Professional Documents
Culture Documents
rungs of the ureau do not have the force and effect of Treas-
7 Decsons and that they are appcabe ony to the facts presented n the pubshed case.
Treasury Department : : : : : ureau of Interna Revenue
Interna Revenue uetn
Cumuatve uetn III 1
NU RY- UN , 1924
IN T IS ISSU
p.g. /p
Introductory Note I
Contents - II ,
Rungs Nos. 1277-1 41 I ,,.
Income Ta . 1-448 , - /
Saes Ta 449-4 9
MsceUaneous Ta . . . U IS. 500-50
Msceaneous . . LOOMING Off g fS
The ruhncs reported n the Interna Revenue uetn are for the nformaton of
ta payers and ther counse aa showng the trend of offca opnon n the admns-
traton of the ureau of Interna Revenue the rungs other than Treasury Decsons
nave none of the force or effect of Treasury Decsons and do not commt the De-
partment to any nterpretaton of the aw whch has not been formay approved and
promugated by the Secretary of the Treasury. ach rung embodes the admn-
stratve appcaton of the aw and Treasury Decsons to the entre state of facts
upon whch a partcuar case rest . It s especay to be noted that the same re-
sut wU not necessary be reached n another case uness a the matera facte are
dentca wth those of the reported case. s t s not aways feasbe to pubsh a
compete statement of the facte underyng each rung, there can be no assurance
that any new case s dentca wth the reported case. s bearng out ths d nne-
t may be observed that the rungs pubshed from tme to tme may appear to
reverse rungs prevousy pubshed.
Offcers of the ureau of Interna Revenue are especay cautoned aganst reach-
ng a concuson n any case merey on the bass of smarty to a pubshed rung,
and shoud base ther |udgment on the appcaton of aU pertnent 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 forma constructon as made n the regua-
tons and Treasury Decsons prevousy ssued.
In addton to pubshng a Interna Revenue Treasury Decsons and a forma
Soctor s opnons, t s the pocy of the ureau of Interna Revenue to pubsh a
1 decsons, ncudng memorandum opnons of the Soctor of Interna
d recommendatons of the Commttee on ppeas and Revew, whch, be-
_| they announce a rung or decson upon a nove queston or upon a queston In
regard to whch there e sts no prevousy pubshed rung or decson, or for other
reasons, are of such mportance as to be of genera nterest. It Is aso the pocy of
the ureau to pubsh a rungs or decsons whch revoke, modfy, amend, or affect
n any manner whatever any pubshed rung or decson. In many nstances memo-
ra|dum opnons of the Soctor of Interna Revenue and recommendatons of the
Commttee on ppeas and Revew are not of genera nterest because they announce
no new rung or no new constructon of the revenue aws but smpy appy rungs
aready made pubc to certan stuatons of fact whch are wthout speca sgnf-
cance. It s not the pocy of the ureau to pubsh such memorandum opnons and
recommendatons. Therefore, the numbers assgned to the pubshed memorandum
opnons of the Soctor of Interna Revenue and to the pubshed recommendatons
of the Commttee en ppeas and Revew are not consecutve. No unpubshed ru-
ng 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 other-
wse specfcay ndcated, a pubshed rungs and decsons have receved the con-
sderaton and approva of the Soctor of Interna Revenue.
W S INGTON : : : GO RNM NT PRINTING O IC ::::::: 1924
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I) f5 8
The Interna Revenue uetn Servce for 1924 w consst of
weeky buetns, quartery dgests, and semannua cumuatve
buetns.
The weeky buetns w contan the rungs to he made pubc
and a Interna Revenue Treasury Decsons. The quartery
dgests, wh the e cepton of the one to be pubshed at the end
of 11)24, w contan dgests of the rungs prevousy pubshed
In the weeky buetns for 1924. The ast dgest for 1924 w
aso contan dgests of the rungs pubshed durng 1922 and 1923.
The semannua cumuatve buetns w contan a new ru-
ngs pubshed durng the prevous s months.
Te compete Ruetn servce may be obtaned, on a subscrp-
ton Imss, from the Superntendent of Documents. Government
Prntng Offce, Washngton, D. C, for . 2 per year.
New subscrbers and others desrng to obtan the 1919, 1920,
and 1921 Income Ta Servce may do so from the Superntendent
of Documents at prces as foows: Dgest of Income Ta Ru-
ngs No. 19 (contanng dgests of a rungs appearng n Cu-
muatve uetns 1 to 5, Incusve), 50 cents per copy Cumu-
atve uetns Nos. 1 to 5, contanng n fu a rungs pub-
shed snce pr, 1919, to and ncudng 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 one Issue of Saes Ta Rue-
tn for 1920, uetn ST-1-20, and the Cumuatve uetns for
anuary- une and uy-December, 1921, may procure them
from the Superntendent of Documents at 15 cents and 5 cents
each, respectvey, per copy.
Persons desrng to obtan the Interna Revenue uetn serv-
ce for the years 1922 and 1923 may do so at prces as foows:
Cumuatve uetn 1-1 ( anuary- une, 1922), 40 cents Cumu-
atve uetn 1-2 ( uy-December, 1922), 30 cents Cumuatve
uetn II- ( anuary- une, 1923), 30 cents Cumuatve ue-
tn II-2 ( uy-December, 1923), 30 cents Dgest No. 9 ( anuary,
1922-Decenber, 1923), 25 cents Dgest No. 10 ( anuary-March,
1924), 10 cents.
nqures In regard to these pubcatons and subscrptons
shoud be sent to the Superntendent of Documents, Government
Prntng Offce, Washngton, D. O.
(n)
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INTRODUCTORY NOT S.
Interna Revenue Cumuatve uetn III- contans n fu the
rungs of the ureau of Interna Revenue reatng to ncome, saes,
estates capta stock, and msceaneous ta es, and msceaneous
rungs and Interna Revenue Treasury Decsons pubshed n the
weeky buetns ( oume III, Nos. 1-2 , ncusve) for the perod
anuary 1 to une 30, 1924. It shoud be retaned, as ts contents
w not be reprnted n any subsequent voume.
The rungs are grouped under the sectons of the Revenue ct
of 1921 and the artces of the Reguatons to whch they reate, the
number and cas of each rung beng ndcated by numeras and
1 22 313
abbrevatons. or e ampe, R R ggg means Commttee on p-
peas and Revew Recommendaton 933, whch s rung 313 and
was frst pubshed n uetn No. 22 of oume I of the Interna
Revenue uetn Servce.
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.
C. . Cumuatve uetn.
Ct D. Court decson.
C. S. T. Capta Stock Ta Dvson.
D. C. Treasury Department crcuar.
. T. state Ta Dvson.
L 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.
O. or D. O. Soctor s aw opnon.
O. . Offce decson.
Op. . G.- Opnon of tte ttorney Genera.
S. T. Saes Ta Dvson.
S. M. Soctor s memorandum.
SoL Op. Soctor s opnon.
T. . M. dvsory Ta oard memorandum.
T. . R. dvsory Ta oard recommendaton.
T. D. Treasnry decson.
and y are used to represent certan numbers, and when used wth the word
doars represent sums of money.
or addtona nformaton whch w be of assstance n the use
of the Interna Revenue uetn servce read the Introductory Notes
to the atest gest.
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ppeas and revew recom-
mendatons Contnued.
4019.
MM
ppeas and
randa:
209
219
220
Offce decsons (I. T.)
1889
1890 ,
1891
1892
1893
189
189 ..
189
1897
1898
1899
1900
1901
1902
1903
1004
1905 ,
190 _.
1907
1908.
1909
1910
1911 ,
1912
1913
1914 ,
191S..
1910
1917
1918
t.
1920
1921
1922
1923
1924
Rung No.
Page.
I1I-1-1278
II1-1-1270
III-1-1280
III-1-I282
III-1-1284
III-1-1285
III-1-128
III-1-1287
III-1-1288
III-2-1290
III-2-1291
III-2-1293
1II-2-1295
III-2-1287
III-2-1298
III-2-1299
UI-2-1300
III-2-1301
UI-2-1302
III-3-1305
111-3-1307
111 3-1308
III-3-130f
III-3-1312
III-3-1318
III-3-1314
III-3-1315
III-4-132S
III-4-132
III-4-1327
I1 -1329
III-4-1330
III-4-1332
III-5-1330
II1-5-1340
111- -1350
24
7
379
WO
377
ff
102
397
m
1.12
144
128
M
175
395
12
75
82
388
102
20
18
148
1 3
138
408
441
421
381
281
404
45
32
41
287
390
203
131
157
199
294
17
319
78
70
us
132
1 7
184
18
222
291
: .
2
M
82
120
19
200
202
205
270
315
75
102
114
147
202
234
287
319
82
8
121
I
188
345
105
105
27
Rung.
Offce decsons (I. T.) Con.
1925
192 -
1927
1928
1929
1945
194
1947
1948
1949
1950
1951
1952
1953
1954
1955
195
1957
1958
1950
I9 0
19 1
19 2
19
19 4
19 8
19
19 7
19 8
19 9
1970
1971
1972
1973
1974
197
197
1977
1978
1U79
1980
1981
1982
1983
1984
198
198
19 7.._.
1988
19 0
1990
1991
1992.
1993
1994..
199 ..
199 ..
1997..
1998..
19119..
2000..
2001..
2002..
2003..
2004..
200 ..
2008..
2007
2008
2009
2010
Rung No.
II1-8-1374
205
111-8-1375
314
111-8-137
320
11I-S-I377
309
11I-S-1379
424
111 9 I3S8
39
III-9-1391
122
111-9-1394
3 1
111-10-1398
111-10 1399
122
111-10-1102
200
111-10-1403
245
m-10-1405
314
II1-10-110
321
111-10-1410
445
111-11-1411
11
III-U-1412
5
IN-11-1414
145
I -11-1417
273
111 11-1 119
300
111-11-1420
332
111-11-1421
343
111-11-1422
344
111-11-1423
350
III-U-1424
302
III-I2-1429
139
111-12-1130
139
111-12-1431
198
III-I2-1432
210
II1-12-1434
228
111-13-1444
34
111-13-1448
111
III-I3-1449
139
III-13-1452
204
III-13-I454
259
111-13-145
291
III-14-14
104
111-14-14 7
123
111-14-1471
201
111-14-1474
215
111-14-1477
259
111-14-1179
33
111-14-1481
342
III-14-1483
3 9
111-14-1484
374
111-14-148
374
111-14-148
37
111-15-1495
104
111-15-1497
123
111-15-1498
154
III-15-I499
232
111-15-1503
374
111-1 -1508
2 0
1I1-1 -1500
293
111-1 -1510
311
111-17-1513
109
111-17-1514
124
111-17-1515
140
111-17-1517
191
111-18-152
7
111-18-1527
142
111-18-1529
19S
111-18-1530
204
111-18-1531
249
111-18-1532
2 1
111-18-1533
2 1
111-18-1534
:m
111-19-1543
4
111-19-1544
145
111-19-154
14
111-19-154
149
111-19-1547
208
111-19-1540
2 3
111-19-1551
290
111-20-1554
87
III-20-155S
22
111-20-155
229
111-20-1558
292
111-20-1559
299
111-21-15
9
111-21-15
178
111-21-1509
31
111-21-1570
318
111-22-1575
4
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II
Offce decsons (L T.) Con.
SOU
Rung.
Offce decsons (S. T.) Con.
441
442
443
444
445
44
447
448
Offce decsons (M8.):
24
25
2
27
2S
29
Deprtment crcuar:
230.
Mmeographs:
31
31 7
3170
317
3177 ,
3178
3180 ,
3184
3187
3188 ,
3109
3201
3204
3207
Msceaneous.
Rung No.
III-0-1357
W
I1I-0-1358
4 5
4 7
111-12 1139
4 0
III 12 1440
4 2
111-12-1441
4 )3
111-18-1539
4f2
111-19-1552
4 2
I1I-7-1372
512
III-8-I3R1
513
111-12-1442
513
111-17-1525
514
III 22-1587
515
III-25-1 15
510
111-8 1382
525
I1I-3-1383
525
III 19-1553
535
111-1-1277
29
111-1-1289
519
111-2-1204
107
III-3-1317
425
1I -1335
231
III- -I355
237
1117 13 1
4
III-9-1397
3 8
III-1-1425
3 9
111-13-14 2
470
111-17-1 24
532
111-18-1535
233
111-18-1537
34
m-24-aoa
21
111-25-1 21
312
1U-12-1437
3 3
Pago.
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CONT NTS O CUMUL TI ULL TINS (I. T.) 1 TO 5, S. T. OR 1 20 ND 1921, ND
INT RN L R NU 1-1, 1-2, 11-1, II-2, ND 111-1.
Cumuatve uetn.
Income Ta :
December, 1919 (No. 1)
anuary- une, 1920 (No. 2)
uy-December, 1920 (No. 3)...
anuarv- une, 1921 (No. 4)
uy-December, 1921 (No. 5).-.
Saes Ta :
1920 (ST. 1-20)
anuary- une, 1921
uy-December, 1921
Interna Revenue uetn:
anuary- une, 1922 (No. I-)._
uy-December, 1922 (No. 1-2).
anuary- une, 1923 (No. II 1)_
v-Deeember, 1923 (No. II 2)
anuary- une, 1924 (No. III-)
( III)
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INCOM T RULINGS.
TITL I. G N R L D INITIONS.
S CTION 2. G N R L D INITIONS.
rtce 1503: ssocaton dstngushed from II1-15-1493
partnershp. T. D. 3582
INCOM T R NU CT O 1918 D CISION O COURT.
1. ont Stock ssocaton Partnershp.
n assocaton organzed under the common aw of Te as as an
unncorporated |ont stock assocaton s ta abe under te Reve-
nue ct of 1918 as a corporaton and not as a partnershp.
2. Statutory Constructon.
The constructon of a statute by the e ecutve department of the
Government charged wth the duty of carryng t nto effect s
gven great weght by the courts.
3. Regv otons.
Reguatons made n pursuance of statutory authorty have the
force and effect of aw. rtce 1501 of Reguatons 45 approved.
4. Stockhoders.
Where sut s brought by and n the name of a ont stock asso-
caton, the stockhoders thereof are not partes thereto, and no
queston as to ther consttutona rghts can be rased.
5. Consttutonaty.
The provsons of the Revenue ct of 1018 evyng an ncome ta
upon assocatons and |ont stock companes are consttutona, as
the ta s unform and appes equay to a assocatons smary
stuated.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of Interna revenue and others concerned:
The appended decson of the Unted States Dstrct Court for
the Northern Dstrct of Te as, Daas Dvson, n the case of
urk-Waggoner O ssocaton v. George C. I opks, Coector,
s pubshed for the nformaton of revenue offcers and others con-
cerned.
D. . ak,
Commssoner of Interna Revenue.
pproved pr 4, 1924.
. W. Meon,
Secretary of the Treasury.
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2, rt. 1503.
2
In the Dstrct Couet of the Unted States. Northern Dstrct of Te as
Da as Dvson. Number 3301. t Law.
urk-M affgoner O ssocaton v. George C. opkns, Coector of Interna
Revenue.
cton at aw for the recovery of 145,827.G7, wth nterest.
Te pantff aeges that t s an unncorporated assocaton or partnershp
that ts members contrbuted 00.000 as a capta to be used n the busness
of producng o n the o feds of Wchta County, Te . that n the year 1911
t receved a proft on such nvestment of 1,838,053.90 that the ureau of
Interna Revenue of the Unted States had adopted certan rues and regua-
tons whch requred the pantff to pay 5 1,279.20 ncome ta on sad net
proft that such payment was made n four nstaments, the frst three beng
pad to the predecessors of the defendant, aganst whom sut kewse pends,
and the atter, of 145,827. 7, havng been pad to the defendant that a of
such payments were made under protest and to avod penates and sezure.
Pantff contends that the enterprse was a partnershp and that ts mem-
bers are sub|ect to ta under the Revenue ct of 1018, f at a, under the
terms and provsons reatng to partnershps, and Indvduas, and not under
the terms and provsons reatng to corporatons, and that no sum whatever
was due by sad enterprse as ta es, hut that any and a profts receved
from such operatons were the ncome of the varous members of sad enter-
prse n an amount proportonate to ther nterest, and that no ncome ta
shoud have been assessed aganst or coected from the pantff.
That the coecton of such ta from the pantff was unconsttutona and
contrary to the provsons of rtce I, secton 1, secton 2, secton 8, and
secton 9 of the Consttuton of the Unted States, and aso to the provsons
of the s teenth amendment thereto, n that the same s not based upon n-
come and s not n proporton to popuaton that n so far as t purports to
be based upon offca reguatons t s unconsttutona n that such reguatons
are beyond the power of the Secretary of the Treasury to promugate and be-
yond the power of the Congress to authorze that the ndvdua members of the
pantff have been sub|ected to unawfu and unconsttutona ta aton e-
cause such ta s not authorzed by the Revenue ct of 1918 that f t be hed
that such ta aton s authorzed by sad ct. then sad ct s unconsttutona
and contrary to the ffth and s th amendments to the Consttuton that the
ta es referred to have been mposed upon the Indvdua members of the
pantff rrespectve of ther cams and rrespectve of the rates of ta set
forth n the ct of 1918.
The defendant reped by genera demurrer and genera dena.
|ury was waved, and from an agreed statement of facts t was shown:
(a) That a wrtten agreement, set out n fu n the stpuaton, was e e-
cuted on the 15th day of November, 1918, by R. M. Waggoner. Cos L. Green,
Lee Crenshaw, D. . Meton, W. . nchor, and . . Murchson, whch
was fed for record n the deed records of Wchta County, Te ., on the 27th
day of the ne t month.
rtce 1 of such agreement provdes for the formaton of an unncor-
porated |ont stock assocaton, to be known as urk-Waggoner O ssoc-
aton, to contnue n e stence durng the ves of the s ndvduas and
for 21 years after the deat of the one who ast des, uness sooner dssoved.
The genera purpose of the company was the purchase or ease of ands con-
tanng o, to e tract the same, and to do a other thngs necessary or proper,
ncdent to the mnng, manufacture, sae or transportaton of o and ts
products. That the capta stock shoud be 0,000 dvded nto 00 share of
100 each, to be evdenced by certfcates. That such certfcates shoud be
sgned by the board of trustees and countersgned by the secretary such cer-
tfcates refer to the pantff as a ont stock assocaton, and are transferabe
ony on the books of the company that no member of the company or owner
or hoder of the certfcates sha have any authorty, power, or rght to trans-
act any busness whatever for, or on behaf of, or bndng on the company, or
any member thereof, and that no member of the company sha be personay
abe for any debts, demands, contract of any knd, or torts of the company,
beyond the payment n fu of the prce for whch the share or shares were
od ndvduay by the company that sharehoders shoud have no rght of
partton nor of dssouton of the trust, but that the shares shoud be persona
property carryng the rght of dvson of profts and at the termnaton of the
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3
2, rt. 1503.
trust to a dvson of the prncpa and profts n proporton to the number of
shares hed death, nsovency, or bankruptcy of any member, or a transfer
of hs nterest shoud not work a dssouton nor shoud t entte anyone to an
acton or proceedng n aw or equty aganst te members, trustees, offcers,
or property the affars of the company were to be managed by a board of ss
studs-hodng trustees, whose successors shoud be eected annuay by a ma-
|orty of the shares present or represented at n meetng, each board to eect
ts own presdent and other offcers and presene ther dutes tte to a prop-
erty was to be hed n the name of the trustees, who woud hod t as |ont
tenants and not as tenants n common such trustees, n ther capacty as
such, mght sue or be sued n any court of aw or equty, or the company
mght sue or be sued n the company name, as provded by the statutes of
Te as: trustees had fu power and authorty to conduct the affars of the bus-
ness n case of a vacancy on the board the remanng members mght f the
same, sub|ect to the rght of the sharehoders to do so, shoud they see proper
to e ercse the rght the board woud seect managers and empoyees as they
were uecessary, f ng ther compensaton and defnng ther dutes the board
to decare and pay dvdends as they mght deem e pedent that such board
oud have no power to bnd the sharehoders or members personay that n
every wrtten contract entered nto by the trustees they suud refer to the
decaraton of trust and that anyone contractng wth them shoud ook ony to
the funds and property of the company for the payment of any debt or |udg-
ment: nether the trustees nor the sharehoders shoud be personay abe for
any debt the board woud adopt such by-aws as t thought proper any an-
nua peca meetng of the sharehoders mght amend the artces of assoca-
ton by a vote of three-fourths of the shares present, and that by-aws mght
be adopted, repeaed, or amended n any respect, not nconsstent wth the
artces, by a vote of two-thrds of the shares present or represented share-
hoders shoud meet annuay n une to consder the affars of the company,
transact such busness as they mght naugurate and as mght be submtted by
the trustees the members of the board of trustees were at a tmes to be
sub|ect to the orders of the sharehoders, who mght at any tme and for any
cause, by a vote of a ma|orty of a the shares then Issued and outstandng,
remove anyone or a of them from offce, and appont and devove upon other
members the dutes and functons of the offce. No trustee shoud be abe
for any fraud or error or neggence of a cotrustee to whch he had not been
a party, and there was a method provded by whch he mght reeve hmsef
from abty to the sharehoders for any act of the board whch e had not
approved 40,000 of the capta stock shoud be pad by conveyng to the s
trustees an o and gas ease, the baance of the 00,000 was to be pad n cash
the stock of the assocaton coud be ncreased at any tme by a vote of the ma-
|orty of the stockhoders present dssouton coud be affected by a vote of
three-fourths of the shares, provded there were no outstandng bonds or
obgatons secured by mortgage of the company s property.
(ft) That the ta was coected from the pantff n the manner and amount
aeged n the petton.
(c) That ega demand had been made for the return thereof as requred
by the aw.
(d( That about 200 persons were nterested and were certfcate hoders
In the assocaton, and the certfcates of the assocaton were traded n gen-
eray by the pubc.
IRST.
The evenue ct of 1918, n secton 1 of Tte I, provdes that The term
person ncudes partnershps and corporatons, as we as ndvduas the
term corporaton ncudes assocatons, |ont stock companes and nsurance
companes.
Secton 218 of the same ct provdes That ndvduas carryng on busness
In ttrtnershp sha be abe for ncome ta ony n ther ndvdua capacty.
There sha be ncuded In computng the net ncome of each partner hs ds-
trbutve share, whether dstrbuted or not, of the net ncome of the partner-
shp for the ta abe year .
The atter paragraph of secton 385 of subdvson C of the same ct reads
as foows: ny ta pad by a partnershp or persona servce corporaton for
any perod begnnng on or after anuary 1, 1918. sha be mmedatey refunded
to the partnershp or corporaton as a ta erroneousy and egay coected.
Wthout presentng the provsons whch reate to the ta to be pad by
corporatons, assocatons, and |ont stock companes, t s manfest from the.
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2, rt. 1503.
4
a ove provsons that partnershps are to pay the ncome ta through the per-
sons who compose t, whe the corporaton, assocaton, and ont stock com-
pany s to pay the ta as enttes of so many ta abe persons the corporaton,
assocaton, and ont stock company s, tsef, the ta abe entty or person.
May an aggregaton 0f ndvduas be both a partnershp and an assocaton
be both a partnershp and a ont stock company If so, how are such ndvd-
uas to be readed If the ta abe proft be made by a corporaton or an
assocaton or a ont stock company, then ether of the three must pay the
ta before the ndvduas who are entted to the profts of ether receve rat
whch s thers, and after recevng It, t must agan be accounted for n suc
ndvdua ncome ta return and payment. The proft of a partnershp, how-
ever, s then and there and at that tme the proft of te partner and Ls ta ed
as such and not as the proft of any artfca person.
It s ceary the ntenton of the Congress that that dfference was to be
we marked.
The pantff contends that snce decsons of ths court and of the State
courts of Te as, and for that matter courts of a ma|orty of the States of the
Unon, hod organzaton, such as the pantff, a partnershp, that t may not
be sad to be a corporaton, or a |ont stock company, or an assocaton.
(Merchant Motona ank of Cncnnat v. Wchrman, 202 U. S., 295 Cagctt
v. bourne, 0 U. S., 34 Crocker v. aey, 248 U. S., 223 ott v. ree-
man, 220 U. S., 178 In re aard, 279 ed., 574 Mae.y v. oward, 281 ed.,
3 3 In re Trust, 222 ed., 1012 Chcago Tte t Trust Co. v. Smetanka, 275
ed., 0 Mae/ v. ordtch, 259 ed., 890 In re Parker, 275 ed., 808:
Roberts v. nderson, 22 ed., 7 Industra Lumber Co. v. Te as Pne Land
ssn., 72 S. W., 875 McCamey v. oster O Co., 241 S. W., S9 Westsde
O Co. v. McUorman, 244 S. W., 1 7 Saughter v. mercan aptst Pubsh-
ng Socety, 150 S. W 224: sheres Co., ct a., v. McCoy. 202 S. W., 343 Wes
v. Mackay Teegraph Co., 239 S. W., 1001 ardee v. dams O ssn., 254 S.
W., 002 Ws v. rener, 2 S. W., 858 urton v. Grand Rapds Schoo ur-
nture Co., 31 S. W., 91 Dee v. Tayor- anna-.ames Co., 227 S. W 3 1 Davs
v. Iudgns, 225 S. W., 73 Morehead v. Greenve change Motona Rank,
243 S. W., 54 Wrghtngton, 2d edton on Unncorporated ssocatons and
usness Trusts.)
No debate can foow the asserton that the trustees of such assocaton, and
probaby the members thereof, are abe for debts to thrd partes, but when
they are vewed from a ta ng standpont and n that herdng where the
accepted cassfcaton puts them as we-known and dstnctve commerca
enterprses, they wear, kewse, another abe another very another name.
The mere fact that the membershp n such an assocaton or ont stock
company woud be abe for a tort or for a debt, or that the ownershp of the
property mght seem to change, woud not, of tsef, dvest such assocaton or
|ont stock company of ts standng as an assocaton or |ont stock company.
In other words, such aggregatons of men have some ponts of smarty wth
partnershps more ponts of smarty wth partnershps than do corpora-
tons and yet, n one sense the corporaton s aso a partnershp, even though
t s aways recognzed as egay free from and ndependent thereof and stands
and s to be treated as an artfca person. Nowhere n the artces of asso-
caton s the pantff referred to as a partnershp ths sut s not brought
as a partnershp the owners of t do not appear here and sue n ther ndvd-
ua capactes. They come here under secton (5149 of the revsed statutes of
Te as, whch authorzed an assocaton or |ont sock company to sue and he
sued. n unncorporated company, fundamentay a arge partnershp, may
be sad to be an assocaton, and wth certan provsons may he sad to he a
|ont stock company, and It w dffer many from a partnershp n that t
s not bound by the acts of the ndvdua partners, but ony by those of ts
managers that ts shares are transferabe and that It Is not dssoved by the
retrement, death, bankruptcy, etc., of ts ndvdua members.
|ont stock company at common aw was hybrd, mdway between a cor-
poraton and a partnershp, havng some of the characterstcs of each, hut
there was no deectus persona . rom e cographers and decsons gathered
theren we may safey say that such assocatons are not pure partnershps,
nor are they pure corporatons not the frst, because ther members are rec-
ognzed as an aggregate body not the second, for ther members are more
or ess abe to contrbute to the debts of the coectve whoe.
Mr. ustce Gray, n arrck v. annaman (1 8 U. S., 334), defnes partner-
shp as foows:
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contract of partnershp s one by whch two or more persons agree to
carry on a busness for ther own beneft, each contrbutng property or servces
nd havng a unty of nterest n the profts. It s, n effect, a contract of
mutua agency, each partner actng as a prncpa n hs own behaf, and as
agent for hs copartners.
partnershp whch dd not have the characterstcs of an assocaton or of
o |ont stock company s merey a partnershp. When t has such characters-
tcs t becomes that whose character t has. s such t comes wttn the pro-
vsons of the aw whch reate to t.
ww s no ess a cow because t s back. n assocaton, and a |ont stock
company, are no ess such assocaton or |ont stock company because they
may possess a smtude to a partnershp. It s dffcut to bud an entty,
far as organzatons for carryng on the busness of the word Is concerned,
wthout there beng some smarty between such organzatons, but genera
smartes do not determne ether the character or the name thereof, both be-
ng ependent upon the dstngushng characterstcs for defnton and cass-
fcaton. In aku Sugar Co. v. ohnstone (249 ed., 103) the Crcut Court
(or the Nnth Crcut, n wrtng about ths troubesome sub|ect, sad:
Ths s the pvota pont n the case, for n makng dstncton between
ont stock assocatons and partnershps the Congress must have had n mnd
that there are substanta ponts of dfference between such reatonshps. It
s notceabe that the arrangement under e amnaton acks the eement of
cumgeabty of partnershp or transferabty of shares, an eement often used
as a determnng crteron as between ordnary partnershps and |ont stock
companes. ates on partnershps, 72. In a |ont stock company
the members have no rght to decde what new members sha be admtted to
the frm: on the other hand, the rght of deectus personarum s an nherent
((Uty of the ordnary partnershp. |ont stock company often
conssts of a arge number of persons, between whom there s no speca rea-
tonshp or confdence the retrement or death of a member works no ds-
souton whe a partnershp, though t may consst of severa persons, gen-
eray s made up of a few, who are drawn to each other by feengs of mutua
confdence, and no member s at berty to retre and substtute another as a
mrtner. In |ont stock companes the busness s generay managed by drec-
tors or other desgnated offcers of the assocaton, and the sharehoder, as
such, s wthout power to contract for the company whereas, n a partnershp,
any member may bnd the partnershp.
S COND.
That ths s the constructon of the statute that has been gven by an e ecu-
tve department of the Government s aso mportant. The courts gve great
weght to a constructon paced upon an ct of the Congress by the e ecutve
department whch s charged wth the duty of carryng t nto effect. Not a
controng weght, but strongy persuasve (Unted States v. ermanos, 209
I . S., 337 Unted States v. nne, 185 U. S., 23 Unted, States v. abama
reat Southern R. R. Co., 142 U. S., 15 Pennoyer v. McConnaughy, 140 T . S.,
1 ehes ecutors v. auehe, 138 U. S., 5 2 Robertson v. Downng, 127
. S., (107 Unted States v. ohnston, 124 U. S., 230 Unted States v. ,
120 C. S., 1 9 rown v. U. S., 113 U. S., 5 8 Unted States v. Moore, 95 U. S
7(50 Sdft v. . S., 105 . S., 91).
T IRD.
The pantff contends that the Commssoner of Interna Revenue, n artce
3501 of the reguatons promugated wth reference to the ct of 1918, at-
tempted to egsate. Such reguaton s as foows:
The statute recognzes three chef casses of persons, to wt, ndvduas,
urtnershps, and corporatons. Corporatons ncude assocatons, |ont-stock
companes, and nsurance companes, but not partnershps propery so caed.
It s contended that the phrase propery so caed mts and defnes part-
nershps n a way that the Congress nether mted or defned.
Whe t has been setted that reguatons made n pursuance of statutory
authorty have the force and effect of the aw (Man/and Casuaty Co. v. U. 8.,
251 . S , 342 Unted States v. Uason, 1 th Pet. (U. S.), 291 parte Reed,
300 U. S., 13 Unted States v. aton, 144 U. S., 77 Caa v. U. 8., 152 U. S.,
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211 In re oock. 1 ) U. S., 52 ), the Congress aone has the power to egs-
ate. (Onsttutfon, rtce I, secton 1.) It aone has te power to ay
ta es. ( rtce I. secton 8.) It may not deegate ths power. Morr
une . 100 . S., 4tttt Unted Sates v. Unted erde Copper Co., 19 U. S.. 207
Unted States v. utter, 195 ed., T)7.)
ut when the Interna Revenue Ottke e paned n ths reguaton ts under-
standng (f the statute It was not egsatng. It was enforcng.
That the Congress, after ths constructon, passed a smar aw wth the
e act wordng woud certany ndcate that t was satsfed wth the construc-
ton and defnton that the e ecutve department had paced en ts ct.
( ske v. ITenare, 142 U. S., 44 dwards v. Wabash, 2 4 ed., 10.)
OUItT .
It s contended that ths constructon gves an unconsttutona tnge to the
ct. s, for nstance, when such a ta Is mposed upon a member by reason
of an aeged m-ome. and such ndvdua member s n fact wthout a net
ncome, the ta nstead of beng an ncome ta , wthn the s teenth amend-
ment, s a drect ta , whch, under rtce I, secton 2, cause 3, and rtce I.
secton 9, cause 4, of the Consttuton of the Unted States, must be propor-
toned n accordance wth the popuaton of the severa States.
The s teenth amendment to the Consttuton provdes:
The Congress sha have power to evy and coect ta es on ncomes from
whntever source derved, wthont apportonment anons the severa States, and
wthout regard to any census enumeraton.
graduated ncome ta Is consttutona. (Rru-taber v. U. P. R. R., 240
U. S., 1: Reaty Co. v. nderson, 240 U. S., 115.)
person, n order to queston the consttutonaty of a statute, must show
that the aeged unconsttutona feature In|ures hm, and, n fact, deprves
hm of rghts secured to hm by the Consttuton. (Rue v. ohnson, 289 ed.,
9 4.)
The stockhoders of the pantff, whose rghts are sad to be affected n ths
case, and for whom the pantff s soctous n ths sut, are not partes to
ths tgaton and woud not be bound by any determnaton reached heren.
Therefore, the consttutona queston rased by the amended b and the very
earned argument thereon s not n the case. It mght be observed, however,
that a statute s not to be nterpreted unconsttutona f such nterpretaton
can he reasonaby, avoded. (Insurance Co. v. ey, 282 ed., 772.) nd the
presumpton s that a statute s consttutona. (Power Co. v. Power Co., 283
ed., 00 Trade Com. v. Lorard, 2S3 ed., 999 Unted States v. Gordon, 2S7
ed., 5 5 Raway Company v. U. 8.. 287 ed.. 728.)
In theer.se of Me I c Iron Works v. U. 8. (25 U. S., 377) the court sad:
The constructon of the e cess-profts ta provson as basng the ta on
nvested capta, whch Is determned ony by the vaue of the assets at the
tme of ther acquston to the e cuson of subsequent Increase of vaue, does
not deprve the ta payer of due process of aw, snce equaty of ta aton can
never be attaned, and the ta In queston appes equay to a corporatons
smary stuated.
The observaton appes, kewse, to the ta mposed on ont stock assoca-
tons, because t appes equay to a such companes smary stuated, and
s. therefore, unform.
It foows, from what has been sad, that recovery by the pantff w he
dened and |udgment may be drawn for the defendant.
rtce 1504: ssocaton dstngushed from trust.
(See T. D. 3595 sec. 1000 (Capta stock ta ).) ueston whether
trustees of Massachusetts trusts are sub|ect to the speca e cse
ta es mposed upon certan assocatons by the. Revenue ct of
191 and the Revenue ct of 1918 based upon the vaue of ther
capta stock.
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htcb 1507: ont ownershp and |ont III-4-1321
adventure. . . . 4948
R NU CT-O 1 17.
Ted. that the partnershp of the M Company whs qudated n
1915 and 191 , and that no partnershp of the M Company e sted
for the year 1S T, e cept wth respect to the operaton of the
mne, from whch no net ncome was derved n 1917.
The Commttee has carefuy consdered the appea of the M
Company from the acton of the Income Ta Unt n proposng the
assessment of a ta for 1017 of the 4.04a- doars and of a 50 per cent
penaty for denquency n fng a partnershp return on orm
10 5 of 2.02|- doars.
The appeant contends that there was no partnershp of the M
Company durng the year 1917.
rom the evdence of record and from the facts deveoped at the
ora hearng, t appears that , , and C, brothers, formed a part-
nershp n 1908 for the growng of certan farm products that n
1914 the partnershp purchased .I y shares of capta stock of the N
Company for. .57 r doars that n 1915 there was some dssenson
among the brothers and a desre on ther part to dspose of ther
nterests that n March, 1915, they sod ther pantaton for 14.29
doars pus the proceeds to be reazed from the sae of a growng
crop to one D, payment therefor to be made over an e tended perod
that a verba agreement was made to dssove the partnershp that
C, who had kept the books of the partnershp, and had had more
busness e perence than hs brothers, was to coect the moneys due
from D, dspose of the other assets of the partnershpr and dstrbute
the proceeds equay among the brothers that n the sprng of 1915,
C was commssoned by certan stockhoders of the N Company to
nvestgate the at ars of that company and report to them that e
soon reported to then, and that shorty thereafter the O Company
was organzed as the successor of the N Company, the stockhoders
of the atter company recevng an equa number of shares of stock
n the new company n e change for ther shares n the N Company
that C was made manager of the O Company and that he eft u-
gust y 1915, to assume hs new dutes that he brought wth hm
the oks and records of the partnershp of the M Company and
had the bank account kept n the name of the partnershp trans-
ferred to hs persona account n the P ank, and that no money has
ever been deposted n the name of the M Company from ugust ,
1915 that and , two of the prncpa stockhoders of the O Com-
pany, who were nstrumenta n empoyng C as manager of that
company, gave hm n ugust, 1915, 3.75 shares of the capta stock
of the O Company that C mmedatey gave y shares of ths stock
to a frend assocated wth hm n the management of the company
and had the baance ssued n the name of the M Company that he
nwde an entry pacng the some upon the partnershp books kept by
hm for a nomna consderaton that and eft ther former
pace of busness n September, 1915, and stayed n the cty of S
unt December, 1915 that thereafter the former spent a number of
months huntng and fshng and then purchased a number of par-
ces of and and two or three mnes or mnng cams, ncudng the
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8
mne, C advancng money for the purchase of these propertes
hat went to work for the O Company n December, 1915, at a
saary of .21a doars per month and remaned n the empoy of that
company unt C resgned hs poston as manager n March, 1917:
that D competed hs payments for the pantaton n 191(5 that C
dd not mmedatey dstrbute the proceeds among the members of
the partnershp but nvested a part thereof n stock of the O Com-
pany, the stock beng ssued n hs own name that n 191 C pur-
chased for the account of and , upon nstructons from them,
certan shares of stock n the O Company that a of the stock n
the O Company whch was owned by the partnershp was sod n
191 and that whch had been purchased by C for hmsef or for hs
brothers was sod n 191 and the eary part of 1917 and the proceeds
dstrbuted n the eary part of 1917 that n March, 1917, , who
had purchased the mne upon hs own account, nvted hs brothers
to |on hm n the deveopment of that property that shorty there-
after tgaton ensued whch put a stop to a deveopment work
upon the mne that C ded n October, 1918, and that the partner-
shp books then frst came nto the possesson of , who was made
one of the e ecutors of hs estate that the books of account show-
that C made many entres upon the books of account whch were,
foregn to the partnershp busness that advances made by C to
for the purchase of the G ands, the mne, and other propertes,
were charged aganst sad propertes and not aganst that moneys
used by C n a |ont venture wth n the acquston of a mne were
treated as havng been made for the beneft of the partnershp, a-
though there had never been any agreement among the brothers
that any moneys beongng to them shoud be so used that no part-
nershp returns were fed for the years 191 and 1917 that the n-
dvdua returns of and , fed for them by C for 1917, refect
ncome from saes of O Company stock bought for them by C.
rom a revew of the entre record, the Commttee s satsfed that
the partnershp of the M Company, organzed n 1908 to mantan
and carry on an agrcutura enterprse, was n process of quda-
ton from 1915 and that the qudaton was competed n 191 wth
the sae of .1 // shares of stock of the O Company that no agreement
was ever reached by the brothers to carry on a partnershp busness
durng the year 191 or the eary part of 1917 unt after the pro-
ceeds from the sae of the assets of the partnershp had been ds-
trbuted to the brothers that there was an agreement n March, 1917,
whereby the brothers entered nto a |ont venture or partnershp for
the operaton of the mne, but that the net resut of the operatons
of ths property n 1917 was a oss that the nvestments n O Com-
pany stock made by C durng 1915 and 191 were for hs own ac-
count that there were never any representatons made by any of
the brothers that a partnershp e sted between them for the years
191 and 1917 that there was never any money deposted to the
credt of any such partnershp durng the years 191 and 1917
that the 2.75y shares of stock gven to C by and were paced n
the name of the M Company for the purpose of conceang the true
ownershp of the stock that t was C s ntenton to make a gft to
hs brothers of the. proceeds to be reazed from the sae of the stock
and that the entres upon the partnershp books dscosng the fact
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that the stock was acqured for a cash consderaton of was
unwarranted and shoud be gnored.
ont Investment n and ownershp of rea and persona property not used n
he o earon of uny trade or busness and not covered by any partnershp
a|nvment does not consttute a partnershp. ( rtce 1507, Itegua-
ms 4. . IStO edton.)
Ths reguaton s hed to be equay appcabe to ta returns for
the year 1917. See aso . R. R. 3552 (C. . 11-2, p. 181).
The Commttee recommends that t be hed that the partnershp
of the M Company was dssoved n 1915, and that no partnershp
of the M Company e sted for the year 1917 e cept wth respect to
the operaton of the mne, from whch no net ncome was derved
n 1917.
rtce 1507: ont ownershp and |ont ad- 111-24-1 00
venture. L T. 2022
( so Secton 223, rtce 401.)
R NU CTS O 191 , 1917, ND 1918.
Certan farm ands n Oregon, owned by , and certan ands
owned by , hs wfe, n the same State, have been cutvated as
a unt under the management of the husband. The profts have
been deposted n a common bank account sub|ect to wthdrawa
by ether. The e penses Incurred have been pad out of ths com-
mon fund. The profts have been ntermnged so that t s m-
possbe to segregate the e penses and ncome. They agreed that
the profts be equay dvded.
The facts do not dscose the e stence of a partnershp. The
queston as to whether ncome from these ands may be dvded
between and n separate returns on an acreage bass so as to
refect ther true net ncome s a queston of fact to be determned
from the best evdence avaabe.
and , hs wfe, are ctzens of Oregon and own certan farm-
ng ands n that State. acqured 2 / acres of ths and n 190 ,
under the w of hs father-n-aw, and under the same nstrument
acqured a remander n 1 y acres, sub|ect to the payment of S
doars a year from the rents and profts to the wdow of the testator.
Subsequenty, the wdow of the testator, who receved a of her
husband s persona property and 2y acres of reaty under the w,
turned ths property over to and , n return for ther promse
to pav her whatever shoud be necessary for her support.
f of these ands have been cutvated by as a snge busness,
and the profts have been deposted n a common bank account sub-
|ect to wthdrawa by hm and hs wfe. The e penses ncurred on
hs and hs wfe s and have been pad out of ths common fund and
the profts have been ntermnged so that t s mpossbe to segregate
the e penses and ncome for the years n whch they have fed n-
come ta returns. ccordng to ther statement, t was agreed at
the tme of the acquston of these ands that they shoud be cut-
vated as a unt and the )rofts shoud be dvded equay between
them. Durng the years 1915 to 1919, ncusve, 1 acres owned by
the wfe were under cutvaton and Gy acres owned by the husband.
The queston s presented whether and shoud account for ths
ncome on the bass of a partnershp reaton, and as to the proper
bass for computng e cess-profts ta abty for the year 1917.
4177 24 2
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2, rt. 1507.
10
The profts from cutvaton of these ands were orgnay re-
ported y n hs returns. e states, however, that he and hs wfe
woud have ted partnershp returns f they had been permtted to
do so. The revenue agent who nvestgated hs I ntks and accounts
was of the opnon that a ncome arsng from these farms shoud
be ta ed to the husband n accordance wth the decson of the Oregon
court n the case of arger v. arger (30 Oregon, 2 8), n whch the
court sad:
Were a husband has, wth hs wfe s consent, used her funds wth hs own
n s busness, mngng them so that they can not be traced, but takng a
ttes and dong a busness n hs own name, and both partes treat a prop-
erty as hs, a trust w not be decared n the property n favor of hs wfe.
It s consdered that the facts n ths case dffer from those n m--
ger v. arger n one very matera respect . e., am dd not
treat a of ther property as beongng to . The e stence of the
common bank account, whch was mantaned n connecton wth the
farmng operatons, s evdence of ths.
In secton 7044 of Lord s Genera Laws of Oregon t s provded
as foows:
The property and pecunary rghts of every marred woman at the tme of
her marrage or afterwards acqured sha not be sub|ect to the debts or con-
tracts of her husband, and she may manage, se, convey, or devse the same by
w to the same e tent and n the same mamer that her husband cau, property
beongng to hm.
In Tayor v. Tayor (54 Oregon, 5 0) t was hed that a wfe
mght sue her husband for rents coected by hm from her separate
property, for whch he had faed to account, and n Sne v. Stone
(23 Oregon, 327) t was hed that a marred woman mght enter nto
a partnershp wth her husband.
It s not beeved that the facts dscose a partnershp between
and . They have not stated that they ntended to form a
partnershp, and the fact that ther ands were cutvated as a unt
under the management of and the profts were dvded s not
ndcatve of such an ntenton. There were no features of ths
arrangement whch coud not be traced to the marta reatonshp
e stng between them. The case s not parae to that cted n
. R. R. 3 (C. . 5, 257), for the reason that there was no
agreement between and to furnsh capta for the conduct of
a busness n certan proportons and to share the osses as we as
the profts arsng therefrom. ccordng to s statement, the
ncome from the operaton of the farm was credted to a |ont
bank account, on whch both he and hs wfe had authorty to draw,
and e penses were pad from ths fund, but t does not appear that
actuay drew her share of the profts or that any porton of
ths fund was ever defntey set asde for her beneft.
It s hed, therefore, that no partnershp reaton e sted between
them. or the reasons prevousy stated, moreover, the case s not
k that of arger v. urger, and the husband shoud not e com-
peed to report a the profts from hs wfe s separate property n
hs returns for the years 191 to 1919, ncusve, athough orgna
returns were fed on that bass. They are entted to the prvege
of fng separate returns for those years, provded the returns w
refect ther true net ncome. If, upon the consderaton of a
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R200, rt. 1522.
the facts, t appears that an apportonment of ncome and e -
penses between and , on the bass of the acreage owned by
e ch (wth an ad|ustment for the vaue of the servces performed
bv the husband), woud correcty refect ther ncome, amended re-
turns shoud be accepted on ths bass.
Where a person receves money from a corporaton, deposts t n
hs name as trustee, and ends t n behaf of the corporaton to
another corporaton, coectng Interest thereon and payng It to the
endng corporaton, no fducary reatonshp s created for ncome
ta purposes.
return on orm 1041 for the ta abe year 1921 fed by the ta -
payer shows ncome from nterest receved amountng to doars and
a deducton of the same amount for nterest pad. The return was
sgned by the ta payer as trustee but no estate was named. In e -
panaton of the return t s stated there was no rea trust formed but
that the transactons gvng rse to the tem of nterest were merey
those n the case of one corporaton, the M Company, endng money
to another corporaton, the O Company, and recevng the payments
on account of the prncpa and nterest n return, and that the trans-
tons were handed through the name of the ta payer as trustee.
The ta payer receved the money from the endng corporaton,
deposted t n the bank n hs name as trustee, and then turned t
over to the borrower from ths account. In return he receved the
money from the borrower n payment of prncpa and nterest,
deposted t n the bank as trustee, and then deposted hs check to
pay the ender. It appears, therefore, that n these transactons he
was merey actng as agent for the endng corporaton. e states
he receved no ncome whatever for hs servces. The queston pre-
sented s what forms he shoud have used n reportng the trans-
set ons.
rom the facts presented t s hed that n the transacton de-
scrbed he was not actng n a fducary capacty such as to render
hm abe for the fng of a fducary return. s acton n fng
the return on orm 1041 was, therefore, erroneous. It aso hed,
upon the bass of the facts stated, that no other return made under
the Revenue ct of 1921 s requred to be fed by the ta payer wth
respect to the transactons and that no notaton need be made of
them n hs ndvdua ncome ta return.
TITL IL INCOM T .
P RT I. G N R L PRO ISIONS.
S CTION 200. D INITIONS.
III-U-1411
I. T. 1942
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200, rt. 1523.
12
kt|ce 15 3: Persona servce corporaton. I- -134
.R. R. 137
R NU CT O 1017.
The M Investment Company, havng empoyed more than a
nomna amount of capta n ts busness durng te fsca perod
December 4 to 31. 1917, Is not entted to assessment of profts
ta under the provsons of secton 0 ) of the Itevenue ct of )17.
The Commttee has carefuy consdered the appea of the M
Investment Company from the acton of the Income Ta Unt n
hodng that the company s not entted to assessment of profts
ta for the fsca perod December 4 to 31, 1917, under the provsons
of secton 209 of the Revenue ct of 1917.
rom the evdence of record, the Commttee fnds that on October
, 1917, the O Company entered nto a contract wth , whereby
the former agreed to se and the atter agreed to purchase 100y
shares of the treasury stock of sad company for the tota sum of
5|t doars, to be pad wthn 0 days from the date hereof, .sad
stock to be ssued to sad , trustee, or hs nomnees on the bass of
z cents a share that at the tme of the e ecuton of ths contract
the capta stock of the O Company was seng n the open market
at 3z cents per share that ate n 1917 caused the M Investment
Company, the appeant company, to be organzed wth an author-
zed capta of .5y shares of the par vaue of each, .002 y
beng ssued at par for cash and the remander .4975// ssued to sad
n e change for hs contract wth the O Company, mmedatey
turnng back to the company .25.y shares of the tota number so
ssued to hm that thereafter addtona shares, aggregatng 150 /
n number, were sod by the O Company, through ther fsca
agent, the M Investment Company/ remttances beng made drect
to fhe former, whch n turn pad stpuated commssons to the
atter that appeant company fed a return for the fsca perod
December 4 to 31, 1917, wheren t camed an nvested capta) of
25 doars, representng the par vaue of the capta stock ssued
for cash and contract, ess .25y shares mmedatey turned back by
, and computed ts profts ta under the provsons of secton 201
of the Revenue ct of 1917 that subsequenty the books of appe-
ant company for the fsca perod under consderaton were e -
amned by a revenue agent, who recomputed the profts ta under the
provsons of secton 209 of the Revenue ct of 1917, and n so
dong commented as foows:
In 1017 the corporaton was ony n e stence for 28 days and ony had a
cash capta of .25s doars and an ntangbe asset n the form of a contract
or opton to purchase the capta stock of the O Company. Ther whoe profts
for ths perod were from the saes of stock whch was the resut of the per-
sona efforts of the stockhoders. In ths year the corporaton s, therefore,
consdered a persona servce corporaton and ta ed accordngy.
In accordance wth the above hodng the revenue agent prepared
an amended return for the fsca perod under consderaton, whch
was duy e ecuted and fed by the appeant company, and ater re-
|ected by the Income Ta Unt on the ground that the appeant
company had an nvested capta whch, under the provsons of sec-
ton 207 of the Revenue ct of 1917, t determned to be 5.25 do-
ars, and more than a nomna capta wthn the meanng of that
term as used n secton 209 of that ct.
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200, rt. 1523.
Tc vaue of 24.7 doars paced on the O Company con-
tract b the appeant company has not been questoned by the
Income Ta Unt. Indeed, the evdence of record ceary supports
such a vaue. s the contract n queston s ntangbe property, the
Unt has ncuded the vaue of the same n ts computaton of n-
vested capta to the e tent of 5.r doars, whch represents the statu-
tory mtaton of 20 per cent of the capta stock outstandng at the
begnnng of the fsca perod, appcabe to ntangbes, whch
nount pus the .25./ doars cash pad n consttutes the nvested
capta as determned by the Unt.
Secton 209 of the Revenue ct of 1917 provdes that n the case
uf a trade or busness havng no nvested capta or not more than a
nomna capta the profts ta sha be an amount equvaent to
L per centum of the net ncome of such trade or busness n e cess
of the specfc deducton, n eu of the ta mposed by secton 201
of that ct.
The queston at ssue depends upon the meanng of the terms
nvested capta and nomna capta as used n secton 209 of
the ct. What s to be deemed nvested capta s ceary set
forth n secton 207. It s cear, from a cose anayss of that secton,
tha the acton of the Income Ta Unt n aowng any vaue for the
contract prevousy referred to for nvested capta purposes s
erroneous. It w be noted that under secton 207(a) n (b) of the
provso good w , and other ntangbe property, sha
be ncuded n nvested capta f the corporaton made
payment bona fde therefor specfcay as such n cash or other
tangbe property. That Congress dd not ntend that shares of
stock of the ssung corporaton, when ssued for ntangbe property,
shoud be regarded as payment bona fde therefor n
cash or other tangbe property s manfesty cear, for contnung
n the same sentence, foowng the semcoon, t s provded that
good w , or other ntangbe property, bona fde pur-
chased, pror to March 8, 1917, for and wth shares n
the capta stock of a corporaton (ssued pror to March 3, 1917),
sha be ncuded n nvested capta . ad no
dstncton been ntended the phrase tangbe property woud
have stood n pace of the phrase shares n the capta stock of a
corporaton as found n the second cause of the provso. That
ths s the constructon paced upon secton 207 by the ureau s
evdent from a readng of artce 47 of Reguatons 41, whch
provdes:
ut when a corporaton pays for ntangbe propery by the ssuance f ts
own stock or bonds, ths w not be regarded as beng a payment bona fde
made n cash or tangbe property wthn the meanng of secton 207.
Therefore, ntangbe property pad n to a corporaton subsequent
to March 3, 1917, for shares of capta stock, as n the nstant case,
may not be ncuded n the computaton of nvested capta under
the provsons of secton 207 of the Revenue ct of 1917. The
appeant company s nvested capta for the perod under consdera-
ton can ncude ony the amount of cash pad n, whch s .25
doars.
The Unted States Crcut Court of ppeas for the Second Cr-
cut n the case of the Lncon Chemca Company v. dwards, co-
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200, rt. 1523.
14
ector (272 ed., 142), aso T. D. 3458 (C. . DM, 194), stated as
foows:
It must be admtted that If the corporaton can show that on anuary 1,
1917, It had no nvested capta or not more than a nomna capta
wthn the meanng of secton 209 t was entted to be assessed under that
secton. We thnk t ceary appears that at the tme above mentoned the
company had some nvested capta and therefore was not ented to be assessed
under the secton referred to. The tac Is by the Commttee.
The rung of the court n the cted case s equay appcabe to the
case under consderaton.
The ureau has consstenty hed that the omsson of the re-
strctve word nvested from the term nomna capta as used
n secton 209 of the ct was to be regarded as havng been nten-
tona, and therefore, n the determnaton of whether the cap-
ta empoyed n the busness was nomna, a knds of capta,
ncudng tangbe, ntangbe and borrowed, must be consdered.
The evdence shows that durng the fsca perod under consderaton
the tota capta empoyed was 25a doars, consstng of tangbe
and ntangbe property, an amount whch coud not be consdered
as nomna n nstant case, but rather qute substanta.
ccordngy, t s recommended that the acton of the Income Ta
Unt be sustaned and the appea be dened.
owever, t s apparent that the e cuson of any vaue for the
ntangbe contract n the computaton of nvested capta by vrtue
of the operaton of secton 207 of the Revenue ct of 1917 creates
an abnormaty affectng nvested capta. Therefore, consderaton
shoud be gven the nstant case under the provsons of secton 210
of the Revenue ct of 1917, and assessment of profts ta for the
fsca perod under consderaton made n accordance wth the pro-
vsons of that secton, provded any reef s aorded thereby.
Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 1523: Persona servce corporaton. 111-22-1574
( so Secton 32 , rtce 831.) T. D. 3592
e cess profts ta revenue act ot 1917 decson of court.
1. Invested Capta Nomna Capta.
Secton 207 of the Itevenue ct of 1917 e cudes borrowed
money from nvested capta for the purpose of computng the
e cess profts ta , and a corporaton whose capta conssts en-
trey of borrowed capta has no nvested capta wthn the mean-
ng of the ct and s therefore entted to assessment under the
provsons of secton 209.
2. Cases oowed.
The cases of Carter- oand Lumber Co. t. Doye (277 ed., 150)
and La ce on Works v. Unted States (2 k U. g., 377 IT. D.
3181 C. . 4, 373 ) foowed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The appended decson of the Unted States Dstrct Court for the
Northern Dstrct of West rgna n the case of mpre ue Cam-
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200, rt. 1523.
pony, a corporaton, v. S. . ays, coector (295 ed., 704), s
pubshed for the nformaton of revenue offcers and others con-
cerned.
D. . ar,
Commssoner of Interna Revenue.
pproved May 22, 1924.
. W. Me on,
Secretary of the Treasury.
Is the Dstrct Court of the Unted States fob the Northern Dstrct of
West rgna.
mpre ue Company, a Corporaton, pantff, v. S. . ays, Coector,
defendant.
Trespass on the case n assumpst,
ebruary 8, 1924.
aker. Dstrct udge: Ths s an acton of trespass on the case n assumpst,
commenced on uy 14, 1920, by the mpre ue Co., a West rgna cor-
poraton, chartered on the 5th day of pr, 1917, under the aws of the State
of West rgna, pantff, aganst S. . ays, Unted States coector of
nterna revenue for the dstrct of West rgna, defendant, to recover the
sum of 35, 8.23, wth nterest thereon from the 30th day of ugust, 1919,
addtona e cess proft ta assessed aganst the pantff corporaton for the
year 1917, aeged to have been Iegay coected by sad ays, coector,
actng under the authorty of the ct of Congress approved October 3. 1917,
commony known as the cess proft aw. (Comp. Stat., 1918, # 33
a et seq.)
Contenton of Partes,
pantff.
That the West rgna Gas Coa Co. owned a coa ease and a mted
amount of equpment and a easehod estate upon a certan coa mnng prop-
erty, stuate n anawha County, W. a., and was engaged n mnng and
producng coa. Desrng to se ts propertes, ts offcers opened negotatons
for that purpose wth Senator Gohen C. rnod and the four Messrs. utchn-
son. These negotatons cumnated n a contract for the sse of the propertes
under date of March 20, 1917, the sae to be consummated on the Inst day of
the month : the purchasers to be entted to the propertes from and after
pr 1, 1917. The contract provded that the conveyance of the propertes was
to be made to rnod and the rtchnsons, or to ther nomnee or nomnees,
aa they mght eect. Durng a the negotatons that ed up to the contract.
It was understood by both buyers and seer that ether a corporaton n e -
stence shoud be the rea purchaser of the propertes, or that nomna pur-
ghasers woud organze a corporaton to acqure the propertes under the con-
tract of purchase, and to own, hod, and operate them.
fter the makng of ths contract of purchase e gences arose, whch made
It desrabe on the part of the seer to convey the ega tte to the propertes
before the tme f ed n the contract of purchase, and ths desre was made
known to Senator rnod, and t was arranged that a deed shoud be forthwth
made and devered to Senator rnod for the propertes, and. under date of
March 20, 1917, such deed was e ecuted and deposted wth Unon Trust Co.,
a bankng nsttuton of Chareston, W. a., for the grantee and hs assocates.
ot havng antcpated takng tte to the propertes unt the 1st day of pr
foowng, the purchasers had not organzed the corporaton to take tte, and
therefore ft became necessary, for the tme beng, to vest the ega tte, at
east. In one or more of the promoters, or n some other person, for the beneft
of the corporaton to be organzed. Whte the deed was made at an earer date
than contempated by the contract, the sae was made, n compance wth the
orgna terms of the contract of purchase, as of the 1st day of pr, 1917.
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1
It was understood n the makng of the deed to rnod on March 20, 1917,
(e seng company shoud conduct the mnng operatons, and a operatons
he pad by t up to the 1st day of pr foowng, and that It shoud receve,
approprate, and own a the ncome, earnngs, and profts from the property
up unt that date. So that from March 20 to pr 1, 1917, Senator rnod
hed the naked ega tte ony of the property, for the use and heneft of the
seer, the West rgna ( as Coa Co. In other words, the property was
hed and operated by the representatve of the seer unt the date of the
fna consummaton of the sae, whch, pr 1, fang on Sunday, was, by
vrtue of West rgna statute, on te Monday foowng, or pr 2. On
pr 2, 1917, the devery of 1 e property to rnod, as trustee for hs asso-
cates and for the corporaton n process of organzaton, was n fact made and
the sae by the West rgna Gas Coa Co. became competed.
The promoters speedy competed the organzaton of a corporaton (the
mpre ue Co.), and by deed dated pr 2, 1017. but e ecuted on the
competon of the organzaton of sad mpre ue Co., the pantff cor-
poraton, on the 21st day of pr, 1917, Senator rnod conveyed, assgned,
and transferred to te pantff company, as of pr 2, 1917, a of the mnng
property, estates, rghts, and franchses of every knd and descrpton whatso-
ever acqured from the West rgna Gas Coa Co., the purchaser assumng a
obgatons ncurred n the purchase of the property and n the promoton of
the corporaton, and a operatng e penses ncurred n the operaton of
the property from and after the date of pr 2, 1917, and the mpre ue
Co. acqurng a rentas, ncomes, and profts accrung upon or derved from the
property from and after pr 2, 1917. t no tme dd Senator rnod, by
vrtue of any of the transactons, own or hod for hmsef or for hs ndvdua
assocates any benefca nterest whatsoever n and to the propertes or any
part of them nor dd he derve for hmsef personay, or for hs assocates,
any profts or benefts whatsoever from the sad propertes, e cept such as
he ater acqured by reason of hs ownershp of a part of the capta stock
n the pantff corporaton. mpre ue Co.
The purchase prce from the West rgna Gas Coa Co. was 125,000,
and the assumpton by the purchasers of any damages that mght be recovered
by ewett- geow and rooks aganst the West rgna Gas Coa Co. n
e cess of 10,000, as stpuated In sad contract. Senator rnod and hs asso-
cates borrowed 41,000 to make the cash payment on ths property and gave
notes aggregatng 84,000. ater, n order to provde workng capta, there
was borrowed 50,000, whch was used to pay the 41,000 orgna cash
payment, and the resdue to be used to provde workng capta. In addton,
Senator rnod personay advanced the dscount on the notes of the Ptts-
burgh ank and the mpre Natona ank, amountng to somethng over
1,200, and some other mnor sums were advanced. It s admtted that these
debts were assumed by pantff, mpre ue Co.
The pantff commenced ts corporate e stence wth an ndebtedness of
84,000 to Mason Crckard, trustee for the West rgna Gas Coa Co.,
ts own notes havng been substtuted for those of Senator rnod and others
aso wth ndebtedness to the mpre Natona ank of 25,000, and a ke
ndebtedness of 25,000 to the ank of Pttsburgh, and an ndebtedness of
somethng over 1,200 to rnod for dscount, etc., advanced. Senator rnod,
In purchasng the property of West rgna Gas Coa Co., was actng for
the beneft of the pantff company n contempaton of ts organzaton,
and that under the rue of qu fact per aum fat-t per se pantff com-
pany, n effect, purchased ths property and borrowed a the purchase money
and a of the money for ts workng capta and corporate organzaton, and
a of sad sums havng been borrowed, the corporaton had no nvested
capta, wthn the meanng of the ct of October 3, 1917, and was ta abe
at the rate of 8 per cent under the terms of secton 209 of sad aw.
D NO NT.
rst. That rnod, n purchasng the West rgna Gas Coa Co. property,
was actng, not on behaf of the corporaton n contempaton,-but on behaf of
hmsef and the four utchnsons, hs assocates.
Second. That the property conveyed by rnod to the corporaton had a vaue
n e cess of 125,000, the amount pad for t, and therefore ths e cess con-
sttuted Invested capta.
Thrd. That the pantff had actua cash pad n for the Incorporators shares
and that such cash pad n consttuted nvested capta.
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17
200, rt. 1523.
ourth. That upon the theory that rnod was not actng for the corporaton,
but actng for hs assocates, the ndebtedness was not borrowed money wthn
the meanng of the ct of October 8, 1917, but was the ndebtedness of rnod
unc hs assocates, and, as a coroary to ths contenton, that the fact that
these persons ndorsed the notes of the corporaton when gven paced them
u the poston of e tendng ther credt to the corporaton, and ths credt con-
sttuted nvested capta.
fth. That the property conveyed by rnod to the pantff corporaton was
f substanta vaue and was workng capta, and that therefore, the pan-
tff beng a corporaton ordnary empoyng capta, t dd not come wthn
the purvew of secton 209, whch apped ony to corporatons n the nature of
erso servce corporatons.
n anayss of ths record shows the case to turn upon the decson of two
outstandng questons of fact, to wt:
U STIONS O CT.
rst. Was Senator rnod actng, n hs purchase on behaf of the pantff,
u contempaton of ts organzaton, or on behaf of hmsef and hs assocates
us ndvduas
Second. The vaue of the property purchased.
The court s ncned to the vew from the record that Senator rnod, n
purchasng the property, was actng on behaf of the pantff corporaton then
u contempaton and speedy organzed, that the property was acqured n the
usua course of busness at a bona fde sae at the prce of 125,000, and from
a the evdence taken and produced n ths case the sum stated In the contract
f March 20, 1917, was a far and adequate prce therefor, and n the absence
of fraud the (overnment s bound by t for the purpose of ta aton.
The pantff corporaton borrowed every cent of ths sum and 9,000 add-
tona for operatng e penses and some 1,200 advanced by Senator rnod to
pay nterest. The sma sums pad n on account of stock were at once e tn-
gushed for e penses.
U STIONS O L W.
The ega queston s whether the pantff corporaton, under a fndng of ths
sate of facts, had nvested capta as contempated by the revenue aw.
Courts, u consderng cases of ths nature, w, so far as they can wthn
bounds or reason, resove every doubt, gvng every reasonabe nference, nter-
pretng every statutory ambguty, n favor of the ta payer. (Partngton v.
ttorney Genera. L. R., 4, . L., 100, 122 U. 8. v. Wggettcorth, 2 Story, 3 9,
ed. (. as. No. 10.090 ct t Twne Co. v. Worthngton, 141 U. S., 474, 12 Sup. Ct.,
55, 35 L d., 821 . 8. v. Isham 17 Wa.. 490, 21 L. d., 728 Rce v. . S.
(C.C, .,8th Ct.),53 ed., 910 (911, 912, of the opnon), 4 C. G. ., 104 Pumer
v. Commonceath. 3 Gratt., 45 Goud v. Goud. 245 U. S., 151, 153, 38 Sup. Ct.,
. 3, G2 L. d., 211 nocton v. Moore. 178 T . S., 42, 20 Sup. Ct., 747, 44 L. d.,
m (T. D. 129) State of Oho v. arrs, 229 ed., 892, 898, 144 C. C. ., 174
. S. v. Couby (C. C. ., th Ct), 258 ed., 28, 1 9 C. C. ., 1 5 Mer v.
carn (G. C. ., 9th Ct.), 258 ed., 225, 1 9 G. C. ., 293, syabus 1 and 2.)
Smar authortes coud be mutped ndefntey, but the very recent dec-
son of the Supreme Court of the Unted States renders ther further consd-
eraton unnecessary. The case of Goud v. Goud ays down most emphatcay
that n cases of doubt the constructon must be most strongy aganst the Gov-
ernment, as the foowng anguage from ths decson w show:
In the nterpretaton of statutes evyng ta es, t s the estabshed rue not
to e tend ther provsons, by mpcaton, beyond the cear Import of the an-
guage used, or to enarge ther operatons so as to embrace matters not specfc-
ay ponted out. In case of doubt they are construed most strongy aganst
the Government, and n favor of the ctzen. (Goud v. Goud, 245 U. S., 153,
38 Sup. Ct., 53, 2 L. d., 211.)
It s obvous, rrespectve of the rues of nterpretaton, that courts are not
concerned n the pocy or reason behnd the statute, f the words are cear
or may be reasonaby resoved In favor of the ta payer. The statute e cudes
burrowed money from computaton as nvested capta, and therefore a cor-
poraton whose capta Is a borrowed has no Invested capta and must be
ta ed under secton 209.
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18
These are cear-cut, defntve, and decsve words of the sn ute, and are sub-
|ect to no doubt or ambguty. Therefore t must foow that the mpre Pne
Co., f a of Its money was borrowed, must be ta ed under secton 209.
cursory gance at the stuaton mght gve rse to the thought that secton 209
creates a certan favortsm n favor of certan corporatons. It mght be sad,
f the queston were consdered superfcay, that those desrng to form a
corporaton may borrow a the money for the very purpose of avodng the
hgher graduate ta . and that therefore secton 209 furnshed a oophoe of
escape from the hgher ta . n e amnaton, however, of ths poston ceary
shows ts faacy.
rst In the snnt case there coud be uo queston of evadng the hgher
ta or of usng secton 209 as a vehce to escape ta aton, because a of the
transactons nvoved n ths case happened ong before October 3. 1917, the
date of the approva of the ct. and ong before secton 209 was conceved n
the bran of ts author.
Second. ven f secton 209 dd furnsh a oophoe for the escapement of
hgher ta n the case of certan corporatons, t woud be mproper for the
court to consder such fact, because the anguage of secton 207, e cudng
money or property borrowed from computaton as nvested capta, s equay
cear, and n such case a court can proceed no further.
It s the duty of courts to nterpret and enforce the statutes, not to nqure
nto ther underyng pocy, ther reasons, or ther effect when enforced. If a
statute s unsound n ts operaton, the remedy Is wth the egsature, and
ot wth the |udcary. Courts have no power to suspend the operaton of a
statute, even though that operaton mght furnsh an advantage to one ctzen
as aganst another, provded the statute Is consttutona. To ask a court to
wthhod the operaton of secton 209. taken n connecton wth the e cudng
mtaton of secton 207, woud be to ask the court not to nterpret the statute,
but to change the pocy of the statute and to overrde t
The case of La ee Iron Works v. U. 8. (T. D. 3181 C. . 4, 373 ), de-
cded by the Supreme Court May 1 , 1921, reported In 25G U. S.. 377. 41 Sup.
Ct., 528, 5 L. d., 998. s determnatve of many of the contentons of the Gov-
ernment n the nstant case and so we shows ther faacy. fter a carefu
study and fu consderaton of ths case, I am drven to the concuson that
the Government s poston s not ony contrary to the decsons of the Supreme
Court of the Unted States and the Crcut Court of ppeas, but aso to the
pronouncements of the Department of Interna Revenue on ths sub|ect. Treas-
ury Decson No. 3220, approved ugust 2 , 1921 : uetn 49-21. ssued Decern-
ber 7, 1921, page 3 C. . 5, 285 Carter v. Doye (C. C. .) (277 ed.. 150).
In vew of the reasons above stated, and In the ght of the prncpes of
aw heren set forth, the court fnds for the pantff, and an order may be
prepared for |udgment accordngy. The record contans consderabe evdence
adduced at the tra, whch was had by the court n eu of a |ury, the adms-
son of whch was sub|ect to reservatons by the court. If desred, the fna
order may show the e cuson of such parts of the evdence as were admtted
on the theores whch have been re|ected. The order mny aso show, f desred,
the court s fndngs as ndcated n the memoranda, nstead of the speca fnd-
ngs requested.
rt|ck 1531: Capta of persona servce cor- III- -1349
poraton. - . R. R. 347
R NU CT O 1918.
The empoyees of the M corporaton engaged n the restaurant
busness were a stockhoders. Capta was a matera ncome-
producng factor and It s not entted to ersona servce cassfca-
ton.
The M Company has appeaed from the hodng of the Income
Ta Unt that t s not entted to cassfcaton as a persona serv-
ce corporaton for the |-ears 1918, 1919, and 1920.
The M Company was organzed October , 191 , to conduct a
restaurant busness, whch busness s conducted n a eased bud-
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200, rt. 1531.
ng on a cooperatve or proft-sharng bass, no person beng em-
poyed who s not a stockhoder. Ths company and two other
restaurant companes, namey, the O Company and the P Com-
pany, are the outgrowth of an dea conceved by , a man wth
many years of e perence n the restaurant busness and one who s
at n tmes actuated by a sncere desre to share wth hs coworkers
whatever success may attend hs busness ventures. The coopera-
tve or proft-sharng pan of dong busness put nto e ecuton by
, n connecton wth the operaton of the M Company, has attracted
wde and favorabe attenton and s regarded as one of the best,
f not the best, of the proft-sharng methods thus far empoyed n
the busness word, and u a very abe and comprehensve bref the
sad company s attorney contends that because of the fact that the
sad busness s conducted soey by stock-hodng empoyees and the
servng of meas has been hed by varous courts not to consttute a
tradng n goods, wares, or merchandse, the company s entted
to cassfcaton as a persona servce corporaton under the provsons
of secton 200 of the Revenue ct of 1918.
Secton 200 of the Revenue ct of 1918 provdes, n part, that
The term persona servce corporaton means a corporaton whose ncome
Is to be ascrbed prmary to the actvtes of tte prncpa owners or stock-
hoders, who are themseves reguary engaged n the actve conduct of the
(fars of the corporaton and n whch capta (whether nvested or bor-
rowed) s not a matera ncome-producng factor.
rtce 1523 of Reguatons 45 states that
The term persona servce corporaton means a corporaton, not e pressy
e cuded, the Income of whch s derved from a professon or busness (a)
whch conssts prncpay of renderng persona servce, ( ) the earnngs of
whch are to be ascrbed prmary to the actvtes of the prncpa owners
or stockhoders, and (c) n whch the empoyment of capta t not necessary
or t ony ncdenta:
Whe n artce 1525, same reguatons, t s stated that
Merchandsng or tradng ether drecty or ndrecty n commodtes or
the servces of others s not renderng persona servce.
rtce 1531, Reguatons 45, states n part that
In determnng whether a corporaton s a persona servce corporaton
that test s the nature of the professon or busness as ndcated (a)
by the knd of servces t renders and ( ) the e tent to whch capta s re-
qured to carry on such professon or busness. If the use of capta s neces-
sary or more than ncdenta, capta s a matera ncome-producng factor
an the corporaton Is not a persona servce corporaton. No corporaton s
a persona sen-ce corporaton f It carres on busness of a knd whch
ordnary requres the use of capta.
rtce 1532, Reguatons 45, states that
If a corporaton engaged In an agency, brokerage or commsson busness
reguary empoys a substanta amount of capta to buy and carry
goods on ts own account, or to buy and carry odd ots n order that t may
render more satsfactory servce to Its prncpas or customers, t s not a
persona servce corporaton.
It s the opnon of the Commttee that the prncpe set forth
n ths artce appes wth equa force to a corporaton engaged
n a restaurant busness.
Durng the ora hearng of October , 1923, t was admtted by
he appeant company s presdent that t woud be mpossbe to
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201, rt. 1541.
20
carry on (he busness of the M Company wthout the use of capta
n a substanta amount and the fact that capta was empoyed s
evdenced by the foowng statement:
1918
1919
1920
DoUrt.
3 .9I
30. r
23.2
,9f
Doart.
4(1. S
as. 1
Doart.
51.01
3 . 1
2S. 7
1. 13
Cost of g s sod ncudes, among other thngs, merchandse purchased..
Percentage of stock hed by ndvduas who rendered no servce to the
( )
Per crn/.
18.:)
1.051
Ptr cent.
21.4
( )
1 Not hown.
1 Not shown, but known to have been n e cess of 20 per cent.
In the nstant case the appeant company was engaged n the
purchase of foodstuffs, whch necesstated the empoyment of capta
n very substanta amounts, and the servng of such foodstuffs n
the form of prepared meas to ts customers. What each cus-
tomer pad for was the mea content and the persona servce ren-
dered by the company s stock-hodng empoyees n the preparaton
of such meas. The appeant company empoyed both capta and
abor, and not abor aone, n the transacton of ts busness, and t s
not to be doubted that the amount of capta empoyed day n the
purchase of foodstuffs, the payment of rents, and the amount n-
vested n furnture and f tures used n the busness was a very
matera factor n the producton of ncome and that wthout the
use of capta the busness coud not have contnued n operaton.
Therefore, cassfcaton as a persona servce corporaton can not
propery be granted the M Company under the provsons of secton
200 of the Revenue ct of 1918.
In vew of the foregong, the Commttee recommends that the ac-
ton of the Income Ta Unt n hodng that the M Company s
not entted to cassfcaton as a persona servce corporaton for
each of the years 1918, 1919, and 1920 be sustaned.
S CTION 201. DI ID NDS.
rtce 1541: Dvdends.
(See I. T. 189 sec. 238. art. 547.) ent pad drect to share-
hoders of essor corporaton by essee corporaton.
rtce 1541: Dvdends. III-7-13 0
( so Secton 214(a) 1, rtce 10 .) . R. R. 242
NU CT O 1017.
n amount pad by the M Company durng 1017 Is shown to
have been a speca payment made to offcers and empoyees, a
of whom, e cept one, were stockhoders at the tme, and, whe
such payment does not appear to have been desgnated for the
purposes of computng net ncome of the payng corporaton as
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21
201, rt. 1541.
saary or compensaton, determnaton of the queston whether
suc speca payment n the hands of the recpents s sub|ect to
both norma ta and surta at the rates In effect for 1917 rather
than sub|ect merey to surta as a dvdend pursuant to secton
31(b) of the Revenue ct of 191 as amended must be predcated
uk facts estabshng that such payment was or was not based
upon or dd or dd not bear a cose reatonshp to the stock hod-
ngs of the offcers or empoyees to whom pad.
The Commttee has had under consderaton the appea of the
above-named ta payer from the acton of the Income Ta Unt n
hodng that the amount of 4,9 4 doars receved by the appeant
from the M Company n 197 was ncome to hm sub|ect to both
norma ta ar 1 surta at the rates appyng for 1917 rather than
a dstrbuton of earnngs ta abe as a dvdend under secton 31(b)
of the Revenue ct of 191G as amended.
The contentons of counse made upon appea warrant the foow-
ng statement of facts and premses to the concuson by the Com-
mttee :
ccordng to an affdavt dated pr , 1923, by , who was
treasurer of the M Company (the M Company was dssoved Octo-
ber , 1917, and succeeded by the O Company), t was the practce
of the company to pay a dvdend, usuay per cent, to stockhoders,
and then, by resouton of the board of drectors, to pace the entre
net earnngs of the company after the dstrbuton of such dvdend
n the hands of the presdent to dstrbute among the heads of the
departments, usuay stockhoders, but n many cases dstrbuton was
made to nonstockhoders (ths must refer to years subsequent to 1917,
as there was but one nonstockhoder who receved a porton of the
dstrbuton for 1917) that ths dstrbuton was known as tan-
teme that the mnute book of the corporaton has been ost, and
t s mpossbe to gve the date of the decaraton of the dvdend
that the books of account show, n each nstance, out of what profts
the dvdends and tanteme were pad and that the dvdends
pad to stockhoders were more n the nature of nterest on the n-
vestment, as the dvdends are pad for the perod and not specfcay
out of any earnngs. The schedues submtted by the ta payer show-
ng the stockhoders as of March 1, 1917, the dvdends pad as such,
and the tanteme dstrbuton out of 1915 and 191 earnngs are
as foows:
March 1, 1917.
DI ID ND OUT O 191 RNINGS.
Stores.
Percent-
age.
Doars.
Pharos.
Percent-
age.
Doars.
c
219b
2.25
30.00
1.00
1.00
1.00
1.00
3. 4
30. S
.r
1.1
.I
.I
G...
1.00
1.00
.OO
.7.5
.I
.
.
.S
.
D..
I.
y
8r
. . .
400-/
100.00
102.1
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5201, rt. 1541. | 22
March SO, 1917.
T NTI M OUT O 1915 ND 191 RN1NOS S NOT D LOW.
rercent-
areas
whoe.
Doars.
Percent-
age as
whoe.
f 1915
aC
1 1913
MS
/ 1915
191
/ 1815
WW
1 1915
191
/ 1915
191
3341
4
aoo
C
9911
,491
4t 7r
525
42r
181
22
( )
W7
3111
9
10,8201
9.5
Not a stockhoder for 1917. Stock sod 9/1 .
Somewhat smar payments were made durng 1913, 1914, 1915,
and 191 . Dvdends pad as such n those years were to a stock-
hoders, there beng but one cass of stock, whe the tanteme,
so caed, was to a certan group of stockhoders, other stockhoders
not havng-partcpated theren, whch was kewse true for 1917.
The payment here n queston was not n proporton to stock hod-
ngs, nor does the payment bear a cose reatonshp to stock hodngs
of the recpents n that recept thereof by any gven stockhoder
was because of hs stock ownershp. Ths s demonstrated by the
fact that.severa stockhoders receved none of the tanteme and
one ndvdua who owned no stock of the company durng 1917 had
a substanta porton thereof pad to hm. Moreover, the payment
s shown to have been to heads of departments as such rather than
as sharehoders. ence, the stuaton s presented where earnngs
were dstrbuted based upon what appears to have been a consdera-
ton not that of ownershp of stock or capta nvested and where
a strong presumpton s created that such porton of the tanteme
as was pad to each and every recpent thereof was n recognton
of servces performed and n effect as compensaton for such servces.
or some reason the corporaton dd not deduct the tanteme n
the process of determnng ts net ta abe ncome. It s obvous,
however, that the Department can not be governed, n deang wth
one ta payer, by the nterpretaton whch another ta payer may
have put upon a certan transacton. Concevaby the Unt mght
have dsaowed the amounts n queston on the ground that they
consttuted e cessve and unreasonabe compensaton for servces,
but that does not appear, snce due to the acton of the corporaton
the queston was never presented to the Unt.
Counse at the ora hearng before the Commttee contended that
the amount receved by the appeant n 1917 as a dstrbuton of
the earnngs or profts accumuated by the corporaton snce ebru-
ary 28, 1913, comes wthn the purvew of secton 31(a) of the
Revenue ct of 191 as amended, whch provdes:
That te term dvdend as used n ths tte sha he hed to mean any
dstrbuton made or ordered to be made by a corporaton, |ont stock company,
assocaton, or nsurance company, out of ts earnngs or profts accrued snce
March 1, 1913, and payabe to ts sharehoders.
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23 201, rt. 1541.
Speca payments to effcers or empoyees who are stockhoders,
made n the guse of addtona saary or compensaton, the amount
of whch s based upon or bears a cose reatonshp to the stock
hodngs of such offcers or empoyees or the capta nvested by
them n the busness of the company, w be regarded as a speca
dstrbuton of profts, or compensaton for the capta nvested, and
not payment for servces rendered. Payments under such atter
condtons beng n the nature of dvdends, w not be deductbe
from gross ncome (artce 138, Reguatons 33, revsed).
The amount pad durng 1917 as tanteme s shown to have
been a speca payment made to offcers and empoyees, a of whom,
e cept one, were stockhoders at the tme, and, whe such payment
does not appear to have been desgnated for the purposes of comput-
ng net ncome of the payng corporaton as saary or compensaton,
determnaton of the queston whether such speca payment n the
hands of the recpents s sub|ect to both norma and sur ta at the
rates n effect for 1917 rather than sub|ect merey to surta as a dv-
dend pursuant to secton 31(b) of the evenue ct of 191 as
amended must be predcated upon facts estabshng that such pay-
ment was or was not based upon or dd or dd not bear a cose rea-
tonshp to the stock hodngs of the offcers or empoyees to whom
pad. In other words, a speca payment made to offcers or em-
poyees who are stockhoders, even though not desgnated by the
payng corporaton as addtona saares or compensaton n that t
was not recorded upon the books as such and camed as a deducton
n the computaton of the net ncome of the corporaton, must be
determned a dvdend or not a dvdend wthn the meanng of sec-
ton 31(a) of the Revenue ct of 191 as amended accordng to
whether such speca payment was or was not based upon or dd or
dd not bear a cose reatonshp to the stock hodngs of such offcers
or empoyees. It s accordngy strcty ogca to rue that, uness
the payment to each offcer or empoyee stockhoder was cosey reated
to hs stock hodng n the sense that t bore substantay the same
rato to the tota payment made as the stock hed by each bore to the
tota stock outstandng, the payment to each was not based upon,
was not n proporton to, and dd not bear a cose reatonshp to
stock hodngs. The dsparty n these ratos n the nstant case s
so pronounced as to precude recognton thereof as substantay the
same. The amount nvoved consequenty must be deemed a pay-
ment to offcers and empoyees as such rather than as stockhoders
and not a dvdend wthn the meanng of secton 31(a) of the Reve-
nue ct of 191 as amended, artce 138 of Reguatons 33 (revsed),
anr artces 105 and 10 of Reguatons 45 and 2.
The concuson accordngy s reached upon the facts presented
that the amount receved by the appeant durng 1917 as tanteme
was not a dvdend, and that such amount was ncome to the appeant
sub|ect to both norma ta and surta at the rates effectve for 1917.
The Commttee therefore recommends that the acton of the In-
come Ta Unt be sustaned and the appea dened.
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20, rt. 1541.
24
htce 1541: Dvdends. 111-13-1443
.R.R. 4919
NU CTS O 1917, 1918, ND 1921.
The Income character of the dvdend was not changed smp.v
because the stockhoders had entered nto an agreement provdng
that the dvdend .shoud be pad to trustees to be Invested for
the stockhoders beneft.
The Commttee as carefuy consdered the appea of from the
acton of the Income Ta Unt n hodng that e derved ta abe
ncome of 1.37.C doars from a dvdend pad n 1917 by the M Com-
pany on shares of stock n that busness owned by hm.
The facts are, brefy, that the M Company desred to acqure the
shares of stock and busness of the 0 Company hut was prevented
from dong so drecty by the aws of the State of S. Wth ths
end n vew, however, a the stockhoders of the M Company en-
tered nto an agreement on anuary , 1913, wheren and whereby
they agreed to assgn, set over, and transfer to certan trustees a
ther rght, tte, and nterest, both at aw and n equty, to a cash
dvdend n the aggregate sum of 33.75./ doars thereafter to be
decared from the undvded profts of the M Company, sad sum
to he used by the trustees n purchasng the stock of the O Com-
pany at doars per share, and t was further provded n
the agreement that n case the trustees thereafter decded to n-
crease the capta stock of the O Company to 50.r doars and to
reserve the undvded profts thereof, or any sum not n e cess of 25./
doars, the sad stockhoders then and there and n pursuance of
sad agreement assgned, set over, and transferred to the trustees
any rght, tte, or nterest whch they woud have n any further
dvdends whch mght thereafter be decared out of the surpus
or undvded profts of the M Company for the specfc purpose
ast named. In pursuance of the agreement, a dvdend of 18|
doars was pad n 1917 for the purpose of ncreasng the capta
stock and surpus of the O Company. The amount of ths dvdend
pad on appeant s z shares of stock n the M Company was 1.37.2
doars.
There can be no doubt but that the dvdend n queston woud
have consttuted ta abe ncome to the appeant f there had been
no agreement on anuary , 1913. The shares of stock upon whch
the dvdend was pad beonged to the appeant. In the opnon of
the Commttee, the ncome character of the dvdend was not changed
smpy because the stockhoders had entered nto an agreement pro-
vdng that the dvdend shoud be pad to trustees to be nvested
for the stockhoders beneft.
The Commttee recommends that the acton of the Income Ta
Unt be sustaned and the appea dened.
rtce 1541: Dvdends. 111-24-1 01
I. T. 2023-
R NU CT O 1918.
Where a stockhoder who owns a but one share of the capta
stock of a corporaton credted the amount of the surpus of such
corporaton to hs persona account, the amount of such surpus s
a dvdend In the hands of such stockhoder, and for ncome ta
purposes shoud be reported as such.
G
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e
25
201, rt. 1541.
The gft to hs sons by a stockhoder of a corporaton of stock
hed by hm In such corporaton dd not dstrbute to the sons any
part of the surpus of the corporaton, and there need not be n-
cuded n the gross ncome of suc donor any part of the surpus
of the corporaton undstrbuted at the tme of the gft.
In 1918 owned 90y of the OOy outstandng shares of the M
Company, a corporaton hs sons, and C, owned 9y shares and y
share, respectvey. On October , 1918, made a gft of hs hod-
ngs to hs three sons, , C, and D, n equa shares, each recevng 30y
shares. The surpus of the M Company at that tme amounted to
ft doars. efore the transfer of the shares gven by to hs
sons was made on the stock regster of the corporaton, two of the
sons on the ne t day sod ther shares of the gft from ther father
to ther brother, , for 94| doars. fter the purchase of hs broth-
ers stock, , three days ater, credted the amount of the surpus
of the corporaton, 0| doars, to hs persona account. Pror to
the gft of the stock to the sons and the purchase of the shares of two
of the sons by ther brother, , the atter had, on ugust , 1918,
credted hs own account wth 7 doars, chargng that amount
aganst the surpus of the corporaton. It does not appear that any
dstrbuton to the stockhoders n proporton to ther respectve
hodngs was made from the surpus of the corporaton n the way
of dvdends pror to the date of the gft from to hs sons. In
an affdavt made by C after had acqured, n addton to the 9y
shares orgnay hed by the atter, the 30 / shares gven hm by hs
father and the COy shares purchased from hs brothers stated:
1 have for many years hed and st hod |/ share n the busness of whch
I am an offcer and have never receved a dvdend thereon. No dvdend has
ever been pad to anyone. The amount transferred on the books to my brother s
account has aways been ooked upon as an overdraft and s so.
It appears, however, from an e amnaton of the photostat copes
of the accounts of the corporaton ncuded n the papers, that on
anuary 31, 1913, there was a dstrbuton of the surpus of the cor-
poraton n what appears to be the same proportons as the amounts
of capta stock hed by the. respectve stockhoders.
In hs capacty as admnstrator of the estate of . deceased, C
further stated n an affdavt under date of May , 1923. that:
rom the day of October, 1918, and unt hs death on ugust , 1921,
had no connecton wth nor any actve partcpaton n the M Company, the
stock n that company from and after October . 1018, standng 99# shares In
the name of and y share n the name of C.
It s contended that , when makng a gft of hs stock to hs sons,
ncuded not ony the capta stock as such, but aso hs undstrbuted
nterest n the surpus of the corporaton.
dvce s requested as to whom the amount of 0.e doars, repre-
sentng the surpus of the M Company, shoud be ta ed.
ased on the evdence submtted and for ncome ta purposes t
s hed that the amount of GO doars, credted to the account of
out of the surpus of the M Company, s a dvdend n the hands of
the sad and shoud have been reported by hm as such that
was never n possesson of the 0a- doars taken out of the company
by , nor was t ever sub|ect to s demand and that the contenton
to the effect that must necessary ncude n hs gft to hs sons
4177 24 3
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2f
hs undstrbuted nterest n the surpus of the corporaton s errone-
ous, as coud, and from the evdence submtted dd, dstrbute bn
hodngs n the company equay among hs three sons n the form of
shares wthout any dstrbuton of the surpus of the corporaton
havng been made.
rtce 1542: Source of dstrbuton. III-2-1290
I. T. 1898
R NU CT O 1917.
Te burden rests upon the ta payer In every case to estabsh
that at the tme a dvdend was pad to hm n 1917 the earnngs
of the corporaton up to that tme were not suffcent to cover the
dstrbuton. No showng has been made by the ta payer whch
woud warrant the Commssoner n fndng that the M Company
dd : r have suffcent earnngs to cover the dvdend receved by
hm from t on anuary 15. 1017. The cam shoud, accordngy,
be dened. The dvdend, therefore, Is ta abe at the 1017 rates.
receved certan dvdends from the M Company on or about
anuary , 1917. tracts from mnutes of a meetng of the board
of drectors of the M Company on November , 191 , contaned a
copy of the foowng resouton passed by that meetng:
Dscusson of dvdend took pace and on moton by and C, the presdent
was authorzed to pay a dvdend equa to haf earnngs of prevous month.
The mnutes of the meetng of the board of drectors of the M
Company, hed on anuary , 1917, contaned the foowng
notaton:
Mnutes of meetng of November , 191 , read and approved, wth the
correcton th t the presdent nstead of beng authorzed to pay dvdend equa
to haf earnngs of prevous month, be changed to read he may authorze
such payment.
The Unt, n ad|ustng s tu abty for the year 1917, has
ta ed the dvdends receved by hm on anuary , 1917, at the raes
provded for 1917 and not at the 191 rates, as contended for by .
The bass of the hodng by the Unt s due to ts fndng that the
earnngs of the M Company for the year 1917, prorated as provded
by the reguatons, showed an amount suffcent on anuary , 1917,
the date of payment, to pay the dvdends n queston. The con-
tenton of the ta payer s that t woud have been out of the ques-
ton for the M Company to have pad dvdends on anuary 15,
1917, out of earnngs for that month, as the nature of ts busness
was such that t coud not te at that tme whether t had any 1917
earnngs avaabe, for such purposes.
n amost dentca queston was passed on by ths offce n the
case of the N Company. In the opnon n that case attenton was
caed to the cases of arder v. Irwn (285 ed., 402) and Dougas v.
dwards (287 ed., 919), wheren t was hed that the presumpton
contaned n secton 31(b) of the 1917 ct, wth reference to the
payment of dvdends, was a concusve presumpton, and any dv-
dend pad by a corporaton n 1917 must be concusvey presumed
to have been pad out of most recenty accumuated profts, ncud-
ng the current profts of the year 1917 up to the date of (he dstr-
buton of such dvdends. rtce 107 of Reguatons 33, revsed,
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27 IS201, rt. 1542.
whch was uphed by the court n the arder and Dougas cases,
above cted, provdes that:
If a corporaton dstrbuted dvdends In 1917, such dvdends w be deemed
to have been pad from the earnngs of 1917, uness t s shown to
te satsfacton of the Commssoner of Interna Revenue that at the tme such
dvdends were pad the earnngs up to that tme were not suffcent to cover
the dstrbuton .
The burden rests on the ta payer n every case, therefore, to estab-
sh that the current corporate earnngs up to the date of the payment
of the dvdend were not suffcent to cover such dstrbuton. In a
manufacturng and merchandsng frm correct ncome at any gven
date can be refected ony by the cosng of the books and the takng
of nventores (artces 91 and 92, Reguatons 33, revsed artce
1581, Reguatons 2). No nformaton has been presented to the
effect that the M Company foowed ths course and no showng has
been made whch woud warrant the Commssoner n fndng that
the M Company dd not have suffcent earnngs to cover ths dv-
dend at the tme t was pad. The ony aternatve s to prorate n
accordance wth T. D. 2 78 (not pubshed n uetn servce) and
under such appro maton there were ampe earnngs to meet the
dstrbuton n queston. The cam shoud, accordngy, be dened.
rtce 1542: Source of dstrbuton. III- -1350
L T.1924
R NU CT O 1918.
onds of the M corporaton and Interest thereon were con-
trbuted to the corporaton as gfts by ts prncpa stockhoders,
the amounts thereof beng credted to ts surpus account These
contrbutons were suffcent to wpe out a defct sustaned pror to
191 and at the tme of a dvdend payment n 1918 Its earnngs
were n e cess of the amount of the dvdend and the books re-
fected a surpus n e cess of the amount of the dvdend.
There beng no evdence that even a parta qudaton of the
assets was contempated or attempted, the ega presumpton that
the dvdend Was pad from surpus profts woud appy. It s hed
that the dvdend was a ega dvdend and not a return of capta
even though the contrbutons were aowed for e cess-profts ta
purposes as pad-n surpus and ts Invested capta consequenty
was not decreased by the operatng defct
Ths case nvoves the queston of the ta abty of a certan
dvdend n the sum of 7 .r doars receved by the ta payer n the
year 1918 from the M Company, ts capta stock beng 1,000a
doars.
Snce the organzaton of the M Company, has been the prn-
cpa owner of ts stock and bonds. Pror to 191- the corporaton
had sustaned heavy operatng osses, but up to the tme of the
dvdend payment (1918) ts tota earnngs amounted to 13 ar do-
ars. eng under heavy deveopment e pense from year to year
the M Company was abe to secure workng capta ony by vrtue
of ts stockhoders, who were aso ts soe bondhoders, donatng
to t ts bonds and accrued nterest, from tme to tme, as needed
by the busness. s the bonds and nterest thereon were forgven
and canceed, the company credted the amounts thereof to surpus
account and, at the tme of the decaraton and payment of the
dvdend, the books of the company refected a surpus greaty n
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(201, rt. 1542.
28
e cess of the amount of the dvdend. The ta payer contends that
these varous tems shoud not have been credted aganst the operat-
ng defct.
The Unt, n computng the e cess-profts ta es due from te cor-
poraton, treated the amounts represented by the surrendered bonds
and accrued nterest thereon as contrbutec or pad-n capta and
consequenty ts nvested capta was not decreased by the operat-
ng defct. It woud be nconsstent for the Government to recog-
nze the operatng defct for e cess-profts ta purposes and ac
the same tme to refuse a recognton thereof n determnng the
ta abty of the dvdend.
owever, nvested capta, for e cess-profts ta purposes, s
purey a statutory concepton, and permttng the ncuson theren
of donated capta when there s an operatng defct s merey an
equtabe concesson to the corporaton whch shoud not concude
the Government n determnng the ta abty of dvdends appar-
enty pad from surpus. n operatng defct, beng a charge
aganst the assets of a corporaton, ordnary woud be dmnshed
by the accreton or addton of assets, uness, of course, there s a
correspondng ncrease n capta stock. There beng no ncrease n
the corporaton s capta stock, but an ncrease n the assets suff-
cent to competey dmnsh the capta oss or operatng defct,
t s qute mpossbe to agree wth the ta payer that the dvdend
he receved was a return of hs capta. The addtons to the assets
of the company by the stockhoders, when made, became |ust as
permanent as the orgna contrbutons whch were represented by
the stock ssued, and there beng no evdence that even a parta
qudaton of the assets of the company was contempated or even
attempted, the ega presumpton that the dvdend was pad from
surpus profts woud appy. t the, tme of tho decaraton and pay-
ment of the dvdend the corporaton was sovent ts assets were
greaty n e cess of ts debts and capta stock. The dvdend was
pad from earnngs and consequenty the capta of the corporaton
was not dmnshed thereby.
There can never at the same tme e st a defct as we as a surpus,
for one s the drect antthess of the other, and. as heretofore stated,
even though the Government has recognzed the operatng defct,
st that concesson shoud not e tend beyond the purposes for whch
t was specfcay aowed, to wt, nvested capta. Law Opnon
942 (C. . 1, p. 300) states that dvdends pad whe there s an
operatng defct sha be deemed to be pad from capta or from
pad-n surpus even though there are earnngs of the ta abe year
suffcent to pay the dvdend n whoe or n part. That opnon has
reference to a rea and genune defct and, of course, where there s
such, no surpus can e st. ut n the nstant case there was no rea
defct there e sted a surpus. The vountary contrbutons and
gfts by the stockhoders were suffcent to dmnsh the defct and
when the dvdend was decared there e sted a surpus from whch
t was pad. Ths s substantated by the books and records of the
company.
In vew of the foregong, t s hed that the dvdend was a ega
dvdend and not a return of capta. Consequenty, t was ta abe
ncome wthn the meanng of the revenue aws.
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29
201, rt. 1545.
rtce 1544: Dstrbutons other than those 111-23-1588
out of earnngs or profts. I. T. 201
R NU CT O 1021.
corporaton In 1020 sod a ts assets for notes whch are hed
by trustees n qudaton. In December, 1922, the baance sheet of
the corporaton showed an operatng defct The amounts pad
to the stockhoders from the nterest receved upon the notes shoud
he consdered as a return of capta to them to the fu e tent of
the operatng defct, and to that e tent are not ta abe as dvdends.
The stockhoders decded to dssove a corporaton, and n pursu-
ance of ths pan sod a ts assets for notes and apponted trustees
to effect the dssouton. These notes become due over a perod of fve
years, and none of the stock n the corporaton has been, as yet, turned
n for canceaton by the stockhoders. The sae of the assets took
pace n 1920, and the corporaton sustaned osses for 1920 and 1921,
so that ts baance sheet at December 31,1922, dscosed a arge oper-
atng defct. The ony ncome of the corporaton s represented by
nterest on the notes whch t hods, and t appears doubtf d whether
the combned amounts the stockhoders w receve from the nterest
on the notes and from a dstrbuton of the company s assets w
equa 90 per cent of the par vaue of ther stock. The trustees are
dstrbutng the ncome receved from the notes to the stockhoders
of the corporaton as though they wTere partners, and are not report-
ng t as ncome of the corporaton. The trustees have aso made
dstrbuton to the stockhoders representng returns of capta.
ed, that the stockhoders of the corporaton are not partners, and
that as the corporaton s st n e stence, the ncome from the notes
s ncome of the corporaton sub|ect to ta as such.
Ordnary a dstrbuton of ths nterest to the stockhoders by
the trustees woud represent dvdends by the corporaton whch
woud be sub|ect to surta when receved by the ndvdua stock-
hoders. In the nstant case, however, n vew of the fact that an
operatng defct e sted, t s hed that the amounts pad to the
stockhoders from the nterest receved upon the notes hed by the
trustees shoud be consdered as a return of capta to the stockhoders
to the fu e tent of the operatng defct, and that the amounts so
receved by the stockhoders are not ta abe as dvdends. If the
dstrbutons of nterest or other ncome of the corporaton to the
stockhoders eventuay equa the amount of the operatng defct,
any further dstrbuton to them w be ta abe as dvdends, even
f the operatng defct st appears upon the books of the corpora-
ton.
rtce 1545: Dstrbutons n qudaton. III-1-1277
Mm. 31
R NU CT O 1921.
Proper treatment under secton 201 of the Revenue ct of 1921
of dstrbutons to ther sharehoders made by corporatons n qu-
daton.
To coectors of nterna revenue, nterna revenue agents n charge,
and others concerned:
Inqures receved by the ureau ndcate that the proper treat-
ment to be accorded dstrbutons to ther stockhoders made by
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(201, rt. 1545.
30
corporatons n qudaton under secton 201 of the Revenue ct of
1921 s not generay understood.
The specfc provson governng dvdends n qudaton con-
taned n secton 201(c) of the Revenue ct of 1918 s not repeated
n the 1921 ct. Such a dstrbuton s, therefore, covered by the
genera provsons of the ct, partcuary by sectons 201 and 202.
rtce 1545 of Reguatons 2, nterpretng these sectons, provdes :
Where a corporaton dstrbute.- a of t property n compete qudaton or
dssouton, the gan reazed by the stockhoder from the transacton, computer
under secton 202, s ta abe as a dvdend to the e tent that t s pnd out of
earnngs or profts of the corporaton accumuated snce ebruary 28, 1913. If
the amount receved by the stockhoder n qudaton s ess than the cost or
other bass of the stock, a deductbe oss s sustaned.
Therefore, where a dstrbuton n qudaton s pad by a cor-
poraton to ts sharehoders, t s necessary frst to determne whether
a gan or oss has been reazed by such sharehoder, usng the bass
prescrbed n secton 202 of the ct. If a gan has been reazed,
to the e tent that t s pad out of earnngs or profts of the cor-
poraton, accumuated snce ebruary 28, 1913, such gan s ta abe
as a dvdend to the e tent that such gan has not been pad ether,
(1) from such earnngs, or (2) from earnngs or profts accumuated
or ncrease n vaue of property accrued pror to March 1, 1913. t
s sub|ect both to norma ta and surta , under the genera pro-
vsons of the ct- ta ng gans. ny dstrbuton made by a cor-
poraton to ts stockhoders out of earnngs or profts accumuated
or ncrease n vaue accrued pror to March 1, 1913, s e empt from
ta . dstrbuton n qudaton by a corporaton of ts assets n
knd s sub|ect to the same treatment, to the e tent that the assets
dstrbuted have a ready reazabe market vaue. It shoud be
noted, however, that the mere ncrease n the vaue of capta assets
unreazed by the corporaton s not earnngs or profts of the cor-
poraton: and that f the gan reazed by the stockhoder from the
dstrbuton n qudaton conssts of such ncrease accrued snce
ebruary 28,1913, t s sub|ect to both norma ta and surta n hs
hands. No gan or oss w be reazed by a stockhoder from a ds-
trbuton of assets havng no ready reazabe market vaue unt
ther subsequent sae or other dsposton by hm. owever, f the
dstrbuton conssts party of (1) property whch has no ready
reazabe market vaue, together wth (2) money or other property
whch has a ready reazabe market vaue, then the money and/or
the far market vaue of the atter property sha be apped aganst
and reduce the bass provded n secton 202 for fnay ascertanng
the gan or oss on the shares owned by the stockhoder recevng
the dstrbuton and f n e cess of such bass, t s ta abe to the
e tent of such e cess, accordng to the fund out of whch such e cess
s pad, on the prncpes stated n ths paragraph. nay, f the
amount receved by the stockhoder n qudaton s ess than the
cost or other bass of the stock, ascertaned accordng to the pro-
vsons of secton 202, ths oss s deductbe on the ncome ta return
of such stockhoder.
Dstrbutons made by a corporaton n parta qudaton shoud
be treated smary to dstrbutons n fna qudaton, sub|ect, how-
ever, to the quafcatons of secton 201(b) of the ct.
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31 201, rt. 1545.
The foowng e ampes w ustrate the rues above announced:
L
M corporaton was organzed n 1915 wth a capta of 10,000
represented by 100 shares of the par vaue of 100 each. In 1922
t has a surpus of 5,000. In that year the corporaton dssoved
and dstrbuted a of ts assets pro rata to ts sharehoders. ,
a stockhoder who purchased hs share at 125, receved a dstrbuton
made up as foows:
arnngs accumuated snce ebruary 28. 1913 50
Capta 100
Tota dstrbuton 150
ass for determnng gan (cost of share to ) 125
Ta abe gan to . 25
Snce the gan thus reazed by s pad out of earnngs accumu-
ated snce ebruary 28, 1913, t s sub|ect to surta ony as a
dvdend.
II.
purchased a share of stock n the same corporaton n 1918 for
50. e kewse receved a dstrbuton n 1922, made up as
foows:
arnngs accumuated snce ebruary 28, 1913 50
Capta 100
Tota dstrbuton 150
ass for determnng gan (cost of share to ) 50
Ta abe gan to 100
fty doars of ths gan s pad out of earnngs accumuated snce
ebruary 28, 1913 t s sub|ect to surta ony as a dvdend. The
remanng 50 of gan s sub|ect both to norma ta and surta to .
III.
purchased n 1920 a share of stock n the Company for 200.
In 1922 he receved a fna qudatng dvdend, made up as foows:
arnng accumuated snce ebruary 28, 1913 75
arnngs accumuated pror to March 1, 1913 50
Capta 100
Tota dstrbuton 225
ass for determnng gan_ 200
Ta abe gan to 25
Snce ths gan s pad out of earnngs accumuated snce ebruary
28,1913, t s sub|ect to surta ony.
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201, rt. 1545.
32
I .
purchased n 1920 a share of stock n the Y Company for 200.
In 1922 he receved a fna qudatng dvdend, composed as foows :
arnngs accumuated snce ebruary 23, 1913 75
arnngs accumuated pror to March 1, 1013 50
Capta 50
Tota dstrbuton 175
ass for determnng oss (cost of share to ) 200
Loss deductbe on s ncome ta return 25
D. II. ar, Co7nmssoner.
rtce 1545: Dstrbutons n qudaton. 111-13-1444
. R. R. 094O
R NU CT O 1918.
The assets of a corporaton were sod n 1918 to a stockhoder
for ess than ther far market vaue. The dfference between the
purchase prce of the assets and the far market vaue thereof at
the date of sae s 50.11a: doars, whch amount, under the prov-
sons of Treasury Decson 3435 (C. . II-, 50), consttutes a
dstrbuton by the corporaton. Of the amount so dstrbuted,
33.18 doars was from earnngs accumuated subsequent to eb-
ruary 28, 1913, and as such s sub|ect to surta n the hands of
the stockhoder for the year 1918, but not to the norma ta . The
baance, or 1 .9 a: doars, represents earnngs accumuated pror
to March 1, 1913, and s nonta abe n hs hands.
The Commttee has carefuy consdered the appea of from
the acton of the Income Ta Unt n ncreasng the not ncome as
reported for the year 1918 by the amount of 33.18. : doars.
The M Company and the O Company, two separate and dstnct
corporatons, were organzed n 1911 and 1908, respectvey. The
stock hodngs n each company on anuary 1, 1918, were as foows:
M Com-
pany.
O Com-
pany.
Shares.
1 -
80
Share .
58,
8 ,
.. .
200,
144,
On ebruary , 1918, and havng dsagreed on busness
poces and management and beng desrous of dscontnung ther
busness reatonshp e changed ther mnorty hodngs n each
company, one wth the other. That s, surrendered hs 58// shares
n the O Company to n e change for the htter s 80y shares n
the M Company.
fter the above e change of stock had been effected, , who
then owned a the stock of the M Company, was advsed by hs
attorney to dssove the corporaton and conduct the busness as
an ndvdua enterprse.
On pr , 1918, the board of drectors of the M Company
passed a resouton authorzng the sae to of the company s
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33
201, rt. 1545.
entre assets for the sum of 20a doars cash and hs assumpton of
a the outstandng obgatons of the company. Ths acton of
the board of drectors was approved and consented to by the stock-
hoders of the company and the conveyance was made as of May ,
1918, and the company7 dssoved.
revenue agent s ad|usted baance sheet at the date the assets
were conveyed to the appeant ndcates ther book vaue after
deducton of reserves to have been 92.32a doars, aganst whch
there were outstandng abtes of 22.18 doars, eavng a net
worth of 70.14. doars, of whch amount 1 .9 a doars represented
surpus accumuated pror to March 1, 1913.
The Income Ta Unt has hed that the e cess of the far market
vaue of the assets at the date of the sae over and above the March
1, 1913, vaue of the stock surrendered by the appeant, or 33.18
doars, consttutes a dstrbuton n qudaton, and as such s ta -
abe n the. hands of the appeant sub|ect to both the norma and
sur ta . or the purpose of computng such e cess vaue the Unt,
n the absence of any other acceptabe evdence, as accepted the
book vaue at March 1, 1913, as evdence of the far market vaue
of the capta stock at that date and the book vaue at the date of
the sae as evdence of the far market vaue of the assets.
The appeant contends that the assets of the company were
conveyed to hm as the resut of a bona fde purchase and sae: that
the sae as made meets a the requrements of the aws of the, State
of S, and can not, therefore, be set asde and dsregarded by the
edera Government that f t s hed that the transacton was a
dstrbuton n knd, no ta abe gan was reazed, as the far market
vaue of the assets dstrbuted coud not be determned, and n any
event such far market vaue coud not be f ed at a greater amount
than the purchase prce pad by the appeant.
Treasury Decson 3435 provdes n part as foows:
Where property s sod by a corporaton to a sharehoder or member, or by
m empoyer to an empoyee for an amount substantay ess than ts far
market vaue, such sharehoder or member of the corporaton or such empoyee
sha ncude n gross ncome the dfference between the amount pad for the
property and the amount of ts far market vaue.
In the case of a stockhoder n a corporaton whch has a surpus
from whch such dvdend can he pad, the dfference between the
purchase prce of the property and ts far market vaue, such dffer-
ence representng a dstrbuton by the corporaton, consttutes a
dvdend to the e tent of the surpus aocabe thereto and sub|ect
o surta but not to norma ta .
The contentons of the appeant that the far market vaue of the
assets coud not be determned, or that the far market vaue thereof
coud not be f ed at a greater amount than the purchase prce pad
therefor, are cearv untenabe. Of the tota assets of 111.22, - doars
shown on the agent s ad|usted baance sheet, 73.49u doars s repre-
sented by cash, accounts recevabe, merchandse, oans, nvestments,
and berty bonds .93u doars s represented by prepad e penses
5.37a doars represents good w and 31.44a doars s represented
by automobes, furnture and f tures, aganst whch a deprecaton
reserve of 18.9a- doars has been set up.
The dfference between the purchase prce of these assets, 42.18a
doars, and the far market vaue thereof at the date of the sae,
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201, rt. 1545.
34
92.32.t- doars, as refected by the agent s ad|usted baance sheet,
whch shoud be accepted n the absence of other acceptabe evdence
tendng to show the actua vaue, s 50.14a doars, whch amount:
under the provsons of Treasury Decson 3435 consttutes a dstr-
buton by the corporaton. Of the amount so dstrbuted, 33.18|
doars was from earnngs accumuated subsequent to March 1. 1913,
and as such s sub|ect to surta n the hands of the appeant for the
year 1918, but not to the norma ta . The baance or 1 .9 ,r doars
represents earnngs accumuated pror to March 1, 1913, and s non-
ta abe n the hands of the appeant.
t the date of the e change of 58y shares of capta stock of the O
Company on ebruary , 1918, for 80y shares of the M Company,
the book vaue of these 80// shares was doars per share, or
27.3,/ doars. The cost of the 58// shares of the O Company gven,
n e change therefor was 11.52# doars, whe the book vaue thereof,
whch has been accepted as the March 1, 1913, vaue n the absence
of other acceptabe evdence as to the actua vaue at that date, waa doars per share, or 17.95a doars. ccordngy, on ths trans-
acton the appeant reazed a ta abe gan equa to the e cess of the
far market vaue of the 80// shares of stock of the M Company, at
the date of the e change, over and above the March 1, 1913, vaue of
the 5S/ shares of stock of the O Company, or 9.35 doars.
On the date of the dssouton of the M Company, the appeant
was the owner of the entre 200y shares of capta stock, of whch
120// shares had cost 12 doars and the remanng 80y shares had
cost 27.3./ doars. The 20.t doars cash pad n to the company by
the appeant for ts assets was dstrbuted n qudaton on the same
date.
ccordngy, the gan or oss by the appeant upon the qudaton
of hs hodngs n the M Company shoud be determned as foows:
Shares.
Cost.
March 1,
1913, vaue.
Receved n
qudaton.
Gan.
Loss.
DoU rt.
121
Doar:
21.79
Doar .
12
81
None.
Doar,.
27.31
The book vaue of the 120// shares has been accepted as the March
1, 1913, vaue thereof n the absence of any other acceptabe evdence
as to what the far market vaue was on that date.
ccordngy, t s recommended that the acton of the Income
Ta Unt be modfed as heren ndcated, and that the appea be
dened.
Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 1545: Dstrbutons n qudaton. 111-13-1445
I. T. 1957
R NU CT O 1921.
The ta payer havng purchased a the stock of a corporaton
In 1917 and receved a dstrbuton of a the assets n compete
qudaton of the corporaton n 1022, he reazed a gan n 1922 to
the e tent of the e cess of the ready reazabe market vaue of
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201, rt. 1545.
the assets receved over the cost of the stock n 1917. Ths gan
h ta abe as a dvdend under the provsons of secton 201(b)
of the statute, and artce 1545 of Reguatons 2, to the e tent of
the earnngs or profts of the corporaton accumuated snce eb-
ruary 28, 1913. Such part of the gan reazed from the fna ds-
trbuton as s not pad out of (1) the earn ags or profts of tut
corporaton ether pror to March 1, 1913, or snce ebruary 28,
1913, or (2) Increase n vaue of property accrued pror to March
1. 1913. s sub|ect, ke other gans and profts, to both norma ta
and surta . Such part of the dstrbuton as conssts of earnngs
or profts accumuated or ncrease n vaue of property accrued
pror to March 1, 1913. s e empt from ta aton, under secton
201(b) of the ct
The queston s rased as to whether the ta payer shoud report
as gan n hs ndvdua return for 1922 the dfference between the
cost of stock n 1917 and the vaue of the. net assets dstrbuted to
hm n 1922.
It s evdent that there was a compete dssouton and qudaton
of the corporaton, n the course of whch the ta payer receved a
dstrbuton of a the assets of the corporaton. rtce 1545 of
Reguatons 2 provdes, wth reference to dstrbutons n quda-
ton, as foows:
Where a corporaton dstrbutes a of ts property n compete qudaton
or dssouton, the gan reazed by the stockhoder from the transacton, com-
puted under secton 202, Is ta abe as a dvdend to the e tent that t s pad
oat of earnngs or profts of the corporaton accumuated snce ebruary 28,
1913. If the amount receved by the stockhoder n qudaton s ess than the
cost or other bass of the stock, a deductbe oss s sustaned.
The facts of the nstant case brng t wthn these provsons, snce
there was a dstrbuton of a the corporate property n compete
qudaton. The procedure drected by artce 1545 s to compute
under secton 202 of the Revenue ct of 1921 the gan or oss
reazed by the stockhoder from the transacton. That secton pro-
vdes, n subdvson (a) :
That the baste for ascertanng the gan derved or oss sustaned from a
ae or other dsposton of property, rea, persona, or m ed, acqured after
ebruary 28, 1913, sha be the cost of such property .
Thus the bass for determnng the gan or oss on the dsposton
of the shares s ther cost n 1917. The other fgure necessary to
cacuate a gan or oss s set forth n artce 15 4 of Reguatons 2,
as the market vaue of the property receved upon the qudaton.
rtce 15 4 provdes n part as foows:
Gru or Iocs arsng from the acquston and subsequent dsposton of
property Is reased ony when as the resut of a transacton between the
owner and another person the property s converted nto other property (a)
that s essentay dfferent from the property dsposed of and (b) that as a
W y reazabe market vaue. Property has a ready reazabe market
nne f t can be ready converted nto an amount of cash or ts equvaent
sobstantay equa to the far vaue of the property.
Under the above-quoted provsons of secton 202 of the Revenue
ct of 1921, and artce 15 4 of Reguatons 2, the ta payer reazed
a gan n 1922 to the e tent of the e cess of the. ready reazabe
market vaue of the assets receved over the cost of the stock n
1917. Ths gan s ta abe as a dvdend under the provsons of
secton 201(b) of the statute and artce 1545 of Reguatons 2 to
the e tent of the earnngs or profts of the corporaton accumuated
snce ebruary 28, 1913. Such part of the gan reazed from the
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201, rt. 154 .
3
fna dstrbuton as s not pad out of (1) the earnngs or profts
of the corporaton ether pror to March 1, 1913, or snce ebruary
28, 1913, or (2) ncrease n vaue of property accrued pror to March
1, 1913, s sub|ect, ke other gans and profts, to both norma ta
and surta . Such part of the dstrbuton as conssts of earnngs
or profts accumuated or ncrease n vaue of property accrued pror
to March 1, 1913, s e empt from ta aton, under secton 201(b)
of the ct.
rtce 1545: Dstrbuton n qudaton.
(See I. T. 2034 sec. 202, art. 15 1.) Sae of stock to corporaton
after resouton of dssouton and parta qudaton.
rtce 151 : Dstrbuton from depeton or III-9-1384
deprecaton reserves. T. D. 3555
Income ta Dstrbuton from depeton or deprecaton re-
serves rtce 1540 of Reguatons 2 amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
rtce 154 of Reguatons 2 s hereby amended to read as fo-
ows :
rt. 1540. Dstrbuton from depeton or deprecaton reserves. reserve
set up out of gross Income by a corporaton and mantaned for the purpose of
makng good any oss of capta assets on account of depeton or deprecaton
s not a part of surpus out of whch ordnary dvdends may e pad. ds-
trbuton made from a depeton or deprecaton reserve based upon the cost
of the property w not be consdered as havng been pad out of earnngs or
profts, but the amount thereof sha e apped aganst and reduce the cost,
or other bass, of the stock upon whch decared for the purpose of determnng
the gan or oss from the subsequent sae of the stock. dstrbuton made
from that porton of a depeton reserve based upon n vauaton as of March
1, 1913, whch s n e cess of the depeton reserve based upon cost, w not
be consdered as havng been pad out of earnngs or prots, but the dstrbu-
tee sha not be aowed as a deducton from gross ncome any oss sustaned
from the sae or other dsposton of hs stock or shares uness, and then ony
to the e tent that, te bass provded n secton 202 e ceeds the, sum of (1)
the amount reazed from the sae or other dsposton of such stock or shares,
and (2) the aggregate amount of such dstrbutons receved by hm thereon.
No dstrbuton, however, can be made from such a reserve unt a the earn-
ngs or profts of the corporaton have frst been dstrbuted. Dvdends de-
cared out of a depeton reserve based upon dscovery vaue to the e tent that
such reserve represents the e cess of the dscovery vaue over cost or Msuvh 1,
1913, vaue are, when receved by the stockhoders, ta abe as ordnary dv-
dends.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved ebruary 20, 1924.
. W. Meon,
Secretary of the Treasury.
