589, that -- The purpose of the "common control" clause in question is at least in part to prevent contractors from establishing, either in corporate or partnership form, a series of ad hoc↩ business enterprises, each of which is to work on a phase of war contracts, in order to prevent the total receipts of the individual contractors derived from war contracts or subcontracts from reaching the jurisdictional minimum. See Senate Report No. 440, part 2, 80th Cong., 2d sess., p. 11.3. The record does not indicate the extent of Victor Pechtel's investment in the corporation, but testimony indicated generally that he probably furnished at least a substantial portion of the capital for this venture.↩4. Sec 403 (a). For the purposes of this section -- * * *(4) (A) The term "excessive profits" means the portion of the profits derived from contracts with the Departments and subcontracts which is determined in accordance with this section to be excessive. In determining excessive profits there shall be taken into consideration the following factors:(i) efficiency of contractor, with particular regard to attainment of quantity and quality production, reduction of costs and economy in the use of materials, facilities, and manpower;(ii) reasonableness of costs and profits, with particular regard to volume of production, normal pre-war earnings, and comparison of war and peacetime products;(iii) amount and source of public and private capital employed and net worth;(iv) extent of risk assumed, including the risk incident to reasonable pricing policies;(v) nature and extent of contribution to the war effort, including inventive and developmental contribution and cooperation with the Government and other contractors in supplying technical assistance;(vi) character of business, including complexity of manufacturing technique, character and extent of subcontracting, and rate of turn-over;(vii) such other factors the consideration of which the public interest and fair and equitable dealing may require, which factors shall be published in the regulations of the Board from time to time as adopted.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625791/	United Industrial Corporation and Subsidiary Companies v. Commissioner. United Industrial Corporation v. Commissioner.United Industrial Corp. v. CommissionerDocket Nos. 86422, 86423.United States Tax CourtT.C. Memo 1962-280; 1962 Tax Ct. Memo LEXIS 26; 21 T.C.M. 1482; T.C.M. (RIA) 62280; November 28, 19621962 Tax Ct. Memo LEXIS 26">26 Herbert M. Weil, Esq., 2212 Guardian Bldg., Detroit, Mich., and John W. Peister, Esq., for the petitioner. Robert W. Siegel, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: Deficiencies in the income tax of petitioner have been determined by respondent for the fiscal years ended September 30, 1956 and 1957 in the respective amounts of $326.35 and $13,219.20. The issue presented is whether respondent has erred in disallowing as business expense deductions the expenses of petitioner incidental to its declaration and payment of stock dividends. Findings of Fact The facts which have been stipulated are found as fact. The petitioner, United Industrial Corporation, as of January 1, 1960, was a Delaware corporation. Prior to that date, petitioner was a Michigan corporation. For the fiscal years ended September 30, 1956 and 1957 petitioner was a Michigan corporation and its principal office was Grand Rapids, Michigan. Federal income tax returns were filed with the district director of internal revenue at Detroit, Michigan, for the taxable years ended September 30, 1956 and 1957. During the taxable years ended September 30, 1956 and1962 Tax Ct. Memo LEXIS 26">27 1957, petitioner's common stock was listed and traded on the New York Stock Exchange. For the fiscal year period ended September 30, 1956, the United Industrial Corporation consisted of various units: Division - Hayes Metal Products Division, Grand Rapids 2, MichiganWholly owned subsidiaries - American Engineering Company, Philadelphia 37, PennsylvaniaDetroit Stoker Company, Monroe, MichiganAffiliated Engineering Corporations, Ltd., Montreal 9, Canada Bawden Industries, Ltd., Toronto 3, Canada Controlled subsidiary - Aircraft Armaments, Inc., Cockeysville, MarylandAffiliate - Hayes Aircraft Corporation, Birmingham, AlabamaFor the fiscal year ended September 30, 1957, the United Industrial Corporation consisted of the above-named wholly owned subsidiaries and the above-named controlled subsidiary, but petitioner no longer operated the above-named division or the above-named affiliate. During the two fiscal years here involved, petitioner manufactured automatic stokers for industrial and utility plants, produced stampings and sub-assemblies, manufactured hydraulic pumps, industrial hoists, marine devices, including steering gears, windlasses, winches, 1962 Tax Ct. Memo LEXIS 26">28 hoists for handling vessels' cargoes, capstans, gypsies for hauling in hawsers on shipboard, electronic devices, varied armament and aircraft modification. The books and records of the petitioner were kept on an accrual basis with fiscal years ending September 30 of each year. The capital stock issued account of the corporation and the surplus account of the corporation for the fiscal years 1955, 1956, and 1957 are as follows: Amount of capital stockAmountissued and out-of sur-standingplus(A) For fiscal year ended 9/30/55: Issued 1,060,000 shares less147 treasury shares equals1,059,853 shares; $2,119,706$4,984,687(B) For fiscal year ended 9/30/56: 1,081,197 shares issued less147 treasury shares equals1,081,050 shares; $2,162,100Appropriated forstock dividendpayable 10/31/56$ 129,726Unappropriated5,315,753Total$5,445,479(C) For fiscal year ended 9/30/57: 1,124,872 shares issued less147 treasury shares equals1,124,725 shares; $2,249,450$6,453,785Petitioner paid cash dividends during the years 1948 through 1958 as follows: FiscalTotalyearCash dividend paid for eachamountendedshare of stock for quartersof divi-Sept. 301st2nd3rd4thdend paid1948.15.15.15.15 1$794,889.751949.15.15.15.15635,911.801950.15.15317,955.901951.15.15.15.15635,911.801952.15.15.15.15635,911.801953.15.15.15.15635,911.801954.15.15.05.05423,941.201955.15.15.15.15635,911.801956.15.15317,955.901957None1958.15.15.15.15674,835.001962 Tax Ct. Memo LEXIS 26">29 The petitioner issued stock dividends for the fiscal years ended September 30, 1956 and 1957, as follows: %amount ofcommonstockNumberissuedofDeclarationRecordPaymentonsharesdatedatedatecommonissued6/29/567/13/567/31/562%21,1979/27/5610/11/5610/31/562%21,62112/28/561/11/571/31/572%22,054The books and records of the petitioner reflect disbursements for the issuance of stock dividends which includes distribution of stock certificates evidencing the stock dividends and elimination of fractional shares as follows: Amount paidAmount paidItemin 1956in 1957N. Y. Stock Exchange listing fee$ 250.00$ 500.00Michigan Corporation & Securities commission fee55.000.00Printing - Stockholders letter260.33520.64- Letters of application146.26191.18- Temporary certificates438.37881.98- Regular certificates0.00921.39Documentary stamps432.301,038.84Registrar's fee638.401,207.76Transfer Agent's fee1,276.802,851.80Paying Agent's fee2,855.3512,821.80Paying Agent's expenses1,237.733,206.28$7,590.54$24,141.671962 Tax Ct. Memo LEXIS 26">30 The stock dividend list of record on July 13, 1956, and paid on July 31, 1956, shows the following: Number of stockholdersShares heldIndividual4,589606,690Brokers168474,507Total1,081,197The records of the company show that no individual stockholder held over 5,000 shares. As a result of the stock dividend declared by the Board of Directors of petitioner on June 29, 1956, the surplus was capitalized; that is, the amount of $6.50 was transferred from the surplus account for each share issued. Of that amount, $2 was transferred to the capital stock issued account and $4.50 to the capital stock surplus account. The amount of $6.50 per share was the approximate market value of petitioner's stock on the record date. As a result of the stock dividend declared by the Board of Directors of petitioner on September 27, 1956, the surplus was capitalized; that is, the amount of $6 was transferred from the surplus account for each share issued. Of that amount, $2 was transferred to the capital stock issued account and $4 to the capital stock surplus account. The amount of $6 per share was the approximate market value of petitioner's stock on the1962 Tax Ct. Memo LEXIS 26">31 record date. As a result of the stock dividend declared by the Board of Directors of petitioner on December 28, 1956, the surplus was capitalized; that is, the amount of $6 was transferred from the surplus account for each share issued. Of that amount, $2 was transferred to the capital stock issued account and $4 to the capital stock surplus account. The amount of $6 per share was the approximate market value of petitioner's stock on the record date. Pursuant to the declaration of the stock dividend of June 29, 1956, 21,197 shares of common stock were issued, including the amount of 518 shares issued in order to meet fractional share requirements. The surplus account of the corporation, as a result of the issuance of this stock dividend, was decreased in the amount of $137,780.50. The amount of $42,394 was transferred to the capital stock account and $95,386.50 was transferred to the capital surplus account. Pursuant to the declaration of the stock dividend of September 27, 1956, 21,621 shares of common stock were issued, including the amount of 782 shares issued in order to meet fractional share requirements. The surplus account of the corporation, as a result of the issuance1962 Tax Ct. Memo LEXIS 26">32 of this stock dividend, was decreased in the amount of $129,726. The amount of $43,242 was transferred to the capital stock account and $86,484 was transferred to the capital surplus account. Pursuant to the declaration of the stock dividend of December 28, 1956, 22,054 shares of common stock were issued, including the amount of 1,007 shares issued in order to meet fractional share requirements. The surplus account of the corporation, as a result of the issuance of this stock dividend, was decreased in the amount of $132,324. The amount of $44,108 was transferred to the capital stock account and $88,216 was transferred to the capital surplus account. In its corporate Federal income tax returns for the respective taxable years ended September 30, 1956 and 1957, petitioner deducted as ordinary and necessary business expense the amounts set forth in our findings for the purposes there stated. We find such amounts to have been paid or incurred by petitioner for the purposes and during the years stated. Ultimate Finding As a result of the issuance of the three quarterly stock lividends, referred to above, a permanent change has occurred in the corporate structure of petitioner. 1962 Tax Ct. Memo LEXIS 26">33 Opinion For purposes of this opinion without so deciding, we assume, as petitioner contends, that the expenses attributable to the disposition of fractional dividends are incidental to the declaration and distribution of the stock dividends here involved. As to the remainder of the expenses in question, there is no dispute between the parties but what they are attributable to the distribution of the stock dividends. This Court has recently decided General Bancshares Corporation, 39 T.C. - (Nov. 26, 1962). Inasmuch as that case is indistinguishable from that which is before us, it is controlling of this issue. As there, we hold here that the issuance and distribution of a stock dividend results in a change in the capital structure of the issuer, rendering expenses incident thereto nondeductible as ordinary business expense. The result is the same regardless of the fact that petitioner's purpose in paying a stock dividend rather than its traditional cash dividend was for the conservation of its cash for expansion and additional plant. Accounting procedures and business custom, disclosed by the record herein, have no bearing upon the nature of the expenses here sought to be deducted1962 Tax Ct. Memo LEXIS 26">34 Decisions will be entered under Rule 50. Footnotes1. Also extra in the amount of.15".↩*. The conclusion "Decisions will be entered for the respondent" was deleted and the conclusion "Decisions will be entered under Rule 50" added by an official order of the Tax Court dated December 4, 1962, and signed by Judge Withey.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625793/	APPEAL OF H. CITRIN.Citrin v. CommissionerDocket No. 1721.United States Board of Tax Appeals2 B.T.A. 626; 1925 BTA LEXIS 2318; September 28, 1925, Decided Submitted July 14, 1925. 1925 BTA LEXIS 2318">2318 Expenses incurred for alteration and improvement of leased properties are properly chargeable to capital account and should be exhausted over the life of the leases. Dan J. Chapin, Esq., for the taxpayer. Ward Loveless, Esq., for the Commissioner. GRAUPNER 2 B.T.A. 626">626 Before GRAUPNER, TRAMMELL, and PHILLIPS. This appeal is from the determination of a deficiency in income taxes for the years 1919 and 1920 in the aggregate amount of $15,617.82. FINDINGS OF FACT. 1. The taxpayer is an individual residing in Los Angeles, Calif., and is engaged in the business of retailing ladies' furnishings. He operates three stores in the City of Los Angeles under the respective trade-name of "Citrins," "The Bon Ton," and "The La Belle." The main store is "Citrins," and from that all purchases and distributions are made for the three stores. This store is located at 516 and 518 West Seventh Street, and the premises are held under a lease which expires September 30, 1927. 2. Under the terms of the lease held by the taxpayer all the expenditures necessary to alter or adapt the premises at 516 and 518 West Seventh Street for the use or convenience of his1925 BTA LEXIS 2318">2319 business were to be borne by the taxpayer and revert to the lessor at the expiration of the lease. 3. During the year 1919 the taxpayer removed the walls between the premises at 516 and those at 518 West Seventh Street on the second floor, repaired the stairway leading thereto, added new shelving and repaired the old, repaired the floors and plaster, painted the entire interior with six coats of paint, and arranged the whole interior to suit the needs of his business, at a cost of $8,947.97. This amount was paid by him and deducted in his income-tax return for the year 1919 as an ordinary and necessary business expense. This 2 B.T.A. 626">627 deduction was disallowed by the Commissioner and the pro rata of the cost for that year allowed as exhaustion. The alteration and repair work had a life of more than one year and added to the value of the building. 4. During the year 1920 the taxpayer removed the walls of the first floor between the premises at 516 and those at 518 West Seventh Street, repaired the shelving, floors, and plaster, changed the windows in the front, making one main entrance to both storerooms, and painted the interior and exterior with six coats of paint at a1925 BTA LEXIS 2318">2320 total cost of $29,960.81. This amount was paid by the taxpayer and deducted by him in his income-tax return for the year 1920 as an ordinary and necessary business expense. This deduction was disallowed by the Commissioner and a pro rata amount allowed as exhaustion for the year. 5. During the year 1919 the taxpayer made withdrawals of cash from the business in the amount of approximately $12,000. These withdrawals were for his personal use and were charged on the books to his personal account. In making his income-tax return for the year 1919 the taxpayer treated $11,000 of this amount as salary and sought to deduct it as an operating expense of the business. This deduction was disallowed by the Commissioner. The deduction of salary and the restoration of it to income by the Commissioner did not effect a duplication of the tax. DECISION. The determination of the Commissioner is approved. OPINION. GRAUPNER: The facts shown in this appeal clearly justify the conclusion that the items of $8,947.97 and $29,960.81, expended in 1919 and 1920, respectively, were for improvements and betterments to the leased premises and that as such they constitute capital expenditures1925 BTA LEXIS 2318">2321 which should be exhausted over the life of the leased property. This appeal comes squarely under the authority of ; ; and . With respect to the salary which the taxpayer, as sole proprietor, sought to charge to the business and deduct as an ordinary and necessary business expense, we can only say that it was properly disallowed by the Commissioner and included in income for the year 1919. The taxpayer contends that the revenue agent's report which was followed by the Commissioner returned the $11,000 to income in such a manner that it is doubly reflected and that consequently 2 B.T.A. 626">628 the taxpayer will be forced to pay double taxes on this amount. The evidence does not prove the taxpayer's contention in this regard. No evidence was offered by the taxpayer to show any erroneous increase by the Commissioner of income in the amount of $305.30 for the year 1919. At the hearing the taxpayer withdrew his allegations of error relating to the disallowance of $3,479.82 which1925 BTA LEXIS 2318">2322 he claimed represented a loss on interstore transactions for the year 1920. ARUNDELL not participating.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625797/	ROBERT DELLI PAOLI a/k/a ORLANDO DELLI PAOLI, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent; WATERBURY REALTY CORPORATION, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, ResponentPaoli v. CommissionerDocket Nos. 4936-82, 4937-82.United States Tax CourtT.C. Memo 1985-196; 1985 Tax Ct. Memo LEXIS 437; 49 T.C.M. 1292; T.C.M. (RIA) 85196; April 23, 1985. Murray Appleman, for the petitioners. Julius1985 Tax Ct. Memo LEXIS 437">438 A. Jove, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined deficiencies in and additions to petitioners' Federal income taxes in these consolidated cases as set forth below: Robert Delli Paoli a/k/a Orlando Delli PaoliDocket No. 4936-82Addition to TaxSec. 6651(a),Sec. 6653(a),Sec. 6654,YearDeficiencyI.R.C. 1954I.R.C. 1954I.R.C. 19541975$6,020.02$1,505.00$301.01$260.67Waterbury Realty CorporationDocket No. 4937-82Addition to TaxSec. 6651(a),Sec. 6653(a),Sec. 6654,YearDeficiencyI.R.C. 1954I.R.C. 1954I.R.C. 19541975$6,170.65$1,542.66$308.53$147.951977$5,276.21$1,319.05$263.81After a concession by petitioner Robert Delli Paoli of one of the issues at trial, 1 the following issues remain for decision: 1. Which of the petitioners, Robert Delli Paoli or Waterbury Realty Corporation, realized and is properly taxable on gains, under section 1231, 2 as follows: (a) $28,900.35 for 1975 from the sale of rental property at 188 Brinsmade Avenue, 1985 Tax Ct. Memo LEXIS 437">439 Bronx, New York; and (b) $28,545.64 for 1977 from the sale of rental property at 186 Brinsmade Avenue, Bronx, New York; 2. If we find petitioner Waterbury Realty Corporation taxable on the gain from the 1975 sale of 188 Brinsmade Avenue, whether the sale resulted in a constructive dividend to petitioner Robert Delli Paoli in the amount of $12,000; 3. Whether, for 1975, petitioner Waterbury Realty Corporation failed to report rental income in the amount of $9,220; 4. Whether, for 1977, petitioner Waterbury Realty Corporation is entitled to deduct certain business expenses disallowed by respondent; 5. Whether, for 1975, petitioner Robert Delli Paoli and petitioner Waterbury Realty Corporation are liable for additions to tax determined by respondent under section 6651(a) for failure to file a return, under section 6653(a) for an underpayment of tax due to negligence or disregard of rules and regulations, and under section 6654 for failure to pay estimated income tax; and, for 1977, whether petitioner Waterbury Realty Corporation is liable for the additions to tax under sections 6651(a) and 6653(a). 1985 Tax Ct. Memo LEXIS 437">440 FINDINGS OF FACT At the time he filed his petition in this case, petitioner Robert Delli Paoli, also known as Orlando Delli Paoli (hereinafter Delli Paoli), resided at 3153 Waterbury Avenue, Bronx, New York. Petitioner Waterbury Realty Corporation (Waterbury) is a corporation organized under the laws of the State of New York, and was incorporated on December 4, 1953. On or about October 1, 1964, Delli Paoli acquired a four-family brick house at 186-188 Brinsmade Avenue, Bronx, New York (the Brinsmade property) which he used as rental property.Delli Paoli's individual Federal income tax returns show that the Brinsmade property produced rental income of $6,960 in 1971 and $9,960 in 1974. By deed dated May 6, 1975, Delli Paoli conveyed the Brinsmade property, for no consideration, to Waterbury. Delli Paoli conveyed the Brinsmade property to Waterbury on order to avoid its seizure to satisfy the claim of a potential judgment creditor, Anthony Venturo, a former business associate of Delli Paoli's, who had obtained a default judgment against Delli Paoli in the amount of $246,815.73 on July 5, 1974. The default judgment was vacated by court order of November 12, 1974; however, 1985 Tax Ct. Memo LEXIS 437">441 Ventura's underlying lawsuit against Delli Paoli continued. At the time of the transfer of the Brinsmade property, Waterbury held title to Delli Paoli's residence at 3153 Waterbury Avenue. Waterbury's Federal income tax return for 1969 shows that it engaged in the business of renting real estate; on that return, Waterbury reported gross rental receipts of $3,780. After the transfer of the Brinsmade property, however, during the remainder of 1975, tenants at the Brinsmade property continued to make their rent checks payable to Delli Paoli in his individual capacity, rather than to Waterbury. From June through December 1975, Delli Paoli received rental payments from Brinsmade tenants Anthony and Marie DiGennaro in the amount of $1,665 and from Louis and Elizabeth Solimano in the amount of $802.35. Waterbury's 1969 Federal income tax return discloses that, as of September 24, 1970, the date it was signed, Delli Paoli was Waterbury's president, and that he owned 100 percent of Waterbury's stock. As of February 26, 1975, Delli Paoli was still listed as Waterbury's president on a mortgage loan application submitted by Delli Paoli and his wife to the Knickerbocker Federal Savings and1985 Tax Ct. Memo LEXIS 437">442 Loan Association. 3 Waterbury maintained a checking account, number XXX-X-XX2451, at the Throgs Neck Branch of the Chase Manhattan Bank, and employed accountants to keep financial records and prepare tax returns. Sometime between February 26, 1975 and May 22, 1975, Delli Paoli's son, Andrew Delli Paoli (Andrew), was named Waterbury's president by Delli Paoli. Waterbury's 1977 Federal income tax return, filed on or about December 8, 1978, was signed by Andrew as president. Unlike Waterbury's 1969 return, its 1977 return does not indicate Waterbury's stock ownership as of the time it was filed on or about December 8, 1978. On or about November 14, 1975, part of the Brinsmade property (the 188 Brinsmade portion) was conveyed by Waterbury to Michael Sanguiolo, Delli Paoli's son-in-law. Andrew, Waterbury's president at the time of sale, was present at the1985 Tax Ct. Memo LEXIS 437">443 closing and signed the deed. Proceeds of the sale in the amount of $47,404.55 went to Delli Paoli directly. On or about January 4, 1977, the remaining part of the Brinsmade property (the 186 Brinsmade portion) was conveyed by Waterbury to Daniel Vitiello and his wife, Rita Vitiello, for a price of $53,000.Proceeds of this sale in the amount of $48,091.82 also went to Delli Paoli directly. Neither Delli Paoli nor Waterbury filed Federal income tax returns for 1975; neither Delli Paoli nor Waterbury reported either the 1975 sale of the 188 Brinsmade portion, or the rent paid by the tenants at the Brinsmade property to Delli Paoli on any Federal income tax return. Delli Paoli also failed to report for 1975 gain in the amount of $20,863.60 realized on his sale of rental property in Miami, Florida. Delli Paoli and his wife, Josephine, filed a joint Federal income tax return for 1977 dated March 8, 1978. The only income reported on this return were wages paid to Delli Paoli by Andrea Motel Corp. in the amount of $2,680. Waterbury filed a 1977 Federal income tax return on or about December 8, 1978, reporting income consisting only of gross rental receipts of $7,800. Neither Delli1985 Tax Ct. Memo LEXIS 437">444 Paoli nor Waterbury reported the sale of the 186 Brinsmade portion on their returns for 1977. OPINION 1. Gains on the 1975 and 1977 Sales of the Brinsmade PropertyIn 1964, Delli Paoli acquired a four-family brick house at 186-188 Brinsmade Avenue which he used as rental property. On May 6, 1975, Delli Paoli conveyed the Brinsmade property, for no consideration, to Waterbury, his "family corporation," in order to place his asset out of the reach of a potential judgment creditor. On November 14, 1975, the 188 Brinsmade portion was sold for a gain of $28,900.35, and on January 4, 1977, the 186 Brinsmade portion was sold for a gain of $28,545.64. Neither of the two sales was ever reported on any Federal income tax return. The parties are in agreement with respect to the fact of, and the amount of gain on, each sale. They disagree, however, concerning which of the petitioners, Delli Paoli or Waterbury, is taxable on the gain. Respondent determined that Waterbury, as title holder and seller of the Brinsmade property, is taxable on the gains derived from both sales. Petitioners contend that Waterbury merely held title to the Brinsmade property, that Delli Paoli at all times1985 Tax Ct. Memo LEXIS 437">445 remained the property's beneficial owner, and that, therefore, he, not Waterbury, is taxable on gain from the sales. After careful consideration of the evidence on this issue, we conclude that Waterbury, not Delli Paoli, is taxable on the sales; we therefore sustain respondent's determination. It is well settled that, in general, a corporation is considered a separate taxable entity and may not be excused from taxation on the gain derived from its transactions. Thus, in Moline Properties v. Commissioner,319 U.S. 436">319 U.S. 436, 319 U.S. 436">438-439 (1943), the Supreme Court stated as follows: The doctrine of corporate entity fills a useful purpose in business life. Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is theequivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. * * * In Burnet v. Commonwealth Improvement Co.,287 U.S. 415">287 U.S. 415,1985 Tax Ct. Memo LEXIS 437">446 this Court appraised the relation between a corporation and its sole stockholder and held taxable to the corporation a profit on a sale to its stockholder. This was because the taxpayer had adopted the corporate form for purposes of his own. The choice of the advantages of incorporation to do business, it was held, required the acceptance of the tax disadvantages. [Citations omitted. Fn. refs. omitted. Emphasis added.] In National Carbide Corp. v. Commissioner,336 U.S. 422">336 U.S. 422, 336 U.S. 422">433-434 (1949), the Supreme Court expressly called attention to the fact that it had reached its conclusion in Moline Properties despite findings of the Board of Tax Appeals that full beneficial ownership of the property there involved was in the sole stockholder; the Court said: Undoubtedly the great majority of corporations owned by sole stockholders are "dummies" in the sense that their policies and day-to-day activities are determined not as decisions of the corporation but by their owners acting individually. * * We reversed the Board of Tax Appeals in Moline Propertiesin the face of itsfindings that "Full beneficial ownership was in Thompson [the sole stockholder,1985 Tax Ct. Memo LEXIS 437">447 ] who continued to manage and regard the property as his own individually. [Emphasis added.] See also Tomlinson v. Miles,316 F.2d 710">316 F.2d 710 (5th Cir. 1963); Harrison Property Management Co., Inc. v. United States,201 Ct. Cl. 77">201 Ct. Cl. 77, 201 Ct. Cl. 77">83-84, 475 F.2d 623">475 F.2d 623, 475 F.2d 623">626 (1973); Bolger v. Commissioner,59 T.C. 760">59 T.C. 760, 59 T.C. 760">767, n. 4 (1973). Under these cases, a taxpayer cannot shop on both sides of the street at the same time. Evans v. Commissioner,557 F.2d 1095">557 F.2d 1095, 557 F.2d 1095">1099 (5th Cir. 1977), affg. in part and revg. in part a Memorandum Opinion of this Court. He must accept the disadvantages as well as the advantages of incorporation. The transfer of the Brinsmade property to Waterbury served Delli Paoli's advantage by providing a shield from his creditors. He cannot now avoid the disadvantage of having Waterbury pay a tax on the gain from the sale of the property. Petitioners contend that since the time of its incorporation in 1953, Waterbury never served as anything more than a mere titleholder, first of the property at 3153 Waterbury Avenue, 1985 Tax Ct. Memo LEXIS 437">448 Delli Paoli's residence, and, after the transfer of the Brinsmade property, of that as well. They contend that Delli Paoli transferred bare legal title of the Brinsmade property to Waterbury, his "family corporation," only to shield the property from a potential creditor, but that Delli Paoli always intended to, and did remain, its beneficial owner. This intent is evident, they argue, because, after the transfer, Delli Paoli personally continued to collect rent from the Brinsmade tenants, and he personally received the proceeds from the sales of the property. In sum, citing Paymer v. Commissioner,150 F.2d 334">150 F.2d 334 (2d Cir. 1945), affg. in part and revg. and remanding in part a Memorandum Opinion of this Court, as their only authority, petitioners argue that Waterbury was merely a dummy corporation, the only function of which was to hold title to the Waterbury Avenue and Brinsmade Avenue properties, and because it served no other business functions, it should be disregarded for tax purposes. In Paymer, two brothers, who for many years had managed real property as partners, formed two corporations, Raymep and Westrich, to which they transferred title to certain1985 Tax Ct. Memo LEXIS 437">449 real estate in order to shield it from creditors. Written minutes of a board of directors' and shareholders' meeting of both Raymep and Westrich, recorded at the time of the property transfers, stated that the corporations were to hold legal title only, but that the stockholders (the brothers) would retain the beneficial interest in, the management and control of, and all profits from the property. After the transfers, the brothers acted in respect to the properties as they always had before, i.e., managing it, collecting income, paying expenses, depositing the income in their partnership account, and using the net profits as they wished. Neither corporation engaged in any business activity except that Raymep obtained a loan and as part security for the loan, Raymep assigned to the lender all of its rights, profits, and interest in two leases on the property to which it held title, and it covenanted that they were in full force and effect and it was the sole lessor. The court held, based on those facts, that Westrich should be disregarded for tax purposes because it was "at all times but a passive dummy which did nothing but take and hold the title to the real estate conveyed1985 Tax Ct. Memo LEXIS 437">450 to it. It served no business purpose in connection with the property." 150 F.2d 334">150 F.2d at 337. The court, however, refused to disregard Raymep as a separate taxable entity because, in securing the loan, it did perform a business function in connection with the property. We think petitioners' reliance on Paymer is misplaced; as we view the facts, limited as they are, we think they are distinguishable. Waterbury was not, by any means, "at all times but a passive dummy." Cf. National Carbide Corp. v. Commissioner,336 U.S. 422">336 U.S. 422, 336 U.S. 422">433-434 (1949), quoted above. As of the time of trial, Waterbury had been in existence for some 30 years. Its 1969 Federal income tax return explicitly states that it engaged in the business of renting real estate, and, on that return, Waterbury reported rental receipts of $3,780. Similarly, on its 1977 return, Waterbury reported rental receipts of $7,800. During the years of its existence, Waterbury had corporate officers, maintained a checking account, and employed accountants to keep financial records and prepare its Federal income tax returns. Petitioners argue that Waterbury served no business purpose other than holding1985 Tax Ct. Memo LEXIS 437">451 title, at least with respect to the Brinsmade property. The facts, however, indicate otherwise. The closing statement from the 1977 sale of the 186 Brinsmade portion indicates that Waterbury was the seller of the property. Although there are no documents in the record pertaining to the 1975 sale of the 188 Brinsmade portion, the parties stipulated that it was conveyed in 1975 to Michael Sanguiolo. In a question and answer session conducted on October 31, 1978, by Special Agents of the Criminal Investigation Division of the Internal Revenue Service (IRS), the transcript of which was admitted in evidence, Andrew, Delli Paoli's son, admitted that he was present at the closing of the sale of the 186 Brinsmade portion as Waterbury's president and at trial, he admitted that he signed the deed of sale. Thus, we find that Waterbury was the seller of that portion of the Brinsmade property as well. Although Delli Paoli both continued to collect rent from the tenants at the Brinsmade property and received the proceeds from the sales of the property in his personal capacity, we do not think those facts are conclusive to a determination that Waterbury was a mere dummy which should be disregarded1985 Tax Ct. Memo LEXIS 437">452 for tax purposes.By transferring title of the Brinsmade property to Waterbury, Delli Paoli gained what he perceived to be a business advantage, i.e., avoidance of the claims of a potential creditor. The transfer, thus, served a business purpose for him. After the transfer, Waterbury, at least with respect to the sales of the property, was the seller and, thus, acted as the true owner of the property. The business advantage gained, the business purpose served, coupled with Waterbury's later sales activity with respect to the property is sufficient, in our view, to satisfy the separate entity test set forth in Moline Properties and quoted above. 4 Based on that test, we conclude that Waterbury should be respected for tax purposes. 51985 Tax Ct. Memo LEXIS 437">453 2. Constructive Dividend for 1975Having decided that Waterbury is taxable on the 1975 sale of the 188 Brinsmade portion to Michael Sanguiolo, Delli Paoli's son-in-law, we next turn to respondent's determination that this sale resulted in a constructive dividend to Delli Paoli in the amount of $12,000 in that when Waterbury sold the property to Sanguiolo, it reduced the selling price by $12,000 in repayment of a loan in that amount which Sanguiolo had made to Delli Paoli. It is well settled that when a corporation satisfies the obligation of its shareholder or makes a payment for his benefit, such payment may result in a constructive dividend to that shareholder. Yelencsics v. Commissioner,74 T.C. 1513">74 T.C. 1513, 74 T.C. 1513">1529 (1980); Smith v. Commissioner,70 T.C. 651">70 T.C. 651, 70 T.C. 651">668 (1978). Petitioners, who have the burden of proof on this issue, Welch v. Helvering,290 U.S. 111">290 U.S. 111 (1933), presented no evidence to shed any light on the facts concerning either the alleged loan from Sanguiolo to Dellui Paoli, or Waterbury's sale of the 188 Brinsmade portion1985 Tax Ct. Memo LEXIS 437">454 to Sanguiolo. 