SP CI L TT NTION | f t0 the cautonary notce on ths page that pu

hshed rungs of the ureau do not have the force and effe
of Treasury Decsons and that they are appcabe ony to facts presented n the pubshed ca
Treasury Department : : : : : ureau of Interna Revenue
Interna Revenue uetn
Cumuatve uetn I-2
ULY-D C M R, 1932
m T IS ISSU
P e
Introductory Notes
Content, - T
Rungs Nos. 5532-5961
oard of Ta ppeas 1-18
Income Ta
Part I (1932 ct) 19-57
Part II (1928 ct) 58-162
Part ID (1926 and Pror cts) 163 126
state Ta 427-145
Saes Ta 446-561
Msceaneous Ta 562-566
Msceaneous 567-577
Inde 579-598
Tke rungs reported n the Interna Revenue uetn are (or the nformaton of ta payers and ther counse as
showng the tread of offca opnon n tba admnstraton of the ureau of Interna Revenue: the rungs other than
Treasury Decsons have none of the force or effect of Treasury Decsons and do not commt the Department to
any nterpretaton of the ar whch has not been formay approved and promugated by the Secretary of the
Treasury. ach rung embodes the admnstratve appcaton of the aw and Treasury Decsons to the entre
tae of facts open whch a partcuar case rests. It s especay to be noted that the same resut w not neces-
sary be reached n another case uness a the matera facts are dentca wth those of the reported case. s t s
not aways feasbe to pubsh a compete statement of the facts underyng each rung, there can be no assurance
that say new ease s dentca wth the reported case. s bearng ont ths dstncton, t may be observed that the
nags pubshed from tme to tme may appear to reverse rungs prevousy pubshed.
Offcers of the ureau of Interna Revenue are especay cautoned aganst reachng a concuson n any case
surey oa the bass of smarty to a pubshed rung, and shoud base ther |udgment on the appcaton of a per-
tnent provsons of the aw and Treasury Decsons to a the facts n each case. These rungs shoud be used as
ads n studyng the aw and ts forms constructon as made n the reguatons and Treasury Decsons prevousy
ssued.
In addton to pubshng a Interna Revenue Treasury Decsons, t s the pocy of the ureau of Interna Revenue
to pubsh a rungs and decsons, ncudng opnons of the Genera Counse for the ureau of Interna Reenue,
whch, because they announce a rung or decson upon a nove queston or upon a queston n regard to whch
there e sts do prevousy pubshed rung or decson, or for other reasons, arc of such mportance as to be of
genera nterest. It s aso the pocy of the ureau to pubsh a rungs or decsons whch revoke, modfy, amend,
or seet n any manner whatever any pubshed rung or decson. In many nstances opnons of the Genera
Coansc fcr the ureau of Interna Revenne are not of genera nterest because they snnounce no new rung or no
new constructon of the revenue aws but smpy appy rungs aready made pubc to certan stuatons of fact whch
an wthout speca sgnfcance. It s not the pocy of the ureau to pubsh such opnons. Therefore, the numbers
assgned to the pubshed opnons of the Genera Counse for the uresu of Interna Revenue arc not consecutve.
No unpubshed rung or decson w be cted or reed upon by any offcer or empoyee of the ureau of Interna
Revenue as a precedent n the dsposton of other cases. Uness otherwse specfcay ndcated, a pubshed
rungs and decsons have receved the consderaton and approva of the Genera Counse for the ureau of,
UNIT D ST T S GO RNM NT PRINTING O IC , W S INGTON : 1933
or aat by the Superntendent of Documents, Washngton, D. C - See hack of tte for pr
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The Interna Revenue uetn servce for 1933 w consst of
weeky buetns and semannua cumuatve buetns.
The weeky buetns w contan the rungs and decsons to be
made pubc and a Treasury Department decsons (known as Treas-
ury decsons) pertanng to Interna Revenue matters. The sem-
annua cumuatve buetns w contan a rungs and decsons
(ncudng Treasury decsons) pubshed durng the prevous s
months.
The compete uetn servce may be obtaned, on a subscrpton
bass, from the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C, for 2 per year. Snge copes of the weeky
uetn, 5 cents each.
New subscrbers and others desrng to obtan the 1919, 1920, and
1921 Income Ta Servce may do so from the Superntendent of Docu-
ments at prces as foows: Dgest of Income Ta Rungs No. 19
(contanng dgests of a rungs appearng n Cumuatve uetns 1
to 5, Incusve), 50 cents per copy Cumuatve uetns Nos. 1 to 5,
contanng n fu a rungs pubshed snce pr, 1919, to and n-
cudng December, 1921, as foows: No. 1, 30 cents No. 2, 25 cents
No. 3, 30 cents No. 4, 30 cents No. 5, 25 cents.
Persons desrng to obtan the Saes Ta Cumuatve uetns for
anuary- une and uy-December, 1921, may procure them from the
Superntendent of Documents at 5 cents per copy.
Persons desrng to ohtan the Interna Revenue uetn servce for
the years 1922, 1923, 1924, 1925, 1926, 1927, 1928, 1929, 1930, 1931, and
1932 may do so at prces as foows:
Cumuatve uetn 1-1 ( anuary- une, 1922) 40 cents
Cumuatve uetn 1-2 ( uy-December, 1922) 30 cents
Cumuatve uetn II- ( anuary- une, 1923) 30 cents
Cumuatve uetn II-2 ( uy-December, 1923) 40cents
Cumuatve uetn III- ( anuary une, 1924) 50 cents
Cumuatve uetn III-2 ( uy-December, 1924) -50eents
Dgest No. 13 ( anuary, 1922-Deeeaber, 1924) 60 cents
Cumuatve uetn I -1 ( anuary- une, 1925) 40 cents
Cumuatve uetn I -2 ( uy-December, 1925) 35cents
Dgest No. 17 ( anuary-December, 1925) 25 cents
Cumuatve uetn - ( anuary- une, 1926) 40cents
Cumuatve uetn -2 ( uy-December, 1926) 30 cents
Dgest No. 21 ( anuary-December, 1926) 15 cents
Cumuatve uetn I-1 ( anuary- une, 1927) 40cents
Cumuatve uetn I-2 ( uy-December, 1927) 40 cents
Dgest No. 22 ( anuary, 1925-December, 1927) 35 cents
Cumuatve uetn II-1 ( anuary- une, 1928) 35 cents
Cumuatve uetn II-2 ( uy-December, 1928) 50 cents
Cumuatve uetn III-1 ( anuary- une, 1929) 50 cents
Cumuatve uetn III-2 ( uy-December, 1929) 55 cents
Cumuatve uetn I -1 ( anuary- une, 1930) 50 cents
Cumuatve uetn I -2 ( uy-December, 1930) 50 cents
Cumuatve uetn - ( anuary- une, 1931) 65 cents
Cumuatve uetn -2 ( uy-Decem er, 1931) 30 cents
Cumuatve uetn I-1 ( anuary- une, 1932) 30cents
Cumuatve uetn I-2 ( uy-December, 1932) 30 cents
Dgest (ncome ta rungs ony, pr, 1919, to December,
1930, ncusve) 1. 50
Inqures n regard to these pubcatons and subscrptons shoud
be sent to the Superntendent of Documents, Government Prntng
Offce, Washngton, D. C.
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INTRODUCTORY NOT S.
The Interna Revenue Cumuatve uetn I-2, n addton to a
ecsons of the Treasury Department (caed Treasury decsons)
pertanng to Interna Revenue matters, contans Genera Counse s
pnons, and rungs and decsons pertanng to ncome, estate,saes,
nd msceaneous ta es, as ndcated on the tte-page of ths ue-
:n, pubshed n the weeky uetns ( oume I, Nos. 27 to 52,
ncusve) for the perod uy 1 to December 31, 1932. It aso con-
tans a cumuatve st of announcements reatng to decsons of the
Unted States oard of Ta ppeas pubshed n the Interna Rev-
enue uetn Servce from anuary 1 to December 31, 1932.
Income Ta rungs are prnted n three parts. Rungs under the
Revenue ct of 1932 are pubshed as Part I, the secton headngs
correspondng wth the sectons of that aw and the artce headngs
correspondng wth the artce headngs of Reguatons 77. Rungs
under the Revenue ct of 1928 are pubshed as Part II, the secton
and artce headngs correspondng wth the secton and artce head-
ngs of the Revenue ct of 1928 and Reguatons 74, respectvey.
Rungs under the Revenue ct of 1926 and pror cts are prnted
as Part III, the secton and artce headngs correspondng wth the
secton and artce headngs of the Revenue ct of 1926 and Regu-
tons 69, respectvey.
R I TIONS.
The foowng abbrevatons are used throughout the uetn:
, , C, etc. The names of ndvduas.
. R. M. Commttee on ppeas and Revew memorandum.
. R. R. Commttee on ppeas and Revew recommendaton.
. T. . oard of Ta ppeas.
C. . Cumuatve uetn.
Ct. D. Court decson.
C. S. T. Capta Stock Ta Dvson.
D. C. Treasury Department crcuar.
. T. state Ta Dvson.
6. C. M. Genera Counse s memorandum.
I. T. Income Ta Unt.
M, N, , Y, Z, etc. The names of corporatons, paces, or busnesses, accord-
n to content.
Mm. Mmeographed etter.
MS. Msceaneous Dvson.
0. or L. O. Soctor s aw opnon.
0. D. Offce decson.
Op. . G. Opnon of the ttorney Genera.
S.T. Saes Ta Dvson.
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I
S. M. Soctor s memorandum.
So. Op. Soctor s opnon.
S. R. Soctor s recommendaton.
T. Tobacco Dvson.
T. . M. dvsory Ta oard memorandum.
T. . It. dvsory Ta oard recommendaton.
T. D. Treasury decson.
and y are used to represent certan numbers, and when used wth the word
doars represent sums of money.
The practce of promugatng Treasury Decsons that embody
court decsons reatng to the nterna revenue has been dscontnued.
ereafter opnons of the courts, wth approprate headnotes for the
nformaton and gudance of ta payers and offcers and empoyees of
the ureau of Interna Revenue, w be pubshed n the Interna
Revenue uetn wthout forma approva and promugaton by the
Secretary of the Treasury.
NNOUNC M NT R L TING TO O RD O T PP LS D CISIONS,
Under the provsons of the recent Revenue cts, reatng to ap-
peas to the oard of Ta ppeas, the Commssoner may acquesce
n the decson of the oard or he may, f the appea was heard by
the oard pror to the passage of the 1926 ct, cause to be nsttuted
a proceedng n court for the coecton of any part of a ta deter-
mned by the Commssoner to be due but dsaowed by the oard,
provded that such proceedng s commenced wthn one year after
fna decson of the oard. s to appeas heard by the oard after
the passage of the 192C ct, the Commssoner may, wthn s months
after the oard s decson s rendered, fe a petton for a revew of
the decson by a Crcut Court of ppeas or by the Court of p-
peas of the Dstrct of Coumba however, as to decsons rendered
on and after une 7, 1932, pettons for revew must be fed wthn
three months after the decson s rendered. In order that ta payers
and the genera pubc may be nformed as to whether or not the
Commssoner has acquesced n a decson of the oard of Ta p-
peas dsaowng a ta determned by the Commssoner to be due,
announcement w be made n the weeky uetn at the earest
practcabe date. notce that the Commssoner has acquesced or
has nonacquesced n a oard decson reates, however, ony to the
ssue or ssues decded n favor of the ta payer. Decsons so acqu-
esced n shoud be reed upon by offcers and empoyees of the ureau
of Interna Revenue as precedents n the dsposton of other cases
before the ureau.
or addtona nformaton whch w be of assstance n the use
of the Interna Revenue uetn servce read the Introductory Notes
to the atest Dgest
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CONT NTS.
Rung.
4344.
4345.
4346.
4347.
4348.
4349.
4350.
4359
Court d
609.
610.
611.
512..
813.
514..
615...
616...
617...
618...
519...
621.
623..
647..
648..
549..
Rung No.
Page.
Rung.
Rung No.
Court decsons Contnued.
/ I-28-5545
495
550.
I-35-5637
I-28-5548
504
661.
1-35-5642
I-29-555S
620
652
I-36-5666
1-30-5567
446
653.
I-36-5661
r 1-30-5573
429
664
I-36-5662
1-30-5574
429
655
I-36-5659
I-31-5582
452
I-36-5671
I-31-5583
453
657
1-37-5682
I-31-5586
495
658.
I-37-5681
I I-31-5587
505
559
I-37-5677
I-31-55S9
486
560
1-37-5678
I-32-5601
534
661
1-37-5892
1-32-5603
620
662 -
1-38-5699
I-33-5619
567
I-38 5701
/ 1-33-5617
425
564
I-38-5702
I-33-5618
426
865
I-38-5703
I-34-5630
119
I-38-5700
I-34-5631
117
567
I-38-5713
I-36-5658
35
568.
I-39-5725
I-36-5664
461
569.
1-39-5724
I-36-5673
486
570
I-39-5722
1-38-5716
562
671
1-39-5723
r I-39-5738
550
672 -
1-39-5718
1 1-39-5739
650
573 -
1-39-5726
/ I-39-5740
651
574
1-40-5746
1-39-5741
552
575
I-40-5745
1-39-5733
619
678.
I-40-574 )
I-46-5860
515
677
1-40-5747
I-16-5861
516
578
I-40-5748
1-51-5945
305
579 -
I-40-5762
580 ----
1-41-5763
I-27-5535
139
581.-
I-41- 5770
1-27-5538
3(12
582
1-41-5771
I-27-5537
302
583
I-41-5765
1-27-5536
270
584
1-41-5772
I-28-5543
252
585.-
I-41-57R2
1-28-5544
389
586
1-42-5789
I-28-5547
643
587.
1-42-5791
I-29-5552
142
588
I-42-5790
I-29-5553
190
689
I-43-5S04
I-29-5555
332
590 -
I-43-5808
1-29-5556
351
591
1-43-5805
I-30-5565
399
592
I-44-5S20
I-30-5561
134
693
I-44-5821
1-30-5564
357
594 _
I-44-5822
I-30-5570
563
595
I-45 5836
1-31-5579
155
696
I-45-5S38
I-31-5581
362
I-45-5S39
I-31-5580
237
598
1-46-5852
I-31-55S4
439
1-46-5863
1-32-5594
141
600
I-46-5864
I-32-5596
178
601
1-47-5870
I-32-5595
167
602.
-47-5868
I-32-5507
275
603
I-47-5869
I-32-5598
2
604
1-48-5884
I-32-5599
300
005
I -48-5893
I-33-5610
249
606
YI-49-58W
I-33-5608
204
607
I-49-5S98
1-33-5609
234
608
1-49-5900
1-33-5611
283
609
I-50-5915
I-33-5612
400
610
I-60-5916
I-33-5613
402
611
I-50-5917
I-34 5627
320
612 .
I-51-5934
I-34-5628
323
613
1-51-5935
1-34-5626
268
614.
I-52-5952
1-34-5622
182
615 -.
I-52-5953
1-34-5624
216
Genera Counse s memo-
I-34 5625
227
randa:
1-35-5639
290
I-31-5578
I-35-5640
354
19423
1-35-5636
I-35-5641
356
10433
I-34-5623
I-35-5638
236
10630
I-27-5534
( )
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. ng.
Rung No.
Page.
Rung.
Rung No.
Genera CounseUs memo-
randa Contnued.
10686
106 8
10699
10739
107M
10759
10792
10798
10814
10843.
10845
10857
10873
10894
109151
10941
10960
10969
11000-.
11010 -
11039 -
11090
11115
11221
11249 -
11324
11330
oard of Ta ppeas:
2025
2459
2775
3144
3576.
5242
oard of Ta ppeas Con.
13830.
15383.
15398.
16138.
10253
17875
19128
21012
21657
22021
22022
22094
22568
22509
23005
24156
24067
24887
25018
25413
25414
25421
25994..
25995
25990 _.
25997
20079
26259
26543
20044
26645
26546
20047
20648
20049
20650
20051
26675.
26730.
20874
20,875
27351
27352
28045
I-29-5554
1-28-5542
1-30-5562
1-31-5577
1-30-5563
I-35-5635
I-33-5607
1-33-5006
1-38-5698
1-43- 5803
1-30-5057
1-37-5670
1-37-5675
I-41-5781
1-37-5679
1-39-5721
I-10-5751
1-40-5743
I-40 5750
I-41-5767
1-45-5837
I-16-5862
1-16-5851
1-18-5883
I-50-5919
1-52-5948
I-52-5949
I-27-5532
-33-5604
-t 1-5764
1-41-5764
1-33-5604
I-27-5532
1-33-5004
1-37-5674
I-31-5575
I-27-5532
I 49 5895
1-33-5604
I-51-5929
1-37-5674
1-37-5674
I-43-5802
1-40-5849
1-35-5033
I-28-5540
I-28-5540
I-28-5540
1-10-5742
1-40-5742
I-29-5550
I-29-5550
I-32-5590
1-39-5717
1-34-5629
1-30-5559
1-30-5559
I : 5559
1-30-5650
1-30-5656
-30-5656
I-36 50,56
I-27-5532
I-28-5540
1-37-5074
1-37-5674
1-37-5674
I- 37- 5674
1-37-5674
1-37-5674
1-37- 5674
1-37-5674
1-3 7-5674
1-34-5620
1-39-5717
I 29 555(1
I-29-5550
-35 5633
-35-5633
1-30-5656
257
106
16S
65
177
99
162
58
113
22
88
105
85
548
245
223
488
64
298
60
118
524
122
123
474
L 0,7
L 7
2
12,17
14
12
16

17
15
16
4
13
13
5
13
13
11
16
13
1, 0
4,6
16
s
9
10
n
2
13
2
2
1
2
3,8
9
:
9
9
1
6
3,12
3, 12
5
5
15
28301
28701
28792
29289
29518
29854
29958
29994
30238
30925
31518
31704
31736
31979
32578
32673
32996
33142
33343
33466
33564
33040
33757
33868
33859
33860
33861
34161
34337.
34352.
34079.
34743.
35014
35688
35718.
35719
35720 ,
35721
35778 ,
36191
36224 ,
36381 ,
36382
36584
36637
36650
36874.
36875.
36876.
37321.
37402.
37403.
37406.
37927.
38049.
38050.
38061.
3S052.
38053.
3-11-2.
38222.
38233.
38295.
38335.
38336.
38337.
3S349.
3S351.
38500.
38573.
38574.
38575.
38576.
38577.
38578.
38579.
39200.
1-46-5849
I-31-5575
1-35-5633
I-29-5550
I-30-5559
-MM
I-36-5656
I-32-5590
1-39-5717
I-36-5656
I-28-5540
I-37-S674
1-34-5620
I-36-5656
I-28-5540
I-30-5559
I-31-5575
I-32-5590
I-27-5532
1-37-5674
I-32-5590
I-32-5590
1-33-5604
I-28-5540
I-28-5540
1-36-5656
I-33-5604
1-33-5604
I-33-5604
I-33-5604
I-39-5717
I-28-5540
I-31-5575
I-50-59I1
1-45-5834
1-35-5633
1-34-5620
1-43-5802
I-43-5802
I-43-5802
I-43-5802
I-31-5575
I-36-5656
I-51-5929
I-36-5666
I-36-5656
I-36-5656
I-32-5590
I-36-5656
I-36-5656
1-35-5633
1-35-5633
1-35-5633
I-38-5695
1-35-5633
I-33-5604
I-33-5604
I-28-5540
I-32-5590
-32-5590
I-32-5590
I-32-5590
I-32-5590
I-32-5590
I -34-5620
I-32-5590
I 32-5590
I-28-5540
1-38-6695
I-38-5695
1-38-5695
I-38-5695
I-38-5695
I-33-5604
1-30-5569
I-30-5559
1-30-6559
I-30-5559
I-30-5559
I-30-5559
1-30-5650
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III
Rung.
Offce decsons (S. T.) Con.
489
490..
491.
492 _
493
494
495
4116
497
498
499
500.
501
602.
503.
504..
605..
506.
607.
60S
509
610
611
612
613
611
615
616
617
618
619.
520.
621
622
623
524
625.
528..
627
628
629
630
531
632
533
634
535
636
537
638
539
540
541
542
643
544
545
646
547
548
549. _
550..
551
552..
553
654
655
656.
557..
658
659
6U0
661
562
Rung No.
I-37-568
1-37-5637
I-37-56S8
1-37-5639
1-37-5690
1-57-569I
1-38-5704
I-38-5705
1-38-5708
1-38-5707
1-38-5708
1-38-5709
I-38-5710
1-38-5711
I-38-5714
I-3S-5712
1-39-5727
1-39-5728
I-39-5729
1-39-5730
1-39-5731
1-39-5732
I-39-5734
1-39-5735
1-39-5738
I-O-5752
1-40-5753
1-40-5754
1-10-5755
1-40-5756
O-5757
1-40-5758
1-10-5759
1-40 5760
I-11-5773
1-41-5774
-11-5775
I-41-5776
1-41-5777
1-41-5778
I-41-5779
I-t-5780
1-42-5792
I-42-5793
W2-5794
1-12-5795
1-42-5796
1-42-5797
I-12-5798
I-12-5799
1-12-5800
I-13-5807
1-43-5808
I-43-5809
1-43-5810
M3-58U
1-43-5812
1-13-5813
I-43-5814
I-44-5S23
1-14-5824
1-44-5825
I-44-5S2S
1-44-5827
I-44-5828
1-44-5829
I-M-5830
W4-5831
1-44-5832
I-45-5840
1-15-5841
1-45-5842
1-45-5843
1-45-5844
Page.
472
490
48
640
641
453
455
4S7
IM
4 5
4711
47:
480
629
633
448
467
480
4 SO
483
488
4 s
4-s
511
471
47S
483
489
498
621
628
631
536
477
4S7
499
499
498
529
698
637
463
480
481
491
600
607
629
630
638
448
449
480
489
600
600
638
641
450
464
477
1ST
505
601
607
516
621
638
450
459
463
483
601
ung.
Offce decsons (S. T.) Con.
663
564
665
566
567
568
569..
670
571
672
673
574
575..
576... .
677
578
579
581..
582.
583.
584.
585
586.
5S7
588
589
590
591
592
693
594
595
696
597
598
599..
COO
C01
602
603
604
605
60S ,
607 ,
608 ,
609
610
O
612
613
614
615 ,
616
017 ,
618.
619.
Offce decsons (MS.):
128
129
130
131
132
133.. ,
MInoographs:
3958 _
3965 ,
3967
3971
39S6
Msceaneous.
Rung No.
I-45-5S46
I-46-5864
1-46-5855
1-16-5850
1-48-6857
I-4,-. 51
1-46-5859
I-47-5871
1-47-5873
1-47-4873
I-47-5874
I-47-6875
I-47-58T6
I-47-5ST7
I-47-5878
1-47-5S79
I-18-5885
I-4S-58S6
I-48-5887
1-18-5S88
1-48-5883
1-18-5880
I-48-5891
I-4S-5892
M9-5901
I-49-5902
M9-5903
I-49-5904
1-49-4905
1-19-5906
I-49-5907
1-19-5908
1-49-5909
I-50-5918
1-50-5920
1-50-5921
I-50-5922
1-60-5923
I-50-5924
1-50-6925
1-50-6926
I-51-6936
1-51-5937
I-51-5938
I-51-5939
1-51-6940
1-51-5941
I-51-5942
1-51-5943
I-52-S944
1-52-5855
I-52-5856
I-52-5957
1-52-6958
1-52-5969
-52-4960
1-28-5548
-32-5600
1-37-4693
I-41-5783
I-45-5S47
1-50-5927
1-30-5560
1-33-5608
-32-5591
1-40-5761
I-49-5898
1-41-6930
I-30-5571
I-33-5614
L-52-591,1
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CONT NTS O CUMUL TI ULL TINS (L T.) 1 TO S S. T. OR 1920 ND 1921: INT RN L
R NU 1-1.1-2, II-. II-2, III-, I-2, I -1, I -2, -I, -2, I-1, I-2. n-1, II-2, I-1, DI-2,
1 -1. I 2, -, -2, I I, ND I-2.
Cumuatve uetn.
Income Ta :
December, 1919 (No. 1)
anuary- une, 1920 (No. 2)
uy-December, 1920 (No. 3)
anuary- une, 1921 (No. 4)
uy-December, 1921 (No. 5)
Saes Ta :
1920 (ST. 1-20) --.
anuary- une, 1921
uy-December, 1921
Interna Revenue uetn:
anuarv- une, 1922 (No. 1-1)
uv-D ecember, 1922 (No. 1-2)....
anuary- une, 1923 (No. II-)
uv-December, 1923 (No. II-2)...
anuary- une, 1924 (No. III-)...
uy-December, 1924 (No. III-2)..
anuary- une, 1925 (No. I -1)...
uy-December, 1925 (No. I -2)..
anuary- une, 1926 (No. -)
uy-December, 1926 (No. -2)...
anuary- une, 1927 (No. I-1)...
uy-December, 1927 (No. I-2)..
anuary- une, 1928 (No. II-1)...
uy-December, 1928 (No. II-2).
anuarv- une, 1929 (No. III-1).
uy-December, 1929 (No. III-2)
anuary- une, 1930 (No. I -1)...
uy-December, 1930 (No. I -2)..
anuary- une, 1931 (No. -)
uy-December, 1931 (No. -2)...
anuary- une, 1932 (No. I-1)...
uy-December, 1932 (No. I-2)..
(I )
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O RD O T PP LS.
CUMUL TI LIST O NNOUNC M NTS R L TING TO
D CISIONS O T UNIT D ST T S O RD O T
PP LS PU LIS D IN T INT RN L R NU
ULL TIN S R IC ROM NU RY 1 TO D C M R
31, 1932, INCLUSI .
nnouncements reatng to the acquescence or nonacquescence of the
Commssoner In decsons of the Unted States oard of Ta ppeas, as
pubshed In the weeky Interna Revenue uetn, from December 22, 1924,
to December 31, 1031, ncusve, are prnted n Cumuatve uetn -2,
pages 1-106. The st beow, therefore, contans ony such announcements
pubshed n the weeky uetns from anuary 1 to December 31, 1032,
Incusve.
I-52-5946
The Commssoner acquesces n the foowng decsons of the
Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard o( Ta ppeas.
oume.
Page.
.
bees, Chares T
bees, Cfford -
bees, rancs, estate of
bees, ohn T
bees, atherne
bees, Wemene
cme Manfodng Co., Inc
deade Park Land et a., trustees
fremow, Davd, estate of
fremow, Sarah, e ecutr .
bert Lea Packng Co., Inc
en, Irene C --
ed mercan Corporaton
mercan Cgar Co
mercan eature m Co
mercan Securty Trust Co. et a., e ecutors
nderson, Gustave
.
adwn, orence G_
afour, Sr Robert
ankers Dary Credt Corporaton.
arber, rthur
arber, Php C.
40546
37695
37693
37694
37696
41034
25194
38687
39980
39593
39593
20765
25414
31704
16229
27623
39167
36224
32387
40230
48329
26747
26755
24
24
24
24
24
24
24
25
25
25
24
25
25
21
24
24
26
23
25
26
25
25
435
435
435
435
435
435
429
211
1246
1246
376
834
1276
464
18
334
1208
512
154
886
513
513
1 state ta decson.
ng No. 5046 ncudes a acquescence and nonacquescence notces pubshed In the
Interna Revenue uetn servce from anuary 1 to December 31, 1032.
(1)
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#
p
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e
cqt|tescences Contnued.
Ta payer.
arber, St. George
arber Trusts, Sarah P
eaumont, Lous D
eows as Power Co
rdneck Reaty Corporaton
scayne ay Isands Co
oodgood, dth
um, uus, trustee
oos ros. Cafetera Co
org eck Co
rown, erence
uck, ohn ., estate of
uck ct a., Mary M., e ecutors 1
nena sta Land Deveopment Co
uock, George 2
uter, U.
C.
Caforna Coast O Co
Camp Manufacturng Co
Carman, .
Carne-Goude Manufacturng Co
Cathey, George
Cathey, Luke
Catn, Dane
Catn, Theron _
Centra Market Street Co.3
Centra Natona ank, trustee -
Centra Renderng Corporaton
Chapman Dewey Land Co
Chapman Dewey Lumber Co
Docket
No.
26757
26747-
26757
31931
46569
49422
/ 18592
I 29104
46079
27616
35098
40147
26750
39242
40939
45741
51507
39200
24223
34964
24667
36637
32584
44153
44684
32584
44153
44684
2025
31209
46055
25018
35955
44321
44939
50178
20074
27095
46056
46057
25421
25413
24837
28701
20776
37403
51059
33466
37402
47130
50196
51058
oard of Ta ppeas.
oume.
25
25
25
25
25
23
26
25
26
24
26
26
26
13
23
24
25
26
26
24
24
24
25
25
25
25
24
25
25
stnto ta decson acquescence reates to vaue of certan rea estate n San rancsco and vaue of
stock of Lanf|eu orf akng Co. for estate ta purposes and reasonabeness of Commssoner s aowance
for support of the wdow.
cquescence reates to ssue 2 of decson.
1 cquescence reates to ssue regardng apportonment of ta es among affated corporatons.
G
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1
3
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2

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7

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8
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5
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cquescences Contnued.
Docket
No.
oard of Ta ppeas.
oume.
Chrstopher, Rache S.1
Cty ank armers Trust Co. et a., e ecutors 1
Cark et a., ames, e ecutors
Cements, W. L
Cnchfed Securtes Co
Coorado Utah Coa Co
Coumban Carbon Co.2
Connectcut Rver Power Co
Cook, zabeth .
Cooke, eatrce
Coombs, zabeth M
Coombs, . oward
Cooper, ohn I
Cornwe, . L
Cotton, G.
Cromwe et a., Wam Neson, e ecutors .
Crouse, George N
Crowey, oseph ., estate of ..
Crownnshed Shpbudng Co.
Cuver, Wmer T.
Cunard Coa Co.8.
Dah, ndrew ., estate of
Dah et a., ua, e ecutors
Daey, ugene S., e ecutor
Davs, ohn
Detrot Trust Co. et a., e ecutors
Dcknson, bert G
Drk en, nna L., e ecutr
Drksen, Theodore ., estate of.
Dome Co
Domnon Natona ank
Dougas Co., ohn
Dre e Packng Co
Robert C.
.
age Pass fe Pedras Negras rdge Co.
kns, aUe D.
ott-Grante Lnen Corporaton
mery, Mary M., estate of7
nameed Metas Co
47704
31869
34499
4605S
40554
53799
42743
18591
29106
38579
26751
44768
44769
32610
40115
30303
59655
42619
43446
51419
35472
18987
37574
26874
26875
28792
44845
44845
26645
20703
35472
35015
43176
17717
17717
41887
52165
38726
20775
37552
42460
39255
48212
40899
19011
21)
23
24
24
25
26
25
25
25
25
25
25
24
24
25
2-1
26
25
24
24
26
24
24
25
24
25
21
24
24
26
26
23
21
23
2:
24
26
25
25
state ta decson.
Nonacquescence pubshed n uetn I-14, page 1, revoked.
cquescence reates to Issues regardng aocaton of tota cost between common and preferred stocks
purchased.
state tat decson nonacquescence pubshed n Cumuatve uetn -2, paces 84, 88, revoked.
cquescence reates to deductons for addtona royates and offcers saares and drectors fees.
1 cquescence reates to ssue 1 of decson.
Nonacquescence pubshed n Cumuatve uetn I-1, page 9, revoked.
G
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1
3
-
0
1
-
2
2

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4
:
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7

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8
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4
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4
cquescences Contnued.
Ta payor.
Docket
No.
oard o Ta ppeas.
oume.
nns Ice Co.
vcrgrccn Cemetery ssocaton
.
ame Cannng Co
edera Street Peasant aey Passenger Ry. Co.
dety Savngs Loan ssocaton.
rst Natona ank of oston, admnstrator.
rst Natona ank of ey West
orence Manufacturng Co
ok, .
orres, Lord.
oster, N. C, estate of
oster et a., Ward, e ecutor 1
G.
Gamb, .
Gardner, Chares .2
Garron et a., Isabe . ., e ecutors .
George Machnery Co., R.
Gnsberg, bert
Gnsberg, Nathan
Gobe Constructon Co.
Goden, dward
Godman, Ma we
Grand Rver Grave Co.
Green, Robert D.
Grffs, Stanton 2
Grffths, George W
Grffths, ohn
Guf Coast Irrgaton Co.
Gurncc, ugustus Coc, estate of .
.
abcrand, Pau
acy-Oa Coa Co
aaday, Sarah P
amburg, |r., Sam
Ianscom, dward ., estate of
22021
22022
26259
42184
30726
20774
29758
14S62
31801
39406
45215
36438
46583
451S6
15383
26079
28396
31018
40229
43973
32984
32984
47902
38575
47705
61218
27628
27629
43438
51694
53310
27625
30302
23085
53647
38577
42498
43074
33694
40081
41343
42619
29289
30962
26754
30304
44992
24
25
24
24
23
25
26
25
25
25
25
25
26
25
26
26
24
24
25
24
24
22
24
25
25
25
24
24
25
24
25
24
24
1 state ta docson.
cquescence reates to ssues regardng aocaton o tota cost between common and pre|erred stocks
purchased.
1 cquescence reates to transactons 1, 2, 3, and 4.
cquescence reates to a ssues e cept afaton ssue.
state ta decson nonacqueseence pubshed n Cumuatve uetn -2, pages 84, 88, revoked.
G
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e
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2
0
1
3
-
0
1
-
2
2

0
4
:
0
7

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0
0
0
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8
9
0
5
4
3
8
5
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cqubcencks Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
anscom et a., Meve, e ecutors -
arbeson Lumber Co., W.
artford- mpre Co
avard, Chares
ay, W.
avnan Co.,
emph. Cfford
ervev, W. R
ess, Nathane ._
ckman, anne Snyder
mehoch ros. Co
res Co., Chares
obbs, enry
obbs, Teck
offer, nta Owens
offer, T. . -
ouston ros.
ouston, George T.
ouston, orace .
ouston, Php D.
unter, C. W., e ecutor
unter, George ., estate of
uyer s, Inc
I.
Ingas, Chares C, estate of 1
Interstate Reaty Co
Iten scut Co
.
ammerdner,
ansas Cty Leasehod Improvement Co.4
ansas Cty Memphs arms Co
asch, d
asch, Theodora
eey, ohn P..
ent, verett
44992
33076
51012
29958
41736
53600
32841
37499
16552
38573
46806
33279
16253
41728
42769
45663
47781
27352
27351
33374
33375
12052
13104
22008
22009
22007
45417
45417
28369
29154
39841
57835
46272
50981
16429
20899
41643
46555
35718
51060
48293
48293
38233
39570
42589
46064
24
173
24
542
26
134
25
1161
25
9f
25
736,
25
1351
25
1282
24
475
24
438
26
541
26
1351
26
241
26
241
24
22
24
23
22
51
22
51
22
5
22
51
26
417
26
417
24
425
25
25
25
25
17
25
25
25
26
26
1 state ta decson.
cquescence reates to Issues regardng aocaton of tota cost between common and preferred stocks
1 cquescence reates ony to deducton for busness e penses n 1920 and to number of feet of tmber
cut durng 1919.
4 cquescence reates to March 1, 1913, vaue, for purposes of cacuatng gan or oss upon sae of and at
ersaes, Mo. whether the nvested capta of the Smcoe Reaty Co. shoud be ncreased for 1918 and the
March 1. 1913, vaue for amortzaton purposes of a easehod beongng to ansas Cty Leasehod
t Co.
G
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a
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d

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Y
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k

U
n

v
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s

t
y
)

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2
0
1
3
-
0
1
-
2
2

0
4
:
0
7

G
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/


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2
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2
7
/

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u
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3
0
0
0
0
0
8
9
0
5
4
3
8
5
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#
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6
cqu sc NC S Contnued.
Ta payer.
I of Ta |
raemer, Samue.
uhn, Ida L
L.
Lake Chares Nava Stores
Landers, Dougas ., estate of
Lawson, ohn
Leamngton ote Co
Ledesdorf, Samue D
Leonard odng Corporaton, George ., estate of
Lberty arms Co
Lncon, Robert Todd, estate of 1 -
Lttauer, ugene, estate of 1
Lttauer et a, Lucus N., e ecutors
Lvngood, Chares ., e ecutor
Loeb, |r., et a., Wam, trustees
Logc, oseph
Longyear, Mary ., estate of.
Loure, Davd
Luhrg Coeres Co
M.
Markham Irrgaton Co.4
Martn ote Co. and affated corporatons.
Martn et a., . are, trustees
Martn, T. S., estate of...
Marvn, Water S.5
Matagarda Cana Co.4
Matthews, . P
Maudn, I. M
McCa, orence 1
McCoo, ess
Mc wan, nna
Mc wan, et a., nna ., e ecutors
Mc wan, .
Mc wan, Lan G
Mc wan, W. ., estate of
McGrew, zabeth W
McLennan, . R
Mercante-Commerce Natona ank n St. Lous
et a., e ecutors and trustees 1
Metropotan Propertes Corporaton
Mby Dow Coa Mnng Co.
34630
36940
35443
40232
48413
48305
48871
26717
29899
39167
51858
51858
40899
34161
37762
40071
36438
46583
27630
40048
41344
16275
44583
44583
38578
40082
41345
26250
26239
47702
46059
25996
25997
25995
25994
25997
26753
26730
35443
45032
22021
22022
26259
42184
1 state ta decson.
state ta decson acquescence reates to ssues 4, 6, and 7 of decson.
Nonacquoscence pubshed n Cumuatve uetn I-1, page 10, revoked.
I 4 cquescence reates to a ssues e cept affaton ssue.
cquescence reates to ssues regardng aocaton of tota cost between common e
purchased.
25
24
25
21
25
26
26
26
22
24
25
25
25
26
24
25
24
26
24
24
24
24
25
24
22
22
26
24
26
26
26
26
26
25
25
21
24
24
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r
a
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d

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U
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2
0
1
3
-
0
1
-
2
2

0
4
:
0
7

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2
7
/

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0
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8
9
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5
4
3
8
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cqdescen C 8 Con t n ued.
Ta payer.
Docket
No.
oume.
Mgrm ros., Inc., II.1
Msssspp Packng Co., Inc
Mobe Lght Raroad Co.3
Moorehead, Wam
Murphy, Mae . eey
Murtha Schmoh Co
Mutua ssurance Socety of rgna
N.
Natona Contractng Co.8
Natona M Suppy Co
Natona Packng Corporaton
Netcher, Chares, estate of
Netcher, Gadys Over, e ecutr
Netcher, Irvng
Netcher, Townsend
Newbury, Moc Netcher
Newbury, Moe Netcher, trustee
Newe et a., Sterng, e ecutors
New ngand Power Co
New Market Investment Co.5
Newton, zabeth .4
Newton, oseph R., estate of4
New York, Chcago St. Lous R. R. Co
Northern Coa Co.
Noyes, ansen 7
O.
Oakey, Rchard II
Ontaro Reaty Co.
P.
Pane et a., rancs Ward, e ecutors
Pane, Wam ., estate of
Pam each Mather Co
Peavy- yrnes Lumber Co
33177
20772
41026
42062
25853
38222
17911
43911
24520
37001
31668
33971
38053
38053
38052
38050
38049
38052
57835
18593
29105
35719
47703
47705
21047
34945
38574
4577S
35721
34113
34113
43850
15824
16354
25984
24
24
23
22
26
17
24
25
23
24
26
26
26
26
26
26
25
25
17
26
26
23
24
25
24
17
25
25
24
25
1 cquescence reates to Issue 1 of decson.
cquescence reates to foowng ssues: 1. Whether payments receved by a trustee on behaf of pet-
toner n the ta abe | ears n accordance wth a wrtten agreement entered nto by and between pettoner
and another In 1906 consttute ta abe payments of rent or nonta abe payments on the seng prce of
assets. 2. Whether pettoner sustaned statutory net osses fur 1924 and 1926 whch can be deducted from
tts Income for 1923 and 1926, respectvey.
cquescence n oard s decson that pettoner had the rght to aocate overhead e penses to each
contract on competed bass and that formua used by pettoner was permssbe and ssue reatve to
neggence.
state ta decson.
cquescence reates to March 1, 1913, vaue, for purposes of cacuatng gan or oss upon sae of and
at ersaes, Mo. whether the Invested capta of the Smcoe Reaty Co. shoud be ncreased for 1918 and
the March 1, 1913, vaue for amortzaton purposes of a easehod beongng to ansas Cty Leasehod
Improvement Co.
cquescence reates to Inventory ssue.
cquescence reates to ssues regardng aocaton of tota cost between common and preferred stocks
purchased.
160003 33 2
G
e
n
e
r
a
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d

f
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(
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Y
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U
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)

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2
0
1
3
-
0
1
-
2
2

0
4
:
0
7

G
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/


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2
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2
7
/

n
u
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3
0
0
0
0
0
8
9
0
5
4
3
8
5
P
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a

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,

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o
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-
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/


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.
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_
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#
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cqoescknces Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
Peavy-Moore Lumber Co.
Peavy-Wson Lumber Co
Pennsyvana Investors Co
Perkns et a., acob
Pcrshouse, .Mce
Pcrshouse, Mabe
Phps, C. -- ---
Pctora Revew Co
Pztz Dry Goods Co., Lous
P-M- Petroeum Co. --
Pope, Ove R
Powe, en|amn I
Prce, Laura M
Prce, W. -
Prophyactc rush Co.
Prosser, Constance .
Putnam Trust Co
R.
Raun Reaty Co
Reardon Sons Co., ohn
Rato Mnng Corporaton
Rchards rschfed, Inc
Robson, Cara P., estate of
Rodeo- ae|o erry Co.2
Rosenberg, Lous
Rosenboom nance Corporaton _
Roth, Gorton
Rov Ttcomb, Inc
Russe, C. C
Russe, Mrs. C. C
S.
Sanders, W. C.
San Martnez O Co
Rappngton, G. Rdgey
Schepp Co., L
Scov Manufacturng Co.
Scruggs, Gross R
Scruggs Investment Co
15823
16355
25986
15822
16356
25985
20766
28701
26749
2674S
47901
43995
46585
50576
54779
29274
503.80
40659
41072
32996
47845
47846
26752
34743
28618
32S22
20773
48692
56877
21715
26645
36411
48528
27626
3577.8
40903
22568
29138
46060
46061
26651
37447
43121
51944
42908
29854
30238
33610
46270
26
25
24
25
2.T
25
26
26
22
24
25
20
24
24
25
25
26
24
26
24
25
24
25
24
24
24
26
24
24
24
25
25
25
25
25
24
24
1 cquescence reates to thrd ssue of decson.
1 cquescence reates to deducton of contrbuton to ctory ghway ssocaton.
cquescence reates to hodng of oard that dstrbutons receved from oseph . nch Co. wen
not parta qudatng dvdends.
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cquesced ces Contnued
Docket
No.
oard of Ta ppeas.
oume.
Scruggs, Maran P
Seaconnet Coa Co.1
Seares Rea state Trust
Securtes Co
S.-s Sportng Goods Co
Sband, Gadsden
Shaw, Davd, estate of --
Shea, R. P
Smcoe Reaty Co.
Smth et a., zabeth D., e ecutors.
Smth, L N., estate of
Smth, esse, e ecutr
Smth, Mrs. esse
Smth, Lous, estate of
Smoot, Lews
Sprague Son Co., C. II.1
Sprunt Son, Inc., e ander-
Standard oef Co..
Standard Conveyor Co.
Stauf en, Theodora
Stearns, Robert L -
Stegeman, .
Stegeman, |r., bert
Stegeman, anne L
Stegeman, II. M
Stegeman, . R .
Stegeman, Mabe
Stegeman, Wam L
Stevens, ohn
Stock Yards ank of Cncnnat
Stockham, |ah
Stone et a., Irvng ., e ecutors and trustees .
Stone, Irvng Lee, estate of3
Stoneman, Davd
Strong, arod C. 4
Sunburst O Refnng Co
Tabot, . .
Te as Irrgaton Co.8.
Tfft, Chares
3S7U
18089
24489
40553
20771
26238
34499
37S35
40034
35720
39291
49668
39291
49668
18876
22313
18876
32578
34946
38408
20770
33159
36393
40S73
26756
37573
26643
26650
20044
26647
26G46
20049
26648
29CS5
41085
22569
43S30
43830
27027
38576
45979
36191
40083
41346
31029
33464
42340
45957
24
24
25
25
24
22
24
24
17
25
25
24
24
24
25
24
24
24
25
25
24
25
25
25
25
25
25
25
24
25
26
26
20
24
25
. 3
23
24
25
1 cquescence reates to Inventory ssue.
cquescence reates to March 1, 1913, vaue, for purposes of cacuatng pan or oss upon sae of and at
ersaes, Mo. whether the nvested capta of the Smcoe Reaty Co. shoud be Increased for 1918 and the
March 1, 1913, vaue for amortzaton purposes of a easehod beongng to ansas Cty Leasehod Im-
provement Co.
1 state ta decson acquescence reates to ssue nvovng deductons from gross estate.
cquescence reates to ssues regardng aocaton of tota cost between common and preferred stock
purchased.
cquescence reates to oss Incurred n sae of a boat.
cquescence reates to a ssues e cept affaton
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10
cquesce n ces Con tn ued.
Ta payer.
Docket
No.
oard of Ta p
oume.
Tfft, Lews .
Tohev, Maurce
Toefton Warfcd Co.1
Tracy, Wam R
Trcou, Sae S_.
Turrsh, enry
Twn e O Syndcate
U.
Uster Deaware It. R. Co
Unon Lard Corporaton
Unted States Trust Co. of New York, trustee
.
aant, the Netcher
W.
Waker, George ., estate of -
Ward ros. Co
Washngton Market Co
Whte Oak Transportat:on Co.
Whtney, Ward M
Whtson, Thomas .
Wams, a
Wams, W. W
Wamson, e ander
Wamson, rchbad (Lord orres)
Wson Co., Inc., of Caforna
Wson Commsson Co
Wson Co., I.cc
Wson Shpbudng Co.4
Wood Lumber Co., .
Wray, za
Wrght, George M
Wrght, Leonard Marsha
Y.
Young, the P
Yukon aska Trust.
Z.
Znsser Co
31030
33465
42341
45958
27624
45320
45513
28093
40258
44742
29518
28927
20769
26747-
26757
38051
31869
30992
43912
18088
37927
40233
29273
46062
40231
43972
40229
43973
20768
20767
33826
34337
23605
24156
25881
25854
45508
38868
34161
5242
25
24
23
25
25
24
26
25
24
25
26
23
24
25
24
26
25
25
24
25
25
24
24
25
25
25
24
22
26
24
26
21
cquescence reates to Issue regardng deducton of
perod.
1 state ta decson.
cquescence reates to nventory ssue.
cquescence does not reate to ssue 6 of
oss sustaned by pettoner durng
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11
The Commssoner does NOT acquesce n the foowng decsons
of the Unted States oard of Ta ppeas:
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
beson Reaty Co., Inc
beson s, Inc
ckerman, Irvng C -
ameda Park Co
ker, era M. oher
ed urrers Corporaton
mercan rck Te Corporaton
partment Corporaton
rabo Manufacturng Co
.
anger, esse M., e ecutr 1
anger, Water ., estate of 1
ankers Trust Co., trustee
eebe, unus, trustee
eebe, Marcus, estate of
efast Investment Co.2
e Sons, Samue
oard of re Underwrters of the Cty of Duuth__
oca Cega Deveopment Co
rackman, .
radbury, I. C.
rown, rank ., estate of
rown, . C -.
rown, arry
rown, Pear ., e ecutr
uck, ohn ., estate of .-
uck et a., Mary M., e ecutors
uock, George
urdette, Cara
urey, anche ., e ecutr
usehe, . C. -
usness Rea state Trust of oston
uter- etch Co
53792
53793
30311
31634
40948
40949
8355
36116
50059
29994
42024
50489
32177
32177
32459
52707
52707
19128
38056
41647
45616
43150
40446
45714
45780
47677
33343
48136
47677
325S4
44153
44684
32584
44153
44684
31209
37321
44909
9447
10202
10755
33469
42684
50305
45169
45170
24
24
24
25
25
24
22
26
26
23
23
24
213
2(5
17
22
26
25
24
23
26
25
26
26
25
25
23
25
26
10
25
23
state ta decson.
Nonacqescenee In ssue as to whether pettoner s entted to deducton for amortzaton of the Lee
tract warehouse for 1918.
1 state ta decson nonacquescence reates to deducton of amount of a cam Sed ngant the estate
and aowed by probate court.
Nonacquescence reates to Issue 1 of decson.
cquescence pubshed In Cumuatve uetn - wthdrawn.
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12
Nonacqukscencks Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume.
c.
Carey bre Products Co., merson
Carey Sat Co
Centra Market Street Co.1
Centra Unon Trust Co. of New York, e ecutor
Chenowth, . C
Cobegh, Margaret dwards, estate of
Commerca Garage Co
Cook, zabeth . ---
Cook, Sam
Cooper, . T.4
Cre, Grace Mc rde
Cross, Maurce
Cunard Coa Co.5
D.
Dave, C. R.
Davs, rederck
Davs, Thomas L
Degener, ohn ., estate of
Degener, |r., et a., ohn ., e ecutors
Deaware udson Co
De Lsscr, orace, estate of7
Dohrmann, ndrew . C
Duff, Robert C.8
.
fert, ar C
verhart, ames Wam.
.
armount Cemetery ssocaton.
ed, Marsha.
fth Street udng.
rst Natona ank of oston, admnstrator
rst Peopes Trust
etcher, Saathc R
oster, Carone ., estate of 1
oster et a., Chares . W., e ecutors
36381
36382
24837
31736
38349
40765
41646
38579
35014
3144
43136
32735
26874
26875
28792
10299
32950
37324
37395
38500
38500
50553
50629
2459
20658
23969
37552
45781
26675
30925
42811
36908
16627
29264
45537
44746
45403
33041
46672
46672
26
26
25
25
26
24
22
25
25
7
26
24
26
10
1233
20
931
24
405
24
405
26
185
26
185
26
520
2
102
19
507
19
466
23
1342
23
1351
26
318
25
1272
26
116
24
876
25
612
26
551
24
75
26
708
26
708
Nonacquescence reates to ssue regardng oard s |ursdcton of subsdares.
1 state ta decson.
Nonacquescence reates to vaue of common stock of mercan Chan Co., Inc., and the bass of aoca-
ton of cost between sad common stock and preferred stock of sad company acqured at the same tme and
under the same agreement.
cquescence pubshed In Cumuatve uetn II-, page 1, wthdrawn
Nonacquescence reates to e pendtures for mne equpment.
cquescence pubshed In Cumuatve uetn - wthdrawn.
state ta decson acquescence pubshed n Cumuatve uetn -2 recaed.
1 Nonacquescence reates to ssue 2 of decson.
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1
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1
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2

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4
:
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13
Non acquesces ces Contnued.
Tapayer.
Docket
No.
oard of Ta ppeas.
oume.
G.
G. M. S. Co
Garcn, dward
Gardner, Chares .
Garre, Dane T., estate of
MI M. ohn oseph, estate of
Gassner, Lous
Goet|en Metson Co
Godberg, arry S.
Godschmdt et a., Georgette, e ecutors 4
Godschmdt, enry P., estate of 4
Graham, M.
Green, Robert D.5
Greencaf Te te Corporaton -
Grffs, Stanton 1
Guf Coast Irrgaton Co.
Guf, Mobe Northern R. R. Co.
.
ancock, G. an
anson, Chares C
arrs, en
arrs, Smon
awey Investment Co
edrck, . T - --
eer, . G
emph, Cfford 1
enn, . W
eronvmus, Car Rchard, estate of
gev Co., .
, t). ., estate of
et a., Pau ., e ecutors3
odges, gnes Wey, e ecutr
odges, W. L., estate of
odges, W. L., trustee
ousehod Products, Inc
ouston aseba ssocaton
16383
21657
38575
31736
44746
4017
17875
5389
16138
16138
38335
53647
46746
38577
33694
40081
41343
24887
42150
36867
15398
10980
31632
45169
45170
33533
40634
38573
37102
4S930
51003
29399
29399
38336
38336
38337
1 S09
43985
45430
26
22
25
25
25
4
26
4
14
14
26
24
26
25
24
22
25
607
23
590
10
1374
24
512
23
953
24
444
25
259
25
1351
20
1133
24
269
25
127
24
1144
24
1144
26
301
26
301
26
301
24
594
24
69
Nonacquescence reates to vaue of common stock of mercan Chan Co., Inc., and the bass of aoca-
ton of cost between sad common stock and preferred stock of sad company acqured at the same tme and
under the same agreement.
1 state ta decson.
I cquescence pubshed n Cumuatve uetn - wthdrawn.
state ta decson acquescence pubshed In Cumuatve uetn -2 recaed.
Nonacquescence reates to transacton 6.
1 Nonacquescence reates to afaton ssue.
Nonacquescence reates to ssues nvovng award of Interstate Commerce Commsson In 1920 for
transportaton of Unted States mas n 1916 and 1917 and deducton n 1926 for deprecaton on ways
and structures.
1 Nonacquescence appes to the entre decson of the board n so far as It s adverse to the Comms-
b pubshed n uetn I-28, page 1, revoked.
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2

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14
Nonacquescences Contnued.
Ta payer.
ouston ros.1
ouston, George T.1
ouston, orace .1
ouston, Php D. _
unter, G. W., estate of .
utchson Coa Co
Impera evator Co
Impera Investment Co
Indanapos, Crawfordsve Danve ectrc
Ry. Co
Indanapos Northwestern Tracton Co
Iten scut Co
Ives Dary, Inc
.
ackson astern Ry. Co
ackson,Wermch Trust
amson Coa Coke Co
efferson Standard Lfe Insurance Co.
.
napp, tte .4
ountze, Chares T
ountze et a., Chares T., e ecutors.
ountze, Luther L., estate of
ru, rancs
Laun, fred
Laun, .
Leetona urnace Co.
Levne, yman 6
Lebes Co.,
Lttauer, ugene, estate of
Lttauer et a., Lucus N., e ecutors
M.
Docket
oard of Ta ppeas.
No.
oume.
Page.
12052
f 13104
22008
22009
22007
33564
34939
22
51
22
61
22
22
25
24
51
51
1078
973
35688
29291
25
23
234
1281
33859
33861
/ 43667
45164
39873
24
24
197
197
25
23
870
679
/ 38295
42149
22
24
233
150
564
1335
32307
/ 31690
34088
-
43149
25
2775
37323
37535
37535
16985
7
24
24
24
10
790
405
405
405
1096
45347
45348
32272
7435
/ 28544
35038
51858
51858
26
26
23
8
764
764
979
298
23
787
25
25
21
21
33392
44891
41344
24
26
24
577
199
958
Manchester Coa Co
Margay O Corporaton
Mark ham Irrgaton Co.7
Nonacquescence reates to March 1,1913, vaue end to the basts for the deducton for depeton and for
the computaton of gan or oss upon subsequent sae of the tmber.
state ta decson.
Nonacquescence reates to ssue nvovng deducton for deprecaton on ways and structures.
4 cquescence pubshed n Cumuatve uetn II-1, page 17, wthdrawn.
1 cquescence pubshed n Cumuatve uetn - wthdrawn.
1 state ta decson nonacquescence n respect to that part of decson whch hods that accrued nterest
pad on edera ncome ta es for 1927 and 1928 from date of decedent s death to November 6,1930, s a proper
aowabe admnstratve e pense.
Nonacquescence reates to affaton ssue.
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15
Nonaoquescences Contnued.
Ta payer.
Marvn, Water S.1
Matagarda Cana Co. .
McCormek et a., Cyrus ., trustees.
McCrorv, Luke W., trustee
Mgett a, Oga _.
Moore read Co
Moore, G.
Morgante rush Co., Inc
Moro Reaty odng Corporaton.
Morrss et a., ua L
Morrss Reaty Co. Trust No. 1
Morrss Reaty Co. Trust No. 2
Murphy et a., red T., trustees
Murphy Persona Property Trust
Mutua Lfe Insurance Co. of New York.
N.
Nashve, Chattanooga St. Lous Ry.
Natona Contractng Co. 3
Natona Land Constructon Co
Natona Ppe oundry Co. 1
Nea et a., . enry, trustees
Ne, ames
Newbock O Co. of Te as
New York Lfe Insurance Co
Nchos Co Lumber Co
C.
Ncodemus, |r., .
Nesen Co., .
North mercan Investment Co.
Northern Coa Co.
Noyes, ansen 1
Docket
No.
38578
400S2
41345
44139
32444
30379
41645
3S351
20309
37406
44759
50490
41023
41024
45S63
45S64
41023
45863
41024
45864
43795
43795
9764
33799
24520
40126
32997
45403
9290
28045
38880
23601
52326
62569
8899
30183
34945
38574
oard of Ta ppeas.
oume.
24
26
25
25
22
26
21
25
23
23
23
25
25
23
24
25
25
19
26
8
26
24
24
26
26
24
24
25
Oakman et a., Mame R 42917 24
Ogden, ugh W . 23943 24
Od Msson Portand Cement Co 38853 25
Onger Mortuary ssocaton 36502 23
Nonacquescenoe reates to vaue of common stock of mercan Chan Co., Inc., and the bass of aoca-
ton of cost between sad common stock and preferred stock of sad company acqured at the same tme and
under the same agreement. (
1 Nonacquescence reates to affaton ssue.
Nonacquescence reates to Issue 1 of decson and Issue regardng deductbty of overhead costs In 1925.
cquescence pubshed n Cumuatve uetn I -2, page 43, revoked. Revocaton of pror acqu-
escence and present nonacquescence are due to the faure of the oard s decson to mt the word ds-
trbuted to the cash dstrbutons made to the stockhoders.
cquescence pubshed n Cumuatve uetn - wthdrawn.
8 onacquesoance reates to statute of mtatons ssue.
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16
Nonacquescencbs Contnued.
Ta payer.
Docket
No.
oard of Ta
oume.
Omaha Coca-Coa ottng Co.
Oswego as Corporaton
Pacfc Nash Motor Co
Peabody, Cornea aven, estate of
Peabody et a., Stephen, e ecutors ,_.
Petauma Santa Rosa R. R. Co. ...
Phps, Wam S
Pettncr, Maude rown
P-M- Petroeum Co.
R.
Rchfed O Co
Rffe, enry 4
Rey Stoker Corporaton.
Roberts, Water
Rodeo- ac|o erry Co. -
Rosenboom nance Corporaton
Rosser. . M., e ecutor 1
Roth, W. . -
s.
St. Lous Southwestern Ry. Co.
Saomon, Leon 9
San Caros Mng Co., Ltd.
Sand Sprngs Ry. Co
Sather Lease Thomas Sater Co.
Schwartz- asser Improvement Co._
Seaconnet Coa Co.8
Seatree, Wam rnest
Sewyn ddy Co
Sma s, Inc
8nyder, Inc., . S. M. W
52641
28301
32673
34352
45169
45170
39647
39647
13830
24446
31769
33345
50576
54779
42921
3576
36584
37534
36411
48528
35778
40903
40765
45065
13319
27768
33938
3725
12231
39525
32438
32439
31979
36876
18089
22094
33640
21612
63791
36686
26
26
23
24
24
11
24
25
24
25
3
26
24
24
24
24
22
24
4
8
24
21
26
26
24
25
26
24
1 state ta decson.
1 Nonacquescence reates to that part of decson concernng purchase of ta payer s own bonds at ess
than par whch were hed as an nvestment. cquescence notce as to ths ssue pubshed n Cumuatve
uetn II-2. page 31, revoked.
1 Nonacquescence reates to frst ssue of decson.
state ta decson: acquescence pubshed n Cumuatve uetn -2 recaed.
Nonacquescence docs not reate to the oard s hodng that dstrbutons receved from oseph . nch
Co. were not parta qudatng dvdends.
cquescence pubshed n Cumuatve uetn - wthdrawn.
T cquescence as to ssue 2 pubshed n Cumuatve uetn I-1, page 6, and nonacquescence as to
Issue 1 pubshed n Cumuatve uetn I-1, page 11, wthdrawn.
Nonacquescence reates to statute of mtatons s
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17
Nonacquesceuces Contnued.
Docket
No.
oard of Ta ppeas.
oume.
Sprague Son Co., C. .1.
Sprng Cty oundry Co
Staney Co. of merca
Stearns, Marsha, admnstrator
Stern et a., Samue . ., e ecutors8
Stockhoms nskda ank
Stone, . C, estate of
Stone, Mrs. . C, e ecutr
Stone et a., Irvng ., e ecutors and trustees 3.
Stone, Irvng Lee, estate of
Strong, arod C.4
Sturgeon- ubbard Trust
Sturgeon et a, Ron S., trustees
Suncrest Lumber Co
Swartz, Inc., dward G
Swft, Mary Dodson, estate of
Swsky, Toby W
Tabot, . .e
Tennessee Consodated Coa Co
Terre aute, Indanapos astern Tracton Co_
Terre aute Tracton Lght Co
Te as Irrgaton Co.8
Ttus, C. Dckson
Todd, Ws
Toerton Warfed Co.7
Towers Suvan Manufacturng Co
Tro|an O Co
Twn e O Syndcate
U.
Unon Trust Co., trustee.
Unted O Co
34946
21169
31516
33142
40023
48930
2459
55755
38336
38336
43830
43830
38576
37095
37095
33244
36650
44909
42032
36191
33383
33858
33860
40083
346
20705
37536
45320
40508
33757
45052
f 40
I 41
42917
38082
42922
51622
24
25
26
24
2
25
26
26
26
26
25
25
25
25
25
26
25
23
24
24
24
24
24
24
23
25
26
.26
24
25
an Camp Packng Co., Inc 46131 26
oebe, acob, estate of3 6009 7
oebe, Water W., e ecutor 6009 7
Nonacquescence reates to statute of mtatons ssue.
state ta decson acquescence pubshed n Cumuatve uetn -2recaed.
1 state ta decson nonacquescence reates to ssue nvovng property transferred by trust agreement.
Nonacquescence reates to vaue of common stock of mercan Chan Co., Inc., and the bass of aoca-
ton of cost between sad common stock and preferred stock of sad company acqured at the same tme and
under the same agreement.
Nonacquescence reates to deprecaton aowance In computng oss n sae of a boat.
1 Nonacquescence reates to aftaton ssue.
7 Nonacquescence reates to ssue regardng deducton of oss sustaned by two affated companes
durng fsca year ended anuary 31, 1924, and the ta abe perod ebruary 1 to pr 25,1924, n computng
the consodated net ncome for ta abe perod pr 20 to December 3, 1924, and the year 1925.
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18
Nohacquescences Contnued.
Ta payer.
Docket
No.
oard of Ta ppeas.
oume,
Page.
w.
Waggoner, a
Waggoner, W. T
Wa, rank .1
Wardman, arry
Warner Coeres Co. of Deaware
Wayne County ome Savngs ank
West rgna-Pttsburgh Coa Co
Whte Oak Transportaton Co.
Whte, Rta M. oher
Wams et a., rank G., e ecutors...
Wson, Luke ., estate of
Wson Shpbudng Co.
Wobber ros
Wobbers, Inc
Wood urnture Co., .
Woodward, George
Z.
Zeger, bert W
Zeger, Cfford
33517
33516
7359
22348
34679
49144
20337
25030
18088
36112
33564
32444
34337
36875
36874
40565
42279
46291
46292
24
24
4
24
26
26
24
24
25
25
25
25
26
26
21
23
23
23
657
657
915
102
1047
761
234
307
243
1078
994
182
322
322
564
1258
1091
1091
I cquescence pubshed In Cumuatve uetn - wthdrawn.
Nonacquesconce reates to statute of mtatons ssue.
Nonacquescence reates to ssue 5 of decson.
cquescence pubshed n Cumuatve uetn -2, page 78, wthdrawn.
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INCOM T RULINGS. P RT L
R NU CT O 1932.
SU TITL . G N R L PRO ISIONS.
P RT II. COMPUT TION O N T INCOM .
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 81: cusons from gross ncome. I-46-5850
I. T. 2655
R NU CT O 1932.
Pensons receved from the Unted States by a veteran for
servces rendered to the Unted States n tme of war, other than
amounts pad under the Word War eterans ct of 1924, are
sub|ect to edera ncome ta .
Pensons receved from the Unted States by the famy of a
veteran for servces rendered by the veteran to the Unted States
n tme of war, are e empt, as gfts.
types of compensaton receved by a veteran or hs famy
under the Word War eterans ct of 1924 are e empt from
edera Income ta , and, to the e tent that such compensaton s
pad under the provsons of that ct, e empton appes to a
types of compensaton receved by a veteran or hs famy under
the provsons of the War Rsk Insurance and ocatona Re-
habtaton cts.
Informaton s requested reatve to the ta abty of amounts re-
ceved as compensaton, famy aotments, and aowances under the
provsons of the War Rsk Insurance and the ocatona Rehab-
taton cts, and the Word War eterans ct, 1924, or as pensons
from the Unted States for servce of the benefcary or another n
the mtary or nava forces of the Unted States n tme of war.
Under secton 22(b) 6 of the Revenue ct of 1928 the tems of
ncome referred to receved by a veteran or hs benefcary were not
requred to be ncuded n gross ncome and were e empt from ed-
era ncome ta . The Revenue ct of 1932 n specfyng the tems
of gross ncome whch are to be e cuded from gross ncome does not
menton the tems of gross ncome desgnated n secton 22(b)6 of
the Revenue ct of 1928. ttenton has been drected to the fact that
secton 22 of the Word War eterans ct, 1924, provdes that the
compensaton| nsurance, mantenance, and support aowances pay-
abe under Ttes II, III, and I of that ct are e empt from a
ta aton.
The specfc queston s whether such payments are sub|ect to ed-
era ncome ta by reason of the fact that a provson smar to
(19)
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522(b), rt. 81.
20
secton 22(b) 6 of the Revenue ct of 1928 s not contaned n the
Revenue ct of 1932.
Secton 22(b) of the Revenue ct of 1928 provdes n part as
foows:
cusons from gross ncome. The foowng Items sha not be Incuded In
gross -ncome and sha be e empt from ta aton under ths tte:

(6) Pensons and Word War compensaton payments. mounts receved as
compensaton, famy aotments and aowances under the provsons of the
War Rsk Insurance and the ocatona Rehabtaton cts or the Word War
eterans ct, 1924, or as pensons from the Unted States for servce of the
benefcary or another n the mtary or nava forces of the Unted States In
tme of war, or as a State penson for servces rendered by the benefcary or
another for whch the State s payng a penson .
The Word War eterans ct, 1924 (43 Stat., 607), s entted as
foows:
n ct to consodate, codfy, revse, and reenact the aws affectng the estab-
shment of the Unted States eterans ureau and the admnstraton of the
War Rsk Insurance ct, as amended, and the ocatona Rehabtaton ct,
as amended.
Secton 601 of that ct provdes n part as foows:
That the foowng cts are hereby repeaed. The sectons of ths codfca-
ton heren appcabe thereto sha be n force n eu thereof, sub|ect to the
mtatons contaned n ths tte.
(1) The War Rsk Insurance ct as amended.
(2) The ocatona Rehabtaton ct as amended.
It s evdent, therefore, that the amounts payabe to veterans under
the provsons of the War Rsk Insurance ct, as amended, and the
ocatona Rehabtaton ct, as amended, are now beng pad
under the provsons of the Word War eterans ct, 1924.
Secton 22 of the Word War eterans ct, 1924, provdes as
foows:
That the compensaton, nsurance, and mantenance and support aowance
payabe under Ttes II, III, and I , respectvey, sha not be assgnabe sha
not be sub|ect to the cams of credtors of any person to whom an award s
made under Ttes II, III, or I and sha be e empt from a ta aton:
Provded, That such compensaton, Insurance, and mantenance and support
aowance sha be sub|ect to any cams whch the Unted States may have,
under Ttes II, III, I , and , aganst the person on whose account the com-
pensaton, nsurance, or mantenance and support aowance s payabe.
That the provsons of ths secton sha not be construed to prohbt the
assgnment by any person to whom converted nsurance sha be payabe under
Tte III of such ct of hs nterest n such nsurance to any other member of
the permtted cass of benefcares.
The omsson from the Revenue ct of 1932 of provsons smar
to those of secton 22(b) 6 of the Revenue ct of 1928 had no effect
on secton 22 of the Word War eterans ct, 1924. rom the
nformaton avaabe t appears that secton 22 of the Word War
eterans ct, 1924, has not been amended, modfed, or repeaed.
Therefore ts provsons are st n effect.
dvce s requested specfcay n the foowng types of pay-
ments :
(1) Pensons receved from the Unted States by a veteran for
servces rendered to the Unted States n tme of war.
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21
22(b), rt. 81 |
Pensons receved from the Unted States by a veteran for servces
rendered to the Unted States n tme of war, other than amounts
pad under the Word War eterans ct, 1924, are sub|ect to ed-
era ncome ta .
(2) Pensons receved from the Unted States by the famy of a
veteran for servces rendered by the veteran to the Unted States n
tme of war.
Pensons receved from the Unted States by the famy bf a vet-
eran for servces rendered by the veteran to the Unted States n tme
of war are e empt, as gfts, from edera ncome ta .
(3) types of compensaton receved ether by a veteran or hs
famy under the provsons of the War Rsk Insurance ct.
types of compensaton receved ether by a veteran or hs
famy under the provsons of the War Rsk Insurance ct, to the
e tent that such compensaton s pad under the Word War et-
erans ct, 1924, are e empt from edera ncome ta .
(4) types of compensaton receved ether by a veteran or hs
famy under the ocatona Rehabtaton ct.
types of compensaton receved ether by a veteran or hs
famy under the ocatona Rehabtaton ct, to the e tent that
such compensaton s pad under the provsons of the Word War
eterans ct, 1924, are e empt from edera ncome ta .
(5) types of compensaton receved ether by a veteran or hs
famy under the Word War eterans ct, 1924.
types of compensaton receved ether by a veteran or hs famy
under the Word War eterans ct, 1924, are e empt from edera
ncome ta .
btce 81: cusons from gross ncome. I-50-5912
I. T. 2660
NT CT O 1932.
The emergency offcers retrement pay receved under the Tyson-
tzgerad ct of May 24, 1928, s sub|ect to edera ncome tu .
dvce s requested whether emergency offcers retrement pay
receved under the Tyson- tzgerad ct of May 24. 1928 (Pubc,
No. 506, Seventeth Congress (S. 777, 45 Stat., 735)), s sub|ect to
edera ncome ta under the provsons of the Revenue ct of 1932.
n e empton n a ta aw must be ceary e pressed and w not
be mped. ank of Commerce et a. v. State of Tennessee, 161
U. S., 134.) n e empton from ta aton s an e traordnary grace
of the soveregn power, and s to be strcty construed. It must be
made to appear pany, ether by the e press words or necessary
ntendment of the statute. ( . R, R. 1122, C. . 1-2, 142.)
There s no provson n the Revenue ct of 1932, or n the Tyson-
tzgerad ct of May 24, 1928, specfcay e emptng from ncome
ta the emergency offcers retrement pay provded for n the atter
ct. Therefore, such retrement pay s sub|ect to edera ncome
ta under the Revenue ct of 1932.
s to e empton under the Revenue ct of 1928, see I. T. 2456
(C. . I -1, 67).
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22(b), rt. 82.
22
rtce 82: Proceeds of nsurance Compen- I-43-5803
eaton. G. C. M. 10843
R NU CT OP 1932 ND PRIOR R NU CTS.
The proceeds of the so-caed amy ncome pocy 20-year
perod ssued by the M Company are whoy e empt from ta a-
ton as amounts receved under a fe nsurance contract pad
upon the death of the nsured, n accordance wth the provsons
of secton 22(b) of the Revenue ct of 1932 and the correspond-
ng provsons of pror Revenue cts.
n opnon s requested reatve to the ta abty of the proceeds
of an nsurance pocy ssued by the M Company known as the
u amy ncome pocy 20-year perod.
The pocy provdes that the company w pay the benefcary
100 a month from date of death of the nsured to the e praton of
20 years from the date the pocy was ssued, and 10,000 n cash at
the end of the 20-year perod. Thus, f the pocy s ssued n 1932
and the nsured shoud de n 1937, fve years after ssuance, the com-
pany w pay the benefcary 100 a month for 15 years (1937 to
1952), and 10,000 cash n 1952. If the nsured shoud de n 1942,
10 years after ssuance of the pocy, the company w pay the bene-
fcary 100 a month for 10 years (1942 to 1952), and 10,000 cash
n 1952. These payments are based on a guaranteed nterest rate of
8 per cent. Shoud the company decare nterest at a rate n e cess
of 3 per ceht for any year, the benefcary w receve e cess nterest
n addton to the 100 a month whch s guaranteed.
In order to accompsh ths resut, the company ssues a pocy
contanng two factors: (1) 10,000 of ordnary fe nsurance, and
(2) decreasng term nsurance. or e ampe: On a 10,000 bass,
as soon as the pocy s ssued t woud have a commuted vaue n
case of mmedate death amountng to 23,680 that s, 10,000 of
ordnary fe nsurance and 13,680 of term nsurance. Therefore,
f death occurred mmedatey the company woud sette the pocy
as foows: (1) 10,000 woud be hed by the company and ony the
nterest on that sum pad to the benefcary for 20 years, the 10,000
beng pad to the benefcary n cash at the end of the 20-year perod.
Interest at 3 per cent woud amount to 300 a year, and (2) 13,680
woud be pad to the benefcary n 240 monthy nstaments. t
the guaranteed 3 per cent nterest rate these monthy nstaments
woud amount to 900 a year. Combnng the 300 of nterest and
the 900 of nstaments, the benefcary woud receve for 20 years
1,200 a year and 10,000 n cash at the end of the 20-year perod.
The company woud aso pay the benefcary durng -the 20-year
perod e cess nterest on the 10,000 whch s beng hed at nterest,
and aso on the baance remanng under the nstament settement
Ths e cess nterest woud be the dfference between the nterest rate
as decared by the company and the guaranteed 3 per cent rate.
If the nsured shoud de 10 years after the pocy was ssued,
the commuted vaue woud be 17,840 that s, 10,000 of ordnary
fe nsurance and 7,840 of term nsurance: In ths case the
company woud sette the pocy as foows: (1) 10,000 woud be
hed by the company and ony the nterest on that sum pad to the
benefcary for 10 years, the 10,000 beng pad to the benefcary n
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23
r 22(b), rt. 82. .
cash at the end of the 10-year perod. Interest at 3 per cent woud
amount to 300 a year, and (2) 7,840 woud be pad to the bene-
fcary n 120 monthy nstaments. t the guaranteed 3 per cent
nterest rate these monthy nstaments woud amount to 900 a
year. Combnng the 300 of nterest and the 900 of nstaments,
the benefcary woud receve 1,200 a year for 10 years and 10,000
n cash at the end of the 10-year perod. The company woud aso
pay the benefcary e cess nterest, as prevousy e paned, durng
the 10-year perod.
In Law Opnon 995 (C. . 2, 90) t was concuded that where
under a fe nsurance pocy there s payabe to the frst benefcary
named 0 per cent per annum of the face vaue of the pocy durng
fe and, upon the death of the frst benefcary, the face vaue of the
pocy s payabe to a second benefcary, the payments to the frst
benefcary are a part of the proceeds of the pocy wthn the mean-
ng of secton 213 (b) of the Revenue ct of 1918, and are not to be
ncuded n gross ncome for the purpose of the ncome ta . Law
Opnon 995 reads n part as foows:
Whe the amount of the face of the pocy w earn ncome, athough
materay ess than 6 per cent, n the hands of the company durng the perod
ensung between the death of the nsured and the death of the frst benefcary,
ths fact s doubtess taken Into consderaton by the company n f ng the
amount of addtona premum charged to cover the rsk. The wthhodng
of the payment of the face of the pocy durng the fetme of the frst bene-
fcary s one of the thngs contracted for by the nsured and consttutes as
much a part of the consderaton or the abty to pay ncome durng the fe
of the frst benefcary, assumed by the company, as does the addtona pre-
mum pad n cash. In vew of these consderatons t s mpossbe to escape the
concuson that the 6 per cent ncome payabe to the frst benefcary durng
fe under such a pocy s not merey the payment of nterest on the face vaue
of the pocy but s a part of the proceeds of the pocy of nsurance.
It s the vew of ths offce that the reasonng and concuson of
that aw opnon are equay appcabe to the facts n the nstant
case. Whe the annua payments made under the pocy represent,
n part, earnngs on the future or deferred payments to be made un-
der the pocy, the stuaton s not essentay dfferent from the case
where the proceeds of a pocy are payabe n perodc nstaments
rather than n a ump sum upon the death of the nsured. In ether
case the annua nstaments represent, n part, earnngs on the de-
ferred payments. owever, the recent Revenue cts have unformy
e empted from ncome ta the proceeds of a pocy of fe nsurance
payabe upon death of the nsured, whether pad n a snge sum or
n nstaments. The perodc payments under the pocy here ds-
cussed represent nstament payments.
It s, therefore, the opnon of ths offce that the proceeds of the
so-caed amy ncome pocy 20-year perod ssued by the M
Company are whoy e empt from ta aton as amounts receved
under a fe nsurance contract pad by reason of the death of the
nsured, n accordance wth the provsons of secton 22(b) of the
Revenue ct of 1932 and the correspondng provsons of pror
Revenue cts.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
16O0O3 83 3
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. 22(b), rt. 87.
24
rtce 87: Interest upon Unted States ob-
gatons.
R NU CTS O 1928 ND 1032.
I-44-5817
I. T. 2651
Treasury bs ssued subsequent to une 17, 1929, and bene-
fcay owned by a nonresdent aen Indvdua not engaged n
busness In the Unted States, are, as to sucb ndvdua, e empt,
wth reference to Interest, from edera ncome ta . ny gan
from tbe sae or otber dsposton of Treasury bs Issued subse-
quent to une 17, 1930, and benefcay owned by a nonresdent
aen ndvdua not engaged n busness n the Unted States,
s, as to such ndvdua, aso e empt from that ta .
dvce s requested whether Treasury bs owned by a nonres-
dent aen ndvdua not engaged n busness n the Unted States
are e empt both as to prncpa and nterest (dscount at whch
ssued) from edera ncome ta the same as are Treasury notes and
Treasury certfcates of ndebtedness.
Treasury bs are ssued under the provsons of secton 5 of the
second Lberty ond ct, approved September 24, 1917, as amended
(Pubc, No. 11, Seventy-frst Congress, une 17, 1929, and Pubc,
No. 376, Seventy-frst Congress, une 17, 1930). That secton, as so
amended, reads n part as foows:
Sec. 5. (a) That n addton to the bonds and notes authorzed by sectons 1
and 18 of ths ct, as amended, the Secretary of the Treasury s authorzed to
borrow from tme to tme, on the credt of the Unted States, for the purposes
of ths ct, to provde for the purchase or redempton before maturty of any
certfcates of ndebtedness or Treasury bs ssued hereunder, and to meet
pubc e pendtures authorzed by aw, such sum or sums as n hs |udgment
may be necessary, and to ssue therefor (1) certfcates of ndebtedness of the
Unted States at not ess than par and at such rate or rates of nterest, payabe
at such tme or tmes as he may prescrbe or (2) Treasury bs on a dscount
bass and payabe at maturty wthout nterest.
(b) certfcates of ndebtedness and Treasury bs ssued hereunder
(after the date une 17, 1929 upon whch ths subdvson becomes aw) sha
be e empt, both as to prncpa and nterest, from a ta aton (e cept estate
and nhertance ta es) now or hereafter mposed by the Unted States, any
State, or any of the possessons of the Unted States, or by any oca ta ng
authorty and the amount of dscount at whch Treasury bs are orguaUy
sod by the Unted States sha be consdered to be nterest wthn tbe meanng
of ths subdvson.
(c)
(d) ny gan from the sae or other dsposton of Treasury bs Issued
hereunder (after the date une 17, 1930 upon whch ths subdvson becomes
aw) sha bo e empt from a ta aton (e cept estate or nhertance ta es)
now or hereafter mposed by the Unted States, any State, or any of the
possessons of the Unted States, or by any oca ta ng authorty .
Under the provsons of secton 5, as amended, supra, Treasury
bs ssued subsequent to une 17, 1929, and owned by any nd-
vdua, are, as to nterest, e empt from edera ncome ta , and any
gan from the sae or other dsposton of Treasury bs ssued subse-
quent to une 17, 1930, and owned by any ndvdua, s, as to such
ndvdua, e empt from that ta .
Consequenty, Treasury bs ssued subsequent to une 17, 1929,
and benefcay owned by a nonresdent aen ndvdua not en-
gaged n busness n the Unted States, are, as to such ndvdua,
e empt, wth reference to nterest, from edera ncome ta , and
any gan from the sae or other dsposton of Treasury bs ssued
subsequent to une 17, 19. 50, and benefcay owned by a nonresdent
aen ndvdua not engaged n busness n the Unted States, s, as
to such ndvdua, e empt from that ta .
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25 123(c), rt. 161.
S CTION 23(a). D DUCTIONS ROM GROSS
INCOM : P NS S.
rtce 121: usness e penses.
R NU CT OP 1932.
Lega e penses ncurred n securng a refund of customs dutes
or ta es, egay or mpropery coected. (See Mm. 3958, page 33.)
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
rtce 151: Ta es. I 8-5882
I. T. 2658
R NU CT O 1032.
The revenues derved from secton 1001(a) of the Revenue ct of
1932 fa wthn the cassfcaton of posta recepts and not wthn
the cassfcaton of nterna revenue ta es, and the addtona rate
of postage s not deductbe as a ta n edera ncome ta returns.
Inqury s made whether the ncrease n Unted States postage,
namey, 1 cent for each ounce or fracton thereof n addton to the
rate provded by e stng aw, s an emergency ta and deductbe,
as such, n edera ncome ta returns.
Secton 1001(a) of the Revenue ct of 1932 provdes as foows:
On and after the thrteth day after the date of te enactment of ths ct
and unt uy 1, 1934, the rate of postge on a ma matter of the frst cass
(e cept posta cards and prvate mang or post cards, and e cept other frst
cass matter on whch the rate of postage under e stng aw s 1 cent for each
ounce or fracton thereof) sha be 1 cent for each ounce or fracton thereof n
addton to the rate provded by e stng aw.
though the. secton of the statute above quoted was ncorporated
n the Revenue ct of 1932 as a part of Tte III, reatng to posta
rates, and became effectve uy 6, 1932, the revenues derved there-
from fa wthn the cassfcaton of posta recepts and not wthn
the cassfcaton of nterna revenue ta es. Ths ncrease n postage
s not, therefore, deductbe as a ta n edera ncome ta returns.
rtce 151: Ta es. I-51-5930
Mm.3988
Deductbty for edera Income ta purposes of the addtona
estate ta , gft ta , manufacturers e cse ta es, and msceaneous
ta es mposed by the Revenue ct of 1032.
Treasury Depahtment,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, November 26,1932.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Other Of|ce s and mpoyees of the ureau of Interna
Revenue Concerned:
Under secton 23(c) of the Revenue ct of 1932, ta es pad or
accrued wthn the ta abe year are aowabe deductons from gross
ncome e cept
(1) ncome, war-profts, and e cess-profts ta es mposed by the authorty
of the Unted States
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523(c), rt. 151.
26
(2) ncome, war-profts, and e cess-profts ta es Imposed by the authorty of
any foregn country or possesson of the Unted States but ths deducton sha
be aowed n the case of a ta payer who does not sgnfy n hs return hs desre
to have to any e tent the benefts of secton 131 (reatng to credt for ta es of
foregn countres and possessons of the Unted States) and
(3) ta es assessed aganst oca benefts of a knd tendng to ncrease the
vaue of the property assessed but ths paragraph sha not e cude the aow-
ance as a deducton of so much of such ta es as s propery aocabe to man-
tenance or nterest charges.
The ta es referred to heren consttute aowabe deductons from
gross ncome for the year n whch pad or accrued, provded they
are not added to and made a part of the e penses of the busness or
the cost of artces of merchandse wth respect to whch they are
pad, n whch case they can not be separatey deducted.
The ttes and sectons of the ct under whch these ta es are m-
posed are arranged n the order n whch they appear n the ct.
The person who s entted to deduct the ta on the partcuar
artce or tem to whch the ta attaches s desgnated heren. The
term person as used heren means an ndvdua, a trust or estate,
a partnershp, or a corporaton.
TITL II. DDITION L ST T T .
The ta mposed by secton 401 of ths tte, ess any amount
aowed under secton 402 as a credt aganst such ta , s an aowabe
deducton from the gross ncome of the estate n computng the n-
come thereof sub|ect to the ncome ta . Ths deducton s n add-
ton to the deducton aowabe on account of the estate ta mposed
by secton 301(a) of the Revenue ct of 1926, ess any amount
aowed as a credt aganst such ta under sectons 301(b) and 301 (c)
of that ct as amended by sectons 801 and 802 of the Revenue ct
of 1932. The ta s deductbe for the year n whch pad or accrued.
Reguatons reatng to the mposton and appcaton of the add-
tona ta are n the course of preparaton.
TITL III. GI T T .
The ta mposed by secton 501 of ths tte, computed n accordance
wth the gft ta rate schedue set forth n secton 502, pad or
accrued durng the ta abe year s an aowabe deducton from the
gross ncome of the donor of the property aganst whom such ta
s assessed. If the ta s pad or s payabe by the donee as a resut
of the statutory abty therefor, then, n such case, the ta pad
or accrued consttutes an aowabe deducton from the gross ncome
of such donee. Reguatons reatng to the mposton and appca-
ton of ths ta are n the course of preparaton.
TITL I . M NU CTUR RS CIS T S.
The ta es mposed under ths tte, wth the e cepton of the mport
ta provded n secton 601, are on certan artces sod, eased, or
used by the manufacturer, producer, or mporter on or after une 21,
1932, even though manufactured, produced, or mported before that
date.
The ta mposed by secton 601(a) appes to the artces specfed
n subsecton (c), (2) to (7), ncusve, mported nto the Unted
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27
23(c), rt. 151
States on and after une 21, 1932 (uness treaty provsons of the
Unted States otherwse provde), and w be admnstered by the
ureau of Customs under reguatons promugated by the Secretary
of the Treasury.
The artces or tems sub|ect to the ta es mposed under ths tte
are as foows:
Secton rtces or Items ta ed.
601(e). (1) Lubrcatng os (2) brewer s wort, qud mut, mat smp,
and mat e tract (3) grape concentrate, evaporated grape |uce, and
grape srup (4) crude petroeum, gasone, ubrcatng o, and paraffn
(5) coa and coke (6) umber (7) copper-bearng ores and concentrates.
602. Tres and nner tubes.
603. Toet preparatons, etc.
604. urs.
605. ewery, etc.
606. utomobes, motor cyces, trucks, etc.
607. Rado recevng sets and phonograph records.
608. Mechanca refrgerators.
609. Sportng goods, ncudng games other than payng cards and ch-
dren s games.
610. rearms, shes, and cartrdges.
611. Cameras.
612. Matches.
613. Candy.
614. Chewng gum.
615. Soft drnks.
616. ectrca energy.
617. Gasone.
The ta es on ubrcatng os (secton 601 (c)), brewer s wort,
qud mat srups, and mat e tract (secton 601 (c)2), and grape con-
centrates, etc. (secton 601 (c)3), appy to the sae of these artces n
the Unted States by the manufacturer or producer and are deduct-
be from the gross ncome of such manufacturer or producer for
the year n whch pad or accrued. The ta es on brewer s wort,
qud mat srups, and mat e tract (secton 601(c)2), grape con-
centrates, etc. (secton 601(c)3), and ubrcatng o (secton 601(c)
4), aso appy wth respect to the mportaton of such artces and are
deductbe from the gross ncome of the mporter for the year n
-whch pad or accrued.
The ta es on crude petroeum, etc. (secton 601(c)4), coa and coko
(secton 601(c)5),umber (secton 601(c)6), and copper-bearng ores
and concentrates (secton 601 (c)7), appy ony wth respect to the
mportaton of these artces. These ta es consttute aowabe
deductons from the gross ncome of the person abe for the ta .
The ta es on a of the artces or tems sted above under sectons
602 to 615, ncusve, and secton 617 are deductbe from the gross
ncome of the manufacturer, producer, or mporter for the ta abe
year durng whch the manufacturer, producer, or mporter pays or
accrues such ta es. |obber, deaer, or consumer who remburses
the manufacturer, producer, or mporter for such ta es, even though
bed to hm as a specfc tem, s not entted to deduct from gross
ncome the amounts so rembursed.
The ta mposed by secton 616 appes to a payments made on
or after une 21, 1932, for eectrca energy for domestc or commer-
ca consumpton furnshed after une 21, 1932, and before uy 1,
1934, whether n the form of a mnmum charge, a fat charge, or
otherwse. The ta s payabe by the person payng for the eec-
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523(c), rt. 151.
28
trca energy and s a proper deducton from the gross ncome of
such person for the year n whch pad or accrued.
In accordance wth the provsons of secton 62o, f any person
has, pror to May 1, 1932, made a bona fde contract for the sae, after
the ta takes effect, of any artce n respect of whch a ta s m-
posed under ths tte of the ct, and such contract does not permt
the addng to the amount to be pad thereunder of the whoe of such
ta , then (uness the contract prohbts such addton) the vendee
sha, n eu of the vendor, pay so much of the ta as s not per-
mtted to be added to the contract prce. It foows, therefore, that
n such a case the ta , athough coected by the vendor from the
vendee, s actuay eved aganst the vendee and consequenty s
deductbe from the gross ncome of the vendee.
The provsons of the sectons of the statute under whch these
ta es are mposed, the defntons, the provsons reatng to the
bass of such ta es, the manner of ther appcaton, coecton, and
return, the mposton of penates, and other matters are contaned
n Reguatons 42, 44, and 46. See aso Reguatons 47 (revsed Oc-
tober, 1928) reatng to the ta on pstos and revovers under sec-
ton 600(2) of the Revenue ct of 1926.
TITL . MISC LL N OUS T S.
The tems sub|ect to the ta es mposed under ths tte and the
sectons of the aw whch mpose the ta es are as foows:
Secton
701 Items ta ed.
(a) (1) ( ) Teephone conversatons (for whch the charge Is 50 cents
or more).
(a)(1)( ) Teegraph dspatches and messages.
(a)(1)(C) Cabe and rado dspatches and messages,
(a) (2) Leased wres and takng crcut speca servces.
711. dmssons.
721. (Stamp ta es.) onds, debentures, and certfcates of Indebtedness.
722. (Stamp ta es.) Issues of capta stock and smar nterests.
723. (Stamp ta es.) Saes and transfer of stock and smar nterests.
724. (Stamp ta es.) Saes and transfer of bonds.
725. (Stamp ta es.) Conveyances.
726. (Stampta es.) Saes of produce for future devery.
731. Transportaton of o by ppe ne.
741. Leases of safe depost bo es.
751. Checks, etc.
761. Use of boats.
The ta es mposed by sectons 701, 741, and 761 are upon the use of
the factes, safe depost bo es, and boats specfed theren. of
these ta es consttute aowabe deductons from the gross ncome of
the person abe for the ta for the year n whch pad or accrued.
The provsons of sectons 701 and 741 and the artces of the regu-
atons appcabe thereto are contaned n Reguatons 42. Regua-
tons 72 cover the ta mposed under secton 7G1 upon the use of
boats.
The ta on admssons mposed by secton 711 s on the amount pad
on and after une 21, 1932, for admsson to any pace of a defnte
ocaton. The ta n each case s to be pad by the person payng for
such admsson and such ta consttutes an aowabe deducton from
the gross ncome of the person abe therefor for the ta abe year
n whch t s pad. Reguatons coverng ths ta as we as the
ta es on Dues and Intaton fees mposed by secton 501 of the
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23(n), rt. 261|
Revenue ct of 1926, as amended by secton 413(a) of the Revenue
ct of 1928 (whch contnue n fu force and effect), are pubshed
as Reguatons 43.
The stamp ta es mposed by sectons 721, 722, 723, 724, 725, and
726, effectve une 21, 1932, consttute aowabe deductons from
the gross ncome of the purchaser of the stamps ony to the e tent
of the tota amount of the stamps actuay aff ed to the documents
whch are the sub|ect of the ta and canceed durng the ta abe
year. Reguatons reatng to the mposton and appcaton of the
stamp ta es are pubshed n Reguatons 71.
The ta mposed by secton 731 on the transportaton of o by ppe
ne consttutes a proper deducton from the gross ncome of the
person furnshng such transportaton. The provsons of ths sec-
ton of the statute and nterpretatons thereof are contaned n
Reguatons 42.
The ta mposed by secton 751 on each draft, check, or order for
the payment of money, drawn upon any bank, banker, or trust com-
any and presented for payment on or after une 21,1932, s payabe
y the maker or drawer of the nstrument. The ta so mposed
consttutes an aowabe deducton from the gross ncome of the maker
or drawer of the nstrument for the ta abe year n whch the
amount of the ta s charged to the maker s account by the bank.
Inqures n regard to ths mmeograph shoud refer to the number
of the mmeograph and the symbos IT: : RR.
S CTION 23(n). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS.
rtce 261: Contrbutons or gfts by ndvduas.
Contrbutons to nonpartsan scentfc agency of ctzens nqures
for promoton of better government. (See I. T. 2654, page 39.)
Dscontnuance of procedure outned n Mmeograph 3931,
reatng to bass for computng 15 per cent mtaton on deduc-
tons for contrbutons by ndvduas havng a capta net gan
or a capta net oss.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, November U, 1932.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
Reference s made to Mmeograph 3931 C. . I-1, 33 , dated
anuary 27, 1932, reatng to the bass for computng the 15 per
cent mtaton on deductons for contrbutons by ndvduas havng
a capta net gan or a capta net oss. Mmeograph 3931 was
ssued by reason of the decson of the Unted States oard of Ta
Davd urnet, Commssoner.
R NU CT O f)32.
rtce 261: Contrbutons or gfts by nd-
vduas.
I-49-5896
Mm. 3986
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23(n), rt. 261.
30
ppeas n the case of ae D. kns v. Commssoner (24 . T.
572), n whch the oard hed that a capta net oss shoud be e -
cuded from net ncome before computng the 15 per cent mtaton
on deductons for chartabe, etc., contrbutons. The oard referred
to I. T. 2104 (C. . III-2,152) as beng apparenty correct under the
Revenue cts of 1918 and 1921, but as not beng sound wth respect
to the nterpretaton of secton 208(c) of the Revenue ct of 1924.
Inasmuch as the oard s decson was contrary to the poston whch
the ureau had consstenty foowed as announced n I. T. 2104,
t was contempated that the decson woud be appeaed, and t was
stated n the mmeograph that n the audt of returns nvovng
capta net osses, the ureau woud contnue to foow I. T. 2104.
It was further stated that n vew of the decson of the oard, and
pendng the fna decson of the courts on the queston, t woud
aso be necessary, n order to protect fuy the nterests of the
Government n cases where a ta payer has a capta net gan,
to compute the 15 per cent mtaton on the deducton for contr-
butons upon the bass of the net ncome e cudng the capta
net gan. The audt of returns n whch the queston arose was
governed by certan rues enumerated n the mmeograph and desg-
nated as paragraphs (1) to (8), ncusve. The purpose of the pro-
cedure outned was to hod n abeyance the fna audt of returns n
such cases, and, n so far as possbe, to protect the nterests of both
the Government and the ta payer unt the queston coud be fnay
ad|udcated.
On ugust 29, 1932, the oard of Ta ppeas rendered a decson
n the case of Raph W. arbson v. Commssoner (26 . T. .,
896), n whch t was hed that n computng the 15 per cent mta-
ton on deductons for chartabe, etc., contrbutons, the ta payer
havng reazed a capta net gan durng the ta abe year and
havng eected to have that gan ta ed at the rate provded n secton
101(a) of the Revenue ct of 1928, the amount of the capta net
gan shoud be e cuded from the amount of the ta payer s ordnary
net ncome.
The nonacquescence n the decson of the oard n the ae D.
kns case C. . I-1, 9 has been wthdrawn.
In vew of the foregong, the audt of uncosed returns for a
years nvovng the queston of the bass for computng the 15 per
cent mtaton on deductons for contrbutons by ndvduas havng
a capta net gan shoud now be competed n accordance wth the
decson of the oard n the Raph W. arbson case. The audt of
uncosed returns for 1924 and subsequent ta abe years nvovng the
queston of the bass for computng the 15 per cent mtaton on
deductons for contrbutons by ndvduas havng a capta net
oss shoud aso be competed now n accordance wth the decson
of the oard n the ae D. kns case.
s to cases coverng ta abe years pror to 1924 nvovng the ques-
ton of the bass for computng the 15 per cent mtaton on deduc-
tons for contrbutons by ndvduas havng capta osses, I. T. 2104
shoud be foowed unt further notce.
Inqures regardng ths mmeograph shoud refer to the number
and the symbos IT: : CW.
. . Mres,
ctng Commssoner.
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23(r), rt. 272.
S CTION 23(r). D DUCTIONS ROM GROSS INCOM :
LIMIT TION ON STOC LOSS S.
rtce 272: Lmtatons on deductons for I-38-5696
osses from saes and e changes of stocks I. T. 2641
and bonds.
R NU CT O 1932.
Where a ta payer deang for hs own account sustans osses
from the sae or e change of stocks and bonds whch are not capta
assets under secton 101 of the Revenue ct of 1932, such osses
are not aowabe as a deducton aganst other Income.
dvce s requested whether osses from saes of securtes are
deductbe from other ncome n the case of a ta payer whose soe
busness s tradng n securtes for hs own account, and when the
u other ncome conssts of dvdends from securtes purchased and
hed n the ordnary course of such busness.
The osses n queston resuted from the sae or e change of stocks
and bonds whch were not capta assets wthn the meanng of secton
101 of the Revenue ct of 1932, and the queston reates to whether
such osses are sub|ect to the mtatons provded n secton 23 (r)
of the Revenue ct of 1932.
Secton 23(r) of the Revenue ct of 1932 provdes:
(r) Lmtaton on stock ossen.
(1) Losses from saes or e changes of stocks and bonds (as defned In sub-
secton (t) of ths secton) whch are not capta assets (as defned n secton
101) sha be aowed ony to the e tent of the gans from such saes or e -
changes (ncudng gans whch may be derved by a ta payer rom the retre-
ment of hs own obgatons).
(2) Losses dsaowed as a deducton by paragraph (1), computed wthout
regard to any osses sustaned durng the precedng ta abe year, sha, to an
amount not n e cess of the ta payer s net ncome for the ta abe year, be con-
sdered for the purposes of ths tte as osses sustaned n the succeedng ta -
abe year from saes or e changes of stocks or bonds whch are not capta assets.
(3) Ths subsecton sha not appy to a deaer n securtes (as to stocks
and bonds acqured for resae to customers) n respect of transactons n the
ordnary course of hs busness, nor to a bank or tr|st company ncorporated
under the aws of the Unted States or of any State or Terrtory, nor to persona
carryng on the bankng busness (where the recept of deposts consttutes
a ma|or part of such busness) n respect of transactons n the ordnary course
of such bankng busness.
The mtatons provded n secton 23(r) do not appy to a deaer
n securtes as to stocks and bonds acqured for resae to customers
n respect of transactons n the ordnary course of hs busness, but
the mtatons do appy to osses ncurred by a ta payer (whether
or not a deaer n securtes) from the sae or e change of stocks and
bonds n respect- of transactons entered nto for hs own account.
Snce the osses n queston resuted from the sae or e change of
stocks and bonds for the ta payer s own account, such osses are not
aowabe as a deducton aganst hs ncome from sources other than
from the sae or e change of stocks and bonds, athough such n-
come conssts of dvdends and nterest receved n respect of stocks
and bonds deat n by hm n the course of hs tradng for hs own
account. The e cess of the osses over the gans from such trans-
actons for the current year may, however, n an amount not n
e cess of the ta payer s net ncome for the current year, be carred
forward and taken as a deducton aganst gans from smar trans-
actons for the succeedng year.
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23(r). rt. 272.
32
rtce 272: Lmtatons on deductons for I-47-5806
osses from saes and e changes of stocks I. T. 2056
and bonds.
R NU CT O 1932.
capta net gan reazed upon the sae of securtes hed for
more than two years may not be reduced by osses sustaned upon
the sae of securtes hed for two years or ess, n vew of the
e press anguage contaned n secton 23(r) of the Revenue ct of
1932.
Reference has been made to I. T. 2641 (see on page 31) reatng
to the mtatons on osses sustaned through the sae of stocks and
bonds under secton 23(r) of the Revenue ct of 1932, and advce
s requested whether the capta net gan reazed upon the sae of
securtes hed for more than two years may be decreased by osses
sustaned upon the sae of securtes hed for two years or ess.
The rung referred to hods that where a ta payer deang for hs
own account sustans osses from the sae or e change of stocks and
bonds whch are not capta assets under secton 101 of the Revenue
ct of 1932, such osses are not aowabe as a deducton aganst
other ncome. Secton 101(c)8 defnes the term capta assets
as foows:
Capta assets means property hed by the ta payer for more than two
years (whether or not connected wth hs trade or busness), but does not
Incude stock In trade of the ta payer or other property of a knd whch woud
propery be ncuded In the nventory of the ta payer f on hand at the cose
of the ta abe year, or property hed by the ta payer prmary for sae n the
course of hs trade or busness.
Secton 23(r) provdes that osses from saes or e changes of
stocks and bonds whch are not capta assets, as defned above, sha
be aowed ony to the e tent of gans from svch saes or e changes.
In respect of ths provson the report of the Senate Commttee on
nance (report No. 665, dated May 9, 1932, page 17) contans the
foowng e panatory matter:
s now drafted the mtaton that osses on stocks and bonds can ony be
taken to the e tent of gans from smar transactons Is confned to the sae
of such securtes whch have been hed for two years or ess. Gans or osses
arsng from the sae for of stocks and bonds hed for over two years are
In a cases treated precsey as under present aw .
It s cear that Congress, n wrtng secton 23 (r) nto the statute,
ntended that osses upon the sae of stocks and bonds whch have
been hed for two years or ess shoud be aowed ony as an offset
aganst gans from the sae of such securtes hed wo years or ess,
and then ony to the e tent of such gans.
It s, therefore, hed, n vew of the e press anguage of secton
23 (r) of the Revenue ct of 1932, that a capta net gan reazed
upon the sae of securtes hed for more than two years may not
be reduced by osses sustaned upon the sae of securtes hed for
two years or ess.
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33
42, rt. 33 1|
rtce 272: Lmtatons on deductons for I-51-5931
osses from saes and e changes of stocks I. T. 2663
and bonds.
R NU CT O 1032.
Insurance companes (other than fe or mutua) ta abe under
secton 204 of the Revenue ct of 1932, may deduct osses from the
6ae or other dsposton of securtes wthout reference to the m-
taton contaned n secton 23 (r) of the ct.
S CTION 23(t). D DUCTIONS ROM GROSS INCOM :
D INITION O STOC S ND ONDS.
rtce 272: Lmtatons on deductons for I-42-5786
osses from saes and e changes of stocks I. T. 2648
and bonds.
I NU CT OP 1932.
onds ssued by edera and banks and |ont stock and banks
are not Government bonds wthn the meanng of secton 23 (t) of
the Revenue ct of 1932.
P RT I . CCOUNTING P RIODS ND M T ODS O CCOUNTING.
S CTION 42. P RIOD IN W IC IT MS O
GROSS INCOM INCLUD D.
rtce 331: When ncuded n gross ncome. I-30-5560
( so Secton 23(a), rtce 121.) Mm. 3958
Ta abe status of refunds of customs dutes and ta es.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, uy 2, 1932.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Other Offcers and mpoyees of the ureau of Interna Reve-
nue Concerned:
Consderaton has been gven the queston whether a refund of
customs dutes coected over a number of years shoud be regarded
as ncome for the year n whch the refund s receved, or whether
the prncpa sum thereof shoud be aocated to the prevous years
n whch the coectons were made and ncome ta abty for those
years ad|usted accordngy.
The queston above outned was consdered n the rung pub-
shed as O. D. 741, Cumuatve uetn 3, page 115. It was theren
hed that e cess customs dutes, whch were pad durng the years
1915, 1916, and 1917 and for whch a refund was receved durng
the year 1919, were amounts whch had been erroneousy deducted
n computng net ncome for the years 1915, 1916, and 1917, respec-
tvey, rather than an amount representng ncome for the year 1919.
The reasonng underyng the rung pubshed as O. D. 741, supra,
was apparenty foowed n the case of the Inand Products Co. v.
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542. rt. 331.
34
Commssoner (10 . T. ., 235, affrmed by the Crcut Court of
ppeas for the ourth Crcut. 31 ed. (2d), 867). Ths atter
case nvoved the mposton of the soft drnk ta upon sweet cder.
The court n ts opnon stated that nasmuch as the Revenue cts
n force n 1918 and 1919 dd not mpose the soft drnk ta upon
sweet cder, the reguatons of the Department attemptng to mpose
t were vod. The court further hed that the whoe queston n-
voved was one of correcton of mstake, and stated that read|ust-
ment of the returns for the years 1918 and 1919, by emnatng the
deducton n queston, woud pace both partes to the mstake e acty
where they woud have been f t had not occurred.
In the case of the Chcago, Rock Isand Pacfc Raway Co. v.
Commssoner (13 . T. ., 988), one of the questons n ssue was
whether amounts represented by uncashed checks gven n settement
of damage cams and for wages, for whch deductons from gross
ncome were taken n the years n whch those checks were ssued,
shoud, after remanng unpad for two years and then beng credted
to the proft and oss account, be restored to ta abe ncome. The
oard, whe e pressng doubt as to whether, n a strct ega sense,
the sums so restored consttuted ncome at a, hed, upon consdera-
ton of a the factors nvoved, that the practce of the company n
credtng the amounts of the uncashed checks to proft and oss h d
the sancton of common sense and that such amounts mght be n-
cuded n the computaton of ta abe ncome for the years n whch
the credts were made rather than n the prevous years n whch
the deductons were taken. On ths pont the oard was sustaned
n Chcago, Rock Isand dt Pacfc Raway Co. v. Commssoner
(47 ed. (2d), 990, cert, dened, 284 U. S. 618).
Reference s aso made to the ta abty as ncome of awards
made by the M ed Cams Commsson to certan nsurance com-
panes. Durng the Word War perod these companes wrote marne
nsurance and were obged to pay cams resutng from the oss of
hus and cargoes occasoned by war operatons. The amounts pad
on these cams were aowed as deductons n the ncome ta returns
of the companes for the years n whch they were pad. The M ed
Cams Commsson, upon the fng of cams for recovery of the
amounts so pad, made awards to the nsurance companes wth re-
spect to certan of the osses. In the partcuar cases consdered
n the memorandum referred to the awards were made by the com-
msson n 1924, but t was not unt 1928 that Congress passed the
Settement of War Cams ct, whch authorzed the payment of
such awards. The ureau hed that the awards consttuted ncome
to the companes when reazed.
dstncton shoud be made between (1) the rung pubshed as
O. D. 741, supra, and (2) the decsons n the cases of the Chcago,
Rock Isand Pacfc Raway Co., supra, and the M ed Cams
Commsson awards. In the former case the customs dutes were
egay coected and were, therefore, vod from the begnnng.
It foows that the deductons from gross ncome were mpropery
taken and the ncome ta abty erroneousy computed. When
the egaty of these payments was ater estabshed the refunds
made dd not consttute ncome, snce the orgna payments were
payments made to the coector under mstake. Read|ustment of
the returns for the years n whch the mstakes were made was the
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35
553, rt. 40 U
ogca method for remedyng the stuaton. In the atter cases,
when the raroad company took deductons for the damage cams
and wages and the nsurance companes took deductons for the
osses, they were strcty wthn ther rghts n so dong. The
egaty of those transactons and the deductons based thereon have
never been questoned. There was nvoved n those cases no eement
consttutng the correcton of a mstake.
It s now hed that appcaton of the rung pubshed as O. D. 741,
supra, shoud be restrcted to cases n whch coectons of customs
dutes and ta es were egay or mpropery made. It sometmes
happens that dutes or ta es are egay or propery coected, but
by reason of some subsequent event are refunded. n e ampe of
ths type of case s the refund under the drawback provsons of the
aw where the mporter pays the customs dutes but ater secures a
refund by showng that the goods mported on whch the dutes were
ad have gone nto a manufactured artce whch was ater e ported,
n such a case the coecton of the customs dutes was entrey ega
and the refund thereof dd not consttute the correcton of a ms-
take because no mstake had been made. Therefore, ega and proper
coectons of customs dutes and ta es shoud be dstngushed from
those egay or mpropery made. Refunds of customs dutes or
ta es, the coecton of whch was egay or propery made, shoud
be treated as ncome for the year n whch refunded.
It s further hed that ega e penses ncurred n securng a refund
of customs dutes or ta es egay or mpropery coected are
proper deductons from ncome for the year n whch pad or accrued,
as ordnary and necessary e penses, when ncurred n carryng on a
trade or busness.
Inqures n regard to ths mmeograph shoud refer to the number
of the mmeograph and the symbos IT: : RR.
Davd urnet, Commssoner.
P RT . R TURNS ND P YM NT O T .
S CTION 53. TIM ND PL C OR
ILING R TURNS.
rtce 401: Tme for fng returns. I-3G-5G58
T. D.4350
Income ta Revsed ncome ta returns to be made for fsca
years ended n 1932.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Revsed forms prescrbed for use n makng returns of ncome
under the Revenue ct of 1932 for fsca years endng n 1932 are
avaabe n the offces of coectors of nterna revenue as foows:
Indvdua ncome ta return orm 1040 Y.
Corporaton ncome ta return orm 1120 .
Partnershp return of ncome orm 1065
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63, rt. 401.
36
s used n the Revenue ct of 1932, the term partnershp n-
cudes a syndcate, group, poo, |ont venture, or other unncorpo-
rated organzaton, through or by means of whch any busness,
fnanca operaton, or venture s carred on, and whch s not,
wthn the meanng of the ct, a trust or estate, or a corporaton.
Such organzatons sha n makng a return for a fsca year endng
n 1932 make such return on the revsed orm 10G5 prescrbed for
use by partnershps.
ny ndvdua, corporaton or partnershp whch has heretofore
made a return under the Revenue ct of 1928 for a fsca year ended
n 1932 and computed the ta on such return n accordance wth
the provsons of the Revenue ct of 1928 and not n accordance wth
the provsons of the Revenue ct of 1932 (or n the case of a partner-
shp whch has made such a return and computed the net ncome
thereon n accordance wth the provsons of the Revenue ct of
1928 and not n accordance wth the provsons of the Revenue ct
of 1932), sha make a new return on the approprate revsed form
under the Revenue ct of 1932 for such fsca year. Such new
return sha be made on or before October 15, 1932. If the ta
shown by the ta payer upon the new return e ceeds the ta shown
by the ta payer upon the return fed under the Revenue ct of
1928, such e cess sha be pad at the tme the new return s requred
to be made, uness the ta payer eects to pay the e cess n nsta-
ments, n whch event such nstaments w be due on the same
dates on whch the nstaments of the ta shown by the ta payer
upon the return made under the Revenue ct of 1928 woud be due
had the ta payer shown a ta upon such return and eected to pay
such ta n four equa nstaments. nstaments of the e -
cess ta due on or before the date such new return s requred to be
made sha be pad on or before that date.
ndvduas and partnershps havng an annua accountng
perod whch s a fsca year endng on or before une 30, and who
were not requred to make a return under the Revenue ct of 1928
for the fsca year 1932, but who are requred to make a return
for such fsca year under the Revenue ct of 1932, sha make
such return on the approprate revsed form on or before October
15, 1932. The ta shown to be due by the ta payer on such return,
n the case of an ndvdua, sha be pad at the tme the return s
requred to be made, uness the ta payer eects to pay the ta n
nstaments, n whch event a nstaments of the ta due on or
before October 15, 1932, sha be pad on or before that date.
Where the ta shown to be due on a return fed under the Revenue
ct of 1932 s pad as provded n ths Treasury decson, no nterest
w be coected on the ta so pad. If the ta s not so pad,
nterest w be coected at the rate of 1 per cent a month from the
date prescrbed n ths Treasury decson for ts pa|-nent unt t s
pad.
Davd urnet,
Commssoner of Interna Revenue.
pproved ugust 30, 1932.
. . a antne,
ctng Secretary of the Treasury.
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37
57, rt. 451
rtce 401: Tme for fng returns. I-42-5787
I. T. 2649
R NU CT O 1932.
In those cases where an Indvdua, a corporaton, or a partner-
shp, pror to the ssuance of the revsed forms prescrbed for
makng returns under the Revenue ct of 1932 for fsca years
endng n 1932, has made a return on the od form for such a
fsca year and computed thereon the net ncome and the ta n
accordance wth the Revenue ct of 1932, and such return contans
a the nformaton necessary for such computaton, a new return on
a revsed form Is not requred by Treasury Decson 4350 (see on
page 35).
It appears that returns have been fed by ta payers for fsca years
ended n 1932 whch were prepared on the od forms prescrbed
for the use of ta payers n makng ther returns under the Revenue
ct of 1928, and that n practcay a these cases the computaton
of both the ncome and the ta was made n accordance wth the
provsons of the Revenue ct of 1932. Inqury s made whether new
returns prepared on the revsed forms are requred to be fed by such
ta payers.
In those cases where an ndvdua, a corporaton, or a partnershp,
pror to the ssuance of the revsed forms prescrbed for the use or
such ta payers n makng returns under the Revenue ct of 1932
for fsca years endng n 1932, has made a return on the od form for
such a fsca year and computed the net ncome and the ta , f any,
on such return n accordance wth the provsons of the Revenue
ct of 1932, and such return contans a the nformaton necessary
to determne the net ncome and the ta , f any, under the Revenue
ct of 1932, a new return on a revsed form for such fsca year s
not requred by Treasury Decson 4350.
S CTION 55. PU LICITY O R TURNS.
rtce 421: Inspecton of returns.
R NU CT O 1932.
Reguatons governng the nspecton of returns. (See T. D. 4359,
page 305.)
S CTION 57. MIN TION O R TURN ND
D T RMIN TION O T .
rtce 451: amnaton of return and deter- I-33-5605
mnaton of ta by the Commssoner. Mm. 3965
amnaton of ncome ta returns Change In procedure.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, uy 15,1932.
Coectors of Interna Revenue and Interna Revenue gents n
Charge:
The Revenue ct of 1932, whch, among other thngs, owers the
e empton of ndvdua ncome ta payers, w resut n the fng of
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57, rt. 451.
38
numerous new returns on orm 1040 . The Revenue ct aso m-
poses many new msceaneous ta es, wth the resut that a greaty
ncreased number of msceaneous ta returns w aso be fed.
In vew of the addtona burdens paced upon the coectors nc-
dent to the recevng and recordng of these new returns and the n-
vestgatve work whch w be requred n connecton therewth, and
n vew of the necessty for economy n the empoyment of personne,
t s deemed essenta to reeve coectors offces of some of the work
they are now performng. Therefore, as a temporary emergency
measure, a orms 1040 w, unt further notce, be referred to the
offces of the nterna revenue agents n charge for e amnaton.
Coectors offces w contnue to perform the premnary e am-
naton n accordance wth the estabshed procedure, e cept that,
effectve mmedatey, the cassfcaton of 1040 returns nto those
whch coectors wsh returned and those whch are recommended for
acceptance w be dscontnued. egnnng wth the ncome ta
sts for the month of anuary, 1933, no segregaton of the 1040 or
1120 returns w be made on the bass of gross ncome.
Unt further notce the foowng rues w be observed by the
ureau n the audt of ncome ta returns:
1. orms 1040 w be audted by coectors of nterna
revenue.
2. orms 1040 showng a gross ncome n e cess of 25,000
w be forwarded by the ureau n Washngton to the approprate
nterna revenue agents n charge for e amnaton.
3. ta abe orms 1120 havng gross ncome n e cess of 75,000
and a nonta abe orms 1120 havng gross ncome n e cess of
125,000 w be forwarded by the ureau n Washngton to the
approprate nterna revenue agents n charge for e amnaton.
4. other 1040 and 1120 returns showng gross ncome ess than
that stated n paragraphs 2 and 3, above, w be gven a premnary
revew n Washngton for the purpose of determnng whether or
not a fed e amnaton s warranted.
5. The procedure for the handng of returns on orms 1041 and
1005 contaned n Mmeograph 3937 C. . I-1, 61 w reman
n effect.
number of orms 1040 for the ta abe year 1931, dscosng
gross ncome of 25,000 or ess, have aready been referred to coec-
tors of nterna revenue. Coectors havng n ther possesson such
returns for 1931, whch have not been cosed as the resut of a survey
or nvestgaton, are requested to transfer them to the approprate
pare cards ( orm 7935) ndcatng the transfer of these returns, but
a etter shoud be addressed to the ureau for the attenton of T: R
when the transfer of these returns s competed.
few 1040 returns for the ta abe year 1930, showng gross ncome
of 25,000 or ess, are st n coectors offces undergong the process
of audt or nvestgaton. Coectors shoud make t a pont to
prompty dspose of these few remanng returns. If the condton
of the work n coectors offces s such that they can not brng the
audt of these returns to a prompt concuson, the coectors are
authorzed to transfer these 1930 returns to the approprate nterna
revenue agents n charge. Ths s a matter that s eft to the dscre-
It w not be necessary to pre-
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39
103, rt. 527.
ton of the coectors. In the event that t s necessary to transfer
these returns to the nterna revenue agents n charge, t s requested
that such acton be taken prompty n order that there may be ampe
tme to cose the cases we n advance of the runnng of the statute
of mtatons. Cards ( orm 7935) shoud be prepared for a trans-
fers of 1930 returns to nterna revenue agents n charge.
Prevous nstructons nconsstent wth the foregong are hereby
revoked.
Correspondence from coectors n regard to the procedure outned
heren shoud refer to the number of ths mmeograph and to the
symbos C. Correspondence from nterna revenue agents n
charge reatve to ths procedure shoud refer to the number of ths
mmeograph and to the symbos IT: : CW.
Da t|knet, Commssoner.
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
S CTION 101. C PIT L N T G INS
ND LOSS S.
rtce 501: Defnton and ustraton of I-50-5913
capta net gan. I. T. 2661
R NU CT O 1932.
The gan reazed from the surrender of a combned annuty and
fe nsurance contract hed for more than two years may not be
treated as capta gan and ta ed fnder secton 101 of the Revenue
ct of 1932. but must be treated as ordnary ncome.
S CTION 103. MPTIONS ROM T
ON CORPOR TIONS.
rtce 527: Regous, chartabe, scentfc, I-45-5835
terary, and educatona organzatons and I. T. 2654
communty chests.
( so Secton 23, rtce 261.)
R NU CTS O 1926, 1928, ND 1932.
Where an organzaton, the purposes of whch are to serve a cty
and county as a nonpartsan scentfc agency of ctzens nqures
for the promoton of better government, etc., engages n makng re-
search and pubshng the resuts of such nvestgaton for the bene-
ft of the State and county, t s e empt under secton 103(6) of
the Revenue ct of 1932 and the correspondng provsons of pror
Revenue cts. Contrbutons made to t by ndvduas are de-
ductbe n the manner and to the e tent provded n secton 23(n)
of the Revenue ct of 1932 and the correspondng provsons of
pror Revenue cts.
160903 38 4
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5105, rt. 551.
40
rung s requested reatve to the status of the M organzaton
for edera ncome ta purposes.
The organzaton was ncorporated as a membershp corporaton
n 1927 under the aws of the State of . Its purposes are to serve
the cty of Y and county of Z, State of , as a nonpartsan scentfc
agency of ctzens nqures for the promoton of better government,
etc. It s actuay engaged n makng research and pubshng the
resuts of such nvestgaton for the beneft of the State and county.
The ncome s derved from contrbutons by members and s e -
pended soey n carryng out the purposes of adng the cty of Y
and county of Z. No part of the ncome nures to the beneft of any
prvate sharehoder or ndvdua.
In vew of the foregong, t s hed that the organzaton comes
wthn the e emptng provsons of secton 103(6) of the Revenue
ct of 1932 and the correspondng provsons of pror Revenue cts.
It w, accordngy, be reeved of the duty of fng returns of an-
nua ncome so ong as ts purposes and actua actvtes reman un-
changed. ny changes, however, n ts purposes or actua actvtes
must be reported mmedatey to the coector of nterna revenue
for ts dstrct n order that the effect of such changes upon ts pres-
ent e empt status may be determned.
The e empton referred to n ths etter does not appy to ta es
eved under other ttes or provsons of the Revenue ct of 1932 and
the correspondng provsons of pror Revenue cts, e cept n so
far as the e empton s e pressy granted under those provsons to
corporatons enumerated n secton 103 of the Revenue ct of 1932
and the correspondng provsons of pror Revenue cts.
Snce t s organzed and operated e cusvey for one or more of
the purposes enumerated n secton 103(6) of the Revenue ct of
1932, t foows that contrbutons m ue to t by ndvduas are de-
ductbe for edera ncome ta purposes n the manner and to the
e tent provded n secton 23 (n) of the Revenue ct of 1932 and the
correspondng provsons of pror Revenue cts.
S CTION 105. T L P tOD M R CING
Y RS WIT DI R NT L WS.
rtce 551: sca years endng n 1932.
R NU CT O 1932.
Computaton of ta abty for fsca year begnnng n 1931 and
endng n 1932 where net osses were sustaned for the fsca years
1930 and 1931. (See I. T. 2652, page 45.)
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41
113, rt. 698|
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 113. D UST D SIS OR D T RMINING
G IN OR LOSS.
Under the facts n the nstant case the bass for determnng
gan or oss and deprecaton of the transferred propertes and
assets n the hands of the transferee corporaton s hed to be the
same as the bass such propertes and assets had n the hands of the
transferor corporaton, propery ad|usted to the date of transfer as
requred by secton 113(b)2 of the Revenue ct of 1932.
dvce s requested reatve to the bass for determnng gan or oss
and deprecaton for the year 1932 and subsequent years, of the
propertes and assets acqured by the M Company on October 1,1928,
from the N Company under the foowng crcumstances:
The transacton orgnated wth the proposa made on uy ,
1928, by the M Company, the name of whch was ater changed to
the 0 Company and whch s heren referred to for convenence aa
the transferee corporaton. Such proposa was made to the N Com-
pany, whch s heren referred to as the transferor corporaton, and
was for the acquston by the transferee corporaton of the entre
propertes and assets, ncudng good w of the transferor corpora-
ton. The proposa s shown to nave been accepted at a meetng of
the stockhoders of the transferor corporaton on September , 1928.
The transfer of such propertes and assets was made on October 1,
The transferor corporaton at the tme of enterng nto the trans-
acton had outstandng 3y shares of common stock and 1.2y shares of
cumuatve preferred stock. Of such amount of common stock 1.53y
shares were hed at the tme by the transferee corporaton, eavng
-47y shares hed by other stockhoders. The preferred stock was
redeemabe at a prce of a share, pus accumuated unpad dv-
dends. The transferee corporaton, n addton to preferred stock,
had outstandng at the tme 14.40 / shares of common stock.
s a part of the pan the preferred stock of the transferor corpora-
ton was redeemed or retred at the prce above specfed, and for
that purpose cash was supped by the transferee corporaton n the
amount of 3.87a doars. s addtona consderaton for such trans-
fer of propertes and assets the transferee corporaton surrendered
for canceaton the common stock hed by t n the transferor cor-
poraton, and n addton thereto t ssued .3675 / shares of ts own
common stock to the transferor corporaton to be e changed for the
remanng outstandng common stock of the atter on the bass of 1
share for 4.
rtce 598: Property acqured n reorgan-
zaton after December 31, 1917.
I-50-5914
I. T. 2662
R NU CT O 1932.
1928.
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113, rt. 598.
42
The propertes and assets n queston were carred at the tme on the
books of the transferor corporaton at a combned or aggregate bass
on whch to compute gan or oss and deprecaton of 4.26a doars.
s measured by the amount of the consderaton, ncudng the amount
n cash pus the market vaue of the stock nvoved, the vaue of
such propertes and assets s shown to have been f ed at 6.82a do-
ars. The queston nvoved s whether, under the crcumstances, the
transferee corporaton s entted to use the greater amount as the
combned or aggregate bass on whch to compute gan or oss and
deprecaton of the propertes and assets so acqured for the year
1932 and subsequent years, or whether t s mted to the bass of
4.26a doars whch the propertes and assets had at the tme n the
hands of the transferor corporaton.
It s hed that, as the transferee corporaton acqured a the prop-
ertes and assets of the transferor corporaton, the transacton con-
sttuted a reorganzaton wthn the meanng of secton 112()( )
of the Revenue ct of 1932, such provson beng the same as the cor-
respondng provson of the Revenue ct of 1928. The propertes
and assets havng been acqured n connecton wth a reorganzaton
after December 31, 1917, the queston reatve to the bass for deter-
mnng gan or oss and deprecaton n the hands of the transferee
corporaton for the year 1932 and subsequent years nvoves the
appcabty of secton 113 (a)7 of the Revenue ct of 1932 readng
as foows:
Sec. 113. d|usted ass for Determnng Gan or Loss.
(a) asn (unad|usted) of property. The bass of property sha be the cost
of such property e cept that

(7) Transfers to corporaton where contro of property remans n same
persons. If the property was acqured after December 31, 1917, by a corpora-
ton n connecton wth a reorganzaton, and mmedatey after the transfer
an nterest or contro n such property of 50 per centum or more remaned n
the same persons or any of them, then the bass sha be the same as t woud
be n the hands of the transferor, ncreased n the amount of gan or decreased
n the amount of oss recognzed to the transferor upon such transfer under
the aw appcabe to the year n whch the transfer was made. Ths para-
graph sha not appy f the property acqured conssts of stock or securtes n
a corporaton a party to the reorganzaton, uness acqured by the ssuance of
stock or securtes of the transferee as the consderaton n whoe or n part
for the transfer.
The answer to the queston presented as apped to 1932 and sub-
sequent years, therefore, depends upon whether an nter-
est or contro n such property of 50 per centum or more remaned n
the same persons or any of them .
The correspondng provson of the Revenue ct of 1926 s con-
taned n secton 204(a)7 of that ct and, so far as s here matera,
s the same as the above-quoted provson of the Revenue ct of
1932, e cept that the mtaton provded n secton 204(a) 7 of the
Revenue ct of 1926 was appcabe ony n case an nterest or
contro of 80 per centum or more remaned n the same persons
or any of them. The meanng of the words nterest or contro n
such connecton s set out at ength n Genera Counse s Memoran-
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43
113, rt. 605.
dum 7472 (C. . I -1,184), and the same meanng s, of course, ap-
pcabe n the nstant case wth the e cepton, or dfference, as to
the percentage of such nterest or contro.
The nterests of the mnorty hoders of the common stock of the
transferor corporaton n the transferred propertes contnued after
the transfer by reason of ther becomng stockhoders n the trans-
feree corporaton pursuant to the reorganzaton pan. The nterest
of the hoder of the ma|orty of the common stock of the transferor
corporaton (the M Company) n the transferred propertes obvousy
contnued after the transfer, snce t then owned such propertes
outrght. The nterest of the preferred stockhoders of the trans-
feror corporaton had pror to the transfer been shfted from the
transferred propertes by reason of that porton of the reorganza-
ton pan whch provded for the retrement of the preferred stock
for cash otherwse stated, upon the acceptance by the transferor
corporaton and ts common stockhoders of the reorganzaton pan
offered by the transferee corporaton, the rght to receve n cash
per share pus unpad dvdends to uy 1, 1928, mmedatey
accrued to the preferred stockhoders, and they no onger retaned
ther stockhoders nterest n the transferred propertes. The pre-
ferred stockhoders, mmedatey upon the acceptance and adopton
of the pan, n effect became credtors of the transferor corporaton
hodng a preferred cam n and to the cash consderaton. Ths
vew s supported by the fact that n the pan of reorganzaton
addressed to the stockhoders of the transferor corporaton on Sep-
tember 1, 1928, the preferred stockhoders were nformed of the pro-
posed redempton of ther stock under the pan and were advsed that
they were not entted to vote reatve thereto. It foows, therefore,
that the nterest of the common stockhoders n the transferred prop-
ertes pror to the transfer was compete to the e tent of 100 per cent,
and that such nterest remaned n the same persons mmedatey after
the transfer to the e tent of 100 per cent, wthn the meanng of
nterest as set forth n, and wthn the scope of the rung con-
taned n, Genera Counse s Memorandum 7472, supra, pages 191,
192, and 193.
ccordngy, n the nstant case the bass for determnng gan or
oss and deprecaton of the transferred propertes and assets n the
hands of the transferee corporaton s hed to be the same as the
bass such propertes and assets had n the hands of the transferor
corporaton, propery ad|usted to the date of transfer as requred by
secton 113(b)2 of the evenue ct of 1932.
rtce 605: d|usted bass for determnng I-51-5932
gan or oss. I. T. 2664
R NU CT O 1932.
The term carryng charges as used n secton 113(b) 1( ) of
the Revenue ct of 1932 ncudes nterest on unmproved and unpro-
ductve rea property.
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116. rt. 643.
44
S CTION 115. DISTRI UTION Y
CORPOR TIONS.
rtce 621: Dvdends.
R NU CT O 1932.
Dvdend receved under empoyees stock purchase pan. (See
I. T. 2657, page 55.)
S CTION 116. CLUSIONS ROM GROSS
INCOM .
rtce 643: Compensaton of State offcers I-38-5697
and empoyees. I. T. 2642
R NU CT O 1932.
Where a State or a potca subdvson thereof conducts a
hospta n such manner as to compete wth the busness of operat-
ng hosptas as carred on by prvate persons that s, by takng
a casses of patents regardess of ther fnanca condton and
requrng a patents abe to do so to pay for the care and treat-
ment receved by them the State or potca subdvson w be
regarded as performng a propretary functon. Where, however,
a State or potca subdvson conducts a hospta for the beneft
of the ndgent sck and paupers, t w be regarded as performng
an essenta governmenta functon. The compensaton receved
by offcers and empoyees of a hospta conducted by a State or a
potca subdvson thereof In ts propretary capacty s sub|ect
to edera ncome ta .
rung s requested concernng the ta abe status of the com-
pensaton receved by offcers and empoyees of a genera hospta
operated by a State or a potca subdvson thereof.
or 1925 and subsequent years there s no statutory e empton for
compensaton pad to offcers or empoyees of a State for servces ren-
dered to a State. Such e empton as e sts resuts from the mped
consttutona nhbton aganst the nterference by the edera Gov-
ernment wth the means and nstrumentates empoyed by a State
fovernment n the e ercse of an essenta governmenta functon,
he Treasury Department has recognzed the mped consttutona
e empton by provdng, n the reguatons appcabe to the varous
Revenue cts coverng the years referred to above, that compensaton
pad to ts offcers and empoyees by a State or potca subdvson
thereof for servces rendered n connecton wth the e ercse of an
essenta governmenta functon s not ta abe. Such reguatons
further provde that compensaton receved for servces rendered
to a State or potca subdvson thereof s ncuded n gross ncome
uness (a) the person receves such compensaton as an offcer or
empoyee of a State or potca subdvson and (b) the servces are
rendered n connecton wth the e ercse of an essenta governmenta
functon.
In I. T. 2357 (C. . I-1, 52) the ureau of Interna Revenue
rued that the operaton by a county of a hospta n whch a pa-
tents, e cept such as were found to be ndgent and entted to free
care and treatment, were requred to pay the board of trustees rea-
sonabe compensaton for care and treatment consttuted the e ercse
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45
5117, rt. 654|
of a propretary rather than a governmenta functon, and that the
compensaton of offcers and empoyees of such hosptas was not
e empt from ncome ta aton. On the other hand, the ureau has
recognzed that a hospta operated by a State or a potca subd-
vson thereof soey for the beneft of ndgent persons, wthout the
pa3 nent by such persons of anythng for ther care and treatment,
fe wthn the term essenta governmenta functon as used n
the reguatons, and that compensaton receved by offcers and em-
poyees of such hospta for servces rendered thereto was e empt
from edera ncome ta . In a very recent rung the ureau hed
that the compensaton of empoyees of a hospta operated by a
county under the State aw n whch ony the ndgent sck and
paupers were admtted as patents, ony a sma percentage of the
patents payng not n e cess of ther actua e penses and the ba-
ance payng nothng, was e empt, upon the theory that the care of
the ndgent sck and dependent poor consttuted the e ercse of an
essenta governmenta functon. (See G. C. M. 10814, page 113, ths
uetn.)
The genera rue of the ureau reatve to hosptas s that where
a State or a potca subdvson thereof conducts a hospta n such
manner as to compete wth the busness of operatng hosptas as car-
red on by prvate persons that s, by takng a casses of patents
regardess of ther fnanca condton and requrng a patents
abe to do so to pay for the care and treatment receved by them
the State or potca subdvson w be regarded as performng a
propretary functon, whereas when the State or potca subdvson
conducts a hospta soey for the beneft of the ndgent sck and
paupers t w be regarded as performng an essenta governmenta
functon.
The compensaton receved by offcers and empoyees of a hospta
conducted by a State or a potca subdvson thereof n ts propre-
tary capacty s sub|ect to edera ncome ta .
S CTION 117. N T LOSS S.
btce 654: Net oss for ta abe year 1931 T44-5818
and for the fsca year 1932. I. T. 2652
( so Secton 105, rtce 551.)
R NU CT O 1032.
Computaton of ta abty for the fsca year endng une SO,
1932, where the ta payer sustaned net osses for the fsca years
endng une 30, 1930, and une 30, 1931.
dvce s requested reatve to the deductbty n a edera n-
come ta return for a fsca year endng n 1932 of net osses sus-
taned for the ta abe years 1930 and 1931.
In the case submtted the ta payer had a net ncome of 12,000
(wthout deductng net osses) for the fsca vear ended une 30,
1932, a net oss of 5,000 for the fsca year ended une 30, 1931,
and a net oss of 10,000 for the fsca year ended une SO, 1930.
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8117, rt. 654.
46
The ony queston presented reates to the e tent to whch the
net osses for 1930 and 1931 mav be deducted n the return of the
ta payer for the fsca year ended une 30, 1932.
Secton 117(a)6 of the Revenue ct of 1932 provdes as foows:
(a) Defnton of net oss. s used n ths secton the term net oss
means the e cess of the deductons aowed by ths tte over the gross ncome,
wth the foowng e ceptons and mtatons:

(6) Net oss not to produce net oss. In computng the net oss for any ta -
abe year a net oss for a pror year sha not be aowed as a deducton.
n dentca provson s contaned n secton 117 (a)6 of the Rev-
enue ct of 1928. Secton 117(d) of the Revenue ct of 1932 reads
as foows:
(d) Net osses for 1930 or 1981. If for the ta abe year 1930 a ta payer
sustaned a net oss wthn the provsons of the Revenue ct of 1928, the
amount of such net oss sha not be aowed as a deducton n computng net
ncome under ths tte. If for the ta abe year 1931 a ta payer sustaned a net
oss wthn the provsons of the Revenue ct of 1928, the amount of such net
oss sha be aowed as a deducton n computng net ncome for the ta abe
year 1932 to the same e tent and n the same manner as a net oss sustaned
for one ta abe year Is, under ths ct, aowed as a deducton for the suc-
ceedng ta abe year.
Secton 117(b) of the Revenue ct of 1932 provdes n part as
foows:
(b) Net oss as a deducton. If, for any ta abe year, t appears upon the
producton of evdence satsfactory to the Commssoner that any ta payer has
sustaned a net oss, the amount thereof sha be aowed as a deducton n com-
putng the net ncome of the ta payer for the succeedng ta abe year (here-
nafter n ths secton caed second year ) .
Secton 117(b) of the Revenue ct of 1928 provdes n part as
foows:
(b) Net oss as a deducton. If, for any ta abe year, t appears upon the
producton of evdence satsfactory to the Commssoner that any ta payer has
sustaned a net oss, the amount thereof sha he aowed as a deducton n
computng the net ncome of the ta payer for the succeedng ta abe year
(herenafter n ths secton caed second year ), and f such net oss s n
e cess of such net ncome (computed wthout such deducton), the amount of
such e cess sha be aowed as a deducton n computng the net ncome for the
ne t succeedng ta abe year (herenafter n ths secton caed thrd
year )
Secton 105 of the Revenue ct of 1932 provdes as foows:
Sec. 105. Ta abe perod embracng years tcth dfferent aws.
If t s necessary to compute the ta for a perod begnnng n one caendar
year (herenafter n ths secton caed frst caendar year ) and endng n
the foowng caendar year (herenafter n ths secton caed second caendar
year ) and the aw appcabe to the second caendar year s dfferent from
the aw appcabe to the frst caendar year, then the ta under ths tte for
the perod endng durng the second caendar year sha be n the sum of:
(1) the same proporton of a ta for the entre perod, determned under the
aw appcabe to the frst caendar year and at the rates for such year,
whch the porton of such perod fang wthn the frst caendar year s of
the entre perod and (2) the same proporton of a ta for the entre perod,
determned under the aw appcabe to the second caendar year and at the
rates for such year, whch the porton of such perod fang wthn the second
caendar year Is of the entre perod.
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47
141, rt. 71U
The ta for any fsca year begnnng n 1931 and endng n 1932
s to be computed under secton 105 of the Revenue ct of 1932, and
as so computed s the sum of the foowng:
(a) The ta attrbutabe to the caendar year 1931, found by com-
putng the ta upon the ncome of the ta payer for the fsca year
under the provsons of the Revenue ct of 1928, and by takng the
proporton of such ta whch the porton of the perod fang wthn
the caendar year 1931 s of the entre perod
(b) The ta attrbutabe to the caendar year 1932, found by
computng the ta upon the ncome of the ta payer for the fsca
year under the provsons of the Revenue ct of 1932, and by takng
the proporton of such ta whch the porton of the perod fang
wthn the caendar year 1932 s of the entre perod.
In the nstant case, the ta payer may, n computng the ta attrb-
utabe to the caendar year 1931, deduct both the net oss of
10,000 sustaned for the fsca year ended une 30, 1930, and the
net oss of 5,000 sustaned for the fsca year ended une 30, 1931.
In computng the ta attrbutabe to the caendar year 1932, the
ta payer may deduct ony the net oss of 5,000 sustaned for the
fsca year ended une 30, 1931.
In computng the ta attrbutabe to the caendar year 1931,
secton 105 of the Revenue ct of 1932 s to be consdered n the
nature of an e cepton to the rue stated n secton 117(d) of that
ct. On the bass of the computaton under secton 105, the ta -
payer dd not have a statutory net oss for the fsca year ended
une 30, 1932.
SUPPL M NT D. R TURNS ND P YM NT O T .
S CTION 141. CONSOLID T D R TURNS O
CORPOR TIONS.
rtce 711: Consodated returns of affated I-35-5634
corporatons for 1932 and subsequent ta abe I. T. 2639
years.
R NU CT O 1932.
Instructons reatve to the makng of separate or consodated
returns by an affated group for the ta abe year 1932 and sub-
sequent ta abe years.
Inqury s made reatve to the makng of edera ncome ta
returns by the M Corporaton and the corporatons wth whch t s
affated, the entre group havng a fsca year ended pr 30, 1932.
n e tenson of tme has been granted by the coector of nterna
revenue wthn whch to fe such returns. The foowng questons
are presented:
(1) Whether for the ta abe year 1932 and each subsequent ta -
abe year the affated group has the opton under the Revenue ct
of 1932 of makng separate returns or a consodated return.
(2) Whether by reason of havng propery made a consodated
return under the Revenue ct of 1928 for the fsca year ended
pr 30, 1931, the affated group s requred to make a consodated
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141, rt. 711.
48
return under the Revenue ct of 1928 for the fsca year ended
pr 30, 1932, compute the ta thereon at the rate of 12 per cent
and pay 8/12ths of the ta so computed, and, n addton, to make
a consodated return under the Revenue ct of 1932 for the fsca
year ended pr 30, 1932, compute the ta on such return at the
rate of 14 - per cent and pay 4/12ths of the ta so computed, or to
make separate returns under the Revenue ct of 1932 for such fsca
year, compute the ta on the returns at the rate of 13 per cent
and pay 4/12ths of the ta so computed n addton to 8/12ths of
the ta shown on the consodated return under the Revenue ct of
1928.
(3) Whether n makng a return under the Revenue ct of 1932
for the fsca year ended pr 30, 1932, the ncome of the M Cor-
poraton for the entre fsca year may be segregated and the actua
ncome for the eght months ended December 31, 1931, ta ed at the
rates for the caendar year 1931, and the actua ncome for the four
months ended pr 30, 1932, ta ed at the rates for the caendar
year 1932.
The three questons presented are so cosey reated that they w
be consdered together. It may be sad at the outset that the entre
ta for any hsca year ended n 1932 s mposed by the Revenue ct
of 1932. Therefore, the affated group s requred under the
Revenue ct of 1932, rrespectve of whether a consodated return
was made under the Revenue ct of 1928 for the fsca year ended
pr 30, 1931, to make ether separate returns or a consodated
return for the entre fsca year ended pr 30, 1932. Whether
separate returns or a consodated return s made for such fsca year,
- the ta can not be computed upon the bass of segregatng the n-
come as suggested (. e., on the bass of the actua ncome earned
durng the porton of each caendar year), but must be computed as
provded n secton 105 of the Revenue ct of 1932. s so computed,
the ta for the ta abe year 1932 s the sum of the foowng:
(a) The ta attrbutabe to the caendar year 1931, found by com-
putng the ta upon the ncome for the entre fsca year ended pr
30, 1932, under the provsons of the Revenue ct of 1928. and by
takng the proporton of such ta whch the porton of the perod
fang wthn the caendar year 1931 s of the entre perod
(b) The ta attrbutabe to the caendar year 1932, found by
computng the ta upon the ncome for the entre fsca year ended
pr 30, 1932, under the provsons of the Revenue ct of 1932, and
by takng the proporton of such ta whch the porton of the perod
fang wthn the caendar year 1932 s of the entre perod.
If separate returns are made for the fsca year ended pr 30,
1932, the affated group may contnue to make separate returns for
succeedng ta abe years. If a consodated return s made for such
fsca year pror to the promugaton of the reguatons under sec-
ton 141(b) of the Revenue ct of 1932, such return w be con-
sdered as consttutng a consent to the provsons of Reguatons
75, n so far as not nconsstent wth the Revenue ct of 1932, and
thereafter nether separate returns nor a consodated return con-
sentng to the reguatons to be promugated under secton 141(b)
of the Revenue ct of 1932 may be made for such fsca year. or
subsequent ta abe years, however, each of the affated corporatons
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49
5143, rt. 761
must make a separate return uness the affated group makes a con-
sodated return consentng to the provsons of the reguatons to be
promugated under secton 141(b) of the Revenue ct of 1932.
If a consodated return s made for the fsca year ended pr
30, 1932, or any subsequent ta abe year after the promugaton of
the reguatons under secton 141(b) of the Revenue ct of 1932,
a consodated return must be made for each subsequent ta abe
year durng whch the affated group remans n e stence uness
(1) a corporaton (other than a corporaton created or organzed,
drecty or ndrecty, by a member of the affated group) has be-
come a member of the group durng such subsequent ta abe year,
or (2) one or more provsons of such reguatons, whch have
prevousy been consented to, have been amended, or (3) the Com-
mssoner, pror to the tme of makng the return, upon appcaton
made by the common parent corporaton and for good cause shown,
grants permsson to change.
S CTION 143. WIT OLDING O T T
SOURC .
rtce 761: Wthhodng ta at source. I 32-5591
( so Secton 144, rtce 781.) Mm. 3967
Wthhodng under the Revenue ct of 1932.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, uy 25, 1982.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
Wthhodng gents, and Others Concerned:
The Revenue ct of 1932 was approved by the Presdent at 5 p. m.,
eastern standard tme, une 6, 1932. The foowng provsons pro-
vde for the wthhodng of ta at the source:
S CTION 143.
(a) Ta - ree Covenant onds.
(1) Requrement of wthhodng. In any case where bonds, mortgages, or
deeds of trust, or other smar obgatons of a corporaton contan a contract
or provson by whch the obgor agrees to pay any porton of the ta mposed
by ths tte upon the obgee, or to remburse the obgee for any porton of
the ta , or to pay the nterest wthout deducton for any ta whch the obgor
may be requred or permtted to pay thereon, or to retan therefrom under any
aw of the Unted States, the obgor sha deduct and wthhod a ta equa to
2 per centum of the nterest upon such bonds, mortgages, deeds of trust, or
other obgatons, whether such nterest s payabe annuay or at shorter or
onger perods, f payabe to an ndvdua, a partnershp, or a foregn corpora-
ton not engaged n trade or busness wthn the Unted States and not bas ng
any offce or pace of busness theren: Provded, That f the abty assumed
by the obgor does not e ceed 2 per centum of the nterest, then the deduc-
ton and wthhodng sha be at the foowng rates: ( ) 8 per centum n the
case of a nonresdent aen ndvdua, or of any partnershp not engaged n
trade or busness wthn the Unted States and not havng any offce or pace
of busness theren and composed n whoe or n part of nonresdent aens,
( ) 13 per centum n the case of such a foregn corporaton, and (C) 2 per
centum n the case of other ndvduas and partnershps: Provded further.
That f the owners of suc obgatons are not known to the wthodng agent
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143, rt. 761.1
50
the Commssoner may authorze such deducton and wthhodng to be at the
rate of 2 per centum, or, f the abty assumed by the obgor does not
e ceed 2 per centum of the nterest, then at the rate of 8 per centum.
(2) eneft of credts aganst net ncome. Such deducton and wthhodng
sha not be requred In the case of a ctzen or resdent entted to receve
such nterest, f he fes wth the wthhodng agent on or before ebruary 1 a
sgned notce n wrtng camng the beneft of the credts provded n secton
25 (e) and (d) nor n the case of a nonresdent aen ndvdua f so pro-
vded for n reguatons prescrbed by the Commssoner under secton 215.
(3) Income of obyor and oht|ee. The obgor sha not be aowed a de-
ducton for the payment of the ta mposed by ths tte, or any other ta
pad pursuant to the ta -free covenant cause, nor sha such ta be Incuded
n the gross ncome of the obgee.
(b) Nonresdent aens. persons, n whatever capacty actng, ncudng
essees or mortgagors of rea or persona property, fducares, empoyers, and
a offcers and empoyees of the Unted States, havng the contro, recept,
custody, dsposa, or payment of nterest (e cept nterest on deposts wth
persons carryng on the bankng busness pad to persons not engaged n
busness n the Unted States and not havng an offce or pace of busness
theren), rent, saares, wages, premums, annutes, compensatons, remunera-
tons, emouments, or other f ed or determnabe annua or perodca gans,
profts, and ncome, of any nonresdent aen ndvdua, or of any partnershp
not engaged n trade or busness wthn the Unted States and not havng any
offce or pace of busness theren and composed n whoe or n part of non-
resdent aens (other than ncome receved as dvdends of the cass aowed
as a credt by secton 25(a)), sha (e cept n the cases provded for a
subsecton (a) of ths secton and e cept as otherwse provded n reguatons
prescrbed by the Commssoner under secton 215) deduct and wthhod from
such annua or perodca gans, profts, and ncome a ta equa to 8 per
centum thereof: Provded, That the Commssoner may authorze such ta to
be deducted and wthhed from the nterest upon any securtes the owners of
whch are not known to the wthhodng agent.
(c) Return and payment. very person requred to deduct and wthhod
any ta under ths secton sha make return thereof on or before March 15
of each year and sha on or before une 15, n eu of the tme prescrbed
n secton 56, pay the ta to the offca of the Unted States Government
authorzed to receve t. very such person s hereby made abe for such
ta and s hereby Indemnfed aganst the cams and demands of any person
for the amount of any payments made n accordance wth the provsons of
ths secton.
(d) Income of recpent. Income upon whch any ta Is requred to be
wthhed at the source under ths secton sha be ncuded n the return of the
recpent of such ncome, but any amount of ta so wthhed sha be credted
aganst the amount of Income ta as computed n such return.
(e) Ta pad by recpent. If any ta requred under ths secton to be
deducted and wthhed s pad by the recpent of the ncome, t sha not
be re-coected from the wthhodng agent nor n cases In whch the ta
Is so pad sha any penaty be mposed upon or coected from the re-
cpent of the ncome or the wthhodng agent for faure to return or pay
the same, uness such faure was frauduent and for the purpose of evadng
payment.
(f) Refunds and credts. Where there has been an overpayment of ta
under ths secton any refund or credt made under the provsons of secton
S22 sha be made to the wthhodng agent uness the amount of such tar
was actuay wthhed by the wthhodng agent.
(g) Notwthstandng the provsons of subsectons (a) and (b), the
deducton and wthhodng for any perod pror to the date of the enactment
of ths ct sha be at the rates of 12 per centum and 5 per centum n
eu of the rates of 13 per centum and 8 per centum prescrbed n such
subsectons.
S CTION 144.
In the case of foregn corporatons sub|ect to ta aton under ths tte
not engaged n trade or busness wthn the Unted States and not havng any
offce or pace of busness theren, there sha be deducted and wthhed
at the source n the same manner and upon the same tems of Income as to
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51
5143, rt. 761.
provded n secton 148 a ta equa to 12 per centum thereof In respect of
a payments of ncome made before the enactment of ths ct, and equa
to 13 per centum thereof n respect of a payments of ncome made after
the enactment of ths ct, and such ta sha be returned and pad n the
same manner and sub|ect to the same condtons as provded n that secton:
Provded, That n the case of nterest descrbed n subsecton (a) of that
secton (reatng to ta -free covenant bonds) the deducton and wthhodng
sha be at the rate specfed n such subsecton.
The foowng tabe shows the rates of wthhodng of ta at the
source appcabe to ncome payments made after 5 p. m., eastern
standard tme, une 6, 1932, the effectve date of the Revenue ct
of 1932:
Interest on bonds and smar obgatons of corporatons contanng a ta -free
covenant.
Ta payer.
Type of nterest.
Rate.
Percent.
2
Ctzen or resdent of the Unted States.
Interest on corporate bonds contanng a ta -free
covenant n whch the aoty assumed by the
Do
obgor e ceeds 2 per rent.
Interest on corporate bonds contanng a ta -free
a
covenant n whch the abty assumed by the
Nonresdent aen Indvdua
obgor does not e ceed 2 per cent.
Interest on corporate bonds contanng a ta -free

covenant In whch the abty assumed by the

Do -
obgor e ceeds 2 per cent.
Interest on corporate bonds contanng a ta -free
8
covenant n whch the abty assumed by the
partnershp not engaged n trade or bus-
ness wthn the Unted States and not
havng any offce or pace of busness there-
n, composed In whoe or n part of non-
resdent aens.
Do
obgor does not e ceed 2 per cent.
Interest on corporate bonds contanng a ta -free
I
covenant n whch the abty assumed by the
obgor e ceeds 2 per cent.
Interest on corporate bonds contanng a ta -free
8
covenant n whch the abty assumed by the
foregn corporaton not engaged In trade or
busness wthn the Unted States and not
havng any offce or pace of busness there-
obgor does not e ceed 2 per cent.
Interest on corporate bonds contanng a ta -free
1
covenant n whch the abty assumed by the
obgor e ceeds 2 per cent.
Do.
Interest on corporate bonds contanng a ta -free
13

covenant n whch the abty assumed by the
obgor does not e ceed 2 per cent.
Interest on corporate bonds contanng a ta -free
covenant n whch the abty assumed by the
Do._._
obgor e ceeds 2 per cent.
Interest on corporate bonds contanng a ta -free
8
covenant n whch the abty assumed by the
obgor does not e ceed 2 per cent.
ed or determnabe annua or perodca ncome from sources wthn the
Unted States (other than nterest on corporate bonds contanng a ta -free
covenant and dvdends of the cass aoocd as a credt by secton 25(a)),
ncudng compensaton for persona servces rendered wthn the Unted
States, royates, nterest on bonds of corporatons not contanng a ta -
free covenant, and nterest on bonds ssued by partnershps and ndvduas.
Ta payer.
Rate.
Tapayer.
Rate.
Per cent.
8
Per cent.
Nonresdent aen ndvdua
foregn corporaton not engaged n trade
or busness wthn Unted .States and
not havng any offce or pace of bus-
ness theren _ ...
partnershp not engaged n trade or
busness wthn Unted States and not
havnt any offce or pace of busness
13 4
8
theren. con |osed n whoe or n part
Unknown owner
8
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143, rt. 761.
52
Secton 211 of the ct provdes, n part, as foows:
(a) Genera rue. In the case of a nonresdent aen ndvdua who Is net
a resdent of a contguous country, the norma ta sha be 8 per centum of the
amount of the net ncome n e cess of the credts aganst net ncome aowed
to such ndvdua.
(b) ens resdent n contguous countres. In the case of an aen nd-
vdua resdent n a contguous country, the norma ta sha be an amount
equa to the sum of the foowng:
(1) 4 per centum of the amount by whch the part of the net Income
attrbutabe to wages, saares, professona fees, or other amounts receved as
compensaton for persona servces actuay performed In the Unted States,
e ceeds the persona e empton and credt for dependents but the amount
ta abe at such 4 per centum rate sha not e ceed 4,000 and
(2) 8 per centum of the amount of the net ncome n e cess of the sum of
( ) the amount ta ed under paragraph (1) of ths subsecton pus ( ) the
tota credts aganst net ncome aowed to such ndvdua.
Secton 216(b) provdes:
(b) Tu wthhed at source. The beneft of the persona e empton and
credt for dependents, and cf the reduced rate of ta provded for n secton
211(b), may, n the dscreton of the Commssoner and under reguatons
prescrbed by hm wth the approva of the Secretary, be receved by a non-
resdent aen ndvdua entted thereto, by fng a cam therefor wth the
wthhodng agent.
nonresdent aen ndvdua, a resdent of Canada or Me co,
who fes wth hs empoyer a cam ( orm 1115) n order to obtan
the beneft of the credts for persona e empton and dependents, as
we as the reduced rates of norma ta , w have ta wthhed at
the rate of 4 per cent from the frst 4,000 of the net ncome
attrbutabe to compensaton for persona servces actuay per-
formed n the Unted States n e cess of the persona e empton of
1,000 (aowabe under secton 214) and the credt of 400 for each
dependent (aowabe under sectons 214 and 25(d)). The amount
of such compensaton n e cess of the sum of (1) the amount ta ed
at 4 per cent and (2) the persona e empton and credt for depend-
ents w be sub|ect to wthhodng at the rate of 8 per cent. In the
case of compensaton pad pror to the enactment of the Revenue
ct of 1932 to a nonresdent aen ndvdua, a resdent of Canada or
Me co, who fed orm 1115 wth hs empoyer n order to obtan
the benefts of the reduced rates of norma ta provded n secton
211(b) of the Revenue ct of 1928, wthhodng of the ta was
requred at the rates of y per cent, 3 per cent, and 5 per cent,
nstead of the rates of 4 per cent and 8 per cent.
DI ID NDS.
No wthhodng from dvdends dstrbuted by a corporaton sub-
|ect to ta aton under Tte I of the ct s requred, e cept dvdends
treated as ncome from sources wthn the Unted States under sec-
ton 119 (a)2 ( ) of the ct and dstrbuted by a corporaton
organzed under the Chna Trade ct, 1922, to
(a) nonresdent aen ndvdua other than a resdent of Chna
at the tme of such dstrbuton
(b) nonresdent partnershp composed n whoe or n part of
nonresdent aens (other than a partnershp resdent n Chna)
(c) nonresdent foregn corporaton (other than a corporaton
resdent n Chna).
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53
143, rt. 761|
Ta at the foowng rates s requred to be wthhed from dv-
dends whch are ncome from sources wthn the Unted States ds-
trbuted by Chna Trade ct corporatons to persons not resdent
n Chna (such dvdends beng sub|ect to norma ta , as we as
to surta ) :
Tapayer.
Rate.
Ta payer.
Rate.
Per cent.
8
Pereenf,
13
Nonresdent aen ndvdua
foregn corporaton not engaged n trade
p rtnershp not engaged n trade or
busness wthn the Unted States and
not havng any offce or pace of bus-
ness theren, composed n whoe or In
part of nonresdent aens.
or busness wthn the Unted States
and not havng any offce or pace of
busness t hc e n
8
Dvdends dstrbuted by a corporaton not sub|ect to ta aton
under Tte I of the ct are sub|ect to wthhodng when such dv-
dends are treated as ncome from sources wthn the Unted States
as determned under secton 119 and dstrbuted to
(a) nonresdent aen ndvdua
(b) partnershp not engaged n trade or busness wthn the
Unted States and not havng any offce or pace of busness theren,
composed n whoe or n part of nonresdent aens or
(c) foregn corporaton not engaged n trade or busness wthn
the Unted States and not havng any offce or pace of busness
theren.
Ta at the foowng rates s requred to be wthhed from such
dvdends, snce they are sub|ect to norma ta as we as to surta :
Ta payer.
Rate.
Ta payer.
Rate.
Per cent.
8
Per cent,
13M
partnershp not engaged n trade or
busness wthn the Unted States and
not havng any offce or pace of busness
theren, composed n whoe or n part of
foregn corporaton not engaged n trade
or busness wthn the Unted Sutes
and not havng any offce or p.ce of
hnan( w theren
8
Wthhodng of the ta at the rates of 8 per cent and 13 per
cent, as set forth n the tabes contaned heren, s appcabe ony
to payments of ncome made after the enactment of the Revenue
ct of 1932, 5 p. m., eastern standard tme, une C, 1932. In the
case of payments of ncome made pror to the enactment of the
Revenue ct of 1932, wthhodng of the ta s at the rates of 5
per cent and 12 per cent (as provded n the Revenue ct of 1928)
n eu of the rates of 8 per cent and 13 per cent provded n the
Revenue ct of 1932. In the case of nterest on corporate bonds,
contanng a ta -free covenant, pad to a ctzen or resdent of the
Unted States, the rate of wthhodng s 2 per cent, whether such
nterest s pad before or after the enactment of the Revenue ct
of 1932.
Nonresdent aen ndvduas and foregn corporatons not en-
gaged n trade or busness wthn the Unted States and not havng
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5144, rt. 781.
54
any offce or pace of busness theren, are requred to fe, or cause
to be fed n ther behaf, ndvdua ncome ta returns, orm
1040 , and corporaton returns, orm 1120, respectvey, for the
year 1932, ncudng theren ther tota ncome from a sources
wthn the Unted States. The ta thereon shoud be computed
at the rates provded n sectons 211 and 12 n the case of nonres-
dent aen ndvduas and secton 13 n the case of corporatons,
whch are as foows:
In the case of a nonresdent aen ndvdua who s not a res-
dent of a contguous country, the norma ta s 8 per cent on the
amount of the net ncome n e cess of the credts aganst the net
ncome aowed to such ndvdua.
In the case of an aen ndvdua resdent n Canada or Me co,
the norma ta sha be an amount equa to the sum of the foowng:
(1) 4 per cent of the amount by whch the part of the net ncome
attrbutabe to wages, saares, professona fees, or other amounts
receved as compensaton for persona servces actuay performed
n the Unted States e ceeds the persona e empton and credt for
dependents, but the amount ta abe at such 4 per cent rates sha
not e ceed 4,000.
(2) 8 per cent of the amount of the net ncome n e cess of the
um of (a) the amount ta ed under (1), pus (b) he tota credts
aganst net ncome aowed to such ndvdua.
In the case of a nonresdent aen ndvdua, whether or not he s
a resdent of Canada or Me co, hs net ncome from sources wthn
the Unted States s sub|ect to the graduated surta provded n
secton 12, rangng from 1 per cent on net ncomes n e cess of
6,000 and not n e cess of 10,000, to 55 per cent on net ncomes
n e cess of 1,000,000.
In the case of a foregn corporaton, ts net ncome from sources
wthn the Unted States s sub|ect to ta at the rate of 13 per
cent.
orms 1000, 1001, and 1012 are beng revsed. orms 1000 and
1001, revsed anuary, 1929, and orm 1012, revsed March, 1931,
shoud be used unt the new forms are dstrbuted.
nqures concernng ths mmeograph etter shoud refer to
the number thereof and the symbos IT: : RR.
Davd urnet, Commssoner.
S CTION 144. P YM NT O CORPOR TION INCOM
T T SOURC .
rtce 781: Wthhodng n the case of nonresdent
foregn corporatons.
R NU CT O 1932.
Rates of ta appcabe. (See Mm. 3967, page 49.)
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55
105.
SUPPL M NT . ST T S ND TRUSTS.
S CTION 165. MPLOY S TRUSTS.
( so Secton 115, rtce 621.)
I-47-5867
I. T. 2657
R NU CT O 1032.
Under an empoyees stock purchase pan, the mere fact that
due to a shrnkage In vaue the stock s worth ess at the tme of
dstrbuton to the empoyee than the amount contrbuted by hm
toward ts purchase s not suffcent to estabsh a deductbe oss
for ncome ta purposes. ny amount aocated to the account
of the empoyee as a dvdend s ta abe to hm at surta rates
when the cash becomes avaabe to hm or sub|ect to hs order.
dvce s requested reatve to the second stock purchase pan of
te M Corporaton under whch dstrbuton was made to partcpants
as of September , 1932.
The provson of the Revenue ct of 1932 whch s appcabe
reads as foows:
Sec 166. mpoyees Trusts.
trust created by an empoyer as a part of a stock bonus, penson, or
proft-sharng pan for the e cusve beneft of some or a of hs empoyees,
to whch contrbutons are made by such empoyer, or empoyees, or both, for
the purpose of dstrbutng to such empoyees the earnngs and prncpa of the
fond accumuated by the trust n accordance wth such pan, sha not be ta abe
under secton 161, but the amount actuay dstrbuted or made avaabe to any
dstrbutee sha be ta abe to hm n the year n whch so dstrbuted or made
avaabe to the e tent that t e ceeds the amounts pad n by hm. Such
dstrbutees sha for the purpose of the norma ta be aowed as credts
aganst net Income such part of the amount so dstrbuted or made avaabe
as represents the tems of dvdends and nterest specfed n secton 25 (a)
and (b).
The foregong secton was commented upon n the report of the
Senate Commttee on nance (report No. 665, dated May 9, 1932,
page 33) as foows:
The ouse b retaned the provsons of e stng aw under whch an
empoyee who receves a dstrbuton from a trust created by an empoyer as
part of a stock bonus, penson, or proft-sharng pan s ta ed upon the amount
contrbuted to such fund by the empoyer pus a earnngs of such fund n the
year n whch dstrbuted or made avaabe to hm. In recent years stuatons
have arsen n whch the amount contrbuted to such fund by the empoyer
and a earnngs of such fund, together wth the amounts contrbuted to the
fund by the empoyees, have been nvested by the trustee n stock of the
empoyer corporaton, and at the tme of dstrbuton to the empoyee the
market vaue of the stock was ess than the amount contrbuted to the fund by
the empoyer pus the earnngs of the fund.
Your commttee beeves that t s a dstnct hardshp to an empoyee to be
ta ed under such crcumstances as the e stng aw requres, and corrects the
stuaton by amendng secton 165 to provde that ony the e cess of the
market vaue of the stock dstrbuted or made avaabe to the empoyee over
the amounts pad n by hm to the trust shoud be ta abe n the year of ds-
trbuton. Ths pan renders the empoyee ta abe at the tme of dstrbuton
upon the e cess of the far market vaue of the stock receved by hm over hs
contrbutons to the trust regardess of the amount contrbuted to the trust by
160903 33 5
S CTION 165. MPLOY S TRUSTS.
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165.
5G
the empoyer. In the case of cash dstrbutons, of course, the present rue Is
unchanged.
It woud appear, therefore, that n the case of a dstrbuton to
empoyees under a stock purchase pan that fas (as n the nstant
case) wthn the scope of ths secton of the Revenue ct of 1932,
the gan, f any, must be determned upon the bass of the far
market vaue of the stock receved by hm, the e cess of such far
market vaue over the amount of hs contrbutons to the trust beng
treated as gan to be ncuded n hs gross ncome. (See Schaefer v.
owers, 50 ed. (2d), 689, certorar dened 284 U. S., 668.)
In the nstant case the tota contrbutons of the empoyee amount
to 25a| doars. The contrbutons of the company amount to 12.5a
doars. Other amounts aocated to the account of the empoyee by
the company ncude dvdends, doars, and other earnngs. 2.5
doars. Thus, the tota amount contrbuted n the stock purchase
pan s 41a doars. The company proposes to dstrbute to the
empoyee as of September , 1932, 10 shares of stock havng a pres-
ent far market vaue of 2 doars a share and a ash dvdend of
doars. The empoyee, therefore, w receve shares of stock worth
20a doars, whch amount s 5 doars ess than the aggregate
amount of hs contrbutons, and n addton w receve a cash
dvdend of doars.
The questons presented are:
(1) Whether the empoyee has sustaned a deductbe oss of 5a
doars for the year 1932
(2) Whether the doars of dvdends sha be treated as dvdend
ncome rather than as a reducton of the oss ndcated
though secton 165, quoted above, s authorty for treatng as
ta abe gan to the empoyee for the year n whch the stock s ds-
trbuted, the amount by whch the far market vaue of stock receved
by the empoyee (under a stock purchase pan such as here nvoved)
e ceeds the amount of the empoyee s contrbuton, there s nothng
n the statute whch warrants treatng as a deductbe oss to the
empoyee the e cess of the amount of hs contrbutons over the far
market vaue of the stock when dstrbuted or made avaabe to
hm. deducton from gross ncome can be camed ony as author-
zed by statute. (See Pugh et aL v. Commssoner of Interna Reve-
nue, 49 ed. (2d), 76.) In the nstant case the shrnkage n vaue of
the stock occurred whe t was n the hands of the trustee, at whch
tme the empoyee hed nothng more than contngent equtabe tte.
Contngences mght arse under whch the empoyee woud never
receve the stock. The shrnkage n vaue pror to the transfer of
the stock to the empoyee has the effect of defeatng the purpose of
the pan, and eaves the empoyee as a purchaser of stock at a cost
of 25a: doars whch had a market vaue of ozy 20 doars. The
purchase of property at a prce greater than ts market vaue does
not resut n a deductbe oss for ncome ta purposes. (See M. .
cmers v. Commssoner, 5 . T. .. 198 Sehuman Pano Co. v.
Commssoner, 10 . T. ., 118 O. D. 851, C. . 4, 179 . R. R. 906,
C. . I 1, 143.) The stock here nvoved was acqured by the em-
poyee n a gong concern, and the mere fact that due to a shrnkage
n vaue the stock s worth ess at the tme of ts recept by the em-
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57
165.
poyee than the amount contrbuted by hm toward ts purchase s
not suffcent to estabsh a deductbe oss wthn the meanng of
the statute. (See dward . Sater v. Commssoner, 12 . T. .,
60, and cases cted theren aso, Whte Star Lne v. Commssoner,
20 . T. ., 111.)
It s, therefore, hed (1) that the empoyee has not sustaned a
deductbe oss durng the ta abe year wthn the meanng of secton
23(e) of the Revenue ct of 1932, reatng to osses by ndvduas
and (2) that the dvdend of doars s ta abe to hm at surta
rates as a dvdend when the cash becomes avaabe to hm or
sub|ect to hs order, n accordance wth sectons 22(d), 25(a), and
115(a) of the Revenue ct of 1932, reatng to dvdends.
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522(a), rt. 51. 58
INCOM T RULINGS. P RT IL
R NU CT O 1928.
SU TITL . G N R L PRO ISIONS.
P RT IL COMPUT TION O N T INCOM .
S CTION 22(a). GROSS INCOM : G N R L
D INITION.
rtce 51: What ncuded n gross ncome. I-33-5606
G. C. M. 10798
R NU ) CT O 1928.
mounts returned to pocyhoders by a mutua marne nsurance
company are to be treated for ncome ta purposes as rebates on
premums, e cept to the e tent they are pad out of earnngs
e cusve of premums. In case the premums have been charged
off by the nsured as a busness e pense, a rebate of any porton
thereof s consdered ncome.
n opnon s requested whether amounts pad to the pocyhoders
of a mutua marne nsurance company are to be treated by the
pocyhoders as dvdends (whch n case the nsured s a corporate
ta payer woud not be refected n ts net ncome), or are to be treated
as rebates on premums and returned as such for ncome ta purposes.
In dscussng the nature of the so-caed dvdend of a mutua fe
nsurance company the court, n the case of uer v. Metropotan
Lfe Insurance Co. of New York (70 Conn., 647, 41 t., 4), sad:
It the nsurer has a sum whch s not needed for the purpose for
whch t was pad. Ths sum s caed profts. It s n fact a surpus re-
sutng from overpayments by pocyhoders. Ths surpus s derved from
money pad by the Insured and receved by the company for a partcuar
purpose, . e., provdng for cost of nsurance and e pense of management. If
not needed for that purpose, t shoud, n equty, be returned to the pocy-
hoders. They do not, however, own t, or have any ega contro over ts
dstrbuton. I art of t, ndeed, s derved from contrbutons of pocyhoders
who are dead but the equty s recognzed, and t s the duty of the company,
when a surpus s ascertaned, to return such porton as t does not deem
proper to keep as a guaranty fund to the e stng pocyhoders n equtabe
(. e., as neary as practcabe) proporton to ther overmyments or contrbu-
tons. Such return of overpayments, whether n cash or by appcaton on
future premums, or by ncrease of the amount nsured, s a dvdend. Ths s
the meanng of dvdend, and the ony meanng t has or can have In connec-
ton wth mutua nsurance.
The opnon of the court n the case of the New York Lfe Insur-
ance Co. v. Styes (59 L. . . ., 291, L. R. 14 pp. Cas., 381) s to
the same effect. The foregong cases were cted, wth approva, bv
the edera Dstrct Court, New ersev, n the case of Mutua enet
Lfe Insurance Co. v. erod (198 ed., 199), n whch the court
sad:
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59
( 22(a), rt. 51.
The above cses furn sh n cear e poston of the nature and character of
the dvdends consdered n ths case. Not ony s ther reasonng nherenty
persuasve, but ther authorty s enhanced by the fact that there are no cou-
h-tng decsons, or at east none have been brought to the court s attenton.
ffrmed, crod v. Mutua eneft Lfe Insurance Co., 201 ed.,
918. cert, dened, 231 U. S.. 755.
It s true that n these cases the court had under consderaton the
nature of the so-caed dvdend pad by fe nsurance companes.
owever, n the case of the Perm Mutua Lfe Insurance Co. v.
Lederer (252 U. S., 523, T. I). 3046, C. . 3, 249), the Supreme Court
sad:
In a mutua company, whatever the fed of ts operaton, the
premum e acted s necessary greater than the e pected cost of the nsurance,
as the redundancy n the premum furnshes the guaranty fund out of whch
e traordnary osses may be met, whe n a stock company they may be met from
the capta stock subscrbed. It s of the essence of mutua nsurance that the
e cess n the premum over the actua cost as ater ascertaned sha be returned
to the pocyhoder. Some payment to the pocyhoder representng such e cess
s ordnary made by every mutua company every year but the so-caed re-
payment or dvdend s rarey made wthn the caendar year n whch the
premum (of whch t s supposed to be the unused surpus) was pad.
The ureau of Interna Revenue, foowng the decson of the
court n the case of Nes v. Centra Manufacturers Mut. Insurance
Co. (252 ed., 564), has unformy hed wth respect to mutua fre
and mutua casuaty nsurance companes that t woud be presumed
that osses and e penses have been pad out of earnngs and profts,
other than premums, to the e tent of such earnngs and profts. In
ths connecton see Law Opnon 1050 (C. . 3, 279), artce 1014,
Reguatons 74, and the correspondng artces of pror reguatons.
It necessary foows that f the earnngs, other than premums, of a
mutua nsurance company e ceed the osses and e penses n a gven
year, the amount returned to ts pocyhoders for that year woud
represent a true dvdend to the e tent that t was pad out of earn-
ngs n e cess of osses and e penses. It s apparent, therefore, that
the so-caed dvdend of a mutua property nsurance company, e -
cept under the crcumstances noted, does not represent a dstrbuton
of earnngs as n the case of an ordnary corporaton.
It s accordngy the opnon of ths offce that amounts returned
to pocyhoders by a mutua marne nsurance company are to be
treated for ncome ta purposes as rebates on premums, e cept to the
e tent they are pad out of earnngs e cusve of premums. In case
the premums have been charged off by the nsured as a busness
e pense, a rebate of any porton thereof s consdered ncome.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
rtce 51: What ncuded n gross ncome. I- 1-5766
I. T. 2646
R NU CT O 1928.
Genera Counse s Memorandum 10798 (see on page 58), reat-
ng to the treatment of amounts returned to pocyhoders by a
mutua marne nsurance company, s appcabe to amounts returned
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22(a), rt. 52.
60
to pocyhoders by a casses of mutua nsurance companes where
the premum orgnay pad by the pocyhoder has been prevousy
deducted as a busness e pense, n determnng the net ncome of
the pocyhoder.
The ma|orty stockhoders of the M Company agreed to e change
the stock of that company for the stock of two other companes.
fter the terms were fuy agreed upon the board of drectors of
the M Company approprated a sum of money from the company s
surpus to be dstrbuted among ts offcers and empoyees who were
not to be empoyed by the other companes after competon of a
reorganzaton: The purchasng corporatons agreed to ths
arrangement.
ed, that the payment to the ta payer represented ta abe
ncome rather than a gft
n opnon s requested whether an amount of a| doars re-
ceved by the ta payer n the year 1929 consttuted ta abe ncome
or a gft.
The ta payer was presdent of the M Company and had been n-
strumenta n makng ths company a successfu organzaton. In
1929 the N Company and the O Company desred to acqure the
busness of the M Company through an e change of stock of the for-
mer for that of the atter corporatons. opposed the e change
of stock but a arge ma|orty of the stockhoders were n favor of t,
wth the resut that such an e change took pace n uy, 1929.
fter e tended negotatons the prncpa stockhoders agreed to
e change shares of stock of the M Company for shares of the N
Company and shares of the O Company. fter these terms were
fuy agreed upon the board of drectors of the M Company requested
that t be permtted to approprate 20a doars from that company s
surpus and dstrbute t among those offcers and empoyees who
were not to be empoyed by the N and O Companes after competon
of the reorganzaton. The purchasng corporatons assented to ths
request. receved 11a doars of the 20a doars so approprated
and reported t as ncome for the year 1929. The M Company
camed the amount of 20a doars as a deducton n ts return for
that year.
It s now contended by the ta payer that the amount of 11a doars
receved by hm out of the speca appropraton from the surpus
of the M Company represented a gft that there was n fact no
consderaton for the payment n queston that the terms of e -
change had aready been agreed upon before anv request was made
for the dstrbuton of ths amount by the M Company that ths
payment was n effect a gft to the ta payer by the purchasng cor-
poratons whch were n no way obgated to hm and that, under
the e stng agreements, the board of drectors of the M Company
coud not have authorzed ths payment wthout recevng n advance
the permsson of the controng nterests of the N and O Companes.
It s aso ponted out that as a resut of the transacton was de-
prved of hs saary amountng to 10,c doars per annum from the
M Company and a share of the profts of that company.
rtce 52: Compensaton for persona servces.
( so Secton 22(b), rtce 83.)
I-41-5767
G. CM. 11010
R NU CT O 1928.
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61
22fa), rt. P2.
The frst queston whch naturay presents tsef s whether there
was any consderaton for the payment to the ta payer, and e acty
what was the motvatng nfuence behnd t. In a etter of une ,
1929, addressed to the board of drectors of the M Company by the
charmen of the boards of the N and O Companes, the foowng
statements were made:
It s further agreed, f and when such e change s competed, the board of
drectors of the M Company may approprate from the funds of sad company
a sum not to e ceed 20 doars for dstrbuton n ts dscreton among present
offcers of the M Company who may not be satsfactory paced n these com-
panes. In consderaton of the above t s agreed that we sha receve an
agreement sgned by , presdent, and , vce presdent, reeasng the M
Company of any and a cams whch they may have to any share of the
profts of the company on and after une , 1929, and submttng ther resgna-
ton from offce effectve at the peasure of the board of drectors of the M
Company. It s understood that such agreement s ony to become effectve f
and when such e change s competed. We sha aso be furnshed wth a etter
sgned by to the effect that no offcer or empoyee, e cept hmsef and have
any nterest n the profts of the company or any cam aganst the company
other than for current saary.
t a meetng of the M Company board on une , 1929, a resou-
ton was passed provdng for the appropraton of 20a doars to be
dstrbuted among the offcers and empoyees of that company who
may not be satsfactory paced n N-0 Company, f and when con-
tempated e change of stock s competed.
In connecton wth the etter of une , 1929, t s contended that
such an agreement was n fact superfuous that s cooperaton
was not requred to consummate the e change that he and a other
offcers were sub|ect to dscharge at any and a tmes by the board
of the M Company n accordance wth the by-aws of that corpora-
ton | and that the proft-sharng agreement under whch worked
specfcay provded that any rght to partcpate n the profts
shoud termnate when he ceased to occupy the offce of presdent.
In other words, t s contended that the agreement ncorporated n
the etter of une , 1929, was unnecessary because the e change
woud have been effected regardess of the e ecuton of the agreement
roposed n that etter. The ta pa er rees upon the decson of the
farted States Crcut Court of ppeas, Thrd Crcut, n the case
of ones v. Commssoner (31 ed. (2d), 755), and the decson of
the Unted States Crcut Court of ppeas, Nnth Crcut, n the
case of ar v. Rosseter (33 ed. (2d), 286), n support of hs pos-
ton.
In the opnon of ths offce the facts n the cases reed upon by
the ta payer are such as to dstngush them from the nstant case.
In ones v. Commssoner, supra, the amount n queston was pad,
wthout consderaton, from a fund vountary created by the stock-
hoders of the corporaton from proceeds of the sae of ther stock
wth no dmnuton of corporate assets. No deducton was camed
by the corporaton n that case for the payment made to Mr. ones.
In ar v. Rosseter, supra, a payment of 50,000 was made to the
presdent of the Sperry our Co., by unanmous nstructon of
the stockhoders to the board of drectors, as a gft n recognton
of hs abe and successfu drecton of the affars of the corporaton
durng the precedng 10 years. Ths amount was charged to the
surpus account of the corporaton. The Crcut Court of ppeas
sustaned the oard of Ta ppeas n hodng that the payment
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22(a), rt. 52.
62
was a vountary one wthout consderaton or compensaton therefor,
and made wth no obgaton on the part of the corporaton or ts
stockhoders. s prevousy stated, the facts n the cases reed upon
by the ta payer are ceary such as to dstngush them from the
nstant case.
The Unted States Crcut Court of ppeas for the ourth Crcut
n the case of Noe v. Parrott (15 ed. (2d), 669, T. D. 3908, C. .
-2, 149) hed that a dstrbuton of surpus to offcers of a cor-
poraton, pursuant to resoutons and a sae by stockhoders of ther
stock, resuted n ta abe ncome rather than a gft. In that case,
where the corporaton treated the dstrbuton as compensaton, the
court hed that there was a consderaton for the payment.
In the case of Schumacher v. Unted States (55 ed. (2d), 1007)
the Court of Cams hed that the amount of 100,000 receved by the
former presdent of the Paso Southwestern Co. at the tme of
the termnaton of hs empoyment because of reorganzaton wth
another raroad, as a part of a sum set asde for offcers and em-
poyees of the former company as addtona compensaton for ong
and fathfu servces, represented ncome and not a gft. It was
ponted out that t was evdent n that case that there was no ntent
to make a gft.
In a recent case decded by the Unted States Crcut Court of
ppeas for the Second Crcut on une 6,1932 dward . sher t.
Commssoner, 59 ed. (2d), 192), t was hed that an amount re-
ceved n 1924 by the ta payer from hs empoyer (a corporaton)
was ta abe ncome rather than a gft, where he had been n the
empoy of the corporaton for many years pror to hs resgnaton
n 1924 and where the corporaton charged the payment on ts books
to saary account and reported t as saary n ts ncome ta return.
The court n ts opnon used the foowng anguage:
ut the mere fact that the empoyer was under no ega duty to
pay Is not concusve that the payment was a nonta abe gft . In
Od Coony Trust Co. v. Commssoner (279 U. S., 716, 730, 49 3. Ct., 499, 504,
73 L. d., 918), the Supreme Court sad that the payment for servces, even
though entrey vountary may nevertheess be compensaton wthn the
statute, . The doctrne that bonus payments and gratutous add-
tona compensaton for past servces may consttute ta abe ncome has been
frequenty recognzed n decsons of the ower edera courts and of the oard
of Ta ppeas. Ctng cases. Whether a payment n a gven case sha
be deemed ta abe compensaton or a gft e empt from ta depends upon the
ntenton of the partes, and partcuary that of the empoyer, to be determned
from the facts and crcumstances surroundng the transacton. Itacs
supped.
(See aso Weagant v. owers, 57 ed. (2d), 679, Ct. D. 526, page
237, ths uetn rthur L. Lougee v. Commssoner, 26 . T. .,
23 Ws L. Garey v. Commssoner, 16 . T. ., 274 Robert .
nger v. Commssoner, 22 . T. ., I, C. . -, 6 and Margaret
. Lunsford, dmnstratr , state of bner Lunsford, v. Comms-
soner, 22 . T. ., 881.)
Ths offce s of the opnon, after a carefu consderaton of the
facts and crcumstances n the nstant case, that the payment of 11a
doars to the ta payer n the year 1929 represented ta abe ncome
rather than a gft. The payment does not meet the test of a gft
snce t was ceary not a vountary payment wthout consderaton,
nor does the evdence ndcate that the ntent to make a gft e sted.
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63
22(a), rt. 62.
The amount was, therefore, propery ncuded as ta abe ncome n
the ta payer s return for the year t)9.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
rtce 62: nnutes and nsurance poces. I-31-5576
I. T. 2635
R NU CTS O 1926 ND 1028.
Treatment for ncome ta purposes of amounts receved n
settement of an endowment nsurance pocy where the Insured
survves the maturty of the pocy. The rung pubshed as
Soctor s Opnon 160 (C. . III-2, 60) does not appy under
secton 213(b)2 of the Revenue ct of 1026 and secton 22(b)2
of the Revenue ct of 1028.
The questons presented nvove the status for ncome ta purposes
of the payments made by the M Insurance Co. n settement of
an endowment nsurance pocy ssued by t under the optona
settements provded for n the pocy. y the terms of the pocy
the nsured may have settement made of the proceeds under one of
three optona methods desgnated as Optons , , and C. Under
Opton the amount of the proceeds payabe upon the death of
the nsured s eft wth the company, wth provson for the pay-
ment of nterest thereon to the desgnated benefcary for fe, wth
the rght to the benefcary of wthdrawng the amount of such pro-
ceeds upon gvng the requred notce. Under Opton the nsured
may have the amount or the proceeds pad to the desgnated bene-
fcary n perodc nstaments over a desgnated perod of tme not
to e ceed 30 years. Under Opton C the nsured may have sette-
ment made by the payment of monthy or other perodc nstaments
over a desgnated perod of tme, or durng the remanng fe of the
benefcary, whchever s greater.
The questons presented pertan to the varous methods of sette-
ment made under an endowment pocy where the nsured survves
the maturty of the pocy and where the nsured, pror to the ma-
turty of the pocy, rrevocaby desgnates a benefcary other than
hmsef wth whom settement s made, n accordance wth one of
the optona methods provded for n the pocy. In the nstant
case the desgnaton of the benefcary was made wthout any vau-
abe consderaton to the nsured. The frst queston presented n-
voves the appcabty to suc stuaton of the rung pubshed as
L T. 2380 (C. . I-2, 32), whether the nsured s to be consdered
as havng constructvev receved the amount of the proceeds upon
the maturty of the pocy.
y rrevocaby desgnatng another person as benefcary pror
to the maturty of the pocy, the nsured thereby dvests hmsef
of the rght to receve the payment of the proceeds and I. T. 2380,
supra, s, therefore, not appcabe to that stuaton, there beng no
constructve recept of the proceeds by the nsured n such case.
The effect or resut to the benefcary n such case depends upon the
method of settement desgnated by the nsured.
The frst queston, therefore, pertans to the stuaton where pay-
ment of the amount of the proceeds s made to a desgnated bene-
fcary n a ump sum upon the maturty of the pocy. Under sec-
ton 22(b)2 of the Revenue ct of 1928 no ta abe ncome resuts
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22(a), rt. C3.
G4
to the nsured n such case but a ta abe gan s reazed by the bene-
fcary to the e tent of the e cess of such proceeds over the amount of
the premums or consderaton pad for the pocy by the nsured.
The second queston pertans to a stuaton where the amount of
the proceeds s retaned by the nsurance company to pay nterest
thereon for fe to one benefcary, referred to for convenence as
the frst benefcary, and upon the death of such frst benefcary the
amount of the proceeds s payabe to another benefcary, referred to
as the second benefcary. When payment s made to such second
benefcary a ta abe gan thereby resuts to hm n the amount of the
e cess of such proceeds over the amount of the premums or consd-
eraton pad for the pocy by the nsured as m the precedng n-
stance. s to the frst benefcary, the arrangement amounts to an
agreement whereby the nsurance company retans the amount of
the proceeds and pays nterest thereon durng the fetme of the
frst benefcary. The amount of such nterest, therefore, const-
tutes ta abe ncome to the frst benefcary n accordance wth artce
82 of Reguatons 74.
The thrd and fourth questons pertan to a stuaton where pay-
ment of the amount of the proceeds s to be made to the desgnated
benefcary n nstaments over a perod of not to e ceed 30 years,
or n eu thereof over such perod of years or the fetme of the
benefcary, whchever s greater. The effect of ths arrangement s
to convert the pocy nto an annuty contract and nvoves the app-
cabty of the rung pubshed as Soctor s Opnon 1G0. s w
be observed, the statutes under whch that rung was promugated
e cude from gross ncome the amount receved by the nsured
as a return of premum or consderaton pad. It was hed n that
rung that such e empton or e cuson ad not e tend to the bene-
fcary of such annuty. Such mtaton s not contaned n secton
213(b)2 of the Revenue ct of 1926 and secton 22(b)2 of the Reve-
nue ct of 1928, however, and t s therefore hed that the rung n
queston s not appcabe under those provsons. ccordngy,
ta abe gan w resut to the donee benefcary of such annuty ony
when the aggregate of the annuty payments receved e ceeds the
amount of the premums or consderaton pad by the nsured from
whom the rght to receve the annuty payments s acqured by the
benefcary.
rtce 63: Improvements by essees. 0-5743
G. C. M. 10969
R NU CT O 1028.
The phrase In pursuance of an agreement n artce 63.
Reguatons 74, as uneaded by Treasury Decson 4282 (C. .
TII-2, 82), does not e cude mprovements made on eased reaty
under a ease whch, athough not requrng mprovements, never-
theess permtted the essee to make such mprovements. The
essor n the nstant ca.se shoud report as ncome the vaue thereof
upon one or the other of the bases prescrbed by that artce,
as amended.
n opnon s requested wth respect to the appcaton of artce 63,
Reguatons 74, as amended by Treasury Decson 4282, to a stua-
ton where mprovements are made vountary by a essee upon
eased premses under a ease that contans no covenant requrng
such mprovements to be made.
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65
22(a), rt. 63.
In the nstant case the tenant was gven the rght under the ease
to ater, tear down, and demosh budngs upon the premses at
the tme of the makng of the ease, and to erect a new budng
upon propery ndemnfyng the essor n the form of a budng
bond. The ease provded that the tenant must hod, mantan,
and keep n good order, repar, and condton any budng whch
at any tme mght be upon the and and further that upon the
e praton of the ease or any renewa ease, a budngs and struc-
tures upon the demsed premses shoud beong to the andord.
Tte to any such mprovements was not reserved to the essee unt
the termnaton of the ease. Consequenty, the tte thereto vested
n the essor mmedatey upon ther competon.
though the essee n ths case was not requred to pace m-
provements upon the eased premses, t s obvous from the pro-
vsons of the ease, referred to above, that both the essor and the
essee contempated the pacng of mprovements upon the property
by the essee. Whe t s true that such mprovements were not
made n pursuance of an agreement requrng them to be made, they
were made n pursuance of an agreement whch permtted them to
be made. The agreement contans no covenant for ther remova
by the essee, but e pressy provdes that they sha beong to the
essor. Under such crcumstances they were |ust as much ncome
to the essor as f the ease had contaned a covenant e pressy
requrng them to be made. There appears to be no reason for
makng a dstncton between the two types of cases. (See ppea
of enry I. rown, 4 . T. ., 1129. C. . I-1, 1 ppea of
verett U. Crosby, 4 . T. ., 1147, C. . I-1, 2.)
It s, therefore, the opnon of ths offce that the use of the phrase
a n pursuance of an agreement n Treasury Decson 4282, supra,
does not e cude mprovements made on eased reaty under a ease
whch, athough not requrng mprovements, nevertheess permtted
the essee to make such mprovements. The essor n the nstant case
shoud report as ncome tne vaue thereof upon one or the other of
the bases prescrbed by that artce, as amended.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
rtce 68: Sae and retrement by corpora- I-31-5577
ton of ts bonds. O. C. M. 10739
R NU CT O 1928 ND TRIOR R NU CTS.
onds purchased by the ssung corporaton for a snkng fund
or for nvestment purposes are retred at the tme of purchase
wthn the meanng of the reguatons.
n opnon has been requested reatve to when bonds are retred
wthn the meanng of artce 68(1) of Reguatons 74 and the cor-
respondng artce of pror reguatons, vhere a corporaton pur-
chases ts own bonds for purposes of nvestment or for a snkng
fund n accordance wth mortgage obgatons.
or convenence the provsons of Reguatons 74 referred to are
quoted beow:
rt. 68. Sae and retrement by corporaton of ts bonds. (1) (a) If bonds
are Issued by a corporaton at ther face vaue, the corporaton reazes no gan
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22(a), rt. 68.
or oss. (6) If thereafter the corporaton purchases and retres any of sucb
bonds at a pres n e cess of the ssung prce or face vaue, the e cess of the
purchase prce over the ssung prce or face vaue s a deductbe e pense for
the ta abe year, (c) If, however, the corporaton purchases aud retres any
of such bonds at a prce ess than the ssung prce or face vaue, the e cess of
the ssung prce or face vaue over the purchase prce s gan or ncome for
the ta abe year.
In the case of bonds purchased by the ssung company for pur-
poses of nvestment, ths offce consders t mmatera whether such
bonds are retred n the technca sense of the term. It does not
appear that for the purposes of ncome ta the term retres nec-
essary mports a technca meanng. unk Wagna s Standard
Dctonary defnes retre as to pay up and wthdraw from crcu-
aton as, to retre the bonds of a cty. When a corporaton pur-
chases ts own bonds at a prce ess than the ssung prce or face
vaue, t dscharges a abty for ess than the amount whch t was
egay obgated to pay at the date of the maturty of the bonds.
So ong as the ssung company hods the bonds there s no abty
to pay any part thereof. corporaton purchasng outstandng
bonds may ressue them. (Pruyne v. dams urnture f Mfg. Co.,
36 N. Y. S., 361, affrmed, 155 N. Y., 629, 49 N. ., 1103.) owever,
t s consdered that bonds purchased by the ssung company are
retred even though they are purchased for ressue. The common
meanng of the word nvestment mpes a certan measure of per-
manence. (Words and Phrases.) It s cear that the purchase of
bonds under such crcumstances consttutes a wthdrawa or retre-
ment from crcuaton. There seems to be no ogca dstncton,
n so far as the reazaton of ncome s concerned, between a pur-
chase whch does not nvove a technca retrement and one whch
does. Whether the bonds have been retred wthn the technca
meanng of the term does not precude the fact that ncome from
such transacton has been reazed, that s, when the purchase prce
s ess than the ssung prce or face vaue. The purchase consttutes
a cosed transacton for ncome ta purposes regardess of the ntent
to rese, and gan or oss s determned accordngy. The purpose
or ntent of the purchaser has no bearng on the queston.
In Woodward Iron Co. v. Commssoner (24 . T. ., 1050) t was
stpuated that certan bonds purchased by the corporaton were
marked hed for the snkng fund and not transferabe, as pro-
vded n the mortgage. In ts decson the oard sad, n part, as
foows:
In Unted States v. rby Lumber Co. (284 U. S., 1 (November 2, 1931) Ct.
D. 420, C. . -2, 356 ), the Supreme Court hed that the ta payer reazed
Income upon the purchase of some of ts bonds at a prce ess than the amount
receved upon the ssuance of such bonds.
The stpuated facts of the nstant case do not dstngush t from Unted
States v. rby Lumber Co., supra, whch contros the ssue here.
Ths oard case s authorty for hodng that bonds purchased for
a snkng fund, whether canceed or not, are retred wthn the
meanng of the reguatons. It s, therefore, the opnon of ths offce
that bonds purchased for nvestment or snkng fund purposes are
retred at the tme of purchase.
C. M. Chabest,
Genera Counse, ureau of Interna Revenue.
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67 122(b), rt. 84
S CTION 22(b). GROSS INCOM : CLUSIONS
ROM GROSS INCOM .
rtce 82: Proceeds of nsurance Compensa-
ton Pensons.
R NU CT O 1D28.
Proceeds of so-caed amy ncome pocy 20-year perod.
(See G. C. M. 10843, page 22.)
rtce 83: Gfts and bequests.
R NU CT O 102R.
Dstrbuton out of surpus to offcer of purchased company by that
company upon reorganzaton. (See G. C. M. 11010, page 60.)
rtce 84: Interest upon State obgatons. I-41-5768
Ct. D. 580
INCOM T R NU ) CTS O 1928 ND 1028 D CISION O COURT.
empton Interest Consttutonaty ward n mnent
Doman Proceedngs.
The obgaton of a muncpaty to pay |ust compensaton for
property taken by t n the e ercse of the power of emnent doman
s not an obgaton of a potca subdvson of a State wthn the
meanng of secton 213(b)4 of the Revenue ct of 1026 and secton
22(b) 4 of the evenue ct of 1928, and nterest pad by a munc-
paty on the prncpa awarded as compensaton for property so
taken s not e empt from ta . n ncome ta on such nterest s
consttutona.
Unted States Dstrct Court, Southern Dstrct of New York.
Unted States Trust Co. of Nec York, as ecutor of the W of Wam
urhans Ishatn, pantff, v. Chares W. nderson, Coector of Interna Reve
nue for the Thrd Coecton Dstrct of New York, defendant.
une 13, 1932.
OPINION.
ondy, Dstrct udge: Ths s a moton to dsmss the compant upon the
ground that t fas to state a cause of acton.
The compant aeges that pantffs testator had an nterest n two peces
of rea property whch were condemned by the cty of New York, one n 1925
and the other n 1926 that there was awarded to the pantff s testator n
each case the vaue of hs nterest n the property at the tme of the takng of
tte by the cty and nterest thereon to the date of the award that pantff s
testator ncuded n hs edera ncome ta returns for the years 1927 and 1928
as gross ncome, the amounts representng nterest on the awards that by
reason thereof there was pad an amount of ta n e cess of hs ta abty
durng these years and that cams for refunds were dsaowed by the Com-
mssoner of Interna Revenue. The compant demands |udgment for the
amounts whch t s camed were overpad.
The Greater New York charter provdes that n case tte to property re-
qured for mprovement sha vest n the cty pror to the entry of the fna
decree, Interest on the entre amount due to the owner for the rea property
acqured for the mprovement from the date of the vestng of tte to the date
of the fna decree sha be awarded as part of such owner s compensaton.
(Sectons 870(a), 976.)
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22 (b), rt. 84.
68
The pantff contends that upon the takng of tte to the property by the
cty of New York an obgaton arose to ay |ust compensaton under the
consttuton of the State of New York, rtce I, secton 6, and the provsons
of the cty charter, and that Interest aowed on the amount found by the
award to be the far market vaue of the property on the day tte passed s
nterest pad on an obgaton of the cty of New York, a potca subdvson of
a State, and therefore e empt by e press provson of the Revenue ct and
that f the nterest s not so e empted by statute, then the ta s unconsttu-
tona because t s a ta mposed upon the e ercse of a governmenta functon.
The statute desgnates as ta -free, nterest upon the obgatons of a State,
Terrtory, or any potca subdvson thereof, . (Revenue ct of 1928,
secton 213(b) Revenue ct of 1928, secton 22(b) 26 U. S. C, secton 2022.)
Though the consttuton of the State of New York and the charter of Greater
New York mposed upon the cty the obgaton to make |ust compensaton for
the property taken, such obgaton s not an obgaton wthn the meanng of
ths provson of the Revenue ct.
The word obgaton does not necessary ncude every duty mposed by
aw, as pantff seems to contend. It s generc, havng many meanngs. When
used n a statute ts meanng depends upon the conte t and the purpose of the
enactment (See Lberna Savng d Loan Socety v. San ranctco, 200 D. .
310.)
It s fundamenta that Congress can not mpose a ta on any obgaton, or
on the nterest on any obgaton, ssued by a State n order to borrow money.
(See WUcuU v. unn, 282 U. S., 216 Ct. D. 280, G. . -, 309 .)
There s no reason to suppose that ths statutory e empton was Intended to
be otherwse than decaratory of the consttutona mtaton upon the power
of Congress to mpose a ta upon an obgaton of a State. The court has not
been referred to any case n whch the e empton has been e tended to any
obgaton other than one to repay money borrowed by a State or a subdvson
thereof. The reason for the e empton does not appy e cept n cases whch
nvove the power of the Government to borrow money, as a means of carryng
on ts governmenta functons. It has never, so far as the court knows, been
e tended to ncude nterest pad by a State government on a |udgment
aganst t
In berna Savngs Ioan Socety v. Son ranctco (supra), the reasonng
n whch appes to ths case, though the facts are ceary dstngushabe, t
was hed that checks or orders ssued by the Unted States Treasury for n-
terest accrued upon regstered bonds of the Unted States, whch represented
obgatons to pay money prevousy borrowed, mght be ta ed by a State n
the hands of the owner wthout voatng secton 3701 of the Revsed Statutes,
whch provded that a stocks, bonds. Treasury notes, and other obgatons
of the Unted States, sha be e empt from ta aton by or under State or
muncpa authorty. ground for the decson was that the statute was one
of those drected aganst Intergovernmenta ta aton enacted pursuant to the
consttutona Immunty of State and edera nstrumentates, and that, snce
n ths case the borrowng power of the Treasury was not affected by the ta ,
the statute dd not prohbt the ta n queston.
Mr. ustce Stone, n Mctcaf d ddy v. Mtche (269 U. S., 514, 522 IT. D.
3824, C. . -, 218 ), n enumeratng nstances of State and edera e emp-
tons, speaks of obgatons sod to rase pubc funds.
The word obgaton as used n secton 213(b)4 of the Revenue ct of 1918
was kewse hed not to ncude a ega dutes, but rather to be confned to
securtes, the purpose of the e empton n queston beng to factate the fota-
ton of ow-nterest bearng Government securtes. See ansas Cty Southern
acay v. Commssoner of Interna Revenue (16 . T. ., 655, 092, affrmed
52 ed. (2d), 372).
smar decson was reached as to Interest receved from the edera
Government upon a refund of overpad ncome and proft ta es, (-|nerens
scose Corporaton v. Commssoner of Interna Revenue, 56 ed. (2d), 1033,
affrmng 19 . T. ., 9 7.)
The dssatsfacton of Congress wth the e empton of State obgatons,
the suggestons made n Congress on varous occasons wth reference to
amendng the Consttuton n so far as t mts the power to ta such obga-
tons, and Its faure to attempt to amend the Revenue ct are some evdence
of the mprobabty of an ntenton to e empt more than was obgatory,
and of the fact that It understood the e empton to be no wder In scope
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69
22(b), rt. 84.
than the consttutona mtaton. (See omes, edera Ta es (Oth d),
page 754 n. 47 Congressona Record, voume 57, pages 553, 775, 2088.)
In a etter dated anuary 26, 1931, the Commssoner of Interna Revenue
hed that nterest receved on awards n condemnaton proceedngs s ta abe,
thereby reversng a Treasury Department offce decson to the contrary,
rendered n 1920. (O. D. 501 (T. . 20-20-1071), C. . 3, 113.)
It does not appear that the orgna decson has been foowed contnuousy.
Though the admnstratve practce s persuasve, t s not concusve, especay
In vew of the fact that the Department has reversed ts decson. (See
Merrtt v. Cameron, 137 U. S., 542 oughton v. Payne, 194 U. S., 88 Swft
Courtney and eevher Co. v. Unted States, 105 U. S., 691.) The absence of any
unform nterpretaton by the Treasury Department s further emphaszed by
artce 84 of the Income Ta Reguatons of 1928 n whch the word Issued
used n connecton wth the word obgatons ndcates a constructon to
the effect that the atter was used n the more restrcted sense of securtes.
The borrowng power of a State or subdvson s not affected, for t s not
nvoved n condemnaton proceedngs. Nothng s borrowed.
ny theoretca effect of such ta upon the e ercse of the power of emnent
doman seems so remote as to fa outsde the fed recognzed by the const-
tutona doctrne. (See Group No. 1 O Corporaton v. ass, 283 U. S., 279, 282
Ct. D. 330, C. . -, 153 o Um Corporaton v. Doya, Unted States
Supreme Court, October term, No. 118, decded May 16, 1932, at pages 2-3.)
Counse urge the unconsttutonaty of the ta upon the further ground that
t deprves pantff of the |ust compensaton to whch t s entted. The
provson of the ffth amendment of the Consttuton of the Unted States that
prvate property sha not be taken for pubc use wthout |ust compensaton,
the ony one appcabe to the edera Government n any event, s a mtaton
upon that Government n the e ercse of the power of emnent doman, and
not of the ta ng power. (See aso ansas Cty Southern Ry. Co. v. Comms-
soner of Interna Revenue, 52 ed. (2d), 372, 381.)
ccordngy the moton to dsmss the compant s granted.
rtce 84: Interest upon State obgatons. I-52-5947
I. T. 2666
R NU CTS O 1926 ND 1928.
Interest on bonds ssued by corporatons formed under the act of
the Legsature of Indana, approved on March 10, 1927, for the
purpose of fnancng the acquston of schoo stes and the erecton
of schoo budngs n the case of a specfed cass of prvate schoo
corporatons of the State, s e empt from ncome ta . I. T. 2374
(C. . I-2, 36) revoked.
Reconsderaton s requested of I. T. 2374, whch hed that nter-
est on bonds ssued by corporatons formed under the act of the
Legsature of Indana approved on March 10,1927, for the purpose
of fnancng the acquston of schoo stes and the erecton of schoo
budngs n the case of a specfed cass of prvate schoo corpora-
tons of the State, s not e empt from the ncome ta .
In I. T. 2374 t s stated that the purpose ntended to be served by
the statute s to provde means to meet the needs of prvate schoo
corporatons whch, by reason of statutory or consttutona mta-
tons, are precuded from ncurrng addtona ndebtedness to obtan
funds for schoo purposes. The corporatons so provded for are
authorzed to obtan through the ssuance of bonds such funds as
may be needed n order to acqure the stes and erect the necessary
schoo budngs. These budngs are eased to the schoo corpora-
tons wth the provson that the schoo corporaton sha have the
opton at any tme pror to the e praton of the ease to purchase
the property at such a fgure as w enabe the fnance corporaton
to redeem ts outstandng obgatons and to qudate.
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22 (c), rt. 102.
70
Secton 2 of the Indana statute, approved March 10, 1927, pro-
vdes n part as foows:
No such contract of ease sha be entered Into by such schoo corporaton
e cept wth a corporaton organzed under the aws of the State of Indana
soey for the purpose of acqurng a ste, erectng thereon a schoo budng,
easng the same to such schoo corporaton and coectng the rentas therefor,
a wthout proft to sad corporaton, ts offcers, drectors and stockhoders,
other than the return of capta actuay nvested, pus nterest or dvdends
thereon not to e ceed G per cent per annum. Such ease contract sha aso
provde that any amount of renta receved by the corporaton over and above
the amount necessary to meet ts ncdenta corporate e penses and to pay dv-
dends or nterest on ts securtes sha be apped n the redempton and can-
ceaton of ts outstandng securtes.
In the case of urnet v. Coronado OU Gas Co. (52 S. Ct., 443,
Ct. D. 485, C. . I-1, 265), the Supreme Court of the Unted
States hed that the ncome receved by an o and gas essee from a
ease of pubc schoo ands of the State of Okahoma was e empt
from edera ncome ta . The court n ts opnon stated n part aa
foows:
When Okahoma undertook to ease her pubc ands for the beneft of the
pubc schoos she e ercsed a functon strcty governmenta In charac-
ter.

ere the ease to the respondent was an nstrumentaty of the State for the
purpose of carryng out her duty In respect of pubc schoos. To ta tha
ncome of the essee arsng therefrom woud amount to an mposton upon
the ease tsef.
It appears that the same reasonng s appcabe n the case of
the bonds ssued by Indana schoo budng corporatons created n
accordance wth the provsons of the statute approved March 10,
1927, referred to above. To ta the nterest on those bonds woud
resut n an mposton upon the nstrumentaty of the State of
Indana used for the purpose of carryng out a functon strcty
governmenta n character. It s hed, therefore, n vew of the
decson n the case of urnet v. Coronado O Gas Co.. supra,
that the nterest on the bonds n queston s not sub|ect to edera
ncome ta . I. T. 2374, supra, s hereby revoked.
rtce 87: Interest upon Unted States obgatons.
R NU CT O 1928.
empton of Treasury bs. (See I. T. 2651, page 24.)
S CTION 22(c). GROSS INCOM : IN NTORI S.
rtce 102: auaton of nventores. I-39-5718
( so Secton 611.) Ct. D. 572
INCOM T R NU CTS O 1910, 1917, ND 1928 D CISION O COURT.
1. vauaton of nventores ntermnged goods burden of
Proof.
In the vauaton of nventores for the year 1917 the rue pro-
vded n artce 1582 of Income Ta Reguatons 45 that goods
taken n the nventory whch have been so ntermnged that they
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522(c), rt. O
can not be dentfed wth specfc nvoces w be deemed to be the
goods most recenty purchased Is sustaned where the ta payer,
a deaer n hardware and reated merchandse, does not sustan ts
burden that ths method dd not correcty refect ncome and was
not n accord wth good accountng practce and where t has not
been shown that an arbtrary or caprcous resut has foowed
from the use of that method.
The cam of the ta payer for a revsed ncome s dened, the
same beng based upon nventores used n ts orgna return
whch were vaued at a fgure or vaue that woud n the ta payer s
opnon be reazabe under any condtons foreseeabe based on
the theory that the stock on hand was practcay the same as had
been on hand for severa years and therefore the cost of such goods
woud be ther cost when acqured regardess of the fact that many
tmes that amount had been purchased and sod n the meantme.
2. Sut Coecton Lmtaton Cam for batement.
Secton 611 of the Revenue ct of 1928 wthdraws the statute
of mtatons upon coecton as a ground for the recovery of a ta
pad under the condtons theren stated, even though the cam n
abatement fed was re|ected before the e praton of the statutory
perod of mtaton for coecton. The facts show that the coec-
ton was stayed by a cam for abatement fed by the ta payer.
Coubt or Cams of the Unted States. No. -513.
Marsha-Wes Co. v. The Unted States.
May 31, 1932.
OPINION.
Ltteton, udge, devered the opnon of the court.
The frst queston s whether the pantff s entted to recover the amount
of 456,896.67 sued for on the ground that the 1917 ta n that amount was
coected after the e praton of the statute of mtaton. It contends that
the tota amount sued for consttutes an overpayment for 1917, as defned n
secton 607 of the Revenue ct of 1928, and bases ths cam upon the conten-
tons, frst, that the abatement cam fed by t dd not stay the coecton of
the addtona ta for 1917 that the addtona assessment was premature and,
n order to avod the effect of the assessment upon the pantff, the coector
fed hs cam n abatement whch had the effect of canceng the pantffs
abatement cam and that t was the coector s cam that stayed the coec-
ton and was the cam whch the Commssoner consdered and re|ected and,
secondy, that as to the addtona ta for 1917, n the amount of 24,475.35
assessed ebruary 19, 1924, and coected pr 15, 1924, no abatement cam
was fed whch stayed coecton.
The pantff nssts therefore that under these crcumstances secton 611
of the Revenue ct of 1928 s nappcabe. It further contends that ts appea
from the decson of the Income Ta Unt was decded by the Commttee on
ppeas and Revew, une 26, 1923 that It dd nothng further whch stayed
coecton of the ta assessed or assessment of a further addtona ta that
the statute n force at the tme prohbted further deay by the ta payer after
decson on appea and that the deays n coectng the addtona assessments
of 433,398.61 and 24,475.35 for 1917, unt after pr 1, 1924, were due to the
deay of the Commssoner n proceedng prompty n the matter.
We are unabe to agree wth the cam of the pantff that the provsons
of secton 611 of the Revenue ct of 1928 are not appcabe to the ta of
456,896.67. represented by the addtona-assessments of 433,398.61 made une
2, 1924, and 24,475.35 made ebruary 19, 1924. oth of these assessments were
made wthn the perod of mtaton propery appcabe thereto and the facts
show that coecton thereof was stayed by the cam for abatement fed by
pantff aganst the addtona assessment of 433,398.61.
The ground of pantff s cam for abatement of the addtona assessment
was that the corporaton was entted to have ts profts ta for 1917 determned
and computed under the provsons of secton 210 of the Revenue ct of 1917.
160003 33 S
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22(c), rt. 102.
72
The facts estabsh that t was the pantffs abatement cam that caused the
deay n coectng the addtona assessment and the deay n coectng the
further addtona ta beyond the mtaton perod. The facts further show
that t was the pantff s abatement cam the Commssoner consdered and
fnay re|ected. The coector s abatement cam was prepared pursuant to the
nstructons of the Commssoner ony for the purpose of reevng the pantff
from the payment of the nterest mposed by the statute upon the deayed
payment of such porton of the addtona ta for 1917 fnay determned to be
due. ut for the fng of pantff s abatement cam, the addtona ta of
433,398.61, assessed une 2, 1922, woud have been coected on or before uy 7.
1922, and the further addtona ta of 24,475.85 proposed n the ureau
etter of anuary 5, 1923, woud have been assessed and coected pror to the
e praton of the statute of mtaton on pr 1, 1924. The fact that do
cam n abatement was fed by the pantff drected specfcay aganst the
addtona ta of 24,475.35, after t was proposed or assessed, s mmatera In
vew of the anguage, and the evdent purpose and ntent of secton 611. The
cam n abatement whch the pantff fed n fact deayed the coecton of
ths Item for 1917, and the appea by the pantff to the Commssoner from the
decson of the Income Ta Unt denyng ts appcaton for reef, as camed
In ts abatement cam, was drected as we to the proposed addtona assess-
ment of 24,475.35 as to the addtona assessment of 433,398.61 theretofore
made.
We are of opnon that there s no mert n the cam of the pantff
that secton 611 s not appcabe, on the ground that the deay In coectng
the entre addtona ta of 456,896.67 was the resut of the faure of the
Commssoner prompty to act after the Commttee on ppeas and Revew had
made ts decson on the appea. The Commssoner approved the recommen-
daton of the commttee on or about October 9, 1923. So far as appears the
matter of offcay notfyng the ta payer of the acton taken on ts abatement
cam, the preparaton of the assessment st, the makng of the assessment of
the further addtona ta of 24,475.35 and the preparaton of the schedue of
re|ecton of the abatement cam proceeded through the ureau of Interna
Revenue n the usua way. The fact that the decson to re|ect pantff s
abatement cam was reached some tme before the e praton of the perod
wthn whch coecton of the addtona ta coud be made does not render
the provsons of secton 611 nappcabe. In raham oster v. Ooodce
(282 U. S., 409 Ct. D. 287, C. . -, 191 ), the court sad In No. 36,
raham v. Ooodcc, however, the cam n abatement was re|ected n Decem-
ber, 1922, and the perod of mtaton dd not e pre unt March, 1923. It
s urged that, for ths reason, that case fas outsde the purvew of secton 611.
The statute makes no such e cepton, and we are not warranted n mpyng
one. The cam n abatement had been fed and was pendng for neary three
years. There s room for the nference that, had t not been for ths deay,
the ta coud have been coected before the statute ran. The ta teas co-
ected ater and the statute, by ts terms, s appcabe. Itacs ours.
In the case of ths pantff the Commssoner offcay re|ected the cam for
abatement March 19, 1924, and the ta n queston was coected on dfferent
dates between pr 15 and une 25, 1924. The pantff s therefore not
entted to recover on ts cam that the addtona ta of 456,896.67 coected
and pad n 1924 consttuted an overpayment wthn the meanng of secton 607
of the Revenue ct of 1928.
The ne t queston s whether the pantff s entted to recover on the
ground that ts nventores at anuary 1 and December 31, 1917, were correcty
stated n Its orgna return fed for 1917 and that the Commssoner was n
error In requrng the pantff to state ts nventores n accordance wth the
method prescrbed n artce 1582, Reguatons 45, whch provded n part that
Goods taken In the nventory whch have been so ntermnged that they can
not be dentfed wth specfc nvoces w be deemed to be the goods most
recenty purchased.
When the pantff fed Its orgna return for 1917 the nventores used In
determnng ts ncome for that year were prced at a fgure or vaue that
woud n ts opnon be reazabe under any condtons foreseeabe. The e act
manner n whch ths was done does not defntey appear, other than that t
was based on the theory that the stock on hand was practcay the same as
had teen on hand for severa years and therefore the cost of such goods woud
be ther cost when acqured regardess of the fact that many tmes that amount
had been purchased and sod n the meantme. Pantff kept on hand about a
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73
R22(c), rt. 102.
four months suppy of a gven artce. The trend of the market was upward
and therefore, f recent purchases had been consdered, the nventory vaues
woud have been greater than those used. Pantff contends, however, that the
repenshng of ts suppy dd not affect ts norma suppy, snce the goods most
recenty purchased were frst sod, thus eavng the od goods on hand.
Subsequent to the fng of the orgna return for 1917, the Commssoner n
the atter part of October or the frst of November, 1919, rendered a decson
whch was adopted as the rung of the ureau of Interna Revenue n whch
methods smar to that foowed by the pantff n the orgna return were
dsapproved. Ths decson and rung was pubshed n 1919, beng T. . R.
65 C. . 1, 51 . fter the pubcaton of ths rung and after the pantff s
attenton had been caed to the fact that the Government reguatons requred
a dfferent method of preparng ts nventores from that whch t had pursued,
the pantff on anuary 20.1922, vountary fed an amended return for 1917 In
whch the Inventores were prepared n accordance wth artce 1582, Regua-
tons 45 (1920 edton), whch provdes, so far as matera here, that Inven-
tores must be vaued at (a) cost or (6) cost or market, as defned n artce
1584 as amended, whchever s ower. Goods taken n the nventory
whch have been so ntermnged that they can not be dentfed wth specfc
nvoces w be deemed to be the goods most recenty purchased.
The foregong reguaton, whch was promugated pursuant to the authorty
granted n secton 203 of the Revenue ct of 1918, merey provdes for the
prcng of nventores n a manner generay recognzed n good accountng
practce, that s, the nventores may be prced at ether cost or cost or
market, whchever s ower, and n carryng out whchever method s adopted,
where fungbe goods are nvoved whch can not be dentfed by specfc
nvoces, the cost of such goods w be computed upon the bass of the most
recent purchases. The Revenue ct of 1916, as amended by the Revenue ct
of 1917, dd not specfcay contan the authorty granted by secton 203 of
the Revenue ct of 1918, but the same rue as to prcng nventores was ap-
pcabe to 1917. (Chcago rog Sdtch Co. v. Unted States, 68 C. Cs.,
186.)
The contenton of pantff s that the method prescrbed by the reguatons
and foowed by t n ts amended return eads to an arbtrary and caprcous
resut, and that the nventores as refected n the orgna return shoud be
accepted. More specfcay, the pantff ob|ects to the use of nventores whch
pace thereon costs on the prncpe that the frst goods purchased were the frst
goods sod and therefore the goods on hand at a gven nventory date were those
most recenty purchased.
It nssts that the prncpe shoud be reversed and that the nventores shoud
be prepared on the bass that the saes were aways made from the most
recent purchases and therefore the goods on hand at a gven date were
those frst purchased. ow far back the pantff woud go In havng us
arrve at the frst purchases does not defntey appear, though a wtness
for pantff testfed that We consdered our stock was practcay the snme
stock we had for severa years. Ths s tte more than another way of
e pressng the dea of a base stock method of nventores where a gven
quantty of goods on hand at a tmes s assgned the same prce year after
year. The reasons for re|ectng such a system of vaung or prcng nven-
tores s suffcenty stated n the Commssoner s rung referred to above,
T. . R. 65, as we as n Lucas v. ansas Cty Structura Stee Co. (2S1 U. S.,
264 Ct. D. 223, C. . I -2, 299 ), and Chcago rog Swtch Co. v. Unted
Sates, supra. ut even f we shoud e amne pantff s nventores, as t urges
we shoud, n an attempt to f nventores based on actua cost, we are
unabe to see wheren t avas the pantff anythng. The testmony of
one of ts wtnesses shows that t had no accountng system whch woud enabe
t to dentfy partcuar goods and aff thereto ther partcuar cost. To meet
ths defcency n ts system, the pantff ntroduced proof to show that ts
saes were made from the top of bns n whch the artces were stored and
that when t became necessary to repensh ts suppy, new artces were
paced on top or n front of the od stock. Pantff therefore contends that
the goods on hand n 1917 were those purchased ong pror to 1917, and that
t shoud have ts nventores prced at these od costs. We fnd tte mert
n ths poston.
The pantff was a deaer n hardware and reated merchandse of varous
knds, ncudng buders hardware, mechancs toos, stoves, mnng and
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23 (c), rt. 151.
74
raway suppes, cutery, sportng goods, automobe suppes, and beatng
and pumbng suppes. The number of tems was from 45.000 to 60,000. It
was necessary to repensh the stock about three tmes each year, the average
stock beng suffcent for appro matey four months busness. It may be
that n seme soated nstances the od stock remaned on hand to the e tent
that the saes were made entrey from new purchases, but n arge nventores,
such as that wth whch we are here concerned, t woud be gong further than
we thnk we woud be |ustfed to say that any substanta part of the orgna
suppy remaned undsturbed over a onpr perod of years. That some part of
the orgna goods remaned unsod Is not equvaent to sayng that the entre
stock of goods on hand at a gven nventory date represented purchases made
many years pror thereto where the equvaent of such stock had been re-
penshed over md over agan. Such a stuaton s not comparabe wth that
consdered n Ozark Ms, Inc. (6 . T. ., 1179), n whch the actua cost of
goods on hand were shown and therefore t was unnecessary to resort to a
prncpe of presumpton as to what goods were on hand. In the present
case the orgna nventores whch we are asked to accept do not purport to
represent actua costs, but rather some knd of an appro maton based on the
cost of the orgna suppy of the varous artces sod.
In these crcumstances we can not adopt the nventores used n the orgna
returns for 1917 as representng nventores acceptabe for ncome ta purposes.
The pantff has the burden of showng that the method prescrbed by the
Commssoner s reguaton and foowed by hm n the nventores accepted
and used dd not correcty refect ncome and was not n accordance wth good
accountng. (Chcago rog Swtch Co. v. Unted States, supra.) We are
of opnon that ths burden has not been sustaned by pantff and that
t has not been shown that an arbtrary or caprcous resut has foowed from
the Commssoner s acton. The cam of pantff for a revsed ncome based
upon the nventores used n ts orgna return s therefore dened. The pet-
ton s dsmssed. It s so ordered.
S CTION 23(a). D DUCTIONS ROM GROSS
INCOM : P NS S.
rtce 121: usness e penses.
R NU CT O 1028.
Lega e penses ncurred n securng a refund of customs dutes,
or ta es, egay or mpropery coected. (See Mmeograph 3958,
page 33.)
S CTION 23(c). D DUCTIONS ROM GROSS
INCOM : T S G N R LLY.
rtce 151: Ta es. I-27-5533
I. T. 2632
R NU CT O 1928.
Under Oho Senate b No. 323 approved une 29, 1931 (Laws
of Oho, 1931), persona property tu es shoud, n genera, be
accrued as of the 1st day of anuary. The ad|ustments for ed-
era ncome ta purposes occasoned by the change n the State
aw set out.
Genera Counse s Memorandum 8218 (C. . I -2, 106) s mod-
fed n so far as t s nconsstent herewth.
dvce s requested reatve to the proper accrua date of rea and
persona property ta es n the State of Oho under Oho Senate b
No. 323, approved une 29, 1931 (Laws of Oho, 1931, page 714),
Srovdng for the evyng of ta es on ntangbe property at cass-
ed rates, and for the assessment of tangbe persona property for
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75
t 23(c), rt. 151
ta aton. That secton of aw amends, repeas, and suppements the
pree stng aw reatng to the ta es mposed upon persona prop-
erty n the State of Oho.
In Genera Counse s Memorandum 8218 t was hed that rea
and persona property ta es mposed by the State of Oho accrue
for ncome ta purposes as of the day precedng the second Monday
of pr. The provsons of aw upon whch that memorandum
was based were sectons 5328, 5366-1, 5518, 5548-1, and 5671 of
Page s nnotated Oho Genera Code, 1926 edton. Secton 5366-1
of that code specfcay provded for the stng and vauaton of
persona property for ta aton purposes as of the day precedng
the second Monday of pr. That secton, however, has been
repeaed by secton 4 of senate b No. 323. (See page 776 of the
Laws of Oho, 1931.) There s no amendment of the aw n the
above-mentoned senate b whch w affect the accrua date of
rea property ta es.
Under the Oho ta aw as amended, t s provded, n genera,
that a ta abe persona property sha be sted wth respect to
the ownershp or contro, vauaton, and ta ng dstrcts as of the
begnnng of the 1st day of anuary, annuay, and deposts not
ta ed at the source sha be sted as of the day f ed by the com-
msson for the stng of deposts n fnanca nsttutons ta ed at
the source, pursuant to secton 5411-1 of the Genera Code. (Sec-
ton 5368, page 734, Laws of Oho, 1931.) ta payer havng a
fsca year may, f authorzed by the ta commsson of Oho, st
hs ta abe property as of the cose of busness at the end of hs
fsca year. (Secton 5372-2, pages 737, 738, Laws of Oho, 1931.)
Under the provsons of secton 5 of senate b No. 323 (see
page 776, Laws of Oho, 1931) t s provded on page 777 that
The frst assessment of ta abe property of the knds and casses mentoned
n ths act sha take paee n the year 1932 at the tmes and n the manner pro-
vded n ths act.
The queston of the admnstratve effect of the aw as changed
was taken up wth the ta commsson of Oho and the foowng
nformaton was receved:
Wth the e cepton of pubc uttes, the returns of persona property (tan-
gbe and ntangbe) made In the year 1931 are canceed and annued and
no ta w be coected wth respect thereto. In such nstances the ony prop-
erty whch w be ta ed for the year, 1931, w be rea estate. The ta es on
pubc uttes for the year, 1931, are to be eved ony upon rea and tangbe
persona property and no ntangbes w be ncuded In the assessment so made.
Under amended senate b No. 323, the frst returns and assessments are
to be made n the year, 1932, wth the e cepton that the ta on bank deposts
n Oho fnanca nsttutons become a en on November 24, 1931. The return
of such deposts w be made by the fnanca nsttutons at the source between
the frst and second Mondays of March, 1982. Generay a returns w be
made as of the begnnng of anuary 1, 1932, wth the e cepton as heretofore
noted of bank deposts, and a further e cepton n the case of those ta payers
who return as of the cose of ther fsca year wth our permsson. Rea estate
w contnue to be ta ed as n the past and the en w attach as heretofore
on the day precedng the second Monday of pr n each year.
In vew of the foregong t s necessary to modfy the rue set
forth n Genera Counse s Memorandum 8218 for accrung persona
property ta es so as to conform to the State aw as amended. It s,
therefore, the opnon of ths offce that, under the Oho ta aw as
amended n 1931, n genera, persona property ta es shoud be
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23(c), rt. 151.
76
accrued as of the 1st day of anuary. or any ta abe year em-
bracng anuary 1, 1932, persona property ta es shoud be accrued
as of that date, wth the foowng e ceptons: (1) Ta es on deposts
n fnanca nsttutons (whether or not ta ed at the source) shoud
be accrued as of the date f ed by the ta commsson of Oho for
the stng and assessment of deposts ta ed at the source: and (2)
ta es mposed n the case of ta payers who have been authorzed by
the ta commsson of Oho to st ther persona property as of the
end of ther fsca year shoud be accrued as of the ast day of such
fsca year. Inasmuch as the accrua date of rea property ta es
s not affected by senate b No. 323, ta payers n Oho shoud
contnue to accrue such ta es as of the day precedng the second
Monday of pr, as provded n Genera Counse s Memorandum
8218.
It s evdent that n Oho the persona property ta es (other than
tangbe persona property ta es mposed aganst pubc uttes),
whch have been accrued as of the day precedng the second Monday
of pr, 1931 (namey, pr 12, 1931), n accordance wth Genera
Counse s Memorandum 8218, w not be pad, as they are canceed
and annued by senate b No. 323, approved une 29, 1931. -
though under the aw of Oho before t was amended ownershp of
persona property on pr 12,1931, was the event whch determned
the ta payer s abty for persona property ta es and f ed the
amount thereof wthn the rue ad down n Unted States v. nd-er-
son (269 U. S., 422, T. D. 3839, C. . -, 179), the act of une 29,
1931, so changed the State aw as to e tngush the abty. It fo-
ows that ta payers n Oho whose ta abe year began before pr
12,1931, and ended after une 29, 1931, and whose books are kept on
the accrua bass, must e cude as a deducton n computng net n-
come the amount of the canceed persona property ta es. Ths s
upon the theory that both the event whch permtted the accrua of
the ta es (ownershp of property on pr 12, 1931) and the event
whch e tngushed the abty (the enactment nto aw of senate b
No. 323 on une 29, 1931) occurred n the same ta abe year.
Where, however, the accrua date of the abty for persona
property ta es and the effectve date of the act whch e tngushed
the abty occurred n separate ta abe years, the stuaton must
be treated dfferenty. ta payer keepng hs books on an accrua
bass whose ta abe year began before pr 12, 1931, and ended
before une 29, 1931, may accrue such ta es as of the former date
for the reason that at the end of hs ta abe year senate b No. 323
had not been enacted, and the accrua may propery be made n
accordance wth the aw and facts as they then e sted. The enact-
ment nto aw of senate b No. 323 and ts approva on une 29,
1931, e tngushed the accrued abty and t s necessary for the
ta payer to take cognzance of ths change by proper bookkeepng
entres. In such cases (. e., where the ta payer s ta abe year
began before pr 12, 1931, and ended before une 29, 1931), the
accrued abty for persona property ta es s an aowabe deduc-
ton for that year, but the ta payer s books shoud be ad|usted by
addng to the proft and oss account for the succeedng ta abe vear
the amount of property ta es whch have been e tngushed by
operaton of aw, and such amount must be ncuded n ta abe n-
come. (G. C. M. 6075, C. . III-1, 76.) Ths treatment s n accord
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23(c), rt. 151:
wth the theory recognzed by the courts that where an accrued
abty s used to reduce ncome for one ta abe year, and the events
occurrng n a subsequent ta abe year e tngush the abty, the
amount thereof shoud be treated as ta abe ncome. (See urnet
v. Sanford rooks Co., 282 U. S., 359, Ct. D. 277, C. . -, 363
Putnam Natona ank v. Commssoner, 50 ed. (2d), 158, Ct. D.
415, C. . -2, 249 Nott- twater Co. v. Poe, 33 ed. (2d), 1000,
affrmed 42 ed. (2d), 1018 Chcago, Rock Isand Pacfc Ry.
Co. v. Commssoner, 47 ed. (2d), 990, cert, dened, 284 U. S., 618
Chareston Western Carona Ry. Co. v. wrnet, 50 ed. (2d),
342.) (Cf. artces 191 and 331 of Reguatons 74 cesor Prntng
Co. v. Commssoner, 16 . T. ., 886, reatng to recovery of bad
debts whch have been charged off and used to reduce ncome of a
prevous year.)
Genera Counse s Memorandum 8218 s modfed n so far as t
s nconsstent herewth.
ktc|: 151: Ta es. I-28-5541
I. T. 2633
R NU CT O 1928.
Under the Wsconsn statutes of 1927, ownershp of rea property
on the daw (fang between May 1 and the frst Monday n uy
of each year for ctes, and between May 1 and the ast Monday of
une esewhere n the State) as of whch such property s actuay
raned for assessment purposes s the event whch determnes
the abty for the ta .
In the nstant case the ta had accrued pror to the purchase of
the property on ugust 1, 1929, and shoud be treated as part of ts
cost
The ta payer purchased certan rea estate on ugust 1, 1929,
and contends that rea property ta es under the Wsconsn statutes
of 1927 (appcabe to ths case) do not accrue or become a en on
the property unt the ta s e tended on the ta ros, reyng on the
decson n Spear v. Door County (65 Wse, 298, 27 N. W., 60). The
specfc queston s shoud the rea property ta es n the nstant case
be added to the cost of the property, or aowed as a deducton n
computng net ncome. If the Wsconsn rea property ta es ac-
crued pror to ugust 1, 1929, the amount of the ta es n queston
shoud be captazed and treated as a part of the cost of the prop-
erty f not, the amount s an aowabe deducton n the computaton
of net ncome.
The ta es concernng whch the queston arses are ta es eved
for the year 1929. The ta payer purchased the property, ocated
n , Ws. (a cty of the frst cass), on ugust 1, 1929. The
statutes n force at the tme of the purchase and when the ta ng
offcas began the work of stng and vaung property on the assess-
ment ro were the statutes of 1927. The pertnent sectons of the
aw are quoted beow and the references to the numbered sectons are
from Wsconsn statutes of 1927.
70.07. What property ta abe. Ta es sha be eved upon a property n
ths State e cept such as s e empted therefrom.
70.06. ssessment, when made. The assessor of c:eh assessment dstrct
sha begn on the 1st day of May n each year, or as soon thereafter as prac-
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23(c), rt. 151.
78
tcabe, and proceed to make an assessment of a the rea and persona prop-
erty abe to ta aton n such dstrct. persona property sha be assessed
as of the 1st day of May n such year . Rea property may be assessed
at any tme between the 1st day of May and the tme of the sttng of the
board of revew for such dstrct.
(Note. Ths secton has been amended by an act approved September 8,
1929, chapter 401, Laws of Wsconsn, 1929.)
70.46. oards of revew members oryanzaton. (1) The supervsors and
cerk of each town, the mayor, cerk, and such other offcer or offcers, other
than assessors, as the common counc of each cty sha, by ordnance deter-
mne, the presdent, cerk, and such other offcer or offcers, other than the asses-
or, as the board of trustees of each vage sha, by ordnance determne, sha
consttute a board of revew for such town, cty, or vage. In ctes of the
frst cass, the mayor, cerk, ta commssoner and assessors sha consttute
the board of revew.
(2) Such board sha meet annuay on the ast Monday of une .
In ctes the board sha meet on the frst Monday of uy In each year.
Secton 70.50 provdes that, e cept n ctes of the frst cass, the
assessor sha, on or before the frst Monday n ugust annuay,
dever the assessment ro so competed and a the sworn statements
and vauatons of persona property to the cerk of the town, cty, or
vage, who sha fe and preserve the same n hs offce.
Wth respect to ctes of the frst cass, the assessment or vauaton
by assessors n the preparaton of the assessment ro s covered by
secton 70.06, supra. Secton 70.03 provdes that n a ctes of the
frst cass, the severa assessors sha dever ther respectve assess-
ment ros to, and fe them wth, the ta commssoner on the ast
Monday of une n each year, or as soon as practcabe there-
after. The ta commssoner sha gve notce by pubcaton n the
offca papers of sad cty that on a day theren named for each
assessment dstrct, the assessment ro for sad dstrct w be open
for e amnaton by the ta abe nhabtants thereof. On the ast
Monday of une the ta commssoner sha ca together a of the
assessors, and sad ta commssoner together wth such assessors
sha consttute an assessment board. Ths board s empowered to
make a necessary correctons and changes and after they are made
the ta commssoner sha submt the corrected assessment ro to
the board of revew.
s prevousy stated n secton 70.46, the board of revew n ctes
sha meet on the frst Monday n uy each year and may ad|ourn
from day to day or from tme to tme unt ts busness s competed.
Secton 70.51 provdes that the board of revew sha compete the
assessment ro of the cty wthn the tme prescrbed by aw and de-
ver the assessment ro to the ta commssoner, who sha make out
therefrom a compete ro. Whe the ta commssoner may make
out a ta ro from the assessment ro, the ta ro can not be com-
peted unt after the evy of ta es by the. proper authortes n the
respectve ta ng dstrcts, ncudng the State evy for State pur-
poses, the county evy for county purposes, and the town, cty, or
vage evy for oca purposes.
The State evy does not become avaabe unt some tme n Octo-
ber and s not certfed to the county cerk unt on or before the
fourth Monday n October. (Secton 70.59.) The county evy and
rate are not determned unt the annua meetng of the county board
and after the second Tuesday n November of each year. (Sectons
70.61 and 70.62.) The common counc can not make ts evy unt
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79
I 23(c), rt. 15L
after the meetng of the board of estmates n ugust of each year,
and, as a matter of practce, does make the evy n the atter part
of October.
The eves must be avaabe to the ta commssoner n order to
compete the ta ro for devery to the cty treasurer on the second
Monday n December. (Secton 70.51.)
The ta payer refers to the genera prncpe, wth respect to the
accrua of ta es for edera ncome ta purposes, stated by the
Unted States Supreme Court n Unted States v. nderson et a.
(269 U. S.,422, T. D. 3839, C. . -, 179), as foows:
In a technca ega sense t may be argued that a ta does not
accrue unt t has been assessed and becomes due but t s aso true that n
advance of the assessment of a ta , a the events may occur whch f the
amount of the ta and determne the abty of the ta payer to pay
t
The ta payer contends that not unt the ta ro s competed a
abty f ed upon the ta payer, and ctes Spear v. Door County
(65 Wse., 298, 27 N. W., CO) n support of ts vew that a ta s not
a en under the Wsconsn aw unt e tended on the ta ro. In
that case, the owner n fee of the rea estate on November 15, 1875,
covenanted n a mortgage to pay a ta es subsequenty eved on
the mortgaged premses. The mortgaged premses, upon forecosure
were sod on pr 8, 1880, one consderaton beng a promse to
protect the premses from a pror ta es. The court sad:
In the mortgage the pantff covenanted to pay a ta es subse-
quenty eved on sad mortgaged premses. Ths mortgage was e ecuted
November 15, 1875, and must have been before the ta es for the year 1S75 had
been e tended on the ta ro for that year. We thnk ths was a covenant
to pay a ta es whch thereafter became a specfc en upon sad ands by
beng e tended upon the ta ro of the town n whch they were stuate. The
rue f ed by statute as to who sha pay the ta es for the current year, as
between grantor and grantee, when no agreement s made n respect to the
same, goes upon the theory that te ta es are not a specfc en upon rea
estate unt the ta ro s competed and the ta es e tended on such ro.
The grantor s not abe, on hs convenant aganst ncumbrances,
for the ta es of the current year uness they have been e tended on the ta
ro at the date of hs conveyance. t the date of the pantff s mortgage hud
he conveyed the ands by warranty deed, he woud not have been abe for
the payment of the ta es for the current year, uness upon speca agreement.
(Itacs n orgna.)
It does not foow, however, that there was no abty for the
ta es pror to the date when the en attached. The court merey
states that the grantor s not abe on hs covenant, and hs
covenant was to pay a ta es subsequenty eved. Labty for
ta es may accrue for edera ncome ta purposes pror to the
determnaton of a specfc rate or ascertanment of the amount of ta
aganst the property.
It s hed that, n the case of rea estate under the Wsconsn
statutes of 1927, the ownershp of property on the date (fang
between May 1 and the frst Monday of uy n each year for ctes,
and between May 1 and the ast Monday of une esewhere n the
State) as of whch such property s actuay vaued for assessment
purposes s the event whch determnes the abty for the ta .
In the nstant case the ta had accrued pror to the purchase of
the property on ugust 1, 1929, and shoud be treated as a part of
the cost of the property. (See G. C. M. 7235, C. . III-2, 197.)
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23(c), rt. 151.
80
rtce 151: Ta es. I-34-5621
L T. 2638
R NU CT O 1928.
Under the aws of the State of Wyomng nhertance ta es accrue
on the ate of death of the decedent. Where the estate s books
of account are kept on the accrua bass, such ta es are deductbe
for the year n whch the death occurred, regardess of when pad.
Inqury s made reatve to the year for whch the estate of s
entted to deduct Wyomng nhertance ta es pad durng the years
1930 and 1931,
It s shown that ded testate n 1929, that the e ecutor for the
estate kept the books of account on the accrua bass, and that ed-
era ncome ta returns were fed on that bass. The e ecutor
eected to report ncome on the caendar-year bass and as a resut
fed a return for the perod from the date of death to December
31, 1929, and a return for the caendar year 1930. Wyomng nhert-
ance ta es were pad n 1930 and addtona Wyomng nhertance
ta es were pad n 1931.
No nhertance ta es were deducted n the return for 1929, whch
ncuded ncome from date of death to December 31, 1929. In the
return for 1930 the e ecutor for the estate deducted Wyomng nher-
tance ta es pad durng the year 1930 on the theory that the ta es
accrued durng that year. The cam for refund s based on the
theory that addtona nhertance ta es pad n 1931 aso represent
ta es whch accrued n 1930 and whch shoud be aowed as a deduc-
ton for the year 1930. The e amnng offcer contends that nhert-
ance ta es may not be aowed as a deducton to the estate for the
year 1930 for the reason that Wyomng nhertance ta es accrue upon
the death of the decedent, whch n the nstant case occurred n
1929.
Secton 23(c) of the Revenue ct of 1928 provdes that n com-
putng net ncome there sha be aowed as a deducton ta es pad
or accrued wthn the ta abe year, wth certan e ceptons not here
matera. It s aso stated n that secton that estate, nhertance,
egacy, and successon ta es accrue on the due date thereof, e cept
as otherwse provded by the aw of the |ursdcton mposng such
ta es, and sha be aowed as a deducton ony to the estate.
Secton 4 of the nhertance ta aws of the State of Wyomng,
chapter 78 (orgna house b No. 96), Sesson Laws of Wyomng,
1925, provdes n part as foows:
Sec. 4. ta es mposed by ths act sha take effect at and accrue upon
e death of the decedent, or donor, and sha be due and payabe at the e -
praton of s teen (16) months from such death, e cept as otherwse provded
n ths act . Itacs supped.
In vew of the fact that the above-quoted provson of the aw of
the State of Wyomng, whch s the aw of the |ursdcton mposng
the nhertance ta es, specfcay provdes that the nhertance ta es
sha accrue upon the death of the decedent, t s hed that the n-
hertance ta es accrued n the nstant case on , 1929, the date
of s death. Inasmuch as the e ecutor of the estate adopted the
accrua method of accountng and fed returns on the caendar-year
bass, the entre amount of the nhertance ta es s deductbe for
the ta abe year 1929, regardess of when pad. The ta payer s con-
tenton that such ta es accrued n 1930 shoud, therefore, be dened.
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81
23(c), rt. 151
rtce 151: Ta es. I-39-5719
I. T. 2643
R NU CT OP 1928.
Ownershp of property n Lousana on anuary 1 s the event
whch determnes the abty for both rea estate and persona
property ta es and f es the amount, though not ascertanabe on
that date. Rea and persona property ta es n Lousana accrue,
therefore, for edera ncome ta purposes, on anuary 1 of each
year.
rung s requested reatve to the date on whch rea and
persona property ta es accrue n the State of Lousana.
The aw under whch such ta es are mposed s contaned n
Marr s nnotated Revsed Statutes of Lousana, voume 3. The
appcabe provsons of the State aw are as foows:
6202. Secton 1, act 170, 1898, page 346. or the caendar year . D.
1914 , and for each succeedng caendar year, there are hereby eved
annua ta es amountng n the aggregate to ms on the doar of
the assessed vauaton of a property stuated wthn the State of Lous-
ana .
The foregong secton further defnes rea property and concudes
wth a ong st of persona property whch s ta abe.
6219. Sec. 10. ach ta assessor, parsh of Oreans e cepted, on and
after the 1st day of anuary of each year, sha dgenty e amne the
records In the offces of mortgages and conveyances and abstracts of and
entres, and sha otherwse make fathfu nqury and Investga-
ton to ascertan what ta abe property n hs dstrct or parsh beongs to
resdents and to absent owners, and to unknown owners and e sha make a
separate st descrbng each tract of and and other tems of ta abe property
beongng to any absent owner whose name s unknown, and sha aff the
vauaton thereof uness sad absent owner sha have
devered to hm a correct and compete ta st on or before the
1st day of une .
6238. Sec 22. Immedatey after stng and estmaton of the vauaton
of a rea and persona property sha have been competed by the assessors
(parsh of Oreans e cepted), whch sha In a cases be done on or before
the 1st day of une n each and every year, the sad assessors sha gve notce
by pubcaton that the stng of the property has been competed,
and the estmated vauaton made theren by the sad assessor n accordance
wth aw. and that the sad st sha be e posed n the offce of the sad
assessor for nspecton and correcton for a term of twenty (20) days, begn-
nng ne t after the ten (10) days requred for notce heren provded sha
have e pred.
6239. t 164, 1904, page 341. In the parsh of Oreans a the assessors
n and for sad parsh sha meet on the 2d day of anuary n each year, or f
a hoday then the ne t succeedng day not a hoday and day thereafter
(Sundays and ega hodays e cepted) unt the assessments sha have
been competed, whch sha, n a cases be done on or before the 15th day
of March of each year.
The sad assessors for sad parsh sha gve notce by pubcaton, as now
provded by aw, of the competon of the assessment of property n sad
parsh, and the estmated vauaton made theren, and that the sad sts w
be e posed n the offce of the board of assessors for nspecton and correc-
ton from the 16th of March to the 31st of March, both ncusve,
of each year .
6211. Sec. 4, act 78, 1006, page 124. The, ta assessors heren provded
for .sha have a the powers and dscharge a the dutes gven to and pre-
scrbed for ta assessors by e stng aws, e cept they sha not be regstn-s
of voters. They sha enumerate and st and assess property as now drected
by aw, and be sub|ect to a the obgatons prescrbed by aw. They sha pre-
pare and have ready ther ros showng the vauatons or assessments made
by them, and ay the same before the boards of revew wthn the tme and In
the manner prescrbed by aw.
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82
6215. Sec. 7. act 170, 1S98, page 350. It Is made the duty of the ta
assessors throughout the Stte to pace upon the assessment st a property
sub|ect to ta aton, ncudng merchandse or stock n trade on hand at the
date of stng, wthn ther respectve dstrct or parshes .
Ta assessors n Lousana are eected at the genera eecton and
hod offce for a term of four years from and after December 31 of
the year n whch they are eected. The audtor of pubc accounts
s requred to prepare and have forwarded to the severa assessors
n the State (parsh of Oreans e cepted), pror to the 1st day of
anuary of each year, ta sts suffcent to secure the stng of a
property sub|ect to ta aton. The property owner s requred to
prepare a st of hs property n accordance wth the prescrbed
form, and to return the st to the assessor before the 1st day of
May of each year. The sts have coumns for vauaton to be fed
n by the assessor.
In the parsh of Oreans the severa assessors comprse a board of
assessors and the audtor of pubc accounts furnshes them such sts
as they requre. The ta payer s requred to make a return of bs
property wthn 20 days after the st has been eft at hs domce
or pace of busness.
cept as ndcated by the requrements stated and the sectons
of the aw quoted, there s nothng to ndcate when the ta assessors
(parsh of Oreans e cepted) sha dstrbute the ta sts or sha
begn the work of assessment. The courts have hed, however, that
for the purpose of assessment the status of property s to be taken as
of the 1st of anuary of the year n whch the assessment s made.
(Pafrey et a. v. Conney, 106 La. 699, 31 So., 148 Southern Insur-
ance Co. v. oard of ssessors, 49 La- 401, 21 So., 913 ome Insur-
ance Co. v. oard of ssessors, 48 La., 451, 19 So., 280.) ence,
budngs and mprovements constructed after anuary 1 are not
sub|ect to ta for that caendar year. ( unke rck Works, Ltd., v.
Poce ury of voyees, 113 La., 1062, 37 So., 970.) ut the average
stock n trade carred durng the year s the bass of assessment.
Movabes brought nto the State after anuary 1 are assessabe
( ammond Lumber Co., Ltd., v. Smart, 129 La., 945, 57 So., 277),
even though ta es may have been pad on the same n another State
(Grggsby Constructon Co. v. reeman, Ta Coector, 108 La., 435,
82 So., 399) and movabes brought from one ta ng dstrct of the
State nto another ta ng dstrct are assessabe n the atter f not a-
ready assessed n the former. The fact that the property was ony ac-
qured after anuary 1 does not make t nonta abe from date of
acquston to the end of the year. (Ctzens ank Trust Co. v.
oard of ssessors, 129 La., 1091, 57 So.. 528.) Rea estate n an-
ne ed terrtory owes ta es to that potca subdvson n whch t
was stuated anuary 1. (Cty of New Ibera v. Poce ury of
Ibera Parsh, 135 La., 769, 66 So., 193.)
In Southern Insurance Co. v. oard of ssessors (49 La. nn.,
401, 21 So., 913), the court sad:
that there shoud be some f ed date determnng the rghts of the
partes, but they contend that that date s f ed as of the 1st of March, when
the assessments are cosed. We are not of that opnon. It s true that
there s a perod of tme between that when the busness of assessment com-
mences and that when t Is ordered to be cosed, but that s because, In the
nature of thngs, the assessors can not make the assessment over an e tended
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83
23(c), rt. 151.
terrtory In one day and It Is true that durng that open perod the ta payer
may make hs return for assessment purposes, but, when he does so, e s
e pected to make t on the bass of the condton of thngs e stng on the 1st
of anuary.
It was concuded, therefore, that the evyng of ta es s for the
caendar years, and the assessment of property for the pur-
pose of evyng the annua ta es s kewse for the caendar
year. So, when the aw provdes that assessment must begn on the
2d of anuary and be competed on the 1st day of March, t con-
tempates an assessment on the bass of the condton of thngs
e stng on the 1st day of anuary.
The rue n regard to ownershp of property for ta aton s
stated n 37 Cyc. at page 788, as foows:
Ordnary nnd n the absence of statute to the contrary, property s ta abe
ony to the person who s the owner thereof at the date for ts stng or
assessment, or the date f ed by statute as of whch ts ownershp for purposes
of ta aton Is to be determned .
Ownershp of property n the State of Lousana on anuary 1
s the event whch determnes the abty for both rea estate and
persona property ta es and f es the amount, though not ascertan-
abe on that date. Rea and persona property ta es n Lousana
accrue, therefore, for edera ncome ta purposes, on anuary 1
of each year.
mcL 151: Ta es. L41-5769
I. T. 2647
R NU CT OP 1928.
Ownershp of property n the State of Montana on the frst
Monday of March s the event whch determnes the abty for
both rea and persona property ta es. Such ta es accrue, there-
fore, for edera ncome ta purposes on that date.
Inqury s made whether , a ta payer, resdng n Montana, s
entted to deduct n hs return fed for the caendar year 1930 the
amount of ta es accrued on certan rea property dsposed of on
November 1, 1930.
The books of the ta payer are kept on the accrua bass and hs
returns are fed for the caendar year. On December 1, 1930, the
frst haf of the ta es for that year was pad, and on May 31, 1931,
the second haf was pad. The tota amount of such ta es was
accrued, however, on the books of account mantaned by the ta -
payer for 1930.
Secton 2002 of voumo 1 of the Revsed Codes of Montana, 1921,
provdes as foows:
2002. When assessment to oe made Credts must oe assessed, how. The
assessor must, between the frst Monday of March and the second Monday of
uy n each year, ascertan the names of a ta abe nhabtants, and a prop-
erty n hs county sub|ect to ta aton and must assess such property
to the persons by whom t was owned or camed, or n whose possesson or
contro t was at 12 o cock m., of the frst Monday of March ne t preced-
ng .
In 1927 the foregong provson was modfed as to the tme of
assessment of rea estate. The modfyng provsons are set forth as
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23(c), rt. 151.
84
sectons 2002.1 and 2002.2 n the Revsed Codes of Montana, Suppe-
ment, 1923-1927, as foows:
2002.1. auaton of rea estate for assessment n 1927. rea estate and a
Improvements on rea estate, n ths State, sub|ect to ta aton sha
be separatey vaued for assessment and ta aton purposes n the year 1927, and
bennay thereafter n each odd-numbered year, wth reference to the vaoe
thereof at 12 o cock noon on the frst Monday of March precedng the assess-
ment, and such vauaton n each such odd-numbered year sha consttute the
assessed vauaton thereof unt the ne t benna assessment .
2002.2. auaton by assessor ffect destructon mprovements. - ach asses-
sor sha annuay vaue and assess a rea estate that sha have become sub-
|ect to ta aton snce the ast prevous vaung and assessng of rea estate n
the county, or whch has escaped ta aton the precedng year, and he sha aso
annuay vaue and assess a budngs, structures and other mprovements on
rea estate whch sha not have been prevousy vaued and assessed.
Secton 2050 of the Revsed Codes of Montana, 1921, provdes that
the assessor must compete hs assessment book on or before the
second Monday n uy. Secton 2052 states that the assessment
book must be devered to the county cerk as soon as competed.
Secton 2161 of the Revsed Codes of Montana, Suppement, 1923-
1927, provdes that on or before the thrd Monday of October he
must dever the orgna assessment book to the county treasurer.
Secton 2169 makes the requrement that wthn 10 days after the
recept of the assessment book the county treasurer must pubsh a
notce specfyng:
1. That one-haf of a ta es eved and assessed w be due and payabe
before 0 o cock p. m. on the 30t day of November ne t thereafter, aud that
uness pad pror thereto the whoe amount of sad ta es w be denquent and
w draw nterest at the rate of 1 per cent per month from and after such
denquency, and 10 per cent w be added to the amount thereof as a penaty,
and that one-haf of a ta es eved and assessed w be due and payabe on or
before 6 o cock p. m., on the 31st day of May ne t thereafter, and that uness
pad pror to sad date sad ta es w be denquent .
Chapter 67 of the Laws of Montana, 1931, has atered the re-
qurements under secton 2169 to some e tent but not so as to change
the dates on whch the ta es become due and payabe. Inasmuch as
the case n queston comes under the provsons of the aw n e st-
ence n 1930, the provsons of chapter 67 are not further dscussed.
It thus appears that the ta on both rea and persona property n
the State of Montana n 1930 was assessed as of the frst Monday of
March of that year and that t was due and payabe on November 30,
1930. ta payer, however, was requred to pay ony one-haf of the
tota ta on that date, and one-haf on May 31, 1931.
The genera rue n regard to the ta aton of property s stated n
37 Cyc, page 788, as foows:
Ordnary and In the absence of statute to the contrary, property s ta -
abe ony to the person who s the owner thereof at the date for ts stng or
assessment, or the date f ed by statute as of whch ts ownershp for purposes
of ta aton s to be determned .
Ownershp of property n the State of Montana on the frst Monday
of March n each year s the event whch determnes the abty for
both rea and persona property ta es. (See Unted States v. nder-
son, 269 U. S., 422, T. D. 3839, C. . -, 179.) Rea and persona
property ta es n Montana accrue, therefore, for edera ncome ta
purposes on that date.
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85
23(e), rt. 171.
Inasmuch as the ta payer kept hs books on the accrua bass and
fed hs return for the caendar year, he s entted to deduct the
entre ta assessed for 1930 n hs return for that year.
rtce 151: Ta es.
R NU CT O 1928.
New York State franchse ta . (See Ct. D. 581, page 141.)
S CTION 23(e). D DUCTIONS ROM GROSS
INCOM : LOSS S Y INDI IDU LS.
rtce 171: Losses. I-37-5675
G. C. M. 10873
R NU CTS O 1926 ND 1928.
Gambng osses ncurred by a ctzen of the Unted States In
egazed foregn gambng casnos shoud be treated as aowabe
deductons from gross ncome f (a) the transactons producng
those osses were entered nto for proft and (b) the ta payer sub-
mts suffcent evdence that the gambng transactons were en-
tered nto for proft to warrant the ureau s aowance of the
osses.
n opnon s requested reatve to proposed certfcates of over-
assessment n favor of the ta payer for the years 1927 and 1928 n
the amounts of 2.75a doars and 3.41a doars, respectvey.
The ssue n the case s the deductbty from ncome of gambng
osses aggregatng 14.40a doars for 1927 and 13.65a doars for
1928, ncurred by the ta payer, a ctzen of the Unted States, n
certan egazed gambng casnos n the Repubc of rance.
Secton 214(a)5 of the Revenue ct of 1926 and secton 23(e)2 of
the Revenue ct of 1-928 provde that n computng net ncome there
sha be aowed as deductons osses sustaned durng the ta abe
year and not compensated for by nsurance or otherwse
f ncurred n any transacton entered nto for proft, though not
connected wth the trade or busness.
It appears that the ta payer s agent fed orgna returns for
1927 and 1928 for the ta payer wthout knowng that osses had
been sustaned through gambng n rench casnos and, accordngy,
dd not take any deductons therefor. Consequenty, upon the ds-
cosure of the osses, amended returns were fed, accompaned by
cams for refund n the amounts of 3.31a doars for 1927 and 3.43a
doars for 1928.
These cams were audted by the ureau upon the bass of aow-
ng the osses as deductons resutng n proposed certfcates of
overassessment n favor of the ta payer for 1927 and 1928 n the
respectve amounts of 2.75a doars and 3.41a doars. Such certf-
cates were then submtted to ths offce for revew, but were re-
turned wthout approva for the reason that there was no proof
that the osses sustaned were ncurred n transactons entered nto
for proft. In returnng the certfcates ths offce cted Lous D.
eaumont v. Commssoner (25 . T. ., 474, C. . I-1, 1), and
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23(e), rt. 171.
86
suggested that the ta payer be gven an opportunty to submt such
proof.
In eaumont v. Commssoner, supra, promugated ebruary 9,
1932, the oard of Ta ppeas dsaowed smar osses from ega-
zed gambng at Monte Caro, wthn the Prncpaty of Monaco, for
ack of proof that the osses were ncurred n any transactons entered
nto for proft. In ts opnon the oard stated n part as foows:
ven though the gambng was ega, as contended by the pettoner,
we are of the opnon that the pettoner s case s not aded thereby. The
deducton aowed by the statute s of osses ncurred n any transactons
entered nto for proft. The queston whether the gambng transactons under
consderaton were entered nto for proft s a queston of fact, upon whch the
evdence before us n these proceedngs s entrey sent. We can not proceed
upon a presumpton that a gambng transactons are entered nto for proft
wthn the meanng of the statute. The pettoner was a weathy man vng
abroad at fashonabe resorts, apparenty as a matter of choce. e was not a
professona gamber and was not dependent upon the success of hs gambng
ventures for a vehood. It may we be that he nduged n games of chance
for sport and recreaton and wthout serous concern as to the fnanca resuts.
Upon the evdence the respondent s sustaned n dsaowng the deductons.
Itacs supped.
s the evdence n the nstant case was entrey sent on the
pont, the ta payer was gven an opportunty to submt addtona
facts tendng to estabsh her cam that her transactons n the
rench gambng casnos were entered nto for proft. Through her
attorney she has submtted further evdence whch may be summa-
rzed as foows:
The osses descrbed n the cams for refund and the protest were
sustaned durng the ta abe years 1927 and 1928, and were not com-
pensated for by nsurance or otherwse. The amounts ost on the
varous dates set out n the cams for refund and the protest were not
the gross amounts of osses but were the amounts o osses, reduced
by the amounts of gans, on a seres of separate transactons e tendng
frequenty over a number of days and sometmes over a number of
months. ach transacton was entered nto wth the e pectaton and
beef that, n accordance wth the aws of chance, or mathematca
probabty, and the rues of the partcuar transacton, a proft woud
resut, and n many nstances a proft dd resut. The ta payer made
a study of the aws of chance affectng the conduct of the transactons
nto whch she entered, and beeved that she was conductng the
transactons n such a way that they woud utmatey resut n a
proft to her. She frequenty succeeded n conductng her gambng
transactons at a proft over a consderabe perod of tme, and
engaged n the partcuar transactons nvoved wth the hope and e -
pectaton of dong so agan. The so-caed games of chance n whch
the ta payer engaged n the years 1927 and 1928 were chemn de fer
and baccarat. These games the ta payer payed wth the beef that
they are not capabe of beng so conducted as to dsturb the opera-
ton of the appcabe aws of chance or mathematca probabty.
The ta payer aso bought and sod shares of stock, bonds, and
other property on the M Stock change and other e changes durng
the years 1927 and 1928, resutng n respectve profts of 5.89ar do-
ars and 39.88a doars, whch were returned by her as ncome.
These stock transactons of purchase and sae were entered nto
wth the same prevous study of the factors affectng the kehood
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23(e), rt. 171.
of proft, and wth the same hope and e pectaton of proft as n the
case of the gambng transactons. In ths respect the ta payer dd
not dfferentate between transactons at the varous casnos where
osses were sustaned and transactons n corporate stocks n whch
profts were reazed.
The record shows that the ta payer was the recpent of a very
arge annua ncome derved prncpay from trusts, that she ved
abroad, that her osses were not e cessve n proporton to her ncome,
that her gambng was not done as a means of vehood, that such
gambng was prohbted n rance e cept n a few waterng resorts
for the rch, that she traveed a great dea, and had nterests n other
parts of the word, from a ot whch t mght be argued that the
ta payer s gambng was done for sport and amusement, or for recre-
aton and entertanment, or for the thr of t, and not for proft
wthn the meanng of the statute. It s of course a matter of com-
mon knowedge that the odds are heavy aganst the partcpant n
such gambng.
The queston then occurs whether such facts of record coud rea-
sonaby be regarded as suffcent to overcome the evdence submtted
by the ta payer. The comments of the oard n the quoted porton
of the eaumont case gve some coor to the answer that they mght
be so consdered, but on the other hand the oard dd not have before
t evdence of the same weght and suffcency as has been presented
to the ureau n the nstant case. In dgar N. Carnrck v. Com-
mssoner (21 . T. ., 12) the oard sad:
In a case such as ths, the ta payer seekng the deducton must
prove n fact that the transacton resutng n the aeged oss was and reason-
aby mght have been entered nto for proft.
If reasonabeness were the test that s, f the queston were
whether the ta payer reasonaby entered nto the gambng trans-
actons for proft there mght be good ground for hodng that her
osses were not deductbe but the statute does not appear to provde
such a test, and the oard s use of the word reasonaby n the
Carnrck case s beeved to reate to the partcuar case whch the
oard had under consderaton.
In the eaumont case the oard sad that the queston whether
the gambng transactons under consderaton were entered nto for
proft s a queston of fact. Therefore, n order to sustan a ds-
aowance of gambng osses as deductons the ureau woud have
to overcome the ta payer s testmony or other evdence that such
transactons were n fact entered nto for proft.
ccordng to the evdence submtted, the transactons entered nto
were not soated, but frequent, wth varyng resuts, and were based
on a study of the aws of chance, f not on a pan. It seems to be
the fact that payers do devse pans for pay n the beef, whether
sound or not, that these gambng estabshments can be broken,
and aso that payers do actuay pay for proft. In the ght of
such evdence as the ta payer has produced, the ureau woud need
somethng more than presumpton to warrant a concuson to the
contrary.
Consderaton must aso be gven to the fact that the queston
whether snch gambng osses are propery deductbe wthn the.
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23 (k), rt. 203.
ss
meanng of the statutes s not fuy an open queston. though
osses n ega transactons are dsaowed as deductons to the
e tent that they e ceed the gans durng the ta abe year from sm-
ar transactons ppea of Mtche M. rey, |r., et a., 1 . T. .,
338. C. . -2, 25 ppea of ames P. Mc enna, 1 . T. ., 326,
C. . -2, 46 and I. T. 1854, C. . II-2, 125), osses on eecton
bets where ega have been hed to be aowabe deductons as osses
sustaned n transactons entered nto for proft (I. T. 1865, C. .
II-2, 125), and osses ncurred n bettng on horse races where ega
have kewse been hed so deductbe (S. M. 2680, C. . III-2, 110 .
It s the opnon of ths offce that no ogca dstncton can be made
between osses at egazed foregn gambng casnos and osses sus-
taned through bettng on horse races and eectons where such trans-
actons are ega, nor woud the fact that the transactons took pace
n a foregn country be matera n the case of a ctzen of the Unted
States.
In vew, therefore, of the ureau s poston wth respect to osses
sustaned through bettng on horse races and eectons, t s concuded
that gambng osses ncurred n egazed foregn gambng casnos
shoud be treated as aowabe deductons from gross ncome f (a)
the transactons producng those osses were entered nto for proft,
and (b) the ta payer submts suffcent evdence that the gambng
transactons were entered nto for proft to warrant the ureau s
aowance of the osses. s the ta payer n the nstant case has sub-
mtted evdence substantatng the fact that her gambng transac-
tons were entered nto for proft, the osses shoud be aowed as
deductons.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
S CTION 23 (k). D DUCTIONS ROM GROSS
INCOM : D PR CI TION.
rtce 203: Deprecaton of ntangbe prop- I-36-5657
erty. G. C. M. 10845
R NU CT OP 1928 ND TRIOR R NU ) CTS.
The ta payer, n smetng company, made n contract wth a
mnng corporaton In whch t hed the ma|orty of the out-
standng stock, the smetng company to buy and the mnng
company to se a of the ores mned upon or comng from
any or a the propertes owned or eased by the mnng company
wthn a certan dstrct.
ed, the contract n the nstant case was vad and enforce-
abe on March 1, 1013, and the ta payer s entted to a determna-
ton of the March 1, 1913, vaue of the contract n order that the
vaue determned upon may be amortzed or e hausted over the
remanng usefu fe of the contract.
n opnon s requested whether the M Company (herenafter
referred to as the Smetng company ) s entted to a vauaton
as of March 1, 1913, on an ore purchase agreement made between t
and the N Company (herenafter referred to as the Mnng com-
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89
23(k), rt. 203|
pany ) to support ts cam for amortzaton of the contract over
the perod from March 1, 1913, to ugust 31, 1930.
Pror to 1913 the Smetng company and the Mnng company
(the ma|orty of whose stock was owned hy the Smetng company)
entered nto an agreement by the terms of whch the Mnng com-
pany agreed to se and the Smetng company agreed to purchase
a of the ores mned upon or comng from any or a the
propertes owned or eased by the Mnng company n a certan
dstrct. The matera parts of the contract read as foows:
The Mnng company agrees to se to the Smetng company a
the ores mned upon or comng from any and a propertes owned or
eased by the Mnng company n the Dstrct n the State of R .
The Smetng company agrees to buy, and accept devery of, a the ores of
the descrpton mentoned n the foregong artce whch the Mnng company
sha tender for devery n accordance wth ths contract, as and when the same
sha be so tendered, and to pay therefor as herenafter provded.
Ths agreement sha be bndng upon and nure to the beneft of the suc-
cessors and assgns of the respectve partes hereto, and a ts provsons re-
atng to the sae of ore sha, as to the Mnng company, be deemed to be and
consdered as a covenant runnng wth the aud. The Mnng company, n
further consderaton of the premses, undertakes and agrees that n the event
that t sha se, ease, or otherwse dspose of any or a of ts mnng property
or dspose of ts stock n a company or companes ownng or easng mnng
property producng the ore covered by ths agreement durng the perod cov-
ered by ths agreement, t w at ts opton obtan the prevous wrtten consent
of the Smetng company to such sae, ease, or dsposa, or w cause ts
successors and assgns n nterest n such mnng property or stock to agree
wth the Smetng company to assume, fuf, and carry out each, every and
a of the covenants and agreements wth respect to the sae of products heren
set forth, to be kept and performed by the Mnng company, and to make a
covenant wth the Smetng company whch sha requre smar agreements,
assumptons, and covenants to those n ths artce provded for on any subse-
quent transfers of any such property. nd n the event that the Mnng com-
pany sha not obtan the prevous wrtten consent of the Smetng company
to such sae, ease, or dsposton, the Mnng company, notwthstandng any
such sae, ease, or other dsposton of any mne or stock, sha be and reman
responsbe and abe to the Smetng company for the due sae and devery,
accordng to the provsons of ths contract, of a products theren contracted
to be sod to the Smetng company and agrees that such sae and devery
sha be so made.
The Income Ta Unt has dened the cam for aowance for
amortzaton on the contract over the perod March 1, 1913, to
ugust 31, 1930, for the foowng reasons:
1. The contract s for the purchase of ores after the producton by
the Mnng company, wthout specfc provson as to the tota quan-
tty of ores to be purchased over the fe of the contract, or for any
specfc amounts to be purchased yeary.
2. The contract dscoses no eements of a ease or other contractua
provsons whch convey to the purchasng company any equtes n
unmned ores or any other tangbe property.
3. No provson appears n the contract that carres any assurance
or guaranty, or provdes any other bass, for the determnaton of
the future profts, a or any part of whch actuay accrued or was
determnabe as of March 1, 1913.
The unt takes the poston that any potenta vaue t may have
had on March 1, 1913, s attrbutabe many to mproved methods
n the mnng and the refnng of ores whch nfuenced the margn
of profts.
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23(k), rt. 203.
90
It seems evdent from the foregong that the acton of the unt
n denyng that the agreement had any vaue as of March 1, 1913, s
based upon the beef that the agreement was vod, ether for want of
mutuaty of obgaton or for ndefnteness, n that t dd not bnd
the Mnng company to produce any specfed quantty of ore ether
by a ma mum or mnmum cause, and that the Mnng company
coud have ceased operatons or gone out of busness at any tme t
chose to do so. In other words, the contract has been regarded as
havng no vaue because t apparenty was beeved that the measure
of the product to be sod was eft to the uncontroed wsh or desre
of the vendor.
n e amnaton of the contract ceary shows that the Smetng
company was requred to purchase a ores whch the Mnng com-
pany produced. In other words, t woud appear that the Smetng
company agreed to purchase the tota output of the mnes owned or
controed through ease or other arrangement by the Mnng com-
pany. t the outset t shoud be noted that a dstncton must be
drawn between contracts whch, wthout specfyng e act quanttes,
provde for the sae or purchase of a or a specfed part of the out-
put of an estabshed pant or busness and contracts whch by ther
terms eave the amount to be sod or purchased sub|ect to the uncon-
troed wsh, desre, or need of one of the partes.
In Mer v. Robertson (266 U. S., 243) the Unted States Supreme
Court had for consderaton the vadty of a contract for the sae
of the entre znc product of a certan mne. In sustanng the vad-
ty of the contract and n affrmng the |udgment of the ower courts
for damages for breach of the contract, the court sad:
Was there a ack of mutuaty and want of consderaton
ppeants contend that the partes faed to make a contract, and assert
the seer promsed ony such ore as t mght shp from the mne and was not
bound to shp a the ore produced or to mne or shp any ore.
The buyers had a arge busness n the smetng of znc ore n the
Unted States. The seer had been engaged for a ong tme n the mnng of
copper ore from the Mammoth Wne. ary n 1914, there was dscovered
n that mne a arge body of znc ore. contanng about 40,000 tons. The
seers desred to dspose of, and the buyers wanted, znc ore. Whe there
had been no reguar weeky or monthy producton or shpments pror to the
sgnng of the wrtng, the seer had made a number of shpments to the
buyers. The work of deveopng the ore body n preparaton for producton
was n progress. The mne was aready equpped and capabe of producng
ore. The wrtng shows that the competon of a pckng pant was contem-
pated. The year covered was to commence on the date of the frst shpment
after ts competon. When the nstrument was e ecuted, September 29, 1914,
both partes knew the quaty of the ore and that the quantty was substanta.
The partes ntended to make a contract one to se, and the other to buy,
znc ore. y pan statements and manfest mpcatons, the seer was bound
for a defnte tme not otherwse to dspose of ts ore the buyers were gven
an opton on the ower grade ore the seer was bound at a tmes, when not
prevented or deayed by some cause beyond ts contro, to mne and to shp
to the buyers the tota producton of znc ore of the specfed grade and the
buyers were bound to take and pay for a such ore when not prevented or
deayed by causes beyond ther contro as specfed n the contract. The quan-
ttes of ore to be mned and shpped were not mted to those to be produced
by the equpment and methods empoyed at the tme of the e ecuton of the
contract. The proposed pckng pant was to be added, and Increased output
was e pected and barganed for.
The wrtng dd not gve the seer the opton to shp or to refran
from shppng as t saw ft, or eave the quantty to e devered to ts choce.
There was no want of consderaton or ack of mutuaty.
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23(k), rt. 203.
In Transcontnenta Petroeum Co. v. Interocean O Co. (262 ed.,
278) the court had occason to consder a contract substantay sm-
ar to the contract here nvoved, and n the course of ts opnon the
court used the foowng anguage:
t the threshod of the ease s defendant s contenton that the contract s vod
for want of mutuaty of obgaton. Ths nvoves a constructon of the frst
three paragraphs of the contract. y the frst paragraph pantff agreed to
se and dever to defendant 1,200,000 barres oC Me can crude petroeum o
upon terms and condtons specfed, provded, however, that deveres n sad
quantty or n any quantty are mted to the actua producton of the o wes
owned by the vendor and the producton of other wes whch may be from
tme to tme controed by the vendor. The second paragraph provdes for
deveres by pantff at the rate of not ess than 50,000 barres per month from
anuary 1, 1914, to December 31, 1915, n cargo ots nto defendant s vesses of
stated capactes, faure of the atter to take the specfed quantty n any month
to be made up the ne t. The defendant was gven the rght to requre pantff,
by notce, to commence the monthy deveres before anuary 1, 1914. y
the thrd paragraph defendant agreed to take sad o as above provded, and
pay for the same at the rate specfed.
The argument of defendant s that the provso of the frst paragraph mtng
pantff s undertakng to the producton of wes owned or controed by t
made t entrey optona wth pantff to dever any o at a. There s no
mert n the argument. In effect, the contract bound the pantff to dever
the entre output of ts wes, up to the quanttes specfed. No such persona
choce or opton was gven to wthhod or refuse deveres of o produced by
ts wes as s sometmes hed to destroy the requste mutuaty of contract
obgatons. The mtaton s a physca one, of a knd common In busness
affars. When the quantty of a commodty to be devered or receved under
a contract of sae rests In the uncontroed w or desre of one of the partes,
mutuaty s ackng. It s otherwse when the quantty s measured by the
output or requrements of an estabshed pant or. busness durng a mted
tme. (Cod ast 7 ransp. Co. v. ansas Cty ot ut Co., 52 C. C. ., 25,
114 ed., 77, 57 L. R. ., 696.) Ths atter rue s an ad|ustment of ega prn-
cpes to necessary and reasonabe busness usages. It appears pantff owned
and controed about 20 o wes n the Panuco fed, wth e tensve structura
equpment, and though the fe of any partcuar we mght not be forecast wth
certanty, t s de to say pantff dd not have an estabshed pant, the actua
product of whch t coud bnd tsef to se and dever n whoe or n part
durng the tme mted. The pantff coud not, wthout voatng ts contract,
have capped ts wes or choked ther producton to escape deveres. In that
respect a correatve duty on ts part woud be mped.
In Impera Refnng Co. v. anote Refnng Co. (29 ed. (2d),
193) the court, after a very carefu revew of the cases, n whch t
ponted out the dstncton between the two types of contracts above
referred to, decded the ssue n that case n favor of the vadty of
the contract.
In entucky Tobacco Products Co. v. Lucas (5 ed. (2d), 723)
the court, n an ncome ta case, had occason to determne the
vadty of a contract for the sae of the entre output of tobacco
stems by one of the partes to a contract. In that case the court hed
that the contract was not unatera that t was not vod for
ndefnteness or for ack of mutuaty and that t coud not be
voded through the medum of one of the contractng partes gong
out of busness. In addton to the cases cted and reed upon n
the opnons above referred to, see aso ayette- anawha Coa Co. v.
Lake port Coa Corporaton (91 W. a., 132, 112 S. ., 222,
23 . L. R., 565 and note).
It s evdent from the foregong decsons that the contract here
nvoved s not vod for want of mutuaty because the promse on the
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92
one hand to se was supported by the promse on the other hand to
purchase, and that the contract was not ndefnte n that t caed
for the entre output of an estabshed mnng and smetng company.
It aso s evdent from the foregong cases that the Mnng company
coud not have ceased ts mnng operatons nor gone out of busness
wthout havng sub|ected tsef ether to an acton to compe per-
formance or for damages for voaton of the contract.
The foregong woud appear to dspose of the specfc questons
rased. owever, subsequent to the tme the case was transmtted
to ths offce the queston arose as to what effect, f any, the dec-
son of the Unted States Supreme Court n urnet v. Logan (283
U. S.. 404, Ct. D. 351, C. . -, 345) had upon the nstant case.
The facts n that case are that pror to 1913 the ta payer (Mrs.
Logan) was one of the stockhoders n the ndrews tchcock
Iron Co. The ndrews tchcock Iron Co. owned 12 per cent
of the stock of the Mahonng Ore Stee Co., an operatng company,
whch owned a ease on a vauabe ron ore mne. of the stock
of the Mahonng company was owned by stee manufacturng com-
panes and through an agreement of such stockhoders the Ma-
honng company was obgated to apporton the e tracted ore among
the corporate stockhoders accordng to ther hodngs. Under ths
agreement the ndrews tchcock Iron Co. was entted to 12
per cent of the e tracted ore. In 1916 the owners of stock n the
ndrews tchcock Iron Co. sod ther entre hodngs to the
Youngstown Sheet Tube Co., whch company acqured among
other thngs 12 per cent of the Mahonng company s stock and the
rght to receve the same percentage of ore thereafter taken from
the eased mne. or the shares so acqured the Youngstown com-
pany pad the hoders 2,200,000 n money and agreed to pay an-
nuay thereafter, for dstrbuton among the seng stockhoders,
GO cents for each ton of ore apportoned to t. Mrs. Logan s mother
had aso owned stock n the ndrews tchcock Iron Co. She
ded n 1917 eavng Mrs. Logan one-haf of her nterest n the
future payments by the Youngstown company. Ths bequest was
apprased for edera estate ta purposes at 277,164.50.
The queston n the case was whether the amounts receved by the
ta payer by reason of the 60 cents per ton payments n years subse-
quent to 1916 consttuted ta abe ncome to her.
The Commssoner rued that the obgatons of the Youngstown
company to pay 60 cents a ton had a market vaue of 1,942,111.46
on the date of the sae that ths vaue shoud be treated as so much
cash, and the sae of the stock regarded as a cosed transacton wth
no proft n 1916. On the bass of the vaue attrbuted to the contract
the Commssoner undertook to apporton the subsequent annua
payments between ncome and capta and to ta the ncome porton
each year. Ths vew was sustaned by the oard ( dth ndreos
Logan et a. v. Commssoner, 12 . T. ., 586). It was aso sus-
taned by the Crcut Court of ppeas for the S th Crcut n
tchcock v. Commssoner (44 ed. (2d), 756). It was reversed by
the Crcut Court of ppeas for the Second Crcut n Logan v.
Commssoner (42 ed. (2d), 193), on the ground that the payments
under the contract were so contngent and uncertan that t was
mpossbe to determne the far market vaue of the contract of the
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23(k), rt. 203.
Youngstown company to pay 60 cents per ton. and that the ta payer
was entted to a return of capta before she was sub|ect to ta .
The Supreme Court agreed wth the second crcut and hed that the
contract had no ascertanabe vaue and that the ta payer coud not
be ta ed upon the recepts from the contract unt her capta (March
1, 1913, vaue n the case of her own shares and date of death vaue
n the case of the nherted payments) had been fuy returned to her.
If the Supreme Court s decson n the Logan case appes to the
nstant case, the resut w be ether to deny the ta payer the rght
to cam any vaue on account of the contract here nvoved, or ese to
requre the ta payer to acceerate the amortzaton of ts contract by
appyng the entre recepts under the contract to capta and hence
deny the rght to any deducton for amortzaton n the atter years
of the contract the years here under consderaton.
though the contract nvoved n the nstant case and the con-
tract nvoved n the Logan case have some ponts n common, the
two contracts are dssmar n some mportant partcuars. s
ponted out above, the contract n the nstant case was a vad and
enforceabe obgaton between two competent contractng partes,
ether of whch coud have compeed performance or coud have
recovered damages for faure to perform. The sub|ect matter of
the contract was ceary wthn the soe contro of the contractng
partes, and, because of ts ma|orty stock ownershp, the ta payer
was n a poston to assure tsef that the contract woud be carred
out by the Mnng company. In the Logan case the contract re-
ated to a sub|ect matter over whch the two contractng partes
had no absoute contro ether |onty or separatey. The contract
tsef was sub|ect to many uncertantes and contngences. Ths fact
was ponted out by the Crcut Court of ppeas for the Second Cr-
cut n ts opnon, as foows:
There were many uncertantes nvoved n the future recept of 60 cents a
ton by ths pettoner. She, a mnorty stockhoder, was not n contro. The
rght to contnue to receve ore was dependent on the contnuance n force of
the contract of December 16, 1914, between the stockhoders of the Mahonng
company. That contract mght be abrogated or changed. No ma mum or
mnmum payment s provded for by the contract. The tonnage mned each
year was sub|ect to the dscreton of the board of drectors of the Mahonng
company.