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37
201, rt. 154
rtce 154 : Dstrbuton from depeton or III-9-1385
deprecaton reserves. T. D. 3557
Income ta Dstrbuton from depeton or deprecaton re-
serves rtce 1549 of Reguatons 45, as amended by T. D. 320 , .
further amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
rtce 1549 of Reguatons 45 (1920 edton), as amended by
Treasury Decson 320 C. . 5, 50 , s hereby further amended
to read as foows:
bt. 1549. Dstrbuton from depeton or deprecaton reserve. reserve
set up out of gross ncome by a corporaton and mantaned for the purpose
of makfug good any oss of capta assets on account of depeton or depreca-
ton Is not a part of ts surpus out of whch ordnary dvdends may be pad.
dstrbuton made from such a reserve w be consdered a qudatng dv-
dend and w consttute ncome to a stockhoder to the e tent that the amount
so receved Is n e cess of the cost of hs shares of stock. If suc stock were
acqured pror to March 1, 1913, and the far market vaue as of such date was
greater than the cost thereof and ess than the amount receved, the ncome
whch s ta abe s the e cess over such market vaue of the amount receved,
but no gan s recognzed f the amount receved s more than the cost hut
ess than the far market vaue of the stock on March 1, 1913. No dstrbu-
ton, however, w de deemed to have been made from such a reserve e cept
to the e tent that the amount pad e ceeds the surpus and undvded profts
of te corporaton. In genera, any dstrbuton made by the corporaton
other than out of earnngs or profts accumuated snce ebruary 28, 1913, s
to be regarded as a return to the stockhoder of part of the capta repre-
sented by hs shares of stock, and upon a subsequent sae of such stock hs
pan w he the e cess of the seng prce over the cost of the stock after
appyng on such cost the amount of such capta dstrbuton. owever, f
such shares were acqured pror to March 1, 1913, and the far market vaue
as of such date was greater than the cost thereof after appyng on such cost
and vaue the amount of any such capta dstrbuton, and was ess than the
Mn receved n dstrbuton, the amount whch s ta abe s the e cess over
ueu vaue of the sum receved n dstrbuton. ut no gan s recognzed
f the amount receved s more than the cost but ess than the far market
vaue of the stock on Marc 1, 1913, after the amount of any such capta
dstrbuton s apped to such cost and vaue. Dvdends decared out of a
depeton reserve based upon dscovery vaue to the e tent that such reserve
represents the e cess of the dscovery vaue over cost or March 1, 1913, vaue
are, when receved by the stockhoders, ta abe as ordnary dvdends.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved ebruary 20, 1924.
. W. Meon,
Secretary of the Treasury.
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201, rt. 1548.
38
rtce 1548: Sae of stock receved as dvdend. IIT-9-13R
T. D. 3553
Sae of stock receved as dvdend.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
Paragraph (2) of artce 1547 of Reguatons 45, as amended
by Treasury Decson 3 20 C. . 5, 42 and Treasury Decson 3238
C. . 5, 43 , s hereby amended to read as foows:
(2) Where the stork ssued as a dvdend Is n whoe or n part of a char-
acter or preference materay dfferent from the stock upon whch the stock
dvdend s pad, the cost (and when acqured pror to March 1, 1913, the
far market vaue as of such date) of the od shares of stock sha be
dvded between suc od stock and the new stock, n proporton, as neary
as may be, to the respectve vaues of each cass of stock, od and new, at the
tme the new shares of stock are ssued, and the cost (or when acqured pror
to March 1, 1913. the far market vaue as of such date) of each share of
stock w be the quotent of the cost (or such far market vaue as of
March 1. 1913) of the cass to whch such share beongs dvded by the number
of shares n that cass: Provded, however. That the porton of the cost of
the od rtoe (or, f acqured pror to March 1, 1913, ts far market vaue as of
such date) to be attrbuted to the new preferred stock sha n no case
e ceed the far market vaue of such new preferred stock as of the tme tha
new shares of preferred stock are ssued.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 18, 1924.
. W. Meon,
Secretary of the Treasury.
rtce 1548: Sae of stock receved as dvdend. III-9-1387
T. D. 3554
Sae of stock receved as dvdend.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
Paragraph (2) of artce 1548 of Reguatons 02 s hereby amended
to read as foows:
(2) Where the stock ssued as a dvdend s n whoe or n part of a char-
acter or preference materay dfferent from the stock upon whch the stock
dvdend s pad, the cost (and when acqured pror to March 1, 1913, the far
market vaue as of such date) of the od shares of stock sha he dvded be-
tween such od stock and the new stock, n proporton, as neary as may be,
to the respectve vaues of each cass of stock, od and new, at the tme the
new shares of stock are ssued, and the cost (or when acqured pror to March
1, 1913. the far market vaue ns of such date) of each share of stock w be
the quotent of the cost (or such far market vaue as of March 1, 1913) of the
cnss to whch such share beongs dvded by the number of shares n that
cass: Provded, however, That the porton of the cost of the od stock (or,
f acqured pror to March 1, 1913, ts far market vaue as of such date to be
attrbuted to the new preferred stock sha n no case e ceed the far market
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39
202, rt. 15C1.
vaue of such new preferred stock as of the tme the new shares of preferred
stock are Issued.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 18, 1924.
. W. Meon,
Secretary of the Treasury.
rtce 1548: Sae of stock receved as dvdend. III-9-1388
I. T. 1930
R NU CT O 1 21.
receved from a corporaton In whch he was a stockhoder a
scrp certfyng that the corporaton woud dever to hm 975a
doars tota par vaue of the common stock of the corporaton at
a tme to be f ed by the drectors.
od, that the ta payer s gan or deductbe oss from the sae
of the scrp s the dfference between the cost to (computed n
accordance wth artce 1548 of Reguatons 2) and the seng
prce of such rght.
The ta payer owned 100 shares of stock n a corporaton for whch
he pad, n 1920, 210 doars per share. e receved durng the year
1922 a stock scrp certfcate whch reads as foows:
Ths s to certfy that the M Company w dever to 975a: doars tota
par vaue of the common stock of the M Company at a tme hereafter to be
f ed by ts board of drectors.
sod ths stock scrp certfcate for ,705.08.c doars durng 1922.
Inqury s made as to how shoud determne the proft from the sae
of ths stock scrp dvdend.
ed, that the ta payer s gan or deductbe oss from the sae of
the scrp s the dfference between the cost to (computed n ac-
cordance wth artce 1548 of Reguatons 2) and the seng prce
of such rgrt, as foows:
Doars.
Cost 100 shares at 210 doars 21.000
Cost 0 shares at 0 doars 0
Tota cost of 109 shares 21.000
Cost of 1 share 1 3-r
Cost of 9 shares 1,8 5. 57
Sae prce 1,705.08
Loss W-
S CTION 202. SIS OR D T RMINING
G IN OR LOSS.
rtce 15 1: ass for determnng gan or III-4-1322
oss from sae. . R. R. 4837
( so Secton 213(a), rtce 39.)
R NU CT O 1018.
purchased stock In certan mnng corporatons both before
and after March 1. 1913. Certan of these stocks he sod n 1918.
The Cut s acton n treatng the stock n three certan corpora-
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202, rt. 15 1.
40
tons sod by appeant n 1918 as havng been purchased pror to
March 1, 1913, s correct and In accordance wth artce 39, Regu-
atons 45, 1920 edton that the Unt s acton n usng nctua saes
of (he dfferent stocks n a free and open market and n substanta
amounts as refectng the far market vaue as at March 1, 1913,
nstead of usns a vaue based on the far market vaue of the
assets of the dfferent corporatons, s correct and shoud be sus-
taned.
The Commttee has consdered the appea of from the, acton of
the Income Ta Unt n computng a proft on certan stocks sod n
1918 nstead of aowng a oss, as camed.
The record ndcates that appeant had purchased stock n certan
mnng corporatons bot before and after March 1, 1913. Certan
of these stocks were sod n 1918, and appeant camed a oss meas-
ured by the dfference between the cost of the stock purchased after
March 1, 1913, and the seng prce. The Unt refused to aow the
oss camed, consderng the stocks sod to be those frst purchased,
and computed the proft to be the dfference between the far market
vaue as at March 1, 1913, as evdenced by actua saes on a stock
e change, and the seng prce. It s conceded that the far market
vaue as at March 1, 1913, was n e cess of cost.
ppeant contends that because he owned sghty ess of tty
dfferent stocks on March 1, 1913, than was owned after the saes n
queston, t shoud be presumed that the stocks sod were actuay
purchased after March 1, 1913, athough the stocks sod were not
dentfed as those most recenty purchased. If the above conten-
ton s not granted and t s hed that the stocks sod represented
those frst purchased, appeant attacks the egaty of determnng
the far market vaue as at March 1,1913, by sates of stock on a stock
e change, even grantng that the saes were substanta n amount
and that no artfca condton e sted to nfate or decrease the
seng prce. It s contended that stockhoders are the equtabe
owners of the assets of a corporaton, and that the March 1, 1913,
vaue of the ore reserves as f ed by the Natura Resource Secton,
pus other assets owned, dvded by the number of shares of stock
outstandng, gves the far market vaue per share as at March 1,
1913, for the purpose of computng proft.
fter carefu consderaton of a the evdence of record, together
wth the arguments made at the ora hearng, the Commttee con-
cudes that the Unt s acton n treatng the stock n three certan
corporatons sod by appeant n 1918 as havng been purchased
pror to March 1, 1913, s correct and n accordance wth artce 39,
Reguatons 45, 1920 edton that the Unt s acton n usng actua
saes of the dfferent stocks n a free and open market and n sub-
stanta amounts as refectng the far market vaue as at March 1,
1913, nstead of usng a vaue based on the far market vaue of the
assets of the dfferent corporatons, s correct and shoud be sustaned.
rtce 15 1: ass for determnng gan or III-5-1338
oss from sae. .R.R.4910
R NU CT O 1918.
In estabshng the far market vaue as of March 1, 1913, of a
certan tract of and sod by the M Company n 1919, the Com-
mttee fnds that prces pad and offered n 1912 and 1913 for ands
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41
202, rt. 15 1.
In the near vcnty of te and sod by the M Company form a bass
for estabshng such vaue rather than the prce at whch another
dvson of ths and was sod by a parent to hs chdren to sette
a famy dffcuty or the vaue paced on ths property n 1914 by
the State nhertance ta apprasers.
The M Company has appeaed from the hodng of the Income Ta
Unt that a certan y acres of and sod by the appeant company n
1919 dd not have a far market prce or vaue as of March 1, 1913,
n e cess of 1.075a doars per acre.
The records show that the appeant company sod n 1919 y acres
of and for 248.3a doars, a prce equvaent to 1.978a doars per
sere, and n computng the amount of proft returnabe for ta pur-
poses the company paced a vaue of 219.5 a doars on the property
as of March 1, 1913, equvaent to 1.749a doars per acre. The In-
come Ta Unt n ts audt of the appeant company s 1919 return
hed that the sad property had a vaue of but. 1.075a doars per acre,
or a tota vaue of but 135.01a doars, as of March 1, 1913, because of
the fact that n 1912 a porton of the acreage hed by the appeant
company was sod to two of the he s of at prces equvaent to
1.075a doars per acre, and n the Unt s memorandum of trans-
mtta, addressed to the Commttee, attenton s caed to the fact that
for State nhertance ta purposes the and n queston was apprased
at .7f doars per acre n 1914.
fter gvng very carefu consderaton to the matter, the Com-
mttee concudes that the prce per acre at whch certan portons of
the and hed by the appeant company n 1912 were sod to two
of the hers of s not to be taken as a factor n determnng the
March 1, 1913, far market prce or vaue per acre of the sad tract
1 of y acres sod n 1919.
The records show that n 18 - acqured about 7.7y acres of and
n , whch ater became known as the N property that n 189- he
subdvded such property nto nne tracts wth a vew to the ater
transfer of such tracts to hs eght chdren then vng and to the
descendants of a deceased chd that n 189- the sad formed a
famy hodng corporaton, known as the M Company, and trans-
ferred to that company a of hs rea and persona property, n-
cudng the N property subdvsons that he hed a of the stock of
the sad company unt uy , 1914, when he ded, eavng one-
nnth of such stock to each of hs eght vng chdren and one-nnth
to the hers of the deceased chd.
The records further show that subsequent to the dvson of the
property nto nne tracts n 189-, and pror to 1912, two of the
chdren, wth the permsson of ther father, took up ther resence
on two of the tracts n queston, made same ther homes, mproved
same, and camed to own such tracts as gfts receved from ther
father, athough the sad ands were never deeded to them that n
1912 severa of the chdren camed that the father had shown
partaty to other of the chdren, and to sette a famy dffcuty
t was agreed, among other thngs, by the father and a the ch-
dren that one of the sad two chdren referred to above shoud be
aowed to purchase the tract occuped by her for 120,/ doars,
wthout nterest, and pay for same out of such dvdends as she
mght thereafter receve from stock n the M Company, and that the
4177 24
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202, rt. 15 1.
42
other shoud be aowed to purchase the tract occuped by hm for 130.
doars on the same terms, and t s these aes that the Income Ta
Unt took nto consderaton when pacng a vaue of 1.075a doars
per acre as of March 1, 1913, on the y-acre tract sod n 1919. Inas-
much, however, as such saes were not made at arm s ength between
a wng buyer and a wng seer, but as a means of settng a fam-
y matter, the Commttee does not beeve the prces pad shoud
be accepted as controng when there are other saes at dfferent
prces of record, coverng ands n the mmedate vcnty of the
N property, durng the years 1912 and 1913 whch were straght
busness transactons between wng buyers and wng seers.
Nether does the Commttee beeve that the vaue per acre paced
on the property n 1914 by a State nhertance, ta appraser
shoud be accepted as controng, n vew of the facts reatve to
that apprasa set forth n a statement submtted by the appeant
company.
s shown by the records, a tract of .y acres of and was sod n
1913 at .v| doars per acre. Ths and was about 2 mes from the
y acres sod by the appeant company n 1919, was of about the
same character, and both of the sad tracts were ocated on tho
same road eadng nto S cty.
In 1913, 2 doars per acre was offered for a tract of .43// acres
of and smar n character to the sad y acres, and ocated near the
atter, whch offer was twce made and twce decned. ffdavts
e ecuted by the maker of the offer and the one who decned the
same have been submtted showng these facts.
In 1913, .19y acres of and ocated wthn 1 me and smar to
the sad y-acre tract were sod at 1. a doars per acre.
In 1912, .77y acres were purchased at a prce of 1.2a) doars per
acre, whch and ay near the N property, but had no water suppy
and there Mas then no way of securng such a suppy, t beng the,
ntenton of the purchaser to foow the dry-farmng method. The
y acres n queston had an abundant suppy of water for rrgaton
purposes and t s camed that t woud have cost the purchaser of
the .77y-ncre tract .2a doars per acre to secure water rghts for hs
hnd from an rrgaton company, pus an annua charge for the
water used.
In 1918, a .32y-acre tract yng cose to the N property was sod,
whch t s camed s comparabe as to quaty, ocaton, and ava-
abty of water to the y-acre tract n queston, and t s further
camed that the Income Ta Unt n determnng the ta abe proft
derved from ths sae aowed a March 1, 1913, vaue of . .r- doars
per acre.
of the tracts mentoned above were n the near vcnty of the
y acres n queston e cept the tract of .y acres whch was sod
at 1.5a doars per acre n 1913. rom what the Commttee has
been abe to earn of the and n queston, ths atter tract, whe
about 2 mes coser to the cty of S, was not so we supped wth
water as the y-acre tract, athough each was ocated on the same
road eadng nto S cty.
asng ts opnon on the prces pad and offered n 1912 and 1913
for ands n the near vcnty of the //-acre tract here n queston,
the atters abundant water suppy and so fertty, and makng
aowance for the fact that a tract of .2y or .4y acres usuay com-
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43
202, rt. 15 1.
mands a somewhat hgher prce per acre than one of y acres, the
Commttee recommends that the far market prce or vaue as of
March 1.1913, of the sad y-acre tract sod by the appeant company
n 1919 be f ed at 1.55# doars per acre and the ta abty of that
corporaton for the year 1919 ad|usted accordngy.
When and s sod pror to March 1, 1013, the purchaser gvng
a mortgage for an unpad baance, and the seer regans posses-
son by purchase at a forecosure sae subsequent to ebruary
28, 1913, the bass for determnng the gan or oss In a subsequent
resae of the and shoud be determned wth proper regard to ts
vaue on March 1, 1913, and the transacton treated as though
the seer had been the owner of the and contnuousy from the
tme of ts purchase by hm to the tme of the resae. The orgna
cost shoud be reduced by the amount of the parta payment made
a the tme of the frst sae.
The case of the M Company presents certan questons reatng to
de ascertanment of gan or oss upon whch no ureau rungs ap-
pear to have been made.
In 1902 the ta payer purchased a arge quantty of and for y
doars per acre. In 1908 part of ths and was sod to for .O c
obars per acre, the purchaser payng 25 per cent n cash and gvng
a mortgage back for the baance. faed to pay the mortgage when
t fe due, and n 1915 the and was bought n at appro matey
1 4 doars per acre by ta payer at a forecosure sae under ths
mortgage. In 1917 a comparatvey sma part of the and thus re-
acqured was sod. though the vaue of the and fuctuated e -
tensvey from year to year, saes of smar and n the vcnty have
been hed to estabsh a market vaue on March 1, 1913, of 20a do-
ars, whch ta payer cams as the bass for ascertanng the gan
or oss upon the sae n 1917. It has aso been found that the prce
bd at the forecosure sae dd not ndcate market vaue. The reve-
nue agent computed the gan upon the bass of the orgna cost n
1902, on the grounds that ta payer dd not own the and n 1913, and
aso because the prce of and n the vcnty dropped mmedatey
after 1913 and at the tme of hs e amnaton and of a smar qua-
ty coud be purchased for from y2 to 2 doars per acre.
It s argued on behaf of ta payer that under artces 45 and 4 of
anguatons 2 and correspondng artces of Reguatons 45, wher-
ever and s sod upon credt and the buyer defauts and the seer
regans tte to the and by agreement or process of aw, the and must
be ncuded by the seer n hs nventory at ts orgna cost, and that
wherever orgna cost s used n the ncome ta aws and reguatons
(hs automatcay means March 1, 1913, vaue f the property was
purchased pror to that date.
Ths offce s of the opnon that the ta payer s contenton must be
sustaned.
One other pausbe answer to the queston has been suggested,
namey, that the frst sae havng been n form and strct ega
theory an absoute one, the ta payer s poston on March 1, 1913,
havng thereby ceased to be that of owner and become that of mort-
nrcL 15 1: ass for determnng gan or
oss from sae.
III- -1351
S.M. 1475
n NU CTS O 1917. 1918, ND 1921.
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202, rt. 15 1.
44
gagee ony, the bass for determnng gan or oss on resae by m
must be the cost to hm of reacqurng the property that s, the
purchase prce at the mortgage forecosure. Much can be sad n
support of the atter poston from the standpont of the aw of
rea property and mortgages. Its fata weakness, however, s that
t gnores the vta ssue n a ncome questons what s the actua
proft or gan. or t s actua and not fcttous gan whch s
ncome wthn the meanng of the consttutona amendment and
the statute. Goodrch v. dwards, 255 U. S., 535 Wash v.
rewster, 255 U. S., 53 .) Leavng March 1, 1913, vaue out of
consderaton for the moment, et us consder the genera resuts of
the atter poston. Two ustratons w be suffcent to prove ts
faacy. Suppose buys and for 5,000 and ses t to for
10,000, recevng 2,500 cash and a mortgage back for 7,500.
defauts n hs payments on the mortgage. forecoses and bds
n the property at the forecosure sae for ,000 and ater reses
for 11,000 cash. If the proft on the resae s computed on the bass
of the purchase prce on forecosure, s ta abe upon a gan of
5,000. ctuay, the amount of money he has n the property at
the tme of resae s 2,500, for he orgnay bought for 5,000 and
on the frst sae he receved 2,500, whch reduced hs nvestment by
that much or to 2,500. s actua gan on the resae s the df-
ference between hs actua nvestment n the property ( 2,500) and
the amount he receved on resae ( 11,000), or 8,500. Or, agan,
suppose reses at 5,000 nstead of 11,000. ased upon the pur-
chase prce at forecosure ( ,000), e has sustaned an apparent
oss of 1,000. ut based upon hs actua nvestment at the tme of
resae ( 2,500) e had made a proft of 2,500.
These ustratons show concusvey that actua gan or actua
oss upon resae can not be arrved at on the bass of the purchase
prce at the forecosure sae. In order to reach the correct resut n
terms of actua gan and actua oss, t s necessary to take nto
consderaton orgna cost wth the necessary ad|ustments on account
of parta payments of the orgna sae prce. Ths s the theory
of Reguatons 2, artce 4 , and the correspondng artce of
Reguatons 45.
Secton 10 of the Revenue ct of 191 , as amended, provdes that
n computng gan or oss on the sae of property acqured pror
to March 1, 1913, the bass sha be the vaue of the property on that
date. avng n mnd that the purpose of the statute basng gan
or oss on the sae of property on the vaue of the property on March
1, 1013, where the property was acqured pror to that date was
merey to mt the ta abe gan or oss to the actua gan or oss
representng an ncrease or decrease n vaue occurrng after March
1, 1913, ths offce s of the opnon that the prncpes ad down n
Reguatons 2, artces 45 and 4 , and the correspondng artces
of Reguatons 45 are ceary appcabe to the specfc case under
consderaton. The queston, of course, s whether, under the cr-
cumstances reated, the ta payer may be consdered as havng ac-
qured the and pror to March 1, 1913, nasmuch as t s ony n
those cases where t was acqured pror to that date that March
1, 1913, vaue becomes mportant n determnng gan or oss. It
must be conceded that as a strct matter of the aw of rea property
and mortgages the ta payer was not the owner of the property, on
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45
202, rt. 15 1.
March 1. 1913, snce e made an absoute deed n 1908 wth ony a
purchase money mortgage back, and that he dd not reacqure ega
tte to the property unt he purchased upon forecosure n 1915.
When, however, we consder the transacton from a practca bus-
ness standpont, dsregardng ega techncates, the fact s that the
forma purchase at forecosure was not a new purchase or repur-
chase, but merey a proceedng whereby the seer repossessed hm-
sef of hs property after a sae whch was not competed on account
of the faure of the vendee to pay the purchase prce the orgna
owner, by vrtue of hs purchase money mortgage, remaned for a
practca purposes the rea owner of the property a the tme.
It foows, therefore, that the transacton n the nstant case must
be treated as though the ta payer had remaned the owner of the
property contnuousy from hs purchase n 1902 to the tme of the
resae n 1917 and that the gan or oss upon the sae n 1917 shoud
be computed wth proper regard to the vaue of the and on March
1, 1913, the parta payment of 25 per cent n 1908 beng used, of
course, to reduce orgna cost.
Neson T. artson,
Soctor of Interna Revenue.
rtce 15 1: ass for determnng gan or 111-13-144
oss from sae. . R. . 930
R NU CT O 1917.
The depeton and deprecaton bused on cost or the March 1,
1913, vaue, whchever s appcabe, that has actuay been sus-
taned by tM SI Company from the basc date to the date of sae
shoud be deducted from the vaue on the basc date u determn-
ng the proft on the sate.
The Commttee has had under consderaton the appea of the
M Company from the acton of the Income Ta Unt n deductng
depeton and deprecaton sustaned from date of acquston and
aso from March 1, 1913, to the date of the sae of certan o bases
n 1917 n order to determne the proft on the sae.
The Commttee has carefuy consdered the nformaton sub-
mtted and s of the opnon that the depeton and deprecaton,
based on cost or the March 1, 1913, vaue, whchever s appcabe,
thnt has actuay been sustaned from the basc date to the date of
sae shoud be deducted from the vaue on the basc date n deter-
mnng the proft on the sae. In the nstant case the Income Ta
Unt has propery determned the depeton sustaned and the re-
sdua vaue on the date of sae. It has aso determned and de-
ducted from the cost a reasonabe deprecaton on the physca
assets from acquston to the date of sae. The Commttee supports
the acton of the Income Ta Unt, snce t appears that the ap-
peant has not made suffcent aowance for deprecaton by settng
up a deprecaton reserve and chargng aganst t a renewas and
repacements or by chargng renewas and repacements to e pense.
The Commttee therefore recommends that the acton of the In-
come Ta Unt be sustaned and the appea be dened.
Chares D. ame,
Charman Commttee on ppeas and Revew.
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202, rt. 15 1.
4
rtce 15 1: ass for determnng gan or 111-19-1543
oss from sae. I. T. 1994
R NU CT O 1921.
Pursuant to a provson n a trust Instrument the.trust property
was reconveyod to the settor, upon hs request, pror to March 1,
1913.
The bass for determnng gan or oss from a subsequent sae s
the orgna cost to the settor or the vaue March 1, 1913, as the
case may be.
The ta payer n 191- conveyed to trustees certan securtes. The
trustees were to pay the ta payer the ncome from the prncpa for
fe, the ta payer havng power to appont by w such persons to
whom the prncpa woud go at hs death, and to revoke the trust n
whoe or n part upon hs wrtten request therefor approved n
wrtng by one of the trustees. It further appears that pror to
March 1, 1913, under the provsons of the trust nstrument, the
securtes were reconvened to the ta payer by the trustees. The
ta payer has sod some of the securtes and nqury s made as to
whether the vaue of such securtes as of the date of such convey-
ance to the ta payer by the trustees or the orgna cost to the ta -
payer shoud be taken nto consderaton, together wth the March
1, 1913, vaue, n determnng the ta abe gan or deductbe oss of
the securtes n queston.
It s consdered that the ta payer under the trust nstrument was
the benefca owner of the securtes n queston and hed the equ-
tabe tte. Upon the termnaton of the trust the ega and equtabe
tte merged and the settor stood n the same poston as f the trust
had never been created. The transacton had no effect on the nvest-
ment of the ta payer. Therefore, the vaue of the securtes as of
the date of the reconveyance shoud not be taken nto consderaton,
and the bass to be used n determnng any proft derved or oss
sustaned from the sae of the securtes s the orgna cost to the
ta payer of the securtes or ther March 1, 1913, vaue, as the case
may be.
rtce 15 1: ass for determnng gan or 111-22-1575
oss from sae. I. T. 2010
R NU CTS O 1018 ND 1021.
partnershp, organzed after ebruary 28, 1913, was dssoved
In 1919, each partner recevng cash n an amount ess than hs
nterest n the partnershp and securtes. or the purpose of
determnng gan or oss from a sae of any of the securtes, the
cost to the partner of hs nterest n the partnershp, ncudng n
such cost the amount of hs share n any undstrbuted partnershp
net ncome on whch the ncome ta has been pad, shoud be
reduced by the amount of the cash receved and the remander
aocated to the securtes receved n proporton to ther respectve
market vaues as at the date of the dssouton.
The partnershp of M Company was organzed n 1914, and was
engaged n the busness of buyng and seng securtes. The secur-
tes carred by the frm were nventored at the begnnng and end
of each year n determnng the annua net ncome of the partner-
shp. In 1919, the partnershp was dssoved and the ta payer re-
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47 202, t. 1501.
ceved as hs share of the assets a sum n cash and a number of secur-
tes, the atter beng devered to hm at the vaue at whch they
appeared n the partnershp nventory on the date of dssouton.
Snce the qudaton of the partnershp the ta payer sod some of
these securtes, made a gft of some, and st retans some of them.
dvce s requested as to the proper bass for the determnaton of
the gan or oss from the sae of the securtes receved by the ta -
payer upon the dssouton of the partnershp n 1919, and sod by
hm durng 1923, and as to the proper bass for the determnaton of
de gan or oss from the sae of securtes so receved by hm n 1919,
and sod durng 1923, by the persons to whom he had gven them
subsequent to anuary 1, 1921.
Upon dssouton of the partnershp ts assets were dstrbuted to
the partners n knd and the cash receved by the ta payer dd not
e ceed the cost to hm of hs nterest n the partnershp.
Under the provsons of secton 202 of the Revenue ct of 1918
and n accordance wth artce 1570 of Reguatons 45, the ta payer
reazed no gan or oss n 1919 upon the dssouton of the partner-
shp and the dstrbuton to hm of hs share of the assets. or the
purpose of determnng the gan or oss on the subsequent sae of any
of the securtes so dstrbuted to hm the cost to hm of hs nterest
n the partnershp, ncudng n such cost the amount of hs share
n any undstrbuted partnershp net ncome on whch the ncome
ta as been pad, shoud be reduced by the cash receved n the
qudaton and the remander aocated to the securtes receved
n proporton to ther respectve market vaues as at the date of the
dssouton of the partnershp.
Under the provsons of secton 202 of the Revenue ct of 1921
and n accordance wth artce 15 2 of Reguatons 2 the bass for
computng the gan or oss from the sae of property acqured by
gft subsequent to December 31, 1920, s the same as t woud have
been n the hands of the donor or the ast precedng owner by whom
t was not acqured by gft. ccordngy, the same bass shoud be
used n determnng the gan or oss from the sae n 1923 of the
securtes bv the persons to whom the ta payer had gven them sub-
sequent to anuary 1, 1921, as that outned above n the case of the
securtes sod durng 1923 by the ta payer hmsef.
rtce 15 1: ass for determnng gan or 111-2 -1 27
oss from sae. I. T. 2034
( so Secton 201, rtce 1545.)
R NU CT O 1921.
The payment to the ta payer In November, 1923, for the y shares
of stock must be treated as a fna qudatng dvdend on the
surrender by hm of the stock, even though the transacton took
the form of a sae after a parta qudaton. The fact that ths
was not a pro rata dstrbuton to a stockhoders Is not deemed
to be ob|ectonabe to ths rung, n vew of the fact that ths was
a cose corporaton, where a the formates attendng smar
steps taken by other corporatons are not aways observed. The
ta payer, therefore, can not Invoke the benefts of secton 200 In
computng hs ta on the gan wth respect to the proceeds of the y
shares of stock n queston.
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202, rt. 15 3.
48
The M Company sod ts pant, assets, nventores, and good w
for cash n uy, 1919. In ebruary, 1920, the drectors passed a
resouton to dssove the corporaton, and parta qudatng dv-
dends were pad durng the years 1920,1921, and 1922, resutng n an
ad|usted book vaue of the common stock of the company on une
30, 192 5, of doars per share. In November, 1923, the ta payer
sod to the corporaton y shares of the common stock of the company
whch he had hed for more than two years for a tte n e cess of 5w
doars per share. The corporaton was a cose corporaton, n whch
the ta payer was one of the prncpa stockhoders. dvce s re-
quested as to whether the ta payer may nvoke the beneft of secton
20(5 of the e venue ct of 1921 n connecton wth the sae of the
stock n queston to (he corporaton.
The payment to the ta payer n November, 1923, for y shares of
stock must be treated as a fna qudatng dvdend on the surrender
by hm of the stock, even though the transacton took the form of a
sae. The fact that ths was not a pro rata dstrbuton to a stock-
hoders s not deemed to be ob|ectonabe to ths rung, n vew of
the fact that ths was a cose, corporaton where a the formates
attendng smar steps taken by other corporatons are not aways
observed. The ta payer, therefore, can not nvoke the benefts of
secton 20G n computng hs ta on the gan wth respect to the pro-
ceeds of the y shares of stock n queston. The gan reazed by the
ta payer through ths transacton as arrved at under artce 1501.
Reguatons 02, s ta abe as a dvdend to the e tent that t was pad
out of earnngs or profts of the corporaton accumuated snce eb-
ruary 28, 1913. ny gan n e cess of that propery aocabe to
earnngs or profts accumuated by the corporaton snce ebruary
28, 1913, s ta abe to the ta payer for both norma ta and surta
purposes.
rtce 15 3: S-de of property acqured by 111-13-1447
gft on or before December 31, 1920, or by S. M. 1C09
bequest, devse, or nhertance.
R NU CT O 1918.
In determnng the vaue of stock as of a certan date for the
purpose of computng gan or oss on a sae t s not a queston of
vauaton of the corporate assets ncudng good w but a queston
of the market vaue of the shares of stock of the company. The
market vaue of shares of stock s deemed to be what they woud
brng when offered for sae n n free and open market, and the best
evdence of such market vaue s actua saes. In the absence of
saes, however, the market vaue s deemed to be what a wng
buyer mght reasonaby have been e pected to pay or a wng
seer to accept for the stock and not necessary a proportonate
part of the vaue of the corporate assets.
In the nstant case there s no evdence showng that the ap-
prasers of the probate court dd not take nto consderaton a the
facts enumerated above n determnng the market vaue of the
stock at the tme of the testatr s death n )f.
Cam s made for a refund on account of a recomputaton of
proft derved from the sae of shares of stock of the M Company
sod by the e ecutors of the estate under the terms of the w of the
testatr . These shares had an apprased vaue as at the tme of the
testatr s death of 3,0 0.| doars and were sod by the e ecutors to
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the M Company for 3,910a doars. The proft of 850 doars re-
sutng from ths transacton was hed ta abe to the estate under a
rung of ths offce. The e ecutors have protested the ad|ustment
upon the ground that the apprasers of the estate dd not take nto
consderaton the vaue of the good w of the company n determn-
ng the market vaue of the stock but accepted the statement of the
company as to such vaue, whch statement, t s camed, was based
entrey upon the tangbe assets shown on the books of the company.
It s further contended that the apprasa of the probate court creates
ny a presumpton that the stock s of the apprased vaue, whch
presumpton may be rebutted by competent evdence. ccordngy,
evdence has been submtted tendng to show that the M Company
had substanta good w not refected on the books of the company.
In support of ths contenton, t s shown by past earnngs that the
correct vaue of the stock at the tme of death of the testatr s n
e cess of the sae prce. The Unt has recomputed the proft on the
transacton, usng as a bass the apprased vaue of 18.r doars a
share pus 4 doars, whch represents the addtona good w vaue
determned n accordance wth . . M. 34 (C. . 2, 31).
rtce 15G2, Reguatons 45, provdes as foows:
Rae of property acqured by gft or bequest. In the case of property
acqured y gft, bequest, devse or descent the bass for computng gan or
oss on a sae s tbo far market prce or vaue of the property at the date of
acquston or as of March 1, 1913, f acqured pror thereto. or the purpose
of determnng the proft or oss from the sae of property acqured by bequest,
devse or descent snce ebruary 28, 1013, ts vaue as apprased for the
p-po of the edera estate ta , or n the case of estates not sub|ect to that
a ts vaue as apprased n the State court for the purpose of State nhert-
ance ta es, shoud be deemed to be ts far market vaue when acqured.
w secton 213(b)3 of the statute and artce 73.
The estate was not sub|ect to edera estate ta , nasmuch as the
testatr ded pror to the date the ct became effectve. Under
. R. M . 7 (C. . 1, 38) t s hed that the reguatons Uo not requre
that the vaue as apprased by a State court sha be fna or con-
cusve, but s merey a presumpton, whch may be rebutted by
competent evdence. It shoud be borne n mnd, however, that the
rung s made to turn upon the queston of fact whether or not the
evdence presented does rebut such presumpton.
There s no showng n the record of the method used by the
apprasers n determnng the vaue of the stock, wth the e cepton
of the statement n the ta payer s bref that the apprasers had been
furnshed nformaton by the M Company as to the vaue of ther
stock. Nevertheess, t s not a queston of vauaton of the corpo-
rate assets of the company but a queston of the market vaue of the
shares of stock of the company. The market vaue of shares of
stock s deemed to be what they woud brng when offered for sae
n a free and open market, and the best evdence of such market
vaue s actua saes. In the absence of saes, however, the market
vaue s deemed to be what a wng buyer mght reasonaby have
been e pected to pay or a wng seer to accept for the stock, and
not necessary a proportonate part of the vaue of the corporate
assets.
In the nstant case there s no evdence showng that the ap-
prasers of the probate court dd not take nto consderaton a the
facts enumerated above n determnng the market vaue of the
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50
stock at the tme of the testatr s death n 191 . The statement n
the record to the effect that the apprasa was based upon nforma-
ton furnshed by the company woud ead to a contrary concuson.
urthermore, the revenue agent s report states that the corporaton
had prevousy acqured a bock of the stock at 17 doars a share, or
f doars a share ess than that f ed by the apprasers. It woud
seem, therefore, n vew of these facts, that the market vaue of the
stock has been estabshed, and uness satsfactory evdence can be
shown to the contrary the vaue approved by the State court must
be accepted as concusve. The method suggested n . R. M. 34
for determnng the vaue of ntangbes s regarded as controng
ony n the absence of better evdence.
Neson T. aktson,
Soctor of Interna Revenue.
rtce 15 4: change of property. III-9-1389
T. D.355
INCOM T R NU CT O 191 D CISION O COURT.
1. Income- Stock Dstrbuton change of Stock foe Stock.
Where .stockhoders of a corporaton organze a new corporaton
u another State an e change ther stock u the frst corporaton
for stock n the new corporaton on the bass of 1 share for 5, and
havng obtaned a the common stork of the od corporaton ts
assets are transferred to the new corporaton and the od corpo-
raton dssoved, ncome s reazed by the stockhoders to the e -
tent that the stock receved n the new corporaton was greater
n vaue than the cost of the stock of the od corporaton.
2. Co POR TIONS R ORG NIZ TION S P R T NTITY.
Where a new corporaton was formed by the stockhoders of
an od corporaton, under the aws of another State and wth a
arger authorzed captazaton, to take over the entre busness
and assets of the od corporaton, hed that the new corporaton
was not dentca wth the od, but was a separate and dstnct
corporate entty.
GuUnan v. Waker (2t2 U. S., 134) T. P. 3508 ( uetn II-
21, 2) Unted States v. Phet (257 U. S., 150) T. D. 3270
(0. . 5, 37) Rockefeer v. Inted Mates (257 U. S 17 ) T. D.
3271 (C. . 5, 34) , foowed.
3. Cases oowed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Court of Cams n
the case of Water L. Marr v. The Unted States s pubshed for the
nformaton of nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 20, 1924.
. W. Meon,
Secretary of the Treasury.
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202, rt. 15 4.
Unted States Coubt of Cams. No. C-12.
Water L. Marr v. Tte Unted States.
Decded November 21, 1923.
Ths case havng been heard and submtted upon a stpuaton of facts
sgned by ssstant ttorney Genera Robert . Lovett on behaf of the
Unted States, and by Messrs. Wams and rerson, attorneys for the pan-
tff, on behaf of the pantff, the court, upon the sad stpuaton, makes |
the foowng
INDINGS O CT.
I.
Durng the year 1910 the pantff, W. L. Marr, and hs wfe were resdents
of the State of Mchgan. t the proper tme they made a |ont ncome ta
return and pad the ta es shown by sad return to be due to the coector of
nterna revenue at Detrot
IL
On March 19, 1921, the pantff was notfed that the Commssoner of In-
terna Revenue had made an addtona assessment aganst hm for the year
191 of 23,( 9S.40 and payment of the same was demanded. The pantff
fed wth the Commssoner of Interna Revenue a cam n abatement. On
December 29, 1921, he was notfed that ths cam had been re|ected and
dsaowed. The pantff havng then become a resdent of Tennessee, the
assessment was sent to the coector of nterna revenue at Nashve for co-
ecton and demand was made of pantff for the payment of sad assessment
wth nterest, aggregatng 24,944.12, whch amount he pad, under protest,
on anuary 7, 1922.
Pantff then made hs appea to the Commssoner of Interna Revenue ac-
cordng to the provsons of the aw and the reguatons of the Secretary of the
Treasury by fng a cam for the refund of sad ta es and nterest upon the
grounds set out n the petton n ths cause. Ths cam, after consderaton by
the Commssoner, has been refused and dsaowed.
III.
Sad assessment was arrved at by addng to the net ncome shown by the
orgna return the sum of 324,4 0.57. upon the ground that that much n-
come had been derved when, n 1910. pantff and hs wfe receved 451
shares of the preferred am 2,125 shares of the common stock of Genera
Motors Corwraton, a corporaton organzed under the aws of Deaware and
herenafter caed the Deaware corporaton, and 100 n cash n e change for
33 shares of the preferred and 425 shares of the common stock of the Genera
Motors Co., a corporaton e stng under the aws of New ersey and heren-
after caed the New ersey corporaton. The market vaue of the stock of the
Deaware corporaton so receved was preferred 94.0875 and common 108.50
per share, makng the tota market vaue of the shares receved 400,7 0.57,
and addng the 100 receved n cash makes the tota vaue receved 400,8 .57.
The shares of the New ersey corporaton had been acqured at par, or a tota
cost of 7 ,400. The dfference between these amounts was treated as ncome,
and ths resuted n the assessment as made.
I .
The transacton cumnatng n sad e change of stock was as foows:
(1) The New ersey corporaton had outstandng 15,000,000 of 7 per cent
preferred stock and 15,000,000 of common stock of the par vaue of 100
per share. It had accumuated a arge surpus, and the actua vaue of ts com-
mon stock was, at the date of the e change, 842.50 per share.
(2) Iu 191 the offcers of the New ersey corporaton caused the Deaware
corporaton to be organzed for the purpose of takng over and contnung the
busness of the New ersey corporaton. The authorzed capta of the Dea-
ware corporaton was 82, 00,000 of common and 20,000,000 of nonvotng pre-
ferred stock.
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52
(3) The pan by whch the Deaware corporaton proposed to take over and
contnue the busness of the New ersey corporaton was set forth In a etter
addressed by 11 of the drectors of the New ersey corporaton to ts stock-
hoders, whch etter was as foows:
Genera Motors Company.
ew York, October 1 , 10 0.
To the stockhoders of Genera Motors Co.:
The undersgned members of the board of drectors of your company, pur-
suant to the request of ther assocate drectors and of sharehoders repre-
sentng upward of 70 per cent of the outstandng stock of the company, present
for your favorabe consderaton the foowng pan, the adopton of whch
n ther opnon w afford the present stockhoders of the company a more
qud and satsfactory nvestment and eventuay w ead to economes n
admnstraton to the beneft of a sharehoders.
(enera Motors Corporaton has been organzed under the aws of Deaware,
wth an authorzed capta stock of 102,(500,000, of whch 82,(500,000 s com-
mon stock and 20,000,000 s nonvotng preferred stock. The shares are of
the par vaue of 100 each. The preferred stock Is entted to receve cumu-
atve dvdends at the rate of 0 per cent per annum, and s sub|ect to redemp-
ton, at the opton of the company, at 110 a share on November 1, 1918, or on
any subsequent dvdend-payng date. In the event of dssouton the preferred
stock s preferred as to assets to the e tent of ts par vaue and accrued dv-
dends.
Genera Motors Corporaton of Deaware offers to the sharehoders of Gen-
era Motors Co. of New ersey the prvege of e changng ther shares of
stock for shares of the Deaware corporaton on the foowng bass:
(a) One and one-thrd (1 ) shares of preferred stock of the Deaware cor-
poraton for one (1) share of preferred stock of the New ersey company.
( ) ve (5) snares of common stock of the Deaware corporaton for one
(1) share of common stock of the New ersey company.
(Certfcates for fractona shares w not be ssued, but, n pace thereof,
the Deaware corporaton w pay n cas at the rate of 100 a share for ts
preferred stock and . 150 a share for ts common stock.)
very stockhoder of Genera Motors Co. s e tended the same prvege of
e change and on the same bass as has aready been accepted by sharehoders
representng upward of 70 per cent of the outstandng stock of Genera
Motors Co.
The pan s to become effectve as of November 1, 1910, and a e changes of
stock under ths offer w be made us of that date. Stockhoders of the New
ersey company of record at the cose of busness Octo er 14, 191(5, w thus
receve the dvdend payabe thereon by that company November 1, 191 .
Dvdends upon the preferred and common stock of the Deaware corporaton
w he computed from November 1, 191(5, upon a of ts stock ssued and e -
changed wthn the perod herenafter f ed for affectng such e change.
Deposts for e change are to be made wth the Guaranty Trust Co. of
New York, No. 140 roadway, New York Cty, between October 1 , 1910, and
December 15, 1910, both dates ncusve, fpon the depost of your certfcates
of stock of Genera Motors Co. of New ersey, duy ndorsed In bank (wth
New York State stock transfer ta stamps attached at the rate of 2 cents
per share, or accompaned by an equvaent amount of cash), the Guaranty
Trust Co. w mmedatey cause to be ssued and forwarded to you temporary
certfcates (pendng the engravng of permanent certfcates) for shares of
stock of Genera Motors Corporaton of Deaware, n accordance wth the
foregong offer.
form of acceptance of ths offer to accompany your certfcate of stock
and to be sgned by you s herewth Incosed, together wth a stamped enveope
addressed to the Guaranty Trust Co. of New York.
Yours, truy,
. . WGGIN, . . McCt. M NT,
C. . Sabn, . . Raskob,
L. G. aufman, . D. et|n,
P. S. dvPont, . G. shop,
W. S. Lh and, W. C. Dubant.
C. S. Mott,
(4) Ths offer was accepted by a the hoders of common stock, and
75,000,000 of the authorzed 82,(500,000 common stock of the Deaware cor-
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202, rt. 15 4.
poraton was ssued In e change for the 15,000,000 of outstandng stock of
the New ersey corporaton.
The hoders of a the preferred stock of the New ersey corporaton, e cept
the hoders of a few shares, aso accepted the offer. The few shares mentoned
were pad off or redeemed n cas and retred. In e change for the shares of
those who accepted the offer the Deaware corporaton ssued ts own 0
er cent preferred stock at the rate of one and a thrd suTes for one. ut
a fractona shares to whch stockhoders were thus entted were pad n
cash as provded n offer above set out.
The remanng 7, 00,000 of the authorzed common stock of the Deaware
corporaton and suc parts of ts authorzed 20,000,000 of preferred stock
as was not thus ssued n e change for preferred stock of the New ersey
corporaton were ether sod or hed for sae as addtona capta shoud be
desred.
(5) The Deaware corporaton havng thus become the owner of a the
outstandng stock of the New ersey corporaton caused the tter to be ds-
soved and a ts assets and abtes to be transferred to the Deaware
corporaton.
( ) The Deaware corporaton contnued the busness of the New ersey
corporaton. It had no assets e cept those transferred from the New ersey
corporaton and such cash as had been reazed by the sae of ts own stock
not used n acqurng the stock of the New ersey corporaton. nd ts
abtes were ony those whch had been the abtes of the New ersey
corpo raton.
.
The pantff and Is wfe accepted the offer.
e had 15 shares of common and 11 shares of preferred stock of the New
ersey corporaton. e receved n e change 75 shares of the common aud
14 shares of the preferred stock of the Deaware corporaton and 00. 7 n
cash.
s wfe had 410 shares of the common and 328 shares of the preferred
stock of the New ersey corporaton. She receved, n e change, 2,050 shares
of te common and 437 shares of the preferred stock of the Deaware corpora-
ton and .33.33 n cash.
I.
Te pantff s a ctzen of the Unted States and resdes n amton
County n the State of Tennessee, as at a tmes borne true aegance to
the Government and as not aded, abetted, or gven comfort to any enemy of
the Unted States. e has not transferred or assgned the cam sued on
or any part of t and no acton has been taken on t e cept as stated n the
petton.
CONCLUSION O L W.
Upon the foregong fndngs of fact the court decdes, as a concuson of
aw. that the pantff s not entted to recover, and hs petton s there-
fore dsmssed.
udgment s rendered aganst the pantff for the cost of prntng the
record n ths cause, the amount thereof to be entered by the cerk and
coected by hm accordng to aw.
M MOR NDUM.
The pantff e changed stock n the New ersey corporaton for stock n the
Deaware corporaton on the bass of 5 shares for 1. Preferred stock was e -
changed on a dfferent bass, but a of the preferred stock was not e changed,
and hoders of that knd who decned to make the proposed e change were
pad n cash for ther preferred stock. avng acqured a of the stock n
the New ersey corporaton, the Deaware corporaton caused a of the
former s assets and abtes to be transferred to tsef and the New ersey
corporaton to be dssoved.
The Deaware corporaton had 82,000,000 of common stock and used 75,-
000,000 of t In acqurng the outstandng stock n the New ersey corporaton.
It sod and reazed cash for some of Its stock In e cess of that nvoved In
the e change. It thus had after the transfer a of the property the New
ersey corporaton owned and some cash, reazed, as stated, from ts treasury
stock.
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202, rt. 15 4
Pany the transactons nvoved two dstnct enttes, organzed under the
aws of dfferent States, wth dfferent powers, and wth dfferent capta.
Pantff e changed hs stock n one of these enttes for stock n the other.
Ths was an e change of property.
When the e change became effectve we thnk that the pantff n a ega
sense reazed hs tan. (Cunan v. Waker, 2 2 U. S., 134 (T. D. 350S :
Phes case, 257 U. , 13 (T. D. 3270) Rockefeer case, 257 U. S.. 17
(T. D. 3271).)
rtce 15 4: change of property. 111-24-1 0 2
I. T. 2024
R NU CT O 1018.
Offce Decson 932 (C. . 4, 4 ) and Offce Decson 970 (C. . 5,
1) are Irreconcabe. The former s overrued and the atter Is
sustaned.
ttenton as been caed to the hodngs emboded n Offce De-
cson 932 and Offce Decson 970, both bearng upon the rght under
secton 202(b) of the Revenue ct of 1918 of one who e changes se-
curtes for other securtes of a greater aggregate par or face vaue
than the securtes e changed n a reorganzaton or consodaton of
a corporaton to take a oss as a resut of the e change.
Offce Decson 932 hods that a oss may not be taken, whereas
Offce Decson 970 hods that a oss may be taken. ttenton has
been nvted to the fact that athough n the atter decson the se-
curty hoder receved upon reorganzaton cash n addton to se-
curtes, whereas n the former he receved ony securtes, the dffer-
ent resuts reached do not appear to be predcated upon that dffer-
ence n the facts.
The queston presented s whether the two decsons can be recon-
ced, and, f not. whch shoud be foowed.
Offce Decson 932, so far as affects the pont rased, reads:
receved n the case of a consodaton of corporatons n 1920 new stock
wth a par vaue n e cess of the par vaue of the od stock e changed, but the
market vaue of the new stock was ess than the cost n 1918 of the stock e -
changed.
ed, that he sustaned no deductbe oss. Paragraph 2, subdvson (b),
secton 202. of te Revenue ct of 1918, refers ony to a possbe gan n con-
necton wth a reorganzaton, merger, or consodaton. There s no provson
of aw permttng the deducton of a oss under such crcumstances.
Offce Decson 970 reads as foows:
The ta payer was a stockhoder of the M Company. The company was
qudated In 1919 and a new corporaton formed entted the N Company.
or each share of stock of the M Company, par vaue 10a doars, the ta -
payer receved 5.4a doars n cash and 11 shares of the N corporaton, pur
vaue 10a doars per share. The far market vaue of the new stock at the
tme of the e change was O.o doars a share, the tota far market vaue
of 11 shares, therefore, beng 13.12a doars, whch, added to 5.4r doars,
makes a tota of 18.52 doars. The od stock cost the ta payer appro matey
20.8a doars a share and t was, therefore, camed that he sustaned an actua
net oss of 2.28a doars for each share sod.
ed, that under the crcumstances stated above, assumng that the stock
of the M Company was acqured by the ta payer subsequent to ebruary 28,
1913, the e change of stock n ths case may be treated as a cosed transacton,
and that the ta payer may accordngy take as a oss the dfference between
the cost of the od stock and the amount of the far market vaue of the new
stock pus the cash receved.
Offce Decson 970 -was carefuy consdered before t was pub-
shed and the reasons assgned n memorandum of pr 28, 1921
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55
202, rt. 15 4.
(fed theren), for the concuson reached are contaned n the fo-
owng e cerpt therefrom:
owever, t s unnecessary to hod that the fact that part of the consdera-
ton was eush governs ths case or to put the concuson upon that ground.
The frst part of secton 202(b) provdes that when property s e changed
for other property, the property receved In 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. Provson s then made for cases where n
connecton wth the reorganzaton, merger, or consodaton of a corporaton
a wrson receves n pace of stock or securtes owned by hm new stock or
securtes of no greater aggregate par or face vaue. The ne t paragraph of
the secton provdes for a speca method of determnng the gan when, n the
case of reorganzaton, merger, or consodaton, the aggregate par or face vaue
(f the new stock or securtes receved Is n e cess of the aggregate par or face
vaue of the stock or securtes e changed. In other words, the second para-
graph of secton 202(b) s appcabe ony where a gan s reazed. Where
a gan s reazed under the crcumstances referred to, the second paragraph
of secton 202(b) ays down the method to be used n ascertanng the amount
of the gan for tbe purposes of the ncome ta . If no gan s reazed, t
then becomes necessary to fa back upon the frst part of secton 202(b),
whch provdes that when property s e changed for other property, the prop-
erty receved n e change sha for the purpose of determnng the gan or oss
be treated as the equvaent of cash to the amount of ts far market vaue, f
any, n order to determne the amount of the oss, f any. In appyng the rue
ad down n the frst part of secton 202(b) to the nstant case, t s cear that
the ta payer s entted to a deducton.
It s apparent, n the ght of the reasonng, n the quoted e tract
from the memorandum of pr 28, 1921, that the premse upon
whch the concuson n Offce Decson 932 s reached, namey, that
there s no provson of aw permttng the deducton of a oss
under such crcumstances, s unsound.
That such e changes of securtes upon reorganzaton are cosed
transactons, for the purpose ef determnng gan or oss n ncome
ta cases, has been e pressy hed by the courts. (CvUnan v. Waker,
2 2 U. S., 134 Water L. Mart v. Unted States, decded by the
Court of Cams. November 21,1923, not yet reported.)
The two decsons can not be reconced, and Offce Decson 932
s hereby overrued.
rtce 15 4: change of property. 111-20-1028
LT. 2035
R NU CT O 1021.
The e change of od bonds of the corporaton for a new ssue
of the same corporaton s not a reorganzaton such as s con-
tempated under secton 202(c)2 of the Revenue ct of 1021, and
gan or oss s recognzed n such an e change under secton
202(c) of the same ct as amended by the ct of March 4.
1923. Mmeograph 315 s not appcabe to the transacton.
dvce s requested as to whether the e change by the bond-
hoders of the M Company of od bonds for bonds of a new ssue,
n connecton wth the refnancng of the company, resuted n ta -
abe ncome or deductbe oss to the hoders, or whether the trans-
acton comes wthn the provsons of secton 202(c)2 of the Revenue
ct of 1921 as a reorganzaton.
Ths refnancng transacton s not a reorganzaton such as s
contempated under secton 202(c)2 of the Revenue ct of 1921 and
s e cuded by the amendment of March 4, 1923, of the Revenue
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5203, rt. 1581.
5f
ct of 1921 from fang wthn a cass of transactons n -whch
no gan or oss s recognzed under secton 202(c) 1 of the Revenue
ct of 1921. Mmeograph 315 (C. . II-2, 24) s not appcabe,
havng to do wth an e change of bonds for preferred stock, and
nvoves a recaptazaton of the corporaton and not a refnancng
transacton ony.
S CTION 203. IN NTORI S.
rtce 1581: Need of nventores. III-4-1323
. R. R. 4899
R NG CT O 1918.
Canned goods were commandeered and pad for by the Unted
Sates Government n 1018, sub|ect to the condton of re|ecton of
spoed or sweed goods. The ta payer ncuded the prce pad
therefor n ts gross saes for the year 1918. In 1919, the Govern-
ment returned the goods to the ta payer and receved a refund of
the entre purchase prce. The goods were sod u 1919 by the
ta payer at a oss.
ed,, that the sae n 1918 was a cosed and competed trans-
acton, and the repurchase of these goods n 1919 consttuted a
new transacton that the amount repad the Government n
1919 consttuted the cost of the goods so repurchased and as
such shoud e ncuded n the cost of goods sod for the year 1919.
The Commttee has carefuy consdered the appea of the M
Company from the acton of the Income Ta Unt n proposng to
re|ect n part ts cam for credt of 2.02. doars, ncome and
profts ta es pad for the. year 1918.
rom the evdence of record t appears that appeant company
s engaged n a certan busness: that durng the year 1918 the
Unted States rmy commandeered y cases of canned goods, the prop-
erty of appeant company, for whch t pad durng that year 9.1,r
doars that n renderng ts return for the, year 1918 the company
ncuded n ts gross saes the above amount of 9.1 doars that
(urng the month of uy, 1919, the rmy returned to the N Com-
pany, brokers for appeant company, the entre ot of y cases and
demanded and receved a refund of the entre purchase prce that
durng the ast s months of the year 1919 the N Company resod
the y cases of the product for the account of appeant company,
reazng a net oss of 2.03 doars, whch was bed to the appeant
company n 1919 that subsequent to the return of these goods by
the rmy the company fed a cam for credt of 2.02 doars, based
upon an amended return for the. year 1918, wheren the gross saes
as reported on the orgna return were reduced by the amount re-
funded to the rmy, the goods beng taken nto the nventory at
December 31, 1918, at .44a doars, the aeged market p ce that
an amended return was aso fed for the year 1919, wheren the net
proceeds from the sae of these goods by the brokers durng that year
were ncuded n gross saes n the amount of 7.07 b doars, ths
amount representng the gross proceeds of 10.91a: doars, ess re-
funds to customers on condemned goods of 3.83a doars and e -
change charges of .01a doars that foowng an audt of the
amended return for 1918 the Income Ta Unt advsed the appeant
company of ts proposed re|ecton of that part of the cam for credt
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57
203, rt. 1581.
of 2.02,/. doars ncome and prots ta es for 1918 to be apped
aganst the remanng unpad nstaments of 1919 ta es whch was
predcated upon the reducton of 2. a doars n the 1918 ncome,
whch reducton represented the dfference between the seng prce
to the rmy of 9.1a doars e cuded from gross saes on the amended
return and the amount of .44a doars at whch they were n-
cuded n the amended nventory at December 31,1918, on the ground
that the sae n 1918 was a cosed and competed transacton and the
repurchase of these goods n 1919 consttuted a new transacton
and that the appeant company contends that the acton of the
Unt s erroneous on the ground that no sae was actuay made, and
on other equtabe grounds.
It s noted that the company states n ts bref that of the y cases
of goods commandeered by the rmy ony S y were returned, and
the remander of .3 y were condemned and never returned to the
company. Ths does not appear to be an accurate statement, as the
revenue agent who nvestgated the company s books for the years
1918 and 1919 ncorporates n hs report a transcrpt of the account
of the appeant company taken from the books or the N Company
brokers. Ths account shows that the brokers receved back from
the rmy and resod the entre ot of y cases.
Consderaton of a the foregong facts eads the Commttee to the
concuson that the acton of the Income Ta Unt shoud be sus-
taned. The sae whch was consummated n 1918, sub|ect to the con-
dton of re|ecton of spoed or swe goods, was undoubtedy a
cosed transacton. See . R. M. 129 (C. . 4, p. 47). The amount
repad to the Government n 1919 consttutes the cost of these goods
repurchased, and as such shoud be ncuded n the cost of goods sod
durng the year 1919.
ccordngy t s recommended that the acton of the Income Ta
Unt be sustaned and the appea be dened.
rtce 1581: Need of nventores. 111-20-1554
( so Secton 213(a), rtce 51.) I. T. 2001
R NU CTS O 1018 ND 1921.
The ta payers sod merchandse to a foregn frm, payment for
whch was guaranteed by a foregn bank. s of adng were
forwarded by the ta payers to ther agents n the foregn country
wth sght drafts attached. The sght drafts were never accepted
by the guarantor and the bs of adng were never out of the pos-
sesson of ta payers agents. fter some deay n payment the
purchasers contested the quaty of the merchandse and n order
to secure commerca and chemca e amnatons were obged to
depost n escrow the purchase prce of the merchandse. Ltga-
ton ensued, n whc It was determned that some of the mer-
chandse dd not meet specfcatons, and n 1922 a fna settement
was made by the ta payers wth the purchasers.
The acceptance of a draft s a condton precedent to the pass-
ng of tte and no sae took pace n 1919. ccordngy, the mer-
chandse n queston shoud have been carred n the nventory
of the ta payers unt 1922, when a cosed transacton occurred
n connecton therewth.
4177 24 5
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203, rt. 1581.1 58
dvce s requested reatve to the ta abty of and ,
partners n the frm of Company, n connecton wth cams for
refund fed by them for ndvdua ncome ta es for the year 1919.
It appears that the M Company, a foregn frm, entered nto a con-
tract wth Company for the purchase of specfed amounts of
certan merchandse. The entre shpment, wth the e cepton of 4y
cases, arrved n the foregn country durng the eary pat of Decem-
ber, 1919. The payment of the account by the M Company, upon
arrva of the merchandse, was guaranteed by the O Company, a
foregn bank. The merchandse was addressed to the O Company,
and sght drafts were drawn on t and gven, together wth the bs
of adng, to certan banks for coecton. The sght drafts were not
accepted by the drawee, and they, together wth the documents, re-
maned n the custody of the foregn correspondents of the banks
for coecton and were never out of the contro of Company.
On December , 1919, Company was advsed by ts fsca agent
n the foregn country that ts drafts were not pad by the guaran-
tor owng to fnanca dffcutes and hgh e change rates, and on
anuary ts fsca agent cabed that n vew of the fnanca dff-
cutes of the obgors they offered to pay 25 per cent of the amount
of the b for the merchandse, the merchandse to reman under the
contro of Company, and that fna payment woud be effected
as soon as market condtons mproved. cceptance of these terms
was recommended by the fsca agent. On anuary , 1920, a con-
tract was made between the partes n whch the M Company agreed
to pay 25 per cent of tho amount due wthn 48 hours after the sgn-
ng of the contract. Ths amount was pad on ebruary . 1920.
It was agreed that the baance be pad wthn three months of the d:te
of the contract. In pr, 1920, Company receved advce from
ts foregn fsca agent statng that the M Company was requestng a
further agreement of e tenson. On pr , 1920, Company
agreed to accept 37 per cent and the baance on uy , 1920. Ony
a part of ths amount was. n fact, pad n 1920. Subsequenty, on
defaut n payment under the contract, Company nsttuted sut
for the entre amount due. In May and une, 1920, the M Company
camed that the merchandse dd not meet specfcatons and asked
for the sezure of the merchandse and for the appontment of e -
perts to make commerca and chemca anayses. Ths demand was
dened, because the goods had not been pad for. The M Company
and ts guarantor, pror to fna argument of the sut prevousy
nsttuted by Company, decded to pay the baance due n order
to meet the requrements of the foregn aw for tho appontment of
e perts to e amne the quaty of the merchandse. The amount of
the payment was deposted n escrow. perts were then apponted,
who reported that the merchandse dd not meet contract specfca-
tons. The foregn court, n March, 1022, handed down a decson
hodng that.the contract as to three certan ots of the merchandse
was to be canceed, reeasng the M Company from abty for pay-
ment as to these ots that amounts prevousy pad by the O Com-
pany, the guarantor, on account of ths merchandse, be returned to
t: that as to certan other ots the contract was canceed and no
obgaton rested on the purchaser who accepts them that the M
Company was entted to an aowance on the prce of certan other
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R203, rt. 1584.
ots, Company faced a heavy oss, due to ths decson, and a
member of the nrm advsed the O Company that an appea woud be
taken. Ths meant tttat the money deposted n escrow by the O
Company, n order to secure an e amnaton of the merchandse,
mght be ndefntey so hed, and, accordngy, Company was
abe to force a settement whereby the O Company agreed to accept
the fu ot of merchandse and to pay, n addton to the amount
aready pad, the sum of doars.
partners ncuded n ther returns the amount of ncome from the
partnershp based n part on proft from ths transacton.
dvce s requested whether the amount of ncome prevousy
ncuded and not reazed shoud be aowed as a deducton from
rross ncome of the partnershp and consequenty n the ndvdua
returns of the partners for the year 1919 when the contract was
made, or 1022, when fna ad|ustment was made.
The acceptance of a draft s a condton precedent to the passng
of tte. In ths case the drafts had never been accepted, and nothng
occurred to ndcate that tte to the merchandse n queston ever
passed to the purchasers.
Under the crcumstances, t s the opnon of ths offce that no
sae took pace wth reference to ths merchandse n the your 1919,
and, consequenty, that the same shoud have been ncuded n the
nventory of Company for ts caendar year ended December
31, 1919. Gross saes for that year shoud fee dmnshed by the
amount of ths transacton, and an ad|ustment shoud be made to
refect the proper ncome, based upon the fact that ths merchandse
was not sod n 1919. Under the crcumstances, the merchandse
woud be carred n the nventory of Company from year
to year upon the nventory vauaton method used by t, and any
gan or oss from the fna dsposton of the merchandse n 1922
woud then be propery refected.
mcus 1582: auaton of nventores.
(See . R. R. 4884 sec. 32 , art. 831.) pportonment as between
years of e cess of physca nventory over perpetua nventory.
Market quotatons as of the date of nventory shoud govern the
prcng of m Inventory uness t can be shown that those prces nre
artfcay pegged or that outsde transactons n u voume
equa to or greater than the recorded transactons were mnde at
prces other than the quoted prces, n whch nstance the weghted
average of the quoted and unquoted prces shoud appy. In the
rare cases where there reay s no evdence of n current market,
eter cost shoud be used or the nearest acceptabe quotatons
pror and subsequent to the date of nventory shoud he obtaned,
and the vaues at the tme of nventory be taken as ndcated by
the poston of the nventory date.
rtce 1584: Inventores at market.
III-4-1324
. R. R. 01
R NU CT O 1918.
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203, rt. 1584.
0
The Commttee has consdered the appea of the M Company
from the acton of the Income Ta Unt n decnng to permt the
vauaton of the nventor of September 30, 1920, by the use of the
market quotatons of December 31, 1920.
fter fu consderaton of the evdence of record and the argu-
ments presented, the Commttee s of the opnon that the appeant s
contenton that ts nventory of September 30,1920. shoud be prced
at the market quotatons of December 31, 1920. under the provsons
of artce 1584 of Reguatons 45 and 2, can not be sustaned.
The ta payer operates on the bass of a fsca year endng on Sep-
tember 30. Its e cepton n ths appea has to do wth the vauaton
of ts nventory of September 30, 1920. Its product s a woven
cotton coth used n a certan trade. On September 30, 1920, genera
market condtons n cotton as we as n busness generay were ds-
organzed and prces were droppng rapdy.
The ta payer bases ts appea upon artce 1584, Reguatons 2,
makng partcuar reference to the foowng:
Where no opon market e sts or where quotatons are nomna, due to stag-
nant market condtons, the ta payer must use such evdence of n far market
prce at the date or dates nearest the nventory as may he avaabe, such as
specfc purchases or saes by the ta payer or others n reasonabe voume and
made n good fath, or compensaton pad for canceaton of contracts for
purchase commtments.
It contends that for the perod September 30 to December 31, 1920,
the cotton market was n a condton whch the term stagnant
does not propery descrbe, there beng n effect no market for cot-
ton goods or raw cotton at any prce. It further contends that ths
condton contnued unt the cose of the year 1920, when the market
began to take on more fe, athough prces st contnued to drop,
and accordngy cams that ts nventory of September 30, 1920,
shoud be vaued at the prces of December 31, 1920, and has so
rendered ts returns for the fsca year endng September 30, 1920.
Cam s aso made that artce 15S4 s meant to be a reef pro-
vson, and as such woud afford reef ony by the use of the Decem-
ber 31, 1920, vaues.
The Unt has dsaowed ths contenton, hodng that as there
were quotatons ssued by the forma marketng organzatons dea-
ng n ths commodty, those quoted prces shoud determne the
nventory vauaton. It aso refers to . R. R. 487 (C. . 4, p. 205),
whch treats of a somewhat smar case, wheren t was hed that a
oss due to a fang market was more a oss of the ne t fsca year
than a oss due to nabty to propery vaue an nventory.
The pont at ssue arses n the fsca year endng September 30,
1920. and accordngy comes under the provsons of the 1918 ct and
of Reguatons 45. T. D. 329 (C. . 1-1, p. 40), ssued under date
of March 3, 1922, amends artces 1581-1588 of Reguatons 45 to the
wordng, wth certan mmatera e ceptons, found n the corre-
spondng artces of Reguatons 2. It s ths wordng whch must
be here consdered.
That the provsons of artce 1584 of Reguatons 45 as orgnay
promugated or as amended by T. D. 329 are not drected toward
the gvng of reef aganst a subsequent drop n market vaues s
ceary ndcated by the ncuson n the aw of secton 214(a) 12,
specfcay drected toward that end. The statement, the ta payer
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203, rt. 1584.
must use such evdence of a far market prce , ndcates
the same thought. Ths artce seems to be drawn more for the pur-
pose of obtanng reabe evdence, for the protecton of both the
Government and the ta payer, as to true vaues at the partcuar date
n queston than for the purpose of grantng the ta payer reef
aganst a subsequent drop n vaues.
Reguatons 45, as amended by T. D. 329 , states, Where no open
market e sts or where quotatons are nomna. In ths nstance
there e st we organzed open markets the quotatons of whch are
avaabe. The appeant cams these are nomna. The term nom-
na s defned as e stng n name ony, ostensbe, trva, ncon-
sderabe. The quotatons represented actua transactons entered
nto not n the usua voume, t s true, yet n consderabe voume
perhaps n as great voume as s usuay found on ether a fang or a
rsng market. It s Under these condtons that the voume of trade
must be consdered not the voume of fu norma operatons. ur-
thermore, the hestancy resutng from an antcpated change n the
prce eve can not, n the opnon of the Commttee, be consdered as
consttutng stagnant market condtons.
The bass of a correct nventory s ceary stated n artce 1582
of Reguatons 45 as revsed:
(1) It must conform as neary as may be to the best accountng practce
In the trade or busness
(2) It must ceary refect the Income.
The profts of a year are determned by the condtons e stng
at the cose of that year. To take an nventory at the cose of a
fsca perod and to hod that nventory n suspense and prce t
under condtons e stng 90 days after the takng of that nventory
certany woud not refect a true statement of the operatons for
the perod cosed, nor can such be consdered good accountng
practce. It woud not seem that artce 1584 coud be nterpreted
as authorzng such a procedure. Certany the ta payer woud
not desre to so treat ts nventory prcng n the case of a rsng
market, where goods mght not be avaabe n arge voume that
s. the e act converse of the condton here e stng. In that case,
presumaby the ta payer woud demand the substtuton of prces
current 90 days before the nventory date.
In ths nstance we are treatng wth a commodty cotton
deat n n vast quanttes. Reguar quotatons are ssued day, gv-
ng prces of ths commodty based on saes of a grades and under
a condtons. It s unquestonaby true that the market cond-
tons mmedatey foowng September 30, 1920, were unstabe, yet
the nference s that there were saes made at the quoted prces.
Under such condtons transactons are often consummated outsde
the market, at prces beow the quotatons, and not reported. so,
sometmes, wash saes are reported for the soe purpose of
Pe g ng tne market. There s here no concusve evdence that
such condtons e sted, the nearest approach thereto beng wth
reference to certan offers beow quoted prces, no defnte prces or
quanttes beng stated.
Under these condtons the appea shoud be dened. Market
quotatons as of the date of nventory shoud govern the prcng of an
nventory uness t can be shown that those prces are artfcay
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203, rt. 158 .
G2
I ggfd or that outsde trau acton n a voume equa to or
greater than the recorded transactons were made at prces other
than the quoted prces, n whch nstance the weghted average of
the quoted and unquoted prces shoud appy. In the rare cases
where there reay s no evdence of a current market, ether cost
shoud he used or the nearest acceptabe quotatons pror and sub-
sequent to the date of nventory shoud be obtaned, and the vaues
at the tme of nventory be taken as ndcated by the poston of the
nventory date.
The Commttee accordngy recommends that the acton of the
Income Ta Unt be sustaned and the appea dened.
rtce 158 : Inventores of ve-stock rasers ITI- -1352
and other farmers. . R. R. 207
R NU CT O 11 17.
rtce 15S of Reguatons 45 and 2, as amended by T. D. 3399
(C. . 1-2, 31), grants to a ta payer the rght to compute s
ta abe net ncome for the current ta abe year on an nventory
bass f e eects to adopt such basts durng such year and submts
an ad|ustment sheet for the precedng ta abe year based on the
nventory method. In the nstant case t appears that the appe-
ant dd not eect or ask to make use of an nventory bass for
the computaton of hs ta abe net ncome for the year 1017 unt
some tme after the begnnng of 1923.
The ta payer may not adopt n 1923 the farm prce nventory
method of computng net ncome for 1917 wth respect to ncome
derved from hs farm and ve-stock busness, whch busness was
entrey cosed out n 1917 and was not resumed unt 1919, and
then ony by the ta payer as a member of a partnershp engaged
n such busness.
hns appeaed from the acton of the Income Ta Unt n refus-
ng to permt hm to make use of an nventory prepared n accord-
ance wth the farm prce method of ve stock on hand at the
begnnng of the year 1917 n determnng the amount of net ncome
sub|ect to ta for that year.
rom the records n the case, t appears that for a number of
years pror to 1917 the appeant was engaged n farmng and stock
rasng that for the years 1913-1917 he rendered hs persona ncome
ta returns on the bass of cash recepts and dsbursements that
n 1917 he sod hs ranch and a of hs ve stock and dd not reenter
the busness of farmng and stock rasng durng that year. The
fed offcer who nvestgated hs returns reported that
t a payer sod out hs busness n 1917 and retred from actve farmng
unt 1919, when he formed a copartnershp wth and C, under the name
of the 51 Company. Ths partnershp e sted unt October, 1921, at whch
tme ta payer purchased tte nterests of the other partners. Ths partnershp
faed to te returns.
The appeant makes the contenton that he s entted to determne
hs ta abe net ncome for the year 1917 on the bass of nventores
prepared n accordance wth the so-caed farm prce method, and
the provsons of artce 158 of Reguatons 45, and smar num-
bered artce of Regdatons 2, whch artces, as amended by T. D.
3399 (C. . 1-2, 31), read n part as foows:
Inventores of vestock raser and other farmers. (1) armers may
change the bass of ther returns from that of recepts and dsbursements to
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203, rt. 153G.
that of an nventory bass, provded ad|ustments are made n accordance wth
one of the two methods outned n ( ) and ( ) beow.
( ) Openng and cosng nventores sha be used for the year n whch
the change s made and there must be submtted wth the return
for the current ta abe year an ad|ustment sheet for the precedng ta abe
year based on the nventory method upon the amount of whch ad|ustment
the ta sha be assessed and pad.
It s the method outned n ( ) whch the ta payer now seeks
permsson to adopt.
fter gvng carefu consderaton to the pont at ssue, the Com-
mttee concudes that the acton of the Income Ta Unt n refusng
to permt the appeant ta payer to use nventores prepared n ac-
cordance wth (ho farm prce method shoud be sustaned. It s
the opnon of the Commttee that artce 1580( ) grants to a ta -
payer the rght to compute hs ta abe net ncome for the current
ta abe year on an nventory bass f he eects to adopt such bass
durng such year and submts an ad|ustment sheet for the precedng
ta abe year based on the nventory method. In the nstant case t
appears that the appeant dd not eect or ask to make use of an
nventory bass for the computaton of hs ta abe net ncome for
tre year 1917 unt s ome tme after the begnnng of 1923, nasmuch
as the revenue agent who nvestgated hs return reported under date
of uy , 1923, th t
Inventores have never been taken and recorded n any years accordng
to ta payer s statement made to me and retaned copes of returns
fed from 1014 to t 2, ncusve, e cept years 1918 to 1921, ncusve, for
whch no returns have been kept, dscose the fact that returns were made
strcty on a cash recept and dsbursement bass. Records kept are ony a
crude memorandum of amounts pad out and receved.
Under such crcumstances, the ta payer can not be permtted to
adopt n 1923 the farm prce nventory method of computng net
ncome for 1917 wth respect to ncome derved from hs farm and
ve-stock busness, whch busness was entrey cosed out n 1917
and was not resumed unt 1919, and then ony by the ta payer as a
member of a partnershp engaged n such busness. or the years
1913-1917, ncusve, the ta payer rendered hs returns on the bass
of cash recepts and dsbursements, and n the preparaton of such
returns camed as deductons a amounts e pended n the purchase
of ve stock and n carng for and feedng the same. If such re-
turns were correcty rendered, he has pad or been assessed wth ta
for such years ony on the actua amount of net ncome he derved
from hs ve-stock busness durng such years, and the effect of per-
mttng hm to now fe an amended return for the year 1917, ren-
dered on the nventory bass, wth an ad|ustment sheet coverng the
year 191 , woud be to reease a greater or ess amount of ncome
actuay receved from ta .
In vew of the foregong, the Commttee recommends that the
acton of the Income Ta Unt n refusng to permt the appeant
ta uayer to make use of an nventory prepared n accordance wth
the farm prce method coverng ve stock on hand at the be-
gnnng of tne ta abe year 1917, n determnng the amount of net
ncome sub|ect to ta for that year, be sustaned, and the appea here
under consderaton be dened.
Chares I). um,,
Charman Commttee on ppeas and Rcre o.
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204, rt. 1 01.
4
nTCL 1588: Inventores of reta merchants. III-7-13 1
Mn. 3180
R NU CT O 1921.
Inventores of reta dry goods deaers.
Treasury De artment,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, ebruary ,19 h
Coectors of nterna revenue, nterna revenue agents n charge,
and others concerned:
Reta dry goods deaers who desre to change the bass of prcng
nventores from the cost or cost or market method to the
reta method as descrbed n artce 1588, Reguatons 2, and
Income Ta Mmeograph 3077 (C. . II-, 31), may do so wth-
out obtanng forma permsson from the Department, provded the
books of account are kept by such deaers on the bass of the reta
method as prescrbed for each ta abe perod affected.
D. . ar, Commssoner.
S CTION 204. N T LOSS S.
rtce 1(501: Net osses, defnton and com- III-2-1291
putaton. I. T. 1899
R NU CT O 1021.
I 1910 the ta payer acqured a tract of Umberand wth the
Idea of oggng off the property and marketng the ogs, raroad
tes, etc. though he had prevousy retred from actve busness,
upon acquston of the tmberand he engaged actvey n the
busness of umberng. In 1921 the tract of tmberand was sod at
forced sae at a oss.
Med, that the oss was n connecton wth bs trade or busness
and s a net oss for 1921 as contempated by secton 204.
In 1919 the ta payer acqured a tract of tmberand wth the dea
of oggng off the property and marketng the ogs, raroad tes,
etc. e entered nto an agreement wth a second person to super-
ntend the operatons under a contract whereby the superntendent
was to obtan an nterest n the property after the ta payer had
reazed a certan amount of money from the oggng operatons. It
was estmated that t woud take fve years work before the super-
ntendent woud receve an nterest n the property. number of
contracts were entered nto for the sae o ogs, raroad tes, etc.,
but owng to a sump n the umber market n 1921, and (e cance-
aton of contracts, t wras determned that t was necessary to
termnate the venture, and there was a forced sae of the property
at a oss. The ta payer states that for a number of years he had
retred from actve busness pror to 1919 but n that year, upon
acquston of the tmberand, he. was engaged actvey n the bus-
ness of umberng, makng contracts, supervsng and keepng records
of the busness, makng dsbursements of the funds and frequent
trps to the ranch durng the tme the work was n progress for the
purpose of supervson.
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204, rt. 1 01.
It s hed that nasmuch as he was actuay engaged n the busness
of umberng, and, owng to the busness condtons, a forced sae
of the property connected wth hs trade or busness was made, that
the oss sustaned by hm was n connecton wth hs trade or busness
and s a net oss for the year 1921, as contempated by secton 204
of the Revenue ct of 1921. The amount of the oss appcabe to
the year 1922 w be determned n accordance wth artces 1 01
and 1005 of Reguatons 2 promugated under the Revenue ct of
1921.
rtce 1 01: Net osses, defnton and com- 111-10-1398
pntaton. I. T. 1935
Y NU CT O 1921.
If the ta payer sustaned a net oss n te year 1023 as con-
tempated by secton 204 of the Revenue ct of 1921, It may
appy the oss aganst ts ncome for the year 1024, and the fact
that t reduces ts captazaton so that t w represent the actua
vaue of the stock after chargng off osses for 1923 and prevous
years does not affect Its rght to cam a net oss.
The ta payer has an authorzed and ssued capta stock of oO
doars and has accumuated over a perod of three years a net defct
of O doars, whch amount has been consdered as a surpus defct.
It s the ntenton to make appcaton to the secretary of state of the
State of Y to reduce the captazaton from 50 doars to 40 c do-
ars, the atter amount representng the actua vaue of the stock.
The net oss of the corporaton for the year 1923 was 4| doars.
Inqury s made whether the reducton of capta stock by chargng
off te oss sustaned n 1923 and pror years w prevent the
corporaton from camng a net oss for the year 1924 n the event
that earnngs for that year are shown.
Secton 204 of the Revenue ct of 1921 provdes n part:
That ns used In ths secton the term net oss means ony net osses re-
sutng from the operaton of any trade or busness reguary carred on by the
ta payer and when so resutng means the e cess of the deductons
owed by secton 215 or 234, as the case may be, over the sum of the foow-
ng: .
It s hed, that f the company sustaned a oss n the year 1923
as contempated by secton 204 of the Revenue ct of 1921, t may
appy the oss aganst ts net ncome for the year 1924, n accordance
wth artces 1001 to 1 05, ncusve, of Reguatons 02, promugated
under the Revenue ct of 1921, and the fact that t may reduce ts
captazaton does not affect ts rght to cam a net oss n accord-
ance wth the reguatons governng.
btce 1 01: Net osses, defnton and com- III 11-1412
pntaton. I. T. 1943
R NU CT O 1918.
oss sustaned upon the sae of a capta asset n 1919, even
though the ta payer retans other assets whch he contnues to use
n hs busness thereafter, s not wthn the defnton of a net oss
nnder secton 204 of the 1918 aw uness the capta asset Is n-
cuded wthn the cass defned by secton 204(a)2.
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204, rt. 1 01.
In arrvng at amounts of over-assessment, the Unt has apped
a oss sustaned n 1919 aganst the ncome for 1918 and a part
aganst the ycome for 1920 under secton 204 of the Revenue ct
of 1918.
Most of the oss s due to the sae of certan property formery
owned by the M Company. ccordng to the ta payer s statement,
pror to May, 190-, he had purchased at par outstandng bonds of
sad company n the amount of 200.r doars, secured by a mortgage
on a the property of the company, consstng of modern mnng
equpment, easehods, and persona property adapted to use n oper-
atng a mne. orecosure proceedngs were nsttuted upon the
mortgage, resutng n a |udgment n May, 190-, n favor of the
ta payer for 223 doars, prncpa and nterest. the assets of
the company were sod May, 190-, and were bought n by the ta -
payer for costs of doars. The ta payer states that after pur-
chasng the property he became convnced that same woud not be
proftabe and from tme to tme sod portons thereof, the ast beng
sod n )19. The tota recepts are stated to bo 17. doars.
In e panaton of the great reducton n prce, affdavts have been
furnshed assertng that the March 1,1913, vaue of the mnng equp-
ment was at east 250 doars, but that n pr, 1913, damage to
the e tent of 80a doars was caused by a food. Ta payer has
stated that an nvestgaton convnced hm that there was not suff-
cent mnera on the easehod to repar the equpment and resume
operatons. pparenty no mnng was done after pr, 1913. The
ta payer dd not cam any oss on the sae of the property unt
1919 for the stated reason that he camed the property at the vaua-
ton of the |udgment n accordance wth the prncpe stated n para-
graph 98, artce 8, Reguatons 33, and artce 153. Reguatons 45.
The M Company had no other assets and has been dssoved wth-
out redempton of the bonds mentoned.
The queston arses as to the avaabty of the oss n reducng
the net ncome of the ta payer for the years 1918 and 1920 under
secton 204. The secton states n part as foows:
That as used n ths secton the term net oss refers ony to net osses
resutng from ether (1) the operaton of uny busness reguary carred on
by the ta payer, or (2) the bona fde sae by the ta payer of pant, budng,
machnery, equpment, or other factes, constructed, nstaed, or acqured
by the ta payer on or after pr f, 1917, for the producton of artces con-
trbutng to the prosecuton of the present war and when so resutng means
the e cess of the deductons aowed by aw (e cudng In the case of corpora-
tons amounts aowed as a deducton under paragraph ( ) of subdvson (a)
of secton 2 4) over the sum of the gross ncome pus any nterest receved
free from ta aton both under ths tte and under Tte III.
In I. T. 1401 (C. . 1-2, 32) ths offce hed that a oss on the
sae of capta assets was not a net oss wthn the meanng of sad
secton 204. In that case t appears that the corporaton n ques-
ton was dsposng of a ts assets premnary to dssouton. Ia
the present case the ta payer owned other mnera ands n and
Y whch he was easng, and the record shows that n 1919 he made
other saes of mnera ands.
In I. T. 1808 (C. . II-2, 3 ) ths offce hed that the words
busness operatng oss as used n artce 1G01 of Reguatons 45
must be consdered as referrng to the annua net oss of a corpora-
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204, rt. 1 01.
ton rather than to any snge oss whch may go to form a part
thereof, and that the annua net oss whch ncudes a busness fre
oss not resutng from processes or operatons used n the busness
shoud be consdered a net oss resutng from the operaton of
any busness reguary carred on by the ta payer wthn the mean-
ng of those words n secton 204(a).
Secton 204 of the Revenue ct of 1921 gves a dfferent defnton
of net oss n determnng net osses under that ct and ncudes
osses sustaned from the sae or other dsposton of rea estate,
machnery, and other capta assets used n the conduct of the trade
or busness. Secton 204(a) of the 1918 aw as above quoted s not
so broad and appears to mt the aowance of net oss to those re-
sutng from the operaton of a busness reguary carred on by
the ta payer or the bona fde sae of certan capta assets provded
they were constructed, nstaed, or acqured after pr , 1917,
for the producton of artces contrbutng to the prosecuton of
the present war. Congress thus ntended to mt the scope of
osses sustaned on the sae of capta assets. To hod that the sae
of such assets may be consdered n determnng the net oss under
secton 204 regardess of when they were constructed, nstaed, or
acqured, and regardess of whether they were used n the produc-
ton of artces contrbutng to the prosecuton of the war, s con-
trary to the purpose of secton 204 of the 1918 aw. In the opnon
of ths offce, the sae of capta assets, meanng such as arc used
n operatng a busness, s not the same thng as operaton of a bus-
ness. Ths offce, therefore, concudes that a oss sustaned upon the
sae of a capta asset n 1919, even though the ta payer retans
other assets whch he contnues to use n hs busness thereafter, s
not wthn the defnton of a net oss under secton 204 of the 1918
aw uness the capta asset s ncuded wthn the cass defned by
secton 204(a)2.
rtce 1 01: Net osses, defnton and com- 111-18-152
putaton. L T. 1980
R NU CT O 1918.
net oss for the cnendar year 1019 resutng from a deducton
for amortzaton s a net oss wthn the meanng o secton 204.
dvce s requested as to whether an aowance for amortzaton
appcabe to the caendar year 1919 may be ncuded n the compu-
taton of net oss for that year, n accordance wth the provsons of
ecton 204 of the Revenue ct of 1918.
It appears that the M Company was ncorporated n uy, 1918,
for the mmedate purpose of manufacturng and suppyng the
Unted States rmy wth an artce contrbutng to the prosecuton
of the war, n accordance wth the terms of a contract entered nto
wth the War Department n une, 1918. The corporaton erected
a pant at a cost of a doars. cam for amortzaton aowance
wth respect to such pant has been fed. It, s stated that the greater
part of the amortzaton aowance when approved w be appcabe
to the caendar year 1919, and that the deducton of such amortza-
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204, rt. 1 01.
8
ton aowance w resut n a net oss for that year. Secton 234 of
the Revenue ct of 1918 provdes n part as foows:
(a) That n computng the net ncome of a corporaton sub|ect to the ta
Imposed by secton 1230 there sha be aowed ns deductons:
(8) In the case of budngs, machnery, equpment, or other factes, con-
structed, erected, nstaed, or acqured, on or after pr , 1917, for the pro-
ducton of artces contrbutng to the prosecuton of the present war, and u
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 deducton for the amortzaton of
such part of the cost of such factes or vesses as has been borne by the
ta payer, .
It s cear, under the secton of the statute above quoted, that so
much of the amortzaton aowance whch, under artce 185, Regua-
tons 45, shoud be aocated to the caendar year 1919, w con-
sttute an aowabe deducton for that year.
The reevant porton of secton 204 of the statute reads as foows:
(a) That as used n ths secton the term net oss refers ony to net
osses resutng from cther (1) the operaton of any busness reguary car-
red on by the ta payer, or (2) the bona fde sae by the ta payer of pant,
budng, machnery, equpment or other factes, constructed, nstaed or ac-
qured by the ta payer on or after pr 0, 1917, for the producton of artces
contrbutng to the prosecuton of the present war and when so resutng
meana the e cess of the deductons aowed by aw (e cudng n the cn of
corporatons amounts aowed as a deducton under paragraph ( ) of sub-
dvson (a) of secton 234) over the sum of the gross ncome pus any n-
terest receved free from ta aton both under ths tte and under Tte III.
rtce 1G01, Reguatons 45, n nterpretng ths secton of the
statute, provdes n part that
s used n the statute the term net oss means ether a busness operat-
ng oss or a oss reazed by a bona fde sae of property constructed, nstaed,
or acqured on or after pr 0, 1917, for the productou of artces contrbut-
ng to the prosecuton of the war.
The test as to the rght of the ta payer to take the statutory net
oss s whether the ordnary net oss s one resutng from ether
the operaton of any busness reguary carred on by the ta payer
or the bona fde sae by the ta payer of the pant, etc. If the
net oss arses n ether of these two ways, the ta payer has the rght
to compute and deduct the statutory net oss as provded by secton
204 of the statute. It s the opnon of ths offce that the oss on
the pant, to the e tent of any amortzaton aowance whch may be
authorzed and deducted for the caendar year 1919, w represent
a oss for that year resutng from the operaton of the busness
reguary carred on by the ta payer wthn the meanng of the
statute. Inasmuch as such amortzaton aowance w be de-
ductbe under secton 234(a)8, t foows that the e cess of the de-
ductons for 1919 aowed by aw, ncudng the deducton for
amortzaton for that year and e cudng the deducton provded
by secton 234(a) , over the sum of the gross ncome pus ta -free
ncome w consttute the net oss for 1919 that may be apped
aganst the net ncome of the corporaton for 1920, n vew of the
fact that the return for the perod uy 11,1918, to December 31, 1918,
was for ess than a whoe ta abe year and showed no net ncome.
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204, rt. 1 04.
rtce 1 01: Net osses, defnton and com- 111-23-1589
putaton. I. T. 2017
R NU CT O 1921.
ta payer purchased and for the purpose of erectng thereon
a hote. The necessary capta coud not be rased, and the and
was sod at a oss.
ed, that the purchase of the and was n the nature of a
pro|ect and that the oss was not one resutng from the operaton
of a trade or busness reguary carred on by the ta payer wthn
the meanng of secton 204.
Durng the ye r 1920, the ta payer, together wth an e perenced
hote man, purchased some and n the cty of for the purpose of
erectng thereon a modern hote. It ater proved mpossbe to rase
suffcent capta to bud the hote, and the and was sod n 1921
at a oss. The ta payer wshes to appy the baance of the oss n
e cess of hs ncome for 1921 aganst hs ncome for the year 1922.
It does not appear that the ta payer ntended to become constanty
and reguary engaged n the hote busness. e refers to the under-
takng as a pro|ect. s prncpa busness durng 1921 appears
to have been that of offcer of an automobe company.
Secton 204(a) of the Revenue ct of 1921 reads n part:
The term net oss means ony net osses resutng from the
operaton of any trade or busness reguary carred on by the ta payer.
It s hed that the oss n queston resuted from a pro|ect or ad-
venture, and not from the operaton of a trade or busness reguary
carred on by the ta payer. Consequenty, the oss can not be n-
cuded n computng a net oss under secton 204.
rtce 1 04: Net osses, for what perods 111-21-15 5
aowed. I. T. 200
R NU CT O 1018.
Under the provsons of secton 204(b) of the tevenue ct of
1918 an amount aowed by the Commssoner as a net oss for 1919
s deductbe n computng the net ncome for 1920 ony to the e -
tent that t s n e cess of the net ncome for the year 1918. Re-
gardess of whether or not the statute of mtatons on 191S assess-
ments and refunds has e pred, the true net ncome for 1918 must be
determned before any porton of the net oss sustaned In 1919
may be apped aganst the net ncome for the year 1920.
Inqury s made whether the net ncome for the year 1918 shoud
be ad|usted before determnng how much of the net oss for 1919
may be e tended to the year 1920, t appearng that no e amnaton
of the ta payer s account had been made nor a waver sgned for the
year 1918.
Secton 204(b) of the Revenue ct of 1918 provdes as foows:
If for any ta abe year begnnng after October 31, 1918, and endng pror
to anuary 1, 1920, t appears upon the producton of evdence satsfactory to
the Commssoner that any ta payer has sustaned a net oss, the amount of
such not oss sha under reguatons prescrbed by the Commssoner wth the
approva of the Seeretary be deducted from the net ncome of the ta payer for
the precedng ta abe year and the ta es mposed by ths tte and by Tte
I for such precedng ta abe year sha be redetermned accordngy. ny
amount found to be due to the ta payer upon the bass of such redetermnaton
sha be credted or refunded to the ta payer n accordance wth the provsons
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70
of secton 252. If such net oss s n e cess of the net ncome for such precedng
ta abe year, the amount of such e cess sha under reguatons prescrbed by
the Commssoner wth the approva of the Secretary be aowed as a deduc-
ton In computng the net Income for the succeedng ta abe year.
Under the above provsons of aw, an amount determned by the
Commssoner as a net oss for 1919 s deductbe n computng the
net ncome for 1920 ony to (e e tent that t s n e cess of (he net
ncome for the year 1918. It s evdent, therefore, that regardess
of whether or not the statute of mtatons on 1918 assessments and
refunds has e pred, the true net ncome for 1918 must be deter-
mned before any porton of the net oss sustaned n 1919 may be
apped aganst the net ncome for (he year 1920.
S CTION 20 . C PIT L G IN.
rtce 1 53: Partnershps, estates, and trusts. III-1-1278
I. T. 1889
R NU CT O 192 1.
In tte case of a ta payer who receved property under the terms
of a w, the two-year perod durng whch the assets must be hed
to entte the ta payer to the beneft of the provsons of secton 200
runs from the date of the testator s death.
dvce s requested n regard to the edera ncome ta abty
arsng from the sae by the ta payer n 1922 of certan securtes
whch he receved n 1921 as part of hs dstrbutabe share of the
estate of hs father, who ded n 1919.
The partcuar queston rased s whether the two-year perod dur-
ng whch capta assets must be hed to entte the ta payer to the
beneft of the provsons of secton 20 of the Revenue ct of 1921
ran from the date of the testator s death or from the ater date on
whch the benefcary actuay receved possesson of the securtes.
The queston requres a determnaton of the meanng of that part
of secton 20 (a) whch provdes:
The term capta assets as used n ths secton means property acqured and
hed by the ta payer for proft or nvestment for more than two years .
It s we setted that the nterest of a dstrbutee of a decedent s
estate attaches upon the date of the decedent s death. Mr. ustce
omes thus states the rue n ooper v. radford (1901) (178 Mass.,
95, 97):
The tme when the property passes under a deed s not ater than the death
of the grantor. The same s true n the case of a w. It s true tha n the
ater nstance the nterest of a egatee s sub|ect to an account, but st t s an
nterest n the fund as t s, anaogous to that of a cestu que trust, and vests
at the death of the testator.
To the same effect s Mechancs Savngs ank v. Whte (1889)
(150 Mass., 234). The rue s the same n the case of ntestacy, ac-
cordng to erryman v. Green (18 3) (39 a., 133):
The rght of a dstrbutee attaches upon the death of the- ntestate. The n-
terest then accrues, and the subsequent dvson serves to ascertan and defne,
convert nto a ega rght, and reduce to possesson, an equty whch e sted be-
fore n the form of a chose n acton, cognzabe n chancery.
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71
520 , rt. 1G53.
In an artce n 21 arvard Law evew, 43 , the resut of the
authortes s thus summarzed:
Nether an e ecutor nor an admnstrator takes any benefca In-
terest n the decedent s property. nd on the death of the testator or ntes-
tate, both egatees and ne t of bn get an mmedate nterest n the persona
estate anaogous to that of a centt que trust.
The Department has adopted ths doctrne n reguatons and ru-
ngs, hodng that a dstrbutee of property from a decedent s es-
tate acqures t at tte date of the decedent s death for the purpose of
determnng gan or oss from ts sae by such dstrbutee. ( rt.
a 3, eg. 2: L. O. 1012, C. . 2, 34.)
Granted, then, that a dstrbutee acqures an mmedate nterest
n the decedent s estate at the date of the decedent s death, and that
ths nterest s anaogous to that of a cestu que tmst, s ths nterest
property acqured and hed by the ta payer from the tme of
the death In other words, does the quoted phrase embrace smpy
ega nterests n possesson, or does t further embrace the benef-
ca nterest of a dstrbutee, whch ater s converted nto a ega
nterest by the actua dstrbuton
That Congress dd not ntend to requre ega tte and possesson
by the use of the terms 14 acqured and hed n defnng capta assets
s strongy ndcated by subdvson (c) of secton 20 , statng the
method for the appcaton of the secton to cases of partnershps,
estates, or trusts. The subdvson provdes:
In the case of a partnershp or of an estate or trust, the proper part of each
share of the net ncome whch conssts, respectvey, of ordnary net ncome
and capta net gan, sha be determned under rues and reguatons to be
prescrbed by the Commssoner wth the approva of the Secrets 17. and sha
be separatey shown n the return of the partnershp or estate or trust, and
sha be ta ed to the member or benecury or to the estate or trust as pro-
vded n sectons 21S and 219, but at the rates and n the manner provded n
subdvson (b) of ths secton.
These provsons gve the benefcary of an estate or trust the
prvege of computng hs ta under secton 20 , athough the estate
or trust and not the benefcary had ega tte to and possesson of
the capta assets sod. If the phrase property acqured and hed
bv the ta payer n the defnton of capta assets requres ega
tte and possesson n hm, t s obvous that subdvson (c) coud
not be gven effect, so far as a benefcary of an estate or trust n
the desgnated cases s concerned. Snce the secton shoud be con-
strued so as to gve efect to both provsons, rather than merey
one ( Monroe Co. v. Rordan (1922) (280 ed.. G24, 2 )). t appears
that Congress dd not ntend the words property acqured and hed
by the ta payer to refer e cusvey to ega property nterests
but that benefca nterests n property are aso ncuded. More-
over, accordng to the doctrne of the cases quoted supra, a ds-
trbutee of a decedent s estate has an nterest vestng at the decedent s
death anaogous to that of a cestu que trust secton 200(c) e -
pressy grants to a cestu the prvege of determnng hs ta n
the manner provded by that secton accordngy, the dstrbutee
shoud be accorded a ke prvege.
urther, n vew of the e press purpose for enactng the secton,
t s very unkey that Congress ntended to dstngush between
ega and benefca nterests n ts appcaton. It s we known
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20 , rt. 1 53. 72
that secton 20 was adopted to provde reef for ta payers who
reaze n a snge year a gan accumuated over severa years (see
notes on the Revenue ct of 1918, pp. 15-1 report from Commttee
on Ways and Means, dated ugust 1 , 1921, p. 10 report from -
nance Commttee, dated September 2 , 1921, p. 12). The reason for
the enactment s drecty appcabe to the nstant case. The property
n queston was acqured by the ta payer under the reguatons at
the date of the testator s death the gan resutng from ts sae
s one accumuated over more than two years, durng a of whch
tme t has been retaned for the ta payer. The fact that durng
part of that perod an e ecutor or admnstrator was n possesson
of the property shoud not affect the resut, snce the ta payer
acqured the property at the testator s death, and thereafter the
benefca ownershp was n hm.
Moreover, the Department has adopted the. vew, both n the regu-
atons and n ts rungs, that the phrase acqured and hed by the
ta payer does not requre actua possesson of the assets n a
cases. rtce 1 51 of Reguatons 2 provdes n part:
The specfc property sod or e changed must have been hed for
more than two years, but In the case of a stock dvdend the prescrbed perod
appes to the orgna stock and the stock receved as a dvdend consdered
as a unt nnd where property s e changed for other property and no gan
or oss recognzed under the provsons of secton 202, the prescrbed perod
appes to the property e changed and the property receved n e change
consdered as a unt.
In nether of these cases woud the ta payer have had possesson
durng the two-year perod of the specfc property dsposed of, a-
though the dentty of the partcuar nvestment durng that tme
woud be suffcenty estabshed. In I. T. 10 0 (C. . II-, 3 ), n
whch the e act queston heren has been consdered by the Unt, t
has been hed that the two-year perod provded n secton 20 (a)
begns to run on the date of the decedent s death.
nay, as stated above, t s we setted that for the purpose of
computng gan or oss from the sae by the benefcary of property
acqured by bequest, devse, or nhertance, the property s acqured
by the benefcar 7 as of the date of the decedent s death. ( rt. 15 3,
Reg. 2 L. O. 1012, C. . 2, 34.) ence, n the nstant case, the
ta payer acqured the securtes at the date of the decedent s death
and that partcuar nvestment has been kept ntact as the ta payer s
from that date to the date of sae, a perod of more than two years.
The gan thereby reazed represents an accumuaton over a |erod
of more than two years. In vew of the ndcatons wthn the secton
tsef that a ta payer possessng a benefca nterest n property may
have the beneft of ts provsons, and of the constructon paced upon
the secton by the reguatons and rungs, t s hed that the ta payer
heren s entted to compute hs ta wth reference to the gan on
the sae of the securtes here n queston on the bass provded n sec-
ton 20 .
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210, rt. 3.
P RT II. INDI IDU LS.
S CTION 210. NORM L T .
rtce 3: Persons abe to ta . 111-22-157
T. D. 3594
INCOM T R NU CT O 1921 D CISION SUPR M COURT.
Income Ta Nonbesdk t Ctzen Consttutonaty Sec-
ton 210.
Under the s teenth amendment to the Consttuton Congress
as the power to evy an Income ta on a nonresdent ctzen of
the Unted States whose ncome s derved whoy from the owner-
shp of property stuated n a foregn country, and the coecton
of such a ta under the provsons of secton 210 of the Revenue
ct of 1921 s consttutona.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The attached decson of the Supreme Court of the Unted States
n the case of George W. Cook v. Tat, coector, s pubshed for the
nformaton of nterna-revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved May 23, 1924.
. W. Meon,
Secretary of the Treasury.
Supreme Coubt of the Unted States. No. 220. October Term, 1023.
eorye W. Cook, pantff n error, v. aen L. Tat, Unted States Coector of
Interna Revenue for the Dstrct of Maryand.
In error to the Dstrct Court of the Unted States for the Dstrct of Maryand.
May 5. 1924.
Mr. ustce Mc en a devered the opnon of the court.
cton hy pantff n error, he w be referred to as pantff, to recover the
sum of 298.34 as the frst nstament of an ncome ta pad, t s charged,
wder the threats and demands of Tat.
The ta was mposed under the Revenue ct of 1921, whch provdes by
secton 210 (40 Stat., 227, 233) : That, In eu of the ta mposed by secton
210 of the Revenue ct of 1918, there sha be eved, coected, and pad for
each ta abe year upon the net ncome of every ndvdua a norma ta of
8 per centum of the amount of the net ncome n e cess of the credts provded
n secton 21(3: Provded, That n the case of a ctzen or resdent of the Unted
States the rate upon the frst 4,000 of such e cess amount sha be 4 per
centum. 1
The foowng reguaton, No. 2, promugated by the Commssoner of Interna Reve-
nue under the Revenue ct of 1921, provdes n artce 3 : Ctzens of the Unted States
cept those entted to the benefts of secton 2 2 wherever resdent, are abe
to the ta . It makes no dfference that they may own no assets wthn the Unted Sbtes
nd m y receve no ncome from sources wthn the Unted States. very resdent aen
ndvdua s abe to the ta . even though hs ncome Is whoy from sources outsde the
Unted States. very nonresdent aen ndvdua s abe to the ta on hs ncome
f.m sources wthn the Unted States.
4177 24 0
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521 , rt. 3.
74
Pantff Is a natve ctzen of the Unted States and was such when he took up
hs resdence and became domced n the Cty of Me co. demand was made
upon hm by defendant n error, desgnated defendant, to make a return of hs
ncome for the purpose of ta aton under the revenue aws of the Unted States,
rntff comped wth the demand but under proUft. the ncome havng been
derved from property stuated n the Cty of Me co. ta was assessed
aganst hm n the sum of 1,193.38, the frst nstament of whch e pad,
and for t. as we have sad, ths acton whs brought.
The queston n the case, and whch was presented by the demurrer to the
decaraton, s, as e pressed by pantff, whether Congress has power to mpose
a ta upon Income receved by a natve ctzen of the Unted States who at the
tme the ncome was receved was permanenty resdent and domced n the
Cty of Me co, the ncome beng from rea and ersona property ocated n
Me co.
Pantff assgns aganst the power not ony hs rghts under the Const-
tuton of the Unted States but under nternatona aw and n sup rt of the
assgnments ctes many cases. It w e observed that the foundaton of the
assgnment s the fact that the ctzen recevng the ncome and the prop-
erty of whch t s the product are outsde of. the terrtora mts of the
Unted Staes. These two facts, the contenton s, e cude the e stence of the
power to ta . Or to put the contenton another way, to the e stence of the
power and ts e ercse, the person recevng the Income and the property from
whch he receves t must bott be wthn the terrtora mts of the Unted
States to be wthn the ta ng power of the Unted States. The contenton s
not |ustfed, and that t s not |ustfed s the necessary deducton of recent
cases. In Unted States v. ennett (232 U. S., 209) the power of the Unted
States to ta a foregn-but yacht owned and used durng the ta ng perod
outsde of the Unted States by a ctzen domced n the Unted States was
sustaned. The ta passed on was Imposed by a tarff ct1 but necessary the
power does not depend upon the form by whch t s e erted.
It w e observed that the case contaned ony one of the condtons of the
present case, the property ta ed was outsde of the Unted States. In Unted
States v. Ooeet (d., 293), the yacht ta ed was outsde of the Unted States
but owned by a ctzen of the Unted States who was permanenty resdent
and domced n a foregn country. It was decded that the yacht was not
sub|ect to the ta but ths s a matter of constructon. Pans were taken to
say that the queston of power was determned whoy rrespectve of the
owner s permanent domce n a foregn country. nd the court put out
of vew the stus of the yacht. That the court had no doubt of the power to
ta was ustrated by reference to the ncome ta aws of pror years and ther
e press e tenson to those domced abroad. The ustraton has pertnence
to the case at bar, for the case at bar s concerned wt an ncome ta , and
the power to mpose t.
We may make further e poston of Ihe natona power as the case depends
upon It. It was ustrated at once n Unted States v. ennett by a contrast
wth the power of a State. It was ponted out that there were mtatons upon
the atter that were not on the natona power. The ta ng power of a State,
t was decded, encountered at ts borders the ta ng power of other States
and was mted by them. There was no such mtaton, t was ponted out,
upon the natona power, and that the mtaton upon the States affords, t was
sad, no ground for constructng a barrer around the Unted States shuttng
that Government off from the e erton of powers whch nherenty beong to t
by vrtue of ts soveregnty.
The contenton was re|ected that a ctzen s property wthout the mts of the
Unted States derves no beneft from the Unted States. The contenton, t
was sad, came from the confuson of thought n mstakng the scope and
e tent of the soveregn power of the Unted States as a Naton and ts rea-
tons to ts ctzens and ther reaton to It. nd that power n ts scope and
e tent, t was decded, s based on the presumpton that government by ts
very nature benefts the ctzen and hs property wherever found, and that
opposton to t hods on to ctzenshp whe t bettes and destroys ts
Sec. 37. Tarff ct ot u ost 5. 1000 cb. , 3 Stat., 11. 112). provded n nart h
foows: There sha be eved and coected annuay on Ihe 1st day of September by
the coector of customs of the dstrct nearest te resdence of the mamgn owner, upon
the use of fvery foregn-but yacht, peasure-boat or ves|-f, not used .or ntended to be
used for trade, now or hereafter owned or chartered for more than s months by nny
cf zen or ctzens of the Unted States, a sum equvaent to a tonnage ta of 7 per
gross ton.
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75
( 212, rt. 22.
advantages and bessngs by denyng the possesson by government of an
essenta power requred to make ctzenshp competey benefca. In other
words, the prncpe was decared that, the Government, by ts very nature,
benefts the ctzen and hs property wherever found and, therefore, has the
ower to make the beneft compete. Or to e press t another way. the bass
of the power to ta was not and can not be made dependent upon the stus
of the property n a cases, t beng n or out of the Unted States, nor was
rt and can not e made dependent upon the domce of the ctzen, that
beng n or out of the Unted States, but upon hs reaton as ctzen to the
Unted States and the reaton of the atter to hm as ctzen. The conse-
quence of the reatons s that the natve ctzen who s ta ed may have
domce, and the property from whch hs ncome s derved may have stus.
In n foregn country and the ta be ega the Government havng power to
mpose the ta .
udgment affrmed.
Mr. ustce Mete|nods took no part n the consderaton or decson of
ths case.
S CTION 212. N T INCOM O INDI IDU LS
D IN D.
rtce 22: Computaton of net ncome.
R NU CT O 1921.
111-3-1305
I. T. 1908
The foowng: are the rates of e change on the countres gven be-
ow prevang as of December 31, 1923:
Country or cty
1 M a
nam .
Cuht
t hegnvaka
nMrk
Imend
ranee
toraaoy
Stea rtan
Monetary unt
aue tn terms of
aed States
money.
Peso (god)....
W.72I1
rone
.000014
e mne
.0903
Lev
.007283
Doar
.9749S9
r so
. IOS
Me can doar
.5139
Shangha tao.
.7170
Pwo
MM
.029132
rone
.1771
.024713
.0510
Rechsmark...
Mtmmmmm
4.3233
Drachma .. .
. CO1 Wn
Country or cty.
ongkong..
ungary
Inda
Itay
apan
Me co
Netherands
Norway
Poand
Portuga
Rumana...
Sngapore...
Rpan
Sweden. ...
Swtzerand,
Uruguay...
Yugosava.
aue In terms of
Monetary unt.
Unted States
money.
10.5078
.0000.52
Rupee
.309
Lra
.0131
Yon
.4 IS
.481219
orn
.3797
.14 3
I os mark...
.00000(1154
sruo
.0343
Lou
.0 5150
Doar
.5081
. 1291
.2013
.174S
. 777
Dnar
.01133:,
rtce 22: Computaton of net ncome. ITI-7-
. R. R. 158
R NU CTS O 1017 NT 191 S.
ed, that the net ncome of Ihe M aw partnershp for each of
the years 1917 to 1020 shoud be determned on a straght cash
recepts and dsbursements bass.
M Company, a aw partnershp, and the four members thereof,
namey, , , C, and D, have |onty appeaed from the hodng
of the Income Ta Unt that the partnershp shoud render ts ta
reurns for the years 1917 to 1920, ncusve, on an accrua bass,
and that the ndvdua members shoud return for ta purposes
for each of such years the amount of ther dstrbutve nterests n
the partnershp s ncome determned on an accrua bass.
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21:. , rt. 22.
7
rom the evdence of record n the case and statements made by
D durng the ora hearng t appears that the aw partnershp of
Company rendered ts orgna ta returns on a cash recepts
and dsbursements bass for the years 1015 to 1020. In uy, 1021,
such returns were nvestgated by a fed offcer, who, upon ascer-
tanng that the appeant partnershp carred on ts books certan
accounts coverng charges made for ega servces rendered whch
apparenty represented accruas, determned that such .books were
beng kept on an accrua bass, and then requred the partnershp
to fe amended ta returns rendered on such bass, and t s from
ts acton that the appea here under consderaton has been taken.
It s the cam of the appeant partnershp and ts ndvdua
members, and such cam appears to be substantated, that ts books
were not kept on an accrua bass durng the years 1017 to 1020,
both ncusve, e cept that there were entered n a servce account
estmated amounts to be charged for ega servces rendered, a
other tems of ncome beng entered ony as payment therefor was
receved and tems of e pense ony as pad.
The practce of ths frm s and has been for a number of years
to requre each of ts members and assstant aw cerks to make day
reports to the frm s bookkeeper showng the amount of tme gven
to each cent s ega matters and the character of the servces ren-
dered. When any partcuar matter was cosed the senor members
of the frm revewed such record and determned what fee shoud
be charged for the servces rendered and a b for such fee was then
sent to the cent. In cases where a partcuar matter n tgaton
receved the attenton of the frm beyond the cose of the caendar
year a rough estmate was made as to what amount shoud be charged
for servces rendered durng that year and such amount was entered
n the servce account. Ths practce was foowed, t s camed,
for the purpose of determnng the appro mate vaue of the serv-
ces rendered by the frm durng any one year to save tme and the
necessty for a detaed e amnaton of od records when a statement
coverng a compete servce was furnshed a cent and to enabe
members of the frm to determne the appro mate vaue of ther
severa nterests n the frm s busness for the year. In makng ds-
trbutons of earnngs to the frm s severa members, however, the
amounts entered n the servce account are not taken nto consdera-
ton, and such dstrbutons were made ony on the bass of cash
recepts.
The case, here under consderaton s practcay dentca wth that
consdered by the Commttee n . R. R. 702 (C. . 1-1, 47).
n that t s contended by the appeant n each case that bs for
ega servces were at a tmes rendered sub|ect to the cent s ap-
prova that often after a conference wth a cent a b was reduced
n amount that no accrua of ndebtedness n favor of or aganst the
frm of ncome, other tentatve accruas entered n a servce account,
or of e pense were made on the books at any tme and that the
consstent practce of the frm was to pay cash for a bs rendered
aganst t as soon as receved or wthn a very short tme thereafter.
The effect of the system of accountng empoyed by the ta payer
whose appea was consdered n . R. R. 702 was fuy dscussed n
the sad recommendaton, and the Commttee reached the concu-
son that the method of accountng used was not an accrua method
G
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77
( 212, rt. 23.
n ts acknowedged sense and that the computaton of net ncome
for the year n queston was more correcty determnabe on the bass
of cash recepts and dsbursements, and t was recommended that the
sad appeant frm be permtted to render ts ta return on such
bass.
fter gvng carefu consderaton to a the facts dscosed n the
nstant case, the Commttee recommends that the net ncome of the
partnershp of M Company for each of the years 1917 to 1920,
ncusve, be determned on the bass of cash recepts and dsburse-
ments, payments of ega fees by transfer to the sad partnershp
of stocks, bonds, or other assets of aue or promssory notes havng
an mmedate dscount vaue, beng treated as cash payments, and
that each ndvdua member of such partnershp be requred to e-
turn for each of the years n queston ony hs proportonate nterest
of the partnershp s net ncome determned on a cash recepts and
dsbursements bass, pus any ncome he may have receved from
other sources. Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 23: ases of computaton. III-3-T30
. R. R. 4802
R NU CT O 3 918.
ed, that for a practca purposes the M Company kept ts ac-
counts on an nccrua bass though the busness was on a cash bass,
a accounts payabe beng qudated before the cose of each
month. The company kept ts cashbook and books of accounts open
each month unt a bs propery beongng In sad month were
receved, checked, and pad.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt n hodng that certan saary
tems are not aowabe deductons durng the ta abe year 1920.
In support of ts contenton the ta payer states:
That the accounts and books of the company were kept on an accrua
bass that we beeve that the Department has been msed due to the state-
ments accompanyng the orgna ncome ta returns, wheren t was reported
that the returns were on a cash recept and dsbursement bass, whereas what
we ntended to convey was that our busness was on cas bass that we carred
no open accounts and that a accounts payabe were qudated before the cose
of each month. In further support of our theory that our accounts were car-
red on an accrua bass, we wsh to state that our cashbook and books of ac-
counts were kept open each month unt a bs propery beongng n sad
month were receved, checked, and pad that many of our arge accounts were
I ad twce a month that ths was our practce for the years n queston that
we adopted ths method of bookeepng so as to gve us a cear concepton of our
earnngs In each and every mouth and year.
In further support of our statement that our books were carred on an
accrua bass we are ncosng sheets from our cashbook for the nonth of Decem-
ber, 1920 that a tems subsequent to the tem Dec. 2Sth were receved and
pad subsequent to December 31, 1020, and that o t books were hed open unt
such tme as they were pad and coud be entered n the month of December,
1920 that some of these tems coud not be pad unt as ate as anuary 10,
nm.
In vew of the above, the Commttee s of the opnon that for a
practca purposes the appeant kept ts accounts on an accrua
bass and that, therefore, the saary tems shoud be accrued as a
abty as at December 31, 1920. The Commttee s further of
G
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212, rt. 23.
78
the opnon that the ta abe ncome shoud be ncreased by the
dfference between the openng nventory and the cosng nventory,
as shown on the baance sheets accompanyng appeant s affdavt
dated September 17, 1923.
ccordngy, t s recommended that the appea be sustaned on
the ssue rased and that t|e case be read|usted n accordance wth
the foregong.
In construng the accountng methods recommended by the
Comptroer of the Currency for the years 1918 through 1921, the
Commttee hods that hanks whch fed ther returns professedy
on the accrua bass but n reaty on the bass outned by the
Comptroer of the Currency, or an appro maton of that bass,
and dd not keep ther records so as to propery refect ther
Income on a fu accrua bass can not be regarded as havng made
returns of ther ncome on an accrua bass, and shoud be con-
sstenty regarded as never havng abandoned the cash recepts
and dsbursements bass, and ther returns for the severa years
n queston shoud be ad|usted on that bass.
Those banks whch defntey adopted a consstent accrua method
of accountng and have eected ether to contnue on that bass or
to return to a cash recept s and dsbursements method of account-
ng shoud be permtted to fe ther returns for the years n
queston n accordance wth ther method of accountng n those
years n compance wth the requrements of artce 23 of Regua-
tons 45 and 2 appcabe thereto.
The Commttee has consdered the matter of the bass on whch
the returns of natona banks for the years 1918 through 1921 shoud
be consdered because of the changes n the methods of accounts
advocated by the Comptroer of the Currency n those years.
The Commttee as carefuy revewed the condtons resutng
from the changes n accountng methods recommended by the Comp-
troer of the Currency n those years and the resuts thereof as
affectng ncome ta returns and s of the opnon:
1. That snce the Comptroer of the Currency dd not requre
natona banks to adopt n the years 1918 through 1920 a compete
an optona appro mate statement of nterest earned but not
coected and of nterest and dscount coected but not earned
on reports to hm durng that perod, wth an ntmaton that a
change of records to an accrua bass woud ater be requested, eav-
ng out of consderaton a other accrua tems, such method of
reportng or accountng woud refect the banks condton from
nether an e cusve cash recepts and dsbursements nor an e cusve
accrua standpont. or ths reason those banks whch fed ther
returns professedy on the, accrua bass but n reaty on the bass
outned by the Comptroer of the Currency, or an appro maton
of that bass, and dd not keep ther records so as to propery refect
ther ncome on a fu accrua bass can not be regarded as havng
made returns of ther ncome on an accrua bass, and shoud be
consstenty regarded as never havng abandoned the cash recepts
and dsbursements bass, and ther returns for the severa years n
queston shoud be ad|usted on that bass.
rtce 23: ases of computaton.
111-15-1494
. R. M. 220
R NU CTS OP 101S ND 1021.
and consstent
G
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79
( 212, rt. 23.
t
2. That those hanks whch defntey adopted a consstent accrua
method of accountng and have eected ether to contnue on that
bass or to return to a cash recepts and dsbursements method of
accountng shoud be permtted to fe ther returns for the years n
queston n accordance wth ther method of accountng n those years
n compance wth the requrements of artce 23 of Reguatons 45
and 2 appcabe hereto.
The Commttee accordngy recommends that the practce above
outned be adopted consstenty by the Income Ta Unt n ts audt
of natona bank returns n the years 1918-1921, and that a Com-
mttee recommendatons and other prevousy authorzed procedure
or rungs not n accordance, herewth be revoked.
Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 23: ases of computaton. 111-22-1577
so Secton 214(a) 1, rtce 111.) I. T. 2011
R NU CTS O 1918 ND 1921.
Where the ta payer s books are kept upon the accrua bass,
e cse ta es are aowabe deductons from gross ncome ony for
te year n whch they were accrued. Offce Decson 240 (O. . 1,
111) modfed.
dvce s requested as to whether Offce Decson 240 (C. . 1,
111), reatve to the deducton of e cse ta es, s to be apped n the
case of corporatons keepng ther books upon the accrua bass.
Offce Decson 240 reads as foows:
ddtona e cse ta es assessed aganst a corporaton under the Revenue
ct of 1909 and pad durng subsequent years are aowabe deductons from
the gross ncome reported on the corporaton s return for the year n whch
pad but ncome ta es assessed under the Revenue ct of 1913 or 191 are
deductbe ony f pad pror to anuary 1, 1917.
In consderng the queston as to whether a corporaton that kept
ts books upon the accrua bass for 191 s requred, n computng t3
net ncome for 191 , to accrue muntons ta es assessed for that year,
and pad n 1917, the Soctor, n Law Opnon 1059 (C. . 4, 147),
rendered on anuary 11, 1921, states that the amount of such ta es
accrued for 191 must be deducted from gross ncome for 191 , n-
stead of for 1917, the year n whch the ta was pad. It s further
stated that secton 13(d) of the Revenue ct of 191 s a quafyng
secton, and when accounts of corporatons are kept on a bss other
than recepts and dsbursements, t quafes the manner of makng
deductons authorzed n secton 12(a) of such ct, and that the
word pad n the atter secton s to be read pad or accrued,
dependng upon how the accounts of the corporaton were kept.
Commttee on ppeas and Revew Memoranda 2 (C. . 2, 115),
29 (C. . 2, 119), and 57 (C. . 2, 121) aso hod that such ta es are
deductbe n the year n whch accrued rather than the year n whch
pad where the books were kept on the accrua bass.