6 Their only argument with respect to this issue appears to be their contention that at the time of the transfer of the Brinsmade property to Waterbury and at the time of the subsequent sales, Delli Paoli was not a Waterbury shareholder, and, therefore, he could not have received a constructive dividend as a result of the 1975 sale. In support of this contention, petitioners presented the testimony of Andrew, Delli Paoli's son, who was Waterbury's president at the time of the property transfer and subsequent sales. Andrew testified that, in May 1975, he, along with his mother, Josephine Delli Paoli, and his sister, Roseann Casale, became the only stockholders of Waterbury. Until May 1975, his father, Delli Paoli, owned all of Waterbury's stock. Andrew further testified that there was no change in Waterbury stock ownership from May 1975 to October1985 Tax Ct. Memo LEXIS 437">455 1978. To corroborate Andrew's testimony, petitioners placed in evidence a photocopy of a handwritten affidavit, purportedly submitted to a bank in connection with a mortgage application by Delli Paoli, signed by Delli Paoli, his wife, Josephine, and Andrew as president of Waterbury which states that as of the date it was executed, May 22, 1975, Andrew, Josephine Delli Paoli, and Roseann Casale "are all the shareholders" of Waterbury. In addition to Andrew's testimony and the supporting affidavit, Delli Paoli testified that he transferred his shares in Waterbury in connection with his transfer of the property as part of his plan to shield his interest in the property from his creditors and although he did not remember the exact date of transfer, he did state that he owned no shares in Waterbury. Petitioners produced no other evidence on this issue, claiming that the stock records were lost. We are simply not convincted that Delli Paoli was not the sole stockholder of Waterbury and in complete control of the corporation both at the time of the transfer of the Brinsmade property to Waterbury and at the time of the sale of the 188 Brinsmade portion to Sanguiolo in 1975.Neither Andrew1985 Tax Ct. Memo LEXIS 437">456 nor Delli Paoli were credible witnesses at trial; both of them, when asked about Waterbury's stockownership, gave vague, evasive, and inconclusive answers. For example, when asked how many Waterbury shares he owned, Andrew stated that he did not know. Indeed, during the question and answer session referred to above conducted on October 31, 1978, by Special Agents from the IRS Criminal Investigation Division, Andrew stated that he did not own any Waterbury stock. 7 As for Delli Paoli, the following statement made at trial contradicts his assertion that he turned over control of Waterbury to his son, Andrew, in 1975, and indicates to us that it was he who was in control of Waterbury: Q. How many shares of Waterbury were there outstanding? How many shares were there? Were there 100; were there 10? A. There wasn't any. They--this was a family affair. I used to tell them verbally to my children that what they got, what they haven't got, and it was just--a family conversation, but actually business wise I was the one that was doing everything. * * * [Emphasis added.] 1985 Tax Ct. Memo LEXIS 437">457 Petitioners, of course, have the burden of proof on this issue. Given Delli Paoli's admission at trial that he controlled Waterbury's operation combined with the statement in Waterbury's 1969 Federal income tax return that Delli Paoli owned 100 percent of its stock, we are satisfied that Delli Paoli was in sole control of Waterbury at the time of the 1975 sale and, absent any evidence from petitioners concerning the alleged loan and bargain sale, we sustain respondent's determination that the sale resulted in a constructive dividend to Delli Paoli. 83. Omitted Rental IncomeIn Waterbury's notice of deficiency, respondent determined that Waterbury failed to report the following rental income for 1975: SourceAmount186 Brinsmade portion$1,890.00188 Brinsmade portion1,330.003153 Waterbury Avenue6,000.00$9,220.00The only evidence presented by petitioners, 1985 Tax Ct. Memo LEXIS 437">458 who, again have the burden of proof on this issue, was Delli Paoli's testimony that after the transfer of the Brinsmade property to Waterbury, he continued personally to collect rent from the Brinsmade tenants, rather than require them to pay rent to Waterbury. In the record are photocopies of checks written to Delli Paoli after the transfer from June through December 1975 by Brinsmade tenants Anthony and Marie DiGennaro in the amount of $1,665 and by Louis and Elizabeth Solimano in the amount of $802.35. Petitioners presented no evidence concerning either the number of tenants living at the Brinsmade property during 1975, or the total amount of rent collected by Delli Paoli from the Brinsmade tenants after the transfer. Petitioners also produced no evidence concerning the amount of rent collected by Waterbury during 1975 from tenants at 3153 Waterbury Avenue. We have concluded above that Waterbury is a separate entity which should be respected for tax purposes, and that, for 1975, it is taxable on the gain from the sale of the 188 Brinsmade portion. Consistent with such conclusion is the further determination that Waterbury is taxable on the rental income derived from the property1985 Tax Ct. Memo LEXIS 437">459 as well. The mere fact that Delli Paoli may have collected and retained the rent payments from the Brinsmade tenants does not relieve Waterbury from tax liability for the rental income. Due to petitioners' failure to convince us that Waterbury did not receive at least the amount of rental income from the sources determined by respondent, we sustain respondent's determination in this regard. 94. Disallowed DeductionsWaterbury's notice of deficiency reflects respondent's disallowance of the following expenses deducted by Waterbury for 1977: ExpenseAmountDepreciation$ 580.00Real estate tax1,403.14Water charges$ 331.33Petitioners produced no evidence whatsoever at trial concerning these alleged expenses; we, thus, sustain respondent's determination that such expenses are not deductible for 1977 due to petitioners' failure to meet their burden of proof on this issue. 5. Additions to TaxA. Section 6651(a)Respondent determined, for 1975, that both Delli Paoli and Waterbury failed1985 Tax Ct. Memo LEXIS 437">460 to file Federal income tax returns and, therefore, respondent determined an addition to tax under section 6651(a). The parties have stipulated that, indeed, neither Delli Paoli nor Waterbury filed a return for 1975. The burden is on petitioners to establish the existence of reasonable cause for their failure to file returns. Richardson v. Commissioner,72 T.C. 818">72 T.C. 818, 72 T.C. 818">827 (1979); Hatfield v. Commissioner,68 T.C. 895">68 T.C. 895, 68 T.C. 895">898 (1977). Concerning the failure of both Delli Paoli and Waterbury to file returns for 1975, Andrew testified that his father's accountant advised him that Delli Paoli did not have to file an individual return for that year because he was "a retired man," and a return for Waterbury need not be filed because it was always controlled by Delli Paoli and there was no income for that year. Significantly, the accountant was not called as a witness, and Delli Paoli himself did not testify at trial concerning his reasons for failing to file a return for 1975. We do not think, based on Andrew's testimony alone, that petitioners have shown reasonable1985 Tax Ct. Memo LEXIS 437">461 cause for failing to file returns for 1975. As our discussion in Part 2 of this opinion indicates, we do not find Andrew's trial testimony credible as a whole.We are even less inclined to credit his testimony on this issue given the fact that Delli Paoli, who testified at trial as to other matters, failed to testify concerning his failure to file a return. Further, we find it hard to believe that an accountant would have given such advice in the face of the substantial gains realized by Delli Paoli and Waterbury on the sales in 1975 of the Miami rental property and the 188 Brinsmade Avenue property. Thus, we sustain respondent's determination for 1975. As to 1977, respondent determined that Waterbury failed to file a return and determined an addition to tax under section 6651(a) for that yeat as well. Waterbury did file a return for 1977, which was dated November 30, 1978, and marked received by the IRS on December 8, 1978. Attached to the return is a Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return, dated March 8, 1978, requesting an automatic extension of time to file until June 15, 1978, and a Form 7005, Application for Additional1985 Tax Ct. Memo LEXIS 437">462 Extension of Time to File Corporation Income Tax Return, dated September 11, 1978, requesting an extension of time to file until December 15, 1978. There is no indication on the Form 7005 that the IRS ever acted on or granted Waterbury's application. Petitioners presented no further evidence on this issue. Under section 6072(b), returns of a corporation made on the basis of the calendar year must be filed on or before March 15 following the close of the calendar year. The Form 7005 dated September 11, 1978, indicates that Waterbury is a calendar year taxpayer. Considering the extra time to file granted by an automatic extension, Waterbury's 1977 return was due on or before June 15, 1978. There is nothing in the record to suggest that the filing deadline was further extended by the IRS. Waterbury's return, filed as it was no earlier than November 30, 1978, was, therefore, not timely. Petitioners have produced no evidence concerning the cause for the delay; thus we sustain the addition for 1977. Saigh v. Commissioner,36 T.C. 395">36 T.C. 395, 36 T.C. 395">430 (1961). B. Section 6653(a)1985 Tax Ct. Memo LEXIS 437">463 Respondent determined that the underpayments in tax for 1975 by both Delli Paoli and Waterbury were due to their negligence or intentional disregard of rules and regulations. We agree. We have determined above that both Delli Paoli and Waterbury realized substantial gains on the sale of real property and that Waterbury failed to report rental income which it had reported in the past. In spite of these gains, neither Delli Paoli nor Waterbury filed an income tax return for 1975, although both had done so in the past. We think the failure to report the large gains may be characterized, at the very least, as negligence. Indeed, having heard the evasive testimony of both Delli Paoli and his son, Andrew, and having considered the fact that Delli Paoli made a false statement on a mortgage application concerning litigation in which he was involved, we do not find it difficult to conclude that he, and Waterbury, the corporation he controlled, failed to report income, thereby underpaying their tax, in intentional, if not reckless, disregard of the tax law. Thus, we sustain the additions for 1975. As for 1977, respondent determined an addition to tax under section 6653(a) with respect1985 Tax Ct. Memo LEXIS 437">464 to Waterbury. Again, we have concluded above that Waterbury realized a substantial gain in 1977 on the sale of the 186 Brinsmade Avenue property, yet this gain too was never reported on any return, even though Waterbury did ultimately file a return for 1977. As was the case for 1975, we think the gain was omitted intentionally. Petitioners have not proven otherwise. In fact, with respect to 1977, they have produced no evidence concerning the omission. Thus, we sustain respondent's determination. Enoch v. Commissioner,57 T.C. 781">57 T.C. 781, 57 T.C. 781">802 (1972). C. Section 6654Respondent determined additions to tax for the underpayment of estimated tax under section 6654 for 1975 with respect to both Delli Paoli and Waterbury. The addition to tax under section 6654, subject to specific limited exceptions not applicable here, is mandatory and extenuating circumstances, had they been shown, are irrelevant. Estate of Roe v. Commissioner,36 T.C. 939">36 T.C. 939, 36 T.C. 939">952 (1961); Estate of Ruben v. Commissioner,33 T.C. 1071">33 T.C. 1071 (1960). Accordingly, we sustain this addition to tax with respect to both petitioners. To reflect the foregoing, Decisions1985 Tax Ct. Memo LEXIS 437">465 will be entered for the respondent.Footnotes1. At trial, petitioner Robert Delli Paoli conceded respondent's determination that he failed to report, for 1975, a gain in the amount of $20,863.60 (resulting in an unreported capital gain of $10,431.80 after the 50-percent deduction under sec. 1202, I.R.C. 1954↩) from the sale of rental property in Miami, Florida. 2. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise noted.All Rules references are to the Tax Court Rules of Practice and Procedure, unless otherwise noted.↩3. On the mortgage loan application, signed by Delli Paoli with the representation that the information therein was "in all respects true, correct and complete," Delli Paoli answered "no" to the following questions: (1) "Do you have any litigation or judgments pending?" and (2) "Have you ever had any suits or judgment?"↩4. In Strong v. Commissioner,66 T.C. 12">66 T.C. 12, 66 T.C. 12">24 (1976), affd. 553 F.2d 94">553 F.2d 94 (2d Cir 1977), this Court stated: "The degree of corporate purpose and activity requiring recognition of the corporation as a separate entity is extremely low." See also Hospital Corp. of America v. Commissioner,81 T.C. 520">81 T.C. 520, 81 T.C. 520">579-580↩ (1983). 5. Petitioners, on brief, state in passing, citing no authority, that Waterbury acted as Delli Paoli's agent. This Court has held, in strictly circumscribed circumstances, that a corporation may serve as a nontaxable agent. See Ourisman v. Commissioner,82 T.C. 171">82 T.C. 171 (1984); Roccaforte v. Commissioner,77 T.C. 263">77 T.C. 263 (1981), revd. 708 F.2d 986">708 F.2d 986 (5th Cir. 1983). Our holdings in Ourisman and Roccaforte were based on an application of the facts in those cases to the following indicia of an agency relationship set forth by the Supreme Court in National Carbide Corp. v. Commissioner,336 U.S. 422">336 U.S. 422, 336 U.S. 422">437 (1949): Whether the corporation operates in the name and for the account of the principal, binds the principal by its actions, transmits money received to the principal, and whether receipt of income is attributable to the services of employees of the principal and to assets belonging to the principal are some of the relevant considerations in determining whether a true agency exists. If the corporation is a true agent, its relations with its principal must not be dependent upon the fact that it is owned by the principal, if such is the case. Its business purpose must be the carrying on of the normal duties of an agent. * *[Fn. ref. omitted.] Petitioners, who have the burden of proof on this issue, Welch v. Helvering,290 U.S. 111">290 U.S. 111↩ (1933), Rule 142(a), have failed to demonstrate that the alleged agency relationship between Waterbury and Delli Paoli satisfies a sufficient number of the factors quoted above on which to base a finding concerning the existence of a bona fide agency relationship. Thus, we reject their bald assertion.6. Sanguiolo was present at trial and although sequestered from the courtroom, he was not called by petitioners as a witness. Their failure to call Sanguiolo was not explained. Wichita Terminal Elevator Co. v. Commissioner,6 T.C. 1158">6 T.C. 1158, 6 T.C. 1158">1165 (1946), affd. 162 F.2d 513">162 F.2d 513↩ (10th Cir. 1947).7. Andrew's credibility is further undermined by his assertion at trial that Waterbury had no checking account. At the question and answer session, Andrew stated that one of his functions as Waterbury's president was to sign corporate checks, and Delli Paoli's attorney presented the IRS Special Agents with records of Waterbury's checking account at the Chase Manhattan Bank.↩8. Our conclusions in Parts 1 and 2, above, holding Waterbury taxable on the 1975 sale of the 188 Brinsmade portion and Delli Paoli taxable on a constructive dividend as a result of the sale, render moot respondent's motion for leave to file amendment to answer, filed Aug. 7, 1984.↩9. We note that on its 1977 Federal income tax return, Waterbury reported rental income, after the sale of the Brinsmade property, of $7,800.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625798/	LINWOOD E. TOPPING, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentTopping v. CommissionerDocket No. 502-76.United States Tax CourtT.C. Memo 1976-342; 1976 Tax Ct. Memo LEXIS 65; 35 T.C.M. 1568; T.C.M. (RIA) 760342; November 10, 1976, Filed Linwood E. Topping, pro se. Mathew E. Bates, for the respondent. SCOTT MEMORANDUM FINDINGS OF FACT AND OPINION SCOTT, Judge: Respondent determined a deficiency in petitioner's income tax for the calendar year 1973 in the amount of $695. Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for our decision only whether petitioner is entitled to a deduction under section 162(a), I.R.C. 1954, 1 of amounts expended for traveling expenses while employed away from the place where he maintained his family residence and if so the amount, if any, which is properly deductible as transportation expenses. 1976 Tax Ct. Memo LEXIS 65">66 FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. Petitioner, an individual whose legal residence at the time of the filing of the petition in this case was Littleton, North Carolina, filed a joint Federal income tax return with his wife for the calendar year 1973 with the Memphis Service Center, Memphis, Tennessee. Petitioner had been engaged in work as a pipefitter on construction projects for a number of years prior to 1973. He had lived most of his life in Littleton, North Carolina. In 1966 he was maintaining a home for his family in Littleton, North Carolina when he obtained work as a pipefitter on a project in Massachusetts. The supervisor of his work in Massachusetts assured petitioner that he would remain on the project on which he was employed in Massachusetts as long as the project lasted. Therefore, after petitioner had been on the project for 6 months, he moved his family to Massachusetts and he lived in Massachusetts with his family while working on that project for 30 additional months. He was a member of Local 77 of the Pipefitters Union in New Bedford, Massachusetts. In 1969, when his work terminated on the project1976 Tax Ct. Memo LEXIS 65">67 in Massachusetts, petitioner moved his family back to Littleton, North Carolina. He then began seeking work in union halls in Richmond, Virginia and Durham, North Carolina on the basis of his membership in Local 77 of the Pipefitters Union. Work sought in this manner is referred to in the trade as being sought on a "travel card." The first work petitioner obtained in 1969 after returning from Massachusetts was for Grenel Corporation in Franklin, Virginia which was between 40 and 50 miles from Littleton, North Carolina. Petitioner worked on this project in Franklin, Virginia until about March of 1970 and commuted to and from work each day from his home in Littleton, North Carolina. When his work in Franklin terminated because the project there was close to being finished, petitioner found work in Surry, Virginia which was not close enough to Littleton, North Carolina for him to commute daily. Petitioner found quarters near the project in Surry where he stayed during the week and returned to Littleton on weekends. He worked on the project in Surry until May of 1971 when he obtained work for a company in Richmond, Virginia where he stayed for approximately 1 month. In June of1976 Tax Ct. Memo LEXIS 65">68 1971 when the work on that project terminated, he obtained work at another location near Richmond, Virginia for the period from June 1, 1971, to August 1971 when the project on which he was working was completed. He again obtained work through the Richmond union, Local 10, with Morrison-Knudsen in Williamsburg at the Budweiser Brewery Plant and worked there from August 1971 through January 1972 when the brewery plant was completed. From February of 1972 until late April of 1972 petitioner was unemployed but was seeking work through the Richmond and Newport News, Virginia and Durham, North Carolina locals of the Pipefitters Union. On or about April 28, 1972, petitioner began work as a pipefitter on the construction of a nuclear power plant in Louisa County, Virginia. Construction on the project in Louisa County had been underway for several months when petitioner obtained a referral to that job through the Richmond local union. The first referral petitioner obtained for work on the nuclear power plant in Louisa County was on the dam. The dam was nearing completion at the time petitioner commenced his work there and petitioner worked there for 8 or 9 weeks until approximately the1976 Tax Ct. Memo LEXIS 65">69 end of June 1972. Petitioner again contacted the business agent at the union hall of Richmond Local 10 and obtained approval to go to the main project of the nuclear power plant which was approximately 10 miles from the dam for work assignment when the dam was finished. Around the first of July 1972 petitioner began working at the main nuclear power plant project. From July 1 until May 1, 1973, petitioner worked on the nuclear power plant project in Louisa County, Virginia. At the time petitioner commenced working on the nuclear power plant in Louisa County it was generally known that the project would require a number of years for completion. However, petitioner overheard rumors from other employees that the work on the plant might be closed down before the plant was completed because of the possibility of earthquake potential in the area. Petitioner's termination on the project on May 1, 1973, was caused by curtailment of work due to a strike by crane operators. Since petitioner was assigned to work from another union on a "travel card" rather than as a member of the Richmond union, Local 10, it was understood that if work were curtailed he, along with other "out-of-towners,1976 Tax Ct. Memo LEXIS 65">70 " would be the first to be terminated and the persons assigned to the project who were members of the local union would be kept. There were a number of pipefitters employed at the nuclear power plant who were members of unions other than Local 10 in Richmond. However, the termination on May 1, 1973, was extensive and not only of "out-of-towners." After petitioner's work on the nuclear power plant was terminated on May 1, 1973, he began to seek work on other projects. He heard of a project near Salem, New Jersey which needed people to work as pipefitters. He went to Salem and obtained a referral to this project through the local union in that area. Before he had gone to the work project with his referral he learned from an acquaintance that pipefitters were being rehired on the nuclear power plant project in Louisa County, Virginia. Instead of accepting work on the project near Salem, which was over 800 miles from Littleton, North Carolina, petitioner went back to the union hall in Richmond, Virginia and obtained a referral back to the nuclear power plant project in Louisa County, Virginia. Petitioner inquired as to the likelihood of the length of time his work as a pipefitter1976 Tax Ct. Memo LEXIS 65">71 on the nuclear power plant in Louisa County might continue, and the business agent in the Richmond local union hall told him that he did not know and that there might be another layoff within a week and yet there might not be. Petitioner decided to accept the work on the nuclear power plant in Louisa County, Virginia and was rehired on the project approximately the middle of May 1973. Petitioner continued working at that project until August 1974 when construction was halted due to lack of funds. At the time construction was halted, there still remained work to be done before the nuclear power plant was completed. After being terminated on the nuclear power plant project in August of 1974, petitioner again obtained employment through Union Local 10 in Richmond in the Richmond area and worked on several different projects in that area. During the year 1973 petitioner spent 220 nights and days in Louisa County, Virginia working on the nuclear power plant project. The project was located 172 miles from Littleton, North Carolina and petitioner spent the weekends in Littleton with his family during the time he was working on the project in Louisa County. He would drive his automobile1976 Tax Ct. Memo LEXIS 65">72 from Louisa County to Littleton generally after work on Friday and return on Sunday night or early Monday morning. Petitioner spent $8 a day for the 220 days he was in Louisa County, Virginia for meals and lodging, making a total of $1,760. During 1973 petitioner, as were all other pipefitters on the nuclear power plant project in Louisa County, Virginia, was paid $6 a day as "travel expenses" in accordance with the agreement in the union contract with the employer. The total amount petitioner was paid as such travel expenses during the year 1973 was $1,386. This amount was included by petitioner's employer along with petitioner's wages on the Form W-2 furnished to petitioner by his employer. Petitioner, on his Federal income tax return for 1973, claimed a deduction of $3,146 in connection with his employment which he explained as follows: Construction Workers ExpensesAllowed by Employer & Shown on W-2Transportation$1,386.00220 Days & Nights Away From HomeOvernights at $8.001,760.00$3,146.00Respondent in his notice of deficiency to petitioner increased petitioner's reported taxable income by $3,146 with the explanation that the deduction1976 Tax Ct. Memo LEXIS 65">73 claimed by petitioner as transportation and travel expenses was not allowable. OPINION Section 162(a)(2)2 provides for deduction as an ordinary and necessary business expense of traveling expenses while away from home in the pursuit of a trade or business. As was held in Commissioner v. Flowers,326 U.S. 465">326 U.S. 465 (1946), in order to qualify for the deduction provided for in section 162(a)(2) a taxpayer must show (1) that the amounts expended were ordinary and necessary, (2) that the expenses were incurred while he was "away from home," and (3) that the expenses were incurred in pursuit of the taxpayer's trade or business. Respondent here does not question the reasonableness of the $8-a-day expenses petitioner claimed for meals and lodging while in Louisa County, Virginia, but rather contends that petitioner was not "away from home" within the meaning of section 162(a)(2). 1976 Tax Ct. Memo LEXIS 65">74 The determination of whether petitioner was "away from home" would control whether the amounts were expended by petitioner in pursuit of a trade or business. Obviously, the amounts were expended for petitioner's living expenses while at his job site and, if petitioner was "away from home" in pursuit of a trade or business when he was at that job site, the expenses were in pursuit of his trade or business. However, if petitioner is not considered to be "away from home" within the meaning of section 162(a)(2), then, as pointed out in 326 U.S. 465">Commissioner v. Flower,supra, his residence was maintained in Littleton, North Carolina because of his personal desires and not through necessity of his business. It is clear on this record that at the time petitioner went to the Louisa County, Virginia project his home was in Littleton, North Carolina. That was where his family lived and since returning to Littleton in 1969 petitioner had not, prior to 1972, had nontemporary employment outside the Littleton, North Carolina commuting area. Therefore, under our holding in Hollie T. Dean,54 T.C. 663">54 T.C. 663, 54 T.C. 663">667 (1970), in early 1972 petitioner's home within the meaning1976 Tax Ct. Memo LEXIS 65">75 of section 162(a)(2) was at Littleton, North Carolina. The real question here is whether prior to the year 1973 petitioner's "home" within the meaning of section 162(a)(2) was changed from Littleton, North Carolina to Louisa County, Virginia. This Court has consistently held that "home" within the meaning of section 162(a)(2) is equated to the principal place of employment of a taxpayer even though his personal residence may be located in a different place. Ronald D. Kroll,49 T.C. 557">49 T.C. 557, 49 T.C. 557">561-62 (1968). We have, however, consistently recognized that a taxpayer's principal place of employment is not his "home" within the meaning of section 162(a)(2) if his employment at a place other than where he maintains his residence is "temporary" as distinguished from "indefinite" or "indeterminate." Emil J. Michaels,53 T.C. 269">53 T.C. 269, 53 T.C. 269">273 (1969), and cases there cited. Generally speaking, if the assignment of a taxpayer away from his residence is for a fixed period of time the assignment may be considered temporary, but if after the conclusion of such fixed period the taxpayer takes employment which is indefinite the new place of employment becomes his "home" 1976 Tax Ct. Memo LEXIS 65">76 for purposes of section 162(a)(2). See 53 T.C. 269">Emil J. Michaels,supra;Kermit L. Claunch,29 T.C. 1047">29 T.C. 1047 (1958), affd. 264 F.2d 309">264 F.2d 309 (5th Cir. 1959). As we pointed out in the Claunch case, at 1052, where the employment at a particular site is not for a stated period it can be classed as temporary only if its termination within a reasonably short period can be foreseen. See also Beatrice H. Albert,13 T.C. 129">13 T.C. 129 (1949), from which we quoted in the Claunch case. Under the criteria we have laid down for determining the distinction between "temporary" and "indefinite" employment, we conclude on the basis of the facts here present that petitioner's employment in Louisa County, Virginia was indefinite in 1973.Certainly when petitioner first went to Louisa County to work on the dam site his employment was temporary. That project was near completion and, as petitioner testified, it was clear that the dam would be completed in a reasonably short period of time. However, when petitioner took an assignment around July 1, 1972, on the main project, there was nothing to indicate that his employment would be terminated within1976 Tax Ct. Memo LEXIS 65">77 a reasonably short period. As petitioner pointed out, there were rumors that because of fear of earthquakes work on the plant might be stopped, but there was no indication when, if ever, this might occur. Therefore, there is no basis in this testimony of petitioner to conclude that his work at the Louisa County project might terminate within a reasonably short period. Petitioner testified that the project was one that would be of long duration. He also testified that no person in a position of authority ever told him the length of time he might expect to be employed on the project. The possibility that the project might be terminated because of environmental conditions was merely rumor. Petitioner's other contention is that since he was assigned on a "travel card" as an out-of-towner he would be in the first group of pipefitters to be terminated. However, as petitioner stated, there were a number of out-of-towners on the project and the project required the services of a large number of pipefitters. The fact that petitioner might be terminated sooner than some other pipefitter in no way indicated that petitioner's employment could reasonably be anticipated to be of short duration.1976 Tax Ct. Memo LEXIS 65">78 Also, as pointed out in 29 T.C. 1047">Kermit L. Claunch,supra, the fact that petitioner's employment at Louisa County, Virginia, which covered over 2 years, was interrupted by one strike of another union does not change the indefinite nature of that employment to temporary. In fact, petitioner's employment in Louisa County, Virginia continued until August 1974 when construction on the project was halted not due to the completion of the project but due to lack of funds. Petitioner himself in his testimony and in his argument at the trial never truly contended that he could foresee at any time after he began working on the main project a termination of his work there in a reasonably short period of time. Rather he took the position that since he had no assurance of how long he might be employed at the Louisa County project, he could not reasonably be expected to move his family from the home he maintained for many years in Littleton, North Carolina. He argued that because he did not know how long he would be working in Louisa County, Virginia he could not reasonably be expected to move his family to Louisa County. Petitioner's situation has a sympathetic appeal, and in1976 Tax Ct. Memo LEXIS 65">79 fact the dissenting opinion of Mr. Justice Douglas in Peurifoy v. Commissioner,358 U.S. 59">358 U.S. 59 (1958), affirming the opinion of the Court of Appeals for the Fourth Circuit (254 F.2d 483">254 F.2d 483 (1957)) which had reversed this Court (27 T.C. 149">27 T.C. 149 (1956)), pointed out the problem to which petitioner refers in the following language (at 62): These construction workers do not have a permanent locus of employment as does the merchant or factory worker. They are required to travel from job to job in order to practice their trade. It would be an intolerable burden for them to uproot their families whenever they change jobs, if those jobs happen to take them to a different locality. When they do not undertake this burden they are living "away from home" for the duration of the term of the jobs. [Footnotes omitted.] However, the majority of the Court in the Peurifoy case affirmed the holding of the Fourth Circuit that the taxpayers in that case were not entitled to a deduction for traveling expenses while away from home since their employment at the construction sites where they were working was indefinite or indeterminate rather than temporary.1976 Tax Ct. Memo LEXIS 65">80 Therefore, since we conclude that the facts here clearly show that after July 1, 1972, petitioner's employment at the Louisa County construction site was indefinite or indeterminate, we hold that petitioner was not away from home when in Louisa County, Virginia within the meaning of section 162(a)(2). Petitioner at the trial called the attention of the Court to a Memorandum Opinion of this Court, 3 which involved a crane operator working on the same Louisa County, Virginia project on which petitioner was working. In that case we concluded as a matter of fact that the taxpayer's work on the project was temporary rather than indeterminate or indefinite. In reaching the conclusion that the crane operator's employment was temporary rather than indefinite, we distinguished such cases as Floyd Garlock,34 T.C. 611">34 T.C. 611 (1960), by pointing out that the taxpayer had been informed that his work would not last for the duration of the project because it was customary for crane operators to have short assignments even on projects of long duration.We further pointed out that the year involved covered the first tax year during which the taxpayer had worked at the project. During1976 Tax Ct. Memo LEXIS 65">81 that year he had worked for one subcontractor only a little over a month when he went to work for another subcontractor at the same site. He was assigned a crane with the understanding that when that crane was no longer needed the taxpayer's work would be terminated even though the project continued. It developed later that the taxpayer's crane was shut down four or five times and he was able to move to a new crane where a vacancy had arisen. However, we concluded this fact could not reasonably have been anticipated in the year before us. Finally we stated that it could be argued that at some point the taxpayer's employment changed from temporary to indefinite, but the change did not occur during the year there involved. The factual differences in this case and those in the case petitioner relies upon make the cases distinguishable. We sustain respondent's disallowance of petitioner's claimed deductions of travel expenses while away from home during the year 1973. Because of concessions made with respect to other issues, Decision will be entered under Rule 155. Footnotes1. All section references are to the Internal Revenue Code of 1954, unless otherwise stated.