The Commssoner may not create ncome by speng out paper
profts wth a the attendng uncertantes whch e st here and whch mght
prevent the return of capta. The statute and the reguaton referrng to
depeton of the mnes, we thnk, have no appcaton to ths pettoner.
It s evdent from the foregong that the contract n the nstant
case s not sub|ect to any of the uncertantes whch nfuenced the
courts n hodng that the contract n the Logan case was ncapabe
of vauaton and that even when the rght to receve the annua pay-
ments was vaued (as n the case of the nherted payments) the
amounts receved shoud frst be treated as a return of capta. It s
aso evdent that, wth respect to the treatment of the nherted
payments, the courts were nfuenced not ony by the uncertantes
but aso by the fact that the vaue of property acqured by bequest
s to be e cuded from gross ncome and by the rues therefor an-
nounced n the case of annutes. The nstant case nvoves none of
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23(n), rt. 262.
94
the factors upon whch the courts based ther decsons n the Logan
case.
Ths offce s, therefore, of the opnon that the Logan case does not
appy to the stuaton here presented that the contract n the nstant
case was vad and enforceabe on March 1, 1913 and that the ta -
payer s entted to a determnaton of the March 1, 1913, vaue of
the contract, n order that the vaue determned upon may be amor-
tzed or e hausted over the remanng usefu fe of the contract.
C. M. Charkst,
Genera Counse, ureau of Interna Revenue.
S CTION 23(n). D DUCTIONS ROM GROSS INCOM :
C RIT L ND OT R CONTRI UTIONS.
rtce 261: Contrbutons or gfts by ndvduas.
R NU CT O 1928.
Contrbutons to nonpartsan scentfc agency of ctzens n-
qures for promoton or better government. (See I. T. 2654, page
39.)
rtce 262: Donatons by corporatons. I-44-5819
I. T. 2653
R NU CT O 1928.
Deductbty by corporatons of contrbutons to unempoyment
emergency funds.
dvce s requested reatve to the atttude of the ureau wth
respect to the deductbty by corporatons of contrbutons to un-
empoyment emergency funds durng the ta abe year 1931.
There s no provson n any of the Revenue cts whch permts
corporatons n computng net ncome to deduct contrbutons to
communty chests, wefare eagues, and smar organzatons e cept
the provson whch authorzes the deducton of a the ordnary
and necessary e penses pad or ncurred durng the ta abe year n
carryng on any trade or busness. (See secton 23(a) of the Reve-
nue ct of 1928 and the correspondng provsons of pror Revenue
cts.) efore a deducton may be aowed t must be shown that
the payment had a busness sgnfcance to the ta payer makng the
payment. That s, the ta payer must reasonaby contempate a
fnanca return commensurate wth the payment and must be n-
fuenced by such e pectaton. The Unted States oard of Ta
ppeas n severa cases where such payments have been aowed as
deductons has referred to evdence showng that ncreased busness
dd resut. In the case of the Yamh ectrc Co. v. Commssoner
(20 . T. ., 1232). the oard aowed as a deducton a contrbuton
to an endowment fund of a oca coege. It was there hed that
Whether an tem such as the one here s deductbe as an ordnary
and necessary e pense of carryng on a trade or busness depends
argey upon the facts of each ndvdua case. The oard aso
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25, rt. 295.
approved ts pror rung n the ppea of The Thomas Shoe Co.
(1 . T. ., 124), that the payment to be deductbe must have n
a drect sense some reasonabe reaton to the ta payer s busness.
In the case of the mercan Rong Ms Co. v. Commssoner (41
ed. (2d), 314), the court stated:
The queston aways s whether baancng the outay aganst the benefts to
be reasonaby e pected, the busness nterest of the ta payer w be advanced.
The answer must depend, among Other thngs, upon the nature and sze of the
ndustry, ts ocaton, the number of ts empoyees as compared to the entre
communty, the type of ts empoyees, and what other empoyers smary
stuated are dong.
the oard cases referred to have been acquesced n.
The character of payments of ths nature and ther sgnfcance
for ncome ta purposes w, of course, depend prmary upon facts
e stng at the tme the payment s made. Some of the eements to
be consdered are the sze of the contrbuton as compared wth the
ta payer s busness, and whether such contrbuton or payment bore
a reasonabe reatonshp to the ta payer s enterprse. very case
w nvove a queston of whether the payment had a practcabe
busness sgnfcance to the partcuar ta payer, and whether a
fnanca return n proporton to the outay coud be reasonaby con-
tempated at the tme of makng such payment. ery carefu con-
sderaton w be gven the facts n each case, snce t s the desre
of the ureau that ts pocy wth respect to the treatment of such
contrbutons be as bera as possbe consstent wth the statute.
S CTION 25. CR DITS O INDI IDU L G INST
N T INCOM .
rtce 295: Date determnng e empton. I-29-5551
I. T. 2634
NC CT O 1928.
Method of computng persona e empton n the ease where a
marred person des and the survvng spouse remarres durng the
same ta abe year.
The coector refers to Genera Counse s Memorandum 10129
(C. . I-1, 38), and requests a rung reatve to the amount of per-
sona e empton aowabe to the survvng spouse and the person
whom the survvng spouse marres under the foowng crcum-
stances :
, the husband of , ded pr 1, 1931, and marred C, who was
not the head of a famy, on September 28,1931. and C were vng
together on December 31,1931, and nether ndvdua had dependents
for whch credt coud be ckmed under secton 25(d) of the Revenue
ct of 1928.
Secton 25 of the Revenue ct of 1928 provdes n part:
There sha be aowed for the purpose of the norma ta , but not for the
surta , the foowng credts aganst the net ncome:

(c) Persona e empton. In the case of a snge person, a persona e empton
of 1,500 or n the case of the head of a famy or a marred person vng wth
husband or wfe, a persona e empton of 3,500. husband and wfe vng to-
gether sha receve but one persona e empton. The amount of such persona
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25, rt. 295.
96
e empton sha be 3,500. If such husband and wfe make separate returns, the
persona e empton may be taken by ether or dvded between them.
(d) Credt for dependents. 400 for each person (other than husband or
wfe) dependent upon and recevng hs chef support from the ta payer f such
dependent person s under 18 years of age or s ncapabe of sef-support because
mentay or physcay defectve.
(e) Change of status.
(1) The credt for dependents sha be determned by the status of the ta -
payer on the ast day of hs ta abe year.
(2) The persona e empton aowed by subsecton (c) of ths secton sha,
n case the status of the ta payer changes durng hs ta abe year, be the sum
of an amount whch bears the same rato to 1,500 as the number of months
durng whch the ta payer was snge bears to 12 months, pus an amount whch
bears the same rato to 3,500 as the number of months durng whch the
ta payer was a marred person vng wth husband or wfe or was the head
of a famy bears to 12 months. or the purposes of ths paragraph a fractona
part of a month sha be dsregarded uness t amounts to more than haf a
month, n whch case t sha be consdered as n month.
(3) In the case of an ndvdua who des durng the ta abe year, the per-
sona e empton and the credt for dependents sha be determned by hs
status at the tme of hs death, and n such case fu credts sha be aowed to
the survvng spouse, f any, accordng to hs or her status at the cose of the
ta abe year.
Genera Counse s Memorandum 10129, supra, nvoved the ques-
ton as to the amount of persona e empton to whch two ndvduas
were entted where each was the head of a famy at the tme of
ther marrage. The nstant case s qute dfferent. ere there was a
death of one spouse and the remarrage of the survvor durng the
same ta abe year to a snge man who was not the head of a famy.
It has been hed n Genera Counse s Memorandum 6275 (C. .
III-1, 86) that secton 25(e)3, n so far as t reates to the persona
e empton of a marred ndvdua who des durng the ta abe year,
s e cusve n ts terms and can not be apped n con|uncton wth
secton 25(e)2, and that where there s both a change of status and
death wthn the ta abe year secton 25(e)3 must govern. The rue
announced n Genera Counse s Memorandum 6275 s aso appcabe
n determnng the persona e empton of the survvng spouse. Ths
does not mean that n a case where a marred ndvdua des and the
survvng spouse remarres durng the ta abe year secton 25(e)3
s to be apped ndependenty of secton 25(c) n determnng the
persona e empton to whch the survvng spouse s entted.
urthermore, secton 25(e)3 s not to be apped ndependenty of
secton 25(e)2 n determnng the persona e empton of the
In vew of the foregong, ths offce hods that n a case where a
marred ndvdua des and the survvng spouse remarres durng
the same ta abe year, and the survvng spouse and the ndvdua
whom the survvng spouse marres are vng together at the cose
of the ta abe year, the fu credts for the persona e empton
to be aowed to the survvng spouse because of such marta status
are 3,500, ess the porton of the |ont persona e empton, deter-
mned as provded n secton 25(e)2, to whch the ndvdua whom
the survvng spouse marres s entted. Ths offce further hods
that n such a case the ndvdua whom the survvng spouse marres
s aso entted (n addton to hs or hor porton of the 3,500 |ont
persona e empton) to the porton of the persona e empton aow-
abe n respect of the snge status occuped durng the ta abe year,
determned as provded n secton 25(e) 2. ppyng these rues to
ndvdua whom the
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41, rt. 321.
the case referred to, the amount of C s persona e empton s 9/12ths
of 1,500, or 1,125, for the perod durng whch he had the status
of a snge person, pus of 3/12ths of 3,500, or 437.50, for the
perod durng whch he was marred and vng wth , or a tota
persona e empton of 1,562.50. The amount of s persona e -
empton s 3,500 ess 437.50, or 3,062.50. The combned persona
e empton aowabe to both and C s 3,062.50 pus 1,562.50, or
4,625. If and C make separate returns, the porton of the 3,500
persona e empton to whch they are entted for the perod durng
whch they were marred and vng together, tha s, 3/12ths of
3,500, or 875, may be taken by ether or dvded between them.
P RT I . CCOUNTING P RIODS ND M T ODS O CCOUNTING.
S CTION 41. G N R L RUL .
btk e 321: Computaton of net ncome. I-27-5534
G. C. M. 10630
R NU CT O 1928.
Treatment for Income ta purposes of amount receved from
award for oss ncurred n respect of certan accounts wth German
banks n 1917.
The opnon of ths offce s requested whether a oss s aowabe
for the ta abe year 1928 n respect of certan accounts of the ta -
payers wth German banks.
The ta payers, dong busness as copartners under the frm name
of M Company, had sundry accounts wth German banks pror
to pr 6, 1917. The decaraton of war on pr 6, 1917, rendered
further deangs between the copartners and the German banks m-
possbe. On ugust 4, 1914, Germany had by aw authorzed the
edera Counc to adopt durng the duraton of the war such eco-
nomc measures as may be necessary n order to avert economc
damage. The decrees and ordnances so ssued had the force and
effect of aw. y decree of September 30, 1914, a payments, d-
recty or ndrecty, to Great rtan and Ireand, or to the rtsh
coones or foregn possessons, as we as the remova or transfer
of moneys or securtes thereto, were prohbted. y decree of
October 7, 1915, a persons havng possesson of property of
natonas of enemy States were requred to gve notce thereof to
specfed German authortes ( Centra State uthortes ). De-
taed reguatons for carryng out the provsons of ths decree were
prescrbed. y decree of pr 19, 1917, the admnstraton of such
property was vested n a Treuhander fur das fendche ermogen
(Custodan for nemy Property). These decrees and reguatons
thereunder permtted the treuhander, n hs dscreton, ether to
take physca possesson of the foregn property (or to requre the
accounts to be qudated and pad to hm), or to permt the person
n possesson to contnue to hod the property, but to hod t, not for
the enemy owner, but for the treuhander. Property thus hed for
the treuhander was n a respects sub|ect to the contro and
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41, rt. 321.
98
drecton of the treuhander. ven n ths cass of cases the ncome
from the property was requred to be pad to the treuhander.
y decree of ugust 9, 1917, the provsons of the ordnance or
decree of September 30, 1914, were. apped correspondngy to the
Unted States of merca. y decree of November 10, 1917, effec-
tve November 17, 1917, and/or November 20, 1917, the provsons of
the ordnance of October 7, 1915, were made appcabe to the prop-
erty of mercan natonas. The accounts wth German bancs of
these ta payers were reported to the approprate German authortes
and throughout the duraton of the war the authortes e ercsed com-
pete contro over them, recevng the payments of ncome as they
arose, supervsng and n a respects drectng the entre manage-
ment of these accounts (prescrbng specfcay what cams on the
fund shoud be pad or not pad, what nvestments shoud be made,
etc.). The accounts themseves were converted nto accounts wth
the treuhander.
The ta payers fed wth the M ed Cams Commsson, Unted
States and Germany, cams aganst Germany n respect of these ac-
counts. wards were made under these cams and 27.89a doars
on account of them became payabe under secton 2(b), Settement
of War Cams ct of 1928, approved March 10,1928 (45 Stat., 254).
Durng the ta abe year 1928 there was pad on account of ths sum
9.72a doars.
The oss n respect of these accounts occurred when the property
n queston was sezed by the authortes of the German Government
n 1917, and the sezure was no ess effectve because t was not
physca. The sezure was wthn the rghts of the German Govern-
ment as a begerent power and eft the ta payers wthout the rght
to demand reease or compensaton, at east unt the decaraton of
peace. What woud utmatey come back to t, as the event
proved, mght be secured not as a matter of rght, but as a matter
ether of grace to the vanqushed or e acton by the vctor. In any
case the amount reazed woud be dependent upon the hazards of
the war then n progress. It was none the ess a deductbe
oss then, athough ater the German Government bound tsef to
repay and an award was made by the M ed Cams Commsson
whch dd resut n a recovery. (27. S. v. S. S. Whte
Denta Mfg. Co., 274 U. S., 398, 47 S. Ct., 598 T. D. 4059, C. .
I-2, 198 .) (See aso ector esande, ecutor, v. Commssoner,
12 . T. ., 1325 ppeas of m Stern and ues Stern, 5 . T. .,
89, acquescence, C. . III-1, 43 and Commssoner v. rown, 54
ed. (2d), 563.)
The oss havng occurred n 1917, there was no oss n 1928, and,
hence, no deducton may be aowed for 1928. (Darng v. Comms-
soner, 49 ed. (2d), 111, cert, dened, 283 U. S., 866 Putnam Na-
tona ank v. Commssoner, 50 ed. (2d), 158 and cesor
Prntng Co. v. Commssoner, 16 . T. ., 886.) The oss occurred
and was aowabe as a deducton n 1917 the crcumstance that n
1928 there was a recovery, n whoe or n part, n respect of that whch
was ost n 1917 does not resut n a oss deducton becomng aowabe
agan n 1928, athough t may resut n ta abe ncome. (See G. C.
M. 9210, C. . -, 129.)
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
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99 51, rt. 381,
S CTION 42. P RIOD IN W IC IT MS O
GROSS INCOM INCLUD D.
rtce 331: When ncuded n gross ncome.
R NU CT O 1028.
Ta abe status of refunds of customs dutes and ta es. (See
Mm. 3958, page 33.)
P RT . R TURNS ND P YM NT O T .
S CTION 51. INDI IDU L R TURNS.
rtce 381: Indvdua returns. I-35-5635
G. C. M. 10759
R ND CT OP 1928.
Where the status of a ta payer for the frst part of the year was
that of a ctzen of the Unted States, but for the baance of the
year was that of a nonresdent aen, ony one return need be fed.
Method of computng the ta stated.
n opnon s requested reatve to the method to be empoyed n
computng the ncome ta abty n the case of a ta payer n whose
behaf a return for the year 1929 was fed March 15, 1930, on orm
1040, as a ctzen and resdent of the Unted States, but whose status
as of December 31, 1929, was that of a nonresdent aen.
The ta payer was a ctzen of the Unted States. On or about
ugust 17, 1929, she fed an appcaton wth the rench Govern-
ment for renstatement as a rench ctzen, whch appcaton was
approved and such ctzenshp granted on September 22, 1929. The
ta payer contends that under Genera Counse s Memorandum 9064
(C. . -, 314), she shoud have fed two separate returns, one
coverng the perod from anuary 1,1929, to the date when her status
changed to that of a nonresdent aen, and the other coverng the
perod from such date to December 31, 1929. though her status
changed on September 22, 1929, when rench ctzenshp was
granted, she has treated the date her status changed as ugust 17,
1929, when renstatement as a rench ctzen was apped for. It s
further contended that for the perod durng whch the ta payer
was a nonresdent aen she s ta abe ony on ncome from sources
wthn the Unted States.
Secton 51 of the Revenue ct of 1928 requres that the foowng
ndvduas sha each make under oath a return, etc.:
(1) very ndvdua havng a net ncome for the ta abe year of 1,500 or
over. If snge, or f marred and not vng wth husband or wfe:
(2) very ndvdua havng a net ncome for the ta abe year of 3,500 or
over, f marred and vng wth husband or wfe and
(3) very ndvdua havng a gross ncome for the ta abe year of 5,000
or over, regardess of the amount of hs net ncome.
Secton 212 of the Revenue ct of 1928 provdes that n the case
of a nonresdent aen ndvdua gross ncome ncudes ony the gross
ncome from sources wthn the Unted States. Under . . Res.
-
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51, rt. 381.
100
133 (Pubc, No. 23, Seventy-frst Congress, U. S. C. Sup. III. tte
26, ch. 24) (C. . I -1, 411), the norma ta rate for the year 1929
n the case of a nonresdent aen (who s not a ctzen of a contguous
country) s 4 per cent, whereas n the case of an mercan ctzen
the norma ta rates are y2 of 1, 2, and 4 per cent. Therefore, where,
as n the nstant case, a change of status has occurred, the ncome
must be segregated for norma ta purposes but combned for surta
purposes.
It s the opnon of ths offce that the provsons of aw referred
to above do not requre two separate returns to be fed by an nd-
vdua whose status at the begnnng of the year was that of a
ctzen or resdent of the Unted States, but whose status at the end
of the ta abe year was that of a nonresdent aen. The aw requres
that every ndvdua wthn the ncome casses specfed sha each
make under oath a return. There s no bass for construng ths
to mean that an ndvdua whose status has changed durng the
ta abe year must be consdered two ta payers from whom separate
returns are requred. urthermore, t may not be assumed that
Congress ntended to requre the fng of two separate returns for
the same year, each coverng ony a part of an ndvdua s ncome,
merey because dfferent rates of ta appy by reason of a change n
the status of such ndvdua from that or a ctzen to a nonresdent
aen.
In Genera Counse s Memorandum 9064, supra, ths offce reached
the concuson that the change n status from that of a ctzen to that
of a nonresdent aen, or vce versa, appears to be governed by the
same rue as that appcabe to a change n status from that of a
resdent aen to that of a nonresdent aen, or vce versa. That
memorandum cted the case of ohn C. Lee et a. v. Commssoner
(6 . T. ., 1005, C. . I-2, 4), n whch the oard of Ta ppeas
hed that ncome receved by a nonresdent aen from sources wth-
out the Unted States s not ta abe even though such person may
become a resdent aen subsequent to ts recept and pror to the cose
of the ta abe year.
Snce a snge return s a that s requred n the nstant case, t s
the opnon of ths offce that the return fed March 15, 1930, on
orm 1040, coverng the entre gross ncome for the year 1929, was
vad for purposes of assessment and the statute of mtatons. In
computng the ta abty the ta abe ncome shoud be segregated
for the two perods nvoved, anuary 1, 1929, to September 21, 1929,
ncusve, and September 22, 1929 (the date rench ctzenshp was
granted), to December 31, 1929, ncusve, for norma ta purposes
and combned for surta purposes, e cept that gross ncome for the
perod September 22, 1929, to December 31, 1929, durng whch the
ta payer was a nonresdent aen, shoud ncude ony gross ncome
from sources wthn the Unted States.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
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101
51, rt. 38L
btce 381: Indvdua returns. I-42-5788
I. T. 2650
R NU CT O 1028.
On pr 1, 1920, by decree of court the ta payer was dvorced
from hs wfe and a dvson was made of a the communty prop-
erty. On March 6, 1930, the ta payer fed a |ont return for the
caendar year 1929, In whch was reported the ncome of hmsef
and hs dvorced wfe. On ebruary 1, 1932, he fed n cam for
refund coverng the year 1929, accompaned by amended separate
returns.
ed, that the ta payers dd not e haust ther statutory rght to
fe separate returns subsequent to March 15, 1930. The decson
of the Crcut Court of ppeas for the fth Crcut n the case of
Rose v. Grant (39 ed. (2d), 340) s not appcabe to ths case,
as husband and wfe were not vng together at the cose of the
ta abe year 1929 and coud not egay fe a |ont return.
Inqury s made whether under the decson of the Crcut Court
of ppeas for the fth Crcut n Rose v. Grant, the ta payer s
precuded from fng amended separate returns dvdng the ncome
receved by hm up to the date of the grantng of a dvorce.
On pr 1, 1929, by decree of the proper State court n Te as,
the ta payer was dvorced from hs wfe and under the decree a
dvson was made of a the communty property. On March 6,
1930, the ta payer fed what purported to be a |ont return for the
caendar year 1929 n whch was reported the ncome of hmsef
and hs dvorced wfe. On ebruary 1, 1932, the ta payer fed a
cam for the refund of doars coverng the year 1929 n whch
t was stated that snce the wfe had a statutory rght under the
State aw to one-haf of the communty ncome to the date of the
dvorce, and snce under artce 381 of Reguatons 74 a |ont return
may be fed ony f the .husband and wfe are vng together at the
cose of the ta abe year, the |ont return was erroneous. The cam
for refund was accompaned by amended separate returns. In the
amended return fed n behaf of Mrs. for the caendar year 1929
there has been reported one-fourth of a the ncome receved by
durng the whoe of the caendar year 1929, ess one-fourth of a
deductons for that year.
fter carefu consderaton of a the facts n the case, t s hed
that the ta payers dd not e haust ther statutory rght to fe sepa-
rate returns subsequent to March 15,1930, snce under the provsons
of artce 381 of Reguatons 74 a |ont return of husband and wfe
may be fed ony f they were vng together at the cose of ther
ta abe year. The return fed and desgnated as a |ont return
was, therefore, erroneous. The decson by the Crcut Court of
ppeas for the fth Crcut n the case of Rose v. Grant, supra, s
not appcabe to the nstant case, because here the husband and wfe
had no eecton whether they shoud fe a |ont return or separate
returns.
It appears from the statement attached to the cam for the refund
that the ta payer n determnng the communty ncome of the wfe
up to pr 1, 1929, the date of the dvorce, computed such ncome
as foows: of a ncome ess of a deductons was treated as net
communty ncome of a ncome ess of a deductons was
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103, rt. 527.
102
treated as the ndvdua ncome of or, n other words, of the
net ncome for the year was treated as the ncome of Mrs. and
Ya as the ncome of .
On ths bass the sum of 10a doars has been reported as the net
ncome of the dvorced wfe n the separate return of that ndvdua.
Such method of computaton s ncorrect and can not be accepted as
refectng the true ncome of the ndvduas concerned. The tota
amount of communty ncome receved by the ta payers up to and
ncudng pr 1, 1929 shoud be ascertaned and one-haf thereof
treated as the communty ncome of each spouse. (See G. C. M.
10941, page 223.)
In other words, the ta abty on the separate return fed n the
name of the dvorced wfe shoud be computed on one-haf of the
gross communty ncome up to and ncudng pr 1, 1929, ess
one-haf of the deductons propery chargeabe to such gross com-
munty ncome for the same perod. There s no authorty of aw
or reguatons under whch the ta payer coud be permtted to report
as the communty ncome of the wfe for the 3-month perod ended
pr 1, 1929, one-eghth of hs tota net ncome as of the cose of the
caendar year 1929.
S CTION 55. PU LICITY O R TURNS.
rtce 421: Inspecton of returns.
U NU CT O 1928.
. Reguatons governng the nspecton of returns. (See T. D. 4359,
page 305.)
rtce 424: amnaton of returns by share- I-40-5744
hoder. I. T. 2645
R NU CT O 1928.
cam for refund fed by a corporaton comes wthn the pro-
vsons of paragraph 3 of the reguatons for nspecton of returns
emboded n artce 421, Reguatons 74, and a stockhoder meetng
the requrements of artce 424, Reguatons 74, s entted to nspect
such cam.
SU TITL C SUPPL M NT L PRO ISIONS.
SUPPL M NT . R T S O T .
S CTION 103. MPTIONS ROM T
ON CORPOR TIONS.
rtce 527: Regous, chartabe, scentfc, I-32-5592
terary, and educatona organzatons and I. T. 2C36
communty chests.
R NU CT O 1928 ND PRIOR R NU CTS.
The M Store was ncorporated wthout capta stock for the
purpose of promotng the Interests of the student body and facuty
of the 11 Unversty, and to provde wthout proft and at owest
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ro3
103, rt. 627.
costs suppes for students. It. was provded that any accumu-
atons of funds above the needs of the store shoud be pad
nto a genera fund to be used for athetc and soca actvtes.
It conducts a students store whch as a saared manager and
necessary cerks. Profts have mosty been put back nto the
busness, some nto the purchase of an addtona athetc fed
and some nto budng and oan stock.
ed, the ta payer s engaged n a busness ordnary carred
on for proft and s not operated e cusvey for any of the pur-
poses specfed under secton 103(6) of the Revenue ct of 191 8
and smar provsons of pror cts.
dvce s requested reatve to whether the M Store s entted
to e empton from ncome ta under secton 103(G) of the Revenue
ct of 1928.
The evdence on fe n the case dscoses that the M Store was
ncorporated wthout capta stock. The artces of ncorporaton
provde that ts purposes, among others, sha be to promote and
foster the educatona, nteectua, soca, and athetc nterests
of the student body and facuty of the R Unversty to provde
te tbooks, statonery, confectonery, and other student suppes and
commodtes and to dstrbute perodcas, student pubcatons, and
tckets to athetc contests and soca functons. The artces of n-
corporaton provde further that pecunary proft to ts members
sha not be an ob|ect of the corporaton that dvdends sha not
be dstrbuted to members and that any accumuaton of funds over
and above the needs of the store sha be pad nto the genera fund
of the students assocaton to be used for the furtherance of athetc
and soca actvtes among the students of the unversty.
reguary regstered students and members of the facuty of the
unversty are members of the corporaton.
The corporaton s actvey engaged n conductng a students
store on the campus of the unversty. ooks, statonery, and other
commodtes are supped to the students at prces as ow as are con-
sstent wth the wefare of the store. No dvdends have ever been
decared and no funds have been dstrbuted to any member of the
organzaton. manager s empoyed, who receves a saary pus a
commsson on stated condtons. The manager n turn empoys the
necessary cerks and pays them a f ed wage for ther servces. It
appears that most of the profts of the store have been put back
nto the busness as they accumuated that some of the profts have
been used for the purchase of addtona campus, whch s beng used
as an athetc fed at the present tme and that a sma nvestment
has been made n budng and oan stock whch w be pad up n
10 years. oth nvestments are treated as a part of a snkng fund
program for the erecton of a students assocaton budng on the
campus.
Secton 103(6) of the Revenue ct of 1928 and the correspondng
sectons of pror Revenue cts provde for the e empton of Corpo-
ratons organzed and operated e cusvey for regous,
chartabe, scentfc, terary, or educatona purposes no
part of the net earnngs of whch nures to the beneft of any prvate
sharehoder or ndvdua.
In order to be e empt under ths provson of aw an organzaton
must be organzed and operated e cusvey for one or more of the
160903 33 8
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103, rt. 529.
104
specfed purposes. The M Store s engaged n conductng a store
where books, statonery, and other commodtes are sod to students.
It s, therefore, engaged n a busness of a knd ordnary carred
on for proft and s not operated e cusvey for regous, chartabe,
scentfc, terary, or educatona purposes.
ccordngy t s hed that the M Store does not come wthn the
provsons of secton 103(6) of the Revenue ct of 1928 and the
correspondng sectons of pror Revenue cts, and hence s not en-
tted to e empton from edera ncome ta .
rtce 527: Regous, chartabe, scentfc, terary, and
educatona organzatons and communty chests.
Nonpartsan scentfc agency of ctzens nqures for promoton
of better government. (See I. T. 2654, page 39.)
The M Corporaton was organzed for the purpose of promotng
and encouragng the effcency and actvty of a offcers and de-
partments of ts cty, county, and State charged wth the duty of
preventng, suppressng, and punshng crme. It has no capta
stock and anyone nterested may become a member on approva of
ts board. It cooperates wth edera and oca offcas. Its
ncome s derved from donatons and no part nures to the beneft
of any prvate ndvdua.
Ths corporaton s entted to e empton as an organzaton
operated for the promoton of soca or pubc wefare under secton
103(8) of the Revenue ct of 1928.
The M Corporaton was organzed for the purpose of promotng
and encouragng the effcency and actvty of a offcers and depart-
ments of the cty of , and of County, and of the State of
R, charged wth the duty of preventng, suppressng, and punshng
crme. The corporaton has no capta stock and any person nter-
ested n ts work may become a member of t upon te approva of
ts board of drectors. The corporaton has aso cooperated and s
cooperatng wth offcas of the Unted States, as we as oca
offcas, n assstng n the preventon and punshment of crme.
was ncorporated. Its ncome s derved e cusvey from donatons
and none of such ncome nures to the beneft of any prvate member
or ndvdua.
It s contended that e empton e tends to ths corporaton on the
ground that t s organzed and operated e cusvey for regous,
chartabe, scentfc, terary, or educatona purposes, wthn the
scope of secton 103(6) of the Revenue ct of 1928. Ths offce
does not agree wth the contenton. The corporaton s performng
work that s au ary to the poce departments of the State of R
R NU CT OP 1928.
rtce 529: Cvc eagues and oca assoca-
tons of empoyees.
I-31-5578
G. C. M. 10232
R NU CT O 1928.
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105
111, rt. 56L
and of the cty of and of 1 County, and ncdentay adng
the Unted States n preventng, suppressng, and punshng crme.
These actvtes are of such a nature as to beneft socety n genera
and are for soca wefare. ut such actvtes are not regous,
chartabe, scentfc, or educatona. If aowed e empton at a
such e empton shoud be accorded the organzaton by vrtue of the
provsons of secton 103(8) of the Revenue ct of 1928, and smar
provsons contaned n pror Revenue cts, snce the corporaton
may, n vew of the nature of ts actvtes, propery be sad to be
organzed and operated for the promoton of soca wefare. It s
concuded that the corporaton s not organzed and operated e -
cusvey for regous, chartabe, scentfc, or educatona purposes,
wthn the meanng of secton 103(6) of the Revenue ct of 1928,
but that t s operated for the promoton of soca or pubc wefare.
The corporaton s, therefore, e empt from ta aton under secton
103(8) of the Revenue ct of 1928.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
SUPPL M NT . COMPUT TION O N T INCOM .
S CTION 111. D T RMIN TION O MOUNT
O G IN OR LOSS.
rtce 561: Determnaton of the amount of I-37-5676
gan or oss. G. CM. 10857
R NU CT O 192S.
Where an organzaton derved ta abe gan from the sae of
ts property, the bass shoud not be reduced by the amount of
deprecaton sustaned wth respect to the property for the perod
durng whch the ta payer occuped the status of au e empt
organzaton.
The queston s presented whether a ta payer whch derved ta -
abe gan from the sae of ts assets n 1931 shoud, n computng
the gan derved from the sae, reduce the bass on account of de-
precaton sustaned for the perod durng whch the ta payer occu-
ped the status of an e empt organzaton.
It appears from the nterna revenue agent s report that the ta -
payer acqured the property n queston pror to March 1, 1913, and
that the March 1, 1913, vaue of the property was the bass to be
used n computng the gan derved from the sae of the property.
ccordngy, t s not necessary to consder deprecaton sustaned
pror to March 1, 1913. In computng the gan the nterna revenue
agent dd not reduce the. bass on account of deprecaton, upon the
theory that no deprecaton was aowabe wth respect to the prop-
erty, snce the ta payer was an e empt organzaton under the Rev-
enue ct of 1928 and a pror Revenue cts.
Under sectons 111 (a) and (b) and 113(b) of the Revenue ct
of 1928. the bass of the property n ths case s the March 1, 1913,
vaue thereof, dmnshed by the amount of deductons for e haus-
ton, wear and tear, obsoescence, amortzaton, and depeton whch
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113, rt. 596.
106
have snce the acquston of the property been aowabe n respect
of such property under the Revenue ct of 1928 and pror Revenue
cts. It s obvous that for the perod durng whch the ta payer
occuped the status of an e empt organzaton no deducton wth
respect to the property on account of deprecaton was aowabe
for ncome ta purposes. Consequenty, there was no return of
capta to the ta payer n the form of deprecaton aowances.
amnaton or the varous Revenue cts, begnnng wth the
Revenue ct of 1913, shows that each ct has provded for a deduc-
ton for deprecaton wth respect to property used n trade or bus-
ness. In the nstant case the fe dscoses that the ta payer occuped
the status of an e empt organzaton under a those Revenue cts.
It s, accordngy, the opnon of ths offce that for the purpose of
computng gan or oss from the sae thereof the bass of the property
n queston shoud not be dmnshed by the amount of deprecaton
ustaned wth respect to the property snce March 1, 1913.
C. M. Chabest,
Genera Counse, ureau of Interna Revenue.
S CTION 113. SIS OR D T RMINING
G IN OR LOSS.
, rtce 596: Property transmtted at death. I 28 5542
G. C. M. 10698
R NU CT O 1028.
In decdng the queston presented n the ast paragraph on page
24 of Genera Counse s Memorandum 10260 (C. . I-1, 79) the
fact was not taken nto consderaton that t had been decded n
the precedng paragraph that the vaue of the stock tsef at the
basc date must be reduced to refect the vaue of the wdow s fe
estate. Obvousy, f an ad|ustment of the bass on account of the
fe estate s made where the orgna trust corpus s devered to the
sons, an ad|ustment must aso be made where the trustees, durng
the e stence of the fe estate, have sod the orgna corpus, ren-
vested the proceeds In other property, and devered the substtuted
property to the sons, and n so far as the ast paragraph on page 24
of Genera Counse s Memorandum 10260, supra, appears to state
the contrary, t does not represent the vew of the Genera Counse.
Genera Counse s Memorandum 10260, supra, modfed.
Reference s made to Genera Counse s Memorandum 10260, supra.
egnnng wth the second fu paragraph on page 101 of Cumu-
atve uetn I-1 the foowng statements appear:
ssumng, therefore, that the certfcates of stock fnay devered to the
ons on the termnaton of the trust were a part of the orgna trust corpus,
the bass of such certfcates n the hands of the sons s the far market vaue
of the property when dstrbuted to them that s, at the tme of dstrbu-
ton to the trustees. The property then dstrbuted to the sons, however,
was not the compete equtabe fee smpe, and the vaue of the stock tsef
at the basc date must therefore be reduced to refect the fact that the wdow
was entted durng her fe to not ess than 90.1a doars a year to mantan
her home and to one-thrd of the remanng net ncome. (Compare Wam
uogct, 24 . T. ., 669, and I. T. 1622, C. . II-, 135.)
If certfcates of stock were devered to the sons whch dd not compose
part of the orgna trust corpus but were purchased by the trustees wth pro-
ceeds of the sae of such corpus, then the bass of such stock n the hands of
the sons s the same bass the purchased stock had n the hands of the trustees
whch bass, presumaby, woud be the cost to the trustees. (See I. T. 1165,
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107
113, rt. 596.
C. . I 1, 30.) In other words, wth the e cepton of cestus que trust whose
nterests are contngent (ordnary ncudng n the e cepton those whose
nterests are vested, sub|ect to be dvested), the bass of property whch has
been purchased by testamentary trustees wth the proceeds of orgna trust
corpus, and whch has ater been devered n knd to the cestus que trust,
s not to be regarded under the frst sentence of secton 113(a)5 as persona
property acqured by specfc bequest, or as rea property acqured by gen-
era or specfc devse or by ntestacy, nor s t to be regarded under the thrd
sentence as property acqured ether by w or by ntestacy, for n such
cases t s the orgna trust corpus that the cestus que trust acqured under
secton 113(a)5, and where the trustees se the orgna corpus and nvest the
proceeds n other property, there s no reason why the substtuted property
shoud aso be consdered as havng been acqured by w, or n any of the
ot her ways specfed n the subsecton. On the other hand, where the nterests
of the cestus are orgnay contngent, the property they acqure by w
s the property as t e sts when ther nterests become substantay vested,
and, as to them, pror changes n form are mmatera. owever, f the trustee
ses and renvests after the substanta vestng of ther nterests, and devers
the substtuted property to the cestus, the bass of such property In ther hands
w be the bass t had n the hands of the trustee.
In decdng the queston presented n the second paragraph above
quoted, ths offce dd not take nto consderaton the fact that t had
been decded n the precedng paragraph that the vaue of the stock
tsef at the basc date must be reduced to refect the vaue of the
wdow s fe estate. Obvousy, f an ad|ustment of the bass on ac-
count of the fe estate s made where the orgna trust corpus s
devered to the sons, an ad|ustment must aso be made where the
trustees, durng the e stence of the fe estate, have sod the orgna
corpus, renvested the proceeds n other property, and devered the
substtuted property to the sons, and n so far as the second para-
graph above quoted appears to state the contrary, t does not repre-
sent the vew of ths offce.
The genera prncpe n the second paragraph above quoted s never-
theess entrey correct, namey, that the cost or other bass of subst-
tuted property n the hands of the trustees must be taken nto account
n f ng the bass of the property n the hands of the benefcares.
or e ampe, et t be assumed that the vaue of the physca property,
when dstrbuted to testamentary trustees n 1914, s 100,000 and
that the vaue of the nterests of certan vested remandermen bene-
fcares at that tme s 75,000. If the trustees, durng the e stence
of the fe estate, se the property of the trust for 200,000, renvest
the proceeds n other property costng that amount, and dever
the substtuted property to the remandermen after the termnaton
of the fe estate, the bass of such property n the hands of the
former remandermen w be 150,000 nstead of 75,000. In other
words, n computng the bass of the property n the hands of
the former remandermen, the same proportonate reducton from
the trustees bass w be made wth respect to the substtuted prop-
erty as woud have been made wth respect to the orgna property
had the atter been retaned by the trustees and devered n knd to
the former vested remandermen after the termnaton of the fe
estate.
Genera Counse s Memorandum 10260, supra, s modfed to accord
wth the vews heren e pressed.
O. M. Charest,
. , Genera Counse, ureau of Interna Revenue.
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113, rt. 596.
108
rtce 596: Property transmtted at death. I-45 5S36
Ct. D. 595
INCOM T R NU CT O 1928 D CISION O COURT.
Gan or Loss Sae ass Property Transmtted at Death
Devse n Trust.
Where property s devsed n trust for the duraton of the ves
of the benefcares, the w provdng that the trustees coud
termnate the trust at any tme and dstrbute the corpus to the
benefcares, the property, the ega tte to whch was conveyed
to them by the trustees n 1928, s acqured by the benefcares by
devse, wthn the meanng of secton 113(a)5 of the Revenue ct
of 1928, at the death of the testatr , and where her death occurs
on or after March 1, 1913, the bass for determnng gan or oss
from the sae of the property by the benefcares n 1928 s the
far market vaue of the property at the tme of her death, as
provded by that paragraph.
Unted States Dstrct Court, astern Dstrct of New York. No. L-4972.
George ss Lane, pantff, v. Water . Corwn, Coector of Interna Revenue
for the rst Dstrct of New York, defendant.
uy 5, 1932,
OPINION.
Moscowtz, D. .: Ths s a moton for |udgment on the peadngs n an
acton brought for the recovery of 14,247.51 wth nterest, aeged to have been
Iegay coected from the pantff by the defendant, who s coector of
Interna revenue of the Unted States for the frst dstrct of New York, as
Income ta for the caendar year 1928.
smar moton has been made n the acton entted, ames W. Lane, |r.,
pantff, v. Water . Corwn, Coector of Interna Revenue for the rst
Dstrct of New York, defendant, No. Lr-4973. The acton n that case Is to
recover the sum of 14,107.60.
The facts n each case are the same, the ony dfference s n amounts. The
moton s based upon the compant and answer the facts are not n dspute.
or convenence the court w refer to the pantff n ths acton and the
pantff n the acton of ames W. Lane, |r., v. Water . Corcn, Coector of
Interna Revenue for the rst Dstrct of New York, L-4973, n whch acton
a smar moton s made, as the pantffs.
On October 29, 1922, va . Lane, a resdent of Suffok County, N. Y., and
mother of the pantffs, ded eavng a w wheren, among other thngs, she
devsed to certan trustees named n the w, for the beneft of the pantffs
and two other sons, a certan pece of property descrbed as ot 2, secton 10,
bock 5832, orough of rookyn, and commony known as Ows ead Park,
at S ty-eghth Street and Coona Road. The trust was for the duraton of
the ves of the pantffs. It was further provded that the trustees, actng
unanmousy and n ther dscreton coud termnate the trust n whoe or In
part at any tme and dstrbute the corpus thereof to the benefcares, and
aso, f t was decded to termnate the trust, the trustees shoud Immedatey
convey the ega tte of the rea property equay to a of the sons of the
testatr .
The vaue of the tract n queston at the date of death of the testatr was
379,500, at whch vaue t was returned for edera estate ta purposes.
On une 8, 1928, the trustees conveyed the property to the four sons of the
decedent by approprate deed. Subsequenty and on ugust 20. 1928. the
pantffs and the two other sons duy conveyed the tract to the cty of New
York for park purposes n consderaton of a purchase prce of 835,000. On
ther Income ta returns fed for the year 1928, the pantffs, n reportng
ther ncome derved from the sae of the property, treated ther nterest as
havng been acqured on une 8, 1928, and as havng a vaue on that date of
208,750, or one-fourth of 835,000, the prce for whch t was sod about two
months ater, and reported no gan or oss from the transacton.
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109
113, rt. 596.
Subsequenty, and upon an audt, of the returns so fed, the Commssoner
of Interna Revenue determned that the pantffs had acqured ther nterest
n the property n queston upon the death of ther mother, on October 29,
1 C22. and that ther respectve nterests had a vaue on that date of 94,875,
or one-fourth of 379,500, the vaue of the entre tract on that date. s a
resut the Commssoner of Interna Revenue assessed aganst the pantff
the addtona ta es sought to be recovered, whch were duy pad to the
defendant, as coector of nterna revenue. Proper cams for refund of the
amounts so pad were tmey fed and re|ected n fu by the Commssoner of
Interna Revenue, whereupon these actons were begun.
The pertnent parts of the decedent s w are as foows:
C. (a) I gve, devse and bequeath to my trustees herenafter named, a
of the peces and parces of rea estate now owned by me n the orough of
rookyn, County of ngs, State of New York, and beongng to me at the
tme of death, wheresoever stuated theren, and whether contguous or not,
and whenever and however the same have been acqured by me, wth a bud-
ugs, mprovements, easements and appurtenances of every nature and descrp-
ton reatng to or connected wth the same.

(b) of the foregong assets sha be hed and dsposed of by my trustees,
ther successors and assgns, upon the trusts, and wth the powers set forth
n ths cause second, subdvson , paragraphs a to , ncusve, of ths
w .
(c) The duraton of the sad trust sha be the ves of my sons, ames W.
Lane, |r.. and George ss Lane, or f ether of them predecease me, then the
ves of the youngest two of my sons who sha survve mc, provded, however,
that my ndvdua trustees herenafter named and ther successors (ncudng
the corporate trustee f t sha act as soe trustee as herenafter provded),
sha, n case they have sod a or any porton of the sad rea estate, have
power n ther unrestrcted dscreton, to dstrbute at one tme or from tme
to tme the proceeds of any such sae or saes among the persons entted thereto
as stated n ths subdvson C, paragraph (e), and to termnate the trust as
to a amounts thus dstrbuted.
(d) I drect my trustees to receve a of the net rents, Income, profts and
ncrement from and of any and a securtes, assets and property now or here-
after hed n trust hereunder, and to pay over the baance n equa parts and
at quartery perods durng the e stence of the trust to each of my sons,
Mortmer ss Lane, rthur ss Lane, ames W. Lane, |r., and George ss
Lane, .

. I gve, devse and bequeath unto my e ecutors and trustees herenafter
named those parts of the respectve shares or portons of my sad sons whch
they w not be entted to receve mmedatey upon death.
In trust, however, to hod, manage and dspose of the same as herenafter
authorzed, to wt:

(1) I further drect my sad trustees to receve the rents, profts, ncome and
nterest from the varous portons thus hed pursuant to the respectve trusts
created hereunder, and to pay the same to the benefcares of sad trusts
durng the respectve perods thereof.
The ony queston for determnaton s the vaue to be used n determnng
the gan or oss upon the sae of the property, whether the vaue shoud be
f ed at the date of death of the testatr , or ts vaue at the date of dstrbu-
ton to the pantffs.
The statute and reguatons nvoved are as foows:
Revenue ct of 1928 ( 45 Stat., 791) :
Sec. 113. ass fob Determnng Gan op Loss.
(a) Property acqured after ebruary 28, 01S. The bass for determnng
the gan or oss from the sae or other dsposton of property acqured after
ebruary 28, 1913, sha be the cost of such property e cept that

(5) Property transmtted at death. If persona property was acqured by
specfc bequest, or f rea property was acqured by geucra or specfc devse
or by ntestacy, the bass sha be the far market vaue of the property at the
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113, rt. 596.
110
tme of the death of the decedent If the property was acqured by the
decedent s estate from the decedent, the bass In the hands of the estate sha
be the far market vaue of the property at the tme of the death of the
decedent. In a other eases f the property was acqured ether by w or
by ntestacy, the bass sha be the far market vaue of the property at the
tme of the dstrbuton to the ta payer. In the case of property transferred n
trust to pay the ncome for fe to or upon the order or drecton of the
grantor, wth the rght reserved to the grantor at a tmes pror to hs death
to revoke the trust, the bass of such property n the hands of the persons
entted under the terms of the trust nstrument to the property after the
grantor s death sha, after such death, be the same as f the trust nstrument
had been a w e ecuted on the day of the grantor s death

Reguatons 74 ureau of Interna Revenue:
rt. 596. Property transmtted at death. In the foowng cases the bass
for determnng gan or oss from the sae or other dsposton of property
acqured after ebruary 28, 1913, sha be the far market vaue of the property
at the tme of the death of the decedent:
(1) Persona property acqured by specfc bequest
(2) Rea property acqured by genera or specfc devse or by ntestacy
and
(3) Property, whether rea or persona, n the hands of a decedent s estate,
acqured by the estate from the decedent (see artce 863).
In a other cases where property was acqured ether by w or by
ntestacy after ebruary 28, 1913, the bass sha be the far market vaue
of the property at the tme of ts dstrbuton to the ta payer.

or the purposes of ths artce, the vaue of property as apprased for the
purpose of the edera estate ta or n the case of estates not sub|ect to that
ta , ts vaue as apprased n the State court for the purpose of State n-
hertance ta es sha be deemed to be ts far market vaue at the tme of the
death of the decedent.
If the vaue to be used n determnng the gan or oss upon the sae of the
property n queston s the date of the death of the testatr , pantffs are not
entted to recover.
The decedent ded n 1922, at whch tme the property n queston had a vane
of 379,500, of whch the pantffs receved one-fourth nterest each. The
property was dstrbuted to the pantffs and two other brothers by havng the
ega tte conveyed to them n 1928. Two months ater, and n the same year,
the property was sod for 835,000.
readng of the w, the pertnent portons of whch have been set forth n
the opnon, ndcates that the property was conveyed to the trustees to be he
for the beneft of the decedent s sons and that upon a termnaton of the trust
they were each to become sezed of an undvded one-fourth nterest n the rea
estate, therefore, at the tme of the decedent s death athough the ega tte
dd not vest n the decedent s sons, they acqured a benefca nterest n the
property, whch benefca nterest creates an equtabe nterest.
though the ega tte was devsed to the trustees, the benefcares acqured
ther equtabe Interest by the same devse and the trust need not e consdered
as t does not affect the nterest acqured by the benefcares at ther mother s
death.
The nterest acqured by the pantffs n the property s not a contngent
remander as there was no contngency upon whch the vestng of ther nterest
depended or by whch t coud be deayed. Ths court s not bound by the
rung of the New York Ta Commsson whch hed that under the New York
State ncome ta aws, the appcabe sectons of whch are amost dentca
wth the edera aw, that the pantffs dd not reaze any ncome from the
transacton.
In the case of rrvtster v. Gage (30 ed. (2d), 604 TCt. D. 50, C. . III-1,
229 ), the Crcut Court of ppeas, Second Crcut, decded:
It surey was not the ntent of Congress that the acquston of a mere
ega tte shoud competey wpe out or render unta abe the gan whch had
been acqured by the equtabe ownershp and whch was, n fact, reazed upon
the sae made when the date of dstrbuton arrved. Moreover, t woud be an
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113, rt. 596|
unfortunate constructon, whch s not, demanded by the statute, that woud
pace It wthn the power of persona representatves nnd the rea owners,
namey, the egatees or dstrbutees, to defer dstrbuton In order to escape ta .
Ths shoud be avoded.
Ts decson was affrmed by the Supreme Court ( rctcster v. Gaffe, 280 U. S.,
327 Ct. D. 148, C. . I -1, 274 ). That court n affrmng the decson of the
crcut court sad:
Upon the death of the owner, tte to hs rea estate passes to hs hers or
devsees. dfferent rue appes to persona property. Tte to t does not
vest at once n hers or egatees. (Unted States v. ones, 230 U. S., 100, 112
35 S. Ct., 201, 09 L. d., 488, nn. Cas. 1016 , 310.) ut mmedatey u on the
death of the owner there vests n each of them the rght to hs dstrbutve
share of so much as sha reman after proper admnstraton and the rght to
have It devered upon entry of the decree of dstrbuton. Sanders v. Soutter,
136 N. Y., 97, 32 N. ., 638 a v. a, 49 Conn., 52 Cook v. McDowe, 52
. . q., 351, 30 ., 24.)
Upon acceptance of the trust there vests n the admnstrators or e ecutors,
as of the date of the death, tte to a persona property beongng to the estate
t Is taken, not for themseves, but In the rght of others for the proper admn-
straton of the estate and for dstrbuton of the resdue. The decree of
dstrbuton confers no new rght t merey dentfes the property remanng,
evdences rght of possesson n the hers or egatees, and requres the admns-
trators or e ecutors to dever t to them. The ega tte so gven reates back
to the date of the death. oster v. fed, 20 Pck. (Mass.), 67, 70 Wager v.
Wager, 89 N. ., 161, 166 Thompson v. Thomas, 30 Mss., 152, 158.)

Undoubtedy the bass for the ascertanment of gan or oss on the sae of
rea estate by an her or devsee s ts vaue at the tme of decedent s death.
That s the tme of such acquston. The decree of dstrbuton necessary s
ater than, and has no defnte reaton to, the tme when the rea estate passes.
nd generay specfc bequests are handed over to the egatees soon after the
death of the testator and such property may be and often s sod by them pror
to the entry of the decree for fna dstrbuton. In such cases gans or osses
are to be cacuated under these acts on vaue at the tme of death. No other
bass s or reasonaby coud be suggested.
In the case of Chander v. ed, Coector, decded by the Unted States
Dstrct Court for the Dstrct of New ampshre, pr 13, 1932, whch has not
yet been reported Ct. D. 517, page 190. ths buetn 1. the pantff was a bene-
fcary under a testamentary trust created by the w of hs mother, who ded
October 25, 1915. Pursuant to the trust, the trustees n 1920 and 1925, devered
to hm a certan number of stocks whch he sod n 1925. The coecter of nter-
na revenue In determnng the gan or oss from the sae of the stock used as a
bass ts vaue at the date of death of the testatr , and assessed and coected
addtona ta es accordngy. The dstrct court n that case decded aganst
the ta payer the court sad:
The pantff seeks to dstngush the rewster case from the case at bar
and cas attenton to the fact that n the rewster case the stock passed at
once upon the settement of the estate to the resduary egatee whe n the
case at bar there was an ntervenng trust under whch the stock was hed
by trustees n trust to pay the ncome to a fe tenant. Pantff further seeks
to dstngush the two cases, pontng out that n the rewster case the resdu-
ary egatee took the entre tte to the property sub|ect to admnstraton
e penses and f he ded before recept of the same t passed to hs hers,
whereas n the nstant case the pantff took a vested remander sub|ect to
be dvested f he ded wthout ssue before reachng the specfed age.
The court can see that the facts n the two cases are easy dstngushabe
but to my mnd the dstngushabe features are not of such a character as to
make the hodngs of the Supreme Court n the rewster case nappcabe. It
U true that the pantff n the case at bar mght never have receved hs share
of the property. What then woud have been the stuaton presents another
queston. e dd receve t and that s the fact wth whch we are deang.
Whatever rghts he fnay acqured date back to the death of hs mother.
That was the date of ther ncepton. Those rghts contnued unnterruptedy,
from the date of her death unt the stocks were physcay devered to the
I/antff.
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5113, rt. 590.
112
In the rewster ease, Mr. ustce uter says:
Pettoner s rght ater to have hs share of the resdue vested mmedatey
upon testator s death. t that tme pettoner became enrched by ts worth
whch was drecty reated to and woud ncrease or decne correspondngy
to the vaue of the property. nd, notwthstandng the postponement of transfer
of the ega tte to hm. Congress unquestonaby had power and reasonaby
mght f vaue at the tme tte passed from the decedent as the bass for
determnng gan or oss upon the sae of the rght or of the property before or
after the degree of dstrbuton. nd we thnk that n substance t woud not be
Inconsstent wth the rues of aw governng the descent and dstrbuton of
rea and persona property of decedents to construe the words In queston to
mean the date of death. .
Pror to the enactment of the Revenue ct of 192.S, the bass n determnng
the gan or oss from the sae of property acqured by bequest, devse or n-
hertance, was the far market vaue of such property at the tme of acquston.
The tme of acquston was the date of death. ( rewster v. Gage, supra.)
The Court of Cams decded the case of Mc nney et a. v. Unted State
(62 C. Cs., 180), and the Supreme Court dened appcaton for wrt of cer-
torar (273 U. S., 71C). The Court of Cams n that case, n construng the
Revenue ct of 1918, s sent as to the bass for determnng gan or oss on
the sae of property transmtted by death, decdng that the bass for deter-
mnng the gan or oss on the sae of stock by the e ecutor of an estate s the
cost of the property to the decedent, or, where acqured pror to March 1, 1913,
Its vaue as of that date, and that when the stock was acqured by a decedent
before March 1, 1913, and sod by the e ecutor for ess than cost or March 1,
1913, vaue, but for more than ts apprased vaue at date of death, no ta abe
gan resuted. Pror to the decson of Mc nney et a. v. Unted States, supra,
the Department has hed that the vaue at date of death was the correct bass
In a cases.
There were hearngs had before the Ways and Means Commttee of the ouse
of Representatves and the nance Commttee of the Senate, on the proposed
Revenue ct of 1928. Such hearngs may be consdered by the court n con-
strung the ntent of Congress. The foowng are e cerpts from the commttee
reports:
Report of the Ways and Means Commttee of the ouse on the revenue b
of 1928, Report No. 2, at page 18:
Sec. 113. ass for Determnng Gan or I/ bs. ecutor s sae.
In vew of the decson of the Court of Cams n Mc nney v. Unted
tatcs, t s desrabe specfcay to provde what bass sha be used n deter-
mnng gan or oss on the sae of property by an estate. It s beeved that
the bass shoud be the vaue of the property on the date of the decedent s
death, and ths rue s ncorporated n secton 113(a)5.
It s aso provded, n the same paragraph, that the bass n case of a sae
by a benefcary sha be the vaue of the property on the date of the decedent s
death. Under e stng aw, the bass n such a case s the vaue at the date of
acquston, whch s ndefnte and has gven rse to controversy. The vaue
on the date of death affords an equtabe and more ready determnabe bass.
Report of the Commttee on nance of the Senate on the nterna revenue
b of 1928, No. 900, at page 26:
Sec. 113. ass for Determnng Gan or Loss. ecutor s sae.
The decson by the Court of Cams n Mc nney v. Unted States has caused
confuson n the e stng aw as to the bass on whch an e ecutor must deter-
mne gan or oss on the sae by hm of property of the estate. The ouse b
In secton 113(a)5 provdes that n such cases the bass sha be the far market
vaue of the property at the tme of the death of the decedent. In the same
secton the ouse b provdes the same bass sha be used where the property
s sod by the benefcary.
It appears that the ouse b s nadequate to take care of a number of
stuatons whch frequenty arse. or e ampe, the e ecutor, pursuant to
the terms of the w, may purchase property and dstrbute t to the bene-
fcares, n whch case t s mpossbe to use the vaue at the decedent s death
as the bass for determnng subsequent gan or oss, for the decedent never
owned the property. Moreover, the far market vaue of the property at the
decedent s death can not propery be used as the bass, n the case of property
transferred n contempaton of death where the donee ses the property whe
he donor Is vng.
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113
116, rt. 643.
ccordngy, the commttee has revsed secton 113(a)5 and certan reated
sectons, so as to provde that n the case of a specfc bequest of personaty
or a genera or specfc devse of reaty, or the transmsson of reaty by n-
testacy, the bass sha be the far market vaue at the tme of the death of
the decedent. In these cases t may be sad, as a matter of substance, that
the property for a practca purposes vests n the benefcary mmedatey
upon the decedent s death, and therefore the vaue at the date of death Is
a proper bass for the determnaton of gan or oss to the benefcary. The
same rue s apped to rea and persona property transmtted by the decedent,
where the sae s made by the e ecutor. In a other cases the bass s the
far market vaue of the property at the tme of the dstrbuton to the ta -
payer. The atter rue woud obtan, for e ampe, n the case of persona prop-
erty not transmtted to the benefcary by specfc bequest, but by genera bequest
or by ntestacy. It woud aso appy n cases where the e ecutor purchases
property and dstrbutes t to the benefcary.
These reports ndcate that the other cases referred to n secton 113(a)5
are those where t s mpossbe to use the date of death as the bass. The
cases at bar do not seem to come wthn the e cepton contaned n the report
of the Commttee on nance of the Senate.
The concuson whch has been reached s, that the vaue of the property at
the date of the death of the testatr governs n determnng the gan or oss
upon the sae of the property.
The moton made by the pantff for |udgment s dened.
Sette order on notce.
S CTION 116. CLUSIONS ROM GROSS
INCOM .
rtce 643: Compensaton of State offcers I-38-5698
and empoyees. G. C. M. 10814
R NU CT O 1928 ND PRIOR R NU CTS.
The ta payer was superntendent of the M County ospta,
whch was estabshed and s mantaned under statutes whch pro-
vde that the countes of the State through ther board of super-
vsors sha have |ursdcton and powers to provde for the care
and mantenance of the ndgent sck or dependent poor of the
county, and evy ta es for such purposes. Coectons from
patents from 1915 to 1931 were ony 3.1 per cent of e penses, and
the factes of the hospta are not avaabe to those abe to pay
reasonabe compensaton.
ed, the M County ospta s an nstrumentaty of the State
engaged n the e ercse of an essenta governmenta functon,
and the ta payer as an empoyee s e empt from ta aton wth
respect to hs saary.
The opnon of ths offce s requested whether the ta payer s
e empt from ta aton wth respect to compensaton receved by hm
as an offcer of the M County ospta.
The facts n the case are as foows: The M County ospta was
estabshed and s mantaned by the authorty of the Caforna
Potca Code, secton 4041.16 (see secton 17, chapter 755, page 1458,
Statutes of Caforna, 1929), whch provdes that the boards of
supervsors, n ther respectve countes, sha have the |ursdcton
and powers to provde for the care and mantenance of the ndgent
sck or dependent poor of the county, and for that purpose to evy
the necessary property or po ta es, or both. It s further provded
that graduates n medcne sha be apponted to attend to such
ndgent sck or dependent poor n the county hosptas and ams-
houses. The aw aso provdes that the board sha not et the care,
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116, rt. 643.
114
mantenance, or attendance of such ndgent sck or dependent poor
by contract to any person e cept, that the board sha be authorzed
and empowered to secure by agreement for the needy sck and
dependent and partay dependent ctzens, n cases of emergency,
hospta care, ncudng medca, surgca, -ray, aboratory, nursng,
and genera hospta servce, at cost from persons, frms, and corpora-
tons then and there mantanng and operatng hosptas n the
county or cty and county. (See aso secton 4041(7) of Deerng s
Potca Code, 1923.)
The ta payer s offce n the M ospta was created by ordnance
enacted by the board of supervsors of M County n 1924. The ta -
payer s a graduate of the Unversty of , wth degree of M. D.,
and a graduate of the Medca Schoo. e was apponted to
the offce n the M County ospta by the board of supervsors upon
ts creaton, and hed that poston unt uy, 1931.
The pauper act (Statutes of Caforna, 1901, page 636) pro-
vdes, nter aa, that every county sha reeve and support a pau-
per, ncompetent, poor, ndgent persons, and those ncapactated, by
age, dsease, or accdent, awfuy resdent theren, when such per-
sons are not supported and reeved by ther reatves and frends, or
by ther own means, or by State hosptas or other State or prvate
nsttutons. It s aso provded that t s the duty of any supern-
tendent of any county hospta or amshouse, or hs subordnates, m-
medatey upon recevng any person nto such hospta or amshouse
as a pubc charge, such person beng poor, ndgent, ncapactated,
or ncompetent as theren defned, to make dgent nqury nto the
abty of such person or of hs reatves to bear the actua charges
and e penses of the mantenance and support of such person, and to
forthwth notfy the dstrct attorney of such county thereof, and the
board of supervsors of such county, of the resut of such nqury.
The moneys coected on the account of the patents are, n accord-
ance wth the provsons of the pauper act, used for the support
of, and furtherance of the care of, the patents n the hospta. Dur-
ng the years 1915 to 1931 the percentage of tota e pense coected
from patents was ony 3.1 per cent. The factes of the hospta
are not avaabe to anyone who s n a poston to pay reasonabe
compensaton for hospta care and treatment, and such persons are
refused admttance to the hospta, as t was never ntended for ths
cass of patents. The attendng physcans and surgeons gve ther
servces free and entrey wthout fnanca remuneraton from any
source.
There s no e press provson of aw whch prohbts ta aton
by the edera Government of the compensaton receved by an
empoyee of a State, but the courts have hed that under the Con-
sttuton of the Unted States the edera Government may not ta
the means, agences, or nstrumentates by whch the States e ercse
ther soveregn powers or dscharge ther strcty governmenta
functons. The Coector v. Day, 11 Waace, 113 South Carona v.
U. S., 199 U. S., 437 nt v. Stone Tracy Co., 220 U. S., 107 Po-
ock v. armers Loan Trust Co., 157 U. S., 429.) ust what
nstrumentates of a State are e empt from ta aton by the edera
Government can not be stated n terms of unversa appcaton.
(Metcaf ddy v. Mtche, 269 U. S., 514, T. D. 3824, C. . -,
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115
116, rt. 643.
218.) ut t s recognzed n artce 643 of eguatons 74 that
compensaton receved for servces rendered to a State or potca
subdvson thereof s ncuded n gross ncome, uness (a) the person
receves such compensaton as an offcer or empoyee of a State or
potca subdvson, and (b) the servces are rendered n connecton
wth the e ercse of an essenta governmenta functon.
There seems to be no doubt that the ta payer s an empoyee of the
county of M. e was apponted an offcer of the M County ospta
by the board of supervsors of that county and hs compensaton s
pad by the county out of ta es eved by the board as provded by
aw. In connecton wth the operaton of a county hospta n
Caforna and the appontment of attendng physcans, the fo-
owng s quoted from Sacramento County v. Chambers (33 Ca.
pp., 142 (1917), 164 Pac, 613):
The consttuton nowhere paces the burden of mantanng, sup-
portng, carng for, and treatng the Indgent sck upon the countes of the
State. The egsature, however, n the e ercse of ts duty and power to
estabsh a system of county governments (secton 4, artce 11, Const.), has.
In f ng and enumeratng the powers of boards of supervsors of the countes,
authorzed sad boards to estabsh and mantan county hosptas, prescrbe
rues for the government and management thereof, and appont county phy-
scans and the necessary offcers and empoyees thereof, who sha hod ofcd
durng the peasure of the board (Po. Code, secton 4223), to bud or rebud,
furnsh, or refurnsh hosptas and amshouses (Po. Code, secton 4041, sub-
dvson 7), and has further provded that the necessary e penses ncurred n
the support of the county hosptas, amshouses, and the ndgent sck and
otherwse dependent poor, chose support s chargeabe to the county, cwsttute
county charges. (Po. Code, secton 4307, subdvson 7.)
There s no doubt that the egsature, by the egsaton above re-
ferred to, ntended to and dd transfer from ts own shouders, and so paced
upon the countes, the duty and burden of carng for, supportng, and treatng
the casses of persons mentoned. The State may, through ts eg-
sature, and In the e ercse of ts soveregn power and w, n a cases where
the peope themseves have not restrcted or quafed such e ercse of that
power, apporton and deegate to the comtes any of the functons whch be-
ong to t. Itacs supped.
The prncpa queston n the nstant case s whether the county of
M n operatng a genera hospta for the ndgent sck and the
dependent poor s e ercsng an essenta governmenta functon.
The pauper act referred to above paces the care and support of
a paupers, ncompetent poor, ndgent persons and those nca-
pactated by dsease or accdent upon the county, e cept where
such persons are supported by reatves n State nsttutons. Under
secton 4041.16 of the Caforna Potca Code the care and man-
tenance of these unfortunates are paced under the supervson of
the county board of supervsors. The care of the ndgent sck and
dependent poor, where there are no reatves to care for them, s the
profound duty of the State and/or ts potca subdvsons. It s
essentay a governmenta functon, for there s no other method of
carng for such cass of ndvduas. The State aone must assume
the burden where there are no reatves whch may be charged wth
ther support. On ths pont the foowng comment n Sacramento
County v. Chambers, supra, s of especa nterest:
It has never been, nor w t ever be, questoned that among the frst or
prmary dutes devovng upon a State s that of provdng sutabe means and
measures for the proper care and treatment, at the pubc e pense, of the
ndgent sck, havng no reatves egay abe for ther care, support, and
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116, rt. 643.
116
treatment, those who are Infrm and hepess from the ravages of advancng
years and wthout means of ther own or reatves upon whom the aw paces
responsbty for ther care and support, and the nsane, kewse stuated as
to means necessary for ther care, support, and safe-keepng. (Cooey on Ta a-
ton, page 204.)
That the care of the dependent poor s a governmenta functon
was recognzed n Cha far v. Cty of Long each (174 Ca., 478, 163
Pac, 670), wheren the Caforna Supreme Court stated as foows:
Nor s t dffcut to set forth the defnton of governmenta functons as
apped to a cty. Under the theory of the common aw, that the muncpaty
s protected from abty ony whe e ercsng the deegated functons of
soveregnty, the governmenta powers of a cty are those pertanng to the
makng and enforcng of poce reguatons, to prevent crme, to preserve the
pubc heath, to prevent fres, the carng for the poor, and the educaton of
the young. nd n the performance of these functons a budngs and n-
strumentates connected therewth come under the appcaton of the prnc-
pe. (Cty of okomo v. hoy (Ind.), 112 N. ., 904.) Itacs supped.
In ensen v. McCuough (271 Pac, 568) the court stated 85
foows:
Tms, n the absence of a mtaton, and wthout an e press grant,
the egsature has the nherent rght to subdvde the State nto potca sob-
dvsons and to prescrbe the mode of government, the powers, dutes, and
obgatons of each of such subdvsons and of the offcers and empoyees
created for the purpose of e ercsng, on behaf of the State, the governmenta
functons of such subdvsons. avng heretofore dscussed the mtatons
whch surround the power of the egsature In matters of ths knd, and havng
found none of them appcabe to the case n hand, we are eft wth the nherent
power of the egsature, n the e ercse of ts poce power, and for the genera
wefare of the State at arge, to provde for the care and nuntenance of ts
ctzens. Wthout specfyng the partcuar acts, we know that the State has
provded for the core and mantenance of the ndgent, the orphans and haf
orphans, the bnd, the nsane, the feebe-mnded, the |uvene denquents, the
crmna, and other dependent persons. Itacs supped.
The hospta n the nstant case may be dstngushed from that
referred to n I. T. 2357 (C. . I-1, 52), where t was hed that the
compensaton receved by the medca drector of the county hospta,
operated under the aws of another State, was not e empt for the
year 1925, and subsequent years, because the hospta was engaged
n a propretary rather than a governmenta functon. (Cf. Mm.
3838, C. . I -2, 137.) In that case t appeared that the attendng
physcaS| ncudng the eadng tubercuoss specasts, receved
compensaton for ther servces, whereas n the nstant case the
attendng physcans gave ther servces free of charge. It dd not
appear n that case that the hospta was operated for the beneft of
the ndgent sck and paupers, but that t was an ordnary hospta
controed by the county where reasonabe compensaton was pad for
care and treatment, athough that hospta ke a hosptas dd have
some charty patents. In the nstant case, however, the hospta was
organzed and operated for the purpose of takng care of the ndgent
sck or dependent poor, a functon whch s recognzed by the courts
as essentay governmenta, and whch s a burden specfcay paced
upon the respectve countes of the State of Caforna. s ndcated
above, those who are abe to pay a reasonabe compensaton for
medca attendance are not admtted. Ceary, such patents coud
not be cassed as ndgent sck, dependent poor, or paupers, referred to
n the statutes under whch the hospta s organzed and mantaned.
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117
117, rt. 651
In vew of the foregong, ths offce s of the opnon that the M
County ospta s an nstrumentaty of the State engaged n the
e ercse of an essenta governmenta functon. It foows that the
ta payer as an empoyee of the nsttuton s e empt from ta aton
wth respect to hs saary.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
S CTION 117. N T LOSS S.
rtce 651: Net osses, defnton and com- I-34-5631
putaton. T. D. 4349
INCOM T .
Net osses deductons artce 1G01 of Reguatons 62, artce
1621 of Reguatons 05, artce 1021 of Reguatons 69, and artce
651 of Reguatons 7 amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
rtce 1601 of Reguatons 62, approved ebruary 15, 1922, s
amended by strkng out the thrd sentence and changng the frst
sentence to read as foows:
The term net oss as used n the statute means ony a net oss sustaned
durng the ta abe year and resutng from the operaton of any trade or bus-
ness reguary carred on by the ta payer durng the ta abe year or any pror
ta abe year.
rtce 1621 of Reguatons 65, approved October 6, 1924, s
amended by strkng out the fourth sentence and changng the frst
sentence to read as foows:
The term net oss as used n the statute appes to a net oss sustaned
durng the ta abe year and resutng from the operaton of any trade or bus-
ness reguary carred on by the ta payer durng the ta abe year or any pror
ta abe year.
rtce 1621 of Reguatons 69, approved ugust 28, 1926, s
amended by strkng out the fourth sentence and changng the frst
sentence to read as foows:
The term net oss as used n secton 200 appes to a net oss sustaned
durng the ta abe year and resutng from the operaton of any trade or
busness reguary carred on by the ta payer durng the ta abe year or any
pror ta abe year.
rtce 651 of Reguatons 74, approved ebruary 15, 1929, s
amended by strkng out the fourth sentence and changng the frst
sentence to read as foows:
The term net oss as used n secton 117 appes to a net oss sustaned
durng the ta abe year and resutng from the operaton of any trade or
busness reguary carred on by the ta payer durng the ta abe year or any
pror ta abe year.
Davd urnet,
Commssoner of Interna Revenue.
pproved ugust 15, 1932.
. . aantne,
ctng Secretary of the Treasury.
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131, rt. 691.
118
SUPPL M NT C CR DITS G INST T .
S CTION 131. T S O OR IGN COUNTRI S ND
POSS SSIONS O UNIT D ST T S.
rtce 691: nayss of credt for ta es. I-45-5837
G. C. M. 11039
R NU CT O 1928.
The fm-hre ta Imposed by the New Zeaand fnance act of
1930 Is not a part of the ncome ta aw of that country and s
eved on mere recepts from the use of fms by those who have
obtaned a renter s cense under the cnematograph fms act of
1928. It s consdered n the nature of an e cse ta rather than
an ncome ta . The amount of the fm-hre ta pad to the New
Zeaand Government may not, therefore, be camed as a credt
aganst Unted States ncome ta .
n opnon s requested whether fm-hre ta , pad to the
Government of New Zeaand under the provsons of the fnance act
of 1930, may be aowed as a credt for ncome ta purposes under
secton 131 of the Revenue ct of 1928. Subdvson (a) of that
secton provdes n part that the ta mposed by the Unted States
Government sha be credted wth
(1) Ctzen and domestc corporaton. In the case of a ctzen of the
Unted States and of a domestc corporaton, the amount of any ncome, war-
profts, and e cess-profts ta es pad or accrued durng the ta abe year to any
foregn country or to any possesson of the Unted States.
rom an e amnaton of the aws of New Zeaand t s found that
that country mposes an ncome ta by the Land and ncome ta
act, 1923/ whch was amended n 1924, 1925, 1926, 1927, and 1928.
The orgna ncome ta aw and the amendments thereto do not con-
tan a fm-hre ta . The atter ta s mposed by the fnance act
of 1930, whch s separate and dstnct from the New Zeaand ncome
ta aw. The fnance act of 1930 s dvded nto s parts, desgnated
as foows: Part I Stamp dutes Part II Death dutes Part
III musements-ta Part I Man hghways Part Cnemat-
ograph fms Part I Msceaneous. The fm-hre ta s eved
under Part . That part of the fnance act of 1930 provdes that a
fm-hre ta sha be eved n respect of the proceeds derved from
rentng sound-pcture fms. The fm-hre ta s payabe by every
person who s the hoder of a renter s cense under cnematograph
fms act, 1928. Secton 45 of the fnance act of 1930 reads as foows:
45. (1) The fm-hre ta payabe by any renter sha be assessed on the net
monthy recepts derved by hm from rentng sound-pcture fms, or, n the
case of an e hbtor who s aso a censed renter, sha be assessed on the net
monthy recepts deemed, n accordance wth the provsons herenafter set
forth, to have been derved by hm from rentng sound-pcture fms.
(2) m-hre ta sha be eved at the foowng rates, namey:
(a) In respect of rtsh sound-pcture fms, at the rate of 10 per centum of
the net recepts aforesad
(b) In respect of foregn sound-pcture fms, at the rate of 25 per centum of
such net recepts.
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119
5131, rt. 092.
In ascertanng net recepts there are deducted therefrom certan
e penses whch are enumerated n the act, as we as an amount equa
to 12y2 per cent of the gross recepts derved from the rentng of
sound-pcture fms.
Ths offce has prevousy hed that an ncome ta wthn the
meanng of secton 131 of the Revenue ct of 1928 has reference to
a ta on ncome wthn the meanng of that term as used and
understood by the edera ncome ta aw and court decsons. (See
I. T. 2596, C. . -2, 184 I. T. 2620, C. . I-1, 44.) a on
net recepts from busness s not an ncome ta but has been hed
to be an e cse ta . (See Cooey on Ta aton, fourth edton, secton
845 udson on Ta aton, second edton, secton 256.) s the fm-
hre ta mposed by the New Zeaand fnance act of 1930 s not a part
of the ncome ta aw of that country, and s eved on mere recepts
from the use of fms by those who have obtaned a renter s cense
under the cnematograph fms act, 1928, the ta n queston s con-
sdered n the nature of an e cse ta rather than an ncome ta .
The amount of fm-hre ta pad to the New Zeaand Government
may not, therefore, be camed as a credt aganst Unted States
ncome ta .
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
rtce 692: Meanng of terms. I-34-5630
T. D.4348
Income ta rtce 382 of Reguatons No. 45, 45 (1920 dton),
02, 65, and 69, and artce 692 of Reguatons No. 74, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The second sentence of artce 382 of Reguatons No. 45, approved
pr 17, 1919 No. 45 (1920 dton), approved anuary 28, 1921
No. 62, approved ebruary 15, 1922 No. 65, approved October 6,
1924 No. 69, approved ugust 28, 1926, and the second sentence of
artce 692 of Reguatons No. 74, approved ebruary 15, 1929, are
hereby amended to read as foows:
oregn country means any foregn state or potca subdvson thereof,
or any foregn potca entty, whch eves and coects ncome, war-profts,
or e cess-profts ta es.
Davd urnet,
Commssoner of Interna Revenue.
pproved ugust 15, 1932.
ames . Dougas,
ctng Secretary of the Treasury.
160903 33 9
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8144, rt. 768.
120
SUPPL M NT D. R TURNS ND P YM NT O T .
S CTION 144. WIT OLDING O T
T SOURC .
rtce 768: Return and payment of ta wth-
hed.
I-39-5720
I. T. 2644
R NU CT OP 1928.
The ct of March 1, 1879 ( 20 Stat., 351, 12 U. S. O. ., 570),
Is mted In ts appcaton to cases nvovng ta es drecty m-
posed upon a bank. It has no reference to a case whch nvoves
the abty of a wthhodng agent for the payment of ta es
mposed upon the owners of bonds contanng a ta -free covenant
cause.
rung s requested whether the M ank, whch s now n-
sovent, s requred to pay to the Unted States Government sums
representng ncome ta es receved by t as wthhodng agent.
The superntendent of banks of the State of s n charge of the
qudaton of the M ank, whch passed nto hs hands on ugust
, 1931. The bank has been actng as wthhodng agent n con-
necton wth nterest payments upon ta -free covenant bonds of a
domestc corporaton, and at the tme the bank was taken over n
qudaton t had on hand the sum of 1.02a doars, representng
ncome ta requred to be wthhed at the source under the pro-
vsons of secton 144(a) of the Revenue ct of 1928. In addton
to ths the bank, as wthhodng agent, receved the sum of .44|
doars subsequent to ts cosng. The assets of the bank are not
suffcent to pay the depostors of the bank n fu, and the queston
arses whether secton 22 of the ct of March 1, 1879, s appcabe.
The ct of March 1, 1879 (20 Stat., 351, 12 U. S. C. ., 570),
provdes as foows:
Insovent banks as e empt from ta . Whenever and after any bank has
ceased to do busness by reason of nsovency or bankruptcy, no ta sha be
assessed or coected, or pad nto the Treasury of the Unted States, on account
of such bank, whch sha dmnsh the assets thereof necessary for the fuU
payment of a ts depostors and such ta sha be abated from such natona
banks as are found by the Comptroer of the Currency to be nsovent and
the Commssoner of Interna Revenue, when the facts sha so appear to hm, s
authorzed to remt so much of sad ta aganst nsovent State and savngs
banks as sha be found to affect the cams of ther depostors. (March 1,
1879, eh. 125, secton 22, 20 Stat., 351 March 3. 1S83, ch. 121, secton 1, 22 Stat,
48S.)
The statute above quoted s mted n ts appcaton to cases
nvovng ta es drecty mposed upon a bank. It has no reference to
a case, such as the one here under consderaton, whch nvoves the
abty of a wthhodng agent for the payment of ta es mposed
upon the owners of bonds contanng a ta -free covenant cause. The
bank s abty for the ta es n queston arses as the resut of the
burden paced upon the debtor corporaton (obgor) by sectons
144(a) and 144(c) of the Revenue ct of 1928, namey, to deduct
and wthhod the ta at the source and to pay the ta to the offca
of the Unted States Government authorzed to receve t.
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121
144, rt. 768.
The bank, as wthhodng agent of the debtor corporaton, s abe
to the Unted States on account of the ncome ta es coected by t
whether such ta es were receved before or after the bank was taken
over by the superntendent of banks. (Cf. secton 3466 of the
Revsed Statutes, whch creates a prorty for debts due to the Unted
States by an nsovent debtor.)
rtce 768: Return and payment of ta wth- I-49-5897
hed. I. T. 2659
R NU CT O 1028.
The abty to coect ncome ta nt the source and pay the
amount thereof to the Unted States Government s prmary that
of the debtor corporaton. In case t has desgnated a bank to act
for t as wthhodng agent, and the bank has not coected any ta
from the bondhoders nor receved any funds from the debtor
corporaton to pay the ta whch the debtor corporaton assumed
n connecton wth ts ta -free covenant bonds, the bank can not
be hed abe for the ta merey by reason of ts appontment as
wthhodng agent.
dvce s requested reatve to the abty of the M ank as
wthhodng agent, wth respect to an outstandng assessment aganst
the O Company representng ncome ta requred to be wthhed
at the source durng 1931 from nterest payments upon bonds ssued
by the atter company.
The M ank states that t has been unabe to coect from the
debtor corporaton the amount of ta assessed, and that t knows
of no provson of aw under whch the Government can compe
a bank actng as wthhodng agent to pay the ta requred to be
wthhed where the bank s unabe to make coecton.
n e amnaton of the returns fed upon whch the assessment
was based ndcates that the M ank was actng ony as a duy
authorzed agent for the debtor corporaton wth respect to nter-
est pad upon ta -free covenant bonds, as provded by artce 761 of
Reguatons 74. The abty to coect ncome ta at the source
and pay the amount thereof to the Unted States Government s
prmary that of the debtor corporaton. (See sectons 144(a) and
144(c) of the Revenue ct of 1928.) In case t has desgnated a
bank to act for t as wthhodng agent, and the bank has not co-
ected any ta from the bondhoders nor receved any funds from the
debtor corporaton to pay the ta whch the debtor corporaton as-
sumed n connecton wth ts ta -free covenant bonds, the bank can
not be hed abe for the ta merey by reason of ts appontment
as wthhodng agent. Inasmuch as t appears n the nstant case
that the M ank, as wthhodng agent of the O Company, has not
coected any ncome ta at the source and has been unabe to obtan
from the debtor corporaton the amount of ta whch the debtor
corporaton covenanted to pay for ts bondhoders, the M ank
can not be hed abe for the ta . (Compare I. T. 2644 (page 120).)
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148, rt. 811.
122
S CTION 148. IN ORM TION T SOURC .
rtce 811: Return of nformaton as to pay
ments of 1,500.
I-46-5851
G. C. M. 11115
It NU CT O 1928.
n nsurance company pa| ng Insurance commssons to agents
shoud furnsh Informaton returns n accordance wth secton 148
of the Revenue ct of 1928 and artce 811 of Reguatons 74.
n opnon s requested reatve to the abty of the M Company
to fe nformaton returns under secton 148 of the Revenue ct of
The M Company s engaged n acceptng nsurance and e ecutng
bonds n connecton wth accdent nsurance, heath nsurance, and
numerous types of property nsurance. The queston has arsen n
connecton wth the nvestgaton of the ta abty of the nsurance
company, whether t s requred to fe nformaton returns on orms
1096 and 1099, showng commssons pad durng the years 1929, 1930,
and 1931 to ts agents for procurng nsurance and wrtng fdety
and surety bonds.
Secton 148 of the Revenue ct of 1928 provdes n part as foows:
(a) Payments of 1,500 or more. persons, n whatever capacty actng,
ncudng essees or mortgagors of rea or persona property, fducares, and
empoyers, makng payment to another person, of Interest, rent, saares, wages,
premums, annutes, compensatons, remuneratons, emouments, or other f ed
or determnabe gans, profts, and ncome (other than payments descrbed n
secton 149(a) or 150), of 1,500 or more n any ta abe year, or, n the case
of such payments made by the Unted States, the offcers or empoyees of the
Unted States havng nformaton as to such payments and requred to make
returns n regard thereto by the reguatons herenafter provded for, sha
render a true and accurate return to the Commssoner, under such reguatons
and n such form and manner and to such e tent as may bo prescrbed by hm
wth the approva of the Secretary, settng forth the amount of such gans,
profts, and ncome, and the name and address of the recpent of such payment.
rtce 811 of Reguatons 74 provdes that a persons makng
payment to another person of f ed or determnabe ncome of 1,500
or more n any caendar year must render a return thereof to the
Commssoner. The return s requred to be made on orm 1099,
accompaned by transmtta orm 1096, showng the number of
returns fed.
Secton 148 of the Revenue ct of 1928 and the correspondng
sectons of pror Revenue cts were ncorporated nto the ncome
ta aw for the purpose of enabng the Department to reach and
mpose a ta upon certan tems of ncome, the e stence of whch
mght otherwse reman undscosed. (I. T. 2560, C. . -, 173.)
The aw s mandatory n ts requrement that returns of nformaton
be fed where the amount pad durng the ta abe year s 1,500 or
more. No e cepton s made n the case of nsurance companes.
The fact that a arge sum n commssons was pad each year Tby the
M Company woud ndcate the necessty for the Government havng
nformaton from whch to verfy propery the ncome ta returns
fed by the recpents.
rom the fe n the case t appears that the nsurance company
has contracts whch t enters nto wth genera agents, agents, and
subagents. The company w be requred to fe nformaton re-
turns, under secton 148 of the Revenue ct of 1928, of the amount of
1928.
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123
161, rt. 861.
commssons pad to a ts agents where such commssons pad to
any ndvdua durng the caendar year amounted to 1,500 or more.
The fact that the genera agent, or agent, has e penses connected
wth the carryng on of hs busness s not suffcent reason for
reevng the nsurance company of the burden mposed upon t by
the statute to fe nformaton returns. Such e penses of operaton
are aowabe deductons to the agent n computng net ncome, but
nformaton returns must be fed by the nsurance company. Shoud
a genera agent pay a part of hs commssons to an agent or sub-
t n consderaton of busness secured, the genera agent shoud
render returns of nformaton as requred by aw.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
SUPPL M NT . ST T S ND TRUSTS.
S CTION 161. IMPOSITION O T .
rtce 861: states and trusts. I-48-5883
G. CM. 11221
R NU CT O 1028.
The Interest on Lberty bonds, benefcay owned by a nonres-
dent aen Indvdua, s e empt from ncome ta when accumu-
ated by a resdent trustee for the beneft of nonresdent aen
benefcares.
The nterest on foregn bonds, when accumuated by a resdent
trustee for future dstrbuton to nonresdent aens under the
terms of a trust, s the ncome of a resdent trust and ta abe to
the trustee under secton 161 of the Revenue ct of 1928.
n opnon s requested whether nterest on certan Lberty bonds
and foregn bonds s ta abe to a resdent trustee when accumuated
for the beneft of nonresdent aen benefcares.
It appears that a trust deed was e ecuted n 1916 by , who was a
nonresdent aen, for the beneft of hs reatves, aso nonresdent
aens. The M Company, a domestc corporaton, was apponted
trustee. The deed, as modfed by suppementa ndenture, provded
that at the death of the grantor a certan porton of the trust prop-
erty shoud go n equa shares to such grandsons of the grantor (by a
certan named son) as were vng at the grantor s death provded,
however, that n the case of any such grandson who was under 21
years of age at the grantor s death, the trustee shoud contnue to
hod the share of such nfant n trust durng hs mnorty, coectng
the ncome and appyng to the use of sad nfant so much of the
ncome as the trustee mght deem proper for the nfant s educaton,
mantenance, and support, accumuatng the remander durng hs
mnorty and payng the corpus and accumuated ncome to the
grandson upon hs attanng 21 years provded, that f the sad
nfant shoud de under the age of 21 years eavng ssue, then the
trustee shoud dever sad grandson s share and accumuatons to hs
ssue vng at hs death, and f the sad grandson shoud de before
attanng 21 years wthout eavng ssue, then hs share and accumu-
atons shoud be treated as though e had ded wthout ssue n the
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161, rt. 861.
124
fetme of the grantor, and as f every person predeceasng the sad
grandson had predeceased the grantor.
Under the terms of ths nstrument the trustee, n 1929, pad and
dstrbuted to the nfant grandson, , a nonresdent aen, through
hs guardan, the sum of doars of trust ncome, part of whch was
nterest on Lberty bonds and foregn bonds, the remander of the
ncome of hs share beng accumuated n accordance wth the terms
of the trust. The sum so accumuated ncuded nterest on Lberty
bonds n the sum of 2.82a doars and nterest on foregn bonds n the
sum of .42a| doars. In the same year the trustee dstrbuted and
pad to the nfant grandson, C, aso a nonresdent aen, through hs
guardan, the sum of doars, part of whch was nterest on Lberty
bonds and foregn bonds, and accumuated the remander of hs share
of ncome. The sum so accumuated ncuded nterest on Lberty
bonds n the sum of 2.78a doars and nterest on foregn bonds n the
sum of .44a doars.
Wth respect to the Lberty bond nterest, t appears that secton 4
of the ctory Lberty Loan ct (40 Stat., 1309) provdes n part
as foows:
Sec. 4. That secton 3 of the ourth Lberty ond ct s hereby amended to
read as foows:
Sec. 3. That, notwthstandng the provsons of the Second Lberty ond
ct or of the War nance Ccrporaton ct or of any other ct, bonds, notes,
and certfcates of ndebtedness of the. Unted States and bonds of the War
nance Corporaton sha, tohe benefcay owned by a nonresdent aen n-
dvdua, or a foregn corporaton, partnershp, or assocaton, not engaged n
busness n the Unted States, be e empt both as to prncpa and nterest from
any and a ta aton now or hereafter mposed by the Unted States, any State,
or any of the possessons of the Unted States or by any oca ta ng authorty.
Itacs supped.
The benefcares, and C, n the nstant case come wthn the
cassfcaton of nonresdent aens not engaged n busness n the
Unted States.
In the opnon of ths offce the fact that the hoder of ega tte
to the bonds s a resdent trustee can not ater the e press e empton
granted by the Lberty ond ct, as amended, for the equtabe and
benefca ownershp of such bonds s n nonresdent aens not en-
gaged n busness n the Unted States, and ths s true regardess of
whether the nterest s dstrbuted to them or s accumuated for
ther beneft.
The stuaton s dfferent, however, wth respect to the foregn
bond nterest. The ureau has conceded that wth respect to foregn
bond nterest currenty dstrbuted to the benefcares the trustee may
be regarded as a mere condut, wth the resut that the character of
such nterest s not changed by passng through the trustee s hands.
Snce secton 212(a) of the Revenue ct of 1928 provdes that In
the case of a nonresdent aen ndvdua gross ncome ncudes ony
the gross ncome from sources wthn the Unted States, t foows
that currenty dstrbuted foregn bond nterest, passng unchanged
through a resdent trustee to a nonresdent aen, s not ta abe, the
ta payer n queston n such a case beng the nonresdent aen and
not the resdent trust or trustee. ( . R. M. 37, C. . 2, 172: I. T
1042, C. . 11-1,81.)
ut foregn bond nterest accumuated by a resdent trustee s n
a dfferent category, for the ta payer n queston s then the resdent
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125
5161, rt. 861.
trust or trustee and not the nonresdent aen. Secton G(u) of
the Revenue ct of 1928 provdes that The ta es mposed by ths
tte upon ndvduas sha appy to the ncome of estates or of any
knd of property hed n trust, and secton 162 provdes that The
net ncome of the estate or trust sha be computed n the same man-
ner and on the same bass as n the case of an ndvdua, e cept
that (namng e ceptons that do not menton nonresdent aens).
Secton 161 (b) provdes that The ta sha be computed upon the
net ncome of the estate or trust, and sha be pad by the fdu-
cary . Such ncome as s to be dstrbuted currenty
(or n the case of a dscretonary trust, such ncome as s propery
pad or credted durng the year to the benefcary) s not ncuded
n the statutory net ncome of the trust but s aowed as a deduc-
ton n computng such net ncome, and wth respect to the amount
so aowed as a deducton, the ta payer n queston s the bene-
fcary. ut ncome accumuated or hed for future dstrbuton
under the terms of the trust s ncuded n computng the
net ncome of the trust, and wth respect to such statutory u net
ncome the trust s ceary a separate ta abe person from the
benefcary. Secton 701(a) 1 provdes that The term person
means an ndvdua, a trust or estate, a partnershp, or a corpora-
ton, and secton 701 (a) 13 provdes that The term ta payer
means any person sub|ect to a ta mposed by ths ct. The nd-
vdua desgnated by the statute to pay the ta upon the statutory
net ncome of the trust s of course the fducary (secton
161(b)).
In the case of state of . . T. Cooper v. Commssoner (9
. T. ., 21, C. . II-1, 7) the oard hed that a decedent s estate
s a separate ta abe entty from the decedent and from the bene-
fcares, and that consequenty f such an estate s beng admns-
tered by a domestc fducary t s a domestc ta payer, entted to
a credt of 1,000 as such, even though the decedent and benefcares
are nonresdent aens. The oard sad that We have no doubt
that the Revenue ct of 1918 ndcates a cear ntent by
Congress to treat an estate as a separate ta abe entty, and dver-
sty of ctzenshp has been hed unformy to depend upon the status
of the trustee, e ecutor, admnstrator, guardan, etc., rather than
upon the status of ther prncpas, whether decedents, hers, or other
benefcares . In other words, f the trustee s a resdent
the trust s a resdent entted to the persona e empton or credt
of a resdent, regardess of where the benefcares ve, and the trust,
as a separate ta paver, s to be treated as any other resdent ta -
payer s treated. s an ordnary resdent ta payer who receves
nterest on foregn bonds s not e empt from ta on such ncome,
t foows that a resdent trust s kewse not e empt from ta on
such ncome where t s the ta payer.
There s no room for the condut theory n the case of accumuated
ncome, because such ncome s not passed on by the trustee durng
the ta abe year but s hed and accumuated. The fact that such
ncome w eventuay be passed on to the benefcares s mmatera
n ths connecton, for the scheme of the Revenue ct s based on
annua accountng perods, not on the bass of the fnay ascertaned
resuts of partcuar transactons e tendng over more than one year.
urnet v. Sanford t - rooks Co., 282 U. S.. 359: urnet v. Thomp-
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161, rt. 861.
126
son O Gas Co., 283 U. S., 301 uffao Unon urnace Co. v.
Commssoner, 23 . T. ., 439.) The very purpose of the trust
sectons s to set up the trust as a separate and ndependent ta abe
entty from the benefcares wth respect to accumuated ncome, so
that the separate entty thus created may pay the ta each year on
such ncome, regardess of what becomes of the ncome after the ta -
abe year s ended. ccordngy, a trust, as a separate ta payer from
the benefcary, s entted to the same persona e empton as s
aowed to a snge person, and a benefcary s kewse entted to hs
own persona e empton n addton. trust, as a separate ta payer
from the benefcary, computes ts own statutory net ncome and pays
no surta on accumuated ncome uness such ncome s tsef arge
enough to be n the surta brackets, regardess of the fact that the
ncome may be accumuated for the soe beneft of a benefcary who
has an ndefeasby vested nterest n the ncome and who s hmsef
n very hgh brackets.
There s nothng n the character of foregn bond nterest whch s
aone suffcent to e empt t from ta aton. It s ony when such
nterest s the ncome of a nonresdent aen that t s e empt. In the
nstant case the accumuated foregn bond nterest s not the ncome
of a nonresdent aen but s the ncome of a resdent ta payer (the
trust), and such ta payer s no more entted to the advantages that
woud occur f the cestu were treated as the ta payer than t s
compeed to assume the dsadvantages that woud fow from such
treatment.
In ppeas and Revew Memorandum 37, supra, t was n effect
hed that foregn bond nterest accumuated by a resdent trustee s
ta abe to the trust, regardess of the fact that the benefcares are
Decson 743 (C. . 3, 203), whch hed that the net ncome of a
dscretonary trust whch was created by a nonresdent aen for the
beneft of another nonresdent aen s ta abe n the hands of a res-
dent fducary, notwthstandng such ncome s derved from nterest
on foregn bonds, uness the ncome s of a character to make t
e empt n the hands of any ordnary resdent. t the tme ths offce
decson was promugated, the reguatons provded that where under
the terms of the w or deed the trustee may n hs dscreton ds-
trbute the ncome or accumuate t, the ncome s ta ed to the trustee,
rrespectve of the e ercse of hs dscreton. ( rtce 342 of Regu-
atons 45.) Offce Decson 743 s, therefore, but another ustraton
of the ureau s poston that ncome whch woud otherwse be ta ed
to the trust as an entty s not rendered nonta abe smpy because
the benefcarv s a nonresdent aen and the ncome s from sources
wthout the Unted States.
The ta payer argues that under the State of R aw the accumuated
ncome n the nstant case s absoutey and ndefeasby vested n the
two benefcares n queston that f they de before reachng 21, such
accumuated ncome w pass to ther ndvdua estates and w not
be governed by the provsons of the trust nstrument whch appear
to gve the accumuatons, n such an event, to others. rom ths the
ta payer concudes that the accumuated ncome has been rrevocaby
set asde by the trustee for the beneft of the two benefcares, and
that n effect, therefore, the ncome has been propery
credted each year to the benefcares. If t be admtted for the
nonresdent aens. Ths run
supported n the ater Offce
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127
162, rt. 862.
sake of argument that the accumuated ncome s n fact ndefeasby
vested n the two grandsons, the resuts camed by the ta payer do
not foow. The trust sectons of the statute pany show that the
trust s an entrey separate ta abe entty from the benefcares wth
respect to ncome whch s accumuated or hed for future dstrbu-
ton under the terms of the trust regardess of whether
the benefcares have ndefeasby vested equtabe nterests or not.
It s not smpy ncome whch the trustee accumuates for the beneft
of unborn or unascertaned persons or persons wth contngent nter-
ests that s ta abe to the trust as an entty, but there s aso ta abe
to the trust as an entty such ncome as s smpy accumuated or
hed for future dstrbuton under the terms of the w or trust.
These addtona words n secton 161 (a) 1 pany mpy that Con-
gress dd not ntend that the queston of whether the ncome of a
trust s ta abe to the fducary or to the benefcary shoud depend
on whether the benefcary has a contngent nterest or an ndefeasby
vested nterest. Regardess of how competey vested a benefcary s
equtabe nterest may be, the ncome s nevertheess ta abe to the
trust as an entty f t s smpy hed for future dstrbuton under
the terms of the w or trust, as dstngushed from ncome whch
s to be dstrbuted currenty, or, n the case of a dscretonary trust,
from ncome whch s propery pad or credted to the benefcary
durng the ta abe year.
In the opnon of ths offce, therefore, the ta payer wth respect to
the foregn bond nterest wthhed by the trustee s the resdent trust,
and such ncome s as sub|ect to ta n the hands of the trust as t
woud be n the hands of any other resdent ta payer. Such ncome
has not been propery pad or credted to the benefcares, nor
does t consttute ncome whch s to be dstrbuted currenty. The
accumuated Lberty bond nterest escapes ta , not because t s
ncuded n ether of those cassfcatons, but because the Lberty
ond ct, as amended, e empts such nterest from ta (f the bonds
are benefcay owned by nonresdent aens), n spte of the fact that
the nterest may be accumuated by a resdent trustee.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
, n hs w, made specfc bequests and drected that the
resdue of hs estate be paced n trust, the ncome to be pad to hs
wdow durng her fe, wth remander over to chartabe nsttu-
tons. In 1928, n order to pay ta es and the specfc bequests, the
e ecutors sod securtes of the estate, whch sae resuted n a
proft.
ed, the proft from the sae of securtes s aowabe as a de-
ducton under secton 162(a) of the Revenue ct of 1928, as havng
been permanenty set asde or to be used e cusvey for chartabe
purposes.
I. T. 1678 (C. . II-, 129) and ppeas and Revew Recom-
mendaton 3293 (C. . II-2. 165) were overrued by Treasury
Decson 4122 (C. . II-1, 247).
S CTION 162. N T INCOM .
rtce 862: Method of computaton of net
ncome and ta .
R NU CT OP 1928.
I-35-5636
G. C. M. 10423
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162, rt. 862.
128
n opnon s requested whether the proft from the sae of secur-
tes of the estate of , whch was not dstrbuted to the benefcares,
may be consdered as permanenty set asde for chartabe purposes.
ded testate on uy , 1927. In hs ast w and testament,
and codcs thereto, he made severa specfc bequests, aggregatng
appro matey 6.165a doars, to certan ndvduas and chartabe
nsttutons, created two trusts, and drected that the resdue of hs
estate be paced n trust, the ncome therefrom to be pad to hs
wdow durng her fe, wth remander over to certan chartabe
nsttutons.
Durng part of the year 1928 the estate was n process of admn-
straton. In order to pay the estate and nhertance ta es, and the
varous specfc bequests, the e ecutors sod securtes of the estate,
whch sae resuted n a proft of 1.233a doars. The estate aso
receved durng 1928 other ncome, consstng of nterest and dv-
dends, n the amount of .91a doars. Under paragraph eghth of
the w, the e ecutors were empowered to satsfy the bequests by
deverng securtes of the estate at far vauatons determned
by them.
There was a arge resduary estate, after satsfyng a charges
and e penses.
Secton 162 of the Revenue ct of 1928 provdes, n part, as foows:
The net ncome of the estate or trust sha be computed n the same manner
and on the same bass as n the case of an ndvdua, e cept that
(a) There sha be aowed as a deducton (n eu of the deducton for
chartabe, etc., contrbutons authorsed by secton 23(n)) any part of the gross
ncome, wthout mtaton, whch pursuant to the terms of the w or deed
creatng the trust, s durng the ta abe year pad or permanenty set asde for
the purposes and n the manner specfed n secton 23(n). or s to be used
e cusvey for regous, chartabe, scentfc, terary, or educatona purposes,
or for the preventon of cruety to chdren or anmas, or for the estabshment,
acquston, mantenance or operaton of a pubc cemetery not operated for
proft.
s stated n Genera Counse s Memorandum 423 (C. . -2, 53):
The genera rue s that gan derved through the sae of assets whch
consttuto a part of the corpus of a trust nures to the beneft of the remander-
men, f any. and not to the fe tenant. Ths s true for the reason that such
gan s not Income n a probate sense, but becomes part of the capta or corpus
of the trust.
The Supreme Court of the Unted States n Lederer v. Stockton
(260 U. S., 3 T. D. 3407, C. . 1-2, 156 ) hed that ncome accumu-
ated n the hands of a trustee, whch on the death of an annutant
woud mmedatey pass to a ta -e empt corporaton, was not ta abe
under the Revenue ct of 1916.
In Socum et a. v. owers (15 ed. (2d), 400) the Dstrct Court
for the Southern Dstrct of New York hed that ncome of the
estate of the deceased, whch woud utmatey pass to regk|us,
chartabe, scentfc, or educatona corporatons whch were resdu-
ary egatees, was not sub|ect to ncome ta under the 1918 ct. In
the course of ts opnon, the court sad:
t s hard to beeve that n the one case of admnstraton of
an estate the e empton shoud turn on the technca queston of whether
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129
162, rt. 862
the corporatons seekng It have the ega or equtabe tte to the Income.
There s no doubt that the e ecutors hed the ega tte, but t does
not necessary foow because they can se assets, pay debts and dstrbute,
that the porton of the property whch they hod, though utmatey dstrbutabe
to ta -e empt persons, s ta abe n ther hands.
The Crcut Court of ppeas for the Second Crcut sustaned
the decson of the dstrct court. owers v. Socum et a., 20 ed.
(2d), 350, T. D. 4122, C. . II-1, 247.) In the course of ts
opnon, the Crcut Court of ppeas sad:
the ncome n queston, n the case at bar, reaches the benefcares
of the bounty of the testatr through the e ecutors, and, f that ncome shoud
be ost or reduced n amount, the oss occasoned thereby woud be that of the
resduary egatees, and therefore the ncome whch the Government s proposng
to ta s the ncome of the resduary egatees.
The Socun case was consdered by the oard of Ta ppeas for
the year 1921, ppea of erbert eman Sooum et a. (6 . T. .,
36). The oard foowed the decson of the dstrct court as to the
pror year, and hed that ncome receved by the estate durng ad-
mnstraton and settement was, pursuant to the terms of the w,
permanenty set asde for chartabe, regous, and educatona pur-
poses and was a proper deducton n the return fed by the estate.
That oard decson was nonacquesced n (C. . II-1, 40) for
the reason that the same ssue for pror years was then pendng before
the Crcut Court of ppeas. When the decson of the Crcut
Court of ppeas was accepted t was pubshed as Treasury Dec-
son 4122, supra, and the oard case was cosed wthout an appea
beng fed. That Treasury decson therefore takes precedence over
the nonacquescence n the oard case.
To the same genera effect as the court and oard decsons n the
Socum cases, see artford-Connectcut Trust Co. v. aton (29 ed.
(2d), 840) . Soher Wech et a. v. Commssoner (9 . T. .,
1370, C. . -, 69) Peopes Trust Co. v. Commssoner (10 . T.
., 1385, C. . -, 51) and . C. ohnson v. Commssoner (13 .
T. ., 850, C. . -, 32).
In I. T. 1G78 (C. . II-, 129), where a testator eft the resdue of
hs estate to e empt chartabe corporatons and provded that certan
stocks shoud be sod n the event there were not suffcent funds to
pay the pecunary egaces, t was hed that the gan derved from the
sae consttuted ta abe ncome accrung to the estate.
The ureau hed n ppeas and Revew Recommendaton 3293
C. . II-2, 165) that the porton of the ncome of an estate of a
eceased perso|, receved durng the perod of admnstraton, whch
accrued to an e empt corporaton, the resduary egatee, was not e -
empt from ncome ta . These two rungs, however, were super-
seded and overrued by the ureau s acceptance of the decson of the
Crcut Court of ppeas n the Socum case.
te r fearefu consderaton of the facts n the nstant case, and the
aw and decsons cted, ths offce s of the opnon that the proft
from the sae of securtes n ths case s aowabe as a deducton
under secton 162(a) of the Revenue ct of 1928, as havng been per-
manenty set asde or to be used e cusvey for chartabe purposes.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
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5165.
130
S CTION 165. MPLOY S TRUSTS.
Secton 165. I-32-5593
I. T. 2637
R NU CT O 1928.
Under an agreement entered nto n 19 29 between each of certan
empoyees and the corporaton, the corporaton ngreed to aot a
certan number of shares of ts common stock to the empoyee
and appy a certan porton of ts annua net earnngs toward
payment therefor n hs behaf. If he e ercses a prvege of
contrbutng an annua amount toward the payment the corpora-
ton w credt hm wth a further amount. Dvdends are cred-
ted toward payment. Upon e ecuton of the agreement the
corporaton set asde the shares and at the cose of accountng
perods certfcates, so far as pad for, are ssued n the em-
poyee s name, who s requred mmedatey to e ecute a trans-
fer In bank and redever to the corporaton or to a desgnated
trustee. e can not transfer or assgn the stock pror to Its uncon-
dtona devery to hm at termnaton of the agreement.
The contract consttutes a trust created as a part of a stock
bonus or proft-sharng pan wthn the meanng of secton 165
of the Revenue ct of 1928. The amount contrbuted toward the
purchase of the stock by the corporaton and the earnngs attrb-
utabe to the stock or the fund are, therefore, ta abe to the em-
poyee n the year n whch the stock s made avaabe to hm.
rung s requested reatve to the edera ncome ta abty
of certan empoyees of the M Corporaton for 1929 and subsequent
years.
The cases of the empoyees referred to nvove the queston of the
ta abe year or years n whch the empoyees are requred to report
n ther ncome ta returns certan amounts credted to them annuay
on the books of the corporaton, pursuant to an agreement entered
nto durng 1929 between each of the empoyees and the corporaton.
The provson of aw nvoved s secton 165 of the Revenue ct
of 1928, whch reads as foows:
Sec. 165. mpoyees Trusts.
trust created by an empoyer as a part of a stock bonus, penson, or
proft-sharng pan for the e cusve beneft of some or a of hs empoyees, to
whch contrbutons are made by such empoyer, or empoyees, or both, for the
purpose of dstrbutng to such empoyees the earnngs and prncpa of the
fund accumuated by the trust In accordance wth such pan, sha not be ta -
abe under secton 161, but the amount contrbuted to such fund by the em-
poyer and a earnngs of such fund sha be ta ed to the dstrbutee n the
year n whch dstrbuted or made avaabe to hm. Such dstrbutees sha
for the purpose of the norma ta be aowed as credts aganst net ncome such
part of the amount so dstrbuted or made avaabe as represents the Items
of dvdends and nterest specfed In secton 25 (a) and (b).
Under the terms of the agreement the corporaton agreed to con-
tnue the empoyment of the empoyee, and the empoyee agreed to
contnue to work for the corporaton, for a perod of fve ye rs from
anuary 1, 1928, n consderaton of whch the corporaton further
agreed to pay the empoyee a stated sum annuay n cash, to aot
a certan number of shares of ts common stock to the empoyee, and
to appy a porton of the annua net earnngs of the corporaton to-
ward the payment by or on behaf of the empoyee for the aotted
shares. The empoyee has the prvege of contrbutng an amount
annuay toward payment for the stock, and, f such payment s made,
the corporaton credts hm wth a further equa amount not e ceed-
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131
165.
ng doars for each aotted share. Dvdends on any of the
aotted shares, whch are pad for when the dvdends are decared,
are credted toward the payment for the stock. Upon e ecuton 01
the agreement the corporaton set asde or aotted the shares, and at
the cose of each accountng perod of the corporaton a certfcate
for such number of shares of stock as can be pad for wth the amount
avaabe for the purpose, determned n accordance wth the agree-
ment, s ssued n the name of the empoyee, who s requred by the
agreement to mmedatey ndorse the certfcate n bank and dever
t, ether to the corporaton or to a desgnated trustee. The prov-
sons of the agreement respectng the rghts of ownershp and contro
by the empoyee of the shares of stock as pad for and ssued are as
foows:
Twefth: Ths agreement s strcty persona as regards the empoyee an
sha not confer any rghts or benefts upon any other person, e cept as heren-
after provded n respect of the ega representatves of te empoyee n case
of hs death. Nether ths agreement nor any nterest heren or rght here-
under sha be sub|ect to sae, pedge, assgnment, or transfer by the empoyee,
whether by hs vountary act or otherwse, and the empoyee w not se,
pedge, assgn, transfer, or otherwse encumber any nterest heren or n the
aotted shares or n any common shares at the tme hed by the trust company
pursuant to the provsons hereof nor sha ths agreement or any such nterest
or rght be sub|ect n any manner to attachment, e ecuton, or sae for any
debts or abtes of the empoyee and f any sae, pedge, assgnment, or
transfer hereof or thereof sha be attempted or any attachment or e ecuton
sha be ssued n respect hereof or thereof, the corporaton may at ts opton
termnate ths agreement.

S teenth: s securty for the performance by the empoyee of a hs ob-
gatons under ths agreement, he hereby pedges wth the trust company a
Of the aotted shares certfcates for whch sha have been ssued and sha
be Issuabe to hm under the provsons of ths agreement, the certfcates for
such shares to be hed by sad trust company as such securty unt the corpora-
ton sha have notfed t that the obgatons of the empoyee under ths agree-
ment sha have been fuy performed, or that the empoyee sha have been
reeased from further performance thereof.
In vew of the foregong and a the other provsons of the
contract, t s hed that the contract consttutes a trust created as
a part of a stock bonus or proft-sharng pan wthn the meanng of
secton 165 of the Revenue ct of 1928. The amount contrbuted
toward the purchase of the stock by the corporaton and a the earn-
ngs attrbutabe to the stock or the fund wth whch t was acqured
are, therefore, ta abe to the empoyee n the year n whch the stock
s dstrbuted or made avaabe to hm.
It s contended that the decson of the oard of Ta ppeas n
the case of Lyc . Oson et a. v. Commssoner (24 . T. ., 702)
s appcabe and controng n the nstant case, but t has been
suggested that the decson of the Crcut Court of ppeas for the
Second Crcut, n the case of Rodrguez v. dwards (40 ed. (2d),
408), may be appcabe and controng. The respectve pertnent
facts and the decsons n the two cases referred to may be summa-
rzed as foows:
In the Oson case, the bonus stock was acqured pursuant to a
resouton passed by the board of drectors of the corporaton on
March 13, 1917, and subscrbed to by the empoyees concerned. The
openng paragraph of the resouton provded that n consderaton
of the empoyees agreeng to reman contnuousy n the empoy of
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165.
132
the company for a perod of fve years from March 1, 1917, specfed
amounts woud be credted to ther accounts each month toward the
purchase of shares of stock n the company.
The resouton further provded that the shares of stock thus pad
for durng each of the fve years woud be ssued to a trustee at the
end of each year to be hed for and on behaf of the empoyees, and
that when the empoyees sha have been contnuousy n the empoy
of the company for a perod of fve years the trustee shoud assgn
to the empoyees a the shares then ssued under the resouton-
There was no provson n the resouton under whch the empoyees
mght have sod or otherwse assgned the shares for vaue pror to
the e praton of the 5-year perod. or the years up to and ncud-
ng the caendar year 1922, the empoyees fed ther returns on the
cash recepts and dsbursements bass. Durng 1922 each of the
empoyees receved uncondtonay 200 shares of stock of a tota
par vaue of 20,000, and reported that amount n ther returns for
that year. The ureau determned the ta abe ncome on the bass
of a far market vaue of the stock of 80,000, and proposed a
defcency n ta aganst each empoyee for the year 1922. Severa
ssues were presented on pettons to the oard of Ta ppeas,
one of whch was whether the vaue of the stock ssued to the trustee
at the end of each year was ta abe to the empoyees n the year for
whch ssued, or the vaue of a the 200 shares was ta abe n the
year 1922 when they were uncondtonay receved by the empoyees.
The oard n decdng that the tota far market vaue of a the
shares of stock was ta abe to the empoyees n 1922 stated, n effect,
that as there was no evdence that the returns of the empoyees were
made on other than a recepts and dsbursements bass, t must be
hed that the addtona compensaton pad to the empoyees was
ncome to them n the year n whch they receved the shares of stock,
and that the shares of stock were receved by the empoyees at the
tme they were turned over to them and made sub|ect to ther
dsposa.
In the Rodrgues case the corporaton and the empoyee entered
nto a contract of empoyment, whch ran for a perod of three years
from anuary 1, 1918. The empoyee was to receve annua compen-
saton of 3,600, pus a sum equa to 2 per cent of the annua net
profts of the corporaton. It was agreed that the empoyee woud
purchase treasury common stock of the corporaton wth two-thrds
of the 2 per cent of net profts, and the company was authorzed to
appy the two-thrds of the 2 per cent for that purpose. The con-
tract provded that the empoyee, upon recevng the stock, woud
pace t n trust and receve n return trust certfcates. The certf-
cates were assgnabe by the empoyee at any tme durng the empoy-
ment wth the consent of the corporaton or the chef stockhoder.
t the termnaton of the contract the corporaton coud, wthn a
bref opton perod, purchase the stock, and f the opton was not
e ercsed the empoyee coud se or otherwse dspose of the stock
wthout restrcton. There was no provson n the contract requr-
ng the empoyee to contnue n the empoy of the company for the
fu perod of three years n order to receve the stock. or the year
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133
( 165.
1919 the empoyee receved stock of the corporaton of a vaue of
13,478.91, representng two-thrds of 2 per cent of the net profts of
the corporaton. The vaue of the stock was ncuded n the em-
poyee s gross ncome for that year and the ta thereon was assessed
and coected. The empoyee (Rodrgues) fed a cam for refund
of the ta on the vaue of the stock and, upon re|ecton of the cam,
sut was brought n the dstrct court for the recovery of the amount.
The verdct was for the defendant, and the pantff appeaed.
The crcut court of appeas, after revewng the facts n the case
and notng that the empoyee conceded that the recept of somethng
of e changeabe vaue, or of whch he coud dspose, woud consttute
ncome, stated that n ts |udgment the contract not ony dd not
prevent pantff from dsposng of the trust certfcates, but, on the
contrar)r, t evdenced a cear ntenton that he shoud have a rght of
mmedate dsposton thereof. The court further stated:
The e pres restrcton aganst any sae was mted to the bref opton
perods at other tmes the certfcates mght have been freey sod sub|ect,
of course, to the optons and, durng the empoyment, to Meyer s or the com-
pany s consent.
In the nstant case the empoyee not ony can not transfer or as-
sgn the stock pror to ts uncondtona devery to hm at the term-
naton of the agreement, but he has pedged the stock wth the
trustee to be hed unt the corporaton notfes the trustee that the
empoyee has fuy performed a hs obgatons under the agree-
ment. Therefore, the empoyee dd not or w not receve anythng
of e changeabe vaue, or of whch he coud dspose, unt the stock
was or s dstrbuted or made avaabe to hm.
fter carefu consderaton of the matera provsons of the
agreement n the nstant case, t s concuded that the practca
ntent and effect of the agreements n the nstant case and the Oson
case are substantay the same and are dstngushabe from the
practca ntent and effect of the agreement n the Rodrgues case.
Ths beng true, t foows that the porton of the decson of the
oard of Ta ppeas n .the Oson case whch hed, n effect, that
the shares of stock were receved by the empoyees at the tme
the shares were turned over to them and made sub|ect to ther ds-
posa, s appcabe to the nstant case. It s, accordngy, hed
that the amount contrbuted toward the fund by the corporaton for
the purchase of the stock, and a the earnngs attrbutabe to the
stock or the fund, were or w be dstrbuted or made avaabe to
the empoyees n the year n whch the stock was or w be uncon-
dtonay turned over to them by the trustee, pursuant to the pro-
vsons of the agreements creatng the trust.
Snce the agreements between the empoyees and the corporaton
consttute a trust created by the corporaton as a part of a stock
bonus or proft-sharng pan, wthn the meanng of secton 165 of
the Revenue ct of 1928, the tota of the amount contrbuted toward
the fund by the corporaton for the purchase of the stock and a
the earnngs attrbutabe to the stock or the fund are or w be
ta abe to the empoyees, n accordance wth the provsons of that
secton, for the year n whch the stock s dstrbuted or made
avaabe to them.
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274 rt. 1191.
134
SUPPL M NT C INSUR NC COMP NI S.
S CTION 203. N T INCOM O LI
INSUR NC COMP NI S.
rtce 971: Ta -e empt nterest and reserve
funds.
( so Secton 204, rtce 992.)
I-51-5933
I. T. 2665
R NU CTS O 1021, 1924, 192C, ND 1928.
nsurance companes are requred to use the hghest aggregate
reserve, after deducton for rensurance paced wth both authorzed
and unauthorzed companes, caed for at the begnnng and end of
the ta abe year by any State n whch they transact busness, but
the reserve must have been actuay hed as shown by the annua
statement approved by the Natona Conventon of Insurance
Commssoners.
S CTION 204. INSUR NC COMP NI S OT R
T N LI OR MUTU L.
rtce 992: Gross ncome of nsurance companes
other than fe or mutua.
R NU CT O 1928.
Deductons of net addtons to reserve funds of nsurance com-
panes. (See I. T. 2665, above.)
SUPPL M NT L. SS SSM NT ND COLL CTION OP D ICI NCI S.
federa ta es bankruptcy decson of court.
Order arrng Puno Cam fob Ta es Due the Unted States.
n order of a referee n bankruptcy barrng the Unted States
from partcpatng n the assets of the estate of a bankrupt e cept
as to cams fed on or before a specfed date s vad and an
order e pungng the cam of the Unted States for ta es assessed
after that date on the ground that the cam had not been fed
on or before the specfed date s affrmed, but wthout pre|udce
to the rght of the Unted States to make appcaton for modfca-
ton of the bar order so that t may fe proof of cam for such
ta es, whch appcaton the referee s bound to grant f there are
assets on hand avaabe to pay the ta es.
Unted States Crcut Court of ppeas for the Second Crcut.
In the Matter of Uorgcn|ttcrn t Co., ankrupt, c parte Water . Carter,
Trustee, appeee, v. Unted States of merca, appeant.
ppea from Unted States Dstrct Court for the astern Dstrct of New York.
pr 4, 1932.
Per curam: Morgenstern Co. was ad|udcated a bankrupt by the Unted
States Dstrct Court for the astern Dstrct of New York, on pr 11, 1930,
S CTION 274. N RUPTCY ND
R C I RS IPS.
rtce 1191: ankruptcy and recevershps.
I-30-5561
Ct. D. 521
OrNION.
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274, rt. 1191.
and Water . Carter was apponted trustee on May 6 of the same year. Upon
the trustee s petton, teferee G Connor made an order that the Unted States
fe a cams t mght have aganst the bankrupt on or before October 11. 1930,
and that t shoud be barred from partcpatng n the assets of the estate
e cept as to cams fed before that date and subsequenty aowed by the
referee. No cams were fed durng the perod provded n ths order, but,
on pr 2, 1931, the coector of nterna revenue fed wth the referee a
proof of cam for 3,876.31, representng ncome ta es for the year 1928,
aeged to be due the Unted States from the bankrupt, and to be entted to a
preference. The Unted States at no tme apped for the remova of the bar
order or sought to open ts defaut n fang to fe the cam for ncome
ta es on or before October 11, 1930, as provded n the order. It dd aege
that the order had no effect on the cam for ncome ta es the orgn and
assessment of sad abty havng arsen subsequenty to sad bar order. In
such a state of the record the trustee moved for an order e pungng the cam
on the ground that t had not been fed wthn the tme provded by the order
of une 16, 1930. Ths moton was granted by the referee and hs order was
affrmed by the dstrct court upon a petton to revew. rom the order of
affrmance, ths appea s taken.
We hed In re nderson (279 ed., 525), that because of the provsons of
secton 64-a of the ankruptcy ct drectng the court to order trustees n
bankruptcy to pay a ta es n advance of the dvdends to credtors, the
Government may be requred to fe ts cam for ta es wthn a tme f ed
or otherwse to be barred from sharng n dstrbuton of the assets n the
hands of a trustee In bankruptcy. y In re ./. Mentt Co., Inc. (294 ed.,
532 T. D. 3563, C. . -, 321 ), we agan approved of ths practce for
e pedtng admnstraton. udge Thatcher, In rc Stavn (12 ed. (2d), 471),
adverted to the rue that the qudaton of ta cams s governed by sec-
ton 64-a and stated that n ad of such qudaton presentaton of these
cams may be requred wthn a perod even ess than that aowed for
ordnary cams under secton 57-n, whch he sad has no reaton to the
procedure requred under secton 64-a. In vew of In re nderson, supra,
the order of the referee n the present estate barrng the Unted States from
partcpatng n the assets e cept as to cams for ta es fed before October
II, 1930, was entrey vad and the moton to e punge the cam for ncome
ta es whch had not been fed wthn the tme mted was propery granted.
It s true that under sectons 274 and 275 of the Revenue ct of 1928, the
Commssoner of Interna Revenue had unt May 15, 1931, to make the
assessment for ncome ta es for the year 1928. ecause of ths the Govern-
ment says that the order requrng t to present ts cam for ta es on or
before October 11, 1931, coud not affect ts rghts. ut, under our construc-
ton of secton 64-a of the ankruptcy ct, the bankruptcy court, n ad of
speedy admnstraton, mght mt the tme wthn whch the Government
mght prove ts cam aganst the estate. If the Commssoner, because of
e stng e gences, requred more tme to make hs assessment, appca-
ton shoud have been made to the court to modfy ts order so as to e tend
the tme to fe proof of cam. In defaut of such e tenson the order bar-
rng cams woud protect the trustee n dstrbutons of assets made whe
t stood. ny other nterpretaton of ts effect woud enabe the Government
to take ts tme n presentng cams for ta es and woud thus destroy the
very advantages whch orders mtng the tme to fe ta cams have been
desgned to prevent.
The Government aso contends that the order barrng t from fng cams
for ta es after October 11, 1930, and from sharng n the assets of the estate
e cept as to cams so fed, does not affect assets st undstrbuted. ut
we know nothng about the e tent or even the e stence of such unds-
trbuted assets. It may be that assets have aready been dstrbuted to
credtors by way of dvdends whch ought to have een retaned for other
purposes f the estate wag to be sub|ect to the deducton of the ncome ta es
n queston. Whe counse say that there are st undstrbuted assets,
we ought not to go on mere genera statements whch are not of record
and, wthout defnte facts ought not to treat the proof of cam as an app-
caton for a modfcaton of the so-caed bar order.
In mpoyers Labty ssur. Corp. v. .4sforfo Mahogany Co. (6 ed. (2d),
945) we hed that the refusa to permt the fng of a cam n an equty re-
cevershp after the termnaton of the perod f ed by a genera order for
160008 33 10
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5274, rt. 1191.
136
the fng of cams must be based on some pre|udce arsng not from the
cam tsef, but from the deay n presentng t. In Peope v. opkns (18
ed. (2d), 731), where aso the admnstraton was n equty, and not n
bankruptcy, we hed that an order mtng the tme wthn whch to present
cams shoud be modfed so as to aow the State of New York to present a
cam for ta es after the orgna tme prescrbed n the bar order. udge
Swan, who wrote the opnon, sad that:
The effect of such so-caed bar order s merey to protect the recever
n makng the dstrbuton wthout regard to possbe cams of credtors
who have faed to fe them. If before dstrbuton s actuay made, a
credtor appears and satsfes the court that he s |usty entted to share
In the assets on hand, hs deay n presentng the cam shoud not bar hm
uness some one has been n|urousy msed thereby . Partcuary
shoud ths be true wth respect to ta es. The assets are st n custoda
egs and shoud bear ther share of the pubc dues despte the States deay
n assertng ts cam.
Smar reasonng ought to govern the admnstraton of estates n bank-
ruptcy.
rom the foregong, t s evdent that If an appcaton had been made for
eave to prove the ta cam here under consderaton, the referee woud
have been bound to grant the appcaton f there were assets on hand ava-
abe to pay ta es. The rght of the Government to share In any assets that
may be avaabe to pay ta es may be preserved If the order beow s affrmed
wthout pre|udce to the rght of the Unted States to appy to the bankruptcy
court for modfcaton of the order of une 16, 1930, so that t may fe proof
of cam and receve payment so far as any assets remanng undstrbuted
may be propery appcabe.
The order Is affrmed but wthout pre|udce to the rght of the Unted
States to appy to the dstrct court for ts modfcaton of the order of
une 16, 1930.
rtce 1191: ankruptcy and recevershps. I 41-5765
Ct. D. 583
federa ta es revsed statutes decson of court.
Recevershp Ta es Prorty Over Stath Ta es.
Under secton 3466, Revsed Statutes, the Unted States s en-
tted to prorty n the payment of edera ta es over cams
of the State of New York for ta es even though the atter were
a genera en, provded by a State statute, upon the property of
the nsovent at the tme recevers were apponted.
Unted States Crcut Court of ppeas for the Second Crcut.
North Rver Coa Wharf Co., companant, v. McWams ros., Inc.,
defendant.
a parte The Peope of the State of New York, appeant, v. Mark W. Macay
and Chares . McWams, Recevers of McWatns ros., Inc., and Unted
States of merca, appeees.
une 13, 1932.
OPINION.
ugustus N. and, Crcut udge: The queston rased by ths appea s
whether under secton 3460 of e Unted Stutes Revsed Statutes cams of
the Unted States for unpad ncome ta es and for damages are entted to
prorty over cams of the State of New York for franchse ta es and ta es
for gross earnngs. The Unted States and the State of New York each pre-
sented ts cams to recevers who had been apponted upon the fng of a
credtors b aegng that the assets of McWams ros.. Inc., e ceeded Its
abtes and prayng for the appontment of a recever, and upon an answer
admttng the aegatons of the b and |onng n the prayer for reef. The
dstrct court awarded prorty to he Unted States.
The consent recevershp n ths case was n effect a vountary assgn-
ment. Under the decsons, the order appontng the recevers gave the Unted
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274, rt. 1191.
States prorty oyer genera credtors of the Insovent estate by vrtue of
secton 3466 of the Revsed Statutes. (Prce v. Unted States, 269 U. S., 492
T. D. 3820, C. . -, 318 Unted States v. uttencorth Corporaton, 269
U. S., 504 T. D. 3825, C. . -, 321 .) Ths prorty attached when the re-
cevers were apponted. (Unted States v. Okahoma, 261 U. S., 260.) The
queston s whether secton 3466 gves prorty not ony over the cams of
genera credtors but over the cams of the State of New York for ta es even
though the ta es were ens upon the property of the nsovent at the tme
when the recevers were apponted. Ths secton s n terms very sweepng. It
provdes that:
Whenever any person ndebted to the Unted States s nsovent
the debts due to the Unted States sha be frst satsfed .
The word debts has ong been hed to ncude ta es.
The State of New York rees upon the decson of the Supreme Court In
Marsha v. New York (254 U. S., 380), whch gave the State, by vrtue of
Its soveregn prerogatve, a prorty over the genera credtors of an nsovent
that had been paced n the hands of a recever. It says that, as ths preroga-
tve rght was never ceded to the edera Government by the Consttuton, t
avas as much aganst the Unted States as aganst prvate credtors. ut
the rght of the Unted States depends upon ts deegated power under the
Consttuton to pass a aws necessary for carryng nto e ecuton the e -
press power to evy and coect ta es and dutes. (Prce v. Unted States, 269
U. S., 492.) It s consequenty paramount whenever e ercsed by statute.
The queston of the e tent of the State s prerogatve recenty came before
the Supreme Court In Spokane County v. Unted States (279 U. S., 80). There
ta es had been assessed aganst the persona property of a corporaton by two
countes n the State of Washngton and afterwards a recever of ts assets
was apponted who sod the property and reduced t to cash. The Supreme
Court of Washngton, from whch the appea ay, had hed that under the
aw of that State the ens of the countes for the ta es assessed before the
recever was apponted had not been made specfc. fter the appontment of
the recevers the Commssoner of Interna Revenue assessed ncome ta es
aganst the corporaton for years pror to the date of the recevershp. The
funds n the hands of the recevers were, as n the present case, nsuffcent to
pay n fu the cams of the Unted States and those of the countes. The
court, per Taft, C. ., hed that the ta es due the Unted States were entted
to payment by the recever n prorty to cams for county ta es that were
not supported by a specfc en acqured pror to the appontment of the re-
cever. ut he e pressy reserved the queston as to whether the ta es due
the Unted States woud have had prorty f ens therefor had been per-
fected under the aws of the State pror to the recevershp and cted the
decson of the Supreme Court of Washngton n Wbcrg v. Yakma County
(132 Wash., 219), where t was hed that f a ta Is to be coected from
persona property t does not become a en upon such property unt t has
been sezed and dstrbuted by the sherff . e emphaszed the
broad scope of the ta ng power of the Unted States, referred to the decsons
of the Supreme Court n Unted States v. sher (2 Craneh., 358) ed v.
Unted States (9 Pet., 182) Lane County v. Oregon (7 Wa., 71) Unted
States v. Snyder (149 U. S., 210), and other cases, and, after dscussng the
authortes, went on to say (at page 93) :
The foregong ctatons certany make t cear that the Unted States has
power, n order to coect ts ta es and ts revenues and debts due t, to confer
prorty for them over those of the States.
Snce the decson In Spokane v. Unted States there can be no doubt that
the Unted States shoud be awarded prorty here, uness the ta es due the
State of New York can be regarded as supported by a suffcent en to gve
them a preference over cams of the Unted States In unte (t It. S. secton 3466.
Counse for the State of New York attemptd to dstngush Spokane County
v. Unted States on the ground that secton 197 of the New York ta aw
provdes that a franchse or gross earnngs ta sha be a en upon and bnd
a the rea and persona property of the corporaton unt the same
Is pad n fu, whereas the statute of the State of Washngton before the
court n the Spokane case was construed as Imposng m effectve en pror
to the takng of subsequent proceedngs to enforce It. ut neeton 197, n
t read when the New York ta es In the case at bar became payabe, dd not
specfy when the ta en woud arse and M-rton 201 provded that upon tm
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274, rt. 1191.
138
ssue of a warrant by the ta commsson commandng te sherff to evy and
se the rea and persona property of the ta payer for denquent ta es such
warrant sha be a en upon and bnd the ren and persona property of the
corporaton aganst whch t s ssued from the tme an actua evy
sha be made by vrtue thereof. It mght have seemed to resut from these
two sectons (when rend together) that the en for State ta es ony arses
when n evy s made by the sherff. ut n New York Termna Co. v. Oaus
(205 N. Y., 514) a ma|orty of the New York Court of ppeas hed that
secton 197 mposed n en for ta es whch was superor to a mortgage. It a
true that when New York Termna Co. v. Oaus was decded secton 197
provded that the ta es shoud be a en upon and bnd a the rea and
I ersona property of the corporaton from the tme when t s payabe
unt the same s pad n fu, and that by amendment subsequent to that
decson secton 197 was changed so that the words from the tme t a
payabe were omtted. Thus when the franchse and gross earnngs ta
now before us accrued, secton 197 had ceased to contan the words from
the tme t s payabe and ony provded that such a ta shoud be a en
unt the same s pad n fu. ccordngy t mght have been argued
that, by the amendment, words n secton 197 statng when the en was to
arse had purposey been omtted so as to eave secton 201 to defne the tme.
ut the dffcuty wth ths s that a smar contenton was made n Carey v.
eth, Inc. (250 N. Y., 219), and the Court of ppeas there hed that such
an omsson dd not affect the tme when the en arose.
Whe t s cear that n the present case the ta es due the State of New-
York pror to the recevershp were a genera en upon the rea and persona
property of the defendant at the tme when the recevers were apponted, the
queston s not whether these ta es are statutory ens of some sort, but
whether they are such ens as the courts of the Unted States have recognzed
as entted to prorty over cams due the Government.
The Supreme Court appears to have gven prorty to the Government under
secton 3466 or smar statutes n a cases e cept where the ega tte of
the ta payer has been n some measure dvested before the ta or other n-
debtedness became due. In Thcusson v. Smth (2 Wheat., 396), debts due
the Unted States were gven precedence over the en of a |udgment-credtor
who had not eved an e ecuton aganst the property of the debtor. ustce
Washngton sad, at page 426:
If before the rght of preference has accrued to the Unted
States, the debtor has made a bona fde conveyance of hs estate to a thrd
person, or has mortgaged the same to secure a debt, or f hs property has
been sezed under a f. fa., the property s dvested of the debtor, and can not
Im| made abe to the Unted States. |udgment gves to the |udgment-credtor
a en on the debtor s ands, and a preference over a subsequent |udgment-
credtors. ut the ct of Congress defeats ths preference, n favor of the
Unted States, n cases specfed n the s ty-ffth secton of the ct of 1799.
t common aw a rea estate mortgage gave the mortgagee tte sub|ect
ony to an equty of redempton and a chatte mortgage dvested the mortgagor s
tte n the same way. The Supreme Court accordngy treated the tte as no
onger n the estate of the mortgagor and gave Government ta es prorty
ony over nterests n the equty of redempton. Conard v. tantc Ins. Co..
1 Pet., 386 rent v. ank of Washngton, 10 Pet., 596.) It was apparenty
ths vew of the dvestng of the ega tte that ed the Supreme Court to sub-
ordnate Government ta es to mortgages n days when the ega tte was
generay regarded as n the mortgagee. It was reterated by ustce Gray n
Savngs Socety v. Mutnomah County (109 U. S., 428), where he sad:
Ths court has aways hed that a mortgge of rea estate, made n good
fath by a debtor to secure a prvate debt, s a conveyance of such an nterest
n the and, as w defeat the prorty gven to the Unted States by ct of
Congress n the dstrbuton of the debtor s estates.
In vew of the sweepng provsons of R. S. secton 3466 t seems unkey that
t was ntended to aow the mere statutory decaraton by a State of a genera
en to gve the atter a preference over debts and ta es due the Government.
Nether the decsons of the Supreme Court nor the specfed prortes aowed
thrd partes under . S. secton 3186 ndcate that secton 3466 s sub|ect to
any such mtaton. We hod that the court beow propery awarded prorty
to the Unted States.
The State contends that a porton of the franchse and gross earnngs ta es
(amountng to 238.26) whch accrued after the appontment of the recevers
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139
( 606, rt. 1301.
shoud be gven prorty as e penses of admnstraton of the Insovent estate.
In McGregor v. ohnson (39 ed. (2d), 574) we aowed ta es on and accrung
after the appontment of the recevers as a p trt of such admnstraton e -
penses, but we dk not pass on whether franchse ta es accrung durng the
recevershp shoud be so treated. Ths queston was not rased by the assgn-
ments of error, whch ony cam prorty of the ta es as a whoe by vrtue
of the State s soveregnty. We accordngy sha not revew the decson of
the tra court as to ths matter. See pokanc v. Unted States (279 U. S., 85).
The order s affrmed.
SUPPL M NT O. O RP YM NTS.
S CTION 322. R UNDS ND C DITS.
rtce 1257: Lmtatons upon the credtng and re-
fundng of ta es pad.
R NU CT O 1928.
rroneous credt of an overpayment for one year aganst def-
cences barred from coecton. (See Ct. D. 592, page 147.)
TITL I . DMINISTR TI PRO ISIONS.
S CTION 606. CLOSING GR M NTS.
btce 1301: Cosng agreements reatng to I-27-5535
ta abty n respect of nterna-revenue Ct. D. 509
ta es.
D R L T S R NU CT O 1928 D CISION O COURT.
Cosng gbeement raud.
Where, for the purpose of decevng the credtors and stock-
hoders of a corporaton, the presdent and treasurer of the cor-
poraton make a return for the corporaton whch fasey shows
net ncome nstead of a oss and, wthout knowedge that the facts
were other than as they appeared n the return and on the audt of
the same, the ta thereon s receved and a cosng agreement e e-
cuted In accordance wth secton 606 of the Revenue ct of 1928,
there s no fraud wthn the meanng of subdvson (b) of that sec-
ton that operates to make neffectua the cosng agreement as a
bar to a sut to recover any part of the ta covered by the
agreement.
Unted States Cbcut Court or ppeas for the Nnth Crcut.
D. W. ohnston, as Trustee n ankruptcy of the state of DuPont Mng
aes Corporaton, ankrupt, appeant, v. ohn P. McLaughn, Coector
of Interna Revenue, appeee.
ppea from the D trct Court of the Unted States for the Northern Dstrct of
Caforna, Southern Dvson.
ebruary 8, 1932.
OPINION.
Wn.nt-R, C. .: Ths s an acton to recover ta es pad by the DaPont Mng
Saes Corporaton upon ts ncome for the year 1927, brought by ts trustee
n bankruptcy. The dstrct court rendered |udgment n favor of the defendant.
Pantff appeas.
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5606, rt. 1301.
140
In the ta return for the company for the year 1927 Its net ncome was
stated to bo 12,448.72. The ta thereon estmated by the ta payer was
1,410.58. The ta was pad by the company and thereafter a cosng agree-
ment was e ecuted by the company and the coector1 and approved by the
Secretary of the Treasury of the Unted States, a In accordance wth the
provsons of secton COO of the Revenue ct of 1928. It s provded that the
agreement thus made
sha be fna and concusve, and, e cept upon a showng of fraud or ma-
feasance, or msrepresentaton of a matera fact

(2) n any sut, acton, or proceedng, such agreement, or any determnaton,
assessment, coecton, payment, abatement, refund, or credt made n accord-
ance therewth, sha not be annued, modfed, set asde, or dsregarded.
It s cear that under ths statute the ta payer can not recover the ta
pad upon a ta abty thus agreed upon uness e pressy authorzed by
sad secton 606 of the Revenue ct of 1928. Ths s conceded by the appeant
and s so we setted by the decsons of the courts that a dscusson of the
matter s entrey unnecessary. ( y the Court of Cams: Loyd-Smth v.
Unted States, 44 . (2d), 990 Parsh d ngham Corporaton v. Unted States.
44 . (2d), 993 ankers Reserve Lfe Go. v. Unted States, 42 . (2d), 313
Ct. D. 209, C. . I -2, 257 etna Lfe Ins. Co. v. aton (C. C. . 2), 43
. (2d), 711 Ct. D. 225, C. . I -2, 263 .) These cases a arose under sec-
ton 1106(b) of the Interna Revenue ct of 1926, but the prncpes theren
estabshed are appcabe to the correspondng secton (606) of the Rev-
enue ct of 1928 (45 Stat., 874). ppeant, however, contends that there
was fraud perpetrated wthn the meanng of subdvson (b) of secton 606,
and therefore the cosng agreement does not bar a recovery of the ta pad.
ppeant s contenton s based upon a somewhat unusua stuaton. It 3
stpuated that athough the report by the ta payer showed a net ncome of
12,44a72 upon whch a ta of 1,410.58 was |usty due, that the return of the
ta payer was fase n that durng that year the corporaton suffered a oss
nstead of a ta abe gan.
It s camed that ths fase return s made by the presdent, Pau . DuPont,
and the treasurer, W. P. Thompson, for the purpose of decevng the credtors
and stockhoders of the corporaton. The cosng agreement was e ecuted on
behaf of the ta payer by the vce presdent of the ta payer corporaton,
Raph D. Wson. It s stpuated that the books of the corporaton were
ntentonay prepared and kept under the drecton of the presdent of the
corporaton, who owned and controed the ma|orty of ts corporate stock,
for tte purpose of conceang the fact that the corporaton suffered a net oss
for the year 1927, that the Income ta return was prepared for the purpose of
decevng the stockhoders and credtors who were not actng n couson wth
the presdent that the Commssoner of Interna Revenue caused the books
of the corporaton to be e amned and therefrom ascertaned the ncome of
the corporaton to be n accordance wth the return of the ta payer, and there-
upon prepared the cosng agreement wthout knowedge that the facts were
other than as they appeared n the return and on the audt that the payment
of the ta was receved by the coector of nterna revenue wth no knowedge
that the facts were other than as reported n the ta payer s return. It s
stpuated that they are now credtors of the corporaton who were such at
the tme of the payment of the ta .
It s a fundamenta prncpe of aw that no person can take advantage of hs
own wrong. The appeant here bases hs acton upon the wrong commtted
by the DuPont Mng Saes Corporaton actng through ts duy apponted
offcers. Ths can not be done. If an ndvdua ta payer had made the ta
return showng an ncome never actuay receved for the purpose of decevng
hs present or prospectve credtors, he coud not be heard to urge n a sut
aganst the Government that he had made a fase return n order to defraud hs
credtors. The rue s the same wth reference to a corporaton. The cam
Is here that the corporaton for the purpose of decevng ts credtors made a
fase return to the Government. To cam that ths frauduent purpose was
aso drected toward decevng the stockhoders of the corporaton does not
1 The term coector apparenty Inadvertenty used, as fna agreement was sgned by
the Commssoner, as provded by aw.
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141
606, rt. 1301.
ater the fact that the trustee In bankruptcy s here assertng the rghts of
the corporaton and not of the credtors or the stockhoders. Indeed, so far
as the stockhoders are concerned n vew of the Insovency of the corporaton
t s doubtfu f they have any nterest n the outcome of ths tgaton, but
whether they have or not s entrey mmatera.
udgment affrmed.
rtce 1301: Cosng agreements reatng to I-32-5594
ta abty n respect of nterna revenue Ct. D. 528
ta es.
federa ta es revenue act op 1928 decson of court.
Cosng greement Msrepresentaton.
msrepresentaton made to a ta payer by a person not an
agent of the Unted States s not a msrepresentaton wthn the
meanng of subdvson (b) of secton 606 of the Revenue ct of
1928 that operates to make neffectua a cosng agreement as a
bar to a sut to recover any part of the ta covered by the
agreement.
Court of Cams of the Unted States. No. L-320.
rgna Trotter yde v. The Unted States.
une 6, 1932.
OPINION.
Green, udge, devered the opnon of the court.
The pantff brngs ts sut aegng that she has overpad her ta es for
the year 1927 n the sum of 1,788.86, whch she asks be refunded.
It appears from the evdence that the pantff has e ecuted what s com-
mony caed a cosng agreement wth reference to her ta es for the year
1927, stpuatng the abty thereon, whch agreement was e ecuted n ac-
cordance wth the provsons of secton 606 of the Revenue ct of 1928, and
sgned by the Commssoner of Interna Revenue and the Secretary of the
Treasury n March, 1929. The aw provdes that such agreements sha be
fna and concusve, e cept upon a showng of fraud or mafeasance, or
msrepresentaton of a matera fact. The argument made on behaf of
pantff s to the effect that the amount of gan and proft receved or due
pantff from her father s estate was msrepresented to her by the trustees
thereof, that by reason of ths msrepresentaton she overstated her ncome,
and that consequenty she s entted to repudate the agreement.
Te statute does not e pressy mt the msrepresentatons upon whch
the agreement may be set asde to statements made by the agents of the
Government, but a readng of the conte t shows pany that the statute was
not ntended to appy to msrepresentatons made by other partes.
Ths constructon of the aw makes t unnecessary to consder the other
defenses set up by the defendant. The pantffs petton must be dsmssed,
and t s so ordered.
rtce 1301: Cosng agreements reatng to I-41-5770
ta abty n respect of nterna revenue Ct. D. 581
ta es.
( so Secton 23(c), rtce 151.)
INCOM T R NU CT O 1928 D CISION O COURT.
1. Cosng greement naty dvce ok Revenue gent.
Proof that a person s prevented from takng a deducton by the
advce of a revenue agent s not a showng of fraud or mafea-
sance or msrepresentaton of a matera fact whch deprves of
fnaty and concusveness a cosng agreement under secton 606
of the Revenue ct of 1928.
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5607.
142
2. Deducton New York Corporate ranchse Ta .
The corporate franchse ta pad to the State of New York for
the year ented October 31, 1929, accrues n 1928 and not havng been
pad n 1929 s not deductbe from gross ncome n 1929, under sec-
ton 23(c) of the Revenue ct of 1928, as a ta pad or accrued
n that year.
Unted States Dstrct Court, Southern Dstrct of New York.
The eU Syndcate, Inc., pantff, v. rank C. owers, as ecutor of the
state of rank . owers, Deceased, defendant.
une 2, 1932.
opnon.
Goddard, Dstrct udge: s the compant now stands t must be dsmssed.
The aegatons n the paragraph Twefth of the compant are not, n my
opnon, broad enough to ncude proof of the facts necessary under secton
606, subdvson (b), of the Revenue ct of 1928 whch the pantff must rey
upon. owever, f the pantff s n a poston to amend ts peadng by settng
up fraud or mafeasance or msrepresentaton of a matera fact so as to
brng the case wthn sad secton 606, subdvson (b), t may do so but an
aegaton to the effect that the ta payer was prevented from takng the deduc-
ton of 1928 by the advce of the revenue agent woud not be suffcent.
(Darng v. Commssoner of Interna Revenue, 49 ed. (2d), 111.) The pan-
tff can not recover a refund for 1929 for secton 23(c) aows as deductons
ony ta es pad or accrued wthn the ta abe year. The New York State
franchse ta concededy was not pad durng the year 1929 and under the rue
ad down by the Supreme Court n New York v. ersatct (263 U. S., 493),
such a ta s regarded as accrung n 1928.
ccordngy the moton to dsmss the compant s granted uness the pan-
tff serves an amended compant wthn 10 days. Sette order on notce.
S CTION 607. CT O PIR TION O P RIOD
O LIMIT TION G INST UNIT D ST T S.
Secton 607. I-29-5552
Ct D. 516
federa ta es revenue acts of 1924 and 1928 decson of court.
1. Credt or Refund Overpayment1 Waver Meanng of
Unt n Waver.
Where the Commssoner and the ta payer consent n wrtng
to the assessment of a ta after the prescrbed statutory perod
for ts assessment and unt December 31, 1925, the word unt
s used as a word of ncuson and a payment made on that date
s not an overpayment wthn the meanng of secton 607 of the
Revenue ct of 1928.
2. Credt or Refund Overpayment Date of Payment by Check.
The date of the recept of an uncertfed check n payment of a
ta and not the date the check s cashed s the date the ta s
pad wthn the meanng of secton 607 of the Revenue ct of 1928.
3. Waver ssessment Coecton.
consent n wrtng by the Commssoner and the ta payer to
the assessment of a ta after the prescrbed statutory perod con-
tempates aso the coecton of the ta and waves the bar of the
Statute as to the coecton thereof.
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143
607.
Dstrct Cot|bt of the Uktkd States for the Dstrct of DeaW Re.
Remngton Rand, Inc., pantff, v. The Unted States, defendant.
pr 4, 1932.
OPINION.
Neas, .: Ths Is a sut by Remngton Rand, Inc., a corporaton of Dea-
ware, aganst the Unted States under secton 607 of the Revenue ct of
1928 (26 U. S. C. ., secton 2607 45 Stat., 874) seekng to have refunded
30,079.39 addtona ncome and profts ta es for the caendar year 1918, wth
nterest, aeged to have been pad after the statute of mtatons had barred
coecton of the ta es.
Secton 607 of that ct provdes:
ny ta (or any nterest, penaty, addtona amount, or addton to such
ta ) assessed or pad (whether before or after the enactment of ths ct)
after the e praton of the perod of mtaton propery appcabe thereto
sha be consdered an overpayment and sha be credted or refunded to the
ta payer f cam therefor s fed wthn the perod of mtaton for fng
such cam.
s ths secton s part of a ta aw gvng to ta payers the rght to secure
refund of payments that arc barred, t s to be construed beray n favor
of the ta payers to gve the reef t was ntended to provde. ( onwt Teer
Co. v. Unted States, 283 U. S., 258, 263 Ct. D. 334, C. . -, 328 .):
owever, the Supreme Court has aso ad down the rue that, The presump-
ton s that ta es pad are rghty coected upon assessments correcty made
by the Commssoner, and n a sut to recover them the burden rests upon the
ta payer to prove a the facts necessary to estabsh the egaty of the
coecton. (Nes emcnt Pond Co. v. Unted States, 281 U. S., 357, 361 Ct.
D. 185, C. . I -1, 295 Phps v. Dme Trust c . D. Co., 284 U. S., 160, 167
Ct. D. 426, C. . -2, 420 .)
The perod of mtaton appcabe to the assessment and coecton of these
ta es s prescrbed n secton 250(d) of the Revenue ct of 1921 whch provdes:
The amount of Income, e cess-profts, or war-profts ta es due under any
return made under ths ct for pror ta abe years or under pror
ncome, e cess-profts, or war-profts ta cts, sha be determned
and assessed wthn fve years after the return was fed, uness both the
Commssoner and the ta payer consent n wrtng to a ater determnaton,
assessment, and coecton of the ta .
The pertnent facts have been admtted by the stpuaton of the partes. In
1927 Remngton Rand, Inc., acqured by merger a of the assets of the aa-
mazoo Loose-Leaf nder Co. On une 16, 1919, the aamazoo company fed
an Income and profts ta return for the caendar year 1918 and pad the ta
shown thereon n the year 1919. In anuary, 1924, the aamazoo company
sgned and fed an ncome and profts ta waver for the year 1918, e tendng
the statutory perod of mtatons for one year. In March, 1924, an addtona
assessment for the ta abe year 1918, ncudng the ta here n queston, was
made. In ebruary, 1925, a second ncome and profts ta waver was fed by
the aamazoo company e tendng the statutory perod of mtatons on
assessment of ta es unt December 31, 1925. In December, 1925, the
coector of Interna revenue Issued to the aamazoo company a notce and
demand to pay the addtona ta of 30,079.39 and nterest of 3,158.34. On
December 31, 1925, the aamazoo company devered to the coector of nterna
revenue a check for 33,237.73 n payment of the addtona assessment and
Interest demanded. Thereafter a cam for refund was duy fed assertng as
a ground for the cam that the ta es were coected after the statute of mta-
tons had barred coecton. In March, 1930, the Commssoner of Interna
Revenue re|ected the cam.
In bref, the ta payer fed hs ncome and war-profts ta return for 1918 on
une 16, 1919, and pad the ta shown on the return. The statute of mtatons
on the coecton of these ta es was fve years and e pred une 16, 1924, In the
absence of a waver. In March, 1924, an assessment of addtona ta es for 1918
was made aganst the ta payer. In ebruary, 1925, the ta payer and the
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607.
144
Commssoner consented n wrtng to a ater coecton of the addtona ta es
by e tendng the statutory perod of mtatons on the assessment of ta es
unt December 31, 1025. On that day the ta payer devered to the coector an
uncertfed check for the amount demanded by hm and the check was ad
6evern days ater by the bank on whch drawn.
The pnntff cams the rght to have the amount pad to the coector
refunded on three grounds. (1) That the check, f deemed payment, was
devered after the bar of the statute of mtatons became effectve and the
day after the e praton of the perod pantff had consented to wave the bar.
(2) That pantff waved the bar of the statute of mtatons to the assess-
ment of ta es and not to ther coecton. (3) That the devery of an
uncertfed check on December 31, 1025, was not payment wthn the perod
covered by the waver, as payment occurred severa days afterwards when the
bank on whch the check was drawn pad t.
Pantff contends that the waver by ts e press terms e pred at mdnght on
December 30, 1025, and that the ta was therefore coected after the runnng of
the statutory bar of mtatons. The ment of ths contenton turns on the
constructon to be gven to the word unt as used n tre waver. Is t used
as a word of Incuson or e cuson No specfc meanng attaches to the word.
Whether unt mports ncuson or e cuson s to be determned by the
Intenton of the partes as gathered from the facts and crcumstances and the
conte t of the wrtng. In nterna revenue matters the ta abe perod usuay
covers the caendar year and ncudes December 31. Where the Commssoner
and ta payer use that day n a waver t s reasonabe to assume that they aso
use t ncusvey as n ta returns. Lght s thrown on the meanng of the
word unt as used n the waver by the words and sha the e pre
Immedatey foowng. Webster defnes then as meanng at that tme
(referrng to a tme specfed). In the waver tre tme specfed s December
31, 1025. It s cear, therefore, that the waver dd not e pre at mdnght on
the 30th day of December, 1025, but Incuded the whoe of December 31.
The second contenton of the pantff s unsound. The partes to the waver
can not have ntended to have the tme for assessng the ta postponed and not
the tme for payng the ta aso postponed. Postponng assessment ncudes
postponng coecton. (Stange v. Unted States, 282 U. S.. 270, 277 Ct. D. 274,
C. . -, 414 Washngton Coa d Coke Co. v. cner, 42 ed. (2d), (581, 685.
affrmed (C. C. . 3) 55 ed. (2d), 220 Ct. D. 216, C. . I -2, 240 Soomon v.
cner, 43 ed. (2d), 502.)
Pantff s remanng contenton that payment can not be made by an uncert-
fed check on the date of ts devery s concusvey answered by the ct of
Congress (26 U. S. C. ., secton 110) and the proof n ths case that the check
was honored. (Second Nat. ank v. Unted States, 42 ed. (2d), 344.)
The pantff s not entted to have the ta and nterest refunded.
Secton C07. I-41-5771
Ct. D. 582
federa ta es revenue act of 1928 decson of codrt.
Compromse greement adty Coecton arred.
Where after payng a defcency the ta payer s offer s accepted
n compromse of a penaty and nterest on the defcency whch
rectes that the defcency was pad wthout recourse, the def-
cency s made a part of the agreement and the ta payer s pre-
cuded from mantanng a sut for the recovery of any part of the
defcency or the amount pad n compromse. The compromse s
not nvad because coecton of the tu , penaty, and nterest was
barred by the statute of mtatons at the tme pad and compro-
msed, the ta payer and the Commssoner, through a mscon-
structon of the aw, beevng that the rght to coect was not
barred, and secton 607 of the Revenue ct of 1028 requrng the
refund of n tu , penaty, or nterest pad after the e praton of
the appcabe perod of mtaton does not appy n a case where
they were the sub|ect of a compromse agreement.
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607
Court of Cams of the Unted States. No. L-491.
eber ord v. The Unted States.
une 6, 1932.
OPINION.
Ltteton, udge, devered the opnon of the court.
The queston n ths case Is whether the pantff may mantan ths acton to
recover an addtona ta for 1918 of 3,962.38 pad pr 6, 1927, and 729.73,
offered and accepted pr 12, 1927, n compromse of a 5 per cent penaty of
198.12 and nterest of 1,438.45 on the defcency, or ether of suc amounts.
It s urged by the pantff, frst, that there was no vad compromse snce
coecton of the defcency, penaty, and nterest was barred by the statute
of mtaton at the tme payment was made second, that the defcency In ta
was not a part of the compromse, and that the statement In the offer that the
ta had been pad wthout recourse was wthout sgnfcance thrd, that
the amount pad In compromse of the penaty and nterest s aso refundabe,
nasmuch as abty for the ta was e tngushed before the offer n com-
promse of the penaty and nterest was made and the amount thereof pad n
1927 and, fourth, that snce the ta and nterest n queston were pad after
beng barred they must be refunded under secton (307 of the Revenue ct of
1928 regardess of the compromse agreement.
We are of tho opnon that the offer of compromse and ts acceptance by the
Commssoner, wth the approva of the Secretary of the Treasury, fnay
cosed the case, and that pantff may not mantan ths acton to recover the
addtona ta or the amount pad n eu of the penaty and nterest. The
addtona ta of 3,962.38 was made a part of the compromse agreement, n
whch the pantff stated that he had pad ths ta wthout recourse. It
s evdent from the anguage of the offer n compromse that ts acceptance
by the Commssoner was condtoned upon payment of the ta wthout re-
course the pantff s agreement n that regard havng become a part of the
contract t must be gven effect. ( cnnessy v. acon, 137 U. S., 78, 85 y 0
Waker Dry Goods Co. v. Unted States, 34 ed. (2d), 429 Ct. D. 102, O. .
III-2. 343 Parsh ngham Corporaton v. Unted States, 44 ed. (2d),
993 Zemurray v. Unted States, 04 C. Cs., 657 erbert DuPuy v. Unted
States, 67 C. Cs., 348 Ct. D. 99, C. . III-2, 337 Lyons v. tzpatrck, 52
L.a. nn., 697, 26 So., 110.) In ennessy v. acon, supra, whch Invoved a
compromse, t was stated that Such a settement ought not to be overthrown,
even f the court shoud now be of the opnon that the party companng of
t surrendered rghts that the aw, If appeaed to, woud have sustaned.
We are unabe to agree wth the pantff that the compromse was nvad
because coecton of the ta , penaty, and nterest was barred at e tme pad
and compromsed. oth pantff and the defendant consdered that under
secton 2T8 of the Revenue ct of 1924 the Government had s years from the
date of the tmey assessment n March, 1924, wthn whch to make coecton.
Pantff now Inssts that the demand of the Government was whoy wthout
ega rght and was not dsputabe. We can not agree that the matters made
the sub|ect of the compromse were not dsputabe.
t the tme of the compromse the hghest courts passng upon the queston
of the Government s rght to coect had hed, n such cases, that when the
mtaton perod for assessment e pred after the date of the enactment of
the Revenue ct of 1924 and assessment of the ta had been tmey made, the
Government had s years from the date of the assessment n whch to enforce
coecton. In November, 1927, ths concuson was reached by the Crcut Court
of ppeas, fth Crcut, n Russe et a. v. Unted States (22 ed. (2d), 249
T. D. 4107, C. . I-2, 133 ). The queston was not setted unt anuary 2,
1929, by the decson n the case of Rus c et a. v. Unted States (278 U. S.,
181 T. D. 4260, C. . I-1, 206 ).
In Chcago Raway qupment Co. v. urnet (282 U. S., 295 Ct. D. 276, C. .
-. 323 ) the court sad:
Whether or not the Commssoner woud have been abe to the ta payer
for a coecton made as the resut of a |eopardy assessment n 1925, we need
not determne. e ceary had the power to make such assessment and thereby
compe the fng of a cam for abatement and the gvng of a bond, or, f such
cam and accompanyng bond were not fed, to make coecton and reegate
respondent to an acton at aw. In the absence of a determnaton that ths
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609.
146
defcency was barred, It was the Commssoner s duty to proceed to Insure the
assessment and coecton of the ta .
The fact that the partes msconstrued the aw dd not render the compromse
nvad.
Pantff nssts that secton 607 of the Revenue ct of 1928 specfcay
requres Ihe refund of any ta , nterest, or penaty pad after the perod of
mtaton propery appcabe thereto, If a tmey cam s fed. We are of
opnon, however, that ths secton does not appy n a case where the ta ,
penaty, and nterest, pad after the e praton of the perod of mtaton, were
the sub|ect of a compromse agreement.
Pantff urges that f the compromse of pr 12, 1927, ncuded the sette-
ment of the addtona ta , the frst compromse of the penaty for denquency,
uy 28, 1921, aso ncuded the settement of the ta abty for 1918 and. that
the Government was thereafter precuded from assessng and coectng any
addtona ta , penaty, and nterest The record, however, does not |ustfy
ths concuson. Pantff fed a cam for abatement specfcay aganst the
penaty for faure to fe a return wthn the tme requred. e was advsed
that the cam woud be re|ected but that he had the prvege of submttng an
offer of 5 n compromse of the penaty. ccordngy, an offer n that amount
was submtted n eu of the penaty of 25 per cent of the ta assessed upon
the return, whch offer was accepted and the penaty was abated. No
nvestgaton and audt of the return had been made, and nothng was sad
n the offer or n the acceptance thereof to ndcate that ether party ntended
fnay to sette the ta abty.
The petton must be dsmssed. It s so ordered.
S CTION 609. RRON OUS CR DITS.
Secton 609. I-38-5699
Ct. D. 562
ncome ta revenue act op 1928 decson of court.
1. Credt oanst arred Defcency Overpayment.
credt of an overpayment for one year aganst a defcency for
another year the coecton of whch s barred by the statute of
mtatons when the credt Is made s vod under secton 009 of the
Revenue ct of 192S and there s no coecton of the defcency by
such credt and no overpayment of the amount so credted wthn
the meanng of secton 607 of the Revenue ct of 1928.
2. Suts Lmtaton ccount Stated.
sut to recover nn overpayment of ta grounded upon an
account stated n a certfcate of overassessment s barred by sec-
ton 1069, Revsed Statutes, f nsttuted more than s years after
the accrua of the cause of acton whch arose upon devery to the
ta payer of the certfcate of overassessment.
Court of Cams of the Unted States. No. L-242.
Parks f Wooson Machne Co. v. The Unted States.
May 81, 1932.
OPINION.
Ltteton, udge, devered the opnon of the court.
Ths sut s for the recovery of a ta for 1917 aeged to have been coected
by credt at a tme when coecton was barred by the statute of mtaton.
Pantff cams that an overpayment of ta for 1918 apped on pr 24, 192
as a credt to an ddtona ta for 1917 assessed n March, 1923, was a coec-
ton of the 1917 defcency out of tme that the Commssoner havng dsaowed
ts cam for refund of the 1917 defcency, t shoud have |udgment for the
prncpa of the ta so coected by credt, wth nterest.
The defendant nssts that there was no coecton of the 1917 defcency,
cther by cash or credt, for the reason that the credt, by whch the Comms-
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147
609(a).
soner attempted to coect the 1917 defcency, was vod under secton 009 of
the Revenue ct of 1928. When the Commssoner sgned the schedue of over-
assessments March 5, 1924, for 1918, he beeved that hs acton was n awfu
coecton by credt of the 1917 defcency. Ths acton was tmey. The Com-
mssoner, however, dd not sgn the schedue of refunds and credts unt
pr 24, 1924. Snce the credt n ths case was taken pr 24, 1924, the acton
was not tmey. (Unted States v. Swft Co., 282 U. S., 468 Ct. D. 290,
C. . -, 283 Unted States v. oston uek Co., 282 U. S., 470 Ct. D. 293,
C. . -, 335 .) The attempted coecton of the 1917 ta by credt was vod
and of no effect under secton 609 of the Revenue ct of 1928, whch provdes:
(a) Credt aganst barred defcency. ny credt aganst a abty n
respect of any ta abe year sha be vod f any payment n respect of such
abty woud be consdered an overpayment under secton 607.

(c) ppcaton of secton. The provsons of ths secton sha appy to any
credt made before or after the enactment of ths ct.
Secton 607, referred to n secton 609, provdes that ny ta
assessed or pad (whether before or after the enactment of ths ct) after the
e praton of the perod of mtaton propery appcabe thereto sha be con-
sdered an overpayment and sha be credted or refunded to the ta payer f
cam therefor s fed wthn the perod of mtaton for fng such cam.
See, aso, Report No. 2, pages 33 and 34, Ways and Means Commttee, Seventeth
Congress, frst sesson, and Report No. 960, pages 41 and 42, Senate Commttee
on nance, Seventeth Congress, frst sesson. In vew of the provsons of
secton 609, supra, the pantff may not recover.
efore sut can be mantaned t must appear that there has been a payment
of the amount of the 1917 ta for whch sut s brought. Snce the credt
nvoved n ths case s vod by egsatve drecton, t s of no effect whatso-
ever. It s a nuty and s as f t had not been attempted. (Unted States
Refractores Corporaton, 23 . T. ., 872.)
In vew of the provsons of secton 609, Revenue ct of 1928, the cases reed
upon by pantff are not controng. That secton was not appcabe to the
facts In oston Pressed Meta Co. v. Unted States (282 U. S., 409 Ct. D. 287,
C. . -, 191 ), reed upon by the pantff. In that case recovery was
dened under the provsons of secton 611 of the 1928 ct. The credt nvoved
In that case was not vod. ere the credt was aganst a barred defcency
and has been made vod by speca congressona enactment.
The certfcate of overassessment for the fsca perod anuary 1 to une 30,
1918, was ssued March 24, 1924. The ssuance of ths certfcate created an
account stated n favor of the pantff and aganst the Unted States. ( onct
Teer f Co. v. Unted States, 283 U. S., 258 Ct D. 334, C. . -, 328).) The
perod of mtaton wthn whch sut coud have been Insttuted upon the
certfcate of overassessment to recover the overpayment for 1918 e pred
March 24, 1930. Ths sut was not nsttuted unt une 17, 1930, more than
s years after the accrua of a cause of acton to recover the overpayment for
1918. Recovery of the overpayment was barred when the sut was nsttuted,
even f t had been grounded upon an account stated.
The petton must be dsmssed. It s so ordered.
S CTION C09(a). RRON OUS CR DITS: CR DIT
G INST RR D D ICI NCY.
( so Secton 322, rtce 1257.) I-44-5820
Ct. D. 592
INCOM T R NU CT OP 1028 D CISION O COT T.
1. Cbedt ganst arred Defcency Overpayment.
credt of an overpayment for one year aganst a defcency
for another year the coecton of whch s barred by the statute
of mtatons when the credt s made s vod under secton 609 of
the Revenue ct of 1928 and there s no coecton of the defcency
by such credt and no overpayment of the amount so credted wth-
n the meanng of secton 607 of the Revenue ct of 1928.
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1809(a).
148
2. Sut Lmtaton.
Where a cam for credt or refund of a ta s fed wthn the
statutory perod therefor and a certfcate of overassessment Is
ssued a part of the amount of whch s credted to ta es for other
years at a tme when the coecton of the ta for the other years s
barred by the statute of mtatons and where no sut was begun
wthn the specfed perod for begnnng sut after the payment of
the ta provded by secton 3226 of the Revsed Statutes as
amended, a second cam for a refund of the amounts so credted
fed after the statutory perod for the fng of the same does not
revve the frst cam and a sut to recover the amounts so credted,
begun wthn the 2-year perod provded n that secton, after the
dsaowance of the second cam, can not be mantaned.
3. Sut1 Coector Count on ccount Stated.
cause of acton stated n a count for money due on account
stated can not be mantaned aganst a coector.
4. Sut Coector Overpayment Credted by Coector.
Where an overassessment s pad to the predecessor n offce of a
coector, an acton to recover the amount of the overassessment,
whch s credted aganst a ta for another year, can not be man-
taned aganst the coector, even though the coecton of the ta
aganst whch the credt s taken s barred by the statute of m-
tatons, when the coector, pursuant to nstructons of the Com-
mssoner, entered the overpayment as a credt
5. Sut Refund Overpayment urden op Proof.
Where a certfcate of overassessment s ssued and the Com-
mssoner ater determnes that there was n fact no overpayment
of the ta , n a sut to recover an aeged overpayment the burden
s upon the ta payer to estabsh that the Government has money
|usty beongng to the ta payer. The ta payer s not entted to a
refund uness there has been an overpayment.
Unted States Crcut Court op ppeas for the rst Crcut.
rthur C. arvey Co., pantff, appeant, v. ohn . Maey and/or Macom
. Nchos, ormer Coectors of Interna Revenue, defendants, appeees.
ppea from the Dstrct Court of the Unted States for the Dstrct of Massachusetts.
une 27, 1932.
OPINION.
Wson, .: Ths Is an appea from a udgment of the Dstrct Court of
Massachusetts n an acton at aw to recover an aeged overpayment of
ncome ta es for the year 1918. In the frst count of ts decaraton, the
pantff-appeant seeks to recover of the defendants, |onty and severay,
the amount of the aeged overpayment under a count of ndebtatus assumpst:
t aso seeks to recover of ohn . Maey, a former coector of nterna
revenue, n a second count for money had and receved, the amount of the
aeged overpayment and n a thrd count for money had and receved, to
recover of Macom . Nchos, the successor of Maey as coector of nterna
revenue, the amount of the aeged overpayment. Maey was a coector n
1919 when the aeged overpayment occurred, and Nchos, as Maey s suc-
cessor, under the drecton of the Commssoner of Interna Revenue, n 1923
credted the aeged overpayment to defcences of pror years.
moton was fed by each defendant to compe the pantff to eect on
whch count t woud proceed, on the ground there was ns|oncr of actons
and aso a ms|oner of partes. The moton was dened and hearng ordered
on the merts.
There was a waver of a |ury tra and the case was heard by the |udge
wthout a |ury. request for fndngs of fact and rungs of aw was made
by the pantff, but no speca fndngs were made nor were the requested
rungs of aw ether made or refused, nor were any e ceptons to a refusa
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149
609(a)
to rue as requested taken n the course of the tra. So far as any rungs
of aw were made n the course of the tra, wth one e cepton they were
n favor of the pantff, and though an e cepton was aowed n ths nstance,
t s not reed upon n the assgnments of error.
The pantff assgns as error a refusa to drect that a udgment be entered
for the pantff but we do not fnd n the record any e press moton to that
effect. The s th requested rung that the credt of 74,648.39 (beng the
amount of an overpayment of the 1918 ta es as determned by the Com-
mssoner n May, 1923), to aeged underpayments for the years 1915, 1916,
and 1917 consttuted an overpayment for those years under sectons 607 and
609 of the Revenue ct of 1928, and shoud be refunded to the pantff, does
not consttute a moton to drect a |udgment snce whether a |udgment shoud
have been drected for the pantff depended upon other consderatons than
whether the appcaton of an overpayment of the 1918 ta es to 1915, 1916,
and 1917 defcences was vod and cousttuted an overpayment for those years
under sectons 607 and 609 of the Revenue ct of 1928.
It Is doubtfu, therefore, whether under sectons 649 and 700, R. S., any
queston of aw s rased on the record for the consderaton of ths court by
the appeant s assgnments of error. The fndngs of fact are genera, and
no rungs of the court were e cepted to durng the course of the tra,
whch are reed on. ceptons, foowng an order of |udgment, to aeged
rungs n a wrtten opnon of the |udge assgnng reasons for orderng a
udgment for ether party, are not rungs n the course of the tra. (. esch-
mann Cons. Co. v. Unted States, 270 U. S., 349 Unted States v. Smth, 39
ed. (2d), 851 Wson v. Merchants Loan Trust Co., 183 . S., 121.)
s the court sad In eschmann Cons. Co. v. Unted States: It s setted
by repeated decsons, that In the absence of speca fndngs, the genera fnd-
ng of the court s concusve upon a matters of fact, and prevents any nqury
nto the concusons of aw emboded theren, e cept n so far as the rungs
durng the progress of the tra were e cepted to and duy preserved by b of
e ceptons as requred by the statute. To obtan a revew by an
appeate court of the concusons of aw a party must ether obtan from
the tra court speca fndngs whch rase the ega propostons, or present
the propostons of aw to the court and obtan a rung on them.
That s, as was sad n umphreys v. Thrd Natona ank, supra, 655, he
shoud request speca fndngs of fact by the court, framed ke a speca
verdct of a ury, and then reserve hs e ceptons to those speca fndngs, f
he deems them not to be sustaned by any evdence and f he wshes to e cept
to the concusons of aw drawn by the court from the facts found, he shoud
have them separatey stated and e cepted to. In ths way, and n ths way
ony, s t possbe for hm to revew competey the acton of the court beow
upon the merts.
ach of the assgnments of error In ths case reates ether to matters of
fact or to concusons of aw emboded n the opnon. These are not open to
revew, as there were no speca fndngs of fact and no e ceptons to rungs
on matters of aw were taken durng the course of the tra and duy preserved
by a b of e ceptons, and no questons of aw favorabe to the pantff are
rased on the peadngs.
ut assumng that the requested rung above referred to was n effect a
moton to drect a |udgment for the pantff, and coud be consdered as dened,
and an e cepton duy taken or that the utmate facts upon whch the rghts
of the partes depend were agreed to, and an e cepton woud e to the order
of udgment for the defendant, we st thnk the |udgment of the dstrct
court must be affrmed.
The facts are: That pror to 1918 the pantff company had cosed ts books
for ts fsca year on une 30, but fed ts returns, as then requred by aw,
for the years 1915, 1916, and 1917 on the bass of the caendar year. To con-
form to the Revenue ct of 1918, the pantff n March, 1919, made a return
for the frst s months of 1918, on whch return Its ta for the s months was
assessed as 302,438.83, n accordance wth the provsons of secton 226 of the
1918 ct (40 Stat, 1075). The Commssoner abated ths ta to the amount
of 75,461.39, and the appeant vountary pad to the defendant Maey as
coector n 1919 the baance of 226,977.44.
Later, In September, 1919, the appeant fed an amended return, showng
ncome for the fu fsca year from une 30, 1917, to une 30, 1918 and took,
as the ta due for the s months from December 31 to uy 1, 1918, the same
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609(a).
150
proportonate part of the ta for the entre fsca year, computed at the 1918
rates, as the porton of the fsca year fang n 1918 was of the entre fsca
year n accordance wth the provsons of secton 205 of the 1918 ct (40 Stat.,
1001), whch resuted, accordng to ts return, n a ta of 234,088.50.
In October, 1920, t fed a second amended return showng the ta for the
s months from December 31, 1917, to uy 1, 1918. to be ony 127,651.08, and
camed that the ta assessed on ts orgna return n March, 1919, was e ces-
sve to the amount of 174,787.75. No detas of the orgna assessment, whch
was evdenty computed n accordance wth the provsons of secton 226 of the
1918 ct, are furnshed.
On pr 9, 1923, the pantff, as a resut of an e amnaton of ts books by
an nterna revenue agent, fed a cam for refund based on the nterna reve-
nue agent s report of an aeged overpayment for 1918 of 156,390.41. In ths
cam, however, tte ta payer recognzed that there were defcences for the
years 1915, 1916, and 1917, and assented to the appcaton of the overpayment
to defcences for those years, amountng to 48,563.39, eavng a baance of
107,S26.61, whch It camed shoud be refunded. On May 7, 1923, the Com-
mssoner, adoptng the vew that n changng from a caendar year to a fsca
year the ta for any fractona part of a year shoud be computed n accordance
wth the provsons of secton 205 of the 1918 ct, determned that the correct
ta for 1918, ess the abatement aready aowed, and based on the e amna-
ton of the appeant s books by the revenue agent, was 146,098, and that
there had been an overpayment of the ta es due from the appeant for the s
months n queston of 80,879.44.
In November, 1923, the Commssoner ssued hs certfcate of overassess-
ment for the year 1918, showng the overpayment of 80,879.44. Certfcates of
overassessment Issued by a Commssoner contan prnted nstructons to the
coector to pay any baance to the ta payer, after credtng such porton of
the overpayment that may be requred to make good any defcences for
prevous years shown on the books of the coector.
Ths drecton of the Commssoner was carred out by the defendant Nchos,
and 2,467.06 was refunded to the appeant In cash 3,763.99, t s agreed,
was propery credted to certan underassessments for the fsca year endng
une 30, 1920 and 74,648.39 was credted to aUeged defcences for 1915,
1916, and 1917 n the foowng amounts: 348.74 for 1915, 4,751.03 for 1916,
and 69,548.62 for 1917. ut the coecton on May 23, 1923, of any addtona
ta es for the years 1915, 1916, and 1917 was barred by the mtaton n secton
250(d) of the Revenue ct of 1921 and sectons 607 and 609 of the Revenue
ct of 1928 decared vod any appcaton of credts made after the mtaton
for coecton of ta es.
The appeant s decaraton sets forth as a bass of ts rght of recovery that
the Commssoner n May, 1923, aowed a refund of 74,64S.39 as an overpay-
ment of the 1918 ta es that t was erroneousy credted by the defendant
Nchos to the defcences n the 1915, 1916, and 1917 ta es that on pr
9, 1923, the pantff fed a cam for a refund of 107,820.61, and on uy 27,
1929, It fed another cam for a refund of the sum of 74,648.39, whch the
Commssoner had determned n May, 1923, n accordance wth the provsons
of secton 205 of the 1918 ct, was the amount of the overpayment of the 1918
ta es that the cam fed n uy. 1929, was dened, and, as the appeant con-
tends, n accordance wth the provsons of secton 3220, R. S., ths acton was
brought wthn two years after the dena of ts cam for a refund.
To avod the ob|ecton that ts sut, begun n 1930, was not brought wthn
fve years of the aeged overpayment, whch was n 1919, the appeant asserts
that the cam fed n 1929 was ony a reasserton of ts cam fed n 1923
and havng fed a cam for a refund wthn four years of the payment of the
ta , and snce the cam fed n uy, 1929, beng a reasserton of ts cam
fed n 1923, was dsaowed, and ths acton was brought wthn two years of
the dsaowance, the provsons of secton 3226, R. S., were comped wth.
ut the cam fed n pr, 1923, was aowed by the Commssoner, though
for a dfferent amount. The ony ground of acton the appeant had after the
aowance of ts cam n May, 1923, must have been ether on the certfcate of
overassessment Issued on the atter date by the Commssoner, or aganst the
defendant Nchos personay for an erroneous appcaton of the aeged over-
payment to ta es aready barred but on the record, as w ater appear, there
was no overpayment of the 1918 ta , and the appeant was therefore not
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151
609(a)
harmed by the act of the defendant N(chos. In respect to Maey- s abty
under the frst count, It s aso dffcut to see how hs act n acceptng the
payment of the ta es found due by the Commssoner based on the ta payer s
own return, coud e pose hm to any acton by the ta payer, e cept for money
had and receved n case a refund was duy camed and dened. ut a cam
for a refund barred by the statute can not be revved by fng a new cam and
basng an acton on Its dena.
If the appeant had decared as on an account stated, or a promse to pay
by reason of the certfcate of overassessment ssued by the coector n May,
1923, as n onw Teer d Co. v. Unted States (283 U. S., 253, 265 Ct. D.
334, C. . -, 328 ), we thnk ts acton woud have to be brought aganst
the Unted States, as nether of the defendants had anythng to do wth the
ssung of the certfcate of overassessment or were prvy to any promse
theren contaned, ether e press or mped, to refund the overpayment.
The acts performed by Maey or Nchos as coectors were mnstera
(Unted States v. Swft d Co., 282 U. S., 468 Ct. D. 290, C. . -, 283 ),
and were done n the dscharge of ther severa dutes as a coector. ( ef-
fernan v. e ander, 48 ed. (2d), 855 Penn Smokeess Coa Co. v. Leweyn,
26 ed. (2d), 743 T. D. 4167, C. . II-1, 184 Sempe v. Leweyn, 1 ed.
(2d), 745, 748-749.) The appcaton of credts to defcences of other years
by a coector, as shown by hs books, s of no effect unt approved by the
Commssoner. Unted States v. Swft d Co., supra.)
Whether or not the cam fed by the appeant n pr, 1923, for a refund
based on an e amnaton of ts books by an nterna revenue agent, together
wth the cam fed on uy 29, 1929, was a suffcent compance wth secton
3226, R. S., on whch to base an acton aganst a coector for money had
and receved, or whether the appcaton by the defendant Nchos of the
aeged overpayment of the 1918 ta es to an assessment aready barred must
be regarded as an erroneous coecton (Graham et a. v. Ooodcc, 282 U. S.,
409, 424 Ct. D. 287, C. . -, 191 ) s reay not Important n ths case
snce to recover n such form of acton the ta payer must prove that the
Government has money n ts possesson |usty beongng to the ta payer.
though the statute of mtatons may have barred the assessment and
coecton of any addtona sum, t does not obterate the rght of the Unted
States to retan payments aready receved when they do not e ceed the
amount whch mght have been propery assessed and demanded. Lews v.
Reynods, 284 U. S., 281, 283 Ct. D. 443, C. . I-1,130 .)
The record shows that when the second cam for refund was fed n uy,
1929, the Commssoner, apparenty under advce of counse, made a rede-
termnaton of the 1918 ta for the s months from December 31, 1917, to
uy 1, 1918, whch he had a rght to do, though he coud not coect any add-
tona ta (Lews v. Reynods, supra), and found that the prevous assess-
ment n May, 1923, whch showed an overpayment of 74,648.39 was errone-
ous, the former computaton havng been based on secton 205 of the 1918 ct.
The appeant s ta n queston was for a perod entrey wthn the year
1918 and under secton 226 of the 1918 ct (40 Stat., 1075), where a change
s made from a caendar year to a fsca year, and a porton of the frst ta
assessed under the 1918 ct was for a fractona part of the year 1918, the
ta for the perod sha be computed n the manner provded and at the rate
for the caendar year n whch the perod fas. ( ppea of enry D. Weed,
2 . T. ., 84.)
Determned under secton 226, the ta assessed n 1919 on the ta payer s
orgna return of March, 1919, to the amount of 302,524.65, ess the abate-
ment of 75,461.39, so far as anythng appears n the record, was correct,
and there was, therefore, no overpayment. t east, the record does not ds-
cose any error. The burden n such cases, n an acton aganst a coector for
money had and receved, s on the pantff to show that the Government has
money |usty beongng to the pantff. Ths burden the appeant has not
sustaned n ths case.
The statement of the deputy commssoner n hs etter to the appeant
n December, 1929, denyng ts cam fed n uy, 1929, that such porton of
the overassessment whch as not been refunded, havng been credted aganst
ta abtes for pror years, w not be refunded, we nterpret to be merey
a categorca dena of the refund cam accordng to ts terms, and that the
reason assgned for the re|ecton of the cam was that the aeged overassess-
160903 33 11
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611.
152
ment n May, 1923, was erroneousy aowed In Its entrety. In other words,
there was no overassessment, and therefore the refundng of that part of
the aeged overassessment whch was on the books of the coector apped
to pror ta abtes was dened, because no such overassessment and over-
payment occurred.
The |udgment of the dstrct court Is affrmed.
S CTION 611. COLL CTIONS ST Y D Y
CL IM IN T M NT.
Secton 611. I-33-5607
G. C. M. 10792
R NU CT OP 1828.
Genera Counse s Memorandum 6296 (C. . YIII-2, 152), In
whch t was hed that secton 611 of the Revenue ct of 1928 s
not appcabe to the case where a cam for credt of an overpay-
ment has operated to stay the coecton of an outstandng assess-
ment, s revoked, n vew of the decson by the Court of Cams
n RaUton Purna Co. v. Unted States (58 ed. (2d), 1065), whch
hed the ta payer was estopped to assert that the Government had
no rght to retan that porton of the 1919 overpayment equa to
the addtona assessment for 1918.
In Genera Counse s Memorandum 6296 t was hed that secton
611 of the Revenue ct of 1928, reatve to ta es coected after the
bar of the statute where coecton was stayed by the fng of a cam
n abatement, may not be reed upon as a bass for dsaowng a
refund of amounts coected by credt pursuant to a cam for credt
fed by the ta payer.
The Court of Cams, under date of une 6, 1932, rendered ts
decson n the case of the Raston Purna Co. v. Unted States. In
that case a tmey assessment of a defcency n ta n the amount
of 23,846.88 was made aganst the ta payer for the ta abe year
1918 pror to une 2, 1924. No cam n abatement, or forma cam
for credt, was fed, but the ta payer, on March 14, 1924, addressed
a teegram to the Commssoner requestng that coecton of the
defcency be wthhed unt an overpayment made for 1919 s
ad|usted. Upon the recept of ths teegram the Commssoner
authorzed the coector to wthhod coecton of the defcency
pendng recept of the schedue of overassessments coverng the over-
payment made for 1919. In anuary, 1925, after coecton of the
defcency for 1918 had become barred, the Commssoner sgned
the schedue showng an overassessment n favor of the ta payer for
1919 n the amount of 68,724.90. Of the overassessment (over-
payment) thus aowed, 23,846.88 was credted aganst the defcency
n ta due for 1918 and the baance was refunded. In the sut
brought n the Court of Cams the ta payer sought to recover the
amount of the overpayment apped as a credt upon the ground that
coecton of the defcency was barred at the tme the credt was
made. The court hed that under the crcumstances nvoved n the
case the ta payer was estopped to assert that the Government had
no rght to retan that porton of the 1919 overpayment equa to the
addtona ta due for 1918.
In vew of the foregong decson, Genera Counse s Memorandum
6296, supra, s hereby revoked.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
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153
561L
Secton 611.
revenue act op 1928.
batement cam re|ected before e praton of mtaton perod
for coecton. (See Ct. D. 572, page 70.)
Secton 611. I-42-5789
Ct. D. 686
INCOM T R NU CT O 1928 D CISION O COURT.
urr Coecton Lmtaton Cam fob batement Tme of
praton of Unmted Waver.
waver unmted as to the tme wthn whch an assessment
for 1917 ta es may be made, whch by Mmeograph 3085 (C. . II-,
174) s hed to e pre pr 1, 1924, does not e pre before mdnght
on that date, and a cam for abatement of such ta es fed before
mdnght on pr 1, 1924, s fed wthn the statutory perod for
assessment and coecton as e tended by such waver and compes
wth the condton reatve to a cam for abatement contaned n
secton 611 of the Revenue ct of 1928, whch wthdraws the statute
of mtatons upon coecton as a ground for the recovery of a
ta pad under the condtons theren stated.
Dstrct Court of the Unted States fob the astern Dvson of the ast-
ern udca Dstrct of Mssour.
Century ectrc Co., a Corporaton, pantff, v. Unted States of merca,
defendant.
une 18, 1932.
opnon.
ars, .: Pantff, a corporaton, sues the Unted States (the coector
who coected the ta beng no onger n offce) for the sum of 71,776.90, to-
gether wth nterest from uy, 1925, pad, as t s aeged, after the ta was
barred by the statute of mtatons.
The ta es n controversy were for the year 1917. The statute ran aganst
the coecton of sad ta es, uness toed by the facts and the aw when apped
to such facts, whch facts are not at a n dspute.
These facts I fnd, so far as pertnent, are as foows: The ta payer fed
ts return March 30, 1918, for the e cess profts or war profts ta for the year
1917. ccordng to the appcatory statutes, as both partes seem to concede,
the statute woud have barred, ordnary, coecton after March 30. 1923. ut
on anuary 27, 1923, an unmted waver, so-caed, was sgned by the ta payer
and the Commssoner of Interna Revenue, wheren such partes consented to
determnaton, assessment and coecton of the amount of ncome, e cess
profts, or war profts ta es due under any return made by or on behaf of the
sad Century ectrc Co., for the year 1917 rrespectve of any
perod of mtatons.
On the 11th day of pr, 1923, a genera rue or reguaton was promugated
by the Conmssoner, wheren he undertook e parte to mt, by a reguaton,
the date of e praton of a of the so-caed unmted wavers then on fe.
So far as s pertnent, ths reguaton provded that, Inasmuch as there are
many wavers on fe sgned by ta payers, contanng no mtaton as to the
tme n whch assessments for 1917 may be made, a such unmted wavers
w be hed to e pre pr 1, 1924.
On ebruary 7, 1924, the Commssoner wrote the ta payer that an mmedate
assessment of an addtona or defcency ta of 73,342.26 for the year 1917,
woud be made, ncosng a compete schedue and computaton for the atter
year, and other years not here n controversy.
On ebruary 25, 1924, an assessment st contanng, among ta es for other
years aso, the ta here n queston, was sent to the pantff. To the etter
f ebruary 7, 1924, the pantff, on ebruary 15. 1924, made protest, contend-
Iag that the assessment was e cessve, and requested that computaton of the
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611.
154
ta es for 1917 be made under the speca reef provsons of secton 210 of the
Revenue ct of 1917.
On March 21, 1924, the coector gave notce by ma to the pantff, that
he hed ths ta for coecton. Pantff thereafter, and on March 28, 1924,
wred the Commssoner that t had not receved fu benefts of secton
250(d), thus ndcatng, obvousy, that pantff had receved the notce sent
March 21, 1924. (There s n the brefs some dspute as to whether such notce
was actuay receved by pantff.)
To the above teegraphc compant by pantff, as to the Commssoner s
faure to fuy compy wth the provsons of secton 250(d), the Commssoner
wred pantff that he (the Commssoner) had advsed the coector of the
ack of compance wth secton 250(d), and that the coector shoud accept
the cam for abatement.
Upon ths same pont the Commssoner, on March 29,1924, wrote the coector
admttng ack of compance wth the provsons of secton 250(d), and recom-
mended to the coector that a cam n abatement be accepted.
On pr 1, 1924, pantff fed ts cam for abatement of the ta es here n
dspute, n the tota sum of 71,776.90. Pendng these matters, and on March
20, 1924, credt had been gven n the sum of 1,565.39, on account of an OTer-
assessment aganst pantff for the year 1919. Ths accounts for the apparent
dscrepancy between the amount of 73,342.29, as shown on the schedue of
ebruary 7, 1924, and the amount here camed by the pantff.
Pursuant to we-estabshed oca custom, efforts to coect were stayed,
or, to be more e act, were not made by the coector pendng the pantffs
cam for abatement. Ths cam for abatement was dened by the Comms-
soner, on the 5th day of May, 1925, and pantff was so advsed by etter,
and on une 30, 1925, forma re|ecton of the cam for abatement was entered
by the Commssoner. Notce and demand were thereupon made upon pantff,
and on uy 21, 1925, pantff pad to the coector the sum of 71,776.90, wth
nterest, amountng n a to the sum of 77,519.05.
Thereafter, three years ater, and n December, 1928, a cam for a refund
of the sum of . 73,342.29 for the ta es so pad, was made by pantff on the
Commssoner. The soe ground of ths cam was that the coecton of the
ta es here n controversy was barred by the statute of mtatons when co-
ecton thereof was made. Ths cam for refund havng been dened, ths
acton was begun by pantff on the 25th day of pr, 1929.
Numerous questons of aw are mooted upon the record and n the brefs. I
thnk I am restrcted to one, and ts ncdents. That one s, whether the ta
was barred by the statute of mtatons when t was coected. Ths s the soe
ground urged n the cam for a refund, and I am of opnon that pantff
can not now mend ts hod and urge others. I do not thnk pantff may uow,
n the ght of ts fng a pea for abatement, cam nherent nvadty n the
assessment of ths defcency ta , on the mere ground that the 30 days notce
provded for by secton 250(d) was not In fact gven to t by the Commssoner.
The record s whoy ackng n any proof whether ths notce was or was not
gven. The ony fact tendng to ndcate that t was not gven s the teegram
of the Commssoner to the pantff, and the etter of the Commssoner to the
coector. Theren the Commssoner made the admsson that secton 250(d)
had not been comped wth, seemngy, by hs offce, and for ths reason he
recommended to the coector that he (the coector) permt to be fed, and
entertan a pea n abatement, whch accordngy was done by the pantff
and by the Commssoner. ut ths dscusson a goes to the fact of the
vadty of the assessment, and not as to the tme thereof.
s sad aready n statng the facts, an unmted waver was e ecuted by
the pantff and the Commssoner, n consonance wth the provsons of secton
250(d) of the Revenue ct of 1921. Ths waver was made and fed before
the statute woud have run n due course. It s my concuson, therefore, that
t s vad and bndng on pantff. ut as sad aready, the Commssoner, by
a reguaton, f ed the date of e praton of such wavers then on fe, as of
pr 1, 1924, the precse anguage beng that such unmted wavers w be
hed to e pre pr 1, 1924.
I concude, therefore, and am of opnon, that the waver here dd not e pre
on March 31, 1924, but that t was n fu force and effect durng the whoe of
pr 1, 1924. Ths vew s n consonance wth common acceptaton, and wth
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155
705.
the great ma|orty of the rued cases. ven the words to, t and
unt a day named, have been hed to ncude the whoe of the day specfed.
St. Lous, etc.. Raway Co. v. racey, 126 Mo., 472, and cases cted State v.
osey, 116 Mo., 545.) Obvousy, the words, w he hed to e pre pr 1,
1924, are, upon the phase of ncudng the whoe of the day named, nfntey
stronger than the words to, t or unt a named day.
Therefore, I concude and am ot the opnon that the dam n abatement
was fed pror to the tme at whch the statute bars coecton. Upon ths
vew t seems pan that secton 611 of the Revenue ct of May 29, 1928, s
appcabe to ths case. Ths secton (now secton 2611, Tte 26, U. S. C.) pro-
Tdes, n effect, that the coecton and payment of any ta assessed pror to
une 2, 1924, wheren a cam n abatement hus been fed (tmey fed, of
course) sha not be deemed a recoverabe overpayment, wthn the purvew of
secton 2607, Tte 26, U. S. C, and that no money pad as and for ta es sha
be recoverabe because made after the runnng of the statute of mtatons, as
ecton 2607, supra, otherwse provdes.
I have assumed, as both counse for the partes dd upon the tra, but wthout
rung the pont specfcay, that the genera reguaton of the Commssoner
abrogatng, on pr 1, 1924, a unmted wavers, s bndng on the defendant,
even absent the consent of the pantff to such abrogaton. The pont s
nterestng, hut n vew of the atttudes of the partes, t s not necessary to
decde t.
The above facts and concusons may be taken as fndngs of fact and concu-
sons of aw, but f counse for ether pantff or defendant, or both, sha desre
a more forma fndngs of facts and concusons of aw, they, or both or ether
of them, may submt such fndngs wthn 10 cays.
The resut s, as a matter of aw, that |udgment shoud be aganst pantff
and n favor of defendant, that t go hence wthout day and recover ts costs,
whch accordngy s ordered.
TITL . G N R L PRO ISIONS.
S CTION 705. INST LLM NT S L S-
R TRO CTI .
Secton 705. I-31-5579
Ct. D. 524
INCOM T R NU CT OP 1928 D CISION O COURT.
Refuno ob Ceedt Instament Saes of Persona Property
Retroactve.
Where a ta payer, who reguary ses persona property on the
nstament pan, by an orgna return made pror to ebruary 26,
1926, the date of the enactment of the Revenue ct of 1926, changed
the method of reportng hs net ncome for the ta abe year 1923
from the accrua bass to the nstament bass and pays under
duress before the enactment of the Revenue ct of 1928 an add-
tona assessment for that year based frst on the ground that the
ta for that year shoud be computed by ncudng, n computng
ncome, amounts receved durng such year on account of saes of
property made n pror years and second that the books of account
dd not contan adequate nformaton and were kept so that
ncome coud not be accuratey computed on the nstament bass
n accordance wth the provsons of artce 42 of Income Ta Regu-
atons 69 and where after the enactment of the Revenue ct of
1928 the Unted States admts that the books were so kept that
ncome coud be accuratey computed on the nstament bass but
retans on the frst ground the amount coected as an addtona
assessment, secton 705(a )1 of the Revenue ct of 1928 precudes
a refund or credt of such addtona ta .
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5705.
156
U-nted States Crcut Court of ppeat.8, c.hth CncnT.
Lev M. WWcuts, Coector of Interna Revenue for the Dstrct of Mnnesota,
appeant, v. . . Gradroh, appeee.
ppea from the Dstrct Court of the Unted States for the Dstrct of Mnnesota.
pr 15, 1932.
OPINION.
Stone, Crcut udge, devered the opnon of the court.
Ths s an acton to recover refund of redetermned ncome ta es, pad under
protest, for the years 1923, 1924, and 1925. It nvoves the appcaton and
constructon of secton 705 of the Revenue ct of 1928 (45 Stat., 881, T . S. C. .
Tte 26, secton 2705).
The pertnent facts are undsputed and are as foows: Pror to and durng
the years 1923, 1924, and 1925, appeee was a partner n the frm of Gtteson
ewery Co., whch was engaged n reta saes of ewery on the nstament
pan. Pror to 1923, ncome ta returns and ta payments were made by the
frm upon the accrua bass. In ts orgna return for 1923, the frm changed
to the nstament bass and, durng that and the two foowng years, returns
and payments were upon that bass no return beng made for nstament pay-
ments receved durng those years whch arose from contracts made pror to
1923, and, therefore, ncuded In the returns of those pror years upon the
accrua bass.
In 1927, an audt of the books of the frm by a revenue agent for the years
1923, 1924, and 1925 resuted n notfcaton of specfed ncreases of ncome n
each of those years and a proposed addtona ta thereon was decared.
Practcay a of the ncreased ta (a here nvoved) was based upon In-
cuson as ncome, of nstament payments receved durng those three years
arsng from contracts made pror to 1923 and returned, on the accrua bass,
pror to that year. The grounds of assessment of the addtona ta were (1)
that such nstament payments shoud have been ncuded, n accordance wth
artce 42 of Reguatons 69 under the Revenue ct of 1926 appyng retro-
actvey and (2) that the frm books dd not contan suffcent nformaton
for the computaton of the pror year amounts and, therefore, not adequate
nformaton for computaton of ncome on the nstament sae bass. ppeee
consented to the defcency tems e cept the addtons to ncome due to ncu-
son of the above nstaments. In ebruary, 1928, under threat of enforcement
and under protest, the addtona ta es were pad. In pr, 1928, and after
a reaudt of the frm books, the Department admtted a parta overassessment
but eavng more than 4,000 of the addtona ta Intact. so, there was a
fndng that the necessary nformaton for computaton of frm ncome on the
Instament bass was avaabe.
oth partes agree that the matter here, as beow, s one purey of aw and
each of them rees upon secton 705 of the Revenue ct of 1928. They dffer
as to what the aw queston here s.
The statement of nether accords accuratey wth the facts. The facts
(shown above) are that the frm used the accrua bass up to 1923 that t
changed, by an orgna return, to the nstament bass In 1923 that before
1 The queston presented by ths rase Is stated by appeant to be:
Where a ta payer, who was reguary engaged n the sae of merchandse upon the
Instament pan, kept hs books, made hs returns, and pad hs ta es for a perod of
years upon the accrua bass of computng Income, and where such ta payer changed,
effectve anuary 1, 1923, by a seasonabe orgna return to the Instament method of
computng and returnng ncome may he recover an overpayment of ta es for the years
1023. 1924, or 1925, wthout Incudng n the ta abe Income for those years a ncome
actuay reazed durng the same under the Instament method of computaton
The statement of appeee s:
Where a ta payer was egay assessed n 1927 by wrongfu dsaowance of the
nstament method, nnd pad such assessment under protest, can hs recovery of the
ega e acton be barred by an attempted mposton of the doube ta after the effectve
date of the reef ct (secton 70S, Revenue ct of 1928), whch prohbted the determ-
naton of a defcency upon that bass
Or, more fuy stated :
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157
705
the 1928 ct became effectve, the ta n queston was assessed and was there-
after coected under duress and protest that there were two grounds for ths
addtona assessment one beng the state of the frm accounts (not adequate
for computaton of ncome on nstament bass), and the other beng that the
nstaments receved on pror contracts (durng accrua bass for returns)
shoud be ncuded that after the ct of 1928 became effectve, the Government
abandoned the frst ground and retaned the coectons on the second ground.
The queston s, therefore, where a ta payer changes from an accrua bass
to an nstament bass and unwngy pays, before the ct of 1928, an add-
tona ta , assessed and coected on the two grounds that the account books
are ncompete and that nstaments receved after the change from contracts
returned before the change shoud have been ncuded, and where the Gov-
ernment admts, after the bove ct becomes effectve, that the account books
are compete but retans the coecton on the other ground, does secton 705 of
that ct deny or aow enforcement of refund thereof
efore ths queston can be answered by appcaton of secton 705 to the
facts, that secton must he construed. It s a pecuar pece of egsaton. It
s dffcut to understand uness one has n mnd the stuaton whch occasoned
t and aso the resut upon that stuaton whch Congress ntended ths secton
shoud have. The ogc to be empoyed s purey the ogc of the stuaton.
The stuaton ntended to be affected was one whch had graduay deveoped
In the endeavors to ascertan the true ncome of ta payers sub|ect to ta aton
under the successve cts passed under authorty of the s teenth amendment.
tracng of ths deveopment s necessary to an understandng of the stuaton
upon whch Congress acted through ths secton.
The s teenth amendment empowered Congress to ta ncomes, from what-
ever source derved. There arose dfferences as to what consttuted ncome
wthn the meanng of the amendment. The Supreme Court determned ths
word In the amendment shoud be construed n the ordnary sense ( sner
v. Macomber, 252 U. S., 189, 204 T. D. 3010, C. . 3, 25 ), as used n common
speech (same, page 207, and see aso . S. v. t-bp Lumber Co., 284 U. S.,
1, 3 Ct. D. 420, C. . -2, 356 , and Merchants L. t T. Co. v. Smetanka, 255
U. S., 509, 519 T. D. 3173, C. . 4, 34 ). So construed, t was hed to mean
gan derved from capta, from abor, or from both combned. provded t
be understood to ncude profts ganed through a sae or converson of capta
assets sner v. Macomber, 252 U. S., 189, 207). Ths defnton has been
repeatedy approved (Taft v. oners, 278 U. S., 470, 481 Ct. D. 49, C. .
III-1, 226 owers v. erbauyh- mpre Co.. 271 U. S., 170, 174 T. D. 3881,
C. . -, 199 U. S. v. Phes, 257 U. S., 150, 109 T. D. 3270, C. . 5, 37
Goodrch v. dwards, 255 IT. S.. 527, 535 T. D. 3174. C. . 4, 40 ).
Snce the ta abe perod was a year, the practca probem was the ascertan-
ment of ths gan or profts ganed by the ta payer for each ta abe
year. Into ths probem entered the mportant eement of the record of trans-
actons as shown by the books of account where such fary mrrored the bus-
ness of the ta payer. Obvousy, such books were not concusve but they were,
f compete and we kept, vauabe as evdentary gudes to the rea ncome or
gan. The use of such books ed nto and necesstated consderaton of
systems of accountng used theren. There were and are two accepted methods
of such accountng restng on dfferent bases. One was based on the theory
of actua recepts and dsbursements durng the year. The other caed
Where a ta payer was reguary engaged n the sae of merchandse upon the nsta-
ment pan, kept hs books, made hs returns, and pad hs ta es for a perod of years upon
the accrua bass of computng ncome : and
Where such ta payer changed, effectve anuary 1. 1923, by a seasonabe orgna
return, to the Instament method of computng and returnng Income, and pad hs ta es
for the years 1023, 1024, nnd 1920, computng the same, n accordance wth the regua-
tons then n force, to wt, on the bass of not ncudng n ncome for such years amounts
receved on nccount of saes made pror to anuary 1, 1923, upon whch the fu ta had
theretofore been pad and
Where such ta payer whs n 1028 compeed to pay tn addtona ta assessed by
dsaowng the nsument method entrey: and
Where such dsaowance wag n fact, and was ater conceded to e. wrongfu: and
Where such ta payer fes cam for refund and upon reuudt was aowed the nsta-
ment bass
May the Commssoner prevent the ta payer recoverng the ega e acton, by
assessng a new defcency, after the effectve date of the Revenue ct of 1928, upon the
doube-ta bass, prohbted by subsecton 2 of secton T05
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705.
158
accrua bass was based upon abtes to and aganst the ta payer con-
tracted for durng the year. Snce the former bass deat wth reazatons
t probaby was a truer measure, yet the atter was not unacceptabe. There-
fore, both were recognzed as proper methods to use In ascertanng true
ncome.
owever, the probem aways e sted of ascertanng the true Income and
the admnstratve offcers were, by the statutes, gven broad powers to that
end. n eary dffcuty met by these offcers was to ascertan the true annua
Income of ta payers engaged n seng on deferred nstaments contnung
beyond a ta abe year. If such a ta payer kept hs books and was wng
to return hs ta and pay upon the accrua bass t was obvousy no detrment,
ordnary, to the pubc revenue to aow ths to be done. ut when the ta -
payer nssted upon deang wth reazatons nstead of contract potentates,
a troubesome queston arose as to how the nstaments receved wthn the ta
year shoud be treated. ach Instament was a part payment on a saes
contract whch nvoved a defnte proft but how was ths proft on the entre
sae to be apportoned to the Instaments receved (urng the ta year n
course of performance of the contract Obvousy, Congress mght determne,
wthn consttutona mts, ths matter but t dd not e pressy do so unt the
Revenue ct of 1926, secton 212(d) (44 Stat., 23). :
Whe our mmedate concern s wth the .treatment of receved nstaments
durng the transton perod from accrua bass to nstament bass those
years n the nstament bass perod when payments were receved under con-
tracts made durng the accrua perod yet the defnton and growth of the
nstament bass method are nseparaby bound up wth the treatment of the
above transton perod, therefore, t s more ntegbe to trace the common
hstory. Pror to the ct of 1926. ths stuaton was handed through depart-
menta reguatons, promugated under the broad grant n the severa statutes,
to the admnstratve offcers to ascertan the true ncome. Ths nstament
stuaton was frst deat wth n artce 117 of Reguatons 33 (revsed), pro-
mugated anuary 2, 1918. Ts was foowed by Reguatons 45, artce 42,
promugated pr 17, 1919, whch defned a rue to measure ncome under
nstament saes as beng that proporton of each nstament payment whch
the gross proft to be reazed when the property s pad for bears to the gross
contract prce. The reguatons, n provdng how such ncome may be
ascertaned, ncuded n the tota recepts for the ta abe year payments
receved on account of saes effected n earer years. Ths reguaton thus
estabshed and defned an Instament bass for estmatng ncome (n
addton to the two other recognzed bases) and provded for a change to ths
bass athough t st permtted the accrua bass n nstament stuaton. The
effect of ths reguaton where changes were made from the accrua to ths
nstament bass was, obvousy, doube ta aton as to the Instaments pad
after the change on contracts made before the change. Ths reguaton was
repeated by a promugaton of December 29, 1919. Ths stuaton resuted n
Treasury Decson 3082 C. . 3, 463 , promugated October 20, 1920, whch
modfed the reguaton to the effect that where the entre proft from nsta-
ment saes has beon ncuded n gross ncome for the year n whch the sae
was made (accrua bass), no part of the nstament payments receved sub-
sequenty on account of such prevous saes sha agan be sub|ect to ta
for the year or years n whch receved. In compance wth ths decson,
artce 42 of Reguatons 45 was atered to e cude nstead of ncude such
nstaments receved durng the transton perod (1920 edton, promugated
anuary 28, 1921).
Ths stuaton contnued unt eary n 1925, when there came before the
oard of Ta ppeas, for the frst tme, the queston of the vadty of ascer-
tanng ncome n accordance wth an nstament bass. In the ppea of . .
Todd (1 . T. ., 762), the oard hed that the Revenue cts had recognzed no
such bass and that t was not proper to use such. In that opnon, the oard
severey crtczed the n|ustce to other ta payers n permttng the e cuson,
durng the transton perod, of nstaments receved theren from contracts
made pror thereto durng the accrua perod. ecause of ths and other
decsons,1 sectons 212(d) and 1208 appeared n the Revenue ct of 1926
. . Graves Co. (t . T. ., 859), oover- ond Co. (1 . T. ., 929), Chares .
oman (1 . T. .. G28). ft undred and fty West fnd ve Co. (2 . T. ., 958),
. . Denns (2 . T. ., 977), Maurce . Weed (2 . T. ., 539).
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159
705.
(44 Stat., 23 and 130). Secton 212(d) provded thut persons reguary deang
In, seng or dsposng of persona property on the nstament pan mght
return as ncome for a ta year that proporton of the nstament payments
actuay receved n that year whch the totn proft reazed or to be reazed
when the payment s competed, bears to the tota contract prce, and, as to
certan casua saes provded they mght be returned on the bass and n the
manner above prescrbed. Secton 1208 made secton 212(d) retroactve
begnnng wth ta es under the ct of 1916 and provded, sub|ect to statutory
perods of mtatons, that any e cess mposed theretofore shoud be credted
or refunded as provded n secton 284 of the ct. Thus, secton 212(d)
setted the proprety of usng the nstament bass n ascertanng ncome and
paced that bass on nstament payments receved durng the ta year and
ths was made retroactve as to a ta payers not barred by the approprate
statute of mtaton. Ths ct contaned no e pressed provson deang wth
the transton perod. owever, the Department construed the statute (T. D.
3821 C. . -2, 77 , promugated ugust 27, 1926) to mean that nstaments
receved durng the transton perod on contract made pror to the change
shoud not be e cuded and ths was foowed by Reguatons 09, artce 42
(promugated ugust 28, 1926), to the same effect. Ths poston was uphed
by the decson of the oard of Ta ppeas, on uy 26, 1927, n ppea of
um s, Inc. (7 . T. ., 737), and, aso, n Warren Rey v. Commssoner
(7 . T. ., 1327), on September 7, 1927. That these constructons of the ct
were n accordance wth the Intenton of Congress s ceary shown by the
commttee of conference report (S ty-nnth Congress, frst sesson, . Rept.
356, page 59), where, n speakng of the retroactve feature, t s sad: In
the appcaton of ths provson t s ntended that the nstament provsons
of Reguatons 45, promugated on December 29, 1919, w be substantay
foowed n settng a cases under pror cts and under ths b.
The Department construed the retroactve provson of the ct to permt
amended returns to be fed by ta payers (not barred by mtaton) n respect
to ta es of pror years begnnng wth those under the Revenue ct of 1916, and
numerous such amended returns were fed. Ths was the confused and
uncertan stuaton concernng whch Congress egsated n the Revenue ct
of 1928.
That ct treated nstament saes qute fuy. s to the future, t repeated
(n so far as here nvoved) the provsons of secton 212(d) of the ct of 1926
(secton 44 (a) and (b), 45 Stat., 805, U. S. C. Tte 26, secton 2044). In the
same secton (44(c)) t deat e pressy wth the perod of transton from
accrua to nstament bass and provded that n computng hs ncome for
the year of change or any subsequent year, amounts actuay receved durng
any such year on account of saes or other dspostons of property made n
any pror year sha not be e cuded.
Recognzng the e asperatng confuson and uncertanty (reveaed In the
above outne) whch had theretofore and then e sted as to Ihe nstament
stuaton .the ct, n secton 705 (44 Stat., 881, U. S. C, Tte 26, secton 2705),
deat therewth retroactvey. The cenry reveaed domnant purpose of the
secton Is to compose and termnate ths confuson and uncertanty n so far as
It then e sted e cept as to a narrowy defned cass. Regardng the ct of
1926 as havng approved the method of Incudng payments of nstaments
Sec. 70S. Instament saet croactve.
(a) If any tn payer by nn orgna return made pror to ebruary 26, 1026. chanced
the method of reportng hs net ncome for the ta ne year 1924 or any pror ta abe
Tear to the Instament bass, then, If hs Income for such year Is propery to be computed
on the Instament bass
(1) No refund or credt of Income, war-profts, or e cess-profts ta es for the year In
respect of whch the change Is made or any subsequent year sha be made or aowed
uness the ta payer has overpad hs ta es for such year, computed by Incudng, In com-
putng ncome, amounts receved durng such year on account of saes or other dspos-
tons of property made In any pror year and
(2) No defcency sha be determned or found In respect of any such ta es uness the
ta payer has underpad hs ta es for such year, computed by e cudng, n computng
ncome, amounts receved durng such year on account of saes or other dspostons or
property made n any year pror to the year n respect of whch the change was made.
(b) Nothng In ths secton sha be construed as n any manner modfyng sectons
607, COS, 609, or 610 of ts ct reatng to the effect of the runnng of the statute of
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705.
160
receved durng the transton years under contracts pror thereto (Seventeth
Congress, frst sesson, . Doc. 139, page 12), ths sc:on s mted to returns
fed pror to the effectve date ( ebruary 20, 15)26) of that ct. It s deang
wth those years when there were reguatons contradctory upon ths matter.
In so deang, It has In mnd that durng some years reguatons permtted
e cuson of such nstaments whe durng others they requred ncuson
and that ta payers made returns n the ght of the reguaton n force at the
tme. Congress ntends to protect ths cuss of ta payers and ths aone, there-
fore, t confnes the secton to those who have fed orgna returns. It
further mts ths cass to those who made the change to the nstament bass
pror to the ta year of 1925. further mt was provsons (contaned n
sectons 607-610, both ncusve) as to mtatons wthn whch refunds,
credts and recoveres generay coud be had. nother mportant mt was
that no refund or credt coud be had uness the ta payer had overpad hs
ta es for such year, computed by ncudng, In computng ncome, amounts
receved durng such year on account of saes or other dspostons of property
made In any pror year, and no defcency assessment was aowabe uness
the ta payer had underpad through e cudng such recepts. Consderng
these mtatons, a concse statement of the cass permtted to recover under
ts secton s as foows. The ony nstament deaer who coud have a refund
or credt for overpayment was one who had changed from the accrua bass
by an orgna return fed pror to ebruary 26, 1926, for any ta year pror
to 1925, and where such overpayment for whch recovery was sought resuted
from a computaton of ncome ncudng nstaments receved from contracts
made n pror years. Ths ceary meant that no refund or credt was to be
aowed arsng from ncuson of such nstament payment recepts after the
change to the Instament bass. On the other hand, the Government was
dened the rght to assess addtona ta es for e cuson of such recepts. In
short, the purpose was to eave the ta payer and the Government bound by
the bass actuay used and upon whch payments had been actuay made.
Our ne t step s to appy ths rue to the present facts. The change here
was made by an orgna return, fed for the ta year 1923, before ebruary
26, 1920, and the returns for 1924 and 1925 were aso orgna returns.
of these returns e cuded the receved nstament payments under contracts
In the report of the conference commttee ( . ept. 1882, Seventeth Congress, frst
sesson, pages 24-25) It was stated :
The ouse b contaned no provs#n of retroactve appcaton to ta payers chang-
ng from the accrua to the nstament bass for reportng ncome for tnz purposes.
The 1919 reguatons of the Treasury prescrbed In such cases the so-caed doube-ta
rue. The 1920 reguatons, however, abandoned ths rue. In 1925 the oard of Ta
ppeas hed the 1920 reguatons Invad upon the ground that they dd not accuratey
refect the ncome of the ta payer durng the transton perod. Secton 1208 of the
Revenue ct of 19U 0 wus a compromse provson wrtng Into the aw for the frst tme
a statutory recognton of the nstament basts, and adoptng the doube-ta rue of the
1919 reguatons. In order to reeve ta payers who have not yet pad the defcences
resutng from the appcaton of the doube-ta rue (n accordance wth secton 1208
the Senate amendment provdes that In such cases the amount of the defcency w be
computed n accordance wth the snge-ta rue and nasmuch as the fnanca status of
ta payers who have aready pad an amount suffcent to cover ther ta abty when
computed In accordance wth the doube-ta rue, w not be |eopardsed, the Senate
amendment provdes that the doube-ta rue sha be apped n computng the rght to a
refund or credt. The Senate amendment was made appcabe to any ta payer who fed
an orgna return or an amended return pror to the effectve date of the Revenue ct
of 192 , and the ta abe year 1924 or any pror ta abe year.
The ouse recedes wth an- amendment denyng reef to a ta payer who, for e ampe.
In 1922, fed an amended return for 1918, 1919. and 1920, shftng from the accrua to Ue
nstament bass. Ths ta payer, however, w In- granted reef for the year In whch
he fed an orgna return and for the years foowng.
In the dscusson of ths secton n the Senate occurs the foowng (May 15, 1928,
S ty-nnth Congressona Record, part 8, pages 8697-S699) :
Mr. ekd of Pennsyvana. In every case In whch the ta payer changed, It Is probabe
he dd It because he thought be was gong to get a dmnuton In hs ta es.
Mr. Carawat. Dd t hare that effect
Mr. Reed of Pennsyvana. In many cases t dd. We have put a chart on the wa
showng how t dd have that effect.
Mr. Caraway. What does the amendment now accompsh
Mr. Reed of Pennsyvana. The amendment substantay aows the status quo to
reman.
Mr. Caraway. In other words, he got t and keeps It
Mr. Reed of Pennsyvana. Those who got the advnntTge keep t. but new men can
not come In and cam smar advantages, so that the system has to stop now.