Inasmuch as the muntons ta s an e cse ta , t s the opnon of
ths offce that the rue stated n Law Opnon 1059 and n the Com-
mttee on ppeas and Revew memoranda referred to, a of whch
G
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212, rt. 20.
80
bear date subsequent to Offce Decson 240, shoud be foowed where
the ta payers books are kept upon the accrua bass, rather than the
rue stated n Offce Decson 240. Offce Decson 240 (C. . 1, 111)
modfed.
rtce 2 : Change n accountng perod III-2-1292
T. D. 3542
INCOM T R NU CT O 1918 D CISION O COt RT.
1. M ND MUS M ND D T NR.
Mandamus w not e to compe the e ercse by (he Comms-
soner of Interna evenne of o power vested n hm by secton
212 of the Revenue ct of 1018 to approve a change n a ta -
payer s accountng perod from n fsca year to a caendar year, or
to accept amended returns.
2. ccountng rC oD Change from sca to Caendar Year.
When a ta payer vountary changed Its accountng perod from
a caendar to a fsca year bass and fed returns on ths bass,
mandamus w not e to compe the Commssoner to accept
amended returns on a caendar-year bass.
3. udgment ffrmed.
udgment of the Supreme Court of the Dstrct of Coumba
denyng appeant s petton for a wrt of mandamus (T. D. 3500
( . . 11-2, 50 ) affrmed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Court of ppeas of the Dstrct of
Coumba n the case of The Greyock Ms, a corporaton, v. Davd
. ar, Commssoner of Interna Revenue, s pubshed for the
nformaton of nterna-revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved anuary 2, 1924.
. W. Meon,
Secretary of the Treasury.
In the Court of ppeas of the Dstrct of Coumba. No. 4015.
Unted Staes e rc. The reuock Ms, a corporaton, appeant, v. D. .
ar, Commssoner of Interna Revenue, appeee.
ppea from a |udgment n the Supreme Court of the Dstrct denyng ap-
peant s petton for a wrt of mandamus to compe the appeee, as Comms-
soner of Interna Revenue, to accept appeant s amended ncome and profts
ta returns for the caendar years 1918 to 1922, ncusve, and to accept
returns n future upon the caendar-year bass.
n answer was nterposed to appeant s petton, to whch answer appeant
fed certan peas. ppeee demurred to these peas and the demurrer was
sustaned.
The ncome ta aw of ebruary 24, 1919 (40 Stat., 1057), n part provded:
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 ac-
cordance wth the method of accountng reguary empoyed n keepng the
books of such ta payer If the ta payer s annua accountng perod
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81
212, rt. 2 .
s other than a fsca year, as defned n secton 200, or f the ta payer has
no annua accountng perod or does not keep books, the net ncome sha be
computed on the bass of the caendar year.
If a ta payer changes hs accountng perod from fsca year to caendar
year, from caendar year to fsca year, or from one fsca year to another,
the net ncome sha, wth the approva of the Commssoner, be computed on
the bass of such new accountng perod, sub|ect to the provsons of secton
12 .
Snce there was not suffcent tme between the date of the passage of ths
ct and March 15, 1910, the date on whch a return was requred, appeant
fed on March 14, 1910, a tentatve and cursory return, contanng the aver-
ment that t was not possbe to te a compete return wthn the tme aowed
for the foowng reasons: No banks avaabe and audtors can not com-
pete work. request therefore was made for an e tenson of tme, whch
was granted.
In the tentatve return the ta was estmated on the caendar year endng
Decen er 31, 1918. The rea or compete return was fed on une 14. 1919,
for the fsca year endng une 30, 1918. nnuay thereafter and down to and
ncudng the year 1922, as aready noted, returns were made upon the fsca-
year bass.
It Is aeged and admtted, by the demurrer, that the fsca-year bass was
frst adopted by appeant upon advce of accountants, based upon ther nter-
pretaton of the ct of ebruary 24, 1919. It was further aeged by appeant
that the nnnua accountng erod upon a caendar-year bass ceary refected
ts ncome for that perod, and that pror to 1919 t had fed ts return on a
caendar-year bass that t never requested or receved permsson of the
Commssoner of Interna Revenue to change ts annua accountng perod from
a caendar to a fsca year bass. It further appears that for many years
appeant reguary has cosed ts books on the ast days of March, une, Sep-
tember, and December as computed Its ncome accuratey for each of the
quarters ndcated has taken a physca nventory on the ast day of each
quarter has rued down ts books on une 30 of each year and has hed Its
annua stockhoders meetng durng the month of uy.
No protest or appcaton for eave to change to the caendar-year bass was
fed by appeant unt ebruary, 1922. It Is averred that the request then
made was based upon a recent rung of the Commttee on ppeas n the
Interna Revenue ureau n another case, n whch a corporaton had eected to
fe ts return on a caendar-year bass. It appearng ttere that the books of
the corporaton were rued down on ugust 31, athough aso cosed on Decem-
ber 31. the Income Ta Unt had sought to requre the corporaton to fe ts
rvtrn upon a fsca-year bass. The rung was that, under the facts, the cor-
poraton was |ustfed In fng ts returns on the bass of a caendar year
and that shoud not now be permtted or requred to change the bass of
fng ts returns.
ppeant s appcaton fnay was dened and ths sut fed.
The purpose of the ncome ta aw was the rasng of revenue to meet
pressng needs of the Government. The provsons of ts aw, at east so
far as (hey reate to the queston here n ssue, were reasonaby free from
ambguty. Whatever may have been the vew of the accountants empoyed
by apeant as to the proper nterpretaton of those provsons, t was the
duty of appeant, wthn a reasonabe tme, to nvoke the dscreton of the
Commssoner of Interna Itevenue f a change to a caendar-year bass was
desred. Instead of dong ths, however, appeant thereafter fed severa
returns upon a fsca-year bass and pad ts ta es accordngy. It w be
apparent at once that f ta payers were to be permtted, severa years after
vountary fng a return upon one bass, to compe the Commssoner to accept
returns for the same perod upon a dfferent bass, endess and needess con-
fuson woud resut and the rea purpose of the aw measuraby defeated.
s the Supreme Court as sad, the wrt of mandamus s awarded not as a
matter of rght but n the e ercse of sound |udca dscreton and upon
equtabe prncpes. It s not wthn genera statutes of mtaton, but s
sub|ect to the equtabe doctrne of aches (Unted States e ret. rant v.
Lane, 249 U. S., 3 7).
Reevng that appeant s deay In the present case was so ong and une -
cusabe as to amount to aches, we affrm the |udgment, wthout consderng
other questons nvoved.
ffrmed.
Chas. . Robb, ssocate ustce.
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23(a), rt. 31.
S CTION 213(a). GROSS INCOM D IN D:
INCLUSIONS.
rtce 31: What ncuded n gross ncome. III-2-1293
LT. 1900
R NU CT O 1918.
, a stockhoder n the M corporaton, purchased the stock of the
other stockhoders, gvng hs promssory note n payment. It was
mutuay understood that the ta payer was to obtan from the cor-
poraton the necessary funds to pay for the stock. The corporaton
thereupon ssued bonds. The corporaton then from ts surpus
aud undvded profts decared a dvdend of I.SGthr doars, pay-
abe 0 r doars n cash, 1.200 doars In bonds, and OO doars
In shares of ts stock. then sod the bonds, devered the pro-
ceeds receved therefrom, together wth the ( 0 doars, to te
other stockhoders, and deposted the shares of stock wth the
trustee us coatera.
ed, that the dvdend to the e tent of the cash and of the
proceeds receved from the bonds consttutes ta abe ncome. The
fact that the ta payer used the proceeds of the dvdend to pur-
chase the outstandng shares s mmatera.
, manager of the M corporaton, purchased the stock of the other
stockhoders, gvng hs promssory notes n payment. It was mu-
tuay understood that (he ta payer was to obtan from the corpora-
ton the necessary fund to pay for the stock. Thereupon the corpo-
raton, from ts surpus and undvded profts, decared a dvdend of
,8(50 doars, payabe GO doars n cash, 1,200# doars n bonds,
and 00a) doars n shares of ts stock. then sod the bonds, de-
vered the proceeds receved therefrom, together wth the 0a do-
ars, to the other stockhoders, and deposted the shares of stock wth
the trustee as coatera.
rom the foregong facts t s apparent that the ta payer receved
for hs separate use, beneft, and dsposa a gan derved and severed
from the capta of the corporaton. y the recept of the cash and
the bonds by the ta payer he was that much rcher, and the corpora-
ton was that much poorer: ts surpus was decreased to the e tent
of the cash and the bonds receved by the ta payer. The mere fact
that the ta payer used the proceeds of the dvdend to purchase the
outstandng shares of stock of the corporaton can not ater the fact
that he receved from the corporaton somethng of e changeabe
vaue that had been severed from ts capta and over whch t had
ost contro. sner v. Maeomber (252 U. S., 189) Unted States v.
Phes (25 U. S., 15 ) : Doerschuch v. Unted States (274 ed.,
739).
It s, therefore, hed that the dvdend, to the e tent of the cash
and of the proceeds receved from the bonds, consttutes ta abe n-
come wthn the meanng of the revenue aws and the defnton ad
down by the Supreme Court n the foregong cases.
rtce 31: What ncuded n gross ncome. IIT-4-1325
I. T. 191
R NU CT OP 1921.
Pror to March 1, 101.3, the ta payer entered nto an agreement
wth to enter hs empoy, the contract to reman n force so ong
as contnued n busness at a certan pont. In October, 1922,
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213(a), rt. 31.
the ta payer, n consderaton of the payment of 31 doars, va-
cated hs poston and surrendered the contract.
Inasmuch as the contract had no reazabe vaue as of March
1, 1913. the entre amount receved on the termnaton of the con-
tract was ncome sub|ect to ta .
It s proposed to make an addtona assessment on the ta payer
of b doars as the resut of an audt of hs 1922 return.
The proposed addtona assessment resuts from addng to hs
ncome an amount of She doars, representng money pad hm by
, hs former empoyer. In 1903 he entered nto an agreement wth
. whereby he agreed to enter hs empoy, the contract to take effect
anuary 1, 190-. The contract was to contnue n force so ong as
contnued n the busness at and he rendered such reasonabe
servce as was necessary and customary n the conduct of the busness.
The orgna contract remaned n force unt October, 1922, wth the
e cepton of certan amendments pertanng to the amount of the
compensaton he was to receve. In October, 1922, he, n consdera-
ton of the payment of 31a doars, vacated hs poston and sur-
rendered the contract. In order to obtan from an amount based
upon hs e pectancy of fe, t was necessary for hm to empoy an
attorney, to whom he pad a doars. It s contended that the tota
amount receved shoud not be consdered as ncome because of the
fact that the contract had a vaue as of March 1,1913.
ed, that nasmuch as the amount of 31a doars was pad to the
ta payer by reason of the canceaton of a contract n whch was
rected a consderaton for servces ony, the contract, therefore, hav-
ng no reazabe vaue as of March 1, 1913, the tem shoud be treated
for ta purposes as an amount receved n the form of saary or com-
pensaton and ta ed n ts entrety, wth the e cepton of a doars,
whch may be camed as a deducton, t beng a busness e pense.
rtce 31: What ncuded n gross ncome. III-4-132
I. T. 1917
R NU CT O 19 21.
Treasury Decson 3435 (C. . II-, 50) s not appcabe to cases
where rghts are gven to subscrbe to stock whch, when ssued,
has a market vaue above the subscrpton prce, and ta payer
shoud contnue to treat uch transactons n accordance wth the
provsons of artce 39 of Reguatons 02 as amended by T. . 3403
(C. . 1-2, 4).
Treasury Decson 3435 (C. . II-, 50) provdes that where
property s sod by a corporaton to a sharehoder or member, or
by an empoyer to an empoyee, for an amount substantay ess
than ts far market vaue, such sharehoder or member of the cor-
poraton or such empoyee sha ncude n gross ncome the dffer-
ence between the amount pad for the property and the amount of
ts far market vaue and that n computng the gan or oss from
the susequent sae of such property ts cost sha be deemed to bo
ts far market vaue at the date of acquston.
rtce 39 of Reguatons 2, as amended by Treasury Decson
D403 (C. . 1-2, 4), states the rue for the computaton of gan or
oss from the sae of stock and rghts to subscrbe for stock, based
r
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213(a), rt. 31.
4
upon the decson of the Supreme Court n the case of Mes v. The
Safe Depost and Trust Company of atmore (C. . 1-1, 72).
rtce 39, as amended, provdes among other thngs that under
certan condtons the gan or oss from the sae of the stock and
ghts s to he based upon and sha be n accordance wth the prn-
cpes ad down n artce 1548 of Reguatons 2 wth respect to
the computaton of the gan or oss from the sae of stock receved
as a stock dvdend.
ed, That Treasury Decson 343ft s not appcabe to cases
where rghts are gven to subscrbe to stock whch, when ssued, has
a market vaue above the subscrpton prce, and that ta payer
shoud contnue to treat such transactons n accordance wth the
provsons of artce 30 of Reguatons 2. as amended by Treasury
Decson 3403.
kto.e 31: What ncuded n gross ncome.
(See T. D. 35 2 sec. 214(a) 10, art. 204.) Royates receved by
essor of coa mnes for rght to e tract coa. Decson under Rev-
enue ct of 191 , as amended.
rtce 31: What ncuded n gross ncome. 111-13-14 3
T. D.35 8
INCOM T COMMUNITY PROP RTY.
rtce 31, Reguatons o. 02 (1922 edton), amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned.
rtce 31, Reguatons No. (52 (1922 edton), s hereby amended
to ncude Caforna, so that the ffth sentence w read as foows:
husband and wfe domced n rzona. Caforna, Idaho, Lousana,
Nevada. New Me co, Te as and Washngton, n renderng separate ncome
ta returns, may each report as gross ncome one-haf of the ncome whch,
under the aws of the respectve States, heeomes smutaneousy wth ts re-
cept communty property.
D . ar,
Commssoner of Interna Revenue.
pproved March 2 , 1924.
. W. Meon,
Secretary of the Treasury.
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213(a), rt. 31.
rtce 31: What ncuded n gross ncome. 111-13-14 4
T. D.3570
INCOM T OPINION O T TTORN Y G N R L.
Ta abty of Income eceved by Indvdua Members of ve
Cvzed Trbes of Indans from Ta - empt Lands.
Income receved by ndvdua members of the ve Cvzed
Trbes of Indans, from ta -e empt ands aotted n severaty by
the Unted States, not sub|ect to the ncome tn aws.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng opnon rendered by the ttorney Genera under
date of March 15, 1924, regardng the ta abty of ncome receved
by the ndvdua members of the ve Cvzed Trbes of Indans
from ta -e empt ands aotted n severaty by the Unted States, s
pubshed for your nformaton and gudance.
D. . ar,
Commssoner of Interned Revenue.
pproved March 27, 1924.
. W. Meon,
Secretary of the Treasury.
Department of .Iustce,
Washngton, March 15, 192k.
Sr: I have the honor to acknowedge recept of your communcaton, re-
questng my opnon whether ncome receved by the ndvdua members of the
ve Cvzed Trbes of Indans from ta -e empt ands aotted n severaty
by the Unted States s sub|ect to ta es mposed by the Revenue cts of 191 ,
1917, 1918, and 1921.
The trbes referred to are the Cherokees, Cboctaws, Chckasaws, Creeks,
an Semnoes.
When the southern porton of the Unted States, east of the Msssspp, was
setted the above-mentoned trbes were occupyng and camng ownershp of
a that terrtory.
y treaty and the use of a degree of force n nstances the trbes agreed to
take up ther abode farther west out of the way of the whte man, on the
and that was afterwards desgnated as Indan Terrtory. It was a part of
the consderaton for the remova that they shoud possess the sad and un-
moested forever as an ndependent peope wth ther own forms of government
and shoud not n a future tme be embarrassed by havng e tended around
them the nes of, or by havng paced over ton the |ursdcton of a Terr-
tory or State, or by beng encroached upon by the e tenson n any way of
the mts of an e stng Terrtory or State.1
ut the whte popuaton graduay encroached upon the Indan Terrtory.
In 1894 t was estmated that about a quarter of a mon whte peope had
taken up ther abode there. They strongy desred to substtute ther own
Trestes and statutes bearng upon these transactons are:
C1I R0 ., M Y , 1829 (7 ST T., 311).
Whereas, It beng the an ous desre of the Government of the Unted Staes to
eture to the Cherokee Naton of Indans, as we those mw vng wthn the mts of
the Terrtory of rkansas, as those of ther frends and brothers who resde In Sates
east of the Msssspp, and who may wsh to |on ther brothers of the West, a pt ma-
c t home, and whch sha, under the most soemn guarantee of the Unted States, be.
aw reman, thers forever a home that sha never, In a future tme, be embarrassed
I havng e tended around It the nes, or paced over t the ursdcton of n Terrtory
or State, nor be pressed upon by the e tenson, In any way, of any of the mts of
ny e stng Terrtory or State .
rt. I. The western boundary of rkansas sha be, and the same s hereby defned,
f: ne sha be run, commencng on Red Rver, at the pont where the eastern
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5213(a), rt. 31.
DM tods of government for the unsatsfactory trba admnstraton. owerer.
the change, wthout the consent of the Indan, was not possbe e cept by
Toaton of treates.
nay, by the ct of March 3, 1893 (27 Stat.. 12. 45. sera. 15 and 1 ).
the Commsson of ve Cvzed Trbes, commony referred to as the Dawes
Commsson, was created to enter nto negotatons wth the ve Indan
Ntons for the purpose of e tngushng the naonu or trba tte to any ands
n that terrtory hed by such trbes by aotment of the ands n severaty to
the ndvdua Indan or such other |ust and equtabe method as mght be
agreed upon between the Indans and the Unted States. fter three years of
negotaton, the commsson was unabe to effect an agreement.
y ct of une 10, 189 (29 Stat., 821, 339-340), the commsson was drected
to prepare ros of the trbes as premnary to aotment. arous statutory
enactn|ents were made, graduay assertng the authorty of the Unted States
over the Indan Terrtory. Congress announced It s hereby decared to be
the duty of the Unted States to estabsh a government n the Indan Ter-
rtory whch w rectfy the many nequates and dscrmnatons now e st-
ng n sad Terrtory and afford needfu protecton to the ves and property of
a ctzens ard resdents thereof, and by mandatory drecton to the commttee
made cear ts ntenton to proceed wth the aotment, whether the Indans
agreed or not. of the trbes assented fnay but the Cherokees.
Under these condtons, Congress passed the ct of .Tune 28, 1898 (30 Stat
405), known as the Curts ct, whch provded premnary measures for aot-
ment. The Government pan was so obno ous to the Indans and so contra-
dctory to the arrangement under whch the trbes moved on to these ands
ong before and under whch they had contnued ther trba reatons, that t
was necessary for the Government to make concessons to the aottees to
obtan ther consent to a renqushment of the ndvdua nterest n the trba
property for a dvson n severaty.
Choctaw ne strkes sad rver, and run due north wth sad ne to the Itver rkansas,
thence n a drect ne to the southwest corner of Mssour.
C OCT W, S PT M R 27, 1830 (7 ST T., 3331.
rt. I . The Government and peope of the Unted State re hereby obged to
secure to the sad Choctaw Naton of T ed I eope the ursdcton and government of a
the persons and property that may be wthn ther mts west, so that no Terrtory
or State sha ever have a rght to pass aws for the government of the Co faw
Naton of Red Peope and ther descendants aud that no part of the and granted
them sha ever be embraced n any Terrtory or .State but the Unted State ahn
forever secure sad Choctaw Naton from, and aganst, a aws e cept snch ag from
tme to tme may be enacted n ther own natona councs, not Inconsstent wth
the Consttuton, treates, and aws of the Unted States: and e cept such as may. and
whch have been enacted by Congress, to the e tent that Congress under the Consttuton
re requred to e ercse a egsaton over Indan affars. ut the Choctaws, shoud the
treaty be ratfed, e press a wsh that Congress nuy grant to the Choctaws the rght
of punshng by ther own aws, any whte man who sha come Into ther naton, and
Infrnge uny of ther natona reguatons.
Patent to trbe on te In Interor Department.
C au ( C OT I, ntC M R 29. 1885 (7 ST T., 4781.
Whereas the Cherokees are an ous to make some arrangements wth the Government
of the Unted States whereby the dffcutes they have e perenced by a resdence wthn
the setted parts of the Unted States under the |ursdcton and aws of the State
governments may be termnated and ad|usted and wth a vew to reuntng ther peope
n one body and securng a permanent home for themseves and ther posterty n the
country seected by ther forefathers wthout the terrtora mts of tbe Stufe soveregn-
tes, aud where they can estabsh and en|oy a government of ther choce and per-
potnste such a statu of socety ns may be most consonant wth ther vew , habts aud
condtons and as may tend to ther ndvdua comfort and ther advancement In
cvzaton.
kt. 5. Te Unted States hereby covenant and agree that the ands ceded to the
Cherokee Naton n the foregong artce sha, n no future tme wthout tor consent,
be ncuded wthn the terrtora mts or |ursdcton of any State or Terrtory.
ut they sha secure to te Cherokee Naton the rght by ther natona councs to
make and carry nto effect a such aws as they may deem necessary for the govern-
o and protecton of the persons and property wthn ther own country beongng
to ther peope or such mrsona as have connected themseves wth them: provded
aways that the.v sha not be nconsstent wth the Consttuton of the Unted
States and such cts of Congress as have been or may be passed reguatng trade
and ntercourse, wth (he Indans and aso, ttat they sha not be consdered as e tend-
ng to such ctzens and rmy of the Unted States us may trave or resde n the
Indan country by permsson accordng to the aws aud reguatons estabshed by
the Government of the same.
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87
213(a), rt. 31.
T C OCT W8 ND C I0 8 WS.
s a resut a number of treates and cts of Congress were made and enacted.
The orgna Choctaw-Chckasaw aotment agreement, secton 29 of the ct
of une 2S, 189S (ch. 517 (Curts ct), 30 Stat, at Large, 495-507), as modfed
by the ct of uy 1, 1902 (32 Stat., 41), provdes that a the ands aotted
sha be nonta abe whe the tte remans n the orgna aottee but not to
e ceed 21 years from the date of patent, and each aottee sha seect from
hs aotment a homestead of 1 0 acres, for whch he sha have a separate
patent, and whch sha be naenabe for 21 years from the date of the
patent .
T C 0 8.
The trba ands of the Cherokees were aotted n severaty pursuant to an
agreement wth them as set forth n the ct of uy 1, 1902 (32 Stat, 71 ),
C IC S W, M T 24, 1834 ( 7 ST T., 4 0).
st. II. The Chckasaws are about to abandon ther homes, whch tbey hare ong
chershed and oved and though htherto unsuccessfu, they st hope to fnd a country,
adequate to the wants and support of ther peope, somewhere west of the Msssspp
and wthn the terrtora mts of the Unted States shoud they do so, the Govern-
ment of the Unted States, hereby consent to protect and defand them aganst the
Inroads of any other trbe of Indans, and from the whtes and agree to keep them
wthout the mts of any State or Terrtory. The Chckasaws pedge themseves never
to make war upon any Indan peope, or upon the whtes, uness they are so authorzed
by the nted States. ut If war be made upon them, they w be permtted to defend
tben eves, unt assstance be gven to them by the Unted States, as sha be the case.
CR , M T 24, 1832 (T ST T., 8 8, 388).
ar. I . The Creek country west of the Msssspp sha be soemny guaranted
to the Creek Indans, nor sha any State or Terrtory ever have a rght to pass aws
for the government of such Indans, but thoy sha be aowed to govern themseves,
so far as may be compatbe wth the genera ursdcton whch Congress may thnk
proper to e ercse over them. nd the Unted States w aso defend them from the
un|ust hosttes of other Indans, and w aso as soon as the boundares of the
Creek country west of the Msssspp are ascertaned, cause a patent or grunt to be
e ecuted to the Creek Trbe: agreeaby to the 3d secton of the ct of Congress of
May 2d (28), 1830. entted n ct to provde for an e change of ands wth the
Indans resdng In any of the States, or Terrtores, and for ther remova west of the
Msssspp.
S MINOL , M T , 18.12 (7 ST T., 8 8, 3 9).
t. I. The Semnoe Indans renqushed to the Unted States, a cam to the
nds they at present occupy In the Terrtory of orda, and agree to emgrate to the
country assgned to the Creeks, west of the Msssspp Rver: t beng understood that
an addtona e tent of terrtory, proportoned to tncr numbers, w be added to tbe
Creek country, and that tbe Semnoes w be receved as a consttuent part of the
Creek Naton, and be readmtted to a the prveges as members of the same.
C U ND S MINOLa, UGUST T, 1858 (U ST T., 899, 700).
Whereas the conventon heretofore e stng between the Creek and Semnoe Trbe
of Indans west of the Msssspp Rver, has gven rse to unhappy aud n|urous ds-
sensons and controverses among them, whch render necessary a read|ustment of ther
reatons to each other and to the Unted States and whereas the Unted States
desre, by provdng the Semnoes remanng n orda wth a comfortabe home west
of the Msssspp Rver, and by makng a bera and generous provson for ther
wefare, to nduce them to emgrate and become one peope wth ther brethren aready
west, and aso to afford to a the Semnoes the means of educaton and cvzaton,
and the bessngs of a reguar cv government and whereas, the Creek Naton and
ndvduas thereof, have, by ther deegaton, brought forward and persstenty urged
varous cams aganst the Unted States, whch It s desrabe sha be nay ad|usted
and setted and whereas t Is necessary for the smpfcaton and better understand-
ng of the reatons between the Unted States and mud Creek and Semnoe Trbes of
Indans, that a ther subsstng treaty stpuatons sha, as far as practcabe, be
M oded n one comprehensve Instrument now therefore
U T. III. The Unted States do hereby soemny guarantee to the Semnoe Indans
the tract of country ceded to them by the frst artce of ths conventon and to
the Creek Indans, tbe ands ncuded wthn the boundares defned n the second
anke hereof and kewse that the same sha respectvey be secured to and hed by
sad Indans by the same tte aud enue by whch thoy were guaranteed uud seemed
to the Creek Naton bv the fourteenth artce of the treaty of March 24. 1S32, the
thrd artce of the treaty of ebruary 14, 1833, and by the etters-patent ssued to the
ad Creek Naton, on the 11th day of ugust, 18r2, and recorded n voume 4 of
records of Indan deeds n tbe OfhYe of Indan ffars, pages 44(1 and 447 : Pror rd
hwccvtr. That no part of the tract of country so ceded to the Semnoe Indans,
h ever bo sod, or otherwse dsposed of wthout the consent of both trbes egay
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213(a), rt. 3 .
88
under whch (Sec. II) the members each receved an aotment of and equa
n vaue to 110 acres of the average aottabe and of the trbe.1
The ands of the Creek Trbe have been aotted n severaty pursuant to an
agreement wth these Indans, as found n secton 7 of the cts of March S,
1901 (M Stat.. S I), and secton 1 of the ct of une 30, 1902 ( 32 Stat.
500).
Under the frst-mentoned ct each member of the trbe receved an aot-
ment of 1 0 acres of and.
S MINO. S.
n agreement was made by the Dawes Commsson wth the Semnoes on
December 10, 1S97, whch was ratfed by ct of uy 1, 1898 (- 0 Stats., 5t 7,
5 8, par. 5), provdng for the conveyance by deed to each aottee of h s parce
of and contanng a dupcaton. It was provded aso that there shoud be
desgnated by each aottee a 40-acre homestead tract to be naenabe and
nonta abe:
When the trba government sha cease to e st the prncpa chef ast
eected by sad trbe sha e ecute, under Is hand and the se of I e naton,
and dever to each aottee a deed conveyng to hm a the rght, tte, and
Interest of the sad naton and the members thereof n and to the ands so
aotted to hm, and the Secretary of the Interor sha approve such deed,
and the same sha thereupon operate as renqushment of the rght, tte, and
Interest of the Unted States n and to the and embraced n sad conveyance,
and as a guarantee by the Unted Sates of the tte of sad ands to the
a..ottee and the acceptance of such deed by the aottee sha be a renqu sh-
ment of hs tte to and nterest In a other ands beongng to the trbe,
e cept such as may have been e cepted from aotment and hed n common
for other purposes. ach aottee sha desgnate one tract of 40 acres, whch
sha, by the terms of the deed, be made naenabe and nonta abe as a home-
stead perpetuty.
Congress recognzng that the Indan was by nature mprovdent and unabe
to wthstand the superor commerca nstncts of hs whte neghbors found
It advsabe to stpuate n treaty, and statute, and n the conveyances to the
aottees, restrctons aganst aenaton of the aotted ands, ut the mem-
bershp of the trbes dd not consst whoy of fu-bood Indans, as has been
aready suggested. mong them were whtes, who had become members by
ntermarrage or adopton, and the former saves (freed men) of negro bood.
s a resut of the mngng of the races, there were persons of numerous degrees
1 The ct provdes :
Sec. 13. ach member of sad trbe sha, at the tme of the seecton of hs aot-
ment, desgnate as a homestead out of sad aotment and equa n vaue to 40 acres
of the average aottabe auds of the Cherokee Naton, as neary as may be, whch
ha be naenabe durng the fetme of the aottee. not e ceedng 21 years from
the date of the certfcate of aotment. Separate certfcate sha ssue for sad home-
stead. Durng the tme sad homestead s hed by the aottee the same sha e non-
ta abe and sha not be abe for any debt contracted by the owner thereof whe
so hed by hm.
Sec. 14. Lands aotted to ctzens sha not n any manner whatever or at any
tme be encumbered, taken, or sod to secure or satsfy any debt or obgaton, or be
aenated by the aottee or hs hers, before the e praton of fve years from the date
of the ratfcaton of ths ct.
Sec. 15. ands aotted to the members of sad trbe, e cept such and as Is
set asde to eae for a homestead as heren provded, sha be aenabe n fve years
after ssuance of patent.
Secton 7 of 1 e ct of March 3, 11101 . U Stat.. 8(11, 8 3), provdes:
Lands aotted to ctzens hereunder sha not n any manner whatsoever, or at any
tme, be encumbered, taken, or sod to secure or satsfy any debt or obgaton con-
tracted or ncurred pror to the de of the deed to the aottee therefor, and such ands
sha not be aenabe by the aotee or hs hers at any tme before the e praton of
ve years from the ratfcaton of ths agreement e cept wth the approva of the
Secretary of the Interor.
ach ctzen sha seect from hs aotment 40 acres of and as a homestead, whch
sha be nonta abe and naenabe and free from any encumberance whatever for 21
years, for whch he sha have a separate deed, condtoned as above.
y secton 1G of the above-mentoned ct of une 30, 1902 (32 Stat., 500, 503),
.now n as the suppementa Creek agreement, t was provded :
Lands aotted to ctzens sha not n any manner whatever, or at any tme, he
encumbered, taken or sod to secure or satsfy any debt or obgaton, nor be aenated
bv the aottee or hs hers before the e praton of fve years from the date of the
approva of ths suppementa agreement, e cept wth the approva of the Secretary of
I fe Interor. ach ctzen sha seect from hs aotment 40 acres of and, or a r|narter
f a quarter secton, as a homestead, whch sha be and reman nonta abe, naenabe.
n free from any encumbrance whatever for 21 years from the date of the deed
therefor, and a separate deed sha be ssued to each aottee for hs homestead. In
whch ths condton sha appear,
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89
1213(a), rt. 31.
of Indan booU. The reason for restrcton dmnshed n accordance wth the
(sappearauce of the Indan bood. esdes many aottees, aready ampy
provded for, nherted other ands as the hers of the aottees, thereby acqur-
ng more and than there was reason for refusng them the rght to aenate,
end statutory enactments were made removng restrctons.
Congress had a rght to remove restrctons for the reason that same, whether
provded by treaty or statute, dd not consttute vested rghts n the Indan but
were provded for by the Indan as a resut of that fosterng guardanshp of
a paterna government of ts recognzed wards. (Chorte v. Trapp, 224 U. S.,
5, 73.)
ut because Congress had a rght to and dd remove restrctons aganst
fdenaton as ts |udgment n connecton wth the admnsterng for the we-
fare of the Indan drected, t dd not foow that the remova of restrc-
tons removed the e emptons from ta aton.
y secton 19 of the et of pr 2 . 190(5, and secton 4 of the ct of May
27, 1908, Congress stted n unmstakabe anguage that a ands from whch
restrctons were removed shoud be sub|ect to ta aton and a other cv
burdens to whch the ands of the other members of the trbes were sub|ect.
I ut the anguage and ntent of Congress were wthout force and effect upon
vested rghts contracted for a vad consderaton. In the case of Choate
v. Trapp, supra, the Supreme Court had ths very queston under consderaton
when t sad:
The patent and the egsaton of Congress must be construed together,
and when so construed they show that Congress, n consderaton of the In-
dans renqushment of a cam to the common property, and for other
satsfactory reasons, made a grant of and whch shoud be nonta abe for
a mted perod. The patent ssued n pursuance of those statutes gave the
Indans as good a tte to the e empton as t dd to the and tsef. Under
the provsons of the ffth amendment there was no more, power to deprve
Mm of the e empton than of any other rght n the property. No statute woud
have been vad whch reduced hs fee to a fe es ate, or attempted to take
from h m 10 acres, or 0 acres, or the tmber growng on the and.
Therefore, the restrcted ands of the Indans are nonta abe and the ands
of those aottees whch are st hed by the orgna aottees (whether restrc-
tons have been removed or not) under and by vrtue of conveyance from
t e edera Government contanng stpuatons of ta e empton cout nue to
be nonta abe because of the vested contractua rght or covenant.
Ths beng true, there remans for further determnaton the queston whether
the ncome from nonta abe and s In tsef ta abe.
The Supreme Court n the case of Poock v. armers Loan and Trust Com-
pny (157 U. S., 429. 581) decded that a ta on the ncome from rea estate
was a drect ta upon the and, and among other thngs sad:
The rea queston s, Is there any bass upon whch to rest the contenton
that rea estate beongs (o one of the two great casses of ta es, and the rent
or ncome whch s the ncdent of ts ownershp beongs to the other We
are unabe to perceve any ground for the aeged dstncton. n annua ta
upon the annua vaue or annua user of rea estate appears to us the same n
rabstanee as an annua ta on rea estate, whch woud bo pad out of the
rent or ncome. Ths aw ta es the ncome receved from and and the growth
or produce of the and. Mr. ustce Paterson observed In yton s ease hand,
ndependenty of ts produce, s of no vaue, and certany had no thought that
drect ta es were confned to unproductve and.
ut t may be argued that the Poock case was decded before the passage
f f the s teenth amendment to the Consttuton, authorzng the ncome ta
aw. In Rrushabcr v. Onon Pacfc Raroad Company (240 1 . R., 1), whch
was the frst case after the adopton of the s teenth amendment nvovng
the consttutonaty of the Income Ta ct. the Supreme Court decded thnt
the amendment dd not confer upon Congress any new ta ng power but served
ony to remove the mtaton wth reference to apportonment. It thereby
removed the obstace ponted out n the Poock case, but dd not change the
aw that where the source s not ta abe nether s the ncome.
The Supreme Court n consderng the effect of the s teenth amendment n
Peck and Co. v. Lowe (247 U. S., 1 5), sad that s ponted out n recent
dscussons, t does not e tend the ta ng power to new or e cepted sub|ects,
but merey removes a occasons whch otherwse mght e st, for an appor-
4177 24 7
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521: ( ), rt. 31 .
90
tonraeut among the States of ta es ad on Income whether derved from one
source or the other.
Later, n Gespe v. .Stae of Okahoma (257 U. S., 501, 505), hodng that
the net ncome derved by a essee from saes of hs share of o and gas
receved under eases of restrcted Creek and Osage ands, whch consttute
hm n effect an nstrumentaty used by the Unted States n fufng ts
dutes to the Indans, can not he ta ed by a State, the Supreme Court reterated
a prncpe announced n the Poock case In the foowng anguage:
In cases where the prncpa s absoutey mmune from nterference an
nqury s aowed nto the sources from whch net ncome s derved and f
a part of t comes from such a source the ta s pro tanto vod (Poock y.
anmrs Loan Trust Co., 157 U. S., 420 158 U. S G01) a rue atey
ustrated by vuns v. Gore (253 U. S., 245) and apped n a case somewhat
ke the present by the Supreme Court of awa. (Oahu Iy Land Co. v.
Pratt, 14 awa, 12b ) Whether ths property coud e ta ed n any other
form or not, t can not be reached as profts or ncome from eases such as
those before us. The same consderatons that nvadate a ta upon the
east s nvadate a ta upon the proft of the eases, and, stoppng short of
theoretca possbtes, a ta upon such profts s a drect hamper upon the
effort of the Unted States to make the best terms that t can for Its wards.
(Weston v. Chareston, 2 Pet., 449, 4 8.)
In Unted States v. Itvkert (188 U. S., 432), nvovng the egaty of mpos-
ton of ta es affectng the Ssseton and Sou Indans n South Dakota, the
Supreme Court sad:
These Indans are yet wards of the Naton, n a condton of pupage or
dependency, and have not been dscharged from that condton. They occupy
these ands wth the consent and authorty of the Unted States and the
hodng of tem by the Unted Sates under the ct of 1887, and the agree-
ment of 1880. ratfed by the ct of 1891, Is part of the natona pocy by
whch the Indans are to be mantaned as we as prepared for assumng
the habts of cvzed fe, and utmatey the prveges of ctzenshp. To
ta those auds s to ta an nstrumentaty empoyed by the Unted States
for the beneft and contro of ths dependent race, and to accompsh benefcent
ob|ects wth reference to a race of whch ths court has sad that from
ther very weakness and hepessness, so argey due to the course of deang
of the edera Government wth them and the treates n whch t has been
promsed, there arses the duty of protecton, and wth t the power. Ths
has aways been recognzed by the ecutve and by Congress, and by ths
court, whenever the queston has arsen. (Unted States v. agama, 118
U. S 375, 384.) So that If they may he ta ed, then the obgatons whch
the Government has assumed n reference to these Indans may be entrey
defeated for by the ct of 1S87 the Government has agreed at a unmet
tme to convey the and to the aottee n fee, dscharged of the trust, and
free of a charge or ncumbrances whatsoever. To say that these ands may
be assessed and ta ed by the county of Roberts under the authorty of the State
s to say that they may he sod for the ta es, and thus become so burdened
that the Unted States coud not dscharge ts obgatons to the Indans wth-
out tsef payng the ta es mposed from year to year, and thereby keepng
the ands free from ncumbrances.
The same theory was apped to the Semnoe Indans n Unted States v.
ean (253 ed., 1, 4), where t was sad:
So t was the mposton of the restrctons upon aenaton by these rts
of 100 and 19U8 upon the auds of the fu-bood Indan hers brought these
ands under the unversa rue that every nstrumentaty awfuy empoyed
by the Unted States to e ecute ts consttutona aws and to e ercse ts
awfu governmenta authorty Is necessary e empt from State ta aton or
nterference. Unted States v. Rckert, 188 U. S., 432, 437. 438, 430.)
theory s deveoped n McCuoufh v. Maryand (4 Wheat, 31 , 431),
an Weston v. Chareston (2 Peters. 449, 4 7), and reterated n an rockton
v. State of Tennessee (117 U. S., 151, 155), and ohnson v. Maryand (254
U. S., 51 | 19 Op. tty. Gen., 1 1, 1 . 1 8), that The power to ta nvoves
the power to destroy the power to destroy may defeat and render useess
the power to create. It has been hed that a State has not the power to
tu an nstrumentaty of the edera Government.
Whe these funds (ncomes) are n the ha|d. of e federa Government,
kept n the Unted States Treasury and not pad out or pedged e cept under
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91
213(a , rt, 31.
(he consent of the Government, a State has no rght to ta teu. If a Stnte
cm not ta them, the queston arses, Is t proper or ega for te edera
Government to ta them Is t consstent for t to guard ths ncome from
the State ta ng power and surrender t to congressona authorty Woud
such procedure be consstent wth ts pocy toward the Indan as protector
un conservator
The fact that some of these wards are weathy s besde the queston. We
can not decde In favor of ther ta aton wthout decdng that they are a
ta abe under certan condtons. It s not dffcut to see how far-reachng
the effect w be and the utmate serous danger to the Indan s property
ghtg.
Therefore, n those cases where a deed or patent ssued to the aottee, con-
tanng a cause e emptng the property from ta aton under condtons spec-
fed, te e empton became a vested rght whch pu not be taken away. Dur-
ng the perod the and s e empt from ta aton, the ncome s aso mmune.
Therefore, t s my concuson that under the provsons of the above-men-
toned ( toka) agreement, secton 29 of the ct of .Tune 28, 1898. a ands
aotted to members of the Choctaw and Chckasaw Tr os, the ncome there-
from s nonta abe whe the and s hed by the orgna aottees for a perod
of 21 years from the date of the patent: that under the provsons of secton
7 of the orgna Creek agreement. ct of March 1, 1 I01 (31 Stat.. 8 1, 8 3),
and secton 1 of the suppementa Creek agreement of une 30, 1902 (32
Stat.. 500. 503). a 40-acre homestead of each of the aottees and the ncome
therefrom s nonta abe for a perod of 21 years from the date of the patent
that under the provsons of secton 13 of the Cherokee agreement of uy 1,
1902 (32 Stat, 71 , 717), there s e empt to each aottee a homestead tract
of 40 acres average and whe hed by hm, but not to e ceed 21 years from
the date of the seecton that under the provsons of Secton I of the
Semnoe agreement of December 1 . 1897 (30 Stat, 5 7), a 40-acre homestead
tract and the ncome therefrom s e empt to each aottee In perpetuty.
Te e emptons |ust above enumerated are vested rghts unaffected by the
remova of the restrctons as to aenaton. When the vested e empton rghts
do not e st remova of restrctons sub|ect the and and ncome to ta aton
n accordance wth the purpose and ntent of secton 19 of the ct of pr
2 , 190 (34 Stat, 137, 144), and secton 4 of the ct of May 27, 1908 ( 35
Stat, 312. 313).
The and n e cess of the tracts specfcay e empted from ta aton as above
set forth, generay spoken of as surpus and, from whch restrctons had not
been removed, hed by fu-bood and more than one-haf-Wood aottees (sec. 1,
rt of May 27, 1908), and a hers of such aottees (sec. 22, ct of pr 2 .
190 , and sea 9 of the sad ct of 1908), are e empt from ta aton as re-
strcted ands unt the remova of the restrctons by apse of tme ( pr
2 , 1931) or by remova of the restrctons by the Secretary of the Interor
(sec. 1. ct of May 27, 1908), decarng the Indan competent, or approvng
a conveyance of the and, or by an ct of Congress.
Respectfuy,
. M. DaUG RTY,
ttorney Genera.
The honorabe the Secbetaby of the Tbeasuby.
rtce 31: What ncuded n gross ncome. 111-13-14 5
T. D. 35 9
communty property caforna opnon ok the attornhy genera.
1. Income Ta Communty Pbopebty.
Cnder the aws of Caforna a husband and wfe n renderng
separate ncome ta returns may each report as gross ncome one-
haf of the ncome whch ecomes smutaneousy wth ts recept
communty property.
2. state Ta Communty Property.
Under the aws of Caforna there shoud be ncuded n the
gross estate of a deceased spouse, for the purpose of computng the
estate ta , one-haf ony of the communty property of a husband
and wfe domced theren.
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23(a), rt. 31.
92
3. ormeb Opnon Modfed.
ormer opnon of the ttorney Genera under date of ebruary
20, 1021 (T. D. 3138 C. . 4, 2381), modfed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton. I). C.
To coector of nterna revenue and others concerned:
The foowng opnon of the ttorney Genera, under date of
March 8, 1924, deang wth the rght of husband and wfe domced
n Caforna to dvde certan of ther ncome for the purposes
of ncome ta , and as to the ncuson of communty property n
the gross estate of a deceased spouse, s pubshed for your n-
formaton and gudance. See, n ths connecton, T. D. 3138 C. .
4, 238 and T. T). 3071 C. . 3, 271 .
D. . ar,
Commssoner of Interna Revenue.
pproved March 27, 1024.
. T . Meon,
Secretary of the Treasury.
Department of ustce,
Washngton, March S, 192-.
The honorabe the Secretary ok the Treasury.
Sr: cknowedgment s made of your etter of December 12, 1023, request-
ng a reconsderaton of an opnon of ths department dated ebruary 2 ,
1921, whch hed nter aa that under the aws of Caforna the wfe has no
vested Interest n the communty property and hence that porton of t whch
passes Into her contro upon her husband s death s sub|ect to the edera
estate ta mposed by the Revenue ct of 191 as amended by the ct of 1917.
Your nqury appes ony to the portons of the former opnon (32 Ops.
. G., 435) whch reate to communty property n Caforna.1
In bref the queston, as you put t, s, whether any modfcaton s neces-
sary n the opnon prevousy rendered, as to the effect of the change made n
the Caforna nhertance ta act n 1917, or does the prevous opnon stand
The concusons n the former opnon were based on the assumpton that
the Caforna courts have hed that under the aw as t stood pror to 1917
the wfe had no vested Interest n communty property pror to the dssouton
of the marrage
and hence reasonng from such a premse It decded that the amendments to
the Caforna Code passed n 1917 e emptng the wfe s share of the com-
munty property from Inhertance ta (ch. 589, Stat. Ca. 1917, p. 8 0) and
the further restrctons mposed n 1917 upon the husband In the management
of the communty property (sec. 172a, Cv Code of Caforna) dd
not change the rue of communty property n the State nor vest n the wfe
any nterest thereto pror to the dssouton of the communty.
s w ater appear from a revew of |udca opnons, t s doubtfu
whether the assumpton of the hodng of Caforna courts coud be so con-
cusvey stated. ut snce ebruary, 1921, when that opnon was promu-
gated by ths department, three new eements have entered nto ths queston:
(a) The edera Crcut Court of ppeas for the Nnth Crcut, n the case
of Warde v. tum (27 ed., 22 ), has decded contrarwse, hodng that the
change n the Caforna nhertance ta aw was manfesty a cear statutory
decaraton that the wfe s haf of the communty property Is not n part of the
property of the deceased husband and athough the act of the
egsature coud of course n terms appy ony so far as State nhertance ta es
are concerned, t nevertheess settes the queston aganst the Gov-
ernment. The edera crcut court further concudes that even were the
Such portons are found from thp thrd paragraph, page 454, to the summary pace
458 and parngnp 1 on page 401 of the opnon.
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93
213(a), rt. 81.
case not controed by the Caforna nhertance ta amendment, the rue of
aw announced by the Supreme Court of the Unted States n rnett v. Reade
(220 U. S., 311) woud compe the same e empton for the wfe, for t s very
pan that the wfe has a greater nterest than the mere possbty of an e -
pectant er, and the edera state Ta ct (sec. 201-2-3, 39 Stat, 777) ony
attempts to ta the decedent s estate. The Supreme Court of the Unted States
refused to revew ths decson by denyng the Government s petton for a wrt
of certorar March , 1922 (258 U. S 17).
h) The egsature of Caforna has contnued to pass amendments to ts
communty property aws, whch, much more concusvey than those of 1917,
can ony be e paned by a egsatve recognton of an e stng property rght
of the wfe n communty property. (See Caforna Statutes, 1923. pp. 29, 30.)
(c) The Supreme Court of Caforna on ugust 17, 1923, handed down a
decson n Roberts v. Wehmeyer (21S Pac, 22) affrmng the concusons of
the edera court n the um case, supra, as far as the effect of the 1917
amendment to the nhertance ta s concerned, but n so far as the opnon
/ded on rnett v. Readc, supra, as proof that a wfe had at a tmes had an
nterest or estate n the communty property they fet constraned to dsagree
wth t. Commentng upon the fact that the Unted States dstrct court n
the uu case had decded unquafedy that secton 172a of the Cv Code
recognzes n the wfe a vad subsstng vested nterest and estate n the
communty property durng the fe of the husband, the Caforna Supreme
Court sad, We need e press no opnon of the decson of the Unted States
dstrct court, for, as we have aready hed, secton 172a has no appcaton
to the property nvoved n the case at bar.
ence, we are faced wth a confct of authortes In the foowng stuatons:
The Unted States Dstrct Court for the Northern Dstrct of Caforna and
the Unted States Crcut Court of ppeas for the Nnth Crcut have decded
that the wfe, upon the death of her husband, free of edera or State nhert-
ance ta obgaton, comes nto possesson of her haf of the communty prop-
erty, not as hs her, but by vrtue of her vad vested nterest n the commu-
nty estate, whch Caforna statutes of 1917 recognze and protect. In what
s probaby ony a dctum the Supreme Court of Caforna e presses approva
of the wfe s ta e empton by the edera court, but specfcay wthhods
|udgment as to whether the 1917 amendments to the communty property aws
of Caforna gve her a vested nterest.
Yon are foowng nn opnon of the ttorney Genera furnshed you eb-
ruary, 1921, hodng that the haf of the communty property whch she takes
at her husband s death passes to her as to an her and sub|ect to the edera
state Ta of 191 as amended by the Revenue ct of 1917.
Manfesty both nterpretatons can not stand, and t s my opnon that the
former opnon of ths department must be modfed to harmonze wth the
decson of the edera Crcut Court of ppeas n the case of um v.
Warde, for the foowng reasons:
The queston turns on what the rea nature of a wfe s nterest s In the
communty estate accordng to the aws of Caforna. In every other State
where the communty property system prevas the wfe s nterest s recog-
nzed as a vested property rght. One ne of Caforna decsons has de-
scrbed her merey as an her e pectant of her husband, and f these de-
csons are the ony source of enghtenment on ths sub|ect, the reasonng n
um v. Warden must fa. Cut there s another course of |udca opnon
equay traceabe throughout the Caforna Supreme Court reports, whch
recognzes her property nterest n communty gans.
These two theores have payed back and forth across the fed of |udca
Interpretaton n Caforna and no rea anayss of the queston can be made
by gnorng the score of ether.
In addton to what the courts have sad, the consttuton, and the provsons
of the Cv Code of Caforna have mantaned a practcay parae statutory
course wth those of other communty property States whose courts unhestat-
ngy affrm her property rght.
Partcuary must the numerous amendments to the Caforna aw passed
snce 1917 be anayzed as bearng on the ntent of the egsature to protect
what some Caforna decsons had faed to recognze the vested nterest of
the wfe n communty estate.
Provsons of the Caforna aw, the dvergng nes of cases brngng
|udca Interpretaton up to 1917, and the egsatve enactments snce 1917
as bearng on the concusons of the edera court n the um v. Warden case
w, n turn, be consdered.
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5213(a). rt. 31.
04
Laws of Caforna.
The consttuton of Caforna, adopted n 1849. contaned ths sgnfcant
provson ( rt. I, sec. 14) :
pro rty, both rea and persona, of the wfe, owned or camed by
her before marrage, and that acqured afterwards by gft, devse, or descent,
sha be her separate property, and aws sha be passed more ceary defnng
the rghts of the wfe n reaton as we to her separate property as to that
hed 1 In common wth her husband. Laws sha aso be passed provdng for
the regstraton of the wfe s separate property.
In 1850 the rst Legsature of Caforna met and from t we fnd a
defnton of what was meant by property hed n common wth her hus a.d
(see Statutes of 1850, p. 254, et set .), where separate and communty pro erty
are separatey descred, and t was provded that upon the death of ether
husband or wfe one-haf of the common property sha go to the survvor and
n case of dssouton of the marrage by dvorce the common prop-
erty sha be equay dvded between the partes. The husband was ,rve
fu power of management and contro of the property durng e stence of the
marrage.
Subsequent egsatures of Caforna have added safeguards for protectng
the rghts of the wfe by settng up checks on the husband s absoute contro of
t. but no egsatve enactment had dsturbed the communty property system.
In 1801 secton 11 (supra) of the Statutes (pp. 310-11) was amended to make
a of the communty property go to the survvng husband upon the dearh of
the wfe, but st the dstncton of hs ownershp n ony haf was preserved by
eavng hnf of t, ony, sub|ect to hs testamentary dsposton.-
In 1803- 4 agan the egsature amended secton 11 (Stats., 18 3-4, p. 3 3)
to aow the entre common property u|on the death of the wfe to go to the
husband wthout admnstraton.
In 1872 and 1874 the aws of Caforna were codfed and agan we fnd em-
bedded n the code, and never subsequenty changed, the cear dstncton of
communty nterest recognzed as a spece of property ownershp of each
spouse.
The pertnent sectons of the Cv Code of Caforna foow:
Sec. 82. Ownershp of severa persons. The ownershp of property by
severa pet sans s ether:
1. Of ont Interests
2. Of partnershp nterests
3. Of nterests In common
4. Of communty nterest of husband and rtfe.
Sec. 87. Communty property. Communty property Is property acqured
by husband and wfe, or ether, durng marrage, when not acqured as the
separate property of ether.
Skc. 1 1. May be |ont tenants. husband and wfe may hod property as
|ont tenants, tenants n common, or as communty property. ,
Sec. 1 2. property of the wfe, owned by her before marrage, and that
acqured afterwards by gft, bequest, devse, or descent, wth the rente, ssues,
and profts thereof, s her separate property. The wfe may, wthout the con-
sent of her hushand, convey her separate property.
Sec. 1 3. property owned by the husband before marrage, and that ac-
qured afterwards by gft, bequest, devse, or descent, wth the rents, ssues,
and profts thereof, s hs separate property.
Sec. 1 4. other property acqured after marrage by ether husband or
wfe, or both (ncudng rea property stuated n ths State, and persona
property wherever stuated, acqured whe domced esewhere, whch woud
not have been the separate property of ether f acqured whe domced n
ths State),1 s communty property but wherever any property s conveyed
to n marred woman by an nstrument u wrtng, the presumpton s that the
tte s thereby vested n her as her separate property. nd n case the con-
veyance s to such marred woman and to her husband, or to her and any
other person, the presumpton s that the marred woman takes the part con-
veyed to her, as tenant n common, uness a dfferent ntenton s e pressed
n the nstrument, and the presumpton n ths secton mentoned s concusve
n favor of a purchaser or encumbrancer n good fath and for a vauabe con-
1 I Insert a tacs n statutes sot our hereafter, for convenent emphass.
fart n parenthess was added n IUI7.
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213(a), rt. 31.
Rdcratou. nd In cases where marred women nave conveyed, or sha here-
after convey, rea property whch they acqured pror to May 19, 1889, the
husband, or ther hers or assgns, of such marred women, sha be barred
from commencng or mantanng any acton to show that sad rea property
was communty property, or to recover sad rea property, as foows: s to
conveyances heretofore made, from and after one year from the date of the
takng effect of ths act and as to conveyances hereafter made, from and
after one year from the fng for record n the recorder s -offce of such con-
veyances, respectvey.
Sec. 1401. Dstrbuton of the common property on the death of the wfe.
Upon the death of the wfe, the entre communty property, wthout admns-
traton, beongs to the survvng husband, e cept such porton thereof as may
have been set apart to her by |udca decree, for her support and mantenance,
whch porton s sub|ect to her testamentary dsposton, and n the absence
o such dsposton, goes to her descendants or hers, e cusve of her husband.
Sec. 1402. Dstrbuton of common property on dent of husband. Upon
the death of the husband, one haf of the communty property goes to the
survvng wfe, and the other haf s sub|ect to the testamentary dsposton
of the husband, and In the absence of such dsposton, goes to ds descendants,
equay, f such descendants are In the same degree of kndred to the decedent
otherwse, accordng to the rght of representat on and n the absence of both
such dsposton and such descendants, s sub|ect to dstrbuton n the same
manner as the separate property of the husband. In case of the dssouton of
the communty by the death of the husband, the entre communty property
s equay sub|ect to hs debts, the famy aowance, and the charges and
e penses of admnstraton.
Note. Sectons 1401-1402 have been amended by the egsatures of 1919
and 1923. The 1919 amendment provdng that the wfe may dspose of her
haf of the communty property by w was repeaed by referendum vote.
ut the amendment of 1923 faed of referendum submsson, and stands as
the ast amendment to the communty property aw. It s sgnfcant that t,
too, restores to the wfe testamentary powers over one-haf the communty
property. s amended, therefore, sectons 1401 G. C. and 1402 C. C. now read:
1401. Upon the death of ether husband or wfe, one haf of the communty
property beongs to the survvng spouse the other haf s sub|ect to the
testamentary dsposton of the decedent, and n the absence thereof goes to
the survvng spouse, sub|ect to the provsons of secton 1402 of ths code.
1402. Communty property passng from the contro of the husband, ether
by reason of hs death or by vrtue of testamentary dsposton by the wfe, s
sub|ect to admnstraton, hs debts, famy aowance and the charges and
e penses of admnstraton but In the event of such testamentary dsposton
by the wfe, the husband, pendng admnstraton, sha retan the same power
to se, manage, and dea wth the communty persona property as e had n
her fetme: and hs possesson and contro of the communty property sha
not be transferred to the persona representatve of the wfe e cept to the
e tent necessary to carry her w nto effect. fter 40 days from the death of
the wfe, the survvng husband sha have fu power to se, ease, mortgage
or otherwse dea wth and dspose of the communty rea property, uness a
notce s recorded In the county n whch the property s stuated to the effect
nt an nterest n the property, specfyng It, s camed by another under tte
wfe s w.
Sec. 172. The husband has the management and contro of the communty
persona1 property, wth ke absoute power of dsposton, other than testa-
mentary, as be has of hs separate estate (provded, however, that he can not
make a gft of such communty persona property, or dspose of the same wth-
out a vauabe consderaton, or se, convey, or encumber the furnture, fur-
nshngs, or fttngs of the home, or the cothng or wearng appare of the wfe
or mnor chdren that Is communty, wthout the wrtten consent of the wfe).
Sec. 172a. The husband has the management and contro of the com-
nuuty rea property, but the wfe must |on wth hm n e ecutng any nstru-
ment by whch such communty rea property or any nterest theren s eased
fur a onger perod than one year, or Is sod, conveyed, or encumbered provded,
however, that the soe ease, contract, mortgage or deed of the husband, hodng
1 Word pergona nner ted n M.
rom provded to end of .secton was added by te amendment of 1891.
of secton 172a added n 1917.
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S2:S(a), rt. 31.
91)
the record tte to communty rea property, to a essee, purchuser or encum-
brancer, n good fath wthout knowedge of the marrage reaton sha he
presumed to be vad but no acton to avod such nstrument sha be com-
menced after the e praton of one year from the fng for record of such
nstrument n the recorder s offce n the county In whch the and s stuate.
In vew of the restrctons paced on the husband s contro of communty
property by sectons 172 and 172a, t s dffcut to see how the |udca mnd
can conceve of hs possessng the eements of absoute ownershp over the
communty estate, partcuary n face of secton 79 of the Cv Code, whch
provdes:
The ownershp of property s absoute when a snge person as the absoute
domnon over t. and may use t or dspose of It accordng to hs peasure, .
sub|ect ony to genera aws.
Secton 80 of the Cv Code provdes:
The ownershp of propery s quafed:
1. When t s shared wth one or more persons
2. When the tme of en|oyment s deferred or mted
. When te use s restrcted.
Secton 82 supra s to he remembered n ths connecton as cassfyng one
knd or ownershp as communty nterest of husband and wfe.
Sec. 94. future nterest s vested when there s a person n beng who
woud have a rght, defeasbe or Indefensbe, to the mmedate possesson of
the property upon the ceasng of the ntermedate or precedent nterest.
To reeve the survvng wfe of nhertance ta on her share of the commu-
nty property to whch she comes nto possesson at the death of-her husband,
the Caforna Legsature of 1917 enacted nter aa the foowng (ch. 5S9,
State of Caforna, 1917, p. 8S0) :
Sec. 1. (2) The words estate and property as used n
ths act sha be taken to mean the rea and persona property or nterest
theren of the testator, ntestate, grantor, barganor, vendor, or donor passng
or transferred to ndvdua egatees, devsees, her, ne t of kn, grantees,
donees, vendees, or successors, and sha ncude a persona property wthn
or wthout the State provded, that for the purpose of ths act the one-haf
of the communty property whch goes to the survvng ttfe on the death of
the husband, under the provsons of secton 1-102 of the Cv Code, sha not
he deemed to pass to her as her to her husband, but sha for the purpose of
ths net, be deemed to go,-pass or be transferred to her for vauabe and
adequate consderaton and her sad one-haf of the communty sha not be
sub|ect to the provsons of ths act . 1
If sectons 82 and 97 of the Cv Code mean anythng, then the husband s
nterest n the communty property can not be e cusve, but ony quafed and
parta. It requres hs wfe s nterest to be added to s to convey the sum
tota tte, ese paragraph 4 of secton 82, secton 1 1, sectons 1401-1402 as
amended n 1917, secton 079, secton 80, sectons 172 and 172a of the Cv
Code are meanngess, In the ght of secton 700 of the Cv Code, whch
provdes:
mere possbty such as the e pectancy of an her apparent s not to
be deemed an nterest of any knd. 1
nd, agan, secton 1045 of the Cv Code cnches the matter:
mere possbty, not couped wth an nterest, can not be transferred.
The Legsature of Caforna must be presumed to have known sectons 700
and 1045 when t passed the more recent amendments requrng the wfe to
furnsh wrtten consent for her husband to gve away the communty property
(1891) when t requred her to |on n saes or eases convenng any nterest
n the communty rea property (1917) when t permtted her to make a w
(1921) and when t e empted her share of the communty property from In-
1 ertance ta on the ground that she took t as a purchaser and not. as her
(1917).
rom the frst roug days of the (-(nventon of 49, when pans for the forma-
ton of a State government n Caforna were ad, the consttuton and stat-
utes have recognzed and preserved a communty property system, practcay
the same as that whch prevas n other communty property States.
I taks added.
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97
213(a), rt. 31.
So much for the consttutona am statutory marta property aws of Ca-
forna. oth are cear, and pany bottomed upon a recognton of a property
nterest n the wfe.
Decsons of Caforna Courts,
(a) her e pectant theory.
Now to e amne the court s nterpretatons or descrptons of what the
wfe s nterest s there we enter a sea of uncertanty s ponted out above,
the decsons dverge, and from the date of dvergence progress down to the
present tme aong two dfferent paths n the shape of a Y.
Unt I8 0, n the case of an aren v. ohnson (15 Caf., 308), the courts
recognzed a Tested property nterest n the wfe to haf of the communty
estate, though ber husband had fu contro and management of t as agent
of the ganancaes. (1855, eard v. no , 5 Ca., 252 1857, uchanan state,
8 Ca., 507 1859, Smth v. Smth, 12 Ca., 21 1850, Meyer v. mzer, 12 Ca.,
247.) Then, udge ed, n the an Maren case, quotng naccuratey from a
/ousana case, ong obsoete, started by way of dctum a new theory of com-
munty property, sayng:
The nterest of the wfe s a mere e pectancy ke the nterest whch an
her may possess In the property of hs ancestors.
Ths decson s foowed n severa decsons (Packard v. reanos, 1SC1, 17
Ca.. 525: Orener v. (rener, 1881, 58 Ca., 115 In re Roand, 1888, 74 Ca.,
23, unt ustce Tempe n In re urdek (112 Ca., 387) and n Spreckes
v. Spreckes (1S07) (11 Ca., 339) fastened t so deepy nto |udca |urs-
prudence that henceforth t s termed, n cases foowng ts reasonng, as a
rue of property, and t therefore assumes the force of stare decss.
In the urdek case t was decded that both husband and wfe ake ther
shares n communty property as an her of the other, whch s of course
absurd, as then cho woud own the communty estate
In Spreckes v. Spreckes (110 Ca., 545) the statement that the wfe s rght
s hut a mere e pectancy emphatcay appears, but t s agan dctum. In
1891 secton 172 of the Cv Code bus been amended to mnke the wfe s consent
u wrtng necessary to vadate a gft of communty property from the hus-
band. the propery nvoved In the Spreckes case was acqured before the
amendment and ustce Tempe s opnon hed that pror to 1S91 the husband
had been soe owner, and hence the amendment coud not take away property
once vested n hm. It dd not decde whether property accumuated snce
1891 woud vest n of/ husband and wfe as communty property.
Snce that tme a number of cases (Sharpe v. Loupe, 120 Ca., 89 Cunha v.
tu|hes, 122 Ca., I) have reed upon the statement that the wfe takes as
. n her, but none have drecty decded the queston rased, but eft undeter-
mned, by ustce Tempe, as to whether the effect of the amendment to secton
172 on property acqured snce S . was to recognze, as to t, the property n-
terest of the wfe.
In 191f the court n the ater Spreckes v. Spreckes case (172 Ca., 780) re-
affrms the pror dctum as a rue of property that the wfe takes as an
her, but t, too, was ony concerned wth property acqured pror to the amend-
ment of 1801.
In 1917, the supreme court, n Darge v. Patterson (17 Ca., 714), granted
reef to a survvng wdow who sued to recover property conveyed by her hus-
nn, as a gft, to whch she had not assented n wrtng. Of course, snce her
husband was dead, her tte to the communty property woud not be questoned
by ether those who thnk she has nothng unt her husband des or by those
who favor her vested nterest at a tmes, but the decson s mportant n two
espect8, other than the approva by way of dctum agan of the her e -
pectant theory. It uphods the amendment of 1891 to secton 172, sayng a
wdow s entted to avod the conveyance so far as s necessary for the pro-
naton of her nterest n the property conveyed. 1 ut whether the power thus
gven by the amendment can be used by a wfe unt her husband des, the
wmrt says, there s no occason to decde here.
Itacs ours.
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213(8), rt. 31.
98
Ths brngs u revew a te decsons down to 1817, whch hek that the
wfe had no vested nterest, but took ony as un her. In 1017, as has been
shown, numerous sgnfcant egsatve changes occurred, most of whch woud
be de f the wfe has no property rghts n common property durng her hus-
band s fe.
( ) ST D INT R ST T ORY.
Whe the above cases were accumuatng, there was another ne of decsons
that foowed the eary nterpretaton we rooted In 1800, before the an Maren
offshoot occurred. These reguar decsons, reguar n that they do not offend
the growth of egsatve enactments, and reguar aso n that they harmonze
wth decsons from other States mantanng communty property systems wth
very smar basc aws, appear n great numbers throughout the Caforna
reports, down to 1920. They a foow the eary case of eard v. no (5
Ca., 252), whch ceary stated:
The husband and wfe, durng coverture, are |onty sezed of the property,
wth a haf nterest remanng over to the wfe, sub|ect ony to t e husband s
dsposa durng ther |ont ves. Ths s a present, defnte, and certan nter-
est whch becomes absoute at hs death, so that a dsposton by devse, whch
can ony attach after death of the testator, can not affect t, for such a con-
veyance can ony operate after death, upon the very happenng of whch, the
aw of ths State determnes the estate, and the wdow becomes sezed of one-
haf of the property.
Ths case has been quoted approvngy and foowed strangey enough after-
wards by the same ustce who n the nsurgent opnon n the an Maren case
sowed the dragon s teeth of confuson n the whoe sub|ect. year ater e
seems to return to earer convctons, for n 18 1, n Payne v. Payne (18 CaL,
301), ustce ed says:
Such was the constructon gven by ths court n eard no (5 Ca..
252) pantff took one undvded haf of the common property n her
ocn rght by vrtue of the communty e stng between hersef and husband.
gan, n 1805, n Morrson v. o man (29 Ca., 337), concusons n both
former cases were reaffrmed and foowed. See aso (aand v. Gaand (38
Ca., 205), n whch the court says the wfe has a |ont am equa Interest
wth the husband n a property acqured durng the marrage.
Iu Iu re Gmore (SI Ca., 240), the ong ne of prevous cases, ncudng
eard v. no , supra, Is revewed wth approva, the court arrvng at the
concuson that the wfe takes her haf of the communty property as sur-
vror of the matrmona communty.
It Is an nterestng fact that n a ths ne of decsons no notce s taken
of the other smaer but growng branch sprngng from the Tan Maren v.
ohnson case unt n 1895 ustce Mc arand n the case of Drectors of
ba (10 CaL, 3 2), speakng of the wfe s nterest n the communty, sad:
It has sometmes been defned as a mere e pectancy, ke the nterest whch
an her may possess n the property of hs ancestor (Tan Maren v. ohnson, 15
Ca.. 312 rener v. Orener supra Peope v. Swan, 80 Ca., 49) athough t
s no doubt more tangbe than the mere e peetancy of a genera u r.
The state of Wckcrsham (138 Ca., 355) chaenges attenton, Iwcause t was
decded u 1902 after the urdck and the frst Spreckes case had been handed
down, and, ndeed, after two other decsons had aso gven e presson to the
statement that the wfe s nterest was but that of an her e pectant.
Strangey enough, t does not menton any of the e pectant her cases, but t
goes cear back aong the other track of reasonng to eard v. nor, ctng t
and a the reguar decsons, foowng them as authorty, and usng the
e presson her tte to descrbe the wdow s nterest n one-haf of the com-
munty property.
It Is not deemed necessary here to revew state of Uofft (153 Ca., 359) (1908),
snce foowng the theory that the wfe took her haf of the communty property as her
husband s her, t construed the wfe s share of communty property abe for State
Inhertance ta es, and a speca statute passed n 11)17 repudated the Mofftt decson and
set up a contrary rue to the effect that the wfo takes as a purchaser, at east n so far
as nhertance ta es are concerned.
z Itacs ours.
I)e Godn v. o ey (39 Ca., 157), state of mveu (42 Ca.. 210), tna v. La Ornnue
(50 Ca., 332), ntnte of rey (52 Ca., 0 0), state of Stewart (74 Ca., 98), oe T.
S fra o (54 Ca., 207).
See Sharpe v. Loupe (120 Ca., 89), Cunha v. ughes (122 Ca., I).
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213(a), rt. 31.
(See aso state of Prayer, fO Ca., 453.) In tc state of Ross (1 9 Cat.,
148), the court decdes:
T e wdow w take one-haf of the communty property by vrtue of w-
nrorshp. 1
In 1919t n the state of r (181 Ca.. 7 ), these nterestng facts are de-
duced from the statutory aw reatve to communty property:
If a dvorce s granted wthout any dsposton of the communty prop-
erty the former wfe herones the owner of one-haf of the communty prop-
erty as tenant n common wth her former husband.
nd yet, f she hud nothng but the nterest of an her e pectant, how
can she, wthout court decree, or deed of any knd, suddeny have tte to au
undvded haf nterest n ther common estate The supreme court further
decdes that:
To remove ths power of tte wfe to contro, ob|ect, or nterfere
may e a consderaton of very great pecunary vaue to the husband and fuy
adequate for a transfer of vauabe rea estate.
Yet how can that be harmonzed wth the provson of aw (C. C, 700) that
an e pectancy of an her apparent s not an nterest of any knd
nay, n Schneder v. Schneder (183 CaL, 335). n 1920, the Supreme Court
of Caforna, n uphodng a dvson of the communty pro|erty acqured dur-
ng a common aw marrage, uttery .gnorng the urdck and both Sprockets
cases, pontedy recognzed the dua property nterest of both the spouses n the
communty acquests by sayng:
ow then can t be that where the property s acqured by the |ont
abors of both, each n the eye of the aw contrbutng one-haf thereto, t sha
beong ony to the husband
It Is a dsquetng crcumstance, but nevertheess one wth whch we muse
reckon, that these two nes of decsons have deveoped contemporaneousy but
ther reasonng has sedom crossed. The court has, when adherng to the one
theory, made tte effort to e pan, overrue, or modfy the other, and wth
a few noted e ceptons, when hodng that te wfe took ony as an her t
has gnored the cases protectng her property nterests or decdng that she
comes nto posseson of her haf as the survvor of the communty. In-
consstences have thus arsen:
The her e pectant theory was frst announced by way of dctum ( an
Mar-en case) and much of ts most persuasve argument s spread n opnons
as dcta (In re urdck and both Spreekes cases).
The eary Spreckes case postvey stated that the husband bad absoute
and e cusve ownershp of ony the communty property whch hnd been
acqured pror to 1891. It rased the queston but dd not decde whether tho
wfe mght have more than the e pectancy of an her In property acqured after
the amendment of 1891.
The reasonng of the court n tho urdck and Spreckes eases arose from the
fact that when the property nvoved n those cases was- acqured the husband
had soe management and dsposton of the communty estate. egnnng
wth 1891, he has hnd ess and ess contro.
The Supreme Court of the Unted States n the cases of Warbvrton v. Whte
(17 U. S.. 484) and rnett v. Reade (220 U. S., 311) hed that It was a
msconcepton of the system to suppose that because power was vested n the
husband to dspose of the communty acqured durng marraee, as If t were
hs own, therefore by aw the communty property beonged soey to the
hoshand.
In repy to contentons urged from the reasonng n Spreckes v. tprerkeU
ropra. the Supreme Court of the Unted States sad n rnett v. Reade supra:
owever ths may be, t Is very pan that the wfe has a greater nterest
than the mere possbty of an e pectant her. or t s conceded by the court
beow and everywhere, we beeve, tat n one way or anotter she has a remedy
for aenaton made In fraud of her by her husband.
The ony rea tme the Supreme Court of the State of Caforna revewed both
knds of decsons, and takng them nto consderaton, nevertheess refused to
foow the vested nterest group, foowng rather as a rue of property
the her e pectant ne, was n the case of In re Mofftt state (153 Ca., 359).
m the Legsature of Caforna passed an act n 1 17 repudatng the
Mofftt decson.
1 Itacs added.
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213(a), rt. 31.
100
Under such condtons, n 1020 the queston enters the arena of the edera
courts n the wse of um v. Warde (270 ed., 309), where sut was brought
to recover edera estate ta es pad under protest on tte wfe s share of the
communty property at the probate of te husband s estate. fter a revew
of the Moftt decson and many of ts forerunners that hed that the wfe s
share came to her as her of her husband. Dstrct udge udkn decded that,
assumng that a ed or decded rue can be wthered from e decded cases, 1
the ta egsaton of 1917 necessary changes such a rue of decson, for
the amendment to the nhertance ta aw of the State s a egsa-
tve dsapprova of the decson n the Moftt case. The communty property
act of 1917 s vad as to communty property acqured before ts passage
( rnett v. Reade supra), and f that act does not recognse n the wfe a vad
subsstng vented nterest and estate n the communty property durng the fe
of the husband, anguage s wthout meanng and egsaton wthout ava.
When the husband had the management and contro of the communty property
wth the ke absoute power of dsposton as of hs own separate estate,2 a de-
cson that the wfe had a mere e pectancy was pausbe f unsound. ut
under these recent acts suc a decson woud be wthout e cuse or |ustfca-
ton.
The Crcut Court of ppeas (27(5 ed., 22 ) uphed the dstrct court n
the um decson on the ground that the Caforna nhertance ta amend-
ment of 1017 manfesty s a cear statutory decaraton that the wfe s haf
of the communty property s not part of the property of the deceased hus-
band, and even f the case were not controed by the Caforna stntute of
1017 appyng the rue of aw announced by the Supreme Court
of the Unted States n the case of rnett v. Reade (220 U. S., 311, 320), the
resut, t seems to us, must e the same.
It as been suggested that the above decsons of the edera courts fa to
foow the constructon paced upon the aws of Caforna by the hghest court
of the State, but that contenton s hardy sound. There s ess |ustfcaton
for assumng that the ne of decsons started by the an Maren case s any
more truy the constructon of the hghest court of the State than the ong
ne of estate decsons whch hed that the wfe takes her haf as a survvor
of the communty, or than the unnterrupted ne of cases arsng out of d-
vorce, where even when the court s decree s sent as to a dvson of com-
munty property she s recognzed as becomng a tenant n common wth her
former husband as soon as the marrage s dssoved.
Two decsons have been handed down by the Supreme Court of Caforna
snce um v. Warde.
The frst, the Roberts v. Wehmeyer supra case, mtanty uphods the her-
shp doctrne, but t eaves open the queston of the effect of the 1017 amend-
ments to te Caforna communty property aws. urthermore, t ncreases
rather than dspes the fog of doubt about the queston, for whe approvng the
Mum v. Warde opnon n so far as t fted the burden of nhertance ta
from the wfe s share, whch t w bo noted was done because the Crcut
Court of ppeas recognzed the amendment of 1017 as manfesty a cear
decaraton that the wfe dd not take as an her, the Caforna court never-
theess repudates the doctrne of her vested nterest on whch the edera
court s reasonng was based, as foowng the Supreme Court of the Unted
States n rnett v. Reade.
The most recent e presson from the Supreme Court of Caforna s from
the case of Tayor v. Tayor ( Ca. Dec, 338), decded September 14, 1923,
where, dscussng the rght of the wfe to contest the husband s ownershp
of communty property wthhed from her, t sad:
If t be contended that any of the fndngs tend to suggest the concuson
of aw that the defendant s the soe and e cusve owner of the and n con-
troversy, they are contrary to the undsputed evdence, that what-
ever nterest he had n the property at the tme of the Nevada dvorce was
obtaned from money acqured after hs marrage wth appeant t
woud seem to necessary foow that the dvorce of the partes havng been
granted wthout any dsposton of the communty property, appeant Is the
owner of one-haf of such property as tenant n common wth respondent
( state of r , 181 Ca., 07).
1 Itacs added.
Ths was true pror to the amenduvnt of 1891.
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101
213(a), ft. 31.
udca pronouncements, therefore, reman n substantay the same dvded
camps n Caforna now as they were n 1920, when the edera court decded
the Uutn ca.se, whch must, therefore, be regarded as announcng the true rue,
that the wfe ha a greater nterest than the mere possbty of an e pectant
h r u communty property, and that the Caforna statutes of 917 deary
recognse that the wfe s haf of communty property s not a part of the
property of the deceased husband. That nterpretaton offends ony the doc-
trne announced In, and perpetuated from, the an Maren case, but whch
I thnk can not be regarded as a f ed rue of decson n the State of Ca-
forna. In fact, I am of opnon no estabshed rue can be gathered from
the decded cases In that State. The concuson I have announced above,
as based on the um decson, s, however, n harmony wth decsons of
te courts of other States1 where the communty property system s man-
taned, and wth pronouncements of the Supreme Court of the Unted States.2
II further gves vadty and a reasonabe constructon to recent acts of the
Caforna Legsature,3 and recognzes and foows a ne of Caforna decsons
begnnng n 1853 and contnung to September, 1923, n the ast decson of
the court on ths sub|ect (Tayor v. Tayor, supra).
The former opnon of ths department s, therefore, amended accordngy.
Respectfuy,
. M. Daugherty,
ttorney Genera.
rtce 31: What ncuded n gross ncome.
(See S. M. 1 99 sec. 219, art, 345.) Income of trust payabe to
settor as often as requested and sub|ect to hs order as to ncome not
wthdrawn.
rtce 31: What ncuded n gross ncome.
(See I. T. 1990 sec. 214(a)4, 5, , art. 141.) Rembursement of a
oss on contract wth Government.
rtce 31: What ncuded n gross ncome. 111-23-1591
T. D.359
communty property caforna.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0. m
To coectors of nterna revenue and others concerned:
Under date of March 8, 1924, the ttorney Genera rendered an
opnon wth reference to the nature of the nterest of the wfe n
communty property under the aws of the State of Caforna, whch
was pubshed as Treasurv Decson 35 9 see pp. 91-101 , ap-
proved under date of March 27, 1924. Under dae of May 27, 1924,
the ttorney Genera wthdrew the opnon of March 8,1924, for fur-
ther consderaton. In vew of ths acton by the ttorney Genera,
1 La Tmrette v. La Tourette (15 rz., 2001 ead v. ufton (31 Idaho, 373) Sr-
sman of Marsha s La.. 211) eas v. res ( rzona, 101 )) (185 Pac, 780) In re
M UUam (40 Nov., 241) Mabe v. Whtaker (Washngton) (30 Pac, 172).
- Warburton v. Me (170 U. S.. 484) : rnett v. Iteude (220 IT. S., 311).
Cv Code. wc. 172a (1917) amendments (1023) to C. C, 1401 and 1402 and ch.
580, Law of Caforna, 1917, p. 880.
eard v. no supra.
Note especay de odey v. odey et a. (30 Ca.. 157) state of Rhey (42 Ca.,
210) state of ohn Onn (77 Ca.. 313) In rc Omarc (81 Ca., 240): state of
Wcterham (138 Ca.. 255) state of Prayer (10 Ca., 453) state of Ross (100 Ca..
9), n every one of whch the doctrne of tho eard v. no case Is reed upon for
uthorty and reaffrmed.
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I3(a), rt. 32.
the audtng and cosng upon a communty property bass of both
ncome and estate ta cases arsng n the State of Caforna w be
hed n abeyance pendng further consderaton of the matter by tho
ttorney Genera. In the meantme ta payers may take such steps
to protect ther nterests by the tng of wavers or cams for re-
fund as they mav deem advsabe.
D. . .ak,
Commssoner of Interna Revenue.
pproved May 31, 1924.
. W. Meon,
Secreta y of the Treasury.
rtce 32: Compensaton for persona servces.
(See I. T. 1891 sec. 214(a) 1, art. 10T.) Dvdends pad on bonus
stock before tte to stock passes to empoyee.
rtce 32: Compensaton for persona servces. 111-3-1307
I. T. 1909
R NU CT O 1921.
The ta payer was formery Unted States dstrct |udge for the
eastern dstrct of Y and n 1922, whe hodng such offce, he was
apponted |udge for the Unted States Crcut Court.
It s hed that nasmuch as he was apponted |udge of the Unted
States Crcut Court subsequent to the passage of the Revenue ct
of 1921, the compensaton receved by hm as |udge of that court s
not e empt from the ncome ta mposed by the Revenue ct of
1921.
rtce 32: Compensaton for persona servces, IIT-(5-1353
. R. R. 035
R N U CT O 19 I S.
The doars n queston were not receved by pursuant to the
. decaraton of a dvdend by the corporaton to ts stockhoders.
There was no dstrbuton n any guse by the corporaton to ts
stockhoders of saary or undvded profts n proporton to ther
record hodngs of stock. The doars were dstrbuted or wth-
drawn by under the guse of compensaton for servces ren-
dered. It was so treated on the corporaton s books. It dd not
represent her proportonate share based on record hodngs of
stock of an amount dstrbuted to a the corporaton s stockhoders
of record, and whe nnder the communty property aw of the
State of Washngton a hus and and wfe each have an equa
ownershp n stock acqured wth communty earnngs and an equa
ownershp n the earnngs on such stock, a corporaton s not
requred to nnke ts dstrbuton of dvdends on such bass or on
any bass other than the record ownershp of ts stock, and t s
not, therefore, to be hed that the corporaton dstrbuted the
doars equay between and on the bass of ther record hod-
ngs of stock.
has appeaed from the proposed hodng of the Income Ta
Unt that the amount of ,r doars receved by her n 1919 from the
M Company, ostensby as saary, s sub|ect to both the norma and
sur ta .
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213( , rt. 32.
The records show that and her husband, , owned a, or prac-
tcay a, the stock ot the M Company: that hed the poston of
vce presdent and the poston of presdent that n 1019 there
was pad to or wthdrawn by from the funds of the sad company
the sum of doars that the corporaton camed such payment or
wthdrawa as a deducton for the sad year as saary pad to offcers
and that the revenue agent who nvestgated the returns of the sad
corporaton dsaowed ths deducton on the ground that no servces
were rendered by . There s nothng n the records now before
the Commttee whch ndcates that the M Company has protested
aganst the sad acton of the e amnng offcer. It s, however, the
contenton of that nasmuch as the amount pad or wthdrawn by
her n 1919 has been dsaowed to the M Company as a deducton,
t must be hed n her case to be ether a gft not sub|ect to ta n her
hands or a dstrbuton of profts made e acty proportonate, to
stockhodngs and sub|ect ony to surta .
s shown by the records, the amount of doars was not pad
over to as a gft, but was wthdrawn from the corporaton and pad
to her under the guse of compensaton for servces rendered, such
acton beng possbe by reason of the. fact that and her husband,
, had compete contro of the company, ownng a, or practcay
a, of the stock.
rtce 105 of Reguatons 45 states that
(a) n ostensbe saary pad by a corporaton may be a dstrbuton of a
dvdend on stock. Ths s key to occur n the case of a corporaton havng
few stockhoders, practcay a of whom draw saares. If n such a case
the saares are based upon or bear a cose reatonshp to the stockhodngs
of te offcers or empoyees, t woud seem key that the saares, f n e cess
of those ordnary pad for smar servces, are not pad whoy for servces
rendered, but n part as a dstrbuton of earnngs upon the stock, (b) n
ostensbe saary pad by a corporaton may be n part a waste or appropra-
ton of assets of the corporaton. Ths may occur where saared empoyees are
n contro of the corporaton through hodng drecty or Indrecty a ma|orty
of ts stock and the tendency of the offcers unduy to nfate ther
saares must be taken nto account.
rtce 10 of Reguatons 45 states that
s to the treatment of amounts ostensby pad as compensaton, but not
aowed to be deducted as such, the foowng rues appy: (1) In the case
of e cessve payments by corporatons, f such payments correspond or bear a
cose reatonshp to stock hodngs, the amount of the e cess shoud be treated
aa dvdends and woud thus be e empt from the norma ta n the hands of
the recpents or f suc payments represent an appropraton of assets of
the corporaton by offcers who contro t and f ther compensaton n voa-
ton of the rghts of the corporaton, the nmount of the e cess, whe dsaowed
as a deducton by the corporaton, shoud be treated as compensaton of te
ndvduas sub|ect to the norma ta , .
It s the contenton of the appeant ta payer that f the payment
to or wthdrawa by her s not to be treated as a gft or as compensa-
ton receved for servces rendered t shoud be treated as a dvdend,
whch contenton s based on the statement that under the aws of the
State of Washngton
and own a communty nterest In a of the stock of the M Compauy
f ths communty nterest gves them not ony an equa nterest n such stock
but aso an e acty equa nterest n the saary of each of them. Tne dstr-
buton, therefore, must be regarded as proportonate to stockhodngs.
Wth ths contenton of the appeant ta payer th Commttee s
not n accord. The doars n queston were not receved by
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23(a , rt. 32.
104
pursuant to the decaraton of a dvdend by the corporaton to ts
stockhoders. There was no dstrbuton n any guse by the corpo-
raton to ts stockhoders of saary or undvded profts n proporton
to ther record hodngs of stock. The sad ,r doars were dstrbuted
or wthdraws by under the guse of compensaton for servces
rendered. It appears to have been so treated on the corporaton s
books. It dd not represent her proportonate share based on record
hodngs of stock of an amount dstrbuted to a te corporaton s
stockhoders of record, and whe under the communty property
aw of the State of Washngton a husband and wfe each have equa
ownershp n stock acqured wth communty earnngs and an equa
ownershp n the earnngs on such stock, a corporaton s not re-
qured to make ts dstrbuton of dvdends on such bass or on any
bass other than the record ownershp of ts stock, and t s not,
therefore, to be hed that the corporaton dstrbuted the sad
doars equay among and on the bass of ther record hodngs
of stock.
In vew of the foregong, the Commttee recommends that the
proposa of the Income Ta Unt to hod that the amount of doars
receved by n 1919 from the M company s not propery to be
treated, for ta purposes, as a gft free from both the norma and
sur ta es, or as a dvdend not sub|ect to norma ta n s hands,
but as an tem of ncome sub|ect to both norma and sur ta es, be
sustaned, and the appea of the sad ta payer accordngy dened.
Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 32: Compensaton for persona servces. III-14-14G0
I. T. 19 3
R NU CT O 1021.
The ta payer was an offcer n the Unted States rmy and was
honoraby dscharged from the servce n December, 1922, under the
provsons o an ct of Congress dated une 30, 1922, as amended
September 14, 1922. Upon hs dscharge he receved a cash consd-
eraton of a doars, or the equvaent of one year s pay n advance.
The amount n queston represents addtona compensaton for past
servces rendered and s, therefore, sub|ect to edera ncome .ta .
rtce 32: Compensaton for persona servces. 111-15-1495
( so Secton 215, rtce 291.) I. T. 1974
revente CT O 1021.
The subsstence aowance pad an offcer of the Unted States
ny for the purchase of ratons represents addtona compensaton
and shoud be reported as ncome. No part of the amount e pended
may be camed as a deducton n arrvng at the ta payer s net
ncome.
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213(a), rt. 39.
rtce 33: Compensaton pad other than n cash.
See I. T. 19 5 sec. 215, art. 291.) Per dem aowance furnshed
to ensted men of the Navy and Marne Corps at certan statons
and posts where housng and messng factes are not avaabe.
Cash aowance for unforms of newy enroed members n the
Nava Reserve orce.
rtce 39: Sae of stock and rghts.
(See . R. . 4837 sec. 202, art. 15 1.) Stock sod hed to have
Wn from purchases pror to March 1. 1913.
rtc.e 39: Sae of stock and rghts. I1I-5-1339
I. T. 1922
R NU CT O 1021.
The decedent was the owner of 22 snares of stock and aso of
rghts to subscrbe to 22 addtona shares at 20 doars a share.
The stock was seng e rghts at the tme of the decedent s
death. The e ecutors apprased the stock at 2G doars a share
and the rghts at 5 doars a share. The e ecutors sod the rghts
fur 114.T doars.
The estate derved a ta abe gan of 4 doars from the sae of
the rghts.
The decedent at the tme of hs death was the owner of 22 shares
of the stock of the M Company, and aso of rghts to subscrbe for
22 addtona shares of stock at 20 doars a share. In ther nven-
tory fed n the probate court, the e ecutors apprased the stock at
2fw doars a share and the rghts at 5a) doars a share. The rghts
were sod by the e ecutors for 114 doars.
It s assumed that the stock was seng e rghts on the date of
the decedent s death and that the rghts had a far market vaue of
b doars for each share for whch they entted the hoder to sub-
scrbe. Under ths assumpton the estate derved a ta abe gan from
the sae of rghts n the sum of 4 doars, the amount by whch the
geng prce of the rghts, or 114a doars, e ceeded 110 doars, the
vaue of the rghts as of the date of decedent s death.
rtce 39: Sae of stock and rghts. III-r -1340
I. T. 1923
R NU CT O 1921.
Computaton showng gan or oss from sae of rghts to sub-
scrbe to stock purchased party before March 1, 1913, and party
subsequent to that date.
The ta payer was the owner on March 1, 1913, of 50 shares of
stock of the M Company costng 127a doars a share and havng a
vaue as of March 1,1913 of 152 o doars a share. e subsequenty
purchased 5 shares of ths stock at 100.v doars a share and re-
ceved rghts to subscrbe to 3 shares of new stock n the company at
4177 24 8
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213( ), rt. 9. 10
75a doars a share for each 10 shares hed. e then sod 55 rghts
enttng hm to subscrbe to 1 shares, recevng 47G.99. doar. ,
or 8. 7a doars a rght.
dvce s requested as to whether the vaue as of March 1, 1913,
shoud be compared wth cost n arrvng at the gan or oss from
the sae.
Under artce 15 1 of Reguatons 2, the bass for determnng
gan or oss from the sae of property acqured pror to March 1,
1913, shoud be ts cost, e cept that f the far market prce or vaue
of the property as of March 1, 1913, s greater than cost, then the
vaue as of March 1, 1913, shoud be used as the bass for determn-
ng gan. If the far market prce or vaue of the property as of
March 1, 1913, s greater than cost and the seng prce s ess tha
cost, the deductbe oss s the amount by whch the cost e ceeds the
seng prce. It w thus be noted that n determnng gan or
oss from the sae of property t s necessary to start wth cost.
Under the case of Mes v. Safe Depost and Trust Company (C.
. 1-1, 72), decded by the Unted States Supreme Court on May
29, 1922, the sae of subscrpton rghts at a f ed sum, the pur-
chaser to pay the ssung company the subscrpton prce, s treat I
as equvaent to a sae of fuy pad shares at a prce equa to the sum
of the seng prce of the rghts pus the amount payabe to the
corporaton for the shares.
Commencng wth the cost of the 50 shares of stock acqured
pror to March 1, 1913, the computaton deveops as foows:
50 127,r doars ,350.r doars, cost of 50 shares.
15 75| do ars 1,1215| doars, oost of addtona shares
obtanabe through e -
ercse of rghts reatng
to the 50 shares.
7. 475| doars, tota cost had rghts car-
red by 50 shares been
e ercsed.
7,475a doars 5 115 r doars, average cost per share.
mount payabe for
each share to corpo-
raton by hoder of
rghts 75/- doars.
mount receved for
34 rghts 28.90.r doars.
103.90| doars, amount consdered to be
the seng prce of 1
share.
115.r doars average cost.
103.90.1 doars seng prce.
11.10. doars oss on each share sod.
11.10a doars 15 (number of shares sod) 10 50 doars, deduc-
tbe oss.
Snce the average vaue as of March 1, 1913, of the 50 shares was
134. 1.7 doars a share and the average cost was ower than such
average vaue as of March 1, 1913, the deductbe oss w be meas-
ured by the dfference between the average cost and the seng prce
and not by the average vaue as of March 1, 1913.
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107 8213(a), rt. 42.
In the case of the 5 shares subsequenty purchased, the foowng
method shoud be apped :
Doars.
Cost of 5 shares at OO doars a share 500a:
Shares obtanabe by 5 rghts, to be pad for 1 shares 112.50
Tota cost shares had rghts been e ercsed 12. 50
12.50 doars-M5 94.23 doars, average cost of shares
acqured after March 1, 1913. .
Purchaser pays: 28.90 doars for 3 rghts requred to
obtan 1 share 28. On
To corporaton for each share 75
103. 90|
Cost 94. 2Sa
Gan from the sae of 1 share 9. 7
1 shares sod equas 14.50| doars, tota gan.
The amount of gan to be reported from the sae of the rghts
ssued ,wth respect to the 5 shares acqured after March 1, 1913, s
14.50a doars.
rtce 39: Sae of stock and rghts. 111-15-149
S.M. 1 4
R NU CTS O 1918 ND 1021.
The decson of the Supreme Court n Mes v. Safe Depost Com-
pany (259 U. S., 247) does not appy to the case of the sae of rghts
to subscrbe for bonds of the corporaton ssung the rghts. Nether
docs the fact that the bonds are convertbe nto stock affect the ques-
ton, for the converson prvege may never be e ercsed. The en-
tre seng prce of the rghts to subscrbe for bonds s ncome.
Neson T. artson,
Soctor of Interna Revenue.
rtce 42: Sae of persona property on III-2-1294
nstament pan. Mm. 317
R NU CTS Or 1918 ND 1921.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 92
mended returns by ta payers engaged n the busness of seng
merchandse upon the nstament pan.
To coectors of nterna revenue, nterna revenue agents n charge,
and others concerned:
Inqures receved by the ureau ndcate that msunderstandng
e sts n regard to the fng of amended ncome and profts ta
returns n the case of ta payers engaged n the sae of merchandse
cn the nstament pan. pparenty the erroneous mpresson e sts
that n a cases where returns have been rendered upon the bass
of treatng such saes as cash transactons the ta payer s precuded
from frng amended returns for the purpose of reportng on the
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213(8), rt. 50.
108
nstament pan the profts reazed from the deferred-payment
saes.
In vew of the foregong, t s desred to ca attenton to the
correct rues governng the fng of amended returns n the case
of ta payers engaged n the sae of merchandse upon the nsta-
ment pan, whch are as foows:
(a) Where a ta payer has n past years fed returns upon the cash
bass or upon the straght accrua bass, but kept accounts upon the
nstament bass, amended returns may be fed for the purpose of
reportng the ncome upon the nstament pan n accordance wth
artce 42 of Reguatons 45 and 2.
( ) Where the accounts of a ta payer n pror years have been
kept upon the cash bass or upon the straght accrua bass, amended
returns may not be fed for the purpose of reportng the ncome
upon the nstament pan. In no event may amended returns be
fed upon the bass of estmates.
D. . ar, Commssoner.
rtce 50: orgveness of ndebtedness. 111-11-1413
S.M. 1495
R NU CT O 1021.
The canceaton of abtes of the M corporaton resutng from
n composton agreement among Its credtors does not consttute
a canceaton and forgveness of ndebtedness so as to amount to
the payment of ta abe ncome to It
The prncpa contenton set forth n the cam s that the can-
ceaton of abtes n the amount of 39 , doars resutng from a
composton agreement among the credtors at the tme the corpora-
ton went nto bankruptcy dd not consttute ta abe ncome. The
cam s re|ected for the reason that no evdence has been furnshed
whch mght show that the dscharge of ndebtedness resuted from
an ad|udcaton n bankruptcy, under authorty of I. T. 15 4 (C. .
II-, 59), whch provdes n part as foows:
ta payer receves no Income by vrtue of a dscharge of Indebtedness
resutng from an ad|udcaton n bankruptcy.
Where a composton agreement among credtors s approved by the court
subsequent to an ad|udcaton n bankruptcy, no ta abe Income s receved
by the ta payer by reason of any dscharge of ndebtedness thereunder.
It appears from the evdence n the record that ths corporaton
became bankrupt durng , 192 , and ceased operatons at that
tme wth the e cepton of carryng out such transactons as were
necessary to coect the outstandng accounts and dspose of the
- nventores on hand. t the meetng of the credtors t was agreed
that a recever be apponted and that the assets be qudated. The
vaue of the assets appro mated one-thrd of the outstandng n-
debtedness, and the composton agreement was effected upon ths
bass. The revenue agent has treated the remanng two-thrds of
the abtes as ta abe ncome upon the theory that the compos-
ton agreement consttuted a canceaton or forgveness of ndebted-
ness. The bref fed by the ta payer docs not specfcay state that
the dscharge of ndebtedness resuted from an ad|udcaton n
bankruptcy, nor s t stated that the composton agreement of the
credtors was approved by the court. Nevertheess, t s the opnon
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109
( 213(a), rt. 52.
of ths offce that the facts and crcumstances n the nstant case do
not consttute a canceaton and forgveness of ndebtedness such
as woud pace upon the ta payer the obgaton of ncudng the
same n hs gross ncome as defned by secton 213 of the Revenue
ct of 1921. ttenton s nvted to artce 50, Reguatons 2, whch
provdes n part as foows:
The canceaton and forgveness of ndebtedness s dependent on the crcum-
stances for ts effect. It may amount to a payment of ncome or to a gft
or to a capta transacton. If, for e ampe, an ndvdua performs servces
for a credtor, who n consderaton thereof cances the debt, Income to that
amount s reazed by the debtor as compensaton for hs servces. If, how-
ever, a credtor merey desres to beneft n debtor and wthout any consderaton
therefor cances the debt, the amount of the debt Is a gft from the credtor to
the debtor and need not be ncuded n the atter s gross ncome.
Neson T. ahtson,
Soctor of Interna Revenue.
rtce 50: orgveness of ndebtedness. 111-17-1513
L T. 1982
R NU CT O 1921.
n e amnaton of the condton of the account of the ta payer s
partner as of uy I, 1921, deveops the fact that he was ndebted to
the partnershp to the e tent of .v doars. The ta payer decded that
ths debt to the frm shoud be canceed and he agreed to assume the
obgaton and thus reduce hs capta by the amount of doars.
The queston presented s whether he may consder the amount of
doars as a deducton n arrvng at hs net, ncome sub|ect to ncome
ta for the year 1923.
ed, that from the facts submtted the ta payer assumed hs
partner s debt to the partnershp and the transacton represents a
gft by- hm to the partner, and, therefore, he may not cam the
amount as a deducton and hs partner shoud not report the amount
as ncome.
rtce 51: When ncuded n gross ncome.
(See I. T. 1894 sec. 214(a) 10, art. 201.) Return of ncome by
purchaser of royaty nterest.
rtce 51: When ncuded n gross ncome.
(See I. T. 2001 sec. 203, art. 1581.) Merchandse shpped abroad
wth sght drafts attached whch were never accepted.
rtce 52: Income not reduced to possesson. III-G-1354
.R.R.G239
R NU CTS O 1917 ND 1918.
The returns of and of her estate were made upon a cash
recepts and dsbursements bass. Interest on notes whch was not
receved dd not consttute ta abe ncome to er. The corporaton
was not In funds out of whch to pay the nterest whch accrued
upon ts notes and consequenty the doctrne of constructve recept
does not appy.
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213(a), rt. 52.
110
The Commttee has consdered tre appea of the above-named
ta payers from the acton of the Income Ta Unt n proposng the
re|ecton of cams for the abatement of assessments of addtona
ta es for the years 1917, 1918, and 1919 and n proposng the re|ec-
ton of cams for refund of ta es pad for the same years.
The questons presented by ths appea are (1) the ncuson n
gross ncome of nterest accrued on notes credted to the appeants
accounts on the books of a corporaton but never receved by the
appeants (2) the ncuson n gross ncome of amounts pad for the
appeants by estate, a corporaton.
was the wdow of , who ded n 1904. Under the terms of
hs w she receved an undvded one-haf nterest n hs estate.
s of anuary , 1917, the estate of was ncorporated and
receved for her nterest n the estate one-haf of the capta stock
of the corporaton and a note havng a face vaue of 45.C doars.
Ths note, dated uy , 1917, was payabe fve years from date and
bore nterest at the rate of per cent per annum, payabe quarter-
annuay.
The prncpa assets of the estate were a brewery and saoon prop-
ertes ocated n the cty of S, State of Oregon. Prohbton became
effectve n the State of Oregon on anuary , 191 , and the
brewery was converted nto a soft drnk pant. It was operated
at a great oss n 191 . advanced money from her own funds to
keep the brewery operatng. The note whch was gven to her by the
corporaton n the amount of 45 doars ncuded 5 doars for
advances so made. Up to anuary , 1917, had advanced an
addtona amount of 1.5 doars to keep the brewery operatng,
whch amount was not covered by the note n queston. Ths amount
s shown by the openng entry upon the corporaton s books of ac-
count as a part of the notes payabe, athough no note was ever
gven to to cover the advance.
Durng the years 1917, 1918, and 1919 the corporaton pad for ,
and after pr , 1918, the date of her death, for her estate,
numerous bs and aso made certan advances of cash to her from
anuary , 1917, to pr , 1918. These amounts were charged
aganst her or her estate upon the corporaton s books. t the cose
of each of the years 1917, 1918, and 1919 the account was credted
wth the nterest whch had accrued upon the note of 45a doars.
The corporaton operated at a huge oss for each of the years 1917,
1918, and 1919 the net oss for each year amountng to much more
than the nterest whch accrued upon ts outstandng notes and whch
was camed as a deducton from gross ncome n ncome ta returns
fed upon an accrued bass.
Durng the year 1917 advanced to the corporaton addtona
amounts totang 1.94c doars, and dnng the year 1919 her estate
advanced 2 doars. The former advances were credted upon the
books of account of the corporaton to notes payabe, whe the ast-
named amount was credted drecty to the account of the estate of .
The returns of and those fed for her estate were made upon the
bass of cash recepts and dsbursements. There was ncuded n the
gross ncome returned the amounts pad by the corporaton for th
appeants but not the e cess of the nterest credt over and above
the. debts to the account. The Income Ta Unt takes the poston
that nasmuch as the tota amount of nterest whch had accrued
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(S213(a), rt. 52.
upon the note was paced to the credt of the appeants and camed
as a deducton n the returns of the corporaton t must be concu-
svey presumed that t was avaabe to the appeants and was at
east constructvey receved by them.
The Commttee s ceary of the opnon that the Unt s n error
upon ths pont. The appeants returns were made upon a cash
recepts and dsbursements bass and ncome whch was not receved
dd not consttute ta abe ncome. The corporaton was not n funds
to pay the nterest whch accrued upon ts outstandng notes conse-
quenty the doctrne of constructve recept does not appy.
Upon the second pont the Commttee s of the opnon that the
amounts pad by the corporaton for the appeants were propery
shown as ncome n the orgna returns. It was apparenty the n-
tenton of the corporaton that the amounts shoud be consdered
as a part payment of the nterest whch had accrued upon the note.
It s true that the advances of 2a doars made by the estate n 1910
(a doars on pr and doars on October ) were credted
drecty to the account of the estate the same as the 2.7a doars
nterest at the cose of the year, but the Commttee s of the opnon
that the debts n the account shoud be consdered offsets to the
nterest, the same as they had to be consdered for 1917 and 1918. n-
stead of as offsets to the advances made n pr and October.
The Commttee recommends that the proposed acton of the In-
come Ta Unt upon the hst pont consdered be reversed and that
ts proposed acton upon the second pont be sustaned.
Chares D. abe,
Charman Commttee on ppeas and Revew.
rtce 52: Income not reduced to possesson. 111-13-1448
I. T. 1958
R NU CT O 1921.
Certan shares of stock were sod to be pad for In 10 equa pay-
ments, 10 per cent of the stock to be devered to the vendees an-
nuay by the bank wth whch the stock was deposted n escrow.
dvdends pad upon the stock whe n the possesson of the
bank are to be credted to the vendor, the annua payments to be
made by such vendees beng reduced by the amounts of the dv-
dends.
The dvdends were constructvey receved by the vendor and
shoud be returned by hm as ncome for the purpose of the surta .
The ta payer under a contract sod certan shares of stoc k for 50./
doars, to be pad for n 10 equa payments, 10 per cent of the stock
to be devered to the vendees annuay. S per cent nterest was
charged on the deferred payments. The stock was deposted wth a
bank n escrow, ndorsed n bank, to be devered to the vendee as
pad for by hm. The contract provded that a dvdends pad upon
the shares of stock whe n the possesson of the bank durng the
term of the agreement shoud be payabe to sad bank for the credt
of the vendor, the-annua payments to be made by the vendees beng
reduced by the amount of the dvdends. Inqury s made as to
whether the cash dvdends sha be consdered as true dvdends re-
ceved by the vendor sub|ect ony to the surta es, thus reducng the
amount receved on the sae of the stock, or sha they be consdered
as accrung to the beneft of the vendees.
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213(b), rt. 72.
,112
ed, that, regardess of the fact that the bank as depostary had
actua possesson of the stock, the ega and equtabe tte to the stock
so hed n escrow by the bank and undevered to the vendee n any
year durng the fe of the agreement remans n the vendor and that
a cash dvdends decared on such stock, even though gong to re-
duce the purchase prce of the stock, were constructvey receved by
the vendor and shoud be returned by hm as ncome for surta
purposes.
S CTION 213(b). GROSS INCOM D IN D:
CLUSIONS.
rtce 72: Proceeds of nsurance Conpensa- 111-2 -1 29
on War pensons. T. D. 3 04
( so Secton 230, rtce 541.)
INCOM T R NU CT O 19IS D CISION O SUPR M COURT.
1. Income Insurance Pocy enefcary.
Proceeds of a pocy of nsurance upon te fe of an offcer of a
corporaton pad to the corporaton as benefcary are not ta abe
as ncome.
2. Insurance.
pocy of nsurance by a corporaton upon the fe of one of
ts offcers s not a wagerng contract.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Supreme Court of the Unted States
n the case of Unted States v. Suppee- dde ardware Company
s pubshed for the nformaton of nterna revenue offcers and
others concerned.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved une 1 , 1924.
. W. Meon,
Secretary of the Treasury.
Supreme Court of tf. Unted States. No. 477. Octobkb Term, 1923.
The Unted Sates, appeant, v. The Suppee- dde ardware Company.
pppn from tho Court of Cams.
May 2ft, 1924.
Mr. Chef ustce Taft devered the opnon of the court.
The Suppee- dde ardware Co. sued the Unted States n the Court of
Cams to recover 55,153.89, wth nterest, as ta es egay assessed on the
proceeds of two fe nsurance poces pad to t as the benefcary on the death
n 1918 of the nsured, Robert Pdde, 2nd. Pdde was eected presdent of the
company In ebruary, 1917. e was then 7 years of age, n good heath, and
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113
213(b), rt, 72.
had for neary 20 years hed varous offces n the dde ardware Co., whch
had merged wth the appeee company n anuary, 1914. e was a man of
abty, energy, and ntatve, and was so regarded n the hardware trade.
The returns from the company s busness under dde s management had been
ranch ncreased. t the nstance of the board of drectors and the e pense of
the company, he took out the two poces for 50,000 each. They were term
poces for fve years. The company ntended thus to make secure ts fnanca
poston, and to ndemnfy tsef aganst osses to ts earnng power n the event
of cde s death.
The Revenue ct of 1918. whch was passed ebruary 24, 1919 (40 Stat.,
1057, eh. 18), n prescrbng the ncome to be ta ed, deas frst wth ndvduas,
from secton 212 to secton 228. ncusve. Then foows provson for the rate
of ncome ta on corporatons, begnnng wth secton 230. Secton 233(a)
says That In the case of a corporaton sub|ect to the ta mposed by secton
230 the term gross ncome means the gross ncome as defned n secton 213,
wth certan e ceptons not here matera. Secton 213 defnes the gross ncome
for ndvduas as foows:
That for the purposes of ths tte (e cept as otherwse provded n secton
- . 11), the term gross ncome
(a) Incudes gans, profts, and ncome derved from saares, wages, or
compensaton for persona servce of whatever knd and n whatever
form pad, or from professons, vocatons, trades, busnesses, commerce, or
saes, or deangs n property, whether rea or persona, growng out of the
ownershp or use of or nterest n such property aso from nterest, rent,
dvdends, securtes, or the transacton of any busness carred on for gan or
proft, or gans or profts, and ncome derved from any source whatever
but
(b) Does not ncude the foowng tems, whch sha be e empt from ta a-
ton under ths tte:
(1) The proceeds of fe nsurance poces pad upon the death of the In-
sured to ndvdua benefcares or to the estate of the nsured.
The Treasury Department, construng these sectons, hed that the proceeds
of nsurance poces pad to a benefcary whch was a corporaton, were not
e empted and were ncuded as gans from any source whatever.
Under ths rung the appeee was forced to pay a ta of 84,737.95 on the
proceeds of the two poces of 97,947.28. The Commssoner of Interna Rev-
enue reduced ths amount by 29,584.0 n accordance wth the powers con-
ferred upon hm by sectons 327 and 328 of the Revenue ct of 1918 to reduce
te rate of ta aton n cases of unusua hardshp. There remaned, however,
the sum of 55,153.89, whch tu the appeees pad under protest, and for ths,
v. th nterest, the Court of Cams gave |udgment to the appeee.
We thnk the Treasury Department erred n assumng that Congress n-
tended by sectons 233 and 213 to dstngush between ndvdua benefcares
and corporate benefcares n ncudng the proceeds of fe nsurance poces
as wthn gross ncome. We thnk the two sectons have no such purpose,
ton 213 prmary appes ony to the tn ng of ndvduas. The unon
of proceeds of fe nsurance payabe to ndvdua benefcares and to the
estate of the assured was thus ntended to emphasze the e cuson from
ta aton n the hands of ndvduas of a such proceeds and to eave no
oubt of t. The meanng s the same as f the cause had read the proceeds
of fe nsurance sha not be ncuded n gross ncome whether they are pad
to ndvdua I|enefcares or to the estate of the assured. When Congress
Mne to dea wth the gross ncome of corporatons, t made use of secton
213 by reference and grafted t on to 233. It s reasonabe that the purpose of
secton 213 to e cude entrey the proceeds of fe nsurance poces from
ta aton In the case of ndvduas shoud be gven the same effect n adaptng
ts appcaton to corporatons, and that such proceeds shoud be so e cuded
whether by the drecton of the nsured they were to go to specay named
Wnefeares or were to nure to the estate of the nsured.
Nor do we fnd any dffcuty wth the e presson n paragraph (b) whch
e empts proceeds of fe nsurance from gross ncome. The word s used
not to ndcate that they woud be otherwse ncuded n the ncome to be
ed, but ony to mnke cear that the gross does not ncude them.
It s earnesty pressed upon us that proceeds of fe nsurance pad on the
death of the nsured are In fact capta and can not be ta ed as ncome
nnder the s teenth amendment. sner v. Macomber, 252 U. S., 189, 207
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213(b), rt. 74.
114
Merchants Loan and Trust Company v. Umctan ca, 2C 5 U. S.. 509, 515.) We
are not requred to meet ths queston. It a enough to sustan onr construc-
ton of the ct to say that proceeds of a fe nsurance pocy pad on the
death of the nsured are not usuay cassed as Income
Lfe nsurance n such a case as the one hefore us s vad and s not
a wagerng contract. There was certany an nsurabe nterest on the part of
the company n the fe of dde. Mutua Lfe Imurame Company of ec
York v. oard, 115 a., 83 eckey v. Coshocton G. Co., 8 Oho State
Mechancs Natona ank v. Cummns, 72 N. ., 12 Unted Securty Lfe and
Trust Company v. rown, 270 1 eun. State, 204.) Lfe nsurance n such a
case s ke that of fre and marne nsurance, a contract of ndemnty. (Cen-
tra/ ank of Washngton v. ume, 12S U. ., 105.) The beneft to be ganed
by death has no perodcty. It s n substtuton of money vaue for some-
thng permanenty ost ether n a house, a shp, or a fe. ssumng wthout
decdng that Congress coud ca the proceeds of such ndemnty ncome, and
vady ta t as such, we thnk that n vew of the popuar concepton of the
fe nsurance as resutng n a snge addton of a tota sum to the
resources of the benefcary, and not n a perodca return, such a purpose on
ts part shoud be e press, as t certany s not here.
Ths vew s strengthened by the fact that under secton 402 (p. 1007 45 )
of the same revenue aw of 1918, a decedent s estate ta s eved, wth rates
rangng from 1 per centum to 25 per centum on the net estate, whch s made
to ncude (par. f) the amount recevabe by the e ecutor as nsurance under
poces taken out by the decedent upon hs own fe and to the e tent of the
e cess over 40,000 of the amount recevabe by a other benefcares as
nsurance under poces taken out by the decedent upon hs own fe. The
resut of the constructon put by the Government upon sectons 233. 230. and
213 woud be to mpose a doube ta on the proceeds of the two poces n
ths case over and above 40,000. . e., an Income ta and an estate ta . Such
a dupcaton even n an e gent war ta measure s to be avoded uness
requred by e press words.
The |udgment of the Court of Cams s affrmed.
rtce 74: Interest upon State obgatons. 1II-3-130S
I. T. 1910
R NU CT O 1921.
The M Company acqures from tme to tme certan ta e -
empt securtes ssued by muncpates. They are deposted wth
the O Company as trustee and nterest-bearng obgatons are
ssued by the M Company, whch partcpate n the profts and
avas of- certan securtes ssued by muncpates and heretofore
assgned and devered to the O Company, as trustee. The abty
to pay the prncpa and nterest of the certfcates s that of the M
Company, and In case of defaut the assets of the SI Company are
to be offered for sae by the trustee and the certfcate hoders are
to share n the proceeds of the saes.
The nterest on the certfcates s sub|ect to ta .
n e amnaton of the trust agreement between the M Company
and the O Company reveas the foowng facts:
1 e M Company as acqured, or w acqure from tme to tme,
certan u ta e empt securtes ssued by muncpates. s these
securtes are n varous denomnatons, bear nterest at varous rates,
and mature at varous dates, t s mpractcabe to offer them for sae
separatey, and they are from tme to tme deposted wth the 0
Company as trustee. Interest-bearng obgatons are ssued by 1 he
M Company, whch certfy that the bearer (or the regstered owner)
s entted to partcpate n the proceeds and avas of certan secur-
tes ssued by muncpates and heretofore assgned and devered
to the O Company as trustee. The abty to pay the prncpa
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115
14213(b), rt. 83.
and nterest of the certfcates s that of the M Company, and n case
of defaut of such payment the assets of the company, represented y
the ta -e empt securtes, are to be offered for sae by the trustee and
the hoders of the certfcates are to share n the proceeds of such sae.
It can not be sad that the O Company s merey a condut for the
payment of nterest on ta -e empt securtes. The ncome derved
by the hoders of the certfcates, athough t may be pad from the
assets of the obgor, consstng of nterest on ta -e empt securtes,
s nterest on the certfcates ssued by the M Company. Consequenty
such nterest can not be hed to be e empt as nterest upon the ob-
gatons of a State or any potca subdvson thereof
wthn the meanng of secton 213(b) 4 of the Revenue ct of 1921.
The nterest on the certfcates ssued by the M Company s, therefore,
sub|ect to edera ncome ta .
rtce 83: Summary of ta e emptons of 111-12-1428
Lberty bonds and ctory notes, as amended T. D. 35 5
and suppemented by the Revenue ct of
1921.
INCOM T R NU CT O 1021.
Method of computng ta abe nterest for the ta abe year 1923
on Lberty bonds and war oan securtes of the Unted States.
Treasury Dkfabtment,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The nterest accrued durng the ta abe year 1923, through uy
2,1923, on hodngs of Lberty bonds and war oan securtes of the
Unted States not n e cess of the foowng amounts s e empt f mm
ta and shoud be treated as such, whether the return s fed on a
cash bass or on an accrua bass:
5,000 n the aggregate of 4 and 4 per cent Lberty bonds, 41
per cent Treasury bonds, Treasury certfcates of ndebted-
ness, and Treasury (war) savngs certfcates
30.000 of frst second 4 per cent Lberty bonds
125, 000 n the aggregate of 4 and 4 per cent Lberty bonds.
1 0,000 tota possbe e empton through uy 2, 1923.
The nterest accrued durng the ta abe year 1923 subsequent to
uy 2, 1923, on hodngs of Lberty bonds and war oan securtes
of the Unted States not n e cess of the foowng amounts s e -
empt from ta and shoud be treated as such, whether the return s
fed on a cash or on an accrua bass :
5,000 n the aggregate of 4 and 4 per cent Lberty bonds, 4 r
cent Treasury bonds, Treasury certfcates of ndebtedness,
and Treasury (war) savngs certfcates
50,000 In the aggregate of 4 and 4 per cent Lberty bonds.
55,000 tota possbe e empton uy 3, 1923, to December 31, 1923,
Incusve.
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11
Such nterest sha be treated as e empt accordng to the perod
durng whch t accrued, whether the ta payer makes a return on an
accrua or on a cash bass.
Where a ta payer reportng on a cash bass fed a return for a
fsca year endng subsequent to uy 2, 1923, and 1923 nterest pay-
ments become due after the cose of such fsca year, t |v be neces-
sary for ad|ustment to be made n reportng Lberty bond and other
war oan securty nterest n the ne t return of the ta payer on the
bass of e cudng therefrom that porton of the nterest accrued
through uy 2, 1923, whch was ta -e empt as above ndcated, but
was not receved unt after the cose of the ta payer s fsca year
1923.
D. . ar,
Co m m seohe r of In tern a Re venue.
pproved March 14, 1924.
. W. Meon,
Secretary of the Treasury.
rtce 88: Compensaton of State offcers and III-1-1279
empoyees. I. T. 1890
R NU CT O 1921.
occupes no poston created by State aw, s not requred to
take an oath of offce, and s not vested wth authorty as an
offcer of the State or potca subdvson thereof. e s not
sub|ect to the contro of nn offcer of the State or any subdvson
thereof.
ed, the compensaton receved by hm as speca nvestgator
of voatons of the State prohbton aw s sub|ect to ta .
The ta payer s empoyed by a vage as a deputy constabe and
as such s an offcer of the State. In addton he s empoyed as a
speca nvestgator of voatons of the State prohbton aw and
as such receves a certan percentage of a fnes pad nto the treas-
ury of the vage. In case the accused person s e onerated or
found not to be guty, the ta payer receves no compensaton. o
hres hs own men to procure for hm evdence to arrest and convct
voators of the State aw. e s not responsbe to the vage but
works when and n the manner he peases.
It s hed that athough the ta payer acts as speca agent for the
vage n the detecton and convcton of voators of the State pro-
hbton aw, he occupes no poston created by State aw, s not
requred to take the oath of offce, and s not nvested wth authorty
as an offcer of the State or potca subdvson thereof wthn the
meanng of artce 88 of Reguatons 0 2. Inasmuch as he s not
sub|ect to contro of an offcer of the State or vage, but works
ndependenty, he can not be consdered to be an empoyee of a State
or potca subdvson thereof. It s hed, therefore, that the com-
pensaton receved by hm from the vage, as speca nvestgator
of voatons of the State prohbton aw, represents ncome sub-
|ect to ta under the provsons of the Revenue ct of 1921.
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5213(b), rt. 88.
rtce 88: Compensaton of State offcers
and empoyees.
R NU CT O 1921.
111-25-1 1
I. T. 2030
pubc admnstrator of a county n Montana s an offcer of
a potca subdvson of a State and as such s e empt from
edera ncome ta on the compensaton receved from ths source.
No statute provdes for the appontment of a pubc admns-
trator as guardan, and the admnstrator was not n the reguar
and contnuous servce of the county when empoyed n the capac-
ty of guardan.
ees whch the pubc admnstrator receved as guardan of the
estate of an ncompetent person are not e empt from ta even
though he receves ths appontment through hs offce as pubc
admnstrator.
dvce s requested as to whether the compensaton whch the ta -
payer receves as pubc admnstrator of County, State of
Montana, s sub|ect to ncome ta under the Revenue ct of 1921.
rtce T, secton 5, of the consttuton of Montana provdes
for the eecton of a pubc admnstrator n each county and f es
the term of offce at two years. Secton 3073 of the Potca Code
defnes the crcumstances under whch he s to assume the admn-
straton of estates. The foowng sectons of the code reate to
the payment for such servces:
Sec. 3174 (par. 4 41). The pubc admnstrator s aowed to
receve and coect for hs own use, for servces rendered, the same fees
as are aowed e ecutors and admnstrators, as provded n secton 7 33
(277 ) of the Code of Cv Procedure.