↩2. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) In General.--There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including-- * * (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; * *↩3. Clifton R. Barkley,T.C. Memo. 1976-159↩, filed May 20, 1976.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625800/	WADE H. ELLIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Ellis v. CommissionerDocket No. 26136.United States Board of Tax Appeals15 B.T.A. 1075; 1929 BTA LEXIS 2724; March 26, 1929, Promulgated 1929 BTA LEXIS 2724">2724 Held, that expenses incurred by a lawyer who is a member of the American Bar Association in attending a meeting thereof are deductible from gross income as ordinary and necessary expenses incurred in a trade or business, and, further, held, that expenses incurred by such member of the American Bar Association in making a trip to Europe as one of a committee of such Association to investigate criminal procedure are not so deductible. Evert L. Bono, Esq., for the petitioner. Bruce A. Low, Esq., for the respondent. LANSDON 15 B.T.A. 1075">1075 The respondent asserts deficiencies in income taxes for the years 1922 and 1923 in the respective amounts of $142.50 and $745.37. The only issue involved is whether the Commissioner erroneously disallowed the deduction in each of the taxable years of an amount alleged to represent ordinary expenses incurred in the trade or business of the petitioner. FINDINGS OF FACT. Petitioner is an individual, resident in Washington, D.C. In the taxable years he was engaged in the practice of law as senior member of the partnership of Ellis, Harrison, Ferguson & Gary. He is a member of the American Bar Association. 1929 BTA LEXIS 2724">2725 In the year 1922 he expended $375 in attending a meeting of such Association, and was not reimbursed therefor. In the year 1922 the American Bar Association appointed the petitioner a member of its "Special Committee" to make a study of and submit a report on criminal procedure and law enforcement. In order to secure first-hand information relative to the subject matter under investigation in foreign countries, petitioner, with other members of the committee, made a trip to Europe in 1923 to study law enforcement, especially in England and France as compared with the United States. On such trip the petitioner expended the amount of $2,745.13 for which he has not been reimbursed. In his income-tax returns for 1922 and 1923 petitioner deducted from his gross income in such years the respective amounts $375of and $2,745.13 as ordinary and necessary business expenses. The Commissioner disallowed such deductions and determined the deficiencies here in controversy. OPINION. LANSDON: The petitioner's first contention is that he should be allowed to take a deduction from gross income in the year 1922 in the 15 B.T.A. 1075">1076 amount of $375 as ordinary and necessary expenses incurred1929 BTA LEXIS 2724">2726 in a trade or business. It is stipulated that this amount was spent by the petitioner in attending a meeting of the American Bar Association. Petitioner is a lawyer and is a member of such Association. In , and , we held that expenses incurred by physicians in attending medical conferences and in consultation trips are deductible as business expenses. In , we reached a similar decision in the matter of expenses incurred by a minister of the gospel in attending religious conferences. In , we reached the same conclusion in respect of the expenses incurred by a college professor in matters pertaining to his specialty. We think such decisions govern here. The expense incurred by the petitioner in 1922, as set forth above, is a proper deduction from gross income for such year. The deduction taken by the petitioner from his gross income in 1923 can not be allowed. That expense had no possible connection with the petitioner's income in such year. The purpose of the trip to Europe was not1929 BTA LEXIS 2724">2727 to serve or educate himself but to secure information for the Bar Association. The expenditure, though incurred at the request of the Association, was voluntary. It has not been shown that it was necessary and certainly it was not ordinary. On this point the evidence is not sufficient to overcome the presumption that the Commissioner's determination is correct. Cf. . Reviewed by the Board. Decision will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625802/	AUGUSTA BLISS REESE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Reese v. CommissionerDocket No. 70410.United States Board of Tax Appeals30 B.T.A. 1; 1934 BTA LEXIS 1385; March 6, 1934, Promulgated 1934 BTA LEXIS 1385">1385 Where commissions due trustees for receiving and distributing the corpus of a trust are by order of the court paid out of the principal of the fund and not out of income and the income of thb fund is paid to the beneficiary without diminution for such commissions, the beneficiary is liable to income tax upon the full amount of the income received by her. Laurence Graves, Esq., for the petitioner. B. M. Coon, Esq., for the respondent. SMITH 30 B.T.A. 1">1 OPINION. SMITH: This proceeding involves a deficiency in petitioner's income tax for the year 1930 in the amount of $17,294.47. The two issues involved are based upon the petitioner's allegations: (1) That the respondent erroneously reduced the deduction to which the petitioner is entitled for contributions to charitable organizations by $4,498.77 upon the ground that the deduction for contributions is limited to 15 percent of the ordinary net income, excluding capital net gain; and (2) That the respondent erroneously included in petitioner's gross income the amount of $96,801.32 representing income distributable to the petitioner from the estate of George Bliss. The principal facts are stipulated. 1934 BTA LEXIS 1385">1386 The petitioner was the sole beneficiary under a trust created by the will of her father, George Bliss, the income of which was distributable to her in accordance with item 14 of the will, which reads as follows: FOURTEENTH. - The SIXTH of said SHARES, designated as the share of my daughter AUGUSTA, I give, devise and bequeath to my said Executors, the survivors and survivor of them and their successors, IN TRUST, for the uses and purposes following, that is to say: To retain and hold the said share as TRUSTEES under this my will, with all the powers and authority hereinafter given to such Trustees; to invest and keep invested said share as and in the manner hereinafter provided; to collect and receive the rents, issues, income, dividends and interest of the said share; 30 B.T.A. 1">2 and after paying all taxes and assessments that may be imposed thereon, or any part thereof, and all other expenses incidental to the execution of the trusts hereby created, including the legal compensation of the trustees therein, to apply the net income of said share half-yearly, or as the same shall be received, to the use of my said daughter AUGUSTA during her natural life, and upon her death, to convey, 1934 BTA LEXIS 1385">1387 transfer, pay over and distribute the same equally in fee simple to and among her lawful issue then living in equal shares, per stirpes and not per capita; and in case my said daughter shall leave no lawful issue surviving her, then in such case, to convey, transfer, pay over and distribute the said share equally in fee simple to and among her surviving brothers and sisters, whether of the whole or half blood, but being of my blood, and the lawful issue then living of any and each deceased brother and sister of such blood, per stirpes and not per capita.During the taxable year 1930 the fiduciary distributed all of the income of the trust to the petitioner, with the exception of certain deductions not here in dispute. The total amount paid to petitioner during the year was $192,177.04, of which the respondent determined that $126,419.56 was net taxable income. By order of the Surrogates' Court dated May 26, 1930, the fiduciary paid out an aggregate of $96,801.32 representing commissions to trustees for receiving and distributing the corpus of the trust. The decree of the Surrogates' Court is as follows: Ordered, adjudged and decreed that out of the balance1934 BTA LEXIS 1385">1388 of the trust for the benefit of Augusta Bliss Reese found as above remaining in the hands of the trustees they make the following payments: From Principal - To Katherine Baldwin Bliss, Cornelius Reese Agnew, George M. Clark and John J. Carolan, as executors of the will of Walter Phelps Bliss, deceased, the sum of $27,040.76, representing commissions found to be due the estate of Walter Phelps Bliss, deceased, late executor. To George Bliss Agnew, the sum of $35,232.48, representing commissions found to be due him. To William Willis Reese, the sum of $34,528.08, representing commissions found to be due him. In her income tax return for 1930 the petitioner did not include the amount of $96,801.32 in her gross income, reporting a net income of only $12,917.91. The petitioner reported a capital net gain of $29,991.85 in her return and elected to have such capital gain taxed at 12 1/2 percent in accordance with the provisions of section 101(a) of the Revenue Act of 1928. The return showed charitable contributions aggregating $46,215.81, for which a deduction was claimed of $21,854.31, computed under section 23(n) of the Revenue Act of 1928. By an adjustment shown in1934 BTA LEXIS 1385">1389 the deficiency notice the respondent has increased the allowance for contributions to charity by the amount or $10,021.43. The first issue, as stated above, is decided in favor of the petitioner's contention upon authority of ; 30 B.T.A. 1">3 ; , reversing ; and , reversing . With respect to the second issue, the respondent has added to the income reported by the petitioner the amount of $96,801.32 representing the trustees' commissions paid by the fiduciary out of the principal of the trust fund. The question is whether the petitioner is entitled to a reduction of her taxable income by such amount. Under clause fourteenth above of the trust agreement the entire net income of the trust fund was payable to the petitioner. All of such income for the taxable year 1930 was distributed to the petitioner without diminution on account of the $96,801.32 paid out as trustees' commissions. We see no reason1934 BTA LEXIS 1385">1390 why the petitioner should not be taxed on all of the taxable income distributed to her, in the absence of any showing that such amount was erroneously or unlawfully distributed. Cf. . In that case it was held that where a trustee under a will distributed all the income of the trust, including amounts representing depreciation of the corpus, and where later the Probate Court held that such distributions were erroneous as to the amount representing depreciation and ordered such amounts repaid by the beneficiaries, the amounts in question were not taxable income to the beneficiaries. In the instant case the trustees' commissions were paid out of the principal of the trust fund by decree of the Surrogates' Court dated May 26, 1930. It does not appear that the validity of the decree of the court directing that the payment of the commissions be made from principal has ever been questioned. Until reversed or overruled it is conclusive in matters regarding the distribution of the trust property. 1934 BTA LEXIS 1385">1391 The instant case is also distinguished from , where the Supreme Court held that the beneficiaries under a trust, the income of which, after deduction of taxes and expenses of administration, was payable to them, were entitled to deduct depletion from the income received in the years 1922 to 1926, inclusive. The reasoning of the Court in that case was that the deductions for depletion properly should have been made from the trust income. In the instant case the trustees' commissions were a charge against the principal of the trust fund and did not affect the amount of income distributable to the beneficiary. We hold that the petitioner is taxable on the amount of income actually distributed to her in the taxable year. Reviewed by the Board. Judgment will be entered under Rule 50.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625803/	Buffalo Shook Company, Inc. v. Commissioner.Buffalo Shook Co. v. CommissionerDocket No. 26257.United States Tax Court1951 Tax Ct. Memo LEXIS 119; 10 T.C.M. 820; T.C.M. (RIA) 51262; August 29, 19511951 Tax Ct. Memo LEXIS 119">119 1. During the years 1943 and 1944, petitioner's board of directors authorized a salary of $12,000 a year for petitioner's president. In 1943 the salary stabilization authorities allowed only $11,000. In each of the years 1943 and 1944, petitioner paid its president only the $11,000 allowed. In 1945 petitioner's board of directors authorized the payment of $2,000 to petitioner's president as additional compensation for services rendered in 1943 and 1944. The payment was made in 1945 after salary stabilization restrictions were relaxed. Held, the $2,000 is deductible as an ordinary and necessary business expense in 1945. Lucas v. Ox Fibre Brush Co., 281 U.S. 115">281 U.S. 115. 2. In 1945 petitioner filed its capital stock tax return for the period July 1, 1944 to June 30, 1945 and paid the tax due. Held, the capital stock tax liability accrued in the year the return was filed. Tennessee Consolidated Coal Co., 15 T.C. 424">15 T.C. 424, followed. 1951 Tax Ct. Memo LEXIS 119">120 William T. Hodge, Esq., c/o Leach Calkins & Scott, Mutual Bldg., Richmond, Va., for the petitioner. Sanford M. Stoddard, Esq., for the respondent. ARUNDELLMemorandum Findings of Fact and Opinion For the taxable year 1945, respondent has determined a deficiency in petitioner's excess profits tax liability in the amount of $10,436.23. Petitioner contests that portion of the deficiency arising from respondent's disallowance of $2,000 of the $14,000 deducted as compensation for officers, and his disallowance of the sum of $500 deducted in 1945 as capital stock tax. Findings of Fact Petitioner is a manufacturing corporation with principal office and place of business at Farmville, Virginia. At all times pertinent to this controversy, petitioner kept its books and records and reported its income1951 Tax Ct. Memo LEXIS 119">121 on the accrual basis. Its income and declared value excess profits tax return for the taxable year ended December 31, 1945, was filed with the Collector of Internal Revenue for the District of Virginia, at Richmond, Virginia. During the years 1943 through 1945, petitioner's officers and directors were as follows: F. H. Hanbury, Sr., hereinafter refered to as Hanbury, was president, treasurer, and a director. His son, F. H. Hanbury, Jr., was vice-president and a director. Dr. M. K. Humphries, Jr., was secretary and a director. During the years 1943 to 1945, the corporation had 250 shares of stock out-standing. Hanbury owned 124 shares; his son, F. H. Hanbury, Jr., owned one share; and the remaining shares were held by Dr. Humphries as representative of the estate of Hanbury's former partner. From 1943 to November, 1945, Hanbury was the only executive or director active in the management of the business. His son was absent due to military service and did not return until November, 1945. Prior to 1943, the son received a salary of $4,000 a year. No salary was paid to him during his absence. During this period, Hanbury devoted his full time to the management of the business, working1951 Tax Ct. Memo LEXIS 119">122 15 to 18 hours a day, six days a week, without vacations. He had no other business interests occupying his time. He had no managerial assistants and no clerical employees other than two part-time bookkeepers. Hanbury had served the petitioner in the capacity of president and treasurer for some years prior to the taxable year. In 1940, 1941, and 1942 his salary was $10,000 and in prior years it varied from $3,700 in 1935 to $7,200 in 1939. On March 13, 1943, petitioner's board of directors authorized a salary of $12,000 for Hanbury for the year 1943. In an application addressed to the Salary Stabilization Unit of the Bureau of Internal Revenue. dated July 1, 1943, Hanbury, on behalf of petitioner, sought approval of the proposed increase in his salary from $10,000 to $12,000 for the year 1943. The Salary Stabilization Unit approved a salary of only $11,000 for 1943. Petitioner was informed of this ruling by a letter which referred to the petitioner's right to protest and request a review. No protest was made. Petitioner paid Hanbury a salary of $11,000 for 1943. On March 4, 1944, petitioner's board of directors authorized a salary of $12,000 for Hanbury for 1944. This salary1951 Tax Ct. Memo LEXIS 119">123 increase was not submitted to the salary stabilization authorities for approval because of Hanbury's belief that such a request would have been useless. The petitioner paid Hanbury a salary of $11,000 for 1944. No salary in excess of the $11,000 paid to its president in each of the years 1943 and 1944 was accrued or otherwise entered on petitioner's books in those years. On March 24, 1945, petitioner's board of directors authorized a salary of $12,000 for Hanbury for the year 1945 and agreed to pay him an additional $1,000 for each of the years 1943 and 1944 as compensation for services rendered in those years. This increase was in anticipation and conditioned on the relaxing of salary stabilization restrictions in that year so as to permit such payment. No mention of the additional $2,000 was made in the resolution authorizing the salary of $12,000 for 1945. The directors thought it was unnecessary to do so because of their prior authorization of $1,000 in excess of the amounts paid in the years 1943 and 1944. The total sum of $14,000 was paid to Hanbury in 1945. The $2,000 additional compensation for the years 1943 and 1944 was paid after the salary stabilization restrictions1951 Tax Ct. Memo LEXIS 119">124 were relaxed. The board of directors intended the increases in salary authorized by them in 1943 and 1944 to be contingent on such increases being lawful under the salary stabilization laws. They did not intend to obligate the corporation to pay Hanbury at some future date any amount in excess of the $11,000 actually paid to him in those years. Petitioner's operations during 1943 through 1945 consisted of cutting standing timber, hauling the timber to its mills located in Farmville and Amelia County, Virginia, and processing the timber into box shooks and tobacco hogsheads. During this period petitioner had approximately 80 employees. The petitioner's gross sales, as shown on its Federal income tax returns for 1943, 1944, and 1945, total $190,739.70, $215,342.72 and $187,011.65, respectively. During these years, the salary paid to Hanbury was the only executive or managerial salary paid by petitioner except for $450 paid to F. H. Hanbury, Jr., at the end of 1945 after he returned from military service. For the years 1943 through 1945, office expenses were $982.23, $670.51 and $646.15, respectively. In its corporation income and declared value excess profits tax return for 1945, 1951 Tax Ct. Memo LEXIS 119">125 petitioner deducted the sum of $14,000 for compensation paid to Hanbury. The sum of $12,000 paid to Hanbury as salary for the year 1945 was reasonable compensation for services rendered in that year and the additional $2,000 paid to Hanbury in 1945 represented reasonable additional compensation for services rendered in the years 1943 and 1944. In computing and reporting its net taxable income for its taxable year January 1 to December 31, 1945, for Federal income and excess profits tax purposes, petitioner deducted the sum of $500 as taxes paid, reprepresenting its Federal capital stock tax liability for the capital stock tax period July 1, 1944 to June 30, 1945. Payment of the $500 capital stock tax so deducted was made in petitioner's taxable year January 1 to December 31, 1945. In computing and reporting its net taxable income for its taxable year January 1 to December 31, 1944 for Federal income and excess profits tax purposes, petitioner deducted the sum of $312.50 as taxes paid, representing its Federal capital stock tax liability for the capital stock tax period July 1, 1943 to June 30, 1944. Payment of the $312.50 capital stock tax so deducted was made in petitioner's1951 Tax Ct. Memo LEXIS 119">126 taxable year January 1 to December 31, 1944. In determining petitioner's Federal income tax liability for its taxable years 1941 to 1944, inclusive, respondent made no adjustment to the return on account of the deduction claimed for Federal capital stock tax paid. Opinion ARUNDELL, Judge: The first question before us is whether the petitioner may deduct in 1945 the sum paid in that year to Hanbury as additional compensation for services rendered in 1943 and 1944. The petitioner relies on Lucas v. Ox Fibre Brush Co., 281 U.S. 115">281 U.S. 115, in which the Supreme Court held that additional compensation for services rendered in prior years is deductible in the year paid if there was no "prior agreement or legal obligation to pay the additional compensation". Respondent contends that the case of Lucas v. Ox Fibre Brush Co. is not applicable because in the instant case there was a prior agreement to pay the additional sum. We think it is clear that the agreement referred to in the quoted remark is one that would justify an accrual of the additional compensation prior to the year in which paid, that is, one which is legally binding on the parties concerned. That was not the nature1951 Tax Ct. Memo LEXIS 119">127 of the agreement to which respondent refers. The board of directors did not and could not enter into a binding agreement to pay Hanbury the additional compensation. Such an increase was disallowed by the ruling of the salary stabilization authorities. Nor could such an agreement have been enforced by Hanbury. The board of directors merely authorized an increase in 1943 and 1944 on the contingency that such increase would be permissible under the then existing salary stabilization laws. Such an authorization or agreement does not render inapplicable the rule of 281 U.S. 115">Lucas v. Ox Fibre Brush Co., supra.See Atlumor Mfg. Co., 12 T.C. 949">12 T.C. 949. We, therefore, hold that the sum of $2,000 paid to Hanbury as additional compensation for services rendered in 1943 and 1944 is deductible in the year paid. 281 U.S. 115">Lucas v. Ox Fibre Brush Co., supra. Nor do we find any merit in respondent's suggestion that perhaps the entire salary authorized by the board of directors in 1943 and 1944 was accruable and deductible in those respective years rather than in 1945, since petitioner has not shown that the salary stabilization authorities would not have approved the entire authorized1951 Tax Ct. Memo LEXIS 119">128 salary had petitioner protested the ruling and appealed. We need not speculate as to what may have occurred if petitioner had pursued such remedies. The fact remains that petitioner accepted the ruling and was legally prohibited from paying more than $11,000 of the $12,000 authorized. 56 Stat. 765-768, 50 U.S.C.A. App., sections 961-971. Under such circumstances, the disallowed sum did not accrue as an expense in 1943 and 1944. Smith-Lustig Paper Box Mfg. Co., 1 T.C. 503">1 T.C. 503. Finally, the fact that the 1945 agreement of the board of directors authorizing the additional compensation was not put into a formal corporate resolution does not in itself furnish sufficient basis for the denial of the deduction. It is clear from the facts as found that the directors agreed that Hanbury should receive the additional compensation in 1945 and informally authorized the petitioner to pay it. Such an informal authorization was sufficient authority for the payment. Cf. Brampton Woolen Co. v. Commissioner, 45 Fed. (2d) 327, reversing 18 B.T.A. 1075">18 B.T.A. 1075; Reub Isaacs & Co., Inc., 1 B.T.A. 45">1 B.T.A. 45. Benz Brothers Co., 20 B.T.A. 1214">20 B.T.A. 1214.1951 Tax Ct. Memo LEXIS 119">129 The next question to be decided is whether the petitioner may deduct the sum of $500 paid in 1945 for capital stock tax incurred for the period July 1, 1944 to June 30, 1945. Respondent opposes this deduction on the ground that the liability accrued in 1944. He argues that the liability for Federal capital stock tax accrues on the first day of the capital stock tax period, and relies on William C. Atwater & Co., 10 T.C. 218">10 T.C. 218. This argument was made and answered adversely to respondent in our recent decision in TennesseeConsolidated Coal Co., 15 T.C. 424">15 T.C. 424, wherein we explained that because of the amendment of the law on capital stock tax on October 21, 1942, by section 301 of the Revenue Act of 1942, 1 the capital stock tax for years subsequent to the effective date of the amendment does not accrue until the year in which a capital stock tax return is filed. The tax is accrued at this later date because under this amendment, at the time the taxpayer files its capital stock tax return, it has the choice of declaring its capital stock at zero and paying no tax, or declaring any other value it chooses. The statutory expression that declared value shall be1951 Tax Ct. Memo LEXIS 119">130 the value declared by the corporation is emphasized by the Treasury Regulations pertinent to this Code provision.2 Hence, the amount of the capital stock tax remains contingent until the filing of the capital stock tax return. Since the return for the period covering July 1, 1944 to June 30, 1945 was filed in 1945, the tax paid pursuant thereto is deductible in that year. Tennessee15 T.C. 424">Consolidated Coal Co., supra.1951 Tax Ct. Memo LEXIS 119">131 Decision will be entered under Rule 50. Footnotes1. SEC. 301. CAPITAL STOCK TAX. (a) Technical Amendment. - Section 1200 (a) and (b) (relating to rate of capital stock tax) are amended by striking out the word "adjusted" wherever occurring therein. (b) Annual Declaration of Value. - Section 1202 (relating to declaration of value) is amended to read as follows: "SEC. 1202. DECLARED VALUE. (a) Declaration of Value. - The declared value shall be the value as declared by the corporation in its return for the year (which declaration of value cannot be amended). The value declared by the corporation in its return shall be as of the close of its last income-tax taxable year ending with or prior to the close of the capital stock tax taxable year * . * (d) Prior Returns Effective. - If a return for the year ended June 30, 1942, is filed under Chapter 6 of the Internal Revenue Code, without regard to the amendment thereof as made by this Act, the adjusted declared value reported by the corporation on such return (whether or not correct) shall constitute the declared value for the purposes of such Chapter 6, as amended by this Act, unless a different value is declared on a subsequent return for such year received within the prescribed filing period. (e) Effective Date. - This section shall be effective only with respect to the year ended June 30, 1942, and succeeding years." ↩2. SEC. 137.33. DECLARED VALUE. - In its return for each year, a corporation must declare a definite and unqualified value for its capital stock. * * A corporation may exercise unrestricted judgment and discretion in determining the value to be declared for its capital stock on a return for any year. In making such declaration, the corporation is not bound by any previous declaration of value. The value shall be declared as of the close of the last income-tax taxable year ending with or prior to the close of the capital stock tax taxable year, * * *.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625805/	Estate of Harry W. Hammond, Deceased, Citizens National Trust and Savings Bank of Riverside, Trustee of the Harry W. Hammond Trust v. Commissioner.Estate of Hammond v. CommissionerDocket No. 45705.United States Tax CourtT.C. Memo 1954-162; 1954 Tax Ct. Memo LEXIS 83; 13 T.C.M. 903; T.C.M. (RIA) 54271; September 29, 1954, Filed Walter L. Nossaman, Esq., 900 Wilshire Boulevard, Los Angeles, Calif., Joseph D. Brady Esq., and James L. Wood, Esq., for the petitioner. Donald P. Chehock, Esq., for the respondent. WITHEYMemorandum Findings of Fact and Opinion WITHEY, Judge: The respondent determined a deficiency of $136,979.94 in the estate tax of the estate of Harry W. Hammond, deceased. Issues presented by the pleadings are the correctness of the respondent's action (1) in failing to comply with the mandate of section 824, Internal Revenue Code of 1939, when he determined in 1950 that the fair market value of 662 1/4 shares of stock of Riverside Daily Press, held at the time of decedent's death in a trust of which he was grantor, was $302.64 per share and collected1954 Tax Ct. Memo LEXIS 83">84 a deficiency of $13,635.55 based on that determination, (2) in determining that the optional valuation date as to 39 of the aforementioned 662 1/4 shares of stock was July 3, 1949, and not November 17, 1948, and in determining that the value of the 39 shares under the optional valuation method was $900 per share instead of $200 per share, the price at which the 39 shares were sold on November 17, 1948, (3) in determining that the fair market value of the 662 1/4 shares of stock of Riverside Daily Press was $900 per share, and (4) in failing to allow a deduction for certain expenses which have been and will be incurred in contesting the deficiency involved herein. Petitioner states in its opening brief that it is not asking this Court to decide that respondent's 1950 finding of a value of $302.64 per share was legally final and binding on it. In view of this statement we need not decide the first issue raised by the pleadings. Findings of Fact Some of the facts have been stipulated and are found accordingly. Harry W. Hammond, hereinafter sometimes referred to as the decedent, died on July 3, 1948, a resident of Riverside, California. The decedent died intestate. His entire estate1954 Tax Ct. Memo LEXIS 83">85 except for a jointly-held bank account was left in trust. The trustee, Citizens National Trust and Savings Bank of Riverside, filed the Federal estate tax return with the collector of internal revenue at Los Angeles, California. The trustee elected to have the gross estate of the decedent valued in accordance with values as of a date or dates subsequent to the decedent's death, as provided in section 811(j), 1939 Code. On October 15, 1930, Harry W. Hammond and his then wife, Maude T. Hammond, transferred in trust to the Citizens National Trust and Savings Bank of Riverside certain real and personal property, including 642 shares of stock of the Riverside Daily Press, sometimes hereinafter referred to as Press. The trust instrument provided, inter alia, as follows: "The entire net income received from the trust estate and available for distribution shall be paid in quarterly or other convenient installments to the Trustor, HARRY W. HAMMOND, during the period of his natural life. * * "The Trustors, during the life of HARRY W. HAMMOND, have reserved the absolute power of appointment and disposition of the principal and income of the trust estate after the decease of the1954 Tax Ct. Memo LEXIS 83">86 said HARRY W. HAMMOND, to be exercised not by Will, but only by the last unrevoked written instrument exercising such power and on file with the Trustee at his death. Such power may be so exercised from time to time, and each exercise thereof may be similarly revoked. * * "In the exercise of the powers mentioned in the preceding paragraph VII, the Trustee shall act at all times jointly with the written approval of HOWARD HAYS, during his lifetime, unless the said HOWARD HAYS (HWH) shall give the Trustee written notice of his refusal to act in such advisory capacity. In the event of the refusal or inability of the said HOWARD HAYS to act in such advisory capacity, the Trustee shall act, under the same conditions, upon the written approval of WILLIAM A. JOHNSON, now of Alhambra, California. Should the Trustee at any time submit to such co-advisors, or either of them, a request for approval of the Trustee's exercise of powers, and the said co-advisors or either of them shall refuse to either approve or disapprove thereof within thirty (30) days of submission to them of the said request, the Trustee shall thereupon act upon the proposed action submitted, in its own discretion. 