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https://www.courtlistener.com/api/rest/v3/opinions/4624490/	Paul A. Teschner and Barbara M. Teschner, Petitioners, v. Commissioner of Internal Revenue, RespondentTeschner v. CommissionerDocket No. 90023United States Tax Court38 T.C. 1003; 1962 U.S. Tax Ct. LEXIS 65; September 28, 1962, Filed 65 Decision will be entered for the petitioners. The taxpayer entered a contest the rules of which precluded him from being the recipient of a prize and which required him to designate, at the time of entry in the contest, a recipient under the age of 17 years and 1 month. Taxpayer designated his 7-year-old daughter. Subsequently, his entry won a prize payable to his daughter at age 18, without restriction as to the use to which she applied said prize. Held, the prize is not includible in the gross income of the taxpayer. Paul A. Teschner, pro se.Seymour I. Sherman, Esq., for the respondent. Train, Judge. Dawson, J., concurring. Mulroney, J., agrees with this concurring opinion. Atkins, J., dissenting. Tietjens, Opper, Raum, Withey, Pierce, and Scott, JJ., agree with this dissent. TRAIN1004 Respondent determined a deficiency in the 1957 income tax liability of petitioners in the amount of $ 283.16.The sole question is whether petitioners are taxable on a prize received by their daughter.FINDINGS OF FACT.Some of the facts have been stipulated and are found hereby as facts.Petitioners Paul A. (hereinafter referred to as Paul) and Barbara M. Teschner are husband and wife. They filed a joint Federal income tax return on the cash basis for the calendar year 1957 with the director of internal revenue, Chicago, Illinois.Sometime prior to October 2, 1957, Johnson & Johnson, Inc. (hereinafter referred to as Johnson & Johnson), in cooperation with the Mutual Benefit Life Insurance Company of Newark, New Jersey (hereinafter referred to as Mutual), announced a contest called the "Annual Youth Scholarship Contest" (hereinafter67 referred to as the contest). An entrant was required to complete in fifty additional words or less the statement "A good education is important because * ."Any person in the United States or Canada was entitled to enter the contest with the exception of employees or their families of either Johnson & Johnson or Mutual. The prizes listed, totaling $ 75,000, were as follows:Grand prize$ 10,000Two second prizes5,000 each Four third prizes2,500 each Six fourth prizes1,500 each Thirty-six fifth prizes1,000 each The prizes consisted of annuity policies in the face amount of the respective prizes. Rule 4 of the contest stated that:Only persons under age 17 years and 1 month (as of May 14, 1957) are eligible to receive the policies for education. A contestant over that age must designate a person below the age of 17 years and 1 month to receive the policy for education. In naming somebody else, name, address and age of both contestant and designee must be filled in on entry blank.As of May 14, 1957, both petitioners were over the age of 17 years and 1 month.The preclusion of Paul from eligibility to receive any of the policies was neither directly68 nor indirectly attributable to any action taken by him. He had not suggested such a contest to anyone; had never discussed 1005 such a contest with representatives of either Johnson & Johnson or Mutual; and had no knowledge of the contest until the official announcement of it was first brought to his attention. Neither at the time Paul prepared and submitted the entry nor at any other time has there been any arrangement or agreement between petitioners and their daughter to divide or share in anything of value she might receive.Paul, an attorney, entered the contest, submitting two statements on the form supplied by Johnson & Johnson. At that time, he designated his daughter, Karen Janette Teschner (hereinafter referred to as Karen), age 7, as the recipient should either of the entries be selected.One of the statements submitted by Paul was selected, and on October 2, 1957, petitioners' daughter received the following telegraph notification addressed to her:JOHNSON & JOHNSON AND THE MUTUAL BENEFIT LIFE INSURANCE COMPANY TAKE GREAT PLEASURE IN INFORMING YOU THAT YOU HAVE BEEN AWARDED THE FOURTH PRIZE OF A ONE THOUSAND FIVE HUNDRED DOLLAR PAID-UP INSURANCE POLICY IN THEIR69 NATIONAL YOUTH SCHOLARSHIP CONTEST. YOU WILL BE CONTACTED WITH FURTHER DETAILS AS SOON AS POSSIBLE --NATIONAL YOUTH SCHOLARSHIP COMMITTEEThereafter, Johnson & Johnson filed an application and paid Mutual $ 1,287.12. As the result thereof, petitioners' daughter received from Mutual, during 1957, a fully paid-up annuity policy, having a face value of $ 1,500. This policy contained no limitation whatsoever on the manner in which Karen would be entitled to use the proceeds or any other benefits available under the policy. Specifically, the use of these proceeds or benefits was not limited to educational or similar purposes.Petitioners did not include any amount in their 1957 income tax return with regard to the foregoing annuity policy. Respondent determined that the policy constituted gross income to petitioners, and assigned a value thereto of $ 1,287.12, the consideration paid by Johnson & Johnson.OPINION.While the taxability of prizes and awards may have been in doubt prior to the enactment of the Internal Revenue Code of 1954, 1 it is now clear that they are includible in gross income, 2 with certain exceptions 1006 not here applicable. Sec. 74 I.R.C. 1954. 370 The sole question in this case is whether the prize (annuity policy) is taxable to petitioners.71 Respondent, relying on Lucas v. Earl, 281 U.S. 111">281 U.S. 111 (1930), and Rev. Rul. 58-127, 1 C.B. 42">1958-1 C.B. 42, contends that the annuity policy which Karen received is includible in petitioners' gross income. Respondent states on brief that the issue here "is whether a prize attributable to a taxpayer's contest efforts, which, if received by him, would constitute taxable income in the nature of compensation for services rendered, may be excluded by him because paid to his designee." Respondent declares his theory of the case to be "that whenever A receives something of value attributable to services performed by B, B, the earner, is the proper taxpayer."Petitioners contend that the value of the annuity policy should not be included in their gross income because they did not receive anything either actually or constructively and never had a right, at anytime, to receive anything that could have been the subject of an anticipatory assignment or similar arrangement.We agree with the petitioners.In the instant case, we are not confronted with the question of whether the prize is income. The sole question is whether72 it is the petitioners' income for tax purposes. Certainly, it was Paul's effort that generated the income, to whomever it is to be attributed. However, as we have found, he could not under any circumstances whatsoever receive the income so generated, himself. He had no right to either its receipt or its enjoyment. He could only designate another individual to be the beneficiary of that right. Moreover, under the facts of this case, the payment to the daughter was not in discharge of an obligation of petitioners. Cf. Douglas v. Willcutts, 296 U.S. 1 (1935). At age 18, Karen will be entitled to $ 1,500. She can use that money, in her uncontrolled and unfettered discretion, for any purpose she chooses. Nor does respondent here contend that petitioners received income by virtue of a satisfaction of an obligation to support. Finally, there is no evidence whatsoever that the arrangement here involved was a sham or the product of connivance.As pointed out above, respondent relies, in part, on Rev. Rul. 58-127, supra, and a consideration of that ruling is useful because it reveals the error into which73 the respondent has here fallen. Under the circumstances 1007 stated by that ruling, the taxpayer prepared and submitted a winning entry in an essay contest. Pursuant to the terms of that contest, the taxpayer received a check payable to his child, the use of which was entirely without restriction imposed by the sponsors of the contest. The respondent ruled that, under such circumstances, the amount of the prize was includible in the gross income of the taxpayer. While the facts set out in that ruling do not disclose whether the taxpayer could himself have received the prize, it would seem that in all salient respects the facts therein are identical to those before us.In his ruling, the respondent declared, "The basic rule in determining to whom an item of income is taxable is that income is taxable to the one who earns it." If by this statement the respondent means that income is in all events includible in the gross income of whomsoever generates or creates the income by virtue of his own effort, the respondent is wrong. If this were the law, agents, conduits, fiduciaries, and others in a similar capacity would be personally taxable on the proceeds of their efforts. 74 The charity fund-raiser would be taxable on sums contributed as the result of his efforts. The employee would be taxable on income generated for his employer by his efforts. Such results, completely at variance with every accepted concept of Federal income taxation, demonstrate the fallacy of the premise.If, on the other hand, the respondent used the term "earn," not in such a broad sense, but in the commonly accepted usage of "to acquire by labor, service, or performance; to deserve and receive compensation" (Webster's New International Dictionary), 4 then the rule is intelligible but does not support the conclusion reached by the respondent either in the ruling in question or in the case before us. The taxpayer there, as here, acquired nothing himself; he received nothing nor did he have a right to receive anything.In Rev. Rul. 58-127, supra, respondent75 relied heavily, as he does here, on Helvering v. Horst, 311 U.S. 112">311 U.S. 112 (1940), especially the language of the opinion to the effect that -- "The power to dispose of income is the equivalent of ownership of it. The exercise of that power to procure the payment of income to another is the enjoyment, and hence the realization, of the income by him who exercises it." The respondent's reliance on this language is misplaced. The power of disposition assumes possession or the right of possession. To dispose is to part with. Where there is neither possession nor the right to possession, there can be no disposition. In Helvering v. Horst, supra, the taxpayer, the owner of negotiable bonds, detached from them negotiable interest coupons shortly before their due date and delivered them as gifts to his son who in the same year collected them at maturity. The language of the Court, quoted above and relied upon by respondent, mistakenly we believe, must be read in relation to the facts 1008 then before the Court. In this connection, the Court in Horst stated unequivocally: "The question here is, whether because76 one who in fact receives payment for services or interest payments is taxable only on his receipt of the payments, he can escape all tax by giving away his right to income in advance of payment." Plainly, here, petitioners have not given away any right of theirs whatsoever. Further, in Horst, at page 119, the Supreme Court stated:The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid. * * * The tax laid * * * upon income "derived from * * * wages, or compensation for personal service, * * * in whatever form paid, * * " * * cannot fairly be interpreted as not applying to income derived from interest or compensation when he who is entitled to receive it makes use of his power to dispose of it in procuring satisfactions which he would otherwise procure only by the use of the money when received. [Emphasis supplied.]In Lucas v. Earl, 281 U.S. 111 (1930), upon which respondent heavily relies, the Supreme Court refused to allow a husband to escape taxes on his income by way of salaries and attorney fees through a contractual77 arrangement by which he and his wife were to receive, hold, and own such earnings as joint tenants. The Court declared that tax on a salary could not be avoided by the person earning the salary by anticipatory arrangements and contracts. Shortly thereafter, in Poe v. Seaborn, 282 U.S. 101">282 U.S. 101, 117 (1930), the Supreme Court stated:In the Earl case * * the husband's professional fees, earned in years subsequent to the date of the contract, were his individual income * * . The very assignment in that case was bottomed on the fact that the earnings would be the husband's property, else there would have been nothing on which it could operate. That case presents quite a different question from this, because here, by law, the earnings are never the property of the husband, * In Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, 580, 582 (1941), the Supreme Court stated that the rule applicable to an anticipatory assignment of income applies when the assignor is entitled at the time of the assignment to receive the income at a future date and is vested with such a right. In the instant case, petitioners themselves received78 nothing and were never entitled to anything. What was said in the early case of Marion Stone Burt Lansill, 17 B.T.A. 413">17 B.T.A. 413, 423 (1929), affd. 58 F. 2d 512 (C.A.D.C. 1932), seems appropriate here:The right in the taxpayer to receive the income at the time it is attributed and taxed to him is likewise not essential, where, as in the Old Colony, Boston & Maine, and Rensselaer and Rosenwald cases, supra, the taxpayer has by his own volition chosen to dispose of the right to receive income while retaining that from which the income is derived. The volition in disposing of the right is important, for while all will agree that one who never received or had a right to receive or who has involuntarily lost it should not be taxed, it is also plain that his voluntary exercise of the right to dispose of the income before receipt may be just as valuable and important practically as its exercise after receipt. * * * [Emphasis supplied.]1009 It cannot be argued that Paul voluntarily gave up his right to get the annuity policy and designated his daughter to receive it in his place. There was no discretion79 on his part; the choice was to accept the terms of the contest or reject them.In the case before us, the taxpayer, while he had no power to dispose of income, had a power to appoint or designate its recipient. Does the existence or exercise of such a power alone give rise to taxable income in his hands? We think clearly not. In Nicholas A. Stavroudes, 27 T.C. 583">27 T.C. 583, 590 (1956), we found it to be settled doctrine that a power to direct the distribution of trust income to others is not alone sufficient to justify the taxation of that income to the possessor of such a power. See also Bateman v. Commissioner, 127 F. 2d 266 (C.A. 1, 1942).Granted that an individual cannot escape taxation on income to which he is entitled by "turning his back" upon that income, the fact remains that he must have received the income or had a right to do so before he is taxable thereon. As stated by the court in United States v. Pierce, 137 F.2d 428">137 F. 2d 428, 431 (C.A. 8, 1943):The sum of the holdings of all cases is that for purposes of taxation income is attributable to the person entitled to receive80 it, although he assigns his right in advance of realization, and although, in the case of income derived from the ownership of property, he transfers the property producing the income to another as trustee or agent, in either case retaining all the practical benefits of ownership.Section 1(a) of the 1954 Code imposes a tax on the "income of every individual." Where an individual neither receives nor has the right to receive income, he is not the taxable individual within the contemplation of the statute. There is no basis in the statute or in the decided cases for a construction at variance with this fundamental rule.Decision will be entered for the petitioners. DAWSONDawson, J., concurring: Harrison v. Shaffner, 312 U.S. 579">312 U.S. 579 (1941), settled the proposition that there can be no anticipatory assignment of income unless the assignor is entitled at the time of assignment to receive the income at a future date and is vested with such a right. Paul Teschner was at no time "vested with the right to receive income" under the rules of the contest and, therefore, could not possibly "escape the tax by any kind of anticipatory arrangement." Consequently, 81 the cases cited by the dissent, Lucas v. Earl, 281 U.S. 111 (1930), Helvering v. Horst, 311 U.S. 112 (1940), and Helvering v. Eubank, 311 U.S. 122 (1940), all of which held that "one vested with the right to receive income [does] not escape the tax by any kind of 1010 anticipatory arrangement, however skillfully devised," Harrison v. Shaffner, supra at 582 (emphasis supplied), are inapposite here.It is true that a taxpayer having the right to dispose of income would be taxable on the exercise of such a right where the disposition results in an economic benefit to him. However, in the instant case Paul Teschner had no right of disposition, but only a duty under the contest rules to designate a person under the age of 17 years, 1 month. Compliance with this duty was a condition precedent for entry of persons over that age into the contest. While it might be said concomitantly that there was a right to designate to whom the prize would go if it were, won, no economic benefit could be conferred upon anyone when this82 right was exercised since there was no income upon which such a right of designation could operate at the time the designation was made. If those who disagree with this result fear the prize (annuity policy) will escape taxation, there is no problem because it would appear to be taxable to the daughter under the provisions of section 74, I.R.C. 1954. ATKINSAtkins, J., dissenting: It is a well-settled principle of our income tax law that personal earnings are taxable to the earner, and that cases involving the taxation of personal earnings are not to be decided by attenuated subtleties. Lucas v. Earl, 281 U.S. 111">281 U.S. 111, in which the Supreme Court held an anticipatory assignment of future personal earnings to be ineffective to relieve the earner of tax. The Court stated:A very forcible argument is presented to the effect that the statute seeks to tax only income beneficially received, and that taking the question more technically the salary and fees became the joint property of Earl and his wife on the very first instant on which they were received. We well might hesitate upon the latter proposition, because however the matter might stand between83 husband and wife he was the only party to the contracts by which the salary and fees were earned, and it is somewhat hard to say that the last step in the performance of those contracts could be taken by anyone but himself alone. But this case is not to be decided by attenuated subtleties. It turns on the import and reasonable construction of the taxing act. There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skilfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.The annuity policy which Paul won resulted from his personal efforts. The fruit of his labor consisted of the payment of the award to his designee, his daughter. His efforts alone generated the income in question; and it is a matter of no consequence that, under the rules of the contest, such income could not 84 be paid to him, for he had the *1011 power to control its disposition. He in fact exercised that power when he entered the contest, by designating the natural object of his bounty, his daughter, as the recipient of any prize which he might win. The exercise of such power, with resultant payment to the daughter, constituted the enjoyment and hence the realization of the income by Paul. In the circumstances he should be fully charged with the income. Cf. Helvering v. Horst, 311 U.S. 112">311 U.S. 112, and Helvering v. Eubank, 311 U.S. 122">311 U.S. 122. There is no more basis here for narrowing the broad scope of the holding in Lucas v. Earl than there was in the Horst and Eubank cases. The decision of the majority herein rests upon "attenuated subtleties" similar to those disapproved, first in Lucas v. Earl and then again in Burnet v. Leininger, 285 U.S. 136">285 U.S. 136, Helvering v. Horst, Helvering v. Eubank, Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579, and Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260. Footnotes1. Compare such cases as Pauline C. Washburn, 5 T.C. 1333 (1945) ("Pot O'Gold" case); McDermott v. Commissioner, 150 F. 2d 585 (C.A. D.C. 1954) (Ross Essay contest); Glenn v. Bates, 217 F. 2d 535 (C.A. 6, 1954) (car giveaway); Ray W. Campeau, 24 T.C. 370">24 T.C. 370 (1955) ("Hollywood Calling -- Film of Fortune") with Herbert Stein, 14 T.C. 494 (1950), and Robertson v. United States, 343 U.S. 711↩ (1952).2. See H. Rept. No. 1337, 83d Cong., 2d Sess., pp. 11, A27 (1954). S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 13, 178 (1954). Finance Committee Hearing, 83d Cong., 2d Sess., pp. 12, 482 (1954).↩3. SEC. 74. PRIZES AND AWARDS.(a) General Rule. -- Except as provided in subsection (b) and in section 117 (relating to scholarships and fellowship grants), gross income includes amounts received as prizes and awards.(b) Exception. -- Gross income does not include amounts received as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, but only if -- (1) the recipient was selected without any action on his part to enter the contest or proceeding; and(2) the recipient is not required to render substantial future services as a condition to receiving the prize or award.↩4. Cf. Cold Metal Process Co. v. Commissioner, 247 F.2d 864">247 F. 2d 864, 872↩ (C.A. 6, 1957).	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624491/	JAY M. BARRASH AND SANDRA BARRASH, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentBarrash v. CommissionerDocket No. 15873-86.United States Tax CourtT.C. Memo 1987-592; 1987 Tax Ct. Memo LEXIS 591; 54 T.C.M. (CCH) 1230; T.C.M. (RIA) 87592; December 2, 1987. Bruce Locke and George W. Connelly, Jr., for the petitioners. Ana G. Cummings, for the respondent. FEATHERSTONMEMORANDUM OPINION FEATHERSON, Judge: The parties' cross motions to dismiss for lack of jurisdiction were assigned to Special Trial Judge Joan Seitz Pate1 for hearing, consideration and ruling thereon pursuant to the provisions of section 7456(d) (redesignated as section 7443A(b) by the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2755) and Rules 180 and 181. 2 The Court agrees with and adopts her opinion which is set forth below. 