Sec. 3092h The pubc admnstrator sha receve as fu com-
pensaton for hs servces, ncudng attorney s fees, a commsson of 15 per
cent of the tota amount of money receved by hm n any estate provded for
n ths act, provded, that n no case sha the compensaton be ess than ( 5)
fve doars.
In vew of these provsons, t s hed that the pubc admnstra-
tor of a county n Montana s an offcer of a potca subdvson
of a State, and, as such, s e empt from edera ncome ta on the
compensaton whch he receves from ths source.
The ta payer aso nqures whether fees whch he receves as
guardan of the estate of an ncompetent person are aso e empt
from ta n vew of the fact that t was through hs offce as pub-
c admnstrator that he secured ths appontment. Inasmuch as
the statutes do not provde for the appontment of pubc admns-
trators as guardans of the estates of ncompetent persons, and
as he s not n the reguar and contnuous servce of the county when
empoyed n ths capacty, such fees are not e empt from edera
ncome ta .
The ta payer serves as attorney for a hghway dstrct, a pot-
ca subdvson of a State. y resouton adopted by the board of
commssoners of sad dstrct, he receves a specfed sum as a re-
taner and such addtona compensaton as may e agreed upon.
The payment of a retaner does not consttute an engagement
for servces n a contnuous sense, but s merey compensaton
pad for the rght of cang upon such attorney from tme to
rtce 88: Compensaton of State offcers
and empoyees.
R NU CT O 1921.
111-2 -1 30
I. T. 203
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5213(b), rt. 88.
118
tme as the need for hs servces arses, for whch servces farther
payments are to be made. That ts s the effect of the contract n
the case of the ta payer s apparent from the further provson
contaned n the resouton to the effect that the ta payer sha
receve such addtona compensaton as may e agreed upon by
the board for servces other than hs ega advce to sad board.
for the makng out of reports and the appearance or
defense n any acton n whch the dstrct may be a party.
. urthermore, In the nstant case, as n the case con-
sdered n Soctor s Opnon 122, the statement of the ta payer
that be was n the contnuous empoy of the commsson s m-
matera where t appears that e was kept n such contnuous
empoy by vrtue of separate undertakngs.
dvce s requested reatve to the ta abty of compensaton re-
ceved by the ta payer as attorney for hghway dstrct, Y
County, Idaho.
It s contended by the ta payer that he s an empoyee of an agency
of a State or potca subdvson thereof, and as such hs compensa-
ton s e empt from edera ta aton. Ths contenton s based on
the rdng contaned n Soctor s Opnon 122 (C. . 5, 107), n
whch an empoyee s defned as one whose dutes consst n rendton
of prescrbed servces and not the accompshment of specfc ob|ects,
and whose servces are contnuous, not occasona or temporary. In
further support of these contentons, the ta payer refers to Offce
Decson 1099 (C. . .5, 113), n whch t was hed that an attorney
empoyed by a county coector durng hs entre term of offce was an
empoyee of a potca subdvson of a State.
The hghway dstrct was created pursuant to the provsons
of chapter 55, Sesson Laws of Idaho, 1911, as amended (ch. f ,
Idaho Comped Statutes, 1919), known as the hghway dstrct aw,
whch authorzes the formaton of hghway dstrcts to be under the
contro of a board of three commssoners known as the hghway
board. Ths statute further provdes that the duty s hereby m-
posed on the hghway board provded for by ths chapter, of m-
pmvng and mantanng the pubc hghways wthn ther dstrcts
. It s apparent, therefore, that tne board n queston s
an agency or nstrumentaty of the State of Idaho for the per-
formance of an essenta governmenta functon that s, the con-
structon and mantenance of hghways wthn the State, Unted
States v. ng County, Washngton, et a., 281 ed., 8 , and cases
cted.)
There s no statutory provson creatng the offce of attorney for
such dstrct. Secton 1507 of the statute, however, provdes n part
that-
Sad board sha have power to appont such nsents, attorneys,
offcers and empoyees as may be requred, and prescrbe ther dutes and t
ther compensaton.
The ta payer has served as attorney for the hghway dstrct
snce 191 , and has submtted a copy of the resouton adopted by
the board of commssoners of ths dstrct, whch, t s stated, s n
effect a renewa of the empoyment heretofore hed by sad ta -
payer. Ths resouton provdes, n part, as foows:
for ds servce to sad dstrct he sha receve doars a month
as a retaner, and sha receve such addtona compensaton as may e
agreed upon between the board and (the tn payer) for the makng
out of reports and the appearance or defense a any acton n whch the
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119
(121.1(b), rt. 88.
dstrct may be a party, and for the preparng of bond proceedngs, contracts
and matters of sneh nature, but that he sha receve no addtona compensa-
ton for ega advce rendered the board and for the preparaton of resoutons
whch are a part of the reguar board proceedngs, e cept such resoutons as
m|rht pertan to bond proceedngs, etc.
On the fncts presented, the coector was advsed that
It s consdered that the present case s to be dstngushed from that pre-
sented In O. D. 1099. In ttat case the coector was the ony person responsbe
for the coecton of ta es by sut and the attorney empoyed by the coector
to prosecute these suts was under hs drecton and contro at a tmes. e
occuped an offce n the county courthouse and w|s requred to be there con-
tnuousy. In the ta payer s case the board of commssoners dd not e ercse
a smar contro of hs tme and of the means to be empoyed by hm n the
prosecuton of hs dutes as attorney. The ta payer moreover dd not devote
any certan porton of hs tme to these servces and t s not hed that he was
n the contnuous empoyment of the dstrct wthn the meanng of Soctor s
Opnon 122. The reaton of empoyer and empoyee dd not e st between
hm and the dstrct. Therefore, he s not e empt from ta on compensaton
receved from the dstrct.
In the case of Lousve, etc., R. . Co. v. Wson (138 U. S., 501,
505), the court, speakng through Mr. ustce rewer, sad:
The terms offcers and empoyees both ake refer to those n reguar
m contnua servce. Wthn the ordnary acceptaton of the terms, one who
engage to render servces In a partcuar transacton s nether an offcer
nor an empoyee. They mpy contnuty of servce, and e cude those em-
poyed for a speca nd snge transacton. n attorney of an ndvdua, re-
raned for a snge sut, Is not hs empoyee. It s true he has engaged to
render servces but hs engagement s rather that of a contractor than of an
empoyee.
It s apparent, therefore, that the reaton ordnary e stng be-
tween attorney and cent s not that of empoyer and empoyee.
There s nothng n the contract of empoyment that s, the resou-
ton of the board of commssoners whch woud change ths ord-
nary reaton n the nstant case, uness the provsons wth respect to
the monthy retaner effects ths resut. ouver s Law Dctonary
defnes a retanng fee as a fee gven to counse on beng consuted
n order to nsure hs further servces. The rue as to retaners, as
makng an engagement for servces, the attorney s to be pad a
reasonabe compensaton for beng so bound. It s compensaton for
the assurance that the cent w have the servces of the attorney n
any proceedngs to whch the retaner reates. ar v. Coumba
reproofnff Co., 77 N. ., 7 2, 7 3.)
It s cear from the foregong that the payment of a retaner does
not consttute an engagement for servces n a contnuous sense, but
s merey compensaton pad for the rght of cang upon such at-
torney from tme to tme as the need for hs servces arses, for
wch servces further payments are to be made. That ths s the
effect of the contract n the nstant case s apparent from the further
provson contaned n the resouton to the effect that the ta payer
sha receve such addtona compensaton as may be agreed upon
by the board for servces other than hs ega advce to sad board,
for the makng out of reports and the appearance or de-
fense n any acton n wrhch the dstrct may be a party, .
urthermore, n the nstant case, as n the case consdered n Soc-
tor s Opnon 122, the statement of the ta payer that he was n the
contnnous empoy of the commsson s mmatera where t appears
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214(a), rt. 101.
120
that he was kept n such contnuous empoy by vrtue of separate
undertakngs.
It necessary foows that the ta payer s not n the contnuous
empoyment of the hghway dstrct wthn the meanng of
Soctor s Opnon 122 and s not e empt from ta on compensaton
receved therefrom.
S CTION 214(a) 1. D DUCTIONS LLOW D:
USIN SS P NS S.
rtce 101: usness e penses. III-2-1295
I. T. 1901
R NU CT O 1018.
mounts advanced by the ma|orty stockhoder of a corporaton
to pay the necessary busness e penses of the corporaton n order
to keep t gong are not deductbe by the stockhoder as busness
e penses, athough he devoted a good part of hs tme to the
affars of the corporaton.
The queston s rased as to whether a ta payer may deduct as
busness e penses sums advanced by hm to pay the busness e penses
of the company, of whch the ta payer s the ma|orty stockhoder.
Shorty after the enactment of the seectve draft ct by ths
country the ta payer purchased a sma weeky, or rather he ap-
pears to have purchased a ma|orty of the stock of the corporaton
whch pubshed the paper. The corporaton was not successfu
n busness durng 1918 and 1919. Its e penses e ceeded ts gross
ncome and from tme to tme the ta payer advanced sums of money
to the corporaton. fter a reorganzaton of the company, the
mnorty stockhoders of the od company beng gven an equa
number of shares n the new company, the ta payer procured the
e ecuton of demand notes by the new corporaton to cover the sum
of hs advances to ts predecessor. Ths was done he states, to
negatve the dea that the sums advanced were contrbutons to the
capta of the corporaton and to prevent the mnorty stockhoders
from sharng pro rata n hs advances n case of hs death. It ap-
pears that the ta payer secured for the corporaton the servces of
an edtor and genera manager, payng therefor out of hs own
pocket, the contract wth the edtor and genera manager beng made
n the ta payer s name rather than n that of the corporaton. The
corporaton appears, however, to be under obgaton to repay the
ta payer. It s aso stated by the ta payer that the empoyees of
the corporaton ook to hm for ther wages and that they woud
hod hm personay responsbe f the corporaton were unabe to
pay.
The ta payer argues that he was engaged n the newspaper bus-
ness, as he devoted the ma|or porton of hs tme to the affars of the
corporaton, and that the sums advanced by hm were e penses n-
curred n carryng on the busness, and are, therefore, aowabe de-
ductons. Whe t mght be sad that the ta payer was n one sense
engaged n busness because of the fact that he devoted a good part
of hs tme to the affars of the corporaton, ths offce s of the opn-
on that e was not so engaged n the sense that he may deduct as
busness e penses the amounts advanced by hm to pay the busness
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121
5214(b) , rt. 101.
e penses of the corporaton. Strcty speakng, the busness to
whch those e penses pertaned was not hs busness but that of the
corporaton, n spte of the fact that he owned the controng nterest
n the stock and that the corporaton was what mght be termed a
one-man company. The recept by the ta payer of demand notes
to cover advances made by hm to the corporaton shows that he
regards these sums nether as gfts nor as contrbutons to the capta
of the corporaton, but as oans to t. s ong as the corporaton s
a gong concern and there s a reasonabe hope that eventuay the
amount of the advances may be repad, t can not be sad that the
amounts were deductbe from the ta payer s gross ncome as bad
debts, whch ths offce regards as the ony theory upon whch the
amounts advanced to the corporaton woud become deductbe from
gross ncome.
rtce 101: usness e penses.
(See I. T. 1905 sec. 215, art. 294.) Premum pad on fe nsur-
ance poces taken out as securty for a oan, where the ender s the
benefcary.
rtce 101: usness e penses. III-4-1327
I. T. 1918
R NU CT O 1921.
fund s estabshed, pursuant to an agreement between manu-
facturers and workers, to provde benefts for such empoyees as
contrbute to It who are nvountary thrown out of empoyment.
It s mantaned through deductons from the weeky wages of such
empoyees and by contrbutons made by the empoyers.
The empoyer shoud report on orm 1090 the amount earned by
each empoyee wthout deducton for the amount contrbuted to the
fund.
The empoyee shoud report hs entre earnngs n hs return and
may not deduct the amount contrbuted to the fund.
The ta payer s a party to a nonempoyment agreement entered
nto between an assocaton of manufacturers and an empoyees asso-
caton under the terms of whch a fund s estabshed to provde
benefts for such empoyees as contrbute to t who are nvountary
thrown out of empoyment because of ack of work n a certan n-
dustry. The fund s mantaned through deductons from the weeky
wage of the empoyees ratfyng the agreement and by contrbutons
n equvaent sums made by the empoyers.
ed, that the empoyer shoud report on orm 1099 the amount
earned by the empoyee wthout deducton for the amount contrbuted
by the empoyee to the fund.
The empoyee shoud report the entre amount earned n hs nd-
vdua return. The amount whch he has contrbuted to the fund
may not be camed as a deducton from hs earnngs, as t does not
represent an ordnary and necessary busness e pense.
ny benefts pad to the empoyee from the fund n e cess of the
amounts whch e has contrbuted w consttute ta abe ncome to
hm n the year of ther recept.
4177 24 9
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214(a), rt. 101.
122
rtce 101: usness e penses.
( so Secton 214(a)8, rtce 1 1.)
III-9-1391
I. T. 1933
R NU CT O 1021.
awyer may deduct hk a busness e pense subscrptons to
coecton ugenees, advertsng, md the coet of upkeep an opera-
ton of an automobe based upon the proporton of tme t was
used for busness. Deprecaton of te automobe mny aso be
taken as a deducton on same bass.
states that he carres hs curd n newspapers, as attorney at aw
that he aso sts hs name wth credt and coectng agences, whch
s a subscrpton each year but n reaty s ony a form of adverts-
ng. If he has a coecton, he ooks n the drectory furnshed by
them and sends out coectons to an attorney sted theren. In
turn, f an attorney sted n ths drectory wants a coecton made
n hs ocaty, he sends t to hm. It s a busness medum. It
produces busness and the tem s a cost aganst the busness t gets
through ths channe. e aso states that e owns two automobes.
One e uses for busness purposes ony and the other he uses a part
of the tme for busness. The charge for gas, o, and repars to the
atter car s ess than one-haf of hs tota automobe e penses. No
deprecaton s camed. e ves 9 mes from hs county seat and
1 mes from an ad|onng county seat. Ths automobe s used
n gong to and from courts and aso gong to court houses procurng
nformaton n hs practce for cents. e goes to one or the other
of the above paces practca 7 every week day n the year. Wthout
ths e pense of a car he coud not produce the ncome, as tte work
s a producng factor n hs busness.
ed, that the tem of advertsng and subscrptons to coecton
agences s an aowabe deducton from gross ncome as ordnary and
necessary busness e pense.
It s aso hed that s entted to deduct as ordnary and neces-
sary busness e pense the cost of upkeep and operatons of hs auto-
mobes, based upon the proporton of tme the automobes were
used for strcty busness purposes as dstngushed from use for
purposes of recreaton or peasure, together wth a reasonabe aow-
ance for deprecaton. Ihe deprecaton aowance for the auto-
mobes shoud be computed upon a proportonate bass as n the
case of the cost of upkeep and operaton. The use of the automo-
bes n gong from hs home to hs offce and returnng s not to be
cassed as use n hs busness or professon.
rtce 101: usness e penses. III-10-1399
The argest Item of e pense of a cub of Cavary offcer s for
tbe empoyment of stabe men to care for the offcers mounts,
thereby permttng the offcers to devote more tme to rdng. The
funds of the cub are aso used for obtanng terature, maps. etc..
for the use of the members, aud for occasona entertanment,
fora offerngs, etc.
Dues pad to the cub are not deductbe as a busness e pense.
The ta payer s an offcer of the Natona Guard. In 192- a
number of Cavary offcers of the Natona Guard n the cty of Y
I.T. 193
R NU CT O 1921.
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214(a), rt. 101.
organzed a chb,, and such offcers pay 5 per cent of the compensaton
receved by them from the edera Government as dues to the cub
the of the argest tems of e pense of the cub s for the empoyment
of stabe men to cadre for the offcer mountsy tereby permttng the
offcers to devote more tme to rdng. The funds of the cub are
aso used for obtanng, terature, maps, etc., for the use of the mem-
bers, and for occasona entertanment, fora, offerngs, etc. Inqury
s made whether the dues pad to the cub are deductbe.
The dues n queston f deductbe must consttute an ordnary
and necessary e pense pad or ncurred n connecton wth the per-
formance of the ta payer s dutes as an offcer of the Natona Guard.
The facts submtted as to the benefts arsng front membershp n
the cub do not |ustfy the concuson that the membershp dues pad
to the cub represent an ordnary and necessary busness e pense
wthn the meanng of secton 214(a) 1 of the Revenue ct of 1921.
It s hed, therefore, that such dues are not deductbe.
rtce 101: usness e penses. 111-14-14 7
I. T. 19 4
R NU CT Off 10 21.
Donatons made by certan members of a chamber of commerce
for the purpose of rasng an amount to pay ts ndebtedness n-
cned n e cess of the amount of dues are deductbe as busness
e penses, provded the membershp of the donors s empoyed as a
means of advancng ther busness nterests.
rtce 101: usness e penses. 111-15-1497
L T. 1975
mOT UCT CT O 1 21L
Subscrptons by members of a commerca cub to a fund to be
used for procurng a rght of way for a raroad through s cty
are hed not to be ordnary and necessary busness e penses n-
curred n the mantenance and- operaton of the busness carred
on by the subscrbers and are , therefore, not deductbe.
Members of the I Commerca Cub and other ctzens of te cty
of Y, County, n the State of , subscrbed money and rea estate
to a fund requred by the O Company as a condton of ts agree-
ment to construct and operate a raroad through the cty of Y to the
cty of Z fn sad State of the fund to be used to defray the e -
penses of procurng the rght of way for the raroad through
Comty ana ad|onng terrtory. Such part of the fund remanng
after the rght.of way had been acqured w be turned over to the
corporaton above named upon the competon of tue raroad.
It s contended that the subscrptons consttuted1 a egtmate pro-
moton and advertsng e pense for the beneft of the busness earned
on by the respectve subscrbers.
Secton 214 of the Revenue ct of 192:1 provdes n part as foows
(a) That n- computng net ncome there sha be aowed as deductons:
(1) ( e ordnary, and necessary e penses pad or ncurred durng the
trtaWe year In carryng cm any trade or busness, .
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2 (a), rt. 101.
124
Secton 234 provdes kewse for the deducton of busness e -
penses by corporatons.
The e penses whch are deductbe under the sectons of the statute
above referred to are those ncurred drecty n the mantenance and
operaton of the ta payer s busness, and not a of those whch may
be benefca and even necessary n the broader sense. Contrbutons
whch egtmatey represent t consderaton for a beneft foowng
drecty to the contrbutng corporaton as an ncdent of ts busness
are aowabe deductons as a busness e pense. The amounts sub-
scrbed for the purpose stated are not deemed to be ordnary and
necessary e penses ncurred drecty n the mantenance and opera-
ton of the busness carred on by the subscrbers n queston wthn
the meanng of the statute referred to, nor do they represent a con-
sderaton for a beneft foowng drecty to corporaton ta payers
subscrbng to the fund.
It s therefore hed that the subscrptons referred to are not de-
ductbe n computng net ncome under the Revenue ct of 1921.
rtce 101: usness e penses. III-7-1514
( so Secton 223, rtce 401.) I. T. 1983
R NU CTS O 1018 ND 1021.
ta payer accepts bets outsde of censed race tracks and
under the statutes of the State of entucky hs busness s ega.
ed, the ta payer s not entted to cam deductons on ac-
count of e penses Incurred n carryng on an Iega trade or
busness under secton 214(a) 1 of the cts and he shoud fe
returns of ncome for a years even though n some of them hs
osses and e penses e ceeded hs wnnngs.
operated a handbook n the State of entucky and durng the
years 1918 to 1921, ncusve, fed no returns of ncome, camng
that hs osses e ceeded hs earnngs n connecton wth bets taken
on horse races.
Under the statutes of the State of entucky bets made wthn the
ncosures of the censed race tracks through par-mutua machnes
are not n voaton of the aw and a bets made esewhere n con-
necton wth races are ega and n voaton of the gambng
aws. The ta payer accepts bets outsde of censed race tracks
and hs busness s, therefore, ega under the entucky statutes.
The deductons from gross ncome aowabe on account of osses
are specfed n secton 214 of both the 1918 ct and the 1921 ct.
Subdvsons (a), (4), (5), and ( ) permt such deductons f not
compensated for by nsurance or otherwse, when ncurred n trade
or busness and n any transacton entered nto for proft, though
not connected wth the trade or busness, and when not con-
nected wth the trade or busness f arsng from fres,
storms, shpwreck . rtce 141 of Reguatons 45 pro-
vdes that osses n ega transactons are, not deductbe under the
Revenue ct of 1918. No dstncton s made between transactons
connected wth a trade or busness and those that are not. It s now
urged by the ta payer that ths rue shoud be confned to transac-
tons entered nto for proft but not connected wth the trade or
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125
214(a), rt, 105.
busness of the ta payer, many on the grounds, frst, that the
statute does not specfcay e cude from ts purvew ega trades
or busness second, that t s nconsstent to ta the gans from an
ega busness and refuse to permt deductons therefrom.
Whe such phrases as ega trade, unawfu busness, etc.,
have been gven |udca sancton, no court, so far, has ever hed that
the modfed words trade or busness are to be taken as compre-
hendng other than awfu occupatons. In ea v. eck (2 ed.
Cas., 1111) t s ntmated that the word trade mpes honest
and awfu occupaton. In the case of Wasch v. Ca (32 Ws., 159,
1 1), the court hed drecty on the pont as foows:
Trade or busness, as used In Tay. St., 1550, secton 32, e empton from
e ecuton, the stock n trade, etc., of any person used and kept for the purpose
of carryng on hs trade or busness means awfu trade or busness and hence
does not appy to a person engaged In the sae of nto catng quors wthout
a cense ( 7a cft v. Ca, 32 Ws., 159, 101), and wth much pertnence to the
present nqury It was sad n the case of Ode v. Cty of tanta (97 Ga., 70,
25 S. ., 173) that the keepng of an estabshment for the purpose of enabng
persons to bet on horse races can not be characterzed as a busness.
In the case of Mente v. mer (2 ed., 1 1) t was sad n con-
strung the 1913 Revenue ct, whch aowed deductons for osses
ony when ncurred n the actua busness of the ta payer, ta aws
are not requred to be perfect, or even consstent. It s thought no
greater ntendment on account of nconsstency shoud be taken n
favor of a ta payer engaged n a busness prohbted by the State
than of one whose deducton was camed as the resut of a perfecty
awfu transacton.
Inasmuch as ordnary the aw does not compe the fufment of
an ega contract, the so-caed osses of the ta payer are not n-
capabe of beng ooked at as a mere vountary deprvaton and not
such osses as are cognzabe n aw. See Shafer v. Senseman (Pa.)
(17 tL. 350) Sampson v. Shaw (101 Mass., 145: 3 m. Rep., 327)
ThomgU v. O Rear ( a.) (31 L. R. ., 792). The hodng of the
entucky court ( Uas v GUI, 92 y., 573 18 S. ., 45 ), to the
effect that a professona poo seer on horse races who, athough
he may not recover n an ndependent acton money ost n hs poo
room, s permtted to offset such amount n an acton to recover money
ost to hm, can have no effect on the present ssue. Such decsons
are soey drected toward a determnaton of the actua oss between
the partes. Rather than decarng a pocy favorabe to the profes-
sona gamber, they emphasze the atttude of the State aganst the
egaty of the busness.
It s hed that these reasons woud operate to dsaow deductons
on account of e penses ncurred n carryng on an ega trade or
busness under secton 214(a) 1 of the cts therefore, the ta payer
shoud fe returns of ncome for a years, even though n some of
them hs osses and e penses e ceeded hs wnnngs.
rtce 105: Compensaton for persona servces.
(See . R. R. 4972 sec. 32 , art. 840.) mounts hed to be saary
payments.
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214(a), rt. 105. 12
rtce 105: Compensaton for persona III-5-1341
servces. . . R. 4831
R T 3TT CT O 1817.
ed, that the addtona compensaton actuay pad or credted
to s account durng the year 1017 pursuant to contracts way be
aowed as a deducton for that year.
The queston of whether was, under n strct Interpretaton
ot the terms-of the contracts, egay entted to receve 20 per
cent of the nn s net prutts for the year 1 17 determned wth-
out the deducton of ncome and prutts ta es for that year or 20
per cent of the profts determned after deductng such ta es s,
n the opnon of the Commttee, mmatera.
The M Company has appeaed from the acton of the Income Ta
Unt n dsaowng T. doars of a tota deducton of 29.09
doars camed for the year 1917 on account of addtona compen-
saton pad to ts manager for that year.
The records n the case show that under the terms of a certan
contract of empoyment entered nto n ugust, 1910| a copy of
whch has been submtted, agreed to serve as genera manager
and buyer for the appeant company s predecessor, the N Company,
at an annua saary of 25a doars per annum pus 20 per cent of
the net profts of the busness, t beng provded that
Sad twenty (20) per centum nterest n the net profts sha be cacuated
ony after frst deductng a the necessary and reasonabe e penses of every
knd, nature and descrpton, necessary n the conduct and mantenance of
e sad busness and a osses of every knd ard nature that may be pad
out or sustaned theren.
In pr. 1913, ths contract was atered, the M Company beng
named as party of the frst part nstead of the N Company, so as
to provde among other thngs that the appeant company woud
hod n ts treasury for the beneft of 10 / shares of ts capta
stock of the par vaue of 125 doars and was to pay for same
y permttng and aowng the party of the frst part to retan a sum
equa to twenty (20) per cent of the net profts erf the busness each year,
and when the party of the frst part sha hare n ts poRfpssIoa to the credt
of the party of the second part for the purposes aforesad the sum of 125,1
doars, then the sad shares of stock for that amount sha mmedatey e-
ssued to the party of the second part, and thereupon hs rght, tte, and
nterest n and to the sad 20 per cent of the not profts of the busness sha
mmedatey cease, termnate, and come to an end.
s thus provded, was to contnue to receve, n addton to hs
annua saary of 25a doars, 20 per cent of the profts of the appe-
ant company s busness, but such 20 per cent of profts was to be
paced to hs credt as part payment for the sad 10y shares of capta
stock he had agreed to purchase.
s shown by the books of the appeant company, the net profts
of ts busness for the year 1917 amounted to 145.4 ar doars, and 20
per cent of ths amount, or 29.09. doars, was paced to the credt
of as part pa3rment on the sad 10 shares of stock. In renderng
ts ta return for the year 1917, the appeant company camed a
deducton of 29.09./- doars as addtona compensaton pad to for
servces rendered.
Upon fna ad|ustment of the sad return by the Income Ta Unt,
the sad company s ta abe net ncome was determned to be 109.25.
doars, and ts tota ta abty for that year 1 doars, and t
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127
214(s), rt. 105.
was hed n effect by the sad Unt that nasmuch as under the
terms of the contracts referred to above s 20 per cent nterest n
the net profts was to be cacuated ony after deductng a the
necessary and reasonabe e penses of every knd, nature and descrp-
ton the company s tota ta abty for the year 1917,
amountng to 1a: doars, shoud be deducted from the ad|usted ta -
abe net ncome of 1 9.25as doars and 20 per cent of the dfference be-
tween these two amounts, or 21. 4a doars, aowed the appeant
company as a deducton for the sad year on account of addtona
compensaton pad to and the dfference between ths atter amount
and 29.09a doars, the amount actuay credted to hs account as
addtona compensaton and camed as a deducton for the year
1917, or 7.44a doars, dsaowed as an amount pad to n e cess of
the amount egay due hm under the terms of the sad contracts.
fter gvng carefu consderaton to a the evdence presented both
oray and n wrtng, the Commttee concudes that the tota amount
of addtona compensaton pad or credted to s account for and
durng the year 1917 shoud be aowed as a deducton for that year.
The queston of whether was, under a strct nterpretaton of the
terms of the sad contracts, egay entted to receve 20 per cent of
the frm s net profts for the year 1917 determned wthout the deduc-
ton of ncome and profts ta es for that year or 20 per cent of the
profts determned after deductng such ta es s, n the opnon of the
Commttee, mmatera. The fact remans that apparenty n ac-
cordance wth the actua nterpretaton of a the contractng partes
of the terms of the sad contracts reatng to the payment of the 20
per cent proft, there was actuay pad or paced to s credt, dur-
ng the year 1917, 29.09a doars as addtona compensaton for serv-
ces rendered durng that year, and, so far as ths Commttee has
been abe to earn, no notce has been gven that the sad credt of
29.09a- doars has or w be reduced n amount, and t s not camed
by the Income Ta Unt, nor does t appear that s saary for 25a
doars pus the addtona aowance of 29.09a doars s an e cessve
aowance for the servces rendered by hm durng 1917.
It s the beef of the Commttee that whe the provsons of the
Revenue ct of 191G as amended by the Revenue ct of 1917 must
be foowed n determnng statutory net ncome for 1917, such pro-
vsons need not necessary be foowed by a ta payer n determn-
ng the net ncome upon whch addtona compensaton, such as was
provded for n the above referred to contracts, s to be computed.
The method of compuaton adopted by the appeant ta payer n
the nstant case was apparenty approved by the empoyees who
receved the addtona compensaton n queston. The appeant
company s 19-1 ncome ta pad durng 1917 was apparenty con-
sdered a 1917 e pense when such computaton was made and the
1917 ta w undoubtedy be consdered a 1918 e pense tem when
computaton of the addtona payment for the atter year s made.
The amount of addtona compensaton, 29.09a doars, was actuay
paced to s credt durng 1917 and st remans to hs credt as a
charge on the books of the appeant company for the sad year.
In vew of the foregong, the Commttee recommends- that te
acton of the Income Ta Unt n dsaowng 7.44a1 doar of a tota
deducton of 29S)9 doars, camed by the appeant company for
the year 1017, be reversed.
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214(a), rt. 105
128
rtce 105: Compensaton for persona III-9-1392
servces. . It. R. 087
R NU CT O 1917.
partnershp Is permtted to deduct for the ta abe year 1017
a reasonabe amount for partners saares for servces actuay
rendered, even though no agreement for the payment thereof was
n e stence durng that year and no payments of saares made.
The M Company, a partnershp, as appeaed from the acton of
the Income Ta Unt n dsaowng the sad company s cam for a
saary aowance of 8.8a doars for the year 1917.
The records n the case show that the appeant company camed
no deductons for saary when renderng ts ncome ta return for
the year 1917 that ths return was nvestgated n anuary, 1920, by
a revenue agent, who made no aowance for saares, and agan n
March, 1921, by a second revenue agent, who aso made no aowance
for saares, and t does not appear from the records that the sad
partnershp requested of ether of these agents a saary aowance
for the sad year, and nether does t appear that the frm pad sa-
ares for that year to any of ts members, nor that any amount of
saary was accrued upon the books for that year as a credt to any
member s account. On November , 1922, neary fve years after
the cose of 1917, the partnershp fed an amended return, and cam
for refund was aso fed based upon a statement that saares n the
foowng amounts shoud be aowed for the year 1917, as though
pad to the partnershp members:
Doars.
2.75a
2.75
C 1.1 a
D LI
1.1
8. 8
The Income Ta Unt n ts memorandum of transmtta states
that the cam of the M Company
Was re|ected for the reason that the deducton for saares camed Is e -
cessve, beng out of a proporton to the net ncome, gross ncome, and nvested
capta. There s aso no evdence on fe concernng the nature of the servces
rendered by the partners and the porton of tme devoted by each to the partner-
shp busness. ad such evdence been submtted t woud no doubt dscose
the fact that servces were not rendered by a the partners.
In an affdavt dated September , 1923, prepared by the appe-
ant frm s attorney, are statements whch ndcate that not ony dd
a of the members of the partnershp of the M Company devote a
consderabe porton of ther tme and attenton to the frm s affars
durng the year 1917, but that such servces were of consderabe
vaue, whch as a matter of equty shoud be recognzed by the aow-
ance of a saary deducton for that year.
Secton 5(a) of the Revenue ct of 191 , as amended by the Reve-
nue ct of 1917, provdes that
or the purposes of the ta there sha be aowed as deductons rst, the
necessary e penses actuay pad n carryng on any busness or trade.
No amount of saary was pad by the appeant frm durng the
year 1917 to any of ts members nor has any amount been pad to
such members snce the cose of that year as saary for that yeas -
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129
214(a), rt. 105.
The appeant company s attorney bases the cam for a saary
aowance on paragraph 2 of artce 32 of Reguatons 41, whch reads
as foows:
Wth respect to any perod prfor to March 1, 1918, regardess of whether a
prevous agreement has been made as to saares or compensaton, a smar
deducton w be aowed for servces actuay rendered.
The Ta Revewers mnutes whch preceded Reguatons 41 con-
tan one paragraph whch reads as foows:
Deductons aowed for saares to partners: To be deductbe as an e pense,
the saares of the members of a partnershp havng an nvested capta, for
perods pror to March 1, 1918, when no partnershp agreement respectng such
saares was actuay made n advance, must represent a far compensaton for
servce actuay rendered, such as mght reasonaby have been agreed upon at
the begnnng of the ta abe year havng regard to the pror earnngs of the
busness as a f ed stpend or drawng account. Such saares sha n no
case e ceed the compensaton customary pad for smar servces under ke
responsbtes by corporatons engaged n ke or smar trades or busnesses
and saary arrangements whch am at a dvson of the appro mate profts
can not be aowed.
It s understood by the Commttee that many cases were setted
by the Income Ta Unt and fed offcers on the bass of ths para-
graph of the sad mnutes and undoubtedy the framers of Regua-
tons 41 took nto consderaton the ntent and purpose of such
mnutes when draftng artce 32 of the sad reguatons, whch
ntent and purpose was to recognze the unfortunate and nequta-
be poston n whch many partnershps had been paced by the
advent of the e cess-profts ta n 1917 wthout havng had any pre-
vous ncome ta hstory or e perence to gude them n the ad|ust-
ment of ther affars so as to secure equtabe saary deductons. It
s further understood by the Commttee that t has been the practce
of the Income Ta Unt to aow a reasonabe amount for partners
saares for the year 1917, even though none were actuay pad and
no agreement e sted for the payment thereof.
It s the opnon of the Commttee that the ntent of the second
paragraph of artce 32 of Reguatons 41, as shown by ts hstory,
and by artce 39 of the same reguatons, was to permt partnershps
to deduct for the ta year 1917 a reasonabe amount for partners
saares for servces actuay rendered, even though no agreement for
the payment thereof was n e stence durng the sad year and no
payments of saares made. Such beng the case, t ony remans for
the Commttee to determne what the 1917 servces of the members ot
the partnershp of the M Company were reasonaby worth.
rom the report dated pr , 1921, of the revenue agent who n-
vestgated the return of the appeant partnershp t appears that
was nterested n and devoted a part of hs tme and attenton n
1917 to three partnershps other than the M Company and that he
was nterested: n varous ndvdua enterprses, operatng severa
ranches, easng ands, etc. was aso nterested n and devoted a
porton of hs tme and attenton to two other partnershps durng
the sad year.
The sad agent reported that the ta return, orm 10 5, rendered
by the M Company for 1917 showed a net ncome of 21.7 a doars
and an nvested capta of 93. 9 doars, but upon nvestgaton tha
was found to ncude , . .
besdes .the Income of the M Company, the profts of a number of ranches and
commssons whch accrued personay to and .
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5214(a) , rt. 105.1
s determned by the agent, the net ncome of the M Company
for 1017 was 13.2 8 doars and ts nvested capta 4 47as doars.
The nterest of each partner and the amount of saary now camed
for each as an aowabe deducton are as foows:
Interest.
Saary
damed.
Interest.
Saary
camed.
Doar).
7S
1
Doar).
Us
Sz:::::::::::::::::: ::::::
S/
1 D
e
2t75
U
e:: ::::::::::::::::: :.
2/18
L.U
8. St
It s evdent from the above that the saary aowances are camed
on the bass of each member s partnershp nterest and not on the
bass of servces actuay rendered, and that the deducton of the
tota saary aowance camed from the net ncome of 13.23a doars
woud not eave an amount equa to a return of 10 per cent on capta
nvested n the amount of 48.47a doars, whe n the opnon of the
Commttee a return of even 10 per cent ou the amount nvested n a
busLess whch s as sub|ect to oss as s the busness engaged n by
the M Company, from crop faures, oss of or damage to pershabe
goods n transt, market fuctuatons abor troubes, etc s not suff-
cent. It s stated n affdavts fed that the servces of were we
worth 3a doars or more per annum to any concern engaged n the
rasng and marketng of frut and vegetabes, yet t s not the beef
of the Commttee that hs servces, dvded as they were between four
partnershps and varous ndvdua enterprses, were worth 2.75as
doars per annum to the M Company. That he s a man of consd-
erabe abty and ong e perence n the sad busness s not to be
doubted, but t appea s equay free from doubt that a concern en-
gaged n the same busness as was the M. Company, wth an nvested
capta amountng to 48.47a doars- and aways e posed to the poss-
bty of arge osses arsng from causes beyond ts contro, woud
not have pad to an annua saary of 2.75a doars for ony a por-
ton of hs tme and attenton and addtona saares amountng to
05a doars to four other empoyees, or a tota of 8.8a doars from
a net ncome of but 13.23a doars. It s cear from the evdence sub-
mtted that s servces were not regarded by those who have e e-
cuted the affdavts as beng worth as much as those of , and hs
tme and attenton were kewse dvded between varous enter-
prses.
fter carefuy revewng the evdence submtted as to the dutes
performed and servces rendered by the appeant partnershp s fve
members, the Commttee concudes that the faowmg saary deduc-
tons shoud be aowed for 1917:
Doars.
Or a tota of 5 S2|f
In vew of the foregong, the Commttee recommends that the M
Company be aowed for the year 1917 a tota saary deducton of
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131
2M(a), rt. 105.
5.82a doars, and that proper ad|ustments wth respect to the n-
dvdua returns rendered by the members of the sad partnershp
be made n accordance wth ths recommendaton.
Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 105: Compensaton for persona 111-14-14 8
servces. . R, R. 7047
R NU CT O 1018.
ddtona saares authorzed and pad offcers In 1017 for serv-
ces performed a 1910, pursuant to an understandng had n 101
that addtona saares for that year woud be pad f the com-
pany s then prosperty contnued, may not be aowed as a deduc-
ton for 1017 under te rue ad down n T. . M. 80 (C. . 1,
10 ). . R. . 232 (C. . 3. 142), . R. R. 519 (C. . 4, 134), and
L T. 1350 (C. . 1-1, 131) dstngushed.
The Commttee has consdered the appea of the M Company from
adverse rungs of the Income Ta Unt n connecton wth the ssues
set forth beow.
The ssue presented to the Commttee s whether addtona offcers
saares of doars, frst authorzed and pad n 1917 but for servces
performed n 191 pursuant to an understandng had n 1910 that
addtona saares for that year woud be pad f the company s then
prosperty contnued, consttute an aowabe deducton for the year
1917.
It s the Commttee s opnon that deducton as a busness e pense
n 1917 of the addtona saares pad n 1917 for 191 servces can
not be aowed under the rue adopted by the Department n T. . M.
S . The ta payer nssts that T. . M. 8 has been vrtuay over-
rued by subsequent decsons of the ureau and n that connecton
refers to . R. R. 232, . R. R. 519, and I. T. 1350. The payment n
queston n . R. R. 232 was made pursuant to an agreement that t
shoud be pad when the recpents succeeded n makng a success
of the busness. In other words, t was not pad or payabe because
of ther efforts to make a success of the busness but for ther accom-
pshment of that resut, and t woud seem that the resut was not
consdered as fnay accompshed unt the year n whch the pay-
ment was made. The aowance of the payment n queston n I. T.
1350 may be e paned smary, snce t does not appear that the
contract there nvoved was competed pror to the year n whch the
bonuses were pad. Wth reference to . R. R. 519, the facts n that
case were of a very speca nature. or the present purpose t s
suffcent to say that the recommendaton was not ntended to over-
rue T. . M. 8 (whch memorandum was referred to wthout ad-
verse comment) and has not been consdered n the ureau as havng
resuted n the vrtua overrung of that memorandum n respect of
tther the year of servces performed or the year of payment.
Chares D. ame,
CTawman Commttee cm ppeas and Revew.
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5214(a) , rt. 107.
,132
rtce 10 : Treatment of e cessve compensaton.
(See . R. R. 242 sec. 201, art. 1541.) Treatment as dvdend
by corporaton when not n proporton to stock hodngs of em-
Under the stock bonus pan operated by the M Company, where
stock bonuses are awarded, a stock certfcate for the number of
shares aotted to each benefcary In Its empoy Is ssued In hs
name and devered to the bonus custodan, who hods t for the
benefcary for fve years. The bonus custodan s to debt each
benefcary wth the pur vaue of the stock, and credt hm on the
ast day of each month wth of ts par vaue. If the empoyee
eaves the corporaton s servce, a certfcate of stock, representng
the whoe .shares of stock whch hs credts w buy, s devered
to hm free from restrctons f the empoyee des, the certfcate
or certfcates representng the tota bonuses awarded hm s to be
devered to hs e ecutor or admnstrator.
onus stock awarded to an empoyee under ths pan does not
become hs at the tme of the award tte does not pass unt
the servces n compensaton therefor are performed. urther, n
the ght of the State consttutona provson, such stock, f ssued
for servces, may ony be ssued egay for servces aready per-
formed. or these reasons, t s hed that the bonus stock Is n
fact ssued to the empoyee for such servces as are performed be-
fore ts devery wthout restrcton and after the award that the
empoyee does not become the owner of the partcuar shares
awarded hm at the tme of the award but ony at the tme he
becomes entted to a devery of the shares wthout restrcton.
In the event that ts books are kept on the accrua bass, the
corporaton may take as a deducton for ncome ta purposes
the amounts actuay credted to the empoyee s accounts by the
bonus custodan at the tme such credts are made (O. D. 124,
C. . 1, 107) provded, of course, that such amounts are n fact
credted n good fath as an addtona reasonabe compensaton for
servces rendered (art. 107, eg. 45).
The corporaton shoud make an ad|ustment n ts accounts at
the tme the stock s devered so that the net deductons for com-
pensaton pad to the empoyee n the form of stock sha equa
ts market vaue at the date t s avaabe for devery to the
empoyee.
Inasmuch as the tte to n partcuar award of stock does not
pass to the empoyee unt the credts on the empoyee s account
equa the debts, dvdends pad to the empoyee pror to such
tme are addtona compensaton to such empoyee (sub|ect to
the quafcatons of art. 107, eg. 45). ence they are deductbe
as such by the corporaton when made avaabe for payment to
the empoyee (O. L . 7 3, 0. . 4, 70 O. D. 791, C. . 4, 7 ).
Specfc rungs are requested wth reference to the stock bonus
pan of the M corporaton, as operated n 1918 and 1919, on the fo-
owng ponts:
1. Shoud the corporaton be permtted to take as a deducton (a)
the fu amount of the bonus n the year for whch t was voted, or
(b) shoud t be requred to take the deducton n the year n whch
the empoyees accounts are credted by the bonus custodan
2. Shoud the amount deductbe, f aowed n the year for whch
voted, be computed (a) on a bass of the amount credted to the
rtce 107: onuses to empovees.
( so Secton 213(a), rte e 32.)
III-1-12S0
I. T. 1891
R NU CT O 1018.
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133
214(a), rt. 107.
bonus fund, or ( ) on a bass of the par vaue of the stock awarded,
or (c) on a bass of the market vaue of the stock as at the date
warded, or (d) on a bass of the market vaue of the stock as at
the ast day of the year for whch awarded
3. Shoud the amount deductbe, f aowed as a deducton n the
year n whch the empoyees accounts are credted by the bonus
custodan, be computed (a) on a bass of the par vaue of the stock
awarded, or (b) on a bass of the market vaue of the stock as at the
date awarded, or (c) on a bass of the market vaue of the stock as
at the date the empoyees accounts are credted by the bonus cus-
todan, or (d) on a bass of the amount credted to the bonus fund,
or (e) on a bass of the market vaue of the stock as at the ast day of
the year for whch awarded
4. If t s decded that the stock was ssued as t was accrued to
the empoyees by the bonus custodan, woud the dvdends pad on
the unssued porton be aowabe deductons n the years n whch
pad
The M corporaton adopted what was termed a bonus pan for
dstrbutng stock to empoyees. y the terms of ths pan a bonus
fund s created, to be nvested n stock of the corporaton, to whch
the corporaton agrees to credt an amount equa to 5y per cent of
ts net earnngs, after deductng 3y per cent on the capta used n
the busness. Provsons are made for cassfyng empoyees each
year, begnnng , accordng to mert, for the purposes of the
bonus award. Wthn 0 days thereafter the fnance commttee sha
determne what amount of the bonus fund shoud be dstrbuted, the
baance to be carred forward from year to year. When stock bo-
nuses are awarded a stock certfcate for the number of shares aotted
to each benefcary sha be ssued n hs name, and devered to the
bonus custodan apponted by the fnance commttee, who s drected
to hod t for the benefcary for fve years from the precedng an-
uary 1, unt fnay devered or setted for. The bonus custodan
sha procure from the benefcary an rrevocabe power of attorney
to be used to retransfer the stock n the event that he eaves the
corporaton s servce.
The bonus custodan s to debt each benefcary wth the par vaue
of the stock, and credt hm on the ast day of each month wth
of ts par vaue. If the empoyee eaves the corporaton s servce, a
certfcate of stock representng the whoe shares of stock whch hs
credts w buy s devered to hm free from restrctons f the
empoyee des, the certfcate or certfcates representng the tota
bonuses awarded hm s to be devered to hs e ecutor or admn-
strator.
The rghts of the benefcary are thus set forth:
10. Sub|ect to the rghts of the bonus custodan to retan possesson of the
stock certfcate for the perod of fve years from the 1st day of anuary In
the year n whch the award s made, or to transfer the stock as heren provded,
an award sha vest the benefcary wth a the rghts of a stockhoder n the
stock awarded, ncudng the rght to vote and to receve dvdends thereon,
but e ceptng, however, the rght to se, assgn, or pedge hs nterest In the
Mock,
It s further provded that, athough the corporaton may modfy
or annu the bonus pan, any bonus once granted sha not be an-
nued wthout the benefcary s consent.
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214( ), rt. 107.
I.
In order to ascertan the consequences of the bonus pan for n-
come ta purposes, t s essenta to determne, frst, the ega nature
of the award of bonus stock second, the rghts and abtes of the
corporaton and ts empoyees, respectvey, wth reference to the
bonus fund. The announcement of the pan ssued by the corporaton
states:
It s hoped thereby not ony to compensate servces rendered, but as to
encourage further efforts by makng ts empoyees partners the corporaton s
prosperty.
Stock mght, of course, be awarded ether (I) as a gratuty by
the corporaton to the empoyee or (2) as consderaton for servces.
Snce the stock s not actuay devered to the empoyee at the tme
of the award, and snce he has no rght to ts possesson unt the
competon of a term of servce for the corporaton, t woud seem I
that there s no e ecuted gft of the stock at the tme the award s
made. (Wston Contracts, sec. 440 and see Mueer wmce Co.
v. omes (1921), 175 Ws., 518 185 N. W., 41.) On the other hand,
the provsons whereby an award once made s not to be annued
wthout the empoyees consent whereby the empoyee s entted
at the tme he eaves the corporaton s empoy to the amount of stock
that hs credts after the makng of the award w purchase, no mat-
ter for what cause he eaves hs poston whereby the dvdends on
the award and the rght to vote are gven the empoyee and. fnay,
the purpose of the bonus pan as above quoted, a ndcate that
the award s an ncentve to future effort, and the actua devery
of the stock to the empoyee thereafter at the tme he eaves the cor-
poraton s empoy, or at the e praton of fve yenrs from the award,
s n consderaton of and n parta compensaton for the empoyee s
servces durng the perod after the award and pror to such actua
devery. To ths effect, see McLemore v. Western Unon Teegraph
Co. (1918) (88 Ore., 288 171 Pac, 390, 1049) Z wUnek t: aker
Mfg. Co. (1912) (150 Ws.r57 137 N. W., 7 9 44L. R. . (N. S.),
1214 nn. Cas. 1914 . 793) Whtney v. Whtney ros. Co. (MS)
(152 Ws., 453 140 N. W., 35) Roberts v. Mays MUDs (1992) (184
. C., 40 114 S. ., 530).
Now, does the empoyee become the owner of the shares n the
corporaton at the tme the shares are awarded Under the pan,
whch s the soe bass upon whch the empoyee acqured whatever
rghts he has, the stock certfcate for the bonus shares w not be
devered to hm unt the end of the fve years. Moreover, the
shares are evdenty ntended as an ncentve or compensaton for
prospectve servces durng that perod, rather than for past serv-
ces. nay, the empoyee, may not, mder the terms of the pan,
se or pedge the- shares awarded hm and from the tme of the
award the bonus custodan hods hs rrevocabe power of attornev
to assgn and transfer the shares n the event of the. empoyee a
eavng the company s servce.
though there have been reatvey few decded cases nvovng
a the features of the nstant case, the. effect of the severa prev-
sons of ths, pan has been frequenty consdered by the- courts. In,
York v. Passac Rong-M Co., (1887) (3 ed,, 471) t appeared
that the defendant had agreed n wrtng wth the pantff, an em-
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M a), rt. 107.
poyee, to se hm 28 shares of stock n the company for 5,000, to
be pad out of dvdends decared, wthout any persona abty
of the pantff, the fa beneft arsng from ownershp of sad
shares to pass to hmsef or hs hers n the event of hs permanent
n|ury or death. The certfcates for the shares were fed up n
pantff s name, pursuant to a resouton adopted at a stockhoders
meetng, hut were retaned by the company. The pantff attended
and voted at stockhoders meetngs, unt he eft the company s em-
poy severa years ater. e fed a b to compe the devery o the
certfcates. The court, n denyng the pantff reef, sad:
Thte fnng np and Indorsement of the certfcate was a- meanngess fonrm-
ty whch, eft the rghts of the partes undsturbed. The contract entted
companant to the stock on fufment of Us terms. Up to that tme the
1 respondents were to retan t. It was not to become hs. ng up a certfcate
n hs name, and deverng t to themseves, eft the matter precsey as t was
before. Itacs the court s.
Gearhart v. Standard Stee Car Co. (1909) (223 Pa., 385 72 t.,
90) s a somewhat smar case. Pantff contracted to enter de-
fendant s empoy at a saary of 7,500 per year and the settng
asde of 2,500 of defendant s stock to be pad for out of the earnng
of the company. though no stock was actuay ssued n pantff s
name, he attended stockhoders meetngs and was eected a drec-
tor or the company. Later he eft the empoy of the company. e
sought to compe the ssuance to hnn of the stock, upon the pay-
ment of the dfference between par and the amonnt of the earnngs
whch shoud have been credted to the stock. The court hed that the
stock was not pantff s, but the property of the corporaton that
the contract was n voaton of the Pennsyvana statute prohbtng
the ssuance of stock by corporatons e cept for money or abor,
snce the abor here was to be performed n the future that the
stock beng the corporaton s, t was not capabe of earnng dv-
dends, and hence coud not thus be pad for.
Smary, t s sad n etcher, Corporatons, at pages 5743-
574 :
In order that a certfcate may be regarded as ssued, so as to confer rghts,
t must aw been devered. So them f no ssuance of a certfcate where t s
never detathed from the stock book, athough the banks theren are proper y
fed up,, f the person whose name s nserted theren has no contro over the
books of the company.
To the same effect s Wocott v. Wadatem (191 ) (8 N. . q
3 97 t., 951).
These cases ndcate that n the nstant case the bonus stock does
not beong to the empoyee at the tme of the award, but rather s
the property of the corporaton. Moreover, these cases hod that
athough the empoyee may have the prvege of votng at stock-
hoders meetngs, ths does not make hm a stockhoder n the cor-
poraton.
Ths concuson that the empoyee does not become a stockhoder
at the tme the shares are awarded hm s supported by those cases,
determnng, the tme at whch tte passes n a contract for the sae
rf stock. or e ampe, n Davd v. Mc ae et a (1910) (183 ed,
f affrmed 184 ed.r 988 ,. 10 C. C. ., ) there was a contract
far Me of corporate stock provdng that n consderaton of 1
(trapfanant had sod the stock to defendants at 75 per share, pay--
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2 (a), rt. 107.
13
ment to be made n nstaments, companant to depost the stock
propery ndorsed n a bank, whch was to dever to defendant 1
share on the payment of each 75. It was hed that there was no sae
n prae8ent, but nstead an e ecutory contract of sae. Lkewse, n
Pacfc Power d- Lght Co. v. Whte (1917) (9 Wash.. 18 1 4 Pac,
02) and n ennedy v. Lee (1905) (147 Ca., 59 82 Pac, 257),
there were rectas n the contract of sae that the stock was thereby
sod, but n vew of the fact that the buyer contracted to perform
varous future acts n consderaton thereof, t was hed that the
saes dd not become e ecuted or tte p ss unt after these acts were
performed, athough n the atter case the certfcates were actuay
n the buyer s possesson. nay, snce the shares to be devered to
the empoyee are not ascertaned unt he eaves the corporaton s
empoy or competes fve years servce, under secton 17 of the Un-
form Saes ct. no property n them s transferred uness and unt
the shares are ascertaned.
gan, the consttuton of Deaware (n whch State the M cor-
poraton was organzed) provdes, n rtce I , secton 3:
No corporaton sha ssue stock, e cept for money pad, abor cone, or per-
sona property, or rea estate or eases thereof actuay acqured by such
corporaton.
See aso Rev. Code, 1915 (ch. 5, sec. 14). In Cooney Co. v. rng-
ton ote Co. (1917) (11 De., ch. 28 101 t., 879) the court
construed these provsons, n a case nvovng stockhoders abty
to credtors. Certan stockhoders camed that ther stock was fuy
pad, on the ground that t was ssued for servces rendered and to be
rendered. The court thus dsposed of ths contenton:
It may be true, as between the corporaton and a stockhoder, that shares
may be ssued for servces to be performed, though even that s doubtfu,
(ctng cuses) . ut when the nterests of credtors are affected, work
done shoud not ncude prospectve abor as an equvaent for money In e -
change for shares of stock. y a strct constructon work done does not
ncude work to be done, or work done and to be done.
In . O. ectrca Const. Co. v. Owen (1917) (1 3 N. Y. S., 31
17 pp. Dv., 399 affrmed 227 N. Y., 5 9 12 N. ..927), an
acton was brought to cance a certfcate of stock ssued to defend-
ant s testator, for servces to be performed as presdent of the pan-
tff s corporaton, on the theory that the ssue was n voaton of
secton 55 of the stock corporaton aw, whose provsons are very
smar to those of the Deaware consttuton. The court drected
a canceaton of the certfcate, n ths anguage (p. 32):
Stock may be ssued for property or work done, but not for servces to
be rendered n the future (ctng the N. Y. statute and cases). Whe a
certfcate of stock reguar upon ts face, ssued by offcers or agents hayng
authorty to ssue stock for the corporaton, may In the hands of an Innocent
transferee become eff ctve, as was hed n the famous case of f. Y. N. . R.
Co. v. Schuyer et a. (34 N. Y., 30), ths certfcate n the hands of the orgna
hoder was vaueess. It was, n effect, ke so much bank paper.
Gearhart v. Standard Stee Car Co. and Mueer urnace Co. v.
omes cted supra, contan smar hodngs.
To summarze, then, the decsons cted ndcate that bonus stock
awarded to an empoyee as n the nstant case does not become hs
at the tme of the award merey that tte does not pass unt the
ght of the consttutona provson, such stock, f ssued for serv-
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137
214(a), rt. 107.
ces, may ony be ssued egay for servces aready performed.
or these reasons, t s hed that the bonus stock s n fact ssued
to the empoyee for such servces as are performed before ts de-
very wthout restrcton and after the award that the empoyee
does not become the owner of the partcuar shares awarded hm at
the tme of the award but ony at the tme he becomes entted to a
devery of the shares wthout restrcton.
II.
It s necessary to determne, n the second pace, the rghts and
abtes of the corporaton and ts empoyees wth reference to the
bonus fund before the specfc questons submtted can be answered.
The bonus pan gves the fnance commttee of the corporaton com-
pete contro over the amounts credted to the fund at east unt an
award of stock s actuay made, snce unt that tme no amount out
of the fund need be dstrbuted uness the fnance commttee so
decdes. rom the tme an award of stock s made to an empoyee,
he bonus custodan w credt hm monthy wth of ts par
vaue. s aready ndcated, however, the stock awarded does not
unquafedy beong to the empoyee from the tme of the award.
If he eaves the company s servce before fve years eapse after the
date of the award, the baance remanng to be pad upon the fu
award reverts to the corporaton (or bonus fund after March, 1920),
and he receves ony a proportona part thereof. It therefore appears
that a the moneys n the fund are st entrey wthn the contro
of the corporaton unt some part thereof s credted to partcuar
stock a vards, and thereby removed from the bonus fund, for the
corporaton can not be compeed to dever stock to any empoyee
e cept on the terms of the pan. (McLemore v. Western Unon Tee-
|mph Co., cted svp-a) and accordng to ts terms, unt some
amount s drected to be credted toward the payment for a stock
award, there can be no certanty that the corporaton w ever be
requred to pay out that amount or ts equvaent n stock.
Conversey, from the empoyee s pont of ew, athough he ac-
qures no enforceabe rghts to the stock award decared n hs favor
unt amounts are credted toward payment for t, he does acqure,
par past wth the credtng of such amounts, the power to compe
the corporaton to ssue hm stock or pay hm an equvaent amount.
e does not actuay have possesson of the stock, but the amount to
whch he s entted at any tme s ready determnabe, and the cor-
poraton has no power to deprve hm or t. (See cases supra, p. 9.)
Moreover, wth the e cepton of the rght to possesson and to aena-
ton, e s gven the benefts of the ownershp of the entre award.
n.
The souton of the questons submtted foows from ths dscusson
of the ega reatonshp of the partes.
1. In the event that ts books are kept on the accrua bass, the
corporaton may take as a deducton for ncome ta purposes the
amounts actuay credted to the empoyee s accounts by the bonus
mstodan at the tme such credts are made (O. I). 124, C. . 1,
107): provded, of course, that such amounts are n fact credted
4177 24 10
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5214(a) , rt. 109.
138
n good fath as an addtona reasonabe compensaton for servces
rendered (art. 107, eg. 45).
It w be noted that ths concuson as to the tme at whch the
deducton may be taken s supported by the reguatons and rungs
n the anaogous case of a penson fund (art. 108, eg. 45 S. M. 05.
C. . 1,224).
3. Snce the stock actuay devered to an empoyee s to be treated,
under artce 33 of Reguatons 45 and G2, as f t were compensaton
to the empoyee n cash, to the amount of ts market vaue, the corpo-
raton shoud make an ad|ustment n ts accounts at the tme the
stock s devered so that the net deductons for compensaton pad
to the empoyee n the form of stock sha equa ts market vaue at
the date t s avaabe for devery to the empoyee.
4. Inasmuch as the tte to a partcuar award of stock does not
pass to the empoyee unt the credts on the empoyee s account equa
the debts, dvdends pad to the empoyee pror to such tme are ad-
dtona compensaton to such empoyee (sub|ect to the quafcatons
of art. 107, Reg. 45). ence they are deductbe as such by the cor-
poraton when made avaabe for payment to the empoyee. (O. D.
7G3, C. . 4, 7 O. D. 791, C. . 4, 7 .)
rtce 109: Rentas. 111-14-14 9
( so Secton 214(a) 10, rtce 203.) . R. R. 459
R NU CT O 1917.
The aquot part of the cost of the ease of coa aud deductbe
by the M Company shoud be bused on the term of the ease
wthout regard to renewas, t beng assumed that the coa w
not be e hausted pror to the e praton of the orgna ease.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt n proposng the assessment of
addtona ncome and profts ta es for 1917.
The ony pont at ssue s the method of amortzng the cost of a
easehod.
ppeant ob|ects to the Unt s method of returnng the cost on a
tonnage bass, nsstng that the ease shoud be amortzed over ts
fe. The Unt contends that the cost of a ease shoud be amortzed
per year ony when the ease s termnabe at a f ed tme, rrespectve
of the en boc tonnage or producton. When renewabe to e hauston
of the coa deposts or for a ong perod, the cost shoud be returned
on a tonnage bass.
fter carefu consderaton of a of the evdence of record, to-
gether wth the arguments made, at the ora hearng, the Commttee
concudes that the aquot part of the cost of the ease deductbe by
appeant shoud be based on the term of the ease wthout regard to
renewas, t beng assumed that the coa w not be e hausted pror
to the e praton of the orgna ease.
ccordngy, the Commttee recommends tat te appea be sus-
taned.
Chares D. ame,
Charman Commttee on ppeas and Revew.
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139
214(ft), rt. 111.
ft
ktck 110: penses of farmers. 111-12-1429
L T. 1952
R NU CT O 19IS.
ta payer who e ercsed hs opton for the years 1918, 1919,
and 1920 n accordance wth artce 110, Reguatons 45, by capta-
zng the e pendtures of brngng hs ranch property to a produc-
tve state nstead of deductng the amounts as busness e penses
s not entted to fe cams for refund based on the fact that he
now desres to treat the amounts as busness e penses for those
years.
Durng the years 1918 to 1920, ncusve, the ta payer captazed
the e pense of brngng hs ranch property to a productve state
and n 1921 and 1922 he camed the e pense as a deducton n ar-
rvng at hs net ncome. e now wshes to fe amended returns for
the years 1918 and 1920, ncusve, camng the e pense as a deduc-
ton.
rtce 110 Reguatons 45, promugated under the Revenue ct
of 1918, provdes n part:
mounts e pended n the deveopment of farms, orchards, and ranches
pror to the tme when the productve state s reached may be regarded as
nvestments of capta.
ed, that nasmuch as the ta payer e ercsed hs opton for the
years 1018, 1919, and 1920 by captazng the e pendtures of
rngng hs ranch property to a productve state nstead of deduct-
ng the amounts as busness e penses, he s not now entted to fe
cams for refund based on the fact that he now desres to treat the
amounts as busness e penses for those years.
rtce 111: When charges deductbe. 111-12-1430
I. T. 1953
R NU CTS O 1918 ND 1921.
The ta payer keeps hs books of account on the accrua bass. d-
dtona ncome ta was assessed n 1922 by the State of Wsconsn
wth respect to returns fed for 1919, 1920, and 1921.
ed, that the addtona ta assessed s deductbe n the edera
ncome ta returns for the years 1919, 1920, and 1921.
rtce 111: When charges deductbe. 111-13-1449
I. T. 1959
R NU CT O 1921.
Where the ta payer s books are kept on an accrua bass and
edera ncome ta returns are fed on a caendar-year bass, the
amount of ta for the year 1923 mposed by the emergency profts
ta act enacted by the State of Pennsyvana une 28, 1923, ac-
crued durng the year 1923, s an aowabe deducton n arrvng
at the net ncome for tat year.
dvce s requested as to whether ta es assessed aganst the M
Company under the emergency profts ta act enacted by the State
of Pennsyvana une 28, 1923, are deductbe n the year 1923 or
1924. The books of the company are kept on an accrua bass and t
fes edera ncome ta returns on a caendar-year bass.
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2I4(a), rt. 111.
140
Secton 2 of act No. 33:5, approved une 28, 1923, passed by the
Legsature of the State of Pennsyvana, reads n part as foows:
Imposton of emergency profts ta . very corporaton sha be sub|ect
to, and pay nto the treasury of the Commonweath, nn emergency profts ta ,
nt the rate of one-haf of 1 per centum per annum, for two years, upon each
doar of the net ncome of such corporaton, durng the caendar years 1923
and 1924, or n the event that such corporaton s permtted by the audtor
genera to make ts report under the provsons of ths act as of ts fsca year
nstead of the caendar year, then the ta mposed sha be pad on the net
Income of such corporaton durng ts two fsca years commencng at any tme
durng the year 1923 and endng at the end of the correspondng day n te
year 1925 .
ed, that the amount of ta for the year 1923 mposed by the
emergency profts ta act of the State of Pennsyvana accrued dur-
ng the year 1923 s an aowabe deducton n arrvng at the net n-
come of the M Company for that year.
rtce 111: When charges deductbe. 111-17-1515
I. T. 1984
R NU CTS OP 1018 ND 1921.
The ta payer keeps hs books of account on the accrua bass. d-
dtona surta es were assessed n 1922 by the State of Wsconsn
wth respect to returns fed for 1919, 1920, and 1921.
ed, that the addtona surta es assessed are deductbe n the
edera ncome, ta returns for the years 1919, 1920, and 1921. I. T.
1953 (see p. 139) modfed.
rtce 111: When charges deductbe.
(See I. T. 2011 sec. 212, art. 23.) ccrued e cse ta es.
rtce 111: When charges deductbe. ITI-24-1 03
S.M. 1931
R NU CT O 1018.
The M Company states that the product, y, can not be produced n
such a manner as to avod some percentage of re|ectons and n
any sae of y products the amount derved by the manufacturer
from the transacton s aways the contract prce ess the amount
aowed for re|ectons. Cams on account of re|ectons of goods
sod had not been made durng the ta abe year nor was t known
that any woud be made, but the reserve for returns and aow-
ances was an estmate of percentage based upon past e perence
and ntended to provde for such contngent osses as may arse
from the re|ecton of materas sod.
ed, that the settng up of such a reserve to cover contngent
osses can not be construed as an acknowedgment on the part of
the ta payer of an e stng abty and that t shoud be ds-
aowed as a deducton from ncome for the ta abe year.
Reference s made to the certfcate of overassessment n the amount
of 2.17 doars for the ta abe year 1918 of the M Company.
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141
f 214(a), rt. 111.
The Unt has aowed as a deducton from ncome for the ta abe
year 1918 the reserve for returns and aowances, doars, whch
s e paned as foows:
In ureau etter an amount of 1.27a doars was dsaowed, snce t was hed
that reserve for returns and aowances were not aowabe as deductons for
Income ta purposes. In your bref t s stated that ths tem represented the
abty of the company for re|ectons of materas sod durng 1918, and there
remaned ony the queston as to the e act amount whch woud have to be
pad n aowances for those re|ected materas. In 1919 an amount of doars
was pad on account of these re|ectons, whch amount s now aowed as a
deducton. ( . R. R. 275 C. . 3, 147.)
In . R. It. 275, the ta payer had sod merchandse to varous
purchasers, the weght and grade of whch was guaranteed by the
seer under contract. The nature of the busness that the ta payer
was engaged n s not dscosed n the rung other than the state-
ment that t s the practce of the trade when such shpments fa to
conform to specfcatons, an ad|ustment s made n accordance wth
rues promugated by certan trade assocatons. It appears further
that n a number of shpments made toward the cose of the ta abe
year cams had been fed by the consgnees and were n process of
ad|ustment at the cose of the ta abe year, athough the e act
amount of such cams was not actuay determned and settement
made thereon unt the foowng ta abe perod. Upon the bass
of these facts the Commttee recommendaton ays down the fo-
owng prncpe:
If the abty of the ta payer were n queston, there woud have been no
deductbe oss unt such abty had been actuay determned, ether by
agreement or n the courts but where such abty s not n dspute and the
amount thereof s merey an accountng deta to be determned under an
e stng contract or agreement, and n accordance wth a ceary recognzed
course of procedure, there can be no queston but that such ad|ustments are
appcabe to the year n whch the saes were made and shoud be regarded
more truy as ad|ustments of the seng prce rather tha as rebates or
aowances.
In the nstant case the ta payer s engaged n the manufacture of
y products, and the trade practce or busness pocy of the company
wth regard to handng saes of fnshed products may be somewhat
ndcated by the foowng statement from the ta payer s bref:
In the sae of y products t has aways been necessary to make some
provson for the re|ecton of artces sod by reason of ther faure to compy
wth the requred specfcatons, y can not be produced n such a manner as
to avod some percentage of re|ectons, and n any sae of y products the
amount derved by the manufacturer from the transacton s aways the
contract prce ess the amount aowed for re|ectons.
It s contended that the abty of the company for re|ectons
of materas sod durng that year was certan and there remaned
ony the queston as to the e act amount whch woud have to be
pad n aowances for those re|ected materas.
In consderng . . R. 275, upon whch authorty the deducton
s aowed, there s noted a marked dstncton n fact when com-
pared wth the nstant case. It does not appear from the record
that cams on account of re|ectons of goods sod had been made
durng the ta abe year, nor was t known that any woud be made,
but on the contrary the statements n the bref fed by the ta payer
ndcate that the reserve for returns and aowances was an est-
mate or percentage based upon past e perence and ntended to pro-
G
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214(a)2, rt. 121.
142
vde for such contngent osses as may arse from the re|ecton of
materas sod.
In vew of the above, t s the opnon of tns offce that, upon the
facts stated, the settng up of a reserve to cover contngent osses
can not be construed as an acknowedgment on the part of the
ta payer of an e stng abty. It s therefore recommended that
the reserve n queston be dsaowed as a deducton from ncome for
the ta abe year.
Neson T. artson,
Sootor of Interna Revenue.
S CTION 214(a)2. D DUCTIONS LLOW D:
INT R ST.
rtce 121: Interest.
(See I. T. 1912 sec. 215, art . 293.) Dscount added to the tota
amount of notes gven n purchase of automobe.
rtce 121: Interest. 111-18-1527
I. T. 1987
R NU CT O 1021.
Inasmuch ns the provson of secton 234(n)2 of the Revenue
pt of 1021 s specfc to the effect that nterest ncurred on n-
debtedness to purchase or carry obgatons or securtes (other
than obgatons of the Unted States ssued after September 24,
1917, and orgnay subscrbed for by the ta payer), the nterest
upon whch s whoy e empt from ta aton, s not deductbe,
deaers n nvestment securtes are bound by the provsons of aw.
The queston presented s whether a deaer n nvestment securtes
may cam as a deducton nterest pad on ta -e empt securtes.
The M Company s a deaer n nvestment securtes and ts bus-
ness has consstenty been that of a merchant. t no tme has t
purchased securtes or carred them for the purpose of beneftng
from the nterest ncome therefrom. It shows that 7. 8 per cent
of ts tota ncome from securtes s derved from the nterest
receved thereon and that 92.32 per cent of ts ncome s obtaned
through outrght purchases and saes. It s further shown that ts
stock n trade conssts of appro matey 80 to 90 per cent ta -e empt
securtes and that t must necessary depost as coatera ta -free
securtes n an amount equa to ts ndebtedness wth subsequent
emnaton of nterest pad upon ts ndebtedness n the same pro-
porton from ts deductbe busness e pense for ta purposes.
Secton 234(a)2 of the Revenue ct of 1921 provdes that n com-
putng the net ncome of a corporaton sub|ect to the ta mposed
by secton 230 there sha be aowed as deductons:
nterest pad or accrued wthn the ta abe year on ts ndebtedness,
e cept on ndebtedness ncurred or contnued to purchase or carry obgatons
or securtes (other than obgatons of (he Unted States ssued after Sep-
tember 24, 1917, and orgnay subscrbed for by the ta payer) the nterest
upon whch Is whoy e empt from ta aton under ths tte .
It s hed that nasmuch as the provson of sectons 214(a) 2 and
234(a)2 of the Revenue ct of 1921 s specfc to the effect that
nterest ncurred on ndebtedness to purchase or carry obgatons
or securtes (other than obgatons of the Unted States ssued
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143
214(a)4,5,| , rt. 141.
after September 24, 1917, and orgnay subscrbed for by the ta -
payer), the nterest upon whch s whoy e empt from ta aton, s
not deductbe, deaers n nvestment securtes are bound by the
provson of aw.
S CTION 214(a)4, 5, . D DUCTIONS LLOW D:
LOSS S.
rtce 141: Losses. IU-1-1281
. R. R. 4725
R NU CT O 1918.
Due to damage from ea tkqua e. the factory of the M Company
coud not be restored to Its orgna condton wthout a compete
rebudng of the structure.
ed, that rreparabe damage was foue the budng and because
of such damage a deducton be aowed to the e tent of doars
n e cess of the tota amount e peuded In repar work.
The M Company has appeaed from the acton of the Income Ta
Unt n dsaowng doars of a tota deducton of 2.04a doars,
camed for the year 1920, on account of damage done to the sad
company s manufacturng pant by an earthquake whch occurred
durng that year.
The records n the case show that on une , 1920, the cty of S
was vsted by a very severe earthquake, whch dd consderabe
damage to numerous busness bocks, prvate resdences, pubc bud-
ngs, and manufacturng pants ocated theren, among whch was
the manufacturng pant of the appeant company, whch pant
conssted, n part, of a brck factory budng, the was of the bud-
ng havng been thrown out of pumb, cracked and severey straned,
and ts roof twsted and thrown, n part, from ts foundaton. The
appeant company e pended 1.04a- doars durng the year 1920
for repars made to offset, n part, the damage caused by the earth-
quake, and n preparng ts ncome ta return for that year t camed
as a deducton, n addton to the amount e pended for repars,
doars, to cover the amount of damage whch was estmated coud
not be repared wthout a tearng down and rebudng of the factory
structure.
It s the cam of the appeant company that whe t was possbe
to restore the was and roof of ts factory budng to ther orgna
poston and to pont up wth cement the arger cracks and breaks
whch occurred n the was, for whch purpose a arge part of the sad
1.04# doars was e pended, t was not possbe wthout u compete re-
budng of the sad structure to restore t to ts orgna condton,
and that ts usefuness as a factory budng and ts saes vaue was
deprecated more than doars n e cess of the amount so e pended
for repar work because of the fact that the bonds between the brcks
n the was had, n many paces, been torn apart, many of such
brcks has become oosened n pace, the was cracked n many paces,
and cement wndow ntes had been cracked through, and a that
coud be done to offset such damage wthout a compete rebudng
of the factory and the ncurrence of a prohbtve e pense was to
force cement mortar nto the arger of such cracks, so far as possbe,
and pant them up on the outsde of the was, n order that mosture
mght not seep n.
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144
It s further camed that cue to the weakened condton of the
was t has been found necessary to reocate varous overhead shafts
and power transmsson gear, and to construct supports for the roof
beams of a sma addton to the pant erected snce the earthquake
whch ordnary woud have been supported by the was of the man
budng.
fter gvng very carefu consderaton to a the evdence sub-
mtted dnng the ora hearng of October , 1923, as to the damage
caused to the sad factory budng by the earthquake of une ,
1920, and further evdence submtted n the form of affdavts e e-
cuted by men apparenty we quafed to speak on that sub|ect, the
Commttee concudes that rreparabe damage was done to the sad
budng that the sad budng suffered e traordnary deprecaton
because of such rreparabe damage n an amount equa at east to
doars and that the tota deducton of 2.0-Lc doars camed for the
year 1920 shoud be aowed n fu.
In vew of the foregong, the Commttee recommends that the
acton of the Income Ta T nft n dsaowng doars of the sad
tota deducton of 2.04a doars, camed for the year 1920, be re-
versed, and the sad deducton be aowed n fu.
rtce 141: Losses.
(See I. T. 1904 sec. 215, art. 293.) Payment made under a guar-
antee of accounts recevabe e changed for stock.
rtce 141: Losses. III-5-1342
. R.R. 0 2
R NU CT O 1017.
n amount was pad by the N ank for the oan department
of the O Company upon the purchase of the assets of the O Com-
pany. When the edera Laud ank began operatng n ts ter-
rtory the M ank, successor of the N ank, ceased makng any
oans on farm property, as t was unabe to make oans at the n-
terest rates adopted by the and bank.
ed, that the M ank has sustaned no oss as the resut of
a cosed and competed transacton so as to entte t to deduct
the amount pad by t to the N ank for the oan department.
The Commttee has consdered the appea of the M ank from
the acton of the Income Ta Unt n dsaowng as a deducton
from the gross ncome for 1917 a camed oss of doars by reason
of ts nabty to contnue makng oans n competton wth the
edera Land ank.
rom the evdence of record, the Commttee fnds that pror to
November , 1914, the N ank, predecessor of the appeant, con-
troed and operated the O Company. On that date (November
, 1914) t acqured for cash the assets of the O Company, whch
ncuded the oan department of that company, vaued at do-
ars. When the edera Land ank began operatng n ts ter-
rtory, the appeant practcay ceased makng any oans on farm
property, as t was unabe to make oans at the rates of nterest
adopted by the and bank, and t accordngy charged off n 1917
the amount pad to the N ank for the oan department of the O
Company.
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145
214(a)4, 5, , rt. 141.
The .Revenue ct of 1917 permts a corporaton to deduct from
ts gross ncome osses actuay sustaned. The reguatons provde
that a oss may be deducted ony when t has been determned from
a cosed and competed transacton. In the nstant case the appe-
ant as the same rght to make the oans whch t had before ts
terrtory was entered by a edera Land ank. The appeant has
sustaned no oss as the resut of a coned and competed transacton.
The Commttee s, therefore, of the opnon that the camed oss of
t doars must be dsaowed as a deducton from gross ncome.
The Commttee recommends that the acton of the Income Ta
Unt be sustaned and the appea dened.
Chares D. ame,
Charman Commttee on ppeah and Revew.
ktce 141: Losses. 111-11-1414
I. T. 1944
R NU CT O 19 21.
If the amount receved upon the canceaton of an nsurance
pocy upon the fe of the ta payer s ess than the premums pad
therefor, the dfference may not be deducted as a oss. It s a part
of the cost of the nsurance.
The ta payer receved 18# doars n 1923 from the canceaton by
the ssung company of an endowment fe nsurance pocy dated
pr , 1912. The tota amount of premums pad n cash and of
dvdends apped to the payment of premums was 25,s doars.
Inqury s made whether the dfference between the tota premum
payments and the amount receved upon canceaton s deductbe
s a oss.
The dfference between the tota amount of premum payments and
the amount receved upon the canceaton of the pocy s not re-
garded as a oss but s hed to be the cost of the nsurance to the
ta payer. Such cost s not deductbe under secton 215(a) 1 of the
Revenue ct of 1921, whch provdes that n computng net ncome
no deducton sha n any case be aowed n respect of persona,
vng, or famy e penses.
rtce 141: Losses.
(See . R. R. 972 sec. 215, art. 393.) Payment made to pur-
chase nterest n property to perfect tte.
rtce 141: Losses. 111-19-1544
I. T. 1995
R NU CT O 1021.
In 1924, the M Natona ank acqured a of the assets and
assumed a of the abtes of the O Natona ank for the sum of
1:e doars, 2 doars of whch represented the amount pad for good
w. Under the requrements of the Comptroer of the Currency,
the M ank had to charge off the amount pad for good w.
ed, that the fact that the 2 doars pad for good w was
charged off n 1924, n order to compy wth the requrements of the
Comptroer of the Currency, does not entte the bank to cam such
sum as a oss.
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214(8)4, 5, , rt. 141.
14
No oss may be camed wth respect thereto unt the busness to
whch the good w s attached s sod or otherwse dsposed of at
a oss. In such event, the oss w be determned upon the bass of
the cost of the assets, ncudng good w. .
The ta payer, who kept accounts on a competed-contract bass
and had a fsca year endng anuary 81, competed a post offce
budng n 1919, and the transacton showed a oss. The ast pay-
ment under the contract as we as the date of the acceptance of the
budng by the Government both occurred durng the fsca year of
the ta payer ended anuary 31, 1920. In ths same fsca year an
ct of Congress was passed provdng for the rembursement to
contractors sustanng osses n the constructon of post offces and
certan other pubc budngs. In pursuance to ths ct of Con-
gress, ths ta payer receved a sum of money n 1921 equa -to the
oss sustaned under the contract.
The transacton was competed In 1921 when the ta payer was
rembursed by the Government and therefore such amount receved
n 1921 dd not consttute ta abe ncome. In other words, the
contract was competed n 1921, showng no gan or oss to the
ta payer n ths partcuar transacton.
The ta payer, who kept accounts on a competed-contract bass
and had a fsca year endng anuary 31, competed a post offce
budng n 1919, and the transacton showed a oss. The ast pay-
ment under the contract as we as the date of the acceptance of t e
budng by the Gove.rnne|at both occurred durng the fsca year of
the ta payer ended anuary 31, 1920. In ths same fsca year an
ct of Congress was enacted provdng for the rembursement to
contractors sustanng osses n te constructon of post offces and
certan other pubc oucngs. In pursuance to ths ct of Con-
oss sustaned under the contract.
Inqury s made whether ths payment consttutes ta abe ncome
to be accounted for n the year 1921. ed, snce the ta payer
kept ts accounts on a competed-contract bass, and snce the oss
under the contract was determned durng the same ta abe year
that an ct of Congress was enacted gvng the ta payer a rght
to rembursement to cover such oss, no deductbe oss has been sus-
taned by the ta payer durng that ta abe year because the trans-
acton had not been competed. The transacton was competed n
1921 when the ta payer was rembursed by the Government and
therefore such amount receved n 1921 dd not consttute ta abe
ncome. In other words, the contract, was competed n 1921, show-
ng no gan or oss to the ta payer n ths partcuar transacton.
:tc| 141: Losses. n-2 -1 31
rtce 1-11: Losses.
( so Secton 213(a), rtce 31.)
111-19-1545
I. T. 199
NU CT O 1918.
f money n 1921 equa to the
I. T. 2037
NU CT O 1921.
oss resutng from an e poson of a bomb s not deductbe
under secton 214(a) uness the e poson resuted In a fre whch
destroyed the ta payer s home or a part of It. n that case, the
oss resutng from the fre w be deductbe.
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147
211(a)4, 5, , rt, 142.
The home of the ta payer was damaged as the resut of the e -
poson of a bomb paced on hs front porch. Inqury s made
whether the amount of such damages consttutes an aowabe deduc-
ton.
Secton 214(a) of the Revenue ct of 1921 provdes for the de-
ducton of osses sustaned durng the ta abe year not n connecton
wth the trade or busness f arsng from fres, storms, shpwreck
or other casuaty or from theft, and f not compensated for by n-
surance or otherwse.
It s hed that the term other casuaty n ths secton reates to
casuates smar to fres, storms and shpwreck that s, to casuates
resutng from the acton of natura physca forces. Therefore,
the oss resutng from the e poson s not deductbe under ths
provson uness the e poson resuted n a fre whch destroyed
the ta payer s home or a part of t. In that case, the oss resutng
from the fre w be deductbe.
rtce 142: ountary remova of budngs. III-3-1309
I. T. 1911
R NU . CT O 1321.
corporaton purchased rea estate contguous to the ocaton
of ts busness wthout knowng when t woud be requred n ts
busness. In ess than a year the od budngs on the purchased
and were razed wth a vew of erectng thereon new budngs.
ed, that no deductbe kss s aowabe by reason of the dem-
oton of the od budngs.
The M Company purchased certan property consstng of and,
hote, apartment house, etc., whch property s surrounded by other
property acqured prevousy by the company. When the prop-
erty was purchased the company beeved that at some tme t woud
requre t n connecton wth ts busness but t dd not know vhen
ths woud be and had no defnte arrangement n connecton there-
wth. owever, n ess than a year after t purchased the property
t was decded, n vew of the growth of ts busness, to arrange for
constructon of new budngs, and, accordngy, the od budngs
were removed.
rtce 142, Reguatons 2, promugated under the Revenue ct
of 1921, provdes n part:
When a ta payer buys rea estate upon whch s ocated a budng
whch he proceeds to raze wth n vew to erectng thereon another budng,
t w be consdered that the ta payer has sustaned no deductbe oss by
reason of the demoton of the od budng, and no deductbe e pense on
account of the cost of such remova, the vaue of the rea estate, e cusve of
od mprovements, beng presumaby equa to the purchase prce of the and
and budng pus the cost of removng the useess budng.
It s hed that n vew of the short perod of tme whch eapsed
between the date the company purchased the budngs and the date
they were razed for the purpose of erectng new budngs to be used
n connecton wth ts trade or busness, the transacton comes wthn
the purvew of the reguatons quoted above and the amount repre-
sentng the vaue of the od budngs s not deductbe, and the vaue
of the rea estate e cusve of the od mprovements w be consd-
ered equa to the purchase prce of the and and budngs pus the
cost of removng the useess budngs.
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214(a)4, 5, , rt. 143.1
148
rtce 143: Loss of usefu vaue.
111-13-1450
S. M. 1 90
R NU CT O 1917.
The ood Contro ct of ugust 10, 1917, n tsef dd not have
the effect of makng a dstery obsoete n 1917. The ct dd not
brng to an end the usefu vaue of the dstery of the ta payer,
athough the ast whsky barreed by t was n 1917.
The ta payer was the owner of a dstery. fter the passage of
the ood Contro ct of ugust 10, 1917, whch prohbted the use
of foods, fruts, food materas, or feeds n the producton of dsted
sprts for beverage purposes, the ta payer ceased mashng n Sep-
tember, 1 )17, and the ast whsky was barreed by t and entered n
bonded warehouse September , 1917. It s stated that after ths
date the company bad no use for any of ts budngs or equpment
e cept for the storage for a bref perod of the quor then on hand.
The Unt proposes to aow a deducton from ncome of 1917 on ac-
count of the oss of the usefu vaue of the dstery whch the ta -
payer contends t suffered n that year.
It may be true that, vewed n the ght of ater events. September
9, 1917, the effectve date of the edera ood Contro ct, s now
seen to be the date whch marked the end of the awfu manufacture
of nto catng quors for beverage purposes. The ood Contro
ct was, however, a war measure ony, and n the absence of proh-
bton egsaton woud have ceased to operate upon the termnaton
of the war. On December 31, 1917, the adopton of the eghteenth
amendment and of egsaton n e ecuton thereof was not generay
beeved to be so mmnent as ater events have proved t to have been.
On ths account t s not seen how t coud have been sad on Decem-
ber 31, 1917, that the ta payer s dstery had become obsoete that
s. that ts usefu vaue as a dstery was gone.
On November 30, 1918, the M Company ceased the brewng of
acohoc beer and a matng pant, ncudng budngs and equp-
ment, was permanenty abandoned and has not been used snce.
The savage vaue of the matng pant s not n e cess of what
t woud cost to remove t from the premses.
ed, that the M Company s entted to a deducton n 1918, n
respect of the matng pant, for oss of usefu vaue, n accordance
wth the provsons of artce 143 of Reguatons 45.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt n denyng the appeant a deduc-
ton n 1918 for obsoescence of brewng propertes (tangbe assets)
computed at appro matey 20 per cent of the book vaue of such
propertes, t beng shown that pant and equpment was operated
at appro matey 20 per cent of capacty durng the year.
Neson T. artson,
Soctor of Interna Revenue.
rtce 143: Loss of usefu vaue.
111-14-1470
. R. R. 349
R NU CT O 1918.
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149
214(a)7, rt, 151.
The Commttee concudes, upon the bass of the evdence furnshed,
that the Unt was correct n denyng the camed deducton. ow-
ever, after hearng before the Commttee and under date of Decem-
ber 31, 1923, , vce presdent of the appeant company, submtted
an affdavt wheren t s stated as a fact that on November 30, 1918,
there was a cessaton of the brewng of acohoc beer and that at
that tme a matng pant, ncudng budng and equpment, was
permanenty abandoned and has not been used snce further, that
sad matng pant was not rented out at the tme the pant and
equpment was eased to another party n 1921. It s aso aeged n
sad affdavt that the savage vaue of the matng pant s not n
e cess of what t woud cost to remove t from the premses. Under
such crcumstances the Commttee concudes that the appeant s
entted to a deducton n 1918, n respect of the matng pant, for
oss of usefu vaue, n accordance wth the provsons of artce 143,
Reguatons 45.
It s accordngy recommended that the queston nvoved n the
appea be dsposed of as herenbefore ndcated.
Chares D. ame,
Charman Commttee on fpeas and Revew.
rtce 147: Losses from the sae and repur- 111-19-154
chase of securtes. I. T. 1997
R NU CT O 1921.
Under secton 223(b) 2 of the R venue ct of 1921, where a hus-
band and wfe vng together fe a snge |ont return of ncome
such return s treated as the return of a ta abe unt and the ncome
dscosed by the return s sub|ect to both norma ta and surta as
though the return were that of a snge ndvdua. In such a case
the purchases and saes of securtes by a husband and wfe are to be
treated as though they were made by one ndvdua and a oss from
the sae of securtes by hm may not be deducted f wthn 30 days
before or after such sae she acqured substantay dentca prop-
erty and the property so acqured s hed for any perod after such .
sae.
S CTION 214(a)7. D DUCTIONS LLOW D:
D D TS.
rtce 151: ad debts. III-2-129
. R. R. 4880
R NU CT O 1918.
The M ank was not n a poston to know at December 81, 1920,
that t hnd sustaned a oss of 1.15a doars n respect of the debt
owed t by the N Company. Ths debt was secured n part by co-
atera whch had not been dsposed of at the cose of 1920. There
was the possbty that the coatera coud have been dsposed of
at an advantage whch woud have operated to reduce the camed
oss.
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24(a)7, rt. 151.
150
The Commttee has carefuy consdered te appea of the M Com-
pany from acton of the Income Ta Unt n dsaowng as a deduc-
ton from gross ncome for the year 1920 a camed oss of 1.15a)
doars as a resut of the nsovency of the N Company, a corporaton.
On anuary 1, 1920, the N Company, a corporaton, then engaged
n the mportaton and dstrbuton of certan products, had become
heavy ndebted to the appeant bank, the amount of the ndebt-
edness on that date equang 5.72a doars. Ths ndebtedness was
n the form of etters of credt estabshed for the corporaton by
the bank.
On une 1 , 1920, after whch no further credt was e tended, the
tota ndebtedness of the N Company to the bank was 12.3 a doars.
part of ths ndebtedness was secured by the depost of coatera
and the assgnment of reatve sae contracts coverng mportatons.
Durng the atter part of une, 1920, t became apparent that the
N Company by reason of a bg drop n the prce of products
mported was nsovent. Other credtors of the corporaton camed
that certan securtes hed by the bank had een transferred to t
under crcumstances whch rendered them a vodabe preference.
These credtors threatened to fe a petton n bankruptcy aganst
the corporaton uness some agreement coud be reached wth the
bank concernng these camed preferences and provdng for the
equa protecton of the credtors.
On uy 19, 1920, the ndebtedness of the N Company to the bank
had been reduced to 7.98a doars, of whch amount 1.7 5a- doars was
then contngent, representng une pended baances under etters of
credt. On that date the natona bank e amner reported upon the
condton of the N Company ndebtedness as foows:
The company s statement Is e ceptonay weak and .some oss w resut
but ft ths tme t can not be determned.
Thereafter, pursuant to a resouton of the hoard of drectors
adopted on ugust 18, 1920, the hank apped the sum of .a doars
monthy begnnng wth ugust 30. 1920, unt the cose of the year
aganst such osses whch mght deveop n connecton wth the
account of the N Company.
On October 14, 1920, a composton agreement was entered nto
bet ween the N Company and ts credtors whch provded for the
qudaton of the busness and granted an e tenson of tme from
one to fve years thereon. The appeant agreed to surrender cer-
tan securtes hed by t n so far as those securtes were un-
necessary to secure t on account of credt estabshed on the strength
thereof and was to partcpate n the unpedged assets of the N
Company to the e tent of ts unsecured cam.
most from the tme of the frst ntmaton of the nsovency of
the N Company the appeant had nssted that ts offcers be g ven
contro of the corporaton, and t was aowed to have three of ts
offcers and empoyees as drectors. There were ony fve drectors,
and therefore the bank had compete contro of the nsovent s affars.
No money coud be pad out e cept wth the approva of one or
more of the offcers of the bank.
In October or November, 1920, a frm of certfed pubc accountants
was empoyed to determne the fnanca condton of the nsovent
company. The vaue of the assets was found to be at December 31,
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151
214(a 7, rt. 151.
1920, 2.45a doars, from -whch shoud be deducted current ab-
tes whch were granted a preference by the credtors amountng to
.ITa- doars, and the vaue of the assets pedged to the bank amount-
ng to .48 doars, eavng avaabe for unsecured credtors 1.79
doars. The bank s pro rata share of ths amount was .49 doars.
Ths eft a defcency between the cams of the bank and the probabe
recovery from the N Company of 1.18 doars. It therefore ap-
peared that the appeant had sustaned a oss on the N Company
ndebtedness of at east 1.15 doars, and havng aready charged
off .3 doars of ths ndebtedness, the e ecutve commttee of the
appeant an December 14, 1920, recommended that the board of
drectors consder chargng off an addtona .85 doars of the n-
debtedness as of December 31, 1920. On December 15, 1920, the
board of drectors adopted the recommendaton of the e ecutve
commttee and ordered charged to proft and oss the addtona .85
doars stated.
The Income Ta Unt has dsaowed the camed oss of 1.15
doars n queston as a deducton from the gross ncome for 1920,
under the provsons of the Revenue ct of 1918, secton 214(a)7 of
whch provdes that debts ascertaned to be worthess and charged
off wthn the ta abe year are aowabe deductons. The Unt
contends that the debt was not ascertaned to be worthess, and ctes
artce 151 of Reguatons 45 (1920), whch states: n account
merey wrtten down s not deductbe. The Unt s
of the opnon that ths prevents the takng of a deducton of a part
of a debt even though t s very apparent that a oss w resut.
The Unt further states that new notes were gven as provded n
the composton agreement, maturng n one, two, three, four, and
fve years. The frst year s notes were pad n 1921 and the baance
were outstandng at December 81, 1921. The Unt hods that t was
mpossbe to ascertan and forecast on December 31, 1920, the prob-
abe oss due to these notes.
rom a carefu consderaton of the entre record, the Commttee
s of the opnon that the M ank was not n a poston to know at
December 31, 1920, that t had sustaned a oss of 1.15 doars n
respect of the debt owed t by the N Company. Ths debt was se-
cured n part by coatera whch had not been dsposed of at the cose
of 1920. There was the possbty that there woud be an ncrease
n the prce of products mported and f so, the coatera coud have
been dsposed of at an advantage whch woud have operated to re-
duce the camed oss of 1.15 doars.
The poston of the appeant appears to be substantay the same
as that of the appeant whose case was consdered n . R. R. 3385
(C. . II-2, 187). It was there hed that a bank whose cam was
secured by coatera whch had not been dsposed of coud not cam
a oss n respect of the transacton unt the coatera was ds-
posed of.
In accordance wth the foregong, the Commttee recommends that
the acton of the Income Ta Unt n dsaowng the deducton of
the camed oss of 1.15 .doars be sustaned and the appea dened.
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214(a)7, rt. 151.
152
rtce 151: ad debts. III-5-1343
. R. . 0 1
R NU CTS O 1817 ND 1918.
n account of 1.34 doars was charged off as a ba debt n 1917
and camed and aowed as a deducton for that year. There
seems to be no |ustfcaton for aowng the account to be charged
off as a bad debt n the fsca year 1918, as there appear to have
been no deveopments n that year wth respect to the debtor s
fnanca status whch coud not have been and were not foreseen
by the offcers of the company when authorzaton was gven to
charge off the account n 1917. In the absence of any affrmatve
evdence upon whch may be predcated a revson of the earer
acton of the credtor, a deducton for the year 1918 s dened.
The Commttee has carefuy consdered the appea of the M Com-
pany from the acton of the Income Ta Unt n refusng to aow
as a bad-debt deducton for the fsca year ended May 31, 1918, an
account charged off on the books n the precedng ta abe year and
camed and aowed as a bad-debt deducton on the return of that
year.
rom the evdence of record and the facts deveoped at the hear-
ng, t appears that on May 31, 1917, whch was the cosng date of
the fsca year 1917, appeant company charged off on the books as
a bad debt the account of one n the amount of .M doars, and
camed ths charge-off as a bad-debt deducton on the return of that
war that appeant now seeks to rescnd ths acton, thereby restor-
ng the account as at May 31, 1917, ony to cam the same as a bad-
debt deducton on the return for the fsca year ended May 31, 1918,
on the ground that the debt was not propery ascertaned to be
worthess unt the atter year, snce as ate as October 31, 191 ,
was e tended credt to the e tent of ,31ar doars, and t does not
appear that suffcent tme had eapsed at the end of the ta payer s
fsca year to have enabed hm, wth any degree of accuracy, to have
determned that s account was bad at that tme and that the In-
come Ta Unt has refused to aow for ncome ta purposes the
acton now sought to be taken by the appeant wth respect to ths
account on the ground that uthorzed offcers confrmed ths de-
ducton when they e ecuted the 1917 return. The fact that the
account was charged off aganst proft and oss n 1917 s evdence
that the appeant had knowedge of the fnanca condton of
and regarded the account as practcay worthess.
The Commttee caed for and has receved a transcrpt of the
account of n so far as that was avaabe. Ths account shows
that sad was an od customer of the appeant company, to whom
there has been e tended from tme to tme n the past credt whch at
tmes reached consderabe amounts. t the cose of the fsca year
ended May 31, 191C, the debt baance n s account amounted to
2.2./ doars. Under the crcumstances, t woud seem that the offcers
of the company were n possesson of nformaton of a substanta
character, whch has not been dvuged to the Commttee, whch ed
them suddeny to termnate the e tenson of credt to and on May
31, 1917, to charge off as a bad debt the baa nce of the htter s ndebt-
edness. s a matter of fact, n une of 1917 the appeant e tended
a further credt of .19a doars to ony on the guarantee of the
O Company, who eventuay pad the account, there beng no fur-
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153
2 4(a)7, rt. 15L
ther payments by on the od account. There seems to be no |ust-
fcaton for aowng the account to be charged off as a.bad debt n
the fsca year 1918, as there appear to have been no deveopments n
I hat year wth respect to s fnanca status whch coud not have
been and were not foreseen by the offcers of the company when
authorzaton was gven to charge off the account on May 31, 1917.
In the absence of any affrmatve evdence upon whch may be pred-
cated a revson of the earer acton of the company, the acton of
he Income Ta Unt shoud be sustaned. See . R. R. 80 (C. .
1-1,15 ). ,
ccordngy, t s recommended that the acton of the Income Ta
Unt be sustaned and the appea be dened.
Chares D. ame,
Chahvnan Commttee on ppeas and Revew.
rtce 151: ad debts. 111-11-1415
S.M. 1491
R NU CT O 1021.
The courts of entucky have hed that where a promssory note
as been dscounted at a bank or ndorsed over to a thrd party t
has been paced upon the footng of a b of e change and the 5-
year perod of mtatons provded In secton 2515 of the entucky
statutes appes. If the note s st n the possesson of the org-
na payee, the same has not been put upon the footng of a b of
e change, and, therefore, secton 2514 of the genera statutes, pro-
vdng for a perod of mtatons of 15 years, appes.
Request s made for nformaton as to whether the perod of the
statute of mtatons under the entucky statutes s 5 or 15 years n
connecton wth a promssory note gven n 1907 and whch the ta -
payer seeks to deduct as a worthess debt durng the year 1917.
The fe does not contan the orgna note nor a copy of t and,
therefore, t s presumed to have been a demand note, that t was
never dscounted at a bank or transferred to a thrd party, but was
hed n the possesson of the payee, the ta payer.
rom the fe, t appears that the Unt s contenton s that the
statute of mtatons under the entucky statutes on such an obga-
on s 5 years and, therefore, t became worthess pror to 1917 and
shoud have been wrtten off n a pror year. The ta payer contends
that the debt was not actuay wrtten off unt 1917, the year the
deducton s camed, and that the perod of mtaton n such a case
s 15 years.
s a genera proposton, wthout regard to the facts n ths par-
tcuar case the mere runnng of the statute of mtatons s not the
soe factor n determnng whether a debt has become worthess. It
s ony a contrbutng factor to be sure, a strong one, yet t s a we-
estabshed rue of aw that n a sut on a debt where the statute has
run, that fact must be affrmatvey peaded as a defense, the pantff
aways havng a rght to show that the statute had been revved.
Secton 2514 of the genera statutes of entucky covers actons
other than for rea estate and provdes for a perod of mtatons
of 15 years for actons on a promssory note.
4177 24 11
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2 (a)7, rt. 151.
154
Secton 2515 of the entucky statutes provdes:
n noton upon a promssory note, paced upon the footng of a h of e -
change, sha be cumnenced wthn 5 years after the euuse of acton accrued.
In the nterpretaton of the above statutes, the courts of entucky
have hed that where a promssory note has been dscounted at a bank
or ndorsed over to a thrd party t has been paced upon the footng
of a b of e change and secton 2515 appes. owever, f the note
s st n the possesson of the orgna payee, the same has not. been
put upon the footng of a b of e change, and, therefore, the genera
statutes, provdng for 15 yeare, appes. Magoffn v. oye Natona-
ank of Danve. 9 S. W. ( v.), 702 Southern Natona ard- v.
Schmpeer, 1 0 y., 813 170 S. W. 178: Sm v. Ctzens ank of
Carrsvtte, 173 y., 799: 191 S. W., 489.)
In the case of the Southern Natona ank v. Schmpeer, supra,
the court hed:
So mp, however, as the nstrument remans n the hands of the orgna
payee, and has not been assgned or transferred to a thrd person, t s not upon
the footng of a b of e change and s controed by our 15 years statute of
mtatons.
In vew of the above, f ths ta payer hed the note n ts possesson
unt 1917, when t was wrtten off, the secton provdng for a 15-
year perod of mtatons appes.
Neson T. artsout,
Soctor of Interna Revenue.
rtce 151: ad debts. III-15-149S
I. T. 1970
NU CT O 1921.
The porton of a partnershp debt due from the estate of a
deceased.partner and pad by the survvor, the ta payer, may he
deducted as a bad debt by the atter f Is shown that the estate
had no assets out of whch the debt owng to the ta payer coud
be satsfed.
partnershp consstng of and was dssoved n 1911. It s
shown that pror to the dssouton of the partnershp certan debts
had been contracted appro matng doars. These debts were
represented by numerous notes payabe by the frm and a sma
amount of accounts payabe. Many of the notes represented money
borrowed by the frm for the purchase of securtes, whch securtes
were hypothecated to protect the hoders of the notes. The secur-
tes became worthess durng the year 1918. ded n 1917, eavng
no estate. In 1923 the ta payer pad the tota amount of the n-
debtedness of the partnershp. I he queston s whether he may
cam a deducton of one-haf of the amount so pad, representng
the porton due by the estate of .
ed, that the amount pad by the ta payer to the partnershp
credtors n 1923 on behaf of the estate of may be deducted n hs
return for that year as a bad debt f t s shown that the estate had
no assets out of fhch the debt owng to the ta payer coud be
satsed.
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155
214(a)7, rt. 151.
stce 151: ad debts. 111-18-1528
S. M. 1742
S N U CT O 1.918
ccounts of gran commsson brokers coverng unpad advances
and commssons n connecton wth contracts for the future de-
very of gran are prma face, at east, the resut of ega trans-
actons and there s no authorty for requestng a ta payer en-
gaged n a awfu busness to demonstrate the egaty of hs
varous transactons by court procedure before he may cam a de-
ducton for bad debts. deducton for bad debts n such trans-
actons, however, must compy wth the statutory provsons and
the practce of the ureau reatve to the aowance of bad debts.
Cases where cams for such deductons are made shoud e
treated wth cauton and the deductons shoud not be aowed to
the operators of bucket shops whch are ony ostensbe brokerage
offces nor In cases where t s evdent there was no transfer or
devery and no ntent to transfer or dever the stock or com-
modty nomnay deat In.
Durng the year 1919 the M partnershp was engaged n the gran
commsson busness on a certan e change and at the cose of the
year had owng to t from customers appro matey 145.e doars,
representng advances made by t n behaf of the customers and
unpad commssons. The books of the partnershp were kept, on
an accrua bass and the unpad commssons verc ncuded n gross
ncome. The crcumstances under whch the advances were made
and the commssons arose are as foows:
The busness on the e change s done by brokers, who buy and
se to each other for ther customers. Much of the busness s done
on margn that s. a customer orders hs broker to buy a gven
number of bushes of gran for hm and, nstead of gvng te
broker the entre purchase prce, he pays the broker a sma amount
on each bushe whch he buys. Ths margn vares n amount
from tme to tme but s usuay f ed by the broker n an amount
suffcent to protect hm n the event the market drops suddeny.
The customer agrees that n the event the prce of the gran drops so
that hs margn w not cover hs oss the broker may se the
gran and charge hm wth the oss. y the rues of the e change,
when the sae s made the broker must pay the broker from whom
he bought the gran by 11 o cock n the mornng foowng the sae,
through a cearng house provded by the e change.
To ustrate, orders hs broker to buy for hm 5,000 bushes
of wheat at 1 a bushe. The broker demands a margn of 2 cents
per bushe from hm, or 100, whch deposts wth the broker.
The broker then goes on the e change and buys 5.000 bushes of
wheat at 1 per bushe for , obgatng hmsef to another broker
for 5,000. If wheat goes up n prce to 1.02 on the ne t day,
orders hs broker to se the wheat for hm, and the proft to s
100, ess a commsson of one-fourth of 1 cent per bushe, or 12.50,
whch the broker charges as a commsson and whch s the soe
proft of the broker. If the market goes down, s asked to post
more margn, and fang to do so the broker must se s wheat
at the market prce to protect hmsef. Let t be assumed that the
wheat whch bought at 1 per bushe drops to 9 cents per bushe.
There s then a oss of 4 cents per bushe, or 200. Snce as put
up a margn of ony 2 cents per bushe, and refuses or negects
to put up more, the broker must se at the market prce, or at a
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214(a)7, rt. 151.
15
oss of 200, whch must be pad to the broker from whom the gran
was bought through the cearng house. It w therefore be seen
that, on ths transacton, the broker has suffered a oss out of hs
own pocket of 100 and has aso ost hs commsson of 12.50 uness
can be nduced to pay the account. Loss may aso occur where
the market goes up, when the customer has ordered the broker to
se gran for hm nstead of buyng. Ths s known as seng
short, and s |ust the reverse of buyng and beng sod out at a
oss.
Counse for ta payer n the bref and on ora argument franky
admt that the man obstaces n the way of coectng these accounts
are the ease wth whch the defense of egaty may be set up and
the dffcuty of rebuttng such an aegaton even n a bona fde case.
It s asserted that as a practca matter the broker can not ord-
narhT te beforehand who of hs customers ntend to make or
receve deveres and who do not that most of the amounts are
sma, and that regardess of the beeved vadty of the transactons
such unpad accounts are ordnary treated as worthess and that
the broker tres to protect hmsef by buyng or seng, as the case
may be, n such a manner that the margn covers the oss and
commsson. . It s emphaszed that no one can say that these
accounts as they stand on the books are ega but any awyer can
predct that they are worthess because of the dffcuty and e peme
The Income Ta Unt s dsposed to aow as deductons for
osses the unpad advances and commssons from gross ncome
under secton 214(a)4 of the Revenue ct of 1918. though the
resut w no doubt ordnary be the same, t s beeved that t
woud be more ogca to treat such amounts as bad debts under
secton 214(a)7.
Tradng n futures, so ong as t s not tnctured wth gambng, s
a egtmate busness. ( eard v. M mne, 88 ed., 808 oard of
Trade v. Osen, 202 U. S., 1.) broker may recover hs advances
and commsson uness t s shown that there was no ntenton to
dever or accept the gran and the broker had notce, ether actua
or constructve, of such ntenton, n whch case the transacton s
consdered a gambng transacton, from whch no cause of acton
may arse. ( art ctt et a. v. Suner (111), 74 N. ., 370.) The
burden of estabshng the egaty of such transactons rests upon
the party who asserts t. (Mohr et a. v. Mesen (Mnn.), 49 N. W.,
8 2.) See aso Law Opnon 908 (C. . 2, 212).
rtce 151, Reguatons 02, reads n part as foows:
Where the surroundng crcumstances ndcate that a debt s worthess
and uncoectbe and that ega acton to enforce payment woud n n
probabty not resut In the satsfacton of e ecuton on a |udgment, a showng
of these facts w be suffcent evdence of the worthessuess of the debt for te
purpose of deducton.
It s the opnon of ths offce that the accounts n queston n the
nstant case are prma face at east the resut of ega transactons,
and that, n the absence of some showng to the contrary they are
deductbe on the ground that ega acton to enforce payment
woud n a probabty not resut n the satsfacton of e ecuton
on a |udgment. Ths provson does not requre the brngng of
an acton to determne the worthessness of a debt nor does there
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157
214(a)7, rt. 151.
seem to be any authorty for requrng a ta payer engaged n a
awfu busness to demonstrate the egaty of hs varous transac-
tons by court procedure smpy because some of them may or may
not be ega.
It s therefore hed that deductons from gross ncome may be
aowed for the unpad advances and commssons n accordance wth
the statutory provsons and the practce of the ureau reatve
to bad debts. Cases where such cams are made shoud, however, be
treated wth cauton. These deductons shoud not be aowed
to the operators of bucket shops, whch are ony ostensby brokerage
offces, nor n cases where t s evdent that there was no transfer
or devery, or ntenton to transfer or dever the stock or com-
modty nomnay deat n.
Neson T. aktson,
Soctor of Interna ft e venue.
rtce 151: ad debts. 111-22-1578
. R. R. 7 41
R NU CT O 1018.
note n the amount of doars charged off by the II ank n
1920 was no more worthess than the other unsecured notes of
the bankrupt debtor, on a of whch a 19 per cent dvdend was ut-
matey pad, whch dvdend was antcpated n 1920. Under these
crcumstances no |ustfcaton e sts, under the Revenue ct of
1918, whch requres as a condton of deducton that a debt shoud
be ascertaned to be worthess, for aowng the deducton. The
fact that the State bank e amner drected the charge-off s m-
matera.
The Commttee s of the opnon that the surroundng and at-
tendant crcumstances e stng at the end of 1920 may fary be
sad to have ndcated that an unsecured note of 1.2 doars was
worthess and that the amount thereof shoud be aowed as a de-
ducton n computng the company s ta abe ncome.
The Commttee has consdered the appea of the M ank from the
acton of the Income Ta Unt n refusng to permt a deducton of
2.2| doars charged off as bad debts pursuant to the drectons of
the State bank e amner.
The amount charged off was made up of two sums frst, an un-
secured note for doars owed to the appeant by the O Company
second, an unsecured note for 1.2a doars owed to the appeant by .
Wth reference to the note for doars due from the O Company,
the facts are as foows: Durng 1920 the O Company owed the
appeant appro matey 1 doars. Of ths amount, 3.9| doars
was secured by rea estate and Z doars was unsecured. On pr
, 1920, the 0 Company made an assgnment for the beneft of ts
credtors, and n ugust, 1920, ts credtors caused to be fed an n-
vountary petton n bankruptcy, the company beng ad|udged
bankrupt n the same month. st of assets and abtes fed n
November, 1920, ndcated that the bank woud pay to the unsecured
credtors a dvdend of ess than 20 per cent. t that tme the State
bank e amner ordered the appeant to charge off, out of ts unse-
cured notes aggregatng Z doars, a note of doars, and sad note
was charged off. The bankruptcy proceedngs were concuded n
uy, 1921, at whch tme the unsecured credtors receved dvdends
totang about 19 per cent.
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214(a)7, rt. 151.
158
It s obvous that the doars note charged off was no more worth-
ess than the other unsecured notes, on a of whch a 19 per cent
dvdend was utmatey pad, whch dvdend was antcpated n
1920. Under these crcumstances no |ustfcaton e sts, under the
Revenue ct of 1918, whch requres as a condton of deducton that
a debt shoud be ascertaned to be worthess for aowng the deduc-
ton. The fact that the State bank e amner drected the charge-
off s mmatera.
Wth reference to the note for 1.2r doars due from , the facts
are as foows: Durng 1920, owed appeant appro matey 3.7
doars, a of whch was secured e cept the note n queston for 1.2|
doars. In November, 1920, was ad|udged bankrupt, and the
schedue of assets and abtes ndcated that substantay a the
assets were pedged and that the amount avaabe for unsecured
credtors was hardy more than nomna. t about ths tme the
State bank e amner ordered the appeant to charge off the unse-
cured note for 1.2a doars, and the sad note was charged off. To-
ward the end of the year some queston arose as to the vadty of the
securty hed by the appeant, and n order to ad|ust the dspute
an agreement was entered nto by the trustee of the bankrupt am the
appeant whch provded that the unsecured note for 1.2 doars
shoud be thrown out and that the appeant woud make no cam
whatever, as an unsecured credtor. The trustee on hs part con-
ceded the vadty of the mortgage by whch the remanng notes were
secured. Durng 1920, that agreement was tentatve and was sub-
|ect to the approva of the referee n bankruptcy but was after
anuary, 1921, approved by the sad referee as made n 1920. The
assets pedged behnd the secured notes proved nsuffcent to meet
the face amount thereof, and the appeant receved nothng as an
unsecured credtor.
The Commttee s of the opnon that the surroundng and attendant
crcumstances e stng at the end of 1920 may fary be sad to have
ndcated that the unsecured note was worthess and that the amount
thereof shoud be aowed as a deducton n computng appeant s
ta abe ncome.
Pursuant to the foregong, the Commttee recommends that the
appea be dened n part and sustaned n part and that the Unt
revse ts audt accordngy.
Chares D. ame.
Charman Commttee on ppeas and Revew.
rtce 151: ad debts. IIT-22-1579
I. T. 2012
R NT CT O 19 21.
The ta payers havng a verba opton to purchase certan ands,
ndorsed notes of purchasers of parces of t arge porton of
the and was purchased by , who went nto bankruptcy, at whch
tme he owed n arge sum on the notes. t forecosure sae the
property brought a prce oss than the baance due by on the
notes and the ta payers were obged to pay ths baance.
ssumng that the amount so pad s uncoectbe from the
nnker of the note, each of the ta payers may deduct as a bad
debt hs proportonate part of the amount n the year n whch the
debt was ascertaned to be worthess and charged off.
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214(ft)8, rt. 1 1.
The ta payers, durng the year 1920, took a verba opton on cer-
tan ands of , wth the understandng that the ands coud be
dvded nto sma tracts and sod at pubc aucton, and the ta -
payer woud ndorse the purchasers notes. arge porton of the
and was purchased by , the ta payers ndorsng hs notes over to
the owner of the and. In 1921, , the purchaser, went nto voun-
tary bankruptcy, at whch tme he owed a arge sum on the notes.
y order of the bankruptcy court, forecosure proceedngs were had
on the porton of and bought by . t the forecosure sae the
property brought a prce ess than the baance due by on the notes
and the ta payers were obged to pay ths baance.
ssumng that the amount so pad s uncoectbe from the maker
of the note, each of the ta payers may deduct as a bad debt hs pro-
portonate part of the amount n the year n whch the debt was
ascertaned to be worthess and charged off.
rtce 152: ampes of bad debts.
(See 1. T. 2025 sec. 214(a)8, art. 1 1.) Debt occasoned by pay-
ment of abty as an accommodaton ndorser.
S CTION 214(a)8. D DUCTIONS LLOW D:
D PR CI TION.
rtce 1 1: Deprecaton. III-3-1310
. R. R. 4822
R NU CT OT 1918.
In the ght of the entre record, the Commttee fnds that the
rate of 5 per cent deprecaton camed by the M Company on cer-
tan ocean freght and passenger steamshps for the years 1918
and 1910 s not e cessve and shoud be aowed.
The Commttee has carefuy consdered the appea of the M
Company from the acton of the Income Ta Unt n reducng de-
precaton camed to have been sustaned on s steamshps durng
the years 1918 and L919 from 5 per cent to 3 per cent of cost per
annum wth 1 per cent addtona aowed durng the perod n
whch the vesses were n war servce.
The appeant company was ncorporated ebruary , 19 , and
s engaged n the operaton of a feet of hgh-speed combnaton
freght and passenger steamshps. It owns and n 1918 and 1919
operated the foowng steamshps:
Name of vesse.
Date
but.
Toonu e.
Name of vesse.
Dute
but.
Tonmse.
n....
130-
190-
1M-
5,000
,000
,000
_
W-
190-
190-
9,000
9,000
3,000
e
I
The ast-named vesse was acqured n 190- and has aways been
operated as a freght vesse.
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2 (a)8, rt. 1 1.
1 0
It has been the appeant s consstent practce from 190-, the
date of the acquston of the frst of the s named vesses, to charge
off deprecaton on ts steamshps at the rate of 5 per cent per an-
num. Ths rate has been apped aganst the tota cost of each ves-
se, ncudng hu, machnery, equpment, and furnshngs. Its n-
come ta returns from 1909 have been made up upon that bass and
the returns for a years pror to 1918 have been audted and passed
by the ureau wthout the dsaowance of any part of the depreca-
ton camed.
In ts memorandum of transmtta, the Income Ta Unt states
that t has made a carefu nvestgaton of the usefu fe of steam-
shps used n ocean trave and fnds that t s not e ceptona to fnd
steamshps makng reguar runs even though they have been n serv-
ce for more than 33 years that a recent nvestgaton of the fe
of passenger vesses used on the Great Lakes dscoses that t s not
unusua to fnd steamshps of substantay the same type as the
steamshps owned by the appeant company makng day runs be-
tween Great Lake ports even though they are more than 33 years
od that an e amnaton of the records of mercan and oregn
Shppng (1922) dscoses that there arc hundreds of vesses whch
are n present usage n the tantc, Pacfc, and Great Lakes trades
whch have been used for more than 33 years. In vew of those
facts, the Unt concudes that a 3 per cent aowance for deprecaton
s ampe.
On behaf of the appeant t s contended that ts own e perence
ndcates that a rate of 5 per cent s not e cessve. The steamshp
1, purchased as a freghter n 190- at a cost of 100,e doars, has a-
ready been dscarded from servce and s now for sae at amost any
prce. Its sae vaue s estmated at doars. The steamshp D,
but n 190-, has aready been taken off the onger runs. It s not
as fast as the other steamshps owned by the appeant company and
was not gettng the passenger trave. It s now dong poneer serv-
ce n shorter runs. The company hopes that t may be abe to get
suffcent freght and passengers from the port of the shorter run to
make t proftabe to operate the steamshp upon ths route for pos-
sby fve years onger. It s aso stated that the steamshp and
ts sster steamshp are aso becomng obsoete and ess proftabe
to operate by reason of the faster and more economca operaton of
the more modern steamshps.
The steamshps owned by ths company other than the I were
specfcay desgned and but to sut the trade between the ports
of the onger run, ths trade route beng n the summer weather
zone n whch oaded drafts and freeboards for the entre year are
permtted on the freeboard marks used for summer months n the
tantc. The vesses are ftted wth arge sde cargo ports for the
handng of freght through them by eectrc |tney trucks and the
propeng machnery s ocated aft to permt of the fu mdshp
porton of the vesses (ordnary occuped by propeng machnery)
beng avaabe for the stowage of freght, thus aowng for an even
dstrbuton of the cargo oad over the vesse. esses wth ma-
chnery aft can ony be successfuy operated when cargoes for the
round trp are avaabe. or ths reason the vesses have sma
savage vaue when dscarded from ths servce. or nstance, they
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214(a 8, rt. 1 1.
woud not be sutabe for a certan trade where shps often have to
make the return trp n baast. mass of evdence has been pre-
sented n ths case to the effect that there s and has been for many
years a rapd evouton n the constructon of fast passenger ocean-
gong steamshps and evdence of ths fact s shown by the foowng
e cerpt from the affdavt of , the superntendng engneer of the
appeant company:
That to present status of the recprocatng engne as but from 5 to 10
years ago s such that such engnes w become whoy mpractca from the
standpont of economy and upkeep wthn the ne t few years. Turbnes,
reducton gears, eectrc propuson and Dese engnes have a been deveoped
wth the dea n vew of reducng overa upkeep as regards number of engne-
room crew, the cost of overhaung and repar, stores requrements, and fue
consumpton. It s recognzed by marne engneers that when a shpowner ot
to-d|y decdes on a type of shp best suted for hs present requrements and
has the shp but and machnery nstaed, before the tras are competed an-
other type of drve has been deveo ed or certan other mprovements n the
ast seected type of drve have been made whch effects greater economy. s
a promnent e ampe of the rapd progress made n recent years n the art of
desgnng and constructng steamshp machnery, the phenomena deveopment
of the Dese engne n the ast 4 or 5 years may be mentoned. If even haf
as much progress shoud be made n the deveopment of the Dese engne durng
the ne t 10 years as has been actuay made n the deveopment of that engne
In the ast 4 or 5 years, the steam engne or turbne n any type of drve e cept
possby n an e tremey arge vesse w become obsoete, and shps so
equpped w be unabe to compete wth those usng nterna combuston
engnes.
The further fact was brought out that the machnery and equp-
ment of a passenger steamshp cost from 40 per cent to 45 per cent
of the tota cost of the vesse and that much of the machnery and
equpment have to be repaced ong before the apse of 20 years.
It s probabe that no rate of deprecaton can be ad down whch
woud appy to a companes operatng ocean-gong steamshps.