1954 Tax Ct. Memo LEXIS 83">87 "The whole title, legal and equitable, in fee, to the trust estate is and shall be vested in the Trustee as such title in the Trustee is necessary for its due execution of this trust. * * * "The Trustor, HARRY W. HAMMOND, has reserved until his death or until he shall surrender it to the Trustee, or until legally declared incompetent, the exclusive possession and use, without rental or other accounting therefor to the Trustee, of the real and tangible personal property of the trust estate, and the exclusive management and control of all other property of the trust estate. * * "The Trustor, HARRY W. HAMMOND, at any time, with the written consent of the Trustee, but not otherwise, may add to this trust other property, which, upon acceptance thereof by the Trustee, shall become a part of the trust estate to be held in trust under all the terms hereof. * "The Trustor, HARRY W. HAMMOND, during his lifetime, may, without the consent of or notice to any beneficiary, by written instrument filed with the Trustee and upon paying any sums due the Trustee and releasing it from and assuming all obligations affecting the Trustee and the trust estate or any part thereof1954 Tax Ct. Memo LEXIS 83">88 withdrawn, and indemnifying the Trustee to its satisfaction against any liabilities incurred by it in administering this trust, revoke it in whole or in part and/or may withdraw any or all of the trust estate, and the Trustee shall transfer and deliver the property affected thereby to the Trustor, HARRY W. HAMMOND; and the Trustors or HARRY W. HAMMOND may likewise, but only with the written consent of the Trustee, amend this trust without limitation, amend or cancel any amendments, and limit or divest the rights of any or all beneficiaries. Except as herein provided, this trust shall not be terminated by the beneficiaries hereunder nor by any court nor otherwise, prior to the expiration of its full term as herein fixed." On October 6, 1933, an amendment was made to the trust which substituted Myrtle G. Hammond as the trustor's wife in place of his deceased wife, Maude T. Hammond. Among other provisions, the amendment contained the following: "The following is a list of the assets comprising the corpus of said Declaration of Trust #40, as of the date of my marriage to MYRTLE G. HAMMOND, and also as of September 30th, 1933. I hereby ratify and confirm my former instructions to you1954 Tax Ct. Memo LEXIS 83">89 not to register or change the titles thereto to the Trustee until my death or until instructed to do so by me. These instructions, however, shall not in any way affect the validity of the title in the Trustee, as it is the intent of both Trustor and Trustee that title to the various assets of the trust estate shall be vested in the Trustee." Thereafter, in this amendment of 1933, follows the list of property, including 551 shares of the stock of Press. At the end of the amendment appears the written acceptance of the trustee to the provisions of the amendment. The acceptance is dated November 6, 1933. Arthur A. Culver married Hammond's daughter, Barbara Hammond, in 1935. Thereafter, on June 27, 1936, a second amendment was made to the trust, substituting Culver as the advisor to the trustee, in place of Howard Hays. Here again at the end, pursuant to the requirements of the trust, the trustee executed in writing its acceptance of the terms of this second amendment. The corpus of the trust constitutes taxable property of decedent's estate. The gross estate as reported in the Federal estate tax return included 662 1/4 shares of stock of Press. Press is a California corporation1954 Tax Ct. Memo LEXIS 83">90 incorporated December 13, 1922. Its principal place of business is at Riverside, California, about 53 miles east of Los Angeles. The operation of Press consisted primarily of the publication and circulation in Riverside County of a daily morning and evening newspaper with a single morning edition on Sunday. At the time of decedent's death Press published the only daily newspaper published in the city of Riverside. Daily and Sunday newspapers were brought into Riverside from Los Angeles and there were weekly newspapers in the immediate area. Press also, in leased premises, operated a commercial printing and photoengraving division or department (not separately incorporated) known as Rubidoux Printing Company. The main part of the Rubidoux division was devoted to photoengraving work incident to the publication of the Press newspapers. The capitalization of Press consisted of 1,500 shares of capital stock of $100 par value per share, authorized, issued and outstanding. Press had no preferred stock and no funded debt. Prior to 1932, Press published the newspaper known as the "Press" and the Riverside Enterprise Corporation published another paper known as the "Enterprise." The Enterprise1954 Tax Ct. Memo LEXIS 83">91 corporation was owned 50 per cent by the Sun Company of San Bernardino and 50 per cent by Press. The publication of the "Enterprise" was not a profitable venture. After some negotiations, a merger of the two corporations took place, with the Enterprise corporation being dissolved. After the merger, in 1932, the 1,500 shares of stock of Press were owned as follows: Harry Hammond550.833Dr. E. P. Clarke308.466Arthur F. Clarke252.06The Sun Company of San Bernardino,California, a corporation178A. A. Piddington155.999Howard H. Hays35.253Louis H. Clarke13.22Maude T. Hammond6.169At the meeting at which the merger was agreed upon, R. C. Harbison, Harry S. Webster and James A. Guthrie represented the Sun Company. Inquiry was made by Hammond as to what the Sun Company intended to do with its 178 shares. All three officers of the Sun Company agreed they desired to keep them. It was then orally agreed by Harbison, Webster and Guthrie that if a sale were to be made of the 178 shares, they would first offer them to Press stockholders. If the Press stockholders were unwilling to pay the price Harbison, Webster or Guthrie asked for the shares, then1954 Tax Ct. Memo LEXIS 83">92 the latter were free to sell the 178 shares to others. Hammond, at or about the same time, also agreed to assist Hays in acquiring the stock of other stockholders so that the Hammond and Hays interests would be the same. The 178 shares were distributed by the Sun Company to its stockholders about 1934 or 1935, with Harbison receiving 89 shares and Guthrie and Webster 44 1/2 shares each. In 1937, Ida M. Harbison, the wife of Harbison, acquired under his will the 89 shares he had owned. The will contained no provision restricting her in the use or sale of the shares. Prior to 1935, Dr. E. P. Clarke was the editor of the newspaper, A. A. Piddington was city editor, and Hammond was the business manager. Dr. Clarke was the president of the company and Hammond was the vice-president. In 1935, Dr. Clarke died and Hammond succeeded him as president of the company, with Howard H. Hays becoming vice-president. From the early 1930's to July 3, 1948, Hammond, Hays and Guthrie were directors of Press. Hammond was born in 1867 and was 81 when he died. He had been one of the owners of Press since 1899. He was on the Riverside Board of Public Utilities and had been a bank director, president of1954 Tax Ct. Memo LEXIS 83">93 the Rotary Club and president of the Chamber of Commerce. He was conservative in his financial policy and maintained that Press never borrow money for its operations. All of the company's capital, except that originally paid in for stock, arose from its earnings. In 1937 Hammond suffered a serious heart attack and he and Hays decided it was time for the company to employ a younger man waho wouldwho would gradually take over management of the company's affairs. Arthur A. Culver, son-in-law of Hammond, was employed in April 1937 to assume the contemplated role. Prior to the time Culver joined Press he had been employed in a security-brokerage firm in Riverside at approximately $4,000 per year. He was employed by Press at $75 per week, or approximately the same salary he had been receiving. At the time Culver was employed he asked Hammond if he could look forward to owning some stock of Press, and Hammond told him he would sell him some stock for $200 per share. Culver occupied the dual capacity of advertising manager and assistant to Hammond. His duties were heavy from the start, with all of his available time being used to study closely all phases of the business. A number of changes1954 Tax Ct. Memo LEXIS 83">94 were made in the operation of the company by Culver. Included in the changes were the raising of the circulation rate; the changing from an agency system of selling newspapers to an office control employment system; the substituting of mail service for carrier service in a few areas; the increasing, at various times, of the advertising and subscription rates; and the dropping of the International News Service and Associated Press and the retaining of the United Press news service only. As planned, Culver graudually took over substantially all of Hammond's duties until he reached the point where, as business manager, he assumed supervision of all departments of the organization. For a number of years prior to Hammond's death, Culver was the active head of the paper, consulting with Hammond and Hays only on major purchases or policy matters. In 1949 Culver was elected president of the Chamber of Commerce of Riverside. Howard H. Hays, Jr., became assistant editor of Press in 1946 and editor in the fall of 1949. He was a graduate of Stanford University, of Harvard Law School, and prior to coming to Press had served 3 1/2 years with the Federal Bureau of Investigation, and approximately1954 Tax Ct. Memo LEXIS 83">95 a year as a reporter for the San Bernardino Sun. Prior to Hammond's death, Howard H. Hays, Jr., was delegated virtually complete control of the editorial department of the newspaper. The members of the board of directors of Press were as follows on the indicated dates: On July 3, 1948On July 3, 1949Howard H. HaysHoward H. HaysJames A. GuthrieJames A. GuthrieArthur A. CulverArthur A. CulverHarry W. HammondRichard B. HampsonHoward H. Hays, Jr.Howard H. Hays, Jr.Arthur A. Culver and Howard H. Hays, Jr., became directors in 1940 and 1946, respectively. Richard B. Hampson, president of Citizens National Trust and Savings Bank of Riverside, was elected a director on November 23, 1948, to fill the vacancy created by the death of Harry W. Hammond. The officers of Press were as follows on the indicated dates: On July 3, 1948 Harry W. Hammond, President and Treasurer, Howard H. Hays, Vice-President, Arthur A. Culver, Secretary On July 3, 1949 Howard H. Hays, President and Treasurer, Arthur A. Culver, Vice-President, Howard H. Hays, Jr., Secretary In 1942 Harry S. Webster notified Hays and Hammond that he wished to sell his 44 1/2 shares1954 Tax Ct. Memo LEXIS 83">96 of Press stock. Hammond, Hays and Culver conferred on the matter and decided $200 per share was a fair price for the stock. Negotiations were then had between Culver and Webster regarding a $200 price per share. On October 6, 1942, a purchase was consummated, with Webster selling his 44 1/2 shares to Hammond, Hays and Hays' wife $200for per share. On or about June 3, 1943, Hammond executed, first in longhand, and then by a typed instrument, the following: "AMENDMENT "CITIZENS NATIONAL TRUST AND SAVINGS BANK OF RIVERSIDE, TRUSTEE FOR HARRY W. HAMMOND, Riverside, California"Gentlemen: "At any time after you assume management of my Trust Estate, and provided you hold therein more than fifty (50) shares of Common Stock of the RIVERSIDE DAILY PRESS, I hereby authorize you to sell to ARTHUR CULVER fifty (50) shares thereof at a price of TWO HUNDRED ($200.00) DOLLARS per share. "Such sale to him shall be in such amounts and at such terms as he may desire. "Dated at Riverside, California, this 3rd day of June, 1943. "Respectfully, "/s/ Harry W. Hammond Trustor" The above instrument does not bear the written acceptance of the trustee. On June 3, 1943, or shortly thereafter, 1954 Tax Ct. Memo LEXIS 83">97 Hammond, out of shares he held personally, sold Culver 4 shares for $800, the 4 shares to be considered part of the 50 shares referred to in the above mentioned instrument of June 3, 1943. Later, on or about March 12, 1946, Hammond, out of shares he then held personally, sold Culver an additional 7 shares for $1,400. Subsequent to Hammond's death on July 3, 1948, and on November 17, 1948, the trustee transferred 38 shares to Arthur A. Culver and 1 share to Richard B. Hampson, Culver paying $7,800 for the 39 shares. The stockholders of Press were as follows on the indicated dates: Number of sharesJuly 3,July 3,Per-Name of Stockholder19481949centageHoward H. Hays family: Howard H. Hays313 1/4313 1/4Margaret M. Hays (wife of Howard H. Hays)307307Howard H. Hays, Jr. (son of Howard H. and2020Margaret)Daniel M. Hays (son of Howard H. and Margaret)2020William H. Hays (son of Howard H. and Margaret)2020Total680 1/4680 1/445.28%Harry W. Hammond family: Harry W. Hammond or his trust662 1/4623 1/4Myrtle G. Hammond (wife of Harry W. Hammond)44Barbara J. Culver (daughter of Harry W.33Hammond)Arthur A. Culver (husband of Barbara)1149Richard B. Hampson (owned beneficially by1Culver)Total680 1/4680 1/445.28%Other: James A. Guthrie (Editor and Publisher of theSan Bernardino,California, Sun-Telegram)44 1/244 1/2Ida M. Harbison (widow of former officer of theSan BernardinoSun Company)8989Citizens National Trust & Savings Bank ofRiverside, Trusteeunder Will of A. A. Piddington, former officerof RiversideDaily Press66Total139 1/2139 1/29.44%Total shares outstanding1,5001,500100.00%1954 Tax Ct. Memo LEXIS 83">98 Both before and after the death of Harry Hammond there was an understanding between the members of the Hays family and the members of the Hammond family that they would maintain equal interests in Press, and that if additional shares of the corporation became available they would be purchased in equal amounts so that equality of interests would remain. The agreement was one of long standing and was first entered into between Hays, Sr., and Hammond. After the death of Hammond, Hays, Sr., regarded Culver as the spokesman for the Hammon family. Hays, Sr., and Culver have had very friendly business relations. The following schedule shows the average net paid daily circulation of each publication of Press by years: AVERAGE NET PAID DAILY CIRCULATIONMorningSunday12 monthsCombinedEveningEnter-Enter-YearendingDailyDaily Pressprise 1prise1926Mar. 316,3456,3451927June 306,8516,8511928June 307,1627,1621929June 307,0847,0841930June 307,1827,1821931Sept. 307,2137,2131932Sept. 306,6356,6351933Sept. 306,8563,138(6 mos.Mar. 31)1934Sept. 3010,1056,9933,1123,1611935Sept. 3010,3777,1643,2133,2621936Sept. 3010,6637,1573,5063,5541937Sept. 3010,9837,0993,8843,9231938Sept. 3011,6897,3944,2954,3321939Sept. 3012,3437,6394,7044,7381940Sept. 3012,0577,5204,5374,5621941Sept. 3012,5657,7684,7974,8391942Sept. 3013,2618,2165,0455,1121943Sept. 3014,9569,6475,3095,3821944Sept. 3016,66011,1385,5225,5611945Sept. 3017,97711,7856,1926,1591946Sept. 3018,89112,3396,5526,4501947Sept. 3019,92013,2866,6346,5361948Sept. 3020,67213,8046,8686,8782 quarters ending21,24114,0187,2237,387June 30, 19491954 Tax Ct. Memo LEXIS 83">99 The following schedule shows the population of the city of Riverside, the net paid week-day circulation, and advertising linages: PopulationNet paidof city ofweek-dayAdvertisingYearRiversidecirculationlinages192626,7506,345192727,6506,851192828,7007,16219297,084193030,6967,182193131,7497,213611,064193232,5086,635488,489193332,9829,994429,546193432,52610,105457,000193533,15610,377497,267193634,14610,663569,736193735,17910,983559,836193836,16611,689503,679193937,49112,343506,625194038,22712,057530,782194137,67812,565550,469194241,58113,261515,992194346,79114,956614,064194459,16916,660746,292194551,83017,977930,428194648,22818,891921,818194750,32419,9201,222,500194850,70020,6721,352,1496/30/4921,301668,889The following schedule shows the total operating income, net profit per books before taxes, Federal income and excess profits taxes, net profit after taxes, net profit per share, and dividends paid per share1954 Tax Ct. Memo LEXIS 83">100 by Press by years: Net profitNet profitperperbooksFederalsharebefore(1,500Federalincome andNetshares ofDividendsTotalincome andexcessprofitcapitalpaidstockoperatingexcessprofitsafteroutstandingperprofitsYearincometaxestaxestaxesat allsharetimes)1926$ 53,024.17$ 6,379.58$ 46,644.59$ 31.10$ 20.66192749,001.575,821.1243,180.4528.7922.00192860,388.146,487.7353,900.4135.9333.33192964,931.216,436.2158,495.0039.0033.33193065,113.047,074.6658,038.3838.6937.33193149,642.455,333.2444,309.2129.5416.00193230,401.413,035.7627,365.6518.248.33193321,600.403,095.8818,504.5212.348.00193436,757.495,037.3031,720.1921.1525.00193549,111.727,003.8042,107.9228.0725.00193664,188.7212,028.9452,159.7834.7720.00193739,570.806,422.1033,148.7022.1018.00193831,590.675,284.6726,306.0017.5410.001939$ 252,057.0030,139.905,990.0224,149.8816.1010.001940269,177.0040,993.819,634.2431,359.5720.9116.001941281,805.0042,856.4813,706.3029,150.1819.438.001942294,332.0049,779.6220,730.3229,049.3019.3714.001943372,065.0079,006.6347,974.0831,032.5520.6916.001944467,874.00157,381.8097,058.9260,322.8840.2226.001945535,459.00126,959.2384,307.3042,651.9328.4314.001946648,016.00200,488.9276,457.93124,030.9982.6916.001947887,417.00280,916.68106,810.73174,105.95116.0716.0019481,021,134.00264,647.25100,107.27164,539.98109.6916.006 mos.ended6-30-49517,411.00135,948.3950,685.4585,262.9456.848.001954 Tax Ct. Memo LEXIS 83">101 The following are the condensed comparative balance sheets of Press at December 31, 1945, 1946, 1947, 1948 and June 30, 1949: 194519461947ASSETS LESS LIABILITIES -Cash$ 57,340.00$124,109.00$169,670.00U.S. Government securities, at costless premiums amortized120,255.00112,000.00177,000.00Other marketable securities, at cost60,758.0061,994.0068,049.00Trade accounts receivable52,735.0084,677.00104,389.00Inventories13,152.0016,301.0020,472.00Prepaid expenses1,553.001,138.002,960.00Total current assets$305,793.00$400,219.00$542,540.00Trade accounts payable$ 7,214.00$ 10,834.00$ 11,716.00Federal income and excess profitstax liability as finally determined87,216.0088,264.00106,811.00Accrued liabilities8,635.0011,992.0013,222.00Total current liabilities$103,065.00$111,090.00$131,749.00Working capital$202,728.00$289,129.00$410,791.00Buildings, at cost or other federalincome tax basis$ 48,101.00$ 48,251.00$ 49,805.00Equipment, at cost or other federalincome tax basis53,449.0057,559.0093,009.00Total depreciable assets$101,550.00$105,810.00$142,814.00Less: Accumulated depreciation47,451.0045,012.0056,688.00Net depreciable assets$ 54,099.00$ 60,798.00$ 86,126.00Land, at cost or other federal in-come tax basis23,333.0023,333.0023,333.00Total fixed assets - net$ 77,432.00$ 84,131.00$109,459.00Other assets - securities held fortrade purposes, at cost$ 3,175.00$ 3,175.00$ 9,025.00Trust deeds and loans receivable -employees and shareholders22,847.0028,875.0028,088.00Miscellaneous assets2,041.002,944.00997.00Total other assets$ 28,063.00$ 34,994.00$ 38,110.00Total net assets$308,223.00$408,254.00$558,360.00CAPITAL STOCK AND SURPLUS -Surplus - beginning of period$136,571.00$158,223.00$163,089.00Net profit for period42,652.00124,031.00174,106.00Total$179,223.00$282,254.00$337,195.00Dividends paid( 21,000.00)( 24,000.00)( 24,000.00)Transfer to reserve for building( 95,165.00)Surplus - end of period$158,223.00$163,089.00$313,195.00Reserve for building95,165.0095,165.00Capital stock outstanding -1500 shares150,000.00150,000.00150,000.00Total capital stock and surplus$308,223.00$408,254.00$558,360.001954 Tax Ct. Memo LEXIS 83">102 June 30,19481949ASSETS LESS LIABILITIES -Cash$186,039.00$184,844.00U.S. Government securities, at costless premiums amortized152,000.00202,115.00 1Other marketable securities, at cost110,367.00110,209.00 1Trade accounts receivable119,661.00109,045.00Inventories33,357.0025,865.00Prepaid expenses3,605.004,343.00Total current assets$605,029.00$636,421.00Trade accounts payable$ 22,486.00$ 9,545.00Federal income and excess profitstax liability as finally determined100,107.00100,533.00Accrued liabilities10,310.0021,659.00Total current liabilities$132,903.00$131,737.00Working capital$472,126.00$504,684.00Buildings, at cost or other federalincome tax basis$ 80,151.00$ 81,641.00Equipment, at cost or other federalincome tax basis147,090.00193,587.00Total depreciable assets$227,241.00$275,228.00Less: Accumulated depreciation61,906.0069,857.00Net depreciable assets$165,335.00$205,371.00Land, at cost or other federal in-come tax basis23,333.0023,333.00Total fixed assets - net$188,668.00$228,704.00Other assets - securities held fortrade purposes, at cost$ 9,025.00$ 9,025.00Trust deeds and loans receivable -employees and shareholders27,661.0024,842.00Miscellaneous assets1,420.004,908.00Total other assets$ 38,106.00$ 38,775.00Total net assets$698,900.00$772,163.00CAPITAL STOCK AND SURPLUS -Surplus - beginning of period$313,195.00$453,735.00Net profit for period164,540.0085,263.00Total$477,735.00$538,998.00Dividends paid( 24,000.00)( 12,000.00)Transfer to reserve for buildingSurplus - end of period$453,735.00$526,998.00Reserve for building95,165.0095,165.00Capital stock outstanding -1500 shares150,000.00150,000.00Total capital stock and surplus$698,900.00$772,163.001954 Tax Ct. Memo LEXIS 83">103 The net assets per books of the corporation (with no amount included therein for good will) and the net book value per share for the years 1937 to June 30, 1949, are as follows: Net assetsBook valueYear(per books)per share1937$205,200$136.801938216,506144.331939225,656150.441940233,016155.341941250,166166.781942258,215172.141943265,248176.831944286,571191.051945308,223205.481946408,254272.171947558,360372.241948698,900465.93June 30, 1949772,163514.78In May 1944 the board of directors of Press gave consideration to the building of a new plant or the enlarging of the present building. Decision was made to enlarge and improve the present plant. As a consequence, real estate acquired in 1936 or thereabouts as a possible building site was sold, and a program of expansion of the existing plant inaugurated. In 1945 the board of directors estimated new presses and housing for them would cost $100,000 to $200,000. In November 1948 James A. Guthrie1954 Tax Ct. Memo LEXIS 83">104 advised the directors of Press that the Sun Company in San Bernadino had erected a new building for approximately $250,000. The directors thought a similar structure might well be the company's eventual objective and that a new building reserve should be accumulated with such expenditure as an objective. Press had not purchased any land on which to erect a new building on July 3, 1949. From January 1, 1945 to June 30, 1949, $50,128.87 was spent by way of additions and improvements to the then existing building, and $146,252.74 for new machinery and equipment. Included in the new machinery and equipment was a large press, acquired at a cost of $77,000, installed in early 1949, with a capacity of printing 40,000 16-page newspapers per hour. The new press and older press were hooked in tandem, and so connected had the capacity to print 22,000 newspapers of 32 pages per hour. Press operates an open shop. The effect of the nonunionization was to make its wage scale below the average of most other newspapers. The following schedule shows officers' salaries of Press for the period January 1, 1939 to June 30, 1949: A.A.HarryHowardJames A.ArthurPid-HowardH.A.H.YearHammondHaysGuthrieCulverdingtonHays,TotalJr.1939$ 3,600$ 2,400$ 1,080$1,200$ 8,28019406,6004,4001,5801,22513,80519416,6004,8001,5001,60014,50019426,6004,8009151,80014,11519436,6004,80072090013,02019446,6004,800720$ 4,23616,356194510,9207,7609008,36027,940194612,9208,7601,5009,36032,540194712,9208,7601,5009,430$ 2,60035,21019483,960 18,2601,50010,2007,80031,720Six monthsended June30, 19492,8804504,1002,65010,080 2Total$77,320$62,420$12,365$45,686$6,725$13,050$217,566officers'salaries1954 Tax Ct. Memo LEXIS 83">105 In the decedent's estate tax return the 662 1/4 shares of stock in Press held in the trust created by him were included in the gross estate at a value, as of the date of death, July 3, 1948, of $297.96 per share, or in the total amount of $197,324.01, and at the value under the optional date, July 3, 1949, of $236.45 per share, or in the total amount of $156,586.81. In determining the deficiency involved herein, the respondent determined the value of the stock on July 3, 1949, was $900 per share, or an aggregate amount of $596,025. The value at the time of decedent's death of the said 662 1/4 shares of stock in Press $550was per share, or a total value of $364,237.50. Opinion The first issue for our consideration is whether the 39 shares of stock in Press which were sold by the trustee to Culver at $200 per share in November 1948 are1954 Tax Ct. Memo LEXIS 83">106 to be valued in the gross estate at their fair market value, as respondent contends, or are to be valued according to an option agreement which petitioner contends existed between decedent and Culver, his son-in-law. In support of its contention, petitioner urges that by the instrument of June 3, 1943, the decedent gave Culver an option to purchase up to 50 shares of Press stock at $200 per share and that acting pursuant to such option the trustee sold the 39 shares to Culver at the option price of $200, and that, in view of this, the situation here is governed by the principle that where stock is held at decedent's death subject to an enforceable option to buy at a specified price, the fair market value of the stock for estate tax purposes can not exceed the option price. Wilson v. Bowers, 57 Fed. (2d) 682; Lomb v. Sugden, 82 Fed. (2d) 166; Commissioner v. Bensel, 100 Fed. (2d) 639; Commissioner v. Childs' Estate, 147 Fed. (2d) 368; Estate of Albert L. Salt, 17 T.C. 92">17 T.C. 92; and May v. McGowan, 97 Fed. Supp. 326, affd. 194 Fed. (2d) 396. Respondent contends that no enforceable contract was1954 Tax Ct. Memo LEXIS 83">107 made because, first, the instrument of June 3, 1943, executed by the decedent did not constitute an effective amendment to the trust agreement since the trustee did not give its necessary consent to the amendment; secondly, Culver gave Hammond no consideration for any agreement to sell him stock and, therefore, mutuality of obligation, an essential element to the formation of a contract, was lacking; and, thirdly, in view of the fact that decedent could have revoked the trust provisions at any time during his life, all trust property is includible at its fair market value under section 811(c) and (d) of the Internal Revenue Code of 1939. Our first problem is to determine whether the 39 shares of Press stock were subject to an enforceable option. The trust that Hammond set up provided that "the Trustors or HARRY W. HAMMOND may likewise, but only with the written consent of the Trustee, amend this trust without limitation * ." The obvious purpose of a provision requiring the written consent of the trustee to any amendment of the trust was to give the trustee an opportunity to be informed of its duties and to permit it to refuse to agree to any amendment which it considered undesirable1954 Tax Ct. Memo LEXIS 83">108 from its standpoint. Petitioner urges that since Hammond sold Culver 4 shares of stock of Press in 1943, it was unnecessary for the trustee to consent to the amendment. Petitioner's contention is that Hammond was bound by the oral contract made with Culver in 1937 but was not obligated to abide by the terms of the trust agreement which he entered into in 1930. How petitioner arrives at such an ingenious conclusion is not explained. Since Hammond created the trust and the trustee had given its written consent to two previous amendments, he certainly knew of the trust requirements. Culver also knew of the requirements, as he was an advisor to the trustee. The record shows that two amendments were made to the trust agreement, one on November 6, 1933, and another on June 27, 1936. Each was accepted in writing by the trustee. In view of this, and in the absence of evidence showing that the provision of the trust instrument, requiring that amendments could be made only with the written consent of the trustee, had been abrogated by the parties, we think that the instruction given to the trustee by Hammond in the instrument of June 3, 1943, which was never accepted in writing by the trustee, 1954 Tax Ct. Memo LEXIS 83">109 was ineffective as an amendment to the trust and did not bind the trustee to sell the 39 shares or any other number to Culver at the price of $200 per share or any other amount. Since the trustee was not bond to sell any shares at any price, there was no agreement enforceable against it. That fact distinguishes the instant case from the aforementioned cases relied on by petitioner, wherein the agreements there involved were binding on the estates to sell the stock after the death of the grantor of the option. The trust agreement provided in paragraph VII that the trustee could sell any part of the trust estate it deemed advisable. The sale of the shares made by the trustee to Culver in November 1948 following the decedent's death apparently was made under the general power to sell granted by the trust agreement. The instrument of June 3, 1943, is further distinguishable from those involved in the cases cited by petitioner. Under paragraph IX of the trust agreement, Hammond had the power until his death to dispose of any trust property or to revoke the trust. The direction to the trustee contained in the instrument of June 3, 1943, was "provided you hold therein more than fifty1954 Tax Ct. Memo LEXIS 83">110 (50) shares of Common Stock of the RIVERSIDE DAILY PRESS, I hereby authorize you to sell * * ." Assuming, arguendo, that the amendment was binding upon the trustee, the restriction imposed upon the property by the option did not actually become effective until decedent's death. Hammond could sell the stock at any time up until he died at any price he could obtain. This agreement merely gave to Culver the right to buy 50 shares provided Hammond's estate owned them at the time of his death. The agreement, therefore, was testamentary in character. See Estate of James H. Matthews, 3 T.C. 525">3 T.C. 525. In the cases which petitioner cites, the restriction upon the sale of the property became effective during the decedent's lifetime and the value of the property was not affected by his death. In view of petitioner's selection of the optional valuation date of July 3, 1949, for valuing the gross estate, it has been suggested that the 39 shares of Press stock should be valued on the basis of the sale made November 17, 1948, at $200 per share. This argument has no merit, as it is obvious that the trustee was making a sale to the son-in-law which it would not have made to any other person1954 Tax Ct. Memo LEXIS 83">111 in a bona fide arm's length transaction. We, therefore, conclude the 39 shares are to be valued at their fair market value in the same manner as the 623 1/4 shares which were not sold. The second issue relates to the value of 662 1/4 shares of stock in Press. The petitioner elected to value the property of the estate under section 811(j) of the 1939 Code, and reported the 662 1/4 shares of stock as having a value of $236.45 per share. In determining the deficiency the respondent increased the value of each share to $900. From a careful consideration of all of the evidence bearing on the value of the 662 1/4 shares of Press stock here involve, including the asset value per share of the stock, the earnings and dividend records of Press, the prospects for the future, and the opinion testimony of witnesses, we are of the opinion that the stock had a value of $550 per share or a total value of $364,237.50 on the critical date, and have so found as a fact. The last issue involves the deductibility of expenses which have been and will be incurred in contesting the present deficiency. No mention of any additional expenses incurred was made during the trial by petitioner. However, Rule1954 Tax Ct. Memo LEXIS 83">*112 51 of this Court makes provision for the deduction of these additional expenses. We conclude that the parties will settle the matter under Rule 50. Decision will be entered under Rule 50. Footnotes1. Press acquired the Enterprise during 1932.↩1. The market value at July 1-5, 1949, of the U.S. Government securities and other marketable securities of $312,324 was $309,523.↩1. The $3,960 excludes bonus of $2,500 paid to the estate of Harry W. Hammond in December of 1948. If this item were included the total would be $6,460. ↩2. The $10,080 total does not include any part of the bonus of $3,000 paid to Howard H. Hays, Jr., nor the bonus of $3,000 paid to Arthur A. Culver in December of 1949 for the year 1949.