593 OPINION OF THE SPECIAL TRIAL JUDGE PATE, Special Trial Judge: Respondent determined the following deficiencies in and additions to petitioners' Federal income taxes: 197919801981Deficiency$ 88,761.00$ 52,850.00$ 45,087.00Additions to Tax:Sec. 6653(a)(1)4,438.052,642.502,254.35Sec. 6653(a)(2)--Sec. 6659--10,926.60Respondent has moved to dismiss for lack of jurisdiction on the grounds that the petition was not filed within the time prescribed by law. Petitioners have also moved to dismiss for lack of jurisdiction alleging that respondent failed to properly mail or deliver the notice of deficiency, thereby rendering it invalid. Alternatively, petitioners ask us to extend the time for filing a petition with this Court to 90 days after the date petitioners received a copy of the notice of deficiency. A ruling in favor of petitioners on this alternative argument would result in our having jurisdiction to determine this case on its merits. Jay M. Barrash and Sandra Barrash (Hereinafter collectively "petitioners"), 594 husband and wife, filed joint Federal income tax returns for 1979, 1980 and 1981, which were received by respondent on May 9, 1980, June 15, 1981, and July 23, 1982, respectively. Dr. Barrash styled himself as "Jay M. Barrash" on his 1979 return and "J. Martin Barrash" on his 1980 and 1981 returns. 3 At all times relevant to this litigation, petitioners resided at 5106 Glenmeadow, Houston, Texas 77096 (hereinafter "Glenmeadow address"). During the years in issue, Dr. Barrash, a physician, maintained offices at 7000 Fannin, Suite 1570, Houston, Texas 77030 (hereinafter "Fannin Street address"). During all of these years, petitioners deducted losses attributable to a purported "tax shelter" entitled DJL Arts. Petitioners also deducted losses from several other activities and partnerships including, for 1980 and 1981, a partnership entitled SCJ Enterprises #1 Crude (hereinafter "SCJ"). Dr. Barrash was listed as "Dr. Martin Barrash" at the Fannin Street address on Schedule K1 of SCJ's partnership return. By letter dated November 15, 1982, respondent595 notified petitioners that their 1979 and 1980 income tax returns had been selected for audit. 4 At that time, petitioners executed a Form 2848, Power of Attorney, appointing their Certified Public Accountant (hereinafter "CPA") as their representative. On that form they requested that their CPA be sent copies of notices and other written communications concerning their 1979 and 1980 tax liabilities. 596 On February 17, 1983, their CPA executed a Form 872-A, which extended the statute of limitations on petitioners' 1979 return but restricted the consent to specific items, including DJL Arts. In March 1984, respondent's Examination Support Staff (hereinafter "ESS") requested that petitioners sign a Form 872-A consenting to extend the limitations period on their 1980 income tax return. Their CPA requested that the extension be limited to particular areas of concern. In response, the ESS stated, in a letter dated April 27, 1984, that a notice of deficiency would be prepared on "May 10, 1984 if we have not received the signed consents at that time." Signed consents were never submitted. A notice of deficiency dated June 13, 1984, determining deficiencies in petitioners' income tax lisbilities for 1979, 1980 and 1981 was prepared by respondent. The year 1981 was included because of respondent's policy of including all years affected by a tax shelter when issuing a notice of deficiency involving that shelter. Respondent claims that he sent such notice to petitioners at their Glenmeadow address. Petitioners maintain that neither they nor their CPA received the original or a copy597 of the notice of deficiency. Moreover, the Postal Service has no record of delivery nor was the notice of deficiency returned to respondent as undeliverable or refused. 5On July 30, 1984, the ESS was notified by the Examination Division that petitioners' 1981 income tax return was under examination because of their investment in SCJ. The ESS, assuming that the statute of limitations on petitioners' 1981 income tax return would expire on April 15, 1985, sent petitioners a letter dated September 5, 1984 requesting that they sign Form 872-A consenting to extend the statute of limitations for 1981. Petitioners' CPA again proposed that the parties limit the extension to particular areas of concern. In a letter dated October 4, 1984, the ESS stated that it had not yet received a copy of petitioners' 1981 return and requested that petitioners provide a copy to expedite matters. On October 18, 1984, respondent sent a letter entitled "Final Request" 598 to petitioners explaining that he had not received an extension from petitioners for the 1981 return and that ESS would "have to act" on the return before the statute of limitations expired. A second "Final Request" letter, dated November 15, 1984, was mailed to petitioners. Therein, the ESS again informed petitioners that it had no record of a reply and stated that "If we do not receive the Form 872-A within 15 days, a statutory notice of deficiency will be issued." In response thereto, on November 17, 1984, petitioners' CPA sent respondent a copy of petitioners' 1981 income tax return together with a Form 872-A for that year, signed by petitioners, containing the same restrictions agreed to with regard to their 1979 return. Apart from the extension requests regarding 1981 caused by petitioners' investment in SCJ, respondent independently assessed the tax and additions to tax reflected in the June 13, 1984 notice of deficiency on November 8, 1984. After the statement of the assessment was sent to petitioners in the middle of November, their CPA contacted respondent in an attempt to ascertain the basis for the assessment, but was unsuccessful in determining its origin. In fact, 599 a letter addressed to respondent by petitioners' attorney showed that petitioners were still attempting to obtain a copy of the notice of deficiency on February 24, 1985. After additional communications with petitioners' representative, respondent finally sent petitioners' attorney a copy of the notice of deficiency on March 5, 1986. In the meantime, petitioners filed a complaint in the United States District Court for the southern District of Texas on March 13, 1985 to set aside the assessment and enjoin the collection of taxes for 1979, 1980 and 1981. On May 27, 1986 a petition was filed in this Court contesting respondent's determinations for 1979, 1980 and 1981. Following a motion in the District Court by the United States to dismiss petitioners' case or for summary judgment therein, the District Court issued an order on approximately June 18, 1986 deferring any action in that case until we reach a decision in the present case. Basically, petitioners maintain that respondent did not properly prepare and mail the notice of deficiency, that the Postal Service did not properly deliver it, and, therefore, it is invalid to establish our jurisdiction over this case. Conversely, 600 respondent maintains that the notice of deficiency was properly mailed to petitioners' last known address, that it is valid regardless of actual receipt, that the petition was not filed within 90 days of that mailing; and therefore, we must grant his motion to dismiss for lack of jurisdiction. 6The law is well settled that both a valid notice of deficiency and a timely filed petition are necessary to maintain an action in this Court. Secs. 6212 and 6213; e.g., Pyo v. Commissioner,83 T.C. 626">83 T.C. 626, 632 (1984); Mollet v. Commissioner,82 T.C. 618">82 T.C. 618, 623 (1984), affd. without published opinion 757 F.2d 286">757 F.2d 286 (11th Cir. 1985); Keeton v. Commissioner,74 T.C. 377">74 T.C. 377, 379 (1980). Generally, a notice of deficiency is issued when mailed to the taxpayer's last known address by certified or registered mail. Sec. 6212(a) and (b)(1); sec. 301.6212-1(a) and (b), Proced. & Admin. Regs. A petition must be filed601 with this Court within 90 days after the mailing of the notice of deficiency.7Sec. 6213(a). Respondent has the burden of proving that the notice of deficiency was properly sent by certified or registered mail. August v. Commissioner,54 T.C. 1535">54 T.C. 1535, 1536 (1970); see Cataldo v. Commissioner,60 T.C. 522">60 T.C. 522 (1973), affd. per curiam 499 F.2d 550">499 F.2d 550 (2d Cir. 1974). To this end, we have considered respondent's standard procedure for preparing and mailing notices of deficiency in his Houston Office during 1984. This procedure began with a 90-day notices clerk reviewing a draft notice of deficiency for correctness, directing that the notice be typed, proofreading the typed notice, and submitting it to the ESS for further review. When satisfactory, the ESS initialed and returned it to the 90-day notices clerk, who then completed the Forms 3877 (a list of the notices of deficiency mailed on that particular day) which included listing the name and address of petitioners, the years covered by the notice of deficiency,602 the insertion of the total number of notices listed on that particular form, checking the box for certified mail, and initialing the top right hand corner signifying that all clerical tasks were completed and checked. Then, each line item was assigned a consecutive certified mail number, each notice of deficiency was placed in a window envelope, and the certified mail number was written on the envelope. The names and addresses showing through the envelope window was once again checked against the Form 3877. Quality Management Program 8 personnel then compared the address on the notice of deficiency with the envelope and, in turn, to the information recorded on Form 3877. If no changes were required, the 90-day notices clerk sealed the envelopes and contacted the mail room for pickup. The mail room clerk delivered the certified letters to the post office only after independently verifying that the number of envelopes coincided with the number of entries on Form 3877 and after comparing the name, address and certified number on each envelope to that listed on the Form 3877. Upon receipt, the Postal Service verified the count, entered the number of envelopes on Form 3877, and matched603 the certified on each envelope to the number listed on Form 3877. Thereafter, the Postal Service postmarked and signed the Form 3877 and returned it to the mail room clerk. Finally, the mail room clerk initialed the Form 3877 before returning it to the Houston Office. A small number of errors were discovered and corrected at each stage of this process. The Form 3877 dated June 13, 1984 contains petitioners' names; the Glenmeadow address; notations of tax years "8112, 8012 and 7912;" initials of the ESS employee and the 90-day notices clerk; the total number of envelopes listed by respondent (15); the total number of envelopes received at the Post Office (15); a June 13, 1984 postmark; the initials of the mail clerk and the signature of the Postal Service employee accepting the certified mail. In the absence of contrary evidence, this Form 3877 alone is proof that respondent mailed the notice of deficiency by certified mail to petitioners' last known address. 604 United States v. Zolla,724 F.2d 808">724 F.2d 808, 810 (9th Cir. 1984), cert. denied 469 U.S. 830">469 U.S. 830 (1984). Cf. Magazine v. Commissioner,89 T.C. 321">89 T.C. 321 (1987). Therefore, petitioners must show that respondent did not follow these procedures with regard to the notice of deficiency addressed to them. See United States v. Ahrens,530 F.2d 781">530 F.2d 781, 785 (8th Cir. 1976); August v. Commissioner,54 T.C. at 1538-1539. Petitioners first contend that an error made at any stage of respondent's standard processing procedures could have resulted in an error in issuing the notice of deficiency in this case. We recognize that there is always a possibility of human error. However, errors discovered in a small number of notices do not prove that an error was made in this case. See United States v. Ahrens, supra at 785-786. Quite the contrary, we are convinced that respondent's procedures effectively minimized errors in such notices; thus, lowering the probability of error in this case. Second, petitioners argue that respondent would not have requested that petitioners consent to extend the statute of limitations on605 1981 in September of 1984 had respondent previously issued a notice of deficiency covering that year. Respondent admits that these requests were unnecessary, and we might add that they do not add to the sound administration of the tax law. We note, however, that Dr. Barrash may have been partially responsible for this confusion inasmuch as he styled himself as "Jay M. Barrash" at the Glenmeadow address on his 1979 income tax return (resulting in the notice of deficiency being so issued) and as "Dr. Martin Barrash" at the Fannin Street address on SCJ's partnership return (which gave rise to respondent's September 1984 requests for extension of the statute of limitations). Cf. Lifter v. Commissioner,59 T.C. 818">59 T.C. 818, 821 (1973). However, petitioner's taxpayer identification number was identical on all these forms and this alone should have adequately identified petitioner. Admittedly, the September 1984 extension request coupled with the alleged lack of delivery of the notice of deficiency was confusing to petitioners. Nevertheless, these factors do not control our jurisdiction. Rather, our determination is predicated on whether the notice of deficiency was mailed606 to petitioners by respondent and as we stated earlier, respondent has presented sufficient evidence to show the notice of deficiency was mailed. Consequently, we surmise that it was respondent's system for processing consents to extend the statute of limitations that failed in this case. Either the information regarding the notice of deficiency covering 1981 had not been properly entered into all of respondent's records necessary for consistent treatment, or those records were not adequately consulted prior to the ESS making their requests to extend the statute of limitations for 1981. Third, petitioners argue that respondent would not have issued a notice of deficiency for 1981 because he had not yet audited that return. However, there is no requirement that respondent audit a return before issuing a notice of deficiency. See Boyer v. Commissioner,69 T.C. 521">69 T.C. 521, 543-544 (1977). Moreover, including 1981 on the notice of deficiency was consistent with respondent's policy of issuing a notice of deficiency for all years relating to a particular tax shelter. The statute of limitations on petitioners' 1980 return was due to expire on June 15, 1984. Consistent with this607 policy, respondent included all years in which petitioners had claimed losses relating to DJL Arts when he issued the notice of deficiency dated June 13, 1984. Finally petitioners put forth what we deem their most persuasive argument. They contend that the notice of deficiency was never mailed because: (a) it was not received by either petitioners or their CPA; (b) it was never returned to respondent; and (c) the postal service has no record of delivery. For the reasons stated below, we disagree. First, it is unclear from the record whether respondent even attempted to mail a copy of the notice of deficiency to petitioners' CPA. Although the power of attorney petitioners filed with respondent requested that copies of correspondence be sent to their CPA, such copies are a matter of courtesy and in no way affect the mailing requirements of section 6212. McDonald v. Commissioner,76 T.C. 750">76 T.C. 750, 753 (1981); Houghton v. Commissioner,48 T.C. 656">48 T.C. 656, 661 (1967); Allen v. Commissioner,29 T.C. 113">29 T.C. 113, 117 (1957). Moreover, since respondent issued the notice of deficiency for 1979, 1980 and 1981, while their CPA's power of attorney covered608 only 1979 and 1980, respondent may have been precluded from sending the CPA a copy. See sec. 6103. Second, we are satisfied that the standard procedures respondent used in Houston during the summer of 1984 contained sufficient safeguards to assure that notices of deficiencies were addressed and mailed as reflected on Form 3877. Petitioners have presented no evidence directly contradicting the testimony of various persons involved with the preparation and mailing of the notice of deficiency or the result of these procedures reflected on Form 3877. Therefore, we hold that respondent mailed the notice of deficiency covering the taxable years 1979, 1980 and 1981 by certified mail to petitioners' last known address on June 13, 1984. Nevertheless, petitioners alternatively contend that their failure to receive the notice of deficiency was due to mishandling by the Postal Service and a technical construction of the statute limiting respondent's duty to placing their notice in the hands of the Postal Service would penalize them in a manner which is inequitable, unnecessary, inappropriate and improper. Petitioners rely on the fact that they allegedly never received the notice, that609 it was never returned to respondent, and that the Postal Service has no record of delivery, as evidence of the Postal Service's mishandling. since we have found that respondent delivered a properly addressed notice of deficiency to the Postal Service, petitioners had to overcome a strong presumption in the law that it was delivered or offered for delivery to them. Zenco Engineering Corp. v. Commissioner,75 T.C. 318">75 T.C. 318, 323 (1980), affd. without published opinion 673 F.2d 1332">673 F.2d 1332 (7th Cir. 1981). After due consideration, we find that petitioners have not overcome this presumption. The record simply does not show what happened to the notice of deficiency. Further, as previously stated, section 6212 only requires that respondent send, by certified or registered mail, a properly addressed notice of deficiency. It does not require that the taxpayer receive such notice. Therefore, if the Postal Servie mishandles a notice in such a way that both parties are unaware of the mishandling, the risk of nondelivery falls on the taxpayer. See 610 United States v. Ahrens,530 F.2d at 785. 9This result may seem unfair and may even be harsh. We recognize that, although other litigating forums are available to the taxpayer to challenge the amount of his tax, they are only available after payment of the tax. Advance payment may be very difficult or even impossible in some instances. Yet, as harsh as the result may seem, the extent of our jurisdiction is determined by Congress. The result we reach here is the only one which gives full meaning to the clear language of section 6212. Cataldo v. Commissioner, supra.See, e.g., DeWelles v. United States,378 F.2d 37">378 F.2d 37, 39 (9th Cir. 1967), cert. denied 389 U.S. 996">389 U.S. 996 (1967); Brown v. Lethert,360 F.2d 560">360 F.2d 560, 562 (8th Cir. 1966); Frieling v. Commissioner,81 T.C. 42">81 T.C. 42, 52 (1983); Lifter v. Commissioner,59 T.C. at 820-821. This Court has no right to extend our jurisdiction on equitable grounds. 10611 Finally, petitioners argue that they were "lulled to sleep" by respondent requesting a consent to extend the statute after issuance of the notice of deficiency and they should not suffer the consequences of respondent's actions. It is well established that the 90-day period commences with the mailing of a properly addressed notice of deficiency, irrespective of the date of actual receipt by the taxpayer. Wilson v. Commissioner,564 F.2d 1317">564 F.2d 1317, 1319 (9th Cir. 1977), affg. per curiam on this issue an unreported order of this Court; Teel v. Commissioner,248 F.2d 749">248 F.2d 749, 751 (10th Cir. 1957), affg. 27 T.C. 375">27 T.C. 375 (1956); Roszkos v. Commissioner,87 T.C. 1255">87 T.C. 1255, 1266 (1986), on appeal (9th Cir., July 14, 1987); cf. Frieling v. Commissioner,81 T.C. 42">81 T.C. 42, 48 (1983). This Court has no authority to grant petitioners' motion to extend the 90-day period for filing a petition, "whatever the equities of a particular case may be and regardless of the cause for its not being filed within the required time period." 612 Axe v. Commissioner,58 T.C. 256">58 T.C. 256, 259 (1972). Therefore, even assuming respondent's actions put petitioners into a soporific state, we have no power to confer jurisdiction upon ourselves as a result. Ruby v. Commissioner,2 B.T.A. 377">2 B.T.A. 377, 378 (1925). The long and short of it is that respondent mailed a notice of deficiency by certified mail to petitioners at their last known address on June 13, 1984. Petitioners allege that for some unknown reason it was not delivered to them. Nonetheless, petitioners had 90 days from June 13, 1984 to file a petition with this Court. In fact, the petition herein was not filed until May 27, 1986, almost two years later. Therefore, by clear statutory mandate the petition was not timely filed. Accordingly, respondent's motion to dismiss for lack of jurisdiction is granted and petitioners' motion to dismiss for lack of jurisdiction is denied. An appropriate order will be entered.Footnotes1. These cross motions were originally assigned to Special Trail Judge Carlton D. Powell. After hearing part of the testimony, he recused himself and this case was reassigned to Special Trial Judge Joan Seitz Pate. The parties have stipulated that this Court may rule on these cross motions using the record introduced before Judge Powell, as supplemented by the additional evidence the parties introduced at a further hearing before Judge Pate↩. 2. Unless otherwise stated, 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. ↩. Fifty percent of the interest due on the underpayment of $ 45,087.00. ↩3. Dr. Barrash signed his 1979 and 1981 income tax returns as "J. Martin Barrash" and his 1980 income tax return as "Jay M. Barrash." ↩4. At trial, respondent objected to the admission into evidence of the November 15, 1982 letter, and to the admission of various other documents prepared by respondent thereafter, correspondence between respondent and petitioners, and a Postal Service letter responding to inquiries regarding the mailing of the notice of deficiency. We reserved ruling on respondent's objections. Respondent contends that the letter, documents, and correspondence are irrelevant because they do not tend to prove or disprove the mailing of the notice of deficiency in this case. Respondent further argues that the letter concerning the audit of petitioners' 1979 and 1980 returns is inadmissible because it relates to the practices and procedures respondent employed in determining the deficiencies in this case. Generally, this Court will not look behind a notice of deficiency at respondent's practices and procedures in making his determinations. Vallone v. Commissioner,88 T.C. 794">88 T.C. 794, 806 (1987), and the cases cited therein. However, for purposes of these cross motions we are not determining the amount of a deficiency, but rather whether respondent properly produced and mailed a notice of deficiency. Respondent's practices and procedures are relevant for that purpose. Fed. R. Evid. 401. See Shelton v. Commissioner,63 T.C. 193">63 T.C. 193, 198 (1974); Cataldo v. Commissioner,60 T.C. 522">60 T.C. 522, 524 (1973), affd. per curiam 499 F.2d 550">499 F.2d 550 (2d Cir. 1974). Moreover, although respondent objected to admitting the Postal Service letter as hearsay, he did not argue this position on brief and, consequently, we deem it abandoned. See Rule 151(e); Strasser v. Commissioner,T.C. Memo. 1986-579, n.13. See also Calcutt v. Commissioner,84 T.C. 716">84 T.C. 716, 721-722↩ (1985). Accordingly, the foregoing letters and documents are admitted into evidence for purposes of these cross motions. 