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161 705
of pror years. Ths was n accordance wth the reguatons then In force.
The ta es were pad n accordance wth such returns. ad the matter stopped
here ths ta payer woud not be here companng and the Government woud,
under secton 705, be barred from decarng a defcency because of ths method
of ascertanng ncome. ut the matter went further. Thereafter, the Govern-
ment assessed addtona ta es based upon the faure to ncude such recepts
n the ncome for those years. It s true that one of the reasons gven was
that the accounts of the ta payer were not suffcent for ascertanment of
ncome on ths bass but that does not hep the ta payer snce the other ground
(that such recepts shoud have been Incuded) was aso stated and t does
not hep the Government snce t concedes error theren n a matter of fact
not dsputed here nor n the tra court. To both grounds, the ta payer ds-
agreed and never conceded. The stuaton before us and the tra court s not
affected by ths abandoned reason for addtona assessment. The payment
was made under duress and protest.
The stuaton thus presented narrows down to the foowng: The ta payer
woud have been protected, under secton 705, had he not made payment of
the addtona ta secton 705 woud have prevented recovery (refund or
credt) of that payment had It been vountary made. Can there be such
recovery where the payment was entrey Invountary beng under duress and
protest
We are constraned to determne that there can be no recovery. We can not
say that ths e acted ta was ega. The change n return bass was entrey
vountary on the part of the ta payer. The opnon n the ppea of . .
Todd (1 . T. ., 762) reveas the possbtes of ta evason f recepts durng
the transton perod from contracts made pror thereto are e cuded. Con-
gress has e pressy adopted the method of Incuson of such recepts (Revenue
ct 1928), not to menton earer acton by the Department and the effect of
the Revenue ct of 1926. In fact, the e acton of the addtona ta , upon
the bass of ncuson of such recepts, seems entrey proper. Ths coecton
beng of a ta egay owng there can be no recovery thereof (Western Unon
Te. Co. v. Gotteb, 190 U. S., 412, 427) uness there s a rght to recover for
Mr. Reed of Pennsyvana. The proposed amendment offered by tbe Senator from
Utah means that the stuaton Is to reman as t s that f the ta payer tres to get a
refund he has to get t on the constructon of the aw whch Is most adverse to hm.
Whe f the Treasury chooses to pursue hm, then that aw whch Is most adverse to It
w obtan. It s uttery Indefensbe ogcay.
Mr. Caraway. I thnk so mysef.
Mr. Reed of Pennsyvana. nd yet ether of the other concusons s ndefensbe.
Mr. D. What w happen If we do not ncude ths provson
Mr. Reed of Pennsyvana. Then we have to go to one aternatve or the other. Wo
hare to say that a the accounts have got to be opened up for a settement on the
accrua bass or ese we have to make refunds to everybody who dd not account on the
Instament pan. oth of those are wrong.
4
Mr. Reed of Mssour. Mr. Presdent, I want to ask the Senator from Pennsyvana
a queston to see If I correcty understood hm. I understood the Senator to say that If a
cam for a refund was made by a ta payer, the rue of constructon to be adopted woud
be the one most strongy aganst the appcant.
Mr. Reed of Pennsyvana. That Is correct.
Mr. Reed of Mssour. If the Treasury Department shoud undertake to coect the
ta es, then the rue of constructon woud be most strongy aganst the Treasury
Mr. Reed of Pennsyvana. That s correct. Logcay that s Indefensbe, but what
It amounts to n substance s sayng that the ta payers who In the past have fed ther
returns and pad ther ta es on ether of these reguatons sha be aowed to rest at that.
They sha not get any advantage by changng retroactvey ther method of accountng,
nor sha the Treasury be beard to say, What you dd n the past was wrong. Whe
that can not be defended ogcay, t s a compromse, apparenty satsfactory to the
Treasury and to ths group of ta payers, between two aternatves, each of whch seems
Indefensbe. We can not aow them to come back and fe new amended returns on the
bass that pays the owest possbe ta . That s not far to the great mass of ta payers
who have pad ther ta es and et the thng e. We can not, on the other band, n
farness overrde the reguatons retroactvey whch were n force part of the tme and say
that the man who fed a return n the sprng of 1921, under perfecty good reguatons
then In effect, sha be assessed an addtona ta because be dd everythng that the aw
then seemed to requre. ence ths compromse.
Mr. Reed of Mssour. The effect of the compromse, then, If I understand the Senator,
woud seem to be that f a man makes an appcaton for a return of ta , the rue whch
was hardest aganst hm w be apped.
Mr. Reed of Pennsyvana. That s true.
Mr. Reed of Mssour. Whe, If the Treasury makes appcaton for addtona ta es,
the rue whch was hardest aganst t w be apped. That woud ook ke no one woud
get anythng.
Mr. Reed of Pennsyvana. That t what ce hope uy resut. Itacs supped.
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705.
162
Irreguartes (If ths was an Irreguarty) gven by statute. ppeee contends
that secton 705 affords a remedy. Whe there s much of persuasveness In
the abe argument for appeee and n the stuaton tsef yet secton 705 was
Intended to compose and set at rest a stuaton. It set forth the condton
and the ony condton upon whch such a ta , once pad, coud be refunded
or credted. It made no dstncton between vountary or nvountary pay-
ments. When we consder the stuaton deat wth by ths secton and the
domnant purpose of the enactment, wo shoud not dsturb the certanty ntendod
by Congress by a constructon whch w make e ceptons where none are
e pressed nor ntended.
The |udgment shoud be reversed and the case remanded for a new tra.
Secton 705.
revenue act of 1928.
Orgna returns fed pror to ebruary 26, 1926, changng method
of reportng, for 1924 or any pror years, to the nstament bass.
(See Ct. D. 597, page 424.)
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163 2, rt. 1502.
INCOM T RULINGS. P RT III.
R NU CT O 1926 ND PRIOR CTS
TITL I. G N R L D INITIONS.
S CTION 2. G N R L D INITIONS.
rtce 1502: ssocaton. I-40-5745
Ct. D. 575
INCOM T R NU CTS O 1024 ND 1926 D CISION O COURT.
1. Trust ssocaton Defnton Organzaton of Devsees.
n organzaton of devsees n quas corporate form operatng
under a decaraton of trust, whose purposes as decared n the
trust nstrument are the acquston, management, mprovement
and dsposton of the trust property and a such other property
as may be acqured from tme to tme, and whch by the acton of
the trustees manages and operates the property n ther charge as
a busness wth the purpose to accumuate a proft by the use of
It, s an assocaton wthn the meanng of secton 2(a) of the
Revenue cts of 1924 and 1926.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (22 . T. ., 564) Is
affrmed.
Unted States Crcut Court of ppeas for the Nnth Crcut.
oyd M. Ws, orence oand arnsworth, and rank . Yerney, Trustee ,
pettoners, v. Commssoner of Interna Revenue, respondent.
Proceedng to revew an order of the Unted States oard of Ta ppeas.
efore Wbur and Sawtee, Crcut udges, and ames, Dstrct udge.
May 2, 1932.
opnon.
ames, Dstrct udge: The oard of Ta ppeas confrmed the assess-
ment made by the Commssoner of Interna Revenue aganst pettoners of
ncome ta amounts for the years 1924 and 1925 n the respectve sums of
3,052.24 and 5,672.65. Pettoners contend that the trust beng admnstered
by them was not an assocaton wthn the meanng of the revenue aw,
and that the ncome accrung thereto was not sub|ect to be ta ed.
Pettoners are trustees under an nstrument e ecuted by devsees named n
the w of ohn . roadbent, deceased, who ded at ose, Idaho, n the
year 1922. Of the property of roadbent s estate 12 persons receved equa
undvded nterests. Ths property conssted of 52 parces of rea estate, ap-
prased at the tme of dstrbuton at a vaue of 1,529,500. There were aso
three mortgages, two for the amount of 35,000 each and one for the amount
of 6,500. The rea estate was argey mproved by budngs there was an
offce budng contanng 100 offce rooms and 8 store rooms aso varous other
budngs, a rented for commerca purposes, such as restaurants, poo has,
a bank, etc. The devsees, beevng that the property coud not be equtaby
dvded, notwthstandng that t was the desre of each to forthwth receve
hs or her aotted share, and fang to fnd mmedate purchasers at what
they consdered far vaues, concuded to poo ther nterests and form a trust.
Ths they proceeded to do, and trustees were apponted to take over the
property. It was at frst provded that the trust shoud contnue for a perod
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52, rt. 1502.
164
of two years, 1. e., from December 18, 1923, to December 31, 1925. On No-
vember 10, 1925, an agreement e tendng the trust to December 31, 1950, was
entered nto by the benefcares.
The trust agreement was very broad n those provsons whch conferred
power on the trustees. The purposes decared n the trust nstrument were,
generay, the acquston, management, mprovement and dsposton of the
trust property and a such other property as may be acqured from tme to tme
for the beneft of the benefcares hereunder, and a dvson of the ncome,
proceeds and avas of sad trust property among the certfcate hoders as here-
nafter provded. Itac s added.
Others of the very numerous provsons were approprate. In the power gven
to the trustees, to enabe the atter to fuy carry out the purposes decared.
or e ampe, the trustees had dscreton to dstrbute funds to the benefcares
n such amounts as they chose durng the trust term. They were authorzed to
borrow money to use capta or ncome n the mprovement of the property or
In the acquston of other property. Certfcates were provded to be ssued,
representng the severa benefca nterests, whch certfcates were made freey
transferabe at the w of the hoder. The power to f vacances caused by
the retrement of any trustee was gven e cusvey to the remanng trustees.
The terms of the trust agreement coud ony be changed wth the consent of
the trustees, but the benefcares aone had power to e tend the fe of the
trust.
The coecton of the ncome ta from ths trust s |ustfed by the Comms-
soner under the cam that the trust organzaton, n form and n ts practce,
s an assocaton as that term s to be understood where used n the Revenue
ct of 1924, secton 2 (43 Stat, 234). Smpy stated the queston s, dd the
trustees manage and operate the property n ther charge as a busness, wth
the purpose to accumuate a proft by the use of t, or was ther soe purpose,
ntended and pursued, to dspose of t as rapdy as possbe, market cond-
tons consdered, and dvde the proceeds among the benefcares. s a qu-
datng trust purey the ncome woud not be ta abe as a busness venture
the ncome woud be ta abe. The dstncton s made cear n the cases
Secht v. Maey (265 U. S., 144 T. D. 3595, C. . III-, 489 ) ar v. Wson
Syndcate Trust (39 ed. (2d), 43, C. C. . 5) Commssoner v. therton (50
ed. (2d), 740, C. C. . 9) and whether benefcares are eft much or tte
contro s mmatera (Ltte our O d as Co. v. Leweyn, 35 ed. (2d), 149,
C. C. . 3 Ct. D. 118, C. . III-2, 264 Whte v. ornbower, 27 ed. (2d),
777, C. C. . 1).
The queston s to be determned from the facts showng what the trustees dd
n ther handng of the property. The terms of the trust nstrument are not
concusve, but they ndcate the purpose n the mnds of the benefcares, and
are of sgnfcance when t s observed that the trustees assumed much of the
power conferred upon them. Durng the year 1924, the trustees coected from
rents and other sources 123,302.70, and e pended 81,500. Of the tota re-
cepts, 188,804.44 represented rents coected. Three parces of rea estate were
sod durng the same year for the aggregate prce of 12,000. nd on the two
mortgages 70,000 was coected. roadbent, the testator, had sod 50 feet
of the ot covered by the offce budng, and the budng under the two owner-
shps was operated thereafter by the use of common eevators and common
heatng factes. The trustees, n 1924, arranged to acqure back the 50 feet
by e changng for t a corner ot across the street. They pad a cash dfference
of 15,000. s a part of the e change transacton they agreed to tear down a
row of shacks on property owned by the trust, and ocated Immedatey n
the rear of the ot they renqushed they agreed to erect a new budng on
ths property, whch they dd at a cost of 55,000. No other rea property was
acqured so far as the evdence showed. No saes of property were made n
the year 1925. The tota saes to une, 1930 (the trust had then operated for
more than s years), amounted to 79,000. The certfcate hoders were reg-
uary pad ncome amounts, many m monthy nstaments. Durng the years
1924 and 1925, tota dsbursements to the benefcares amounted to 28 200 for
each year. reguar offce wth a manager n charge was at a tmes man-
taned.
In ther handng of the property, the trustees apparenty used ther best
efforts to ncrease ncome and accrue profts. The e change of property as
noted, and the erecton of a new budng at a consderabe cost, was consdered
wthout queston as a proftabe nvestment. udged by ther course of acton
as shown, t woud be reasonabe to assume that the trustees woud contnue
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165
201, rt. 1541.
to dea wth the property In ke manner as ong as the trust remaned ave.
Such acts, as enumerated, gave to the trust operatons the character of an
actve busness enterprse. (What consttutes the dong of busness, nt v.
Stone Tracy Co., 220 U. S., at page 171.) They went beyond transactons car-
red on for the snge purpose of effectng a qudaton of assets. nd for that
reason the coecton of an ncome ta was authorzed under the terms of the
Revenue ct.
The order of the oard of Ta ppeas s affrmed.
TITL II. INCOM T .
P RT L G N R L PRO ISIONS.
S CTION 201. DISTRI UTIONS Y CORPOR TIONS.
rtce 1541: Dvdends. I-30-5562
G. C. M. 10699
R NU CT O 1926.
In the nstant case the dstrbutng corporaton had at the tme
of the dstrbuton suffcent earnngs or profts accumuated after
ebruary 28, 1913, to pay the dvdend dstrbuted and the entre
payment shoud be treated as an ordnary dvdend n the hands
of the recpent.
The M Company, a foregn corporaton (herenafter referred to
as the Canadan corporaton), n March, 1927, pad a dvdend to
the N Company (herenafter referred to as the mercan corpora-
ton) n the amount of 20a: doars. The mercan corporaton had,
at the begnnng of the year 1927, undvded earnngs and profts
accumuated after ebruary 28, 1913, n the amount of 8a doars.
In pr, 1927, the mercan corporaton decared and pad a
dvdend to ts stockhoders n the amount of 18a doars. owned
one-thrd of the stock n the mercan corporaton and receved
one-thrd of ths dvdend, or 6a: doars.
The ta payer, , reported ths dstrbuton n hs ndvdua n-
come ta return. e contends, however, that doars of the 6a
doars dstrbuted to hm by the mercan corporaton were not
avaabe for dstrbuton as an ordnary dvdend by that corpora-
ton. s cam s based upon the theory that the entre year s
earnngs of the mercan corporaton must be prorated to the dv-
dend dstrbuton date n order to determne the source of the
dstrbuton.
Pro rata apportonment of earnngs to dvdend dstrbuton dates
does not appear to have any specfc statutory orgn. The eadng
cases on the sub|ect are dwards v. Dougas (269 U. S., 204, T. D.
3797, C. . -, 158) and Mason v. Routzahn (275 U. S., 175, T. D.
4131, C. . TI-1, 194). These cases ceary stand for the
proposton that n the absence of a showng of the amount ava-
abe for dvdend purposes the pro rata rue shoud be apped. The
ta payer admts the pro rata rue does not appy f there s a
showng of the amount avaabe for dvdend dstrbuton on a
gven date, but nssts that there s no showng n the nstant case.
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201, rt. 1541.
1G6
Thus, the rea queston presented s what consttutes a showng
of the amount avaabe for dvdend dstrbuton on a gven date.
Under the ta payer s theory t s necessary, n order to consttute a
showng so as to determne the amount avaabe for dvdends as
of the date of dstrbuton, for the books of the company to be cosed
or baanced on that date. Secton 201(a) of the Revenue ct of
1926 provdes that the term dvdend means any dstrbuton
made by a corporaton to ts sharehoders, whether n money or n
other property, out of ts earnngs or profts accumuated after
ebruary 28, 1913. Secton 201(b) of the Revenue ct of 1926
provdes that every dstrbuton s made out of earnngs or profts
to the e tent thereof, and from the most recenty accumuated
earnngs or profts.
t the begnnng of the year 1927 the mercan corporaton had
earnngs accumuated after ebruary 28, 1913, n the amount of
8 doars. Ths amount, pus the 20a doars dvdend receved n
March, 1927, from the Canadan corporaton, equas 28a doars.
ppro matey one month after the dvdend was receved from the
Canadan corporaton a dvdend was decared by the mercan
corporaton wthn the purvew of secton 201(b), supra.
The ta payer does not cam that the dstrbuton was out of
earnngs accumuated pror to March 1, 1913, nor show the ds-
trbuton as beng a qudaton of the assets of the corporaton. e
merey contends that the pro rata rue of determnng the amount
avaabe for dvdends shoud be apped, and that under that rue
there were not suffcent earnngs on hand to pay the entre amount
of dvdends. No evdence s submtted to show that the resouton
whch authorzed the dstrbuton treated such dstrbuton as other
than an ordnary dvdend. The evdence shows concusvey that
the earnngs of the mercan corporaton on hand at the begnnng
of the year 1927, pus the dvdend receved n March, 1927, from the
Canadan corporaton, were far greater than the amount of the
dvdend decared. Under dwards v. Dougas, supra, and Mason
v. Rovtzahn, supra, the pro rata rue shoud be apped n the
absence of a showng reatve to the amount of earnngs avaabe
for payment of dvdends. Wth respect to the ta payer s conten-
ton that doars of the 6a doars shoud be treated other than as
an ordnary dvdend, he has faed to show that on the dvdend ds-
trbuton date the mercan corporaton actuay dd not have suf-
fcent earnngs or profts to pay the dvdend.
The facts n ths case actuay show the mercan corporaton to
have had avaabe for dstrbuton as an ordnary dvdend n
pr, 1927, 28a doars, and n the absence of evdence as respects
the corporate osses or how ths money was spent, t foows that ths
consttutes a showng wthn the meanng of the rue ad down n
dwards v. Dougas, supra, and Mason v. Routzahn, supra.
In vew of the foregong, ths offce s of the opnon that the
mercan corporaton had on hand n pr, 1927, suffcent earnngs
or profts accumuated after ebruary 28, 1913, to pay the dvdend
of 18a doars. It therefore foows that the entre 6a doars
receved by shoud be treated as an ordnary dvdend.
C. M. Charest,
Genera Oounse, ureau of Interna Revenue.
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167
201, rt. 1541
bttce 1541: Dvdends.
I-32-5595
Ct. D. 530
INCOM T R NU CT O 1021 D CISION O COURT.
1. Dvdends Loans Wthdrawas by Soe Stockhoder
Where there s no evdence that a stockhoder, ownng a the
shares of a corporaton e cept quafyng shares, ntended to repay
hs wthdrawas from the corporaton for whch he gves to the
corporaton no notes or other evdences of ndebtedness, pays no
nterest and s charged wth none, the wthdrawas to the e tent
that they are from earnngs or profts of the corporaton accumu-
ated snce ebruary 28, 1913, are dvdends to such e tent wthn
the meanng of secton 201(a) of the Revenue ct of 1921, even
though the wthdrawas are charged aganst hm on the books of
the corporaton.
2. Same.
Where a corporaton at the tme dstrbutons are made n 1921
to a stockhoder ownng a the shares of the corporaton e cept
quafyng shares has on hand earnngs or profts accumuated snce
ebruary 28, 1913, the dstrbutons made by t are made out of
such earnngs or profts to the e tent thereof and are dvdends to
such e tent wthn the meanng of secton 201(a) of the Revenue
ct of 1921, athough the dstrbutons are made wthn the frst
60 days of the corporaton s ta abe year and are n e cess of the
earnngs or profts of the corporaton on hand at the end of 1920
and athough there s no forma decaraton of a dvdend and the
owners of the quafyng shares do not partcpate n the dstr-
butons. Subdvson (f) of that secton does not affect the ta -
abty of such dstrbutons after ther recept by a dstrbutee.
3. Decson ffrmed.
The decson of the oard of Ta ppeas (13 . T. ., 729) a
affrmed.
L. . Chrstopher, appeant, v. Davd urnet, Commssoner of Interna
Revenue, appeee.
efore Mabtn, Chef ustce, and Robb, tz, and Gboneb, ssocate ustces.
Robb, ssocate ustce: ppea from a fna decson of the oard of Ta
ppeas (13 . T. ., 729).
The matera facts are as foows: ppeant, L. . Chrstopher, entered
the whoesae and reta Ice cream, candy, and confectonery busness In
1887 n Los ngees, Caf., wth a capta of appro matey 50,000. The
busness was successfu. Pror to 1914 appeant had acqured rea estate and
but thereon an e tensve pant, and n that year he organzed the L. .
Chrstopher Co. of Caforna, under the aws of that State, wth a capta
stock of 400,300. To that company he transferred a the assets of the
busness, ncudng the good w, n consderaton of a ts capta stock,
e cept a few quafyng shares. ppeant was at a tmes presdent of the
Caforna company and owner of a ts stock, e cept the quafyng shares
and certato sma bocks of stock hed by empoyees, whch were taken over by
appeant pror to the sae herenafter referred to.
rom the date of ts ncorporaton down to and ncudng the year 1924, the
Caforna company made no forma decaraton of dvdends, but durng that
perod appeant from tme to tme wthdrew from the earnngs of the
Caforna company money and other personaty. Those amounts were
charged aganst hm on the books of the Caforna company.
100003 33 12
Court of ppeas of the Dstrct of Coumba.
ppea from the oard of Ta ppeas.
December 14, 1931.
OPINION.
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201, rt. 1541.
168
In ebruary, 1921, the L. . Chrstopher Co. of Deaware waa organzed
under the aws of Deaware, and thereupon acqured a the persona property
of the Caforna company. The consderaton pad by the Deaware company
to the Caforna company under the b of sae was 125,000 cash and 1:230
shares of ts 7 per cent preferred stock of the par vaue of 100 each.
ppeant was presdent of both corporatons. The cash was pad through
a check of the Deaware company, payabe to the Caforna company. Ths
check was ndorsed by the Caforna company to appeant, who deposted t
n the bank n hs persona account. Durng 1921 the Deaware company
retred 25,000 par vaue of ts preferred stock for the sum of 25,000. The
check representng ths payment was payabe to and receved by the Caforna
company, and by t ndorsed to appeant, who deposted t n the bank to ha
persona account.
Pror to the sae to the Deaware company, the Caforna company had
paced orders for goods at a sae prce of 12,093.46, and had pad ths snm to
the seers. The goods were receved subsequent to the sae and turned over
to the Deaware company, who thereupon pad to the Caforna company the
cost of the goods. The Caforna company dd not dssove after the sae of
part of ts assets to the Deaware company, and s now In e stence, hodng
and controng ts remanng assets.
The Commssoner of Interna Revenue hed that the amounts receved by
appeant n 1921 (aggregatng 158,528.14) were dvdends and ta abe as
such. The oard affrmed ths fndng.
Under secton 201(a) of the Revenue ct of 1921 (ch. 136, 42 Stat., 227),
the term dvdend means any dstrbuton made by a corporaton to ts share-
hoders or members, whether n cash or n other property, out of ts earnngs
or profts accumuated snce ebruary 28, 1913, . The oard has
found that appeant domnated and controed these corporatons and that,
athough hs saary was 1,000 per month, he wthdrew no part of t, but dd
wthdraw money whenever It suted hm to do so that the Caforna com-
pany from the date of ts organzaton to and ncudng the year 1921 (a perod
of 7 years) made no forma decaraton of a snge dvdend. Durng a that
tme appeant was the owner of practcay a the capta stock of the Ca-
forna company. It was a 1-man concern.
It s setted aw that no forma dvdend decaraton s necessary where sub-
stantay a the stock s owned by a snge ndvdua. ( thcrton v. eaman,
264 ., 878 Chattanooga Sav. ank v. recer, 17 . (2d), 79, certorar dened,
274 U S., 751 T. D. 3986, C. . I-1, 161 .) In the case ast cted, two stock-
hoders ownng a the capta stock wthdrew funds from the busness wthout
corporate acton or authorty, chargng the wthdrawas to themseves on the
books of the corporaton. It was hed that such wthdrawas consttuted ta abe
dvdends and not oan , as contended by the ta payer. In the present case
appeant e ecuted no notes or evdences of ndebtedness pad no nterest and
none was charged aganst hm and we agree wth the oard that snce there
s no evdence n the record whch ndcates that L. . Chrstopher ntended to
repay these wthdrawas, the mere entres made on the books of charges aganst
hm can not convert nto an asset what was n fact a dstrbuton.
ppeant suggests that the dstrbuton was not a dvdend because the ev-
dence fas to show that the hoders of the quafyng shares partcpated
theren. ssumng that the benefca nterest of the quafyng shares was
not n appeant, the owners of such shares are not companng nor coud
they, havng acquesced n hs management and contro of the corporaton for
years. (Ratcff v. Cendenn, 232 ., 61 en v. Wson, 28 ., 677. See aso
adey v. Commssoner of Interna Revenue, 59 pp. D. C, 139, 36 . (2d),
543 Ct. D. 153, C. . I -1, 266 .) Certany appeant s not n a poston to
compan.
It s contended that the oard erred n fndng that the Item of 12,093.40
was a dvdend. On ths pont the oard sad: The pettoner further fanty
contends that he shoud not be charged wth the tem of 12,093.46. The bur-
den rests upon pettoner to overcome the fndngs of respondent (Comms-
soner) on ths pont. though he testfed at the hearng, he gave no test-
mony wth respect to ths tem . On ths state of the record, the
presumpton n favor of the correctness of the concusons beow has not
been overcome.
It further Is contended that the oard erred n hodng that appeant
receved a ta abe dvdend n the amount stated from the Caforna company,
when under the provsons of secton 201(f) of the Revenue ct of 1921 no
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169
201, rt. 1541.
such amount was avaabe to sad company for the payment of dvdends.
ppeant argues that snce he receved the buk of hs wthdrawas wthn
the frst 60 days of 1921, he can not n vew of secton 201(f) of the 1921 ct
be charged wth dvdends n e cess of the amount of the undstrbuted earnngs
of the corporaton as of anuary 1, 1921. Such a constructon of secton 201(f),
brngs that secton nto confct wth secton 201(b).
Secton 201(b) reads: or the purposes of ths ct every dstrbuton s
made out of earnngs or profts, and from the most recenty accumuated earn-
ngs or profts, to the e tent of such earnngs or profts accumuated snce
ebruary 28, 1913 . Itac ours.
It has been hed that ths secton means that so ong as a corporaton has
on hand earnngs or profts accumuated snce ebruary 28, 1913, and avaabe
for dstrbuton, every dstrbuton made to stockhoders Is made from the most
recenty accumuated earnngs or profts, and n effect the statute creates a
presumpton that the dstrbutons were so made. (McCaughn v. McCahan,
39 . (2d), 3 Leand v. Commssoner of Interna Revenue, 50 . (2d), 623
Ct. D. 387, C. . -2, 300 .)
Secton 201(f) provdes that any dstrbuton made durng the frst 60 days
of any ta abe year sha be deemed to have been made from earnngs or profts
accumuated durng precedng ta abe years . Ths subdvson sha
not be n effect after December 31, 1921.
Ths subdvson frst found ts way nto the ta ng cts as secton 201(e)
of the Revenue ct of 1918 ( ct of ebruary 24, 1919, ch. 18, 40 Stat., 1057),
and was reenacted as secton 201(f) n the 1921 ct. ust why t was enacted
does not appear. It s, however, obvous that the apparent confct between ths
subdvson and subdvson (b) of secton 201 requred eucdaton by the
admnstratve offcers.
Reguatons 45, artce 1542, under the 1918 ct, was promugated, n whch
secton 201 was Interpreted as foows:
Presumpton as to source of dstrbuton. In the case of a corporaton
other than a persona servce corporaton any dstrbuton to stockhoders a
deemed to have been made so far as possbe (c) If durng the frst
GO days of a ta abe year, from earnngs or profts accumuated durng pre-
cedng ta abe years and (d), f durng the remander of a ta abe year after
the frst 60 days, from earnngs or profts accumuated durng the ta abe year
up to the date of dstrbuton. The presumpton contaned n causes (c) and
(d) affects the determnaton of nvested capta for the purpose of the war
profts and e cess profts ta , but has no effect upon the rates at whch dv-
dends pad n 1918 and subsequent years are ta ed.
Reguatons 62, artce 1542(b), under the 1921 ct, was promugated, n whch
secton 201(f) was nterpreted as foows:
The presumptons contaned In ths paragraph affect the determ-
naton of nvested capta for the purpose of the e cess profts ta , and are not
n effect after December 31, 1921.
s thus nterpreted, secton 201(b) and secton 201(f) of the 1921 ct do not
confct, for secton 201(f) has no effect upon the rates at whch dvdends pad
In 1921 are ta ed n the hands of the dstrbutee. dmnstratve reguatons
contemporaneousy construng a statute and made for Its enforcement, and whch
are not unreasonabe or Inconsstent wth the statute, w not be overrued
e cept for weghty reasons. ( accus Machne Co. v. Unted States, 282 U. S.,
375 Ct. D. 278, C. . -, 424 .) The nterpretaton paced upon the statute
by the admnstratve offcers was not, n our vew, ether unreasonabe or In
confct wth the provsons of the statute. smar secton n the 1918 ct
was (under Reguatons 45) hed to affect the determnaton of nvested capta
for the purpose of the e cess profts ta . The 1921 ct (secton 301) repeaed
the e cess profts ta as to ncome receved after the caendar year 1921, and
t Is sgnfcant that the same ct provded that secton 201(f) (whch the
admnstratve offcers had agan hed to affect ony the determnaton of n-
vested capta for the purpose of the e cess profts ta ) shoud kewse not be
n effect after the caendar year 1921, to wt, December 31, 1921.
nay, t s contended that the ony ssue rased n the peadngs was
whether or not the dstrbuton made by the Caforna company was a qudat-
ng dvdend and that, therefore, the oard was wthout |ursdcton to de-
termne that t was n fact an ordnary dvdend. The record does not sustan
ths contenton of appeant. Moreover, a the facts were before the oard and
t found therefrom, as t was authorzed to do, the correct amount of the
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201, rt. 1545.
170
defcency. ( tahcs v. Commssoner, 38 . (2d), 755 Seufert ros. Co. v.
Lucas, 44 P. (2d), 528 urwtz v. Commssoner, 45 . (2d), 790. See, aso,
Lew - a Iron Works v. ar, 57 pp. D. C, 3 4, 23 . (2d), 972.)
The decson s affrmed.
ffrmed.
rtce 1545: Dstrbutons n qudaton. I-40-5746
Ct. D. 574
INCOM T R NU CT O 1920 D CISION O COURT.
1. Dvde.n Parta Dvdend n Lqudaton.
certan dstrbuton pad to the stockhoders of a corporaton
was not a reguar dvdend pad out of surpus and current earn-
ngs but s hed to have been a qudatng dvdend, one of a seres
of dstrbutons n compete canceaton or redempton of a of ts
stock. n amount so dstrbuted shoud be treated as n part or
fu payment n e change for the stock n accordance wth secton
201(c) of the Revenue ct of 1926.
Unted States Crcut Court of ppeas, ghth Crcut. March Term, 1932.
No. 9269. Mton Toote, |r., pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 9270. Wam D. Toote, pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 9271. ohn W. Graver, pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 9272. Graham G. Lacy, pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 9273. a Y. Lemon, pettoner, v. Commssoner of .Interna Revenue,
respondent.
No. 9274. Mton Toote, III, pettoner, v. Commssoner of Interna Revenue,
respondent
On pettons to revew the decsons of the Unted States oard of Ta ppeas.
efore Stone and enton, Crcut udges, and Cant, Dstrct udge.
pr 13, 1932.
OPINION.
Stone, Crcut udge, devered the opnon of the court.
These are pettons to revew redetermnatons of the ncome ta es of pet-
toners for 1926. ach pettoner was a common stockhoder n the unt
emma Ms Co. (a Deaware corporaton) and the controversy, n each case,
s whether a dvdend pad n 1925 s to be treated as an ordnary or as a
dvdend n course of qudaton. The ta payers ncuded t n ther return as
an ordnary dvdend. The Commssoner and the oard of Ta ppeas deter-
mned t to be a parta dvdend n a qudaton and, as such, ta abe under
secton 201(c) of the Revenue ct of 1926 (U. S. C. ., Tte 26, secton 932, 44
Stat., 9, 10).
The facts are stpuated and are as foows: The unt emma Ms Co. was
a Deaware corporaton wth a arge amount of nonpar-vaue stock outstandng
n the hands of varous hoders, ncudng these pettoners. s of October 81,
1925, the baance sheet of the company showed surpus and earnngs of 870,176
(ncudng profts for 1925 of 363,296.97 and cash n banks and on hand of
146,330.19). On November 14, 1925, the company offcers sent out notces for a
stockhoders meetng, upon November 24, 1925, to consder the sae of the
property and busness to the uaker Oats Co. Ths notce and a bank pro y
were ncosed n a etter to the stockhoders. ach of these stated that the
uaker Oats Co. had made an offer to purchase a of ts property and assets,
ncudng ts busness and good w, e cept ts cash on hand and ts cam or
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171
201, rt. 1545.
cams aganst the Unted States for refund of edera ta es (not matera
here), and that the board of drectors thought the offer shoud be accepted.
In the etter, t was stated that the drectors beeved that the purchase prce
wth cash on hand woud be suffcent to pay at east eghty doars ( 80)
per share for the outstandng common stock of the company and that under
ths offer t s possbe that the returns to hoders of common stock mght be
sghty n e cess of 80 per share.
The stockhoders meetng authorzed the sae and a contract of sae was
entered whereby the company sod and devered, as of that (ate (November
24, 1925), a of the property, assets, busness and good w e cept ony tho
cash on hand and n bank of the frst party on October 31, 1925, as shown on
sad baance sheet, and the cams of the frst party aganst the Unted States
Government for a refund of edera ta es. On the prce of 4,202,077.28, a
cown payment of 2,000,000 was made. The baance was payabe 1,202,077.28
npon devery of assgnments of a trade-marks and trade-mark regstratons
and 1,000,000 wthn 15 days after devery of deeds to the rea estate. The
purchaser was to have the rght to use the corporate name of the seer as far
as the purchaser desred to enabe t to obtan the fu beneft of the good w
and of the busness hereby sod. The company agreed as soon as practcabe
after the transfer of the property to qudate and to dstrbute Its
assets among the stockhoders, and w thereupon be dssoved as a corpora-
ton whch sha be competed not ater than one year from the date
of such transfer or t woud dstrbute ts assets among ts stockhoders, and
w thereupon cause ts capta stock to be reduced to a nomna amount, and
transfer and assgn such nomna amount of ts capta stock to the purchaser.
The nta payment of 2,000,000 was made on November 25, 1925. On
December 12 or 15, 1925, the drectors passed a resouton that they deemed t
advsabe and most for the beneft of Ihe corporaton that t shoud be ds-
soved, and that Its debts shoud be pad and that the remander of ts cash
and the proceeds derved from the sae of ts propertes and assets shoud be
dstrbuted to ts stockhoders and the busness of the corporaton fnay qu-
dated and then caed a meetng of the stockhoders for anuary 15, 1926, to
consder the queston of the fna dssouton of the corporaton and the dstrbu-
ton of ts cash and the proceeds derved from ts property and assets, after
the payment of ts debts, to ts stockhoders. Thereafter, and on the same day,
was decared the dvdend nvoved here, by the resouton foowng:
Whereas, ths corporaton has sod to the uaker Oats Co. a of ts property
and assets e cept cash on hand and ts cam or cams aganst the Unted
States Government for a refund of ta es, and ths corporaton has agreed to
qudate ts affars and to dssove and
Whereas, t s estmated that the sum pad by the uaker Oats Co. for the
propertes and assets of the corporaton, together wth cash on hand and other
assets, w be suffcent to pay a hoders of the nonpar-vaue common stock of
the corporaton, not tess than eghty doars ( 80) per share and
Whereas, the board of drectors of the corporaton have caed a meetng of
Its stockhoders, to be hed between the hours of 10 o cock a. m. and 3
o cock p. m., on rday, the oth day of anuary, 1926, to convene at 10
o cock a. m., to consder the queston of the fna dssouton of the corpora-
ton and the dstrbuton of ts cash and the proceeds derved from ts property
and assets, after the payment of ts debts, to ts stockhoders: and
Whereas, the corporaton now has on hand an earned surpus and und-
vded profts suffcent to dstrbute therefrom to each share of sad nonpar-
vaue common stock the sum of twenty-fve doars ( 25) and
Whereas, the board of drectors n ther |udgment deem t advsabe and
most for the beneft of the corporaton that such dstrbuton shoud be made
as a part payment of the tota sum to be pad to the hoders of such stock by
reason of the sae of the propertes and assets of the corporaton to the uaker
Oats Co. and the dssouton of the corporaton:
Therefore, resoved, that the corporaton dstrbute to the hoders of ts
nonpar-vaue common stock from Its earned surpus the sum of twenty-fve
doars ( 25) per share for each and every share thereof, upon condton, how-
ever, that such dstrbuton sha consttute a part of the payment to be made
to the hoders of the nonpar-vaue common stock of the corporaton by reason
of the sae of ts propertes and assets to the uaker Oats Co. and the dssou-
ton of the corporaton.
Resoved, further, that the presdent and secretary of the corporaton pre-
pare and ma to each and every hoder of the nonpar-vaue common stock of
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201, rt. 1545.
172
the corporaton, at hs or her ast known pace of resdence a wrtten or prnted
notce, advsng them of the dstrbuton to be made to the hoders of such stock,
and requestng such stockhoders to forward ther stock to the corporaton or to
some bank or agent n the cty of St. oseph, Mo., n order that proper ndorse-
ment may be made thereon, when payment s made.
Resoved, further, that a payments made to the stockhoders by vrtue
hereof sha be a part of the tota amount to be pad to such stockhoders by
reason of the sae of the propertes and assets of the corporaton, from whch,
together wth cash on hand and the proceeds from other assets of the corpora-
ton, t s estmated that the hoders of nonpar-vaue common stock w ut-
matey receve not ess than eghty doars ( 80) per share for each and every
share of such stock, and that no payment sha be made to any person or
persons e cept stockhoders of record at the tme or tmes payments are actuay
made, and, uness and unt the certfcate or certfcates evdencng such stock
ownershp sha be presented to the corporaton, n order that proper Indorse-
ment of such payment or payments may be made thereon.
Resoved, further, that the presdent and secretary of the corporaton be,
and they hereby are authorzed and drected to pay, or cause to be pad, to the
hoders of the nonpar-vaue common stock of the corporaton, from ts earned
surpus, the sum of twenty-fve doars ( 25) per share, by reason of the ds-
trbuton hereby ordered, when and not unt the certfcate or certfcates ev-
dencng such stock sha be presented to the corporaton and ndorsed as
foows:
There has been pad upon ths certfcate the sum of twenty-fve doars
( 25) for each and every share of nonpar-vaue common stock of unt emma
Ms Co. evdenced by such certfcate, pursuant to a dstrbuton ordered by
the board of drectors of sad corporaton on the 16th day of December, 1925,
sad dstrbuton beng a part of the tota sum to be pad to the hoders of
common stock by reason of the sae of the corporaton s propertes and assets
to the uaker Oats Co. and the fna dssouton of the corporaton.
unt emma M s Ck ,
y , Secretary.
, Treasurer.
ach of these pettoners was pad the dvdend and the above ndorsement
was made upon hs certfcates of stock.
t the stockhoders meetng on anuary 15, 1926, a resouton was passed
provdng for and authorzng the drectors and offcers to proceed to dssove
the corporaton and dstrbute the assets. On the same day, the drectors de-
cared a qudaton dvdend of 50 per share pad as soon as the certf-
cate of the dssouton of the corporaton sha be ssued by the State of Dea-
ware and the baance due to the corporaton by the uaker Oats Co. sha have
been pad provded, however, that no payment sha be made upon any certf-
cate of stock unt such stock sha be presented at the offce of the corporaton
n St. oseph, Mo., and unt there sha be ndorsed thereon the foowng
certfcate of payment, to wt:
There has been pad on ths date, upon each and every share of stock ev-
denced by ths certfcate the sum of ffty doars ( 50) as a qudaton dv-
dend.
Dated at St. oseph, Mo., ths day of , 1926.
Secretary.
Treasurer.
urther qudatng dvdends were authorzed on une 1, 1926, of 3.50, on
une 15, 1927, of 6.70, and on December 19, 1929, of 0,052 per share.
Pettoners present ther argument under four headngs wth varous sub-
headngs. The frst headng s that the stpuated facts compe the concu-
son that ths was an ordnary dvdend because the drectors had and e ercsed
the dscreton (wthout fraud) to decare ths dvdend from surpus and profts
wthout mparment of capta and because the dvdend was so decared under
compuson of the Revenue ct of 1926 (secton 220 and Reguatons 69, artces
853, 1545).
s to the frst reason, two matters are destructve. The frst s that the
dvdend was, as a matter of fact, not pad and coud not have been pad from
surpus and/or earnngs. t the tme ts dvdend was decared, the entre
property of the corporaton had been sod, under authorzaton of the stock-
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173
201, rt. 1545.
hoders, e cept the cash on hand and a cam for ta refunds. The contract
of sae requred the dstrbuton of a assets to the stockhoders and the dsso-
uton or mere nomna e stence of the corporaton. Ths sae was on the bass
of the baance sheet of October 31, 1925, whch showed ony 140,330.10 cash on
hand whe ths dvdend woud requre 831,825 to make payment on the out-
standng common stock. Whe the baance sheet shows combned surpus and
earnngs of 870,176 (ncudng the above cash on hand) t s cear that a
(hereof e cept the cash on hand was nvested n property whch passed to the
purchaser. Wthout the nta purchase payment of 2,000,000, there woud
have been no funds to meet ths dvdend. Pettoners contend that:
The mere fact that a sae of assets n whch the surpus was n part tempo-
rary nvested produced the cash from whch the dvdend was pad does not
ndcate a qudaton of capta.
It s dffcut to see how a part of a tota prce for a assets (whch happen
to ncude property bought wth surpus and earnngs) can be segregated and
caed surpus or earnngs. It s purchase prce and nothng ese.
The second dffcuty wth ths poston of pettoners s that the dvdend
was ceary ntended by the drectors to be a parta qudaton. It s true
that the resouton speaks of havng on hand an earned surpus and und-
vded profts suffcent to dstrbute therefrom to each share the
sum of 25, and decares the dstrbuton to be from ts earned surpus.
owever, the resouton tsef sets out that the corporaton has sod a of ts
property (e cept cash on hand and ts ta refund cam) and ths corporaton
has agreed to qudate ts affars and to dssove that t s estmated that
the purchase prce, wth cash on hand and other assets, w pay not ess than
80 per share that a ca has been made for a stockhoders meetng to act
upon dssouton and fna dstrbuton that the drectors deem t advsabe
that the dstrbuton of ths dvdend be made as a part payment of the
tota sum to be pad to the hoders of such stock by reason of the sae of the
propertes and assets of the corporaton to the uaker Oats Co. and the dsso-
uton of the corporaton that a payments made to the stockhoders by
vrtue hereof sha be a part of the tota amount to be pad to such stock-
hoders by reason of the sae of the propertes and assets of the corporaton,
from whch, together wth cash on hand and the proceeds from other assets
of the corporaton, t s estmated that the hoders of nonpar-vaue common
stock w utmatey receve not ess than eghty doars ( 80) per shnre for
each and every share of such stock and thnt no payment sha be made of
ths dvdend unt the stock certfcate sha be ndorsed wth an ndorse-
ment statng that ths dstrbuton s a part of the tota sum to be pad to
the hoders of common stock by reason of the sae of the corporaton s prop-
ertes and assets to the uaker Oats Co. and the fa dssouton of the
corporaton.
In short, whe the dstrbuton was to be made from earned surpus,
t was very ceary stated that t was made as a parta dstrbuton n vew
of dssouton and coud not be receved uness accepted upon that bass.
There s no need to go beyond the terms of the resouton whch made ths
dstrbuton n order to determne concusvey the character of the dstrbu-
ton. If such were necessary, every attendant and surroundng crcum-
stance woud speak the same thought. ere was a corporaton whch had
sod ts entre assets and busness and, as securng such resut to the pur-
chaser, had agreed to dssove wthn a year. It had no further busness e cept
settement of ts ta refund cam, dssouton and dstrbuton. of ths
had been sanctoned by the stockhoders. The sae had been consummated,
the property devered or n course of devery, amost haf of the purchase
prce pad and accepted and a meetng of stockhoders caed to compy wth
the contract requrement of dssouton. t the tme ths dstrbuton was
provded for, the corporaton was an e stng but not, n reaty, a gong bus-
ness concern. The ony busness for whch t e sted had entrey ceased and
t was obgated not to engage theren further.
s to the reason that the dvdend was compeed by the provsons of the
ct (secton 220) and the departmenta reguatons. It may be that t was
apprehenson of the appcaton of ths secton and these reguatons whch
nduced ths dstrbuton. That, however, does not determne the character
of the dstrbuton. Such character must be gathered from what was actuay
done.
The second headng of the argument s that ths coud not ogcay be treated
as a dstrbuton n qudaton snce no corporate acton for dssouton had
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(201, rt. 1545.
174
been taken. It Is contended that a corporaton cnn not be n dssouton
unt after corporate acton to that end by a stockhoders meetng propery
convened. Wthout cose e amnaton and soey for the purpose of ths contro-
versy, t mght be conceded that a corporaton s not n dssouton unt
proper acton therefor has been taken as requred by the governng aw. Ths
does not hep pettoners. Whatever compant, f any, the State of Deaware
or nterested credtors mght have made s not of concern here. The queston
here s not what the corporaton coud do but what t dd. It may or may not
be that the corporaton coud not egay dstrbute ts assets unt after t had
comped wth certan requrements of ts parent State, but t dd do that very
thng and w|en t dd so t created the stuaton to whch the natona ta ng
statute drecty apped. These pettoners accepted and coud have obtaned
ths dstrbuton dvdend ony upon condton that t was such. They can not
now be heard to cam that the corporaton hud no rght to make such character
of dstrbuton that t s not, therefore, of such character and thus escape the
appcabe ta whe they retan the dvdend.
The thrd contenton s that secton 201, propery construed, can not appy to
ths stuaton because the secton appes ony to actua dstrbutou of cap-
ta whe ths dvdend was ony of a part of surpus earnngs. The sec-
ton carres ts own defnton. It reads: mounts dstrbuted n parta
qudaton of a corporaton sha be treated as n part or fu payment n
e change for the stock (secton 201(c)), and amounts dstrbuted n parta
qudaton s defned as meanng a dstrbuton by a corporaton n compete
canceaton or redempton of a part of ts stock, or one of a seres of dstrbu-
tons n compete canceaton or redempton of a or a porton of ts stock
(secton 201(b)). Was ths dvdend one of a seres of dstrbutons n com-
pete canceaton or redempton of a of ts stock 1
The drectors had estmated to the stockhoders that the contempated sae
(under a submtted offer) woud resut n at east eghty doars ( 80) per
share for the outstandng common stock. The stockhoders had authorzed the
sae under a contract requrng dssouton wthn a year and dstrbuton.
Te contract had been made. The property devered or n course of devery.
Neary haf of the purchase prce receved and accepted. stockhoders meet-
ng to carry out the contract requred dssouton and dstrbuton had been
caed. The dvdend (caed dstrbuton n the resouton decarng t)
had been ordered as a part payment of the tota sum to be pad to the hoders
of such stock by reason of the sae of the propertes and assets of the corpora-
ton to the uaker Oats Co. and the dssouton of the corporaton. It was an
e press condton that no payment of the dvdend be made to any stockhoder
unt hs certfcate of stock be ndorsed that such payment was a part of
the tota sum to be pad to the hoders of common stock by reason of the sae
of the corporaton s propertes and assets to the uaker Oats Co. and the fna
dssouton of the corporaton. y far the urger part of ths dvdend had to
be and was pad from a payment on the purchase prce. The stockhoders
meetng was hed and authorzed compete dssouton and dstrbuton. Subse-
quent qudaton dvdends were decared whch, wth ths dvdend, totaed
85,252 per share. When the ne t to the ast dvdend was pad t was cond-
toned upon the devery of common stock certfcates to be retaned by the
drectors and the ast dvdend was payabe at once to stockhoders who have
surrendered ther certfcates, and payabe to those who have not surrendered
ther certfcates, upon recept of the certfcates, whch certfcates w be
retaned by us.
rom ths outne, t must be cear that ths dvdend was never ntended, nor
understood to e, nor coud be other than one of a seres of dstrbutons n
compete canceaton or redempton of a of ts stock. Ths s
not an nstance of doubtfu appcaton of the statute nor Is the urged anaogy
of the appcaton of dvdends as between fe tenant and remanderman
usefu.
The fna contenton s that the oard of Ta ppeas and the departmenta
reguatons and rungs have unformy construed smar dvdends to be not
In qudaton and that much weght shoud be accorded ths practca con-
structon of a statute by offcers or departments whose duty t s to enforce t.
Wthout determnng here whether the constructon contended for has been
that of the oard of Ta ppeas or of the admnstratve offcers, t s enough
to say that we entertan no doubt concernng the constructon to be paced upon
the provsons, here nvoved, of the statute.
The pettons for revew must be dsmssed.
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175
( 201. rt. 1545
btce 1545: Dstrbutons n qudaton. I-49-5898
Ct. D. 607
ncome ta revenue act of 1921 decson of court.
1. Dvdend Reorganzaton arnngs of Predecessor Corpora-
ton.
Where there s a reorganzaton of a corporaton wthn the
meanng of secton 202(c)2 of the Revenue ct of 1921 nvovng
the transfer of ts assets and an e change of ts stock for stock
of a new corporaton on whch no gan or oss s recognzed under
that paragraph, the two corporatons are dentca n a consdera-
ton of the nature for the purpose of ta aton of a dstrbuton
n 1923 of the earnngs of the od corporaton accumuated snce
ebruary 28, 1913, and a dstrbuton n qudaton receved n
that year from the new corporaton, whch made no profts, s a
dvdend as defned by secton 201(a) of the Revenue ct of 1921
to the e tent that t Is a dstrbuton of the earnngs or profts
of the od corporaton accumuated snce ebruary 28, 1913.
2. Decson Reversed.
The decson of the oard of Ta ppeas (22 . T. ., 1171) s
reversed.
Unted States Crcut Court or ppeas for the Second Crcut.
Commssoner of Interna Revenue, pettoner, v. rederck . Sansome,
respondent.
On petton of the Commssoner of Interna Revenue to revew an order of the oard
of Ta ppeas, vacatng a defcency assessed by hm aganst a ta payer upon na
ncome ta for 1023.
efore L. and, ugustus N. and, and Chase, Crcut udges.
uy 20, 1932.
OPINION.
T|. and, Crcut udge: Sansome, the ta payer, on anuary 1, 1921, bought
some shares of stock, havng 100 par vaue, n a New ersey company, whch
on pr 1, 1921, sod out a ts assets to another company of the same State.
The new company assumed a e stng abtes, and ssued ts shares to the
sharehoders of the od, wthout change n the proporton of ther hodngs,
though the number of new shares was ncreased fve tmes, and they were
wthout par vaue. The new charter dffered ony n that the company coud
manufacture other products besdes sk, to whch the charter of the od
company had been confned. There was no other change n the fnanca
structure, as the phrase s.
The od company had carred upon ts books a arge surpus and undvded
profts, whch we may assume to have been atogether earned before anuary 1,
1921, and whch the new company carred over at the same fgure upon ts
books for the year, 1921, but somewhat reduced because of osses n 1922. The
busness made no proft, and the company was dssoved n 1923. Durng ths
year Sansome receved payments upon hs shares n qudaton whch the Com-
mssoner ncuded n hs returns as dvdends for the year 1923, for the dstrbu-
ton of that year dd not e haust the surpus and undvded profts whch st
remaned. Sansome protested he wshed to use these dvdends to compute
the gan upon hs nvestment that s, to take a qudatng dvdends frst
to amortze hs cost, or base, and return any overpus as proft n tn1 year,
1924, when the ast payment was made. The queston s whether secton 201 of
the Revenue ct of 1921 |ustfed the Commssoner s wston. The oard hed
that as the companes were separate |urstc persons, the ater one had dstrb-
uted nothng out of ts earnngs or profts.
Secton 201 of 1921 dffered from the same secton n the -t of 1918, whch
e pressy provded that a qudaton dvdends shoud be taken as n e -
change for shares, and that the gan shoud be computed by the formua whch
Sansome wshed to use and the ct of 1924 (secton 201(c)) restored the
aw to ts orgna form. The change of 1921 must have been deberate and
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201, rt. 1545.
176
we can not dsregard t t s aso unequvoca, ony dstrbutons not aocated
to profts by subdvson (b) may te used to reduce the subtrahend for com-
putng the gan derved, or the oss sustaned. Ths means that the share-
hoder s to be ta ed upon the dvdends as such so far as they represent profts,
cacuated under the precedng subdvson and that what s eft sha be
treated as amortzng hs cost. The rue woud work n some cases to the
ta payer s advantage and n others not he escapes norma ta es pro tanto,
provded he has enough ncome n ater years to use as a deducton the oss
cacuated upon the reduced payments. (fcCaughn v. MeCahan, 39 ed. (2d),
3 (C. O. . 3) Pheps v. Commssoner, 54 ed. (2d), 289 (C. C. . 7) Ct. D.
478, C. . I-1, 24 ppea of Darrow, 8 . T. ., 276 ppea of amton
Wooen Co., 21 . T. ., 324.)
Nor s there doubt as to the consttutonaty of the secton. When Sansome
bought the od shares, the profts had ndeed been aready earned yet he
mght be ta ed upon ordnary dvdends pad out of them Unted States v.
Phes, 257 U. S., 156, 171, 172 T. D. 8270 (Ct. D. 19), C. . 5. 37 Taft v.
otcers, 278 U. S., 470, 484 Ct. D. 49, C. . III-1, 226 ). e coud not
successfuy assert that such dvdends must be computed as part of hs gan
on the transacton, but must be content wth a correspondng aowance when
he sod. If so, Congress mght nsst that a dvdend n qudaton shoud be
treated ke any other, for whe ths may voate ordnary usage, once we
conceve as ncome of the change from undvded profts to an mmedatey
avaabe dvdend, the rest foows. The ta payer gets hs qud pro quo n
the cosng transacton. Though t s a chance whether the fna resutant w
be favorabe or not, the dce are not oaded aganst hm. Thus, there was
ncome to ta as much as though the company contnued ts fe and t was not
an unfar method.
ths the oard accepted, but hed wth Sansome, because t treated
the company as new and ndependent, and the qudatng dvdends as ds-
trbuted out of capta, not out of ts earnngs or profts, of whch there
were none. Under the ct of 191G, whch had not yet deveoped the eaborate
defnton of the ater statutes, greater corporate dfferences have been con-
sdered not to break the dentty of the oder company (Wess v. Stearns, 265
U. S., 242 T. D. 3609, C. . III-2, 51 ). In Marr v. Unted States (268 . S.,
536 T. D. 3755, C. . I -2, 116 ), st greater dfferences dd ndeed change
the resut, but for our purposes the decson s rreevant, for the facts were
wde of those at bar. Western, etc., Co. v. Commssoner (33 ed. (2d), 695)
(C. C. . 4) was a stronger case for the pettoner here, and Phps v. oce
(33 ed. (2d), 891) (C. C. . 3) was substantay on a fours, for we attach
no mportance to the anguage of the Pennsyvana statute. In Poneer, etc.,
Co. v. Commssoner (55 ed. (2d), 861) (C. C. . 6) the new company had
been organzed n a dfferent State, a concevabe dstncton (vde Marr v.
Unted States), but not enough. ven that s absent here.
owever, we prefer to dspose of the case as a matter of statutory con-
structon, qute ndependenty of decsons made n anaogous, though not
parae, stuatons. It seems to us that secton 202(c)2 shoud be read as a
goss upon secton 201. That secton provdes for cases of corporate reorgan-
zaton whch sha not resut n any gan or oss to the sharehoder
partcpatng n them, and t defnes them wth some partcuarty. e must
wat unt he has dsposed of the new shares, and use hs orgna cost as the
base to subtract from what he gets upon the sae. Such a change n the
form of the .shares s an e change of property, not a sae or other ds-
poston of them. Secton 201 was passed, n some measure at east, to
f what shoud come nto the computaton of gan or oss t aowed a
payments e cept those cut out by subdvson (c). It appears to us e tremey
unkey that what was not recognzed as a sae or dsposton for the
purpose of f ng gan or oss, shoud be recognzed as changng accumuated,
profts nto capta n a secton whch so far overapped the ater. That n
substance decared that some corporate transactons shoud not break the
contnuty of the corporate fe, a troubesome queston that the courts had
becouded by recourse to such vague aternatves as form and substance,
anodynes for the pans of reasonng. The effort was at east to narrow the
mts of |udca nspraton, and we can not thnk that the same ssue was
eft at arge n the earer secton. ence we hod that a corporate reorgan-
zaton whch resuts n no gan or oss under secton 202(c)2 does not
to the compnny s fe as a contnued venture under secton 201, and that
what were earnngs or profts of the orgna, or subsdary, company re-
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177
202, rt. 1561
man, for purposes of dstrbuton, earnngs or profts of the successor, or
parent, n qudaton. s the transacton reorganzaton between the
companes at bar fe pany wthn secton 202(c)2, t seems to us that the
oard was wrong.
Order reversed cause remanded for further proceedngs n accord wth
the foregong.
S CTION 202. D T RMIN TION O MOUNT
O G IN OS LOSS.
rtce 1561: Determnaton of the amount of I-30-5563
gan or oss. G. C. M. 10754
R NU CT OP 1924.
In nn rbor Raroad Co. v. Commssoner (Docket No. 34918),
unreported, the oard of Ta ppeas hed that secton 202(b)
of the Revenue ct of 1924 was not ntended to prohbt the reduc-
ton of the bass for determnng the oss by deprecaton actuay
sustaned pror to the ncepton of the cse Ta ct of 1909.
Genera Counse s Memorandum 8573 (C. . I -2, 168)
modfed.
Reference s made to Genera Counse s Memorandum 8573, supra.
In that memorandum the concuson was reached that n computng
the amount of gan or oss under secton 202(a) of the Revenue ct
of 1924 on the sae or other dsposton of property, the ad|ustment
to the bass requred by secton 202(b) of that ct to be made on
account of any tem 01 oss, e hauston, wear and tear, obsoescence,
amortzaton, or depeton, prevousy aowed wth respect to such
property tacs supped , does not ncude a reducton of cost
on account of deprecaton sustaned pror to 1909, for the reason
that the edera revenue aws n effect pror to that year contaned
no provson under whch the Commssoner was requred to consder
deprecaton deductons.
Ths concuson was based prmary upon Soctor s Memorandum
4249 (C. . I -2, 15), n whch t was stated that deprecaton
4 prevousy aowed wth respect to property, wthn the meanng
of secton 202(b) of the Revenue ct of 1924, contempates an ad-
|ustment of bass ony for deductons whch have n pror years
been actuay granted by the Commssoner n computng the net
ncome of the ta payer. The deducton for deprecaton must, ac-
cordngy, not ony have been aowabe, but the Commssoner must
have actuay granted the deducton n determnng net ncome for
pror years. deducton s not aowed unt t s passed upon
and approved by the Commssoner. Deprecaton, however, may be
prevousy aowed, athough t has not been taken n a return, as
ts aowance, for e ampe, n a cam for refund. Itacs n
orgna.
Ths offce s now of the opnon that Soctor s Memorandum
4249, supra, was ntended to dea ony wth ad|ustment of bass for
deprecaton whch occurred n 1909 and ater years, that s, after
the begnnng of edera revenue aws whch take nto consderaton
n some form or other deprecaton as an annua deducton from gross
ncome. The rung was gven too broad an appcaton n Genera
Counse s Memorandum 8573, supra. Ths s ndcated by the acton
of the oard of Ta ppeas n the case of nn rbor Raroad Go.
v. Commssoner (Docket No. 34918), unreported to date, whch n-
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202, rt. 1561.
178
voved the queston whether the cost of certan equpment whch was
retred durng the ta abe year 1924 shoud be reduced by depreca-
ton sustaned pror to uy 1, 1907, for the purpose of determnng
the deductbe oss for ta purposes. The oard hed that secton
202(b) of the Revenue ct of 1924 was not ntended to prohbt the
reducton of the bass for determnng the oss by deprecaton ac-
tuay sustaned pror to the ncepton of the cse Ta ct of
1909.
In vew of ths decson by the oard of Ta ppeas, Genera
Counse s Memorandum 8573, supra, s hereby modfed to accord
wth such decson.
C. M. Chare8t,
Genera Counse, ureau of Interna Revenue.
rtce 1561: Determnaton of the amount of I-32 5596
gan or oss. Ct. D. 529
INCOM T R NU CT OP 1926 D CISION O COURT.
1. Income Sae: Gan Transfer of Stock.
The transfer by ta payers to the S musement Co., pursuant
to a wrtten agreement, of one-haf of the capta stock of the
musement Co., s hed to consttute a sae whch s not defeated
by a coatera agreement that the ta payers shoud make future
contrbutons to or for the use of the musement Co. for the
constructon of a theater or by the pedge of a part of the purchase
prce to secure ths beng done or by the actua use of part of t
n mkng the contrbutons. The prce of the stock beng arrved
at on condton that the ta payers woud pay the abtes of the
musement Co. up to a specfed date, an amount pad by the
ta payers n dschargng such abtes s a capta nvestment
whch added to the vaue of each one-haf of the capta stock of
that company, one-haf of whch amount shoud therefore be
deducted from the consderaton receved from the sae of the stock
n determnng the amount of gan from the sae under secton 202
of the Revenue ct of 1926.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (20 . T. ., 334) Is
affrmed.
Unted States Crcut Court of ppeas for the fth Crcut.
No. 6338. . C. Ccmmons, pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 6339. Mrs. . C. Ccmmons, pettoner, v. Commssoner of Internet Revenue,
respondent.
No. 6340. So. . Gordon, pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 6341. Mrs. So . Gordon, pettoner, v. Commssoner of Interna Revenue,
respondent.
Pettons for revew of the decson of Unted States oard of Ta ppeas, dstrct
of Te as.
efore ryan, Sbey, and Waker, Crcut udges.
December 18, 1931.
opnon.
Sbey, Crcut udge: These are pettons by So . Cordon and . O. Cem-
mons and the wfe of each to revew a decson of the oard of Ta ppeas
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179
202, rt. 1561.
whereby each pettoner was hed to have reazed a ta abe gan durng the
year 1925 n a transacton nvovng the transfer to Saeuger musement
Co. of one haf of the capta stock of the efferson musement Co., the other
haf beng retaned by the pettoners. The two wves are concerned because
of the communty property aws of Te as, but they do not fgure otherwse
n the transacton. Gordon and Cemmons owned the entre 500 shares of
the capta stock of efferson musement Co., whch had cost them 13,030.16.
Threatened wth competton n the oca movng pcture busness by Saeuger
musement Co., they arranged as they descrbe t, to go ffty-ffty wth
that company n It and n the budng of a better theater. On ebruary 17,
1925, a wrtten agreement was made between Gordon and Cemmons of the
frst part, and Saenger musement Co. of the second, whch, after premnary
rectas, stated: Now, therefore, sad partes of the frst part, for and n
consderaton of the sum of 87,500 agreed to be pad to them by sad Saenger
musement Co., have transferred, assgned, ndorsed and devered, and by
these presents do transfer, assgn, ndorse and dever unto the sad Saenger
musement Co. 250 shares, or an equa undvded one-haf of the capta
stock of the efferson musement Co. It was provded that the mode and
manner of payment was to be ater agreed on. The nterest of Saenger
musement Co. n the earnngs was to date from March 1, 1925, and Gordon
and Cemmons were mmedatey to negotate wth the owners of a named
theater for a 10-year ease thereon. On ebruary 28 a suppementa agree-
ment was made, |oned n by the efferson musement Co., whch rected the
former agreement and stated that So . Gordon and . C. Cemmons do now
se, convey and dever unto sad Saenger musement Co. sad 250 shares of
the capta stock of efferson musement Co. n dentfed certfcates. The
consderaton above referred to was and s agreed to be pad by the Saenger
musement Co. to So . Gordon and . C. Cemmons as foows, to wt, the
sum of 10,000 cash n hand pad to sad So. . Gordon and . C. Cemmons,
the recept of whch s hereby acknowedged and confessed, and the baance
evdenced by eght promssory notes e ecuted by Saenger musement Co. and
payabe to So . Gordon and . C. Cemmons as descrbed, bearng 7 per
cent nterest from date and to be secured by the transferred stock certfcates
as coatera attached. There were mutua warrantes aganst any oca com-
petton and other agreements ncudng one by Gordon and Cemmons to pay
off a abtes of efferson musement Co. on March 1, 1925. The ony
obgaton assumed by efferson musement Co. reated to the erecton of a
new theater. The agreement as to that was that the ma mum to be nvested
n and, constructon and equpment shoud be 400,000, Saenger musement
Co. obgatng tsef to furnsh up to 100,000 as needed, Gordon and Cemmons
100,000, and efferson musement Co. by bonds or otherwse the baance.
There was no e press agreement as to whether the theater shoud be owned
n proporton to the money advanced or whether the advances shoud be
treated as proportonate contrbutons to the capta of efferson musement
Co. The drectors of the company were to be ncreased to s , of whch Gordon
and Cemmons were to name three and Saenger musement Co. three. On
anuary 9, 1926, a further suppementa agreement was sgned by a partes,
ncreasng the cost mt of the theater to 500,000, and the contrbutons of
Saenger musement Co. and Gordon and Cemmons to 120,000 each. In
uy, 1926, the capta stock was ncreased to 750,000 and a tota of 3,750
shares was ssued to Gordon and Cemmons, and a ke amount to Saenger
musement Co. It Is found as a fact by the oard that on ebruary 28,
1925, there was aso an ora understandng between Gordon and Cemmons
and Saenger musement Co. that as the notes gven by the atter were pad
the money woud be accumuated n a speca bank account by Gordon and
Cemmons to be used by them n makng ther contrbuton toward the bud-
ng of the theater. Durng 1925 there was no speca account, but the pay-
ments went nto the persona accounts at the bank of Gordon and Cemmons.
egnnng ebruary, 1926, there was a speca account n another bank n
ther name. The accumuatng baance was Invested from tme to tme n
nterest-bearng stocks and oans n the name of Gordon and Cemmons, the
ncome from whch wbb returned to the account. The money was at a tmes
sub|ect to check by Gordon and Cemmons, and never by efferson musement
Co. Payments to that company were by check drawn n ts favor. The ast
payment to t was 12,500 on anuary 13, 1928, shorty after whch the
account was dvded between Gordon and Cemmons and cosed. The tota
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5202, rt. 1561.
180
contrbuton by Gordon and Cemmons to the theater fund was 40,684.75, and
by the Saenger musement Co. the seme, efferson musement Go. havng
pad the baance. On these facts the Unted States contend that there was a
sae by Gordon and Cemmons of 250 shares of stock n efferson musement
Co. n ebruary, 1925, on whch a arge proft was reazed notwthstandng
part of the proceeds was straghtway pedged to secure performance of an
obgaton. Gordon and Cemmons contend that no gan was reazed, at east
not n 1925, the substance of the whoe transacton beng an enargement and
reorganzaton of the efferson musement Co. wheren Saenger musement
Co. obtaned one-haf of ts stock n return for money contrbuted through
Gordon and Cemmons to that corporaton.
The ta payers contenton s not sustanabe. It s true that n ta matters
the courts must regard the substance rather than the mere form of the transac-
ton but effect must be gven to what persons have done rather than what they
say they ntended. (Wess v. Steam, 265 U. S., 242 T. D. 3609. C. . III-2,
61 Pugh ft a. v. Commssoner, 49 ed. (2d), 77.) Much ess can courts
regard that whch mght have been done but was never even attempted. It s
true, as s argued, that efferson musement Co. mght have doubed ts stock
at the outset and sod the ncrease to Saenger musement Co. for a hub of
175,000, the amount at whch ts assets were vaued, as a resut of whch
Gordon and Cemmons woud have been eft wth one-haf ts stock and woud
have reazed no gan. ut ths was not done. The ncrease of capta and
dvson of the stock made n uy, 1926, was not n pursuance of any agree-
ment had n 1925. The efferson musement Co. had no part n the orgna
man transacton. It sod no stock and was to get no cash. In both the frst
and second agreements n the panest words t was sad that Gordon and
Cemmons were seng the stock. They receved and recepted for the cash
payment, and the notes representng the baance of the purchase money were
payabe to them. The proceeds were deposted by them n bank to ther own
credt. The wrtten agreement to hep bud a theater n the future dd not
requre that any partcuar money be used and f t had t woud not prevent
the gan from the sae whch produced the money beng ta abe, there beng
merey an nvestment provded for t n advance of ts recept. (Lonsdae v.
Commssoner, 32 ed. (2d), 537 Ct. D. 93, C. . III-2, 237 Detrot gg
scut Co. v. Commssoner, 9 . T. ., 1365 out v. Commssoner, 24 . T. .,
79.) The ora understandng that the payments on the notes shoud be re-
taned to nsure that Gordon and Cemmons woud have cash to carry out
ther agreement to hep fnance the constructon of the theater was probaby
unenforceabe n the face of the paro evdence rue. (Pugh et a. v. Comms-
soner, supra.) ut f otherwse t was at most a pedge of the money to
ths end, and no more hndered the ownershp of the notes and cash passng
to Gordon and Cemmons than the pedge of the stock certfcates hndered
the ownershp of them passng to Saenger musement Co. efferson muse-
ment Co. had no rght or tte to the notes or money uness and unt Gordon
and Cemmons shoud pay the money over to t. In pont of fact ony
40,684.75 of t ever went to efferson musement Co. and 25,000 of that
amount was not pad unt December, 1927, and anuary, 1928. Otherwse
Gordon and Cemmons owned and used the money as ther own, together wth
the nterest earned on t. There was a competed sae of the stock by Gor-
don and Cemmons n 1925 resutng n gan n nowse defeated by the
coatera agreement to make future contrbuton to or for the use of the
corporaton, or by the pedge of the purchase prce to secure ths beng done,
or by the actua use of part of t n makng the contrbuton.
subsdary queston s whether the gan shoud be reduced by the whoe or
ony by haf of the 12,346.79 pad out by Gordon and Cemmons March 1, 1925,
n dschargng pursuant to agreement the abtes of efferson musement
Co. as of that date. Ths was agreed to be done n order to make the whoe
stock worth the 175,000 whch had been agreed on as the vaue of the assets.
The payment was an addtona capta nvestment by Gordon and Cemmons
whch added 0,173.39 to the vaue of each haf of the stock. In seng one
haf Gordon and Cemmons are entted to deduct from the gan ony 6,173.39
as part of the cost of that haf. The remanng 6,173.39 must stand over
unt the other haf of the stock sha be dsposed of by them.
We agree wth the concusons of the oard of Ta ppeas and the
pettons to revew are dened.
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181
202, rt. 1561
rtce 1561: Determnaton of the amount of I-42-5790
gan or oss. Ct. D. 588
INCOM T R NU CT OP 1918 D CISION O COURT.
Gav ob Loss Sae Unproductve Tmbkband Carryno
Chaboks.
In the case of unproductve tmber property acqured pror to
March 1, 1913, ta es on the property pad after that date may not
be added to Its far market vaue on that date for the purpose of
ascertanng the gan derved from the sae of the property under
secton 202(a) of the Revenue ct of 1918.
Unted States Cbcut Court of ppeas, S th Crcut.
. M. O. Lumber Co., appeant, v. Unted, States of merca, appeee.
ppea from the Unted States Dstrct Court, Western Dstrct of Mchgan.
une 27, 1932.
OPINION.
Moormak, Crcut udge: The appeant umber company acqured tmber-
ands pror to March 1, 1913, whch had a vaue as of that date of 310,182,
and whch t sod on an nstament sae contract n 1920 at a proft. In the
Intervenng years t receved no ncome from the property or from other
sources but e pended a consderabe sum thereon for ta es and to cear a
rght of way for a raroad and for a road. In ts ta returns for the years
1921 and 1924 t added ths e pendture to the March 1, 1913, vaue for the
purpose of determnng the profts resutng from the sae of the property. The
Commssoner rued that the e pendture coud not be added to the March 1,
1913, vaue, and determned the profts accordngy. The company pad the ta
assessed, fed cams for refunds, whch were dened, and brought ths sut.
The dstrct court uphed the Commssoner s decson, and the umber company
appeas.
The company dd not set out n ts cam before the Commssoner the
amounts e pended for a raroad rght of way and a road as dstngushed
from the amounts e pended for ta es and dd not ntroduce proof on that
sub|ect on the hearng n court. s the case s not argued here as f any part
of the e pendtures were for such purpose, we treat them as f whoy for ta es.
The evenue ct of 1918, secton 202(a), provdes:
That for the purpose of ascertanng the gan derved or oss sustaned from
the sae or other dsposton of property, rea, persona, or m ed, the bass sha
be
(1) In the case of property acqured before March 1, 1913, the far market
prce or vaue of such property as of that date .
No Treasury reguaton ssued under ths secton provdes for the addng
of ta es pad subsequenty to March 1, 1913, to the vaue as of that date for
the purpose of ascertanng the gan derved from a sae. ppeant nssts,
however, that such procedure s requred by secton 234(a) of the ct of 1918
as construed by the Treasury reguatons ssued thereunder. Ths secton,
subsecton 9, provdes that n computng the net ncome of a corporaton sub|ect
to the ta mposed by secton 230, there sha be aowed as deductons:
In the case of mnes, o and gas wes, other natura deposts, and tmber,
a reasonabe aowance for depeton and for deprecaton of mprovements,
accordng to the pecuar condtons n each case, based upon cost ncudng cost
of deveopment not otherwse deducted: Provded. That n the case of such
propertes acqured pror to March 1, 191.3, the far market vaue of the prop-
erty (or the ta payer s nterest theren) on that date sha be taken n eu
of cost up to that date: .
The Treasury reguaton reed upon, artce 231 of Reguatons 45, decares
that:
In the case of a tmber property hed for future operaton by an owner hav-
ng no substanta Income from the property or from other sources, a e pend-
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203, rt. 1571.
182
tures for admnstraton, protecton, and other carryng charges pror to
producton on a norma bass sha be charged to capta account after such
a property s on a norma producton bass such e pendtures sha be treated
as current operatng e penses.
ppeant contends that the ta es pad on the property here n queston were
carryng charges wthn the meanng of the above reguaton. We fnd dff-
cuty n assentng to that vew. Whe busness men often consder the ta es
that have been pad on property n f ng a prce at whch the property may
be sod at a proft, yet ta es and nterest, when propery defned, do not reay
represent anythng pad nto the capta nvestment. (Westerfed v. Rafcrty,
4 ed. (2d), 590, 593 T. D. 3067, C. . I -1, 96 .) The reguaton n queston
was not ssued as a formua for determnng gans or osses from saes, but s
the Treasury Department s nterpretaton of provsons n the Revenue ct
specfyng aowabe deductons n computng net ncome. urthermore,
ts ony effect as to the matters to whch t seems to be drected s to permt
the chargng of e pendtures on undeveoped tmber property to capta, even-
tuay to be depeted by future operaton, and, as sad by the court beow,
there s a dstnct dfference between permttng such e pendtures to be de-
peted by future operatons and chargng them to the capta vaue as of March
1, 1913, for the purpose of determnng gans or osses from saes. We can not
thnk the reguaton was Intended to authorze the atter procedure.
Whatever may have been the purpose or ntended effect of the reguaton,
the statute Itsef s mandatory and obvousy can not be changed or atered by
admnstratve acton. That s ncome whch s derved from nvested capta,
whether In the form of dvdends or profts on saes. The capta nvested n
property nonta abe of course s the cost or, n case the property was ac-
qured before March 1, 1913, the ascertaned vaue as of that date. Ta es
subsequenty pad on the property do not represent Increase n vaue, but are
pad as an ncdent to ownershp. If they may be added to the March 1, 1913,
vaue In determnng the base for ascertanng gans from sae, there s no
reason why nterest on the nvestment shoud not aso be added. The atter s
mpossbe n vew of ays v. Gauey Co. (247 U. S., 189). Nether s a part
of the Invested capta. So much was hed n Westerfted v. Raffcrty, supra
Prascr v. Commssoner (25 ed. (2d), 653) and Centra Rea state Co. v.
Commssoner (47 ed. (2d), 1030 Ct. D. 302, C. . -2, 219 ). Pany, there-
fore, the ta es n queston shoud not have been added to the March 1, 1913,
vaue n determnng gans from the sae. We fnd no reason to doubt and the
appeant has cted no authorty to show that ta ng gans from saes on ths
bass s not wthn the purvew of the s teenth amendment.
udgment affrmed.
S CTION 203. R COGNITION O G IN OR LOSS
ROM S L S ND C NG S.
rtck 1571: Recognton of gan or oss. I-34-5622
Ct. D.543
INCOM T R NU CT O 1021 D CISION OP COURT.
1. Gan or Loss Recognton Sae of Property for Stock.
Where the members of a partnershp n 1921 organzed a cor-
poraton for the purpose of acqurng and hodng rea estate owned
by the partnershp, and on a ater day n the same month they
pad cash or ts equvaent n part payment for ther subscrptons
for 494 of the 500 shares of the corporaton stock, and the cor-
poraton purchased the rea estate at a specfed prce, payng
therefor party n cash and credtng the baance as a payment
on the stock, the transacton s wthn the provsons of secton
202(c)3 of the Revenue ct of 1921, and no gan or oss to the
partners from the transacton s recognzed under that paragraph.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (18 . T. ., 332) s
affrmed.
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183
203, rt. 157L
Court of ppeas of the Dstrct of Coumba.
Syvester TP. Labrot, zabeth . Labrot, appeant/, v. Davd urnet,
Commssoner of Interna Revenue.
efore Martn, Chef ustce, and Robb, an Obsde, tz, and Gboner,
ssocate ustces.
ebruary 15, 1932.
OPINION.
tz, ssocate ustce: Ths case s here under chapter 2T, sectons 1001,
1002, and 1008 of the Revenue ct of 1926 ( 44 Stat., 9. 100-110), on petton
for revew of decsons of the Unted States oard of Ta ppeas.
Pettoners, husband and wfe, were notfed of a fndng by the respondent
of a defcency n ther ncome ta es for the year 1921, amountng n hs
case to some 12,500 and n hers to sghty ess.
The questons nvoved are dentca.
Somethng over 20 years ago they formed a partnershp known as Labrot
Co. for the purpose of hodng a of the property beongng to the partners.
ach of them owned a haf nterest n the partnershp.
Thereafter the partnershp acqured 550 acres of and n nne runde
County, Md., and e tensvey mproved t under the name of oy each
arm, a of whch cost 195,443.38.
In 1920 the partnershp purchased Trya arm, ad|onng, contanng about
450 acres, for 65,098.
uy 8. 1921, the pettoners formed a corporaton under the aws of Mary-
and, whch they caed Labrot Co., Inc., for the purpose of takng over
and hodng the rea estate then owned by the partnershp.
Of ts capta stock of 500 shares, par vaue 500 a share, pettoners sub-
scrbed for 494 shares, W. . Labrot and S. W. Lat rot, |r., 2 shares each,
and one Mms and one Marsha 1 share each.
On uy 26, 1921, the partnershp pad 86,440.53 n cash or ts equvaent,
on account of these subscrptons.
The same day t made an offer to se to the corporaton oy each arm
for 75,000 and Trya arm for 55,000, whch offer was mmedatey accepted.
The corporaton thereupon pad the partnershp 75,000 by check for the
oy each arm and smary 5,000 on the purchase of Trya.
The remanng 50,000 was credted on ts books as a payment on the stock.
Thereafter pettoners n ther ncome ta returns deducted as a oss the
dfference between the cost to the partnershp of the two farms and the sae
prce to the corporaton.
The deducton was dsaowed by the Commssoner of Interna Revenue and
hs acton was uphed by the oard of Ta ppeas.
Secton 202(c)3 of the Revenue ct of 1921 provdes:
(c) or the purposes of ths tte, on an e change of property, rea, persona
or m ed, for any other such property, no gan or oss sha be recognzed uness
the property receved n e change has a ready reazabe market vaue but
even f the property receved n e change has a ready reazabe market vaue,
no gan or oss sha be recognzed -

(3) When ( ) a person transfers any property, rea, persona or m ed, to a
corporaton, and mmedatey after the transfer s n contro of such corporaton,
or ( ) two or more persons transfer any such property to a corporaton, and
mmedatey after the transfer are n contro of such corporaton, and the
amounts of stock, securtes, or both, receved by such persons are n substan-
tay the same proporton as ther nterest n the property before such transfer.
or the purposes of ths paragraph, a person s, or two or more persons are,
n contro of a corporaton when ownng at etst 80 per centum of the votng
stock and at east 80 per centum of the tota number of shares of a other
casses of stock of the corporaton.
The oard of Ta ppeas, n consderng the appcaton of that secton to
ths case sad:
The substance of the transacton s that the partnershp e changed the
farms for stock of the corporaton, and that after the e change the partnershp
was n contro of the corporaton, as the word contro s used n the secton of
the statute |ust quoted. We are of opnon that the transacton s essentay
160903 33 13
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203, rt. 1572.
184
one of the knd In whch Congress dd not ntend for the purposes of ta aton to
recognze ether gan or oss, and that we shoud be governed by ts substance
and not ts form.
Wth that reasonng of the oard of Ta ppeas we agree.
In transactons ke the one before us, substance and not form determnes the
appcabty of the ta ng ct. (Southern Pacfc Co. v. Lotce, 247 U. S., 330
Guf O Corporaton v. Leweyn, 248 U. S., 71 U. S. v. Phes, 257 U. S., 156
T. D. 3270, C. . 5, 37 .)
ppeants nether ganed nor ost by ths transacton.
The fact that they ncorporated themseves nto a chartered company n no
way enhanced ther rght to deduct osses from ther ta abe ncome.
(Tsvogou v. U. 8., 31 ed. (2d), 706.)
efore ther conveyance to the company they owned together a farm worth
appro matey 250,000.
fter ther conveyance ther certfcates of stock n the corporaton were for
a practca purposes ther munments of tte to the same property.
If consdered as a sae, t was, n effect, a sae to themseves for about haf
of the cost or vaue of the property, and we are of opnon that such a sae
woud not have been made to others for such a prce.
Whe f deducton of the other haf of the vaue nvested was permssbe as
a oss, t foows that the appeants coud as we have sod to themseves for
a merey nomna consderaton and deducted a greater oss.
We regard the case as fung wthn the provsons of secton 202 of the
statute herenbefore quoted, and the decson of the oard of Ta ppeas s
accordngy affrmed.
ffrmed.
rtce 1572: changes of property. I-3f -5659
Ct. D. 555
INCOM T R NU CT O 1918 D CISION O COURT.
1. auaton vdence.
The concuson of the oard of Ta ppeas that certan shares
of stock, at the tme they were receved n e change for an o and
gas ease, had no far market vaue nvoved a dsregard of ev-
dence havng a substanta tendency to prove that at that tme
they had a far market vaue.
2. auaton ndng of Commssoner ppea to oabd.
In nn appea to the oard of Ta ppeas from the Comms-
soner s determnaton resutng from the fndng of the Comms-
soner that certan shares of stock receved for a ease had a far
market vaue of a certan amount at the tme of ther recept, the
fndng of the Commssoner on the queston of vaue s prma
face correct and the burden s upon the ta payer to produce ev-
dence to overcome ths presumpton and to show the correct vaue
or that the shares had no far market vaue at the tme acqured
by the ta payer.
3. Decson Reversed.
The decson of the oard of Ta ppeas (14 . T. ., 675)
s reversed.
Unted States Crcut Cour of ppeas for the fth Crcut.
Commssoner of Interna Revenue, pettoner, v. S. T. tMMon, toc ttor of
the state of Mrs. Chrstna Swenson, Deceased, respondent.
Petton for revew of decson of the Unted States oard of Ta ppeas (Dstrct of
Te as).
efore ryan, oster, and Waker, Crcut udges.
March 5, 1932.
opnon.
Waker, Crcut udge: The Commssoner of Interna Revenue assessed a
defcency of ncome ta for the year 1919 aganst the appeee as e ecutor of
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203. rt. 1572.
the estate of Chrstna Swenson, deceased. That assessment was a resut of a
fndng by the Commssoner that 2,400 shares of the capta stock of the
Swensondae O Co., a Te as corporaton (heren referred to as the corpora-
ton), receved n 1019, for an o and gas ease on 414 acres of and, owned In
communty by the ta payer and her husband, Peter Swenson, had at the tme
of that transacton a far market vaue of 240,000. Upon appeee s petton
for a redetermnaton of such assessment the oard of Ta ppeas hed that
the stock receved n e change for the o and gas ease had no far market
vaue at the tme of ts recept, and abated the assessment accordngy. That
acton of the oard of Ta ppeas s before us on the Commssoner s petton
for revew.
Incontroverted evdence adduced n the hearng before the oard of Ta p-
peas showed the foowng: Durng the years 1918 and 1919 the ta payer and
her husband owned under the communty-property aws of Te as about 3,500
acres of and, ocated n one body, n Stephens County, a of whch were ac-
qured pror to the year 1913. t the tme those ands were acqured It was
not known or supposed that ands n that part of Te as contaned o or gas.
In November, 1918, after the dscovery of o n the part of Te as n whch those
ands are ocated, Peter Swenson assocated wth hmsef eght other persons and
organzed the corporaton, wth an authorzed capta of 3,000 shares of stock
of the nomna par vaue of 100 each. The eght assocates of Peter Swenson
subscrbed, at par, for 940 shares of the corporaton s stock and pad therefor
the sum of 94,000. Of the remanng 2,060 shares 1,800 were ssued to Peter
Swenson for an o and gas ease coverng 1,093 acres of the above-mentoned
and. rom the proceeds of the stock sod the Swensons receved 10,000 n
cash. Ten shares of that stock were ssued to S. T. Swenson, a son of Peter
Swenson, and 250 shares were ssued to two persons |onty, as a promoton fee.
The agreement under whch the corporaton was organzed and the ease e e-
cuted provded that shoud o be dscovered the Swensons shoud receve as a
royaty one-eghth of the commerca o produced from the and covered by the
ease. t the tme the corporaton was organzed no o was known to e st
nearer the Swensons and covered by the ease than about 2 mes. The
corporaton began drng on the eased and on ebruary 22, 1919, usng for
that purpose cash acqured from the sae of ts stock. rom the tme of
the begnnng of the drng operatons the corporaton ntended to dr to a
depth of 3,200 to 3,500 feet, uness o n payng quantty shoud be found at
a ess depth. y pr 14, 1919, that we had been dred to the depth of about
2,200 feet wthout o havng been dscovered. t that tme the physca cond-
ton of the we was not satsfactory, gas pressure and sat water havng been
encountered at a depth of about 1,950 feet, and heavy e penses had been ncurred
n shuttng oft the gas and water, wth a resut that the corporaton s cash re-
sources were so reduced as to make t doubtfu whether t woud be fnancay
abe to undertake the drng of another we n case of the frst one beng a
faure. t that tme seven or eght other wes were beng dred or had been
dred by other companes n terrtory surroundng the and covered by the
above-mentoned ease, three northeastery, one to the southeast, one south, and
one to the west. Some of those wes were producng o and others were
not. Those to the north and northeast of the corporaton s we were the more
productve those to the south and west ess so, or fang atogether. Such were
the crcumstances when t was determned to ncrease the capta stock of the
corporaton from the orgna amount of 3,000 shares to 14,000 shares, and on
pr 14, 1919, Peter Swenson and hs wfe, the ta payer, offered to the corpora-
ton an o and gas ease on an addtona tract of and contanng 414 acres,
as a bass for an ncrease n the captazaton of the corporaton. On pr 17,
1919, that ease was accepted by the corporaton, the stockhoders votng an
ncrease of 11,000 shares n ts captazaton, makng the tota number of shares
4,O0 f of the par vaue of 100 each. y the terms of the offer and acceptance,
Pete r Swenson and hs wfe, the ta payer, subscrbed for 2,400 shares, at par,
of the ncreased captazaton, to be pad for wth the o and gas ease on the
addtona tract of 414 acres 6,000 of the new shares to be ssued to the hoders
of the orgna shares, makng a 200 per cent stock dvdend on the ast-men-
toned shares and 2,350 of the new shares were to be sod at par. y May
15, 1919, a of the new shares whch were to be offered for sae at par had been
subscrbed for, to be pad for n cash to the corporaton, and 81,300 of the
amount so agreed to be pad had actuay been pad n cash. On the same day.
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186
May 15, 1919, the drectors of the corporaton cosed such stock subscrptons
and apped for an amendment of ts charter provdng for the ncreased capta-
zaton upon the above-mentoned bass. In that appcaton that ease was
arbtrary stated to have a reasonabe vaue of 865,000 or more. Up to May
15, 1919, no o had been dscovered anywhere on the aud of the corporaton or
on and beongng to Peter Swenson and hs wfe, or anywhere nearer to such
and than appro matey two and a haf mes. On pr 17, 1919, and on May
19, 1919, and at a tmes between those dates, the corporaton had no assets
other than the two above-mentoned o eases, some drng machnery, argey
second-hand, and such part of the cash actuay pad to t on stock subscrptons
as had not been e pended n drng ts frst test we. It had no ncome what-
ever. Durng the tme that the corporaton was captazed at 300,000 par
vaue, and after the Increase n Its capta to 1,400,000 par vaue, Peter Swen-
son and hs wfe, the ta payer, owned a substanta ma|orty (appro matng
60 per cent) of Its capta stock. They never sod any of ths stock for money
or property of any knd. On May 18, 1919, the above-mentoned we on and
ncuded n the frst-mentoned ease came In, and proved to be a arge o
producer.
t and pror to the tme of the e ecuton of the above-mentoned ease
coverng the tract contanng 414 acres, there were numerous producng wes
and many other wes n process of beng dred n the mmedate vcnty of
that and. In pr and May, 1919, there was ncreased actvty n the easng
of ands n the terrtory surroundng the Swenson ands. Wth the e cepton
of the Swenson and a but a few sma tracts n soated paces had been
eased and unsuccessfu efforts had been made to ease the Swenson and. In
1918, pror to the organzaton of the corporaton, Peter Swenson receved an
offer of 1,000,000 cash for hs and, supposed to ncude about 5,000 ncres, wth
a one-eghth royaty Interest, the prospectve purchaser agreeng to dr 10
wes on the property. Peter Swenson was unwng to part wth hs contro
of the rght to o and gas n the and owned by hmsef and hs wfe, and dd
not want any of the bg o companes to acqure stock n the corporaton to
whch he made eases. Severa wtnesses, who quafed as e perts n the bus-
ness of o and gas easng, testfed that at the tme of the e ecuton of the
ast-mentoned ease an o ease on that aud was worth from 700 to 1,200
per acre, and that f that and had been cut up nto three or four parts a
the eases on t woud have been worth as hgh as 1,500 per acre. That part
of the ncreased capta stock of the corporaton whch, under the pan adopted,
was to be sod was offered for sae ony to those who aready were stock-
hoders and to persons satsfactory to the Swensons and ther orgna asso-
cates. It was agreed among them that the sae of that stock to outsders
shoud be confned to sma buyers In order to keep out the bg o companes,
whch were tryng to buy the stock and whch had acqured nterests a
around the Swenson property. The new stock was aotted to the od stock-
hoders, and most of t was bought by them, some of them takng more of the
new stock than ther aotment. The part of the new stock not taken by
the od stockhoders was bought by subscrbers who were acceptabe to Peter
Swenson and hs assocates. The evdence showed that some of that stock
was bought after the buyer had had an o e pert to make an nvestgaton
of the terrtory n whch the and covered by eases to the corporaton was
ocated.
The Revenue ct of 1918 (40 Stat., 1057) provded:
Sec. 202. (a) That for the purpose of ascertanng the gan derved or oss
sustaned from the sae or other dsposton of property, rea, persona, or
m ed, the bass sha be
(1) In tke case of property acqured before March 1, 1913, the far market
prce or vaue of such property as of that date and
t
(b) When property s e changed for other property, the property receved
n e change sha for the purpose of determnng gan or oss be treated as
the equvaent of cash to the amount of ts far market vaue, f any .
Treasury Reguatons 45 1920 edton , promugated under that ct,
provded:
st. 1566. change of property and stock. Where property s transferred
to a corporaton n e change for ts stock, the e change consttutes a cosed
transacton and the former owner of the property reazes a gan or oss f the
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187
203, rt. 1572.
stock has a market vaue, ard such market vaue Is greater or ess than the cost
or the far market vaue as of March 1, 1913 (f acqured pror thereto), of
the property gven n e change.
It appears from the opnon rendered by the onrd of Ta ppeas that the
fact that a of the ncreased capta stock whch was offered for sae on pr
17, 1919, was sod at par by May 15, 1919, was e cuded from consderaton as
evdence of the market vaue of the 2,400 shares of that ssue receved n e -
change for the ease coverng the tract contanng 414 acres, because the shares
sod were not offered on the genera market, but were sod at prvate sae to
acquantances of one or more of the od stockhoders and that n reachng the
concuson that no market vaue coud be attrbuted to the stock receved n
e change for the ast-mentoned ease, the oard was nfuenced by the vew
that the specuatve nature of the property for whch that stock was e changed
kept that stock from havng a market vaue. pressons contaned n that
opnon ndcate that the oard dd not attrbute prma face correctness to the
Commssoner s determnaton, and assumed or concuded that the burden was
on the Commssoner to prove that at the tme of the consummaton of the
ast-mentoned ease the stock receved n e change therefor had n far market
vaue and what that market vaue was.
The evdence dd not show the e stence n fact of the ground reed on for
e cudng from consderaton the crcumstance that practcay contemporane-
ousy wth the e ecuton of the ast-mentoned ease 2,350 shares of stock of the
same ssue as that receved n e change for that ease were sod at par. Most
of those shares were bought by hoders of the orgna stock of the corporaton,
ony such of those shares as were not bought by orgna stockhoders beng
offered for sae, and sod, to seected persons. The fact that corporate shares
were ready sod at par Is not kept from beng evdence that other shares of the
same ssue had substanta market vaue at or about the tme of such sae or
saes by the crcumstances that none of that stock was offered for sae to the
genera pubc, and that such of t as was sod was bought by hoders of
prevousy ssued stock of the corporaton and by other seected persons whose
partcpaton n the ownershp of the stock of the corporaton was desred by
those n contro of the corporaton. The fact that such saes were so made
had some tendency to prove that there was a market for the shares of stock
receved n e change for the ease (whch at par for the stock amounted to
substantay more than 500 per acre), and that these shares coud have been
sod at a substanta prce f they had been offered to the pubc for sae at
that tme. (Penny d Long v. Commssoner of Interna Revenue, 39 ed.
(2d), 849 O Meara v. Commssoner of Interna Revenue, 34 ed. (2d), 390,
395.) The concuson that the 2,400 shares receved n e change for the ease
had no market vaue at the tme of the e change we may be regarded as
beng nconsstent wth the fact that wthn ess than 30 days after the date of
the e change 2,350 shares of the same ssue a that was offered for sae to
anyone were sod at par for cash.
The vaue of property at a gven tme depends upon the reatve ntensty
of the soca desre for t at that tme, e pressed n the money t woud brng
n the market. That vaue depends argey on e pectatons as to what may be
reazed from the property n the future. (Ithaca Trust Co. v. Unted States,
279 U. S.. 151 Ct. D. 61, C. . III-1, 313 .) The fact that those e pectatons
are hghy specuatve may not keep them from beng nfuenta n brngng
about a wngness to e pend money for the acquston of the property or an
nterest n t. Though a venture s as specuatve as a ottery, a chance or
nterest n t may be ready saabe for a substanta sum of money. The aw
does not forbd the recognton of the proved e changeabe vaue of an asset
because of the specuatve nature of t. (Con v. Commssoner of Interna
Revenue, 32 ed. (2d), 753.) urthermore, t dd not appear from the evdence
that t was mere guesswork to attrbute a substanta money vaue to the
shares of stock n queston at the tme they were receved n e change for an
o and gas ease. t and pror to the date of that e change there were e ten-
sve e poratons and o deveopments of near-by ands ocated on a sdes of
the tracts covered by the eases hed by the corporaton. Tnder the condtons
shown by the evdence to have e sted at the tme those shares were acqured
by the ta payer, t was not to be assumed that those operatons had not
resuted n the acquston of knowedge of facts furnshng a substanta bass
for a reasonabe beef that o n payng quantty woud be found n nnd
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204, rt, 1591.
188
ncuded n those enses. The shares of stock n queston represented an nter-
est n assets whch ncuded money, o and gas eases coverng more than 1,500
acres of and, an uncompeted we ocated on part of that and, and equpment
used n drng t. vdence showed that the rght to whatever o and gas
the and covered by these eases mght contan was so desred by many persons
at or about the tme of the mentoned e change that substanta sums of money
were obtanabe for o and gas eases coverng that and. vdence tendng
to prove that at the tme the shares n queston were acqured the assets an
nterest n whch those shares represented had, f offered to the pubc for sae,
a presenty reazabe substanta money vaue propery was sub|ect to be con-
sdered n determnng whether those shares then had a far market vaue,
and what that market vaue was. (Lamprccht v. Swss O Corporaton, 32
ed. (2d), 646, 652 North mercan Teegraph Co. v. Northern Pacfc Ry. Co.,
254 ed., 417 omes edera Ta es (1923 d.), 511.) The oard s concuson
that those shares, at the tme they were receved n e change for an o and gas
ease, had no far market vaue nvoved a dsregard of evdence havng a sub-
stanta tendency to prove that at that tme they had a far market vaue.
The fndng of the Commssoner on the queston of vaue s prma face
correct. The burden was upon the respondent to produce evdence suffcent to
overcome ths presumpton and to show the correct vaue upon whch the ta
was to be assessed, or that the sub|ect of the ta had no far market vaue at
the tme t was acqured by the ta payer. (Wams v. Commssoner of Inter-
na Revenue, 45 ed. (2d), 61.)
It appears from the record that the oard of Ta ppeas, n reachng the
concuson that the shares of stock n queston had no far market vaue when
they were acqured by the deceased ta payer, was nfuenced by vews or con-
sderatons nconsstent wth rues of aw appcabe to questons presented for
decson.
ecause of the above ndcated errors, the decson of the oard of Ta
ppeas s reversed, and the cause s remanded for further proceedngs not
nconsstent wth ths opnon.
S CTION 204. SIS OR D T RMINING G IN OR
LOSS, D PL TION, ND D PR CI TION.
rtce 1591: ass for determnng gan or I-43-5804
oss from sae. Ct. D. 589
ncome ta revenue act of 1920 decson of court.
auaton Determnaton of aue on March 1, 1913.
The appcaton of the formua provded by the thrd method
contaned In . R. M. 34 (C. . 2, 31) best refects the far market
vaue on March 1, 1913, of stock sod by the ta payer for the pur-
pose of determnng the amount of gan or oss from the sae. The.
far market vaue as of that date may not be ncreased by the
restoraton of e cessve deprecaton dsaowed by the Comms-
soner years after that date.
Dstrct Court of the Unted States for the Northern Dstrct or Oho,
astern Dvson.
/. O. Robertson, pantff, v. Car . Routzahn, Coector of Interna Revenue,
defendant.
une 28, 1932.
opnon.
ones, .: y wrtten stpuaton, ths case was tred and submtted for
determnaton wthout the nterventon of a ury. s the ssues were fnay
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189
204, rt. 1591.
made up, u snge queston was presented upon whch the pantff s rght of
recovery depends.
What was the far market vaue as of March 1, 1913, of the 700 shares of
the common stock of the restone Tre Rubber Co. sod by the pantff n
1925
On the basc date, ths stock was unsted but was traded n on the Ceve-
and Stock change n sma ots. If such saes aone furnsh the soe bass
for determnng gan or oss permtted by the statute, I shoud fnd the far
market vaue to have been appro matey 300 per share as of March 1, 1913.
It s true that there was not a arge number of the tota shares outstandng
avaabe for tradng. The stock was cosey hed by offcers of the company
and there was a consderabe number of shares transferred on the books of
the company whch were not sod through the stock e change. It s aso true
that the pantff hmsef paced the vaue of the shares at substantay the
actua 1913 bd prce n hs 1923 and 1924 returns.
Two hundred thrty-fve shares of the stock were sod through the Ceveand
Stock change over the perod anuary 8, 1913, to pr 28, 1913, n ots of
from 5 to 50 shares, for a prce rangng from 222 to 350 per share. The
sae of the argest number of the shares durng that perod was n March
at a prce rangng from 283 to 295 per share. y far the argest number
of the whoe number of shares traded n appeared to have been on the pan-
tff s account. I thnk that the mted number of saes of shares n the eary
months of 1913 do not concusvey f a far market vaue for determnng
gan because the statute provded that due regard shoud be gven to the far
market vaue of the assets as of the basc date but such saes shoud not
be whoy dsregarded n determnng vaue of stock as of a certan date. The
consderaton of ts vaue n subsequent years shoud not be gven much weght
beyond an mmedate and restrcted perod. What the potenta vaue of a
stock on the basc date may have been s specuatve wthout the consdera-
ton of subsequent events presenty too uncertan to be reabe. The test s
not the prospectve or hoped for vaue, but t s what under then prevang
and pertnent crcumstances was the far market vaue, gvng due regard to
the far market vaue of the assets as of the basc date.
What were the far market vaues of stocks n the fa of 1929, gauged by
the then promsng but uncertan future In the fa of 1929 a wng seer
and an ntegent buyer woud have traded on the bass of contnued busness
e panson on a tremendous scae. There are too many fs n measurng
present vaues by future fruton. ng past vaues by subsequent events
s not, n the nature of thngs, a reabe bass. Lookng backward after the
future s known s not a far test. The vaue as of the basc date s not what
the owner beeves t to be worth, but what s t fary worth n an ntegent
and open trade The statute f es not the far vaue, but the far market
vaue. Ths means what t s fary worth as a marketabe securty or equty
to be bought and sod n the course of busness somethng for whch there s
suppy and demand and nterested buyers and seers.
The vaue as of March 1, 1913, can not be enhanced by the restoraton of
e cessve deprecaton dsaowed by the Commssoner years afterwards. The
vaue as of that date was based upon the asset vaue as the records stood. The
far market vaue as of a gven date may not be ncreased by a subsequent
Increment not cacuated or antcpated at the tme, and whch rested not upon
any cam made by the company, but upon an adverse, arbtrary rung by the
Commssoner.
Upon due consderaton, t s my opnon that the formua provded by
ppeas and Revew Memorandum 34 C. . 2, 31 , and as apped by the Com-
mssoner (Pantff s hbt No. 24), best refects the far market vaue of
the stock n queston. I thnk the far market vaue as of March 1, 1913, was
not n e cess of 431.85 per share, as determned by the Commssoner, and
probaby, more accuratey, ower, when due consderaton s aso gven to actua
saes and quoted market prces as of and shorty pror to the basc date.
udgment may be entered for the defendant and speca fndngs of fact and
concusons of aw may be submtted.
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204, rt. 1594.
190
rtce 1594: Property acqured by gft or trans- I-29-5553
fer n trust on or before December 31, 1920, or Ct. D. 517
by bequest, devse, or nhertance.
ncome ta revenue act of 1026 decson op codrt.
Gan ob Loss ass Property cqured by equest.
Where a w provdes that property sha be hed n trust
to pay the ncome therefrom to a fe tenant and after the death
of the fe tenant to pay a part of the prncpa to C at a spec-
fed age, hs nterest to be dvested f he des wthout ssue before
reachng the age, the property dstrbuted to C by the trustees s
acqured wthn the meanng of secton 204(a)5 of the Revenue
ct of 1926 at the date of the death of the testatr , and the bass
provded by that paragraph n ascertanng gan on the sae of the
property s ts far market vaue at that tme, when the death
occurs on or after March 1, 1913, and not ts vaue at the date of
dstrbuton.
DST ICT COU T O T UNIT D ST T S, DISTRICT O N W MPS IR .
ohn P. . Ctonder v. ohn . ed, Coector of Interna Revenue.
pr 13, 1932.
OPINION.
Morbs, .: Ths s an acton brought by ohn P. . Chander of Ports-
mouth, N. ., aganst ohn . ed, coector of nterna revenue for the
dstrct of New ampshre, for the recovery of a porton of the edera
ncome ta pad by hm for the year 1925.
In the return fed by Chander March 10, 1926, for the caendar year of
1925, the pantff showed a ta due n the amount of 2,382.99, whch was
pad n nstaments durng the year 1926.
Subsequenty, the Commssoner of Interna Revenue audted Chander s
return and as a resut assessed aganst the pantff an addtona ta for
sad year 1925 n the sum of 21,772.28, whch was pad on pr 30, 1928.
On March 10, 1930, the pantff fed wth the defendant a cam for refund
of a part of the ta pad and the cam was dened by the Commssoner n a
etter une 13, 1930, and ths sut was thereupon nsttuted.
The case comes before me upon an agreed statement of facts e ceptng that
the partes were unabe to determne and agree upon the age of the pantff.
Pantff s deposton was taken and from t fnd as a fact that ohn P. 3.
Chander, the pantff, was born n Washngton, D. C, March 22, 18So, and
was the son of Unted States Senator Wam D. Chander, of New ampshre.
The ta whch s the sub|ect of refund was assessed upon shares of stock
n the St. oseph Lead Co. whch the pantff receved under the w of hs
mother, Lucy L. . Chander, who ded October 25, 1915.
The ony matera cause n the w reads as foows:
Seventh: the rest, resdue and remander of my property and estate
of every knd and descrpton, I gve, bequeath and devse to my e ecutors n
trust for the foowng purposes:
the ncome of sad property am, after the decease of my sad husband,
as aforesad, to be pad by sad trustees to my son ohn P. ae Chander at
such tmes as they may deem proper the sum of 150 a year to be pad quar-
tery, to my mad, Lyda . uzze, durng her fe, provded she remans wth
me as such mad unt my decease one-thrd of the prncpa of sad property
and estate, after aowng for the payment of sad sum to sad Lyda . uz-
ze, to be pad to my sad son when he sha arrve at the age of 30 years
one-thrd to be pad to hm when he sha arrve at the age of 35 years and
one-thrd when he sha arrve at the age of 40 years. If, however, my 6on
shoud not ve to reach the ages heren specfed and shoud de eavng ch-
dren, then sad trustees are to pay over to sad chdren the entre amount of
sad property and estate or the entre amount of the baance thereof n case
payment or payments to my sad son have been made as aforesad. nd n
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191
204, rt. 1594.
case my eon shoud de eavng no chdren vng at the tme of hs death, I
gve and bequeath to hs wfe Madeene f then vng, the sum of 10,000,
and then sad trustees are to ray over the sum of 500 to the pscopa Church
n Dover, N. . (n memory of my grandmother, bga R. Lambert, and my
aunt zabeth Ltte), then the one-hnf of sad property and estate reman-
ng to be pad to the Untaran Cburc n sad Dover (one-haf of the ncome
thereof to be used for the pastor s saary) the other one-haf of sad property
and estate to be pad n equa amounts to the Chdren s ome, to the Went-
worth ome for the ged n sad Dover (n memory of my parents and sster),
to the ayes ospta In sad Dover, and to the New ampshre Socety for
the Preventon of Cruety to nmas.
s above stated In the w, the pantff was to receve hs share of the
prncpa after the e ecuton of the trust n three nstaments the frst when
he became 30 years of age the second when he became 35 years of age and
the thrd and ast nstament when he reached the age of 40.
Durng the year 1925, the pantff 6od a number of shares of stock of the
St. oseph Lead Co. We are concerned n ths acton wth ony a part of
those shares, to wt, 753 shares whch were receved by the pantff under the
w of hs mother. The pantff s cam for refund s based soey upon the
bass used by the Commssoner of Interna Revenue n determnng gan from
the saes by the pantff of the 753 6hares of stock.
The Commssoner n determnng the gan from the saes used as a cost
bass the vaue of sad stock at te date of the death of the pantff s mother.
In other words, the Commssoner has determned the gan by deductng from
the seng prce of the stock ts vaue at the date of the death of Lucy L. .
Chander.
It s contended by the pantff that there shoud be used as the bass for
determnng gan or oss the vaue of sad stock at the date of ts devery to
hm. The 753 shares were actuay devered to the pantff by the trustees
as foows: 660 shares on pr 19, 1920 75 shares on uy 15, 1925 18 shares
on ugust 24, 1925.
The 93 shares whch were dstrbuted by the trustees In 1925 were sod dur-
ng the same year for 3,817.53. The seng prce of 660 shares whch were
dstrbuted by the trustees n 1920 Is not known nasmuch as ths bock of stock
was sod by the pantff together wth 4,140 addtona shares from the same
company and the sae whch represents the 660 shares can not be dentfed
4,800 shares of the stock of the St. oseph Lead Co. (4,140 660) were sod for
210,337.76. The cost bass of the 4,140 shares of stock s 31,400.50. The gan
from the sae of the entre 4,800 shares was determned by the Commssoner
to be 170,357.26. If the Government s poston as to the cost bass for deter-
mnng the gan from the sae of the stock s sustaned, no change s to be
made n the amount of ths gan. If the ta payer s poston s sustaned then
the gan from the sae of sad 660 shares of stock sha be determned by deduct-
ng from the seng prce of 210,337.76 the sum of 31,400.50 pus the cost
bass as fnay determned n ths ease.
The queston to be determned s whether the bass date to be used n deter-
mnng the gan or oss on the sae of the stock acqured by Chander under
the w of hs mother s the vaue of sad stock at the date of her death or
ts vaue at the date the stock was actuay dstrbuted to Chander.
The appcabe statutes and Department reguatons thereunder areas foows:
The Revenue ct of 1926 provdes n part as foows:
Sec. 204. (a) The bass for determnng the gan or oss from the sae or
other dsposton of property acqured after ebruary 28, 1913, sha be the
cost of such property e cept that
(5) If the property was acqured by bequest, devse, or nhertance, the
bass sha be the far market vaue of such property at the tme of such
acquston. The provsons of ths paragraph sha appy to the acquston
of such property nterests as are specfed n subdvson (c) or (e) of secton
402 of the Revenue ct of 1921, or n subdvson (c) or (f) of secton 302 of
the Revenue ct of 1924, or n subdvson (c) or (f) of secton 302 of ths ct.
Reguatons 69, Revenue ct of 1926, artce 1594, provdes n part as foows:
In the case of property acqured by bequest, devse, or nhertance, ts vaue
as apprased for the purpose of the edera estate ta or n the case of estates
not sub|ect to that ta , ts vaue as apprased n the State court for the pur-
pose of State nhertance ta es sha be deemed to be ts far market vaue when
acqured.
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204, rt. 1594.
192
The Treasury De|artment appears to have consstenty hed that the nsg
date for determnng gan or oss on the sate of property acqured by bequest,
devse or nhertance, s that of the decedent s death. Ths fact s evdenced
bv varous reguatons whch have been promugated from tme to tme. Para-
graph 44 of Reguatons 33 (1918) artce 1562 of Reguatons 45 (1919):
artce 1562 of Reguatons 56 45 (1920) artce 1563 of Reguatons 02
(1922) artce 1594 of Reguatons 65 (1924) artce 1594 of Reguatons 69
(1926).
The queston narrows tsef to the nterpretaton of the word acquston
as t appears n the conte t of the statute.
s I understand, the agreed statement of facts nterpreted n con|uncton
wth the decaraton n the wrt, f the pantff s contenton s sustaned, he
s entted to a refund of 762.62. If the defendant s contenton s sustaned,
he s entted to a verdct.
In the case of rewster v. Gage (280 . S., 327 Ct. I 148, C. . 1 -1,2741 .
t was hed that the bass of cacuaton In the case of stocks acqured by the
ta payer as a resduary egatee and sod by hm, s not ther vaue at the date
of the decree of dstrbuton, but ther vaue at the date of the testator s death.
The pantff seeks to dstngush the rewster case from the case at bar
and cas attenton to the fact that n the rewster ease the stock passed at
once upon the settement of the estate to the resduary egatee whe n the case
at bar there was an ntervenng trust under whch the stock was hed by trustees
n trust to pay the ncome to a fe tenant. Pantff further seeks to ds-
tngush the two cases pontng out that n the rewster case the resduary
egatee took the entre tte to the property sub|ect to admnstraton e penses
and f he ded before recept of the same t passed to hs hers, whereas n the
nstant case the pantff took a vested remander sub|ect to be dvested f he
ded wthout Issue before reachng the specfed age.
The court can see that the facts n the two eases are easy dstngushabe
but to my mnd the dstngushabe features are not of such a character as to
make the hodngs of the Supreme Court n the rewster case nappcabe. It
s true that the pantff n the case at bar mght never have receved hs share
of the property. What then woud have been the stuaton presents another
tteston. e dd receve t and that s the fact wth whch we are deang.
Whatever rghts he fnay acqured date back to the death of hs mother. That
was the date of ther ncepton. Those rghts contnued unnterruptedy from
the date of her death unt the stocks were physcay devered to the pantff.
In the rewster case, Mr. ustce uter says:
Pettoner s rght ater to have hs snare of the resdue vested Immedatey
upon testator s death. t that tme pettoner became enrched by ts worth
whch was drecty reated to and woud ncrease or decne correspondngy
to the vaue of the property. nd, notwthstandng the postponement of transfer
of the ega tte to hm, Congress unquestonaby had power and reasonaby
mght f vaue at the tme tte passed from the decedent as the bass fo
determnng gan or oss upon the sae of the rght or of the property before
or after the decree of dstrbuton. nd we thnk that n substance t woud
not be nconsstent wth the rues of aw governng the descent and dstrbuton
of rea and persona property of decedents to construe the words n queston to
mean the date of death.
In the same case the eourt further cas attenton to varous reguatons of
the Treasury Department n force between 1917 and 1928 estabshng as a
bass for gan or oss the far market vaue of the property at the date of the
death of the testator and further cas attenton that snce 1917 Congress n
the passage of the severa Revenue cts has not changed the meanng and
st uses the word acqured. The nterpretaton gven to t has contnued
for a seres of years and for so ong as to mpy that the constructon gven to
t by the admnstratve board havng to do wth the coecton of revenue has
receved egsatve sancton.
On ths pont udge uter says:
These reguatons were prepared by the Department charged wth the duty
of enforcng the cts. The rue so estabshed Is reasonabe and does no
voence to the etter or sprt of the provsons construed. reversa of that
constructon woud be key to produce nconvenence and resut n nequaty.
It Is a setted rue that the practca nterpretaton of an ambguous or doubtfu
statute that has been acted upon by offcas charged wth ts admnstraton
w not be dsturbed e cept for weghty reasons. (Logan v. Davs, 233 U. S,
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193
( 204, rt. 1596.
613, 627 Maryand Casuaty Co. v. Unted States, 251 U. S., 342, 349 Swendg
v. Washngton Water Power Co., 265 U. S., 322, 331.)
The Interpretaton gven to the word acqured n the Revenue ct appears
aso to be n accord wth the rungs of the hghest courts n severa States
and varous te t wrters. (See atter of Lansng, 182 N. Y., 238 arvey v.
oaz, 29 a., 168 a v. a, 49 Conn., 52 Schouer on Ws (6th d),
secton 3148.)
I do not thnk t s essentu to enter nto a dscusson of the dfferences be-
tween n vested remander, contngent remander, e ecutory devse and other
forms of tte known to the common aw.
I hod that whatever tte the pantff took dates back and was acqured on
October 25, 1915, when hs mother ded.
verdct w be entered for the defendant.
rtce 1596: Property acqured upon an e - I-34-5623
change. G. C. M. 10433
R NU CT O 1926.
Where the ta payer acqured stock n 1922 n an e change whch
resuted n no recognzabe gan or oss under secton 202(c) 1 of
the Revenue ct of 1921, the bass to be used n determnng the
oss from the sae of the stock n 1026 s the cost or other bass of
the stock e changed therefor.
n opnon s requested reatve to the bass to be used n determn-
ng the ta payer s oss resutng from the sae n 1926 of stock n the
P Company.
The ta payer, , was, durng the years under consderaton,
engaged n the busness of buyng and seng securtes for hs own
account. In October, 1922, the ta payer e changed 1.8y shares of
stock of the M Company, 7.2y shares of stock of the N Company, and
5.4y shares of stock of the O Company, common , for 45y shares of
the P Company stock and 49.5 / shares of the Company stock.
The March 1, 1913, vaue of the M Company, the N Company, and
the O Company stock e changed was 1,333.4a doars, and the far
market vaue of ths stock at the date of the e change was 3,168.3a
doars.
In November, 1922, the ta payer e changed 20.7y shares of the
O Company cass common stock for 49.5y shares of the P Com-
pany stock. The March 1, 1913, vaue of the O Company stock
e changed was 315as doars and the far market vaue at the date of
the e change was 1,118a) doars. No ta abe ncome was reported
on these e changes. (See secton 202(c) 1 of the Revenue ct of
1921.) In uy, 1923, the ta payer purchased 7 y shares of the
capta stock of the P Company for .0003a doars per share, or at
a cost of .002a doars. Durng the year 1926 the ta payer sod at
ubc aucton the entre 101.9)/ shares of the capta stock of the
Company acqured upon the purchase and e changes noted above,
and receved therefor 2.7a doars.
When the ta payer fed hs ncome ta return for the year 1926
he camed that the bass of the P Company stock receved n 1922
was to be determned from the far market vaue of the N Company,
the M Company, and the O Company stocks at the tme of the
e changes. ccordngy, n hs orgna return he determned that
the cost of the 45y shares of the P Company stock whch he acqured
n October, 1922, was to be determned by apportonng the 1922
vaue of the M Company, the N Company, and the O Company stock
(3,168.3a doars) between the 45// shares of the P Company stock
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204, rt. 1598.
194
and the 49.5y shares of the Company stock. y ths method he
determned that the bass for computng oss from the sae of y
shares of P Company stock acqured n October, 1922, was 1,508.7
doars. Wth reference to the 49.5y shares of P Company stock
acqured n November, 1922, for whch 20.7y shares of O Company
stock were gven n e change, the ta payer computed the oss on the
bass of the 1922 vaue of the 20.7y shares of the O Company stock,
namey, ,118.r doars. The cost of 7 y shares of P Company stock
purchased n uy, 1923, namey, .002a doars, was used as ts bass.
Thus the ta payer used the bass of 2,626.702a doars n computng
hs oss on the sae of the 101.9y shares of P Company stock n 1926.
The ureau used the March 1, 1913, vaue of the stock gven n
e change for the P Company stock n arrvng at the bass to be
used n computng the oss sustaned by the ta payer, and the actua
cost of the P Company stock purchased n 1923. Under ths
method the bass was determned to be 949.952a doars, and the oss
was reduced by appro matey 1,676.75a doars. The ta abe n-
come for the year 1926 was ncreased by that amount and the ta -
payer pad the ta and fed cam for refund.
Secton 204(a)6 of the Revenue ct of 1926 provdes:
Sue. 04. (a) The bass for determnng the gan or oss from the sae or
other dsposton of property acqured after ebruary 28, 1013, sha ho the
cost of such property e cept that

(0) If the property was acqured upon an e change descrbed n subdvson
(b). (d), (e), or (f) of secton 203, the bass sha be the same as In the case
of the property e changed, decreased n the amount of any money receved by
the ta payer and ncreased n the amount of gan or decreased n the amount
of oss to the ta payer that was recognzed upon such e change under the aw
appcabe to the year n whch the e change was made.
The bass of the property e changed n 1922 was the March 1,
1913, vaue of the N Company, the M Company, and the O Com-
pany stocks. Therefore, f the P Company stock was acqured upon
an e change descrbed n secton 203 (b), (d), (e), or (f) of the
Revenue ct of 1926 the bass used by the ureau n computng the
ta payer s oss was correct. dmttedy subdvsons (d), (e), or
(f) do not appy. Secton 203 (b) of the Revenue ct of 1926
reads:
(b)(1) No gan or oss sha be recognzed f property hed for productve
use In trade or busness or for Investment (not ncudng stock n trade or
other property hed prmary for sae, nor stocks, bonds, notes, choses n
acton, certfcates of trust or benefca nterest, or other securtes or ev-
dences of ndebtedness or nterest) s e changed soey for property of a ke
knd to be hed ether for productve use n trade or busness or for nvestment,
or f common stock n a corporaton s e changed soey for common stock In
the same corporaton, or f preferred stock n a corporaton s e changed
soey for preferred stock In the same corporaton.
In a memorandum whch accompaned the ta payer s cam for
refund t s contended that the e change of the M Company, the N
Company, and the O Company stocks for the P Company stock n
1922 s not such an e change as s descrbed n subdvson (b), (d),
(e), or (f) of secton 203 of the Revenue ct of 1926, because sec-
ton 203(b) 1 of that ct specfcay provdes that the e changes
theren referred to sha not ncude e changes of stocks or other
securtes. In reaty the ta payer s contendng that the word
descrbe as used n secton 204(a)6 of the Revenue ct of 1926
means wthn the purvew of secton 203(b) of that ct. Ths
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195
204, rt. 1596.
contenton s untenabe. The word descrbe means to gve an
account of. Secton 204(a)6 teray appes to every e change of
whch an account s gven n secton 203(b) 1, whether ths account
s by way of ncuson or e cuson.
Webster s New Internatona Dctonary, 1927 edton, page 603,
gves the foowng meanng to the word descrbe :
To represent by words wrtten or spoken to gve an account of to make
known to others by words or sgns as, the geographer descrbe. countres
and ctes.
Descrbed means ony represented by words wrtten or
spoken, an account of whch s gven. Nether descrbed nor
any of ts synonyms means wthn the purvew of, under, or
wthn the scope of. Where one s referred to a pace n whch
somethng s descrbed, as a genera proposton one woud usuay
e pect to fnd t descrbed by way of ncuson rather than by e cu-
son, but whether t s ncuded or e cuded s qute mmatera f the
thng s descrbed. ence, t appears to be a perverson of a
norma modes of speech to say that a thng s not descrbed n secton
203 (b) merey because t s theren descrbed and then e cuded.
The e presson n secton 204(a)6, the amount of gan or
the amount of oss to the ta payer that was recognzed
upon such e change under the aw appcabe to the year n whch
the e change was made, ceary recognzes that among the e -
changes descrbed n secton 203(b) are e changes, the gan or oss
upon whch s recognzed. If the e changes descrbed secton
203 b) mean e changes wthn the purvew of secton 203(b), as
contended for by the ta payer, ths e presson s whoy superfuous
and absurd. Ths e presson makes perfecty pan that what s
contempated s any e change descrbed n secton 203(b). It s
mmatera that the e change occurred not under the Revenue ct n
queston but under some or any pror Revenue ct, and equay
mmatera whether the gan or oss upon the e change descrbed s
or was recognzed or unrecognzed. If, for e ampe, secton 204(a)6
means e changes wthn the purvew or wthn the scope of secton
203(b), t s pan that the ony e changes wthn the purvew of
secton 203(b) are the e changes whch occurred n ta abe years
covered by the partcuar ct.
The e changes referred to heren dd not resut n recognzabe
gan or oss by reason of the fact that they took pace n 1022 before
secton 202(c) 1 of the Revenue ct of 1921 was amended. Secton
202(d) of the Revenue ct of 1921 took care of the bass for gan
or oss purposes of such e changes. The atter secton reads as
foows:
(d) (1) Where property s e changed for other property and no gan or
oss s recognzed under the provsons of subdvson (c), the property re-
ceved sha, for the purposes of ths secton, be treated as takng the pace
of the property e changed therefor, e cept as provded n subdvson (e).
Secton 202(c), as amended by the ct of March 4, 1923 (42
Stat., 1560), reads as foows:
When any such property hed for nvestment, or for productve use n trade
or busness (not ncudng stock-n-trade or other property hed prmary for
sae, and n the case of property hed for nvestment not ncudng stock, bonds,
notes, choses n acton, certfcates of trust or benefca nterest, or other se-
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204, rt. 1603.
196
curtes or evdence of ndebtedness or nterest), s e changed for property
of a ke knd or use. New matter n tacs.
The amendment was drafted to nsure the recognton of gan or
oss upon e changes such as the e changes whch took pace n the
nstant case. When Congress amended secton 202(c) of the Rev-
enue ct of 1921 t dd not amend secton 202(d) 1 of that ct, be-
cause the atter provson specfcay prevented a stepped-up bass
n the case of e changes, the gan or oss upon whch coud not be
recognzed.
That the bass provded n secton 202(d) was to be used n
computng gan or oss from saes that took pace whe the Revenue
ct of 1924 was n effect s ceary shown by ouse of Representa-
tves Report No. 179, S ty-eghth Congress, frst sesson, page 54.
The ouse report reads n part as foows:
Secton 204:

(2) Paragraph (0) corresponds to secton 202(d) of the e stng aw. The
genera theory of ths secton s that tchere no gan or oss s recognzed as
resutng from an e change, the new property receved sha, for purposes of
determnng gan or oss from a subsequent sae and for deprecaton and
depeton, be consdered as takng the pace of the od property gven up n
connecton wth the e change. The provsons of secton 203 of the b that no
gan or oss s recognzed from certan e changes do not grant an e empton
and are not so ntended. Itacs supped.
To the same effect see Senate Report No. 398, S ty-eghth Con-
gress, frst sesson, page 17.
That porton of secton 204(a) G of the Revenue ct of 1926,
supra, s dentca wth secton 204(a)6 of the Revenue ct of 1924.
The congressona commttee reports of the Revenue ct of 1924
e pcty state that under secton 204(a)6 of the Revenue ct of
1924 the bass s to be carred over wherever the gan or oss upon
the e change was not recognzed. To contend that the stock ac-
qured a stepped-up bass as the resut of an e change whch resuted
n no recognzabe gan or oss under secton 202(c) of the Revenue
ct of 1921 s nconsstent wth the e press ntent of Congress and
the tera anguage of the statute. ,
In vew of the foregong, ths offce s of the opnon that the
bass to be used n determnng the oss resutng from the sae of
the P Company stock acqured n 1922 s the cost or other bass of
the stocks e changed therefor.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
rtce 1603: Read|ustment of partnershp n- I-35-5637
terests. Ct. D. 550
( so Secton 214(a)8, rtce 164.)
ncome ta revenue act of 1921 decson of court.
1. Deducton Deprecaton Revauaton of ssets upon In-
ducton of New P RTN R.
The conveyance by a partner of part of hs nterest n the part-
nershp and the nducton thereby of a new member nto the part-
nershp do not under the aws of Pennsyvana dssove the od
partnershp nor consttute a reason for deductons of aowances
for deprecaton of the partnershp assets based upon ther far
market vaue u| n the date of the conveyance.
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197
204, rt. 1603
2. Deducton Deprecaton aue op ssets ndng of
oard.
There s substanta evdence to support the fndng of the oard
of Ta ppeas that the vaue of the assets of n partnershp as of
March 1, 1913, was ther cost as refected by the partnershp books
ess deprecaton to that date and such fndng s therefore
sustaned.
3. Deducton Deprecaton Cost Recovered by owance for
Deprecaton.
Where the entre cost of assets s recovered through deductons
for aowances for deprecaton, no addtona deducton s aow-
abe n respect of such assets even though they are contnued n
usefu servce.
4. Decson ffrmed.
The decson of the oard of Ta ppeas (20 . T. ., 305) Is
affrmed.
Unted States Crcut Court of ppeas fob the Thrd Crcut. October
Term, 1931.
No. 4589. pn . Cameron, pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 4590. pn W. Cameron, pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 4591. Wam P. Denegre, pettoner, v. Commssoner of Interna Revenue,
respondent.
Pettons for revew from the Unted States oard of Ta ppeas.
efore uffngton, Wooey, and Davs, Crcut udges.
ebruary 29, 1932.
OPINION.
Davs, Crcut udge: There are three cases here, nvovng ncome ta es
for the year 1922, on petton for revew from an order of redetermnaton of
the Unted States oard of Ta ppeas. These cases were consodated for
hearng an decson (20 . T. ., 305).
or a number of years pror to 1920, pn . Cameron and Wam P.
Denegre were partners tradng n Pennsyvana, as woo-spnners, under the
name of . . Cameron Co. In 1920, pn W. Cameron, the son of pn
. Cameron, was made entted to receve a quarter share of the partnershp s
earnngs. t ths tme, the father gave the son a . 250,000 nterest n the
assets of the frm. The gft was accompshed by transferrng that amount
on the books of . . Cameron Co. from the father s capta account to a
smar account of the son. No revauaton of assets was made by . .
Cameron Co.
The severa ta payers contend that a new partnershp resuted from the
gft to pn W. Cameron and that the aowance for deprecaton of the
partnershp shoud be determned on the bass of the far market vaue of
the assets contrbuted to the partnershp on that date.
The oard fet that even f a new partnershp was actuay formed on
anuary 1, 1920, then there was no bass for a new rate of deprecaton for
there was no new cost to the od partners and no evdence of the dentty
of the partcuar part of the deprecabe assets whch the new partner had
acqured.
ssumng the concuson of the oard on ths theory of the case to be rght,
yet the same concuson may be reached on the ground that the transfer of
part of the assets by the father to the son dd not consttute a dssouton of
the partnershp.
The rea queston n ths case Is whether or not on any ground there
shoud e a revauaton of the assets of the partnershp tradng under the
name of . . Cameron Co. because of the admsson of the son as a partner
on anuary 1, 1920.
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204, rt. 1603.
Secton 218(a) of the Revenue ct of 1921 (42 Stat, 227) provdes that
partners sha be abe for ncome ta ony In ther ndvdua capactes and
that the net ncome of each partner sha ncude hs dstrbutve share of the
net ncome of the partnershp.
The net ncome of a partnershp s computed as f the partnershp were an
ndvdua. Secton 218(c), Revenue ct of 1921 (42 Stat, 227).
Secton 214(a) of the ct of 1921 (42 Stat., 239) provdes:
That n computng net ncome there sha be aowed as deductons:
(8) reasonabe aowance for the e hauston, wear and tear of property
used n the trade or busness, ncudng a reasonabe aowance for obsoes-
cence. In the case of such property acqured before March 1, 1913, ths
deducton sha be computed upon the bass of ts far market prce or vaue
as of March 1, 1913.
Ths case arose n Pennsyvana and the aws of that Commonweath as to
what consttutes the dssouton of a partnershp contro. The statute pro-
vdes that the conveyance by a partner of hs nterest In the partnershp does
not of tsef dssove the partnershp, nor, as aganst the other partners n
the absence of agreement, entte the assgnee durng the contnuance of the
partnershp to nterfere n the management or admnstraton. (P. L. 18, Part
, secton 27, March 26, 1915.) There s nothng n the evdence to ndcate
that the conveyance of a part of hs nterest n the partnershp by the father
to the son was Intended by anyone to work a dssouton. Ths was the
ordnary case of the admsson of a son nto the busness wthout the thought
on the part of anyone to dssove the partnershp. The Supreme Court of
Pennsyvana has ssed upon ths e act queston and hed that such a con-
veyance as we have here from father to sou does not dssove the partneshp.
Whte v. Long, 289 Pa., 525.)
There s no new partnershp, no new assets, and hence no reason for the
aowance of a new rate for the deprecaton of the partnershp, assets. So far
as we can ascertan, the stuaton was changed ony n that the son receved
a part of the earnngs of the partnershp that had htherto gone to the
father.
The second queston s whether or not the oard was |ustfed n ts fndng
of the vaue of the assets of the partnershp as of March 1, 1913. It found
that ther vaue on that date was 300,78234. It arrved at ths fgure by tak-
ng the cost of the assets then owned whch was 429,689.06 ess deprecaton
of 128,906.72. The controversy here s over the amount of deprecaton to be
aowed. The amount aowed by the Commssoner and oard was .taken
from the books of the partnershp. Ths amount was f ed by the partnershp
n the ordnary course of busness when there was nothng to Infuence ts
compete accuracy. Severa wtnesses of the pettoner say that the depreca-
ton was not so much and so accordng to ther npprasa made n 1926, the
vaue of the partnershp assets on March 1, 1913, was 396,000 or 397,000. The
evdence gave the oard the aternatve of acceptng the retrospectve apprasa
of the ta payer s wtnesses, made n 1926, on the bass of cost of reproducton
ass an estmated amount for deprecaton, or cost as refected by the partner-
shp books ess a far rate of deprecaton to March 1, 1913. The oard
chose the atter as the far market vaue of the partnershp assets on that
date.
dmnstratve fndngs on ssues of fact are accepted by courts as fna f
there was substanta evdence to support them, and no rreguarty n the
proceedngs. (Phps v. Commssoner of Interna Revenue, 283 U. 8., 588,
600.) The ta payers, themseves, ad emphass on the accuracy of ther
pant accounts, and we thnk that ther records, kept n ordnary course of
busness, are suffcent evdence to support the oard s fndngs.
nay, the ta payers contend that the oard was n error n affrmng
the acton of the Commssoner (n determnng the deprecaton aowance
for 1920 and 1921) n emnatng certan tems of machnery and equpment
n the amount of 404,007.67 from the deprecabe assets account as of
December 31, 1919.
Tho evdence estabshes that these emnated tems were not ony In use
In 1921, hut were aso Rvng satsfactory servce n 1926. ut the amount of
the aowance for deprecaton s the sum whch shoud be set asde for the
ta abe year, n order that, at the end of the usefu fe of the pant n the
busness, the aggregate of the sums set asde w (wth savage vaue) suffce
to provde an amount equa to the orgna cost. (Unted States v. Ludev,
274 U. S., 295. 300 T. D. 4040, C. . I-2, 157 .) Obvousy, the ta payers are
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199
205, rt. 1612.
not entted to a doube deducton for the same capta assets, and If the fact
s, as the oard found, that the assets have been fuy deprecated, the ta -
payers can no onger rghtfuy cam an aowance for deprecaton even
though such assets contnue to gve usefu servces.
In emnatng the tems from the deprecabe assets account, the Comms-
soner used a deprecaton reserve whch had n part accumuated pror to
March 1, 1913, but that was accounted for n determnng the March 1, 1913,
vaue. Ths vaue and the cost of some property subsequenty acqured were
returned (save for a sma amount remanng n 1920) by arge deprecaton
aowances between March 1, 1913, and December 31, 1919. These assets had
been fuy deprecated on the partnershp books and for those years, the Com-
mssoner had aowed the rate camed by the ta payers e cept for some
reducton n the rate for 1917, 1918, and 1919.
The oard has carefuy consdered the questons and ts concusons are
evdenty correct. Its order of redetermnaton s affrmed.
S CTION 205. IN NTORI S.
rtce 1612: auaton of nventores. I-37-5677
Ct.D. 559
ncome ta revenue act of 1918 decson of court.
1. Inventores auaton Manufacturer of Lumber.
Where a ta payer, engaged n the manufacture and sae of um-
ber and takng nventores on the bass of cost or market, whch-
ever s ower, treats as the cost of umber of any grade the so-caed
average cost, whch s arrved at by ascertanng the tota cost of a
umber of a grades that had reached the same stage of manufac-
ture and then dvdng that tota by the tota number of feet of a
grades manufactured, the amount so ascertaned beng treated as
the cost of a foot of umber of any grade, the acton of the Com-
mssoner and the oard of Ta ppeas n re|ectng, as nadequate
to refect the true cost, the cost unts empoyed by the ta payer n
ts comparson wth market prces for each grade s approved.
2. Same Reducton for stmated Losses.
ta payer, manufacturer of umber, whose stock n trade s
argey made up of goods n varyng stages of producton, and
whch ncudes n ts nventores raw or unfnshed product, may
not reduce the vaue of ts cosng nventory taken at market by
an amount of estmated osses on account of shrnkage, degradng,
wastage, and dscount
3. Decson ffrmed.
The decson of the oard of Ta p eas (20 . T. ., 394) s
affrmed.
Unted States Crcut Court of ppeas for the fth Crcut.
Industra Lumber Co., Inc., pettoner, v. Commssoner of Interna Revenue,
respondent.
Petton for revew of decson of Unted States oard of Ta ppeas (Dstrct of
Lousana).
efore ryan, oster, and Waker, Crcut udges.
May 3, 1932.
OPINION.
Waker, Crcut udge: The Commssoner of Interna Revenue assessed
aganst the pettoner corporaton, a manufacturer of umber, a defcency of
ncome and profts ta es for the year 1920, that defcency beng a resut of the
re|ecton by the Commssoner of the pettoner s cosng nventory for that year,
and the dsaowance by the Commssoner of deductons camed by the pet-
160903 33 14
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205, rt. 1612.
200
toner from the tota shown by an aternatve nventory submtted by the pet-
toner after the re|ecton of the nventory orgnay submtted. The cosng
nventory orgnay submtted by the pettoner, whch kept ts books on the
accrua bass, purported to be at cost or market, whchever s ower, as
authorzed by reguaton. (Reguatons 45, artce 1582.) In takng that fuven-
ory pettoner ascertaned the cost and the then prevang market vaue of
each tem and sted that tem at the ower of the two fgures, wth a resut that
where cost of the artce was ower than market t was sted at cost, and where
cost of the artce was hgher than market t was sted at market. What the
pettoner treated as the cost of umber of any grade was the so-caed average
cost, whch was arrved at by ascertanng the tota cost ncudng that of the
raw matera (the tmber), sawng, handng and smar e penses of a um-
ber of a grades that had reached the same stage of manufacture, and then
dvdng that tota by the tota number of feet of a grades manufactured, the
amount so ascertaned beng treated as the cost of a foot of umber of any
grade, wth a resut that a gven number of feet of umber of the hghest grade
was assgned the same cost as the same number of feet of the owest grade
whch had reached the same stage of manufacture. Pettoner s stock contaned
fve grades of umber, the grades beng determned by the presence or absence of
knots or other defects, the hghest grade beng desgnated and better,
and the other grades beng 1, 2, 3 and 4. the ast stated beng the owest. The
prces of dfferent grades of umber vary, accordng to condton and market
demands, from 120 a thousand feet for the hghest grade to 8 a thousand feet
for the owest grade. The fndngs of fact ncuded the foowng as to pet-
toner s busness:
bout 25 per cent of ts product as t came fresh cut from the m was n
the form of raroad brdge tmbers and beams, whch were sod green, whe
the remanng 75 per cent requred further processng before marketng. Under
the methods foowed by the pettoner about one-thrd of ths resdue, or 25
per cent of the whoe, was cured In kns, whe the remander, or 50 per cent
of the whoe, was ar dred n the yards. n dryng requred from three to
fve days and ar dryng from three to four months. fter curng, the stock
not hed for sae n the rough was sent to the panng ms where t was
dressed and trmmed n fna preparaton for market.
fter the Commssoner had refused to accept the above-descrbed Inventory
orgnay submtted, the pettoner submtted another nventory, n whch the
tems were sted at market, the tota at market beng ess than the tota at
cost. In that nventory, the pettoner camed deductons from the tota sted
market vaue of the goods nventored of stated amounts for, respectvey,
shrnkage and breakage, degradng, and dscount. Those deductons were ds-
aowed by the Commssoner. The rungs of the Commssoner were sus-
taned by the oard of Ta ppeas.
It appears from the record that a ground reed on for re|ectng the cosng
nventory orgnay submtted by the pettoner was that the evdence showed
that pettoner n makng that nventory apped to the severa tems sted the
actua sae prce for market, but not the actua cost prce for cost. Wth refer-
ence to nventores the appcabe statute provdes:
That whenever n the opnon of the Commssoner the use of nventores s
necessary n order ceary to determne the ncome of any ta payer, nventores
sha be taken by such ta payer upon such bass as the Commssoner, wth
the approva of the Secretary, may prescrbe as conformng as neary as may
be to the best accountng practce n the trade or busness and as most ceary
refectng the Income. (Secton 203, Revenue ct of 1018, 40 Stat.. 1057.)
Reguatons adopted n the e ercse of authorty conferred by the cted ct,
secton 1309, ncude those set out In the margn.1
1 Need of nventores. In order to refect the net ncome correcty. Inventores nt the
begnnng and endng of each year are necessary In every case In whch the producton.
furchase or sae of merchandse s an ncome-producng factor. The nventory shoud
ncude raw materas and suppes on hand that have been acqured for ae, con-
sumpton or use n productve processes, together wth a fnshed or partv fnshed
goods. (Reguatons 4 | (1920 d.), artce 1581.)
Inventores at cost. Cost means :
(1) In the case of merchandse purchased, the nvoce prce ess trade or other ds-
counts, e cept strcty cash dscounts, appro matng a far Interest rate, whch may be
deducted or not at the opton of the ta payer, provded a consstent course Is foowed.
To ths not Invoce prce shoud be added transportaton or other necessary charges
Incurred In acqurng possesson of the goods.
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201
( 205, rt. 1812
The burden was on the pettoner to prove that the amount t assgned to an
Item sted n the Inventory as the cost of that Item was, at east appro matey,
the actua cost of It. In the absence of evdence tendng to prove that the cost
per foot of the raw matera whch went nto umber of one grade was the same
as the cost per foot of the raw matera whch went nto umber of n dfferent
grade, the pettoner was not warranted n assumng that those costs were the
same, though the other eements of the tota costs were the same. It Is a
matter of common knowedge, of whch |udca notce may be taken, that ord-
nary the cost to a umber manufacturer of the raw matera stumpage or
ogs from whch umber s produced s based upon estmates as to the amounts
and grades of umber that may be e pected to be produced from It, the prce or
cost of tmber a arge percentage of whch may be e pected to go nto hgh grade
umber beng hgher than that of tmber havng the same footage, but from
whch a substantay smaer percentage of hgh grade and hgh prced umber
may be e pected to be produced. It s not unusua for estmates made by
tmber crusers to be avaed of by prospectve purchasers of tmber. It rea-
sonaby mny be nferred or supposed that ordnary the estmates whch nfu-
ence an e perenced and prudent umber manufacturer n agreeng on the prce
to be pad for tmber bought n effect amount to roughy determnng the
(2) In the case of merchandse produced by thp ta payer, (a) the cost of raw ma-
teras and suppes enterng nto or consumed n connecton wth the product, (b) e -
pendtures for drect abor, (c) ndrect e penses Incdent to and necessary for the
producton of the partcuar artce, Incudng n such ndrect e penses a reasonabe pro-
porton of management e penses, but not ncudng any cost of seng or return on
capta whether by way of nterest or proft. In any ndustry n whch the usua rues for
computaton of cost of producton are nappcabe, costs may be appro mated upon such
bass as may be reasonabe and n conformty wth estabshed trade practce n the
partcuar ndustry. (Ib., artce 1583.)
Inventores at market. Under ordnary crcumstances, market means the current
bd prce prevang at the date of the nventory for the partcuar merchandse n the
voume n whch ordnary purchased by the ta payer, and s appcabe n the cases
(a) of goods purchased and on hand, and (b) of basc eements of cost (materas, abor
and burden) n goods n process of manufacture and n fnshed goods on hand e cusve,
however, of goods on hand or n process of manufacture for devery upon frm saes con-
tracts at f ed prces entered nto before the date of the nventory, whch goods must be
Inventored at cost. Where no open market quotatons are avaabe, the ta payer must
ose such evdence of a far market prce at the date or dates nearest the nventory as may
be avaabe, such as specfc transactons In reasonabe voume entered nto n good
fath, or compensaton pad for canceaton of contracts for purchase commtments.
Where, owng to abnorma condtons, the ta payer has reguary sod such merchandse
at prces ower than the current bd prce ns above defned, the Inventory may be vaued
at such prces, and the correctness of such prces w be determned by reference to the
actua saes of the ta payer for a reasonabe perod before and after the date of the
nventory. Prces whch vary materay from the actua prces so ascertaned w not
be accepted as refectng the market and the penates prescrbed for fng fase and
frauduent returns may be asserted. Goods n process of manufacture may be vaued
for purposes of the nventory on the owest of the foowng bases: (1) the repace-
ment or reproducton cost prevang at the date of the nventory or (2) the proper
proportonate part of the actua fnshed cost or, under abnorma condtons, (3) the
proper proportonate part of the saes prce of the fnshed product, account beng taken
n a cases of the proportonate part of the tota cost of basc eements (materas, abor
and burden) represented n such goods n process of manufacture at the stages at whch
they are found on the date of the Inventory. The nventores of ta payers on whatever
bass taken w be sub|ect to nvestgaton by the Commssoner, and the ta payer must
satsfy the Commssoner of the correctness of the prces adopted. e must be prepared
to show both the cost and the market prce of each artce ncuded n the nventory.
(b., artce 1584.)
Inventores of umber moM/focrers. 1. ecause of the mpractcabty of de-
termnng accuratey the costs propery assgnabe to each speces, grade, and dmenson
of umber makng up the product of the m, umber manufacturers may use as a bass
for prcng nventores the average cost to the manufacturer of producng the nventored
products durng the ta abe year for whch the teturn of net ncome Is made.
2 It the quantty of umber on hand at the tme of nventory s greater than the
tota quantty of umber produced durng the current ta abe year, t s evdent that the
e cess stock has been carred over from the prevous year s producton, and such e cess
sha be vaued at the average cost of producton for the precedng ta abe year.
3. ta payer who reguary aocates In hs books of account such average cost to the
dfferent knds and grades of umber n proporton to the seng vaue of such knds and
grades may. sub|ect n each case to the approva of the Commssoner upon audt_of the
return, make hs returns of net ncome on that bass. (b., artce 1587.)
auaton of nventores.- The ct provdes two tests to whch each nventory must
conform: (1) It must conform as neary as may be to the best accountng practce n
the trade or busness, and (2) t must ceary refect the ncome. It foows, therefore,
that nventory rues can not be unform but must gve effect to trade customs whch
come wthn the scope of the best accountng practce In thp partcuar trade or busness.
In order to ceary refect ncome, the nventory practce of a ta payer shoud be con-
sstent from year to year, and greater weght Is to be gven to consstency than to any
.... , .... as tne method or bass
partcuar method of nventoryng or bass of vauaton so ong as the method or
used s substantay n accord wth these reguatons. (b., artce o8-.
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205, rt. 1812.
202
vaues of the dfferent parts of the tmber whch, respectvey, w, n the
process of manufacturng, go nto dfferent grades of umber, wth the resuts
that the agreed-on prce for the tmber s the aggregate of the vaues assgned
to the dfferent parts of t whch are e pected to go nto dfferent grades of
umber, and that substantay dfferent costs per foot w be attrbuted to the
dfferent parts of the tmber whch, respectvey, w go nto dfferent grades
of umber. There was no evdence tendng to prove that the actua cost per
foot of the raw matera whch went nto grade and better umber
sted n the nventory was, even appro matey, the same as the cost per
foot of the raw matera whch went nto No. 4 umber, or any of the other
numbered grades of umber manufactured by the pettoner. There was no
evdence tendng to prove that the pettoner, n determnng the cost of the
raw matera from whch was produced the severa tems of umber sted In
ts orgna nventory conformed to an accountng practce whch had been
adopted or foowed In the umber manufacturng trade or busness, or to a
practce whch prevousy had been foowed by the pettoner tsef n ts
busness.
It s not dened that t was mpractcabe for the pettoner to determne
accuratey the costs propery assgnabe to each grade of umber sted n ts
nventory. That the offcas charged wth the admnstraton of the statute
recognzed the mpractcabty of u umber manufacturer dong so Is ndcated
by an above set out reguaton (artce 15S7), whch permts the assgnment to
umber of any grade of the average cost, not of umber of a grades, but of
umber of that grade. If the pettoner, n determnng the cost of each Item
of umber sted n ts orgna nventory, had arrved at the cost of the raw
matera used n producng that umber by aocatng to each foot of the raw
matera used n producng a the grades of umber the average cost per foot
of a the raw matera so used n producng a grades of umber In proporton
to thf seng vaue per foot of umber of the dfferent grades, t we mght have
been contended that such acton was permssbe by reason of t beng anaogous
to a practce whch was sanctoned by an above set out reguaton. ( rtce
1587(3), supra.) ut the evdence shows that the pettoner, Instead of aocat-
ng to each foot of raw matera used n producng the severa grades of umber
the average cost per foot of the tmber used n producng umber of a those
grades n proporton to the seng vaue per foot of such grades of umber,
attrbuted to each foot of tmber used n producng any grade of umber the
same cost, wthout any regard to the wdey dfferng seng vaues per foot
of the severa grades. In dong so the pettoner assumed the e stence of a
fact whch no evdence adduced tended to prove. urthermore, the fact so
assumed acks the appearance of probabty, as t can not reasonaby be sup-
posed that the cost per foot to an e perenced umber manufacturer of the
part of a saw og from whch grade and better umber was e pected to
be produced woud be the same as the cost per foot of the parts of that og
whch were e pected to go nto ower grades of umber and nto waste or refuse.
It s apparent that f the ccsts per foot of the tmber used In producng two
ots of umber of dfferent grades but havng the same footage are substantay
dfferent the costs of the two ots are dfferent, though other eements of the
ast-mentoned costs are the same. It we may be consdered that, n the
absence of supportng evdence, t s arbtrary and unreasonabe to assgn to
tmber used n producng grade and better umber the same cost per
foot as s assgned to tmber used n producng No. 4 umber, and that a resut of
so dong s to msrepresent the costs per foot of umber of both the grades
mentoned. It s obvous that n determnng whch s ower, market or cost, a
fase resut must be reached f for market the actua market prce s used, but
for cost somethng other than actua cost s used. We thnk t fary appears
from the record that the re|ecton of the cosng nventory orgnay submtted
by the pettoner was warranted because the evdence showed that n makng
that nventory the pettoner dd not assgn to the severa sted tems of umber
the actua costs of those Items, and that what was treated as consttutng such
costs was substantay dfferent from the actua costs. Certany t does not
appear from he record that the pettoner sustaned the burden of provng that
the Commssoner acted arbtrary n concudng that the costs assgned to the
severa tems sted n the orgna cosng Inventory were not the actua costs of
those tems, and that t was not shown that the vauatons assgned to the
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203
205, rt. 1612.
severa sted tems were arrved at by comparng actua cost wth actua
market, and takng the ower of the two fgures. (Lucas v. anms Cty Struc-
tura Stee Co., 281 U. S., 284, 271 Ct. D. 223, C. . I -2. 299 .)
What s companed of wth reference to the cosng nventory at market
whch was submtted by the pettoner after the re|ecton cf the oue above con-
sdered s the dsaowance of camed deductons from the stated tota market
vaue of the tems sted n that nventory, the amounts sought to be deducted
beng for shrnkage .and breakage, for degrade and for dscount. vdence
showed that umber was graded as t came from the saw, and was then stacked
n pes and nventored. The deductons camed for shrnkage and breakage,
and for degrade, were based on estmates of osses due to umber shrnkng and
beng broken between the tme t was frst graded and stacked and the tme of
ts sae and shpment, and to changes of condton of some umber durng that
tme havng the effect of requrng t to be assgned to a grade ower than the
one to whch prevousy t was assgned. The deducton of a stated amount
as dscount was based on the contenton that such a deducton from the tota
market vaue shown was aowabe n order to brng the nventory to a net
reazabe fgure at the nventory date. Reguatons appcabe to nventores re-
qured, to be furnshed by a umber manufacturer ta payer do not ndcate that
t was contempated by the offcas who prepared those reguatons that such
deductons as the ones camed woud be aowabe. It was not made to appear
that the ettoner, n makng such deductons, conformed to an estabshed
accountng practce n the umber manufacturng busness. The camed de-
ductons based on estmated osses due to shrnkage and breakage, and resut-
ng from changes In condtons cang for degradng, covered aeged osses sus-
taned after the e praton of the year 1920. The amounts of osses due to
thngs whch occurred entrey n a subsequent year were not factors proper to
be consdered n determnng ncome n 1920. The market vaue of stocks on
hand at the end of that year was not sub|ect to be reduced by osses or
deteroraton whch occurred n n subsequent year. The dsaowance of the
two camed deductons now under consderaton s sustanabe on the ground
that the evdence was such as |ustfed fndngs that osses n the amounts and
due to the causes stated were not proved to have been sustaned pror to the
end of the year 1920, and that the amounts of whatever osses due to the
causes stated whch may have been sustaned pror to the end of the year 1920
were not estabshed by evdence.
The nventory now n queston beng one at market, the prces theren assgned
to the artces sted are to be taken to be the current prces prevang at thq
date of the nventory for the goods sted, arrved at n a way prescrbed by an
appcabe reguaton (artces 15S4 and 1587, supra) or n accordance wth an
approved accountng practce. The defnton of market found n a |ust-men-
toned reguaton ndcates the absence of any ntenton to make the concu-
sveness of the tota of such assgned prces shown by the nventory dependent
upon the ta payer beng abe to reaze n cash the amount of that tota at the
nventory date, or to permt the makng of such deductons as those camed by
the pettoner n order to brng the nventory to a net reazabe fgure at the
nventory date. So far as we are advsed, nothng n any reguaton adopted or
n any estabshed practce ndcates an ntenton to make the cosng Inventory
requred serve the purpose of showng what the ta payer coud reaze n cash
for hs entre stock at the date of the nventory. It s not to be assumed
that ordnary the tota amount shown by an nventory can, at the date of t,
be reazed n cash for the goods nventored. It we may be supposed that not
nfrequenty, even when condtons are norma, t may be found to be mpossbe
to do so. bty to do so s not to be accepted as a test of the suffcency of
an nventory n the absence of authentc evdence of an authortatve recogn-
ton of t as such. It seems reasonabe to thnk that the adopton of the requre-
ments that a umber manufacturer ta payer furnsh a cosng nventory was
nfuenced by a purpose to enabe ta offcas by e amnng that nventory n
connecton wth the ta payer s openng nventory for the same ta year, show-
ngs as to addtons to stock durng that year, saes, recepts and e pendtures,
and other factors proper to be consdered to determne what, f any, part of
the ta payer s ncome hs profts or gans went nto the goods sted n the
cosng nventory. It s a common practce to take nventores at cost. Inven-
tory at market s a substtute for nventory at cost. The ettoner had, and
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206, rt. 1621.
204
e ercsed, the eecton to make ts cosng nventory at market, because when
the Inventory was taken market was ower than cost. The reguaton per-
mttng ths to be done evdences the concuson that t Is far and reasonabe
to count at ts market vaue at the tme a cosng nventory Is taken the part,
f any, of the ta payer s ncome whch had gone nto goods on hand at the
end of the year, though at the tme that part of hs ncome was acqured by the
ta payer ts vaue was more than that ndcated by the nventory. It was not
made to appear that under any reguaton adopted or any estabshed account-
ng practce a ta payer s entted to deduct from the tota shown by an
nventory, whether taken at cost or at market, the amount of a dscount
requred to brng that tota to a sum whch, at the date of the nventory, coud
be reazed n cash for the goods nventored. Nor was t made to appear that
the aowance of the camed deducton now under consderaton was requred
to make the nventory a proper factor n the cear refecton of ncome.
resut of aowng that deducton woud be to make the nventory one, not at
market, but at ower than market when market, as defned by reguatons, the
reasonabeness or vadty of whch has not been chaenged, was ower than
cost. Certany t can not propery be sad that the acton of ta offcas
now under consderaton was voatve of any adopted reguaton, of any
estabshed practce n the umber manufacturng busness, or of any recognzed
rue of aw. The practce adopted by the Commssoner and the oard of Ta
ppeas wth reference to camed deductons from the tota of an nventory
taken at market s not to be nterfered wth uness ceary unawfu. Lucat v.
mercan. Code Co., 280 U. S., 445, 449 Ct. D. 168, C. . I -1, 314 .)
or the reasons ndcated we concude that none of the companed of actons
of the Commssoner and the oard of Ta ppeas was erroneous.
The petton s dened.
S CTION 206. N T LOSS S.
rtce 1621: Net osses, defnton and computaton.
R NU CT OP 1924.
Net osses of former corporaton the assets of whch had been
acqured by new corporaton. (See Ct. D. 513, page 252.)
rtce 1621: Net osses, defnton and com- I-33-5608
putaton. Ct. D. 535
INCOM T R NU CTS O 1024 ND 1926 D CISION O COURT.
1. Deducton Net Loss Worthess Stock.
Where a ta payer, devotng hs tme to nventng, uses a corpora-
ton, whch he organzed and of whch and ts affars he was n
actve charge, to manufacture and market artces of hs nventon,
purchases a ts capta stock wth the ntenton of dsposng of t
to the pubc, deas wth the corporaton as an entty and through
t wth the pubc, makes t hs debtor, fes separate returns of n-
come for t and hmsef and cams deductons for debts owed hm
by the corporaton, a oss of hs nvestment n the stock of the
corporaton s not attrbutabe to the operaton of a trade or bus-
ness reguary carred on by the ta payer wthn the meanng of
secton 206(a)1 of the Ievenue ct cf 1924, and s therefore not an
aowabe deducton under subdvson (b) of that secton.
2. Same When Stock ecomes Worthess.
oss on account of worthess stock of a corporaton occnrs n
1924, when ts assets are sod for ess than an amount suffcent to
pay ts credtors, and not n 192f , when t s dssoved.
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205
206, rt 1621
Um ted States Crcut Coubt of ppeas fob.- the Second Cbcut.
ubert oton and orence W. Daton, pantff s-appetee , v. rank . moen,
as ecutor of the Last Wtt and Testament of rank . owers, a Co-
ector of Interna Revenue of the Unted etate for the Second Dstrct of
New York, defendant-appeant.
ebruary 15, 1932.
opnon.
Manton, Crcut udge: The appeee, ubert Daton, s an nventor and en-
gneer. In 1917, he organzed the Daton Manufacturng Co., a New York
corporaton, of whch he became the presdent, treasurer and a drector. e
owned a the capta stock, whch cost hm 395,000, and made unsuccessfu
efforts to se the stock to the pubc. e devoted hs tme to nventng, and
used the Daton Manufacturng Co. to manufacture and market artces of hs
nventon. e was n actve charge of the company and ts affars, and from ts
ncorporaton unt September, 1924, spent the greater part of hs tme at ts
offce, recevng no compensaton for hs tabors, athough he was credted wth
a saary from 1917 to 1922, Incusve. The company at no tme was proftabe
and appeee oaned to t from 1920 to 1924 appro matey haf a mon
doars for whch t was ndebted to hm at the tme of ts dssouton. It man-
ufactured artces of hs nventon ony, but sod some sma toos ncdenta to
the artces manufactured. In 1924, t became bady nvoved fnancay, owng
consderabe money. In 1923, n hs ncome ta return, appeee camed a de-
ducton for bad debts of 157,035.50, owed hm by the corporaton, camng
that t was unabe to meet ts obgatons and pay ts debts to hm. In De-
cember, 1923, the abtes e ceeded the assets by 173,462, and n that year
t ceased operatons and took steps to wnd up ts busness. Its assets were
dsposed of durng 1924. The profts of the sate were nsuffcent to pay ts
credtors. owever, the appeee advanced suffcent funds to the corporaton
for that purpose. It was not actuay dssoved unt 1925, when appeee sur-
rendered hs stock for canceaton.
In hs return for 1925 he camed a deducton for te oss sustaned n hs
nvestment of 395,000 pad for the stock of the corporaton, pursuant to sec-
ton 206, subdvsons (a) and (b), of the Revenue ct of 1924 (43 Stat,
200). Under subdvson (a) the net oss means the e cess of the deduc-
tons aowed by secton 214 er secton 234 over the gross ncome, wth the
foowng e ceptons and mtatons:
(1) Deductons otherwse aowed by aw not attrbutabe to the operaton)
of a trade or busness reguary carred on by the ta payer sha be aowed ony
to the e tent of the amount of the gross ncome not derved from such trade or
busness.
Subdvson (b) provdes:
If, for any ta abe year, It appears upon the producton of evdence sats-
factory to the Commssoner that any ta payer has sustaned a net oss, the
amount thereof sha be aowed as a deducton n computng the net ncome of
the ta payer for the succeedng ta abe year (herenafter n ths secton caed
second year ), and f such net oss s n e cess of such net ncome (computed
wthout such deducton), the amount of such e cess sha be aowed as a
deducton In computng the net ncome for the ne t succeedng ta abe year
(herenafter n ths secton caed thrd year ) the deducton n a cases
to be made under reguatons prescrbed by the Commssoner wth the approva
of the Secretary.
Reguatons 65, artce 1621, provdes that the net oss may ncude theren
osses from the sae or other dsposton of rea estate, machnery, and other
capta assets used n the conduct of such trade or busness. a
order to be entted to cam an aowance for a 4 net oss the ta payer must
have suffered an actua net oss n a trade or busness durng the ta abe
year.
The uestons presented here are (a) when was the Ioks sustaned and (b)
f n 1924, was It n a busness or trade resuary carred on by the appeee.
Tfoere s no |ustfcaton for sayng that the busness of the corporaton was
that of the appeee. Durng the perod the appeee deat wth the corporaton
as an entty. When he pad the debts of the corwraton, he drew on M
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206
persona account In favor of the corporaton s account and ths made the
corporaton hs debtor. Separate ta returns were fed by the corporaton
and by the appeee. e purchased the capta stock wth the ntenton of
dsposng of t to the pubc. s ndvdua tme was spent n arge part n
matters of nventon. In hs return for 1923, he stated that the corporaton
ceased operatons and took steps to wnd up ts busness that he advsed the
trade that no further orders woud be accepted and the pant woud reman
cosed. The oss now sought to be deducted was an nvestment whch e made
n the corporaton and dd not occur n the operaton of the trade or busness
reguary carred on by the appeee. (Mente v. sner, 266 ed., 161 (C. C
. 2) T. D. 3029, G. . 2, 131 ede v. Commr., 30 ed. (2d), 622 (C. C. . 2)
Godberg v. Commr., 36 ed. (2d), 551 (Ct. pp. D. C.) Phpps v. Commr.
(0. C. . 2), December 7, 1931 nderson v. . 8., 48 ed. (2d), 201 (C. C.
. 5).)
y the statute, aowng the deductons and carryng over the oss for two
years, Congress ntended to gve reef to persons engaged n an estabshed
busness for osses ncurred durng a year of depresson n order to equaze
ta aton n the two succeedng and more proftabe years. It was not ntended
to appy to occasona or soated osses. Congress had made ths dstncton.
( nderson v. U. 8., 48 ed. (2d), 201 (C. C. . 5) Pabst v. Lucas, 36 ed. (2d),
614 (Ct. pp. D. C.) De aven Mfg. Co. v. U. 8., 31 ed. (2d), 999 Ct. D. 62,
C. . III-1, 235 .) In N on v. Lucas (42 ed. (2d), 833), ths court con-
sdered a case where three pettoners owned a the stock of a corporaton and
made a practce of seng n the corporate name. usness was unsuccessfu
and the pettoners made oans to the corporaton, agreeng to take n return the
profts. The company sustaned arge osses and the pettoners dvded these
among themseves and camed a deducton n ther ncome ta returns. We
sad that the partes chose to dea wth the corporaton as a ega person, whch
they coud do f they so desred that the agreements created contracts wth the
same obgatons as though the corporaton had been an ndvdua and the fact
that the partners coud at any tme take over the assets and dea drecty wth
ther customers was not a reason for ookng behnd the pattern so devsed and
used we sad further that the osses of the corporaton n the partcuar year
were not the osses of the stockhoders.
Ths ta payer dd not regard the busness osses of the Daton Manufacturng
Co. as hs oss. The oss sustaned by the appeee whch he seeks to charge
off s a capta nvestment oss. The rue s we setted that the corporaton
wt be ooked upon as a ega entty. (Donne v. errng- a Marvn Safe
Co., 208 U. S., 267 en v. oard of Ta Supervsors, 282 . S.. 19.) It s ony
where the ega entty s used to defeat pubc convenence, protect fraud or
defend crme, that the entty w be dsregarded and the corporaton be sad
to be an assocaton of persons. ( . 8. v. Mwaukee Refrgerator Co., 142
ed., 247 Ma|estc Co. v. Orpheum Crcut, 21 ed. (2d), 720 (C. C. . 8)
oatrght v. Stente Rado Corp., 46 ed. (2d), 385 (C. C. . 10).)
ppeee rees prncpay upon the authorty of Washburn v. Commssoner
(51 ed. (2d), 949 (C. C. . 8)), where t appeared that a awyer gave up hs
practce and devoted a hs tme to the management of varous corporate
enterprses whch he had formed n hs practce and n whch he was fnancay
nterested. our of these corporatons were tmber-hodng companes whch
he aone managed. To open up more tmberands, he organzed a raroad,
advanced the money to bud t and took back most of the stock. In 1922, he
sod the stock, sustanng a heavy oss, and sought to deduct t n hs 1923
return. e was aowed such deductons, as t was found that hs occupaton
and avocaton was the management of hs own nterests. The court sad:
party may have nterests n corporate stocks, have no partcuar occupa-
ton, and ve on the return of hs nvestments. That woud not consttute
busness under the statute n queston (secton 204, Revenue ct 1921, now
secton 206, Revenue ct 1924). e may, however, take such an actve part
n the management of the enterprse n whch he has nvestments as to amount
to the carryng on of a busness.
The budng of the raroad was not an soated transacton. It was con-
structed as an ad to the tmber companes and was part of the genera enter-
prse It was merey the ater ego of the pettoner. e mantaned a com-
petey organzed offce and gave hs persona attenton to the management of
the varous companes, recevng no saary e cept such as to cover the actua
e penses nvoved. s ncome was the resut not aone of hs nvestments, but
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207
206, rt. 1621.
aso of the abor e pended by hm In the deveopment of the companes. The
combnaton of the two consttuted hs avocaton. These facts, perhaps, ds-
tngushed the case from the nstant case. t bar, t s cear no busness s
shown e cept that conducted by the Daton Manufacturng Co. The ta payer
had an ndependent busness, to wt, nventng. It must be borne n mnd that
the appeee here advanced 395,000, not to hs own busness, but to be apped
to the purchase of stock n the corporaton and e chose to dea wth the
pubc through the corporaton. The oss he thus sustaned was not a oss
ncurred n the reguar occupaton of a trade or busness.
Moreover, t appears that the oss whch the appeee now seeks to deduct
was ncurred when the stock proved worthess. Ths dd not occur n 1925
when the corporaton was dssoved. There was a net defct at the end of
1924 of 714,344. of the assets had been sod n that year. ppeee had
ascertaned the stock to be worthess pror to the end of 1924, and f any
deducton was permssbe, It shoud have been made n 1924. The Comms-
soner therefore was correct n hodng that the stock was not ascertaned to
be worthess n 1925. (.Darng v. Commr., 49 ed. (2d), 111 (C. C. . 4)
Deeds v. Commr., 47 ed. (2d), 695 (C. C. . 6) DcLoss v. Commr., 28 ed.
(2d), 803 (C. C. . 2) Roya Packng Co. v. Commr., 22 ed. (2d), 536
(C. C. . 9).)
udgment reversed.
rtce 1621: Net osses, defnton and computaton.
R NU CTS O 1021, 1824. ND 1028.
mendment of artces 1601 and 1621, Reguatons 62, 65, and 69.
(See T. D. 4349, page 117.)
rtce 1621: Net osses, defnton and compu- I-40-5747
taton. a. D. 577
( so Secton 214(a)4, 5, and 6, rtce 141.)
INCOM T R NU CT O 1021 D CISION O COURT.
1. Deducton Net Loss Loss Payment Undeb a Guaranty.
Where a person, whose soe busness s that of presdent of a
umber corporaton, wthout e pectaton of proft guarantees a
contractor aganst a oss n the constructon of a hospta whch
the atter agreed wth the Unted States to bud for a specfed
amount, an amount pad under such guarantee s not a net oss
resutng from the operaton of any trade or busness reguary
carred on by the ta payer wthn the meanng of secton 204(a)
of the Revenue ct of 1921 and s not deductbe from net ncome
under subdvson (b) of that secton nor s t deductbe as a
oss under paragraph 4 or 5 of secton 214(a) of that ct
2. Decson ffrmed.
The decson of the oard of Ta ppeas (18 . T. ., 21) s
affrmed.
Unted States Crcut Court op ppeas fob the Seventh Crcut.
Lorctta . ncs, Raph . nes, and Chares M. ncs, as ecutors of the
W of dward nes, Deceased, pettoners, v. Commssoner of Interna
Revenue, respondent.
Petton for revew of order of Unted States oard of Ta ppeas.
efore vans and Sparks, Crcut udges, and atze , Dstrct udge.
pr IS, 1932.
OPINION.
Ths appea s taken from an order of redetermnaton of the Unted States
oard of Ta ppeas, and nvoves the ncome ta es of dward nes, heren-
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208
after referred to as nes, for the year 1922. The statute authorzng the
appea s Revenue ct 1926 (ch. 27, 44 Stat., 9), sectons 1001-1003.
dward nes, at the tme of hs death, was presdent of dward nes
Lumber Co., herenafter referred to as Lumber company, and had hed that
offce contnuousy snce about 1892. e ded durng the pendency of hs
appea to ths court, and pettoners are hs e ecutors.
Pror to or about 1917 the Lumber company contracted wth S eedway Park
ssocaton, herenafter referred to as Speedway, to furnsh umber for con-
structng an automobe speedway. Durng a part of 1917 nes was absent
from the cty and durng hs absence deegated to the secretary of the Lumber
company certan authorty n the management thereof. Whe nes was
absent sad secretary, actng for the Lumber company, n e cess of hs author-
ty and wthout the knowedge of nes, entered nto what appeared to be a
mora guarantee of certan ndebtedness of the Speedway, whch nvoved the
Lumber company to the e tent of severa hundred thousand doars.
Upon nes return the openng date of the Speedway, as advertsed, was
cose at hand, and t was qute apparent that the pant woud not be ready by
that tme uness sad ndebtedness guarantee was pad and money was furnshed
to pay the abor and other thngs necessary to compete the pro|ect. On nes
recommendaton ths ndebtedness was pad by the Lumber company, and as a
resut thereof t receved 1,194,000 par vaue of mortgage securtes of the
Speedway, whch was tweve-thrteenths of the Speedway s tota outstandng
mortgage securtes. Later, n order to get compete contro of the Speedway,
the Lumber company purchased from certan stockhoders ther stock nterest In
the Speedway, and pad them therefor 64,177.94. nes concuded that f the
property of sad Speedway coud be hed for severa years t woud ncrease
materay n vaue. e aso fet a persona responsbty, as presdent of the
Lumber company, n havng t make the aforesad e pendtures on behaf of
the Speedway, and he personay offered the Lumber company 550,000 for ts
cam aganst the Speedway and for ts mortgage securtes whch the Lumber
company had taken over. That offer was accepted, and nes thereupon took
over the cam and securtes.
In December, 1917, the war had stopped a actvtes of the Speedway, and
n the sprng of 1918 nes began negotatons wth the Government ookng
to ts takng over the Speedway property for a hospta. The Government was
parta to budng a frame hospta on the Speedway ste. nes much pre-
ferred a freproof budng, and suggested that Its cost woud not greaty e ceed
the cost of a frame budng. In support of hs suggeston nes procured
Shank Co., contractors, to submt a proposa to construct sad freproof bud-
ng at a certan prce, whch proved to be satsfactory to the Government, and
a contract embodyng that proposa was entered nto n March, 1920.
In order to nduce the Government to construct a freproof budng, nes
ngreed to and dd contrbute 1,000,000 toward the erecton of It, and aso
ndemnfed Shank Co. aganst any oss sustaned by t n ts erecton.
The cost of the hospta, known as the dward nes r. ospta, was
5,049,840.32, and the amount receved from the Government under the contract
was 3,282,498.79, makng a oss to nes, after deductng hs contrbuton, of
767,341.53. Of ths oss 282,632.15 was pad by nes n 1920, 467,362.23 n
1921 and 17,347.15 n 1922.
t the tme nes purchased Seedway s mortgage securtes from the Lumber
company he dd not have, nor dd he at any tme have, any trade, occupaton
or busness e cept that of beng presdent of the Lumber company and ts
affated subsdary organzatons: and when he was rembursng Shank Co.
for Its osses n the constructon of the hospta there was no one to whom he
coud ook for rembursement, nor dd he then e pect to be rembursed.
In an audt of nes return for 1920, he was aowed a deducton for oss of
282,632.15 for 1921 he was aowed as a oss sad sum of 467,362.23, and hs
net oss for that year was 389,483.27. In determnng nes ta abty for
1922, respondent aowed as a deducton for oss sad sum of 17,347.15, but
refused to appy the 1921 net oss aganst the net Income of 35,515.33 deter-
mned for 1922.
Respondent asserted a defcency In ncome ta for 1922 of 1,927.73, but n
hs amended answer camed that the aowance of 17,347.15 as a deducton
for that year was an error. The oard thereupon redetermned nes
defcency n the sum of 5.85)9.93.
Sparks, Crcut udge: The soe ssue heren nvoved s the deductbty
from ncome of nes of the amount pad by hm as a resut of hs guaranty to
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209
5206, rt. 1621.
protect Shank Co. from oss ncurred by them In the erecton of the dward
nes r. ospta.
Pettoners contend, however, that nes oss wag ntated when he bought
the mortgage securtes n December, 1917, and was not caused by hs ndemn-
fyng contract wth Shank Co. n March, 1920. Wth ths contenton we can
not agree. The purchase of the securtes may have ndrecty and eventuay
ed to the e ecuton of the guaranty contract, but t s certan that sad purchase
of securtes n no way obgated nes to e ecute the guaranty contract. There
s no evdence of record that nes sustaned any oss n the entre transacton
over and above the sum of 767,341.53, whch he pad under hs guaranty eon-
tract n the respectve years of 1920, 1921, and 1922. Ths represented the df-
ference between the cost of the hospta and the contract prce receved from the
Government, phs nes contrbuton of 1,000,000. We thnk there s no
causa connecton between nes purchase of the bonds and hs oss under hs
ndemnfyng contract
It can not be dened that nes sustaned osses n 1921 and 1922 n the
manner and amounts as herenbefore set forth. Whether or not such osses are
deductbe from hs ncome for those years depends upon the statutes set forth
n the margn.1
The oard hed that nes oss n 1921 was the resut of an soated trans-
acton and was not a net oss resutng from the operaton of any trade or
busness reguary carred on by nes wthn the meanng of secton 204(a).
snpra. It aso hed that the Commssoner erred n aowng a deducton of
17,347.15 n the same transacton for the year 1922, as representng a oss
Incurred n trade or busness, or ncurred n a transacton entered nto for
proft though not connected wth the trade or busness wthn the meanng of
secton 214(a), (4), and (5), suprn.
We thnk both rungs of the oard are correct. It s qute obvous from
the record that the actvtes whch resuted a the osses to nes were no part
of the operaton of any trade or busness reguary carred on by hm but they
consttuted a dstnct and soated transacton, whoy separate from hs trade
or busness, whch was that of presdent of the Lumber company. The Lumber
company had no nterest n ether the Speedway or the hospta after t sod
the Speedway securtes to hm n December, 1917.
It s aso apparent from nes testmony that n carryng out the pro|ects of
reevng the Lumber company and n guaranteeng the erecton of the hospta
he had no thought of makng a fnanca proft. The gst of hs testmony s
that n the purchase of the securtes he was tryng to protect hs good name
wth the Lumber company, whch he very commendaby thought was n ssue
by reason of an unwse dea of the secretary of that company, who was hs
brother-n-aw, and on that account he sad that he fet moray obgated to
protect the Lumber company by purchasng the bonds. If at that tme e
reay Intended, as he testfed, to proft by the purchase of the securtes, that
fact woud have qute a tendency to reeve the pressure of the mora obga-
ton whch he says was then mpeng hm. Later he guaranteed the construc-
ton of the hospta n a certan manner and at a certan prce, and hs purpose
was to do that thng regardess of what persona obgaton t mght cast upon
hm for he testfed that he dd not e pect to be rembursed therefor.
Smar questons have frequenty been before the courts, and necessary the
determnaton of each case has depended upon the partcuar facts of the case
Revenue ct of 1921 (ch. 186, 42 Stat., 227):
Sec. 204. (a) That as used n ths secton the term net oss means ony net osses
resutng from the operaton of any trade or busness reguary carred on by the ta -
payer (ncudng osses sustaned from the sae or other dsposton of rea estate, machn-
ery, and other capta assets, used n the conduct of such trade or busness) .
(b) If for any ta abe year begnnng after December 81, 1920, t appears upon the
producton of evdence satsfactory to the Commssoner that any ta payer has sustaned
a net oss, the amount thereof sha be deducted from the net ncome of the ta payer for
the succeedng ta abe year and f such net oss Is In e cess of the net ncome for such
succeedng ta abe year, the nmount of such e cess sha be aowed as a deducton n
computng the net ncome for the ne t succeedng ta abe year the deducton n a cases
to be made under reguatons prescrbed by the Commssoner wth the approva of the
Secretary.
a S|c. 214. (a) That n computng net ncome there sha be aowed as deductons:
(4) Losses sustaned durng the ta abe year and not compensated for by nsurance
or otherwse, f ncurred n trade or busness
(5) Losses sustaned durng the ta abe year and not compensated for by nsurance or
otherwse, f ncurred n any transacton entered nto for proft, though not connected
wth the trade or busness .
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210
then before the court. Under the partcuar facts of ths case we are convnced
that nes osses were not deductbe under the statutes cted. Rogers v.
Unted States, 41 . (2d), 865 Ct. D. 227, C. . I -2, 302 Pabst v. Lucan.
36 . (2d), 614 Godberg v. Commssoner, 36 . (2d), 651 O. ngeo d Co.
. Commssoner, 30 . (2d), 193 ede v. Commssoner, 30 . (2d), 622
very v. Commssoner, 22 . (2d), 6 T. D. 4116, C. . II-1, 155 nt v.
tone Tracy Co., 220 U. S., 107 and Washburn v. Commssoner, 51 .
(2d), 049.)
Pettoners rey on Washburn v. Commssoner, supra, to support ther con-
tenton, but the facts n that case reatve to the trade or busness reguary
carred on by the ta payer were very much dfferent from those n the Instant
case, and the court, we thnk, propery hed that Washburn s oss was occa-
soned by the operaton of hs reguar trade or busness, and hence t was
deductbe. The court n that opnon sad:
Obvousy n every case a busness to be reguary carred on must be
characterzed by a contnung actvty n some fed of busness endeavor. The
oss contempated by the statute s an operatng oss, and the party camng It
must be the operator of the trade or busness n whch the oss occurs.
The dfference between that case and the one at bar s one of fact and not
of aw, and the same may be sad as to the other cases cted by pettoners.
Pettoners aso contend that there was error n the court s rung because
respondent ntroduced no evdence after amendng hs answer, and the burden
was upon respondent to sustan the added facts. There s no mert n ths
contenton. The evdence to sustan the amendment was aready n the record,
and the amendment merey caused the answer to conform to the facts proven.
The decree of the oard s affrmed.
rtce 1621: Net osses, defnton and computaton.
Net oss of new corporate entty created by consodaton under the
aw of New York. (See Ct. D. 615, page 415.)
S CTION 208. C PIT L G INS ND LOSS S.
INCOM T R NU CT OP 1924 D CISION OP SUPR M COURT.
1. Capta Gan Capta ssets onus Royates Mnera
Where an owner n fee e ecutes o and gas eases on and for a
specfed term and as ong thereafter as o and gas shoud be pro-
duced by the essee, n return for bonus payments n cash, and stpu-
ated royates, measured by the producton of o and gas, the bonus
payments and royates do not consttute gan from the sae or
e change of capta assets wthn the meanng of secton 208 of
the Revenue ct of 1924, but are ta abe as ordnary ncome.
2. Same State Law.
Where the State aw regards an o and gas ease as a present
sae of the o and gas n pace It does not operate to consttute
bonus payments made thereunder as gan from the sae or e -
change of capta assets wthn the meanng of secton 208 of the
Revenue ct of 1924, whch as ts own crtera rrespectve of any
partcuar characterzaton of the payments n the oca aw. State
aw may contro ony when the operaton of the edera ta ng ct
by e press anguage or necessary mpcaton makes ts own opera-
ton dependent upon State aw.
R NU CT O 1918.
rtce 1651: Defnton and ustraton of
capta net gan.
I- 50-5917
Ct. D. 611
Lease.
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211
208. rt. 1651.
3. Decson Reversed.
The decson of the Crcut Court of ppeas (56 . (2d), 153)
reversed.
Supreme Court of the Unted States.
Davd urnet, Commssoner of Interna Revenue, pettoner, v. enry armeL
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut
November 7, 1932.
OPINION.
Mr. ustce Stoke devered the opnon of the court.
Respondent, the owner n fee of Te as o ands, e ecuted o and gas eases of
the ands for three years and as ong thereafter as o or gas shoud be pro-
duced from them by the essee, n return for bonus payments aggregatng 57,000
n cash, and stpuated royates, measured by the producton of o and gas by
the essee. In makng hs ncome ta returns under the Revenue ct of 1924 for
the years 1924 and 1925, respondent reported the cash payments as gan from a
sae of capta assets, ta abe under the appcabe secton of the statute at a
ower rate than other ncome. The Commssoner treated the payments as
ordnary ncome ta ed at the hgher rate, and gave respondent notce of assess-
ment for the defcency. The order of the oard of Ta ppeas uphodng the
assessment (19 . T. ., 376) was reversed by the Court of ppeas for the fth
Crcut (56 . (2d), 153), foowng ts earer decson In erguson v. Com-
mssoner (45 . (2d), 573). It was hed that because Te as aw, unke that of
other States, regards an o and gas ease as a present sae of the o and gas In
pace, the gan resutng from the cash payment receved as consderaton for the
eases was ta abe ony as gan from the sae of capta assets. Ths court
granted certorar (286 U. S., 536), to resove a confct of the decson beow
wth that of the Court of Cams, under correspondng provsons of the Revenue
ct of 1921, n rsch v. Unted States (67 Ct. CIS., 637).
The Revenue ct of 1924 (ch. 234, 43 Stat., 262), ke that of 1921 (Ch. 136, 42
Stat., 232), ta ed certan Income derved from capta gans at a ower rate than
other Income. y secton 208(a)1 The term capta gan means ta abe
gan from the sae or e change of capta assets consummated after December
31, 1921. y secton 208(a)8 capta assets means property hed by the
ta payer for more than two years but does not ncude property whch woud
propery be ncuded n the nventory of the ta payer f on hand at the cose of
the ta abe year, or property hed by the ta payer prmary for sae n the
course of hs trade or busness. Reated provsons of the secton defne
capta oss and capta deductons whch, n some crcumstances, are
aowed as deductons from capta gan n order to arrve at the net gan ta ed
at the ower rate. The ony queston presented here s whether the bonus pay-
ments to the respondent, after aowed deductons, f any, arc gan from the
sae or e change of capta assets wthn the meanng of the ta ng ct.
efore the ct of 1921, gans reazed from the sae of property were ta ed at
the same rates as other ncome, wth the resut that capta gans, often accrung
over ong perods of tme, were ta ed n the year of reazaton at the hgh rates
resutng from ther ncuson In the hgher surta brackets. The provsons of
the 1921 Revenue ct for ta ng capta gans at a ower rate, reenacted n 1924
wthout matera change, were adopted to reeve the ta payer from these e ces-
sve ta burdens on gans resutng from a converson of capta nvestments,
and to remove the deterrent effect of those burdens on such conversons. ouse
eport No. 350, Ways and Means Commttee, S ty-seventh Congress, frst ses-
son, on the revenue b of 1921, page 10 see e ander v. ng (46 . (2d), 235
Ct. D. 294, C. . -, 223 ).
It s an ncdent of every o and gas ease, where producton operatons are
carred on by the essee, that the ownershp of the o and gas passes from the
essor to the essee at some tme and the essor s compensated by the payments
made by the essee for the rghts and prveges whch he acqures tnder the
ease. ut notwthstandng ths ncdenta transfer of ownershp, t s evdent
that the ta aton of the recepts of the essor as ncome does not ordnary
produce the knd of hardshp amed at by the capta gans provson of the
ta ng ct. O and gas may or may not be present n the eased premses, and
may or may not be found by the essee. If found, ther abstracton from the so
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208, rt. 1651.
212
Is a tme-con.sunng operaton and the payments made by the essee to the essor
do not normay become payabe as the resut of a snge transacton wthn the
ta abe year, as n the case of a sae of property. The payment of an nta
bonus aters the character of the transacton no more than an unusuay arge
renta for the frst year aters the character of any other ease, and the ta aton
of the one as ordnary ncome does not act as a deterrent upon converson of
capta assets, any more than the ta aton of the other.
Moreover, the statute speaks of a sae and these eases woud not gener-
ay be descrbed as a sae of the mnera content of the so, usng the term
ether n ts technca sense or as t s commony understood. Nor woud the
payments made by essee to essor generay be denomnated the purchase prce
of the o and gas. y vrtue of the ease, the essee acqures the prvege of
e potng the and for the producton of o and gas for a prescrbed perod he
may e pore, dr and produce o and gas, f found. Such operatons wth
respect to a mne have been sad to resembe a manufacturng busness carred
on by the use of the so, to whch the passng of tte of the mneras s but an
ncdent, rather than a sae of the and or of any nterest n t or n ts mnera
content. (Sratton s Independence v. owbert, 231 U. S., 399, 414, 415 see Yon
aumbach v. Sargent Land Co., 242 U. S., 503, 521.)
Long before the enactment of the capta gans provson n the 1921 Revenue
ct, ths court had to determne whether a mnng ease was to be regarded as a
sae. In Interpretng the corporaton ta aw of 1909, t had occason to con-
sder the nature of the proceeds derved by the owner of mnera and from hs
own mnng operatons or from payments made to hm by the essee under a
mnng ease. That ct mposed an e cse ta on corporatons, measured by
ther ncome. Unke the ater Revenue cts, t made no provson for a depe-
ton aowance to be deducted from the proceeds of mnng n order to arrve at
the statutory ncome. It was argued that snce the net resut of the mnng
operaton s a converson of capta nvestment as upon a sae, the money re-
ceved by the corporate owner or essor, beng ts capta n a changed form,
coud not rghty be deemed to be ncome. ut that argument was re|ected, both
wth respect to the proceeds of mnng operatons carred on by the corporate
owner on ts and (Stratton s Independence v. owbert, supra Godfed Con-
sodated Mnes v. Scott, 247 U. S., 126 Stanton v. atc Mnng Co., 240 U. S.,
103, 114), and wth respect to payments made by the essee to the corporate
essor under the provsons of a mnng ease. ( on aumbach v. Sargent Land
Co., 242 U. S., 503, 521, 522 Unted States y. wabk Mnng Co., 247 U. S., 116.)
though these cases arose under the ct of 1909, before the enactment of
the capta gans provson n the 1921 ct, they estabshed, for purposes of
defnng ncome n a ta measured by t, that payments by essees to essors
under mnng eases were not a converson of capta, as upon a sae of capta
assets, but were ncome to the essor, ke payments of rent. nd before the
1921 ct ths court had ndcated (see sner v. Macomber, 252 U. S., 189, 207
T. D. 8010, 0. . 3, 25 ), what t ater hed, that ncome, as used n the
Revenue cts ta ng ncome, adopted snce the s teenth amendment, has the
same meanng that t had n the ct of 1909. (Merchants Loan Trust Co. v.
Smetanka, 255 U. S., 509, 519 T. D. 3173, C. . 4, 34 see Southern Pacfc Co.
v. Lowe, 247 U. S., 330, 335.)
Congress egsated n the ght of ths hstory (cf. Unted States v. Merram,
263 U. S., 179, 187 T. D. 3535, C. . II-2, 87 ), and, n the absence of e pct
anguage ndcatng a dfferent purpose, t can not be taken to have ntended
that an o and gas ease under the capta gans provson, any more than a
mnera ease under the earer cts, shoud be treated ke an ordnary sae of
and or chattes, resutng n a converson of capta assets. Such a constructon
woud have dsregarded egsatve and |udca hstory of pursuasve force t
woud have adopted a dstorted, rather than the common meanng of the term
sae (see Od Coony R. R. Co. v. Commssoner, 284 U. S., 552, 561 Ct. D.
456, C. . I-1, 274 ), and woud have tended to defeat rather than further
the purpose of the ct.
The respondent does not chaenge the correctness of the constructon of the
statute whch we adopt,1 when apped to o and gas eases under whch the
1 The capta Rans provson of the 1021 ct (secton 200) was hed not to ombraca
recepts of the essor from an o and gas ease n urkett v. Commssoner (31 . (2d),
67) : era v. Commssoner (33 . (2d). 641 Ct. D. 97. C. . III-2, 280 ) rsef t.
Unted Sates (07 Ct. CI., 6371 : erpuson v. Commssoner (50 . (2d), 891) and In
t ander v. ng (4 . (2d). 235 Ct. D. 294, C. . -, 223 ), a smar constructon
was paced upon the ke provsons of the 1024 ct.
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213
208, rt. 1651.
tte to the o and gas passes to the essee ony on severance from the easehod.
ut t s argned that the secton can not be so apped to the bonns payments
receved by the essor n the present case, because, under Te as aw, an o and
|ras ease operates mmedatey upon ts e ecuton to pass the tte of the o
and gas, n pace, to the essee, and t s thus a sae of the o and gas and a
converson of capta assets wthn the precse terms of secton 208.
In Group No. 1 O Corporaton v. ass (283 U. S., 279 Ct D. 330, C. . -,
153 ), ths court recognzed that o and gas eases have been characterzed, n
the decsons of the Te as courts, as present saes of the o and gas In pace,
and we apped the rue of those decsons that ownershp of the o and gas
passes from essor to essee on e ecuton of the ease. There the queston was
not one of the nterpretaton of a edera statute, but of the power of the ed-
era Government to evy a ta upon the ncome of a essee of State ands de-
rved from the sae of o and gas abstracted by hm from the and. It was
ob|ected that the ta was not wthn the power of the edera Government
because mposed on ncome derved from an nstrumentaty of the State. If
the o and gas had ceased to be property of the State before ts remova by the
essee, t had, under the decsons of ths court, ceased to be an nstrumentaty
of the State, and the ncome derved from t was wthn the ta ng power of
the Nntona Government. Whether the tte had so passet was a queston of
State aw, and the affrmatve answer of the State courts necessary ed to the
concuson that the essee s ncome was not mmune from edera ncome ta .
(Compare urnet v. Coronado O Co., 285 U. S., 393, 399 Ct. 1). 485, C. . I-1,
265 .)
ere we are concerned ony wth the meanng and appcaton of a statute
enacted by Congress, n the e ercse of ts penary power under the Consttu-
ton, to ta ncome. The e erton of that power Is not sub|ect to State contro.
It s the w of Congress whch contros and the e presson of ts w n
egsaton, n the absence of anguage evdencng a dfferent purpose, s to be
nterpreted so as to gve a unform appcaton to a natonwde scheme of
ta aton. (See Wess v. Wener, 279 U. S. 333, 337 TCt. D. 60, C. . III-1,
257 urkc-Waononer O ssocaton v. opkns, 269 U. S., 110 T. D. 3790,
C. . -, 147 Unted States v. Chds, 266 U. S., 304, 309 T. D. 3671. C. .
I 1, 241 .) State aw may contro ony when the operaton of the edera
ta ng ct, by e press anguage or necessary mpcaton, makes ts own oper-
aton dependent upon State aw. (See Crooks v. arrcson, 282 U. S., 55
Ct. D. 271, C. . -, 409 Poc v. Seaborn, 282 U. S., 101 Ct. D. 259, C. .
I -2, 2021 Unted States v. Loan t udng Co., 278 U. S., 55 Tyer v. Unted
States. 281 U. S., 497 Ct. D. 190, C. . I -1, 383 see on aumbach v.
Sargent Land Co., supra, 519.)
ur secton 208 nether says nor mpes that the determnaton of gan
from the sae or e change of capta assets s to be controed by State aw.
or the purpose of appyng ths secton to the partcuar payments now under
consdenton, the ct of Congress has ts own crtera, rrespectve of any par-
tcuar characterzaton of the payments n the oca aw. (See Wess v.
Wener, supra, 337.) The State aw creates ega nterests but the edera
statute determnes when and how they sha be ta ed. We e amne the Te as
aw ony for the purpose of ascertanng whether the eases conform to the
standard whch the ta ng statute prescrbes for gvng the favored treatment
to capta gans. Thus tested we fnd n the Te as eases no dfferences from
those eases where the tte to the o and gas passes ony on severance by the
essee, whch are of suffcent consequence to ca for any dfferent appcaton
of secton 208. The fact that tte to the o and gas s sad to pass before
severance, rather than after, s not such a dfference. The economc conse-
quences to the essor of the two types of ease are the same. Under both, the
payments made by the essee are consderaton for the rght whch he acqures
to enter upon and use the and for the purpose of e potng It, ns we as for
the ownershp of the o and gas under both the bonus payments are pad
and retaned, regardess of whether o or gas s found and despte the fact that
a whch s not abstracted w reman the property of the essor upon
termnaton of the ease.
Tte to the o and gas kewse passes from the andowner when he conducts
mnng operatons on hs own and. ut, as was ponted out n Stratton s
Independence v. owbert, snce that s ony an ncdent to the use of hs and
for o producton, the operaton, consdered n ts entrety, can not e vewed
as a sae or a converson of capta assets. Lke consderatons govern here.
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5212, rt. 23.
214
The court beow thought that the bonus payments, as dstngushed from the
royates, shoud be treated as capta gan, apparenty because t assumed that
the statute authorzes a depeton aowance upon the royates aone. (See
erguson v. Commssoner, 45 . (2d), 573, 577.) ut bonus payments to the
essor have been deemed to be sub|ect to depeton aowances under secton
214(a)9, Revenue ct of 1924, by artce 216, Treasury Reguatons GT , as we
as under earer cts. (Secton 214(a)10, Revenue ct of 1921. artce 215.
Treasury Reguatons 62.) Cf. Murphy O Co. v. urnet (55 . (2 1), 17).
The dstncton, so far as we are advsed, has not been taken n any other case.
See e ander v. ng, supra erguson v. Commssoner (59 . (2d), . 91)
ppea of Neson Land t O Co. (3 . T. ., 315) urkett v. Commssoner
(31 . (2d), 667, and see the same case before the oard of Ta ppeas
(7 . T. ., 560)) erg v. Commssoner (33 . (2d), 641) rsch v. Unted
States, supra. We see no bass for t. onus and royates are both consder-
aton for the ease and are ncome of the essor. We can not say that such
payments by the essee to the essor, to be retaned by hm regardess of the
producton of any o or gas, are any more to be ta ed as capta gans than
royates whch are measured by the actua producton. (See Work v. oser,
261 U. S., 352, 357-358.)
Reversed.
P RT II. INDI IDU LS.
S CTION 212. N T INCOM O INDI IDU LS
D IN D.
rtce 23: ases of computaton. I-42-5791
( so Secton 1208.) Ct. D. 587
ncome ta revenue acts of 1926 and 1928 decson op codbt.
1. Net Income Computaton Instament Saes Consttu-
tonaty.
If a ta payer entted to the benefts of secton 212(d) of the
Revenue ct of 1926 eects for the ta abe year 1917 to report ts
net ncome on the nstament bass, that subdvson and secton
1208 of the same ct requre that n computng Its ncome for that
year amounts actuay receved n that year on account of saes of
property made n any pror year sha not be e cuded, notwth-
standng the profts upon such saes were reported as ncome by
the ta payer n pror years n whch t empoyed the accrua bass
as the method of reportng ts net ncome. Secton 212(d) and sec-
ton 1208 of the Revenue ct of 1926 as so construed are consttu-
tona.
2. Refund or Credt Instament Saes.
Where a ta payer, whch reguary ses property on the nsta-
ment pan, by an orgna return made pror to ebruary 26, 1926,
the date of the enactment of the Revenue ct of 1926, changed the
method of reportng ts net ncome for the ta abe year 1917 from
the accrua bass to the nstament bass and pad before the en-
actment of the Revenue ct of 1928 (May 29, 1928) an addtona
assessment for that year resutng from the Commssoner s compu-
taton of the ncome for that year on the accrua bass under the
vew that the ta payer s books of account dd not contan adequate
Informaton to compute ncome accuratey on the Instament bass,
f ts ncome for that year can be computed accuratey upon the
nstament bass secton 705(a) 1 of the Revenue ct of 1928
prohbts a refund of the addtona ta uness the ta payer has
overpad ts ta for that year, computed by ncudng, n comput-
ng Income, amounts receved durng such year on account of saes
of property made n any pror year.
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215
212, rt. 23.
Unted States Crcut Coubt or ppeas. S th Crcut.
The oover- ond Co., appeant, v. U. O. Denman, dmnstrator tcth the W
nne ed of Chares . Nauts, Deceased, appeee.
ppea from the Dstrct Court for tc Northern Dstrct of Oho, Western Dvson.
une 27, 1932.
OPINION.
cks, Crcut udge: ppeant, heren cued pantff, brought sut aganst
the admnstrator of the estate of Nauts, a deceased revenue coector, to re-
cover the sum of 13,108.87 wth nterest whch t aeged was wrongfuy
e acted from t as ncome and profts ta es for the year 1917.
Pantff has been engaged snce 1913 n the sae of furnture at reta. The
prncpa porton of ts saes was on the nstament pan. The amount sued
for represents an addtona assessment for the year 1917 made on May 25, 1925,
and pad by pantff upon the same date. No statute of mtatons s nvoved.
Ths addtona ta arose out of the Commssoner s computaton of pantff s
ncome for 1917 upon the accrua bass. Pantff concedes that f ths method
s correct t s not entted to recover but t nssts that ts ncome for that year
shoud be computed (1) upon the nstament bass and (2) by the snge ta
rue 1 and that when so computed t w appear that pantff as overpad ts
ta es n the amount sued for.
or 1916 and pror years pantff had made ts ncome ta returns upon
the accrua bass. On pr 1, 1918, t fed an orgna return for 1917. Ths
return refected a change n pantff s method of reportng. It e cuded the
amounts coected n that year upon saes made n prevous years and upon
whch t camed that t had been ta ed n those years. Ths was done upon
the theory that f t shoud agan report such saes doube ta aton woud
resut. It was thought that Treasury Reguatons 33, artce 120, promugated
anuary 2, 1918, |ustfed such method of makng returns. n e amnaton of
ths reguaton ndcates to us that whe t provdes for nstament returns
t makes no specfc provson for the appcaton of ether the snge ta rue
or the doube ta rue. Ths reguaton, however, was on pr 17, 1919, sup-
panted by Reguatons 45, artce 42, whch e pressy authorzed and requred
the doube ta rue, but an amendment of ths reguaton (T. D. 3082 C. . 3,
107 ) promugated October 20, 1920, authorzed the appcaton of the snge
ta rue.
ut a of these reguatons were decared nvad by the oard of Ta
ppeas n ppea of . . Todd, Inc. (1 . T. ., 762), for ack of any statutory
bass. The decson n the Todd case naturay created uncertanty and con-
fuson not ony n the ureau of Interna Revenue but among ta payers who
had changed ther method of makng returns from the accrua bass to the
nstament bass.
Under these crcumstances secton 212(d) was ncorporated n the Revenue
ct of 1926 (eh. 27, 44 Stat., 23, 130) and by secton 1208 of the same ct
secton 212(d) was made to appy retroactvey to the computaton of ncome
for the years 1916 to 1924, ncusve. Secton 212(d) was the frst egsatve
authorty granted to nstament deaers for reportng ncome upon the nsta-
ment bass. The egsatve hstory of ths secton and the nterpretaton of
t by the Treasury Department as we as |udca constructon of t, a nd-
cate that ts purpose was to requre a nstament payments made n the ta -
abe year to be returned regardess of whether they were refected n returns
made n prevous years upon the accrua bass. Wcuts v. Gradcoh, C. C. .
8, decded pr 15, 1932 Ct. D. 524, page oo, ths uetn Tu Gbbs, Inc.,
v. . 8., 48 ed. (2d), 148, C. C. . 9 ohn M. rant Co. v. U. 8., 40 ed. (2d),
120 (Court of Cams) Ct. D. 222, C. . I -2, 192 um s, Inc., v. Comms-
soner, 7 . T. ., 737 . . radford Pano Co. v. Commssoner, 15 . T. .,
1 The snge ta rue of computng net ncome on the Instament bass s to e cude
coectons made In the ta abe year on saes made n pror years and whch had been
aready ta ed n such pror years. The doube ta rue s to ncude coectons made
n the ta abe years on saes made n pror years and whch had aready been ta ed
n pror years.
160903 33 15
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213(a), rt. 31.
216
1045, 1047 Treasury Decson 3021, promugated ugust 27, 192C C. . Y-2,
24 the report of the conference commttee ( ouse Report No. 356. frst
sesson S ty-nnth Congress), pages 32 to 59.) Concretey, secton 212(d)
retroactvey apped, requred pantff, f It shoud eect to make ts 1917
returns upon the nstament bass, to observe the doube ta rue rather than
the snge ta rue.
Ths egsatve pocy was recognzed and contnued n the Revenue ct of
1928 and we fnd no mert n the contenton that t contravenes rtce I, secton
9, cause 4 of the Consttuton. (Tennessee v. Whttoorth, 117 U. S.. 129, 137
emch v. eman, 276 U. S., 233 T. D. 4217, C. . II-2, 238 Tu Gbb
. U. S ., supra.)
The effect, of course, of secton 212(d) retroactvey apped, was to upset
returns made under the snge ta rue for the years 1916 to 1924, ncusve.
Ths stuaton was brought to the attenton of Congress when the Revenue ct
of 1928 was beng consdered and we thnk t manfest from the report of
Senate proceedngs (S ty-nnth Congress, Record, part 8, pages 8697. S699I
that secton 705 of the Revenue ct of 1928 (45 Stat., 881. 26 U. S. C, secton
2705) was ntended to grant a measure of protecton to those ta payers -who
fe wthn subsecton (a), cause 2, of secton 705, but we thnk that t s |ust
as cear that the egsatve ntent was not to refund ta es aready pad by a
ta payer who by an orgna return pror to ebruary 26, 1926, had changed hs
method of reportng for 1924 or any pror years to the nstament bass uness
he had overpad hs ta es when computed by the doube ta rue.
If pantff was entted to fe ts 1917 return on the nstament bass rather
than the accrua bass (whch both the dstrct |udge and the oard of Ta
ppeas doubt see oover- ond Co. v. aus (42 ed. (2d), 299 (D. C.))
and ppea of the oover- ond Co. (1 . T. ., 929, 931)), then ts case fas
wthn secton 705(a) of the Revenue ct of 1928 and under such crcumstances
pantff s no more entted to recover than f t had fed ts 1917 return upon
the accrua bass. (See Wcus v. Gradwoh, supra.)
udgment affrmed.
S CTION 213(a). GROSS INCOM D IN D:
INCLUSIONS.
rtce 31: What ncuded n gross ncome. I-34-5624
Ct. D. 544
INCOM T R NU CT O 1921 D CISION O COURT.
1. Income onus Rkntat. Deducton I ss Sa of u| -
ngs udngs as Reaty.
Where a ta payer, the owner of an undvded three-fourths n-
terest n mproved rea estate, accepts an offer to pay the sum of
100,000 for the budngs erected upon the property and to enter
nto a perpetua ease of the and upon whch the budngs stand,
and where the proposed ease does not purport to convey the bud-
ngs apart from the and or permt ther severance and remova at
the w of the essee but requres them to be mantaned n good
condton by the essee and to be repaced, n the event of remova
under desgnated condtons, by other budngs of greater vaue,
the e ecuted ease, nto whch a antecedent agreements are
merged, does not operate to create n ega or equtabe estate n the
budngs as reaty and there s no constructve converson of rea 1
property nto personaty. The ta payer therefore s not entted to , ,
a deducton for a oss camed to have resuted from the sae of
the budngs and the 100,000 receved by the ta payer s a bonus
pad for the easehod estate n the nature of renta and s ta -
abe ncome to hm under the Revenue ct of 1921 n such pro-
porton as t was n fact for hs beneft.
2. Decson -tkmed.
The decson of the oard of Ta ppeas (18 . T. ., 588) s
afrmed.
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213(a), rt. 31.
Unted States Crcut Coubt of ppeas, S th Crcut.
George W. Cre, pettoner, v. Commssoner of Interna Revenue, respondent.
Petton to revew decson of Unted States oard of Ta ppeas.
efore Moorman, cks, and ckenoopeb, Crcut udges.
ebruary 5, 1932.
opnon.
ckenooper, Crcut udge: On une 16, 1923, George W. Cre was the
owner of an undvded three-fourths nterest n certan mproved rea estate
In the cty of Ceveand. On the date mentoned he receved an offer from
the ast S ty-Thrd ucd Co., In whch that company offered to pay the
sum of 100,000 for the budngs erected upon ths property, and to enter nto
a perpetua ease of the ot or and upon whch such budngs stood. The
proposed ease dd not purport to convey the budngs apart from the and or
to permt thar severance and remova at the w of the essee, but requred
them to be mantaned n good condton by such essee and to be repaced, n
the event of remova under desgnated condtons, by other budngs of con-
cedety greater vaue. Ths offer was accepted, the ease was e ecuted, and
the sum of 100,000 was pad. Thereafter, n hs ncome ta return for 1923,
Doctor Cre camed a oss of 59,960.S9 sad to have resuted from the sae
of the budngs, whch then had a deprecated vaue of 139,960.89. The
Commssoner dsaowed the deducton, and assessed the ta payer upon add-
tona ncome n the amount of 100,000, as a bonus pad for the easehod estate.
The oard of Ta ppeas affrmed.
Two dfferent nes of argument are pursued by the pettoner. It s frst
camed n the brefs that the sae of the budngs and the euse of the ground
were ndependent transactons separatey permssbe under the estabshed rea
estate aw of Oho, that the statute of frauds was satsfed by the wrtten offer
and acceptance, and that thereby a tte to the budngs, as dstnct from the
and, was created n the so-caed purchaser. It s aso suggested n the ater-
natve that the 100,000 payment s propery to be consdered as a payment on
account of the purchase prce of the property as u unt, the prvege of pur-
chase prce f ed by the ease beng reduced n that amount, but wthout the
creaton of any f ed obgaton on the part of the essee to pay the baance of
the purchase prce, referred to n the ease as the prvege of purchase prce.
Thus, t s urged, the 100,000 s a return of capta, and shoud not be ta ed
as ncome for 1923, regardess of whether the deducton was propery dsaowed,
or whether. If the property subsequenty reverted, ths payment woud then be
regarded as ncome, In whoe or In part, or merey as qudated damages.
The atter argument above stated Is much the more persuasve. Doubtess
rentas may be pad n part n advance, and n part n nstaments durng the
contnuance of the ease, and when ths s the proper nterpretaton of the acts
of and nstruments e ecuted by the partes the nta payment s truy ncome.
Where, however, there s an Intent to create n the essee an nterest n the
property tsef as by way of purchase even though that nterest may be for-
fetabe by faure to perform condtons .subsequent, and ths ntent s made
manfest by the nstruments duy e ecuted to carry t nto effect, the attendng
payment s a return of capta and shoud be so regarded, at east pror to
forfeture and reverson. There s, of course, no ega obstace to one tenant
n common easng the nterest of another tenant n common, and we assume that
the undvded nterest of such essee tenant n common may consst of a
defntey desgnated porton, or of the whoe, of the budng erected upon
such ot, as we as of n proportonate nterest In the entrety (Cncnnat
Coege v. Yeatman, 30 Oho St., 276) but n each such case two questons arse,
(1) whether there has been n effect a constructve converson of rea property
nto personaty (cf. Case Mfg. Co. v. Oarven, 45 Oho St., 289), or, f ths be
not the effect of the acts of the partes, (2) whether there has been a egay
suffcent and vad conveyance of, or the creaton of a ega or equtabe estate
n, the budngs, not as personaty, but as reaty, operatng thus to create the
requste tenancy n common n such reaty.
In the present case there was obvousy no ntent to effect a constructve
converson, for no present rght of severance and remova was gven, or future
rght, e cept upon an accompanyng e pendture of the fu vaue of the bud-
ngs for the drect or ndrect beneft of the owner of the fee of the and. Was
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213(a), rt. 31.
218
there then a egay suffcent and vad conveyance of, or the creaton of a ega
or equtabe estate In, the budngs as reaty We are constraned to fnd that
there was not. The cffer to purchase the budngs and Its acceptance at
best created but an e ecutory contract of sae, whch, athough satsfyng the
statute of frauds as to suc contracts (Oho Genera Code, secton S6201, was
whoy neffectve as a conveyance. (Oho Genera Code, secton 8510 Rch-
ardson v. ates, 8 Oho St., 257, 261-262 Langmcde v. Weaver, 65 Oho St., 17,
80, 31.) The want of such conveyance was not cured by the ease nto whch
a antecedent negotatons and agreements were merged. We are of the
opnon that thereafter even the rght of specfc performance, upon whch
the creaton of an equtabe estate must depend, ceased to e st. The ease, and
the ease aone, became the decaraton and embodment of the agreement of
the partes, and under t the payment can be cassfed ony as a bonus pad
for the easehod estate, as a consderaton n the nature of renta. We are
not here and now concerned wth whether there mght have been a reformaton
of the contract of ease. We must accept the stuaton us we fnd t. Under
these crcumstances there s no escape from the concuson, not ony that the
deducton was propery dsaowed, but that the payment of 100,000 was ta abe
ncome n such proporton as t was n fact for the beneft of pettoner.
ffrmed.
rtce 31: What ncuded n gross ncome. I-37-5678
CtD.560
ncome ta revenue act of 1918 decson of court.
Income Ta abty Sae by en Property Custodan.
Property of an aen enemy sezed under the Tradng wth the
nemy ct of October 6, 1017, s, when returned under the Set-
tement of War Cams ct of March 10, 1028, sub|ect to deduc-
ton for Income ta on gan on capta assets resutng from a sae
n 1010 made by the en Property Custodan.
Dstrct Court of the Unted States for the Dstrct of Maryand.
Chemsche abrk von eydcn ktengeseschaft, pantff, v. Gaen L. Tat,
Coector of Interna Revenue for the Dstrct of Maryand, defendant.
May 10, 1032.
opnon.
Chesnut, Dstrct udge: Ths s a sut at aw by the pantff to recover n-
come ta coected for the year 1010 n the amount of 160,254.17. The defenses
ore: (a) That the ta (wth the e cepton of the amount of 3,095.90, whch
has been refunded snce the begnnng of the sut) was propery due and pay-
abe (b) that the pantffs cam for refund was not fed wthn four years
after the payment of the ta , as s requred by R. S. 3226 (Tte 20. secton
156), and (c) that f any amount of ta s recoverabe, ony 78 per cent s
payabe to the pantff and the remanng 22 per cent s payabe to the en
Property Custodan. t the hearng, for the frst tme, appcaton was made
by the pantff to make oward Sutherand, en Property Custodan, a
party pantff, by amendment to the decaraton. The moton was taken
under advsement. The case has been submtted on an agreed statement of
facts and n addton thereto, the pantff has offered n evdence two e hbts.
ury tra has been waved n wrtng. o 1
The substanta queston rased s whether property of an aen e nemy
sezed under the Tradng wth the nemy ct s, when returned under the
Settement of War Cams ct sub|ect to deducton for ncome ta es for
gan on capta assets resutng from a sae made by the en Property Cus-
todan but under the peadngs the queston s erhaps the narrower one,
whether such ta es pad by the custodan to the coector, may be recovered
by the former aen from the coector.
The agreed statement, much abrdged, and not changed by the e hbts, shows
the foowng facts:
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219
213(a), rt. 31.
The pantff s a corporaton under the aws of Germany, engaged n the
manufacturng and seng of chemca products. t the begnnng of our war
wth Germany n 1917, ths German corporaton owned 747 out of a tota
ssue of 750 shares of the par vaue of 200 each, n a New ersey corporaton
whch t had organzed as a subsdary n 1900. bout uy 17, 1918, the
en Property Custodan, actng under the provsons of the Tradng wth
nemy ct, sezed the 747 shares of stock and had a new certfcate ssued
therefor n hs name. On Mfrch 27, 1918, he sod ths stock for 1,500,000. e
set up on hs books a record of the transacton desgnated as Trust No. 23907
n the name of the pantff. The pantff was an aen enemy durng the war,
and of course, fed no ncome ta return and n fact was not dong busness
n any way n the Unted States.
On March 15, 1924, pursuant to the provsons of secton 3176, R. S. (Tte
26, secton 97, U. S. G.), the deputy coector of nterna revenue for the dstrct
of Maryand prepared an ncome and e cess profts ta return for the year
1919 n the name of the pantff showng a ta payabe n the sum of 503,206.46.
The computaton was based on the proft arsng from the sae of the stock,
takng ts orgna vaue at ts par of 200 per share. On March 28, 1924,
the Commssoner of Interna Revenue made an assessment for the ta n the
name of the pantff (and aso desgnatng the number of the trust, us above
gven on the books of the en Property Custodan) and on March 31, 1924,
the en Property Custodan pad the ta out of the fund arsng from
the sae.
On anuary 21, 1926, pantff s attorney fed wth the Commssoner of
Interna Revenue hs wrtten appontment under power of attorney from the
pantff, and on ebruary 23, 1926, the same attorney ( dran C. umphreys)
fed a smar power of atttorney from oward Sutherand, en Property
Custodan, dated ebruary 9, 1926 and on ebruary 16, 1926, Mr. umphreys,
as attorney n fact for the en Property Custodan (for Chemsche nbrk
von eyden ktengeseschaft Trust No. 23907) fed a cam for refund wth
the Commssoner of Interna Revenue and stated as reasons therefor, among
others, that the ta had been wrongfuy computed and the profts reazed
from the sae were not sub|ect to ta aton n the hands of the en Property
Custodan. nd on pr 12, 1928, the same attorney fed another cam
for refund n the name of the pantff corporaton settng out more spe-
cfcay the reasons for the refund prevousy stated n the earer cam.
The fourth and ffth reasons for the refund as gven n the atter cam are
as foows:
4. The sezure and sae of the ta payer s property by the en Property
Custodan as an act of war, was nvountary and wthout the owner s consent
and s, therefore, a transacton whch can resut n no proft or oss and s
not sub|ect to ta under Revenue ct of 1918.
5. The sae of the property mentoned heren s not sub|ect to ncome or
e cess profts ta for the reason that upon sezure t became the property of
the Unted States and as such s not sub|ect to ta aton.
On pr 20, 1929, the Commssoner notfed the en Property Custodan
that the ta had been recomputed n the amount of 160,254.17, thus showng
an overassessment n the orgna ta of 342,952.29, whch amount was duy
refunded to the en Property Custodan. The reducton n the ta on recom-
putaton was based argey on substtutng the March 1, 1913, vaue of the stock
In eu of the par vaue for determnaton of the reazed proft from the sae.
On March 12, 1931, the Commssoner agan notfed the en Property Cus-
todan of a further reducton n the ta and refunded the amount of the over-
assessment, to wt, 3,095.90.
On uy 13, 1928, pantff fed wth the en Property Custodan ts cam
for return of property hed n Trust No. 23907, and on or about pr 25, 1929,
the en Property Custodan pad to the pantff 78 per cent of the baance
of the funds then n trust, and has aso pad to the pantff 78 per cent
of the amount of the refunded ta es. The cams for refund fed by the
en Property Custodan, to the e tent not aowed, were re|ected by the
Commssoner.
The prncpa contenton of the pantff s that no Income ta coud be aw-
fuy mposed on ths fund because the pantff was an aen enemy durng the
year 1919, for whch the ta was assessed, nnd then had no nterest whatever
n the property, whch was absoutey owned by the Unted States and therefore,
not sub|ect to ta aton. Reference s made to edera appeate decsons defn-
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213(a). rt. 31.
220
ng the character of the hodng of aen enemy property by the en Prop-
erty Custodan as foows: Unted States v. Chemca oundaton (5 ed. (2d),
207 (C. C. . 3)), where the court sad: Upon sezure the tte of the enemy
owners was not hed n suspenson but passed out of them and became vested
egay or benefcay n the Unted States (nffrmed on appea, 272 U. S., 1)
and Commerca Trust Co. of New ersey v. Mer (262 U. S., 51, 56), where It
was sad : esdes, under the ct, t s to be remembered the custodan succeeds
to a the rghts n the property to whch the enemy s entted as competey as
If by conveyance, transfer or assgnment. ( enkes v. Sutherand, 271 U. S-,
298, 302 and Munch Rensurance Co. v. rst Rensurance Co., 300 ed., 345
(D. O. Comm.).)
The contenton s aso stated n the form of the proposton that as the aen
was dvested of a property nterest, no ncome accrued to t and, therefore, t
had no ncome to ta because the Revenue ct can ony reach reazed ncome.
( sner v. Macomber, 252 U. S., 189 T. D. 8010, C. . 3, 25 .)
ut In my opnon, the concuson contended for s not sound In vew of the
cts of Congress passed durng and subsequent to the war and deang wth the
sub|ect of enemy property hed by the en Property Custodan durng the war
and thereafter unt authorzed to be returned under the ct of Congress. The
war, of course, brought about many new condtons and compcatons, and the
hstory of the egsaton n Congress shows that the sub|ect was beng deat
wth progressvey and In the ght of deveopments as they occurred durng and
after the war. The egsaton conssts of two mportant cts known as the
Tradng wth the nemy ct, of October 0, 1917, wth many amendments, and
the more recent egsaton, Settement of War Cams ct of March 10. 1928.
Convenent reference to ths egsaton can be found n 50 U. S. C, append ,
pages 189 and foowng. It w hep to an understandng of the matter now
under consderaton to make reference to some of the statutes partcuary dea-
ng wth the sub|ect matter.
y secton 6 of the Tradng wth the nemy ct, as orgnay passed, pro-
vson was made for the appontment of the en Property Custodan, who was
to hod, admnster and account for the property receved under the genera
drecton of the Presdent
Secton 12 of the orgna Tradng wth the nemy ct provdes, n part:
fter the end of the war any cam of any enemy or of an ay of any enemy
to any money or other property receved and hed by the en Property
Custodan, or deposted n the Unted States Treasury, sha be setted as Con-
gress sha drect.
nd the secton aso now provdes:
The en Property Custodan sha be vested wth a of the powers of
a common-aw trustee n respect to a property, other than money, whch has
been or sha be, or whch has been or sha be requred to be conveyed, trans-
ferred, assgned, devered or pad over to htm n pursuance of the provsons
of ths ct. nd sha have power to manage such property and do
any act or thng n respect thereof or make any dsposton thereof or of any
part thereof, by sae or otherwse, and e ercse any rghts or powers whch may
be or become appurtenant thereto or to the ownershp thereof In ke manner as
though he were the absoute owner thereof.
The ct of uy 1, 1918 (chapter 113, secton 1, 40 Stat, 646), provded that
n ta es awfuy assessed by any body potc aganst property hed by the
en Property Custodan shoud be pad out of funds n hs hands. s amended
by what s known as the Wnsow ct of March 4, 1923 (42 Stat, 1511 whch
has now become subsecton of secton 24 of the Tradng wth the nemy ct),
the anguage Is:
The en Property Custodan s authorzed to pay a ta es (ncudng
speca assessments) heretofore or hereafter awfuy assessed by any body
potc aganst any money or any other property hed by hm or by the Treasury
of the Unted States under ths ct.
nd subsectons (b) and (c) of secton 24, added by ct of March 10, 192S,
chapter 167, secton 18 known as Settement of War Cams ct, provde
as foows:
(b) In the case of ncome, war-profts, e cess-profts, or estate ta es Im-
posed by any ct of Congress, the amount thereof sha, under reguatons
prescrbed by the Commssoner of Interna Revenue wth the approva of the
Secretary of the Treasury, be computed n the same manner (e cept as here-
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221
213(a), rt. 31.
nafter n ths secton provded) as though the money or other property had not
been se:zed by or pad to the en Property Custodan, and sha be pad, as
far as practcabe, n accordance wth subsecton (a) of ths secton. endng
fna determnaton of the ta abty, the en Property Custodan s author-
zed to return, n accordance wth the provsons of ths ct, money or other
property n any trust n such amounts as may be determned, under reguatons
prescrbed by the Commssoner of Interna Revenue wth the approva of the
Secretary of the Treasury, to be consstent wth the prompt payment of the
fu amount of the nterna-revenue ta es.
(c) So much of the net ncome of a ta payer for the ta abe year 1917, or
any succeedng ta abe year, as represents the gan derved from the sae or
e change by the en Property Custodan of any property conveyed, trans-
ferred, assgned, devered or pad to hm, or sezed by hm, may at the opton
of the ta payer be segregated from the net ncome and separatey ta ed at the
rate of 30 per centum. Ths subsecton sha be apped and the amount of net
ncome to be so prescrbed by the Commssoner of Interna Revenue wth the
approva of the Secretary of the Treasury, as neary as may be n the same
manner as provded by secton 208 of I he Revenue ct of 1920 (reatng to
capta net gans), but wthout regard to the perod for whch the property
was hed by the en Property Custodan before ts sae or e change, and
whether or not the ta payer s an ndvdua.
Secton 9 of the Tradng wth the nemy ct, wth ts many amendments,
provdes for the return of property hed by the custodan, and t s under ths
secton as amended by the Settement of War Cams ct of 1928, that the
pantff n ths case on uy 13, 1928, fed ts cam for return of ts former
property whch had been sezed and whch, as aready stated, has been returned
to the e tent mentoned.
These statutes show very ceary that Congress ntended that enemy prop-
erty hed by the en Property Custodan shoud be sub|ect to current ta a-
ton substantay and as neary as possbe n the same way and to the same
e tent as the property of ctzens or frendy aens.
It s cear that the pantff s property was not absoutey confscated whe
hed by the en Property Custodan. It s true that t had no rght or
tte theren whch he coud then enforce unt authorty was gven by the
further ct of Congress, but the substanta stuaton n e pectaton was that
ts rghts woud probaby be restored n some form or to some e tent when t
was determned by Congress what dsposton shoud fnay be made of the
property. (Swss Natona Insurance Co. v. Mer, 267 U. S., 42 Unted States
v. Chemca oundaton, 272 U. S., 1.) In ths stuaton, t seems cear that
Congress dd net ack power to sub|ect the property to deductons for current
e penses of the Government. nd there s certany no n|ustce In sub|ectng
aen enemy property to the same ta aton as affected the property of our
ctzens. In ths case t s not contended that the ta as utmatey computed
Invoved any dscrmnaton aganst the aen property. It s true, of course,
that the sae of the pantff s property was nvountary so far as t was con-
cerned, but ths consderaton s met by subsecton (d) of secton 24 of the
ct, whch makes appcabe to saes of such property the provsons of the
genera ncome ta aws appcabe to property compusory or nvountary
converted.
In the vew I take of the matter the domnant and controng consderaton
s that the Settement of War Cams ct was an act of grace of the
soveregn Unted States, and n returnng the property ths Government un-
doubtedy had the cear rght to mpose such terms and condtons as t peased
Congress to enact. The property coud have been wthhed entrey or con-
fscated beyond any ega rght or remedy of the pantff. The soe queston of
aw whch, therefore, contros the matter s, what was the ntenton of Congress
as to the terms and condtons on whch the property shoud be returned to the
former aen enemy. nd the answer to ths, I thnk, must be found n the
egsaton whch has been revewed and whch, n my opnon, partcuary as
evdenced by subsectons (b), (c), (d), (e), and (f) of secton 24 of the Trad-
ng wth the nemy ct (comng from the Settement of War Cams ct of
March 10, 1928) shows beyond any reasonabe doubt that the ntenton of
Congress was to return ony the corpus of the property remanng after the
payment of ta es and other e penses thereout and the ta es referred to are
e pressy stated to ncude ncome and e cess profts ta es computed on gan
derved from the sae of property by the en Property Custodan for the
ta abe years 1917 and succeedng years. Obvousy the ntenton was to make
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5213(a), rt. 31.1
222
the property sub|ect retroactvey to ta es for the desgnated years. If, there-
fore, the ta had not prevousy been pad by the en Property Custodan, It
was the ntenton of ths egsaton to requre the determnaton and payment
of the ta before the return tf the property to the former aen enemy.
Ths vew of the aw has recenty been apped to a smar case by the
Unted States oard of Ta ppeas In the case of Pau abcrand (21 . T. .,
446), where, construng secton 24 of the Tradng wth the nemy ct, as beng
concusve on the sub|ect, the oard sad:
In secton 24 of the Tradng wth the nemy ct, Congress has specfcay
apped the ta ng cts to Income arsng out cf property hed by the custodan.
The ntent of Congress to appy the amendment of 1928 retroactvey s manfest
from the wordng of subsecton (b) referrng as t does to ncome, war profts,
e cess profts or estate ta es mposed by any ct cf Congress. t the tme
the amendment of 1928 was enacted the ta ng cts mposng profts ta es had
been repeaed and uness the amendment s apped retroactvey the reference
theren to such ta es s meanngess.
uhe v. Commssoner (43 ed. (2d), 61 (C. C. : 8), certorar dened, 282
U. S., 292), and orstman v. erguson (25 ed. (2d), 47 (C. C. . 3)), aso up-
hed ncome ta aton under smar though not dentca stuatons. In the ahe
case, as In the nstant case, the return cn whch the ta was based was made
by the deputy coector. ganst the contenton that he acked authorty to do
so, the court hed the acton of the deputy coector was authorzed and proper.
mnor contenton of the pantff n ths case s that the ta was rreguary
mposed because the assessment was made n the name of the pantff corpo-
raton whch was not and coud not be a ta payer for the year 1919. It s to be
noted, however, that the assessment aso made reference to the partcuar trust
n whch the property was hed by the en Property Custodan. The conten-
ton s that the property f ta abe at a, shoud have been assessed n the
name of the en Property Custodan. The pont seems to me at most an
rreguarty of no matera consequence n vew of the whoe stuaton.
Wth regard to the appcaton to amend the decaraton by ncudng the
present en Property Custodan as a party pantff, I had some doubts as to
whether the amendment shoud be aowed. Reference s made by counse for
the pantff to the case of ombst v. Unted States (Court of Cams, 52 ed.
(2d), 1030), where sut by a former aen enemy for a return of estate ta es
mpropery assessed durng the war perod was sustaned. It s sad, however,
by counse that after the decson was reported, t was caed to the attenton of
the court that the sut coud ony propery have been prosecuted by the en
Property Custodan. In the opnon, It s sad:
If there Is a refund aowed, t must be pad to the custodan, who s now n
contro of the corpus.
nd as the custodan was not a party to the sut, counse state that he was -
made a party subsequent to the rendton of the opnon.
The frst cam for refund n ths case was fed In the name of the en
Property Custodan by one of the present counse for the pantff n ths case.
If there coud be any recovery n ths case, t seems cear to me that ony 78 per
cent thereof woud be payabe to the pantff drecty, and the remanng 22 per
cent woud be payabe to the en Property Custodan. If the concuson whch
I have reached s correct, the pont as to the amendment becomes unmportant,
but n order to enabe the pantff to have no defect n procedure n ths case,
I have aowed the amendment.
I have aso had some queston as to whether the pantff had any rght to
mantan ths sut n ts own name. The contenton of ts counse s that the
pantff had no nterest or rght whatever n the property at the tme the ta s
aeged to have become due, and none when t was pad by the custodan. On
ths theory t seems to me hghy doubtfu f the pantff n ts own name bus
any standng whatever n court to recover a ta pad by the custodan to the
coector of nterna revenue. The sut s aganst the atter personay athough,
no doubt, any recovery woud be pad by the Government. It seems qute
nconsstent to me, on the pantff s theory of the case, to permt the pantff
to recover aganst the defendant, a ta pad to the defendant by a thrd person
out of property n whch, nt the tme, the pantff had no nterest whatever.
s the rghts of the pantff to a return of ts property come ony from secton
9 of the Tradng wth the nemy ct (as amended n 1928), t woud seem to
ogcay foow that ts ony rght of recovery, f any, Is aganst the en Prop-
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213(a), rt. 31.
erty Custodan. owever, there Is the possbe vew to be taken that the effect
of the return of Its property to the puntff by the custodan s n the nature of
an assgnment of a cams of the custodan wth respect to the orgna corpus.
The ombst case above cted seems to mpy that the rght to recover the ta
pad out of corpus foows the orgna contro o the corpus. nd possby a
rght of sut by the pantff n ths case may be mped from subsecton (f) of
secton 24 of the Tradng wth the nemy ct. ut as I hod the ta s not
recoverabe at a. t s not necessary to rue upon ths pont of procedure.
nd kewse, I fnd t unnecessary to rue upon the defense that the cam
for refund as made by the pantff s not wthn the four years perod. It
woud appear that t was fed wthn the perod aowed to the pantff n
subsecton (f) of secton 24. nd the earer cam for refund fed by the
custodan was wthn the mted perod f the pantff s entted to the beneft
of the act of the custodan.
The cerk s nstructed to enter a verdct for the defendant, wth e cepton
noted for the pantff. On ths dsposton of the case t becomes unnecessary
to fe on the pantff s requested nstructons.
ktce 31: What ncuded n gross ncome. I-39-5721
G. C. M. 10941
R NU CT O 1920.
The ta payer, a resdent of Te as, had a vested nterest n a
communty ncome receved durng the perod anuary 1, 1927, to
September 26, 1927, the date when the marred reaton was term-
nated by a fna dvorce decree. She s ta abe wth respect to her
share of the communty ncome notwthstandng the fact that she
entered nto an agreement wth her husband n settement of her
communty property rghts.
n opnon s requested reatve to the ta abe status of s nterest
n communty property under the aws of Te as, where there has
been a dvorce and settement of communty property rghts.
The ta payer was formery the wfe of . In ebruary, 1927, she
separated from her husband, and fna dvorce was granted Sep-
tember 26, 1927. The wfe s share of the communty ncome from
anuary 1, 1927, to September 26, 1927, the date the fna decree of
dvorce was entered, was 3.2a doars. The ta payer entered nto
an agreement wth her husband whereby she receved from hm .54a
doars n settement of her communty property rghts. The ques-
ton at ssue s whether the ta payer s abe for ncome ta on her
vested nterest n the communty ncome from anuary 1, 1927, to
September 26,1927, consstng of 3.2a doars, or whether she s abe
for ta ony wth respect to .54a doars, the amount for whch she
surrendered her communty property rghts. The provson of aw
defnng communty property n Te as s contaned n artce 4619,
Compete Te as Statutes, 1928, ernon Law ook Co., readng n
part as foows:
bt. 4C19 4622-3 . Communty property. Secton 1. property acqured
by cther the husband or wfe durng marrage, e cept that whch s the sepa-
rate property of ether, sha be deemed the common property of the husband
and wfe and a the effects whch the husband and wfe possess at the tme
the marrage may 6c dssoved sha be regarded as common effects or gans,
uness the contrary be satsfactory proved. Itacs supped.
It s the setted aw of Te as that when a marrage s once con-
summated the reaton contnues unt dssoved by a decree of
dvorce or annument, or unt death of one of the partes but
whatever may be the cause for separaton, t s not tantamount to
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213(a), rt. 31.
224
a dssouton of the marrage reaton. (See secton 586, Spew s
Law of Marta Rghts n Te as, thrd edton.)
In earse v. earse et a. (262 S. W., 561) the Court of Cv
ppeas of Te as, n dscussng the communty property rghts of
husband and wfe after separaton, stated as foows:
The marrage reaton can ony be dssoved by death or |udca decree. t
the begnnng and durng the entre e stence of ths reaton, the aw estab-
shes a communty of nterests n a property acqured by ether spouse, e cept
that whch s acqured by gft, devse, or descent. Ths partnershp or com-
munty nterest s not based n any sense on the dea of equaty or contrbu-
ton of abor or capta by the respectve spouses, but e sts on prncpes of a
perfect unon and equaty of en|oyment of gans, regardess of nequates
nduced by sckness, deness, habts, or otherwse It grows out of and depends
upon the e stence of the marta reaton and not merey upon the e stence
of the famy.