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625806/	ROBERT and EULA DOWNS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentDOWNS v. COMMISSIONERDocket No. 5087-77.United States Tax CourtT.C. Memo 1978-502; 1978 Tax Ct. Memo LEXIS 11; 37 T.C.M. 1851-58; December 20, 1978, Filed Gary A. Ward and George D. McDonald, for the petitioners. Frank C. Hider, for the respondent. FEATHERSTONMEMORANDUM FINDINGS OF FACT AND OPINION FEATHERSTON, Judge: Respondent determined a deficiency in the amount of $8,805.53 in petitioners' Federal income tax for 1973. The issue for decision is whether petitioners are entitled under section 162(a) 1 to deduct as an ordinary and necessary expense of their cattle feeding business the sum of $27,500 which they paid for 1 million pounds of grain in 1973. FINDINGS OF FACT Petitioners Robert and Eula Downs, husband and wife, 1978 Tax Ct. Memo LEXIS 11">12 were legal residents of Roscoe, Texas, when the petition was filed. They filed their joint Federal income tax return for 1973 with the Director, Internal Revenue Service Center, Austin, Texas. Petitioners use the cash receipts and disbursements method of accounting. During 1971, 1972, and 1973, petitioners were both employed by H & H Feed Lot (hereinafter H & H)--Robert Downs (hereinafter Robert) as a grain buyer and office manager and Eula Downs (hereinafter Eula) as bookkeeper and secretary to the general manager. H & H was engaged in the business of feeding cattle owned by its customers. H & H made its profits through buying ingredients, processing and mixing them, feeding the mixture to its customers' cattle, and adding to the cost of the feed a markup sufficient to provide a profit. Generally speaking, the charge for the feed was at retail rates. During and before 1973, H & H maintained a cash prepayment feed program under which a customer-feeder advanced funds to H & H and received a credit to his account to cover the cost of feeding his cattle during a feeding cycle. The customer's credit was applied to his account, and he was charged the retail rate for feed every1978 Tax Ct. Memo LEXIS 11">13 15 days. If this credit was not used up by the feed charges, it was subject to refund upon request, to being carried over to the next feeding cycle, or to being fed to other pens of cattle belonging to the customer. The cash prepayment was limited to an amount computed by projecting the cost of feed for cattle on hand at H & H at the time of payment. For periods in which H & H had need of additional funds, the feedlot offered favorable interest rates (9 percent in October 1973) payable on feed prepayments. Robert's duties as grain buyer consisted of making contracts on behalf of H & H for grain purchases. During 1973 those grain purchases usually ranged from 1 to 5 million pounds, but some of them were as large as 26 million pounds. In making grain purchase contracts, Robert first contacted grain elevators or grain brokers to determine the amount of grain they had available for sale and for delivery at given dates and the price at which it was offered. After consulting with Philip Haynes (Haynes), general manager of H & H, to determine whether H & H was interested in buying such grain, Robert then made purchase contracts on behalf of H & H. As head bookkeeper, Eula was in1978 Tax Ct. Memo LEXIS 11">14 charge of H & H's bookkeeping and records. By 1978, she had 15 to 17 years of bookkeeping experience. In addition to their employment at H & H during 1973, petitioners bought cattle and had them fed at the feedlot. Robert also speculated in grain during 1973 in his own name and under the assumed business name of Brands Cattle Company. Prior to August 1972, he had not to any significant extent dealt in grain for his personal account. Petitioners' joint income tax returns for 1968 through 1970 and for 1972 showed no income from grain sales. On their 1971 income tax return, petitioners reported sales of $6,632.25 of grain which was purchased at a cost of $6,625. During 1973, grain prices rose rapidly. Robert purchased 11,383,705 pounds of grain for delivery at his direction, at a total cost of $327,749.11. The purchase price per cwt. ranged from $2.15 to $2.66 on grain delivered during January through March 1973, and from $2.75 to $4.55 on grain delivered from September through December 1973. In addition, Robert made speculative purchases of smaller amounts of grain, in truckloads, throughout this period. During 1973, Robert sold grain in a total amount of $395,647.52, with1978 Tax Ct. Memo LEXIS 11">15 sales prices ranging from $3 to $4.75 per cwt. from January 1973 through November 16, 1973. The deduction at issue stems from one of Robert's grain purchase contracts, one for 10 million pounds negotiated by Robert on February 2, 1973, and originally for H & H in the name of Ray Hendricks. The agreed price was $2.75 per cwt., and the contract called for delivery in October, November, and December 1973, with a two-cent-per-cwt. storage charge for every 10 days after January 1, 1974. Shortly after negotiating this contract, Haynes told Robert that the feedlot did not want to commit itself to purchase this 10 million pounds that far in advance. Robert thereupon called the seller, Barwise Elevator and Fertilizer (hereinafter Barwise), and informed it that H & H did not want the contract and that he would buy the 10 million pounds instead. Barwise agreed to the change. The February 2, 1973, contract was returned and marked void. As confirmation of the February oral change in the contract, Barwise issued a purchase contract dated June 4, 1973, in Robert's name for 10 million pounds of grain at the February price of $2.75 per cwt. with the same shipping schedule as set forth in the1978 Tax Ct. Memo LEXIS 11">16 February 2, 1973, contract. In October 1973, Robert sold to Goodpasture, Inc., approximately 3.5 million pounds of the 10 million pounds he had contracted from Barwise. One sale, made on October 2, 1973, covered 2 million pounds of grain at a price of $4.25 per cwt. for delivery within 20 days. Another sale, made on October 22, 1973, covered 1.5 million pounds at a sales price of $4.35 per cwt. for shipment in 30 days. On October 10, 1973, Robert contracted to purchase 3 million additional pounds of grain from Barwise at a price of $4.40 per cwt. with delivery to be made in January 1974, and with a two-cent-per-cwt. storage charge for every 10 days after January 31, 1974. On October 12, 1973, and November 6, 1973, petitioners made prepayments of $20,000 and $8,500, respectively, to H & H to cover the cost of feeding their cattle at the feedlot. At the close of 1973, $6,452.87 of the prepayments had not been used. This amount was sufficient to cover feed for petitioners' cattle for the period through February 28, 1974. On December 19, 1973, pursuant to Robert's February 1973 10-million pound grain purchase contract with Barwise, he purchased 1 million pounds of grain1978 Tax Ct. Memo LEXIS 11">17 from Barwise for $27,500 at a price of $2.75 per cwt. This purchase was documented by a warehouse receipt issued by Barwise and is the item here in dispute. After completing this 1-million pound purchase transaction, a balance of approximately 6 million pounds of grain was available for delivery on Robert's 10-million pound contract, and an additional 3 million pounds at $4.40 per cwt. was available on the October 10, 1973, purchase contract. Robert intended to use this grain for speculation purposes. During 1973, petitioners purchased two pieces of real property, the first sometime in the summer and the second in November. These properties had a total of 275 acres suitable for running cattle. Petitioners incurred the following expenses for equipment or for services performed on these two properties: $468 for a water tank; $1,450 for two cattle feeders; $1,210.05 for drilling a water well; $411.10 for testing the well; and $6,672.43 for fencing. Robert paid for the first two items by checks dated August 8, 1973, and November 17, 1973, respectively. The other items are evidenced by invoices dated November and December 1973. Through the latter part of 1973, petitioners held1978 Tax Ct. Memo LEXIS 11">18 the following numbers of head of cattle: July 31: 447 (272 at H & H and 175 at petitioners' ranch) October 1: 422 at H & H November 1: 422 at H & H December 1: 467 at H & H December 31: 327 at H & H In late December 1973, petitioners were discharged from their positions at H & H. On December 24, 1973, H & H, for its own account, obtained delivery of the remaining 6 million pounds of grain subject to the February 2, 1973, contract with Barwise. On January 16, 1974, petitioners initiated a lawsuit against Haynes and H & H for lost profits which petitioners alleged they could have realized on the sale of grain under the Barwise contract if H & H had not interfered with Barwise's performance of that contract. The suit charged not only that H & H had obtained delivery of the remaining 6 million pounds but also that its actions had caused Barwise to refuse to deliver to petitioners the 1 million pounds held under the warehouse receipt.Sometime prior to February 7, 1974, the Texas State court which had jurisdiction over petitioners' lawsuit against Haynes and H & H directed the sale of the 1 million pounds of grain represented by the Barwise warehouse receipt. On February 7, 1974, a1978 Tax Ct. Memo LEXIS 11">19 contract of sale from Robert to Goodpasture, Inc., was executed for the 1 million pounds of grain at a sale price of $5.05 per cwt., a total of $50,500. Sometime in 1974, petitioners received from the State court $27,500, which was the cost of this grain. The profit on the sale, $23,000, was awarded to H & H sometime in 1975 in settlement of the lawsuit. Prior to having a certified public accountant prepare their income tax return for 1973, petitioners prepared a cash receipts and disbursements journal by reviewing their bank statements, deposits, and checks each month during 1973 and classifying each check in the cash disbursements journal according to the type of expenditures which the check represented. Petitioners prepared the cash disbursements journal to show the date of the check, payee, bank account, and type of expense to which each check was classified. Petitioners' expense classifications included separate columns for "Feed" and "Cattle & Grain Purchases." Petitioners classified the purchase of the 1 million pounds of grain on December 21, 1973, on line 24 of the cash disbursements journal, as follows: Cattle & Grain DatePayeeBank AccountPurchases12/21Roscoe StateBrands Cattle Co.1,000,000 # miloBank27,500.0027,500.001978 Tax Ct. Memo LEXIS 11">20 Petitioners made no classification of this 1-million pound grain purchase as "Feed" expense under the column provided for "Feed" in their cash disbursements journal. In April 1974, petitioners took their bank statements, cash receipts and disbursements journal, and notes regarding ending inventory of grain to Reid Warner (Warner), a certified public accountant, for preparation and filing of their 1973 income tax return. Petitioners were referred to Warner by their prior tax preparer, Gene Berry, a certified public accountant, because a conflict of interest prevented the latter from preparing petitioners' 1973 tax return. Petitioners had never before employed Warner. Included in the materials furnished was a handwritten note prepared by petitioners showing the following: No Beginning Inventory in Grain Ending Grain Inventory 1,126,300 # $32,627.41 Disposable 126,300 # = 5,124.41 Based upon specific discussions of the $27,500 purchase of 1 million pounds of grain by petitioners with Warner, a review of the cash disbursements journal, and preparation of workpapers from that journal, petitioners and Warner decided to treat the1978 Tax Ct. Memo LEXIS 11">21 $27,500 amount as a cost of grain sold. Their reasoning was that the 1 million pounds of grain was then the subject of litigation, and petitioners did not control and could not sell it. Petitioners and Warner did not discuss the deductibility of this $27,500 grain purchase as a prepaid cattlefeed expense. Warner computed the cost of grain petitioner sold in 1973 to be $327,460.51, and that amount was deducted on the 1973 income tax return. In making this computation, Warner subtracted the disposable ending grain inventory of $5,127.41 2 from total grain purchases of $332,587.92. These figures were set forth in the workpapers which he prepared from petitioners' cash receipts and disbursements journal and the notes regarding ending inventory. On schedule F, Farm Income and Expenses of their 1973 joint income tax return, petitioners reported receipts of $395,647.52 from grain purchased for resale and a cost of $327,460.51 for grain reported sold. This latter amount included the1978 Tax Ct. Memo LEXIS 11">22 $27,500 cost of the 1 million pounds of grain purchased from Barwise on December 19, 1973. Petitioners' income tax returns for 1973 and 1974 were audited by an agent of the Internal Revenue Service. The agent determined that petitioners' claimed cost of grain sold of $327,460.51 per the income tax return should be decreased by the amount of $27,500 for the cost of the grain which was the subject of litigation at the end of 1973. The computation of this adjustment, as set forth in the revenue agent's report dated September 19, 1975, and in the notice of deficiency, is as follows: Beginning Inventory$ Purchases332,587.92Less Ending Inventory32,627.41Cost of Grain Sold per Audit299,960.51Cost of Grain Sold per Return327,460.51Decrease$ 27,500.00During the preliminary stages of the audit, neither petitioners nor Warner argued that the $27,500 in issue was deductible as a prepari feed expense. The agent's report notes the following argument advanced by petitioners: Taxpayer contends that since he was involved in a law suit at the end of 1973 and the courts had not decided who the grain belonged to, then he did not have to show it in his ending1978 Tax Ct. Memo LEXIS 11">23 inventory, but he should be able to deduct the cost of this grain since he had paid for it. Warner advanced the prepaid feed expense argument for the first time at district conference. On schedule F, Farm Income and Expenses, of the 1974 income tax return, petitioners reported the $27,500 as income from grain held for resale, reflecting the fact that they were reimbursed the amount of their cost upon the court-ordered sale of the 1 million pounds of grain to Goodpasture, Inc., on February 7, 1974. Consistent with his treatment of this item on petitioners' 1973 income tax return, respondent decreased income from grain held for resale in 1974 by $27,500 and determined petitioners were entitled to an overpayment credit of $4,568.43 for that year. OPINION At issue is the tax treatment of the $27,500 cost of 1 million pounds of grain purchased in December 1973, from Barwise which petitioners claim to be deductible as a prepaid feed expense. Section 162 allows a deduction for ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business. Section 1.162-12(a), Income Tax Regs., states that-- The purchase of feed and other costs1978 Tax Ct. Memo LEXIS 11">24 connected with raising livestock may be treated as expense deductions insofar as such costs represent actual outlay * * . Contending that petitioners bought the grain not to feed cattle but rather to hold for resale, respondent would have us deny the deduction. If the Court finds that petitioners bought the grain in order to use it as cattlefeed, respondent concedes the deductibility of the amount in issue. Accordingly, the determination of the case depends on a finding of petitioners' intent. On this issue, petitioners bear the burden of proof. Rule 142(a), Tax Court Rules of Practice and Procedure; Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933). We do not think they have shown that they bought this grain to feed their cattle. We begin with the fact that Robert contracted to purchase the disputed grain in February 1973. He expressly or implicitly admits that the other 9 million pounds of grain covered by the Barwise contract were contracted for speculation purposes. There is nothing in the history of the Barwise transaction prior to December 19, 1973, even suggesting any different intention with respect to the 1 million pounds. Indeed, at the time the Barwise1978 Tax Ct. Memo LEXIS 11">25 contract was made, there is no showing that petitioners owned any cattle outside the feedlot or owned any facilities where they could precondition cattle for feeding. It is true that on December 21, 1973, Robert paid Barwise for the 1 million pounds of grain and received therefor a warehouse receipt dated December 19, 1973. But only a few days later, he and Eula were dismissed from their jobs at H & H. 3 Petitioner's original petition in the suit in the Texas State court alleged that on December 24, 1973, Haynes and H & H induced Barwise to breach its contract with Robert. With events occurring as fast as they were during this period, we think it highly unlikely that Robert would buy grain to feed ranch cattle which he did not then own. While an effort was made to show that Robert expected H & H to accept part of this grain in kind to be placed in a "grain bank" to feed his cattle at the feedlot, the evidence is quite clear that in 1973 and early 1974 H & H did not have a grain bank program. Under the circumstances, it is not reasonable that he expected H & H to make an exception to its normal operating procedures to accommodate him. The more reasonable inference is that1978 Tax Ct. Memo LEXIS 11">26 he bought this 1 million pounds of grain and took a warehouse receipt for it in an attempt to protect the gain which could be realized from the resale of that grain. The manner in which petitioners treated the $27,500 cost of this grain on their accounting records and their 1974 income tax return confirms our finding that it was bought for resale. As stated in our findings, petitioners classified in their accounting records this $27,500 expenditure as a grain purchase rather than as a feed expenditure. On their cover note to Warner, who prepared their 1973 income tax return, they included this item as part of their grain inventory. Since Eula had worked as a bookkeeper for approximately 10 years and Robert had spent much of his career in the cattle business, we do not think this classification in their records was inadvertent. This treatment in their1978 Tax Ct. Memo LEXIS 11">27 records and in their 1973 income tax return is an admission, though not conclusive, entitled to weight in deciding whether this grain was bought for resale or as feed for cattle. See Waring v. Commissioner,412 F.2d 800">412 F.2d 800, 412 F.2d 800">801 (3d Cir. 1969), affg. per curiam a Memorandum Opinion of this Court. Petitioners' discussions with revenue agents during the audit are consistent with these classifications in their records and on their 1973 return. In a September 19, 1975, report filed by a revenue agent, there is no mention of an argument that the $27,500 was deductible as a prepaid cattlefeed expense. Instead, petitioners' argument consists of an evidently sincre but clearly mistaken position that they were entitled to a deduction because they had made a cash outlay for an item which was later removed from their control. It was only at the district conference that petitioners and their accountant brought up the prepaid feed expense theory. The evidence, as we view it, requires a holding that the 1 million pounds of grain in dispute was purchased for resale. To reflect the foregoing, Decision will be entered for the respondent.Footnotes1. All section references are to the Internal Revenue Code of 1954, as in effect during the tax year in issue, unless otherwise noted.↩*. 1,000,000 # were taken by the court↩2. On a handwritten note furnished to Warner, petitioners listed the amount of the disposable ending inventory as $5,124.41. There is no explanation for this discrepancy in the record.↩3. Petitioners' brief contains the following: On December 24, 1973, petitioner were relieved of their duties at H & H Feed Lot because they allegedly were taking corporate opportunities and self-dealing in milo [grain]. A criminal fraud trial was held against Robert Downs and he was found innocent of any wrongdoing.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625807/	ALLAN S. LEHMAN, CECILE S. LEHMAN, HERBERT H. LEHMAN AND MONROE C. GUTMAN, AS EXECUTORS OF THE ESTATE OF HAROLD M. LEHMAN, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lehman v. CommissionerDocket No. 86829.United States Board of Tax Appeals39 B.T.A. 17; 1939 BTA LEXIS 1086; January 3, 1939, Promulgated 1939 BTA LEXIS 1086">1086 Several years prior to his death the decedent by two trust indentures conveyed certain assets in trust, the income from which was to be paid to his brother for life, and thereafter to his brother's two children. Simultaneously, the decedent's brother by two identical trust indentures conveyed like assets in trust, the income from which was to be paid to the decedent for life, and thereafter to the decedent's two children. The trusts were all irrevocable and no part of the trust estates created by the decedent was ever to revert to him or his estate. The decedent had the right, however, to withdraw during his lifetime, or up to December 31, 1935, $75,000 from each of the trust estates created by his brother. Held, that the transfers to the trusts were not made in contemplation of death or intended to take effect in possession or enjoyment at or after death; held, further, that, inasmuch as the decedent had a right to withdraw $150,000 from the trust estates created by his brother, that amount is includable in the gross estate. Edgar J. Bernheimer, Esq., and Sydney J. Schwartz, Esq., for the petitioners. Ralph F. Staubly, Esq., for the respondent. 1939 BTA LEXIS 1086">1087 SMITH 39 B.T.A. 17">18 OPINION. SMITH: This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $734,927.19, only $268,113.57 of which is in controversy. The petitioners are the executors of the estate of Harold M. Lehman, who died a resident of the city of New York on November 14, 1933. The executors filed an estate tax return for the decedent which showed a net estate of approximately $5,000,000. Upon the audit of the estate tax return the respondent added to the gross estate $715,844.20 representing the value, at the date of death, of the assets of two trust estates created by the decedent on December 6, 1930, and disallowed the deduction from the gross estate of $68.43, $1,631.71, and $41,552.22 representing payments made by the executors in the settlement of certain actions brought against a banking concern doing business under the firm name and style of Lehman Brothers, defendants, in the Supreme Court of the State of New York, County of New York. He also disallowed the deduction of $6,942.21 claimed by the executors as administration expenses paid during the years 1934 and 1935 for investment advisory service rendered by certain1939 BTA LEXIS 1086">1088 individuals for the benefit of the estate. The respondent admits error in the disallowance of the deductions of $68.43, $1,631.71, and $41,552.22 on account of the claims referred to above and paid by the executors for the account of the estate. This leaves in issue only the questions whether the respondent correctly included in the gross estate $715,844.20 representing the value of the assets of the two trust estates referred to above, and the deduction from the gross estate of investment advisory expenses in the amount of $6,942.21. All of the facts have been stipulated. They are summarized as follows: The decedent, Harold M. Lehman, on December 6, 1930, executed two trust indentures by which he transferred to Allan S. Lehman, Herbert Lehman, and himself, as trustees, certain assets to be held in trust for the benefit of his brother, Allan S. Lehman, for life with 39 B.T.A. 17">19 remainder to his (Allan's) children, or their lawful issue, or to the lawful issue of the grantor. Simultaneously with the creation of those trusts by the decedent, his brother, Allan S. Lehman, created two identical trusts conveying to himself, Harold M. Lehman (the decedent), and Herbert Lehman, as1939 BTA LEXIS 1086">1089 trustees, identical securities for the benefit of the decedent for life and thereafter for the benefit of decedent's children, or their lawful issue, or the lawful issue of the grantor. The assets and securities so transferred to each of the above described trusts consisted of a one-half part of certain assets and securities of each of the grantors which had been carried on the books of Lehman Brothers under the designation of "S. M. Lehman, trustee." The assets transferred to the two trusts created by the decedent had a value at the date of his death of $715,844.20. Regarding the creation of these trusts by the decedent and Allan S. Lehman, it is stipulated as follows: The circumstances under which * * * trusts were created by decedent and Allan S. Lehman were that in the year 1885 there had been set aside by Sigmund M. Lehman, the father of decedent and Allan S. Lehman certain monies and/or securities which were added to from time to time thereafter for decedent and Allan S. Lehman. These were the securities referred to in all of the indentures of trust as "carried on the books of Lehman Brothers under the designation 'S. M. Lehman, trustee'." When these securities came1939 BTA LEXIS 1086">1090 into the possession of Allan S. Lehman and decedent they both felt a desire to make provision for their own children and establish the future of their children securely as had been done by their father for his children. The capital of which the fund so designated on the books of Lehman Brothers consisted, had never been used or involved in the business of decedent or Allan S. Lehman and was not regarded as necessary for such purpose and at that time both decedent and Allan S. Lehman were possessed of other means and capital that appeared amply sufficient for all business or personal requirements and it was desired to continue the segregation of said capital separate and relieved so far as possible from any hazards or contingencies of business or commercial transactions for the benefit of their children and also of the decedent and his brother. Decedent and Allan S. Lehman therefore determined to devote the entire capital acquired by them as aforesaid to the establishment of trusts of which they themselves should enjoy the income during their lives and of which the income should be secured to their children in the same manner. With the aforesaid purposes in view upon the advice1939 BTA LEXIS 1086">1091 of counsel the four indentures of trust dated December 6, 1930, * * * were drawn and it was upon the advice of counsel to decedent and Allan S. Lehman in order to more securely effectuate the purpose that the said securities and assets should never be at the hazard of the business commitments or transactions of decedent or his brother, that decedent became the donor of the securities and assets referred to in the two indentures of trust [exhibits 1 and 2 of the stipulation] * * * and that Allan S. Lehman became the donor of the securities and assets referred to in the two indentures of trust [exhibits 3 and 4 of the stipulation] * * * That the said indentures of trust were prepared by and under the direction 39 B.T.A. 17">20 of Edgar J. Bernheimer a member of the Bar of the State of New York who was the counsel of said decedent and Allan S. Lehman. * * decedent and Allan S. Lehman both consulted said Bernheimer as to the advisability of establishing said trusts. At said time they stated that their motives and intentions were ultimately to secure to their own children these monies which they felt as a matter of sentiment their father would have liked to see go to his grandchildren. 1939 BTA LEXIS 1086">1092 At that time they both stated to said Bernheimer that their means were very large and all that could reasonably be required for the purposes of their banking business. They stated at the same time that their then means outside of the securities and assets that ultimately became the corpora of these trusts were far in excess of any possible immediate claims of creditors but they stated that they realized that if these means became part of their capital and invested in their business and subject to unavoidable business risks and uncertainties, especially in view of the then current difficult economic situation, there might be a possibility that they would ultimately be dissipated. After conferences with and advice by said Bernheimer, it was decided to establish the trusts in question so that the monies could be segregated and kept aside from such capital as was subjected to ordinary business risks and investment to the end that so far as humanly possible the children would be secured in the ultimate enjoyment of it and the donors would be secured in the immediate enjoyment of it. With this in view said Bernheimer advised the establishment of the said trusts and advised further1939 BTA LEXIS 1086">1093 that in order the better to accomplish the purposes of decedent and Allan S. Lehman and assure for all time the segregation of said monies the trusts be established in the manner appearing from the instruments themselves, the said Allan S. Lehman establishing trusts for decedent and decedent's children in consideration of the decedent establishing identical trusts for the benefit of his brother Allan S. Lehman and Allan's children. At the time when said instruments were drawn and said trusts established there was never any mention or suggestion of the approaching demise of either decedent or said Allan S. Lehman nor of their state of health and there was never any indication that either of said individuals regarded his health as precarious or his approaching demise as a thing to be considered otherwise than in the natural course of life in the far future. At that time both decedent and Allan S. Lehman were in unusually robust and vigorous health, were extremely active in their business affairs as members of the banking firm of Lehman Brothers of 1 William Street, New York City, and decedent especially was accustomed to frequent excursions for the purpose of fishing and shooting. 1939 BTA LEXIS 1086">1094 Decedent at that time was 41 years of age and was of a very athletic tendency and it was his usual custom in addition to his other physical and athletic activities to play at least several sets of tennis or games of handball every day. That decedent up to the time of the making of the transfers had never suffered from any serious illness. Decedent at the time of the making of the transfers was worth approximately five million dollars in excess of the securities and assets transferred in trust by the indentures of trust dated December 6, 1930. Decedent continued to be in good health and vigor and continued his daily business, athletic and social pursuits from December 6, 1930, until he was admitted to Mt. Sinai Hospital on October 24, 1933 for the operation for appendicitis as a result of which he died on November 14, 1933, the entire duration of his illness being 21 days. All of the above described transfers of December 6, 1930, were made in the City of New York, State of New York. 39 B.T.A. 17">21 The determinable annual income of the securities and assets transferred in trust by Allan S. Lehman pursuant to the indentures of trust executed by him December 6, 1930, was, at1939 BTA LEXIS 1086">1095 the time of the transfer, $48,431.24. The appropriate factor for determining the then present value of decedent's right to receive such income during his lifetime, as prescribed by the Treasury Department regulations, was 14.86102. The total value of the securities and assets so transferred in trust by Allan S. Lehman, pursuant to the indentures of trust, was on December 6, 1930, $937,523.18. The value on December 6, 1930, of decedent's right to receive the income from the securities and assets transferred in trust pursuant to the above referred to indentures of trust was $719,737.63. It is stipulated that: * * the execution of the trusts and the making of the transfers effected thereby was not prompted by a condition of body or mind that would have led the decedent to believe that his death was imminent or near at hand, or that his death was to be expected within the reasonably distant future. Under the trust indentures executed by the decedent on December 6, 1930, the income of the trusts was payable to Allan S. Lehman for the period of his life. Upon his death the income, and eventually the corpus, of one of the trusts was to be paid to Allan's son, Orin, and the1939 BTA LEXIS 1086">1096 income and the corpus of the other trust to Allan's daughter, Ellen. In the event of the death of either Orin or Ellen before the death of Allan the income and the corpus were to be paid to their issue per stirpes and not per capita, or, in default of any such child or children or issue of the deceased children, to the then living issue of the grantor. The grantor was never to receive any of the income or corpus of either of the trusts created by him. The trusts created by the decedent and by Allan S. Lehman were reciprocal. The decedent was to receive the income of the trusts created by Allan during the period of his life and upon his death his (decedent's) children were to receive the income and the corpus. Each of the trusts created by the decedent provided in part as follows: FOURTH: The trust hereby created shall be irrevocable, except that said Allan S. Lehman, shall have the right at any time or from time to time prior to December 31, 1935, upon notice in writing to the Trustees of his intention so to do, to withdraw from the rrincipal of the trust hereby created such amount of money as he shall specify in such notice, not exceeding $75,000, and the Trustees1939 BTA LEXIS 1086">1097 shall thereupon pay the same to him free and clear of said trust. The trusts created by Allan S. Lehman contained a like paragraph giving the decedent the right to withdraw $75,000 from each trust up to December 31, 1935. The decedent never exercised his right to withdraw any part of the principal of the trust estates created by his brother, Allan. 39 B.T.A. 17">22 The trusts under consideration were all irrevocable. Neither of the grantors retained any right whatever to amend, alter, or revoke the trusts created by him. There is no provision in the trust instruments limiting the right of the beneficiaries to assign or otherwise alienate their interests in the trusts. During the years 1934 and 1935 the executors expended $6,942.21 for investment advisory service. During these years the decedent's estate was in the process of administration. Under the terms of the decedent's will the executors were required to keep the entire residue of the estate invested for the benefit of the beneficiaries of the various trusts created under the will. During the year 1934 all assets in the hands of the executors amounted to a sum in excess of five million dollars. During the year 1935 the1939 BTA LEXIS 1086">1098 assets in the hands of the executors amounted to a sum in excess of one and one-half million dollars. The executors have waived commissions, by instruments severally signed by them. In a proceeding brought in the Surrogate's Court, County of New York, to settle judicially the intermediate account of the executors, no surcharge was made against the executors and the expenditure of sums for investment advisory service, as aforesaid, during the period of administration, was allowed and approved as a proper deduction made by the executors for administration expenses. The executors have received no commissions or remuneration of any kind for acting as such. It is stipulated that "* * * the expenditure of the said sum of $6,942.21 was reasonable in amount." We shall consider first the question as to whether there should be included in the gross estate of the decedent $715,844.20, the stipulated value on November 14, 1933, of the assets transferred in trust by the decedent by the indentures of trust dated December 6, 1930. In his deficiency notice the respondent held that the amount was properly includable in the decedent's gross estate under the provisions of section 302(c) and1939 BTA LEXIS 1086">1099 (d) of the Revenue Act of 1926, as amended. Section 302(c) and (d) of the Revenue Act of 1926, as amended by section 803(a) of the Revenue Act of 1932, reads as follows: SEC. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated - * * (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case 39 B.T.A. 17">23 of a bona fide sale for an adequate and full consideration in money or money's worth. 1939 BTA LEXIS 1086">1100 * * * [Italics supplied.] (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * * The matter in italics was added by section 803(a) of the Revenue Act of 1932. Since the transfers in question here were made prior to March 3, 1931, the amendment of section 302(c) effected by section 803(a) of the Revenue Act of 1932, set forth in italics in this subdivision quoted above, is not applicable; for it was held in Hassett v. Welch,303 U.S. 303">303 U.S. 303, that the amendment had no retroactive effect and that where the transfer was made prior to the effective date of the amendment, or the amendment effected by Joint Resolution No. 131 adopted March 3, 1931, the property transferred was not to be included in the gross estate1939 BTA LEXIS 1086">1101 simply because the grantor or settlor reserved the right to receive the income of the property transferred during the period of his natural life. In his brief the respondent states as follows: Respondent contends that the disposition effected by the decedent [by the two trusts created December 6, 1930], respecting his interest in the securities involved, and whether viewed from the standpoint of the dispositions made by his brother through the trusts executed by him (Exhibits 3 and 4 of Stipulation), or from the standpoint of the trusts executed by the decedent (Exhibits 1 and 2), were transfers intended to take effect in possession or enjoyment at or after the decedent's death, within the purview of Section 302(c) of the Revenue Act of 1926, and taxable as such. This contention is not rested upon the new classifying provision incorporated in said Section, by Section 803(a) of the Revenue Act of 1932, incorporating therein the amendment effected by the Joint Resolution of the Congress adopted March 3, 1931, as stated by petitioners. * * On the contrary, as heretofore indicated, respondent's contention is rested upon the transfer of the right to possession or enjoyment, 1939 BTA LEXIS 1086">1102 not the passing of the fact of possession or enjoyment or actual possession or enjoyment (dominion) out of the decedent at death. * * A predicate for this contention, as stated in the respondent's brief, is that "the Federal estate tax, is a strict succession excise." This is a statement of what the Federal estate tax is not - not of what it is. If anything is settled with respect to the Federal estate tax law, it is that it is not a "succession excise" tax. In the early case of Y.M.C.A. of Columbus, Ohio v. Davis,264 U.S. 47">264 U.S. 47, Mr. Chief Justice Taft, in referring to the estate tax imposed by section 401 of the Revenue Act of 1918, stated: * * * It was not a tax upon succession and receipt of benefits under the law or the will. It was death duties, as distinguished from a legacy or succession 39 B.T.A. 17">40 tax. What this law taxes is not the interest to which the legatees and devisees succeeded on death, but the interest which ceased by reason of the death. * * Mr. Justice Holmes, writing the opinion of the court, similarly declared in 1939 BTA LEXIS 1086">1103 Edwards v. Slocum,264 U.S. 61">264 U.S. 61, that the Federal estate tax: * * is a tax upon a transfer of his net estate by a decedent, a distinction marked by the words that we have quoted from the statute, and previously commented upon at length in Knowlton v. Moore, 178 U.S.41, 49, 77, 20 Sup.Ct. 747, 44 L. Ed. 969. It comes into existence before and is independent of the receipt of the property by the legatee. It taxes, as Hansen, Death Duties, puts it in a passage cited in 178 U.S.49, 20 Sup.Ct. 751 "not the interest to which some person succeeds on a death, but the interest which ceased by reason of the death." * * * The point under discussion is clearly illustrated by the two Supreme Court cases, Nichols v. Coolidge,274 U.S. 531">274 U.S. 531, and Coolidge v. Long,282 U.S. 582">282 U.S. 582. In the former case the statute involved was the Federal estate tax law; in the latter case, the Massachusetts succession tax law. In Nichols v. Coolidge, Mr. Justice Reynolds, writing for a unanimous court, quoted with approval the above excerpt form 1939 BTA LEXIS 1086">1104 264 U.S. 61">Edwards v. Slocum, supra, and stated further: The exaction is not a succession tax like the one sustained by Scholey v. Rew,23 Wall. 331, 23 L. Ed. 99; Keeney v. New York,222 U.S. 525">222 U.S. 525, 32 S. Ct. 105, 56 L. Ed. 299, 38 L.R.A.