5. The post office's failure to have a record of delivery of a piece of certified mail means only that there is no delivery record of the letter; it does not necessarily mean that the post office did not receive or deliver the letter. ↩6. This Court has jurisdiction to determine whether we have jurisdiction. Pyo v. Commissioner,83 T.C. 626">83 T.C. 626, 632 (1984); Brannon's of Shawnee, Inc. v. Commissioner,69 T.C. 999">69 T.C. 999, 1002↩ (1978). 7. A petition must be filed within 150 days if the notice of deficiency is addressed to a person outside the United States. ↩8. This was a special review program conducted at respondent's Houston Office in 1984. ↩9. See also Brooks v. Commissioner,T.C. Memo. 1984-20↩, on appeal (9th Cir., Sept. 13, 1984). 10. See Shipley v. Commissioner,572 F.2d 212">572 F.2d 212, 214↩ (9th Cir. 1977), affg. a Memorandum Opinion of this Court.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624492/	APPEAL OF CLARENCE STRECKER, EXECUTOR OF ESTATE OF EDWARD STRECKER.Strecker v. CommissionerDocket No. 5382.United States Board of Tax Appeals6 B.T.A. 19; 1927 BTA LEXIS 3624; February 2, 1927, Promulgated 3624 By his will decedent devised his real estate to his executor in trust for the use of his widow during her life, and directed the executor, upon her death, to sell such real estate and divide the proceeds among his children. Held, that while the interest of the children vested at the death of decedent, their sole interest, in the absence of any election to take the real estate, was in the proceeds of sale and was personal property, and that the gain from the sale was taxable to the executor as income to the corpus of the estate. Samuel Freedman, C.P.A., for the petitioner. M. N. Fisher, Esq., for the Commissioner. PHILLIPS 19 This is an appeal from the determination of a deficiency in income tax in the amount of $2,446.21 for the calendar year 1920. The question involved is whether the executor is subject to tax on the profit realized from the sale of real estate in 1920. FINDINGS OF FACT. The appellant is a resident of Greenfield, Mass., and is the duly appointed executor of the estate of Edward Strecker, who died testate on December 2, 1913. By his will the decedent devised certain real estate to the executor in trust for the3625 use of his widow during her life, and directed the executor, upon the death of the widow, to convert the property into cash and distribute the proceeds equally among the decedent's nine children, or their representatives. The widow died December 8, 1916. The real estate was sold by the executor in 1920. In computing the deficiency the Commissioner has included the profit from the sale as income of the estate. 20 OPINION. PHILLIPS: It is the contention of the petitioner that no part of the profit resulting from the sale of the real estate in question is taxable to the estate of the decedent. The only authority cited by counsel for the petitioner is the opinion of the Solicitor of Internal Revenue, No. 35, published in Cumulative Bulletin No. 3, p. 50. It appears that the facts before the Solicitor were substantially the same as those involved in the present proceeding. The principal question under discussion in the opinion was the basis for measuring the gain or loss. It appears, however, that the Solicitor also had under consideration the question whether any taxable gain resulted to the beneficiaries of the will for, after quoting the provisions of law governing3626 the measurement of gain or loss, the opinion reads: In applying the statutory rule in this case it is necessary to determine the character of the respective interests involved and when they were acquired. The problem is somewhat confused by the fact that the testator directed the sale of the land and the distribution of the proceeds among his children after the death of the life tenant instead of devising to them the land itself, subject to the life estate, without any direction for its sale. While, under the doctrine of equitable conversion, the interest of the children is regarded as personalty instead of realty, yet the estate which they acquired was a remainder and vested at the death of the testator. ; ; . Also, their interest was such that if they had so elected prior to its sale they could have taken the actual land itself after the death of the life tenant instead of the proceeds from its sale. Jarman on Wills, p. 562 and cases there cited. It is believed, therefore, that the question is the same for the purposes of3627 our present inquiry as if the land itself had been devised to the widow for life with remainder in fee to the children and without any direction for its sale. There is nothing in the opinion from which we may learn under the laws of which State the case before the Solicitor arose, nor has counsel for the petitioner cited any authorities which might help us in determining what is the legal effect in Massachusetts of the provisions of the will of this decedent. The investigation which we have been able to make of the Massachusetts decisions leads us to believe that the position taken by the Commissioner in the instant appeal in assessing gain to the executor of the estate is correct. Under the Revenune Act of 1918 estates and trusts are taxable as separate entities under certain circumstances. Section 219 of that Act provides that the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary in the following instances: (1) Income received by estates of deceased persons during the period of the administration or settlement of the estate; (2) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent3628 interests; and (3) income held for future distribution under the terms of the will or trust. In the 21 case of income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, the income is to be returned and the tax paid by the beneficiary. There are certain refinements of these provisions with which we are not here concerned. It appears to be the theory of the Solicitor's opinion, cited above, that the property which was sold belonged to the children of the testator and that the sale was in effect a sale by them and not a sale by the fiduciary of the state. With this theory, certainly as applied under the decisions of Massachusetts which we have examined, we can not agree. While the children might by joint action have elected to receive the real estate in lieu of the proceeds thereof, until such an election was made the property remained a part of the decedent's estate, and so far as the estate was concerned was personalty for all purposes. Prior to any such election a sale by any of the children of his interest in the estate would not have made the purchaser a tenant in common of the land or given such purchaser any right*3629 to convey an interest in the land, but would have given only an interest in the proceeds of the sale. In the event of the death of any of the children his rights under the will would have passed to his next of kin as personalty and not to his heirs-at-law as realty. ; ; ; . No election to take the real estate having ever been made by the children, and the property having been sold by the executor pursuant to the terms of the will, it appears that any gain or loss is to be accounted as a gain or loss to the corpus of the estate and taxed to the executor as income received during the period of settlement of the estate. Decision will be entered for the Commissioner.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624495/	Frank Ix & Sons Virginia Corporation (N.J.), Petitioner, v. Commissioner of Internal Revenue, RespondentFrank Ix & Sons Virginia Corp. v. CommissionerDocket No. 3955-64United States Tax Court45 T.C. 533; 1966 U.S. Tax Ct. LEXIS 131; March 11, 1966, Filed 131 Decision will be entered under Rule 50. During its taxable years ended March 31, 1953 and 1954, the petitioner operated the Cornelius mill at a loss. On September 30, 1953, in a tax-free reorganization, it acquired in exchange for stock the assets of another corporation, owned by the same interests, which had operated the Charlottesville mill at a profit. After the reorganization the petitioner continued to operate the Cornelius mill at a loss until July 22, 1954, when it terminated the operation of that mill. From the time of the reorganization through its taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959, it operated the Charlottesville mill at a profit. Held, under the principle of Libson Shops, Inc. v. Koehler, 353 U.S. 382">353 U.S. 382, that the petitioner is not entitled to carry over and deduct from its income for its taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959, the net losses sustained in its taxable years ended March 31, 1953 and 1954. Benjamin Nadel and Norman Nadel, for petitioner.Leo A. Burgoyne, for respondent. Atkins, Judge. ATKINS534 The respondent determined deficiencies in income tax for the taxable years ended March 31, 1957, 132 March 29, 1958, and March 28, 1959, in the respective amounts of $ 84,309.62, $ 115,954.90, and $ 22,329.76.The parties having reached agreement with respect to certain issues, the only issue remaining is whether net operating losses sustained by the petitioner for the taxable years ended March 31, 1953 and 1954, may be carried over and deducted from income earned by it in the taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959, in the light of the principles of Libson Shops, Inc. v. Koehler, 353 U.S. 382">353 U.S. 382.FINDINGS OF FACTSome of the facts have been stipulated and the stipulations are incorporated herein by this reference.The petitioner is a corporation organized under the laws of New Jersey on or about May 15, 1944, to engage in the manufacture, sale, and distribution of textiles, with its principal office at 3300 Hudson Avenue, Union City, N.J. During the years in issue, it maintained its books and records and filed its Federal income tax returns on an accrual method of accounting and on the basis of a fiscal year consisting of 52 or 53 weeks ending nearest to March 31. It filed its returns with the district director of internal revenue at Newark, N.J.Petitioner's 133 name when organized was Cornelius Mills, Inc. On or about November 24, 1948, its name was changed to Frank Ix & Sons Carolina Corp., and on or about August 8, 1950, its name was changed to Frank Ix & Sons Sheraton Mills Corp. The change to the present name of petitioner, Frank Ix & Sons Virginia Corp., was made on or about August 2, 1954, after a reorganization described hereinafter.Another corporation, Frank Ix & Sons of Virginia Inc., was organized under the laws of Virginia on November 18, 1948. On February 14, 1949, its name was changed to Frank Ix & Sons Virginia Corp. (hereinafter referred to as the Virginia Corp.). It was dissolved on October 7, 1954.When the Virginia Corp. was organized on November 18, 1948, the persons who owned its stock had also owned, in the same proportions, 535 the stock of the petitioner at its organization. The principal officers and directors of petitioner and of the Virginia Corp. were the same until April 29, 1953, namely:PresidentAlexander F. IxVice presidentFrank J. Ix, Jr.Vice presidentWilliam E. IxVice presidentCharles W. IxTreasurerAlexander F. IxSecretaryEdward P. IxAlexander F. Ix died on April 29, 1953. On May 14, 1953, Edward P. Ix was 134 elected president and treasurer of each of the corporations to succeed him and Charles W. Ix was elected secretary. Mary Hill Ix, widow of Alexander, was elected a vice president. Thereafter, and during all pertinent times, those individuals continued to occupy these positions.Petitioner and the Virginia Corp. were, during all times pertinent, engaged in the manufacture and sale of woven synthetic fibers, including nylon, dacron, acetate, and rayon.Petitioner maintained and operated a factory at Cornelius, N.C. (hereinafter referred to as the Cornelius mill). The Virginia Corp. maintained and operated a factory at Charlottesville, Va. (hereinafter referred to as the Charlottesville mill). The Cornelius mill had spinning and twisting machinery and the Charlottesville mill had throwing machinery. The spinning and twisting machinery and the throwing machinery performed the same functions with respect to the yarn before weaving. Both had similar weaving machinery. The same types and styles of cloth were manufactured in the Cornelius mill as in the Charlottesville mill.The Ix family group had several corporations, including Frank Ix & Sons, Inc.; Frank Ix & Sons Pennsylvania Corp.; 135 Frank Ix & Sons Carolina Corp.; Frank Ix & Sons New York Corp.; and Frank Ix & Sons Administrative Corp.Petitioner owned a building located at 3300 Hudson Avenue, Union City, N.J., which at all pertinent times was used by it, the Virginia Corp., and other Ix companies as a central office for accounting, bookkeeping, inventory control, and yarn purchasing. The same staff of employees performed these services for all the corporations. During the years 1949 to 1959 an office was maintained by Frank Ix & Sons New York Corp. at 1441 Broadway, N.Y. Such office maintained a complete technical staff, a production and control staff, and a sales force, which served all the Ix corporations, including the petitioner and the Virginia Corp. The technical staff, consisting of about 10 employees, did the styling and technical layouts; the production planning and control staff scheduled and laid out all the production work for all the plants; and the sales staff, consisting of a sales manager. 536 2 assistant sales managers, and about 8 salesmen, operated out of the Broadway, New York, office and solicited orders for the manufacture of cloth. Business was solicited throughout the United States. 136 About 70 percent of the business was from customers in the New York City area. The orders so solicited were returned to the New York office where the production and control department determined which of the Ix companies, including petitioner and the Virginia Corp., would manufacture the cloth. Such determination was based in part upon the workload of the various plants as well as the availability of skilled operators in the particular type of fabric to be manufactured. Frank Ix & Sons New York Corp. charged a fee to the various companies for the services it performed as selling agent.During the time it was in operation, the petitioner's Cornelius mill operated approximately 600 looms and employed 400 to 500 persons. The Virginia Corp.'s Charlottesville mill operated approximately 1,000 looms and employed between 600 and 700 persons. In each mill there were single box looms and multiple box looms. Of the 1,000 looms operated by the Charlottesville mill 352 had been purchased for the petitioner's Cornelius mill over the period 1948 to 1951.On March 5, 1952, Frank Ix & Sons, Inc., borrowed $ 3 million at 3 1/2-percent interest from the Guaranty Trust Co. of New York, evidenced 137 by a promissory note with a maturity date of March 1, 1957. That corporation borrowed the money in order to make loans to other Ix family corporations, including the petitioner and the Virginia Corp. As collateral the borrower pledged all the capital stock which it owned in such other corporations, 1 and the promissory notes which it received from them. Among the conditions for the loan was an agreement that during the period the note to the bank remained unpaid the working capital of the various corporations would not be reduced below a specified figure. The amount of working capital required of petitioner under such loan agreement was $ 2,800,000. It was provided that in the event the working capital of the corporations fell below the specified amount, the borrower would be deemed to be in default.The amount which the petitioner borrowed from Frank Ix & Sons, Inc., on March 5, 1952, was $ 2,550,000 138 at 3 1/2-percent interest which was evidenced by several promissory notes, each with a maturity date of March 1, 1957. Petitioner agreed that during the period the notes remained unpaid, it would maintain working capital in the amount of $ 2,800,000, and it was provided that failure to maintain such amount of working capital would constitute an act of default. Pursuant 537 to the loan agreement with Guaranty Trust Co., Frank Ix & Sons, Inc., assigned petitioner's promissory notes to the bank.By September 30, 1953, the petitioner's working capital had diminished to $ 1,863,021.29. Thereupon negotiations were carried on with the Guaranty Trust Co. of New York, and a plan of reorganization involving the petitioner and the Virginia Corp. was agreed upon. At that time the common stock of each of those corporations was owned by the same persons (namely the members of the Ix family, Frank Ix & Sons, Inc., and two other companies). Their holdings in the petitioner were in the same proportions (with one small exception) as their holdings in the Virginia Corp. Frank Ix & Sons, Inc., owned all the preferred stock of each corporation. The estimated net worth of the petitioner at September 139 30, 1953, was $ 768,438, and of the Virginia Corp. as of the same date was $ 4,138,674, which included working capital in excess of $ 1 million. The plan of reorganization provided that the petitioner should increase the amount of its class B common stock and its preferred stock; that the Virginia Corp. would transfer to petitioner all of its properties, assets, and business subject to its debts, liabilities, and obligations; that in consideration of such transfer the petitioner would assume all the debts, liabilities, and obligations of the Virginia Corp. and would issue to it shares of its preferred stock and shares of its class B common stock; that the amount of common stock to be issued should be calculated on the basis that the common stock of the Virginia Corp. had a value of 13 times the value of the common stock of the petitioner; that the Virginia Corp. should distribute the stock so acquired to its stockholders in complete liquidation and dissolution of the Virginia Corp.; and that the petitioner should change its name to Frank Ix & Sons Virginia Corp. The plan of reorganization was fully consummated, including the execution and delivery of a "Bill of Sale and Agreement" 140 dated as of September 30, 1953. After the reorganization the same persons, with minor exceptions, continued to hold the stock of the petitioner at all times material in the same proportion that they had held its stock and the stock of the Virginia Corp. prior to the reorganization. The petitioner and the respondent agree that the reorganization was a nontaxable reorganization under the provisions of the Internal Revenue Code of 1939.Following the reorganization, the petitioner operated the Cornelius mill and the Charlottesville mill in the same fashion as they had been operated prior to the reorganization. Separate records were kept for each plant. Such records show that the Cornelius mill operated at a net loss of $ 450,599.51 from October 1, 1953, to March 31, 1954, and at a net loss of $ 347,083.80 from April 1, 1954, to September 30, 1954. The Ix interests decided that in view of the condition of the textile industry it was advisable to close down one of their mills. Petitioner was having management problems in connection with the Cornelius 538 mill and it was decided to close down such mill. Accordingly, the manufacturing operations of the Cornelius mill were terminated on or about 141 July 22, 1954. The president of the petitioner did not think the adverse business conditions would continue indefinitely. However, operation of the Cornelius mill was never resumed. All orders then on hand at the Cornelius mill were allocated to the other mills owned by the Ix interest, including the Charlottesville mill.On March 31, 1954, the Cornelius mill had assets of a book cost of $ 2,479,000, which included weaving and twisting machinery of a book cost of $ 1,986,000. On the same date the Charlottesville mill had assets of a book cost of $ 3,646,000, of which $ 3,203,000 consisted of weaving and throwing machinery. During the taxable years ended March 31, 1955, to March 28, 1959, there were transferred from the Cornelius mill to the Charlottesville mill various assets having a book cost of approximately $ 163,000, which included weaving and twisting machinery of a book cost of approximately $ 157,000.For the taxable years ended September 30, 1951, to September 30, 1953, the Virginia Corp. realized taxable income as follows:T.Y.E. Sept. 30 --Taxable income1951$ 498,753.751952377,295.4419531,507,861.04For the taxable years ended March 31, 1947, through March 31, 1953, during 142 which time the petitioner was operating only the Cornelius mill, it realized taxable income and sustained net operating losses as follows:Taxable year ended Mar. 31 --TaxableNet operatingincomeloss1947$ 947,778.4019481,559,150.921949320,788.5019502,689.4619511 80,796.9619522 $ 566,437.531953904,596.84 For the taxable year ended March 31, 1954, during which the petitioner operated the Cornelius mill and during a part of which it also operated the Charlottesville mill, the petitioner sustained a net loss of $ 211,012.93. 2For its taxable years ended March 31, 1955, through March 28, 1959 (without regard to any deductions on account of any net operating 539 143 losses of prior years), the petitioner realized taxable income, as follows:Taxable year endedTaxable incomeMar. 31, 19551 $ 340,004.15Mar. 31, 1956385,628.29Mar. 31, 1957162,781.75Mar. 29, 1958579,541.09Mar. 28, 1959354,721.30 The reported amount of petitioner's net operating loss for the taxable year ended March 31, 1952 (after subtracting the portion carried back to prior years), and a portion of its reported net operating loss for the taxable year ended March 31, 1953, were carried over by it and claimed as deductions for its taxable years ended March 31, 1955 and 1956, to the extent of taxable income reported for those years. Respondent did not make any determination of deficiencies for those years. The remaining portion of petitioner's reported net operating loss for the taxable year ended March 31, 1953, and the entire amount of its reported net operating loss for the taxable year 144 ended March 31, 1954, were carried over by it and claimed as deductions from its income of its taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959. In the notice of deficiencies for the latter 3 years the respondent determined that "you are not entitled to net operating loss deductions in the taxable years ended March 31, 1957, to March 28, 1959, inclusive, based upon losses sustained in the taxable years ended March 31, 1953, to March 31, 1954."OPINIONThe question presented is whether the petitioner, in computing its taxable income for the taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959, may deduct, pursuant to sections 23(s) and 122 of the Internal Revenue Code of 1939, and section 172 of the Internal Revenue Code of 1954, 3145 146 net losses sustained by it in its taxable 540 years ended March 31, 1953, and March 31, 1954. 