The statute s ne orabe n ts meanng wheren It provdes that a
property acqured by ether husband or wfe durng the marrage, etc., sha be
deemed common property.
The court n that case cted Routh v. Routh (57 Te ., 589), where-
n t was hed that the rghts of the partes resutng from the
marrage reaton are f ed y statute, and that separaton does not
work a forfeture of the communty property rghts wth respect
to and acqured n Te as durng the separaton. nother case
consdered by the same court was MeTe et a. v. Moore et a. (104
S. W., 511). In that case the husband abandoned hs wfe and
chd. The wfe, beevng that the husband had obtaned a dvorce,
remarred. It deveoped that the husband had not secured a d-
vorce. The court hed that the wfe had not forfeted her share n
the communty property acqured by the frst husband. In rst
Natona ank of Mount Cam v. Rotter et a. (299 S. W., 917) t
was stated that a woman does not cease to be a marred woman n
the contempaton of the aw athough she may be permanenty
separated from her husband. (Cf. Cromer v. Schafer, 250 S.
444.)
ven abandonment for a perod of 16 years, eavng the wfe n
possesson of communty rea estate, does not prevent the husband
from recoverng hs nterest n the communty property. ardn et
a. v. ardn, 217 S. W., 1108.) nd, conversey, where the wfe
deserts her husband she does not ose her nterest n the communty
estate. a et a. v. a et a., 241 S. W., 624.) In Te as the
wfe has a present vested nterest n the communty ncome and
when fng a separate ncome ta return she shoud report theren
one-haf of the communty ncome. opkns v. acon, 282 U. S.,
122.) Ths s true regardess of agreements between husband and
wfe changng the status of communty ncome to separate ncome.
Lucas y. ar, 281 U. S., I ar v. Roth, 22 ed. (2d), 932,
certorar dened 277 U. S., 588.) Income whch at the tme of ts
recept s communty ncome must be so treated for ncome ta pur-
poses. (G. C. M. 9938, C. . -2, 115 G. C. M. 9953, C. .
I-1, 13.)
ppyng the foregong prncpes to the nstant case, the ta -
payer had a vested nterest n a communty ncome receved dur-
ng the perod anuary 1,1927, to September 26, 1927, the date when
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225
213(a), rt. 31.
the marred reaton was termnated by a fna dvorce decree. s
her share of the communty ncome was 3.2a doars, she s ta abe
on that amount n her separate return.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
rtce 31: What ncuded n gross ncome. I-47-5868
Ct. D. 602
INCOM T R NU CT O 1918 D CISION O COURT.
Income empton Land of ottee op ve Cvzed Tebes.
Nether secton 2 nor secton 6 of the ct of Congress of May 27,
1908 (35 Stat., 312), operates to retan restrctons aganst aen-
aton upon and of a mnor aottee of the ve Cvzed Trbes, a
m ed-bood Indan havng ess than haf Indan bood, from whose
and restrctons aganst aenaton were removed by secton 1 of
that ct. Income derved from such and s not e empt from the
ta mposed by the Revenue ct of 1918, secton 4 of the ct of
May 27, 1908, provdng that and from whch restrctons have
been removed s sub|ect to ta aton as though t were the property
of other persons than aottees of the ve Cvzed Trbes.
Unted States Crcut Court op ppeas, Tenth Crcut.
Dora en agby, ne e Parks, appeant, v. The Unted States of merca,
appeee.
ppea from the Dstrct Court of the Unted States for the Northern Dstrct of Okahoma.
uy 14, 1932.
OPINION.
Lews, Crcut udge, devered the opnon of the court.
The appeant, pantff beow, brought ths sut to recover ncome ta es
assessed and pad for the year 1918. er compant was dsmssed on demurrer,
and she has appeaed.
In support of her aegaton that the ta es were erroneousy and egay
assessed and coected she sets forth that she Is and was at the tme of her
brth, ugust 12,1902, a member of the Creek Trbe of Indans of one-s teenth
Indan bood, and was so enroed that there was aotted to her as her surpus
aotment pursuant to the ct of March 1, 1901 (31 Stat., 861), suppemented
by the ct of une 30, 1902 ( 82 Stat., COO), a descrbed 120 acres, then n the
Indan Terrtory and now n the State of Okahoma f that the patent conveyng
the 120 acres to her was e ecuted and devered on uy 6, 1907 that her
guardan wth the approva of the county court of Tusa County, Oka., gave an
o and gas ease on the 120 acres, and It has produced o contnuousy snce
1908 that her estate has receved and sod contnuousy one-tenth of the o as
her royaty, and aso receved n the year 1918 a sum of money as a bonus for
e tendng the term of the ease that her guardan ncuded sad bonus and
royates receved durng 1918 In ber ncome ta return that she was durng
a of that year and unt ugust 12, 1920, a mnor, and because of her mnorty,
her guardanshp, the supervsng contro over her estate retaned n the Secre-
tary of the Interor by the ct of March 27, 1908, and the further fact that she
was n 1918 and ever snce has been a ward of the Unted States, her ncome
from sad ease was nonta abe, and, therefore, sad assessment and ts coecton
was erroneous and ega.
The ssue thus tendered and |oned by demurrer s one of aw and must be
determned by the correct nterpretaton of sad ct of May 27, 1908 (35 Stat.,
312). The sectons for consderaton are 1, 2, 4, and C, and so far as matera
to ths nqury read thus:
Secton 1. That from and after 60 days from the date of ths ct the status
of the ands aotted heretofore or hereafter to aottees of the ve Cvzed
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1213(a), rt. 31.1
226
Trbes sha, as regards restrctons on aenaton or ncumbrance, be as foows:
ands, ncudng homesteads, of sad aottees enroed as ntermarred
whtes, as freedmen, and as m ed-Uood Indans havng ess than haf Indan
bood ncudng mnors sha be free from a restrctons.
Sec. 2. nd provded further, and the term mnor or
mnors, as used n ths ct, sha ncude a maes under the age of 21 years
and a femaes under the age of 18 years.
Sec. 4. That a and from whch restrctons have been or sha be re-
moved sha be sub|ect to ta aton and a other cv burdens as though t
were the property of other persons than aottees of the ve Cvzed
Trbes: .
Sec. 6. That the persons and property of mnor aottees of the ve Cv-
zed Trbes sha, e cept as otherwse specfcay provded by aw, be sub|ect
to the |ursdcton of the probate courts of the State of Okahoma. The Secre-
tary of the Interor s hereby empowered, under rues and reguatons to be
prescrbed by hm, to appont such oca representatves wthn the State of
Okahoma who sha be ctzens of that State or now domced theren as he
may deem necessary to nqure nto and nvestgate the conduct of guardans
or curators havng n charge the estates of such mnors, and whenever snch
representatve or representatves of the Secretary of the Interor sha be of
opnon that the estate of any mnor s not beng propery cared for by the
guardan or curator, or that the same s n any mnnner beng dsspated or
wasted or beng permtted to deterorate n vaue by reason of the neggence
or careessness or ncompetency of the guardan or curator, sad representatve
or representatves of the Secretary of the Interor sha have power and t
sha be ther duty to report sad matter In fu to the proper probate court
and take the necessary steps to have such matter fuy nvestgated, and go to
the further e tent of prosecutng any necessary remedy, ether cv or crmna,
or both, to preserve the property and protect the nterests of sad mnor
aottees and t sha be the further duty of such representatve or representa-
tves to make fu and compete reports to the Secretary of the Interor.
(There are further paragraphs of ths secton not matera here, because they
dea wth the dutes of the Secretary and hs representatves n the case of
mnors havng restrcted ands.)
The condtons set forth n secton 9 of sad ct are not appcabe to the
facts of ths case.
Of course, the royates and bonus receved were not the and tsef, but the
ta here n queston Is n substance a ta on the and (Poock v. armers Loan
d Trust Co., 158 U. S., 001), whch secton 4 of the ct sub|ects to ta aton
and a other cv burdens as though t were the property of other persons than
aottees of the ve Cvzed Trbes. The quoted phrase puts appeant n the
same cass as mnors of non-Indan bood n a ke stuaton, and as to them
there can be no doubt of ther abty to an Income ta on rentas. So on
readng the e cerpts from sectons 1 and 4 t woud seem to be cear that the
ta here n queston s vad. ut appeant rees on sectons 2 and 6, con-
tendng that she and her aotment are st under restrctons, notwthstandng
sectons 1 and 4 that her estate Is st under the supervsng contro of the
Secretary of the Interor, and that unt 1920 she was a mnor ward of the
Unted States, sub|ect to ts care and protecton. That may be conceded, yet
f t ceary appears from sad ct and the Revenue ct that Congress ntended
to sub|ect her ncome to the ta , the assessment was not erroneous and ega
(Goudv v. eath, 203 U. S., 146 Choteau v. urnet, 283 U. S., 691 Ct. D. 352,
C. . -, 355 .) Secton 2 prevents appcaton of shorter perods of mnorty
under State statutes and practce. (M Nee v. Whtehead, 253 ed., 546 arbn
v. ood, 228 ed., 658: Truskctt v. osser, 236 U. S., 223.) It s a temporary
restrcton on persona capacty, and suppants every State rue or aw to the
contrary, and couped wth secton 6 demonstrates a contnung nterest n and
retenton of a supervsng care over the mnor s estate to the e tent theren
mted but that does not nterfere wth aenaton of the aotment through
proceedngs n probate when t s to the nterest of a mnor that a sae be made,
nor the mnor s rght to se on reachng ma|orty. There s nothng n secton
0 or other parts of the ct e pressng an ntenton to contnue the restrctons
on aenaton whch were removed by secton 1 of the ct and secton 4 ceary
sub|ected her and to ta aton as though she were wthout Indan bood. It s
our opnon that the rents and protts arsng therefrom were sub|ect to the
ta whch she now seeks to recover.
ffrmed.
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227
213(a), rt. 36.
btce 36: Long-term contracts. I-34-5625
Ct. D. 545
INCOM T R NU CT O 1018 D CISION OP COURT.
1. Income Computaton Long-Term Contracts.
The provson n artce 36 of Income Tu Reguatons 45 that
persons engaged n contractng operatons, who have uncompeted
contracts, n some cases runnng for perods of severa years, w
be aowed to prepare ther returns so that the gross ncome w
be arrved at on the hass of competed work, s a vad reguaton,
and where such a person eects to empoy such method of account-
ng on the ong term contract bass and makes returns of ncome
accordngy, he has no rght to have ncome for a snge year from
uncompeted contracts computed on the annua accrua bass even If
It s possbe to determne from hs books ncome upon the accrua
bass of accountng.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (19 . T. ., 181) s
affrmed.
Unted States Crcut Court of ppeas for the Nnth Crcut.
. Staney ent, pettoner, v. Commssoner of Interna Revenue, respondent.
Upon petton to revew an order of the Unted States oard of Ta ppeas.
efore Wbur and Sawtee, Crcut udges, and ames, Dstrct udge.
ebruary 8, 1932.
OPINION.
Wbur, C. .: Pettoner s a member of the copartnershp of ent ros.,
engaged n the genera contractng busness, constructng reservors, dams and
other smar work. The partnershp made ts returns to the Commssoner of
Interna Revenue upon what s caed the ong term competed contract bass,
by whch the proft or oss ncurred upon a contractng |ob coverng more than
one year was ncuded In the return of ncome for the ta abe year n whch
the ob was competed. Ths was a consstent practce of the partnershp from
1913 to 1923. defcency ta for the year 1920 was assessed by the Comms-
soner upon the Indvdua ncome and surta es for the year 1920 to the pet-
toner n the amount of 12.73. Pettoner sought a revew of ths acton by
the oard of Ta ppeas. The oard sustaned the method and manner of
assessment by the Commssoner but f ed the amount of the ta at 60.50.
The pettoner seeks to revew ths order of the oard of Ta ppeas.
The gst of the pettoner s contenton s that the return and the assessment
based thereon was erroneous for the reason that the partnershp books were
kept on the accrua bass n such fashon that the books correcty refected the
ncome for each ta abe year and therefore that the assessment must be made
for the ta abe years 1920 and 1922 n accordance wth the frst cause of sub-
dvson (b) of secton 212 of the Revenue ct of 1918, chapter 18 (40 Stat.,
1057). Consequenty It Is argued that the aternate method permtted by sec-
ton 212 under the second cause of subdvson (b) s not appcabe, and, for
the same reason, that the rues of the Treasury Department permttng returns
upon the ong-term contract are not controng. Subdvson (b) of secton 212
s n part as foows:
(b) The net ncome sha be computed upon the bass of the ta payer s
annua accountng perod (fsca year or caendar year, as the case may be) n
accordance wth the method of accountng reguary empoyed In keepng the
books of such ta payer but f no such method of accountng has been so
empoyed, or f the method empoyed does not ceary refect the ncome, the
computaton sha be made upon such bass and n sueh manner as n the
opnon of the Commssoner does ceary refect the ncome.
The ta es of the pettoner were assessed accordng to the terms of secton
218 of the Revenue ct of 1918 wth reference to ndvduas carryng on bus-
ness n a partnershp and the soe queston nvoved on ths petton to revew
the acton of the oard of Ta ppeas s the correct method of computng
the ncome of the partnershp.
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213(a), rt. 36.
228
The method of accountng adopted by ent ros, s stated In the respond-
ent s bref, and ths statement has been accepted by the pettoner as the
correct statement of the stuaton, and t s as foows:
separate account was kept n the partnershp books for each pro|ect
undertaken. t the end of the mouth ths account was charged wth the cost,
whether pad or not, of a abor, materas, and drect e penses ncurred
durng the month and chargeabe to the pro|ect. t the cose of the year
the account was charged wth ts proporton of the ndrect e penses, or
overhead, of the busness ncurred durng the year, whether pad or not
The overhead was dstrbuted over the severa pro|ects upon whch work had
been performed durng the year In the same proportons that the tota costs
of each pro|ect ncurred durng the year bore to the tota costs of a pro|-
ects ncurred durng the year. If the contract provded for payment upon
competon of the pro|ect the customer s account was charged and the separate
account of the pro|ect was credted when a work was competed and accepted.
If payment was to be made as the work progressed, upon the bass of monthy
estmates by the customer s engneer of work competed durng the month
and the amount of payment due therefor, the customer s aecount was charged,
and the separate account of the pro|ect was credted, as such estmates were
receved, wth the amount of payment shown to be due by the estmate.
If the contract provded that a percentage of the amount due on each est-
mate was to be wthhed pendng competon and acceptance of the pro|ect,
the separate account of the pro|ect was credted ony wth the payment due
and the amount of the hodback was credted to retenton account. No
accountng was made for any gan or oss on any pro|ect unt the work was
competed and accepted. Unt that tme the debt baance n a pro|ect account
was consdered on nvestment and carred on the books as an asset. When
work was competed and the pro|ect accepted, the pro|ect account was cosed
by transferrng the baance representng gan or oss to proft and oss account.
The net ncome reported by the partnershp n a returns red for ed-
era ncome ta purposes was computed n accordance wth the method of
accountng empoyed n keepng the books.
Durng 1920 the partnershp was engaged on four pro|ects whch were not
competed n the same ta abe year n whch work was begun. Dev s Gate
Dam was commenced n 1919 and competed n 1920 work on untngton
Park Reservor began n 1920 and was competed n 1921 work on Rodeo
Dran started n 1920 and was competed n 1921 and work on San Dmas
Dam began n 1920 and was competed In 1922.
Dev s Gate Dam was constructed wthn the Los ngees County food
contro dstrct. Ths contract provded that compensaton shoud be pad
to the partnershp upon the bass of monthy estmates of materas furnshed
and work competed. Compensaton shown to be due by the monthy estmates
of the chef engneer of the food contro dstrct were usuay pad by the
10th of the foowng month.
In accordance wth the method of accountng empoyed n keepng the
books, the partnershp ncuded n the return for 1920 the entre compensaton
receved for and a of the costs and e penses ncdent to the constructon of
Dev s Gate Dam whch was competed n that year, but dd not ncude the
ncome or e penses reatng to the three other pro|ects commenced but not
competed n that year. It was the partnershp s custom to report ncome from
each |ob when t was competed.
Ths method of accountng and reportng ncome was n strct accord wth
the reguatons of the Treasury Department. Treasury Reguatons No. 45
1920 edton , artce 36, provdes as foows:
rt. 36. Long-term contracts. Persons engaged n contractng operatons,
who have uncompeted contracts, n some cases perhaps runnng for perods
of severa years, w be aowed to prepare ther returns so that the gross
ncome w be arrved at on the bass of competed work that s, on |obs
whch have been fnay competed any and a moneys receved n payment w
be returned as ncome for the year n whch the work was competed. If
the gross ncome s arrved at by ths method, the deducton from such gross
ncome shoud ncude and be mted to the e pendtures made on account of
such competed contracts.
Secton 212 of the Revenue ct of 1918, thus nterpreted by the reguatons
of the Treasury Department (Reguatons 45, artce 36) has been reenacted n
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229
213(a), rt. 36.
subsequent revenue aws wthout change. (Revenue ct of 1921. ch. 136, 42
Stat., 227 Revenue ct of 1924, ch. 234, 43 Stat.. 253 Revenue ct of 1926,
ch. 27, 44 Stat., 9 and Revenue ct of 1928. ch. 852. 45 Stat., 791.)
The reenactment of the statute n e acty the same terms where the statute
has been nterpreted by the reguatons of the Treasury Department s per-
suasve evdence of the egsatve approva of the reguaton. ( rewster v.
Gage, 280 U. S., 327, 337 Ct. D. 148, C. . 1 -1, 274 , Trust No. 5SS3, Securty-
rst Naf ank of Los ngees, v. Wech. Coector, etc., No. 6583 Ct. D. 490,
C. . I-1, 138 , decded by ths court December 7, 1931.) ven n the
absence of subsequent egsaton the practca nterpretaton by the Department
of the statute w not be dsturbed f the statute s ambguous or doubtfu.
It s the setted rue that the practca nterpretaton of an ambguous or
doubtfu statute that has been acted upon by offcas charged wth the admns-
traton w not be dsturbed e cept for we hty reasons. (Id., page 336,
. . v. ackson, 280 U. S., 183.) Pettoner concedes that returns may propery
be made and assessments eved upon the ong term competed contract bass
where the contract s a ump sum contract but contends that where the con-
tract s upon the unt prce bass t can be ceary determned from the books
of the ta payer |ust what ncome has accrued to the ta payer durng the ta -
abe year and for that reason a resort to the aternate bass s not permssbe
under the statute and the reguatons of the Treasury Department (Reguatons
45, artce 36).
It s we setted and t s conceded that the ta payer may make hs returns
upon ether a cash bass or accrua bass n accordance wth the method of
accountng reguary empoyed n keepng the books of sad ta payer. (Rev-
enue ct of 1918, secton 212, subdvson (b), supra.) The respondent con-
tends that the statute permts and the reguatons e pressy authorze a
modfcaton of the accrua method of bookkeepng and returns based thereon
n cases of ong-term contracts, whe pettoner n effect contends that ths
method of makng returns s not permssbe f the books kept on accrua
bass ceary refect the ncome of the ta payer for the ta abe year. s
apped to the stuaton n the case at bar, the pettoner contends that not-
wthstandng the fact that t kept separate |ob accounts showng dsburse-
ments and recepts on each |ob and apportoned to the |ob accounts at the
end of each year ts pro rata of the overhead e penses and dd not carry over
nto ts genera accountng system the proft or oss of each |ob unt the |ob
was competed and the account cosed, t was at n tmes ready ascertanabe
from the books of the partnershp what the ncome of the partnershp was
for the ta abe year upon the accrua bass, and therefore, notwthstandng
the manner n whch ts books were kept, and notwthstandng the manner n
whch t made ts returns to the coector of nterna revenue, t was entted
to have a ncome receved from |obs durng the current year treated as
ncome from whch e pendtures upon that |ob shoud be deducted. Ths
contenton reates back to the proper defnton of ncome, t beng con-
tended n effect that when the ta payer adopts the cash bass of accountng
the ncome for the current year s correcty refected by the dfference between
the cash recepts and dsbursements and kewse when the accounts are kept
upon the accrua bass that the ncome s correcty refected by the dfference
between the obgatons ncurred and ncome earned regardess of the actua
recepts and dsbursements. moment s consderaton ndcates that the prac-
tca determnaton of ncome s one of great dffcuty. Ta abe ncome upon
the accrua bass may be and usuay s very dfferent from the ta abe ncome
for the same year f t were determned upon the cas system of bookkeepng.
In the ong run the two systems woud probaby resut n about the same
amount of ta es were t not for the ncrease and decrease of the ta rate
and the change n the rues as to e emptons and methods of ta aton. In
the choce of the accrua or cash bass method of accountng the matter s eft
to the dscreton of the ta payer regardess of the actua effect upon the
amount of the ta , and there seems no good reason why n the speca cases
of ong-term contrncts the ta payer shoud not have the rght to suspend n
the |ob account both e penses and recepts unt t s ascertaned wfether
on the whoe |ob there has been a proft or oss. That was done by the
ta payer n ths case. It s true that there s a more defnte bass of ascer-
tanng the amount of proft earned n the case of unt prce contract or ncome
upon a contract on the bass of cost pus a f ed fee than there s on a ump
sum contract where payments refect ony a porton of the amount earned.
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5213(a), rt. 36.
230
ut In ether event the contract Is a unt and unt the contract s competed
and accepted t can not be defntey known what the proft may be or
what oss may be suffered by the contractor. The books are fu of Instances
where by reason of defectve work or unsuspected obstaces or changes n
prces of abor and materas contractors have suffered osses notwthstandng
the unt prce bass and n the case of the contract based upon cost pus a
f ed fee the work may be proonged over a ong perod of tme by reason of
dffcutes n the work or the fee mght be dmnshed or whoy ost because
of nabty to compete the contract These observatons, famar to a,
are made merey for the purpose of ndcatng that under such contracts the
ncome, that s, the proft, derved from a contract s not necessary refected
by the payments made thereunder for a partcuar perod, whether such pay-
ments are upon a ump sum contract bass, or unt prce bass, or cost pus a
f ed fee bass. The pont we have suggested may be ustrated by the recent
decson of the Supreme Court n Lucas, etc., v. mercan Code Co. (280 U. S.,
445 Ct. D. 168, C. . I -1, 314 ). There the books of the ta payer were
kept upon the accrua bass. In 1919 the ta payer dscharged the saes man-
ager In voaton of hs contract of empoyment. e sued for damages and
n the year 1923 the ta payer pad a |udgment recovered by the empoyee
for breach of the contract whch occurred n 1919. The ta payer sought to
have ths payment deducted from Its Income for the year 1919 upon the ground
that ts books were kept on the accrua bass and that the obgaton to pay
damages for breac of contract accrued at the tme of the dscharge and not
at the tme of payment of the |udgment. The Supreme Court hed that ths
contenton coud not be sustaned, and n connecton wth the decson ustce
randes, speakng for the court, made some genera observatons upon the
theory of the ncome ta aw, whch are appcabe n prncpe to the case
at bar. e sad:
Generay speakng, the ncome ta aw s concerned ony wth reazed
osses, as wth reazed gans. (Wess v. Wener, 279 U. S., 333, 335 Ct. D.
60, C. . III-1, 257 .) cepton s made, however, n the case of osses whch
are so reasonaby certan n fact and ascertanabe n amount as to |ustfy
ther deducton, n certan crcumstances before they are absoutey reazed.
s respects osses occasoned by the ta payer s breach of contract, no defnte
ega test s provded by the statute for the determnaton of the year n whch
the oss s to be deducted. The genera requrement that osses be deducted
n the year n whch they are sustaned cas for a practca, not a ega
test. nd the drecton that net ncome be computed accordng to the meth-
od of accountng reguary empoyed by the ta payer s e pressy mted to
cases where the Commssoner beeves that the accounts ceary refect the
net Income. Much attude for dscreton s thus gven to the admnstra-
tve board charged wth the duty of enforcng the ct. Its nterpretaton of
the statute and the practce adopted by t shoud not be nterfered wth
uness ceary unawfu.
In urnet, Commssoner, v. Sanford rooks Co. (282 U. S., 359 Ct. D. 277,
C. . -, 363 ) the Supreme Court had occason to dea wth a ong-term
contract under whch the work was carred on at a oss. The ta payer each
year returned ts e pendtures and recepts ncudng those made and receved
upon the dredgng contract. The contractor abandoned the work n 1915 and
brought sut aganst the Government to recover damages from the Govern-
ment n the amount that ts e pendtures under the contract e ceeded Its
recepts and udgment was recovered for that amount ( 176,271.8S). The
Commssoner contended that ths amount, athough t was equa to and no
greater than the oss suffered by the contractor because of the contract, shoud
nevertheess be returned ns ncome n the year n whch t was receved and that
n determnng the ta of the ta payer for that year that amount shoud be
added to Its other ncome for that year. The Court of ppeas hed that ths
method was erroneous but the Supreme Court sustaned the Commssoner s
rung. It shoud be observed that the contenton by the ta payer n that case
was dametrcay opposed to the contenton made n the case at bar. There
the ta payer contended that the ta abe gan or proft can ony be net proft
ascertaned on the bass of partcuar transactons of the ta payer when they
arc brought to a concuson. In vew of the character of the contenton there
rased and the reevancy of the reasonng of the court upon that queston to
the prncpes nvoved n the case at bar and n vew of the fact that the
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231
f 213(a), rt. 36.
reguatons of the Treasury Department to ong-term contracts were referred to
by the court (Reguatons 45, artce 36), we quote from that decson at ength:
If respondent s contenton that ony gan or proft may be ta ed under the
s teenth amendment be accepted wthout quafcaton (see sner v. Macomber,
252 U. S., 189 T. D. 3010, C. . 3, 25 Doye v. Mtche ros. Co., 247
U. S., 179), the queston remans whether the gan or proft whch s the sub|ect
of the ta may be ascertaned, as here, on the bass of f ed accountng perods,
or whether, as Is pressed upon us, It can ony be net proft ascertaned on the
bass of partcuar transactons of the ta payer when they are brought to a
concuson.
the Revenue cts whch have been enacted snce the adopton of the
s teenth amendment have unformy assessed the ta on the bass of annua
returns showng the net resut of a the ta payer s transactons durng a f ed
accountng perod, ether the caendar year, or, at the opton of the ta payer,
the partcuar fsca year whch he may adopt. Under sectons 230, 232 and
234(a) of the Revenue ct of 1918 (40 Stat., 1057), respondent was sub|ect to
ta upon ts annua net ncome, arrved at by deductng from gross Income for
each ta abe year a the ordnary and necessary e penses pad durng that
year In carryng on any trade or busness, nterest and ta es pad, and osses
sustaned, durng the year. y sectons 235(a) and 213(a) gross ncome
ncudes ncome derved from busnesses or
the transacton of any busness carred on for gan or proft, or gans or profts
and ncome derved from any source whatever. The amount of a such tems
s requred to be ncuded In the gross ncome for the ta abe year n whch
receved by the ta payer, uness they may be propery accounted for on the
accrua bass under secton 212(b). (See Unted States v. nderson, 269 U. S.,
422 T. D. 3839, O. . -, 179 umnum Castngs Co. v. Routzahn, ante,
92 Ct. D. 270, C. . -, 352 .)

ut respondent nssts that f the sum whch It recovered s the ncome
defned by the statute, st t s not Income, ta aton of whch wthout ap-
portonment s permtted by the s teenth amendment, snce the partcuar
transacton from whch t was derved dd not resut n any net gan or proft.
ut we do not thnk the amendment Is to be so narrowy construed. ta -
payer may be n recept of net ncome n one year and not n another. The
net resut of the two years, f combned n a snge ta abe perod, mght st
be a oss but t has never been supposed that that fact woud reeve hm
from a ta on the frst, or that It affords any reason for postponng the assess-
ment of the ta unt the end of a fetme, or for some other ndefnte perod,
to ascertan more precsey whether the fna outcome of the perod, or of n
gven transacton, w be a gan or oss.

Under the statutes and reguatons n force n 1920, two methods were
provded by whch, to a mted e tent, the e penses of a transacton ncurred
In one year mght bo offset by the amounts actuay receved from t n
another. One was by returns on the accrua bass under secton 212(b),
whch provdes that a ta payer keepng accounts upon any bass other than
that of actua recepts and dsbursements, uness such bass does not ceary
refect ts ncome, may, sub|ect to reguatons of the Commssoner, make ts
return upon the bass upon whch ts books are kept. (See Unted States v.
nderson and umnum Castngs Co. v. Routzahn, supra.) The other was
under Treasury reguatons (artce 121 of Reguatons 33 of anuary 2, 1918,
under the Revenue cts of 1916 and 1917 artce 36 of Reguatons 45, pr
19, 1919, under the Revenue ct of 1918) provdng that n reportng the
ncome derved from certan ong-term contracts, the ta payer mght ether
report a of the recepts and a of the e pendtures made on account of a
partcuar contract In the year n whch the work was competed, or report In
each year the percentage of the estmated proft correspondng to the percentage
of the tota estmated e pendtures whch was made n that year.
We thnk t cear from the foregong constructon that Reguatons 45, artce
36, s a vad reguaton that has been approved by Congress, that t s propery
appcabe to the stuaton presented by the record and ttat the ta payer had
an opton whch he e ercsed to keep hs books and make hs return upon the
160903O 33 16
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213(a), rt. 36.
232
ong term competed contract bass and that the decson of the oard of Ta
ppeas upon that pont s correct.
Wth reference to ta es for the year 1922, t appears that n computng the
ta the ta payer made a mstake n addton amountng to 1,440. The tota
shoud have been 65,177.80, but the ta payer ncorrecty made the tota
06,617.80. The Commssoner on e amnng the return ncreased the ta abe
ncome by 1,359.09 and computed the ta at 65,928.78. The pettoner fed
a cam n abatement for the dfference between the amount of ta es pad,
66,617.80, and the ta es as assessed by the Commssoner, 65,928.78. Upon
consderaton of the cam n abatement the Commssoner camed an under-
statement of ta abe ncome upon whch the ta amounted to 671.02-and
notfed the ta payer that the overassessment w be made the sub|ect of
certfcates of overassessment whch w reach you n due course, .
The oard of Ta ppeas hed that under these crcumstances there was no
determnaton of the defcency wthn the meanng of sectons 273 and 274 of
the Revenue ct of 1926, and that therefore the oard had no |ursdcton n
the matter. Pettoner cams that the orgna assessment by the Comms-
soner correctng the ta payer s mstake n addton shoud be consdered as
the amount prevousy abated n determnng whether or not the addtona
assessment wras a determnaton of defcency wthn the meanng of secton 273
of the Revenue ct of 1926, supra.
The ony reason that the pettoner ob|ects to the decson of the oard of
Ta ppeas wth reference to the year 1922 s because of hs desre to have
the ta es for that year redetermned upon the bass whch e contends shoud
have been apped to both the years 1920 and 1922. In vew of our concuson
he s not pre|udced by the rung of the oard of Ta ppeas. s we under-
stand the record pettoner makes no speca pont upon the ta of 1922 other
than the genera cam whch we have dscussed and decded.
Order affrmed.
rtce 36: Long-term contracts. I-47-5869
Ct. D. 603
INCOM T R NU CT O 1018 D CISION OP COURT.
1. Long-Term Contracts Contracts for Purchase and Sae op
O.
person who enters nto contracts of purchase and sae of o s
not thereby engaged n contractng operatons wthn the mean-
ng of artce 30 of Income Ta Reguatons 45, whch aows
persons engaged In contractng operatons who have contracts run-
nng for more than a year to prepare returns on the bass of com-
peted work.
2. Deductons Loss reach op Contract.
Where a person engaged n buyng and seng o has on hand
at the end of 1919 a number of uncompeted contracts for the pur-
chase and sae of o and n 1920 one of such contracts for the pur-
chase of o s breached by the vendor and n order to compete
some of such contracts of sae he s obged to purchase o n the
open market at a hgher prce than specfed n the breached
contract, no part of a resutng oss s deductbe n 1919.
Dstrct Court of the Unted States, Northern Dstrct op Inos, astern
Dvson.
Lakesde Petroeum Co. v. Unted States.
uy 21, 1932.
OPINION.
Woodward, Dstrct udge: The pantff, durng the year 1919, was a broker
of fue os. It kept ts books on a cash recepts and dsbursements bass.
It purchased fue o at a certan fgure and then entered nto contracts of
sae for the same amount of o. When the o was shpped t gave In pay-
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233
213(a). rt. 47.
mert a b of acceptance or a note. The o was shpped drecty to the pur-
chaser who pad pantff for t upon ts recept. t the end of the year 1919
the pantff had a number of contracts for the purchase of o from the
Mken company, the prncpa company from whch t purchased ts os,
under whch deveres were to be made from tme to tme and on whch there
remaned further deveres to be made by the seer durng the year 1920.
so, at the end of the year 1919 pantff had a number of contracts for the
sae of os whch were not entrey e ecuted. On anuary 9, 1920, the M-
ken company breached ts contract and refused to furnsh any more o at
the prce and under the condtons agreed upon n the contract. Pantff, n
order to f some of ts contracts of sae and dever os under ts contracts,
was forced to purchase o n the open market at a hgher prce than as spec-
fed n ts contract wth the Mken company.
On March 15, 1920, pantff fed ts ncome and profts ta return for the
year 1919 and the ta shown due thereunder was pad n 1920. In 1923 pan-
tff fed an amended return for the year 1919 camng that ts contracts of
sae whch were not competed on December 31, 1919, shoud be caed ong-
term contracts under the provsons of artce 36 of Reguatons 45 and part
of the oss sustaned n 1920 shoud be deducted from ts profts n 1919. Ths
return was re|ected by the Commssoner. Pantff fed ts cam for refund
aso was re|ected. It now brngs sut for the recovery of the amount of ts
cam for refund.
rtce 36 of Reguatons 45, so far as matera, reads as foows:
rt. 36. Long-term contracts. Persons engaged n contractng operatons,
who have uncompeted contracts, n some cases perhaps runnng for perods of
severa years, w be aowed to prepare ther returns so that the gross ncome
w be arrved at on the bass of competed work that s, on |obs whch have
been fnay competed any and a moneys receved n payment w be returned
as ncome for the year n whch the work was competed.
Pa by pantff docs not put tsef wthn ths artce. It was not engaged
n contractng operatons. It entered nto contracts of purchase and sae but
there was no contractng operatons, whch strcty mean operatng as a
contractor. There was no competed work. There were no |obs whch
have been fnay competed. There was no e pense ncurred e cept the pur-
chase prce of o whch was f ed by the contract. Whe artce 36 of Regua-
ton 02, promugated under the Revenue ct of 1921, s not bndng n ths case,
yet as t represents the constructon whch has aways been put by the Govern-
ment upon the phrase ong-term contracts, t s pursuasve. It provdes
that:
s used heren the term ong-term contracts means budng, nstaaton,
or constructon contracts coverng a perod n e cess of one year.
In other words, ong-term contracts were contractng operatons where work
was done under the contract and e pendtures and e penses were ncurred
thereunder often n dfferent years from the tme payments were receved
by the contractors.
That the concuson of the Commssoner s correct s supported by the
foowng cases, a of whch are cted n the bref for the Government:
urnet v. Stanford rooks Co. (282 U. S., 359 Ct. D. 277, C. . -, 363 )
Shcsberger v. Commssoner (38 ed. (2d), 566) acon Gran Co. v. Rcnrckc,
Coector (26 ed. 2d), 705 T. D. 4229, C. . II-2, 251 ) wng-Thomas
Convertng Co. v. McCaughn (43 ed. (2d), 503 Ct. D. 43, C. . III-1, 232 ).
The fndng w be n favor of the Government and aganst the pantff.
rtce 47: nnutes and nsurance poces.
R NU CT O 1026.
Treatment for ncome ta purposes of amounts receved n sette-
ment of an endowment nsurance pocy where the nsured survves
the maturty of the pocy. (See I. T. 2G35, page C3.)
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1213(a), rt. 50.
234
rtce 50: When ncuded n gross ncome.
R NU CT O 1920 ND TRIOR R NU CTS.
Ta abe status of refunds of customs dutes and ta es. (See
Mn. 3958, page 33.)
ncome ta revenue acts of 1018 and 1921 decson of court.
1. Income Year. ccruabe Dsputed Cam.
Where a raroad corporaton, whose propertes are taken over
by the Unted States and operated by the Drector Genera of Ra-
roads durng the perod of edera contro from anuary 1, 1918,
to March 1, 192U, receves tos durng that perod n whch aso
certan nterest accrues and where the rght to the tos and n-
terest s not conceded by the drector genera but camed for the
Unted States and frst became the sub|ect of negotatons n 1923,
when abty of the Unted States to the corporaton for them
was contested, the company nether assertng a cam thereto unt
the atter year nor accrung these tems on Its hooks nor returnng
them as accrued ncome n the edera contro years, the vaue of
the tos and nterest whch s reazed by the corporaton n 1923
upon a settement of cams of the company and the drector
genera aganst each other arsng out of the use of the company s
propertes, s not ncome to the corporaton, whose books are kept
on the accrua bass, n the years of edera contro, but n the
year 1923, when the Government s abty for ether tos or n-
terest was defntey determned by the settement.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (19 . T. ., 969)
Is affrmed.
Unted States Crcut Court of ppeas, S th Crcut.
entucky Indana Termna Raroad Co., pettoner, v. Commssoner o
Interna Revenue, respondent.
Petton to revew an order of the Unted States oard of Ta ppeas.
efore cks and ckenooper, Crcut udges, and Smons, Dstrct udge.
cks, Crcut udge: Petton by entucky Indana Termna Raway Co,
a corporaton, to revew a decson of the oard of Ta ppeas affrmng the
acton of the Commssoner of Interna Revenue n assessng aganst t on
redetermnaton a defcency n ncome ta es for the year 1923 n the sum of
S30.697.87.
Pror to .Innuary 1, 1918, pettoner owned and operated raroad termna
factes n Lousve. s a component part thereof t owned a brdge across
the Oho Rver over whch t operated a doube-track raroad. The brdge
carred ndependent eectrc, teephone and street raway nes and the usua
vehcuar and pedestran traffc for a of whch pettoner charged rentas and
tos. The stock of pettoner was owned by three raway companes each
ownng one-thrd. Pettoner s propertes ncudng that porton of the brdge
(arryng the raway tracks were used for the busness of the stock-hodng
companes.
of pettoner s propertes were taken over by the Unted States and
operated by the Drector Genera of Raroads under edera contro, from
anuary 1, 1918. unt March 1, 1920. There was no agreement for ust
compensaton to pettoner for the use of ts property upon the bass of the
rtce 50: When ncuded n gross ncome.
I-33-5609
Ct. D 536
December 18, 1931.
OPINION.
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235
( 213(a), rt. 50.
standard return ( edera Contro ct, ch. 25, secton 1, 40 Stat., 451) but
durng edera contro the drector genera dd pay pettoner from tme to tme
on account of compensaton an amount suffcent to pay the nterest on
pettoner s bonds. Ths was substantay a that was pad to pettoner
durng that perod. Subsequent to the return of ts property at the end of
edera contro, pettoner and the drector genera entered nto negotatons
for a settement of a matters between them. Upon presentaton of ther
respectve cams, specfc n nature and amount, some of the tems of each
were mutuay assented to whe others were dsputed. Upon such bass no
settement coud be reached, whereupon specfc tems were dsregarded and an
agreement was arrved at by whch pettoner pad the Government 50,000 n
fu settement of a cams of ether party.
mong these tems was one for 382,391.00 whch the drector genera had
charged aganst pettoner for addtons and betterments durng the edera
contro perod. Ths tem was undsputed. Pettoner was by aw obgated to
pay t. See edera Contro ct, March 21, 1918 (ch. 25, secton 6, 40 Stat., 451,
453). Upon the other hand pettoner had debted the drector genera wth
brdge tos coected by hm n the sum of 231,178.99. It aso camed
1,711.93, nterest upon quartery baances, and 10,422.32, nterest on com-
peted addtons and betterments.
The prncpa controversy was over the tos. The amount was not ques-
toned but the drector genera nssted that these tos beonged to the Govern-
ment. Pror to edera contro they were coected by pettoner and apped
to operatng e pense and any defct was defrayed by the three stock-ownng
companes. Durng edera contro there was never any understandng
between the drector genera and pettoner as to the dsposton or ownershp
of the tos. The drector genera apped them to operatng e penses |ust
as had pettoner. e probaby assumed that he was |ustfed theren because
he was payng as compensaton a suffcent amount to dscharge pettoner s
bond nterest. Pettoner camed that these tos consttuted noncarrer reve-
nue whch beonged to It. The oard of Ta ppeas upon consderaton of
a dsputed ponts between the pettoner and the drector genera concuded
that at the settement the drector genera had conceded to pettoner the mert
of ts cams for tos and nterest. We concur n ths vew.
We can not assume that the drector genera forgave the cam aganst
pettoner for addtons and betterments. We thnk the proper nference s
that he aowed the brdge tos and nterest, whch were ess than the add-
tons and betterments, to go In dscharge thereof. If ths s the correct vew,
t s obvous that through the settement of the Government s cam for add-
tons and betterments pettoner has receved ta abe ncome to the vaue of the
tos and nterest. The contrary was urged before the oard of Ta ppeas
but apparenty has been abandoned here.
Pettoner, however, nssts that the tos havng been coected n the edera
contro years and the Interest hayng accrued durng the same perod these
tems for ta purposes shoud be aocated to those years, nstead of 1923, the
pettoner havng under the drecton of the Interstate Commerce Commsson
kept ts books upon the accrua bass. ut the obstace s that there was no
acknowedgment or determnaton of abty on the part of the Government
for ether tos or nterest unt the settement n October, 1923. Pettoner
made no demand for ether tos or nterest durng edera contro. It dd not
pace these tems npon ts books or return them as accrued ncome In the
edera contro years. Ths omsson was not the resut of oversght. It arose
from the uncertanty pettoner entertaned as to ts duty to return the tems
for those years. Ths s sgnfcant Inasmuch as the burden was upon pettoner
to estabsh before the oard of Ta ppeas that the Commssoner shoud
have aowed them for those years. (See urnet v. Sanford rooks Co., 282
U. S., 359, 366 Ct. D. 277. C. . -, 363 .) The tos were omtted from the
orgna cam presented to the drector genera. Nether the tos nor nterest
tems became the sub|ect of negotatons unt une, 1923, when abty for
each was vgorousy dsputed. We thnk that the event whch defntey
determned the Government s abty for ether tos or nterest was the sette-
ment In October foowng and that the ta abe ncome n queston arose then
and not prevousy. (See Lucas v. mercan Code Co., 280 U. S., 445, 449 Ct. I).
168, C. . I -1, 314 Lucas v. O bre rush Co.. 281 U. S.. 115, 120 Ct. D.
285, C. . I -2, 384 auer ros. Co. v. Commr., 46 ed. (2d), 874, 876 (C.
C. . 6) Ct. D. 361, C. . -2. 359 .) These cases dea wth e pense rather
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213(a), rt. 50.
236
than ncome tems but the appcabe prncpe s the same. (See aso . 8. v.
nderson, 269 U. S., 422, 441 T. D. 3839, C. . -, 179 urnet v. Sanford d
rooks Co., supra.) Unt the settement t coud not be known how pettoner
woud fare as a resut of Government operaton.
The decson of the oard of Ta ppeas s affrmed.
rtce 50: When ncuded n gross ncome. I-35-56S8
Ct.D.549
INCOM T R NU CT OP 1924 D CISION OP COURT.
1. Income Year ccruabe- Ltgated Cam.
Where a ta payer, keepng ts books on the accrua bass, has
n 1921 a contngent cam to ncome, the rght to whch ncome s
tgated and s sustaned by vrtue of a decson of the Supreme
Court n 1924, n whch an amount n settement of the cam s
receved, the entre amount receved n the atter year s ncome
n 1924.
2. Decson Reversed.
The decson of the oard of Ta ppeas (19 . T. ., 490) s
reversed.
Unted States Crcut Court of ppeas fob the fth Crcut.
Commssoner of Interna Revenue, pettoner, v. Southeastern press Co.,
respondent.
retton for revew of decson of the Unted States oard of Ta ppeas (Dstrct of
abama).
efore ryan, oster, and Waker, Crcut udges.
March 4, 1932.
OPINION.
ryan, Crcut udge: Durng the Word War a raway e press companes
In the Unted States were consodated, and after the consodaton the mer-
can Raway press Co. was the ony one n the country unt May 1, 1921,
when the Southeastern press Co. began to do busness over what s caed
the Southern Raway System ocated prncpay n terrtory south of the
Oho and Potomac Rvers and east of the Msssspp, athough t aso operated
over an eectrc raway ne from Washngton to atmore, and over the ne
of the Maryand Pennsyvana Raway Co. from atmore to York, Pa.
The terrtory seected by the Southeastern was prompty abandoned by the
mercan. The Southeastern attempted to concur n the tarffs of the mer-
can. ut the mercan thwarted ths attempt by suppementary tarffs, by
whch t made through routes and |ont rates appcabe ony between ts own
e cusve offces and the e cusve offces of the Southeastern, and thus con-
tnued ts monopoy between common ponts, chargng ts oca rates and takng
the ong hau on the theory that t was a carrer by raroad wthn the mean-
ng of the Interstate Commerce ct as amended. fter hearngs, upon app-
catons made by the Southeastern and certan shppers, the Interstate Com-
merce Commsson n uy, 1923, entered an order requrng the mercan to
estabsh and mantan through routes and |ont rates between ts e cusve
ponts north and east of Washngton, and a ponts on the man ne of the
Southern Raway from Washngton to rmngham, wth rght of transfer at
Washngton. (Southeastern p-ess Co. v. mercan Raway press Co.,
78 I. C. C, 120 81 I. C. C, 247.) Ths order was contested n the courts, but
was nay sustaned n 1924 by the Supreme Court. (Unted States v. mer-
can Raway press Co., 265 U. S., 425.) In 1924 the mercan pad the
Southeastern about 208,000 n settement of the controversy between them.
The Southeastern kept ts books on the accrua bass, and accrued as ncome
for the year 1921 51,300 out of the tota amount whch t receved n 1924 n
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213(b), rt. 73.
ts settement wth the mercan. The oard of Ta ppeas decded that
t was entted to do ths. (19 . T. ., 490.) The Commssoner of Interna
Revenue has fed a petton for revew, and contends that the whoe amount
receved n settement by the Southeastern shoud be treated as ncome n
1924, the year n whch t was actuay receved.
The returns of ta payers, whether upon cash or accrua bass, must ceary
refect ncome. (Revenue ct of 1921, secton 212(b) 42 Stat., 237.) The
Southeastern dd not earn the amount of 51,300 whch t entered on ts books
n 1921, but woud have earned that amount f t had been permtted to share
wth the mercan the e stng rates over the through route, whch t was
contendng shoud be, but whch had not been, estabshed. Whether the
through rate woud ever be estabshed was uncertan, and was dependent
upon the future determnaton by the Interstate Commerce Commsson that
such a route was necessary or desrabe n the pubc nterest. (49 U. S. C. .,
secton 15(3).) It foows that the Southeastern n 1921 had ony a cam
whch rpened nto a defnte rght n a ater year. mere contngent cam,
especay a contested one, whether of oss or gan, may never be sustaned
or reazed t s too uncertan to be consdered n makng up an ncome ta
return. (Lucas v. mercan Code Co., 280 U. S., 445 Ct. D. 168, C. . I -1,
314 Lucas v. North Te as Co., 281 . S., 11 Ct. D. 169, C. . I -1, 294
Lucas v. O bre rush Co., 281 D. S., 115 Ct. D. 205, C. . I -2, 384 .)
The petton for revew s granted, and the cause remanded for further
proceedngs not Inconsstent wth ths opnon.
S CTION 213(b). GROSS INCOM D IN D:
CLUSIONS.
rtce 72: Proceeds of nsurance Compensaton Pensons.
R NU CT O 1926 ND PRIOR R NU CTS.
Proceeds of so-caed amy ncome pocy 20-year perod.
(See G. C. M. 10843, page 22.)
rtce 73: Gfts and bequests. I-31-5580
Ct. D. 520
INCOM T R NU CTS O 1916 ND 1918 D CISION O COURT.
1. emmton -Gft Payments Under greement Wthout Con-
sderaton.
ed that the evdence of record does not support the fndng
that an agreement between a ta payer and hs empoyer s wthout
consderaton and ntended ony as a memora of a gft. mounts
pad to the ta payer n 1917 and 1919 pursuant to the agreement
are therefore not e empt from ta under the Revenue cts of 1916
and 1918.
2. Same.
Where a ta payer cams that an amount pad to hm pursuant
to an agreement between hm and hs empoyer s e empt from ta
as a gft, the ntenton to make a gft must be estabshed and
where there s no evdence of such ntenton but persuasve
evdence to the contrary, the amount s not e empt from ta .
though the payment s made wthout a ega duty to pay, t does
not foow that the amount receved by the ta payer Is e empt
from ta , snce addtona compensaton pad for past servces may
consttute ta abe ncome.
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238
Unted States Crcut Court of ppeas for the Second Crcut.
Roy . Weagant, pantff-appeee, v. rank Co ocers, as ecutor of
the Last W and Testament of rank . owers, Deceased, former Unted
States Coector of Interna Revenue for the Second Dstrct of Ifcw York,
defendant-appeant.
ppea from the Dstrct Court of the Unted States for the Southern Dstrct of New York.
pr 13, 1932.
OPINION.
Swan, Crcut udge: The pantff sued to recover sums pad by hm as
addtona ncome ta es for the years 1917 and 1919 n the amounts of 6,042.77
and 3,072.09, respectvey. The addtona assessments resuted from the ncu-
son by the Commssoner of Interna Revenue In the ta payer s gross ncome,
of 33,333.33 receved by n n the former year, and 10,666.66 n the atter
year, from Marcon Wreess Co. of merca, by whom he was empoyed.
The ta payer contends that these payments were gfts the defendant that they
were ta abe ncome wthn the meanng of the Revenue cts of 1917 and
1918. ury havng been waved by wrtten stpuaton, the case was tred
to the court, who made fndngs of fact upon whch he hed that the pantff
was entted to recover. udgment was entered accordngy.
Ths case was formery before us n Weagant v. owers (24 . (2d), 362),
where we affrmed a |udgment hodng the compant nsuffcent, but gave
the pantff eave to fe an amendment. Ths he dd, and the appeant now
chaenges the amended compant us beng not materay dfferent from the
one hed nsuffcent on the pror appea. s to ths t w sutce to say
that we thnk the amended compant aeges wth adequate certanty facts
whch we sad n our former opnon mght, If propery proved, show n cause
of acton. The compant now aeges that the nstrument of October 3, 1917,
though n form a contract, was a sham and never ntended by the partes
to be a contract aso facts to show the pantff gave no consderaton for t.
The ne t contenton of appeant s that the court s fndngs that the nstru-
ment of October 3, 1917, was a memora of a gft, that the pantff gave
no consderaton for t, and that the payments n queston were gfts nstead
of ta abe ncome are whoy wthout support n the evdence. ut before
turnng to the evdence we w consder the pantff s argument that n any
event the 1917 ta was egay coected because barred by the statute of
mtatons set up n secton 250(d) of the Revenue ct of 1921 (42 Stut.,
227, 265). The ta payer s 1917 return was fed March 29, 1918 the add-
tona ta for that year was assessed ebruary 26, 1923, and was pad to
the coector on pr 26, 1923. Thus, athough the assessment was made
wthn 5 years ufter the date when the return was fed, the payment was made
neary 30 days after the e praton of the 5-year perod. Ths was too ate
for the Government to begn a sut or proceedng for coecton of the
1917 ta . (ovcrs v. N. Y. t bany Lghterage Co., 273 U. S., 346 T. D. 4009,
C. . I 1, 268 .) We may assume that the ta was pad to avod dstrant,
as the compant aeges, athough the stpuaton of facts admts ony the fact
of payment, and was egay coected. See onwt Teer d Co. v. Unted
States (2 3 U. S., 258, 259 ret D. 334, C. . -, 328 ). ut grantng ths, the
queston s of the pantff s rght to recover t when hs cam for refund
nether asserted as a ground that the tu was coected more than fve years
after the return was ted nor aeged facts showng ths to be the case. Re-
vsed Statutes secton 3226 requres a cam for refund to be made n ac-
cordance wth the reguatons, and these requred that a facts reed upon
shoud be ceary set forth. ( rtce 1036, Reguatons 62 artce 1306. Regu-
atons 65.) The pantff fed two cams for refuud of the 1S17 ta but
each reed soey u m the ground that the dsputed tem of ncome was a
gft. Nether cam dscosed the date when the ta payer s return was fed
and therefore dd not set forth a the facts necessary to show that the ta
was coected too ate. Consequenty the (mnt s not now avaabe to the
pantff. Counc v. opkns (43 . (2d), 773 (N. D. Te .) Ct. D. 248, C. .
I -- , 407 ) s squarey n pont, and cases too numerous for compete ctaton
have recognzed the prncpe that a ta payer who brngs sut after a refund
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239
213(b), rt. 73.
has been dened can rey for recovery ony on grounds presented to the Com-
mssoner. (See Unted States v. et Tarrant Mfg. Co., 283 U. S., 269,
272 Ct. D. 336, C. . -, 431 . P. Steven ngravng Co. v. Unted States,
53 . (2d), 1 (C. C. . 5) Lews . Crossctt Co. v. Unted States, 50 . (2d),
292 (Ct. Cs.) Ct. D. 373, C. . 2, 392 Tucker v. e ander, 15 . (2d),
356 (C. C. . 8) T. D. 3973, C. . I-1, 287 , reversed on another ground n
275 U. S., 228.)
We now return to appeant s contenton that tte proof w not support
the court s fndng of a gft. Weagant was empoyed by the Marcon com-
pany us an assstant engneer, hs dutes ncudng work of research and e -
perment. On ebruary 5, 1914, n consderaton of the contnuance of hs
empoyment he sgned a contract by whch he agreed that on makng any ds-
covery or nventon reatng to hs empoyer s busness, he woud dscose the
same to hs empoyer, whch sad dscovery or nventon (even shoud the
empoyee fa to dscose the same) sha become and be the property of the
company at the tme of such dscovery or nventon, for whch patent or
patents may be taken out by t or not and n the name of the empoyee or ts
own name at the opton of the company. The contract aso provded that he
shoud e ecute a such papers, wthout remuneraton other than hs reguar
saary, as may be deemed necessary to absoutey and fuy vest the ds-
covery or nventon and the patent n the company. In 1917 Weagant made
new and usefu mprovements n the art of wreess teegraphy and teephony,
and apped for two Unted States patents coverng the same. y two assgn-
ments referrng respectvey to hs patent appcatons, he assgned to the
Marcon company the fu and e cusve rght to the sad nventon, as fuy
set forth and descrbed n the specfcaton accompanyng the aforesad app-
caton, and requested that the patent e ssued to the company. Subse-
quenty, the nstrument of October 3, 1917, was e ecuted by Weagant and the
company. The e ecuton of ths nstrument was authorzed at a meetng
of the e ecutve commttee, hed on the same date, by a resouton readng
as foows:
Contract drawn and prepared by Messrs. Sheffed and etts regardng
patents of Mr. Weagant was submtted and read to the meetng. fter due
consderaton thereof, on moton duy made and seconded It was
Resoved, that the contract wth oy . Weagant regardng patent on bs
most recent nventon as presented to the meetng s hereby ratfed, approved
and confrmed and the offcers of the company are hereby authorzed and em-
powered to e ecute wth the sea of the company sad contract.
The nstrument e ecuted pursuant to ths resouton Is headed greement
made and entered nto ths 3d day of October, 1917. It rectes Weagant s
two 1917 appcatons for Unted States etters patent and hs assgnment of
hs nterest n sad appcatons. It aso rectes that the company s desrous
of acqurng from the sad Weagant the whoe rght, tte and nterest n and
to the sad nventons for a countres foregn to the Unted States, and n
and to a nventons whch the sad Weagant has made or may hereafter make
as mprovements upon the same n a countres foregn to the Unted States.
Then foow the mutua promses: Weagant ses, assgns and transfers to the
company the whoe rght, tte and nterest n sad Inventons and n and to a
mprovements whch e has now made or whch he may hereafter make on the
same, and n and to a etters patent n a countres foregn to the Unted
States for the sad nventons or any mprovements thereon aso he agrees
that e w wthout further compensaton do everythng necessary to appy for
patents In a foregn countres, the fees and Incdenta e penses beng borne
by the company. nd the company agrees to pay to Weagant one-thrd of the
net recepts or profts whch t may thereafter obtan from the sae of any
patents or appcatons for patents or patents granted In foregn countres for
sad nventons or any mprovements thereon made by the sad Weagant.
Later n the year 1917 the company sod the patent rghts n South mercan
countres for 150,000, and pad to Weagant one-thrd thereof, 33,333.33 beng
pad n 1917 and 16,660.60 n 1919.
On ts face the nstrument of October 3, 1917, was a contract entered nto by
the company for the purpose of acqurng the patent rghts n foregn countres
on Weagant s sad nventon. It certany ta es creduty to beeve that ths
forma document drawn up by the corporaton s attorneys was a a sham,
ntended merey to evdence a benevoent ntent to make Weagant a gft n the
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213(b), rt. 73.
240
event that the foregn patent rghts (assumed to have been aready owned by
the company under the contract of ebruary 5, 1914) shoud subsequenty be
sod. Ths becomes a the more ncredbe when we ook at the two subsequent
contracts ntroduced as defendant s hbts 1 and 2. The former s an agree-
ment of uy 25, 1919, whch rectes that the partes have heretofore entered
nto an agreement dated October 3, 1917, reatng to the dsposton of certan
nventons made by Weagant, and that the company desres to acqure nn
opton to purchase from Weagant a hs rghts under sad contract. Weagant
agrees to reease hs rghts f on or before anuary 1, 1920, he sha be pad
100,000 cash, another 100,000 of preferred stock n a prospectve rado cor-
poraton, and a royaty agreement by the atter provdng royates runnng Tp
to 300,000. Ths opton was not e ercsed. It was superseded by defendant s
hbt 2, dated anuary 2, 1920. Ths provded for the termnaton of Wea-
gant s empoyment by the Marcon company and hs empoyment by the Rado
Corporaton of merca, and for the reease of a Weagant s contracts wth the
Marcon company, specfyng the contract of ebruary 5, 1914, the contract of
October 3, 1917, the contract of uy 25, 1919, to a whch we have aready re-
ferred, and aso another of pr 3, 1913, whch s not n the record. Weagant
then, wth the consent of the Marcon company assgned to the Rado Cor-
poraton a nventons whch he had made or whch he may make whe n
the Rado Corporaton s empoy, and under the terms of the agreement was to
receve 50,000 cash, and condtonay 200,000 more. To say that the pares
meant the contract of October 3, 1917, to create no rghts and understood that
t dd not, when they were subsequenty offerng Weagant such sums as these
to get rd of t, s reay unbeevabe.
The ony evdence whch tends to support the fndngs beow s a deposton
of Weagant. In response to questons of hs counse, he e pressed the opnon
that the contract of ebruary 5, 1914, obgated hm to turn over to hs em-
poyer hs nventons, thus gvng the Marcon company foregn patent rghts
as we as patent rghts n the Unted States. ence he aways consdered
the contract of October 3, 1917, as e pressng ony a mora obgaton of the
company to carry out ts benevoent ntenton to make hm a gft on account of
the vaue of hs antstatc nventons. e aso says that the vce presdent of
the company, when handng hm the nstrument, decared that t was Intended
to be an e presson of apprecaton for hs work and to consttute a memo-
randum whch woud be moray bndng on future drectors of the company.
Such evdence, f competent at a, certany can not be aowed to outwegh
the documentary proof. To us t seems cear that the partes thought the 1914
contract dd not gve the Marcon company patent rghts n foregn countres.
It dd not e pressy menton foregn countres and ts anguage that Weagant s
nventons sha become the company s s so ted up wth references to obtan-
ng patents that f the atter refer ony to domestc patents, that mtaton
mght reasonaby be e tended to cover the whoe agreement. The partes have
construed t that way. When there s ambguty n the terms of a contract the
practca constructon whch the partes have put upon t s entted to great
f not controng nfuence. (Topff v. Topff, 122 U. S., 121, 131.) In the
present case ther nterpretaton shoud contro and shoud precude a court
from readng the 1914 contract so as to make the 1917 contract a nudum
pactum. The evdence w not |ustfy the fndngs that the atter was wthout
consderaton and ntended ony as a memora of a gft.
ut even were t to be conceded that the company s promses contaned u
the wrtng of October 3, 1917, were wthout consderaton because Weagant
was aready bound by the 1914 contract to turn over foregn as we as domestc
patent rghts, t need not foow that the payments made In 1917 and 1919 were
proved to be nonta abe gfts. There s authorty for the proposton that t
s not enough to show that a payor was under no ega duty to pay and that
addtona compensaton pad for past servces may consttute ta abe n-
come. (Noe v. Parrott, 15 . (2d), 669, 671 (C. C. . 4) T. D. 3908. C. . -2,
149 .) Ths case was cted wth approva n Od Coony Trust Co. v. Com-
mssoner (279 U. S., 716, 730 Ct. D. 80, C. . III-2. 222 ). (See aso Oarey v.
Commssoner, 16 . T. ., 274 nger v. Commssoner, 22 . T. ., I
Lumsford v. Commssoner, 22 . T. ., 881 compare ar v. Roester, 33 .
(2d), 286 (C. C. . 9).) These cases rest upon the vew that an ntenton to
make a gft must be estabshed. In the case at bar there s no evdence that
such was the ntenton of the Marcon company. In fact the form of the 1917
wrtng and the resouton of ts e ecutve commttee nre cear evdence to the
contrary. nd the subsequent agreements aready referred to nre equay
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241
214(a), rt. 101.
persuasve evdence to the same effect. Moreover the payments made to the
pantff were treated by the company n ts books ns the cost of acqurng a
capta asset.
udgment reversed.
rtce 74: Interest upon State obgatons.
R NU CT O 1920.
Interest pad by a muncpaty upon prncpa awarded as com-
pensaton for property taken. (See Ct. D. 580, page 67.)
rtce 74: Interest upon State obgatons.
R NU CT OP 1026.
Revocaton of I. T. 2374 (C. . I- 2, 36), reatng to the e emp-
ton of nterest on bonds ssued by corporatons formed under the act
of the Legsature of Indana, approved March 10, 1927. (See
I. T. 2666, page 69.)
rtce 88: Compensaton of State offcers and empoyees.
R NU CT O 1026 ND PRIOR R NU CTS.
Offcer of a county hospta for the ndgent sck or dependent
poor. (See G. C. M. 10814, page 113.)
S CTION 214(a) 1. D DUCTIONS LLOW D INDI-
IDU LS: USIN SS P NS S.
rtce 101: usness e penses.
R NU CTS O 1021 ND 1024.
Payments made by new corporaton n dscharge of obgatons of
od corporaton the assets of whch had been acqured. (See Ct.
D. 513, page 252.)
rtce 101: usness e penses.
R NU CT O 1020 ND TRIOR R NU CTS.
Lega e penses ncurred n securng a refund of customs dutes,
or ta es, egay or mpropery coected. (See Mm. 3958, page 33.)
rtce 101: usness e penses.
R NU CT O 1024.
pense of prosecutng successfu sut for sander. (See Ct. D.
642, page 268.)
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214(a) 1, rt. O.|
242
rtce 101: usness e penses. I-40-5748
Ct. D. 578
INCOM T R NU CTS O 1921. 1024, ND 1026 D CISION O COC T.
1. Deducton usness penses penses n Prosecuton of
Cam foe Compensaton for Property Condemned fob Pubc
Uses.
pendtures representng attorneys fees, cost of apprasas and
other ke e penses made by a person n connecton wth the prose-
cuton of hs cam for compensaton for property condemned for
pubc uses are not ordnary and necessary e penses pad or n-
curred n carryng on any trade or busness and are therefore
not deductbe under secton 214(a)1 of the Revenue cts of 1921,
1924, and 192C.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (21 . T. ., 109)
s affrmed.
Court of ppeas of the Dstrct of Coumba.
No. 5429. Thomas Wams, appeant, v. Davd urnet, Commssoner of
Interna Revenue.
No. 5430. Uenry . 8. Wams, appeant, v. Davd urnet, Commssoner of
Interna Revenue.
ppeas from the oard of Ta ppeas.
efore Martn, Chef ustce, and obb, an Orsde, and Gboner, ssocate
ustces.
May 23, 1932.
opnon.
Martn, Chef ustce: ppeas nvovng certan deductons taken by ap-
peants n ther ncome ta returns for 1921, 1922, 1924, 1923, and 192C.
It appears that n the year 1919, and for many years pror thereto, appe-
ants owned a tract of and stuate aong the water front on Staten Isand, N. Y.
The property was sutabe for busness purposes, and appeants had used
portons of t n carryng on varous busness enterprses. part of the and
was occuped, under ease from appeants e prng n 1923, by the frm o(
Ichabod T. Wams Sons, a copartnershp engaged n the whoesae umber
busness. One of the appeants was a member of that frm. nother part o
the property was under ease e prng n 1928, to the dgewater Saw Ms
Corporaton, of whch appeants, together wth other partes, were stockhoders.
Other portons of the property had been transferred by appeants to the
Stapeton Dock Warehouse Corporaton, a hodng corporaton, the capta
stock of whch was owned n equa shares by appeants.
On uy 1, 1919, the commssoners of the snkng fund of New York Cty
nsttuted proceedngs to condemn the property for pubc uses n connecton
wth the mprovement of the water front and harbor factes of New York
Cty. Tte to the property was reguary taken over by the cty and notce
was gven for the owners to fe wth the court ther cams for compensaton.
Thereafter such cams were fed by appeants, and on March 13, 1923, a
|udgment for 3,792,090.74 was recovered by them n the Supreme Court of
ngs County. Ths |udgment was affrmed by the appeate dvson (215 pp.
Dr., 204, 438), and the atter |udgment was affrmed by the court of appeas
(246 N. Y., 1).
Durng the years 1921, 1922. 1924, 1925, and 1926 appeants made varous
e pendtures n connecton wth the prosecuton of ther cam for compensa-
ton, ncudng attorneys fees, apprasas, and other ke e penses. These e -
pendtures were reasonabe and necessary for ther ntended purpose, and ther
amount Is not dsputed.
In ther ncome ta returns for the years n queston appeants took deduc-
tons for these e pendtures, upon the ground that they were ordnary and
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243
214(a), rt. 101.
necessary e penses pad In carryng on a trade or busness, wthn the meanng
of sectons 214(a) of the Revenue cts of 1921, 1924, and 1926.
The deductons were dsaowed by the Commssoner of Interna Revenue,
and hs decson was sustaned by the oard of Ta ppeas. (21 . T. .,
109.) Ths appea foowed.
The secton In queston reads as foows:
Sec. 214. (a) That n computng net ncome there sha be aowed as
deductons:
(1) the ordnary and necessary e penses pad or Incurred durng the
ta abe year n carryng on any trade or busness . (Revenue ct of
1921, 42 Stat., 227.)
The correspondng sectons of the Revenue cts of 1924 and 1926 are In
dentca anguage. (43 Stat., 253 44 Stat, 9.)
In our opnon the fees and costs pad by appeants n the prosecuton of
ther cam for compensaton do not answer to the descrpton of ordnary and
necessary e penses pad or ncurred n carryng on any trade or
busness. It s true that parts of the condemned ands had been eased by
appeants to varous busness enterprses n whch appeants were sharehod-
ers, but the e pendtures n queston were not Incurred or pad by any of these.
The and beonged to appeants as Indvduas, and compensaton for t was
due to them ndvduay. The e pense of the prosecuton of ther cam to
compensaton for the takng of ther property was not ncurred n carryng on
a trade or busness, or n producng or protectng ta abe ncome. t most t
was a capta e pense n the protecton of ther rghts arsng from the owner-
shp of the property, and n that aspect, as a oss, mght be taken nto account
as a part of the cost of the property.
The present case bears a strong anaogy to the defense by a ta payer n a
ease nvovng the tte to hs ands. In Treasury Reguatons 62 (1922 d.),
artce 293. t s provded that the costs of such a defense consttutes part of
the cost of the property, and s not a deductbe e pense. The reguatons of
the Treasury Department under the Revenue cts of 1921, 1924, 1926, and 1928
n effect mt deductbe e penses under the provson for ordnary and neces-
sary e penses In carryng on a trade or busness to the current operatng
e penses ncurred In producng the ncome. (Reguatons 45, artces 101-111
Reguatons 65 and 69, artces 101-112 Reguatons 74, artces 121-132.)
Such a ong-contnued admnstratve constructon s not to be overrued uness
pany wrong. (Unversa attery Co. v. Unted States, 281 U. S.. 374, 378
Ct, D. 220, C. . I -2, 422 .) The faure of Congress to enact egsaton
dsapprovng such admnstratve constructon consttutes an mped approva
thereof. ( rewster v. Gage, 280 U. S., 327, 337 Ct. D. 148, C. . I -1, 274
Poe v. Seaborn, 2S2 U. S., 101, 117 Ct. D. 259, C. . I -2, 202 McCaughn v.
ersha Cwcoate Co., 283 U. S., 488, 492 Ct. D. 345, C. . -, -444 . See
Smmons Co. v. Commssoner of Interna Revenue, 33 . (2d). 75 Ct. D. 96,
C. . III-2, 317 .) It has been hed by ths court n utchnys v. urnet,
Commssoner, decded March 28, 1932, that the cost of defendng ta payer s
tte to ore ands whch were not operated by ta payer, was not an ordnary and
necessary e pense ncurred n carryng on a trade or busness.
We have e amned the authortes cted by appeant, ncudng ornhauscr
v. Unted States (276 U. S., 145 T. D. 4222, C. . II-2, 267 ), but we thnk
that the facts nvoved n the present case dffer essentay from those n the
cases cted by appeant.
The decsons of the oard of Ta ppeas arc accordngy affrmed.
ffrmed.
rtce 101: usness e penses. I-4G-5852
( so Secton 215, rtce 292.) Ct. D. 598
INCOM T R NU CT O 1926 D CISION O COOIT.
Deducton usness pense Capta pendture Comms-
son fob Negotatng a Long-Term Lease.
commsson pad by a essor to a broker for obtanng a ease
for a term of years s a capta e pendture and s not deductbe
as a busness e pense under secton 214(a) 1 of the Revenue ct
of 1926.
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5214(a) 1, rt. 101.
244
Dstrct Coubt of the Unted States, Northern Dstrct or Inos, astern
Dvson.
Ly P. Stacey v. Unted, States.
uy 19, 1932.
OPINION.
Woodward, Dstrct udge: The pantff grounds her rght to recover on
secton 214(a)1 of the Revenue ct of 1926, whch reads as foows:
Sec. 214. (a) In computng net ncome there sha be aowed as deductons:
(1) the ordnary and necessary e penses pad or ncurred durng the
ta abe year n carryng on any trade or busness, ncudng a reasonabe aow-
ance for saares or other compensaton for persona servces actuay rendered
traveng e penses (ncudng the entre amount e pended for meas and odg-
ng) whe away from home n the pursut of a trade or busness aad rentas
or other payments requred to be made as a condton to the contnued use or
possesson, for purposes of the trade or busness, of property to whch the
ta payer has not taken or s not takng tte or n whch he has no equty.
The pantff, a wdow, s a housewfe and durng the year 1927 owned four
tracts of rea estate n vanston, 111. She testfed that she handed her own
property. She was not engaged n any trade or busness. In 1927 she engaged
brokers who negotated a 99-year ease upon a budng ocated upon one of the
tracts owned by her. The brokerage fee amounted to one average year s renta
of whch 8,488.50 was pad durng the year 1927. The broker s fee pad for the
year 1927 e ceeded the renta for that year.
In her ncome ta return for the year 1927 pantff ncuded the sum of
8,4S8.50 n her deductons from gross ncome for the year 1927 n the computa-
ton of her net ncome upon whch her edera ncome ta was based. Ths
deducton was dsaowed by the Commssoner of Interna Revenue, the Com-
m.|soner hodng that the brokerage fee shoud be spread over the term of tho
ese and accordngy aowed as a deducton durng the year 1927 the sum of
85.74, whch s one nnety-nnth (1/99) of the tota commsson pad. s a
resut of ths ad|ustment, puntff was requred to pay an addtona ta and
nterest whch she seeks to recover back n ths acton.
t the tra, evdence was offered and receved sub|ect to ob|ecton to the
effect that the ease was surrendered by the essee.
In order that an e pendture may consttute an aowabe deducton under
secton 214(a) 1 of the Revenue ct of 1926, three eements must concur:
(1) The e pendture must have been ncurred n carryng on any trade or
busness
(2) It must have been an ordnary e pendture n such connecton and
(3) It must have been a necessary e pense n such connecton.
Pantff contends that a three eements are present, whe the Government
contends that the frst and second eements as above desgnated are absent
rom the statement of facts above set forth t s dffcut to brng the mnd to
a concuson that durng the year 1927 the pantff was engaged n carryng
on any trade or busness wthn the purvew of the secton reed upon.
The apparent ob|ect and purpose of ths secton s to provde for the deduc-
ton of trade and busness e pendtures such as are of a recurrng, reguar or
frequent nature and not to ncdenta or soated transactons. Such s the
pan mpcaton from a readng of a of secton 214(a) and such has been the
constructon paced upon a smar cause of the Revenue ct of 1927 1917 n
the reguatons of the Treasury Department nterpretng the meanng of the
words trade and busness as used n the Revenue ct of 1917. I am of
the opnon that under the facts stated the pantff n ths case was not engaged
n carryng on any trade or busness for the year 1927.
ut t s not necessary to rest the rung n ths case whoy upon the propos-
ton that the pantff has not brought hersef wthn the cause that she was
not carryng on a trade or busness. The rung may be paced upon the
more substanta ground that the e penses for brokerage fees s not an ord-
nary e pense wthn the meanng of the secton under consderaton. The
queston of whether or not brokerage fees pad n the negotaton of ong-term
eases consttute an ordnary e pense n carryug on a trade or busness has
been the sub|ect of frequent consderaton by the oard of Ta ppeas wth
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245
5214(a) 1, rt. 102.
consderabe confct of hodng. owever, n the ease of onwt, Teer d Co.
r. Commssoner (53 ed. (2d), 381), the Court of ppeas of the Second Crcut
has hed that the fees pad a broker for negotatng a ong-term ease on behaf
of the ta payer as essor was an nvestment of capta and not a busness
e pense. The words ordnary e pense woud seem to mpy that the e pense
was an annua or at east a perodca or recurrent e pense growng out of the
conduct of a busness as opposed to an e pense whch s e traordnary and
nfrequent. y ncurrng the e traordnary e pense for the negotaton of the
ease the pantff receved n return somethng havng a vaue whch woud
e tend over a perod of years. I am ncned to foow and to base the rung
upon the hodng of the court n the case of onwt, Teer d Co. v. Comms-
soner, supra.
The evdence whch was receved sub|ect to the ob|ecton of the Government
s e cuded from consderaton n arrvng at the concuson above stated and
the ob|ectons of the Government to the recepton w be sustaned. It s not
permssbe to ook to ater events to ascertan whether the asset whch the
pantff receved n e change for the broker s commsson was vauabe. The
proper treatment of the broker s commssons must be determned n the ght
of the fact and crcumstances known n the ta abe year of 1927.
The court fnds the ssues n favor of the defendant and |udgment w be
entered accordngy.
rtce 102: Traveng e penses. I-37-5679
G. C. M. 10915
R NU CT O 1918.
Raroad fare e pended by a member of the facuty of a unver-
sty n traveng from hs pace of reguar empoyment, to hs pace
of temporary empoyment at a summer schoo, s a deductbe bus-
ness e pense. Recommended that L T. 1238 (C. . 1-1, 122) be
revoked.
In I. T. 1238 t was hed that a member of the facuty of a unver-
sty who nstructs n the summer schoo of another unversty, some
500 mes from hs pace of reguar empoyment, was not entted to
u deducton as a busness e pense of the raroad fare e pended n
traveng to and returnng from the summer schoo. In I. T. 2481
(C. . III-2,291) t was hed that the traveng e penses, ncudng
meas and odgng, ncurred by a unversty professor, who spent
56 days tutorng n a cty other than the cty where he was reguary
empoyed, were propery deductbe n computng net ncome. In
Genera Counse s Memorandum 7133 (C. . III-2. 85) t was
concuded that traveng and other e penses ncurred by a profes-
sona gof payer ncdent to hs partcpaton n gof tournaments
were propery deductbe n determnng hs ncome ta abty.
That memorandum was argey based on the decsons of the oard
of Ta ppeas n amton Ward (8 . T. ., 704) and Water
. rotcn (13 . T. ., 832).
It s the opnon of ths offce that the concuson reached n I. T.
2481, rather than that contaned n I. T. 1238, s n harmony wth
Genera Counse s Memorandum 7133 and the oard of Ta ppeas
decsons cted theren. It foows that raroad fare e pended by a
member of the facuty of a unversty n traveng from hs pace
of reguar empoyment, to hs pace of temporary empoyment at
a summer schoo, s deductbe as a busness e pense. It s accord-
ngy recommended that I. T. 1238 be revoked.
C. M. Carest,
Genera Counse, ureau of Interna Revenue.
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214(a), rt. 112.
246
rtce 102: Traveng e penses. I-37-5680
I. T. 2640
R NU CT O 1918.
I. T. 1238 (C. . 1-1, 122), hodng that raroad fare e pended
by a member of the facuty at one unversty n traveng from hs
reguar pace of empoyment to hs pace of empoyment as an n-
structor n the summer schoo at another unversty s not deductbe,
s revoked, n vew of Genera Counse s Memorandum 10915 (page
245).
rtce 104: epars.
R NU CT O 1018.
Treatment of assessments for oca benefts n the case of an estate.
(See G. C. M. 11330, page 247, and I. T. 2667, page 248.)
rtce 112: When charges deductbe. I-43-5805
Ct.D.591
INCOM T R NU CT O 1918 decson of court.
Deducton Yeah op Deducton mount Pad n Settement of
udgment.
Where a ta payer n 1920 wrongfuy mnes coa from and of
another, whch fact s not dscovered unt 1921, when an acton for
damages caused by the remova s nsttuted, an amount pad by the
ta payer n 1923 n settement of a |udgment s not deductbe from
gross ncome n 1920 as addtona cost of coa removed and sod n
the atter year.
Unted States Crcut Court of ppeas, S th Crcut.
Robert . Lucas, Coector of Interna Revenue for the Dstrct of entucky,
appeant, v. Provdence Coa Mnng Co., appeee.
ppea from Unted States Dstrct Court for the Western Dstrct of entucky.
une 29, 1932.
OPINION.
ckenooper, Crcut udge: In the year 1920 the appeee, Provdence Coa
Mnng Co., wrongfuy mned certan coa underyng and beongng to one
D. . Cuen. Ths fact was not dscovered unt some tme durng 1921, and
on December 22 of that year Cuen nsttuted an acton aganst the appeee for
damages caused by the remova. In due course ths cause came to tra, and on
pr 28, 1922, a |udgment for 9,000 was rendered coverng not ony the coa
mned n 1920 (appro matey 71 per cent of the tota), but aso that mned n
the prevous year. n appea was taken from ths |udgment to the Court of
ppeas of entucky. Whe the case was pendng on appea, the partes, on
March 16, 1923, entered nto a wrtten agreement of settement for the sum of
4,500. In ts orgna return for 1920 appeee dd not cam deducton for the
abty ncurred by the wrongfu remova of ths coa, but on March 31, 1923.
fed an amended return for 1920, n whch t camed the 4,500 pad by t on
March 16, 1923, as addtona cost of coa removed and sod durng 1920. The
rght to make deducton as n ts return for the year 1920 was dened. Cam
for credt or refund was kewse dened, and the appeee thereupon, havng
aready pad the ta , brought sut aganst the coector of nterna revenue to
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247
214(a)3, rt. 133.
recover, as egay coected, such porton thereof as was attrbutabe to the
amount of the camed deducton. The dstrct court hed that the appeee was
entted to a deducton from ts gross ncome for 1920 of 71 per cent of the 4,500
pad n 1928, or 3,195. and rendered |udgment for the ta resutng from the
dsaowance of ths deducton, vz. 1,890.91, wth nterest.
Upon the prncpes ths day announced n the decson of the case of Comms-
soner of Interna Revenue v. R. . Darne, Inc., and especay n vew of the
cose anaogy between the facts of ths case and those of Lucas v. mercan Code
Co., Inc. (280 U. S., 445 Ct. D. 168, C. . I -1, 314 ), we are constraned to the
opnon that the court beow erred n denyng defendant s moton for |udgment.
ust as n the case of North mercan O Consodated v. urnet, Commssoner
(286 U. S., 417 (May 23, 1932) Ct. D. 499, C. . I-, 293 ), t s hed that a
ta payer need not report as ncome an amount whch t mght never receve, so
In Lucas v. mercan Code Co., supra, t was dstncty hed that a ta payer may
not make deducton for a gven year of osses of whch the amount was whoy
unpredctabe, where the amount to be recovered, f there was ega abty,
depended n arge part on the course of future events, and where the company
had not accrued on ts books, wthn the ta year, a abty n the estmated
amount of the oss. In our opnon ths decson contros the nstant case, whch
dffers from the case of The Landers ros. Co. v. Commssoner, decded at the
present sesson, n that there the oss was defntey f ed and qudated by
agreement of the offcers of the ta payer wthn the ta abe year. Compare,
aso, wng Thomas Convertng Co. v. McCaughn (43 . (2d), 503 (C. C. . 3)
Ct D. 43, C. . III-, 232)).
The udgment of the dstrct court Is reversed and the cause s remanded for
a new tra.
S CTION 214(a)3. D DUCTIONS LLOW D
INDI IDU LS: T S.
rtce 133: Ta es for oca benefts. I-52-5949
( so Secton 214(a) 1, rtce 104 Secton G. C. M. 11330
214(a)8, rtce 162 Secton 219, rtce 341.)
R NU CT O 1918.
Recommended that Offce Decson 613 (C. . 3, 149), wth re-
spect to the treatment of assessments for oca benefts, n the case
of an estate, be revoked, n vew of the decson of the oard of
Ta ppeas n the case of . M. Uubbe Son d Co. v. Comms-
soner (19 . T. ., 612), and the decson of the Crcut Court of
ppeas. ghth Crcut, n the case of . M. ubbe Son Co.,
Inc., v. urnet (51 ed. (2d), 644, Ct. D. 411, C. . -2, 250, cer-
torar dened 284 U. S., 664).
n opnon s requested reatve to Offce Decson 613, whch re-
ates to speca assessments or ta es for oca benefts. The Income
Ta Unt nqures whether that rung shoud be revoked, n vew
of Genera Counse s Memorandum 9461 (C. . -, 120) and the
decson of the Crcut Court of ppeas, ghth Crcut, n the
case of . M. ubbe Son Co., Inc., v. urnet, decded uy 20,
1931 (51 ed. (2d), 644).
In Offce Decson 613 t was hed that amounts e pended by an
estate on account of speca assessments for the mantenance or
repar of streets or for sdewak mprovements eved upon property
used n trade or busness, f the same s necessary n the conduct of
such trade or busness, consttute aowabe deductons. It was
aso stated n that offce decson that amounts e pended for re-
pacements can, under no crcumstances, be camed as a busness
160003 33 17
G
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214(a)4, 5, 6, rt. 141.
248
e pense, but f such repacements, however, are used n connecton
wth the busness of the estate, a reasonabe amount may be camed
for e hauston, wear and tear of the property, ncudng obso-
escence.
The oard of Ta ppeas n . M. ubhe Son rf Co. v. Com-
mssoner took tn poston that the statutory provson (secton
214(a)8 of the Revenue cts of 1924 and 1926, reatng to depre-
caton) upon whch the pettoner reed contempates the ta -free
return ony of the cost of assets n whch the ta payer has a capta
nvestment and whch n some way contrbute to gross ncome, and
that ownershp of the mprovement must be estabshed. The Cr-
cut Court of ppeas n . M. ubhe Son Co., Inc., v. urnet,
supra, affrmed the oard decson and stated n part as foows:
Whe the statute does not In so many words decare that before a deducton
from net ncome may be made on account of the e hauston, wear and tear
of property used n the trade or busness t must appear that the property
deprecated s property n whch the ta payer has an absoute or quafed
ownershp and that the e hauston, wear and tear has resuted from the
use of the property n the ta payer s busness, those are necessary mpcatons.
Itacs supped.
Genera Counse s Memorandum 5589 (C. . TTI-1, 83), whch
was n confct wth the oard decson n the ubbe case, was
revoked by Genera Counse s Memorandum 9461, supra. Inas-
much as Offce Decson 613 s aso n confct wth the oard dec-
son as we as the decson of the Crcut Court of ppeas n the
ame case, t s recommended that the offce decson be revoked.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
rtce 133: Ta es for oca benefts. I-52-5950
( so Secton 214 (a) 1, rtce 104 Secton I. T. 2667
214(a)8, rtce 162 Secton 219, rtce 341.)
R NU CT O 1918.
In vew of Genera Counse s Memorandum 11330 (Page 247,
ths uetn), Offce Decson 613 (C. . 3, 149), wth respect to the
treatment of speca assessments for oca benefts n the case of an
estate, s revoked.
S CTION 214(a)4, 5, ND 6. D DUCTIONS LLOW D
INDI IDU LS: LOSS S.
rtce 141: Losses.
R NU CT OP 1921.
Progressve damage to a resdence due to the ordnary acton of
the eements upon a bady constructed budng. (See Ct. D. 510,
page 392.)
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249
214(a)4, 5. 6, rt. 141
rtce 141: Losses.
LT 111 . US Ca.
( so Secton 215, rtce 291.)
I-33-5610
Ct. D. 534
INCOM T R NU CT O 1020 D CISION O COURT.
1. Deducton Loss Persona pense Lega pense Pro-
bate of W.
penses ncurred for ega servces n opposng unsuccessfuy
the probate of a w are a persona e pense wthn the meanng of
secton 215(a)1 of the Revenue ct of 1926 and are not an aow-
abe deducton, under secton 214(a)5 of that ct, as a oss n a
transacton entered nto for proft.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (21 . T. ., 67) s
affrmed.
Unted States Crcut Court of ppeas for the rst Crcut.
een . P. Mcrrman, pettoner for revew, v. Commssoner of Interna
Revenue.
Morrtb, .: Ths s a petton to revew a decson of the oard of Ta p-
peas affrmng a decson of the Commssoner of Interna Revenue determnng
a defcency of 492.33 n pettoner s ncome ta for the year 1926.
The facts are bref. Durng the ta abe year 1926 the pettoner pad an
attorney s b and ega e penses ncurred n 1923, n an unsuccessfu effort to
break the w of her aunt. The w was sustaned by a decree of the surrogate
court for New York County, N. Y., May 31, 1923. No proceedngs were there-
after taken further to contest the w and the aunt s estate was setted In
accordance therewth. The pettoner brought the sut wth the hope that she
woud recover somethng out of the estate f she were successfu n breakng
the w.
The e pendture of 2,028.45, pad by the pettoner n 1926, was taken as a
deducton by her n her ncome ta return for that year as a oss on a transac-
ton entered Into for proft. The Commssoner dsaowed the deducton on
the ground that t was a persona e pense and the oard of Ta ppeas
affrmed the Commssoner s decson.
The ony error argued s that sad oard erred n hodng that sad ega
e penses were not deductbe as a oss ncurred n a transacton entered nto
for proft.
decson of the case seems to turn upon the constructon of the words
transacton entered nto for proft, and more partcuary upon the word
proft. Secton 214(a)5 of the Revenue ct of 1926 provdes as foows:
In computng net ncome there sha be aowed as deductons: .
(5) Losses sustaned durng the ta abe year and not compensated for by n-
surance or otherwse, f ncurred n any transacton entered nto for proft,
though not connected wth the trade or busness.
Concedng the rue of nterpretaton of ta ng statutes to be that n case of
doubt they are to be construed most strcty aganst the Government and n
favor of the ta payer (Goud v. Goud, 245 U. S., 151, 153) st the anguage
used must be gven ts usua and ordnary meanng keepng n mnd the sub|ect
matter to whch t reates. It can not under the rue of nterpretaton be
straned beyond the breakng pont n the nterest of ta payers. Proft and
oss are we-known terms referabe to busness transactons. Proft s gan
oss more than wpes out a gan. It s unnecessary to try to gve a com-
prehensve defnton of ether term. s ordnary understood proft does
not refer to what s aready one s own but s an accreton to what one aready
possesses. Loss does not refer to what one has never had.
ppea from oard of Ta ppeas.
efore ngham, Wson, and Morrs, .
December IT, 1931.
opnon.
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214(a)4, 5, 6, rt. 141.
250
When the pettoner brought her sut to break her aunt s w t was to estab-
sh her rght to what she must have camed honesty beonged to her. To hod
otherwse woud be to mpute to her dshonest motves. If the tgaton had
proved successfu she woud have receved ony such part of the testator s
estate as |usty beonged to her. That woud not have been proft. The t-
gaton was unsuccessfu. er antcpated share n the estate was dened her.
It was not oss because she never possessed t. To hod that the e penses of
tgaton under the e stng facts were a deductbe oss because Incurred n a
transacton entered nto for proft woud be stranng the meanng of proft
beyond any ordnary or usua meanng of the word and beyond the sense n
whch t was used by Congress.
The decson of the oard of Ta ppeas s affrmed.
rtce 141: Losses.
R NU CT O 1926.
Losses ncurred n gambng n a |ursdcton where such transac-
ton s ega. (See G. C. M. 10873, page 85.)
rtce 141: Losses.
R NU CT OP 1021.
mount pad under guarantee aganst oss, made wthout e pecta-
ton of proft. (See Ct. D. 577, page 207.)
rtce 141: Losses. I-50-5915
( so Secton 214(a)7, rtce 152.) Ct.D.600
INCOM T R NU CT O 1924 D CISION O COURT.
1. Deducton Loss ad Debt Contrbuton by ank Stock-
hoder to Cover nother s Msappropraton.
n amount vountary pad to a bank by a stockhoder of the
bank, of whch e s a drector and presdent, to cover an overdraft
by a depostor and msappropraton of bank funds by the treasurer
and thus to prevent the cosng of the bank, s not deductbe as a
oss under secton 214(a) of the Revenue ct of 1924 nor are any
amounts n respect of optons on coa ands and cams of the bank
whch were assgned to the presdent as securty, a of whch are
worthess, deductbe as bad debts, there beng no change n ther
vaue after the presdent acqured them.
Unted States Crcut Court of ppeas for the Second Crcut.
state of ngus Park, Wam C. Park, ecutor, pettoner, v. Commssoner
of Interna Revenue, respondent.
Petton to revew a decson of the Unted States oard of Ta ppeas. ffrmed.
efore L. and, Swan, and Chase, Crcut udges.
May 23, 1932.
opnon.
ngus Park fed a petton for the redetermnaton of a defcency n hs
Income ta for 1924. Whe hs petton was pendng before the oard of Ta
ppeas, he ded and hs e ecutor was substtuted n hs stead but he w be
referred to heren as the pettoner.
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251 214(a)4, 5, 6, rt. 141:
In 1921, the ankers Trust Co. of Norwch, Conn., was organzed as a State
hank. Soon after that Mr. Park, who was a man of means and promnence n
the communty, was asked to become a drector and to serve as presdent. e
accepted, became the owner of 300 shares of capta stock and the bank began
dong busness.
It was dscovered at a drectors meetng hed on October 24, 1924, that the
treasurer bad permtted a depostor to overdraw about 40,000. The State
bank commssoner was mmedatey requested to nvestgate. e began hs
e amnaton of the bank s affars ate that afternoon and that evenng reported
to the drectors that n addton to the overdraft there was a shortage of about
85,000 because of the treasurer s converson of the bank s funds to hs own
use for specuaton. e aso tod the drectors that uness at enst 100,000 n
cash was put nto the bank before noon the ne t day he woud be obged to
cose t. None of the drectors but Park coud fnd a way out. If the bank had
cosed the oss to a stockhoders woud have been tota and that to depostors
substanta. The stock was nonassessabe but Mr. Park was unwng to permt
acton whch woud resut n oss to stockhoders and depostors and offered
to suppy the 100,000 hmsef. e dd so. e aso agreed to stand any other
defacatons of the treasurer whch mght be dscovered ater. e aso dd that.
sde from what was recovered on the treasurer s bond, a sma recovery from
hs property and contrbutons from a but four of the drectors Mr. Park was
not repad. None of the 100,000 was returned to hm. The treasurer hed
some optons on coa ands as securty for the overdrafts and these together
wth cams the bank hed aganst the depostor who had overdrawn and aganst
ts treasurer were assgned to Mr. Park but they turned out to be absoutey
worthess, e cept to the e tent of 1,581 recovered from the depostor and
7,574.35 from the treasurer.
There was no reguar system In the bank for checkng overdrafts that the
treasurer faed to report or for dscoverng oans whch had been made wthout
the authorzaton of the board of drectors.
The ony deducton now to be consdered s the 100,000 camed n pettoner s
Income ta return for 1924 and dsaowed by the Commssoner. Ths amount
was charged off as a net oss on December 31, 1924.
Chase, Crcut udge: It s camed that the 100,000 s deductbe from 1924
ncome as a oss under the provsons of secton 214 of the Revenue ct of that
year. If so, the deducton must fa wthn some one of subdvsons (4), (5),
(6), or (7) of secton 214(a). They foow so far as matera:
(4) Losses sustaned durng the ta abe year and not compensated for by
nsurance or otherwse, f Incurred In trade or busness
(5) Losses sustaned durng the ta abe year and not compensated for by
Insurance or otherwse, f ncurred n any transacton entered nto for proft,
though not connected wth the trade or busness
(6) Losses sustaned durng the ta abe year of property not connected wth
the trade or busness f arsng from fres, storms, shpwreck, or
other casuaty, or from theft,
(7) Debts ascertaned to be worthess and charged off wthn the ta abe
year .
It s possbe to emnate subdvson (6) wth ony the observaton that
t coud appy but n the respect that t reates to osses from theft and
pany means theft from the ta payer. s nothng was stoen from ths
pettoner he can not mantan hs cam under the theft provson even f It
s assumed that a oss has been shown. ust as a corporaton s, a dea
of fraud asde, regarded as an entty separate and dstnct from ts stock-
hoders ( sner v. Macvnber, 252 U. S., 1S9, 214 T. D. 3010, C. . 25 ), so
does a theft from the corporaton dffer from a theft from a stockhoder.
To mantan t under ether subdvson (4) or (5), the pettoner must
prove that he sustaned a oss durng the ta abe year. The bank dd sus-
tan a oss. ad the pettoner not made the contrbuton he dd when be
supped the addtona funds to the bank t may be taken for granted that he
woud have sustaned a oss aso though t s not possbe to determne
from ths record how much that woud have been or n what |Tear t woud
have been ascertaned. s stock woud have been worthess but for hs
contrbuton. Yet we do not know what that stock was worth before or
ater. e may have been personay abe because of some faure n bs
duty to the bank n permttng ts busness to be conducted n such a way
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214(a)7, rt. 151.
that the treasurer coud msapproprate ts funds. ut a ths s mere specu-
aton. No such cam was made so far as we know and certany no ab-
ty on any such ground was admtted by the pettoner. e dd not put n
hs 100,000 In addtona money n settement of any recognzed ega a-
bty so to do. e acted whoy as an honorabe genteman who was deter-
mned that no one shoud ose through the msmanagement of a bank of
whch he was the presdent and a drector. What he recognzed was a mora
and not a ega duty. s conduct was n every way commendabe. e dd.
Indeed, use an addtona 100,000 of hs money to save the bank but te
fact remans that he dd save t and kept hs stock from becomng worthess.
Whether he ever suffered any oss or not does not appear. we now know
Is that he ncreased hs nvestment n the bank. If we assume, arguendo, that
hs connecton wth ths bank was an engagement ether n trade or busness,
or was a transacton entered nto for proft though not connected wth trade
or busness, vountary addtons to hs nvestment though made to avod a
oss that woud otherwse have to be taken, and made under crcumstances
whch eft no choce but to contrbute or ose, ncreased hs capta nvest-
ment. ad the pettoner s stock been assessabe and been assessed, what-
ever he had been obged to pay because of the assessment woud not have
been a deductbe oss but a contrbuton to capta. rst natona ank
of Wchta et a. v. Commssoner, 40 ed. (2d), 283 Ct. D. 296, C. . -,
384 .) So where a stockhoder sees ft to contrbute addtona funds to the
capta account of the bank when hs stock can not be assessed, he has merey
added to the cost of hs stock. s contrbuton may be turned nto a oss by
subsequent events but unt such a resut s shown no deductbe oss under
secton 214 of the 1924 ct can be proved.
Such a contrbuton as the pettoner made can not be soated from hs
other servces to and deangs wth the bank and possby be consdered by
tsef as a trade or busness. Taken wth them he has faed to prove a oss
snce the venture as a whoe may have been proftabe for a we know. If
soated and treated as a transacton not connected wth a trade or busness, t
woud be beyond reason to ca t one entered nto for proft, so that secton
214(a)5 woud appy, when obvousy the 100,000 was put nto the bank
to dscharge a mora obgaton and prevent oss rather than wth the e -
pectaton of proft as such. (Compare Stephenson v. Commssoner, 43 ed.
(2d), 348.)
Nor were the optons on coa ands, whch were assgned to the pettoner
and were n fact worthess, and the cams assgned to hm, debts ascertaned to
be worthess and charged off durng the ta abe year. There was no change
n ther vaue after the pettoner acqured them so far as the proof shows.
If they shoud be treated as debts at a, they were debts taken as debts for
whatever they may have been worth and there was nothng to charge off snce
they dd not decrease In vaue after the pettoner got them. (See ckert v.
urnet, 283 U. S., 140 Ct. D. 325, C. . -, 241).)
The decson of the oard of Ta ppeas s affrmed.
S CTION 214(a)7. D DUCTIONS LLOW D
INDI IDU LS: D D TS.
rtce 151: ad debts. I-28-5543
( so Secton 206, rtce 1621 Secton Ct. D. 513
214 (a) 1, rtce 101.)
INCOM T R NU CTS OP 1921 ND 1924 D CISION O COURT.
1. Deducton ad Debts Change from Reserve Method.
Where a ta payer adopts the reserve method of treatng had
debts n accordance wth artce 151 of Reguatons 62, reatng
to the ncome ta , and deducts from ncome n 1923 an addton
to a reserve for bad debts, t may not, wthout the permsson of
the Commssoner, change the method of treatng bad debts and
deduct n 1924 under secton 234(a)5 of the Revenue ct of 1924
the amount of ts debts ascertaned to be worthess and charged off
In the atter year.
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214(a)7, rt. 151
2. Deducton Net Loss Net Loss of Pbedecessor Corporaton.
Where a new corporaton acqures the busness and assets of
an od corporaton a net oss sustaned by the od corporaton
may not be deducted under secton 206 of the Revenue ct of 1924
n computng the net ncome of the new corporaton.
8. Deducton usness pense Obgatons of Predecessor
Corporaton Dscharged.
Where a new corporaton acqures the busness and assets of
an od corporaton and as a part of the consderaton therefor
assumes and agrees to pay a the debts and obgatons of the od
corporaton, payments made by the new corporaton n 1923 and
1924 n dscharge of the obgatons of the od corporaton are
capta e pendtures and may not be deducted as a busness
e pense under secton 234(a)1 of the Revenue cts of 1921 and
1924 rn computng the net ncome of the new corporaton.
4. Decson ffrmed.
The decson of the oard of Ta ppeas (22 . T. ., 105)
affrmed.
Unted States Crcut Court of ppeas for the rst Crcut.
tho Manufacturng Co., pettoner for revew, v. Commssoner of Interna
Revenue.
efore ngham, Wson, and Morrs, .
ppea from oard of Ta ppeas.
December 17, 1931.
OPINION.
ngham, .: Ths s a petton to revew a decson of the oard of Ta
ppeas, rendered March 30, 1931, redetermnng a defcency n the pettoner s
ncome ta for the year 1924 n the sum of 1,880.74.
The pettoner, the tho Manufacturng Co., s a Massachusetts corporaton,
organzed une 28, 1923. It was organzed to take over and dd take over the
busness and assets of another Massachusetts corporaton of the same name.
In ts agreement for the purchase and takng over of the busness and assets
of the earer corporaton the pettoner, as a part of the consderaton therefor,
assumed and agreed to pay a the debts and obgatons of every knd of the
other corporaton.
Durng the ta abe year 1922. the od company sustaned a net oss n e cess
of 100,000 and durng the perod of ts operaton from anuary 1 to une 30,
1923, t sustaned a net oss of 425,979.24. In ts ta return for 1924, the
pettoner camed a deducton of these sums as osses, whch the Commssoner
dsaowed.
rom uy 1 to December 31, 1923, and durng 1924 the pettoner pad certan
sums on account of the obgatons of the od company whch t had assumed
and agreed to pay as a part of the consderaton for the busness and assets of
the od company. In ts ta returns for 1923 and 1924 the pettoner camed
a deducton of these payments as ordnary and necessary e penses of ts bus-
ness. The Commssoner dsaowed ths cam, hodng that these payments
were a part of the prce of the assets of the od company and were therefore
capta tems.
The od company, pror to ts dssouton, had for severa years made t a
practce to set up on ts books a reserve for bad debts n an amount equa to
1 per cent of ts saes but, n makng ts ta returns, t camed ts actua
bad debts, ascertaned to be worthess durng the ta abe year, as a deducton-
The pettoner, after ts organzaton, aso set up on ts books a bad debt
reserve equa to 1 per cent of ts saes but n ts frst ncome ta return for
the s months of ts e stence endng December 31, 1923, t camed and receved
as a deducton the addtons made to ts reserve for that perod. The addtons
to ts reserve amounted to 3,338.75 whe the pettoner s books showed but
52.30 of actua bad debts. Snce 1923 the pettoner has contnued to set up
a bad debt reserve equa to 1 per cent of ts saes, but t camed a deducton
n ts ta return for 1924 of the actua bad debts ascertaned to be worthess
and charged off durng the year. The addtons to the bad debt reserve n 1924
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214 (a) 7, rt. 155.
254
amounted to 8,434.75, whe Its bad debts In 1924 and whch It now cams
shoud be deducted have been ascertaned to be 20,85)5.21.
The oard of Ta pppas hed that the pettoner was a dstnct entty
from the od corporaton that the osses of the od corporaton n 1922 and
1923 were not the osses of the pettoner under secton 206(b), (e), and (f) of
the Revenue ct of 1924, and such osses coud not be deducted In the ascertan-
ment of ts net ncome.
s to the sums pad out by the pettoner durng the s months of ts e st-
ence n 1923 and n 1924 upon the obgatons of the od company, whch t
has assumed and agreed to pay, the oard of Ta ppeas hed that these
payments were a part of the consderaton for the purchase of the assets of
the od company that they were part of the cost to the pettoner of those
assets and consttuted a capta, not a busness e pense.
nd, as to the remanng matter, t hed that the pettoner, n ts ta
return for 1923, havng deducted the sum of 3,338.75. the amount of the
addtons to ts bad debt reserve for that perod, and camed that as a deducton
n the ascertanment of ts ta abe Income, nstead of camng a deducton on
account of ts bad debts amountng to 52.30, t was not entted, n ts ta
return for 1924, to deduct ts ascertaned bad debts nstead of the sum added
to a reserve for bad debts, t not havng frst obtanpd permsson to make such
change, as requred by Reguatons 65, artce 115. The oard, however, dd
ncrease the amount set up by the pettoner on ts books as a reserve for bad
debts for 1924 from 8,434.75 to 17,608.76.
We fa to see how we can add anythng to what was stated by the oard of
Ta ppeas n ts opnon. We are n fu accord wth ts rung and fndng
that the pettoner was an ndependent entty from the od corporaton whose
assets and busness t took over that the osses sustaned by the od company
n conductng ts busness durng 1922 and a part of 1923 were not the pet-
toner s osses and that t was not entted to deduct the same n ts ta return.
We are aso of the opnon and agree wth the concuson of the oard that
the amounts pad out by the pettoner n 1923 and 1924 to satsfy the obga-
tons of the od company, whch It has assumed and agreed to pay, were not a
busness e pense whch t was entted to deduct, but rather a capta e pend-
ture. nd we agree wth the oard that the pettoner, havng avaed Itsef
of the beneft of artce 151 of Reguatons 65 and, n ts ncome ta return
for 1923, deducted the amount set up as a reserve for bad debts, coud not,
n 1924, deduct the amount of ts debts ascertaned to be worthess, as t
undertook to do, wthout havng obtaned permsson therefor. We can hardy
see why ths appea was taken.
The decson or order of the oard of Ta ppeas s affrmed.
rtce 152: ampes of bad debts.
Worthess cams as securty for a debt. (See Ct. D. 609, page 250.)
INCOM T NU CT O 1924 D CISION O COD T.
1. Deducton ad Debts Reserve fob ad Debts.
Where the evdence does not |ustfy a hodng that the ta payer
had eected the reserve method of treatng bad debts n accord-
ance wth artce 155 of Income Ta Reguatons 62, a decson
of the oard of Ta ppeas, whch s prma face correct, that
the ta payer s not entted under secton 234(a)5 of the Revenue
cts of 1921 and 1924 to a deducton for an addton to a reserve
for bad debts s sustaned.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (23 . T. ., 121S)
s affrmed.
R NU CT O 1926.
rtce 155: Reserve for bad debts.
( so Secton 234, rtce 561.)
I-49-5899
Ct. D.606
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255
214(a)7, rt. 155
Unted States Ckcut Court of ppeas, ourth Crcut.
tanto ank t Trust Co., pettoner, v. Commssoner of Interna Revenue,
respondent.
On petton to revew the decson of the Unted States oard at Ta ppeas.
efore Parker and Northcott, Crcut udges, and Way, Dstrct udge.
une 13, 1932.
OPINION.
Northcott, Crcut udge: Ths s a petton to revew a decson of the
oard of Ta ppeas sustanng a determnaton of a defcency n Income
ta es aganst the pettoner made by the Commssoner of Interna Revenue.
The defcency, as determned, was for the years 1922, 1923, and 1924, n the
sums of 16,201.59, 2,327.71, and 3,344.55, makng a tota of 21,873.85.
The pettoner, durng the years n queston, was a bank organzed under the
aws of the State of North Carona, wth ts prncpa pace of busness at
Greensboro.
In Its ncome ta return for the caendar year 1921, pettoner camed a
deducton of 5,000 as a bad debt evdenced by a certfcate of depost of the
ank of Coats, and aso a deducton of 46,834.20 as a reserve for bad debts.
The Commssoner of Interna Revenue aowed the deducton of 5,000 as a
bad debt for the caendar year 1921, but dsaowed the deducton of 46,834.20
as a reserve, and hs acton was sustaned by the oard of Ta ppeas. (10
. T. ., 796.) rom ths decson the pettoner dd not appea.
In makng ts return for the year 1922, the pettoner camed as a reserve
for bad debts the sum of 125,000, and made no cam for specfc bad debts. In
the return for the year 1923, pettoner camed as an addton to Its reserve
for bad debt the sum of 16,000, and aso camed as a deducton 34,134.27 for
bad debts, and for the year 1924, camed 20,000 as an addton to ts reserve,
and In addton camed 5,988.28 for bad debts. The Commssoner hed, as he
had hed wth respect to the year 1921, that pettoner was not entted to the
amounts camed for reserve for bad debts for any of the years 1922, 1923, and
1924.
On appea the oard of Ta ppeas affrmed the acton of the Commssoner.
The pertnent part of the Revenue ct of 1921 as appyng to ths appea Is
as foows:
Sec. 234. (a) That n computng the net ncome of a corporaton sub|ect
to the ta mposed by secton 230 there sha be aowed as deductons:
(5) Debts ascertaned to be worthess and charged off wthn the ta abe
year (or In the dscreton of the Commssoner, a reasonabe addton to a
reserve for bad debts) and when satsfed that a debt s recoverabe ony n
part, the Commssoner may aow such debt to be charged off n part.
smar provson s found n secton 234(a)5 of the Revenue ct of 1924.
Reguatons No. 62 was prepared by the Commssoner of Interna Revenue
under the Revenue ct of 1921. rtce 151 of these reguatons provdes as
foows:
rt. 151. ad debts. ad debts may be treated n ether of two ways (1)
by a deducton from ncome n respect of debts ascertaned to be worthess In
whoe or n part, or (2) by a deducton from ncome of an addton to a reserve
for bad debts. or the year 1921 ta payers may, regardess of ther prevous
practce, eect ether of these two methods and w be requred to contnue the
use n ater years of the method so eected uness permsson to change to the
other method s granted by the Commssoner.
rt. 155. Reserve for tad debts. Ta payers for 1921 may eect the reserve
method of treatng bad debts, and for 1921 and subsequent years may deduct
from gross ncome a reasonabe addton to a reserve for bad debts n eu of a
deducton for specfc bad-debt tems.
What consttutes a reasonabe addton to a reserve for bad debts must be
determned In the ght of the facts, and w vary as between casses of bus-
ness and wth condtons of busness prosperty. ta payer usng the reserve
method shoud make a statement n hs return showng the voume of hs charge
saes (or other busness transactons) for the year and the percentage of the
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214(a)8 rt. 163.
256
reserve to such amount, tbe tota amount of notes and accounts recevabe at the
begnnng and cose of the ta abe year, and the amount of the debts whch
have been ascertaned to be whoy or partay worthess and charged aganst
the reserve account durng the ta abe year. T. D. 3997, C. . I-L, 222.
It s evdent that a ta payer of ths cass must use one of two methods n
camng bad debts. ther the charge must be made for the specfc debts
camed to be worthess or the reserve method must be used. The ta payer
may not use both methods, and If the reserve method be adopted artce 155
of Reguatons 62 must have been comped wth. ere the pettoner, accord-
ng to the determnaton of the Commssoner, had not propery gone on the
reserve system. It had made returns for the year 1921 under both systems,
and ts cam for reserve had been dsaowed not ony by the Commssoner
but by the oard of Ta ppeas. Whe pettoner ony camed a deducton
for reserve n the year 1922 t does not show that for that year t had comped
wth artce 155 of Treasury Reguatons 62. gan n 1923 and 1924, pettoner
camed not ony sums for reserve but camed certan sums for specfc bad
debts, showng that t was not usng the reserve method ony.
It s most sgnfcant that tbe bank never opened a reserve account for bad
debts on ts books and never deducted from ts assets the amounts camed n
ts ta return for reserve, whe on the other hand, t dd deduct a amounts
camed as specfc bad debts.
It s aso sgnfcant that pettoner never made any request of the Comms-
soner to change ts method.
The determnaton of the Commssoner s prma faoe correct (Wrffht et o.
v. Commssoner of Interna Revenue, 50 ed. (2d), 727), and hs determnaton
can ony be reversed by the oard of Ta ppeas upon evdence ( urnet, Com-
mssoner, v. ouston, 283 U. S., 223 Ct. D. 328, C. . -, 343 ). The burden
was upon the pettoner not ony to estabsh the fact that the determnaton of
the Commssoner was erroneous, but to estabsh facts from whch a correct
determnaton coud be made. ( urnet v. ouston, supra mercan Land
Investment Co. v. Commssoner, 40 ed. (2d), 336.) The oard Is a fact-
fndng body (Godsmth v. oard of Ta e ppeas, 270 U. S., 117), and ths court
can not substtute ts |udgment for that of the oard. avng n mnd these
prncpes, we are ed to the concuson that the acton of the oard, upon the
evdence presented, n refusng to set asde the determnaton of the Comms-
soner, was rght.
Pettoner has not ony faed to show that the determnaton of the Comms-
soner was erroneous but has aso faed to estabsh, by proper evdence, facts
from whch a correct determnaton coud be made, n tbe event the Comms-
soner s determnaton had been hed to be erroneous.
ttorneys for pettoner rey upon the cases of Rhode Isand ospta Trust
Co. v. Commssoner of Interna Revenue (29 ed. (2d), 339) and rst Natona
ank of Omaha v. Commssoner (49 ed. (2d), 70), but n both these cases the
ta payer had entered on ts books an account showng a reserve for bad debts,
and a dfferent state of facts was presented from that e stng here.
The decson of tbe oard s accordngy affrmed.
S CTION 214 (a)8. D DUCTIONS LLOW D
INDI IDU LS: D PR CI TION.
rtce 162: Deprecabe property.
R NU CT O 1918.
Treatment of assessments for oca benefts n the case of an estate.
(See G. C. M. 11330, page 247, and L T. 26G7, page 248.)
rtce 163: Deprecaton of ntangbe property.
R NU CT O 1928 ND PRIOR R NU CTS.
Contract of purchase of ore between mnng company and smet-
ng company. (See G. C. M. 10845, page 8a)
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257
214(a)9, rt. 223|
rtce 164: Capta sum recoverabe through deprecaton
aowances.
R NU CT O 1921.
ssets n usefu servce though entre cost has been recovered
through deductons by aowances for deprecaton. (See Ct. D. 550,
page 196.)
S CTION 214(a)9. D DUCTIONS LLOW D
INDI IDU LS: D PL TION.
rtce 223: Charges to capta and to e pense I-29-5554
n the case of o and gas wes. G. C. M. 10688,
R NU CTS OP 1924 ND 1926.
The ta payer as the assgnee of a one-haf nterest n certan
o eases, the assgnment beng made n consderaton of the
drng of an o we on the property, may deduct one-haf of the
ntangbe cost of drng the nta we or wes as an e pense,
or at ts opton same may be captazed. The ntangbe cost of
drng a test we where the ta payer dd not obtan tte to the
ease unt after the we was competed consttutes a capta n-
vestment and s not deductbe as an e pense.
n opnon s requested whether the M Company, for the years
1924, 1925, and 1926 as the assgnee of a one-haf nterest n certan
o eases, the assgnment beng made n consderaton of the drng
by the M Company of an o we on the property, may charge off as
deveopment e pense one-haf of the ntangbe cost of the we under
the provsons of artce 223, Reguatons 69, nasmuch as the ta payer
had theretofore e ercsed ts opton under the reguatons of chargng
ntangbe drng costs to e pense.
In vew of the fact that artce 225 of Reguatons 65 and artce
223 of Reguatons 69 have been restated n Treasury Decson 4333
(C. . I-1, 31), so as to ncorporate theren certan detas of
admnstratve appcaton and practce of ong standng, the nstant
case has been consdered n connecton wth that Treasury decson.
Recourse has been had to copes of the orgna contracts, eases, and
assgnments of eases, by vrtue of whch the o operatons n ques-
ton were undertaken by the ta payer.
The queston arses n connecton wth the ntangbe costs of dr-
ng wes on three dfferent groups of o eases, n connecton wth
each of whch groups the ta payer entered nto a contract for the
acquston of a one-haf nterest n the underyng o ease, and
the drng and operatng of o wes on the eased and. sum-
mary of the pertnent facts, wth reaton to each of the groups, s
as foows:
IRST GROUP.
Durng the years 1924, 1925, and 1926 varous ndvduas and cor-
poratons entered nto contracts wth the M Company where t wag
agreed n each nstance that the ndvdua or corporaton was to
assgn to the M Company an undvded one-haf nterest n a specfed
o ease. In each contract the M Company agreed to dr on the
property a specfed number of o wes (n no case e ceedng three)
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258
at ts own e pense, and n some nstances agreed to pay a specfed
sum n cash. In each contract t was agreed that, after the drng
of the we or wes specfed n the contract, a future wes shoud
be dred at the |ont e pense of both partes and n each nstance
the M Company was to operate the ease. In each nstance the as-
sgnment was e ecuted, devered, and recorded pror to the tme the
drng operatons began. In each nstance the assgnment was un-
condtona and on the usua prnted form.
S COND G ODP.
Under date of pr , 1925, one , aegng hmsef to be the
owner of a good, vad, and merchantabe o and gas mnng ease
on a tract of and n County, State of L, entered nto a contract
wth the M Company regardng the operaton of ths ease. The
record ndcates that dd not own ths ease but had an opton to
purchase t. On ths ease there was a we dred to the 2,500-foot
sand. In ths contract agreed to assgn a one-haf nterest to the
M Company. The M Company agreed to dr the we to a depth
of 3,500 feet, free of cost to . If the we produced, was to
pay one-haf of the cost of new casng and the M Company was to
pay one-haf of the cost of the od casng remanng n the we.
addtona wes were to be dred at the |ont e pense of the M
Company and . The M Company was to operate the ease, and
was to contrbute hs porton of the M Company s overhead n
connecton wth the operaton. s of uy , 1925, obtaned,
by assgnment, an eeven-s teenths nterest n the ease from a bank
camng to own such assgned nterest. s of uy , 1925, the
M Company acqured from the owners of the fee a ease to a arge
tract of and, ncudng the and covered by the other ease. s of
October , 19 23, the M Company apparenty e ecuted an assgnment
to of a seven-s teenths nterest n the frst ease, but the ta payer
asserts n ts bref that t was a one-haf nterest. Drng by the
M Company began on ugust , 1925. Three wes n a were
dred on ths ease.
thbd group.
Under date of March , 192G, the S Company entered nto an
agreement wth and C. y the terms of ths agreement the S
Company agreed to assgn to and C four o and gas eases on
and n T County, State of L. and C agreed n consderaton
thereof to dr a test we on one of the eases to a depth of 4.000
feet. The agreement further provded that assgnments of the four
eases from the S Company to and C shoud t e paced n escrow
n a bank n the cty of U, to be devered to and C upon the com-
peton of the test we.
s of the ne t day, March , 1926. the M Company entered nto
a contract wth and C. y tne terms of ths agreement and C
agreed to assgn to the M Company two of the S Company eases,
and an undvded one-haf nterest n another of the S Company
eases (the one on whch the test we was to be dred). and C
agreed to secure and assgn to the M Company dry-hoe contrbu-
tons to the amount of 2a doars. The M Company agreed to dr
a we on the one ease to a tota depth of 4,000 feet, uness o and
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259
214 (a) 9, rt. 223.
gas n payng quanttes were found at a esser depth. and C
agreed to contrbute 2 doars toward the cost of ths we, f t
proved to be a producer, payment to be made as the o was run.
Ths we was otherwse to be at the soe e pense of the M Company,
e cept that f a producer came n and C were to pay for one-ha
of the cost of the derrck and the casng of the we. subsequent
wes on the ease were to be dred at the |ont e pense of both
partes. ght wes n a were dred.
The contract between the M Company and and C s, n substance,
qute smar to the deveopment contracts n connecton wth the
other two groups of eases. The M Company was not to commence
the wet unt the assgnments to t were e ecuted and devered, a-
though and C s nterest n the eases was st sub|ect to the escrow
above noted.
Drng of the nta we was begun on pr , 1926, and com-
peted on uy , 1926. s of uy , 1926, the S Company e e-
cuted and devered to the M Company a one-haf nterest n the
ease, whch assgnment was recorded on uy , 1926, and C
receved from the S Company the remanng undvded one-haf
nterest n the ease.
rom the foregong statement of facts t s evdent that the con-
tracts and assgnments underyng ths case were varyng forms of
what are generay known as free we contracts. These are aso
known as undvded nterest contracts, or ffty-ffty contracts.
(Compare The Law of O and Gas by Ms and Wengham,
1926 edton, page 321, secton 226.)
Under arrangements of ths nature a contract s entered nto
between the owner of an o ease and an operatng o company,
by the terms of whch tte to an undvded nterest n the ease s
agreed to be assgned to the o company and the o company agrees
to pay a certan amount of cash and to operate the ease, ether
aone or wth the assgnor, and to bear the e pense of drng the
frst we (or the frst two or three wes, as the case may be). The
e pense of drng subsequent wes on the ease s shared |onty
by the contractng partes n proporton to ther severa nterests
n the ease. It w be observed as a saent feature of these contracts
that they are operatng and deveopment contracts, the consdera-
ton on the one part beng the assgnment of an undvded nterest
n a ease, and on the other part the drng of one or more free
wes, pus, n some nstances, an amount of cash pad by the assgnee
to the assgnor, and then the subsequent operaton at the |ont e pense
of both partes.
Ths stuaton obtaned n the nstant case. The ta payer entered
nto such contracts wth severa dfferent ndvduas or groups,
and wth respect to severa dfferent eases or tracts. Snce the
facts n the three groups of eases dffer, they w requre separate
consderaton.
Takng up the frst group of eases, t w be noted that n each
nstance the M Company entered nto a contract wth the owner of
the ease, who, thereupon, by a separatey e ecuted nstrument,
assgned an undvded one-haf nterest n the ease to the M
Company.
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214(a)9, rt. 223.
260
y the terms of these contracts the M Company agreed to pay
a certan amount of cash (e cept n one or two nstances) and to
dr one, two, or three wes, free of cost to the other party, and
thereafter to operate the ease at the |ont e pense of both partes.
In each nstance the assgnment to the M Company was an absoute
assgnment, wthout condton, and the consderaton, as set forth
theren, was one doar (and other good and vauabe consdera-
tons), the recept of whch s hereby acknowedged. In each
nstance the assgnment was mmedatey recorded n the offce of
the proper county cerk. It appears to be the custom to do ths n
order to protect the operatng company, n vew of the fact that,
under the terms of the contract, a very arge outay of money s
requred. In each nstance the assgnment was devered before the
we was begun.
In each of the contracts the M Company was to operate the ease,
and a e penses after the frst we (or two or three wes, as the case
mght be) were to be shared equay by both partes to the contract.
ach party was to share n the o runs.
rom the foregong t s apparent that the M Company, n gettng
an assgnment of an undvded one-haf nterest n the ease before
the drng began, actuay and mmedatey became the record
owner of such assgned one-haf nterest.
Ths ownershp was not postponed unt the we was competed
but dated from the tme of the devery of an unquafed assgnment.
In other words, when the M Company, after payng any cash re-
qured under the terms of the contract and after recevng devery
of an assgnment, commenced drng under the ease t was drng
on a bare undeveoped easehod, owned |onty by t and the assgnor.
In each of these cases the ownershp of the one-haf nterest dd not
depend upon any contngency. When the M Company entered nto
a contract wth the owner of the ease t requred the owner to fuf
hs part of the contract, namey, to assgn outrght an undvded one-
haf nterest. The M Company, n turn, proceeded to fuf ts part
of the contract, namey, pay whatever cash was requred and to begn
drng. When t dred t was drng as much for ts own nterest
as t was for that of the assgnor. That s, when the consderaton
pad n fufment of the contract was cash and a we dred free of
cost to the other party, the other party dd not own the whoe we,
nor dd t own a of the equpment necessary for drng the we.
The assgnor had ony a one-haf nterest n the ease, and that one-
haf nterest e tended to everythng on or connected wth the ease,
ncudng the we and the equpment (e cept as reserved under the
contract) and the o produced from the we. In other words, when
the M Company began drng each of the stpuated wes t was
drng n each nstance under a ease to whch t had a rght to a
one-haf nterest prevousy perfected by assgnment to t. or that
reason, then, one-haf of the ntangbe costs of drng the nta
we or wes was undoubtedy part of the e pense of operatng the
M Company. Under the provsons of artce 225, Reguatons 65,
or artce 223, Reguatons 69, such one-haf of the ntangbe costs of
drng may, at the opton of the M Compan , be ether deducted as
an e pense or captazed. The restatement of the sad artces n
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214(a)9, rt. 223
Treasury Decson 4333, as above referred to, has not changed that
rght of the M Company.
In the second group of eases a ease was gven to the M Company
by the owner of the and, so that when drng was begun the M
Company apparenty was the owner of the entre easehod, or at
east had an undvded easehod nterest n the and. It was dr-
ng on and to whch t had a rght prevousy perfected by ease
drect from the owner of the fee. When the we was competed
the M Company assgned a part nterest n the ease to , wth whom
the M Company had the operatng contract. In ths case, kewse,
the M Company s one-haf of the ntangbe drng costs may be
captazed or deducted as an e pense, at the opton of the M Com-
pany, under the provsons of the reguatons referred to above.
st dfferent stuaton obtans n the case of the thrd group
of eases.
In the thrd group of eases the eases were assgned by the S
Company to and C on condton that and C woud dr a test
we to a gven depth on one of the eases, but these assgnments
were paced n escrow to awat the competon of the we. It was
e pressy stpuated that unt ths test we was competed and 0
were to have no rght or tte n or to the ease. The ne t day
and C entered nto an operatng agreement wth the M Company.
Ths agreement was n many respects smar to the operatng agree-
ment n connecton wth the other groups of eases mentoned above.
y ths agreement the M Company was to dr a test we on the
stpuated ease, free of cost to and C. These ndvduas agreed
to assgn a one-haf nterest n the ease to be dred, and aso an
entre nterest n two other eases. subsequent wes were to be
dred at the |ont e pense of both partes to the agreement. The
M Company was to operate the ease. and C were to contrbute
a certan amount of cash (payabe out of the o from the we f
t was a producer) and to pay one-haf of the cost of the derrck
and of the casng (f the we was a producer). In ths agreement
and C, aegng that they were owners of the ease, agreed to
assgn to the M Company a one-haf nterest n the ease on whch
the test we was to be dred, and to make ths assgnment before
the we was started. ut ths coud not be done snce they dd not,
as yet, have tte to the ease, nasmuch as the assgnment of the
ease to them from the S Company was n escrow awatng
competon of the we.
It foows that the M Company when t dred the we dd not own
an nterest n the ease. Dervng ts tte to the one-haf nterest
from and C, the M Company dd not have tte greater than that of
and C. In other words, the M Company s tte to the one-haf
nterest was contngent on ts competng the we, and the drng of
the we was part consderaton for the assgnment to the M Company
of a one-haf nterest n a deveoped ease. Snce ths tte rested on
a contngency, and snce the M Company coud not get tte unt the
we was competed, and snce t was drng under a ease whch
was not the M Company s but whch t e pected to own n common
wth and C as a deveoped easehod after the we was competed,
the ntangbe costs of such drng can not be regarded as e penses
of operaton of the M Company, but as consderaton, n whoe or
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214(a)9. rt. 223.
262
n part, for a one-haf nterest n a deveoped easehod. Ths aspect
of the case woud seem to brng ths we wthn Genera Counse s
Memorandum 932 (C. . I-1, 241), wheren t was stated n part
as foows:
When the we was competed, on whch contngency the assgnee-ta payer s
rght depended, t then had not a haf nterest In a bare easehod pus a haf
Interest n an o we, but an undvded one-haf nterest n a deveoped ease-
hod. Ths t n effect acqured by the e pendture of 4 doars n deveopng
the ease, and therefore that entre sum shoud be captazed as the cost to t
of ts new nterest n a producng easehod. Drng costs may we be ord-
nary propery deducted as operatng e penses by a ta payer where the deveop-
ment s one of a prevousy perfected rght, but here these very drng costs
consttute the consderaton for the acquston of the producng rghts and can
be nothng ese but capta nvestment, returnabe by way of depeton aganst
producton.
or the reasons set forth above, the ntangbe costs of drng the
test we n the thrd group of eases consttuted a capta nvestment
and not a deductbe e pense.
C. M. Chaeest,
Genera Counse, ureau of Interna Revenue.
rtce 223: Charges to capta and to e pense I-51-5934
n the case of o and gas wes. Ct. D. 612
INCOM T R NU CT O 1926 D CISION O COURT.
1. Deducton Depeton Deprecaton Cost of Drng On,
Wes.
Where a ta payer e ercses the opton under artce 223 of
Income Ta Reguatons 69 to charge to capta account return-
abe through depeton the cost of drng o wes and of haung
and pacng equpment n the wes, amounts e pended representng
such cost are recoverabe under the Revenue ct of 1926 through
depeton rather than deprecaton.
2. Decson Reversed.
The decson of the oard of Ta ppeas (23 . T. ., 890) s
reversed.
Unted States Crcut Court op ppeas, ourth Crcut.
Davd urnet, Commssoner of Interna Ret mue, pettoner, v. Petroeum
poraton, respondent.
On petton to revew the decson of the Unted States oard of Ta ppeas.
efore Nobtcott and Soper, Crcut udges, and Genn, Dstrct udge.
October 3, 1932.
OPINION.
Northcott, Crcut udge: Ths s a petton to revew a decson of the
Unted States oard of Ta ppeas reported n 23 . T. ., 890.
The pertnent facts, about whch there s no dspute, us found by the oard
of Ta ppeas, are as foows:
The pettoner (the ta payer) s a corporaton organzed on September 25,
1910, under the aws of the Stute of Mane, and ts prncpa offce s at Ss-
tersve, W. a.

The parres hereto have submtted the foowng stpuaton of facts:
1. On December 31, 1924, the undeprecated nvestment of Petroeum po-
raton n equpment n o wes amounted to 475,975.02.
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214(a)9, rt. 223.
2. Durng the years 1925, 1926, and 1927 Petroeum poraton capta-
zed on ts books of account the tota cost of new productve o wes dred,
such charges representng amounts pad for equpment put nto the wes,
amounts pad to drng contractors for drng the wes, amounts pad for
freght and hauage of the equpment, and amounts pad for abor In nstang
the equpment n the wes, as foows:
-,
Year.
Cost of
equpment.
Cost of dr-
ng wes,
haung and
Tota cost of
competed
producng
wes.
pacng
equpment
1925.
121,303.03
15,882. 88
66,626.31
49,640.17
52,994.14
2,659.26
170,943.20
68,887.02
69,285.67
1M26
3. The productve fe of a producng wes, the tota cost of whch was
captazed as shown n paragraph No. 2 s more than one year.
4. Deprecaton has been camed by the pettoner and aowed by the
Commssoner at a unt producton rate, based on the ength of fe of the o
deposts.
5. The Commssoner, In makng hs computaton of deprecaton, has added
to hs deprecaton schedues the cost of the equpment added eacn year, as
shewn n paragraph No. 2, but has not added the cost of drng wes, haung
and pacng the equpment.
6. Instead, the cost of drng wes, haung and pacng the equpment,
as shown n paragraph No. 2, has been added to the cost depeton schedues
by the Commssoner but depeton has been aowed on a statutory percentage
bass (27 per cent of gross ncome, not to e ceed 50 per cent of net ncome)
and s not based on cost.
7. The pettoner, n makng ts computaton of deprecaton as shown n ts
orm O, has added the tota cost of competed wes, ncudng equpment,
drng, haung and pacng the equpment, to ts deprecaton schedues, no
part of the cost of the wes beng added to the cost depeton schedues.
8. If pettoner s method of computng deprecaton bo sustaned by the
oard, namey, by addng to the undeprecated nvestment shown n paragraph
No. 1 the tota cost of competed wes as shown n paragraph No. 2 (no part
of such cost beng added to the depeton schedues) an ncrease n the depreca-
ton aowance w resut as foows:
Deprecaton aowance.
1
Computed
by Com-
mssoner s
method.
Computed
by pet-
toner s
method.
Increase n
deprecaton
aowance If
pettoner s
method be
sustaned.
Year.
1926
82,826.35
68.105. 24
66,015.91
89,369. 57
78,192.46
75,161.03
6,543.22
10,087. 22
9,146.12
1926 -
1927
9. If pettoner s method of computng deprecaton be sustaned, as shown
n paragraph No. 8, a decrease n the depeton aowance w resut as foows:
Depeton aowance.
Decrease n
1 T Mba
Computed
by Com-
mssoner s
method.
Computed
by pet-
toner s
method.
depeton
aowance f
pettoner s
method be
sustaned.
Year.
302,012.87
277,900. 70
168,874.41
300. ma. 43
1,152.44
2,708. 76
1.387.88

275, 101.94
107,480.55
1 7
160003 33 18
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214(a)9, rt. 223.
264
The statutes and Treasury reguatons Invoved are:
Revenue ct of 1920 (ch. 27, 44 Stat., 9) :
Sec. 204. (c) The bass upon whch depeton, e hauston, wear and tear,
and obsoescence are to be aowed n respect of any property sha be the
same as s provded n subdvson (a) or (b) for the purpose of determnng
the gan or oss upon the sae or other dsposton of such property, e cept
that

(2) In the case of o and gas wes the aowance for depeton sha be
27 per centum of the gross ncome from the property durng the ta abe year.
Such aowance sha not e ceed 50 per centum of the net ncome of the ta payer
(computed wthout aowance for depeton) from the property, e cept that n
no case sha the depeton aowance be ess than t woud be f computed
wthout reference to ths paragraph.
Sbo. 234. (a) In computng the net ncome of a corporaton sub|ect to the
ta mposed by secton 230 there sha be aowed as deductons:

(7) reasonabe aowance for the e hauston, wear and tear of property
used n the trade or busness, Incudng a reasonabe aowance for obsoescence:
(8) In the case of mnes, o and gas wes, other natura deposts, and
tmber, a reasonabe aowance for depeton and for deprecaton of mprove-
ments, accordng to the pecuar condtons n each cuse such reasonabe aow-
ance n a cases to be made under rues and reguatons to be prescrbed by
(he Commssoner wth the approva of the Secretary. In the case of eases
the deductons aowed by ths paragraph sha be equtaby apportoned between
the essor and essee .
Treasury Reguatons 69:
bt. 221. Depeton n the case of o and gas ces. Under secton 204(c)2,
n the case of o and gas wes, a ta payer may deduct for depeton an
amount equa to 27 per cent of the gross ncome from the property durng the
ta abe year, but such deducton sha not e ceed 50 per cent of the net ncome
of the ta payer (computed wthout aowance for depeton) from the prop-
erty. In no case sha the deducton computed under ths paragraph be ess
than t woud be f computed upon the bass of the cost of the property, or ts
vaue at the basc date, us the case may be. In genera, the property, as
the term s used n secton 204(c)2 and ths artce, refers to the separate tracts
or eases of the ta payer.
bt. 223. Charges to capta and to e pense n case of o and gas wes.
Such ncdenta e penses as are pad for wages, fue, repars, haung, etc., n
connecton wth the e poraton of the property, drng of wes, budng of
ppe nes, and deveopment of the property may at the opton of the ta payer
be deducted as a deveopment e pense or charged to capta account return-
abe through depeton. If n e ercsng ths opton the ta payer charges these
ncdenta e penses to capta account, n so far as such e pense s represented
by physca property t may be taken nto account n determnng a reasonabe
aowance for deprecaton. The cost of drng nonproductve wes may at
the opton of the operator be deducted from gross Income as a deveopment
e pense or charged to capta account returnabe through depeton and de-
precaton as n the case of productve wes. n eecton once made under
the provsons of ths artce w contro the ta payer s returns for a subse-
quent years. Where deductons for deprecaton or depeton have ether on
the books of the ta payer or n hs returns of net ncome been Incuded n
the past n e pense or other nceounts, rather than specfcay as depreda-
ton or depeton, or where capta e pendtures have been charged to e pense
n eu of deprecaton or depeton, a statement ndcatng the e tent to whch
ths practce has been carred shoud accompany the return.
rt. 225. Deprecaton of mprovements n the case of o and gas wes.
oth owners and essees operatng o and/or gas propertes w, n addton to
and apart from the deducton aowabe for depeton as herenbefore provded,
be permtted to deduct a reasonabe aowance for deprecaton of physca
property, such as machnery, toos, equpment, ppes, etc., so far as not n con-
fct wth the opton e ercsed by the ta payer under artce 223. The amount
deductbe on ths account sha be such an amount based upon ts cost or other
bass equtaby dstrbuted over ts usefu fe as w brng such property to ts
true savage vaue when no onger usefu for the purpose for whch such property
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265
214(a)9, rt. 223.-
was acqured. ccordngy, where t can be shown to the satsfacton of the
Commssoner that the reasonabe e pectaton of the economc fe of the o or
gas depost wth whch the property s connected s shorter than the norma
usefu fe of the physca property, the amount annuay deductbe for depre-
caton on such property may be based upon the ength of fe of the depost.
The soe queston presented s whether the captazed cost of drng o
wes and of haung and pacng equpment n the wes s recoverabe through
aowances for deprecaton or depeton. The Commssoner of Interna Rev-
enue determned that ths cost was propery recoverabe through an aowance
for depeton. Upon hearng before the oard of Ta ppeas ths determna-
ton of the Commssoner was reversed.
The Treasury reguatons cted above are authorzed by Congress, and whe
the Secretary of the Treasury can not by a reguaton ater or amend the aw
South Carona Produce ss n v. Commssoner, 50 ed. (2d), 742), If wthn
and n accordance wth the cts of Congress such reguatons have a the force
and effect of statutes. ( umet v. Moore Cotton Ms Co., 49 ed. (2d), 59, and
authortes there cted rewster v. age, 280 U. S., 327 Ct. D. 148, C. . I -1,
274 atccus Machne Co. v. Unted States, 282 U. S., 375 Ct. D. 278, 0. .
-, 424 .)
It has been repeatedy hed by ths court, and there s no authorty to the
contrary, that the acton of the Commssoner of Interna Revenue n determn-
ng a ta assessment s prma face correct, and the burden Is on the ob|ectng
ta payer to show the acton of the Commssoner to be erroneous. (Lehman v.
Tat, 58 ed. (2d), 20, and authortes there cted.)
ere the ta payer was gven the opton under the provsons of artce 223 of
Reguatons 69 to ether charge the e pendtures n queston to deveopment
e pense or charge them to capta account returnabe through depeton.
Itacs ours. Ths opton was e ercsed by the ta payer by chargng the
e pendtures to capta account, and by so actng the ta payer must have done
so wth the fu knowedge that such sums so charged must come back through
depeton and not deprecaton. Ths s the pan provson of the reguaton.
It s true that artce 225 of Reguatons 69 permts an aowance for depre-
caton of physca property, but ony so far as not to confct wth the opton
e ercsed by the ta payer as to chargng such e pendtures to capta account,
and such aowance s gven ony for such physca property as machnery,
toos, equpment, ppes, etc. The hoe of an o we Itsef certany woud not
come wthn ths cassfcaton, and coud not be hed to be physca property.
We are here concerned wth the cost of puttng down the hoe through whch
o s recovered from under the ground. In the o we the hoe n the ground
performs a functon, wth respect to the o brought out of the we, smar to
that performed by the shaft or tunne n a mne wth respect to the ore brought
oat of the ground. Nether the shaft nor the hoe can be, strcty speakng,
termed mprovements. They smpy serve as conduts through whch the mn-
era s recovered. The bare hoe n an o we does not deterorate or depre-
cate as does a pece of machnery or as does the casng wth whch t s ned,
and has no servce fe other than the perod necessary to e haust the body of
the mnera whch t reaches. Once the mnera Is e hausted the hoe s useess
and of no vaue whatever, such as may be possessed by the casng whch may
be pued or the machnery whch may be removed to be used esewhere. It
seems to ns that the pro|)er and ogca method of returnng to the ta payer the
e pense of drng the hoe s through depeton rather than deprecaton, ths
entrey asde from the mped agreement to accept depeton when the ta -
payer e ercsed the opton to charge the e |ense to capta account.
The aowance for depeton was ntended by Congress to restore to the ta -
payer hs capta nvestment wth respect to the o and gas wes as that nvest-
ment s used up or e hausted.
In Lynch, ecutr , v. worth-Stephcns Co. (267 U. S., 364 T. D. 3690,
C. . I -1, 162 ) the Supreme Court sad:
It Is sad that the depeton aowance appes to the physca e hauston
of the ore deposts, and snce the tte (hereto Is n the essor, he aone s
entted to make the deducton. ut the faacy n the syogsm s pan. The
deducton for depeton n the case of mnes Is a speca appcaton of the
genera rue of the statute aowng a deducton for e hauston of property.
Whe respondent docs not own the ore deposts, ts rght to mne and remove
the ore and reduce t to possesson and ownershp s property wthn the mean-
ng of the genera provson. Obvousy, as the process goes on, ths property
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214(a)9, rt. 223.
266
Interest of the essee n the mnes s essened from year to year, as the owner s
property nterest n the same mnes s kewse essened. There s an e haus-
ton of property n the one case as n the other.
If the cost of the hoe s ncuded n deprecaton aowances as we as cost of
machnery, toos, etc., whch have a servce fe n no way connected wth or
dependent upon the ength of tme t takes to e haust the mnera, then there s
no e pense whatever connected wth an o we eft to he returned through de-
peton, and the reguaton (artce 223) s robbed of any meanng, e cept as to
the e poraton of the property.
In urnet v. Thompson O Ons Co. (283 U. S., 201 Ct. D. 331, C. . -,
390 ), the court sad:
It s cear that Congress ntended that the essee of an o we shoud be
entted to a reasonabe aowance for depeton based upon cost or March 1,
1013, vaue. It dd not, however, attempt to prescrbe a formua for ascertan-
ng t, but e pressy deegated that functon to the Commssoner of Interna
Revenue, who was to make rues and reguatons to that end. Pursuant to ths
authorty, reguatons were made, whch requred the deducton of depeton
theretofore sustaned n ascertanng the capta remanng n any year recover-
abe by depeton deductons.
The decson n the Ludey case Unted States v. Ludey, 274 U. S., 295
T. D. 4046, C. . I-2, 157 ) has been adopted n the ater statutes as affect-
ng saes of capta assets, but the provson for annua depeton aowance
has remaned substantay unchanged. Ths In tsef s persuasve evdence
that Congress has approved the e ecutve constructon emboded n the regu-
atons.
The ong and consstent admnstratve constructon, especay when It s,
as here, ceary an admssbe one and consstent wth the purpose of the
statute, shoud not be set asde uness pany wrong. (Unversa attery Co. v.
Unted States. 281 U. S., 580 Ct. D. 220, C. . I -2, 422 atceus Machne
Co. v. Unted States, 282 U. S., 375 supra Wams v. urnet, Commssoner,
,59 ed. (2d), 357.)
consderaton of ths queston eads to the concuson that the eements
cang for both depeton and deprecaton are present n an o we. The
outay for geoogca study and survey s drecty connected wth the ocaton
or dscovery of the o depost, and woud seem to be not sub|ect n any way
to deprecaton, but shoud be aowed under depeton when captazed. So
wth the hoe n the ground. It can not be wthdrawn or nventored as hav-
ng any ndependent vaue or resod as may be done wth casng, toos or
machnery. s the wages for abor and other e penses n connecton wth the
transportaton and work of a geoogst n prospectng an o fed are a part
of the cost of dscovery or deveopment so the wages for abor n drng a
we are such a part of the cost of dscovery or deveopment as are not sus-
ceptbe of deprecaton.
Secton 204 of the ct of 1926, above set out, provdes for depeton and
for deprecaton of mprovements, and goes on to eave the rues and regu-
atons to be prescrbed by the Commssoner wth the approva of the Secre-
tary. Such rues and reguatons have been prescrbed and are apparenty
reasonabe and |ust. Under these reguatons, the cost of the dr hoe of an
o we, and as t seems to us to be natura, s not sub|ect to deprecaton, but,
shoud be aowed for, especay when captazed, under the head of depeton.
The oard of Ta ppeas rests ts decson n the nstant case on ts
decson n the case of . T. ergens Trust Co. (22 . T. ., 551), where a
smar queston was presented and the Court of Cams n the recent case of
Dakota-Montana O Co. v. Unted States (decded uy 5, 1932), has by a
ma|orty opnon reached the same concuson as the oard. We are, however,
of the opnon that the reguatons are reasonabe and havng been n force for
a ong tme they shoud be sustaned, partcuary where the ta payer, as n ths
case, avaed tsef of the dentca reguatons to captaze e pendtures for
Intangbes, thus acceptng the provson that such e pendtures shoud be
returned through aowances for depeton. The ta payer can not accept the
benefts of the reguaton and re|ect the accompanyng obgaton.
In concuson we wsh to say that f any of the e pense of wages, haung,
etc., n connecton wth the casng, operatng toos, machnery, etc., are ncuded
n the Commssoner s aowance for depeton t s our opnon that such
e pense shoud be apprecated. It s mpossbe for us to te from the record
the fact as to ths queston, but, as to aowances for a e pense of puttng
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267
214(a)10, rt. 251.
down the dr hoe the Commssoner was rght n makng such aowances
under the head of depeton. It foows that the decson of the oard of Ta
ppeas must be reversed.
rtce 223: Charges to capta and to e pense n the case
of o and gas wes.
R NU CT OP 1924.
Intangbe cost of drng group of o wes for acquston of
one-haf nterest n underyng o ease. (See G. C. M. 10686,
page 257.)
S CTION 214 (a) 10. D DUCTIONS LLOW D INDI-
IDU LS: CONTRI UTIONS OR GI TS.
rtce 251: Contrbutons or gfts.
R NU CT OP 1926.
Contrbutons to nonpartsan scentfc agency of ctzens nqures
for promoton of better government. (See I. T. 2654, page 39.)
rtce 251: Contrbutons or gfts. I-52-5948
G. C. M. 11324
R NU CTS O 1918, 1921, ND 1924.
In determnng net ncome for the purpose of computng the
amount of chartabe contrbutons aowabe as deductons under
secton 214(a) of the Revenue cts of 1918 and 1021, capta
osses can not be e cuded.
In Iae D. kns v. Commssoner (24 . T. ., 572, page 8,
ths buetn) the oard of Ta ppeas concuded that a ta payer
was entted to dsregard a capta net oss n arrvng at the net
ncome upon whch the 15 per cent deducton authorzed under
secton 214(a) 10 of the Revenue ct of 1024 was computed.
Recommended that I. T. 2104 (C. . III-2, 152) be modfed.
In I. T. 2104 t was hed that nasmuch as osses resutng from
the sae or e change of capta assets are deductbe under secton
214 of the Revenue cts of 1918, 1921, and 1924, and enter nto the
computaton of the net oss that s deductbe under secton 206 of
the Revenue ct of 1924, such osses can not be e cuded n com-
putng the net ncome for the purpose of determnng the amount
of chartabe contrbutons that are deductbe under secton 214(a) 11
of the Revenue cts of 1918 and 1921 and secton 214(a) 10 of the
Revenue ct of 1924.
In Iae D. kns v. Comms on.er the oard of Ta ppeas
concuded that a ta payer was entted to dsregard a capta net
oss n arrvng at the net ncome upon whch the 15 per cent de-
ducton authorzed under secton 214(a) 10 of the Revenue ct of
1924 was computed.
It s apparent, therefore, that the concuson reached n the kns
case s nconsstent wth that reached n I. T. 2104 n so far as cases
arsng under the Revenue ct of 1924 are concerned. The ac-
uescence of the Commssoner n the kns decson presents for
etermnaton the queston whether that decson or I. T. 2104
shoud be foowed n cases arsng under the Revenue cts of 1918
and 1921.
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215, rt. 291.
268
In the kns case the oard stated n part as foows:
The Revenue cts of 1918 and 1921 contan no provson smar to secton
208(c) of the 1924 ct, and capta osses, f deductbe, are deductbe under
secton 214 of those two pror cts, and we may say, wthout decdng, that
the rung seems to be a correct Interpretaton of the 1918 and 1921
cts.
In vew of the foregong t s the opnon of ths offce that the
statutory structure of the Revenue cts of 1918 and 1921 requres
that the prncpe of I. T. 2104 be foowed n determnng the net
ncome upon whch the deducton authorzed by secton 214(a) 11
of the Revenue cts of 1918 and 1921 s computed.
It s therefore recommended that I. T. 2104 be modfed accord-
ngy. (See Mm. 3986, on page 29.)
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
rtce 251: Contrbutons or gfts. I-52 5951
I. T. 2668
R NU CT O 1924.
In vew of the concuson of the oard of Ta ppeas n ate
D. kns v. Commssoner (24 . T. ., 572, page 3, ths buetn)
and Genera Counse s Memorandum 11324 (see on page 267), I. T.
2104 (C. . III-2, 152) s modfed, n so far as t hods that capta
osses can not be e cuded n computng net ncome for the purpose
of determnng the amount deductbe for chartabe contrbutons
under the Revenue ct of 1924.
S CTION 215. IT MS NOT D DUCTI L .
rtce 291: Persona and famy e penses.
R NU CT O 1926.
Lega servces n opposng unsuccessfuy probate of w. (See
Ct. D. 534, page 249.)
rtce 291: Persona and famy e penses. I-34-5626
( so Secton 214(a), rtce 101.) CtD.542
INCOM T R NU CT O 1924 D CISION O COURT.
1. Deducton usness pense Persona pense Lega
e pen8e sandeu of controng stockhoder of corpora-
TION.
Lega e penses ncurred by the presdent, genera manager, and
controng stockhoder of a corporaton n the successfu prosecu-
ton of a sut for sander, the |udgment n whch s uncoectbe,
nsttuted by hm n order to protect hs reputaton and the cor-
poraton s busness from possbe n|ury, are a persona e pense
wthn the meanng of secton 215(a) of the Revenue ct of 1924
and are not aowabe as a deducton as a busness e pense under
secton 214 (a)1 of that ct.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (22 . T. ., 674) s
affrmed.
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209
( 215, rt. 291.
Unted States Cbcut Coubt or ppeas fob the Seventh Cecut.
rnest . Loyd, pettoner, v. Commssoner of Interna Revenue, respondent.
Petton for revew of decson of Unted States oard of Ta ppeas.
efore vans and Spabks, Crcut udges, and atze , Dstrct udge.
ebruary 8, 1932.
OPINION.
atze, Dstrct udge: The pettoner was, durng the year 1924, and
for many years pror thereto had been, a resdent of the cty of Chcago, 111.
e was presdent and genera manager of the . . Loyd Paper Co. durng
a of the tme n queston, ownng a ma|orty of the stock of that company.
In the month of ebruary, 1924, pettoner attended the annua conventons of
the mercan Pup and Paper ssocaton and the obbers and Merchants
ssocaton n New York Cty. Whe attendng these conventons, he earned
that one W. T. P. Wardrop, of oston, Mass., was crcuatng fase statements
and derogatory remarks concernng hs reputaton and character for nteg-
rty, reabty and sobrety, and that these statements and remarks were
beng brought to the attenton of hs customers and compettors.
In order to protect hs reputaton and ncdentay to protect the busness
of the . . Loyd Paper Co., pettoner fed a sut for damages for sander
aganst Wardrop n the Crcut Court of Suffok County, Mass., knowng at
the tme the sut was fed that any |udgment that mght be rendered n hs
favor woud be uncoectbe. s a resut of ths sut, he recovered |udgment
aganst Wardrop, but never reased anythng thereon. In connecton wth ths
sut he e pended the sum of 2,810.65 durng the year 1924 for attorneys fees
and e penses, whch sum was deducted by hm n determnng hs ta abe
ncome for that year. Respondent dsaowed ths deducton and determned a
defcency ncome ta for the year 1924 n the sum of 604.50. Ths deter-
mnaton was approved by the oard of Ta ppeas, from whch decson ths
appea was prosecuted.
The queston presented s whether or not the attorneys fees pad and the
e penses ncurred by pettoner n the prosecuton of ths sander sut are de-
ductbe as ordnary and necessary e penses of hs trade or busness n com-
putng hs net ncome for the year 1924.
Secton 214(a) of the Revenue ct of 1924 provdes that n computng net
ncome there sha be aowed as deductons:
(1) the ordnary and necessary e penses pad or ncurred durng the
ta abe year n carryng on any trade or busness, .
Secton 215(a) of the above ct provdes that n computng net ncome no
deducton sha n any case be aowed n respect of
(1) Persona, vng, or famy e penses.
It s the contenton of pettoner that he s entted, under secton 214(a),
n computng hs net ncome for the year 1924, to deduct the amount pad by
hm for attorneys fees and e penses n the aforementoned sander sut as an
ordnary and necessary e pense pad or ncurred n carryng on hs busness.
The respondent contends that such e pendtures were purey persona and
come wthn the provsons of secton 215(a), and are, therefore, not de-
ductbe.
It s apparent that the Revenue ct does not permt a ta payer to deduct
from hs gross ncome a osses sustaned by hm durng any gven year n
determnng hs net or ta abe ncome. Such osses or e pendtures as are
permtted to be deducted are purey statutory. ta payer, n makng hs ta
return, has no rght to any deductons from hs gross ncome uness such deduc-
tons are provded for by the revenue statute. (Lynch v. worth-Stephens Co.,
267 U. S., 364 69 L. d., 6G0 45 S. Ct., 274 T. D. 3G90, C. . I -1, 162
Oodfed Conso. Mnes Co. v. Scott. 247 U. S., 120 62 L. d., 1022 38 S. Ct.,
465 on aumbach v. Sargent Land Co. et a ., 242 U. S., 503 01 L. d., 460
37 S. Ct, 201.)
If, therefore, the attorneys fees and e penses pad by pettoner are ord-
nary and necessary e penses ncurred by hm n carryng on hs busness, then,
under secton 214(a), he s entted to have such payments deducted. In order
that such payments may meet the requrements of the statute, they must be
both an ordnary e pense and a necessary e pense. ( ubnger v. Commr. of
Int. Rev. (C. C. . 2), 36 . (2d), 724.)
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217, rt. 320.
270
There can be no doubt that the sanderous reports crcuated by Wardrop
were such as woud tend to backen the character or reputaton of pettoner.
Ths was a persona n|ury, however, and one for whch, under the aw, he was
entted to recover damages. The sut was not nsttuted by the corporaton
of whch he was presdent, but by pettoner hmsef. In practcay every case
where sanderous reports are crcuated about an ndvdua and damage hs
character or reputaton, such reports affect ndrecty, and, to a certan e tent,
the busness n whch he s engaged. ny e pense, however, ncurred by hm
n defendng hs good name under such crcumstances, can not be sad to be
ordnary and necessary e penses ncurred n carryng on hs busness.
Sander has been defned to be words fasey spoken, whch are n|urous to
the reputaton of another. ( ouver Law Dctonary.) Ths defnton nd-
cates that when the sanderous words spoken are about the reputaton of an
Indvdua such ndvdua hmsef s the one who suffers the n|ury. ny
damages recovered for such n|ury s recovered by the ndvdua. ppyng
ths rue to the nstant case, the n|ures were suffered by the pettoner, and
had he coected the amount of the |udgment, such sum woud have been hs
own prvate property and woud have had no connecton whatsoever wth hs
busness. The . . Loyd Paper Co. nether profted nor ost by the sut.
The fact that pettoner was unabe to coect the udgment whch he recovered
does not ater or change the stuaton.
The e penses ncurred n the prosecuton of the sander sut were not
ordnary and necessary e penses ncurred n carryng on hs busness, and he
was, therefore, not entted to deduct the amount thereof n determnng hs
net ncome for the year 1924, under secton 214(a). Such e penses were per-
sona and fa wthn the provson of secton 215(a).
The decson of the oard of Ta ppeas s affrmed.
rtce 292: Capta e pendtures.
Commsson for negotatng a ong-term ease. (See Ct. D. 598,
page 243.)
S CTION 217. N T INCOM O NONR SID NT
LI N INDI IDU LS.
INCOM T R NU CT OP 1018 D CISION O COURT.
Income Soubces Wthn the Unted States Nonbesdent
Where a nonresdent aen professona snger makes two con-
tracts n the Unted States wth a domestc corporaton dong bus-
ness there under whch he sngs n the Unted States for the pur-
pose of enabng the corporaton to make phonograph records of
seectons rendered by hm and s pad compensaton n the Unted
States by the corporaton at a f ed sum for each record sod or a
percentage of the st prce of the records sod, the frst contract
provdng that he agrees to make these records and the second
that he grants a rghts n and to the matrces and records to
the corporaton, the contracts are ony for persona servces. The
gross ncome receved by the snger from the sae of records n for-
egn countres by foregn corporatons, pursuant to contracts under
whch the domestc corporaton furnshed matrces of ts seec-
tons and the foregn corporatons were obged to pay the domestc
corporaton a royates whch t was requred to pay the snger, s
gross ncome from sources wthn the Unted States wthn the
meanng of secton 213(c) of the Revenue ct of 1918.
R NU CT O 1926.
rtce 320: Compensaton for abor or per-
sona servces.
I-27-5536
Ct. D. 512
en.
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217, rt. 320.
Unted States Crcdt Court or ppeas for the Second Crcut.
Dorothy Caruso Ingran, ormery Dorothy P. . Caruso, ncary dmnstra-
tr of the goods, chattes and credts of nrco Caruso, Deceased, appeant,
v. rank C. owers, as ecutor of the state of rank . owers, Deceased,
appeee.
ppea from a udgment of the Dstrct Court for the Southern Dstrct of Mew York.
March 21, 1032.
OPINION.
Lu and, Crcut udge: The pantff s the wdow and ancary admns-
tratr of the snger, Caruso, who (urng hs fe pad the sums at ssue n
dscharge of defcency assessments of ncome ta es for the years 1918, 1919,
and 1920. She sued to recover these the case was tred before a |ury of one,
and the |udge drected a verdct for the defendant at the end of the evdence
and wrote an opnon statng the facts n deta. (Ingram v. owers, 47 ed.
(2d), 975 Ct. D. 306, C. . -, 372 .) We adopt hs statement, and refer
to t as the premse of our dscusson.
The case turns upon the meanng of the phrase, gross ncome from sources
wthn the Unted States, as used n secton 213(8) of the Revenue ct of
1918 for we assume arguendo that, as the |udge found, Caruso was a non-
resdent aen. If hs agreements wth the ctor company were no more
than contracts for persona servces, t makes no dfference whether we hod, aa
was hed beow, that the source of the resutng ncome wns the servces ren-
dered, or the promse to pay the royates. The frst has the authorty of a
departmenta rung (C. ., Dec, 1920, page 12S), and whatever nferences may
be drawn from the amendments n the statutes from 1921 forward (secton
217(a)3 of the cts of 1921, 1924, and 1926 secton 119(a)3 of 1928). On the
other hand we fnd t dfcut to dstngush dwards v. eth (231 ed. Rep.,
110 (C. C. . 2), and Woods v. Leweyn (263 ed. Rep., 106 (C. C. . 3).
pror, the source of an ncome woud seem to be determned by the same
factor, whether tme or pace be n queston that f that source s the con-
sderaton for the promse, and not the promse tsef, the return or servces
rendered before any ta was mposed woud not be a gan from any ta abe
source. owever, we are not drven to a decson on ths pont, because f the
source s the promse, the promsor was aso wthn the Unted States, and the
same resut foows as though the servce was the source.
The more vta queston s whether the contracts were for more than per-
sona servces whether they gave to Caruso some nterest n the matrces
and records, or, f there was any copyrght, n the copyrght, and whether the
payment can n ths wse be ooked at as emanatng from property. If so,
the pantff argues, the sums n sut came from the foregn matrces f not,
then at east from the foregn companes. s to both matrces and records
the second contract s too cear for queston t provdes that Caruso grants
a rghts n and to them. The frst contract contaned no such words, but
we thnk that the resut was the same. In t he ony agreed to make these
records, meanng of course, to sng nto the recordng apparatus, and the c-
tor company, to pay hm a royaty as records made from the resutng matrces
were sod. The company was to manufacture both prma face they became
ts chattes ke anythng ese of ts make. If t was ntended to gve Caruso
an nterest n them, some such reservaton was to be e pected, and there was
none. The fact that hs return was caed a royaty s mmatera t was so
descrbed n the second contract whch was not equvoca. No remedy was
created by whch he coud assert any such rghts. It appears to us that the
purpose was the same as was e pressed ater, and f so, he had no propretary
nterest n the profts arsng out of the records. If there be a copyrght under
secton 1(e) of the Copyrght ct whch we do not say t became emboded
n the matrces, as a terary composton s emboded In ts te t. ny puta-
tve monopoy woud do no more than prevent (he copyng of these, and t passed
wth the property n them. It was not mpedy reserved separate from them,
for that woud have nterfered wth ther fu en|oyment whch the manu-
facturer was certany to have.
Nor can we see how the source of the payments coud be the royates pad
by the foregn companes to the ctor company. They dd not promse to
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218, rt. 336.
272
pay Caruso, or to assume the obgatons of the company. Whether n the
event of ts nsovency, he coud have had recourse to ther promse s besde
the mark. ssumng as much, t woud be ony as securty for the ctor
company s performance, and that woud not change the source of the ncome
whe t contnued to perform. or argument we may even assume the con-
trary after defaut t never dd defaut a the payments here n queston
came from t. Ths woud be equay true, though by a ong stretch we were
to assmate the stuaton to that n In Re Waterson ern d Snyder Co.
(48 ed. (2d), 704 (C. C. . 2)), and hod that Caruso had a en upon the
matrces sent to the foregn companes. That woud agan be ony as securty,
for, under the doctrne of that decson, the second assgnee does not, by
acceptng the transfer, become personay abe on the promse of the frst.
s ong as the frst assgnee performs, the assgnor s rghts aganst the second
reman n abeyance f he defauts, they are aganst the property aone. Thus,
on no theory can t be sad that the source of ths ncome was outsde the
Unted States.
udgment affrmed.
S CTION 218. P RTN RS IPS.
rtce 336: Dstrbutve shares of partners. I-44-5821
Ct. D. 593
ncome ta revenue act of 1021 decson op court.
Income ssgnment of uture Income,
n Instrument, by whch a member of a partnershp n quda-
ton transfers to a part of hs nterest n and to the profts and
a other moneys and benefts to be derved and reazed from
the partnershp busness whch sha be receved on and after the
date of the nstrument, merey assgns future ncome wthout any
actua transfer of the property from whch the ncome Is derved
and the dstrbutve share of the partner n the partnershp ncome
whch s receved by by vrtue of the nstrument s ncome of
the partner.
Unted States Dstrct Court, Southern Dstrct ov New York.
merson . Rossmoore, pantff, v. Chares W. nderson, Coector of Interna
Revenue, defendant.
I uy 6, 1932.
opnon.
Coze, D. .: Ths s an acton to recover 34,876.70, pad under protest
September 22, 1927, on account of addtona ncome ta es of 27,882.77, as-
sessed aganst the pantff for 1921, together wth nterest of 6,993.93 to the
date of payment. The facts have a been stpuated and the ssue s purey
one of aw.
The pantff was one of three members of the frm of Rossmoore bbott
engaged n the accountng busness n New York Cty. On November 1, 1920,
the three partners sgned a dssouton agreement provdng that no new bus-
ness shoud he undertaken, and for the competon and qudaton of the pend-
ng commtments. Ths agreement consttuted the pantff qudator of the
busness at a compensaton of 12,000 for hs entre servces t specfed that
the cash on hand, amountng to 70,732.92, ncudng capta contrbutons,
shoud forthwth be dstrbuted, e cept for a 5,000 reserve for dsbursements
and t further provded that upon competon of the qudaton the frm name
shoud cease to be used.
y anuary 3, 1921, the soe assets of the frm, e cusve of offce furnture
and suppes, and of the dsbursement reserve, conssted of (1) moneys recev-
abe for servces rendered by the frm pror thereto and (2) moneys to become
due for servces by reason of the competon of servce contracts on hand on that
date.
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273
218, rt. 336|
On anuary 8, 1921, the pantff e ecuted and devered to hs wfe, Sarah
Rosymoore, a wrtten nstrument by whch he transferred to her ndvduay,
one-thrd, and to her, as trustee for ther two mnor chdren, the remanng
two-thrds of a hs rght, tte and nterest, n and to the profts, and any and
a other moneys, advantages, nterests and benefts to be derved and reazed
from and out of the sad partnershp busness now n qudaton, whch sha
be receved on and after the date hereof, e cusve of the 5,000 reserve and
he 12,000 to be pad the pantff for hs servces as qudator. The trustee-
shp wth respect to the fund for the chdren was subsequenty taken over by
the pantff. The nstrument of transfer contans, however, no provsons for
revocaton, and s by ts terms absoute.
Durng the qudaton, Sarah Rossmoore ndvduay and as trustee for the
two chdren receved n 1921 54,259.86, representng the dstrbutve share of
The pantff n the frm Income for that year, and she returned as ncome the
amounts so receved, and pad ta es thereon. The pantff n hs ndvdua
return for 1921 reported the amount of hs compensaton as qudator receved
In that year, but dd not return anythng representng hs dstrbutve share
n the frm, t beng hs contenton that the assgnment to hs wfe effectvey
transferred to her, ndvduay and as trustee, hs entre nterest n the frm
n qudaton, and that the amount dstrbuted n 1921 was n no sense Income
to hm. The Commssoner, on the other hand, dsregarded for ta purposes the
transfer of anuary 3, 1921, and assessed to the pantff, as hs ndvdua
ncome, the entre amount dstrbuted n 1921 on account of the pantffs
nterest n the frm. It s to recover the addtona ta due to the ncuson
of these amounts n the pantffs return, together wth the Interest thereon,
that ths acton has been brought.
Secton 52 of the New York partnershp aw provdes that a partner s nter-
est In the partnershp s s share of the profts and surpus and the same s
persona property. Ths was aso true under the common aw. ( odgett v.
SUberman, 277 U. S., 1.) It s further provded n secton 53 of the New York
act that a conveyance by a partner of hs nterest n the partnershp does not
of tsef dssove the partnershp but It merey enttes the assgnee
to receve n accordance wth hs contract the profts to whch the assgnng
partner woud otherwse be entted. Ths modfed the common aw rue wth
respect to partnershps n genera (Mcnhar v. Samon, 249 N. Y., 458, 471)
but the conveyance mentoned n the statute gves no nterest n the frm
assets as such, and, durng the contnuaton of the partnershp, s neffectve to
remove from the transferrng partner bs Income ta burden on subsequent
profts. (Mtche v. owers, 15 ed. (2d). 287 T. D. 3982, 0. . I-1, 244
arrs v. Commssoner, 39 ed. (2d), 546.)
Is the stuaton dfferent by reason of the e ecuton of the qudatng agree-
ment of November 1, 1920 Ths agreement s referred to n the stpuaton as
a dssouton agreement, and athough counse for the Government appeared
to contest that desgnaton on the tra, I have no reason to doubt that the
agreement actuay worked a dssouton of the partnershp. ut even on ds-
souton, a partnershp s deemed to contnue for the purposes of wndng up
and under the terms of the present agreement, the unfnshed busness of the
partnershp conssted argey of contracts upon whch addtona accountng
servces were to be performed before the amounts payabe to the frm coud
be reazed. Ths was necessary so because of the e tremey persona nature
of the busness and the fact that t took unt 1927 to compete the qudaton,
ndcates that the profts n whch the pantff had an nterest were prn-
cpay those to be made In the future through the persona efforts of the pan-
tff and those connected wth the frm rather than such as mght be reazed
from fnshed busness. The agreement was n the nature of an arrangement for
a contnuaton of the busness under the pantffs management wth a mta-
ton on hs authorty to undertake new work and I do not thnk It had any
matera effect on the ta abty of the ndvdua partners n so far as future
ncome from partnershp busness was concerned.
I am satsfed aso that the transfer of anuary 3, 1929, merey assgned fu-
ture ncome wthout any actua transfer of the property from whch ths ncome
was to be derved. It Is. as apty stated by Mr. ustce omes n Lucas v. ar
(281 U. S., I), a case where the fruts are attrbuted to a dfferent tree from
that on whch they grew. (See aso urnet v. Lennger, 2S5 U. S., 136.)
The transfer by the pantff was of hs nterest n and to the profts and any
and a other moneys, advantages, nterests and henefts to be derved and
reazed whch sha be receved on and after the date hereof,
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231, rt. 517.
274
Indcatng ceary that the ntenton was ony to transfer whatever the pantff
mght be entted to at some subsequent date from the earnngs whch had not
then been made, and profts whch coud ony be reazed from future operatons
of the busness.
The cases cted by the pantff n support of hs contenton are not anaogous,
as they concern transfers of property, together wth the ncome resutng there-
from whereas n the present case the pantff s nterest n the partnershp,
even n qudaton, was ony hs share n the profts and surpus after the
accountng (New York partnershp aw, secton 53, subdvson 2) and the
amounts dstrbuted by the partnershp n 1921 had to come through the part-
nershp, and dd not sprng drecty from any property transferred under the
nstrument of anuary 3, 1921.
There may be a decree for the defendant dsmssng the compant wth costs.
S CTION 219. ST T S ND TRUSTS.
rtce 341: states and trusts.
R NU CT OP 1918.
Treatment of assessments for oca benefts n the case of an estate.
(See G. C. M. 11330, page 247, and I. T. 2667, page 248.)
S CTION 222. CR DIT OR T S IN C S O
INDI IDU L.
rtce 382: Meanng of terms.
R NU CTS O 1918, 1921, 1924, ND 1926.
mendment of Reguatons 45, 45 (1920 edton), 62, 65, and 69.
(See T. D. 4348, page 119.)
S CTION 223. INDI IDU L R TURNS.
rtce 404: Return of ncome of nonresdent aen.
R NU CT O 1926.
Return made by ctzen of Unted States under power of attorney.
(See G. C. M. 11000, page 298.)
P RT III. CORPOR TIONS.
S CTION 231. CONDITION L ND OT R
MPTIONS O CORPOR TIONS.
rtce 517: Regous, chartabe, scentfc, terary, and
educatona organzatons and communty chests.
R NU CT O 1926 ND RIOR R NU CTS.
Incorporated store operated by an assocaton of students at
unversty. (See I. T. 2636, page 102.)
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275 233, rt. 541.
rtce 517: Regous, chartabe, scentfc, terary, and
educatona organzatons and communty chests.
R NU CT O 1920.
Nonpartsan scentfc agency of ctzens nqt
of better government. (See I. T. 2654, page 39.)
of ctzens nqures for promoton
nan a nnr,n qq
S CTION 233. GROSS INCOM O CORPO-
R TIONS D IN D.
rtce 541: Gross ncome. I-32-5597
Ct. D. 531
INCOM T R NU CTS OP 1918. 1921. 1924, ND 1926 D CISION OP
COURT.
1. Income Royates Under Leases of Coa Lands.
Royates receved by a essor under eases of coa ands con-
sttute gross ncome under the Revenue cts of 1918, 1921, 1924,
and 1926, athough under State aw the eases consttute saes of
the mnera n pace and the royates are part payment of the
purchase prce.
2. Res udcata Dfferent Partes.
determnaton by a court of competent |ursdcton of a fact
dstncty put n ssue as a ground for recovery n a sut aganst
a coector s not res |udcata n a subsequent proceedng aganst
the Commssoner before the oard of Ta ppeas.
3. Gan or Loss Compromse of Sut Damage for Coa Removed
and In|ury to Property.
Where the ta payer sues for damages for compensaton for coa
wrongfuy removed from ts mne by an ad|acent owner and aso
for n|ury to ts mne property and the oard fnds that the
amount of coa removed can not be ascertaned, t can not be
determned that any part of the amount receved n 1924 n com-
promse of te sut s ta abe gan n that year n whch there s
no fna dsposton of the ta payer s property.
4. vdence Use of Stpuaton of acts.
Where a stpuaton s fed by a essor of coa ands before
the tme had arrved for the fng of computatons under rue 50
of the oard of Ta ppeas, under whch the hearng s confned
strcty to the consderaton of the correct computaton of the
defcency resutng from the determnaton aready made, the
oard may propery take nto consderaton, n determnng the
depeton rate, the estmated tonnage n pace on March 1, 1913,
as shown by the stpuaton, athough the stpuaton s made
merey to ad n the computaton of the defcency under rue 50.
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233, rt. 541.
276
5. vdence earng Under Rue 50 of oard.
Where the ta payer, essor, at the hearng before the oard
to determne the ssues puts n evdence ony one of severa eon-
tracts of ease as typca of a the rest under whch the rght of
the essee to mne addtona coa to offset the e cess of royates
pad for n any year s mted to the ne t succeedng year after
the amount necessary to produce the mnmum royaty for that
year had been mned, and, at a hearng under ts rue 50 whch
under the rue s confned strcty to the consderaton of the cor-
rect computaton of the defcency resutng from the determna-
ton aready made, the ta payer offers to show that, under two
eases, the coa pad for n severa years substantay e ceeded
the coa mned and that the payments were made as mnmum
royates requred under the eases, wth eave, to the essee, at
any subsequent tme to take out the coa pad for, the oard n the
e ercse of ts dscreton may refuse the offer. The evdence
offered beng n the ta payer s possesson from the begnnng of
the proceedngs before the oard, the refusa to accept such ev-
dence s not an abuse of ts dscreton.
6. Decson ffrmed n Part, Reversed n Part, and One Case
Remanded.
The decson of the oard of Ta ppeas (18 . T. ., 901)
affrmed n part, reversed n part, and one case remanded for fur-
ther proceedngs.
Unted States Crcut Court of ppeas, ourth Crcut.
No. 8214. D. . . Strother, pettoner, v. Commssoner of Interna Revenue,
respondent.
No. 3215. ankers Pocahontas Coa Co., pettoner, v. Commssoner of Interna
Revenue, respondent.
On pettons to revew the decsons of the Unted States oard of Ta ppeas.
efore Parker and Soper, Crcut udges, and aker, Dstrct udge.
anuary 25, 1932.
opnon.
Soper, Crcut udge.
ankers Pocahontas Coa Co. v. Commssoner. No. 3215.
The sub|ect matter of ths sut Invoves ncome and proft ta es of the
ankers Pocahontas Coa Co. for the caendar years 1920-1926, as determned
by the oard of Ta ppeas. Defcences n substanta amounts were
charged agnst the ta payer n each of these years and a petton to revew
was fed. The oard made the foowng fndngs of fact wth reference
to the property concerned:
In uy, 1912, the ankers Pocahontas Coa Co.. a West rgna corporaton,
acqured the fee smpe tte to appro matey 6,200 acres of coa ands, n-
cudng both the surface and the mnera rghts n the State of West rgna.
The and had no apprecabe vaue e cept for the coa content.
Upon Incorporaton n 1912, the corporaton acqured by forma assgnment
and has contnued to retan the benefca nterest of the orgna owners n
certan contracts affectng the coa content whch were e ecuted n 1901 and
1902 wth varous operatng companes and to whch contracts the 6,200 acres
and coa content were sub|ect.
These contracts were orgnay prepared by D. . . Strother, who at that
tme was attorney, drector and stockhoder n the predecessor corporatons.
The form of the contracts Is that prevang n the West rgna coa feds,
whch foowed the Pennsyvana form of contract as ntroduced by Penngy-
vanans who were argey Instrumenta n the eary coa deveopment In .the
West rgna fed.
ach of these contracts purported to be a contract of ease between the pror
owners of the and, as essor, and a coa mnng company, as essee, coverng
a tract of and n McDowe County, W. a., for a perod of 30 years from
anuary 1, 1901. It was provded that the essee shoud have the soe and e -
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277
233, rt. 641.
eusve prvege of mnng and cokng coa on the premses, and of conductng
a genera mercante busness thereon. In consderaton thereof, the essee
agreed to pay to the essor, as renta for the premses, a royaty (rangng from 1
cent to 10 cents) for each ton of coa mned and sod or used for any other
purpose than the manufacture of coke, and a arger amount for each ton of
coke manufactured and sod upon the premses. In some cases, a mnmum
annua renta or royaty (rangng from 4,000 to 10,000) was agreed upon.
In addton, the essee agreed to pay a ta es assessed aganst the property,
or the coa mned, coked or manufactured. The essee was gven the opton
to renew the ease at ts e praton and provson was made for the fna
vauaton and dsposton of the mprovements paced upon the and by the
essee.
The contenton of the ta payer s that these contracts, e ecuted In the
years 1901 and 1902, and acqured by t n the year 1912, were saes of coa n
pace that were fuy compete before the s teenth amendment went nto
effect and that the royates receved durng the perod 1920 to 1926 were
merey payments of obgatons that e sted uncondtonay on March 1, 1913,
and were not ncome ta abe under the edera Revenue cts. It Is sad
that ths constructon of mnng eases as saes of coa n pace s the aw of
the State of West rgna, ad down by ts hghest court, and s therefore a
rue of property whch the edera courts must respect and enforce. The oard
of Ta p eas, however, overrued ths contenton and drected that the roya-
tes shoud be ncuded n the gross ncome of the ta payer, sub|ect to ta aton.
The appcaton of the ncome ta statutes passed n conformty wth the
s teenth amendment to the proceeds of mnng was frst consdered by the
Supreme Court n Stanton v. atc Mnng Co. (240 U. S., 103). The court
hed that a ta on the product of a mne s not, n ts essence, a drect ta on
property merey because some e hauston of the ore body must resut from the
workng of the mne and that even though an adequate aowance s not made
for the depeton of the mnera, the ta does not become a drect ta on prop-
erty because of ts ownershp. On the contrary, t was hed n accordance wth
ts former rung n Stratton s Independence v. owoert (231 U. S., 399), that
such a ta s a true e cse eved on the busness of carryng on mnng
operatons. The Supreme Court reterated and apped ths rue n on
aumbach v. Sargent Land Co. (242 U. S., 503), where t was hed that royates
from mnng eases on ands n Mnnesota consttuted ncome sub|ect to the
Corporaton Ta Law of 1909. It was ponted out that under the aw of Mn-
nesota, such enses are not merey conveyances of the ore n pace, and do not
consttute a sae of any part of the and, but the ore derved from the opera-
ton of the mnes consttutes rents and profts from the and. Commentng on
ths rue, the court sad:
Ordnary, and as between prvate partes, there s no queston of the
duty of the edera court to foow these decsons of the Mnnesota Supreme
Court, as a rue of rea property ong estabshed by State decsons. ( uhn v.
armont Coa Co., 215 U. S., 349, 300.) Whether n consderng ths edera
statute we shoud be constraned to foow the estabshed aw of the State, as
contended by the Government, we do not need to determne. The decsve
queston n ths case s whether the payments made as so-caed royates
amount to ncome so as to brng such payments wthn the scope of the Corpora-
ton Ta ct of 1909. The pror decsons of ths court n Stratton s Independ-
ence v. mcbert (231 U. S., 399) and Stanton v. atc Mnng Co. (240 U. S.,
103), n whch the Stratton case was foowed and approved, are decsve of
ths queston.
The court aso hed that there was no dfference as to ta abty of the gans
from the mnng operatons, whether the ore was e tracted by the mne owner,
as n the Stratton case, or by a essee of the owner, as n the case of the
Sargent Land Co.
of ths ground was consdered by the Crcut Court of ppeas of the
Thrd Crcut n Roscnberger v. McCaughn (25 . (2d), 699 T. D. 4171, C. .
TI-2, 253 ), a case whch reated to ncome ta es based on royates or rents
from coa ands n Pennsyvana. In that State, the courts appy a dfferent
rue from that In vogue n Mnnesota and hod that mnng eases consttute
saes of the mnera n pace and t was therefore argued that the case must
be dstngushed from the decsons of the Supreme Court we have cted. ut
It was hed, and we thnk propery, that the rues of decson ad down by the
State courts wth regard to property, whe generay controng upon the
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5233, rt. 541.
278.
edera courts, do not necessary govern those courts n the nterpretaton
of the aws of Congress In regard to ta aton, and, t was ponted out that n
on aumbach v. Sargent Land Co., supra , the Supreme Court had reached the
concuson that royates from mnes consttuted ta abe ncome whoy asde
from the constructon paced by the Mnnesota courts upon mnng eases. The
Supreme Court decned to revew ths nterpretaton of ts decson when t
dened certorar (278 U. S., 604) (see aso Ursch v. Unted States, 67 Ct
Cs., 637, certorar dened, L80 U. S., 576 erg v. Commssoner, 33 . (2d), 641,
certorar dened, 280 U. S., 598 Ct. D. 97, C. . III-2, 2801 urkett v.
Commssoner, 31 . (2d), 667, certorar dened. 280 U. S., 565 e ander v.
ng, 46 . (2d), 235 Ct. D. 294, C. . -, 223 ).
We sha assume, for the purposes of ths decson, that the aw of West
rgna, ke that of Pennsyvana, s that a mnng ease consttutes a sae of
the mnera n pace, t was sad n Coa Co. v. Overhot (81 W. a., 427, 434)
that the ngsh and many mercan decsons hod that when, n a mnng
ease, the partes contract wth reference to a mnera known to e st, the
quantty of whch s unknown and ncapabe of e act ascertanment, and the
essee covenants to brng forth a mnmum quantty annuay, and to pay a
mnmum royaty, the contract amounts to a sae of the mnera n the and
and the essee s bound to pay the mnmum prce. (See aso eather v. ar,
85 W. a., 267 Urpman v. Lowther O Co., 53 W. a., 501 Toothman v.
Courtney, 62 W. a., 167 Smth v. .Roof, 66 W. a., 633.)
Nevertheess, we thnk that the royates n queston, sub|ect to the deducton
aowed by the cts of Congress, consttute ta abe ncome. There can be no
doubt that t was the Intenton of Congress to ta them. It s provded In
secton 234(a) of each of the pertnent statutes, to wt, the Revenue ct of
1918 (40 Stat., 1057), the Revenue ct of 1921 (42 Stat., 227), the Revenue
ct of 1924 (43 Stat., 253), and the Revenue ct of 1926 ( 44 Stat., 9), that In
computng the net Income of a corporaton sub|ect to the ncome ta , n the
case of mnes and other natura deposts, there sha be aowed as a deducton,
a reasonabe aowance for depeton, accordng to the pecuar condtons n
each case. It does not foow, as the ta payer assumes, that the royates
cease to be Income under the cts of Congress because the eases are saes
and the royates are part payment of the purchase prce under the aw of
West rgna. It Is obvous, as the Supreme Court has ponted out, that
somethng more Is nvoved under a mnng ease than a sae and devery of
vauabe property. efore the busness s compete, there must take pace
the whoe process of ocatng, e tractng and preparng the ore for market.
Ths s a manufacturng process, and n ths aspect the royates are seen to
be ncome of the busness and as such sub|ect to ta aton. The edera courts
must respect the oca aws of property ad down by the courts of the State,
but the power of Congress to ta must be |udged by the reates of the stua-
ton and not by the ogc of State rues of property, pushed ne oraby to ther
e treme.
In Wets v. Wener (279 U. S., 333 Ct. D. 60, C. . III-1, 257 ), the ta -
payer, who was n the busness of takng ong eases on rea property and sub-
ettng, camed the rght to make an annua deducton from hs Income for
estmated deprecaton of the budngs, but the Supreme Court decded that the
cam was unfounded snce he was not the owner of the property. The court
sad (page 337):
It does not matter that n Oho, where the propertes e, these ong eases
are treated as n many respects ke conveyances of the fee. The ct of Con-
gress has ts own crtera, rrespectve of oca aw, that ook to certan rather
severe tests of abty and e empton and that do not aow the deductons
demanded whatever the essees may be caed. We understand ths to be the
vew taken by the Department for a ong tme, and we are of opnon that t
shoud not be dsturbed.
It may be noted, n passng, that the Supreme Court of ppeas of West
rgna tsef dd not appy the rue wth regard to mnng eases teray
when t came to the sub|ect of ta aton for n arvey Coa t Coke Co. v.
Don (59 W. a., 605) t hed that a mnng ease, smar n a substanta
respects to those nvoved n the pendng case, consttuted a chatte rea, ta abe
to the essee under a West rgna statute whch provded for the ta aton
of persona property, ncudng, n that term, chattes rea. Ths decson was
made notwthstandng the contenton that the deed created not a chatte rea
but a sae of the coa tsef n stu, ta abe ony as reaty.
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The ta payer does not seem to deny the force and effect of the decsons of
the Supreme Court we have cted, hut cams that the court has snce dscarded
the theory ad down n these cases and has returned to the we-estabshed
rae that the State aw of property must he accepted and apped by the
edera courts. Reference s made to Ter, dm., v. Unted States (281 U. S.,
497 Ct. D. 190, 0. . I -1, 383 ), Crooks, Co., v. arreson (282 U. S., 55
Ct. D. 271. C. . -, 469 ), and Poe, Coector, v. Seaborn (282 U. S., 101
Ct. D. 259, C. . I -2, 202 ) but t s obvous that eac of these decsons
turned upon the fundamenta queston whether the property sought to be ta ed
came wthn the purvew of the ta ng statutes. When t was cear that such
was the case, the edera statute was gven effect as n Tyer v. . S. (281
U. S., 497), where the court hed that the vaue of a tenancy by the entretes
shoud be ncuded n the gross estate of a decedent, for the purpose of com-
putng the ta upon the transfer of the net estate, athough, under the State
aw appcabe to such an nterest, t coud not be sad n a strct sense of the
term that a transfer of the property had taken pace. In the other cted cases,
on the other hand, property was hed to be e cuded from the ta proposed
because t dd not come wthn the terms of the statute, and ths concuson was
mantaned athough t was occasoned by observance of a Stute rue of prop-
erty, and It was cear that the rung woud brng about a ack of unformty
n the ncdence and operaton of the ta n dfferent States by reason of
dversty of oca property rues. The Supreme Court has never abandoned the
rue as to the effect of State decsons on questons of property but t has hed
n some nstances that State decsons do not cover the whoe ground to whch
the edera ta ng statutes reate, and n other nstances, that the statutes or
decsons of the State ay down rues whch defne and mt the property whch
Congress as undertaken to ta .
It s ne t ob|ected that even f the royates of the mne are ta abe, an
nsuffcent aowance for depeton has been made. The Commssoner est-
mated the aowance at 3.6 cents per ton, as the vaue of the coa n pace on
the basc date of March 1, 1913 and the defcences were determned on ths
bass. The ta payer contends that an aowance of 5 cents per ton shoud
have been made because ths sum has been f ed as res ad|udcata between the
partes by reason of a |udgment of the Dstrct Court of the Unted States for
the Southern Dstrct of West rgna rendered on anuary 21, 1928. The
Commssoner had prevousy determned a defcency aganst the ta payer for
the years 1914 to 1919, usng the unt vaue of 3 cents per ton, and had mposed
addtona ta es n the sum of 0,267.08, whch the corporaton had pad under
protest. Thereafter t brought an acton aganst the coector of nterna
revenue at arkersburg, W. a., wheren the court determned that the rate
shoud be 5 cents per ton, and rendered a |udgment n favor of the ta payer
for 5,373.01, whch the Unted States pad. ence the ta payer cams that the
queston s no onger open between t and the Government, snce t s a genera
prncpe that when a fact s dstncty put n ssue, and drecty determned
by a court of competent |ursdcton between the partes n a awsut as a
ground for re overy. t can not be dsputed n a subsequent sut between the
same partes or ther prves, even f the second sut s for n dfferent cause of
acton. Southern Pacfc R. U. v. 17. S., 1G8 U. S., 1, 4S New Oreans v.
Ct:en ank, 167 U. S., 371.)
The rue s appcabe, however, ony when the subsequent sut s between
the same partes or ther prves. The ta payer mantans that we have that
stuaton n the present tgaton because the Unted States n reaty s ts
opponent n both cases, beng represented by the coector of nterna revenue
n the pror sut, and by the Commssoner of Interna Revenue now. Rut
the argument s refuted by the decson n Sage v. Unted States (250 U. S., 33),
where t was e pressy rued, aganst the protest of the Government, that the
court was not bound by a |udgment In a former sut concernng the same sub|ect
matter between the ta payer and a coector of nterna revenue, because a sut
agaust a coector of nterna revenue s persona and ts ncdents, such as the
nature of the defenses open and the aowance of nterest, arc dfferent. Ths
rung has recenty been cted wth approva by the Supreme Court n Graham
oster v. Goodce (282 U. S., 409, 430 Ct. D. 2S7, C. . -, 191 ). The
decson of the Dstrct Court for the Southern Dstrct of West rgna was
therefore not bndng upon the Commssoner, and he had the authorty to deter-
mne anew, as a queston of fact, what aowance shoud be made for the
depeton of the mne.
160003 33 19
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280
In revewng the Commssoner s determnaton, the oard took nto eons -
ernton not ony the evdence ntroduced before the dstrct court n the pror
case, but aso addtona evdence. The presdent of the corporaton testfed
that the cost of the property, when acqured n 1912, dd not e ceed 507,000,
a fact castng strong ght on the vaue of the property on March 1 of the
foowng year n 1915, an engneer estmated that there were then 20,000,000
tons of m abe coa, havng a tota vaue of 1,000,000 on December 31, 1917,
an entry was made upon the genera edger of the ta payer that the estmated
vaue as of March 1, 1913, on the bass of 20,000,000 tons of coa at 5 cents a
ton was 1,000,000 and the ncome ta return fed for these years camed a
March 1, 1913, vaue of the property of 1,000,000. stpuaton, fed by the
partes before the fndngs of fact and opnon of the oard were made, to be
receved as a statement of fact upon any queston necessary to any computa-
ton under rue 50 of the oard, contaned a schedue showng that the est-
mated recoverabe tonnage on March 1, 1913, was 37,608,642 tons. The stpu-
aton aso ncuded a resume of the eases, wth the appro mate acreage and
royates per ton n each, and aso the tonnage mned and royates receved
for the years 1913 to 1919, ncusve, as we as the tonnage mned, the tonnage
pad for and the royates receved for the years 1920 to 1926. Prom ths
resume of facts, t s obvous that there was substanta evdence to support
the fndng of the oard. s t ponted out, an aowance of 3.6 cents per ton
woud return to the ta payer a tota of 1,353,911.11 upon the tonnage est-
mated n the stpuaton. It s true, as the ta payer contends, that a dffer-
ent resut mght have been based upon the evdence n the record but t s not
the provnce of ths court to fnd the facts anew. We merey ascertaned
whether there s substanta evdence to support the fndngs of the oard.
The ta payer ob|ects to the use by the oard, n determnng the depeton
rate, of the estmated tonnage n pace on March 1, 1913, as shown by the
stpuaton. It s sad that the stpuaton was made merey to ad n the
computaton of the defcency under rue 50. The rue s appcabe when the
oard determnes the ssues n any proceedng, and wthhods decsons of
defcences for ater computaton. If the partes are n agreement as to the
amount, copes of ther computaton are fed for entry of the decson but
f not n agreement, the partes may fe ther respectve computatons, and an
opportunty to be heard s afforded. ut any hearng s strcty confned to
the consderaton of the correct computaton, and no argument may be made
upon ssues or matters dsposed of by the report of the oard, or upon any
new ssues. The stpuaton was fed n ths case before the tme had arrved
for the fng of computatons under the rue. The oard had not yet de-
termned the prncpes to be apped n the computaton of the defcences,
and one of the mportant ssues was the rate of depeton to be used n case
the royates shoud be hed to be ncome. The stpuatons of fact wore
obvousy fed by the partes to enabe the oard to reach correct concusons
upon the dsputed ponts. We thnk the oard propery took the stpuated
facts nto consderaton n determnng the depeton aowance. They coud
not |usty have been consdered for one purpose, and not for others.
fter the oard had fed ts fndngs and opnon, the partes fed confct-
ng computatons of defcency, whch then came on for hearng under rue 50.
The ta payer then for the frst tme made the pont that the schedues fed
showed that under two eases, the coa pad for n severa years substantay
e ceeded the coa mned, and offered to ntroduce the eases to show that the
payments were made as mnmum royates requred under the contracts,
wth eave, to the essees, at any subsequent tme, to take out the coa pad
for. The Commssoner ob|ected to the offer as new matter not recevabe at
that stage of the proceedngs, under the provsons of the rue. The oard
decded that the offer consttuted n effect a request for rehearng and reargn-
ment and fnay fed ts order of decson wthout grantng a rehearng or
consderng the evdence offered. Ths rung the ta payer assgns as error.
It s provded n Reguatons 45, 62, 05, and 09, artce 216, that n case a
essee under a mnng ease s requred to pay annuay a specfed sum to be
apped n payment of royaty for mnera, whenever the same sha be e -
tracted and removed, the vaue n the ground to the essor, for purposes of
depeton, of the number of unts so pad for n advance, w consttute an
aowabe deducton from the gross ncome of the year n whch the payment
sha be made. It woud have been proper to have ntroduced the eases n
evdence at the orgna hearng of the case before the oard had determned
the ssues nvoved. ut the ta payer put u evdence ony one of the con-
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tracts of ease as typca of a the rest. Under ths form of ease, the rght
of the essee to mne addtona coa to offset the e cess of royaty pad n
any year was mted to the no t succeedng year after the amount necessary
to produce the mnmum royaty for that year had been mned. To such a
stuaton under the facts proved, artce 216 had no reevance. The oard
was accordngy correct n ts rung that to receve n evdence the new matter
offered by the ta payer was equvaent to the grantng of a rehearng of the
case. It was wthn the sound dscreton of the oard to grant or deny the
ta payer s moton and snce the evdence must have been n the possesson
of the ta payer from the begnnng, we can not say that the dscreton of
the oard was abused. ongs and uh v. Com., 84 . (2d), 859, 801.)
nother queston for decson reates to the sum of 3,770.40 pad to the cor-
poraton n 1924 as damages for an unawfu trespass. The oard made the
fndng of fact that n 1920, the angan Coa Co., whch owned and ad|acent
to that of the ta payer, trespassed on the atter s and and removed coa to
whch t had no rght. It then destroyed the entres and as a resut the e tent
of ts operatons coud not be determned. The stuaton was dscovered n
1923, whereupon the ta payer brought sut for damages and camed com-
pensaton not ony for the coa removed, but aso for damages to the property.
In 1924 the sut was compromsed by the payment mentoned, but ths sette-
ment had no reaton to the coa e tracted as the amount of the same coud
not be determned. The oard quoted the testmony of the presdent of the
corporaton to the effect that the destructon of the entres had absoutey
destroyed the method of gong nto the mne at that pont that he and hs
engneers had estmated that the damages to the property and to the seam
of coa wrere at east 10,000 and that 3,770.40 was accepted because the
trespasser at the tme was n a precarous fnanca condton.
The Commssoner hed that the damages receved consttuted gross ncome
n the year 1924 that the trespasser had mned or damaged 15,000 tons of
coa and that the ta payer was entted to deduct from the amount receved
the sum of 3.6 cents per ton, or 540, for depeton. The oard sustaned ths
acton. It sad that a oss caused by a tortous act, f not compensated for by
nsurance or otherwse, s deductbe from gross ncome but that the evdence
dd not afford facts from whch the amount of the oss mght be determned
and that the cost of the coa removed by the trespasser or ts vaue on March
1, 1913, was not known. ence t hed that no deducton coud be aowed
for oss n 1920. s to the year 1924, t made the foowng statement:
The same stuaton obtans wth respect to the year 1924. The company
receved from the trespasser 3,770.40. The pettoner has found that a but
540 of ths amount (whch he has aowed as a deducton from gross ncome
as depeton) consttuted ta abe ncome of the company for 1924. The com-
pany has submtted no evdence that the cost or March 1, 1913, vaue of the
coa removed by the trespasser was n e cess of 540, or that such bass pus
damages to the property was n e cess of 540. The determnaton of the
Commssoner s therefore sustaned for ack of evdence showng error on
the part of the respondent.
The ta payer ob|ects to ths addton to ts ncome for the year 1924, on
the ground that the money pad by the trespasser was merey compensaton
for In|ury to the mne, and was n effect a return of capta. ny oss or
gan n the transacton coud be determned under the crcumstances ony
upon a fna dsposton of the property. We thnk ths poston s sound.
If the ta payer were askng for a deducton from ncome n 1920 for the oss
caused by the trespass n that year, t woud be wthn the provnce of the
oard to determne whether the evdence submtted by the ta payer was
suffcenty defnte to |ustfy the aowance camed. The fndng of the oard,
that the amount of coa removed coud not be ascertaned, showed that the
amount of the oss was uncertan. ut ths fndng kewse shows that the
Commssoner s acton n addng the sum of 3,770.40 to the gross ncome of the
ta payer n 1924, was wthout foundaton. If there had been substanta
evdence to support the fndng that 15,000 tons of coa had been unawfuy
e tracted, and that 3,770.40 had been pad soey n settement of that wrong,
It woud have been proper to have added ths amount to the gross ncome,
ess the e penses for coecton and an aowance for depeton. The baance
remanng woud have been as ceary proft n the ta payer s hands as f It
had been pad by a essee operatng on a royaty bass. ut the stuaton s
confused by the fact that the amount of coa e tracted s not known. So
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5233, rt. 541.
282
far as can be tod from the record, the amount pad by the trespasser may
not have e ceeded payment at the rate of 3.5 cents per ton. In addton, there
s the uncontradcted evdence of substanta damage to the approach to
the mne.
These crcumstances show that the Commssoner was not warranted n
addng the sum of 3,770.40, ess au estmated depeton aowance of 540
to the corporaton s ta abe ncome for the year 1924. We are not deang
wth a stuaton ke that consdered by the Supreme Court n urnet v.
Sanford d rooks Go. (282 U. S., 359 Ct D. 277, C. . -, 363 ), but wth
a oss of capta nvestment. In Doye v. Mtche (247 U. S., 179, 185), the
court, speakng of such a queston, sad: In order to determne whether
there has been a gan or oss, and the amount of gan, f any, we must wth-
draw from the gross proceeds an amount suffcent to restore the capta vaue
that e sted at the commencement of the perod under consderaton. ta -
payer s not aowed to deduct a oss from gross ncome unt the amount s
defntey f ed and ascertaned and for the same reason, he shoud not be
charged wth gan on pure con|ecture unsupported by any foundaton at
ascertanabe fact (See urnet v. Logan, 283 U. S-, 404 CL D. 351, C. .
-, 345 .)
It foows that as to the determnaton of the defcences of the corporaton
for a of the years n queston e cept the year 1924, the acton of the oard
s affrmed, and as to that year, the case s remanded for further proceedngs
n accordance wth ths opnon.
Strother, pettoner, v. Commssoner of Interna Revenue. No. 3214.
Ths case reates to the ncome of a stockhoder of the ankers Pocahontas
Coa Co. derved from dvdends by whch the greater part of the royates
whch the corporaton receved, were dstrbuted. Durng the severa years
nvoved n the foregong case, 1920 to 1926, Strother, as one of the corpora-
ton s stockhoders, receved dvdend payments from the company and reported
them n hs ncome ta returns, but dd not return them as ta abe ncome.
Th - oard found, n Its orgna fndngs of fact, that the corporaton made
dstrbuton of the entre amounts receved by t as royates, ncudng any
depeton reserve. The Commssoner determned as defcences aganst
Strother the tota amounts receved by hm from the company, and made no
aowance for that part of the moneys whch consttuted depeton of the
capta. Upon these facts, the oard hed n ts opnon that to the e tent
that the dstrbuton made by the corporaton consttuted a dstrbuton of
depeton reserve, the amount receved by Strother was nonta abe.
The opnon estabshed, as we have seen, that the royates consttuted
Income to the corporaton, and not the proceeds of sae of mnera n pace, and
that the proper aowance for a depeton reserve was at the rate of 3.6 cents
per ton. y stpuaton of the partes, the decson on these matters was
adopted n the Strother case. fter the decson was rendered, a hearng was
hed upon the recomputaton of the Strother defcences. Strother ob|ected
to the new computaton proposed by the Commssoner because t dd not pro-
vde for the deducton from the dvdends receved of a proportonate part of
the entre aowance for depeton. It seems that the tota depeton aowance
of the corporaton for the years n queston was 125,000, but the computatoa
was made as f the tota aowance was ony 90,000. pparenty, the Com-
mssoner hed that a sum retaned by the corporaton n each year to meet
the ta defcency was In fact part of the aowance for depeton, and to that
e tent, the aowance for depeton had not been ncuded n the dvdend
nother queston seemngy nvoved was whether or not n determnng how
much of the dvdends were capta, the tota net ncome and the tota de-
peton for the year shoud be pro rated to the date of each dvdend payment
These questons appear to be those whch are rased by the pettoner but
the record n the case s so vague that we can not obtan a cear concepton
ether of the facts to be consdered or the questons of aw to be decded.
Ths stuaton doubtess arose because the mportant questons n whch the
partes were nterested were those concernng the character of the royaty
payments as return of capta or ncome, and f ncome, the proper aowance
to be made on account of depeton. decson coud not be reached In the
Strother case unt these questons had been determned. t the hearng on
the queston of recomputaton of the Strother defcences, t was ponted out
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234, rt. 561.
by counse for the Commssoner that the record dd not suppy a compete
bass for recomputng the Strother ta that strcty speakng, the ta payer
had faed to mantan the compete burden of proof, but that ths was not
reasonaby to be e pected under the crcumstances. It was conceded that the
recomputaton proposed by counse for Strother was teray n compance
wth the decson of the oard, but that ths decson was n need of revson.
Thereupon, the oard announced that t woud make an amendment of ts
fndngs of fact, and ths was fed after the hearng. Instead of the statement
that the corporaton dstrbuted the entre amount receved from ts operatng
contracts, the fndng was substtuted that the corporaton used such porton
of the royates as was necessary for the payment of admnstraton e penses,
set asde a certan reserve to meet the edera ta es, and dstrbuted the rest
to the stockhoders. No change was made n the opnon as to the hodng
that to the e tent the amounts receved by Strother Incuded depeton reserve,
they were not ta abe and wthout further recomputaton, the decson com-
paned of was prompty entered.
The Government s bref n the case before us suggests that the record does
not contan suffcent facts to permt a determnaton of the questons rased,
and that therefore the oard s decson shoud not be dsturbed. We thnk,
however, that under the crcumstances, It woud be ust for the oard to gve
further consderaton to the Strother case, and to afford the ta payer an op-
portunty to ntroduce addtona testmony to brng out the facts necessary to
a decson of the ssues Invoved. The case w therefore be remanded for
further proceedngs n accordance wth the opnon n the case of ankers
Pocahontas Coa Co. v. Commssoner, n so far as t determnes the questons
Invoved heren, and wthout pre|udce to the rght of pettoner to rey upon
the ega postons as to other matters urged upon ths appea.
Case No. 3214, remanded for further proceedngs.
Case No. 3215, modfed.
rtce 645: Sae and retrement of corporate bonds.
R NU CT O 1926 ND PRIOR R NU CTS.
What consttutes retrement of bonds. (See G. C. M. 10739, page
65.)
S CTION 234. D DUCTIONS LLOW D
CORPOR TIONS.
rtce 561: owabe deductons. I-33-6611
Ct.D.537
INCOM T R NU CT O 1918 decson of court.
Deducton usness pense ddtona Compensaton Ob-
gaton rsng fter Years When Servces Were Per-
formed.
reasonabe amount of addtona compensaton pad by a cor-
poraton subsequent to 1 )20 for servces performed n 1010 and
1020, the ega obgaton to pay for whch was not ncurred n
those years but arose by vrtue of a resouton of the drectors
n 1921, s not deductbe n 1920 under secton 234(a)1 of the
Revenue ct of 1918 as a busness e pense pad or ncurred n that
year.
Dstrct Court of the Unted States for the Dstrct of Deaware.
Desco Corporaton, pantff, v. Unted States of merca, defendant.
anuary 15, 1932.
OPINION.
Neds, .: Ths s a sut aganst the Unted States for the recovery of
19,798.04 aeged to have been erroneousy or egay coected from pantff
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234, rt. 561.
284
as an addtona ncome and e cess-profts ta for the year 1920. The add-
tona ta arose from the dsaowance hy the Commssoner of Interna Reve-
nue of an tem of 48,070 deducted by the pantff from ts 1920 ta return.
The sut was tred by the court wthout a |ury.
INDINGS OP CT.
1. Pantff s a |obber and deaer n eectrca, m, pumbng, and shp sup-
pes and a contractor for coverng ppe at Wmngton, De. It was ncor-
porated n 1889 under the name of Deaware ectrc Suppy Co. Its name
was changed to Desco Corporaton n 1930.
2. In 1920 rederck . Stone was presdent and treasurer erbert . Smth
was vce presdent and genera manager and are C. Comegys was secretary
and saes manager. These three gentemen hed a ma|orty of the outstandng
capta stock and consttuted ts board of drectors.
3. In 1919 the drectors voted that each of the three offcers shoud receve
a saary of 60 per week, whch was pad throughout the year 1920.
4. The pantff made a practce of payng ts ofcers sma saares.
5. Pantff s books of accounts were kept on an accrua bass. t the cose
of each year an nventory was taken and was usuay competed n about two
and one-haf months.
6. ddtona compensaton to offcers and mportant empoyees was fre-
quenty voted by the drectors when the profts |ustfed t The prospect of
such addtona compensaton was defntey hed out to certan empoyees by
the ofcers. In 1919 and 1920 the drectors nformay dscussed addtona
compensaton and the payment thereof from profts.
7. March 14, 1921, the drectors voted addtona compensaton to the offcers
and certan empoyees of the company duy recorded n the foowng mnute:
The treasurer presented hs report for the year endng December 31, 1920,
whch after beng read was approved and ordered fed. Owng to the unusua
care and responsbty the board on moton decded that the offcers be granted
n bonus of 15,000 each as addtona compensaton for ther work performed
for the ast two years. t the same tme Mr. Smth for the empoyees pre-
sented to the board a request for further consderaton on account of a number
of the empoyees for the same reasons. On moton bonuses were thereupon
granted to G. . andergrft for 2,000 . P. rmor, W. . Robnson, and . .
Daett for 250 each Ceo. . Leach for 150 . I. Mousey, 50 W. . ames,
S. Sprnger, . P. Comegys and . . oey for 25 each C. rown for 20,
a payabe at the dscreton of the treasurer.
8. Pantff s books for 1920 had not been cosed and upon the passng of the
above resouton an entry was made as of December 31, 1920, on the edger of
the company under the headng Saares, n the words, onus a/c 4S.070.
Ths amount was subsequenty pad n accordance wth the terms of the
resouton.
9. The compensaton voted the offcers and empoyees March 14, 1921, was
reasonabe n amount and |ustfed under a the crcumstances.
10. March 15, 1921, pantff fed ts ncome and profts ta return for 1920
and deducted the amount of 48,070 n ts return as an ordnary and necessary
e pense.
11. The Commssoner of Interna Revenue dsaowed the deducton of
48,070 from the ncome of pantff for the year 1920 and determned the
amount of defcency ta n controversy.
The statute nvoved s the Revenue ct of 1918 (40 Stat, 1057, ch. 18).
Secton 234(a) of that ct provdes:
Sec. 234. (a) That n computng the net Income of a corporaton sub|ect to
the ta mposed by secton 230 there sha be aowed as deductons:
(1) the ordnary and necessary e penses pad or ncurred durng the
ta abe year n carryng on any trade or busness, ncudng a reasonabe aow-
ance for saares or other compensaton for persona servces actuay
rendered, .
The soe queston n the case s whether pantff may awfuy deduct from
ts gross ncome for the year 1920 the sum of 48,070 as addtona saares and
compensaton for servces rendered durng 1919 and 1920. The answer to ths
queston depends upon the subordnate queston whether such compensaton
represented an e pense Incurred n the year 1920. Snce the sut s one to
recover ta es erroneousy e acted the burden s on the pantff to prove the
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234, rt. 561,
facts estabshng the nvadty of the ta . (Unted States v. nderson, 269
U. S., 422, 443 T. D. 8839, C. . -, 179 urnet v. ouston, 283 U. S., 223,
227 Ct. D. 328, C. . -, 343 .) The books of the ta payer were kept upon
nn accrua bass. Under that system an e pense accrues when a the events
have occurred from whch abty s determned and the abty has become
f ed even though payment s not yet due. (Unted States v. nderson, 269
U. S., 422.) Whether the term Incurred as used n the Revenue ct of
1918 s used n a technca ega sense, or n an economc or bookkeepng sense,
e penses are not ncurred uness there has arsen a ega obgaton to pay them
and they do not accrue wthn a gven ta abe year uness a of the events
whch f the amount and determne the abty of the ta payer to pay occuy
wthn that year. auer os. Co. v. Commssoner of Interna Revenue,
46 ed. (2d), 874 Ct. D. 301, C. . -2, 359 . Certorar dened, 2S3 U. S.,
850.) If the pantff dd not ncur any abty for the payment of the add-
tona compensaton durng 1920 the acton of the Commssoner of Interna
Revenue n dsaowng the e pense was proper. There s no evdence of the
e stence of any contract, ora or wrtten, assurng offcers or empoyees add-
tona compensaton for servces when the profts of the company |ustfed t.
Unt the passage of the resouton of the board of drectors on March 14,
1921, there was no obgaton upon the pantff to pay ts offcers or empoyees
any addtona compensaton. There s some evdence that durng the year
1920 and pror thereto the board of drectors Informay dscussed the queston
of saares of offcers and mportant empoyees and the practce of the company
n payng bonuses when earnngs warranted t. There s some evdence as to
statements to new empoyees that bonuses woud be pad. Ths evdence, how-
ever, fas far short of warrantng the court n fndng a ega abty o
obgaton on the part of the pantff to pay ths addtona compensaton,
The addtona compensaton was whoy dependent upon the acton of the
drectors of the company. Ther acton n 1921 was not retroactve so as to
ncur an obgaton n 1920 when no such obgaton e sted durng that year.
The facts of ths case are substantay Identca wth those n auer ros.
Co. v. Commssoner of Interna Revenue (46 ed. (2d), 874). The reasonng
n that case s equay convncng when apped to the facts n ths case. (See
aso Lucas v. O bre rush Co., 281 . ., 115 Ct. D. 265, C. . I -2, 884
Unted States v. nderson, 269 U. S., 422 S. Natove d Co. v. Commssoner of
Interna Revenue, 82 ed. (2d), 949 Ct. D. 77, C. . III-2, 295 ock
ohner Mercante Co. v. Unted States, 37 ed. (2d), 877, 879 Ct. D. 152.
C. . I -1, 298 Indana Rubber Insuator Wre Co. v. Commssoner of
Interna Revenue, 20 . T. ., 1201.)
CONCLUSIONS O L W.
1. The dsaowance by the Commssoner of Interna Revenue of 48,070
from pantff s ncome for the year 1920 whs correct.
2. udgment shoud be entered for defendant.
ceptons may be fed wthn four days.
rtce 561: owabe deductons. I-36-5G60
Ct. D. 552
ncome ta revenue act of 1926 decson of court.
Deducton usness pense) Gratuty Refund of Interest
Pad.
Where a corporaton, owner of the capta stock of the Cor-
poraton, ses to a number of ts stockhoders a number of shares
of stock of the Corporaton, takng n payment nterest-bearng
notes the Interest on whch s reported n ta returns as gross
Income n the years t was receved and the notes are canceed and
nonnterest-bearng notes receved In eu thereof, the refund to the
makers of the notes of the Interest pad pursuant to a resouton
of the drectors, passed more than two years after the cancea-
ton of the notes and ndcatng n no way that the nterest was
Impropery coected, s a gratuty and not an ordnary and neces-
sary busness e pense deductbe under secton 234 (a) 1 of the
Revenue ct of 1920.
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28G
Court of Cams of the Unted States. No. -338.
Louden Machnery Co. v. The Unted States.
May 2, 1932.
OPINION.
Whaey, udge, devered the opnon of the court.
The pantff s sung to recover the sum of 1,814.57, beng the amount of
Interest returned by t to certan of ts stockhoders n the year 1925, havng
been pad by the sad stockhoders on certan demand promssory notes bearng
nterest at the rate coected.
It s contended by the pantff that the amount returned to ts stockhoders
was an ordnary and necessary busness e pense and deductbe from ts gross
ncome for that year. The pantff was the owner of the capta stock of the
Porter Company. It sod to a certan number of ts stockhoders a certan
number of shares of the Porter Company common stork at par and took In pay-
ment therefor the demand promssory notes of each stockhoder, and these
notes were secured by the assgnment of the shares of stock of the Porter
Company as coatera for the payment of the notes. The notes were n the
ordnary form of coatera notes and bore nterest at the rate of 6 per cent
per annum, payabe annuay. The pantff kept ts books on an accrua bass
and made ts ta return on the caendar year bass. t the end of the caendar
year 1921 there had accrued on the company s books nterest to that date n
the sum of 13,875, and ths amount was ncuded In Its ta abe Income for the
year 1921. On anuary 1, 1922, these nterest-bearng notes were canceed and
nonnterest-bearng notes were gven n eu thereof. Certan of the stock-
hoders had protested, and contnued to protest, that t was never ntended the
notes shoud carry nterest, but the treasurer of the pantff, who was one of
the orgnators of the pan to purchase ths stock, not ony pad the nterest on
hs note, but nssted and requred the other note makers to pay nterest as
caed for n the notes. s the nterest payments were made to the pantff
company, they were reported as ncome n ts edera ta return for the years
n whch the payments were coected, and ta es were duy pad thereon. In
anuary, 1925, more than two years after these nterest-bearng notes had been
canceed and the Interest coected n cash, or by notes, the board of drectors
of pantff company passed a resouton drectng that the nterest be refunded
to those stockhoders who had pad t. Ths was done, ether by payments In
cash, or by canceaton of the notes gven n payment of the nterest. The
pantff deducted from ts gross ncome for the year 1925 the amount of the
nterest refunded. The Commssoner of Interna Revenue dsaowed ths
deducton and by renson of ts dsaowance, assessed aganst and coected
from the pantff an addtona ta of 1,814.57. cam for refund was fed
and re|ected.
The soe queston In ths case Is whether the refundng of ths Interest Is an
ordnary and necessary e pense or a gratuty. The makers of the notes were
egay bound to pay the Interest, and as t was coected It was entered on the
books of the company as ncome and returned as part of the gross ncome of the
company, and ta es were pad thereon. No queston was made at that tme
that the coecton of the nterest was erroneous, or an ega coecton. If
there had been any doubt as to the egaty of ts payment, then the pantff
overstated ts ncome for the years In whch the nterest charges were coected
by the amount of such Interest, and coud have fed a cam for overpayment
for those years. Ths was not done, but, on the contrary, the company treated t
as part of Its ncome and returned t for ta aton. In 1925 the board of drec-
tors refunded these Interest charges to the makers of the notes. The resou-
ton s sent as to any ega coecton, or any notaton that the notes shoud
not have carred Interest, and ndcates In no way that the nterest had been
mpropery coected. fter the passage of ths resouton the treasurer of the
company who had prepared the notes orgnay, and was one of those who
pad the Interest and was entrey famar wth the transacton from the mak-
ng of the notes to the passage of the resouton, entered on the books of the
company the refundng of ths amount under the head of gratutes.
The company was under no ega obgaton to repay the Interest coected ns
t had been egay coected under ega contracts entered nto by the respectve
stockhoders. It was under no mora obgnton to refund ths amount. It was
a vountary and gratutous act. The takng of ths amount out of the asset of
the company and payng It over to certan stockhoders by order of the board of
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234, rt. 561:
drectors coud not n any wny or any manner be construed as an ordnary and
necessary e pense pad or ncurred n carryng on the trade or busness. The
record does not show that the company receved any beneft as a consderaton
for ths refundment. On the other hand those who purchased the stock and
gave ther notes dd receve a beneft n that for years they dd not have to pay
any carryng charges on ther notes gven n payment for the stock. (See
orthecstern Cabnet Co. v. Commssoner, 13 . T. ., 533, und Dcckerhoff,
tuffoer Co. v. Commssoner, 17 . T. ., 1251.)
In our opnon, the Commssoner was correct n hodng that the return of
the nterest was not an ordnary and necessary busness e pense and deductbe
as such. The petton shoud be dsmssed.
It s so ordered.
rtce 561: owabe deductons. I-38-5700
Ct. D. 5G6
INCOM T R NU CT O 1918 D CISION OP COUNT.
Deducton mortzaton -Ppe-Lne Corporatons.
Ppe-ne factes owned by ppe-ne corporatons, common
carrers, the busness of whch s e cusvey the transportaton of
o from the o wes of other corporatons to the refneres of other
corporatons, are not factes constructed or acqured for the pro-
ducton of artces contrbutng to the prosecuton of the war
wthn the meanng of secton 234(a)8 of the Revenue ct of 1918
and the corporatons are not entted to deductons for amortza-
ton provded by that paragraph. Ths concuson s not affected
because they are affated wth a parent corporaton, ownng a
ther stock, whch Is engaged n the producton of artces con-
trbutng to the prosecuton of the war produced from the o trans-
ported by the ppe-ne companes and such factes are operated
as pant factes of the consodated group, 98 per cent of the o
transported by the ppe-ne corporatons beng for use by the
parent company.
Court of Cams op the Unted States. Nos. -368, -369, -370, -371.
The Te as Ppe Lne Co. v. The Unted States.
The Te as Ppe Lne Co. of Okahoma v. The Unted States.
The Te as Co. v. The Unted States.
The Te as Co. et at. v. The Unted Sates.
May 31, 1932.
opnon.
Ltteton, udge, devered the opnon of the court.
The amortzaton deductons camed In these cases are by the Te as Ppe
Lne Co., a Te as corporaton, and the Te as Ppe Lne Co. of Okahoma, an
Okahoma corporaton, on ppe-ne factes acqured by these corporatons
upon organzaton on uy 1, 1917, and certan ppe-ne factes thereafter
constructed and Instaed by them. The ppe-ne propertes acqured by these
two corporatons upon organzaton were pad n to them by the Te as
Company n e change for whch the ppe-ne companes Issued to the Te as
Company ther entre capta stock wth the e cepton of quafyng shares and
throughout the perod from uy 1, 1917, to December 31, 1918, the Te as
Company owned a of the capta stock of the two ppe-ne corporatons.
The controng ssue n the cases Is whether the ppe-ne propertes of
the two ppe-ne corporatons, the busness of whch was e cusvey the
transportaton of o from the o wes of other corporatons to the refneres
of other corporatons, were factes constructed or acqured for the producton
of nrtces contrbutng to the prosecuton of the war wthn the meanng of
secton 234(a)8 of the Revenue ct of 1918 (40 Stat., 1057, 1058).
The Commssoner hed, and the defendant here nssts, that these ppe-
ne companes, beng common carrers, were not producng artces for the
prosecuton of the war wthn the meanng of the statute and the reguatons
that the rght to ths deducton must be determned on the bass of the nature
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234, rt. 561.
288
of the busness engaged n by the ppe-ne companes and the purpose for
whch the factes were acqured, constructed, and used by the ta payer
camng the deducton.
The pantffs ppe-ne companes contend that the amortzaton deducton
provded n the statute s propery aowabe on factes of a ppe-ne com-
pany, a member of a consodated group, engaged n the producton of petroeum
products where a the stock of the ppe-ne companes s owned by be
parent company and such factes are operated as a pant facty of the
consodated group that the propertes of the Te as Ppe Lne Co. and the
Te as Ppe Lne Co. of Okahoma on wMch amortzaton deductons are
camed n ths sut were acqured or nstaed by the members of a consodated
group durng the war perod and were used for the producton of war artces.
Durng the war perod the Te as Company was engaged n the producton of
petroeum and ts products, whch were artces contrbutng to the prosecuton
of the war. Ths corporaton owned, operated, and mantaned o wes and re-
fneres, and, unt uy 1, 1917, owned and operated as a part of ts busness
certan ppe-ne factes for conveyng crude petroeum from the wes to
ts refneres.
In ebruary, 1917, the Legsature of the State of Te as by enactment of
chapter 30 of the Genera Laws of Te as, 1917, decared o ppe-ne com-
panes to be common carrers and paced them under the ursdcton of the
raroad commsson of the State.
y the provsons of chapter 31 of the Genera Laws of Te as, 1917, the
egsature requred a Te as corporatons ownng or operatng o ppe nes
separatey to ncorporate such ppe nes and, n the case of ownershp of o
ppe nes beyond the border of Te as, authorzed addtona ppe-ne corpora-
tons to be organzed outsde of the State and the transfer of such ppe-ne
propertes to thcn. In every such case the statute permtted the o-producng
companes to acqure and own a of the capta stock of the separate ppe-ne
corporatons.
uy 1, 1917, the Te as Company conveyed to the Te as Ppe Lne Co. and the
Te as Ppe Lne Co. of Okahoma, a of ts ppe-ne propertes then owned
n the States of Te as and Lousana and, on the same date, conveyed to the
Te as Ppe Lne Co. of Okahoma a of ts ppe-ne propertes then owned n
the State of Okahoma. These transfers were due to the Te as statute above
mentoned decarng a ppe-ne companes to be common carrers and re-
qurng that such companes bo separatey ncorporated.
The ppe-ne propertes wth respect to whch amortzaton s camed were
constructed by the Te as Ppe Lne Co. and the Te as Ppe Lne Co. of
Okahoma after uy 1, 1917. s common carrers these corporatons were re-
qured to and dd offer ther servces to the pubc for the transportaton
of o at prescrbed shppng rates. Nnety-eght per cent (98 per cent) of the
os transported by these ppe-ne companes was for the Te as Company. The
Te as Company owned a of the capta stock of the two ppe-ne companes
and these corporatons were therefore affated wthn the meanng of secton
240 of the Revenue ct of 1918. In 1919 the Te as Company prepared and
ed a consodated ncome and profts-ta return for 1918 for tsef and the
Te as Ppe Lne Co. and the Te as Ppe Lne Co. of Okahoma, affated
companes. deducton for amortzaton of war factes was shown. The
Commssoner aowed an amortzaton deducton to the Te as Company for
ppe-ne propertes constructed and owned by t up to uy 1, 1917, but dened
the deducton for amortzaton of any of the propertes owned by the two
ppe-ne corporatons after that date on the ground that the cost of acqus-
ton and the cost of constructon of the ppe nes were borne by the Te as
Ppe Lne Co. and the Te as Ppe Lne Co. of Okahoma, transportaton cor-
poratons, not entted under the statute to such a deducton.
Secton 234(a)8, supra, provdes that In the case of budngs, machnery,
equpment, or other factes, constructed, erected, Instaed, or acqured, on
or after pr C, 1917, for the producton of artces contrbutng to the pros-
ecuton of the present war, and n the case of vesses constructed or acqured
on or after such date for the transportaton of artces or men contrbutng to
the prosecuton of the present war, there sha be aowed a reasonabe deduc-
ton for the amortzaton of such part of the cost of such factes or vesses as
has been borne by the ta payer, . smar provson s found n
secton 234(a)8 of the Revenue ct of 1921 (42 Stat., 227, 255). rtce 183
of Reguatons 02 (1922 edton), promugated ebruary 15, 1922, under the
provsons of the Revenue ct of 1921, provdes as feows:
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289
234, rt. 561
rt. 183. Property cost of whch may be amortzed. The ta payer may
deduct from gross Income a reasonabe aowance for amortzaton of the cost
of budngs, machnery, equpment, or other factes, constructed, erected,
Instaed, or acqured on or after pr 6, 1917, for the producton of artces
contrbutng to the prosecuton of the war aganst the German Government,
and of vesses constructed or acqured on or after such date for the trans-
portaton of artces or men contrbutng to the prosecuton of such war.
The aowance may be deducted ony by ta payers who after pr 6, 1917,
have constructed or otherwse acqured pant or other factes for the actua
producton of artces contrbutng to the prosecuton of the war. It Is not
suffcent, to entte the ta payer to the aowance, that the nature of hs
busness s such as to contrbute to the producton of artces. or e ampe, a
ta payer, such as a raroad, whose busness actvtes are confned to trans-
portaton (other than water transportaton) s not entted to the aowance.
ta payer, the nature of whose busness s the actua producton of artces,
however, may cam the aowance wth respect to the cost of a budngs,
machnery, equpment or other factes whch were constructed for use or
whch were used n connecton wth the producton of such artces, both n the
acquston and transportaton of raw matera, the actua process of manu-
facture or other converson, and the transportaton and marketng of the fnshed
product.
The Treasury Department has consstenty hed, and we thnk correcty, that
a ta payer whose busness actvtes are confned to transportaton, other than
transportaton by water, of artces or men contrbutng to the prosecuton of
the war, Is not entted to the amortzaton aowance provded n the statute.
The Department has aso consstenty hed, as provded n the reguatons, that
a partcuar ta payer, the nature of whose busness s the actua producton
of artces contrbutng to the prosecuton of the war may cam an aowance
wth respect to the cost of a budngs, machnery, equpment, or other fac-
tes whch were constructed for use or whch were used n connecton w th
the producton of such artces, both n the acquston and transportaton of
raw matera, the actua process of manufacture or other converson, and the
transportaton and marketng of the fnshed product.
The queston before the court n these cases does not fa wthn the ast-
mentoned rue provded n the reguatons and foowed by the Treasury De-
partment, nasmuch as we are here deang wth separate and dstnct corpora-
tons. The Te as Company was engaged In the producton of artces con-
trbutng to the prosecuton of the war, but the transportaton of crude o from
whch those artces were manufactured through the factes, upon whch
amortzaton s here camed, was not made by the Te as Company and was
not a part of ts busness such transportaton was carred on by the ppe-ne
companes, separate and dstnct ta payer corporatons. Under the Te as
statutes the ppe-ne companes were common carrers engaged In the busness
of transportng for proft such artces as shoud be entrusted to them by
the pubc. Ther ncome was derved from charges on transportaton of o
they dd not se or produce any artce they carred raw matera and devered
the same to the consgnee In the same natura state n whch receved from
the shpper. or the purpose of the deducton provded In the statute, ther
actvtes were In no wse dfferent from those of a raroad company. In
ampton d L. . Ry. Go. v. Noe (300 ed., 438 T. D. 3619. C. . III-2, 1341),
a raroad company enarged ts factes to provde servce durng the war
for the Langey ed avaton staton and engaged In the transportaton of
artces for the prosecuton of the war. It sought a deducton for amortzaton
of war factes n Its return for the ye r 1018. The cam was dsaowed by
the Commssoner and ths acton was uphed by the court. The court ponted
out that the statute ceary dd not Intend to permt and transportaton com-
panes to take such a deducton. The reasonng of the court and the decson
denyng deducton are appcabe to the queston Invoved n these cses.
ee, aso. Law Opnon 1074 (C. . 5, 159). ut the pantffs n ths case
contend that the amortzaton deducton provded n the statute s aowabe
to the ppe-ne companes because they were members of a consodated group
of corporatons, one of whch consodated group, . e., the Te as Company, was
engaged n the producton of petroeum products whch were artces contrbut-
ng to the prosecuton of the war. The fact that a partcuar ta payer whose
busness s n no wse the producton of artces s affated wth another
corporate ta payer whch s engaged n the producton of artce contrbutng
to the prosecuton of the war does not aone brng the frst corporaton wthn
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234, rt. 564.
290
the provsons of secton 234(a)8. ffaton does not destroy the corporate
entty nor change the separate dentty of each member of the affated group.
The consodated group of corporatons s not the ta payer. The fact that one
member of the consodated group may be entted to a certan deducton under
the statute does not gve the other members of the affated group the rght
to cam such deducton f, as separate and dstnct ta payers under the statute,
they ore not entted to t.
Items of gross ncome and deductons are not consodated for the purpose
of determnng the net ncome and the ta . It s ony the net ncome of
the separate corporate ta payers, members of the affated group, that s
consodated and treated as the consodated net ncome for the purpose
of computng the ta to be aocated and assessed to the severa corporatons
In accordance wth the net ncome propery assgnabe to each. (Swft v.
Unted 8tatc , 67 C. Cs., 322.) The consodated group therefore may ony
receve the beneft of the deducton for amortzaton of the factes In
queston f the ppe-ne companes ndvduay and as separate corporate
ta payers are entted under the statute to the deductons. s such separate
ta payers, and ndependenty of the busness carred on by the Te as Company,
the ppe-ne companes dd not come wthn the provsons of secton
234(a)8 and were not entted to a deducton for amortzaton of ther
propertes. The ownershp of ther stock by the Te as Company, whch, as
a separate and dstnct ta payer corporaton, was entted to the amortzaton
deducton on ts factes, does not change the stuaton. ( rst Natona ank
of Chcarro v. Unted States, 69 C. Cs., 312 283 U. S., 142 Ct. D. 335, C. .
-, 406 .) The propertes and factes upon whch the deducton for
amortzaton s camed were purchased or nstaed by the ppe-ne companes.
The costs of acquston and constructon of ppe-ne factes were the costs of
the ppe-ne companes. The statute aows the deducton for amortzaton ony
to the corporatons bearng the cost of acquston or constructon, whch. In ths
case, were the p e-ne companes. (Mtary qupment Co., 2 . T. ., 38.)
We have consdered the cases of O. M. Standfer Constructon Corporaton
(4 I . T. ., 525) and Unted States Refractores Corporaton (9 . T. ., 6T1),
reed upon by pantffs, but the facts and crcumstances n the cases before
ths court dstngush them from the cases mentoned before the Unted States
oard of Ta ppeas.
The pantffs are not entted to recover and the pettons are therefore
dsmssed. It s so ordered.
rtce 561: owabe deductons.
R NU CTS O 1921 ND 1924.
Ta payer not eectng reserve method of treatng bad debts. (See
Ct. D. 606, page 254.)
rtce 564: Interest. I-35-5639
Ct. D. 546
INCOM T R NU CT O 1920 D CISION OP COURT.
L Deducton Interest Dvdends Payments to odees ov
P neD Stock.
Where a corporaton ssues a form of preferred stock, n ac-
cordance wth ts certfcate of ncorporaton, whch does not en-
tte the hoders to demand a f ed rate of return upon ther
nvestment but ony such dvdends not e ceedng 8 per cent per
annum as are payabe from the net earnngs of the corporaton,
whch provdes that n case of qudaton of the corporaton they
are not to be pad from ts assets on an equaty wth ts credtors
but are to be preferred over the common sharehoders ony,
and whch provdes for redeemng the stock upon certan con-
dtons, te hoders of the preferred stock do not become credtors
of the corporaton by vrtue of ther ownershp of the stock and
payments n the name and form of dvdends to the hoders of
the preferred stock are not deductbe as nterest under secton
234(a)2 of the eveuue ct of 1926.
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234, rt. 664|
2. Decson ffrmed.
The decson of the oard of Ta ppeas (10 . T. ., 043) Is
affrmed.
Court of ppeas of the Dstrct of Coumba.
The nance t Investment Corporaton, appeant, v. Davd urnet, Commt-
soncr of Interna Revenue.
ppea from the oard of Ta ppeas.
efore Martn, Chef ustce, and Rora, an Orsde, and Gboner, ssocate
ustces.
March 7, 1932.
opnon.
Martn, Chef ustce: Ths appea reates to corporaton Income ta es for
the year 1925. ppeant, a Deaware corporaton, camed certan deductons
n ts returns for that year for payments made durng the year to ts preferred
stockhoders, camng that the hoders of the preferred stock had thereby
become credtors of the corporaton, and that the payments athough caed
dvdends were n fact nterest. The Commssoner, however, hed that the
payments were dvdends and not nterest, and therefore dsaowed the deduc-
tons. correspondng defcency was then asserted n the corporaton s ta es,
and ths was sustaned upon appea by the oard of Ta ppeas. (19 . T. .,
643.) The record s now before us.
Secton 234 of the Revenue ct of 1926 provdes:
(a) In computng the net ncome of a corporaton sub|ect to the ta mposed
by secton 230 there sha be aowed as deductons:

(2) nterest pad or accrued wthn the ta abe year on ts ndebted-
ness, .
The amounts In queston were pad by the corporaton under the name and
form of dvdends payabe to the hoders of ts preferred stock, and the soe
ssue n the case s whether the payments are deductbe as nterest under the
provsons of the ct. The answer depends n arge part upon the terms of the
company s certfcate of ncorporaton and the stock certfcates hed by the
payees.
It s provded n substance by the certfcate of ncorporaton that 4,000
shares of preferred stock, of the par vaue of 25 per share, may be ssued
by the drectors, whch sha entte the hoders thereof to receve, and the
corporaton sha be bound to pay out of the net earnngs, a cumuatve dvdend
at the rate of 8 per cent per annum, before any dvdend sha be set apart
or pad on the common stock the hoders of preferred stock sha have no
votng power n case of qudaton or dssouton the hoders of preferred
stock sha be pad the par amount of ther shares and unpad accumuated
dvdends thereon before any amount sha be pad to the hoders of common
stock, but sha not partcpate n any further dstrbuton of the assets of
the company any part of the preferred stock sha be sub|ect to redempton
at the eecton of the company or of the hoders thereof, at par pus accrued
unpad dvdends on December 25, 1925, or at any dvdend day thereafter,
provded that the corporaton sha not be requred to redeem more than 10
per cent of the outstandng preferred stock at any one dvdend date, and such
redempton sha be n the order of appcaton therefor f redempton s at
the eecton of the corporaton 5 per cent of the par vaue s to be added to
the payment, but a dscount of 5 per cent s to be deducted upon redempton
made at the opton of the stockhoders the corporaton may aso prescrbe a
specfed notce to be gven ether by the company or by the hoders, or by both,
as a condton to the e ercse of the rght of redempton.
The preferred stock certfcates upon whch the sums now n queston were
pad conform to the foregong provsons.
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5234. rt. 564.
292
In our opnon the hoders of such preferred stock dd not therehy become
credtors of the corporaton, and the payments n queston were receved by
them as dvdends and not as nterest.
Ths concuson foows from the fact that they were not entted to demand
a ed rate of return upon ther nvestment, but ony such dvdends not
e ceedng 8 per cent per annum as w-cre payabe from the net earnngs of the
company aso that n case of qudaton of the corporaton they were not
to be pad from ts assets on an equaty wth ts credtors, but were ony to
be preferred over the common stockhoders. (Scott v. I. 0. R. Co., 93 M L,
475 Lockhart v. an Ostne, 31 Mch., 76. See aso Warren v. ng, 108
U. S., 3S9.)
ppeant ays especa stress upon the provson contaned n the preferred-
tock certfcates, to the effect that the stock s redeemabe n whoe or n
part at the eecton of the corporaton or of the stockhoders upon 60 days
wrtten notce pror to any dvdend-payment date on or after December 31,
1925. ppeant contends that ths provson shows that the so-caed pre-
ferred stock s actuay a certfcate of ndebtedness. We thnk not. These
terms provde for redeemng the stock upon certan condtons, and do not
treat t as a debt.
The payments n queston are nowhere caed nterest but aways dv-
dends n the certfcate of ncorporaton and n the stock certfcates. ut
even f they were caed nterest, when n fact dvdends, they woud not be
accredted as nterest. In artce 564 of Treasury Reguatons 65, promugated
under the Revenue ct of 1924, t s provded that so-caed nterest on pre-
ferred stock, whch s n reaty a dvdend thereon, can not be deducted n
computng net ncome. Ths reguaton has been n effect under a the Revenue
cts, begnnng wth that of 1918 and ncudng that of 1928.
On the other hand, f the nstrument e ecuted by a corporaton has every
essenta feature of a certfcate of preferred stock and s ssued n usua form
of such stock, t s a certfcate of preferred stock and not a contract for the
payment of money, athough t may provde for redempton by the corporaton
by a certan tme or on certan condtons, and n such a case the hoders are
stockhoders and not credtors unt a change s actuay made. (14 C. ., 417.)
In rmstrong v. Unon Trust t Savngs ank (248 ed., 268), the court hed,
where a corporaton, authorzed to ssue preferred stock, ssued certfcates
rectng that the hoder was the owner of shares of preferred stock and entted
to nterest on the par vaue thereof, and provdng for a premum n case of
retrement wthn 10 years from ssuance, the hoders of such certfcates are
preferred stockhoders, and not credtors, the purchasers of the certfcates no
doubt e pectng to partcpate n dvdends decared after payment of stpuated
nterest, for t can not be assumed that the purchasers e pected to be credtors
and at the same tme share n dvdends.
In ko Lamoe Power Co. v. Commssoner of Interna Revenue (50 . (2d),
595), a corporaton ssued preferred stock wthout votng power, bearng 7 per
cent cumuatve dvdends payabe semannuay, preferred as to ncome and
assets, caabe after 3 years at 110, the stock was sod on representatons that
t woud be redeemabe at any tme on demand wth accumuated dvdends. In
an effort to make the dvdends deductbe, the board of drectors had by
resouton ratfed these representatons, the stock was carred on the books as
preferred stockhoders nterest account, and there was evdence that some
stockhoders regard the purchnse as a oan.
The court hed that the hoders of the preferred stock were not credtors,
and the dvdends pad upon t were not deductbe as nterest. The court ds-
tngushed the case from rthur R. ones Syndcate v. Commssoner of Interna
Revenue (23 . (2d), 833), cted by appeant, upon the ground that the pre-
ferred stock n the atter case was a drect obgaton of the corporaton wth a
defnte date for payment, and not merey redeemabe at the opton of the
corporaton.
Ths rung s appcabe to the nstant case wheren the rght to redeem s
reserved upon prescrbed terms at the eecton of the stockhoder or the
corporaton, but no e press tme s f ed for payment wthout the e ercse of
such opton.
The decson of the oard of Ta ppeas s accordngy affrmed.
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293
f 234, rt. 564|
rtce 564: Interest. I-40-5749
Ct. D. 576
INCOM T R NU CT O 1021 D CISION O COURT.
1. Deducton Dvdend Interest Stock orrowed Money.
Where stock of a corporaton s ssued n an amount equvaent
at par to cover oans to t, and the corporaton enters nto an
agreement whch rectes that the stock had been sod and trans-
ferred, for the repurchase of the stock at a specfed prce together
wth an amount equa to a stated per cent per annum from the
date of ssuance of the stock and that the stock ssued shoud ha
consdered as preferred stock and guaranteed dvdends In an
amount equa to 7 per cent, and where the amount of such oans
s ncuded n the Invested capta of the corporaton for years pror
to the ta abe year, and on a the stock of the corporaton there s
dstrbuted n the ta abe year out of profts accumuated snce
ebruary 28, 1013, sums equvaent to 7 per cent of the par vaue of
the stock, the recpents of such stock are vested wth the rghts of
stockhoders and such payments made to the stockhoders are not
nterest on money borrowed deductbe from gross ncome but are
dvdends wthn the meanng of secton 201 of the Revenue ct
of 1921, notwthstandng that the stock s ssued n voaton of
State aw. .
2. Decson ffrmed.
The decson of the oard of Ta ppeas (20 . T. .. 667)
s affrmed.
Unted States Crcut Court of ppeas for the Nnth Crcut.
ngeas udng Investment Co., a Corporaton, pettoner, v. Commssoner
of Interna Revenue, defendant.
Upon petton to revew an order of the Unted States oard of Ta ppeas.
efore W-bub and Sawte.e, Crcut udges, and ames, Dstrct udge.
March 21, 1932.
OPINION.
akes, Dstrct udge: In ths proceedng, broucht by the pettoner cor-
poraton, to revew a decson of the oard of Ta ppeas, there s pre-
sented the queston whether certan payments made by the pettoner n 1922
to persons sted as hoders of ts stock, are to be consdered as dvdends,
or as nterest on money bornrwed. If the former, they were not deductbe
from gross revenue n computng ncome ta f the atter they were deductbe.
The Commssoner hed that the payments were dvdends dstrbuted to
sharehoders and hence were not deductbe. The oard of Ta ppeas
approved that rung.
y the Revenue ct of 1921 (42 Stat., 227), secton 201, dvdends, not
deductbe from gross ncome, are defned as:
ny dstrbuton made by a corporaton to ts sharehoders or members,
whether n cash or n other property, out of earnngs or profts.
Treasury Reguatons 62, artce 504, provded that:
So-caed nterest on preferred stock, whch s n reaty a dvdend thereon,
can not be deducted n arrvng at a net ncome.
Pettoner was organzed as a famy corporaton n the year 1910, hav-
ng for ts genera purposes the subdvson and sae of rea estate. Up to
December 31, 1919, . II. ray and erman anss, brothers-n-aw, owned
n of the ssued corporate stock. Pror to the date ast mentoned, . II.
ray, father of . . ray and of Mrs. anss, had oaned to the pettoner
arge sums of money. . . ray had advanced money for use n the bus-
ness of the company. The brothers-n-aw had aso owned what was known
as ray- auss Investment Co., In equa shares, the assets of whch had been
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234, rt. 504.
294
transferred to pettoner, at the stated vaue of 70,000 . . ray and
erman ansa takng credt on pettoner s books by open account n the
amount of 35,000 each.
On December 31, 191 ), a stock ssued was canceed and ressued n severa
amounts. s . . ray, the father, was then a man 88 years of age, bs sons,
. . ray and . . ray, and daughter, Mrs. ansa, were desgnated to act
as hs trustees. Stock was ssued to them at par n amount suffcent to cover
the sum of hs cash oans or advances to pettoner, whch at the tme were
In e cess of 200,000. Stock was aso ssued to cover amounts carred on open
account to the credt of . . ray and erman anss. ddtona stock was
Issued separatey to . ray whch was apparenty for cash. Other changes
In and addtons to the stock ssue were subsequenty made, whch are not
necessary to be detaed. On a of the stock there was dstrbuted durng the
year n queston sums equvaent to 7 per cent on par. These payments were
entered on the books of the corporaton as nterest, and no dvdend account
was carred. The pettoner camed that the transactons whereby stock was
ssued to . . ray s trustees to cover amounts advanced by . . ray, and
to . . ray n amount equvaent to hs open account credt, were mere forms
and dd not convert the oans nto stock purchases. In ncome returns for
pror years ( 20 and 1921) the pettoner had ncuded these aeged oan
amounts as nvested capta.
On anuary 18, 1920, . . ray s trustees sgned wth the pettoner an
agreement whch frst rected that as the corporaton had sod and transferred
to the trustees certan certfcates of corporate stock for cash, the trustees
agreed to rese the stock to the corporaton upon payment by t of the fu
prce of 1 per share, together wth an amount equa to 6 per cent Interest per
annum, compounded quartery from the date of Issuance of sad frst-mentoned
certfcate. . . ray at the same tme n wrtng agreed to pay the nterest
specfed unt sad stock s taken up by frst party. further agreement of
date pr, 1922 (the ta year concerned heren), changed the nterest agreed
to bo pad to 7 per cent on the repurchase of the stock wth the added cond-
tons that none of the partes concerned woud dspose of the shares wthout
the consent of the others, and that the assets of the corporaton woud not be
dsposed of e cept as necessary n te proper conduct of the busness. It was
aso stated that the stock ssued to ray trustees and to . . ray shoud
be consdered as preferred stock and guaranteed dvdends n an amount
equa to 7 per cent. epurcha.se agreements are by no means unusua n saes
transactons nvovng corporate stock.
s stated the cam of the pettoner s that It never treated the stock ssued
to cover advances made by the severa partes, as convertng the oan accounts
nto any dfferent form of obgaton and never ntended so to do. Mr. . .
ray testfed as foows:
We wanted to get t In more convenent form, and we aso wanted somethng
behnd that account. Therefore we decded as a convenence and more as a
matter of bookkeepng to ssue stock to hm and mysef for the ndebtedness
wth a rate of nterest specfed to us so that we coud retre the stock as money
came n. We thought ths woud he more convenent than tryng to gve
securtes In the shape of mortgages. It woud be more dffcut to reease
those than to ressue stock.
Pany t was the Intenton that the recpents of the stock shoud be, n
ther reaton to the corporaton, vested wth the rghts of stockhoders. ow
ese coud the share representaton put somethng behnd the accounts as
. . ray sad was desred. y pan nterpretaton, stock representaton
was what was ntended to be gven, and t was gven.
ta payer can not, by a form of book entry, merey, change the amount of
an ncome tota. Can It be doubted that had the status of the ray trustees,
and . . ray, as stockhoders been chaenged by a stranger wth an nterest,
that the trustees and ray woud have stouty mantaned ther rght to the
shares for what they purported to be Otherwse, how coud the possesson of
the certfcates have protected them In the way Mr. . . ray testfed t
was desgned they shoud be protected The chargng of the amounts of money
receved from these sources to nvested capta n former years (1920-1921)
the payment of the same rate of nterest to a stockhoders out of profts
the rectas n the agreement frst mentoned that the stock had been sod
and transferred to the ray trustees are a facts ndcatng that the hoders
of the certfcates were to be nvested wt the character of stockhoders of
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295
234, rt. 664t
the corporaton. The Commssoner was therefore authorzed to concude that
the payments made by the company to a stockhoders consttuted a dvson
of profts n proporton to shares, and that they were, wthn the meanng of
the revenue aw, dvdends. Whether the attempt to change the form of
the stock from common to preferred was effectua or cot, woud make
no dfference In the resut n the ncome ta computaton ( so Lamoe
Pocer Co. v. Commssoner, 50 ed. (2d), 593 ths crcut) nether woud the
wrtten agreements shown to have been made, n our vew, n anywse change
the reaton of the partes, or convert that reaton nto somethng dfferent
from the ordnary one e stng between a corporaton and ts sharehoders.
ut pettoner has a further contenton to urge aganst the ta assessment:
That has to do wth the provsons of the corporate securtes act of Ca-
forna. That act, desgned to gve State supervson over the stock ssues of
corporatons for the protecton many of the nvestng pubc, requres that
permts must be secured from the State corporaton commssoner before shares
are ssued and sod or transferred. It decares that any stock dsposed of
wthout such a permt havng been frst secured sha be vod. The conten-
ton n essence Is that when shares are ssued n voaton of the State aw,
dvdends actuay pad to the persons, the hoders of such stock, out of the
profts of the corporaton, can not be taken account of In estmatng ncome
tu es due the Government. If ths contenton s vad, then a convenent
method s made avaabe by whch ncome ta es requred to be pad by corpo-
ratons may bo materay reduced n amount. The Government n the coec-
ton of ts revenues takes no notce of any stuaton of accountabty to a
State that the ta payer may have caused to e st through hs own wrongdong.
s transactons are as he has made them, and f rea ncome credts have been
created whch are sub|ect to be ta ed, they are to be assessed accordngy.
Thus ncome derved from an unawfu busness may be made to pay ts to
n ta es n the same percentages as that whch s reaped from egtmate
enterprses.
The foowng decsons, as ctPd by respondent, are In ther genera effect
appcabe: Caforna Iron Yards Co. v. Commssoner (47 ed. (2d), 514)
dety-Phadepha Trust Co. v. Commssoner (47 ed. (2d), 36 (C. C. . 3)
IT. D. 4239, C. . II-2, 373 ). In the case ast noted, the court sad:
It s we setted that a State aw can not be gven an effect for ta pur-
poses whch confcts wth the provsons of a edera revenue aw and defeats
the coecton of the ta .
Pettoner, subsequent to the submsson of ths case on ora argument, fed
an addtona st of authortes. The most pertnent of these s Garrson
Company v. Commssoner, decded by the Crcut Court of ppeas for the
ghth Crcut on anuary 25, 1932 Ct D. 551, page 386, ths buetn . The
court there decded that promssory notes gven to an rkansas corporaton for
ts stock, where the consttuton of that State forbade the takng of notes n
payment of corporate shares, coud not be propery ncuded as a part of the
nvested capta of the company concerned. It had been hed by the Supreme
Court of rkansas that such notes coud not be recovered upon In a sut
aganst the maker by reason of the consttutona provson. The decson
does not furnsh a rue whch, under the facts here, w determne the |udg-
ment to be made. The crcut court n the Garrson company case partcuary
referred to the argument made on the part of the Commssoner, whch was
n bref:
That resuts from transactons that are n voaton of State aw,
and not enforceabe contracts n the State, are st recognzed for edera
ta purposes f they are of a knd that woud otherwse come wthn the
Revenue cts.
nd the court sad :
It s unnecessary to dscuss the proposton thus generay stated for the
reason that the transacton n the case at bar does not come wthn ts terms.
Treasury reguatons are then quoted, wheren t s provded that:
nforceabe notes or other evdences of ndebtedness may be con-
sdered as tangbe property n computng nvested capta to the
e tent of the actua cash vaue of such notes
160003 33 20
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235, rt. 582.
296
nd the court went on to say:
It s pan from the anguage of the reguaton that the promssory notes
n the ease at bar coud not be consdered tangbe property n computng the
corporaton s nvested capta .
That s, as the notes were not enforceabe (the reasons whch made them
so are Immatera), they dd not come wthn the descrptons of the regua-
tons, but were by the genera terms of such reguatons e cuded from n-
vested capta.
The case of Strother v. Commnsoner, decded by the Crcut Court of p-
peas of the ourth Crcut on anuary 25, 1932 Ct. D. 531, page 275, ths bue-
tn , aso cted by pettoner, s not consdered appcabe here. ute pertnent
to the sub|ect dscussed are the observatons of ths court as made n Osbum
Caforna Corporaton v. Wech (39 ed. (2d), 41 Ct. D. 173, C. . I -1, 250 ).
There the court, by udge Rudkn, sad:
It s contended that the Domnguez stock became capta n the hands of
the Osburn Corporaton, because secton 11 of artce 12 of the Caforna
Consttuton provdes that no corporaton sha ssue stock or bonds e cept for
money pad, abor done, or property actuay receved, and that Congress can
ony ta ncome as dstngushed from capta. ut Congress has power to
mpose a ta upon ncomes and, as an ncdent, to defne what sha consttute
Income and the power of Congress n that regard s not mted or crcum-
scrbed by the aws of the severa States.
We are of the opnon that the decson of the oard of Ta ppeas shoud
be affrmed.
It s so ordered.
S CTION 235. IT MS NOT D DUCTI L
Y CORPOR TIONS.
rtce 582: Capta e pendtures. I-32-5598
Ct D. 532
INCOM T R NU CT O 1021 D CISION O COURT.
1. Deducton Loss Capta pendtuee mnaton of Com-
petton.
Where corporatons become the stockhoders of a new corporaton
whch pursuant to ther soe purpose acts as ther agent for the
e ecuton of ther pan to purchase the tangbe assets and good
w of certan compettors In order thereby to dscontnue the
busness of the compettors and emnate them from competton,
amounts pad by the stockhoders n qudaton of ther abty
under ther guaranty of the bonds of the new corporaton ssued
as a part of the pan are a part of the cost of emnatng com-
petton, are therefore capta e pendtures and are not deductbe
as osses under secton 234(a)4 of the Revenue ct of 1921.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (17 . T. ., 452) s
affrmed.
Unted States Crcut Court of ppeas for the Thrd Crcut.
fewspaper Prntng Co., pettoner, v. Commssoner of Interna Revenue,
respondent.
Petton for revew from the Unted States oard of Ta ppeas.
efore Davs, Crcut udge, and Thomson and Watson, Dstrct udges.
ebruary 5, 1932.
OPINION.
Thomson, Dstrct udge: The facts of ths case are entrey cear, and the
concuson whch shoud he reached s argey one of aw.
Pror to anuary, 1923, there were fve competng pubshng companes In
Pttsburgh: The Newspaper Prntng Co., the Press Pubshng Co., the Post
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297
235, rt. 582
Pubshng Co., the Dspatch Pubshng Co., and the Leader Pubshng Co.
The tree frst mght be desgnated as ta payers, the atter as compettors. It
beng the opnon of the ta payers, that there were more newspapers n the cty
than the revenues |ustfed, they decded to purchase the busness and assets of
the Dspatch and Leader, whch wo name as compettors. To accompsh ths
end, the three frst named companes organzed the Unon Pubshng Co., a
corporaton of the State of Deaware, wth a capta stock of 20,000, of whch
each of the three named companes subscrbed to one-thrd. The Unon Pub-
shng Co. then ssued bonds n the sum of 1,590,000, each of the three sub-
scrbers to ts stock guaranteeng the payment of 530,000 of these bonds.
On ebruary 13, 1923, the Unon Pubshng Co. bought out the compettors,
e cept cash and accounts recevabe, and mmedatey dscontnued the pubca-
ton of the papers so acqured. The company then proceeded to qudate the
tangbe assets, the money procured thereby beng apped to Its borrowed
Indebtedness. On December 31, 1923, the company transferred the remanng
assets to ts credtors, the vaue beng apped on ts borrowed ndebtedness,
whch eft a baance of 1,315,390.48 unpad, for whch each of the three above-
named companes was abe as a guarantor to the e tent of one-thrd. The
pettoner the Newspaper Prntng Co., deducted ths one-thrd, or 438,460.14
from gross ncome n ts ta return for 1923, as a f ed accrued abty as
of December, 1923. Ths cam was dsaowed by the Commssoner, and hs
acton was affrmed by the oard of Ta ppeas. rom ths acton, the
present appea was taken.
In determnng the queston before the court, there are certan admtted facts,
whch seem to us not ony matera, but vta. The purpose and ob|ect of the
pan s conceded. . . Stow, manager of the Unon Pubshng Co., testfed
(R., 53) :
The ob|ect of the Unon Pubshng Co. was smpy to dspense wth these
two newspapers on the theory that there were more newspapers n the town
than coud ve from the ncome whch was derved from possbe newspaper
earnngs.
In the stpuated facts (R., 50) It Is stated:
The purpose of sad Newspaper Prntng Co., Press Pubshng Co., and
Post Pubshng Co. n causng sad Unon Pubshng Co. to be created was to
provde an agency by means of whch the papers known as the Leader and the
Dspatch coud be purchased and the pubcatons of those papers dscontnued.
Thus there can be no queston that the Unon Pubshng Co. was the mere
agent for the carryng out of the pan of purchase and emnatng from com-
petton the Dspatch and Leader. The pan was duy consdered by the nter-
ested partes as benefca to the pettoner. Ths s shown by the resouton
of the drectors of that body at a meetng hed on ebruary 13, 1923, authorzng
the company to guarantee the bonds. The matera part of the resouton s
as foows:
Whereas the purchase of the property and assets of the Dspatch Pubshng
Co. and the Leader Pubshng Co. by the Unon Pubshng Co. w nure
greaty to the beneft of the busness of ths company and aso w beneft It
as a stockhoder of the Unon Pubshng Co.
The new company was formed n ebruary, 1923. It had no assets or
busness of ts own. On ebruary 13, the pettoner authorzed the guaran-
teeng of the bonds, and on the same day, the two newspapers were purchased
and pubcaton dscontnued. These facts concusvey Indcate that the
purchase prce, the dscontnung of pubcaton, the ssuance of bonds, etc.,
were agreed upon n advance, and smutaneousy e ecuted and carred out.
In appyng ta ng statutes, courts must ook to the substance, rather than
the form of a transacton. Unted States v. Phes (257 U. S., 156 T. D. 3270,
C. . 5, 37 ), McCa k Co. v. Unted States (216 U. S., 504), and many other
cases whch mght be cted.
The companes who formed the Unon Pubshng Co., ookng over the fed,
decded that t was wse and worth the cost, to buy out and dscontnue tha
busness of the compettors. To accompsh ths end, the Unon Pubshng
Co. was created as ther agent. Ths agency accompshed the desred ob|ect at
a cost of 1,315,390.48, pus the amount of capta stock of 20,000. ctng
merey as the agent to carry out the transacton, the acts of the agent ceary
became the acts of the prncpas. Thus the cost to the agent of emnatng the
undesrabe competton, was In fact, the cost to the prncpa. Whe tha
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5239, rt. 624.
298
6ystem may be consdered somewhat nvoved, It s easy understood, nt-
matey, the cost fe where t propery beonged upon the prncpas. The
smpe queston then arses, whether the cost of emnatng competton can
consttute a oss wthn the meanng of secton 234(a)4 of the Revenue ct of
1921: or whether the vaue of the thng procured, that s, the emnaton of
competton s a capta asset to be carred to capta account. That the cost
of emnatng competton s a capta asset, has been estabshed by a ong
ne of decsons of the oard of Ta ppeas.
In ths case t appears to be cear, that the ta payer was wng to pay the
amount of ts camed oss, for the benefts to be derved from the emnaton
of the two compettors. The vaue of ths ntangbe asset, whch must be
presumed to be measured by ts cost, shoud have been credted to the capta
account and carred as a capta asset. The fact that busness men, perhaps
of wde e perence, were wng to pay out the money n return for the gan,
ceary negatves any dea that they contempated that the gan woud be ess
than the e pendture.
In ths case, there were purchased, both the tangbe assets and the good
w, whe the tangbe assets ony, were sod. What the ta payer here con-
sdered a oss, s represented by the good w, whch he dd not se and now
has.
To us, t s therefore cear, that the ta payer dd not sustan a oss wthn
the meanng of secton 234 of the Revenue ct of 1921 that the e endture
was nether an ordnary nor a necessary e pense n carryng on the ta payers
busness.
We therefore affrm the decson of the oard of Ta ppeas.
Where a foregn corporaton has specfcay apponted n ctzen
of the Unted States, who s a resdent n ths country, to prepare
and fe an ncome ta return for It, such return s vad for a
ega purposes. The abty to fe a return for a foregn corpo-
raton s not mted to an agent who has the recept and contro
of the ncome of the ta payer, or who has knowedge of ts bus-
ness actvtes n the Unted States. The foregong prncpes are .aso appcabe to cases where returns are fed on behaf of non-
resdent aen ndvduas.
The opnon of ths offce s requested whether the return, orm
1120, fed n behaf of the ta payer, a foregn corporaton, s a com-
pete return under artce 624 of Reguatons 69, and whether the
rung made n ths case s appcabe to returns smary prepared
and sgned n behaf of a nonresdent aen ndvdua.
The rea queston nvoved s whether the return fed under a
power of attorney ssued n favor of , a ctzen of the Unted States,
m behaf of the M Company, a foregn corporaton, s a vad return
under secton 239(a) of the Revenue ct of 1926 and artce 624 of
Reguatons 69. The return s not sgned by the offcers of the cor-
poraton, but s sgned by , who certfed that the return was made
under power of attorney from the ta payer stpuatng for such
servces, and upon nformaton furnshed by the ta payer.
rtce 624 of Reguatons 69 reads as foows:
very foregn corporaton and corporaton satsfyng the condton set forth
under secton 262, havng ncome from sources wthn the Unted States, must
make a return of ncome on orm 1120. If such a corporaton has no offce
S CTION 239. CORPOR TION R TURNS.
rtce 624: Returns of foregn corporatons.
( so Secton 223, rtce 404.)
I-40-5750
G. C. M. 11000
R NU CT O 1926.
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299
239, rt. 624.
or pace of busness here, but has a resdent agent, he sha make the return.
though the foregn corporaton Is not engaged n busness n ths country and
has no offce, branch, or agency In the Unted States, It s requred to make a
return If t has receved ncome from sources wthn the Unted States.
Secton 239(a) of the Revenue ct of 192G provdes as foows:
very corporaton sub|ect to ta aton under ths tte sha make a return,
statng specfcay the tems of ts gross ncome and the deductons and credts
aowed by ths tte. The return sha be sworn to by the presdent, vce
presdent, or other prncpa offcer and by the treasurer or assstant treasurer.
If any foregn corporaton has no offce or pace of busness In the Unted States
bat has an agent In the Unted States, the return sha be made by the
agent-
It shoud be noted that secton 239(a) specfcay provdes that
If any foregn corporaton has no offce or pace or busness n the
Unted States but has an agent n the Unted States, the return sha
be made by the agent. To the same effect s artce 624, supra. In
the nstant case the foregn corporaton had no offce or pace of bus-
ness n the Unted States, but dd have ncome from sources n the
Unted States derved from an nvestment n mercan securtes.
power of attorney ssued n favor of s contaned n the fe.
Ths power of attorney was e ecuted May , 1927, and was sgned by
and C, who are offcers of the corporaton. The power of attorney
states that the ta payer, a corporaton duy organzed under the aws
of the foregn country and havng ts pace of busness n the cty of
R, has made, consttuted, and apponted , ts true and awfu
attorney for and n the name, pace, and stead of the undersgned,
to make any and a ncome ta retwns, certfcates| or other nstru-
ments, whch he may consder necessary or proper m order that the
undersgned may compy wth the ncome ta aws of the Unted
States of merca and the reguatons of the Commssoner of Inter-
na Revenue ssued n respect thereto. Itacs supped. Under
the power of attorney the ta payer aso undertakes to advse ts
attorney of any and a ncome whch t receves n the ta abe
perod from or through sources wthn the Unted States, a of
whch ncome s to be ncuded n the return made to the Unted
States by ts attorney.
Mechem, n dscussng a contract of agency and power of attor-
ne| , states that the contract, when one e sts, by whch the reaton
of prncpa and agent s created, s caed a contract of agency
the rght of the agent to represent the prncpa s caed hs author-
ty or power when the authorty s conferred by forma nstru-
ment n wrtng t s sad to be conferred by etter of attorney or
more commony by power of attorney. (Secton 35, Mechem s Law
of gency.) The same authorty states that the term attorney
s often used n the aw of agency as synonymous wth the word
agent, partcuary when the authorty s conferred by a wrtten
nstrument. (Secton 71, Mechem s Law of gency.) power of
attorney, however, s not restrcted to one whose professon s to gve
advce and assstance n ega matters, but may be ssued n favor of
a broker, bank offca, auctoneer, shpmaster, etc. When a power
of attorney s e ecuted n favor of a awyer t s frequenty ntended
that he act merey as agent for hs prncpa, rather than as a bar-
rster. The courts recognze that an agent for any purpose may be,
and often s, apponted by a wrtng caed hs power or etter of
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5240, rt. 632.
300
attorney, whch s defned as an nstrument authorzng a person to
act as the agent or attorney of the person grantng t. (Stockce y.
Whtehead, 47 Ind. pp., 423, 94 N. ., 736 nkenr| v. Young ros.,
52 Wash., 235, 100 Pac, 736 rnk v. Roe, 70 Ca., 296,11 Pac, 820.
Ths offce has prevousy hed n Offce Decson 586 (C. . 3, 284)
that where an nsurance broker n the Unted States had the contro
of certan ncome of the foregn corporaton t was requred to fe
a return. ut the abty to fe a return for a foregn corporaton
s not mted to an agent who has the recept and contro of the
ncome of the ta payer, or who has knowedge of hs busness actv-
tes n the Unted States. The statute provdes that f the foregn
corporaton has no offce or pace of busness n the Unted States
but has an agent, n the Unted States, the return sha be made by
the agent. Such s the stuaton n the nstant case. It foows that
where the foregn corporaton has specfcay apponted a ctzen of
the Unted States, who s a resdent n ths country, to prepare and
fe an ncome ta return for t, such return s vad for a ega
purposes.
In the nstant case the power of attorney was e ecuted May ,
1927. The return, Corporaton ncome ta return, orm 1120,
was e ecuted May , 1928, and fed n the offce of the coector.
It s therefore hed that the return s a vad return and meets the
requrement of the statute and artce 624 of Reguatons 69.
The foregong prncpes are aso appcabe to cases where returns
are fed n behaf of nonresdent aen ndvduas. It s stated n
secton 223(c) of the Revenue ct of 1926, reatng to ndvdua
returns, that f the ta payer s unabe to make hs own return
the return sha be made by a duy authorzed agent. Lkewse
artce 402 of Reguatons 69 provdes that the return may be made
by an agent, when by reason of absence or nonresdence the
person abe for the return s unabe to make t. It foows that
where a power of attorney s granted to specfcay authorzng
hm to prepare a return for a nonresdent aen ndvdua, a return
prepared under such agency appontment s vad.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
S CTION 240. CONSOLID T D R TURNS
O CORPOR TIONS.
rtce 632: Consodated returns. I-32-5599
Ct. D.533
ncome ta revenue act of 1021 decson of coert.
1. Consodated etubnb ecton Commssoner s Rt.no.
The rung of the Commssoner that a corporate ta payer s not
affated wth another corporaton so as to entte them to fe a
consodated return for the year 1921 does not prevent or mpar
the free e ercse of the rght to fe a consodated return for that
year f they are affated wthn the meanng of secton 240(c)
of the Revenue ct of 1921, and where the ta payer s affated
wth another corporaton n 1922 and fes a separate return for
the atter year t makes ts eecton under subdvson (a) of that
secton and ts ta must be computed and determned upon the
bass of ts separate return.
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301
240, rt. 632.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (16 . T. ., 610) a
affrmed.
Cot|bt of ppeas of the Dstrct of Coumba,
Radant Gass Co., appeant, v. Davd urnet, Commssoner of Interna
Revenue.
ppea from a decson of the oard of Ta ppeas.
efore Martn, Chef ustce, and tz and Gboneb, ssocate ustces.
December 7, 1031.
OPINION.
Martn, Chef ustce: n appea Invovng Income ta es for the caendar
year 1922.
ppeant Is an rkansas corporaton, and for the caendar year 1022 t
made out and fed Its cor rate ncome ta return, showng no net revenue
sub|ect to assessment. owever an e amnaton of appeant s books of
account and records, made for the Commssoner of Interna Revenue In 1926,
dscosed a number of errors n the return, among whch was an e cessve
cam of deducton for deprecaton n the sum of 13,338.54. s a resut of
ths e amnaton the Commssoner determned a ta defcency of 405.62,
and reported ths to appeant n due course.
Thereupon n une, 1026, appeant fed a petton wth the Commssoner,
not denyng the naccuracy of the return fed by t nor the correctness of the
Commssoner s defcency determnaton based upon the return, but contendng
by way of avodance that n the year 1922 t was affated wth the Tmes-
Record Co., another rkansas corporaton, and the two companes were
entted to fe a consodated return for that year, but Instead of dong so they
fed separate returns, whereas a consodated return f fed woud have shown
no net revenue sub|ect to assessment. The prayer of the petton was that
the ta abe Income and ncome ta of the two companes for 1922 be treated
and computed as a consodaton under the Revenue ct of 1921.
Under artce G32, Treasury Reguatons 62, Revenue ct of 1921, affated
corporatons were obged to fe consodated returns for the year 1921, but
for the year 1922 such corporatons were permtted to fe ether consodated
or separate returns at ther eecton.
In the year 1921, beng the year precedng that of ths return, appeant and
the Tmes-Record Co. were owned by the same nterests and understood that
they shoud fe a consodated return for that year as affated corporatons.
They fed a questonnare wth the Commssoner of Interna Revenue to
secure a rung concernng ther rght to make such a return. The Comms-
soner, actng upon a report of the affated secton of the ureau of Interna
Revenue, rued that the corporatons were not affated n aw, and accordngy
shoud not fe a consodated return. The two companes thereupon fed
separate returns for the year 1921.
In the foowng year when appeant came to make out and fe ts ta re-
turn for 1922, the reatons of the companes remanng the same, t agan fed
a separate return, beng that now n queston.
In the year 1926, the Commssoner of Interna Revenue, overrung the
answer theretofore gven by hm to the 1921 questonnare, permtted an
amendment of the returns for 1921, to wt, the year when a consodated
return of affated corporatons was obgatory, but refused to permt an amend-
ment of the returns for 1922, when such cor oratous were entted to fe
ether separate or consodated returns at ther eecton.
The Commssoner accordngy dened appeant s petton reatng to th
1922 return, and the oard of Ta ppeas sustuned hs decson.
We agree wth the decson of the oard.
When appeant came to make out and fe ts return for the year 1922, t
was entted, f affated wth tho Tmes-Record Co., to fe ether a separate
or consodated return. Tho rung of the Commssoner upon the queston-
nare n the pror year dd not prevent or mpar the free e ercse of that
rght. Such a rung does not have the force of aw, nor are the courts
bound by t. (Unted States v. urst, 2 . (2d), 73.) The status of appeant
and the Tmes-Record Co. was to he fnay determned by the courts, and not
by the Commssoner. ( dety Nat. ank v. Commssoner, 39 . (2d), 58, 61.)
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240, rt. 633.
302
ccordngy It was the rght of appeant If affated to fe a consodated
return f t so eected, and to appea to the oard of Ta ppeas and to the
courts for a |udca determnaton of ts rghts. Instead of takng ths
course appeant fed an naccurate separate return for 1922, and rested upon
t unt t was corrected by the Commssoner n 1926. Unt corrected that
return reported no ta abe ncome, and a consodated return coud have been
of no greater advantage to appeant. The Commssoner was |ustfed under
these crcumstances n denyng appeant s petton.
The courts have unformy hed that the rght of choce or eecton to fe
one or another sort of return Is e ercsed by fng the return. Lucas v. a.
aseba Cub, 42 . (2d), 984 ameda Inv. Co. v. McLaughn, 33 . (2d),
320 Ct. D. 101, C. . III-2, 326 Lev Strauss Reaty Co. v. Unted States,
41 P. (2d), 55.)
In Rose v. Grant (39 . (2d), 340), t s hed that where husband and wfe
had made a snge |ont return of ncome, the Commssoner coud decne to
accept separate returns after the tme for fng had e pred. The court sad:
The statute gves the rght to the husband and wfe to fe ether a separate
or a |ont return, but not to change from one to the other at any tme t
appears to ther advantage to do so. The mpossbty under such a system of
determnng the amount of the ta due as requred by secton 250(b) of the
Revenue ct of 1921 (42 Stat., 264), as we as the admnstratve ncon-
venence thereof, condemns t.
Moreover, t s hed n ameda Inv. Co. v. McLaughn, supra, a case bearng
some anaoges wth ths, that a refusa of the Commssoner of Interna Revenue
to permt corporatons to fe a consodated return of ncome under Revenue
ct of 1921 (secton 240(a), 42 Stat., 260), for an ncome year n whch sep-
arate returns had theretofore been fed, s not a breach of a ega obgaton
and not sub|ect to revew, rrespectve of the rght of such corporatons to have
fed a consodated return In the frst Instance. Ths concuson, based upon
the terms of secton 240(a), supra, s manfesty correct, and s concusve
In ths case.
The decson of the oard Is accordngy affrmed.
ffrmed.
btce 633: When corporatons are affated. I-27-5537
Ct,D. 511
ncome ta revenue act of 1921 decson op court.
1. Consodated Return ffaton Contro.
Where the S Corporaton, ownng 70 per cent of the capta stock
of the Corporaton, hods an opton to purchase 25 per cent of
the shares of the atter corporaton owned by W, whch provdes
that f the S Corporaton shoud eect to e ercse Its opton then
W shoud have the rght for 30 (ays thereafter to purchase
from the S Corporaton a ts shares of the Corporaton,
the S Corporaton does not own or contro, wthn the meanng of
secton 240(c) of the Revenue ct of 1921, W s 25 per cent of the
stock of the Corporaton so as to authorze affaton of the
two corporatons under that cause.
2. Decson Reversed.
The decson of the oard of Ta ppeas (17 . T. ., 123C)
reversed.
Unted States Crcut Coubt of ppeas for the Second Crcut.
Commssoner of Interna Revenue, pettoner, v. Waden nfe Co., respondent
efore L. and, Swan, and Chase, Crcut udges.
ppea from the Unted States oard of Ta ppeas.
December 7, 1931.1
OPINION.
Ths proceedng nvoves defcences n ta es of Waden nfe Co., a New
Tork corporaton, for the years 1921, 1922, und 1923. The soe ssue presented
to the oard of Ta ppeas was whether sad ta payer was affated wth
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303
I 245, rt. 6851
certan other corporatons durng the years n queston. The oard decded
that affaton e sted, and redetermned the aeged defcences accordngy.
The Commssoner has pettoned for revew. Order reversed.
or the fndngs of fact and opnon beow, see 17 . T. ., 1236.
Per curam: The corporatons wth whch the ta payer cams to have been
successvey affated (for convenence referred to as Smmons) owned 70 per
cent of the ta payer s capta stock and hed optons to purchase the reman-
ng 30 per cent comprsng 100 shares owned by ndrews and 500 shares
owned by Whtehead. ndrews opton gave Smmons the rght to purchase
hs shares at a stpuated prce at any tme upon demand. Were the Whte-
head opton of the same character, the case woud present the queston whch
the partes seem to thnk s before us, namey, whether such an opton gves
the hoder of t contro of the stock wthn the meanng of secton 240
of the Revenue ct of 1921, defnng affaton (42 Stat., 260). We may assume
wthout decson that t does.
ut the opton gven by Whtehead s very dfferent. It provded that f
Smmons shoud eect to e ercse ts opton, then Whtehead shoud have
the rght for 30 days thereafter to purchase from Smmons at ther book vaue
a the share of Waden nfe Co. Ths cross-opton n favor of Whtehead
gave hm as much contro over a the shares as the opton n favor of Smmons
coud gve over the 500 Indeed, t eft wth Whtehead the fna say as to
ownershp of the shares. (Cf. Wadhams f Co. v. Unted States, 67 Ct. Cs,
235 Ct. D. 121, C. . III-2, 332 .) owever unkey t may be that
Whtehead woud have the fnanca means to purchase a the stock s qute
as Immatera as s the fact that the busness of the Waden nfe Co. was,
economcay speakng, entrey wthn the contro of Smmons. It has now
been authortatvey determned that secton 240 contempates a egay
enforceabe contro. ( andy arman v. urnet, 47 . (2d), 184 (C. C. . 2)
Ct. D. 339, C. . -, 409 affrmed by the Supreme Court November 23,
1031.) Smmons dd not have that knd of contro of Whtehead s 25 per cent
of the ta payer s capta stock. ccordngy t was n error to hod that the
ta payer was affated wth Smmons, and the order of the oard of Ta
ppeas must be reversed.
S CTION 245. T S ON INSUR NC
COMP NI S.
rtce 681: Reserve funds.
R NU PT O 1926 ND TRIOR R NU CTS.
Deductons of net addtons to reserve funds of nsurance com-
panes. (See L T. 2G65, page 134.)
rtce 685: Other deductons. I-38-5701
Ct. D. 563
INCOM T R NU CT OP 1926 D CISION O COURT.
Deducton Interest Credted Lfe Insurance Company Cash
Recepts and Dsbursements Method.
Interest accrued and credted n 1926, but not pnd n that year,
to pocyhoders under pocy contracts provdng that t was sub-
|ect to wthdrawa on demand docs not consttute a constructve
payment of the nterest n 1926 and Is not an aowabe deducton
n that year, under secton 245(a)8 of the Revenue ct of 1926,
from the gross ncome of a fe nsurance company empoyng, aa
requred by the Revenue ct of 1926 and the ncome ta regua-
tons thereunder, the cash recepts and dsbursements method of
accountng.
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245, rt. 685.
304
Court of Cams of the Unted States. No. -323.
The Massachusetts Mutua Lfe Insurance Co. v. The Unted State .
May 81, 1032.
OPINION.
Ltteton, udge, devered the opnon of the court.
The pantff, a fe nsurance company, was requred by the revenue statute
and the reguatons of the Treasury Department n force durng 1926 to deter-
mne ts ncome unc deductons, and compute ts ta on the bass of recepts
and dsbursements as dstngushed from an accrua bass.
The queston n ths case Is whether the pantff s entted to deduct from
gross ncome for 1926, as nterest pad, the amount of such nterest credted
to ts pocyhoders durng the year 1926. The pocyhoders were notfed
durng the year of the amount of nterest so credted and that t woud be pad
upon demand or handed n accordance wth the terms of the pocy contract,
upon recept of notce of the desre of the pocyhoder. The pocy contract
under whch the pantff became abe for the nterest so credted, provded
that t was sub|ect to wthdrawa on demand. If a pocyhoder dd not
Wthdraw the nterest or surrender t for appcaton by the company n reduc-
ton of premums or to purchase partcpatng pad-up addtons, t was aowed
to accumuate and Interest on such accumuatons was thereafter credted to
the pocyhoders. In these crcumstances the pantff contends that Interest
In the amount of 544,964.40 credted to the pocyhoder was constructvey
d by t and was a proper and ega deducton from gross ncome for the year
whch credted.
The defendant nssts that the nterest tem of 544,964.40 s purey an
accrued tem whch, under the aw and the reguatons, s not an aowabe
deducton on the cash recepts and dsbursements bass of accountng, whch
method of accountng the pantff was requred to and dd empoy: that artce
61 of Treasury Reguatons 69, and pror reguatons under pror Revenue cta
provde that Income whch s credted to the account of or set apart for a
ta payer and whch may be drawn Upon by hm at any tme s sub|ect to ta for
the year durng whch so credted or set apart, athough not then actuay re-
duced to possesson. To consttute recept n such a ease the ncome must be
credted to the ta payer wthout any substanta mtaton or restrcton as
to the tme or manner of payment or condton upon whch payment Is to be
made. If the ncome s not credted, but Is set apart, such ncome
must be unquafedy sub|ect to the demand of the ta payer, ap-
pes soey to the recpents of a credt when, accordng to the method of
accountng empoyed by the ta payer makng the credt, there Is a payment for
Income ta purposes that the reguaton therefore can have no appcaton
to a credt by a ta payer empoyng the cash recepts and dsbursements method
of accountng.
The pantff rees upon Corss v. owers (281 U. S., 376 Ct. D. 188, C. .
I -1, 254 ) Comm soner v. npham (35 ed. (2d), 503 Ct. D. 207, C. .
I -2, 289 ) Iadcy v. Commssoner (36 ed. (2d), 643 Ct. D. 153, C. . I -1,
266 ) Chcat|o, R. I. - P. Ry. Co. v. Commssoner (47 ed. (2d), 990)
Chareston rf W. C. Ry. Co. v. urnet (50 ed. (2d), 342) : ohn . rander
(3 . T. .. 231) Chpcy v. Commssoner (25 . T. ., 1103). These cases
are not appcabe to the queston here nvoved. The Corss case Invoved
ncome from a revocabe trust and the ngham and adey cases nvoved
the queston whether dvdends decared and made unquafedy sub|ect to the
demand of the stockhoders were ncome In the year n whch decared and set
apart. When a dvdend s decared and set apart to the stockhoders the
amount thereof s separated from the nvested capta of the corporaton and
the provsons of the above-quoted reguaton have been consstenty apped.
Secton 201(e) of the Revenue ct of 1921 specfcay provded that such
dvdends consttute ncome to the stockhoders. The two raroad cases In-
voved the queston whether the amounts accrued and deducted by the corpora-
tons from gross ncome n the years credted but not pad consttuted ncome to
the corporatons In subsequent years when the credts were charged to proft
and oss. The rander and Chpey cases Invoved the queston whether a
sanry credted to an offcer of a corporaton empoyng the accrua method of
accountng and avaabe for wthdrawa by hm, consttuted Income, and the
rae announced n the reguaton quoted was apped. It w be seen, therefore.
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305
257, rt. 1090.
that n the ordnary case the queston of constructve recept of ncome arses
where the ta payer makng the credt empoys the accrua method of account-
ng. In such cases the credt consttutes a payment for ta purposes, and t has
been consstenty hed that the person to whom the amount s credted and made
unquafedy sub|ect to hs demand may not escape ta aton thereon by fang
to wthdraw t.
Other than n the admnstraton of estates or trusts, as to whch the statute
specfcay provdes for a deducton of credts under certan crcumstances, we
know of no nstance, and none has been caed to our attenton, n whch t has
been hed that an amount credted but not pad by a ta payer empoyng the
cash recepts and dsbursements method of accountng consttutes ncome to
the person to whom credted. It Is not camed that the nterest credted by
the pantff to ts stockhoders durng 1926 was ta ed as ncome to them
n that year by the Commssoner. To hod that an amount credted by a
ta payer empoyng a cash recepts and dsbursements method of accountng
consttutes a payment, and s, therefore, deductbe from gross ncome n the
year n whch credted, woud destroy the dstncton between the accrua and
the recepts and dsbursements methods of accountng whch s recognzed and
made controng by the revenue statutes. Unted States v. nderson, 269
U. S-, 422 T. D. 3839, C. . -, 179 Unted States v. Mtche, 271 U. S., 9,
12 T. D. 3865, C. . -, 233 .) It foows therefore that pantff s not en-
tted to a deducton of the nterest credted to ts pocyhoders durng 1926 on
the ground that there was a constructve payment thereof n that year.
It s aso urged by the pantff that secton 245(a)8 of the Revenue ct of
1926 authorzes a deducton by nsurance companes of Interest pad or accrued,
wthn the ta abe year on ts ndebtedness. The anguage of ths subsecton
s the same as secton 234(a)2 reatng to deductons by ordnary corporatons,
and secton 214(a)2 reatng to deductons by ndvduas, and, n our opnon,
the term pad or accrued must be construed accordng to the method of
accountng empoyed as provded n secton 200(d) of the Revenue ct of 1926.
We thnk that n the enactment of subdvson (8) of secton 245(a), of the
Revenue ct of 1926, Congress dd not Intend to make an e cepton In favor
of nsurance companes to the recognzed rue that deductons from gross ncome
shoud be determned In accordance wth the method of accountng empoyed.
The petton s dsmssed. It Is so ordered.
S CTIONS 246 ND 247. T ON INSUR NC
COMP NI S.
rtce 692: Gross ncome of nsurance companes.
R NU CTS OP 1921, 1024, ND 1926.
Deductons of net addtons to reserve funds of nsurance compa-
nes. (See I. T. 2665, page 134.)
P RT I DMINISTR TI PRO ISIONS.
S CTION 257. R TURNS TO PU LIC
R CORDS.
rtce 1090: Inspecton of returns. I-51-5945
T. D.4359
INSP CTION O R TURNS.
Reguatons governng the nspecton of returns of Indvduas,
partnershps, estates, trusts, corporatons, assocatons, |ont-stock
companes, and nsurance companes, made pursuant to the requre-
ments of secton 2, Tarff ct of 1913 Tte I, Revenue ct of
1916: Tte II, Revenue ct of 1917 Ttes II and III and secton
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257, rt. 1090.
306
1000, Tte , Revenue ct of 1918 Ttes II and III and secton
1000, Tte . Revenue ct of 1921 Tte II and secton 700, Tte
II. Revenue ct of 1924: Tte II, Revenue ct of 1926: Tte I,
Revenue ct of 192S and Tte I, Revenue ct of 1932, or any snch
ct as amended. ormer reguatons bearng on the same sub|ect
superseded.
Treasury Department,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Secton 257(a) of the Revenue ct of 192C provdes:
, Returns upon whch the ta has been determned by the Commssoner sha
consttute pubc records but, e cept as herenafter provded n ths secton and
secton 1203, they sha be open to nspecton ony upon order of the Presdent
and under rues and reguatons prescrbed by the Secretary and approved by
the Presdent.
Secton 257(c) provdes:
The proper offcers of any State may, upon the request of the governor
thereof, have access to the returns of any corporaton, or to an abstract thereof
Showng the name and ncome of the corporaton, at such tmes and In such
manner as the Secretary may prescrbe.
Secton 257(d) provdes:
bona fde sharehoders of record ownng 1 per centum or more of the
outstandng stock of any corporaton sha, upon makng request of the Conms-
|soner, be aowed to e amne the annua ncome returns of such corporaton
and of ts subsdares.
Secton 55 of the Revenue ct of 1928 provdes:
Returns made under ths tte sha be open to nspecton n the same man-
ner, to the same e tent, and sub|ect to the same provsons of aw, Incudng
penates, as returns made under Tte II of the Revenue ct of 1926.
Secton 55 of the Revenue ct of 1932 provdes:
Returns made under ths tte sha be open to nspecton n the same man-
ner, to the same e tent, and sub|ect to the same provsons of aw, ncudng
penates, as returns made under Tte II of the Revenue ct of 1926.
Pursuant to these provsons of aw the Presdent orders that
returns of ndvduas, partnershps, estates, trusts, corporatons,
assocatons, |ont-stock companes, and nsurance companes fed
under the provsons of secton 2 of the Tarff ct of October 3,
1913 Tte I of the Revenue ct of 1916 Tte II of the Revenue
ct of 1917 Ttes II and III and secton 1000, Tte , of the
Revenue ct of 1918 Ttes II and III and secton 1000, Tte ,
of the Revenue ct of 1921 Tte II and secton 700, Tte II, of
the Revenue ct of 1924 Tte II of the Revenue ct of 1926
Tte I of the Revenue ct of 1928 and Tte I of the Revenue ct
of 1932, or any such ct as amended, sha be open to nspecton n
accordance and upon compance wth the foowng rues and reg-
uatons :
1. These reguatons dea ony wth nspecton of returns n so far as t s
necessary for the Presdent to approve reguatons on ths sub|ect. Other uses
to whch returns may be awfuy put, wthout acton by the Presdent, are
not covered by these reguatons.
2. The word return, when so used sha, uness otherwse ndcated,
ncude ncome and profts ta returns, and aso speca e cse ta returns
of corporatons fed pursuant to secton 1000, Tte , of each of the Revenue
cts of 1918 and 1921, and pursuant to secton 700 of Tte II of the Revenue
ct of 1924. ny other word or term used n these reguatons whch s de-
fned by the Revenue cts sha be gven the defnton contaned n the ct
under whch the partcuar return s made.
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307
. 257, rt. 1090.
3. Informaton returns and other wrtten statements ted wth the Com-
mssoner of Interna Revenue desgned to be suppementa to or to become a
part of ta returns sha be sub|ect to the same rues and reguatons as to
Inspecton as are the ta returns themseves.
4. cept as herenafter specfcay provded, the Commssoner of Interna
Revenue may, n hs dscreton, upon wrtten appcaton settng forth fuy the
reasons for the request, grant permsson for the nserton of returns n
accordance wth these reguatons. The offcers and empoyees of the Treasury
Department whose offca dutes requre nspecton of returns may nspect any
such returns wthout makng such wrtten appcaton.
5. The return of an ndvdua sha be open to nspecton (a) by the person
who made the return, or by hs duy consttuted attorney n fact (b) f the
maker of the return has ded, by the admnstrator, e ecutor, or trustee of hs
estate, or by the duy consttuted attorney n fact of such admnstrator,
e ecutor, or trustee (c) n the dscreton of the Commssoner of Interna
Revenue, by any her at aw, ne t of kn, or benefcary under the w, of such
deceased person, upon a snowng that such her at aw, ne t of kn, or
benefcary has a matera nterest whch w be affected by nformaton con-
taned n the return, or by the duy consttuted attorney n fact of such her
at aw, ne t of kn, or benefcary and (d) n the dscreton of the Comms-
soner of Interna Revenue, and at such tme and n such manner as the
Commssoner may prescrbe for the nspecton, by an offcer of any State
havng a aw mposng an ncome ta upon the ndvdua, or a ta upon
ntangbe property owned by the ndvdua, measured by the ncome derved
therefrom, upon wrtten appcaton sgned by the governor of such State under
the sea of the State, desgnatng the offcer to make the nspecton and showng
that the nspecton s soey for such State ncome and/or ntangbe property
ta purposes.
6. |ont return of a husband and wfe sha be open to nspecton (a) by
ether spouse for whom the return was made, upon satsfactory evdence of
such reatonshp beng furnshed, or by hs or her duy consttuted attorney n
fact (b) f ether spouse has ded, by the admnstrator, e ecutor, or trustee
of hs or her estate, or by the duy consttuted attorney n fact of such
admnstrator, e ecutor, or trustee (c) n the dscreton of the Commssoner
of Interna Revenue, by any her at aw, ne t of kn, or benefcary under the
w, of such deceased spouse, upon a showng that such her at aw, ne t of kn,
or benefcary has a matera nterest whch w be affected by nformaton
contaned n the return, or by the duy consttuted attorney n fact of such
her at aw, ne t of kn, or benefcary and (d) n the dscreton of the Com-
mssoner of Interna Revenue, and at such tme and n such manner as the
Commssoner may prescrbe for the nspecton by an offcer of any State
havng a aw mposng un ncome ta upon ether spouse or a ta upon
ntangbe property owned by ether spouse, measured by the ncome derved
therefrom, upon wrtten appcaton sgned by the governor of such State under
the sea of the State, desgnatng the offcer to make the nspecton and showng
that the nspecton s soey for such State ncome and/or ntangbe property
ta purposes.
7. The return of a partnershp sha be open to nspecton (a) by any nd-
vdua who was a member of such partnershp durng any part of the tme
covered by the return upon satsfactory evdence of such fact beng furnshed,
or by hs duy consttuted attorney n fact (b) f a member of such partner-
shp durng any part of the tme covered by the return has ded, by the
admnstrator, e ecutor, or trustee of hs estate, or by the duy consttuted
attorney n fact of such admnstrator, e ecutor, or trustee (c) n the dscre-
ton of the Commssoner of Interna Revenue, by any her at aw, ne t of kn,
or benefcary under the w, of such deceased person, upon a showng that such
her at aw, ne t of kn, or benefcary has a matera nterest whch w be
affected by nformaton contaned n the return, or by the duy consttuted
attorney n fact of such her at aw, ne t of kn, or benefcary and (d) n
the dscreton of the Commssoner of Interna Revenue, and at such tme and
n such manner as the Commssoner may prescrbe for the nspecton by an
offcer of any State havng a aw mposng an ncome ta upon the partnershp
or upon any member thereof n respect of ncome therefrom or a ta upon
ntangbe property owned by the partnershp, measured by the ncome derved
therefrom, upon wrtten appcaton sgned by the governor of such State under
the sea of the State, desgnatng the offcer to make the nspecton and show-
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257, rt. 1090.
308
ng that the Inspecton Is soey for such State ncome and/or ntangbe
property ta purposes.
8. The return of an estate sha be open to nspecton (a) by the admn-
strator, e ecutor, or trustee of such estate, or by hs duy consttuted attorney
n fact (b) n the dscreton of the Commssoner of Interna Revenue, by any
her at aw, ne t of kn, or benefcary under the w, of the deceased person
for whose estate the return s made, upon a showng of matera nterest
whch w be affected by nformaton contaned n the return, or by the duy
consttuted attorney n fact of such her at aw, ne t of kn, or benefcay
and (c) n the dscreton of the Commssoner of Interna Revenue, and at
such tme and n such manner as the Commssoner may prescrbe for the
nspecton, by an offcer of any State havng a aw mposng an ncome ta
upon the estate or upon any benefcary of the estate n respect of ncome
therefrom, or a ta upon ntangbe property owned by the estate, measured
by the ncome derved therefrom, upon wrtten appcaton sgned by the
governor of such State under the sea of the State, desgnatng the offcer to
make the nspecton and showng that the nspecton s soey for such State
ncome and/or ntangbe property ta purposes.
9. The return of a trust sha be open to nspecton (a) by the trustee or
trustees, |onty or severay, or the duy consttuted attorney n fact of such
trustee or trustees (b) by any ndvdua who was a benefcary of such trust
durng any part of the tme covered by the return, upon satsfactory evdence of
such fact beng furnshed, or by hs duy consttuted attorney n fact (c) f
any ndvdua who was a benefcary of such trust durng any part of the tme
covered by the return has ded, by the admnstrator, e ecutor, or trustee of
hs estate, or by the duy consttuted attorney n fact of such admnstrator,
e ecutor, or trustee (d) In the dscreton of the Commssoner of Interna
Revenue, by any her at aw, ne t of kn, or benefcary under the w, of such
deceased person, upon a showng that such her at aw, ne t of kn, or bene-
fcary has a matera nterest whch w be affected by nformaton contaned
n the return, or by the duy consttuted attorney n fact of such her at aw,
ne t of kn, or benefcary and (e) n the dscreton of the Commssoner of
Interna Revenue, and at such tme and n such manner as the Commssoner
may prescrbe for the nspecton, by an offcer of any Stae havng a aw
mposng an ncome ta upon the trust or upon any benefoary of the trust In
respect of ncome therefrom, or a ta upon ntangbe property owned by the
trust, measured by the ncome derved therefrom, upon wrtten appcaton
sgned by the governor of such State under the sea of the State, desgnatng
the offcer to make the nspecton and showng that the nspecton s soey for
such State ncome and/or ntangbe property ta purposes.
10. The return of a corporaton sha be open to nspecton by the presdent,
vce presdent, secretary, or treasurer of such corporaton, or, f none, by any
of Its prncpa offcers, upon satsfactory evdence of dentty and offca pos-
ton, or by the duy consttuted attorney n fact of such offcer. The return of
a corporaton whch has snce been dssoved, sha, n the dscreton of the
Commssoner of Interna Revenue, be open to nspecton to any person who
under these reguatons mght have nspected the return at the date of
dssouton.
11. The access to returns of corporatons provded for In subdvson (c)
of secton 257 sha be consdered as Inspecton of returns wthn the meanng
of subdvson (a) of sad secton.
12. The e amnaton of returns of corporatons provded for In subdv-
son (d) of secton 257 sha be consdered as nspecton of returns wthn the
meanng of subdvson (a) of sad secton.
13. When the head of an e ecutve department (other than the Treasury
Department) or any other Unted States Government estabshment desres to
nspect or to have some other offcer or empoyee of hs branch of the servce
Inspect a return n connecton wth some matter offcay before hm, the n-
specton may, n the dscreton of the Secretary of the Treasury, be permtted
upon wrtten appcaton to hm by the head of such e ecutve department or
other Government estabshment. The appcaton must be sgned by such
head and must show n deta why the nspecton s desred, the name and
address of the ta payer who made the return, and the name and offca desg-
naton of the one t s desred sha nspect the return. When the head of a
bureau or offce n the Treasury Department, not a part of the Interna Reve-
nue ureau, desres to nspect a return n connecton wth some matter
offcay before hm, other than an Income, profts ta , or corporaton e cse-
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309
I 257, rt. 1090,
ta matter, the Inspecton may, n the dscreton of the Secretary, be permtted
upon wrtten appcaton to hm by the head of such bureau or offce, showng
n deta why the nspecton s desred. The Secretary of the Treasury, upon
such condtons and mtatons as he may mpose, s authorzed to permt the
nspecton of returns, upon the wrtten request of the Secretary of Commerce,
by such offcers and empoyees as the Secretary of Commerce may desgnate,
for statstca purposes.
14. In the case of returns or copes thereof furnshed by the Department for
use n ega proceedngs, ony such nspecton as necessary resuts from such
use s permtted.
15. cept as provded n paragraph 14 returns may be nspected ony n the
offce of the Commssoner of Interna Revenue, Washngton, D. C, uness such
returns are n the custody of a coector of nterna revenue or nterna revenue
agent n charge, n whch event the return may be nspected h the offce of
such coector or agent, but ony n the presence of an nterna revenue offcer
desgnated by the coector or agent for that purpose. When the returns are
n the custody of a coector of nterna revenue or nterna revenue agent n
charge, such coector of nterna revenue or nterna revenue agent n charge
s authorzed to grant permsson for the nspecton of such returns n accord-
ance wth these reguatons.
16. The Commssoner of Interna Revenue sha cause to be prepared a
wrtten decson n every case n whch an overassessment (whether resutng
n a refund, credt, or abatement) of an ncome, war-profts, e cess-profts,
estate, or gft ta s aowed, n e cess of 20,000, and such decson sha be
consdered a pubc record and sha be open to nspecton, durng reguar hours
of busness, n the offce of the Commssoner of Interna Revenue or such offce
as he may desgnate. Such decson sha gve the amount of the overassessment
and sha be accompaned by a bref summary of the reevant facts and a
ctaton of the authortes appcabe thereto, or, n a case n whch a decson
of a court or of the oard of Ta ppeas has become fna, by a ctaton of the
court or oard decson. Under no crcumstances sha the provsons of ths
paragraph be construed as makng any return, or any part thereof, open to
nspecton, or as authorzng the source of any ncome, gans, or profts, or the
specfc transactons resutng n osses or e pendtures, to be made pubc nor
sha any of the nformaton contaned n any return or reatng thereto be
made pubc e cept n accordance wth, and to the e tent necessary n carryng
out, these reguatons.
17. person who, under these reguatons, s permtted to nspect a return
may make and take a copy thereof or a memorandum of dnta contaned theren.
18. y secton 3107, Revsed Statutes, as amended by the Revenue ct of
1918, and reenacted wthout change n secton 1311 of the Revenue ct of 1921
and In secton 1018 of the Revenue ct of 1924 and n secton 1115 of the
Revenue ct of 1920, t s made a msdemeanor for any person to prnt or
pubsh n any manner whatever not provded by aw any ncome return, or
any part thereof or source of ncome, profts, osses, or e pendtures, appearng
n any ncome return, whch msdemeanor s punshabe by a fne not e ceedng
1,000 or by mprsonment not e ceedng one year or both, at the dscreton of
the court, and f the offender be an offcer or empoyee of the Unted States, by
dsmssa from offce or dscharge from empoyment.
19. former reguatons ssued wth the approva of the Presdent n
respect of nspecton of returns are hereby wthdrawn.
20. These reguatons sha reman n force unt e pressy wthdrawn or
overrued.
. . aanttne,
ctng Secretary of the Treasury.
pproved December 13, 1932.
erbert oover,
The Whte ouse.
e ecutve order nspecton of ncome ta returns.
Pursuant to authorty conferred upon the Presdent by secton
257 (a) of the Revenue ct of 192C, secton 55 of the Revenue ct of
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270, rt. 1203.
310
1928, and secton 55 of the Revenue ct of 1932, t s hereby ordered
that returns fed under secton 2 of the Tarff ct of October 3,1913
Tte I of the Revenue ct of 1916 Tte II of the Revenue ct of
1917 Ttes II and III and secton 1000, Tte , of the Revenue ct
of 1918 Ttes II and III and secton 1000, Tte . of the Revenue
ct of 1921 Tte II and secton 700, Tte II, of the Revenue ct
of 1924 Tte II of the Revenue ct of 1926 Tte I of the Revenue
ct of 1928 and Tte I of the Revenue ct of 1932, or any such ct
as amended, sha be open to nspecton n accordance and upon com-
pance wth rues and reguatons prescrbed by the Secretary of
the Treasury and approved by me, bearng even date herewth.
erbert oover.
The Whte ouse,
December 13, 1932.
P RT . P YM NT, COLL CTION, ND R UND O T ND
P N LTI S.
S CTION 270. D T ON W IC T
S LL P ID.
rtce 1203: Coecton of ta by sut. I-37-5681
Ct. D. 558
D R L T S SCROW GR M NT D CISION O COURT.
Sut scrow greement or Cash ond ndng of no Def-
cency by oard of Ta ppeas.
Where an escrow agreement n the nature of a cash bond s
gven n connecton wth a cam for abatement as securty for
payment of so much of an addtona ta assessed as shoud ut-
matey be determned by the Commssoner to be due, the certf-
caton of the coector to the escrow agent of the fna determna-
ton to be fna wth respect to f ng the abty of the ta payer
for the ta n queston, and, after the re|ecton of the cam and
the certfcaton by the coector of the fna determnaton by the
Commssoner, the ta payer appeas to the oard of Ta ppeas
from the determnaton of the Commssoner, the order of the
oard that there s no defcency pursuant to ts decson that the
coecton of the ta was barred by the statute of mtatons has
no effect upon the rght of the Government to have recourse
aganst the cash deposted wth the escrow agent under the
agreement.
Unted States Crcdt Court of ppeas, ghth Crcut. May Term, 1932.
No. 9342. Unted States of merca, appeant, v. Martn ote Co., a Corpora-
ton, et a., appeees.
No. 9347. Martn ote Co., a Corporaton, et a., appeants, v. Unted States
of merca, appeee.
ppeas from the Dstrct Court of the Unted States for the Dstrct of Nebraska.
May 18, 1932.
OPINION.
Sanborn, Crcut udge, devered the opnon of the court.
In March, 1924, the coector of nterna revenue for the dstrct of Iowa
assessed addtona corporate ncome and profts ta es aganst the Martn
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311
5270, rt. 1203.
ote Co. for the year 1918 of 2,306.96. and for the year 1919 of 25,593.21
and aganst the M. M. ote Co. for the year 1918 of 2,338,31, and for the
year 1919 of 13,525.12. e notfed both companes of these addtona ta es
on March 18, 1924, and demanded ther payment. Thereupon the ta payers
fed cams for the abatement of these ta es, and asked that coecton be
stayed. The assessments were transferred to the nterna revenue coecton
dstrct of Nebraska n une, 1924, at the request of the ta payers. The Com-
mssoner of Interna Revenue refused to consder the cams n abatement
and to refran from coectng the ta es uness ther payments was secured.
On uy 10, 1924, n consderaton of the postponement of proceedngs to
coect the ta es unt the cams for abatement were determned, the ta -
payers and . C. ppey. an offcer of each of them, deposted wth the Omaha
Natona ank, of Omaha, Nebr., 48,000, n accordance wth the terms of a
decaraton of trust or escrow agreement, whch was devered to the coector
of nterna revenue for the dstrct of Nebraska as securty for the payment of
the addtona ta es assessed or so much thereof as shoud utmatey be deter-
mned to be due. Ths agreement, whch was, n effect, a cash bond, after rect-
ng the assessment of the addtona ta es, that they were due and coectbe,
and that the ta payers had fed cams for ther abatement, provded:
Now, for the protecton of the nterests of the Unted States durng the
pendency of sad cams of sad hote companes for abatement of sad ta es,
sad Martn ote Co. and sad M. M. ote Co. by arrnngements wth sad
. C. ppey, have caused to be deposted wth Omaha Natona ank at
Omaha, Nebr., as escrow agent, the prncpa sum of 48,000 to be used n the
payment of a such ta es herenbefore referred to, as may eventuay be
determned by sad Commssoner of Interna Revenue to be due from sad
Martn ote Co. and sad M. M. ote Co. upon fna consderaton of sad
cams for abatement fed by sad Martn ote Co. and sad M. M. ote Co.
Now, therefore, ths decaraton of trust s made by sad Omaha Natona
ank, escrow agent, for the purpose of statng the terms and condtons of
sad trust:
1. Sad prncpa sum of 48,000 so deposted wth sad Omaha Natona
ank as escrow agent hereunder, sha be hed by sad escrow agent unt
the fna determnaton of sad addtona corporaton ncome ta es due from
sad Martn ote Co. and sad M. M. ote Co. for the years 1918 and 1919
s made by sad Commssoner of Interna Revenue n accordance wth the
procedure prescrbed by the aw and reguatons for such cases. Sad fna
ad|ustment and determnaton sha be certfed to sad Omaha Natona ank
by sad coector of nterna revenue for the dstrct of Nebraska and such
certfcaton sha be fna wth respect to f ng the abty of sad ta payers
for the years n queston.
The agreement then provdes that f, wthn 10 days after the fna determna-
ton of the ta payers abty s made, they sha pay any and a addtona
corporaton ncome ta es found due from them, or ether of tem, upon the
fna hearng of ther cams n abatement, and sha e hbt to the escrow
agent satsfactory proof of payment, the escrow agent sha dever to them
the prncpa sum that f, at the end of 10 days after the fna determnaton
of ther ta abty, they sha not have pad the ta es found due upon fna
consderaton of ther cams, then, upon notce to that effect from the co-
ector of nterna revenue for the dstrct of Nebraska, the escrow agent sha
pay over to the sad coector a of the prncpa sum of 48,000 that may be
necessary to pay the addtona ta es fnay determned to be due from the
ta payers, together wth any penates or nterest thereon, and sha pay over
any baance remanng to the ta payers.
In reance upon ths agreement, the Government postponed proceedngs to
coect the addtona ta es pendng the consderaton of the cams for abate-
ment, and on ugust 24. 1925, the Commssoner of Interna Revenue con-
sdered those cams, and on that day advsed the ta payers that there re-
maned unabated of the addtona ta es of the Martn ote Co. for the year
1918, 740.70, and for the year 1919, 14.518.48 and of the addtona ta es
of the M. M. ote Co. for 1918, 1,084.04, and for 1919, 11,844.22 and
advsed them of ther rght to fe a protest wthn 30 days. They fed such
a protest, and he agan consdered ther cams, but dd not change hs deter-
mnaton, and so nformed them by etter of March 23, 192G. In that etter
100903 33 21
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270, rt. 1203.1
312
he advsed them that, under secton 274 of the Revenue ct of 1926, they
were aowed 60 days n whch to fe an appea wth the oard of Ta ppeas
contestng n whoe or n part the correctness of ths determnaton.
On October 5, 1927, the coector of nterna revenue for the dstrct f
Nebraska certfed n wrtng to the Omaha Natona ank that a fna ad|ust-
ment and determnaton had been made by the Commssoner of Interna
Revenue wth reference to the addtona ta es n queston, and that none
of the ta es had been pad as fnay determned, and he demanded so much of
the 48,000 deposted as was necessary to pay the ta es wth nterest. Ths
demand was not comped wth.
The ta payers dd not appea to the oard of Ta ppeas from the de-
termnaton by the Commssoner of the defcences n ther 1918 ta es, but
dd appea from hs determnaton of the defcences n the 1919 ta es. On
anuary 15, 1930, the oard of Ta ppeas fed an opnon (see Martn ote
Co. and ffated Corporatons, pettoners, v. Commssoner of Interna Revenue,
respondent (18 . T. ., 826)) rectng that the ta payers had set up the statute
of mtatons as a bar to the coecton of the defcences n ther ta es for the
year 1919 as determned by the Commssoner, and that the Commssoner
camed that the escrow agreement was a waver of the rght of appea to
the oard or a waver of the statute of mtatons. The oard sad:
Wth respect to the Martn ote Co. and the M. M. ote Co., the ques-
tons presented are two: rst, whether the so-caed escrow agreement e e-
cuted by them consttutes a waver of ther rght to ask of ths oard a
revew of the defcences fnay determned aganst them, and, second, does that
agreement, f not a waver of |ursdcton, consttute a waver of the statutory
mtaton aganst coecton
nd, further:
We hod that the agreement n queston does not consttute a waver of the
rght of these two ta payers to appea to the oard and that we have |ursdc-
ton to entertan the appea.
In respect to the queston rased that the escrow agreement consttutes a
waver of the statute of mtatons, we see nothng n ts terms to cause It to be
consdered as anythng more than a persona bond wth a cash depost as
securty and havng no more effect than bonds gven n severa other cases upon
whch we have passed n whch a smar queston has been rased.
We hod that the so-caed escrow agreement of uy 10, 1924, dd not con-
sttute a waver of the 5-year statute of mtatons and, as the admtted facts
show that the returns n queston were fed more than fve years pror to the
date of the determnaton of the defcences n queston and that the assess-
ments were made pror to the enactment of the Revenue ct of 1924, that
coecton of these defcences s, upon authorty of Russe v. Unted States,
supra (278 U. S., 181 T. D. 4260, C. . III-1, 206 ), now barred. Ths con-
cuson s not n confct wth the decson n the case of Unted States v. ohn
arth Co. (279 U. S., 370 Ct. D. 65, C. . III-1, 189 ). s we read that
case t nvoves soey the queston of the defendant s abty under sat
brought upon the obgaton created by the e ecuton of a bond under a specfc
provson of the ta ng ct, not here nvoved, cang for such bond and grant-
ng the ta payers a stay of coecton n cases where t was furnshed. In the
proceedng before us we consder the so-caed escrow agreement ony for the
purpose of determnng whether t consttutes a waver of |ursdcton, or a
waver of the statutory mtaton n respect to coecton of the ta as such,
and we do not pass upon the queston as to whether these ta payers have
abtes under the escrow agreement and created thereby.
The oard then ordered that a decson be entered that coecton of the
defcences determned n respect to these pettoners s now barred
by the statute of mtatons. The decson and order of the oard, so far as
s here matera, s as foows:
In accordance wth the fndngs of fact and opnon of the oard of ths
proceedng of anuary 15, 1930, t s hereby ordered and decded
that for the caendar year 1919 there s no defcency n ncome or profts ta es
n respect to any of the foowng pettoners heren: Martn ote Co., Sou
Cty, Iowa M. M. ote Co., Cedar Rapds, Iowa.
No appea was taken from ths decson.
The Government brought sut aganst the bank, as escrow agent, |onng
Mr. ppey and the ta payers, to recover so much of the depost as equaed
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313
270, rt. 1203.
the amount of the addtona ta es as fnay determned by the Commssoner,
wth nterest. The defense aganst the cam so far as t was based on the
1918 ta es was that they were outawed when the escrow agreement was made,
and, so far as t was founded upon the 1919 ta es, that the oard of Ta
ppeas had determned that there was no defcency u such ta es. The case
was tred wthout a |ury. The court hed the bank abe as to the amount of
the 1918 ta es and nterest, but was of the opnon that the decson of the
oard of Ta ppeas that there was no defcency n the 1919 ta es precuded
the Government from recoverng the amount of those ta es and nterest under
the terms of the escrow, and that therefore the ta payers were entted to
a of the 48,000 deposted e cept so much as was requred to cover the 1918
ta es. oth sdes appeaed, but the correctness of the court s decson as to
the 1918 ta es s now conceded, and the dsmssa of ppea No. 9347 s con-
sented to. We are therefore ony concerned wth that porton of the |udgment
of the court beow whch denes to the Government the rght to recover under
the escrow the amount of the 1919 ta es and nterest.
The escrow agreement of uy 10, 1924, was for the protecton of the nterests
of the Unted States durng the pendency of the cams for abatement. The
depost was to be used n the payment of a such ta es herenbefore referred
to as may eventuay be determned by sad Commssoner of Interna Revenue
to be due upon fna consderaton of sad cams for abatement.
The escrow agent was to hod the depost unt the fna determnaton of
sad addtona corporaton ncome ta es due from sad Martn ote Co. and
sad M. M. ote Co. for the years 1918 and 1919 s made by sad Comms-
soner of Interna Revenue n accordance wth the procedure prescrbed by the
aw and reguatons for such cases. The fna ad|ustment and determnaton
was to be certfed to sad Omaha Natona ank by sad coector of nterna
revenue for the dstrct of Nebraska, and such certfcaton was to be fna
wth respect to f ng the abty of sad ta payers for the years n queston.
If the ta payers faed to pay the ta es 10 days after fna determnaton, the
bank was to pay over so much of the depost as shoud be necessary to cover
the ta es wth nterest and penates.
The Commssoner made a determnaton of the amount of the addtona
ta es upon a fna consderaton of the cams for abatement. Ths fna
determnaton was certfed to the bank by the coector. The ta payers dd
not pay the ta es wthn the 10 days specfed, and the bank dd not pay them
out of the depost.
It s now conceded that the certfcaton by the coector was fna as to the
1918 ta es, snce no appea was taken from the determnaton of the Com-
mssoner wth respect to them, but t s contended that t was not fna as to
the 1919 ta es, wth reference to whch the oard of Ta ppeas found no
defcency.
ssumng that the ta payers mght mpeach the certfcate of the coector
n spte of ther agreement as to ts fnaty, and assumng that the agreement
contempated that the determnaton by the Commssoner shoud be sub|ect
to revew by the oard of Ta ppeas, and that ts determnaton shoud be
deemed to be hs determnaton, we thnk t st does not appear that the
Government was not entted to recover. The escrow agreement referred to a
ta abty of the ta payers for the years 1918 and 1919 as t e sted uy 10,
1924, and was ntended to secure the payment of the ta es whch were then due
and sub|ect to coecton, but the amount of whch was then n dspute. There
was at that tme no controversy between the Government and the ta payer
wth reference to the coectbty of the ta es, but ony as to ther amount.
The agreement and the depost made thereunder protected the Government n
foregong ts remedes for the coecton of the ta es and eft t wt a secured
cam for an amount equa to what t shoud fnay be determned was the cor-
rect amount owed by the ta payers as corporate ncome tu es for the years 191S
and 1919 and nterest.
The oard of Ta ppeas never passed upon the queston cf the amount of
addtona ncome ta es owed by the ta payers for the year 1919. It faed to
do ths for the reason that the ta payers asserted that the coecton of the
defcences as utmatey determned was barred by the statute of mtatons,
and the oard specfcay passed upon no other ssue, and concuded that there
was no defcency n those years because the coecton of the ta es as such
was then barred. The decson whch was entered by the oard was no broader
than Its opnon and fndngs, and was n conformty wth sectfon 601 of the
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270, rt. 1203.
314
Revenue ct of 1928, amendng secton 906(e) cf te Revenue ct of 1926 (ch.
852, 45 Stat., 871, 872), whch provded: If the assessment or coecton of any
ta s barred by any statute of mtatons, the decson of the oard to that
effect sha be consdered as ts decson that there s no defcency n respect
of such ta .
ad the oard of Ta ppeas determned that, upcn the merts, there were
no defcences n corporate ncome ta es for the year 1919, there mght be some
substanta bass for hodng that ts decson must, under the terms of the
escrow agreement, be regarded as the fna determnaton of the Commssoner,
and that, therefore, the certfcaton by the coector dd not f the ta payers
abty or the obgaton of the bank under the escrow agreement, regardess
of the fact that the agreement provded that such certfcaton was to be fna.
Consderng, however, the substance of what was decded by the oard, and ds-
regardng mere form, the acton of the oard consttutes nothng more than a
fndng that the abty of the ta payers for addtona ta es for 1919, as
determned by the Commssoner, was no onger enforceabe as such. It dd
not dsturb the determnaton of the Commssoner as to the amount cf add-
tona ta es whch were due and unpad for the year 1919, and the payment
of whch was secured by the depost. It s our opnon that the Commssoners
determnaton, certfed to the bank by the coector cf nterna revenue, must
stand as f ng the abty of the ta payer under the provsons of the escrow
agreement, and that the decson of the oard of Ta ppeas had no effect
upon the rght of the Government to have recourse aganst the depost n the
hands cf the bank.
In the case of Guf States Stee Co. et a. v. Unted States (56 ed. (2d), 43
Ct. D. 464, C. . I-1, 305 ), the Crcut Court of ppeas of the fth
Crcut had before t substantay the same queston that s presented here.
The court sad (page 44) :
The appea presents the snge queston whether the fndng by the oard of
Ta ppeas on a petton for redetermnton of defcency fed after the Com-
mssoner had re|ected the ta payer s cam for abatement, that there s no
defcency for the year 1917, because the statutes of mtaton have run aganst
the coecton, abated the addtona assessment wthn the meanng of the
bond.
The dstrct |udge concuded that t dd not. e was of the opnon that
the fndng of the oard had the effect not at a of abatng any part of the
ta , but of formay decarng that, because barred, t was not coectbe. e
was cf the opnon that the fndng of the oard that mtaton had run added
nothng to the fact that t had, and that the ease was rued by Unted States v.
ohn arth Co. (279 U. S., 370). We are of the same opnon. That case hed
The makng of the bond gves the Unted States a cause of acton separate and
dstnct from an acton to coect tu es whch t aready had. The
postponement of the coecton of the ta es returned was a waver of the statu-
tory mtaton of fve years that woud have apped had the vountary return of
the ta payer stood, and no bond been gven (page 375). and that the ob|ect
of the bond was not ony to prevent the mmedate coecton of the ta but aso
to prevent the runnng of tme aganst the Government. The ta payer has
obtaned hs ob|ect by the use of the bond, and he shoud not ob|ect to makng
good the contract by whch he obtaned the deay he sought. (Page 376.)
We thnk that the case before us s aso rued by the case of Unted States
v. ohn arth Co., above referred to.
ppea No. 9347 s dsmssed, and n appea No. 9342, so much of the |udgment
as s appeaed from Is reversed and the case remanded for further proceedngs
not nconsstent wth ths opnon.
rtce 1203: Coecton of ta by sut. I-49-5900
Ct. D. 608
D R L T S LI ILITY ON OND D CISION O SUPR M COURT.
Sut ond batement op Ta ndng of oard of Ta
ppeas.
Where a bond s e ecuted, to stay the coecton of an addtona
assessment, pendng dsposton of a cam for ts abatement, con-
dtoned for the payment of so much of the amount of the cam
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315
270, rt. 1203.
as s not abated the fndng by the oard of Ta ppeas on a
petton for redetermnaton of the defcency fed after the Com-
mssoner had re|ected the cam for abatement that there s no
defcency because the statutes of mtaton have run aganst
the coecton does not abate the addtona assessment wthn the
meanng of the bond, and n a sut upon the bond does not affect
the abty of the prncpa or surety.
Supreme Court of the Unted States.
Gutf States Stee Co. and Natona Surety Co., pettoners, v. The Unted States
of merca.
On wrt of certorar to the Unted States Crcut Court of ppeas for the fth Crcut.
November 7, 1032.
OPINION.
Mr. ustce McReynods devered the opnon of the court.
In the Dstrct Court for abama ugust 25, 1930 the Unted States sued
the Guf States Stee Co., prncpa, and Natona Surety Co., surety pet-
toners here upon a bond dated September 9, 1925, whereby they agreed to
pay Snead, coector of nterna revenue, so much of the addtona ncome
and profts ta es for 1917 assessed by hm aganst the prncpa n 1921 as
s not abated. udgment on a verdct went for pantffs the Crcut Court
of ppeas affrmed the matter s here by certorar.
Pettoners say the soe queston presented s whether the addtona ta es
were abated by the determnaton of the oard of Ta ppeas ( uy 10, 1928)
n a proceedng brought by the Stee company to revew the Commssoner s
fna re|ecton of ts demand for abatement. The oard hed that the re-
spondent s now barred by statute from coectng any part of the addtona
assessment made n pr, 1921, and that there s no defcency for the year
1917. It drected entry of an order to that effect.
The petton for certorar asserts: The soe queston n ths case s
whether the fna decson of the oard that there was no defcency abated
the ta . The foowng s the ony specfcaton of error reed on here
That the court erred n hodng that the cam for the defcency of ta es
was not abated by the fna decson of the Unted States oard of Ta ppeas
that there was no defcency. nd n ther bref counse for pettoners say
The soe queston n ths case Is whether the fna decson of the oard that
there was no defcency abated the ta .
March 28, 1918, the Stee company fed ts ncome and e cess profts ta
return for 1917 and shorty thereafter pad the amount apparenty due. In
pr, 1921, the Commssoner made a defcency assessment of 153,815.30
May 6, 1921, the company fed cam and demand for abatement of ths entre
sum upon the ground that the addtona assessment was unwarranted and
ega n so far as t resuts (1) rom the faure to compute the nvested
capta by ncudng the actua cash vaue of camant s property on anuary
1, 1914 (2) from the acton of the e amners n deductng ony 7 per cent of
nvested capta, nstead of 8 per cent and (3) from dsaowance of certan
nterest payments as part of nvested capta.
March 13, 1923, 15 days before the 5-year statute woud have barred coecton
of the defcency assessment the addtona ta beng whoy unpad and the
abatement cam undetermned n order to secure deay and further consder-
aton of ob|ectons, the ta payer as prncpa, wth the mercan Surety Co.
as surety, gave the coector a bond for . 175,350 whch rectes
The condton of the above obgaton s such that, f the sad Guf States,
Stee Co. w ndemnfy the sad W. . Snead as coector as aforesad, or hs
successor n offce, aganst a oss, cost, damage, and e pense to whch he may
be put by reason of havng aowed the sad Guf States Stee Co. to wthhod
the payment to hm. as such coector, of the sum of one hundred and ffty-three
thousand eght hundred ffteen and 30/100 doars ( 153,815.30), camed of t
under the War Revenue ct of 1917, pendng the fng, by the sad Guf States
Stee Co. of addtona facts and nformaton n support of a cam for the abate-
ment of sad amount heretofore fed by t, then ths obgaton to be nu and
vod, otherwse, to be and reman n fu force and effect.
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270, rt. 1203.
316
pr 3, 1925, n order to obtan reease of the mercan Surety Co. from the
above-descrbed bond, aso to m ke certan the payment of whatever the co-
ector mght thereafter fnay decare to be payabe under the defcency assess-
ment of 1921, the Stee company e ecuted a second obgaton and pedged as
securty 200,000 Unted States Lberty oan bonds. Ths obgaton rectes
Whereas the Guf States Stee Co. dd e ecute a bond n the pena sum of
one hundred seventy-fve thousand, three hundred and ffty doars ( 175,350).
and n favor of W. . Snead, coector of nterna revenue, for the dstrct of
abama, whch sad bond was sgned by the mercan Surety Co. of New York,
as surety, under date of the 13th day of March, 1923, and was gven n support
of a cam for the abatement of assessments, penates and nterests, under the
Revenue ct of 1917. eng desrous of reevng the above bound surety com-
pany and further securng the payment of any amount found to be due the
Unted States Government under the above Revenue ct, now, therefore, f the
undersgned Guf States Stee Co. sha pay to W. . Snead. coector, or hs suc-
cessors n offce, such amount of the cam as s not abated, together wth a
costs, damages, penates, nterest, or other e pense connected therewth, then
ths obgaton sha be vod, otherwse t sha reman n fu force and effect-
September 9, 1925, the Stee company as prncpa, and Natona Surety Co.
as surety, e ecuted the bond n sut, condtoned as foows
Whereas, an addtona ncome ta has been assessed for the year 1917 n
the sum of one hundred ffty-three thousand eght hundred and ffteen doars
and thrty cents ( 153,815.30), wth penaty and nterest aganst the Guf States
Stee Co. of rmngham, a. cam for the abatement of the addtona
ta was fed wth the coector of nterna revenue for the dstrct of abama at
rmngham. On the 3d day of pr, 1925, the Guf States Stee Co. dd
e ecute ts bond securng the payment of so much of the addtona assessment,
penates and nterest as s not abated. In eu of surety on the above bond
the sad company dd depost wth the edera Reserve ank of New York,
under secton 1029 of the Revenue rt of 1924, the foowng descrbed Unted
States, ourth Lberty Loan 4 God onds of 1933-8 seres, beng of the
par vaue of 200,000 (coupons), numbers . The above bonds were
deposted on account and sub|ect to the orders of W. . Snead, coector of
nterna revenue for the dstrct of abama. Now, therefore, f W. . Snead,
coector of nterna revenue, sha reease and surrender the sad bonds to the
sad company, and the prncpa, or suretes, ether or both, sha pay to the
sad coector so much of the amount of the cam as s not abated, together
wth penates and nterest thereon as provded by aw, then ths obgaton
sha be of no effect. Otherwse, t sha reman n fu force.
May 12, 1920, the Commssoner fnay re|ected n toto the Stee company s
ong pendng cam for abatement of the addtona assessment of 1921 and
gave proper notce. Ths notce nnong other thngs stated you are aowed
60 days (not countng Sunday as the s teth day) from the date of mang
of ths etter wthn whch to fe a petton wth the Unted States oard of
Ta ppeas, are udng, Washngton, D. C, contestng n whoe or n part
the correctness of ths determnaton.
y an orgna petton to the oard of Ta ppeas, uy 9, 1926, the Stee
company asked a redetermnaton of the defcency set forth by the respondent
(Commssoner) n hs notce of defcency dated May 12, 1926.
The prayer foows
The pettoner prays for reef from the defcency asserted by the respondent
and from payment of the ta es assessed n the foowng and each of the
foowng partcuars:
(a) That the pettoner be aowed as a deducton from ts gross ncome
for the year 1917, the sum of 47,021.82 as amortzaton of the cost to t of
the ease (or stock) of Cnton Mnng Co. or as depeton or e hauston of the
eased propertes based upon n cost of 145,000 or
(b) That the Cnton Mnng Co. be granted a reasonabe aowance for
the e hauston or depeton of the eased propertes based upon a Mareh 1,
1913, vaue of the easehod, and that amount so aowed be deducted In com-
putng the consodated net ncome of the pettoners and Cnton Mnng Co.
for the year 1917
(c) That the pettoner bo aowed 11,000,000 In computng ts nvested
capta for 1917, on account of the property pad n for stock on December 1,
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317
270, rt. 1203.
Wherefore pettoner prays that ths oard may hear and determne the
defcency heren aeged.
y an amended petton, March 2, 1927 (after owers v. New York d bany
Lghterage Co., ebruary, 1927, 273 U. S., 346 T. D. 4009, C. . I-1, 268 ) the
Stee company renewed ts request for a redetermnaton of the defcency set
forth by the respondent n hs notce of defcency dated May 12, 192G.
The pettons are dentca e cept the amended one contans two new para-
graphs whch aege e tngushment through the statute of mtatons of a
abty of the Stee company for the addtona ta es aso the foowng
new prayer
(d) That the oard determne that the abty of the pettoner for the
payment of the aeged defcency has been e tngushed by the runnng of the
statute of mtatons upon ts coecton and/or that the coecton of sad
aeged defcency was barred at the e praton of fve years after sad returns
were fed.
The oard of Ta ppeas n uy, 1928, hed None of the bonds n the
Instant ease can be sad to consttute a consent n wrtng by both the Com-
mssoner and the ta payer to a ater determnaton, assessment and coecton
of the ta n queston, and no other e cepton to the runnng of the statute
of mtatons provded n any of the cts beng present, and no sut or pro-
ceedng for the coecton of ta havng been begun pror to the e praton of
ve years from the date of fng the return, and the 5-year perod havng
e pred pror to the passage of the Revenue ct of 1924, we hod that the
respondent s now barred by statute from coectng any part of the addtona
assessment made n pr, 1921, and that there s no defcency for the year
1917. ( owers v. New York t bany Lghterage Co., 273 U. S., 346 C. .
Shaffer v. Commssoner, 12 . T. ., 298 Unted States v. The ohn arth Co.,
279 U. S., 370 Ct. D. 65, C. . III-1, 189 rt Meta Works v. Commssoner,
9 . T. .. 491.) Our decson n ths respect n no wse dsposes of any ques-
tons arsng as to abty on the bond. The consequent forma entry rectes
It s ordered and ad|udged that the coecton of the defcency, f any, n
Income and e cess profts ta es for the year 1917 s barred by the statute of
mtatons .
owers v. New York f bany Lghterage Co. ( ebruary 21, 1927, 273 U. S.,
346) construed the provson, Revenue ct 1921, prohbton sut or proceedng
for the coecton of ncome or e cess profts ta es, after rve years subsequent
to the return and hed t apped both to suts In court and to dstrant pro-
ceedngs. Pror to ths ta offcers went upon the vew that the statute of
mtatons dd not appy to dstrant.
Unted States v. The ohn arth Co. (279 U. S., 370, May 13, 1929) rued
that the mtaton In Revenue cts 191S, 1919, 1921, and 1924 upon the tme
wthn whch ncome and e cess profts ta es may be assessed and suts begun
to coect s nappcabe where the sut s upon a bond gven to secure pay-
ment of ta es theretofore returned and assessed, In order to obtan postpone-
ment of payment pendng decson upon cam for abatement aso, that a bond
made n such crcumstances affords a cause of acton separate and dstnct
from one to coect the ta .
Pror to 1924, n order to contest the Commssoner s assessment, the ta -
payer had to pav the sum demanded and brng sut to recover. (Graham v.
Dupont, 262 U. S., 234, 258 T. D. 3486 (Ct. D. 33), C. . II-, 226 .)
Tte I oard of Ta ppeas ft une 2. 1924 (ch. 234, 43 Stat., 253,
336), estabshed the oard of Ta ppeas and authorzed t to hear appeas
from the Commssoner s acton n respect of defcences before payments, etc.
Under ths ct f the oard dsaowed an aeged defcency, thereafter the
Commssoner coud enforce coecton ony by sut n court.
The Revenue ct, ebruary 26,1926 Tte oard of Ta ppeas (ch. 27,
44 Stat., 9, 105, 107), amended Tte I oard of Ta ppeas, Organzaton
and procedure ct of 1924, supra, by addng thereto, among other thngs
(under subtte Organzaton and procedure ) the foowng whoy new
paragraph:
Sec. 906. (e) If the assessment or coecton of any ta s barred by any
statute of mtatons, the decson of the oard to that effect sha, for the pur-
poses of ths tte and of the Revenue ct of 1926, be consdered as ts decson
that there s no defcency n respect of such t: .
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270, rt. 1203.
318
Secton 274 (a) and (b) of ths ct are n the margn.
The evenue ct, May 29, 1928, Tte I dmnstratve provsons (45
Stat., 791, 871, 872, eh. 854), amended the above-quoted secton 906(e) to read
If the assessment or coecton of any ta s barred by any statute of mta-
tons, the decson of the oard to that effect sha be consdered as ts decson
that there s no defcency n respect of such ta .
The orgna compant n the present cause aeges that the Stee company s
cam for abatement of the addtona assessment for the year 1917 was re|ected
by the Commssoner May 12, 1926, for the fu amount thereof, whereby there
remaned unpad and unabated of the sad assessment one hundred ffty-three
thousand, eght hundred ffteen doars and thrty cents ( 153,815.30), whch
sad fndng and determnaton of the Commssoner of Interna Revenue re|ect-
ng sad cam for abatement has remaned and now s n fu force, vgor and
effect, unvacated, unreversed and unmodfed and s sub|ect to no credts, set-offs
or countercams other than herenafter set forth. Pettoners dened ths ae-
gaton. They mantaned that the Commssoner s acton had been reversed
and the addtona ta es abated by the opnon and rung of the oard of Ta
ppeas and ths seems to have been the ony pont reed upon n the Crcut
Court of ppeas whch re|ected pettoners theory and approved the chaenged
|udgment on the bond.
Concernng the oard s acton that court sad Ths s not a fndng that
the ta or any part of t shoud be abated. It does not abate any part of t.
It s but a forma |udgment that the ta , as ta , s, because the bar of mta-
tons has faen, not coectbe. Snce t s ths and no more, t has the effect
upon the sut on the bond here and no more, that the fact found n the arth
case and the ega concuson there announced, that tme had run aganst the
ta and that t was therefore uncoectbe, had on the sut on the bond there.
The bond n sut must be construed n the ght of surroundng crcumstances.
( v. mercan Surety Co., 200 U. S., 197, 203, 204, 205.) They are narrated
above.
s n Unted States v. arth, supra, the pan purpose of the frst bond
March 13, 1923 was to prevent mmedate coecton of the assessed addtona
ta es and to provde aganst any oss whch mght foow deay whether through
e tngushment of rghts under the statute of mtatons or otherwse. We
thnk t suffcenty cear that the two succeedng bonds were ntended to con-
tnue the protecton afforded by the frst. The ta payer, havng attaned ts
purpose through these bonds, now cams that the Unted States can not enforce
the obgaton whch nduced the deay contempated by a partes. It seeks
escape through tera constructon of a statute evdenty desgned to protect
ta payers n dfferent crcumstances.
Consderng the state of the record, t s ony necessary now to pass on one
pont Were the addtona assessments, penates and nterest abated by
the oard of Ta ppeas fna determnaton, wthn the meanng of the bond
n sut. Uness ths s answered n the affrmatve, the |udgment beow most
stand. There s no suggeston that t shoud be upset upon any other ground.
Pettoners mantan that the oard had |ursdcton of the appea from the
Commssoner that t defntey rued the coecton of the defcency, f any,
of ncome and e cess profts ta es for the year 1917 s barred by the statute of
mtatons and that the necessary resut of ths rung was abatement of the
1 Skc. 274. (a) If In the case of any ta payer, the Commssoner determnes that there
s a defcency n respect of the ta Imposed by ths tte, the Commssoner Is authored
to send notce of such defcency to the ta payer by regstered ma. Wthn 60 days
after such notce s maed (not countng Sunday as the s teth day), the ta payer may
fc a petton wth the oard of Ta ppeas for a redetermnaton of the defcency.
cept as otherwse provded n subdvson (d) or (f) of ths secton or In secton 279,
282, or 1001. no assessment of a defcency In respect of the ta Imposed by ths tte and
no dstrant or proceedng In court for Its coecton sha be made, begun, or prosecuted
unt such notce has been maed to the ta payer, nor unt the e praton of such O-day
rod. nor, f a petton has been fed wth the oard, unt the decson of the oard
g become fna. Notwthstandng the provsons of secton 3224 of the Revsed Statutes
the makng of such assessment or the begnnng of such proceedng or dstrant durng the
tme such prohbton s n force may be en|oned by a proceedng n the proper court.
(b) If the ta payer fes a petton wth the oard, the entre amount redetermned .n
the defcency by the decson of the oard whch has become fna sha be assessed and
sha be pad upon notce and demand from the coector. No part of the amount deter-
mned as a defcency by the Commssoner but dsaowed as such by the decson of the
oard whch has become fna sha e assessed or be coected by dstrant or by proceed-
ng In court wth or wthout assessment.
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319
270, rt. 1203.
addtona assessments, mentoned n the 1025 bond. Ths concuson, they say,
s nescapabe under the cear mandate of secton 906(e), Revenue ct of 1924,
as amended by the cts of 1926 and 1928 If the assessment or coecton of
any ta s barred by any statute of mtatons the decson of the oard to that
effect sha be consdered as ts decson that there s no defcency n respect of
such ta .
s the provsons of secton 906(e) frst came nto the aw after e ecuton of
the bond, they coud not then have been wthn contempaton of the partes.
The bond of 1925, ke the two precedng ones, was gven to protect the Unted
States aganst oss t referred to the ta abty e stng March 13, 1923
153.815.30 and was ntended to guarantee payment of that sum uness reduced
or annued by some future payment of the Commssoner. Payment mght have
been enforced but the ta payer camed the nmount assessed was too hgh and
procured further deay for nvestgaton by e ecutng the bond. The possbe
abatement parta reducton or annument there referred to depended upon
the future decson of the Commssoner.
On appea to the oard the ta payer chaenged the assessment as erroneous
aso, because under the statute of mtatons there remaned no rght to enforce
the ta . s to the frst ground, the oard found nothng. It decared ony that
the statute had run aganst the rght to coect the ta ths upon the ta payer s
prayer. In no proper sense was there a redetermnaton of the defcency
assessed n 1923. The antcpated bar of the ta by the statute coud not
affect the controversy was not the pont n ssue, was not dsputed. The bond
requred payment of a stated sum under the assessment aready made, uness
ths shoud be abated by the Commssoner. What abatement shoud be aowed
was the matter before hm and a ree amnaton of hs determnaton was neces-
sary mted to those matters whch mght have been presented to hm. y
the prayer based on the statute of mtatons the ta payer defeated a determna-
ton of the rea controversy.
In the crcumstances, possby, a decson upon the merts mght have been
regarded as the Commssoner s acton wthn the mpcaton of the bond. The
effectve scope of the decson rendered s no broader than the ssue, opnon and
fndngs. It eft undsturbed the Commssoner s assessment of 1923. Ths the
bond undertook to pay whoy wthout regard to the rght to enforce the ta
as such.
The e stence of the bar under the statute, as aganst the en or rght to
enforce the ta as such, was never the sub|ect of controversy was not dened.
nd as the present sut s not to enforce the ta as such, but an obgaton
gven n contempaton of the oss of rght to enforce, a decson procamng
ths oss s but announcement of somethng e pected by a partes an un-
frutfu pronouncement upon an mmatera pont. Unted States v. arth,
supra. See Unted States v. Martn ote Co., 59 . (2d), 549 Ct. D. 558,
page 310, ths buetn .) s the oard faed to pass upon the Commssoner s
refusa to reduce the amount of the assessment, that sum, wth nterest, etc.,
now represents what s due upon the bond. The oard e pressy dscamed
purpose to rue concernng ths obgaton the queston was not present. It
mght, wth proprety, have e amned the ob|ectons to the amount of the 1923
assessment but the ta payer asked another course.
Secton 906(e) may fnd proper appcaton on an ordnary appea, as for
e ampe, where the Commssoner s rght to assess s chaenged because the
statute of mtatons had run, or where, as n owers v. Nec York bany
Lghterage Co., supra, the coector asserts the rght to enforce payment by
dstrant after the statutory bar. It can have no appcaton to what may have
been sad or done by the oard when undertakng to redetermne a defcency
havng no possbe reaton to the statute of mtatons.
The tera constructon of secton 906(e) proposed by the pettoners woud
ead to consequences manfesty un|ust, f not absurd. When the bond n sut
was e ecuted the statute had e tngushed the rght of the Unted States to
enforce the ta as such. That Congress thereafter actuay ntended to reease
the partes whenever the oard shoud decare ths fact s beyond beef. The
thng announced by the oard had no rea reaton to the obgaton of the bond.
When possbe, every statute shoud be ratonay nterpreted wth the vew of
carryng out the egsatve ntent. We can not attrbute to Congress the purpose
necessary to support pettoners urgence.
ffrmed.
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273 and 274, rt. 1232.
320
S CTIONS 273 ND 274. D ICI NCY IN T .
rtce 1232: ssessment of a defcency.
I-34-5627
Ct. D. 540
ncome ta revenue act of 1029 decson of court.
1. oard of Ta ppeas ursdcton Defcency Notce rro-
neousy ddressed ffect of ppea.
Where u trustee fes a return of ncome for a trust and a notce
of a defcency, pursuant to secton 274(a) of the Revenue ct of
1926, whch s receved by the trustee, s erroneousy addressed to
the benefcary of the trust and erroneousy refers to the defcency
as that of the benefcary, the genera appearance by the trustee
n an appea t fed to the oard of Ta ppeas from the Comms-
soner s determnaton waves the defect n the notce and confers
|ursdcton of the appeu upon the oard.
2. Decson Reversed.
The decson of the oard of Ta ppeas (20 . T. ., 162) s
reversed.
Unted States Crcut Court of ppeas for the Second Crcut.
Commssoner of Interna Revenue, pettoner, v. The New York Trust Co.,
Trustee under Trust Indenture, dated December 2, 1981, by and between
Conrad enry Matthessen and sad the New York Trust Co., respondent.
efore Manton, ugustus N. and, and Chase, Crcut udges.
Petton to revew an order of the oard of Ta ppeas. The order entered
dsmssed the appea for ack of |ursdcton, upon suggeston of the pettoner,
for the nsuffcency of the defcency notce served. (20 . T. ., 162.) Order
reversed.
Manton, Crcut udge: The New York Trust Co. became trustee for Conrad
enry Matthessen who, by rrevocabe Indenture dated December 24, 1921,
conveyed to t (5,000 shares of common stock of the Corn Products Refnng Co.,
whch cost hm, on pr 27, 1906, 141,375. t the date of transfer, the stock
was vaued at 557,500. Durng the year 1922. the trustee sod the 6,000 shares
for 603,385. On March 15, 1923, the trustee fed an Income ta return for the
year 1922 for the trust, reportng a proft of 87,385. The benefcary fed no
ta return for 1922. e was then a mnor and under the terms of the trust,
was not entted to receve any ncome from the trust and therefore was not
sub|ect to a ta . The coector, upon e amnaton of the return, mposed an
addtona ta abty of 238,275.95.
In the ta return fed by the trustee, n the space provded for the name
and address of the ta payer, were the words The New York Trust Co. as
Trustee for rard Matthessen (a mnor) of ndenture dated December 24,
1921. On May 22, 1926, the nterna revenue agent rendered hs report to
the supervsng nterna revenue agent n New York of Is e amnaton of the
books and records of the New York Trust Co. as trustee for rard Matthessen
(a mnor) of ndenture dated December 24, 1921, 100 roadway, New York
Cty, N. Y. On ugust 28, 1926, a form etter transmttng the report to the
Commssoner had ony one ne for the ta payer s name and t was fed n
rnard Matthessen (a mnor) wth N. Y. Trust Co., trustee, entered beow
on the ne for the address. On une 28, 1926, a copy of the report was maed
to the New York Trust Co. wth a etter of transmtta addressed, New York
Trust Co., as trustee for rard Matthessen (a mnor), etc. protest aganst
the report was fed under a smar capton by the New York Trust Co. On
ebruary 8, 1927, the Commssoner n proposng an assessment of defcency
December 7, 1931.
opnon.
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321
273 and 274, rt. 1232.
a determned by te revenue agent, erroneousy drected the etter to Mr.
rard Matthessen, c/o New York Trust Co., Trustee, 100 roadway, New
York, N. Y. Ths etter was receved and answered by respondent. confer-
ence was hed by a representatve of the trust company wth the ureau of
Interna Revenue n regard to the defcency proposed aganst the New York
Trust Co. as trustee. etter denyng a postponement of the conference due
to the fact that the statutory perod for assessment woud shorty e pre was
maed ebruary 25, 1927, and on March 12, 1927, a GO-day defcency etter
was maed and had attached thereto a statement captoned: Mr. rard
Matthessen, c/o New York Trust Co., Trustee, 100 roadway, New York,
N. Y. The statement was as foows:
Under date of ebruary 8, 1927, you were advsed that the report of the
nterna revenue agent n charge at New York, N. Y., a copy of whch was
furnshed you under date of May 22, 1926, had been revewed n ths offce
and approved as submtted.
The defcency n ta of 238,275.95 resuted from the ad|ustment of ncome
from sae of 6,000 shares of Corn Products - ennng Co. stock assgned by
Conrad . Matthessen n 1921 to the New York Trust Co., as trustee, for
your beneft.
In determnng ta abe proft from ths transacton the e amnng offcer
used the dfference between the seng prce and the orgna cost of ths stock
to the donor, Conrad . Matthessen.
In a conference hed n ths offce t was contended that ta abe proft
represented the dfference between the seng prce and the vaue of the
stock at the tme t was transferred to the trustee n 1921.
fter carefu consderaton of the evdence submtted t s hed that the
proft as computed under artce 1562, Reguatons 62, s correct, and the
fndngs by the e amnng offcer are therefore sustaned.
Payment of the ta shoud not be made unt a b s receved from the
coector of nterna revenue for your dstrct, and remttance shoud then be
made to hm.
On pr 29, 1927, another etter was addressed to the New York Trust Co.,
as trustee, referrng to the defcency etter of March 12, 1927, uphodng the
ureau s decson as to the ta aton of the proft of the sae of the stock.
On May 9, 1927, the respondent fed wth the oard of Ta ppeas, a petton
for redetermnaton of the ta set forth by the Commssoner n hs notce of
defcency dated March 12, 1927. It was fed n the name of the New York
Trust Co. as trustee, rectng, among other thngs, that the notce of defcency
was maed to the pettoner and that the ta n controversy was ncome ta
for the year 1922. It was verfed by an offcer of the trust company, and
attached thereto, as hbt , was a copy of the etter of March 12, 1927.
No queston was rased by the peadng ns to the adequacy of the notce nor
was any queston of |ursdcton. The content was based soey upon the
queston of proft derved from the sae of the stock. n answer was fed to
the petton by the Commssoner of Interna Revenue on uy 8, 1927, and
an amended answer was fed December 7, 1929, aegng that a hearng had
been had on March 2, 1927, between the attorney for the trustee and represent-
atves of the Commssoner. On December 9, 1929, a hearng was had before
the oard of Ta ppeas at whch counse for the trustee moved to amend
the petton prevousy fed so as to read: The notce of defcency (a copy of
whch s attached and marked hbt ) was maed to rard Matthessen
on March 12, 1927, and, The respondent had erroneousy determned rard
Matthessen s gross ncome for the year 1922 and (b) In so far as secton
202(a)2 of the Revenue ct of 1921 purports to authorze respondent to ta
pettoner or rard Matthessen, an aeged proft upon the sae, that
the sad rard Matthessen s not abe, as a matter of aw, for any ncome ta
on any proft derved from the sae of sad Corn Products Refnng Co. stock,
and pettoner s prayer asked that the proceedng be dsaowed for the aeged
defcency as set forth. The oard on une 30, 1930, dsmssed the petton for
ack of |ursdcton.
The queston presented on ths appea s whether the error commtted n
addressng the defcency notce, maed March 12, 1927, precuded the oard
of Ta ppeas from e amnng the merts of the defcency ta . trustee
named In the trust s ncuded among those named n the Revenue ct of 1921
as a ta payer (42 Stat., 227), and the fducary must make a return for the
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273 and 274, rt. 1232. 322
estate or trust for whch he acts, under secton 219(b) of that ct. Secton
274(a) of the Revenue ct of 1926 (eh. 27, 44 Stat., 9) provdes:
If n the case of any ta payer, the Commssoner determnes that there s
a defcency n respect of the ta mposed by ths tte, the Commssoner s
authorzed to send notce of such defcency to the ta payer by regstered ma.
Wthn 60 days after such notce s maed (not countng Sunday as the
s teth day), the ta payer may fe a petton wth the oard of Ta ppeas
for a redetermnaton of the defcency.
Secton 274(a), t w be observed, provdes that The Commssoner s
authorzed to send notce of such defcency to the ta payer by regstered ma.
The ta payer as referred to n the ta ng statutes has not a narrow or
restrcted meanng. ( . S. v. Updke, 281 U. S., 489 Ct. D. 192, C. . I -1.
228 Routzahn v. Tyroer, 36 ed. (2d), 208 (C. C. . 6).) There was no
speca form of defcency notce requred, but the purpose of the ct s that the
ta payer sha be notfed of the defcency by ma. The ct ntends to gve
hm an opportunty to appea to the oard of Ta ppeas and a proceedng
before the oard s nvoked by the ta payer. e does not merey submt to
the |ursdcton of the oard. (Caforna Yards Co. v. Commr., 47 ed. (2d)r
514 (C. C. . 9).) Under secton 274(d) the ta payer may wave the requre-
ment under secton 274(a) and permt the mmedate assessment of any part
or a of the defcency. Secton 274(e) gves |ursdcton to the oard to
redetermne the correct amount of the defcency even f the amount so deter-
mned s greater than the amount of the defcency, and notce thereof must be
maed to the ta payer f a cam for such greater defcency s asserted by
the Commssoner at or before the hearng or rehearng. Where a 60-day etter
was maed to the wrong number of a street but actuay receved by the
ta payer, t was hed to be suffcent. (DUks v. ar, 23 ed. (2d), 831
(C. C. . 7).) Where a notce of defcency was maed to a successor n
busness, whereas the respectve ta es were due from ts predecessor, t was
hed that faure to desgnate t as a transferee was not fata nor dd t deprve
the oard of ts |ursdcton. ( urnet v. San oaqun rut Investment Co,
decded une 22, 1931 (C. C. . 9) Ct. D. 406, C. . -2, 260 .)
t bar the notce was not ony receved by the ta payer, but t apparenty
was fuy understood as referrng to the abty of the trust company as trustee
for ths benefcary. There s no fndng by the oard that the method of
addressng the trustee msed. ecause the defcency notce was addressed as
t was, t was a harmess error. The trust company fed a return as trustee
for rard Matthessen and pad a ta as such trustee. Subsequenty ts boobs
and records reatng to the trust were e amned by the revenue agent and the
trust company had been furnshed wth a copy of the agent s report dscosng
a defcency. It sted tems on the return of the trust company as trustee and
the correcton made n the proft on the sae of the securtes. Moreover, the
etter referred to conferences had wth the trust company s representatves
regardng the sae of the stock beongng to the trust and stated that the offcers
actng for the trustee ntended to protest. The etter transmttng the report
was addressed to the trust company as trustee, referred to the recent e amna-
ton whch had been made, mentoned the addtona ta and offered an oppor-
tunty to p.rotest wthn 30 days after the tme when the report woud be sent
to Washngton for fna acton. ths ceary gave notce of the sub|ect mat-
ter contaned n the defcency notce of March 18, 1927, and n effect, advsed
them that f they dd not successfuy protest a demand for payment woud be
forthcomng. It coud wave the requrement that another notce be sent, n
the same way that the ta payer may wave a demand for ta es necessary to
create a en. (In re atmore Pear omny Co., 5 ed. (2d), 553 (C. C.
4).) ta payer may wave a requrement for fng a refund cam pror to
sut. (Tucker v. e ander, 275 U. S., 228 T. D. 3973, C. . I-1, 287 .)
In urnet v. San oaqun rut Investment Co. ( une 22, 1931, C. C. . 9),
a defcency notce for 1920 ta es was sent to the San oaqun rut Invest-
ment Co., Tustn, Caf. Ths company was the successor and transferee of the
San oaqun rut Co., the atter havng been dssoved n 1922 and the nvest-
ment company havng taken over ts assets n that year. defcency etter
had been sent n 1921 for ta es, addressed to the San oaqun rut Co, c/o
San oaqun rut Investment Co, Tustn, Caf. The nvestment company
appeaed to the oard of Ta ppeas n each case descrbng tsef as the
ta payer, formery the San oaqun rut Co. and successor to the San
oaqun rut Co, through change of name ony. Contnuances were had on
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323
277 and 278, rt. 1271.
the hearngs and the Investment company ater, by eave, amended ts pead-
ngs so as to rase the queston of the dentty of the ta payer. The crcut
court of appeas reversed a hodng that there was no defcency aganst the
company for 1920 and dsmssng the appea based on the defcency etter for
1921 ta es for ack of |ursdcton, and hed that the Investment company n
aw and n fact was the ta payer an had so admtted n ts peadngs. It
partcpated n the hearngs before the oard of Ta ppeas and rased no
queston as to the (50-day etters unt after the tme had e pred wthn
whch determnaton coud be had aganst the rut company, and the case had
been tred n part upon the theory that t was abe for the ta es. It was
therefore estopped from changng ts poston and denyng abty. The Invest-
ment company had actua notce of the defcency notces, and the mere faure
to desgnate the company as a transferee was hed not to be fata and dd not
deprve the oard of Ta ppeas of |ursdcton.
The faure on the part of the Commssoner was sad to e procedura ony.
The court sad :
The San oaqun rut Investment Co. was n a-w and n fact the ta -
payer n the Instant case, and so hed tsef out n ts own peadngs, further
settng forth the theory upon whch t regarded tsef as the ta payer
namey, that It was formery the San oaqun rut Co. and successor to the
San oaqun rut Co. through change of name ony.
Ta payers can not repudate wavers of the statute of mtatons upon whch
the Government reed. ( ken v. urnet, 282 U. S., 277 Ct. D. 275, C. . -,
417 Loewer Reaty Co. v. nderson, 31 ed. (2d), 268 (C. C. . 2) Ct. D.
125, C. . III-2, 218 .) Ths ta payer w not be permtted to change ts
poston after proceedng as t dd, n an effort to prevent the coecton of the
ta and thus deny |ursdcton to the oard whch t nvoked. s was sad n
Unted States v. New York d Ontaro 8. S. (210 ed., 61 (C. C. . 2)) :
ut a genera or vountary appearance s regarded as equvaent to the
servce of process. genera appearance, therefore, under ordnary
condtons s hed to confer |ursdcton of the person on the court the defend-
ant beng estopped to ob|ect for want of such |ursdcton.
The appearance here before the oard of Ta ppeas was genera, not
speca, and the respondent waved any defect n the notce by nvokng the
|ursdcton of the oard of Ta ppeas.
Order reversed.
rtce 1235: Interest on a defcency.
Demand for ta made on ta payer and bondsman n 1927 and 1928,
respectvey. (See Ct. D. 565, page 337.)
S CTIONS 277 ND 278. P RIOD O LIMIT TION UPON
SS SSM NT ND COLL CTION O T .
INCOM T R NU CT O 1928 D CISION O COURT.
1. ssessment Lmtaton ppea to oard Suspenson of
Runnng of Statute of Lmtaton ffect of mended
Petton.
Where a ta payer fes an orgna petton wth the oard of
Ta ppeas whch reates to defcences for the years 1923 and
1925 and thereafter fes an amended and suppementa petton In
whch s asked a redetermnaton of the defcency for the year
1925 ony, the amended petton does not supersede or destroy the
orgna petton or consttute an abandonment of the compant
as to the defcency for 1923 and a moton by the Commssoner
R NU CT O 1926.
httce 1271: Perod of mtaton upon
assessment of ta .
I-34-5628
Ct, D. 541
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277 and 278, rt. 1271.
324
at the cose of the tra as to the defcency for the year 1925 to
dsmss the appea as to the defcency for the year 1923 and to
sustan the defcency found for the atter year s then propery
before the oard for ts decson thereon. The tme between the
fng of the amended petton and the moton to dsmss s there-
fore embraced n the perod durng whch the runnng of the
statute of mtatons on the makng of an assessment of a de-
fcency for 1923 s suspended as provded n secton 277(b) of
the Revenue ct of 1926.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (18 . T. , 1123)
s affrmed.
Unted States Crcut Court of ppeas, S th Crcut.
tas Paster ue Co., pettoner, v. Commssoner of Interna Revenue,
respondent.
Petton to revew an order of the Unted States oard of Ta ppeas.
efore Moorman, cks, and ckenoopeb, Crcut udges.
ebruary 5, 1932.
opnon.
cks, Crcut udge: The respondent, Commssoner of Interna Revenue,
found a defcency u Income ta es aganst pettoner, tas Paster ue Co.,
n the sums of 448.34 and 2,909.39 for the years 1928 and 1925, respectvey.
Pettoner sought a redetermnaton by the oard of Ta ppeas.
Respondent moved a dsmssa of ts petton because t dd not conform to
rue 5 of the oard. The oard dened ths moton but on November 5, 1927,
pettoner by permsson fed an amended petton styed mended and sup-
pementa petton n whch t sought a redetermnaton of the defcency for
1925 ony. Respondent answered ths amended and suppementa petton.
s to the year 1923: t the cose of the hearng before the oard respondent
moved a dsmssa of the appea n so far as t reated to the year 1923 and a
confrmaton of the fndng that there was a defcency for sad year n the sum
of 448.34. Pettoner coud not effectvey ob|ect to the amount of sad de-
fcency because t had not attempted to show that the Commssoner was wrong
but t prmary took the poston that the matter of ta es for 1923 was not
then before the oard at a that the amended and suppementa petton fed
November 5, 1927, deang wth ta es for 1925 ony, had superseded the orgna
petton and that the compant touchng the ta es for 1923 had been abandoned
snce that date. It further nssted that e cudng the tme durng whch
the orgna petton was before the oard, to wt, from uy 20, 1927, unt
November 5, 1927 (see Revenue ct of 1926, ch. 27, secton 274(a) and secton
277(b)), the mtaton perod of four years wthn whch any assessment coud
be made had e pred.
We do not fnd t necessary to consder whether as a matter of technca
peadng, ether at equty or n aw, an amended and suppementa petton
supersedes the orgna entrey or whether t becomes ncorporated wth and
s a contnuaton thereof. Wc are not confronted wth such queston. We are
concerned ony wth the practce and procedure of the oard of Ta ppeas
estabshed by ts rues pursuant to secton 907(a) of the Revenue ct of 1924
as amended by secton 1000 of the Revenue ct of 1926. Rue 7 thereof pro-
vdes for the fng of an orgna petton whe rue 18 under the capton
mended and suppementa peadngs reguates the amendment of pettons.
We do not thnk that t was ever contempated by these rues that amended and
suppementa pettons shoud supersede or destroy the nta one. Obvousy
the purpose of amended and suppementa peadngs s to provde a method by
whch mperfectons n the frame or structure of the orgna petton mght be
remeded.
We concude that the ssue made by the orgna petton as amended and the
answer as amended was pendng before the oard at the tme of ts fna
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325
277 and 278, rt. 1271.
decson confrmng the ta defcency found by the Commssoner for 1923
(see Capta dg. and Loan s n v. Commr., 12 . T. ., 349) and no error
appearng the order of the oard s affrmed.
s to the year 1925: Under the provsons of the Revenue ct of 1921 (eh.
136, secton 34(a), pettoner n computng ts net ncome for 1925, deducted
24,600 and 15,880 as saary for and compensaton to Wam Seke, ts pres-
dent, and Lyda Seke, ts secretary-treasurer, respectvey. The Commssoner
dsaowed 12,000 and 8,400 respectvey of these deductons upon the ground
that they were e cessve. The oard uphed the Commssoner and ts fndng
must preva uness the evdence ceary an convncngy requres a contrary
concuson. Tracy v. Commr., 53 ed. (2d), 575, 579 (C. C. . 0) Ct. D. 4C8,
C. . I-1, 205 Guarantee ond, d Mtg. Co. v. Commr., 44 ed. (d), 297,
298 (C. C. . 6).)
Pettoner, a corporaton, was organzed n 1907 wth a capta stock of
10,000. Subsequenty Wm. Seke bought 51 shares, a controng nterest, for
55,100. Thereafter he purchased the baance of the stock. The busness con-
ssted of m ng and seng paster. It was not successfu unt 1922 but there-
after t pad C per cent dvdends. Durng the years 1923, 1924, and 1925 ts
stock was owned n the foowng proportons: Wm. Seke, 48 shares Lyda
Seke, 49 shares and a Mr. opper, vce presdent, 3 shares. Gross saes,
saares and net ncome after deductng saares for those years are set out n
the margn.1 The Department ncreased the net Income for 1925 from 12,191.22
to 12,555.87. Ths net ncome wth the saares camed woud amount to
53,235.87 of whch the saares aone woud consttute 76.4 per cent. The
saares aone woud consttute 324 per cent of the net ncome. The tabe1
ndcates that athough the net ncome n 1925 was neary 2,000 beow that
of 1923, the saary of the presdent was ncreased 12,000 and that of the secre-
tary-treasurer 14,400. It s shown that both Wm. Seke and Lyda Seke, hs
wfe, devoted themseves e cusvey and fathfuy to the servce of pettoner
and that Wm. Seke aded t wth hs persona credt but ths does not show
that the amounts pad them for ther servces n 1925 consttuted ordnary and
necessary e penses. (See otany Worsted Ms v. U. 8., 278 U. S., 282, 293
Ct. D. 39, C. . III-1, 279 .)
In determnng whether saares are e cessve the oard of Ta ppeas must
necessary e ercse ts own |udgment and dscreton reasonabe aowances
can not be ascertaned wth mathematca precson. very case must stand
upon ts own pecuar facts and crcumstances. We are not |ustfed n decar-
ng that the oard of Ta ppeas was wrong and ts order confrmng the
fndng of the Commssoner as to the defcency for the year 1925 s affrmed.
ktce 1271: Perod of mtaton upon assess- I-37-5682
ment of ta . Ct, D. 557
ncome ta revenue act of 1924 decson of court.
1. Waves adty ecuton by Secretary.
Where, pursuant to secton 278(c) of the Revenue ct of 1924, a
consent n wrtng to the assessment of a ta after the prescrbed
statutory perod s e ecuted, whch bears the sea of the ta payer
and s sgned n the name of the ta payer by ts secretary wthn
the scope of hs genera dutes and at the nstance of ts presdent
and comptroer n charge of ts ta matters, the consent, whch
s sgned by the Commssoner, s vad and effectve to to the
statute.
1 See foowng tabe.
1023.
1924.
1925.
168, 392. 99
14, 142.00
205, 281. 71
18, 671. 42
301,644. 20
12,191. 22
Net Income
Saares:
Presdent
12,600.00
1. 480. 00
200.00
12,600.00
7,480.00
200.00
24,600.00
15,880.00
200.00
Secretary-treasurer
ce presdent
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277 and 278, rt. 1271.
326
2. Same Repudaton.
Where te ta payer knew that the Government had reed upon
a consent n wrtng to the assessment of a ta after the e praton
of the prescrbed statutory perod and had receved a substanta
reducton n ts ta n consequence of the same and where the
ta payer had acquesced n the waver by payment of the ta
assessed by vrtue thereof wthout protest and had aowed sub-
stantay four years to eapse wthout questonng the vadty
of the waver, the ta payer can not be permtted to repudate
ts consent.
Unted States Crcut Court of ppeas, S th Crcut.
The Php Carey Manufacturng Co., appeant, v. Chares M. Dean, ormer
Coector of Interna Revenue, appeee.
ppea from the Dstrct Court (or the Southern Dstrct of Oho, Western Dvson.
May 13, 1932.
OPINION.
cks, Crcut udge: Ths sut was brought by appeant to recover ncome
and profts ta es for the year 1918 assessed aganst and pad by t. ppeant
camed that the assessment and coecton were barred by the statute of
mtatons. The case was heard by the |udge wthout a |ury. t the cose of
the evdence each party moved for |udgment. ppeant s moton was dened,
and that of appeee was granted. ppeant e cepted and fed ts b of
e ceptons. There were no requests for speca fndngs of fact or concusons
of aw and the fndngs were genera. Nothng was preserved for revew
e cept the queston of aw, whether the evdence ndsputaby requred a
|udgment for appeant.
There was on fe n the ureau of Interna Revenue a waver e tendng the
perod for the assessment and coecton of 1918 ta es uut December 29, 1924.
On October 17, 1924, the Commssoner wrote appeant that an e amnaton
had dscosed an addtona ta aganst t for 1918 n the sum of 158,270.02.
ppeant protested and requested a conference, whch was hed at Washngton
on December 8, 1924, between representatves of the ureau and Mr. Crabbs,
presdent and drector of appeant Mr. Ignatus, ts comptroer Mr. Cassatt,
ts genera counse, and Mr. en, aso of counse. The presdent and comp-
troer of appeant had charge of ts ta matters. t the conference there was
an agreement, sub|ect to confrmaton by the Commssoner, who was not pres-
ent, that the ta es shoud be reduced to 151,475.25. It was e pected that
when the matter was fnay passed upon the Commssoner woud, f gven a
reasonabe tme for ts consderaton, confrm the conference agreement, but a
partes know that f the Commssoner shoud be compeed to act before
December 29, the e praton date of the e stng waver, the assessment woud
very probaby bo at the arger fgure and that coecton woud be made mmed-
atey. Wth the matter thus pendng some one (evdenty by ora request for
the fes of nether party dscosed any correspondence upon the sub|ect) pro-
cured or receved an offca form of waver from the ureau and ether
devered or transmtted t to Mr. use, secretary of appeant, who on De-
cember 20, 1924, s days before the e praton of the e stng waver, e ecuted
t by sgnng t as foows: The Php Carey Manufacturng Co., Ta payer,
by . L. use, Secretary, and by aff ng the sea of appeant thereto. It
was then transmtted to the ureau, sgned by the Commssoner and fed on
December 23, 1924.
On anuary 24, 1925, the ureau competed ts fna audt and transmtted
a statement thereof to appeant. Ths statement f ed the ta abty at
the sum of 151,475.25, the e act amount agreed upon at the conference, and
caed appeant s attenton to the fact that a waver e prng December 20,
1925, was on fe. The ta was assessed n pr, 1925, and was pad wthout
protest on May 19. 1925.
Matters stood thus unt pr, 1929, when appeant fed a cam for
refund upon the ground that the waver e ecuted December 20, 1924, was
nvad and vod for ack of authorty n the secretary to e ecute t. The
cam was that the powers of the secretary were mted to those set forth
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327 277 and 278, rt. 1271.
In rtce I , secton 3, of the reguatons of appeant.1 The refund was
dened, sut was nsttuted and the burden was upon appeant. (Stem ros.
f Co. v. urnet, 51 ed. (2d), 1042, 104C (C. C. . 8) Ct. D. 476, C. .
I-1, 311 .)
We thnk the dstrct |udge was rght.
ppeant can not be heard to say that ts presdent and comptroer were
unauthorzed to e ecute the waver. They were n charge of the whoe ta
matter. (Independent Ice Cod Stora/c Co. v. Commssoner. 50 ed. (2d),
31, 33 (C. C. . 5) Ct. D. 471, C. . I-1, 308 .) The waver nvoved no more
than gvng the consent of the ta payer n wrtng to the e tenson of the mta-
ton perod. These offcers were represented by counse who were wth them at
the conference and no doubt advsed them (f we can assume that they needed
such advce) of the pressng necessty of such consent. The urgent necessty of
the matter creates an nference that t was not overooked. (See Greer v. U. 8.,
245 U. S.. 559. 561.) avng authorty to act they had the authorty to drect the
secretary to act for them (see Trustees for 0. d . S. Coa Co. v. Commr.,
43 ed. (2d), 782, 7S4 (C. C. . 4) Chrstopher Co. v. Commr., 55 ed. (2d),
530 .r31), and there s room for the nference that they dd. The statute
dd not requre them to sgn the waver personay. It requred the ta payer
to sgn t (secton 250(d) of the Revenue ct of 1921, 42 Stat., 227 278(a)
of the Revenue ct of 1924, 43 Stat., 253) and t s not unreasonabe to con-
cude that the secretary sgned for the ta payer at ther nstance or that of
some authorzed agent We thnk ths was ceary wthn the scope of the
genera dutes of a secretary ( ouver s Law Dctonary, voume 2, 12th ed.,
page 507) as recognzed n the reguatons of appeant, the reevant portons
of whch we have taczed.
We do not thnk that ths nference n appeee s favor s destroyed by any
countervang evdence. The testmony of appeant s presdent and comp-
troer that they dd not know of the e ecuton of the waver unt about
four years afterwards s not concusve. The ureau etter of anuary 24,
1925, gvng e press notce of the waver on fe had been n appeant s fes
snce that date and the ta es were pad upon the approva of counse wthout
any protest that ther assessment and coecton were barred for ack of a
proper waver. The testmony of use, asde from the fact that he dentfes
hs sgnature upon the waver of December 20, 1924, s of tte vaue. e
as whoy forgotten the transacton. The record ndcates that the presdent
and comptroer have kewse forgotten many of ts detas. The testmony
of appeant s remanng wtnesses was amost whoy negatve n character.
The testmony of appeant s ta counse who partcpated n the Washngton
conference and who afterwards approved the payment of the ta was not
ntroduced nor ts absence accounted for. The sea upon the waver of Decem-
ber 20, 1924, s prma face evdence that t was paced there by the secretary
wth the authorty of appeant. (Mart/and. nance Corporaton v. Duva,
284 ed., 765, 770 (C. C. . 5) ss v. arrs, 38 Coo., 72.)
We thnk there s ampe bass for the |udgment. We can not assume that
the secretary, after 23 years of e perence n that capacty, ether vountary
or thoughtessy e ecuted an unauthorzed nstrument.
nay, we thnk that appeant shoud not be permtted to repudate ths
waver. It knew that the Government had reed upon t and t had receved
a substanta reducton n ts ta by the reaudt and had tsef acquesced
by payment of the ta wthout protest and had aowed substantay four
years to eapse wthout compant. (See Commssoner v. New York Trust
Co., 54 ed. (2dL 463, 465 (C. C. . 2) Ct. D. 540, page 320, ths buetn
. 8. v. emp, 12 ed. (2d), 7, 8 (C. C. . 5) T. D. 3858, C. . -, 326
Stern ros. f Co. v. urnet, supra Lberty akng Co. v. ener, 34 ed (2d),
513, 517 (D. C), affd. 37 ed. (2d), 703 Ct. D. 194, C. . I -1, 231 .)
We do not deem t necessary to pass specfcay upon whether a resouton
of the board of drectors of appeant on March 23, 1925,a was a ratfcaton
of the waver.
ffrmed.
1 gc. 3. Secretary. It sha be the doty of the secretary to keep nn accurate record
of the proceedngs of the stockhoders and drectors. Rve a notces requred, wep proper
cooks of accounts and books for transfer of stock ssue, attest a certfcates of stock and
In genera, to perform a the dutes tchch usuau pertan to sad offce, or requred of
bm by the board of drectors.
2 Resoved that the acts of the offcers n the genera conduct of the busness n the
past be, and the same are, hereby approved and ratfed and adopted by unanmous vote.
1G0D03 33 22
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277 and 278, rt. 1271.
328
rtce 1271: Perod of mtaton upon assess-
ment of ta .
I-39-5722
Ct. D. 570
INCOM T R NU CT O 1920 D CISION O COURT.
1. Waver adty ecuted fteb praton of Statutory
Perod Statutory Perod pred Pror to nactment of
the Revenue ct of 1924.
consent In wrtng by a ta payer to wave the statute of
mtatons operatng aganst the assessment and coecton of a
ta e ecuted after the date of the enactment of the Revenue ct
of 1924 and before the enactment of the Revenue ct of 1926 s
vad and bndng upon the ta payer even though the waver s
e ecuted after the e praton of the statutory perod and the
statutory perod e pred pror to the date of the enactment of the
Revenue ct of 1924.
2. Waver Duress.
waver of the statute of mtatons wth respect to hs n-
dvdua ta abty for 1917 e ecuted and fed by a member of
a partnershp s not e acted by duress because e ecuted and fed
pursuant to the advce of the Commssoner that If such waver
shoud be fed he woud consder makng a speca assessment of
the profts ta of the partnershp for the year 1917 under secton
210 of the Revenue ct of 1917.
3. Notce of Defcency Suffcency.
wrtten notce sent by the Commssoner to a ta payer of hs
fna determnaton of a defcency for 1917 n an amount stated
compes wth the notce requred by secton 274(a) of the Revenue
ct of 1926.
Court of Cams of the Unted States. No. -488.
Ltteton, udge, devered the opnon of the court
The frst contenton of the pantff s that the wrtten consent e ecuted
by hm wavng the statute of mtaton for assessment and coecton of a
defcency aganst hm for 1917 was e ecuted after the e praton of the
statute of mtaton that t was obtaned by duress and was, therefore.
Invad. e further nssts that snce the perod of mtaton for makng an
addtona assessment for 1917 e pred pror to une 2, 1924, and the waver
n queston was gven after that date and before the enactment of the Revenue
ct of 1926, the waver n queston s nvad under the decson of the Crcut
Court of ppeas for the Second Crcut n Uncasve Mfg. Co. v. Commssoner,
decded ebruary 1, 1932. We fnd no mert n the contenton of the pantff
that the waver was nvad because e ecuted after the e praton of the
statute of mtatons (Stanye v. Unted States, 282 U. S.,#270 Ct. D. 274,
C. . -, 414 ), nor n the cam that t was obtaned under duress.
The mutter of the computaton of the partnershp s profts ta under the
speca reef provsons of secton 210 of the Revenue ct of 1917 was entrey
wthn the dscreton of the Commssoner. (Wamsport Wre Rope Co. v.
Unted States, 277 U. S., 551 T. D. 4172, C. . II-2, 323 .) ad the Com-
mssoner proceeded to coect from the partnershp the e cess-profts ta due
by t under the norma ta provsons of the Revenue ct of 1917 on ts n-
come for that year, us he had a rght to do, such ta woud have amounted to
100,005.14, and there woud have been no overassessment aganst the part-
nershp and no addtona ta due by the partners. It can not be sad that a
waver e ecuted by the pantff In order to obtan a reducton n the amount
of the profts ta due by the partnershp through a computaton under the
reef provsons of the statute was e acted by duress. e e ecuted the waver
Peter L. McDonne v. The Unted States.
May 31, 1932.
OPINION.
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329
277 and 278, rt. 1271.
because t was to hs advantage to do so. The Commssoner was not requred
to compute the ta of the partnershp under the speca reef provson, and
had he decned to do so nether the partnershp nor the pantff woud have
had any ega rght to compan. (Matu v. Unted States, 282 U. S., 822.)
ny ad|ustment n the profts-ta abty of the partnershp necesstated a
correspondng ad|ustment n the dstrbutve nterests of the partners and a
reducton of partnershp ncome ncreased the ta abe ncome of the ndvdua
partners. The Commssoner therefore advsed the pantff and the other
partner of McDonne Truda that f wavers of the statute of mtaton wth
respect to ther ndvdua ta abty for 1917 shoud be fed by them he
woud gve consderaton to the determnaton of the profts ta of the partner-
shp under the speca reef provsons of secton 210. ccordngy the pan-
tff duy e ecuted such waver. e was not forced to do so, and the resuts ob-
taned as a resut of the e ecuton of the waver were favorabe to hm.
The case of Uncasve Mfg. Co., supra, hods that where the statutory perod
e pred pror to une 2, 1924, wavers e ecuted after that date and before the
approva of the Revenue ct of 1926 were nvad.
We have carefuy consdered the decson of the earned Crcut Court of
ppeas for the Second Crcut, but we are unabe to concur n the concuson
that a waver e ecuted under such crcumstances s nvad and that a ta
coected on the bass thereof must be refunded. ( urnet v. Chcago Raway
qupment Co., 282 U. S., 295 Ct. D. 276, C. . -, 323 rown Sons
Lumber Co. v. urnet, 282 U. S., 283 Ct. D. 279, 0. . -, 274 ken v.
urnet, 282 U. S., 277 Ct. D. 275, C. . -, 417 Stange v. Unted States,
supra.)
In the Uncasve case, the court sad :
Confessedy, had the tme for assessment e pred after une 2, 1924, the
wavers woud have been good, though e ecuted after the e pry of the tme
to assess or coect. ( urnet v. Raway qupment Co., 282 U. S., 295.)
owever, secton 278(e) of the ct of 1924 decared that the secton as a
whoe shoud not aow the assessment or coecton of a ta , barred by e st-
ng mtatons on une 2, 1924. Subdvson (c) of secton 278 s necessary
to the assessments because they depend upon the wavers, and there was no
other aw, reguatng wavers n effect after une 2, 1924. Thus, If subdvson
(e) confnes subdvson (c) to cases where the assessment was not barred on
une 2, 1924, the company s rght. In spte of some ntmaton n urnet v.
Chcago Raway Co. whch, however, e pressy reserved the pont, we thnk
that an anayss of secton 278 as a whoe does not admt of any other con-
structon.
In none of the cases cted was coecton barred on the date of the enact-
ment of the Itevenue ct of 1924 however, In ken v. urnet, supra, a waver
had been gven before the enactment of the Revenue ct of 1921, whch f ed
a mtaton perod of fve years. The court hed that the ta payer had suff-
cent authorty, n the absence of any statute, to e ecute a vad waver, and
that the Commssoner, under the same crcumstances, had authorty to accept
such waver and bnd the Government. The court further hed that a waver
sgned s vad to e tend the subsequenty enacted mtaton upon coecton.
Other wavers were secured n the ken case under the Revenue ct of
1921, and were hed vad to authorze assessment on March 12, 1925. gan
In rown Sons Lumber Co. v. urnet, supra, the court nfers that the ast
of the three wavers nvoved n that case woud have been suffcent standng
aone. footnote n the opnon states: Inasmuch as the second and thrd
wavers were n themseves suffcent to e tend the perod for coecton, the
frst waver may be dsregarded n ths connecton, as was done by the ower
court. See 38 . (2d), 428. In rown Sons Lumber Co. case, supra,
the frst waver was fed December 13, 1920, and the second on December
10, 1923 the thrd waver was fed October 25, 1924. In the Uncasve
Mfg. Co. case the court construed secton 27S(e) of the Revenue ct of 1924
as a prohbton upon the gvng of a waver by a ta payer and the acceptance
thereof by the Commssoner. We are unabe to fnd any provson n the
1924 Revenue ct whch precudes a ta payer from vountary wavng the
benefts of the statute of mtaton, nor do we fnd anythng n such ct
prohbtng the Commssoner s acceptance of such waver. Ths vew seems
not to have been presented n the Uncasve Mfg. Co. case, supra It was
not commented upon by the court n ts opnon. The court merey stated
that subdvson (e) of secton 278 of the Revenue ct of 1924 mts the pre-
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5277 and 278, rt. 1271.
330
cedng subdvson (c) of secton 278 so that subdvson (c) does not authorze
the e tenson of tme for assessment by n waver e ecuted after the enactment
of the Revenue ct of 1924 where the tme for assessment e pred pror
to the enactment of that ct. In urnet v. Chcago Raway qupment Co..
supra, n footnote 5, page 300, to the statement n the opnon that We need
not determne whether respondent s correct n assumng that secton 278(e)
quafes secton 278(c) n respect to wavers on assessment of ta es barred
pror to une 2, 1924, t s stated that Subdvson (e) can not be sad to
quafy every other subdvson n secton 278. Nothng ndcates an ntenton
to have t mt the effect of secton 278(a) whch permts assessment to be
made or sut to be brought at any tme n the case of a fase or frauduent
return or a faure to fe any return. Nor s there any ndcaton
that t shoud quafy subsecton (c) whch provdes for the gvng of tcavers.
Itacs ours. We concude, therefore, that the Revenue ct of 1924 does not
precude a ta payer from wavng the beneft of the statute of mtaton, and
that a waver gven after the enactment of the Revenue ct of 1924, n a
case where the statutory mtaton had e pred pror thereto, and before
ebruary 26, 1926, s vad.
The pantff ne t contends that the Commssoner faed to compy wth the
statutory requrement of assessment and coecton of the ta for the reason
that he dd not send to the pantff a notce of the defcency, ns requred
by secton 274(a) of the Revenue ct of 1926. We thnk ths contenton of the
pantff s unmportant as affectng hs rght to nsttute a proceedng before
the Unted States oard of Ta ppeas under the Revenue ct of 192G upon
recept of notce of assessment, whch woud have consttuted the Comms-
soner s fna determnaton had the Commssoner faed to ma hm a forma
notce pror to assessment. owever, the facts show that the Commssoner
fuy comped wth the requrements of secton 274. May 22, 1926, the Com-
mssoner notfed the pantff of a proposed assessment of a defcency for
1917, aowng hm 30 days wthn whch to protest the same or to e ecute a
waver of hs rght to fe a petton wth the oard of Ta ppeas consentng
to mmedate assessment. The waver was not e ecuted, but pantff fed a
protest settng forth that the correct ta was 4,386.15 nstead of 4,549.03, as
proposed by the Commssoner n the 30-day etter. The protest was consdered
and aowed and thereafter, on uy 12,1926, the Commssoner sent the pantff
a wrtten notce of s fna determnaton of a defcency for 1917 n the
amount of 4,386.15. Ths notce comped wth secton 274(a) of the Revenue
ct of 1926. The Commssoner was not requred specfcay to advse pantff
n ths notce of hs rght to nsttute a proceedng before the oard. The
pantff dd not nsttute a proceedng before the oard of Ta ppeas wth
respect to ths defcency and thereafter, on October 9, 1926, more than 60 days
after the mang by the Commssoner of the notce of hs fna determnaton,
the Commssoner assessed the defcency and coected the same October 23,
1926. Secton 274(a) of the Revenue ct of 1926 does not requre any speca
form of notce, but provdes ony that If the Commssoner determnes that
there s a defcency he s authorzed to send notce of such defcency to the
ta payer by regstered ma. The notce of uy 12, 1926, whch was receved
by the pantff, comped wth ths requrement.
The petton s dsmssed. It Is so ordered.
rtce 1271: Perod of mtaton upon assess- I 39-5723
ment of ta . Ct. D. 571
INCOM ND C SS PRO ITS T S R NU CT O 1026 D CISION O
COURT.
ssessment Lmtaton Speca ssessment Commssoner s
uthorty.
Where ncome and e cess profts ta es are assessed and coected
wthn the prescrbed statutory perod, a ater determnaton and
computaton of the e cess profts ta under secton 328 of the
Revenue ct of 1918, ndcatng nn overassessment, and the mang
of etters by the Commssoner showng the resuts thereof do not
consttute the aowance of an overassessment nor an assessment
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331 277 and 278, rt. 1271.
of the ta for the purpose of computng the statutory perod of
mtaton wthn whch the Commssoner may assess and coect
a ta and the Commssoner s determnaton and computaton
of the ta abty as dscosed n a ater etter wrtten after the
statutory perod for assessment had e pred n accordance wth
whch he ssued and approved a schedue of overassessment aow-
ng the ta payer s cam for credt n an nmount ess than that
ndcated n the earer computaton dd not consttute an assess-
ment of a ta after the e praton of the statutory perod of
mtatons wthn whch the Commssoner coud assess and coect
the ta .
Court of Cams of the Unted States. No. -546.
The Western Shade Coth Co. v. The Unted- State .
May 31, 1932.
OPINION.
Ltteton, udge, devered the opnon of the court.
We are unabe to agree wth the contenton of the pantff that a determ-
naton and computaton of a ta abty by the Commssoner s offce and the
mang of a etter showng the resuts thereof consttute an assessment of
the ta as that term s used n the revenue statutes for the purpose of com-
putng the statutory perod of mtaton wthn whch the Commssoner may
assess and coect a ta , or ad|ust the ta abty of a ta payer for the pur-
pose of aowng or re|ectng cams for abatement, credt, or refund. The
mtaton for makng assessments s suspended under certan crcumstances
where a proceedng s nsttuted before the oard of Ta ppeas, but those
provsons of the statute are nappcabe to the queston presented n ths ease.
The ta sought to be recovered n ths case was duy assessed and pad on or
about uy 16, 1919.
Long pror to the determnaton of the Commssoner wth respect to the
pantff s profts ta , as dscosed by hs etter of uy 15, 1927, and the
schedue of overassessment sgned anuary 5, 1928, the Commssoner had
tmey assessed and coected an ncome and profts ta of 249,715.68 for
1918. No further assessment or coecton of a ta for 1918 was ever found
necessary or was made by the Commssoner. that the Commssoner dd
after the ta for 1918 had been assessed and pad was to determne whether,
n hs dscreton, the profts ta mposed by the statute upon the consodated
net ncome, whch ta had been assessed and pad, shoud be reduced through
a computaton of the profts ta n the manner specfed n secton 328 of the
Revenue ct of 1918.
The pantff had fed an appcaton wth the Commssoner requestng that
the profts ta for 1918 be so computed. Wthn the tme aowed by aw
pantff fed two cams for credt wth respect to the ta pad for 1918. The
Commssoner consdered the pantff s appcaton for reef under secton 328,
and concuded that the appcaton shoud be aowed. e thereupon, on
une 13, 1921, made a computaton of the profts ta under secton 328 whch
showed a profts ta of 38,641.41 and an ncome ta of 60,553.07 upon the
net ncome shown n the return, or a tota Income and profts ta abty of
99,194.48. On that date he maed pantff a notce showng ths determna-
ton. On the bass of the ta so computed the overassessment was 150,521.10.
Ths determnaton and computaton dd not consttute an assessment wthn
the meanng of the statute. The Commssoner was free to make a further
determnaton and computaton wth respect to the profts ta abty under
secton 328 before he had made any aowance of an overassessment n the
manner provded by aw.
No schedue of overassessment or certfcate of overassessment was ever
sgned or ssued by the Commssoner upon the bass of the computaton shown
n the etters of une 13 and November 8, 1921. The pantff had fed cams
for credt and the perod of mtaton wthn whch the Commssoner coud
aow an overassessment, overpayment, or a credt was suspended. The mang
of the etter of une 13, 1921. dd not consttute the aowance of an over-
assessment or overpayment. (Martn M. Php born v. Unted States, 72 C. Cs.,
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277 and 278, rt. 1272. 332
545, 53 ed. (2d), 133.) efore the Commssoner had fnay acted upon the
cams for credt n the manner provded by the statute, the matter of the
correct ta abty of the pantff was open for consderaton and determna-
ton by hm. (Lews v. Reynods, 284 U. S., 281 Ct. D. 443, C. . I-1, 130 .)
Unt he had taken fna acton wth respect to the cams for credt In the
manner provded n the statutes, ether by re|ectng or aowng the sane, he
was free to make as many determnatons and computatons of the pantff s
correct ta abty as he deemed necessary, ether under secton 328 of the
Revenue ct of 1018 or wth respect to any other feature affectng the correct
ta abty, for the purpose of determnng whether there had been an over-
assessment or overpayment and whether any porton thereof shoud be credted
or refunded. (Oak Worsted Ms v. Unted States, 68 C. Cs., 539 Ct. D. 151,
C. . I -1, 326 .)
The Commssoner s determnaton and computaton of the ta abty for
1918, as dscosed n the etter of uy 15, 1927, n accordance wth whch he
ssued and approved a schedue of overassessment aowng pantff s cams
for credt n the amount of 134,907.90 nstead of 150,521.10 as ndcated n
an earer computaton, dd not consttute an assessment of a ta of 15,613.20
for 1918 after the e praton of the statutory perod of mtaton wthn whch
the Commssoner coud assess and coect the ta for 1918.
The petton must be dsmssed. It Is so ordered.
rtce 1272: Perod of mtaton upon co- I-29--5555
ecton of ta . Ct. D. 518
ncome ta revenue acts of 1921 and 1024 decson of court.
1. ssessment Coecton Lmtaton Return Requred for
sca Year ed on Caendar-Year ass.
Where a ta payer fes returns on a caendar-year bass for the
years 1918 and 1919 on une 16, 1919, and May 15, 1920, respec-
tvey, but s requred by secton 212(b) of the Revenue ct of 1918
to fe ts returns on the bass of a fsca year endng anuary 31,
the return fed for the caendar year 1918 s not the return re-
qured by secton 239 of that ct for the fsca year endng anuary
31, 1919, nnd the perod of mtaton on the assessment and coec-
ton of the ta for that fsca year, provded by secton 250(d) of
the Revenue ct of 1921 and secton 277(a)2 of the Revenue ct of
1924, commences to run from May 15, 1920.
2. Sut1 Defense ond.
bond gven wthn the statutory perod for the coecton of a
ta condtoned to pay any ta found to be due s a defense to a
sut by the ta payer based upon the ground that the ta was co-
ected after the e praton of the statutory perod therefor.
Court or Cams of the Unted States. No. L-368.
Natona Shrt Shops, Inc., v. The Unted States.
May 2, 1932.
opnon,
Wams, udge, devered the opnon of the court
Ths s a sut to recover ncome and e cess-profts ta es pad by the pantff
for the ta abe perod endng anuary 31, 1919, n the amount of 55,986.S4,
wth nterest thereon from the date of payment.
The pantff durng the perod nvoved kept Its books on the bass of a
fsca year endng anuary 31. Under the reguatons (artce 25, Reguatons
45) t was requred to make ts ta returns on that bass, and the Commssoner
of Interna Revenue was requred by secton 212(b) of the Revenue cts of 1918
and 1921 to compute the net ncome n accordance wth that system of account-
ng. Te pantff dd not make ts ta returns on the bass of ts fsca year, but
on une 16, 1919, fed ts ncome nnd e cess-profts ta returns for the caendar
year 1918, and on May 15, 1920, fed ts returns for the caendar year 1919.
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333
277 and 278, rt. 1272.
The caendar year returns for 1918 and 1919 coud not be reconced wth
the pantff s books, and n ebruary, 1923, the Commssoner of Interna Rev-
enue ad|usted the caendar-year returns for 1918 and 1919 to the bass of fsca
years endng anuary 31, 1919, and anuary 31, 1920, respectvey, and assessed
for the fsca year endng anuary 31, 1919, an addtona ta of 100,031.47.
On pr 7, 1925, a warrant of dstrant was ssued aganst the pantff and
notce of evy was served on banks wheren pantff carred accounts. Imme-
date payment was demanded by the coector, and on pr 10, 1925, pantff,
protestng that coecton of the ta was barred by the statute of mtatons,
made a cash depost of 10,000 and posted a surety bond n the sum of 100,000
guaranteeng payment of the baance. The coector thereupon Issued a certf-
cate of dscharge of the ta ens. Subsequenty the addtona assessment was
satsfed n fu by the abatements, credts, and cash payments set out n fndngs
12 and 13 of our fndngs of fact. Of the tota amount of the addtona assess-
ment, ony 55,986.84 s nvoved n ths sut, e cash payments of 36,974.79
on December 28, 1925, 5,000 on ebruary 19, 1926, 5,000 on May 3, 1926, and
the credt of 9,012.05 of September 30, 1925. ( ndng 12.)
The pantff contends the ta was coected subsequent to the runnng of the
statute of mtatons, as f ed n secton 250(d) of the Revenue cts of 1918
and 1921 (40 Stat., 1083 42 Stat., 265), and s refundabe as an overpayment
under secton 607 of the Revenue ct of 1928.1.
Pantff s contenton Is based on the assumpton the statute of mtatons
commenced to run aganst coecton of the ta on une 16, 1919, the date on
whch the return for the caendar year 1918 was made. If the pantff s rght
n ths contenton the 5-year perod n whch coecton coud be made e pred
une 16, 1924, and the surety bond was posted after the bar of the statute had
faen on the coecton of the ta .
The poston of the Government Is that the statute of mtatons aganst the
coecton began to run on May 15, 1920, the date on whch the return for the
caendar year 1919 was fed, and e pred May 15, 1925. It s aso contended
the bond was vad and precudes recovery, even f the statutory perod for
coecton had e pred when t was fed.
Secton 250(d) of the Revenue cts of 1918 and 1919 bars the coecton of
any ta after the e praton of fve years from the date when the return was
due or made. Snce the Commssoner s requred to compute the net ncome
upon the bass of the ta payer s annua accountng perod, fsca year or
caendar year, as the case may be, a return, suffcent to start the runnng of
the statute of mtatons, must be one that covers the entre ta abe perod.
Where there are two returns, each coverng ony a part of the ta abe year,
both of whch are necessary to a correct computaton of the net ncome and the
ta abty for such ta abe year, the statute begns to run from the date of
the ast return. (Paso Robes Mercante Co. v. Commssoner. 33 ed. (2d),
653 P. L. Mann v. Unted States, 71 C. Cs., 31 mercan de Leather Co. v.
Unted. States. 71 C. Cs.. 114 Ct. D. 444, C. . I-1, 2011.)
In Paso Robcs Mercante Co. v. Commssoner, supra, the court sad:
That under the crcumstances the pettoner dd not have the ega rght to
make returns for caendar years s vrtuay conceded. rtce 25 of Regua-
tons 45, among other thngs, provdes: ta payer havng an e stng account-
ng perod whch s a fsca year wthn the meanng of the statute not ony
needs no permsson to make hs return on the bnss of such a ta abe year,
but s requred to do so, regardess of the former bass of renderng returns.
If that be true, and pettoner was bound to make return for the year endng
anuary 31, t coud not e pect an assessment unt a return was n for the
whoe of that year. True, a return purportng to cover the tu year, f merey
erroneous or defectve, may start the runnng of the statute but where there
are two or more returns each of whch covers ony a part of the year, and a
of whch the Commssoner must have before he can ntegenty determne the
net ncome for such year and made the requste assessment, t woud be un-
reasonabe to hod that the statute begns to run before the ast one s n, and
he s thus for the frst tme enabed to perform hs duty.
1 Sec. 607. ny ta (or any Interest, penaty, addtona amount, or addton to such
ta ) assessed or pad (w-hether before or after the enactment of ths ct) after the
e praton of the perod of mtaton propery appcabe thereto sha be consdered
an overpayment and sha be credted or refunded to the ta payer f cam therefor
s fed wthn the perod of mtaton for fng such cam.
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277 and 278, rt. 1272.
334
The pantff contends that the opnon of the Crcut Court of ppeas n
Paso Rubes Mercante Co. v. Commssoner, supra, and the opnon of ths
court In Mann v. Unted States, supra, are nappcabe to the queston pre-
sented n ths case whether the caendar year 1918 return fed une 16. 1919.
apparenty after an e tenson of tme, was a return for the fsca year endng
anuary 31, 1910, and, therefore, suffcent to start the runnng of the statute
of mtaton for the assessment and coecton of any ta due for the fsca
year endng anuary 31, 1919. The pantff undertakes to dstngush the
Paso Robes Mercante Co. case n the ground that wth respect to that ta -
payer the Commssoner of Interna Revenue assessed the ta for the fsca
year on the bass of the two caendar-year returns by takng eeven-twefths of
the ta from the frst return and one-twefth from the second return, whereas
n the present case the Commssoner dd not compute the ta for the fsca
year by that method but on the bass of actua ncome shown for the fsca
year begnnng ebruary 1, 191S, and endng anuary 31. 1919, as dscosed
by the company s books when e amned by the revenue agent and that the
decson of ths court n Mann v. Unted States, supra, n whch the court hed
that the caendar year 1919 return was the return for the fsca year endng
anuary 31, 1919, was based on the decson of the Court of ppeas n Paao
Robes Mercante Co., supra.
Pantff further nssts that n the Mann case the Commssoner of Interna
Revenue treated the caendar year 1919 return as the return for the fsca
year endng anuary 31, 1919, whereas n the present case he acted upon the
1918 caendar-year return as the return for the fsca year endng anuary
31, 1919. In Mann v. Unted States, supra, and n mercan de Leather
Co. v. Unted States, supra, ths court squarey hed that the caendar year
1918 return was the return for the fsca ta abe perod endng anuary 31.
1918, and that the caendar year 1919 return was the return for the fsca
year begnnng n 1918 and endng the caendar year 1919, and ths s true
nde )endenty of the method empoyed by the Commssoner n determnng
the ta due for the fsca ta abe perod of ess than 12 months and for the
subsequent ta abe year. The mtaton perod wthn whch the Commssoner
may assess a ta for the fsca ta abe perod n 1918, or a subsequent fsca
year, begns to run from the date on whch the return, whch s to be regarded
as the return under the statute, for such ta abe perod s fed. The Supreme
Court, n the mercan de Leather Co. case, dd not dsturb the hodng
of ths court that the caendar-year returns were returns for the fsca perod,
or year, endng wthn the caendar year for whch such returns were fed,
but hed that for the purpose of computng the statute of mtaton wthn
whch a cam for refund coud be fed, the date on whch the returns for
the fsca perod, or year, were due shoud be used nstead of the earer
date on whch the caendar-year returns were fed. In the Mann case and
n the mercan de Leather Co. case the ta payers books were kept
on the fsca-year bass, as were those of the pantff, and n those cases the
Commssoner of Interna Revenue determned the ta for the fsca year begn-
nng n 1918 and endng n 1919 on the bass of the net ncome shown by the
books. The caendar-year returns n those cases and n the present case
dd not purport to be rr turns for the fsca year endng n a caendar year
subsequent to the caendar year for whch they were fed. The contenton
of the pantff overooks the fact that by treatng the caendar year 1918
return as the return under the statute for the fsca year begnnng n 1918
and endng n 1919, the ta payer woud be eft n a poston of havng fed
no return for the fsca ta abe perod of ess than 12 months under secton
226 of the Revenue ct of 1918 begnnng anuary 1, 1918, when as a matter
of fact, the ta payer had fed a return for that perod when he made hs
caendar year 1918 return.
The Revenue ct of 1917 dd not requre that returns be made n accordance
wth the method of accountng empoyed by the ta payer, . e., fsca year or
caendar year, but under that ct a ta payer was permtted to fe caendar-
year returns even though ts books were kept on a fsca-year bass. The Reve-
nue ct of 1918, secton 200, requred that the return be made on the bass of
the fsca year or caendar year, accordng to the method of accountng empoyed
by the ta payer. Therefore, ta payers who kept ther books on a fsca-year
bass and fed caendar-year returns for 1017, 1918, and subsequent years were
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335
277 and 278, rt. 1272.
requred to make a return for the fsca ta abe perod anuary 1, 191S. to the
end of the fsca year begnnng n 1017 and endng n 1918 and for each fsca
year of 12 months thereafter, uness the method of accountng shoud be changed
wth the approva of the Commssoner. ( ppea of ccd, 2 . T. ., 8-4.) or
the purpose of the statute of mtaton therefore the caendar year 1918 was
the return for the fsca ta abe perod fang wthn that caendar year. The
contenton of the pantff therefore that the caendar year 1918 return was the
return under the statute, for the fsca year begnnng ebruary 1, 1918, and
endng anuary 31, 1919, s wthout mert.
The statutory perod of mtaton on coecton of the ta due for the fsca
year endng anuary 31, 1919, therefore e pred on May 15, 1925, whch date
was fve years after the date on whch the caendar year 1919 return was fed.
The surety bond was fed pr 10, 1925, wthn the perod coecton coud be
egay enforced. y gvng the bond pantff avoded the mmedate coecton
of the ta through the dstrant proceedngs then pendng and secured further
tme n whch to contest the vadty of the ta . The bond operated not ony to
postpone the coecton of the ta but aso to suspend the runnng of the 5-year
statutory mtaton on the coecton of the ta . (Unted States v. ohn arth
Co., 279 U. S., 370 Ct. D. 65, C. . III-1, 189 .)
The bond consttuted a separate and dstnct agreement, vountary entered
Into between the pantff and the Government at a tme when coecton of the
ta was egay enforceabe, whch took the pace of ther rghts and prveges
under the mtatons of secton 250(d) of the Revenue cts of 1918 and 1921.
Through the promse and agreement represented by the bond, the rghts of the
partes under the revenue aws were postponed and ncorporated n the bond
whch nsured the payment of the ta . (Unted States v. Onken ros. Co., 23
ed. (2d), 367 T. D. 4108, C. . I-2, 270 George . Mendes d Co. v. owers,
Coector, 21 ed. (2d), 1008 T. D. 4093, C. . I-2, 145 .) It s mmatera
whether the subsequent payments were made n satsfacton of the ta or of the
bond. (Mascot O Co., Inc., v. Unted States, 70 C. CIs., 246, afrmed 282 U. S.,
434 Ct. D. 286, C. . -, 190 .)
In vew of our decson that the surety bond was fed before the statute of
mtatons had e pred on the coecton of the ta , t s not necessary to dscuss
ether the pantff s contenton that the bond was secured by duress, or the
defendant s contenton that the bond was vad even though fed after the e p-
raton of the statute.
The Detton w be dsmssed. It s so ordered.
rtce 1272: Perod of mtaton upon coecton of ta .
ppcaton of a waver of restrctons aganst assessment to the
coecton of the ta . (See Ct. D. 516, page 142.)
C S8 PRO ITS T R NU CTS O 1917 ND 1926 D CISION O COURT.
Coeoton Commencement of Statutory Perod Partnershp
Requrement of cess Profts Ta Return.
partnershp, not e empt from the e cess profts ta , whch has
a net ncome n e cess of 6,000 and more than a nomna nvested
capta for ts caendar year 1917 s requred to make an e cess
profts ta return for that year. baance sheet attached to ts
Informaton return of ncome does not compy wth the requrement
of an e cess profts ta return under that ct and the fng of the
nformaton return does not commence the runnng of the perod of
mtaton on coecton provded n secton 277(a)3 of the Revenue
ct of 1926.
R NU CT O 1924.
rtce 1272: Perod of mtaton upon co-
ecton of ta .
I-38- 5702
Ct. D. 564
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277 and 278, rt. 1272.
336
Cocbt op Cams of the Unted States. No. L-14.
Peter L. McDonne and Domnc . Truda, ormer Partners of the Partnershp
McDonne d Truda, v. The Unted States.
May 31. 1932.
OPINION.
Ltteton, udge, devered the opnon of the court.
Ths sut was nsttuted by the former partners of the dssoved partnershp
of McDonne Truda to recover 29,748.40, beng e cess-profts ta of 24.863.28
for the caendar year, and nterest of 4,885.12 thereon pad September 29,
1926. Refund cams were tmey fed and were re|ected wthn two years
mmedatey precedng nsttuton of ths sut. It s aeged that the ta and
nterest were coected after the e praton of the statute of mtaton of
fve years, and ths contenton s predcated upon the cam that the partnershp
return of ncome, orm 1065, fed pr 1, 1918, was a suffcent compance
wth the statute and that the fng of the e cess-profts ta return. orm 1102,
was not necessary.
Pantffs further nsst that the nvested capta of the partnershp was
nomna and that t was ta abe at 8 per cent under secton 209 of the Revenue
ct of 1917.
The Commssoner of Interna Revenue hed, and we thnk correcty, that
the partnershp was requred to fe a profts-ta return, orm 1102, and
that the baance sheet, whch the partnershp attached to ts ncome ta
return. orm 10(55, was not a suffcent compance wth the statute and the
reguatons. The books and records of the partnershp were e amned and
nvestgated by the Commssoner through a revenue agent, wth the resut
that t was determned that the partnershp actuay had a arge nvested
capta wthn the meanng of secton 207 of the Revenue ct of 1917, and
the facts estabsh that the partnershp had more than a nomna nvested cap-
ta. March 18, 1923, the Commssoner made a |eopardy assessment of e cess-
profts ta aganst the partnershp n the amount of 100,005.14. The partner-
shp protested ths addtona assessment and requested that the profts ta be
computed and determned under the speca reef provsons of secton 210
of the Revenue ct of 1917. Upon the recommendaton of the Commttee on
ppeas and Revew, to whch t was sent by the Commssoner after the
cam of the partnershp that the ta shoud be determned under secton 209
of the Revenue ct of 1917 had been dened, the Commssoner tentatvey
computed the profts ta of the partnershp under the speca reef provsons,
whch computaton showed an overassessment of 75,141.86. ach change or
proposed change n the partnershp s ta abty naturay affected the
ncome ta abty of the ndvdua partners and was refected n the de-
termnaton of ther ta es. When the |eopardy assessment of 100,005.14
was made aganst the partnershp, overnssessments were aowed the nd-
vdua partners n the amounts of 9,500 each. When the |eopardy assessment
was reduced to 24,863.28 an addtona assessment of about 6,800 was pro-
posed aganst each partner. Utmatey the ta abty of the partnershp
and the two partners was reconced and cosed out together.
Upon the facts n ths case we are of opnon that the partnershp of
McDonne Truda was requred to fe an e cess-profts ta return. orm
1102, and that n the crcumstances the fng of the return of ncome. orm
1065, was not a suffcent compance wth the statutes and the reguatons.
(Updke v. Unted States. 271 U. S 661 T. D. 3815, C. . -, 312 eam v
amton, 289 ed., 9 T. D. 3519, C. . II-2, 217 Rockand t Rockport
Lme Corporaton v. am, 38 ed. (2d), 239 Morrs County Crushed Stone Co,
6 . T. ., 800.) ssessment and coecton of the ta n queston were not
therefore barred at te tme made. (Commssoner v. The Pod Lumber Co
281 U. S 245 Ct. D. 266, C. . I -2, 390 Updke v. Unted States, supra.)
The petton s dsmssed. It s so ordered.
Whaey, udge Wams, udge Gbeen, udge and ooth, Chef ustce,
concur.
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337
277 and 278, rt. 1272.
btc |s 1272: Perod of mtaton upon co- I-38-5703
ecton of ta . Ct. D. 565
( so Sectons 273 and 274, rtce 1235.)
federa ta es bond decson ok court.
1. ond adty Lmtaton on Sut.
Where a bond s gven n connecton wth a cam for the abate-
ment of a defcency assessed, by reason of whch the coecton of
the defcency s postponed, the bond rectng that the prncpa has
perfected an appea from the determnaton of the Commssoner
and desres that the payment of the defcency be e tended unt
the determnaton of the appea, the bond s an enforceabe contract
the vadty of whch s affected nether by the fact that t was
e ecuted under the erroneous assumpton that an appea to the
oard of Ta ppeas had been perfected nor the fact that the bond
and the cam for abatement were not fed n tme.
2. Sut ond Lmtaton.
Secton 1047, . S., provdng a perod of mtaton on a sut for
any penaty or forfeture has no appcaton to a sut on a bond to
recover the penaty theren f ed for a breach thereof.
3. ccord and Satsfacton Coecton of a Check by Coector.
The assent of the Secretary of the Treasury Is essenta to a com-
promse of any cv case arsng under the nterna revenue
aws and the coecton of a check by a coector tendered n fu
settement of a cam of the Unted States for an nterna revenue ,
ta does not tsef consttute an accord and satsfacton.
4. Interest.
Where a bond Is gven n 1925 n connecton wth a cam for
abatement of a ta assessed In that year and the notce of the
re|ecton of the cam for abatement s gven to the ta payer and
the demand for the ta s made on the ta payer In December, 1927,
and on the surety uy 14, 1928, the Unted States s entted to
Interest on the ta at the rate of 12 per cent at east after uy
14, 1928.
Unted Statbs Crcut Court of ppeas for the Nnth Crcut.
Wam L. ughson, appeant, v. Unted States of merca, appeee.
ppea from the Dstrct Coort ot the Unted States for the Northern Dstrct of
Caforna, Southern Dvson.
May 23. 1932.
opnon.
Wbur, Crcut udge: Ths acton was brought by the Unted States to re-
cover upon four bonds e ecuted by appeant ughson as surety and defendant
ader as prncpa, for the purpose of stayng the coecton of defcency
ta es assessed aganst defendant ader for the years 1920, 1921, 1922, and
1923. Defendant ader not beng before the court, |udgment was rendered
aganst appeant ony, for the amount of the bonds together wth nterest
thereon at the rate of 6 per cent per annum from the date of the bond to uy
15, 1928, and thereafter at 12 per cent per annum. ppeant set up ack of
consderaton for the bonds. One of the rectas of the bonds was as foows:
Whereas, the prncpa heren has perfected an appea from the deter-
mnaton of the Commssoner assessng the defcency ta for the year ,
and desres that the payment of the defcency ta be e tended unt the deter-
mnaton of sad appea, as a matter of farness and |ustce.
In vew of ths recta t s contended by appeant that there was no con-
sderaton for the bonds because they were e ecuted under the erroneous
assumpton that appeas had een perfected, whereas the appeas were n
fact taken prematurey. There s no mert n ths contenton.
The tra court found that the consderaton for the bonds was that the
coector shoud refran from enforcng mmedate payment of the ta whch he
dd unt after the petton for abatement fed by the ta payer had been con-
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277 and 278 rt. 1272.
338
sdered and determned by the Commssoner. somewhat smar queston
was dsposed of by the Court of Cams n Roberts Sash Door Co. v. Unted
States (38 . (2d), 716 Ct. D. 177, C. . I -1, 227 ), whch was affrmed by
the Supreme Court n 282 U. S., 812, on the authorty of Unted States v. ohn.
arth Co. (279 U. S., 370 Ct. D. 65, C. . III-1, 189 ). The ony dstncton
between these cases and the case at bar s that n the case of Roberts Sash
Door Co. v. Unted States, supra, the recta In the bond was that the ta payer
was about to fe a cam n abatement, whereas he fed no such cam. The
Court of Cams sad:
The consderaton for the bond was n the fact that a ta had been assessed,
and by reason of the fng of the bond ts coecton was postponed. The
vadty of the bond was not affected by the faure to fe the pea n abatement.
ppeant cams that, the acton s barred by the provsons of secton 791,
Tte 28, U. S. C. ., whch provdes that:
No sut or prosecuton for any penaty or forfeture, pecunary or other-
wse, accrung under the aw of the Unted States, sha be mantaned, e cept
n eases where t s otherwse specay provded, uness the same s commenced
wthn fve years from the tme when the penaty or forfeture accrued etc.
Secton 791, supra, has no appcaton to a sut on a bond to recover the
penaty theren f ed for a breach thereof. The secton appes to a penaty
or forfeture mposed n a puntve way for an nfracton of a pubc aw.
(Meeker C Co. v. Lehgh aey R. R., 236 U. S., 412, 423.) There s nothng
In arn v. Tesson (66 U. S., 309), cted by appeant, n confct wth ths vew.
(See, aso, Unted States v. ohn arth Co., 279 U. S., 370, supra.)
ppeant cams that the bonds were not accepted or approved. The tra
court found as a fact that the coector acted upon the bonds n deayng co-
ectton of the ta n accordance wth hs purpose. Ths was suffcent to con-
sttute the bond an enforceabe contract.
ppeant cams that nether the bonds nor abatement cams were fed n
tme. s aready ponted out, t s mmatera whether the cams n abate-
ment were ever fed. (Roberts Sash c Door Co. v. Unted States, 38 . (2d),
716, supra.)
ppeant cams that there was an accord and satsfacton arsng from the
fact that appeant tendered a check for 100 n fu settement of the cams
of the Government aganst hm. It s camed that by ndorsng and coect-
ng ths check an accord and satsfacton was estabshed. ppeant ctes
numerous cases on ths sub|ect, none of whch dea wth transactons wth the
Government. The coector who receved the check had no authorty to com-
promse te cam aganst the appeant by e press agreement, much ess by
mpcaton. (Secton 3229, R. S. otany Worsted Ms v. Unted States,
278 U. S., 282 Ct. D. 39, C. . III-1, 279 .) The assent of the Secretary
of the Treasury s essenta to a compromse of any cv case arsng under
the nterna revenue aws. (See otany Worsted Ms v. Unted States,
supra.)
ppeant cams that the aowance of nterest at 12 per cent per annum
after uy 15, 1928, s erroneous. ut the bonds n sut mposed a abty
for the defcency n tu pus a penates and nterest. The bonds were gven
on ugust 18, 1925, under the Revenue ct of 1924, whch provdes that where
an e tenson of tme s gven nterest runs on the defcency at 6 per cent for
the perod of the e tenson and thereafter at 1 per cent per month. (Revenue
ct 1924, secton 274(g), 43 Stat., 298.) The same rue appes to eopardy
assessments such as these made under secton 276(a)2 and secton 274(d) of
the Revenue ct of 1924 and secton 279(a) provdes for nterest at the rate
of 1 per cent per month, f the amount ncuded n the notce and demand s
not pad wthn 10 days after such notce and demand. The demand referred
to s that made by the coector upon the ta payer after the cam n abatement
has been re|ected n whoe or n part. smar provson occurred n the
Revenue ct of 1926 and the Revenue ct of 192S. (Sectons 274(k), 276(a)2,
(b), and 279(|), ct of 1926 273(f) and 294 (a), (b), ct of 1928.) The
notce of the re|ecton of the cam for abatement and demand for the ta was
made on the ta payer n December 9, 1927, and on the bondsman uy 14, 192S.
The Government was entted to nterest at 12 per cent at east as soon as
uy 15, 1928. (U. S. v. Maryand Casuaty Co., 49 . (2d), 556 Ct. D. 371,
O. . -2, 381 .)
There s no other pont rased whch merts dscusson.
udgment affrmed.
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339
277 and 278, rt. 1272.
|rncL 1272: Perod of mtaton upon co-
ecton of ta .
I-39 5724
Ct.D.569
INCOM T R NU CT O 1024 D CISION OP COURT.
ssessment Coecton Lmtaton When ssessment Made.
The fng of a return does not consttute the assessment of the
ta shown thereon wthn the meanng of secton 278 of the Rev-
enue ct of 1924 but requres an act of the Commssoner and
when the Commssoner sgned the assessment certfcate accom-
panyng a suppementa assessment st stng the ta payer wth
nn assessment n the amount shown on the return the assessment
was made. The assessment on anuary 20, 1925, beng wthn
fve years from the date the return was fed, as provded n sec-
ton 277(a)2 of the Revenue ct of 1924, the Unted States had
under secton 278(d) of that ct s years from that date wthn
whch to coect the ta .
Cotbt of Cams op the Unted States. No L-293.
Ltteton, udge, devered the opnon of the court.
Pantff contends that for the purpose of the statute of mtaton the
assessment of the ta n queston, beng a porton of the tota ta shown by
hm to be due upon the return fed, was made on March 15, 1920, when he
fed hs return, wthout further acton by the Commssoner of Interna
Revenue, and that, therefore, the perod wthn whch coecton by dstrant
or otherwse coud be made e pred March 15, 1925. e nssts that the
sgnng by the Commssoner of an assessment st and certfcate does not
consttute the assessment of ta wthn the meanng of the varous Revenue
cts and that for the purpose of the operaton of the statute of mtatons,
as provded n the varous ta ng statutes, partcuary secton 278 of the
Revenue ct of 1924, the computaton of ta upon the return fed by the ta -
payer s the assessment thereof. It s contended, therefore, that the tota
amount coected consttutes an overpayment wthn the meanng of secton
607 of the Revenue ct of 192S.
Secton 250(d) of the Revenue ct of 1918 provdes that the amount of ta
due under any return sha be determned and assessed by the Commssoner
wthn fve years after the return was due or was made. very Revenue
ct, begnnng wth the ct of 1916, to and ncudng the Revenue ct of 1928,
specfcay requres the Commssoner of Interna Revenue to determne
and assess the amount of the ta es due under any return and specfes the
tme wthn whch the Commssoner shoud make the assessment.1
The assessment of the ta nvoved n ths sut was made when the Comms-
soner, on anuary 20, 1925, sgned the assessment certfcate whch accom-
paned the suppementa assessment st of that date. The coecton by
dstrant havng been made wthn s years thereafter, as provded n secton
278(d) of the Revenue ct of 1924, was made wthn tme, and pantff s
therefore not entted to recover. Unt the Commssoner acted no assessment
was made. When he sgned the assessment certfcate on anuary 20, 1925,
whch was wthn fve years from the date the return wns fed, as provded
n secton 277(a)2 of the Revenue ct of 1924, the defendant had, under
secton 278(d) of the Revenue ct of 1924, s years from that date wthn
whch to coect the ta . The ta was assessed after the enactment of the
Revenue ct of 1924 and the case of Russe ct a. v. Unted States (278 U. S.,
181 T. D. 4260, C. . III-1, 206 ) sustans the acton of the defendant
rather than the contenton of the pantff. The cases cted by the pantff
n support of ts contenton are not n pont upon the queston nvoved n
ths case. The petton must be dsmssed. It s so ordered.
Davd Davdovtz v. The Unted States.
May 31, 1932.
OPINION.
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277 and 278, rt. 1272.
340
rtce 1272: Perod of mtaton upon co-
ecton of ta .
I-41-5772
Ct. D. 584
INCOM ND PRO ITS T S R NU CTS O 1921 ND 1924 D CISION
O COURT.
1. Coecton Lmtaton stoppe.
Where the coector makes demand for payment of a defcency
duy assessed for 1918 and the ta payer by teegram asks that
coecton be wthhed unt an overpayment for 1919 s ad|usted, (
to whch request the Commssoner accedes and advses the coector
not to coect the defcency unt recept of the schedue of over-
assessment for 1919, the teegram s as construed by the Comms-
soner an agreement on the part of the ta payer that f the Unted
States woud reeve t of the burden of payng the defcency pror
to the aowance of a refund for 1919 the Unted States mght
retan a suffcent amount of the 1919 overpayment to satsfy the
defcency and the ta payer s estopped to assert that the Unted
States had no rght to credt a part of an overpayment for 1919
aganst the defcency on the ground that the credt was made
after the e praton of the statutory perod for coecton of the
defcency.
2. ssessment Lmtaton Return fob sca Year 1918.
The perod of mtaton on the assessment of ncome and profts
ta es of a corporaton for ts fsca year 1918 prescrbed by secton
250(d) of the Revenue ct of 1921 runs from the fng of ts com-
peted return pursuant to secton 239 of the Revenue ct of 1918.
Ltteton. udge, devered the opnon of the court.
Pantff frst contends that the defcency for the fsca year 1918 was not
tmey assessed. The return for that fsca year, to be used n computng the
statute of mtaton wthn whch the Commssoner coud make an assessment
for such fsca year, was the competed consodated return fed by pantff
une 1G, 1919, under and pursuant to the provsons of the Revenue ct of 1918,
approved ebruary 24, 1919, whch was retroactve to anuary 1, 1918. Dav
eed Co., 2 . T. .. G16 Covert Oear Co., 4 . T. ., 1025 red T. Ley, 9 . T.
., 759 .4. Ceers ct at., 16 . T. ., 411 Natona Paper Products Co.. 20 . T.
.. 92, decded May 17, 1932 Unted States v. Updke, 1 ed. (2d), 550 T. D.
3654, C. . III-2, 1961, affrmed 8 ed. (2d), 913 T. D. 3815, C. . -, 3121
Unted States v. Updke, 25 ed. (2d), 746, affrmed 32 ed. (2d). 1, 281 U. S
489 Ct D. 192, C. . I -1, 228 : Whtney odden Shppng Co. v. Unted States.
72 C. CIs, 653 Ct. D. 437, C. . I-1, 318 52 ed. (2d), 1003 I. T. 1875.
C. . II-2, 238.) The addtona assessment of 23,846.88, March 6, 1924, for the
fsca year 1918 was therefore tmey.
The defcency of 23,840.88 for 1918 was tmey assessed. t the tme the
coector maed pantff a notce of the defcency and made demand for pay-
ment thereof, he had three months wthn whch to make coecton. Pantff
was advsed by the Commssoner at the tme the assessment was made that
nasmuch as the defcency had been assessed wthout gvng pantff an oppor-
tunty to appea, as provded n secton 250(d) of the Revenue ct of 1921, It
had the prvege of fng a cam n abatement wth respect to the defcency.
No protest of the defcency was made and no cam n abatement was fed.
The pantff appears to have agreed to the correctness of the defcency for 1918.
In order to be reeved of the burden of havng to pay the addtona ta of
23,846.88 due for 1918, pantff communcated wth the Commssonet by tee-
gram n whch t asked that coecton of the addtona ta due for 1918 be
wthhed unt the overpayment for 1919 was ad|usted. In our opnon ths
Court of Cams ok the Unted States. No. L-506.
Raston Purna Co. v. The Unted Sates.
une 6, 1932.
OPINION.
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341 277 and 278, rt. 1272.
teegram to the Commssoner was an agreement on the part of the pantff that
If the Government woud reeve t of the burden of payng the addtona ta
for 1918 pror to the aowance of the refund for 1919 the Government mght
retan a suffcent amount of the 1919 overpayment to satsfy the defcency for
1918. In consderaton thereof tte Commssoner advsed the coector to take
no steps to coect the defcency unt recept of the schedue of overassessment
for 1919. ut for the pantffs teegram to the Commssoner the addtona
ta for the fsca year 1918 woud have been coected or a dstrant proceedng
for the coecton thereof woud have been begun pror to the e praton of the
mtaton perod of fve years after the return for 1918 was fed on une 16,
1919. When the overpayment of 6S,724.90 for the fsca year 1918 was
determned on November 3, 1924, and formay aowed on March 7, 1925, the
Government retaned 23,846.88 thereof, as the pantff had requested and
agreed shoud be done, and the baance of 44,878.02 was duy refunded to
pantff, together wth nterest of 17,051.20. Pantff was duy notfed of the
acton taken. It made no ob|ecton thereto and for more than fve years there-
after acquesced n the acton whch had been taken. In these crcumstances t
s our opnon that pantff s estopped to assert that the Government had no
rght to retan that porton of the 1919 overpayment equa to the addtona ta
due for 1918. In Dckers n v. Cogrove (100 U. S., 578), the court sad:
The estoppe here reed upon s known as an equtabe estoppe, or estoppe
n pat. The aw upon the sub|ect s we setted. The vta prncpe s that
he who by hs anguage and conduct eads another to do what he woud not
otherwse have done, sha not sub|ect such person to oss or n|ury by dsap-
pontng the e pectatons upon whch he acted. Such a change of poston s
sterny forbdden. There s no rue more necessary to enforce good
fath than that whch compes a person to abstan from assertng cams whch
he has nduced others to suppose he woud not rey on. The rue does not rest
on the assumpton that he has obtaned any persona gan or advantage, but on
the fact that he has nduced others to act n such a manner that they w be
serousy pre|udced f he s aowed to fa n carryng out what he has
encouraged them to e pect.
The reef of equtabe estoppe s admnstered n favor of one who has been
nduced to ater hs ne of conduct wth respect to the sub|ect matter n con-
troversy so as to have foregone some rght or remedy whch he otherwse woud
have taken. Under the doctrne of equtabe estoppe, a person s hed to a
representaton made or a poston assumed, where otherwse nequtabe conse-
quences woud resut to another, who, havng the rght to do so under a the
crcumstances of the case, has, n good fath, reed thereon. (Cf. . G. unt,
45 ed. (2d), 781 Lous Werner Sawm Co., 26 . T. ., 141, decded May 24,
1932.) though ths case s not a sut n equty but s one at aw n a umnpnt,
however, an assumpst of ths knd s of an equtabe nature (New York Lfe
Insurance Co. v. nderson, 263 ed., 527), and the defendant may rey upon any
defense whch shows that the pantff n equty and good conscence s not
entted to recover n whoe or n part. (Myers v. urey Motor Co., 273 U. S.,
18 secton 274(b) of the udca Code secton 398, U. S. C. ., Tte 28.)
The facts and crcumstances n ths case dstngush t from the ordnary
case where the ta payer fes the usua cam for credt. cam for credt s
drected prmary to the year n whch there s an overpayment and operates
to protect the rghts of the person makng t wth respect to the statute of
mtaton for the year of the overpayment. That the pantffs teegram n
ths case was construed by the Commssoner as ts agreement to the coecton
of the 1918 ta out of the 1919 overpayment, as and when aowed, s evdenced
by the fact that the Commssoner on November 3, 1924, pror to the aowance
of the overpayment for 1919, advsed the pantff to fe a cam for refund
for 1919 to protect ts nterest aganst the statute of mtaton for that year.
The teegram n ths case was not a cam for credt, but t was drected
prmary to the coecton of the addtona ta for 1918. y ts terms the
pantff represented to the Commssoner that f he woud nstruct the coector
not to coect the 1918 ta , t woud consent to a satsfacton thereof out of the
1919 overpayment when aowed. The teegram was therefore more than a
mere request for deay. It was a promse that the 1918 defcency woud be
pad out of the 1919 overpayment.
It s urged by counse for pantff that the Commssoner s reason for not
coectng the ta for 1918 earer than he dd was due to the fact that he
msunderstood the aw and consdered that there was no mtaton on hs
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277 and 278, rt. 1272.
342
rght to coect by dstrant. ssumng that the Commssoner so construed
the statute, ths does not hep the pantff, nasmuch as the facts n ths case
how that had It not been for the representaton made by pantff to the
Commssoner the ta for 1918, n the amount sought to be recovered, woud
have been tmey coected.
The petton s dsmssed. It s so ordered.
rtce 1272: Perod of mtaton upon co- I-44-5S22
ecton of ta . Ct. D. 594
federa ta es abty on bond decson of court.
Sut ond stoppe.
Where a bond, condtoned to pay such amount of a ta assessed
as may be found to be due and rectng that the prncpa has
fed hs cam for abatement of the ta , s accepted by the Unted
States and the cam, whch was fed three years after the devery
of the bond, s consdered and coecton of the ta s postponed n
reance on the bond, n a sut upon the bond the surety s estopped
to deny that a cam for abatement had been fed when the bond
was e ecuted, where the Unted States has not msnformed the
surety that a cam had been fed nor msed the surety In any
other manner.
Unted States Dstrct Court, Southern Dstrct of New York.
L. 47-191. Unted States of merca, pantff, v. Massachusetts ondng
Insurance Co., defendant.
|. 46-182. Unted States of merca, pantff, v Samue urtg, Prncpa, and
Massachusetts ondng Insurance Co., a Corporaton, Surety, defendants.
uy 14, 1932.
OPINION.
Patterson, D. .: Two actons on bonds were by stpuaton tred together.
The stpuaton provded for tra by a |ury of one and for a drected verdct.
Most of the facts are aso covered by stpuaton. The frst sut nvoved a
bond n connecton wth an ncome ta abty of one ues urtg. The
second nvoves a smar bond n connecton wth an ncome ta abty of one
Samue urtg.
In the frst sut, t was shown that on March 12, 1921, ues urtg fed an
Income ta return for the year 1920, dscosng a ta abty n the amount
of 17,379.85, and at the same tme made payment of one-fourth of the ta
shown to be due, 4,344.96. On May 16, 1921, urtg fed an amended return,
showng a tota ta abty for 1920 n the reduced amount of 13,047.41, and
nn unpad baance n the amount of 8,702.45. The Unted States thereafter
demanded payment and a warrant of dstrant was ssued. To stay proceedngs,
urtg as prncpa and the defendant surety company as surety gave a bond
dated anuary 31. 1923, n the sum cf 10,000 to the Unted States. The
recta n the bond s:
Whereas the sad ues urtg as been assessed a ta by the Commssoner
of Interna evenue n the prncpa sum of eght thousand seven hundred two
and 45/100 doars ( 8,702.45) and whereas, the sad ues urtg has fed hs
cam n abatement aganst sad ta
The recta s foowed by ths condton:
Now, therefore, f the sad cam n abatement sha be dened n whoe or
n part by the ureau of Interna Revenue, and upon notce and demand of
the sad r mk . owers, coector of nterna revenue, or hs successor
n offce, the sad ues urt , pays to the sad rank . owers, as coector
of nterna revenue, or hs successor n offce, the sad ta or such amount
thereof as may he found due. together wth such penates and nterest as may
accrue thereon, then ths obgaton to be nu and vod otherwse to be and
reman n fu force and effect.
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343 277 and 278, rt. 1272|
No cam In abatement was actuay fed by urtg unt March, 1926. The
cam was aowed In part, but there remaned due from urtg for 1920
ncome ta the sum of 4,398.02 whch was demanded from hm wthout
success. e ded pror to the brngng of sut on the bond. In dsputng ts
abty on the bond, the surety company shows that t beeved a cam n
abatement to have been fed pror to the devery of the bond, and that t
woud not have e ecuted the bond had t known that no such cam had
been fed.
The case nvovng Samue urtg s smar. Samue urtg on March 26,
1921, fed hs 1920 ncome ta return showng a abty of 1,028.84 and pad
on account the sum of 257.21, eavng a baance of 771.83. No further pay-
ments were made athough demanded, and a warrant of dstrant was fnay
ssued. To stay coecton, Samue urtg and the surety company gave a
bond dated pr 6, 1923, n the sum of 1,000. Ths bond rected that urtg
bad been assessed a tu of 833, and had fed a cam n abatement aganst
the ta . The condton of ths bond was substantay the same as n the
case of ues urtg. No cam n abatement was fed by Samue urtg unt
March, 1926. The cam was re|ected, and demands for payment of the unpad
ta of 771.63 were unavang. The case s defended ony by the surety
company.
The two cases dffer ony n mnor detas, and the dscusson of the frst
one w contro the dsposton of the second one as we. The stuaton s
one where the ta coector was about to enforce coecton of an aeged ta
abty and where In order to obtan a stay of coecton the ta payer as
prncpa and a surety company as surety gave a bond n favor of the Gov-
ernment, rectng that a cam n abatement had been ted and provdng
that f the cam was dened and the ta payer pad the requred ta the bond
to be vod otherwse to be n fu force. pparenty the cam n abatement
was not fed unt three years ater. The cam was dened, and after demand
and nonpayment by the ta payer recourse s sought on the bond.
The defense s that the bond was vod at ts ncepton, because the fng of
a cam n abatement pror to the e ecuton of the bond was one of the stpu-
ated condtons of the bond, and no cam had then been fed. Ths defense,
however, s dsposed of by the rue that the obgor on a bond accepted and
acted upon by the obgee s estopped to deny a matera fact rected n the
bond. ( ruce v. Unted States, 17 ow., 457 Danes v. Tearney, 102 U. S.,
415 me v. Morse, 218 U. S., 493 Mcver Constructon Co. v. urttz, 144
Md., 451.)
ere the ta payer and the surety |onty represented to the Government
that the cam had been fed and Induced t to forego coecton of the ta .
The Government dd not seek out the surety and ask t to furnsh a bond,
nor dd t ever te the surety that a cam n abatement had been fed. It
remaned passve, accepted the bond and postponed coecton of the ta n
reance on the bond. It ater took the cam n abatement when fed, con-
sdered t and dened the cam. The bond served the purpose for whch t was
gven. I regard t of no moment that the Government upon carefu scrutny
of ts records coud have dscovered that no cam n abatement had been fed
when the bond was devered to t. It had no ready or convenent means of
earnng ths and was reasonabe In reyng upon the representaton by the
ta payer and surety that a cam had been fed. I can not see that the case
dffers from the stuaton n an appea bond, where the obgors are estopped
to deny that an appea has been taken f that s rected as a fact n the bond
and f the appeant has derved an advantage from the gvng of the bond.
The matter woud be dfferent f the Government had nformed the surety
that a cam n abatement had been fed when the fact was otherwse. In
such a case the mstake woud be a mutua one and the bond woud be vod.
( teney v. Rogers, 174 Mass., 277.)
The case bears no resembance to the cases where an obgee knowngy ms-
eads a surety by conceang matera Informaton concernng the rsk, the cr-
cumstances creatng a duty to speak and the conceament beng equvaent to
fraud. (See Grswod v. azard, 141 U. S., 260, 284 Phps v. Unted States
dety d Guaranty Co., 200 pp. Dv., 208 Damon v. mpre State Surety
Oo 161 pp. Dv., 873.)
verdct n favor of the pantff w be drected n each of the two
actons.
160903 33 23
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277 and 278, rt. 1272. 344
rtce 1272: Perod of mtaton upon coecton of ta .
R NU CT O 1926.
Lmtaton perod for assessment e prng before enactment of the
Revenue ct of 1924. (See Ct. D. 596, page 373.)
rtce 1272: Perod of mtaton upon co- I-52-5952
ecton of ta . Ct. D. 614
INCOM T R NU CTS O 1924 ND 1926 D CISION O COURT.
1. Waver Coecton. Lmtatons.
Where tmey assessment of 1917 ta es was made n 1923, tnder
an unmted waver, whch by departmenta rung e pred on
pr 1, 1924, coecton n 1927 and 1928 under a seres of wavers,
the ast of whch e pred on December 31, 1927, s tmey, under the
provsons of sectons 278 (c), (d), and (e) of the 1926 ct. Sub-
secton (e) of secton 278 of the 1924 ct dd not mt the rght
to e ecute a vad waver under subsecton (c) of sad ct.
2. Case Dstngushed.
Uncasve Manufacturng Co. v. Commssoner (56 ed. (2d),
893) dstngushed.
Unted States Crcut Court of ppeas for the Nnth Crcut.
Pacfc Coast Stee Co., a Corporaton, appeant, v. ohn P. McLaughn, Unted
States Coector of Interna Revenue for the rst Coecton Dstrct of
Caforna, appeee.
Upon appea from the Dstrct Court of the Unted States for the Northern Dstrct of
Caforna, Southern Dvson.
ugust 22, 1932.)
opnon.
McCormck, Dstrct udge: corporate ta payer, Pacfc Coast Stee Co,
brought ths acton at aw n the Dstrct Court for the Northern Dstrct of
Caforna for the recovery of ncome and e cess proft ta es for the caendar
year of 1917, camng that sad ta es were egay assessed and coected as
defcency ta es. Pursuant to stpuaton, the case was tred by the court,
sttng wthout a |ury, and upon speca fndngs, a |udgment was entered for
the defendant. The ta payer has prosecuted ths appea from the |udgment,
and the soe ssue s whether or not coectons of ta es on une 30, 1927, and
ugust 27, 1928, respectvey, were made after the appcabe perods of mta-
ton had barred the rght of the coector to make them.
The pertnent facts found by the court beow are as foows:
On March 30, 1918, pantff fed ts ncome and profts ta return for the
caendar year 1917.
On une 24, 1920, the Commssoner of Interna Revenue forwarded to pan-
tff a tentatve determnaton of ta defcency wheren pantff was notfed
that the Commssoner asserted a cam of 209,876.47, for defcency ta es be-
cause of an understatement by pantff n the return of March 30, 1918.
On December 9, 1922, the Commssoner determned that , the correct amount
of defcency ta that was due from the pantff for sad caendar year 1917
was 257,443.30.
On December 16, 1922, pantff and the ctng Commssoner of Interna
Revenue entered nto a wrtten agreement whereby the pantff consented to a
determnaton, assessment and coecton of ncome, e cess profts or war proft
ta es due under any return made by or on behaf of t for the years 1911 to
1917, ncusve, under the Revenue ct of 1921 or under pror ta cts rrespec-
tve of any perod of mtatons.
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345
85277 and 278, rt. 1272.
On ebrnary 9, 1923, the defcency ta of 257,443.30, was assessed aganst
pantff for the caendar year 1917, and, on pr 1, 1923, notce and demand
for the payment of such defcency ta was made upon pantff but no proceed-
ng to coect a defcency ta for 1917 was nsttuted pror to December 7, 1925,
when by a wrtten nstrument e ecuted by pantff and the Commssoner the
pantff waved unt December 31, 1926, the tme prescrbed by aw for makng
any assessment of the amount of Income, e cess profts or war profts ta es
due under any return made by or on behaf of t for the years 1917 to 1920,
ncusve, under e stng or pror Revenue cts, and agan on November 29,
1926, by a smar wrtng, the pantff e tended the perod of waver of tme
for makng any assessment of sad ta es under any return made by or on
behaf of t for the year 1917 under e stng or pror Revenue cts unt
December 31, 1927.
second notce and demand was made upon pantff on or about uy 16,
1927, wheren defendant coector camed a defcency ta due from pantff
n the sum of 129,920.06, upon ts ta abty for 1917. In ths notce and
demand, pantff was nformed that overpayments by t of ta es n 1918 and
1919, Incudng the amount of 111,953.71, had been on une 30, 1927, credted
upon the defcency ta of 1917.
On ugust 27, 1928, pantff under wrtten protest and to avod sezure and
sae of ts property pad to the defendant coector 103,111.16, as defcency
taes due and nterest n the further sum of 26,808.90, the entre amount of
129,920.06, to appy aganst the determned defcency ta es due from the
pantff for the caendar year 1917. On October 23, 1928, pantff fed wth
the defendant coector, for transmtta to the Commssoner of Interna Rev-
enue, a demand and cam of refund for ta es so pad as ncome and e cess
profts ta es and nterest thereon n the aggregate sum of 284,252.20 upon the
ground that the assessment and the coecton of such ta es was ega and
barred by the statutes of mtatons. The Commssoner on December 14, 1928,
re|ected entrey sad cam for refund, refused to return any part of sad
sum of money, and pantff thereupon brought ths acton.
When pantff fed ts ncome ta return on March 30, 1918, the tme wthn
whch the amounts of any ta due thereunder coud be assessed or coected
was controed by secton 250(d) of the Revenue ct of 1918 (ch. 18, 40 Stat. L.,
1057, 1083), whch as far as appcabe to ths appea reads:
Sec. 250. (d) cept n the case of fase or frauduent returns wth
ntent to evade the ta , the amount of ta due under any return sha be de-
termned and assessed by the Commssoner wthn fve years after the return
was due or made, and no sut or proceedng for the coecton of any ta sha
be begun after the e praton of fve years after the date when the return was
due or was made.
When the assessment of ebruary 9, 1923, Invoved n ths appea, was made
and appcabe to t, there was n effect the Revenue ct of 1921 (42 Stat. L.,
227, 265). Secton 250(d) thereof, as far as t s appcabe here, reads:
The amount of ncome, e cess-profts, or war-profts ta es due under any
return made under ths ct for the ta abe year 1921 or succeedng ta abe
years sha be determned and assessed by the Commssoner wthn four
years after the return was fed, and the amount of any such ta es due under
any return made under ths ct for pror ta abe years or under pror
Income, e cess-profts, or war-profts ta cts, sha be determned
and assessed wthn fve years after the return was fed, uness both the Com-
mssoner and the ta payer consent n wrtng to a ater determnaton, assess-
ment, and coecton of the ta and no sut or proceedng for the coecton
of any such ta es due under ths ct or under pror ncome, e cess-profts, or
war-profts ta cts, sha be begun, after the e praton of fve
years after the date when such return was fed, but ths sha not affect suts
or proceedngs begun at the tme of the passage of ths ct: .
It s conceded by appeant that the assessment of the addtona ta of
257,443.30, havng been made ebruary 9, 1923, was tmey, and no queston
s rased by the ta payer on the cams for refund or n the peadngs n
the court beow, and none s urged here, aganst the reguarty or vadty of
ths assessment.
Moreover, notwthstandng the waver was accordng to ts terms unmted
n tme, t s ndsputabe that under the decsons of the Supreme Court n
ken v. urnet (282 T . S., 279 Ct. D. 275, C. . -, 417 ) and Stange v. . 8.
(282 U. S., 270 Ct, D. 274, C. . -, 414 ), and pursuant to reguatons of
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277 and 278, rt. 1272.
346
the Commssoner of Interna Revenue promugated pr 11, 1923 (Mm. 3085,
C. . 11-1, 174), the vountary waver dated December 16, 1922, e tended the
tme for both assessment and coecton of the 1917 ta es ony to pr 1, 1924.
Ths was because a departmenta rung termnated a such wavers pr
1, 1924.
The appeant contends, however, that the court beow erred n hodng that
the second waver the one e ecuted on December 7, 192 ) operated retroac-
tvey to e tend the tme n whch the coecton of ta es assessed on ebruary
9, 1923, coud be made. In other words, the argument s that because the
waver of December 16, 1922, e pred pr 1, 1924, a rght to subsequenty
coect the ta es that were vady assessed on ebruary 9, 1923, ceased when
the Revenue ct of 1924 became aw by reason of the terms of that ct and
specfcay because of subdvson (c), (d), and (e) of secton 278 thereof.
The 1924 ct (43 Stat L., 253) became effectve on une 2, 1924. Secton
277(a) thereof, as far as matera to ths appea, states:
cept as provded n secton 278 and n subdvson (b) of secton 274
and n subdvson (b) of secton 279 (274 and 279 are not nvoved n ths
appea)
(2) The amount of Income, e cess-profts, and war-profts ta es Imposed by
the Revenue ct of 1917, the Revenue ct of 1918, and by any such
ct as amended, sha be assessed wthn fve years after the return was fed,
and no proceedng n court for the coecton of such ta es sha be begun
after the e praton of such perod.
Secton 278, (c), (d), and (e), respectvey, of the ct provdes:
(c) Where both the Commssoner and the ta payer have consented In
wrtng to the assessment of the ta after the tme prescrbed n secton 277
for ts assessment the ta may be assessed at any tme pror to the e praton
of the perod agreed upon.
(d) Where the assessment of the ta s made wthn the perod prescrbed
n secton 277 or n ths secton, such ta may be coected by dstrant or by
a proceedng n court, begun wthn s years after the assessment of the ta .
Nothng n ths ct sha be construed as preventng the begnnng, wthout
assessment, of a proceedng n court for the coecton of the ta at any tme
before the e praton of the perod wthn whch an assessment may be made.
(e) Ths secton sha not (1) authorze the assessment of a ta or the
coecton thereof by dstrant or by a proceedng n court f at the tme of
the enactment of ths ct such assessment, dstrant, or proceedng was barred
by the perod of mtaton then n e stence, or (2) affect any assessment
made, or dstrant or proceedng n court begun, before the enactment of ths
ct.
The appeant s poston concretey stated s that subdvson (e) of secton
278 mts and quafes subdvson (c) of the same secton so as to prevent
ta payers from effectvey wavng the beneft of the statute of mtaton n
a cases where the rght of the Government to coect ta es was barred on
the date of the enactment of the Revenue ct of 1924, to wt une 2, 1924.
We fnd no anguage n subdvson (e) of secton 278 or n any other part
of the ct of 1924 that e pressy forbds ta payers from, pursuant to the com-
prehensve wordng of subdvson (c), vountary wavng the bar aganst the
coecton of vady assessed and unpad ta es, the coecton of whch was
barred on une 2, 1924. Subdvson (e) merey decares that secton 278 of
the 1924 ct sha not nuthorze the assessment or the coecton of such ta es.
There beng no cear prohbton aganst ta payer s vountary waver or m-
taton for coectng ta es that have been tmey assessed, t woud be stran-
ng and ampfyng the terms of (e) and unnecessary restrctng the broad
and ncusve anguage of (c) to construe secton 278 as appeant contends.
We shoud not adopt a constructon that woud requre gvng to the statute
a meanng not e pressed by the anguage used.
Statutes of mtaton barrng the coecton of ta es that are |usty due
and unpad must receve a strct constructon n favor of the Government, and
mtaton n such cases w not be presumed n the absence of cear congres-
sona acton. (Loewer Reaty Co. v. nderson, C. C. . 2, 31 ed. (2d), 268
Ct. D. 125, C. . III-2, 218 .)
Moreover, the Supreme Court has hed that the rght of waver of statutes
of mtaton by ta payers does not necessary depend upon statutory author-
zaton. (See Stanye v. Unted mates, 282 U. S, 270 supra ken v. urnet,
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347 277 and 278, rt. 1272
282 U. S., 280 supra 1 torshem ros., etc., v. Unted States, 280 U. S., 453
Ct. D. 167, C. . I -1, 260 .) There Is nherent In the ta payer what may
be termed a common aw rght to wave the beneft of the bar of mtaton.
s ustratve of the broad effect that shoud be gven to vountary wavers
of mtaton aganst coectons of ta es the Supreme Court has pontedy sad
In ken v. urnet, supra :
It s contended that the waver of ebruary 5, 1921, s nvad because t
was e ecuted pror to the enactment of secton 250(d) of the Revenue ct
of 1921, whch was the frst of the Revenue cts to provde n terms for the
gvng of wavers. The argument s that pror to the enactment of that secton
the Commssoner acked authorty to accept wavers of the mtaton on the
perod wthn whch assessment mght be made under the cts of 1916 and
1917. Ths contenton s not sound. The mtaton perods on assessment
coud be waved by the ta payer n the same fashon as other statutes of
mtatons are waved. No reason appears why the Commssoner coud not
accept such a waver pror to the ct of 1921. though the Government
mght at that tme st have brought sut even though the perod for assess-
ment had e pred, t was thought desrabe to foow the norma and smper
course of assessment and coecton by dstrant proceedngs because of the
advantages afforded. The Commssoner requested the ta payer to e ecute a
waver n cases where proonged ree amnaton of the return seemed necessary.
If authorty was needed for the acceptance of such wavers, t may be found
n the genera broad admnstratve provsons of the respectve cts. ven
after the ct of 1921, a so-caed waver was not a contract. The requrement
n secton 250(d) of that ct that the Commssoner sgn the consent was
Inserted to meet e gences of admnstraton, and not as a grant of authorty
to contract wavers.
The obgaton of the appeant to pay the 1917 ta es had been actuay f ed
and determned by a vad assessment made pror to une 2, 1924, the day
the Revenue ct of 1924 went nto effect, and therefore the wavers under
consderaton n ths appea are dstngushabe from those nvoved n
Dncasve Mfg. Co. v. Commssoner (C. C. . 2, 56 ed. (2d), 893). In the
atter case a of the defcency ta es were assessed for the years n queston
subsequent to une 2, 1924. Upon that date the tme had aready e pred for
assessment for defcences for the years nvoved. Wavers were then gven
authorzng the Commssoner to assess defcences and actng on such wavers,
he assessed them. The Crcut Court of ppeas for the Second Crcut n that
case construed 278(e) of the 1924 Revenue ct as confnng 278(c) of the
same ct to nstances where assessment was not barred on une 2, 1924. In
the Unca ve acton t thus appears that the obgaton to pay, as we as
the rght of the Government to enforce payment of the defcency ta es, dd
not e st on une 2, 1924, whe here the ta debt and obgaton were fuy
estabshed and e stent at a tmes snce ebruary 9, 1923. that was
accompshed by the waver of December 7, 1925, was to revve the remedy of
coecton for a f ed and |ust debt that was due and undscharged on that
date. There was no attempt by the waver under consderaton here to thereby
create an ndebtedness that dd not e st and had not been estabshed at the
tme of the waver.
There are many strong ntmatons In the opnon of Mr. ustce randes
In urnet v. Rahcay qupment Co. (282 U. S., 295), that sustan our con-
cuson that the waver of December 7, 1925, s vad and effectve under secton
278 of the Revenue ct of 1924. In footnote 5 on page 300 of the offca report
of the Supreme Court decson n the urnet case reatve to a statement n
the opnon
We need not determne whether respondent s correct n assumng that
secton 278(e) quafed secton 278(c) n respect to wavers on assessment of
ta es barred pror to une 2, 1924
The foowng e panaton appears:
Subdvson (e) can not be sad to quafy every other subdvson n
secton 278. Nothng ndcates an ntenton to have t mt the effect of secton
278(a) whch permts assessment to be made or sut to be brought at any
tme In the case of a fase or frauduent return or a faure to fe any
return. Nor s there any ndcaton that t shoud quafy subsecton
(c) whch provdes for the gvng of wavers. The decson n Russe
. . 8. (278 U. 8., 181), Invoved the nterpretaton of subdvson (d) whch
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277 and 278, rt. 1272.
348
e tended the perod of coecton wthout any act on the part of the ta payer.
Subdvson (c) s effectve ony f the ta payer vountary e ecoted a waTer.
The vadty and effect of wavers gven by ta payers subsequent to une 2,
1924, and after the e praton of the perod of assessment of defcency ta es
were consdered by ths court n Caforna Iron Yards Co. v. Commssoner of
Interna Revenue (47 ed. (2d), 514), and udge Wbur n tre course of the
opnon n that case sad:
The pettoner seeks to revew the acton of the oard of Ta ppeas In
affrmng an order of the Commssoner of Interna Revenue f ng a defcency
ta of the pettoner for the years 1918, 1919, and 1920. The prncpa queston
In the case nvoves the vadty and effect of a waver of anuary 16, 1925.
Ths waver was sgned more than fve years after the return made by the
pettoner for the year 1919, and t s contended by the pettoner that, nasmuch
as ths waver was e ecuted more than fve years after return, and therefore
after the mtaton for assessment of the ta for the year 1919, t dd not
authorze the assessment whch was made by the Commssoner on I) cember
16, 1925. s the courts were dvded upon that queston (see note 1, page 146,
opnon of Supreme Court n Stange v. Unted States, 51 S. Ct., 145, 75 L. d.,
335, affrmng 08 Ct. CI., 395, decded November 4, 1929). and, as the matter
was then pendng before the Supreme Court n that case on certorar from
the Court of Cams, t was suggested that a decson heren be postponed unt
the decson by the Supreme Court n that case. Ths decson was rendered
anuary 5, 1931. It s there hed n accordance wth the contenton of the
Commssoner n ths case that the waver was effectve, notwthstandng that
t was e ecuted after the runnng of the statute of mtatons. It foows
that a propery e ecuted waver was effectve, notwthstandng the e praton
of the perod of makng the assessment before the e ecuton of the waver.
fortor shoud a propery e ecuted waver of the bar aganst coecton
of a ta that had been tmey assessed be hed effectve and bndng.
In art Gass v. 17. 8. (48 ed. (2d), 435), the Court of Cams n consderng
the scope of wavers under 278(c) of Revenue cts of 1924 and 1926, sad:
y vrtue of secton 278(c) of the Revenue cts of 1924 and 1926
the waver heren, athough fed after the mtatons had run aganst the
assessment of ta es aganst the pantff for the year 1918, revved n the
Commssoner authorty to make an assessment wthn the perod covered by
the waver.
See aso the recent decson of the Court of Cams n McDonne v. . 8
reported n Prentce- a edera Ta Servce on une 16, 1932, 1(556 TCt. D.
564, page 335, ths buetn , under paragraph 1308, sustanng the vadty of
vountary wavers of ta payers of the beneft of the statute of mtatons where
such wavers were gven after the enactment of the Revenue ct of 1024 n
cases where the statutory mtaton had e pred pror to the effectve date
of sad ct and to the same effect see decsons of the Court of ppeas of
the Dstrct of Coumba In Pottash ro. v. urnet (50 ed. (2d), 317) and
Consumers Ice Co. v. urnet (50 ed. (2d), 342).
We are of the opnon that the waver vountary e ecuted by the appeant
ta payer on December 7, 1925, was effectve fnd that t operated to revve the
rght of the Government to coect the ta es that had been awfuy assessed on
ebruary 9, 1923, athough at the tme ths waver was gven and pror to the
date the Revenue ct of 1924 became effectve, the statute of mtatons bad
run aganst the remedy of coecton. Wo thnk ths concuson s n conso-
nance wth the decson of the Supreme Court. (See urnet v. Racay
qupment Co., 282 U. S., 298 Stanpe v. . 8., 282 U. S., 274 ro cn d Sons v. -
urnet, 282 U. S., 283 Ct. D. 279, C. . -, 274 ken v. urnet, 282 U. S,
277.)
The appeant concedes that f the waver of December 7, 1925, Is effectve
the coecton made by the appeee on une 30, 1927, s vad and does not
consttute an overpayment whch appeant can recover because the waver of
December 7, by ts terms, ran to December 31, 1926, and the thrd waver, that
of November 29, 1926, e tended the tme for coecton beyond une 30, 1927,
to wt, to December 31, 1927. Our concuson that the waver of December 7,
1925, s vad and appeants concesson reatve thereto dsposes of any neces-
sty of consderng secton 1106(a) of the Revenue ct of 1920 that provded
that the bar of the statute of mtatons aganst the Unted States In respect
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349 277 and 278, rt. 1272,
of any Interna revenue ta sha not ony operate to bar remedy, but sha
e tngush the abty as we. It shoud be noted, however, that ths secton
was by the Revenue ct of 1928 repeaed as of ebruary 26, 1926. (Secton
612, ch. 852, 45 Stat. L.)
It Is fnay contended, however, assumng that the waver of December 7,
1925, s vad for a purposes, that the coecton made on ugust 28, 1928,
was unauthorzed and ega. The argument n support of ths contenton s
that because the thrd and ast waver had by ts own terms e pred before ths
coecton was made, a rght to coect was termnated on the e praton date
of the waver, notwthstandng the Revenue ct of 1926, whch e tended the
perod for coecton to s years after the date of assessment, became effectve
before the e praton date specfed n the waver. We thnk ths poston
untenabe.
Pror to December 31, 1927 (the e pry date of the ast waver), the Revenue
ct of 1926 (ch. 27, 44 Stat. L.) became aw. Ths aw became an ne tr-
cabe part of the waver. Its terms and provsons must be read nto and wth
the waver. Secton 277(3) thereof, as far as appcabe to ths appea, reads:
(3) The amount of ncome, e cess-profts, and war-profts ta es mposed by
the Revenue ct of 1917, the Revenue ct of 1918, and by any such
ct as amended, sha be assessed wthn fve years after the return was fed,
and no proceedng n court wthout assessment for the coecton of such ta es
sha be begun after the e praton of such perod.
Secton 278, (c), (d), and (e), respectvey, of sad ct provdes:
(c) Where both the Commssoner and the ta payer have consented In
wrtng to the assessment of the ta after the tme prescrbed n secton 277
for ts assessment the ta may be assessed at any tme pror to the e praton
of the perod agreed upon.
(d) Where the assessment of any ncome, e cess-profts, or war-profts ta
mposed by ths tte or by pror ct of Congress has been made (whether
before or after the enactment of ths ct) wthn the statutory perod of m-
taton propery appcabe thereto, such ta may be coected by dstrant or
by a proceedng n court (begun before or after the enactment of ths ct),
but ony f begun (1) wthn s years after the assessment of the ta , or (2)
pror to the e praton of any perod for coecton agreed upon n wrtng by
the Commssoner and the ta payer.
(e) Ths secton sha not bar a dstrant or proceedng n court begun
before the enactment of the Revenue ct of 1924 nor sha t authorze the
assessment of a ta or the coecton thereof by dstrant or by proceedng n
court (1) f at the tme of the enactment of ths ct such assessment, ds-
trant or proceedng was barred by the statutory perod of mtaton propery
appcabe thereto, uness pror to the enactment of ths ct the Commssoner
and the ta payer agreed n wrtng thereto, or (2) contrary to the provsons
of subdvson (a) of secton 274 of ths ct.
Secton 274(a) s the secton whch provdes that the Commssoner must
gve notce to the ta payer of a defcency n the ta and wthn 60 days from
such notce the ta payer may petton the oard of Ta ppeas for a redeter-
mnaton of the defcency. Ths secton has no appcaton to ths appea.
When sectons 277(3) and 278 (c), (d), and (e) of ths ct are consdered
together and In reaton to one another and then apped to the facts as found
by the court beow, t s cear that the coecton of ugust 28, 1928, was vad
and egay authorzed.
The assessment of ebruary 9, 1923, was vady made wthn fve years after
the return was fed on March 30, 1918, as requred by secton 277(3) and as the
three vountary wavers effectvey operated to e tend the tme for coecton
of the ta es so assessed to December 31, 1927, t s obvous from the pan and
e pct terms of secton 278 (c), (d), and (e) that were n effect durng the
perod that was specfed n the ast waver that the appeee was gven the
rght to enforce ths ta abty by coecton at any tme wthn s years
after the date of the assessment or unt ebruary 9, 1929. Subdvson (d)
e pressy refers to an assessment tmey mposed by ths tte or by pror
ct of Congress (whether before or after the enactment of ths
ct). nd t ceary authorzes coecton of ta es made under such an as-
sessment at any tme wthn s years from the assessment.
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27 and 278, rt. 1272.
350
The terms and provsons of the 1026 Revenue ct respectng the perod of
mtaton upon assessment and coecton of ta es are dfferent from those of
the Revenue ct of 1924. Whe secton 278(d) of both cts provde a 6-year
perod after the date of assessment for coecton of the ta , the 1924 ct n
secton 278(e) thereof provdes that secton 278 sha not affect any assessment
made before the enactng of the 1924 statute. No such condton s found n
the Revenue ct of 1926. To the contrary, ths atter statute n 278(d) thereof
e pressy made the 0-year perod for coecton appcabe to assessments be-
fore or after the enactment of the ct. It s cear, therefore, that Russe t.
Unted States (278 U. S., 181 T. D. 4260, C. . III-1, 206 ), whch hed that
the 6-year perod for coecton provded for n the 1924 ct dd not appy
where the assessment was made pror to une 2, 1924 (the effectve date
of the Revenue ct of 1924), because to make the 6-year perod appcabe to
such assessments woud affect them contrary to the e press terms of (e)
of secton 278 of the 1924 ct, s not n pont.
Ths court had before t n Toy v. Unted States (45 ed. (2d), 1 Ct D. 289,
C. . -, 454 ), an anaogous stuaton to the one now under dscusson, e -
cept that the part of the Revenue ct of 1926 that was consdered n the Toy
case was secton 311, reatng to estate ta es, nstead of secton 278, deang
wth ncome and profts ta es, but the mtaton and waver features of both
sectons are dentca. In the Toy case, the estate ta return was fed ugust
16, 1922, and a sut for coecton of ths ta was brought November 14, 1927.
It was hed that the 6-year perod for coecton provded by the Revenue ct
of 1926 apped. ppeant seeks to dstngush ths case from the one at bar
because n the Toy case the fve years for the assessment and coecton of the
ta dd not e pre unt after the enactment of the 1926 Revenue ct and
therefore that ct coud e tend the mtaton perod by mposng the 6-year
perod for coecton, but we thnk that the operaton of the wavers, under
secton 278, whereby the rght of coecton was e tended to a date after the
enactment of the 1926 ct, as we as the terms of the 1926 Revenue ct
tsef, make the prncpe of the Toy case appcabe here.
We have n an earer part of ths opnon mentoned that t has been setted
by the Supreme Court n orshem ros. Co. v. U. 8. (280 U. S., 466) and n
ken v. urnet, supra, that the ta payers wavers of the statute of mtaton
n assessment and coecton of ta es are not contracts that mt the power of
the Government from enforcng by egsaton the payment of ta es beyond the
tme specfed In wavers, and athough the appeant couched the terms of the
ast waver n a manner specfcay provdng that ths waver of the tme
for makng any assessment (coecton) as aforesad sha reman n effect
unt December 31, 1927, and sha then e pre, t can not thereby dsabe the
Government from proongng the perod for coecton by statute enacted whe
the waver was n force. The 1926 Revenue ct gave a 6-year perod for the
coecton of a assessments, tmey assessed and e stng at the tme the ct
went nto effect, wthout e ceptng those where wavers had been gven.
In the orshem case, supra, the Supreme Court sad:
The Government contends that the ncome and profts ta wavers
e ecuted by the corporatons were wavers by them of the statutory perod for
another year that whe these wavers were st n force and whe the
corporatons abty was thus st ave, the Revenue cts of 1924 and 1926
were passed, Increasng the perod for coecton to s years after assessment
that these cts are appcabe to the cases at bar and that, snce the coectons
were made wthn s years after the assessments, they were tmey made.
The corporatons nsst that the wavers were not merey wavers e tendng
the statutory perod, but were bndng contracts whch mted the tme n
whch the Commssoner coud assess and coect the ta es and that no change
n the aw made after the date of the contracts and enargng the tme for
coecton can affect ther rghts. They urge that the 1924 and 1926 cts dd
not purport to e tend the perods thus mted by contract and that, f con-
strued as e tendng such perods, the provsons of these cts are unconsttu-
tona. They conceded that, n the absence of contract, a egsature may con-
sttutonay engthen or shorten the perod In whch a rght may be enforced
by ega proceedngs.
14 We are of opnon that the contenton of the Government must preva.
The dstrct court was correct n hodng that none of the coectons In thU
case were barred by the statutes of mtaton. The |udgment s afrmed.
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351
280, rt. 1291.
S CTION 280. CL IMS G INST TR NS-
RR D SS TS.
rtce 1291: Cams n cases of transferred
assets.
I-29-5556
Ct. D. 519
federa ta es bankruptcy decson of court.
1. Coecton ttempted Dssouton ok Corporaton.
The provsons of the statutes of Inos that before a dssouton
of a corporaton organzed under the aws of that State sha be
accompshed a debts or abtes sha be dscharged and the
property of the corporaton devered to such persons as are en-
tted to the same and that a fu and compete verfed report of
the date and manner of payment of the debts be made to the
secretary of state are condtons precedent to the cessaton of
the e stence of the corporaton, ther purpose Is defeated by a
fase statement under oath to the secretary of state that there
were no corporate debts or abtes and a faure to compy
wth them renders the attempted dssouton noperatve and vod
as to the Unted States, and an assessment aganst the corporaton
s vad whch s made pursuant to corporate acton taken after
the attempted dssouton and made after compance wth the
statutory procedure necessary for the same commenced after the
attempted dssouton.
2. Same Cam oanst Successor Trust.
Where the ony consderaton for the transfer of corporate
assets to trustees s a promse by the atter to pay the debts
and dscharge the abtes of the corporaton, the Unted States,
havng estabshed the ega abty of the corporaton for a debt
due the Unted States, s entted to have the cam for the debt
aowed aganst the trust estate n a court of bankruptcy whose
duty t Is to treat the property of the bankrupt as a trust fund
for the beneft of the credtors of the corporaton accordng to
ther respectve prortes.
8. Same Identty of Corporaton and Successor Trust.
Where the assets of a corporaton are transferred to a trust
for the beneft of the stockhoders of the corporaton n proporton
to ther respectve nterests theren, the offcers of the trust are
the same as the offcers of the corporaton and the trust enters
on ts books as ts own debt the ta abty of the corporaton,
a bankruptcy court w regard the corporaton and the trust as the
same entty wth the resut that the ta due from the corporaton
s a drect abty of the bankrupt trust estate.
Unted States Crcut Court or ppeas for the Seventh Crcut.
In the matter of Wof Manufacturng Indu trcs, ankrupt Robert L. Tudor,
Trustee, appeant, v. Unted States of merca, appeee.
Lndey, .: Ths appea nvoves the queston of whether the dstrct court
rghtfuy overrued the ob|ectons of the trustee In bankruptcy to the cam
of the Government for ncome ta es.
Wof Manufacturng Co., an Inos corporaton, on December 31, 1920,
transferred a ts assets to red Wof, Pau . Wof, Leo . Wof and red
. Wof, as trustees under a so-caed common aw trust, upon the soe con-
sderaton that the trustees dscharge the abtes of the corporaton. In
the trust agreement t was provded that the trustees shoud use and empoy
the trust property frst n payng the corporate debts of the Wof company and
dschargng the abtes of sad corporaton, and further they shoud conduct
the busness and manage the property as prevousy. On March 21, 1921, the
ebruary 24, 1932.
opnon.
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2S0, rt. 1291.
352
stockhoders voted to dssove the corporaton, and on December 28, 1921,
report of such dssouton was fed wth the secretary of state, who, on the
same date, ssued certfcate of dssouton. t that tme there were n e st-
ence at east two edera ta abtes, one for the year 1919, whch s here
n controversy, and another for the year 1920, whch appeared n the baance
sheet of assets and abtes taken over by the trust.
The Government, nvestgatng the corporaton s ta report for 1919, re-
quested and receved from t, on ebruary 16, 1925, a waver of the statute
of mtatons e tendng the statutory perod for assessment to December 31,
1925. On September 1, 1925, the Commssoner sent by regstered ma to
the corporaton notce of assessment of addtona ncome ta for 1919 n the
amount of 31,443.70. On October 31, 1925, the corporaton fed wth the
Unted States oard of Ta ppeas ts appea from sad assessment. oth
the waver and petton for appea were e ecuted In the name of the corpora-
ton by red . Wof, as secretary and treasurer of the same. On March 5,
1928, the oard made ts decson fndng that there was a defcency n the
ncome ta pad by the corporaton for the year 1919 n the amount of 28,-
673.72. No revew of ths decson was ever sought.
The trust became bankrupt une 12, 1929. The orgna cam for the afore-
sad addtona ta , pus nterest, was fed on September 17, 1929, and the
amended cam, here reed upon, on March 17, 1930. The trustee ob|ected
to aowance of the cam upon the grounds that coecton was barred by the
statute of mtaton and that the bankrupt was not abe for the ta es as a
transferee of the corporaton. The referee sustaned the ob|ectons. Upon
revew the dstrct court reversed and set asde the order of the referee and
drected the aowance of the cam.
The appeant contends that the waver by the corporaton, ts appea and
Its a|pearance before the oard of Ta ppeas were the acts of a dssoved
corporaton and therefore vod, and that there has been no compance wth
the statutory requrements necessary In order to hod the trust abe for the
assessment.
The statute of Inos upon vountary dssouton of a corporaton provdes
that before a dssouton sha be accompshed a corporaton sha pay and
dscharge a ts corporate debts and abtes and dstrbute ts corporate
assets amongst the persons entted thereto. avng comped wth these
mandatory drectons, the corporaton sha then report to the secretary of
state a compete temzed st of a corporate debts and abtes and the
date and manner of payment of each debt and abty e stng. nother sec-
ton of the statute provdes n effect that the remedes of thrd persons aganst
the corporaton sha not be affected by the dssouton f asserted wthn two
years from the date thereof. Ths atter provson s not matera upon the
ssue heren presented.
The statute here under consderaton s a comparatvey recent one, and
the Supreme Court of Inos has not passed upon the effect of a faure to
compy wth the provsons thereof. It becomes our duty, therefore, to deter-
mne the ntent of the act. Obvousy, proceedngs to brng to an end a cor-
poraton, a creature of the State, empowered to acqure property, transact
busness, and ncur debts, s one that must be guarded wth the strctest of
supervson by the State. avng brought the corporaton nto the word nnd
havng authorzed ncurrence of abtes to others, the State s evdent obga-
ton before endng the e stence of ts creaton s to pace a possbe reason-
abe guards aganst n|ustce and n|ury to thrd persons. In recognton of
that duty, and n order to protect credtors, ts mandate n the statute aow-
ng dssouton s that a debts and abtes sha be dscharged and the
property devered to such persons as are entted to the same, and fu and
compete verfed report of the manner of payment of the debts be made of
record. These are condtons precedent to the cessaton of e stence of the
ega entty. Consequenty, If the corporaton does not compy wth the statute,
so far as the rghts of thrd persons are concerned, the dssouton s Inopera-
tve and vod.
In mercan ank d Trust Go. v. ahn (48 ed. (2d), 588), ths court ap-
proved the decson of the ower court to the effect that faure to gve the
requste statutory notce prevented an effectve dssouton as to such credtors
as were not notfed. In rank v. Weddern (68 ed., 818 (C. C. . 5)) t was
remarked, when such dssouton s brought forward to defeat credtors, the
court shoud see that a the formates prescrbed by the aws of the State and
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280, rt. 129L
the charter of the corporaton to brng about a ega dssouton of the corpora-
tons are strcty comped wth. These pronouncements are consonant wth
the pubc pocy of the State of Inos as announced by the supreme court n
repeated decsons. Thus, n Commerca Trust Co. v. Maers (242 111., 50), the
court sad: It s a part of the setted pubc pocy of ths State that upon the
dssouton of a corporaton, no mutter how the dssouton may be effected,
the corporaton sha nevertheess be regarded as st e stng for the purpose of
settng up ts affars. (See aso Snger Tacott Stone Co. v. utchnson,
176 111., 48, and wen v. mercan dety Co., 201 U. S., 322.)
In vew of the theory n Inos that the property of a corporaton consttutes
a trust fund for the payment of the debts of the corporaton (see Wheeer v.
Puman Iron Co., 143 111., 197), and the further pocy of the State that dssou-
ton sha not be competed unt and uness such fund s protected and the
statute strcty comped wth, t foows that the dssouton of the corporaton
In the present nstance can have no ega effect as to credtors f t s not n
compance wth the essenta provson of the statute above noted.
The record dscoses that when the attempted dssouton was reported,
the corporaton under oath assured the secretary of state that there were no
corporate debts or abtes. Ths was a postve msrepresentaton of fact
drecty contrary to the purpose of the provson of the enactment, and defeat-
ng the same, for f the State was erroneousy advsed that a debts had been
pad and dscharged t coud ony assume that the corporate assets had been
dstrbuted to the persons entted to the same, and that t was unnecessary to
fe a competey temzed st of corporate debts as requred by the statute.
Whatever mght be the effect as to other persons, there can be no queston that
ths faure to compy wth the statutory provsons prevented the dssouton
from becomng an effectve bar to the Government s acton n attemptng to
coect the ta . nd there havng been no compance wth the statute by the
corporaton and the dssouton beng vod as to the Government, the 2-year
mtaton provded for actons aganst a dssoved corporaton where dssou-
ton s perfected does not appy.
It foows therefore that the Government propery made assessment of ta es,
that the oard of Ta ppeas had ursdcton of the partes when t entered
udgment, and that the amount found due was ad|udcated n the fna order, of
whch no revew has been had.
We have observed that the ony consderaton for the transfer of the cor-
porate assets to the trustees was the agreement by the atter to pay the
debts and dscharge the abtes of the corporaton, and that the property
receved n trust was to be devoted frst of a to the dscharge of such debts
and abtes. Upon such wrtten contract, under the statutes of Inos
and Indana, actons are barred n 10 years. Wthn that tme the Government
fed ts cam n the court of bankruptcy, showng that there had been egay
estabshed a ta abty aganst the corporaton n the sum camed.
oth Inos and Indana recognze the rue that thrd persons for whose
beneft a contract s made may brng acton thereon. (See Commerca v. rk-
cood, 172 111., 563 Dean v. Waker, 107 111., 540 Chcago Tte t Trust Co. v.
Centra Trust, 312 111., 396 ess v. Lackey. 191 Ind., 107 Tnker v. Swayne,
71 Ind., 562 Ransdc v. Moore, 153 Ind., 393.) nd despte what may be the
roe n varous other Commonweaths, the same rue has ong abded n the
edera courts. (See endrck v. Lndsay, 93 U. S., 143 Prnces musement
Co. v. Wes, 271 ed., 226 (C. C. . 6. certorar dened, 254 U. S., 701) Gbson
v. ctor Takng Machne Co., 232 ed., 225 arker v. Puman, 124 ed., 555
at 567 ackmore v. Parkes et a., 81 ed., 899 (C. C. . 6) : In Re Dresser,
135 ed., 495 (C. C. . 2) Mett v. Omaha ank, 30 ed. (2d), 665 (C. C. .
8).) It foows that the Government, havng estabshed the ega abty
of the corporaton, was entted to fe and have aowed ts cam n the bank-
rupt estate of the partes who assumed and agreed to pay such abtes.
urthermore, t was the court s duty, sttng as a court n equty, to treat the
property of the bankrupt as a trust fund for the beneft of the credtors of
the corporaton accordng to ther respectve prortes.
We are of the opnon aso that the court was |ustfed n treatng the
ta as a drect abty, of the bankrupt on the ground that there was dentty
of entty n the two organzatons. The members of the Wof famy who were
benefcares of the trust were the stockhoders of the corporaton. s such
they authorzed the transfer of the assets to themseves for the od stock-
hoders n the same proportons. Offcers of the corporaton became dentca
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280, rt. 1291.
354
offcers of the trust. The ony change was one from corporate e stence to
trust e stence. The waver, e ecuted n the name of the corporaton, was
sgned by the secretary and treasurer of the trust. The appea, perfected In
the name of the corporaton, was e ecuted by the same offcer of the trust.
The trust vountary entered on ts books, as ts own debt, the ta abtes
of the corporaton for 1920. It was as f the Wof famy removed themseves
and ther property from one house to another as f they changed ther address
but none of ther trats, obgatons or property rghts.
The bankruptcy court, beng a court of equty, ooks beyond the mere outward
she to the partes n nterest beyond the fctons of aw and corporate forms
to the purposes and offcers who are dentfed wth that purpose. (See
McCask Co. v. . S., 216 U. S., 504.) The edera Government recognzes
rues of property but s not compeed to recognze transfers whch resut n
no substanta change n benefca ownershp. (See Osburn Caforna Cor-
poraton v. Wech, 89 ed. (2d), 41 Ct. D. 173, C. . I -1, 250 .)
The bankrupt estate s abe for the ta as an entty of the same Identty
as the orgna ta payer. It s aso abe, under the terms of the trust agree-
ment, to pay the ta abty of the corporaton. The decree of the dstrct
court s affrmed.
rtce 1291: Cams n cases of transferred I-35-5640
assets. Ct. D. 547
INCOM T R NU CT O 1920 D CISION O COURT.
Transferee Transfer Wthout Consderaton.
In the crcumstances dscosed t s hed that the transfer of
certan assets of the S Company to the Company was wthout
consderaton to the S Company. The Company Is therefore sub-
|ect to the abty of a transferee of the property of the S Com-
pany n respect of a ta mposed upon the S Company as provded
by secton 280(a) 1 of the Revenue ct of 1926.
Dstrct Court of the Unted States for the Western Dstrct of Lousana,
Shreveport Dvson.
ohange Ratona ank of Shreveport, La., pantff, v. Unted State of
merca, defendant.
March 14, 1932.
OPINION.
Dawkns, .: Pantff seeks to recover from the Unted States the sum of
2,063.71 aeged to have been pad under protest as ncome ta es for the
year 1924, assessed aganst the Natona Securty Co. of Shreveport, on the
cam of the Government that the pantff bank had taken over or absorbed
the property and assets of the sad Securtes company, and was, therefore,
abe for sad ta es under secton 280 of the Revenue ct of 1926.
Defendant denes the matera aegatons of the petton and of course
aeges n substance that the ta es were awfuy coected.
Some tme pror to the frst of 1925, the natona bank e amner, havng
found certan questonabe paper In the portfoo of the change Natona
ank of Shreveport, whch affected ts capta stock and surpus, caed upon
the stockhoders to make the same good, Rather than assess themseves upon
ther stock, a separate corporaton was formed by some of the stockhoders of
the bank, under the name of the change Natona Securtes Co. (but was
ater changed to Natona Securtes Co.) and referred to heren as the
Securtes company, whch took over ths paper and pad the bank therefor
the sum of 70,000. The funds wth whch to make the purchase were rased
by subscrptons to the stock of the Securtes company.
Thereafter, on ebruary 7, 1925, Messrs. Mnor Merwether and .
Conway, desrng to enter the bankng busness, made an agreement wth
. C. ayne, then presdent of the bank, to purchase a controng nterest n
ts capta stock, amountng to some 1,500 shares. There was st addtona
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280, rt. 1291
questonabe paper In the bank, and Payne agreed uncondtonay, not ony
to guarantee a bs recevabe and accounts due the bank, but aso to ndem-
nfy t aganst any Indebtedness whch mght be due by t to the e tent that
ether mght affect the capta, surpus and undvded profts up to 213,000.
s further securty, t was stpuated that he shoud depost wth the bank
the sum of 43,750, n cash, to draw nterest at the rate of 4 per cent per
annum, so ong as t was not necessary to appy the same to the dscharge
of the guaranty. It was further stpuated that of the prce of 185,000 pad
to Payne for the 1,500 shares of stock, beng at the rate of 125 per share,
35,000 was to be the consderaton for the uncondtona guaranty above
mentoned. Payne was then presdent of the Securtes company, whch was
engaged n the busness of dscountng purchase prce notes, gven for auto-
mobes, and t was provded n sad agreement that the bank, of whch Mer-
wether and Conway were to assume contro, as a part of the consderaton,
wotd contnue to dscount ths paper for the Securtes company up to
200,000 on certan specfed terms. It was further agreed that the name o
the Securtes company shoud be changed so as not to resembe that of the
bank, whch was ater done by changng t to the Natona Securtes Co.
On ebruary 11, 1925, the sad agreement was carred out by the payment
of the purchase prce and transfer of the bank stock, the depost of the
43,750, and the e ecuton by Payne n favor of the bank, Merwether and
Conway of the guaranty agreement. In sad ndemnty or guaranty t was
provded that ether Merwether, Conway, the change Natona ank or ts
assgns, mght enforce the same by approprate acton.
Later, the stockhoders of the Securtes company, who had aso owned
some of the stock n the bank, transferred by Payne to Merwether and Con-
way, concuded that there mght be some equty or surpus remanng after
the dscharge of the obgatons for whch the 43,750 was deposted on March
2, 1925. Ths money had been reazed from the sae of the bank stock to
Merwether and Conway, and a resouton was passed by the board oft
drectors of the Securtes company, authorzng the underwrtng of the guar-
anty gven by Payne to the bank. In ths way the Securtes company, or
the stockhoders thereof other than Payne, were permtted to share n the
benefts, f any, to accrue from a refund of ths depost of 43,750.
Thereafter, on pr 13, 1926, n dscharge of ths obgaton to Payne, the
Securtes company passed another resouton, authorzng Payne and . .
ocker, or ether of them, to sgn any and a notes and other nstruments
n favor of the change Natona ank to effectuay carry out
the assumpton of that certan act of guaranty e ecuted by . C. Payne u
favor of the sad bank, the obgaton of the sad . C. Payne havng been,
assumed by ths corporaton.
Thereafter, on pr 15, 1926, ocker sgned for the Securtes company a
bank agreement or pedge, authorzng the bank to appy any and a securtes
or coateras whch mght be hed for account of the Securtes company to
any obgaton due by t, and on the same day, Payne, as presdent of the
Securtes company, sgned a note In favor of the bank for the sum of 21,307.94,
whch represented the baance due the bank after reazng as far as possbe
up to that tme on the questonabe paper hed by t and guaranteed by Payne.
The Securtes company havng sod ts busness of dscountng cr fnancng
automobe paper to the Unted States Securtes Co., that s a notes and
contracts hed by t arsng therefrom (whch n effect put an end to ts
e stence), turned back to the bank as coatera for the sad pedge agreement
and note of date pr 15, 1926, a of the od paper or obgatons whch
remaned of that taken over at ts organzaton by the Securtes company under
the orgna purchase and for whch t had been pad 70,000 to the bank. n
amount was utmatey coected suffcent, wth the depost of 43,750, to
reduce the baance due upon the note to somethng over 17,000, whch remans
unpad to the bank.
It s the contenton of the pantff that the transfer by the Securtes
company of these assets, to wt, the remander of the questonabe obgatons
taken over n 1924, was n fufment of ts assumpton of the guaranty of
Payne, and that the consderaton fowng to t was the hope or e pectaton
that there woud be an equty or surpus remanng from the depost of 43,750,
to be returned to the Securtes company for the beneft of ts stockhoders.
On the other hand, defendant cams that the assumpton of the guaranty, f t
ever e sted, was to Payne and not to the bank, and that when the resouton of
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280, rt. 1291.
356
pr 13, 1926, was passed and the bank agreement of pedge and note for
21,307.94 were e ecuted on pr 15, 1926, the same were done wthout any
consderaton from the bank, and that the atter havng receved or absorbed
a of the remanng assets of the Securtes company, became abe for the
ncome ta es of the Securtes company, due for the year 1924, under the
provsons of secton 280 of the Revenue ct of 1926.
I thnk t reasonaby cear that, n the frst nstance, the attempt to put the
Sectrtes company n the pace of Payne wth respect to the guaranty to the
bank, was a transacton whoy between hm and the sad Securtes company,
to whch the bank was n no wse a party, and that when the resouton of
pr 13,1926, was passed and the note and pedge of pr 15, 1926, was sgned,
t had been defntey ascertaned that there woud be no equty remanng from
the 43,750 depost. So that the transfer of the remanng assets of the
Securtes company to the bank was wthout consderaton to that company and
was n effect an attempt by t and ts stockhoders to have whatever mght be
reazed from these assets apped upon the bank s debt.
In these crcumstances, I am constraned to hod that the bank became
abe under sad secton of the Revenue ct for the ncome ta es whch had
accrued and were due by the Securtes company. It foows that the pantffs
demand must be re|ected. Proper decree shoud be presented.
INCOM T R NU CT OP 1026 D CISION O COURT.
1. ssessment Lmtaton Transferee.
The mang of a notce of defcency to a transferee wthn one
year after the e praton of the perod of mtaton for assessment
aganst the ta payer s wthn the perod of mtaton for assess-
ment of the abty of the transferee provded n secton 280(b)
of the Revenue ct of 1926 and an assessment of the defcency
aganst the transferee, notce of whch was maed to the trans-
feree wthn that perod, s not barred because the notce to the
ta payer of the defcency was maed to the ta payer after the
e praton of the statutory perod for assessment of the ta aganst
the ta payer.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (19 . T. ., 1080) Is
affrmed.
Unted States Crcut Coubt of ppeas fob the fth Crcut.
Cty Natona ank, pettoner, v. Commssoner of Interna Revenue,
respondent.
Petton for revew of decson of the Unted States oard of Ta ppeas (Dstrct of
Te as).
btan, Crcut udge: Ths s a petton to revew a decson of the oard
of Ta ppeas, whch hed the Cty Natona ank of Wchta as, Te ,
abe, as transferee of the assets of the Natona ank of Commerce, for a
defcency In the ncome ta of the atter for that part of the year 1920 endng
pr 30, when the two banks were consodated under the provsons of the
ct of Congress of November 7, 1918. (40 Stat, 1043.) The opnon of the
oard s reported n 19 . T. ., 1080.
fter the consodaton busness was contnued n the name of the Cty
Natona ank and as survvor t of course became the owner of the assets of
the ank of Commerce. On May 23, 1921, ncome ta return was fed n the
name of the ank of Commerce for the perod begnnng anuary 1, 1920, and
endng pr 30, 1920, the date of the consodaton. defcency notce was
rtce 1291: Cams n cases of transferred
assets.
I-35-5641
Ct. D. 548
efore btan, oster, and Waker, Crcut udges.
ebruary 22, 1932.
opnon.
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357
282, rt. 1293.
maed to It In uy, 1926, and to the Natona Cty ank, as transferee n
November, 1926. It s therefore to be conceded that the assessment and co-
ecton of the ta as aganst the transferor bank was barred by the 5-year
statute of mtatons. (Revenue ct of 1918, secton 250(d), 40 Stat., 1083.)
The queston for decson s whether the assessment was kewse barred as
aganst the Cty Natona ank, transferee and pettoner here. The Revenue
ct of 1926 provdes that the perod of mtaton for assessment of a ta
abty of a transferee sha be one year after the e praton of the perod
of mtaton for assessment aganst the ta payer. (Secton 280(b) 26
T . 8. O. ., secton 1069.) ccordng to the pan terms of ths statutory
provson, the assessment aganst pettoner was made we wthn the statu-
tory perod appcabe to a transferee, and t coud be coected by sut nst-
tuted wthn s years thereafter under secton 278(b) of the same ct (26
U. S. C. ., secton 1061). ut It s argued that n the absence of a vad
and tmey assessment aganst the transferor ta payer there can be no assess-
ment or enforcement of the ta aganst the transferee, because of the genera
provson contaned n secton 278(b), whch makes the assessment of Income
ta wthn the perod of mtaton a condton precedent to coecton by sut
The case of Unted States v. Updke (281 U. S., 489 Ct. D. 192, C. . I -1,
228 ) s cted n support of ths argument, but ceary t s not n pont. There
the queston was as to the perod appcabe to the coecton of an assessment.
Sut was brought seven years after the assessment was made, or more than a
year after It was barred. The queston here reates to the perod aowed
for assessment, whch under secton 280 (b) was made wthn the statutory
perod. There s and coud be no contenton here that the sut to coect the
ta was barred. It s aso contended that the transferee can not be hed,
because under secton 1106(a) the statute of mtatons not ony operates to
bar the remedy but e tngushes the abty. compete answer to that
contenton s that mtaton had not run aganst the transferee, because the
assessment of ts abty was made wthn the year aowed by secton 280(b) 1
after the e praton of the perod of mtaton for assessment aganst the
ta payer.
The petton for revew s dened.
S CTION 282. N RUPTCY ND
R C I RS IPS.
rtce 1293: ankruptcy and recevershps. I-30-5564
Ct. D. 522
federa, ta es bankruptcy decson of court.
Order arrng ng of Cam fob Ta es Due the Unted States.
n order of a referee n bankruptcy barrng the Unted States
from partcpatng n the estate of a bankrupt uness a cam
aganst the estate for ta es due be fed on or before a specfed
date does not bar, whe undstrbuted funds reman n the hands
of the trustee n bankruptcy, the fng after that date of a cam
by the Unted States aganst the estate for ta es assessed after
that date.
Unted States Cbcut Court of ppeas, S th Crcut.
Unted States of merca, appeant, v. W. . ott, Trustee n ankruptcy
of Prcy . arney, appeee.
ppea from the Dstrct Court for the astern Dstrct of entucky.
pr 15, 1932.
OPINION.
cks, Crcut udge: e ander arney ded pror to 1924, Prcy . arney
s hs wdow. On ugust 3, 1925, she was ad|udged a bankrupt. ppeee
ott was apponted trustee of her estate. On May 12, 1927, the Commssoner
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5282, rt. 1293.
358
of Interna Revenue fed wth ott as recever of the estate of e ander
arney a cam for ncome and profts ta es for the years 1919 to 1924, ndn-
sve. rom the ensung correspondence t deveoped that ott was not
recever of the estate of e ander arney but a queston arose as to whether
the ta es camed were chargeabe to the estate of Prcy . arney. Where-
upon on une 28, 1927, the trustee fed a petton n the bankruptcy court for
an order barrng the Unted States from partcpaton In the estate upon any
cam for ta es for the years n queston or, n the aternatve, drectng t to
fe ts cam on or before a day certan.
Upon consderaton of ths petton the referee ordered that the Unted
States fe any cam seekng ta es out of the estate of Prcy . arney on or
before September 1, 1927, and further ordered that f such cam shoud not be
fed by that date the Unted States woud be barred from partcpatng n the
estate. The coector was served wth a copy of ths order.
t the nstance of the Commssoner an nvestgaton made In March, 1929,
dscosed that Prcy . arney, hersef, had faed to fe returns of ncome
for the years 1918 to 1925, ncusve, whereupon the Commssoner fed returns
for her and made speca assessments aganst her (Tte 26, secton 97, U. S. C.)
for those years n the aggregate sum of 5,752.18, and on March 21, 1929, the
coector fed a cam therefor n the bankruptcy court aganst her estate and
sought prorty of payment under secton 64-a, b(7) of the ankruptcy ct
The trustee moved to strke ths cam upon the ground that t was barred by
the order of une 28, 1927. The referee sustaned the moton and hs acton
was confrmed.
Nether the amount nor egaty of the cam was questoned and at the
tme t was strcken there remaned n the court, undstrbuted, funds suff-
cent for ts payment We thnk the court erred n dsaowng the fng of
the cam. We do not thnk that the rght of the Government to fe ts cam
and have t consdered on ts merts by the court was uncondtonay de-
stroyed by the bar order. Such orders were sustaned In re nderson (279
ed., 525, 527, C. C. . 2) and n In re Stavn (12 ed. (2d), 471, 473, D. C).
They e n the nherent power of the court They are anaogous to the
usua orders n credtors suts and nsovent proceedngs In chancery whereby
camants are requred to come n wthn a mted perod or be e cuded
from partcpaton n assets. (Danes Chancery Practce, 4th mercan ed.,
oume II, page 1-04.)
ut such orders n bankruptcy are wthn the contro of the court unt
the termnaton of the case and may be revoked f no one suffers n|ury
thereby. (In re Ives, 113 ed., 911, 913, C. C. . 6 see aso Peope v. opkn ,
18 ed. (2d), 731, 733, C. C. . 2.) We thnk the crcumstances here ca for
an appcaton of ths prncpe. The fund beng n court, the ta es may yet be
pad and the trustee have credt therefor as provded by secton 64-a, ank-
ruptcy ct Credtors acqured no vested nterest n the fund n vrtue of the
bar. The order was ntended ony to hasten the wndng up of the estate
and to protect the trustee n ts dstrbuton. (In re nderson, supra, 529
Peope v. opkns, supra.) It has been the practce of equty courts to abro-
gate the tme mt for fng cams where reasonabe e panaton Is offered
for fang to compy and to et n camants upon such terms as mght be
Imposed as ong as the fund s n court. (Danes Chy. PI. and Prac, supra,
page 1205 In the Matters of oward, 76 U. S., 175, 184 ohnson v. Water ,
111 U. S, 640, C74 Ooott v. eadrck, 141 U. S., 543, 548 rnneU v. Mer-
chants Ins. Co., 16 N. . q. Rep., 283, 284 rooks v. Gbbons, 4 Page (N. Y.
Chy. Rep.), 374 urchard v. Phps. 11 Page (N. Y. Chy. Rep.), 66 see
aso Wechser v. . 8., 27 ed. (2d), 850, 851, C. C. . 2 U. 8. v. rmngham
Trust d Savngs Co., 258 ed., 562, 564, C. C. . 5.) We do not thnk that
the Government n seekng to coect ta es shoud be treated wth ess favor
than genera credtors. In ths case t coud not have presented ts cam
before the e praton of the mted perod because the ta es were not assessed
unt afterwards. In ths respect the case dffers from In re nderson, supra,
reed upon by appeee, but s smar to In re ates Machne Tractor Co.
(8 ed. (2d), 424. 425, D. C. T. D. 3762, C. . I -2, 98 ). cted by appeant
We recognze that the assessment was not made nor the cam presented
unt about a year and a haf after the prescrbed perod but t must be
remembered that the assessment was upon a return made by the Comms-
soner after an ndependent nvestgaton of the affars of the bankrupt and
because of her defaut. If aches shoud be attrbuted to the revenue agents
of the Government under such drcumstunees t shoud not be Imputed to the
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359
284, rt. 1304.
Government tsef In a case Invovng ts pecunary nterests. (Son Pedro
Canon De ffua Co. v. . 8., 146 U. S., 120, 135 . 8. v. eebe, 180 D. S., 343,
354 U. 8. v. Mchgan, 190 U. S., 379, 405.)
The order of the dstrct court s reversed and the case remanded wth
drectons to reverse the order of the referee and aow the presentaton of
the cam.
S CTION 284. CR DITS ND R UNDS,
rtce 1304: Cams for refund by ta payers. I-39-5725
( so Secton 1116, rtce 1371.) Ct. D. 568
INCOM ND C SS PRO ITS T S R NG CT O 1926 D CISION O
COURT.
1. Sut Peopeb Party ab Consodaton of Companes s-
sgnment of Cam fob Ta es.
Where the C Corporaton resuts from the consodaton of the
Corporaton and the M Corporaton, the C Corporaton acqurng
the assets and assumng the abtes of the consodated com-
panes and becomng the owner of any cam for the refund of ta es
assessed aganst the Corporaton, the O Corporaton s the
proper party to prosecute a sut for the refund of such ta es and
secton 3477 of the evsed Statutes forbddng a transfers and
assgnments of any cam upon the Unted States before ts aow-
ance does not prohbt such sut.
2. Coecton Lmtaton Credt When owed.
credt of any Income or profts ta s aowed under secton
1116 of the Revenue ct of 1926 on the frst date on whch the
Commssoner sgns the schedue of overnssessments n respect
thereof and the sgnng of that schedue wthn the statutory perod
of mtaton on the coecton of the ta aganst whch the credt
s taken accompshes a awfu coecton thereof.
Codbt or Cams of the Unted States. No. L-477.
Consodated Paper Co. v. The Unted States.
May 31, 1932.
OPINION.
rm TON, udge, devered the opnon of the court.
Upon the facts n ths case wth reference to the organzaton of the pan-
tff und the acquston by t of the assets, through the consodaton of the
oehme Ranch Co. and the Monroe nder oard Co., we are of opnon
that the pantff s the proper party to prosecute ths sut, and that the man-
tenance of the sut by the pantff s not prohbted by secton 3477 of the Revsed
Statutes. The facts show that the pantff acqured the assets and assumed
the abtes of the Rauch company and the nder oard company, as the
resut of a consodaton. though certan assets of the consodated com-
panes, ncudng cams of the nature here nvoved, had been emnated
from the nventory vaues used as the bass for ssung preferred stock, the
common stock of the pantff bore an ndorsement to the effect that such
assets, f and when reazed, shoud be dstrbuted soey among the hoders
of ts common stock Issued n e change for stock of the company whch had
owned such assets. The common stock certfcates of the pantff each bore
an addtona ndorsement showng whether the same was ssued n e change
for stock of the Rauch company or the nder company. The pantff s
therefore the owner of the cam and f there shoud be recovery t w be
credted to the so-caed oehme Rauch account, and f there shoud
eventuay be a net credt n that account, the amount thereof w be dsbursed
as a speca dvdend to the then hoders of the pantffs stock ssued n
e change for the oehme Rauch stock. The rght to partcpate n any
recovery n ths case depends therefore upon the ownershp of the stock of
160903 33 24
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284, rt. 1304.
360
the pantff and has no connecton wth the orgna owner of oehme Ranch
stock, as such. We thnk ths queston s controed by the decsons n Sea-
board r Lne Raway v. Unted Sates (256 U. S., 655) and nga Co,
Inc., v. Unted States (44 ed. (2d), 447).
The pantff contends wth reference to the ast queston that the credt of
overpayments for 1914 to 1919, ncusve, aganst the ta of 103,347.78 for
1920 was aowed by the Commssoner October 31, 1927, on whch date the
coecton of the 1920 ta was barred that the Commssoner s frst aowance
on October 12, 1926, was canceed and was therefore vod and of no effect as
a coecton of the 1920 ta .
The defendant nssts that snce the credt n ths case was aowed after
the enactment of the Revenue ct of 1926, the sgnng of the schedue of
overassessments on September 20, 1926, consttuted the aowance of the credt
wthn the meanng of secton 116 of the Revenue ct of 1926 rather than the
sgnng of the schedue of refunds and credts, orm 7805- , and that snce
none of the entres made on the schedue of overassessment on ths form was
erased or deeted, there s no mert n the cam of the pantff that there was
no aowance of credt unt the Commssoner sgned a suppementa schedue
of refunds and credts on October 31, 1927. The cam of the defendant s
predcated upon the anguage of subdvson (b)(2) of secton 1116, whch
provdes that the term date of the aowance of the refund means, n any
case, the frst date on whch the Commssoner sgns the schedue of over-
assessments n respect thereof.
We are of opnon that the poston taken by the defendant on ths pont 1b
correct. Pror to the enactment of the Revenue ct of 1926 t was hed In
rard Trust Co. v. Unted States (270 U. S., 163 T. D. 3919, C. . -2, 209 ),
that a refund or credt was aowed when the Commssoner approved the
schedue of refunds and credts prepared and forwarded to hm by the co-
ector of nterna revenue after the coector had made approprate entres n
the schedues of overassessments theretofore sgned by the Commssoner and
transmtted to the coector. That case arose under secton 1324(a) of the
Revenue ct of 1921, whch provded that upon the aowance of a cam for
refund or credt, nterest shoud be pad under certan crcumstances. Secton
1019 of the Revenue ct of 1924 provded that upon the aowance of a refund
or credt, nterest shoud be pad thereon to the date of the aowance. Sec-
ton 1116 of the Revenue ct of 1926, however, provded that upon the aow-
ance of a credt or refund, nterest shoud be pad n the case of a refund to
the date of the aowance, and n the case of a credt to the due date of the
amount aganst Whch the credt s taken, but f the amount aganst whch the
credt s taken s an addtona assessment then to the date of the addtona
assessment. The reason for makng the change wth reference to the payment
of nterest upon an overpayment credted aganst a ta due for another year
and the aowance of nterest on an overpayment to be refunded was that the
ta payer shoud receve nterest on an overpayment ony durng the tme that
he was not ndebted to the Government for a ke amount. Rversde d Da
Rver Cotton Ms v. Unted States, 69 C. Cs., 70, 37 ed. (2d), 965 Ct. D. 215,
C. . I -2, 269 .) The anguage of secton 1116 s that Upon the aow-
ance of a credt or refund nterest shn be pad on the
amount of such credt or refund from the date such ta
was pad to the date of the amcance of the refund, or In the case of a credt,
to the due date of the amount aganst whch the credt s taken, but f the
amount aganst whch the credt s token s an addtona assessment
then to the date of the assessment of that amount.
Subdvson (b)(2) of ths secton provdes that s used In ths secton
the term date of the aowance of the refund means, n the case of any
Income, war-profts, or e cess-profts ta , the frst date on whch the Comms-
soner sgns the schedue of overassessments n respect thereof. Subdvson
(c) of ths secton aso provdes that Ths secton sha be appcabe to any
refund pad, and to any credt taken, on or after the date of the enactment
of ths ct, even though such refund or credt was aowed pror to such date.
The pantff contends that the defnton of the date of the aowance of
the refund s specfcay mted to that term as used n secton 1116 for the
purpose of determnng the ast nterest date n the case of a refund and that
a dfferent date s prescrbed n the case of a credt that the secton pany
ays down a rue for the computaton of nterest and does not. n any sense,
change the stuaton as to when a refund s aowed or a credt taken, as
matter of substantve aw.
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361 284, rt. 1304-