The foowng authortes f a mnmum 4 per cent rate of depreca-
ton for vesses: ccountant, anuary 1, 191 conomst, May 1 ,
1914: udtng, Theory and Practce, Montgomery (191 ) Income
Ta Procedure, Montgomery (1919 and 1920). y the Pennsuar
Occdenta Steamshp Lnes and the Roya Ma Steamshp Packet
Co. and by ccountng and Commssons, n the November ssue of
1915, and by the ccountant n ts ssue of May 28,1898, a 5 per cent
rate s consdered to be proper by the ccountant of December 21,
1889, a rate of from per cent to 7 per cent appears to be estmated
as soundy based and by the Phppne Isands oard of Pubc
rtty Commssoners a proper rate of deprecaton on steamshps
as been found to be per cent. (In re Mana Raroad Co.,
P. U. R. 1915, ch. 711, p 722.)
In the ght of the entre record, the Commttee s of the opnon
that the 5 per cent rate of deprecaton camed by the appeant s
not e cessve and shoud be aowed. It was oray stated that f ths
rate were aowed no addtona deprecaton woud be camed for
the perod of war servce. It recommends that the acton of the
Income Ta Unt n dsaowng any part of the deprecaton camed
be reversed and the appea sustaned.
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211(a)8, rt. 1 1.
1G2
rtce 1 1: Deprecaton. III-7-13 3
R. R. 42
R NU CT O 1917.
There s no provson In the Revenue ct of 1917 or the regua-
tons thereunder permttng a deducton for obsoescence of good
w or physca property.
,oss n usefu vaue can be camed ony where the assets n
queston wore permanenty abandoned or dscarded durng the year
n whch the oss Is camed. No e traordnary deprecaton or
oss of usefu vaue of brewery property, due to prohbton egs-
aton, may be camed for the year 1017 uness the property had
been |teruauenty abandoned n that year.
The Commttee has consdered the appea of the M Company
from the acton of the Income. Ta Unt n dsaowng a deducton
of . doars, representng e traordnary deprecaton, obsoescence,
or oss of usefu vaue of brewery property n 1917.
The record shows that n November, 191 , the consttuton of the
State of S was amended, provdng that the manufacture, sae,
keepng for sae, gvng away, barterng, or furnshng of any vnous,
mat, brewed, fermented, sprtuous or nto catng quors, e cept for
medcna purposes, sha be after pr 30, 1918, prohbted n the
State forever/
ppeant s brewery was operated unt May 1, 1918, after whch
t was cosed down for about one year on advce of counse to the
effect that t was unawfu to manufacture any mat beverage regard-
ess of acohoc content. It was ater determned that the manufac-
ture of beverages meetng the requrements of the natona prohb-
ton aws woud be permtted, and appeant engaged n the manu-
facture of near beer about the mdde of 1919.
ppeant wrote off e traordnary deprecaton or oss n usefu
vaue of ts property n the arbtrary amount of doars n 1917,
and cams that the deducton shoud be aowed as oss n usefu
.vaue of the property actuay sustaned n that year.
There s no provson n the Revenue ct of 1917 or the regua-
tons thereunder permttng a deducton for obsoescence of good
w or physca property. Loss n usefu vaue can be camed ony
where the assets n queston were permanenty abandoned or ds-
carded durng the year n whch the oss s camed. There was no
permanent abandonment of appeant s property n 1917, therefore,
no obsoeteness.
fter carefu consderaton of a the evdence of record, together
wth the arguments made at the ora hearng, the Commttee con-
cudes that the acton of the Income Ta Unt n dsaowng the
deducton of doars, camed as e traordnary deprecaton or
oss of usefu vaue of brewery property n 1917, shoud be sustaned.
ccordngy, the Commttee recommends that the appea be dened.
Chares D. ame
Charman Commttee on ppeas and Revew.
rtce 1 1: Deprecaton.
(See I. T. 1933 sec. 214(a), art. 101.) utomobe used by
awyer n the practce of hs professon.
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1 3
214(a) , rt. 1 1.
rtce 1 1: Deprecaton. 111-17-151
S. M.1723
R NU CT O 1921.
n e ecutory contract for the sae of m property, dated ugust,
1920, e pressy provded that the purchaser was to have possesson
on anuary 1, 1921, when t n fact acqured fu possesson. What
t purchased, therefore, was the property n ts condton on anu-
ary 1, 1921, and the amount of the purchase prce was f ed accord-
ngy. It coud not have suffered any oss from deprecaton
pror to that date, because t bought the property n ts then de-
precated condton. Whether the purchaser became from the date
of the contract the equtabe owner of the m property by reason
of ts equtabe converson s mmatera n determnng who Is en-
tted to deprecaton.
The queston s rased as to whether or not the purchase by the ta -
payer of certan m property shoud be deemed to have taken pace
n 1920 or 1921. It s assumed that the specfc queston on whch an
opnon s desred s as to the effect of the sae as regards the rghts
of vendor and vendee to deprecaton upon the property purchased,
and ts effect upon the nvested capta of the purchaser.
The facts n the case are as foows:
On une , 1920, an agreement was entered nto between the M
Company and the N Company, the ta payer, whereby the former
agreed to se and the atter to buy a factory and the and upon whch
t was stuated and water power rghts runnng wth the and for
the sum of 950a doars, payabe as foows: 50a doars at the date
of e ecuton of the agreement, the recept of whch s acknowedged
n the nstrument: 3003- doars n cash and OO doars n frst mort-
gage bonds of the M Company on anuary 1, 1921 and 500 doars
n ve equa annua nstaments of 100a doars each on or before
the 1st day of anuary of the years 1922, 1923, 1924, 1925, and 192 ,
respectvey, wth nterest at the rate of per cent per annum from
anuary 1, 1921, on whch date vendor s to gve possesson and e e-
cute a and contract for ts conveyance, free and cear of encum-
brances, upon payment n fu of the purchase money. The agree-
ment further provdes that on payment of the fu purchase prce the
vendor sha e ecute and dever to the purchaser a warranty deed.
It s aso provded that the vendor sha retan the possesson and
use of the property unt anuary 1.1921, mantanng t n good op-
eratng condton unt that day that the purchaser may. however,
pror to anuary 1, 1921, make such mprovements as may be desr-
abe, provded such mprovements do not nterfere wth the operat on
of the factory by the vendor that the vendor sha pay the 1920 ta es
that a materas and suppes not purchased of the vendor by te
purchaser sha be removed wthn 10 days after anuary 1. 1921, pro-
vded the pu chaser sha have made hs agreed payments and that
the vendor sha mantan nsurance on the property unt anuary 1,
1921, oss f any payabe to the seer and buyer as ther respectve
nterests may appear, after whch date the, purchaser s to mantan
the nsurance unt the fu payment of the purchase prce has been
made, oss f any payabe to the buyer and seer as ther respectve
nterest may appear. The provsons wth respect to possesson, etc.,
read:
The seer Is to retan possesson and use of sad property unt anuary
1,1921, the seer then to surrender possesson and gve and contract for the
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2U(a)8, rt, 1 1.
1G4
conveyance of sad pro erty, free and cear of a encumbrances, on payment
of the then unpad purchase money, accordng to the tmes and condtons
above stated. Seer w, on the competon of the payments above specfu.
make to the buyer a warranty deed of a .sad property wth fu covenants
of tte aganst encumbrances.
Notwthstandng the fact that the seer retans genera possesson and use
of sad property unt anuary 1, 1921, yet n the meantme buyer sha have
the rght to make such mprovements to such property as may be desrabe
for ts purposes, and as may not nterfere wth fu ntraton of the pant by
the seer.
The seer w pay ta es of 1020 the buyer thereafter.
The se|er sha mantan the property n good operatng condton, and n
as good condton as the same now s, unt the 1st day of anuary, 1921,
e ceptng ordnary wear and tear and decay.
The purchaser vountary and wth the permsson and acques-
cence of the vendor pad to the atter the 300 doars whch was due
anuary 1,1921, n advance of that date. The payments were made n
nstaments of 100 doars each on ugust , 1920, November ,
1920, and December , 1920. On these advance payments the
vendor aowed the vendee nterest at the rate of per cent from the
date of payment to anuary 1, 1921. the date on whch they were due
under the contract.
Pursuant to the provsons of the contract, the purchaser between
the 1st of ugust and the end of te year entered upon the premses
and made e tensve repars and ateratons nvovng an e pendture
of 8 doars for machnery and 71 doars for budngs, a tota
of 139 doars. In connecton wth ths work t occuped a con-
sderabe porton of the warehouse on the premses from the month
of uy on. Some of the more mportant ateratons and repars
conssted of the remova of tanks to the basement and nstaaton
of new grders and steps at an appro mate cost of 2.r doars: con-
structon of a new pant, at a cost of 38 doars the reconstructon
and enargement of a room by addng one and one-haf stores of
brck constructon at a cost of 41 doars the budng of a new
retanng wa at a cost of 2 doars and a new warehouse at a
cost of 4.r doars pantng the roofs and the wndow sashes to cor-
respond wth the pant coors of the purchaser s other m prop-
ertes.
u possesson was surrendered to the purchaser on anuary 1,
1921, n accordance wth the contract. Durng the perod from the
e ecuton of the contract on une to surrender of fu possesson
on anuary 1 the seer retaned possesson and operated the factory
on ts own account.
The so-caed and contractr provded for n the quoted e tract
from the agreement of une , 1920. was e ecuted on anuary ,
1921. It compes substantay wth the terms of the frst agreement
e cept that certan parts of ot 11 (one of the parces of and de-
scrbed n and sod under the terms of the frst agreement) are e -
cuded. Ths e cuson of part of ot 11 was due to the fact that
une , 1920, t had been dscovered that the seer dd not have
tte thereto or at east that ts tte was defectve. The amount of
and thus e cuded or ts vaue does not appear, but t was of suf-
fcent consequence to gve the vendor consderabe concern.
The ta payer cams that t s entted to deprecaton upon the
property purchased from une , 1920, the date of e ecuton of the
contract.
upon nvestgaton
e ecuton of the agreement of
1 .M t. _ _ 11 1 1 1
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214(a)8, rt. 1 1.
Wth respect to the rghts of vendor and vendee under a bndng
e ecutory contract for the sae of and such as the above-mentoned
agreement of une , 1920, t s the genera rue foowed by the
courts of the State of Wsconsn that from the date of the e ecuton
of the contract the vendee becomes the equtabe owner of the and.
(Western L. c - C. Co. v. Cooper Rver L. Co., 138 Ws., 404 Wetzer
v. Duffy, 78 Ws., 170 Laughn v. North Wsconsn Lbr. Co., 17
ed.. 772.)
oowng ths prncpe, t has been hed that the vendor s n-
terest consttutes personaty and s dstrbutabe among hs ne t of
kn. (Mayer v. Gowand, 2 Dck.. 5 3, ng. 1779 and c- ses cted n
57 L. R. ., 4 .)
Conversey, t has been hed that the vendee s nterest consttuted
1729 and cases cted n 57 L. R. ., 4 .)
It has aso been hed that the wfe of the vendee s entted to
dower n and purchased under an e ecutory contract (Thompson v.
Thompson, 4 N. C, 430), and that the wfe of the vendor s not
entted to dower n property whch the husband has agreed to se
pror to marrage, athough he may hod the ega tte after mar-
rage. (Dean s ers v. Mtche s ers. y., 1830 4 . . Mar-
sha. 451.)
The prncpe ad down by these cases s that so far as rghts
depend upon the dstncton of rea estate and persona property,
the nterest of the vendee becomes rea estate and that of the vendor
persona property from the e ecuton of the contract, even though
payment of the purchase prce, devery of the deed, and the trans-
fer of possesson be postponed. It has aso been hed that depreca-
ton and the rsk of oss of budngs by fre and smar osses must
be borne bv the vendee. (Wetzer v. Daffy, 78 W7s., 170 Laughn
y. North Wt. Lbr. Co.. 17 ed., 772 Woodward v. McCoum,
111 N. W. (N. Dak.), 23 veston v. Msssspp d- R. R. oon Co.
(Mnn.), 79 N. W.. 92: Thompson v. Norton and others, 14 Inch, 187
Maron v. Wocott (N. .), 59 t., 242 Wanscott v. Svers, 13 Ind.,
497 Snyder v. Murdoch, 51 Mo., 175 Mahan v. ome Ins. Co., 22
S. W. (Mo.), 593 Mannng et a. v. North rtsh Mercante Ins.
Co. (Mo.), 99 S. W., 1095.)
Conversey, the vendee s entted to any ncrement n vaue.
(27 L. R. . (N. S.), 233, and cases cted n the note.) The courts
aso hod that the vendee s nterest can be sod or mortgaged and
can he eved upon and sod upon e ecuton. (Smonson v. Wenze,
147 . W., 804 Raon v. Mercer, 42 N. W., Cummnas v. Duncan,
m N. W., 712.)
In no case, do these decsons depend upon the transfer o posses-
son of the property. ( mes Cases n quty ursdcton, note at
p. 23 Mamng v North rtsh Mercante Ins. Co., 99 S. W.
(Mo.), 1095.)
Reyng upon the rue of equtabe converson, the ta payer takes
the poston that t became the equtabe owner of the property from
the date of the e ecuton of the contract of une , 1920 that
deprecaton durng the perod from the e ecuton of the frst con-
tract to the surrender of possesson must be aowed to ether the
vendor or vendee that nasmuch as benefca ownershp s a neces-
sary prerequste to a deprecaton aowance, t and not the vendor
(Mner v. Ms, Mosey 123, ng.
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214(a)8, rt. 1 1.
1GG
s entted to cam t n ths case. The reatonshp between vendor
and vendee durng that tme, t says, was tat of andord and
tenant (ctng Watnscott v. Svers, 13 Ind., 497), the vendee beng
the andord and the vendor the tenant.
The genera rue that an e ecutory contract w rks an equtabe
converson s not appcabe, however, uness there s abty, as
we as wngness, on the part of the vendor to perform, and f he
s so stuated that he can not make tte accordng to the contract,
the purchase - w not be deemed te owner and oss due to de-
precaton, deteroraton, or destructon of the property fas upon
the vendor. (Mackey v. owes, 98 Ga., 730 25 S. ., 884 : Phnzy
v. Gwrnsey, 111 Ga., 34 3 S. ., 79 Lotnbard v. Chcago Srw
Congregaton, 4 111., 477 ppstcn v. uhn, 225 .. 115 80 N. .,
- 80 Cahoon v. eden, 3 ush., 74 ares v. Cobe, 180 Mass.,
20 2 N. ., 244 Dcknson v. Wrght, 5 Mck. 42 22 N. W., 312
nney v. cko , 24 Neb., 1 7 38 N. W., 81 ostwck v. each,
105 N. Y.. 1: 12 N. ., 32 Chrstan v. Cobe, 22 Gratt., 82
oster v. Deacon, 3 Madd. Ch., 394 mundon v. Severson, 170
N. W. (S. Dak.), 33 echte v. ank, 35 S. Dak., 191: 151 N. W.,
887 owde v. encks, 18 S. Dak.. 80: 99 N. W., 98: Thompson v.
Goud, 20 Pck., 134 Green v. Smth, 1 tk., 572: Re Thomas,
L. R., 34 ch. Dv., 1 5 L. ., ch. N. S., 29.)
Snce the M Company, the vendor n the contract of une , 1920,
was not n a poston at any tme to make tte n accordance wth
the terms of that contract, there was no equtabe converson at
east unt the sgnng of the second contract. The ta payer s
argument s therefore based upon a fase premse.
It s doubtfu, n any event, f the queston of who s entted to
deprecaton n cases of ths nature can be decded on the technca
rue of equtabe converson. The rea substance of the present case
s ths: The st contract e pressy provded that the purchaser
was to have possesson on anuary 1, 1921. What t purchased,
therefore, was the property n ts condton on that date, and the
amount of the purchase prce was f ed accordngy. It coud not
have suffered any oss from deprecaton pror to that date, because
t bought the property n ts then deprecated condton.
The ta payer, of course, s entted to deprecaton from anuarv
1, 1921, on.
Snce the transacton effected no change of ownershp of the prop-
erty n 1920, there was no substtuton of assets, and hence no effect
upon nvested capta of the M Company durng that year.
Neson T. artso ,
Soctor of Interna Revenue.
rtce 1 1: Deprecaton. I 24 1004
( so Secton 214(a)7, rtce 152.) I. T. 2025
R NU CT O 1921.
member of a aw partnershp who personay owns hs offre
furnture, the frm assumng no burten of upkeep on the same,
nfty deduct deprecaton thereon.
n accommodaton uorser who has pad notes because of the
death or nsovency of the makers, s entted to cam deductons
as bad debts the amount of the notes n the year In whch the
debts were determned to be worthess and charged off.
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214(a)8, rt. 1 3.
dvce s requested as to whether the ta payer, a member of a aw
frm, who personay owns hs offce furnture, s precuded by reason
of hs membershp n the frm from chargng off and deductng de-
precaton thereon, the frm havng no ownershp thereof and assum-
ng no burden of upkeep as to the same, and chargng no deprecaton
thereon.
ed, that f the furnture s not consdered as part of the capta
contrbuted to the partnershp by the ta payer, he s entted to cam
a reasonabe rate of deprecaton thereon n arrvng at hs net ncome
sub|ect to ncome ta .
n accommodaton ndorser, who as pad notes because of the
death or nsovency of the makers, s entted to cam deductons as
bad debts the amount of the notes n the year n whch the debts
were determned to be worthess and charged off.
rtce 1 3: Deprecaton of ntangbe 111-1-128-2
Pursuant to a partnershp agreement, D pad doars to another
for an nterest n the good w of the partnershp, whch was to
contnue for a perod of fve years.
Under the aws of Te as, upon the e praton of the partnershp
term D w be entted to an accountng for the vaue of hs share
of the good w of the partnershp. Deductons for obsoescence
of good w or the proratng of sueh payment as a bonus are not
aowabe.
D entered nto a partnershp agreement wth another party, desg-
nated as , n the copy of the agreement submtted, for the pur-
pose of conductng a busness at , Te ., under tne partnershp
name of and Company, the fe of such partnershp to be fve
years.
The partnershp agreement provdes as foows wth respect to the
nterest of each partner and dvson of profts and osses:
(c) sha put nto the partnershp doars, consstng of rhe present
Impne s equpment of and Company accepted at ts far vaue, whch h s been
agreed upon, and the addtona amount to be pad n actua cash.
( / The sad D sha pay nto sad busness dohu-s n actua cash at the
Suue tme and sha pay to ndvduay the sum of doars for a
nterest n the good w of sad busness of and Company, and upon
snen payments beng made the sad sha own and hod a nterest
n sad busness and the sad D sha own and hod a nterest n sad busness.
payments by eac partner sha be mnte to the partnershp on or before
the 1st day of anuary, and the payment of D to sha aso be made on
or before sad date.
(o) profts and osses of sad busness, as between the partners, sha be
dstrbuted or dvded and shared as between them, on the bass above stated
that s, nterest to and nterest to D.
The sum of doars was pad by the ta payer to the other party
to the agreement for an nterest n the good w of and Company
referred to n paragraph (d) of the agreement. The agreement
provdes that n the event of the death of O durng the term of the
partnershp the estate of D sha se and the other partner sha
purchase the estate s nterest n the partnershp upon the payment
I. T. 1892
Secton 215, rtce 293.)
R NU CTS O 1018 ND 1921.
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214(a)8, rt. 1 3.
8
to the estate of the book vaue of such nterest, and n addton there-
to such part of the doars as the remanng years of the partner-
shp term bears to the entre fve-year term. Nether of the partners
may assgn, se, transfer, convey, pedge, or encumber hs nterest
n the partnershp wthout the consent of the other party.
The artces of partnershp are sent as to D s rghts n the good
w of the frm after the termnaton of the partnershp reaton
otherwse than by death or dsabty. D s apparenty under the
mpresson that athough the amount of doars was by the terms
of the agreement pad for a nterest n the good w of the
partnershp, at the e praton of fve years he w own no nterest
n the pood w. Though the sum of ./ doars s e pressy denom-
nated the purchase prce of an nterest n the good w, he argues
that the payment s merey a bonus pad to hs partner for the
prvege of enterng nto partnershp for a perod of fve year ,
argues further that even assumng that the payment of doars was
for good w n the partnershp, he s entted to obsoescence of ths
good w for the reason that at the end of the term of the partner-
shp he w own no nterest n the good w. oth these arguments
appear to be based upon the assumpton that when the partnershp
has ended by the e praton of ts term D w have nothng to show
for hs payment of doars.
The genera rue s that the good w of a partnershp s part of
the assets of the frm and s to be taken nto consderaton n the
pott enent and accountng had between the partners after the ds-
souton of the frm. utchns v. Page (00 N. ., 5G5 (Mass.)):
Inman v. In-sttr (134 N. W 2 5 (Nebr.)) Peterson v. Lghtfood
(101 Pac., 48 (Ca. pp.)). The facts n the case of Rce v. nge
(73 Te ., 350 11 S. W., 338) are not qute dentca wth the facts
n the present case, for the reason that the partners there traded
under ther own names that s. under the frm name of nge and
ce. The court ntmated, however, that (p. 340) f the busness
had been conducted under an assumed name whoy dstnct from the
name of ether partner, such, for e ampe, as the (aveston Insur-
ance gency, t mght be hed that the probabty that the patrons
of the partnershp woud contnue to do busness wth any person
or frm usng that name consttuted a vauabe rght, and woud be
the sub|ect of ega dsposton upon a dssouton of the frm. In
the present case the partners do busness under the frm name of
and Company. I) has studousy refraned from gvng the name
of hs partner, contentng hmsef wth desgnatng hs partner as
. It s assumed that the partner s name s not , for f t
were D woud hardy have resorted to such eaborate secrecy. It s
cear that under the aws of Te as, as ndcated by the Supreme
Court of Te as n Rce v. ge, supra, when the fve-year term
of the perod of. partnershp w have e pred D w be entted
to ah accountng for the vaue of hs share of the good w of the
frm. It resuts that the deductons for so-caed obsoescence of good
w or for proratng a bonus can not be aowed, because the
doars n queston s the purchase prce of an nterest n the frm s
good w whch D now owns and w own upon dssouton of the
frm. When the present partnershp termnates and there s an
and as such to be prorated over
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8214(a)8, rt. 1 3.
accountng and settement had between the partners a gan or oss
may be reazed by D as a resut of the e pendture by hm n 1920
of doars for an nterest n the good w of and Company.
Unt that tme no deductons can be camed for the reason that the
matter w not, unt then, be a cosed transacton.
rtce 1 3: Deprecaton of ntangbe 111-11-141
property. . R. R. 092
( so Secton 32 , rtce 835.)
R NU CTS O 1917 ND 1918.
The ta payer had a term contract for the manufacture of certan
artces, whch contract was made n 1910 and consttuted a part
of the assets nvoved n a consodaton whch took pace n 1911.
The contract s conceded to be ntangbe property. The tangbe
assets were worth more than the par vaue of stock ssued and
were so recognzed on the books, whe the contract was not set
up on the books ether when acqured or at the date of consoda-
ton. The vaue of the contract or other ntangbe property ac-
qured may not be ncuded n nvested capta.
The ta payer s not entted to base a deprecaton or amortza-
ton deducton on the March 1, 1913, vaue of a mted-term eon-
tract, even assumng that the contract n queston had a March 1,
1913, vaue.
The contract n queston, a contract gvng the ta payer no defnte
assurance of future profts, such profts dependng prmary upon
the effcency of the ta payer s operatons, ts abty to keep down
ts manufacturng costs and to meet competton, does not const-
tute an asset propery sub|ect to deprecaton or amortzaton
deductons n the determnaton of ta abe ncome.
The Commttee has consdered the appea of the M Company from
the Income Ta Unt s ad|ustment of ts ta abty for the caen-
dar years 1917, 1918, 1919, and 1920. The appea rases the foow-
ng ssues:
(1) Ta payer s rght to ncude n nvested capta the vaue of a
contract or other ntangbe property acqured by t n connecton
wth a corporate consodaton n December, 1911.
(2) Ta payer s rght to deduct n determnng ts ta abe ncome
an amount measurng the deprecaton or amortzaton of the vaue
of a mted-term contract as of March 1, 1913.
(3) Ta payer s rght to deduct n determnng ts ta abe ncome
an amount measurng the deprecaton or amortzaton of the vaue
or aeged vaue of a mted-term contract as of the date of acqu-
ston n connecton wth a corporate consodaton n December,
1911.
The thrd ssue s pressed ony n the event that the Commttee s
recommendaton wth reference to the second ssue s unfavorabe to
the ta payer.
Issue No. 1: Ths ssue nvoves the rght of the appeant to n-
cude n ts nvested capta a porton of the vaue of a contract (con-
ceded to be ntangbe property) acqured n connecton wth a con-
sodaton n 1911. The facts wth reference to ths consodaton
are stated under ssue No. 3. Wth reference to ths contenton t s
suffcent to say that nasmuch as the aggregate par vaue of the
4177 24 12
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214( )8, rt. 1 3.
170
capta stock ssued at the tme of the consodaton n queston was
ony 18.f doars, whereas the conceded vaue of the tangbe pant
acqured was 35.78| doars, appeant s contenton coud be sustaned
ony on one or the other of the two foowng theores: (a) That te
contract consttuted a pad-n surpus and mght be ncuded n n-
vested capta as such (b) that, n spte of the fact that the tangbe
assets were worth more than the par vaue of stock ssued and were
so recognzed on the books, whe the contract n queston was not
set upon the books at a, nevertheess, a porton of the capta stock
must be treated as havng been ssued for the contract, n order to
sustan appeant s contenton on the bass of ether theory severa
decsons of the ureau woud have to be revoked (see, for e ampe.
. R. M. 80 C. . 3, p. 343), and the Commttee s not dsposed
to recommend such revocaton and accordngy denes the appeant s
contenton wth respect to ths ssue. (See aso artce 835, Regua-
tons 45 and 02.) s to . R. R. 307 (C. . 3, p. 344), upon whch
the appeant rees, t has been stated n . R. R. 25 4 (C. . II-, p.
1 )9) that that recommendaton was erroneous.
Issue No. t: Ths ssue nvoves the rght of the appeant to a
deducton based on the March 1, 1913. va ue of a mted-term con-
tract between the appeant and the. Company for the manufacture
by the appeant of certan goods, appeant compensaton to be
based on cost pus a proft of - per cent of cost, the term of contract
beng from anuary , 1910, to December , 192 ,
Under departmenta practce, vaue as of March 1, 1013, s recog-
nzed as the proper bass for deprecaton n the case of certan n-
tangbe assets, but s not recognzed n the case of certan other n-
tangbe assets. Thus, patents and copyrghts may be deprecated
on the bass of the vaue March 1, 1913 (artce 1 , Reguatons 45
and 2). On the other hand, Treasury Decson 3414 (C. . 1-2,
p. 90) categorcay denes the rght to deprecate commerca ease-
hods on the bass of a March , 1913. vaue, and, athough that
Treasury decson s confned to easehods, there are rungs appy-
ng the same prncpe to contracts. In the absence of any ogca
bass for dstngushng contracts from easehods, and n vew of the
rungs referred to. the Commttee fees constraned to rue thnt
mted-term contracts can not be deprecated on the bass of a March
1, 1913, vaue.
Isme No. 3: Ths ssue, ke ssue No. 2, nvoves the rght to de-
precate the mted-term contract descrbed under ssue No. 2, but
n ths case the deprecaton haw suggested s the vaue of the con-
tract at the date or acquston by the consodated corporaton, De-
cember, 1911, rather than vaue March 1, 1913.
Ths ssue No. 3 reay nvoves the foowng subsdary ssues:
( ) Dd the consodaton of December. 1911, resut n a new entty
and furnsh the bass for a new set-up of vaues for ncome ta pur-
poses (b) Dd the so-caed N Company contract have a vaue as
of the consodaton date formng n proper bass for subsequent de-
precaton or amortzaton deductons ) ssumng subssue (b)
s decded n the affrmatve, how s the vaue of the contract to be
determned, and n partcuar shoud antcpated ncreases n future
profts, as compared wth profts current at the date of consoda-
ton, be taken nto consderaton n the determnaton of such vaue
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171
214(a)8, rt. 1 3.
Inasmuch as a decson of subssue (b) unfavorabe to the ta -
payer woud nrake. unnecessary to consders (a) and (c),
and nasmuch as the Commttee s, decson wth respect to subs ue
(b) s unfavorabe to the ta payer, that ssue ony w be here con-
sdered.
The Unt s etter of transmtta refers to the contract n queston
foows:
Under e eontraet the ta payer was to furnsh per cent of certan
goods repared by a the manufacturers of certan ther.goods n the Unted
States, and be eontraet provded a mnmum proft of pe- cent to ta -
payer.
The Unt was consderng ony the queston of deprecatng the
March 1, 1913, vaue of the contract, and snce ts decson on that .
pont was, under departmenta precedents, aganst the ta payer,
rrespectve of actua vaue, t wa unnecessary for the Unt to con-
ader carefuy the detaed provsons of the contract and ther
bearng upon ts vaue. Snce, however, the Commttee s obged
to consder another ssue namey, the possbty of deprecatng
the contract on the bass of an acquston for stock upon consoda-
ton the queston of vaue must be deat wth, snce the ta payer s
rghts, n the opnon of the Commttee, hnge upon the concuson
wth reference to that queston.
When the contract s anayzed t appears that the above-quoted
statement of the Unt s not accurate and that the contract does not
assure to the ta payer a mnmum proft of per cent or any other
amount. ven the ta payer s bref does not make any such cam,
the very guarded anguage used beng as foows :
s fnay dracn f and actuay operatve, n vew of condtons knvtm to
o partes Doteerned, ths the contract consttuted an agreement by whch
the M Company was substantay guaranteed by the N Company the sae of
per cent of certan goods to he requred by a manufacturers of certan
other goods throughout the Unted States n any year up to an ncudng 192-,
such goods to be sod at a proft of per cent n e cess of cost. Ths con-
tract provded for a mnmum cost of a unt upon .whch the per cent
of proft to the M Company mght he computed. owever, n fact ths mnmum
was never controng. Itaczed by Commttee.
n anayss of thecontract of pr ,1910, dscoses the foow-
ng outstandng features:
uantty of product cove ed. The ta payer obtaned te rght to
suppy per cent of the tota amount of goods requred by the N
and the O Companes, the so-caed manufacturng companes.
Prce. The prce to be receved by the ta payer was governed by
the foowng consderatons: (a) In no event shoud fna settement
prces e ceed the prces set forth n Schedue , attached to the con-
tract, whch schedue was based on costs estmated from e perence
pror to the eontraet pus a proft of per cent, (b) Prces, other-
wse compyng wth the terms of the contract, shoud be reduced to
meet bona fde bds from other reabe manufacturers coverng n
amount appro matey one year s requrements for:a casses of the
goods, (o) or the frst year prces shoud be those set forth n
Schedue , attached to the contract, (d) or any year subsequent
to the frst year tentatve prce fgures for bng purposes shoud
pressed n the foregong subdvsons (a) and (b) provded, how-
ever, that such eost, for thepurpose of estabshng prces, shoud
not n the case of any party to the contract e ceed by per cent the
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4214(a)8, rt. 1 3.
172
owest cost at the pant of any other party to the contract (ncudng
the Company and the O Company, purchasers of the product, who
were aso manufacturers thereof). owever, when the actua costs
for such year shoud be determned, f they shoud prove to be above
the cost of the pror year, on whch the tentatve prce fgures were
based, then the tentatve prce fgures shoud be ncreased, sub|ect to
the mtatons e pressed n (a), by two-thrds of such cost ncrease,
whereas f such actua costs shoud prove to be beow costs of pror
year, then the tentatve prce fgures shoud be decreased by two-
thrds of such cost reducton provded further, that when, f ever,
costs shoud be reduced to per cent of the 1912 costs the tentatve
prce fgures shoud be decreased by the entre amount of any further
cost reductons.
It w be observed from the foregong anayss that the reazaton
by the ta payer of a proft equa to per cent of the cost was sub-
|ect to severa contngences, as foows: (1) The contngency that t
woud be unabe to keep ts costs wthn per cent of the owest
cost mantaned by any other party to the contract, ncudng the
purchasers of the product, the N Company and the O Company,
who were aso producers thereof to some e tent (2) the contngency
that ts costs woud rse above those on whch the prces set forth
n Schedue were based (3) the contngency that other manu-
facturers woud be abe and wng to manufacture the product at
a prce ower than that permtted by the terms of the contract.
In other words, the contract had the effect of gvng the ta payer
for years a practca assurance of a su stanta proporton of
the busness of the country so far as that busness contnued
to be controed by the N Company and the O Company and so ong
as the ta payer coud produce as cheapy as any of ts compettors.
The amount of ts profts under the contract, however, woud depend
upon ts abty to keep ts costs from ncreasng above the 1908-1910
eve (upon whch the Schedue prces were based), upon ts
abty to keep ts costs from rsng more than per cent above the
cost of any other party to the contract, and upon the e tent to whch
ts compettors mght, by compettve bddng, compe t to reduce ts
margn of proft over cost. urthermore, and as an offset to the
vaue attachng to a contract even as thus mted, t must be noted
that the contract compeed the ta payer to devote ts factes to the
suppy of the N Company and the O Company. Thus, concevaby
ths contract may have prevented the ta payer from makng profts
whch t mght easy have been abe to demand f unrestrcted dur-
ng the perod of war nfaton.
If the foregong s a correct anayss of the contract, t s not be-
eved that t affords the bass for any set-up of capta vaues sub-
|ect to deprecaton durng the contract term. The wngness of
a corporaton of the standng of the N Company to enter upon a
ong-term reatonshp of ths sort s, of course, evdence of the hgh
standng of the ta payer n ts fed and may fary be sad to nd-
cate the possesson by t of consderabe ntangbe vaues n the
nature of good w. The contract n tsef, however, and merey of
ts owrn force, gave the ta payer tte assurance of arge future
profts e cept to the e tent that the possesson of an effcent pant,
skfu workmen, and competent e ecutves made t probabe that
t coud manufacture ts product on a proftabe bass as compared
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173
214(a)8, rt. 1 4.
wth ts compettors, and the possesson of these assets woud have
gven t amost equa assurance of profts wthout the contract. It
may be conceded that the contract was an asset to the ta payer.
Presumaby every contract s vauabe to a partes nvoved other-
wse no contract woud ever be made e cept where one party or the
other was overreached. Presumaby the contract n queston was
consdered by the N Company as of equa vaue to t as to the ta -
payer, both when t was entered nto and at the date of consoda-
ton. Such a mutuaty of advantage, resutng from a busness
reatonshps, s not beeved to be the sort of vaue whch can prop-
ery he set up as capta and sub|ected to deprecaton. In such cases
there s no reason to suppose that upon the termnaton of the con-
tract an equay advantageous arrangement coud not be entered nto,
ether wth the same or dfferent partes, for e acty the same reasons
of mutua advantage that prompted the orgna contract, and under
such crcumstances t woud seem cear that no deprecaton or amor-
tzaton s nvoved.
ute a dfferent stuaton s presented when subsequent to the date
of a contract condtons have changed n some substanta way wth
the resut that f a new contract were to be negotated ts terms woud
be much ess favorabe to the ta payer than the terms orgnay
drawn. Where such a stuaton e sts the contract may be sad to
have a bonus vaue at the ater date, and f the contract s confned
to a mted term and has been pad n at the ater date for cash or
stock a cam for deprecaton or amortzaton over ts fe may be
|ustfed. No such stuaton s presented by the present case. The
nterva eapsng between pr , 1910, the date of the contract,
and December , 1911, the date of consodaton, was so short as to
make a fundamenta change n busness condtons mprobabe, and
no cam s made that any such fundamenta change actuay took
pace. There s accordngy no reason to suppose that f the partes
had on December , 1911, negotated a new contract coverng the
sub|ect matter the terms of such contract woud have been substan-
tay dfferent from the terms of the contract as actuay made a few
months before.
The Commttee accordngy recommends that the acton of the In-
come Ta Unt be sustaned and the appea dened.
rtce 1 4: Capta sum recoverabe through deprecaton
aowances.
(See . R. R. 4799 sec. 32 , art. 831.) owance to essee for
deprecaton of a ease based on vaue as of March 1, 1913.
The M Company s not entted to n deprecaton or an amortza-
ton deducton based on the March 1, 1913, vaue of a term saes
contract acqured n 1911 wthout cost.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt n refusng to aow a deducton
rtce 1 4: Capta sum recoverabe through
deprecaton aowances.
III-4-1328
.R. .4803
R NU CT O 1917.
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214(8)8, rt. 1 4.
174
for deprecaton on a 10-year saes contract based on ts camed far
market vaue as of March 1, 1913.
It appea s from the record that on anuary -, 1911, appeant
entered nto a contract wth the N Company for the sae of the atter
company s products for a perod of 10 years on a commsson bass.
The contract was acqured wthout cost.
ppeant contends that the vaue of the contract as of March 1,
1913. was doars, computed by determnng the present worth at
that dae of the yeary ncome receved therefrom up to the e pra-
ton of the contract on anuary , 1921, whch amount shoud be
deprecated over the remanng fe of appro matey eght years
from March 1, 1913.
Treasury Decson 3414 (C. . -2, 90) estabshes the rue wth
reference to commerca easehods that a essee s not entted, under
the Revenue cts of 191 , 1917, 1918, or 1921, to an aowance for
deprecaton based on the vaue of hs ease as of March 1, 1913, f
acqured pror thereto. There appears to be no ogca bass for
dstngushng contracts from eases, and the Commttee has con-
sstenty apped the prncpe ad down n Treasury Decson 3414
to contracts.
fter carefu consderaton of a of the evdence of record, to-
gether wth the arguments made at the ora hearng, the Commttee
concudes that appeant s not entted to a deprecaton or amortza-
ton deducton based on the March 1, 1913, vaue of ts contract.
ccordngy, the Commttee recommends that the appea be dened.
rtce 1 4: Capta sum recoverabe through 111-2 -1 32
In the case of the reorganzaton of a corporaton, when there
Is such a reorganzaton as resuts n the creaton of a new cor-
porate entty, the bass for deprecaton deducton that may be
camed by the reorganzed corporaton s the cost of the deprec-
abe assets at the tme they were acqured n reorganzaton, or
ther far market vaue as at March 1, 1913, f so acqured pror
thereto.
dvce s requested as to the proper bass for computng depreca-
ton aowance wth respect to property acqured n the reorganza-
ton of a corporaton.
Secton 202 of the Revenue ct of 1921 prescrbes the bass for
ascertanng the gan derved or the oss sustaned from the sae or
other dsposton of property.
Secton 234(a)7 provdes for the deducton of a reasonabe aow-
ance for the e hauston, wear and tear of property used n the trade
or busness, ncudng a reasonabe aowance for obsoescence, n
the case of such property acqured before March 1, 1913, the deduc-
ton s to be computed upon the bass of ts far market prce or
vaue as of March 1, 1913.
rtce 1 4, Reguatons 2, reads n part as foows:
The capta sum to be repaced by deprecaton aowances s the orgna cost
of the property n respect of whch the aowance s made, e cept that n the
case of property acqured by the ta payer pror to March 1, 1913, the capta
sum to be repaced Is the far market vaue of the property as of that date.
I. T. 2038
R NU CT O 1921.
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175
214 a)8, rt. 1 5.
Inasmuch as the statute makes specfc provson for the deducton
of a reasonabe deprecaton aowance, t s the opnon of ths offce
that secton 202 has no hearng upon the bass for computng such
aowance. It s hed, therefore, that n the case of the reorganza-
ton of a corporaton, were there s such a reorganzaton as resuts
n the creaton of a new corporate entty, the bass for deprecaton
deducton that may be camed by the reorganzed corporaton s the
cost of the deprecabe assets at the tme they were acqured n reor-
ganzaton, or ther far market vaue as at March 1, 1913, f so
acqured pror thereto.
rtce 1 5: Method of computng depreca- III-5-1344
ton aowance. . R. R. 099
R NU CTS O 1917 ND 1918.
deducton for deprecaton for the years of 1917 and 1918 on
the physca assets of the M Company n e cess of the amount
camed on the returns for those years may not he aowed. The
returns for the years 1917 and 1918 were prepared at a tme when
the appeant was acquanted wth and cognzant of a such con-
dtons as were factors to be consdered n determnng the
amount of deprecaton whch had accrued durng those two
ta abe years. The submsson s years ater of a cam for
ncreased deprecaton, soey because the workng out of some
theoretca formua shows resuts whch woud materay reduce
the net Income of those years f accepted, shoud not be en-
tertaned n the absence of affrmatve evdence that the amounts
orgnay camed n the returns are ceary erroneous.
The Commttee has carefuy consdered the appea of the M
Company from the acton of the Income Ta Unt n refusng to a-
ow a deducton for deprecaton of physca assets for the years
1917 and 1918 n e cess of the amounts camed on the returns for
those years.
rom the evdence of record and the facts deveoped at the hear-
ng, t appears that appeant company n renderng ts returns for
the years 1917 and 1918 camed deductons on account of depreca-
ton of physca assets n the amounts of 1.27,r doars and 1.71 do-
ars, respectvey that the deprecaton so deducted was computed
for the year 1917 upon the bass of appro matey. 3.9 per cent of the
stmated appro mate cost, and for the year 1918 upon the bass
of appro matey 5.9 per cent of the estmated vaue of the severa
casses of pwsca assets at March 1, 1913, pus the cost of aeged
subsequent addtons that subsequenty the books for the years under
consderaton were e amned by a revenue agent, who recomputed
the deprecaton aowance for both years on the bass of cost, as
near as that coud be determned from the books, and at the rate of
5 per cent for machnery, per cent for budngs, 5 per cent for
furnture and f tures, and 4 per cent for mprovements to bud-
ngs, whe the deprecaton deducted n the returns on oose toos,
patterns, drawngs, cuts, and eectros was accepted as correct and
permtted to stand by that offcer, ths acton of the revenue agent
resutng n an ncrease of .03 doars and a decrease of .29,e doars
n the deprecaton deductons aowed by that offcer for the years
1917 and 1918, over and under, respectvey, the amounts camed on
the returns of those years: that ths acton of the revenue agent was
reversed by the Income Ta Unt and the deprecaton deductons
G
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I214(a)8, rt. 1 7.
17
as camed on the returns permtted to stand that thereafter appe-
ant company fed wth the Unt certan schedues showng a recom-
putaton of deprecaton for those years on the bass of revsed
estmates of the March 1, 1913, vaue of deprecabe assets, pus a-
eged subsequent addtons, and at rates consderaby hgher than
those used n makng up ts returns, such recomputatons showng
an ncrease over and above the amounts camed on the returns of
1917 and 1918 of 1.01a doars and .99| doars, respectvey, and
camed the rght to deduct such ncreased amounts: and that the
Income Ta Unt has refused to aow the addtona deprecaton
camed because of certan statements contaned n the revenue
agent s report that the rate of deprecaton taken subsequent to
anuary 1, 1907, has not been consstent durng each year, but was
appro matey 2 per cent on a deprecabe assets, and I have
gone nto the matter of deprecaton very carefuy wth the man-
agement and on account of the fact the machnery s mantaned
n frst-cass condton on account of the company beng n the bus-
ness of budng and reparng machnery, the fe of a machnes
are onger than n the average pant. The Unt further states that
the March 1, 1913, vaues camed n the amended deprecaton
schedues are whoy unsupported, e cept that camed for the bud-
ngs, whch was estabshed by apprasa.
Consderaton of a the foregong facts, as we as the amended
deprecaton schedues submtted by the appeant, eads the Com-
mttee to the concuson that the acton of the Income Ta Unt
shoud be sustaned. The returns for the years 1917 and 1918 were
prepared at a tme when the appeant was acquanted wth and
cognzant of a such condtons as were factors to be consdered n
determnng the amount of deprecaton whch had accrued durng
those two ta abe years. The submsson s years ater of a cam
for ncreased deprecaton soey because the workng out of some
theoretca formua shows resuts whch woud materay reduce the
net ncome of those years, f accepted, shoud not be entertaned n
the absence of affrmatve evdence that the amounts orgnay
camed n the returns are ceary erroneous.
Char.es D. ame,
Charman Commttee on ppeas and Revew.
rtce 1 5: Method of computng deprecaton
aowance.
(See . R. R. 040 se . 32 , art. 839.) ass for computng
deprecaton on deprecabe assets.
rtce 1 7: Deprecaton of patent or copy- III 3 1311
rght. . R. M. 209
R NU CT O 1918.
corporaton In computng ta abe net ncome may charge oft
deprecaton of ts patent each ta abe year, whether t has or
has not In pror years avaed tsef of ts prvege to do so.
The opton to charge off deprecaton of patents remavs open
ony durng the tme for fng the orgna return. Such opton,
or eecton, s e ercsed by not camng a deprecaton aow-
ance wth respect to the partcuar ta abe year an opton so
e ercsed s thereafter bndng and concusve on the ta payer
wth respect to the partcuar ta abe year.
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214(a)8, rt. 1 9.
The Commttee s n recept of a request from the Income Ta
Unt for an e presson of opnon as to (1) whether the opton to
charge off deprecaton of patents, n computng ta abe net ncome,
s one whch may be e ercsed by a corporaton each ta abe year
wthout reference to whether t has or has not charged off deprecar
to n pror years and (2) whether such opton havng been once
e ercsed wth respect to any ta abe year s bndng and concusve
on the ta payer thereafter.
There appears to be nothng n the statute or reguatons to ds-
cose a requrement of a contnuty of acton of a corporaton wth
respect to chargng off deprecaton of patents n computng ta abe
net ncome. In the absence of such requrement t must be nferred
that a corporaton that desres to charge off deprecaton of patents
n the computaton of ts net ncome s not concuded by ts acton
n pror years wth respect thereto. The ast sentence of artce 1 7
of Reguatons 45 woud seem to ndcate that resut. It states: ,
The fact that deprecaton has not been taken In pror years foes not entte
the ta payer to deduct n any ta abe year a greater amount for deprecaton
than woud otherwse be aowabe.
The rght to charge off deprecaton of patents s a prvege whch
may be e ercsed or not, as the ta payer may choose. It s the
opnon of the Commttee, therefore, that n answer to your frst
queston, a corporaton n computng ta abe net ncome may charge
o deprecaton of ts patents each ta abe year, whether t has or
has not n pror years avaed tsef of ts prvege to do so.
It s the opnon of the Commttee that the opton to charge off
deprecaton of patents remans open ony durng the tme for rng
the orgna return that such opton, or eecton, s e ercsed by not
camng a deprecaton aowance wth respect to the partcuar
ta abe year and that an opton so e ercsed s thereafter bndng
and concusve on the ta payer wth respect to the partcuar ta abe
year.
The Commttee s supported n ts concusons by memoranda of
the Soctor of Interna Revenue.
rtce 1 9: Chargng off deprecaton. III-1-1283
.R. R.4801
R NU CT O 1018.
frnatre evdence warrantng an ad|ustment of the accounts
of the II Company by settng up a proper deprecaton reserve.
The Commttee has had under consderaton the appea of the M
Company from the acton of the Income Ta Unt n determnng a
proft of 2.183a doars on the sae of capta assests n 1919 nstead
of the oss camed of 7.032a doars.
The Commttee has carefuy consdered the nformaton submtted
and the arguments presented and s of the opnon that the proft on
the sae of capta assests n 1919 was correcty determned by the
Income Ta Lnt to be 2.183a doars.
The Commttee s further of the opnon that the Income Ta Unt
was |ustfed n ad|ustng the accounts of the appeant by settng up
a proper deprecaton reserve on account of affrmatve evdence
warrantng such ad|ustment.
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214(tt)0, rt. 183.
178
It s the opnon of the Commttee that affrmatve evdence may
consst n part of the foowng:
1. The faet that the ta payer has made no ad|ustment over a
perod of years on account of deprecaton, ether by way of chargng
ordnary repars drecty to e pense and settng up a deprecaton
Teserve aganst whch are propery chargeabe a renewas and re-
pacements, or by chargng renewas and repacements as we as
repars aganst gross ncome.
2. The fact that an actua e amnaton of the deprecabe assets
dscoses that the book vauaton of such assets s ceary n e cess
of the sound vaue based on cost at the begnnng of the ta abe year.
8. The fact that the ta payer cams as a deducton n subsequent
years deprecaton argey n e cess of the average camed pror te
the ta abe year, a other condtons beng equa.
The Commttee therefore recommends, n the appea of the M
Company, that the acton of the Income Ta Unt be sustaned and
the appea be dened.
Tn T IS the O Company entered nto an agreement wth the
T nted 8tutes Government whereby tt wa to erect a pant for the
producton of certan artces contrbutng to Che prosecuton of
tke war.
The Government ad the rght at any tme, upon days notce
to the contractor, to cense takng any more of the products and
to request suspenson of the work, the Government payng to the
contractor an amount suffcent to cover a e pendtures made.
suspenson request was gven the contractor on December ,
1918. On ebruary , 1919, a so-caed settement contract was
entered nto, and an award of the cam was made uy . 1919.
Constructon of the pant was contnued after suspenson request
had been receved and after the settement agreement of ebruary
, a 9.
If, ats woud seem probabe, the constructon of the pant was
contnuousy carred on after recept of the suspenson request,
t woud seem cear that such part of the pant as was constructed
subsequent to December 31, 1918, was constructed for purposes
other than the producton of artces contrbutng to the prosecu-
ton of the war. If, as seems unkey, constructon of the pant
was suspended and resumed ony when the award of uy , 1919,
made the rght to the condensaton or proft condtona upon
competon of the pant, the e endtvres woud st be wthout
the mts of the amortzaton .provson. .obgaton on the
part of the contractng partes ether to furnsh or to accept
or materas ad been abrogated and apparenty resumpton of
the work and competon of the pant woud be for the purpose
of procurng the advantage of tbe award rather than the construc-
ton of u budng for the producton of .artces contrbutng to the
prosecuton of the war.
It s therefore hed that the ta payer s not entted to any de-
ducton for amortsaton mder paragraph 8 of secton 284(a) of
the Revenue ct of 1918 on account of the e pendtures made
after December 31, 1918, n competng the pant n queston.
S CTION 214(a)9. D DUCTIONS
MORTIZ TION.
LLOW D:
rtce 183: Property cost of whch may e
amortzed.
R NU CT O 191 .
I -21-15
I. T. 2007
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179
214(a)9, rt. 183.
n opnon has been requested whether e pendtures made after
December 31,1918, aggregatng 95.2. doars, n competng a certan
manufacturng pant are sub|ect to amortzaton n the crcum-
stances outned. The cam s presented by the M Company n
behaf of one of ts subsdares.
On une , 1918, an agreement purportng to-be a contract between
the Unted States and the O Company was entered nto. It provded
(artce ) that the company shoud provde .a sutabe ste and erect
thereon a pant fuy equpped for the manufacture of certan
materas , sad pant to have a capacty of appro matey 140 unts
of C matera per day and a day producton of appro matey 1.1
unts of matera and 1.5 unts of matera. Ths artce
further provded that as and when ready for operaton the com-
pany shoud operate the same for a perod of two years. y artce
of the contract t was provded that and materas shoud be
made n accordance wth certan specfcatons. y artce thereof
the Unted States agrees to take and purchase a the and mar
teas produced by the pant conformng to specfcatons, and an
opton s gven to purchase other products resutng from the pant s
operatons. rtce f ed the prce of matera at doars per
unt and matera at doars per unt. y artce the com-
pany agrees to dever and the Unted States to take under the con-
tract appro matey 900 unts of matera and 950 unts .of
rtce reads:
Termnaton of contract. The Unted -States sha have the rght at any
tme, upon days notce n wrtng to the contractor, to cease takng nny
further or materas. In the event of the gvng of such notce the
Tated States sw ether (1) pay to the contractor the sum of doars
rcr unt for the undevered porton of the matera so contracted for, and
doars per unt for the undevered porton of the matera so contracted
for: the same to be pad by the Unted States to the-contractor ns consdera-
ton for canceng and termnatng ths contract, or (S the contractor w
se for the account of the Unted States the undevered porton of sad
matera so contracted for, at the then commerca prce for that matera, or
Its equvaent n D matera. The Unted States sha remburse the contractor
for any defcency between the prces so obtaned by the contractor und the
(trce of doars per unt, agreed to he pad by the Unted States to the
contractor. The contractor w aso se for the account of the Unted States
the undevered porton of the matera contracted for by the Unted Stntas.
at te then market prce for the same, and the Unted States sha remburse
the contractor or any defcency between the prce so obtaned by the con-
tractor and te prce of doars per unt, agreed to be pad by the Unted
States.
The Unted States sha eect wthn days after the gvng of the notce
eforesad whch of the two methods heren provded sha be adopted n makng
wtttemeat wth the contractor for the undevered portons of sad and
materas .
December , 1918, there was sent to the company, over the sg-
nature of an offcer of the Unted States Government, a suspenson
request, statng:
1. y drecton of fa Unted States offcer), you are requested n the
prttc nterest mmedatey to suspend further operatons under your contract
wth the Unted States, and to order no further materas or factes, and,
e cept In cases of proved necessty, enter nto no further subcontracts, make
no farther commtments, and ncur no further e penses In connecton wth the
performance of sad contract.
2. Ths request s made wth a vew to the negotaton of a suppementa
couuact provdng for the canceaton, settement, and ad|ustment of your
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S24(a)9, rt. 183.
180
e stng contract, n a manner whch w permt of a more prompt settement
and payment than w be practcabe under the terms of sad e stng contract.
3. Pease acknowedge recept of ths notce mmedatey, and ndcate your
decson as to compance wt or re|ecton of ths request. Upon notce of
your compance, a representatve of the Government w forthwth take np
wth you the proposed negotaton.
anuary , 1919, the company responded to the suspenson request
n a etter statng:
e beg to advse you that the work whch had been undertaken under ths
contract for the constructon of a pant has progressed to such a pont and e -
penses and obgatons have been ncurred n suc an amount that, n our
opnon, t woud not be n the pubc nterest to suspend work n the competon
of ths pant.
The etter further states that the company woud be peased to un-
dertake the negotaton of a suppementa contract provdng for the
termnaton of the e stng contract and assumes that the compensa-
ton to be pad w be computed wth due reference to the provsons
of the orgna contract. The etter further states:
Referrng to paragraph 3 of your etter, we have been unabe to advse
you that we sha compy wth the terms provdng for suspenson of opera-
tons for the reasons above quoted.
ebruary , 1919, a so-caed settement contract was entered nto
between the company and the Unted States. It rectes the e ecu-
ton of the orgna contract, that the furnshng and devery of the
artces caed for w e ceed the present requrements of the Unted
States, that termnaton thereof s n the fnanca nterest of tbe
Unted States, that the contractor has ncurred e penses and obga-
ons for furnshng the artces, that the contractor s wng to ac-
cept the termnaton of the orgna contract and forego such profts
as mght have accrued to t and to accept ths contract n eu thereof,
and that the contractor s wng to wave a rghts t may ave
had to a specfed notce of termnaton or to contnue the perform-
ance after recept of such notce. It s then agreed that the contract
supersedes the orgna, and the contractor reeases the Unted States
from a cams of every nature arsng out of the orgna contract
and that the Unted States sha pay the contractor the sum of 19.38.r
doars (beng the amount of contractor s cam, vz, 20.4.7 doars
ess per cent, dscount for prompt payment, amountng to do-
that ths agreement, sha not become a vad and bndng obgaton
of the Unted States unt approved by the oard of a certan
department of the Unted States.
uy , 1919, the oard of the department approved an award
of the Government under the ct of Congress entted n ct to
provde reef n case of contracts connected wth the prosecuton
of the war and for other purposes. It s theren stated that ths
suppementa contract and award confrms the settement contract
of ebruary , 1919. It s further theren rected that t appears
that the orgna agreement was entered nto n good fath for a
purpose connected wth the prosecuton of the war, that sad agree-
ment was not e ecuted n the manner prescrbed by aw and s
wthn the provsons of the above ct, that the sum of 19.38|-
doars w dscharge the obgaton of the Unted States there-
under and that such sum does not ncude prospectve or possbe
profts. The contract provdes, however, that ths suppementa
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181
214(a)9, rt. 183.
agreement and award sha not be construed to reeve the camant
from any of ts obgatons under sad agreement as contaned n the
artce desgnated as artce . Ths award was accepted by the
company uy , 1919.
The queston here s the rght to amortzaton deductons on ac-
count of e pendtures made after December 31, 1918. The rght to
a deducton depends upon paragraph (8) of secton 234(a) of the
Revenue ct of 1918, whch provdes:
In the case of budngs, machnery, equpment, or other factes, con-
structed, erected, nstaed, or acqured, on or after pr , 1917, for the pro-
ducton of artces contrbutng to the prosecuton of the present war, and n
the case of vesses constructed or acqured on or after such date for the trans-
portaton of artces or men contrbutng to the prosecuton of the present
war. there sha be aowed a reasonabe deducton for the amortzaton of
such part of the cost of such factes or vesses as has bean home by the
ta payer, but not agan ncudng any amount otherwse aowed under
ths tte or prevous cts of Congress as a deducton n computng net
ncome.
The foregong provson aows the deducton ony n respect of
budngs, machnery, etc., constructed or erected for the produc-
ton of artces contrbutng to the prosecuton of the present war.
The nsstence s that the orgna contract requred erecton of a
pant for producton of artces contrbutng to the prosecuton of
the war, that the award of uy , 1919, contnued n effect the
provsons requrng erecton of the pant, and, that, therefore, the
entre pant, ncudng the part erected after December 31, 1918, was
constructed for producton of artces contrbutng to the prosecu-
ton of the war.
No matera or matera was ever furnshed the Government
under the agreement. Pror to December 31, 1918, ony 9.23
doars had been actuay e pended and the aeged addtona con-
tract obgatons ony amounted to 19. a doars, whe the amortza-
ton cam s on account of e pendtures amountng to 95.2a doars
made after December 31, 1918. The suspenson request of Decem-
ber , 1918, asked that the compan| mmedatey suspend work
on the constructon of the pant, but n the etter dated anuary ,
1919, t decned to do so on the ground that t woud not be n the
pubc nterest. Ths etter ndcates that the e pendtures were
made contnuousy after the Government s suspenson request. p-
parenty such e pendtures were made contnuousy to ebruary
, 1919, and t s reasonabe to assume that they contnued unn-
terruptedy after that date. The agreement of ebruary , 1919,
purported absoutey to termnate the orgna contract, wth no
ntmaton that constructon of the pant must be competed. The
award of uy , 1919, requred competon of the pant, but a
obgaton on the part of the company to furnsh or the Govern-
ment to purchase or materas was abrogated both under the
agreement of ebruar - and the award of uy .
The refusa to compy wth the Government s request to dscon-
tnue constructon of the pant n ts then ncompete state and con-
tnue e pendtures thereafter ndcates that constructon was con-
tnued for purposes other than the erecton of a pant for the pro-
ducton of var materas. Contnued e pendtures after the agree-
ment of ebruary , 1919, purported absoutey to termnate the
orgna agreement, confrms ths vew. Concededy, f approva of
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182
ths agreement by the board had not been made condtona upon the
competon of the pant, no bass coud be tfound for a hodng that
subsequent e pendtures were sub|ect to amortzaton. pendtures
made after the company had agreed to an absoute termnaton of
the orgna contract and pror to the award of uy , 1919, coud
not reasonaby be sad to have had any proper reatonshp to the
producton of war materas, and the subsequent mposton of the
condton coud not change the purpose for whch such e pendtures
had been made. Nor s t beeved that mposton of the requre-
ment that the pant be competed resuted n a change n the purpose
of the company n the contnued constructon of the pant, and con-
verted the e pendtures thereafter made nto those of a knd whch
may be made the bass of amortzaton under the statute.
In short, f, as woud seem probabe, the constructon of the pant
was contnuousy carred on after recept of the suspenson request,
t woud seem cear that such part of the pant as was constructed
subsequent to December 31, 1918, was constructed for purposes other
than the producton of artces contrbutng to the prosecuton of
the war. If, as seems unkey, constructon of the pant was sus-
pended and resumed ony when the award of uy , 1919, made
the rght to the compensaton or proft condtoned upon competon
of the pant, the e pendtures woud st be wthout the mts of
the amortzaton provson. obgaton on the part of the con-
tractng partes ether to furnsh or to accept or 13 materas had
been abrogated and apparenty resumpton of the work and compe-
ton of the pant woud be for the purpose of procurng the advan-
tage of the award rather than the constructon of a budng for the
producton of artces contrbutng to the prosecuton of the war.
ccordngy, the ta payer s not entted to any deducton for
amortzaton under the above-quoted provson of the statute on ac-
count of e pendtures made after December 31, 1918, n competng
the pant at the cty Of S, State of T.
ktq|e 184: Computaton of amortzaton Tf- 0-1400
aowance. 8. M. 1584
R NU CTS OT 1 18 ND T 21.
Deductons reatve to amortzaton are not requred to be
fnay determned by the ureau on or before March 3, 1024, and
a ta payer who has made a proper cam for amortzaton w
not be precuded from the aowance of a deducton therefor
because of the faure to reach a determnaton of the proper
amount before such date.
The M Company camed amortzaton for the years 1918 and
1919: schedues were fed n the amortzaton secton n pr, 1923,
but the report thereon by the amortzaton engneers of the ureau
was not competed unt November, 1923. The ta payer asks
whether a questons reatve to amortzaton must he fnay deter-
mned by ths ureau on or before March 3, 1924.
The company made cam to a deducton or amortzaton n an
amended return for the caendar year 1918, but an e amnatcn of
the company s propertes has not yet been made by engneers of the
amortzaton secton, nor has a fed audt been made of the com-
pany s 1918 return. The queston s asked whether, f a determna-
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183
214(a)9, rt. 184.
ton of the amortzaton s not made before March 3, 1924, the com-
pany w be precuded from recevng any deducton on account of
amortzaton.
Secton 234-(a)8 of the Revenue ct of 1921 provdes
In the ease of budngs, machnery, .equpment, or other factes, con-
structed, erected, Snataed, or aeqwred on r after pr , 1017, for the
producton of artces ctuttr nrtk g to tne prosecuton of the war aganst the
German Government, and n the case of vesses .cowtnacted or acqured on or
after such date for the transportaton of artces or men contrbutng to the
prosecuton of such -war, there sha e aowed, for any ta abe year endng
befate March 3, 1924 (f cam therefor was made at the tme of fng return
for the ta abe year 1918, 1919, 1920, or 1921)., a reasonabe deductfcm for the
amortzaton of such part of the cost of such factes or vesses as has been
borne by .the ta payer, but not agan ncudng any amount otherwse aowed
under ths tte or prevous cts of Congress as a deducton n computng net
Income. t any tme before March 3, 1924, the Commssoner may, and at the
request of the ta payer sha, ree amne the return, and f he then fnds as a
resut of an apprasa or from other evdence, that the deducton orgnay
aowed was ncorrect, the ncome, war-profts, and e cess-profts ta es for the
year or years affected sha be redetermned and the amount of ta due upon
such redetermnaton, f any, sha be pad upon notce and demand by the
coector, or the amount of ta overpad, If any, sha be credted or refunded
to the ta payer n accordance wth the provsons of secton 202
Secton 250(d) provdes n part:
The amount of ncome, e cess-profts, or war-profts ta es due under a.v
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 ncome,
e cess-profts, or war-profts ta cts, or under secton 38 of the ct entted
n ct to provde revenue, equaze dutes, and encourage the ndustres of
the Unted States, and for other purposes, approved ugust 5, 1909, 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 ater determ-
naton, assessment, nd coecton of tte ta Provded further,
That n cases conng wthn the scope of paragraph (9) of subdvson (a) of
secton 214, or of paragraph (8) of subdvson (a) of secton 234, or n cases
of fna settement of osses and other deductons tentatvey aowed by the
Commssoner pendng a determnaton of the e -act amount deductbe, the
amount of ta or defcency n ta due may be determned, assessed, and co-
ected at any tnse but pror to the assessment thereof the ta payer sha 1 e
notfed and gven a perod of not ess than 30 days n whch to fe an appea
and be heard as herenafter provded n ths subdvson.
Under the anguage of the thrd provso of secton 250(d) above
footed ,(aso atce 1012, Reguatons 2), the amount of ta due n
cases of amortzaton comng wthn the scope of secton 234(a)8,
may be determned, assessed, and coected at any tme. The ques-
ton to be ooasdered s whether ths authorty s mted by the
anguage of secton 234(a)8, whch states that :
t any tme before March 3, 1924, the Commssoner may, and at the request
etf the ta payer sha, ree amne the return, .
It s a we-setted rue n construng statutes that effect s to be
gven, f possbe, to every part thereof. To hod that a ree amna-
ton of a return must be made and amortzaton fnay determned
before March 3, 1924, woud obvousy nufy the provson of sec-
ton 250(d) that the ta n such cases may be determned, assessed,
and coected at any tme. Ovng effect to the two provsons above,
t s cear that March 3,1-924, was not ntended as a mt to the tme
wthn whch the Commssoner mght determne, assess, and coect
the ta es, whether on e amnaton or ree amnaton, but was n-
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214(a)10, rt . 201.
184
tended as a mt to the tme when he coud be requred to make a
ree amnaton at the request of the ta payer. In other words, the
mtaton s upon the rght of the ta payer and not upon that of the
Commssoner. The e presson at any tme before March 3, 1924,
the Commssoner may was apparenty used to avod any thought
that the Commssoner coud not ree amne such returns pror to
March 3, 1924, e cept by request of the ta payer.
It s to be noted that under secton 234(a)8, f the ree amnaton
resuts n the fndng of an overpayment of ta , such overpayment
sha be credted or refunded n accordance wth the provsons of
secton 252. In ths connecton, attenton s drected to the mta-
tons as to the tme wthn whch refunds or credts may be made
under secton 252 and under the ct of March 4, 1923 (Pubc, 527),
T. D. 34 2 (C. . II-, 180), approved pr 10, 1923, and T. D. 3471
(C. . II-, 181), approved pr 30, 1923.
Neson T. artson,
Soctor of Interna Revenue.
S CTION 214(a) 10. D DUCTIONS LLOW D:
D PL TION.
rtce 201: Depcton of mnes, o and gas III-1-1284
wes deprecaton of mprovements. I. T. 1893
R N r CTS O 191S ND 1921.
In ascertanng the amount remanng to be recovered by way
of depeton for 1919 and subsequent years, n the case of copper
and sver mnes, there shoud be deducted from the March 1, 1913,
vaue as redetermned the actua sustaned depeton for the years
1913, 1914, and 1915, based on the new vauaton, pus the aowed
depeton for the years 191 , 1917, and 1918.
The queston has been rased as to the proper method of makng
depeton deductons for the years pror to the year 1919 ncdent to
the revauaton of the mnes of the copper and sver mnng com-
panes for the purpose of determnng ther ta abtes for 1919
and subsequent years.
The Revenue ct of 1913 aowed depeton n the case of mnes
to the e tent of 5 per centum of the gross vaue at the mne of the
output for the vear for whch the computaton s made but no
deducton sha be made for any amount of e pense of restorng
property or makng good the e hauston thereof for whch an aow-
ance s or has been made. The Revenue ct of 191 provded
for fu depeton, but ths aowance was hed to be ony avaabe
to the owner of the property and not to the essee. (Wess, coector,
v. Mohawk Mnng Company, 2 4 ed., 502.) The Revenue cts
of 1918 and of 1921 kewse provded for fu depeton, but stated
that the depeton aowance sha be equtaby apportoned between
the essor and the essee.
The Supreme Court of the Unted States n the cases of Stratton s
Independence v. owbert (231 U. S., 399), on avmbach v.
Sargent Land Company (242 U. S., 503), and Unted States v.
wabk Mnng Company (247 U. S., 11 ) specfcay hed that
nether the owner nor the essee of mnng property was entted
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185
214(a)10, rt.201.
to an aowance by way of depeton n the absence of a provson
n the statute to that end, even though the ncome from the mne
carred wth t a certan wastng of the capta assets of the ta payer.
It foows from these cases that depeton as a deducton n deter-
mnng the amount of the ta payer s ta s purey statutory.
The fact that the workng of a mne carres wth t a depeton
of ts mnera content s a fact that can not be dsregarded, owever,
rrespectve of whether Congress recognzed the desrabty of a
deducton by reason thereof. It foows that for the years 1913,
1914, and 1915 the mne was depeted to the fu e tent of the
mnera e tracted, even though Congress permtted a deducton ony
to the e tent of 5 per cent of the-gross vaue at the mne of the
output for the year, and, n determnng for further years the de-
peton to be aowed on the March 1, 1913, vaue, there must bo
deducted the fu depeton sustaned for those three years.
Where for the years 1910, 1917, and 1918 the ta payer has actu-
ay ecn aowed, wth the acquescence of the ureau, a deducton
n an amount n e cess of what he shoud have been aowed under
the revauaton of the mne, t s beeved that the amount so aowed
to hm on the hgher vauaton must be consdered n determnng
the vaue |et to be returned to hm for 1919 and subsequent years.
To dsregard ths aowed depeton, n so far as t s n e cess of
that sustaned on the new vauaton, woud be to permt the ta -
payer to dupcate the statutory deducton, whch ceary was never
contempated by the statute, and fnds no |ustfcaton n ether equty
or aw. The typca case set forth beow w more ceary ustrate
the queston propounded.
Od vauaton 30,000,000 New vauaton 18,000,000
s of March 1, 1013.
Year.
Depeton.
Od vaua-
ton.
Sustaned.
New vaua-
ton.
Depeton
aowed.
1913
, 000,000
3,000.000
3,000,000
3,000.000
3,090,080
3,000,000
, on,ono
750,000
1914
1, S I), 000
500,000
1,000.000
3,000,000
3,000,000
3,000,000
1915 ,
.sao.ooo
19W
1,800.000
1917
1,800, ono
1918
1,800,000
Tota
IS, 000,000
o, son, ow
11.250,000
5 per cent of the vaue ot the ore at the mne.
It foows from what has been set forth above that n ascertanng
the amount remanng to be recovered by way of depeton for 1919
and subsequent years that there shoud be deducted from the March
1,1913, vaue as redetermned the actua sustaned depeton for the
years 1913, 1914. and 1915, based on the new vauaton, pus the a-
owed depeton for the years 191 , 1917, and 1918. In the typca
case set forth above there shoud be deducted from the new vauaton
as of March I. 1913, vz, 18,000,000, the sum of 14,400,000, eavng
to be recovered n 1919 and subsequent years the sum of 3, 00,000.
4177 24 13
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2M(a)10, rt. 201.
,18
rtce 201: Depeton of mnes, o and gas III-1-1285
wes deprecaton of mprovements. I. T. 1894
( so Secton 213(a), rtce 51.)
.NU CT O 1021.
The purchaser of a royaty nterest n an o or gas ease shoud re-
turn a amounts receved hy hnt from the essee as ncome for the
year n whch receved. e may, however, take as a deducton the
depeton aowance to whch he s entted under the provsons of
the aw.
ktce 201: Depeton of mnes, o and gas ITI 1-132 )
wes deprecaton of mprovements. I. T. 1919
R NU CTS O 1018, 1918, ND 1011.
fe tenant s not entted to a deducton for depeton.
fe tenant suffers no oss and s not entted to a deducton hy
reason of the fact that the property from whch he receves hs
ncome a essenng n vaue due to depeton or deprecaton.
The queston s rased as to whether a tenant for fe of property
upon whch a mne had been opened or whch had been mpressng
wth the character of mnng property pror to the commencement
of the fe estate s entted to an aowance for depeton n com-
putng ta abe net ncome under the Revenue cts of 191 and 19IS.
It s we setted that a fe tenant can do nothng to mpar the
estate of those who are n remander. Durng the contnuance of
hs estate he occupes a poston anaogous to that hed by a trustee,
e must e ercse reasonabe care to preserve the estate ntact for
transmsson to the remanderman and can not n|ure or dspose of
t to hs detrment. It s equay we setted, however, that a tenant
for fe, when not e pressy precuded by restranng words creatng
hs estate, may work a quarry, mne, or we, opened up before the
commencement of hs estate, to e hauston, not ony for hs own use
but for proft. IIffgnst O and ue Ca. v. Snow (113 ed.. 433)
Mc adders state (224 Pa., 443: 73 t., 927) Danes v. Chares,
et a. (189 S. W., 192) Pooe v. Unon Trust Co. (157 N. W.. 430).
Ths prncpe appes not ony to open mnes and wes but aso to
property whch has been stamped as mnng and by the e ecuton
of an enforceabe mnng ease by the former owner pror to the com-
mencement of the fe estate, athough no mnes were opened there-
under unt after the commencement of the fe estate.
In Mc adderCs state, supra, the common-aw rue wth reference
to the rghts of a fe tenant to work open mnes was stated and
quoted wth approva. It was there sad that where a testator de-
vsed and upon whch was an open mne to one for fe and then over
to others, the tenant had the rght to work the mne to e hauston
that ths rue found favor n the eary cases decded by the courts
and had become a rue of property n Pennsyvana.
In Danes v. Chares et a., suprar the court hed that
Mnng hy a fe tenant, ncudng a doweress, w be aowed f the former
owner of the fee bus mpressed upon t the character of mnng and hy e ecut-
ng nn enforceabe ease for that purpose pror to the commencement of the
fe estate, athough no mnes were opened unt after ts commencement.
( rom the syabus.)
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187
2t4(a)10, rt.2O.
In Pooe v. Unon Trust Co., et a., supra, t was stated
It has, however, ong been the aw that where mnes were opened or the
eases e ecnted before the fe estate commenced, the owner of the fe estate
m ght, n the absence of restranng words, work the mnes, eveu to the pont
of e hauston and take the profts.
The cases supportng the above proposton are numerous.
In the Revenue ct of 191 t s provded:
Skc. 5. That In computng net ncome n the case of a ctzen or resdent of
the Unted States
(a) or the purpose of the ta there sha be aowed as deductons
ghth (b) In the case of mnes a reasonaba aowance for
depeton thereof not to e ceed the market vaue n the mne of the product
thereof, whch has been mned and sod durng the year for whch the return
and computaton are made, such reasonabe aowance to be made n the case
of both (a) and (b) under rues and reguatons to be prescrbed by the
Secretary of the Treasury:
It s provded n secton 214(a) 10 of the Revenue ct of 1918 that
n computng net ncome there sha be aowed as a deducton
h 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 Ln each case, based upon cost Incudng cost
of deveopment not otherwse deducted: Provded, That In the ease of such
propertes acqured pror to March 1, 1913, the far market vaue of the property
(or the ta payer s nterest theren) on that date sha be taken n eu of cost
op to that date:
Deductons for depeton are permtted by the statute n order to
compensate the ta payer for the dmnshment n the vaue of the
mnera reserve caused by the e tracton and remova of the mneras
therefrom. Is the nterest of a fe tenant n the mnera reserve
such as to permt hm to take the deductons authorzed by the
statute
verythng n the nature of ncome or profts accrung durng the
contnuance of the fe estate beongs to the fe tenant. The capta
of the estate can not be broken nto for the beneft of the remander-
man so as to dmnsh the ncome of the fe tenant wthout the at-
ter s consent. trustee can not retan any of the ncome to com-
pensate for a decrease n the vaue of the property from whch t s
derved. (Matter of ohnson, 57 ppeas Dvson. 49 7 N. Y.
Sup., 1004 Matter of Chapman, N. Y. Sup., 235 affrmed 9
N. Y. Sup., 1131.) In the Chapman case, supra, the court hed that
a fe tenant does not beneft by way of ncome through any ncrease
n the vaue of the capta assets and shoud not therefore be requred
to pay any part of her ncome to make good any deducton n vaue
whch arses from age or ordnary use.
In Law Opnon 1013 (C. . 2, 181) the rght of the fe tenant
to take deprecaton was under consderaton and the foowng hod-
ng was there made:
smar confct of nterests e sts between fe tenant and remanderman
am must be recognzed In nterpretng tte statute to avod an nequtabe and
nnreasonabc resut. The net ncome of the estate or trust s the resut of
statutory deductons from statutory gross ncome. In case the estate or trust
comprses dfferent nterests the varous tems of ncome and deducton shoud
be scrutnzed and aocated so far as possbe to the proper nterest. y ths
means a fe tenant recevng Income w be requred to account for a
amounts receved by hm as Income (e cept e empt ncome), even though
de aggregate of dstrbutve shares so determned e ceeds the net ncome of
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2M(a)10, rt. 201.
188
the estate or trust computed as n unt. The prncpes stted wth reference
to case (1) appy here. The benefcares are not, therefore, entted to ac-
count for ess than the actua dstrbutons of ncome to them by reason of
capta osses whch do not reduce the dstrbutabe ncome. The statutory
anguage treatng the estate or trust us a unt must be regarded as appyng
to that part of the estate whch s propery treated as a unt. The procedure
here adopted carres out the genera purpose am ntent of the secton.
In the case of Strattor a Independence v. owbert (231 U. S.,
390), the Supreme Court dened an aowance for depeton n the
absence of e press statutory authorty and n the case of Unted
States v. wabk Mnng Company (247 U. S., 11 ), the depeton
aowance was dened to a essee. In the case of Wess v. Mohawk
Mnng Company (2 -1 ed., 502), n whch case certorar was de-
ned by the Supreme Court, the Crcut Court of ppeas for the
S th Crcut hed that the depeton aowance granted under the
191 ct was avaabe ony to the owner of the property and not to
a essee. The Revenue cts of 1918 and 1921 specfcay permt a
essee, as we as the owner, to take depeton to the e tent of hs
nterest n property. It s ony by vrtue of ths e press statutory
authorty that depeton s aowabe at a, however.
rom what has been sad above, t w be seen that a fe tenant
suffers no oss and consequenty s entted to no deducton by reason
of the fact that the property from whch he receves hs ncome s
essenng n vaue due to ts depeton or deprecaton. It s further
cear that, under the ta ng statute, a fe tenant does not meet the
defnton of owner or essee. It s, therefore, hed that depeton can
not be aowed a fe tenant, and the cam of the ta payer n ths
partcuar must accordngy be dened.
ktcb 201: Depeton of mnes, o and gas III-4-1330
wes deprecaton of mprovements. I.T. 1920
R NU CTS O 1018 ND 1021.
The owner of a fractona nterest n a essor s royaty under an
o and gas ease may be granted depeton based on dscovery
vaue.
Where an orgna essee from the fee owner of o and gas prop-
erty subeases the property to a thrd person the orgna essee Is
entted to depeton based on dscovery vaue.
In a case where an orgna essee competey renqushes hs
ease and a thrd person enters nto a new agreement wth the fee
owner to whch the orgna essee s not In any sense of the word
a party, t s not beeved that such orgna essee woud be en-
tted to depeton f by a coatera agreement wth the new essee
he receved as consderaton for renqushng hs ease au amount
based on the o thereafter recovered.
1. May the owners of fractona nterests u a essor s royaty be
granted depeton based on dscovery
2. May the owners of overrdng royates be granted depeton
based on dscovery
The foowng typca cases are presented:
(a) , the owner n fee of a certan property, e ecutes an o and
gas ease to , retanng a royaty n the o. fter 1 starts dr-
ng, C buys from one-haf of hs royaty, thereby becomng the
owner of a nterest n the o, but havng no nterest n the fee
and havng no contractua reatons wth the essee, .
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189
214(a)10, rt. 201.
(b) , the owner n fee of a certan property, e ecutes an o and
gas ease to C, retanng a yg royaty nterest n the o. C, n return,
subeases hs rghts to , retanng a of of the o, and
agrees to deveop the property under the terms of the orgna ease.
Thus C becomes the owner of a overrdng royaty. e has con-
tractua reatons wth both the essor, , and the essee, .
Secton 214(a) 10 of the evenue ct of 1921 reads as foows:
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, 1913, the far market vaue of the
property (or the ta payer s nterest theren) on that date sha be taken n
eu of cost up to that date: Provded further, That n the case of mnes, o
and gas wes, dscovered by the ta payer, on or after March 1, 1013, and not
acqured as te resut of purchase of a proven tract or ease, where the far
market vaue of the property s materay dsproportonate U the cost, the
depeton aowance sha be based upon the far market vaue of the property
at the date of the dscovery, or wthn 30 days thereafter: nd provded
further, That such depeton aowance based on dscovery vaue sha not
e ceed the net ncome computed wthout aowance for depeton, from the
property upon whch the dscovery s made, e cept where such net ncome so
computed s ess than the depeton aowance based on cost or far market
vaue as of March 1, 1913 such reasonabe aowance n a the above cases
to e made under rues and reguatons to be prescrbed by the Commssoner,
wth the approva of the Secretary. In the case of eases the deductons a-
owed by ths paragraph sha be equtaby apportoned between the essor
and essee
The same secton of the Revenue ct of 1918 reads dentcay as
does the above-quoted secton of the 1921 ct, e cept that the ast
provso does not appear n the 1918 ct.
The Corporaton cse ct of 1909 made no provson for a de-
peton aowance ether to an operatng owner or a essor or essee.
( on av.rn.bach v. Sargent Land Company, 242 U. S., 503 U. S.
v. Uwabk Company, 247 U. S., 11 .) Lmted depeton was granted
under the 1913 ct, and substantay fu depeton was granted
under the evenue ct of 191 , but ths aowance was hed to be
avaabe to the fee owner ony and not to a essee. Mohawk Mn-
ng Company v. Wess, 2 4 ed., 502.) owever, by Law Opnon
1103 (C. . 1-2, 128), ths offce gave a dfferent nterpretaton
to the matter of aowng depeton to a essee of o propertes and
by that opnon granted depeton to an o essee to the e tent of hs
nterest n the property.
y the Revenue ct of 1918 depeton was granted specfcay to
the essee as we as to the essor, and ths provson was carred nto
the 1921 ct. It w aso be noted that both cts provde for de-
peton based on the March 1, 1913, vaue of the property, or the
ta payer s nterest theren n the case of propertes acqured pror
to March 1, 1913. It was hed n L. O. 1110 (C. . II-, 104) that
t was not necessary that the camant for depeton have a fee-smpe
tte to the and or on the other hand that he be n a-technca sense
a essee of the o rghts, but t was suffcent f he had a property
nterest n the o whch was the sub|ect of the depeton aowance.
y a reference to the above-quoted secton, t w be seen that the
second provso n terms mts depeton based on dscovery to a
ta payer who on or after March 1, 1913, made the dscovery. The
queston naturay arose whether, n vew of the anguage, ths e -
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214(a)10, rt. 201.
190
traordnary aowance woud be avaabe to a essor where the actua
dscovery was made by hs essee. The queston was referred to
the ttorney Genera and n an opnon rendered under date of
October 29, 1920 (T. D. 30S9 C. . 3, 175), he hed that n vew of
the ast sentence of the secton, whch provded for an equtabe
apportonment between the essor and the essee, of the depeton
aowance, that a essor was entted to have hs depeton based on
dscovery vaue.
The queston presented n e ampe 1 s whether the purchaser
from the fee owner of a porton of hs reserved royaty nterest has
thereafter such an nterest n the property as to entte the former
to depeton bused on a dscovery by the essee at a date subsequent
to hs purchase from the essor. The nstrument whch serves to
vest n the purchaser the so-caed royaty nterest hed by the
essor usuay takes the form of a mnera deed and purports to
convey a or some porton of the nterest reserved by the grantor,
whch s usuay a porton of the o theretofore reserved.
It may we be that the purchaser of the so-caed royaty nterest
s not techncay ether a essor or essee. That the nstrument,
however, serves to nvest hm wth an nterest n the o seems
equay true. ease of o propertes has been hed n some |urs-
dctons to convey the o n pace, where n other |ursdctons such
an nterest grants merey a rght to e pore for and remove such
o. Whether t s ncumbent on the edera courts n the matter
of edera ta aton to foow the constructon paced on such con-
tracts by the State courts s not entrey a setted queston. ( on
aumhach v. Sargent Land Company, 242 U. S., 503.) It s beeved
that secton 214(a) 10 of the Revenue cts of 1918 and 1921 n-
tends to grant depeton n accordance wth the ta payer s nter-
est n the property depeted, whether the bass of that depeton
aowance be cost, March 1, 1913, vaue, or dscovery vaue. The
purchaser of a royaty nterest from a essor acqures by the con-
veyance an assgnment of that porton of the essor s nterest n
the property and t s beeved that he woud have an enforceabe
rght aganst the essee for faure to compy wth the terms of the
e:tse. It woud foow that depeton shoud be aowed a pur-
chaser of a royaty nterest based on dscovery n a case such as s
covered by e ampe 1.
In the second e ampe, an orgna essee from the fee owner sub-
enses the property to a thrd person. e remans n the chan of
tte and does not by subeasng the property change hs poston
from that of a essee. It s to hm that the owner ooks for com-
pance wth the agreement, and t s beeved that he answers the
technca descrpton of the statute as a essee and accordngy s
entted to depeton based on dscovery. In a case where an orgna
essee competey renqushes hs ease and a thrd person enters
nto a new agreement wth the. fee owner to whch the orgna essee
s not n any sense of the word a party, t s not beeved that
such orgna essee woud be entted to depeton f by a coatera
agreement wth the new essee he receved as consderaton for
renqushng hs ease an amount based on the o thereafter re-
covered. The dstncton n the atter case s that the rght of the
orgna essee woud be based on a coatera contract and not on
the ease and ho has no nterest n the and or the mnera contents.
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191
214(a)10, rt. 203.
rtce 203: mount returnabe through depeton and
deprecaton deductons n the case of essee.
(See . R. R. 459 sec. 214(a) 1, art. 109.) Method of amortzng
cost of a easehod of coa and, t beng assumed that the coa w
not be e hausted pror to the e praton of the orgna ease.
rtce 203: mount returnabe through de- 111-17-1517
peton and deprecaton deductons n the I. T. 1985
case of essee.
R NU CTS O 1917 ND 1918.
O eases were aoqured for stock. They were made for n term
of 78 months and provded that If o s found n commerca quan-
ttes durng such perod that the easee shoud have the rght to
dr and operate upon the and covered thereby for as ong a perod
as o s found n such quanttes.
n aquot part of the capta e pendture based on the number
of years the ease s to run may be taken as a deducton for each
year. Where o s so found the amount whch the o company
may take as a deducton, representng the unrecovered orgna
cost of the ease, w depend upon the producton receved from
the pro crtes. The method of apportonng the amount over the
entre perod of 78 months shoud no onger be used. The amount
to be returned must be returned at the rate at whch the mnera
s e tracted from th ground. The baance of the cost dvded by
the estmuted number of recoverabe unts of mnera w deter-
mne the amoun of the orgna cost appcabe to each unt e -
tracted. Ths quotent mutped by the number of unts produced
and sod durng any year w determne the sum whch w con-
sttute an aowabe deducton from sross ncome on account of the
unrecovered cost of the eases n queston.
fter the propertes have become productve, and as ong as the
eases contnue n force, the nnrecovered cost of the eases must be
spread over the remanng fe thereof.
In 1915 the M Company acqured fve o eases for stock of the
par vaue of 50 doars. The Natura Resources Dvson has vaued
these eases as of the date of acquston at 500 doars, vaung
each ease separatey at 100 doars.
The ease nstruments are of the knd ordnary used n the o
and gas busness and the matera portons of a are dentca. They
are for a term of 78 months and provde that f o s found n com-
merca quanttes durng that perod the essee sha have the rght
to dr and operate upon the and covered thereby for as ong a
perod as o s found n such quanttes.
The frst queston upon whch the opnon of ths offce s asked 13
as foows:
Sha amortzaton be aowed on the bass of 78 months unt such
tme as dscoveres of o are made and, from the date of dscovery
(whereby the term of the ease s ndefntey e tended), sha an
aowance be made on the bass of depeton appcabe to the un-
amortzed cost
Reguatons 33, revsed, provde n artce 8, paragraph 113, that:
Where a easehod Is sod for a specfed sum, the purchaser may take
as a deducton n hs return an aquot part of such sum, each year, bused on
the number of years the ease has to run.
Smar rungs may be found n artce 140 of Reguatons 33
(revsed) and artce 09 of Reguatons 45 (1920 edton).
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214(a) LO, rt. 204.
192
rom the foregong t s cear that the ureau of Interna Revenue
has recognzed that an aquot part of a capta e pendture, made
for the purpose of acqurng a easehod, based on the number of
years the ease s to run, may be taken as a deducton for each year.
s aready stated, the eases are for a defnte term of 78 months,
wth a provson theren for an e tenson of the term n case o s
found n payng quanttes. ere o s so found, the term of the
ease s e tended for so ong a tme as the property s commercay
productve. In such a case the amount whch the o company may
take as a deducton, representng the unrecovered orgna cost of the
ease, w depend upon the producton receved from the propertes.
The method of apportonng the amount over the entre perod of
78 months shoud no onger be used. The amount to be returned must
be returned at the rate at whch the mnera s e tracted from the
ground. The baance of the cost dvded by the estmated number of
recoverabe unts of mnera w determne the amount of the orgna
cost appcabe to each unt e tracted. Ths quotent mutped by
the number of unts produced and sod durng any year w deter-
mne the sum whch w consttute an aowabe deducton from
gross ncome on account of the unrecovered cost of the eases n
queston.
fter the propertes have become productve, and as ong as the
eases contnue n force, the unrecovered cost of the eases must be
spread over the remanng fe thereof. Ths has been the practce
of the ureau for years and s far to both the ta payer and the
Government. No reasons now appear why the practce shoud be
changed.
rtce 204: mount returnabe through depe- 111-10-1401
ton and deprecaton n case of essor. T. D. 35 2
( so Secton 213(a), rtce 31.)
ncome ta bevent|e act of 1010 as amende ) decson of court.
1. Income Royates rom Obb Lands.
The entre proceeds, Incudng royates to a essor, derved from
the mnng of coa consttute gross ncome.
2. Deductons Depeton.
mnng corporaton whch, n consderaton of certan royates,
grants the rght to e tract ore from ts and s not entted
us an nherent rght to any deducton from gross ncome for de-
peton, and the rght to such a deducton depends upon the statu-
tory provsons of the ta ng ct .
3. Depeton Regttatons Reasonabeness.
The Revenue ct of 191(3 as amended provdes a reasonabe
aowance for depeton and deegates to the Secretary of the
Treasury the power to prescrbe the amount by approprate
reguatons. The aowance for depeton provded by artces
171 and 172 of Reguatons No. 33 (revsed) s reasonabe.
4. DGM NT O LOW R CO RT.
udgment of the Unted States Dstrct Court for the astern
Dstrct of Pennsyvana, n the case of feto Creek Company v.
Ledcrer (2S8 ed., 99 T. D. 3172 C. . II-, 111 ), affrmed.
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193 214(a)10, rt . 204.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of-nterna revenue and others concerned:
The foowng decson of the Unted States Crcut Court of
ppeas for the Thrd Crcut, n the case of New Creek Company
v. phram Lederer, coector, s pubshed for the nformaton of
nterna-revenue offcers and others concerned.
I). . ar,
Commssoner of Interna Revenue.
pproved ebruary 29, 1924.
. W. Meon,
Secretory of the Treasury.
Unted States Crcut Court ok ppeas, Thrd Cucut. No. 3014.
October Term, 1023.
rgued November , 1923. Decded ebruary 8, 1924.1
cr Creek Company, pantff-appeant, v. phram Lederer, Coector of Inter-
na Revenue for the rst Dstrct of Pennsyvana, defendant-appeee.
Id error to the Dstrct Court of the Unted States for the astern Dstrct of
Pennsyvana.
efore uf.ngton, Woo ey, and Davs, Crcut udges.
Wooey, Crcut udge: The queston n ths case concerns the vadty of
rues and reguatons prescrbed by the Secretary of the Treasury for the
enforcement of the ncome and e cess-profts ta provsons of the Revenue
ct of September 8, 101 , amended by the ct of October 3, 1017, as they
affect an aowance n a ta return for depeton of a mne where coa has
been mned on royates. The pertnent facts, submtted n an agreed state-
ment, are brefy these:
In 1851 the pantff corporaton purchased coa auds In what s now the
State of West rgna. Of these ands t owned on March 1, 1013, severa
tracts underad wth merchantabe coa of an estmated oad of 9,057, 40.32
tons and of a vaue of 109,875.
Durng the year 1017 the pantff s mnes were operated on royates the
amount of coa mned was 93,515.18 tons and the amount of royates receved
w:s 37,5 5.25. These royates represented the e act market vaue In the
mnes of the coa rased and sod durng that year. In makng ts ncome ta
return for 1017 the pantff ncuded n ts gross ncome the entre amount of
ts coa royates, but mmedatey deducted the whoe of ths sum as a depe-
ton of ts capta asset.
Ths return showed no -e cess-profts ta to be due but showed to be due an
ncome ta of 88.12. Ths the pantff pad. Thereafter, the Commssoner
of Interna Revenue notfed the pant that t was not entted to cam a
credt for depeton to the fu amount of ts royates, but was entted to cam
ony a porton thereof reckoned on a ner-ton bass ascertaned by dvdng the
sum representng the far market vaue of the ands on March 1,101. ) ( 190,875),
by the tota estmated number of tons of coa underyng the ands on that
date (9,057, 40.32 tons). Ths cacuaton gave a per-ton unt of 0.0220 7,
whch, when mutped by the 1)3.515.18 tons mned, showed a tota mne de-
peton of 2,0 3. 0 for the year. ased on ths ad|ustment of the depeton
aowance, the Commssoner assessed an addtona ncome and e cess-profts
ta of 5,952.87. The pantff pad ths sum under protest, and, after ts
cam for refund had been re|ected, nsttuted ths acton to recover the same.
t the tra the partes took whoy opposte postons. The pantff corpora-
on contended that the coa before t was mned was capta that royates
for coa mned were capta converted nto another form : and, representng the
precse depeton of the mne, these royates were not ncome and therefore
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2U(a)10, rt.204.
191
were not sub|ect to assessment for au Income ta , and that n consequence t,
the pantff, woud not be abe for ta es under the ct unt Its capta n
coa reserves had been e hausted, and then, and not unt then, woud the coa
that remaned and was thereafter mued be Income. The defendant coector
contended that royates represented both capta and ncome and tha the
aowance for capta depeton whch the statute authorzed was to be deter-
mned by the vaue In the ground of each ton of coa on March 1, 1913
(reckoned as before stated), mutped by the number of tons mned n the
year for whch the ta was payabe. The dstrct court sustaned the co-
ector s poston and, accordngy, entered |udgment n hs favor. (2SS ed.,
99.) The coa company sued out ths wrt of error.
The pantff stated the queston nvoved In ths case to be ths: On what
bass shoud depeton aowance for a mne be f ed wth respect to ore mned
n 1917 on royaty Or, as agan stated by the pantff, whether under any
satutory provson these royates, whch were n the nature of prncpa,
became ta abe as ncome and, f so, to what e tent We thnk the true ques-
ton s whether the rue prescrbed by the Secretary of the Treasury, under
authorty of the statute, assured to the pantff the reasonabe aowance for
depeton whch the statute ntended t sha have n makng an ncome
and e cess-profts ta return for coa mned on royates. Our answer s based
on the foowng reasonng:
It shoud frst be noted that we are deang wth a revenue ct the Revenue
ct of 191 , now superseded by ater cts. Under ths ct ta es were assessed
on net ncome ascertaned by deductng specfed tems from gross ncome. or
purposes of ta aton t has been hed both In ngand and n ths country that
the product of a mne s a proper sub|ect of ta aton under Income ta aws,
notwthstandng the pecuarty that such a product s never Income n the sense
of ncrement and s aways capta n the sense that It Is somethng whch s
not produced but s aways n beng, and that ts wthdrawa and sae cause a
correspondng depeton n the oad and n the vaue of the mne. eepng
In vew that we are deang wth a revenue ct that caed for a yeary ta
on yeary ncome and embraced the produce of mnes as a sub|ect of ta aton,
we start wth the proposton, whch we thnk Is no onger open to queston,
that the proceeds from the sae of mned coa s gross Income sub|ect to ta a-
ton. We then come to the proposton that the ta abe had no nherent rsrht
to deduct therefrom the capta cost of the coa mned, ether under the head
of deteroraton or depeton. See the prncpe n ttraton Independence v.
owbert (231 U. S., 399) on aumbach v. Sargent Land Co. (242 U. S.,
oftt) Godfed Conso. Mne Co. v. Unted Stae (247 17. S., 12 ) Unted
States v. uabk Mnng Co. (247 U. S., 11 ) Stanton v. atc Mnng Co.
(240 U. S., 103) Doye v. Mtche rothers Company (247 . S., 179). What-
ever rght a corporate mne-ownng ta abe had to deduct from the gross
ncome of ts mne anythng for deprecaton or depeton came to It soey
by vrtue of the statutes under whch the ta was assessed. Therefore, we
ne t nqure what aowance for capta depeton dd the Revenue ct of 191
gve a ta abe. Ths ct provded (sec. 13) that ncome and e cess-profts
ta es sha be eved aganst net ncome, whch sha he ascertaned by
deductng from the gross amount of the ts ncome receved n the year from
n sources e penses of operaton and mantenance, osses not compensated
by nsurance, and n the case of mnes a reasonabe aowance for depeton
thereof not to e ceed the market vaue n the mne of the product thereof
whch has been mned and sod durng the year for whch the return and
computaton are mde. Therefore, t appears that the ct aowed the ta abe
a deducton for depeton of the corpus or capta of the property. Rut how was
t to be arrved at Ceary. Congress dd not know. nd ths s entrey
natura, because of the varabe factors enterng Inevtaby nto such probems
as they arse wth reference to mnes under varyng condtons. Therefore,
Congress sad that ths reasonabe aowance for capta depcton shoud be
made under rues and reguatons to te prescrbed by the Secretary
of the Treasury, wth the mtaton bearng both on the rght of the ta abe
and the authorty of the Secretary of the Treasury That when the aowance
authorzed sha equa the capta orgnay nvested, or n case of purchase
made pror to March 1, 1013 (sha equa), the far market vaue as of that
date, no further aowance sha be made.
Obvousy, ths statutory deegaton of authorty to the Secretary of the
Treasury was made because of the pecuar nature of mnng property as a
sub|ect of ta aton. The vaue of such property s usuay n the mnes whch
e wthn t. Ther mnera e tent and money vaue are factors Impossbe
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195
2U(a)10, rt. 204.
of precse ascertanment. Yet on these factors any aowance for depeton of
capta or the corpus must be based. Wth ths duty mposed upon hm by the
ct. the Secretary of the Treasury promugated ues and Reguatons No. 38.
Ttmse affectng ths case are artces 171 and 17a. In framng these rues e
Secretary of the Treasury frst nserted the provsons of the statute provdng
a reasonabe aowance for mne depeton and then prescrbed, as stated before,
that the aowance for depeton sha be b sed on I te mutpcaton of the
tons mned n a ta year by a per-ton unt f capta depeton whch sha be ar-
rved at by dvdu the capta orgnay nvested n the mne (or n case h mne
purchased pror to March 1,1013, then b.v dvdng ts far market vaue as of that
te by the number of tons of ore n the mne, aso estmated as of that date.
The pantff says that s not the reasonabe aowance for mne depeton whch
the statute gave t on the contrary, the aowance s unreasonabe because t s
ascertaned n part on estmated and therefore on uncertan factors, and that,
n consequence, the net ncome on whch t was requred to pay a ta was
.y uncertan and therefore an un|ust bass of ta aton. On the contenton
that t was entted to an aowance precsey equa to mne depeton the
pantff rests ts cam to deduct for depeton, year by year, the whoe of ts
royates uut ts orgna nvestment, or the far market vaue of ts ore
as capta, has been e hausted. We are not persuaded by ths contenton,
because the |anUf s ony entted to the aowance whch the statute gave t
and the statute dd not gve t an aowance for the precse depeton of ts
rtne. It gave t a reasonabe aowance for depeton, havng regard, of course,
to the Impossbty of absoute precson n estmatng depeton of a ta abe
asset of the character of a mne. If the pantff s rght n ts contenton
that t can deduct from ts gross ncome (n ths case royates) a of ts
royates n the form of depeton of capta unt ts whoe capta s e hausted,
ts ncome from mnes, admttedy a proper sub|ect of ta aton, woud escape
ta aton unt ts capta had been worked out and nothng was eft but profts.
Ths coud not have been the ntenton of Congress n passng the ct for the
rasng of revenue presenty. If ths had been ts Intenton, the revenue con-
tempated by the ct woud not be avaabe, In many nstances, for years,
decades, and centures. or e ampe, these propertes were purchased n 18 ,
portons were sod and the remanng two or three thousand acres have not
yet been mned to e hauston and may not be for another T years. One cor-
poraton n ths country owns anthracte mnes whch, t s sad, w not be
e hausted for 200 years. .
Under ths ct Congress evdenty ntended that the Government shoud e act
an ncome ta yeary, and. correspondngy, the ta abe wns gven a r ht to
demand an aowance for capta depeton yeary. On the theory of the statu e,
as we read t, depeton aowance was ntended as a return to the ta payer
of the orgna cost of the coa so that he may be ta ed not on the whoe of ts
sae prce n the event that he s an operatng owner, or on the fu amount of
royates f he s a essor, but that he may be ta ed on the dfference between
the cost (capta) and the sae prce or royates receved (ncome). (Of
course n estmatng ncome on sae prce other factors enter.) If he were
aowed to deduct n each year the fu amount of the sae prce or the fu
amount of the royates receved (as the pantff here cams), the practca
pffect woud be that be woud, for many years, pay no ta at a, and ths
regardess of the1 fact that the tota sae prce (or tota royates) may. ton by
ton. show a proft over the orgna capta cost. It s ths proft or net ncome
annuay earned whch the ct ta ed annuay. nd In ths regard we see no
dstncton n the appcaton of the prncpe to a mne owner whose ncome s
royates and to a mne owner whose ncome s derved from workng the mnes
and seng the cou. The ony dfference s that n the atter more factors enter
nto cacuaton. The prncpe s the same.
We do not fnd that the rues and reguatons proscrbed by the Secretary
of the Treasury for the enforcement of the aowance for depeton under the
Provsons of the Revenue ct of 191G are, n vew of the sub|ect mat er of
ta aton, unreasonabe, or that by these rues the ta payer was deprved of
te deducton whch the statute aowed. Therefore, we affrm the |udgment
of the court heow.
udge uffngton took no part In the consderaton and decson of ths case.
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LM4(a)10, rt. 218.
19
rtce 218: ddtona statement to be attached III-2-1297
to return where depeton of o or gas camed. I. T. 1902
( so Secton 257, rtce 1090.)
R NU CT O 1918.
Where the essor of nterests In o-benrng ands as faed to
fe tc schedues requred by the reguatons for the reason that
the essee companes have decned to furnsh hm the necessary
data, t s hed that the Government may not resort to the sched-
ues fed by the essee companes for nformaton on whch to work
out for a essor the amount of s depeton deduct on.
The ta payer owns nterests n varous o-bearng ands from the
ease of whch to varous o-producng companes he has receved
royates. In each of such propertes the ta payer asserts a revaua-
ton has been granted the essees under the dscovery provsons of
the Revenue ct of 1918. e has faed to fe the schedues requred
by the reguatons for the reason aeged by hm that the essee com-
panes decned to gve hm the necessary data needed to f out
orm O. The queston arses whether the Government shoud resort
to the schedues fed by the essee companes, and attached to ther
ta returns, for nformaton on whch to base the depeton aowance
camed by the ta payer heren n hs capacty as a essor.
Secton 214(a) 10 of the Revenue ct of 1918 provdes for an a-
owance for depeton based on the dscovery vaue of the property,
and, further, that n the case of eases the deductons aowed by
ths paragraph sha be equtaby apportoned between the essor and
essee. The reguat ons specfcay requre that every ta payer mak-
ng a cam for depeton sha hmsef furnsh the data necessary on
whch to compute the deducton camed by hm. In other words,
t has unformy been the practce of the ureau to ad|udcate each
case on the showng made by the ta payer or on nformaton ac-
qured n connecton therewth and not to use nformaton obtaned
n the returns of other ta payers for the purpose of makng such
an aowance. The poston of the ta payer s that under the prov-
son of the statute there can be but one ascertanment of the depeton
aowance and that such ascertanment s for the property as a whoe,
the depeton then to be equtaby apportoned between the nterests
of the essor and the essee.
Secton 214(a)10 of the 1918 ct states that depeton w be a-
owed accordng to the pecuar condtons n each case. The con-
dtons pecuar to a essor are not the condtons pecuar to a essee.
essor, through a fortunate purchase, possesses and or a ease under
v hch natura resources are found. or a consderaton he ses a essee
the rght to e pore for and prove that such natura resources are
under or n such and or ease. The essor s rsk s far ess than that of
the essee, as hs ony e pense s hs orgna nvestment, and, perhaps,
n a ma|orty of cases, hs orgna nvestment was not made for the
natura resources the and contaned but for agrcutura or other
purposes. The essee s the one who takes most of the rsk, and
usuay gets ess reef through depeton deductons than the essor.
The essee usuay pays a bonus for the rght to prospect and then
must stand a the e pense of prospectng and f a natura resource
s found must aso bear the cost of e tractng, not ony for hmsef
but aso for the essor. nother pecuar condton n determn-
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197
214(a)10, rt. 218.
ng the vaue of o reserves of a essee s nterest for depeton deduc-
tons based on dscovery s that from the gross vaue of such reserves -
must be deducted (1) deveopment cost, (2) equpment cost, (3) ft-
ng cost, and (4) overhead cost and ta es, n order to determne the
net vaue. No such deductons are taken from the gross vaue of a
essor s nterest. One of the pecuar condtons n hs case s that
he does not have to bear any of the e pense of deveopment and e -
tracton.
rom the foregong, t w be seen that the data furnshed by the
essee s not n and of tsef suffcent on whch to determne the de-
peton deducton for the essor. In fact, there are cases not here
necessary to dscuss, but whch w ready suggest themseves, n
whch the return of the essee may competey fa to gve any nfor-
maton on whch to determne dscovery vaue and where the Gov-
ernment voud have to rey entrey on the showng made by the
essor camng the deducton.
Irrespectve of whether suffcent nformaton may be avaabe
n the returns of a essee on whch to make a fndng of the depeton
aowance to be made to a essor, a grave queston arses as to the
proprety of usng such nformaton n the manner suggested by the
ta payer heren. Secton 1317 of the Revenue ct of 1918 amended
secton 31 7 of the Revsed Statutes to read as foows:
Skc. 31 7. It sha be unawfu for any coector, deputy coector, anent,
cerk, or other offcer or empoyee of the Unted States to dvuge or to make
known n any manner whatever not provded by aw to any person the opera-
tons, stye of work, or apparatus of any manufacturer or producer vsted by
hm n the dscharge of hs offca dutes, or the amount or source of ncome,
profts, osses, e pendtures, or any partcuar thereof, set forth or dscosed
n any ncome return, or to permt any ncome return or copy thereof or any
book contanng any abstract or partcuars thereof to be seen or e amned
by any person e cept as provded by aw and t sha be unawfu for any
I erson 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 and any offense aganst the fore-
gong provson sha be a msdemeanor and be punshed 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 he sha be dsmssed from the offce or dscharged from em-
poyment.
It s beeved that the depeton data sheets fed wth the ta
return of an operatng essee of o ands are n every proper sense
of the word a part of that ta payer s returns, and to work out for a
essor the amount of hs depeton deducton from data obtaned
from the schedues attached to a essee s return woud, t s beeved,
be a voaton of that provson of the above secton forbddng pub-
caton n any manner whatever not provded by aw any ncome
return, or any part thereof or source of ncome.
or the foregong reasons, t s the opnon of ths offce that the
contenton of the ta pa3rer must be re|ected. It s beeved that
there s avaabe to the ta payer suffcent data whch, when pre-
sented to the Unt, w enabe t to determne the depeton aow-
ance of the ta payer wthout recourse beng had to nformaton fur-
nshed by the essee.
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214(a), rt. 251. 198
S CTION 214(a) 11. D DUCTIONS LLOW D:
C RIT L CONTRI UTIONS.
rtce 251: Chartabe contrbutons. 111-12-1431
I.T. 1954
R NU CT O 19Z1.
Contrbutons ry ndvduas to the ardng Memora ssoca-
ton arc aowabe deductons n computng net ncome under the
provsons of secton 214(a) 11.
rtce 251: Chartabe contrbutons. 111-18-1529
I. T. 19S8
R NU CT O 1921.
The e penses of a deegate to a church conference or to an mer-
can Legon conventon pad by hmsef are not chartabe contrbu-
tons but persona e penses, and are, therefore, not deductbe.
rtce 251: Chartabe contrbutons. III-22-1580
I. T. 2013
R NU CT O 1921.
Te 15 per cent mtaton on chartabe contrbutons contaned
n secton 214(a) 11 shoud he determned on the bass of the net
ncome pror to the deducton for a net oss aowabe under sec-
ton 204.
The ta payer sustaned a net oss durng the year 1921. Durng
the year 1922 he made chartabe donatons n an amount whch was
n e cess of 15 per cent of hs net ncome for that year, after deduct-
ng hs 1021 oss, but was not n e cess of bs net ncome for the year
1922 wthout deductng the net oss for 1921.
Inqury s made whether the net oss shoud be taken nto con-
sderaton n determnng the amount of the aowabe deductons
for contrbutons.
Secton 214(a) provdes that a deducton for contrbutons to
chartabe and certan other organzatons may be camed:
to an amount whch does not e ceed 15 per centum of
the ta payer s net ncome as computed wthout the beneft of ths paragraph.
It s consdered that the term net ncome as used n ths secton
mens statutory net ncome as defned n secton 212(a) that :, gross
ncome as defned n secton 213 ess the deductons aowabe under
secton 214. Inasmuch as the deducton for a net oss sustaned n
a prevous year s provded for n secton 204 rather than n secton
214, the 15 per cent mtaton of secton 214(a) 11 shoud be deter-
mned on the bass of the net ncome pror to the deducton for the
net oss aowabe under secton 204.
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199
214( ), n.251.
rtce 251: Chartabe contrbutons. 111-25-1 17
. R. R. 77 9
R NU CT O 1 18.
ccrued donatons are not contempated by secton 214(a) 11 of
the Revenue ct of 1918 and ony such amounts ns are actuay
pad or gven to the donee are aowabe deductons as contrbu-
tons or gfts, sub|ect to the statutory mtaton.
The Commttee has had under consderaton the appea of from
the acton of the Income Ta Unt n dsaowng as a deducton
from gross ncome for the year 1918 two tems of accrued .contrbu-
tons aggregatng .78. doars.
The appeant ncuded among the genera deductons n Schedue
I of hs 1918 ncome ta return the amount 5.83a doars for con-
trbutons and gfts, of whch amount t appears that, a e cept the
sum of .7S doars was pad out n cash or ts equvaent wthn the
ta abe year 1918. The e cepted tems were accrued n the ta payer s
books of account and were not aowed by the Unt on the ground
that contrbutons may not be accrued, snce, pedges are mere
promses and rest upon no ega obgaton to pay.
The Commttee has gven carefu consderaton to a of the cr-
cumstances surroundng the promses to pay at a future date the
two sums totang .78| doars and s of the opnon that ths ta -
payer made the pedges n good fath and they were to hm a mora
obgaton to be fufed, and that, moreover, t s possbe that these
two pedges were ega obgatons.
It s cear to the Commttee, however, that chartabe contrbutons,
f aowabe at a as deductons, must come wthn the purvew or
secton 214(a) 11 of the Revenue ct of 1918 and artce 251 of
Reguatons 45 (1920 edton), as amended by Treasury Decson
3490 (C. . II-, 118). Ths Treasury decson states n part:
Contrbutons or gfts wthn the ta abe year are deductbe to an aggregate
amount not n e cess of | per cent of the ta payer s net ncome, ncudng
euc payments, If made (a) to corporatons or assocatons . In con-
necton wth cams for ths deducton there sha be staed on returns of
ncome tw name and address of each organzaton to whch a gft was made
au the appro mate date and the amount of the gft In each case.
y the e press terms of the statute a deducton s predcated upon
a gft that has been made wthn Ihe ta abe year. ccruabe
deductons, such as ordnary and necessary busness e penses, n-
terest, and ta es, are specfcay permtted by the anguage of the
aw. In fact, apart from the word made appearng n the aw,
the ega concepton of a gft ncudes the dea of devery of pos-
sesson of the thng gven. The Commttee concudes, therefore,
that accrued contrbutons or gfts are not contempated by the
statute and that ony such amounts as are actuay pad or gven
to the donee are aowabe deductons, sub|ect to the statutory mta-
ton, under secton 214(a) 11 of the Revenue ct of 1918.
The Commttee, accordngy, recommends that the acton of the
Unt be sustaned and that the appea be dened.
Chahes D. ame,
Charman Commttee on ppeas and Revew.
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215, rt. 291.
200
S CTION 215. IT MS NOT D DUCTI L .
rtce 291: Persona and famy e penses. III-2-1298
I. T. 1903
t NU CT O 1921.
fnance offcer of the rmy, on duty at headquarters, 3 mes
dstant from a cty, who s compeed to make day trps to a
hunk n the cty, uses hs persona automobe to make the trps.
Transportaton by street cars was avaabe, the e pense of whch
woud have been borne by the Government.
The e pense of the upkeep of hs automobe s a persona e -
pense and not an aowabe deducton.
The ta payer ves n the cty of II and s on duty as fnance of-
fcer at headquarters, Department, ort S, a dstance of more
than 3 mes from hs home, there beng no quarters avaabe for
hm at the fort. s fnance offcer he s compeed to make day
trps to the M ank n the cty of for the purpose of depostng
ncomng cash, etc. e can not obtan the use of Government cars,
as the number of such cars s so mted as to make t mpossbe to
assgn a car to the fnance offcer. Therefore he uses hs persona
automobe to make the trps.
The use of hs automobe whe on duty at headquarters, ort S,
for the purpose of makng day trps to the M ank n the cty of
appears to have been due to hs persona preference, nasmuch as
transportaton by street cars was avaabe, the e pense of whch
trave woud have been borne by the Government.
It s hed that the upkeep of hs automobe s a persona e pense
and s not an aowabe deducton n arrvng at hs net ncome sub-
|ect to ncome ta .
rtce 291: Persona and famy e penses. 111-10-1402
I. T. 1937
R NU CT O 1021.
The speca order of the Secretary of the Navy drectng a
offcers on duty n the Navy Department to wear cvan cothng,
e cept at certan tmes and on certan occasons, does not affect
the concuson that e pendtures by nava offcers for unforms are
not deductbe.
n order by the Secretary of the Navy, dated March 5, 1923, pro-
vdes that on and after May 15, 1923, cvan cothng w be worn
by a offcers and others on duty n the Navy Department, but does
not modfy n any manner the unform reguatons regardng the
wearng of unforms at certan tmes and on certan occasons.
In vew of ths order, advce s requested as to whether e pend-
tures by nava offcers for unforms requred by the reguatons of
the Navy Department are deductbe as ordnary and necessary bus-
ness e penses n computng net ncome under the Revenue ct of
1921.
It s contended that the unforms do not repace artces of coth-
ng requred n cvan fe, as offcers must obtan and mantan the
requred unforms n addton to cvan attre, and that they have
no choce n the matter. urthermore, that the occasons on and
crcumstances under whch the unforms are worn are prescrbed by
rgd reguatons of the Navy Department. Offcers on duty at shore
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201 11215, rt. 293.
statons, other than at Washngton, and on shpboard are not pro
hbted from wearng unform when net on duty. The unform s
rarey worn, however, e cept when the offcer s on duty.
ed, that the order of the Secretary of the Navy referred to above
does not affect the concuson that e pendtures by nava offcers for
unforms requred by the reguatons of the Navy Department con-
sttute persona e penses, whch are not deductbe. Whe the
order drects that cvan cothng be worn bv a offcers on duty n
te Navy Department, t aso provdes that te unform reguatons
regardng the wearng of unforms at certan tmes and on certan
occasons sha be comped wth. The fact remans that the artces
of unform cothng when worn at the tmes and on the occasons
specfed by the unform reguatons take the pace of cvan dress.
rtce 201: Persona and famy e penses. 111-14-1471
( so Secton 213(a), rtce 33.) I.T. 19 5
R NU CT O 1021.
The amount of 20 cents per month whch s deducted from the pay
of offcers and ensted men of the Navy and Marne Corps, whch s
apped to the hospta fund, s a persona e pense and not a de-
ductbe tem.
The per dem aowance whch s furnshed to ensted men at cer-
tan statons and |osts where housng and messng factes are not
avaabe s consdered compensaton for servces and shoud be re-
umed as ncome.
The tems of equpment, such as god ace, chn strap, gt but-
tons, gt and sver devces on the caps, and god ace and gt
buttons on the unforms are consdered a part of the unform and
cap whch take the pace of reguar cothng and the cost thereof
may not be deducted. The cocked hat takes the pace of the hat
ordnary worn on fu dress occasons n cv fe and the cost s
not deductbe.
The cost of tems of equpment such as corps devces, Sam rowne
bets, epauets, campagn bars, and aguets are deductbe as bus-
ness e penses.
Te cost of aterng the equpment on a unform subsequent to pro-
moton or demoton s a persona e pense and not a deductbe tem.
The cash aowance for unforms of newy enroed members n
the Nava Reserve o ce s to be reported as ncome.
rtce 291: Persona and famy e penses.
(See I. T. 1974 sec. 213(a), art. 32.) owance pad an offcer
of te Unted States rmy for |nrchase of ratons.
rtce 293: Capta e pendtures.
(See I. T. 1892 sec. 214(a)8, art. 1 3.) mount pad for an nter-
est n the good w of a partnershp to contnue for fve years.
4177 24 14
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5215, rt. 293.
202
rtce 293: Capta e pendtures.
( so Secton 214(a)4, 5, ,. rtce 141.)
III-2-1299
I. T. 1904
R NU CT OP 1921.
The ta payer who turned hs busness over to a corporaton,
recevng n en thereof capta stock n the corporaton, guar-
anteed the accounts recevabe whch he turned over to the cor-
poraton. In 19 22 the ta payer pad the corporaton r doars,
representng that porton of the accounts whch proved to be
worthess.
Ths payment does not consttute a deductbe oss for 1922 but
Is a capta transacton and represents addtona cost of the shares
of stock hed by the ta payer at I e tme the payment was made.
In 1921 the ta payer was engaged n busness and durng that
year the M Company was organzed and he turned over hs hodngs
as an ndvdua to the corporaton and receved n eu thereof
capta stock n the corporaton. t that tme the ta payer guaran-
teed the accounts recevabe whch he turned over to the corporaton,
whch accounts ncuded one of 7 doars. The debtor was decared
bankrupt n the year 1922, and by vrtue of the ta payer s guaranty
of the accounts recevabe whch he e changed for stock n the cor-
poraton he was requred to pay an amount of 4,r doars, represent-
ng that porton of accounts recevabe whch proved to be worthess.
It s assumed that the entre transacton was cosed out and deter-
mned durng the year 1922. The ta payer states that ths payment
of -.v doars n 1922 consttuted a oss and that the oss thus sus-
taned was n e cess of hs gross ncome, and he wshes to appy the
amount of the e cess aganst hs ncome for the year 192.1.
ed, that the payment of 4 doars, representng the amount pad
to the M Company, consttutes a capta transacton.
In vew of the foregong, t s further hed that the 4a doars
payment referred to represents addtona cost of the shares of stock
of the corporaton hed by the ta payer at the tme the payment was
m:de and that such payment does not consttute a deductbe oss
for 1922.
The amount of dscount whch was added to the tota amount
of the notes e ecuted n payment of an automobe represents add-
tona cost of the automobe purchased and s not an aowabe
deducton n arrvng at the net ncome of the ta payer.
The ta payer purchased an automobe and e ecuted a seres of
notes payabe monthy secured by a chatte mortgage o the automo-
be. t the tme of the purchase he was advsed that the notes
woud be dscounted at a bank n the sum of 5 per cent of ther face
vaue, whch dscount was ncuded n the tota amount of the notes.
It s hed that the amount of the dscount whch was added to the
tota amount of the notes e ecuted n payment of the automobe
rt presents an addtona cost of the automobe purchased and s not-
an aowabe deducton n arrvng at the net ncome of the ta -
III-3-131-2
I.T. 1912
R NU CT O 1921.
payer.
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203
215, rt, 293.
btce 293: Capta e pendtures. 111-13-1451
( so Secton 214(a)4, 5, , rtce 141.) . R. R. 972
R NU CTS OP 1917 ND 1918.
The e pendture of the ta payer was ceary for the purpose of
perfectng ts tte to rea estate and s therefore a capta e pend-
ture and not a deductbe e pense nor a deductbe oss.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt n refusng to aow as a deduc-
ton doars pad for the reease of tte and one-fourth nterest n
the ots on whch the store budng of the M Company stood.