4It is the respondent's position that the business in which the net operating losses were sustained was not substantially the same business which gave rise to the income sought to be offset by the carryovers, and that, under the principle of Libson Shops, Inc. v. Koehler, 353 U.S. 382">353 U.S. 382, the net operating losses are not deductible. The petitioner, on the other hand, contends that under the circumstances here presented it should be considered that the same business gave rise to the losses and to the income sought to be offset, and that the principle of the Libson Shops case is not applicable.In Libson Shops, Inc. v. Koehler, supra, 147 the same interests owned 17 corporations, 16 of which were engaged in the retail clothing business and 1 of which was engaged in rendering management services to the others. Each of these 17 corporations filed separate income tax returns. The 16 sales corporations were merged into the managing corporation (the same interests continuing in control), and the surviving corporation conducted the entire business as a single enterprise. Prior to the merger three of the sales corporations had net operating losses, and the year following the merger each of the retail units formerly operated by these three corporations continued to sustain operating losses. In its income tax return for the first year after the merger the surviving corporation claimed deductions for the net operating losses of these three constituent corporations. The Supreme Court held that the claimed deductions were not allowable, stating in part:The requirement of a continuity of business enterprise as applied to this case is in accord with the legislative history of the carry-over and carry-back provisions. Those provisions were enacted to ameliorate the unduly drastic consequences of taxing income strictly on an 148 annual basis. They were designed to permit a taxpayer to set off its lean years against its lush years, and to strike something like an average taxable income computed over a period longer than one year. There is, however, no indication in their legislative history that these provisions were designed to permit the averaging of the pre-merger losses of one business with the post-merger income of some other business which had been operated and taxed separately before the merger. What history there is suggests 541 that Congress primarily was concerned with the fluctuating income of a single business. [6]* * * Petitioner is attempting to carry over the pre-merger losses of three business units which continued to have losses after the merger. Had there been no merger, these businesses would have had no opportunity to carry over their losses. * ** * * The fact that § 129(a) is inapplicable does not mean that petitioner is automatically entitled to a carry-over. The availability of this privilege depends on the proper interpretation to be given to the carry-over provisions. We find nothing in those provisions which suggest that they should be construed to give a "windfall" to a taxpayer 149 who happens to have merged with other corporations. The purpose of these provisions is not to give a merged taxpayer a tax advantage over others who have not merged. We conclude that petitioner is not entitled to a carry-over since the income against which the offset is claimed was not produced by substantially the same businesses which incurred the losses. [9] [Footnotes omitted.]In the instant case both the petitioner and the Virginia Corp. were owned by the same interests, principally the Ix family. During its fiscal years ended March 31, 1951, 1952, and 1953, the petitioner had suffered large operating losses from the operation of the Cornelius mill. The Virginia Corp. for its taxable years ended September 30, 1951, 1952, and 1953, had operated the Charlottesville mill at substantial profits. As of September 30, 1953, pursuant to a tax-free reorganization, the petitioner acquired the assets of the Virginia Corp. and continued, for a time, to operate both mills. Each was operated as a separate division and separate records of the operations were kept. The Cornelius mill continued to operate at a loss, while the Charlottesville mill operated at a profit. On July 22, 1954, the 150 petitioner terminated its operation of the Cornelius mill, but continued to operate the Charlottesville mill at a profit throughout the following years, including the taxable years in question, namely, the taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959. During the time that the two mills were in operation, both before and after the reorganization, each manufactured the same types of products, woven synthetic fibers; each used similar equipment; and another Ix family controlled corporation, Frank Ix & Sons New York Corp., provided the staff which rendered services to each of them, including production planning, styling and technical layouts, sales solicitations, yarn purchasing, and bookkeeping, accounting, and inventory control. Orders from customers were allocated by Frank Ix & Sons New York Corp. among the Cornelius mill, the Charlottesville mill, and other mills operated by the Ix interests.The petitioner contends that the operation, prior to the reorganization, of the Cornelius mill by the petitioner and the operation by the Virginia Corp. of the Charlottesville mill constituted substantially the 542 same business (even though operated by different corporations), 151 and that the petitioner operated the same business in its taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959, even though in those years it was operating only the prosperous Charlottesville mill. It is its contention that the shutdown of the Cornelius mill on July 22, 1954, was not the termination of a business, but was merely the termination of one of the business' manufacturing plants, and that the same business continued on thereafter, using only the Charlottesville mill to fill orders.We cannot agree with the petitioner that there was here the requisite continuity of business enterprise. Even though, prior to the reorganization, the operation of the two mills constituted similar businesses and each business utilized the same management facilities, the fact remains that each mill constituted a separate business operated by a different corporation, and each business was taxed separately. The net operating losses sought to be carried over were sustained entirely in the petitioner's operation of the Cornelius mill. The income against which the deduction is sought to be taken was derived entirely from the operation of the Charlottesville mill. Such deduction is 152 precluded under the principle of the Libson Shops case. To paraphrase the language of the Supreme Court in that case, petitioner is attempting to carry over the prereorganization losses of a business unit which continued to have losses after the reorganization; had there been no reorganization, and the acquisition by the petitioner of the prosperous Charlottesville mill in connection therewith, there would have been no opportunity to carry over the losses of the Cornelius mill. And it is now well established that the fact that the continuing corporation is the same corporation which sustained the operating losses in the prior years, does not serve to render inapplicable the rule of the Libson Shops case. J. G. Dudley Co., 36 T.C. 1122">36 T.C. 1122, affd. (C.A. 4) 298 F. 2d 750; Huyler's, 38 T.C. 773">38 T.C. 773, affd. (C.A. 7) 327 F.2d 767">327 F. 2d 767; Julius Garfinckel & Co., 40 T.C. 870">40 T.C. 870, affd. (C.A. 2) 335 F.2d 744">335 F. 2d 744; and Federal Cement Tile Co., 40 T.C. 1028">40 T.C. 1028, affd. (C.A. 7) 338 F.2d 691">338 F. 2d 691.The Garfinckel case is closely in point. There Garfinckel & Co. had acquired in 1946 and 1947 all the stock of Brooks Bros., a New York corporation long engaged in the manufacture and retail sale of men's wear. By 1952 Garfinckel 153 & Co. had acquired 58 percent of the stock of A. DePinna, a New York corporation engaged in the manufacture and retail sale of both men's and women's clothing. In February 1952, it caused Brooks Bros. to merge into DePinna, the latter corporation surviving, with Garfinckel & Co. owning 95 percent of its stock. For several years preceding the merger DePinna had sustained substantial net operating losses, while Brooks Bros. had made substantial profits. After the merger the two businesses were operated 543 as separate divisions. The DePinna division continued to suffer losses and the Brooks Bros. division continued to operate at a profit. In its returns filed for its taxable years ended July 31, 1952, 1953, and 1954, the surviving corporation claimed as a deduction its premerger net operating losses. We there held, and the Court of Appeals agreed, that the principle of the Libson Shops case prevented the allowance of the claimed net operating losses, it being immaterial that it was the loss corporation which survived the merger. There the Court of Appeals stated "We find no reason to think the Supreme Court would have decided Libson Shops differently if the 14 profit-making corporations 154 had been merged into the 3 losing corporations and these had survived."Petitioner makes much of the fact that at all times material the same interests owned the petitioner and the Virginia Corp. in the same proportions. We cannot attach any significance to that fact since in the Libson Shops case the same interests which controlled all the corporations before the merger continued to control the surviving corporation.The petitioner further argues that it is entitled to the beneficial treatment accorded by Rev. Rul. 63-40, 1963-1, C. B. 46, wherein the respondent announced that he would not rely upon the Libson Shops doctrine to bar a corporation from carrying over losses from a discontinued business against income from a new business enterprise acquired through a cash purchase of assets of an unrelated corporation, there being no change in the stock ownership of the corporation. We see no basis for applying that ruling in the instant situation. The instant case does not involve the cash purchase of assets of an unrelated corporation.We have given careful consideration to the contention made by the petitioner that to allow the carryover and deduction of the net loss of $ 211,012.93 155 for the taxable year ended March 31, 1954, would not violate the principle of the Libson Shops case. It is its contention that such net loss was realized after the reorganization and that there is no reason for disallowing such a post-reorganization loss from profits of its subsequent years. It argues that since in the last 6 months of the taxable year ended March 31, 1954, the Cornelius mill operation resulted in a net loss of $ 450,599.51 and that since this is far in excess of the $ 211,012.93 net operating loss for the entire taxable year ended March 31, 1954, such net operating loss of $ 211,012.93 must have been sustained after September 30, 1953. We cannot agree with this reasoning. The Cornelius mill may have had substantial losses during the first half of that taxable year. Indeed, the parties to the reorganization estimated that the Cornelius mill operated at a loss of $ 50,000 for the period April 1, 1953, to September 30, 1953. Accordingly, 544 we are forced to conclude that at least some portion (which we cannot determine) of the net loss would be attributable to that portion of the taxable year prior to the reorganization. Thus, to allow the net operating loss for the 156 taxable year ended May 30, 1953, to be carried over and deducted from income of the taxable years ended March 31, 1957, March 29, 1958, and March 28, 1959, would, at least to some extent, result in applying the prereorganization loss from one business against the post-reorganization income of a different business, contrary to the principle of the Libson Shops case. Even if we were able upon this record to calculate the portion of petitioner's net operating loss sustained in the last half of its taxable year ended March 31, 1954, it is our opinion that the annual accounting principle upon which our tax system is based ( Burnet v. Sanford & Brooks Co., 282 U.S. 359">282 U.S. 359) would preclude us from fragmentizing such taxable year and treating such portion as a net operating loss which may be carried over to another year and deducted. Section 122 of the Internal Revenue Code of 1939 refers to the net operating loss "for any taxable year," and section 48(a) of that Code defines "taxable year" as "the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed."We hold that the respondent did not err in disallowing the claimed net operating 157 loss deductions.Decision will be entered under Rule 50. Footnotes1. Frank Ix & Sons, Inc., owned all the preferred stock of both petitioner and the Virginia Corp. It owned 100 of the 606 outstanding shares of class B nonvoting common stock of petitioner, and 140 of the 646 outstanding shares of class B nonvoting common stock of the Virginia Corp.↩1. Before deduction resulting from carryback of net operating loss for the fiscal year ended Mar. 31, 1952.↩2. Remainder after deducting the portion carried back to prior years.↩2. As found hereinabove, the Cornelius mill operated at a net loss of $ 450,599.51 from Oct. 1, 1953, to Mar. 31, 1954. Also, in connection with the reorganization, the parties thereto estimated that the Cornelius mill operated at a loss of $ 50,000 for the period Apr. 1, 1953, to Sept. 30, 1953.↩1. From Apr. 1, 1954, until July 22, 1954, the petitioner operated both the Cornelius mill and the Charlottesville mill, and thereafter operated only the latter. As found hereinabove the Cornelius mill operated at a net loss of $ 347,083.80 from Apr. 1, 1954, until it ceased operating on July 22, 1954.↩3. Sec. 23(s) of the 1939 Code provides for the deduction of the net operating loss deduction computed under sec. 122. Sec. 122(b) (2) (B) of the 1939 Code provides in part:Loss for Taxable Year Beginning After 1949. -- If for any taxable year beginning after December 31, 1949, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-over for each of the five succeeding taxable years, * * Sec. 172 of the Internal Revenue Code of 1954 provides in part:(a) Deduction Allowed. -- There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of (1) the net operating loss carryovers to such year, plus (2) the net operating loss carrybacks to such year. * ** * * *(g) Special Transitional Rules. -- (1) Losses for taxable years ending before January 1, 1954. -- For purposes of this section, the determination of the taxable years ending after December 31, 1953, to which a net operating loss for any taxable year ending before January 1, 1954, may be carried shall be made under the Internal Revenue Code of 1939.It should be pointed out that sec. 381 of the 1954 Code contains special provisions for carryovers in certain corporate acquisitions, and that sec. 382 contains special limitations on net operating loss carryovers. However, it is clear that the transaction here involved occurred before the effective date of those sections. See secs. 393 and 394 of the 1954 Code; Irving-Kolmar Corporation, 35 T.C. 712">35 T.C. 712; Allied Central Stores, Inc. v. Commissioner, (C.A. 2) 329 F. 2d 503, certiorari denied 381 U.S. 903">381 U.S. 903, affirming a Memorandum Opinion of this Court; and Federal Cement Tile Co., 40 T.C. 1028">40 T.C. 1028, affd. (C.A. 7) 338 F. 2d 691↩. It may be added that apparently the petitioner does not contend that secs. 381 and 382 are applicable.4. On brief the petitioner refers to the carryover to such years of its net operating loss for its taxable year ended Mar. 31, 1952. However, it seems apparent that its net loss for that year has been exhausted by having been carried over and deducted from income of the taxable years ended Mar. 31, 1955, and Mar. 31, 1956.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624496/	ESTATE OF FRANK MARTIN PERRY, SR., DECEASED, MICHAEL C. PERRY, WHIT S. PERRY, AND ROBERT S. PERRY, CO-EXECUTORS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEstate of Perry v. CommissionerDocket No. 4132-88United States Tax CourtT.C. Memo 1990-123; 1990 Tax Ct. Memo LEXIS 123; 59 T.C.M. (CCH) 65; T.C.M. (RIA) 90123; March 8, 1990Hugh C. Montgomery, Jr., David P. Webb, and Charles L. Brocato, for the petitioner. J. Craig Young and Helen C. T. Smith, for the respondent. COHEN187 MEMORANDUM OPINION COHEN, Judge: Respondent determined a deficiency of $ 320,957 in the Federal estate tax of the estate of Frank Martin Perry, Sr., deceased, Michael C. Perry, Whit S. Perry, and Robert S. Perry, co-executors. After concessions, the sole issue for decision is whether proceeds totaling $ 600,000 from life insurance policies purchased within 3 years of decedent's death are includable in decedent's gross estate pursuant to section 2035(a). The parties have agreed that the issue in this case is the same as the issue in , affd. , and , on appeal (6th Cir., Jan. 19, 1990). Unless otherwise indicated, all section125 references are to the Internal Revenue Code, as amended and in effect as of the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure. After trial, the parties submitted a Stipulation of Joint Proposed Findings of Fact. Thus the material facts are not disputed. Petitioner is the Estate of Frank Martin Perry, Sr. Petitioner 188 is represented by Michael C. Perry, Whit S. Perry, and Robert S. Perry, co-executors of the estate and the sons of decedent, Frank Martin Perry, Sr. The co-executors resided in Tunica, Mississippi, at the time the petition was filed. Decedent died on March 19, 1984, from gunshot wounds sustained in a hunting accident. At the time of his death, decedent was a resident of Tunica, Mississippi. A number of insurance policies on decedent's life were in effect at the time of his death. The proceeds of all but two of these policies were included in the gross estate on decedent's Federal estate tax return. The two insurance policies excluded from the return, which were purchased within 3 years of decedent's death, were as follows: DateInsurer/Policy Owners/Amount ofAcquiredPolicy No.BeneficiariesProceeds5-04-83Lloyd's, LondonMichael, Whit,$ 400,000#L-26502& Robert Perry6-08-83Integon LifeMichael, Whit,$ 200,000#848082& Robert PerryTotal$ 600,000126 On April 16, 1983, decedent signed an application form for $ 400,000 of life insurance from Underwriters at Lloyd's, London (Lloyd's). Decedent signed this application as Applicant (Person to be Insured). Decedent's three sons, Michael C. Perry, Whit S. Perry, and Robert S. Perry, signed the application as the proposed policy owners. Lloyd's policy #L-26502 was issued on May 4, 1983. Under the terms of the policy and Mississippi law, decedent's sons were the policy owners at all times from the time of the issuance of the policy. Decedent paid all of the premiums on Lloyd's policy #L-26502. The annual premium on this policy was $ 512. Decedent paid the initial annual premium on or about April 27, 1983, by a check drawn on his personal checking account, account #03-362-16, at the Planters Bank of Tunica, Mississippi. Decedent died before the second annual premium on this policy became due. On May 4, 1983, decedent signed an application for $ 250,000 of life insurance from Integon Life Insurance Corporation (Integon). Decedent signed this application as Proposed Insured. Decedent's three sons signed the application as Applicant or Owner if not Proposed Insured. The application127 designated decedent's sons as co-owners of $ 200,000 of the insurance and decedent as the owner of the remaining $ 50,000. As both applicant and proposed insured, decedent also signed a medical questionnaire filed in connection with the application for life insurance from Integon. In lieu of issuing a single $ 250,000 life insurance policy, Integon issued two separate policies. One of these policies was Integon policy #848082 in the amount of $ 200,000. The other Integon policy, in the amount of $ 50,000, is not in dispute. Integon policy #848082 was issued on June 8, 1983. Under the terms of the policy and Mississippi law, decedent's sons were the policy owners at all times from the time of the issuance of the policy. Decedent paid all of the premiums on this policy. The initial premium was paid by a check in the amount of $ 140 drawn on checking account #03-362-16 at the Planters Bank. Thereafter, the premiums of $ 127.28 per month were paid by preauthorized withdrawals from decedent's personal checking account, account #021-585-6, at the Tunica County Bank, Tunica, Mississippi. The final monthly premium was paid on March 12, 1984, 1 week before decedent's death. Decedent's128 payments of the premiums on Lloyd's policy #L-26502 and Integon policy #848082 were not loans to decedent's sons, the beneficiaries. Upon decedent's death, the proceeds of Lloyd's policy #L-26502 in the amount of $ 400,000 and Integon policy #848082 in the amount of $ 200,000 (plus accrued interest of $ 1,767.15) were paid in lump sums to decedent's sons as beneficiaries. Respondent determined that the proceeds of these two insurance policies in the total amount of $ 600,000 were includable in decedent's gross estate. During the pendency of this case, the Court filed its opinions in the cases of ; and . In addition, the Court of Appeals for the Tenth Circuit affirmed our opinion in , affd. . Respondent has acknowledged that the legal issues in those cases and the issue in this case are virtually identical. Respondent does not contend that the instant case is distinguishable from Estate of Headrick or Estate of Leder. Respondent, however, 129 maintains that those cases were wrongly decided and asks that we reconsider our refusal to apply the "beamed transfer" theory of . 189 Section 2035Section 2035(a) generally requires that the gross estate of a decedent include the value of any property in which the decedent had an interest or had transferred within 3 years of death (the 3-year inclusionary rule). Section 2035(b) excepts bona fide sales for adequate and full consideration and gifts for which gift tax returns need not be filed (except any transfer with respect to a life insurance policy). Section 2035(d), which applies to decedents dying after 1981, was added by the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. 