We thnk, however, that Congress Intended by subdvson (b) (2) of sec-

ton 1116 to f the date of the aowance of an overpayment n the case of any
ncome, war-profts, or e cess-profts ta , whether the amount aowed was to
be refunded or credted, and, n so dong, t defntey f ed the date of such
aowance as the frst date on whch the Commssoner sgns the schedue of
ovcrassessments n respect thereof. In defnng the term date of aowance
of the refund, Congress was construng the word refund n the broad sense
of an overpayment rather than n the technca sense of a repayment to the
ta payer by cheek of an overpayment, where the ta payer was not ndebted for
a ta for any other year, or the repayment by check of the e cess of overpay-
ment credted. Ths constructon s supported by Report No. 52 of the Senate
Commttee on nance, S ty-nnth Congress, frst sesson, and Conference
Report No. 350, page 56, S ty-nnth Congress, frst sesson, and whch t was
stated that In the case of refunds, nterest s aowed to the date of the aow-
ance of the refund. In practce, the Commssoner frst sgns a schedue of
overassessments, whch s sent to the coector n order to determne whether.
the overpayment shoud oe credted or refunded. The commttee amendment
proposes to f as the date on whch a refund s aowed the date on whch the
Commssoner sgns the schedue of overassessments. Itacs supped.
The anguage of subdvson (a) of secton 1116, consdered as a whoe, seems
ceary to Indcate that there shoud be no dstncton between the date of aow-
ance of a credt and the date of aowance of a refund. The commttee re-
ports, e panng the ntenton and purpose of subdvson (b)(2) of secton
1116, support ths nterpretaton. In reaty, the aowance of a credt s the
aowance of a refund. In ether case that whch s aowed s an overpay-
ment. When a credt s aowed there s techncay and egay the aowance
of a refund, but, nstead of payng the same by check, the amount thereof s
apped n satsfacton of a ta due the Government by the partcuar ta payer
for another year or perod. In actua practce, refunds and credts are aowed
by the Commssoner on the same schedue and n the same manner, and the
procedure n both cases s the same.
In ths case the Commssoner sgned the schedue of overassessment Septem-
ber 20, 1926, and the amount of 103,347.78 thereof, whch had been pad, was
apped by the coector on October 1, 1926, to the satsfacton of the outstand-
ng ta Indebtedness of 114,753.38 of the pantff on the orgna return for,
1920. The credt was therefore aowed September 20, 1926. s stated n
Unted States v. Swft Co. (282 U. S., 408 Ct. D. 290, C. . -, 283 ), Ths
constructon of the ct brngs about unformty n admnstraton, as t makes
the aowance of credts and refunds smutaneous. The provso contaned n
the frst defcency ct, approved ebruary 28, 1927, herenbefore quoted, re-
qured the report to the Congressona ont Commttee on Interna Revenue
Ta aton ony wth respect to any cam aowed by the Commssoner, and,
n order to make such report t was not necessary for the Commssoner to
cance hs aowance of the overpayment to be credted or repad by check.
Pantff urges that ths court hed n tas Powder Co. v. Unted States
(69 Ct. Cs., 558, 40 ed. (2d), 136) that a credt s aowed wthn the mean-
ng of secton 1116 of the Revenue ct of 1926 when the Commssoner sgns
the schedue of refunds and credts. The queston n that case was whether
the credt was taken on the date the Commssoner sgned the schedue of over-
assessments or the date on whch he sgned the schedue of refunds and credts,
or the date on whch he maed to the ta payer the certfcate of overassess-
ment. oth the schedue of overassessments and the schedue of refunds and
credts nvoved n that case were sgned and approved by the Commssoner,
pror to the enactment of the Revenue ct of 1926. That case s not, therefore,
authorty for the contenton made by the pantff n ths case.
In vew of our concuson that the credt was aowed under secton 1116 of
the Revenue ct of 1926 when the Commssoner sgned the schedue of over-
assessments on September 20, 1928, It s not necessary to dscuss the cam of
the pantff that a credt s aowed under the 1926 ct when the Comms-
soner sgns the schedue of refunds and credts, and that the restng of the
overpayments and credts, whch frst appeared on the schedue of refunds and
credts duy sgned by the Commssoner wthn the perod of mtaton wthn
whch the ta for 1920 coud be egay coected, on a suppementa schedue
whch the Commssoner sgned October 31, 1927, had the effect of makng that
date the date of the aowance of the credt.
The petton s dsmssed. It s so ordered.
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284, rt. 1305.
362
rtce 1305: Lmtatons upon the credtng
and refundng of ta es pad.
I-31-5581
Ct. D. 525
ncome ta revenue act of 1926 decson of court.
Sut ursdcton ppea to oard.
Where after the enactment of the Revenue ct of 1926 the Com-
mssoner has notfed a ta payer of a defcency under secton
274(n) of that ct n respect of a ta mposed by a pror ct and
the ta payer fes a petton wth the oard of Ta ppeas for
the redetermnaton of the defcency, a sut, nsttuted durng the
pendency of the appea to the oard to recover the amount of a
|eopardy assessment, whch was made before the enactment of
the Revenue ct of 1924 for the year for whch the defcency was
determned and pad durng the pendency of the appea, s pro-
hbted by secton 284(d) of the Revenue ct of 1926.
Unted States Crcut Court of ppeas fob the rst Crcut.
rampton Wooen Co., pantff appeant, v. ohn . ed, Coector of
Interna Revenue, defendant appeee.
ppea from the Dstrct Court of the Unted States for the Dstrct of New ampshre.
Wson, .: Ths s an appea from a |udgment of the Dstrct Court of
New ampshre In an acton at aw brought by the appeant aganst the
appeee, who s the coector of nterna revenue for the dstrct of New
ampshre, to recover a sum aeged to have been unawfuy coected of
the appeant, under threat of dstrant, as a defcency ta for the year 1918.
The appeant s a corporaton conductng a te te m n the State of New
ampshre.
The Revenue ct of 1918 was not approved unt ebruary 24. 1919, and
owng to the shortness of the tme for computng the ta for 1918 before
March 15 under the new ct, the Commssoner suggested to ta payers the
fng of a tentatve return, so caed, on or before the atter date, and
that an e tenson of tme woud then be granted for fng a compete return.
On March 14, 1919, the appeant fed a tentatve return on orm
1031-T, showng a ta due for the year 1918 of 120,000, and, as requred by
the Revenue ct of 1918, pad one-fourth of that sum, 30,000, upon the fng
of the return. The appeant fed a compete return on une 14, 1919, showng
a ta for the year n queston of ony 73,657.46, whch was n due tme pad.
The Revenue ct of 1921 provded that a ta under the Revenue ct of 1918
mght be assessed at any tme wthn fve years of the date of fng a return,
whch date the Supreme Court hed n orthem ros. Co. v. Unted State
(280 U. S, 453 Ct. D. 167, C. . I -1, 260 ) was the date of the fng of
the compete return, whch n ths case was une 14, 1919.
On ebruary 7, 1924, the Commssoner notfed the appeant of a defcency
ta for the year 1918 of 62,001.27, and suggested that n the event that the
ta payer desred to appea and to avod an mmedate assessment, a waver of
the statute mtng the perod of assessment and coecton be fed. waver
was fed wth the Commssoner n Washngton on ebruary 27, 1924, but
apparenty was not n tme under the procedure n the Department to prevent
a eopardy assessment, whch was made by the Commssoner on March 18,
1924. On March 30. the appeant fed a cam for an abatement of the entre
amount of 62,001.27, the grounds of whch are stated as foows:
ssessment prevousy made was erroneous, due to the fact that the revenue
agent dd not take nto consderaton the proper ad|ustment of saares to
offcers, reasonabe deprecaton aowance, as we as amortzaton of war
factes nstaed durng the year and due to handng of war orders. The
nformaton and bref are beng prepared now to ceary refect the above and
w be presented to the Treasury Department for consderaton at an eary
date.
ebruary 25, 1932.
opnon.
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363
284, rt. 1305.
On une 7, 1924, the appeant aso fed a cam for a refund for the years
1918, 1919, and 1920. rom March 30, 1924, up to October 23, 1926, frequent
hearngs or conferences wth the Income Ta Unt were had reatng to ts
cam for refunds, and partcuary to ts cam for an abatement of the de-
fcency ta assessed n March, 1924, based on the grounds set forth n ts
cam for abatement.
Whe a sma aowance for an over assessment for 1919 was made and
another sma cam for refund on ts 1918 ta was ater fed by the appeant
and dened, they do not appear to have any effect on the resut of ths acton,
as no further acton was taken n reaton thereto after the decson of the
Commssoner on October 23, 1926.
On October 23, 1926, the Commssoner notfed the appeant that Its cam for
abatement of the defcency ta assessed on March 13, 1924, was re|ected, and
a compete restatement of the appeant s ncome for the year 1918 and a recom-
pntaton of ts ta for that year was sent the appeant, showng both tho
defcency assessed n ebruary, 1924, and that a further defcenc| of 2,224.93
resuted from the recomputaton. The appeant was notfed that, uness t
protested wthn 30 days, the addtona defcency shown by the recomputaton,
a forma 60 days notce of the addtona defcency woud be gven, and to
gve suffcent tme for consderaton t was suggested that another waver
be fed, whch was done November 15, 1926, e tendng the perod for assess-
ment to December 31, 1927.
On anuary 8, 1927, the Commssoner formay notfed the appeant of tho
assessment of the defcency of 2,224.95 and on March 1, 1927, the appeant
fed wth the oard of Ta ppeas an appea from the Commssoner s assess-
ment of the second defcency ta , based on the foowng errors:
(a) The faure of the Commssoner to aow as a deducton from gross
ncome n the year 1918, deprecaton upon the machnery of the Newport
pant of the ta payer at the rate of 15 per cent per annum.
(b) The faure of the Commssoner to aow as a deducton from gross
Income n the year 1918, an addtona saary amountng to thrty thousand
doars ( 30,000) voted by the board of drectors of the ta payer as speca
compensaton for servces rendered by the four offcers n the year 1918.
No further steps were taken n determnng the amount of ta due e cept n
bearngs before the oard of Ta ppeas, or toward coectng any part of the
defcency assessed n March, 1924, unt 1928, when n une the coector
seut the appeant a etter suggestng that the appeant fe a bond f t desred
the coecton of the defcency ta further deayed.
The appeant fang after severa more requests to fe such a bond, the
coector, on September 3, 1929, gave notce that f not pad at once, he woud
proceed by dstrant to coect, to avod whch the appeant on September 9,
1929, pad the amount wth nterest totang 82,561.70. On October 16, 1929,
the appeant fed a cam for a refund of the sum so pad, whch was dened
by the Commssoner on the 6th day of December, 1929, whereupon the appeant
on March 11, 1030, fed ts wrt and decaraton n ths acton n the Dstrct
Court of New ampshre to recover the amount. The decaraton contans
three counts: One for the recovery of the entre sum based soey on the
ground that t was coected after the mtaton for coecton f ed by the
Revenue cts of 1918, 1921, 1924, 1926, and 1928 a second based on the cam
for aowance on account of the ncrease n saares and a thrd based on
the aeged deprecaton due to war condtons.
To ths acton the Government fed a pea to the ursdcton of the court
en the ground that, there beng an appea pendng before the oard of Ta
ppeas, nsttuted after the passage of the 1926 Revenue ct, and after
notce of a defcency by the Commssoner n accordance wth secton 274(a),
under whch appea the entre computaton of the appeant s ta for 1918 was
nvoved, secton 284(d) and secton 1003 of the Revenue ct of 1926 (44 Stat,
67, 110) prohbted any acton at aw by a ta payer n a dstrct court to
recover an aeged overpayment.
The dstrct court overrued the pea to the |ursdcton as to the frst count,
and sustaned the pea as to the second and thrd counts seekng a refund
by reason of the ncrease n saares and for deprecaton of machnery due
to e traordnary condtons durng the war perod, presumaby on the ground
that those tems were e pressy n ssue before the oard of Ta ppeas
under the appeant s petton to the oard, March 1, 1927 but hodng that
the status of the pror assessment of March 13, 1924. had aready been fnay
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284, rt. 1305.1
364
determned, and coud not be made the sub|ect of adversary proceedngs In
the determnaton of an addtona defcency, uness affected by the wavers.
The waver fed n ebruary, 1924, was for an unmted perod, but on
ebruary 10, 1925, a second waver was fed to reman n effect unt December
81, 1925 on September 16, 1925, a thrd waver was fed, e tendng the perod
of mtaton for another year from the e praton of the ast waver, o
unt December 31, 1926 and on November 15, 1926, a fourth waver was
e ecuted and fed, and, as above stated, e tended the perod of mtaton for
another year from the e praton of the ast pror waver, or unt December
81, 1927.
It can not be sad that under the 1926 Revenue ct, n vew of these wavers,
a ta assessed for the year 1918 had become a f ed and unchangeabe sum on
an appea before the oard of Ta ppeas, and that, therefore, n ths case
ony the defcency assessment of 2,224.95 was nvoved n the appea of
March 1, 1927. When the queston of a defcency s under consderaton, the
entre ta s Invoved and must be recomputed. ( ankers Reserve Lfe Co. v.
Unted States, 44 ed. (2d), 1000 Ct. D. 303, C. . -, 286 ames v.
Unted States, 38 ed. (2d), 140 Ct. D. 175, C. . I -1, 241 Oho Stee
oundry Co. v. Unted States, 38 ed. (2d), 144 Leurts et at. v. Reynods, 48
ed. (2d), 515 Ct. D. 347, C. . -, 180 , afrmed n opnon of Supreme
Court handed down anuary 4, 1932.)
y e press provson n secton 273 of the Revenue cts of 1924 and 1928, a
defcency s determned by frst fndng the true ta for the year n queston,
and subtractng therefrom the ta assessed on the ta payer s return, pus any
defcency prevousy assessed, and a sums coected wthout assessment, f
any, n addton to the ta computed on the ta payer s return, ess certan de-
ductons defned In the cts.
The oard of Ta ppeas n ebruary, 1930 (18 . T. .. 1975), sustaned
the Commssoner n hs recomputaton of the 1918 ta , whch resuted n an
addtona defcency, and dened the appeant s cam for a deducton by
reason of the aeged Increase n saares accrung n 1918, and aso for the
deducton camed for e traordnary deprecaton of machnery. rom ths
decson an appea was taken to ths court, whch on November 26, I960, handed
down a decson (45 ed. (2d), 327), hodng n effect that the defcency ta
assessed n March, 1924, was the sub|ect of adversary proceedngs n the appea
to the oard of Ta ppeas n 1927, at east to the e tent of the cam for the
ncrease n saares, and that the appeant s cam for a deducton of saares
shoud have been aowed. It reversed the decson of the oard on ths pont,
and presumaby sustaned t on the other ssue nvoved, f any assgnment of
error was made wth reference thereto and, f not, the decson of the oard of
Ta ppeas was fna as to a other ssues that mght have been consdered
on the appea. The amount of the ta of the appeant for the year 1918 was
then, and not unt then, fnay determned, sub|ect, of course, to revew by
the Supreme Court on certorar.
deducton from the pror defcency ta was accordngy made by the oard
by reason of the ncrease n saares, and a refund vountary made of the
sum of 22,660. dscamer for the above sum, whch wth Interest amounted
to 27,211.56, was fed In ths acton n the dstrct court before |udgment,
eavng a baance sought to be recovered of 55,350.14, wth nterest from
September 11, 1929.
fter a pea to, and a hearng on the merts, the dstrct court ordered |udg-
ment for the defendant on the ground that the coecton on September 11. 1929,
of the amount of the frst defcency assessment wth nterest was. by reason
of the wavers, wthn the tme aowed for coecton under secton 278(d),
vz, s years after assessment, t havng been assessed on March 13, 1924.
The pantff appeaed from the |udgment of the dstrct court and assgned
as errors (1) that the court erred n hodng that the coecton of the amount
of the frst defcency ta was not barred by the appcabe perods of mta-
tons set forth n the Revenue cts of 1924, 1926, and 1928 (2) that the dstrct
court erred n hodng that uness the waver e pressy provded for the coec-
ton of a ta prevousy assessed, t dd not e tend the tme for coecton
and (8) that the court erred n hodng that the waver of November 15. 1926,
whch referred ony to assessments, e tended the perod for coecton of the
ta assessed n March, 1924.
The queston of |ursdcton of the sub|ect matter beng aways open, the
Government strongy urges that the dstrct court was wthout |ursdcton, on
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365
284, rt. 1305.
the ground that the ta payer havng appeaed to the oard of Ta ppeas
from the determnaton by the Commssoner of an addtona defcency ta
n anuary, 1927, the oard of Ta ppeas, and ths court on appea there-
from, under sectons 284(d) and 1003 of the Revenue ct of 1926, had e cusve
ursdcton to determne the amount of the appeant s ta for the year 1918,
and thereafter no acton woud e at common aw aganst the coector for a
refund.
The wavers of ebruary 27, 1924, ebruary 10, 1925, and September 16, 1925,
e tended the perod for coecton of the 1918 ta beyond the enactment of the
3926 ct, Whatever was the effect of the waver fed n November, 1926, on the
coectdn of the ta , the dstrct court propery found that the wavers above
enumerated e tended the perod for assessng any ta found due from the ta -
payer to December 31, 1927. When the Commssoner on October 23, 1926,
dened the ta payer s cam for an abatement of the defcency assessment of
March, 1924, and recomputed the entre ta of the appeant for 1918, showng
an addtona defcency of whch he gave forma notce n anuary, 1927, he
must have taken nto consderaton, as t appears he dd from the e hbts on
te, not ony the correct ta for the year n queston, but aso the orgna
assessment on the ta payer s compete return, as we as the defcency assess-
ment of March, 1924, as he was requred to do under secton 273 of the Revenue
ct of 1924 and 1926. The oard of Ta ppeas, and ths court on revew, had
before t the same questons as were rased on the petton for the abatement of
the defcency assessment of March, 1924, vz, the aeged ncrease n saares
and the abnorma deprecaton of ts machnery owng to war condtons
durng 1918.
In determnng the addtona defcency upon appea, the oard was aso
obged to revew the Commssoner s recomputaton of the entre ta , and to
take Into consderaton the dsputed questons prevousy rased n connecton
wth the abatement of the frst defcency assessment. If the ta payer s cam
for deductons were aowed, there not ony woud be no addtona defcency,
but the ta assessed as a defcency on March 13, 1924, woud be materay
reduced, as, ndeed, t was cn the appea to ths court, and by the dscamer n
ths acton. Whether the addtona defcency ta was ad|usted n the amount
refunded s not cear on the record, but the nference s from the anguage of
the decson of the oard foowng the decson of ths court fed anuary
28, 1931, that t entered nto the ad|ustment. The decson of the oard n
part reads as foows:
Pursuant to the mandate of the Unted States Crcut Court of ppeas for
the rst Crcut fed anuary 28, 1931, . The partes havng on May
2, 1931, fed a wrtten stpuaton respectng the ta abty of the pettoner
here It s, therefore,
Ordered and decded that there Is an overpayment for the year 1918 n the
amount of 22,660.
Logan Morhs, Member.
Dated Washngton, D. C, May 2, 1931.
We are of the opnon from a consderaton of the scope and purpose of the
1926 ct that, n consequence of the waver of November 15, 1926, and by the
ap ea to the oard n March, 1927, even though the waver purported to be a
waver ony as to assessments (see Stange v. Unted State , 282 U. S., 270
Ct. D. 274, C. . -, 414 ), the mtatons n the Revenue cts on the coec-
ton ct ta es for the year 1918 n respect to the defcency ta es assessed aganst
the appeant were toed, pendng the fna determnaton of the ta for the year
n queston on appea and revew and that the coecton of the amount of the
frst defcency assessment n September, 1929, whe t may have been unneces-
sary at that tme n order to preserve the rghts of the Government, was not
Iega, not beng barred by the mtatons of sectons 277 and 278 of the 1924
ct. nd havng been coected, sectons 284(d) and 1003 of the Revenue ct
of 1920 e cude orgna |ursdcton by the courts n any acton to recover a
refund unt the amount of the ta due for the year n queston s fnay
determned.
One of the purposes of the 1926 ct was to remedy n condton e stng under
the ct of 1924, whereby a ta payer coud appy to the oard of Ta ppeas,
and whatever the resut, then brng an acton etc noro n the dstrct court. See
report of Senate Commttee on nance on Revenue ct of 1920, S ty-nnth
Congress, frst sesson. The hearng before the oard was at that tme tte
more than a premnary skrmsh. ar v. Curran, 24 ed. (2d), 390.)
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5284, rt. 1305.
366
Under the ct of 1926, e cept n few nstances, and many where proceedngs
were aready begun before the oard under the 1924 ct, the |ursdcton of the
oard, and of ths court on appea, was made e cusve. Oho Stee oundry
Co. v. Unted States, 38 ed. (2d), 144.)
s the court sad n the ast case cted, page 148:
We thnk secton 284(d) of the Revenue ct of 192G (26 U. S. C. . secton
1065(d)) contempated that no sut shoud be nsttuted by a ta payer for the
recovery of a ta after the Commssoner has determned and notfed such
ta payer of a defcency n respect of the ta for such ta abe year, n the event
of nsttuton by the ta payer of a proceedng before the oard of Ta ppeas
for the redetermnaton of such a defcency.
ad the Commssoner determned a defcency n respect of the ta of ths
pantff for the year 1918 and maed to t a notce of such determnaton, and
the pantff heren had nsttuted a proceedng before the oard of Ta ppeas
pror to the brngng of ths sut, we thnk ths sut woud, under such cr-
cumstances, be premature and ths court woud be wthout |ursdcton to enter-
tan t. Under such crcumstances t woud be ncumbent upon the ta payer
to rase a questons reatng to hs ta abty for the ta abe year, n respect
of whch the Commssoner had determned the defcency, before the oard of
Ta ppeas and to pursue hs remedy wth respect both to the defcency and
to any camed overpayment to a concuson under the provsons of the Revenue
ct of 1920, ether by acceptng the decson of the oard, whch has become
fna by the e praton of the tme for fng of a petton for revew of such
decson, or by prosecutng such revew to a concuson as provded by aw.
ut even f the dstrct court had |ursdcton, we thnk that ts |udgment
shoud be affrmed, whether or not secton 278 (d) and (e) of the ct of 1926
contros. No cam s made n the appeant s decaraton, or n the hearng
on the merts, that the baance of the amount sued for, after deductng the
amount of the dscamer, was not a vad ta . The ony cam made s that the
coecton was barred by the mtatons f ed n sectons 277 and 278 of the
ct of 1924, as nterpreted n Russe v. Unted States (278 U. S., 181 T. D.
4260, C. . III-1, 206 ), and that the perod of coecton was not e tended
by the waver fed n November, 1926.
The Supreme Court, however, n the case of Lew et a. v. Rcmod , supra,
hed that, n a sut to recover a ta aeged to have been egay coected
after the perod of mtaton had run, the ta payer must show that no part
of the ta was due that such an acton for a refund s n the nature of an
acton for money had and receved, and the ta payer must show that the co-
ector has money that beongs to hm. The court sad :
n overpayment must appear before refund s authorzed. though the
statute of mtatons may have barred the assessment and coecton of any
addtona sum, t does not obterate the rght of the Unted States to retan
payments aready receved when they do not e ceed the amount whch mght
have been propery assessed and demanded.
We hod, however, that the case shoud have been dsmssed beow for want
of |ursdcton.
The |udgment of the dstrct court s vacated, and the case s remanded to
that court wth drecton to enter an order dsmssng the case for want of
ursdcton.
ktce 1305: Lmtatons upon the credtng I-39-5726
and refundng of ta es pad. Ct. D. 573
C SS PRO ITS T R NU CT O 1926 D CISION O COURT.
Refund or Credt Lmtaton Inadequate Deductons De-
crease of Invested Capta.
Where a ta payer has pad a speca assessment of e cess profts
ta under secton 210 of the Revenue ct of 1917 and the Com-
mssoner determnes statutory nvested capta for the year 1918
Incudng a pad-n surpus aowed for a suphur depost and
where he decreases the nvested capta for 1918 on account of
accrued depeton and deprecaton, ncudng deductons for de-
predaton and depeton for 1917 n e cess of those prevousy
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367
284, rt. 130
aowed for that year, an overpayment for 1917 attrbutabe to the
Increased deductons for 1917, the Increase of whch resuts In a
decrease of nvested capta for 1918, s aone wthn the purvew
of secton 284(c) of the Revenue ct of 192(3 whch does not con-
tempate the retroactve aowance of the pad-n surpus as an
tem of statutory nvested capta for 1917 whch may have some
necessary reaton to the ncreased deductons for 1917.
Coubt of Cams of the Unted States. No. -452.
reeport Te as Co., reeport Suphur Co., reeport Termna Co., reeport
Town Ste Co., reeport Lght, Water t Ice Co., reeport Suphur Transporter
turn Co. v. The Unted States.
May 2, 1932.
OPINION.
Green, udge, devered the opnon of the court
The facts n the case are stpuated and set forth at ength n the fndngs,
bnt we sha refer ony to such facts as we consder necessary to understand
the Issues n the case.
The pantffs are affated corporatons engaged n the busness of producng
and marketng suphur. The reeport Te as Co. was the parent company
and the owner of a of the capta stock of the other pantffs |oned.
bout pr 1, 1918, the pantffs each fed a return for ther ncome and
e cess profts ta for the fsca year endng November 30, 1917, e cept that the
reeport Town Ste Co. fed no separate e cess profts ta return. The ree-
port Te as Co. fed aso a consodated e cess profts ta return for the aff-
ated group. The Commssoner of Interna Revenue e amned and audted
these returns In 1919, and reduced the depeton deducton, whch resuted n
an Increase of the ta abe ncome and n an ncrease of the tota ta abty
to 1,733,914. The dfference between ths amount and the amount of 108,-
471.23 shown by the orgna return was pad by pantffs.
In une, 1919, the pantffs fed a consodated ncome and profts ta
return for the fsca year endng November 30, 1918, and reported a con-
sodated nvested capta of 37,285,083.98, whch ncuded an addton of
31,050,415.86 to the amount of consodated nvested capta and surpus aa
shown by the pantffs books. Ths ncrease over the book vaue was based
upon the orgna vaue of the suphur deposts whch the company owned.
In ad|ustng the pantffs ta abty for the fsca year 1918, the Comms-
soner found the vaue of the suphur deposts to be 13,375,857 at the date
of acquston, and ths vaue was used for the purpose of determnng the
nvested capta and depeton deductons after makng certan ad|ustments
for accrued depeton durng the years 1913 to 1917, of whch the amount
2,106,75350 represents depeton for the fsca year of 1917. The Comms-
soner found that pantffs consodated nvested capta for the fsca year
1918 was reduced by ther faure to take adequate deductons for depeton
and deprecaton for the fsca year 1917 In the amount of 691,806.80 for
depeton and 29,860.10 for deprecaton, makng a tota of 721,666.90. Sub-
sequenty the Commssoner made a ree amnaton of the pantffs ta ab-
ty for the fsca year endng November 30, 1917, and n the ght of a the
evdence determned t to be 1,003,720.84 the consodated nvested capta
for 1917 was determned to be 16,605,060.92, and the consodated net ncome
was determned to be 4384,445.36 computed the amount of overpayment of
ta es to be 730,193.16, and hed that the refund to whch the pantffs were
entted for the fsca year 1917, due to ther faure to take adequate deduc-
ton for depeton and deprecaton, wns 321,713.11, whch was pad to pan-
tffs. Thereafter the pantffs fed a cam for refund of 408,480.05, beng
the dfference between the amount of refund aowed and pad and the tota
amount of overpayment. Ths appcaton was dened by the Commssoner
on the ground that the amount refunded was n that had been overpad on
account of the ta payers faure to take adequate deducton for depeton and
deprecaton. The ssue n the case Is whether ths rung of the Comms-
soner was correct.
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284, rt. 1305.
868
Pantffs contend that the facts n the case brng t wthn the provsons
of secton 284(c) of the Revenue ct of 1926 (44 Stat, 66), whch provdes
as foows:
If the nvested capta of a ta payer Is decreased by the Commssoner,
and such decrease s due to the fact that the ta payer faed to take adequate
deductons n prevous years, wth the resut that there has been an overpay-
ment of ncome, war-profts, or e cess-profts ta es n any prevous year or
years, then the amount of such overpayment sha be credted or refunded,
wthout the fng of a cam therefor, notwthstandng the perod of mtaton
provded for n subdvson (b) or (g) has e pred.
On behaf of the defendant t s sad thnt pantffs took as a deducton In
ther 1917 returns depeton n a much arger sum than was subsequenty
aowed. The argument Is that t s not the deducton that the ta payer
faed to get but ony that whch he fas to take that s covered by the pro-
vsons set out above, and ths constructon fnds some support from the fact
that where the ta payer took a deducton n hs return, whch the Comms-
soner faed to aow, he had an adequate remedy for ths dsaowance at the
tme thereof. Upon ths theory and under the facts n the case, the Com-
mssoner mght have refused to aow any refund whatever. The Comms-
soner, however, dd aow a arge refund. Defendant, however, does not urge
the appcaton of ths theory and we do not fnd t necessary to pass upon It.
It w be observed at the outset that the pantffs seek to recover a refund
of 408,480.05 by reason of havng faed to take deducton for depeton and
deprecaton for the fsca year 1917, In the amount of 691,806.80, and that the
Commssoner has aready aowed 321,713.11 upon the orgna cam, so that
pantffs are askng for a reducton n ta es of 730,193.16 by reason of the
faure to take deducton for depeton n the sum of 691,806.80. Or, In other
words, pantffs cam a refund n a sum whch e ceeds the amount of the
deductons whch f the amount of the refund. Counse for the defendant
ay n argument that ths s manfesty absurd. Wthout gong so far as to
say that t s mpossbe that such a resut woud foow, t s apparent that t
Is hghy mprobabe, and we thnk t w appear ceary upon further consd-
eraton thnt a and probaby the most of the overpayment dd not resut from
the faure to take proper deductons for depeton.
The Commssoner made a cacuaton, accordng to the ureau reguatons,
of the amount of the overpayment resutng from the faure to take adequate
deductons. Pantffs contend that the method used by the Commssoner n so
determnng the amount of the overpayment s purey theoretca, and nsst
that pantffs ta es coud not, n the frst nstance, have been propery
computed n such manner. It may be conceded that f the Commssoner had
been abe to compute the ta es for 1917, n the frst nstance, upon the facts as
now known to e st, the computaton woud not be made n the manner shown
n ndng 14, for f the correct amount nvested was ascertanabe pantffs
were not entted to the beneft of the speca assessment provsons whch were
used n computng the 1917 ta . ut ths s not matera nor do we need to de-
termne whether the method used to compute the overpayment gave e acty cor-
rect resuts. If we e cude the computaton made by the Commssoner, we
have no evdence before us as to the correct sum whch consttuted overpay-
ment resutng from the faure to take proper deductons n 1917. The con-
tenton of the pantffs s that the Commssoner shoud have used the amount
whch he found to be nvested capta for 1917 after the proper deductons were
made and the vaue of the ore deposts redetermned. Ths contenton seems
to be based on the theory that no fgure or sum was used as the amount of the
nvested capta n the orgna computaton of the ta es for 1917, and, as the
correct amount of the nvested capta for 1917 has now been determned, ths
sum shoud be used not ony n computng the correct ta es of pantffs for
1917, but aso the amount of overpayment thereon. Ths s manfesty ncor-
rect. The pantffs asked to have the provsons of secton 210 of the ct of
1917 apped In determnng the amount of ther ta es for that year. The
Commssoner comped wth the request, so computed the ta es, and hs con-
cuson to appy ths secton, and hs determnaton of the ta es thereunder
was an e ercse of hs dscretonary powers and s not now sub|ect to revew.
(Wamsport Wre Rope Co. v. Unted States, 277 U. S., 551 T. D. 4172. C. .
II-2, 323 .) The provsons of secton 284(c) of the Revenue ct of 1926.
under whch pantffs cam a refund, do not change the genera manner of
computng the ta under secton 210 of the Revenue ct of 1917. They merey
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3G9
284, rt. 1305.
provde that under certan crcumstances aowance sha be made or de-
ductons that had not been taken. In computng the ta es under the provsons
of ths secton the Commssoner dd not use the correct amount of nvested
capta, as subsequenty ascertaned, for the provsons of ths secton ony
appy where The Secretary of the Treasury s unabe n any case sats-
factory to determne the nvested capta, but t was mpossbe to compute
the e cess profts ta es wthout the use of a certan sum as the amount of n-
vested capta, for one of the man provsons of the e cess-profts ta depends
on the percentage of the profts on the amount of nvested capta. The Com-
mssoner, n computng the 1917 ta , accordngy f ed and used a certan
sum as the amount of nvested capta. Ths sum, for want of a better term,
we w ca Constructve nvested capta, and we assume that t was the
best estmate that the Commssoner coud make of the amount of nvested
capta at the tme he apped the speca assessment provson. If, n com-
putng the amount of change n pantffs ta es for 1917 resutng from the
faure to take proper deductons, a change was made n the amount of n-
vested capta to make t accord wth the ncrease n vaue of the ore deposts,
or for any other reason, the overpayment woud then be determned, not by the
resuts of the faure to take the proper deductons, but by what resuted from
changes made n the nvested capta whch resuted from other causes.
In order to determne accuratey the amount of the dfference In pantffs
ta es caused by reason of the faure of the pantffs to take certan deduc-
tons, the computaton must be made n accordance wth secton 210 of the
1917 ct, aowng pantffs the amount of the deductons whch they shoud
take and usng the same fgures for the constructve nvested capta as the
Commssoner used. In other words, the computaton must be made n tho
same manner n whch the Commssoner woud have made t, had he known
of these deductons at the tme he orgnay computed the ta . ut ths we
can not do, as the agreed facts do not show the amount of ths constructve
nvested capta. It woud seem that evdence on ths pont coud have been
obtaned, but we assume that t was not furnshed by pantffs because under
the theory of ther counse the sum used by the Commssoner as the amount
of Invested capta n makng hs orgna cacuatons s mmatera.
The contentons made on the part of the pantffs show, as we thnk, a ms-
understandng of the statute. Three matters are requred to be estabshed by
the provson under consderaton. These matters appear qute pany from
the statute, but the msapprehenson arses from the fact that they are often
apped to the wrong year. They are
rst, a decrease n the nvested capta of the ta payer. Ths, however,
appes to the subsequent year, not to the year for whch the ta payer may
recover an overpayment.
Second, that such decrease s due to the fact that the ta payer faed to take
adequate deductons n prevous years. ere agan the decrease s the
decrease n subsequent years whch must be due to the faure to take adequate
deductons n prevous years.
Thrd, the above matters havng been shown, t must further appear that the
resut s that there has been an overpayment of ncome or profts ta es n the
prevous years.
It seems to be thought that f the ta payer faed to take adequate deduc-
tons n prevous years, ths s suffcent to entte t to recover for any over-
payment resutng therefrom. Ths Is an error, for such a state of facts w
not entte the ta payer to recover uness by reason thereof the nvested capta
of the ta payer s reduced n a subsequent year, and f the nvested capta s
reduced, even then ony to the e tent that an overpayment s caused by the
faure to take such reductons. Or, n other words, as stated n the statute,
uness the nvested capta of a ta payer s decreased by the Commssoner,
and such decrease s due to the fact that the ta payer faed to take adequate
deductons n prevous years, and even then t must further appear that ths
has resuted n an overpayment of ncome or profts ta es n the prevous
year fnd the e tent thereof must be shown.
fter havng apped the two provsons of the stntnte frst mentoned above,
we fnd that the outstandng defect n pantffs case arses n connecton wth
the thrd requrement, as we sha see upon a further consderaton of the facts
of the case.
The Commssoner, n 1919, ncreased the unt vaue of the ore deposts.
Ths undoubtedy entted the pantffs to addtona deductons for depeton
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284, rt. 1305. 370
In 1917, and these reductons woud be refected In a decrease of nvested
capta for 1 )19, but ony to the e tent of the amount thereof: and for and on
account of the faure to take these deductons, the Commssoner reduced the
ta es of pantffs for 1917. s ths amount whch was aowed by the Com-
mssoner dd not cover the whoe of the overpayment, t s assumed on the
part of the pantffs that the overpayment resuted entrey from the faure
to obtan the proper deductons. Ths s manfesty an error for the foowng
reasons:
The faure to take proper deductons n 1917 on account of the ncrease made
by the Commssoner n the unt vaue of the ore deposts dd, as we have stated
above, decrease to a certan e tent the nvested capta for the foowng years
and caused the pantffs to make an overpayment for 1917. ut the overpay-
ment for 1917 was not caused entrey, nor as we thnk even prncpay, by ths
faure to get the proper deductons. Whe an overpayment was caused there-
by, the same matter that gave rse to t aso gave rse to an overpayment n
another manner. If pantffs had been aowed the vaue whch the Comms-
soner subsequenty f ed upon ther ore deposts the resut woud have been to
greaty ncrease the amount of ther nvested capta and f ther nvested
capta had been ncreased n accordance wth ths vaue the resut woud nave
been to have owered ther e cess profts ta , as that ta was based on the
reatve percentage of ther profts to nvested capta. Ths e pans how t s
that pantffs are camng the rght to have a tota refund (ncudng what baa
been refunded before) of ta es n the sum of 730,193.16 by reason of the faure
to take deducton for depeton n the sum of ony 691,808.80. Pantffs make
ths cam because they are now seekng to recover not ony the overpayment of
ta es resutng from the faure to take proper depeton but aso the overpay-
ment of ta es resutng from a faure to obtan proper ad|ustment of ther n-
vested capta n accordance wth the vaue of ther ore reserves. It may be
sad that concedng ths to be a fact, t nevertheess remans that pantffs have
overpad the ta es of 1917 n a greater sum than they have yet receved . Ths
may be conceded, but the pantffs sue under a speca provson of the statute
whch aows them to recover notwthstandng the statute of mtatons, f
certan facts have been shown. If these facts have not been shown there can
be no recovery, and n no event can pantffs recover beyond the amount of
overpayment resutng from the faure to aow adequate deductons for depe-
ton. (See Southtcestern O t Oas Co. v. Unted States, 29 ed. (2d), 404 Ct
D. 36, C. . III-1, 211 .) We thnk, as was sad n the same case on further
consderaton by the Crcut Court of ppeas (34 ed. (2d). 446), that to sus-
tan the contenton of the pantffs we woud have to read nto the statute upon
whch pantffs base ther case, a provson whch woud enabe the pantffs
not merey to recover overpayments resutng from any of the matters requred
to be shown by secton 284(c), but any overpayment for the prevous year or
years. Ths s not the aw. The statute of mtatons appes to any overpay-
ment caused by matters not specfed n sad secton 284(c).
It shoud be observed aso n ths connecton that there s no evdence by
whch we can determne how much of the overpayment was caused by the In-
creased vaue gven to the ore deposts, and, as stated above, there can be no
recovery under the aw for an overpayment so caused.
If we concede for the sake-of the argument that the method used by the Com-
mssoner n cacuatng the overpayment s wrong, there s then no way of
determnng whether t gave the pantffs too much or too tte. There s no
testmony upon whch we can make a segregaton of the amount of overpayment
resutng from a faure to receve proper deductons for depeton n 1917, and
the amount thereof whch resuted from the faure to make the proper ad|ust-
ment of Invested capta for that year. The Commssoner made the pantffs an
aowance whch he consdered was a to whch the pantffs were entted
under the statute and there s nothng to show that the pantffs are entted to
anythng more.
There s aso another reason, as we thnk, why pantffs can not recover.
It w be observed that what pantffs seek now s to have ther ta es recom-
puted wthout any regard to secton 210 of the ct of 1917, athough they had
heretofore requested that ther ta es be computed thereunder. We do not
thnk that the pantffs, after havng orgnay requested that the secton ast
named above be apped and havng ther ta es computed n accordance there-
wth, can now say that they prefer to have ther ta es computed n some other
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371
284, rt. 1305.
way whch woud reduce them. It w be noted that even If pantffs had
fed a cam for refund they coud not have the decson gven by the Com-
mssoner when he was actng under the provsons of secton 210 revewed
by ths court, athough the Commssoner coud of hs own voton correct any
mstakes or errors that occurred n computng the ta es under ths secton.
e dd make a recomputaton and a refund, and, whe we have no way of
estmatng t e acty, t woud seem that pantffs were granted as much aa
they were entted under the provson by vrtue of whch the sut s brought.
The petton of the pantffs must be dsmssed and t s so ordered.
Whaet, udge, and Wams, udge, concur.
Ltteton, udge, concurrng: The defendant s computaton gves the pan-
tffs the refund of a the overpayment to whch they are entted under sec-
ton 284(c). The Commssoner s method of computng the amount of over-
payment refundabe may not be mathematcay perfect, but when, as n ths
case, varous factors of computaton and varous profts-ta rates are appcabe,
t s cear that the resut of hs computaton s more neary correct than any
that we can work out or that has been suggested by the pantffs. The pan-
tffs, whe admttng that te ony overpayment whch they may recover Is
mted to the overpayment for 1917 resutng from ther faure to receve the
beneft of adequate deductons from ncome for depeton and deprecaton,
contend that the entre overpayment for 1917 of 730,196.16 was due to ther
faure to take or receve the beneft of adequate deductons for 1917, whch
deductons, when propery computed, operate to decrease nvested capta In
the subsequent year.
The nrgument n support of ths cam Is that pantffs correct nvested
capta was determned for the frst tme when the Commssoner was caed
upon to refund the overpayment for 1917 that the prevous determnaton and
computaton of the profts ta for 1917 under secton 210 of the Revenue ct
of 1917 must be gnored, because the provsons of that secton mt ts app-
caton to cases where the nvested capta can not be satsfactory determned,
and the pantffs consodated nvested capta coud be determned that
secton 284(c) of the Revenue ct of 1926 makes no menton of nvested capta
or prevous years and that there s ony one Invested capta, and that
s the correct Invested capta that, therefore, n determnng the amount of
refund payabe under secton 284(c), the correct Invested capta for 1917 must
be used, and the refund computed upon the correct percentage of e cess-profts
ta to net ncome, nstead of at a rate consderaby ower than the rate at
whch the addtona profts ta was pad.
It Is further ponted out by pantffs that the Commssoner of Interna
Revenue n 1919 when he determned and computed the profts ta n accord-
ance wth secton 210 of the 1917 ct and determned the addtona ta of
1,625,442.77, whch was pad, made ony one change n the net Income reported
In the return, such change beng a reducton n the depeton unt front
9.39141 to 2.80 per ton that f the depeton unt had not been reduced the
pantffs woud have had the beneft of an nvested capta of 36,217,521.26
shown on the return. Ths, the pantffs say, makes the entre overpayment
determned by the defendants on pr 29, 1927, by the use of the correct
Invested capta of 16,605,060.92 and correct net Income of 4,384,445.36, re-
fundabe under secton 284(c).
The pantffs are n error In contendng that the defendant s determnaton
under secton 210 of the Revenue ct of 1917 of the amount of profts ta
computed upon such determnaton s mmatera to a determnaton of the
amount of the overpayment refundabe under secton 284(c). The provsons
of secton 210 are mandatory f the Commssoner s unabe satsfactory to
determne nvested capta, and f he concudes that he can not determne
nvested capta t s hs duty to so compute the profts ta . Ths secton
s recognzed n the revenue aw as much as s secton 207 of the 1917 ct,
and a ta computed thereunder s as ega and vad as a ta computed on
nvested capta determned under secton 207. Secton 284(c), whch was)
frst enacted as a part of secton 252 of the Revenue ct of 1921, does not
menton Invested capta for the prevous year or years, nor does t menton
any factor that mght affect the correct ta abty for such prevous year
or years e cept those deductons from gross ncome whch, when ncreased
n order to determne the correct nvested capta for a subsequent year, had
the effect of reducng nvested capta and thereby ncreasng the profts ta
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284, rt. 1305.
372
for the year tnder consderaton over what such ta es woud be f the deduc-
tons camed and aowed n such prevous year were permtted to stand. It
s cear that the words such overpayment for the prevous year refer to
an overpayment measured by the nadequate deductons and nothng ese,
and that the words wth the resut that there has been an overpayment do
not contempate a determnaton of statutory nvested capta where t has not
theretofore been determned or a redetermnaton of Invested capta through
the retroactve aowance of a pad-n surpus, or for any other reason, e cept
as t may be affected by deductons from gross Income. It s evdent n ths
case that the determnaton of the correct nvested capta for 1917 was the
cause of a arge porton of the overpayment whch had been made as the
resut of the assessment of an addtona ta based upon a computaton of
the e cess-profts ta under secton 210. ny porton of the overpayment
resutng from ths s not now refundabe.
The e cess profts ta computed by the Commssoner n 1919 under secton
210 and pad by pantff for 1917 was 1,506,169.87, and the correct profts
ta computed n 1927 on the correct nvested capta and correct net ncome
was 795,816.87, a dfference of 710,353. The ncome ta determned by the
Commssoner n 1919 on the net ncome computed wthout aowng adequate
deductons for depeton and deprecaton was 227,744.13, and the Income ta
determned n 1927 upon the correct net ncome, after aowng adequate
deductons for depeton and deprecaton and after ad|ustng the ncome on
account of certan nventory tems and a camed deducton for royates ds-
aowed, resutng n a net decrease n ncome of 140,748.98, was 207,905.97,
a dfference of 19,840.16. The Income and profts ta determned and com-
puted by the Commssoner of Interna Revenue under the provsons of secton
210 of the Revenue ct of 1917 upon a consodated net ncome of 4,525,194.34
determned, wthout aowng pantffs adequate deductons for depeton and
deprecaton, amounted to 1,733,914. Ths resuted n the payment of an
addtona ta of 1,625,442.77 n e cess of that shown and pad on the
returns. The tota ncome and profts ta computed upon the same net ncome
of 4,525,194.34 arrved at wthout the aowance of adequate deductons for
depeton and deprecaton and ncreased to 5,106,112.26 by proper ad|ustments
n respect of the openng and cosng nventores for 1917 and the restoraton
to ncome of the amount camed as a deducton on the returns as royates,
and upon the correct consodated Invested capta of 16,605,060.92, was
1,325,433.25. The correct ncome and profts ta for 1917 computed upon a
correct consodated net ncome of 4,384,445.36 arrved at by makng a proper
ad|ustments and aowng adequate deductons for depeton and deprecaton
and upon the correct nvested capta for 1917 of 16,605,060.92, s 1,003,720.84.
It s cear therefore that the dfference of 231,929.48 between the ta computed
wthout the aowance of adequate deductons, but wth a other proper and
ega ad|ustments, and the ta computed upon the correct consodated net
Income after the aowance of adequate deductons and upon the correct Invested
capta s that porton of the overpayment for 1917 resutng from the faure
of the pantffs to take or receve the beneft of adequate deductons for 1917.
The fact that had the Commssoner of Interna Revenue n 1919 not re-
duced the vaue of the depeton unt beow what t shoud have been, the
pantffs woud have receved an adequate deducton for depeton n 1917
and woud have had the beneft of a correspondng nvested capta and,
therefore, woud not have overpad ts ta , does not hep the pantffs case.
Secton 284(c) does not contempate or ncude wthn ts terms any tems
effectng the ta whch may have some necessary reaton to the nadequate
deductons. It s the deductons, the Increase of whch n a subsequent year
resuts n a decrease of nvested capta for the subsequent year, that mark the
mt of the amount whch may be refunded after the e praton of the statute
of mtatons, and no other tems are ncuded however cosey they nW
be connected or reated to such deductons.
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373
284, rt. 1305
rtce 1305: Lmtatons upon the credtng
and refundng of ta es pad.
( so Sectons 277 and 278, rtce 1272.)
I-45-5838
Ct. D. 596
INCOM T R NU CT O 1024 D CISION O COURT.
1. Refund Lmtaton Credt by Drecton of Ta payer.
Where a credt for a ta on the persona ncome of a partner
Is apped by hs drecton aganst a ta assessed aganst and owed
by the partnershp of whch he s a member, he can not recover
the amount of the credt, regardess of the tme when hs cam
for the refund of the amount of the credt was fed and even
though the credt was apped after the statutory perod for the
coecton of the partnershp ta .
2. ccount Stated.
Where a cnm for refund of or credt for a ta for a partcuar
year s not fed but the Commssoner, wthn the statutory perod
for the aowance of a refund wthout the fng of a cam there-
for, approves a schedue of refunds and credts showng an amount
of ta for that year refundabe, there s no account stated between
the ta payer and the Unted States by vrtue of the Comms-
soner s approva of the schedue.
3. Same.
The evdence does not show that an account stated between the
ta payer and the Unted States was rendered to the ta payer.
4. Coecton Lmtaton.
Where the statutory perod for assessment has e pred before
the enactment of the Revenue ct of 1924, secton 278(d) of that
ct does not authorze the coecton of an assessment at any tme
wthn s years of the date of the same.
Green, udge, devered the opnon of the court.
The Commssoner of Interna Revenue havng found that pantff had over-
pad hs ndvdua ncome ta for the years 1916, 1917, 1918, 1919, and 1920,
credted the amount of such overpayments upon a defcency n ta es of West-
hemer Daube, a frm of whch the pantff was a member. There s no
dspute as to the overpayment, the defcency n the ta of the partnershp, or
the credts made by the Commssoner thereon, but pantff, camng that the
acton of the Commssoner n makng these credts was ega, brngs sut to
recover the amount of the overpayments and credts. Snce the fng of the
petton, the pantff has abandoned hs cam for the credts made from over-
payments on the ta es of 1916, 1917, and 1920. The ssue now s wth reference
to the credts made out of overpayments for 1918 and 1919.
Wth reference to the credts made of overpayments of the ta es for these
two years, the contenton for pantff s that the credts were made after the
e praton of the perod of the statute of mtatons for the coecton of ta es
for the years on whch these two overpayments were made. It s contended
on behaf of the defendant that the credts were made before the e praton of
the statutory mtatons and that n any event the pantff s not entted to
recover for the reason that no appcaton for a refund was fed wthn the
tme prescrbed by aw.
On the queston of the statute of mtatons the cases of or hcm ros.
Co. v. Unted States (280 . S 453 Ct. D. 167, C. . I -1, 200 ), and
Northwestern arb Wre Co. v. Unted States (70 C. Cs., 329), are cted on be-
haf of defendant to show that secton 278(d) of the 1926 ct permtted the
Court of Cams of the Unted States.
Davd Daube v. The Unted States.
uy 5, 1932.
opnon.
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284, rt. 1305.
374
coecton of the partnershp ta at any tme wthn s years from the tme of
the addtona assessment aganst the partnershp, whch was on March 29, 1924.
ut n those cases t appeared that the statute of mtatons had not e pred
when the ct of 1926 went nto effect.
In the case at bar the partes agree that the perod of mtaton for the
coecton of the partnershp ta es for 1917 was e tended by the so-caed
unmted waver whch the partnershp had fed to pr 1, 1924, when It
e pred. Thus the perod of mtaton ended pror to the enactment of the
1924 ct, whch n subdvson (d) of secton 278 authorzed the coecton to be
made wthn s years from the assessment of the ta . ut In subdvson (e)
of the same secton, there was a provson that the secton shoud not authorze
the coecton of a ta f at the tme of the enactment of the ct such assess-
ment was barred by the statutory perod of mtatons propery appcabe
thereto. We are of the opnon that nether the Revenue ct of 1924 nor that
of 1926 s of any hep to defendant s case. (See Russe v. Unted States, 278
U. S., 181 T. D. 4260, C. . III-1, 206 .)
The defendant contends that both of the cams of the pantff now at ssue
are barred by reason of the fact that no cam for refund as to ether of them
was fed unt more than four years after the payment of the sum whch s
sought to be recovered. Pantff does not concede ths to be the fact as to the
cam for refund of the ta es of 1918, but argues that f t be a fact t Is Im-
matera for the reason, as pantff cams, that one bass of the sut s the
rendton of an account stated on whch a sut may be commenced wthn the
tme of the rendton of the account notwthstandng the provsons wth refer-
ence to the fng of cams for refund. In support of ths poston the pantff
ctes the case of ontct Teer d Co. v. Unted State (283 U. S., 258 Ct. D.
834, C. . -, 328 ).
The facts n the case present a very unusua stuaton and are qute dfferent
from those n the onwt Teer case, supra, where ony one ta payer was n-
voved. It appears that on November 10, 1923, the Commssoner maed to the
pantff a statement whch showed that he had found that addtona ta es
were due from the pantff for the years 1916, 1917, and 1920, and that for the
years 1918 and 1919 there had been an overassessment, n each case specfyng
the amount, and that there was atogether a net overassessment of 13,502.90.
On anuary 26, 1924, the Commssoner sgned an assessment st for the
dstrct of Okahoma upon whch appeared the addtona assessments heren-
above referred to, and on anuary 31, 1924, the Commssoner sgned a schedue
of overassessments, whch schedue showed an overassessment of ta es n
favor of pantff for the year 1918 of 22,151.88 and for the year 1919 of
2,628.26. Ths schedue was sent to the coector wth nstructons to e amne
the accounts of the ta payer and appy the overpayment as a credt aganst
any ta es due, enterng the same on the schedue, whch the coector dd, and
after sgnng the schedue returned t to the Commssoner of Interna Revenue,
It then showed that 11,277.24 of the overpayment of 1918 ta es was credted
aganst addtona assessments of 1916, 1917, and 1920 ta es. t the same
tme, the coector made out a schedue of refunds and credts dated ebruary
27, 1924, whch he forwarded to the Commssoner aong wth the schedue of
overassessments. Ths schedue sted as refundabe 10,874.64 out of the ta es
pad for 1918 and 2,028.26 out of the ta es pad for 1919. The Comms-
soner sgned an approva of ths schedue and an authorzaton of the payment
thereof on March 29, 1924, notwthstandng the fact that he had on fe an
agreement and drectons of pantff to appy certan of hs overpayments to
the addtona assessment aganst the partnershp whch he had prevousy
nformed pantff and the partnershp woud be made. On the same day
(March 29, 1924) the Commssoner made an addtona assessment of ta es
In the sum of 53,012.47 for 1917 aganst the partnershp.
The authorzaton of the payment of the overassessment sgned by the Com-
mssoner was ceary made by oversght, but a check for 13,502.90, the amount
of the overassessment, was ssued pursuant thereto on pr 23, 1924, and
forwarded to the coector for devery to the pantff. The coector, how-
ever, returned the check wthout deverng t. It s not matera to ths
branch of the case, but t s evdent ths was done because the coector knew
that about ebruary 23, 1924, pantff and the other members of the part-
nershp of Westhemcr Daube had ndvduay sgned and maed to the
Commssoner an nstrument whch consttuted an agreement between them-
seves wth reference to the dsposton of overassessments to whch they
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375
284, rt. 1305
mght be ndvduay entted and further authorzed and requested the
Commssoner
to appy and credt the amount refundabe to each and a of the
ndvdua members of sad partnershp for 1918 aganst the addtona ta
assessed aganst sad partnershp for the year 1917 and ths agreement to be
taken and accepted as fu and compete authorty therefor.
In a pror paragraph of ths agreement t rected that
the sad partnershp of Westhemer Daube has been assessed an
addtona e cess-profts ta of 53,012.47 as shown by Commssoner s etter
dated ebruary 11, 1924.
fter the return of the check, the Commssoner wrote agan to the coector
gvng hm nstructons as to the dstrbuton of the amounts of the overassess-
ment, and accordngy, on ugust 7, 1924, the coector apped the sum of
10,874.64, the baance of the overassessment for 1918, and aso the sum of
2,628.26, overassessed for 1919, upon the ta es outstandng aganst the partner-
shp for the year 1917.
ths seems to have been perfecty satsfactory to the pantff unt
ong afterwards. few days before the 0-year mtaton on suts had e pred
for brngng suts aganst the Government ths acton was commenced, appar-
enty on an afterthought that there was a chance to recover back the amount
so pad on the ground that the appcaton had been made after the e praton
of the perod of mtatons.
We thnk the pantff has msapprehended the prncpes of aw appcabe
to the overpayment of 1918 as we consder those prncpes to be. It s st
contended on the part of the pantff that defendant had no rght to appy the
amount of any overassessment aganst pantff upon the partnershp ta es
after the perod of mtaton had e pred, and there s much dscusson as to
the effect of the provsons of the Revenue ct wth reference to the appcaton
of credts upon a ta when the perod of mtaton for ts coecton has
e pred. s we vew these provsons they were ony ntended to contro when
the credt was made upon other ta es of the same party whose ta es for a
partcuar year were overpad and have no appcaton when an overpayment
by one ta payer s credted upon the ta es of another. The aw appcabe
to ths part of the case s no dfferent than t woud be f the pantff had
drected the amount of any refund comng to hm to be apped on the ta es of
ohn ones or some other ta payer. True, the pantff was a member of the
partnershp aganst whch an addtona assessment had been made and these
ta es coud be enforced aganst hm by proper proceedngs, but they had not
been assessed aganst hm. They were assessed aganst another ta payer
and money used to pay them pursuant to the |ont agreement went to the
beneft of hs partners as we as hmsef. When one ta payer authorzes the .
payment of money due hm upon the ta es of another a stuaton resuts whch
s not covered by the revenue statutes but smpy by the genera aw. In ths
partcuar case the appcaton of the overpayment was made after the statute
of mtatons had run, but the statute then n force dd not e tngush the
debt due from the ta payer. It merey abrogated the remedy. It s not neces-
sary to decde whether the pantff coud have recaed hs drecton to so
appy the money at any tme before the appcaton was made. e dd not
do so, and when once the appcaton had been made n accordance wth pan-
tff s drectons the Government coud retan the money provded there was any
consderaton for the transacton. The fact that the partnershp st owed
the money and the debt st e sted was, as we thnk, suffcent consderaton,
and therefore the overpayment for 1918, whch was covered by the nstrument
to whch we have referred, can not be recovered by the pantff regardess of
the tme when the cam for refund was fed or account stated was rendered.
In fact the schedue never havng been presented to pantff there was no
occason that he shoud ndcate dssent or approva. When the 1918 refund
was fnay aowed a compete agreement e sted between the Commssoner
and the pantff as to what shoud be done wth the overassessment, the
Commssoner havng prevousy stated what he ntended to do and the pan-
tff not ony accepted the proposton of the Commssoner but drected the
appcaton n accordance therewth.
There remans the sum of 2,628.26, overpayment for the year 1919, to whch
no reference s made n the agreement and drectons gven by pantff, whch
we have consdered above. The defendant contends that no cam fur refund
100903 33 25
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284, rt. 1305.
376
of the 1919 ta es havng been fed, the defcency assessment was propery
made aganst the partnershp wthn the tme covered by the waver fed by the
partnershp, that t had the rght to appy the overpayment of pantff s ta es
for 1919 on the partnershp assessment, and that n any event the appcaton
for payment of refund s now barred by the statute of mtatons. The petton
rectes that a Treasury cheek n the amount of 13,502.90, drawn to the order
of pantff, was on ugust 7, 1924, apped by the coector aganst the add-
tona assessment aganst the copartnershp for the year 1917, and a etter from
the Treasury Department rectng that ths check had been returned by the co-
ector and had been deposted as a repayment to the appropraton from
whch drawn s attached to the petton. Nether the coector nor the Com-
mssoner apped the check whch had been ssued n favor of the pantff
n the manner rected by the petton. It was smpy turned back nto the
Treasury, and the transacton has been so fuy e paned n connecton wth
the 1918 ta es that we need not recte the partcuars any further. The pet-
ton does aege that on a schedue dated March 29, 1924, approved by the
Commssoner, a credt was made of 4,449.50 aganst an aeged addtona
ta for the year 1917 out of the overpayments for 1918, and avers that such
credt was wthout warrant n aw. ut ths has no reference to any over-
payment of 1919. In argument counse for pantff contend that under the
hodng n the case of onwt Teer Co., supra, he Is entted to recover that
porton of hs ta es for 1919 whch was apped on the partnershp ta es.
Pantff s cam s not defntey stated n the petton, but t s evdent that
he can not recover even for the 1919 overpayment under the speca provsons
of the Revenue ct, for the reason that no cam for refund was fed. If he
recovers at a t must be upon the theory that there was an account stated
between the partes by vrtue of the schedue sgned by the Commssoner
March 29, 1924, whch, t s urged, under the onwt Teer case, gave the
pantff s years n whch to commence sut under the genera statute appca-
be to cams aganst the Government. In consderng whether there was an
account stated between the partes upon whch pantff may rest hs case, t
becomes necessary to consder the fundamenta rues upon whch such a ease
may be based.
The man prncpes wth reference to an account stated are we setted
and so far as we are abe to ascertan no court has ever vared from them.
In a genera way t s sad, n account stated s an agreement between partes
who have had prevous transactons of a monetary character that a the
Items of the account representng such transactons, and the baance struck,
are correct, together wth n promse, e press or mped, for the payment of
such baance. (1 C. ., 678, secton 249, ctng numerous authortes.) It Is
of course necessary that some knd of a statement of the account must be
rendered (Idem, 079, secton 250) and there must be an admsson by one
party of the correctness of the baance struck by the other, or some other
evdence to show that the party sought to be charged has by hs anguage or
conduct admtted the correctness of the account. (Idem, secton 251.) Of
speca mportance s the rue that, To consttute an account stated each
party must understand the transacton as a fna ad|ustment of the respectve
demands between them taken nto consderaton n the accountng. (Itacs
ours.) (Idem, 683, secton 259.) so, that To consttute an account stated,
the correctness of the baance must receve the assent, e press or mped, of
both partes. certan f ed sum must be admtted by the one party to be
due to- the other, and where there are mutua or cross demands, the partes
must come to an agreement as to the aowance or dsaowance of the tems
composng the account there must be an ad|ustment, a baance struck, and an
assent to the correctness of the baance. (Idem, 685, secton 263.) The rght
of acton arses from the mped promse to pay whch s based on ths agree-
ment.
It s not absoutey necessary that the account shoud be stated or the assent
thereto gven n wrtng. It s suffcent f t s so communcated that the mnds
of the partes can come to an agreement as to the baance due one or the other,
and do come to such an agreement but If the mnds of the partes do not meet,
there Is no account stated.
It has aso been hed that where an account rendered by one party to
another s reed on by the atter to charge the former as regards Items n favor
of the atter, the nccount s to be taken as an entrety, and the account Is ev-
dence In favor of the former as to tems theren n hs favor. (Idem, 681,
secton 252.)
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377
284, rt. 1305.
The partes can not state an account by agreeng to part of the tems, and
eavng the others open for future ad|ustment or tgaton. (Idem, 684, sec-
ton 260, ctng New York re Underwrters v. ougham, 97 N. Y. S., 402,
hodng that the test of an account stated s that the mnds of the partes met
as to the amount due.)
Nor does t make any dfference that a cam made n the account may be
groundess, athough f any part of the cam s dsputed eo that the baance
stated s not admtted t does not become an account stated. (Coumba Rver
Packng Co. v. Taant, 132 ed., 271.) It s contended n argument on behaf
of the defendant that the partners were ndvduay abe for the partnershp
ta es and that ths gave defendant the rght to credt the pantff s overassess-
ment for 1919 on the partnershp ta es, but t s not necessary to pass on the
queston thus rased, as our decson does not depend upon ts determnaton.
It thus appears that an account stated necessary ncudes a the cams that
are made by the respectve partes at the tme of ts presentaton or rendton
that t appes not ony to what may be admtted by- one party but to cross
demands made by the other whch have no drect or even no ndrect connecton
wth the cam, admtted by the other party, and the foundaton of a sut thereon
Is that the baance s struck and agreed upon between the partes on ther
respectve cams. The admsson of one tem n the account of the transactons
between the partes offset by another tem w not support an acton on an
account stated as to the tem admtted, athough t may consttute evdence of
the correctness thereof In an acton otherwse commenced. On the other hand,
the presentaton of an account admttng an tem n favor of the party present-
ng t, but offsettng It by a cam upon an tem aganst the party to whom the
account was presented and strkng a baance may, f no ob|ecton s made
wthn a reasonabe tme, become an account stated for the baance so struck.
The authortes supportng these prncpes are so numerous that t s mprac-
tca to cte them wthn the reasonabe mts of an opnon, and the decsons
are so unform and so unversay accepted n ther hodngs that we see no
necessty for makng further reference to any of them.
It s not necessary n ths case to decde whether a the prncpes ad down
above appy to the facts In the case. The frst queston to be determned s
whether a statement of any knd was presented by defendant to pantff whch
showed the condton of the account between the partes, for the rue s abso-
ute that uness some knd of an account or statement s presented or commun-
cated by one party to the other whch shows the baance due on the accounts
between the partes, there s no foundaton for a cam upon an account stated.
Indeed ths s so obvous that t woud not need to be stated f t were not nec-
essary In consderng the evdence n ths case, whch fas to show the presen-
taton of any account or nstrument showng any amount due to pantff, or any
agreement as to the baance due.
The ony communcaton that the pantff receved from the defendant whch
n any way pertans to the amount due s the so-caed 30-day etter wrtten
by the deputy commssoner to the pantff and dated November 10, 1923.
There are severa statements n ths communcaton that we thnk show pany
that t can not be consdered as an account stated.
In the frst pace, the etter refers to a statement whch s made part thereof,
whch ceary shows that nothng that was n the etter was ntended as a fna
statement of the amount due on the account between the partes or even any
Items thereof. Ths statement made t pan that taken as a whoe the commun-
caton was merey a recta of what was proposed to be done n the future and
that t dd not admt that any amount whatever was due pantff or woud be
due on the account between the partes when the proposed acton shoud be
taken. In fact the acton whch made the overassessment vad, and the assess-
ment of the defcency ta aganst the partnershp were both done or made some
tme after the etter was wrtten, and the whoe proposton and the statement
were a predcated upon the concudng words of the statement, whch are as
foows:
The overassessment shown heren w be made the sub|ect of n certfcate of
overassessment whch w reach you n due course through the offce of the co-
ector of nterna revenue for your dstrct. If the ta n queston has not been
pad, the amount w be abated by the coector. If the ta has been pad, the
amount of overpayment w frst be credted nguust unpad ncome ta for
another year or years and the baance, f any, w be refunded to you by check
of the Treasury Department. It w thus be seen that the overassessment
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284, rt. 1305.
378
does not ndcate the amount whch w be credted or refunded snce a porton
may be an assessment whch has been entered but not pad. (Itacs oars.)
It w be observed that by ths statement the ta payer s not tod that be
w be pad the amount of any overpayment but that such overpayment w be
credted on unpad ta for other years, and t shoud be noted n ths connecton
that t makes no dfference as to whether the defendant had the rght to credt
ths overpayment on the unpad ta es of the partnershp, as the defendant at
the tme was settng out ts cams, and even f they were wrongfuy made
they consttuted no admsson that anythng was due the pantff. .-sdes
ths, the pantff was specay warned by fhe porton of the statement tacsed
above that the overassessment shoud not be taken as any ndcaton of the
amount whch woud be credted to hm or refunded. Ths anguage was ev-
denty ntended to make t cear to hm that the etter and the statement con-
sttuted no acknowedgment of any ndebtedness, and the subsequent proceed-
ngs on the part of the pantff show that he understood the statement ast as
t read.
It s true thnt by some oversght the Commssoner subsequenty prepared a
etter statng the amount of the overassessment, whch, wth a check for the
amount thereof, was sent to the coector. ut the coector, percevng the
error, dd not forward the check or the etter to the pantff but returned It to
the Commssoner. Nothng was receved by the pantff whch pertaned to
the condton of the account between pantff and defendant e cept the etter
of November 10, 1923, to whch reference has been made above.
though the etter ast above referred to was the ony communcaton from
defendant to pantff wth reference to the baance due on the accounts between
the partes, there seems now to be some cam that the schedue of refunds and
overassessments sgned by the Commssoner on March 29, 1924, consttuted an
account stated. No such cam s set up by counse for pantff n argument
uness t be by a mere ctaton of the onwt Teer case, supra. In any event
ths schedue of refunds and credts was not presented to pantff. When t
was forwarded to the coector he must have seen at once that an oversght
had occurred. It not ony was at varance wth what the Commssoner had
orgnay wrtten pantff woud be done, but f taken n the sense now camed
for t on behaf of the pantff t was absoutey contrary to the e press drec-
tons whch pantff hmsef had gven to the Commssoner and of whch the
coector was advsed. The coector therefore sent ths schedue wth the check
for 13,002.90 back to the Commssoner and the Commssoner then drected
the coector to credt the amount thereof aganst the 1917 assessment aganst
the partnershp of Westhemer Daube. or so much of ths credt as came
out of the overassessment for 1918 ( 10,874.64), the Commssoner had, as we
have heretofore shown, e press drectons from the pantff to appy t on
the partnershp ta for the remander ( 2,628.26), he dd not have any drec-
tons from the pantff as to how t shoud be apped, but t w be observed
n ths connecton that the pantff had made no cam for ts refund.
Ths mudde, whch arose from the oversght of the Commssoner, resuted
n what the evdence shows to have been an entrey erroneous statement of
refunds and credts. y e press drecton of the pantff the greater part of
ths refund was, as we have aready shown, to be apped on the partnershp
ta es. We thnk the evdence shows ceary that the schedue was ssued by
mstake, but n any event t uttery fas to compy wth the requstes of an
account stated. The pantff had never revoked hs drectons as to what shoud
be done wth the overassessment for 1918 and the mnds of the partes had
come to no agreement n reaton thereto, or as to what shoud be done wth the
overassessment for 1919 wth reference to whch pantff had made no cam.
It shoud aso be observed that the petton does not set forth a cause of
acton based upon an account stated. There s nothng n t referrng to any
statement of account receved from the defendant. On the contrary, the acton
s based upon the aegaton that the overpayments mentoned theren were
egay credted on the ta of Westhemer Daube for the reason that the
statute of mtatons had run aganst the assessment and coecton thereof
at the tme the credt was made and that cams have been fed for the refund
thereof.
So far as the cam made by pantff that he Is entted to recover upon
an account stated s concerned, the case Is atogether dfferent from that of
onwt Teer Co., supra. In that case a second count was set up In the pe-
tton whch asked recovery on a certfcate ssued and devered to the pan-
tff statng the amount due, whe n the case at bar, as we have aready seen,
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379
284, rt. 1305.
there s no aegaton In the petton wth reference to nnytng of the knd.
No queston was rased ether n ths court or n the Supreme Court on the
submsson of the onwt Teer case as to whether the certfcate upon whch
the second count of the petton was ba ed consttuted an account stated and
the argument was confned to other ponts nvoved. Consequenty nether
court passed upon the queston ns to whether ths certfcate was suffcent to
consttute an account stated n favor of the pantff and t w be noted n
ths connecton that the authortes cted as supportng a rght to brng sut
thereon, a refer to cases where a certfcate hud been ssued by the proper-
authortes aowng pantff s cam, authorzng ts payment, and pantff
brought sut for the amount drecty stated by the certfcate to be due hm.
In our |udgment the opnon of the Supreme Court s no authorty for hodng
that the certfcate ssued n the onwt Teer case was an account stated.
e ths as t may, we have, as we thnk, a frm ground for our decson on other
matters. The etter n the onwt Teer case contaned no warnng to the.
pantff that nothng was decded thereby. It advsed the pantff that a
defnte sum woud be refunded or credted. In the case at bar, the 30-day
etter n ts fna concudng statement notfed the pantff that the- whoe
matter was st undecded. In ths connecton t shoud be sad that we do
not thnk the fact that more than one year was taken nto consderaton n con-
sderng the accounts of the respectve partes has anythng to do wth the
prncpes reatng to an account stated. Certany no authorty can be gven
for any such poston. The underyng prncpe of an account stated s that
t states the baance e stng between the two partes and shows to whch of
the two partes ths baance s due.
The cases that have been cted by counse for pantff and others that have
been caed to our attenton do not support the theory that an account stated
was rendered n the case at bnr. In each and a of them a cam was fed
by the pantff for refund of the amount egay coected. The cam as fed
was approved n the fu amount thereof and the approva certfed by the
proper offcer. When a pantff presents a cam and t Is aowed n fu by
the proper offcer, manfesty the mnds of the partes have met upon an ac-
count stated, and a promse to pay the amount agreed upon s mped. In the
case at bar no cam whatever was fed for a refund of the overpayment
on the ta es of 1919. In the case of onwt Teer Co., supra, a cam was
aso fed by the pantff and there was a certfcaton. ut cases where the
pantff presents a cam to the Government whch s nowed and certfed
are no authorty for uphodng the acton n such a case as the one at bar
where no cam has been fed, no statement made by one party to the other,
and there has been no meetng of the mnds of the partes or agreement thereon,
or any facts shown n evdence from whch an agreement mght be mped.
n unbroken ne of authortes, we thnk, shoud not be overrued n order to
enabe the pantff to recover a payment whch n ustce and equty was
owng to the Government.
The pantff s petton must be dsmssed and t s so ordered.
Whaet, udge Wams, udge and ooth, Chef ustce, concur.
rtce 1305: Lmtatons upon the credtng I-47-5870
and refundng of ta es pad. Ct. D. 601
INCOM T R NU CT O 192G D CISION O COURT.
Sut ursdcton ppea to oard of Ta ppeas Ds-
mssa by oard.
Where after the enactment of the Revenue ct of 1926 a person
fes a petton wth the oard of Ta ppeas and the oard on
hs moton dsmsses the proceedng for reasons other than ack
of |ursdcton by an order statng that the oard s unabe from
the peadngs to determne the amount of the defcency as deter-
mned by the Commssoner, secton 284(d) of that ct prohbts
a sut to recover any part of the ta pad for the ta abe year n
respect of whch the Commssoner determned the defcency,
even though the Commssoner acquesced In the moton to dsmss.
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4284, rt. 1305.
Dstrct Court of the Unted States for the Dstrct of Maryand.
Warren manufacturng Co., a Corporaton, pantff, v. Gaen L. Tat, Coector
, of Interna Revenue for the Unted States Coecton Dstrct of Maryan,
defendant.
uy 28, 1932.
opnon.
Coeman, Dstrct udge: The soe queston here presented Is whether ths
court has |ursdcton to entertan the present sut whch s brought by the
pantff to recover ncome ta es aeged to have been egay coected by the
Government, and s to be determned by the constructon to be paced upon
secton 284(d) of the Revenue ct of 1926 (26 U. S. C. ., 1065(d)). The pert-
nent anguage of ths secton s as foows: If the Commssoner has maed to
the ta payer a notce of defcency under secton 1046 of ths tte and f the
ta payer after ebruary 26, 1926, fes a petton wth the oard of Ta ppeas
wthn the tme prescrbed n such secton, no credt or refund In respect of the
ta for the ta abe year n respect of whch the Commssoner has determned
the defcency sha be aowed or made and no sut by the ta payer for the
recovery of any part of such ta sha be nsttuted n any court e cept and
then foows e ceptons whch admttedy are not appcabe to the present case.
The matera facts as they appear from the peadngs, and as to whch there
s no dspute, are that the pantff company camed that the Government was
In error n the vaue that t paced upon the company s capta assets as of
March 1, 1913, and n fndng a gan from the sae of those assets for 287,950
In 1922. That s, the pantff company camed that the true vaue of certan
water power and other water rghts on March 1, 1913, was 287,950, and that
thus no proft had been derved from ther sae n 1922. owever, the Com-
mssoner determned a defcency for that year, and gave the company notce
thereof on ebruary 22, 1926, advsng t that t mght appea the defcency
determnaton to the oard of Ta ppeas. Ths was done on uy 13, 1926.
owever, on May 21, 1927, ths appea was dsmssed, upon moton of the com-
pany n whch the Government acquesced, by the foowng order of the oard
of Ta ppeas:
Ths proceedng havng been caed from the day caendar of May 18, 1927,
and counse for the pettoner havng fed a moton to dsmss the proceedng,
wthout ob|ecton by counse for the respondent, t s hereby
Orderkd that the moton to dsmss be and the same s hereby granted.
The oard s unabe from the peadngs to determne the amount of the def-
cency as determned by the Commssoner.
(Sgned) C. M. Tummh|,
Member, Unted States oard of Ta ppeas.
Dated, Washngton, D. C, May 21, 1927.
Some s weeks nter, namey, on uy 5, 1927, the company pad the amount
of the camed defcency, nnmey, 57,382 and thereafter nothng appears to
have been done unt anuary 2, 1931, when the company fed wth the coector
of nterna revenue ts cam for refund and upon t beng re|ected, the com-
pany nsttuted, on une 30, 1931, the present sut to recover the defcency,
wth nterest
Upon the peadngs, the precse queston arses upon the Government s
demurrer to pantff s repcaton, the substance of ths demurrer beng that
secton 284(d) of the Revenue ct of 1926 must be teray construed. On
the other hand, the gst of pantff s contenton s that where, as n the present
case, the ta payer has taken a mere premnary step by fng an appea wth
the oard of Ta ppeas, but before the case Is reached by the oard, or
anythng done by t, he. of hs own moton n whch the Government acquesces,
dsposes of the case so far ns the oard s concerned, he has done nothng
whch the statute endeavors to prevent and that snce he no onger has
redress to the oard, he s eft wthout hs day n court and s deprved of hs
|ust rghts, uness he can prosecute the present sut.
The precse queston appears to be an orgna one. t east none of the
reported decsons have passed upon t, nor has the court been referred to any
unreported decson nvovng the e act pont. There are, however, a arge
number of decsons nterpretng secton 284(d) of the Revenue ct of 1926,
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381
284. rt. 1305.
whch may, for brevty, be dvded Into three casses. rst, those cases where
appcaton s made to the courts (ether the dstrct courts or the Court of
Cams), before an appea s taken to the oard of Ta ppeas (see Camp v.
U. 8. (C. C. . 4), 44 . (2d), 126 Oho Stee oundry Co. v. 17. 8. (Ct. of
CI.), 38 . (2d), 144) second, those cases where the ta payer endeavors to
sue n court after an appea taken to the oard of Ta ppeas, and the
atter s decson s st pendng (see ames v. U. 8. (Ct. of CI.), 38 . (2d),
140 Ct. D. 175, C. . I -1, 241 ames v. . 8. (Ct. of CI.), 38 . (2d). 143
rampton Wooen Co. v. ed, 56 . (2d), 23 (C. C. . 1) Ct. D. 525, page 362,
ths buetn ). Lasty, those cases where the ta payer endeavors to sue n
court, subsequent to a fna ad|udcaton of the matter by the oard of Ta
ppeas. (See ndey v. ener (D. C. Pa.), 38 . (2d), 489 Ct. D. 156, C. .
I -1, 356 (nterpretng 26 U. S. C. ., 1120 (a), evenue Law of 1926, secton
319, a statute governng estate ta es and n a respects smar to 26 U. S. C. .
(1065(d)) ankers Reserve Lfe Co. v. . 8., 44 . (2d), 1000 Ct. D. 303,
C. . -, 286 certorar dened 51 Sup. Ct., 485 Green v. MacLaughn,
55 . (2d), 423.)
refy summarzed, the resut of the three casses of decson s that wherC
a sut s nsttuted n a edera court before the oard of Ta ppeas Is
pettoned, the court s not ousted of ts |ursdcton by such petton, but f,
after notce of a defcency, the ta payer eects to proceed before the oard of
Ta . ppeas, then no matter whether the queston s st pendng before the
oard, or has actuay been decded by t, he s precuded from recourse to the
courts. See especay ankers Reserve Lfe Co. v. . 8., supra.
The hstory of, and the prmary ob|ects sought to be obtaned by the creaton
of the oard of Ta ppeas must be understood. The oard was created n
1924. One of ts prncpa ob|ects was to reeve the ta payer of the hardshp
of payng a defcency assessment before contestng the same, whch was neces-
sary pror to that tme. ut aso t was ntended to reevo the edera courts
of the great burden of ta tgaton to whch they e cusvey fe her, by
transferrng t to a new agency, whch, by ts specazed work, woud be an
e pert body better ftted than a court of genera |ursdcton, to hear and decde
ta questons. y the 1924 statute, the ta payer was permtted mmedatey
to appea from the defcency assessment to the oard of Ta ppeas, or at
hs opton, to pay the camed amount, and thereafter sue for ts refund n the
dstrct court. In 1926, the oard s powers were further e tended. It was
permtted not ony to decde whether the actua defcency was due or not, but
to determne that even a greater defcency than had been camed was due.
(26 U. S. C. ., 1048(c) evenue ct of 1926, 274(e).) On the other hand,
It mght fnd no defcency to be due, but rather that the ta payer had made an
overpayment, and mght order a refund to hm. (20 U. S. C. ., 1065(e)
Revenue ct 1926, 284(e).) so, a revew cf the oard s decson was mted
by appea to the Court of ppeas of the Dstrct of Coumba, or to the appro-
prate Crcut Court of ppeas, sub|ect to the rght to petton the Supreme
Court on certorar. (26 U. S. O. ., 1226 evenue ct 1926, 1003.)
tera Interpretaton of secton 284(d) of the ct of 1926 eaves no ground
for doubtng the correctness of the Government s contenton, because that sec-
ton, as we have seen, provdes that f the ta payer has fed a petton wth
the oard, no sut sha be nsttuted by hm for the recovery of any part of the
ta . In support of ths tera constructon, the Government refers to the report
of the Commttee on nance cf the Senate respectng ths secton at the tme
It was before the Senate for adopton, n whch we fnd the foowng statement:
ut If he (the ta payer) does eect to fe a petton wth the oard, hs
entre ta abty for the year n queston (e cept n case of fraud) s fnay
and competey setted by the decson of the oard when t has become fna.
Whether the decson s by fndngs of fact and opnon, or by dsmssa, as n
case of ack of prosecuton, nsuffcency of evdence to sustan the petton, or
on the ta payer s own moton. ( eport of the Commttee on nance of the
Senate, S ty-nnth Congress, frst sesson, at page 25.)
In addton, the Government rees upon the foowng secton of the ct of
1926 (26 U. S. C. ., 1217(d)) :
decson of the oard (e cept a decson dsmssng a proceedng for ack
of |ursdcton) sha be hed to be rendered upon the date that an order spec-
fyng the amount of the defcency s entered n the records of the oard. M
the oard dsmsses a proceedng for reasons other than ack of |ursdcton
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5325, rt. 811.
382
and s unabe from the record to determne the amount of the defcency deter-
mned by the Commssoner, cr f the oard dsmsses a proceedng for ack of
|ursdcton, an order to that effect sha be entered n the records of the oard,
and the decson of the oard sha be hed to be rendered upon the date of
such entry.
Thus ths secton determnes the date upon whch certan decsons of the
oard sha be consdered to have been rendered, and t Is to be noted that
among such decsons are to be ncuded dsmssa of a proceedng when the
oard s unabe, from the record, to determne the amount of the defcency
f ed by the Commssoner. When we refer to the acton taken In the present
case by the oard when dsmssng the proceedng, we fnd the assgned reason
to be that the oard was unabe from the peadngs to determne the amount
of the defcency so f ed. Therefore, the oard may be sad to have rendered
a decson wthn the meanng of ths secton, w|ch woud prevent any subse-
quent acton In the courts. See Camp v. . 8., supra, and ndky v. ener,
supra.
s was sad by the oard n Capta udng C- Loan ssocaton (12 . T.
., 349), n hodng that the cerk was wthout authorty to dsmss the appea.
When a proceedng s nsttuted before ths oard there come nto beng other
rghts than that of the pettoner to secure a redetermnaton of hs ta a-
bty. The fng of the petton mposes certan restrctons upon respondent
n the assessment and coecton of the ta . It may affect the perod of mta-
tons on assessment or coecton, and the rght of the Commssoner to there-
after ncrease the ta . It aso creates n the respondent the rght to set up a
demand that the defcency shoud be ncreased. Ths case woud
seem to Indcate that regardess of any effect that t mght have upon the subse-
quent ursdcton of edera courts, an appea to the oard shoud ony be
capabe of wthdrawa by a decson of the oard as such. ccordngy, even
asde from secton 1217(d), what was done n the present case woud then
amount to n decson.
ut even assumng that ths was a dsmssa, rather than a decson, t s
dffcut to see |ust how the Commssoner s assent to a ta payer s moton to
dsmss the proceedng before the oard mproves, as the company here con-
tends, hs stnndng before ths court. Certany, t s not arguabe that If the
Government consented to the dsmssa of a sut upon whch the statute of
mtatons had run, such consent wou d aow the ta payer to successfuy
overcome the runnng of the statute n a new acton. The most that s argu-
abe s that the ta payer shoud not be abe to dsmss hs appea to the oard
wthout the acquescence of the Government, but no nference may be drawn
from ths that such assent now confers upon ths court any |ursdcton.
In concuson, whe the resut here reached s undoubtedy a harsh one
from the pont of vew of the ta payer, especay snce he woud appear no
onger to have any redress before the oard, suffce t to say that the remedy
es wth the egsatve body, Congress, and not wth the courts. ccordngy,
the Government s demurrer must be sustaned, wth the resut that the proceed-
ng must be dsmssed for ack of |ursdcton.
S CTION 325 (R NU CT O 1918). T RMS
R L TING TO IN ST D C PIT L.
rtce 811 (Reguatons 45) : Ltangbe and I-50-5916
tangbe property. Ct. D. 610
e cess profts ta revenue act of 1018 decson of court.
Intestkd Capta Intangbe Pbopebty Contract Rght to
ut and Se a everage.
contract conferrng the rght to purchase from the manufac-
turer at a certan prce and to dstrbute by sae over certan terr-
tory a beverage havng an estabshed reputaton, the process
of the manufacturer and composton of whch s secret and the
formua of ts composton protected from genera knowedge, Is
ntangbe property as defned bv secton 323(a) of the Revenue
ct of 1918.
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383
325, rt. 811.
Unted States Crcut Court of ppeas, ourth Crcut.
ohn . ones, Coector of Interna Revenue for the Dstrct of South Carona,
appeant, v. . D. and . . Cro nwe, Inc., appeee.
ppea from the Dstrct Court of the Unted States for the astern Dstrct of South
Carona, at Coumba.
ugust 1, 1932.
OPINION.
Nokthcott, Crcut udge: Ths s au appea from a |udgment of the Dstrct
Court of the Unted States for the astern Dstrct of South Carona n favor
of the appeee (pantff beow) for the sum of 11,600.81 and nterest, n a
sut at aw, to recover e cess profts ta es assessed and coected by the Unted
States for the years 1918, 1919, and 1920 under the provsons of the Revenue
ct of 1918.
|ury was waved and the sut tred by the court on stpuatons of fact.
In ebruary, 1903, . D. and . . Crosswe, a partnershp, acqured a con-
tract to botte and se coca-coa wthn certan terrtora mts of the State of
South Carona and to purchase coca-coa srup from the Coca-Coa ottng Co.
at a stated prce per gaon. Thereafter, subcontracts were entered nto by the
partnershp wth 12 bottng companes to purchase srup and botte coca-coa
wthn certan prescrbed mts of the State of South Carona. The partner-
shp, whch was formed n 1903, contnued unt t was ncorporated on March
10, 1915, under the aws of the State of South Carona wth a capta stock
of 5,000 par vaue. The stock of the corporaton was ssued to the partners
for the busness of the partnershp.
The agreed actua cash vaue of the contracts at the tme they were pad n
for stock was 162,500.
The appeee tmey fed ncome ta returns on a persona servce bass for
the years 1918, 1919, and 1920, showng no ta due. The Commssoner of
Interna Revenue determned that the appeee was not entted to be cassed as
a persona servce corporaton and determned ts ta abty under the
provsons of secton 302 of the Revenue ct of 1918 for each of the years,
whch determnaton resuted n a defcency beng asserted aganst the pantff
for each of the years.
rom the defcences so asserted the appeee fed a petton wth the Unted
States oard of Ta ppeas seekng a revew of the Commssoner s determ-
naton, on the grounds (1) that the appeee was entted to persona servce
cassfcaton, or, (2), f such cassfcaton was dened, to speca assessment
under the provsons of sectons 327 and 328 of the Revenue ct of 1918. fter
a hearng before the oard of Ta ppeas the determnaton by the Comms-
soner of Interna Revenue was affrmed (6 . T. ., 1315). The defcences
determned by the Commssoner of Interna Revenue and affrmed by the oard
of Ta ppeas were thereafter assessed, together wth Interest, the same beng
pad by the appeee n December, 1927. The appeee duy fed cams for
refund of the ta es and nterest so pad and upon re|ecton thereof by the Com-
mssoner of Interna Revenue brought ths sut.
Pertnent provsons of the Revenue ct of 1918 (40 Stat., 1057, 1088, 1089,
1091-1093) are sectons 325, 326, 301, and 302. It Is admtted that the (Soe
queston nvoved s whether the contracts n queston, vaued at 162,500, and
transferred to appeee for ts capta stock, are tangbe or Intangbe
property for the purpose of computng nvested capta and e cess profts
ta es for the years n queston.
Secton 325(a) of the Revenue ct of 1918 provdes:
The term ntangbe property means patents, copyrghts, secret processes
and formuae, good w, trade-marks, trade-brands, franchses, and other ke
property
The term tangbe property means stocks, bonds, notes, and other ev-
dences of ndebtedness, bs and accounts recevabe, easehods, and other
property other than ntangbe property .
t common aw and n the ordnary acceptance of the term, the contracts
woud undoubtedy be cassfed as Intangbes, but, Congress, as t has the
rght to do, has defned tangbes and ntangbes for ta aton purposes.
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5325, rt. 811.
384
It, therefore, remans to be seen whether the cassfcaton set up by Congress
specfcay paces these contracts under the head of tangbes otherwse
they must reman cassfed as they ordnary woud be, as ntangbes.
When Congress carved out from the great mass of persona property whch s
and aways has been hed to be ntangbe property certan e ceptons, the same
beng stocks, bonds, notes, and other evdences of ndebtedness, bs and
accounts recevabe, and easehods and made such property tangbe, t dd
not say and other ke property. - eng e ceptons carved out of the genera
rue, ntangbe property not specfcay mentoned as beng tangbe property
must be e cuded. The ma m e prcsso unus est e cuso aterusappes.
It s a we-setted prncpe of statutory constructon that the e presson of
one thng e cudes others not e pressed. (The Pauna s Cargo, 7 Cranch. 52
Wood v. Unted States, 16 Pet., 342 Unted States v. rredondo, 6 Pet., 691
Phadepha, Wmngton d atmore R. R. Co. v. oward, 13 ow., 307
rthur v. Cu-wmng et a., 91 U. S., 362 25 C. ., 220.)
urther, when a statute mts a thng to be done n a partcuar mode. It
ncudes a negatve of any other mode. (Raegh, etc., R. Co. v. Red, 13 Wa.,
269.)
Ths foregong prncpe s most apty stated n the case of In re eath (144
U. S., 92), n whch t was hed that the affrmatve descrpton of the cases
n whch the |ursdcton may be e ercsed under the Crcut Court of ppeas
ct of March 3, 1891, mpes a negatve on the e ercse of such power n other
cases.
Certany the contracts are not stocks, bonds, notes, and other evdences of
ndebtedness, bs and accounts recevabe and easehods, and they are not
of that cass of property ordnary desgnated as tangbes. On the other
hand, the nherent quates of the contracts are smar to those whch char-
acterzed the tems sted as ntangbes n secton 325(a). They are con-
tracts havng a speca vaue because they carred the e cusve rght to hande
a beverage n certan terrtory. Ths beverage had a arge sae because of ts
estabshed reputaton, somethng cosey akn to good w, f t coud not prop-
ery be termed ust that. The process of ts manufacture or composton was se-
cret, and the formua for ts composton was protected from genera knowedge.
gan, prveges partakng n ther nature of an e cusve rght to use a certan
thng or servce have commony come to be termed franchses, a meanng
dfferng from the ega defnton of a franchse as beng a speca prvege
conferred by the Government on the ndvdua. Thus we frequenty hear of
an ssocated Press franchse. These contracts were certany ke property
to secret formuae, because the sub|ect matter wth whch they deat was pro-
tected by a secret process, and they were agan ke property to good
w, because they were vauabe because the sub|ect matter wth whch they
deat was argey vauabe because of the reputaton that had been but up for
coca-coa as a drnk through wse handng and e tensve advertsng coverng
a number of years. The trade brand Coca-Coa tsef was of great vaue.
The property here nvoved s a contractua prvege. It s the rght to buy
a product at a certan prce and to dstrbute that product by sae over certan
terrtory, and n many respects partakes of the nature of a prvate franchse.
The phrase other ke property shoud not be gven a narrow or restrcted
meanng. The word ke means substantay smar. It s thus defned
n Webster s Internatona Dctonary:
1. avng the same, or neary the same, appearance, quates, or character-
stcs resembng smar to smar, ake.
In the Century Dctonary and Cycopeda the word ke s thus defned:
1. Of smar form, appearance, or quaty of correspondng knd, amount
e tent, degree, etc. correspondng equa or equvaent anaogous agreeng
n some notceabe respect.
unk Wagnas New Standard Dctonary of the ngsh Language gves
ths defnton of the word ke :
1. avng resembance neary dentca n appearance or characterstcs
appro mate smar often formery wth to or unto before the ob|ect com-
pared as, ke methods as ke as two peas. 2. most or qute the same n
the quaty consdered equa or neary equa- vrtuay equvaent.
(See, aso, Unted States v. Waace, 116 U. S., 398 ss v. ss. 221
Mass., 201.)
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385
( 325, rt. 811.
It s contended on behaf of appeee that the contracts under consderaton
here are smar to the tangbe property enumerated n the statute, but even
were ths true such smarty woud not be suffcent to brng them under the
cassfcaton of tangbe made by Congress, because the statute enumerates
te tangbes specfcay and does not foow the enumeraton wth the phrase
other ke property. When the enumeraton does not Incude specfcay the
property, t can not be brought n under any genera terms, because there are
no genera terms. One of the genera rues of statutory constructon s that a
provso or e cepton n a statute s to be strcty construed, and one who sets
up an e cepton must estabsh t as beng wthn the words as we as the
reason thereof. Spokane I. . R. Co. v. Unted States, 241 U. S., 344.)
No statute s to be construed as aterng the common aw further than ts
words mport. (Ross v. ones, 22 Wa., 576 Ransom v. Wams, 2 Wa., 313.)
Carred to ts ogca concuson, the contenton made on behaf of appeee
eads to a whoy mpossbe resut. Thus a patent s necessary hed to be an
ntangbe because so enumerated n the statute, whe a contract entered nto
between a patentee and a censee, under appeee s contenton, woud be a tan-
gbe. ere the secret process or formua for producng coca-coa s ceary an
ntangbe, and t s reasonabe to concude that a contract deang wth coca-
coa shoud aso be cassed as an ntangbe uness t s otherwse specfcay
provded by statute.
The rue reed upon by the earned |udge beow for reachng hs concuson
that these contracts were tangbes, that a the ntangbes possessed the
common characterstc of beng gven protecton by speca statutes certany
does not appy to good w, and, therefore, coud not have been n the con-
tempaton of Congress when t made the cassfcaton.
Whe we have been abe to fnd no decson bearng drecty on ths pont,
somewhat smar contracts have been hed to be ntangbe property for the
purposes of ta aton. ( acon Coa Co. v. Unted States, 34 ed. (2d), 706
Day Pantograph, Inc., v. Unted States, 37 ed. (2d), 783.)
In Strong Pubshng Co. v. Commssoner of Interna Revenue (56 ed. (2d),
550 Ct. D. 514, page 389, ths buetn ), udge vans sad:
na determnaton of ths cose queston must turn upon the effect of the
words and other ke property as used n the frst cause of secton 325(a).
Ths e presson must be gven some range of equvaents. Such equvaency
e tends to speces of property somewhat ke the dfferent knds enumerated
patents, copyrghts, secret processes and formuae, good w, trade-marks,
trade-brnnds, franchses, .
of these speces of property are n aw and n commerce recognzed as
possessng attrbutes somewhat dfferent from stocks, bonds, notes and other
evdences of ndebtedness, bs and accounts recevabe, easehods, .
nd that whch earmarks ther dfferences, specfcay and as a group, s the
presence or absence of specuatveness n determnng ther vaue.
Consderng a the crcumstances the anguage of the statute, the purpose
of the cassfcaton of property nto tangbe and ntangbe, the dfferences n
the certanty wth whch ther vaue may be acertaned we concude that the
crcuaton of a newspaper fas wthn the comprehenson of the cause other
ke property used n the frst paragraph of secton 325(a).
There s here no such doubt as to the ntenton of Congress as woud |ustfy
our decdng the queston n favor of the ta payer. The contracts n queston
are Intangbes. The |udgment of the court beow s accordngy reversed.
S CTION 325 ( NU CTS O 1918 ND 1921). T RMS
R L TING TO IN ST D C PIT L.
rtce 811 (Reguatons 62): Intangbe and tangbe
property.
R NU CTS O 1018 ND 1021.
Crcuaton of newspaper as ntangbe property. (See Ct. D. 514,
page 389.)
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5326, rt. 833.
386
S CTION 326 (R NU CT O 1918).
IN ST D C PIT L.
rtce 833: Tangbe property pad n: ev- I-35-5642
dences of ndebtedness. Ct. D. 551
e cess profts ta revenue act of 1918 decson of court.
1. Invested Capta Tangbe Property Promssory Notes n
Payment op Stock rkansas.
Promssory notes of a subscrber can not under the aws of
rkansas be egay receved n payment for stock of a corporaton
organzed under the aws of that State and are vod as between the
maker and the corporaton no amount on account of such notes
may therefore be ncuded In the nvested capta of the corporaton
under secton 826 of the Revenue ct of 1918.
2. Decson ffrmed.
The decson of the oard of Ta ppeas (17 . T. ., 460) s
affrmed.
Unted States Crcut Court or ppeas, ghth Cmcurr.
The Garrson Co., pettoner, v. Commssoner of Interna Revenue, respondent.
On petton to revew decson of tho Unted States oard of Ta ppeas.
efore an akenburoh, ooth, and Gardner, Crcut udges.
anuary 25, 1932.
opnon.
ooth, Crcut udge, devered the opnon of the court.
Ths s a petton for revew of a decson of the oard of Ta ppeas, and
nvoves redetermnaton of ncome and profts ta es of the pettoner for the
year 1920.
The queston of the vaue of pettoner s deprecabe assets, whch was aso
before the oard of Ta ppeas and was covered by ts decson, s not In-
voved on ths appea.
The short facts are as foows: The pettoner was ncorporated under tbe
aws of the State of rkansas n 1919, havng 2,000 shares of capta stock
of 100 par vaue. ve ndvduas subscrbed for 999 shares of the stock and
pad for the same, 55,000 n cash for 550 shares, and ther promssory notes
amountng to 44,900 for 449 shares. The makers of the notes were sovent
The stock ssued for the notes was thereafter hed by the corporaton as securty
for the payment of the notes.
The Commssoner, n hs audt of the pettoner s return for 1920, e cuded
from the computaton of nvested capta the face amount of the notes, namey,
44,900. Ths acton of the Commssoner was affrmed by the oard of Ta
ppeas.
The queston on ths revew s whether promssory notes n the face amount
of 44,900, or any porton thereof, may be ncuded n ta payer s nvested capta
for 1920 as cash or tangbe property bona fde pad n for stock under secton
326 of the Revenue ct of 1918.
The term Invested capta s defned n the Revenue ct of 1918 as foows:
Sec. 326. (a) That as used n ths tte the term nvested capta for any
year means (e cept as provded n subdvsons (b) and (c) of ths secton):

(2) ctua cash vaue of tangbe property, other than cash, bona fde pad
n for stock or shares, at the tme of such payment, but n no case to e ceed the
par vaue of the orgna stock or shares specfcay Issued therefor, uness the
actua cash vaue of suc tangbe property at the tme pad n s shown to the
satsfacton of the Commssoner to have been ceary and substantay n
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387
326, rt. 833.
e cess of such par vaue, n whch case such e cess sha be treated us pad-n
surpus.
The term tangbe property s defned n secton 325(a) as foows:
Skc. 325. (a) That ns used n ths tte

The term tangbe property means stocks, bonds, notes, and other ev-
dences of ndebtedness, bs and accounts recevabe, easehods, and other prop-
erty other than ntangbe property.
The bass of the acton of the Commssoner and the oard of Ta ppeas
was the provson n rtce II of the Consttuton of rkansas, readng as
foows:
rtce II.
ISSU ND INCR S O STOC , TC., O PRI T CORPOR TIONS.
Sec. 8. No prvate corporaton sha ssue stocks or bonds, e cept for
money or property actuay receved or abor done, and a fcttous ncrease
of stock or ndebtedness sha be vod nor sha the stock or bonded ndebted-
ness of any prvate corporaton be ncreased, e cept n pursuance of genera
aws, nor unt the consent of the persons hodng the arger amount n vaue
of stock sha be obtaned at a meetng hed after notce gven for a perod
not ess than 60 days, n pursuance of aw.
Ths provson of the rkansas consttuton as been construed by the courts
of that State n severa cases:
In ank of Commerce v. oosby (129 rk., 416), the supreme court of that
State hed that the takng of a note by a corporaton n e change for ts cap-
ta stock was a voaton of the consttutona prohbton.
In ank of Mana v. Waace (177 rk., 190), t appeared that Waace had
bought from one Thompson stock n the onesboro Cotton Ms, a corporaton,
and had gven Thompson a promssory note n payment. Thompson dscounted
the note at the appeant bank, and t brought sut thereon aganst Waace.
The ssues n the case were, frst, whether Waace bought the stock of the cor-
poraton through Thompson as ts agent, or bought stock owned by Thompson
second, f the stock bought was the stock of the corporaton, whether the bank
was an nnocent purchaser of the note. The court n ts opnon sad (page
192) :
The evdence was suffcent to |ustfy the court n submttng to the |ury,
frst, whether the note was gven for stock of the corporaton and whether
Thompson was smpy actng for the corporaton, and, second, whether the
appeant was an nnocent purchaser.
If the note was gven for stock n the corporaton and Thompson was
merey actng for the corporaton, seng ts stock, then, under the aw as
setted by the decsons of ths court, the note was vod. nd f the bank was
not an nnocent purchaser, t coud not recover.
See aso rvmpcn v. Tayor (40 S. W. (2d), 775 ( rk.)) Lepanto Gn Co. v.
arnes (31 S. W. (2d), 746 ( rk.)) ank of Dermott v. Mease (172 rk.,
193) .
Pettoner ctes and rees argey upon two cases: s v. onesboro Trust
Co. (17 S. W. (2d), 324 ( rk.)) and Memphs, etc., . R. v. Dow (120 U. S.,
287).
In the s case, sut was brought by the Trust company, whch was a bank-
ng corporaton, aganst s upon a promssory note whch had been gven
by hm to the Trust company to cover a vountary assessment whch had been
authorzed by the board of drectors of the Trust company because of mpar-
ment of capta as found by the State bank commssoner. mong the defenses
set np by s to the note was an aegaton that the note was vod under
secton 8 of rtce II of the rkansas consttuton and the decsons of the
Supreme Court of rkansas. In reference to ths defense, the supreme court
n ts opnon sad:
We are aso of the opnon that the note s not vod under secton 8, of
rtce II, of the consttuton .
In construng ths secton of the consttuton t has been severa tmes hed
by ths court that a note gven to a prvate corporaton for the purchase prce
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1326, rt. 833.
388
of corporate stock s nether money nor property actuay receved wthn the
meanng of the consttuton, and that such a note s vod, e cept n the hands
of an nnocent purchaser, as havng been e ecuted n voaton of the con-
sttuton.

ut the cases cted have no appcaton here.
There was here no ssue or ncrease of stock or of ndebtedness of the
corporaton n connecton wth the e ecuton of the note. s receved no
stock. s stock had been prevousy ssued to hm and had been pad for by
hm, and, nstead of waterng the stock, hs note was ntended to gTe t a
vaue whch t woud not otherwse have had. Snce the consttutona proh-
bton s drected aganst the ssuance of watered stock, t can not be con-
strued to prohbt a stock assessment note e ecuted to gve vaue to stock
aready ssued, pad for, and outstandng.
The Dow case, whe t nvoved the constructon of secton 8, rtce II,
of the consttuton of rkansas, dd not nvove that part of the secton con-
strued n the cases cted above. In the Dow case the queston nvoved was
whether certan bonds ssued by a raroad corporaton were fcttous as hav-
ng been ssued wthout any consderaton receved n money, property or abor.
It was hed, under the facts dscosed, that the bonds had not been so ssued
as to be fcttous.
Iu the case at bar, the queston s whether promssory notes taken by an
rkansas corporaton n payment for ts stock are vad. The Dow case does
not pass upon that queston.
It s further contended by pettoner that resuts from transactons that are
n voaton of State aw, and not enforcbe contracts n the State, are st
recognzed for edera ta purposes f they are of a knd that woud otherwse
come wthn the Revenue cts.
It s. unnecessary to dscuss the proposton thus generay stated for the
reason that the transacton n the case at bar does not come wthn ts terms.
Treasury Department Reguatons 45 (1920 dton), artce 833, reads as
foows:
rt. 833. Tangbe property pad n: evdences of ndebtedness. nforcbe
notes or other evdences of ndebtedness, ether nterest bearng or nonntereat
bearng, of the subscrber receved by a corporaton upon a subscrpton for
stock may be consdered as tangbe property n computng ts nvested capta
to the e tent of the actua cash vaue of such notes or other evdences of n-
debtedness at the tme when pad n, but ony (o) f such notes or evdences of
ndebtedness coud under the aws of the |ursdcton In whch the corporaton
was organzed egay be receved n payment for stock, and (6) f they were
actuay receved by the corporaton as absoute, and not as condtona, pay-
ment n whoe or n part of the stock subscrpton.
It Is pan from the anguage of the reguaton that the promssory notes n
the case at bar coud not be consdered tangbe property n computng the
corporaton s nvested capta for the reason that such notes coud not, under
the aws of rkansas, be egay receved n payment for stock. The notes n
queston n the hands of the corporaton were vod and vaueess.
The fna suggeston of pettoner s that, though the promssory notes taken
by the corporaton for 449 shares of stock are vod, yet the 550 stock certf-
cates pad for n cash and representng 55,000 can be consdered to represent
aso 44,900 as surpus.
We thnk the suggeston fnds no support n secton 326(a)2 or n the cases
cted by pettoner, and s wthout mert. No surpus of assets was created
by the corporaton or receved by t by takng vod notes n payment for ts
stock and hodng the stock as coatera.
In vew of the provson above quoted contaned n the consttuton of the
State of rkansas, and the decsons of ts courts construng the same, we
thnk the decson of the oard of Ta ppeas was rght, and t s affrmed.
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389
326, rt. 851.
S CTION 326 (R NU CTS O 1918 ND 1921).
IN ST D C PIT L.
rtce 851 (Reguatons C2): Intangbe prop- I-28-5544
erty pad n. Ct. D. 514
( so Secton 325, rtce 811.)
e cess profts ta revenue acts of 1018 and 1921 decson of court.
1. Intanob|e Property Crcuaton Structure of a Newspaper.
The crcuaton structure of a newspaper s ntangbe property
wthn the meanng of secton 325(a) of the Revenue cts of 1918
and 1921.
2. Invested Capta Pad-n Surpus Intangbe sset.
The vaue of an ntangbe asset may not be ncuded n the
computaton of nvested capta as pad-n surpus under secton
326(a)3 of the Revenue cts of 1918 and 1921.
Unted States Crcut Court of ppeas for the Seventh Crcut.
Strong Pubshng Co., pettoner, v. Commssoner of Interna Revenue,
respondent.
efore vans, Sparks, Crcut udges, and atze, Dstrct udge.
Petton for revew of order of Unted States oard of Ta ppeas.
March 9, 1932.
opnon.
vans, Crcut udge: We are n the nstant ease, caed upon to revew the
acton of the oard of Ta ppeas whch assessed defcency ta es aganst
pettoner n the foowng amounts: 1919, 133,447.48 1920, 41,664.97 1921,
35,204.68. Dfferences e st between the partes over the amount of petton-
er s nvested capta for these three years. Respondent refused to Incude
three tems (the vaue of the ssocated Press membershp, the crcuaton of
pettoner s newspaper, and ts good w) as part of the ta payer s nvested
capta. aure to persuade the oard of Ta ppeas of the correctness of
ts contenton n ths respect accounts for the assessment of the defcency ta es
and pettoner s appea to ths court for redress.
The facts: The Chcago Day News Co. was ncorporated n 1893 to succeed
another company by the same name. It was engaged n the pubshng of a
day newspaper n Chcago. ctor Lawson was ts soe stockhoder. In 1926,
t secured an amendment to ts charter wth a resutant change n ts name to
Strong Pubshng Co.
When ncorporated n 1893, the capta stock was f ed at 1,500 shares wth
100 par vaue. In 1917, the stock was ncreased to 18,000 shares, the addtona
stock gong to Lawson n e change for rea estate and a note. The assets
acqured n 1893 by the Chcago Day News Co. conssted of budngs and
easehods, machnery and equpment, cash, accounts recevabe, nventores,
and deferred charges aggregatng 1,081,304.88. Its outstandng abtes were
666,792.88. It had a net book vaue of 414,512 or a surpus over par vaue
of Its capta stock of 264,512. The Commssoner ncuded ths atter amount
n pettoner s nvested capta. Its sted assets dd not menton good
w, ssocated Press membershp, or crcuaton. Upon pettoner s ncorpora-
ton, however, these tems were a transferred to t.
Pettoner s compant s grounded upon the refusa of the respondent to n-
cude as nvested capta the three tems above mentoned, whch concededy
have a substanta vaue.
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5326, rt. 851.
390
uthorty for ncudng or e cudng an asset as a part of the nvested
capta must be found n the statutes. Lkewse, we must ook to the same
source to ascertan the meanng of ntangbe assets. The appcabe statutes
are quoted beow.1
The controverted questons may be stated thus: (1) Is crcuaton of a
newspaper ntangbe property wthn the defnton of the statute (2) Is
ntangbe property to be ncuded n nvested capta by vrtue of secton
326(a)3
Pettoner contends that crcuaton s tangbe property, but admts that
good w and ssocated Press membershp are ntangbe property. It con-
tends, however, that even though ntangbe property, a three tems shoud
be ncuded as a part of ts nvested capta because they come wthn the
provson of secton 326(a)3. Respondent denes that crcuaton s tangbe
property and denes that any ntangbe property shoud be ncuded In n-
vested capta under sad subsecton (3).
Crcuaton Whether tangbe or ntangbe. The crcuaton of the paper
was 192,495 n 1893, and pettoner cams that t was reasonaby worth at east
1,759,000. It contends that crcuaton s an tem dstnct from good w
(defned by the statute to be an ntangbe) and one whch s saabe per e
(ctng the nstance of a sae of a snge edton of a newspaper). In enumer-
atng the characterstcs of crcuaton, the pettoner states that t s a more
permanent and substanta asset than physca property.
rom these facts pettoner argues that nasmuch as crcuaton Is not ke
any of the tems specfcay denomnated by the statute to be ntangbe and
snce t aso s not covered by the catch-a phrase other ke property, t
must e necesstate be ncuded n the statutory defnton of tangbe property,
whch provdes that tangbe property sha ncude (after enumeratng specfc
tems) other property other than ntangbe property.
Is crcuaton so akn to patents, copyrghts, secret processes and formua,
good w, trade-marks, trade-brands, franchses, as to fa wthn the resduary
phrase other ke property
It may be conceded for the purpose of the argument that crcuaton s an
tem dstnct from good w, yet t does not foow that they are not nherenty
ake n ther essenta aspects. Crcuaton grows as the good w of the paper
ncreases. It s, generay speakng, a manfestaton of the e stence of good
w. Wthout good w there woud hardy be a we-sustaned crcuaton.
The vaue and e tent of both crcuaton and good w are dependent upon the
game factors servce and the pocy of the paper. If the servce or pocy of
1 Secton 325 n) of the Revenue ct of 1918 provdes:
That as used n ths tte
The term ntangbe, property means patents, copyrghts, secret processes and for-
mua, good w, trade-marks, trade-brands, franchses, and other ke property
The term tangbe property means stocks, bonds, notes, and other evdences of
ndebtedness, bs and accounts recevabe, easehods, and other property other than
Intangbe property .
Secton 320(a) provdes:
That as used n ths tte the term nvested capta for any year means (e cept a
provded n subdvsons (b) and (c) of ths secton) :
(1) ctua cash bona fde pad n for stock or shares
(2) ctua cash vaue of tangbe property, other than cash, bona fde pad n for stock
or shares, at the tme of such payment, but n no case to e ceed the par vaue of the
orgna stock or shares specfcay ssued therefor, uness the actua cash vaue of such
tangbe property at the tme pad n s shown to the satsfacton of the Commssoner
to have been ceary and substantay In e cess of such par vaue, n whch case sock
e cess sha be treated as pad-n surpus : Provded, That the Commssoner sha keep a
record of a cases n whch tangbe property s ncuded n Invested capta at a vaue In
e cess of the stock or shares ssued therefor,
(3) Pad-n or earned surpus and undvded profts not ncudng surpus and und-
vded profts earned durng the year
(4) Intangbe property bona fde pad n for stock or shares pror to March 3. 1917,
n an amount not e ceedng (a) the actua cash vaue of such property at the tme pad n,
(b) the par vaue of the stock or shares ssued therefor, or (c) In the aggregate of 25 per
centum of the par vaue of the tota stock or shares of the corporaton outstandng on
March 3, 1917. whchever s owest
(5) Intangbe property bona fde pad n for stock or shares on or after March 3, 1917,
In an amount not e ceedng (a) the actua cash vaue of such property at the tme pad In,
(b) the par vaue of the stock or shares ssued therefor, or (c) n the aggregate 25 per
centum of the par vaue of the tota stock or shares of the corporaton outstandng at the
begnnng of the ta abe year, whchever s owest: Provded, That n no case sha the
tota amount ncuded under paragraphs (4) and (6) e ceed In the aggregate 25 per
centum of the par vaue of the tota stock or shares of the corporaton outstandng at
the begnnng of the ta abe year .
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391
326, rt. 851.
the paper vares, the crcuaton and good w vary accordngy. the prop-
erty characterstcs ascrbed to crcuaton are certany as ndscrmnatey
dentfabe wth ntangbe as wth tangbe property. They may be sad to be
n nseparabe aance wth both.
In the ony reported decson, Day Pantograph v. Unted States (37 . (2d),
783), outsde of the oard of Ta ppeas hodngs, crcuaton was hed to be
ntangbe property.
True, there may be crcuaton wthout good w. In fact, nstances may be
cted where crcuaton s arge whereas the atttude of the pubc toward the
pubcaton s . ut good w, as used n the statute and as a ega term, 13
more comprehensve than when used cooquay. It has been defned n rown
v. ensnger (84 t. (Md.), 79) as:
Good w s the advantage or beneft whch s acqured by an estab-
shment beyond the mere vaue of the capta stock, funds, or property em-
poyed theren, n consequence of the genera pubc patronage and encourage-
ment whch t receves from constant or habtua customers on account of ts
oca poston, or from ceebrty or reputaton for sk, or affuence or punctua-
ty, or from other accdenta crcumstances or necesstes, or even from ancent
partates or pre|udces.
It was of ths sort of good w of whch Congress spoke when t defned t
to be ntangbe property.
Nor have we overooked the fact that crcuaton as such, aone and sep-
arated from the rest of the busness of pubshng a newspaper, may be sod,
and possesses, n some nstances, substanta vaue. ut ths fact aone s not
sgnfcant. or, athough saabty and assgnabty as such may evdence
property e stence, they bear ony nconsequenty on the dstnctons be-
tween tangbe and ntangbe property.
The true test by whch the two knds of property may be dstngushed s
traceabe to, and must be found n, ther evauaton dfferences. Congress was
not nterested n the characterstcs of these two casses of property Lave as
such characterstcs reated to ther property vaues. or Congress was dea-
ng wth nvested capta (because rate of return on nvested capta affected
rate on ta abe ncome), and t made ts cassfcaton of property nto tangbe
and ntangbe property and defned both, and mted the amount of ntangbe
property whch coud be ncuded n Invested capta, because of ts nterest
n the base upon whch the ta payer s ncome ta es were computed.
amnng the speces of property enumerated under the two heads, the
chef dfference between them, whch bears on vaue, s to be found n the
certanty and defnteness wth whch ther vaue may be ascertaned. Whe
no doubt the vaue of each speces of property specfcay ncuded wthn
the defnton of ntangbe property may be estmated and apprased, there s
nevertheess uncertanty about ts vaue, an ndefnteness, a specuatve quaty
whch s absent from the vaue of the property specfed and defned as tangbe.
na determnaton of ths cose queston must run upon the effect of the
words and other ke property as used n the frst cause of secton 325(a).
Ths e presson must be gven some range of equvaents. Such equvaency
e tends to speces of property somewhat ke the dfferent knds enumerated
patents, copyrghts, secret processes and formua , good w, trade-marks,
trade-brands, franchses, . of these speces of property fre n
aw and n commerce recognzed as possessng attrbutes somewhat dfferent
from stocks, bonds, notes and other evdences of ndebtedness, bs and ac-
counts recevabe, easehods, . nd that whch earmarks ther
dfference, specfcay and as a group, s the presence or absence of tpecuatve-
ness n determnng ther vaue.
Consderng a the crcumstances the anguage of the statute, the pur-
pose of the cassfcaton of property nto tangbe and Intangbe, the dfferences
n the certanty wth whch ther vaue may be ascertaned we concude that
the crcuaton of a newspaper fas wthn the comprehenson of the cause
other ke property used n the frst paragraph of secton 325(a).
Pad-n surpus: Does subdvson (3) of secton 326(a) ncude ntangbe
as we as tangbe property The reguatons e cude ntangbe property from
ths subdvson. ut the reguatons can not govern f contrary to the pro-
vsons of the statute. The courts passng on the queston have hed that n-
tangbe property coud not be ncuded as pad-n surpus under ths subdv-
son (3). (Landesman- rtokemcr Co. v. Commssoner, 44 . (2d), 521 (C. C.
100903 33 26
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1002.
392
. 6) Lafayette-South Sde ank v. Commssoner, 33 . (2d). 646 (Ct pp.
D. C.) aker Tayor Co. v. Unted States, 21 . (2d), 789 T. D. 4109, C. .
I-2, 285 Lews . Crossett Co. v. Unted States, 50 . (2d), 292 (Ct. Cs.)
Ct. D. 373, C. . -2, 392 Coorado Contnenta Lumber Co. v. Unted States,
42 . (2d), 327 (Ct. Cs.) Day Pantograph v. Unted States, 37 . (2d),
783 (Ct. Cs.) Tusa Trbune Co., 21 . T. ., 1405 erad-Despatch Co.. 4
. T. ., 1096.)
In vew of these decsons, t woud be fute to dscuss at great ength the
underyng queston here nvoved, whch Is prmary one of statutory con-
structon. Our concuson s that the frst three subsectons of secton 328(a)
dea wth tangbe property ony, and subsectons (4) and (5) dea specfcay
wth ntangbe property and offer an e panaton of congressona acton n
cassfyng the ta payer s nvested capta nto tangbe and ntangbe property.
The ma m, generaa specabus non derogant, appes.
We are unabe, however, to agree wth the oard of Ta ppeas n ts
concuson that pettoner was not entted to ncude any part of ts ntangbe
property as nvested capta. Subsecton (4) authorzes the ncuson of n-
tangbe property up to one-fourth of the par vaue of the tota stock of the
corporaton outstandng on March 3, 1917 (f such amount be ower than the
vaue of the Intangbes pad n and of the stock ssued therefor). s the
capta stock, n the Instant case, outstandng at such date was of the par
vaue of 150,000, pettoner was entted, upon t showng suffcent vaue n
the way of ntangbe assets, to have 37,500 ncuded n ts nvested capta
for ths tem.
Other questons presented by pettoner s bref, we have duy consdered and
deem dscusson of them unnecessary.
The order of the oard of Ta ppeas s reversed wth drectons to n-
crease pettoner s n vested, capta by the sum of 37,500 for each of the years
n queston and to recompute ts ta accordngy.
INCOM T R NU CTS OP 1021 ND 192ft D CISION O COURT.
1. enue Revew of oard s Decson Death Pendng ppea
to oard.
Where a ta payer des pendng hs appea to the oard of Ta
ppeas and hs e ecutors are substtuted as partes by order of the
oard, one an nhabtant of the second crcut and the other an
nhabtant of the ffth crcut, secton 1002(a) of the Revenue ct
of 1926 does not requre a revew of the oard s decson to be by
the Court of ppeas of the Dstrct of Coumba as n the case
of an ndvdua not an Inhabtant of any crcut, and the Crcut
Court of ppeas for the Second Crcut has |ursdcton of a pet-
ton to revew the decson by vrtue of that subdvson.
2. Deducton Loss Casuaty auty Constructon.
Where there s damage to a resdence due to rapd dsntegra-
ton of ts foundatons but over sat water and owands and there
s evdence of no unusua acton by the eements to cause the same,
there s a substanta bass for the fndng of the oard of Ta
ppeas, whch s bndng on a Crcut Court of ppeas, that the
oss s due ony to the ordnary acton of the eements upon a bady
constructed budng. Such oss does not arse from a casuaty
wthn the meanng of secton 214(a)6 of the Revenue ct of 1921
and s not an aowabe deducton under that paragraph.
3. Decson ffrmed.
The decson of the oard of Ta ppeas (18 . T. ., 674) s
affrmed.
TITL . O RD O T PP LS.
S CTION 1002. NU .
Secton 1002.
( so Secton 214(a)4, 5, and 6, rtce 141.)
I-27-5538
Ct. D. 510
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393
1002.
Unted States Crcut Court of ppea for the Second Crcut.
ugh M. Matheson and Ws D. Wood, ecutors of the state of Wam
. Matheson, Deceased, pettoners, v. Commssoner of Interna Revenue,
respondent.
efore Manton, ugustus N. and, and Chase, Crcut udges.
ppea from Unted States oard of Ta ppeas.
December 1, 1931.
OPINION.
rom an order of the oard of Ta ppeas approvng a defcency found
by the Commssoner of Interna Revenue n the ncome ta es of Wam
. Matheson, deceased, for the years 1922 and 1923, pettoners, as e ecutors
of hs w, appea. ffrmed.
ugustus N. and, Crcut udge: The frst queston rased by ths appea
s whether ths court has |ursdcton to revew the proceedngs of the oard
of Ta ppeas.
Wam . Matheson mantaned a resdence and a busness offce wthn the
State of New York and aso a resdence wthn the State of orda. e fed
hs ncome ta returns n the offce of a coector of nterna revenue wthn
the second crcut. The Commssoner assessed a defcency aganst hm and
he sought a revew before the oard of Ta ppeas. Whe that proceedng
was pendng he ded, and the e ecutors of hs w were substtuted as partes
by order of the oard. One of them, Ws D. Wood, was an nhabtant of the
State of New York, and the other, ugh M. Matheson, an nhabtant of the
State of orda.
enue for appeas from the oard of Ta ppeas to the courts of appea
s governed by secton 1002 of the Revenue ct of 1926, whch provdes for
revew
(a) In the case of an ndvdua, by the Crcut Court of ppeas for
the crcut whereof he s an nhabtant, or f not an nhabtant of any crcut,
then by the Court of ppeas of the Dstrct of Coumba.
ecause of the fact that Wam . Matheson ded before ths appea was
taken and hs e ecutors were nhabtants of dfferent dstrcts, t s camed
that the present revew s by a person who s not an nhabtant of any ds-
trct and, therefore, must be had n the Court of ppeas of the Dstrct of
Coumba. ut, after the death of Wam . Matheson, hs e ecutors became
the rea partes n nterest. (McNtttt v. and, 2 ow.. 9.) ach e ecutor
coud, therefore, seek a revew n the court of appeas of the crcut whereof
he was an nhabtant and the appea n the present case mght e ether to
the Court of ppeas of the Second Crcut, of whch Ws D. Wood was an
nhabtant, or to the Court of ppeas of the fth Crcut, of whch ugh M.
Matheson was an nhabtant. In Rtsk v. Commssoner (as yet unreported)
the Court of ppeas of the Seventh Crcut hed that the deat of a ta payer
pendng a revew before the oard of Ta ppeas dd not abate the proceed-
ng. The ta payer s e ecutors, who were resdents of the seventh crcut,
were substtuted and the decson by the Ta oard went aganst them. It
was hed that an appea from the oard of Ta ppeas propery ay to the
Crcut Court of ppeas of the Seventh Crcut because the word ndvdua
used n secton 1002(a) of the Revenue ct of 1926 embraced e ecutors as we
as the orgna ta payer.
The words of secton 1002(a) provdng that appeas by ndvduas who are
not nhabtants of any crcut shoud be taken to the Court of ppeas of the
Dstrct of Coumba apparenty reate to persons vng outsde of any crcut
and can not reasonaby be thought to cover resdent ta payers who de eav-
ng e ecutOTS vng wthn one of the crcuts. The burden of requrng
representatves of such estates to proceed to Washngton to have ther appeas
heard shoud not be mposed wthout the panest anguage. We thnk the
appea was propery taken.
The mportant queston remanng for consderaton s whether the oard of
Ta ppeas erred n refusng to aow 42,692.26 pad out by Wam .
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1002.
394
Matheson n 1922 and 28,655.05 pad out n 1923 for osses arsng from an
aeged casuaty deductbe under secton 214(u)6 of the Revenue ct of
1921. Secton 214(a) provdes
That n computng net ncome there sha be aowed as deductons:

(6) Losses sustaned durng the ta abe year of property not connected wth
the trade or busness f arsng from fres, storms, shpwreck, or
other casuaty, or from theft, and f not compensated for by nsurance or
otherwse. Losses aowed under paragraphs (4), (5), and (G) of ths sub-
dvson sha be deducted as of the ta abe year n whch sustaned uness,
n order to ceary refect the ncome, the oss shoud, n the opnon of the
Commssoner, be accounted for as of a dfferent perod .
The oss whch the ta payer sought to deduct from hs ncome was due to a
rapd deteroraton of hs resdence but on ey scayne, an sand n s-
cayne ay, about 12 to 15 mes south of Mam, a. s resdence conssted
of two stores n Moorsh desgn, wth a andng stage or basement e tendng
over the waters of scayne ay and n part ovet the owands of ey scayne.
The oard of Ta ppeas determned that:
The foundaton on whch the superstructure was ad conssted of pes
drven nto the mud to bedrock and ncased n concrete. Of these pes 310
were entrey under water and the remander, 100 n number, protruded a
few feet above mean water eve. The ongest span from center to center
of any of the pes was 3 feet, but a great number of pes were so paced
that there was ony a 2-foot span from center to center. s orgnay but
no f or rubbe was paced around the png, a dock beng constructed to
permt yachts to dock aongsde the resdence.
Concrete ss were paced on the png and 4-nch foor beams were then
constructed from s to s. The foor beams were made of concrete ren-
forced wth -neh stee bars and had a span of 28 feet. It was not possbe
to obtan ocay -nch stee bars 28 feet n ength and n eu thereof there
was empoyed n the constructon of each foor beam 16-foot engths of -nch
stee whch were apped n the mdde of each beam for a dstance of 2 feet
Ths appng caused four -nch bars to be paced together n a 4-nch concrete
beam, eavng ony a thn she of concrete coverng the four bars at the center
of the span. Such method of constructon permtted sat mosture to pene-
trate the porous cement and come n contact wth the renforcng stee bars.
Ths caused the bars to rust and corrode and converted the pont where the
most strength was needed n the whoe structure Into a pont of weakness.
Ths rustng and corroson spread progressvey to a of the renforcng
stee used throughout the structure, as we as other meta used n the construc-
ton of the budng, such as eectrc ght conduts, etc. Durng the year 1922
the roof and every concrete foor of the structure was n mmnent danger of
fang. The ower part of the concrete |onts and terra cotta fer tes had
become detached from the body of the constructon, eavng the renforcng
stee hangng free and wthout bond n the concrete. The concrete protectng
the png supportng the foundaton of the budng had been washed away,
eavng the wooden pes e posed. The pettoner caused the damage to hs res-
dence to be repared, e pendng n such repars appro matey 2,500 durng the
year 1921, 42,692.26 durng the year 1922, and 28,655.05 durng the year
1923.
The oard of Ta ppeas concuded that the damage whch had to be re-
pared was due to a progressve deteroraton caused by fauty constructon,
and not to any casuaty, wthn the meanng of secton 214(a)6, and
accordngy refused to aow the cost of repars as a deducton from gross
ncome.
The ta payer ntroduced evdence showng an unusua ranfa durng 1922
and 1923, and a storm, the effects of whch he thought dsastrous, whch
occurred on ebruary 21, 1922. ut there was evdence that the ranfa coud
not perceptby rase the water eve of the ocean and that the wnd never
reached a veocty of more than 30 mes per hour. The queston, therefore,
arses whether a rapd dsntegraton of the foundatons of an edfce but
over waters and owands, whch, f we constructed, woud stand for years,
can be regarded as a casuaty.
In our opnon, the word casuaty as used n secton 214(a)6 s an
event due to some sudden, une pected or unusua cause. nythng ess than
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395
1005.
ths renders t hardy dstngushabe from deprecaton from ordnary wear
and tear whch can not be deducted by a ta payer n the case of property
that s not used n trade or busness. (Secton 214(a)8.) Whe t s con-
tended that the concrete casng of the pes was washed away by storms and
tdes so that the pes became e posed, eaten by worms and weakened, the
evdence that there were no unusua wnds and that there was nothng to cause
e traordnary tdes afforded a substanta bass for the concuson of the oard
of Ta ppeas that the oss was due ony to the ordnary acton of the
eements upon a poory constructed budng. In such crcumstances we are
bound by ts fndngs and hod that the damage dd not arse from a casuaty,
resembng fres, storms or shpwreck. The dsntegraton was due to
encasement of the stee framework n was of concrete so thn as to et n
mosture and gve rse to corroson, and to nadequate sheathng of the pes.
Ths concuson seems nevtabe when the proof of any serous storm or cata-
cysmc operaton of the eements faed. No tme s satsfactory estabshed
when any serous n|ury to the foundaton occurred. It was never over-
whemed by any unusua thng. There was smpy a steady abefacton from
wnd and weather more rapd than usua because of structura defects. Such
a deteroraton can not reasonaby be termed a casuaty. (Crysta Sprng
Dstery Co. v. Cos, 49 ed., 555 Sorsdck v. oard of Supervsors of ut-
man County, 25 So., 204 (Mss.) aton v. Gndcman, 33 Idaho, 389.)
In Shearer v. nderson (16 ed. (2d), 905 T. D. 3860, C. . -L 2393). the
ta payer s automobe was overturned and damaged (whe n the unauthor-
zed possesson of a chauffeur) because of the cy condton of the road, resut-
ng from storms and freezng. We hed that the oss was a casuaty wthn
the meanng of the Revenue ct and sad that the word casuaty e presses
rather the resut than the cause of the damage, that s, the wreck tsef
rather than the ghtnng, storm or the neggence or faut of some person
. The oss there was, however, due to a sudden accdent and to
nothng resembng mere deteroraton more rapd than usua. We do not
suggest that the destructon of a budng by an unusua storm woud not be a
casuaty f the edfce was so bady constructed as to be ready destroyed.
We smpy hod that a oss due, as here, to progressve decay or corroson,
occurrng wthout any unusua acton by the eements, does not arse from a
casuaty wthn the meanng of the statute.
The order s affrmed.
INCOM ND C SS PRO ITS T S R NU CTS O 1918 ND 1028
D CISION O COURT.
1. Sut Transferee Trust unb Doctrne naty of oard s
Decson.
In a sut n equty aganst a transferee of the property of a ta -
payer to enforce hs abty under the trust fund doctrne for the
amount of a defcency of the ta payer redetermned by the oard
of Ta ppeas n an appea pendng wthout a hearng thereon at
the tme of the enactment of the Revenue ct of 1926, the decson
of the oard as to the ta abty of the ta payer as redetermned
by the oard, whch has become fna, s fna and concusve and
therefore the transferee can not ava hmsef of any defense to
that abty whch was not peaded before the oard.
2. ssessment Defcency Lmtaton ppea to oard.
Where an appea to the oard of Ta ppeas s pendng wth-
out a hearng thereon at the tme of the enactment of the Revenue
ct of 1926, the tme wthn whch the Commssoner may assess
the defcency redetermned by the oard s governed by the pro-
vsons of the Revenue ct of 1920 as n a case where the Comms-
soner determnes that there s a defcency mposed by the Revenue
ct of 1926 and the ta payer fes a petton wth the oard.
S CTION 1005. D T ON W IC O RD S
D CISION COM S IN L.
Secton 1005.
( so Secton 1106, rtce 1341.)
I-48-5884
Ct. D. 604
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51005.
396
8. Speca ssessment Representatve Corporatons Comms-
soner s Dscreton.
In computng the ta n the ease of a speca assessment under
secton 328 of the Revenue ct of 1918, the seecton by the Com-
mssoner as theren provded of the representatve corporatons
engaged n a ke or smar trade or busness s an act of admn-
stratve dscreton whch s not revewabe by the courts.
Dstrct Court or the Unted States for the Northern Dstrct of Oho,
astern Dvson.
Unted States of merca, pantff, v. fred . Cohn, defendant.
uy 9, 1932.
opnon.
West, .: Ths s a sut n equty to enforce aganst the defendant, who was
the soe stockhoder of the Conn-Goodman Co., the ta abty of the corpora-
ton as redetermned by the oard of Ta ppeas. Upon dssouton of the
corporaton shorty before the order became fna, the entre assets of somewhat
greater vaue than the amount of the ta , were taken by Mr. Cohn. The facts
nppear n a stpuaton and e hbts thereto, one of whch sets out the proceed-
ngs before the oard, ncudng evdence taken.
The Government admts that on uy 21, 1925, when the Commssoner maed
hs 60-day etter, coecton of the 1917 and 1918 ta es was barred, and the
frst queston s whether the defendant can now ava hmsef of that defense.
The appea was fed wth the oard on September 14, 1925, heard on November
80, 1926, fndngs of fact and opnon fed on une 23, 1927, and order of rede-
termnaton made on November 30, 1927. owers v. Tec York bany Lght-
erage Co. (273 U. S., 346 T. D. 4009, C. . I-1, 268 ) was decded ebruary 21,
1927. Nowhere n the proceedngs before the oard was the statute of mta-
tons set up or mentoned. Nor s there any evdence n that record showng
that t had run, or the date when the rght to assess and coect e pred, or
that prma face or probaby such rght had e pred before _uy 21, 1925. The
oard of Ta ppeas had absoutey no knowedge or nformaton on that sub-
|ect. See hbt . On faure to fe petton for revew wthn s months
after the decson, t became fna on May 30, 1928. ad the stuaton been
watched cosey there was ampe tme after the decson of the owers case to
have brought the queston of mtaton to the attenton of the oard before t
rendered ether ts fna order or ts opnon and fndngs. Refusa to consder
the matter woud then have consttuted error. (Oucder Paeschke d rey Co. v.
Commssoner, 41 . (2d), 308 (C. C. . 7) and ameda Park Co. v. Lucas, 37
. (2d), 805.) It was the ta payer s duty to make the defense. (Updke v.
Unted States, 8 . (2d), 913, 916 (C. C. . 8) T. D. 3815, C. . -, 312 .) If,
as defendant cams, secton 1006(a), Revenue ct 1928 secton 1106(a), Reve-
nue ct 1926 e tngushed the abty for these ta es, st t was necessary,
before the oard coud be e pected to so hod, to advse It n some fashon that
the bar of the statute had faen. decson of the oard to that effect woud
be the equvaent of a decson of no defcency. See 26 U. S. C, 1217. The |urs-
dcton of the oard over that sub|ect, whch Congress here e pressy recog-
nzes, coud not be e ercsed uness propery nvoked, a.nd due to careessness of
the ta payer and hs counse, t was not nvoked, nor was there any attempt to
Invoke t. s the resut the ta payer waved the defense, even though ts a-
bty had by aw been e tngushed. or the facts on whch the aw operates
were not brought to the attenton of the oard, and there was nothng by way
of aegaton or proof to overcome the usua presumpton that the ta es whch
had been assessed accordng to aw, were vad.
The defendant was presdent of the corporaton as we as soe stockhoder,
and verfed the petton for appea. I thnk he s bound by the proceedngs
and fna order. (Sanger v. Upton, 91 U. S., 56 U. S. v. Lam, 26 . (2d), 830
T. D. 4119, C. . II-1, 275 , and cases cted.) In my |udgment and under
the conceded facts, he s aso the ta payer and s bound as such, regardess
of hs connecton wth and membershp n the corporaton and prmary ta payer.
(Unted States v. Updke, 281 U. S., 489 at 494 Ct. D. 192, C. . I -1, 228)
Routzahn v. Tyroer, 36 . (2d), 208 (C. C. . 6).)
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397
1005.
Counse for the defendant contends that as the oard of Tu ppeas s not
a court, and as a ta payer who appeas to t may take an adverse decson to
the crcut court of appeas for revew and may aso by vrtue of secton
283(b) Revenue ct 1926 ( 26 U. S. C, 1064) pay the ta and then brng sut n
the dstrct court to recover t back, the orders of the oard are not fna and
concusve. (See Od Coony Trust Co. v. Commssoner, 279 U. S., 710 Ot. D.
80, C. . III-2, 222 .) In the present proceedng the oard hed that t
acqured |ursdcton under secton 283(f) and not 283(b). ut that seems
not matera to the pont. I thnk t cear enough that f the oard s rung on
an appea governed by ether of the above subsectons, s not fna and concu-
sve on the partes, that can ony be true n the nstance whch the statute
contempates, to wt, n an acton brought n the dstrct court to recover back
the ta es pad and ths s not such an acton. Consderng the means provded
through statutes and rues of the oard, for preventng and decdng ssues
before that trbuna, and the statutory methods for revewng ts decsons, t
seems cear that e cept possby n a few specfed nstances, Congress dd not
ntend that a ta case once decded by the oard shoud be tred over agan
de novo by the courts. It may be that the rght to produce to them a matter
entrey omtted beow s ost rather by waver than by technca former
ad|udcaton. nd I thnk that the defendant transferee s bound and con-
cuded by the proceedngs before the oard, to such e tent that he can not now
rase the queston of mtaton. Unted States v. Updke (281 U. S., 489) s
reed on by the defendant, but t has no appcaton, for no |udgment of a
court or order of the oard of Ta ppeas was nvoved. Pantff ctes
Unted States v. romme ro. (50 . (2d), 73 (C. C. . 2) Ct. D. 378, C. .
-2, 307 ) where a |udgment had been obtaned aganst the prmary ta payer
and the sut was to mpress assets n the hands of a transferee. Ths s more
ke our case, though defendant thnks that there s no resembance due to the
dfference between a court |udgment and an order of the oard of Ta ppeas.
The crcut court hed the sut not controed by the mtatons appcabe to
an acton for ta es. It woud seem ogca to appy the doctrne of res
ad|udcata to the orders of redetermnaton made by the oard under the
Revenue ct of 1926. cept of course n stuatons such as are mentoned n
the Od Coony Trust Co. case, supra. In the proceedng for drect revew of
such order, the crcut court of appeas deas wth the record made before the
oard, and as I understand t, woud not have been free upon a revew of ths
proceedng to enter upon a tra de novo of the cam that coecton of the ta es
was barred. s the record faed to show any reference to the pont 5r to
dscose any of the facts upon whch such a cam must rest, the court, so far as
that feature of the case was concerned, coud ony have affrmed. It coud not
have remanded for a rehearng, for that s done ony when the decson s not
accordng to aw, and s therefore reversed or modfed. (26 U. S. C, 1226.)
Ths court shoud have no wder dscreton than the one desgnated by aw to
revew- the order of the oard, and shoud be bound by the record |ust as that
court s. The sub|ect s treated n en edera Income Ta aton, pages 1410-
1412. It s there sad that under the ct of 1924 the determnaton of the
oard was not bndng on the ta payer, as he coud pay the defcency and sue
n the courts to recover. The ct of 1926 n deprvng the ta payer of that
rght, made the decson of the oard res ad|udcata as to the amount of the
redetermned tar, and barred the defeated party from a sut de novo and
Wth the amendment of 1926, defntey makng the decson of the oard fna
as to the facts, and revewabe as to error by the crcut court of appeas, t
seems reasonabe to assume that fndngs of fact made under the ct of 1926
and subsequent thereto shoud be treated as res ad|udcata. Defendant says
the Conn-Goodman Co. can now pay the assessments and sue for a refund. If
by ths he refers to the rght to sue spoken of n the Od Coony case, suprn, I
shoud suppose that rght ost by faure to have the decson of the oard
revewed by the crcut court, and permttng the order to become fna pror
to fng acton n the dstrct court. If not, as stated above, ths s not an
acton to recover back, and t s ony In such actons that the order of tho
oard s not concusve. (See aso mercan Wooen Co. v. Whte, 56 . (2d),
716 Ct. D. 413, C.- . -2, 257 and ankers Reserve fe Co. v. Unted States,
44 . (2d), 1000 Ct. D. 303, C. . -. 286 .)
The ta es for 1919 and 1920 were assessed on uy 14. 1928, and defendant
says ths was too ate under the statute. nd that as the 60-day etter was
sent out under the ct of 1924, sad ct and not the ct of 1926, contros the
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1005.
398
assessment, ncudng mtaton. Secton 283(b), ct 1926 (26 U. S. C, 1064)
appes to assessments made after une 3, 1924, foowng appeas taken under
the ct of 1924 and pendng on ebruary 26, 1926. It provdes that In such
cases the dutes of the Commssoner and |ursdcton of the courts sha be
determned as provded n subdvson (a). nd secton 283(a) provdes that
the amount to be assessed sha be computed as f the ct of 1926 had not been
enacted, but sha be assessed, coected, and pad n the same manner and
sub|ect to the same provsons and mtatons as n case of a defcency n the
ta mposed by ths tte. The tme wthn whch the assessment of the 1919
and 1920 ta es coud be made was controed by the ct of 1926.
Defendant s theory s that as the ct of 1924 appes, the decson of the
oard became fna on une 23, 1927. nd that takng ths as the day when the
Commssoner was frst permtted to make the assessment, he wated too ong
and that even f November 30, 1927, be taken as the proper day, the assessment
of the 1920 ta was barred 16 days before uy 14, 1928. s the premse fas,
these concusons fa wth t. The tme dd not begn to run unt uy 30, 1928
(secton 277(b), ct of 1926 secton 504, Revenue ct 1928).
It s aso camed that as to 1919 a waver fed September 22, 1925. after
servce of the 60-day notce n uy, was nvad. ut see Stange v. Unted
States (282 U. S., 270 Ct. D. 274, C. . -, 414 ). Cam s aso made
that the wavers sgned by the secretary of the corporaton were not e ecuted
by one shown to be authorzed. If there s anythng defensve n these matters,
t was waved so far as ths case s concerned, |ust as the statute of mtatons
was waved, by not beng peaded or proven before the oard of Ta ppeas,
and the fndng and redetermnaton of that body s concusve.
In the petton for appea the Cohn-Goodman Co. companed that n the
appcaton of sectons 327 an 328, Revenue ct 1918, the Commssoner used
comparatve data of corporatons not truy comparabe to the ta payer s
stuaton. hbt , page 3 and the defendant urges that cam here. I am
of opnon that ths pont s no more sub|ect to |udca revew than s the
decson of the Commssoner as to proprety of the ta payer s appcaton for
speca assessment. (Wamsport Wre Rope Co. v. Unted States, 277 U. S.,
551 T. D. 4172, C. . II-2, 323 ro on s Shamrock Lnens, Ltd., v. owers,
48 . (2d), 103 (C. C. . 2) Ct. D. 322, C. . -, 426 Damond ka Co. v.
cner, unreported (C. C. . 3) reeport Te as Co. v. Unted States, unre-
ported (Ct. of Cams) Ceveand uto. Co. v. Unted States, unreported (ths
court by ones, .). I shoud say further that so far ns I can see, no evdence
wasn-oduced to support the ta payer s cam that n appyng the reef sectons
the Commssoner used mproper comparatves. nd n ths connecton, I can
not agree wth counse that f the resut of appyng the so-caed reef
sectons s not reef to the ta payer n a reducton from what a norma computa-
ton woud produce, then a msappcaton of the secton s demonstrated. No
authorty s cted for ths heads I wn tas you ose proposton.
If the court does have power to pass on the queston rased before and
decded by the oard of Ta ppeas, then t s cear that no mstake was
made n ths respect for any of the years.
I can do no better than to refer counse to the fndngs of fact and opnon
of the oard, found on pages 11 et seq. of hbt . Some of the authortes
not cted there whch tend to support the concuson of the oard, are Zenth
Mng Co. v. Commssoner (41 . (2d), 905 (C. C. . 8)) Chattanooga
Savngs ank v. rewer (17 . (2d), 79 (C. C. . 6) T. D. 3986, C. . I-1,
161 ) Spencer v. Loce (198 ed., 961) and uger ock Coa Co. v. Unted
States (48 . (2d), 675). I have ooked at these and other cases cted by
pantff and fee that they represent the weght of authorty and are appcabe
to the facts, rather than Geo. eck t Sons Co. v. ar (26 . (2d), 540
( pp. D. C.)) aton v. ngsh er sck Co. (7 . (2d), 54) and Davdson
Case Lor. Co. v. otter (14 . (2d), 137), cted and reed on by defendant s
counse. In my |udgment the statement of evdence, page 26, hbt ,
eaves no doubt that the amounts whch defendant cams were part of the
nvested capta of the Cohn-Goodman Co. reay represented borrowed capta.
Secton 326(a), Revenue ct 1918.
Defendant compans of aches, but I thnk the court woud be gong en-
trey too far f the Government were hed guty of undue deay, when t
commenced the sut n ess than two years after concuson of the ta payer s
appea before the oard.
Decree w be entered for the pantff.
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399 1113, rt. 1351
TITL L G N R L DMINISTR TI PRO ISIONS.
S CTION 1106. IN L D T RMIN TIONS ND
SS SSM NTS.
rtce 1341: na determnaton and assessment of ta
or penaty.
R NU CT O 1920.
Lmtatons perod not set up n proceedngs before Unted States
oard of Ta ppeas. (See Ct. D. 604, page 395.)
S CTION 1113. LIMIT TIONS UPON SUITS ND
PROC DINGS Y T T P Y R.
rtce 1351: Suts for recovery of ta es errone- I-30-5565
ousy coected. Ct. D. 520
INCOM T R NU CT O 1926 D CISION O COURT.
Cam fob Refund Suffcency mended Cam Lmtaton.
cam for the refund of an overpayment of ta statng as the
ony bass for the same that profts were credted to the camant
on the bass of erroneous profts ascrbed to aho Co. for the
caendar year 1919 s not n suffcent cam under secton 3226 of
the Revsed Statutes, and after the dsaowance of the cam t
can not be amended, after the statutory perod for fng a cam
for refund has e pred, by settng forth a specfc ground for recov-
ery. Such amended cam fed a pr, 1928, must be regarded as
an orgna cam governed by the provsons of secton 284(b) of
the Revenue ct of 1926 and secton 3228 of the Rersed Statutes
as amended.
Unted States Crcut Court of ppeas fob the Second Crcut.
rthur Soomon v. Unted States.
ppea from a udgment of the Dstrct Court for the Southern Dstrct of New York.
pr 4, 1932.
OPINION.
Chase, Crcut udge: Durng 1919, the pantff was a saesman empoyed
by a corporaton caed the aho Co. under a contract n wrtng whch pro-
Tted for the payment of 25,000 to hm as a saary pus 10 per cent of the
net profts of the company for that year as addtona compensaton. fter
defnng the term net profts for the purposes of the contract t was further
agreed that:
(a) The addtona compensaton may be ad|usted n accordance wth ater
ad|ustments of the net ncome for the year ended December 31, 1919, as fnay
ad|usted by the Treasury Department of the Unted States.
The pantff fed hs return upon an accrua bass and pad the ta upon
hs ncome computed n that way. The ta upon the part of hs ncome so
computed and derved from hs so-caed addtona compensaton s here
nvoved.
s return was fed on March 15, 1920. s ta was pad n four nsta-
ments durng 1920. On March 6, 1925, a waver was fed whch e tended
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51113, rt. 1351.
400
the tme for makng a cam for refund to March 6, 1926. On December 29,
1925, the aho Co. fed ts cam for refund of ta es for 1919 and as a resut
ts cam was subsequenty aowed on December 20, 1928, on the bass of a
reducton of ts net ncome from 736,004.81 to 609,446.70. On December 31,
1925, the pantff fed a cam for refund and assgned as the ground of hs
cam the foowng: Profts were credted to the camant on bass of errone-
ous profts ascrbed to aho Co. for the caendar year 1919. ref w fo-
ow. No bref dd foow and the pantff was notfed on May 26, 1926, that
as no bref has been receved and no nformaton has been furnshed to sub-
stantate your statement, your cam w be re|ected. The re|ecton ap-
peared on the ne t schedue approved by the Commssoner. Thereafter noth-
ng was done about t by the pantff unt pr 20, 1928, when he fed an
appcaton to reopen hs cam for refund and then for the frst tme presented
the facts concernng hs contract of empoyment and the agreement about ad-
|ustment of net profts on whch hs cam was based. s appcaton was
refused on May 25, 1928, and ths sut was brought the ne t day.
though t does not appear that the 1919 ncome of ths pantff aa ds-
cosed In hs return fed was ever n fact ad|usted on the bass of any reduc-
ton n the net profts of the aho Co. and the contrary s ndcated by the
fact that he was pad the fu amount n preferred stock of the company
when It was reorganzed In 1923, we thnk t s unnecessary to put anythng
upon that.
efore we can ook to the merts, t s necessary to determne whether any
cam has been fed whch can be treated as a compance wth the statute
(26 U. S. C. ., secton 156) and the reguatons promugated thereunder.
rtce 1306 of Reguatons 65 requred that a facts reed upon n support of
a cam shoud be ceary set forth under oath. ere the ony bass of the
cam stated was profts erroneousy ascrbed to the aho Co. for the
caendar year 1919. Such a cam was nsuffcent. (Unted States v. et
d Tarrant Co., 283 U. S., 269, 51 S. Ct., 376 (9 m. ed. Ta Rep., 1416)
Ct. D. 336, C. . -, 431 .)
Ths beng so, t was necessary, as the pantff apparenty recognzed, to
amend the cam before brngng sut. e tred to do ths by means of the
appcaton to reopen above noted. The appcaton was dened and so the
prevous re|ecton of the cam stood unchanged n every respect. See, how-
ever, Mc esson Robbng, Inc., v. dwards (57 ed. (2d), 147). The rea
queston before us s whether the camant has been deprved, by the refusa
to reopen, of any rght to amend after hs cam had been re|ected and the
perod for fng an orgna cam for refund had e pred. The Court of
Cams has severa tmes hed a cam for refund can not be amended after
re|ecton but must be treated as a new cam whch fas afou the tme mt
of the statute f the tme for fng has run. Mutua Lfe Ins. Co. of New
York v. Unted States, 49 ed. (2d), 662, 664 ( 9 m. ed. Ta Rep., 1377
Ct. D. 363, C. . -2, 2921 Sugar Land Ry. Co. v. Unted States, 48 ed.
(2d), 973, 976 ( 9 m. ed. Ta Rep., 1216) Ct. D. 382, C. . -2, 309 New
ngand Mutua Lfe Ins. Co. v. Unted States, 52 ed. (2d), 1006 Ct D. 440,
C. . I-1, 315 .) We agree that the Commssoner need not accept amend-
ments after re|ecton, as w be notced from what s sad n Mc esson f
Robbng, Inc., v. dwards, supra. It seems that endess attempts to cam
refunds woud resut f re|ecton had no effect upon the amendment of cams
and the mtaton of the statute woud be of no practca effect. Wth a
the freedom of amendment modern conceptons of |ust procedure permt,
there can he no rght to amend after the cam has been dened. Then the
camant, uness he st has tme to fe a new cam wthn the statutory
perod or the Commssoner sees ft to reconsder, must seek reef esewhere
on the bass of hs cam as t was when re|ected.
udgment affrmed.
rtce 1351: Suts for recovery of ta es erro- I-33-5612
neousy coected. Ct. D. 538
D R L T S GR TUITOUS P YM NT D CISION O COURT.
Sut Gratutous Dscharge of Ta payer s Labty.
Where a corporaton, organzed n 1919, before uy 1 of that
year, actng for a predecessor partnershp, fes a return of the
partnershp for the year 1918. computng the net ncome and n-
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401 1113, rt. 1351.
vested capta, In accordance wth secton 330 of the Revenue ct
of 1918, as f the busness had been carred on by a corporaton n
e stence on and after anuary 1, 1018, the vountary payment by
the corporaton of the ta shown on the return before ts assess-
ment s a gratutous dscharge of a abty of the partners and the
corporaton s not entted to recover t. Secton 3226, Revsed Stat-
utes, provdng that a sut for a ta may be mantaned though
not pad under duress does not enarge the abty of the Unted
States when the payment of a ta s not ony vountary but made
wth fu knowedge of the facts.
Unted States Ckcvt Coubt of ppeas foe the Second Crcut.
Cft f Goodrch, Inc., appeant, v. Unted States of merca, appeee.
Upon appea from a udgment of the Dstrct Court for the Southern Dstrct of New York.
March 17, 1932.
OPINION.
I. and, Crcut udge: The pettoner was a corporaton, the successor to
a frm of the same name t was organzed on pr 1, 1919, and took over the
frm property on May 24 of that year n e change for preferred stock ssued
to the partners. These had aready on anuary 8 fed ndvdua ncome ta
returns for ther shares n the frm ncome for the year 1918, and a frm
return for e cess-profts ta , and they pad the amounts returned on anuary
22. On ugust 15 the pettoner fed an e cess proft and ncome ta return
of the frm ncome for the year 1918, whch was cacuated as though It had
been a corporaton, as partners were aowed to do under secton 330 of the
Revenue ct of 1918. The amount so shown the pettoner pad n three
nstaments durng 1919, after unsuccessfu efforts to secure a set-off of the
stuns pad by the partners n anuary. On anuary 2, 1920, the Comms-
soner assessed aganst the pettoner the sum returned and pad, and ater,
a defcency whch he afterwards abated on the ground that ony the frm,
and not the corporaton, coud be ta ed. The sums pad by the partners
were ater refunded, but the pettoner s appcaton for refund was refused,
and ths sut foowed. that s aeged regardng the reatons between
the pettoner and the partners as to the payment s as foows: ach of
sad payments (the three Instaments) was charged on the books of the
corporaton to the ta account of the corporaton, and not at that tme, nor at
any other tme, charged ether aganst the partnershp or the ndvdua mem-
bers thereof. The return of ugust 15, 1919, was made n the name of
Cft 4 Goodrch (Partnershp) two of the schedues carred the same
capton the others, the name Cft Goodrch, not Cft Goodrch, Inc.,
the corporaton s tte. The verfcaton was by the presdent and treasurer
of the corporaton, who were two of the partners.
Secton 330 of the Revenue ct of 1918 aowed partners, whose busness
had been taken over by a corporaton organzed before uy 1, 1919, n cr-
cumstances here e stng, to fe ther return for 1918 as though they were a
corporaton, treatng dstrbutons made durng the ye r as dvdends, and
not sub|ectng undstrbuted profts as surta es. Ths made a dfference of
some 37,000, by whch the partners have profted, even assumng that they
bore the same proporton of the ta here n queston as sharehoders, that
they woud have borne as partners. The sut s based upon the theory that,
as the Treasury offcas treated the ta as that of the corporaton wthout
warrant of aw, they have coected money whch was reay not due, snce
the partners shoud have pad It under a return made n accordance wth
secton 330. If successfu, the resut w be that the partners w pay no
ta es whatever for the year 1918. The |udge dsmssed the petton as de-
murrabe and the pettoner appeaed.
ny recovery must rest upon quas contract, an mped promse to repay,
rased e aequo et bono because t was unconsconabe for the respondent to
keep the money. (Cary v. Curts, 3 ow., 230 Ncc York Lfe Ins. Co. v.
nderson, 263 ed. Rep., 527 (C. C. . 2).) ad the petton aeged that the
pettoner pad the ta under (he mstaken beef that t was abe, the sut
mght perhaps succeed (Meyer v. Mayor of New York, 63 N. Y., 455 ctz v.
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1113, rt. 1351.
402
N. Y., 110 pp. Dv., 91 affd. 193 N. Y., 625), though even then there woud be
obstaces, for the od noton that a mstake of aw w not serve n such a
stuaton st proongs ts dscredtabe fe and t s moreover at east open
to doubt whether there woud not be a defense, f when the petton was fed,
the perod had aready e pred wthn whch the partners coud be assessed.
ut wth these questons we need not concern ourseves, because the petton
does not even ntmate that the pettoner pad the tu under a mstaken beef
that t was abe as a ta payer. Indeed, t was not n e stence durng 1918,
and t s entrey cear from the return tsef that t was actng for the partners.
The payment was no more therefore than a gratutous dscharge of the obgor s
duty, and on what theory t can be recovered f that duty e sted, we can not
conceve. The ta was certany due from the partners and the Treasury had
the rght to keep the money, uness t was nequtabe to do so because t came
from the corporaton. n obgee s surey not bound n good conscence to
repay such coectons.
esdes, t suffcenty appears that the corporaton had recourse over aganst
the partners. Two of them made the return as offcers of the pettoner they
at east were abe. s to the rest they procured refunds of what they had
pad on anuary 22, 1919, because of the payment here n queston, and that
estabshed an mped promse to remburse the corporaton, whch they had no
rght to e pot. Ths s not affected by the aegaton that they had never
been charged wth the ta on the corporate books. The rght e sted, and
mght we have been reeased by common consent, f the partners were the
ony sharehoders. What they woud receve as former partners woud come
out of ther dvdends as sharehoders. Moreover, the whoe ssue s n any
case rreevant, for t was not matera to the Treasury s rght to retan the
payment that the pettoner shoud have ndemnty.
The offcas apparenty supposed for a reason that the corporaton owed the
ta , though they ater receded from that poston. No estoppe arses from
ths t does not mpugn the rght of the Treasury to retan the money that ts
offcers msconceved ts bass, or ther own powers. ad they coerced the
payment, more mght have been sad, but a the nstaments were pad before
assessment. Nor does t make a dfference that they were not made unt the
Treasury had refused to accept the partners payments of anuary n subst-
tuton for that due under the return. The pettoner was st not obged to
pay the ta when t dd so, t was ether a mere nteroper, or actng for the
partners.
We do not forget that under secton 156 of Tte 260, Unted States Code,
ta es may be recovered though not pad under duress. The secton does not
mean to enarge the Treasury s abty when the payment s not ony vountary,
but made wth fnU knowedge of the facts. It eaves open for determnaton
whether under prncpes appcabe n genera to such suts, there s any bass
for the recovery and snce t woud be whoy unwarranted to rescnd such a
transacton merey because one party pays another s ta actuay due, wth fu
knowedge of what he s dong, the secton s pro tauto rreevant.
udgment affrmed.
rtce 1351: Suts for recovery of ta es erro- I 33-5613
neousy coected. Ct. D. 539
D R L T S R S UDIC T D CISION O COURT.
Res udcata Dsmssa Wthout Pre|udce.
The dsmssa of an acton by a ta payer aganst the Unted
States by the |ourna entry petton dsmssed wthout pre|udce
s mted by the moton fed n open court upon whch the |udg-
ment s entered to a dsmssa wthout pre|udce ony as to the
ta payer s rght to agan assert a cam to an overpayment credted
to a ta for the year 1917. renders res |udcata the ssues rased
n that case e cept that e pressy reserved, and bars recovery
n a ater acton by the ta payer aganst the coector presentng
an ssue rased n the pror acton and not so reserved.
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403
( 1113, rt. 1351.
DST ICT COU T O T UNIT D ST T S, DISTRICT O M SS C US TTS.
Pau . ertcten, Recever for Crocc Thuror Steamshp Co., v. Thomas
W. Whte, Coector of Interna Revenue for the Dstrct of Massachusetts.
pr 18, 1032.
OPINION.
wrwsT , 3.: Ths Is a sut aganst the coector of nterna revenue for
ths dstrct, to recover edera ncome ta es amountng to 48,613.52, aeged
to have been erroneousy assessed upon and egay coected from the Crowe
Thurow Steamshp Co. for the ta abe year 1920. The case was heard
wthout ury upon agreed statements of fact.
The defendant has nterposed three defenses: (1) That ths acton s barred
by a |udgment entered n the Court of Cams upon the petton of ths pantff
aganst the Unted States (2) that the ta for the year 1920 was egay
assessed and coected and (3) that f the ta was egay e acted t can not
be recovered n an acton aganst ths defendant.
The second defense s the one gong to the merts of the controversy and
nvoves the appcaton of secton 23 of the Merchant Marne ct of 1920 (46
U. S. C. ., 878) or ts effect upon the Revenue ct of 1918.
If the frst defense s good, the pantff has ost hs rghts to attach the
vadty of the assessment and coecton of the 1920 ta , and the court n ths
sut can not be asked to agan determne the egaty of the coecton. In that
event, t w not be necessary to nqure whether the Commssoner of Interna
Revenue erred n appyng the provsons of secton 23.
I w, therefore, consder frst whether the pantff s concuded by the
|udgment entered upon a petton prevousy brought by ths pantff n the
Court of Cams.
Secton 23 of the Merchant Marne ct, 1920, whch was effectve une 5,
1920 ( 46 U. S. C. ., 878), contans the foowng provsons:
Sec. 878. Deductons aowed owners of documented vesses of Unted States
for ncome and e cess-profts ta purposes. The owner of a vesse documented
under the aws of the Unted States , be aowed as a deducton for
the purpose of ascertanng hs net ncome sub|ect to the war-profts and e cess-
profts ta es mposed by Tte III of the Revenue ct of 1918 an amount
equvaent to the net earnngs of such vesse durng such ta abe year, deter-
mned n accordance wth rues and reguatons to be made by the board:
Provded, That such owner sha not be entted to such deducton uness durng
such ta abe year he nvested, or set asde under rues and refatons to be
made by the board n a trust fund for nvestments, n the budng n shpyards
n the Unted States of new vesses of a type and knd approved by the board,
an amount, to be determned by the Secretary of the Treasury and certfed
by hm to the board, equvaent to the war-profts and e cess-profts ta es
that woud have been payabe by such owner on account of the net earnngs
of such vesses but for the deducton aowed under the provsons of ths
secton: Provded further, That at east two-thrds of the cost of any vesse
constructed under tts paragraph sha be pad for out of the ordnary funds or
capta of the person havng such vesse constructed. ( une 5, 1920, ch. 250,
secton 23,41 Stat., 997.)
The essenta facts are as foows:
The pantff Is recever of the Crowe Thurow Steamshp Co. whch, n
1920, was the owner of vesses documented under the aws of the Unted States
and operatng In foregn trade.
It comped wth the provsons of secton 23 of the Merchant Marne ct,
and n determnng the ncome ta for the year 1920 the Commssoner pro-
ceeded upon the assumpton that the deductbe credt of e cess-profts ta
was the amount actuay pad by the steamshp company rather than the
amount that woud have been mposed had the vesse not met the requrements
of secton 23.
The Commssoner, havng determned that the 1918 ta had been overpad to
the amount of 243,599.46, took approprate steps to appy ths sum to the
pa3-ment of ta es assessed for the years 1917, 1919 and 1920. Ths acton s
brought to recover 48,61353 whch was satsfed by credtng that amount from
the 1918 overpayment. The pantff aeges that ths sum was egay e acted,
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1113, rt. 1351.
404
due to the refusa of the Commssoner to aow as a credt for the purposes
of the ncome ta the amount of the e cess-profts ta whch woud have been
mposed had the steamshp company not comped wth secton 23.
It s the contenton of the defendant that the earer proceedngs n the
Court of Cam t nvoved the egaty of the 1920 ta and that the udgment
entered n that case fnay setted a controverses respectng the ta for that
year, ncudng the controversy presented by the peadngs n the case at bar.
It appears that the pantff, on uy 7, 1926, fed n the Court of Cams a
petton to recover a porton of the 1918 overpayment. In the petton, nmong
other thngs, t was aeged that 155,909.70 had been erroneousy apped by
the Commssoner as foows: 37,875.07 to ta es for 1917, 68,279.25 to those
for 1919 and 49,752.39 for 1920, a of whch ta es were aeged to have been
unawfuy determned to be due on account of ncome and profts ta es for
the respectve years. We are ony concerned wth the aegatons respectng
the 1920 ta . These aegatons were to the effect that the camant dened
the rght of the Commssoner to appy sad sum of 49,752.39 to the e tngush-
ment of any aeged abty of camant for the year 1920, or any sum n
e cess of 16,971.34 conceded to be due. Whe the petton does not state
the grounds upon whch the dena was based, t appears from a etter, wrtten
by the pantff s attorney to the Genera Counse for the ureau, that the
dspute between the ta payer and the Commssoner over the amount of the
1920 ta es nvoved the constructon of secton 23 of the Merchant Marne
ct. The Government fed a genera traverse denyng a the aegatons of
the petton.
In December, 1927, and whe these proceedngs were pendng n the Court
of Cams, a settement of a controverses nvoved n the sut was proposed
on behaf of the ta payer whereby the controversy respectng the 1917 ta es
was to awat the outcome of tgaton pendng n another trbuna. y the
terms of the proposed settement, the Unted States was to abate 68,279.12
of the 1919 ta es and 414.23 of the 1920 ta es, and the ta payer was to
consent to the appcaton of the 1918 overpayment so far as necessary to the
e tngushment of the remanng ta abty for the years 1917, 1919 and
1920. pproprate ad|ustments of nterest were to be made, and the agree-
ment was to be fna e cept that the ta payer reserved the rght to fe a cam
for refund wth respect to the amount apped to the 1917 ta . Ths proposed
settement by ts e press terms Incuded the appcaton of 59,103.85 to the
payment of the 1920 ta es, the amount of whch I fnd to have been n Issue
before the Court of Cams.
The camant was to dever a moton to dsmss the sut n the Court of
Cams wthout pre|udce to agan assert a cam wth respect to the 1917
ta es. There was never any forma acceptance of ths offer of settement,
but a etter, dated ebruary 15, 1927, wrtten by pantff s attorney, eaves no
doubt that the proposa was agreed to by the ureau of Interna Revenue.
Ths etter s sgnfcant. It reads as foows:
urther reference s made to the case No. -206 n the Court of Cams,
ertesen, Recever for Crove t Thuroto Steamshp Co., camant, v. Unted
States of merca, and to my etters to you dated December 9 and December
16 proposng a method of settement of that sut.
ccordng to the arrangement outned n sad etters and agreed to by
your offce, there s transmtted herewth our moton to dsmss sad sut n
the Court of Cams wthout pre|udce to our reasserton, by sut or other-
wse, of our cam to receve the sums wthhed and apped to the aeged
underpayment of ta es for the year 1917.
It s understood that ths moton s to be hed n escrow unt payment of
the refund, ncudng nterest duy computed, has been made.
The moton accompanyng ths etter was n the foowng terms:
In the Court or Cams. No. -206.
Pau . ertesen, Recever for Crowe Thurow Steamshp Co., camant, v.
The Unted States of merca.
v. pantff s moton to dsmss wthout pre|udce.
( ed n open court ebruary 2S, 1928.)
Comes now the camant n the above-entted cause, by hs attorney theren,
and moves the court to dsmss the petton fed uy 7, 1926, n sad cause.
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405
1113, rt. 1351.
wthout pre|udce, however, to the asserton by the camant, by sut or other-
wse, of ts cam to receve the sums wthhed and apped to the aeged
underpayment by the camant of ta es for the year 1017, for the reasons as
he shows,
That, snce the fng of sad petton, a other matters have been satsfac-
tory ad|usted between camant and the Unted States.
S. Don S. bney,
ttorney for Camant.
The Commssoner of Interna Revenue accordngy proceeded wth a recon-
sderaton of the 1918 ta , and on March 14, 1927, notfed the ta payer of an
overassessment of 1919 ta es amountng to 68,279.25. e aso found a sma
overassessmeut of 1920 ta es, resutng from the recomputaton. The baance
of the 1918 overpayment was n due course pad to the camant.
The moton to dsmss was fed n the court ebruary 28, 1928. The records
of the court recte that the pantff s moton to dsmss wthout pre|udce was
fed and aowed n open court and petton dsmssed wthout pre|udce.
Does ths dsmssa of the earer sut bar recovery n ths acton
I am qute prepared to agree that the offer of settement proposed by the
pantffs counse, athough accepted and acted upon by the offcas n the
ureau of Interna Revenue, dd not compy wth secton 1106(b) of the
Revenue ct of 1926 (Loewu d Son, Inc., v. Commssoner of Interna Revenue,
31 . (2d), 652) or wth R. S. 3229 ( 26 U. S. C. .. 158) ( otany Worsted Ms
v. Unted States, 278 U. S., 282 Ct. D. 39, C. . III-1, 279 ) and that, there-
fore, the settement by tsef woud not precude the pantff from mantanng
ths acton.
It s not the compromse agreement that s reed upon by the Government
to defeat the rghts of the pantff, but rather a |udgment n a sut whch had
been entered upon a moton statng n substance that a matters nvoved n
the sut had been satsfactory ad|usted between the camant and the Unted
States e cept the controversy respectng the 1917 ta es.
I am persuaded that the entry of petton dsmssed wthout pre|udce
mast be. mted by the moton upon whch the |udgment was entered, wth the
resut that the petton was dsmssed wthout pre|udce ony as to the pan-
tffs rghts to agan assert a cam to the overpayment apped to qudate the
1917 ta es. I am convnced that the |udgment rendered n the frst acton was
fna as to a other matters n ssue n the Court of Cams.
In Unted States v. Parker (120 U. S., 89) the court ponts to the dstncton
between a nonsut and a retra t, the atter beng an open, vountary renun-
caton of the pantff s cam n court. It was hed that a udgment of
dsmssa, when based upon and entered n pursuance of the agreement of the
partes, must be understood, n the absence of anythng to the contrary e pressed
n the agreement and contaned n the |udgment tsef, to amount to such an
ad|ustment of the merts of the controversy, by the partes themseves through
the |udgment of the court, as w consttute a defense to another acton after-
wards brought upon the same cause of acton.
To the same effect see Conner v. Corne (32 . (2d), 581) Second Natona
ank of Sagnaw v. Unted States (66 Ct. Cs., 166 T. D. 4238, C. . II-2,
356 ) Second Natona ank of Sagnaw v. Woodworth (54 . (2d), 672 Ct. D.
470, C. . I-1, 331 ).
The doctrne of res ad|udcata appes to a case arsng under the nterna
revenue aws as we as to any other cv acton. . (Od Coony Trust Co. v. Com-
mssoner, 279 U. S., 716 Ct. D. 80, C. . III-2, 222 Orcyock Ms v.
Whte, Coector, 55 . (2d), 704 Ct. D. 469, C. . I-1, 187 .)
Nor does the fact that the frst sut was aganst the Unted States, and the
case at bar aganst the coector of nterna revenue, avod the bar of res ad|u-
dcata. (Second Natona ank of Sagnato v. Woodtoorth, supra.)
It s the contenton, however, of the pantff that f the dsmssa of the pet-
ton by the Court of Cams was, n effect, a fna |udgment upon the merts
of the controversy and rendered res ad|udcata a ssues rased n that case
e cept those e pressy reserved, st the |udgment woud not bar recovery n
ths acton because the ssue here rased was not before the Court of Cams.
Ths contenton s based, as I understand t, upon the fnct that the sut n the
Court of Cams was brought aganst the Unted States to recover an overpay-
ment of 1918 ta es, whereas n ths case, as the pantff argues, the sut s to
recover from a coector of nterna revenue 1920 ta es Iegay e acted. It
must be conceded upon the facts that the 1920 ta es were coected by the
appcaton of a part of the 1918 overpayment and, n the Court of Cams as
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51113, rt. 1351.
406
we as n ths court, the egaty of the acts of the Commssoner n determn-
ng the 1920 ta was n ssue and was one of the mportant ssues of the case.
Whe the prncpa controversy n the Court of Cams centered about the
1919 ta , the pettoner saw ft to brng to that court hs dspute wth respect
to the 1920 ta . e admtted abty for 16,971.34 and chaenged the rght
of the Unted States to e act any sum n e cess of that amount. It s true
as pantff ponts out, that n uy, 192G, when the petton was fed n the
Court of Cams, the Commssoner had under consderaton cams for refund
and abatement of 1920 ncome and profts ta , both orgna and addtona,
whch cams contan no reference to the Merchant Marne ct but n Octo
ber, 1926, the pettoner was notfed that a fna audt reveaed an overas-
sessment of the 1920 ta es, and that the amount egay due for that year was
177,895.66. Thus t appears that the amount of the 1920 ta had been
determned when the pantff proposed to sette a controverses respectng
the 1917, 1918, 1919, and 1920 ta es or, to quote from the etter of December 9.
.1926, wrtten by pantff s attorney the entre controversy nvoved n ths
sut (n the Court of Cams). In ths determnaton the Commssoner had
deducted, as a credt aganst Income ony, 9,698.45 nstead of 495,833.77.
whch the pantff now cams shoud have been deducted. It s aso sgnf-
cant here that n the ureau s etter of October 21, 1926, there was a computa-
ton of the profts ta whch woud have been payabe on account of the net
ncome but for the deducton aowed under secton 23 of the Merchant Marne
ct. These facts, n connecton wth the e press reference to the Merchant
Marne ct n the offer of settement, eave no room for argument that the
partes dd not contempate that the settement woud effectuay bar any
cam to further refund, or abatement, of the 1920 ta . Not ony were the
aegatons of the petton broad enough to embrace any controversy reatve
to these ta es, but t appeared that, at the tme of the proposa and the con-
summaton of the settement, the prncpa dspute over the 1920 ta es arose
over the constructon, or appcaton, of secton 23.
The purpose of the proceedngs n the Court of Cams was to recover an over-
payment whch, as the pettoner aeged, had been credted upon ta es er-
roneousy determned to be due, and I am unabe to see how the ease coud have
been dsposed of n that court upon ts merts wthout the necessty of deter-
mnng the vadty of the 1920 ta es, as we as those of the other years n
dspute.
I can see no escape from the concuson that the ssue presented n the case
at bar was ncuded among the ssues rased by the peadngs n the Court of
Cams, and the |udgment was a fna determnaton of these ssues, bndng
upon both partes to the acton.
urthermore, t s my opnon that, f the correctness of the amount of the
1920 ta was n any way n queston n the proceedngs before the Court of
Cams, the pantff woud not be entted to preva here, even f we assume
that he now, for the frst tme n court, dsputes the correctness of the 1920
ta on the ground that the Commssoner msconstrued secton 23 of the
Merchant Marne ct. The |udgment n the Court of Cams concuded the
partes, not ony as to every matter whch was offered to sustan the cam, but
as to any other admssbe matter whch mght have been offered for that pur-
pose. The pantff may not spt up hs demand and prosecute t by pece-
mea, or present ony a porton of the grounds upon whch speca reef s
sought, and eave the rest to be presented n a second sut f the frst fa
(Sanborn, ., n owe- urke Mnng Co. v. Wcnts, 45 . (2d), 394 Ct. D.
317, O. . -, 428 .)
The statutes provde that a fna |udgment aganst the camant on a cam
prosecuted n the Court of Cams sha forever bar any further cam or demand
aganst the Unted States arsng out of the matter nvoved n the controversy.
(28 U. S. O. ., 286.) avng found that the |udgment entered n the earer
case was a fna |udgment and that the cam sought to be enforced n the case
at bar arose out of matters nvoved n the earer controversy, t foows under
the statute that ths acton s barred.
The pantff can not escape the effects of the fna dsposton of the pro-
ceedngs brought n the Court of Cams by ntmatng that the compromse and
the subsequent moton for |udgment entered thereon were unauthorzed. The
Unted States has, n good fath, carred out the terms of the compromse by
abatng the 1919 ta and payng to the pantff the baance of the 1918 over-
payment remanng after deductng the credts agreed to, and the pantff s
now estopped from settng up the cam that the compromse was wthout
authorty.
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407
1113, rt. 1351.
The foregong concusons nso render t unnecessary for me to consder
whether the pantff has proceeded aganst the rght party.
udgment may be entered for the defendant.
D R L T S SUIT G INST COLL CTOR D CISION O COURT.
Sut Coector Overpayment Credted by Coector.
Where an overassessment s pad to the predecessor of a co-
ector, an acton to recover the amount of the overassessment,
whch s credted aganst a ta for another year, can not be man-
taned aganst the coector even though the ta aganst whch
the credt s taken s barred from coecton by the statute of
mtatons when the coector, pursuant to nstructons of the
Commssoner, performs the cerca and mnstera duty of enter-
ng the overpayment as a credt upon a schedue of overassess-
ments and a schedue of refunds and credts and of certfyng
the schedues to the Commssoner.
Unted States Crcut Court of ppeas, S th Crcut.
Car Routzahn, Unted State Coector of Interna Revenue, appeant, v. The
Reeves ros. Co., a Corporaton, appeee.
ppea from the Dstrct Court for the Northern Dstrct of Oho, astern Dvson.
cks, Crcut udge: Ths was an acton to recover the sum of 61,218.13
aa a part of appeee s 1917 Income and e cess profts ta es aeged to have
been Iegay coected by appeant after the runnng of the statute of
mtatons. udgment was entered for pantff.
ppeant was a coector of nterna revenue. ppeee overpad ts 1918
and 1918 Income ta es In the sum of 26,453.87 and 34,764.20, respectvey.
These payments were made to arry . Wess, appeant s predecessor n offce,
and were due to overassessments. When these overassessnents were ds-
cosed a deputy commssoner, foowng the practce descrbed In Unted States
y. wft d Co. (282 U. S., 468 Ct. D. 290, C. . -, 2S3 ), certfed them
to appeant upon a schedue for overassessments and accompaned the
schedue wth another schedue styed Schedue of refunds and credts.
Upon the schedue of overassessments was prnted the authorzaton of
Commssoner to the coector, found In the margn.1 In response thereto,
1 uthorzaton of Commssoner.
To the Coector 18th Dstrct of Oho:
The amounts sted In coumn 4 ns overassessments (or reductons of ta abty)
arr hereby approved, and the reated cams, f any, aowed In the respectve amount
Indcated by the Certfcates of overassessment or Notces of ad|ustment of refund
attached thereto.
Yon w Immedatey check such tems nftnnst the accounts of the severa ta payers
and determne whether the amounts In whch the ta abtes have been reduced
shoud be respectvey abated. In whoe or In part, and make such abatements as may
he warranted by the condton of the ta payers accounts for the years Invoved.
If any part of any such Item Is found to be an overpayment, you w e amne a
accounts of the ta payer for other perods and appy the overpayment as a credt
aganst the ta es due, f any, makng the approprate entres n your accounts. (Ths
appes ony to Income, war profts, and e cess profts ta es.) Such credts w be
entered In coumn 9, and paced In coumn 5 of a subsdary schedue of refunds and
credts ( orm 7805- ).
The baance. If any, of the overpayment w be entered In coumn 12, and paced
In coumn 4 of the subsdary schedue ( orm 7805- ) referred to above, and an appro-
prate memorandum made upon the ta payers account.
Ton w thereupon compete and certfy th schedue and the schedue upon orm
7805- , and return the necessary copes of each to the Commssoner of Interna Revenue.
rtce 1351: Suts for recovery of ta es erro-
neousy coected.
I-43-5806
Ct. D. 590
une 29, 1932.
OPINION.
(Date) March 29. 1924.
16O903 33 27
D. . ar,
Commssoner of Interna Revenue.
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1113, rt. 1351.
405
the coector checked the overassessment aganst the ta payer s account In
hs possesson, and found that appeee had overpad Its ta es for 1918 and
1919 to the e tent thereof and entered the overpayments In credt coumn
9 of the schedue of overassessments as credts aganst an addtona assess-
ment made by the Commssoner for the year 1917 n the sum of 95,527.60.
These credts he aso entered n amount credted (coumn 5) of the
schedue of refunds and credts and certfed and returned both schedues to
the Commssoner. Thereupon the Commssoner entered hs certfcate upon
the schedue of refunds and credts to the effect that nothng was refundabe.
ppeee cams that these entres by the coector were In effect the co-
ecton of or at east a partcpaton by hm n the coecton of 1917 ta es
then barred by the statute of mtatons of fve years f ed by secton 250(d)
of the Revenue ct of 1921 (ch. 136, 42 Stat., 227, 265). We may assume that
the bar of the statute had faen nnd that the Government was not entted
to credt these overpavments upon the uncoectbe ta es for 1917. ( ocers v.
N. Y. bany Lghterage Co., 273 U. S., 346 T. D. 4009, C. . I-1. 28S .)
We may further assume that appeee has comped wth a procedura re-
qurements ncdent to the prosecuton of hs acton. We thnk we may
confne ourseves to the cruca queston, propery preserved n the record,
whether appeee was entted to recover aganst the coector.
The case was tred wthout the nterventon of a ury. It was a persona
acton Sage v. . 8., 250 U. S., 33, 37) anaogous to one for money had and
receved (Co v. Lott, Co., 12 Wa., 204, 220 Duffn v. Lucas, 55 ed. (2d),
786, 792 (C. C. . 6)), but the appeant never e acted or receved or had n
hs possesson, offcay or unoffcay, any of the money whch was ut-
matey apped to the payment of the 1917 ta es. These moneys were coected
by and pad to appeant s predecessor n offce as 1918 and 1919 ta es. The
appeant merey made a bookkeepng entry pursuant to nstructons of the
Commssoner. The Unted States Government retaned the money the ap-
peant dd not. It s therefore not recoverabe n an acton aganst hm.
(Smetanka, Co., v. Indana Stee Co., 257 U. S., 1, 4 Ct. D. 17, C. . 5, 251
Unon Trust Co. v. Warde, 258 T . S., 537, 542 T. D. 3338, C. . 1-2, 310
Pha., . P. R. Co. v. Lederer, 242 ed., 492, 494 (C. C. . 3) Coffey, Co., .
e change ank of Lenno , 296 ed., 807, 809 (C. C. . 8) T. D. 3574, C. . III-,
430 .) In support of ts contenton appeee ctes . S. v. oston uck Co.
(282 U. S., 408, 478 Ct. D. 293, C. . -, 335 ), Peeress Paper o Mfg.
Co. v. Routzahn, Co. (22 ed. (2d), 459, 460 (D. C.)), Logan Gregg dw.
Co. v. encr (26 ed. (2d), 131 T. D. 4186, C. . II-2, 315 ), and aso the
opnon of the dstrct court n Routzahn v. Landesman- rshemer Co.
(Prentce- a Ta Servce for 1931, paragraph 499, page 645).
No doubt the procedure amounted to a payment of the 1917 ta es
because upon the authorty of the Commssoner s certfcate the Treasury
retaned the overpayments n satsfacton of 1917 ta es (Graham oster v.
Goodce, 282 U. S., 409, 424 Ct. D. 287, C. . -, 191 ), but as ponted out
above, appeee s obstace s that no part of these funds was pad to or
e acted or receved by appeant.
ppeee advances another and to us an nconsstent theory. It s that, re-
gardess of whether appeant actuay receved the money, he s abe for
enterng the credts upon the schedues and certfyng them to the Comms-
soner because he thereby deprved or aded n deprvng appeee of the amounts
thereof. The theory s that at the tme the credts were entered and certfed
the bar of the statute had destroyed appeant s rght to coect any 1917 ta es
and that therefore hs act n enterng the credts was unauthorzed and was n
the nature of a converson n that t deprved appeee of a refund to whch It
was entted. The entry of the credts upon the schedues was not an aowance
thereof. s an admnstratve provson the Commssoner, aone, was cothed
I wth authorty to determne whether the ta es for 1917 were due or whether
they were barred and f they were not barred whether the overpayment shoud
be credted aganst them. (See Tte 26, sectons 149 and 1065, U. S. C . S.
v. Swft t Co., supra, at page 475 Grard Trust Co. v. U. S., 270 U. S., 163, 169
T. D. 3919, C. . -2, 209 . S. v. oston uck Co., 35 ed. (2d), 560, 562
(C. C. . 1).)
It was not wthn the provnce of the coector to pass upon the effect of the
statute of mtatons. e was not authorzed by the Commssoner to perform
such duty. s duty was to cbey the nstructons of the Commssoner n
accordance wth the practce of the ureau. Ths was a smpe duty. e was
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409
1113, rt. 1351.
to check the overassessments aganst the accounts of appeee. If an overpay-
ment resuted he was to appy t as a credt aganst any ta es appearng to be
due, make the approprate entres upon the accounts and certfy the schedues,
as e tended, to the Commssoner. Ths duty was merey cerca and
mnstera. (17. S. v. Swft Co., supra.) It dd not nvove dscreton. It
was a duty that appeant owed to the Commssoner aone. ppeee coud not
requre t of hm. ppeant coud not fa n a duty as to whch he was not
bound to the appeee, nor voate a rght whch dd not e st. The moneys
represented by the credts were n the Treasury. The Commssoner had soa
domnon over them, appeant had none and undertook to e ercse none.
We are not passng upon the queston of whether the amount camed Is
recoverabe from the Unted States but soey upon the queston whether t s
recoverabe from ths coector of nterna revenue who merey made a book
entry. If the coecton of the 1917 ta es was n fact barred at the tme of the
aowance and credt of the overpayments appeee has an approprate remedy
whch s n no way affected by the acton of the appeant n ths case.
udgment reversed.
rtce 1351: Suts for recovery of ta es erro- I-51-5935
neousy coected. Ct. D. 613
INCOM ND C SS PRO ITS T S R IS D ST TUT S D CISION O
COURT.
Cam for Refund Suffcency of Cam.
cam for refund statng soey that the e cess profts ta
shoud be assessed under the provsons of sectons 327 and 328
of the Revenue ct of 1918 does not consttute a cam for refund
under secton 3226, Revsed Statutes, as amended, whch w sup-
port a sut based on the ground that the vaue of certan matera
shoud have been added to nvested capta. Ths concuson s not
affected by the fact that n the cam for refund the Commssoner
had caed to hs attenton a the facts necessary to |ustfy a reduc-
ton n ts ta es on the bass of nvested capta where the cam
a not predcated on that ground.
Unted States Crcut Court of ppeas, ghth Crcut.
emg ro. ag Co., a Corporaton, appeant, v. Unted States of merca
appeee.
ppea from the Dstrct Court of the Unted States for the astern Dstrct of Mssour.
ugust 29, 1932.
OPINION.
Nordbte, Dstrct udge, devered the opnon of the court.
Ths acton was brought to recover ncome and e cess profts ta es pad by
appeant for the years 1918 and 1919. The coector to whom the ta es were
pad havng gone out of offce, the acton was brought drecty aganst the
Unted States. The acton was tred to the court wthout a |ury on an agreed
statement of facts. The ony queston presented to the ower court was whether
or not the pantff n ts cam for refund, at any tme before the runnng of
the statute of mtatons, stated the facts or grounds upon whch t asserted
ts rght to a refund.
Paragraph 18 of the stpuaton provdes as foows:
If the appeant wthn the tme provded by aw, fed cams for refund
for the years 1918 and 1919, respectvey, whch under the aw were suffcent
to be the requred premnary for the mantenance of ths acton on that
ground, above stated, then appeant may be entted to |udgment for the yeur
1918 n the amount of 14,054.18, wth nterest, and for the year 1919 n the
amount of 9,073.15, wth nterest.
If the cams for refund fed by the appeant for the years 1918 and 1919,
respectvey, were not suffcent under the aw to be the requred premnary
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1113, rt. 1351.
410
for the mantenance of ths acton on that ground, the appeee w be entted
to |udgment dsmssng ths acton.
The appeant on ebruary 29, 1924, fed ts cam for refund for 1918 of
1,270,907.97, and on December 12, 1924, ts cam for refund for 1919 n the sum
of 000,546.13. These cams for refund were based on the contenton that the
e cess-profts ta und war-profts ta shoud be assessed under the provsons
of sectons 327 and 328 of the Revenue ct of 1918. These sectons are reef
statutes enacted for the purpose of reevng a ta payer from an e cessve ta .
Provson s made n secton 327 for cases where the Commssoner s unabe to
determne the nvested capta of the ta payer and n secton 328 t s provded
that n the cases specfed n secton 327 the ta sha be the amount whch
bears the same rato to the net ncome of the ta payer (In e cess of the specfc
e empton of 3,000) for the ta abe year, as the average ta of representatve
corporatons engaged n a ke or smar trade or busness, bears to ther aver-
age net ncome (n e cess of the specfc e empton of 3,000) for such year.
In fng ts cams for refund for the years 1918 and 1919, reference was
made to a bref theretofore fed n support of the cam for refund for the
1917 ta es, and an addtona bref was fed n support of the cams for refund
for the years 1918 and 1919. The cam for refund for the year 1918 stated
the foowng:
Deponent very beeves that ths appcaton shoud be aowed for the
foowng reasons: The e cess-profts ta and war-profts ta aganst ths com-
pany for the year 1918 shoud be assessed under the provsons of sectons 327
and 328 of the Revenue ct of 1918.
The facts and argument n support of ths cam are contaned n a bref,
duy verfed, whch has been fed wth the Commssoner of Interna Revenue,
n support of a cam for refund made n connecton wth the company s re-
turn for 1917 and the ta pad thereon. The facts and crcumstances whch
entte the company to assessment under sad sectons for 1917 obtaned aso
n 1918. In order to smpfy matter and avod repetton, the bref fed wth
the cam for refund for 1917 (a copy of whch bref s attached hereto) by
reference thereto s made a part of ths cam.
The bref attached to the cam for refund and by reference made a part of t
states as foows:
In re: Cam of ems ro. ag Co. for refund of ta es for the year 1917
based upon rght to speca assessment.
To the honorabe Commssoner of Interna Revent|h
Washngton, D. C:
ems ro. ag Co. has heretofore fed ts cam for refund of ta es for
the year 1917, based upon the rght to assessment of ts e cess-profts ta es
under secton 210 of the Revenue ct of 1917. It now desres to eaborate
and present n deta the reasons why ts e cess-profts ta for sad year
shoud be so determned.
Statement. The facts are hereafter stated n the order and under the
subdvson above wrtten.
I. Reasons why the ta shoud be so determned and the facts upon whch
such reasons are based.
. Reef sought.
Reyng upon the suffcency of the facts above rected to entte t to the
assessment of ts e cess-profts ta abty under the provsons of secton 210
of the Revenue ct of 1917, ems ro. ag Co. has heretofore presented
a cam for refund for the year 1917.
smar statement and a smar reference to the 1917 bref was used n
fng the cam for refund for the year 1919.
The appeant n fng ts cam for refund for the years n queston, n the
bref above referred to, attempted to set forth In substantaton of ts cam, the
fact that n|ustce woud be done f t were not permtted to receve the beneft
of the speca assessment provded n sectons 327 and 328 of the 1918 Revenue
ct. It proceeded to set forth n deta the varous phases of Its busness whch
made t dffcut to determne the vaues of the severa casses of property that
Were pad n for stock. It s qute apparent that the appeant was concerned
over the arge ta t was requred to pay to the Government, and fet that the
reaton of ts ncome to ts nvested capta was strkngy abnorma. It set
out a arge number of reasons why t was entted to a ta based on a compar-
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411
1113, rt. 1351.
son wth representatve corporatons engaged n a ke or smar busness.
Instances were cted of the accountng pocy of the company n prevous years
where e pendtures were charged to e pense or proft and oss, when good
accountancy woud have |ustfed the captazaton thereof. s an e ampe of
tbe conservatve methods empoyed by the company, reference was made to
certan prntng pates whch are used for the purpose of prntng the varous
brands on the bags that are manufactured by the appeant. That s, the ap-
peant Is equpped to prnt upon the bags manufactured, the user s brands.
Durng the years t has been n busness, t has accumuated a arge amount
of prntng sets for the prntng of user s brands, whch t contended were
reasonaby worth 851,375.50. The vaue was accordng to the ta payer some-
thng more than the mere consderaton of bare abor and matera that went
nto te manufacture of the prntng set It represented the resuts of aert
busness soctaton and advertsng wth years of servce that has been ren-
dered by t to ts customers consequenty, t contended n ths presentaton to
the Commssoner, that the prntng equpment represented an accumuaton
of years of good w, and athough e pense had been charged from year to year
for the actua outay for abor and matera, no porton of ths vaue had ever
been added to the nvested capta.
The facts concernng the orgna Incorporaton of the company and the eary
hstory of the corporaton were presented to substantate the faure on the part
of the company to captaze ts good w n the proper amount. New pants, t
was contended, had been obtaned from tme to tme, and no good-w vaue was
set up on the books for the dfferent propertes that were acqured n the ong
perod of tme that t had been engaged n the manufacturng busness. aure
to propery captaze certan patent rghts was aso set forth n the ta payer s
bref. Not a the varous tems whch were ncapabe of proper vauaton and
whch shoud have gone nto capta were set forth. It was merey the nten-
ton of the ta payer as dscosed by ts bref, to throw some ght upon what
appeared to be abnorma profts upon whch t was assessed and t was con-
tended by the ta payer that the showng made entted t to the speca assess-
ment that t requested. In other words, the varous phases of the busness of
the ta payer were set forth n order that the Commssoner woud be convnced
that the arge ta es that had been assessed arose on account of undercaptaza-
ton, rather than e cessve profts.
Secton 156, Tte 26, U. S. C. ., provdes that:
No sut or proceedng sha be mantaned n any court for the recovery of
any nterna revenue ta aeged to have been erroneousy or egay assessed
or coected, or of any penaty camed to hnve been coected wthout authorty,
or of any sum aeged to have been e cessve or n any manner wrongfuy
coected, unt a cam for refund or credt has been duy fed wth the Com-
mssoner of Interna Revenue accordng to the provsons of the aw n that
regard, and the reguatons of the Secretary of the Treasury estabshed n
pursuance thereof .
The statute of mtatons appcabe f es the tme for fng such cams at
four years after the payment of any part of the ta es. The cams fed on
ebruary 29, 1924, and December 12, 1924, were tmey, and were duy consd-
ered by the Commssoner on ther merts. On October 30, 1926, a communca-
ton was sent by the Treasury Department to the ta payer, a porton of whch
reads as foows:
You are advsed that after carefu consderaton and revew your appca-
ton und. r the provsons of secton 327 of the Revenue ct of 1918 has been
dened for the reason that the evdence presented fas to estabsh that your
nvested capta or net ncome s affected by abnorma condtons whch woud
ustfy the ureau n computng your ta under the provsons of secton 328
of the above-mentoned ct.
In accordance wth the above concusons, your cam for refund w be
re|ected n fu.
On November 27, 1926, a second communcaton was sent by the Treasury
Department to the ta payer, a porton of whch reads as foows:
fter carefu consderaton and revew, your appcaton under provsons
of sectons 210 and 327 of the Revenue cts of 1917 and 1918 for assessment
of your profts ta as prescrbed n sectons 210 and 32S of the above-mentoned
cts has been dened, nasmuch as the audt dscosed no e ceptona hardshp
evdenced by gross dsproporton between the ta computed by reference to
representatve concerns specfed n sectons 210 and 328.
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1113, rt. 1351.
412
In accordance wth the above concusons, your cams for refund of
1,770,104.23 and 35,355.79 for 1917 and 1,270,907.97 for 1918 w be re|ected
n u.
It s cear that the cam for speca assessment for the years 1918 and 1919
was re|ected by these etters. On December 13, 1920, after the statute of m-
tatons had run on these cams, the appeant sent to the Commssoner a com-
muncaton referrng to the re|ecton and among other thngs sad:
We protest aganst the re|ecton of sad cams for refund for the foowng
reasons:
(a) The e cess-profts ta aganst the company for the year 1917 shoud be
determned under secton 210 of the Revenue ct of 1917 and the e cess-profts
and war-profts ta es for the years 1918 and 1919 shoud be determned under
secton 328 of the Revenue ct of 1918. The dena of sad rght must be based
upon the use of mproper comparatves as representatve.
(b) If the assessment of the e cess-profts ta es aganst the company n the
manner camed n the above subdvson s dened, then the tems heretofore
presented whch have been mpropery emnated from nvested capta shoud
be restored to nvested capta and the e cess-profts ta recacuated on that
bass.
urther communcaton was sent by the ta payer under date of pr 12,
1927. Under date of December 17, 1927, the Commssoner wrote advsng
that the cams for the years 1917, 1918, and 1919 had been reconsdered n
connecton wth the ta payer s protest, and the entre matter was then re-
vewed by the Commssoner, and the foowng s a porton of the communca-
ton so sent:
In vew of the above, your cam for the refund of 35,355.79, ncome and
profts ta es for 1917, w be aowed for 32,675.42 and your cam for the
refundng of 1,770,104.23 for 1917 w be re|ected n fu, n the ne t schedue
to be approved by the Commssoner.
Inasmuch as computaton of your ta abty for 1918 and 1919 under the
provsons of sectons 327 and 328 of the Revenue ct of 1918 (provson for
speca assessment) s dened and your cam for the refundng of 1,270,907.97
for 1918 s confned to that pont, t w be re|ected n fu n the ne t
schedue to be approved by the Commssoner.
Your cam for the computaton of your ta abty for 1919 under the
provsons of sectons 327 and 328 has aready been re|ected.
The overassessments ndcated for 1918 and 1919 not beng covered by proper
cams are barred by the statute of mtatons and can not be aowed.
In the revew that was made by the Commssoner, the prntng equpment
Items were consdered, and t was determned by the Commssoner that the
stereo meta used n producng the patterns and pates shoud be captazed at
cost n that t had a fe of some years. The foowng s quoted from the
Commssoner s etter of December 17, 1927:
Tour contenton for the restoraton of prntng equpment charged to e pense
n the amount of 851,375.50, has been gven carefu consderaton and It s
found that a abor costs and matera costs for patterns, pates, type and
mats are charged drecty to e pense accounts n the current ta abe years and
t s beeved such charges are proper. owever, the stereo meta used n
producng the patterns and pates nasmuch as t has a fe of severa years
shoud be captazed at cost. The average cost of such meta from 1905 to
1910, ncusve, s 0.0893 per pound. The average cost for a term of years
pror to 1917 shoud be used nstead of the average cost subsequent to that
date, n determnng the vaue of such meta on hand anuary 1, 1917.
The Commssoner then determned that the amount of 129,372.93 shoud be
restored to prntng equpment, and that the baance of the 851,375.50. or
722,002.57, shoud be dsaowed for restoraton to nvested capta on the
ground (hat t had been propery charged to e pense. In makng hs computa-
tons, the Commssoner found that after restorng the amount of 129,372.93 to
the prntng equpment, there had been an overassessment of 14,054.18 n the
tu pad for the year 1918, and 9,073.15 n the ta pad n the year 1919. The
overassessments for the year 1917 were aowed however, for the years 191S and
1919 they were dsaowed by the Commssoner because he contended that no
proper cams had been fed before these cams were barred by the statute of
mtatons.
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413
1113, rt. 1351|
The fact that the Commssoner took t upon hmsef n consderng the 1917,
1918, and 1919 ta es, to reconsder the entre appcaton, woud not be of any
ava to the appeant f In truth and n fact, the cam for refund sued upon
heren was not fed wth the Commssoner wthn the statutory perod. It s
not serousy contended by the appeant that the Commssoner waved any
rghts of the Government by hs communcaton of December 17, 1927. The
Commssoner woud have no authorty to e tend the statute of mtatons
after the e praton thereof. The etter of December 13, 1926, from the appe-
ant to the Commssoner was wrtten after the cams fed n 1924 were
dened and after the statute of mtatons had e pred. The ony queston,
therefore, presented to ths court s whether or not the cams for refund fed
by appeant on ebruary 29, 1924, and December 12, 1924, were suffcent, under
the aw, to be the requred premnary for the mantenance of ths acton, whch
Is based on overpayment of ts ta es for 1918 and 1919 on the grounds that ts
nvested capta s a arger amount than was set forth In ts return for those
years. The tra court hed that the orgna appcaton asked for a speca
assessment and n ts appcaton for speca assessment, there was no ndcaton
that the ta payer contended that t was entted to a reducton of ts ta es on
the ground that there was certan prntng matera that shoud have been added
to Its nvested capta. In other words, the tra court hed that ths acton s
based upon a new and nconsstent ground compared to the orgna appcaton
for ta refund, and that for the reason that the orgna cam for refund dd
not state the grounds whch are the bass for ths sut, that no recovery can be
had heren.
In the case of Tucker v. e ander (15 ed. (2d), 356, 357 T. D. 3973,
C. . I-1, 287 ), the court stated:
Therefore, we thnk t s a requred precedent or mtaton that the acton
sha be upon the same grounds and ony such as are presented n the cam.
s no ground n ths petton s stated n the cam for refund, we thnk ths
petton has no standng under the ssues tendered by the petton.
In the case of Red Wng Matng Co. v. Wcuts (15 ed. (2d), 626, 634 T. D.
3980, C. . I-1, 225 ), the court stated :
The precse ground upon whch the refund s demanded must be stated
In the appcaton to the Commssoner, and we thnk, f that s not done, a
party can not base a recovery n the court upon an entrey dfferent and ds-
tnct ground from that presented to the Commssoner.
In the case of Unted States v. et Tarrant Manufacturng Co. (283 U. S.,
269 Ct. D. 336, C. . -, 431 ) the Supreme Court had a very smar queston
presented to t. In that case, the ta payer fed a cam for refund askng for
speca assessment as n the nstant case. Ths was dened and t brought sut
on the bass that ts gross ncome shoud be decreased by tems of e hauston
or obsoescence of patents. The Supreme Court sad on page 271:
That secton provdes for a speca method of assessment of e cess profts
ta es n any case where the Secretary of the Treasury s unabe satsfactory
to determne the nvested capta of the ta payer. It has no reaton to de-
ductons from gross ncome on account of e hauston or obsoescence of pat-
ents. In support of ts cam, whch was utmatey aowed n part, respondent
prepared and fed a bref, and an ora argument was hed n the offce of the
Commssoner but nether n ts cam for refund, ts bref, nor at the hearng,
was menton made of the deducton now camed.
The fng of a cam or demand as a prerequste to a sut to recover ta es
pad s a famar provson of the revenue aws, compance wth whch may be
nssted upon by the defendant, whether the coector or the Unted States.
(Tucker v. e ander, 275 U. S., 228 Maryand Casuaty Co. v. Unted States,
251 U. S., 342, 353, 354 ngs County Insttuton v. ar, 116 U. S., 200
Nchos v. Unted States, 7 Wa., 122, 130.)
One ob|ect of such requrements s to advse the approprate offcas of the
demands or cams ntended to be asserted, so as to nsure an ordery admn-
straton of the revenue (Nchos v. Unted States, supra, page 130), a purpose
not accompshed wth respect to the present demand by the bare decaraton
In respondent s cam that t was fed to protect a possbe ega rghts of
the ta payer. The cam for refund, whch secton 1318 makes prerequste to
sut, obvousy reates to the cam whch may be asserted by the sut. ence,
qute apart from the provsons of the reguaton, the statute s not satsfed
by the fng of a paper whch gves no notce of the amount or nature of the
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1113, rt. 1351.
414
cam for whch the sut s brought, and refers to no facts upon whch t may
bo founded.
The Court of Cams, n aowng recovery, reed upon Tucker v. e ander,
supra, and upon the fact that t the tme when respondent fed ts return and
Its cam for refund, the Treasury had consstenty refused to aow deduc-
tons from gross ncome for e hauston of patents. Consequenty It hed
that the fng of n demand whch was certan to be refused was a fute and
Unnecessary act. ut n Tucker v. e ander the rght of the Government to n-
sst upon compance wth the statutory requrement was emphaszed. Ony
because that rght was recognzed was t necessary to decde whether t coud
be waved. The court hed that t coud, and that n that case t had been
waved by the stpuaton of the coector ted n court. ere there was no com-
pance wth the statute nor was there a waver of ts condton, snce the Com-
mssoner had no knowedge of the cam and took no acton wth respect to t.
The necessty for fng a cam such as the statute requres s not dspensed
wth because the cam may be re|ected. It s the re|ecton whch makes the
sut necessary. n antcpated re|ecton of the cam whch the statute con-
tempates, s not a ground for suspendng ts operaton. ven though forma,
the condton upon whch the consent to sut s gven s defned by the words of
the statute, and they mark the condtons of the camant s rght. (Rock
Isand R. R. Co. v. Unted States, 254 T . S., 141, 143.) Compance may be
dspensed wth by waver, as an admnstratve act (Tucker v. e ander,
supra) hut t s not wthn the |udca provnce to read out of the statute the
requrement of ts words. (Rand v. Unted States, 249 U. S.. 503, 510.)
The appeant takes the poston that n ts orgna cam for refund, the
Commssoner had caed to hs attenton a the facts necessary to ustfy a
reducton n ts ta es on the bass of ncreased capta. owever, t seems
cear that the reference to the prntng equpment presented n the orgna
cam for refund was merey used as an ustraton of the nabty to determne
the vaues of the nvested capta n order to substantate the rght of the cam-
ant to have ts ta es assessed under sectons 327 and 328 of the Revenue ct
of 1918. It was merey ncdenta. There s no partcuar smarty between
a cam for refund based on a rght of speca assessment, and a cam for
refund based on the rght to have the nvested capta ncreased. In fact, the
appeant took the poston, when ts cam for refund was orgnay presented,
that the facts regardng ts nvested capta and vaue of property pad n for
ts stock, coud not be determned, and for that reason, t nssted that ts ta
shoud be assessed as the average ta of representatve corporatons engaged n
a ke or smar trade or busness. It may be that there s some confuson
between the terms facts and grounds as used wth reference to cams
for ta refund. ut the pur ose n settng out facts s to advse the Comms-
soner of the grounds for ta reducton, and the orgna cam was predcated
soey upon the rght of speca assessment. ny reference u the cam to the
status of ts prntng equpment was merey referred to n support of the
ta payer s rght to speca assessment. t east, one ob|ect of the requrement
to set forth the facts u substantaton of the cam for refund s to advse the
Commssoner so that there may be an ordery admnstraton of the Revenue
Department. (Unted States v. et t Tarrant Mfg. Co., supra.) If the ap-
peant had n mnd that t was entted to a ta reducton on account of n-
creased nvested capta, there woud have been no dffcuty whatsoever n
settng forth such a statement and askng for a reducton on such specfc
ground. The ony purpose evdenced by appeant n fng ts cams was to
obtan a speca assessment n vew of certan abnorma condtons and cr-
cumstances set forth n consderabe deta n ts bref n support of ts cam.
The Commssoner was asked to aow a speca assessment. In vew of these
crcumstances, no other cam was presented. The Commssoner s attenton,
before the cam was barred by the statute of mtatons, was not caed to any
other cam for refund.
The court, n the case of Mutua Lfe Insurance Co. of New York v. Unted
States (49 ed. (2d), 602 Ct. D. 363, C. . -2, 292 ), seems to have had
suhstantay ths same queston before t. On page 064 t sad :
though the cam of ugust 2 stated certan facts wth reference to the
reserve funds at the begnnng and end of the ta abe year from whch the 4
per cent of the mean of those reserve funds coud be determned, they were
stated, consdered, and acted upon by the Commssoner for an entrey dfferent
purpose than that upon whch the pantff now rees. No cam for refund
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415
1113, rt. 1351
of the nature asserted n ths sut wns ever made to the Commssoner unt
the appcaton for reconsderaton ong after he had re|ected the cam and
after the statute of mtaton for fng a cam had e pred.
The cam for refund was prepared by the attorneys for appeant wth con-
sderabe care. Great pans were taken n presentng to the Commssoner a
voumnous bref n support of ts contenton that t was entted to a speca
assessment. The Commssoner consdered appeant s appcaton for some
two years, and then formay dened t. If appeant ntended to press a cam
for refund before the statute of mtatons e pred on the grounds that ts
nvested capta shoud be ncreased by certan prntng equpment, there was
no ndcaton of any such ntenton pror to December 13, 1926. The target
at whch appeant was amng was the consent of the Commssoner to have ts
ta assessed accordng to sectons 327 and 328 of the Revenue ct of 1918. The
fact that n ad of that ob|ectve certan facts appeared that mght furnsh
grounds for a parta refund on an entrey dfferent and nconsstent cam,
coud hardy be consdered a premnary requrement to a sut for such parta
refund. (Conne v. opkns, 43 ed. (2d), 773 Ct. D. 248, C. . I -2, 407
Lucas v. Pod Lumber Co., 281 U. S., 245 Ct. D. 206, C. . I -2, 396 Maas
Wadsten Co. v. Unted States, 283 U. S., 583 Ct. D. 353, C. . -, 433 .)
In accordance wth the vews heren e pressed, the |udgment of the ower
court s affrmed.
rtce 1351: Suts for recovery of ta es erro- I-52-5953
neousy coected. Ct. D. 615
( so Secton 206, rtce 1621.)
INCOM T R NU CT O 1918 D CISION O COURT.
1. Cam fob Refund Suppementa Cam.
Where n ts orgna cam for refund pantff sought speca
assessment t may not set up a new ground for refund after the
re|ecton of ts cam and after the e praton of the statutory
perod for fng refund cams.
2. Cam fob Refund ng urden of Proof.
Pantff has burden of aegng and provng tmey fng of
cam for refund.
8. Deductons Net Loss Consodated Corporatons.
Under the aw of New York a consodaton of two corporatons
effects a dssouton of the consttuent corporatons and the crea-
ton of a new corporate entty. Net oss of such new corporate
entty may not be deducted from net Income of one consttuent
under secton 204(b) of the Revenue ct of 1918.
Unted States Dstrct Court, Southern Dstrct of New York.
Swedsh Iron d Stee Corporaton, pantff, v. Wam . dwards, defendant.
ugust 27, 1932.
opnon.
Goddard, Dstrct udge: Ths acton chaenges the correctness of a ta
assessed and coected for the fsca year endng pr 30, 1918. The ta was
assessed aganst Swedsh Iron Stee Corporaton, a New York corporaton
organzed n 1907, whch for convenence w hereafter be referred to as cor-
poraton No. 1. The pantff asserts that t s the same ta payer as corpora-
ton No. 1 and contends, n reance upon sectons 200 and 204(b), Revenue
ct of 1918, that t was overassessed for the year n queston because the Com-
mssoner refused to deduct a net oss ncurred by the pantff for the caendar
year 1919. The defendant denes that the pantff s the same ta payer as
corporaton No. 1, and contends that n any event the year endng pr 30,
1918, was not the precedng ta abe year to that durng whch the net
oss was ncurred, wthn the meanng of the statute nvoved In addton,
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1113, rt. 1351.
416
the defendant urges that the sut can not be mantaned because pantff s cam
or refund dd not specfy the ground for reef whch s now reed upon.
or an understandng of these opposng contentous a further statement must
be made of the facts estabshed at the tra. y an agreement dated October
2, 3918, and fed n the offce of the secretary of state of New York on October
8, 1918, between corporaton No. 1 and edera Too oy Stee Corporaton,
a New York corporaton organzed n 1917 and hereafter, for convenence,
referred to as corporaton No. 2, t was agreed to merge and consodate such
corporatons nto a snge corporaton, and t was mutuay covenanted that
the name of the corporaton newy formed by sad consodaton sha be
edera Too oy Stee Corporaton, and that the term of e stence of
such new corporaton sha be ffty (50) years. The agreement aso provded
that the capta stock of such new corporaton shoud be e changed share
for share for the outstandng certfcates of sad consttuent corporatons.
e cept that for the outstandng shares of corporaton No. 1 (3,738.1125 In
number) there shoud be e changed an addtona 1.8875 shares of the new cor-
poraton (a tota of 3,740 shares) n order to avod the ssue of fractona shares.
The outstandng shares of corporaton No. 2 were 100 n number. The cor-
poraton resutng from ths agreement subsequenty changed ts name to
Swedsh Iron Stee Corporaton and s the pantff n the present acton.
One of the ponts n dspute s whether the agreement effected ony a merger
of the two corporatons pursuant to secton 15 of chapter 61 of the stock
corporaton aw (New York Laws of 1909) wth the resut that the pantff
s the same ega entty as corporaton No. 1, as the pantff contends, or
whether t effected a technca consodaton pursuant to secton 7 of chapter 12
of the busness corporatons aw (New York Laws of 1909) and resuted n the
creaton of a new and dfferent corporate entty, as the defendant contends.
Pror to e ecutng the aforesad agreement corporaton No. 1 had fed a ed-
era ta return for ts fsca year endng pr 30, 1918. Corporaton No. 2
had never engaged In busness and so fed no ta return. Subsequent to e ecu-
ton of the sad agreement, corporaton No. 1 fed another Income ta return
for the perod from May 1 to October 10, 1918, and the pantff, n ts then
name of edera Too oy Stee Corporaton, fed a return for the perod
from October 10 to December 31, 1918, and a return for the caendar year 1919.
The ntter shows a net oss of some 30,000, whch, as aready stated, forms
the bass of the present sut. The ta assessed aganst corporaton No. 1 for
ts ta abe year endng pr 30, 1918, amounted to 78,625.06 and was pad
n three nstaments, the frst beng pad on uy 29, 1918, by corporaton No.
1. and the ast two, on anuary 6 and May 19, 1919, respectvey, by the pan-
tff. The ast nstament was 18,515.82. It s stpuated that f the pantff
s entted to a |udgment, the amount thereof shoud be 14,150.82.
On ebruary 28, 1923, pantff fed a cam for refund of the entre ta
assessed aganst corporaton No. 1 for the year endng pr 30. 1918, on
the ground that t was entted to a speca assessment under secton 210 of
the Uevenue ct of 1918. y etter dated pr 22, 1925 ( hbt ), the
Commssoner notfed pantff of the re|ecton of ts cam for refund. There-
after by etters dated uy 22 and September 29, 1925 ( hbt 16), pantff
asked for a reaudt and reconsderaton of the ta es assessed for the year
endng pr 30, 1918, and camed deducton of ts net oss for the caendar
year 1919. The Commssoner reped on October 26, 1925 ( hbt 17). that
the case woud be reconsdered, and by etter of November 27, 1925 ( hbt
15), notfed pantff that the ta es as prevousy determned were correct.
Wthn two years thereafter and n October, 1927, the present sut was brought.
The contenton that the cam for refund presented to the Commssoner s
Insuffcent to support the sut w be frst consdered. Revsed Statutes, secton
3226, as amended (45 Stat., 343), provdes that no sut or proceedng sha
be mantaned n any court for the recovery of any nterna revenue ta aeged
to have been erroneousy or egay assessed or coected unt a
cam for refund or credt has been duy fed wth the Commssoner of Interna
Revenue, accordng to the provsons of aw n that regard, and the reguatons
of the Secretary of the Treasury estabshed n pursuance thereof.
rtce 1036 of Reguatons 62 was n effect when the pantff fed ts cam
for refund on ebruary 28, 1923. The artce provdes
Cams by the ta payer for the refundng of ta es and penates erroneousy
or egay coected shoud be made on orm 843. the facts reed
upon n support of the cam shoud be ceary set forth under oath .
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417
51113, rt. 1351.
The pantff s cam for refund fed on ebruary 28, 1923, was made on orm
843 and was under oath, but t contaned no suggeston that the cam was based
on the rght to deduct the net oss ncurred by pantff n the caendar year 1919
and no nference to facts n support of such a cam. ence the cam as org-
nay fed was nsuffcent to gve notce of the cause of acton now sued upon.
(See Unted States v. et d Tarrant Co., 283 T . S., 269, 272 Ct. D. 336, C. .
-, 431 Red Wng Matng Co. v. Wcutt, 15 e. (2d), 626, 634 (C. C. .
ghth Crcut) T. D. 3980, C. . I-1, 225 and numerous authortes cted n
rt Meta Const. Co. v. Unted States, 47 ed. (2d), 558, 561 (C. C. . Second
Crcut) Ct. D. 300, C. . -, 421 .)
ut the pantff contends that the cam for refund was amended to specfy
the proper ground by the etters of uy 22 and September 29, 1925. Ths was
subsequent to the Commssoner s etter of pr 22, 1925, notfyng the pantff
of the re|ecton of ts cam for refund. It was aso more than s years after
payment of the fna nstament of the ta on May 19,1919. Secton 1316 of the
Revenue ct of 1921 (42 Stat., 314) and secton 1012 of the Revenue ct of 1924
(43 Stat., 342) requre a cam for refund to be presented wthn four years after |
payment of the ta . ssumng that the etters of uy 22 and September 29,
1925, may be treated as an amendment of the cam as orgnay fed, athough
they do not profess to be such, but asked for a reaudt and reconsderaton I
of the ta for the fsca year endng pr 30, 1918, the queston arses whether
an amendment settng up a new ground for refund may be receved and consd-
ered by the Commssoner after the orgna cam has been re|ected and after |
the statutory perod for fng cams has run. That the Commssoner can not
be requred to receve an amendment under such crcumstances was stated In
Soomon v. Unted States (37 ed. (2d), 150, 151 (C. C. . Second Crcut) Ct
D. 520, page 399, ths buetn ). In Mc esson d Robbns, Inc., v. dwards (57
ed. (2d), 147, 150 (C. C. . Second Crcut)), t was hed that an amendment
mght be made wth the Commssoner s acquescence after the perod of mta-
ton had run. There, however, the orgna cam contaned a reference, though
an nsuffcent one, to the ground of reef set forth n deta n the amendment
there was somethng to amend. ere the etters treated as an amendment set
np an entrey new ground not n any way mentoned n the orgna cam.
Strcty t was not an amendment at a but the presentaton of an entrey new
bass for reef. To aow an entrey new ground for reef to be presented
after the statutory perod has run appears to me no dfferent than to aow the
orgna and ony cam for refund to be fed at that tme. Ceary the atter
Is forbdden by the statute. In my opnon the former s aso. (See Mutua
Lfe Insurance Co. v. Unted States, 49 ed. (2d), 662, 664 (Ct. CI.) Ct. D. 363,
C. . -2, 292 Sugar Land Ry. Co. v. Unted States. 48 ed. (2d), 973 (Ct. CI.)
Ct. D. 382, C. . -2, 309 New ngand Mutua Lfe Insurance Co. v. Unted
States, 52 ed. (2d), 1006 (Ct. CI.) Natona re Insurance Co. v. Unted
States, 52 ed. (2d), 1014, 1017 (Ct. CI.) Connc v. opkns, 43 ed. (2d), 773
(N. D. Te as) Menrath rokerage Co. v. Crooks, 28 ed. (2d), 991 (W. D.
Mo.).)
The pnntff contends that the ssue above dscussed s not propery before
the court because the defendant dd not pead the statute of mtatons. The
pont s not we taken. In ts compant the pantff aeged that on or about
ebruary 28, 1923, t fed a cam for refund t aeged nothng as to the
etters upon whch t now rees as consttutng an amendment. The defend-
ant s amended answer sets up as a second defense that n sad cam for
refund pantff dd not set forth the cause of acton whch s not stated n ts
compant. When the cam for refund ( hbt 14) was offered n evdence,
the defendant ob|ected to ts admsson for the same reason. fter the tra
was concuded the etters n queston ( hbt 16) were put n by stpuaton
sub|ect to the ob|ectons and e ceptons of defendant. Where the fng of
a cam for refund accordng to the provsons of aw n that regard s a
condton of the pantffs rght to mantan ts sut, t woud seem that the
pantff woud have the burden of aegng and provng tmey fng of hs
cam, and that the defendant woud not be requred to pead and prove a ate
fng. In other words, I do not thnk ths s a sut where the ordnary rues
of peadng a statute of mtatons are appcabe. ut f they were, I shoud
aow the defendant, n vew of the way the case was presented, to amend
Its answer to set up the statute. In my opnon, therefore, the defendant s
contenton that the amendment was too ate s propery before me and pre-
sents a compete bar to the sut.
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1116, rt. 1371.
418
ut even If ths concuson were wrong, there s another ground upon whch
the verdct must be drected for the defendant, namey, the ack of Identty
between the pantff and the ta payer aganst whom the ta n queston was
assessed. Under the aw of New York, as t e sted when the agreement of
October 2, 1918, was made, a consodaton of two corporatons effects a ds-
souton of the consttuent corporatons and the creaton of a new corporate
entty. (Peope v. Rce, 57 un., 486, affrmed 128 N. T., 591 Peope v. N. . C.
d S. L. . Co., 129 N. Y., 474 Matter of ergdorf, 149 N. Y. pp. Dv., 529, 532.)
It seems perfecty cear that the agreement of October 22 contempated a con-
sodaton of the two consttuents whch I have referred to as corporaton No. 1
and corporaton No. 2. ach of the consttuent corporatons had a corporate
fe of unmted duraton. The agreement specfes the name of the new
corporaton formed by sad consodaton and provdes that ts term of
e stence sha be 50 years. Secton 7 of the busness corporatons aw (eh. 12,
New York Laws, 1909) e pressy provded that an agreement for consoda-
ton shoud prescrbe the name of the new corporaton and the term of
ts e stence, not e ceedng 50 years. The agreement aso specfed the amount
of the capta stock of the new corporaton (as requred by the statute) and
provded for the ssuance of the stock of the new corporaton n e change for
the certfcates of the consttuent corporatons. The use of the word merge
n con|uncton wth consodaton s whoy nsuffcent to overcome ths
cear evdence of the creaton of a new corporaton by consodaton. Nor s the
agreement consstent wth an ntent to merge corporaton No. 2 nto corpora-
ton No. 1. The merger statute (secton 15, ch. 12, New York Laws, 1909) pro-
vdes that the subsdary corporaton may be merged nto the possessor corpo-
raton and thereupon the atter sha acqure a the rghts, prveges and
property of the former and contro them In ts name. The agreement of
October 2, 1918, contempated nothng of ths sort corporaton No. 1 was not
to acqure and contro n ts name the rghts of corporaton No. 2, but a new
corporaton, of a dfferent name and dfferent terra of corporate fe, was to take
the pace of the two consttuent corporatons. nd what was done after the
agreement was e ecuted s consstent ony wth ths vew. Corporaton No. 1
fed a ta return for the perod from May 1 to October 10, 1918, and the
new corwraton by Its then name of edera Too oy Stee Cor-
poraton fed ts return for the perod from October 10 to December 31, 1918,
thereby ceary ndcatng ts own understandng that t was a dfferent ta -
payer from corporaton No. 1. Moreover, In a merger there s no e change of
stock such as took pace under the agreement of October 2, 1918. Snce the
pantff Is a dfferent corporate entty from corporaton No. 1, aganst whch
the ta n queston was assessed, secton 204(b) of the Revenue ct of 1918
has no appcaton. That secton requres that the net oss be ncurred by
the same ta payer aganst whom a ta was assessed for the precedng ta -
abe year.
or the foregong reasons, I deny the pantffs moton for a drected verdct
and drect a verdct for the defendant.
S CTION 1116. INT R ST ON R UNDS
ND CR DITS.
rtce 1371: Interest on refunds and credts. I-36-5661
Ct D. 553
federa ta es revenue act of 1021 decson of court.
Interest Refund ob Credt Specfc Protest rgument for
Speca ssessment.
n argument by a ta payer supportng the rght to speca
assessment under secton 210 of the Revenue ct of 1917 s not
a specfc protest settng forth n deta the bass of and reasons
for such protest wthn the meanng of subdvson (a)(1) of
secton 1324 of the Revenue ct of 1921, and therefore nterest on
a refund or credt s not aowabe as provded theren.
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419
1116, rt. 1371
Court of Cams op the Unted States. No. -80.
uton ag f Cotton s, a Corporaton, v. The Unted States.
May 2, 1932.
OPINION .
Wams, udge, devered the opnon of the court.
The pantff, a Georga corporaton, durng the year 1917, owned a the
capta stock of the uton ag Cotton Ms of rookyn,_ N. Y., a New York
corporaton. The atter corporaton was dssoved n anuary, 1918, and a ts
assets and abtes were taken over by the pantff.
On March 27, 1918, the pantff fed wth the coector of nterna revenue
at rookyn, N. Y., the ncome and e cess-profts ta return for ts subsdary
corporaton for the year 1917, and on une 13, 1918, pad the coector the ta
shown to be due thereon. On March 29, 1918, pantff fed ts own ncome and
e cess-profts ta return for the year 1917, wth the coector of Interna revenue
at tanta, Ga., and on une 15, 1918, pad the coector the ta shown to be due
thereon.
The Commssoner of Interna Revenue, n 1923, granted the pantff the
beneft speca assessment under secton 210 of the Revenue ct of 1917, whch
It had theretofore, on a cam dated September 5, 1922, requested. The Com-
mssoner determned that the pantff had overpad ts ncome and e cess-
profts ta es for the year 1917 n the sum of 106,933.92, and that t had over-
pad the ta es of ts dssoved subsdary n the sum of 48,801.75, makng a
tota overpayment for the year, of 155,735.67. Of ths amount 137,326.63 was
refunded to the pantff and the baance, 18,409.04, was credted aganst ta es
due the Government for the year 1922.
There s no controversy between the partes as to the correctness of the
Commssoner s determnaton of the amount of the overpayment, or the manner
n whch t was refunded and credted. The controversy reates whoy to the
amount of nterest the pantff s entted to receve on the overpayment.
The Commssoner aowed nterest on the amount refunded, from s months
after the fng of the cam for refund, to the date of the aowance of the
refunds.
The pantff cams t pad the ta n queston under specfc protest wthn
the requrements of cause (1), of secton 1324(a) of the Revenue ct of 1921
(42 Stat., 316), and that nterest was aowabe from the date of payment of
the ta . The ct provdes:
(a) That upon the aowance of a cam for the refund of or credt for
nterna revenue ta es pad, nterest sha be aowed and pad upon the tota
amount of such refund or credt at the rate of one-haf of 1 per centum per
month to the date of such aowance, as foows: (1) If such amount was pad
under a specfc protest settng forth n deta the bass of and reasons for such
protest, from the tme when such ta was pad, .
t the tme of the payment of ts 1917 ta es, une 15, 1918, pantff fed
wth the coector of nterna revenue at tanta, a etter protestng the pay-
ment on the ground that the ta was erroneous and ega, especay that part
of the ta reatng to e cess profts. The pantff concedes ths etter was not
a specfc protest wthn the meanng of secton 1324(a), and rees whoy upon
certan ora representatons made to the coector by pantff s ega advser
at the tme of the payment of the ta , as consttutng a specfc protest.
It appears pantff s an od and conservatvey managed corporaton, the
capta stock of whch s cosey hed, beng practcay a one-famy concern.
Pror to 1917, proper ad|ustments n nvested capta had not been made and
the net earnngs of the company for 1917, as shown by ts books, on whch It
was requred to pay ta es, were, n the opnon of offcers of the company, e -
cessve and paced pantff n the poston of payng more ta es proportonatey
than other companes smary stuated whose books refected the true n-
vested capta. On the day the ta es were pad pantff s vce presdent
accompaned by hs ega advser, caed upon the coector and had a conver-
saton wth hm about ths stuaton of the pantff company. The coector
was nformed that the company s nvested capta, as shown on ts books, was
argey understated, and that the ta es beng coected were out of a pro-
porton to the ta es pad by compettve corporatons ess conservatvey
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420
captazed. The conversaton between pantffs representatve and the co-
ector, whch was characterzed by pantff s wtness as beng fussng and
fmung, was somewhat e tended, but the ony protest made aganst the ta
was that t was e cessve because of the pantffs faure, n pror years, to
make proper ad|ustments of ts nvested capta. These ora representatons
were not reported to the Commssoner of Interna Revenue by the coector.
It s not necessary to pass upon the pantffs contenton that an ora pro-
test, f otherwse satsfactory, meets the requrements of the statute, as, n our
opnon the ora statements made to the coector, even f they had been made
n wrtng, were not suffcent to consttute a specfc protest. The egaty of
the ta s not chaenged, and the rght of the ta ng offcas to e act payment
of the ta es shown to be due on the return, s not questoned n any way. In
ths respect the ora protest Is ackng n the essenta requrements of a spe-
cfc protest. (Grard Trust Co. v. Unted States, 270 T . S., 163 T. D. 3919,
C. . -2, 209 Unted States v. Magnoa Petroeum Co., Z1 U. S., 160
T. D. 4153, C. . II-1, 287 .)
protest s for the purpose of nvtng attenton of the ta ng offcers to the
Iegaty of the coecton, so that they may take remeda measures at once.
(Grard Trust Co. v. Unted States, supra.)
The ora statements, reed upon as consttutng a specfc protest to the
payment of the ta , amount, at most, to an argument |ustfyng speca assess-
ment under secton 210 of the Revenue ct of 1917. If, as has been hed, a
request for speca assessment under secton 210 s not a specfc protest wthn
the meanng of secton 1324(a) (Maas Wadsten Co. v. Unted States, 283
U. S., 583, and Chestnut f Smth v. Unted States, No. -105 Ct. D. 491, C.
I-1, 320 , decded ebruary 8, 1932), certany an argument by a ta -
payer supportng the rght to speca assessment can not be hed to be a specfc
protest.
In Maas d Wadsten, supra, the ta payer fed hs Income and e cess-profts
ta returns for the year 1917 In the same manner as dd the pantff n the
nstant case. Wth the return the ta payer sent a wrtten communcaton
statng our ta s proportonatey arger than that of other representatve
concerns n the same ne of busness, and under paragraph 4, artce 52, our
nvested capta when compared n the manner specfed n the reguatons s
manfesty serousy dsproportonate to the ta abe ncome. On the payment
of the ta es the ta payer agan wrote the Commssoner statng: We fed a
request dated March 28, for assessment n the manner provded for In artce
52, referrng aso to artces 18 and 24, Reguatons 41. The ta payer con-
tended these two etters were suffcent to meet the requrements of secton
1324(a) as to a specfc protest settng forth n deta the bass of and the
reasons for such protest. The Supreme Court, overrung the ta payer s con-
tenton, through Mr. ustce McReynods, sad:
The genera purpose of the pettoner s communcatons to the Comms-
soner was to nduce the atter to set on foot an Investgaton of the company s
affars to the end that, after ascertanng the crcumstances and n the e ercse
of a proper dscreton, he mght make an assessment duy proportoned to those
Imposed upon others engaged n ke busness. There was no chaenge of the
Commssoner s rght then to demand payment accordng to the genera rue
no cam that n vew of the facts then before hm ths woud amount to an
unawfu mposton.