The queston nvoved beng one of aw, the case was referred to the
Soctor s offce for an opnon. The Soctor s opnon s as foows:
The facts as shown by the record are that n 1901 the M Company purchased
from certan rea estate for use n conductng ts reta busness. The tte
to ths property had been acqured by through the w of hs father, . In
1910 queston arose whether was vested wth the fee-smpe tte to the
property under the w of hs father, or whether, because of the provsons of
a codc to hs father s w, hs nterest was merey a fe estate whch woud
be otherwse dsposed of at hs death. t ths tme an opnon was obtaned
by the ta payer from ega counse e pressng the vew that was vested
under s father s w wth an ndefeasbe fee-smpe tte to the property n
queston. No further queston as to the tte appears to have been rased unt
the death of n 1918, when one C made demand upon the ta payer, camng
that under the w of she was awfuy entted to a one-haf nterest n
the rea estate n queston from and after the death of . In order to sette
the queston the ta payer brought sut to quet tte, and n 1919 a decson was
rendered by the court quetng tte n C to a one-fourth nterest n the and.
fter consderng the possbty of a successfu appea, the ta payer decded
to purchase the nterest of C, and n 1920 pad her doars for the reease of
her cam. The ta payer now contends that ft sustaned a deductbe oss by
reason of the court s decson hodng that the tte to a one-fourth Interest
the and was vested n C. It contends further that the oss of r doars shoud
be deducted for the year 1918 because of the death of durng that year,
whch resuted n the dvestng of ts tte. The Unt, however, has dsaowed
te ta payer s cam on the ground that the doar consttuted a capta
e pendture nstead of a oss and, as such, was not deductbe n any year.
In snpport of ts contenton the ta payer rees on secton 24(a)4 of the
Revenue ct of 1918, whch reads as foows:
Skc, 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:
(4) osses sustaned durng the ta nbe year and not compensated for by
nsurance or otherwse, .
In the ght of the facts above stated, t Is apparent that ths e pendture
ean not be consdered a oss. The ta payer coud not ose what t dd not
possess, and accordng to the decson of the court, acquesced n by the ta -
payer, t dd not acqure from an ndefeasbe fee-smpe tte to the prop-
erty. It had purchased merey the tte whch had, and t t was not the
fee-smpe tte. It may have been thought that the ta payer acqured n-
defeasbe fee-smpe tte to the property from , hut t s apparent, that ths
whs an erroneous opnon and that there was outstandng n C an nchoate
nterest to one-fourth of the property whch became vested upon the death of
n 1918. The subsequent payment of the doars was for the purchase of
ths outstandng nterest and as such t shoud be treated as a part of the
tota cost of the property, whch Is propery a capta e pendture.
rtce 293, Reguatons 45, provdes n part that:
The cost of defendng or perfectng tte to property consttutes a part of
the cost of the property and s not a deductbe e pense. .
Snce the e pendture In the present case was ceary for the purpose of per-
fectng the tte. It fas wthn the above reguaton and wthn the prncpe
set forth n . R. R. 701 (a . 5, 170), approved by ths offce.
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204
In accordance wth the above opnon of the Soctor, n whch
the Commttee concurs, t s recommended that the acton of the
Income Ta Unt n dsaowng as a deducton doars, represent-
n e pendtures made by appeant n perfectng the tte to cer-
tan rea estate on whch ts store budng was ocated, shoud be
sustaned, and accordngy that the appea be dened.
Char|cs D. ame,
Charman Commttee on ppeas and Revew.
rtc e293: Capta e pendtures. 111-13-1452
I. T. 19 0
R NU CT O 1021.
In 1923 a 2-story structure e tendng across the rear of a bus-
ness budng owned by the ta payer was torn down and a 12-story
budng constructed on the same ste wth no ntervenng space.
The constructon of ths budng made t necessary for the ta payer
to cose the rear wndows on severa foors of hs budng and to
cut new wndows and haways at a cost of appro matey doars.
The ta payer states that ths e pendture was ncurred to keep the
property n a condton to be rented and that t dd not add to the
fe or the vaue of the budng n any way.
ed, that as the e pendture was ncurred n makng ateratons
to a budng the amount so e pended represented a capta e -
pendture whch s not deductbe.
rtce 293: Capta e pendtures. 111-18-1530
I. T. 1989
R NU CT O 21.
company purchases State ta certfcates. The amount of the
ta es pad by the company for tfe perod pror to the date when t
s entted to receve a ta deed to the property represents ta es
pad by t on heaf of the record owner who hods ega tte to
the property. Therefore, the amount of ta es pad, together wth
the cost prce of the ta certfcates, consttutes capta e pend-
tures and are to e so treated n determnng any gan or oss when
the property s sod under qutcam deeds.
company purchases State ta certfcates and. as a consstent ac-
countng practce, adds the yeary ta es to the cost of the certfcates
unt ta deeds are secured and unt the property s sod under
qutcam deeds. dvce s requested as to whether the amounts
representng the cost of the certfcates and the ta es pad shoud be
consdered capta nvested to be returned to the company when the
property s sod.
ed, that the amount of the ta es pad by the company for the
perod pror to the date when t s entted to receve a ta deed to the
property represents ta es pad by t on behaf of the record owner
who hods ega tte to the property. Therefore, the amount of ta es
pad, together wth the cost prce of the ta certfcates, consttutes
capta e pendtures and are to be so treated n determnng any gan
or oss when the property s sod under qutcam deeds.
Ta es pad on the property by the company for the perod sub-
sequent to the date of the recept of the ta deed to such property
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205
21 , rt, 303.
under the ta certfcates are, however, consdered ordnary ta pay-
ments wthn the meanng of sectons 214(3) and 234(3) of the
Revenue ct of 1921. It foows that these ta es do not consttute
capta e pendtures but may be taken as a deducton from the com-
pany s gross ncome on ts return for the year n whch pad or
accrued.
rtce: 294: Premums on busness nsurance. III-2-1300
( so Secton 214(a) 1, rtce 101.) I. T. 1905
R NU CTS O - 191S ND 1021.
Soctor s Opnon 13 (C. . 1-1, 197) states the correct rue
wth respect to the deducton of premums pad on fe nsurance
poces taken out as securty for n oan where the ender s the
benefcary. Offce Decsons 39( (O. . 2, 104) and 1011 (C. . 5,
11 )) were superseded by such rung.
dvce s requested as to whether a ta payer may deduct pre-
mums pad on a fe nsurance pocy taken out as securty for a oan
where the ender s named as benefcary.
Offce Decsons 39 (C. . 2, 104) and 1011 (C. . 5, 119), hod-
ng that premums pad on fe nsurance poces taken out n favor
of the ender n order to procure a oan are deductbe, are n confct
wth Soctor s Opnon 13 (C. . 1-1,197) and have therefore been
overrued.
S CTION 21 . CR DITS LLOW D
INDI IDU LS.
rtce 303: Persona e empton of marred III-8-1374
person. I, T. 1925
NU CTS O 1017 ND 1918.
|ont e empton aganst net ncome s aowabe to a husband
and wfe ony n the event that each s ether a ctzen of the
Unted States or a resdent aen.
resdent aen whose wfe s a patent n an nsane asyum
n her natve country, the husband supportng her, s therefore
entted ony to the e empton aowed a snge person.
n opnon s requested as to the amount of persona e empton
aowabe to the ta payer, a marred man, for 1917, 1918, 1919, and
1920.
The facts are:
The ta payer s a resdent aen a natve of Y country, who as
resded n the Unted States snce 1914. Durng a these years hs
wfe was detaned n an nsane asyum n Y, the ta payer supportng
her. So far as the record shows, the wfe has never been n ths
country.
Secton 7 of the Revenue ct of 191 , as amended by secton
1203(1) of the Revenue ct of 1917, provdes:
That for the purpose of the norma ta ony, there sha be aowed as an
e empton n the nature of a deducton from the amount of the net ncome of
f-ach ctzen or resdent of the Unted States, ascertaned as provded heren,
the sum of 3,000, pus 1,000 addtona f the person makng the return be a
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21 , rt. 303.
20
head of a famy or a marred man. wth a wfe vng wth hu, or pus the
sum of 1,000 addtona f the person mukug the return e a marred woman
wth a husband vng wth her but In no event sha ths addtona e emp-
ton of 1,000 be deducted by both a husband and a wfe: Provded, That ony
one deducton of 4,000 sha be made from the aggregate ueoue of both hus-
band and wfe when vng together:
Secton 3, Revenue ct of 1917, provdes that n case of the norma
ta mposed by secton 1 of that ct, the e emptons of 3,000 and
4|00U provded by secton 7, Revenue ct of 1910, as amended by
the Revenue ct of 1917, sha be, respectvey, 1,000 and 2,000.
No persona e empton s aowed to nonresdent aens under
ether the 191 ct as amended or the 1917 ct.
Secton 21 (c) and (e) of the Revenue ct of 1918 provdes:
(e In the case of a snge person, a persona e empton of 1,000. or n
the case of the head of a famy or a marred person vng wth husband or
wfe, a persona e empton of 2,000. husband and wfe vng together
sha receve but one persona e eupton of 2,000 aganst ther aggregate net
ncome and n case they make separate returns, the persona e empton of
2.000, may be taken by ether or dvded between them
(e) In the case of a nonresdent aen Indvdua who s a ctzen or. sub-
|ect of a country whch mposes an ncome ta , the credts aowed rn sub-
dvson (c) and (d) sha be aowed ony If such country aows a smar
credt to ctzens of the Unted States not resdng n such country.
Secton 217 of the Revenue ct of 1918 provdes:
That a nonresdent aen ndvdua sha receve the beneft of the deduc-
tons and credts aowed n ths tte ony by fng or causng to be fed wth
the coector a true and accurate return of hs tota ncome receved from
a sources corporate or otherwse n the Unted States, n the manner pre-
scrbed by ths tte, ncudng theren a the nformaton whch the Com-
mssoner may deem necessary for the cacuaton of such deductons and
credts: Provded, That the beneft of the credts aowed n subdvsons (c)
and (d) of secton 21 may. n the dscreton of the Commssoner, and e -
cept as otherwse provded n subdvson (e) of that secton, be receved by
fng a cam therefor wth the wthhodng agent.
The provsons of the two cts are substantay dentca so far
as the e empton to resdent aens s concerned. The earer ct
aows the e empton to a marred man wth a wfe vng wth
hm, and to a marred woman wth a husband vng wth her, wt
the provso that n no event sha the |ont e empton be deducted
by both husband and wfe, and ony one |ont e empton s to be
made from the aggregate ncome o both husband and wfe when
vng together. The ater ct aows the e empton to a marred
person vng wth husband or wfe wth the provso that the hus-
band and wfe vng together sha receve but one |ont e empton
aganst ther aggregate ncome, and n case they make separate
returns the |ont e empton may be taken by ether or dvded
between them.
rtce 30-3 of Reguatons 45 const-rued secton 21 (c) of the 1918
ct to mean:
In the case of a marred man or marred woman the ont e empton repaces
the ndvdua e empton ony If the man ves wth hs wfe or the woman
ves wth her husband. In the absence of contnuous actua resdence together,
whether or not a man or woman has a wfe or husband vng wth hm or
her wthn the meanng of the statute must depend on the character of the
separaton. If merey occasonay and temporary a wfe s away on a vst
or a husband s away on busne s, the ont home beng mantaned, the add-
tona e empton appes. The unavodabe absence of a wfe or hnsband at
a sanatorum or asyum on account of ness does not precude camng the
e empton. If, however, the husband vountary and contnuousy makes hs
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207
1121 , rt. 303.
home at one pace and the wfe hers at another, they are not vng together
for the purpose of the statute, rrespectve of ther persona reatons.
resdent aen wth a wfe resdng abroad s not entted to the |ont e empton.
Under a tera nterpretaton of the ast sentence of ths artce,
a resdent aen wth a wfe resdng abroad woud be dened the
|ont e empton. sewhere the artce states that f the hnsband
vountary and contnuousy makes hs home at one pace and the
wfe hers at another they are not vng together for the purposes
of the statute, but that the unavodabe absence of the wfe at an
asyum on account of ness does not precude camng the |ont
e empton. Construng the artce as a whoe, t woud seem that
the ast sentence s ntended to cover ony the case of a resdent
aen whose wfe vountary remans abroad, and not that of an
nvountary separaton such as we have n the nstant case-, snco
there s nothng n artce 303 whch suggests that the ocaton of
the asyum whether n ths country or abroad s matera. Gong
back to the cts themseves, though, and consderng together the
provsons wth respect to both resdent and nonresdent aeus, t
becomes cear that a resdent aen wth a nonresdent wfe s not
entted, under any crcumstances, to the |ont e empton. ach
ct provdes that the |ont e empton may be taken by ether the-
hnsband or the wfe that ony one |ont e empton sha be made
from the aggregate ncome of both husband and wfe when vng
together, and specfes that n no event sha the |ont e empton
be deducted by both husband and wfe. eng a |ont e empton
and camabe ether n part or as a whoe by ether, t must ha e
been the ntent of Congress that both shoud quafy under the ct
before ether coud receve the e empton.
gan, each ct makes a dfferent provson wth respect to the
e empton of resdent from that of nonresdent aens. The earer
ct aows no e empton to nonresdent aens the atter ct an
e empton ony under certan condtons. Uness the cts be con-
strued as aowng the |ont e empton ony n the event that both
husband and wfe are resdent aens, we have ths anomaous st tu-
ton, that a resdent aen husband, whose nonresdent aen wfe
wth an ncome of her own was constructvey vng wth hm wthn
the meanng of artce 303, woud be aowed the fu e empton un-
condtonay, and the nonresdent aen wfe, because se was such,
woud be dened any e empton under the 1917 ct and ony aowed
e empton under the 1918 ct n the event she fed a return and the
country of whch she was a sub|ect mposed no ncome ta or, whe
mposng such a ta , aowed a smar e empton to ctzens of the
Unted States not resdng n that country. It s a famar rue of
statutory constructon that a statute s to bo construed as a whoe and
gven that nterpretaton whch makes t a consstent whoe. It
s qute cear, therefore, that each of the cts n queston contem-
pates a |ont e empton to husband and wfe ony n event that
each s ether a ctzen of the Unted States or a resdent aen.
Snce the wfe of ths ta payer was a nonresdent aen durng the
years n queston, t s the opnon of ths offce that the ta payer s
persona e empton shoud be mted to that of a snge person.
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210, rt. 305.
208
rtce 304: Credt for dependents.
111-19-1517
I. T. 1998
R NU CT O 1921.
mother supports her two sons, under IS years of age, out of
money earned by her n furnshng board to her two daughters and
another member of the househod. The daughters may not cam a
r red It for dependents even though the ncome of the mother, who
s entted to the credt, s not arge enough to requre the fng of
a return.
famy conssts of the mother, father two sons under 18 years
of age. and two daughters, one of whom marred. They a ve
n one house, whch s beng purchased by the marred daughter n
monthy nstaments. The father s totay dsabed and the mother
supports the two mnor sons from the board, amountng to doars
per month, pad by the unmarred daughter and the marred
daughter and her husband. The two ssters n fng ther ncome
ta returns for 1922 each camed a credt for dependents amountng
to 400 on account of one of te mnor chdren. The queston was
presented as to the person who was entted to the credt for the two
dependent chdren.
Inasmuch as the chdren n queston are supported by the mother
out of the money earned by her n furnshng board to three nd-
vduas, the mother s the ony person entted to cam the credt
referred to. If her ncome s not arge enough to requre the fng
of an ncome ta return, that fact does not essen the dependency
of the chdren upon the mother and the support by her. ecause
the mother s tota ncome conssts of the board pad by three nd-
vduas and they happen to be members of her famy, t can not be
sad that they contrbute drecty to the support of the younger
members of the famy.
Income ta Returns for a perod of ess than 12 months rt-
ces 305, 421. 431, 2 , and 1013 of Reguatons 2 amended.
Treasury Department,
Offce of Commssoner of Interna evenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
rtces 305, of Reguatons 2 are hereby amended
to conform wth the decson announced by the Unted States Crcut
Court of ppeas for the Second Crcut n the case of ankers
Trust Company and rederck . Pearce, as e ecutors of the ast
w and testament of ohn Gackner, deceased v. rank . ocers,
Coector of Interna Revenue, wth respect to pacng the ncome on
returns for a perod of ess than one year on an annua bass. The
artces as amended are as foows:
rt. 305. Date determnng e empton. The status of the ta payer on the
ast day of hs ta abe year determnes hs rght to an addtona e empton
and to a credt for dependents. If then he s the head of a famy, the per-
sona e empton of 2,000 or 2,500, as the case may be, may be taken. If
then he s the chef support of a dependent who s under 18 years of age or
rtce 305: Date determnng e empton.
111-14-1472
T. D.3573
R NU CT O 1921.
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209
217, rt. 311.
Incapabe of sef-support because mentay or physcay defectve, the credt of
WOO may be taken. ut an unmarred ndvdua or a marred ndvdua not
vng wth husband or wfe, who durng the ta abe year has ceased to be the
head of a famy or to have dependents, s entted ony to the persona e emp-
ton of 1,000 aowed a snge person. husband and wfe vng together at
e end of the ta abe year may receve but one persona e empton, dvsbe as
they pease, aganst ther aggregate net ncome. If an ndvdua des durng
e ta abe year, hs e ecutor or admnstrator n makng a return for hm s
entted to cam hs fu persona e empton accordng to hs status at the
me of hs death. See aso secton 219(c) of the statute and artces 34 and
421. If a husband or wfe so des and the ont persona e empton s used
by the e ecutor or admnstrator n makng a return for the decedent, an un-
dmnshed persona e empton accordng to the status of the survvor at the
end of the ta abe year may be camed n the survvor s return. If a ta payer
makes a return for a perod other than a ta abe year, the ast day of such
Iprod sha be treated as the ast day of the ta abe year for the purpose of
ths artce. Where a return for a fractona part of a year s made by a ta -
payer as a resut of a vountary change n hs accountng perod or t s
brought about by the termnaton of hs ta abe perod by the Commssoner
n accordance wth secton 230(g), the net ncome sha be paced on an
annua bass as provded by secton 22 (c). See rtces 431 and 1013.
S CTION 217. N T INCOM O NONR SID NT ,
LI N INDI IDU LS.
rtce 311: Defnton. 111-23-1590
I. T. 2018
NT CT O 1921.
foregn raroad whch s operated as a commerca enterprse
by a foregn government mantans an offce n the Unted States
as a staton to whch ndvduas are dspatched temporary for
the purposes of nvestgaton and study of raway condtons. It
s hed that such ndvduas are nonresdent aens and that ther
compensaton receved from the raroad on account of servces
rendered to t n the Unted States, ether by nvestgaton and
study of raway condtons or otherwse, s sub|ect to edera n-
come ta .
The offcers of the M Raway Company, a foregn corporaton, are
apponted by the foregn government. It has a Unted States offce
whch yeds no proft but whch s mantaned as headquarters for
the members of the company who are dspatched temporary to
the Unted States for purposes of nvestgaton and study of raway
condtons the saares of the members are pad n the foregn coun-
try, ther necessary e penses beng pad through the Unted States
offce.
ed, that accordng to artce 311 of Reguatons 2, pertanng
to the ncome ta under the Revenue ct of 1921, a ctzen or sub|ect
of a foregn country who comes-to the Unted States for a defnte
purpose whch n ts nature may be prompty accompshed s a
nonresdent aen. Under secton 217(a)3 of the Revenue ct of
1021 the compensaton receved by a nonresdent aen for abor or
I ersona servces performed n the Unted States s ncome from
sources wthn the, Unted States, and, therefore, sub|ect to edera
ncome ta .
The empoyees n the Unted Staes are nonresdent aens and the
compensaton receved by them from the M Raway Company on ac-
count of servces rendered to t n the Unted States, ether by n-
vestgaton and study of raway condtons or otherwse, s sub|ect
to edera ncome ta .
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217, rt. 318.
210
rtce 31 : Income from sources wthn the Unted
States.
(See I. T. 2002 sec. 221, art 3 1.) Sae n a foregn country of
machnes purchased n the Unted States.
rtce 318: Dvdends. ITI-12-1432
I. T. 1955
R NU CT O 1921.
nonresdent aen ndvdua s abe to edera ncome ta
wth respect to dvdends on stock of a domestc corporaton other
than a corporaton entted to the benefts of secton 2 2,
nonresdent aen ndvdua a abe to surta ony upon dv-
dends receved upon stock of a domestc corporaton.
nonresdent aen ndvdua s abe to both norma ta and
surta on dvdends receved upon stock of a domestc corporaton
organzed under the Chna Trade ct, but n such case the beneft
of the persona e empton of 1,000 may be en|oyed wth respect
to such dvdends, whch e empton s not aowabe f the dv-
dends are sub|ect to surta ony.
, on behaf of , hs sster, a nonresdent aen, bought some
stock of domestc corporatons n 1923 upon whch the annua
dvdends w amount to 7.5.v doa-s.
dvce s requested whether s abe for edera ncome ta on
those dvdends and whether w be requred to make a return
of nformaton on orm 109 . nonresdent aen ndvdua s
sub|ect to edera ncome ta wth respect to ncome from sources
wthn the Unted States.
ccordng to secton 217 a)2 of the Revenue ct of 1921, n the
case of a nonresdent aen ndvdua fp foowng ncome s to be
treated as ncome from sources wthn the Unted States:
(2) The amount receved as dvdends ( ) from a domestc corporaton
other than a corporaton entted to the benefts of secton 2 52, .
Secton 2 2 of the statute reads n part as foows:
(a) That n the case of domestc corporatons, satsfyng the
foowng condtons, gross ncome means ony gross ncome from sources wthu
the Unted States.
(1) If 80 per centum or more of the gross ncome of such domestc
corporaton (computed wthout the beneft of ths secton) for the three-year
perod mmedatey precedng the cose of the ta abe year (or for such part
of such perod mmedatey precedng the cose of such ta abe year as may
he appcabe) was derved from sources wthn a possesson of the Unted
States and
(2) If, n the case of such corporaton, 50 per centum or more of ts gross
ncome (computed wthout the beneft of ths secton) for sue perod or such
part thereof was derved from the actve conduct of a trade or busness wthn
a possesson of the Unted States .
If s money has been nvested n the stock of domestc corpora-
tons entted to the benefts of secton 202, the dvdends pad by
such corporatons are not sub|ect to edera ncome ta . Otherwse,
the dvdends receved from the domestc corporatons are sub|ect to
the ncome ta es mposed by the Revenue ct of 1921. In that caso
a return of the dvdends shoud be fed by or n behaf of on
orm 1040 .
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211 217, rt. 327(a). I
Te ta abe dvdends receved shoud be ncuded n gross ncome,
and f the domestc corporatons are corporatons other than cor-
poratons organzed under the Chna Trade ct, the dvdends are
sub|ect to surta ony. or nstance, assumng that durng any
ta abe year s tota ncome from a sources wthn the Unted
States conssts of dvdends receved from domestc corporatons
other than domestc corporatons entted to the benefts of secton
2 2 or corporatons organzed under the Chna Trade ct, the amount
of the dvdends whch e ceeds ,000 but does not e ceed 10,000
w be sub|ect to a ta of 1 per cent.
If, however, the dvdends are receved from domestc corporatons
whch are organzed under the Chna Trade ct, the dvdends w
be sub|ect to the norma ta of 8 per cent and the surta of 1 per
cent. In case the dvdends are sub|ect both to the norma ta and
surta , the beneft of the persona e empton of 1,000 aowed to
nonresdent aens for the purpose of norma ta may be taken on
the return, but f the dvdends are sub|ect to surta ony such
e empton s not aowabe.
No return of nformaton, orm 109 , s requred to be fed by
wth respect to the dvdends receved by .
rtce 320: Rentas and royates.
(See L T. 2039 sec. 221, art. 5G1.) Royates r|ad to a nonres-
dent foregn corporaton for the use n the Unted States of property
beongng to such corporaton.
rtce 327(a): Transportaton servces. 111-14 147.1
T. D.3578
INCOM T R NU CT OP 191 , 1017. 1918, ND 1921 OPINION O
TTORN Y G N R L.
1. Income Sources Wthn the Unted States oregn Steam-
shp Lnes,
Under the provsons of the Revenue cts of 1910, 1917, nnd 1918.
Income from sources wthn the Unted States s derved from
freght and passenger traffc orgnatng wthn the Unted States.
2. Same Legsatve Intent.
The provsons of the Revenue ct of 1921 reatng to sources of
ncome wthn the Unted States do not refect the egsatve Inent.
e pressed n the Revenue cts of 191 , 1917, and 1918, but changed
the pror egsatve rue.
3. ormer Opnon oowed.
ormer opnon, dated November 3, 1920 (32 Op. . G., 330 T. D.
3111 C. . 4, 2801) foowed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, . C.
To coectors of nterna revenue and others concerned:
The foowng opnon of the ttorney Genera, under date of an-
uary 21, 1924, reatng to ncome from sources wthn the Unted
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217, rt. 327(a)
212
IStntes, s pubshed for the nformaton of nterna revenue offcers
md others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved March 28, 1921
. W. Meon,
Secretary of the Treasury.
Department ok ustce.
Washngton, anuary 21. ) .
Sr: I have the honor to acknowedge recept of your etter of uy 2 . 1023,
requestng an opnon wth respect to the constructon of the Revenue cts of
5910, 1917, and 1918, as affectng ta aton of foregn corporatons, n partcuar
foregn steamshp corporatons, n ths country. The specfc questons are:
1. What s the net ncome receved from sources wthn the Unted States by
foregn corporatons
2. What Is the measure and method for determnng the amount of ncome
derved from such sources
The sgnfcant portons of the tevenue cts of 1910, 1917, and 1918, and
departmenta reguatons are:
The ct of 191 , secton 10, provded
That there sha he eved, assessed, coected, and pad annuay upon the
tota net ncome receved n the precedng caendar year from a sources
wthn the t nted States hy every corporaton, organzed, author-
zed, or e stng under the aws of any foregn country, ncudng nterest on
bonds, notes, or other nterest-bearng obgatons of resdents, corporate or
otherwse, and ncudng the ncome derved from dvdends on capta stock
or from net earnngs of resdent corporatons whose net ncome s
ta abe under ths tte:
The ct of 1917, secton 1200, s practcay a reenactment of secton 10 of
the Revenue ct of 191 .
The ct of 1918, secton 233, provded
(a) That n the case of a corporaton sub|ect to the ta mposed by secton
230, the term gross ncome means the gross ncome as defned n secton 213,
e cept that:
(b) In the case of a foregn corporaton gross ncome ncudes ony the gross
Income from sources wthn the Unted States, ncudng the nterest on bonds,
notes, or other nterest-bearng obgatons of resdents, corporate or otherwse,
dvdends from resdent corporatons, and ncudng a amounts receved (a-
though pad under a contract for the sae of goods or otherwse) representng
profts on the manufacture and dsposton of goods wthn the Unted States.
Under the Revenue cts of 191(5 and 1917 the Treasury Department ssued
the foowng reguaton:
rtce 00 of Reguaton 33 (Revsed) reads
Source wthn the Unted States. It s not necessary that the foregn cor-
poraton sha be engaged n busness n ths country or that t have an offce,
branch, or agency n the Unted States. Labty to the ta attaches wth
respect to the ncome, the source of whch s n the Unted States.
Source as here used means the pace of the orgn of the ncome.
Under the provsons of the Revenue ct of 1918, an opnon by the ttorney
Genera was requested upon the foowng questons
1. Whether under the Revenue ct of 1918 the foregn corporatons derve
ncome from sources wthn the Unted States.
2. What s the measure for determnng the amount of ncome derved from
such source
fter quotng from a former ttorney Genera s opnon (28 Ops. . t .. 211)
and the case of rch e v. La t (8 . . D., 414. etc., 422 (1881), t was hed:
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2,13
2 8, rt. 332.
I am of the opnon that the Manchester Lners (Ltd.) derves Income from
sources wthn the Unted States to I he e tent that, t derves ncome from
freght and passenger trafc orgnatng wthn the Unted Sates. (32 Op.
. G.. 33 .)
The questons nvoved n ths opnon were dentca wth those n the
present case. The contentons as to the meanng of the word source that
ncome can ony be ascertaned by determnng the proporton earned wthn
the Unted States for servces rendered theren and n case of foregn steam-
shp corporatons, transportaton s a servce performed for compensaton,
are a rased n ths opnon. Snce ths opnon was wrtten, however, the
Revenue ct of 1921 was passed, whch n part provdes
(a) That n the case of a corporaton sub|ect to the tu mposed by secton
230 the term gross ncome means the gross ncome as defned n sectons
213 and 217. e cept
(b) In the ease of a foregn corporaton, gross ncome means ony gross
ncome from sources wthn the Unted Ststes, determned n the
manner provded n secton 217.
Secton 217(e) provdes (In part) that
Gans, profts and ncome from (1) transportaton or other serv-
ces rendered party wthn and party wthout the Unted Staes, or (2) from
the sae of ersona property produced (n whoe or n part) by the ta payer
wthn and sod wthout te Unted States, or produced (n whoe or n part)
by the ta payer wthout and sod wthn the Unted States, sha be treated
as derved party from sources wthn and party from sources wthout the
Unted States.
The pont s rased that the Revenue ct. of 1021 refects the egsatve
ntent e pressed n the Revenue cts of IS f, 1917, and 1918. ut the ct
of 1921, n ny opnon, was not a decaraton of an ntent uready e stng,
but obscure, n the aw t was, rather, a change of the pror egsatve rue.
I have carefuy weghed the varous reports and brefs submtted by persons
nterested n ths matter n connecton wth |our nqury, but I can fnd no
bass n them to warrant me n overrung the former opnon of ths depart-
ment.
fter a fu consderaton, t s my opnon that the former opnon of the
ttorney Genera s a correct and true nterpretaton of the Revenue cts of
1910, 1917, and 1918. wth respect to the net ncome receved from a sources
wthn te Unted States by every foregn corporaton and, n partcuar, by
foregn steamshp corporatons.
Respectfuy,
. M. Daugheuty,
ttorney Genera.
To the Secretary of the Treasury.
S CTION 218. P RTN RS IPS ND P RSON L
S R IC CORPOR TIONS.
rtce : . 52: Dstrbutve shares of partners. 111-24-1 05
I. T. 202
R NU CTS O 1918 ND 1921.
Where the persona representatve of a deceased partner agrees
that the busness of the frm sha be carred on by the survvor,
(e persona representatve becomes a partner and becomes ac-
countabe for hs proportonate share of the partnershp profts,
whether dstrbuted or not. n agreement between the wdow and
the chdren of the decedent whereby the wdow s gven a fe
nterest n a the decedent s reaty and personaty n pace of an
absoute one-thrd nterest n the reaty and personaty does not
affect the partnershp abty of the persona representatve or
of the estate.
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218, rt. .132.
and were partners. On uy , 1919, ded ntestate, eav-
ng a wdow and chdren, a of age. One of the decedent s
daughters was apponted admnstratr of hs estate, and she, wth
te knowedge and consent of the wdow and the other chdren, per-
mtted and drected , the survvng partner, to contnue the Iwsuess
of the frm. The wdow and chdren of the decedent agreed among
themseves that the wdow s share of the decedent s estate shoud e
a fe nterest n the reaty and personaty nstead of the absoute
one-thrd nterest n reaty and personaty whch the aw of the
|ursdcton gave her. The questons presented are as to the ta -
abty pendng actua dstrbuton of the share of the profts of the
busness whch woud have beonged to had he ved, and whether
these profts are ta abe n the hands of the persona representatve
(the estate) or n those of the wdow.
It appears that the busness of the frm was contnued, not merey
wound up, by the survvng partner wth the consent of the admns-
tratr and of the ne t of kn, and that whe most of the profts of
the busness were not dstrbuted, some porton of the profts was
pad from tme to tme to the admnstratr and by her turned over
to the wdow. The ureau s of the opnon that te admnstratr
became a partner n the busness and was as such ta abe upon her
share of the partnershp profts each year whether dstrbuted or not.
The facts n ths case are amost, the same as those n Cty Nat-orw
ank v. Stone (92 N. W., 99), where the court sad:
It s now we setted that the admnstrator, by tacty eavng the assets
In the hands of the survvng partner, does not ncur abty as a partner.
Nor does the recept of profts of the busness. In and of Itsef, consttute hm
a partner. (Parsons, Partn., sec. 74, and cases cted.) On the other hand.
It appea-s to be as defntey setted that by au agreement to contnue the
busness, ether e pressy or mpedy made, ether for the beneft of tbe estate
or of the e ecutor, he does ncur abty as a partner.
In ths case the testmony of defendant shows that Mrs. Stone, as we as her
son, understood that, for an ndefnte tme, property owned by tbera |onty
was to be used n the busness, and that the assets of the od frm were to be
contnued n that busness wth a vew to the mutua proft of the partes.
Under the aw, they became partners.
s the estate appears to have been n process of admnstraton
durng the years n queston, the estate s dstrbutve share of the
partnershp profts each |rcar s ta abe n the hands of the admns-
tratr , e cept that there may be aowed as a deducton n determn-
ng the net ncome of the estate any part of the ncome of the estate
propery pad or credted to the wdow. ny ncome so pad or
credted must be accounted for by the wdow n her ndvdua re-
turns. Snce the estate was st beng admnstered, the agreement
between the wdow and the chdren changng ther shares had no
efeet upon ts ncome ta abty.
The admnstratr shoud fe on behaf of the decedent a return
showng hs share of the partnershp profts to the, date of hs death.
Thereafter partnershp returns shoud be fed by the new partner-
shp and the admnstratr shoud fe returns accountng for the
dstrbutve share of the estate n those profts.
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215
219, rt. 341.
S CTION 219. ST T S ND T USTS.
rtce 341: states and trusts.
( so Secton 250, rtce 1012.)
111-14-1474
I. T. 19
R NU CT O 1318.
Under the terms of secton 219(b) of the eveuue ct of 191
It s not enough merey to show that some part of the gross ncome
has been pad to or set asde for the recpents specfed t must
appear that such part of the gross ncome has been pad or set
asde pursuant to the terms of the w or deed creatng the trust.
In other words, for the deducton to be aowabe the terms of the
w or deed creatng the trust must drect the payment or settng
asde of some part of gross ncome for the benefcares sted n
ths subdvson, not merey of some part of the corpus of the
estate. The w of merey authorzes the payment of these -
bequests, wthout specfyng that they sha be pad from the n-
come of the estate. deducton for these amounts s therefore
not authorzed. or these reasons, the cam for abatement on the
ground that the amount of these bequests was a proper deducton
from the estate s gross ncome for 1918 shoud not have been
aowed .
The fact that a prevous Commssoner by an erroneous con-
structon of the aw abated an assessment of tn egay due he
Unted States does not prevent the coecton of such u es by the
Unted States In the manner drected by statute. Therefore, any
ta es found to be due may agan be assessed notwthstandng pre-
vous abatement thereof, sub|ect to the runnng of the statute of
mtaton.
, e ecutr of the estate of presents the foowng questons:
(1) Whether a cam for abatement of ta orgnay assessed was propery
Rowed and (2) f not propery aowed whether the ta may be reassessed
at ths tme.
ded testate on or about May , 1917. Item of hs w
reads as foows:
I gve and bequeath the sum of 5a doars to the M Coege, sad sum to
be receved by sad coege and to be thereafter known as the endowment
fund, the prncpa of whch sha never be used for any purpose, and the
tacome of such fond devote to the educatona work of the nsttuton. I
desre that ths fund sha be pad over at as eary a date as may, n the
|udgment of my e ecutr and e ecutor, be practcabe, consderng the n-
terests of my entre estate, and that such sum may be pad n money or In
such stocks or securtes as and when my sad e ecutr and e ecutor may
decde.
Item contans a bequest, sub|ect to certan specfed condtons,
of 20.r doars to the O ospta.
In hs cam for abatement, the facts wth reference to the pay-
ment of these bequests are thus set out by one of the e ecutors:
. Deponent further says that, under the provsons of tem of the
w of sad decedent there was pad to the M Coege the sum of .S doars
and under tem of sad w to O ospta, the sum of 20r doars both
sad coege and hospta beng chartabe nsttutons and to C, a daughter
and egatee, the sum of 2.5 doars, a provded for n a codc to sad w
dated March , 191 , payment of the tota amount whereof was: made n n-
staments from corporate dvdends receved durng the aforesad year 1918
and a of the payments n ths paragraph sot forth havng been made from
fncorne derved dur g the aforesad year 1t 18.
In the ncome ta return for the estate of for the year 1918
these payments were deducted from the gross ncome n cacuatng
the net ncome sub|ect to ta . Subsequenty, the deducton of the
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21
amounts bequeathed to the M Coege was dsaowed, and an add-
tona ta of 8.2 .r doars assessed. cam for abatement of
ths assessment n fu, on the ground that the deducton of the
amount of these bequests was authorzed by secton 219(b) of the
Revenue ct of 1918, was fed pr , 1920, and on or about pr
, 1921, the ta was abated n fu.
Secton 219(b) of the evenue ct of 1918 provdes n part:
The net ncome of the estate or trust sha he computed n the same manner
and on the same bass as provded n secton 212, e cept that there sha aso
he aowed as a deducton (n eu of the deducton authorzed by paragraph
(11) of subdvson (a) of secton 214) any part of the gross ncome whch,
pursuant to tte terms of the w or deed creatng the trust, s durng the
ta abe year pad to or permanenty set asde for the Unted States, any State,
Terrtory, or any potca subdvson thereof, or the Dstrct of Coumba,
or auy corporaton organzed and operated e cusvey for regous, chartabe,
scentfc, or educatona purposes, or for the preventon of cruety to chdren
or anmas, no part of the net earnngs of whch nures to the beneft of any
prvate stockhoder or ndvdua
ccordng to the terms of ths provson, t s not enough merey
to show that some part of gross ncome has been pad to or set asde
for the recpents specfed n the secton t must appear that such
part of gross ncome has been pad or set asde pursuant to the terms
of the w or deed creatng the trust. In other words, for the deduc-
ton to be aowabe, the terms of the w or deed creatng the
trust must drect the payment or settng asde of some part of gross
ncome for the benefcares sted n ths subdvson, not merey ot
some part of the corpus of the estate. The w heren merey
authorzed the payment of these bequests, wthout specfyng that
they sha be pad from the ncome of the estate. The deducton of
these amounts from the ncome of the estate, then, n computng
ts ncome ta for 1918 s not authorzed under the terms of secton
219(b). or these reasons, the cam for abatement on the ground
that the amount of these bequests was a proper deducton from the
estate s gross ncome for 1918 shoud not have been aowed.
The second queston s whether the Commssoner may now assess
any ta found to be due on the ncome of the estate for 1918. The
attorney for the ta payer urges that where a Commssoner has a-
owed a cam for abatement, the same s concusve, and the
matter can not ater be reopened by the Government n the absence
of fraud or mstake of fact. In support of ths concuson he ctes
Penrose v. Sknner (1921) (278 ed., 291), and the cases cted theren
as estabshng the court s statement:
If t were necessary to pass upon the frst proposton noted above I woud,
In the ght of present nvestgaton, decde the queston wth the pantff.
No authorty has been vested n a Commssoner to overrue and reverse the
acton of hs predecessor n offce. Commssoner Osborn, actng under hs
authorty, heard and determned a queston of fact necessary to enabe hm
to act ntegenty n ascertanng and determnng the amount of pantff s
net ncome on whch e woud be requred to make the evy and assessment,
and hs fndng on that ssue not havng been mpeached by the answer shoud,
under every prncpe and rue of aw, be regarded here as fna. Ctng cases
tacs ours.
It w be noted that the quoted statement s sad by the court to
be dctum, unnecessary for the decson of the pantff s moton for
|udgment on the peadngs, whch, n fact, was overrued. Moreover,
t s mportant to observe that the court s deang soey wth a de-
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217
219, rt. 341.
termnaton by the Commssoner of a queston of fact. Ths s
further brought out n a second opnon n the same case, dated
ugust 14, 1923:
The subsequent acton of Commssoner Roper n reopenng the matter and
compeng pantff to pay the ta has tte to do wth the controversy here,
as I thnk no one w contend that a succeedng Commssoner coud overrue
or gnore the decsons of hs predecessor, uness such decson were n aw
erroneous or tanted wth fraud. Itacs ours.
In the nstant case, the facts are not n dspute. The ssue s soey
a matter of aw the constructon of secton 219(b) of the Revenue
ct of 1918. or the reasons gven n the answer to the frst queston,
t appears that the aowance of the cam n abatement was n aw
erroneous. ven under the opnons n Penrose v. Sknner such a
decson may be overrued.
The cases from whch the ta payer quotes at ength Unted States
v. aufman (1877) (9 U. S., 5 7) and Unted States v. Savngs
ank (1881) (104 U. S., 728) hod that the Court of Cams need
not go behnd an aowance by a Commssoner of a cam for re-
fund of ta es pad to fnd the facts n respect to such cam that
an acton may De mantaned on such an aowance n the Court of
Cams unt n some approprate form t was mpeached for fraud
or mstake f t has not been pad on appcaton to the Treasury
Department. These decsons do not advance the ta payer s argu-
ment. Granted that a fndng of fact by a Commssoner on matters
commtted to hs decson s fna unt mpeached, t s we estab-
shed that the constructon of a statute by an admnstratve offcer
s not fna and concusve. Medbury v. Unted States (1899), 172
U. S., 492, 497 Commonweath Tte, tc., Company v. Unted
State (1902). 37 Ct. of CI., 532, 537.) Nor do these decsons out-
ne or even dscuss the power of the Commssoner hmsef to correct
upon ts dscovery the erroneous constructon of a statute prevousy
adopted n hs offce.
though the cases cted by the ta payer do not estabsh that the
Commssoner s concuded from makng an assessment heren by
the abatement of a former assessment due to erroneous constructon
of the aw durng the term of hs predecessor, t s desrabe to deter-
mne affrmatvey the authorty of the Commssoner to make an
assessment n ths case. In secton 3182, Revsed Statutes t s
provded:
The Commssoner of Interna Revenue s hereby authorzed and requred
to make the nqures, determnatons, and assessments of a ta es and pena-
tes mposed by ths tte, or accrung under any former nterna revenue ct,
where such ta es have not been duy pad by stamp at the tme and n the
manner provded by aw, and sha certfy a st of such assessments when
made to the proper coectors, respectvey, who sha proceed to coect and
account for the ta es and penates so certfed. (Comp. St., sec.
5004.)
If a ta s due, the statute requres that t be assessed, and the
fact that any such assessment woud actuay be a reassessment does
not seem to ater the requrements of the statute. ta egay due
must be assessed, provded the assessment s made wthn the tme
prescrbed by statute. The queston of the power of the Comms-
soner to reassess a ta need not be dscussed. e s requred to
assess a ta found to be egay due.
4177 24 15
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219, rt. 343.
218
In a note n 31 arvard Law Revew, 487-488, t s sad n part :
The successfu appcaton of a ctntutory aw by ndmnstratre agences
depends amost entrey on the abty of such agences to dscrmnate, un-
hampered by precedent, between subte dfferences of fact and crcumstance-
It woud be very unfortunate, Indeed, to appy the doctrnes of .tfare decss
and res ad |udcata to admnstratve rungs and the Supreme Court of the
fnted States has so hed. Pearson v. Wams (202 . S., 281).
The opnon of the ttorney Genera n 14 Op. tty. Gen.. 275, s
sometmes cted for the genera proposton that the Commssoner
can not reopen a case decded by hs predecessor e cept for errors n
cacuaton. The e act ssue there decded, however, does not bear
out ths genera statement. The concuson of the opnon reads:
The rung of the present Commssoner n recent cases can have no bearng
upon the decson of the Commssoner n cases for whch reef Is sought.
It was a matter of dscreton wth the od Commssoner, and s aso a mutter
of dscreton wth the present Commssoner.
That a proper e ercse of dscreton by the Commssoner can not
be ater revewed may be granted. In the nstant case, however,
there s no queston of the e ercse of any dscretonary powers by
the Commssoner the queston s purey the proper nterpretaton
of the statute. The statute does not permt the deducton whch the
ta payer seeks heren and whch was made the bass of the cam n
abatement. The statute requred the Commssoner to assess ta es
whch have been mposed by the statute and are unpad. The fact
that the prevous Commssoner, by an erroneous constructon of the
aw. abated an assessment of the ta egay due the Unted States
surey does not prevent the coecton of such ta es by the Unted
States, n the manner drected by the statute, when the error s ds-
covered. To hod otherwse woud be to gve the rungs of a Com-
mssoner n the nterpretaton of a statute the force of egsatve
acts, whch t s cear they do not have.
ccordngy, t s hed that snce the cam for abatement heren
was erroneousy aowed, the ta found to be due may be agan
assessed, sub|ect to the tme mtatons mposed by the statute.
rtce 343: Decedent s estate durng admn- II1-17-1518
stfcton. S. M. 1709
NU CTS O 1018 ND 1921.
On death of testator resduary egatees empowered one of the
e ecutors to carry on the busness formery conducted by the
decedent. fter payment of certan egaces some two and a
haf years after decedent s death, the resduary egatees entered
nto a forma partnershp agreement, desgnatng the e ecutor as
the manger of the busness to be contnued as theretofore.
ed, that the earnngs of the busness shoud be ta ed to the
estate as a separ ate entty between I e date of decedent s death
and the date of the forma partnershp agreement.
The questons nvoved n the nstant case are whether the estate
of , from the date of hs death n uy, 1918, up to anuary ,
1922, was ta abe as a separate ega entty and whether there shoud
be ncuded as part of the ncome of the estate durng ths perod
the earnngs from a manufacturng busness whch had beonged to
durng hs fetme.
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219
219, rt . 343.
The facts are that ded on uy , 1918, eavng a w by the
terms of whch a arge number of specfc bequests were made and a
bequest of the resdue made to hs wfe, , and to hs daughters, C,
D, and , to be dvded among them accordng to the aws of descent
and dstrbuton of the State of Y. , the wfe, and two sons-n-aw
were apponted e ecutors under the w.
On uy , 1918, a of the above-named resduary egatees e -
ecuted a power of attorney authorzng the e ecutors to tase charge
of. manage, and carry on the busness whch had been conducted by
durng hs fetme. uthorty was aso gven to the e ecutors
n the power of attorney to take charge of a the rea estate of the
sad and to empoy t n the busness and e press ratfcaton and
approva were gven to anythng the e ecutors shoud awfuy do or
cause to be done by vrtue of the power of attorney. The e ecutors
operated the busness durng the years from 1918 to anuary ,
1922, when the resduary egatees entered nto a wrtten agreement of
partnershp for the purpose of carryng on the busness, but e -
pressy e cepted therefrom the rea estate nodngs of the partners.
ach year durng the perod from uy, 1918, to anuary , 1922,
the resduary egatees fed separate ncome ta returns showng the
recept of the entre net ncome from the busness and the estate fed
a fducary return showng that the net ncome was dstrbuted n
ts entrety among the four resduary egatees. fter an e amna-
ton of the accounts and returns by a revenue agent, ths offce by
etter of December , 1923, hed that from the date of s death
unt anuary , 1922, when the partnershp was formed, the ncome
from the busness shoud be treated as ncome to the estate of ,
nstead of as ncome to the ndvdua resduary egatees. rom ths
rung the attorney for the estate dffered, contendng that the ega-
tees took charge of ther own busness as partners mmedatey after
the death of that they have snce conducted the busness as part-
ners that the e ecutors had no rght under the aw to carry on the
busness and that the power of attorney above referred to merey
authorzed the e ecutors to carry on the busness as agents of the
The pertnent provsons of the Revenue ct of 1918 arc as fo-
ows:
Sue. 219. (a) That the ta mposed by sectons 210 and 211 sha appy to
the Iucone of estates or of any knd of property hed n trust, ncudng
(1) Income receved by estates of deceased persona durng the perod of
admnstraton or settement of the estate
(c) In cases under paragraph (1). (2). or (3) of subdvson (a) the ta
sha be Imposed upon the net ncome of the estate or trust and sha be pad
by the fducary, e cept that n determnng the net ucone of the estate of any
teceosod person durng the perod of admnstraton or settement there may
be deducted the amount of any ncome propery pad or credted to any
egatee, her, or other benefcary. In such cases the estate or trust sha, for
the purpose of te norma ta . I aowed the same credts as are aowed to
snge ersons under secton 210.
Smar provsons are contaned n secton 219(a) 1(c) of the
Revenue ct of 1921.
The frst queston n connecton wth the present nqury s
whether the ncome to the estate durng the perod from the date of
the testator s death to anuary , 1922, was receved durng the
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5219, rt. 343.
220
perod of admnstraton or settement of the estate. rtce 343,
Reguatons 45 and 2, states:
The perod of admnstraton or settement of the estate s te perod
requred by te e ecutor or admnstrator to perform the ordnary dutes per-
tanng to admnstraton, n partcuar the coecton of assets and the pay-
ment of debts and egaces. It s the tme actuay requred for ths purpose,
whether onger or shorter than the perod specfed n the oca statute for the
settement of estates. Where an e ecutor, who Is aso named as trustee, fas
to obtan hs dscharge as e ecutor, the perod of admnstraton contnues up
to te tme when the dutes of admnstraton are compete and he actuay
assumes hs dutes as trustee, whether pursuant to an order of the court
or not.
Ths defnton s n accord wth the defnton gven n numerous
court decsons. (23 C. .. 997 Underground ectrc Raway v.
Owsey, 17 ed., 2 , 30.)
In te nstant case the w provded numerous specfc bequests
of money, two of whch were for 0a doars each, these amounts to
be pad at the rate of 2 doars per month and the frst payments
to be made one year after the testator s death. It s appa ent that the
payment of these egaces e tended from the date or the testator s
death unt the formaton of the partnershp n anuary, 1922. In
fact, t woud appear that the partnershp was formed mmedatey
upon competon of the payment of these two bequests, nasmuch
as the perod of 30 months requred to pay the bequests eapsed n
December, 1921. It further appears that as ate as 1923 the perod
of admnstraton of the estate had not e pred, nasmuch as cer-
tan stock whch had been put up as coatera by the e ecutors had
not been transferred to the benefcares of the estate. In vew of
these facts, there s no doubt that the perod of admnstraton had
not e pred when the partnershp was formed n 1922 and that
any ncome of the estate pror to that tme was receved durng the
perod of admnstraton.
ut the attorney for the estate contends that the estate dd not
receve the ncome from the busness, because the egatees took charge
of te busness n ther own behaf as partners mmedatey after
te testator s decease and the e ecutors were merey actng as agents
of the partnershp n the conduct of the busness. In support of
ths contenton, he argues that the power of attorney created a mere
agency and that the e ecutors had no rght under the aw to carry
on a busness. The power of attorney reads n substance as foows:
Now, therefore, we, the aforesad , C, D, and , resduary egatees as
aforesad, do hereby authorze and empower the aforesad e ecutors of sad
w, . , and O, to take charge of a the persona estate of sad connected
wth, appertanng to, and necessary for the transacton of a busness con-
nected wth the manufacture and sae of certan artces at whoesae and reta
and the carryng on of a certan busness, both htherto conducted by te sad
, and whch t s proposed to contnue, to supervse and take charge of a
bookkeepng connected wth a branches thereof, to receve and account for
the proceeds of sad busnesses, to mantan bank accounts n connecton
therewth, to borrow money therefor, upon the pedge of securtes or other-
wse, to sgn and ndorse notes, checks and drafts on account thereof and u
a respects to act as our agents n the premses.
In the e ercse of the authorty above conferred, sad e ecutors are hereby
authorzed to engage, hre and contract wth such workmen, empoyees, cerks,
saesmen, accountants, agents and servants as may be necessary for the con-
tnuaton and carryng on of a branches of sad busnesses and to termnate
the empoyment of the same at such tmes and h such manner as they sha
deem most advantageous for the success of sad busnesses, aso to make such
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221 219, rt. 343.
purchases and saes of stock, materas, f tures, machnery, toos an other
thngs as may be necessary or proper for the conduct of sad busnesses.
Meanng and ntendng hereby to gve to the sad e ecutors a the power
am authorty necessary for the carryng on of sad busnesses n a branches
nd the rght to e ercse the same as fuy as we ourseves mght f personay
present.
We, the aforesad egatees, do aso hereby authorze the e ecutors before men-
toned, to take charge of a the rea estate of the sad , wherever stuate,
to empoy the same n sad busnesses, to coect the rents thereof, to contract
for the necessary repars, and to do a other thngs whatsoever necessary for
the pro er mantenance and upkeep of sad rea estate.
nd we hereby approve, ratfy and confrm whatsoever the sad e ecutors
sha awfuy do, or cause to be done, n and about the premses by vrtue
(f those presents.
There s nothng n the anguage of ths power of attorney to nd-
cate that the resduary egatees were ntendng to engage n a part-
nershp busness, or that the e ecutors were to act n any other ca-
pacty than as e ecutors. Wthout such authorty the e ecutors
woud have had no rght to engage n busness wth the property of
the estate, but under the decsons n numerous |ursdctons t s hed
that the persons nterested n an estate may authorze an e ecutor
to carry on a testator s busness and that, f the busness s conducted
n good fath and wth prudence, the authorzaton w reeve the
e ecutor from abty to such persons for resutng osses. (Svane
v. emph, 131 N. W., 8 40 L. R. . N. S., 201, and cases cted.
so 24 C. ., 58, and cases cted.) It ceary appears, therefore, that
the power of attorney was desgned to gve authorty and protecton
to the e ecutors n contnung the busness of the testator.
T s concuson s borne out by the fact that the partnershp agree-
ment of anuary , 1922, makes no reference to any prevous part-
nershp and by the further fact that the books of the busness were
not kept on a partnershp bass unt anuary , 1922, when an en-
trey new set of books were opened. It appears further that durng
the perod before the formaton of the partnershp the etterheads,
bheads, and advertsng matter of the busness bore the name
state, and there was apparenty nothng to ead anyone deang
wth the estate to beeve that t was n fact a partnershp.
The asserton s made by the attorney for the estate that the
profts for each year have been n part credted to the partners n
the busness (the egatees) and n part actuay dstrbuted to them,
but, accordng to the report of the revenue agent, the books of account
fa to bear out such asserton. It s shown n agent s report that
the genera and prvate edgers of the busness dscose no credt of
ncome to the ndvdua accounts of the four resduary egatees, and
that the contenton that the entre profts of the estate were credted
or constructvey pad to the severa egatees can not be supported by
the book entres. In T. . R. 47 (C. . 1,178) t was hed:
Revenue ct of 1018. Income of an estate durng the perod of admnstra-
ton whch s not pad or credted to a benefcary s ta abe to the estate even
though such benefcary was, as a matter of aw, entted to be pad or credted
wth such ncome durng that year.
In vew of a the facts above stated, t s the opnon of ths offce
that the estate of from the date of the testator s death to anu-
ary , 1922, was ta abe as a separate entty and that the earnngs
from the busness operated by the e ecutors shoud be ncuded as
part of the ncome of the estate durng ths perod.
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219, rt. 345.
222
The ncome and e penses arsng durng ths perod from the rea
estate passng to resduary egatees shoud be ncuded n the ncome
of sad egatees n proporton to ther respectve nterests n the
property. Ths s n accord wth . R. M. 151 (C. . 1-1, 214) aso
S. M. 1229- (C. . 2,175).
Ne|son T. artsoh,
Soctor of Inferna Revenue.
rtce 345: states and trusts ta ed to bene- III-1-128
fcares. I. T. 1895
R NU CT O 1917.
or a perod of 11 years earnngs were dstrbuted monthy to the
benefcares of a trust. Subsequent to that tme ther respectve
shares of the earnngs were sub|ect to wthdrawa by them at ther
convenence. Ths ceary ndcates that the ncome was to be ds-
trbuted reguary between the benefcares and that the trust was
not one for the accumuaton of ucome.
Pror to 190 the M busness was owned by the ta payer and sev-
era others, some of whom were aso owners of the N busness. y
an arrangement effected through the master n chancery a decree was
ssued under whch the ta payer became the owner of a haf nterest,
n the M busness, and and 15, the owners of a fourth nterest each.
The deed to the property was taken n the name of the ta payer and
t s by vrtue of ths that he cams a resutng trust was created
n whch he was the trustee. The ta payer states that the deereo
of court and the deed consttute the ony trust agreement or under-
standng.
The ta payer further states that from the creaton of the trust n
189 unt 190 , a perod of 11 years, the earnngs resutng from
the operaton of the busness were, each month of sad perod, actu-
ay dstrbuted as earned to the sad benefcares. e further states
that foowng 190 there was no actua dstrbuton but that the
proportonate share of each of the benefcares was sub|ect to wth-
drawa bv the benefcares at any tme and that substanta amounts
were wthdrawn by . e contends that the entre matter has been
treated and consdered as a resutng trust and that a system of
bookkeepng smar to that ordnary used n a partnershp was
adopted.
The frst paragraph of secton 2(b) of the Revenue ct of 191 as
amended by the Revenue ct of October 3, 1917, reads as foows:
fh) Income receved by estates of deceased persons durng the perod of
admnstraton or settement of tbe estate, sha be sub|ect to the norma and
addtona ta and ta ed to ther estates, and aso such Income of estates or
any knd of property hed n trust, Incudng such ncome accumuated n
trus for the beneft of unborn or unascertaned persons, or persons wth con-
tngent nterests, and ncome hed for future dstrbuton under the terms of
the w or trust sha be kewse ta ed, the ta n each nstance, e cept when
the ncome Is returned for the purpose of the ta by the benefcary, to be
asssessed to the e ecutor, admnstrator, or trnstee, as the case may he:
Provded, That where the ncome s to be dstrbuted annuay or reguary be-
tween e stng hers or egatees, or benefcares, the rate of ta and method
of computng the same sha be based n each case upon the amount of the
ndvdua share to be dstrbuted.
The facts brng ths case ceary wthn the provsons of the
quoted porton of the statute. or a perod of 11 years the earn-
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223
219, rt. 345.
ngs were dstrbuted monthy to the benefcares of the trust. Sub-
sequent to that tme ther respectve shares of the earnngs were
sub|ect to wthdrawa by them at ther convenence. Ths ceary
ndcates that the ncome was to be dstrbuted reguary between
the benefcares and that the trust was not one for the accumuaton
of ncome.
rtce 34o: states and trusts ta ed to bene- III 17 151S
fcares. S. M. 1 99
( so Secton 213(a), rtce 31.)
R NU CT O 1918.
conveyed to bmsef and two other erson8 as trustees cer-
tan shares of corporate stock In trust
Te trust nstrument specfcay provdes that the trustees
sha pay, as often as requested, to me durng my fe the net
cash Income from sad trust fund and any ncome
not wthdrawn by the benefcary n any year was to be hed
sub|ect to hs order and to be capabe n future years of beng
wthdrawn by hm or apped n any way n whch he mght drect.
ed, that the Income of the trust whch s not wthdrawn s
returnabe by and ta abe to the settor of the trust.
conveyed to hmsef and to two other persons as trustees certan
shares of corporate stock n trust. The trust nstrument specfcay
provdes that the trustees sha pay, as often as requested, to me
durng mv fe the net cash ncome from sad trust fund
and any ncome not wthdrawn by the benefcary n any year was
to be hed sub|ect to hs order and to be capabe n future years of
beng wthdrawn by hm or apped n any way n whch he mght
drect. Durng the years 1918 to 1920, ncusve, the benefcary re-
quested the trustees to pay to hm certan amounts of ncome and
permtted the rest of the ncome to reman n the hands of the
trustees.
Soctor s Opnon 14 (C. . 1-2, 1 0), upon the 1917 porton of
ths case, hods that where the amount of the ncome of the trust
n e cess of that actuay wthdrawn by the ta payer was under the
terms of the trust hed for future dstrbuton as mght be d-
rected by the settor of the trust durng hs fetme, such ncome
s ta abe n the hands of the trustees. The ast paragraph of ths
rung specfcay states, however, that the rue ad down n ths
opnon s to be confned strcty to the nterpretaton of secton
2(b) of the Revenue ct of 191 , and has no appcaton to the
Revenue cts of 1918 and 1921. The queston arses as to whether
or not the prncpe ad down n Soctors Opnon 14 can be e -
tended to cover the years 1918 to 1920, ncusve. Secton 2(b) of
the Revenue ct of 191 provdes:
Income receved by estates of deceased persons durng the perod of admn-
straton or settement of the estate, sha be sub|ect to the norma and artd-
a n ta and ta ed to ther estates, and aso such ncome of estates or any knd
of p |perty hed n trust, ncudng such ncome accumuated n trust or the
beneft f unborn or unascertaned persons, or persons wth contngent nterests,
and ncome hed for future dstrbuton under the terms of the w or trust
sha be kewse ta ed, the ta n each nstance, e cept when the ncome Is
returned for the purpose of the ta by the benefcary, to be assessed to te
e ecutor, admnstrator, or trustee, as the case nuy be: Provded, That where
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219, rt. 345.
224
the ncome Is to be dstrbuted annuay or reguary between e stng hers
or egatees, or benefcares, the rate of ta and method of computng the same
sha be based n each case upon the amount of the ndvdua share to be
dstrbuted.
The nterpretaton paced by Soctor s Opnon 14 upon the
e press anguage the ta n each nstance, e cept when the ncome
s returned for the purpose of the ta by the benefcary, to be
assessed to the e ecutor, admnstrator, or trustees, as the case may
he, s that the benefcary was obged to return and pay the ta
upon the amount ony of the ncome actuay dstrbuted to hm.
The anguage of secton 219 of the Revenue cts of 1918 and 1921
s not dentca to that of the above-quoted secton of the 191 ct,
but paces upon the benefcary the obgaton to ncude n the com-
putaton of hs ncome hs dstrbutve share. or ths reason, t
s cear that Soctor s Opnon 14 can not be apped to ta abe
years other than those fansr under the provsons of the Revenue
ct of 191 .
Law Opnon 1102 (C. . 1-2, 50) ays down the rue that where
(he ncome s pad to certan benefcares, one of whom s the creator
of the trust, there shoud not be ncuded n hs gross ncome any
porton of the ncome other than tha receved by or accrued to hm
as benefcary. comparson of the provsons of the trust referred
to n Law Opnon 1102 wth those n the nstant case dscoses that
n Law Opnon 1102 there s no provson for the accumuaton of
ncome, but the e cess over the amount to be pad to the benefcares
s to be pad back to the settor of the trust, whereas n the trust
created by any ncome not wthdrawn by the benefcary n any
year s to be hed sub|ect to hs order and capabe n future years of
beng wthdrawn by hm or apped n any way whch he mght
drect. The specfc provson n the trust nstrument referred to n
Law Opnon 1102 s as fooMrs:
To p y over the baance (f any) of sad nterest yeary to me, or In case of
my death, to my e ecutors or admnstrators: such payments, f receved by
my e ecutors or admnstrators, to be consdered as a part of the ncome and
not of the prncpa of my estate.
In vew of ths dfference n the e press terms of the trust nstru-
ments, t woud appear that the nstant case does not come wthn
the appcabty of Law Opnon 1102.
It s the opnon of ths offce that the ncome for the years 1918
to 1920, ncusve, whch s not wthdrawn by the settor of the
trust n any year but hed sub|ect to hs order and capabe n future
years of beng wthdrawn by hm or apped n any way n whch
he may drect, s returnabe by and ta abe to the settor of such
trust.
It s therefore concuded that, pursuant to the terms of the trust
nstrument governng the dstrbuton of ncome, such ncome as s
not wthdrawn by the settor of the trust but hed sub|ect to hs
order, whether dstrbuted or not, consttutes hs dstrbutve
share as a benefcary under the trust wthn the meanng of the
ct.
Neson T. artso ,
Soctor of Interna Revenue.
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225
219, rt. 347.
rtce 347: states and trusts, wth ncome whch 111-22-1581
s dstrbuted perodcay and other ncome. I. T. 2014
NT CT O 1921.
It appears from a provson n the w of the testator that a
trust created thereunder has ncome dstrbutabe to the bene-
fcares as we as ncome to be hed as part of the trust estate.
The trust shoud be ta ed as an entty e cept n computng ts
net ncome, there may be camed as a deducton an amount of
ncome dstrbuted to the benefcares. The trust havng ncome
whch s to be dstrbuted perodcay and other ncome, appears
to be one of the cass descrbed n secton 219(e) of the Revenue
ct of 1921 and artce 347 of Reguatons 02. Therefore,
under ths secton the amount n queston shoud be ncuded as a
part of the gross ncome of the recpent n computng her net
ncome sub|ect to ta , and the amount s not ta abe to the
t rustee.
The w of the testator provdes n part as foows:
1 drect that my e ecutors and trustees, out of the baance of my ncome,
f the same sha be suffcent, to pay the sum not e ceedng doars per
year to mantan a sutabe home for my sad wfe, and for any of my
chdren who may not have a home of ther own, the above ncome to be
pad n monthy nstaments to one of my daughters vng n the home,
who s to e seected by my e ecutors and trustees. Sad aowance s to
be used for the genera e penses of the househod and to provde for the
mantenance and educaton of my hers who are not of age or who reman
at home. ut ths aowance s not to provde cothng or persona e penses
for those who are recevng a monthy ncome from my estate. ny surpus
ncome after the payment of the above aowance sha be nvested and hed
as part of my genera trust fund. These aowances sha contnue unt
my youngest chd becomes of age, at whch tme e ecutors and trustees are
drected to dvde the ncome from my estate after provdng for the e penses
of the famy home as drected above as foows.
It appea s from the above provson of the w of the testator that
the trust has ncome dstrbutabe to the benefcares as we as n-
come to be hed as part of the genera trust fund. The trustees are
drected to e pend from the ncome of the trust under the w of
the testator not to e ceed doars per year to mantan a sutabe
home for hs wfe and chdren to be pad n monthy nstaments to
one of hs daughters vng n the home, who s to be seected by hs
e ecutors and trustees, and to accumuate any surpus unt hs
youngest chd becomes of age, at whch tme the ncome s to be
dvded, after provdng for the e penses of the famy home. The
w makes specfc provson for the payment of the aowance from
the ncome of the estate. urthermore, the aowance has been pad
pursuant to the terms of the w creatng the trust.
The queston nvoved s whether the above-mentoned sum shoud
e ncuded n the ndvdua return of the recpent or whether the
trustee shoud add that amount to the separate return.
Secton 219(e) of the Revenue ct of 1921 provdes as foows:
In the case of an estate or trust the Income of whch conssts both of ncome
of the cass descrbed n paragraph (4) of subdvson (a) of ths secton and
other ncome, the net ncome of the estate or trust sha he computed and a
return thereof made by the fducary n accordance wth subdvson (b) and
the ta sha be mposed, and sha be pad by the fducary n accordance wth
subdvson (c), e cept that there sha be aowed as an addtona deducton
In computng the net ncome of the estate or trust that part of ts Income of the
rass descrbed n paragraph (4) of subdvson (a) whch, pursuant to the
Instrument or order governng the dstrbuton, s dstrbutabe durng Its ta -
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1221, rt. 3 1.
22
abe year to the benefcares. In cases under thn subdvson there sha bo
ncuded, ns provded fn subdvson (d) of ths secton, n computng the net
ncome of each beuefcary. that part of the Income of the estate or trust whch,
pursuant to the nstrument or order governng the dstrbuton, s dstrbutabe
durng the ta abe year to such benefcary.
rtce 347 of Reguatons 2 aso provdes as foows:
In the case of an estate or trust, the ncome of whch conssts both of n-
come to e dstrbuted to benefcares perodcay and other ncome, the net
Income of the estate or trust sha be computed and a return thereof made by
the fducary In accordance wth secton 219(b) and the ta sha be mposed
and pad by the fducary n accordance wth secton 219(c), e cept that there
sha be aowed as an addtona deducton In computng the net Income of
the estate or trust that part of ts Income of the cass descrbed
n secton 219(a)4 whch, pursuant to the w or trust deed, s dstrbutabe
durng ts ta abe year to the benefcares. ach of such benefcares sha
ncude, n computng hs net ncome, that part of the ncome of the estate or
trust whch, pursuant to the nstrument or order governng the dstrbuton, s
dstrbutabe to hm durng the ta abe year.
It s evdent from the above-quoted provson from the statutes and
reguatons that n case of a trust such as descrbed n the w of the
testator the trust s to be ta ed as an entty e cept n computng ts
net ncome there may bo camed as a deducton an amount of ncome
dstrbuted to the benefcares. The trust havng ncome whch s to
be dstrbuted perodcay and other ncome, appears to be one of
the cass descrbed n secton 219(e) of the Revenue ct of 1921 and
artce 347 of Reguatons 2.
Therefore, under ths secton the amount n queston shoud be n-
cuded as a part of the gross ncome of the recpent n computng
her net ncome sub|ect to ta , and the amount s not ta abe to the
trustee.
S CTION 221. P YM NT O INDI IDU L S
T T SOURC .
rtce 3 1: Wthhodng ta at source, 111-20-1555
( so Secton 217, rtce 31 .) I. T. 2002
R NU CT O 1921.
The dfference between the factory prce at whch a nonresdent
foregn corporaton buys certan machnes n the Unted States and
the prce receved by such corporaton from the sae n a foregn
country of the machnes s not ncome from sources wthn the Unted
States and s, therefore, not sub|ect to edera ncome ta aton.
Ths s true whether the dfference s consdered commsson for
servces rendered n the foregn country by the foregn corporaton
n behaf of the domestc manufacturer or whether t s consdered
the profts derved by the foregn corporaton from the sae of
machnes n the foregn country.
rtce 3 1: Wthhodng ta at source. 111-2 -1 33
( so Secton 217, rtce 320.) I.T. 2039
R NU CT O I91T.
Royates pad to a nonresdent foregn corporaton for the use
n the Unted States of property beongng to such corporaton are
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227
5232, n. 382.
ncome from sources wthn the Unted States. Such royates were
not, however, sub|ect to the wthhodng requrements of the Revenue
ct of 1917. The ncome receved durng 1917 by a foregn cor-
poraton from sources wthn the Unted States was sub|ect to the
ta of 2 per cent mposed by secton 10 of Tte I of the Revenue
ct of 191 , the war ncome ta of 4 per cent mposed by secton 4
of Tte I of the Revenue ct of 1917, tfnd the war e cess profts
ta mposed by secton 201 of Tte II of the Revenue ct of 1917.
nna 3 1: Wthhodng ta at source. 111-2 -1 34
I. T. 2040
R NU CT O 1 24.
Inqury s made as to whether the 25 per cent reducton on nd-
vdua ncome ta es payabe n 1924 appes to ta pad at the source
by a wthhodng agent on account of nterest on ta -free bonds.
ed, that the reducton n queston s not appcabe to wthhod-
ng agents.
S CTION 222. CR DIT OR T S IN C S
O INDI IDU LS.
btge 382: Meanng of terms. 111-12-1433
S.M. 1 14
R NU CT O 1018.
Tasmana, South ustraa, Western ustraa, and New South
Waes are not foregn countres wthn the meanng of secton
238(a) of the Revenue ct of 1918, but are subdvsons of the
Commonweath of ustraa.
The Unon of South frca s one of the sef-governng coones
of the rtsh mpre and comes wthn the defnton of foregn
country.
The ta of the Itaan Government known as rchezza mobe
Is hed to be a persona property ta , for whch a cam for credt
may not be aowed. The ta s, however, deductbe as a busness
e pense. .
mong the foregn countres to whch the M corporaton pad
ncome and profts ta es and for whch t seeks credts are Tasmana,
South ustraa, Western ustraa, New South Waes, and Unon
of South frca.
In Offce Decson 1050 (C. . 5, 194) t was hed:
That the term foregn country as used n sectons 238(a) and 2 W(a)3 of
the Revenue ct of 1918 s hed to mean the composte whoe made up of a
the subdvsons of a foregn State sub|ect to the same centra contro. ach
of the subdvsons In ths sense Is not a country but a part of a country.
The Provnce of rtsh Coumba, therefore, does not come wthn the meanng
of the term foregn country as contempated by the statute.
mounts of mnera ta and Income ta pad or accrued to the Provnce of
rtsh Coumba by a domestc corporaton are deductbe as busness e penses
from the ta abe Income of the corporaton.
Tasmana, South ustraa, Western ustraa, and New South
Waes are subdvsons of the sef-governng rtsh possesson, the
Commonweath of ustraa, and, therefore, n vew of Offco De-
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223, rt. 401.
228
cson 1050, the cams for credt for ncome ta es pad to these coun-
tres shoud be dsaowed. owever, n vew of ths same decson,
these tems are deductbe as busness e penses from the ta abe n-
come of the company. In the case of the ncome ta pad to the
Unon of South frca, the cam for credt shoud be aowed.
rtce 382 of Reguatons 2 provdes n part as foows:
oregn country ncudes wthn ts meanng any foregn soveregn State
or sef-governng coony (for e ampe, the Domnon of Canada).
The Unon of South frca s one of the sef-governng coones of
the rtsh mpre. Its reaton to the rtsh mpre s smar
to that of Canada. Its subdvsons are the Cape of Good ope,
Orange ree State, Nata, Transvaa, and Southwest frca. It has
ts own government and ts egsatve power rests wth a senate and
a house of assemby.
Therefore, t s the opnon of ths offce that the Unon of South
frca s a foregn country as contempated by secton 238(a)
of the Revenue ct of 1918.
In regard to the cam for ta es pad to the Government of Itay,
an tem appears n the recepts whch the ta payer has furnshed
wth hs cam termed rchezza mobe, whch transated means
movabe weath. Ths tem appears further to be a bmonthy
assessment and, due to the fact that t s constant throughout the
year, t s the opnon of ths offce that ths s a persona property ta
and not an ncome ta . Therefore, ths tem s not one for whch
a cam for credt can be fed. owever, n vew of Offce Decson
1050, referred to above, t may be deductbe as a busness e pense
from the ta abe ncome of ths company.
The cams for credt for ncome ta es pad to Great rtan, Nor-
way, Span, and rance shoud be aowed.
Neson T. artson,
Soctor of Interna Revenue.
S CTION 223. INDI IDU L R TURNS.
rtce 401: Indvdua returns. 111-12-1434
I. T. 195
R NU CT O 1921.
Where husband and wfe fed a |ont return for 1922 they may
not subsequenty fe separate amended returns, even though the
we s ncome was not reported n the |ont return.
I hs return of ncome for the year 1922 the ta payer stated that
t was the |ont return of hmsef and wfe.
n e amnaton of the ta payer s books of account deveoped the
fact that errors had been made n the preparaton of the return and
that hs wfe s ncome of appro matey doars had not been re-
ported. The ta payer now mantans that he and hs wfe shoud
fe separate returns.
ed, that n the nstant case the ta payer and hs wfe eected to
fe a |ont return n the frst nstance and the fact that a of ther
ncome was not reported theren does not ater the fact that an eec-
ton was made at the tme the orgna return was fed therefore,
separate returns may not now be accepted.
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229
223, rt. 401.
rtce 401: Indvdua returns.
(See I. T. 1983 sec. 214(a) 1, art. 101.) Profts from ega trans-
acton to be ncuded n ta payer s returns.
rtce 401: Indvdua returns.
(See Mn. 3201 sec. 252, at. 1034.) Mmeograph 3201, reatve
to the procedure for fng amended returns and cams under Treas-
ury Decsons 35 8 and 35 9, reatng to comnfunty property n the
State of Caforna.
rtce 401: Indvdua returns. 111-20-155
I. T. 2003
R NU CTS O 1917 ND 1918.
Under the aws of I-oushmn, te ncome arsng from para-
pherna property, a of whch was admnstered by the husband,
became smutaneousy wth ts recept communty property and,
under Treasury Decson 3138 (C. 15. 4, 238), may be dvded be-
tween the husband and wfe n ther separate returns.
dvce s requested as to the ncome ta abty of and hs
wfe for the years 1917 to 1919, ncusve, as determned wth regard
to the communty property aws of the State of Lousana.
These ta payers orgnay fed a |ont return for each of the
years n queston. They have submtted amended returns, n whch
saares and drectors fees were treated as ncome of the husband,
the ncome from rea estate was treated as ncome of the wfe, and n-
come from stocks, bonds, and bank deposts was dvded equay be-
tween them. In the subsequent audt of the returns n connecton
wth a revenue agent s report, t was hed that a ncome from rea
estate, stocks, bonds, and bank deposts arose from the separate
property of the wfe whch she acqured upon the death of , and
a of the ncome for those years was ta ed to the wfe e cept one-
haf of the saary receved by the husband. The ta payer has fed
an appea from the assessments proposed to be made on ths bass.
e contends that a of the ncome receved by hm and hs wfe con-
sttuted communty property and as such was dvsbe between
them n separate returns under Treasury Decson 3138 (C. . 4, 238).
Ths decson provdes that a husband and wfe domced n the
State of Lousana, n renderng separate ncome ta returns, may
each report as gross ncome one-haf of the ncome whch, under the
aws of that State, becomes smutaneousy wth ts recept com-
munty property. Ths decson n defnng communty property
provdes as foows:
In Lousana the communty property comprehends a property acqured
durng the marrage by ether husband or wfe e cept that acqured wth
separate funds or by Inhertance or partcuar donaton, and e ceptng the
earnngs of the wfe when she s vng separate from her husband .
Inasmuch as and hs wfe dd not enter nto an agreement to the
contrary, a communty of acquets and gans e sted between them
under artce 2332 of the Revsed Cv Code of Lousana. The
queston to be determned, therefore, s whether under the aws of
Lousana the ncome derved by and hs wfe from rea estate,
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223, rt. 401.
230
stocks, bonds, and bank deposts became smutaneousy wth ts
recept communty property or whether ths ncome consttuted the
separate property of the wfe.
Under the aws of Lousana, the separate property of the wfe s
dvded nto dota and e tradota, or parapherna property. Dota
property s defned as that whch the wfe brngs to the husband to
assst hm n bearng the e penses of the marrage. Inasmuch as
and hs wfe dd not enter nto a forma contract to marry, and
as her property was .not decared to be brought nto the marrage or
to be gven or to beong to her at the tme of her marrage, her
separate property appears to have been parapherna rather than
dota property. (Ch. 2, sec. 3, Revsed Cv Code.)
Some of the sgnfcant provsons of the Lousana statutes rea-
tve to pharapherna property are as foows:
rt. 2. S4. The wfe has the rght to admnster personay her parapherna
property wthout the assstance of her husband.
rt. 23S0. The parapherna property, whch s not admnstered by the wfe
separatey and aone, s consdered to be under the management of the husband.
When the parapherna property Is admnstered by the husband, or by hm
and the wfe ndfferenty, the fruts of ths property, whether natura, cv,
or the resut of abor, beong to the con|uga partnershp, f tere e st a
communty of gans. If there do not, each party en|oys as he chooses, that
whch comes to hs hand but the fruts and revenues whch are e stng at
the dssouton of the marrage beong to the owner of the thngs whch pro-
duced them.
rt. 2387. The wfe who has eft to her husband the admnstraton of her
parapherna property may afterwards wthdraw t from hm.
The secton upon whch the ta pa rer prncpay rees, n camng
that a of the ncome receved durng the years 1917 to 1919 const-
tuted communty ncome, s the above-quoted artce 2385. There
are numerous decsons of the Lousana courts based on ths artce n
regard to the effect of the admnstraton of the parapherna property
of the wfe by the husband. In the case of Successon of Sangpe
(114 Lousana, 7 7) t was hed that the fruts of parapherna prop-
erty admnstered by the husband or by hm and the wfe ndffer-
enty beonged to the communty. In Por v. Gddens (23 Southern,
237) t was hed that where the separate property of the wfe durng
her fetme s admnstered by the husband, the debts ncurred n
such admnstraton, such as e penses of cutvatng a pantaton, are
communty debts and the revenues are assets of the communty.
On the other hand, t w be noted the statute provdes that the
wfe may at any tme resume the management of her parapherna
property and that n ordcs v. Du-prat (2 Southern, 821) t was
hed that f the husband had reduced the wfe s property to money
she mght, n order to resume her admnstraton of her separate,
property, obtan |udgment aganst hm for the amount hed. Sm-
ary, the successon of the husband s abe to the wdow for para-
pherna funds receved and used by the decedent durng the e st-
ence of the communty. It s consdered that whe these atter dec-
sons have the effect of pre.servng the wfe s ownershp of her para-
pherna property ntrusted to the husband s management, they are
not authorty for the proposton that the ncome from such property
so admnstered consttutes her separate property.
There seems to Ik no doubt that the parapherna property of the
wfe has been,admnstered by her husband wthn the meanng of
artce 2385 of the revsed code, and hs wfe have both made
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231
5223, rt. 403.
affdavt to ths effect. Under hs management the property has
appro matey quadruped n vaue, and he has coected the revenue
derved from the prncpa and nvested them accordng to hs own
|udgment wthout consutng her. t the end of the year ther n-
come from a sources has een dvded equay between them.
In vew of the foregong, t s hed that ncome arsng from the
parapherna property of the wfe, a of whch was under the man-
agement of her husband durng the years 1917 to 1919, ncusve, be-
came smutaneousy wth ts recept communty property under the
aws of Lousana and may be dvded between them n ther returns
for the year 1917 and succeedng years.
rtce 401: Indvdua returns.
(See I. T. 2022 sec. 2, art. 1507.) arm and cutvated as a unt
by a husband but owned by the husband n part and n part the
separate estate of hs wfe.
rtce 402: orm of return. - III-4-1335
Mm. 3177
Use of orms 1040 and 1040 for 1923.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 19, 1924-
Coectors of nterna revenue, nterna revenue agents n charge,
and others concerned:
orm 1040 for 1923 s ntended prmary for use of ta payers
whose net ncomes do not e ceed 5,000 derved chefy from saares
or wages. In the nterest of smpfcaton, no pace s provded on
the form for reportng severa tems whch appear on orm 1040.
ta payer who uses orm 1040 and desres to cam credt for n-
come ta pad at the source may modfy the form accordngy. The
use of ths form s not compusory and the ta payer may fe orm
1040 n cases where hs ncome s such that the atter form s more
appcabe.
C. R. Nash,
ctng Commssoner.
rtce 403: Return of ncome of mnor. 111-25-1 18
S. M.2045
R NU CT O 1818.
Under the Cv Code of Lousana the father and mother of a
mnor chd are not entted to the estate whch the chd may
acqure by Its own abor and Industry. The father, therefore, was
not requred to Incude In hs ncome for 1919 the earnngs of hs
mnor son.
dvce s requested as to whether the ta payer n reportng hs
ncome for the year 1919 shoud ncude the earnngs of hs mnor
son.
It appears that the ta payer, a resdent of the State of Lousana,
ncuded n hs 1919 return the earnngs of hs mnor son. It s con-
tended that under the aws of that State a father s not entted to
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223, rt. 404.
232
the earnngs of a mnor chd and therefore such earnngs shoud
not be ncuded as ncome to the father. The Cv Code of the
State of Lousana provdes:
Sec. 221. The father s, durng the marrage, admnstrator of the estate of
s mnor chdren, and the mother n case of hs nterdcton or absence, durng
sad nterdcton or absence.
e or she sha be accountabe both for the property and revenues of the
estate, the use of whch he or she s not entted to by aw, and for the prop-
erty ony of the estate, the usufruct of whch the aw gves hu or her.
Ths admnstraton ceases at the tme of the ma|orty or emancpaton of
the chdren.
Sue. 223. athers and mothers sha have, durng marrage, the en|oyment
of the estate of ther chdren unt ther ma|orty or emancpaton.
Sec. 22 . Ths usufruct sha not e tend to any estate, whch the chdren
may acqure by ther own abor and ndustry, nor to such estate as s gven
or eft them under the e press condton that the father nnd mother sha
not en|oy such usufruct.
In the case of Darngton v. Turner (202 U. S.. 195) t was hed
that by the cv aw, and by the Lousana Code based thereon, the
father has the admnstraton of hs chd s estate unt ts ma|orty
or emancpaton, and s entted to the usufruct thereof e cept as to
property earned by the chd or gven to t wth e press e cuson of
the father s usufruct.
The wordng of (he above sectons of the Cv Code of Lousana
s very pan, and specfcay provdes that the father and mother
of a mnor chd are not entted to the estate whch the chd may
acqure by ts own abor and ndustry, and, therefore, the ta payer
erroneousy ncuded n hs ncome for 1919 the earnngs of hs
mnor son. The cam for refund shoud be aowed.
Under an agreement, a nonresdent aen ndvdua deposted
wth a domestc trust company certan securtes. The trust com-
pany was authorzed to coect the nterest and dvdends due, to
e ecute ownershp certfcates, and to se the securtes under
speca nstructons.
od, that the trust company s the responsbe representatve
of the nonresdent aen ndvdua. The agreement that the trust
company w not be requred to re edera ncome ta returns
for the aen can not reeve the trust company from the s eefc
requrements of artce 404 of the reguatons.
Certan nonresdent aen ndvduas have deposted securtes
wth the M Trust Company for the purpose of havng the ncome
thereon coected. The securtes were deposted under an agree-
ment authorzng the M Trust Company to hod the securtes, co-
ect the nterest and dvdends due thereon, to e ecute ownershp
certfcates as agent, and to se the securtes under speca n-
structons. The ast paragraph reads as foows:
The authorty contaned n ths etter sha not be construed as authorzng
the M Trust Company to fe wth the Unted States Treasury Department
on behaf of the undersgned any return of ncome sub|ect to ta under the
edera ncome ta aw or as consttutng t us agent of the undersgned to
Neson T. artson,
Soctor of Interna Revenue.
111-15-1499
I. T. 1977
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233
523, rt. 404.
fe any such return or pay such ta . In the event that It shoud he assessed
any ta on behaf of the undersgned, the undersgned agree to ndemnfy
and bod t harmess on account of any payment of ta so requred to be made
by t, and agree that t sha hod the securtes n sad account as securty
for rembursement of any amount so pad.
dvce s requested whether, under the agreement, the M Trust
Company w be responsbe for fng returns other than those of
a wthhodng agent. It s contended that the agreement has been
so prepared that the M Trust Company does not assume any agency
responsbtes suffcent to requre the fng of ndvdua ncome
ta returns n behaf of ther prncpas. ttenton s drected to
the foowng provson of artce 404, Reguatons 2:
The responsbe representatves of nonresdent aens n connecton wth any
sources of ncome whch such nonresdent aens may have wthn the Unted
States sha make a return of such ncome, and sha pay any and a ta ,
annua am addtona, assessed upon the ncome receved by them n behaf
of ther nonresdent aen prncpas, n a cases where the ta on ncome
so n ther recept, custody, or contro sha not have been wthhed at the
source. The agent of a nonresdent aen Is responsbe for a correct return
f n ncome accrung to hs prncpa wtdn the purvew of the agency.
It s hed that the M Trust Company s the responsbe repre-
sentatve of the nonresdent aen ndvduas wth whom t has
made agreements n the form submtted wth the etter. The fact
that tbe M Trust Company has entered nto an agreement wth an
aen whereunder he agrees that he w not requre the M Trust
Company to fe edera ncome, ta returns n hs behaf can not
reeve the M Trust Company from the specfc requrements of
artce 404 of the reguatons.
rtce 404: Return of ncome of nonresdent 111-18-1535
aen. Mm. 3199
abty of responsbe representatves of nonresdent aens to
te returns and to pay ta n behaf of ther prncpas.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, pr 3,1921
To coectors of nterna revenue and others concerned:
ttenton s drected to the provsons of artce 404 of Reguatons
2, as foows:
nonresdent aen ndvdua sha make or have made a fu and accurate
return on orm 1040 of hs ncome receved from sources wthn the Unted
States, regardess of amount, uness the ta on such ncome has been fuy pad
at the source. See secton 217 of the statute and artces 311-310. The respon-
sbe representatves of nonresdent aens n connecton wth any sources of
ncome whch such nonresdent aens may have wthn the Unted States sha
make a return of such ncome, and sha pay any and a ta , norma and
addtona, assessed upon the ncome receved by them n behaf of (her non-
resdent aen prncpas, n a cases where the ta on ncome so n ther re-
-t f. custody, or contro sha not have been wthhed at the source. The
wut of a nonresdent aen s responsbe for a correct return of a ncome
accrung to hs prncpa wthn the purvew of the agency. The agency ap-
pontment w determne how competey the agent s substtuted for the
Irt ncpn for ta purposes. Where upon fng a return of ncome t appears
tnt a nonresdent aen s not abe for ta , hut nevertheess a ta sha have
4177 24-
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2 4. rt. 411.
234
been wthhod at the source, n order to obtan a refund on the bass of the
showng made by the return there shoud be attached to t a statement show-
ng accuratey the amounts of ta wthhed, wth the names and post-offce ad-
dresses of a wthhodng agents. See artce 375.
Some banks and trust companes whch are custodans of stocks
and bonds beongng to nonresdent aens apparenty are n doubt
as to the scope of the term, responsbe representatves. person
who has on depost wth hm bonds and stocks of a nonresdent aen
and who has been authorzed by the aen to coect the ncome ac-
crung on such property to e ecute ownershp certfcates as agent:
to credt the aen s account wth the amount of Income coected or
to transmt t to the aen, s ceary the responsbe representatve
of the aen wth respect to the neone n queston.
In such a case, as the agent has been substtuted competey for the
prncpa, the agent s requred to make a return of such ncome and
to pay any or a ta , both norma ta and addtona ta , assessed
upon t, n a cases where the tota ta due on such ncome has not
been wthhed at the source. The obgaton to fe returns and to pay
ta devoves upon the person who s the responsbe representatve,
whether such person s a bank, trust company, ndvdua, or other
person.
C. R. Nash,
ctng Commssoner of Interna Revenue.
S CTION 224. P RTN RS IP R TURNS.
rtce 411: Partnershp returns. III-3-1113
I.T. 1913
R NU CT O 1921.
s manager of the mercan branch offce of a foregn partner-
shp, both of the members of whch resde n the foregn country.
ed, that whe the partnershp and the partners are requred
to make returns of ncome, no abty for fng these returns at-
taches to by reason of hs poston as manager of the mercan
branch of the partnershp, uness the partnershp and the partners
hare desgnated hm as ther agent for the purpose of rng such
returns.
rtce 411: Partnershp returns. ITT 19 1548
( so Secton 239, rtce 21.) S. M. 181-2
R NU CTS O 1917, 191S, D 1921.
In 1909 the charter of a corporaton was canceed for noncom-
pance wth the aw. There were transfers of capta stock there-
after, but no stock has been Issued snce 1912. Nether have
there been .stockhoders meetngs or offcers eected. The busness
has not been carred on n a corporate form or n an organzed
capacty. The busness was contnued by ndvduas, who agreed
to share equay n profts and osses. ach had authorty to act
for the others n the transacton of busness.
ed, the company s a partnershp.
Durng the year 190 , , , and C ncorporated ther commerca
busness n Okahoma under the name of the M Company. I
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235 224, rt. 411.
1907, and C sod ther stock to D and . Durng the year 1008,
sod hs stock to . In 1912, sod hs stock to D and , each
of the atter ownng 50 per cent of the stock of the company.
Durng 191 , sod hs nterest n the busness to G. In 1909 the
corporaton commsson canceed the charer of the corporaton for
noncompance wth the aw. There were transfers of capta stock
thereafter, but no stock has been ssued snce 1912 nether has there
teen any stockhoders meetngs hed nor offcers eected. It s
stated that any stock outstandng as been used ony to show the
nterest of the partes that G acqured hs nterest wth the consent
of D that G has never been ssued any stock to show hs nterest
n the busness that D and G agreed to share equay n the profts
and osses of the busness and that each has fu authorty to act
for the other n connecton wth the transacton of busness of the
frm that s, to buy and se merchandse, hre and dscharge em-
poyees, and draw checks on the funds of the busness. The frm
has been ta ed as a partnershp by the State, and nether of the
members of the frm has the rght to se or trade hs nterest n
the busness wthout the consent of the other. The owners have
fed corporaton returns n gnorance of the status of the company,
sgnng themseves as offcers wthout beng duy eected.
The proprety of the company fng corporaton returns for the
years 1917 to 1920, ncusve, under secton 13(b) of the ct of
191 as amended by the Revenue ct of 1917 and secton 239 of tw
Revenue cts of 1918 and 1921 and artce 21, Reguatons 45 and
2, depends on whether or not the company was n corporate e -
stence. Secton 1271, revsed aws of Okahoma (actons for the
nvountary dssouton of a corporaton), provdes among other
thngs:
Whenever t sha have done or omtted nny ct whch amounts to a sur-
render of ts corporate rghts, prveges and franchses .
Secton 7539 provdes that t sha be the duty of corporatons to
procure annuay from the corporaton commsson a cense author-
zng the transacton of busness n the State. Secton 7545 and
secton 754 provde for the forfeture of charter n case of domestc
corporatons fang to fe the annua statement and pay the cense
fee. Secton 12S1 provdes:
corporaton once dssoved can be revved ony by the same power by whch
t coud be created.
In the case of Overstreet v. Rock Isand Impement Company (12
Okahoma, 383) t was hed that the e stence of a corporaton s
e tngushed when the charter s surrendered or forfeted. rtce
1252 of the Okahoma aws provdes that the corporate powers,
busness, and property of a corporatons must be e ercsed, con-
ducted, and controed by a board of not ess than three to be eected
by hoders of stock, etc. Under the aws of Okahoma the company
does not appear to have been n corporate e stence snce ts ds-
souton.
Whe the company has retaned ts corporate name, no stock has
been ssued snce 1912, no stockhoders meetngs have been hed,
and no offcers eected. usness was not carred on n corporate
form or n an organzed capacty. There are no dvdends from
outstandng stock. Therefore, for ncome ta purposes the company
can not be consdered to consttute a corporaton or assocaton.
G
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225, rt. 421.
23
Partnershp s defned n secton 4431 of the aws of Okahoma as
the assocaton of two or more persons for the purpose of carryng
on busness together and dvdng the profts beween them. Secton
443C provdes that a dvson of profts mpes a dvson of oss.
Secton 4432 provdes:
partnershp can be formed ony by the consent of a partes thereto and
no new partner can be admtted to a partnershp wthout the consent of every
e stng member thereof.
partnershp e stence s a resut of a vountary contract between
the partes and never soey by operaton of aw. (Ctzens Natona
ank v. Mtche et a, 24 Oka., 488.) It s a rue that a dssou-
ton of a prvate corporaton entrey changes the character of the
property nterests of ts stockhoders t destroys ther stock as
suc and under the modern equtabe vew substtutes that whch
ther stock represented. (R. C. L.) In Lynch v. Per n| man (Supreme
Court of Okahoma, 119 Pac., 229) t was hod (quotng the syabus) :
Partes actng as stockhoders, attemptng to organze a corporaton but
fang theren for the reason that a corporaton coud not be organzed for ts
decared purposes, or because a of ts busness was to be conducted n a
foregn Stae, are generay hed to be partners.
urther evdence of the character of the company s estabshed
by the fact that the company has been ta ed by the State as a part-
nershp.
In vew of the foregong, t s concuded that under the crcum-
stances the company consttutes a partnershp and shoud propery
te returns as such for the years 1917 to 1922, ncusve. The nd-
vdua members of the frm shoud fe amended returns for the
years 1918 to 1922, reportng ther dstrbutabe share of the ncome
from the partnershp, together wth ther ncome from a other
sources.
Neson T. artson,
Soctor of Interna Revenue.
S CTION 225. - IDUCI RY R TURNS.
rtce 421: ducary returns.
(See Mn. 3178 sec. 22 , art. 431.) Perod for whch a return
for a decedent and the return by hs estate s made.
rtce 421: ducary returns.
(See T. D. 3547 sec. 22 , art. 431.) Computaton of ta on ncome
of decedent to date of deat and on ncome of an estate durng the
perod of settement.
rtce 421: ducary returns. 111-14 1475
T, D. 3573
rtces 421 of Reguatons 02 are hereby
a mended :
rr. 421. ducary return . very fducary, or at east one of |ont fduc-
ares, must make a return of ncome (a) for the ndvdua whose ncome s
G
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237
22 , rt. 431.
In hs charge, f the gross ncome of such ndvdua s 5,000 or over, or f
the net ncome of such Indvdua s 2,000 or over f marred and vng wth
husband or wfe, or s 1,000 or over n other cases, or (b) for the estate or
trust for whch he acts, f the net ncome of such estate or trust s 1,000 or
over, or f any nefenry of such estate or trust s a nonresdent aen. The
return n case (o) and aso n case ( ), f the ta s payabe by the fducary,
sha be on orm 1040, or on orm 1040 f the net ncome does not e ceed
3,000. In cases under (b) where the ta s payabe by the benefcnres the
return sha be made on orm 1041. In such a case the fducary sha ncude
n the return a statement of each benefcary s dstrbutve share of the net
ncome, whether or not dstrbuted before the cose of the ta abe year for
whch the return s made. See secton 219 of the statute and artces 341-348.
If the net ncome of n decedent from the begnnng of the ta abe year to the
date of hs death was 1,000 or more If unmarred, or 2,000 or more f
marred, or f hs gross ncome for the same perod was 5,000 or over the
e ecutor or admnstrator sha make a return for such decedent. See artce
305.
S CTION 22 . R TURNS OR P RIOD O
L SS T N 12 MONT S.
rtce 431: Returns for perods of ess than III- -1355
12 months. Mm. 3178
( so Secton 225 , rtce 421.)
Income ta Returns for decedent and hs estate not to be paced
m annua bass.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 29, 1024.
Coectors of nterna revenue, nterna revenue agents n charge, and
others concerned:
In the case of the ankers Trust Company v. owers, Unted
States Crcut Court of ppeas for the Second Crcut, t was hed
that under the provsons of secton 22 (c) of the Revenue ct of
1021 the ncome of decedents and ther estates shoud not be paced
upon an annua bass. The ureau of Interna Revenue w not
appea from ths decson and ncome ta returns shoud be made
n accordance therewth. Treasury decson amendng the regua-
tons n ths respect w be ssued at an eary date.
D. . ar, Commssoner.
rtce 431: Returns for perods of ess than III-7-13 4
12 months. T. D. 3547
( so Secton 225, rtce 421.)
INCOM T R NU CT O 1921 D CISION O COURT.
1. Incomk ok Decedent Income of state Returns Computa-
ton.
The ta upon the ncome of a decedent to the date of death and
the ta u k the ncome of an estate durng the perod of sette-
ment shoud be computed under the genera provsons reatng to
returns for a perod of 12 months and not under secton 220(c) of
the Revenue ct of 1921, whch appes to returns for a perod of
ess than 1 year.
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233
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, I). C.
Coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Crcut Court of
ppeas for the Second Crcut n the case of ankers Trust Com-
pany, et a., e ecutors of Gackner, v. owers, coector, s pubshed
for the nformaton of nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna e venue.
pproved ebruary 7, 192-1.
. W. Meon,
Secretary of the Treasury.
Unted States Chcut Court of ppeas fob the Second Cp.c t. No. 173.
Octoher Term, 1923.
ankers Trust Company and rederck 11. Pearce, as e ecutors of the ast w
and testament of ohn Gackner. (eceased. companants-appeants, v. rank
. owers, as coector of nterna revenue for the second dstrct of New
York, defendant-appeee.
ppea from the Dstrct Court of the Unted States for the Southern Dstrct of Now
York.
rgued November 12, 1923. Decded December 10, 1923.
efore Rocebs, Manton, and Mayer, Crcut udges.
Wrt of error to the Unted States Dstrct Court for the Southern Dstrct
of New York. cton by ankers Trust Company and rederck . Petrce, as
e ecutors of the ast w and testament of ohn Gackner. deceased, eopsn-
ans, aganst rank . owers, as coector of nterna revenue for the second
dstrct of New York, defendant. udgment for defendant. Pantffs appea.
Reversed.
M nton, Crcut udge: We sha refer to the partes as beow, pantffs
and defendant.
The pantffs have appeaed from a |udgment at aw. Ther remedy on
appea s by wrt of error, and we sha treat ther appea as a wrt of error
pursuant to the ct of September , 191 (ch. 448, sec. 4, 39 Stat, 727), gnorng
the mstake and regardng e acton taken as approprate so as to brng the
cause here for revew.
ohn Gackner ded pr 4, 1921, eavng a w whch was duy admtted to
probate and the pantffs quafed as hs e ecutors. On March 15, 1922, they
ted two ncome ta returns. One reported the net ncome of decedent durng
the caendar year of 1921 and the other the net ncome receved by the pan-
tffs as e ecutors durng the same caendar year. The frst cause of acton
set forth n the compant s for a ta pad upon the bass of the return fed
for the decedent. It aeges that the correct ta abty of the decedent for
the caendar year 1921 was 8209.44 and that the defendant demanded and was
pad on account of ths ta 1.5(50.04 that 1,200.00 of sad ta was pad under
protest and duress and a cam for the refund thereof was subsequenty re|ected
by the Commssoner of Interna Revenue. The second cause of acton sets
forth a ta pad upon a bass of the return reportng the net ncome receved
by the e ecutors n 1921. The correct ta Is aeged : -s 2,050.27, whereas there
was demanded and pad 2, 33.85 of ths amount, 5S3.5S was pad under pro-
test and a cam for refund was dened by the Commssoner of Interna n-e-
nue. The ta coected and pad was computed by the Interna Revenue Com-
mssoner under a constructon of secton 220(c) of the Revenue ct of 1921.
On moton made by the defendant that the compant dd not state a cause of
acton, the compant was dsmssed, the court deverng an opnon whch
supported the cam of the Government as to the amount of the ta es. The
queston rased on ths revew s whether the ta es n queston shoud have
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22 , rt. 431.
been determned In the manner descrbed In secton 22 (c) of the Revenue ct
of 1921 or by other provsons of tbe ct referred to heren. Secton 22 reads
as foows:
(a) That f a ta payer, wth the approva of the Commssoner, changes the
bass of computng net ncome from fsca year to caendar year a separate
return sa be made for the perod between the cose of the ast fsca year for
whch return was made and the foowng December 31. If the change s from
caendar year to fsca year, a separate return sha be made for the perod
between the cose of the ast caendar year for whch return was made and the
date desgnated as the cose of the fsca year. If the change Is from one fsca
year to another fsca year a separate return sha be made for the perod be-
tween the cose of the former fsca year and the date desgnated as the cose
of the new fsca year.
(b) In a cases where a separate return s made for a part of a ta abe
year the net Income sha be computed on the bass of such perod for whch
separate return s made, and the ta sha be pad thereon at the rate for the
caendar year n whch such perod s ncuded.
(c) In the case of a return for a perod of ess than one year the net ncome
sha be paced on an annua bass by mutpyng the amount thereof by 12
and dvdng by the number of months ncuded n such perod: and the ta
sha be such part of a ta computed on such annua bass as tbe number of
months n such perod s of 12 months.
Subdvson (c) of secton 22 apped ony to computng ta n case of a
return for a perod of ess than one year, and the dstrct court as hed that
returns necessary to be fed by tbe pantffs were returns for a perod of ess
than a year and that the ta abty was propery determned appyng the
statutory formua of (1) mutpyng the net ncome by 12 (2) dvdng the
product so obtaned by the number of months and fracton thereof n the perod
covered by the return (3) computng the norma and sub tu on the quotent
and (4) dvdng the tota ta so computed by 12 and mutpyng the quotent
by the number of months and fracton thereof n the perod covered by the
return.
The statute and reguatons of the Department, apart from secton 22 (c),
contan a compete scheme for the fng of ncome ta returns of decedents
and ther estates. We must accept the fact that ncome ta statutes are
desgned and ntended to reach actua ncome receved by the ta payer.
Secton 213(a), defnng gross ncome, ponts ths out n provdng:
Incudes gans, profts and ncome derved from saares, wages or com-
pensaton for persona servce (ncudng n the case of the Presdent of the
Unted States, the |udges of the Supreme and nferor courts of the Unted
States, and a other offcers and empoyees, whether eected or apponted, of
the Unted States, aska, awa, or any potca subdvson thereof, or
the Dstrct of Coumba, the compensaton receved as such), of whatever
bnd and n whatever form pad, or from professons, vocatons, trades, bus-
nesses, commerce, or saes, or deangs n property, whether rea or persona,
growng out of the ownershp or use of or nterest n such property aso from
Interest, rent, dvdends, securtes, 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 (e cept as provded In subdvson
(e) of secton 201) sha be ncuded n the gross ncome for the ta abe
year In whch receved by the ta payer, uness, under methods of accountng
permtted under subdvson (b) of secton 212, any such amounts are to be
propery accounted for as of a dfferent perod.
Secton 212 defnes net ncome as meanng the gross Income as defned In
secton 213 ess the deductons aowed by secton 214, and subdvson (b)
thereof provdes that 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
way be) n accordance wth the method of accountng reguary empoyed In
keepng the books of such ta payer. ctua ncome was to be ta ed not
constructve or hypothetca. The pantffs argue that the return was not a
retnro for a perod of ess than one year wthn secton 220(a) and that the
ta shoud be computed by the ordnary method prescrbed for the computaton
f ncome ta . The pantffs base ths wrt of error upon the nonappoa-
bty of secton 22 and urge that f t appes t s unconsttutona for tbe
reason that In operaton t woud ta as ncome that whch does not con-
sttute Income wthn the s teenth amendment of the Consttuton and
therefore voates the provsons of rtce I, secton 2, cause 3, and rtce I,
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240
secton 0, cause 4, of the Consttuton aso If so construed, It woud voate
the ffth amendment of the Consttuton. In the vew we take, t w be un-
necessary to consder the consttutona questons presented. Ths, for the
reason that secton 2, subdvson (c), provdes soey for the pacng of ncrome
on an annua bass and for computaton of the ta thereon n the case of a
return for a perod of ess than one year where te change s made vountary
by the ta payer or pursuant to an order of the Commssoner. The funda-
menta scheme of tte 2 of the Revenue ct s for a ta upon the net ncome
of the ta payer durng an accountng perod of 12 successve months. Ths
genera accountng perod seems to be a predetermned measure to be apped
to a ta payer as ncome and s not affected by hs death or change of status
wthn the perod. The ta s mposed upon the entre net ncome for such
perod and the return of such ncome consttutes hs return for the perod of
12 fu months, even though he may have ved ony a porton thereof. The
e cepton to ths s where a vountary change s made n the accountng
perod by the ta payer or where t becomes nvotmtary n so far as the
ta payer s concerned by the Commssoner s decarng the ta abe perod
termnated under secton.250(g). Sectons 210 and 211 mpose n norma ta
and surta for each ta abe year upon net ncome of the ndvdua. ta abe
year, a term apped to the genera accountng perod, s by secton 200 defned
as foows:
(1) The term ta abe year means the caendar year, or the fsca year
endng durng such caendar year, upon the bass of whch the net ncome s
computed under secton 212 or secton 232. The term fsca year means an
accountng perod of 12 months endng on the ast day of any month other
ttan December. The frst ta abe year, to be caed the ta abe year 1921,
ha be the. caendar year 1021 or any fsca year endng (urng the caendar
year 1921.
The bass for computng the net ncome of ndvduas s found n secton 212
and provdes:
(b) The net ncome sha be computed upon the bass of the ta payer s
annua accountng perod (fsca your or caendar year, as the case may e) n
accordance wth the method of accountng reguary empoyed n 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 he made upon suc h bass and n such manner as n the opn-
on of the Commssoner does ceary refect the ncome. If the ta payer s
annua accountng perod s other than a fsca year as defned In secton 200
or f the ta payer has no annua accountng perod or does not keep books,
the net ncome sha he computed on the bass of the caendar year.
(C) If a ta payer changes hs accountng perod from fsca year to caendar
year, from caendar year to fsca year, or from one fsca year to another, the
net ncome sha, wth the approva of the Commssoner, be computed on the
bass of such new accountng perod, sub|ect to the provsons of secton 22(.
Tms t w be observed that e cept where a vountary change s made, the
accountng perod s 12 months, whch becomes the ta abe year. nd. so that
the Commssoner of Interna Revenue may have the necessary .nformaton
for determnng the ta abty upon ths bass, returns are to be fed under
secton 223 (1) by ndvduas havng a net ncome for tho ta abe pear equa
to or n e cess of specfc sums (2) by partnershps for each ta abe year and
(.3) by fducares for ndvduas, estates, or trusts havng ncome equa to or
n e cess of specfed sums for the ta abe year. The tme of fng s gven
by secton 227 as:
(a) That returns (e cept n the case of nonresdent aens) sha be made
on or before the 15th day of the thrd month foowng the cose of the fsca
year, or, f the return s made on the bass of the caendar year, then the
return sha be made on or before the 15th day of March. In the case of a
nonresdent aen, ndvdua returns sha be made on or before te 15th day
of the s th month foowng the cose of the fsca year, or, f the return s
made on the bass of the caendar year, then the return sha be made on or
before the 15th day of une.
No tme other than the cose of the caendar or fsca year s f ed. y sec-
ton 225 any fducary requred to make a return under ths ct sha be sub|ect
to a the provsons of the ct whch appy to ndvduas. Secton 219, en-
tted states and trusts, does not requre fng returns for ess than one year,
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nnd subdvson () thereof provdes that ta es Imposed by secton 210 and
secton 211 appy to ncome of estates and trusts. It reads:
(1) Incon e receved by estates of deceased persons durDg the perod of
admnstraton or settement of the estate
(2) Income accumuated n trust for the beneft of unborn or unascertaned
persons or persons wth contngent Interests
(3) Income hed for future dstrbuton under the terms of the w or trust
(4) Income whch s to be dstrbuted to the benefcares perodcay,
whether or not at reguar ntervas, and the ncome coected by a guardan of
n nfant to be hed or dstrbuted as the court may drect.
The pantffs aege ther accounts as e ecutors were kept on the caendar-
year bass and upon ths bass they are ta abe pursuant to secton 219. We
fnd nothng n the ct makng returns fed for decedents or estates e cep-
tons to the genera rue. The pantffs ther returns for the decedent and
s estate dd. not eect to change the accountng perod, nor s there any
attempt to defeat the coecton of the ta whch mght nvoke ether of the
sectons above referred to. Therefore, not fang wthn ether of the e cep-
tons above, they woud be Impropery consdered f returned for ess than
year. The tme of recept of ncome or the abty to receve ncome has
no hearng upon the accountng perod. ta payer may receve hs ncome
for the year on the frst day of the year. e may become a nonresdent
aen durng the year wthout property n or ncome from any source n the
1 nted States. s an aen, he may have come to ths country durng the
frst ta abe year and he may have attaned hs ma|orty or become Incompe-
tent durng the year. When durng the year hs status changes and e
herones a ta payer, or ceases to be one, s mmatera. If he receved ta abe
ncome durng any part of that year and kept hs books on a caendar-year
bass, a return s requred of a such ncome derved from or receved wthn
the 12 months of such caendar year and the return s for a perod of 12
months. ere the pantffs reported a the ta abe ncome receved by the
decedent durng the caendar year of 1921. nd n ther return they reported
a the ta abe ncome receved by the estate of the decedent durng the same
caendar year 1921. The estate and deceased were separate enttes, each
avng a separate accountng. ecause ther books were kept for the caendar
year 1921, t requred them to return for that year. It was possbe for the
estate to have kept ts books on a fsca-year bass. dfferent perod mght
then have been caed for. The return ted for the decedent was one of the
returns requred to be fed by the fducares and for an ndvdua havng
a net ncome for the ta abe year of 1,000 or over under secton 225,
and the estate return was requred for every estate or trust the net ncome
of whch for the ta abe year s 1,000 or over under the same secton.
TIp decedent and hs estate have ong been regarded as separate ta abe
enttes. In Mande v. Perce (10 ed. Cases, 510, case No. 99,008), arsng
under the ct of une 80, 18 4 (13 Stat. L., eh. 173), an e ecutor sought to
recover a ta coected on the ncome receved by the decedent from anu-
ary 1, 1805, to uy 2, 18 5, the date of hs death. The pantff argued
that the ncome ta was mposed on an annua ncome and the ct. requred
no return to be fed by an e ecutor where the deceased ded before the tme
pPw nted for the fng of the return. In sustanng the ta , the court sad
t was mposed upon the ncome receved wthn the ncome year and that
the ncome receved by the decedent wthn the ncome year consttuted
annua gans, profts, and ncome wthn the meanng of the ct, hodng
hat gans, profts, and ncome receved wthn the ncome year are annua
gans, profts, and ncome wthn the meanng of those aws, athough the
whoe amount of the same n a gven case may he receved wthn the frst
mouth or the ast month of the near. nd further When ascertaned as
requred by aw, the ntenton of Congress was, that gans, profts, and ncome
recked wthn the ncome year, from the sources theren defned, shoud be
sub|ect to the prescrbed ta aton, whether such gans, profts, or ncome were
derved from any knd of property, rents, nterest, dvdends, saares or from
any trade, professon, empoyment, vocaton, owned, coected, pursued, or
foowed for the whoe or any part of the ncome year.
Subdvson (f) of secton 21 provdes:
The credts aowed by subdvsons (c), (d), and (e) of ths secton sha
be determned by the status of the ta payer on the ast day of the perod for
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22 , rt. 431.
242
whch the return of ncome Ls made but n the case of an ndvdua who
des durng the ta abe year, such credts 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
perod for whch such survvor makes return of Income.
Ths secton ndcates It was not the ntenton of Congress that the date
of death be the ast day of e perod for whch the decedent s return s
fed. If Congress wanted to ncude wth secton 22G(e) decedent s and
other estates t mght have done so n approprate anguage.
eadng secton 22 as a whoe, t s cear that the purpose was to present
a snge unfed pan for computng ta abty of a ta payer who vountary
changed hs accountng perod. Subdvson (a) provdes for makng of sep-
arate returns coverng a perod of ess than 12 months In case of a ta payer
who, wth the consent of the Commssoner, changes hs accountng perod,
and ths Is the ony provson provdng for a change of accountng perod
e cept secton 250(g). Subdvson (b) merey provdes that n a cases
where separate returns are made for part of the ta abe year, the return sha
ncude the ta payer s Income durng the perod covered by the separate return
and that the ta rate of the caendar year In whch the perod fas s
appcabe. The use of the phrase a cases undoubtedy appes to cases
where separate returns are requred under subdvson (a). avng provded
the perods to be covered by returns n the case of a change n vountary
perods and n ncome to be accounted for n returns and the ta rate
appcabe thereto, subdvson (c) provdes for the computaton of the ta
on an annua bass. The returns requred under subdvson (a) are returns
for a perod of ess than one year and t s cear from the conte t that subdvson
(c) was Intended to appy to such returns aone. There was nothng n sub-
dvson (c) whch woud ndcate a purpose to create a new aud e tensve
cass of returns, such as those n the nstant case, for a perod of ess than
one year. We regard subdvson (b) and (c) as nterreated. Subdvson
(b) assumes that the perod covered by the return w fa wthn a snge
caendar year, for t provdes that ta sha be pad at the rate for the
caendar year n whch such perod s ncuded. In case of a vountary change
of the accountng perod, the perod of ess than one year w necessary fu
wthn a snge caendar year n the case of a ta payer who renders returns
on a fsca-year bass.
owever, the perod from the begnnng of the fsca year to the date of
hs death may very we fa wthn two caendar years. So t s wth
e ecutors who may keep ther books on a fsca-year bass n whch case the
perod from the date of the decedent s death to the end of the fsca year may
fa wthn two caendar years. If Congress had consdered returns for
decedent s and for ther estates to consttute a separate return
for a part of a ta abe year, subdvson (b) woud have made provson for
the appcaton of the rates of ta es for the caendar year n whch the
perods covered by the returns were Incuded. The Revenue ct nowhere
contans a provson or computaton of a ta n the case of a return for a
perod commencng n one caendar year and termnatng the foowng caendar
year other than at the cose of a fsca year. It s ony n secton 205 n whch
provson s made for a ta where a ta sha be computed n case of fsca
years begnnng n 1920 and endng n 1921 or begnnng n 1021 and endng
In 1022. but there fsca years ony are covered. Therefore, subdvson (c),
whch provdes for the method of computng the ta appyng the rates pro-
vded n subdvson (b), coud not appy to returns for decedents or ther
estates. gan, subdvson (c) n provdng for the pacng of a net ncome
on an annua bass, refers soey to the number of months ncuded n such
perod. Ths anguage s entrey napproprate where death occurs on any
date durng the month and no provson s made for computaton whch woud
ncude a perod coverng a fracton of a month. The anguage used s entrey
approprate n cases of returns fed under subdvson (a) for a month, for
such returns woud not ncude a fracton of a month.
In Interpretng a statute, the constructon paced thereon shoud avod nn|ust
consequences uness the anguage compes such a resut and n constructon
shoud be had wth reference both to the hstory of the egsaton and to other
sectons of the aw wth whch It s n par matera. (Gutschak v. Peek,
2f ed., 212.) The congressona reports and the egsatve hstory of secton
220 are of nterest. Under the ct of 1918, secton 22 , a ta payer, wth the
approva of the Commssoner, was permtted to change hs accountng perod.
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243
22 , rt. 431.
whch ad|ustment necesstated a-return for a perod for ess than one year.
The fng of a return for a shorter perod resuted n a subsequent savng n
surta es and made a change n the accountng perods of decded advantage
to the ta payer. Ths resut was unfar to the ta payers who dd not change
ther accountng perods or who coud not show a bass therefor, as we us
unfar to the Government. It was remeded by the present ct (sec. 220(c))
as fnay enacted. The purpose of the proposed amendment was stated n
the report of the Commttee on Ways and Means accompanyng . R. 8245:
Secton 232: Under e stng aw the ta payer may mpropery reduce hs
surta by changng hs sca year, thus spttng hs annua ncome nto two
parts. Ths secton proposes to prevent sch evason by provdng that n the
case of a return for a perod of ess than one year the net ncome sha be
paced on an annua bass and the surta propery computed thereon n ac-
cordance wth the number of months n such perod.
In the orgna ouse b, the subdvsons of secton 22 were not separatey
numbered or ettered, and the nserton by the Senate of the dstngushng
etters (a), (b), and (c) was descrbed n the s tement attached to the
conference report as a cerca change. It Is apparent that ths was done
soey for convenence and not wth the ntenton of separatng subdvson (c)
from ts conte t. In the ouse b, secton 220(d) began wth the words n a
of the above eases. Ths was changed by the Senate amendment No. 34
to read n a eases where a separate return s made for a part of a ta abe
year. Ths amendment was adopted n conference, and states: mendment
No. 34 : Ths amendment s a cerca change and the ouse recedes.
In the 1018 ct, the tte of secton 22 was Returns when accountng perod
changed. Ths b was changed n the orgna ouse amendment and n
the tte as reported by the Senate nance Commttee by amendment proposed
on the foor of the Senate and adopted wthout debate, the tte of the secton
was changed to Return for a perod of ess than 12 months ( 1 Congres-
sona Record, 7917-18). The amended tte was prnted n the draft of the
b accompanyng the conference report. The conference report refers to the
Senate amendment No. 345 (reenactng secton 220(a) wth the amended tte)
as foows:
Ths amendment Is a cerca change made necessary by the repea and
reenactment of the Revenue ct of 1918 nstead of ts amendment n specfed
partcuars, as e paned n connecton wth amendment No. 3 and the ouse
recedes.
y subdvson (b) The net Income of the estate or trust sha be com-
puted n the same manner and on the same bass as provded n secton 212.
The e ecutors here have made a return of ncome receved and pad ta es
for the estate durng the perod of admnstraton or settement and by
subdvson (c), the ta sha be mposed upon the net ncome of the estate or
trust and sha be pad by the fducary, e cept that n determnng the net
ncome of the estate of any deceased person durng the perod of admns-
traton or settement there may be deducted the amount of any ncome prop-
ery pad or credted to any egatee, her, or other benefcary. In such cases
the estate or trust sha, for the purpose of the uornta ta , be aowed the same
credts as are aowed to snge persons under secton 210.
We therefore observe that secton 219(b) e pressy requred that the
net ncome sha be computed n the same manner and on the same bass
a provded n secton 212 and that secton 212 provdes for an accountng
of 12 fu months. The ony e cepton beng n the case aone where tha
net Income sha, wth the approva of the Commssoner, be computed on the
bass of such new accountng perod, sub|ect to the provsons of secton 220.
There s nothng of the egsatve hstory of secton 220 whch ndcates
n contrary nterpretaton than that whch we have gven t, and the confer-
ence report argues forcby that Congress had n mnd returns e pressy
referred to In subdvson (a) when t enacted subdvson (c) thereof. The
Interpretaton of statutes evyng ta es must not e tend beyond ther pro-
vsons by mpcaton, nor must they be nterpreted beyond the cear mport
of the anguage used. In case of doubt, they are nterpreted strongy aganst
the Government and In favor of the ta payer. (Unted States v. Wgges-
worth, 2 Story, 3 9 mercan Net rf Twne Co. v. Worthngon, 141 If. S.,
4 8: cnzger v. Unted Sate . 192 U. S., 38 Goud v. Goud, 245 U. S.. 151
metnka v. rst Trust Savngs ank, 257 U. 8., 0(12.) The ta payer
may change bs accountng perod under secton 220 as e w and may stand
the dsadvantage of the ta . Inequty woud fow In foowng the formua
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5227, rt. 444.