97-34, sec. 424, 95 Stat. 172, 317. Because decedent herein died in 1984, section 2035(d) applies to his estate. Section 2035(d)(1) provides that the general rule of section 2035(a) shall not apply to the estates of decedents dying after December 31, 1981, except in cases of those transfers enumerated in section 2035(d)(2). Section 2035(d)(2) excepts transfers of an interest in property that is included in the value of130 the gross estate under section 2042 (or various other sections not applicable here) or that would have been included under any of those sections "if such interest had been retained by the decedent." Thus, in order to determine whether section 2035(d)(2) applies, we must determine whether decedent possessed any interest under the terms of section 2042. Section 2042Section 2042 provides that the gross estate includes (1) the proceeds of insurance on decedent's life receivable by or for the benefit of the estate, and (2) the proceeds of insurance on decedent's life receivable by other beneficiaries if decedent possessed at his death any "incidents of ownership" in that insurance policy. Sec. 2042; sec. 20.2042-1(b) and (c), Estate Tax Regs. The term "incidents of ownership" refers to the right of the insured or his estate to the economic benefits of the policy. Sec. 20.2042-1(c)(2), Estate Tax Regs. Incidents of ownership listed in the regulations include the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the131 policy. Sec. 20.2042-1(c)(2), Estate Tax Regs. We must also look to state law to determine whether decedent had any rights that might be incidents of ownership taxable under section 2042. ; . In Estate of Leder, we held that the proceeds from an insurance policy were not includable in the insured's gross estate where the insured did not possess at the time of his death, or at any time within the 3 years preceding his death, any of the incidents of ownership in the policy. Specifically, we held that section 2035(d)(1) overrides section 2035(a). Because the proceeds of the policy were not includable under section 2042, we held that the section 2035(d)(2) exception to section 2035(d)(1) was not applicable. Similarly, in Estate of Headrick, we held that the proceeds from an insurance policy were not includable in the insured's gross estate because the insured never possessed incidents of ownership in the policy within the meaning of section 2042. Although the decedent contributed cash annually to an irrevocable inter vivos trust in amounts132 sufficient to meet the trust's cumulative monthly premium obligations, we held that "the premium payment test is 'now abandoned' under section 2042." . Under section 2035(a), a "'transfer' is not limited to the passing of property directly from the donor to the transferee, but encompasses a donation 'procured through expenditures by the decedent with the purpose, effected at his death, of having it pass to another.'" . In Estate of Leder, respondent asked us to construe the term "transfer" for purposes of section 2035(d) to include any transfer whether direct or indirect. Similarly, in Estate of Headrick, respondent asked us to apply a beamed transfer theory to impute to the insured a transfer of the life insurance policy acquired by the trust. In the instant case, respondent asks that we reconsider our refusal to apply the Bel beamed transfer theory of section 2035(a). In both Estate of Leder and Estate of Headrick, we rejected respondent's arguments that we should incorporate into section 2042 the constructive transfer doctrine. In view of respondent's acknowledgment that this133 case cannot be distinguished from Estate of Leder or Estate of Headrick, we decline to apply the beamed transfer theory to the facts of this case. The parties have stipulated that, under the terms of the policies and Mississippi law, decedent's sons were the policy owners at all times from the time of the issuance of the two policies in question. The parties have also stipulated that decedent paid all of the premiums on the policies in issue. Under section 2042, however, decedent's payment of premiums is irrelevant in determining whether he retained any incidents of ownership in the policy proceeds. , affg. ; . Under the section 2042 definition of "incidents of ownership," decedent never held any ownership, economic, or other contractual rights in the policies. Decedent's sons were the legal and equitable owners of the policies. On these facts, we hold that the proceeds of the insurance policies 190 are not includable in decedent's gross estate under section 2042. To reflect the foregoing134 and concessions by the parties, Decision will be entered under Rule 155.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624498/	JACK C. EDWARDS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, RespondentEdwards v. CommissionerDocket No. 2753-73.United States Tax CourtT.C. Memo 1975-72; 1975 Tax Ct. Memo LEXIS 300; 34 T.C.M. (CCH) 373; T.C.M. (RIA) 750072; March 24, 1975, Filed Jack C. Edwards, pro se. Douglas K. Cook, for the respondent. FORRESTERMEMORANDUM FINDINGS OF FACT AND OPINION FORRESTER, Judge: Respondent has determined a deficiency of $995.60 in petitioner's 1971 Federal income tax. Petitioner having made a number of concessions, the following two issues remain for our decision: (1) whether petitioner is entitled to dependency exemptions for his three children by a former marriage; (2) whether he may deduct, as a theft loss, amounts allegedly taken from him by a state trooper during an allegedly unlawful arrest. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Jack C. Edwards (petitioner) resided in Glendale, Arizona, on the date of the filing of the petition herein. He filed his 1971 Federal income tax return with the district director of internal revenue, Phoenix, Arizona. Petitioner married Shirley M. Edwards (Shirley) in Wichita, Kansas, in August of 1954. During the marriage three children were born to the couple: Jack D. Edwards (Jack), born July 1, 1958; Kevin S. Edwards (Kevin), born April 11, 1961; and Korey302 G. Edwards (Korey), born February 8, 1964. The couple was divorced on April 16, 1970, and the divorce decree gave custody of the three above-mentioned children to Shirley. The decree required petitioner to pay Shirley $150 a month as support for the three children, an amount which was revised upwards to $200 a month by a court order entered on May 13, 1971. During 1971, pursuant to these court orders, petitioner paid to Shirley $1,425 for the support of the couple's three children. During 1971 petitioner exercised his visitation rights with respect to the three children for an approximately three-week period running from the latter part of July to early August. Because petitioner resided at that time in Phoenix, Arizona, he had to make during such three-week period two round trips by automobile to Wichita where the children resided with their mother. The first such round trip was to pick up the children in Wichita and bring them to Phoenix, the second, to return the children at the conclusion of their visit. The children spent the first week of the visit with petitioner and his wife at petitioner's house in Phoenix. Groceries for the five cost approximately $60 for such week, and303 petitioner also spent approximately $20 for clothing for each of his children. Petitioner, for the remaining two weeks of the visitation period, took his spouse and children on an automobile tour through Utah and California, spending some time at Disneyland in Anaheim, California. The total expenditure by petitioner during the visitation period was approximately $600, excluding the amounts for groceries and clothing described above, and including automobile expenses incurred by him in transporting his children from and to the home of their mother in Wichita. Except for the three-week period described above, the children resided in Wichita with Shirley and her 19-year old son by a former marriage. Shirley received in 1971 $3,733 of Aid to Dependent Children funds (ADC) from the State of Kansas and Sedgwick County. In addition, the State of Kansas made the following medical payments on behalf of the children during 1971: Jack$ 81.60Kevin1,473.61Korey40.40 The record is silent as to whether Shirley or any of her children worked or received support from any other sources during 1971. On July 10, 1972, petitioner filed a complaint in the Superior Court of Arizona, 304 Maricopa County, against an Arizona State Highway Department patrolman and the City of Peoria. In such complaint petitioner alleged, together with other allegations, that the patrolman, without justification, had taken $900 from petitioner's person during an allegedly unlawful arrest, and that such patrolman had failed to return such money. The suit was scheduled to be tried on February 9, 1975. On his 1971 return petitioner claimed dependency exemptions for each of his three children and, in addition, claimed a $900 theft loss arising out of his alleged encounter with the patrolman. In his statutory notice of deficiency respondent disallowed in full all these claimed deductions. OPINION The first issue to be decided is whether or not petitioner is entitled under section 151(e) 1 to dependency exemptions in 1971 for his three children by his marriage with Shriley. For petitioner to establish such entitlement, he must demonstrate that it was he who provided over one-half of the support of each of such children during 1971. Sec. 152(a). Respondent first contends that petitioner, 305 in order to show that he provided over one-half of the support of such children, must first demonstrate what was the total amount expended on the support of the children during 1971. On this contention, respondent is clearly correct, Bernard C. Rivers,33 T.C. 935">33 T.C. 935, 937-8 (1960), James E. Stafford,46 T.C. 515">46 T.C. 515, 518 (1966), Edward J. Pillis,47 T.C. 707">47 T.C. 707, 709 (1967), affirmed per curiam 390 F. 2d 659 (C.A. 4, 1968), and equally as clearly, petitioner has failed to carry his burden as to this matter. The record before us establishes only that petitioner made certain payments in support of the children in 1971, and that Shirley received $3,733 of ADC funds from state and local institutions in 1971. The record is entirely silent as to whether or not Shirley, any of petitioner's three children, or Shirley's child by a former marriage contributed anything further to the support of such three children. The detriment arising from such a gap in the record must, of course, fall on petitioner, who, as described above, had the burden of proof on the issue of his three children's total support in 1971. We need not, however, rest our306 holding as to the issue before us on the failure by petitioner to produce or even approximate a total support figure for his three children during 1971. For, even assuming that the amount demonstrated in the record as having been used for their support represents their total support, petitioner has also failed to show that one-half of such amount was contributed by him. From the record before us, we have found that petitioner contributed $1,620 in 1971. Of this amount $1,425 was the sum paid in 1971 pursuant to the court orders for child support entered against petitioner in 1970 and 1971. Petitioner also bought $60 of clothing for his three children while they were visiting him during the summer of 1971. During the first week of such visit petitioner spent $60 for groceries for himself, his spouse and his three children, and we find $35 of such amount as a reasonable allocation to the support of his children. As to the $600 spent in bringing the children to and from their mother's home in Wichita, and in taking them and his spouse on a two-week automobile trip through Utah and California, the part of such amount which represents petitioner's cost of transporting his children to307 and from Wichita, at the commencement and termination of the three-week visit, may not be deemed an amount spent to support the children. Aaron F. Vance,36 T.C. 547">36 T.C. 547, 550 (1961), Harvey L. Hopkins,55 T.C. 538">55 T.C. 538, 542 (1970). Using our best judgment, we find that $100 of this $600 is allocable to the support of his children on their two-week vacation tour. Petitioner also claimed that some part of the rent on his house, and some part of the utilities expense he incurred while the children were at his house for one week, should be considered as a contribution by him to their support. It is well established, however, that such expenses do not constitute support of a dependent for purposes of section 152. Aaron F. Vance,36 T.C. at 550, Harvey L. Hopkins,55 T.C. at 542. Thus, we have found that petitioner contributed $1,620 to the support of his children during 1971, or $540 per child. In addition to the amounts contributed by petitioner, Shirley received in 1971 $3,733 of ADC funds from state and local agencies in Kansas, and petitioner has given us no reason why respondent's allocation of three-fifths of this amount, 308 or approximately $2,240, to the support of petitioner's three children should not be accepted. 2 When we add to each child's pro-rata share of such ADC support, the additional amounts contributed by the State of Kansas for medical expenses for such children--$81.60 for Jack, $1,473.61 for Kevin, and $40.40 for Korey, it is abundantly clear that petitioner has failed to show that he contributed more than one-half of his children's 1971 support. The special rule of section 152(e)(2)(B) is of no avail to petitioner in the instant case. 3 For, before the special presumption enacted by such provision becomes applicable, a taxpayer must show that his children received at least one-half of their total support from the taxpayer and his former spouse during the year at issue, Harvey L. Hopkins,55 T.C. at 540-1, Jewell D. Godbehere,57 T.C. 349">57 T.C. 349, 351 (1971), a showing petitioner has clearly failed to make in the instant case. Thus, it is our holding that respondent correctly disallowed dependency exemptions to petitioner for any of his three children. 309 Petitioner also claimed a theft loss of $900 in 1971. It is his contention that an Arizona state patrolman unlawfully took such amount from him in 1971, and has never returned such $900 to petitioner. We need not decide whether the patrolman, in fact, took such money from petitioner during the course of an allegedly unlawful arrest. For, even accepting this assertion of petitioner, he has not established the lack of a reasonable prospect of recovering such amount from the patrolman or the patrolman's employer. Indeed, petitioner is in the midst of using the patrolman and his employer in order to recover such amount together with additional damages. Petitioner's failure to establish this lack of a reasonable prospect of recovery precludes him from deducting the $900 as a theft loss. Ramsay Scarlett & Co., 61 T.C. 795">61 T.C. 795, 807 (1974), on appeal (C.A. 4, June 6, 1974). Rainbow Inn, Inc. v. Commissioner,433 F. 2d 640, 642-3 (C.A. 3, 1970), reversing on another issue a Memorandum Opinion of this Court; sec. 1.165-1(d)(3), Income Tax Regs.Decision will be entered for the respondent.Footnotes1. All statutory references are to the Internal Revenue Code of 1954, unless otherwise specified.↩2. As found above, there were five individuals in Shirley's household during 1971.↩3. (e) Support Test in Case of Child of Divorced Parents, etc.-- * * * * * (2) Special rule.--The child of parents described in paragraph (1) shall be treated as having received over half of his support during the calendar year from the parent not having custody if-- * * * * * (B)(i) the parent not having custody provides $1,200 or more for the support of such child (or if there is more than one such child, $1,200 or more for all of such children) for the calendar year, and (ii) the parent having custody of such child does not clearly establish that he provided more for the support of such child during the calendar year than the parent not having custody.↩	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624499/	John Green and Roslyn Green v. Commissioner.Green v. CommissionerDocket No. 3294-62.United States Tax CourtT.C. Memo 1964-113; 1964 Tax Ct. Memo LEXIS 220; 23 T.C.M. (CCH) 649; T.C.M. (RIA) 64113; April 28, 1964Sidney J. Matzner, 9465 Wilshire Blvd., Beverly Hills, Calif., for the petitioners. Robert L. Gnaizda, for the respondent. FAYMemorandum Opinion FAY, Judge: The Commissioner determined a deficiency in petitioners' 223 income tax for the taxable year 1957 in the amount of $3,124.07. The parties have agreed to certain adjustments with respect to the deficiency. 1 The principal issue for decision is whether the loss resulting from the sale by petitioners of a piece of real property is deductible in full as an ordinary loss. If this issue is decided adversely to petitioners, then a secondary issue arises concerning whether the petitioners elected to capitalize certain interest payments. If petitioners did not elect to capitalize certain interest payments, then a further question arises as to when certain interest was paid. All of the facts have been stipulated and are so found. Petitioners are husband and wife with their residence at 169 North McCadden Place, Los Angeles, California. They filed their joint income tax return for the taxable year 1957 with the district director of internal revenue at Los Angeles, California. Petitioner John Green is a practicing physician. Of the $56,141.91 shown on petitioners' return for 1957 as adjusted gross income, $49,222.48 was derived224 from his medical practice. On or about December 6, 1955, petitioners purchased a note secured by a second deed of trust on property located at 4814 Vista De Oro, Los Angeles, California. The purchase price was $13,718,06. The maturity value of the note at the time of purchase was $17,147.57. Petitioners, during 1955 and 1956, received five payments of $109 each on the note. Of the $545 received, $426.93 represented a reduction of the principal balance of the note. No other payments were received by petitioners on the note. Petitioners thereafter foreclosed on the security and acquired title to the property which secured the second deed of trust. Petitioners made the following expenditures regarding said property in the years as indicated: 19561957Painting$ 612.00Attorney fees100.00$100.00Plumbing61.25Property taxes549.54126.55Insurance9.29Water2.507.25Gardener85.0070.00Termite7.50Interest141.11Total$1,358.33$513.66In addition to the above expenditures, petitioners made payments to Home Savings & Loan Association on the first deed in the total amount of $2,014. Payment was made by three checks, one for225 $1,632 and two checks for $191 each. Petitioners' check for $1,632 was dated December 12, 1956, but did not clear the bank until January 17, 1957. The two checks for $191 were dated with a 1957 date. The payments to Home Savings & Loan Association consisted of the payment of principal and interest as follows: PrincipalInterestTotal$581.93$1,050.07$1,632.0068.10122.90191.0068.10122.90191.00$718.13$1,295.87$2,014.00Immediately upon acquisition of the property, petitioners listed it for sale. The property was never resided in by the petitioners. Petitioners' return for 1957 does not reflect the receipt of rental income. The property was sold on March 29, 1957, for $33,083.87. Petitioners' return for 1957 does not reflect the sale of any other piece of real property during the year. At the date of sale the principal balance of the first deed of trust was $19,243.56, which amount was paid out of the sale proceeds. The expenses of sale were as follows: Commissions$1,650.00Title Insurance144.00Recording4.50Internal Revenue stamps15.40Escrow fee53.00Insurance.50Miscellaneous fee10.00Total$1,877.40226 Petitioners did not separately deduct any of the expenses incurred in connection with the property either on their 1956 return or on their 1957 return, but instead they took into account all such expenses in computing the loss on the sale of the property. Petitioners deducted the loss on their 1957 income tax return as an ordinary loss. Petitioners did not attach to their return for 1957 a statement indicating that they elected to treat interest expense in connection with the real property as a capital expenditure. Respondent adjusted the amount of the loss and determined that the loss was a capital loss. In computing the amount of the loss, respondent treated all the expenditures made by petitioners in both 1956 and 1957 as capital expenditures. 2Petitioners' primary position is twofold: (1) that the loss on the sale of the piece of real227 property was a loss on a transaction entered into for a profit and is deductible in full under section 165(c)(2); 3 and (2) that the real property sold was a "section 1231 asset" 4 and the loss is therefore deductible in full. Respondent claims that the real property was a capital asset as defined in section 12215 and, accordingly, the loss was a capital loss subject to the limitations of section 1211(b). 6 We must agree with respondent. 228 The gist of petitioners' argument is that a transaction which falls under section 165(c)(2) is not limited by section 165(f)7 or section 1211(b). This is where petitioners err. The limitations imposed by sections 165(f) and 1211 apply alike to any losses under section 165(c) if from sales or exchanges of capital assets. Estate of Maria Assmann, 16 T.C. 632">16 T.C. 632 (1951). 8 Whether petitioners are allowed an ordinary loss deduction depends upon whether the real property at the time of sale was not a capital asset in their hands. Section 1221 starts by defining a "capital asset" as "property held by the taxpayer." The property here involved was held by the taxpayers. It was therefore a capital asset unless it can be shown to fall within the exceptions provided for in section 1221. The only possible exceptions petitioners could rely upon are that the property was "stock in trade," "held * * * primarily for sale to customers in the ordinary course of his trade or business," or "property, used in his trade or business." 229 Whether property is "stock in trade" or "held * * primarily for sale to customers in the ordinary course of his trade or business" is a question of fact. In determining the answer to this question the courts have evolved a number of criteria, none of which are conclusive within themselves. Some of the factors most often relied upon are the intent of the seller with respect to the particular asset in question; the purpose for which the property was acquired, held and sold; the volume of sales; the frequency of sales; the time relation to the purchase and sale; the number of sales and the substantiality of the sales when compared to the taxpayer's other business interests; the amount of advertising; and the holding of a real estate license by the taxpayer. Ralph J. Oace, 39 T.C. 743">39 T.C. 743 (1963). 