We are unabe to concude that the pettoner s acton amounted to a pre-
cse ob|ecton to an unauthorzed e acton wthn the far ntendment of the
statute. Metcuous compance by the ta payer wth the prescrbed cond-
tons must appear before he can recover. (Lucas v. Pod Lumoer Co., 281
U. S., 245, 249 Ct. D. 266, C. . I -2, 396 .)
The facts n the ease at bar are In a essenta respects smar to the facts
n the ease cted, e cept that the aeged specfc protest n the nstant case
was made oray to the coector, whe the protest n the former case was
made n wrtng, and addressed to the Commssoner. Concedng, wthout
decdng, that a specfc protest wthn the requrements of secton 1324(a) of
the Revenue ct of 1917 can be made oray, the pantff n ths case can not
recover, as the statements reed upon are not suffcent to consttute a specfc
protest wthn the meanng of the secton. There s no cam that In vew
of the facts then before the ta ng offcas the amount of ta shown to be
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421
1116, rt. 1371.
dne on the pantffs return amounted to an unawfu mposton. The return
upon whch the ta was based was made out n the manner provded by aw,
and the amount of ta shown to be due was based on pantff s net earnngs
for the year as refected by Its books. Pantff s rght to be reeved from the
genera appcaton of the aw, and to have ts ta abty determned under
the provsons of secton 210, of the Revenue ct of 1917, was dependent entrey
upon Its abty to make the showng requred n that secton, and the grantng
of that prvege to the pantff, as the Commssoner subsequenty dd, does
not make the orgna ta computed under the strct appcaton of the aw
ega, or ts coecton an unauthorzed e acton.
The petton w, therefore, be dsmssed. It Is so ordered.
rtce 1371: Interest on refunds and credts. I-36-5662
Ct. D. 554
federa ta es revenue act of 1921 decson of court.
1. Interest on Refund Cam for Refund Suffcency.
report upon ts ta es made by audtors empoyed by a ta -
payer whch Is presented to the Commssoner but addressed to
the ta payer, s not sworn to, does not purport to be a cam for
refund, makes no menton of such cam and Is never recognzed
by the Commssoner as a cam, s not an nforma or forma cam
for refund wthn the meanng of secton 1324(a) of the Revenue
ct of 1921, whch provdes for the payment of Interest on refunds,
and a ater report by the audtors whch Incudes a the requre-
ments for a cam for refund can not be consdered as an amend-
ment of the frst report so as to vadate t as a suffcent cam.
2. Sut Interest on Refund Lmtaton.
Under secton 1324(a) of the Revenue ct of 1921 the date of
aowance of a cam for refund of a ta to whch nterest s pay-
abe s the date on whch the Commssoner sgns the schedue of
refunds and credts n respect thereof, on whch date a cam for
the nterest accrues, and a sut for such nterest commenced more
than s years after that date s barred by secton 1069, Revsed
Statutes.
Court of Cams of the Unted States. No. L-151.
Cogate-Pamove-Peet Co. (Successors to Peet ros. Manufacturng Co.) t.
The Unted States.
May 2, 1932.
OPINION.
Green, udge, devered the opnon of the court.
Ths s a sut to recover 23,940.07 aeged to be due as addtona nterest
upon a refund pad to pantff of ncome and profts ta es coected for the
fsca year endng September 30, 1918. The defendant sets up two defenses:
rst, that a the Interest due the pantff under the aw has been pad second
(n a suppementa bref), that the acton s barred by the statute of mta-
tons. Under the frst defense the case turns entrey upon the queston of
whether a certan audtors report upon pantff s ta es for sad year, whch
was presented to the Commssoner of Interna Revenue by the ta payer on
September 15, 1920. s to be treated as an nforma cam for refund and n-
terest aowed from s months after the date of fng such cam or whether
on the other hand no cam for refund, ether forma or nforma, was fed unt
December 20, 1922, when, through a further report of sad audtors, t was
stated to the Commssoner that the ta payer was entted to a refund. The
Commssoner hed that no refund cam was fed unt the date ast named
above, and foowng the appcabe provsons of the Revenue ct of 1921 a-
owed nterest begnnng wth a date s months after the cam under hs dec-
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1116, rt. 1371.
422
son had been fed. The pantff cams that nterest shoud have been a-
owed after s months from September 15, 1920.
We are of the opnon that the Commssoner was rght. The frst report
made by the audtors and whch, as rected above, was presented to the Com
mssoner of Interna Revenue was evdenty made for the purpose of showng
how the ta shoud be computed. It s true that ths report showed that the
ta payer had argey overpad ts ta es and that t was presented to the Com-
mssoner for the purpose of correctng what the ta payer camed to be an
error. ut t was not addressed to the Commssoner. It was addressed to the
ta payer and presented to the ta payer for such use as the ta payer mght see
ft. It dd not purport to be a cam for refund and made no menton of .such a
cam. Moreover, as we have found, the Commssoner never recognzed t as a
cam for refund. e may have made use of ths report n preparng the certf-
cate of overussessnent together wth the second report fed, as shown above,
December 20, 1922, In whch there was a cam that pantff was entted to a
refund. ut concedng that the Commssoner made such use of the frst report,
ths fact woud not make t a cam for a refund. Nor does the fact that refer-
ence was made thereafter n the correspondence between the partes to the frst
report as our cam by the ta payer and your cam by the Commssoner
make t a cam for a refund. The report dd set out a cam, but t was a
cam for certan deductons and aowances to be made n the computaton of
the ta and the word cam was evdenty used n that sense. The cam for
refund was frst made n the second report and nterest was aowed and pad
from s months after the date of ts presentaton. There s therefore nothng
more due the pantff.
Pantff seems to rey on the case of Mc enney v. Unted States (72 C. Cs..
195). In that case t appears that the Commssoner had aowed a refund and
that the ony bass for the aowance thereof was a certan document whch
the pantff n the case contended amounted to an nforma cam for refund.
Under the facts and crcumstances presented to the court the pantff s con-
tenton was sustaned, but we thnk the decson has no appcaton to the case
at bar. In that case the acton of the Commssoner of Interna Revenue was
hed n effect to recognze the document or nstrument as a cam for refund
and ths consttuted an mportant feature of the case. The court hed wth
reference to ths document that s (the Commssoner s) ony authorty for
aowng and payng the refund was the cam fed by the partnershp. In
the nstant case the Commssoner dd not make hs decson approvng a sched-
ue of overassessment wth reference to the ta es n controversy from whch
resuted the refund subsequenty pad to pantff, and upon whch addtona
nterest s now sought to be recovered, unt after the second report makng a
cam for refund had been fed. In fact he never recognzed the frst audtors
report as a cam for refund.
It s argued that the second audtors report, whch was duy sworn to by
authorzed attorneys and ncuded a the requrements for a cam for refund,
shoud be consdered as an amendment to the frst report made by the audtors
whch s referred to n argument as an nforma cam for a refund, but the
orgna statement of the audtors possessed none of the requrements for a
refund ether forma or nforma. Whe t was fed n the Commssoner s
offce, t was not even addressed to the Commssoner or the defendant, and t
was not sworn to. s we have shown above, there was nothng about t that
was n the nature of a cam for refund and, therefore, the second audtors
statement whch dd contan the cam for refund can not be consdered as an
amendment thereof.
Nor do we thnk the opnon n onwt Teer d Co. v. Unted State (283
U. S., 258 Ct. D. 334, C. . -, 328 ) sustans pantff s contenton. In that
case aso, the Commssoner hed that a communcaton from the ta payer
consttuted an Informa cam for refund and the court sad n substance that
such a rung n favor of the ta payer was entted to much weght. The facts
n that case and the aw appcabe thereto made t necessary for the ta payer
to fe a waver before t coud commence sut and the Supreme Court caed
attenton to ths fact, but ths has no appcaton to the tme wthn whch
pantff n the case at bar was requred to begn ts acton.
We are aso of the opnon that the second defense must be sustaned.
questons reatve to the nterest to whch pantff s entted are con-
troed by secton 1324(a) of the Revenue ct of 1921. The porton of ths
secton upon whch the queston ne t to be consdered turns reads as foows:
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423
1116, rt. 1371.
Sec. 1324. (a) That upon the aowance of a cam for the refund of or
credt for nterna revenue ta es pad, nterest sha be aowed and pad
from s months after the date of fng of such cam for refund or
credt.
It w be observed that under ths provson nterest s not pad, e cept upon
the aowance of a cam for refund, and when the refund s aowed then n-
terest s pad from s months after the date of fng such cam for refund or
credt. oth partes agree that a cam for refund was aowed. We hnk t
cear under the statute that whenever the cam for refund was aowed the
statute of mtatons began to run. The fndngs show that on March 15, 1024,
the Commssoner of Interna Revenue approved a schedue of overassessments
u favor of the pantff, whch was on March 28, 1924, sgned and returned
to the Commssoner by the coector of nterna revenue wth a schedue of
refunds and credts showng a baance of 106,455.01 refundabe. On pr
24 the Commssoner authorzed the cerk of the Treasury Department to Issue
a check for the amount so found to be refundabe, and on May 15, 1924, the
certfcate of overassessment and a Treasury check dated May 12, 1924, for the
amount found to be refundabe, 106,455.01, were maed to the pantff.
It shoud be kept n mnd that pantffs case s based upon the provsons
of the 1921 ct, and under ths statute an acton to recover nterest can ony
be mantaned upon the aowance of a cam for a refund or credt. There
s therefore no bass for pantffs sut uness a cam for a refund was aowed.
Counse for pantff concede that a cam was aowed, a concesson whch must
be made f the sut s to be mantaned. It s contended on behaf of the
defendant that the cam was aowed on pr 24, 1924, when the Comms-
soner of Interna Revenue sgned the schedue of overassessments, approved
the coector s acton pursuant to drectons appearng thereon, and authorzed
the dsbursng cerk of the Treasury to ssue a warrant for the amount so
determned to be refundabe. We thnk ths poston s sound and that pan-
tffs cause of acton arose when the refund was aowed. Ths sut was not
commenced unt pr 28, 1930. Not beng commenced wthn s years from
the tme the cause of acton accrued, the pantffs rght to recover s barred
under the genera statute of mtatons.
Counse for pantff refer n ther prnted bref to two etters whch It s
sad the Commssoner wrote the pantff. ased upon the statements con-
taned n one of them, t s contended that the certfcaton of overpayment
made on pr 24, 1924, dd not n fact reate to any cam, and that the cam
was not n fact aowed unt the certfcate of overassessment and check n
paymeut of the refund were devered to pantff on May 16, 1924. The con-
tents of these etters are not referred to In the fndngs made by the comms-
soner of ths court whch were accepted by the pantff, and the etters do
not appear to have been ntroduced u evdence. In any event, we thnk the
Commssoner s acton on pr 24, 1924, as shown by the fndngs and set out
above, amounted to an aowance of the cam whch had been prevousy made.
In Unted States v. Magnoa Petroeum Co. (276 U. S., 160 T. D. 4153, C. .
II-1, 287 ) the Supreme Court sad:
The date of aowance was October 11, 1923, when the Commssoner
approved the refunds. (Orard Trust Co. v. Unted States, 270 . S., 163, 169
T. D. 3919, C. . -2, 209 .) Under secton 1324(a), upon the aowance
of the refunds, respondent became entted to nterest accordng to the rue
then In force. (Cf. ar v. rkcnstock, 271 U. S., 348, 350.) Computaton
and payment were a that remaned to be done.
It s true that pantff had no knowedge of ths aowance unt neary a
month ater, but the perod of the statute of mtatons can not be ad|usted
to meet every sma varaton In the crcumstances to whch t appes. In ths
case, after recevng the check for refund and beng fuy advsed n the mat-
ter, the pantff had 5 years and 11 months n whch to brng sut.
or the reasons above stated the petton of the pantff must be dsmssed,
and t s so ordered.
rtce 1371: Interest on refunds and credts.
R NU CT O 1928.
The date on whch a credt s aowed. (See Ct. D. 568, page 359.)
160903 33 28
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1116, rt. 1371.
424
rtce 1371: Interest on refunds and credts. I-45-5839
Ct. D. 597
ncome ta revenue acts of 1921 and 1924 decson op cocrt.
1. Interest Refund ob Cbedt Cam Suffcency.
Where the cam for a refund of or credt for a ta pad makes
nff menton whatever of the ta abe perod for whch the ta a
camed to have been overpad, t does not consttute a cam for a
refund of or credt for a ta for that perod and there can there-
fore be no aowance of the cam whch s essenta to the aow-
ance of nterest, under secton 1324(a) of the Revenue ct of
1921, on a refund or credt aowed under that ct.
2. Same Iega owance of Refund oe Credt.
The aowance of a credt or refund of a ta after the statutory
perod for the aowance of the same wthout the fng of a cam
therefor s ega and therefore no nterest s aowabe under sec-
ton 1010 of the Revenue ct of 1924 on a refund or credt so
aowed under that ct.
Court of Cams of the Unted States.
Wmngton Trust Co., dmnstrator C. T. . of the state of amton If.
arksdae, Deceased, v. The Unted States.
uy 5, 1932.
OPINION.
Green, udge, devered the opnon of the court.
The Wmngton Trust Co. Is the admnstrator, wth the w anne ed, of the
estate of amton M. arksdae, deceased, and seeks to recover nterest under
secton 1019 of the Revenue ct of une 2, 1924, on 21,918.43, beng the amount
of an overpayment by the estate n respect of ts ncome for the ta abe perod
October 18 to December 31, 1918, subsequent to arksdae s death 20,843.42
of ths overpayment was credted by the Commssoner aganst a part of a def-
cency for 1915. The baance of 1,075.01 was refunded by Treasury check dated
Septembe 11, 1924.
Pantff bases ts cam on the aegaton that the credt and refund were
aowed wthn the meanng of the Revenue cts on ugust 28, 1924, when
the Commssoner rested the amounts on a suppementa schedue of
refunds and credts after ths tem, numbered 5, had been deeted from a
prevous schedue of refunds and credts contanng entres wth respect to over-
payments by a number of ta payers whch had been approved by the Com-
mssoner May 27, 1924. Inasmuch as the date, ugust 28, 1924, was after the
e praton of the perod of mtaton wthn whch the Commssoner coud
egay aow an overpayment for the ta abe perod, October 18 to December
81, 1918, and credt or refund the same, pantff contends that the cam for
credt fed March 9, 1922, was suffcent authorty for the Commssoner s
aowance beyond the statute of mtaton and that the Commssoner n fact
aowed the credt and refund for ths ta abe perod on the bass of the cam
for credt fed.
Counse for the defendant resst pantff s cam for nterest on the ground,
frst, that the cam for credt fed March 9, 1922, was not a cam for credt
for the ta abe perod October 18 to December 31, 1918, nasmuch as t made
no menton whatever of any overpayment for ths perod that the cam specf-
cay and defntey reated to an overpayment of 56,107.56 pad In nstaments
on March 15, une 15, September 15, and December 15, 1919, and on uy 30,
1920, wth respect to the ta on the ncome of the decedent, arksdae, for the
perod pror to hs death, anuary 1 to October 18, 1918, and an overpayment
of 47,832.58 on anuary 13, 1920, wth respect to the ta on the ncome of
the estate of arksdae for the year 1919 second, that If the credt of 20,843.42
and the refund of 1,075.01 were aowed by the Commssoner on ugust 28,
1924, when he rested these tems on a suppementa schedue, such aowance
was beyond the perod of mtaton wthn whch he coud aow a credt or
refund wthout a cam and was therefore ega, snce the cam for credt
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425
1118, rt. 1391
fed by pantff was not a cam wth respect to the overpayment for the perod
October IS to December 31, 1918, on whch nterest s camed.
We are of opnon that the defendant s correct n ts contenton that pan-
tff fed no cam for credt wth respect to the overpayment for the perod
October 18 to December 31, 1918, on whch nterest s camed. The cam for
credt reed upon by pantff set forth that an addtona ta of 108,155.90
ha been assessed for 1915 and camed a credt aganst that amount of 103,-
940.14. The overpayments, for whch credt was camed, were payments tota-
ng 56,107.56 made on March 15, une 15, September 15, and December 15, 1919,
and on uy 30, 1920, n respect of the ta on the Income of the decedent pror
to bs death for the perod from anuary 1 to October 18, 1918, and the pay-
ment of 47,832.58 made anuary 13, 1920, wth respect to the ta on the ncome
of the estate of arksdae for the year 1919. No menton whatever was made by
pantff n the cam wth respect to any overpayment for the ta abe perod
October 18 to December 31, 1918, and the tota amount camed as a credt dd
not ncude any amount wth respect to the ta pad for that perod. The docu-
ment fed therefore gave the pantff no greater rghts wth respect to any
overpayment for the perod endng December 31,1918, than f the cam had not
been made. When the cam for credt was receved by the Commssoner
sera No. 332708 was paced thereon. In the course of hs audts the Com-
mssoner determned overassessments for the ta abe perod anuary 1 to
October 18, 1918, the ta abe perod October 18 to December 31, 1918, and for
the ta abe year 1919. When the overassessments for the two ta abe perods
n 1918 were entered upon the schedue of overassessments, approved ebruary
8, 1924, and upon the orgna and suppementa schedue of refunds and credts,
the number paced by the ureau on the cam for credt was entered n co-
umn 2 under the headng Certfcate of overassessment or cam number.
Pantff nssts, therefore, that by pacng the sera number of the cam fed
opposte the overassessment for the perod October 18 to December 31, 1918,
as shown on the schedue of overassessments, the Commssoner treated the
cam fed as a cam for credt for the ta abe perod October 18 to December
31, 1918. The contents of the cam fed, however, show very pany that t
had no reference to the perod endng December 31, 1918, and the mere fact
that n the preparaton of the schedues the sera number gven to the cam
fed was entered on the schedues opposte the entry of the assessment for the
perod nvoved, as we as the overassessment for the perod anuary 1 to
October 18, 1918, for whch the cam was ted, does not estabsh that the
Commssoner treated t as a cam for the perod endng December 31, 1918,
nor do we thnk that such a notaton under the crcumstances woud be bndng
on the Government, snce the cam dd not purport to be for the perod October
18 to December 31, 1918.
In vew of our concuson that no cam for credt was fed wth respect to
the ta abe perod nvoved, It s not necessary to dscuss the queston whether
the credt of 20,843.42 and the refund of 1,075.01 were aowed on May 27,
1924, when the Commssoner sgned the orgna schedue of refunds and
credts, or on ugust 28, 1924, when he sgned a suppementa schedue. If the
aowance was made May 27, 1924, the Revenue ct of 1921 was then n force,
and no nterest woud be payabe under secton 1324 of that ct uness a cam
was fed therefor and aowed. If the aowance was made ugust 28, 1924,
whch was after the 1924 ct went nto force, no nterest may be recovered
for the reason that on that date the aowance was barred by the statute of
mtaton.
The petton must be dsmssed. It s so ordered.
S CTION 1118. P YM NT O ND C IPTS
OR T S.
rtce 1391: Payment of ta by Treasury cer- I-33-5617
tfcates of ndebtedness and Treasury notes. T. D. 4347
INCOM T .
cceptance of Treasury certfcates of ndebtedness and Treasury
notes n payment of ncome and profts ta es. rtce 1391, Regu-
atons 69, and artce 1392, Reguatons 69, amended.
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51208.
426
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 1391 of Reguatons 69, approved ugust 28,1926, s hereby
amended to read as foows:
rt. 1391. cceptance of Treasury certfcates of ndebtedness and Treasury
notes n payment of ncome and profts ta es. Coectors of Interna revenue
are authorzed and drected to receve, at par, n payment of ncome and
profts ta es payabe at the maturty of the certfcates or notes, respectvey.
Treasury certfcates of ndebtedness and Treasury notes, the maturty dates
of whch are the 15th day of any caendar month, and whch accordng to the
e press terms of ther ssue are made acceptabe n payment of ncome and
profts ta es. Coectors are not authorzed hereunder to receve n payment
of Income and profts ta es any Treasury certfcates of Indebtedness or Treas-
ury notes not e pressed to be acceptabe n payment of ncome or profts ta es,
nor any such certfcates or notes whch mature on a date other than the date
on whch the ta es are payabe. When the ta es are due on Sunday, the cer-
tfcates or notes n payment thereof may be accepted on the foowng day.
Coectors are authorzed to receve Treasury certfcates of ndebtedness and
Treasury notes whch are acceptabe as heren provded n payment of Income
and profts ta es n advance of the respectve ta -payment dates. nterest
coupons attached to Treasury certfcates of ndebtedness and Treasury notea
must be detached by the ta payer before presentaton to the coector and co-
ected n ordnary course when due. Recepts gven by coectors to ta payers
shoud show the amount and descrpton of the certfcates or notes receved
In payment of ta es. The amount, at par, of Treasury certfcates of ndebted-
ness or Treasury notes presented by any ta payer n payment of ncome and
profts ta es must not e ceed the amount of the ta es to be pad by hm, and
coectors sha n no case pay nterest on the certfcates or notes, or accept
them for an amount ess or greater than ther face vaue.
rtce 1392: Procedure wth respect to Treasury I-33-6618
certfcates of ndebtedness and Treasury notes. T. D. 4347

Ta payer entted to benefts of secton 212(d), Revenue ct of
1926, eectng to report 1917 ncome on nstament bass. (See Ct.
D. 587, page 214.)
TITL II. G N R L PRO ISIONS.
S CTION 1208. INST LLM NT S L S.
Secton 1208.
R NU CT O 1926.
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ST T T RULINGS.
TITL III. ST T T . (1926)
CR DITS G INST ST T T .
Reguatons 70(1929), ktce 9(a): Credt for I-40-5761
estate, nhertance, egacy, or successon ta es. Mm. 3971
state ta . Credt for estate, nhertance, egacy, or successon
ta es pad any State, Terrtory, or the Dstrct of Coumba.
rtce 9(a), Reguatons 70 (1929 edton), as amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, ugust , 1932.
Coectors of Interna Revenue, Interna Revenue gents n Charge,
and Others Concerned:
In vew of the decson of the Unted States Supreme Court n the
case of the rst Natona ank of oston v. State of Mane (52 S.
Ct., 174), the foowng nstructons are ssued reatve to credt
aganst the edera estate ta on account of State estate, nhertance,
egacy, or successon ta es:
1. No credt w be aowed the estate of a decedent who was a
resdent of the Unted States for such ta es pad after the date of
the decson, anuary 4, 1932, wth respect to ntangbe property to
a State other than that of decedent s domce.
2. No credt w be aowed the estate of a decedent who was a
nonresdent of the Unted States for such ta es pad after the date
of the decson, anuary 4, 1932, wth respect to ntangbe property
to a State other than the State wthn whch the property had ts
ega stus.
3. If such ta es were pad pror to that date, the credt may be
aowed f the estate submts evdence suffcent, n the opnon of
the ureau, to show that no refund whch w affect the amount of
such ta es can be made. The ureau w consder any evdence sub-
mtted but such evdence may ncude the foowng:
(a) Statement of the proper State offca contanng such n-
formaton as he s abe to gve reatve to any possbe refund n-
cudngapproprate reference to the setted pocy.
(b) ecutor s affdavt showng whether, to hs best knowedge,
nformaton, and beef, any refund can be made n vew of such
edera decson. The affdavt shoud specfcay refer to the dec-
son and shoud state whether, f a refund s made, any estate ta
due the edera Government as a resut of such refund w be pad.
(427)
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Regs. 70(1929), rt. 16(1). 428
(c) vdence of the e stence of any aw of the State of dece-
dent s domce mposng an estate ta desgned to gve the State
the beneft of the ma mum credt aowabe under the appcabe
Revenue ct, so that, f a refund of the ta pad to another State
was made, the amount woud be pad to the State of the domce.
Ths evdence may consst of a statement of the proper ta offca
n whch there s set forth the practce, and n whch there are aso
6et forth the vews of such offca on the queston as to whether
the State woud have the rght to reopen the case, or whether t
mght be barred by mtaton provsons or any other reason.
Correspondence n regard to the procedure outned heren shoud
refer to the number of ths mmeograph and the symbos MT- T.
Davd urnet, Commssoner.
TR NS RS Y D C D NT IN IS LI TIM .
Reguatons 70(1929), rtce 16(1): Transfers I-36-5671
made n contempaton of death. Ct. D. 556
ST T T R NU CT O 1926 D CISION O COURT.
Transfers n Contempaton of Death.
Where a decedent at an advanced age sustans a stroke of
parayss whe sufferng from other nfrmtes and In that con-
dton makes transfers of hs property whch are practcay
contemporaneous and cosey connected wth the e ecuton of hs
w, the transfers are made n contempaton of death wthn the
meanng of secton 302(c) of the Revenue ct of 1926, athough
he contempated makng the transfers a consderabe tme before
they were made.
Unted States Dstrct Court, Dstrct of Mnnesota, fth Dvson.
ctor . nnekc, pantff, v. Lev M. Wft uts, Indvduay and at Coector
of Interna Revenue for the Dstrct of Mnnesota, defendant.
uy 16, 1932.
opnon.
Cant, Dstrct udge: The underyng and controng queston n ths case Is
whether the transfers by the deceased, upon whch the dsputed ta was
computed, were made n contempaton of death. Wthout gong nto an
e haustve dscusson of the evdence, pro and con, upon ths queston, or of
the authortes whch throw ght thereon, the court s of the opnon that
It s practcay compeed to hod wth the defendant. The stroke whch Mr.
nneke had sustaned, hs other nfrmtes, and hs rather advanced age,
a warned hm that, whe death mght not be mmnent, st, n the ord-
nary course of nature, t mght occur at any tme, and coud not ong be
deayed. gan, the fact that the transfers here nvoved were practcay
contemporaneous and cosey connected wth the e ecuton of Mr. nneke s
w, makes It dffcut, f not Impossbe, to reach any other concuson than
that, taken together, they were a of a testamentary character. The fact
that, for a consderabe tme before the transfers were made, the deceased
had contempated the makng thereof, s not especay persuasve, one way
or the other. The queston s what must be sad of them, havng n mnd the
crcumstances under whch they were fnay made
In any case where the evdence s substantay the same as here, the court
woud be bound to fnd that, wthn the meanng of the aw, the transfers
were made n contempaton of death. In anaogous cases, the authortes
so decare, and, as an orgna queston, f t were such, the court woud not
be free to hod otherwse.
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429
Regs. 70, rt. 10|
Reguatons 70(1929), rtce 16(2): Transfers I-30-5573
not admtted to have been made n contempa- T. D. 4340
ton of death.
ST T T .
rtces 16 and 20 of Reguatons 70 (1929 edton) amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To Coectors of Interna Revenue and Others Concerned:
Subdvson (2) of the second paragraph of artce 16, Reguatons
70 (1929 edton), approved March 23, 1929, s hereby amended to
read as foows:
(2) Transfers not admtted to have oeen made n contempaton of death.
The e ecutor s requred to dscose n the return a transfers made by the
decedent subsequent to September 8, 1916, of an amount or vaue of 5,000, or
more. ny such transfer made wthn two years of the decedent s death, but
before the effectve date of the Revenue ct of 1926, and consttutng a matera
part of decedent s property and n the nature of a fna dsposton or dstr-
buton thereof, s deemed to have been made n contempaton of death wthn
the meanng of the statute. Where the e ecutor contends that the transfer
was not made n contempaton of death he must fe wth the return sworn
statements, n dupcate, of a the matera facts, ncudng, among other thngs,
the decedent s motve n makng the transfers and hs menta and physca
condton at that tme, and one copy of the death certfcate.
Reguatons 70(1929), rtce 20: Power ren- I-30-5574
qushed n contempaton of death. T. D. 4340

rtce 20 of Reguatons 70 (1929 edton), approved March 23,
1929, s hereby amended to read as foows:
rt. 20. Power renqushed n contempaton of death. Where property was
transferred by the decedent, who reserved a power to ater, amend, or revoke
the transfer, and such power was renqushed n contempaton of death, the
vaue of the property shoud be ncuded n the gross estate. (See artce 16.)
Davd urnet,
Commssoner of Interna Revenue.
pproved uy 15, 1932.
Ogden L. Ms,
Secretary of the Treasury.
TITL n. P RT I. ST T T . (1924)
Reguatons 70, rtce 10: Character of nter- I-46-5863
ests ncuded. Ct.D.599
estate ta revenue act of 1d24 decson of court.
1. Gross state Consttutonaty.
Secton 302(a) of the Revenue ct of 1924 as construed by the
Supreme Court n Crooks v. aneson et a. (Ct. D. 271, C. . -,
469) s consttutona.
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Regs. 70, rt. 10.
2. Gross state Rea state Located n Inos.
The vaue of the nterest of a decedent at the tme of hs death
n rea estate ocated n Inos shoud be ncuded n determnng
the vaue of hs gross estate under secton 302(a) of the Revenue
ct of 1024.
Dstrct Court op the Unted States, Northern Dstrct of Inos, asteb
Dvson.
No. 39477. Contnenta Inos ank Trust Co., etc., v. Unted States.
No. 39375. The Northern Trust Co. and dtcard . ennett, etc., v. Unted
States.
No. 39546. Wam P. Dean, etc., v. Unted States.
uy 22, 1932.
OPINION.
Woodward, Dstrct udge: These causes were submtted to the court for
tra wthout a |ury on stpuatons as to the facts.
In each case sut s brought to recover a ta pad under the estate ta aw of
1924. The facts, so far as matera to a determnaton of the ssues Invoved,
are brefy as foows:
Lawson state: ctor . Lawson ded testate ugust 19, 1925, a resdent of
Cook County, 111. The return for the estate ta was fed ugust 19, 1926.
It showed rea estate n Inos vaued at 778,542.68 and rea estate n Ws-
consn vaued at 484,500 and other property whch, wth the rea estate, made
a gross estate vaued at 21,559,940.78. Deductons amounted to 15,397,133.12
eavng a net estate of 6,162,807.66 on whch a ta of 655,546.15 was pad on
ugust 19, 1926. Subsequenty on demand a defcency amountng to the sum of
18,612.55 and nterest was pad on une 30, 1928. Incuded n the gross estate
was an undvded one-thrd nterest n what s known as the Iver Lawson
property vaued at 225,922.31 on whch a ta of 8,472.09 was pad.
ennett state: Catherne ennett ded testate May 21, 1925, a resdent of
Cook County. III. The decedent eft a gross estate of 940,802.20, of whch
170,000 conssted of rea estate. Deductons amounted to 384,313.40, eavng
a net estate of 556,488.80 on whch a ta of 14,917 was pad. Thereafter a
defcency was demanded and pad amountng to 2,555.16.
assett state: Robert . assett ded testate anuary 22, 1926, a resdent of
Cook County, 111. Decedent eft rea estate n Inos of the vaue of 358,277.28
and a gross estate of 361,992.05. Deductons amountng to 52,150 eft a net
estate for the purpose of ta aton of 309,842.05. n estate ta of 5,920.26
was pad.
The frst contenton made by pantffs s that secton 302(a) of the Revenue
ct of 1924, as construed by the Supreme Court n Crooks v. arreson (282
U. S., 55 Ct. D. 271, C. . -, 469 ), s unconsttutona and vod. The court
n the argument at the bar stated that t woud hod secton 302(a) of the
Revenue ct of 1924 to be a consttutona enactment. The court, therefore,
wthout further argument passes over ths contenton and hods the secton
referred to to be a vad enactment. It s then contended, and ths contenton
Is common to a three cases, that under the hodng of the Supreme Court n
the case of Crooks v. arreson, supra, rea estate of a decedent stuated n
Inos shoud not be ncuded n the gross estate of the decedent n computng
the edera estate ta . In the ease of Crooks v. arreson, supra, construng
secton 302(a) of the Revenue ct of 1924, the court hed that the nterest of
the decedent to be ncuded n the gross estate must be sub|ect to the payment
of charges aganst the decedent s estate, sub|ect to the payment of the e penses
of admnstraton and sub|ect to dstrbuton as a part of the decedent s estate.
That case Invoved the queston of whether rea estate stuated n Mssour
shoud be ncuded n the gross estate of the decedent. Under the aw of
Mssour as construed by the court, rea estate coud not be sod for the purpose
of payng admnstraton e penses and that even where rea estate has been
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43
Regs. 70, rt. 10|
sod to Day the debts of the decedent, the proceeds of such sae may not bo
apped n payment of admnstraton e penses.
The Inos aw, however, s materay dfferent from that of Mssour. In
Inos, n case the personaty s nsuffcent to pay the debts of the decedent,
decedent s rea estate may be sod to pay such debts and aso the cost of admn-
straton and the proceeds from the sae of the and are apped n payment of
the debts and of the admnstraton e penses. The Inos aw (paragraph 98,
ch. 3, Caaghan s Inos Statute) provdes:
When the e ecutor or admnstrator has made a |ust and true account of
the persona estate and debts to the county court, and t s ascertaned that the
persona estate of a decedent s nsuffcent to pay the |ust cams aganst hs
estate, and there s rea estate to whch such decedent had cam or tte, such
rea estate, or such porton as may be necessary to satsfy the ndebtedness of
such decedent, and the e penses of admnstraton, may be sod n the manner
heren provded.
Three cases, namey, Waker v. Deh (79 111., 473), tzgerad v. Cancy (49
111., 465). and Darmon v. Tost (13 111., 127), hod that rea estate n Inos may
not be sod merey to pay e penses of admnstraton where there are no cams
aganst the estate. Where, however, there are cams aganst the estate and
the personaty Is not suffcent to pay the cams, rea estate may be sod for
the payment of those cams and for the payment of the e penses of admn-
straton. Where there s a defcency of personaty to meet the cams, the
purpose of seng the and s as much to pay admnstraton e penses as t Is
to pay cams aganst the estate. The court hods, therefore, that the vaue of
the rea estate stuated n Inos was propery ncuded as a part of the gross
estate for the purpose of the estate ta n each of the cases now under consder-
aton and that the acton can not be mantaned to recover any part of the
ta es propery aocated to such rea estate.
It was aso contended n the Lawson estate that the vaue of the and n
Wsconsn was mpropery ncuded n the gross estate of the decedent. Ths
contenton has been abandoned.
The Supreme Court of Inos n the case of Lno on v. Inos Merchants
Trust Co. (337 111., 49) hed that the undvded one-thrd nterest of the
decedent ctor . Lawson n the Iver Lawson property dd not pass to the
decedent but passed to decedent s brother. The vaue of ths property, there-
fore, was mpropery ncuded as a part of the gross vaue of the I/nvson estate.
The ta es pad n the Lawson estate on account of the Iver Lawson property
may be recovered.
In No. 39477 the court fnds the Issues for the pantff n the sum of
8,472.09 wth nterest thereon at the rate of 6 per cent per annum from an-
uary 30, 1928, pus a proper proportonate amount of addtona nterest of
1,514.50 whch was pad on anuary 30, 1928. Counse for pantff w make
the computatons n order that a |udgment may be entered for the correct sum.
In No. 39375 the court fnds the ssues for the defendant.
In No. 39540 the court fnds the ssues for the defendant.
TITL I . ST T T . (1921)
Reguatons 70, rtce 10: Character of nter- I-46-5864
ests ncuded. Ct. D. 600
ST T T R NU CT O 1921 D CISION O COU T.
Gross state Rea state Located n Nebraska and Iowa.
The vaue of the nterest of a decedent at the tme of hs death
n rea estate ocated n Nebraska and the vaue of hs Interest at
(he tme of hs death n rea estate ocated n Iowa shoud be
ncuded n determnng the vaue of hs gross estate under secton
402(a) of the Revenue ct of 1921.
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Regs. 70, rt. 10.
432
Unted States Crcut Coubt op ppeas, ghth Cbcott.
rst Trust Co. of Omaha, Wam W. oagan , rank P. Doo tte, ecutors
of the state of George . oagand, Deceased, appeants, v. . . en,
Coector of Interna Revenue for the Dstrct of Nebraska, appeee.
ppea from the Dstrct Court of the Unted States for the Dstrct of Nebraska.
uy 29, 1932.
ooth, Crcut udge, devered the opnon of the court.
Ths s an appea from a |udgment n so far as t dened recovery by appe-
ants (pantffs beow) of a refund of certan moneys aeged to have been
wrongfuy coected from them by the Commssoner of Interna Revenue as
part of the edera estate ta aganst the estate of George . oagand,
deceased.
The saent facts are as foows: Pantffs beow were the e ecutors of the
w of George . oagand, deceased, and as such e ecutors commenced the
present acton. fter the cause was odged n ths court, the rst Trust Co.
of Omaha was egay dssoved, and Wam W. oagand ded. y eave of
court, the appea s now beng prosecuted n the name of rank P. Dootte as
soe survvng e ecutor.
George . oagand, a wdower and resdent of Omaha, Nebr., ded testate
on December 6, 1923. s e ecutors duy fed wth the Commssoner of Inter-
na Revenue n edera estate ta return showng a ta due of 212,843.70,
whch was pad December 2, 1924.
fter an audt and revew, the Commssoner determned the rea and persona
property of decedent s estate to be of the vaues foowng:
Persona property 1, 297. 756.64
Rea estate n Nebraska 1, 536. 789.43
Rea estate n Iowa 18.100.00
Rea estate n Mssour 2, 000.00
The Commssoner determned a defcency n the ta pad of 46,691.68. whch
sum the e ecutors pad. Thereafter, they duy fed wth the coector of
Interna revenue (appeee heren) a cam for refund contanng severa tems
one of them beng based on the ground that the vaue of the rea property n
the States of Nebraska, Iowa, and Mssour was erroneousy Incuded n de-
cedent s gross estate under the provsons of the Revenue ct of 1921 (42 Stat-
227, 277-280). It was not camed that the vauaton paced upon the rea
property by the Commssoner was ncorrect The Commssoner re|ected so
much of the cam for refund as was based upon the aeged erroneous ncuson
In the gross estate of the vaue of the rea property above mentoned.
The present sut foowed.
The compant aeged the foregong facts n substance and aso aeged that
the decedent, at the tme of hs death, was the owner of persona property, the
vaue of whch greaty e ceeded the amount of a charges aganst the estate
and the e penses of admnstraton.
The answer admtted substantay a the foregong facts but aeged n
substance that n vew of the statutes of the States of Nebraska and Iowa, de-
cedent s rea property n those States was, at the date of decedent s death,
sub|ect to the payment of charges aganst the estate, and the e penses of ad-
mnstraton, and sub|ect to dstrbuton as part of the estate that, therefore,
the vaue of sad rea property was propery ncuded In the gross estate of
decedent. It was admtted n the answer that pantffs were entted to recover
so much of the ta as was based upon the Incuson In the gross estate of the
vaue of the rea property In Mssour.
Demurrer was nterposed to the answer. The dstrct court sustaned pan-
tffs demurrer n part, hodng that the vaue of the rea property of the de-
cedent ocated In Mssour was unawfuy ncuded In hs gross estate: but
overrued the demurrer n part, hodng that the vaue of the rea property
ocated n Nebraska and Iowa was awfuy ncuded In hs gross estate.
Pantffs eected to stand upon ther petton and demurrer, and the court
thereupon granted |udgment on ugust 13, 1931, to the pantffs for 280, wt
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433
Regs, 70, rt. 10.
nterest from September 26, 1925, on account of the erroneous Incuson n de-
cedent s gross estate of the vaue of the rea property stuated n Mssour, and
granted |udgment to the defendant aganst pantffs dsmssng ther petton
so far as t aeged that the vaue of the rea property n Nebraska and Iowa
was erroneousy Incuded.
Pantffs have appeaed to ths court from the |udgment n so far as t
dened them the recovery of any sum n e cess of 280 wth Interest thereon.
The defendant has fed no cross appea from the |udgment for 280 n favor
of the pantffs.
The soe queston presented s, Was the vaue of rea property stuate n the
States of Nebraska and Iowa, beongng to the decedent, George . oagand,
at the tme of hs death, whch occurred on December 6, 1923, propery Incuded
n the gross estate of sad decedent for the purposes of the edera estate ta ,
under the provsons of secton 402(a) of the Revenue ct of 1921
The reevant porton of the secton of the statutes referred to reads as
foows:
Sec. 402. That the vaue of the gross estate of the decedent sha be deter-
mned by ncudng the vaue at the tme of hs death of a property, rea or
persona, tangbe or Intangbe, wherever stuated
(a) To the e tent of the nterest theren of the decedent at the tme of hs
death whch after hs death Is sub|ect to the payment of the charges aganst hs
estate and the e penses of ts admnstraton and s sub|ect to dstrbuton as
part of hs estate.
In the case of Crooks v. arreson (282 U. S., 55 Ct. D. 271, C. . -, 469
(affrmng 35 . (2d), 416)), the Supreme Court had occason to construe secton
402(a) of the Revenue ct of 1918, whch s dentca n anguage wth secton
402(a) of the Revenue ct of 1921 the one here nvoved. In Its opnon the
Supreme Court sad (page 58) :
The meanng of the provson n queston, consdered by Itsef, does not
seem to us to be doubtfu. The vaue of the nterest of the decedent s not to
be ncuded uness t s sub|ect to the payment of the charges aganst hs
estate and the e penses of ts admnstraton not one or the other, but both.
We fnd nothng n the conte t or n other provsons of the statute whch
warrants the concuson that the word and was used otherwse than n ts
ordnary sense and to construe the cause as though t sad, to the payment
of charges and e penses, or ether of them, as pettoner seems to contend,
woud be to add a matera eement to the requrement, and thereby to create,
not to e pound, a provson of aw. Nor w t do to say that the words,
charges aganst hs estate, ncude e penses of admnstraton, for pany
they are dfferent and dstnct thngs, generay so cassfed n the settement
of estates of decedents, and so regarded by Congress, as evdenced by the
dscrmnatng terms of the statute.
fter ctng and quotng from the case of Unted States v. ed (255 U. S.,
257), the court further sad (page 59) :
It seems cear enough that the ed case s decsve of the queston and
requres us to hod that f the vaue of the nterest of the decedent now beng
consdered s not sub|ect, under the aw of Mssour, to the e penses of admn-
straton, t forms no part of the gross estate for the purpose of the edera
estate ta .
s respects the case at bar, nothng further need be sad as to the proper
constructon of secton 402(a) of the Revenue ct of 1921.
We turn to the nqury whether, under the aw of Nebraska, the vaue of the
nterest of decedent n the rea pro erty owned by hm In that State at the
tme of hs death was sub|ect to the e penses of admnstraton, t beng con-
ceded that t was sub|ect to the payment of charges aganst the estate and
sub|ect to dstrbuton as part of the estate.
It s conceded that at common aw, rea estate can not be sod to pay e -
penses of admnstraton and that the rue of the common aw s n effect n
Nebraska uness changed by statute.
There are a number of statutory provsons In Nebraska havng a more or
ess drect bearng upon the queston here nvoved.
Secton 30-233, Comped Statutes of Nebraska, 1929, contans the foowng
anguage:
The estate, rea or persona, gven by w to any devsees or egatees, sha
be hed abe to the payment of the debts, e penses of admnstraton, and
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Regs. 70, rt. 10.
434
famy e penses, In proporton to the amount of the severa devses or
egaces .
Secton 30-405 provdes n part as foows:
|f tne gO0(|S chattes, rghts and credts n the hands of the e ecu-
tor or admnstrator sha not be suffcent to pay the debts of the deceased,
and the e penses of admnstraton, the whoe of hs rea estate, e cept the
wdow s dower, or so much thereof as may be necessary, may be sod for that
purpose by the e ecutor or admnstrator .
Secton 30 106 reads:
The e ecutor or admnstrator sha have a rght to the possesson of a
the rea as we as the persona estate of the deceased, and may receve the
rents, ssues and profts of the rea estate, unt the estate sha have been
setted, or unt devered over, by order of the county court, to the hers or
devsees, and sha keep n good tenantabe repar a houses, budngs, and
fences thereon whch are under hs contro.
Secton 30-413 provdes:
ny rea estate so hed by an e ecutor or admnstrator, or whch may be
purchased by hm as such, upon a sae on e ecuton for the recovery of a debt
due the estate, may be sod for the payment of debts or egaces and the
charges of admnstraton, n the same manner as f the deceased had ded
Sezed thereof .
Secton 30-1101 provdes:
When the persona estate of any deceased person, n the hands of hs e ecu-
tors or admnstrators, sha be nsuffcent to pay a hs debts, wth the
charges of admnsterng hs estate, such e ecutors or admnstrators may se
hs rea estate for that purpose .
Secton 30-1109 provdes:
The proceeds of any rea estate sod for the payment of debts, and charges
of admnstraton, as provded n ths artce, sha be deemed assets n the
bands of the e ecutor or admnstrator, In ke manner as f the same had been
orgnay part of the goods and chattes of the deceased .
No decson of the Supreme Court of the State of Nebraska has been cted
as hodng drecty that rea estate may be sod under the foregong statutory
provsons to pay e penses of admnstraton but the anguage of the statutes
pany ndcates that ths may be done. urthermore, severa decsons of the
Supreme Court of Nebraska nferentay, at east, ead to the same concuson.
In e ander v. e ander (41 N. 1065 (Nebr.)), t was hed that an
her or devsee can not mantan an acton for partton unt the debts, aow-
ances and e penses aganst tho estate have been pad or provded for, uness
a bond be gven to pay the same.
In Reckewcy v. Watemath (44 N. W., 659 (Nebr.)), the court referred to
the e ander case as foows:
In e ander v. e ander (41 N. W. Rep., 1065), ths court hed that an
her or devsee of an estate can not mafnton an acton of dstrbuton or
partton unt the debts, aowances, and e penses aganst the estate have been
pad or provded for, uness he gve a bond, wth approved suretes, to pay the
same. Ths, we thnk, s a correct statement of the aw, as ony the resdue
of an estate that remans after the debts and e penses aganst the estate have
been pad w pass to the devsees or hers.
Marke v. Marke (232 N. W., 770 (Nebr.)) foows the e ander and
Reckewey cases.
In re Mer (131 N. W., 226 (Nebr.)) e pressy recognzes that rea estate
n Nebraska owned by a resdent who des ntestate, descends sub|ect to the
debts and funera e penses of the decedent.
In en v. enggeer (32 . (2d), CO Ct. I ). 92, C. . III-2, 387 ), the
queston Invoved was whether a wdow s one-thrd nterest n the rea estate
of her deceased husband was abe to the edera estate ta . Ths court, n
dscussng the character of the one-thrd nterest of the wdow, sad (page 71):
The wfe s Interest In both rea and persona property s sub|ect, frst, to
the payment of the debts of the husband s estate, whch Incudes the cost of
admnstraton.
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435
Regs. 70, rt. 10.
s opposed to the foregong eases, appeants cte Cooey v. ansen (74 N. W.,
S91 (Nebr.)) Schck v. M htcomb (94 N. W, 1023 (Nebr.)) ughe v. Lang-
don (199 N. W., 832 (Nebr.)).
In the Cooey ease, the decedent at the tme of hs denth was sezed of certan
ands whch were occuped as a homestead. The queston nvoved was whether
the admnstrator had the rght to take possesson and ease the ands. The
court hed n the negatve and sad (page 392) :
The and n sut descended to the wfe and hers shorn of any abty for
the debts of the deceased, and the admnstrator had no rght of possesson,
or other rght thereto or theren .
In the Schck case, one of severa |ont devsees brought sut for partton
aganst an e ecutor and the other devsees. The tme for fng cams had
e pred, but there had been no settement of the estate. It was contended
that the sut was premature and the e ander case, supra, was cted. The
court dstngushed the case, sayng (page 1026) :
There s nothng n that case nconsstent wth the vews herenbefore e -
pressed, but we do not consder t drecty n pont on the precse queston
under dscusson. There the petton contaned no aegaton whatever n
regard to the sovency of the estate, or of the suffcency of the persona assets
to meet the charges whch the statute requres to be pad or provded for
before a dvson or partton of the estate can be had. ut n ths
case the sovency of the estate, as we as the suffcency of the persona assets
to pay the debts aganst t, are aeged n the petton and concusvey estab-
shed by the evdence. The dstncton between the two cases, to our mnds,
Is cear.
ughes v. Langdon, supra, nvoved a sut upon a guardan s bond, and the
questons dscussed were, who was the person entted to brng such acton,
and whether the statute of mtatons had run. We fa to see that the case
has any appcaton to the one at bar.
Our concuson on ths branch of the case s, n vew of the provsons of
the Nebraska statutes, and n vew of the hodngs n the e ander, Reckewey,
Mer and Marke cases, supra, that the vaue of the nterest of the decedent
oagand n the rea property owned by hm n Nebraska was sub|ect to the
e penses of admnstraton. The vaue of such nterest, therefore, was propery
Incuded In the vaue of the gross estate for the purpose of the edera estate
ta .
The queston as to the Iowa ands depends, of course, upon the Iowa statutes
and the decsons of the State supreme court of that State. It s conceded that
the common aw e sts n Iowa e cept as modfed by statute. The reevant
statutes are found n the Code of Iowa, 1924, and are as foows:
11933. Sae or mortgage of rea estate appcaton. If the persona effects
are found nadequate to satsfy the debts and charges, a suffcent porton of
the rea estate may be ordered sod or mortgaged for that purpose, appcaton
therefor beng made n the court grantng admnstraton, and ony after a
fu statement of a the cams aganst the estate, and after renderng a fu
account of the dsposton made of the persona estate.
11969. penses of funera aowance to wdow. s soon as the e ecutor
or admnstrator s possessed of suffcent means over and above the e penses
of admnstraton, he sha pay off the charges of the ast sckness and funera
of deceased, and ne t, any aowance made by the court for the mantenance
of the wdow and mnor chdren.
11907. (Reatng to estates of absentees.) Sae of rea estate. Such ad-
mnstrator may, under the orders of the court, se and dspose of a rea
estate and other property owned by such absentee, and after the payment of
ega costs, e penses, and cams, make dstrbuton of the proceeds thereof to
the persons entted thereto.
We have been cted to no decson of the Supreme Court of Iowa, and have
found none, passng drecty upon the queston whether, under the provsons
of the statutes quoted, rea property of a decedent n that State s sub|ect to
the payment of e penses of admnstraton. It becomes necessary, therefore,
for us to construe the statute n order to determne the controversy n the
nstant case.
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Regs. 70, rt. 10.
436
The provsons of the Iowa Code are not so e pct as those n the Nebraska
statute nevertheess, we thnk they are the same n ega effect so far as con-
cerns the queston here nvoved.
The meanng of the word charges n secton 11933 s of vta mportance.
Ths word s used n contradstncton to the word debts and has a
dfferent and a broader meanng than the same word charges where It
occurs n secton 402(a) of the Revenue ct of 1921. In the atter statute,
the word s used n contradstncton to e penses of admnstraton. We
thnk the word charges n the Iowa statute ncudes e penses of admns-
traton, and aso other e pendtures propery made by the admnstrator
though not strcty e penses of admnstraton, such as funera e penses. Such
broader meanng of the word churges s not unknown n probate aw.
In an eary case, Goodwn v. Chaffee (4 Conn., 163), under a statute whch
aowed the probate court to order the sae of rea estate of a decedent when
the debts and charges aowed by the court e ceeded the vaue of the persona
estate, the queston arose whether a sae of rea estate coud be ordered to pay
a egacy. The court n ts opnon sad:
ut when the persona estate has been e hausted, as In ths case It was,
and resort must be had to reaty, t becomes an Important queston, whether,
for the payment of a egacy, the court of probate has authorty to order the
sae of rea estate. On ths pont, the case before the court most turn. or
the debts and charges aganst the estate, the aw has mparted ths au-
thorty and, of consequence, mposed t on the |udge as a duty but a egacy
s not a debt, nor s t a charge, wthn the meanng of the statute. The atter
word has, from famar use, the precson of a technca term, and merey
comprses the e penses ncurred n te settement of an estate. Itacs ours.
The same meanng was gven to the word charges n the ater case.
Duff ed, r., v. Pke (71 Conn., 521).
In the case of Carns v. Smth (49 S. W., 728) (Te as), appcaton had been
made by the e ecutors of a w for eave to se rea estate to pay certan
egaces. Carns ded ntestate as to the rea estate sought to be sod. The
proceeds of the property covered by the w had been pad out by the e ecutors.
The queston n the case was whether the egaces provded n the w were
charges upon the rea property sought to be sod. The court cted the Goodwn
case wth approva as to the meanng of the word charges, and sad (page
733) :
Our statute, n prescrbng the requstes of an appcaton by an e ecutor or
admnstrator to se rea estate, apparenty uses the term charges n the
same sense.
The foregong cases end support to our vew that the word charges n the
Iowa statute, above quoted, ncudes e penses of admnstraton. There are
aso decsons of the Supreme Court of Iowa whch, we thnk, are of nferenta
vaue as pontng to the same concuson.
In the case of Conger v. Cook (8 N. W., 784) (Iowa), the pettoner prayed
for an order for the sae of rea estate, aegng that the persona property was
Inadequate to pay the debts and e penses of admnstraton. Demurrer was
nterposed to ths petton. The court, n reference thereto, sad (page 784) :
s another ground of demurrer, t s sad that the petton s nsuffcent
because t shows that there s somethng due the admnstrator as costs of ad-
mnstraton, and the appcaton s made n part to rase money to remburse
the admnstrator, and aso to pay hm hs compensaton. The defendant con-
tends that the rea estate can not be sod for such purpose. If ths were true
we do not thnk that t woud consttute a ground of demurrer to the petton,
whch seeks an order of sae for the purpose of payng credtors. It was proper
to grant an order of sae, though, of course, ony for a egtmate purpose, and
ony for the sae of so much rea estate as was necessary for such purpose.
The petton, f ob|ectonabe upon the ground urged, shoud have been assaed,
we thnk, by a moton to strke out the ob|ectonabe part. We do not wsh to
be understood as ntmatng that we do not thnk that rea estate can be sod to
pay the admnstrator s costs and compensaton where the proceeds of the per-
gona property have been e hausted n propery payng credtors. Itacs
ours.
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437
Regs. 70, rt. 10
oey v. roeksmt (93 N. W., 344) (Iowa), Invoved a sut by an undertaker
aganst the admnstrator for funera e penses. In ts opnon the court sad:
Such charges are not, strcty speakng, debts due from the deceased, but
charges whch the aw out of decency mposes upon hs estate. nd, so far as
these are reasonabe n amount, they take ega prorty of a such debts as,
kewse, do the admnstraton charges. Itacs ours.
In Crapo, r., v. rmstrong (IT N. W., 41) (Iowa), the court hed that
money pad for a tombstone for a decedent was a proper e pendture as per-
tanng to the funera e penses.
In the ater case of Mvnns v. rown (131 N. W., 671) (Iowa), nvovng a
smar queston as we as a sae of rea estate for such e pense, the court sad
(page 674) :
gan, t s sad that no order to se shoud have been made because of ack
of proof of the aowance of any cams save that for the monument whch was
secured upon order of court, and that there e sts no authorty n aw for
orderng a sae of rea estate for the purpose of payng such cams. In ths
contenton counse are n error. The record does show the aowance of cams
aganst the estate of the deceased for more than the amount of money and
persona property n the hands of the admnstrator. Moreover, we thnk that
rea estate eft by one deceased may be sod upon pror (proper) appcaton for
the payment of such debts as we as for the funera e penses of one deceased.
The cost of a sutabe monument for one deceased s as propery
chargeabe aganst hs estate as are the funera e penses and that ands may
be sod n the absence of a persona estate to meet such cams s entrey
cear.
In the case of In re Spcer s state (203 Iowa, 393, 212 N. W., 689), the ad-
mnstratr made report that a certan cam amountng to appro matey
15,000 aganst the estate had been fnay aowed by the Supreme Court of
Iowa and the report further stated: That sad cam and cost of cosng sad
estate have not yet been pad, and that as shown above there s not enough
persona property out of whch to pay the same.
petton to se rea estate beongng to the estate was aso fed by the
admnstratr . Ths petton stated that t was necessary for the payng off of
cams aganst the estate and to cose the estate to se the rea estate.
demurrer was nterposed to the petton. Ths was overrued and the
court entered an order rectng that t was necessary to se the rea es-
tate n order to have suffcent funds to cose sad estate.
n appea was taken from the |udgment orderng the sae of the rea estate,
and the |udgment was affrmed by the Supreme Court of the State of Iowa.
The queston was not drecty rased whether the rea estate mght be sod to
pay the e penses of admnstraton, but the cear nference from the case s that
such was the practce n Iowa.
In vew of the foregong, our concuson on ths branch of the case s that
the ands owned by decedent n Iowa were sub|ect to be sod for the payment of
the e penses of admnstraton, n addton to beng sub|ect to the payment of
the charges aganst the estate, and beng sub|ect to dstrbuton as part of the
estate. It foows that the vaue of such ands was propery ncuded as part of
the vaue of the gross estate.
further contenton of appeants s that the persona property of decedent
was ampy suffcent to pay a debts and e penses of admnstraton and that,
therefore, the rea property n Nebraska and Iowa was not sub|ect to the e -
penses of admnstraton and, hence, the vaue of the nterest of decedent n
such rea property was not propery ncuded n the gross estate. We thnk
there s no mert n ths contenton.
The test to determne whether the vaue of the nterest of decedent n rea
property sha be ncuded n the vaue of hs gross estate s found n the words
of the statute (secton 402(a) of the Revenue ct of 1921) and not n specu-
atve probabtes as to the necessty for seng the rea property durng
admnstraton.
We thnk the |udgment of the tra court was rght, and It s affrmed.
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Regs. 70, rt. 10.
438
Reguatons 70, rtce 10: Character of n- I-48-5893
terests ncuded. Ct. D. 605
ST T T R NU CT O 1921 D CISION O COURT.
Gross state Communty Property Caforna Wfe s Con-
sent to W and Dsposton Theren of Communty
Property.
In determnng the vaue of the gross estate of a deceased hus-
band under secton 402 of the Revenue ct of 1921, there shoud
be ncuded the entre vaue of the communty property acqured
under the aws of the State of Caforna, athough at the tme of
e ecuton of hs w hs wfe sgned a paper eectng to acquesce
n and consent to the w and dsposton of the communty prop-
erty theren and waved a cams to her share of the communty
property. Ths concuson s not affected whether the w and the
waver consttuted a bndng contract or whether power of eecton
remaned n the wdow to take ether In pursuance of the w or In
accordance wth her communty rghts.
Unted States Crcut Court of ppeas for the Nnth Crcut.
Tte Insurance d Trust Co., a Corporaton, ecutor and Trustee under the
Last W and Testament of m rth, Deceased, appeant, v. Re .
oodCe, Coector of Interna Revenue for the S th Dstrct of Caforna,
appeee.
Upon appea from the Dstrct Court of the Unted States for the Southern Dstrct f
Caforna, Centra Dvson.
ugust 15, 1032.
opnon.
Norcross, Dstrct udge: rom a |udgment for defendant n an acton to
recover the sum of 60,894.08 pad under protest as an estate ta , the pantff,
Tte Insurance Trust Co.. appeas.
m rth, a resdent of Los ngees, Caf., ded ugust 23, 1922, eavng
hm survvng hs wdow, enveneda S. rth, and a daughter and grand-
daughter. The decedent eft a ast w and testament, dated ugust 11, 1922,
whch was duy probated. Under ths w the decedent devsed and bequeathed
a of the property then hed by hm, Incudng the entre communty estate.
Substantay a of ths property was paced n a trust, whch provded for the
payment of somethng ess than one-haf of the ncome therefrom to the de-
cedent s wfe, and gave her testamentary dsposton of one-haf of the corpus
of the property. Concdent wth the e ecuton of the w, hs sad wfe
e ecuted a paper contanng, among other provsons, the foowng:
I hereby eect to and do accept, acquesce n and consent to sad
w and a of ts provsons, ncudng dsposton at the death of my sad
husband of a of our communty property thereunder, and hereby wave a
cams to my share of any communty property, and any and a other cams,
rghts, nterests and estates whch I may have at the tme of the demse of my
sad husband, upon or n a of hs separate property and a of our communty
property, .
The court found that the vaue of decedent s gross estate was 1,602,843.36
and the net vaue 1,361,537.33 that the entre estate was communty property,
e cept separate property of the vaue of 27,700.
The tota ta upon the estate was 85,159.86, whch was pad under protest
and cam for refund n the amount of 60,894.08 fed therefor, whch was
re|ected by the Commssoner of Interna Revenue. In the cam for refund
fed, and upon whch ths acton s predcated, appeant defned ts poston
as foows:
t the tme of decedent s death, therefore, the wdow had a vested Interest
and owned outrght her communty nterest so that at the tme of bs death
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439 Regs. 70(1929), rt. 16(1).
decedent ony owned and hs estate then was ony one-haf of a the c, mmunty
property. The fact that the wdow took her communty one-haf under the w
wth other benefts s mmatera for the reason that she can not thereby con-
vey her nterest to her spcuse as of a tme before or at the tme of hs death,
the w not takng effect unt after hs death and for the further reason that
even f her eecton dd have the effect of transferrng her nterest to the
estate, t dd not augment decedent s property rghts and tte thereto, but
effected ony an ncrease of the estate for dstrbuton eft after hs death and
created equtes between her and other benefcares ony. In other wcrds,
decedent havng passed ths fe, eft sezed of hs communty one-haf ony.
The wdow s eecton to eave her one-haf n the estate augmented the estate s
propertes to whch tte bad passed to testamentary benefcares, and not the
decedent s propertes.
To hod otherwse woud be to urge n effect that the wdow s eecton on
beng e ercsed was carred back to a tme before decedent s death, whch con-
tenton answers tsef, for the w was neffectua unt after the death of the
decedent and there coud be no eecton on her part unt the w became
effectve.
In appeant s bref the contenton s made that under the aw of the State
of Caforna the two documents, the w and the waver, consttute a contract,
supported by a consderaton and bndng upon both partes, by vrtue of whch
the wdow of m rth receved her porton of the estate n eu of her rghts
n the communty property. If the contenton made n the bref may be re-
garded as a new or addtona ground of recovery then t may not be consdered
upon ths appea, as ony such grounds may be revewed as are presented n
the cam for refund. (Red Wng Matng Co. v. WUcuts, 15 . (2d), 626, 634
T. T . 3980, C. . I-1, 225 dreys aroor Motorshp Corporaton v. Unted
States, 45 . (2d), 259, 281.)
Concedng that the two documents, the w .and the waver, consttuted a
contract bndng upon both partes and that the wdow receved her porton of
the estate n eu of her rghts n the communty property, t was the death
of her husband whch brought nto beng or rpened for the survvor, property
rghts of such character as to make approprate the mposton of a ta upon
that resut. (Tyer v. Unted States, 281 U. S., 497 Ct. D. 190, C. . I -1,
383 .)
If the wdow be regarded as havng the rght of eecton upon the death of
her husband to take her communty nterest freed from the trust and other
prevsons of the w and had so taken such communty nterest, such eecton
woud not have affected the vadty of the ta . (Taoott v. Unted States,
23 . (2d), 897 T. D. 4137, C. . II-1, 319 enshaw v. Commssoner, 31 .
(2d), 946 Ownn v. Commssoner, 54 . (2d), 728.)
Whether the w and the waver consttuted a bndng contract of whether
power of eecton remaned n the wdow to take ether n pursuance of the w
or n accordance wth her communty rghts, the abty for the ta s not
affected, for, n ether case, property rghts are brought nto beng or rpened
for the survvor whch before coud not be e ercsed. (Tyer v. Unted States,
supra, 281 U. S., 497.)
udgment affrmed.
TR NS RS Y D C D NT IN IS LI TIM .
Reguatons 70(1929), rtce 16(1) : Transfers I-31-5584
made n contempaton of death. Ct. D. 527
estate ta revenue act of | 921 decson op court.
Transfer n Contempaton of Death.
The evdence proves that the thought of hs death was the con-
trong motve of the decedent n effectng transfers of hs prop-
erty and that n the crcumstances shown they were made n con-
tempaton of death wthn the meanng of secton 402(c) of the
Revenue ct of 1921.
160003 33 29
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Regs. 70(1929), rt. 16(1).
440
Coubt of Cams of the Unted States. No. -470.
zabeth M. enge, ecutr of ohn . enge, Deceased and ront .
enge, ndvduay and n ther capacty as benefcares of the estate of
oseph enge, v. The Unted States.
May 2, 1932.
OPINION.
ooth, Chef ustce, devered the opnon of the court.
On May 29, 1925, the pantffs pad to the Commssoner of Interna Revenue
93,994.35 edera estate ta es assessed by the Commssoner aganst the
estate of oseph enge, deceased. On une 1, 1925, the pantffs pad a
sma defcency assessment of 5.58. Of the tota amount of estate ta es pad
91,255.53 was assessed and pad because the Commssoner ncuded n the
estate ta assessment the then vaue of certan rea property In the cty of
Detrot deeded by the decedent to hs two sons, ohn . and rank . enge,
on May 12, 1924, the property beng vaued at 1,300,000, the Commssoner
contendng that decedent transferred sad property to hs sons n contempa-
ton of death. Ths sut s for recovery of the ta pad as above.
No |ursdctona queston s nvoved. We cte the provsons of the
Revenue ct appcabe, as foows:
Sbc. 401. That, n eu of the ta mposed by Tte I of the Revenue ct
of 1918, a ta equa to the sum of the foowng percentages of the vaue of
the net estate (determned as provded In secton 403) s hereby mposed
upon the transfer of the net estate of every decedent dyng after the passage
of ths ct, whether a resdent or nonresdent of the Unted States:

10 per centum of the amount by whch the net estate e ceeds 1,000,000
and does not e ceed 1,500,000

Sec. 402. That the vaue of the gross estate of the decedent sha be de-
termned by ncudng the vaue at the tme of hs death of a property, rea
or persona, tangbe or ntangbe, wherever stuated

(c) To the e tent of any nterest theren of whch the decedent has at
any tme made a transfer, or wth respect to whch he has nt any tme created
a trust, n contempaton of or ntended to take effect n possesson or en|oy-
ment at or after hs death (whether such transfer or trust Is made or
created before or after the passage of ths ct), e cept n case of a bona fde
sae for a far consderaton n money or money s worth. ny transfer of a
matera part of hs property n the nature of a fna dsposton or dstrbuton
thereof, made by the decedent wthn two years pror to hs death wthout such
a consderaton, sha, uness shown to the contrary, be deemed to have been
made n contempaton of death wthn the meanng of ths tte. (Revenue
ct of 1921, 42 Stat., 227, 277, 278.)
The Treasury reguatons n force and appcabe are artces 17 and 18 of
Reguatons 63, and contan the foowng provsons:
rt. 17. Nature and tme of transfer. transfer made by the decedent at
any tme, and n any manner, s ta abe when made In contempaton of or
ntended to take effect n possesson or en|oyment at or after hs death, provde
t was not a bona fde sae for a far consderaton n money or money s worth.
To consttute such a sae t must have been made n good fath, and the prce
must have been a far equvaent, and reducbe to a money vaue.
rt. 18. Nature of transfer. The words u contempaton of death do not
mean, on the one hand, a genera e pectaton of death such as a persons enter-
tan, nor, on the other, s the meanng mted to an e pectaton of mmedate
death. transfer, however, s made n contempaton of death wherever the
person makng t s nfuenced to do so by such an e pectaton of death, arsng
from body or menta condtons, as prompts persons to dspose of ther prop-
erty to those whom they deem proper ob|ects of ther bounty. Such a transfer
s ta abe, athough the decedent parts absoutey and mmedatey wth hs
tte to and possesson and en|oyment of the property.

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441 IRegs. 70(1929), rt. 10(1).
The case Is one of fact. (Unted States v. Wes, 283 U. S., 102 Ct. D. 340,
C. . -, 475 , and cner v. Donnan, decded by the Supreme Court March
21, 1032 Ct. D. 473, C. . I-1, 324 .) It was sad n the Wes case:
It Is apparent that there can be no precse demtaton of the transactons
embraced wthn the concepton of transfers n contempaton of death, as
there can be none n reaton to fraud, undue nfuence, due process of aw, or
other famar ega concepts whch are appcabe to many varyng crcum-
stances. There s no escape from the necessty of carefuy scrutnzng the
crcumstances of each case to detect the domnant motve of the donor n the
ght of hs body and menta condton, and thus gve effect to the manfest
purpose of the statute. (Page 119.)
oseph enge, a naturazed ctzen of the Unted States, was born n Ger-
many on ugust 15, 1831 he came to ths country n hs eary twentes, takng
up a permanent resdence n Detrot, Mch., n the year 3854. few years ater
he estabshed n Detrot a carrage busness and thereby ad the foundaton
of hs subsequent fortune. In 1865 the decedent began to purchase rea estate
In the cty and at the tme of hs death owned contguous parces of the same
whch came to be known as the Lbrary Park ote property, vaued at 1,300,-
000. Toward the deveopment, care, and management of ths property Mr.
enge gave amost hs e cusve attenton, and n ts ownershp manfested
conscous prde and concern. In 1895 Mrs. enge, the wfe of the decedent, ded
at ther home n Detrot, and soon thereafter Mr. enge retred from the
carrage busness and removed from Detrot to a country home he constructed
on Lake St. Car at Grosse Ponte. near Mount Cemens, Mch., some 20 mes
from Detrot. On May 31, 1924, oseph enge ded Intestate at hs country
home, havng attaned the age of 92 years 9 months and 16 days. e eft
survvng hm two sons, ohn . enge, snce deceased, and rank . enge,
and certan grandchdren chdren of a deceased son and daughter as hs
hers at aw. oseph enge, the pantffs father, en|oyed remarkaby good
heath he was rarey ever , and hs menta facutes remaned unmpared.
e was actve n the management of hs busness affars, devotng much tme
thereto unt wthn a few months of hs death. On March 5, 1924, the decedent
contracted a heavy cod whch confned hm to hs house, an Iness whch at
ts begnnng dd not aarm hm or hs famy. In a few days, however, hs
unmproved condton caused hs housekeeper to ca n n doctor to see hm,
and on March 9, 1924, the doctor found hm n bed sufferng from an nguna
herna of the rght sde, as the physcan then dagnosed the case, whch, not-
wthstandng hs enfeebed nppearance and condton, the doctor dd not regard
as dangerous. On March 17, 1924, ths same doctor caed agan and reported
decedent s condton as not aarmng. On March 29, 1924. the doctor reported
hs patent as sufferng from bronchts, weak heart, and severe pans n hs
eft sde, whc because of hs advanced age mght prove serous. Durng the
eary days of pr, 1924, the decedent s bronchts Improved but hs physca
condton ndcated ntense weakness, and he was confned to hs bed contnu-
ousy. On May 12, 1924, decedent s son, Prank enge, and an ntmate frend,
a Mr. Church, consuted two emnent surgeons, and the foowng day, accom-
paned by one of them, a Doctor en, drove out to hs father s home. Doctor
en found the decedent n a very serous condton, both physcay and men-
tay, . e., drowsness and nn ndsposton to be dsturbed characterzed hs
mentaty, and physcay he was very weak. The doctor dagnosed hs case
as cancer of the stomach, an affcton whch n the doctor s opnon had e sted
for at east s months and for whch he coud propose no remedy, sayng he
woud probaby not survve for more than two or three weeks.
Wthout gong nto addtona detas, t s suffcent at ths pont to observe
that on May 81, 1924, oseph enge ded. On May 5, 1924. rank enge
caused two deeds to be drawn up, conveyng to hm and hs brother, ohn .
enge, an undvded one-haf Interest n the Lbrary Park ote property, the
reaty nvoved n ths tgaton. On the same day and date rank enge,
n company wth Mr. Church, vsted oseph enge at hs home to secure the
e ecuton of the deeds. oseph enge, the father, decned at ths tme to sgn
the deeds, sayng he wshed a few days to thnk the matter over. Whe the
record contans testmony contrary to the facts |ust stated the wtnesses do
f the date of May 5, 1924, as the date when the deeds were nay e ecuted,
another wtness, a traned nurse In charge on that date, es the same defntey,
and ths testmony s corroborated by a sworn answer ed by ohn . and
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Regs. 70(1929), rt. 99.
442
rank enge n a chancery proceedng brought aganst them by t e grand-
chdren of the decedent, n whch the date May 5. 1924, Is e pressy f ed as
stated n ths opnon and May 12, 1924, gven as the date of e ecuton. In
addton to ths, the record ndsputaby estabshes that the deeds were not
e ecuted on the date of the son s frst vst to hs father and that the father
decned at frst to sgn them and whe the deeds bear a notara acknowedg-
ment as of May 5, 1924, they were not recorded unt May 28, 1924, three days
pror to the father s death, and we thnk from the record were n fact sgned
on May 12, 1924. e matter s not one of such vta mportance as the pan-
tffs accord t, for asde from a other facts there can be no doubt that the
sons regarded the father on the date when the deeds were sgned as rapdy
approachng hs demse.
Precedng May 12, 1924, and on pr 3, 1924, at a tme when oseph enge
was fatay , he transferred by deed to hs son, rank, certan other parces
of and ocated n the States of Mchgan and Mssour, wth nstructons then
gven to rank to dstrbute the ands deeded equay among hs grandchdren,
and n a court proceedng rank . enge admtted the above facts.
There can be no doubt that the reatons between oseph enge and hs two
sons were corda, ntmate, and confdenta. The father had e pressed a
desre for hs sons to have the Lbrary Park ote property, and there s
evdence n the record that he contempated deedng t to them, but he never
dd so unt hs fna ness, notwthstandng a man of hs unusuay advanced
age, n fu possesson of hs facutes, must have known and apprecated the
serousness of even sght ness. The way was open by ether w or deed
to accompsh hs desre. It s abundanty proved that oseph enge was a
fruga and astute busness man be knew fu we the vaue of property and
the consequences whch mght foow hs partng rrevocaby wth tte to the
same. ea estate consttuted practcay a hs estate and durng a the
years of hs ong fe be retaned tte to t n hs own name, and as we vew
t must have apprecated what t meant to hm to deed t to another a trans-
acton of such consequences to such an actve, carefu and prudent man |ustfes
the nference, to say the east, that the tme had arrved when he confdenty
beeved he woud have no further use for t.
The fndngs, we thnk, accuratey refect the facts of the case. We w not
dscuss them n a ther reatonshp to the transacton nvoved. It s suff-
cent to say that the deedng of the property Incuded by the Commssoner
n the decedent s estate under the crcumstances and at the tme t was deeded
e acts of the court the necessty, as was sad n the Wes case (supra), of
carefuy scrutnzng the crcumstances of each case to detect the domnant
motve of the donor n the ght of hs body and menta condton. Sub|ect-
ng the facts to the rue thus estabshed, we fnd an unusuay edery man
who a hs fe e erted a ma mum of ndustry and ntegence n the acqure-
ment of arge and e tremey vauabe rea estate hodngs, mantanng watch-
fu care n the management and contro of the same by persona supervson,
never partng wth the tte or makng any dsposton whatever of t durng
hs fe to hs bers, and fnay, when over 92 years of age, fatay , confned
to bed, and under the care of doctors, deeds to hs sons reaty consttutng 86
per cent of hs entre estate, and to hs grandchdren addtona reaty of a
vaue not shown. Ths s, we thnk, ceary evdentary that the transfers were
made n contempaton of death, and that the domnant motve n thus
wthout other consderaton than ove and affecton n makng sad transfers,
was hs conscousness that he was affcted wth a fata maady. man of
the type and menta sturdness of oseph enge dd not need to be tod that he
was fatay . We thnk the petton shoud be dsmssed. It s so ordered
ST T T RRON OUS R UND D CISION O COURT.
1. rroneous Rkftsd Labty of ecutors.
Where an estate of a decedent s admnstered under the urs-
dcton of a Caforna court and the e ecutors of the estate
derve ther authorty from ther appontment by the court, and
where they are obgated by a decree of dstrbuton to turn the
Reguatons 70(1929), rtce 99: Cam for
refund.
I-40-5762
Ct. D. 579
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443
Regs. 70(1929), rt. 99.
property of the estate over to those to whom t s dstrbuted by
the decree of the court and have no authorty to retan any of
the property after the decree, the e ecutors havng receved an
erroneous refund of a ta upon the estate are not obgated to
repay the same where n pursuance of an order of the court pre-
vousy entered the erroneous refund receved by them n ther
representatve capacty has been dstrbuted by them to those en-
tted thereto under the decree of dstrbuton n the estate of the
deceased.
2. Sake Labty of Dstrbutees.
Where an erroneous refund of an estate ta receved by the
e ecutors of the estate of a decedent s dstrbuted to two per-
sons n proporton to ther respectve nterests theren n accord-
ance wth the terms of the decrees of dstrbuton of the estate
of the decedent and the estate of a deceased egatee under hs
w, each s severay and personay obgated to pay to the Unted
States the part of the refund he receved.
Unted States Crcut Court ok ppeas foe the Nnth Crcut.
Curts Lndey, |r., and osephne Lndey Rood, Indvduay, and Curts
I ndey, |r., osephne Lndey Rood, and I). . Mendenha, as ecutors
of the state of Curts obrook Lndey, Deceased, appeants, v. Unted
States of merca, appeee.
ppea from the Dstrct Court of the Unted States for the Northern Dstrct of
Caforna, Southern Dvson.
May 23, 1932.
OPINION.
Wbur, Crcut udge: The facts nvoved n (hs acton were stpuated and
are n part as foows:
Curts obrook Lndey, a resdent of the cty and county of Sun rancsco,
State of Caforna, ded n sad cty and county on the 20th day of November,
1920, and eft an estate consstng of rea and persona property stuated n
the State of Caforna and wthn the |ursdcton of ths court. In pursuance
of the petton of defendants, etters testamentary were ssued to them upon
sad estate of Curts obrook Lndey, deceased, and defendants duy quafed
as e ecutors of sad estate and thereafter at a tmes acted as such and con-
tnued so to act at the tme of commencement of ths acton. fter recevng
ther appontment and quafyng as e ecutors of sad estate, n pursuance
wth the provsons of an ct of Congress, defendants as e ecutors of the
estate of sad decedent on or about the oth day of November, 1921, ted wth
the coector of nterna revenue for the frst dstrct of Caforna, a return
for estate ta purposes n due form, whch set forth that the amount of the
estate ta es due from sad estate was the sum of 2,051.32, and sad amount
was duy pad by defendants as sad e ecutors, to the coector of nterna
revenue of the frst dstrct of Caforna on the 30th day of November, 1921.
Subsequent to the fng of the estate ta return as aforesad, the Comms-
soner of Interna Revenue assessed addtona ta es aganst sad estate n the
sum of 8.51, whch sad sum was duy pad by the defendants as e ecutors
on the 20th day of November, 1922.
Thereafter, the defendants as sad e ecutors on or about the 8th day of
December, 1922, fed wth the coector of nterna revenue for the frst dstrct
of Caforna, a cam for refund of estate ta es n the amount of 1,813.94,
whch sad cam was based on the ground that the entre gross estate returned
was communty property and tnt under the decson by the Crcut Court of
ppeas for the Nnth Crcut, n the case of um v. Warden (276 ed., 226),
ony one-haf of such communty property was sub|ect to estate ta . Sad
cam was audted and revewed under the drecton of the Commssoner of
Interna Revenue and was aowed by hm n the amount of 1,669.87 and
re|ected n the amount of 144.07 and sad amount so aowed resuted entrey
from the reducton n ta attrbutabe to reducng the estate by one-haf of sad
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Regs. 70(1929), rt. 99. 444
aeged communty property. Thereafter ths sad cam for refund was cert-
fed to the dsbursng cerk of the Treasury Department for payment n the
prncpa sum of 1,060.87, together wth nterest n the amount of 336.86, or
a tota of 2,006.73, whch sad tota sum was duy pad to and receved by
the defendants as sad e ecutors on pr 23, 1925.
Thereafter, pursuant to the decson of the Supreme Court of the Unted
States n the case of Unted States v. RobbhM (269 U. S., 315 T. D. 3S17,
C. . -, 188 ), hodng n the opnon of the ttorney Genera that the com-
munty property nterest of a survvng spouse of a decedent resdng n Ca-
forna, n the property of sad decedent, was sub|ect to the edera estate ta
under the Interna Revenue ct of 1918 above referred to, the Commssoner
of Interna Revenue redetermned the estate ta upon the sad estate of Curts
obrook Lndey, deceased, and determned that the sum of 2,006.73 pre-
vousy refunded had been erroneousy refunded and that addtona tu was
due and unpad from sad estate n the amount of 2,006.73, together wth
nterest from the date of refund. Notce of sad redetermnaton and demand
for repayment was maed to defendants on the 19th day of November. 1926,
and receved by them on the 20th day of November, 1920. The defendants have
negected, refused and st refuse to pay the same.
Under the terms of the w of sad decedent, Curts obrook Lndey. an
undvded one-haf nterest n hs property was eft to hs wdow, zabeth
Mendenha Lndey, an undvded one-s th nterest to hs son, the defendant,
Curts Lndey, |r and an undvded one-thrd nterest to hs danghter, the
defendant, osephne Lndey Rood. Pursuant to a decree of statement of
accounts and fna dstrbuton duy made and entered on the 1st day of Decem-
ber, 1921, by the Superor Court of the State of Caforna n and for the Cty
and County of San rancsco, sad estate was mmedatey thereafter and
pror to the date of commencement of ths acton, dstrbuted n accordance
wth the sad provsons of sad w.
Thereafter, on the 28th day of anuary. 1925, zabeth Mendenha Lndey,
the wdow of sad decedent, Curts obrook Lndey, ded ntestate. Pror to
her decease, sad zabeth Mendenha Lndey had created a trust n whch
had been paced a of the property receved by her from her husband, Curts
obrook Lndey, upon dstrbuton of hs estate as aforesad. Under the
terms of sad trust, the defendants Curts Lndey, r., and osephne Lndey
Rood Indvduay and n ther own rghts, respectvey, receved at the death
of sad zabeth Mendenha Lndey, one-haf each of sad property. Sad
defendants Curts Lndey, |r., and osephne Lndey Rood as the soe hers
and ne t of kn of the sad zabeth Mendenha Lndey, under the statutes
of dstrbuton and descent of the State of Caforna, aso receved a other
property both rea and persona of the sad zabeth Mendenha Lndey by
decree of the probate court entered ebruary 23, 1926. In accordance wth the
terms of the decrees of dstrbuton of the estates of both sad decedents, the
amount of 2,006.73, pad as aforesad by the dsbursng cerk of the Treasury
Department to the defendants Curts Lndey. |r., osephne Lndey Rood, and
D. . Mendenha as e ecutors, was dstrbuted to the defendants Curts
Lndey, |r., and osephne Lndey Rood, ndvduay, n ther respectve
nterests on and pror to the 23d day of ebruary, 1926.
On the 24th day of September, 1925, the defendants Curts Lndey. |r., and
osephne Lndey Rood caused to be pad to the Unted States eoOector of
nterna revenue at San rancsco, Cnf., the sum of 624.58, representng the
ta on sad securtes (whch she had receved as her haf of the communty
property), and thereby depeted the amount whch sad defendants receved
from sad estate of zabeth Mendenha Lndey, deceased, by sad sum of
624.58. Sad ta was pad on sad securtes n the estate of zabeth Men-
denha Lndey, deceased, whch had been prevousy ta ed wthn fve years,
n the estate of her deceased husband, as aforesad, because the ta on the
sad communty nterest of sad wdow n her husband s estate had been re-
funded on the 28th day of pr, 1925, as herenabove mentoned.
In support of the |udgment we assume that the e ecutors of the estate of
Curts Lndey acted upon the theory that the decree of dstrbuton n the
estate of Curts Lndey, dsposed of a property of the decedent subsequenty
dscovered (see eydcnfcdt v. Osmont, 178 Ca., 768 12 Ca. nr., 196, secton
939), and that the deed of trust from the wdow kewse dsposed of her haf
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445 (Regs. 70(1929) rt. 99.
of the assets of Curts Lndey, deceased, ncudng the refund, and |ustfed
a dstrbuton by them drecty to the son and daughter, as the benefcares of
the trust, whch had termnated at her death (see secton 1678, Ca. Code Cv.
Proc., n effect n 1921 and to 1930). In short, that the defendant e ecutors
acted upon the theory that the decree of dstrbuton n the estate of Curts
Lndey, deceased, requred them to pay (3/12 of the refund to the son and 7/12
to the daughter, and that nothng was pad by the e ecutors of Curts Lndey
to the admnstrators of the estate of zabeth Lndey, as such.
Ths acton was brought aganst the three e ecutors of the estate of Curts
Lndey n ther representatve capacty and aganst two of them, that s, the
two chdren, n ther ndvdua capacty, to recover the amount of the er-
roneous refund. That the Government s entted to recover money erroneousy
repad by ts offcers under mstake of aw smar to that Invoved here s
we estabshed and s not dened by the appeant. (Tacott v. Unted States,
23 . (2d), 897 T. D. 4137, C. . II-1, 319 eey v. Unted States, 30 .
(2d), 193 Unted States v. Pusey, 47 . (2d), 22.)
The Government contends that the e ecutors of the estate of Curts Lndey
havng receved the erroneous refund are obgated to repay the same not-
wthstandng the fact that n pursuance of an order of the court prevousy
entered the money receved by them n ther representatve capacty has been
dstrbuted by them to those entted thereto under the decree of dstrbuton n
the estate of Curts Lndey, deceased.
Whatever may be the rue n other |ursdctons wheren the reaton of the
partes to an estate s dfferent from that n Caforna, we thnk that under
the Caforna rue, where an estate s admnstered under the |ursdcton of
the court and the e ecutors derve ther authorty from ther appontment by
the court (11 Ca. ur., 214 (secton 6)), and where they are obgated by a
decree of dstrbuton to turn the property over to those to whom t s ds-
trbuted by the decree of the court and have no authorty to retan any of that
property after the decree, such a decree beng enforceabe aganst the e ecutors
by contempt proceedngs f they negect to dstrbute the property n accordance
wth the terms of the decree (12 Ca. ur., 222 (secton 955)) the authorty of
the e ecutors over the funds of the estate thus dstrbuted ceases upon dstrbu-
ton (12 Ca. ur., 199 (secton 940)) and that havng dsposed of the property
n accordance wth the requrements of the aw under whch they act, they can
not be subsequenty hed n ther representatve capactes to repay moneys
whch they have coected for and on behaf of any pad to the dstrbutees
athough that coecton may have been erroneousy made. The money dd not
beong to the e ecutors. They had no authorty to wthhod t from the egatees
upon the theory that the Government mght subsequenty seek to recam t.
Ther fu duty was performed when they turned It over to the dstrbutees.
We concude that n so far as the |udgment s aganst the e ecutors of Curts
Lndey n ther representatve capactes t s erroneous and shoud be reversed.
It remans to consder whether the |udgment aganst the appeants, the two
chdren, as egatees and grantees of a egatee under the w of Curts Lndey,
deceased, can be sustaned. We see no reason to doubt that they are thus
abe. The coecton was made on ther behaf by the e ecutors who were In
effect ther representatves. The money was receved for them and pad to
them.
The Government has not appeaed from the aowance of the set-off of 024.58.
We concude, therefore, that as to the refund whch they receved as egatees,
and as grantees of a egatee, of Curts Lndey the |udgment aganst them as
ndvduas s proper for ther proportonate share, that s, seven-twefths thereof
from the daughter and fve-twefths thereof from the son.
The |udgment aganst the appeants n ther representatve capacty s re-
versed. The |udgment aganst the appeants as ndvduas s modfed so that
there w be a severa |udgment aganst osephne Lndey Rood for seven-
twefths ( 835.52) and aganst Curts Lndey, |r., for fve-twefths ( 590.80)
of the amount of the baance of the refund, 1,432.32, both wth nterest at 8
per cent per annum from September 24, 1925.
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S L S T RULINGS.
TITL I . M NU CTUR RS CIS T . (1932)
S CTION 601. CIS T S ON C RT IN RTICL S.
LU RIC TING OILS.
Reguatons 44, rtce 11: Scope of ta . I-30-5567
T. D.4339
Ta on ubrcatng os Secton 601(c) , Revenue ct of 1932.
rtce 11, Reguatons 44, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 11 of Reguatons 44 s amended to read as foows:
rt. 11. Scope of ta . The ta Imposed under secton 601 (c) attaches to
the sae by the manufacturer of ubrcatng os. Lubrcatng os Imported
nto the Unted States are sub|ect to a ta of 4 cents a gaon upon mporta-
ton under secton 601(c)4, but the mporter s sae thereof s not ta ed under
secton 601 (c).
Lubrcatng os are a os sod as such and a os sod or used for
ubrcaton. partcuar o havug both ubrcatng and nonubrcatng uses
s ta abe uness (1) t s put nto a channe of consumpton or dstrbuton
for a use other than that of ubrcaton, under a name dentfyng It for such
use, and (2) the manufacturer obtans from the purchaser a certfcate to the
effect that the o w be used by the purchaser for a stated purpose other than
that of ubrcaton or resod by hm ony to a person who n turn furnshes a
smar certfcate. banket certfcate coverng a orders between gven
dates (for a perod not e ceedng a month) may be accepted from the pur-
chaser. Such certfcates and proper records of nvoces, orders, etc., reatve
to ta -free saes must be retaned as provded n artce 50. Where upon
nspecton t s dscovered that a manufacturer s records wth respect to any
sae camed to be ta -free do not contan a pro er certfcate, wth supportng
nvoce and such other evdence as may be necessary to estabsh the character
of the sae, ta sha be payabe by the manufacturer on such sae.
ampes of os not sub|ect to ta when sod (otherwse than as ubr-
catng o) for purposes other than ubrcaton, as prescrbed n the precedng
paragraph, are: Road o, cordage o, agrcutura spray o, cotton softener
o, nk o, medcna whte o, and o used as a component matera n the
manufacture of nonta abe os, pant, nsectcdes, soap stock, grease, etc.
The term ubrcatng os does not ncude products of the type commony
known as grease. Oeagnous substances are cassed as grease and not sub|ect
to the ta ony f (1) of a worked consstency of ess than 390 penetraton
unts, or an unworked consstency of ess than 360 penetraton unts, by the
method of test of the mercan Socety for Testng Materas D-217-27-T and
(2) free from o or comprsng o and a soap or a m ture of soaps or of
soaps and other substances.
ffectve ugust 16, 1932, no ubrcatng o sha be sod ta -free for further
manufacture under secton 620 to any person (other than a refner of crude
petroeum) uness the e empton certfcate furnshed pursuant to artce 7
(446)
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447
601, Regs. 44, rt. 11,
shows the regstraton number of the purchaser. ach manufacturer or
producer of ubrcatng os (other than a refner Of crude petroeum) w
be granted a regstraton number upon appcaton to the coector for the
dstrct n whch s ocated hs prncpa pace of busness (or, f he has no
prncpa pace of busness n the Unted States, to the coector at atmore,
Md.). Such numbers sha be n a separate seres, begnnng wth the number
1, for each dstrct. ppcatons for regstraton numbers sha state the name
and pace or paces of busness of the appcant and the nature of the processes
of manufacture or producton n whch he s engaged
person who merey bends ta abe ubrcatng os s not a manufacturer
or producer, and such a bender may not purchase ubrcatng os for bendng
ta -free under secton 620 (see artce 7). person who produces ubrcatng
os by a process of compoundng nvovng more than the mere m ng of
ta abe os, s a manufacturer or producer, and may be granted a regstraton
number.
person who produces ubrcatng o by recamng used ubrcatng o,
rrespectve of the process used and whether or not new ubrcatng o a
added thereto, s a manufacturer or producer, and the ta attaches to o so
produced when sod or used by hm for ubrcaton.
Davd urnet,
Commssoner of Interna Revenue.
pproved uy 16, 1932.
Ogden L. Ms,
Secretary of the Treasury.
Reguatons 44, rtce 11: Scope of ta . I-37-5683
( so Secton 617, rtce 43.) S.T.486
Ta abty of broker who has storage factes for os and
gasone.
dvce s requested regardng severa questons wth respect to
the ta es on ubrcatng o and gasone under the Revenue ct of
1932. The questons and answers are as foows:
Is a broker that has storage factes for storng o cassed any dfferenty
than a broker who does nothng but purchase and se os
There s no dfference n the cassfcaton.
broker buys os from a manufacturer under a contract pror to May 1,
1932, puttng the o nto hs own storage factes. Under a smar contract
wth nnother manufacturer, he ses the o and the manufacturer purchasng
the o refuses to pay the ta . These two contracts are based on a prce that
does not ncude the ta . Is the orgna manufacturer seng the o responsbe
for the payment of the ta
Labty for payment of the ta s dependent upon the provsons
of the contract. If the contract does not permt the addton of the
ta to the contract prce and does not provde that the vendor sha
pay the ta , the ta s payabe by the vendee to the vendor at the
tme of sae and must be returned and pad to the coector by the
vendor.
Where because of a contract dated pror to May 1, 1932, the orgna manu-
facturer can receve e empton from the payment of ta . makng the broker
responsbe, can the broker, aso wth a contract dated pror to May 1, n
turn receve e empton, makng the purchasng manufacturer responsbe for
the ta
broker who s abe for the payment of a ta may not n turn
receve e empton, thereby makng the purchasng manufacturer re-
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601, Regs. 44, rt. 11.
448
sponsbe for the ta . owever, there s no provson n the ct
whch prohbts a ta payer from passng the ta on to hs purchaser.
The queston s one between such ta payer and purchaser over whch
the ureau has no |ursdcton.
Cuttng os and water soube os used for ubrcatng purposes
hed ta abe.
dvce s requested whether cuttng os and water soube ok are
ubrcatng os and sub|ect to the ta under secton 601(c) of the
Revenue ct of 1932.
Under Treasury Decson 4339, ssued uy 16, 1932 see on page
446 , any o havng both ubrcatng and nonubrcatng uses s
ta abe when sod or used for ubrcaton.
Cuttng os and water soube os, used n cuttng and machnng
operatons on metas, are used for ubrcatng purposes and are
therefore hed to be ta abe under secton 601 (c) of the Revenue
ct of 1932, when sod by the manufacturer or producer.
Ta abty as ubrcatng o of fatty os of vegetabe, anma,
fsh, or marne orgn.
dvce s requested whether the ta mposed under secton 601 (c)
of the Revenue ct of 1932 upon saes of ubrcatng os appes to
saes of fatty os of vegetabe, anma, fsh, or marne orgn.
dvce s aso requested wth respect to furnshng e empton certf-
cates on ta -free saes of such os when put nto channes of con-
sumpton or dstrbuton for uses other than that of ubrcaton.
In order to determne the necessty of fng a certfcate to the
effect that the partcuar o sod w be used by the purchaser for
a stated purpose other than that of ubrcaton, t must frst be de-
termned whether the fatty os n queston are ubrcatng os
wthn the meanng of secton 601(c/1 of the Revenue ct of 1932
and artce 11 of Reguatons 41, as amended by Treasury Decson
4339 see on page 446 . If the fatty os n queston are not sod
as ubrcatng os n ther natura state by the manufacturer or
producer, and are not sod or used for ubrcaton n such state but
must be m ed wth other os before beng sod or used for ubrca-
ton, saes of such os are not sub|ect to the ta on ubrcatng os
and certfcates for the e empton of saes thereof are not requred.
The fact that such fatty os are used to some e tent by manufac-
turers of ubrcatng os as matera n the manufacture or produc-
ton of ta abe ubrcatng os does not, n tsef, requre the manu-
facturer of such fatty os to obtan from the purchaser a certfcate
Reguatons 44, rtce 11: Scope of ta .
I-39-5727
S.T.505
Reguatons 44, rtce 11: Scope of ta .
I-43-5807
S. T. 540
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449 601, Regs. 44, rt. 11.
n order to secure e empton of the saes of the so-caed fatty os
from the ta mposed under secton 601 (c) of the ct, uness such
fatty os are themseves ubrcatng os wthn the defnton ad
down n Treasury Decson 4339, supra.
On the other hand, f a partcuar o has both ubrcatng and
nonubrcatng uses, saes thereof are sub|ect to the ta , uness (1)
t s put nto a channe of consumpton or dstrbuton for a use
other than that of ubrcaton, under a name dentfyng t for such
use, and (2) the manufacturer obtans from the purchaser a certf-
cate to the effect that the o w be used by the purchaser for a stated
purpose other than that of ubrcaton, or resod by hm ony to a
person who n turn furnshes a smar certfcate.
strct appcaton of the foregong rues to saes of each of the
fatty os ot vegetabe, anma, fsh, or marne orgn w f the
ta abty of saes of the partcuar product and ndcate whether
the manufacturer must obtan from the purchaser a certfcate as
requred under Treasury Decson 4339.
Reguatons 44, rtce 11: Scope of ta . I-43-5808
S. T.541
Ta abty of recamed ubrcatng o.
The M Raroad Co. purchases arge quanttes of ubrcatng os
whch are used for saturatng packng n the |ourna bo es of ra-
road cars. fter beng so used ths o s recamed by a process
somewhat as foows: The drty and o-soaked packng s taken
from the |ourna bo es and paced n a centrfuga cynder. The
revovng of ths cynder separates the o from the packng. The
o s then coected and paced n a tank and an appcaton of soda
ash s spread over the top of the o. Ths ash snks to the bottom
of the tank, carryng wth t a foregn matter. The cear o s
then drawn off and s agan ready for |ourna-bo ubrcaton.
If, under the provsons of secton 622 of the Revenue ct of 1932
a person produces a ta abe artce and uses t, he s abe to ta n
the same manner as though the artce were sod by hm. Secton 622
makes no dstncton wth respect to the source of the matera used
n the producton of a ta abe artce, and the abty mposed under
the secton s not mted to those persons engaged n the producton
of the ta abe artce as a prncpa busness.
The process empoyed by the M Raroad Co. n recamng such
used ubrcatng os changes an artce, the ubrcatng vaue of
whch s e hausted, nto one whch s sutabe for ubrcatng pur-
poses. The company thus becomes a producer of ubrcatng os
wthn the meanng of artce 11, Reguatons 44, of the Revenue ct
of 1932, as amended by Treasury Decson 4339 see on page 446 .
The company s, therefore, sub|ect to the ta mposed under secton
601 (c) of the Revenue ct of 1932, wth respect to the use of a
ubrcatng o whch t recams by the process descrbed.
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C01. Regs. 44, rt. 11.
450
Reguatons 44, rtce 11: Scope of ta . I-44-5823
S. T. 548
Dstncton between a compounder and a bender of ubrcatng os.
dvce s requested concernng the dstncton between a com-
pounder and a bender of ubrcatng os, as those terms are used n
Treasury Decson 4339 see on page 446 .
The necessty for dstngushng between a bender and a com-
pounder of ubrcatng os arses n the appcaton of secton 620 of
the Revenue ct of 1932, reatng to the saes of ta abe artces for
further manufacture. Ths secton provdes, n effect, that an artce
sub|ect to ta under the Revenue ct of 1932, wth certan e ceptons
not here matera, may be sod ta -free where such artce s sod for
use as matera n the manufacture or producton of, or for use as a
component part of, an artce to be produced by the vendee whch
w be sub|ect to ta .
In determnng the appcaton of secton 620 t s necessary that
consderaton be gven to the queston of what consttutes further
manufacture n the case of ubrcatng os. The ureau has reached
the concuson that a person who merey bends ta abe ubrcatng
os that s to say, one who merey m es two or more varyng
f rades of ubrcatng os s not a manufacturer or producer of
ubrcatng o, and, consequenty, may not buy ubrcatng os ta -
free for the purpose of such bendng. owever, a person who by
means of a process of compoundng or other manpuaton nvov-
ng substantay more than the mere m ng of ta abe os, or one
who m es ta abe os wth other substances, s a manufacturer or
producer of ubrcatng o, and may buy ubrcatng os ta -free
where such os are to be used n the compoundng or producton of
other artces sub|ect to ta .
Reguatons 44, rtce 11: Scope of ta . I-45-5840
S. T. 558
Ta abty of buffng o, burnng o, concrete form o, core o,
foor o, harness o, eather o, quenchng o, sushng o, temper-
ng o, transformer o, ard o, and neatsfoot o.
dvce s requested whether certan os when sod otherwse than
for ubrcatng purposes are sub|ect to ta under secton 601 (c) of
the Revenue ct of 1932.
It s hed that buffng o, burnng o, concrete form o, core o,
foor o, harness o, eather o, quenchng o, sushng o, temper-
ng o, transformer o, ard o, and neatsfoot o, are not sub|ect
to ta when sod under a name dentfyng such os for purposes
other than ubrcaton, or when used as the component matera n
the manufacture of other artces whch are ta abe under Tte I
of the Revenue ct of 1932, provded the manufacturer obtans from
the purchaser a certfcate to the effect that the o w not be used
for ubrcaton. The fact that an o s sod under a name dentfy-
ng t for use for a purpose other than that of ubrcaton w not
e empt the sae thereof from ta f the o s actuay used for ubr-
catng purposes.
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451
5601, Regs. 44, rt. 11.
Reguatons 44, rtce 11: Scope of ta . I-47-5871
S. T.571
Lubrcatng o Is not a component part of an automobe and s
sub|ect to ta when sod to a manufacturer of automobes.
dvce s requested whether ubrcatng o sod by a manufac-
turer or producer thereof to a manufacturer of automobes, who
furnshes ths o n the crank case of automobes when sod to the
consumer, s ta abe under secton 601 of the Revenue ct of 1932.
Secton 620 of the Revenue ct of 1932 provdes that a ta abe
artce under Tte I of the ct may be sod ta -free by vrtue of
that secton when t s used by the purchaser as component matera
n the manufacture of another artce whch s aso ta abe under
Tte I of the ct.
The term component matera, as used n the aw, sgnfes a
substance whch comprses an ntegra part of an artce, one whch
may not be easy separated from the artce and whch may not be
repenshed. O paced n the crank case of an automobe may be
draned at w and a new suppy furnshed. Such o s not a com-
ponent matera of the automobe. Consequenty, a ubrcatng o
sod by a manufacturer, or producer thereof, to a manufacturer of
automobes for the purpose of pacng t n the crank cases of auto-
mobes sod s ta abe under secton 601 (c) of the Revenue ct
of 1932.
Reguatons 44, rtce 11: Scope of ta . I 8-5885
S. T. 580
Ta abty of ubrcatng o sod for use on a foregn steamshp.
dvce s requested concernng the ta mposed by secton 601(c)
of the Revenue ct of 1932 as apped to saes of ubrcatng o to
foregn steamshps at a domestc port, the o beng used by the shps
on ther return |ourney to a foregn country.
rtces whch are not actuay transported to and devered at a
foregn destnaton for the purpose of enterng nto the commerce of
such country are not e ported wthn the meanng of the nterna
revenue aws and reguatons.
Whe t appears that the ubrcatng o n queston s sod to a
foregn company, yet t s devered to shps of the purchaser for
consumpton n ther operaton and not for transportaton to a for-
egn country as artces of commerce. It s hed that such saes are
ta abe under secton 601 (c) of the Revenue ct of 1932, snce the
ubrcatng o s not sod for e port and n due course so e ported.
Reguatons 44. rtce 11: Scope of ta . I 8-5886
S. T. 581
Ta abty of ubrcatng os seaed n the crank ca.se of mechan-
ca refrgerators.
dvce s requested whether ubrcatng o sod for use n the
manufacture of compressors for mechanca refrgerators s sub|ect to
the ta mposed under secton 601 (c) of the Revenue ct of 1932
and whether t may be sod ta -free to manufacturers under secton
620 of the Revenue ct of 1932.
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5601, Regs. 44, rt. 15.
452
It s hed that o whch s seaed n the crank case of the com-
pressor of a mechanca refrgerator s a component matera n the
manufacture of such compressor. Therefore, ubrcatng o pur-
chased for use n the manufacture of compressors for ta abe refrg-
erators (the househod type) may be purchased ta -free by vrtue of
secton 620.
owever, ubrcatng o sod for use as a component part of com-
pressors on nonta abe refrgerators (commerca) may not be sok
ta -free under the provsons of Treasury Decson 4339 (see on page
446).
Reguatons 44, rtce 11: Scope of ta . T-49-5901
S. T. 588
Ta abty of saes of ubrcatng os purchased for resae.
dvce s requested concernng the appcaton of the ta mposed
under secton 601 (c) of the Revenue ct of 1932 to saes of ubr-
catng o purchased soey for resae.
certfcate of regstraton has been ssued to the Corporaton
under the provsons of artce 11 of Reguatons 44, as amended by
Treasury Decson 4339 (see on page 446), cassfyng t as a man-
ufacturer or producer of ubrcatng os. The corporaton desres
to purchase ubrcatng o ta -free for resae n the same form n
whch purchased.
The prmary purpose of secton 620 of the Revenue ct of 1932
s to prevent the pyramdng of ta es where ta abe artces are
purchased for use n the manufacture of other artces whch are
aso ta abe when sod. Where a person purchases artces ta -
free by vrtue of secton 620 and for some reason does not use a
of such artces n the manufacture of hs own products, he s per-
mtted to rese such artces n the same form as purchased by hm,
n whch event he becomes abe for the ta on such saes.
The provsons of secton 620 are not, however, appcabe to saes
of ubrcatng os when purchased for the soe purpose of resae n
the same form n whch purchased, and, consequenty, saes for
that purpose may not propery be made free of ta .
R W R S WORT, LI UID M LT, M LT SIRUP, ND M LT
TR CT.
Reguatons 44, btce 15: Labeng con- I-31-55SU
taners. T.D.4M1
Ta on brewer s wort, qud mat, mat srup, and mat e tract
secton 601(c)2 of the Revenue ct of 1032 and ta on grape
concentrate, etc. Secton 601(c)3 of the Revenue ct of 1932.
rtces 15 and 19, Reguatons 44, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To Coectors of Interna Revenue and Others Concerned:
rtce 15 of Reguatons 44 s hereby amended to read as foows:
Labeng contaners. ach separate can, keg, or other contaner In whch
any of the artces enumerated n secton 601(c)2 s sod by the
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453
601, Regs. 44, rt. 19.
must have pany shown thereon the true name and address of the manufac-
turer, e cept that If the artces are sod by the manufacturer for resae the
abe may show the name of the vendee, nstead of the manufacturer, preceded
by the words Packed for or Dstrbuted by or some equvaent phrase.
M LT SIRUP.
Reguatons 44, rtce 16: Rate of ta . I-38-5704
( so rtce 14: empt saes.) S.T.495
ed that mat products sod to |obbers and resod by them to
bakeres are ta abe.
dvce s requested concernng the ta abty of mat srup sod
to bakeres by |obbers.
It s stated that some manufacturers are addng the ta of 3 cents
per pound to the seng prce of mat shpped to |obbers and resod
to bakeres.
The ta under secton 601(c)2 of the Revenue ct of 1932 s m-
posed upon the saes of mat products by the manufacturer.
such saes are ta abe uness sod to a baker for use n bakng or
to a manufacturer or producer of mated mk, etc.
Under Reguatons 44, artce 14, the manufacturer, n order to
estabsh the rght to e empton on saes to bakers, must obtan
from the purchaser a certfcate to the effect that he s a baker and
that the products sod are to be used n bakng. Resaes of mat
products by a deaer or |obber are not ta abe and there s no way
by whch ether may cam e empton on resaes to a baker. The
fact that the deaer has rembursed the manufacturer for the ta
s a matter between the two partes concerned and s one over whch
the ureau of Interna Revenue has no |ursdcton.
GR P CONC NTR T S, TC.
Reguatons 44, rtce 19: Labeng con- I-31-5583
taners. T. D. 4341

rtce 19 of Reguatons 44 s hereby amended to read as foows:
Labeng contaners. ach separate can, botte, or other contaner n whch
any of the artces enumerated n secton C01(c)3 s sod by the manufacturer
must have pany shown thereon the true name and address of the manufac-
turer, e cept that f the artces are sod by the manufacturer for resae the
abe may show the name of the vendee, nstead of the manufacturer, preceded
by the words Packed for or Dstrbuted by or some equvaent phrase.
Davd urnet,
Commssoner of Interna Revenue.
pproved uy 20, 1932.
Ogden L. Ms,
Secretary of the Treasury,
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602, Regs. 46, rt. 19.
454
S CTION 602. TIR S ND INN R TU S.
Reguatons 46, rtce 14: changes, etc.
I-52-5954
S. T. 613
Where defectve artces are repaced by the manufacturer under
a guaranty contract, and the manufacturer receves no consderaton
for the new artce e cept the orgna artce whch s defectve, the
transacton s not a sae and s not sub|ect to the ta mposed by
secton 602 of the Revenue ct of 1932. Ths s true rrespectve
of whether the orgna artce was sod before or after the effectve
date of the ct, provded the orgna artce s repaced n knd.
The term tres as used n secton 602 of the Revenue ct of
1932 ncudes a knds of rubber casngs, rubber hoops, and rubber
strps or bands desgned and shaped or but to form the tread of
a whee or to ft a whee, and commony or commercay known
as tres. The test of ta abty of tres used on chdren s toys
s whether they are rea or mtaton. If they are rea tres,
they are ta abe f mere mtatons, they are not sub|ect to ta .
n opnon s requested wth respect to the ta es on tres and toys
as apped to certan artces under the Revenue ct of 1932.
Secton 602 of the Revenue ct of 1932 mposes certan ta es on
tres and nner tubes. The term tres as used n secton 602 of
the above-mentoned ct ncudes a knds of rubber casngs, rubber
hoops, and rubber strps or bands desgned and shaped or but to
form the tread of a whee or to ft a whee f these artces have
reached such a state of manufacture that they consttute artces
commony or commercay known as tres, but does not ncude raw
matera used n the manufacture of tres. Tres of ether the sod
or pneumatc type are sub|ect to ta rrespectve of whether they are
desgned for use on whees for automotve vehces, carrages, bcy-
ces, whee chars, wagons or other vehces, hand trucks, scooters,
trcyces, etc.
The term tres does not ncude sod rubber whees, or mere rep-
resentatons of tres whch are not capabe of use n the same manner
as the orgna tre mtated. Tres on do carrages, on the other
hand, are rea tres, and are sub|ect to the ta .
If a toy manufacturer has on hand a suppy of fnshed tres or
tubngs whch was purchased from another manufacturer before
une 21, 1932, he w not be abe for any ta thereon f he uses
them on toys sod after that date.
The sae of tubng n engths s not ta abe but the cuttng up
thereof nto szes for use s hed to be a manufacturng process.
When these szes are ftted to ta abe artces the manufacturer
(. e., the one who cuts them up) s abe for the ta on hs saes.
The ureau has no suggestons to make as to how the ta on tres
may be passed on by the manufacturer. e has the choce of
absorbng the ta , of bng the ta separatey from the seng
prce of the a-uces, or of ncudng the ta n the seng prce
Reguatons 46, rtce 19: Scope of ta .
I-34-5632
S. T. 465
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455
603, Regs. 46, rt. 8
wthout separate bng. The ureau w nterpose no ob|ecton
to any of these methods.
It s stated that there s some confct between the terms of artce
19 of eguatons 46, provdng that tres used on chdren s toys
are ta abe, and artce 56 of these reguatons, provdng that
chdren s toys are not ta abe. The test of ta abty of tres used
on chdren s toys s whether they are rea or mtaton. If they are
rea tres, they are ta abe f mere mtatons, they are not sub|ect
to ta .
Reguatons 46, rtce 19: Scope of ta . I-38-5705
ed that rentas receved from the ease of tres and Inner
tubes are ta abe on devery of artces.
dvce s requested whether rentas receved from the ease of tres
and nner tubes are ta abe under secton 602 of the Revenue ct of
1932.
Secton 618 of the Revenue ct of 1932 provdes that, for the
purposes of ths tte, the ease of tres and tubes sha be consdered
the sae of such artces.
The ta on tres and tubes supped under a meage contract s
ncurred at the tme when such tres and tubes are devered by the
tre manufacturer to hs customer and shoud be computed on the
fu weght of such artces.
owever, no ta s due on tres and tubes devered pror to une
21,1932, under eases coverng meage contracts.
Where three pants are operated under one ownershp, hed that
no ta s due on transfers of goods from one pant to another but
shoud be computed on frst saes to outsde Interests.
dvce s requested on certan questons reatng to the ta mposed
by secton 603 of the Revenue ct of 1932. The questons and ru-
ngs are gven beow n the order n whch presented.
1. manufacturer who operates three pants, one ocated n
Pennsyvana, one ocated n Inos, and a thrd ocated n New
York, a of whch se ther products to the reta druggst and to
the whoesae druggst, asks three questons:
(a) Where the branch pant In Pennsyvana ses to the branch pant n
Inos a ta abe toet artce whch s a competed package and s ntended
for resae by the pant n Inos to ether reta or the whoesae trade, who
s supposed to pay the ta the pant n Pennsyvana on the bass of prce
charged to the Inos pant, or the pant n Inos on the bass at whch t
w se ths partcuar toet artce
The three pants referred to are a part of one manufacturng cor-
poraton. When one pant ostensby ses to another the trans-
160003 33 30
S. T.496
S CTION 603. TOIL T PR P R TIONS, TC.
Reguatons 46, rtce 8: ass of ta on
saes generay.
I-37-5684
S. T. 487
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603, Regs. 46, rt. 22.
456
acton s not a bona fde sae but merey represents a transfer from
one part of the corporaton to another. Under these crcumstances
the manufacturng corporaton shoud pay ta on the prce at whch
the Inos branch ses the artces to outsde nterests.
(b) The pant n Pennsyvana ses a shavng oton n buk to the branch
pant n New York, shppng 50 gaons of ths matera to that pant and
makes a far prce charge of 1 per gaon for ths shavng oton to that pant.
Is the pant n Pennsyvana abe to the 10 per cent ta on ths toet artce,
or s the New York pant supposed to pay the ta upon the botted shavng
oton whch t packages from the buk matera receved from Pennsyvana
The ta woud attach to the sae prce by the New York pant.
(c) One of these pants ses the other pant an artce of toet water, whch
toet water Is botted at the one pant and shpped to the other pant unabeed.
Whch pant s supposed to pay the ta the pant whch suppes ths artce
unabeed, or the pant whch eventuay paces the abe onto the contaner
The ta attaches to the prce for whch the abeed artce s sod.
Reguatons 46, rtce 22: Scope of ta . I-36-5663
S. T.478
rtces produced by druggsts pursuant to bona fde prescrp-
tons of physcans and dentsts are not consdered ta abe as toUet
artces e cept where a prescrpton specfes that t s for toet
purposes.
n opnon s requested as to whether the ta mposed by secton
603 of the Revenue ct of 1932 on toet preparatons, etc., w at-
tach where the druggst fs prescrptons of physcans and dentsts.
Certan cases referred to are those n whch the fnshed artce or
preparaton s smar n nature and susceptbe of the same uses as
n the case of artces enumerated n the statute whch are prepared
or manufactured on a commerca bass by manufacturers of toet
preparatons and cosmetcs.
It s contended that the absence of an ta on medcne, and the
unversa recognton of physcans prescrptons as medcna n
character, afford ground for the concuson that the artces produced
pursuant to physcans prescrptons are not ta abe as toet artces.
It s aso contended that preparatons covered by physcans and
dentsts prescrptons are aways for medcna and never for toet
use.
y the terms of secton 603 of the Revenue ct of 1932 ts appca-
ton s mted to artces used or apped or ntended to be used or
apped for toet purposes. Whether artces are used or ntended
to be used for toet purposes s a queston of fact. prescrpton
wrtten for a toet purpose, as dstngushed from a medcna prep-
araton, s no doubt a rarty. It s the opnon of ths offce that bona
fde prescrptons of physcans and dentsts censed under the aws
of the State or other approprate governmenta entty shoud be con-
sdered as wrtten for medcna purposes, and that druggsts may
treat preparatons compounded thereunder as e empt e cept where
the physcan or dentst wrtng the prescrpton specfes on ts face
that t s for a toet purpose.
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457
603. Regs. 46, rt. 22.
Reguatons 46, rtce 22: Scope of ta . I-37-5685
S. T.488
Ta abty of manufacturer s saes of permanent wave soutons
and pads used as accessores to permanent wave machnes and
treatments.
dvce s requested whether the ta mposed by secton 603 of
the Revenue ct of 1932 appes to a manufacturer s sae of perma-
nent wave soutons and pads used as accessores to permanent wave
machnes and treatments.
It s stated that the permanent wave soutons are apped to
pads whch n turn are apped to the har and heated by wave ma-
chnes, thereby mpartng so-caed permanent waves to the har.
The permanent wave pads used as accessores to permanent wave
machnes and the accompanyng permanent wave souton are not
ta abe under secton 603 of the evenue ct of 1932. owever,
substances or preparatons apped drecty to the har n producng
fnger waves or wave sets are ta abe under the aw when
sod by the manufacturer, producer, or mporter.
Reguatons 46, rtce 22: Scope of ta . I-38-5706
S. T. 497
Styptc pencs hed not ta abe.
dvce s requested whether styptc pencs are sub|ect to the ta
mposed on toet preparatons, etc., under secton 603 of the Revenue
ct of 1932.
Styptc pencs are advertsed and sod as effcacous n heang
cuts qucky n stoppng the fow of bood at once and n strength-
enng a tender skn. They are aso represented as beng a remedy
for canker, sore mouth, fever bsters, and nsect btes.
It s hed that styptc pencs are not toet artces and are not
sub|ect to the ta mposed under secton 603 of the Revenue ct of
1932.
Reguatons 46, rtce 22: Scope of ta . I-39-5728
S. T.506
Cocoa butter, f abeed or advertsed as a toet preparaton, s
ta abe under secton 603 of the Revenue ct of 1932.
The queston s presented whether cocoa butter s sub|ect to the
ta mposed on toet preparatons under secton 603 of the Revenue
ct of 1932.
Cocoa butter s not ta abe under secton 603 of the Revenue ct
of 1932, uness t s abeed or advertsed for toet purposes, or pre-
pared n stcks or cakes smar to cakes of soap, or s sod n such
other forms as to ndcate that t s ntended to be used for toet
purposes. If the product s so prepared, advertsed, or sod, t s
ta abe under secton 603 of the Revenue ct of 1932.
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603, Regs. 46, rt. 22.
458
Reguatons 46, htce 22: Scope of ta . I-40 5751
G.C.M. 10960
rtces Intended for appcaton to the human skn to cover
brthmarks hed ta abe.
n opnon s requested whether an artce resembng pant,
ntended for appcaton to the human skn to cover brthmarks, s
ta abe as a toet preparaton or cosmetc under secton 603 of the
Revenue ct of 1932.
Whether an artce s ta abe as a cosmetc depends upon the
purpose for whch t s sod or used. It s contended that the artce
n queston shoud be e empt from ta because t s a necessty.
There s no ega bass for dstncton between cosmetc necesstes
and cosmetc u ures. If an artce s a cosmetc t s ta abe,
whether t be a necessty or a u ury. The ureau has consdered
the queston of whether ths artce s a cosmetc, and whether there
s a bass for dstngushng, as to cosmetc propertes, between
artces whch, ke the ordnary cosmetc, are prmary used to
ornament or beautfy, and an artce used not so much to ornament
or beautfy as to hde or neutraze a dsfgurement or deformty.
In other words, whether any dstncton shoud be made between
artces commony used to mprove or beautfy the norma and an
artce commony used to neutraze the abnorma.
It s hed that there s no substanta ground for a dstncton.
The ordnary use of cosmetcs s to beautfy or ornament the norma,
but such s not ther ony use. The word cosmetcs s used to denote
substances of dverse orgn scentfcay compounded and used
(1) to ceanse, (2) to aay skn troubes, (3) to cover up mperfec-
tons, and (4) to beautfy. mong the artces regarded as cosmetcs
are bath preparatons denta preparatons, comprsng tooth pow-
ders and pastes together wth qud dentfrces har preparatons,
ncudng bay rum, har toncs, shampoos, and depatores p stcks
mancure preparatons rouges shavng preparatons skn creams,
and soaps. (See ncycopeda rtannca, 14th dton, voume 6,
page 485.)
substance used for coverng mperfectons s ndcated by the
defnton of a cosmetc. It can hardy be dsputed that the use of
an artce for the purpose of hdng mnor skn bemshes such as
freckes, sunburn, warts, and eruptons woud be a cosmetc use. The
use of rouge or powder to cover a sma brthmark woud kewse
hardy be questoned as a cosmetc use. The e tent of the dsfgure-
ment shoud make no dfference n prncpe. If t dd t woud be
dffcut to draw a ne of demarcaton between bemshes of dfferent
szes. Nether can t make any dfference n prncpe that the artce
under consderaton s a qud, whereas cosmetcs desgned for
beautfcaton are usuay n the form of powders or pastes. In so
far as the ta s concerned, there s tte dfference between a so-
caed qud powder apped to hde undue redness of the skn and
a smar artce used to cover brthmarks.
That t was the ntenton of the awmakers that the ta on toet
artces shoud be e tensve n ts scope s shown by the mposton
of the ta not merey on the artces specfcay mentoned but aso
on a smar artces by whatsoever name known or dstngushed.
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459
603, Regs. 46, rt. 22.
Ths comprehensve provson seems to remove any ground that
mght otherwse e st for the makng of fne dstnctons, provded
the artce under consderaton meets the test of beng smar to one
or more of the artces specfcay named n the aw.
It s the opnon of ths offce that the artce n queston s ta abe
under secton 603 of the evenue ct of 1932.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
Reguatons 46, rtce 22: Scope of ta . I-45-5841
S. T. 559
Ta abty of cgarette cases and vanty cases as contaners of
cosmetcs.
rung s requested concernng the appcaton of secton 603 of
the Revenue ct of 1932 to cgarette cases and vanty cases used as
contaners for cosmetcs.
Secton 619 of the Revenue ct of 1932 provdes that n determn-
ng the prce for whch an artce s sod there sha be ncuded any
charge for coverngs and contaners of whatever nature.
The cgarette and vanty cases submtted for a rung were of
consderabe vaue, the manufacturer s prce beng doars per
dozen and hgher. Most of the cases contan a sma meta pate
wth a coatng of rouge. Some of the artces have receptaces for
face powder.
The mere fact that a sma quantty of cosmetcs of neggbe
vaue s paced n a vauabe case does not warrant the concuson
that the atter s a contaner wthn the meanng of secton 619.
The ony rea consderaton for the prce pad s the vaue of the
case and not the comparatvey neggbe vaue of the cosmetc
whch s ncuded to dspay or set-off the case. Therefore, such
cases are not contaners for the cosmetcs, wthn the meanng of
secton 619.
person who purchases cosmetcs and paces them n such cases
s not deemed to be a manufacturer or producer of cosmetcs. The
ta under secton 603 s mposed upon the sae of the cosmetcs to
hm by the manufacturer and not upon the sae of the assemby by
hm. person who manufactures cosmetcs and paces them n such
cases for sae shoud compute the ta on the prce of the cosmetcs
aone and b the same to the purchaser as a separate tem.
owever, f the cosmetc nserted n a compact, vanty case, or
smar contaner s substanta n amount and the far manufac-
turers seng prce of a ke amount of cosmetc bears a substanta
reaton to the sae prce of the competed assemby the prncpa
artce sod s the cosmetc, and the ta under secton 603 of the
Revenue ct of 1932 appes to the tota amount for whch both
the cosmetc and the contaner are sod.
It shoud be borne n mnd that f vanty cases or cgarette cases
such as those referred to herenbefore are made of, or ornamented,
mounted or ftted wth, precous metas or mtatons thereof or
vory, they may be sub|ect to the ta on |ewery, etc., mposed by
secton 605 of the Revenue ct of 1932.
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604, Regs. 46, rt. 24.
460
S CTION 604. URS.
Reguatons 46, rtce 24: Scope of ta . I-35-5646
S. T.470
Dyed and processed ambskn and sheepskn ta abe as fur.
Dyed and processed ambskn or sheepskn are consdered fur and
artces made therefrom or of whch such ambskn or sheepskn s
the component matera of chef vaue are hed to be ta abe under
secton 604 of the Revenue ct of 1932.
Reguatons 46, rtce 24: Scope of ta . I-38-5707
S. T. 498
Interpretaton of the term e cusve of abor charges for
manufacturng or producng the artce.
dvce s requested concernng the meanng of the term e cusve
of abor charges for manufacturng or producng the artce, used
n artce 24 of Reguatons 46, reatng to the ta on furs under
secton 604 of the Revenue ct of 1932.
The words abor charges for manufacturng or producng the
artce were used to make t cear that n computng the cost of the
materas used n a fur artce n order to ascertan whether such an
artce s ta abe, such charges can not be consdered as matera
wthn the meanng of the aw. The foowng e ampes w make
ths nterpretaton cearer:
ampe 1: Where artces used n a garment consst of fur cost-
ng 20 coth costng 10 buttons costng 5 and fndngs, etc.,
costng 3, the garment s ta abe on the entre prce for whch sod
because no one of the other materas e ceeds n vaue the cost of the
fur used n the artce. If abor charges n the sum of 25 shoud be
added for manufacturng, the artce woud st be ta abe on ts
seng prce because the abor charge s not a factor n determnng
whether ta s due. The cost of the fur woud st e ceed n vaue
the cost of any of the other component materas and ths fact aone
woud render the fnshed garment ta abe.
ampe 2: Where the fur n a garment costs 20, the coth 25,
the buttons 5, and the fndngs 3, the artce woud not be ta abe
because one snge matera, the coth, e ceeds n vaue the fur used.
Reguatons 46, rtce 24: Scope of ta . I-39-5729
S. T. 507
Method of computng the ta .
In decdng whether fur s the component matera of chef vaue
used n makng fur-trmmed coth coats, the manufacturer may use
the cost of the fur set or fur trmmngs and e cude any ta actuay
pad thereon under secton 604 of the Revenue ct of 1932.
Where more than one purchase of fur s used n makng up a ne
of fur-trmmed coats and the varous fur purchases were made at
dfferent prces, wth the resut that the vaue of the fur used on two
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461
15605, Regs. 46, rt. 28.
coats of the same stye and quaty dffers, the cost of the fur n each
garment may be averaged, provded a separate cacuaton sheet
usng averaged prces s made for each mode of coat. or e ampe,
the cost of fur and of coth used n makng dfferent styes of fur-
trmmed coats n msses and stout modes may not be averaged. The
pan must be restrcted to szes of a snge mode.
The manufacturer who ses both ur-trmmed and untrmmed
coats must keep adequate records showng the number of each knd
manufactured by hm and to whom sod. Smar records must be
mantaned by a coat manufacturer who buys for resae the coats of
other manufacturers. whoesaer who cams that he s not a
manufacturer wthn the meanng of secton 604 of the Revenue ct
of 1932 must keep adequate records to support hs cam.
In vew of the provsons of secton 619(b) of the Revenue ct of
1932, where a manufacturer of artces made of fur or of whch fur s
the component matera of chef vaue transfers such artces to a
seng subsdary and the sae s not an arm s ength transacton, the
far market prce formng the bass of the ta w ordnary be the
prce at whch such artces are sod at whoesae n the open market
by the subsdary. If the subsdary makes no saes at whoesae,
the prce at whch artces of a ke grade and quaty are sod at
whoesae by manufacturers n the ordnary course of trade may be
used as the bass for determnng a far market prce.
If manufacturers se at a st prce, wth the understandng that
the purchaser may take a dscount of a certan agreed percentage
n the event he pays wthn a gven tme, the ta must be returned on
the bass of the st prce as bed. owever, f the payment has been
receved and the dscount taken before the return for the month n
whch the sae took pace s prepared, the net amount may be used as
the bass for ta payment. If the goods are bed at the net prce,
deductng the dscount, and f there s no agreement or understand-
ng that the amount to be pad w be more than the net bed prce,
the ta w attach to the net prce for whch sod.
The prces shown on the buyer s order are not concusve as to
the sae prce. In the usua sae for resae the ta w be based on the
prce for whch the manufacturer ses the goods.
S CTION 605. W LRY.
Reguatons 46, rtce 28: Scope of ta . I-36-5664
T. D.4351
Ta on |ewery Secton 605 of the Revenue ct of 1932. rtce
28 of Reguatons 46 amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 28 of Reguatons 46 s hereby amended to read as foows:
bt. 28. Scope of ta . Under secton 605 there s mposed a ta on saes by
the manufacturer of certan artces cassfed as foows:
(1) artces commony or commercay known as |ewery, whether rea
or mtaton
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605, Regs. 46, rt. 28.
462
(2) Pears, precous and semprecous stones and mtatons thereof
(3) other artces uude of, ornamented, mounted, or ftted wth precous
metas or mtatons thereof, or vory and
(4) rtces specfcay mentoned n the ct, such as watches, cocks, parts
for watches or cocks sod for more than 9 cents each opera gasses orgnettes
marne gasses fed gasses and bnocuars.
The ta does not appy to any of the foregong sod for ess than 3, e cept
parts for watches or cocks.
ffectve October 1, 1932, none of the artces sub|ect to ta under secton
605 may be sod ta -free for further manufacture In accordance wth the pro-
vsons of secton 620 uness the purchaser has regstered as a manufacturer
or producer and has been Issued a regstraton certfcate ( orm No. 632)
by a coector of nterna revenue. ach person quafyng as a manufacturer
or producer of artces ta abe under secton 605 (whether seng at whoesae
or reta) w be granted a regstraton certfcate bearng an dentfyng num-
ber, upon appcaton to the coector of nterna revenue for the dstrct n
whch s ocated the prncpa pace of busness of such manufacturer or pro-
ducer (or f he has no prncpa pace of busness n the Unted States, to the
coector at atmore, Md.). Regstraton numbers sha be n separate seres,
begnnng wth the number 1, for each dstrct. ny e empton certfcate
furnshed pursuant to artce 7 of these reguatons must show the regLst raton
number of the purchaser.
The Commssoner s authorzed to cance the regstraton certfcate and to
deny the rght to purchase artces ta -free for further manufacture n any
case where he s satsfed that the regstrant s not a bona fde manufacturer
or producer or that ta -free purchases are beng made for the purposes of
resae n the form In whch purchased.
mong the artces or parts of artces comng wthn the scope of secton
605 whch may be purchased ta -free for further manufacture by a manufac-
turer or producer who compes wth the regstraton provsons, are (1) a
mountngs made of or ornamented, mounted or ftted wth precous metas or
mtatons thereof, or vory (2) pears, precous and semprecous stones and
mtatons thereof, whether uncut or cut and ready for use but not mounted
(3) watch cases, watch movements or mechansms, parts for watches and cocks,
etc., and (4) other smar ncompete or unfnshed artces sub|ect to ta
under secton 605. Parts for watches or cocks seng for more than 9 cents
each may not be purchased ta -free under an e empton certfcate when such
parts are to be used n the manufacture of a watch or cock seng for ess
than 3.
Davd dknet,
Commssoner of Interna Revenue.
pproved ugust 30,1932.
. . aantne,
ctng Secretary of the Treasury.
Reguatons 46, rtce 28: Scope of ta . I-37-5686
S.T. 489
ed, that certan artces mounted or ftted wth precous
metas used n the practce of dentstry are not ta abe.
dvce s requested whether the provsons of secton 605 of the
Revenue ct of 1932 are appcabe to the use of precous metas n
the practce of dentstry.
The ta mposed by secton 605 of the Revenue ct of 1932 on
artces made of, or ornamented, mounted or ftted wth precous
metas or mtatons thereof or vory does not appy to
removabe denta brdges contanng god god crowns and crowns
contanng god parta upper paata bars, contanng precous
metas parta ower ngua bars, contanng precous metas f ed
denta brdgework, contanng precous metas or orthodontc ap-
pances, contanng, precous metas.
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463
605, Regs. 46, rt. 28.
Reguatons 46. rtce 28: Scope of ta . I-42-5792
S. T.531
Ta abty of artces of |ewery used n repars.
dvce s requested concernng the ta abty under secton 605 of
the Revenue ct of 1932 of artces sod for use n makng repars
to |ewery.
The M Company s a manufacturer of |ewery. It aso repars
|ewery. In makng repars t frequenty uses artces whch, f
used n the manufacture of |ewery sod, woud unquestonaby be
ta abe. or e ampe, n reparng a brooch from whch severa
|ewes are mssng new |ewes are supped.
If ta abe artces are manufactured and used by the company
n makng repars, the ta mposed under secton 605 of the Revenue
ct of 1932 attaches to the prce for whch the same or smar
artces are sod n the ordnary course of trade by other manufac-
turers, producers, or mporters. Snce |ewes are added by the com-
pany n reparng the brooch, the amount charged for such |ewes
s sub|ect to the ta mposed under secton 605 of the Revenue ct
of 1932, provded the |ewes so used were manufactured, produced,
or mported by the company or purchased ta -free from other manu-
facturers, producers, or mporters, under secton 620 of the Revenue
ct of 1932.
Reguatons 46, rtce 28: Scope of ta . I-45-5842
S.T.560
Ta abty of damonds nd mountngs when assembed and sod.
dvce s requested concernng certan questons whch have arsen
reatng to the ta mposed on |ewery under secton 605 of the
Revenue ct of 1932.
Where a damond and mountng were purchased by a reta |eweer
pror to une 21, 1932, and were sod separatey on or after such
date n the same form n whch they were purchased, no ta thereon
s due under secton 605 of the Revenue ct of 1932. owever, f
those artces were assembed by the retaer, ether before or after
that date, such retaer s deemed to be a manufacturer or producer
wthn the meanng of the aw and s abe for ta on the prce for
whch the compete assemby s sod. In the event that the assemby
s sod at reta, the ta shoud be computed on the prce for whch
the same or smar artces are sod n the ordnary course of trade
by the manufacturers, producers, or mporters thereof.
If a customer brngs a damond to a deaer to be mounted and the
mountng was manufactured, produced, mported, or further manu-
factured by the deaer pror to the sae, or was purchased ta free
under an e empton certfcate from the manufacturer, producer, or
mporter thereof, the deaer s abe for the ta on the prce for
whch the mountng s sod, uness t s sod at reta, n whch event
the ta shoud be computed on the prce for whch the same or a
smar mountng s sod n the ordnary course of trade by the manu-
facturer, producer, or mporter. Where a damond s sod by the
deaer whch was not manufactured, produced, mported, or further
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5605, Regs. 46, rt. 29.
464
manufactured by hm, or purchased ta free under an e empton
certfcate, no ta s due on the sae of such stone by hm.
In the event ta abe artces are manufactured, produced, or m-
Sorted by reta |eweers, the ta mposed under secton 605 of the
Revenue ct of 1932 attaches when such artces are sod on and
after une 21, 1932, even though they were manufactured, produced,
or mported pror to such date. If customers brng mountngs and
damonds to a retaer for the soe purpose of beng assembed, the
assembng of such artces s not a sae by the manufacturer, pro-
ducer, or mporter, and no ta w be due from the assember on the
amount charged for merey assembng the artces.
Under secton 622 of the Revenue ct of 1932, the use of a ta abe
artce s sub|ect to ta n the same manner as f such artce were
sod. The assemby of ta abe artces s deemed to be a manufac-
turng or producng process. Customers who have ta abe artces
assembed by others for ther own use are deemed to be manufac-
turers or producers wthn the meanng of the aw and are abe for
the ta mposed under secton 605 of the Revenue ct of 1932, based
on the prce for whch the same or smar artces are sod n the
ordnary course of trade by the manufacturers, producers, or m-
porters thereof. Where ta abe artces are assembed for customers
the person who does the assembng shoud report to the coector
the name and address of such customers, pror to the devery of the
artces, together wth such nformaton as w show the prce for
whch the same or smar artces are sod n the ordnary course
of trade by manufacturers, producers, or mporters.
In computng the ta due on the sae of the compete artces,
credt may be taken for any ta prevousy pad to the manufac-
turers, producers, or mporters of the parts so assembed.
Reguatons 46, rtce 29: ewery. I-44-5824
S. T. 549
Ta abty of embems for coeges, scboos, and cobs.
dvce s requested concernng the ta abty of embems for co-
eges, schoos, and cubs under secton 605 of the Revenue ct of
1932 mposng a ta on |ewery.
It s hed that coege, schoo, cub, fraternty, sororty, and hos-
)ta pns, rngs, buttons, charms, embems, and guards, and ath-
etc awards n the form of pns, buttons, medas, and charms, when
made of, ornamented, mounted, or ftted wth precous metas or m-
tatons thereof, or vory, are ta abe as |ewery under secton 605 of
the Revenue ct of 1932, when sod by the manufacturer, producer,
or mporter for 3 or more.
Trophes and cups are not ta abe under secton 605 uness made
of, or ornamented, mounted, or ftted wth precous metas (e cept
sver-pated ware) or mtatons thereof, or vory.
though secton 605 specfcay e empts from ta sver-pated
ware, yet ths e empton does not appy to sver-pated artces com-
mony or commercay known as |ewery, whether rea or mtaton.
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4G5
605, Regs. 46, rt. 32.
Reguatons 46, rtce 31: rtces other I-35-5650
than |ewery, made of, or ornamented, S. T. 472
mounted, or ftted wth, precous metas
or mtatons thereof, or vory.
ountan pens ftted or ornamented wth precous metas or
Imtatons thereof hed ta abe.
n opnon s requested reatve to the appcaton of the ta m-
posed under secton 605 of the Revenue ct of 1932 to fountan pens
ornamented or ftted wth precous metas or mtatons thereof.
These fountan pens have four parts whch are made of precous
metas or mtatons thereof, namey, the god pen pont, the ever,
the cp, and the band at the bottom of the cap.
Secton 605 of the ct mposes a ta on a artces made of, or
ornamented, mounted or ftted wth, precous metas or mtatons
thereof or vory .
It s hed that the fountan pens above descrbed are wthn the
scope of the statute and are sub|ect to the ta mposed under secton
605 of the Revenue ct of 1932 at the rate of 10 per cent of the prce
for whch sod, provded they are sod for 3 or more.
Reguatons 46, rtce 32: Watches and cocks. I-38-5708
( so Sectons 606, 607, 619, 620, 622, and 626.) S. T. 499
Ta abty of watches and cocks and cock parts.
Request s made for an nterpretaton of varous provsons of the
Revenue ct of 1932, n ther appcaton to the sae of cocks and
cock parts. The questons rased, foowed by the answers, are set
forth herenafter.
ueston: Secton 605 of the Revenue ct of 1932 provdes that
watches, cocks, and parts for watches or cocks sod for more than 9
cents each are ta abe at 10 per cent of the prce for whch so sod.
The same secton defntey states that No ta sha be mposed
under ths secton on any artce (other than watch parts
or cock parts) sod for ess than 3. Does ths mean that f the
parts are used for a cock sod for ess than 3, f they are sod for
more than 9 cents they are st ta abe
nswer: Secton 605 of the Revenue ct of 1932, beng specfc n
ts appcaton to parts for watches and cocks, s deemed to be con-
trong n computng the ta es due on the sae of such artces,
rrespectve of the 3 e empton appearng esewhere n the secton.
In other words, a saes of parts for watches or cocks arc sub|ect to
the ta when sod for more than 9 cents each.
ueston: Secton 620 of the Revenue ct of 1932 covers the sae
of artces for further manufacture and provdes as foows:
Under reguatons prescrbed by the Commssoner wth the approva of the
Secretary, no ta under ths tte sha be mposed upon any artce
sod for use as matera n the manufacture or producton of, or for use as
a component part of, an artce to be manufactured or produced by the vendee
whch w be ta abe under ths tte or sod free of ta by vrtue of ths secton.
If the vendee reses an artce sod to hm free of ta under ths secton, then
for the purpose of ths tte he sha be consdered the manufacturer or pro-
ducer of such artce.
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605, Regs. 46, rt. 32.
466
Does ths mean that f a manufacturer ses watch or cock move-
ments and those movements are ncorporated n a case or ses watch
or cock parts and those parts are used n the further manufacture of
a watch or cock or ses automobe cocks that are accessores to an
automobe or ses stove range cocks to turn on and turn off stoves
that are component parts of the eectrc range to whch they are to be
attached or that they se rado cocks that are component parts of
the rado set on whch they are paced, the manufacturer s not
requred to pav any ta on these under secton 605 of the Revenue
ct of 1932
nswer: dstncton s drawn between saes of parts of cocks
or watches to manufacturers of cases and saes of automobe cocks
to manufacturers of automobes. If the parts of cocks or watches
are sod for more than 9 cents each and f the watches n whch those
parts are used are sod for ess than 3, no ta woud be due on the
fnshed product and, consequenty, the credt provsons n the aw
coud not be apped. It foows that the ta must be pad under such
condtons by the person who manufactures and ses the parts. If
the parts are sod to manufacturers for use n the manufacture of
watches or cocks seng for more than 3, the parts coud be sod ta -
free under an e empton certfcate and the second manufacturer
coud pay ta on hs fnshed product or, f preferred, the frst manu-
facturer coud pay the ta and the second manufacturer, on seng
hs ta abe products n whch the ta -pad parts have been ncor-
porated, coud compute the ta on hs sae prce and take credt on
hs return coverng these saes for the ta prevousy pad on such
parts.
manufacturer or producer may se hs cocks ta -free under
e empton certfcates for use as matera n the manufacture or pro-
ducton of other artces ta abe under Tte I of the ct. If the
second manufacturer ncorporates the cocks n a ta abe artce pro-
duced by hm, he shoud compute ta on hs sae of the artce or
assemby at the rate of ta appcabe to hs product. Where, for
any reason, he ses the cocks whch he acqured ta -free (e cept
to another manufacturer of ta abe artces), wthout usng them as
matera n the manufacture or producton of, or as a component
part of, hs product, he must pay ta on such resae at the rate of 10
per cent, as requred by secton 605 of the Revenue ct of 1932,
provded the cocks are sod by hm for 3 or more.
ueston: re cock movements sod to manufacturers of tme
swtches and ncorporated n tme swtches ta abe under secton
COS n vew of the provsons of secton 620
nswer: The ta shoud be pad on the sae of the cock movements.
ueston: re parts that are e ported out of the country and as-
sembed n a foregn pant owned by a manufacturer and subse-
quenty sod ta abe re cocks that are e ported or parts that
are e ported sub|ect to ta
nswer: rtces sod for e port and n due course e ported are
not ta abe. If manufactured abroad and ater mported nto ths
country, the sae n ths country of the parts or of the competed
watch or cock by the mporter woud be sub|ect to the ta .
ueston: Shoud the cock companes who have assemby pants,
say, n Canada, and who shp parts from the Unted States pay a
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467
605, Regs. 46, rt. 32,
10 per cent ta on these parts gong to Canada, f vaued at more than
9 cents, even though they mght enter nto cocks sod for ess than
3 Canada has a protectve tarff aganst compete cocks and most
mercan manufacturers shp ther parts nto Canada and assembe
them there. ow w ths busness be affected by ths partcuar
aw If an mercan company assembes cocks n Canada and
ses them n Canada, are they st sub|ect to the 10 per cent ta
eved under secton 605 of the Revenue ct of 1932
nswer: The ta s mposed upon artces sod n ths country by
the manufacturer, producer, or mporter. If parts of cocks or
watches are e ported to Canada by the manufacturer or mporter
and sod there, no ta coud be mposed on ths procedure by the
Unted States. owever, f the artces shoud ater be mported
nto ths country ther sae or use by the mporter fcvoud be ta abe.
ueston: Secton 606 of the Revenue ct of 1932 covers automo-
be cocks. utomobe cocks are a far porton of the tota cock
busness. On what bass w automobe cocks be ta ed These
cocks are but especay for automobe use and are known n the
trade as automobe accessores, but st they are cocks. If they are
sod to a dstrbutor and ncorporated n a car, on what bass w
they be ta ed and on what bass w the ta be pad on the sae of
the car wth the automobe cock Secton 607 of the Revenue ct
of 1932. Cocks are used to a arge e tent n rado sets. On what
bass w cocks so used be ta ed
nswer: The test of ta abty of cocks for automobes or rados
s whether they are prmary cocks or whether by ther speca con-
structon or desgn they are prmary parts or accessores for auto-
mobes or rados. If they are prmary cocks, they are sub|ect to
the ta on the sae of cocks at the 10 per cent rate mposed by the
aw. If, however, ther prmary or chef use s that of parts or acces-
sores, they may be sod ta -free to manufacturers of automobes or
rado apparatus under e empton certfcates. Saes of cocks to
dstrbutors or deaers who se to owners and not to manufacturers
as orgna equpment, are ta abe under the same genera rue, de-
pendng entrey upon whether they are cocks for genera use, n
whch event ther sae woud be ta abe at the 10 per cent rate, or
whether desgned prmary for use on an automobe or rado, n
whch event ther sae woud be ta abe at the ower rate.
ueston: Secton 619 of the Revenue ct of 1932. Can the trans-
portaton and devery costs be deducted from the seng prce to
ascertan the ta ow can the amount of such costs be estabshed
to the satsfacton of the Commssoner
nswer: Charges for transportaton, devery, nsurance, nstaa-
ton, and other charges whch have no connecton whatever wth the
manufacturng process are to be e cuded n computng the ta . The
aw provdes that there sha be ncuded n the prce for whch an
artce s sod any charge for coverngs and contaners of whatever
nature and any charge ncdent to pacng the artce n condton
packed ready for shpment. No partcuar method of estabshng
ths rght to deducton has been prescrbed. ny, convncng ev-
dence on ths pont w be accepted.
ueston: Can a consumer who mports artces drect escape any
manufacturers e cse ta , or s t the purpose of secton 622 of the
Revenue ct of 1932 to prevent ths
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605, Regs. 46, rt. 32.
468
nswer: Under secton 622 an mporter who uses a ta abe artce
mported by hm s sub|ect to ta to the same e tent as f the artce
were sod by hm.
ueston: Do the reguatons promugated under secton 621(b)
of the Revenue ct of 1932 aow the e change of merchandse whch
s frequenty necessary to factate trade that s, gve a credt for
goods returned and aow a substtuton for other artces n the
same cass
nswer: Where an unta ed artce s returned to the manufac-
turer for ad|ustment, repacement, or e change, and a new artce
sub|ect to ta s gven n ts stead, free of charge or at a reduced
prce, the ta shoud be computed on the trade-n aowance of the
frst artce pus the payment, f any, for the second artce. If the
returned artce was ta -pad and returned to the manufacturer
thereof for ad|ustment, repacement, or e change, under a guaranty
as to quaty or servce, and a new artce s gven pursuant to the
guaranty, free of charge or at a reduced prce, the ta shoud be
computed on the actua amount, f any, pad to the manufacturer
for the new artce.
ueston: Under secton 626 of the Revenue ct of 1932 does the
ta of 10 per cent have to be pad on the bass that t s co-
ected at the tme that t s bed and added to the nvoce of the
manufacturer
nswer: The ta attaches at the tme when the artce s sod and
t s mmatera, from the standpont of the revenue, whether the sae
s made for cash or on credt. Return shoud be fed and the ta
pad to the coector on or before the end of the month foowng that
n whch the sae occurred, even though the manufacturer does not
receve payment unt afterwards.
Reguatons 46, rtce 32: Watches and cocks. I-46-5854
( so rtce 69.) S.T.565
very manufacturer must keep accurate records of ta abe
transactons.
rtce 69 of Reguatons 46, Revenue ct of 1932. provdes that
every person requred to fe a return and pay ta on the sae or use
of an artce sha keep on fe at hs prncpa pace of busness, or
at some other convenent or safe ocaton, accurate records and
accounts of a ta abe transactons. The records must be of such a
character as w enabe nvestgatng offcers to dentfy each ta abe
artce n stock. or e ampe, records kept by a deaer n watches
must show the watch movement numbers, the case numbers, the name
or names of the manufacturers, producers, or mporters from whom
such artces were purchased, and whether they were purchased sepa-
ratey or as compete watches. In the event such artces were pur-
chased separatey the records must aso show whether they were pur-
chased ta -pad or ta -free under an e empton certfcate from the
manufacturers, producers, or mporters. Records pertanng to parts
for watches or cocks must show whether the parts were purchased
ta -free under an e empton certfcate or purchased ta -pad, as
we as the name or names of the manufacturers, producers, or m-
porters from whom they were purchased.
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469
605, Regs. 46, rt. 3
Reguatons 46, rtce 32: Watches and cocks. I-46-5855
S.T. 566
Ta abty of synchronzed tmng devces.
dvce s requested concernng the ta abty, under secton 605 of
the Revenue ct of 1932, of eectrc tmng devces.
synchronzed system of tmng devces s often sod for use n
pubc schoo budngs, coeges, and other arge budngs. Ths
apparatus conssts of a cock, known as a master cock, whch con-
tans the mechansm of the ordnary cock and, n addton, s con-
nected by eectrc wres wth sma magnetc devces n cock cases,
mounted n separate rooms, whch receve mpuses from the master
cock and regster the tme. The ndvdua mechansms n the sepa-
rate rooms have no power of mechanca operaton e cept as the
eectrc mpuses are transmtted to them from the centra master
cock and can not operate ndependenty of the master cock.
s the ta under secton 605 of the Revenue ct of 1932 s mposed
on cocks, rrespectve of the operatng mechansm, and as the sec-
ondary cocks serve the purpose of ndcatng the tme of day n the
same manner as any other cocks operated by ther own mechansms,
t s hed that the ta attaches not ony to the amount charged for
the master cocks but aso to the amount charged for the secondary
cocks. Parts for both the prmary and the secondary cocks, f sod
for more than 9 cents each, are sub|ect to the ta mposed on cock
parts. Such parts, however, may be purchased ta -free for the
further manufacture of ta abe cocks under the provsons of secton
620 of the Revenue ct of 1932, f the manufacturer s regstered as
provded by Treasury Decson 4351 (see on page 461).
The ta n queston does not attach to saes of cocks to States or
potca subdvsons thereof for use n the e ercse of an essenta
governmenta functon, provded such saes are made drect by the
manufacturer, producer, or mporter to a State or potca subdv-
son thereof wthout any ntervenng sae to a deaer or dstrbutor.
owever, the ta appes to a such artces sod to the Unted States
Government.
Reguatons 46, rtce 32: Watches and cocks. I-47-5872
S.T.572
Ta abty of tmng devces attached to thermostats.
dvce s requested by the Company concernng the ta abty
of tmng devces attached to thermostats under secton 605 of the
Revenue ct of 1932.
The artce n queston s a patented devce desgned, ntended,
and used for the purpose of automatcay controng the tempera-
ture n the structure n whch t s nstaed. mboded n the
thermostat s a speca tmng devce, the mechanca functon of
whch s to change the temperature to a desred degree at a f ed
tme. The tmng devce contans a compete cock movement as
we as addtona parts not ordnary consdered cock parts. t-
tached to the thermostat s a cock da, hands, and case dentca
wth those of the ordnary cock and upon whch the tme of day s
ndcated. It s contended by the Company that the cock face or
tme ndcatng porton of the thermostat s not necessary to ts
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5605, Regs. 46, rt. 34.
470
successfu operaton that the cock face s attached to the thermostat
ony to make t sghty more attractve and that users prefer the
nstrument wth the cock face to the unadorned meta case whch
woud otherwse be used.
Secton 605 of the Revenue ct of 1932 mposes a ta on cocks
when sod by the manufacturer, producer, or mporter for 3 or
more. The tmng devce attached to the thermostat s a cock and
sub|ect to the ta mposed f the sum attrbutabe to the cock porton
equas 3 or more. In bng these thermostats to purchasers, the
amount apportoned to the sae of the cock and the ta thereon
shoud be shown separatey from the amount charged for the thermo-
stat.
Reguatons 46, rtce 32: Watches and cocks. I 50-5918
S. T.597
Ta abty of certan nstruments contanng watch or cock
parts.
dvce s requested reatve to the ta abty under secton 605 of
the Revenue ct of 1932 of recordng thermometers, recordng pres-
sure gauges, recordng barometers, tme swtches, bank ocks, re-
cordng vot meters, fow meters, demand meters, etc.
The nstruments do not serve the purpose of cocks, athough some
of the parts used theren are the same as those used n the manufac-
ture of cocks.
Secton 605 of the Revenue ct of 1932 mposes a ta on cocks
when sod by the manufacturer, producer, or mporter for 3 or more,
and upon parts for watches or cocks sod for more than 9 cents.
s the nstruments n queston can not be used for ndcatng tme,
they can not be cassfed as ether watches or cocks and, therefore,
are not sub|ect to the ta mposed on those artces.
Some of the parts used n the manufacture of these nstruments, of
the same character as those used n the manufacture of watches and
cocks, are purchased prmary as parts for these nonta abe nstru-
ments. Under such crcumstances they are not sod by the manu-
facturer as parts for watches or cocks and may be sod ta free.
owever, n order to estabsh the rght to the e empton, the manu-
facturer makng a ta -free sae must obtan and retan n hs posses-
son a certfcate from the purchaser to the effect that the purchaser
s a manufacturer and w use the parts n the manufacture of art-
ces other than ta abe watches or cocks. If a manufacturer s
records do not contan certfcates coverng such ta -free saes, wth
supportng nvoces, the ta sha be payabe by hm.
Reguatons 46, rtce 34: emptons. I-38-5709
S. T.500
ed that the ta abty of such artces as crucf es, rosares,
medas, and crosses s dependent upon the prmary purpose for
whch they are to be used.
dvce s requested whether certan artces whch may be used for
regous purposes are ta abe as |ewery under secton 605 of the
Revenue ct of 1932.
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471
606, Regs. 46, rt. 36|
It s hed that artces such as crucf es, rosares, and medas
desgned, nscrbed, engraved, or stamped so as to ndcate that they
are prmary ntended to be used for regous purposes are not sub-
|ect to ta under secton 605 of the Revenue ct of 1932.
owever, pan god crosses crosses made of back ony , orna-
mented wth pears or damonds crosses made of god, ornamented
wth semprecous stones and pears and damond crosses are deemed
to be artces of persona adornment and ta abe as |ewery under
secton 605 of the Revenue ct of 1932.
Reguatons 46, rtce 34: emptons. I-49-5902
S. T. 589
Ta abty of |ewery manufactured or produced by Indans.
Secton 624 of the Revenue ct of 1932 provdes that no ta sha
be mposed under Tte I of that ct on any artce of natve
Indan handcraft manufactured or produced by Indans on Indan
reservatons, or n Indan schoos, or by Indans under the |ursdc-
ton of the Unted States Government n aska.
Snce some Indans manufacture sver artces, ncudng a num-
ber of artces commony known as |ewery, the queston s rased
whether the saes of such artces manufactured by Indans vng
on aotments of and come wthn the terms of the aw.
Nava|o Indans on aotments of and ad|acent to the Nava|o
Reservaton, who are sub|ect to the supervson contro, and |urs-
dcton of the respectve Nava|o Indan agences as we as those
on the reservaton proper, are consdered, for the purpose of secton
624 of the Revenue ct of 1932, as Indans on Indan reserva-
tons. Therefore, a artces of natve Indan handcraft manu-
factured or produced by the Indans vng on aotments of and
of the character ndcated are e empt from the ta mposed by
secton 605 of the Revenue ct of 1932.
S CTION 606. UTOMO IL S, TC.
Reguatons 46, rtce 36: Scope of ta . I-35-5647
S. T. 468
n opnon s requested regardng the ta abty of a tank whch
s nstaed on auto trucks for the transportaton of o and gasone
n commerca quanttes.
It s hed that the manufacturer of ths o or gasone tank s
abe for the ta of 2 per cent on the saes prce thereof under secton
606(a) of the Revenue ct of 1932. Ths tank consttutes a body
and as such comes wthn the provsons of the ct.
Reguatons 46, rtce 36: Scope of ta . I-40-5752
S. T. 514
Ta abty of secondhand motor cyces.
dvce s requested reatve to the ta abty of secondhand motor
cyces under secton 606(b) of the Revenue ct of 1932.
160903 38 81
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606, Regs. 40, rt. 41.
472
Where manufacturer accepts as a trade-n a used motor
cyce made by manufacturer , the resae by manufacturer s
not ta abe because t s not a sae by the manufacturer, producer,
or mporter. owever, n the event that used motor cyces are
so materay changed before beng resod as to ose ther orgna
dentty, the resae of such machnes s sub|ect to the ta mposed
by secton 606(b) of the Revenue ct of 1932.
If any such machnes are acqured by the manufacturer and resod
by hm to the trade after une 21, 1932, ether as new machnes or
as rebut machnes, they are ta abe. Lkewse, f a manufacturer,
pror to une 21, 1932, used ta abe artces of hs manufacture n
connecton wth hs own busness, and subsequent to une 20, 1932,
ses such artces, the saes are ta abe. Where a manufacturer
repossesses hs products and rescnds a sae, a subsequent resae s
sub|ect to the ta mposed by secton 606(b) of the Revenue ct
of 1932.
Reguatons 46, rtce 36: Scope of ta . I- 18-5887
S. T. 582
Repars on automobes performed n a repar shop, such as pant-
ng, uphosterng, changes n, or repacements of, woodwork, and
repars to fenders and bodes are deemed to be n the nature of gen-
era repar work, rather than artces sod, and are not sub|ect to
ta under secton 606 of the Revenue ct of 1932.
Reguatons 46, rtce 41: Defnton of parts I-37-5687
or accessores. S. T. 490
( so Secton 620, Reguatons 46, rtce 7.)
ed that engnes and certan artces used n gasone engne
power unts are sub|ect to ta as automobe parts or accessores.
dvce s requested by the Company reatve to the ta abty
of certan gasone power unts whch consst of an engne and a
necessary accessores mounted on the same base and assembed n a
sef-contaned sef-ncosed unt whch s used as a source of power
for ndustra purposes and never used n automobes.
Such power unts as those descrbed are not sub|ect to the ta
mposed by secton 606 of the Revenue ct of 1932. owever, the
engnes and certan artces used on or n connecton therewth are
automobe parts or accessores and are under secton 606(c) sub|ect
to ta at the rate of 2 per cent when sod by the company, e cept as
herenafter provded.
The Company may se ts engnes and parts therefor to a manu-
facturer of truck or other automobe chasss ta -free, provded such
manufacturer attaches to hs order a certfcate such as that prescrbed
n artce 7 of Reguatons No. 46.
The Company may aso se ts engnes and parts or accessores
therefor (e cept spark pugs, storage batteres, cos, and tmers
whch are sutabe for use on or n connecton wth, or as component
parts of automobe truck chasss, other automobe chasss, and motor
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473 606, Regs. 46, rt. 41
cyces) ta -free for use n the manufacture of nonta abe artces,
provded the purchaser attaches to hs order a statement that the
engnes or parts and accessores w be used on or n connecton wth
an artce other than an automobe truck chasss, other automobe
chasss, or motor cyce.
Reguatons 46, rtce 41: Defnton of I-38-5710
parts or accessores. S. T. 501
ed that Incandescent eectrc bnbs prmary desgned and
adapted for use on automobes are ta abe.
dvce s requested whether ncandescent eectrc bubs when
manufactured for use on automobes are ta abe under secton
606(c) of the Revenue ct of 1932.
Incandescent eectrc bubs prmary desgned and adapted for
use on or n connecton wth automobes are parts or accessores and
ub|ect to the ta mposed under secton 606(c) of the Revenue ct
of 1932. .
Reguatons 46, rtce 41: Defnton of I-47-5873
parts or accessores. S. T. 673
Ta abty of varous artces as automobe parts or accessores.
dvce s requested wth respect to the ta abty of severa artces
used n connecton wth automobes, etc., under secton 606 of the
Revenue ct of 1932.
utomobe toos are not ta abe when sod separatey. owever,
where toos are assembed nto a kt whch s recommended for use n
connecton wth a partcuar make of automobe, the ta attaches on
the manufacturer s sae prce of the kt.
Wreckng cranes sod for mountng on trucks, towng crades used
n connecton wth servce trucks, reborng machnes, vave refacng
machnes, vave regrnders, ar compressors, and pant sprayng
equpment are not consdered as parts or accessores and are not
sub|ect to ta .
ushngs, ba bearngs, waterproof cement, automobe pants,
acquers, and gasket cement are not sub|ect to ta . owever, the ta
attaches to battery cabes and gnton cabe sets, battery bo hod-
downs, and gnton wres when cut nto prepared engths.
The ta aso attaches to rebabbtted connectng rods and recamed
brake drums n whch new stee bands have been nad where they
are paced n stock to be sod as parts and accessores. owever,
where these artces are recondtoned n connecton wth an mmed-
ate . par |ob the ta does not attach.
Spoo cabe, noeum, vctorte, gnton wres, and smar artces
when sod n buk are not ta abe. owever, f a person prepares
these artces to ft partcuar automobes he s consdered the manu-
facturer of an automobe part or accessory and s abe for the ta
mposed under secton 606(c) of the Revenue ct of 1932.
Semfnshed pstons are ta abe f they have reached such a stage
that they consttute artces commony or commercay known as
parts and accessores for automobes or motor cyces, regardess of
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5606, Regs. 46, rt. 41. 474
the fact that fttng operatons may be requred n connecton wth
nstaaton.
Pston pns partcuary desgned for tractors and pston rngs and
pns smaer than those used n motor cyces and arger than those
used n automobe trucks and buses are not ta abe.
Spark pugs, storage batteres, eaf sprngs, cos, tmers, and tre
chans specfcay mentoned n secton 606(c) of the Revenue ct
of 1932 are ta abe as automobe parts or accessores f sutabe for
use on, n connecton wth, or as component parts of automobe
trucks, other automobe chasss, or motor cyces, even though they
are sod for use n the manufacture of nonta abe artces.
Parts or accessores, other than those specfcay mentoned n
secton 606(c), may be sod ta -free for use n the manufacture of
nonta abe artces, provded the purchaser attaches to hs order a
statement that the parts or accessores are to be used by hm n the
manufacture of nonta abe artces.
Reguatons 46, rtce 41: Defnton of I-50-5919
parts or accessores. G. C. M. 11249
Ta abty of certan automobe repar parts.
n opnon s requested concernng the ta abty under secton
606(c) of the Revenue ct of 1932 of repar parts for tmers and cos
sutabe for use on automobes or automobe trucks.
Secton 606 provdes that automobe and automobe truck chasss
and bodes and parts or accessores for such chasss or bodes are
sub|ect to ta . Secton 606(c) provdes that spark pugs, storage
batteres, eaf sprngs, cos, tmers, and tre chans sutabe for use
n connecton wth automobes or automobe trucks, whether or
not prmary adapted for such use, sha be consdered as such parts
or accessores.
n automobe conssts of a number of ma|or parts and each ma|or
part conssts of a number of mnor or subparts. subpart s as much
a part of an automobe as t s a part of a ma|or part. Therefore,
as Congress ndcated that certan artces are parts of automobes,
t foows that parts of the desgnated artces shoud aso be regarded
as automobe parts. Ths vew s supported by the decson of the
Supreme Court n the case of Unversa attery Co. et a. v. Unted
States (281 U. S., 580 C. . I -2, 422 ). In that case the court
sad:
In No. 351 tbe artces sod were gears, fe be shafts, and fe be housngs,
a beng repacement parts for speedometers used on motor vehces. It s con-
ceded that speedometers are accessores but t s nssted that parts of a speed-
ometer can not be such. We thnk they can. speedometer conssts
of dstnct and separate parts, and we perceve no reason why one or more
of these, when manufactured and sod for the purpose shown by the fndng,
shoud not take the same cassfcaton as speedometers.
In No. 352, the ta was ad on saes of bars, brackets, and fttngs for use as
repacement parts for bumpers on automobes. They were desgned, manu-
factured, and sod for such use, and were not adapted for any other. It Is sad
that, whe bumpers are accessores these parts can not be so regarded. We
thnk they are on the same pane as tbe parts of speedometers |ust deat
wth.
The rue stated by the court s n no degree ess appcabe where
the statute specfcay cassfes artces as parts or accessores. The
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475 606, Regs. 46, rt. 41.
same rue must appy whether the artces to whch repar parts
pertan are parts or accessores by vrtue of ther nherent nature or
by vrtue of ther statutory cassfcaton.
It s therefore the opnon of ths offce that parts of parts and
parts of accessores for automobes or automobe truck chasss and
bodes, as we as the parts and accessores themseves, are sub|ect to
the ta .
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
Reguatons 46, rtce 41: Defnton of I-51-5936
parts or accessores. S. T. 605
Ta abty of automobe gass.
dvce s requested concernng the ta abty as parts or acces-
sores, under secton 606 of the Revenue ct of 1932, of automobe
gass.
Where the Company purchases wndshed gass cut to sze
by the manufacturer of such gass, such manufacturer s abe for
the ta and no ta s due on the sae by the Company of the same
artce.
Where the Company purchases wndshed gass n arge szes
and cuts such gass to ft paces provded n partcuar makes of
automobes, whch gass s kept n stock for sae as occason demands,
the Company s hed to be the producer of a ta abe artce ana
sub|ect to ta on ts sae.
Wnd wng brackets are sub|ect to ta when sod by the manu-
facturer, beng consdered parts or accessores for an automobe
wthn the meanng of secton 606(c) of the ct.
Nonshatterabe wndshed gass cut to sze to ft partcuar makes
of automobes, to be nstaed by the automobe owner, s sub|ect
to ta whether used to repace an ordnary pate wndshed, to
repar a broken ordnary pate wndshed, or to repar a non-
shatterabe pate wndshed.
Rear vson mrrors are sub|ect to ta as automobe parts or acces-
sores when sod by the manufacturer thereof. The Company
s abe for the ta on saes of rear vson mrrors of ts own
manufacture.
eadght enses cut from pan gass are not sub|ect to ta , because
not prmary adapted for use on an automobe. On the other
hand| headght enses havng antgare or beam refractng char-
acterstcs, beng prmary desgned for automobe use, are ta abe
when sod by the manufacturer.
Cuttng and nstang operatons n connecton wth gass fur-
nshed by the owner, gass shop, or repar shop, are not sub|ect to
ta .
The Revenue ct of 1932 s effectve as to a saes made by the
manufacturer on and after une 21, 1932, regardess of when the
artce was manufactured. Consequenty, f the Company had on
hand on une 21, 1932, any wndshed gass whch t had pur-
chased cut to sze, saes of such gass woud not be sub|ect to ta .
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607, Regs. 46, rt. 45.
476
Where wndshed gass s sod and cut to sze for nstaaton n
connecton wth an mmedate repar or repacement |ob, rrespectve
of the reason for the repar or the repacement, the transacton s
deemed to be more n the nature of genera repar work than a sae
and s not ta abe.
The Company may aso se artces manufactured by t ta -free
for further manufacture, provded t obtans from the purchaser the
e empton certfcates outned n artce 7 of Reguatons 46.
Reguatons 46, rtce 41: Defnton of I-51-5937
parts or accessores. S. T. 606
Ta abty of ta meters.
dvce s requested reatve to the ta abty of ta meters under
secton 606(c) of the Revenue ct of 1932.
Ta meters are automobe accessores and are ta abe under sec-
ton 606(c) of the Revenue ct of 1932. Sma parts used n ta -
meters, such as bushngs, pns, evers, and gears, whch are com-
merca commodtes not specay desgned for use n ta meters, are
not ta abe when sod separatey.
No ta s due upon the sae of rebut or secondhand ta meters
under secton 606(c) of the Revenue ct of 1932, provded they are
not rebut or refnshed to the e tent that they ose ther orgna
dentty.
Where a ta meter s repossessed by the manufacturer for non-
payment of the purchase prce and the sae rescnded, the ta w
attach to the prce at whch the artce s resod by the manufac-
turer, but f a ta was pad on the frst transacton, a credt or
refund may be camed n the amount of that part of the ta pad
whch s proportonate to the part of the sae prce whch s re-
funded or credted to the frst purchaser.
S CTION 607. R DIO R C I ING S TS, TC., ND
P ONOGR P R CORDS.
Reguatons 46, rtce 45: Rado apparatus. I-35-5651
S. T. 473
Ta abty of bezes and escutcheons used on rado cabnets.
n opnon s requested as to whether the ta mposed by secton
607 of the Revenue ct of 1932 s appcabe to bezes or escutcheons
sod to rado manufacturers.
The partcuar artces referred to are the ornamenta meta peces
whch are paced on the front of a rado cabnet around the wndow
n whch the da appears.
It s hed that no ta w attach to the saes of such artces to a
manufacturer of rado cabnets. owever, f such ornamenta meta
peces are sod by the rado cabnet manufacturer on or n connecton
wth the sae of a rado cabnet they are sub|ect to the ta mposed
by secton 607 of the Revenue ct of 1932.
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477 608, Regs. 46, rt. 48|
Reguatons 46, rtce 46: Phonograph rec-
ords.
I-44-5825
S. T. 550
ectrca transcrptons used for broadcastng purposes are ta -
abe as phonograph records.
dvce s requested concernng the ta abty of eectrca tran-
scrptons as phonograph records.
rtce 46 of Reguatons 46, Revenue ct of 1932, provdes that
a phonograph records are sub|ect to ta regardess of the sub-
stance of whch made or the manner n whch used.
ectrca transcrptons used by broadcastng systems are phono-
graph records and are ta abe as such under secton 607 of the
Revenue ct of 1932, when sod by the manufacturer.
S CTION 608. M C NIC L R RIG R TORS ND
R RIG R TOR COMPON NTS.
Ta abty of househod type refrgerators and refrgerator
components.
dvce s requested reatve to the appcaton of secton 608 of
the Revenue ct of 1932 to househod type of refrgerators and
refrgerator components.
Refrgerator parts or unts, desgned prmary and soey used
for commerca purposes, are e empt from ta . These ncude ce
cream cabnets, ce cream cabnet unts, water cooers, ens chers,
and refrgeratng unts for commerca transportaton equpment.
or purposes of the ta refrgerator parts and accessores are
dvded nto three groups, vz:
(1) ousehod and nterchangeabe parts.
(2) Commerca parts.
(3) Standard purchase parts (commerca commodtes not pr-
mary desgned for use on or n connecton wth refrgerators).
ny of these parts are ta abe f sod on or n connecton wth
or wth the sae of househod type refrgerators or refrgerator
components, but f sod separatey no ta attaches, as, for e ampe,
saes to deaers for repar of refrgerator components.
Refrgerator gas, coed copper tubng, and smar tems are
e empt from the ta under secton 608(b) of the Revenue ct of
1932, because these artces beong to the genera cass of standard
merchandse used n many ndustres. The producer or mporter
of the ubrcatng o whch s seaed nto certan types of me-
chanca refrgerators may se such o ta -free, under certfcate, to
manufacturers of househod type mechanca refrgerators for such
use.
When goods are shpped pror to une 21, 1932, by b of adng
consgned to ether the seer or to the buyer and the b of adng
wth draft attached s sent to the bank for coecton, but the draft
remans unpad on une 21, 1932, the goods are sub|ect to ta .
Reguatons 46, rtce 48: Scope of ta .
T41-5773
S. T. 523
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609, Regs. 46, rt. 53.
478
In the foregong cases of shpment by b of adng, f the b
of adng was, pror to une 21, 1932, ndorsed and dscounted wth
a bank, acceptance company, or dscount company, tte passed to
the transferee pror to that date and, consequenty, the shpment was
not sub|ect to ta .
ny merchandse returned must be concusvey dentfed as hav-
ng been ta -pad before any refund or credt of the ta can be
secured.
In bng to a dstrbutor or deaer a manufacturer often adds a
specfc charge for advertsng and servce guarantee. Such add-
tona charges may be e cuded from the seng prce upon whch
the ta s computed f t can be estabshed that the vaue of the
servces equas or e ceeds the amount coected from the customer.
If t s ess than the amount coected, a ta must be pad upon the
dfference. In any event, such tems must be shown separatey on
the nvoces before they may be e cuded n computng the ta .
natona advertsng s an e pense of the manufacturer and must
be borne by hm and not made chargeabe aganst the customer s
advertsng reserve. Charges to customers for advertsng shoud
cover ony oca advertsng.
S CTION 609. SPORTING GOODS.
Reguatons 46, rtce 53: Scope of ta . I-36-5665
S.T.4S0
ed, that a vendng machne converted Into a game of chance
Is ta abe as a game.
dvce s requested reatve to the ta abty of certan vendng
machnes or games of chance.
It s hed that the ordnary penny machne n whch the operator
deposts a con and receves n return ether merchandse or servce,
such as hs correct weght, s not ta abe under secton 609 of the
Revenue ct of 1932.
owever, where the operator of a machne upon nsertng a con
receves n return a prnted card whch cas for the payment n cash
n the amount of two, four, or eght tmes the amount orgnay
nserted, the vendng machne s converted nto a game of chance and
s ta abe as a game under secton 609 of the Revenue ct of 1932.
Reguatons 46, rtce 53: Scope of ta . I-40-5753
S. T. 515
adders desgned for use In a ta abe ba such as a footba,
basket baU, soccer ba, etc, are ta abe.
dvce s requested reatve to the ta abty of badders under sec-
ton 609 of the Revenue ct of 1932.
adders desgned for use n a ta abe ba, such as a footba,
basket ba, soccer ba, etc., are ta abe as sportng goods under sec-
ton 609 of the Revenue ct of 1932. Such badders when sod for
use n the further manufacture of a ta abe artce or for use as a
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479
609, Regs. 46, rt. 54|
component part of a ta abe artce, may be sod ta -free under a
ta -e empton certfcate.
adders sod for use n makng repars or repacements are sub-
|ect to the ta mposed by secton 609 of the Revenue ct of 1932.
Reguatons 46, rtce 54: Sportng goods. I-30-5568
S.T.461
shng tacke, such as fshng nets, nes, hooks, bats, fes, etc. -
n opnon has been requested as to whether the ta mposed by,
the appcabe porton of secton 609 of the Revenue ct of 1932 s
mted to fshng rods and rees or whether fshng tacke, such as
fshng nets, nes, hooks, bats, fes, etc., may be propery ta ed.
Secton 609 of the Revenue ct of 1932, n so far as appcabe to
the ssue presented, provdes:
There s hereby mposed upon the foowng artces, sod by the manu-
facturer, producer, or mporter, a ta equvaent to 10 per centum of the prce
for whch so sod: fshng rods and rees and a smar
artces commony or commercay known as sportng goods. Itacs supped.
The taczed porton of secton 609 herenbefore quoted specf-
cay refers to fshng rods and rees. No menton s made of fshng
nets, nes, hooks, bats, fes, etc.
Subdvson 5 of secton 900 of the Revenue ct of 1918 contans
anguage that s practcay dentca to the above-quoted porton of
secton 609 of the Revenue ct of 1932. In pr, 1919, t was
determned that, under the provsons of subdvson 5 of secton 900
of the Revenue ct of 1918, ony fshng rods and rees were ta abe
wthn the purvew of that secton. In vew of the smarty of the
sectons referred to above, t foows that fshng nets, nes, hooks,
bats, fes, etc., ordnary known as fshng tacke, are hed not to
be sub|ect to the ta mposed under secton 609 of the Revenue ct
of 1932.
Reguatons 46, rtce 54: Sportng goods. I-36-5666
S. T. 481
Ta abty of unforms.
dvce s requested reatve to ta abty of unforms under secton
609 of the Revenue ct of 1932.
It s hed that a unforms specay desgned for or commony
used n athetc contests or games are sub|ect to the ta under secton
609 of the ct. owever, unforms worn by empoyees of hotes,
theaters, street raways, pocemen, fremen, mercan Legon dr
teams, Savaton rmy offcers, bandsmen, rmy and Navy offcers,
members of fraterna orders, chauffeurs, deverymen, bus drvers,
and etter carrers are not sub|ect to the ta under that secton.
If any of those unforms are trmmed wth fur they are ta abe
under secton 604 of the Revenue ct of 1932, f such fur s the com-
ponent matera of chef vaue n the unform.
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609, Regs. 46, rt. 54.
480
Reguatons 46, rtce 54: Sportng goods. I-38-5711
S.T.502
ed that cheek pads and hand protectors used In huntng are
not ta abe.
dvce s requested whether cheek pads and hand protectors used
by hunters on guns and rfes are ta abe under secton 609 of the
Revenue ct of 1932.
It s hed that artces such as cheek pads, used to protect the cheeks
whe the stock of a shotgun s beng rased, and hand protectors,
used to protect the hands from a heated rfe barre, are not ta abe
under secton 609 of the Revenue ct of 1932.
Reguatons 46, rtce 54: Sportng goods. I-39-5730
S.T.508
ed that certan artces are not ta abe as sportng goods.
dvce s requested whether rdng crops, cartrdge bets, hosters,
gun cases, skate straps, shoe aces, cree harnesses or fshng basket
straps, huntng cense hoders, and duck hobbes are ta abe.
None of the artces specfed are ta abe as sportng goods under
secton 609 of the Revenue ct of 1932.
Reguatons 46, rtce 54: Sportng goods. I-42-5793
S. T. 532
andba goves are ta abe.
dvce s requested whether handba goves are sub|ect to ta
under secton 609 of the Revenue ct of 1932.
Inasmuch as handba goves are used n a we-recognzed sport,
t s hed that they are sportng goods and sub|ect to ta as such
under secton 609 of the Revenue ct of 1932.
Reguatons 46, rtce 54: Sportng goods. I-43-5809
( so rtce 56.) S. T. 542
Ta abty of parts of unforms.
If a part of a unform s by ts constructon and desgn susceptbe
for use n any contest or game and s not customary used for genera
wear, t s sub|ect to the ta mposed by secton 609 of the Revenue
ct of 1932, when sod. or e ampe, such artces as footba
pants, baseba shrts and pants, and basketba pants, are sub|ect to
the ta , but sweaters, athetc underwear, hose, bets, etc., are not
ta abe uness actuay sod as a part of a unform. urthermore,
artces such as pan basketba snrts and footba |erseys are not
ta abe artces n themseves, but f embems, paddng, numeras, or
other speca features are attached to these artces by the manufac-
turer they become artces sub|ect to the ta .
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481
609, Regs. 40, rt. 55.
Reguatons 46, rtce 54: Sportng goods. I-47-5874
S. T. 574
n ce skate and a skate shoe when sod as a combnaton hed ,
ta abe.
n ce skate and a skate shoe when sod as a combnaton are
sub|ect to the ta mposed by secton 609 of the evenue ct of
1932. The manufacturer of the combnaton that s, the assember
of the skate and the skate shoe may purchase the skate or the
skate shoe from the manufacturer thereof ta free under a ta
e empton certfcate. If the assember of the combnaton does not
purchase the skate shoe and the skate ta free under ta e empton
certfcates, he may take a credt for any ta pad by hm to rem-
burse the pror manufacturer of the skate and the skate shoe aganst
the ta the assember pays upon hs sae of the combnaton.
Reguatons 46, rtce 55: Games. I-42-5794
S. T. 533
Ta abty of poo tabes.
dvce s requested reatve to the ta abty of poo tabes under
secton 609 of the Revenue ct of 1932.
Secton 609 of the Revenue ct of 1932 mposes a ta on poo
tabes, wthout regard to sze, but e empts chdren s toys and games.
There are on the market certan artces usuay made of meta whch
are fashoned n the sembance of poo tabes but are not susceptbe
for use n payng the game of poo or any smar game. These
artces are not poo tabes wthn the meanng of the aw and are not
capabe of use as such but are merey mtatons and are chefy used
by chdren. ust when an artce s a poo tabe and when an mta-
ton s a queston of fact. s a genera rue the sze of an artce s
not the ony test n determnng whether t s a mere mtaton or
an orgna. owever, t s mpossbe to nspect every artce paced
on the market and advertsed as a poo tabe, and the ureau, n
order to secure unformty n the enforcement of the aw wth respect
to such artces, hods that any artce constructed n the sembance
of a poo tabe, n substantay the usua proportons of such a tabe
and of smar characterstcs, whch s more than 30 nches ong
(outsde measurement) s a poo tabe wthn the meanng of secton
609 of the Revenue ct of 1932, and ta abe as such. Tabes ess
than 30 nches ong w not be regarded as poo tabes.
Reguatons 46, rtce 55: Games. I-46-5856
S.T. 567
Ta abty of g saw puzze as a game.
dvce s requested concernng the ta abty, under secton 609
of the Revenue ct of 1932, of |g saw puzzes as games.
The word games, as used n secton 609 of the Revenue ct of
1932, does not mean the games themseves but the nstrumentates
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609, Regs. 46, rt. 55. 482

used n payng them. (See atmore Takng oard Co. v. Mes,

280 ed., 658, T. D. 3401, C. . 1-2, 297.) Under the strct nterpre-
taton o that word a pcture puzzes coud be cassfed as games
and hed to be ta abe. owever, chdren s games are specfcay
e empted from the ta . It woud foow that f the pcture puzzes,
or games, are of the type ordnary desgned for the use of chdren,
they are not ta abe.
|g saw puzze contanng comparatvey few peces may propery
be consdered as one so smpe as to warrant cassfcaton as a ch-
dren s game and e empt from the ta . Where such puzzes contan
many peces they become more compe and are ta abe on the ground
that they are desgned for use by aduts. or revenue purposes, t
s hed that f the |g saw puzze contans 50 peces or ess, t s a
chdren s game and not sub|ect to the ta . If the |g saw puzze
contans more than 50 peces t s sub|ect to the ta as a game under
secton 609 of the Revenue ct of 1932.
Reguatons 46, rtce 55: Games. I-50-5920
S. T. 598
Ta abty of portabe bowng aey.
dvce s requested reatve to the ta abty of a portabe bowng
aey under secton 609 of the Revenue ct of 1932.
Secton 609 of the Revenue ct of 1932 mposes a ta on the sae by
the manufacturer of games and parts of games.
In the case of the atmore Takng oard Co. v. Mes (280 ed.,
G58, certorar dened, 259 U. S., 587 C. . 1-1, 445 ) the court was
concerned wth an nterpretaton of that porton of secton 900, sub-
dvson 5, of the Revenue ct of 1918, whch reates to games and
parts of games. The court hed that the word games, as used n
the statute, dd not mean the games themseves but the nstrumen-
taty used n payng them.
When Congress enacted secton 609 of the Revenue ct of 1932 t
adopted the dentca anguage the court was deang wth n the
atmore Takng oard case. It s proper to presume that Con-
gress had knowedge of and approved the court s defnton of the
word game.
owng s recognzed n merca as an ndoor game payed upon
an aey wth wood or composton bas and mape pns. bowng
aey s defned as a ong narrow panked space for payng at ten
pns, havng at one end a pt to receve the bas and overturned
pns. ( unk Wagna s New Standard Dctonary. owng
s a pay or sport for amusement. The word games, as used n
the statute, s the nstrumentaty rather than the contest. In the
nstant case there s a specay but and desgned nstrumentaty.
It s hed out and sod as a devce used n payng the game known
as bowng. It s a devce upon whch a pay for sport or amusement
takes pace. It s an nstrumentaty absoutey necessary to pay
the game of bowng.
In vew of the foregong t s hed that a sae by the manufacturer
of a portabe bowng aey s ta abe.
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483
611, Regs. 46, rt. 61.
S CTION 610. IR RMS, S LLS, ND C RTRIDG S.
Reguatons 46, rtce 58: Scope of ta . I-39-5731
S. T.509
ed that ar pstos or ar rfes are not ta abe as frearms.
dvce s requested whether ar pstos or ar rfes are ta abe
under secton 610 of the Revenue ct of 1932.
r pstos or ar rfes are not frearms and are not ta abe under
secton 610 of the Revenue ct of 1932.
Reguatons 46, rtce 58: Scope of ta . I-44 -5826
S. T. 551
Shes and cartrdges sod or used n testng frearms are ta abe.
dvce s requested concernng the ta abty, under secton 610
of the Revenue ct of 1932, of shes and cartrdges when used or
sod for testng frearms.
To be e empt from ta under secton 620 of the Revenue ct of
1932, the artce must be sod, (1) for use as matera n the manu-
facture or producton of a ta abe artce, or (2) for use as a com-
ponent part of a ta abe artce to be produced by the vendee.
Shes and cartrdges sod by a manufacturer for use n testng
guns do not meet these condtons and are not e empt from the ta
mposed under secton 610 of the Revenue ct of 1932.
Under secton 622 of the Revenue ct of 1932, a manufacturer of
frearms, shes, and cartrdges s abe for the ta on a shes
and cartrdges used by hm n testng frearms.
Reguatons 46, rtce 58: Scope of ta . I-45-5843
S. T. 561
Ta abty of component parts of shes and cartrdges.
The ta mposed by secton 610 of the Revenue ct of 1932 does
not attach to the sae of component parts of ammunton consstng
of cartrdge cases, prmers, buets, and powder by manufacturers
for use as matera n the manufacture or producton of a ta abe
artce.
S CTION 611. C M R S.
Reguatons 46, rtce 61: Scope of ta . I-40-5754
S. T.516
Ta abty of cameras when sod wth or wthout ens.
dvce s requested concernng the ta abty of cameras sod wth
or wthout a ens, under secton 611 of the Revenue ct of 1932.
The Corporaton manufactures moton-pcture cameras. It does
not manufacture enses but purchases most of the enses used n these
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613, Regs. 46, rt. 63.
484
cameras from a ens manufacturng company. The Corporaton
aso mports some enses whch are admttedy sub|ect to the ta
upon ther sae. No work s done by the Corporaton n connec-
ton wth any of the enses purchased, and n many cases the enses
do not go through the Corporaton factory. The prce st fur-
nshed to the trade quotes cameras both wth and wthout enses.
Due to the dfference n the quaty of the enses, the seng prce
vares. camera seng for 75 s sometmes equpped wth a ens
costng as much as 35.
The questons, together wth the answers thereto, are as foows:
ueston: Where a ens s sod by the Corporaton, the ta hav-
ng been pad by the manufacturer on the sae to the Corporaton,
s there any ta to be pad by the Corporaton on ts resae
nswer: The ta mposed by secton 611 does not attach to the
resae. In such a case the Corporaton s nether a manufacturer,
producer, nor mporter of the ens. owever, the transacton
whereby the Corporaton obtans the ens must be bona fde and at
a far market prce for the artce purchased.
ueston: Where the Corporaton ses a camera manufactured
by t, and at the same tme ses a ens on whch the manufacturer
thereof has pad the ta , s there any ta to be pad by the Cor-
poraton on the sae of ths ens
nswer: No ta s due on the resae of the ens, provded t s
bed as a separate tem and at a prce for whch such enses are
generay sod.
ueston: Where the Corporaton ses a bo or camera com-
pete, e cept for the ens, s ths artce ta abe as a camera under
the aw
nswer: The ta s due even though the camera s sod wthout
a ens.
S CTION 613. C NDY.
Reguatons 46, rtce 63: Scope of ta . I-35-5652
S. T. 474
The dppng of fruts, nuts, ees, etc., In chocoate consttutes
a manufacturng process and renders the product ta abe as candy
at 2 per cent.
dvse s requested reatve to the ta mposed by secton 613 of
the Revenue ct of 1932 on the sae of candy by a manufacturer as
apped to a concern whch purchases fruts, nuts, |ees, etc., and
dps these materas nto chocoate.
It s hed that such dppng consttutes a manufacturng process
and that the artce produced s ta abe as candy at 2 per cent of
the seng prce under secton 613 of the Revenue ct of 1932.
Reguatons 46, rtce 63: Scope of ta . I 7-5875
S. T.575
Ta abty of candy sod In fancy contaners.
dvce s requested concernng the ta mposed under secton 613
of the Revenue ct of 1932 as apped to candy sod n fancy contan-
ers, such as bon bon dshes, cedar chests, gove bo es, etc.
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485
613, Regs. 46, rt. 63
Subdvson (a) of secton 619 of the Revenue ct of 1932 pro-
vdes that n determnng the prce for whch an artce s sod, there
sha be ncuded any charge for coverngs and contaners of what-
ever nature.
Therefore, the bass of ta on candy sod n fancy contaners s
the sae prce of the combnaton, uness the prce of the candy and
the ordnary contaner are segregated from the prce of the fancy
type package. If the sae prces are so segregated the ta w at-
tach to the sae prce of the candy, pus the ordnary contaner ony.
Reguatons 46, rtce 63: Scope of ta . I-50-5921
S. T. 599
Ta abty of chocoate coatng and sweet chocoate as candy.
dvce s requested concernng the ta abty of chocoate coatng
and sweet chocoate as candy under secton 613 of the Revenue ct
of 1932.
There are severa casses of chocoate coatng whch have a hgher
content of cocoa butter than the ordnary sweet chocoate. Ths
coatng s used by confectoners for dppng purposes. It s usuay
meted and the candy manufacturer dps the unfnshed center or
confecton n the meted coatng to make the competey manu-
factured confecton. It s aso used by bakers and ce cream
manufacturers for manufacturng purposes. Coatng s produced
by the manufacturer n arge cakes for the soe purpose of use n
further manufacture and s not ntended for use as candy n the
form n whch sod. Chocoate coatng may, therefore, be sod
wthout abty for the ta mposed upon candy by secton 613.
Ordnary sweet chocoate, as dstngushed from chocoate coatng,
has a ower cocoa butter content. If sweet chocoate s sod to ds-
trbutors or retaers, rrespectve of the sze of the cake, t may not
be sod ta free, because t s candy n the form n whch sod by the
manufacturer and s ta abe as such. If t s sod to candy manu-
facturers for further manufacture, t may be sod ta free under an
e empton certfcate, as provded by artce 7 of Reguatons 46.
Sweet chocoate, as dstngushed from chocoate coatng, may aso
be sod ta free to ce cream manufacturers for use n manufacturng
ce cream, provded the purchaser, pror to or at the tme of sae,
furnshes a certfcate to the effect that such chocoate s to be used
by hm n the manufacture of ce cream, and that f such chocoate
shoud be sod by hm n the form n whch purchased he w make
return and pay ta upon such saes.
If manufacturers records do not contan certfcates coverng ta
free saes of sweet chocoate, as dstngushed from chocoate coatng,
to ce cream manufacturers, wth supportng nvoces, the ta sha be
payabe by the manufacturer.
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615, Regs. 44, rt. 23.
486
S CTION 615. SO T DRIN S ND C R ONIC CID G S.
Ta on soft drnks Regstraton Secton 615(c), Revenue ct
of 1932. rtce 23, Reguatons 44, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The frst paragraph of artce 23 of Reguatons 4 s hereby
amended to read as foows:
very manufacturer of cerea beverages of unfermented grape |uce of
unfermented frut |uces or mtatons thereof of st drnks of natura or
artfca mnera waters or tabe waters, or mtatons thereof of fnshed
or fountan srups of carbonc acd gas who ses such gas to a manufacturer
of carbonated beverages, or to a person conductng a soda fountan, ce cream
paror, or other smar pace of busness of carbonc acd gas who uses
such gas n the producton of carbonated beverages of carbonated beverages
made wth concentrates, essences, or e tracts of carbonated beverages made
by use of fnshed or fountan srups manufactured by such manufacturer
every deaer n carbonc acd gas who ses such gas to any of the manufacturers
named above and every person conductng a soda fountan, ce cream paror,
or other smar pace of busness who manufactures any srups of the knd
mentoned n artce 37, sha, on or before ugust 1, 1932, or wthn 10 days
after commencng busness, and thereafter on or before uy 1 of each year,
make appcaton for regstry to the coector n whose dstrct hs pace of
busness s ocated.
Davd urnet,
Commssoner of Interna Revenue.
pproved uy 27, 1932.
Ogden L. Ms,
Secretary of the Treasury.
Ta on soft drnks Regstraton Secton 615(c), Revenue ct
of 1932. rtce 23, Reguatons 44, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The frst paragraph of artce 23 of Reguatons 44, approved une
18, 1932, as amended by Treasury Decson 4343 above , approved
uy 27,1932, s further amended to read as foows:
very manufacturer of cerea beverages of unfermented grape |uce of
unfermented frut |uces or mtatons thereof of st drnks of natura or
artfca mnera waters or tabe waters, or mtatons thereof of fnshed
Reguatons 44, rtce 23: Regstraton.
I-31-5589
T. D.4343
Reguatons 44, rtce 23: Regstraton.
I-36-5673
T. D.4352
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4S7
615, Regs. 44, rt. 28.
or fountan srups of carbonc acd gas who ses such gas to a manufacturer
of carbonated beverages, or to a person conductng a soda fountan, ce cream
paror, or other smar pace of busness of carbonc acd gas who uses such
gas n the producton of carbonated beverages of carbonated beverages made
wth concentrates, essences, or e tracts of carbonated beverages made by use
of fnshed or fountan srups manufactured by such manufacturer every
deaer n carbonc acd gas who ses such gas to any of the manufacturers
named above and every person conductng a soda fountan, ce cream paror,
or other smar pace of busness who manufactures any srups of the knd
mentoned n artce 37, sha, on or before October 1, 1932, or wthn 10 days
after commencng busness, and thereafter on or before uy 1 of each year,
make appcaton for regstry to the coector n whose dstrct hs pace of
busness s ocated.
Davd urnet,
Commssoner of Interna Revenue.
pproved ugust 29, 1932.
ames . Dougas,
ctng Secretary of the Treasury.
Reguatons 44, rtce 24: Scope of ta . I-52-5955
S. T. 614
Ta abty of cerea beverages gven away.
In order to promote saes a certan company offers 10 cases of
cerea beverage free of charge wth each 100 cases purchased. Inqury
s made whether the ureau w requre payment of a ta on the
10 cases of cerea beverage for whch no charge s made.
The ta on cerea beverages s based upon the quantty of the
product sod. Therefore, the ta must be coected upon the tota
quantty of the shpment even though a porton conssts of a bonus
or so-caed free goods.
It s hed that a manufacturer s abe for a ta of 1 4 cents per
gaon on the tota quantty of the cerea beverages n the shpment,
ncudng the quantty for whch-no specfc charge s made.
Reguatons 44, rtce 28: Scope of ta . I-41-5774
S. T. 524
Ta abty of nonacohoc artces.
dvce s requested whether the foowng artces are sub|ect to
ta under secton 615(a) (3) or (6) of the Revenue ct of 1932, vz:
Nonacohoc mond Srup, nonacohoc Grenadne, nonacohoc
Creme de Menthe, nonacohoc enedctne, nonacohoc Chartreuse,
nonacohoc ermouth, nonacohoc Manhattan Cocktas, nona-
cohoc Martn nonacohoc Creme d prcot, nonacohoc um-
me, nonacohoc London Dry, and nonacohoc Creme de Cerses
(Cherry).
None of the products mentoned are unfermented frut |uces or
fnshed fountan srups wthn the meanng of the Revenue ct of
1932 and, consequenty, none of them are sub|ect to the ta .
160903 33 32
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615, Regs. 44, rt. 32.
488
Reguatons 44, rtces 28 and 32: Scope of I-39-5734
ta . S. T. 511
ed that tomato |uce Is not ta abe as a frut |uce or as a
st drnk.
dvce s requested whether tomato |uce s ta abe under the
provsons of secton 615(a) of the Revenue ct of 1932.
tomato s a vegetabe and not a frut. Not beng a frut, to-
mato |uce s not sub|ect to the ta mposed by secton 615(a)3 of
the Revenue ct of 1932. It s aso hed that tomato |uce s not a
beverage wthn the meanng of secton 615 (a) 4 of that ct, mpos-
ng a ta on st drnks.
Reguatons 44, rtce 32: Scope of ta . I-36-5667
S. T. 482
Pure orange |uce, me uce, emon uce, and grapefrut uce
hed sub|ect to ta as st drnks.
dvce s requested whether natura frut |uces, such as orange
|uce, me |uce, emon |uce, and grapefrut |uce, served at soda
fountans as a beverage and at restaurants as a part of a mea, to
whch no sugar or water has been added, are sub|ect to the ta
mposed under secton 615 of the Revenue ct of 1932.
Secton 615(a)3 specfes a cass of frut |uces adapted to duton.
Secton 615(a)4 specfes a cass of beverages not adapted to duton.
In secton 615(a)3 the phrase s: frut |uces
ntended for consumpton as beverages wth the addton of water
or water and sugar, . In secton 615(a)4 the phrase s:
st drnks ntended for consumpton as
beverages n the form n whch sod . These words were
used upon the assumpton that frut |uces, ke st drnks, are n-
tended for beverage use.
It s hed that pure orange |uce, 4me |uce, emon |uce, and grape-
frut |uce, such as are sod at soda fountans as a everage and at
restaurants as a part of a mea wthout the addton of sugar or sugar
and water, are st drnks and sub|ect to the ta of 2 cents per gaon
mposed under secton 615 (a)4 of the Revenue ct of 1932.
Reguatons 44, rtce 32: Scope of ta . I-39-5732
S. T. 510
Grapefrut |uce packed n cans n ts natura state, wth or
wthout the addton of sugar, and ntended for consumpton as a
beverage n such form, s ta abe as a st drnk.
dvce s requested whether the ta mposed upon unfermented
frut |uces under secton 615 (a) 3 of the Revenue ct of 1932 w
appy to grapefrut |uce packed n cans n ts natura state, wthout
the addton of sugar, and whether the addton of sugar w make
any dfference n the appcaton of the ta .
Secton 615 (a) 3 mposes a ta upon unfermented frut |uces
ntended for consumpton as beverages wth the addton of water
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489 615, Regs. 44, rt. 8 |

or water and sugar. Secton 615 (a)4 mposes a ta upon a st

drnks ntended for consumpton as beverages n the form n whch
sod. The rate of ta n both cases s 2 cents per gaon.
Whe t s true that secton 615(a)4 does not specfcay refer
to frut |uces, yet there s tte doubt that t was ntended to cover
such artces. The specfc e empton of grape |uce and appe cder,
both beng frut |uces, suggests that Congress regarded secton
615 (a)4 as coverng frut |uces. The term ntended for consump-
ton as beverages n the form n whch sod aso ndcates that the
provson covers frut |uce used wthout duton, n contrast wth
the frut |uce adapted to duton covered by secton 615(a)3.
Grapefrut |uce packed n cans n ts natura state, wth or wth-
out the addton of sugar, s therefore hed to be sub|ect to the ta
of 2 cents per gaon mposed by secton 615(a)4 of the Revenue
ct of 1932.
Reguatons 44, rtce 32: Scope of ta . I-40-5755
S. T. 517,
rozen suckers not sub|ect to ta .
dvce s requested whether the ta mposed by secton 615 (a) 4
of the Revenue ct of 1932 s appcabe to the manufacture and sae
of frozen suckers. ,
The M Company manufactures frozen suckers by usng frut
geatne, sugar, and water. Ths m ture s paced n mods and
frozen.
It s hed that the fnshed product, commony known as frozen
suckers, s not sub|ect to any of the ta es mposed under secton 615
of the Revenue ct of 1932.
Reguatons 44. rtce 32: Scope of ta . I-43-5810
( so rtce 37.) S. T. 543
Chocoate mk and other mk drnks are not ta abe, but fnshed
or fountan srups used In ther manufacture are sub|ect to ta .
Chocoate mk and other favored mk drnks are not sub|ect to ta
as soft drnks, rrespectve of the form n whch prepared or the
manner n whch sod.
owever, fnshed or fountan srups used n the preparaton of
such drnks are ta abe at 6 cents per gaon, under secton 615(a)6 of
the Revenue ct of 1932, payabe by the manufacturer of such srups.
Reguatons 44, rtce 35: Scope of ta . I-48-5888
S. T. 583
Ta abty of natura or artfca mnera waters.
ottes, |ugs, kegs, barres, dem|ohns, carboys, and a smar
artces are cassed as cosed contaners wthn the meanng of sec-
ton 615(a)5 of the Revenue ct of 1932. The sae by the producer

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615, Regs. 44, rt. 37.
490
of mnera waters n such contaners s ta abe, regardess of whether
the contaner s owned by the vendor or the vendee.
uckets, pas, and smar artces are not cosed contaners and,
therefore, the sae of mnera waters n such receptaces s not ta -
abe under that secton.
Reguatons 44, rtce 37: Scope of ta - I 35-5644
S. T.471
Defnton of a fnshed or fountan smp.
n opnon s requested concernng the nterpretaton of secton
615(a)6 of the Revenue ct of 1932 mposng a ta upon fnshed
or fountan srups.
It s contended that a fnshed or fountan srup s a srup whch
s possbe of duton wth smpe srup n a rato of 3 or 4 parts of
smpe srup to 1 part of fountan srup. It s aso urged that a
reta deaer shoud not be consdered as beng a manufacturer wthn
the meanng of the aw because of the addton of smpe srup to the
fnshed or fountan srup. Carefu consderaton has been gven to
a aspects of the probem, and the nterpretaton contended for,
whe t woud materay smpfy the task of coectng the ta , can
not be acceded to by the ureau.
The queston turns upon the defnton of fnshed or fountan
srups as used n secton 615(a)6 of the Revenue ct of 1932. y
ths secton the ta s mposed upon a fnshed or fountan srups
of the knds used n m ng or compoundng drnks commony known
as soft drnks. In artce 37 of Reguatons 44 the term fnshed
or fountan srup has been defned to ncude the knd of srup
used n compoundng the drnk at the soda fountan. Ths srup s
ready to serve, requrng no further duton wth smpe srup, and
s ordnary used n the rato of 1 part srup to appro matey 5 or 6
parts of water n order to make a fnshed drnk. Ths rung s
consstent wth the poston taken by the ureau under the Revenue
ct of 1921.
It s hed that f any person conductng a soda fountan, ce cream
paror, or other smar pace of busness produces a srup, ether
by usng a concentrate, essence, or e tract, or by dutng a concen-
trated srup wth smpe srup, he becomes a manufacturer or pro-
ducer of a fnshed or fountan srup and s sub|ect to a ta of 6
cents per gaon on each gaon so manufactured and used n the
preparaton of the soft drnk.
Reguatons 44, rtce 37: Scope of ta . I-37-5688
S. T.491
Chocoate srup sod to dares or mk deaers for use In choco-
ate mk hed ta abe.
dvce s requested whether chocoate srup sod to dares or mk
deaers for use wth mk sod n bottes s ta abe under secton 615
of the Revenue ct of 1932.
Secton 615 (a) 6 of the ct mposes a ta upon the sae by the
manufacturer, producer, or mporter of a fnshed or fountan srups
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491
615, Regs. 44, rt. 40.
of the knds commony used n compoundng soft drnks at a soda
fountan. The srup sub|ect to ta s one whch s ready to serve, re-
qurng no further duton wth smpe srup and s ordnary used
n the rato of 1 part srup to appro matey 5 or 6 parts of water
n order to make a fnshed drnk.
Where a dary uses a fnshed or fountan chocoate srup n the
producton of chocoate mk, the manufacturer, producer, or mporter
of such srup who ses the same s abe for a ta of 6 cents per ga-
on on each gaon of srup sod.
Where a dary produces ts own srup to be used n the producton
of chocoate mk or where a concentrated srup s purchased and
reduced to a fnshed or fountan srup for use n makng chocoate
mk, the dary becomes the manufacturer and s abe for a ta of
6 cents per gaon on a srup so produced and used.
Reguatons 44, rtce 37: Scope of ta . I-51-5938
S. T. 607
Ta abty of fnshed fountan srups manufactured pror to
ane 21, 1032, and used after that date.
dvce s requested reatve to the ta abty of fnshed or foun-
tan srups under secton 615 (a) 6 of the Revenue ct of 1932, when
manufactured pror to une 21, 1932, and used after that date n the
producton of carbonated beverages.
Secton 622 provdes that a person who manufactures and uses a
ta abe artce sha be abe for ta under the aw n the same man-
ner as f such artce was sod by hm. It has been suggested that
ths anguage s prospectve n ts scope, and that as the term s con-
|unctve t foows that both the manufacture and the use must occur
after the effectve date of the aw. Ths anguage must, however,
be read n connecton wth that whch foows. Readng the secton
as a whoe, t s cear that Congress ntended to ta the use of an
artce by a manufacturer n the same manner as f the artce was
sod by hm. Revertng to the wordng of secton 615(a)6, the ta
s mposed upon the artces specfed sod n the Unted States by
the manufacturer. The ta s thus ceary eved on the sae. It
has been consstenty hed that the ta becomes due when the artce
s sod by the manufacturer, even though t was produced before the
aw became effectve. Under secton 622 the use s made sub|ect to
ta n the same manner as f sod. The use beng ceary the com-
pement of the sae, the rue apped to the sae must aso be apped
to the use. The ta thus becomes due upon the use of an artce by
the manufacturer after the effectve date of the aw, rrespectve of
when t was manufactured.
Reguatons 44, rtce 40: Rates of ta . I-42-5795
S. T.534
Method of computng and payng ta es by chan stores.
dvce s requested reatve to the methods whch shoud be
adopted n computng ta es payabe by the M Company under sec-
ton 615 of the Revenue ct of 1932.
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8615, Regs. 44, rt. 41. 492
The M Company operates a chan of stores ocated throughout the
Unted States. Soda fountans, where soft drnks are sod, are
mantaned.n the ma|orty of these stores. of the stores are
supped wth concentrated srup, for use at ther soda fountans,
through a centra pant of the company. When a store needs a
suppy of fnshed srup the one n charge of the fountan of the
partcuar store compounds and m es 1 gaon of concentrated srup,
furnshed by the M Company, wth appro matey 3 gaons of smpe
srup. Thus every gaon of concentrated srup shpped from the
centra pant s made nto 4 gaons of fnshed or fountan srup
by the branch store.
It s proposed to keep nventores of a concentrated srup on
hand and n transt to stores on une 21, 1932, and to pay a ta
of 24 cents on each gaon of concentrated srup shpped to the
branch stores. Such a procedure, t s stated, woud not ony beneft
the company, n that t woud reeve the soda fountan cerks of
branch stores from the task of keepng detaed records for use n
makng ta payments, but woud aso be benefca to the Govern-
ment n that t woud nsure coecton of the tota amount of ta
due.
Where branch stores purchase ocay a of the oranges, emons,
and mes used n connecton wth the manufacture of the beverage
ta ed under secton 615(a) (3) and (4| of the Revenue ct of 1932,
a day report of the quantty of fruts so purchased s submtted
to the company s centra offce. or ta purposes t s permssbe
to have a premnary test made n a number of representatve
stores n order to ascertan the average number of gaons of ta -
abe beverages manufactured out of each case of oranges, emons,
or mes. The ta mposed by secton 615(a) (3) and (4) w then
be computed on the bass of the number of cases of oranges, emons,
and mes used n a stores.
The procedure proposed wth respect to the payment of ta under
secton 615(a) (3), (4), and (6) of the Revenue ct of 1932 s
approved by the ureau. The company w be permtted to pay
the ta on concentrated srup and st drnks n the manner nd-
cated, provded t furnshes the ureau wth an affdavt to the
effect that a srups used by the branch stores are supped from
the centra pant, and that each gaon of concentrated srup shpped
from the dstrbuton center w not be used to make more than
4 gaons of fnshed or fountan srup. There must aso be sub-
mtted a waver, to be approved by the ureau, to the effect that
ths procedure w never be used as the bass of a cam for refund
of ta es.
I Reguatons 44, rtce 41: Scope of ta . I-35-5653
S. T. 475
Dry Ice, whe chemcay the same as gaseous or qud carbon
do de, s not carbonc acd gas wthn the meanng of secton
615(a)7, and s not ta abe.
n opnon s requested reatve to the ta mposed upon carbonc
acd gas under secton 615(a)7 of the Revenue ct of 1932.
The ta mposed by secton 615 (a)7 attaches at the rate of 4 cents
per pound to the sae of carbonc acd gas by the manufacturer, pro-
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493
IS615,Reg8. 44, rt. 41
ducer, or mporter, or by a deaer n such gas, to a manufacturer of
any carbonated beverages, or to any person conductng a soda foun-
tan, ce cream paror, or other smar pace of busness, and to the
use of carbonc acd gas by the manufacturer n the preparaton of
soft drnks.
It s stated that sod carbon do de, or dry ce as t s com-
mony known, s manufactured by compressng carbon do de (car-
bonc acd gas) to qud form and then coong t to a sodfed
snowke substance whch s compressed nto bocks n mtaton of
ce and used argey for refrgeraton purposes. It s contended that
sod carbon do de s not sod n a form sutabe for use n car-
bonatng beverages. It s necessary, n order to use t for that pur-
pose, to sub|ect t to a further process whch reconverts t back to a
qud form. The poston taken s that the person so reconvertng
dry ce becomes the manufacturer of carbonc acd gas and shoud
be hed abe for the ta . Ths woud e cude dry ce entrey
from the scope of artces sub|ect to ta under secton 615 (a) 7 of
the Revenue ct of 1932.
Ths offce s of the opnon that dry ce, whe chemcay the
same as the gaseous or qud carbon do de, s not carbonc acd
gas wthn the meanng of secton 615(a)7. The ntent of the
statute s obvousy to ta the commodty commony known and sod
as carbonc acd gas and sutabe for use n the manufacture of car-
bonated beverages. Dry ce s not commony so known and sod,
and t not sutabe for use n the manufacture of carbonated bever-
ages unt t has been converted by a process of manufacture nto the
qud form of carbon do de commony known and sod as carbonc
acd gas.
It s therefore hed that the sae of dry ce s not ta abe under
secton 615 (a) 7. owever, any person who converts dry ce nto
carbonc acd gas and ses t to a manufacturer of carbonated bev-
erages, or to any person conductng a soda fountan, ce cream paror,
or other smar pace of busness, or uses t n the preparaton or
soft drnks, must pay ta under secton 615 (a) 7 as the manufacturer
or producer of the carbonc acd gas.
Reguatons 44, rttoue 41: Scope of ta . I-46-5857
( so Sectons 620 and 621.) S. T. 568
person producng soft drnks sub|ect to ta under secton
615(a) 1, 3, or 5 of the Revenue ct of 1932 may, n computng ta
on hs saes of such products, take credt for the amount of the
ta mposed by secton 615(a)7 whch he has rembursed to a man-
ufacturer or deaer In carbonc acd gas.
dvce s requested whether a producer of soft drnks whch are
sub|ect to ta under secton 615 (a) 1, 3, or 5 of the Revenue ct of
1932 may, n computng ta on hs saes of such products, take
credt for the amount of the ta mposed by secton 615(a)7 of the
Revenue ct of 1932 whch he has rembursed to a manufacturer or
deaer n carbonc acd gas.
It s hed that f a manufacturer of soft drnks whch are ta abe
under secton 615(a) , 3, or 5 of the Revenue ct of 1932 has rem-
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61S, Regs. 44, rt. 41. 494
bursed the manufacturer of, or deaer n, carbonc acd gas for the
ta mposed by secton 615(a)7 of the Revenue ct of 1932, he may
take credt aganst the ta pad on the compete ta abe beverages n
the amount of the ta pad on the carbonc acd gas used n such
beverages by reason of the provsons of secton 621 (a) 1 of the Reve-
nue ct of 1932. In takng such a credt the provsons of the frst
paragraph of artce 52 of Reguatons 44 must be observed.
It s aso hed that a manufacturer of beverages ta abe as de-
scrbed above may, by reason of the provsons of secton 620 of the
Revenue ct of 1932, purchase carbonc acd gas from the manu-
facturer of, or deaer n, such gas ta -free under an e empton certf-
cate, n the manner outned n artce 7 of Reguatons 44, for use n
the further manufacture of such beverages.
person purchasng carbonc acd gas under an e empton certf-
cate must keep an accurate record of the amount used n the manu-
facture of ta abe beverages, avaabe for nspecton by revenue
offcers, and he must fe returns and pay the ta of 4 cents per pound
on a such gas not used as matera n the manufacture or producton
of hs ta abe beverages.
Reguatons 44, rtce 41: Scope of ta . I-51 5939
S. T. 608
Ta abty of carbonc acd gas sod for pressure purposes n
drawng beverages from receptaces.
dvce s requested regardng the ta abty of carbonc acd gas
when sod for pressure purposes n drawng so-caed near beer or
cerea beverages from receptaces. Secton 615(a)7 of the Revenue
ct of 1932 mposes a ta of 4 cents per pound upon a carbonc
acd gas sod to a manufacturer of any carbonated beverages or to
any person conductng a soda fountan, ce cream paror, or other
smar pace of busness, and upon a carbonc acd gas used by the
manufacturer, producer, or mporter n the preparaton of soft
drnks.
The words other smar paces of busness refer prmary to
the character of the busness transacted. Whether a person seng
soft drnks s conductng a pace of busness smar to a soda foun-
tan or ce cream paror depends upon the facts n each partcuar
case. Saes of carbonc acd gas to a person conductng a soda foun-
tan are ceary ta abe. n ce cream paror s amost nvaraby
equpped wth a soda fountan. Consequenty, a pace of busness
smar to that of a person conductng a soda fountan or ce cream
paror s one whch s equpped wth a soda fountan. Ths s true
whether a pace so equpped s an ce cream paror, hote, restaurant,
cafetera, unch room, or cubhouse. It s aso true where a soda
fountan s operated n connecton wth the sae of a substanta
artce of food as part of a mea and where servce from the soda
fountan s made by way of the ktchen.
Consequenty, hotes, restaurants, cafeteras, unch rooms, or cub-
houses servng carbonated beverages from a soda fountan are sm-
ar paces of busness wthn the meanng of secton 615(a)7. On
the other hand, a pace of busness equpped wth one or more beer
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495
616, Regg. 42, rt. 40|
gumps and not equpped wth a soda fountan s not a pace of
usness smar to a soda fountan or ce cream paror. Manufac-
turers of. or deaers n, carbonc acd gas are not sub|ect to a ta on
aes of the gas to such paces.
S CTION 616. L CTRIC L N RGY.
Reguatons 42, rtce 40: Scope of ta . I-28-5545
T. D. 4337.
T ON L CTRIC L N RGY S CTION 616, R NU CT O 1932.
rtces 40 and 41, Reguatons 42, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
The frst paragraph of artce 40 of Reguatons 42 s hereby
amended to read as foows:
The ta appes to the amount pad for a eectrca energy furnshed fo
domestc or commerca consumpton, ether by a prvatey or pubcy owned
eectrca power company.
Reguatons 42, rtce 40: Scope of ta . I-31-5586
T. D.4342
Ta on eectrca energy Secton 616(a) of the Revenue ct of
1932 rtces 40 and 41 of Reguatons 42, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
rtce 40 of Reguatons 42 s amended to read as foows:
The ta appes to the amount pad for a eectrca energy furnshed
for domestc or commerca consumpton by any person or agency (whether
prvate, pubc or quas pubc) rrespectve of whether such person or agency
produces the energy so furnshed. ( or defnton of the word person,
eee secton 1111 of the ct.)
eectrca energy furnshed the consumer s ta abe e cept (1) eec-
trca energy furnshed for ndustra consumpton, e. g., that used n
manufacturng, processng, mnng, refnng, shpbudng, budng construc-
ton, etc., and (2) that furnshed for other uses whch kewse can not
be cassed as domestc or commerca, such as used by pubc uttes, water-
works, rrgaton companes, teegraph, teephone, and rado communcaton
companes, raroads, other common carrers, educatona nsttutons not
operated for prvate proft, churches, and chartabe nsttutons. owever,
eectrca energy s sub|ect to ta f consumed u the commerca phases
of ndustra or other busnesses, such as n offce budngs, saes and dspay
rooms, reta stores, etc.
Where eectrca energy s supped to a snge consumer for two or more
purposes, the specfc use for whch the energy Is furnshed, . e., whether
for domestc or commerca consumpton, or for other consumpton, sha
determne ts ta abe status. Where the consumer has a the eectrca
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8616, Regs. 42, rt. 40. 496
energy used at a gven ocaton furnshed through one meter, the predomnant
character of the busness carred on at such ocaton sha determne the
cassfcaton of eectrca consumpton for the purposes of ths ta .
The ta does not appy wth respect to saes of eectrca energy other than
saes for consumpton. very person purchasng eectrca energy for resae
sha appy for a regstraton number to the coector for the dstrct n whch
Is ocated hs prncpa pace of busness (or, f he has no prncpa pace of
busness n the Unted States, to the coector at atmore, Md.). The app-
caton sha state the name and pace or paces of busness of the appcant.
Regstraton numbers sha be n a separate seres, begnnng wth the number
1, for each dstrct. ectrca energy furnshed for resae sha be e empt from
ta ony when the vendee furnshes to the vendor a certfcate showng the
vendee s regstraton number and statng that the energy s to be resod by hm.
Where eectrca energy s sod through one meter to a person for both resae
and consumpton, the certfcate furnshed by the vendee pursuant to the pre-
cedng paragraph sha show the porton of the energy whch s consumed by hm
for domestc or commerca purposes, and the vendor sha coect the ta on
such porton of the amount pad for a the energy. The vendee sha n. turn
coect from the person to whom he reses the energy the ta under secton
616, based on the prce for whch the energy s resod.
The ta attaches to a amounts pad for eectrca energy for domestc or
commerca consumpton rrespectve of whether any of the energy pad for Is
actuay used. In other words, the ta s due on a such payments whether
In the form of a mnmum charge, a fat charge, or otherwse.
Where a dscount s deductbe from the gross charge for eectrca energy
If payment therefor Is made wthn a prescrbed perod or where an addtona
amount s added for faure to make payment wthn a prescrbed perod, the
ta attaches to the amount actuay pad.
Reguatons 42, rtce 40: Scope of ta . I-31 5588
S. T. 463
Is ta on eectrca energy appcabe when furnshed to power
or steam aundres
dvce has been requested whether the ta on eectrca energy s
appcabe when furnshed to power or steam aundres.
Secton 616 of the Revenue ct of 1932 mposes a ta equvaent
to 3 per cent of the amount pad on or after une 21, 1932, for
eectrca energy for domestc or commerca consumpton furnshed
after such date and before uy 1, 1934. The aw provdes that
the ta so mposed sha be pad by the person payng for such eec-
trca energy and sha be coected by the vendor.
It s hed that eectrca energy furnshed to a power or steam
aundry for consumpton n the aundry pant tsef s not furnshed
for domestc or commerca consumpton, and s not ta abe under
secton 616. owever, the use of eectrca energy n branch offces
or agences of such a aundry s a commerca use and eectrca
energy so used s sub|ect to the ta .
Reguatons 42, rtce 40: Scope of ta . I-33-5616
S. T. 464
ectrca energy for outdoor advertsng s commerca, and sub-
|ect to ta .
The queston s presented for advce whether eectrca energy used
n the outdoor advertsng busness s sub|ect to the ta mposed by
pecton 616 of the Revenue ct of 1932.
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497 616, Regs. 42, rt. 40.
The secton mentoned mposes a ta equvaent to 3 per cent of
the amount pad on or after une 21, 1932, for eectrca energy for
domestc or commerca consumpton furnshed after such date and
before uy 1, 1934.
ectrca energy for outdoor advertsng s commerca n ts scope
and s sub|ect to tne ta mposed by secton 616 of the Revenue ct
of 1932.
Reguatons 42, rtce 40: Scope of ta . I-35-5643
S. T. 466
n opnon s requested reatve to the ta abty under the Rev-
enue ct of 1932 of eectrca energy consumed by moton pcture
theaters.
Secton 616 of the Revenue ct of 1932 mposes a ta of 3 per cent
of the amount pad for eectrca energy for domestc or commerca
consumpton to be pad by the person payng for such eectrca
energy and to be coected by the vendor. ectrca energy for
ndustra consumpton does not come wthn the provson of tho
ct and amounts pad therefor are not sub|ect to the ta .
It s hed that eectrca energy consumed by a moton pcture
theater n the pro|ecton of moton pctures n the ghtng of sgns
and dspay boards, and aso n the ghtng of the budng, etc., s
furnshed for commerca consumpton. amounts pad for eec-
trca energy so furnshed are therefore sub|ect to the ta .
Reguatons 42, htce 40: Scope of ta . I-36-6668
S. T. 483
ectrca energy furnshed to raroad docks for use In oadng
and unoadng shps hed not sub|ect to ta .
dvce s requested whether the ta on eectrca energy s
appcabe to that furnshed for dock operatons.
It s stated that the docks and equpment are owned by certan
raroads. The docks and equpment are used n oadng and
unoadng shps and the charges made for the servces are sted n
the tarffs of such raroads. It s aso stated that these docks are
factes of the raroads, beng an ntegra part of ther transpor-
taton system for buk freght, and that the eectrca energy used
by the docks s furnshed for the ndustra servce of transportaton.
It s hed that eectrca energy furnshed for operaton of the dock
factes used by raroads n oadng and unoadng shps s not
furnshed for domestc or commerca consumpton and that
amounts pad for such eectrca energy are not sub|ect to ta under
the provsons of secton 616 of the Revenue ct of 1932.
Reguatons 42, btce 40: Scope of ta . I-37-5689
S. T. 492
ed, that ta on eectrca energy furnshed by prvatey or mu-
ncpay owned pants can not be absorbed but must be coected
In every case as a separate Item on b rendered to consumer.
dvce s requested whether the edera Government w requre
a prvatey or muncpay owned eectrc company to show the ta on
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616, Regs. 42, rt. 40.
498
eectrca energy as a separate tem on the bs rendered to the con-
sumer.
Secton 616 of the Revenue ct of 1932, whch mposes a ta on
eectrca energy, provdes that such ta sha be pad by the person
payng for such energy and that the ta sha be coected by the per-
son furnshng the eectrca energy for consumpton.
very person recevng payments for eectrca energy furnshed
for domestc or commerca consumpton w be requred under the
provsons of the aw to coect the ta mposed on such payments and
to make proper returns of the ta to the coector of nterna revenue.
There s no provson n the aw whereby a prvatey or a munc-
pay owned eectrc company may absorb the ta or may be reeved
of the obgaton of coectng the ta and of bng the same as a
separate tem to the consumer.
Reguatons 42, rtce 40: Scope of ta . I-39-5735
S. T. 512
ed that eectrca energy generated by the owner of a budng
and furnshed to hs tenants s ta abe when a charge Is made for
such energy.
dvce s requested reatve to the ta abty of eectrca energy
under secton 616 of the Revenue ct of 1932 where the owner of
a budng generates the eectrca energv consumed n the budng.
The ta mposed by secton 616 of the Revenue ct of 1932 appes
ony where a charge s made for energy furnshed. No ta s due
merey by reason of ts producton. The provsons of secton 622
are not appcabe wth respect to the ta mposed under secton
616(a). (See secton 616(b).)
The ta attaches ony when an amount s pad for the eectrca
energy furnshed. Where the owner of a budng generates the
energy consumed theren, no ta appes uness a charge s made
therefor. If the charge s ncuded n the rent, the ta s due on
such part of the rent as may propery be aocated as a charge for
the energy furnshed. The vendor w be requred to determne and
coect the ta on a reasonabe bass and return the same to the
coector.
Reguatons 42, rtce 40: Scope of ta . I-40-5756
S. . 518
ectrca energy furnshed bottng works, mk companes, or
creameres for manufacturng purposes hed not ta abe.
dvce s requested whether eectrca energy furnshed bottng
works, mk companes, and creameres s ta abe under secton 618
of the Revenue ct of 1932.
ectrca energy furnshed for consumpton by bottng works,
mk companes, or creameres engaged n the pasteurzaton and
bottng of mk, and n the manufacture of butter, buttermk,
chocoate mk, and cottage cheese, s not furnshed for domestc
or commerca consumpton and s not sub|ect to the ta mposed
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499
616, Regs. 42. rt. 40.
by secton 616 of the Revenue ct of 1932. owever, the use of
eectrca energy n branch offces or agences of such ndustres s
a commerca use and eectrca energy so used s sub|ect to the ta .
Reguatons 42, rtce 40: Scope of ta . I-41-5775
S. T. 525
Ta abty of eectrca energy furnshed to branch houses owned
and operated by meat packng companes.
dvce s requested whether the ta on eectrca energy s app-
cabe when furnshed to branch houses owned and operated by
meat packng companes.
Where eectrca energy s furnshed to branch houses owned
and operated by a meat packng company for the processng of meat
products, such as curng and smokng meats, manufacturng sau-
sages, frankfurters, etc., t s regarded as used for ndustra
purposes and s not sub|ect to the ta mposed under secton 616 of
the Revenue ct of 1932. owever, eectrca energy furnshed for
refrgeraton, storng, so-caed ageng of fresh meats, or dstrbutng
the company s products s commerca n ts scope and s sub|ect
to the ta . Where both operatons are carred on at the same oca-
ton and the eectrca energy s furnshed through one meter, the
Sredomnant character of the busness carred on at such ocaton
etermnes the cassfcaton of eectrca energy for the purposes
of ths ta .
Reguatons 42, rtce 40: Scope of ta . I-41-5776
S. T. 526
ed that a payments for eectrca energy for domestc or com-
merca consumpton even though n the form of or ncusve of f ed
charges, such as transformer charges, mnmum charges, fat
charges, servce charges, and mantenance charges, are ta abe.
dvce s requested whether the ta mposed under secton 616 of
the Revenue ct of 1932 on the consumpton of eectrca energy s
due on a payments for domestc or commerca consumpton, whether
n the form of a mnmum charge, a fat charge, or otherwse.
It s hed that a payments for eectrca energy for domestc or
commerca consumpton even though n the form of or ncusve of
f ed charges, such as transformer charges, mnmum charges, fat
charges, servce charges, and mantenance charges, are sub|ect to the
ta mposed by secton 616 of the Revenue ct of 1932.
Reguatons 42, rtce 40: Scope of ta . I-41-5777
S. T. 527
Ta abty of eectrca energy furnshed gran eevators.
dvce s requested whether eectrca energy furnshed to gran
eevators s ta abe under secton 616 of the Revenue ct of 1932.
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616, Regs. 42, rt. 40. 500
The ta mposed under secton 616 of the Revenue ct of 1932 s
appcabe to eectrca energy furnshed for domestc or commerca
consumpton, as dstngushed from that furnshed for ndustra
consumpton. ectrca energy for ndustra purposes s deemed to
ncude that used generay for manufacturng, processng, mnng,
and smar ndustres.
Where the predomnant character of a gran eevator busness s
the purchasng of gran for resae and the storage of gran for the
account of the producer, and where no processng of a substanta
nature s carred on, eectrca energy furnshed to the eevator s hed
to be for commerca consumpton and sub|ect to ta under secton
616 of the Revenue ct of the 1932. owever, eectrca energy con-
sumed n a gran eevator for purposes of ceanng, dryng, grndng,
and beachng gran, as dstngushed from the mere handng, stor-
ng, and dstrbuton of gran, s consdered ndustra consumpton
and s not sub|ect to the ta . Where both operatons are carred on
at the same ocaton and the eectrca energy s furnshed through
one meter, the predomnant character of the busness carred on at
such ocaton determnes the cassfcaton of eectrca energy for
purposes of ths ta .
Reguatons 42, rtce 40: Scope of ta . I-42 5796
S. T. 535
Ta abty of eectrca energy used by nsttutons operatng
on a nonproft bass n promoton of knowedge and scence n
ndustry.
ed that the consumpton of eectrca energy by an nsttuton
operatng on a nonproft bass and engaged n the promoton of
knowedge and scence n ndustry s nether domestc nor commer-
ca consumpton, wthn the meanng of the aw, and that, there-
fore, such eectrca energy s not sub|ect to the ta mposed by
secton 616 of the Revenue ct of 1932.
Reguatons 42, rtce 40: Scope of ta . I-43-5811
S. T. 544
Ta abty of eectrca energy furnshed cathedras, churches,
rectores, and convents.
ectrca energy furnshed cathedras, churches, and convents s
not for domestc or commerca consumpton and s not sub|ect to the
ta mposed under secton 616(a) of the Revenue ct of 1932. ow-
ever, eectrca energy furnshed a rectory s for domestc consump-
ton and s sub|ect to the ta .
Reguatons 42, rtce 40: Scope of ta . I-43-5812
S. T. 545
Ta abty of eectrca energy furnshed bus companes.
ectrca energy furnshed for drect consumpton by bus com-
panes n ther operatons as a common carrer, and eectrca energy
used n the operaton of garages and servce statons whch are con-
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501
616, Regs. 42, rt. 40|
ducted by a bus company for the soe purpose of servcng the busea
used n ts operaton as a common carrer, s not sub|ect to the ta
mposed under secton 616 of the Revenue ct of 1932. The ta -
abty of eectrca energy furnshed to bus statons or depots de-
pends upon the predomnant character of the busness carred on at
such statons or depots. If the predomnant purpose s the man-
tenance of a watng room and other factes to patrons of the bus
ne, t s free from the ta . Otherwse, t s ta abe under the aw.
Reguatons 42, rtce 40: Scope of ta . I 41 5828
S. T. 653
mounts pad In monthy Instaments for the e tenson of an
eectrca transmsson ne to a rura subdvson are not ta abe
as amounts pad for eectrca energy.
dvce s requested concernng the appcaton of the ta on
eectrca energy mposed by secton 616 of the Revenue ct of 1932,
under the foowng crcumstances:
power company e tends a transmsson ne to a rura sub-
dvson under an agreement wth the consumers of eectrcty that
the e pense of such e tenson sha be repad n monthy nsta-
ments. The nstaments are bed wth the reguar charges for
eectrca energy n the monthy statements ssued to the consumers
by the power company.
The amounts receved by the power company whch represent
charges to the consumers for the cost of e tendng the transmsson
ne, snce these charges are soey for the cost of the e tenson and
are separate and dstnct from the charges for eectrca energy,
are not sub|ect to ta under secton 616 of the Revenue ct of 1932.
Reguatons 42, rtce 40: Scope of ta . I-45-5844
S. T. 562
Ta abty of eectrca energy furnshed for consumpton by
hosptas.
ectrca energy furnshed for consumpton by hosptas whch
are not organzed or operated for proft and no part of the net earn-
ngs of whch nure to the beneft of any prvate stockhoder or
ndvdua s not sub|ect to the ta mposed by secton 616 of the
Revenue ct of 1932. owever, the use of eectrca energy n hos-
ptas whch are operated for proft w be sub|ect to the ta .
Reguatons 42, rtce 40: Scope of ta . I 16-5858
( so rtce 41.) S. T. 569
Ta abty of eectrca energy furnshed a company operatng
under a contract wth a muncpaty.
dvce s requested whether a company operatng under a contract
wth a muncpaty for the remova and dsposton of ashes, gar-
bage, rubbsh, and street ceanngs s abe for the ta on eectrca
energy mposed by secton 616 of the Revenue ct of 1932.
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616, Regs. 42, rt. 40.
502
The consumer contends that by actng soey under a contract wth
the muncpaty n the performance of a cty functon, ts use of
eectrca energy s nether domestc nor commerca and s not,
therefore, sub|ect to the ta mposed by secton 616 of the Revenue
ct of 1932.
It s hed that a company whch s operatng under a contract wth
a cty for the remova and dsposton of ashes, garbage, rubbsh,
and street sweepngs s engaged n a commerca enterprse. Con-
sequenty, eectrca energy furnshed to a company so operatng s
for commerca consumpton and s sub|ect to the ta mposed by
secton 616 of the Revenue ct of 1932. The eectrca energy so
used s not furnshed to a potca subdvson of a State wthn the
meanng of secton 616(c) of the aw.
Reguatons 42, rtce 40: Scope of ta . I-46 5859
S- T. 570
Ta abty of eectrca energy consumed by agrcutura fars.
dvce s requested whether eectrca energy consumed by agr-
cutura fars s sub|ect to the ta mposed under secton 616 of the
Revenue ct of 1932.
If the far quafes strcty as an agrcutura far conducted by a
nonproft assocaton, no part of the net earnngs of whch nures to
the beneft of any prvate stockhoder or other ndvdua, t s hed
that the eectrca energy consumed n the operaton of the far s
not purchased for domestc or commerca consumpton and that
amounts pad for such eectrca energy are not sub|ect to the ta
mposed under secton 616 of the Revenue ct of 1932.
Reguatons 42, rtce 40: Scope of ta . I-47-5878
S. T. 576
Ta abty of eectrca energy used by rado broadcastng sta-
tons and educatona nsttutons.
dvce s requested whether eectrca energy consumed by broad-
castng statons and educatona nsttutons s sub|ect to ta under
secton 616 of the Revenue ct of 1932.
ectrca energy consumed by broadcastng statons operated for
commerca or entertanment purposes s sub|ect to the ta . ow-
ever, where a broadcastng staton s owned and operated by an edu-
catona or regous nsttuton and s used e cusvey for the
purpose of broadcastng educatona or regous programs n
connecton wth such nsttutons, eectrca energy consumed n such
operatons s not sub|ect to the ta .
ectrca energy furnshed schoos, coeges, and unverstes for
consumpton n connecton wth the reguar actvtes of such nst-
tutons not operated for prvate gan s not sub|ect to the ta
mposed under secton 616 of the Revenue ct of 1932.
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503 61G, Regs. 42, rt. 40.
Reguatons 42, rtce 40: Scope of ta . I-48-5889
S. T. 584
Ta abty of eectrca energy ost n remeterng.
dvce s requested whether the ta on eectrca energy mposed
by secton 616 of the Revenue ct of 1932 appes to such energy
as s ost n remeterng to tenants of a budng.
The ta payer purchases eectrca energy for resae. owever,
there s a oss of energy due to ne resstance, grounds, shorts, eak-
ages, etc., between the meters through whch the energy s orgnay
receved and the resae meters.
The ta mposed by secton 616 attaches to a amounts pad for
eectrca energy furnshed for domestc or commerca consump-
ton, rrespectve of whether any of the energy pad for s actuay
used. Under the provsons of Treasury Decson 4342 (see on page
495), the ony eectrca energy whch may be purchased ta free s
that whch s purchased for resae and actuay resod by a regstered
owner or agent of an offce budng. The baance of the eectrca
energy s furnshed for domestc or commerca consumpton n the
operatons of the offce budng tsef and as such s sub|ect to the
ta mposed by secton 616 of the Revenue ct of 1932, regardess
of the fact that some porton of t may be ost after ts recept.
Reguatons 42, rtce 40: Scope of ta . I-49-5903
S. T.590
Ta abty of eectrca energy furnshed cosed ndustra pants.
dvce s requested concernng the appcaton of the ta on
eectrca energy mposed by secton 616 of the Revenue ct of 1932
under the foowng crcumstances:
The Company owns a number of de manufacturng pants
whch are equpped wth transformers, thereby ncurrng a mn-
mum charge n e cess of the reguar charge for eectrca energy
actuay consumed by these pants durng ther perod of nactvty.
ectrca energy furnshed for ndustra consumpton s not
sub|ect to the ta but where such energy s furnshed to a pant
durng a perod of tme when ts ndustra actvtes have tempo-
rary or permanenty ceased, the eectrca energy so furnshed s
deemed to be commerca n ts scope, rrespectve of whether any
of the energy pad for s actuay used, and the charge pad there-
for s sub|ect to the ta mposed by secton 616 of the Revenue ct
of 1932.
Reguatons 42, rtce 40: Scope of ta . I-51-5940
S. T.609
Ta abty of eectrca energy ncuded n rent. S. T. 512 (see on
page 498) reconsdered and modfed.
Reconsderaton s requested of the rung pubshed as S. T. 512
(whch see on page 498), whch hods that where the cost of eec-
trca energy s ncuded n the amount pad as rent, offce budng
owners or managers w be responsbe for the coecton of the ta
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616, Regs. 42, rt. 41.
504
mposed by secton 616 of the Revenue ct of 1932 on that porton
of the rent that s attrbutabe to such energy.
The ta mposed by secton 616(a) of the Revenue ct of 1932
s based upon the amount pad foe eectrca energy furnshed for
domestc or commerca consumpton, and s to be pad by the person
payng for such energy and coected by the vendor.
The ureau has reconsdered S. T. 512 and now hods that -where
the owner of a budng purchases or generates eectrca energy and
furnshes such energy to the tenants wthout a charge other than
the amount charged as rent, or wthout submeterng t, no ta w
attach to energy so furnshed tenants, because there s no practca
method by whch the charge to, or the amount of energy consumed
by, them can be accuratey determned. S. T. 512 s modfed
accordngy.
On the other hand, eectrca energy furnshed bv a power com-
pany to a budng rentng space to tenants, for use n ts operatons
as such, s commerca n ts scope and s sub|ect to the ta . Under
ths constructon a eectrca energy purchased by the budng,
whch t does not submeter or rese for a specfc charge, s deemed
to be furnshed for use n ts operatons as such and s sub|ect to the
ta , regardess of the purpose for whch the energy may be used by
the tenants. It foows that the budng company s abe, under
such crcumstances, for the ta on a energy purchased by t and
must pay the ta thereon at the tme when payment for such energy
s made to the power company.
The concuson heren reached does not n any way affect the
responsbty of owners or managers of offce budngs or apartment
houses to coect the ta on payments made for eectrca energy when
such energy s submetered to the tenants or when a specfc charge s
made, whether n the form of a mnmum charge or a fat charge.
Reguatons 42, rtce 40: Scope of ta . I-52-5956
S. T. 615
ectrca energy furnshed to cod storage warehouses for use n
the producton of refrgeraton for storage purposes s commerca
n ts scope and s sub|ect to the ta mposed by secton 616 of the
Revenue ct of 1932.
Reguatons 42, rtce 41: emptons. I-28-5546
T. D. 4337

The second paragraph of artce 41 of Reguatons 42 s hereby
amended to read as foows:
Ths e empton does not appy to payments for eectrca energy for domestc
or commerca consumpton furnshed by governmentay or muncpay owned
eectrca power companes.
Raph . Smth,
ctng Commssoner of Interna Revenue.
pproved une 30, 1932.
. . aantne,
ctng Secretary of the Treasury.
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505
( 616, Regs. 42, rt. 41.
Reguatons 42, rtce 41: emptons. I-31-5587
T. D. 4342