244
proposed for ta aton under secton 22 (a), f apped to a decedent and hs
estate, partcuary f the practce was nduged n of usng the month and
a fracton of a month n cacuatng the ncome. Where a constructon of a
statute w occason great Inconvenence or produce nequaty or n|ustce,
that vew s to be vetoed f another and more reasonabe nterpretaton s
present In the statute. ( notcton v. Moore, 178 U. S 41 ate Refrg-
eratng Co. v. Suzberger, 157 U. S., 37.)
We thnk the compant suffcenty aeges a cause of acton for the recovery
of the ta n queston and that t was error to grant the moton for |udgment.
udgment reversed.
rtce 431: Returns for perods of ess than III 14 147
12 months. T. D. 3573
rtces 431 of Reguatons 2 are hereby
amended :
bt. 431. Returns for perods of ess than 12 months. No return can he
made for a perod of more than 12 months. separate return for a fractona
part of a year, s, therefore, requred wherever there s a change, wth the
approva of te Commssoner, n the bass of computng net ncome from one
ta abe year to nnother ta abe year. The |yerods to be covered by such sepa-
rate returns n the severa cases are stated In the statute. The requrements
wth respect to the fng of a separate return and the payment of ta for a
part of a year are the same as for the fngof a return and the payment of ta
for a fu ta abe year cosng at the same tme. See sectons 227 and 2.r 0 of
the statute and artces 441-447 and 1001. The ta on net ncome computed
on the bass of the perod for whch a separate return s made sha be pad
thereon at the rate for the caendar year n whch such perod s ncuded.
In case of a change n the accountng perod the net ncome computed on the
return for the fractona part of a year sha be paced on an annua bass and
the ta computed as provded n subdvson (c) of secton 220. See ustra-
ton beow. See further secton 212 and artces 25 and 2 , and as to corpora-
tons sectons 232 and 230 and artces 31 and 02 .
Iustraton of computaton of ta for a perod of ess than one year when a
change s made n the accountng perod. or the caendar year 1021 the n-
come ta of a marred person entted to a persona e empton of 2,000. makng
a return for a s months perod of 10,000 net ncome, s 905, computed as
foows:
Net ncome 10,000
Mutped bv 12 120, 000
Dvded by 0 20. 000
Subtractng e empton of 2,000 18,000
Norma ta on 18,000 1,280
Surta on 20,000 710
Tota 1,900
Dvded by 2 995
S CTION 227. TIM ND PL C OR ILING
INDI IDU L, P RTN RS IP, ND
IDUCI RY R TURNS.
rtce 444: tenson of tme by Commssoner. I 7 1373
( so Secton 241, rtce 51 Secton 250, T. D. 3550
rtce 1003.)
INCOM T TIM T NSIONS TOR DOM STIC CORPOR TIONS.
tenson of tme unt une 15, 1924, of the fna date for fnp
returns of domestc corporatons, orm 1120 for the caendar year
1923, and orm 1120 for the fsca year ended anuary 31, 1924,
and the fsca year endng ebruary 29, 1924.
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245
227, rt, 444.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
Under the authorty of secton 227 of the Revenue ct of 1921,
a genera e tenson of tme s hereby granted domestc corporatons
up to and ncudng une 15, 1924, for competng returns of ncome
for the caendar year 1923, the fsca year ended anuary 31, 1924,
and the fsca year endng ebruary 29, 1924, condtona upon the
fng of tentatve returns wth the proper coector of nterna reve-
nue on or before March 15, pr 15, and May 15, 1924, respectvey,
accompaned wth at east one-fourth of the estmated amount of ta
due, together wth a statement settng forth the reason why the return
can not be competed wthn the prescrbed tme and a forma request
for the e tenson.
Tentatve returns submtted n accordance wth the foregong
shoud be on orm 1120 for the caendar year, and on orm 1120
for a fsca year, on whch shoud be wrtten pany across the face
Tentatve return. Ony the name a.nd address of the corporaton
and the estmated amount, f any, of the ta due need be stated.
ny defcency n the frst nstament as determned upon subms-
son of the fna return w bear nterest at the rate of per cent per
annum from March 15, pr 15, or May 15, 1924, respectvey.
D. . ar
Commssoner of Interna Revenue.
pproved ebruary 13, 1924.
. W. Meon,
Secretary of the Treasury.
rtce 444: tenson of tme by Commssoner. III-0-1403
I. T. 1938
R NU CT O 1918.
The e tenson of tme for fng returns to une 15, 1919, was
granted ony to those corporatons whch fed tentatve returns on
or before March 15, 1919, accompaned wth a payment of at east
one-fourth of the estmated ta due, and such e tenson of tme
apped ony to returns on orm 1120 under the Revenue ct of
1918.
rtce 444: tenson of tme by Commssoner. 111-13-1453
T. D.35 7
ncome ta .
tenson of ue for fng fsca-year returns of partnershps
and fducares.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue am others concerned:
Under authorty of secton 227 of the Revenue ct of 1921 an
e tenson of tme up to and ncudng une 15, 1924, s hereby
granted n whch to fe fducary returns on orm 1041 and partner-
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230, rt. 502. 24
shp returns on orm 10 5 for the fsca years ended on anuary
31, 1921, and ebruary 29, 1924.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved March 19, 1924.
. W. Meon,
Secretary of the Treasury.
rtce 444: tenson of tme bv Commssoner. 111-23-1509
T. D. 3597
INCOM T .
tenson of tme to September 15, 1924, for fng fsen-year
returns of partnershps, fducares, and corporatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
n e tenson of tme up to and ncudng September 15, 1924, s
hereby granted n whch to fe partnershp returns, orm 10 5 ,
fducary returns, orm 1041, and corporaton returns. orm 1120 ,
requred to be fed for fsca years endng on the ast day of anuary,
ebruary, March. pr, and May, 1924. In the case of corporatons
ths e tenson s granted upon condton that there s fed on the
orgna due date a tentatve return accompaned by at east one-
fourth of the amount of estmated ta , and that, subsequent nsta-
ments of ta are pad on the reguar due dates. ny defcency n
ta as a resut of estmatng the nstaments w bear nterest at the
rate of 0 per cent per annum from the nstament due date.
D. . un,
Commssoner of Interna Revenue.
pproved uno 5. 1924.
. . Meon,
Secretary of the. Treasury.
P RT III. CORPOR TIONS.
S CTION 230. T ON CORPOR TIONS.
rtce 502: Raes of ta . 111-24-1 0
Mn. 3201
Corporatons are not entted to a reducton n ta under the
Revenue ct of 1924.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, une ,, 1981
Coectors of nterna revenue, nterna revenue agents n charge, ana
others concerned:
There appears to be a msunderstandng as to the amount of n-
come ta mposed upon corporatons by the Revenue ct of 1924
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247
5231, rt. o.
Your attenton s drected to the fact that under the provsons of
secton 230 of the ct the ncome ta on corporatons s 12 per cent,
whch s the same rate of ta appcabe for the ta abe year 1 23.
Corporatons, therefore, are not permtted to take as a credt any
reducton n ta for the payment due une 15, or any subsequent
nstament date. The credt of 25 per cent s mted to ndvduas
and fducares who are requred to fe returns on orms 1040 or
1040 .
The nformaton contaned heren shoud be gven mmedate
pubcty.
D. . ar, Commssoner.
ktce 503: Corporatons abe to ta .
(See T. D. 3591 sec. 250, art. 1008.) Ta abty of ncomes of
operatng recevers of corporatons.
S CTION 231. CONDITION L ND OT R
MPTIONS O CORPOR TIONS.
rtce 511: Proof of e empton. 111-21-15 7
T. D.3587
ncome ta e empt corporatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
rtce 511 of Reguatons 2 s hereby amended to read as fo-
ows, the od matter beng strcken out and the new matter beng
wrtten n tacs:
|t. 511. Proof of e empton. In order to estb h ts e empton, and thus
be reeved of the duty of fng returns of ncome and payng the ta , t s
necessary that every organzaton camng e empton, e cept persona servce
corporatons, fe an affdavt wth the coector of the dstrct n whch t
s ocated, showng the character of the organzaton, the purpose for whch t
was organzed, the sources of ts ncome and ts dsposton, whether or not
any of ts ncome s credted to surpus or may nure to the beneft of any
prvate stockhoder or ndvdua, and n genera a facts reatng to ts
operatons whch affect ts rght to e empton. To such affdavt shoud be
attached a copy of the charter or artces of ncorporaton and by-aws of the
organzaton. Upon recept of the affdavt and other papers by the coector,
he w nform the organzaton wethc or not t k c onpt. tfr-howovcr, the
L -f w. . , .1 f. .U t - . frn- , 1 1 c t . 11 a. L f t n, fctr tf 1 t . 1.71 u
- IL- Ur tr rTT T TtTrTtT T 3 w nt. rrr.TM r T II II ( I T MC ITI II nC tt III rT| T rTC
affdavt and accompanyng pnpera to the Commoooncr or dcenon forvard them
to the Commssoner for derson as to whether the organzaton s ernnpt.
Wuen an organzaton has estabshed ts rght to e empton, t need not
thereafter make a return of ncome or any further showng wth respect
to Its status under the aw. uness t changes the character of Its organzaton
or operatons or the purpose for whch t was orgnay created. Coectors
w keep a st of a e empt corporatons, to the end that they may occasonay
nqure nto ther status and ascertan whether or not they are observng the
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231, rt. 513.
248
condtons upon whch ther e empton s predcated. Persona servce
co | ratons are not e empt after December 31, 1021 see secton 218 of the
statute nud artces 33 -339.
D. . ar,
Commssoner of Interna Revenue.
pproved May 15, 1924.
. W. Meon,
Secretary of the Treasury.
rtce 513: Mutua savngs banks. 111-1 -1507
S. M. 1 97
R NU CTS O 1018 ND 1021.
cub, formed by the empoyees of a corporaton, estabshed,
by resouton of ts advsory counc, a fund to whch ts mem-
bers obgated themseves to make a f ed depost nt certan n-
tervas and these deposts are under the contro of and are n-
vested by three trustees, sub|ect ony to the restrctons of the by-
aws adopted by the depostors. It was not organzed under a
State aw for savngs banks or smar nsttutons. Such a fund
s not e empt from ta aton as a mutua savngs bunk under the
provsons of secton 231(2) of the Revenue cts of 1918 and 1921.
The M Cub was formed for the purpose of deveopng the soca
and recreatona actvtes of the O corporaton, the encouragement
of educaton, and the promoton of good feowshp and cooperaton
among ts empoyees. mong ts actvtes the cub operates the M
thrft fund and the Chrstmas fund. ppcants for membershp
n the thrft fund sgn an appcaton and agree to depost a certan
sum wth the treasurer of the fund at certan specfed tmes. Ths
fund s under the drecton and contro of three trustees apponted
by the offcers of the cub. These trustees are authorzed and em-
powered to nvest the funds n such manner as to secure to the de-
postors n the fund at east 4 per cent nterest per annum on amounts
deposted, after settng asde a certan amount to cover possbe
deprecaton n ts nvestments. The ncome from ths fund s
dstrbuted quartery. The Chrstmas fund s operated n sub-
stantay the same manner as the thrft fund, e cept that the amount
deposted n ths fund pus nterest at the rate of 2 per cent per
annum s dstrbuted annuay to the depostors |ust pror to
Chrstmas.
Tt s contended on behaf of the cub that these funds are e empt
from ta under secton 231(2) of the Revenue cts of 1918 and 1921
whch e empts Mutua savngs banks not havng a capta stock
represented by shares.
The savngs banks contempated by ths secton are those savngs
banks or smar organzatons whch are organzed under State
statutes and operated sub|ect to restrctons mposed by aw wth
respect to the nvestment of the funds of ts depostors. It s not
essenta to e empton under ths secton that a partcuar organza-
ton be ncorporated as a savngs bank that s, ts status s to be
determned not by ts name but by ts form or organzaton and ts
method of dong busness.
The M thrft fund and Chrstmas fund were not organzed under a
State aw for savngs banks or smar organzatons, but pursuant
o a resouton of the advsory counc and offcers of the M Cub, and
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249
( 231, rt. 513.
are operated as one of the actvtes of that cub ts membershp
s mted to empoyees of a partcuar concern, who obgate them-
seves to make a f ed depost at stated ntervas, and these deposts
are under the contro of three trustees, who nvest them sub|ect ony
to the restrctons mposed by the by-aws adopted by the depostors
n the funds.
Ths offce s of the opnon that an organzaton so formed and
operated s not e empt from ta as a mutua savngs bank under sec-
ton 231(2) of the Revenue cts of 1918 and 1921.
Neson T. artson,
Soctor of Interna Revenue.
The ncome of the M ank Is derved from the nterest on Its
nvestments, whch s used to pay the necessary e penses of con-
ductng the busness and the nterest on deposts and to provde
such addtons to surpus as are permtted by aw for the protec-
ton of depostors. The bank has no capta stock or shares and
the ncome nures drecty to the beneft of the depostors on a
mutua bass.
The bank s a mutua savngs bank wthn the meanng of sec-
ton 231(2) of the Revenue cts of 1918 and 1921.
The M ank has forwarded evdence for the purpose of determn-
ng whether t s e empt under secton 231(2) of the Revenue cts
of 1918 and 1921.
It appears that the bank was ncorporated and gven ts charter
n 18 by the egsature of the State of Y. It was authorzed to
receve deposts and nvest n securtes of the Unted States of the
State of Y and n no other way, such sma amounts of money as
may be saved from the earnngs of tradesmen, mechancs, aborers,
mners, servants and others, thereby affordng the twofod advantage
of securty and nterest.
The management of the bank s vested n a board of trustees, n
accordance wth the bankng aw of the State of Y. The bankng
aw provdes that trustees sha not have any nterest, drect or n-
drect, n the gans or profts of the savngs bank, e cept to receve
dvdends upon the amounts contrbuted by them to the guaranty
fund. The bank s ncome s derved from the nterest on ts nvest-
ments, whch s used to pay the necessary e penses of conductng the
busness and the nterest on deposts and to provde such addtons
to surpus as are permtted by aw for the protecton of the depost-
ors. It s stated that no part of such ncome nures or can nure to
the beneft of any prvate stockhoders or ndvdua e cept to the
depostors.
The fnanca statement coverng the fsca perod 1921 shows
assets consstng of cash bonds of the cty of Z Government, State,
county, and muncpa bonds and other hgh-cass bonds and n-
vestments, aggregatng 132a doars. The abtes are as foows:
rtce 513: Mutua savngs banks.
111-18-1531
I. T. 1990
R NU CTS O 1818 ND 1921.
4177 24-
17
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523 , rt. 513.
250
Due depostors, 114a doars surpus at par vaues, 17 doars and
undvded profts, doars.
The bank has no capta stock or shares, and t s stated that no
nterest or dvdends have ever been pad or credted to anyone other
than depostors. The surpus does not e ceed the ma mum aowed
by aw.
ased on the foregong, t s hed that the M ank s a mutua
savngs bank wthn the meanng of secton 231(2) of the Revenue
cts of 1018 and 1921, and w not be requred to fe returns of
annua net ncome for 1023 and pror years under the Revenue cts
of 1018 and 1921, or for any subsequent year durng whch the asso-
caton operates n accordance wth the aw and reguatons ssued
thereunder.
rtce 513: Mutua savngs banks. 111-21-1007
I. T. 2027
R NU CTS O 1918 ND 1921.
In a true mutua savngs bank, the ftmds beong to the depos-
tors, the members havng no property Interest In the funds, e empt
sneh as they may acqure by beng themseves depostors.
In the case of the M Socety, the management of the corpora-
ton s vested n a board of drectors who are eected by the mem-
bers, and t appears from the evdence submtted that n the ab-
sence of a court rung to the contrary the corporaton n case of
dssouton woud decde aganst the depostors havng any further
Interests or rghts n the assets and funds of the corporaton than
the return of ther deposts wth nterest thereon. The queston
of such ownershp s vta, snce before dstrbuton of proft each
year to depostors there s paced n a reserve fund the amount
requred by aw, together wth nterest equa to that gven to de-
postors who are not members.
Snce the depostors woud not partcpate n any dstrbuton of
the reserve fund, whch apparenty beongs to the members, there
s no mutuaty, and, therefore, the M Socety Is not a mutua
savngs bank wthn the meanng of secton 231(2) of the Revenue
cts of 1918 and 1921.
The M Socety has forwarded to the ureau evdence for use n
determnng ts ta abe status for the purpose of edera ta aton.
rom an e amnaton of the evdence submtted, t appears that
the M Socety was ncorporated n the State of S n 18 . under the
acts of pr , 1802. and pr . 18 4. whch provde for the
accumuaton and nvestment of funds and savngs. The ob|ect of
the corporaton, as stated n the certfcate of ncorporaton, s that
of aggregatng the funds and savngs of the members of sad cor-
poraton and of others, and of preservng and safey nvestng the
same for ther common beneft. The certfcate provdes that the
corporaton sha have no capta stock.
The ony members of the M Socety a e those persons who have
sgned the agreement of ncorporaton and who have kept open
accounts of at east 100 wth the corporaton and those persons
who have become members by a vote of the board of drectors,
sgned the agreement of ncorporaton, and kept an open account
as before stated. The corporate powers of the socety are vested
n the board of drectors, 11 n number, eected annuay by the
members and whch has entre contro of the funds and busness of
the socety.
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251
231, rt. 513.
Dvdends may be decared semannuay, but when so decared
te reserve fund must get a dvdend equa to that gven to de-
postors who are not members, n addton to the percentage of the
net earnngs requred to be gven t by aw. Depostors who
are not members sha receve a dvdend equa to that gven mem-
bers unt otherwse provded by the board of drectors.
osses when ascertaned must be pad out of the reserve fund,
and, f ths s nsuffcent, then out of a funds, assets, and property
of the corporaton. In consderaton of the securty thus afforded,
each depostor who s not a member must agree to wave a cams,
whether founded under the statutes or consttuton of the State of
S, whch he mght have aganst any ndvdua corporator, offcer,
or member of the corporaton. Members of the corporaton sha
have no other or greater securty than that gven to depostors who
are not members.
mounts deposted or drawn out are entered n a pass book, whch
must be surrendered when an account s cosed. Deposts must be
not ess than doars, and are mted to 1.2 doars on each
account, the mtaton, however, not appyng to accumuatons
from dvdends and beng sub|ect to change by the board of
drectors.
the profts, wth the e cepton of the amount gong to the re-
serve fund, are dstrbuted to the depostors. In ths connecton, the
corporaton states after deductng runnng e penses, a profts
have been approprated to two purposes frst, a sum determned
upon s set apart to the reserve fund and the entre baance s ds-
trbuted to the depostors. Durng the fetme of the corporaton
nothng has ever been approprated to any members as such n
e cess of what s reguary aowed nonmember depostors. The
word members as used n the precedng sentence refers to those
persons who are defned n the by-aws of the corporaton as mem-
bers. They are not stockhoders but have the rght to vote at the
eecton of drectors.
The corporaton mantans no surpus other than the reserve fund.
Under the State of S statutes, 10 per cent of the frst 1,000,000 de-
posts must go to a reserve 7 per cent of the ne t 2,000,000 5
per cent of the ne t 7,000,000 . 2 per cent of the ne t 15,000,000
and 1 per cent of any amount remanng. Under secton of the
by-aws of the corporaton, t s provded the reserve fund must
get a dvdend equa to that gven to depostors who are not mem-
bers, n addton to the percentage of the net earnngs requred to
be gven t by aw. It accordngy appears that the corporaton
mantans a reserve fund consderaby n e cess of that requred by
the statute.
The corporaton s ncome s derved from ts nvestments and n-
terest receved from oans. Loans are made to the genera pubc
upon rea estate or other coatera, n accordance wth the bank act
of the State of S reguatng oans by savngs banks.
The fnanca statement of the corporaton ssued une , 1922,
shows assets of 30,000a doars, ncudng cash on hand of 1,300a
doars. Its deposts on that date amounted to 29,450 doars and
ts reserve fund to 1,4 8a doars.
The mportant queston n ths case s whether the assets of the cor-
poraton beong to the depostors or members. The assocaton has
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231, rt. 515.
252
advsed ths offce that the courts of the State of S have never deter-
mned whether the ownershp of the assets of the corporaton s
vested n the members or n the depostors, and aso that t has never
been determned whether, n the case of dssouton, the assets woud
be dstrbuted among the members or among the depostors. The
queston of such ownershp s vta, snce t appears that the entre
profts each year are not dstrbuted to the depostors, but that before
such dstrbuton there s frst paced n the reserve fund the amount
requred bv aw, and n addton there s paced n such fund a dv-
dend equa to that gven to depostors who are not members. There
s no mutuaty under these condtons uness the reserves beong to
the depostors.
In a true mutua savng bank, such as Congress ntended to grant
e empton, the funds beong to the depostors the members have no
property nterests n the fund e cept such as they may acqure by
beng themseves depostors. It s not shown whether the funds n
ths case beong to the depostors or members, but t appears from the
evdence submtted, and n the absence of a court rung to the con-
trary, that the management of the corporaton woud decde aganst
the depostors havng any further nterests or rghts n the funds of
the corporaton than the return of ther deposts wth dvdends
thereon.
ased upon the foregong, t s hed that the M Socety s not a
mutua savngs bank wthn the meanng of secton 231(2) of the
Revenue cts of 1918 and 1921. Nether s t e empt from ta aton
as a domestc budng and oan assocaton under secton 231(4) of
the Revenue cts of 1918 and 1921. The M Socety s, therefore, a
ta abe organzaton, requred to fe returns of annua net ncome
and to pay the ta thereby shown to be due.
rtce 515: udng and oan assocatons 111-10-1404
and cooperatve banks. S. M. 14 9
R NU CT O 1921.
domestc budng and oan assocaton whch oans sub-
stantay of ts funds to members, a consderabe number of
whom, however, subscrbe to ony a nomna amount of capta
stock, s e empt from ta aton under secton 231(4) of the
Revenue ct of 1921 where t appears that the assocaton obtans
practcay a of ts funds from members through the sae and
ssuance of nstament stock nnd s operated prmary for the
beneft of ts borrowng members.
The M ssocaton was hed to be e empt from ta aton under the
Revenue ct of 1918 as a domestc budng and oan assocaton,
but ts cam for e empton under the Revenue ct of 1921 was
dened on the ground that substantay a the busness of the
assocaton was not confned to makng oans to members wthn the
meanng of secton 231(4) of the 1921 ct. The cam for e emp-
ton under the Revenue ct of 1921 has been reconsdered by ths
offce after an ora hearng of the assocaton s case.
The evdence whch has been submtted shows: The M ssoca-
ton (herenafter caed the assocaton) s a corporaton organzed
and e stng under the aws of the State of Y, reatng to budng
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253
f 231, rt. 515.
and oan assocatons, for the purpose of rasng money to be oaned
among ts members for use n buyng ots or n budng or repar-
ng houses, or for other purposes. The ssued capta stock of the
assocaton conssts of runnng depost or nstament stock, t beng
provded by the consttuton of the assocaton that the owner of
any part of the capta stock of the assocaton sha be deemed a
member thereof. On anuary 31 1923, the assocaton had among
ts outstandng abtes: unnng stock and dvdends, ,728
doars reserve fund, 315a doars undvded proft fund, 95
doars certfcates of depost, doars from whch t appears
that the assocaton obtaned practcay a of the funds wth whch
t carred on busness from the sae of runnng stock. Contnu-
ousy snce 189-, wth the e cepton of the perod from December,
1918, to anuary, 1921, the assocaton has requred a borrowers
to become members by subscrbng for ts runnng or oan stock.
Its oans on mortgage securty on anuary 31, 1923, amounted to
,525./ doars, of whch a consderabe part was oaned to persons
who merev subscrbed to 1 of the assocaton s oan stock. It s
mantaned that these borrowers became actua members of the
assocaton by subscrbng to ts capta stock, even though n a
mted amount. Of these outstandng oans, 5,557 a doars was
to persons who subscrbed to runnng or oan stock and 9 7- a doars
to persons who subscrbed to no stock and were not regarded as
members. Its tota assets amounted to 7,258a doars.
Durng the fsca year ended anuary 31, 1922, the assocaton
oaned 1,59 a doars to 557 persons, each of whom subscrbed to
1 of oan stock, whe durng the ast fsca year, ended anuary
31, 1923, the assocaton oaned 3,093 a doars to 990 persons, a
of whom smary subscrbed to oan stock. It w be notced that
none of the borrowers durng the ast two fsca years subscrbed to
more than a nomna amount of stock.
The rate of nterest charged on oans was unformy per cent
per annum, no premum whatever havng been charged to the bor-
rowers the dvdends decared on the outstandng capta stock
were at the rate of 5 per cent per annum. In addton to the pay-
ment of e penses and dvdends from earnngs, 5 per cent of the
earnngs was credted each year to a reserve fund, as requred by
aw, eavng a sma baance, whch was carred to undvded profts.
owever, f a of the earnngs had been decared as a dvdend,
the dvdend rate woud st have been ess than the nterest rate
charged on money oaned. Ths reaton between dvdend and n-
terest rates must resut n every case where an assocaton obtans
a of ts funds from members through the sae of ts capta stock.
s the e penses of the assocaton are pad from the nterest receved
before dvdends can be pad, the rate of dvdends receved by
stockhoders must necessary be ess than the rate of nterest
charged on oans.
Upon these facts the assocaton cams t s e empt from ta a-
ton under sectons 231 and 1000 of the Revenue ct of 1921, whch
e empt from edera ncome and capta stock ta es Domestc
budng and oan assocatons substantay a the busness of whch
s confned to makng oans to members (Revenue ct of 1921,
secton 231(4)).
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231, rt. 515.
254
udng and oan assocatons are e empt under the above-men-
toned sectons f they are true domestc budng and oan assoca-
tons whch confne substantay a of ther busness to makng
oans to members. corporatons and nsttutons dong essen-
tay a bankng busness are necessary e cuded.
In order to determne what consttutes a true budng and oan
assocaton t s necessary to consder the basc prncpes and pur-
poses of such assocatons as they have been deveoped. Orgnay
a budng and oan assocaton was a prvate corporaton for
mutua proft, the members or sharehoders of whch contracted to
pay f ed sums at stated perods n payment for the stock of the
assocaton, the funds receved beng oaned or advanced by the
assocaton to ts members at nterest, and sometmes at a premum,
for the prmary purpose of assstng them n budng or acqurng
homes, or for other smar purposes. of the stock of the asso-
caton was pad for n nstaments. When the money pad n,
together wth a profts, reached a certan f ed amount per share,
the hoder was pad ts par vaue and was compeed to wthdraw.
Not ony dd the assocaton obtan a of ts funds from members,
but t oaned ts money e cusvey to members. The man feature
was mutuaty between a members, each member, whether a bor-
ower or nonborrower, partcpatng n the profts n proporton to
the amount whch he had pad to tre assocaton on account of hs
stock. very borrower was requred to subscrbe to stock of the
par or utmate vaue of hs oan, whch stock he assgned to the
assocaton as securty for the oan. Contrary to the ordnary case,
the oan was not ntended to be repad by drect payments, but the
vaue of the stock was eventuay to cance the obgaton. When
a member procured a oan from the assocaton, he assumed a dua
reatonshp both that of borrower and that of ender. s pay-
ments to the assocaton over and above the nterest due on the oan
were credted toward the payment of hs stock. The profts of the
assocaton were perodcay credted upon the net sums pad n
by each stockhoder, borrowng as we as nonborrowng, so that the
borrower thereby partcpated n the profts of the assocaton,
ncudng the profts made by oanng money, n effect, to hmsef
and others. It was argey by ths method that mutuaty was
effected, the borrower beng certan to obtan hs share of the profts
on the same bass as the nonborrower. ny assocaton n the
operaton of whch borrowers are deprved or equvaent rghts to
share n the profts wth nonborrowng members, such as was
worked out under ths orgna form of organzaton, acks mutuaty
and can not be cassfed as a true budng and oan assocaton.
perence demonstrated that the funds receved from the payment
of nstaments on stock were usuay nsuffcent to meet the demands
of borrowng members, so that t became necessary for assocatons
to borrow money and ssue prepad stock, on whch the fu par
vaue was pad by the hoder at the tme of ts ssuance, n order
to meet the demands of borrowng mem ers. Ths procedure was
recognzed as permssbe when ncdenta to the man busness of
the assocaton, . e., provdng a fund from whch oans coud be
made to ts members, and promotve of the man purpose of the
assocaton s creaton, . e., to assst ts borrowng members. ( ok
v. State Capta, etc., sm. ( 214 Pa., 543 3 tL, 1019.) . Under
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255
231, rt. 515.
these crcumstances strct mutuaty dd not obtan, for those who
oaned money to the assocaton, and n many cases who purchased
prepad stock, receved a defnte rate of nterest or return on ther
money, and dd not partcpate equay n the profts of the assoca-
ton. In other words, the profts and benefts were no onger rataby
dstrbuted among a the members n strct accordance to the amount
of money each had pad n. (S. M. 1140 C. . 1, 194.) In Park-
vew udng and Loan ssocaton v. erod (203 ed., 87 | 879
affd. 210 ed., 577) ths practce was approved on the ground that
t advanced the man purpose of the assocaton, to make oans to
members, the court sayng n reference to mutuaty that mutua
was not necessary synonymous wth equa. Lkewse, n Centra
udng, Loan Savngs Co. v. owand and eef ontane ud-
ng and Loan Go. v. McMaken (21 ed., 52 ), t was hed that a
budng and oan assocaton coud both receve deposts from, and
make oans to, nonmembers when by so dong the essenta purpose
of the assocaton was advanced, and that the assocaton woud
nevertheess be hed to be organzed and operated e cusvey for the
mutua beneft of ts members. Ths deveopment n the aw has ts
|ustfcaton n the recognton of the fact that the man purpose of
budng and oan r.ssocatons has become that of assstng persons
to borrow money to bud or acqure homes. nythng adng n
the accompshment of that end w be ooked upon wth favor. s
ong as the needs of the borrowers are taken care of, and the borrow-
ng and nonborrowng owners of nstament stock share mutuay
n the profts of the assocaton, and there s recprocty and equaty
among them, the assocaton s a true budng and oan assocaton.
It w be noted that the deveopment of the aw has been prmary
wth a vew to the borrowers needs, so that such assocatons may
now be sad to dffer from the usua fnanca nsttuton n that they
are not organzed for the beneft and proft of a sma group of
nvestors n the stock of the corporaton but rather for the beneft
of those who are n need of funds for the purchase or acquston
of homes. Ths was recognzed under the Revenue ct of 1918.
rtce 515 of Reguatons 45, as amended by T. D. 3179 (C. . 5,
200), nterpretng secton 231(4) of that ct, provded that a bud-
ng and oan assocaton was e empt when t accumuated funds for
the prmary busness of makng oans to ts members for the pur-
pose of budng or acqurng homes and n whch the members of the
assocaton shared n the profts on substantay the same footng.
Thus the two essenta characterstcs of a true budng and oan
assocaton are emphaszed, (1) ts purpose, and (2) ts mutuaty,
whch resuts n a proportonate share of the profts beng passed
aong to borrowng members. rtce 515 of Reguatons 45, as
amended, further provded, foowng So. Op. 78 (C. . 3, 237),
that the proporton of prepad stock to runnng or nstament stock
was mmatera, provded the ssuance of such prepad stock was n-
cdenta to, and n furtherance of, the man busness of the assoca-
ton that s, that t was ntended to provde, a fund from whch
oans were to be made prmary to persons subscrbng to the run-
nng or nstament stock to enabe them to bud or acqure homes.
Under the Revenue ct of 1921 t s requred that substantay
a of the busness of an e empt budng and oan assocaton be
confned to makng oans to members. To restate the requrement
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231, rt. 515.
25
substantay a of those who borrow from the assocaton must be
permtted to share on an equa footng wth a other members n
the profts and benefts of the assocaton. If an assocaton has
accumuated to any apprecabe e tent funds whch are not needed
for oans to members, the remedy s to e tend ts benefts to others
who w become members and who need funds to acqure or bud
homes, aowng the new borrowers to become members and to share
n the profts on the same bass as a the other members.
Membershp n a budng and oan assocaton s acqured n the
same manner as n any other stock corporaton by becomng the
hoder of ts capta stock. The e tent or character of membershp
s not prescrbed by aw, but that matter must be deemed to have
been eft to the dscreton of each assocaton. n amendment was
proposed to the revenue b of 1921, addng the words, on the bass
of ther stock hodngs, to secton 231(4), as t orgnay appeared,
so that the secton woud have provded for the e empton of do-
mestc budng and oan assocatons ony when substantay a of
ther busness was confned to makng oans to members on the bass
of ther stock hodngs. The amendment was not adopted. It fo-
ows that, generay, any one who shares n the profts of an assoca-
ton and through the ownershp of any amount of ts capta stock
s entted to partcpate n ts management must be regarded as a
member wthn the meanng of the aw.
Ths does not mean that banks and other smar fnanca nsttu-
tons can, by requrng appcants for oans to subscrbe to a nomna
amount of ther capta stock, operate under the guse of budng
and oan assocatons and thereby obtan e empton from edera
ta es. The essenta characterstc of such an assocaton s mutua-
ty, and no corporaton can carry on an ordnary bankng busness
and at the same tme operate on a mutua bass. s has been ponted
out, a bankng nsttuton operates for the proft of ts nvestng
stockhoders, whe a budng and oan assocaton s conducted for
the beneft of ts borrowng members, who partcpate n ts profts
on the same bass as nonborrowng members that s, n accordance
wth the net amount each member has pad to the assocaton, e -
cudng, of course, payments of nterest upon oans, premums, fnes,
etc.
In the deveopment of budng and oan assocatons, varatons
from the orgna pan of organzaton have been permtted when
they operated to the advantage of borrowng members. Ths, then,
may propery be consdered the rue wth whch to test further
varatons: Do they operate to the advantage of borrowng mem-
bers If a change n organzaton or operaton resuts n beneft
to the borrowers, t s n accord wth the underyng purpose of a
true budng and oan assocaton otherwse, not.
rtce 515 of eguatons C2 provdes that a budng and oan
assocaton to be e empt under the evenue ct of 1921 must be
mutua that s, a of ts stockhoders or members must share n the
profts on substantay the same footng. It s evdent from ths
that the mutuaty referred to has to do prmary wth the ds-
trbuton of profts rather than partcpaton n the management or
the sharng of osses. s t s a usua requrement of aw that re-
serves be but up presumaby adequate to protect a members
aganst oss and to enabe the dstrbuton of a other earnngs, the
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257
231, rt. 515.
phase of the matter reatng to the sharng of osses has become of
reatvey tte mportance, partcuary when t s the borrowers,
n whose nterest the assocatons are prmary operated, who are
benefted.
The appcaton of the above-announced prncpes to the nstant
case eads to the concuson that the M ssocaton s e empt from
edera ncome and capta stock ta es under the evenue ct of
1921.
It appears from the evdence submtted, whch sets forth the nature
of the assocaton s busness up to anuary, 1923, that the assoca-
ton, a domestc budng and oan assocaton under the aws of the
State of Y, has at a tmes obtaned practcay a of ts funds
from members, n the manner of a true budng and oan assocaton,
through the ssuance of runnng or nstament stock upon whch
dvdends at the rate of 5 per cent per annum have been pad. The
assocaton s e empt status, therefore, depends upon the use t has
made of ts funds. though n anuary, 1922, the assocaton had
outstandng oans to nonmembers of 1,43 doars (9 7 a: doars
n anuary, 1923), a of whch were made durng the perod from
December, 1918, to anuary, 1921, as compared wth outstandng
oans of 3,4 0 doars (5,557 # doars n anuary, 1923) to mem-
bers, t was hed to be e empt from ta aton under secton 231(4) of
the Revenue ct of 1918. In determnng the assocaton s e emp-
ton under the correspondng secton of the Revenue ct of 1921, the
nature of ts busness snce that tme becomes determnatve. Subse-
quent to anuary, 1921, the assocaton has oaned no money to non-
members, athough t has oaned substanta amounts to members
who subscrbed to ony a nomna amount of runnng stock and n
numerous cases to ony 1 of oan stock. The crteron of member-
shp n the assocaton has for many years been the ownershp of
any part of ts capta stock, and persons subscrbng to oan stock
have aways been regarded as members of the assocaton, entted to
vote ther stock, and thus to partcpate n the management of the
assocaton. It must be concuded that substantay a of the
busness of the assocaton has been confned to makng oans to
members wthn the requrement of the statute.
There remans for consderaton the queston of whether the M
ssocaton s mutua. .Mutuaty s the essenta prncpe of a
true budng and oan assocaton, and any assocaton n whch a
the members, partcuary the borrowers who are the members to be
prmary served do not share n the profts on substantay the
same bass can not cam e empton as a true budng and oan asso-
caton. Mutuaty concerns tsef prmary wth the dstrbuton
of profts, athough partcpaton n management and the sharng
of osses aso deserve consderaton. We sha consder these eements
of mutuaty n the ght of the nstant case n the reverse order
from that n whch they have been mentoned.
1. The assocaton, pursuant to the aws of the State of Y,
has for a number of years been accumuatng a reserve to provde
aganst osses. In vew of ths fact, that phase of mutuaty havng
to do wth the sharng of osses becomes unmportant. urthermore,
the matter s argey wthn the dscreton of the ma|orty stock-
hoders of every assocaton, who can requre a borrowng members
to subscrbe to stock to the fu amount of ther oans. If they do
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258
not choose to nsst upon ths requrement, the borrowng members
are not n any way pre|udced. ppyng the test re the nterests
of the borrowers, for whose assstance n obtanng oans the asso-
caton s prmary operated, advanced t s concuded that the
prncpe of mutuaty s satsfed n ths regard.
2. ach borrower s requred to subscrbe to the capta stock of
the assocaton and s permtted to vote hs stock, regardess of knd,
n whoe or fractona parts. Thus each borrower s entted to par-
tcpate n the management.
3. The prncpa feature of mutuaty s the sharng of profts
by a members on substantay the same bass. ( rtce 515, Regu-
atons 2.) That bass has been determned to be the amount
pad n to the assocaton by each member, e cudng, of course, pay-
ments n the nature of premums, fnes, penates, and nterest pay-
ments. s ong as the borrowng members of an assocaton share n
ts profts on ths bass or one equay as benefca to them, the
prmary ob|ect of the assocaton s beng carred out. The assoca-
ton contends that ths s the resut accompshed under ts present
method of operaton.
Its borrowng members are requred to make monthy payments
of 1 per cent of the amount of the oan, whch payment ncudes
nterest at per cent per annum on the unpad porton of the oan.
made, ess the nterest due, are credted on the oans so as to reduce
the prncpa amount each month, wth a correspondng decrease n
the cost of the oan to the borrower. s e paned by the assoca-
ton, credts on stock are mmedatey apped to the reducton
of the prncpa oan at the tme the payment s made, thereby
creatng a new prncpa upon whch the borrower s charged n-
terest at the rate of per cent per annum for the subsequent
months. Under the orgna practce the borrowng members woud
be charged wth nterest on the fu amount of ther oans unt
the amounts pad n toward the payment of ther stock, together
wth ther share of the profts, equaed the face of ther oans and
nterest. It s apparent that t s to the beneft of the borrowng
members to have ther payments mmedatey credted on ther
oans n every case where the nterest they are payng on ther oans
s n e cess of the dvdends whch they -woud receve f the pay-
ments were credted on account of stock. In the present case, the
borrowng members, by havng ther payments credted drecty on
ther oans, save per cent nterest on the amount by whch the
oan s reduced, as aganst recevng the usua 5 per cent dvdend
on the same amount f used as a credt n the purchase of stock.
Ths resut necessary foows n every case, rrespectve of the
nterest or dvdend rates, when a the funds of the assocaton are
obtaned from members through the sae of stock, because, obvousy,
the rate of dvdends pad to stockhoders can never e ceed the rate
of nterest charged to borrowers. Under these crcumstances, the
budng up of a reserve or surpus merey resuts n decreasng the
dvdend rate, wthout pre|udce to the borrowng members. It
w be seen that ths so-caed drop-nterest pan of operaton resuts
n e tendng the prncpe of mutuaty to borrowers n respect to
sharng n the profts n every case where a budng and oan assoca-
ton obtans a of ts funds from ts members through the sae and
No premums
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231, rt. 515.
ssuance of nstament stock. The benefts and profts accrung to
the borrowng members n such cases are |ust as great where the
payments are credted aganst the oan, decreasng the subsequent
nterest payments, as where they are credted toward the payment
of nstament stock, enttng the member to dvdends on the amount
of the credt. Under the assocaton s method of conductng ts
busness, the borrowng members receve ther proportonate share
of the profts to no esser degree than under the orgna and ong-
recognzed pan of operaton, and the prncpe of mutuaty obtans
among a the members of the assocaton. orrowng members pay
nterest at the rate of per cent per annum and are charged no
premums on oans, whe dvdends are mted to 5 per cent per
annum. nay, t appears from a the evdence that the assoca-
ton s operated prmary for the beneft of ts borrowng members,
to assst them n obtanng funds to bud or acqure homes at a
mnmum cost. It s, therefore, the opnon of ths offce that the
assocaton s a true budng and oan assocaton.
In vew of the foregong, t s hed that the M ssocaton s a
true budng and oan assocaton that substantay a of ts
busness s confned to makng oans to ts members and, accordngy,
that t s e empt from edera ncome and capta stock ta es under
the Revenue ct of 1921, and that ts cam for e empton shoud
be sustaned.
Neson T. artson,
Soctor of Inte na Revenue.
rtce 515: udng and oan assocatons 111-13-1454
and cooperatve banks. I. T. 19 1
R NU CTS O 1918 ND 1921,
budng and oan assocaton durng 1919, 1920, and 1921
purchased budng ots upon whch t erected houses. It subse-
quenty sod the houses and ots at a substanta proft, whch was
dstrbuted to the stockhoders n dvdends.
ed, that the busness of deang n rea estate, e cept when
ncdent to forecosures, s not a egtmate actvty of a domestc
budng and oan assocaton and when engaged n destroys e emp-
ton from ta aton under the edera statutes.
rtce 515: udng and oan assocatons 111-14-1477
and cooperatve banks. L T. 11)07
R NU CT O 1921.
cooperatve bank may be propery cassfed as a budng and
oan assocaton wthn secton 231(4) of the Revenue ct of 1921
rovded such bank meets the requrements of the statute and s n
act, athough not n name, a true budng and oan assocaton.
If the funds of such an organzaton are oaned e cusvey to mem-
bers for the. prmary purpose of budng or acqurng homes, the
members thereof are entted to the benefts of secton 213(b) 10 of
the Revenue ct of 1921.
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231, rt. 515.
2 0
rtce 515: udng and oan assocatons
and cooperatve banks.
111-1 -1508
L T. 1979
R NU CT O 1921.
Pad-up stockhoders n a budng and oan assocaton receved
dvdends at te rate of 10 per cent per annum and per cent per
annum was pad on deposts. orrowng members receved no
share n the earnngs of the M ssocaton but pad nterest on oans
at the rate of per cent per annum wth the rght to a reducton of
nterest charges whenever payments on the oan equaed 100.
ed, that the profts of the assocaton were not dstrbuted
mutuay among the borrowng and nonborrowng members and,
accordngy, the assocaton s not entted to e empton under the
provsons of secton 231(4) of the Revenue ct of 1921.
The M ssocaton has forwarded to the ureau evdence for the
purpose of determnng whether t s e empt under secton 231(4)
of the Revenue ct of 1921.
The fnanca statement for the fsca perod ended n 1921 shows
mortgage oans 7.89 doars, free shares 2.21a doars, and speca
account .23a doars. The free shares and speca account are noth-
ng more than pad-up stock and deposts, respectvey. There do
not appear to be any runnng or nstament shares ssued e cept the
runnng shares or redeemed shares pedged by borrowers on ther
oans.
The pad-up stockhoders receve dvdends at the rate of Of per
cent per annum and per cent per annum s pad on deposts. The
borrowng member receves no share n the earnngs of the assoca-
ton. e pays per cent per annum on hs oan but s entted to
a reducton of nterest charges whenever the payments on the oan
equa the sum of 100. The funds of the assocaton are derved
prncpay from deposts.
One of the essenta characterstcs of a domestc budng and oan
assocaton s mutuaty that s, the dstrbuton of profts among
ts members on substantay the same bass. reducton of n-
terest charges on oans to borrowng members when the amounts pad
n equa 100 s to the e tent of the reducton the equvaent of
sharng n the profts of the assocaton. owever, to be mutua the
dstrbuton of profts to nonborrowng members must not be e ces-
sve as compared to the benefts of the borrowng members n the
reducton of nterest charges on ther oans. rom the foregong
t s shown that the borrower pays nterest charges of per cent and
s entted to a reducton of nterest charges ony when he has pad
toward the qudaton of the oan the sum of 100. Comparng ths
beneft of the borrowng member wth that receved by the pad-up
stockhoker or nonborrowng member, who receves a return of 10
per cent per annum on hs nvestment, t s apparent that there s a
consderabe dfference n the benefts receved by such membes
from the assocaton. It s a n favor of the nonborrowng member
and aganst the borrowng member. Thus, t appears that the ee-
ment of mutuaty s ackng n ths case.
ccordngy, t s hed that the M ssocaton s not entted to
e empton under the provsons of secton 231(4) of the Revenue
ct of 1921, and t w be requred to fe returns of annua net n-
come and to pay the ta thereby shown to be due.
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231, rt. 515.
rtce 515: udng and oan assocatons 111-18-1532
and cooperatve banks. L T. 1991
R NU CT O 1918.
The ta payer camed t shoud not be requred to pay ta on
ncome derved from oans to members on the strcty budng
and oan assocaton pan.
budng and oan assocaton may not be party e empt and
party ta abe. It s ether e empt or ta abe, accordng to Its
method of operaton, and snce the M Company was a ta abe
organzaton ts entre net ncome for 1918, 1910, and 1920 s
sub|ect to ta .
The M udng and Loan ssocaton has fed returns for the
years 1918 to 1920, ncusve, and pad the amount of ta shown to
be due thereon.
The assocaton contends that t shoud not be requred to pay ta
on the ncome derved from the oans made to members on the strcty
budng and oan pan, and, accordngy, has fed cams for refund
coverng the ta pad on ths porton of ts busness for the years
1918 to 1920, ncusve.
The Revenue ct of 1918 provdes that every corporaton not
e pressy e empt from ta aton must make a return of net ncome.
Certan organzatons mentoned n secton 231 (1) to (14), ncu-
sve, of the ct are e empt, but there s no authorty n the statute
for an organzaton to be party e empt and party ta abe. It s
ether e empt or ta abe accordng to ts method of operaton. The
operaton of the M udng and Loan ssocaton ndcates that t
s not e empt from ta aton under the Revenue ct of 1918. It s,
therefore, ta abe, and ts entre net ncome for the years 1918, 1919,
and 1920, as denned n secton 233 of the Revenue ct of 1918, s
sub|ect to ta aton.
rtce 515: udng and oan assocatons 111-18-1533
and cooperatve banks. I. T. 1992
R NU CTS O 1918 ND 1921.
One of the essenta characterstcs of a domestc budng and
oan assocaton s mutuaty. Such an assocaton Is mutua when
t dstrbutes ts earnngs among ts members, borrowng and non-
borrowng, on substantay the same bass. In the nstant case
the permanent stockhoders receved a return on ther nvestment
whch was many tmes greater than that receved by the other
casses of stockhoders, thus effectuay destroyng the essenta
mutuaty.
It s hed, therefore, that the M udng and Loan ssocaton
s not entted to e empton under the provsons of secton 231(4)
of the Revenue cts of 1918 and 1921.
The M udng and Loan ssocaton has forwarded to the
ureau evdence for use n determnng whether t s a domestc
budng and oan assocaton for the purpose of edera ta aton.
The fnanca statement for the fsca perod ended December 31,
1921, shows the foowng tems: Loans, 39a doars nstament
shares, as doars prepad shares, 2 doars depost shares, If a
doars fu pad shares, 24a doars and permanent stock, 2 do-
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231, rt. 515. 2 2
ars. The tota oans outstandng at the cose of fsca perod ended
December 31, 1921, were made as foows: 34a doars to persons
who subscrbed for shares to the fu amount of ther oans at the
tme of takng the oans - a doars to stockhoders on shares n
the assocaton and 4 ar doars to nonmembers. Durng the year
1921, t appears that the assocaton made oans amountng to
doars, of whch amount .43a: doars represented nonmember oans.
The by-aws provde that the permanent stock sha be ssued
for whch the fu par vaue sha be pad at the tme of ssue or n
nstaments of per share, at the opton of the purchaser, and
upon whch permanent stock a fu dvdend or a defnte dvdend
may be pad, whch dvdend sha n no case e ceed the per cent
of proft acqured by any other cass or seres of stock at the tme
such dvdend s decared. The baance of proft (f any) and the
prncpa pad on sad stock sha not be pad to the hoders of the
same unt a awfu cams of every other cass of stock n ts seres,
whch the hoders of permanent stock assume and guarantee, as
e pressed n the certfcate of such other casses, and a other ar
bhtes of such corporaton sha have been fuy qudated and pad.
The evdence shows that the amount of permanent stock orgnay
subscrbed for and pad for n fu was .2a doars and that subse-
quent payments brought ths tota to .39a doars. our stock dv-
dends have been decared on the permanent stock, aggregatng n a
1. a doars. These stock dvdends were pad as foows: 1908. .IS
doars 1913, .45a doars 1915, .5a) doars and 1920, .5a doars.
It appears that the rate of dvdend decared and pad on the per-
manent stock for 1920 and 1921 was 8 , per cent and that the perma-
nent stock capta was aso ncreased by a credt of 1 per cent n 1920
and 2 per cent n 1921.
In vew of the foregong, t appears that the permanent stock-
hoders receved an appro mate ncome of .19 doars n 1920 and
.21 doars n 1921 on ther orgna nvestment of .39a doars,
whch s appro matey a 50 per cent return on ther nvestment.
In contrast to such return receved by the permanent stockhoders
for 1920 nnd 1921, the oan nstament stockhoders were credted
wth a return of per cent per annum, the nstament nvestment
stock per cent, prepad stock per cent, depost stock 4 per cent,
and fu-pad stock per cent.
One of the essenta characterstcs of a domestc budng and
oan assocaton s mutuaty. Such an assocaton s mutua when
t dstrbutes ts earnngs among ts members, borrowng and non-
borrowng, on substantay the same bass. In the nstant case the
permanent stockhoders receved a return on ther nvestment whch
was many tmes greater than that receved by the other casses of
stockhoders, thus effectuay destroyng the essenta mutuaty.
It s hed, therefore, that the M udng and Loan ssocaton s
not entted to e empton under the provsons of secton 231(4) of
the Revenue cts of 1918 and 1921 and that t w be requred to
fe the returns requred by those cts and pa - the ta thereby shown
to be due.
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231, rt. 515.
rtce 515: udng and oan assocatons 111-19-1549
and cooperatve banks. I. T. 1999
R N0 CTS OP 1918 ND 1921.
One cass of stock hoders, n addton to sharng n the profts
of the assocaton dstrbuted to a stockhoders n ke propor-
ton, partcpates n the dstrbuton of the baance of the un-
dvded profts account.
ed, that the partcpants n the dvson of the undvded
profts account receve a much hgher rate of return upon the
orgna nvestment, thus hodng an advantage over the nsta-
ment stockhoders who are the borrowng members of the assoca-
ton. Ths method of operaton destroys mutuaty between a
casses of stockhoders.
The evdence presented to the ureau n support of the cam for
e empton of the M udng and Loan ssocaton shows that dur-
ng 1921 the profts of that organzaton were not dstrbuted to ts
fve casses of stockhoders on a substantay mutua bass. One
cass of stockhoders, n addton to sharng n the profts of the
assocaton dstrbuted to a stockhoders n ke proporton, par-
tcpates n the dstrbuton of the baance of the undvded profts
account. Such partcpants receve a much hgher rate of return
upon the orgna nvestment, thus hodng an advantage over the
nstament stockhoders, who are the borrowng members of the
assocaton. Ths method of operaton destroys mutuaty between
a casses of stockhoders. Therefore, e empton was dened.
In a cam for reconsderaton t s contended that an organzaton
created under the aws of a State as a budng and oan assocaton
s a budng and oan assocaton n fact and shoud be so consdered
by the edera Government, rrespectve of the actua busness
methods empoyed.
The ureau has unformy hed wth respect to the ta abty of
corporatons that the character of the organzaton s to be deter-
mned by an anayss of ts methods of operaton. Thus, an organ-
zaton chartered as a budng and oan assocaton by the aws of a
State and engaged n the prncpa busness of suppyng funds to
promote home budng, s e empt under the edera statute ony
when operated on a bass whch s substantay mutua. The aws
of some States permt actvtes by organzatons chartered-as bud-
ng and oan assocatons whch are smar to those ordnary en-
gaged n for proft by banks or other fnanca nsttutons. Man-
festy, athough observng the State statute n a partcuars, such
organzatons are not e empt under the edera statute. To hod
otherwse woud, n effect, vest the varous State egsatures wth
power to determne what consttutes a domestc budng and oan
assocaton for the purposes of edera ta aton. Ths vew was
sustaned n the case of The LUey udng and Loan Company v.
Stwton M. Mer, Coector of Interna Revenue (C. . 1-1, 253 280
ed., 143, affrmed 285 ed., 1020).
carefu e amnaton of the entre evdence n the case confrms
the correctness of the rung that the assocaton s sub|ect to ta
under the Revenue cts of 1918 and 1921.
G
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231, rt. 515.
2 4
rtce 515: udng and oan assocatons 111-19-1550
and cooperatve banks. S. M. 1801
R NU CT O 1021.
ed, that the M ssocaton was n 1921 an e empt domestc
budng and oan assocaton that t confned substantay a of
ts busness to makng oans to members that deposts were ac-
cepted for the soe purpose of makng member oans that the so-
caed drop-nterest pan of operaton dd not destroy ts mutua-
ty that the borrowng members u effect receved ther fu share
of the profts and that the borrowng members were the members
prmary served.
n opnon s requested as to whether the M ssocaton s en-
tted to e empton from ta aton as a domestc budng and oan
rtssocaton. ttenton s caed to the fact that the assocaton op-,
crated on the so-caed drop-nterest pan and accepted deposts.
The e empton cams of assocatons operatng aong these ne
must be decded upon ther speca facts wth a vew of ascertanng
n each case whether the, camant s mutua and operated prmary
for the beneft of ts borrowng sharehoders.
The M ssocaton s a domestc corporaton, organzed and e st-
ng under the aws of Y for the purpose of furnshng a safe and
proftabe nvestment for the savngs of ts stockhoders and accumu-
ate a fund to oan to members who wsh to borrow money and repay
the same n sma nstaments and to transact the busness of a bud-
ng and oan assocaton as authorzed by aw.
vdence has been submtted concernng the method of operaton
of the assocaton for the caendar year 1921.
Its fnanca statement as of December 31, 1921, shows, among ts
abtes, nstament stock, 8 8.2 doars deposts, 8 8 doars
reserve fund, 25 doars and undvded proft fund, 21 doars.
On the same date ts assets ncuded cash, 82 doars oans on mort-
gage securty, 1,710 doars and Lberty bonds, 5as doars. It s
stated that a of the above-mentoned oans on mortgage securty
were to persons who subscrbed for nstament stock to the fu
amount of ther oans.
Durng 1921 the oans made by the assocaton amounted to 459./1
doars, the borrower n every nstance beng requred to subscrbe
for nstament stock to the fu amount of hs oan. Thus the bus-
ness of the assocaton was confned to makng oans to persons who
were members both wthn the usua meanng of the term and the
provsons of rtce II of ts consttuton, whch reads:
ny person, ncudng a mnor, subscrbng for, or becomng the owner by
transfer or otherwse, ether n Is own name or as the trustee for another
or others, of one or more shares of the capta stock of ths assocaton, sha
become a member, and as such, sha e entted to a the benets and prve|res.
and sub|ect to a the dutes and abtes of membershp as provded by aw
and prescrbed n ths consttuton and the by-aws of sad assocaton.
The rate of nterest charged on oans to borrowng members, and
a comparson of that rate wth the rate of dvdends and nterest pad
to nonborrowng sharehoders and depostors, respectvey, both n-
dcate that the assocaton was operated for the beneft of ts borrow-
ng members, n whose behaf every true budng and oan assoca-
ton s prmary operated. orrowers were never charged nterest
n e cess of per cent per annum. No addtona charge was made
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2 5
231, rt. 515.
on account of premums, commssons, bonuses, etc. On the other
hand, the dvdends pad to nonborrowng sharehoders were at the
rate of 5 per cent per annum, whch was aso the rate of nterest
pad to depostors. Manfesty, t was not the purpose of the assoca-
ton to make a proft for nonborrowng sharehoders by recevng de-
posts at one rate of nterest and oanng the money at a hgher
rate, as the depostors receved the same rate of return as share-
hoders. The assocaton was operated on a 1 per cent margn, that,
apparent 7, beng |ust suffcent to cover ts necessary operatng
e penses.
Mutuaty beng the essenta prncpe of a true budng and oan
assocaton, t becomes necessary to determne whether or not the
assocaton satsfed the test of mutuaty, a of ts members sharng
n ts profts upon substantay the same bass, wth partcuar
emphass upon the borrowng members. ( rtce 515, Reguatons
2 S. M. 14 9, see pp. 252-259.) It appears that the borrowng
members, nstead of havng ther dues credted toward the payment
of ther stock and recevng dvdends upon the amounts credted,
usuay had ther payment credted drecty aganst the prncpa of
ther oans. Whenever the payments of a borrowng member, e cud-
ng the nterest due, amounted to 100, the prncpafupon whch such
member was charged nterest was reduced by that amount, wth the
resut that the subsequent nterest payments were proportonatey
reduced. Under that method the borrowng members vrtuay
saved nterest of the rate of per cent per annum upon the amount
by whch ther oans were reduced n pace of recevng upon the
same amounts dvdends at the rate of 5 per cent per annum to whch
they woud have been entted had the amounts been credted toward
the payment of ther nstament stock. It w thus be seen that the
o rowng members n effect shared n the profts on a bass equay
as benefca as that upon whch nonborrowng sharehoders shared.
so, the depostors benefted by the operaton of the assocaton to
the same degree as the sharehoders.
The amounts credted to the reserve and undvded profts, as shown
by the fnanca statement of the assocaton, were so credted
Pursuant to the aws of Y. The amounts, beng comparatvey sma,
me not regarded as affectng the status of the assocaton.
Upon a the facts shown by the record evdence, ths offce s of
e opnon that the M ssocaton was n 1921 a domestc budng
end oan assocaton that t confned substantay a of ts busness
to makng oans to members that deposts were accepted for the
soe purpose of makng member oans that the so-caed drop-
nterest pan of operaton dd not destroy ts mutuaty that the
borrowng members n effect receved ther fu share of the profts
and that the borrowng members were the members prmary
served. ccordngy, the cam of the assocaton for e empton
from ta aton for the caendar year 1921 shoud be granted under
the provsons of secton 231(4) of the Revenue ct of 1921. If
ts method of operaton durng pror years was smar to that fo-
owed n 1921, t s aso entted to e empton under the correspond-
ng sectons of the pror revenue acts.
Neson T. artson,
Soctor of Interna Revenue.
4177 24 18
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5231, rt. 515.
2
-ktce 515: udng and oan assocatons
and cooperatve banks.
111-21-15 8
S. M. 1705
R NU CTS O 1018 ND 1921.
Tht M Company dd not obtan a of Its funds through the sae
of Instament stock. prospectve borrower from the company,
havng subscrbed to ony 1 share of nstament stock of the pur
vaue of doars, was permtted to borrow, upon adequate securty,
wthout regard to the amount of stock subscrbed for. s a resut
of ths permsson the great ma|orty of those who borrowed from
the company subser ed to ony a few shares of stock, for the rea-
son, t s contended, that by subscrbng to a nomna amount of
stock they receved the mutua advantages of the company to S
great an e tent as f they had subscrbed to stock o the fu
aaou. .f ther oans, wth the addtona rght or opportunty of
payng ther oans In fu at any tme.
The evdence shows that It.s a true budng and oan assoca-
ton, operated on a mutua bass and prmary for the beneft of
ts borrowng memers, substantay a the busness of whch s
confned to makng oans to members. ccordngy t s entted
to e empton under secton 231(4).
The opnon of ths offce s requested as to whether the Com-
pany s e empt from ta aton under secton 231(4) of the Revenue
cts of 1918 and 1921.
The M Company (herenafter caed the company) s a domestc
corporaton, organzed and e stng under the budng assocaton
aws of the State of Z, for the purpose of rasng money to be
oaned to ts members and others to ad them n the purchase or
budng of homes, and for such other purposes as are authorzed
by aw.
The baance sheet of the company as of December 31, 1922, shows
among ts abtes runnng stock (not yet matured) and dvdends,
98 doars pad-up stock and dvdends, 557a doars prepad
stock and dvdends, 33 doars deposts and accrued nterest, 3 8
doars reserve fund, 49 doars undvded proft fund, 22 do-
ars. On the same date, ts assets totaed 1,158 doars, ncudng
oans on rea estate securty, 1,098 doars, and bonds, 54 doars.
These fgures appear to be representatve of the perods nvoved,
both under the Revenue ct of 1918 and the Revenue ct of 1921.
Durng the year ended December 31, 1922, the company made
a of ts oans to members, oanng 303 doars to persons who
subscrbed to // shares of nstament stock of the tota par vaue of
15 doars. It thus appears that durng 1922 a of the busness
of the company whs confned to makng oans to hoders of ts
nstament stock, athough n no case was the par vaue of the
stock subscrbed for equa to the fu amount of the oan. The
busness of the company for pror years was substantay smar,
as s ndcated by the fact that a of the outstandng oans on
December 31, 1922, amountng to 1,098 doars, were to hoders
of nstament stock.
The hoder of any part of the capta stock of a budng and oan
assocaton must be regarded as a member thereof n the same way
as a hoder of the capta stock of any other stock corporaton s a
member of such corporaton. The e tent or character of member-
shp n a budng and oan assocaton s not prescrbed by aw,
but that matter must be deemed to be eft to the dscreton of each
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2 7
231, rt. 515.
assocaton. n amendment was proposed to the revenue b of
1921, addng the words on the bass of ther stock hodngs to
secton 231(4) as t orgnay appeared, so that the secton woud
have provded for the e empton of domestc budng and oan
assocatons ony when substantay a of ther busness was con-
fned to makng oans to members on the bass of ther stock hod-
ngs. The amendment was re|ected. It foows that, generay,
anyone who shares n the profts of an assocaton and through the
ownershp of any amount of ts capta stock s entted to partc-
pate n the management of the assocaton must be regarded as
a member wthn the meanng of the aw. (S. M. 14 9, see pp.
52-259.)
It s to be borne n mnd, however, that banks and other smar
fnanca nsttutons can not, by requrng appcants for oans to
subscrbe to a nomna amount of ther capta stock and operatng
under the guse of budng and oan assocatons, thereby obtan
e empton from edera ta es. The essenta characterstc of such
an assocaton s mutuaty, and no corporaton can carry on an
ordnary bankng busness and at the same tme operate on a
mutua bass.
The queston, decsve of ths- case, then, s whether the M Com-
pany was operated on a mutua bass.
Mutuaty concerns tsef prmary wth the dstrbuton of
rofts, athough partcpaton n the management and sharng
osses are aso reevant s the company pursuant to the aws
of the State of Z accumuated a reserve and thus made provson
aganst a ordnary osses, the phase of mutuaty havng to do
wth the sharng of osses becomes unmportant. so a of the
outstandng oans of the company were to nstament sharehoders
who had the rght to vote ther stock and thus partcpate n the
management of the company.
The prncpa feature of mutuaty s the sharng of profts by a
mem ers on substantay the same bass that s, the amomt pad
n by each member e cudng such payments as those on account of
nterest. Ths resut s readed when each borrower s requred to
subscrbe for nstament stock of the par or utmate vaue of hs
oan, and hs payments over and above the nterest due on the oan
are credted toward hs stock n the assocaton. The profts of the
assocaton beng perodcay credted upon the bass of the net
sums pad n by each sharehoder, every borrower receves a pro-
portonate share of the profts. s ong as the borrowng members
of the assocaton share n ts profts on ths bass, or one equay as
benefca to them, substanta mutuaty e sts. Thus, where the
payments of borrowng membe s are used to reduce ther oans n-
stead of beng credted toward the payment of nstament stock, t
s hed that there s a mutua sharng of profts, provded the nterest
saved to the borrower s as great as the profts whch he woud re-
ceve f hs payments were credted toward the payment of stock.
Ths s the stuaton where a budng and oan assocaton obtans a
of ts funds from members through the sae of nstament stock, for,
when an assocaton s operated upon that bass, the rate of dvdends
pad to stockhoders can never e ceed the rate of nterest charged to
borrowers. ccordngy, t s to the advantage of the borrower to
have hs payments credted on hs oan rather than toward the pay-
ment of stock.
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231, rt. 515.
2G8
owever, n the nstant case, the company dd not obtan a of
ts funds through the sae of nstament stock. Therefore, t s
necessary to e amne further nto ts operaton to determne whether
the borrowng members dd n fact share n the profts on substan-
tay an equa bass wth the nonborrowng members, or whether the
varaton n ts pan of operaton resuted n detractng from the
benefts receved by borrowng members under the ong recognzed
pan orgnay foowed by budng and oan assocatons.
It s conceded that a prospectve borrower from the company,
havng subscrbed to ony one share of nstament stock of the par
vaue of doars, was permtted to borrow, upon adequate secur-
ty, wthout regard to the amount of stock subscrbed for. s a re-
sut of ths permsson the great ma|orty of those who borrowed
from the company subscrbed to ony a few shares of stock, for the
reason, t s contended, that by subscrbng to a nomna amount of
stock they receved the mutua advantages of the company to as
great an e tent as f they had subscrbed to stock to the fu amount
of ther oans, wth the addtona rght or opportunty of payng
ther oans n fu at any tme. Upon consderaton of a the ev-
dence presented, ths offce s of the opnon that ths contenton s
we founded.
Snce 190- the stockhoders of the company have receved dvdends
on ther stock, rrespectve of knd, at the unform rate of 5 per cent,
whe the usua rate of nterest charged to borrowers was unformy
per cent. Generay, borrowers were requred to make reguar
monthy payments, equa n amount to the monthy nstaments they
woud have had to pay upon subscrptons to stock equa to the fu
amount of ther oans. These perodca payments by borrowers, to
the e tent that they e ceeded the nstaments due on the stock actu-
ay subscrbed for, was credted to the account of the borrowers unt
the credts reached the sum of 100, when they were used as offsets to
reduce the prncpa of the oans. Pror to the reducton of a oan
the baance to the borrower s credt drew nterest at 5 per cent,
whch was the same rate of return the borrower woud have re-
ceved as a dvdend f the baance had been used n part payment
for addtona nstament stock. urthermore, when a borrower s
credts totaed 100, and were used to reduce the oan, the borrower,
whe gvng up the further rght to receve 5 per cent on the ba-
ance to hs credt, actuay benefted by the transacton by beng
reeved pro tanto of hs obgaton to pay per cent nterest on the
fu amount of hs oan. e thus profted to the e tent of 1 per
cent on the amount pad n, savng nterest at per cent on that
amount by foregong the rght to receve a 5 per cent return on a
smar amount.
In connecton wth the fact that most of the borrowng members
of the company subscrbed to ony a nomna amount of nstament
stock, t s mportant to note that these borrowng members were
unformy gven the opton to subscrbe for such number of shares
as they desred up to the amount of ther oans, and t was apparenty
because they shared n the profts on a bass equay as benefca as
f they were arger stockhoders that they subscrbed to ony a
nomna amount of nstament stock.
s of December 31, 1922, the company s abty for deposts was
equa to appro matey one-haf of the par vaue of ts outstandng
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2 9
231, rt. 15.
capta stock. Concernng the acceptance of these deposts, the sec-
retary of the company, n an affdavt, states:
The assocaton has 90 nonmember savngs book depostors who have on
depost about 40 doars. These accounts -were opened years ago and ths
form of depost has been practcay dscontnued.
The company aso has outstandng certfcates of deposts n favor of non-
members to the e tent of 32 | doars. In recent years ony a sma number
of these certfcates have been ssued and they to those of our patrons who pre-
vousy hed them. These nonmember depostors and certfcate hoders receve
4 per cent per annum.
It s further stated that the money receved from these deposts
was used for makng oans to members on rea estate securty. That
the proft made from oanng such funds was shared n by the bor-
rowng members on an equa bass wth nonborrowng members has
aready been demonstrated. In the absence of such a showng the
company woud ceary be ta abe, for a budng and oan assoca-
ton whch accepts deposts and oans the funds, so obtaned, to
others, thereby makng a proft whch s not n effect shared wth
a the borrowers on the bass of the amounts, ess nterest, pad by
them to the assocaton, s carryng on an ordnary bankng busness
for proft, and s sub|ect to ta accordngy.
The remanng feature for consderaton concerns the accumua-
ton by the company of ts reserve and undvded profts. The aws
of Z requre that n the case of a permanent or perpetua budng
and oan assocatons at east 5 per cent of the annua net earnngs
sha be set asde each year n a reserve fund unt t reached at east
5 per cent of the tota assets. osses are to be pad out of such
fund unt t s e hausted, and f the amount n the fund fas be-
ow 5 per cent of the assets, t s to be repenshed by annua appro-
natons of at east 5 per cent of the annua net earnngs unt the
und agan amounts to 5 per cent of the assets. Such fund s for the
soe purpose of provdng aganst osses dvdend payments and e -
penses must be pad out of earnngs. In the nstant case the company
never added to ts reserve n any snge year more than 5 per cent of
the net earnngs. Such reserve, whch s not avaabe for dvdend
dstrbutons, amounts to consderaby ess than 5 per cent of the
assets. The company aso has a reatvey sma undvded profts
fund whch t mantans for the purpose of stabzng the dvdend
rate. Such fund s ess than the ma mum amount prescrbed by aw,
whch s 3 per cent of the tota assets of the company. The sum of
the reserve pus the undvded profts s equa to appro matey 10
per cent of the outstandng capta stock. Nether the reserve nor
the undvded profts fund was avaed of as a means of accumuatng
the profts of the company for the future beneft of arge stockhod-
amount of stock.
It s stated that snce the present nqury nto the queston of the
company s status as an e empt organzaton the company as re-
qured every new appcant for a oan to subscrbe for nstament
stock to the fu amount of the oan.
In vew of the foregong, t s concuded that the M Company s a
true domestc budng and oan assocaton, operated on a mutua
bass and prmary for the beneft of ts borrowng members, sub-
stantay a the busness of whch s confned to makng oans to
subscrbng to ony a nomna
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231, rt. 517. 270
members, and, accordngy, that the company s entted to e empton
from ta aton under secton 231(4) of the Revenue cts of 1918 and
1921.
Neson T. artson,
Soctor of Interna Revenue.
rtce 517: Regous, chartabe, scentfc, III-2-1301
terary, and educatona organzatons and I. T. 190
communty chests.
R NU CTS O 1918 ND 1921.
corporaton whch s operated as a bona fde, nonproft, edu-
catona nsttuton shoud not be dened e empton under artce
231( ) of the Revenue cts of 1918 and 1021 merey because the
stockhoders may share n the assets upon dssouton, ncudng
renvested earnngs.
Reference s made to the case of the M organzaton, nvovng ts
rght to e empton from ta aton under secton 231( ) of the Rev-
enue cts of 1918 and 1921 as an educatona nsttuton no part of
the net earnngs of whch nures to the beneft of any prvate stock-
hoder or ndvdua.
It appears that the M organzaton was ncorporated n 19 , for
the purpose of estabshng a nonsectaran mtary academy for the
educaton and tranng of boys preparatory to enterng the best
unverstes of the Unted States, and ncdentay thereto to gve
promnence to gymnastc, mtary, nava, and manua tranng that
snce ts organzaton t has constanty e ercsed such powers that
a the net earnngs of the corporaton are used entrey n provdng
budngs and equpment for proper housng, nstructon, and care
of students that none of the stockhoders has ever receved any-
thng by way of dvdends or otherwse on hs or her shares of
stock and that such pocy has had the undvded approva of a
concerned and w reman unchanged n the future conduct of the
nsttuton.
On such a showng ths offce s of the opnon that the fact that
the stockhoders may procure the beneft of the captazaton of the
earnngs of the corporaton s not suffcent to prevent t from beng
hed to be e empt under the provsons of the statute here n ques-
ton.
rtce 517: Regous, chartabe, scentfc, III 7-1307
tearary, and educatona organzatons and T. D. 3348
communty chests.
INCOM T CT O OCTO R 3. 1913 D CISION O SUPR M COURT.
1. Income Regous Corporaton empton.
regous corporaton whch receves ncome from the rent
of rea property, dvdends from stock ownershp n prvate cor-
poratons, and nterest on money oaned, s e empt from ncome
tu under the provsons of Secton II O of the ct of October 3,
1013, where a of the ncome Is hed and used for carryng ou
Its work.
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231, rt. 517.
2. Same.
Dervng ncome from the sae of wne, chocoate, and other art-
ces does not amount to engagng n trade where prott s a neg-
gbe factor, saes are not made to the pubc or n competton
wth others, and the artces are bought and supped for use
wthn the organsaton, ether for regous purposes or ucdeuta
to the work carred on.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To coectors of nterna revenue and others concerned:
The foowng decson of the Supreme Court of the Unted States
n the case of W. Trndad, nsuar coector, v. Sagrada Or den de
Predcadores, etc., s pubshed for the nformaton of nterna-
revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 9,1924.
. W. Meon,
Secretary of the Treasury.
Supreme Court of the Unted States. No. S3. Octobek Term, 1923.
W. Trndad, nsuar coector, v. Sagrada Orden de Predcadores, etc.
On wrt of certorar to the Supreme Court of the Phppne Isands.
unuary 14, 1924.
Mr. ustce an Devanter devered the opnon of the court.
Ths was an acton to recover money pad under protest as a ta on ncome.
The pantff prevaed n the Phppne courts, both tra and appeate
(42 Ph., 397), and the case Is here on certorar (2 0 U. S., 7f).
The ta was eved under paragraphs (a) and M of Secton II of the ct
of October 3, 1913 (ch. 1 , 38 Stat., 172, 180), requrng every corporaton, not
wthn defned e ceptons, to pay an annua ta , computed at a specfed rate,
on ts entre net Income from a sources. The e ceptons covered, among
others, any corporaton organzed and operated e cusvey for repous,
chartabe, scentfc or educatona purposes, no part of the net ncome of
whch nures to the beneft of any prvae stockhoder or Indvdua. The
pantff nssted t was wthn ths e cepton, and the Phppne courts so
rued.
The case was heard on a stpuaton statng:
That the pantff s a corporaton soe consttuted under sectons 154 to ,
1 4 of art No. 1459 of the Phppne Commsson, and s organzed and op-
erated for regous, benevoent, scentfc, and educatona purposes n these
sands and n ts mssons In Chna, Cochnchna, and apan, and that nether
Us net Income nor part of ts rents from whatever source t may come s ap-
ped to the beueft of any partcuar stockhoder or ndvdua, or of any of ts
members, and that no part of the whoe or of some of Its tempora propertes
beong to any of ts members, who have no rghts to the same, even n case of
dssouton of the corporaton.
That the dvdends and Interests or profts and e penses whch appear n
hbt 1 of the defendant as the ncome of the pantff consttute the ncome
derved from the Investments of the capta of the pantff corporaton, whch
was Invested, n the year 1913, neary n the manner and form s eefed n
hbt 2 of the defendant, and that the rents appearng n hbt 1 were
derved from the propertes whch together wth ther vauatons appear n
hbt 3 of the defendant.
The second pnragraph of the stpuaton s rather obscure and the e hbts are
n a very condensed form, but a are eucdated by the opnons beow and the
brefs here. They mean, when read wth these ads, that the pantff as
targe propertes n the Phppnes, consstng of rea estate, stocks n prvate
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231, rt. 517.
272
corporatons, and money oaned at Interest, a of whch are hed and used
as sources from whch to obtan funds or revenue for carryng on ts regous,
chartabe, and educatona work that the buk of ts ncome conssts of rents,
dvdends, and nterest derved from these propertes that the rest of ts
ncome s reatvey sma and comes from ams for mass, profts from occasona
saes of some of ts stocks, and sums receved, In e cess of cost, for wne,
chocoate, and other artces purchased and supped for use n ts churches,
mssons, parsonages, schoos, and oter subordnate agences. The proportons
n whch these severa tems contrbuted to ts ncome for the year covered by
the ta n queston are shown n the margn.1
The defendant concedes that the pantff s organzed and operated for
regous, chartabe, and educatona purposes and that no part of ts net n-
come nures to the beneft of any stockhoder or ndvdua, but contends that
t s not operated e cusvey for those purposes, and therefore s not wthn
the e cepton n the ta ng ct. Stated In another way, the contenton s that
the pantff s operated aso for busness and commerca purposes n that t
uses ts propertes to produce ncome, and trades n wne, chocoate, and other
artces. In effect, the contenton puts asde as mmatera the fact that the
ncome from the propertes s devoted e cusvey to regous, chartabe, and
educatona purposes, and aso the fact that the mted tradng, f t can be
caed such, s purey Incdenta to the pursut of those purposes, and s n no
sense a dstnct or e terna venture.
Whether the contenton s we taken turns prmary on the meanng of
the e ceptng cause, hefore quoted from the ta ng ct. Two matters ap-
parent on the face of the cause go far toward settng ts meanng. rst,
t recognzes that a corporaton may be organzed and operated e cusvey
for regous, chartabe, scentfc, or educatona purposes, and yet have
a net ncome. Ne t, t says nothng about the source of the ncome, but
makes the destnaton the utmate test of e empton.
vdenty the e empton s made n recognton of the beneft whe the
pubc derves from corporate actvtes of the cass named, and s ntended
to ad them when not conducted for prvate gan. Such actvtes can not
be carred on wthout money and t s common knowedge that they are
argey carred on wth ncome receved from propertes dedcated to ther
pursut. Ths s partcuary true of many chartabe, scentfc, and educa-
tona corporatons and s measuraby true of some regous corporatons.
Makng such propertes productve to the end that the ncome may be
thus used does not ater or enarge the purposes for whch the corporaton
s created and conducted. Ths s recognzed n Unverstu v. Peope (99
T. S., 309. 324), where ths court sad: The purpose of a coege or un-
versty s to gve youth an educaton. The money whch comes from the
sae or rent of and dedcated to that ob|ect ads ths purpose. Land so
hed and eased s hed for schoo purposes, n the fuest and cearest sense.
To the same effect s Methodst p copa Church, South v. nton (92
Term., 188, 2( ). nd n our opnon the e ceptng cause, taken accordng
to ts etter and sprt, proceeds on Ibs vew of the sub|ect.
The pantff, beng a corporaton soe, has no stockhoders. It s the
ega representatve of an ancent regous order the members of whch
have, among other vows, that of poverty. ccordng to the Phppne aw
under whch t s created, a of ts propertes are hed for regous, chartabe,
and educatona purposes and accordng to the facts stpuated t devotes
and appes to those purposes a of the ncome rents, dvdends, and nterest
from such propertes. In usng the propertes to produce the ncome, t
therefore s adherng to and advancng those purposes, and not steppng asde
from them or engagng n a busness pursut.
s respects the transactons n wne, chocoate, and other artces, we
thnk they do not amount to engagng n trade n any proper sense of the
term. It s not camed that there s any seng to the pubc or n competton
wth others. The artces are merey bought and supped for use wthn
the pantff s own organzaton and agences some of them for strcty
regous use and the others for uses whch are purey ncdenta to the
work whch the pantff s carryng on. That the transactons yed some
Pesos.
1 Rent 90, 092. 70
Dvdends 90. 405. 54
Interest 54, 2. 0. 10
Sae of stocks 2.10. 80
bae of wne ,711.13
Sae of chocoate
Sae of other artceS-
ms for mass
Pesos.
3,219.21
1, 49. 10
. 4-r.. 00
254, 702. 9
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231, rt. 5)7.
proft s In the crcumstances a neggbe factor. nanca gan Is not te
end to whch they are drected.
Our concuson s that the pantff s organzed and operated e cusvey
for regous, chartabe, and educatona purposes wthn the meanng of the
e ceptng cause. udgment affrmed.
rtce 517: Regous, chartabe, scentfc, III 11 1417
terary, and educatona organzatons and 1. T. 1945
communty chests.
R NU CTS O 1018 ND 192 .
corporaton formed to dspense charty whch does not actuay
engage n chartabe undertakngs tsef but dstrbutes ts ncome to
nsttutons organzed and operated e cusvey for the purposes
named n subdvson ( ) of secton 231 s e empt from ta aton un-
der sad secton.
Offce Decson 872 C. . 4, 2 4) rescnded n so far as nconsstent
herewth.
rtce 517: Regous, chartabe, scentfc, 111-20-1557
terary, and educatona organzatons and S. M. 183
communty chests.
R NU CT O 1021.
The amy ssocaton s organzed In part to pay the
e pense of educaton of members of the famy and to furnsh
pecunary ad to needy members thereof. These ob|ects are man-
festy prvate and wthout pubc aspect. The persons to be bene-
fted are the members of the famy. The terms educatona
and chartabe, as used n the Revenue ct of 1921, carry the
mpcaton of pubc utty. Where the purpose of an organza-
ton s persona, prvate, or sefsh, t s not n the ega sense
educatona or chartabe. In other words, t s ony where the
purpose accompshed s that of pubc usefuness, unstaned by
persona, prvate, or sefsh consderatons, that an organzaton
can cam e empton on the ground that t s organzed and oper-
ated e cusvey for educatona and chartabe purposes.
n opnon s requested as to whether the amy ssocaton
s an e empt organzaton wthn the provsons of secton 231 of
the Revenue ct of 1921.
The evdence of record shows that the amy ssocaton was
organzed n 191- under the membershp corporatons aw of the
State of New York (Conso. Laws, ch. 35) by seven members of the
famy. Ony nea descendants of one are egbe to mem-
bershp n the assocaton, and then ony f approved by a concurrng
vote of not ess than fve of the seven drectors. The prncpa
ob|ects for whch the assocaton was formed, as decared by the
artces of ncorporaton, are:
To pay the e pense of preparatory, coegate, and professona educaton
or other sutabe educaton for such members of the fanty as may be desg-
nated and approved by at east fve drectors of the corporaton.
To furnsh pecunary ad, e cusve of oans, to such poor and needy mem-
bers of the famy as may be desgnated and approved by at east fve
drectors of the corporaton.
To receve and hod, coect and preserve, famy portrats and herooms
of the famy, and matter connected wth the hstory of that famy am
documents and books reatng to the famy, wth power to add to and pubsh
the same and to desgnate and mantan a pa e of depost for recevng,
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23 , rt. 517.
274
hodng, coectng, preservng, and e hbtng these portrats, herooms, and
matter connected wth the hstory of the famy, and documents and books as
an undvded coecton.
To care for and mantan, Improve, and embesh such bura ots or paces
n cemeteres, ncudng the waks, fences, monuments, structures, and tombs
thereon, n whch are nterred members of the famy as sha be desgnated
and approved by at east ve drectors of the corporaton, provded that at
east one such bura ot or pace sha aways be cared for, mantaned, m-
proved, and embeshed by the corporaton.
To support, mantan, and educate a person or persons other than a member
or members of the famy, and to contrbute toward the mantenance of
educatona nsttutons otherwse than for the educaton of members of the
famy, and to contrbute to chartabe and benevoent uses and to regous
purposes, as from tme to tme the board of drectors sha deem proper and
desrabe provded, however, that no such acton as specfed n ths secton
sha be taken uness e pressy authorzed by the by-aws of the corporaton
and then ony by the concurrng vote of a and at east seven drectors.
The rea founder of the assocaton, , ded on November , 191-,
eavng a ast w and testament by whch he devsed and bequeathed
to the. assocaton rea and persona property of consderabe vaue.
estate and shares of the common stock of a certan busness corpora-
ton. The gross recepts for 1022 are gven as doars. Ths
amount was e pended prncpay n the upkeep of the property of
the assocaton, n repayng to prncpa certan oans prevousy
made, and n donatons for the educaton of the chdren of members
of the famy. Durng 1923 the funds of the assocaton were
used for smar purposes, and n addton a dsbursement was made
to an edery woman n need. ven that payment was to a member
of the famy. It thus appears that the assocaton has mted
ts ad and servces strcty to the famy, as t s compeed to do
under ts artces of ncorporaton e cept where every one of ts
seven drectors concurs n votng a contrbuton for puposes out-
sde the famy.
Secton 231 of the Revenue ct of 1921 provdes for the e empton
of certan casses of organzatons from edera ncome ta es. Sub-
dvson (C) of that secton enumerates as one of the e empt casses:
Corporatons, and any communty chest, fund, or foundaton, organzed am
operated e cusvey for regous, chartabe, scentfc, terary, or educatona
purposes, or for the preventon of cruety to chdren or anmas, no part of
the net earnngs of whch nures to the beneft of any prvate stockhoder or
ndvdua
mere readng of the other subdvsons of the same secton s
suffcent to show that the assocaton n queston does not fa wthn
any of the casses theren specfed. t the ora hearng granted
the ta payer before ths offce, the ony argument advanced was n
support of the proposton that the assocaton was organzed and
operated e cusvey for educatona and chartabe purposes.
Two of the prncpa ob|ects of the assocaton, above set forth,
are brefy, (a) to receve and hod, coect and preserve, famy por-
trats and herooms of the famy and (b) to care for and man-
tan, mprove, and embesh desgnated bura ots n whch are
nterred members of the famy. These purposes are nether edu-
catona nor chartabe wthn the meanng of secton 231 of the
Revenue ct of 1921.
Nether are the frst two ob|ects set forth n the artces of ncor-
poraton of the assocaton educatona and chartabe wthn the
Incuded
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231, rt. 518.
meanng of the statute. These ob|ects are manfesty prvate and
wthout pubc aspect. The persons to be benefted are the members
of the famy. The terms educatona and chartabe, as
used n the Revenue ct of 1921, carry the mpcaton of pubc ut-
ty. Where the purpose of an organzaton s persona, prvate, or
sefsh, t s not n the ega sense educatona or chartabe. In other
words, t s ony where the purpose accompshed s that of pubc
usefuness, unstaned by persona, prvate, or sefsh consderatons,
that an organzaton can cam e empton on the ground that t s
organzed and operated e cusvey for educatona and chartabe
purposes. (Matter of MacDowe, 217 N. Y., 454, 112 N. . 177
.Matter of Shattuck s W, 193 N. Y., 44 , 8 N. ., 455 ent v.
Dunham, 142 Mass., 21 ,7 N. ., 730 . R. R. 477, C. . 4, 2 4.)
The New York Court of ppeas n a carefuy consdered opn-
on has heretofore dened the contenton that such an organzaton
s a chartabe corporaton. The court hed that a prvate and per-
sona purpose permeated the whoe of such an organzaton that t
was not a chartabe corporaton, and, accordngy, that t was not
entted to the benefts of secton 221 of the New York ta aw,
whch enacts that property devsed or bequeathed to any regous,
educatona, brary, chartabe, mssonary, benevoent, hospta, or
nfrmary corporaton sha be e empt from the ta mposed by sec-
ton 220 of the ta aw upon the transfer of property by w or
ntestate aw.
Ths offce, therefore, s of the opnon that the amy ssoca-
ton s not entted to cassfcaton as an organzaton e empt from
ta aton under the provsons of secton 231 of the Revenue ct of
1921.
Neson T. aktson,
Soctor of Interna Revenue.
rtce 518: usness eagues. III-7-13 5
L. 0.1121
INCOM T C PIT L-STOC T MPTIONS R NU CTS O 1010,
1918, ND 1921.
Sectons 11 and 407 of the Revenue ct of 1010.
Sectons 231(7) and 1000(c) of the Revenue ct of 1918.
Secton 281(7) and 1000(b) of the Revenue ct of 1921.
usness eagues, chambers of commerce, and boards of trade
wthn the meanng of secton 231 of the Revenue ct of 1921 are
organzatons of the same genera cass havng for ther prmary
purpose the promoton of busness wefare.
stock e change s a vountary assocaton, usuay unncorpo-
rated, of persons who, for convenence n the transacton of bus-
ness wth each other, have assocated themseves to provde a com-
mon pace and factes for the conduct, of ther busness, and s not
a busness eague, chamber of commerce, or board of trade wthn
the meanng of secton 231 of the Revenue ct of 1921.
The true character of an organzaton must be determned from
the actvtes n whch t engages and not from ts name, and the
mere fact that an organzaton s denomnated busness eague.
hoard of trade, or chamber of commerce does not make t
necessary such an organzaton as s entted to e empton under
the provsons of secton 231(7) of the Revenue ct of 1921.
Statutes e emptng from ta aton must be strcty construed.
The M change, the N Company, the O Company, the P Com-
pany, and the Company are not e empt from the payment of
capta-stock ta es and ncome and profts ta es for the years 1917
to 1921, ncusve,
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23 , rt. 518.
27
The opnon of ths offce has been requested as to whether the M
change, the N Company, the O Company, the P Company, and
the Company are e empt from the payment of capta-stock ta es
and ncome and profts ta es for the years 1917 to 1921, ncusve.
The M change s a vountary unncorporated assocaton and re-
suted from a consodaton n 18 , of the change, the
, and the S . The contract of assocaton s known as the
consttuton of the e change, and s requred to be sgned by
everyone who becomes a member. The ob|ect of the M change
s decared by ts consttuton to be as foows:
Its ob|ect sha be to furnsh e change rooms and other factes for the con-
venent transacton of ther busness by ts members, as brokers to mantan
hgh standards of commerca honor ard ntegrty among ts uen ers and to
promote and ncucate |ust and equtabe prncpes of trade and busness.
The orgna membershp was . bout 18 the membershp
was ncreased to . nonmember secures membershp by pur-
chasng the membershp, aso caed seat, of some deceased or retr-
ng member, and by beng eected by the affrmatve vote of two-
thrds of the entre commttee on admssons. In 192- seats sod as
hgh as a seat. Members admtted by transfer are requred to
pay an ntaton fee of , and annua dues n an amount not
to e ceed .
gratuty fund s mantaned by the e change and s admnstered
by a board of trustees, known as Trustees of the gratuty fund,
and consstng of the presdent and the treasurer of the e change and
of fve other trustees chosen for a term of fve years. very person
who becomes a member of the e change s requred to pay to the
trustees of the gratuty fund the sum of y doars before he s ad-
mtted to the prvege of membershp. Upon the death of a member
there s eved and assessed aganst every other member the sum
of y doars. The fath of the e change s pedged to pay to certan
specfed benefcares wthn one year after proof of the death of
any member, out of the gratuty fund, the sum of - , or so much
thereof as may have been coected. The sums so pad are stated
by the consttuton to be gratutes from the other members of the
e change, free from a debts, charges, or demands whatever. It
s provded by the consttuton that the trustees of the gratuty fund
sha pay over to the treasurer of the e change the net ncome whch
has been receved as nterest on the fund durng each year, ess the
necessary e penses of management and dstrbuton, and that each
member of the e change sha be credted wth hs proporton of the
amount n reducton of the payments due from hm to the gratuty
fund. The consttuton further provdes that there sha be credted
annuay to each member of the e change, n reducton of payments
due from hm to the gratuty fund, hs proporton of the surpus
ncome of the e change, after settng apart such sum as the govern-
ng commttee sha determne to be necessary for conductng the
busness of the e change.
The e change owns the entre capta stock of the N Company, the
O Company, the P Company, and the Company. In addton
to the stocks of the companes |ust mentoned, t appears from the
baance sheet of the e change under date of pr , 192-, anne ed
to the consodated corporaton ncome and profts ta return fed
for the fsca year ended pr 30, 1921, whch t s beeved may be
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231, rt. 518.
taken as fary representatve of the stuaton durng the perods
n queston, that the e change owned nvestment securtes n the
amount of 0a doars. The baance sheet aso shows that the
e change had cash n the amount of .59a doars, accounts recev-
abe n the amount of 4.48.r doars, and bonds of subsdary com-
panes n the amount of .4a doars, makng tota assets of 10 .42 :
doars, as aganst abtes n the amount of 37.38 # doars, rep-
resentng accounts and notes payabe. It accordngy appears that
at that tme the e change had a surpus n the amount of 9.04a
doars.
Revenue s derved bv the e change from a varety of sources,
among whch are the foowng: Dues ntaton fees payments to
gratuty fund fnes fees for metac push servce, whch represents
payments made by members of the e change for use of emmcator
boards fees for messenger servce teephone cerks tckets rentas
from members for teephone space fees pad by members for the
regstraton of branch offces payments from the T Company and
the U Company for quotatons monthy wre charges to members
stng fees pad by corporatons for the prvege of havng ther
securtes sted on the e change payments from the P Company for
quotatons supped to members nterest and dvdends on nvest-
ment securtes owned by the e change and dvdends from sub-
sdary companes. The prncpa e penses of the e change are the
foowng: Pay ro, genera e pense, compensaton of offcers, repars,
nterest, ta es, and rent.
The e change not ony provdes factes to members for the trans-
acton of ther busness as brokers, but t aso supervses and reguates
n the mnutest deta the busness transactons of the members of the
e change wth each other. Supervson and reguaton are effected
argey through certan standng commttees, whch functon under
the genera drecton of the governng commttee. mong these
commttees are the commttee of arrangements, whch has the genera
care and supervson of the e change, together wth the enforcement
of a rues and reguatons necessary to the conduct of busness, to
good order, and to the comfort of the member the commttee on ad-
mssons, whch acts upon a appcatons for membershp the arb-
traton commttee, whch nvestgates and decdes a cams and
matters of dfference arsng from contracts sub|ect to the rues of
the e change the commttee on busness conduct, whch consders
matters reatng to the busness conduct of members wth respect to
customers accounts and the commttee on stock st, whch revews
and consders a appcatons for pacng securtes upon the st of
the e change. Under the consttuton, ony members are permtted
to conduct busness on the e change, and members are prohbted from
deang upon the e change e cept durng the hours when the e -
change s offcay open for busness. Deang upon any other e -
change n the cty of or pubcty outsde of the e change, ether
drecty or ndrecty, n securtes sted or quoted on the e change s
forbdden. Ony those securtes whch have been offcay sted by
the e change are permtted to be deat n upon the e change. The
consttuton prescrbes n deta the mnmum commssons whch
sha be charged and pad, under a crcumstances, upon a purchases
or saes of securtes deat n upon the e change.
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5231, rt. 518.
278
The N Company was orgnay organzed n 18 , wth a capta
of Oz doars, whch n 18 was ncreased to 14.2 doars. The
orgna stockhoders were members of the change. In 18
the M change donated 12.4s doars to the company. In 18 the
e change bought the entre capta stock of the company for 2 3
doars. The prncpa asset of the company s the budng used
by the e change. Durng the years 192 192 that part of the
budng on the corner was erected. The company eases to the
e change the entre stores and a other parts of the budng
requred for the mmedate use of the e change. T e terms of the
ease are that the e change w pay the company an amount whch,
together wth the revenues t derves from other sources, w be
suffcent to cover the entre e penses of the company, ncudng n-
terest and ta es, and n addton w enabe t to pay per cent
dvdends on ts stock. The company aso eases e tensve quarters
to (e Company and eases to the O Company the premses occu-
ped by that company. The prncpa revenues of the company are
derved from the eases mentoned and from eases to outsders of
suc h portons of ts propertes as are not requred for the use of the
e change and ts subsdares. Parts of the and stores
of the addton and a of the stores of the addton above the
are eased to outsders.
The O Company was organzed n IS) , wth a capta of
4a doars, for the purpose of takng over safe-depost vauts and
saes n the budng. The entre capta stock of the company s
owned by the M change. It eases safes to subscrbers and pays
over ts net earnngs n the form of dvdends to the e change. The
subscrbers to whom safes or safe-depost bo es are eased ncude
both members and nonmembers of the e change.
The 1 Company was organzed n 18 . The M change
|ust after the organzaton of the company purchased a ma-
|orty of ts capta stock. In 190- the baance of the capta stock
was purchased. The property of the company conssts prncpay
of a pant for the operaton of quotaton tckers, wres n conduts,
and quotaton tckers. The ony quotatons that t transmts are
the quotatons of the e change and the ony peope to whom they a-e
transmtted are members of the e change n a certan ocaty. The
company charges members of the e change a certan amount per
month per tcker and pays to the e change a certan amount per
month per tcker.
The Company was organzed n 19 , and the entre capta
stock s owned by the M change. The corporaton s a credt
agency desgned to effect the cearance of saes and oans of secur-
tes for such members of the e change who choose to ava themseves
of ts servces. Tt appears thnt n 192- there were about mem-
bers of the e change who avaed themseves of the factes of the
corporaton. The funds of the corporaton, whch are deposted as
an ever-qud fund, payabe on demand, n such bankng estabsh-
ments as ordnary hande brokers accounts, are, provded from the
cearng fund, to whch members of the e change contrbute n
proporton to the e tent to whch thc empoy the corporaton s
servces. cearance charge s made on the money vaue of such
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231, rt. 518.
securtes as are ceared, and these charges, together wth fnes m-
posed for faure to compy wth the reguatons of the e change n
regard to cearances, consttute the prncpa source of revenue of
the corporaton.
ach of the severa revenue cts coverng the years n queston
provdes that the capta-stock ta theren mposed sha not appy
to corporatons e empt under the provsons of the ct reatng to
ncome ta es. Secton 407, Revenue ct of 191 secton 1000(c),
Revenue ct of 1918 and secton 1000(b), Revenue ct of 1921.
The provsons of the severa cts reatve to e emptons from n-
come ta es are found n secton 11 of the Revenue ct of 191 and n
secton 231 of the Revenue ct of 1918 and the Revenue ct of 1921.
The ony possbe cassfcaton of e empt organzatons wthn whch
the organzaton n queston mght be consdered as fang s that
reatng to busness eagues, chambers of commerce, and boards of
trade. The provsons of the severa revenue cts reatng to that
cass are substantay dentca.
Secton 231(7) of the Revenue ct of 1921 provdes as foows:
That the foowng organzatons sha be e empt from ta aton under ths
tte
(7) usness eagues, chambers of commerce, or hoards of trade, not or-
ganzed for proft and no part of the net earnngs of whch nures to the
beneft of any prvate stockhoder or Indvdua.
In the consderaton of the queston presented t s necessary to
determne what s meant by the e presson busness eagues, cham-
bers of commerce, or boards of trade, as found n secton 231 of
the Revenue ct of 1921. It s a fundamenta rue of statutory
constructon that words n common use are to be construed n ther
natura, pan, and ordnary sgnfcaton. The term busness
eague has been defned by the Department as an assocaton of
persons havng some common busness nterest, whch mts ts
actvtes to work for such common nterest and does not engage
n a reguar busness of a knd ordnary carred on for proft.
rtce 518, Reguatons 2 (1922 edton). Ths defnton s n
accord wth the we-accepted meanng of the term. Webster s New
Internatona Dctonary defnes a eague as n agreement or
covenant between two or more natons, partes or persons, for the
accompshment of some purpose by ther cooperaton, as for mutua
defense, or for furtherance of commerca, regous or potca
nterests, etc. aso, the aance or combnaton so formed, or the
partes to t taken coectvey a confederacy.
The terms board of trade and chamber of commerce do not
appear to have been at any tme defned by the Department. ow-
ever, those terms have a common and we-accepted meanng, and
defntons are to be found n the dctonares. ccordng to Web-
ster s New Internatona Dctonary, a board of trade, n the Unted
States, s a body of men apponted for the advancement and pro-
tecton of busness nterests, and a chamber of commerce s a board
or assocaton to protect the nterests of commerce, chosen from
among the merchants and traders of a cty. The same authorty
states that the term chamber of commerce s by some dstnc-
tvey used of the bodes that are nterested n the protecton of
genera commerca nterests, especay n connecton wth foregn
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231, rt. 518.
280
trade, and board of trade of those deang prmary wth oca
commerce. Substantay the same defnton s to be found n
ouver s Law Dctonary, where t s stated that a chamber of
commerce s a socety of the prncpa merchants and traders of a
cty who meet to promote the genera trade and commerce of the
pace. The terms board of trade and chamber of commerce
appear n (her ordnary acceptaton to be practcay synonymous.
It s undoubtedy true that those terms are sometmes used wth
reference to organzatons of a somewhat dfferent nature than those
whch meet the defntons referred to above. Thus ack s Law
Dctonary refers to a chamber of commerce as an assocaton whch
may or may not be ncorporated, comprsng the prncpa merchants,
manufacturers, and traders of a cty, desgned for convenence n
buyng, seng, and e changng goods, and to foster the commerca
and ndustra nterests of the pace. It s to be observed that the
defnton contaned n ack s Law Dctonary s consderaby
broader than the other defntons referred to above, and suggests
that the term s sometmes used to desgnate organzatons whch
provde convenences or factes to certan persons n connecton
wth buyng, seng, and e changng goods. Ths defnton of the
term s undoubtedy broad enough, to ncude a certan cass of
organzatons, ordnary known as stock e changes, whose purposes
and actvtes appear to be materay dfferent from those organ-
zatons ordnary denomnated as boards of trade and chambers of
commerce. ouver s Law Dctonary defnes a stock e change as
a vountary assocaton, usuay unncorporated, of persons who, for
convenence n the transacton of busness wth each other, have
assocated themseves to provde a common pace for the transacton
of ther busness.
The fact that the e pressons board of trade and chamber of
commerce are sometmes used to ndcate organzatons of a df-
ferent character s further ustrated by reference to secton 1001
of the evenue ct of 1921, whch provdes that f a broker s
a member of a stock e change, or f he s a member of any produce
e change, board of trade, or smar organzatons, where produce or
merchandse s sod, he sha pay certan addtona occupatona
ta es. It s obvous that as used n secton 1001 the terms stock
e change and board of trade refer to organzatons whch
mantan paces and factes for the sae and e change of securtes,
produce, or merchandse by ther members.
n e amnaton of secton 231 n entrety w dscose that wth
the possbe e cepton of those organzatons referred to n sub-
dvsons 12, 13, and 14, a of the organzatons theren enumerated
are wefare organzatons. Indeed, that suggests the very reason
and bass for ther e empton. Under the we-estabshed ma m
nosctur a socs, the meanng of a word used n a statute must be
construed n connecton wth the words wth whch t s assocated.
though t .s undoubtedy true, as stated n artce 518 of Regua-
tons 2, that a busness eague does not need to be smar n a
respects to a chamber of commerce or board of trade, nevertheess
t appears under the accepted prncpes of statutory constructon
that Congress must have used the e pressons busness eagues,
chambers of commerce, and boards of trade to ndcate organza-
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281
5231, rt. 521.
tons of the same genera cass, havng for ther prmary purpose the
promoton of busness wefare. though t may be true that stock
e changes ncdentay contrbute to the promoton of busness we-
fare and ndrecty contrbute to busness prosperty, nevertheess
ther prmary purpose s to afford factes to a mted cass of
peope for the transacton of ther prvate busness. Therefore,
stock e changes are not busness eagues, chambers of commerce, or
boards of trade wthn the meanng of secton 231.
It shoud be observed that the Supreme Court of the Unted States
n the case of Unted States v. mery. rd, Thayer Reaty Com-
pany (237 U. S., 28), havng under consderaton the queston whether
or not the appeee was dong busness wthn the meanng of the
corporaton ta aw of 1909, stated that the queston had to be deter-
mned by what the corporaton was actuay dong rather than by
what t was empowered to do. y the same reasonng t foows that
the true character of an organzaton must be determned from the
actvtes n whch t actuay engages and not from ts name. c-
cordngy, the mere fact that an organzaton s denomnated bus-
ness eague, board of trade, or chamber of commerce does not
make t necessary such an organzaton as s entted to e empton
under the provsons of secton 231(7).
It s a we-estabshed rue that statutes e emptng from ta aton
must be strcty construed. In Chcago Theoogca Semnary v.
Inos (188 U. S., 2) the Supreme Court stated the rue as fo-
ows (p. 72) :
The rue s that, n cams for e empton from ta aton under egsatve
authorty, the e empton must he pany and unmstakaby granted t can
not e st by mpcaton ony a doubt s fata to the cam.
ppyng the concusons reached above to the fact n the specfc
cases here under consderaton, t appears that the M change,
the N Company, the O Company, the P Company, and the Com-
pany are not such organzatons as are contempated by secton
231(7) of the Revenue ct of 1921. In the opnon of ths offce
they are not e empt from the payment of capta-stock ta es and
ncome and profts ta es for the years 1917 to 1921, ncusve.
Neson T. artson,
Soctor of Interna Revenue.
rtce 521: Loca mutua nsurance com- III 11 1418
panes and ke organzatons. . R. R. 735
R NU CT O 101S.
mutua fre nsurance company whch year after year accu-
muates through assessments, very substanta amounts n e cess
of oss requrements and whch amount t uses for Income-pro-
ducng purposes s not entted to e empton under secton 231(10)
of the Uevenue ct of 1918.
The Commttee has consdered the appea of the M Mutua re
Insurance Company from the rung of the Income Ta Unt that t
s not e empt under secton 231(10) of the Revenue ct of 1918.
4177 24 19
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231, rt. 521|
Under the statutory provson, n queston one of the condtons of
e empton s that ncome sha consst soey of assessments, dues,
ard fees coected from members. The data pertnent to the app-
caton of ths provson of the statute s as foows r
101s
m
1 0
Doars.
3.725
2.9911
Doars.
7.3I0
3.497r
3.23SU
7.70
.7341
38t3
L O
.8071
1.8 4r
1.13S
u
1.4S8
.704
.72 C
.97ST
The Commttee notes that the aocaton of e penses mght be crt-
czed as unduy favorabe to the ta payer s contenton. Thus, for
e ampe, saares have been aocated equay as aganst each cass
of ncome nstead of pro rata to the amount of ncome. owever,
the Commttee s of the opnon that, even assumng the correctness
of the e pense aocaton, and ookng ony at the net fgures n each
case, the appeant does not brng tsef wthn the statute as con-
strued by artce 521 of the reguatons. though the statute re-
qures that ncome sha be soey from assessments, dues, and fees
coected from members, artce 521 provdes that the e empton may
be granted even though there be other ncome, provded such other
ncome s a mere ncdent of the busness. Obvousy such an e -
tenson of the tera provsons of the statute must be strcty con-
strued. It s the opnon of the Commttee that t can not fary be
construed to ncude such a ease as the present, where year after year
very substanta amounts are accumuated through assessments n
e cess of oss requrements and used for ncome-producng pur ses.
The ta payer rees on the case of Nes v. Insurance Compaq./ (252
ed., 5 4) (not pubshed n uetn Servce), but that case arose
under the ct of October 22, 1914, and a statutory provson whch
dd not contan the phraseoogy upon whch the present recommenda-
ton must rest. The argument s made that the fundamenta bass for
e empton s mutuaty and that where that bass e sts e empton
shoud not be defeated by reason of other consderatons. That argu-
ment mght very fary be addressed to the egsature but can not
|ustfy an admnstratve bureau n whoy dsregardng a condton
whch the egsature has seen ft to mpose n e pct and unambgu-
ous anguage.
ccordngy, the Commttee recommends that the acton of the
Income Ta Unt be sustaned and the appea dened.
Chares D. amet,,
Charman Commttee on ppeas and Revew.
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283
231, rt. 521.
trcc 521: Loca mutua nsurance com-
panes and ke organzatons.
111-15-1500
T. D.3581
rtce 521, Reguatons No. 45 (1920 edton), and artce 521,
Reguatons No. 2, amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To coectors of nterna revenue and others concerned:
rtce 521, Reguatons No. 45 (1920 edton), and artce 521,
Reguatons No. 2, are hereby amended to read as foows:
rt. 521. Loca mutua nsurance companes and ke organzatons. It s
necessary to e empton that the ncome of the company be derved soey from
assessments, dues, and fees coected from members. If ncome s receved
fwm other sources, such as f ed cash premums, the corporaton s not e empt,
even though ts addtona ncome s ta e empt. Income, however, from
sources other than those specfed does not prevent e empton where ts recept
s a mere ncdent of the busness of the company. Thus the recept of nterest
upon a workng bank baance, or of the proceeds of the sae of badges, offce
suppes, or equpment, w not defeat the e empton. The same s true of the
recept of nterest upon Lberty bonds, where they were purchased as a patrotc
duty and were afterwards sod. Where, however, such bonds are bought as a
permanent nvestment, the recept of the nterest destroys the e empton. The
recept of what s n substance an entrance fee, charged by a mutua nsurance
company as a condton of membershp, does not render the company ta abe,
athough ths fee s caed a premum. farmers mutua fre and ghtnng
nsurance company does not become ta abe because t makes advance assess-
ments for the soe purpose of meetng future osses and e penses, where any
baance of such assessments remanng at the end of the year s retaned to
meet osses and e penses n the ensung year. ut the ssuance of poces
for f ed cash premums prevents e empton. oca e change or assocaton
to nsure the owners of automobes aganst fre, theft, coson, pubc abty,
and property damage s e empt, snce It performs functons of the same charac-
ter as a mutua fre nsurance company, and s a ke organzaton wthn the
meanng of the statute. oca reservor and dtch company may kewse
be esempt from ta . n organzaton dong busness on the nterndemnty
or recproca nsurance pan through an attorney n fact sub|ect to drecton
of an advsory board of pocyhoders, whch requres advance deposts to cover
the cost of the nsurance and mantans nvestments or deposts from whch sub-
stanta Income s derved, s not e empt. The e empton does not ncude a
teephone cearng assocaton, whose busness s to apporton to rates between
ndependent teephone companes handng the same cas and whose ncome
conssts of compensaton pad by such companes and recepts from the sae of
form banks. The phrase of a purey oca character quafes a the or-
razatons enumerated n subdvson (10) of secton 231. n organzaton of
a purey oca character s one whose busness actvtes are confned to ft
partcuar communty, pace, or dstrct, rrespectve, however, of potca sub-
dvsons. The word purey ntensfes and mts oca, and ndcates a
cear ntenton on the part of Congress to e empt from ta aton ony such or-
ganzatons as are entrey and unquafedy oca n ther operatons.
pproved pr 3, 1924.
. -W. M LLON,
Secretary of the Treasury.
D. . ar,
Commssoner of Interna e venue.
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231, rt. 521.
284
rtce 521: Loca mutua nsurance com- 111-15 1501
panes and ke organzatons. So. Op. 15
( so Secton 234, rtce 572.)
INCOM T : S CTION 231(10), S CTION 234 a)13, R NU CTS O 1018
ND 1921.
ssessments are premum deposts wthn the meanng of that
term ns used n secton 234(a) 13 and accordngy a mutua n-
surance company operatng on the. assessment pan, where not
e empt under secton 231(30), s entted to the deductons aowed
by secton 234(a) 13.
premum deposts are not assessments wthn the meanng
of that term as used n secton 231(10). The assessment pan of
nsurance contempates possbe addtona payments by the pocy-
boder subsequent to the orgna depost pad n. Where a mutua
Insurance company coects a depost on the ssuance of the pocy,
the pocyhoder beng abe to no addtona assessment, and beng
entted to the return of that part of any une pended baance
remanng at the end of the pocy year not necessary for the
payment of osses, e penses, and rensurance reserves, such orgna
depost, whe a premum depost wthn the meanng of secton
234(a) 13, s not an assessment wthn the meanng of secton
231(10).
rtce 521, Reguatons 45 and 2, shoud be amended.
Ths offce has had before t for consderaton the constructon of
the terms assessments and premh rm deposts as used n sec-
tons 231(10) and 234(a) 13 of the Revenue ct of 1918.
Secton 231(10) provdes:
That the foowng organzatons sha he e empt from ta aton under ths
tte
(10) armers or other mutua ha, cycone, or fre Insurance companes,
mutua dtch or rrgaton companes, mutua or cooperatve teephone com-
panes, or ke organzatons of a purey oca character, the ncome of whch
conssts soey of assessments, dues, and fees coected from members for the
soe purpose of meetng e penses .
Secton 234(a) 13 provdes:
That n computng the net ncome of a corporaton sub|ect to the ta m-
posed by secton 230 there sha be aowed as deductons
(13) In the case of mutua nsurance companes (other than mutua fe
or mutua marne nsurance companes) requrng ther members to make
premum deposts to provde for osses and e penses, there sha be aowed,
n addton to the deductons aowed n paragraphs (1) to (10), ncusve
(uness otherwse aowed under such paragraphs), the amount of premum
deposts returned to ther pocyhoders and the amount of premum deposts
retaned for the payment of osses, e penses, and rensurance reserves
Secton 231(10) and 234(a) 13 of the Revenue ct of 19-21 are sub-
stantay dentca wth the foregong.
rtce 521, Reguatons 45 and 2, whch appes to secton
231(10), says among other thngs:
It s necessary to e empton that the ncome of the company be derved soey
from assessments, dues, and fees coected from members. If ncome s re-
ceved from other sources, such as cash premums or premum deposts, the
corporaton s not e empt, even though ts addtona ncome s ta e empt.
The foregong rung n artce 521 n effect hods that cash
premums and premum deposts are not assessments, dues, and
fees wthn the meanng of secton 231(10) and that, accordngy,
f ncome s receved from such cash premums or premum deposts,
the company s not e empt. s a coroary- f a mutua company
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285
231, rt. 521.
operatng on the assessment pan s dened e empton under secton
231(10), t s not entted to the beneft of deductons aowed by
secton 234(a) 13, because the atter appes ony to companes recev-
ng premum deposts. It s contended that ths aeged dstncton
between assessments, cash premums, and premum deposts has no
bass n aw or fact and that artce 521 shoud be amended by strk-
ng out the words such as cash premums or premum deposts
appearng n the second sentence thereof.
The term cash premum as used n artce 521, Reguatons 45,
means a f ed cash premum such as s charged by stock companes on
nonassessabe nonpartcpatng poces, the pocyhoder beng abe
to no further payments durng the pocy perod and entted to no
return of possbe savngs. It apparenty s not serousy contended
that such a premum consttutes an assessment and the prncpa
queston centers, therefore, on the aeged dstncton between
premum deposts and assessments.
The term premum depost s not one used n nsurance crces
and does not appear n reported decsons or n treatses reatng to
nsurance. It was frst used by Congress n the Revenue ct of 1913,
and appeared ater n the Revenue cts of 191 , 1918, and 1921. s
the term has no trade meanng, ts true meanng must be determned
from the ordnary sgnfcance of ts component words. ewed n
ths ght, t s beeved that a premum depost s nothng more than
a depost on the premum. premum s the cost of the nsurance
purchased, and a depost on a premum s, therefore, a depost on the
cost of the nsurance made by the pocyhoder at the takng out of
the pocy. The pocyhoder may n some cases be abe for further
payments f the depost prove nsuffcent or he may be entted to a
return f the depost proved e cessve. In any event, the amount
pad n s not a f ed cash premum but a depost on the premum
or premum depost. The foregong s n conformty wth the def-
nton of premum depost appearng n Soctor s Opnon 141
C. . 1-1, 287 , where t s stated:
premum depost s an amount of money deposted wth a mutua nsurance
company by a pocyhoder to pay the cost of hs nsurance, the une pended
baance not necessary for the payment of osses, e penses, and rensurance re-
serves beng returned to the pocyhoders.
ssessments are amounts coected by nsurance companes for the
payment of osses. They are made ether after osses occur, or n
antcpaton thereof. (Soctor s Opnon 99 C. . 4, 270 .) It
has been hed n Soctor s Opnon 99 that advance assessments are
|ust as much assessments wthn the meanng of secton 231(10)
as those made after the occurrence of osses. dvance assessments
are receved for the same purpose as are premum deposts that
s, for the payment of osses and e penses.
arge number of mutua fre nsurance companes coect a cash
payment at the tme the pocy s taken out, the pocyhoder beng
abe for the payment of addtona assessments n the event osses
sustaned render such assessments necessary. The pocyhoder, on
the other hand, may be entted to the return of savngs made. The
payments thus made are ceary premum deposts wthn the defn-
ton ad down n Soctor s Opnon 141. They have aso been hed
to be assessments under numerous court decsons.
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231, rt. 521.
28
In ayde v. Mutua Reserve (98 ed., 200) the court says:
It Is mportant to understand dstncty wat s assessment nsurance or
Insurance on the assessment pan. genera statement of ths poston s that
t n assessment nsurance where the beneft to he pad s dependent upon the
coecton of such assessments as may be necessary for payng the amount n-
sured. In other words, t s assessment nsurance f payments to be made by
the nsurer are not f ed unateraby f ed by the contract. On the contrary,
an od ne pocy s a contract where the amount to be pad by the nsured s
f ed, the premums to be pad unateraby and the abty ncurred by the de-
fendant company s aso f ed, defnte, and unchangeabe.
In Moran v. rankn Lfe Insurance Company (140 S. W., 955
(Mo.)) there was nvoved a provson of the Mssour statutes pro-
vdng that contracts of nsurance on ves the payment of the prn-
cpa of whch s dependent upon the coecton of an assessment
upon persons hodng smar contracts shoud be deemed contracts
of nsurance on the assessment pan. The court there remarks:
There has been consderabe dscusson In the decsons as to the appca-
bty of ths anguage to partcuar poces. We need not set t forth. It s
suffcent for the purposes of ths sut that we may deduce from such decsons
the concuson that, even though a pocy contans provsons for f ed and
defned sums to be pad at certan ntervas, st f such payments do not form
the ony resource for the payment of the beneft, and are not necessary suff-
cent for that purpose, but by the terms of the contract sha be suppemented,
f necessary, by an assessment whch sha )e eved by some desgnated per-
son or body, and be drected aganst and bndng upon persons hodng smar
contracts, then such pocy meets the requrement of the statute under con-
sderaton.
See aso nott et a. v. Securty Mutua Lfe Insurance Company
(144 S. W., 178 (Mo.)) oyden v. rankn Lfe Insurance Com-
pany (13 ed., 285) v. anners Mutua re Insurance. Com-
pany (88 N. W., 392 (Mch.)) and State v. Root (54 N. W., 33
(Ws.)).
It seems cear under the foregong decsons that, where a mutua
nsurance company coects a depost at the tme a pocy s ssued,
such depost not beng a fna f ed premum, but the pocyhoder
beng abe for the payment of further amounts by way of assess-
ments and entted to a return f the depost prove more than reason-
aby necessary for the payment of osses and e penses, the amounts
so pad n are advance assessments. It s equay cear that the
orgna depost and the amount subsequenty pad n are deposts
on the premum or cost of the nsurance that s, premum deposts.
It does not foow from the foregong that the terms premum
depost and assessments are nterchangeabe. Whe a assess- -
ments are premum deposts wthn the meanng of the statute, a
premum deposts are not. necessary assessments. Some mutua fre
nsurance companes, for e ampe, coect when the pocy s wrtten
a f ed fna depost cacuated to be more than suffcent to pay a
osses and e penses, the une pended baance of such depost not nec-
essary for osses, e penses, and rensurance reserves beng returned
to the pocyhoder. Whe the amount so coected s a premum
depost and the pocyhoder entted under secton 234(a) 13 to de-
duct that porton thereof returned to the pocyhoder and that por-
ton retaned for the payment of osses, e penses, and rensurance
reserves, such depost s not under the cases cted an assessment. In
assessment nsurance, the payments to be pad by the nsurer are not
unateraby f ed and, whe there may be a defnte depost requred
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287
231, t. 822.
at the tme the pocy s wrtten out, there must be a abty for the
makng of further payments f the orgna depost be not suffcent
for the needs of the company. (Moran v. rankn Lfe Insurance
Company, 140 S. W., 955 (Mo.) ayde v. Mutua Reserve, 98 ed.,
200.)
Ths offce s accordngy of the opnon that assessments are n-
cuded n the term premum deposts and that therefore a mutua
nsurance company operatng on the assessment pan, where not e -
empt under secton 231(10), s entted to the deductons aowed by
secton 234(a) 13. It does not foow, however, that a premum
deposts are assessments. The assessment pan of nsurance con-
tempates possbe addtona payments by the pocyhoder subse-
quent to the orgna depost pad n. rtce 521 of Reguatons
45 and 2 shoud be modfed to accord wth ths opnon.
Neson T. artson,
Soctor of Interna Revenue.
rtce 522: Cooperatve assocatons. III-3-1314
I. T. 1914
R NU CTS O 1918 ND 1921.
Under ts artces of ncorporaton, the M Company has very broad
powers to engage n busness for proft. These powers, however, are
not e ercsed. Its actua busness conssts n the takng over of the
catte and sheep of ts members, saughterng them, and credtng
the members wth the amount of meat or mutton at a rate mutuay
agreed upon. It then ses the meat at an advance of one-haf cent
per pound, whch amount s used to defray e penses. The by-
products are sod at the prevang market rates. t the end of the
annua accountng perod a dvdend of 7 per cent, and no more, s
pad the stockhoders n eu of nterest, and the baance, f any,
s dstrbuted among the members on the bass of amount of produce
furnshed. Ony producers own ts stock.
ed, that the M Company s entted to e empton under secton
231(11) of the Revenue cts of 1918 and 1921.
rtce 522: Cooperatve assocatons. 111-13-1455
. R. R. 9 7
R NU CT OP 1917.