230 Applying these tests here, we find that petitioner did not acquire the property for the purpose of dealing in real estate. They purchased the realty to protect their investment in the second deed of trust when their debtor failed to keep up the payments on the note. This was an isolated sale. Petitioner John Green was a physician. Eighty-eight percent of his income was from his practice of medicine. The remaining twelve percent was from dividend and interest income. Petitioners presented no evidence, other than the fact of this sale, that they were actively engaged in the real estate business. We hold, on the basis of this record, that petitioners did not hold this property as "stock in trade" nor was the property "held * * primarily for sale to customers in the ordinary course of his trade or business." Petitioners were not in the trade or business of selling real estate. Ralph J. Oace, supra; and Estate of Maria Assman, supra.It is evident that since petitioners were not in the trade or business of selling real estate, and since there was no evidence introduced indicating that the property was used in John Green's medical business, the property does231 not qualify as an exception to a capital asset under section 1221(2). Furthermore, for the same reason petitioners derive no benefit from section 1231. Estate of Maria Assmann, supra.Accordingly, the property in the hands of petitioners was a capital asset making the loss derived from the sale thereof limited by section 1211. The cases relied upon by petitioners are either not applicable or are distinguishable on their facts. Henry J. Gordon, 12 B.T.A. 1191">12 B.T.A. 1191 (1928) and Marjorie G. Randall, 27 B.T.A. 475">27 B.T.A. 475 (1932), cited by petitioners for the proposition that a loss on the sale of residential property which was purchased in a transaction entered into for profit is deductible, are not applicable here. Section 165(f) and 1211 did not become part of our taxing laws until the Revenue Act of 1934. Prior to 1934, losses arising from a transaction entered into for profit were deductible without any limitations even if the property sold was a capital asset. S. Rept. No. 558, 73rd Cong., 2d Sess., pp. 13, 25 (1934), 1939-1 C.B. (Part 2) 586; H. Rept. No. 704, 73rd Cong., 2d Sess., pp. 22, 31 (1934), 1939-1 C.B. (Part 2) 554.232 The case of John D. Fackler, 45 B.T.A. 708">45 B.T.A. 708 (1941), affd. 133 F. 2d 509 (C.A. 6, 1943), is distinguishable on the ground that the property there involved was used in the taxpayer's trade or business. The same applies to Leland Hazard, 7 T.C. 372">7 T.C. 372 (1946) and Mary E. Crawford, 16 T.C. 678">16 T.C. 678 (1951). The case of Westmore Willcox, 20 T.C. 305">20 T.C. 305 (1953) held that the loss resulting from the sale of real property was deductible under section 23(e)(2) of the Internal Revenue Code of 1939 (predecessor of 165(c)(2)) as a loss resulting from a transaction entered into for profit. It did not hold that the loss was an ordinary loss. Petitioners, in the instant case, are entitled to a loss deduction under section 165(c)(2). However, the amount of the loss is limited by section 1211. Estate of Maria Assman, supra. Having established that the loss is a capital loss, we must next decide whether petitioners can take a deduction for certain expenditures on their return for the year 1957. Petitioners maintain that if the loss is not an ordinary loss, then all of the expenditures incurred in 1956 and 1957, including the costs233 of sale, in connection with the property are deductible in full in the year 1957. They cite section 2129 as authority for this position. Respondent concedes that the expenditures for repairs and real property taxes totalling $272.55 paid in 1957 are deductible. However, respondent claims there is no authority in the Code to allow as deductions in 1957 expenses incurred and paid in 1956. Furthermore, respondent contends the costs of sale are not a deduction but are a reduction of the sales price and must be treated as such. Regarding the interest, respondent argues that petitioners have elected to capitalize interest expenses under section 26610 and cannot now change their election. We agree with respondent except as to the interest expense. In support of his position, respondent points to the fact that the mere failure of petitioners to deduct the interest expense in either 1956 or 1957 establishes an election under the Code. Respondent pays no mind to his own regulations 11 which provide: If the taxpayer elects to capitalize an item or items under this section, such election shall be234 exercised by filing with the original return for the year for which the election is made a statement indicating the item or items * * * which the taxpayer elects to treat as chargeable to capital account. * * * There was no statement attached to petitioners' return for the year 1957. The mere failure of petitioners to deduct an item of interest separately on their return for 1957 was not an indication that they elected to capitalize this expense. Furthermore, as we will discuss infra, petitioners did not have an interest expense deduction in 1956 which could have been deducted. The noncompliance with the regulations prohibits a valid election. Smyth v. Sullivan, 227 F. 2d 12 (C.A. 9, 1955); Gulf Atlantic Transportation Co. v. United States, an unreported case ( S.D. Fla. 1956, 52 A.F.T.R. (P-H) 2011">52 A.F.T.R. 2011, 56-2 USTC [] 10,052). 12 We hold, therefore, that petitioners, not having elected to capitalize their interest expense, can deduct the amount of interest paid during 1957.13235 We find no merit in petitioners' argument regarding the other expenditures made in connection with the property. Assuming that the $1,358.33 paid in 1956 was for ordinary and necessary expenses, petitioners did not choose to deduct them on their return for 1956. They cannot now deduct them on their 1957 return. They were not "paid or incurred" during the year 1957. Accordingly, section 212 does not aid petitioners. We have found that the costs of sale totalled $1,877.40. These items were properly treated by respondent as a reduction of the selling price. The only other item paid by petitioners in 1957 was $100 for attorney's fees. This amount was also treated by respondent as a capital charge. Petitioners' having the burden to establish that this was an ordinary and necessary expense rather than a capital expenditure and not having offered any evidence to show what the legal fees were paid for, we must sustain respondent's treatment of this amount. Cf. Charlotte M. Douglas, 33 T.C. 349">33 T.C. 349 (1959). The remaining question concerns the amount of interest actually paid in 1957. Since we have already decided that petitioners are entitled to deduct as an expense interest paid236 in the year 1957, it becomes necessary to determine the amount paid in that year. The total interest paid was $1,436.98. 14 This amount is not in dispute. However, respondent contends that $1,050.07, representing the interest contained in the check made payable to Home Savings & Loan Association dated December 12, 1956, was paid in 1956 and not in 1957. The check cleared the drawee bank on January 17, 1957. Delivery of a check may constitute payment for purposes of determining the year in which a sum is deductible by a cash basis taxpayer. Estate of Modie J. Spiegel, 12 T.C. 524">12 T.C. 524 (1949). The mailing of a check, properly addressed, can constitute delivery to the addressee. Witt's Estate v. Fahs, 160 F. Supp. 521">160 F. Supp. 521 (S.D.Fla., 1956). Here we are without any information as to the date when the check in question was actually delivered to the Association or if mailed, as to the actual date of mailing. However, we know that Home Savings & Loan Association is a financial institution. It deals with checks in great numbers every day of its existence. It would be highly237 unusual, to say the least, for a financial institution not to present a check for payment within a very short time after its receipt, especially in view of the applicable sections of the Negotiable Instruments Law. 15 The check was cleared on January 17, 1957, which would indicate receipt on a date some time immediately prior thereto. We conclude from the evidence that delivery of the check took place in January 1957. The Negotiable Instruments Law, 16 although providing that the date on an instrument is deemed to be the true date of execution, does not contain nor provide for any presumptions regarding the date of delivery. 17 In Smith's Estate v. Commissioner, 208 F. 2d 349 (C.A. 3, 1953), affirming on this issue a Memorandum Opinion of this Court, the Court of Appeals, in holding that a check dated December 16, 1947, and cashed on January 10, 1949, was not paid in 1947, stated: We think it would be an undesirable tax rule to let the mere date on an instrument, in the absence of showing of the time it was delivered, carry with it a conclusion that the instrument was delivered on the date put upon it by the drawer. 238 While it is true that the time lapse between the date of execution and the date of clearing is not as great in the instant case and even though the petitioners here are arguing that payment was made in the later year, we nevertheless find that the quoted language of the Court of Appeals is applicable here. Accordingly, having concluded that the check was paid in 1957, the portion thereof representing interest is a proper deduction in that year. Decision will be entered under Rule 50. Footnotes1. Petitioners concede that the disallowance by respondent of $870.46 claimed as entertainment expenses was proper.↩2. On this basis, the parties agreed that the amount of the loss was $5,214.21. However, on brief, respondent conceded that if the loss is a capital loss, expenses for real property taxes and repairs totaling $272.55 paid in 1957 are proper deductions in that year. This would correspondingly reduce the amount of the loss to $4,941.66.↩3. Unless otherwise indicated, all section references are to the Internal Revenue Code, as amended. SEC. 165. LOSSES. (a) General Rule. - There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. * (c) Limitation on Losses of Individuals. - In the case of an individual, the deduction under subsection (a) shall be limited to - * (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; * * ↩4. Sec. 1231. PROPERTY USED IN THE TRADE OR BUSINESS AND INVOLUNTARY CONVERSIONS. (a) General Rule. - If, during the taxable year, the recognized gains on sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, 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. * * * ↩5. SEC. 1221. CAPITAL ASSET DEFINED. For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include - (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxpayer year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; (2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167↩, or real property used in his trade or business; 6. SEC. 1211. LIMITATION ON CAPITAL LOSSES. (b) Other Taxpayers. - In the case of a taxpayer other than a corporation, losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from such sales or exchanges, plus the taxable income of the taxpayer or $1,000, whichever is smaller. For purposes of this subsection, taxable income shall be computed without regard to gains or losses from sales or exchanges of capital assets and without regard to the deductions provided in section 151↩ (relating to personal exemptions) or any deduction in lieu thereof. If the taxpayer elects to pay the optional tax imposed by section 3, "taxable income" as used in this subsection shall be read as "adjusted gross income."7. SEC. 165. LOSSES. (f) Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212↩. 8. The cited case involved secs. 23(e), 23(g) and 117(d), I.R.C. 1939, which sections were carried over to I.R.C. 1954 without substantive change as secs. 165(c), 165(f) and 1211↩. S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. 591), 83rd Cong., 2d Sess., p. 198; H. Rept. No. 1337, to accompany H.R. 8300 (Pub. L. 591), 83rd Cong., 2d Sess., pp. A46, A272, A273.9. SEC. 212. EXPENSES FOR PRODUCTION OF INCOME. In the case of an individual, 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; (2) for the management, conservation, or maintenance of property held for the production of income; or (3) in connection with the determination, collection, or refund of any tax. ↩10. SEC. 266. CARRYING CHARGES. No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary or his delegate, are chargeable to capital account with respect to property, if the taxpayer elects, in accordance with such regulations, to treat such taxes or charges as so chargeable. ↩11. Sec. 1.266-1(c)(3), Income Tax Regs.↩12. Both cited cases were decided under sec. 24(a)(7), I.R.C. 1939, which was the predecessor of sec. 266↩. 13. With interest paid in 1957 being a proper deduction, the amount of the loss as determined in footnote 2, supra, must be adjusted accordingly.↩14. The entire amount was paid to Home Savings & Loan Association, the holder of the first deed of trust, $1,295.87 being paid by check and $141.11 being paid out of the sale proceeds. ↩15. Sec. 3265(b), California Civil Code, provides: A check must be presented for payment within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. Sec. 3266, California Civil Code, defines "issue" as "the first delivery * * *." A "reasonable time," though varying depending on the facts, is usually interpreted to mean the next day when drawer, drawee and payee are all in the same town. 5 U.L.A. § 186. ↩16. Adopted by California as Civil Code, Title 15, sec. 3082 et seq. in 1917. These sections were in effect during the year in issue. California has subsequently repealed the Negotiable Instruments Law, effective January 1, 1965, and adopted the Uniform Commercial Code. Stats. 1963, c. 819. ↩17. Sec. 3092, California Civil Code. Sec. 3097, California Civil Code↩, states that a negotiable instrument in the hands of a holder in due course is presumed to have been validly delivered. However, this situation is not applicable herein. Furthermore, this section does not provide for a presumption as to the date of delivery.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624447/	Edward R. Bacon Company v. Commissioner. Edward R. Bacon v. Commissioner.Edward R. Bacon Co. v. CommissionerDocket Nos. 4043, 4044.United States Tax Court1945 Tax Ct. Memo LEXIS 86; 4 T.C.M. (CCH) 868; T.C.M. (RIA) 45289; September 10, 194586 1. Petitioner, an individual, was the majority stockholder in Edward R. Bacon Company, a corporation. On March 31, 1941, the corporation transferred all its assets to petitioner in exchange for his note in the amount of their net value and his assumption of the corporation's debts and liabilities. On the same date the corporation resolved to terminate and dissolve. At the same time, the petitioner acquired all the other outstanding shares of the corporation's stock. Held, (a) the transfer of the corporation's assets to the petitioner constituted a distribution in liquidation, the petitioner receiving long-term and short-term capital gain thereon; (b) amount of petitioner's gain determined. 2. Held, Edward R. Bacon Company, California, was, for Federal tax purposes, a partnership during 1941, the income of which is taxable to the various partners in proportion to the interest of each therein. 3. Petitioner, on January 7, 1938, subscribed for 448 shares of stock in a corporation organized January 10, 1938, payment for the stock was not completed until November 12, 1940, and the stock certificates were issued December 2, 1940. The corporation was dissolved February 28, 1941. Held, 87 petitioner became a stockholder in the corporation on January 10, 1938, and his gain on liquidation is a long-term capital gain. 4. Gain on the sale of a mining venture, known as South Gulch Placers, was realized in a prior year and should not have been reported in 1941. 5. Salary and commissions paid to petitioner in 1941 by a partnership, of which he and his wife are both members, constitute community property under California law, and are taxable on that basis. 6. Held, Edward R. Bacon Company, a California corporation, was liquidated on March 31, 1941; held, further, petitioner is entitled, under section 711(a)(3)(B), Internal Revenue Code, to use its actual excess profits income for the 12 months prior to its liquidation as a basis for computing its excess profits tax. Louis Janin, Esq., 1190 Mills Tower, San Francisco 4, Calif., for the petitioners. T. M. Mather, Esq., for the respondent. VAN FOSSAN Memorandum Findings of Fact and Opinion The respondent determined deficiencies as follows: Docket No.PetitionerYearTaxDeficiency4043Edward R. Bacon Co.1940Income$ 222.574043Edward R. Bacon Co.1941Income2,274.91Declared value4043Edward R. Bacon Co.1941Excess profits959.234043Edward R. Bacon Co.1941Excess profits5,465.674044Edward R. Bacon1941Income69,021.71The issues in controversy in Docket No. 4043 are whether the Edward R. Bacon Company was liquidated on March 31, 1941, and, if it was, whether, pursuant to the provisions of section 711(a)(3)(B) of the Internal Revenue Code, it is entitled to use its actual excess profits income for the 12 months prior to its liquidation as a basis for computing its excess profits tax. The issues in Docket No. 4044 are: (1) whether property received by the petitioner from the Edward R. Bacon Company, in exchange for his note, constituted a distribution in liquidation; 89 if this is decided in the affirmative, we must determine the amount of the petitioner's gain thereon; (2) whether the respondent erred in determining the amount of the liquidating dividend of the Edward R. Bacon Company, if any, by failing to allow as deductions additional capital stock tax, Califorria franchise tax and Federal income and excess profits taxes; (3) whether or not the income from Edward R. Bacon Company, unincorporated, is taxable to the petitioner in its entirety; (4) whether the petitioner is entitled to a deduction for 1941 of the difference between the value of interests in the business of Edward R. Bacon Company, unincorporated, transferred to certain persons by the petitioner, and the value of the consideration given by such persons in exchange for such interests; (5) whether the petitioner's gain on the liquidation of Edward R. Bacon Company, Ltd., Honolulu, T.H., was a long- or short-term capital gain; (6) whether or not the gain on the sale of certain mining properties, known as South Gulch Placers, was realized in 1941; and (7) whether salary and commissions received by the petitioner from a partnership are taxable as his separate property or as the income90 of his marital community. The petitioner claims an overpayment. Certain of the respondent's adjustments were not contested. Other issues raised by the pleadings were disposed of by concession and abandonment. Findings of Fact The following facts were stipulated or admitted in the pleadings: Edward R. Bacon, hereinafter called the petitioner, is an individual residing at 1940 Vallejo Street, San Francisco, California. He maintained no formal books of account. His return was prepared and filed on the cash basis with the collector of internal revenue for the first district of California. Edward R. Bacon Company, hereinafter sometimes called the San Francisco corporation, is a California corporation organized in 1913, with its principal place of business at Folsom and 17th Streets, San Francisco, California. It kept its books and prepared its tax returns on the accrual basis. The returns for the periods here in controversy were filed with the collector of internal revenue for the first district of California. The excess profits net income of the San Francisco corporation for the 12 months ending March 31, 1941, was $58,685.45. Its excess profits tax credit for 1941 is $35,515.7291 and its excess profits credit carry-over for 1941 is $4,070.62, as shown in the notice of deficiency. The San Francisco corporation filed an excess profits tax return for the calendar year 1941 showing no tax due. The respondent determined that the corporation was liquidated March 31, 1941, and annualized its income for the three-months period January 1, 1941 to March 31, 1941, in accordance with section 711 (a) (3) (A) of the Internal Revenue Code. On December 18, 1943, at 9:30 A.M., after the notice of deficiency had been mailed, the San Francisco corporation filed an "amended final return" for the three-months period in which it computed its excess profits tax in accordance with section 711 (a) (3) (B). On January 1, 1941, the San Francisco corporation had outstanding 8,340 shares of common stock of the par value of $10 per share. Of such shares, the petitioner held 5,495 and his wife, Estelle T. Bacon, 1,800 shares. The shares held by the petitioner had a cost basis to him of $55,400.60, as set forth in the notice of deficiency. On February 1, 1941, the petitioner purchased 500 shares of stock from two stockholders at a cash cost of $10,000, or $2092 per share. The common shareholders, other than the petitioner and his wife, were then Milton R. Clark, owning 400 shares; A. B. Hartley, an employee, owning 110 shares; W. F. McGouirk, an employee, owning 30 shares; and H. J. Learn, an employee, owning five shares. On March 31, 1941, pursuant to resolution of its shareholders, the San Francisco corporation transferred all its assets to the petitioner in exchange for his promissory note of $209,644.87, the agreed net book value of the corporation's assets, and his assumption of all of its indebtedness and liabilities. At the same meeting and on the same date, the stockholders of the San Francisco corporation passed the following resolution: "WHEREAS it is deemed advisable and for the best benefit of this corporation that it be wound up and dissolved, "NOW, THEREFORE BE IT RESOLVED that the shareholders of this corporation hereby elected to terminate the business of this corporation as of the 1st day of April, 1941, to wind up its affairs, and voluntarily to dissolve it. "BE IT FURTHER RESOLVED that the officers or directors of this corporation be and they are hereby authorized and directed to file the certificate, give the93 notice, and file the affidavit of mailing of notice in accordance with the provisions of Section 400 of the Civil Code of the State of California; and "BE IT FURTHER RESOLVED that the officers or directors of this corporation be and they are hereby authorized and directed to take such further action as may be necessary or proper to terminate the business of this corporation, wind up its affairs and to dissolve it; and "BE IT FURTHER RESOLVED that upon the complete and final dissolution of this corporation the Board of Directors of this corporation be and they are hereby authorized and directed to divide the assets of this corporation, which shall consist and be limited solely to the proceeds derived from the note of Edward R. Bacon, to be received by this corporation for the sale of its assets as provided in the resolution of the stockholders of this corporation this day adopted, as required