(N.S.) 1139. The right to become beneficially entitled is not the occasion for it. There is no claim that the transfers were made in contemplation of death or with purpose to evade taxation. The provision applicable in such circumstances is not relied on and the extent of congressional power to prevent evasion or defeat of duly imposed exactions need not be discussed. The distinction is clearly pointed out in the dissenting opinion in 282 U.S. 582">Coolidge v. Long, supra, written by Mr. Justice Roberts, as follows: The one is collected on the transfer of his estate by a decedent; it taxes not that to which some person succeeds upon a death, but that which ceased by reason of death. Nichols v. Coolidge,274 U.S. 531">274 U.S. 531, 274 U.S. 531">537, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A.L.R. 1081">52 A.L.R. 1081; 1939 BTA LEXIS 1086">1105 Edwards v. Slocum,264 U.S. 61">264 U.S. 61, 264 U.S. 61">62, 44 S. Ct. 293, 68 L. Ed. 564. The other is laid on the right to become beneficially entitled to property on the death of its former owner. Keeney v. Comptroller of State of New York,222 U.S. 525">222 U.S. 525, 222 U.S. 525">533, 32 S. Ct. 105, 56 L. Ed. 299, 38 L.R.A.(N.S.) 1130; Nichols v. Coolidge, 274 U.S. at page 541, 47 S. Ct. 710, 71 L. Ed. 1184, 42 A.L.R. 1081. The latter type of excise has existed in Massachusetts for years, and the courts of that commonwealth have consistently construed the statutes as they did in this case. Reliance is also placed by the respondent in his brief upon Klein v. United States,283 U.S. 231">283 U.S. 231. In that case the estate tax was sustained upon the ground that the transfer was in fact intended to take effect in possession and enjoyment or after death. The deed 39 B.T.A. 17">25 provided in the habendum clause that the grantee should have the land for the term of her natural life, but that if she died before the grantor the reversion in fee should be and remain vested in the grantor. It was further provided that "on condition that the grantee survive the grantor, 1939 BTA LEXIS 1086">1106 then the grantee should, by virtue of this conveyance, take and hold the land in fee simple." In sustaining the tax the Supreme Court said: * * * The life estate is granted with an express reservation of the fee, which is to "remain vested in said grantor" in the event that the grantee "shall die prior to the decease of said grantor." By the second clause the grantee takes the fee in the event - "and in that case only" - that she shall survive the grantor. It follows that only a life estate immediately was vested. The remainder was retained by the grantor; and whether that ever would become vested in the grantee depended upon the condition precedent that the death of the grantor happen before that of the grantee. The grant of the remainder, therefore, was contingent. * * * The Klein case is an excellent illustration of the meaning of the phrase "transfer * * * intended to take effect in possession or enjoyment at or after his death," contained in section 302(c). Since the title to the assets to be transferred remained vested in the grantor until his death, the transfer did not take effect until the death of Klein. 1939 BTA LEXIS 1086">1107 By the indentures of trust executed by the decedent, Harold M. Lehman, on December 6, 1930, he turned over to the trustees all of his right, title, and interest in and to the assets forming the corpora of the trust estates. In May v. Heiner,281 U.S. 238">281 U.S. 238; Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339; Shukert v. Allen,273 U.S. 545">273 U.S. 545; McGregor v. Commissioner, 82 Fed.(2d) 948; and Kaufman v. Reinecke, 68 Fed.(2d) 642; it was held that a transfer in trust of the character here involved takes effect irrevocably at the time of the actual transfer of assets to the trustee and that, in the absence of actual contemplation of death, assets thus transferred are not includable in the gross estate. We think that the transfers in question were not transfers to take effect in possession and enjoyment at the date of death of the decedent. We think, too, that the transfers were not made in contemplation of death within the meaning of section 302(c) of the Revenue Act of 1926. The leading case upon this point is 1939 BTA LEXIS 1086">1108 United States v. Wells,283 U.S. 102">283 U.S. 102. In that case the Court, speaking through Mr. Chief Justice Hughes, said: * * * The words "in contemplation of death" mean that the thought of death is the impelling cause of the transfer, and while the belief in the imminence of death may afford convincing evidence, the statute is not to be limited, and its purpose thwarted, by a rule of construction which in place of contemplation 39 B.T.A. 17">26 of death makes the final criterion to be an apprehension that death is "near at hand." If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. Such transfers were made the subject of a distinct gift tax since repealed. As illustrating transfers found to be related to purposes associated with life, rather than with the distribution of property in anticipation of death, the Government mentions transfers made "for the purpose of relieving the donor of the cares of management or in order that his children may experience the responsibilities of business under his guidance and1939 BTA LEXIS 1086">1109 supervision." The illustrations are useful but not exhaustive. The purposes which may be served by gifts are of great variety. It is common knowledge that a frequent inducement is not only the desire to be relieved of responsibilities, but to have children, or others who may be the appropriate objects of the donor's bounty, independently established with competencies of their own, without being compelled to await the death of the donor and without particular consideration of that event. There may be the desire to recognize special needs or exigencies or to discharge moral obligations. The gratification of such desires may be a more compelling motive than any thought of death. The Court further observed: * * * transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. * * * As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor's motive. Death1939 BTA LEXIS 1086">1110 must be "contemplated," that is, the motive which induces the transfer must be of the sort which leads to testamentary disposition. * * In Thomas C. Boswell et al., Executors,37 B.T.A. 970">37 B.T.A. 970, theBoard stated: * * * We are required to determine whether "the impelling cause" for that transfer was decedent's contemplation of his death. United States v. Wells,283 U.S. 102">283 U.S. 102. "Contemplation" is defined as the "act of the mind in considering with attention." Webster's New International Dictionary, 2d ed. * * * The circumstances under which the trusts were created are described in the stipulated facts as quoted above. It appears from those facts that the decedent and his brother, Allan, shortly after coming into the possession of their portions of a trust estate created by their father in 1885, desired to make the same provision for their children as had been made for themselves by their father. The trust assets thus received were not needed by the sons in their banking business. They did not want those trust assets to be subject to the hazards of business and the trusts were created in the form in which they were created for that reason. 1939 BTA LEXIS 1086">1111 Both the decedent and his brother were in excellent health. In the negotiations leading up to the creation of the trusts no reference was 39 B.T.A. 17">27 made by either of the brothers to any thought of death. So far as could be seen they had many years of life before them. Since the trusts were created more than two years prior to the death of the decedent, the statute makes no presumption that the transfers were made in contemplation of death. There is nothing in the record from which it might be inferred that contemplation of death was the predominant motive for the making of the transfers, which is the criterion for the determination in accordance with 283 U.S. 102">United States v. Wells, supra. The stipulation of facts is convincing that the transfers were not made in contemplation of death. In his brief the respondent makes a further contention that if the principal of the trust funds may not be included in the gross estate as having been transferred in contemplation of or intended to take effect in possession or enjoyment at or after death, it must, nevertheless, be held that the transfers are to be included in the gross estate to the extent of $150,000, because1939 BTA LEXIS 1086">1112 by the reciprocal trusts the decedent gave his brother, Allan, the right to withdraw from the corpora of the trusts created by him $150,000, in exchange for the right which his brother, Allan, gave him to withdraw $150,000 from the trusts created by Allan. It can not be questioned that the decedent gave to his brother, Allan S. Lehman, the right to receive the income for life of the two trust estates created by him and a right to withdraw $150,000 from the principal of the trust estates during his life or until December 31, 1935, in exchange for similar rights of the decedent in the trust estates created by Allan. Up to the date of his death the decedent had the power to bring into his own estate $150,000 of the corpora of the trusts created by Allan. The right to make this withdrawal out of the reciprocal trusts created by Allan was the equivalent of a right in the decedent to withdraw that amount from the trust estates which he had created. This right had a value at the time of decedent's death of $150,000. It was an interest in property "which ceased by reason of the death." 1939 BTA LEXIS 1086">1113 264 U.S. 61">Edwards v. Slocum, supra.We are of the opinion that the respondent did not err in including the $150,000 in the gross estate of the decedent. The final question for consideration is whether the $6,942.21 expended by the executors for investment advisory service during the years 1934 and 1935 is a legal deduction from the gross estate as an administration expense. The respondent submits that payments are not deductible from the gross estate as administration expenses because they were made to enable the petitioners to keep the residuary estate profitably invested for the benefit of the beneficiaries under the testamentary trust created under the decedent's will. The stipulated facts show that the Surrogate's Court allowed the payments 39 B.T.A. 17">28 as administration expenses. The Board has no doubt that they were expenses legally incurred and paid by the executors in the administration of the estate and that they are a legal deduction from the gross estate. Reviewed by the Board. Judgment will be entered under Rule 50.BLACK BLACK, dissenting: I agree with the majority opinion wherein it holds that the corpus of the two irrevocable trusts1939 BTA LEXIS 1086">1114 executed by decedent, Harold M. Lehman, December 6, 1930, may not be included in decedent's gross estate under the provisions of section 302(c) of the Revenue Act of 1926. It seems clear that both trusts were irrevocable and were not made in contemplation of death and were not intended to take effect in possession or enjoyment at or after death. I do not agree to that part of the majority opinion which holds that $150,000 should be included as a part of decedent's gross estate under section 302(d) of the Revenue Act of 1926 because at the time of decedent's death he had the right to withdraw $150,000 from two trusts which were simultaneously executed by his brother Allan S. Lehman. Manifestly if the right to withdraw this $150,000 had survived decedent's death and was available as an asset to decedent's estate, then it is includable as a part of decedent's estate. This inclusion would be by reason of the provisions of section 302(a) of the Revenue Act of 1926, and not by reason of section 302(d) of the same act. Section 302(d) reads: (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment1939 BTA LEXIS 1086">1115 thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * In the two trusts which decedent executed he retained no power to make any change in the trust corpus, either alone or in conjunction with any other person. He did confer upon his brother Allan the right to withdraw $75,000 from the corpus of each trust at any time or from time to time prior to December 31, 1935. This right, so far as the record shows, Allan possessed at the time of decedent's death and it continued until December 31, 1935. But this was no reservation of a power to decedent, and the fact that his brother Allan conferred upon decedent similar rights in two trusts which Allan executed at the same time, it seems to me, does not affect the situation under section 302(d). 39 B.T.A. 17">29 Congress can of course tax such transactions by means of the gift tax and has done so in revenue acts enacted subsequent1939 BTA LEXIS 1086">1116 to the dates of the execution of the trusts herein involved. I do not believe however that section 302(d) of the Revenue Act of 1926 can properly be construed so as to make includable in decedent's gross estate the $150,000 which the majority opinion holds should be included. When decedent died his right to withdraw that $150,000 from trusts which his brother Allan had created ceased and nothing passed from the dead to the living. Hasbrouck v. Bookstaver,114 N.Y.S. 949">114 N.Y.S. 949. Article 13 of Treasury Regulations 80 (1937 Ed.), Estate Tax, would seem to cover the situation which we have here, where it says: "Nor should anything be included on account of an interest or an estate limited for the life of the decedent." In my judgment the $150,000 in question was so limited and is therefore not includable as a part of decedent's gross estate. ARUNDELL, VAN FOSSAN, LEECH, and ARNOLD agree with this dissent.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625808/	Consolidated Foods Corporation, Petitioners v. Commissioner of Internal Revenue, RespondentConsolidated Foods Corp. v. CommissionerDocket No. 4650-74United States Tax Court66 T.C. 436; 1976 U.S. Tax Ct. LEXIS 95; June 14, 1976, Filed 1976 U.S. Tax Ct. LEXIS 95">95 Decision will be entered for the respondent. A State municipality issued $ 2 million of industrial development bonds to finance construction of a manufacturing facility. The municipality leased the facility for 25 years to Conso Fastener Corp., which paid semiannual rental payments equal to principal and interest due on the bonds. The actual construction cost of the facility was $ 178,506 less than the anticipated construction cost of $ 2 million; the resulting surplus of bond proceeds was credited against lease payments due in years immediately following completion of construction. Held, Conso Fastener Corp., an accrual basis taxpayer for whom petitioner is liable as transferee, was entitled to deduct the full rental payments due, notwithstanding crediting of the surplus bond proceeds against such payments. Held, further, petitioner must also take such credits into income under the tax benefit rule. Paul W. Clevenger (an officer), for the petitioner.Harmon B. Dow, for the respondent. Wiles, Judge. WILES66 T.C. 436">437 OPINIONRespondent determined deficiencies in the income taxes of Conso Fastener Corp. (hereinafter Conso) as follows:FYE June 30 --Amount1967$ 3,500196855,517196935,757Total94,774Petitioner is a transferee of Conso and thereby is liable for any taxes determined to be due from Conso. The only issue for decision is whether Conso correctly 1976 U.S. Tax Ct. LEXIS 95">97 computed its rental deductions under section 162(a)(3) 1 by properly crediting surplus industrial bond proceeds against lease payments which originated in the underlying industrial development bonds.This case was fully stipulated pursuant to Rule 122, Tax Court Rules of Practice and Procedure.Petitioner, a Maryland corporation, had its principal office in Chicago, Ill., from 1966 through 1969 and when it filed its petition herein. On or about February 1, 1967, petitioner acquired Conso, a New York corporation from 1966 through 1969. The deficiencies in issue relate to the business of Conso during taxable years ended June 30, 1967, June 30, 1968, and June 30, 1969, for which Conso timely filed corporate income tax returns with the District Director of Internal Revenue, New York, N.Y. Petitioner liquidated Conso and received its assets in 1971.Conso was an accrual basis taxpayer at all relevant times.Union Realty Corp. (hereinafter Union), 1976 U.S. Tax Ct. LEXIS 95">98 a South Carolina corporation, was an affiliated sister corporation of Conso prior to 1967. At some time before 1967, Union conveyed certain real estate in Union County, S.C., to the Industrial Development Corp. of Union County, S.C. (hereinafter Industrial), a nonprofit corporation which had as its purpose stimulation of industrial development in Union County. The consideration for this conveyance was $ 5,000, plus Industrial's promise to provide construction funds for a manufacturing plant on that land, plus Industrial's promise to lease the plant and land to Conso.66 T.C. 436">438 On June 13, 1967, Industrial executed an indenture with the Citizens & Southern National Bank of South Carolina to secure a $ 2 million bond issue, the proceeds of which were to be used for construction of a manufacturing plant. On that same date, Industrial and Conso entered into a lease under which Conso would rent the land and manufacturing plant to be constructed by Industrial for 25 years, beginning January 1, 1967.Plant construction was completed in the fall of 1967, and Conso took possession on or about October 18, 1967. Conso used the plant from the date of possession and at all relevant times thereafter1976 U.S. Tax Ct. LEXIS 95">99 as a manufacturing facility.The lease agreement between Industrial and Conso provided, in part, as follows:Upon the completion of such manufacturing building * * * and the payment of all costs and expenses therefor payable from the proceeds of the Series A Bonds, any surplus of such bond proceeds shall be disbursed for the purposes and in the manner provided in the Indenture.The Lessee agrees that in the event the cost of such construction exceeds the amount derived from the sale of the Series A Bonds, it will pay all costs in excess of such amount.* * This Lease shall, upon the expiration of the Original Term, be automatically renewed or extended for not exceeding four (4) additional terms of 5 (five) years each unless and until notice be given in writing by the Lessee * ** * In no event shall the monthly rental to be paid by Lessee during any renewal term be less than a rental based upon the fair market value of the Leased Premises at the time of the renewal of such term. * ** * Section 4.01. Lessee will pay to Lessor * * the net basic rental (hereinafter called the "Basic Rent") for the periods, in the amounts and at the times set forth in Schedule B attached1976 U.S. Tax Ct. LEXIS 95">100 hereto * * The Basic Rent shall be absolutely net to Lessor * * * so that this Lease shall yield the Basic Rent net to Lessor throughout the Original Term.* * When all of the Bond Indebtedness shall have been paid in full, both as to principal and interest, any money remaining in the various accounts created by the Indenture shall be paid to the Lessee * ** * Section 4.04. * * so long as any part of the Bond Indebtedness is outstanding and unpaid the Basic Rent * * * shall continue to be payable in all events [e.g., condemnation, loss, or destruction] and the obligations of Lessee hereunder shall continue unaffected * * Schedule B of the lease agreement provided for the following lease payments during the years in issue: 66 T.C. 436">439 Year endingPayment duePayment dueTotal paymentsDec. 31 --June 15Dec. 15during year1967$ 59,000$ 59,000$ 118,000196859,00099,000158,000196957,82097,820155,640The indenture between Industrial and the Citizens & Southern National Bank of South Carolina provided, in part, as follows:Section 3.02. * * The Company [Industrial] shall deposit with the Trustee [the Citizens & Southern National1976 U.S. Tax Ct. LEXIS 95">101 Bank of South Carolina] all of the proceeds from the sale of the Series A Bonds * * * and the Trustee shall out of such proceeds:(a) Deposit to the credit of the Interest Account * * * the accrued interest on the Series A Bonds from their date to the date of their delivery plus an amount which when added to said accrued interest will equal $ 59,000. It is understood that the amount so deposited shall constitute a credit to Conso Fastener Corporation on the next succeeding payment or payments of Basic Rent due or to become due under the Conso Lease and such reduction in rental shall be agreed to by the Trustee.(b) Pay upon the written order of the Company * * :(i) The payment of the cost of construction of the manufacturing plant * (ii) Any surplus remaining after making the payments specified in subparagraph (i) of this paragraph (b) shall be * * disbursed by it pursuant to the terms of Section 4.04 of this Indenture.* * Section 4.03. * The Trustee may * * establish such accounts as it deems desirable for [holding] * * * moneys obtained from Conso Fastener Corporation as prepayments of rent, until such time as such amounts are used in full pursuant to the 1976 U.S. Tax Ct. LEXIS 95">102 terms of the Conso Lease or of this Indenture.Section 4.04. Moneys remaining after the construction of the manufacturing plant * * shall * * * be deposited by the Trustee in the Revenues Account and shall constitute a credit to Conso Fastener Corporation on the next succeeding payment or payments of Basic Rent due or to become due under the Conso Lease.* * Section 4.06. All moneys held by the Trustee may be invested and reinvested by the Trustee at the direction of Conso Fastener Corporation * . Any interest, profit or loss on such investments shall be credited or charged to the Revenues Account. It is understood that * * moneys so credited to the Revenues Account are to constitute a credit to Conso Fastener Corporation on the next succeeding payment or payments of Basic Rent and such reduction in Basic Rent shall be agreed to by the Trustee. * * ** * Section 5.05. * [Under certain circumstances] the Trustee shall hold moneys available for the redemption of a particular [bond] series * . Moneys so held by the Trustee shall be invested and reinvested by the Trustee in general obligations of the 66 T.C. 436">440 United States of America * * * and any 1976 U.S. Tax Ct. LEXIS 95">103 interest, profit, or loss on such investments shall be credited or charged to the Revenues Account. It is understood that * * moneys so credited to the Revenues Account are to constitute a credit to Conso Fastener Corporation on the next succeeding payment or payments of Basic Rent and such reduction in Basic Rent shall be agreed to by the Trustee.Industrial received $ 2 million in proceeds from the bond issue. The lower than anticipated actual cost of constructing the manufacturing plant, $ 1,821,494, resulted in a surplus of $ 178,506 in bond proceeds, which was credited against basic rent as follows:Basic rentCredit againstBalance duedue datebasic rentfrom ConsoJune 15, 1967$ 59,0000 Dec. 15. 19670 $ 59,000June 15, 196859,0000 Dec. 15, 196860,50638,494June 15, 19690 57,820On its corporate income tax return for the taxable year ended June 30, 1967, Conso did not claim a deduction for rent under the lease. On its corporate income tax return for the taxable year ended June 30, 1968, Conso deducted $ 163,612 for rent under the lease, computed by subtracting a credit of $ 13,388 from the sum of three $ 59,000 payments due on1976 U.S. Tax Ct. LEXIS 95">104 June 15, 1967, December 15, 1967, and June 15, 1968. On its corporate income tax return for the taxable year ended June 30, 1969, Conso deducted $ 147,895 for rent under the lease, computed by subtracting a credit of $ 8,925 from payments due of $ 57,820 for June 15, 1968, and of $ 99,000 for December 15, 1968.Conso had no economic interest in the manufacturing facility beyond the original 25-year term of the lease, other than renewal rights based upon a fair rental value. Conso had no right or duty to acquire an equity interest in the facility at any time.We first must decide whether Conso was entitled to deduct the full amounts of basic rent as they became due. The amount of rental deductions properly accrued by Conso, an accrual basis taxpayer, in turn depends upon how credits resulting from surplus bond proceeds should be applied to those lease payments.Petitioner contends that Conso committed itself to a 25-year obligation. Thus, Conso should deduct in each lease year an allocable part of that total commitment, reduced pro rata by an allocable part of the surplus bond proceeds credit for each lease year. Petitioner accordingly asserts that the full basic rent due 66 T.C. 436">441 1976 U.S. Tax Ct. LEXIS 95">105 each year is deductible, except for a reduction equal to 1/25 of the surplus bond proceeds credit. This is essentially how petitioner treated this transaction on its income tax returns for the years in issue. 2In support of this "total commitment" theory, petitioner argues that the "lease" payments were not in fact related to specific occupancy periods, as illustrated by Conso's obligation to make these payments notwithstanding condemnation or destruction of the plant or other circumstances which would render the plant unusable.Respondent, on the other hand, asserts that Conso should deduct only basic rent payments that were not satisfied by surplus bond proceeds credits, as liabilities could not have accrued for rents reduced by those credits. In other words, Conso's rental liability was fixed at the basic rent less any possible1976 U.S. Tax Ct. LEXIS 95">106 credits which might arise.We believe Conso should be allowed to fully deduct all amounts which accrued as basic rent, notwithstanding the surplus bond proceeds credits. For an accrual basis taxpayer such as Conso to deduct rental payments under section 162(a)(3), 3 it must be shown that "all the events have occurred which establish the fact of the liability giving rise to such deduction and the amount thereof can be determined with reasonable accuracy." Sec. 1.446-1(c)(1)(ii), Income Tax Regs. Resolution of the proper liability to be deducted in this case turns on how Conso's rental liability is defined: if its rental liability is defined as the basic rent payments due, then the amount of each such payment is fully deductible; if its rental liability is defined as the basic rent payments due less any contingent credits which might arise, as respondent contends, then the deduction would of course be reduced to the extent of such credits, resulting in a net deduction.1976 U.S. Tax Ct. LEXIS 95">107 66 T.C. 436">442 We believe the key to defining Conso's rental liability is in turn determined by examining the relationship of the possible credits to basic rent payments. Credits could arise from four sources: (1) Surplus bond proceeds not needed for the cost of construction were to be credited to the next basic rent payment due, as here; 4 (2) $ 59,000 of bond proceeds, consisting in part of accrued interest on the bonds, were to be set aside and were to be credited to the next basic rent payment due under section 3.02 of the indenture; (3) profits from investments of certain moneys held by the trustee were also to be credited against the next basic rent payment due under section 4.06 of the indenture; and (4) profits from investments of bond redemption funds held by the trustee were also to be so credited under section 5.05 of the indenture. It is immediately apparent with respect to the last three credits described that they bear no relation whatsoever to the lease in issue or the parties' obligations thereunder. They are purely random adjustments in Conso's favor which are being offset for cash-flow purposes as bookkeeping entries against basic rent cash due. A true rental liability1976 U.S. Tax Ct. LEXIS 95">108 -- which we believe this to be, in both form and substance -- is not contingent upon investment returns from an unrelated account. That the surplus bond proceeds credits here in issue arose near inception of the lease does not change their similarity to these other credits: the surplus bond proceeds credits did not originate in the parties' obligations under the lease, they did arise from the entirely unrelated cost of constructing the plant, and they were used as bookkeeping entries to avoid the needless charade of Industrial receiving cash payments for basic rent from Conso and then paying cash payments back to Conso for whatever credits might arise. This procedure also had the virtue, from Industrial's viewpoint, of safeguarding cash funds in the trustee's accounts until basic rent payments became due, thereby precluding loss of such funds while under Conso's control.In sum, we do not view Conso's rental liabilities as1976 U.S. Tax Ct. LEXIS 95">109 variable, depending on what credits might arise; rather, rental liabilities were fixed by the basic rent schedule, and any credits -- all of which were unrelated to actual occupancy of the property -- merely constituted a method of properly reflecting random adjustments in Conso's favor. Conso was obligated to make 66 T.C. 436">443 definite, semiannual rental payments to Industrial, whether or not various contingencies might result in credits to reduce the actual cash Conso would have to pay directly. As each basic rent payment became due, all events had occurred which established the fact of liability, and the amount of the liability was a fixed sum, accurately determinable. That the liability could be satisfied by credits resulting from various contingencies -- of which there were four -- did not change Conso's obligation to discharge or Industrial's right to satisfaction of the liability in full. We accordingly believe Conso had accrued a liability on each basic rent payment date and was then entitled to deduct each full basic rent payment as it accrued.The case of Your Health Club, Inc., 4 T.C. 385">4 T.C. 385, 4 T.C. 385">389-390 (1944), is analogous on this point. In that1976 U.S. Tax Ct. LEXIS 95">110 case an accrual basis taxpayer received a credit against rent due for improvements it made as lessee to the rented property. We held that the full rent due accrued and was deductible, notwithstanding that a lower cash payment was made to the lessor because of the improvements credit. Although the taxpayer in that case was a direct source of the credit, rather than an indirect source as here, the logic underlying allowance of the full rental deduction is the same. We accordingly hold that Conso was entitled to deduct the full amounts of the basic rent payments due.The parties' contentions to the contrary are unpersuasive. Petitioner's contention that Conso assumed a commitment to pay the full amount of lease payments over 25 years and that the full commitment should be reduced by the surplus bond proceeds and then prorated over the lease term more aptly describes the proper tax treatment for a purchased leasehold than for a lease. Cf. Oscar L. Thomas, 31 T.C. 1009">31 T.C. 1009, 31 T.C. 1009">1012 (1959). Indeed, petitioner cites section 1.162-11(a), Income Tax Regs., 5 which applies to purchased leaseholds, in support of this argument. We cannot agree that the lease obligation1976 U.S. Tax Ct. LEXIS 95">111 should be regarded for tax purposes as a "total commitment" or that the lease is anything other than what it purports to be. The agreement uses leasing vocabulary throughout, lease payments are to be made "for the periods * * set forth in Schedule B," and there is no support in 66 T.C. 436">444 the record for distinguishing the lease agreement from a traditional lease. As to petitioner's emphasis on Conso's continued obligation to make payments under the agreement notwithstanding condemnation, casualty loss, or other unusability of the facility, we note that condemnation awards, insurance proceeds, or other recoveries were generally to be applied to Conso's remaining lease obligations. Furthermore, "a taxpayer must normally accept the tax consequences of the way in which he deliberately chooses to cast his transactions." Sterno Sales Corp. v. United States, 345 F.2d 552">345 F.2d 552, 345 F.2d 552">554 (Ct. Cl. 1965).1976 U.S. Tax Ct. LEXIS 95">112 Petitioner also relies on Southwestern Hotel Co. v. United States, 115 F.2d 686">115 F.2d 686 (5th Cir. 1940), cert. denied 312 U.S. 703">312 U.S. 703 (1941); Main & McKinney Bldg. Co. v. Commissioner, 113 F.2d 81">113 F.2d 81 (5th Cir. 1940), affg. a Memorandum Opinion of the Board of Tax Appeals, cert. denied 311 U.S. 688">311 U.S. 688 (1940); and University Properties, Inc., 45 T.C. 416">45 T.C. 416 (1966), affd. 378 F.2d 83">378 F.2d 83 (9th Cir. 1967). Those cases are not in point because they involve prepaid rent, which is not in issue here. Cf. Bellingham Cold Storage Co., 64 T.C. 51">64 T.C. 51, 64 T.C. 51">57 (1975). Indeed, the indenture itself, at section 4.03, distinguishes between prepayments of rent and the credits in issue herein.Petitioner also cites Rev. Rul. 70-119, 1970-1 C.B. 120. Respondent there asserted that the portion of rental payments withheld during the first 3 years of a lease, to be paid ratably in monthly installments in later years, was deductible by an accrual method lessee in the year in which withheld. 