The fourth and ffth paragraphs of artce 41 of Reguatons 42
are amended to read as foows :
Persons camng e empton on the ground that the energy furnshed s not
for domestc or commerca consumpton must submt to the person furnshng
the energy satsfactory evdence showng that t was used for purposes other
than domestc or commerca.
Davd urnet,
Commssoner of Interna Revenue.
pproved uy 26, 1932.
Ogden L. Ms,
Secretary of the Treasury.
Reguatons 42, rtce 41: emptons. 4-5827
S. T. 552
Insovent banks are not ta abe for eectrca energy consumed
where payment of the ta woud dmnsh the funds necessary for
the fu payment of depostors.
dvce s requested whether eectrca energy consumed by n-
sovent banks s ta abe under secton 616 of the Revenue ct of
1932.
Where eectrca energy s furnshed for the use of an nsovent
bank and coecton of the ta woud dmnsh the assets necessary
for the fu payment of a ts depostors, the eectrca energy so
used s not sub|ect to the ta mposed under secton 616 of the Rev-
enue ct of 1932, by reason of the e empton granted n secton 22
of the ct of March 1, 1879. (Secton 570, Tte 12, Unted States
Code.)
In a such cases the person n charge of the nsovent bank must
cam e empton from ta under the terms of that aw and furnsh
to the person recevng payment for such eectrca energy a state-
ment to the effect that, n hs opnon, payment of ta on ts use
woud dmnsh the assets necessary for the fu payment of a ts
depostors. If t shoud ater transpre that the assets are suffcent
to pay the ta due, or any porton thereof, wthout dmnshng
the sums due the depostors, payment of the ta , n whoe or n part,
as the case may be, shoud be made prompty to the coector.
Reguatons 42, rtce 41: emptons. I-47-5877
S. T. 577
vendee who purchases eectrca energy for resae must furnsh
the power company an e empton certfcate each month.
dvce s requested concernng the ta on eectrca energy where
such energy s furnshed for resae.
Secton 616 of the Revenue ct of 1932 mposes a ta on eectrca
energy furnshed for domestc or commerca consumpton and pro-
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610, egs. 42, rt. 43.
50G
vdes that such ta sha be pad by the person payng for such
energy and coected by the person furnshng the eectrca energy
for consumpton.
It s hed (1) that the vendee who purchases eectrca energy for
resae must gve the power company an e empton certfcate each
month, and (2) that the frst vendee sha make the certfcate to
cover as neary as possbe the same perod as the b of the frst
vendor.
eguatons 42, rtce 43: Rate of ta . I-50-5922
S. T.600
Ta abty of eectrca energy receved through a master meter
and remetered.
dvce s requested concernng the ta on eectrca energy under
secton 616 of the Revenue ct of 1932 where t s remetered and sod
to tenants of a budng.
It s stated that a certan budng consumes eectrca energy
receved through ts master meter amountng n a to 23,420 kowatt
hours, the cost of whch, at the power company s rates, s 533.40. Of
the tota amount of energy receved 11,040 kowatt hours s re-
metered and sod to tenants and 12,380 kowatt hours s consumed
for budng operaton. The power company deverng the energy
makes ts charges accordng to the foowng rates:
500 kowatt hours, at 0.05.
500 kowatt hours, at 0.04.
4,000 kowatt hours, at 0.03.
aance, 0.02.
Request s made for nformaton concernng the method of com-
putng the ta .
It s hed that the ta w attach to the actua amount pad to the
power company for the energy whch s used n the operatons of
the budng tsef.
Where the power company has a schedue of rates whch vary
accordng to the number of kowatt hours used, the ta due on the
energy consumed n operatng the budng shoud be determned by
appyng to the tota charge the percentage whch the number of
kowatt hours consumed n such operaton bears to the tota number
of hours purchased durng the month n queston.
The cost of the tota kowatt hours consumed n ths nstance s
533.40. The ta w be computed as foows:
Cost of 23,420 kowatt hours 533. 40
3 per cent ta on . 533.40 10. 00
r 16 ta 8.46
In the e ampe gven, the power company shoud coect and pay
to the coector of nterna revenue a ta of 8.46 upon that porton
of the eectrca energy whch s consumed n the operaton of the
budng and the owner of the budng shoud coect and pay to the
coector of nterna revenue a ta of 3 per cent on the amounts pad
by the tenants for energy furnshed them for domestc or commerca
consumpton.
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507
617, Regs. 44, rt. 44.
S CTION 617. G SOLIN .
Reguatons 44, rtce 5: When ta attaches. I-42-5797
S. T. 536
No refund of ta can be made where gasone has been ost or
destroyed.
dvce s requested whether a whoesaer who has suffered a oss of
gasone n an eectrca storm whch wrecked one of the storage
tanks fed wth gasone purchased ta -pad from the refner, may
propery fe a cam wth the Commssoner for the refund of ta
rembursed to the producer on the gasone that was ost.
The ta under secton 617 of the Revenue ct of 1932 s mposed
upon, and accrues at the tme of, the sae by the mporter or by a
producer of gasone. The subsequent use or fna dsposton of such
gasone has no bearng on the ta . Therefore, no refund of ta
may propery be made where gasone has been ost through fres or
other causes.
Reguatons 44, rtce 43: Scope of ta .
Ta abty of broker who has storage factes for os and
gasone. (See S. T. 486, page 447.)
Reguatons 44, rtce 44: Use of terms. I-35-5645
S. T. 467
dvce s requested as to whether the ta mposed by secton 617
of the Revenue ct of 1932 attaches to such artces as ordnary
kerosene, tractor dstate, technca naphtha, and crude naphtha.
It s hed that ordnary kerosene, tractor dstate, technca
naphtha and crude naphtha, the chef use of whch s not as fue for
the propuson of motor vehces, motor boats, or aeropanes, s not
ta abe as gasone under secton 617 of the Revenue ct of 1932.
Reguatons 44, rtce 44: Use of terms. I-44-5829
S. T. 554
Ta abty of motor benzo and Industra benzo.
dvce s requested reatve to the appcaton of the ta mposed
by secton 617 of the Revenue ct of 1932 to benzo sod by the
mporter or by a producer.
Secton 617 of the Revenue ct of 1932 provdes, n part, as
foows:
(c) (2) the term gasone means gasone, benzo, and any other qud
the chef use of whch s as a fue for the propuson of motor vehces, motor
boats, or aeropanes.
It appears from the nformaton submtted that there are two
dstnct grades of the commerca product benzo, namey, motor
benzo and ndustra benzo, and that they dffer substantay n
physca and chemca characterstcs as we as n ther use. It s
understood that motor benzo, as the name mpes, s a fue for
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619, Regs. 46, rt. 8.
508
motor vehces, whe ndustra benzo s not sutabe for use as a
fue for the propuson of motor vehces, motor boats, or aeropanes.
Under these crcumstances, a saes of motor benzo by the m-
porter or producer are sub|ect to the ta on gasone mposed by
secton 617 of the Revenue ct of 1932, and saes of ndustra benzo
are not sub|ect to the ta .
If, however, any porton of ndustra benzo sod ta -free s fur-
ther processed, manufactured, bended, or compounded unt t be-
comes sutabe for use as a fue for the propuson of motor vehces,
motor boats, or aeropanes, saes and uses by the producer of the
product so further manufactured, compounded, bended, or processed
w be sub|ect to the ta .
Reguatons 44, rtce 44: Use of terms. I 18-5890
S.T.585
Ta abty of Dese o.
The chef use of Dese o at the present tme s not for the
propuson of motor vehces, motor boats, or aeropanes, but for the
propuson of ocean-gong vesses and ferres and for the operaton
of statonary engnes. Therefore, saes of Dese o by the manu-
facturer, producer, or mporter are not now ta abe under secton
617 of the Revenue ct of 1932.
Reguatons 44, rtce 44: Use of terms. I-19-5904
S. T. 591
The Company m es appro matey 5 gaons of gasone wth
y2 pnts of ubrcatng o, not for the purpose of producng a new
product but for the purpose of ubrcatng the cynder was of a
motor n whch the gasone s beng used.
Such operaton by the Company does not make t a producer
of gasone wthn the meanng of secton 617 of the Revenue ct
of 1932.
S CTION 619. S L PRIC .
Reguatons 4G, rtce 8: ass of ta on I-36-5669
saes generay. S. T. 4S4
here a manufacturer bs Goods at hs reguar prce and n
addton shps certan quanttes of the name goods free. hed
that the transacton Is not a gft of any porton of the goods but s
merey a reducton n the reguar prce charged for the entre ot.
dvce s requested reatve to the appcaton of secton 603 of the
Revenue ct of 1932 to so-caed free goods devered by manu-
facturers and n certan nstances devered by |obbers from ta -pad
stock.
It s hed that where a manufacturer bs goods at hs reguar
prce and n addton shps certan quanttes of the same goods
free the transacton s not a gft of any porton of the goods but
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509
619, Regs. 46, rt. 8.
s merey a reducton n the reguar prce charged for the entre
ot. ssumng that ths s a sae at whoesae, the ta w attach
to the prce actuay charged for the entre shpment.
Inqury s aso made reatve to the abty ncurred where a
manufacturer ses goods at hs reguar whoesae prce and pays ta
on such saes, but thereafter authorzes the purchaser to offer free
a gven quantty of such merchandse n cases where orders are re-
ceved for a stated quantty. It s understood that upon authorzng
the |obber to make such an offer the manufacturer agrees to credt
the |obber wth that porton of the orgna purchase prce whch
appes to any goods devered free on such an offer.
Secton 621 fa)2 of the Revenue ct of 1932 provdes n part that
a credt or refund may be aowed or made to any person who has
pad ta under Tte I wth respect to an artce, when the prce
on whch the ta was based s read|usted by a bona fde dscount,
rebate, or aowance, n the amount of that part of the ta propor-
tonate to the part of the prce whch s refunded or credted.
In the event that the manufacturer aows the |obber a rebate for
free goods, on whch ta has been pad, devered by the |obber
n connecton wth an offer sponsored by the manufacturer, the manu-
facturer s entted to cam a credt on hs ta return for the month
n whch the rebate s aowed, or n any succeedng month, for that
part of the ta whch s proportonate to that part of the prce
rebated.
Reguatons 46, rtce 8: ass of ta on 9-5905
saes generay. S. T. 592
Ta abty of and methods of determnng sae prce n cases
of free goods, tra packages, repacements, sampes, and bonus
goods.
or purposes of the foowng rungs the word manufacturer
ncudes a producer or mporter. The questons propounded and the
answers thereto are as foows:
ueston 1. Where sampes of ta abe artces are dstrbuted by
the manufacturer free of charge to the consumer for advertsng
purposes, s a ta abty ncurred and how s t determned
nswer. No ta abty s ncurred.
ueston 2. Is a ta abty ncurred where a manufacturer makes
gfts of ta abe artces to chartabe nsttutons or for other char-
tabe purposes
nswer. No ta abty s ncurred.
ueston 3. Wth the sae of ta abe artces the manufacturer
gves to the purchaser wthout charge an addtona amount of so-
caed free goods of the same ta abe cass does the ta attach
n the case of the so-caed free goods
nswer. The ta attaches and shoud be computed upon the prce
charged the purchaser for the entre order or shpment. See ques-
ton No. 10, reatng to saes of products ta ed accordng to weght or
qud measure.
ueston 4. Does the ta attach n the case of a manufacturer who
ses tra sze packages of ta abe artces for a nomna sum
ascrbed as the cost of postage, packng, etc.
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619, Regs. 46, rt. 6 .
510
nswer. The manufacturer s abe for ta based on the actua
saes prce of the artces.
ueston 5. manufacturer ses to hs agents or representatves
ta abe artces for use as sampes, e hbts, or dspays. Is there
a ta abty n connecton wth ths transacton and f so, what
s the bass for the ta 1
nswer. Such a transacton s ta abe. The ta must be based
upon the sae prce of the artces, uness such prce s ess than the
far market prce. If the artces are sod at ess than the far mar-
ket prce, the ta must be based on the prce for whch such artces
are sod n the ordnary course of trade by manufacturers or pro-
ducers, sub|ect to approva by the Commssoner.
ueston 6. manufacturer suppes ta abe artces to hs agents
or representatves, wthout charge, for the purpose of repacng
artces whch have been used as sampes or e hbts and whch have
been ost, destroyed, or rendered unft as sampes or e hbts. Is a
ta abty ncurred
nswer. No ta abty s ncurred.
ueston 7. manufacturer ses a quantty of ta abe artces
for 15 and gves the purchaser as a bonus or free goods a
quantty of ta abe artces wth an ordnary seng prce of
5. rtces and are ta abe at dfferent rates. ow
shoud the ta be computed
nswer. The ta must be based upon the sae prce of the entre
order or shpment and aocated to the sae prces of the respectve
artces. The sae of both casses of artces for 15 represents a re-
ducton n the customary seng prce coverng both artces of 5,
or one-fourth. The actua sae prce of the shpment s therefore
three-fourths of the ordnary seng prce. Ths fracton shoud be
apped equay to each artce to determne the actua seng prce.
Thus the sae prce of artce s 11.25 and of artce 3.75.
The ta must be based upon the respectve prces as so determned
and at the respectve rates provded by the aw. ocatons of ta
are sub|ect to revew7 by the Commssoner.
ueston 8. manufacturer ses ta abe artces and gves the
purchaser as a bonus or free goods certan nonta abe artces.
ow shoud the ta be computed (
nswer. The sae prce of the entre order or shpment must be
aocated between the ta abe and nonta abe artces. The ta s
mposed ony on the sae prce attrbutabe to the ta abe artces.
ssume the sae prce of the shpment to be 15 and the norma se-
ng prce to be f20, of whch 15 s attrbutabe to ta abe artces
and 5 to nonta abe artces. The sae thus nvoves a reducton n
prce of one-fourth. The ta shoud, therefore, be based on three-
fourths of 15, or 11.25, and shoud be computed at the rate pro-
vded by aw.
ueston 9. manufacturer ses nonta abe artces and gves the
purchaser as a bonus or free goods certan ta abe artces.
What, f any. ta s mposed and how shoud t be computed
nswer. The sae prce of the entre order or shpment shoud be
aocated between the ta abe and nonta abe artces. The ta s
mposed ony on the sae prce attrbutabe to the ta abe artces.
ssume the sae prce of the shpment to be 15 and the ordnary
seng prce 20, of whch 5 s attrbutabe to the ta abe artces
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511
619, Regs. 46, t. 12.
and 15 to nonta abe artces. Ths sae thus nvoves a reducton
n prce of one-fourth, resutng n the sae prce of the ta abe
artces at three-fourths of 5 or 3.75. The ta s based upon the
ast-named prce and at the rate provded by aw.
ueston 10. Wth the sae of artces ta ed by qud measure-
ment, such as ubrcatng os, grape concentrate, brewer s wort, etc.,
and artces ta ed by weght the manufacturer gves the purchaser
an addtona quantty free of charge, as a bonus or so-caed free
goods. ow shoud the ta be computed
nswer. Where the ta s based upon the weght or quantty of
the product whch s sod, the ta s mposed upon the tota weght
or quantty of the order or shpment, whether or not a porton of the
order or shpment conssts of a bonus or so-caed free goods.
Reguatons 46, rtce 8: ass of ta on I-49-5906
saes generay. S. T. 593
Methods of determnng sae prce.
In determnng the bass of the ta under secton 619 of the Revenue
ct of 1932 the amount of ta mposed must be e cuded, whether or
not bed as a separate tem. There are two methods by whch manu-
facturers may b ther goods, (1) ta ncuded, or (2) ta e cuded.
or e ampe, f an artce ta abe at 10 per cent of the saes prce
ses at 100 t may be bed at 110, ta ncuded, or the seng prce
may be bed as 100 and the ta , 10, as a separate tem. I bed
at 110, ta ncuded, the amount of ta must be computed by takng
of such amount, namey, 10.
Reguatons 46, rtce 12: cuson of charges I-39-5736
for transportaton, devery, etc. S. T. 513
ed that transportaton or devery charges e cuded n com-
putng the saes prce of an artce must be supported by adequate
records.
dvce s requested reatve to the e cuson of transportaton and
devery charges n computng the sae prce of an artce under
secton 619 of the Revenue ct of 1932.
arous condtons under whch goods are sod by a manufacturer
and a concuson wth respect to the queston of how ta sha be
computed n each case, n so far as a transportaton or devery
charge s nvoved, are as foows:
1. manufacturer ses goods f. o. b. factory or pont of orgn.
The ta n ths case s on the manufacturer s seng prce wthout
reference to any freght charges whch may be pad by the pur-
chaser to secure devery of the goods.
2. (a) manufacturer prepays the transportaton charges on goods
sod. The same charge s made for the goods n a parts of the
Unted States wthout reference to the amount of transportaton
charge whch may be nvoved.
(b) The same stuaton as (a) wth the e cepton that the manu-
facturer makes a hgher charge for goods devered to ponts west
of the Msssspp Rver than s charged for the same goods dev-
ered east of the Msssspp Rver.
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619, Regs. 46, rt. 13.
512
In the cases descrbed under (a) and (b) the prce upon whch
the ta s to be computed s that amount whch the manufacturer
receves for the ta abe artce, ess the amount of any transporta-
ton charges pad by hm to effect devery. In other words, the basc
prce upon whch the ta s to be computed s the dfference between
the amount the manufacturer receves from ts customer (or the
nvoce prce) and the cost of transportaton and devery to the
customer.
3. manufacturer ses ta abe merchandse freght deductbe
or freght aowed. The purchaser, at the tme of remttng,
deducts from the amount of the nvoce any freght charges he may
have pad to secure devery of the goods from the pace of manu-
facture to the purchaser s pace of busness.
The prce upon whch the ta shoud be computed n ths case s
the amount whch the purchaser remts after deductng the trans-
portaton costs permtted n accordance wth the terms of the saes
agreement.
4. manufacturer ocated n rdgeport, Conn., ses goods to a
deaer n ansas Cty, Mo., f. o. b. rdgeport, Conn. owever, n
order to equaze compettve condtons, the manufacturer credts
the deaer, as an aowance aganst the nvoce prce, wth an amount
equvaent to the dfference between the transportaton cost from
rdgeport to ansas Cty and the transportaton cost from Indan-
apos, Ind. (the nearest competng pont), to ansas Cty.
In ths ease ta s to be computed upon the nvoce prce ess the
amount of the speca aowance for the freght dfferenta, provded
t does not e ceed the amount actuay pad by the manufacturer as a
transportaton charge. In other words, the net return to the manu-
facturer s the basc saes prce for purposes of the ta .
5. queston has arsen n connecton wth the deducton of dray-
age charges.
Where a defnte amount s pad by a manufacturer of goods to
another person performng a transportaton servce by motor truck,
or otherwse, n order to secure devery of goods at a customer s
pace of busness ocated n a cty other than that n whch the manu-
facturer s ocated, the amount of such transportaton or devery
charges s to be e cuded from the prce upon whch the ta s
computed.
No transportaton or devery charges may be e cuded n comput-
ng the saes prce of an artce for the purpose of determnng the
bass of the ta , uness the manufacturer can support the same by
adequate records, freght bs, and other evdence of the amount of
transportaton and devery charges ncurred. The records must be
so prepared that a revenue offcer may ready determne whether the
amount of transportaton and devery charges camed as a deducton
has actuay been pad.
Reguatons 46, rtce 13: Dscounts and I-52-5957
ad|ustments. S.T.616
Method of handng cash dscounts.
dvce s requested concernng the proper method of handng
cash dscounts under the provsons of secton 619 of the Revenue
ct of 1932.
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513
619, Regs. 46, rt. 15.
The ta payer contends that when an nvoce s made out wth the
amount of the ta fgured on the transacton t makes no dfference
whether the b s to be dscounted or not. e concudes that snce
the cash dscount s not earned unt payment s made, the dscount
can not propery be deducted from the vaue of the nvoce. ow-
ever, hs customer contends that the cash dscount shoud be deducted
before computng the ta .
Where goods are offered for sae at a prce on whch a cash ds-
count w be aowed f and when payment s made wthn a specfed
perod, the ta shoud be computed upon the gross amount. The
reason for ths s that a manufacturer has no way of knowng n
advance whether a customer w take advantage of the dscount
offer. If the customer does take advantage of the offer, the ta shoud
then be computed on the net nvoce prce. In a cases the ta must
be computed upon the gross nvoce uness the dscount s actuay
aowed at the tme of the sae. If no dscount s aowed durng the
month n whch the sae was made but s aowed n a subsequent
month, the dfference n ta may be ad|usted by takng credt there-
for n the return for the month n whch the aowance s made.
When a cash dscount s aowed on the prce, the amount of the ta
shoud kewse be correspondngy reduced to the purchaser.
Rectatons 46, rtce 15: ar market prce I-52-5958
n case of reta saes, consgnments, etc. S. T. 617
Ta abty of rado tubes sod by one corporaton to another n
an affated group. Consodated saes ta returns net authorzed.
dvce s requested concernng the bass for computng ta es,
under secton 619 of the Revenue ct of 1932, where saes of rado
tubes are made by one corporaton to another n the same affated
group.
Saes of rado tubes are made by the Producton Corporaton to
the Y Manufacturng Co. and thence to the Z Company, Inc. The
Producton Corporaton furnshes a materas enterng nto the
manufacture of the tubes and manufactures them under ts own
patents or censes.
Under secton 607 of the ct a ta s mposed upon saes made by
the manufacturer and under secton 619 a method s provded for
ascertanng the far market prce upon whch the ta sha be com-
puted n those cases where the nterests of the vendor and vendee
may be the same. Secton 619(b)3 s undoubtedy ntended to pre-
vent the avodance of ta es whch woud easy be possbe wthout
ts presence n the aw. Congress apparenty foresaw the prob-
abty of the creaton of corporatons havng dentca nterests, one
as the manufacturer and the other as the dstrbutng agency, and
sought to mpose the ta on the fu manufacturer s saes prce where
the manufacturng corporaton sod to the dstrbutng corporaton
at a nomna prce. There are numerous other nstances where sm-
ar mutua nterests coud operate to the dsadvantage of the Gov-
ernment. ewng the statute n ths ght, t must be presumed that
Congress dd not ntend to have two or more affated corporatons
recognzed as a snge entty for manufacturers e cse ta purposes.
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620, Regs. 44, 46, rt. 7.
514
If t had so ntended t seems reasonabe to beeve that some pro-
vson woud have been made n the statute for such recognton.
That no such provson was made, couped wth the fact that trans-
actons not at arm s-ength are specfcay provded for, eads to the
concuson that the ntent was to mpose a ta on a saes between
such corporatons.
That Congress had fu knowedge of the condtons e stng wth
reference to affated corporate groups s further estabshed by
the fact that n the ncome ta aw speca provsons appear reatng
to such groups, under whch they are authorzed to fe consodated
returns. The genera aws recognze corporatons as separate en-
ttes and n the absence of speca egsaton, such as s ncorporated
n the ncome ta provsons of the ct reatng to affated groups,
each corporaton, as a separate ega entty, must fe a separate re-
turn for the purpose of the e cse ta .
The contenton that the statute shoud be nterpreted to mean
the economc manufacturer, rather than the ega entty, can not
be supported ether by the anguage of ths partcuar statute or
by the genera aw reatng to corporatons. In the absence of spe-
cfc provsons to the contrary, wherever a statute has spoken of
a corporaton t has aways been nterpreted to mean a snge ega
entty.
The Producton Corporaton manufactures the tubes under
censes and patents acqured by the ssuance of ts stock and ap-
parenty does not make the tubes under the specfcatons, censes,
or patents of the Y Manufacturng Co. nor does t appear that the
Y Manufacturng Co. furnshes any of the materas enterng nto
the manufacture of the tubes. ut even f t coud be hed that the
Y Manufacturng Co. was the manufacturer, the rung woud not
serve the purpose desred. In that case, the ta woud have to be
mposed on saes to the Z Company, Inc., and thus the ta woud at-
tach before a sae to outsde nterests, t beng certan that the Y
Manufacturng Co. can not, as a resut of the varous contracts, be
consdered the agent of the Z Company, Inc.
or these reasons t s hed that the Producton Corporaton
s the manufacturer wthn the meanng of the ct. ccordngy,
the ta shoud be computed on the prce for whch smar rado
tubes are sod n the ordnary course of trade by the manufacturers
or producers thereof.
S CTION 620. S L O RTICL S OR URT R
M NU CTUR .
dvce s requested reatve to the provsons of secton 601 (c)
and secton 620 of the Revenue ct of 1932.
It s stated that some manufacturers of artces such as auto-
mobes, brewer s wort, matches, soft drnks, etc., are nsstng that
because these artces are ta abe- under Tte I of the Revenue
ct of 1932 the manufacturers thereof are entted under secton
Reguatons 44 and 46, rtce 7: Saes for
further manufacture.
I-30-5566
S. T. 460
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515
621, Regs. 44, rt. 52.
620 of the ct to buy ubrcatng o and gasone, used n the man-
ufacturng processes, ta -free.
Secton 620 of the Revenue ct of 1932 provdes n part that:
Under reguatons prescrbed by the Commssoner wth the approva of the
Secretary, no ta under ths tte sha be mposed upon any artce (other
than a tre or nner tube, or an artce ta abe under secton 604, reatng
to the ta on furs) sod for use as matera n the manufacture or producton
of, or for use as a component part of, an artce to be manufactured or
produced by the vendee whch w be ta abe under ths tte or sod free
of ta by vrtue of ths secton.
It w be noted that under the provsons of secton G20 an artce
may be sod ta -free by vrtue of that secton, f such artce s to
be used as matera n the manufacture of or as a component part
of an artce whch w be sub|ect to ta under Tte I of the
Revenue ct of 1932.
s nterpreted the anguage of secton 620 has reference to artces
whch become a tangbe part of a fnshed product, as, for e ampe,
automobe parts and accessores whch mantan ther form and
substance n the structure of the automobe.
It s therefore hed that the provsons of secton 620 are not
appcabe to the saes of ubrcatng o and gasone whch are
e pended or consumed n manufacturng processes and whch do
not become a component matera of a fnshed product sub|ect to
the ta under Tte I of the Revenue ct of 1932.
S CTION 621. CR DITS ND R UNDS.
Reguatons 44, rtce 52: Credts and I-46-5860
refunds. T. D. 4357
Credts and refunds Secton 621 of the Revenue ct of 1932.
rtce 52, Reguatons 44, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The frst paragraph of artce 52, Reguatons 44, s hereby amended
to read as foows:
rt. 52. Credts and refunds. credt aganst ta under Tte I or a
refund may be aowed or made to a manufacturer n the amount of any ta
under Tte I whch has been pad by any person wth respect to the sae of
any artce purchased and used by such manufacturer as matera n the
manufacture or producton of, or as a component part of, an artce wth
respect to whch ta under Tte I has been pad, or whch has been sod free
of ta by vrtue of secton 620, reatng to saes for further manufacture. (See
artce 7.) The cam for refund must be supported by evdence showng (1)
the name and address of the person who pad to the Unted States the ta for
whch refund s camed, (2) the date of payment, (3) the amount of such
ta , and (4) the fact that the artce was so used. credt must be supported
by evdence of the same character. If t s mpossbe to furns such evdence
at the tme when the credt Is taken, a statement to that effect must be sub-
mtted wth the return n whch the credt Is taken. The evdence supportng
such credt must be fed wth the coector wthn 30 days after the date on
whch the return Is fed. If the requred evdence s not so fed wthn that
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626, Regs. 46, rt. 73.
516
perod, the amount of the credt w be dsaowed and assessment of the ta
resutng from the dsaowance w be made on the current assessment st.
Davd urnet,
Commssoner of Interna Revenue.
pproved November 4, 1932.
. . aantne,
ctng Secretary of the Treasury.
Reguatons 46, rtce 71: Credts and I-46-5861
refunds. T. D. 4358
Credts and refunds Secton 621 of the Revenue ct of 1982.
rtce 71, Reguatons 46, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The frst paragraph of artce 71, Reguatons 46, s hereby amended
to read as foows:
bt. 71. Credts and refunds. credt aganst ta under Tte I or a
refund may be aowed or made to a manufacturer n the amount of any ta
under Tte I whch has been pad by nny person wth respect to the sae of
any artce (other than n tre or nner tube) purchased and used by such
manufacturer as matera n the manufacture or producton of, or as a com-
ponent part of, an artce wth respect to whch ta under Tte I has been
pad, or whch has been sod free of ta by vrtue of secton 620, reatng to
saes for further manufacture. (See artce 7.) The cam for refund must be
supported by evdence showng (1) the name and address of the person who
pad to the Unted States the ta for whch refund Is camed, (2) the date of
payment, (3) the amount of such ta , and (4) the fact that the artce was so
used. credt must be supported by evdence of the same character. If t
s mpossbe to furnsh such evdence at the tme when the credt Is taken, a
statement to that effect must be submtted wth the return n whch the credt
s taken. The evdence supportng such credt must be fed wth the coector
wthn 30 days after the date on whch the return s fed. If the requred
evdence Is not so fed wthn that perod, the amount of the credt w be
dsaowed and assessment of the ta resutng from the dsaowance w be
made on the current assessment st.
Davd urnet,
Commssoner of Interna Revenue.
pproved November 4, 1932.
. . aantne,
ctng Secretary of the Treasury.
S CTION 626. R TURN ND P YM NT O M NU C-
TUR RS T S.
Reguatons 46, rtce 73: Penates and I-44-5830
nterest. S. T. 555
( so Secton 1114, Revenue ct of 1926.)
Manufacturer abe for ta on goods shpped on consgnment
to a obber or deaer and for penates and nterest due to den-
quences of atter.
dvce s requested whether the Company (a manufacturer) or
the |obber or deaer to whom goods are sod on consgnment s abe
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517
627, Regs. 46, rt. 77.
for the penates mposed by secton 1114 of the Revenue ct of 1926,
where tne |obber or deaer fas to report saes to the Company.
rtce 15 of Reguatons 46 provdes that where a manufacturer
consgns ta abe artces to a |obber or deaer, retanng ownershp
n them unt they are dsposed of by the |obber or deaer, tte does
not pass and the ta does not attach unt sod by such |obber or
deaer. The reaton between the manufacturer and the |obber or
deaer s, therefore, n substance that of prncpa and agent. The
manufacturer, accordngy, s responsbe not ony for the ta due on
the saes of such artces but aso for any penaty or nterest arsng
from denquency on the part of the |obber or deaer n fang to
report to hm hs saes for the month.
Secton 1114 of the Revenue ct of 1926 does not appy to the
|obber or deaer, because he s not the person abe for the ta . It s,
therefore, ncumbent upon the manufacturer to secure monthy re-
ports of saes from |obbers or deaers who have goods on consgnment.
In the event a |obber or deaer wfuy fas to report hs saes
monthy to the manufacturer, the atter shoud ceary state such
facts on hs monthy return, and show that the ta returned s n-
compete. The manufacturer shoud agree to fe an amended return
and pay the ta due as soon as reports of the saes are receved from
the |obber, and not ater than 30 days after the monthy return s
made. aure to do so w sub|ect the manufacturer to abty for
penates and nterest provded by aw.
In a such cases abty for ta by the manufacturer must be
based on hs far market prce and not on the prce for whch the
artces are sod at reta.
S CTION 627 (S CTION 1121, CT O 1926) . PORTS,
ND S IPM NTS TO POSS SSIONS O
T UNIT D ST T S.
Reguatons 46, rtce 75: Proof of e porta- I-35-5655
ton. S. T. 477
Requrements n parce post shpments.
n opnon s requested reatve to proof of e portaton on parce
post shpments.
It s hed that n connecton wth e portaton made by parce post,
the manufacturer shoud have a form prepared to be used wth each
package e ported on whch shoud be shown such nformaton as the
destnaton, order or nvoce number, the contents of the package,
the name of the vendee, etc. Upon mang the package descrbed
n the form, he shoud have the form stamped by the oca postmaster
as evdence of sad package havng been receved by hm for e porta-
ton by parce post.
Reguatons 46, rtce 77: Msrepresentaton I-30-5569
of ta . S. T. 462
Deaers n artces of casses ta abe free to f prces at whch
they se goods.
n opnon has been requested as to whether there s any provson
of aw to prevent hoders of merchandse on whch no ta has been
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5701, Regs. 42, rt. 2.
518
pad from ncreasng prces to the purchaser on the ground that the
ta renders necessary such advances.
Deaers n artces of the casses ta abe under the Revenue ct of
1932 are, of course, free to f the prces at whch they se those
artces. owever, secton 1123 of the Revenue ct of 1926, whch
under secton 627 of the Revenue ct of 1832 s appcabe to the
ta es mposed by Tte I of that ct, provdes as foows:
Whoever n connecton wth the sae or ease, or offer for sae or ease,
o any artce, or for the purpose of makng such sae or ease, makes any
statement, wrtten or ora, (1) ntended or cacuated to ead any person to
beeve that any part of the prce at whch such artce s sod or eased, or
offered for sue or ease, conssts of a ta Imposed under the authorty of
the Unted States, or (2) ascrbng a partcuar part of such prce to a ta
mposed under the authorty of the Unted States, knowng that such state-
ment s fase or that the ta s not so great as the porton of such prce
ascrbed to such ta , sha be guty of a msdemeanor and upon convcton
thereof sha be punshed by a fne of not more than 1,000 or by mprsonment
not e ceedng one year, or both.
Under secton 1123 t s a crmna offense for a deaer who n-
creases the prce of merchandse n hs hands on une 21, 1932, n
order to take advantage of the compettve stuaton arsng out of
the mposton of the ta es under the Revenue ct of 1932, to repre-
sent fasey n any way that the ncrease s due to a ta pad on the
merchandse.
G N R L PRO ISIONS
Reguatons 46. I-35-5648
S. T.469
rtces mported on whch duty has been pad.
n opnon s requested as to whether duty pad on mported
artces may be deducted from ta due on sae prce.
It s hed that when a duty has been pad upon ngredents and
component parts mported and ater assembed n the Unted States
as a compete artce, the duty may not be deducted from any ta
due on the sae prce of the manufactured artce.
TITL MISC LL N OUS T S. (1932)
S CTION 701. T L GR P , T L P ON , R DIO, ND
C L CILITI S.
Reguatons 42, rtce 2: Transmsson. I-36-5670
S. T. 485
Test of ta abty of messages sent from a pharmacy.
dvce s requested concernng the ta abty of messages trans-
mtted va pharmacy teephone fnes to the Y Teegraph Co.
It s hed that where the pharmacy s an agent of the Y Teegraph
Co. and a message s devered to t by a sender and transmtted by
use of a teephone ne to the teegraph offce and from there by
use of teegraph nes to the addressee, and a snge charge s made
for such combned servce, there s one message and one transms-
son, whch s ta abe at the rate of 5 per cent of the tota amount
charged therefor.
Where, however, the pharmacy s not the agent of the Y Tee-
graph Co., and the sender uses te teephone Tne to reach a tee-
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519
( 701, Regs. 42, rt. 9.
graph offce to secure the transmsson of the teegraph message, and
a separate charge s made for each servce, the transmsson of the
teegraph message begns at the teegraph offce. In ths case there
are two dstnct messages, one transmtted by the use of teephone
factes and the other by the use of teegraph factes. If the
amount charged for the teephone message s 50 cents or more, t s
ta abe at the rates prescrbed n secton 701(a)( . The tee-
graph message s ta abe at the rate of 5 per cent o the amount
charged therefor, as prescrbed n secton 701 (a) 1( ).
Reguatons 42, rtce 3: ass and rate of I-39-5733
ta . T. D. 4356
Ta on teegraph, teephone, rado, and cabe factes Secton
701, Revenue ct of 1S 32. rtce 3, Reguatons 42, amended.
Treasury Department,.
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 3 of Reguatons 42 s amended by nsertng after the fourth
paragraph thereof a new paragraph as foows:
Radophone conversatons orgnatng n the Unted States are sub|ect to ta
as teephone conversatons at the rates mposed under secton 701(a)( ).
Overand rado dspatches and messages and overand radograms are ta abe as
teegraph dspatches and messages at the rate of 5 per centum of the charge
therefor, regardess of the amount of the charge. Radograms n marne serv-
ce, ncudng servce on the Great Lakes and the Guf of Me co, are sub|ect to
ta as cabe and rado dspatches and messages at the rate of 10 cents for each
dspatch or message transmtted for whch a charge s made.
Davd urnet,
Commssoner of Interna Revenue.
pproved September 21, 1932.
Ogden L. Ms,
Secretary of the Treasury.
Reguatons 42, rtce 9: ass and rate of I-49-5907
ta . S. T. 594
Ta abty of wres and nstruments eased to a person who
has e cusve use thereof.
dvce s requested reatve to the appcaton of the ta on tee-
graph, teephone, rado, and cabe factes mposed by secton 701
of the Revenue ct of 1932.
It appears that the M oard of Trade owns an offce budng,
rents offces theren, and operates a gran e change. Teephones
have been nstaed wth wres runnng drecty from the tradng
foor of the e change to ndvdua offces n the budng. These
wres and nstruments are eased to members at a renta of a certan
sum per month. No teephone e change s operated n connecton
wth them. person desrng to use the teephone smpy removes
160903 33 34
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701, Regs. 42, rt. 44. 520
the recever from the hook and a sgna fashes n the offce wth
whch the teephone s connected, and vce versa.
It s hed that n such a case, where wres and nstruments are
eased to a person and he has e cusve use thereof, the amount pad
therefor s ta abe under secton 701 (a)2 of the Revenue ct of 1932
as a eased wre or takng crcut speca servce, even though the
factes n queston are confned to the budng n whch the
essee s offce s ocated. The ta s payabe by the person makng
payment for the servce furnshed.
Under those crcumstances the M oard of Trade s performng
the functons of a teephone company and s entted to e empton on
the amount pad to other teephone companes for so much of a eased
wre or takng crcut speca servce as s utzed n the conduct of
ts busness as a teephone company. The M oard of Trade w
be requred to coect and report such ta to the coector of nterna
revenue, n accordance wth the provsons of Chapter I of Regu-
atons 42.
Reguatons 42, rtce 20: Pubc press. I-32-5603
T. D.4345
Ta on teegraph, teephone, rado, and cabe factes Secton
701 of the Revenue ct of 1932. rtce 20, Reguatons 42, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
The ast paragraph of artce 20 of Reguatons 42 s hereby
amended to read as foows:
The e empton from ta authorzed wth respect to any payment receved
for servces or factes of ths character appes ony to amounts charged
to newspapers or press assocatons for messages from one newspaper or press
assocaton to another newspaper or press assocaton or to or from ther bona
fde correpondents whch dea e cusvey wth the coecton of news for the
pubc press or wth the dssemnaton of news through the pubc press.
Raph . Smth,
ctng Commssoner of Interna Revenue.
pproved ugust 4, 1932.
Ogden L. Ms,
Secretary of the Treasury.
Reguatons 42, rtce 44: Duty to coect, I-29-5558
return, and pay ta . T. D. 4338
Ta on teegraph, teephone, cabe, and rado factes. Secton
701, Revenue ct of 1932.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 44 of Reguatons 42 s amended by nsertng after the frst
paragraph thereof a new paragraph as foows:
very person transmttng any teegraph, teephone, cabe, or rado dspatch,
message, or conversaton coect to a pont outsde the Unted States, and
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521
( 711, Regs. 43, rt. 1.
recevng, whether from a connectng carrer or otherwse, any payment for the
transmsson, sha coect the ta and make return thereof n accordance wth
artce 40.
Davd urnet,
Commssoner of Interna Revenue.
pproved uy 12, 1932.
. . aantne,
ctng Secretary of the Treasury.
Reguatons 42, rtce 44: Duty to coect, I-44-5831
return, and pay ta . S. T. 556
teegraph company s abe for coecton of ta for messages
coected and devered by Its agent to the teegraph company for
transmsson.
dvce s requested reatve to who s abe for the coecton of
the ta mposed by secton 701 of the Revenue ct of 1932 on the
transmsson of dspatches by teegraph under the foowng cr-
cumstances :
The Company has an arrangement or contract wth the Y
Teegraph Co. whereby the Company s pad a commsson on
a teegraph busness whch the Company orgnates wth ts tee-
phone subscrbers. The Company accepts the Y Teegraph Co s.
messages from ts subscrbers, devers them to the Y Teegraph Co.
for transmsson, and coects the fu amount of the charge for the
entre servce. Monthy statements are made by the Y Teegraph Co.
to the Company n whch the Company s bed for the amount
of the busness orgnated by the Company ess commssons
thereon.
It s understood that the dspatches and messages are mted to
those to be transmtted by teegraph, and, accordngy, the Com-
pany s actng merey as an agent for the Y Teegraph Co. There-
fore the Y Teegraph Co. s the party whch renders the ta abe
servce under the crcumstances and s abe for the coecton and
return of the ta on the amount pad by the senders for such mes-
sages. If a teephone to message orgnates on the Company
ne, that company w be responsbe for the coecton and return
of the ta on such teephone to message.
S CTION 711. DMISSIONS.
Reguatons 43 rtce 1: ass, rate, and I-40-5757
computaton of ta , S. T. 519
Ta abty of reduced rate admsson charge for whoe famy
dvce s requested reatve to the ta abty under secton 711 of
the Revenue ct of 1932 of an admsson charge of 50 cents whch
covers admsson for a whoe famy.
On one nght of each week the moton-pcture theater admts a
whoe famy for 50 cents, and f there s a snge admsson tcket
sod to an ndvdua the charge s 35 cents.
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711, Regs. 43, rt. 29.
522
If the estabshed prce of admsson to the theater on that nght s
ony 35 cents, such admsson charge, beng ess than 41 cents, s not
sub|ect to the ta . The reduced rate of admsson of 50 cents for an
entre famy s, therefore, not sub|ect to ta , snce t covers the
admsson for two or more persons, and snce the snge admsson
s ony 35 cents.
Reguatons 43, rtce 12: dmssons to whch 5-5845
e empton appes. S. T. 563
Ta abty of student actvty fee and of season tckets sod to
students and members of the facuty.
dvce s requested reatve to the abty of certan unverstes
for coecton of ta on admssons mposed by secton 500 of the
Revenue ct of 1926, as amended by secton 711 of the Revenue ct
of 1932, on certan payments made by students.
In the Unversty the students are requred to pay a certan
sum for nontransferabe student books enttng them to admsson to
a athetc games and other events durng a specfed perod. In
ths case and n other cases where the fee so requred from students s
coected n addton to the reguar tuton fees, the payment s
deemed to be n the nature of a student actvty fee rather than
a charge for admsson and s not, therefore, sub|ect to the ta n
queston.
In the Y Unversty, however, there s no student actvty fee
and reguar season tckets are sod to members of the facuty and
to students or others, the purchase beng a purey vountary trans-
acton. The amount pad for such tckets may not propery be
cassfed as a student actvty fee and s ta abe. Lkewse, the
amount pad for season tckets by members of the facuty of the
Unversty or by ts aumn s sub|ect to the ta .
Reguatons 43, rtce 29: Requrements app- I-41-5778
cabe to tckets S. T. 528
Passes used to gan admsson to a theater are consdered tckets
of admsson and must show the estabshed prce of admsson and
the amount of ta where the estabshed prce of admsson e ceeds
40 cents.
dvce s requested concernng the ta abty under secton 711(a)
of the Revenue ct of 1932 of passes ssued by theater owners and
whether these passes must show the estabshed prce of admssons,
especay where such prce s ess than 41 cents.
If the passes ssued consttute tckets of admsson and are used by
the hoder to gan admsson to the theater, they are sub|ect to the
requrements mposed by Reguatons 43, artce 29, as to the prntng
of admsson tckets. If the estabshed prce of admsson e ceeds
40 cents, the passes must show the amount of ta due based on the
estabshed prce of admsson. If the estabshed prce of admsson
s ess than 41 cents, the passes need not show such data. In the
event that any passes gven are n effect orders for tckets and may
not be used to gan admsson but must be e changed for reguar
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523
722, Regs. 71. rt. 25.
admsson tckets, no prntng of estabshed prce and ta on such
passes s necessary, but the reguar admsson tckets for whch these
passes are e changed must show such nformaton f the estabshed
prce e ceeds 40 cents.
Reguatons 43, rtce 29: Requrements ap- I-50-5923
pcabe to tckets. S. T. C01
Method of computng ta on a tcket of admsson sod for 51,
ncudng ta .
dvce s requested concernng the ta due, and the proper form
n whch the tcket shoud be prnted, where a tcket of admsson s
sod for the tota sum of 1, ncudng ta .
The form of tcket suggested shows admsson 90 cents, edera
ta 10 cents, tota admsson 1. The ta due on an admsson
charge of 90 cents s 9 cents and t s not permssbe to coect a ta
of 10 cents on an admsson charge n that amount.
In the event that the estabshed prce of admsson s 91 cents, the
ta due w be 10 cents (1 cent for each 10 cents or fracton thereof),
makng a tota of 1.01. In such a case, however, the ureau has
approved the foowng method of coectng the ta and prntng the
admsson tckets:
dmsson 01 cents, ta 10 cents, tota 1.01, reduced prce 1.
In such a case, the ta of 10 cents must be pad on each admsson
tcket.
S CTION 722. ISSU S O STOC , TC.
Reguatons 71, rtce 25: ass of ta . I-61-5941
S. T.C10
Tu ubty of ssues of stock n connectm wth s merger of
corporatons.
dvce s requested whether, n the case of a statutory merger of
two or more companes, the ssue of stock representng ony the e cess
of the combned capta of the corporatons s sub|ect to the ta
mposed by secton 722 of the Revenue ct of 1932.
One queston nvoved s whether a statutory consodaton or a
statutory merger s effected. Where two or more corporatons com-
bne and contnue busness through a newy created corporaton,
a consodaton s effected. Where two or more corporatons combne
under the amended charter of one of the corporatons, whch s a
party to the agreement and s to contnue, a merger s effected.
rom the evdence submtted n the nstant case, t s apparent
that the Stee Corporaton was organzed to take over the assets
and assume the abtes of the Y Stee Co. and the Z Stee Co.
Therefore, a new entty was created and the entre ssue of stoak by
the new corporaton was sub|ect to ta .
Where a statutory merger s effected the stock ssued to the stock-
hoders of the mergng corporatons represents an orgna ssue of
stock and s sub|ect to ta as such.
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723, Regs. 71, rt. 34.
524
S CTION 723. S L S ND TR NS RS O STOC .
Reguatons 71, rtce 32: Rate of ta aton. I-51-5942
S. T.611
Ta abty of stocks when changed from no par vaue to par
vaue of 5 each.
dvce s requested reatve to the stamp ta abty mposed by
secton 723(a) of the Revenue ct of 1932, on the foowng
transacton:
The shares of capta stock of a corporaton have been changed by
amendment of ts certfcate of ncorporaton from shares of no par
vaue to shares of the par vaue of 5 each, share for share.
certfcates ssued on transfers of ts stock snce such amendment
became effectve have the new 5 par vaue ndcated thereon. Its
outstandng no par certfcates have not been caed n for e change
or for the stampng of the new 5 par vaue thereon.
The partcuar queston presented s whether the corporaton was
correct n advsng ts stockhoders that the stamp ta appyng to the
sae or transfer o the shares shoud be based on the new 5 par vaue,
regardess of whether the certfcate they devered on such sae or
transfer s one of ts no par vaue certfcates or a certfcate havng
the new 5 par vaue ndcated thereon.
Where the no par vaue certfcates are transferred after the date
when the charter was amended, the ta shoud be measured by the
vaue of the stock as dscosed by the amended charter of the corpo-
raton and not by the vaue prnted on the certfcates themseves.
In the case of the Goodyear Tre Rubber Co. v. Unted States (273
U. S., 100) the Supreme Court concuded that the statements n the
certfcate of ncorporaton, as amended, and not those appearng on
the face of the stock certfcates shoud contro.
In vew of ths decson, the ta on the transfer of a certfcate of
stock of the corporaton, whether the certfcate transferred s one
of no par vaue or one havng the new 5 par vaue ndcated thereon,
shoud be computed at the rate of 4 cents on each 100 of face vaue,
or fracton thereof, f the stock s seng for ess than 20 per share,
or at the rate of 5 cents on each 100 of face vaue, or fracton thereof,
f seng for 20 or more per share. owever, f the assgnment of
an od certfcate was made pror to the date when the charter was
amended, the ta shoud be computed on the no par vaue bass.
Reguatons 71, rtce 34(w) : Loans of shares I t6-5862
or certfcates of stock, ncudng ntraoffce G. C. M. 11096
borrowngs.
Ta abty of oaned or borrowed stock.
n opnon s requested concernng the nterpretaton of Schedue
-3 of Tte III of the Revenue ct of 1926, as amended by secton
723(a) of the Revenue ct of 1932, n ts appcaton to oans of
stock. dvce s aso requested n ths connecton as to whether
Treasury Decson 3249 s n force n ts entrety.
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525
723, Regs. 71, rt. 34.
Treasury Decson 3249, approved November 18, 1921, n so far as
hereto pertnent, reads as foows:
In Treasury Decson 2685, approved March 30, 1918, ths offce hed, In
accordance wth an opnon of the ttorney Genera, that stamp ta apped to
transfers of shares or certfcates of stock made by a person oanng stock to
another borrowng the stock to effect a sae and to the transfer of shares or
certfcates of stock from a borrower returnng them to a ender n fufment
of the borrower s obgaton to buy n and return stock.
In accordance wth the rungs theren made, t s further hed that the
tatnp ta appes to a transfers of ega tte nvoved In the practce of so-
caed ntraoffce borrowng, wth the e cepton of such borrowng and returnng
as s rendered necessary n effectng devery on a bona fde sae of ong stock,
where the seer or cent broker prompty deposts the stock or certfcates n
the mas at a pont so far removed from the pont of devery as to make
actua devery of sad stock or certfcates so sod mpossbe wthn the
prescrbed perod of tme. The rung n O. D. 105 S. T. 4-21-220) s modfed
In conformty herewth.
On November 23, 1921, fve days after ths Treasury decson was
promugated, the Revenue ct of 1921 became a aw. Schedue -3
under Tte I of that ct e empted from the stock transfer ta
mere oans of stock and the return of stock so oaned. Ths
vrtuay made neffectve the Treasury decson n so far as t reated
to the borrowng or oanng of stock under the crcumstances set
forth n ts second paragraph. The e empton from ta on transfers
nvoved n makng oans of stock was not authorzed by the aw
whch was n force when Treasury Decson 3249 was promugated,
namey Schedue -4 of Tte I of the Revenue ct of 1918. That
ths s so was made cear bv the decson of the Supreme Court n the
case of Provost et a. v. U. S. (269 U. S., 443, T. D. 3811, C. . -,
417), where the court, n referrng to the ta on transfers of stock
under the Revenue ct of 1917 and the Revenue ct of 1918, sad that
the pan purpose of the statute was to e tend the ta ng provsons
to a transfers of ega tte to shares or certfcates. The anguage
of the Revenue ct of 1932 s substantay the same, n ths regard,
as that ncorporated n the Revenue cts of 1917 and 1918, e cept for
the e empton of transfers nvoved n returnng stock oaned.
The e empton n the Revenue ct of 1921, referred to herenbe-
fore, was contnued n the Revenue cts of 1924 and 1926. The
Revenue ct of 1928 made no change n ths respect. The Revenue
ct of 1926 was amended by the Revenue ct of 1932 as to the
mposton of the ta on transfers of stock, etc. (Secton 723, Rev-
enue ct of 1932.) The e empton causes n the new aw, n so
far as pertnent to the queston under consderaton, read as foows:
Provded further, That t s not ntended by ths tte to mpose a
ta upon an agreement evdencng a depost of certfcates as coatera securty
for money oaned thereon, whch certfcates are not actuay sod, nor upon
the devery or transfer for snch purpose of certfcates so deposted nor upon
the return of stock oaned: Provded further, That the ta sha not be Imposed
upon deveres or transfers to a broker for sae, nor upon deveres or trans-
fers by a broker to a customer for whom and upon whose order he has pur-
chased same, but such deveres or transfers sha be accompaned by a cer-
tfcate settng forth the facts: Provded further, That the fa sha not be
Imposed upon deveres or transfers from a fducary to a nomnee of such
fducary, or from one nomnee of such fducary to another, f snch shares or
certfcates contnue to be hed by such nomnee for the same purpose for whch
they woud be hed f retaned by such fducary, or from the nomnee to such
fducary, but such deveres or transfers sha be accompaned by a certfcate
settng forth the facts: .
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723, Regs. 71. rt. 34.
526
rtce 34(w) of Reguatons 71 reads as foows:
The foowng are e ampes of transactons sub|ect to the ta :
(w) Loans of shares or certfcates of stock, ncudng ntraoffce borrowngs.
rom a consderaton of secton 723 of the Revenue ct of 1932,
omttng the e empton n the Revenue ct of 1926 upon mere oans
of stock, t s apparent that Congress ntended to mpose the ta
upon such oans. Mere oans of stock are not, therefore, now e empt
from the ta athough the return of stock oaned s e empt.
transfer where the stock s deposted as coatera securty for money
oaned thereon s aso e empt. If a oan of stock, be t of what-
soever nature, does not meet ths strct requrement, t does not fa
wthn the e empton and the transacton s ta abe. It woud be
contrary to the ntent of the aw to e tend the e empton further than
Congress ntended, by aowng ntraoffce oans of stock to be e empt
from ta .
When ouse No. 10236, whch became the Revenue ct of
1932, passed the ouse and was sent to the Senate, there was em-
nated from the b the e empton theretofore accorded to mere
oans of stock but there was retaned theren the e empton as to
the return of stock oaned. The Senate nance Commttee
amended the b by restorng the emnated words so that the cause
read: upon mere oans of stock nor upon the return of stock so
oaned.
In ts report on ths b the Senate nance Commttee, wth re-
spect to ths change, e paned ts poston as foows (Report No.
665, May 9,1932, page 46):
The ouse b emnated the provson of e stng aw e emptng oans of
stock. Your commttee has restored ths e empton, snce the oanng of stock
s essenta to the earrng out of many egtmate transactons, such as the
sae of stock by those IMng at a dstance from the stock e change. Itacs
supped.
When the ouse b, as so amended, came up for consderaton n
the Senate, the amendmentproposed by the nance Commttee was
re|ected. (Congressona Record, May 30, 1932, page 11890.) In
the course of the dscusson on ths amendment proposed by the
nance Commttee Senator Reed sad, n part (Congressona
Record, May 30, 1932, page 11884):
Under the rues of the New York Stock change devery most aways be
made by 15 mnutes after 2 o cock of the day foowng a sae. It s obvousy
mpossbe for a securty hoder vng more than 24 hours from New York to
se there on teegraphc order and compete the transacton by 2.15 of the fo-
owng day. One resut, therefore, of the adopton of the moton of the Senator
from Montana woud be to make t cost every mercan who ves more than
24 hours from New York twce as much as t costs a New Yorker to perform the
same acton. We woud be puttng a penaty upon the country we woud be
gvng a further advantage to the man who ves n New York Cty. We woud
et the New Yorker perform e acty the same act performed by the man vng at
a dstance for |ust one-haf the cost. It dd not seem to the commttee that that
woud be far.
rom the acton of the Senate and from the dscusson on the
amendment proposed by the Senate nance Commttee n endeavor-
ng to restore the e empton of oans, t s obvous that stuatons
such as were contempated n the second paragraph of Treasury
Decson 3249, supra, were aso consdered by Congress n the enact-
ment of the Revenue ct of 1932. The fact that Congress had such
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527
723, Regs. 71, rt. 35.
stuatons n mnd when the e empton on oans was dened nd-
cates very ceary that the e empton accorded by the second para-
graph of Treasury Decson 3249 supra, was not approved by Con-
fress, but that, on the contrary, Congress ntended to ta a trans-
e s nvoved n makng oans of that knd.
It has been contended, however, that so-caed ntraoffce bor-
rowngs or ntraoffce oans are, n most cases, not oans at a.
Whether a so-caed ntraoffce oan s ta abe or not depends on
whether there s actuay a oan of stock to the seng customer.
The concuson to be reached necessary depends upon the crcum-
stances of each case. If the seng customer ndorses hs certfcate
and devers t to a branch house or agent of the broker at a pont
beyond the 24-hour mt, such devery (beng a devery to an agent
of the broker s equvaent to a devery to the broker. s shares
of stock are fungbe, the broker may use any avaabe certfcates
n hs possesson to make devery on the sae, and such acton woud
not consttute a oan of stock to the customer. Or f a seng cus-
tomer at a dstance ndorses hs certfcates and devers t to a
cent broker of the broker or to a correspondent of the broker, and
such cent broker or correspondent has to hs credt wth the broker
at the e change shares suffcent to make devery on the sae made
by the seng customer, such devery does not nvove a oan of stock.
In a other cases where a seng customer or a cent broker or a
correspondent has not made avaabe to the deverng broker suff-
cent shares wherewth to make devery under the sae, but stock
s secured esewhere and dever s made under the rues of the
e change, such devery necessary nvoves a oan of stock whch s
ta abe.
or the foregong reasons ths offce s of the opnon that Treasury
Decson 3249 s no onger n force as an entrety, but that, on the
contrary, the porton thereof whch e empts an actua oan of stock
has been revoked by reason of the provsons of secton 723 of
the Revenue ct of 932, as construed n the ght of the opnon of
the Supreme Court n the Provost case, supra, and n vew of the
promugaton of artce 34 (w) of Reguatons 71.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
Reguatons 71, rtce 35: Saes or transfers I f8-5891
not sub|ect to ta . S. T. 586
The surrender by a corporate stockhoder of certfcates of stock n
e change for new certfcates for the soe purpose of refectng a
mere change n the name of the corporate stockhoder s not a sae
or transfer sub|ect to ta under secton 723 of the Revenue ct of
1932.
Regttatons 71, rtce 35: Saes or transfers I-49-5908
not sub|ect to ta . T. 595
Ta abty of transfers of stocks to a trustee In bankruptcy.
dvce s requested whether a ta abty s ncurred under secton
723 of the Revenue ct of 1932 where stock standng n the name
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724, Regs. 71, rt. 120. 528
of a bankrupt stockhoder s transferred to the name of hs trustee
n bankruptcy.
Upon hs appontment and quafcaton, a trustee of the estate
of a bankrupt becomes vested by operaton of aw wth the tte of
the bankrupt.
Consequenty, transfers of the stock nto the name of the trustee
n bankruptcy w not ncur the transfer ta mposed by Schedue
-3 of Tte III of the Revenue ct of 1926, as amended bv sec-
ton 723(a) of the Revenue ct of 1932.
S CTION 724. ST MP T ON TR NS R
O ONDS, TC.
Reguatons 71, rtce 120: ass of ta . I tO-5758
S.T.520
Ta abty of sae or transfer of bonds purchased for cent.
dvce s requested reatve to the stamp ta abty, mposed by
secton 724 of the Revenue ct of 1932, ncurred on the sae of bonds
under the foowng descrbed crcumstances:
customer gves an order to buy a 1,000 bond at 80 net to hm.
The bond s purchased from another bond deaer at 78 and when the
bond s receved the memorandum of sae accompanyng t has aff ed
one 40-cent documentary stamp. The bond s devered to the cus-
tomer at 80, wthout pacnganother stamp ether on the bond or on
the memorandum of sae. The memorandum of sae receved from
the bond deaer bearng the canceed stamp s then paced n the
purchaser s ta fe.
The transacton ncudes both a purchase and a sae and, conse-
quenty, the bond may not propery be devered to the customer on
the snge stamped memorandum of sae e ecuted by the bond deaer
from whom the purchase was made. The transfer to the name of
the customer ncurs a second transfer ta and t w be necessary to
e ecute a second memorandum of sae, to whch the stamps shoud
be aff ed, coverng the resae of the bond to the customer. The
stamped memorandum of sae shoud accompany the bond when t s
presented to the transfer agent for transfer, or devered to the
customer.
Reguatons 71, rtce 120: ass of ta . I -5779
S. T. 529
Ta abty of bonds surrendered for retrement and canceaton.
dvce s requested whether t s necessary to aff stamps on bonds
whch are surrendered to a trustee for retrement and canceaton
under the terms of a corporate mortgage.
Where bonds are surrendered to a trustee actng under a trust
ndenture, or to the ssung corporaton, for mmedate canceaton,
the transfer ta mposed by secton 724 of the Revenue ct of 1932
s not ncurred. If, however, the bonds are not canceed but are
retaned for resae, the surrender of the bonds consttutes a ta abe
transacton.
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529
725, Regs. 71, rt. 80
Reguatons 71, rtce 120: ass of ta . I-42-5798
S. T. 537
Ta abty of bonds devered to n broker for sae.
dvce s requested whether bond saes made through brokers and
agents are ta abe on each transacton under secton 724 of the Reve-
nue ct of 1932.
Under the provsons of secton 724 of the Revenue ct of 1932
the ta on the transfer of bonds s not mposed upon deveres or
transfers to a broker for sae, or upon deveres or transfers by a
broker to a customer for whom and upon whose orders he has pur-
chased the same, provded such deveres or transfers are accom-
paned by a certfcate settng forth such facts. Ths e empton, how-
ever, does not appy to deveres or transfers to banks, trust com-
panes, or nvestment bankers.
If the Company merey acts as agent for a purchaser and at
the tme of the sae nstructs the broker to transfer the bonds to the
name of the purchaser, ony one transfer ta s ncurred. owever,
where the Company purchases bonds for ts own account and ater
reses them to purchasers, two transfer ta es w be ncurred.
S CTION 725. ST MP T ON CON Y NC S.
Reguatons 71, rtce 77: Ta , how computed. I-38-5714
S. T. 503
ed, that where the purchase prce for property s pad n n-
staments, some payments beng made before une 21, 1932, and
some after that date, the ta shoud be based on entre purchase
prce.
dvce s requested concernng the appcaton of the stamp ta
on conveyances to a deed conveyng rea property under the foow-
ng crcumstances:
purchased an acre of and n 1927, purchase prce of whch was
1,250. e pad 250 cash and assumed a contract to pay 12.50
per month. When a subsequent payments, together wth ta es and
nterest, have been made, he s entted to a deed to the property.
On une 21, 1932, he st owes a baance of 125, but wshes to pay
the baance so that he may obtan hs deed.
ed, that the ta shoud be computed on the tota amount of the
consderaton passng for the transfer of the property, namey
1,250.
Reguatons 71, rtce 80: Deed dated pror I-50-5924
to une 21, 1932, but acknowedged and de- S. T. 602
vered after that date.
deed devered after une 21, 1032, s ta abe.
deed s not effectve uness and unt t s devered. The ta
accrues upon devery of the deed to the grantee or hs agent on or
after une 21, 1932, regardess of the fact that the contract of sae
mght have been entered nto and a part of the consderaton pad
pror to that date.
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725, Regs. 71, rt. 98.
530
Reguatons 71, rtce 82: Deeds conveyng I-42-5799
property sod under forecosure or e ecuton. S. T. 538
Ta abty of deeds conveyng property sod under forecosure
or e ecuton.
dvce s requested concernng the ta abty of certan deeds of
conveyance under the provsons of secton 725 of the Revenue ct
of 1932.
Paragraph 8, added to Schedue , Tte III, of the Revenue ct
of 1926, by secton 725 of the Revenue ct of 1932, mposes a ta
on any nstrument by whch reaty sod s conveyed to the purchaser
and the consderaton nvoved s n e cess of 100. The ta accrues
upon devery of the nstrument to the grantee or hs agent. Deeds
e ecuted by masters n chancery, sherffs, cerks of court, etc., to
cover transfers of property sod under a forecosure or e ecuton, are
sub|ect to ta . The grantee or vendee may be requred to pay the
ta or the cost of revenue stamps may be ncuded n the e penses of
a forecosure sae.
If, under the aws of a State, the certfcate of sae operates to vest
tte to reaty, the devery of ths nstrument to the grantee on and
after une 21, 1932, the effectve date of the stamp ta provsons of
the Revenue ct of 1932, s ta abe, and stamps n evdence of the
payment of the ta shoud be aff ed to such nstrument and canceed.
The deed requred to be e ecuted and devered at the e praton of
15 months from the date of sae, beng smpy confrmatory, woud
not be sub|ect to the ta .
If, on the other hand, tte to the property s actuay conveyed for
the frst tme by a deed e ecuted and devered 15 months after the
sae, stamps shoud be aff ed to such deed devered on and after
une 21, 1932.
Reguatons 71, rtce 98: Deed to budng I-52-5959
and oan assocaton. S. T. 618
n e panaton s requested concernng artce 98 of Reguatons
71 under the Revenue ct of 1932, whch reads as foows:
deed transferrng tte to property to a budng and oan assocaton for
the purpose of securng a oan on the property so conveyed, whch property
Is mmedatey reconveyed to ts owner, Is not sub|ect to ta , the deed of recon-
veyance beng kewse e empt.
The queston rased s how a deed can secure a oan f the property
s mmedatey reconveyed to the borrower.
The artce referred to appes where the borrower conveys reaty
by warranty deed to the ender, and where the ender, n turn, re-
conveys t to the borrower. These transactons estabsh the reaton
of vendor and purchaser between ender and borrower, respectvey,
wth securty for the oan n the form of a vendor s en on the reaty.
Under such crcumstances nether deed consttutes a conveyance of
reaty wthn the meanng of secton 725(a) of the Revenue ct of
1932. The conveyances, taken together, accompsh the same resut
n securng the debt as does a rea estate mortgage e ecuted by the
borrower n favor of the ender.
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531
731, Regs. 42, rt. 20.
S CTION 731. TR NSPORT TION O OIL Y PIP LIN .
Reguatons 42, rtce 26: ass of ta . I-40-5759
S.T.521
Transportaton of gasone by ppe ne, smar to movements
whch ppe-ne carrers usuay undertake and erform, hed ta -
abe under secton 731 of the Revenue ct of 1032.
dvce s requested whether the ta mposed by secton 731 of tho
Revenue ct of 1932 appes under the foowng crcumstances:
The Company owns and operates a 2-nch ppe ne from ts
gasone pant to a cty appro matey 29 mes away. The ne con-
nects the gasone pant and the oadng dock at the cty and s used
e cusvey by the Company n transportng ts own product.
t the dock the gasone s oaded nto tank cars and transported to
the consgnee.
The movement s not merey oca or ncdenta to the producton
or refnement of gasone. It s substantay smar to movements
whch ppe-ne carrers usuay undertake and perform wth respect
to devery servce to tank cars through oadng racks.
It s hed that the movement of gasone under the crcumstances
above set out s ta abe under secton 731 of the Revenue ct of 1932.
Reguatons 42, rtce 26: ass of ta . I-45-5846
S. T.564
Transportaton of natura or casng head gasone by ppe ne
s ta abe.
Natura or casng head gasone s a qud product of crude petro-
eum, wthn the meanng of secton 731 of the Revenue ct of 1932,
and the transportaton thereof by ppe ne s sub|ect to the ta m-
posed by that secton of the aw. (See Wempe v. Producers O
Co., 145 La., 1031, 83 So., 232 Locke v. Russe, 75 W. a., 602,
84 S. ., 948 Lvngston O Corporaton v. Waggoner, 273 S. W.,
903 Conneee et a), v. Magnoa Petroeum Co., 279 S. W., 597
Gbreath v. States O Corporaton, 4 ed. (2d), 232 Twn s
Gasone Co. v. radford O Corporaton, 264 ed., 440.)
Reguatons 42, rtce 26: ass of ta . I-51-5943
S. T.612
Transportaton of o by ppe ne to destnatons nsde and
outsde the Unted States.
dvce s requested reatve to the ta mposed by secton 731
of the Revenue ct of 1932 on o receved or transportaton to
destnatons nsde the Unted States and on o receved for trans-
portaton and consgned to, and movng to, a destnaton outsde the
Unted States.
No ta attaches to the contnuous transportaton of o by ppe
ne to foregn ports or paces. O s n course of e portaton when
t has been started on ts fr|a voyage or devered to a carrer for
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731, Regs. 42, rt. 44. 532
contnuous transportaton from ts pont of orgn to ponts beyond
the boundares of the Unted States.
The test of ta e empton on transportaton of o ntended for
e portaton s the contnuty of the movement from the pont of
orgn n the Unted States to ts foregn destnaton. The mere
ntent of the shpper or the contents of the shppng document are
not concusve on ths pont. or nstance, t may be that the shpper
ntends that the o movng n commerce utmatey w go nto e -
port trade, but before e portng the o he ntends to sub|ect t to
further manufacture. e may consder the movement from the pont
of orgn to pont of manufacture a part of the e portaton movement,
but f there s a stoppage n transt for a manufacturng process
the transportaton to the pace of manufacture s domestc ony and
sub|ect to ta . In other words, the movement must be contnuous.
In case there s a break or comng to rest of the property at any pont
n transt to a foregn destnaton, t s hed that there are two sepa-
rate and dstnct movements one beng from the pont of orgn to
the stoppng pont, whch s a compete domestc movement and ta -
abe and the second beng from the stoppng pont to the port of
e portaton, whch s an e port movement and not ta abe, provded
the property s actuay devered to ts foregn destnaton wthout
any further break n the movement.
In a such cases the person normay abe for the ta must retan,
accessbe for nspecton, evdence of the e port character of the o
transportaton. Ths evdence must estabsh that at the tme the o
started from the pont of orgn, a contract order or other evdence of
ntenton to e port the o for devery at a pace beyond the bounda-
res of the Unted States e sted, as we as evdence of devery of
the o to ts foregn consgnees n a contnuous and unbroken
movement.
Reguatons 42. rtce 44: Duty to coect, I-47-5878
return, and pay ta . S. T. 578
ont owners of ppe nes must make separate monthy returns.
dvce s requested reatve to who shoud fe returns and pay
the ta mposed under secton 731(a) of the Revenue ct of 1932 on
the transportaton of o by ppe ne under the foowng crcum-
stances: The Ppe Lne Co. and the Y Ppe Lne Co. render a
|ont servce coverng a contnuous movement over two nes. ues-
ton arses as to whether one company shoud report the ta on the
entre movement and coect the proportonate sum from the other
company, or whether each company shoud report the ta due on the
movement over ts ne separatey.
The fa mposed under secton 731 (a) of the Revenue ct of 1932
s to be pad by the person furnshng the transportaton servce.
rtce 44 of Reguatons 42 provdes that every person requred
by the ct to pay any ta on the transportaton of crude petroeum
and qud products thereof by ppe ne sha make a monthy
return and pay the ta due, n accordance wth the provsons of
artce 46.
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533
741, Regs. 42, rt. 33.
Where a ta abe |ont servce s rendered by two or more carrers
of o by ppe ne, each carrer must return and pay the ta on the
partcuar porton of the servce rendered by t, based on the porton
of the charge receved by t for such servce.
S CTION 741. L S S O S D POSIT O S.
Reguatons 42, btce 30: ffectve date. I-38-5712
S. T.504
ed that the amount pad for the use of a safe depost bo after
une 21. 1932, Is sub|ect to ta where both payment and use are
after that date.
dvce s requested whether the amount pad for the use of a safe
depost bo when both payment and use occur after une 21, 1932,
s sub|ect to the ta mposed under secton 741 of the Revenue ct
of 1932.
It s stated that the renewa of the safe depost bo fee was due
durng the month of May, 1932 that t was not pad unt the month
of ugust, 1932 and that the essee was requred by the bank to pay
the ta on the renta charge.
Under secton 741 (a) of the Revenue ct of 1932 the ta attaches
to any amount coected after the effectve date of that secton for
the use after such date of any safe depost bo . Consequenty, that
porton of the renta charge pad n ugust whch covered the use of
the bo for the perod on and after une 21, 1932, s sub|ect to a
ta of 10 per cent of such amount.
Reguatons 42, ktc e 33: d|ustment. I-50-5925
S. T. 603
Ta abty of rentas for safe depost bo es where a arger bo s
eased.
dvce s requested concernng severa questons whch have arsen
reatve to the ta mposed by secton 741 of the Revenue ct of
1932 on eases of safe depost bo es. The questons and answers are
as foows:
ueston. person eases a safe depost bo on March 1, 1932, for
a perod of one year, at an annua renta of 15, the fu amount for
such ease havng been pad by the essee n advance. On November
1, 1932, he eases a arger bo , not n e cess of 40 cubc feet capacty,
at an annua renta of 25, surrenderng the od bo . The accountng
system of the safe depost company shows that a check was receved
from the essee for the payment of 25. The safe depost company
refunds to the essee an amount of 5 due on the une pred porton
of the orgna ease. The queston s whether the ta of 10 per cent
s to be based on the fu charge of 25 or on the net amount pad, 20.
nswer. It s hed that the ta shoud be coected on the 25
payment. The provsons of secton 772(c) of the Revenue ct of
1932 have no appcaton to payments on whch no ta has been
coected.
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751, Regs. 42, Ch. I .
534
ueston. Where a person eases a safe depost bo of 40 cubc
feet capacty, or ess, subsequent to une 21, 1932, but after that date,
upon appcaton, the safe depost company rents the essee a arger
bo than the one orgnay rented, but of ess than 40 cubc feet
capacty, and addtona rent s coected for the arger space, on what
bass s the ta to be computed
nswer. Where durng the perod of a ease of a safe depost bo
entered nto after une 21, 1932, the essee takes a new ease for
another safe depost bo of not more than 40 cubc feet capacty, at a
hgher rate, and s gven credt for the amount pad on the frst ease,
an addtona ta shoud be coected ony upon the addtona
amount pad under the new ease.
S CTION 751. C C S, TC.
Reguatons 42, Chapter I : Ta on checks, I-32-5601
etc. T. D. 4344
Chapter I of Reguatons 42, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
Chapter I of Reguatons 42 s hereby amended to read as
foows:
chapter I .
Ta on Checks, tc.
secton 751 (a) of the revenue act of 1932.
(a) There s hereby mposed a ta of 2 cents upon each of the foowng
nstruments, presented for payment on or after the ffteenth day after the
date of the enactment of ths ct and before uy 1, 1934: Checks, drafts, or
orders for the payment of money, drawn upon any bank, banker, or trust
company such ta to be pad by the maker or drawer.
rt. 34. ffectve perod. The ta attaches to a nstruments specfed n
secton 751 when presented for payment to a bank, banker, or trust company
on or after une 21, 1932, and before uy 1, 1934.
rt. 35. Use of terms. Checks, drafts, and orders for the payment of
money ncude any order n wrtng, drawn upon a bank, banker, or trnst
company, requrng the person upon whom drawn to pay a sum certan n
money, whether on demand, at sght, or at a f ed or determnabe future tme.
The term bank, banker, or trust company ncudes any person or nsttu-
ton carryng on the busness of, or mantanng an estabshment for, the
custody, oan, e change, or ssue of money, the transmsson of funds by
checks, or the acceptance or payment of drafts or orders for the payment
of money. The fact that the bankng factes afforded are ncdenta to any
other busness carred on w not avod abty to the ta .
rt. 36. Scope of ta . The ta mposed under secton 751 attaches to a
nstruments of the knd descrbed In artce 35 presented for payment wthn
the effectve perod of the secton. It s mmatera whether the nstrument
s made or drawn n ths country or abroad, but n order to be sub|ect to the
ta t must be drawn on, payabe by, and presented for payment to, a bank,
banker, or trust company n the Unted States.
Instructons gven by ma, teephone, teegraph, cabe, or rado drecty to e
bank, banker, or trust company for the transfer or payment of funds are not
sub|ect to the ta , snce they do not consttute nstruments whch are pre-
sented for payment wthn the meanng of the ct
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535
751, Regs. 42, rt. 36.
draft In form drawn upon the drawer, or upon any offcer of the drawer,
and made payabe at or through a desgnated bank s an order for the pay-
ment of money and sub|ect to the ta , uness the bank s under no ob-
gaton to the drawer drect or mped to pay such nstrument and s wthout
authorty to charge the amount thereof aganst an account of the drawer.
The nstrument woud not be sub|ect to the ta n the absence of both such
obgaton and such authorty.
Trave or traveer s checks are sub|ect to the ta .
check drawn by a casher or other offcer of a bank upon the bank of whch
he Is such offcer, s sub|ect to the ta .
Coupons reatng to bearer bonds, athough payabe at a desgnated bank n
the Unted States, are not checks, drafts, or orders for the payment of money.
The ta does not attach to the wthdrawa of money (1) from a savngs ac-
count where the tem s refected as an entry on a pass book hed by the depostor
or (2) from a checkng account, provded n ether case the wthdrawa s
evdenced ony by a recept personay tendered to the bank by the depostor.
The checks, drafts, or orders drawn by offcers of the Unted States or of a
State, county, or muncpaty, or of a foregn government, n ther offca
capactes, aganst pubc funds standng to ther offca credt and n further-
ance of dutes mposed upon them by aw, are not sub|ect to the ta .
If an nstrument Is not pad by the bank, banker, or trust company upon
whom or whch t s drawn, the ta does not attach.
Labty to Ta .
secton 761 of the revenue act of 1932.
(a) There s hereby mposed a ta of 2 cents upon each of the foowng
Instruments, such ta to be pad by the maker or drawer.
(b) very person payng any of the nstruments mentoned n subsecton
(a) as drawee of such Instrument sha coect the amount of the ta Imposed
under such subsecton by chargng such amount aganst any deposts to the
credt of the maker or drawer of such nstrument, and sha on or before the
ast day of each month make n return, under oath, for the precedng month, and
pay such ta es to the coector of the dstrct . very person requred
to coect any ta under ths secton s hereby ndemnfed aganst the cams and
demands of any person for the amount of any payments made n accordance wth
the provsons of ths secton.
rt. 37. Labty. Under the terms of the ct the ta s payabe by the
maker or drawer of the nstrument. very bank, banker, or trust company
who pays the nstrument as drawee sha coect the amount of the ta by
chargng the amount of the ta aganst any deposts to the credt of the maker
or drawer of the nstrument. (See artce 44.)
rt. 38. Rate of taw. The ta attaches at the rate of 2 cents to every check,
draft, or order for the payment of money, presented for payment and pad
by a bank, banker, or trust company wthn the effectve perod of secton 751.
Davd urnet,
Commssoner of Interna Revenue.
pproved uy 29, 1932.
Ogden L. Ms,
Secretary of the Treasury.
Reguatons 42, rtce 36: Scope of ta . I-35-5654
S. T. 476
Certan forms of trade acceptances and promssory notes hed
ta abe as orders for the payment of money.
n opnon s requested reatve to the appcabty of the ta
mposed by secton 751 of the Revenue ct of 1932 to certan forma
of trade acceptances and promssory notes.
160903 83 36
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751, Regs. 42, rt. 36.
536
oth the promssory notes and the acceptances prnted on the
face of the drafts are made payabe at a desgnated bank. n ac-
ceptance made payabe at a desgnated bank must be treated, for
the purpose of the edera check ta , as a separate nstrument from
the draft upon the face of whch t s prnted. The prnted accept-
ances as we as the promssory notes, when presented to the bank
at maturty, are treated by the bank |ust as checks woud be and are
debted to the account of the acceptor or maker.
oth the promssory notes and the acceptances are n ega effect
wrtten orders for the payment of money. eng drected to a bank,
they are orders drawn upon a bank wthn the meanng of the ct.
ccordngy, they are hed to be nstruments sub|ect to the edera
check ta as mposed by secton 751 of the Revenue ct of 1932.

Reguatons 42, rtce 36: Scope of ta . I-4O-5760

S.T.522
Checks Issued by a State offcer before the effectve date of the
Revenue ct of 1932, In settement of rates on fre Insurance po-
ces, and presented after the aw took effect, are sub|ect to ta .
n opnon s requested whether certan checks ssued by the com-
mssoner of nsurance of a certan State, n settement of rates on
fre nsurance poces, are sub|ect to the ta on checks mposed by
secton 751 of the Revenue ct of 1932.
The checks n queston were mpounded pursuant to a court dec-
son and were dstrbuted to pocyhoders pursuant to a State aw.
They were ssued n October, 1930, and n the months of ebruary,
une, and September, 1931. They were ssued by a State offca but
are not State warrants. They are payabe through a certan bank.
Many of the checks are st unpad and w probaby be presented
for payment for some tme to come. ny uncamed checks w
revert to the genera fund of the State. Tne State offca s of the
opnon that because of ths fact any ta coected on the checks w
eventuay be borne by the State.
Under secton 751 the presentaton of a check for payment after
the effectve date of the aw s one of the tests of ta abty. Conse-
quenty, the mere fact that the checks n queston bear dates n 1930
and 1931 does not warrant e empton from the ta f the checks are
presented for payment after the aw became effectve.
Under a ong ne of Supreme Court decsons the nstrumenta-
tes, means, and operatons whereby States engage n the e ercse of
essenta governmenta functons are e empt from ta aton by the
Unted States. Coector v. Day, 11 Wa., 113 Indan Motocych
Co. v. Unted States, 283 U. S., 570.) owever, where a State
departs from ts usua governmenta functons and engages n other
actvtes, the mmunty from ta aton does not appy. (South
Carona v. Unted States, 199 U. S., 437 Mm. 3838, C. . I -2,
,137.)
ppyng those prncpes to the facts presented, there s no reason
why the dstrbuton of mpounded nsurance money shoud be
vewed as an essenta governmenta functon warrantng ta mmu-
nty. The fact that payment of the ta es on checks woud serve to
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537 751, Regs. 42, rt. 36,
dmnsh the amount whch w be eventuay receved by the State
from uncamed checks s nsuffcent to warrant e empton. It s,
therefore, hed that e empton from the ta on the checks n queston,
presented on or after une 21, 1932, s not warranted.
Reguatons 42, rtce 36: Scope of ta . I-41-5780
S. T. 530
Ta abty of certan nstruments.
dvce s requested reatve to the appcaton to certan specfed
nstruments of the ta on checks mposed under secton 751 of the
Revenue ct of 1932.
The ta s mposed upon certan nstruments presented for pay-
ment, namey, checks, drafts, or orders for the payment of money,
drawn upon a bank, banker, or trust company. Checks and
u drafts are terms whch have a we-estabshed meanng. Orders
for the payment of money, ntended to be ta ed under ths secton,
are such as have some smarty to checks and drafts, at east
to the e tent that they are capabe of beng cassfed as nstru-
ments and of beng presented for payment. The phrase pre-
sented for payment mpes that the nstrument must be capabe
of havng a hoder that s, a person who, by reason of hs possesson
of the nstrument, s entted to receve payment of the sum of money
specfed theren. Moreover, the nstrument must, accordng to ts
terms or effect, ca for the payment of money. n order or author-
zaton merey to charge a book account does not consttute an order
sub|ect to the ta . If the nstrument s n fact an order for the pay-
ment of money, t s none the ess ta abe because the payment of
money may, n a partcuar case or even n a number of cases, be
accompshed through a book entry.
Where depostors fe wth a savngs bank what s known as a per-
manent dvdend order, whch authorzes the bank to send to the
depostor a dvdends decared from tme to tme, nether the con-
tnung authorzaton nor the separate entres made pursuant thereto
are ta abe.
Where a depostor borrows from a bank, uses hs pass book as co-
atera, sgns a promse to pay to the bank the sum borrowed, and
authorzes the bank to charge hs account wth the amount of the
oan, the authorzaton s sub|ect to the ta .
n order sgned by one depostor havng a |ont account author-
zng the transfer of funds to hm personay or to hmsef |onty
wth another person s not sub|ect to the ta .
n order sgned by a trustee authorzng the transfer of funds to
the benefcary of an account whch was opened n the name of one
person as trustee for another s not sub|ect to the ta .
The ta does not attach to the wthdrawa of money (1) from a
savngs account where the tem s refected as an entry on a pass
book hed by the depostor, or (2) from a checkng account, provded
n ether case the wthdrawa s evdenced ony by a recept personay
tendered to the bank by the depostor or by an offcer of the depostor,
f a corporaton or assocaton.
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5751, Regs. 42, rt. 36. 538
rtce 36 of Reguatons 42, as amended by Treasury Decson 4344
(see on page 534), provdes that:
cheek drawn by a casher or other offcer of a bank upon the bank of whch
he s such offcer, s sub|ect to the ta .
In vew of ths provson, checks ssued by the bank n payment of
Chrstnas savngs accounts or other smar cub funds are sub|ect
to the ta .
Reguatons 42, rtce 36: Scope of ta . I-42--5S00
S. T. 539
Chartabe organzatons are sub|ect to ta on checks.
dvce s requested whether checks drawn by chartabe organza-
tons engaged n emergency work and by reef bureaus are sub|ect
to the ta on bank checks mposed under secton 751 of the Revenue
ct of 1932.
It s stated that these emergency work agences and reef bureaus
act as agents of emergency unempoyment reef commttees, and
dsburse ony the donatons receved to reeve unempoyment.
Secton 751(a) of the Revenue ct of 1932 mposes a ta of 2 cents
upon each check, draft, or order for the payment of money drawn
upon any bank, banker, or trust company, and no provson s made
for e emptng from the ta checks ssued by chartabe or phan-
thropc organzatons..
Chartabe organzatons are, therefore, sub|ect to the ta on checks.
Reguatons 42, rtce 36: Scope of ta . I-43-5813
S. T.546
Ta abty of checks, etc., drawn by Natona Guard unts.
dvce s requested whether checks drawn by a Natona Guard
unt are ta abe under secton 751 of the Revenue ct of 1932, under
the foowng crcumstances:
unds for the support of the unt, furnshed by the edera Gov-
ernment or by a State, or both, are deposted n ank. unds
contrbuted by oca organzatons, etc., for support of the unt are
deposted n ank.
Inasmuch as the funds deposted n the ank are pubc funds,
wthn the meanng of the reguatons, and as the mantenance of the
Natona Guard s an essenta governmenta functon, checks drawn
on funds n the ank are not sub|ect to the check ta . The funds
contrbuted and deposted n the ank are not pubc funds and
checks drawn thereon are ta abe.
Reguatons 42, rtce 36: Scope of ta . I 11 5832
S. T. 557
stock broker who mantans factes for margna tradng for
hs cents permts them to draw drafts aganst ther margna
accounts, or on credt baances on depost wth the broker and who
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539
5751, Regs. 42, rt. 37|
ays such checks at hs casher s wndow on presentaton, s a bank,
anker, or trust company wthn the meanng of secton 751 of the
Revenue ct of 1932.
Reguatons 42, rtce 36: Scope of ta . I-47-5879
S.T.579
Ta abty of checks transferrng funds.
dvce s requested whether the ta mposed under secton 751
of the Revenue ct of 1932 appes to checks transferrng funds
from a depostory to a reguar dsbursng agency.
transfer of funds by a depostor n one bank to an account n
another bank s sub|ect to the ta f the transfer s evdenced by an
nstrument n the nature of a check, draft, or order for the payment
of money. mere bookkeepng entry transferrng funds from one
account to another, wthout the ssue of a check, draft, or order
for the payment of money, s not ta abe.
Reguatons 42, rtce 36: Scope of ta . I-48-5892
S. T. 587
Checks ssued by church treasurers or other church offcers n sette-
ment of church obgatons are sub|ect to the ta mposed by secton
751 of the Revenue ct of 1932.
Reguatons 42, rtce 37: Labty. I-50-5926
S. T. 604
Method of securng ta es on checks coected by a bank whch
becomes nsovent before payng same over to the coector.
dvce s requested whether ta es on checks mposed by secton
751 of the Revenue ct of 1932, coected by the ank, now
nsovent, are edera funds and f so, what steps shoud be taken
toward securng such funds from the State bank commssoner.
Secton 751 of the Revenue ct of 1932 mposes a ta on checks.
It provdes that the maker of the check sha pay the ta due thereon
and that the bank, banker, or trust company sha coect the amount
of the ta by chargng such amount aganst any deposts to the
credt of the maker of such nstrument. Thus the
maker of the check s the ta payer and the bank s charged wth the
duty of coectng the ta es n the manner ndcated and of payng
them over to the coector of the dstrct.
In the case under consderaton t appears that the bank coected
the ta es on checks n the manner prescrbed by the aw, but s now
nsovent and can not pay them over to the coector by reason of the
fact that t s n charge of a State bank e amner. It s contended
that the reaton between the bank and the Unted States s that of
baee and baor rather than that of debtor and credtor, and that,
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761, Regs. 72, rt. 5.
540
therefore, the Unted States can hod the State bank e amner per-
sonay abe for the payment of such ta to the Government wthout
regard to the amounts due the credtors.
Substantay ths same queston was consdered by the Supreme
Court n the case of Unted States v. ohnston (268 U. S., 220 C. .
I -1, 313 ). In that case one ohnston was convcted on the charge
of fang to pay over to the Government ta es coected by hm from
persons who pad such ta es on admsson charges to certan bo ng
matches. e was aso charged wth embezzng the amounts so
coected. In the course of ts opnon the court sad:
t seems to us that under ths aw the person requred to pay over
the ta s a debtor and not a baee. The money pad for the ta s not
dentfed at the outset but s pad wth the prce of the tcket that beongs to
the owner of the show. We see no ground for requrng the tcket offce of
a theater to create a separate fund by ayng asde the amount of the ta on
each tcket and to keep t apart, ether n a strong bo or as a separate depost
n a bank. Reports are requred ony once a month, sectons 802, 502, whch
does not ook as f the Government were deang wth these peope otherwse
than wth others answerabe for a ta . urther argument seems unnecessary
upon ths pont
The person who pays for admsson s the one who pays the ta es
due thereon, |ust as the one who draws the check s the ta payer of
the check ta . The theater whch coects the ta es on admssons s
comparabe to the bank whch coects the ta es on checks. s the
Supreme Court hed that the theater was a debtor and not a baee,
so t must aso be hed n the nstant case that the bank s not a
baee but a debtor, and that t and ts representatve must be deat
wth as persons answerabe for a debt under sectons 3466 and 3467,
Revsed Statutes.
S CTION 761. T ON US O O TS.
Reguatons 72, rtce 5: oats ta abe. I-37-5690
S. T. 493
Ta abty of the use of racng shes, motcr aunches, and sa
boats by coeges for racng purposes.
dvce s requested reatve to the ta abty under secton 761 of
the Revenue ct of 1932 of the use of certan racng shes, motor
boats, and sa boats, by coeges for racng purposes. The questons
and answers are as foows:
Is the use of racng shes over 28 feet over-a ength, smar to those used
In coeges for racng purposes, ta abe
If the racng shes have no means of sef-propuson, ether by
engne or sa, no ta woud be ncurred on the use of such boats.
Is the use of motor aunches by coeges e cusvey n connecton wth racng
ta abe
If the aunches have an over-a ength of more than 28 feet, the
ta w be ncurred on the use of such boats.
Is the use of sa boats over 28 feet over-a ength e cusvey for racng
ta abe
Yes.
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541 723-725, Regs. 71, rts. 31,120.
Reguatons 72, rtce 6: oats not sub|ect I-37-5691
to ta . S. T. 494
Substanta use hed to be determnng factor whether boat s
ta abe.
dvce s requested whether boats operated by certan oceano-
graphc nsttutons are sub|ect to ta .
It s stated that an nsttuton has two boats, one 143 feet and
the other 45 feet n ength that these vesses are operated entrey
for purposes of scentfc nvestgaton and that such data as are
obtaned are aso of nterest to the Unted States Government.
ny boat whch s used e cusvey durng the entre ear n con-
necton wth any actvty whch consttutes a person s busness, occu-
paton, professon, or means of vehood, s e empt from the ta .
Casua empoyment at rreguar ntervas for convenence of the
owner or hs famy, not e ceedng such casua empoyment as s
usua for boats mantaned or empoyed n trade or other actvty,
w not cause the ta to attach. owever, where a boat s used n a
substanta manner for the peasure of an owner or hs famy, such
boat w be sub|ect to ta . In other words, substanta use deter-
mnes whether the boat s ta abe.
In vew of the crcumstances and condtons n connecton wth the
use of the boats by such nsttutons as those mentoned, t s hed that
the use of the boats as set forth above w not render such nsttu-
tons abe for the speca ta mposed by secton 761 of the Revenue
ct of 1932.
TITL III. ST MP T (1926), M ND D Y TITL ,
R NU CT O 1932.
S CTIONS 723, 724, 725. STOC S, ONDS, D DS
O CON Y NC .
Reguatons 71, rtces 31 and 120: ass of I-43-5814
ta . S.T.547
Where stocks or bonds are transferred or rea estate s con-
veyed by nsovent banks havng assets nsuffcent to pay ther
depostors n fu, no abty for stamp ta on the transfers or
conveyances nvoved w be ncurred by the partes to the trans-
acton.
dvce s requested whether, under the provsons of secton 22
of the ct of March 1, 1879, reevng nsovent banks from abty
for the payment of edera ta es, the coecton of whch woud
operate to dmnsh the assets thereof necessary for fu payment
of depostors, transferees of stocks or bonds or grantees of rea estate
are sub|ect to the stamp ta mposed by the Revenue ct of 1932 on
transfer of stocks and bonds and on conveyances of rea estate
where the stocks or bonds are transferred or the rea estate s con-
veyed by the secretary of bankng of the State of and const-
tute assets of cosed banks n hs possesson havng assets nsuffcent
to pay ther depostors n fu.
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723-725, Regs. 71, rts. 31,120.) 542
Secton 22 of the ct of March 1, 1879 (20 Stat., 351, 12 U. a
C. ., 570), provdes as foows:
Insovent banks as e empt from ta . Whenever and after any bank has
ceased to do busness by reason of nsovency or bankruptcy, no ta sha be
assessed or coected, or pad nto the Treasury of the Unted States, on account
of such bank, whch sha dmnsh the assets thereof necessary for the fu
payment of a ts depostors and such ta sha be abated from such natona
banks as are found by the Comptroer of the Currency to be nsovent and
the Commssoner of Interna Revenue, when the facts sha so appear to hm,
s authorzed to remt so much of sad ta aganst nsovent State and savngs
banks as sha be found to affect the cams of ther depostors, (March 1,
3879, ch. 125, secton 22, 20 Stat., 351 March 3, 1883, ch. 121, secton 1, 22
Stat., 488.)
The concuson has been reached that the ta es n queston, a-
though mposed on the transferee as we as the transferor, and on
the grantee as we as the grantor, are wthout appcaton where the
transferor or grantor s reeved from abty therefor by secton
22 of the ct of March 1, 1879. Ths concuson s based on the
vew that the statutory provson referred to s remeda n character
and s to be beray construed. Its manfest purpose s to reeve
depostors from the burden of the ta . To ta the transferee or
grantee n such case woud be n effect, through the shftng of the
burden of the ta to the transferor or grantor, to ta the nsovent
bank and thus defeat the purpose of the statute.
It s hed accordngy that where the secretary of bankng of the
State of s the transferor of stocks or bonds or the grantor of
rea estate consttutng assets of cosed banks n hs possesson havng
assets nsuffcent to pay ther depostors n fu, no abty for the
ta on the transfers or conveyances nvoved w be ncurred by
the partes to the transacton, provded such transfers and convey-
ances are accompaned by an e empton certfcate n substantay
the foowng form:
Date
Ths s to certfy that the attached (bond/share of stock)
(descrbe fuy)
(s) (are) beng transferred,1 conveyance
(gve date of deed and names of grantor and grantee)
(s) (are) beng made1 pursuant to the qudaton of the
an Insovent bank, the assets of whch are nsuffcent for the fu payment of
depostors. The Commssoner of Interna Revenue has rued that under sec-
ton 22 of the ct of March 1, 1879, no stamp ta abty w be ncurred by
the partes to such transacton. No edera stamps are therefore attached.
Secretary of ankng of the State of
y
Speca Deputy n Charge of the Lqudaton.
Note. or frauduent use 10,000 fne and mprsonment. (See secton 1114, Revenu
ct of 1920.)
The above e empton certfcate shoud be used ony where the sec-
retary of bankng of the State of has determned that the
assets of the bank n hs possesson w be nsuffcent to pay ts de-
postors n fu. If an e empton certfcate has been used and t
ater appears that the cosed bank has suffcent assets to pay ts
depostors n fu, the secretary of bankng must prompty notfy
the coector of nterna revenue and pay the ta due.
1 Strke out words Inappcabe.
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543
Regs. 43(1928), rt. 40.
n e empton certfcate must not be used where stocks or bonds
or rea estate, hed as coatera or securty for a oan, are trans-
ferred or conveyed, uness the secretary of bankng beeves that the
oan w not be pad n fu. If an e empton certfcate has been
used and t ater appears that the oan w be pad n fu, the secre-
tary of bankng must prompty notfy the coector of nterna reve-
nue and pay the ta due.
Ths rung s aso appcabe to nsovent natona banks.
TITL II. MISC LL N OUS T S. (1928)
DU S ND INITI TION S.
Reguatons 43(1928), rtce 40: Dues or I-28-5547
membershp fees. Ct. D. 515
T ON DU S R NU CT OP 1028 D CISION OP COURT.
1. Dues ountary ssessment n Pace of Increase n
Dues.
mounts vountary pad to a sportng cub by ts members as
assessments n pace of an ncrease of dues are ncuded n the
term dues n accordance wth secton 413(d) of the Revenue
ct of 1928.
2. Intaton ees mounts n ddton to Intaton ees
and aso n ddton to ack Dues.
n amount pad by an appcant for a membershp n a sportng
cub In addton to the ntaton fee and an amount pad n add-
ton to back dues by a member who had resgned and was read-
mtted are ncuded n the term ntaton fees n accordance
wth secton 413(d) of the Revenue ct of 1928.
Unted States Dstrct Court, astern Dstrct of New York.
The Garden Cty Gof Cub, pantff, v. Water . Corwtn, Indvduay and as
Coector of Interna Revenue of the rst Dstrct of New York, defendant.
ebruary 15, 1932.
opnon.
Inch, .: The pantff, Garden Cty Gof Cub, has brought ths acton aganst
Water . Corwn, ndvduay and as coector of nterna revenue, to recover
the sum of 5,530, wth nterest, pad pr 16, 1931, and representng a 10 per
cent ta assessed and coected n accordance wth the provsons of secton
413 of the Revenue ct of 1928, entted ta on cub dues or fees (Tte 26,
U. S. C. ., secton 872). Pantff cams ths ta was erroneous and ega
and that the amount so pad by t shoud be returned.
ury has been duy waved. The facts have been duy stpuated. (Pan-
tff s hbt 1.) The soe queston represented s one of aw.
The functon of our Government and the ntent of Congress s not to ta
as much as possbe but to ta as tte and as reasonaby as necessty requres.
or that reason where a doubt e sts as to the meanng of a ta statute
the ta payer shoud receve the beneft of such doubt. (Sktcab, etc., v. Doye,
258 U. S., 529 T. D. 3339, C. . 1-2, 312 Smctanka v. rst Trust, etc.,
257 U. S., 602 T. D. 3321, C. . 1-1, 210 Unted States v. Merram, 263
U. S., 179 T. D. 3535, C. . II-2, 87 .)
t the tra, bearng the above n mnd, the argument of counse for pantff
Impressed the court as havng weght so far as the greater porton of ths ta
was concerned, but carefu consderaton of the facts and the aw has com-
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Regs. 43(1928), rt. 40.
544
peed me, I confess aganst my own ncnaton because of the great usefuness
of such cubs for heath and necessary recreaton, to decde that the ta was
propery mposed.
The pantff s a membershp corporaton, duy ncorporated, over 30 years
ago, under the aws of the State of New York. It has snce mantaned a
gof cub and course at Garden Cty, Long Isand, and s one of the odest and
most hghy esteemed gof cubs n the Unted States.
y the consttuton, by-aws, etc., of the cub, the contro and management
of the cub s vested n a board of governors consstng of 12 members. There
are, n addton, the usua offcers and commttees. There are severa casses
of members, reguar, assocate, fe, honorary and absentee. The atter cass
are those who may be contnuousy absent from the Unted States for a perod
e ceedng one year. The honorary cass are those who have acheved dstnc-
ton In any fed of endeavor. The fe and assocate cass are mted to 35
and 25 n number, respectvey, whe the reguar membershp s mted to 350.
It s thus seen that the source of revenue for the upkeep of ths cub s
mted. Ths mtaton s further ncreased by the fact that the ntaton
fees and dues are moderate, the annua dues of the reguar members beng
200, whe the ntaton fee s 500.
n e amnaton of the charter, consttuton, by-aws and rues of pantff
reveas no authorty n the board of governors to mpose an assessment.
So far as I have been abe to fnd from the few authortes on the sub|ect t
woud seem that f such assessment had been ressted n ths State, by any
member, such resstance woud have been successfu. Thompson v. Wyandanch
Cub, 127 N. Y. Supp., 195, 70 Msc. Rep.. 299.)
The above was the stuaton when t became advsabe, on or about anuary
3, 1930, for the board of governors to consder the necessty of rasng a consd-
erabe sum of money for the purpose of cosng a road through the property
of the cub and the substtuton of a new one, together wth changes n the
ocaton and erecton of budngs whch ths woud enta or make advsabe,
together wth severa other necessary e pendtures for the comfort of the
members and the better fnancng of the cub.
ccordngy a meetng of the board of governors was hed on sad date at
whch eght of the members of the board were present and four were e cused
from attendance. The queston dscussed was how to rase ths necessary
money.
We may pause here to set forth the approprate secton of the ta statute
about whch ths controversy has arsen.
ST TUT IN OL D.
Secton 413 of the Revenue ct of 1928 (Tte 26, U. S. C. , 872) provdes:
Seo. 413. Cub dues ta . ( ) Secton 501 of the Revenue ct of 1926 s
amended to read as foows:
Sec. 501. (a) There sha be eved, assessed, coected, and pad a ta
equvaent to 10 per centum of any amount pad
(1) s dues or membershp fees to any soca, athetc, or sportng cub
or organzaton, f the dues or fees of an actve resdent annua member are n
e cess of 25 per year or
(2) s ntaton fees to such a cub or organzaton, f such fees amount
to more than 10, or f the dues or membershp fees, not ncudng ntaton
fees, of an actve resdent annua member are n e cess of 25 per year.

(d) s used n ths secton, the term dues ncudes any assessment
rrespectve of the pwpose for whch made and the term ntaton fees,
ncudes any payment, contrbuton, or oan requred as a condton precedent
to membershp, whether or not any such payment, contrbuton, or oan Is
evdenced by a certfcate of nterest or ndebtedness or share of stock, and
rrespectve of the person or organzaton to whom pad, contrbuted, or
oaned. Itacs mne.
earng ths aw n mnd we return to the meetng of the board of governors.
The presdent after reportng these varous tems requrng money, made the
foowng recommendaton among others:
That the cub undertake to rase the necessary amount by permssve
assessment on the part of the membershp. That a permssve assessment on
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545 Regs. 43(1928), rt. 40,
the membershp be requested at the rate of 150, from each member, or, a
genera meetng be caed to ncrease the dues to meet ths past and prospectve
necessary e pendture.
e aso caed attenton to the fact that:
The dues of the members of the Garden Cty Gof Cub are at present the
owest of any cub around New York of equa standng and that these necessary
e pendtures must be met f the cub s to contnue to gve the members what
they want and have a rght to e pect.
The board thereupon, after due consderaton, duy passed a moton by whch
the presdent was authorzed to prepare a etter to the members n whch the
above matter shoud be e paned for ther nformaton and assent requested
to an assessment of 150, from each member.
Pursuant to ths moton, on March 20, 1930, the presdent sent to the members
(e cept the honorary members) a etter whch set forth a the facts and ths
necessty for rasng the gross sum of 52,500. Ths etter cosed wth the
foowng:
s a our present ncome Is needed for operatve e penses two courses
seem avaabe to enabe the board of governors to obtan ths sum namey to
ncrease our present annua dues of 200 the owest of any cub of equa
rank or to ask the members to submt to an assessment of 150 each.
The board has decded on the atter course and nvtes the cooperaton of
the members to safeguard the nks and to mantan the cub s hgh standard.
bank ndcatng how the assessment may be pad Is ncosed for the con-
venence of the members.
Ths bank n substance was as foows:
I accept the assessment of 150, for the purpose stated n the presdent s
etter of March 20, 1930.
arge ma|orty of the reguar members pad ths proporton n fu. few1
members pad a esser sum. The honorary members pad ther share as we
whe a few members refused or omtted to pay anythng. No steps were taken
nor ndcated that any penaty of any sort for nonpayment were taken or even
contempated. In addton ths 150 was added to the requrements for adms-
son to membershp of certan appcatons pendng.
Thereupon the Government, under the provsons of the aw aready set
forth, Imposed a ta of 10 per cent on ths sum so rased makng a ta of
5,530. Ths acton was duy commenced by pantff to recover ths ta so pad.
Pantff cams that ths ta was erroneousy assessed and Iega n that
the fund so coected was not an assessment, for the reason, frst, that the
corporaton had no power under the aws of the State of New York to evy any
such assessment. Second, that Congress dd not ntend to ncude n the term
assessment as used n ths ta statute, a vountary payment by members
under such crcumstances as here shown.
The Government contends, on the contrary, that the argument that ta
board was wthout authorty to evy an assessment, even f correct n aw,
Is wthout mert. That what happened n ths case was e acty what Con-
gress had n mnd when t amended the ct n queston by the words: Tho
term, dues ncudes any assessment rrespectve of the purpose for whch
made.
It must be conceded that there s a dfference between the term dues and
the term assessment. Dues referrng to stated amounts whch the mem-
bers must pay perodcay for the contnung prvege of membershp.
owever, Cases mght be magned n whch t mght be dffcut to ds-
tngush between dues and assessment. (Thompson v. Wyandanch Cub,
127 N. Y. Supp., 195-201.) See aso for varous defntons, 5 Corpus urs,
814-815-816 (and cases there cted).
The term assessment may have dfferent meanngs accordng to ts use
and must be construed accordng to the conte t. (5 Corpus urs, 816, and
cases cted.)
Whe, generay speakng, dues of a cub, ntaton fees and assessments,
are assocated, n the pubc s mnd, wth the contnued rght of membershp,
an assessment by a cub may be a specfc demand or request by the cub
upon ts membershp, as a whoe or as a cass, for a certan sum of money,
the proporton to be pad by each member beng stated.
The penaty for nonpayment, whe aso oftentmes a part of the contract
of membershp, s not absoutey essenta, n a cases, to the creaton of an
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Regs. 43(1928), rt. 40. 546
assessment of th s character. Notce of a penaty need not necessary accom-
pany the demand or request Such penaty, even If Its mposton was con-
tempated, may be and not nfrequenty s waved or rendered unnecessary
by prompt payment.
The queston before ths court Is not as to the power of Congress to ta
ths fund but whether or not Congress has n fact ta ed It awfuy.
Therefore bearng n mnd the dfferent meanngs of the term assessment
and construng t n accordance wth the conte t of the ta statute n queston
we foow the rue of constructon that s, of course, we known and was ony
recenty apped by the Supreme Court (Unted States v. Ryan, 284 U. S,
167) :
aws are to be gven a sensbe constructon. tera appcaton of
a statute whch woud ead to absurd consequences Is to be avoded whenever
a reasonabe appcaton can be gven whch s consstent wth the egsatve
purpose. (Unted States v. atz, 271 U. S., 354 Unted States v. n uey Moy,
241 U. S., 394 Unted States v. Panter, 3 Wheat, 010, 631.)
Notwthstandng the broad anguage of the secton, we thnk t may be
gven a reasonabe constructon, and the one most consstent wth ts apparent
purpose, by the appcaton of the prncpe nosctur a socs. y
reason and anaogy, as we as by conte t, we concude that the genera words
a persona property whatsoever were ntended to Incude chattes other
than the specfed toos and Impements, but to be restrcted to those whch,
ke toos or mpements, are reated to one or the other of the prncpa thngs,
or ncdent to ther ntended use or dsposton In fraud of the revenue
Itacs mne.
Secton 501 of the Revenue ct of 1926 created a ta equvaent to 10 per
centum of any amount pad (a) as dues or membershp fees.
In 1928 Congress amended ths secton 501, by secton 413(a) of the Revenue
ct of 1928, as foows:
(d) s used In ths secton, the term dues ncudes any assessment
Irrespectve of the purpose for whch made.
The purpose of Congress In makng ths amendment Is shown In the ournas
of Congress and Its commttees and they may be consuted. (McLean v. Unted
States. 226 U. S., 374 uttfcd v. Stranshan, 192 T . S., 470.)
The Commttee on Ways and Means of the ouse made a report n respect
to ths proposed amendment, (report, Seventeth Congress, page 26, frst sesson,
December 7, 1927). In ths report ths commttee states:
It has been found that the ta on dues s beng evaded by the devce of
owerng the amount of dues and coectng the money by assessment.
The Commttee on nance of the Senate (May 1, 1928, Seventeth Congress,
frst sesson) kewse made a report n whch t states:
The ouse b amends the e stng aw to take care of the stuaton chrh
has arsen from the prevaent use of the devce of owerng the amount of cub
dues and coectng the requred money by assessment nstead as a means
of evadng the cub dues ta .
It Is thus pany shown that, whe the ta s upon cub dues pad, the par-
pose of Congress, In ncudng under ths head assessments, was to endeavor
to overcome the efforts of those who woud avod the ta on dues by prop-
ery camng that the necessary money had been rased by assessment
Therefore Congress enacted that where such substtuton for dues was shown
the fund so rased by assessment was to be ta ed under the provson for
ta on dues, the term dues to ncude the term assessment for any
purpose.
ppyng ths statute, wth ts sad purpose, to the facts of ths case, we fnd
that a consderabe sum of money was necessary to be rased by pantff.
The presdent of the cub stated to the board of governors the fnanca requre-
ments and urged that there were but two courses open, one to rase the dues
sufcenty to meet the e pendtures, the other to assess the members 150
each. The board of governors decded upon the assessment ccordngy,
a etter was sent to the members, by the presdent, settng forth these two ways
of rasng the money, and, reazng that there was no power to egay assess,
askng each member to vountary accept such assessment
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547
Regs. 71, rt. 53.
If the board of governors had decded on the method of rasng the money by-
rasng the dues, or, If the members had refused to accept the assessment and
had agreed to an Increase of dues, ths fund so rased woud present no queston
as to the correctness of the ta . Instead the opposte course was taken and
Instead of rasng the dues the money has been rased by a vountary assessment.
Ths was e acty what Congress had n mnd n enactng the amendment.
Needess to say, no member of the board of governors or any of the members
of the cub had the sghtest dea or desre to evade any ta .
The Government concedes that ths effort by the board of governors, n ts
appea to the membershp, was not a devce to evade the ta .
The queston of ntent however s not matera f what was actuay done was
reasonaby wthn the purpose of Congress n so amendng the statute. (Wess
v. Steam, 265 U. S., 242-254 T. D. 3609, C. . III-2, 51 .)
Whe the mere name s not too mportant, both the board of governors and the
members (e ceptng the few that refused to sgn) have e pressy caed the
method pursued an assessment.
I agree wth the Government that t appears here that f the amount had
not been rased by ths vountary assessment the other aternatve presented
to the membershp was a correspondng ncrease n ther dues.
The ta s on the amount pad whether by dues or assessment.
Ths s not a controversy between a member and hs cub as to ts rght to
assess hm. The members have pad the assessment, preferrng to wave any
ega rghts In ths regard. Wth ths choce the Government s not concerned.
pparenty It woud be an nsuffcent ob|ecton even f the queston of the
egaty of the assessment was to be consdered. (U. S. v. mery, etc., 237
U. S., 28 oston v. . 8., 265 ed., 578 Suvan v. . 8., 15 . (2d), 809
. 8. v. Suvan, 274 U. S., 259 (T. D. 4028, C. . I-2, 177 .)
The fund has been pad n by an assessment n pace of an ncrease of dues.
The ta thereon was proper and the amount pad can not be recovered.
There remans but the queston of the ntaton fee. Ths was aso n-
creased by the amount of ths assessment and pad by the appcants. Ths
addtona amount so pad was, n my opnon, a part of the ntaton fee.
Ths aso appes to a certan member who had resgned In 1927 and who
subsequenty was readmtted on the payment of back dues and ths sum.
These payments requred were condtons to be met n order to become a mem-
ber. (Mtnn v. ocers, 47 . (2d), 204, cert, dened, 51 Sup. Ct., 492 Ct D.
283, C. . -, 436 .)
The burden of proof was on the pantff to show that t was entted to re-
cover ths ta .
In my opnon the proof shows that the ta was propery Imposed both as to
the cub dues, a term whch Incudes the assessment vountary pad and such
as here took pace, and on the ntaton fees. udgment must be gven for
the defendant.
The ob|ectons of pantff to the materaty and reevancy of certan of the
stpuated facts are each overrued and e cepton granted.
ndngs of fact shoud be submtted. The order for |udgment shoud be
setted on notce.
SC DUL -5 O TITL III O T NU CT
O 1926, S M ND D Y S CTION 442 O
T R NU CT O 1928.
Reguatons 71, rtce 53: Passage tckets. I-49-5909
S. T.596
Ta abty of passage tckets Issued to foregn consus.
dvce s requested concernng the appcaton of the ta mposed
by Schedue -5 of Tte III of the Revenue ct of 1926, as
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Regs. 71, rt. 58.
548
amended by secton 442 of the Revenue ct of 1928, to passage tckets
ssued to foregn consus.
Under recognzed prncpes of nternatona aw, duy accredted
dpomatc representatves of foregn governments are not sub|ect
to the stamp ta mposed by Schedue -5 on the sae of passage
tckets. Ths e empton s, however, confned to representatves
havng a dpomatc status and snce consuar offcers, as such, do not
have a dpomatc status, they are sub|ect to the ta uness they
are entted to e empton under the provsons of a treaty between
the country they represent and the Unted States.
Cams of consus for e empton from the stamp ta on passage
tckets shoud be submtted to the Commssoner for determnaton.
ST MP T ON P SS G TIC TS.
Regt|atons 71, rtce 58: Passage tckets I-41-5781
to ports not n the Unted States, Canada, G. C. M. 10894
Me co, or Cuba.
The sae In the Unted States of two tckets, one to and the other
from ermuda, consttutes the sae of a round trp tcket sub|ect
to ta .
n opnon s requested reatve to the amount of ta whch shoud
be pad on passage tckets sod under the foowng condtons:
steamshp company ses a tcket No. 1 for a passage to
ermuda and at the same tme ses a separate tcket No. 2 for
return from ermuda to the Unted States. Tcket No. 2 has
prnted thereon the words ssued n connecton wth tcket No. 1.
The prce of tckets No. 1 and No. 2, whch are sod together, s 80.
The prce of each tcket s 40. ta of 3 s pad on tcket
No. 1 for passage to ermuda. No ta s pad on tcket No. 2 for
passage from ermuda to the Unted States on the ground that the
tcket was sod for a passage to the Unted States from a foregn
port.
Schedue -5, Tte III of the Revenue ct of 1926, as amended
by secton 442 of the Revenue ct of 1928, mposes a stamp ta on
passage tckets as foows:
5. Passage tcket, one way or round trp, for each passenger, sod or ssued
In the Unted States for passage by any vesse to a port or pace not n the
Unted States, Canada, Me co, or Cuba, f costng not e ceedng 30, 1 costng
more than 30 and not e ceedng 60, 3 costng more than 60, 5. Ths
subdvson sha not appy to passage tckets costng 10 or ess.
It s cear that under the aw passage tckets costng more than
10, ether for one way or a round trp, are sub|ect to the ta n
queston when sod or ssued n the Unted States for passage to a
port or pace not n the Unted States, Canada, Me co, or Cuba.
The partcuar queston to be decded s whether the sae of the
two tckets, No. 1 and No. 2, s the sae of a round trp tcket n the
Unted States, wthn the meanng of the aw, or whether the trans-
acton s twofod n ts operaton and consttutes the sae of two
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549
Regs. 71, rt. 58.
tckets, one to ermuda sub|ect to ta and the other from er-
muda to the Unted States not sub|ect to ta .
In decdng the queston whether the two tckets sod under the
crcumstances rected are sub|ect to ta as a round trp tcket, there
are severa facts to be consdered. oth tckets were evdenty sod
at the same tme, at the same pace, and to the same person. Ths
person bought the tckets for a return |ourney. The tcket No. 2
for the return from ermuda to the Unted States showed that t
was ssued n connecton wth tcket No. 1. Thus the two tckets
were connected as havng reference to one and the same trp. Doubt-
ess the purchaser receved the usua beneft of reducton n prce
through hs payment for the return passage at the tme when he
secured hs outward bound tcket. It s evdent that the purchase
of these two tckets formed a snge transacton and for a snge
purpose, namey, a round trp. It s mmatera, so far as the ta
s concerned, that two tckets were ssued for the |ourney nstead of
one. fter a, the purchaser, n effect, bought a passage tcket for
a round trp.
It s, therefore, the opnon of ths offce that the two tckets n
queston shoud be consdered as a round trp tcket, wthn the
meanng of the aw, and hed sub|ect to the stamp ta n queston.
C. M. Charest,
Genera Counse, ureau of Interna Revenue.
Reguatons 71, btce 58: Passage tckets I-52-5960
to ports not n the Unted States, Canada, S. T. 619
Me co, or Cuba.
dvce s requested whether a passage tcket sod under the foow-
ng crcumstances s sub|ect to the stamp ta mposed by Schedue
-5 of Tte III of the Revenue ct of 1926, as amended by secton
442 of the Revenue ct of 1928, vz:
Recenty, agents of a company at Shangha, Chna, advsed the
company to get n touch wth a certan person n the Unted States
and nform her to ca at the company s offce n ths country and se-
cure a tcket coverng a trp from New York to Shangha. The
mother of ths person, resdng n Shangha, pad for the passage,
makng t unnecessary for the sad person to pay anythng to the
company n the Unted States.
The fare w be sent by the agents n Shangha to the owners of
the vesse at Copenhagen and no part of t w reach the company s
offce n merca.
Schedue -5 of Tte III of the Revenue ct of 1926, as
amended, mposes a ta on tckets sod or ssued n the Unted States
for passage by any vesse to a port or pace not n the Unted States,
Canada, Me co, or Cuba.
Whe the passage money n ths case was pad to the agent n
Shangha, yet the tcket coverng passage from New York to Shang-
ha was ssued n ths country, and ths fact aone s suffcent to make
t sub|ect to the ta .
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1121, Regs. 44, rt. 56. 550
TITL L G N R L DMINISTR TI PRO ISIONS.
(1926)
S CTION 1121. PORTS, ND S IPM NTS TO POSS S-
SIONS O T UNIT D ST T S.
Reguatons 44, rtce 55: Saes for e port. I-39-5738
T. D. 4354
Saes for e port Proof of e portaton. rtces 55 and 56 of
Reguatons 44.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtces 55 of Reguatons 44 are amended to read as
foows:
rt. 55. Saes for e port. In order for a sae to be e empt from ta under
secton 1121 t Is necessary that two condtons be met, namey, (1) that the
artce must be Identfed as havng been sod for e port and (2) that t must
have been e ported n due course.
n artce w be regarded as havng been sod for e port f the manufac-
turer has n hs possesson at the tme tte passes or at the tme of shpment
(whchever s pror), (a) a wrtten order or contract of sae showng that
the manufacturer s to shp the artce to a foregn destnaton or (b) where
devery by the manufacturer s to be made wthn the Unted States, a sworn
statement from the purchaser showng (1) that the artce s purchased to
f e stng or future orders for devery to a foregn destnaton or that the
artce s purchased for resae to another person engaged n the busness of
e portng who w e port the artce, and (2) that such artce w be trans-
ported to ts foregn destnaton n due course pror to use or further manufac-
ture and pror to any resae e cept for e port
In these cases the manufacturer, for a perod of s months from the date
when tte passes or the date of shpment (whchever s pror), s e cused from
payng ta on the artce sod. If wthn such perod the manufacturer has
not receved and attached to the order or contract proper proof of e porta-
ton (see artce 56), then the temporary e empton ceases and the manufac-
turer sha ncude the ta on the sae of such artce n hs return for the
month n whch such 6-month perod e pres.
Reguatons 44, rtce 56: Proof of e porta- I 39-5739
ton. T. D. 4354

rtces 56 of Reguatons 44 are amended to read as
foows:
rt. 56. Proof of e portaton. portaton may be evdenced by (1) a copy
of the e port b of adng, or (2) a certfcate by the agent or representatve
of the e port carrer showng actua e portaton of the artce, or (3) a certf-
cate of andng sgned by a customs offcer of the foregn country to whch the
artce s e ported, or (4) where such foregn country has no customs admn-
straton, a sworn statement of a foregn consgnee coverng recept of the
artce.
In any case where the manufacturer Is not the e porter, such manufacturer
must have n hs possesson an affdavt from the person to whom he sod the
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551
1121, Regs. 46, rt. 74
artce statng that the artce was In fact e ported In due course or was sod
to another person who n due course e ported the artce. Ths affdavt must
tate what evdence s avaabe whch w show that the artce was n fact
e ported n due course pror to use or further manufacture and pror to resae
In the Unted States other than for e port. Such evdence must be that re-
ferred to under ether (1), (2), (3), or (4) above, and the affdavt must show
where such evdence s ready avaabe for nspecton by Government offcers.
In a cases the saes records together wth the evdence of the proof of e -
portaton must be preserved by the manufacturer for a erod of at east four
years from the ast day of the month foowng the sae, and must be ready
accessbe for Inspecton by nterna-revenue offcers.
In any case where the manufacturer does not have n hs possesson wthn
the 6-month perod proof of e portaton as outned heren, the manufacturer
must pay the ta nvoved. If proof of e portaton ater becomes avaabe,
a cam for refund of any ta pad may be fed on orm 843, or a credt may
be taken upon any subsequent monthy return, but such acton must be taken
wthn the 4-year perod of mtaton prescrbed by secton 3228, Unted States
evsed Statutes, as amended.
Davd urnet,
Commssoner of Interna Revenue.
pproved September 20, 1932.
Ogden L. Ms,
Secretary of the Treasury.
Reguatons 46, rtce 74: Saes for e port. I-39-5740
T. D. 4355
Saes for e port Proof of e portaton. rtces 74 and 75
of Reguatons 46.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtces 74 of Reguatons 46 are amended to read as
foows:
bt. 74. Saes for e port. a order for a sae to be e empt from ta under
secton 1121 t s necessary that two condtons be met, namey, (1) that the
artce must be dentfed as havng been sod for e port and (2) that t must
have been e ported n due course.
n artce w be regarded as havng been sod for e port f the manufacturer
has In hs possesson at the tme tte passes or at the tme of shpment (whch-
ever s pror), (a) a wrtten order or contract of sae showng that the manu-
facturer s to shp the artce to a foregn destnaton or (b) where devery by
the manufacturer Is to be made wthn the Unted States,, a sworn statement
from the purchaser showng (1) that the artce s purchased to f e stng or
future orders for devery to a foregn destnaton or that the artce s
purchased for resae to another person engaged n the busness of e portng
who w e port the artce, and (2) that such artce w be transported to
ts foregn destnaton n due course pror to use or further manufacture and
pror to any resae e cept for e port.
In these cases the manufacturer, for a perod of s months from the date
when tte passes or the date of shpment (whchever s pror), s e cused
from payng ta on the artce sod. If wthn such perod the manufacturer has
not receved and attached to the order or contract proper proof of e porta-
ton (see artce 75), then the temporary e empton ceases and the manufac-
turer sha ncude the ta on the sae of such artce n s return for the
month n whch such 6-month perod e pres.
100902 33 36
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Regs. 43-11, rt. 6.)
552
Reguatons 46, rtce 75: Proof of e porta- I-39-5741
ton. T. D. 4355

rtces 75 of Reguatons 46 are amended to read as
foows:
bt. 75. Proof of e portaton. portaton may be evdenced by (1) a copy
of the e port b of adng, or (2) a certfcate by the agent or representatve of
the e port carrer showng actua e portaton of the artce, or (3) a certfcate
of andng sgned by a customs offcer of the foregn country to whch the artce
s e ported, or (4) where such foregn country has no customs admnstraton, a
sworn statement of a foregn consgnee coverng recept of the artce.
In any case where the manufacturer s not the e porter, such manufacturer
must have n hs possesson an affdavt from the person to whom he sod the
artce statng that the artce was n fact e ported n due course or was sod to
another person who n due course e ported the artce. Ths affdavt must state
what evdence s avaabe whch w show that the artce was n fact e ported
n due course pror to use or further manufacture and pror to resae In the
Unted States other than for e port. Such evdence must be that referred to
under ether (1), (2), (3), or (4) above, and the affdavt must show where such
evdence s ready avaabe for nspecton by Government offcers.
In a cases the saes records together wth the evdence of the proof of e -
portaton must be preserved by the manufacturer for a perod of at east four
years from the ast day of the month foowng the sae, and must be ready
accessbe for nspecton by nterna-revenue offcers.
In any case where the manufacturer does not have n hs possesson wthn
the 6-month perod proof of e portaton as outned heren, the manufacturer
must pay the ta nvoved. If proof of e portaton ater becomes avaabe, a
cam for refund of any ta pad may be ted on orm 843, or a credt may be
taken upon any subsequent monthy return, but such acton must be taken
wthn the 4-year perod of mtaton prescrbed by secton 3228, Unted States
Revsed Statutes, as amended.
Davd urnet,
Commssoner of Interna Revenue.
pproved September 20, 1932.
Ogden L. Ms,
Secretary of the Treasury.
TITL . T ON DMISSIONS ND DU S. (1924)
T ON DU S.
Reguatons 43-11, rtce 5: Soca cubs. I-37-5692
Ct. D. 561
T ON DU S R NU CTS OP 1921 ND 1924 D CISION OP COURT.
Soca Cub Character of Organzaton.
The soca actvtes of the Town Cub of St Lous, whch as
52 soca affars and 97 educatona, cvc, or artstc functons,
consttute a matera part of the cub s functons and t s a soca
cub wthn the meanng of secton 801 of the Revenue ct of 1921
and secton 501 of the Revenue ct of 1924, the dues to whch are
ta abe under those sectons.
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553
Regs. 43-11, rt. 5
dstrct court of unted states n and for the eastern dvson of tub
astern udca Dstrct of Mssour. Consodated Cause No. 0179.
The Town Cub of St. Lous, pantff, v. Unted States of merca, defendant,
and The Town Cub of St. Lous, pantff, v. Lous . ecker, Coector of
Interna Revenue, defendant.
une 19, 1932.
OPINION.
ars, .: Pantff sues In two separate actons at aw to recover a tota
amount of 10,803.98. Of the atter sum 6,281.84 s sought to be recovered for
ta es pad to a coector of the Unted States, who Is not now n offce, for ta es
aeged to have been egay coected, and whch accrued between pr 9,
1924, and December 19, 1925, both ncusve. ,
The sum of 10,522.14, hereby sought to be recovered, s for ta es aeged to
have been egay coected from the pantff, and whch accrued between
anuary 16, 1926, and March 3, 1928.
The above sums were pad by pantff to the respectve coectors n offce at
the tme of such payments. Demand for refund thereof was made and refund
refused.
The controng facts n the two cases beng precsey smar, the two actons
were by consent consodated for tra, and a |ury beng waved, were submtted
to the court on the peadngs and proof.
The ta es whereof refund s sought were assessed and coected under the
provsons of secton 801 of the Revenue ct of 1921, whch reads as foows:
That from and after anuary 1, 1922, there sha be eved, assessed, co-
ected, and pad, n eu of the ta es mposed by secton 801 of the Revenue
ct of 1918, a ta equvaent to 10 per centum of any amount pad on or
after such date, for any perod after such date, (a) as dues or membershp
fees (where the dues or fees of an actve resdent annua member are In
e cess of 10 per year) to any soca, athetc, or sportng cub or organzaton
or (b) as ntaton fees to such a cub or organzaton, f such fees amount
to more than 10, or f the dues or membershp fees (not ncudng ntaton
fees) of an actve resdent annua member are n e cess of 10 per year such
ta es to be pad by the person payng such dues or fees: Provded, That there
sha be e empted from the provsons of ths secton a amounts pad as
dues or fees to a fraterna socety, order, or assocaton, operatng under the
odge system. In the case of fe membershps a fe member sha pay annuay,
at the tme for the payment of dues by actve resdent annua members, a ta
equvaent to the ta upon the amount pad by such a member, but sha pay
no ta upon the amount pad for fe membershp.
The above quoted secton of the ta ng statute was carred nto the Revenue
cts of 1924 and 1920, wthout any matera change. So, the aw of the case
Is found n secton 801, supra, above quoted.
The soe queston presented, n the vew I take of the case, s whether
pantff was, durng the tme and perods wheren the ta es were e acted,
a soca, athetc or sportng cub or organzatton, or whether ts func-
tons were cvc and/or educatona. If the former, t Is conceded the ta es
coected from t are ega and can not be recovered If the atter, these ta es
were unawfuy e acted and coected and pantff may recover. There s,
or shoud be, but tte dspute about the aw. It seems to be fary we
setted, In the cases of emng v. Renecke (52 ed. (2d), 449) Women s
Unversty Cub v. Unted States (50 ed. (2d), 469 Ct. D. 389, C. . -2,
402 ) Women s Unversty Cub of Seatte v. Unted States (52 ed. (2d),
447) rmy and Navy Cub v. Unted States (53 ed. (2d), 377 Ct. D. 421,
C. . -2, 401 ).
The above cases deat wth facts whch nduced the concuson that the
severa organzatons were enttes wheren soca features and actvtes con-
sttuted matera parts of ther actvtes. Per contra, the cause of Cosmos
Cub v. Unted States (42 ed. (2d), 321) Cty Cub of Los ngees v. Wech
(44 ed. (2d), 239) ouston Cub v. Unted States (Court of Cnns)
uders Cub of Chcago v. Unted States (Court of Cams), were cases
wheren the facts warranted the concuson of aw reached, that the actvtes
of the respectve organzatons were predomnanty busness, commerca,
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Regs. 43-11, rt. 5.
554
artstc or educatona, and that the soca features, though present, were not
matera part of such actvtes.
The ora evdence of the case at bar preponderanty dscosed that the
actvtes of pantff were predomnanty cvc and educatona, as contrads-
tngushed from soca. ut ths evdence came, for the most part, from
offcers of pantff who have had occason to be whoy and cosey famar
wth pantff s actvtes ony snce 1928, or ater whereas, the perod from
pr 0, 11)24, and up to March 3, 1928, s the perod Invoved n these
controverses.
To make ts contentons respectng the actvtes durng the perod between
pr 9, 1924. and March 3, 1928, the defendant offered many, f not a, of the
ssues of The Informant (pantff s offca pubcaton), as aso many,
perhaps a, programs embodyng pantff s actvtes between the dates ast
above mentoned. None of these pubcatons by pantff, subsequent to March,
1928, was offered, for the very smpe reason that the cub s actvtes for the
atter perod were not n dspute nor n ssue here. I have, however, carefuy
e amned the programs of the cub as ssued by t between the years 1924 and
1928. These show that wthn the perod named there were gven, or seemngy
fostered by the cub, that Is gven under ts auspces, 10 dances, 5 muscas,
2 pcncs, 9 swmmng partes, 6 teas, 14 card partes, 2 shows, 5 msceaneous
partes, uncheons, etc., and 11 other functons whch may or may not have been
ether educaton or soca or m ed.
Durng the same perod there were a tota of 97 functons whch, n my
opnon, were educatona, artstc, or cvc.
. So, the totas stand, 52 ceary soca, 97 ceary educatona or cvc or artstc,
and 11 doubtfu or m ed.
The cub had a ounge, used aso as a brary a pano perhaps three a
swmmng poo, and mantans, and mantaned, arge we-furnshed quarters,
ncudng a ktchen and dnng rooms, wheren meas are served to members and
ther guests. These atter thngs are, of course, not decsve here ether way,
and not nconsstent wth the actvtes of a nonta abe entty. ut they may
be consdered In connecton wth the soca features above rected.
The cub was organzed and ncorporated under the aws of Mssour reatng
to benevoent, regous, scentfc, educatona and msceaneous assocatons.
( rtce 10, chapter 33, R. S. of Mo., 1909.)
The artces of assocaton of the cub nter aa n artce 4 thereof say:
bt. 4. The ob|ect and purpose of the assocaton sha be for the dscusson
of questons of commerca, ndustra, cvc, and soca nterest for the encour-
agement of good readng and the cutvaton of art and terature and ratona
soca amusement to ad and assst the ndustra, commerca, cvc and soca
deveopment of the cty of St. Lous, and more especay as they pertan to
women to provde, estabsh, and mantan a cubhouse or cub rooms wth
brary and other factes approprate and convenent for the entertanment of
ts members and ther guests and for the awfu and ratona out-of-door pay
games and e ercses: Provded, however, that the assocaton as such sha have
no connecton wth partsan potcs or partsan organzatons, nor sha t ever
be commtted to the ndorsement of any partcuar measure or measures.
The consttuton of the cub, In artce 2 thereof, provdes that:
The ob|ect of ths assocaton sha be to provde and mantan an organzed
center for the nvestgaton, dscusson and mprovement of the cvc, busness
and soca affars of the cty of St. Lous and more especay as they pertan
to women, and to provde cub room, brary and other convenences for ts
members: provded that the organzaton as such sha never be commtted to
the ndorsement of any partcuar measure.
So, It w be observed that both the artces of the assocaton, or ncorpora-
ton, and cub s consttuton, gve the same promnence to the soca phase that
they gve to educatona and cvc phases. It s, of course, to be granted that,
standng aone, the cub woud not be concuded by ether Its artces of ncor-
poraton, or ts consttuton, especay n a case, as here, wheren more than
one ob|ect of the cub s set out and wheren certan actvtes woud render It
ta abe, and other nonta abe. In short, the cub coud, f t had chosen to do
so, have devoted ts actvtes to those thngs set forth n ts charter, whch are
not wthn the ta ng statute, and refraned from carryng on those actvtes
whch render It ta abe under the statute. The reason for the rue s too
obvous to render e poston necessary.
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555
Regs. 43-r, rt. 5
The ega rue ad down In the rued cases fary foows the constructon
of the ta ng statute ad down by the Revenue Department. If the rue s
correct, ts orgn s mmatera, even though such a rue, consttutng as t
does a |udca nterpretaton of a statute by a non|udca body, mght other-
wse nvade a prerogatve commtted aone to the coordnate |udca branch
of Government. It Is obvousy necessary that a fed force of the Revenue
Department sha have promugated, for ts gudance, rues for appcaton
o ta ng statutes. To ths e tent reguatons are necessary, even f such
reguatons Impnge, as here, upon statutory nterpretaton, not at a a functon
of an e ecutve bureau but the pont I stress s, that such an nterpretaton
does not bnd the |udca body. If t happens that the nterpretaton put
upon the statute be correct, or that the napttude or the ndoence of the courts
nduce acceptance of the departmenta nterpretaton, t then becomes a |udca
rue and a |udca Interpretaton, and shoud be foowed. Thus here, because
the courts have accepted t, and so the rue s that any organzaton whch
mantans quarters or arranges perodca dnners or meetngs for the purpose
of affordng an opportunty of congregatng for soca ntercourse s a soca
cub or organzaton wthn the meanng of the ct (secton 801, Revenue cts
of 1918 and 1921) uness ts soca features are not a matera purpose of the
organzaton, but are subordnate and merey Incdenta to the actve further-
ance of dfferent and predomnant purpose, but f the soca features are a
matera purpose of the organzaton, then t s a soca cub.
Confessedy, I fnd a dffcuty wth the above nterpretaton because of the
use of the terms matera purpose and a predomnant purpose n the
same nstance, the former referrng to the soca actvtes and the atter to the
busness, educatona, etc., actvtes. The word matera Is obvousy not
predomnant matera connotes ess than haf, and predomnant more
than haf. There mght we be a predomnant purpose, but a dametrcay
dfferent actua practce. Purpose mght we be deduced from the artces of
assocaton or the consttuton, whe practce woud be found from functons
performed and actvtes engaged n. If purpose aone sha be the test, actv-
tes coud vary from purpose nfntey, and yet ta aton be escaped.
So, I thnk the rue of the Department ntends, and the proper constructon
of the statute s, that f any matera, that s, mportant substanta part of the
cub s actvtes (but not necessary as much as a moety thereof) are soca,
as contradstngushed from the remanng nonsoca actvtes, t s ta abe
otherwse, of course, t s not ta abe.
s sad aready, thoroughgong reance can not be put on the anguage of
ether the artces of assocaton or the consttuton, or both. ut both of these
nstruments may be consdered n connecton wth the actua functons and
actvtes of the pantff.
So here, not ony do the artces of assocaton and consttuton of the cub
prescrbe as among ts ob|ects the provdng and mantenance of an organzed
center for nvestgaton, dscusson and mprovement of the soca affars of the
cty of St. Lous as they pertan to women and to provde cub rooms, brary,
and other convenences for ts members, but the programs and pubcatons
promugated by the cub show that durng the perod here n controversy,
ether 39 per cent or 58 per cent, appro matey (accordng to whether the 11
doubtfu actvtes of the cub are aocated to the one sde or to the other),
consttuted matters whch were soca rather than cvc, artstc or educatona.
I am not abe to say that such a per cent of tota actvtes does not const-
tute a matera part of the cub s functons. Of course, the mathematca pre-
domnance of nonta abe actvtes s obvous, but, nevertheess, the ta abe
functons are so numerous as to consttute, n my opnon, a matera part of
the cub s performed functons. I do not attempt to contrast, e cept mathe-
matcay, the reatve mportance of these dua actvtes. There Is no evdence
on whch to wegh one as aganst the other nether do I thnk reatve mport-
ance, even f t coud be found, enters nto the ega equaton to an e tent whch
makes t matera or reevant. These vews render It unnecessary to pass on
the queston of the statute of mtatons.
So t foows, that |udgment n the consodated case shoud be for defendant,
that t go hence and recover Its costs and so t s ordered.
These fndngs and concusons may be taken n eu of a forma fndng of
facts and concusons of aw, but f counse sha deem further fndngs and
concusons necessary, I sha pass on and sette any fndngs and concusons
whch may be, n 10 days, submtted by counse on ether or both sdes.
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Regs. 43-TI, rt. 9.
556
TITL III. T ON DMISSIONS ND DU S. (1921)
T ON DU S R NU CT OP 1921 D CISION O COU T.
Dura Monthy Green ees.
Monthy green fees pad by a partcuar cass of membershp n a
gof cub for use of the cub s gof course, In addton to reguar an-
nua dues, whch represent a recurrng contractura obgaton e -
tendng over an ndefnte perod of tme regardess of the desre of
members to use the greens are ncdenta to the partcuar cass of
membershp and are dues wthn the meanng of secton 801 of the
Revenue ct of 1921.
Unted States Crcut Court of ppeas for the Nnth Crcut.
rank . oran, appeant, v. ohn P. McLaughn, Coector of Interna
Revenue, appeee.
Upon appea from the Dstrct Court of the Unted States for the Northern Dstrct of
Caforna, Southern Dvson.
Sawtee, Crcut udge: The appeant brought ths acton to recover a 10
per cent ta e acted by the appeee upon certan payments that the appeant
made to the Oympc Cub, of San rancsco, durng 1923. The appeee
camed that the payments to the cub, amountng to 52 consttuted dues, whch
were sub|ect to a 10 per cent ta of 5.20 under secton 801 of the Revenue
ct of 1921. The appeant contends that the payments In queston were not
dues, but, on the contrary, green fees that he pad to the cub monthy at a fat
monthy rate, n eu of the day green fees e acted for the day use of the
cub s gof courses.
These green fees that were ta ed had been pad by the appeant to the cub
n addton to hs reguar monthy dues of 0 as an actve resdent member.
The appeant contends that these monthy green fees were not ncdenta to
membershp and therefore were not dues, but were speca charges pad for the
use of a speca facty of the cub.
The queston presented, therefore. Is whether these monthy green fees
were or were not dues wthn the meanng of secton 801 of the Revenue
ct of 1921. dmttedy day green fees are not ta abe. Therefore, the ony
queston on ths appea s whether such green fees, when pad monthy as
f ed and recurrng obgatons that carred wth them rgd contractura ab-
ty, ost ther character as casua green fees and became dues.
|ury havng been waved by wrtten stpuaton, the acton was tred by
the court. Wam . umphrey, presdent of the Oympc Cub, was the ony
wtness caed by ether party. t the concuson of the evdence, the pantff-
appeant moved the court for |udgment n hs favor upon the peadngs and
the evdence. Thereupon the defendant-appeee moved the court for |udgment
n hs favor, and both partes requested speca fndngs. The court granted
the defendant-appeee s moton for |udgment and adopted the fndngs of fact
and concusons of aw proposed by the defendant-appeee. rom the order
and udgment on the fndngs the ta payer appeaed.
The facts of the case are In bref as foows:
In 1922, the probem of fnancng the purchase of the propertes of the
Lakesde Gof Cub, a corporaton ownng ands n San Mateo and San ran-
csco Countes, was presented to the board of drectors of the Oympc Cub.
The atter cub had aso purchased other property and was pannng to con-
struct two 18-hoe gof courses and to mprove the cubhouse. To fnance a
these pro|ects, the board of drectors of the Oympc Cub devsed a pan where-
by there woud be created a cass to be known as contrbutng members,
whch cass w be mted to 850 Oympans. ny actve, fe, or nonresdent
Reguatons 43-11, rtce 9: Dues or member-
shp fees.
I-3 -5713
Ct.D.567
May 23, 1932.
OPINION.
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557
Regs. 43-11, rt. 9
member who contrbuted to the capta of the cub the sum of 275 In cash, or
300 n monthy nstaments, became entted to receve, at hs opton, ether
a cass prvege or a cass prvege, or, n the case of a nonresdent
contrbutor, he had the opton of acceptng a cass , , or C prvege.
Ony members of the Oympc Cub n good standng coud acqure any of these
prveges.
In 1922, at the tme of the creaton of the prveges, the appeant con-
trbuted the sum of 275 n cash to the cub, and became the owner of a cass
prvege. Members hodng ths prvege were entted to use the gof
nks as often as they desred, on payng, n eu of the day green fees, a fat
monthy green fee n an amount to be f ed by the board of drectors.
urthermore, hoders of cass prveges were entted to e tend the cour-
tesy of the gof courses to ther guests, upon payment of the reguar day green
fee for each tme that such guest used the course. Such members were aso
prveged to e tend the use of the gof courses to ther wves, on payment of
an addtona contrbuton to capta, and payment of addtona monthy green
fees for the wves, who were not, however, thereby gven membershp n the
cub. The by-aws of the cub mted the membershp to whte maes. The
monthy green fee for the wfe was charged aganst her husband, who was the
momber of the Oympc Cub.
Members of the cub who dd not contrbute to the fund used In purchasng
the country property had equa obgatons, rghts and prveges as to a the
property and factes of the cub, ncudng gof courses, as compared to mem-
bers who dd contrbute and who therefore receved cass , , or C
prveges, wth the foowng e ceptons:
1. Members hodng cass prveges were obged to pay the specfed
monthy green fee. The cub member havng such cass prvege had the
opton of payng the fees and retanng the prvege, or of dsposng of t at
any tme, ether to the cub tsef, or to any other member of the cub n good
standng. The cub bad a standng offer to purchase for 600 each, a such gof
prveges as mght be offered for sae.
2. Cass members had the rght to e tend the courtesy of the courses
to ther wves and guests, on payment of addtona sums.
The ta that the appeant seeks to recover was coected under secton 801
of the Revenue ct of 1921, whch reads as foows:
That from and after anuary 1, 1922, there sha be eved, assessed,
coected, and pad, n eu of the ta es mposed by secton 801 of the Revenue
ct of 1918, a ta equvaent to 10 per centum of any amount pad on or after
such date, for any perod after such date, (a) as dues or membershp fees
(where the dues or fees of an actve resdent annua member are n e cess of
10 per year) to any soca, athetc, or sportng cub or organzaton or (b)
as ntaton fees to such a cub or organzaton, f such fees amount to more
than 10, or f the dues or membershp fees (not ncudng ntaton fees) of an
actve resdent annua member are n e cess of 10 per year such ta es to
be pad by the person payng such dues or fees: Provded, That there sha be
e empted from the provsons of ths secton a amounts pad as dues or fees
to a fraterna socety, order, or assocaton, operatng under the odge system.
In the case of fe membershps a fe member sha pay annuay, at the tme
for the payment of dues by actve resdent annua members, a ta equvaent
to the ta upon the amount pad by such a member, but sha pay no ta upon
the amount pad for fe membershp.
Counse agree that the terms dues and membershp fees, as used n the
statute, are synonymous and convertbe. Lkewse, concedng that the
terms dues, green fees, membershps and prveges were used
oosey and Interchangeaby by members and offcers of the cub, counse are n
accord on the fundamenta prncpe that the actua, true nature and
character of a rght, or of a thng, Is determned by Its essenta characterstcs
and not by the name by whch t s caed.
In other words, because of the Inapt anguage used by offcers of the Oympc
Cub, n the nstant case ths court must be guded chefy not by what was
sad, but by what was done. Nevertheess, n construng an aeged member-
shp of a cub, human anguage can not be atogether dsregarded. Infecty In
ts use merey compcates the task.
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Regs. 43-11, rt. 9.
558
n e ampe of such Infecty of e presson as to an Important eement a
found n the crcuar etter sent out by the Oympc Cub to ts varous members,
under date of une 12, 1922. On one page of the record we fnd the statement:
To fnance the purchase of the property, the constructon of the two gof
courses and mprovements to the cubhouse, t s panned to create a cass to
be known as contrbutng members, whch cass w be mted to 800
Oympans.
ut on the ne t page we read:
y the proposed pan there s no ntaton fee, as no new membershp s
created, but every contrbutor w have the rght to se the rghts acqured by
hs contrbuton to an Oympan and retan haf the proceeds of the sae.
We have underscored the seemngy contradctory passages.
t the threshod of our Inqury, It s necessary to ascertan the meanng of
the terms dues and membershp fees as used In the statute.
In Whtman v. O ford Natona ank (176 U. S., 559, 562) the court sad:
The word dues s one of genera sgnfcance, and ncudes a contractua
obgatons.
Ctng the Whtman case, supra, the Crcut Court of ppeas for the rst
Crcut, n Ward v. osn (105 ., 224, 227), contnued:
We refer, aso, to ouv. Law Det. Due, showng that the word may
sgnfy what ought to be pad what may be demanded and to udge
Story s observaton n Carver v. Manufacturng Co. (2 Story, 432, 449, ed.
Cas. No. 2,485), on the words debts and dues, that dues Is broader
than debts.
The appeant quotes In ts entrety the decson n Wed v. Nchos, Coector
(D. C. Mass.) (9 . (2d), 977-978). That case nvoved an addtona fee
of 7.50 for the prvege of payng gof for s months, on whch fee a ta of
75 cents was assessed. The report of the case does not dscose whether the
cub member hodng the gof prvege was or was not compeed to pay the
addtona fee for another s months at the cose of the frst 6-month
perod. It s not shown whether the member woud have been absoved from
payng the 6-month fee n case he had decded he dd not desre to pay gof
durng the ensung semester. In other words, the prnted record of the Wed
case, supra, Is sent as to whether or not the member s obgaton to pay the
fee was a f ed and recurrng one, and one that carred wth It contractua
abty. s w be seen presenty, the appeant s obgaton was of ths
atter knd.
ut even n the Wed case we fnd the foowng sgnfcant anguage:
Presumaby the same e presson s used n the same sense throughout
the secton, f so, the words dues or membershp fees, n cause (a), were
meant to cover ony f ed and defnte charges appcabe to a members of
each partcuar cass of membershp. Ths seems to me to be the underyng
ntenton of the secton. Itacs our own.
In Thompson v. Wyandanch Cub (127 N. Y. 8., 195, 200) the court sad:
Wth reference to cubs and other membershp corporatons, the meanng
of the word dues s setted. It means the obgaton nto whch the members
enter to pay a sum to be f ed, usuay by by-aws, at recurrng ntervas, for
the mantenance of the organzaton.
Revertng to the Supreme Court s defnton of dues as ncudng a
contractua obgatons, we may e amne the record n the nstant case, n the
effort to ascertan whether the appeant s obgaton to pay the aeged dues
for hs cass prvege or membershp was n fact and n aw contractua.
We do not desre to burden ths opnon wth copous ctatons from the
record tendng to show the rgor wth whch the appeant s feow-members
were beng hed to ther obgaton to pay monthy green fees. few nstances,
however, w be quoted as typca, from the mnutes of the gof commttee:
Letter dated anuary 24 from Pau T. Carro, cass member, wheren
he advsed that he and hs wfe are pannng to eave ths cty and w be
absent for appro matey s months and for ths reason request a eave of
absence from the Oympc Country Cub coverng that perod t was the sense
of the meetng that, under the present rung, 1. e., that members of cass
must contnue theren for a perod of at east one year, Mr. Carro s request
be dened.
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559
Regs. 49, rt. 110.
Letter dated anuary 15, from D. D. Madden, cass member of the
Oympc Country Cub, wheren he asks that hs wfe, Mrs. D. D. Madden, be
wthdrawn from the monthy green fee, but ( ) nasmuch as she has ony
payed gof twce durng the past year t was the sense of the meetng that,
under the present rung, . e., that members of the Women s Gof nne must
contnue theren for a perod of at east one year, Mr. Madden s request be
dened.
Note from Dr. artand Law askng that hs monthy green fee of 4 be ds-
contnued t was the sense of the meetng that hs request be dened for the
reason that compance therewth woud be contrary to the rues now and
heretofore n effect at the Oympc Cub, . e., that members of cass must
contnue theren for at east one year.
The foregong e cerpts from the mnutes ceary Indcate that, by whatever
name these cass membershps were caed, they entaed upon ther
hoders a f ed, contractua abty to pay monthy green fees, regardess of
ther desre to contnue to use the greens. ssuredy, then, these so-caed
fees were not for a snge, casua and occasona prvege ke a chance
mea at the country cub dnng room but represented a recurrng, contractua
obgaton, e tendng over an Indefnte perod of tme, and, n the anguage of
the Wed case, supra, ncdenta to a partcuar cass of membershp.
We therefore beeve that these fees were propery ta ed.
udgment affrmed.
TITL . T ON TR NSPORT TION ND OT R
CILITI S. (1918)
P YM NTS, COLL CTIONS, R TURNS, ND P N LTI S.
Reguatons 49, rtce 110: Payment of ta es. I-41-5782
Ct. D. 585
T ON TR NSPORT TION R NU CTS OP 1917 ND 191S D CISION
O COURT.
Labty fob Ta y Whom Pad.
Where a vendor, who has engaged to se and dever umber to
a county at a desgnated pont In the county f. o. b. at a stated
prce, shps the umber by ra to that pont preparatory to there
effectng the requred devery and forwards the bs of adng
to the county, and the atter, conformaby to the vendor s Inten-
ton, surrenders the bs of adng to the carrer, pays ts transpor-
taton charges, receves the umber from t, deducts from the f. o. b.
prce at destnaton the transportaton charges pad to the carrer
and remts the baance to the vendor, the transportaton servces
are rendered to the vendor and the vendor s the person who
pad for the servces rendered wthn the meanng of secton 601
of the Revenue ct of 1917 and secton 501(a) of the Revenue ct
of 1918 aud s abe for the ta on transportaton Imposed by those
acts.
Coubt of Cams op the Unted States. No. -567.
Wheeer Lumber rdge d Suppy Co. of De Mones, Iowa, v. The Unted
States.
une C, 1932.
OPINION.
Green, udge, devered the opnon of the court.
The pantff n ths case seeks to recover the sum of 1,833.89 wth nterest,
beng the amount of transportaton ta es together wth penates and Interest
thereon coected from t by reason of certan shpments of umber whch t
had made durng the years 1918, 1919, 1920, and 1921, to partes havng bought
the same.
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Regs. 49, rt. 110.
560
There Is no dspute as to the facts In the cnse as reported by the Comms-
soner. It appears that the shpments n queston were made at the tme when
the Revenue ct of 1917 mposed a ta on the amount pad for transportaton
by ra, and the pantff caused to be shpped to certan countes n the States
of Iowa and Nebraska consgnments of umber whch n each nstance was
needed and used by the purchasng county In the constructon or repar of
brdges aong pubc hghways wthn the county under an agreement that the
umber was to be devered at stated ponts wthn the purchasng county f. o. b.
at stated prces. The shppng was done by raroad under bs of adng
cang for devery by the carrer to the pantff, or on ts order, at destna-
ton. Pantff forwarded the bs of adng to the county cerk, and, when
the shpments reached ther destnaton, the county cerk, actng for the
county and conformng to the pantff s ntenton, presented the bs of adng
to the carrer, pad the freght charges, accepted the umber, and deducted
the transportaton charges from the stpuated f. o. b. prce and remtted the
baance to the pantff. The defendant dd not coect any ta es on account
of these shpments at the tme they were made, but ater assessed and co-
ected from pantff the amount of ta es whch t now seeks to recover n the
manner as stated n the fndngs of fact.
The contentons made by pantff n support of ts case may be summarzed
as foows:
rst, that the ta was ad upon the sae, and the transacton was both
under the statute and the Consttuton e empt.
Second, that n any event the pantff under the statute was not abe for
the ta .
The queston nvoved n the ssue frst above stated was certfed to the
Supreme Court for determnaton. The form thereof s set out n the opnon of
the Supreme Court n Wheeer Lumber rdge t Suppy Co. v. Unted State
(281 U. S., 572 Ct. D. 196, C. . I -2, 417 ). It s sufcent to say here that In
that case the Supreme Court hed n substance that the ta was not upon the
sae, and that the case dd not come under the rue ad down n Panhande O
Co. v. Msssspp (277 U. S., 218) aso that the transportaton under con-
sderaton was not a servce rendered to the county whch woud be e empt
under secton 502 of the Revenue ct of 1917, or secton 500(h) of the Revenue
ct of 1918, but was a servce rendered to the vendor, and that t was
measured by the transportaton charges. In short, the Supreme Court rued
aganst the pantff on the queston certfed whch ncuded the pantff s
cam of e empton and-unconsttutonaty of the ta .
There remans for consderaton the queston of whether the pantff was n
any event abe for the ta . It s contended on behaf of the pantff that the
aw mposed a abty for the ta drecty upon the person from whom the
carrer coected the charges and t s argued that under the facts n the case,
as the carrer dd not drecty coect the ta es from the pantff, t was not
abe for the ta .
In support of ths proposton a provson of secton 501 of the 1917 ct a
quoted as foows:
That the ta es sha be pad by the person payng for
the servces or factes rendered.
Pantff s counse aso cted Treasury Reguatons No. 49 (revsed) promu-
gated anuary 17, 1920, whch provded, by artce 110 thereof, that
ta es mposed by secton 500 sha be pad by the person from whom or
from whch the carrer coects the charges for the servces or factes ren-
dered. The method of ad|ustng transportaton e penses between the buyer and
seer, or the consgnor and the consgnee, s a matter of prvate contract over
whch the Government has no ursdcton.
If ths contenton of the pantff s to be sustaned then the person who
turned over to the raroad the money, checks, or whatever s used to pay the
transportaton charges, by reason of ths act becomes abe for the ta . We do
not thnk ths s a reasonabe constructon of the statute. s the Supreme
Court says n ts opnon, the transportaton servces were rendered for the
pantff. eng so rendered the pantff was abe therefor. It s true that
the county cerk pad the freght charge to the raway company, but he pad t
for the pantff and out of funds beongng to the pantff n the manner n
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561
Regs. 49, rt. 110.
whch pantff ntended. The pantff was n fact the person who pad for
the servce or factes rendered. The case of the Cty of Wchta as v.
Unted States (62 C. Cs., 239 T. D. 3899, C. . -2, 218 ) s somewhat dfferent
In ts facts from the case at bar, and an atogether dfferent queston was n-
voved. We do not thnk that anythng sad n the opnon thereon sustans the
poston of ether party to the case at bar.
The agreement made by pantff to dever the umber f. o. b. at stated ponts
was n effect an agreement to pay the raway charges and the county, or the
county cerk actng for t, coud have refused to pay the freght or the ta f
It had been demanded, and coud have caed upon pantff to make payment
thereof n accordance wth ts agreement. The pantff then, n order to com-
pete ts contract wth the county, woud have been obged to pay the freght
and the ta f demanded n fact t coud not have obtaned the umber to de-
ver to the purchaser wthout payng for the transportaton and thus makng
tsef abe for the ta . We thnk the stuaton n that event woud have been
no dfferent In prncpe from what fnay resuted from a payment of the
freght out of money beongng to the pantff.
It foows that pantff s petton must be dsmssed and t s so ordered.
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MISC LL N OUS T RULINGS.
TITL I . T ON CIG RS, TO CCO, ND
M NU CTUR S T R O . (1926)
Reguatons 8(1928), rtcue 76: Subdvson
packages.
CIG RS SU DI ISION P RC LS.
I-38-5716
T. D.4353
Packng of not more than 10 arge cgars In ghtweght card-
board parces wth cut-out wndows or open at one end as sub-
dvsons of statutory packages authorzed. Reguatons No. 8,
artce 76, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To Coectors of Interna Revenue and Others Concerned:
rtce 76 of Reguatons No. 8, approved pr 24,1928, s hereby
amended to read as foows:
rt. 70. Subdvson parces. The statutory number of cgars weghng more
than 3 pounds per thousand, contaned n the bo , may be subdvded by the use
of paper or rbbon bands, or separated nto parces of not more than 10 cgan
each by ncosure n fo, wa paper, ceophane, or ghtweght cardboard wth
cut-out wndows or open at one end.
The cauton notce abe (artce 84), factory brand (artce 85),
and cassfcaton abe (artce 86), must not appear on any sub-
dvson or parce of a statutory package but must appear ony on
the statutory package on whch the requste stamp s aff ed.
Cgars so subdvded nto parces must reman n the stamped
statutory bo unt they are sod and devered drect to the consumer,
and the whoe number of cgars packed n each bo must correspond
to the denomnaton of the stamp aff ed to the bo .
Davd urnet,
Commssoner of Interna Revenue.
pproved September 14, 1932.
Ooden L. Ms,
Secretary of the Treasury.
(562)
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563
Regs. 71, rt. 19
TITL III. ST MP T S. (1926)
ONDS, D NTUR S, ND C RTI IC T S O IND T DN SS.
Reguatons 71, rtce 19: Certfcates of I-30-5570
ndebtedness. Ct. D. 523
stamp ta es revenue act of 1020 decson of court.
Corporate Securtes ace aue.
Instruments n regstered form ssued by a corporaton, each
of whch certfes that n consderaton of the payment of a spec-
fed amount annuay n advance durng the perod of 10 years
from the date of the nstrument the corporaton promses to pay
to a desgnated person at the e praton of sad perod a specfed
sum, whch are assgnabe upon certan condtons but have no
surrender or cash vaue so far as the corporaton s concerned unt
18 months after the date of ssue and whch specfcay f es the
tme of payment sub|ect to the performance of the condtons
named n the certfcate, come wthn the cassfcaton corporate
securtes that are ta abe under secton 800, Tte III, Schedue
- of the Revenue ct of 1926. The face vaue of each certf-
cate, whch s the bass of the ta , s the maturty vaue.
Unted States Crcut Court of ppeas, ghth Crcut.
L. II. Wcuts, as Unted States Coector of Interna Revenue for the Coecton
Dstrct of Mnnesota, appeant, v. Investors Syndcate, appeee.
ppea from the Dstrct Court of the Unted States for the Dstrct of Mnnesota.
March 22, 1032.
opnon.
ooth, Crcut udge, devered the opnon of the court.
Ths s an acton at aw brought by the Investors Syndcate aganst Wcuts,
coector, to recover the amount of edera stamp ta es coected by hm from
sad corporaton for the perod from anuary 1 to une 30, 1928.
Tra by |ury was waved, and the case was submtted to the tra court on
a stpuaton of facts. The court found n favor of the pantff.
The stamp ta es n queston were camed by the coector to be due, and
were coected, upon certan accumuatve nstament certfcates ssued by the
Investors Syndcate durng the perod n queston. The syndcate camed
that the certfcates were not ta abe. No queston of amount s nvoved.
The frst page of the certfcate s set out n the margn.1
1 See foowng certfcate.
Doars. Number.
ounded 1894.
Investors Syndcate.
Incorporated under the Laws of the State of Mnnesota,
Mnneapos, Mnnesota.
ccumuatve Instament Certfcate.
Ths Is to certfy that In consderaton of the payment of doars, annuay a
advance durng the perod of 10 years from date hereof, the Investors Syndcate, frst
party, herenafter referred to as the company, hereby promses to pay to , here-
nafter referred to as the second party, at the e praton of sad perod, upon presentaton
and surrender of ths certfcate to the company at ts offce n the cty of Mnneapos,
Mnn., the sum of doars.
Ths certfcate s sub|ect to the prveges, terms and condtons on the second, thrd
and fourth pages hereof whch are hereby referred to and made a part hereof, as fuy,
as If set forth n the face of ths certfcate.
In wtness whereof the company has caused ths certfcate to be e ecuted n Its
corporate name at Mnneapos, Mnn., ths day of 19 .
Investors Syndcate,
y . R. Rdoeway, Presdent.
ttest: Countersgned by
. M. Rchardson. _
/Secretary.
5
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Regs. 71, rt. 19.
564
mong the prveges, terms and condtons are provsons as to cash and oan
vaues after 18 months aso the foowng:
ssgnment. Ths certfcate f n force and uncanceed on the books of the
company may be assgned, but the assgnment of transfer hereof sha not be
vad wthout the consent n wrtng ndorsed hereon by the company and a
transfer fee of 1 pad to the company .
Cash n fu guaranteed at matukty. nythng n ths certfcate to the
contrary notwthstandng, the second party sha at the tme of maturty be
entted to receve, and the company guarantees then to pay n cash the face
amount hereof ess any ndebtedness due the company.
The foowng facts were stpuated reatve to the ssuance of certfcates
and the keepng of records regardng the same:
The sad so-caed accumuatve nstament certfcates were
ssued by the pantff heren n the foowng manner, and nformaton con-
cernng the same kept as heren stated.
person desrng to become a hoder of a so-caed accumuatve nsta-
ment certfcate made an appcaton therefor on the bass of such annua
payments as the appcant may have desred to make. such appcatons
were made on a form dentca wth the copy thereof attached to pantff s
compant, .
If the syndcate accepted the appcaton, a certfcate n form and substance
dentca wth (the one) attached to pantffs compant, was
ssued by sad pantff to the appcant, and the appcant was gven a pass
book, a copy of whch s attached to pantffs compant .
t the same tme, a edger card, a copy of whch s attached to pantff s
compant was fed n wth the (hoder s) name, hs address, the
name of the saes manager, the name of the saesman, the date of the ssuance
of the certfcate, the amount to be pad at the maturty of sad certfcate, the
consecutve number of the sad certfcate, and the method of payment of
nstaments eected by the hoder.
s payments were made and are made they were and are recorded n the
sad pass book and were and are credted to the hoder upon the sad edger
card, sub|ect to the terms and condtons of sad certfcate.
The number representng the certfcate number was paced upon the edger
card, appcaton bank, cross reference card and pass book, upon
whch appears the name of the owner of the certfcate. The edger cards are
the permanent records of the pantff corporaton and are fed numercay.
It was further stpuated:
That from on or about the 1st day of anuary, 1928, unt on or about the
80th day of une, 1928, pantff had from tme to tme ssued so-
caed accumuatve Instament certfcates the tota sums to be pad at the
maturty of whch woud equa the sum of 30,745,500 (f and provdng the
nstament payments have been and are pad and a other condtons per-
formed n accordance wth the terms and provsons of each and a of the
same), each of sad so-caed accumuatve nstament certfcates havng
been n substance and form e acty smar to hbt attached to pan-
tffs compant and made a part thereof, e cept that upon the ssuance of
each of the so-caed accumuatve nstament certfcates the banks appear-
ng thereon were appropratey fed n wth words and fgures denotng the
amount to be pad at maturty, the consecutve number and order of ssue,
the name of the hoder, hs address, and the date of the ssuance thereof.
The amount of the contempated annua payments was set out n the body of
the certfcate on the frst page thereof, foowng the words of the payment
of and precedng the words doars, beng a sum n doars at the rate of 74
per thousand of the amount to be pad at the maturty of sad certfcate.
The amount to be pad at. maturty (and aeged by the Commssoner to be
the face vaue of the certfcate) was stated n fgures underneath the word
Doars appearng n the upper eft corner of the certfcate and was aso
stated n words mmedatey foowng the words the sum of and precedng
the word doars set out n the body of the certfcate, a on the frst page
thereof.
The reevant statutes are as foows:
Secton 800, Tte III, of the Revenue ct of 1926:
Sec. 800. On and after the e praton of 30 days after the enactment of
ths ct there sha be eved, coected, and pad, for and n respect of tbe
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565
Regs. 71, rt. ft
severa bonds, debentures, or certfcates of stock and of ndebtedness, and
other documents, nstruments, matters, and thngs mentoned and descrbed
n Schedue of ths tte, or for or n respect of the veum, parchment, or
paper upon whch such nstruments, matters, or thngs, or any of them, are
wrtten or prnted, by any person who makes, sgns, ssues, ses, removes,
consgns or shps the same, or for whose use or beneft the same are made,
sgned, ssued, sod, removed, consgned, or shpped, the severa ta es specfed
In such schedue. The ta es mposed by ths secton sha, n the case of any
artce upon whch a correspondng stamp ta s now mposed by aw, be n eu
of such ta .
Secton 801 makes certan e emptons.
Schedue -, referred to n secton 800, reads as foows:
onds of ndebtedness: On a bonds, debentures, or certfcates of n-
debtedness ssued by any corporaton, and a nstruments, however termed,
ssued by any corporaton wth nterest coupons or n regstered form, known
generay as corporate securtes, on each 100 of face vaue or fracton thereof,
5 cents: Provded, That every renewa of the foregong sha be ta ed as a
new ssue: Provded further. That when a bond condtoned for the repay-
ment or payment of money s gven n a pena sum greater than the debt
secured, the ta sha be ba ed upon the amount secured.
The tra court hed that the certfcates came wthn the cassfcaton
corporate securtes mentoned In the schedue, but that they had no
face vaue at the tme of ther ssue and durng the perod n queston, and
hence were not ta abe.
Two questons are nvoved n the case:
rst, whether the accumuatve nstament certfcates came wthn the
genera cass of corporate securtes made ta abe
Second, whether they had a face vaue so that the ta coud be computed.
In our opnon, the ntenton of Congress was that the statute nvoved shoud
be broad and comprehensve. Ths ntent s evdenced by the angunge used
In the sectons quoted and t s further shown by the fact that n secton
801 certan e emptons were specfcay mentoned.
It s to be noted frst of a that the ta mposed was not a property ta
nor was t a ta upon transactons. It was a stamp ta .
The statute contans the provson:
there sha be eved or n respect of the veum,
parchment, or paper upon whch such nstruments are wrtten or
prnted the severa ta es specfed n such schedue.
s respects ths knd of ta es, the abty to pay a stamp duty, as we
as the amount, s to be determned by the form and face of the nstrument.
(Unted States v. Isham, 17 Wa., 496.) The case Goodyear Tre d Rubber Co.
v. Unted States (273 T . S., 100 T. D. 3992, C. . I-1, 3321) s to be ds-
tngushed. In that case a transfer ta was nvoved, not a documentary ta .
Provsons of the ta ng aw are to be reasonaby construed n order to
carry out the ntent of Congress.
In dety Trust Co. v. Lederer (276 ., 51), nvovng car trust certfcates,
the dstrct court, n construng a somewhat smar statute, sad:
forms of so-caed securtes or nvestments ssued by corporatons,
whether e pressve of ndebtedness or shares n anythng the corporaton
possesses, are wthout doubt ta ed, as are aso a forms of nstruments e -
pressve of the ndebtedness of any person to the hoder.
In nffrmng ths decson, the Supreme Court sad (267 T . S., 17, 21) :
s a matter of common speech, to whch the statute refers, we have no
doubt that these nstruments woud be known as corporate securtes. They
woud be caed so more accuratey than some other documents whch we be-
eve aso woud be known generay by that name. Ther purpose, as stated
n the agreement of the trustee wth the raroad, s to secure payment to the
hoder wth nterest. They do nothng ese. We do not regard the precse
mts of the Trust company s undertakng as mportant. If t were ony to
coect and pay money receved by the company under the secured contract of
the rarond, t woud be a securty for money payment.
These decsons were made n construng the ct of ebruary 24, 1919, Tte
I, secton 1100, and Schedue - (40 Stat., 1057, 1133, 1135) a dfferent
statute from the one n the case at bar but the 1919 statute eved ta es on
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Regs. 71, rt. 19.
566
certan nstruments known generay as corporate securtes as dd the
statute In the case at bar, so that the anguage quoted s pertnent
The words securtes and certfcates and corporate securtes were
not technca, but were In common use at the tme of the passage of the
Revenue ct of 1920, and shoud be construed n accordance wth ther ord-
nary sgnfcance. corporate securty s smpy a means adopted by the
corporaton to secure funds whch t can empoy n ts busness and by
makng a arger return on the funds so secured, t s enabed to pay ts ob-
gaton under the corporate securty ssued, and aso secure an ncome for
tsef.
The documents ssued by the Investors Syndcate n the case at bar have the
earmarks of corporate securtes. They are prnted n the form of corporate
securtes, and on paper used generay for such securtes. The purpose of the
ssue of the certfcates was the same ns the purpose ordnary nvoved n
Issung corporate securtes namey, to secure the money of others for use
n the corporate busness. The operatons of the pantff n seng these
certfcates were sub|ect to the scrutny of the State authortes havng super-
vson over the seng of corporate securtes. In re Investors Spndcate
147 Mnn., 217.) The certfcates n queston were ssued n arge numbers
and n arge amounts n the perod n queston, and were sod throughout
the Unted States and foregn countres. Some 30,745,500 of such certfcates
were ssued between anuary 1 and une 30, 1028 and the nta coectons
thereon were 458,424. It s true that accordng to the terms of these cer-
tfcates, they had no surrender or cash vaue so far as the Investors Synd-
cate was concerned unt 18 months had eapsed after the ssue but It can
not be doubted that from the very moment of ssue, the certfcates had an
actua vaue based upon the amount that was pad as the nta nstament.
The tme of maturty payment by the Investors Syndcate s specfcay f ed
Ub|ect to the performance of the condtons named n the certfcate. The
document s n form regstered. It has a number assgned to t. Ths num-
ber s kept by the Investors Syndcate to enabe t to dentfy the partcuar
certfcate. The certfcates are aso assgnabe upon certan condtons. The
syndcate undertakes to keep on hand frst mortgages on mproved rea estate
or other securty to nsure the payment of these certfcates. abty of
the company from the moment of ssue e sts, and t s specfcay stated as
to amount after the certfcate has been ssued for 18 months.
The fact that there was not an absoute uncondtona abty for the ro
maturty vaue at the tme of ssung the certfcate s mmatera. There
was a condtona obgaton to pay the fu amount at maturty. The statute
makes no dstncton for ta ng purposes between absoute and condtona
obgatons to pay the atter as we as the former are ta ed. Ths s con-
cusvey shown by the second provso of Schedue -, whch e pressy pro-
vdes for a ta on an nstrument of condtona abty. It s aso shown
by the ta es on certan poces of nsurance provded for n Schedue 7.
We hod that the face vaue of the certfcates n queston was the maturty
vaue, for purposes of ta aton under the statute, and that the ta was prop-
ery assessed and coected.
The ony drect authorty cted by ether sde Is the case of natona Thrft
Corporaton of merca v. Wech, Coector. That case was tred n the Ds-
trct Court for the Southern Dstrct of Caforna, Centra Dvson. The
certfcates nvoved were substantay the same as the certfcates nvoved
n te case at bar. The court hed that the certfcates were corporate secur-
tes and aso that the face vaue of sad coatera trust thrft certfcates
was the amount appearng on the face thereof as beng due at maturty.
ppea s pendng n the Crcut Court of ppeas for the Nnth Crcut.
Our concuson n the case at bar s that the udgment of the court beow
shoud be reversed, and the case remanded for further proceedngs. It s
so ordered.
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MISC LL N OUS RULINGS.
TO CCO.
Reguatons 8(1928), rtce 116: Redempton I-33-f619
of stamps. T. D. 4846
TO CCO T R D MPTION OP ST MPS CT O M RC 8, 1931.
Destructon of stamps by deputy coectors permtted where re-
mova ntact from packages s practcay mpossbe wthout soak-
ng or steamng. rtce 116 of Reguatons 8, approved pr 24,
1928, as amended by Treasury Decson 4330 C. . I-1, 368 ,
amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To Coectors of Interna Revenue and Others Concerned:
rtce 116 of Reguatons No. 8, approved pr 24, 1928, as
amended by Treasury Decson 4330, approved December 31, 1931,
s further amended by changng the fourth, ffth and seventh para-
graphs of subdvson (b) to read, respectvey, as foows:
When the groupng Is competed and the schedue prepared, the manufacturer
shoud notfy the coector of the dstrct to that effect and request the deta
of a deputy to verfy the schedue and supervse remova of the stamps and
dsposton qt the packages and contents. The deputy so detaed w e amne
and count the stamped packages and w verfy or correct a the entres n
the schedue. e w aso supervse the remova of the stamps ntact from
the packages and the destructon of the packages and contents by fre or by
some other method whch w render them unft for use. Remova of the
stamps from the packages w not be requred n those cases where the stamps
are so securey aff ed that t s practcay mpossbe to remove the stamps
Intact wthout soakng or steamng them, for e ampe, stamps aff ed to caddes
of tobacco and to other packages made of wood or tn. In such cases, the
deputy w supervse the destructon of the packages wth the stamps aff ed
and the contents, by burnng or other approved method. separate schedue
and cam sha be made n respect to stamps whch are not removed from the
packages but are destroyed under supervson of the deputy. If, however, a
manufacturer desres to savage the contents of the packages, he w be per-
mtted to receve such manufactures on hs factory premses, rrespectve of
where produced, under the provsons of artce 108.
The stamps whch have been removed from the packages under supervson of
the deputy w be devered by the manufacturer as prescrbed n subdvson
(a) of ths artce.
The deputy detaed to verfy the schedue of stamps w certfy to ts cor-
rectness on both copes and w set forth aso each step taken by hm n con-
necton wth hs deta. e w then dever one schedue to the manufacturer or
Importer, to be attached to and made a part of hs cam, and w forward the
160903 88 87 (567)
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Msc.
568
other to the coector. The schedues must show whether the stamps were de-
stroyed or w be transmtted drect to the Commssoner. The schedue dey-
ered by the deputy w be hed by the coector unt the cam s receved and
w be transmtted therewth to the Commssoner.
Raph . Smth,
ctng Commssoner of Interna Revenue.
pproved ugust 9, 1932.
Ogden L. Ms,
Secretary of the Treasury.
OL OM RG RIN .
I-28-5549
MS. 128
ohrdue of oeomargarne produced and materas used durng the month of
May, 1932, as oompared wth Mag, 1931.
May, 1932.
May. 193L
Pound .
14,016,070
Pammt
Tota producton of uncoored oeomargarne
14,013.848
14,566,615
Ingredent schedue for uncoored oeomargarne:
L178
8,403,799
5,508
1,084,365
21,613
261
442
3.422,197
3. MS. 7M
1,539
510,711
L234.2T
874. 7ft)
55,785
99,727
810,034
Peanut o _ - -
607,828
877,705
321,862
16, 616
3,325
197,958
871,622
nt
U7. m
Soya bean o
4,820
240

Tota-
15,840,897
16,985.063
Tota producton of coored oeomargarne -
321, 748
345.253
Tota wthdrawn ta -pad
84,930
Ingredent schedue for coored oeomargarne:
utter
Cocoanut o .
93,403
192
62,715
68
89,566
25,164
55,118
10,239
2,938
19,819
2,686
28,317
78
Coor .
Dervatve of gvcerna_ . . _
Mk
Neutra ard
27,743
84.014
Oeoo . .. ......
Oeostearno . . ...
tnS
Pam o
12,760
(W
Sat . . . ..
29.426
I
Tota
880,306
417,209
I Of the amount produced, 18.SS7 pounds were reworked.
Of the amount produced, 42,876 pounds were reworked.
Of the amount produced, 416 pounds were reworked.
Of the amount produced, 1,540 pounds were reworked.
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569
Mac|
I-32-5600
MS. 129
Schedue of oeomargarne produced and materas used durng the month of
une, 1932, as compared wth une, 1931.
Tota producton of uncoored oeomargarne.
Tota wthdrawn ta -pad
Ingredent schedue for uncoored oeomargarne:
utter
Cocoanut o
Corn o _ _ _
Cottonseed o -
Dervatve of gycerne
Lecthn
Mk,.
Neutra ard
Oeo o
Oeo stearne
Oeo stock
Peanut o
Pam o
at.
Sesame o
Soda bemoate of)-
6oya bean o
Tota
Tota producton of coored oeomargarne..
Tota wthdrawn to-pad__
Ingredent schedue for coored oeomargarne:
uter
Cocoanut o
Coor
Cottonseed o
Dervatve of gycerne
Mk
Neutra ard
Oeo o-
Oeo stearne
Oeo sock --
Pam o.
Peanut o
Sat
oda (bemoate of)
Tota.
une, 1932.
Pounds.
11,8.50, 720
12,028, 172
11.524
7,0D3, 105
872
040,080
17,928
206
2, 814,939
402, 769
733,843
288,141
34, , 09
155, 767
8, 140
774, 595
3,921
240
13, 377, 679
56,982
125
87,609
238
39, 226
50
74,738
20, 277
4(1. M7
8,829
1,375
16,668
2,715
25, 076
8
une, 1931.
Pounds.
12,248,815
6.141
7,013,374
964,114
8,710
352
8,332, 569
509,058
991,309
898,964
63,281
819,850
14,503
925,394
20,635
4,791
2,105
14, 564,155
387, 270
822, 782
360
91, 703
436
47,600
2
99,625
80, SM
83,267
6,480
7,68
16,003
3,693
30,454
22
417,022
Of the amount produced, 16,010 pounds were reworked.
1 Of the amount produced, 31,950 pounds were reworked.
Of the amount produced, 806 pounds were reworked.
Of the amount produced, 2,658 pounds were reworked.
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Msc.
570
I-37-5693
MS. 130
Schedue of oeomargarne produced and materas used durng the month of
uy, 1932, as compared th uy, 1931.
uy, 1931
uy. m
Pwndt.
U, 223, 272
Pound .
10. 959.348
Tota wthdrawn ta -pad
11,341.835
Ingredent schedue for uncoored oeomargarne:
utter __
1.034
2.155
Cocoanut o
6,831,877
6,081.809
Corn o
1.093
899,607
19,446
151
Cottonseed o
846. 389
9,499
Dervatve of gycerne
637
Mk
2, 727, 195
444,466
611.707
242,561
66.853
6.200
119,771
684,749
2,848,737
646.345
Neutra ard
1.012.284
367.296
66,132
Oeo stearne
Oeo stock
Pam o
1 m
m m
Peanut o.,
Sat
814,573
27,900
2,612
1 M
Sesame o- ...... ...... .. ..... .....
oda (bencoate of)
3,981
330
Tota
1166(1820 12 nan 715
185, 143
311.843
Ingredent schedue for coored oeomargarne:
43,938
utter
48, 877
267
30,958
6
60
88.757
444
Coor
16
Mk
53.880
17,428
35.705
6,717
475
10.500
1.887
15,648
1
94.350
so. m

8.190
9.214
Pam o
S. :.0
6,451
28.871
t
Tota
221,340
384.721
Of the amount produced, 14,129 pounds were reworked.
Of the amount produced, 23,271 pounds were reworked.
1 Of the amount produced, 874 pounds were reworked.
Of the amount produced, 2,743 pounds were reworked.
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571
Msc.
I-41-5783
MS. 131
Schedue of oeomargarne produced and materas used durng the month of ugust,
19SS, as compared wth ugust, 19S1.
Tota producton of uncoored oeomargarne.
Tota wthdrawn ta-pad .
Ingredent
utter
Cocoanut o
Corn o
Cottonseed o .
Dervatve of gycerne
Lecthn.
Mk
Neutra ard
Oeo o
Oeo stearne
Oeo stock.
ue for uncoored oeomargarne:
Pam o
Peanut o
Sat
Sesame o
Soda (benzoate of)-
Soya bean o
Tota.
Tota producton of coored oeomargarne..
Tota wthdrawn ta -pad
Ingredent schedue for coored oeomargarne:
utter
Cocoanut o
Coor
Cottonseed o
Dervatve of gycerne
Mk
Neutra ard
Oeo o -
Oeo stearoe
Oeo stock
Pam o
Peanut o
Sat.
Soda (benzoate of)
Soya bean o -
Tota..
ugust,
1932.
Pounds.
15, 678, 807
15, 437, 038
200
1,533,823
13.000
, 188, 307
27, 767
171
, 694. 860
720,690
961, 793
318, 437
82,816
11,470
209.565
922, 160
6, 169
ugust,
1931.
17, 690, 228
336, 734
38,958
87, 545
354
52,276
10
97,28
22,900
68,747
11, 192
3,605
10,837
2,959
2 , .r.4
386,233
2,595
9, 382, 520
6,600
883, 159
12, 514
439
4,101, 3S4
681, 792
1,208,238
377, 052
94, 152
7,200
409,004
1,126, 377
50,275
7, 121
3,710
18, 353,132
314, 834
120
90,613
426
26,848
7
97, 462
24,630
85,548
6,140
6,069
6,610
6,796
27,604
43
IS
375, 731
1 Of the amount produced, 17,538 pounds were reworked.
Of the amount produced, 5,536 pounds were reworked.
Of the amount produced, 212 pounds were reworked.
4 Of the amouDt produced, 2,019 pounds were reworked.
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Msc. 1 572
I-45-5S47
MS. 132
Sohedue of oeomargarne produced and materas used durng the month of
September, 1932, as compared toth September, 1SS1.
1
September,
1932.
embw
193L
Tota producton of uncoored oeomargarne
Pounds.
16,918.812
PoamU.
s.42S.480
Tota wthdrawn ta -pad
16,84a 421
Ingredent schedue for uncoored oeomargarne:
225
2.721
10,834,927
8.100
1.113,485
19,812
501
Cottonseed o . . -
10, 345,092
13,997
1,265,694
24.963
124
Lecthn
Mk
3,993.078
789,044
1,049, 778
328,559
47, 514
5,391
178.152
1739.272
875,930
1. 531. 774
428.627
103.230
27.214
412.078
1.363.382
62,374
Pam o
Sesame o
5.704
Is
6oya bean o -
19. )36, 239
21. 631.487
Tota producton of coored oeomargarne
208,888
407. 16S
Tota wthdrawn ta-pad_.
43,094
Ingredent schedue for coored oeomargarne:

69
utter
80,103
283
25,809
6.056
80,706
20,657
37.014
2,841
605
3,200
2,109
17,056
IS
112.372
568
40, 3
29
Dervatve of gycerne
109.801
42.599
116.947
S. 8(0
10.545
Peanut o
.va
Sat
35,777
33
325
foya n|n n
255.451
498.041
1 Of the amount produced, 7,043 pounds were reworked.
Of the amount produced, 20,591 pounds were reworked.
I Of the amount produced, 88 pounds were reworked.
Of the amount produced, 948 pounds were reworked.
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573
Mso.
I-50-5927
MS. 133
Schedue of oeomargarne produced and materas used durng the month of
October, 1932, as compared tcth October, 1931.
October,
1932.
October,
1931.
Tota producton of uncoored oeomargarne
Tota wthdrawn ta -pad
Ingredent schedue for uncoored oeomargarne:
utter
Cocoanut o _ __
Corn o
Cottonseed o
rvatve of gycerne
Lecthn..
Pounds.
I 18, 358, 643
Pounds.
23,439,119
Oeo stock-
Pam o-
Peanut o
at
Sesame o
oda (benzoate of).
bean o
Soya be
Whae o..
Tota
Tota producton of coored oeomargarne.
Tota wthdrawn ta-pad
Ingredent schedue for coored oeomargarne:
utter
Cocoanut o -.
Coor
Cottonseed o
Dervatve of gycerne
Mk
Mustard o
Neutra ard
Oeo o
Oeo stearne
Oeo stock.
Pam o
Peanut o
at
oda (benzoate of) -
Whae o
Tota.
I .. 600, MO
11,505
11,854,848
1,004
1, 253,055
31,039
4, 595, 522
943,422
1,207, 594
271,259
30, 167
9,100
204, 194
1,163, 992
6,539
21, 583, 398
168, 943
48,852
125
64,994
163
16, 787
3
60,449
16,346
36,075
1,590
745
4,650
2,634
11,305
6
205,922
2,329
13,721,855
27, 182
1,416,012
22,289
696
6,976, 072
1, 263, 421
1,849,834
473,280
61,908
20,771
484,814
1,612,773
62,710
8,115
1,315
150
26,985, 427
526, 324
40
136, 891
739
63,562
43
185,604
187
60,954
149,971
6,601
9,415
16,600
7,082
45,390
29
117
Of the amount produced, 9,942 pounds were reworked.
Of the amount produced, 10,491 pounds were reworked.
Of the amount produced, 228 pounds were reworked.
Of the amount produced, 935 pounds were reworked.
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Msc.
574
MISC LL N OUS.
I-30-5571
Rate of Interest on udgments and overpayments.
Secton 319 of the Legsatve ppropraton ct for the fsca
year endng une 30, 1933, reads as foows:
Seo. 319. ereafter the rate of nterest to be aowed or pad sha be 4 per
centum per annum whenever nterest s aowed by aw upon any |udgment
of whatsoever character aganst the Unted States and/or upon any overpay-
ment n respect of any nterna revenue ta . aws or parts of aws n so far
as Inconsstent herewth are hereby repeaed.
I-33-5614
. . 12280. PU LIC, NO. 304, S NTY-S COND CONGR SS.
n ct to create edera home oan banks, to provde for the
supervson thereof, and for other purposes.
e t enacted by the Senate and ome of Representatves of the
Unted States of merca n Congress assembed, That ths ct may
be cted as the edera ome Loan ank ct

Seo. 13. ny and a notes, debentures, bonds, or other such obga-
tons ssued by any bank sha be e empt both as to prncpa and
nterest from a ta aton (e cept surta es, estate, nhertance, and
gft ta es) now or hereafter mposed by the Unted States, by any
Terrtory, dependency, or possesson thereof ,or by any State, county,
franchse, ts capta, reserves, and surpus, ts advances, and ts
ncome sha be e empt from a ta aton now or hereafter mposed
by the Unted States, by any Terrtory, dependency, or possesson
thereof, or by any State, county, muncpaty, or oca ta ng
authorty e cept that any rea property of the bank sha be sub|ect
to State, Terrtora, county, muncpa, or oca ta aton to the same
e tent accordng to ts vaue as other rea property s ta ed.
pproved uy 22, 1932.
MPTION ROM T TION.
muncpaty, or oca ta ng
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575
Msc|
1 I-52-5961
Dsbarments and suspensons from practce before Treasury Department of
attorneys and agents
DIS RM NTS.
The Secretary of the Treasury, after due notce and opportunty
for hearng, has ordered the dsbarment from further practce be-
fore the Treasury Department of the foowng-named attorneys and
agents:
Name.
ddress.
Date of
dsbarment.
Cause.
ea, enry W
ehrendt, enry ..
Cadwe, Robert
Lee.
Cark, ar S
Curson, Samue T_.
Dow, Wam
s, . L
verett, 8.
aconer, Robert M
oston, Mass.
Detrot, Mch.
Sept. 29,1932 I Charged wth havng been dsbarred by the
Superor Court of Suffok County, Mass.,
for msappropraton of cont s funds.
Charges found proven.
Dec. 8,1932 Charged wth havng been dsbarred from
practce as an attorney n courts of Mchgan.
Charges found proven.
pr. 7,1932 Charged wth obtanng 225 from a cent by
frauduent pretenses. Charges found proven.
Oct. 30,1931 Charged wth havng prepared a fase cam
for refund wth havng forged the sgnatures
of the ta payer and notary to such cam n a
ta case barred by the statute of mtatons,
and wth havng surrepttousy nserted
such fase cam for refund and other docu-
ments nto the fes of the ureau of Interna
Revenue. Charges found proven.
Oct. 28,1931 Charged wth adng and counseng a ta payer
to make a fase ncome ta return. Charges
found proven.
May 7,1932 I Charged wth havng been dsbarred as an
attorney by the Supreme Court of the
Dstrct of Coumba. Charges found proven.
uy 11,1932 Charged wth preparng fase artces of copart-
nershp showng fve partners when there
were but two and preparng fase returns for
such ta payers. Charges found proven.
Oct. 27,1932 Charged wth defraudng numerous persons
by ssung worthess checks and drafts.
Charges found proven.
Oct. 30,1031 Charged wth enterng nto an agreement to
dvde the fee n a ta case wth a deputy
coector. Charges found proven.
eb. 27,1932 Charged wth havng been convcted of grand
theft. Charges found proven.
une 22,1932 Charged wth havng been convcted In the
Unted States dstrct court for unawfuy
obtanng money from a ta payer n a ta
matter. Charges found proven.
Ths rung (5961) ncudes aso rungs Nos. 5539, 5549, 5557, 5572, 5585. 5602, 5615, 5629, 5649, 5672, 5694,
715, 5737, 6763, 6784, 5801, 5815, 5833, 5848, 5S53, 5880, 5894, 6910, 5928, and 5944. These rungs have been
thus consodated because pubcaton of each one separatey woud be argey dupcaton.
1 Ths st ncudes a attorneys and agents whose dsbarment from practce before the Treasury Depart-
ment was pubshed durng the 12-month perod ended December 31, 1932, and a suspensons n effect
durng the 6-month perod uy 1-December 31, 1932, ncusve. It does not Incude those barred from
practce by reason of dsapprova of ther appcaton for enroment.
ewkes, ohn .
o , Maurce
ormery ort
Worth, Te .,
now Daas, Te .
Provdence, R. I..
ormery oy-
woo d, C a 1 f.,
ater Los nge-
es, Caf. ,
Washngton, D. C.
Counc uffs,
Iowa.
ormery ados-
ta, Ga., ater Or-
ando, a.
New York, N.Y..
Los ngees, Caf.
ormery New
York, N. Y.,
now rookyn,
N. Y.
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Msc.
576
Name.
ddress.
Date of
dsbarment.
Groves, Wam .
ohnson, Sven -
mer.
May, arry P
Moore, . dward..
Mueer, . C
Muford, mer W.
Norwood, Seth W__
Prussan, aron
uereau, dward
Ransom, Don .
Reed, ohn P
Sander, vn M...
Saydman, Davs..
tes, . 8
Stone, Raph W..
Turner, e ander.
an Rper, arod.
Wensten, arry II
Wess, enry M
Wenger, George
zabeth, N. ...
ormery Chcago,
111., ater New
Oreans, L.
ormery ash-
ngton, D. C.,
now Los n-
gees, Caf.
New edford,
Mass.
ormery Chcago,
h.
ormery Detrot,
Mch.
Portand, Me
ormery New
York, N. Y.,
ater Detrot,
Mch.
ormery Cncn-
nat, Oho, ater
St. Lous, Mo.
ormery Wch-
ta, ans., ater
ort Worth,
Te.
Chcago, 111
ormery Tampa,
a.
New York, N. T_
ormery Chares-
ton, W. a.
ormery Chca-
So, T., now
.f ddetown,
I.
Daas, Te
ormery New
York, N. Y.
ormery New
York, N. Y.,
now rookyn,
N. Y.
New York, N. Y.
Paterson, N. ...
Dec. 21,1931
eb. 27,1932
uy 6.1931
Sept. 29,1932
pr. 29,1932
May 7,1932
uy 8,1931
uy 8,1931
une 21,1932
Sept. 28,1932
Sept. 30,1931
Dec. S,1932
une 23,1932
pr. 29,1932
Nov. 2,1932
uy 13,1931
Nov. 30, 1932
une 29,1932
pr. 29,1932
pr. 29,1932
Charged wth havng been convcted on aa
Indctment for embezzement of funds be-
ongng to a cent. Charges found proven.
Charged wth knowngy preparng a fasa
edera ncome ta return for a ta payer.
Charges found proven.
Charged wth soctng empoyment n edera
ta matters, and wth enterng nto an agree-
ment to spt fees n edera ta matters.
Charres found proven.
Charged wth havng unawfuy attempted to
e tort a arge fee from a cent by threats of
dscosure. Charges found proven.
Charged wth soctaton of empoyment n
edera ta matters from ta payers wth
whom respondent had no prevous assoca-
ton. Charges found proven.
Charged wth havng been dsbarred as an
attorney by the crcut court of Wayne
County, Mch. Charges found proven.
Charged wth knowngy havng made a fase
ncome ta return for a cent. Charges found
proven.
Charged wth forgng the sgnature of a cent
to a check drawn on the Treasurer of the
Unted States utterng such check and
msappropratng the money receved oo
such chec . Charges found proven.
Charged wth makng a edera Income return
for a ta payer and recevng a check for the
amount of ta due from the ta payer that ha
faed to fe such return and approprated the
amount of such check to hs own use and ben-
eft aso charged wth ssung bad checks aso
charged wth embezzng funds of a corpora-
ton of whch he was secretary. C barges
found proven.
Charged wth knowngy preparng a fase
offer of compromse n a ta matter. Charges
found proven.
Charged wth havng been dsbarred as an
attorney by the Supreme Court of the State
of Inos. Charges found proven.
Charped wth havng been convcted of a
crmna offense n Unted States dstrct
court and dsbarred as an attorney by sock
court. Charges found proven.
Charged wth offerng money to a revenue
agent to make a favorabe report on the e am-
naton of the books and records of a ta payer.
Charges found proven.
Charged wth msappropratng funds of a
cent and wth conspracy to e tort money
from a cent. Charges found proven.
Charged wth gvng money to prohbton
offcers to procure the approva of appca-
tons for permts for wthdrawa of wne.
Charges found proven.
Charged (1) wth ssung checks on banks when
respondent had no money on depost n such
banks (2) wth havng been convcted for
ssung checks when respondent had no
money on depost to pay such checks and
(3) wth recevng 250 fee and fang to pat-
form servces for such fee. Charges found
proven.
Charger wth convcton n a crmna case n
the Unted States dstrct court. Charges
found proven.
Charged wth tng fase ncome ta returns fat
hmsef. Charges found proven.
Charged wth knowngy preparng frauduent
amended ncome ta return for a cent.
Charges found proven.
Charged wth havng been convcted n Unted
States dstrct court for conspracy to concea
assets n a bankruptcy case. Charges found
proven.
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577
Ms
SUSP NSIONS.
The Secretary of the Treasury, after due notce and opportunty
for hearng, has ordered the suspenson from practce before the
Treasury Department for the perod stated n each case of the foow-
ng-named attorneys and agents:
Name.
ddress.
Perod of
suspenson.
Cause.
Coeman, Caude D
ormutb, rank
Newmark, Morrs...
Wthem, R. L___
ormery Sara-
sota, a., ater
Decatur, a.
Mwaukee, Ws..
New York, N. Y.
ormery Daas,
Te., now Los
ngees, Caf.
3 months, from
uy 11, 1932.
3 months, from
une 14,1932.
6 months, from
une 2S, 1932.
30 days, from
une 22,1932.
Charged wth makng fase Income ta
returns for ta payers. Charges found
proven.
Charged wth mang a crcuar etter to
edera ta payers contanng a statement
that the respondent was formery empoyed
In the Interna Revenue ureau and soct-
ng empoyment n edera ta matters,
Charges found proven.
Charged wth fauro to make ncome ta re-
turns and wth fng fase denquent
returns for hmsef. Charges found proven.
Charged wth proposng a questonabe pan
to a ta payer for the reducton of edera
ncome tares and procurng a cash retaner
and a contngent fee contract of empoy,
ment on such pan. Charges found proven,
Resgnatons from enroment to practce before the Treasury Department.
The foowng-named persons tendered ther resgnaton from enro-
ment to practce before the Treasury Department. y drecton of,
the Secretary of the Treasury ther resgnatons were accepted and
ther names ordered strcken from the ro of attorneys and agents
enroed to practce before the Treasury Department. They are there-
fore no onger entted to practce before the Treasury Department.
Name.
cnberger, I. W_.
McCure, Samue..
ddress.
Washngton, D. C.
Phadepha, Pa...
Desgnaton.
gent-.
gent-.
Date of
acceptance.
Oct. 10,1932
Oct. 24,1932
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IND .
Rung
No. 1
batement:
onds. (See onds.)
Cams for. (See Cams.)
ccord and satsfacton, coecton of check by coector
dmssons. (See Msceaneous e cse ta es.)
ffated corporatons, returns. (See Returns: Consodated.)
en Property Custodan, sae of sezed capta assets, ncome
ens:
nemy, sezed property sod by en Property Custodan,
ta abe ncome
Nonresdent. (See Nonresdent aen.)
mendments:
Reguatons 8 (1928)
rtce 76
rtce 116
Reguatons 42
rtce 3
rtce 20
rtces 34 to 38
rtce 40.
rtce 41
rtce 44
Chapter I (artces 34 to 38) ---
Reguatons 44
rtce 11
rtce 15
rtce 19
rtce 23
rtce 52
rtce 55
rtce 56
Reguatons 45, artce 382
Reguatons 45 (1920 edton), artce 382.
Reguatons 46
rtce 28
rtce 71 -
rtce 74
rtce 75
Reguatons 62
rtce 382.
rtce 1601 -
Reguatons 65
rtce 382
rtce 1621
Reguatons 69
rtce 382
rtce 1391
rtce 1392
rtce 1621
5703
5678
5678
5716
5619
5733
5603
5601
1/5545
5586
/5546
5587
5558
5601
5567
5582
5583
5589
6860
5738
5739
6630
5630
5664
6861
5740
5741
6630
5631
5630
5631
5630
5617
5618
5631
(579)
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580
mendments Contnued.
Reguatons 70 (1929 edton)
rtce 16
rtce 20
Reguatons 74
rtce 651
rtce 692
mortzaton, ppe-ne corporatons
rkansas, promssory notes n payment of stock, nvested capta..
rtces manufactured or produced by Indans. (See Manufac-
facturers e cse ta es.)
ssessment, ta es. (See Ta es.)
ssessments, oca benefts, estate s deducton
ssgnments, future ncome
ssocaton, trust dstngushed
ttorneys and agents, dsbarments and suspensons
utomobes, parts and accessores. (See Manufacturers e cse
ta es.)
wards, emnent doman proceedngs, nterest e empton

ad debts:
ank, worthess cams as securty
Reserve method, change from
Reserves
ank accounts, sezure by German Government, award ater year,
when oss deductbe
ank checks. (See Manufacturers e cse: Checks.)
ankruptcy, cam for edera ta es, mtaton
anks:
edera home oan, e empton
Insovent, abty as wthhodng agent
Wthhodng agent, ta abty
oats. (See Msceaneous e cse ta es: Stamp ta .)
onds:
batement cam
stoppe, sut for recovery of ta
Sut on, mtaton
Defense, sut for recovery of ta
edera and bank and |ont-stock and bank, oss from sae-
Interest. (Sec Interest.)
Losses from sae or e change, mtaton
Retrement, what consttutes
Ta -free covenant, nsovent bank s abty as wthhodng
agent
onuses, o ease, sae of, capta gan
rewer s wort, qud mat, mat srup, and mat e tracts. (See
Manufacturers e cse ta es.)
usness e penses:
ddtona compensaton, servces rendered n pror years
ssessments aganst oca benefts
Commsson for negotatng ong-term ease
Lega costs n securng refund of ta es, dutes, etc
Lega servces n prosecuton of sander sut
Obgatons of predecessor corporaton dscharged
Refund of nterest on notes pad n for stock
Traveng e penses, teachers
tug
No.
5573
5574
5631
5630
5700
5642
15949
5950
5821
5745
5961
5768
5915
5543
5899
5534
(5561
5564
5614
5720
5897
5822
/5703
5900
5555
57S6
5786
5577
5720
5917
5611
/5949
5950
5852
5560
5626
5543
5660
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581
Rung
No.
0
Cameras. (See Manufacturers e cse ta es.)
Candy. (See Manufacturers e cse ta es.)
Capta e pendtures:
Commsson for negotatng ong-term ease
mnaton of competton, cost of
Obgatons of predecessor corporaton dscharged
Capta gans and osses:
nnuty and fe nsurance contract, gan from surrender of.
Loss e cuson n determnng net ncome for chartabe con-
trbuton deducton
Royates and bonus, o ease
Carryng charges:
ffect on gan or oss saes bass
Interest on unmproved reaproperty
Chartabe contrbutons. (See Contrbutons.)
Checks. (See Msceaneous e cse ta es.)
Chewng gum. (See Manufacturers e cse ta es.)
Cams:
batement
onds. (See onds.)
Coecton stayed
ppcaton of secton 611 to cam for credt
Refund mtaton
Tme of e praton of unmted waver
Sut, escrow agreement, oard s fndng, mtaton
ganst transferred assets. (See Transferred assets.)
Credt or refund. (See Credt or refund.)
Ltgated, settement n ater year, who/| reported
Cosng agreements
Commssons, ong-term ease negotaton, e pense deducton
Communty property and ncome, Te as, effect of dvorce and
communty property settement
Compensaton:
ddtona, servces rendered n pror years
State offcers and empoyees. (See State.)
Surpus dstrbuton to offcers upon corporaton s reorganza-
ton
War veteran or hs famy, e empton
Compromse:
Penaty and nterest on barred defcency, vadty
Sut for damages, gan or oss
Ta es, coecton of check by coector, accord and sats-
facton
Consodated returns. (See Returns.)
Contngent cam to ncome, settement n ater year, when
reported
Contracts:
ecuted pror to May 1, 1932. (See Manufacturers e cse
ta es.)
Long-term:
Income computaton
Purchase and sae of o
Purchase of ore between mnng and smetng company,
deprecaton
Rght to buy and se a product, ntangbe property, n-
vested capta
5852
5598
5543
5913
|/5948
5951
5917
5790
5932
5607
5718
5789
5681
5638
1/5594
5770
5852
1/5721
5788
5611
6767
5850
5771
5597
5703
5638
5625
5869
5657
5916
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582
No.
Contrbutons:
Chartabe-
Ctzens
agency for promoton of better government. -
Deducton mtaton, bass where capta net gan or oss-
Stockhoder of bank, coverng msappropratons, oss
deducton
Unempoyment emergency funds
Corporatons:
ffaton, determnaton of
onds, sae and retrement
Consodaton, e cess stock ssue under merger, ta abty 1
Contrbutons to unempoyment emergency funds
Returns. (See Returns.)
Court decsons:
en rst Trust Co. of Omaha e a. v
nderson Rossmore v
nderson Unted States Trust Co. of New York v
ngeus udng Investment Co. v. Commssoner
nneke v. Wcuts
ho Manufacturng Co. v. Commssoner
tantc ank Trust Co. v. Commssoner
tas Paster ue Co. v. Commssoner
agby v. Unted States
ankers Pocahontas Coa Co. v. Commssoner
ecker Town Cub of St. Lous v
e Syndcate, Inc., v. owers
ems ro. ag Co. v. Unted States
ent v. Commssoner
ertesen v. Whte
owers e Syndcate, Inc., v
owers Daon e a. v
owers Ingram v
owers Weagan v
rampton Wooen Co. v. ed
urnet Crstopher v
urnet nance Investment Corporaton v
urnet v. arme
urnet Labro e a. v
urnet v. Petroeum poraton
urnet Radant Gass Co. v
urnet Wams e a. v
Cameron v. Commssoner
Century ectrc Co. v. Unted Staes
Chander v. ed
Chemsche abrk von eyden ktengescschaft v. Tat
Chrstopher v. urnet
Cty Natona ank v. Commssoner
Cemmons e a. v. Commssoner
Cft Goodrch, Inc., v. Unted States
Cohn Unted States v
Cogate-Pamove-Peet Co. v. Unted States
Commssoner ngeus udng Investment Co. v
Commssoner ho Manufacturng Co. v
Commssoner tantc ank Trust Co. v
Commssoner tas Paster fc ue Co. v
Commssoner ankers Pocahontas Coa Co. v
Commssoner ent v
Commssoner Cameron v
Commssoner Cty :atona ank v
Commssoner Cemmons et a.
Commssoner Craver
5835
5896
5948
5951
5915
5819
5537
5577
5941
5819
5864
5821
5768
5749
5671
5543
5899
5628
5868
5597
5692
5770
5935
5625
5613
5770
5608
5536
5580
5581
5595
5639
5917
5622
5934
5599
5748
5637
5789
5553
5678
5595
5641
5596
5612
5884
5662
5749
5543
5899
5628
5597
5625
5637
5641
5596
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583
Court decsons Contnued.
Commssoner Cre v
Commssoner Denegre v
Commssoner Garrson Co. v
Commssoner Gordon et a. v
Commssoner nes et a. v
Commssoner Industra Lumber Co., Inc., v
Commssoner entucky Indana Termna Raroad Co. v.
Commssoner Lacy v
Commssoner Lemon v
Commssoner Loyd v
Commssoner Matheson et a. v
Commssoner Merrman v
Commssoner Newspaper Prntng Co. v
Commssoner v. New York Trust Co
Commssoner Park v
Commssoner v. Sansome
Commssoner v. Southeastern press Co
Commssoner Strong Pubshng Co. v
Commssoner Stroher v
Commssoner v. Swenson
Commssoner Toote v
Commssoner Toote, |r., v
Commssoner Toote, III,
Commssoner v. Waden nfe Co
Commssoner Ws et a. v
Consodated Paper Co. v. Unted States
Contnenta Inos ank Trust Co. v. Unted States
Corurn Garden Cty Gof Cub v
Corwn Lane v
Craver v. Commssoner
Cre v. Commssoner
Crosswe, Inc. ones v
Daton et a. v. owers
Daube v. Unted States
Davdov v. Unted States
Dean Php Carey Mfg. Co. v
Dean v. Unted States
Denegre v. Commssoner
Denman oover- ond Co. v
Desco Corporaton v. Unted States
dwards Swedsh Iron Stee Corporaton v
ott Unted States v
change Natona ank of Shreveport, La. v. Unted States...
ed ramton Wooen Co. v
ed Chander v
nance Investment Corporaton v. urnet
rst Trust Co. of Omaha et a. v. en
oran v. McLaughn
reeport Lght, Water Ice Co. v. Unted States
reeport Suphur Co. v. Unted States
reeport Suphur Transportaton Co. v. Unted States
reeport Termna Co. v. Unted Sates
reeport Te as Co. v. Unted States
reeport Town Ste Co. v. Unted Sates
uton ag Cotton Ms v. Unted States
Garden Cty Gof Cub v. Corwn
Garrson Co. v. Commssoner
Goodce Tte Insurance Trust Co. --
Gordon et a. v. Commssoner
Gradwoh WUcuts v
Guf States Stee Co. v. Unted States - -
arme urnet v
arvey Co. v. Maey et a
nes et a. v. Commssoner. ..
160903 33 38
5624
216
5637
196
5642
386
5596
178
5747
207
5677
199
5609
234
5746
170
5746
170
5626
268
5538
392
5610
249
5598
296
5627
320
5915
250
5898
175
5638
236
5544
389
5597
275
5659
184
5746
170
5746
170
5746
170
5537
302
5745
163
5725
359
5863
429
5547
543
5836
108
5746
170
5624
216
5916
382
5608
204
5838
373
5724
339
5682
325
5863
429
5637
196
5791
214
5611
283
5953
415
5564
357
5640
354
5581
362
5553
190
5639
290
5864
431
5713
556
5726
366
5726
366
5726
366
5726
366
5726
366
5726
366
5661
418
5547
543
5642
386
5893
438
5596
178
5579
155
5900
314
5917
210
5820
147
5747
207
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584
Rung
No.
Court decsons Contnued.
oover- ond Co. v. Denman
ord v. Unted Staes
ughson v. Unted States
urtg Unted Sates v
yde v. Unted States
Industra Lumber Co., Inc. v. Commssoner..
Ingram v. owers
Investors Syndcate Wcuts v
ohnston v. McLaughn
ones v. Crosswe, Inc
enge v. Unted Staes
entucky Indana Termna Raroad Co. v.
Labrot et a. v. urnet
Lacy v. Commssoner
Lakesde Petroeum Co. v. Unted States
Lane v. Corwn
Lemon v. Commssoner
Lndey, |r., et a. v. Unted States
Loyd v. Commssoner
Louden Machnery Co. v Unted States
Lucas v. Provdence Coa Mnng Co
Lumber Co., . M. 0., v. Unted States
Commssoner..
Macay et a. Peope of the State of New York v
Maey et a. arvey Co.
v
Marsha-Wes Co. v. Unted States
Martn ote Co. et a. v. Unted States
Martn ote Co. et a. Unted States v
Massachusetts ondng Insurance Co. Unted States v
Massachusetts Mutua Lfe Insurance Co. v. Unted States.
Matheson et a. v. Commssoner
McDonne Truda v. Unted Staes
McDonne v. Unted States
McLaughn oran v
McLaughn ohnston v
McLaughn Pacfc Coast Stee Co. v
Mc Wams ros., Inc. North Rver Coa Wharf Co. v.
Merrman v. Commssoner
Morgenstern Co. v. Unted States
Natona Shrt Shops, Inc. v. Unted Sates
Natona Surety Co. v. Unted Staes
Newspaper Prntng Co. v. Commssoner
New York Trust Co. Commssoner v
Northern Trust Co. et a. v. Unted States
North Rver Coa Wharf Co. v. McWams ros., Inc..
Pacfc Coast Stee Co. v. McLaughn
Park v. Commssoner
Pars Wooson Machne Co. v. Unted States
Peope of the State of New York v. Macay et a
Petroeum poraton urnet v
Php Carey Mfg. Co. v. Dean
Provdence Coa Mnng Co. Lucas v
Radant Gass Co. v. urnet
Raston Purna Co. v. Unted States
Reeves ros. Co. Rouzahn v
Remngton Rand, Inc. v. Unted States
Robertson v. Routzahn
Rossmore v. nderson
Routzahn v. Reeves ros. Co
Routzahn Robertson v
Sansome Commssoner v
Soomon v. Unted States
Southeastern press Co. Commssoner v._
5791
5771
5703
5822
5594
5677
5536
5570
5535
5916
5584
5609
5622
5746
5S69
5836
5746
6762
5626
5660
5805
5790
5765
5820
5718
5681
5681
5822
5701
5538
5702
5722
5713
5535
5952
5765
5610
5561
5555
5900
5598
5627
5863
5765
5952
6915
5699
5765
5934
5682
5805
5599
5772
5806
5552
6804
5821
6806
5804
5898
5565
I 6638 I
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585
Rung
No.

5852
243
5544
389
5597
275
5953
415
5659
184
5678
218
5870
379
5700
287
5700
287
5700
287
5700
287
5893
438
5746
170
5746
170
5746
170
5692
552
5692
552
5868
225
5935
409
5789
153
5612
400
5884
395
5662
421
5725
359
5863
429
5838
373
5724
339
5863
429
5611
283
5564
357
5640
354
5726
368
5726
366
5726
366
5726
366
5726
366
5726
366
5661
418
5900
314
5790
181
5771
144
5703
337
5822
342
5594
141
5584
439
5869
232
5762
442
5660
285
5718
70
5681
310
5681
310
5822
342
5701
303
5722
328
5702
335
5561
134
5555
332
5900
314
5863
429
5699
146
5772
340
5552
142
Court decsons Contnued.
Sacey v. Unted States
Strong Pubshng Co. v. Commssoner
Strother v. Commssoner
Swedsh Iron Stee Corporaton v. dwards
Swenson Commssoner v
Ta Chemsche abrk von eyden ktengeseschaft v
Ta: Warren Mfg. Co. v -
Te as Company v. Unted States
Te as Company et a. v. Unted States
Te as Ppe Lne Co. v. Unted Sates
Te as Ppe Lne Co. of Okahoma v. Unted States
Tte Insurance Trust Co. v. Goodce
Toote v. Commssoner
Toote, |r., v. Commssoner
Toote, III, v. Commssoner
Town Cub of St. Lous v. ecker
Town Cub of St. Lous v. Unted States
Unted States agby v
Unted Sates ems ro. ag Co. v
Unted Sates Century ectrc Co. v
Unted States Cft Goodrch, Inc., v --
Unted Sates v. Cohn
Unted Staes Cogae-Pamove-Peet Co. v
Unted Staes Consodated Paper Co. v
Unted States Contnenta Inos ank Trust Co. v
Unted States Daube v
Unted States Davdovz v
Unted Staes Dean v
Unted Staes Desco Corporaton v
Unted State v. ott
Unted Staes change Natona ank of Shrcvepor, La., v
Unted States reeport Lght, Water Ice Co. v
Unted States reeport Suphur Co. v
Unted States reeport Suphur Transportaton Co. v.
Unted States reeport Termna Co. v
Unted Staes reeport Te as Co. v
Unted Sates reeport Town Ste Co. v
Unted Staes uon ag Cotton Ms v
Unted States Guf Staes Stee Co. v
Unted States . M. 0. Lumber Co. v
Unted States ord v
Unted Staes ughson v
Unted Sates v. urtg
Unted States yde v
Unted States enge v
Unted Sates Lakesde Petroeum Co. v
Unted States Lndey, |r., e a. v
Unted Staes Louden Machnery Co. v
Unted States Marsha-Wes Co. v
Unted Sates Martn ote Co. e a. v
Unted Sates v. Martn ote Co. et a -
Unted States v. Massachusetts ondng Insurance Co
Unted Staes Massachusetts Mutua Lfe Insurance Co. v..
Unted States McDonne v
Unted States McDonne Truda v
Unted States Morgensern Co. v
Unted States Natona Shrt Shops, Inc., v
Unted States Natona Surety Co. v
Unted Staes Northern Trust Co. et a. v.
Unted Staes Parks Wooson Machne Co. v
Unted States Raston Purna Co. v
Unted States Remngton Rand, Inc., v ---
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586
Rung
No.
Court decsons Contnued.
Unted Staes Soomon v
Unted Sates
Unted States
Unted Staes
Unted States
Staeey v
Te as Company v
Te as Company et a.
Te as Ppe Lne Co. v
Unted States Te as Ppe Lne Co. of Okahoma v
Unted States Town Cub of St. Lous v -.
Unted Sates Tnts Co. of New York v. nderson
Unted States Western Shade Coth Co. v
Unted Sates Wheeer Lumber rdge Suppy Co. of Des
Mones, Iowa, v
Unted Staes Wmngton Trust Co. v
Unted Staes Wof Manufacturng Industres v
Waden nfe Co. Commssoner v
Warren Mfg. Co. v. Ta -
Weagant v. owers
Western Shade Coth Co. v. Unted Staes
Wheeer Lumber rdge Suppy Co. of Des Mones, Iowa, v.
Unted Staes
Whte ertesen v
Wcuts nneke v
Wcuts v. Gradwoh
Wcuts v. Investors Syndcate
Wams et a. . urne
Ws et a. v. Commssoner
Wmngton Trust Co. v. Unted States
Wof an 11 fact urng Industres v. Unted States
Courts, |ursdcton of. (See ursdcton.)
Credt or refund sec aso Manufacturers e cse ta es):
Cams
mendment after dsaowance .
Coecton of assessment stayed by credt cam
Corporaton, nspecton by stockhoder
ng, burden of proof
Prerequste, sut for recovery of ta es
Suffcency
Suppementa
Transfer upon consodaton of companes
Coecton stayed by abatement cam. (See Cams: bate-
ment.)
Customs dutes, ta abe status
rroneous estate ta refund, e ecutors abty
Instament saes, ta orgnay computed on accrua bass
Interest. (See Interest.)
Invested capta reducton
Manufacturer, ta es aready pad-
Overpayment credted aganst barred defcency
Suts. (See Suts: Recovery of ta .)
Credts:
ganst net ncome, persona e empton, change of status
durng year
Ta es, foregn, New Zeaand, fm-hre ta
Customs dutes, refunds, ta abe status
D
Damages, resdence, fauty constructon, osses
Deeds transferrng tte to budng and oan assocatons, ta a-
bty
5565
5852
5700
5700
5700
5700
5692
5768
5723
5782
583 )
5556
5537
5870
5580
5723
5782
5613
5671
5579
5570
574S
5745
5839
5556
5565
5607
5744
5953
/5565
5662
5935
5953
5725
5560
5762
5579
5726
/5S60
5S61
5699
5551
5837
5560
5538
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#
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587
Depeton:
O and gas wes
Charges to capta and e pense
Drng costs
Deprecaton:
ddtona deducton after aowances coverng entre costs.
ssessments aganst oca benefts, estate
Contract for ore purchase between mnng and smetng com-
pany
Gan or oss bass
d|ustments
Reducton for e empt status perod
O and gas wes, drng costs
Revauaton of partnershp assets upon nducton of new
member
Transferred assets, bass
Dsbarments and suspensons
Dvdends:
mpoyees stock purchase trust
Parta qudaton
Payments to hoders of preferred stock, nterest deducton..
Presumpton as to earnngs from whch pad
Reorganzaton, predecessor s earnngs
Wthdrawas by stockhoders
Donatons by corporatons, deducton
Dues and ntaton fees:
Green fees
Soca cub, ta abty...
ountary assessment n pace of ncrease n dues

ectrca energy. (See Msceaneous e cse ta es.)

mergency offcers retrement pay, ta abty
mpoyees stock bonus trust, ncome from
mpoyees stock purchase trust, shrnkage n vaue, osses
states and trusts:
ssessments for oca benefts, deducton
Income hed for ta -e empt remandermen, deducton
Nonresdent aen benefcares, bond nterest, e empton
state ta :
ddtona, 1932 ct, deducton
Credt aganst
rroneous refund, e ecutors abty
Gross estate
Caforna communty property, dsposton under wfe s
consent to w
Rea estate n
Inos
Iowa
Nebraska
Transfers
y decedent n hs fetme
In contempaton of death
stoppe, bond supportng abatement cam, sut
amnaton of returns, change n procedure, 1932 ct
changes, gan or oss. (See Gan or oss.)
5554
5934
5637
/5949
5950
5657
5563
5676
5934
6637
5914
5961
5867
5746
/5639
5749
15562
5595
5898
5595
5819
5713
5692
5547
5912
5593
5867
/5949
5950
5636
5883
5930
5761
5762
5893
5863
5864
5864
5573
.5574
5584
5671
5822
5605
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588
Rung
No.
empt corporatons:
Ctzens agency for promoton of better government
edera home oan banks
Soca and pubc wefare organzaton
Unversty students store
empt ncome:
mergency offcers retrement pay -
mpoyer s payments under agreement wthout consderaton
edera home oan bank obgatons
Indans. (See Indans.)
Insurance proceeds
Interest
ward n emnent doman proceedngs
Lberty and foregn bonds accumuated for nonresdent
aen benefcares
State obgatons. (See Interest.)
Treasury bs owned by nonresdent aen
Pensons and compensaton receved by war veteran or hs
famy

edera home-oan banks, e empton

edera and bank bonds, oss from sae of
ees, attorneys , busness e pense deducton
rearms, shes, and cartrdges. (See Manufacturers e cse
ta es.)
oregn country, meanng of, reguatons amended
ranchse ta es, New York, accrua date
urs. (See Manufacturers e cse ta es.)
G
Gan or oss:
ass for determnng, deprecaton ad|ustments
Compromse of sut for damage
change of property
or stock, sae dstngushed
auaton, Commssoner s fndng, appea to oard
Paes. (See Saes.)
Transferred assets, bass
Gambng osses
Gasone. (See Manufacturers e cse ta es.)
Gfts:
mpoyer s payments under agreement wthout consderaton,
e empton
Surpus dstrbutons to offcers upon corporaton s reorgan-
zaton
Gft ta es, 1932 ct, deducton -.
Gratuty, refund of nterest pad, deducton
II
osptas, State or county, empoyees compensaton, ta abty..
I
Inos, rea estate nterest ncuded n gross estate
Improvements, essee s, essor s ncome
Income from sources wthn Unted States, royates, contract
made n Unted States
Indana, bonds of schoo corporaton, nterest on,
5835
5614
5578
5592
5912
55S0
5614
5803
5768
5883
5S17
5850
5614
5786
5748
5630
5770
5563
5597
5622
5659
5914
5675
55S0
5767
5930
5660
/5697
5698
5863
5743
5536
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#
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589
Indans, ve Cvzed Trbes, ncome from aotted ands
Informaton returns. (See Returns.)
Inspecton of returns. (See Returns.)
Instament saes. (See Saes.)
Insurance:
Proceeds
empton
Settement under endowment pocy, ta treatment
Rebates on premums, mutua nsurance companes, ncome-
Insurance companes:
Informaton returns, agents commssons
Lfe, nterest accrued and credted, deducton
Other than fe or mutua, stock osses, mtaton
Reserves
Intangbe property, contract to buy and se a product, nvested
capta
Interest:
ward n emnent doman proceedngs, e empton
onds
Lberty and foregn, accumuated for nonresdent aen
benefcares, e empton
State
Credted, fe nsurance company, cash recepts bass, deduc-
ton
Credt or refund, date of aowance
Dvdend payments to hoders of preferred stock, deducton-
udgments -
Notes pad n for stock, refund, busness e pense deducton. _
Refund
Cam wthout menton of ta abe perod, suffcency
Iega aowance of credt or refund
Speca assessment appcaton, nsuffcent protest
State obgatons, bonds, schoo corporatons, Indana
Ta es, bond supportng re|ected abatement cam
Treasury bs owned by nonresdent aen, e empton
Unmproved rea property, carryng charges
Inventores:
Lumber manufacturers, vauaton
Intermnged goods, vauaton, burden of proof
Invested capta:
Contract, beverage wth estabshed reputaton, buyng and
seng prveges
Decrease, nadequate deductons, refund mtaton
Intangbes, newspaper crcuaton structure
Pad-n surpus, ntangbe asset
Promssory notes n payment of stock, rkansas
Iowa, rea estate ncuded n gross estate

ewery. (See Manufacturers e cse ta es.)

ont stock and bank bonds, oss from sae of
udgments:
Interest
Settement n ater year, when deductbe
ursdcton:
oard s, defcency notce erroneousy addressed, effect of ap-
pea
Courts
ppea pendng before oard
ppea to oard dsmssed
Rung
No.
5868
5803
5576
5606
.5766
5851
5701
5931
5933
5916
5768
5833
5947
5701
5725
5639
5749
5571
5660
5839
5839
5661
5947
5703
5817
5932
5677
5718
5916
5726
5544
5544
5642
5864
5786
5571
5805
5627
5581
5870
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g
o
o
g

e
590
unas
No.
Leases:
Coa ands, royates as part purchase prce,
Improvement by essee, essor s ncome
Long-term, commsson for negotatng, e pense deducton
O and gas, assgnee s drng coste
Lmtaton perod:
ssessment of ta es
ppea pendng wthout hearng, effect of 1926 ct
Return for fsca year 1918
Speca assessment, Commssoner s authorty
When made, effect of return
ssessment and coecton of ta es
ppea to oard, runnng of statute suspended, amended
petton, effect
Commencement date, returns for fsca year fed on
caendar-year bass
Coecton of ta es
ssessment perod e pred pror to enactment of 1924
ct
stoppe
Partnershp, e cess profts ta return requrements
Wavers. (See Lmtaton perod: Wavers.)
Credt or refund
ccount stated
Coecton stayed by abatement cam
Credt by drecton of ta payer, mtaton
Suts
ond supportng abatement cam
Cam for refund, prerequste, suffcency of cam
Coecton stayed by abatement cam
Recovery of nterest on refund
Recovery of ta , account stated n certfcate of over-
assessment
Wavers
5597
5743
5852
5554
5884
5772
5723
5724
5628
5555
5838
5772
5702
ssessment purposes ony, coecton.
ecuted after bar of statute
ecuton by secretary, vadty
praton date, meanng of unt
Unmted, effect of abatement cam
Losses:
onds, sae or e change, mtaton .
Contracts, ncompeted, purchase and sae of o
Contrbuton by bank stockhoder coverng msappropratons
Damage to resdence due to fauty constructon
mnaton of competton, cost of
mpoyees stock purchase trust, shrnkage n vaue
Gambng, egazed rench casnos
Lega e penses n probate of w
Payments under a guaranty
Sae of budngs, rentas pad for easehod estate
Sezure of bank accounts n Germany, award ater year,
deductbe
Stock, mtaton.
Lousana property ta es, accrua date
Lubrcatng os. (See Manufacturers e cse ta es.)
Lumber manufacturers, nventores, vauaton
5838
5718
5838
1/5681
5703
5820
5789
5662
5699
1/5552
5952
5722
5682
5552
5789
5786
5869
5915
5538
5598
5867
5675
5610
5747
5624
5534
5696
5866
15931
5719
6677
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#
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591
M
Manufacturers e cse ta es:
utomobes, parts or accessores
ushngs, babearngs
Consgnments, goods sod to |obber or deaer
Gasone engne power unts
Gass, wndshed, rear vson, headght ens, etc
Ignton wre, cabe sets, spoo cabe, battery cabe
Incandescent eectrc bubs desgned for automobes
O for crankcase not a component part of automobe
Pants, acquers, gasket cement
Parts or accessores, cassfyng certan artces
Pstons semfnshed, pston pns, pston rngs
Repar work performed n repar shop
Secondhand motor cyces, sae of
Spark pugs, storage batteres, eaf sprngs, etc
Tanks on auto trucks for transportng o and gasone.-
Ta meters and parts thereof
Tmers and cos, repar parts for
Toos, repar kts, etc
rewer s wort, qud mat, mat srup, and mat e tract
Labeng contaners
Grape concentrate (T. D. 4341)
Treasury Decson 4341
Mat srup sod to bakeres by |obbers
Cameras and enses therefor, when sod wth or wthout enses.
Candy
Chocoate coatng and sweet chocoate
Chocoate-dpped fruts, nuts, |ees, etc
ancy contaners, such as bon bon dshes, cedar chests,
etc
Sweet chocoate, n arge cakes, consdered candy
Credts and refunds
Credt camed under e empton certfcate
vdence to support cam for credt or refund
Treasury Decson 4357 (amendng artce 52,
Reguatons 44)
Treasury Decson 4358 (amendng artce 71,
Reguatons 4G)
ectrca energy. (See Msceaneous e cse ta es.)
ports -
Parce post shpment, proof of e portaton
Proof of e portaton
Saes for e port
rearms, shes, and cartrdges
r pstos or rfes
Shes and cartrdges
Component parts of
or testng frearms
urs-
Labor charges for manufacturng or producng the
artce, nterpretaton of the terms
Lambskn and sheepskn
Subsdary, saes to
Trmmngs, component matera of chef vaue
Gasone
enzo, motor and ndustra
roker, cassfcaton not changed by mantanng storage
factes
Casnghead or natura gasone, transportaton of
Dese o, not cassed as gasone
5873
5830
5687
5936
5873
5710
5871
5873
5873
5873
5887
5752
5873
5647
5937
5919
5873
5583
5582
5704
5754
5921
5652
5875
5921
5857
5860
5861
5655
(5738
5739
/5740
5741
5731
5843
5826
5707
5646
5729
5729
5829
5683
5846
5890
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#
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592
Manufacturers e cse ta es Contnued.
Gasone Contnued.
erosene, tractor dstate, technca and crude naphtha
M ture wth o, producer dstngushed
Refund for osses from fre, etc
Saes for further manufacture
Saes under contracts e ecuted pror to May 1, 1932
Imports, artces mported on whch duty has been pad
ewery, etc.
Cgarette cases, vanty cases used as contaners for
cosmetcs
Cocks, master and secondary, for schoos, coeges, and
offce budngs
Crucf es, rosares, medas, and crosses
Dentstry, precous metas used n practce of
Damonds and mountngs, when assembed and sod
mbems, for coeges, schoos, cubs, etc
ountan pens, ornamented wth precous metas
Instruments contanng watch and cock parts (thermo-
stats)
Manufactured or produced by Indans
Regstraton as manufacturer of |ewery, saes for further
manufacture
Reguatons 46, artce 28 amended (T. D. 4351)
Repars, artces of |ewery used n
Tmng devces attached to thermostats
Watches and cocks, parts for same
Watches and cocks, ta abe transacton, accurate records.
Lubrcatng o
roker, factes for storng o, cassfcaton
uffng o, burnng o, concrete form o, core o, foor
o, harness o, eather o, quenchng o, sushng o,
temperng o, transformer o, ard o, neatsfoot o
Compounder and bender, dstncton between
Cuttng os and water soube os
Defnton of, products not ncuded (T. D. 4339)
atty os of vegetabe, anma, fsh, or marne orgn..
O for crankcase not a component part of automobe
Purchased soey for resae
Recamed ubrcatng o, |ourna bo es of raroad cars
Sae for further manufacture
Seaed n crankcase of mechanca refrgerator
Use on foregn steamshps s not sod for e port
Mechanca refrgerators and refrgerator components
ousehod type refrgerators and components
O seaed n crankcase
Msrepresentaton of ta , deaers ncreasng prces on ta -free
goods, when offense
Rado recevng sets, etc., and phonograph records
ezes and escutcheons used on rado cabnets
Phonograph records, eectrca transcrptons for broad-
castng
Tubes sod by one corporaton to an affated group
ae prce
Cash dscounts, computaton of ta
Consgnment saes, computaton of ta , penaty for de-
nquency
Devery and transportaton charges, e cuson of
ree goods
Reducton n prce
Tra packages, repacements, sampes, bonus goods.
Method of determnng sae prce, ta to be e cuded
Rado tubes sod by one corporaton to another n an af-
fated group
Rung
No.
5645
5904
6797
5566
5683
5648
5841
5855
5709
5686
5842
5824
5650
5918
5902
5664
5664
5792
5872
5708
5854
6683
5840
5823
5727
5567
6807
5871
5901
5808
5566
5886
5885
5773
5886
6569
5651
5825
5958
5957
6830
6736
5669
5905
6906
5958
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2
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1
3
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2

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#
p
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e
593
Manufacturers e cse ta es Contnued.
Saes for further manufacture
Gasone and ubrcatng o
ewery, precous metas, pears, watches, and cock parts.
Lubrcatng o, defnton of (T. D. 4339)
Soft drnks
Carbonc acd gas purchased ta -free under e empton
certfcate
Carbonc acd gas sod for pressure purposes
Cerea beverages gven away
Chan store operatons, ta computaton and payment..
Chocoate mks and other mk drnks
Chocoate srups sod to dares or mk deaers, for use
n chocoate mk
Dry ce not carbonc acd gas
nshed or fountan srups defned
nshed or fountan srups manufactured pror to une
21, 1932
rozen suckers
Grapefrut |uce packed n cans
Natura or artfca mnera waters
Nonacohoc artces
Orange, me, emon, and grapefrut |uce
Regstraton
Treasury Decson 4343 (artce 23, Reguatons 44,
amended)
Treasury Decson 4352 (artce 23, Reguatons 44,
amended)
Tomato |uce
Sportng goods
rtces not ta abe
adders for footbas, etc
owng aey, portabe
Cheek pads and hand protectors
shng tacke, etc
andba goves
Ice skate and skate shoe sod as a combnaton
g saw puzze, when ta abe as a game
Poo tabes
Unforms, parts of
Unforms, specay desgned
endng machne converted nto game of chance
Tres and nner tubes
Rentas from ease of tres and nner tubes
Repacement of defectve artces sod under guaranty
contract
Tres, rea or mtaton, on vehces and chdren s toys..
Toet preparatons
Cocoa butter
Compacts, cgarette cases, and vanty cases
Cosmetc artce apped to hde brthmarks
ree goods, reducton n prce
Permanent wave soutons and pads, wave sets
Pants separatey operated, but under one ownershp,
transfer of goods
Prescrptons of physcans and dentsts
Styptc pencs
Mechanca refrgerators. (See Manufacturers e cse ta es.)
Msceaneous e cse ta es:
dmssons
Passes as tckets, prntng of
Reduced rates for whoe famy
Tckets sod for 1, ncudng ta , computaton
Unversty, student actvty fees and season tckets
5566
5664
5567
5857
5939
5955
5795
5810
5688
5653
5644
5938
5755
5732
5888
5774
5667
5589
5673
5734
5730
5753
5920
5711
5568
5793
5874
5856
5794
5809
5666
5665
5705
5954
5632
5728
5841
5751
5669
5685
5684
5663
5706
5778
5757
5923
5845
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2
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1
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_
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#
p
d
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g
o
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e
594
Msceaneous e cse ta es Contnued.
oats. (See Stamp ta .)
onds. See Stamp ta .)
Checks
Chartabe organzatons, checks drawn by
Church offcers, checks drawn by
Insovent banks, hed debtor not baee of ta coected.-.
Natona Guard unts, checks drawn on funds of
Promssory notes
State offcers, checks n settement of nsurance rates
Stock broker mantanng bankng factes for margna
tradng
Ta abty of certan nstruments
Trade acceptances
Transfer of funds from depost n one bank to account n
another bank
Treasury Decson 4344 (Reguatons 42, Chapter I ,
amended)
Deeds of conveyance. (See Msceaneous e cse ta es:
Stamp ta .)
Dues and fees
ssessment, vountarv, n pace of ncrease n dues
(Garden Cty Gof Cub v. Corwn)
Green fees ( oran v. McLaughn)
Soca cub (Town Cub of St. Lous v. ecker)
ectrca energy
grcutura fars, conducted by nonproft assocaton..
ottng works, mk companes, or creameres
us companes, statons and garages
Cathedras, churches, rectores, and convents
Cod storage warehouses
Docks, raroad for oadng and unoadng shps.:
Domestc and commerca or ndustra consumpton
(T. D. 4342)
ducatona nsttutons
nergy ncuded n rent of tenants n budngs S. T.
512 modfed
nergy ost n remeterng
vdence showng purposes as ndustra (T. D. 4342)
at charge, mnmum charge, servce charge, etc
Governmentav or muncpay owned eectrc power
company (T. D. 4337)
Gran eevators
osptas operated for proft or nonproft
Industra pants, temporary or permanenty cosed
Insovent banks, where payment dmnshed funds
Laundres, power and steam
Meat packng companes, branch houses
Moton pcture theaters
Muncpa contracts for dsposng of rubbsh, sewage, ete.
Museums, nonproft, promoton of knowedge and scence.
Outdoor advertsng
Owner generatng and consumng entre output used by
tenants
Prvate or muncpa pants, can not absorb ta , must
coect as separate tem
Prvatey or pubcy owned eectrc power company
(T. D. 4337) ---
Rado broadcastng statons
Remeterng to tenants of budng, varyng rates
Transmsson ne e tenson, specfc charge
endee purchasng for resae, must furnsh e empton
certfcate each month
Rung
No.
5800
538
5892
539
5926
539
5813
538
5654
535
5760
536
5832
538
5780
537
5654
535
5879
539
5601
534
5547
543
5713
556
5692
552
5859
502
5756
498
5812
500
5811
500
5956
504
5668
407
5586
495
5876
502
5940
503
5889
503
5587
505
5776
499
5546
504
5777
499
5844
501
5903
503
5827
505
5588
496
5775
499
5643
497
5858
501
5796
500
5616
496
6735
498
5689
497
5545
495
5876
502
5922
506
5828
501
5877
505
G
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d

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1
3
-
0
1
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2
2

0
4
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0
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8
9
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4
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_
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#
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d
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g
o
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g

e
595
Msceaneous ta es Contnued.
Issue of stocks and bonds. (See Msceaneous e cse ta es:
Stamp ta .)
Passage tckets. (See Msceaneous e cse ta es: Stamp
ta 3
Return and payment of ta
gent coectng and deverng messages for trans-
msson by teegraph company
ont owners of ppe nes must make separate monthy
returns
Safe depost bo es
mount pad after effectve date of 1932 ct
Renta for arger bo n eu of smaer
Stamp ta
oats
Coege racng shes, motor aunches, and sa boats.
Oceanographc nsttutons, e empton
onds purchased for cent, sae or transfer of
onds purchased through brokers and agents
onds surrendered for retrement and canceaton
Corporate securtes, face vaue (Wcuts v. Investors
Syndcate)
Deed conveyng property under forecosure or e ecuton.
Deed conveyng rea property, purchase prce beng pad
by nstaments
Deed devered after une 21, 1932
Deed transferrng tte to a budng and oan assocaton..
Insovent banks, transfer of stocks, bonds, or rea estate..
Instament certfcates, accumuatve
Issue of e cess stock n connecton wth statutory merger
of corporaton
Passage t.kets ssued n Unted States, passage money
pad to agent n foregn country
Passage tckets ssued to foregn consus
Passage tckets, round trp, sae of
Stock changed from no par vaue to par vaue
Stock e changed for new stock, when merey a change n
corporate name
Stock, ntraofnee borrowngs, ntraoffcc oans
Stock, transfers to a trustee n bankruptcy _r.
Teegraph, teephone, rado, and cabe factes
gents recevng and transmttng messages to teegraph
company
Messages transmtted over pharmacy teephone ne to
teegraph company
Wres and nstruments eased to a person, e cusve use of_
Treasury decsons
4338, messages to ponts outsde the Unted States
4345, pubc press
4356, radophone, rado dspatches, radograms
Transfer of stocks and bonds. (See Msceaneous e cse ta :
Stamp ta .)
Transportaton
Casnghead or natura gasone, product of crude
petroeum
Devery servce from pant to tank cars at dock
Destnatons wthn and outsde Unted States
ont owners of ppe nes, separate monthy returns
Servce rendered to a State, ta abty
Montana, property ta es, accrua date
5831
5878
5712
5925
5690
5691
5758
5798
5779
5570
5799
5714
5924
5959
5814
5570
5941
5960
5909
5781
5942
5891
5862
5908
5S31
5670
5907
5558
5603
5733
5846
5759
5943
5878
5782
5769
521
532
533
533
640
541
528
529
528
563
530
529
529
630
541
563
523
549
547
548
524
527
524
527
521
518
519
520
520
519
531
531
531
532
559
83
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596
N
Nebraska, rea estate nterest ncuded n gross estate
Net ncome, computaton, nstament saes, eecton under 1926
ct
Net osses:
Consodated corporatons
Defned
1930 and 1931, deducton In return for fsca year ended n
1932
Payments under a guaranty
Predecessor corporaton
Worthess stock
New York, franchse ta , accrua date
New Zeaand, fm-hre ta , credt
Nonresdent aens:
enefcares, bond nterest, e empton
Income from Unted States sources
Interest on Treasury bs, e empton
Returns fed by Unted States ctzen wth power of attorney,
vadty
Notes pad n for stock, nvested capta, rkansas
Oho, property ta es, accrua date
O and gas:
Depeton. (See Depeton.)
Deprecaton. (Sec Deprecaton.)
Leases. (.See Leases.)
Royates. (See Royates.)
Oeomargarne:
Statstcs of producton and materas used-
Mav, 1932 and 1931
une, 1932 and 1931
uy, 1932 and 1931-_
ugust, 1932 and 1931 -
September, 1932 and 1931
October, 1932 and 1931
Partnershps:
Dstrbutve shares of partners, assgnment
Returns. (See Returns.)
Revauaton of assets upon nducton of new member, depre-
caton aowance
Passage tckets. ( See Msceaneous e cse ta es: Stamp ta .)
Pensons:
mergency offcers retrement pay
War veteran or hs famy, e empton
Persona e empton, change of status durng year
Persona e penses:
Lega servces
Probate of a w
Prosecuton of sander sut
Ppe-ne corporatons, amortzaton deducton
Posta rate ncrease, deducton
Prorty of edera ta es
Property ta es. (See Ta es.)
Rung
No.
5864
431
5791
214
5953
415
5631
117
5818
45
5747
207
5543
252
5608
204
5770
141
5837
118
5883
123
5536
270
5817
24
5750
298
5642
388
5533
74
5548
568
5600
tea
5693
670
5783
571
5847
572
5927
673
5821
272
. 5637
196
5913
89
5850
19
5551
05
6610
249
6626
268
. 5700
287
5882
25
5765
136
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597
R
Rado recevng sets and phonograph records. (See Manu-
facturers e cse ta es.)
Raroads, edera contro perod, ncome, dsputed cam, year
accruabe
Rebates, nsurance premums, ncome
Recevers and recevershps, prorty of edera ta es
Refunds. (See Credt or refund.)
Reguatons:
mendments. (See mendments: Reguatons.)
Inspecton of returns
Rentas:
onus pad for easehod estate, ncome
Safe depost bo eases, ta abty
Reorganzaton, dvdends. (See Dvdends.)
Reserves:
ad debts. (See ad debts.)
Insurance companes
Res |udcata:
Dfferent partes
Dsmssa wthout pre|udce
Return and payment of ta es. (See Msceaneous e cse ta es.)
Returns:
Communty ncome, Te as
Consodated
ffaton determned
ecton of ta payers, Commssoner s rung
1932 and subsequent years, nstructons
Corporaton, foregn, Unted States ctzen wth power of
attorney, vadty
amnaton, change n procedure, 1932 ct
sca year 1932, use of revsed forms
Indvdua, ctzenshp status changed durng ta abe year..
Informaton, nsurance company, agents commssons
Inspecton of
Corporaton s cam for refund, sharehoders nspecton
Reguatons governng
Nonresdent aens, Unted States ctzen wth power of at-
torney, vadty
Partnershp, requrement of e cess profts ta , coecton m-
taton perod
Royates:
Coa and eases, ncome
Nonresdent aen, ncome from Unted States sources
O ease, sae of, capta gan
S
Safe depost bo es. (See Msceaneous e cse ta es.)
Saares. (See Compensaton.)
Sae prce. (See Manufacturers e cse ta es.)
Saes:
en Property Custodan, sezed capta assets, ncome
rtces for further manufacture. (See Manufacturers
e cse ta es.)
onds, through brokers and agents, ta abty
udngs, rentas pad for easehod estate, oss
Deeds conveyng property under forecosure or e ecuton
Rung
No. 1
5609
/5606
5766
5765
5945
5624
5925
5933
5597
5613
5721
.5788
5537
5599
5634
5750
5605
(5658
5787
5635
5851
5744
5945
5750
5702
5597
5536
5917
5678
5798
5624
5799
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598
Saes Contnued.
Gan or oss
Deprecaton reduced for e empt status perod
Property-
cqured by bequest, bass
or stock, e change effect
Transmtted at death
Stock acqured under ta -free e change
Transfer of stock
Unproductve tmberands, carryng charges
Instament
ecton under 1926 ct, net ncome computaton
Persona property, ta orgnay computed on accrua
bass, refund mtaton
Refund, change n accountng method
Securtes, nsurance companes, other than fe or mutua,
mtaton
Stock-
Saes and transfers, ta abty
auaton determnaton
Soca and pubc wefare organzaton, e empton
Soca cub, dues. (See Dues.)
Soft drnks. (Sec Manufacturers e cse ta es.)
Speca assessment:
ppcaton for, cam for refund bass
Commssoner s authorty, assessment mtaton
Representatve corporatons, seecton of, Commssoner s
dscreton
Sportng goods. (See Manufacturers e cse ta es.)
Stamp ta es. (See Msceaneous e cse ta es.)
State:
Obgatons, nterest on. (See Interest: State obgatons.)
Offcers and empoyees, hosptas
Ta es-
Lousana property
Montana property
Oho property
Wsconsn property
Wyomng nhertance
Stock:
Loaned or borrowed, ta abty
5676
5553
5622
5542
5623
5596
5790
5791
5579
5791
5931
5891
5804
5578
5661
5723
5884
Sut:
Losses from sae or e change, deducton-
Saes. (Sec Saes.)
Transfer to trustee n bankruptcy
Worthess, net oss deducton
Coecton of ta es
ond supportng abatement cam
stoppe
Lmtaton, oard s fndng
adty
scrow agreement, cash bond, supportng abatement
cam, mtaton
Court s |ursdcton. (See ursdcton.)
Lmtaton perod. (See Lmtaton perod.)
Recovery of ta es
ccount stated
Cam for refund, prerequste, suffcency of cam
Coecton stayed by abatement cam
Compromse of penaty and nterest on barred defcency.
5697
44
5698
113
5719
81
5769
83
5533
74
5541
77
5621
80
5862
624
/5696
31
5866
32
5908
627
5608
204
5822
342
5900
314
5703
337
5681
310
/5820
147
6838
373
5565
899
5718
70
5771
144
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599
Rung
No.
Sut Contnued.
Recovery of ta es Contnued.
Defense, bond
Gratutous dscharge of ta payer s abty
Lmtaton perod. (See Lmtaton perod.)
Overassessment pad to predecessor coector
Pror acton dsmssed wthout pre|udce, res |udcata
Refund cam transferred upon consodaton of com-
panes
Transferee, abty under trust fund doctrne, fnaty of
oard s decson
Suspensons and dsbarments
Ta es:
ssessment
ttempted dssouton of corporaton
Lmtaton perod. (See Lmtaton perod.)
Checks, appcaton of secton 751, 1932 ct
Coecton
Lmtaton perod. (See Lmtaton perod.)
Teegraph transmsson of dspatches, abty
Credts. (See Credts.)
Deducton of estate, gft, and other ta es, 1932 ct
Defcences
ssessment mtaton. (See Lmtaton perod.)
Coecton barred, overpayment, erroneous credt
Notce
rroneousy addressed, oard s |ursdcton, effect
of appea ..
Suffcency
state, gft, manufacturers e cse, and msceaneous, 1932
ct, deductbty
na determnaton and assessment
Cosng agreements
raud, sut to recover
oregn country, meanng of, reguatons amended
oregn, credts for. (See Credts.)
ranchse, New York, accrua date
Inhertance, Wyomng
Loca benefts, estate s deducton
Overpayment, credt aganst barred defcency
Payment
y check, determnaton of date of payment
Treasury notes and certfcates
Posta rate ncrease, deducton
Property, accrua date
Lousana
Montana
Oho
Wsconsn
Wthhodng at source. (See Wthhodng at source.)
Teachers, traveng e penses, deducton
Teegraph, teephone, rado, and cabe factes. (Sec Msceane-
ous e cse ta es.)
Te as, communty property
16O0O2 33 38
5555
5612
(5806
5820
5613
5725
5884
5961
5556
5780
5831
5930
5820
5627
5722
5930
15594
5770
5535
5630
5770
5621
/5949
5950
5699
5552
/5617
5618
5882
5719
5769
5533
5541
(5679
5680
f5721
15788
223
101
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600
Rung I
No. I p fc
Tmberand, carr|-ng charges, effect on gan or oss saes bass..
Tres and nner tubes. (See Manufacturers e cse ta es.)
Tobacco:
Cgars, subdvson packages
Reguatons amended, redempton of stamps
Toet preparatons. (See Manufacturers e cse ta es.)
Transferred assets:
ssessment mtaton
Corporaton and successor trust
Gan or oss and deprecaton bass
Transfer wthout consderaton.
Transportaton:
Natura or casng-head gasone by ppe ne
Of o by ppe ne. (See Msceaneous e cse ta es.)
Servce rendered to a State, ta abty
Traveng e penses, temporary pace of empoyment
Treasury notes and certfcates of ndebtedness, acceptance for
ncome and profts ta es
Trusts, assocatons dstngushed
Tyson- tzgerad ct, emergency offcers retrement pay,
ta abty
U
Unempoyment emergency funds, contrbutons to
Unted States oard of Ta ppeas:
Decsons of
Lst of acquescences and nonacquescences
Revew, death pendng appea, venue
ursdcton
Defcency notce erroneousy addressed, effect of appea
Unversty students store, e empton

enue, revew of oard s decson, death pendng appea

W
Waver of statute of mtatons. (See Lmtaton perod:
Wavers.)
War veterans compensaton
Watches and cocks. (See Manufacturers e cse ta es: ewery.)
Wsconsn property ta es, accrua date
Wthhodng ta at source:
ank as agent, abty
Insovent bank s abty
Revenue ct of 1932... .
Word War eterans ct, 1924, aowances under, e empton
Wyomng nhertance ta es, accrua date
5790
181
5716
562
5619
567
5641
356
5556
351
5914
41
5640
354
5846
531
5782
559
5679
245
5680
246
5617
425
5618
426
5745
163
5912
21
5819
94
5946
1-18
5538
392
5627
320
5592
102
5538
392
5850
19
5541
77
5897
121
5720
120
5591
49
5850
19
5621
80
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