by law." The petitioner acquired all of the preferred shares of the San Francisco corporation not theretofore owned by him at their $10 par value for cash, the certificates bearing assignments sometimes undated, but more frequently dated, with dates as late as June 7, 1941. He also acquired94 all the common stock not theretofore owned by him. On April 1, 1941, the petitioner executed letters to Estelle T. Bacon, his wife, and to Milton R. Clark, former shareholders of the San Francisco corporation who were not employees. The material portions of the letter to the petitioner's wife, are as follows: "In full consideration of your assignment to the undersigned of all of your common stock in Edward R. Bacon Company, a California corporation, the undersigned, doing business as Edward R. Bacon Company, agrees as follows: "1. You are to hereafter participate in any and all net profits of the business of Edward R. Bacon Company to the extent of thirty-seven and one-half (37 1/2%) per cent after deductions have first been made for compensation to me for my services; "2. You are to receive thirty-seven and one-half (37 1/2%) per cent of any and all remaining assets on the dissolution or termination of said business of Edward R. Bacon Company, as, if and when the same are distributed; "3. You shall have no right of assignment of this agreement or any rights hereunder, without first receiving my written consent so to do." The letter to Milton R. Clark was similar in all95 respects except that the interest therein granted was five per cent. On April 1, 1941, petitioner executed letters to W. F. McGouirk, Alfred B. Hartley and Harry J. Learn, former shareholders of the San Francisco corporation, who were also employees. The material portions of the letter to W. F. McGouirk are as follows: "In consideration of the assignment to me by you of all of your common stock in Edward R. Bacon Company, a California corporation, and your continuance in my employ, doing business as Edward R. Bacon Company, IT IS AGREED: "1. You are to hereafter participate in any and all net profits of the business of Edward R. Bacon Company, to the extent of five percent (5%) after deductions have first been made for compensation to me for my services; "2. You are to receive five per cent (5%) of any and all remaining assets upon the dissolution or termination of said business of Edward R. Bacon Company, as, if and when the same are actually distributed; "3. In the event of the termination of your employment with the undersigned, doing business as aforesaid, for any cause whatsoever, I shall have the right or option for a period of sixty (60) days thereafter to pay you96 the sum of Five Thousand and 00/100 Dollars ($5,000.00) in lieu and in full of any and all obligations due you hereunder, in four equal annual installments,without interest. "4. You shall have no right of assignment of this agreement, or any rights hereunder, without first receiving my written consent so to do." The letter to Alfred B. Hartley was similar in all respects to the letter to W. F. McGouirk and that to Harry J. Learn was similar with the exception that the interest therein granted was 2 1/2 per cent. On the same date Bacon executed letters to Mrs. S. Foster and Paul W. Mohr, former employees of the San Francisco corporation who had not been shareholders. The material portions of the letter to Mrs. Foster are as follows: "In consideration of your former employment by Edward R. Bacon Company, a California corporation, and your continuance in my employ, doing business as Edward R. Bacon Company, IT IS AGREED: "1. You are to hereafter participate in any and all net profits of the business of Edward R. Bacon Company to the extent of two and one-half per cent (2 1/2%) after deductions have been made for compensation to me for my services; "2. You are to receive two97 and one-half per cent (2 1/2%) of any and all remaining assets upon the dissolution or termination of said business of Edward R. Bacon Company, as, if and when the same may be actually distributed; "3. In the event of the termination of your employment with the undersigned, doing business as aforesaid, for any cause whatsoever, I shall have the right or option for a period of sixty (60) days thereafter to pay you the sum of Five Thousand and 00/100 Dollars ($5,000.00) in lieu and in full of any and all obligations due or to become due you hereunder, in four equal annual installments, without interest. "4. You shall have no right of assignment of this agreement or any rights hereunder, without first receiving my written consent so to do." The letter to Paul W. Mohr was similar except that the interest therein recited was five per cent. The written acceptance of the addressee was executed on each of these letters. The common shares transferred to the petitioner, the percentage interests granted by him, the dates of written acceptance of the petitioner's offer and the dates of assignments of the stock certificates to him are as follows: CommonInterestDate ofDate commonNamesharesofferedwritten acceptancestock assignedW. F. McGouirk305 %June 6, 1941No dateA. B. Hartley1105 %June 9, 1941June 11, 1941Stella FosterNone2 1/2%June 6, 1941Paul W. MohrNone5 %June 7, 1941H. J. Learn52 1/2%June 9, 1941June 9, 1941Estelle T. Bacon180037 1/2%April 1, 1941April 1, 1941Milton R. Clark4005 %Not datedNo date98 The San Francisco corporation paid salaries to certain of its officers and employees in prior years, as follows: Person1937193819391940Edward R. Bacon$15,750$15,750$15,500$20,000A. B. Hartley6,7756,7756,5256,525W. F. McGouirk4,6254,6504,1005,450Stella Foster3,1753,7253,5253,500From April 1939 to August 1939, the petitioner Bacon operated as an individual a gold dredging project under the title of South Gulch Placers, sustaining an operating loss of $3,880.28. On August 31, 1939, he agreed to sell all the assets used in the project for the sum of $26,458.98, of which selling price $9,458.98 was then paid in cash or other credits and the balance of the agreed price was evidenced by 17 promissory notes of $1,000 each, bearing interest at six per cent per annum and payable on each succeeding month, commencing with September 30, 1939. These notes were secured by a mortgage of all the assets. The petitioner discounted 12 of these notes for cash in 1939, being required to endorse them. On or about January 7, 1938, the petitioner subscribed for 448 shares of the common stock of a corporation, hereinafter called99 the Honolulu corporation, which was organized under the laws of the Territory of Hawaii on January 10, 1938, with an authorized capital of 1,000 shares of $10 par value. The petitioner's wife subscribed for 165 shares and others subscribed for 97 shares. On or about January 29, 1938, the sum of $1,100 was paid in by the petitioner. No further payments were made on the subscriptions until November 12, 1940, when petitioner paid in $8,900 to complete the authorized capital. The petitioner was reimbursed for so much of this payment as was for the benefit of other shareholders by their endorsement to him of the dividend of $10 per share paid by the Honolulu corporation in the total amount of $10,000 on or about December 1, 1940. On November 12, 1940, the petitioner advised the Honolulu corporation that capital stock certificates should be issued as follows: Edward R. Bacon and Estelle T.Bacon820 sharesH. J. Roblee100 sharesM. R. Clark50 sharesA. B. Hartley10 sharesH. J. Learn10 sharesW. F. McGouirk10 shares The actual certificates were dated December 2, 1940 and were issued in accordance with petitioner's instructions except the 10 shares which100 were to have been issued to A. B. Hartley were issued to petitioner. The distributable income of the partnership of Edward R. Bacon Company of Honolulu, a partnership, for its year ended November 30, 1941 was $74,232.18. Petitioner's interest in this partnership was 42 1/2 per cent. Included in the profits of $74,232.18 is partnership salary and commissions paid petitioner amounting to $3,780. Petitioner's wife, Estelle T. Bacon was also a partner, her interest likewise being 42 1/2 per cent. The notices of deficiencies were mailed December 17, 1943. The record discloses the following additional facts: The San Francisco corporation was never formally dissolved but was quiescent after March 31, 1941. Its only business consisted in filing returns and receiving interest on the petitioner's note. A meeting of the corporation was held on December 31, 1942. Since March 31, 1941, the corporation's only assets have been the petitioner's note and a small bank account. The amount of the note was reduced subsequent to March 31, 1941, by the retirement by the petitioner of $24,700 of preferred stock which had been held by him. The petitioner was married to Estelle T. Bacon in 1907, and101 at all times material herein they have resided in San Francisco, California. The petitioner filed gift tax returns in 1943 in which he reported the gift to his wife in 1936 of 1,800 shares of stock of the San Francisco corporation and the gift in 1941 of an interest in Edward R. Bacon Company, unincorporated, to the extent that such interest exceeded the value of the 1,800 shares of stock of the San Francisco corporation. The tax due was paid. The San Francisco corporation and the unincorporated company succeeding it, were engaged in the business of selling and distributing construction equipment. The balance sheet of the unincorporated business showed assets and liabilities as of April 1, 1941, as follows: ASSETSCash$ 10,826.67Accounts and notes re-ceivable147,954.84Inventories290,118.01Real estate and building49,572.70Leasehold improvements3,708.73Equipment, net of re-serve for depreciation: Shop tools141.97Service cars and trucks4,254.06Office furn. and fix-tures5,637.56$ 10,033.59Deferred charges to op-erations and personalaccounts$ 2,099.36Total$514,313.90LIABILITIES AND CAPITALNotes and accounts pay-able$269,253.22First deed of trust20,358.05Dividends payable, prede-cessor company247.00Unrealized profits14,810.76Capital209,644.87Undistributed profits$514,313.90102 The partnership reported a net income of $104,188.98 for the period April 1, 1941 to August 31, 1941. The petitioner, who was the majority stockholder of the San Francisco corporation prior to March 31, 1941, desired to convert the business from a corporation to a partnership because he believed it would be advantageous to the operation of the business to do so. The corporation had several key employees whose services the petitioner desired to retain. Other methods of retaining their employment had been tried which, however, had proved unsuccessful. A stock bonus plan had been tried but this failed since the corporation paid only one dividend during its entire existence and hence the small stock interest an employee would have was not attractive. In 1939 the petitioner entered into an agreement under which certain of the employees would be enabled to acquire stock on the petitioner's death. Under this agreement, the petitioner placed in trust 1,875 shares of stock of the San Francisco corporation and also a policy of insurance on his life in the amount of $30,000, the premiums on which were to be paid by the employees. The trust was revocable by the petitioner upon his payment103 of the gross premiums paid by the employees. If the plan was in full force on the petitioner's death, the insurance proceeds would be delivered to the petitioner's wife, with some adjustments, and the shares of stock and possibly some of the insurance proceeds, would be distributed among the participating employees. This plan was offered to several of the employees, but only three of them took advantage of it. The petitioner also had in mind the fact that he was approaching an age where it would be advisable to let someone else assume the burden of the business. The salaries which certain of the key employees had received were, in the petitioner's opinion, insufficient to keep them in the business. Therefore, he desired to take them in with him on a partnership basis in order to hold them as integral units of the organization. The petitioner's wife was given a 37 1/2 per cent interest in the new business, because of the petitioner's desire that she should share equally with him in all things acquired during their marriage. She contributed no services to the business. The petitioner has never attempted in any manner to control the funds paid to his wife under this agreement. She104 has her own bank account, which the petitioner has no right to draw upon. On and after March 31, 1941, the petitioner paid the household expenses of his wife and himself. The letters set forth in the stipulated facts are the only partnership agreements ever entered into between the petitioner and the others. The petitioner has never exercised any of the options retained by him. All the interests granted therein have remained outstanding and in effect. Distributions of profits have been made in accordance with the proportionate interest of each in the business. After the formation of the partnership the petitioner executed a sworn statement, which was filed with the clerk of courts on April 2, 1941, and published in the newspaper, in which he stated that he was sole owner of the Edward R. Bacon Company. A partnership return was filed for the fiscal year ended August 31, 1941, in which the following statement appeared: "These individuals, although participating in the net proceeds, have no voice in the management of the business and no equity in the assets. Accordingly, the salaries paid them as distinguished from their profit participation, have been treated as expenses of the105 business." This statement was inserted by the accountant who prepared the return and was not read by the petitioner before he executed the return. The petitioner executed instruments authorizing Stella Foster to sign documents as treasurer of the partnership, appointing W. F. McGouirk as general manager, and appointing Stella Foster, W. F. McGouirk and Alfred B. Hartley his attorneys in fact. In his return for 1939, the petitioner did not report either the operating loss nor the gain on the sale of South Gulch Placers. He included therein the following explanation: "Taxpayer entered into a contract for sale of these mining claims and certain equipment coupled with an interest in the operations of the property. It is the taxpayer's understanding that until his investment has been recovered the profit or loss on the transaction cannot be determined. All books and record are in the possession of the taxpayer." In his return for 1941, the petitioner reported gain on the sale in the amount of $3,858.68 to which he had added interest received in the sum of $174.80. From the total thus obtained, he deducted the operating loss of $3,880.28, leaving a net gain of $153.20. The respondent106 determined that the operating loss was deductible in 1939, the year in which it was sustained, and that the gain on the sale in the sum of $3,858.68 was taxable in its entirety in 1941. The Honolulu corporation commenced business after the advanced payment by the petitioner. No other payments of capital were made at that time. The corporation was dissolved on February 28, 1941. Opinion VAN FOSSAN, Judge: Several issues are here presented for our determination. We consider first those relating to the individual petitioner, Edward R. Bacon. The first of these issues is whether property received by the petitioner from the San Francisco corporation in exchange for his note constituted a distribution in liquidation. The facts show that on March 31, 1941, the corporation transferred all its assets to the petitioner in exchange for his note in the amount of their net value and his promise to assume all the corporation's debts and liabilities. On the same date the stockholders resolved to terminate the business of the corporation as of April 1, 1941, to wind up its affairs and voluntarily to dissolve it. The corporation was not formally dissolved but thereafter it conducted no business, 107 remaining inactive except for the filing of returns and the collection of interest on the petitioner's note. It had no assets except the petitioner's note and a small bank account. At the same time the petitioner became the sole stockholder of the corporation by acquiring from the other stockholders their shares of stock. We think it evident that the transfer to the petitioner of the corporation's assets constituted a distribution in liquidation. The petitioner does not seriously contend otherwise and admits on brief that on this issue the respondent has the better of the argument. The purported sale to the petitioner can not be recognized as relieving him for taxation upon the liquidating dividend. It must be treated as a mere bookkeeping transaction rather than a sale. Cook v. United States, 3 Fed. Supp. 47; Cf. Benjamin H. Read, 6 B.T.A. 407">6 B.T.A. 407. We hold there was a liquidation of the San Francisco corporation on which the petitioner realized long-term capital gain. There remains for determination the amount of gain realized. In his notice of deficiency the respondent determined that the petitioner received longterm capital gain of $76,212.97, representing108 the gain on 5,495 shares of common stock which he had held for over two years, and short-term capital gain of $11,242.06 on 2,845 shares held by the petitioner less than two years. The latter shares consist of 500 shares purchased by the petitioner on February 1, 1941, concerning which there is no dispute, and 2345 shares which the petitioner received from the other stockholders on or about March 31, 1941, in consideration of his assigning to them interests in the business. The respondent determined the petitioner's cost of these last shares as follows: As no fixed consideration was named in this agreement, it is held that you were obligated to pay fair market value, which is set at $20.00, the price paid February 1, 1941, in the cash purchase of 500 shares. The above finding by the Commissioner placed on petitioner the burden of proving that $20 did not represent the fair market value of the shares, i.e., that some figure other than $20 was the correct value. We have searched the record and are unable to find any basis for fixing a different figure. Consequently, on this question we have no alternative to sustaining the Commissioner. A cost of $20 per share will be used in the109 computation of gain to petitioner on the 2,345 shares. The petitioner offered no evidence and makes no argument in his brief that his gain should be reduced because of additional capital stock tax and California franchise tax. He does contend, however, that his gain should be reduced by the amount by which the value of the corporation's assets will be reduced by reason of the deficiencies in its income and excess profits taxes, a part of which is conceded to be due. He is entitled to this adjustment, effect to which will be given in the recomputation under Rule 50. The next issue is whether or not the petitioner is taxable on the entire net income of Edward R. Bacon Company, unincorporated. The respondent contends that the so-called partnership was merely an arrangement whereby the petitioner assigned a portion of the profits of the business to each of the alleged partners as payment for their stock which they had assigned to him. The petitioner contends that, whether or not a partnership in the technical sense was created, he is taxable on only 37 1/2 per cent of the net income of the company, the remaining income being taxable to the various partners according to their respective110 interests in the business. Briefly, the facts show that in consideration of their assignment to him of stock, or for other considerations, the petitioner granted to certain persons specified interests in the unincorporated business, including a corresponding interest in the assets on termination of the business. The interests in the assets were absolute in the case of Estelle T. Bacon and Paul W. Mohr. With respect to the others, the petitioner reserved the option to purchase for $5,000 the interest of each in the event of cessation of his employment. Distribution of the profits was thereafter made on the basis of the proportionate interest of each in the business. The fundamental issue thus presented is not whether this arrangement gave rise to a technical partnership under State law but rather it is a question of determining who were the owners of the income which the respondent seeks to tax to the petitioner. The rule which applies here is that tax liability on income attaches to ownership of the property producing the income. Justin Potter, 47 B.T.A. 607">47 B.T.A. 607. See Robert P. Scherer, 3 T.C. 776">3 T.C. 776.111 In our opinion a real partnership was created. Clearly each of the persons contributed the property producing his share of the income and is taxable upon that income. Each of them had an interest not only in the profits of the business but in its assets, which were an important income-producing factor in the business. While the petitioner had the option to purchase the shares of all but two of the partners for $5,000 each, this contingency would not arise unless the person affected actually terminated his employment and the petitioner exercised the option. It is admitted that the profits were actually distributed to the partners. The respondent contends, however, that this distribution was merely the method chosen by the petitioner to pay for the stock assigned to him by the others. This argument, of course, is wholly inconsistent with his contention on the previous issue. There he contended that the petitioner had purchased the stock for $20 per share and determined the amount of his gain thereon. Here, however, he in effect asserts that the petitioner is still purchasing the stock. The term of the partnership is indefinite and if the respondent's argument were carried to its112 logical conclusion the petitioner might conceivably sustain a loss on the sale of the stock rather than realize a gain. The respondent's argument overlooks the fact that the partners acquired interests in the assets of the business as well as its profits. Furthermore, two of the partners did not own any stock of the San Francisco corporation but had been merely its employees. As to these it could not be argued that their distributable shares of the profits constituted payment for stock. The respondent also relies upon the sworn statement of the petitioner that he was the owner of the business and upon the statement inserted in the partnership return. While such statements are factors to be considered along with all the other evidence, they are not controlling in and of themselves. Nor do we attach controlling importance to the statement in the partnership return which the petitioner testified was inserted by the accountant who prepared the return and was not read by the petitioner before he executed it. Each of the