1976 U.S. Tax Ct. LEXIS 95">113 Although respondent contends that that ruling is factually distinguishable, that ruling is indeed helpful because it shows that the focus of inquiry for a lease payment deduction of an accrual basis taxpayer is on when the liability accrued, not on how it was satisfied.Petitioner also contends that to deny Conso a deduction for basic rent satisfied by surplus bond proceeds credits would distort its taxable income because to do so would treat Conso as occupying the manufacturing plant rent-free during such basic rent periods. With this, we agree. On the other hand, petitioner's proposed proration of the surplus bond proceeds credit over the full 25-year lease term would also distort Conso's income because the full credit would not be reflected in years during which the benefit therefrom was received. Furthermore, such an approach is impractical, as other credits allowable under the indenture 66 T.C. 436">445 may arise long after it is possible to reflect such credits over the entire lease term by adjusting all prior lease deductions.Respondent cites Meyer Bros., Inc., 19 T.C. 104">19 T.C. 104 (1952), in support of his contention that Conso should deduct only the net 1976 U.S. Tax Ct. LEXIS 95">114 amount due for each basic rent payment because each accrued deduction should have reflected the reduction in basic rent liability due to credits against that obligation. That case is distinguishable because the funds resulting from a reduction in rental payments due therein were not paid and did not accrue to the lessor's benefit. Here the lessor always received funds fully equal to the basic rent due, either from Conso directly or from an account for which Conso was ultimately the source of the funds.Respondent argues, in the alternative, that we should hold that the surplus bond proceeds credits constituted taxable income to Conso when applied to basic rent payments because of the tax benefit rule. Under that rule, "if an amount deducted from gross income is later recovered, the recovery is income in the year of recovery." Estate of David B. Munter, 63 T.C. 663">63 T.C. 663, 63 T.C. 663">671 (1975). Although the rule is generally addressed to situations in which a deduction in an earlier taxable year is related to a recovery in a later taxable year, the same approach has been applied where both deduction and offsetting recovery occur in the same taxable year. See Connery v. United States, 460 F.2d 1130">460 F.2d 1130, 460 F.2d 1130">1133 (3d Cir. 1972);1976 U.S. Tax Ct. LEXIS 95">115 Spitalny v. United States, 430 F.2d 195">430 F.2d 195, 430 F.2d 195">198 (9th Cir. 1970); Anders v. United States, 462 F.2d 1147">462 F.2d 1147, 462 F.2d 1147">1149 (Ct. Cl. 1972), cert. denied 409 U.S. 1064">409 U.S. 1064 (1972), rehearing denied 410 U.S. 947">410 U.S. 947 (1973); 63 T.C. 663">Estate of David B. Munter, supra at 674-677. Here accrued liabilities were satisfied during the same taxable years by crediting surplus bond proceeds against such liabilities -- indeed, the liabilities arose and the funds were credited on the same days -- and the tax benefit rule should be applied. In making this determination we are satisfied that there is "such an inter-relationship between the event which constitutes the loss [deduction] and the event which constitutes the recovery that they can be considered as parts of one and the same transaction." Merton E. Farr, 11 T.C. 552">11 T.C. 552, 11 T.C. 552">567 (1948), affd. sub nom. Sloane v. Commissioner, 188 F.2d 254">188 F.2d 254, 188 F.2d 254">262-263 (6th Cir. 1951). Cf. Capitol Coal Corp., 26 T.C. 1183">26 T.C. 1183, 26 T.C. 1183">1195-1197 (1956), affd. 250 F.2d 361">250 F.2d 361, 250 F.2d 361">364 (2d Cir. 1957),1976 U.S. Tax Ct. LEXIS 95">116 cert. denied 356 U.S. 936">356 U.S. 936 (1958). The rental obligation incurred by Conso originated in the 66 T.C. 436">446 industrial development bond issue 6 and was reduced by a surplus of bond proceeds from that issue; deductions and income thus arose from the same single, integrated transaction. We accordingly hold that petitioner was required to include the surplus bond proceeds credits in income under the tax benefit rule.Petitioner contends that Conso's actual liability on its basic obligation never reached $ 2 million because the cost of construction was less; the surplus bond proceeds accordingly could not result in taxable income because they did not originate in or later reduce the liability that was incurred. This ignores, however, the fixed liabilities which accrued on basic rent due dates and which were reduced by surplus bond proceeds credits on those dates.We have1976 U.S. Tax Ct. LEXIS 95">117 examined the parties' other contentions and found them unconvincing. Inasmuch as respondent has asserted that the result we reach herein will result in the same deficiency due as determined in the notice of deficiency, 7Decision will be entered for the respondent. Footnotes1. Statutory references are to the Internal Revenue Code of 1954, as amended.↩2. Petitioner has, of course, contended here that Conso was entitled to deduct basic rent in 1967, notwithstanding Conso's failure to deduct any such rent on its 1967 income tax return.↩3. SEC. 162. TRADE OR BUSINESS EXPENSES.(a) In General. -- There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including -- * *(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.↩4. There is no evidence in the record that credits other than this type have in fact arisen.↩5. That regulation provides, in part, as follows:If a leasehold is acquired for business purposes for a specified sum, the purchaser may take as a deduction in his return an aliquot part of such sum each year, based on the number of years the lease has to run.↩6. See generally O'Connor, "Financing Costs and Industrial Development Bonds," 61 A.B.A.J. 1539↩ (1975).7. Although the notice of deficiency was framed only in terms of disallowing rental deductions claimed by Conso, respondent added, after a Motion For Leave To File Amendment To Answer, the contention that petitioner received unreported taxable income due to the surplus bond proceeds credits in an Amendment To Answer.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625810/	MAGDALENA W. DE SABICHI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.De Sabichi v. CommissionerDocket No. 10802.United States Board of Tax Appeals4 B.T.A. 445; 1926 BTA LEXIS 2270; July 28, 1926, Decided 1926 BTA LEXIS 2270">2270 Under the provisions of the Revenue Act of 1926, where an appeal has been taken from the determination of a deficiency in gift tax, the Board has jurisdiction to hear the appeal and determine any overpayment, even though the tax may have been paid after the appeal was taken. The same jurisdiction is extended by the Act to appeals taken under section 308 (a) of the Revenue Act of 1924, prior to and undetermined at the date of the enactment of the Revenue Act of 1926. Frank G. Butts, Esq., for the petitioner. F. T. Horner, Esq., for the respondent. PHILLIPS 4 B.T.A. 445">445 Before PHILLIPS. PHILLIPS: This appeal is before us upon motion of the Commission to dismiss for want of jurisdiction. It appears that the taxpayer 4 B.T.A. 445">446 filed with the collector of internal revenue for her district a return under the so-called "gift tax" provisions of the Revenue Act of 1924, which return reported certain transfers of property made by the taxpayer but expressly recited that it was made under protest and without any admission or confession that there was any tax liability whatever on the transfers reported. On December 1, 1925, the Commissioner mailed to the1926 BTA LEXIS 2270">2271 taxpayer notice of his final determination that the amount of gift tax was $282,618.19, of which $244,045.08 is stated to be the amount disclosed by the return and $38,573.11 is stated to be a deficiency. On or about December 9, 1925, the taxpayer received notice and demand for payment of $244,045.08 from the collector for her district. On January 11, 1926, an appeal was filed with the Board alleging, among other errors, that no tax whatever should have been assessed or determined. While such appeal was pending undetermined, the Revenue Act of 1926 was passed, amending the Revenue Act of 1924 by reducing the rates of taxation. On February 23, 1926, taxpayer paid to the collector for her district $194,876.15, which the Commissioner contends is the correct amount of tax and interest under the rates as revised by the 1926 Act. The Commissioner moves that the appeal be dismissed on the ground that "the Board is without jurisdiction to hear and determine the appeal in that the taxpayer has paid the entire amount of the tax." For our jurisdiction we must look to the provisions of the Revenue Act of 1926. (Sec. 904 of the Revenue Act of 1924, as amended by the Revenue Act of 1926.) 1926 BTA LEXIS 2270">2272 Section 318(b) of the 1926 Act provides: If before the enactment of this Act any person has appealed to the Board of Tax Appeals under subdivision (a) of section 308 of the Revenue Act of 1924 * * and the appeal is pending before the Board at the time of the enactment of this Act, the Board shall have jurisdiction of the appeal. Each of these conditions existed on February 26, 1926, the date when the Revenue Act of 1926 was enacted, and there can be no doubt that the Board has jurisdiction if only for the purpose of determining whether there has been an overpayment of tax. Section 318 (b) further provides that in the cases enumerated - the powers, duties, rights, and privileges of the Commissioner and of the person who has brought the appeal, and the jurisdiction of the Board and of the courts, shall be determined * * * in the same manner as provided in subdivision (a) of this section, except * * . Subdivision (a) of that section provides in substance that the procedure for the assessment, collection and payment of deficiencies determined under acts prior to the Revenue Act of 1926 shall be the same as where notice is sent under subdivision (a) of section 308 of the Act. 1926 BTA LEXIS 2270">2273 That subdivision provides for notices of deficiency in tax 4 B.T.A. 445">447 under the provisions of the 1926 Act and for appeal therefrom. The sections which follow lay down in more detail the jurisdiction of the Board and the procedure to be followed after notice of deficiency has been given. Section 312 (i) provides in part: When the petition has been filed with the Board and when the amount which should have been assessed has been determined by a decision of the Board which has become final, * * if the amount already collected exceeds the amount determined as the amount which should have been assessed, such excess shall be refunded. Substantially the same provision is contained in section 319 (c), which reads: If the Board finds that there is no deficiency and further finds that the executor has made an overpayment of tax, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the executor as provided in section 3220 of the Revised Statutes, as amended. * * . That section further provides that, where an appeal has been taken to the Board from the1926 BTA LEXIS 2270">2274 determination of a deficiency made after the enactment of the 1926 Act, no refund shall be made except in accordance with the decision of the Board which has become final. It is clear that, under the Revenue Act of 1926, when notice of a deficieney has been mailed to the taxpayer and an appeal taken to the Board, the Board has jurisdiction not only to determine whether such deficiency should be assessed or collected, but also whether there has been any overpayment of the tax, and that in such case the taxpayer has no method of securing a refund other than to prosecute his appeal before the Board. This jurisdiction is not lost by reason of the fact that, after the appeal is taken, the deficiency may be assessed and collected. This same jurisdiction to determine overpayments now exists with reference to appeals which were taken before the enactment of the Revenue Act of 1926 and which were pending undetermined when that Act became a law. The motion to dismiss is denied.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4625812/	Main Properties, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Southern Loan & Investment Company, Petitioner, v. Commissioner of Internal Revenue, RespondentMain Properties, Inc. v. CommissionerDocket Nos. 815, 834United States Tax Court4 T.C. 364; 1944 U.S. Tax Ct. LEXIS 17; November 28, 1944, Promulgated 1944 U.S. Tax Ct. LEXIS 17">17 Decisions will be entered under Rule 50. 1. Where a taxpayer on the cash basis purchased stock in a prior year and gave its note to the seller for the purchase price, and both purchaser and seller agreed that at any time prior to the payment of the note either party might rescind, and in later years prior to the taxable year the taxpayer received $ 1,900 liquidating dividends on the stock and then the stock became worthless and the taxpayer took a deduction on account thereof in its income tax return but received no tax benefit therefrom, and in the taxable year 1938 the taxpayer elected to rescind and returned the stock to the seller, who in turn returned the note to the taxpayer, held, the taxpayer realized no taxable gain on the transaction except the liquidating dividend which it received in years prior to the redelivery of the stock and did not pay over with the stock but reported for taxation.2. Where a taxpayer on the cash basis for value received obligated itself to purchase certain corporation bonds held by an individual and to extend that individual or any of his companies a line of credit, and one of such companies obtained a loan from a bank by executing a promissory1944 U.S. Tax Ct. LEXIS 17">18 note, endorsed by the individual, secured by the bonds, and guaranteed by the taxpayer, and in the taxable year the taxpayer made the final payment for the bonds under its guaranty, and the bonds were then worthless and the final payment was used to liquidate the note, held, the taxpayer sustained a deductible loss in the taxable year in the amount of the final payment made for the then worthless bonds.3. The fair market value of a building and leaseholds received in exchange for certain bonds in the taxable year 1939 is found from the evidence for the purpose of determining the amount of gain realized or loss sustained on the exchange.4. Where a corporation's personal holding company income for the taxable year 1939 was less than 80 per centum of its gross income for that year, held, the corporation was not a personal holding company within the definition contained in section 501 (a) of the Internal Revenue Code.5. Where a taxpayer exchanged a building and leaseholds for some of its own bonds, which it canceled, and the evidence shows that the taxpayer was insolvent both before and after the exchange, held, the taxpayer realized no taxable gain on the exchange. Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95,1944 U.S. Tax Ct. LEXIS 17">19 followed; Lutz & Schramm Co., 1 T.C. 682, distinguished. George W. Rice, Esq., and Charles H. Draper, Esq., for the petitioners.Samuel G. Winstead, Jr., Esq., and Frank B. Schlosser, Esq., for the respondent. Black, Judge. BLACK 4 T.C. 364">365 These proceedings were consolidated. In Docket No. 815 the respondent determined deficiencies in income tax and declared value excess profits tax against Main Properties, Inc. (hereinafter sometimes referred to as "Main") for the fiscal year ended November 30, 1939, in the amounts of $ 43,987.05 and $ 36,352.94, respectively. In Docket No. 834 the respondent determined deficiencies in income tax and declared value excess profits tax against the Southern Loan & Investment Co. (hereinafter sometimes referred to as "Southern") for the calendar years 1938 and 1939 in amounts as follows:YearIncome taxExcess profitstax1938$ 17,870.30$ 5,934.25193918,888.32By amended pleadings in Docket No. 834 the respondent affirmatively alleges that the deficiency of $ 18,888.32 determined for 1939 is understated and that the correct deficiency in income tax and penalty for that year1944 U.S. Tax Ct. LEXIS 17">20 is $ 161,120.76, determined as follows:Deficiency in income tax$ 1,331.81Deficiency in income or surtax under section 401 of the Revenue Actof 1938 and corresponding provisions of the Internal Revenue Code128,131.1625% delinquency penalty31,657.79Total additional income tax and penalty161,120.76This affirmative allegation, which raises the issue as to whether Southern is liable for the personal holding company surtax and penalty for the year 1939, is treated by the parties as issue No. 4, and it will be so considered.In an amended petition filed in Docket No. 834, Southern alleges that it overpaid its taxes for the year 1939 and requests that this Court determine the amount of the overpayment.In a statement attached to the deficiency notice in Docket No. 815 the respondent made adjustments to the net income of Main for the fiscal year ended November 30, 1939, together with explanations thereof as follows:Net income as disclosed by return (loss)$ (140,121.67)Unallowable deductions and additional income:(a) Gain from sale of Chronicle Building$ 427,817.98(b) Depreciation2,229.10(c) Interest13,015.75443,062.83Net income adjusted$ 302,941.161944 U.S. Tax Ct. LEXIS 17">21 Explanation of Adjustments(a) The transfer by you in the taxable year of the Chronicle Building leasehold having a basis of $ 212,182.02 in exchange for the surrender and cancellation of $ 640,000 principal amount of your own outstanding bonds is held to have been a 4 T.C. 364">366 transaction in which you realized a taxable gain of $ 427,817.98. It is held further that you were at all times during the taxable year solvent.(b) and (c) These amounts represent adjustments which you have accepted * .By an appropriate assignment of error Main contests adjustment (a). The issue thus raised is treated by the parties as issue No. 5, and it will be so considered.In a statement attached to the deficiency notice in Docket No. 834 the respondent made several adjustments to the net income of Southern for the calendar years 1938 and 1939, some of which are contested by appropriate assignments of error and some of which are not contested. The issues thus raised by the contested adjustment are as follows:Issue No. 1. -- Did the respondent err in holding that the cancellation and delivery to Southern in 1938 of Southern's note for $ 20,000 payable to one J. E. Josey was a transaction from1944 U.S. Tax Ct. LEXIS 17">22 which Southern realized taxable income in the amount of $ 20,000?Issue No. 2. -- Is Southern entitled to a deduction of $ 75,000 from gross income of the year 1938 for a loss arising out of transactions entered into with one J. W. Colvin prior to that year?Issue No. 3. -- Did the exchange on June 1, 1939, by Southern of Main bonds costing $ 260,256.72 for the Chronicle Building and leaseholds result in taxable capital gain or deductible capital loss to Southern, and, if so, how much?The respondent now concedes that the net income of Southern for the year 1938 should be reduced by $ 1,500 representing a recovery of a bad debt from Stallones & Bobo, Inc. The respondent also concedes that Southern, on Form 972, "Consent of Shareholder to Include Specific Amount in Gross Income Under Section 28 of the Revenue Act of 1938," dated February 9, 1943, filed its consent to include as income for the taxable year 1939 the amount of $ 53,891.75 consent dividends from its wholly owned subsidiary, S. L. I. Corporation. Effect will be given to these concessions under Rule 50.FINDINGS OF FACT.Many of the facts have been stipulated. The stipulation is incorporated herein by reference. 1944 U.S. Tax Ct. LEXIS 17">23 In general. -- Petitioners are corporations organized under the laws of the State of Texas, with their principal places of business in Houston, Texas. Main was dissolved by the Secretary of State of Texas on February 10, 1942, and Southern was likewise dissolved on December 31, 1942. Both corporations will continue in existence for three years after their respective dissolutions for the purpose of settling their affairs. The income and excess profits tax returns of petitioners 4 T.C. 364">367 for the periods here involved were filed with the collector for the first district of Texas. Southern did not file for the year 1939 any return on Form 1120 H as a personal holding company. Throughout 1939 the capital stock of Main was owned by the Realty Management Co., and the capital stock of Southern was owned by John T. Jones.Main kept its books and filed its Federal income tax returns on the accrual basis of accounting. Southern kept its books and filed its income tax returns on the cash receipts and disbursements basis.Southern filed a timely income and excess profits tax return for the table year 1939 showing taxable net income of $ 8,329.44 and income tax of $ 156.18, which it1944 U.S. Tax Ct. LEXIS 17">24 paid when due in 1940. Southern filed an amended income and excess profits tax return for the taxable year 1939 showing amended taxable net income of $ 53,329.44 and amended income tax of $ 2,653.14, and paid additional income tax of $ 2,496.96 in 1941. On November 28, 1942, respondent mailed the deficiency notice to Southern, claiming an amended net income of $ 144,974.50 and amended income tax of $ 21,541.46, or deficiency in income tax of $ 18,888.32. On February 26, 1943, Southern filed with the Tax Court a petition for redetermination of the above deficiency.Issue No. 1. -- One of the adjustments to net income of Southern for the year 1938 was an addition thereto of $ 20,000, which the respondent called "(d) Gain through cancellation of indebtedness" and explained as follows:(d) It is held that the cancelation and delivery to you of your note for $ 20,000 payable to J. E. Josey was a transaction from which you realized taxable income to the amount of such note.On September 4, 1929, Southern gave its demand note for $ 20,000 to one J. E. Josey of Houston, Texas, and received therefor 1,000 shares of the capital stock of the National Standard Fire Insurance Co. of Houston, 1944 U.S. Tax Ct. LEXIS 17">25 Texas, hereinafter sometimes referred to as "National." At the time of the purchase there was an oral agreement between the parties that at any time before the note was paid Southern could redeliver the stock to Josey, who would thereupon cancel the note, or Josey could turn the note back to Southern and recapture the stock. On its income tax return for the taxable year ended December 31, 1933, Southern reported liquidating dividends of $ 900 on the stock, and charged off $ 17,190 as a loss from the worthless stock of National. In the taxable year ended December 31, 1933, Southern was included in a consolidated income tax return filed by its parent company, Jesse H. Jones Co., which return showed a net loss of $ 3,373,771.68. Of this loss, $ 2,259,354.08 represented a deduction for worthless stocks, including the loss of $ 17,190 referred to above and $ 262,622.20 for bad debts, and the balance for a loss from ordinary 4 T.C. 364">368 operations. On June 21, 1935, Southern received a $ 1,000 liquidating dividend on the 1,000 shares of National stock. The $ 20,000 note given by Southern to Josey for the 1,000 shares of National stock was an interest-bearing note and interest was paid1944 U.S. Tax Ct. LEXIS 17">26 thereon until March 4, 1936, after which date Southern did not pay any interest on the note. On or about March 1, 1936, Southern asked Josey to surrender the note in exchange for the stock, but Josey was unable to do so at that time for the reason that the note was pledged by him as collateral with a bank. As soon as the financial affairs of Josey permitted, he got the bank to release the note as collateral and thereupon, on February 1, 1938, Southern notified Josey of its intention to exercise the option contained in the original agreement between the parties, whereupon Southern delivered and transferred to Josey the 1,000 shares of National stock originally purchased from him on September 4, 1929, and on the same date, and as a part of the same transaction, Josey canceled and delivered back to Southern the $ 20,000 note originally given by Southern as purchase price of the stock. The 1,000 shares of the capital stock of National were worthless at the time Southern received its $ 20,000 note back from the seller of the stock. Southern, on its income tax return for the taxable year ended December 31, 1938, returned as income the amount of $ 1,900 representing the liquidating dividends1944 U.S. Tax Ct. LEXIS 17">27 which it had received and which had been credited to cost of the 1,000 shares of National stock in 1933 and 1935. Respondent in his deficiency notice determined that an additional amount of $ 20,000 should be returned as income from the cancellation of the Josey note originally given by Southern as purchase price of the 1,000 shares of the National stock.For the taxable years 1934 to 1936, inclusive, Southern's Federal income tax returns show net losses as follows:1934$ 2,646,215.40193521,853.61193624,500.44For the taxable year 1937 Southern's Federal income tax return showed net income $ 4,029.19, with respect to which a tax was paid in the amount of $ 683.43. For the taxable years 1931, 1932, and 1933 Southern was included in the consolidated returns of its parent, Jesse H. Jones Co. Such consolidated returns for 1931 showed no net income, and for 1932 they showed a net loss of $ 1,396,600.08. No substantial adjustments were made by respondent for the years 1931 to 1936, inclusive.Southern realized no taxable gain on the redelivery to Josey in 1938 of the 1,000 shares of National stock in exchange for its $ 20,000 note, except the $ 1,900 representing liquidating1944 U.S. Tax Ct. LEXIS 17">28 dividends, which it duly reported as income.4 T.C. 364">369 Issue No. 2. -- Another of the adjustments to net income of Southern for the year 1938 was an addition thereto of $ 75,000 which the respondent called "(e) Capital loss" and explained as follows:(e) The amount of $ 75,000 claimed by you as a bad debt and deducted from gross income in your return is disallowed since it represents a payment made by you within the taxable year upon your own obligation voluntarily assumed.In 1928, 1929, 1930, and 1931 Southern owned the capital stock of the Fort Worth Properties Corporation. In 1928 the Fort Worth Properties Corporation owned certain land in Fort Worth, Texas, upon which Southern was constructing what was later known as the Fort Worth Electric Building and Theatre.On October 12, 1928, a written contract was entered into between J. W. Colvin of Houston, Texas, as first party, and Jesse H. Jones of Houston, as second party. Jones was acting on behalf of Southern "and/or those affiliated companies owning and building the Electric Building in Fort Worth, Texas * ." This contract was later modified by written agreements dated February 9 and July 3, 1929 Pursuant to these three1944 U.S. Tax Ct. LEXIS 17">29 agreements: (1) A new corporation, named Fort Worth Electric Building Co., hereinafter sometimes referred to as the Electric Co., was organized under the laws of the State of Texas; (2) Fort Worth Properties Corporation paid in the entire capital stock of the Electric Co.; (3) Southern during 1929 sold the Fort Worth Electric Building and Theatre to the Electric Co. for $ 1,500,000 first mortgage bonds of the Electric Co., on which Southern realized $ 1,380,000 cash during 1929, after paying $ 120,000 commission to an investment broker; (4) Fort Worth Properties Corporation sold part of the land on which the Fort Worth Electric Building and Theatre was built to the Electric Co. for $ 500,000 par value series A bonds and $ 100,000 par value series B bonds of the Electric Co., and it leased the remainder of the land on which the Fort Worth Electric Building and Theatre was built to the Electric Co. for $ 30,000 per annum; and (5) Colvin for a cash consideration of $ 200,000 paid to Fort Worth Properties Corporation, received, together with other considerations, the entire capital stock of the Electric Co., $ 150,000 par value series A bonds, and $ 100,000 par value series B bonds of1944 U.S. Tax Ct. LEXIS 17">30 the Electric Co., and an option to acquire for $ 600,000 the fee to that part of the land under the Fort Worth Electric Building and Theatre which was leased by the Electric Co.Thereafter Colvin became dissatisfied with what he had received and a controversy arose between Southern and Colvin, with the result that on February 28, 1931, Southern, Fort Worth Properties Corporation, and Colvin entered into a written agreement, hereinafter sometimes referred to as the three-party agreement, supplemented by two written agreements of the same date between Southern and Colvin, 4 T.C. 364">370 hereinafter sometimes referred to as Exhibit A and Exhibit B, respectively. Pursuant to these agreements: (1) Fort Worth Properties Corporation, which owned $ 350,000 par value series A bonds of the Electric Co., transferred $ 200,000 par value thereof to Colvin, who transferred to Fort Worth Properties Corporation all the capital stock of the Electric Co., $ 100,000 series B bonds of the latter company, and one-half interest in a theatre lease and certain equipment; and (2) Fort Worth Properties Corporation canceled $ 150,000 par value series A bonds and the $ 100,000 par value series B bonds of the Electric1944 U.S. Tax Ct. LEXIS 17">31 Co. which it received back from Colvin.Paragraphs eighth and ninth of the three-party agreement were as follows:EighthSouthern, for value received, agrees to execute to and with Colvin agreements for the purchase of Series A bonds and to establish and maintain a line of credit for Colvin, his heirs or estate, -- such agreements to be executed in the form of those hereto attached marked "Exhibit A" and "Exhibit B", respectively.NinthColvin and Jesse H. Jones, acting for himself and companies or corporations owned or controlled by him, executed a certain agreement dated October 12, 1928, and a supplement or amendment thereto dated February 9, 1929, and a further supplement or amendment dated on or about July 3, 1929, -- all having reference or being related to dealing with the properties of Electric Company, reference being here made for all purposes to said original contract of October 12, 1928, and any and all amendments or supplements thereto irrespective of whether same are hereinabove mentioned or identified.Part of the consideration for the execution of this instrument is the cancellation and full release of said contract of October 12, 1928, and any and all amendments1944 U.S. Tax Ct. LEXIS 17">32 or supplements thereto; hence, Colvin hereby agrees that said original contract, and the amendments or supplements thereto are hereby fully discharged, canceled, rescinded and set aside and all parties thereto are fully, finally and unconditionally released and discharged from any and all liability thereunder, and Colvin hereby waives and releases all claims for losses or damages and all causes of action, if any, of any and every kind or character which he has, had or may have against Jesse H. Jones and/or any of those corporations for which Jesse H. Jones was acting in making said original contract of October 12, 1928, and all amendments or supplements thereto.Exhibit A referred to in the three-party agreement was an agreement reciting that Colvin was the owner of $ 350,000 of series A bonds of the Electric Co. and that Southern agreed to purchase such bonds, $ 15,000 par value on or before March 2, 1932, an additional $ 15,000 every year thereafter until and including March 2, 1945, and the balance on or before March 2, 1946. It was also provided that these purchases could be made in advance of Southern's obligation to purchase.Exhibit B referred to in the three-party agreement1944 U.S. Tax Ct. LEXIS 17">33 was an agreement wherein Southern agreed to establish and maintain for a period of five years an unconditional line of credit for "Colvin, his heirs or 4 T.C. 364">371 Estate, and/or any companies or corporations owned or controlled by him" up to $ 150,000, on condition that any loan made be secured by a pledge of series A bonds of the Electric Co. in a par value amount of one and one-third times the amount of any loan made.In April 1931 Colvin transferred to Fort Worth Properties Corporation $ 100,000 par value series A bonds of the Electric Co. in consideration of his release from liability for his one-half of losses on the theatre lease. This transfer left Colvin with $ 250,000 series A bonds.On June 10, 1931, Texas Investors, Inc., a corporation controlled by Colvin, obtained from the National Bank of Commerce of Houston, Texas, hereinafter sometimes referred to as the bank, the sum of $ 150,000, executing a note endorsed by Colvin, guaranteed by Southern, and secured by Colvin's series A bonds in the face amount of $ 200,000.The series A bonds of the Electric Co., if not worthless on February 28, 1931, were worthless in 1934 or prior thereto. On June 5, 1934, all of the properties1944 U.S. Tax Ct. LEXIS 17">34 of the Electric Co. were sold at public auction, pursuant to foreclosure decree to the first mortgage bondholders' committee, for $ 300,000, and immediately thereafter the first mortgage bondholders transferred the assets to a new corporation, Electric Properties, Inc., for all the capital stock of the new corporation. Since the first mortgage bonds amounted to $ 1,500,000, there were no assets to be applied against the series A bonds. Likewise, Fort Worth Properties Corporation was insolvent in 1934 or prior thereto.Southern, during the years 1932, 1933, and 1934 and prior to November 25, 1935, purchased the $ 15,000 par value series A bonds per year it had agreed to purchase in accordance with Exhibit A referred to above, and $ 7,500 of the amount paid was applied on the $ 150,000 note referred to above, leaving a balance due on November 25, 1935, of $ 142,500 and leaving $ 190,000 face amount of series A bonds in the possession of the bank.On May 11, 1932, Metropolitan Properties Corporation, a corporation controlled by Colvin, had entered into an agreement with Southern in regard to Southern's liability to Metropolitan Properties Corporation under an operating agreement entered1944 U.S. Tax Ct. LEXIS 17">35 into prior to 1932, and thereafter on November 25, 1935, a final settlement of such liability was agreed upon. As a part of the consideration for this final settlement contract and on the same date, four agreements in the form of four letters were entered into.The body of the first letter, dated November 25, 1935, from Southern to Texas Investors, Inc., was as follows:This is to evidence our agreement that the undersigned has this day purchased from you for $ 145,775.00 all of the Second Mortgage Series A Bonds of Fort Worth Electric Building Company pledged as collateral to secure your note at 4 T.C. 364">372 The National Bank of Commerce of Houston maturing December 1, 1935, for the principal sum of $ 142,500.Of the consideration aforesaid $ 13,275.00 has this day been paid to you by the undersigned and $ 10,000 applied by you on your note at said Bank, the balance on your note having been renewed for ninety (90) days from the date hereof.You agree upon the interest being paid in advance upon said bank note by Southern Loan & Investment Company to renew the same from time to time for the convenience of Southern Loan & Investment Company over a period of the next eighteen months on1944 U.S. Tax Ct. LEXIS 17">36 or before the expiration of which time full payment for the purchase price of said bonds will be made to you by the undersigned and paid by you to the Bank in liquidation of your note.The body of the second letter, dated November 25, 1935, from Southern to the bank was as follows:The undersigned at present is a guarantor of an obligation held by you in the amount of $ 142,500.00 executed by Texas Investors, Inc. and endorsed by J. W. Colvin of Houston, Texas.This will authorize you to release J. W. Colvin and Texas Investors, Inc. from any personal liability on said note or any renewal or extension thereof without effecting in any way the liability of the undersigned on its present guarantee to you.The body of the third letter, dated November 25, 1935, from Jesse H. Jones & Co. to the bank was as follows:Southern Loan & Investment Company has this day authorized you to release from personal liability J. W. Colvin and Texas Investors, Inc. on a certain note in the amount of $ 142,500 held by you and executed by Texas Investors, Inc. and endorsed by J. W. Colvin.This is to advise you that we concur in the request made upon you by Southern Loan & Investment Company and hereby agree1944 U.S. Tax Ct. LEXIS 17">37 that our guarantees made to you in regard to direct or indirect liabilities of Southern Loan & Investment Company shall not be affected or the collateral securing the same shall not be affected in any respect by your action in complying with the request of Southern Loan & Investment Company.The body of the fourth letter, dated November 25, 1935, from the bank to Colvin and Texas Investors, Inc., was as follows:Because of the $ 10,000 payment on the principal of the note of Texas Investors, Inc. held by us in the amount of $ 142,500, we are accepting renewal note of Texas Investors, Inc. due in 90 days for the balance, without Mr. Colvin's personal guarantee.We agree to accept the collateral of and promises made by Southern Loan & Investment Company in lieu of the personal liability of either of you and in the event said note, or any renewal or extension thereof, is not paid in full we will not hold you or either of you personally responsible.On August 1, 1936, Jesse H. Jones & Co. executed and delivered to the bank a guaranty of the note in question. On November 25, 1935, the note at the bank was reduced to $ 132,500 as a result of the $ 10,000 payment. In 1936 Southern paid1944 U.S. Tax Ct. LEXIS 17">38 $ 17,500 to the bank, reducing the 4 T.C. 364">373 note to $ 115,000. In 1937 Southern paid $ 40,000 to the bank, reducing the note to $ 75,000. On December 27, 1938, Southern paid $ 75,000 to the bank, thus paying in full the note to the bank, and the bank delivered to Southern $ 190,000 face amount of the series A bonds which had been received by the bank as security for the loan. On its books of account and income tax return for the taxable year ended December 31, 1938, Southern charged off the above $ 75,000 payment made to the bank in 1938 as a bad debt, and respondent, in his deficiency notice, disallowed it as a deduction.Issue No. 3. -- One of the adjustments to the net income of Southern for the year 1939 was an addition thereto of $ 139,743.28 which the respondent called "(a) Gain on exchange" and explained as follows:(a) It is held that you realized a taxable gain in the amount of $ 139,743.28 from the exchange of bonds of Main Properties, Inc. costing you $ 260,256.72 for the Chronicle Building leasehold having a fair market value of $ 400,000.00.Prior to June 1, 1939, Southern had acquired bonds of Main in the face amount of $ 640,000 at a cost to Southern of $ 260,256.72. 1944 U.S. Tax Ct. LEXIS 17">39 On June 1, 1939, Southern exchanged these bonds for a certain building and two leaseholds (one being a sublease) in Houston, Texas, known as the Chronicle Building leasehold, on which is situated a 10-story office building known as the Chronicle Building. Southern, in its amended petition, alleges that the building and leaseholds had a fair market value as of June 1, 1939, of "not more than" $ 213,107.33, and claims that it sustained a deductible capital loss of $ 47,149.39, being the difference between the cost of the bonds and the alleged fair market value of the building and leaseholds. Net capital gain of Southern from other sales during 1939 was $ 45,149.39.On May 20, 1926, a contract was entered into between Houston Chronicle Realty Co., as lessor, and Houston Chronicle Building Co., hereinafter sometimes referred to as Building Co., as lessee, wherein the lessor let and leased for a period of 99 years from May 1, 1926, unto the lessee an irregular shaped lot in the city of Houston containing in all 10,579 square feet of land. On the same day, May 20, 1926, the Building Co. assigned its interest in the above contract to United Properties Corporation. The 99-year lease 1944 U.S. Tax Ct. LEXIS 17">40 provided that the lessee should pay as rent to the lessor the amount of $ 65,000 per year, plus all taxes on the ground and improvements, and insurance on the building, so that the lessor would receive a net annual rental of $ 65,000. If the lessee or any of its assigns should fail to perform any of the obligations imposed by the contract, then, under article VIII of the contract (the 99-year lease), "all improvements, of every kind of character, then occupying the demised premises, shall be and 4 T.C. 364">374 become the property of the Lessor, and the Lessee shall have no claim for, or upon, or against the same, of any kind or character whatsoever * * ."On July 1, 1927, United Properties Corporation executed a 15-year sublease of the Chronicle Building to the Building Co., under the terms of which the Building Co. obligated itself to pay the annual ground rent of $ 65,000 plus taxes and insurance to the Houston Chronicle Realty Co. and, in addition to pay $ 40,000 per annum to United Properties Corporation. On December 29, 1932, without otherwise modifying the sublease, the rental under such sublease payable by the Building Co. was reduced to $ 15,000 per annum. In 1934 the bondholders1944 U.S. Tax Ct. LEXIS 17">41 of United Properties Corporation foreclosed on the properties of that company and as a result thereof the 99-year lease and the sublease and the Chronicle Building were transferred to Main. On April 27, 1934, after the properties in question had been transferred to Main, the term of the sublease was extended 6 1/2 years, or until December 31, 1948, without otherwise modifying the sublease. The performance of the sublease by the Building Co. was guaranteed to Main by the Houston Chronicle Publishing Co. This latter company rented from the Building Co. several of the floors of the Chronicle Building. The July 1, 1927, contract (the sublease) between United Properties Corporation and the Building Co. contained the following provisions of article VIII thereof:* * * Provided, however, any equipment, fixtures and machinery of every kind and character placed therein and/or used by the Houston Chronicle Publishing Company or any other sub-tenant of any part of the premises, may be removed at the end of the term hereof, but any injury done to the premises by said removal shall be promptly repaired by the person so removing said property.It was this Chronicle Building and 99-year lease1944 U.S. Tax Ct. LEXIS 17">42 and sublease which Southern acquired from Main on June 1, 1939.During the period from June 1937 to August 1938, the Houston Chronicle Publishing Co. made certain expenditures on the 10-story Chronicle Building which aggregated a cost of $ 120,908.82. The items totaling $ 120,908.82 were capitalized on the books of the Houston Chronicle Publishing Co.The Chronicle Building was constructed in 1909 and cost $ 525,000, plus $ 33,533.36 cost of remodeling the mailing room in 1926.The fair market value on June 1, 1939, of the Chronicle Building and two leaseholds was $ 260,256.72.Issue No. 4. -- Southern is in the business of erecting, maintaining, and managing real properties. Its gross income for the taxable year 1939 was as follows (item numbers are those shown under the heading of "Gross Income" on petitioner's corporation income and excess profits tax return, Form 1120 A, for the calendar year 1939): 4 T.C. 364">375 Item No.Gross income from --Amount7Interest$ 16,792.94 9Rents203,975.99 10Light and power sales100,756.32 11(a)Capital gain (or loss)45,149.39 11(b)Gain (or loss) from sale or exchange of propertyother than capital assets(51,533.03)12Dividends70,856.75 Total385,998.36 1944 U.S. Tax Ct. LEXIS 17">43 Southern's "personal holding company income," as that term is used in section 503 of the Internal Revenue Code for the taxable year 1939, consisted of the following portion of the gross income:Item No.Gross income from --Amount7Interest$ 16,792.9411(a)Capital gain (or loss)45,149.3912Dividends70,856.75 Total personal holding company income132,799.08Southern's "personal holding company income" for the taxable year 1939 did not constitute 80 percent of Southern's gross income for that year. Southern was not a personal holding company for the taxable year 1939.Issue No. 5. -- On June 1, 1939, Main transferred to Southern the Chronicle Building and leaseholds in exchange for $ 640,000 face value of Main's own bonds. At the time of such exchange Main had an adjusted basis of $ 212,182.02 in the building and leaseholds. The respondent determined that Main derived a gain from the exchange in the amount of the difference between $ 640,000 and $ 212,182.02, or $ 427,817.98.In 1939, prior to the exchange in question, Main owned the following properties located in the city of Houston, Texas: Lamar Hotel Annex and leaseholdLoew's State Theatre1944 U.S. Tax Ct. LEXIS 17">44 Building and leaseholdNational Standard Building and leaseholdKirby Building, and the land thereunderChronicle Building and leaseholdsPrior to the exchange in question in 1939, all of the above properties were subject to first mortgage bonds issued by Main in the amount of $ 2,935,050.Main's balance sheets as of the beginning and end of the fiscal year ended November 30, 1939, were as follows (the land, buildings and equipment account includes the properties referred to in the immediately 4 T.C. 364">376 preceding paragraph. The values marked with an asterisk are undisputed):Nov. 30, 1938Nov. 30, 1939Assets and deficit:Cash $ 85,997.73 * $ 67,104.45Notes and accounts receivable * 4,350.23 * 4,565.53Supplies * 66.02 * 71.69Prepaid expenses, furniture and fixtures * 5,496.94 * 8,140.1495,910.9279,881.81Land, buildings and equipment3,017,258.282,377,258.28Less reserve for depreciation418,259.52499,177.282,598,998.761,878,081.00Deficit345,656.87485,778.543,040,566.552,443,741.35Liabilities and common stock:Accounts payable4,859.214,121.76Bonds, notes and mortgages2,935,050.002,295,050.00Interest, taxes, expenses80,657.34124,569.59Common stock20,000.0020,000.003,040,566.552,443,741.351944 U.S. Tax Ct. LEXIS 17">45 The respondent has determined that the land, buildings, and equipment owned by Main in 1939, prior to the transfer of the Chronicle Building and leaseholds to Southern, had a fair market value of $ 3,250,000; that such land, buildings, and equipment had a fair market value of $ 2,850,000 at the end of the fiscal year; and that the total value of Main's assets as of the beginning and end of the fiscal year ended November 30, 1939, were as follows:Nov. 30, 1938Nov. 30, 1939Land, buildings and equipment$ 3,250,000.00$ 2,850,000.00All other assets95,910.9279,881.81Total3,345,910.922,929,881.81On the basis of the above determined values, the respondent further determined that Main was solvent both before and after the exchange in question.The buildings known as Lamar Hotel Annex and Loew's State Theatre are located at the southeast corner of Travis and McKinney in Houston, on land covered by a 99-year lease entered into on April 1, 1926. Under this lease the lessee agreed to pay $ 35,000 per year for the first 25 years and $ 50,000 per year for the balance of the term, and, as additional rental for the full term of 99 years, "all taxes, assessments, 1944 U.S. Tax Ct. LEXIS 17">46 levies and governmental charges of every kind and character whatsoever * * ." Article VIII of the lease provided in part:At the expiration and termination of this lease, whether from lapse of time, or from breach of any term, covenant or condition herein imposed upon the Lessee, all improvements of every kind and character then occupying the demised premises, shall be and become the property of the Lessor * .4 T.C. 364">377 Article XVI of the lease provided that within five years from the date of the lease the lessee would construct and equip upon the leased land a building or buildings to cost not less than $ 500,000. During 1928 and 1929 Lamar Hotel Annex (an 8-story building) was constructed at a cost of $ 297,737.99, and during 1928 Loew's State Theatre was constructed at a cost of $ 531,596.57. The theatre seats approximately 2,500 people.The National Standard Building is an 8-story store and office building, located at the southwest corner of Main and McKinney in Houston on land covered by a 99-year lease entered into on April 1, 1926. Under this lease the lessee agreed to pay $ 40,000 per year for the first 25 years and $ 50,000 per year for the balance of the term, and, 1944 U.S. Tax Ct. LEXIS 17">47 as an additional rental for the full term of 99 years, "all taxes, assessments, levies and governmental charges of every kind and character whatsoever * ." Articles VIII and XVI contained provisions identical with articles VIII and XVI of the lease mentioned in the immediately preceding paragraph. During 1928 and 1929 the National Standard Building was constructed at a cost of $ 667,289.23.Prior to 1938 Main succeeded to the obligations and interests of the lessees under the last two leases mentioned above in a manner more fully described below.The building known as the Kirby Building is a 10-story office building and is located between Walker and McKinney on the east side of Main Street in Houston. The land under this building was owned in fee by Main during the entire fiscal year ended November 30, 1939. The building was constructed in 1927 at a cost of $ 496,977.62.Main was organized in the spring of 1934. It acquired the above mentioned five buildings and leaseholds from a bondholders' committee which had acquired them at a foreclosure sale. Prior to the foreclosure sale the properties were owned by United Properties Corporation, which had constructed all of the buildings1944 U.S. Tax Ct. LEXIS 17">48 except the Chronicle Building and had placed a bond issue thereon of $ 3,000,000. In 1932 the United Properties Corporation defaulted on the bond issue and the bondholders' committee was organized. A plan of reorganization was worked out between Main and the committee whereby the committee, after acquiring the properties at a foreclosure sale, transferred them to Main, which issued income bonds in the same principal amounts as bonds held by the committee, plus some accumulation of interest, which bonds were sinking fund bonds to mature 15 years after January 1, 1934, and bore 5 percent interest during the first 5-year period only if earned, and after the first 5-year period a fixed 3 percent interest and an additional 2 percent only if earned. The additional 2 percent, if not earned currently, was to accumulate and be payable in any event out of future earnings or at maturity. Towards 4 T.C. 364">378 the end of 1938 it became evident that Main could not meet, beginning July 1, 1939, the fixed interest of 3 percent. At that time the bonds were selling in Chicago at about 30 cents on the dollar. Main desired to avoid default if possible. Main's officers thought that if Main retired1944 U.S. Tax Ct. LEXIS 17">49 about $ 640,000 of its bonds it might be able to meet the fixed 3 percent interest on the balance. As a result Main transferred the Chronicle Building and leaseholds to Southern for $ 640,000 face value of the bonds, which were canceled. This is the same transaction involved under issue 3.The disposal of the Chronicle Building and leaseholds for the bonds did not have the desired effect of substantially improving Main's financial position. New air conditioned buildings were erected in Houston, which tended to make Main's buildings less desirable. It then became necessary for Main to assess its stockholders to avoid a default on the bonds, but this also failed. A new company was then organized, under the name of Block 139, Inc., for the purpose of purchasing the remaining properties of Main for such amount of money in cash as to pay the bondholders 40 cents on the dollar and all expenses in connection with the liquidation. That offer was submitted to the bondholders in March 1941, and it was accepted by them in November 1941. In January 1942 the transaction was closed and Block 139, Inc., acquired all the remaining properties of Main for approximately $ 1,250,000.The net income1944 U.S. Tax Ct. LEXIS 17">50 (or loss) of the properties owned by Main from the time of its incorporation to the end of the taxable year, before deducting general administrative expenses, interest paid, and depreciation, was as follows:LamarLoew'sNationalYearAnnexTheatreStandardApril to 12-31-34$ 9,540.93$ 27,104.33($ 27,797.63)Calendar 193513,343.2637,135.10(34,265.19)1-1-36 to 11-30-3612,096.8133,561.23(29,933.74)12-1-36 to 11-30-3713,117.6537,728.00(34,460.29)12-1-37 to 11-30-3813,027.8837,845.18(29,748.36)12-1-38 to 11-30-399,986.7936,950.60(23,687.18)YearKirbyChronicleApril to 12-31-34$ 27,144.47$ 10,343.22Calendar 193544,097.5014,250.001-1-36 to 11-30-3657,297.0613,062.5012-1-36 to 11-30-3741,391.9614,250.0012-1-37 to 11-30-3845,374.4914,250.0012-1-38 to 11-30-3947,391.527,125.00After deducting the general administrative expenses, interest paid, and depreciation, Main sustained net losses from the operation of said properties for the above mentioned periods, which resulted in a growing operating deficit, as follows:YearNet lossesDeficit1934$ 48,561.42$ 48,561.42193571,402.77119,168.58193652,746.22170,255.321937$ 85,175.70$ 255,158.80193890,498.07345,656.871939140,121.67485,778.541944 U.S. Tax Ct. LEXIS 17">51 4 T.C. 364">379 The fair market value of Main's land, buildings, and equipment, both before and after the exchange of the Chronicle Building and leaseholds on June 1, 1939, was not more than the depreciated book values of $ 2,598,998.76 and $ 1,878,081, respectively.Main was insolvent both before and after the transfer of the Chronicle Building and leaseholds to Southern on June 1, 1939.OPINION.Issue No. 1. -- The issues presented and the evidentiary facts, all of which were stipulated, have been previously stated and need not be repeated. It is our opinion that the respondent erred in holding that the cancellation and redelivery by Josey to Southern in 1938 of Southern's note for $ 20,000 payable to Josey was a transaction from which Southern realized $ 20,000 of taxable income. We do not think Southern realized any taxable income on that transaction. The $ 1,900 of liquidating dividends which Southern reported as income in 1938 and which has been accepted by the respondent as being correct is not in issue.This is not a case where a taxpayer, as the respondent contends, realizes income through the cancellation of indebtedness as provided for in article 22 (a)-14 of Regulations1944 U.S. Tax Ct. LEXIS 17">52 101. 1 Until the note was paid, either Southern or Josey had the right under their oral agreement to demand what was actually done in 1938.The situation here is somewhat analogous to the situation in those cases like Hirsch v. Commissioner, 115 Fed. (2d) 656,1944 U.S. Tax Ct. LEXIS 17">53 and Helvering v. A. L. Killian Co., 128 Fed. (2d) 433, where property was purchased partly on credit and in a later year, due to the property having greatly depreciated in value, the creditor settled for less than the amount originally agreed upon. The courts hold that substance rather than form is to be given controlling weight and that such a settlement is in essence a reduction of the purchase price. Of course, in the instant proceeding, Southern returned the 1,000 shares of National stock to Josey, so we could hardly say that the cancellation and return of the $ 20,000 note to Southern was a reduction of the purchase price, as Southern no longer owned the stock. We do think, however, that the return of the stock by Southern and the return of the note by Josey in 1938 were in substance a rescission of 4 T.C. 364">380 the 1929 purchase by Southern, resulting in neither gain nor loss, except for the $ 1,900 which is not in question. Just why Southern did not return to Josey the $ 1,900 which it received as a liquidating dividend on the stock, the stipulated facts do not show. But, inasmuch as there is no issue concerning this $ 1,900, we need not1944 U.S. Tax Ct. LEXIS 17">54 discuss it further.Neither the petitioner here nor its parent company, the Jesse H. Jones Co., received any tax benefit from the charge-off by Southern in 1933 of $ 17,190 as a loss from the worthless stock of National. If the Commissioner had disallowed this loss in its entirety it would not have affected the tax liability of either Southern or its parent company, Jesse H. Jones Co.We think the tax accounting question here is somewhat similar in principle to the tax accounting question in Dobson v. Commissioner, 320 U.S. 489">320 U.S. 489. The taxpayer in that case in 1929 purchased 300 shares of certain stock. He sold 100 shares in 1930, sustaining a deductible loss of $ 41,600.80, which was claimed on his return for that year and allowed. In 1931 he sold another 100 shares, sustaining a deductible loss of $ 28,163.78, which was claimed on his return and allowed. He retained the remaining 100 shares. In 1936 he learned that the purchase in 1929 had been induced by fraudulent representations. He filed suit against the seller and asked rescission of the entire transaction. In 1939 the suit was settled on a basis which gave him a net recovery of $ 45,150.63, 1944 U.S. Tax Ct. LEXIS 17">55 of which $ 23,296.45 was allocable to the stock sold in 1930 and $ 6,454.18 allocable to that sold in 1931. He did not report any part of the recovery as income in 1939. Any adjustment of his 1930 and 1931 tax liability was barred by the statute of limitations. He had not, however, received any tax benefits from the charge-offs in 1930 and 1931. The Commissioner contended that the amount of the recovery attributable to the shares sold was income in 1939. The recovery upon the shares sold was not, however, sufficient to make good the taxpayer's original investment in them. It was held that the taxpayer there realized no taxable gain from the recovery.The respondent's determination on this issue is reversed.Issue No. 2. -- In assigning error as to this issue, petitioner alleges that respondent "erroneously disallowed a payment made by petitioner to the National Bank of Commerce of Houston" in the amount of $ 75,000. Although the amount was deducted by petitioner in its return as a bad debt, the parties have briefed the issue from the standpoint of a statutory loss rather than a bad debt. Section 23 of the Revenue Act of 1938 provides that in computing net income there1944 U.S. Tax Ct. LEXIS 17">56 shall be allowed as deductions:(f) Losses by Corporations. -- In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.4 T.C. 364">381 On the basis of the facts set out in our findings, all of which were stipulated, did Southern sustain a deductible loss of $ 75,000 during the taxable year 1938? We think it did.The payment of $ 75,000 by Southern to the bank in the taxable year 1938 had its origin in the October 12, 1928, contract between Colvin and Jones, who was acting on behalf of Southern and certain affiliated companies. That contract and any and all amendments or supplements thereto were rescinded and set aside by the three-party agreement of February 28, 1931, and the two supplemental agreements (Exhibits A and B) attached thereto. The details of these written instruments are set out in our findings of fact and need not be repeated here.The taxable year here involved is the calendar year 1938. Southern is not claiming as a loss in 1938 any of the payments made prior to 1938. Since it reports on the cash receipts and disbursements basis, we are of the opinion that Southern, in making the final payment of $ 75,0001944 U.S. Tax Ct. LEXIS 17">57 in 1938 on its guaranty, sustained a deductible loss of that amount in the taxable year, and we so hold. Eckert v. Burnet, 283 U.S. 140">283 U.S. 140; Helvering v. Price, 309 U.S. 409">309 U.S. 409. See also I. T. 3252, C. B. 1939-1 (Part 1), p. 182.Issue No. 3. -- Did the exchange by Southern on June 1, 1939, of $ 640,000 par value of Main bonds for the Chronicle Building and leaseholds result in a capital gain or loss to Southern, and if so, how much? The respondent determined that the exchange resulted in a taxable gain of $ 139,743.28 on the ground that Southern's cost basis of the bonds was $ 260,256.72 and that the fair market value of the building and leaseholds was $ 400,000. The parties have stipulated that Southern's cost basis of the bonds was $ 260,256.72, but petitioner contends that the fair market value of the Chronicle Building and leaseholds was "not more than" $ 213,107.33. Petitioner actually contends that the fair market value of the Chronicle Building and leaseholds was much less than $ 213,107.33, but, due to section 117 (d) of the Internal Revenue Code2 and the stipulated fact that the net capital gain of1944 U.S. Tax Ct. LEXIS 17">58 Southern from other sales during 1939 was $ 45,149.39, the maximum deductible capital loss to Southern could not exceed $ 47,149.39, which is the difference between the cost of the bonds and the above mentioned amount of $ 213,107.33.What was the fair market value of the Chronicle Building and leaseholds on June 1, 1939? The respondent determined and still 4 T.C. 364">382 contends it was $ 400,000. Petitioner contends it was $ 110,000, but in any event not more than $ 213,107.33. We have found as a fact that the fair market value of the Chronicle Building and leaseholds on June 1, 1939, was $ 260,256.72.The evidence on this question consists of the testimony of five witnesses for the petitioner and one for the respondent, all supplemented1944 U.S. Tax Ct. LEXIS 17">59 by certain documentary evidence and some stipulated facts. We do not consider it necessary to review in detail all of this evidence. In arriving at our valuation of the Chronicle Building and leaseholds on June 1, 1939, we have given careful consideration to all of this evidence. We have concluded that there is no reason for disturbing the valuation which Southern evidently put upon the property at the time of the exchange. It owned bonds of Main which had cost it $ 260,257.72, and in an arm's length transaction it exchanged these bonds with Main for the Chronicle Building and leaseholds. It is fair to assume that in making the exchange it regarded itself as getting its money's worth, and we think the evidence justifies a valuation finding which shows that it did get its money's worth. It received property of a value equal to the cost of the bonds which it exchanged. In a recomputation under Rule 50, $ 260,257.72 will be used as the fair market value of the Chronicle Building and leaseholds at the time of the exchange. This means that Southern had neither gain nor loss on the transaction.Issue No. 4. -- Is Southern liable for the personal holding company surtax and penalty1944 U.S. Tax Ct. LEXIS 17">60 for the taxable year 1939? This depends on whether Southern is a "personal holding company" as that term is defined in sections 501 and 502 of the Internal Revenue Code, the material provisions of which are in the margin. 31944 U.S. Tax Ct. LEXIS 17">61 As shown in our findings, petitioner's gross income for the year 1939 was $ 385,998.36 and its personal holding company income for the same year was only $ 132,799.08. Since this latter amount is less than 80 percent of petitioner's gross income, it follows that petitioner is not a personal holding company for the year 1939 and is not liable for the personal holding company surtax and penalty for that year. It thus 4 T.C. 364">383 becomes unnecessary to decide several other questions briefed by the parties under this issue which would have been material if we had held that petitioner was a personal holding company for the year 1939.Issue No. 5. -- The question here is whether Main realized any taxable gain on the exchange of the Chronicle Building and leaseholds on June 1, 1939, for $ 640,000 of its own bonds, which it canceled. The parties have stipulated that Main's adjusted basis of the property was $ 212,182.02 at the time of the exchange.The respondent contends that Main was solvent both before and after the exchange and that, in line with United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1, and similar cases, Main realized a taxable gain of $ 1944 U.S. Tax Ct. LEXIS 17">62 427,817.98, which represents the difference between the adjusted basis of the property exchanged and the face value of the bonds which were received and canceled.Petitioner contends that it was insolvent both before and after the exchange and that in line with Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95, and similar cases, it realized no taxable gain on the exchange.The parties agree that the liabilities of Main before and after the exchange were $ 3,020,566.55 and $ 2,423,741.35, respectively. They also agree that the values of Main's current assets before and after the exchange were $ 95,910.92 and $ 79,881.81, respectively. They disagree on the value of the land, buildings, and equipment. The respondent determined and contends that the values of such assets before and after the exchange were $ 3,250,000 and $ 2,850,000, respectively, whereas Main contends that the values of such assets before and after the exchange were considerably less than their depreciated book values of $ 2,598,998.76 and $ 1,878,081, respectively. The parties agree that the value of the separate properties on June 1, 1939, may be taken1944 U.S. Tax Ct. LEXIS 17">63 as the value of such properties both before and after the exchange. As stated above, the respondent determined these values to be $ 3,250,000, itemized as follows:Lamar Hotel Annex and leasehold$ 375,000Loew's State Theatre Building and leasehold650,000National Standard Building and leasehold750,000Kirby Building and the land thereunder1,075,000Total value after exchange2,850,000Chronicle Building and leaseholds400,000Total value before exchange3,250,000Under issue No. 3 we found the fair market value of the Chronicle Building and leaseholds on June 1, 1939, to be $ 260,256.72. Under the present issue it will therefore only be necessary for us to determine 4 T.C. 364">384 from the evidence the fair market value on June 1, 1939, of the four remaining properties.Four of petitioner's witnesses testified to values of these four remaining properties as of June 1, 1939, as follows:Loew'sNationalKirbyTotalLamarTheatreStandardHester$ 100,000$ 370,000None$ 700,000$ 1,170,000Butler135,000375,000None700,0001,210,000Moore130,000375,000None700,0001,205,000Burchfield($ 550,000 for all three)650,0001,200,0001944 U.S. Tax Ct. LEXIS 17">64 Houx, a witness for petitioner, and Rowe, a witness for respondent, testified to depreciated reproduction cost new values as of June 1, 1939, for the buildings only, exclusive of land and leaseholds, as follows:Loew'sNationalKirbyTotalLamarTheatreStandardHoux$ 207,143$ 439,107$ 488,176$ 380,311$ 1,514,737Rowe292,700612,000744,000570,0002,218,700Houx expressed no opinion as to the value of the land under the Kirby Building. Rowe thought the land alone was worth $ 514,800, which would bring his total values of the four properties up to $ 2,733,500. Burchfield's $ 650,000 valuation of the Kirby property was divided $ 400,000 for the land and $ 250,000 for the building.We do not deem it necessary to fix a specific value for each of the above properties. We are convinced from all of the evidence that the fair market value of the land, buildings, and equipment before and after the exchange was not more than the depreciated book values of $ 2,598,998.76 and $ 1,878,081, respectively. On the basis of these values, petitioner was insolvent both before and after the exchange. Nothing, therefore, would be gained in taking up each property1944 U.S. Tax Ct. LEXIS 17">65 separately as we did in valuing the Chronicle Building and leaseholds under issue No. 3. The testimony of the several witnesses relative to the four properties now under consideration was of the same general nature as that given relative to the Chronicle Building and leaseholds, and we do not deem it necessary to review it in detail.The Commissioner strongly urges Lutz & Schramm Co., 1 T.C. 682, in support of his determination that Main received a profit of $ 427,817.98 when it transferred to Southern the Chronicle Building and leaseholds, which had a cost basis to Main of $ 212,182.02, for bonds of Main having a face value of $ 640,000. We think Lutz & Schramm Co. is distinguishable on its facts. In that case during the course of 4 T.C. 364">385 our opinion we pointed out: "This petitioner was not insolvent and the question is not whether it realized income from the discharge or forgiveness of indebtedness, cf. United States v. Kirby Lumber Co., 284 U.S. 1">284 U.S. 1; Lakeland Grocery Co., 36 B. T. A. 289; but is rather whether it realized gain from the disposition of a piece of real property." 1944 U.S. Tax Ct. LEXIS 17">66 In the instant case we have found that petitioner was insolvent both before and after its transfer of the Chronicle Building and leasehold for $ 640,000 face value of its own bonds.As was said in Dallas Transfer & Terminal Warehouse Co. v. Commissioner, supra:* * * In effect the transaction was similar to what occurs in an insolvency or bankruptcy proceeding when, upon a debtor surrendering, for the benefit of his creditors, property insufficient in value to pay his debts, he is discharged from liability for his debts. This does not result in the debtor acquiring something of exchangeable value in addition to what he had before. There is a reduction or extinguishment of liabilities without any increase of assets. There is an absence of such a gain or profit as is required to come within the accepted definition of income. [Citing cases.]We think the instant case under issue 5 falls within the ambit of such cases as Dallas Transfer & Terminal Warehouse Co. v. Commissioner, supra, rather than within the ambit of Lutz & Schramm Co., supra, and we so hold.Decisions will be entered1944 U.S. Tax Ct. LEXIS 17">67 under Rule 50. Footnotes1. Art. 22 (a)-14. Cancellation of indebtedness. -- (a) In General↩. -- The cancellation of indebtedness, in whole or in part, may result in the realization of income. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income in the amount of the debt is realized by the debtor as compensation for his services. A taxpayer realizes income by the payment or purchase of his obligations at less than their face value. (See article 22 (a)-18.) In general, if a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation to the extent of the principal of the debt.2. SEC. 117. CAPITAL GAINS AND LOSSES. * * (d) Limitation on Capital Losses. --(1) Corporations. -- In the case of a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of $ 2,000 plus the gains from such sales or exchanges. * ↩3. SEC. 501. DEFINITION OF PERSONAL HOLDING COMPANY.(a) General Rule. -- For the purposes of this subchapter and chapter 1, the term "personal holding company" means any corporation if --(1) Gross income requirement. -- At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 502; * SEC. 502. PERSONAL HOLDING COMPANY INCOME.For the purposes of this subchapter the term "personal holding company income" means the portion of the gross income which consists of:(a) Dividends, interest (other than interest constituting rent as defined in subsection (g)), royalties (other than mineral, oil, or gas royalties), annuities.(b) Stock and Securities Transactions. -- Except in the case of regular dealers in stock or securities, gains from the sale or exchange of stock or securities. * * (g) Rents. -- Rents, unless constituting 50 per centum or more of the gross income. * *↩	01-04-2023	11-21-2020

Subsets and Splits

No community queries yet

The top public SQL queries from the community will appear here once available.