partners gave something of value for his interest in the business, either in the way of stock or services, or both. If the interest received was greater than that given, 113 the fact that the difference might be a gift does not control the issue. J. D. Johnston, Jr., 3 T.C. 799">3 T.C. 799; Justin Potter, supra; Walter W. Moyer, 35 B.T.A. 1155">35 B.T.A. 1155. On this issue we, therefore, hold in favor of the petitioner. The petitioner contends next that he is entitled to a deduction for 1941 of the difference between the value of the interests in the business of Edward R. Bacon Company, transferred to the employees by him, and the value of the consideration given by the employees in exchange for their interests. This position is inconsistent with his previous contention that a partnership was in existence during 1941. We have already held that for Federal tax purposes the Edward R. Bacon Company was a partnership during that year. Consequently, we reject this contention. The next issue is whether or not the respondent erred in his determination that the petitioner received short-term capital gain in the amount of $3,030.88 upon the liquidation of the Honolulu corporation. The facts show that on January 7, 1938, the petitioner subscribed for 448 shares of stock in the corporation, which was organized on January 10, 1938, and his wife114 subscribed for 165 shares. On or about January 29, 1938, petitioner paid in $1,100 to the corporation. No further payments were made until November 12, 1940, when the petitioner paid in $8,900 to complete the authorized capital. The stock certificates were then issued as of December 2, 1940. On February 28, 1941, the corporation was dissolved. Petitioner contends that as to the 448 shares he was a stockholder in the Honolulu corporation from the date of stock subscription and that his gain on its liquidation was a long-term capital gain. The respondent, on the other hand, contends that the petitioner did not become a stockholder until the date stock certificates were issued and that his gain is consequently a short-term capital gain, taxable in its entirety. We do not agree with the respondent. The issuance of a certificate of stock is not necessary to make one a stockholder in a corporation. It is well settled as a general rule of corporation law that in the absence of a statutory or charter provision or agreement to the contrary a subscriber for stock in a corporation becomes a stockholder115 as soon as his subscription is accepted by the corporation, whether a certificate of stock is issued to him or not, and, although he may have no certificate, he is thereupon entitled to all the rights and is subject to all the liabilities of a stockholder. Fletcher Cyclopedia of Corporations (Per. Ed.), section 5094. In Schwartz v. Manufacturers' Casualty Insurance Co., 335 Pa. 130">335 Pa. 130, 6 Atl. (2d) 299, it was held that by the act of incorporation, with nothing more, the original subscribers become members of the corporation. The petitioner subscribed for his stock on January 7, 1938, and the corporation was organized and commenced doing business on January 10, 1938. Consequently, in the absence of some agreement to the contrary, and there is no evidence of any such agreement in the instant case, the petitioner became a stockholder in the corporation on the latter date. The situation is not altered by the fact that the petitioner did not complete the payment for his stock until 1940 since, in the absence of a contrary agreement, actual payment is not necessary to make a subscriber a stockholder. Fletcher Op. Cit., section 1375. We hold, therefore, that the petitioner116 became a stockholder in the Honolulu corporation on January 10, 1938, the date of its incorporation, and that as to the 448 shares his gain on the liquidation of that corporation was a long-term capital gain, 50 per cent of which is taxable. The next issue is whether the gain on the sale of South Gulch Placers is taxable to the petitioner in 1941. The petitioner does not contest the respondent's action in determining that the operating loss from this venture should be deducted in 1939 instead of 1941. He contends, however, that his gain from the sale was realized in 1939 and should have been reported in that year and that it was erroneously included in his 1941 return. It is a well established principle that where property is exchanged for notes, income is realized to the extent that the fair market value of the notes exceeds the basis of the property. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462">287 U.S. 462. The respondent contends that there is no evidence that the notes were worth face value when they were received by the petitioner in 1939 or that it was a closed117 transaction in that year instead of in 1941, when the last of the notes were actually paid. He contends that, in the absence of such evidence, or evidence that the payments were not of a contingent character, the gain must be reported on the return of capital theory, citing Burnet v. Logan, 283 U.S. 404">283 U.S. 404. While the facts are not as complete as we might desire, we think them sufficient to show that the sale of the assets was a closed transaction in 1939. So far as appears from the record, the sale was completed at that time. Title to the properties was passed and the purchaser paid the sale price, partially in cash or other credits, and partially in promissory notes. At the same time the petitioner took back a chattel mortgage on the assets to secure the payment of the notes. There is nothing to show that the payments of those notes were in any way of a contingent nature and the fact that the petitioner discounted 12 of them for cash in 1939 indicates they were not of this character. Consequently, Burnet v. Logan, supra, is not applicable. It follows then that the petitioner's gain was realized in the year 1939, measured by the amount of cash or its equivalent, 118 received by the petitioner in that year in excess of his basis. Pinellas Ice & Cold Storage Co. v. Commissioner, supra. The evidence shows sufficiently, we think, that the notes were worth their face value when received by the petitioner in 1939. The sale price of the properties, which had a cost basis to the petitioner of $22,600.30, was $26,458.98. Of this $9,458.98 was paid in cash or other credits, leaving a balance of $17,000, evidenced by 17 promissory notes of $1,000 each, which were secured by a chattel mortgage on all the assets. Under the mortgage the petitioner had the usual rights of reentry and also in case of default on the notes. The mortgaged assets were clearly sufficient to secure full payment of the notes. Therefore, the petitioner received income in 1939 of the full amount of the cash and notes and such income should have been reported in that year. We hold that it was error to include it in his 1941 income. H. G. Stevens, 14 B.T.A. 1120">14 B.T.A. 1120; George Antonoplos, 3 B.T.A. 1236">3 B.T.A. 1236. The next issue is whether salary and commissions paid to the petitioner in 1941 by Edward R. Bacon Company of Honolulu, T. H., a partnership, constitute119 the separate income of the petitioner or whether the income is that of his marital community. The petitioner and his wife were both members of the partnership, each having a 42 1/2 per cent interest therein. We have frequently held that a husband and wife may be members of a partnership under California law and that their respective interests in the profits thereof are the separate property of each. L. S. Cobb, 9 B.T.A. 547">9 B.T.A. 547., Elihu Clement Wilson, et al., 11 B.T.A. 963">11 B.T.A. 963; Charles Brown, et al., 13 B.T.A. 981">13 B.T.A. 981. During 1941, in addition to his distributive share of the partnership profits, the petitioner received a salary and commissions totaling $3,780. The respondent contends that this latter amount must also be included in the petitioner's separate income. In support of this he relies upon T. H. Banfield, 42 B.T.A. 769">42 B.T.A. 769. In that case it is said that "the profits of a partnership which are credited or paid out as interest on partner's capital contributions, 120 or salaries paid to partners, constitute distributable income of the partnership to the person entitled to the interest or salary." Consequently, argues the respondent, since the distributable interest of the petitioner in the partnership is his separate property, the salary and commissions paid to him being a part of such distributable interest, also constitute his separate property. This argument can not be sustained. The Banfield case, supra, involved facts entirely different from those before us, having nothing to do with community property law. Whether the amounts in question constitute separate property or community property is a matter of State law. Poe v. Seaborn, 282 U.S. 101">282 U.S. 101. Under California law, the earnings of the husband or wife ordinarily constitute community property. H. A. Belcher, 11 B.T.A. 1294">11 B.T.A. 1294; Wren v. Wren, 100 Cal. 276">100 Cal. 276, 34 Pac. 775. By agreement between the parties, the earnings of one may become his or her separate property, Wren v. Wren, supra,121 but we find no evidence of such an agreement here, and the rule is not altered by the fact that the petitioner's distributable share of the partnership profits, other than his salary and commissions, constitute his separate property. Thus in Heck v. Heck, 147 Pac. (2d) 110, it was held that where a husband acquired an interest in a partnership out of his separate property, his distributive share of the partnership profits was his separate property but the salary paid to him by the partnership, being his earnings, constituted community property. It thus clearly appears that the salary and commissions paid to the petitioner in 1941 are community property and are to be taxed as such. We so hold. The final issues relate to the excess profits tax liability for the year 1941 of the San Francisco corporation which, for convenience, will hereinafter be called the petitioner. The petitioner filed an excess profits tax return for the calendar year 1941, reporting no tax due. In his notice of deficiency the respondent determined that the petitioner had been liquidated on March 31, 1941, and computed its excess profits tax by placing its excess profits net income for the period122 January 1, 1941 to March 31, 1941 on an annual basis, as provided in section 711(a)(3)(A) of the Internal Revenue Code. On December 18, 1943, the day after the mailing of the notice of deficiency herein, the petitioner mailed for filing an "amended final return" in which it computed its excess profits tax for the same period in accordance with the provisions of section 711(a)(3)(B), I.R.C.Section 711(a)(3) provides as follows: SEC. 711. EXCESS PROFITS NET INCOME. (a) Taxable Years Beginning After December 31, 1939. - * * * * * (3) Taxable Year Less Than Twelve Months. - (A) General Rule. - If the taxable year is a period of less than twelve months the excess profits net income for such taxable year (referred to in this paragraph as the "short taxable year") shall be placed on an annual basis by multiplying the amount thereof by the number of days in the twelve months ending with the close of the short taxable year and dividing by the number of days in the short taxable year. The tax shall be such part of the tax computed on such123 annual basis as the number of days in the short taxable year as of the number of days in the twelve months ending with the close of the short taxable year. (B) Exception. - If the taxpayer establishes its adjusted excess profits net income for the period of twelve months beginning with the first day of the short taxable year, computed as if such twelve-month period were a taxable year, under the law applicable to the short taxable year, and using the credits applicable in determining the adjusted excess profits net income for such short taxable year, then the tax for the short taxable year shall be reduced to an amount which is such part of the tax computed on such adjusted excess profits net income so established as the excess profits net income for the short taxable year is of the excess profits net income for such twelve-month period. The taxpayer (other than a taxpayer to which the next sentence applies) shall compute the tax and file its return without the application of this subparagraph. 124 If, prior to one year from the date of the beginning of the short taxable year, the taxpayer has disposed of substantially all its assets, in lieu of the twelve-month period provided in the preceding provisions of this subparagraph, the twelve-month period ending with the close of the short taxable year shall be used. For the purposes of this subparagraph, the excess profits net income for the short taxable year shall not be placed on an annual basis as provided in subparagraph (A), and the excess profits net income for the twelve-month period used shall in no case be considered less than the excess profits net income for the short taxable year. The benefits of this subparagraph shall not be allowed unless the taxpayer, at such time as regulations prescribed hereunder require, makes application therefor in accordance with such regulations, and such application, in case the return was filed without regard to this subparagraph, shall be considered a claim for credit or refund. The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary for the application of this subparagraph. The petitioner does not seriously press its contention125 that it was not liquidated on March 31, 1941. In its reply brief it concedes that for excess profits tax purposes it must be regarded as having disposed of all its assets on that date. We have already held that the corporation was liquidated on March 31, 1941. Consequently, it is not entitled to compute its excess profits tax for 1941 on the calendar year basis. General Aniline & Film Corporation, 3 T.C. 1070">3 T.C. 1070; Kamin Chevrolet Co., 3 T.C. 1076">3 T.C. 1076. The petitioner contends, however, that it is entitled to compute its excess profits tax in accordance with the provisions of section 711(a)(3)(B). That section is a relief measure and consequently is to be construed liberally in favor of the taxpayer. Bonwit Teller & Co. v. United States, 283 U.S. 258">283 U.S. 258. However, it is provided therein that in order to avail itself of the benefits of the section the taxpayer must make application therefor to the Commissioner in such manner as the regulations prescribe. The regulations (Regulations 112), which are printed in full in the margin, 1 provide generally that126 if, at the time the return for the short taxable year is filed, the taxpayer is able to determine that the 12-month period ending with the close of the short taxable year will be used in the computation under subsection (B) of section 711(a)(3), then the tax on the return for the short taxable year may be determined under the provisions of subsection (B). In such a case, an excess profits tax return form covering the 12-month period is to be attached to the return as a part thereof and the return will then be considered the application for the benefits of subsection (B). In all other cases the taxpayer must file its return and compute its tax according to subsection (A) and the application for the benefits of subsection (B) shall consist of a notice to the Commissioner setting forth the facts involved, together with an excess profits tax return form, covering the 12-month period used. The claim or other application for the benefits of subsection (B) must set forth the computation of the adjusted excess profits net income and the tax thereon for the 12-month period. An application for the benefit of subsection (B), other than a claim for credit or refund, made in any case in which the127 tax liability computed under subsection (A) has not been paid, may be filed at any time before the tax liability for the taxable year is finally determined. 128 Thus the regulations prescribe no specific form in which the application for benefits of subsection (B) must be made. The return itself is sufficient if, at the time it is filed, the taxpayer is able to determine that the 12-month period, ending with the close of the short taxable year, will be used in the computation of the tax under subsection (B). In other cases the application is to consist of a notice to the Commissioner setting forth the facts involved, together with a return computing the tax in accordance with the provisions of subsection (B). In the instant case the original return was filed on the basis of the calendar year, the petitioner contending that it was not liquidated on March 31, 1941. However, on December 18, 1943, the petitioner filed an amended return in which it computed its tax liability in accordance with subsection (B). No separate notice was attached to the return but this was not necessary since the respondent was already apprised of all the facts. See Germantown Trust Co. v. Commissioner, 309 U.S. 304">309 U.S. 304. The regulations provide that the application129 may be made at any time before the tax liability for the taxable year is finally determined. We think the petitioner made application for the benefits of subsection (B) in substantial compliance with the requirements of the statute and regulations. The respondent does not contend that the petitioner is not otherwise entitled to the benefits of the subsection and we can see no reason for denying to it the relief it seeks. Consequently, we hold that the petitioner is entitled to compute its excess profits tax for the period January 1, 1941 to March 31, 1941, in accordance with the provisions of section 711(a)(3)(B). Subsequent to the hearing in this proceeding the petitioner, pursuant to leave of Court, filed an amendment to its petition in which it alleged as follows: 5(k) On January 11, 1945, petitioner received a Notice and Demand from the Collector of Internal Revenue at San Francisco, California, for $2,056.46 for additional taxes and interest due in accordance with the Amended Final Returns (Exhibit 16 in the proceeding consolidated for hearing with Docket No. 4044). This sum with additional interest of $25.70 was paid to the Collector on or about March 24, 1945. On September 7, 1945, the130 respondent filed an amended answer to the above amendment to petition in which he admits the allegations contained in subparagraph (k) of paragraph 5 of the amendment to petition. Due recognition will be given to this admission in the computation under Rule 50. Decisions will be entered under Rule 50. Footnotes1. Sec. 35.711(a)-4. Tax for Period of Less Than 12 Months. * * * (d) Application to Compute Tax Under Section 711 (a) (3) (B). - A taxpayer desiring the benefit of section 711 (a) (3) (B) must file an application therefor. If at the time the return for the short taxable year is filed the taxpayer is able to determine that the 12-month period ending with the close of the short taxable year will be used in the computations under section 711 (a) (3) (B), then the tax on the return for the short taxable year may be determined under the provisions of section 711 (a) (3) (B). In such a case, an excess profits tax return form covering the 12-month period shall be attached to the return as a part thereof, and the return will then be considered the application for the benefits of section 711 (a) (3) (B) required by that section. In all other cases, the taxpayer shall file its return and compute its tax as provided in subsection (b) of this section, and the application for the benefit of section 711 (a) (3) (B) shall be made in the form of a claim for credit or refund if the tax computed under section 711 (a) (3) (A) has been paid, or, if the tax computed under section 711 (a) (3) (A) has not been paid, the application shall consist of a notice to the Commissioner setting forth the facts involved together with an excess profits tax return form covering the 12-month period used. The claim or other application for the benefit of section 711 (a) (3) (B) shall set forth the computation of the adjusted excess profits net income and the tax thereon for the 12-month period and, if credit or refund is sought for taxes paid before the application for the benefit of section 711 (a) (3) (B) is filed, the claim must be filed not later than June 15, 1943, or the time prescribed for filing the return for the first taxable year (or for the period which would be its taxable year if it continued in existence) ending with or after the twelfth month after the beginning of the short taxable year, whichever date is later. For example, the taxpayer changes its accounting period from the calendar year basis to the fiscal year basis ending September 30, and files a return for the period from January 1, 1942, to September 30, 1942. At the time it files its return, it pays the tax computed thereon under the provisions of section 711 (a) (3) (A). Its claim for credit or refund of the overpayment which would result from the application of section 711 (a) (3) (B) must be filed not later than the time prescribed for filing its return for the first taxable year which ends on or after the last day of December, 1942, the twelfth month after the beginning of the short taxable year. In this case, the taxpayer must file its claim for credit or refund not later than December 15, 1943, the time prescribed for filing the return for its fiscal year ending September 30, 1943. However, if it obtains an extension of time for filing the return for such fiscal year, it may file its claim during the period of such extension. If the Commissioner determines that the taxpayer has established the amount of the adjusted excess profits net income for the 12-month period, any excess of the tax paid for the short taxable year over the tax computed under section 711 (a) (3) (B) will be credited or refunded to the taxpayer in the same manner as in the case of any other overpayment. An application for the benefit of section 711 (a) (3) (B), other than a claim for credit or refund, made in any case in which the tax liability computed under section 711 (a) (3) (A)↩ has not been paid, may be filed at any time before the tax liability for the taxable year is finally determined. Such application does not constitute a claim for credit, refund, or abatement. If credit or refund is sought for taxes paid after such application is filed, a claim therefor on Form 843 should be filed after such payment and within the period prescribed in section 322.	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624450/	"Romy Hammes, Inc., Petitioner v. Commissioner of Internal Revenue, RespondentRomy Hammes, Inc. v. C(...TRUNCATED)	01-04-2023	11-21-2020
https://www.courtlistener.com/api/rest/v3/opinions/4624451/	"Richard C. Richardson v. Commissioner.Richardson v. CommissionerDocket No. 48536.United States Tax (...TRUNCATED)	01-04-2023	11-21-2020

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