The artces of Incorporaton nnd the by-aws of the M Coopera-
tve ssocaton requre that certan reserves be set asde and 8
per cent Interest on the pad-up capta stock be pad out of each
year s earnngs before makng any dstrbuton thereof to members.
The method and computaton to determne to what e tent the
amounts retaned to patrons upon the bass of purchases and saes
are rebates or refunds that s, true patronage dvdends and to
what e tent such amounts are profts made on busness wth non-
members are shown on page 290. To the e tent that they represent
true patronage dvdends they are deductbe, whe to the e tent
that they represent profts from nonmember busness they are not
an aowabe deducton.
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231, rt. 522.
288
The Commttee has carefuy consdered the appea of the M Com-
pany from the acton of the Income Ta Unt n dsaowng 14.38.
doars of a tota deducton of 39.1 ,c doars, camed for 1017, on
account of so-caed patronage dvdends pad to members dur-
ng the year.
The appeant company was ncorporated pr , 1907, and the
nature of ts busness s stated n the artces of ncorporaton as
foows:
The genera nature of the busness authorzed to be transacted by ths cor-
poraton sha he the buyng and seng of gran and other farm produce:
four, feed, and other m stuffs ve stock and poutry of a knds umber,
stone, and other budng materas pants and os twne hardware boots
and shoes rea estate and a other knds of merchandse and property.
rtce of the artces of ncorporaton provdes as foows:
The net earnngs of ths corporaton sha he dvded as foows: Not ess
than 10 per cent thereof sha be added to the surpus fund not ess than 5
per cent to the educatona fund not more than 8 per cent nterest may be pad
on the pad-up capta stock and the baance sha be dvded among the stock-
hoders accordng to the amount of the busness transacted wth the asso-
caton.
rtce of the company s by-aws provdes as foows:
Profts sha be dvded among stockhoders as foows: Not to e ceed 8
per cent on the pad-up capta and the baance of profts, f any. sha be
dvded among the members accordng to the amount of husness they have
transacted wth the assocaton, but frst not ess than 5 per cent sha be
added to the educatona fund and 10 per cent to the surpus.
Durng the year 1917 refunds were pad to members n the amount
of 39.1 ( doars, and under the provsons of artce 75, Reguatons
33 (revsed), n so far as the above amount represents the refundng
of profts derved from sae of members produce, the same may be
deducted from the gross proceeds of sae. The tota amount pad
was deducted by appeant company apparenty from gross saes,
but the Income Ta Unt restored 14.38a doars on the ground that
the company had not sot asde an amount suffcent to meet the
requrements of the by-aws before makng any refunds, wth the
resut that 14.38./- doars was refunded to members out of profts
reazed from sae of nonmembers produce.
The Income Ta Unt presents the foowng computaton nd-
catng the manner n whch t arrved at ts concusons:
Doars.
Net ncome as shown n agent s report 73. 93
Dstrbuton of net ncome
5 per cent to educatona fund 3. 7
8 per cent nterest on capta stock 9. 84|
To surpus account as shown In appea 22. M|:
3 .38a
aance to be dvded among stockhoders accordng to
amount of busness transacted wth the assocaton 37. 5. )|r
Tota net ncome 73.93
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231, rt. 522.
The stockhoders busness s per cent of the tota busness transacted.
S ty-s per cent of 37.55 doars s 24.78 doars, whch had been aowed
as a deducton.
Doars.
mount camed 39.1 ar
mount aowed 24.78
mount at ssue (dsaowed) 14.38
The nstant case s compcated somewhat by the provsons of the
artces of ncorporaton and the by-aws whch requre that certan
reserves be set asde and 8 per cent nterest on the pad-up capta
ttock be pad out of each year s earnngs before makng any ds-
trbuton thereof to members. The case, therefore, presented the
queston as to whether the requred reserves shoud be set asde and
nterest on pad-up capta stock pad out of profts from members
or nonmembers busness, or both, n proporton to the amount of
busness done wth each of these groups, and t was thought that
ths queston must necessary be dsposed of before t was possbe
to determne to what e tent the amounts returned to patrons by the
appeant company upon the bass of purchases or saes, or both,
are rebates or refunds that s, true patronage dvdends. Upon the
queston at ssue, tte Soctor of Interna Revenue was requested to
render an opnon, whch has now been receved and s as foows:
T. T. 1409 (C. . 1-2, 189), a rung approved by ths offce, reads n part:
Ths offce as consstenty hed that, under the Treasury decson and
artces of the reguatons referred to, cooperatve assocatons, even though
not e empt from ta aton, may deduct from gross ncome for the years 1017,
1M8, 1919, and 1920 the amounts returned to ther patrons, whether nem ers
or nonmembers, upon the bass of the purchases or saes, or both, made by
or for them. Ths s upon the theory that a cooperatve assocaton s organ-
zed for the purpose of furnshng ts patrons goods at cost or for obtanng
the hghest market prce for the produce furnshed by them. It s
to be understood, of course, that any profts made on busness wth nonmem-
bers whch may be dstrbuted to members n the guse of rebates are ta abe
to the assocaton and the members.
The probem now presented s to determne to what e tent the amounts
returned to patrons by a cooperatve assocaton upon the bass of purchases
or saes, or both, are rebates or refunds that s, true patronage dvdends
and to what e tent such amounts are proft made on busness wth non-
members. To the e tent that they represent true patronage dvdends they
are deductbe, whe to the e tent that they represent pro0ts from nonmember
busness they are not an aowabe deducton.
fter thorough consderaton, ths offce s of tbe opnon that the foowng
method shoud be used n determnng the amount of true patronage dvdends
In cases such as those now under consderaton:
rst compute the apparent net ncome of the cooperatve assocaton. rom
ts amount deduct the f ed dvdend pad or payabe on any outstandng
capta stock. The amount of such f ed dvdend Is the porton of net ncome
propery attrbutabe to the nvestment made n the assocaton by the hoders
of any outstandng capta stock.
The baance conssts of (1) the amount avaabe for refund to the members
of the assocaton and (2) the profts made from nonmembers. In the absence
of evdence to the contrary, t w he assumed that the deangs wth members
and nonmembers are equay proftabe, and, accordngy, that the amount
avaabe for refund conssts of that proporton of the apparent net profts,
fter deductng the f ed dvdend on outstandng capta stock, whch the
amount of busness transacted wth members bears to tbe entre amount of
busness transacted. Up to the amount avaabe for refund thus computed,
a dstrbuton by a cooperatve assocaton to ts members, upon the bass of
tbe busness transacted wth them, w he deemed to be a true patronage
dvdend, deductbe by tbe assocaton n computng ts ta abe net ncome
for edera ncome and profts ta purposes.
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233, rt. 41.)
290
The Commttee s n thorough accord wth the above opnon of
the Soctor, and n accordance therewth recommends that n te
nstant case the amount to be aowed as a deducton for the year
1917 on account of patronage dvdends pad to members durng that
year be determned as foows:
Doars.
Net Income per agent s report 73.93
Deduct: Interest at 8 per cent on capta stock
97.9 (12 months) 7.84
. 8 (111 months) .05
24.30 (4 months) .7
8.59
Profts from nonmembers busness pus amount ava-
abe for refund 05.34
Tota busness (members and nonneubers) 4.042.83
usness transacted wth members 3,05(5.04
Percentage of members busness to tota busness
transacted .82
vaabe for refunds to members ( 5.33 doars o.82
per cent) 43.
Therefore, nasmuch as but 39.1 a doars was dstrbuted to mem-
bers durng the year 1917 as patronage dvdends, whch amount s
ess than the amount avaabe for dstrbuton as above computed,
the fu amount of 39.1 a doars shoud be aowed as a deducton
for 1917.
ccordngy, t s recommended that the acton of the Income Tas
Unt be reversed and that the appea be sustaned.
Chares D. ame,
Charman Commttee on |rpeas and Revew.
rtce 522: Cooperatve assocatons. I 19-1551
I. T. 2000
R NU CT O 1921.
corporaton formed by severa farmers cubs and farmers
unons for the purpose of coordnatng n one centra agency the
purchase of suppes and the sae of the products of the members
of such organzatons, whch deas wth ts member cubs and unons
ony and dstrbutes ts ncome by proratng ts profts back to such
members on the bass of ther purchases and saes through the cor-
poraton, s entted to e empton from ta aton under the provsons
of secton 231(11) of the Revenue ct of 1921.
S CTION 233. GROSS INCOM O CORPOR TIONS
D IN D.
rtce 541: Gross ncome.
(See T. D. 3 04 sec. 213(b), art. 72.) Ta abty of proceeds of
fe nsurance pocy pad to corporaton as benefcary upon the
death n 1918 of ts presdent.
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233, rt. 547.
rtce 545: Sae and retrement of corporate 111-13-145
bonds. I. T. 19 2
R NU CT O 19 21.
carrer, whch e ercses ts opton, under the Interstate Com-
merce Commsson accountng rues, of e tngushng n any one
year, through charges to proft and oss, a or any porton of the
une tngushed dscount and e pense on funded debt, shoud, for
ncome ta purposes, prorate or amortze the amount of the ds-
count and e pense over the fe of the bonds.
Under the accountng rues prescrbed by the Interstate Commerce
Commsson, a carrer s requred to charge to ts ncome accounts
of each fsca perod a proporton of the dscount and e pense brought
about by the sae of securtes. The carrer s further aowed an
opton of e tngushng at any tme through charges to proft and
oss a or any porton of the dscount and e pense on funded debt
emanng at any tme une tngushed.
dvce s requested as to whether f the carrer shoud e ercse ts
opton under the Interstate Commerce Commsson accountng rues
of e tngushng n any one year through charges to proft and oss
a or any porton of the une tngushed dscount and e pense on
funded debt t woud be permtted to report n ts ncome ta returns
of subsequent years as a deducton from ncome the proportonate
amount of the dscount and e pense on funded debt that woud
have been charged to the ncome accounts of the carrer currenty,
f the sad dscount and e pense had been amortzed over the fe of
the securtes n eu of beng e tngushed n whoe or n part
through the proft and oss account.
rtce 24, Reguatons 2, promugated under the Revenue ct of
1921, provdes n part:
It s recognzed that no unform method of accountng can be prescrbed
for a ta payers, but the aw contempates that each ta payer sha adopt such
forms and systems of accountng as are n hs |udgment best suted to hs pur-
pose. ach ta payer s requred by aw to make a return of hs true ncome.
e must, therefore, mantan such accountng records as w enabe hm to
do so .
rtce 545(3) (a) of Reguatons 2, promugated under the Rev-
enue ct of 1921, provdes:
If bonds are ssued by a corporaton at a dscount, th. n smo 1- .t
dscount s deductbe and shoud be prorated or amortzed ow
bonds.
ed, that the carrer shoud cam a Wu aun or.-t|f.uwmn of
dscount and e pense, for funded deb , v ,u amortzed fe of (he
securtes for ncome ta purpose s, no ma tor how they may e treated
under the rues of the Interstate Commerce Commsson.
rtce 547: Income from ea.-,e,d propery. III-1-1287
( so Secton 201, rtce M541. IT. 1S9
R NU CT- O 1918 ND 1021.
The SI Company eased the entre property of the O Company
and pad a spect sum pc: ure per annum drect to the stock-
hoders of the O Company a :-nt for such propery.
The amount paOrett to e stockhoders of the O Company
Is prmary ncome to that .mpany and ts recept by the stock-
hoders s equvaent to the p- yment of a dvdend by the essor
company.
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24, rt. 5 1.
292
The M Company eased the entre property of the O Company
and agreed to pay, and has pad, doars per share per annum drect
to the stockhoders of the O Company as rent for such property.
In the past the M Company has pad the edera ncome ta upon
the amount of ths rent for the () Company, and the ta payer,
who s a stockhoder n the O Company, has reported the amount
receved by hm from the M Company as rent n hs ndvdua ncome
ta returns. e now contends that the ta upon the amount of
the rent he receved has been pad twce, once by the M Company
for the O Company and once by hmsef, and he asks whether
the ta pad by hm on that amount shoud not be refunded.
ed, the rent pad drect to the stockhoders of the O Company
s prmary ncome to that corporaton, and ts recept by the
stockhoders s equvaent to the payment of a dvdend of do-
ars per share by the essor company, athough the payments of
rent never come nto that company s possesson. The amounts
receved by the stockhoders shoud be returned by them as dv-
dends pad by the O Company and are not sub|ect to norma
ta but are sub|ect to surta n case a stockhoder s ncome s
wthn the mts of the surta . The ta payer, therefore, s entted
to fe a cam for the refund of the norma ta es pad upon the
amounts receved by hm from the M Company durng the years
1918 to 11)22, ncusve.
The corporaton ncome ta pad by the M Company for the 0
Company durng past years was separate and dstnct from the
ndvdua ta es due by the stockhoders of the O Company, and
the payment of that ta was not a dupcaton of the payments
made by the stockhoders.
S CTION 234. D DUCTIONS LLOW D
CORPOR TIONS.
rtce 5 1: owabe deductons. 111-20-1558
I. T. 2004
fcfc t|MW R NU CT O 1021.
te p T u s ncurred In carryng on the busness of the bankrupt
. : v, r u, 11P recever are deductbe under secton 234(a) 1 of
the- M cnuf ct 1921 as busness e penses. The admnstratve
e pemn.3 o de eeevett- v are not deductbe as an e pense of
the busness. ccord ffev.- pa3 to the attorney for the pet-
tonng credtors. fec ,. : e apprasers, and dsbursements
made n connecton wth the rec|MTcMp are not deductbe. ees
pad to the attorney for the rccerre for servces rendered n con-
necton wth the recevershp are not deductbe. owever, f the
servces were rendered n connecton wth the bankrupt ta payer s
busness carred on by the recever, the attorney s fees woud he
deductbe as an e pense of the busness. The addtona compensa-
ton aowed the recever, under the provsons of the Natona
ankruptcy ct, must be consdered as- compensaton for carryng
on the busness of the bankrupt ta payer and unreated to the ad-
mnstraton of the bankrupt estate.
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293
234, rt. 5 3.
rtce 5 2: Donatons.
111-1 -1509
I. T. 1980
R NU CTS O 1918 ND 1921.
corporaton contrbuted to a fund used for the constructon
of a cty genera hospta. Its empoyees w pay the same rates
for treatment theren as are pad by other patents.
The contrbuton n queston s not deductbe as an ordnary and
necessary busness e pense.
The queston s presented whether contrbutons made by the M
Company to a fund for the constructon of the genera hospta of
the cty of Y are deductbe.
It appears that the corporaton n 1920 and 1923 contrbuted to a
fund used for the constructon of the genera hospta of the cty of
Y. It s stated that the empoyees of the corporaton w pay the
same rates for treatment at the hospta as are pad by other patents.
It s further stated that pror to the constructon of the hospta
the cty of Y dd not have a modern hospta. The corporaton
cams that the mproved hospta factes made avaabe to ts
empo3 ees through the constructon of the new hospta w resut
n ess oss of tme on account of ness by ts empoyees and thereby
beneft the corporaton.
ed, that corporatons are not entted to deduct chartabe or
other contrbutons whch ndvduas may deduct under secton
214(a) 11 of the Revenue ct of 1921. Under the provson of artce
5 2, eguatons 45 and 2, donatons made by a corporaton for pur-
poses connected wth the operaton of ts busness, when mted to
chartabe nsttutons, hosptas, or educatona nsttutons con-
ducted for the beneft of ts empoyees or dependents, are deductbe
as ordnary and necessary busness e penses. Donatons whch
egtmatey represent a consderaton for a beneft fowng drecty
to the corporaton as an ncdent of ts busness are deductbe.
Inasmuch as the empoyees of the M Company w be requred to
pay the same rates for hospta treatment as are pad by other
patents of the hospta, and n vew of the fact that the hospta
w be avaabe to the genera pubc, t s hed that the beneft
accrung to the corporaton as a resut of ts contrbutons to the
fund used for the constructon of the hospta s not of such a drect
nature as to consttute an aowabe deducton as an ordnary and
necessary busness e pense pad or ncurred n the mantenance and
operaton of the corporaton s busness.
rtce 5 3: Sae of capta stock, bonds, and IIT- -135
ed that e pendtures of 2.1a doars nade by the M Company
for the year 1918 n the sae of ts capta stock are capta e -
pendtures and may not be camed as a deducton for that year.
The M Company has appeaed from the proposa of the Income
Ta Unt to dsaow for the year 1918 a deducton of 2.1a doars
camed for that | ear to cover e penses ncurred and pad n the
sae of the appeant company s capta stock.
capta assets.
.R.R. 048
R NT CT O 19 IS.
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234, rt. 572.
The M Company was organzed n May, 191(5. In 1918 the com-
pany found t necessary to enarge ts pant and make addtons to
ts pant equpment n order to f contracts outstandng, and to
fnance the budng of such addtons and to acqure addtona pant
equpment the company undertook to se addtona shares of ts
capta stock a stock saesman was empoyed, and the amount pad
to hm for servces rendered and for other sma ncdenta e penses
connected wth the sae of the stock amounted to 2.1a doars, to
cover whch the company camed a deducton for the year 1918. s
was stated n I. T. 1198 (C. . 1-1, 275):
commsson pad by a corporaton to market Its capta stock s a capta
e pendture and not an aowabe deducton ether as a oss or as a busness
e pense.
Whch rung appes wth equa force to tems of e pense ncurred
n the sae of a corporaton s capta stock other than commssons
pad to stock saesmen, and the proposa of the Income Ta Unt to
dsaow the sad camed deducton must be sustaned.
In vew of the foregong, the Commttee recommends that the
proposa of the Income Ta Unt to dsaow the stock sae e pense
tem of 2.1a doars as a deducton for the year 1918 be sustaned.
Chares D. ame,
Cmrman Commttee on ppeas and Re vew.
rtce 572: Speca deductons aowed mutua
nsurance companes.
(See So. Op. 15 sec. 231, art. 521.) Premum deposts and
assessments defned and dstngushed.
rtce 572: Speca deductons aowed 111-2 -1 35
mutua nsurance companes. . It. R. 7939
revenue act of m 8.
The M Company s hed to be n mutua nsurance company re-
qurng ts members to make premum deposts to provde r
osses nnd e penses, and the amount of sue premum deposts re-
taned for the payment of osses, e penses, and rensurance reserves
s deductbe from gross ncome under the provsons of secton
234(a) 13 of the Revenue ct of 1918. The sma amount of ncome
receved from poces wrtten to nonmembers s not consdered ma-
tera n ths case, as t Is cear that the gan derved from poces
wrtten to nonmeners pus ncome from nterest and gans on n-
vestments dd not e ceed the e penses durng the ta abe years n-
voved.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt n refusng to treat certan pay-
ments by pocyhoders as premum deposts and accordngy re-
fusng to permt deductons from gross ncome for the amount of
such payments as was retaned for the payment of asses, e penses,
and rensurance reserves.
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295
234, rt, 572.
In bref submtted by the appeant the foowng statements are
raade:
The M Company was organzed and durng 1918 transacted busness as a
mutua nsurance company on. the pan of ssung ts poces for payments
coected n advance and perodcay durng the terms of the poces, whch
payments were f ed beow the stock company rates to appro mate as neary
as possbe the actua cost of the nsurance. The artces and by-aws contan
nothng prohbtng a dstrbuton or refund of savngs to the pocyhoders.
The surpus accumuated was never n e cess of a reasonabe proporton of
the nsurance In force and the surpus accumuated durng some years has
been fuy used to pay e cess osses n other years.
In 1918 the percentage of surpus to nsurance n force was ess
than 1 per cent (0.84 per cent).
of the deposts hed at the end of the year were hed for the payment of
osses and e penses and rensurance reserves. In a mutua nsurance com-
pany conducted ony for the beneft of ts members t s mpossbe for pocy-
hoders payments to be hed for any other purpose.
The company s owned, controed, and managed soey by ts mem-
bers. It has no capta stock or stockhoders or other thrd party propretary
nterests. The company pays no dvdends or profts to any thrd party or
other nterests, and s operated purey for the mutua advantage and beneft
of ts members, and a gans and savngs beong to and aways reman (he
property of the members. The purpose of the company s to furnsh ts mem-
bers are nsurance at as near actua cost as s possbe.
The pan of operaton provded for poces to be ssued for a term of fve
years n consderaton of a cash premum payabe n advance and addtona
payments every s months, and for poces to be ssued fur any term for an
advance payment.
Short-term poces on an advance payment were aso ssued durng 1018 at
about one-haf of the stock company rate and are at the present tme ssued
at a reducton of about 25 per cent from the present stock company rates.
Paragraph of the appeant s by-aws effectve n 1918 states:
ppcaton and membershp. Membershp n ths company may be ac-
qured ony when one of ts offcers sha have approved a wrtten appcaton
for nsurance and a premum note n the sum of fve annua bass premums
u on the amount apped for provded, however, that the company may aso
ssue potees to ts members an others upon the stock pan, nvovng nether
premum note or wrtten appcaton.
The appeant cas attenton to that part of artce 572, Regua-
tons 45, whch reads as foows:
In determnng the amount of premum deposts retaned by a mutua re
or mutua casuaty nsurance company for the payment of osses, e penses,
and rensurance reserves, t w 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.
fter carefu consderaton of the facts and the aw nvoved, the
Commttee concudes that the appeant s a mutua nsurance corn-
requrng ts members to make premum deposts to provde
|sses and e penses, and the amount of such premum deposts
retaned for the payment of osses, e penses, and rensurance re-
serves s deductbe from gross ncome under the provsons of sec-
ton 234(a) 13 of the Revenue ct of 1918. The sma amount of
ncome receved from poces wrtten to nonmembers s not consd-
ered matera n ths ease, as t s cear that the gan derved from
poces wrtten to nonmembers pus ncome from nterest and gans
on nvestments dd not e ceed the e penses durng the ta abe years
nvoved.
It s accordngy recommended that the appea be sustaned.
Chares D. ame,
Charman Commttee on ppeas ctnd Revew.
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5234, rt. 573.
29
rtce 573: Deductons aowed foregn cor- 111-24 1 08
poratons. I. T. 2028
R NU CT O 101 , S M ND D, ND R NU CT O 191S.
Interest pad on deposts Is nterest pad o ndebtedness,
and there s nothng n the aw n effect for the years 1917 am
1918 or the reguatons ssued thereunder whch s authorty for
e cudng nterest pad on deposts from nterest deducton
aowabe on the ground that t s not nterest pad on ndebted-
ness.
Under the Revenue ct of 1910, as amended, a foregn bankng
corporaton dong busness n the Unted States may deduct ony
that porton of the nterest pad on deposts whch s pad on de-
posts receved from ctzens or resdents of the Unted States.
There s nothng n the Revenue ct of M or Reguatons 45
whch coud be construed as authorty for dsaowng nterest
deductons camed by foregn corporatons because such e pense
Is not connected drecty wth some tem of ncome arsng from a
source wthn the Unted States.
The M ank s a foregn corporaton havng ony one branch offce
n the Unted States. mong the deductons camed by ths corpo-
aton n ts returns for the years 1917 and 1918, n determnng ts
net ncome from sources n the Unted States, s a porton of the
nterest pad on deposts.
It s contended that both the Revenue ct of 1917 and the Revenue
ct of 1918, and the reguatons ssued thereunder, dstngush be-
tween nterest pad on deposts and nterest pad on ndebted-
ness, and that there shoud be dsaowed n the case of a foregn
corporaton a deductons whch are not shown to be appcabe to
operatons the ncome from whch s reported as arsng from sources
wthn the Unted States.
Interest pad on deposts s nterest pad on ndebtedness,
and there s nothng n the aw n effect for the years 1917 and 1918
or the reguatons ssued thereunder whch s authorty for e cudng
nterest pad on deposts from nterest deducton aowabe on the
ground that t s not nterest pad on ndebtedness.
In the nstant case, the amount camed as nterest pad on deposts
s not deductbe for the year 1917 because t s not nterest pad on
deposts made by ctzens or resdents of the Unted States.
The provson of the Revenue ct of 191 , as amended, whch s
appcabe s quoted as foows:
Sec. 12. (b) In the case of a corporaton, |ont-stock company or assocaton,
or nsurance company, organzed, authorzed, or e stng under the aws of
any foregn country, such net ncome sha be ascertaned by deductng from
the gross amount of ts ncome receved wthn the year from a sources wtu
the Unted Sates
Thrd. The amount of nterest pad wthn the year on ts ndebtedness
(e cept on ndebtedness ncurred for the purchase of obgatons or securtes
the nterest upon whch s e empt from ta aton as ncome under ths tte)
to an amount of such ndebtedness not n e cess of the proporton of the sum
of (a) the entre amount of the pad-up capta stock outstandng at the cose
of the year, or, f no capta stock, the entre amount of the capta empoyed
n the busness at the cose of the year, and (b) one-haf of ts nterest-
bearng ndebtedness then outstandng, whch the gross amount of ts ncome
for the year from busness transacted and capta nvested wthn the Unted
Sates bears to the gross amount of ts ncome derved from a sources wthn
and wthout the Unted States: Provded, That n the case of bonds or other
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297
234, rt. S73.
Indebtedness whch have been ssued wth a guaranty that the nterest payabe
(hereon sha be free from ta aton, no deducton for the payment of the
a heren mposed or any other ta pad pursuant to such guaranty sa be
aowed and n case of u bank, bankng assocaton, oan or trust company,
or branch thereof, nterest pad wthn the year on deposts by or on moneys
receved for nvestment from ether ctzens or resdents of the Unted States
and secured by nterest-bearng certfcates of ndebtedness ssued by such
bank, bankng assocaton, oan or trust company, or branch thereof
The ast porton of the aw quoted above s authorty for ds-
aowng the deducton for the year 1917.
The provsons of the Revenue ct of 1918 appcabe to the case
are contaned n secton 234(a)2. Subdvson (b) of secton 234
specfcay e cudes the deductons aowed n paragraph 2 of sub-
dvson (a) from the deductons whch are aowed ony f and
to the e tent that they are connected wth ncome arsng from a
source n the Unted States.
Secton 234(a)2 reads:
(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:
(2) nterest pad or accrued wthn the ta abe year on ts Indebtedness,
e cept on ndebtedness ncurred or contnued to purchase or carry obgatons
or securtes (other than obgatons of the Unted States ssued after September
24.1917) the nterest upon whch s whoy e empt from ta aton under ths tte
as ncome to the ta paper, or, n the case of a foregn corporaton, the pro-
norton of such nterest whch the amount of ts gross ncome from sources
wthn the Unted States bears to the amount of ts gross ncome from a
sources wthn and wthout the Unted States
rtce 573 of Reguatons 45, entted Deductons aowed for-
egn corporatons, provdes n part as foows:
the Interest deductbe s that proporton of so much of the entre
nterest pad on the corporate ndebtedness as woud be deductbe f pad by
a domestc corporaton whch the gross ncome from sources wthn the Unted
States bears to the tota gross ncome, . ,
Te term corporate ndebtedness, whch s referred to n the
porton of artce 573 whch s quoted above, ncudes any ndebted-
ness of the corporaton, and there s nothng n the aw or reguatons
whch coud be construed as authorty for dsaowng nterest de-
ductons camed by foregn corporatons because such e pense s not
connected drecty vrth some tem of ncome arsng from a source
wthn the Unted States.
There s no dstncton made n ether the Revenue ct of 1918
or the reguatons ssued thereunder between nterest pad on de-
posts and nterest pad on ndebtedness. Of the nterest pad on
ndebtedness, that pad on the porton of the ndebtedness ncurred
or contnued to purchase or carry ta e empt securtes s not deduct-
be. It s cear that ndebtedness ncurred by I eason of deposts
n a hank s not ncurred to purchase or carry ta -e empt securtes,
ence the amount of the nterest pad on deposts s to be ncuded
n fu n nterest pad on ndebtedness. The amount of such
nterest deductbe by a foregn corporaton s determned n accord-
ance wth the ast porton of secton 234(a)2 quoted above.
4177 24 20
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239, rt. 21.
298
S CTION 239. CORPOR TION R TURNS.
rtce 21: Corporaton returns. III-1-1288
I. T. 1897
NTT CT O 1018.
It s contended that the transfer In 1917 of the property of a Ger-
man ctzen, a soe propretor, to the O corporaton by hs agent
was ega and vod. It s hed, however, that the company whch
was organzed by the agent was a de |ure corporaton duy or-
ganzed and teratng n the year 1918. It was not dssoved
by the sezure of ts stock or assets n 1918 by the en Property
Custodan. It was. therefore, under obgaton to render ncome
ta returns for the year 1918.
The corporaton was n possesson of a of the assets n queston
under coor of tte and t was through ts efforts that the assets
were ncome producng durng the year 1918. The corporaton had
the use of the earnngs made by t. whe dd not receve such
funds ether actuay or constructvey. There Is no evdence that
ever repudated the transfer or that he woud have dont so had
he had an opportunty. Under the crcumstances t s hed that
the ncome wae the ncome of the corporaton and that the ta
thereou was egay due and payabe by t.
German ctzen. , was engaged n busness snce the year 190
under the name of the M Company and ater the N Company. Durng
ths tme the busness had been unncorporated. reatve, , a
naturazed mercan ctzen, was s resdent agent and manager.
ary n 1917, when t was evdent that war was mmnent, pro-
ceeded to form a corporaton under the aws of the State of , known
as the O Company, and actng under a rather genera and ndefnte
power of attorney attempted to transfer a the assets of the busness,
e cept the rea estate on whch the factores were ocated, to the
sad corporaton for 23a doars, whch sum was credted on the books
to . renta of -fo doars per month for the use of the rea
estate was credted on the books to s account, y shares of stock
of the par vaue of 100 were ssued to , C, and D, three naturazed
mercan ctzens. It deveoped ater that these shares were pad
for out of the earnngs of the corporaton, whch sum was mpropery
charged on the books of the corporaton as an advertsng e pense.
In 1918 the en Property Custodan sezed the stock of the corpo-
raton and a of the property of under the provsons of the Trad-
ng wth the nemy ct. The stock of the corporaton was ressued
to certan members of the en Property Custodan s staff. In 1919
the stock and the other property was duy sod at aucton, under the
drecton of the en Property Custodan, for 114# doars. The
record purchaser was one , but t ater appea s he was reay the
counse and agent of one , the rea purchaser. The corporaton was
operatng durng the year 1918 and pad some tme n 1919 an n-
come ta of 10a doars to the edera Government.
It s now contended that had no authorty to transfer the prop-
erty of to the corporaton that the transfer was ega and vod,
and that, therefore, the ncome earned by the corporaton through
the use of such property durng the year 1918 was n fact the ncome
of , not the ncome of the corporaton. ccordngy, t s requested
that the ta so pad be refunded and that the ta for the year 1913
be coected from the en Property Custodan out of the funds
now hed by hm for .
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299
239, rt. 21.
There can be no queston but that the O Company was a de |ure
corporaton, duy organzed and operatng under the aws of the
State of , n the year 1918. It was not dssoved by the sezure
of ts stock or the assets n ts possesson. It was, therefore, under
obgaton to render ncome ta returns for the year 1918 (see sec-
ton 239, Revenue ct of 1918) and pay any ta shown thereon to be
due. The soe queston at ssue, then, s whether the corporaton had
any ncome durng the year 1918 or whether, as contended, the earn-
ngs made by t durng that year were n fact the ncome of .
The facts are undsputed that the O Company was a gong con-
cern n the year 1918 that t was n possesson of a of the assets
n queston under coor of tte and that t was through ts efforts
that such assets were ncome producng durng that year. The
corporaton had use of such funds, whe dd not receve such
funds ether actuay or constructvey. Moreover, there s no ev-
dence that ever repudated the transfer or that he woud have
done so had he had an opportunty. Under these crcumstances, ths
ureau must hod that the ncome n queston was the ncome of
the 0 Company and that the ta thereon was egay due and payabe
by the corporaton. Ths offce has consstenty rued that the sezure
of the stock of a corporaton by the en Property Custodan n no
way affects the abty of the corporaton to make returns of ncome
and pay the ta as requred by the revenue aws.
s to the equtes of the case, the foowng s found n the mnutes
of a meetng of the board of drectors of the corporaton. It was re-
corded that G and had gone to Y at the request of , the pur-
chaser, and had conferred wth hm, and at hs request had made a
payment to the Commssoner of Interna Revenue of 10a doars on
account of ncome ta for the year 1918, and had apped for an e -
tenson of tme wthn whch to fe a return . pparenty
ths s the same payment of ncome ta aganst whch the purchaser
s now protestng.
rtce 21: Corporaton returns.
(See . R. R. 745 sec. 32 , art 845.) Returns where busness of
an ndvdua propretor was ta ed as a corporaton under secton
330 of the Revenue ct of 1918.
rtce 21: Corporaton returns.
(See S. M. 1812 sec. 224, art. 411.) usness of a corporaton
operated by stockhoders after e praton of charter.
rtce 21: Corporaton returns. 111-20-1559
I. T. 2005
R NU CT O 1921.
Under secton 138, subdvson 5, of the bankng taws of the
State of New York, the converson of the O ank nto the M Trust
Company dd not create a new corporaton. snge return shoud
be fed by the M Trust Company for the ta abe year 1924. n
whch are refected the operatons of the O ank for the perod
from the begnnng of ts ta abe year to ebruary , 1924, and
Its own operatons for the perod from ebruary , td, to the
cose of the ta abe year.
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239, rt. 22.
300
The M Trust Company s operatng under an organzaton certfcate
whch became effectve ebruary , 1924, under secton 138 of the
bankng aw, subdvson 5, of the State of New York. It s deemed
to be a contnuaton of the entty and dentty of the O ank of the
same State. There was no change n the stock or capta of the O
ank at the tme t was converted nto the M Trust Company.
Inqury s made whether under the crcumstances t w be neces-
sary for the O ank and the M Trust Company to fe separate
returns for 1924.
ed, that the converson of the O ank nto the M Trust Com-
pany n accordance wth secton 138 of the New York State bank-
ng aw, subdvson 5, dd not create a new corporaton wthn the
meanng of the ncome ta aw. ccordngy, the M Trust Company
shoud fe one return for the ta abe year 1924, n whch are re-
fected the operatons of the O ank for the perod from the begn-
nng of ts ta abe year to ebruary , 1924, and ts own opera-
tons for the perod from ebruary , 1924, to the cose of the
ta abe year.
rtce G22: Returns by recevers. 111-11-1419
L T. 194
R NU CT8 O 1013 ND 1018.
There s no authorty of aw under whch a corporaton can
he reeved from fng returns for past years even though there
are now no records from whch correct returns coud be made and
t s certan that there was no ta abe ncome for past years.
In uy, 1923, t was hed that the M Company s e empt from
fng returns under secton 231(11) of the Revenue ct of 1921,
but that nasmuch as such e empton does not appy under the
Revenue ct of 1918, the company woud be requred to fe returns
for 1920 and each year pror thereto from the date of ts ncor-
poraton.
The company has fed a the returns requred of t e cept returns
for 1915, 1918, 1919, and 1920, and the recever requests that the
corporaton be reeved of fng returns for those years. In support
of hs request the recever has submtted an affdavt n whch he
states that the corporaton was nsovent at the tme he was ap-
ponted as recever n anuary, 1922 that hs appontment was
soey for the purpose of qudatng the assets of the corporaton
and dstrbutng the proceeds to the credtors that he has now
dsposed of practcay a of the assets and has been abe, under
the drecton of the court, to pay about 45 per cent of the cams
aganst the company that the assets w not be suffcent to pay a
of the cams, consequenty there w be nothng eft for the stock-
hoders, and the corporaton w not, therefore, resume busness
after the termnaton of the recevershp and that he has no records
from whch he coud make correct returns for the years n queston
and that there woud be no ta abe ncome shown n any of such
returns.
ed, that there s no authorty of aw under whch the request
of the recever can be granted. See secton 2-G(c) of the ct of
October 3, 1913, and secton 239 of the Revenue ct of 1918. It
w, therefore, be necessary for the corporaton to fe a return for
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301
240, rt. 32.
each of the years n queston. Under the crcumstances, however,
t w not be necessary for the corporaton to furnsh the data
caed for by the return forms, but, n eu of such data, an affdavt
shoud be attached to each return settng forth the facts presented
n the recever s affdavt above referred to.
rtce 22: Returns by recevers.
R NU CTS O 191 ND 1917.
(See T. D. 3591 sec. 250, art. 1008.) Ta abty of ncomes of
recevers of corporatons.
rtce 2 : Returns for fractona part 111-14-1478
of year. T. D. 3573
rtces 2 of Reguatons 2 are hereby
amended :
bt. 2 . Returns for fractona part of year. If a corporaton, wth the
approva of the Commssoner, changes ts accountng perod from caendar
year to fsca year, from fsca year to caendar year, or from one fsca year
to another fsca year, a separate return sha be made for a fractona part
of a year and the net ncome on such return sha be paced on an annua bass
as provded n secton 22 . See artce 431. In such a case the credt of 2,000
aganst net ncome aowed a domestc corporaton havng a net ncome not
e ceedng 25,000 sha be reduced to such proporton of the fu credt as the
number of months In the perod for whch the return s made bears to 12
months. Ths prorated credt, however, sha be apped to the net ncome
before such net ncome s paced on an annua bass. See secton 305 and
artce 7 1. In case the frst or the fna return made by a domestc corpora-
ton s for a perod of ess than 12 months, the fu credt of 2,000 sha be
aowed f ts net ncome for such perod s 25,000 or ess. See secton 23
and artce 591. ,
S CTION 240. CONSOLID T D R TURNS
O CORPOR TIONS.
rtce 32: Consodated returns. 111-22-1582
S.M. 1549
R NU CT O T917.
group of affated corporatons fed an amended return for
1917 and requested that the profts ta shown to be due be ao-
cated among the members of the group n certan specfed
amounts. It was found mpossbe to aocate the corrected ta es
n the amounts orgnay agreed upon because ad|ustments made
by the Unt n ncome ta abty and n consodated net ncome
and nvested capta had caused matera changes. s artce 78
of Reguatons 41 aows the corporatons to agree upon the
proportons n whch the ta may be assessed, the ta es shoud
be aocated to the respectve corporatons n the same proporton
to the corrected tota ta as the amounts agreed upon bear to the
tota ta as computed by the ta payer n the amended return.
n opnon s requested as to the proper method of aocatng the
e cess profts ta for the year 1917 among the affated group of
whch the M Company, the ta payer, s the parent.
It appears that n ts amended returns the aocaton of the ta
was requested by ta payer n certan specfed amounts based upon
the ta abty as computed theren. Upon ad|ustment by the
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5240, rt. G33.
302
Income Ta Unt, t s found that, nasmuch as the ad|usted ncome
ta abty as we as the consodated net ncome and nvested
capta of the affated companes has been materay changed snce
the ta payer submtted ths agreement, t s mpossbe to aocate
the corrected ta es n the amounts orgnay agreed upon.
rtce 78 of Reguatons 41 provdes n part as foows:
In cases wore consodated returns are accepted, the tota ta w be com-
puted n the rst Instance as a unt upon the bass of the consodated return
and w be assessed upon the respectve affated corporatons n such pro-
portons as may be agreed among them. If no such agreement s made the
ta w be assessed upon each such corporaton n accordance wth the net
Income and nvested capta propery assgnabe to It
Ths offce s of the opnon that as artce 78 aows the corpora-
tons to agree upon the proportons n whch the ta may be as-
sessed, the ta es shoud be aocated to the respectve corporatons n
the same proporton to the corrected tota ta as the amounts agreed
upon bear to the tota ta as computed by the ta payer n the
amended return.
Neson T. artson,
Soctor of Interna Revenue.
rtce 33: When corporatons are affated.
R NU CT O 1918.
111-23-1592
I. T. 2019
More than 85 per cent of the stock In each of two corporatons
was hed by the same ersons, a of whom hed dfferent per-
centages of nterest n each of the two corporatons, whe of the
remanng 1 mnorty stockhoders, ony 2 or 3 hed the same
proporton of stock n the two companes. If the members of two
fames were consdered coectvey, however, the stock n the
two corporatons woud be owned n substantay the same propor-
ton by the stockhoders when grouped n ths manner.
ed, that such contro or ownershp as s requred for affaton
by the Revenue ct of 1918 has not been estabshed, and thnt the
facts stated do not satsfy the requrements of artce 033 of
Reguatons 45.
Reference s made to the certfcate of ovcrassessment amountng
to doars ncome and e cess profts ta es for the year 1918 of the
M Company and the N Company.
The ta abty of those companes for the year 1918 has been
computed on a consodated bass. No questonnare was fed, but
the bref of counse dscoses the foowng percentages of stock
hodngs:
Stockhoders.
M
Com-
pany
N
Com-
pany.
M
Com-
pany
N
Com-
pany.
, estate of s wfe.
C, hs son
I), hs son
. hs daughter
. hs daughter
0, hs daughter
. son-n-aw
1, hs sator.
, sster
Per-
Cttf t .
34.13
11. 3
8.
.33
.33
.3.1
. 33
. m
5. S3
. , S3
3.33
Per-
centages.
4. 3
.00
8.8
1. 5
L 5
1.5
1. 5
.15
.5
L 5
.vo
L
M, sster . .
N
O
P, manager M Company.
, son of former secretary..
Tota
Remander outstandng...
Per-
cenaen.
.00
.20
. 19
. 19
00
5. (13
Per-
eenngr .
0.00
.d
,7
I )
. )
.no
1 s
85.34
14.0
11. 3S
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240, rt. 33.
The remanng stock n each company was hed n sma quanttes
and ony 2 or 3 of the remanng 1 sharehoders hed the same pro-
portons n the two companes. Consderng a the stockhoders,
there were 7 hodng stock n the M Company, hut havng no nterest
n the N Company, and 11 stockhoders of the N Company who hed
no stock n the M Company.
It s observed from the above that varous dvergences e st n
the ndvdua hodngs of these companes. The prncpa ones are:
, who hods 4. 3 per cent of the stock of the N Company, but
ony 34.13 per cent of the stock of the M Company and the estate
of s wfe, whch hods 11. 3 per cent of the stock of the M Com-
pany, but has no stock n the N Company. It woud appear, there-
fore, that the ownershp of the stock of those companes was not
substantay n the same proportons.
The ta payer contends that members of the famy, consdered
coectvey, own stock of the two companes n substantay the
same proportons. The same s contended wth respect to three
empoyees, who are members of the P famy. These contentons are
true, but nevertheess they do not estabsh such a contro or owner-
shp as s requred for affaton by the Revenue ct of 1918. rtce
33 of Reguatons 45, construng secton 240(b) 2 of the 1918 ct,
provdes that n a case of ths character the same nterests sha be
deemed to mean the same ndvduas, and that where stock n two
or more corporatons s owned by the same two or more ndvduas,
the corporatons w not be consdered affated uness the percent-
age of stock of such corporatons hed by each ndvdua s sub-
stantay the same n each corporaton.
rtce 33: When corporatons are affated. 111-24-1 09
The fact of marrage Is not n tsef, n those States where the
common aw rue of e unty of nterest between husband and
wfe has been abrogated by statute, suffcent to consder the
ownershp of stock hed by the husband and that hed by the wfe
as stock owned or controed by the same nterests under secton
240 of the Revenue et of 191 .
n opnon s requested on a queston of aw n the matter of the
M corporaton and the O corporaton.
The facts are as foows: and are husband and wfe and ct-
zens and resdents of Oho. owns 77 per cent and owns 17 per
cent of the stock of the M Company. owns 15 per ent and
owns 82 per cent of the stock of the O Company. These stock hod-
ngs have remaned the same snce some tme pror to 1917. ach has
receved hs or her proportonate share of dvdends and each has
personay voted hs or her stock. oth corporatons are engaged n
the same nd of busness. There have been no ntercompany trans-
tsef suffcent to consder the ownershp of stock hed by the hus-
band, , and that hed by the wfe, , as stock owned or controed
by the same nterests under secton 240 of the Revenue ct of 1918
I. T. 2029
R NU CT O 1918.
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240, rt. 33.
304
Secton 240 of the Revenue ct of 1918 reads n part as foows:
(b) or the purpose of ths secton two or more domestc corporatons sha
be deemed to be affated (2) f substantay a the stock of two
or more corporatons s owned or controed by the same nterests.
rtce 33, Reguatons 45, defnes the words the same nterests
as foows:
The words the same nterests sha be deemed to mean the same ndvdua
or the same ndvduas , but when the stock of two or
more corporatons s owned or controed by two or more ndvduas
h consodated return s not requred uness the percentage of stock hed by
each ndvdua s substantay the same n each of the affated
corporatons.
Secton 7998 of the Genera Code of Oho reads:
Nether husband nor wfe has any nterest n the property of the other,
e cept as mentoned n the ne t precedng secton (secton reatng to support).
Secton 7999 of the Genera Code of Oho provdes that:
husband or wfe may enter nto any engagement or transacton wth the
oer, or wth any other person, whch ether mght f unmarred sub|ect, n
transactons between themseves, to the genera rues whch contro the actons
of persons occupyng confdenta reatons wth each other.
Secton 8001 of the Genera Code of Oho provdes that:
marred person may take, hod and dspose of property, rea or persona,
the same as f unmarred.
t common aw the husband had contro over the person of hs
wfe to such an e tent that she coud not contract n her own name
and her ega e stence was merged n that of her husbaud, so that
they were termed and regarded as one person n aw. The modern
statutes reatng to the property rghts of marred women are gen-
eray ntended to cut off the common aw rghts of the husband to
the persona estate of the wfe. The courts of Oho have sad that
the purpose of the egsature n enactng the chapter on husband and
wfe, whch ncudes the sectons above quoted, was to do away wth
the common aw rues wth regard to the nterest and rghts of hus-
band and wfe n the property of each other. ( art v. Sarvs, 3
O. N. P., 31 Raroad v. Gtenn, 4 N. ., 438 (Oho) echte v.
wng, 105 N. ., 72 (Oho).) Where the common aw has been
abrogated by statute, as t has been n Oho, the persona property
of any marred woman whch she may have at the tme of marrage,
or whch she may thereafter acqure, s not sub|ect to the dsposa
of her husband, nor abe for hs debts, but s her soe and separate
property as f she were a feme soe. ( ohnston v. ohnston, 73 S. W.,
202 (No.) Garner v. Provdence ank, 151 U. S., 420 echte v.
wng. 105 N. ., 72 (Oho).) Where, as n the nstant case, the aw
recognzes the rght of the wfe to hod and acqure property, and to
dea n the contract wth reference thereto, the same as f unmarred,
her ownershp of stock n a corporaton s to be treated n the same
ght as f such ownershp were that of an unmarred woman.
It s, therefore, the opnon of ths offce that the fact of marrage
s not n tsef, n those States where the common aw rue of the
unty of nterest between husband and wfe has been abrogated by
statute, suffcent to consder the ownershp of stock hed.by ths
husband and that hed by the wfe as stock owned or controed by
the same nterests under secton 240 of the Revenue ct of 1918.
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305
240, rt 33.
rtce 33: When corporatons are affated. III-25-1 19
I. T. 2031
R NU CT O 1018.
ed, that te stock of the M Company, O Company, Company,
R Company, and S Company s not owned or controed by the same
persons In substantay the same proportons. Whe such stock
s owned by members of the same famy, such ownershp does not
come wthn the meanng of the same nterests, as set out n
artce C33, Reguatons 45, and none of the ndvduas s shown to
have had any ega or actua contro over the stock of the others.
There have been ncuded n a consodated return for the year
1919 the foowng corporatons:
ffat ms, 1919.
Stockhoders.
Company.
M
N
Company.
O
P
R
S
Company.
Company.
Company.
Company.
Company.
Per een.
57
43
0
0
Per cent.
Per cent.
33)
331
33 |
0
Per cent.
Per cent.
100
0
0
0
Per cent.
331
33t
331
0
Per cent.
0
0
0
100
0
0
0
100
0
50
50
C
0
. , and C arc members of the same famy.
rom the foregong statement t s cear that the stock of the M
Company, O Company, Company, , Company, and the S Com-
pany s not owned or controed by the same persons n substantay
the same proportons. Whe such stock s owned by members of the
same famy, such ownershp does not come wthn the meanng
of the same nterests, as set out n artce 33, Reguatons 45.
Nether of the ndvduas s shown to have had any ega or actua
contro over the stock of ether of the others.
The M Company owned a the stock of the N Company and the P
Company. Ths woud, therefore, be a separate cass affaton.
The O and R Companes shoud be affated as a cass affaton.
rtce 33: When corporatons are affated. 111-25-1 20
( so Secton 1331, rtce 1735.) I. T. 2032
R NU CTS O 1018 ND 1021.
otng contro e ercsed through the hodng of pro es not
couped wth an nterest or otherwse of such u nature as to be
rrevocabe does not, ether by tsef or n con|uncton wth the
ownershp of stock, consttute contro wthn the meanng of sec-
ton 240(b) of the Revenue ct of 1918 and sectons 240 and 1331
of the Revenue ct of 1921.
n opnon s requested as to whether or not n the case of both
cass and cass affatons (e cept n 1917) votng contro e er-
csed through the hodng of pro es not couped wth an nterest
ether (a) by tsef or (o) n con|uncton wth the ownershp of
stock consttutes contro wthn the meanng of secton 240(b) of
the ct of ebruary 24, 1919, and sectons 240 and 1331 of the ct
of November 23, 1921.
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240, rt. G33.
0O
It s beeved that a genera dscusson of votng by pro y w
suffcenty answer the queston as regards both casses of affatons,
for even f a corporaton may hod and vote a pro y the stuaton
woud be governed by the same rues as n the case of an ndvdua
so far as the queston s concerned.
Sectons 240(b) of the 1918 ct and 240(c) of the 1921 ct are
dentca, and read as foows:
or te purpose of ths secton two or more domestc corporatons sha be
deemed to be affated (1) If one corporaton owns drecty or contros through
cosey affated nter st8 or y a nomnee or nomnees substantay n the
stock of tue other or others, or (2) f substantay a the stock of two or more
corporatons s owned or controed by the same nterests.
The pertnent part of secton 1331 of the 1921 ct s as foows:
(b) or the purpose of ts secton a corporaton or partnershp was
affated wth one or more corporatons or partnershps (1) when such cor-
poraton or partnershp owned drecty or controed through cosey affated
nterests or by a nomnee or nomnees a or substantay a the stock of
the other or others, or (2) when substantay a the stock of two or more
corporatons or the busness of two or more partnershps was owned by the
same Interests .
The statutes upon consodated returns are, as stated n artce 31,
Reguatons 2, based upon the prncpe of evyng the ta accord-
ng to the true net ncome and nvested capta of a snge enterprse
even though the busness s operated through one or more corpora-
tons. Whether or not corporatons are to be consdered as affated
s made to depend under the sectons above quoted upon the owner-
shp or contro of the stock. It s not necessary to consder, there-
fore, the many schemes for securng contro of corporatons by
means of genteman s agreements, nterockng drectorates,
etc., save as these are effected through ownershp or contro of the
stock. Indeed, as ntmated n the case of Unted States v. Northern
Securtes Company (120 ed., 721-725), actua contro of corpora-
tons s ordnary based upon ownershp of stock. Whether or not
con ro of stock suffcent to satsfy the statute e sts by reason
of votng by pro y depends naturay upon the ega character of
the reatonshps thus created.
When the word contro s used wth reference to corporate
management, t s hed to have no ega or technca meanng ds-
tnct from ts popuar acceptaton t w be construed
to mean the mmedate contro and not to refer to some remote con-
tro or uncertan remedy of contro. (Robnson v. ster, 59 S. .,
505.) ut gvng the words ther oosest possbe meanng, pro y
hodng coud not be hed to consttute contro of the stock by the
pro y hoder. Such contro, as s ceary set forth n the foowng
e cerpt from the case of ache v. Centra Leather Co. (N. .) (81
t., 570), s actuay and egay e ercsed by the stockhoder hm-
sef actng through an agent:
If a stockhoder e ecutes a pro y, the person to whom t runs
s the stockhoder s agent, and he must vote n accordance wth the nstruc-
tons gven ether openy or tacty to hm by the rea owner of the share .
The agency s of such a character that t may be abrogated by the appearance
of the sharehoder n person at the meetng, or by the e ecuton of a sub-
sequent pro y whch woud cance the former one the whoe stuaton beng
entrey under the contro of the stockhoder hmsef
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307
240, rt. 37.
Indeed, .asde from beng n ts nature temporary, such votng
contro over stock s decdedy crcumscrbed and ths no matter
how unmted the authorty granted n the pro y may seem to be.
( ar-s/ v. Ceneguta Copper Co. ( rz.), 100 Pac, 781.)
The rung here suggested s, n genera terms, that votng contro
e ercsed through the hodng of pro es not couped wth an n-
terest or otherwse of such a nature as to be rrevocabe does not,
ether by tsef or n con|uncton wth the ownershp of stock, con-
sttute contro wthn the meanng of the sectons referred to.
It s evdent, of course, that ths rue has no reevancy to cass
affatons under secton 1331 of the 1921 ct, because stock owner-
skp, aone, s there made the soe test for affaton.
btce 37: Consodated accounts of re- 111-20-15 0
ated trades owned by same nterests. S. M. 1530
( so Secton 32 , rtce 8 4 Sectons
1318, 1319, and 1320, rtce 1050.)
R NU CTS O IS 17 ND 1918.
Profts resutng from ntercompany transactons durng the year
1917 shoud not be emnated from the openng nventores of the
subsdary corporatons n determnng the consodated ta abe
net ncome for the year 1918.
The ta payer s consodated nvested capta for the years
1917, 1918, and 1919 shoud be reduced by the prorated amount
of the ta es doe for the respectve precedng years.
In the computaton of the consodated nvested capta of te
ta payer and ts subsdares the cost of the stock of some of
the subsdares to the parent company was propery taken
as measurng the vaue at whch the stock of such subsdares
couM be Incuded n the consodated nvested capta, and the
surpus of such subsdares was propery restrcted to the
amount of ther undvded earnngs accumuated between the
date of the acquston of ther stock by the parent company
and the begnnng of the year nvoved n the determnaton of
nvested capta.
In makng a protest n order to ay a foundaton for a sut
to recover ta es egay coected, the protest shoud be made n
wrtng to the coector, and at the tme the ta es are pad. Ths
does not mean that a verba protest woud not be suffcent under
certan crcumstances, but a wrtten protest s easer proved and
s the safer method of protectng one s rghts.
The foowng questons are rased n the case of the M Company:
1. In determnng the consodated ta abe net ncome of the ta -
pnyer and ts subsdares, for ncome ta purposes, for the year
1918, must ntercompany profts reazed n 1917, and whch were
refected n the openng nventores of certan of the subsdary cor-
poratons, be emnated
.. Must the consodated nvested capta of the ta payer and
t subsdares for the years 1917, 1918, and 1919 be reduced by the
prorated amount of the ta es due for the respectve precedng years
. In computng the consodated nvested capta of the ta payer
and ts subsdares for the years 1917, 1918, and 1919, must the
fu nvested capta of each separate subsdary be ncuded n the
tota consodated nvested capta, or must the cost of the stock
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240, rt. 37.
308
of a subsdary to the parent corporaton be taken as measurng
the vaue at whch the stock of such subsdary may be ncuded n
the consodated nvested capta
4. In what manner and at what tme shoud a protest be made n
order to ay a foundaton for a sut to recover ta es
The foregong questons w be taken up n ther order:
1. The frst queston reates to the emnaton of ntercompany
profts, whch were refected n the openng nventores of certan of
the ta payer s subsdares, n determnng the consodated net n-
come of the group for the year 1918. The ta payer s a parent cor-
poraton of an affated group of corporatons. Certan of ts sub-
sdares n 1917 reazed profts from the sae of merchandse to other
subsdares. The profts reazed by the vendor corporatons from
these ntercompany transactons were ncuded n ther ncome ta
returns for 1917, and the merchandse purchased by the vendee cor-
poratons, remanng n ther hands on December 31, 1917, was n-
cuded, for the purpose of determnng ther ncome for that year,
n ther nventores at cost to them. In the computaton of the net
ncome of the affated group of corporatons for the year 1918 there
was deducted from the openng nventores of the vendee corporatons
amounts equvaent to the ntercompany profts derved n 1917 by
the vendor corporatons from the saes of the merchandse ncuded
n the sad nventores, whch had the effect of reducng the cost of
goods sod and ncreasng the net ncome accordngy. Ths, the
ta payer contends, s equvaent to ncudng ntercompany profts a
second tme n determnng the amount sub|ect to ncome ta as we
as sub|ectng part of the same ncome to both the 1917 and 1918 n-
come ta rates.
The emnaton of these amounts from the openng nventores
was apparenty based upon artce C37 of Reguatons 45, whch pro-
vdes that, sub|ect to the provsons coverng the determnaton of
ta abe net ncome of separate corporatons, and sub|ect further to
the emnaton of ntercompany transactons, the consodated ta -
abe net ncome sha be the combned net ncome of the severa cor-
poratons consodated.
In the computaton of net ncome sub|ect to ncome ta the words
emnaton of ntercompany transactons refer ony to transac-
tons occurrng durng the year for whch the ncome s beng de-
termned. In determnng the net ncome of the affated group as
a ta abe entty, t s obvous that a deangs between the affated
corporatons shoud be gnored, snce transactons between the con-
sttuent parts of the ta abe unt do not affect the net ncome of the
Unt, but, of course, t s equay obvous that the ntercompany trans-
actons to be gnored shoud be confned to the ta abe perod for
whch the ncome s beng computed and the entty recognzed. The
Revenue ct of 191 as amended treats each corporaton of the
affated group as a separate entty for ncome ta purposes the
group beng consodated ony for the computaton of the e cess
profts ta . Income for that year whch was treated as ntercompany
proft for e cess profts ta was treated as reazed proft for ncome
ta and was accordngy ta ed at 2 per cent and 4 per cent. Where
an affated vendor corporaton durng the year 1917 sod goods to
an affated vendee corporaton, t pad an ncome ta upon the proft
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309
240, rt. 37.
reazed, and the vendee corporaton had a rght to ncude any such
merchandse whch remaned on hand at December 31, 1917, n ts
cosng nventory of that date. The merchandse of the subsdary
corporatons ncuded n ther cosng nventores of 1917 became
and was ther capta at the begnnng of 1918, and to reduce those
nventores, thereby ncreasng the net ncome, woud be amost
equvaent to ta ng capta.
The subsdary corporatons havng for the year 1917 fed returns
as separate and dstnct enttes and havng pad ta es upon the net
earnngs derved from ntercompany transactons shoud not be
affected by the provsons of the Revenue ct of 1918 n determnng
the net ncome sub|ect to ncome ta es for that year. Ther net n-
come for 1917 havng been refected by ther nventores shoud not
be changed. To reduce these nventores and appy the 1918 ncome
ta rates woud n effect, n the opnon of ths offce, be ta ng ncome
reazed n 1917, and whch had aready borne ts ta burden.
There s nothng n the evenue ct of 1918, nor n Reguatons
45, whch requred ntercompany proft for 1917 to be emnated
from the openng nventores of the vendee corporatons for 1918 n
determnng the consodated net ncome whch was sub|ect to the
ncome ta under the 1918 ct. It s true that artce 8 4 of Regua-
tons 45, whch has reference to consodated nvested capta of
affated corporatons, states that n preparng a consodated ba-
ance sheet for such corporatons proper ad|ustments shoud be made
n respect of ntercompany profts and osses refected n nventores
whch at the begnnng or end of the ta abe year contaned mer-
chandse e changed between the corporatons ncuded n the aff-
ated group at a prce above or beow cost to the producng or orgna
owner corporaton. Ths, however, had no reference to the com-
putaton of the net ncome upon whch the ncome ta was to be
assessed. Under Tte II of the Revenue ct of 1917 the proft of
a vendor corporaton arsng from ntercompany transactons was
emnated n computng the net ncome whch was sub|ect to e cess
rofts ta , and t foows accordngy that ths proft shoud not
refected n the consodated nvested capta of the vendor and
vendee corporatons for 1918 by permttng t to reman n the
openng nventory of the affated vendee corporaton ths, how-
ever, was an ad|ustment whch affected the e cess profts ta ony
and not the ncome ta . The statutory method of determnng n-
vested capta, n ths nstance, for e cess profts ta purposes does
not affect the method of determnng the amount sub|ect to the n-
come ta .
Therefore, n the opnon of ths offce, the profts resutng from
ntercompany transactons durng the year 1917 shoud not be em-
nated from the openng nventores of the subsdary corporatons n
determnng the consodated ta abe net ncome for the year 1918.
2. The ta payer contends that ts consodated nvested capta
for the years 1917,1918, and 1919 shoud not be reduced by the pro-
rated amount of the ta es due for the respectve precedng years, for
the reason that a abty ncurred at one date can not operate to
reduce surpus as of another date. Ths contenton s based upon the
theory that ncome and e cess profts ta es are not abtes unt
due.
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310
The ta payer s premse s entrey faacous. Labty for ncome
and e cess profts ta es arses by operaton of aw. That abty
arses and attaches to the ncome of a corporaton as soon as such
ncome s earned, and t was ony a matter of grace to the ta payer
that n computng nvested capta t was permtted to ncude the
amount of such ta es n ts surpus and to retan t beyond the cose
of the ta abe year and unt the date of the payment of the ta es
n the succeedng year.
Therefore, t s the opnon of ths offce that the ta payer s con-
sodated nvested capta for the years 1917, 1918, and 1919 shoud be
reduced by the prorated amount of the ta es due for the respectve
precedng years.
3. In the computaton of the consodated nvested capta of the
ta payer and ts subsdares the cost of the stock of some of the
subsdares to the parent company was taken as measurng the vaue
at whch the stock of such subsdares coud be ncuded n the con-
sodated nvested capta, and the surpus of such subsdares was
restrcted to the amount of ther undvded earnngs accumuated
between the date of the acquston of ther stock by the parent com-
pany and the begnnng of the year nvoved n the determnaton of
nvested capta. The ta payer contends that by ths method the
surpus of ts subsdares e stng at the date of the acquston of
the stock by the ta payer was mpropery emnated from the con-
sodated nvested capta that n computng the consodated n-
vested capta the fu nvested capta of each separate subsdary
shoud bo ncuded.
The consodated nvested capta of the ta payer and ts sub-
sdares appears to have been computed n the manner prescrbed
by artces 8 4 and 8 7 of Reguatons 45. Those artces, n the
opnon of ths offce, are n accordance wth the statute and cor-
recty outne the method of determnng the consodated nvested
capta n cases of ths knd.
4. Regardng the tme and manner of makng a protest n order to
ay a foundaton for a sut to recover ta es egay coected, the
protest shoud be made n wrtng to the coector, and at the tme
the ta es are pad. Ths does not mean that a verba protest woud
not be suffcent under certan crcumstances, but a wrtten protest
s easer proved and s the safer method of protectng one s rghts.
Neson T. artson.
Soctor of Interna Revenue.
S CTION 241. TIM ND PL C OR ILTNG
CORPOR T R TURNS.
rtce 51: Tme and pace for fng returns.
(See T. D. 3550 sec. 227, art. 444.) Treasury decsons reatng
to e tenson of tme for fng returns of domestc corporatons for
the caendar year 1923 and for the fsca year ended anuary 31,
1924, and the fsca year endng ebruary 29, 1924.
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311
24 and 247, rt. 92.
S CTIONS 24 ND 247. INSUR NC COMP NI S OT R
T N LI OR MUTU L COMP NI S.
The provsons of the Revenue ct of 1921 wth respect to the
dvson of premums receved by nsurance companes nto earned
and unearned premnms are not appcabe to tte nsurance com-
panes whose premums are earned n fu at the tme ther servces
are rendered. earnngs of such companes shoud be reported
as ncome for the year n whch the charge for ther sendees s made,
n the event that that was the method for reportng ther ncome
whch was foowed n past years.
rtce 92: Gross ncome of nsurance com- 111-22-1583
panes. I. T. 2015
foregn Insnranec company (not a mutua or fe nsurance
company) havng an agency n the Unted States deposted bonds
as requred by the State of S Insurance Department, wth a trus-
tee n that State. These bonds were foregn bonds and the agency
coected the nterest therefrom and ncuded such nterest n ts
Income ta return. Such foregn nterest must be ncuded n the
report the agency makes to the nsurance department of the State
of S.
ed, t was propery Incuded n reports of ncome fed under
the Revenue ct of 1921 and that smar tems were propery n-
cuded n returns fed under the Revenue cts of 1917 and 1918.
Secton 24 of the Revenue ct of 1921, coverng the ta aton of
nsurance companes other than fe and mutua nsurance compa-
nes, provdes n part as foows:
(a) That, n en of the ta es Imposed by sectons 230 and 1000, there sha
be eved, coected, and pad for the caendar year 1922, and for each ta abe
year thereafter, upon the net Income of every Insurance company (other than
a fe or mutua nsurance company) a ta as foows:
(2) In the case of such a foregn nsurance company the same percentage
of ts net Income from sources wthn the Unted States as s mposed upon
the net ncome of other corporatons by secton 230.
(b) In the case of an nsurance company sub|ect to the ta mposed by ths
secton
(1) The term gross ncome means the combned gross amount, earned
durng the ta abe year, from nvestment ncome and from underwrtng ncome
as provded n ths subdvson, computed on the bass of the underwrtng and
Investment e hbt of the annua statement approved by the Natona Conven-
ton of Insurance Commssoners.
It s to be noted that there sha be ncuded n gross ncome n
the determnaton of the net ncome of an nsurance company, ta -
abe under secton 24 of the Revenue ct of 1921, the combned
|rross amount of ncome from the sources theren stated, computed on
the bass of the annua statement approved by the Natona Con-
venton of Insurance Commssoners, whch s the statement whch
s submtted to the nsurance department of the State of S. state-
111-1 -1510
I. T. 1981
R NU CTS O 1917, 1918, ND 1921.
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250, rt. 1001.
312
ment so prepared for submsson to the nsurance department of the
State of S woud ncude n the tota amount of ncome the nterest
derved from the bonds, and t must, therefore, under secton 24 (b) 1,
be ncuded n gross ncome for edera ncome ta purposes.
Smar tems were propery ncuded n returns fed under pror
cts of 1917 and 1918, n accordance wth the reguatons nterpret-
ng these cts.
P RT I . DMINISTR TI PRO ISIONS.
S CTION 250. P YM NT O T S.
rtce 1001: Tme for payment of ta . 111-25-1 21
( so Secton 252, rtce 1031 (a).) Mm. 3207
Instaments of ncome ta due une 15, 1924, on ndvdua re-
turns.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, une 12, 192 .
To coectors of nterna revenue and others concerned:
Under the provsons of Tte II of the Revenue ct of 1924
the amount of ncome ta due on ndvdua returns fed for the
caendar year 1923 s reduced by 25 per centum of the amount shown
as ta upon the return. If the amount shown as ta upon an n-
dvdua return has been pad n fu, the 25 per centum aowance
w be credted or refunded n accordance wth the provsons of
secton 281 of the Revenue ct of 1924.
If the ta payer has eected to pay the ta n quartery nsta-
ments n accordance wth the provsons of secton 250(a) of the
Revenue ct of 1921, the amount of the aowance sha be prorated
to the four nstaments. The amount so prorated to the nsta-
ments due on une 15, September 15, and December 15 sha be
apped n reducton of such nstaments. The amount prorated
to the nstament whch was pad on March 15 sha be credted
aganst the nstament fang due on une 15. ccordngy, one-
haf of the aowance shoud be credted aganst the nstament due
on une 15, and the resut w be that the amount due on that date
w be one-haf of the amount pad on March 15. The computaton
may be ustrated as foows:
Tota ta computed under the Revenue ct of 1921 800
mount of aowance (25 per centum of the above) 200
mount of aowance prorated to each quartery nstament. 50
mount pad March 15 200
mount to he pad une 15 100
mount to he pad September 15 150
mount to be pad December 15 150
In the event that one-haf of the entre amount shown as ta
upon such ndvdua returns was pad on March 15, no further pay-
ment w be due unt September 15. The amount of the nstament
due on that date as orgnay computed shoud be reduced by three-
fourths of the aowance specfed n the Revenue ct of 1924. In the
event that three-fourths of the entre ta abty was pad on March
15, no further ta w be due for the reason that the aowance
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313
250, rt. 1001.
specfed n the Revenue ct of 1924 w equa the amount of the
fna nstament cue on December 15 as orgnay computed.
smar aowance by credt or refund of 25 per centum of the
amount shown as the ta upon the return s e tended to ndvduas
makng returns for a perod of ess than a year and begnnng and
endng wthn the caendar year 1923. The aowance n such cases
shoud be computed and apped n a smar manner to that outned
above n the case of a ta payer who made a return for the fu
caendar year 1923.
ny ndvdua makng a return for a perod begnnng n 1922
and endng n 1923 s entted to an aowance by credt or refund
of 25 per centum n the same proporton of ta for such perod (de-
termned under the aw appcabe to the caendar year 1923 and at
the rates for such year) whch the porton of such perod fang
wthn the caendar year 1923 s of the entre perod. Ths may
be ustrated as foows:
Tota amount of ta due for fsca year endng une 30,
1023 500. 00
The porton of such perod fang wthn the caendar
year 1923 s oue-haf of entre perod and the proporton
of ta Is 250.00
25 per cent of the proporton of ta equas 2. 50
Ta as recomputed amounts to 500 mnus 2.50, namey- 437. 50
Instaments as recomputed are 109. 38
mount pad before une 15, 1924 375. 00
mount due une 15, 1924 2. 50
The bs for the nstaments of ta due une 15, 1924, computed
n accordance wth the Revenue ct of 1921 have been maed out
and n so far as the amount of ta s stated thereon such bs w
necessary be erroneous. Ta payers shoud, therefore, recompute
ther ta n accordance wth the foregong ustratons wthout
watng for a corrected notce from the coector of nterna revenue.
The Revenue ct of 1924 aso provdes that any ndvdua mak-
ng a return for a perod begnnng n 1923 and endng n 1924 sha
be entted to an aowance by credt or refund of 25 per centum of
the same proporton of a ta for such perod (determned under the
aw appcabe to the caendar year 1923 and at the rates for such
year) whch the porton of such perod fang wthn the caendar
year 1923 s of the entre perod. Ths provson of the Revenue
ct of 1924 may be ustrated by the foowng e ampe:
mount of ta due under the provsons of the Revenue
ct of 1924 for fsca year endng March 31, 1924, before
subtractng aowance : 400. 00
mount of ta for such perod determned under the aw
appcabe to the caendar year 1923 and at the rates
for such year 500. 00
The porton of such perod fang wthn the caendar year
1923 Is three-fourths of the entre perod and the pro-
porton of ta s (three-fourths of 500) 375.00
25 per cent of the proporton of ta equas 93. 75
Tota ta as recomputed amounts to 400 mnus 93.75,
namey 30 . 25
C. R. Nash,
ctng Commssoner.
4177 24 21
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250, rt. 1004.
314
rtce 1003: Nonpayment of ta Interest and penaty.
(See T. D. 3550 sec. 227, art. 444.) Interest on defcency of frst
nstament of ta as determned upon submsson of fna returns
fed under authorty of T. D. 3550.
rtce 1003: Nonpayment of ta Interest and III-8 1375
penaty. L T. 1920
R NU CT O 1921.
Where a cam for abatement of the entre ta assessed was fed
ater than 10 days after notce and demand by tbe coector and
tbe ta Is abated n part, the penaty and Interest wth respect
thereto are abated aso. If the ta payer faed to pay the un-
abated porton of the pan after second notce and demand, be
woud be abe ony for the 5 per cent penaty wth res eet to
the amount fnay determned to be due, wth nterest at the rate
of 1 per cent per month from the date of the orgna notce and
demand by the coector unt payment.
Under the provsons of secton 250(d) of the Revenue ct of 1921,
t s apparent that by reason of a ta payer s faure to fe a cam for
abatement wthn the statutory perod of 10 days the provso of the
statute reatng to cams for abatement s not appcabe. It foows,
therefore, that the 5 per cent penaty and 1 per cent per month n-
terest began to run from the date the ta became due. owever,
where the assessment s abated n part, the penaty and nterest wth
respect thereto are abated aso, but the penaty and nterest due wth
respect to that porton of the assessment whch was not abated reman
due and payabe by the ta payer. There s nothng n the anguage
of the statute referred to that ndcates an ntenton on the part of
Congress to mpose a second penaty n the event of the faure of
the ta payer to pay after a second notce and demand. ccordngy,
f the ta payer faed to pay the unabated porton of the cam after
second notce and demand, he woud be abe ony for the 5 per cent
penaty wth respect to the amount fnay determned to be due. wth
nterest at the rate of 1 per cent per month from the date of the
orgna notce and demand by the coector unt payment.
rtce 1004: Penaty for faure to fe return. 111-10-1405
L T.1939
R NU CTS O 1818 ND ID 21.
waver of rghts as to mtaton of the assessment of ta es does
not carry wth t a waver as to penates, uness the ta payer ceary
ndcates that hs waver ncudes both ta es and penates. If a
ta payer fes a denquent return and a waver of the statutory
perod of mtaton upon the assessment of a ta or addtona ta
on such return, the ad vaorem penaty for denquency n fng hs
return shoud not be asserted after the statutory perod of mtaton
upon assessment has run.
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315
250, rt. 1005.
rtce 1005: Defcency n payment Interest
and penaty.
R NU CT OP 1921.
III-2-1302
L T.1907
Interest on a defcency of ta pad, dscovered n an e amna-
ton of a return of a ta payer who eected to pay hs ta In a
snge payment at the tme f ed by aw for fng the return,
shoud be computed from the due date of the return.
The ta payer pad the entre amount of ta dscosed on hs re-
turn at the tme t was fed, and thereafter, upon e amnaton of the
return, addtona ta was dscovered. Inqury s made whether the
one-haf of 1 per cent per month nterest mposed by secton 250(b)
of the Revenue ct of 1921 shoud be computed from the tme the
ta was due, or whether the nterest shoud be determned on the
nstament bass.
Secton 250(b) of the Revenue ct of 1921 provdes that
If the amount aready pad s ess than that whch shoud have been pad, the
dfference together wth nterest thereon at the rate of one-haf of
1 per centum per month from the tme the ta was due (or, f pad on the
nstament bass, on the defcency of each nstament from the tme te n-
stament was due), sha be pad upon notce and demand by the coector.
It s provded by secton 250(a) of the Revenue ct of 1921 that
The ta may at the opton of the ta payer be pad In a snge payment
nstead of nstaments, n whch case the tota amount sha be pad on or
before the tme f ed by aw for fng the return, or, where an e tenson of
tme for fng the return has been granted, on or before the e praton of the
I erod of such e tenson.
It s, accordngy, hed that a ta payer who eected to pay hs
ta n a snge payment at the tme f ed by aw for fng the return
s not entted to the nstament prvege n computng the one-
haf of 1 per cent nterest on addtona ta dscovered n an
e amnaton of hs return. In such case, the nterest must be com-
puted from the date f ed by aw for fng the return, or from the
due date as e tended where an e tenson of tme was granted for
fng such return.
rtce 1005: Defcency n payment Interest 111-20-15 1
The term defcency as used n secton 250(b) appes ony
n cases where tmey returns are fed. If a tmey return was
fed and no ta was shown thereon and therefore nothng was
pad when the return was fed and t ater deveops that the
return shoud have shown ta and somethng shoud have been
pad when the tmey erroneous return was fed, there s ceary
a defcency, to whch the nterest provded n secton 230(b) at-
taches. The defcency n such a case s the dfference between
nothng and the amount whch shoud have been pad.
ttenton s caed to Soctor s Opnon 150 (C. . II-, 1 1),
readng n part:
The payment of an amount at a ater date than that f ed by aw for ts
payment s manfesty not a payment of an amount at the tme f ed by aw
for ts payment. If, therefore, nothng was pad at or before the tme f ed
hy aw for Its payment there coud be no defcency as descrbed and de-
fned n secton 250(b), and f no such defcency e sts the nterest pro-
vded for n subdvson (b) can not attach, snce by the secton t s made
to attach ony to a defcency.
and penaty.
S. M. 1813
R NU CT O 1021.
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31
The memorandum of the Unt states as foows:
oowng teray the provsons of Soctor s Opnon 150, above quoted, a
ta payer, who fed a 1921 nonta abe return upon whch a ta abty of
5,000 was ater dscovered, s not sub|ect to the one-haf of 1 per cent per
month nterest mposed by secton 250(b) of the Revenue ct of 1921. On
the other hand, a ta payer who fed a return for 1921, payng a ta of 1
and an e amnaton of such return dscosed a ta abty of 5,000, s sub-
|ect to the one-haf of 1 per cent nterest on the defcency, namey, 4,999.
It s not cear to the Unt whether Soctor s Opnon 150 was ntended to
appy where a nonta abe return was fed and a ta ater dscovered, and an
opnon on ths pont s requested.
The hodng n Soctor s Opnon 150 s:
(1) Where an ncome ta return s not fed wthn the tme prescrbed by
aw, secton 317 of the tevsed Statutes, as amended, makes t necessary for
the Commssoner to assess the whoe amount of ta and add thereto the 25
per centum ad vaorem penaty theren provded, the penaty not to be added,
however, f a denquent return s fed and a reasonabe cause for faure to
fe the return on tme s shown.
(2) In such a case the nstament pan of payment s not appcabe and
consequenty the nterest provsons of secton 250(b) have no appcaton.
The Soctor s opnon deat ony wth cases n whch ta payers
faed to fe returns wthn the tme prescrbed by aw. It dd not
dea wth and was not ntended to dea wth cases where tmey
erroneous returns are fed or tmey nonta abe erroneous returns
are fed. So far as the term defcency as defned n the statute
and as nterpreted n Soctor s Opnon 150 s concerned, as beng
the dfference between the amount aready pad and the amount
whch shoud have been pad, there s a vast dfference between the
meanng of the e presson when a nontmey return s fed on the
one hand and ts meanng when a tmey nonta abe erroneous return
s fed.
The term defcency as used n secton 250(b) has meanng and
appes ony n cases where tmey returns are fed. If a tmey
return was fed and no ta shown thereon and therefore nothng
was pad when the return was fed and t ater deveops that the
return shoud have shown ta and somethng shoud have been pad
when the tmey erroneous return was fed, there s ceary a de-
fcency, to whch the nterest provded n secton 250(b) attaches.
The defcency n such a case s the dfference between nothng and
the amount whch shoud have been pad.
Neson T. artson,
Soctor of Interna e ven ue.
rtce 1005: Defcency n payment Interest 111-21-15 9
and penaty. I. T. 2008
R NU CT O 1921.
Where a ta payer consents to pay the amount of the defcency u
ta to the deputy coector makng the nvestgaton of hs re-
turn for 1921 or subsequent years, the deputy coector shoud co-
ect nterest on the defcency at the rate of one-haf of 1 per cent
a month from the date the ta was due up to the date of payment
If, however, the ta payer does not make payment of the ta , a
forma assessment by the Commssoner s necessary and the n-
terest on the defcency must be computed by the coector from the
tme the ta was due up to the date of the demand notce.
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317
250, rt. 1005.
dvce has been requested wth respect to the coecton of nterest
on defcences n ta under secton 250(b) of the Revenue ct of
1921.
The questons are presented and answered as foows:
(1) fed an ncome ta return on March 15,1922, coverng the
year 1921. The ta shown due by the return was 100. The ta -
payer eected to pay the entre amount upon submsson of the re-
turn. Upon verfcaton of the return, 18 months ater, t was
found that the ta payer shoud have pad e acty 200, or a de-
fcency of 100. The ta payer accepted the verfcaton by the
zone deputy as beng correct and offered to pay the amount due.
It appeared that the defcency was due purey to an oversght.
ow much, f any, nterest shoud the deputy coect
Interest at the rate of one-haf of 1 per cent per month shoud be
coected on the defcency of 100 from March 15, 1922, to the date
of payment. In ths connecton attenton s nvted to Income Ta
Rung 1907 (see p. 315), n whch t s hed that nterest on a
defcency of ta pad, dscovered n an e amnaton of a return of a
ta payer who eected to pay hs ta n a snge payment at the tme
f ed by aw for fng the return, shoud be computed from the due
date of the return.
(2) fed hs ncome ta return at the same tme owed 100
ta as shown by the return, but eected to pay hs ta n quartery
nstaments, and pad 25 upon submsson of the return. s re-
turn was verfed on September 15, 1923, and t was found that he
owed 100 addtona ta , and that the reason for defcency n hs
case was a mstake n cacuaton. Ths ta payer dd not have the
money to pay the ta at the tme of verfcaton, but accepted the
verfcaton as beng correct and asked that the ta be assessed.
ow much nterest, f any, shoud the deputy report for assessment
The deputy coector shoud not report for assessment any nterest
on the defcency but shoud merey report the amount of the def-
cency. Snce the ta payer dd not make payment of the defcency
at the tme of the e amnaton of hs return by the deputy coector,
the one-haf of 1 per cent per month nterest s due and payabe wth
the defcency upon notce and demand by the coector and must be
ncuded n the demand made by the coector. The nterest must
be computed on the defcency of each nstament from the tme the
nstament was due up to the date of sendng notce and demand
by the coector. In ths connecton attenton s nvted to Soctor s
Opnon 147, contaned on pages 213 to 21 , ncusve, of Cumuatve
Interna Revenue uetn 1-2.
(3) C fed hs return on March 15, 1923, showng no ta due.
Upon verfcaton by a deputy t was found that ths ta payer, as a
matter of fact, owed 100 ta (apparenty not a defcency as hed
by Soctor s Opnon 150 (C. . II-, 1 4)). Ths ta payer s fa-
ure to pay the amount of ta due was not due to neggence or nten-
tona dsregard of the authorzed rues wth ntent to evade the ta .
Ths ta pa Ter accepted the verfcaton as beng correct and was
wng to pay the fu amount due. ow much nterest, f any,
shoud the deputy coect from ths ta payer
Interest at the rate of one-haf of 1 per cent per month shoud be
coected on the amount of 100 from March 15, 1923, to the date of
payment. In Soctor s Opnon 150 t s hed that the nterest
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250, rt. M05.
318
provsons of secton 250(b) of the Revenue ct of 1921 have no
appcaton where a return s not fed wthn the tme prescrbed
by aw. Ths opnon does not, however, refer to cases where re-
turns were fed wthn the requred tme. The term defcency
as used n secton 250(b) has meanng and appes ony n cases
where returns were fed wthn the prescrbed tme. If a return
showng no ta due was fed on tme and a ta s ater dscovered,
there s ceary a defcency to whch the nterest provded for n
secton 250(b) attached. The defcency n such a case s the df-
ference between nothng and the amount whch shoud have been
pad.
It w be noted from the answers to the above questons that
where a ta payer consents to pay the amount of a defcency n ta
to the deputy coector makng the nvestgaton of hs return, the
deputy coector shoud coect nterest on such defcency at the rate
of one-haf of 1 per cent per month from the tme the. ta was due
up to the date of payment. If, however, the ta payer does not make
payment of the ta , a forma assessment by the Commssoner s
necessary, and the nterest on the defcency must be computed by
the coector from the tme the ta was due up to the date of the
demand notce.
rtce 1005: Defcency n payment Interest 111-21-1570
and penaty. I. T. 2009
R NU CT O 1921.
Interest at the rate of one-haf of 1 per cent a month shoud be
coected as provded In secton 250(b) of the Revenue ct of 1921
upon defcences n ta resutng where a nonta abe return s
fed wthn the tme requred by aw and a ta s ater dscovered.
ttenton has been caed to the fact that the ureau has nd-
cated by rubber stamp that nterest shoud be coected on defcen-
ces n ta where the orgna return dscosed no ta to be due. In
ths connecton reference s made to the provsons of Soctor s
Opnon 150, dated May 23,1923 (C. . II-, 1 4).
Soctor s Opnon 150 refers ony to cases n whch ta payers
faed to fe returns wthn the tme prescrbed by aw. It dd not dea
wth cases where tmey returns were fed or tmey nonta abe
erroneous returns were fed. The term defcency as used n
secton 250(b) has meanng and appes ony n cases where returns
are fed on tme. If a return showng no ta due was fed n te
requred tme and a ta s ater dscovered there s ceary a def-
cency to whch the nterest provded for n secton 250(b) attaches.
The defcency n such a case s the dfference between nothng and
the amount whch shoud have been pad.
ccordngy, nterest at the rate of one-haf of 1 per cent a
month shoud be coected, as provded n secton 250(b) of the
Revenue ct of 1921, upon defcences n ta resutng where a non-
ta abe return s fed wthn the tme requred by aw and a ta
s ater dscovered.
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319
250, rt. 10OG.
rtce 100 : ppeas and hearngs. I 3-1315
LT.1915
The Income Ta Unt e pects to be abe to send out an assess-
ment etter n a 1917 and 1918 cases now pendng n tme to aow
ta payers the 30- days wthn whch to appea, n accordance wth
the provsons of secton 250(d) and Treasury Decson 3492 (O. .
11-1,170).
In a such cases appeaed to the Commttee on ppeas and Re-
vew or wheren addtona tme s requred to protest to the Unt,
t w be the pocy to requre wavers before they are forwarded
to the Commttee or an e tenson granted.
mc 100 : ppeas and hearngs. III-4-1331
. R. M. 219
Ruks or Procedure efore Commttee on ppeas and Revew.
L The |ursdcton of the Commttee on ppeas and Revew s
mted to cases under secton 250(d) of the Revenue ct of 1921
wheren appeas have been perfected pursuant to the procedure spec-
fed n artce 100 of Reguatons 2, as amended by T. D. 3102
(C. . II-, 170), and to such other cases as may specfcay be
referred to t by the Commssoner of Interna Revenue.
2. When an appeu has been duy perfected and the case forwarded
to and receved by the Commttee, together wth a certfcaton by
the Income Ta Unt of the ssues on appea, a copy of such cert-
fcaton havng prevousy been maed to the ta payer, the ta payer
or hs duy authorzed representatve w be notfed of the date and
hour set for a hearng of the appea. hearng or an opportunty
for a hearng before a member s a hearng or an opportunty for a
hearng before the Commttee.
3. The representatve of the ta payer shoud be prepared to e -
. hbt at the hearng (1) a copy of hs power of attorney, (2) ev-
dence of hs enroment to practce before the Department, and (3)
evdence of havng fed, as requred by departmenta reguatons, the
decaraton concernng contngent fees.
4. The statute merey provdes that an opportunty for hearng
sha be granted. Uness an appearance s made at the tme set for
hearng, or for adequate cause shown a postponement requested n
wrtng and granted, the opportunty for hearng w be consdered
as waved, and the case w thereupon be decded on the record.
5. evdence submtted by the appeant must be n affdavt
form and an outne of the argument showng the authortes reed
upon shoud be n documentary form. If brefs n addton to those
fed wth the Income Ta Unt are to be submtted to the Commttee,
they must be fed wth the Commttee n trpcate at east three days
pror to the date set for hearng. Ora evdence may be presented,
but such ora evdence can ony be confrmatory of the evdence of
record. The ora dscusson at the hearng w be merey to eucdate
the ssues or dspose of any msunderstandng wth respect to the
evdence or argument.
G. The hearng before the Commttee can not be made the occason
for the presentaton of new evdence. In the event that the hearng
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deveops the desrabty of new evdence, t may be admtted or re-
|ected at the dscreton of the Commttee. If the evdence s ad-
mtted, the Commttee may n ts dscreton resubmt the case to the
Income Ta Unt for a further e presson of ts vews upon the ssue
or ssues nvoved.
7. Whe ony the ssues stated n the transmtta etter are before
the Commttee formay, the Commttee s not precuded from ca-
ng to the attenton of the Unt and of the Commssoner any errors
whch n ts opnon may have been commtted by the Unt n ad-
|ustments not made the sub|ect of appea.
8. The hearng or opportunty for hearng before the Commttee
s the fna hearng or opportunty for hearng n the ureau of In-
terna Revenue. When a case has been heard or the opportunty for
hearng waved and the recommendaton of the Commttee has been
approved by the Commssoner of Interna Revenue, the decson
arrved at and communcated to the ta payer or hs representatve
s the fna decson of the ureau of Interna Revenue n so far as
the ssues consdered n the recommendaton are concerned, and
such ssues w not agan be consdered bv the ureau e cept as
provded by T. D. 3492.
9. The procedure heren outned appes to the Speca Commttee
on peas.
Offce Decson 709 (C. . 3, 370) s revoked.
Chares D. ame,
Oharmm Commttee on ppeas and Revew.
rtce 100 : ppeas and hearngs. III-8-137
I. T. 1927
R NU CT O 1921.
ow eaborate the appea from the acton of the coector n con-
necton wth a 1040 return shoud be depends upon the facts of
the partcuar case but n any case the appea shoud contan suff-
cent nformaton to show ceary the fndngs to whch the ta -
payer takes e cepton and the grounds upon whch the ta payer
rees n support of such e ceptons. Treasury Decson 3492 (C.
15. II-, 170) does not contempate that an appea In connecton
wth a 1040 return sha be n any partcuar form.
Treasury Decson 3492 (C. . II-, 170) does not contempate
that an appea n connecton wth a 1040 return sha be n any
partcuar form e cept that t sha be ceary desgnated as an
appea from the acton of the coector that t must be under oath
and that t sha contan the name and address of the ta payer, a
desgnaton by date and symbo of the regstered notce or notces
from whch the appea orgnates, a desgnaton of the years n-
voved and a statement of the amount of ta n dspute for each
year, an temzed schedue of the fndngs to whch the ta payer
takes e cepton, accompaned by a summary statement of the grounds
upon whch the ta payer rees n connecton wth each e cepton,
and n case the ta payer desres a further conference as provded n
the second paragraph of the Treasury decson a request for such con-
ference and a statement that the appea s not taken for the purpose
of deay.
ow eaborate the appea shoud be depends upon the facts of
the partcuar case but n any case the appea shoud contan suff-
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cent nformaton to show ceary the fndngs to whch the ta payer
takes e cepton and the grounds upon whch the ta payer rees n
support o such e ceptons.
rtce 100 : ppeas and hearngs. 111-10-140
I. T. 1940
R NU CT O 1921.
Ths offce desres that a ob|ectons a ta payer may have to a
revenue agent s report and a the addtona nformaton of any
knd whch he beeves w affect the fna decson be presented to
the revenue agent n charge before hs report s forwarded to ths
offce.
Ths procedure does not affect the provsons of Treasury Decson
3492 (C. . n-1, 170).
rtce 1008: Coecton of ta by sut. 111-12-1435
T. D.35 3
bankruptcy decson of court.
1. Statute of Lmtatons.
Statutes of mtaton do not appy to the Unted States uness
specfcay named theren.
2. ankruptcy Lmtaton on Cams.
Secton 57(n) of the ankruptcy ct, provdng that cams sha
not he proved aganst the estate of a bankrupt subsequent to one
1 year after ad|udcaton, does not appy to cams for unpad ta es
fed by the Unted States.
Treasury Department,
Offce of Commssoner of Interna evenue,
Washngton, D. G.
To coectors of nterna revenue and others concerned:
The appended decson of the Unted States Crcut Court of p-
peas for the Second Crcut n the case of dward . Chds, trustee
n bankruptcy, v. Unted States s pubshed for the nformaton of
nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna evenue.
pproved March 13,1924.
. W. Meon,
Secretary of the Treasury.
Unted States Crcut Court of ppeas for the Second Cbcut.
In the matter of . Menst Company, Inc., ankrupt dward . Chds,
Trustee n ankruptcy, appeant, v. Unted States of merca, camant-
appeee.
efore Rogers, Manton, and Mayer, Crcut udges.
ppea from order of the Dstrct Court for the Southern Dstrct of New
York sustanng an order of the referee n bankruptcy denyng the moton
of the trustee n bankruptcy to e punge two cams of the Unted States.
On March 25, 1920, an nvountary petton n bankruptcy was fed aganst
. Menst Co., Inc., and ad|udcaton foowed on pr 5, 1020.
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Te tme for fng of proofs of cams by credtors e pred on pr 5, 1921.
The Unted States of merca fed two cams for ta es, one on December 27,
1022, and one on annaTy 29, 1923. oth cams were thus fed more tan one
year after ad|udcaton.
Mates, Crcut udge: Ths appea presents the queston whether the
Unted States of merca s bound by the provson of secton 57 n) of the
ankruptcy ct:
Cams sha not be proved aganst a bankrupt estate subsequent to one
year after the ad|udcaton
arous cases have ponted out, for reasons theren stated, that certan pro-
vsons of the ankruptcy ct are appcabe, nter aos, to the Unted States
of merca. (Guarantee Co. v. Tte Guaranty Co.. 224 U. S., 152 . S.
dctu Co. v. ran, 22:1 U. S.. 205: In re nderson, 279 . It.. 525 In re Tde-
water Coa change, 280 . R., 48 Unted States v. Wood, 290 . It., 109.)
No case has hed that the soveregn can he bound by a statute of mtatons
uness that concesson s ceary made by specfcay namng the soveregn
n the statute. The cases are to the contrary and the reason for the rue or
prncpe was thus stated by Mr. ustce ed n Gbson v. Chateau (13
Wa., 99) :
It s a matter of common knowedge that the statutes of mtaton do
not run aganst the State. That no aches can be mputed to the ng an
that no tme can bar hs rghts, was the ma m of common aw, and was
founded on the prncpe of pubc pocy, that as he was occuped wth the
cares of government he ought not to suffer from the neggence of hs offcers
and servants. The prncpe s appcabe to a governments, whch must
necessary act through numerous agents, and s essenta to a preservaton of
the nterests and property of the pubc. It s upon ths prncpe that n ths
country the statutes of State prescrbng perods wthn whch rghts must
be prosecuted are not hed to embrace the State Itsef, uness t s e pressy
desgnated or the mschefs to be remeded are of such a nature that t must
necessary he ncuded.
See aso Unted States v. arron (20 Wa L, 251) T nd y v. Mer (
Peters, G , G73) Redfed v. Parks (132 U. S.. 239, 247) Unted States v.
rmngham Trust d- Savngs Go. (258 . R., 5 2 certorar dened 251 U. S.,
550).
We apprecate that secton 57(n) Is one of the provsons of the ankruptcy
ct whch has for ts purpose an e pedtons wndng up of a bankruptcy
estate but, under our decson In re nderson (279 . R., 525), the trustee
may ava of a smpe and practcabe method whereby the Unted States re-
ceves notce and thus s requred prompty to prove Its cams for ta es.
The practca dffcutes whch woud attend the requrement that the Gov-
ernment shoud be hed to the statutory mtaton of secton 57(n) are so great
that we see no warrant for assumng that Congress ntended, n that regard,
any departure from the rue that the Unted States of merca must be named
before t can be bound by a statute of mtatons.
Order affrmed wthout costs.
rtce 1008: Coecton of ta by sut. 111-22-1584
( so Secton 230, rtce 503 Secton T.D.3591
239, rtce 22.)
INCOM ND PRO ITS T R NU CTS OP 191 ND 1917 D CISION OP
COURT.
1. Income Ta Recever.
Under secton 10 nnd secton 13(c) of the Revenue ct of 191
Congress eved ta upon ncomes of operatng recevers of cor-
poratons. U. S. v. Whtrdge T. D. 1890 and Scott v. R. R.
(24 ed., 545) are not appcabe to the nstant case.
2. cess Profts Ta Recever.
Whether Congress ntended to evy e cess profts ta upon In-
come of such recevers Is not decded.
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or
3. Statute of Lmtatons.
Under secton 9(a) of Itevenue ct of 191 the three years m-
taton upon the Government s rght to coect by summary proceed-
ng does not mt the Government s rght to proceed by acton to
coect the ta at aw or n equty.
. Statute of Lmtatons.
Secton 250(d) of Revenue ct of 1921 s retroactve and appes
to the determnaton sad assessment of ta under the Itevenue ct
of 191 .
5. Corporatons Reorganzatons Ta Labty.
Part of the assets of a raroad company n the hands of an oper-
atng recever was sod at speca master s sae to a reorganzaton
commttee actng for stockhoders of raroad company, who after-
wards conveyed the same to defendant company, under a pan
whereby raway company gave fu-pad shares of ts capta stock
to the stockhoders of raroad company who In turn surrendered
to raway company a ke number of ther shares n raroad com-
pany and pad addtona money to assst n fnancng the raway
company. ed, that companant may be entted to a decree for
amount of ncome ta assessed aganst such recever. Not decded
whether companant s entted to a en upon such part of de-
fendant s property as t acqured theretofore beongng to the ra-
road company.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The appended decson of the Dstrct Court of the Unted States
for the Northern Dstrct of Inos, astern Dvson, n the case
of Unted States of merca v. The Chcago astern Inos
away Company, s pubshed for the nformaton of nterna
revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved May 21, 1924.
. W. Meon,
Secretary of the Treasury.
Dstrct Court of the Unted States, Northern Dstrct of I nos,
astern Dvson.
Unted States of merca, pantff, v. The Chcago astern Inos Raway
Company.
pr 12, 1924.
statement of facts.
pproved by udge vans.
Ths Is a b n equty to recover aganst the defendant addtona ncome
and e cess proft ta es neged to.be due and owng to the Unted States and
assessed aganst the recever of Chcago astern Inos Raroad Company
under secton 10 and secton 13(c) of the Revenue ct of 191 and secton 4
and secton 201 of the Revenue ct of 1917. The b aeged nter aa aa
foows:
The raroad company was n 1913 paced n the hands of an operatng
recever. Such recever made return on March 25, 1918, for the ta abe year
of 1917, showng ncome ta due (whch was pad) aud no e cess profts
ta due.
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On pr 21, 192 , a speca master under order of court sod certan of the
raroad property and assets of the raroad company to a purchasng or reor-
ganzaton commttee actng for and n behaf of such stockhoders of the
raroad company who mght ater assst n the reorganzaton and fnancng
of sad raroad company as the defendant raway company. They afterwards
conveyed the sad property and assets to the raway company, and the
recever surrendered possesson and contro thereof to the defendant on anu-
ary 1, 1922.
The defendant raway company as part of the pan of reorganzaton gave
fu-pad shares of ts capta stock to the stockhoders of the raroad company,
who, In turn, surrendered to Ihe raway company a ke number of ther
shares n the raroad company and pad some addtona money n furtherance
of fnancng t. The recever of the raroad company and the suretes on hs
bond were then dscharged by order of court, entered n une, 1922.
The raroad company was never dssoved but was fuy nsovent nnd has
whoy abandoned the ob|ects and purposes of ts organzaton, now retanng
ony ts charter franchse, represented soey by ts shares of stock, a or most
a of whch s now hed and owned by defendant.
fter audt by the Commssoner of Interna Revenue of the above re-
cever s returns an addtona ta assessment was on March 8, 1923, made
aganst hm of both ncome and e cess profts ta es.
The b prayed for an ad|udcaton that the amount of such addtona ta es
was due and owng from the raway company to companant and for a
decaraton of a ta en of such amount found due upon so much of the
property and assets (formery of the raroad company) as had been trans-
ferred to t by such reorganzaton commttee of the raroad company. Moton
to dsmss b.
vans, Crcut udge: The very abe ora argument, suppemented by the
e haustve brefs that have snce been fed, makes It mperatve for the court
to brefy set forth Its vews and concusons respectng the ssues deter-
mnatve of the controversy. I had at frst concuded to merey announce my
concusons and hasten the case to the appeate court. The panstakng effort
of counse, however, woud not |ustfy such a summary dsposton of the
moton.
There s at east one argument made by counse for defendant whch must
be dsposed of wthout consderng ts merts. It s predcated upon facts whch
do not appear n the b. Upon ths moton to dsmss, the facts set forth n
the compant must be accepted as true. I can not consder any statencnt
made outsde of the record or not propery nferabe from the b. It may be
that the amount camed e ceeds the sum utmatey recoverabe, nnd, n fact,
t may even be conceded that the surta e cess profts ta can not propery
be assessed aganst a recever. Nevertheess the b shoud not be dsmssed
f under any vew of the facts aeged a rght to some recovery s shown.
Lkewse, companants may not be entted to a en upon defendant s property,
yet f entted to other equtabe reef the b can not be dsmssed merey
upon the ground that a of the reef sought shoud not be grauted.
Ths vew of the b dsposes of certan very serous questons presented by
defendant s counse, and aso makes t mpossbe for me at ths tme to
e press my opnon concernng ther merts.
Two questons of vta mportance, however, are fary presented upon ths
moton to dsmss. The frst deas wth the statute of mtatons, and the
second wth the Revenue ct, by the terms of whch aone the court must
determne whether ncome of a raroad operated by the court through u
recever s sub|ect to an ncome ta .
The contenton that the Government s b s barred by the statute of mta-
tons, whch on the ora argument appeared to be a very serous one, has
fnay been resoved aganst the defendant.
refy stated, the defendant contends that the Revenue ct of 191 f ed a
three-year mtaton perod, whch, f t had remaned n effect, woud have
barred the recovery sought n ths sut. The ct of 1919 dd not ad the
Government, because t was not retroactve. (Shwab v. Doye, 258 U. S., 529
T. I). 3339 C. . 1-2, 312 .)
The Government, however, contends that the ct of 1921 e tendng the
mtaton to fve years was retroactve and ths e tenson was an authorzed
ct of Congress. In Campbe v. ot (115 U. S., C20) the court sad:
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L 250, rt. 1008.
We can see no rght whch the proussor has n the aw whch permts
hm to pead apse of tme nstead of payment, whch sha prevent the egs-
ature from repeang that aw, because ts effect s to make hm fuf hs
honest obgatons.
Lkewse, t was hed In that case:
It may, therefore, very we be hed that, n an acton to recover rea or
persona property, where the queston s as to the remova of the bar of the
statute of mtatons by a egsatve act deprves the party of hs property
wthout due process of aw.
The two foregong statements unquestonaby set forth the aw, and we are
merey confronted wth a queston of ther appcaton.
The ct of 1921 was not enacted unt more than three years after the
recever fed hs ncome ta return. Defendant contends that nasmuch as
companant seeks to have ts cam for 145,000 decared a eu upon property
acqured by defendant subsequent to the makng of the ncome ta return, t
s voatve of ts vested rghts to thus e tend the tme.
The decson n Mc downey v. Wyatt (44 W. a., 711, 45 L. R. .. 009)
seems to gve some support to Government s contenton that the rue appcabe
to debtor and credtor appes to the Government and a ta payer, and that the
statute of mtatons may be enarged by congressona enactment notwth-
standng the ta had been barred by apse of tme.
ut t s unnecessary to determne the precse queston presented by de-
fendant so far as the en s concerned. or pantff may be dened ts en
and st be entted to recover the amount of ts ta , and such reef may be
granted n ths equtabe sut n vew of the aegatons respectng the reaton
of defendant and the raroad company that owned and operated the raroads
pror to the forecosure sae.
It further appears that the ct of 191 above referred to was merey a tme
mtaton upon the Government s rght to evy and coect ta es by summary
proceedng, and was not ntended to and dd not mt the tme n whch t
coud proceed, n an acton at aw or a sut n equty (the necessary facts
appearng), to coect the amount of ts ta . (Unted States v. Nashve,
C. d St. L. Ry. Co.. 249 ed., 078 T. D. 2097 Teto York Lfe Ins. Co. v.
nderson, 257 ed., 570 Unted States v. Grand Rapds t I. Ry. Co., 239 ed.,
153 Unted States v. Mnneapos Threshng Mach. Co., 229 ed., 1019 T. D.
2285 Doar Savngs ank v. Unted States, 19 Wa., 227 ng. v. Unted
States, 99 U. S., 229 Unted States v. Chambern, 219 U. S., 250 T. D. 1074
Cement at ank v. ermont, 231 U. S., 120.)
urthermore, the tme mtaton of secton 9a, ct of 191 , contans the
e cepton
In cases of refusa or negect to make return, and n cases of fase or
frauduent returns.
Secton 250d of the ct of 1921 contans a smar e cepton.
Wthout referrng specfcay to the e hbts and reports attached to the
compant, t s suffcent to say that on ths moton to dsmas, the Govern-
ment has asserted facts whch brng the case wthn the e cepton above
noted. (Sgman v. Reneeke, ct a., ed., T. D. 3572 see p. 428 .)
Was the ncome of a raroad operated by a recever apponted n a fore-
cosure proceedng (here sought to be ta ed) sub|ect to the ncome ta aw
To better determne the proper constructon to e gven to the effectve ct,
t s necessary to frst e amne and compare the cts of 1909, 1911, 1913, 191 ,
1917, 1918, and 1921. Doubtess the most enghtenng sectons of these varous
cts are secton 38 of the ct of 1909, secton 2 of the ct of 1913, sectons 10
and 13 of the ct of 191 , and secton 4 and secton 120 (1), (2) of the ct of
1917. sectons 230 and 239 of the ct of 1918, and the same sectons of the ct
of 1921.
Defendant contends (1) that the ncome enrned durng the recevershp
coud not be sub|ected to the ncome ta and (2) t was not sub|ected to any
ncome ta by the cts under consderaton.
Te frst contenton s re|ected upon the authorty of Unon Trust Co. v. III.,
etc., R. R. Co. (117 U. S., 434) mer. Cas. Ins. Co. s Ca e (82 Md., 535 34
., 778) Mc arand v. urey (2S0 ed., 305) Lberty Centra Trust Co. v.
Gand O Co. (279 ed., 432) Swarts v. ammer (194 U. 8., 441) rght
v rkansas (249 ed., 950) Wswa v. uns (173 111., 110) Coy v. Tte
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32
Guar. Trust Co. (220 ed., 90) ear Rver Co. v. Petoskey (241 ed., 53)
Swarts v. ammer (120 ed., 25 ) Stnte of Oho v. on- (229 ed., 892).
More serkras Is the urge that Congress dd not Impose a tar upon the ncomes
of corporatons operated by a court through a recevershp. e decsons
Unted States v. Whtrdae (231 U. S., 144 T. D. 189 ) Scot v. Went. Pac.
. R. Co. (24 ed., 545) In re eer (258 ed., 208) Penna. Cem. Co. v.
radey Contractng Co. (274 ed., 1003) and Lathers v. amn (170 N. Y.,
Supp. 98), cted by defendant, are not controng.
The Whtrdge case deat wth the ct of 1909, the Scott case wth the ct
of 1913.
It s worthy of consderaton that Congress had the Whtrdge decson and
the Scott case before t when the ct of 191 was enacted.
In the face of ths hstory, what effect can the court gve to secton 13(c),
whch appears for the frst tme n our ncome ta aw
It rends:
In cases wheren recevers, trustees n bankruptcy, or assgnees are operat-
ng the property or busness of corporatons, sub|ect to ta mposed
by ths tte, such recevers, trustees or assgnees sha make returns of net
ncome as and for such corporatons, n the same manner and form as
such organzatons are herenbefore requred to make returns, and any ncome
ta due on the bass of such returns made by recevers, trustees, or assgnees
sha be assessed and coected n the same manner as f assessed drecty
aganst the organzatons of whose busnesses or propertes they have custody
and contro.
Moreover, secton 8(c) of the ct provdes that:
Recevers sha make and render a return of the ncome of the
person, fust, or estate for whom or whch they act, and be sub|ect to a the
provsons of ths tte whch appy to ndvduas.
I can not escape the concuson that when the Congress, by secton 1. eved
upon the entre net ncome receved n the precedng caendar year from a
sources by every ndvdua, a ctzen or resdent of the Unted States, a ta ,
etc., and by secton 10 eved a ta upon the tota net ncome of every cor-
poraton, t was Intended to Incude recevers of ndvduas and corporatons.
In fact, the queston of congressona Intent s hardy open to serous doubt,
but defendant nssts that Congress faed to enact such ntenton, and that
another nstance of omsson such as was consdered n Smctanka v. rst
Trust and Savngs ank (2 8 ed., 230 S. C, 257 U. S., 02 T. D. 3321
C. . 1-1, 210 ) and Unted Staes v. ed (255 U. ft, 257 T. D. 3150 not
pubshed n uetn servce ) Is presented.
I can not reac any other concuson than that Congress n amendng the
191 ct n the respects heretofore mentoned enarged the defnton of the
ndvduas and the corporatons aganst whch the ta was eved by sec-
tons 1 and 10 of the ct to ncude recevers of such ndvduas and
corporatons.
Other contentons are serousy made whch do not ca for eaborate ds-
cusson. They are dsposed of by the observaton that the b does not per-
mt of ther consderaton. It seems to me that the aegatons of the b
suffcenty connect the defendant wth the company whose affars were con-
ducted by the recever to hod t for the sum sought.
The moton to dsmss s dened, and defendants are drected to answer the
compant wthn 20 days hereof.
rtce 1009: Coecton of ta by dstrant.
(See T. Ds. 3572 and 3579 sees. 1318, 1319, and 1320, art. 1050.)
In|uncton to restran coector from e ecutng warrant of dstrant
for coecton of ta assessed wthn the fve-year perod, the dstrant
warrant not havng been ssued unt after fve years from date of
fng return.
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rtce 1012: ssessment of ta . 111-10-1407
T. D.3559
INCOM T S N RUPTCY D CISION O COURT.
1. ankruptcy Lmtaton on Cams.
The one-year mtaton provded by secton 57(n) of the ank-
ruptcy ct for fng cams aganst the estate of a bankrupt does
not appy to a cam by the Unted States for unpad ta es, and
such a cam can be fed at any tme whe the bankruptcy s pend-
ng and the funds of the estate are undstrbuted.
2. Payment Prortes Partnershp ssets.
cam of the Unted States for Income ta es due from nd-
vdua partners can be satsfed out of partnershp assets where
the ndvdua assets are nsuffcent but partnershp assets are
suffcent by reason of undvded profts eft n the busness by the
partners and unpad saary accounts doe the partners. The cam
of the Unted States takes prorty under sectou 34 , Revsed
Statutes, and secton (54(a) of te ankruptcy ct over tne cams
of genera credtors of the partnershp.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Dstrct Court for the
Dstrct of New ersey n the matter of rezn and Schaefer, ank-
rupts, s pubshed for the nformaton of nterna-revenue offcers
and others concerned.
D. . ak,
Commssoner of Interna Revenue.
pproved ebruary 2 , 1924.
. W. Meon,
Secretary of the Treasury.
Unted States Dstrct Court, Dstrct of New ersey. In ankruptcy.
On Petton to Revew Referee s Order.
In the matter f Water rezn and ugo Schaefer, ndvduay and as part-
ners, tradng as rezn Schaefer, bankrupts.
OPINION.
Runyon, Dstrct udge: The essenta facts heren are as foows: Water
rezn and ugo Schaefer were partners, tradng as rezn Schaefer, and
engaged n sk manufacture n Paterson, N. ., durng the years 1917, 1918,
1919, and a porton of 1920.
In December, 1920, as the resut of an nvountary petton fed aganst sad
partners, both as ndvduas and as partners, they were ad|udcated bank-
rupts. On pr 28, 1922, rank C. erguson, coector of nterna revenue for
the ffth dstrct of New ersey, fed a proof of cam wth the referee n
bankruptcy for. ta es camed to be due from the bankrupts to the Unted
States. Thereafter, on May 31, 1922, he fed another cam for addtona and
further ta es, and on September 21, 1922, st another amended and cor-
rected proof of cam for the stnn tota of the two pror cams. Ths cam,
n short, was as foows: ganst rezn Schaefer, addtona ta es for the
fsca |ear endng une 30, 1917, and the ensung perod endng anuary t,
1918, aggregatng 1,232.01 aganst Water rezn, unpad and addtona
ta es for the .years 1917, 1918, and 1919, aggregatng ,8 5.02 and aganst
ugo Schaefer for ke Items and for the same perod, aggregatng G,83 .34.
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328
In each of sad cams preference and prorty of payment was camed
under sectons 34 and 34 7 of tte Unted States Revsed Statutes and secton
4-a of the ankruptcy ct of 1898.
Wthn a month thereafter the trustee for the bankrupts fed a petton set-
tng fort hs ob|ectons to the fna proof of cam, as foows:
(a) That the cam was not fed wthn one year, as mted by the ank-
ruptcy ct.
( ) That no cam was fed by the Unted States n ths court wthn one
year from the date of ad|udcaton.
(c) That the cam does not set forth facts consttutng any vad cam by
the Unted Staes aganst the estate of the sad bankrupts or the trustee thereof,
or te assets or property beongng to the estate, ether as ndvduas or as
partners.
(d and c) That nether partner ndvduay nor te partnershp dd or does
owe the Unted States ta es for the fsca years endng une 30, 11)17 and 1918,
respectvey.
(f) That Water rezn dd not and does not owe ta es to the Unted States
for 1917, 1918, 1919, or any part thereof.
(n) The same as ne t herenabove as to ugo Schaefer.
(h and ) That no assets of any knd beongng to the ndvdua partners
came nto possesson of the trustee n bankruptcy.
The pettoner then prayed for an order dsaowng and re|ectng the cam
of te Unted States and for further reef.
n order to show cause, ssued by and returnabe before the referee In
bankruptcy, ne t ensued, and as a resut of the hearng had before hm, the
referee made an order rectng that the cam as aganst te partnerstp,
amountng to 1,232.01, shoud be aowed that a the assets whch came
n te trustee s possesson were assets of the partnershp, e cept 1,000
reazed from the ndvdua estate of ugo Schaefer that te partnershp
assets are not abe for the payment of ta es owed by te ndvdua part-
ners, and that nether of the ndvdua partners had any ta abe Income for
the years 1917, 1918, and 1919 whch coud form the bass for the mposton
of a ta cam aganst them as ndvduas.
The referee then ordered that the cam of te Unted States n sad sum
of 1,232.01 he aowed wth nterest that te sad cam n a other respeets
be dsaowed, and the trustee nstructed that the same does not consttute a
cam aganst the estate n hs hands.
The Unted States thereupon fed ts petton for revew, camng that the
referee erred n two partcuars, vz:
(1) In fndng that the partnershp assets are not abe for the payment of
ta es owed by the ndvdua partners.
(2) That nether of the ndvdua partners had any ta abe ncome for
the years stated above whch coud form the bass of a ta cam aganst
them and prayng that te order be revewed and reversed, so far as t ds-
aows the cam of the Unted States, and nstructs the trustee that sad
cam does not consttute a cam aganst the estate n hs hands.
The ta es camed from the partnershp were the addtona e cess-profts
ta es for te fsca year endng une 30, 1917, and te addtona haf year,
endng anuary 1, 1918. These amounted to 1,232.01, and as nether party
hereto has ob|ected to that porton of the referee s order whch provdes for
the payment thereof, we are n nowse concerned therewth.
though not certfed to ths court for revew, te fact that the trustee
argey emphaszes the pont n hs argument makes te frst matter cang
for consderaton the queston as to Whether or not the Unted States s
barred from pressng ts cam, not havng fed the same wthn one year
from the date of ad|udcaton. The trustee rees upon secton 57-n of the
ankruptcy ct, and upon the nderson case (279 ed. Rep., 525), n support
of hs contenton.
Te anguage of secton 57-n s, n part, as foows:
Cams sha not be proved aganst a bankrupt estate subsequent to one
year after the ad|udcaton
Whe n te nderson case, the court, among other thngs, sad:
The Unted States must fe ts cam for ta es as any other credtor, f
t desres to share n the estate, and te court must determne any queston
arsng ns to the amount or egaty of such ta .
The queston of mtng the tme of the Unted States for the fng of
cams has been many tmes presented to the courts for decson, and the
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329
250, rt. 1012.
genera trend of opnon has been to the effect that the Government Is not
bound as are ordnary credtors. (In re Prnce and Wuter, 131 ed., 54
In re sher Co., 148 ed., 907.)
The nderson case, whe seemng to hod to the contrary, reay goes no
further than to rue that the Government can not, after notce, ndefntey
refuse to present ts cam.
More than two years had eapsed after ad|udcaton of bankruptcy In ths
case, and the trustee, desrous of settng the estate, prayed for an order
barrng and forecosng the Unted States from partcpatng In the estate
heren, or n the aternatve that the Unted States be drected to fe ts cam
r cams wth the referee heren on or before a day certan, n order that the
trustee may ob|ect thereto and hearngs had on sad cam n accordance wth
aw.
The Unted States appeared specay and apparenty was satsfed to move
a dsmssa of the trustees petton on the ground that the court was wthout
|ursdcton and that servce upon the coector of Interna revenue was not
servce upon the Unted States. These ob|ectons beng overrued by the ref-
eree, testmony was taken on behaf of the trustee, and an order entered barrng
the Unted States from partcpatng n the estate for any ncome ta for the
year 1917. The dstrct court affrmed the referee s order, and the Crcut Court
of ppeas, after quotng secton 4-a of the ankruptcy ct, and cang at-
tenton to the fact that t consttutes a departure from the prncpes of
pubc |wcy theretofore prevang as to the rghts of the soveregn whch were
recognzed n the prevous cts of 1800, 1841, and 1807, quotes n support
f that concuson, and as defnng the scope thereof, the anguage of the Cr-
cut Court of ppeas n the case of Guarantee Tte and Trust Company v.
Tte Guaranty Surety Company In re Genera m Corporaton (274 ed.,
W ), as foows: We regard ths secton ( 4-a) as bndng on the Govern-
ment because t s named theren and, whe conferrng prorty, as gvng the
bankruptcy court the power to hear and determne any queston that arses as
to the amount or egaty of a ta assessed by t. The provson appes to ta es
of a the persons mentoned and we coud not dfferentate the Government
from the other persons n the absence of anguage |ustfyng t.
The nderson opnon then goes on to say: The Unted States must fe ts
cam for ta es as any other credtor, f t desres to share n the estate, and
the court must determne any queston arsng as to the amount or egaty of
such ta . It can not stand by, as t dd here, after permsson havng been
grauted to fe ts cam, and e pect to subsequenty coect the ta from the
bankrupt or hs trustee. To permt such a procedure woud make t mpossbe
to say when there coud be a wndng up of the bankruptcy proceedngs and a
dstrbuton of the assets.
The departure n pubc pocy above noted conssts n gvng the edera
courts |ursdcton as to the amount or egaty of any ta , and n apparenty
puttng the Unted States on a par wth other ta ng dvsons. Secton 04-a
e pressy recognzes prorty and s sent as to any mtaton of tme, smpy
makng t mandatory that the courts sha order the payment of ta es n advance
of payments to credtors.
Whe t makes a dstnct departure from the provsons of secton 28, sub-
dvson 5. of the prevous ct (14 Stat., 531), whch says: That nothng con-
taned n ths ct sha nterfere wth the assessment and coecton of ta es by
the authorty of the Unted States or any State, t encroaches n nowse upon
e authorty of secton 57-n of the ankruptcy ct, whch states that cams
sha not be proved aganst a bankrupt estate subsequent to one year after the
ad|udcaton and as ths secton fas to name the Unted States
n any way, t foows that there s appcabe thereto the we-estabshed prn-
cpe that a soveregn can not be bound by a statute of mtatons n whch
t s not named.
s to the e empton of the Unted States from the mtaton of tme, see
In re Stoever (127 ed., 394) In re Ceanfast osery Co. (4 m. . R 702
( ef. . Y.)) In re Prnce and Water (131 ed., 54 ) In re sher Co.
(148 ed., 907).
In the case of Unted States v. rmngham (258 ed., 5 2), the Crcut Court
of ppeas for the fth Crcut speaks as foows: The rght of the Unted
States to present a cam n a bankruptcy case at any tme whe the bank-
ruptcy Is pendng and the funds thereof are not dstrbuted can not be
dsputed.
4177 24 22
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330
Under the crcumstances of the present caae the above anguage seems entrey
approprate, and I am of the opnon that the Unted States s atogether
wthn ts rghts n the presentaton of ts cam, despte the fact that more
than one year had eapsed snce the bankruptcy ad|udcaton, especay as
the funds n the trustee s hands to a consderabe e tent reman undstrbuted
and property n the course of admnstraton under the ankruptcy ct s not
freed from ens or cams for ta es. (29 L. R. ., 2- 0, 283 In re psten, 150
ed., 42 Stokes v. State, 40 Ga., 412, 12 m. Rep., 588.)
The referee certfes that a the assets whc came nto the trustee s hands
were the assets of the partnershp, e cept 1,000 whch was reazed from the
ndvdua estate of ugo Schaefer.
The testmony shows that each of the partners was entted to 50 per cent
of (he net profts of the partnershp and a saary of 10,400 per year.
The partners, nstead of drawng out ther respectve 50 per cent shares
of the net profts from year to year, eft a consderabe porton n the bus-
ness undstrbuted, and durng the years 1917, 1918, and 1910 the dstrbutve
share of each partner, In e cess of the amounts actuay wthdrawn by hm.
totaed 2 ,140.05, or a tte more than 52,000 n a, eft n the busness.
The Government ta , assessed aganst the two partners ndvduay for the
same three years, totaed 13,701.98, each partner beng assessed for appro -
matey one-haf thereof, and the ta es so assessed not havng been pad.
Pursuant to the concusons aready reached herenbefore, there woud seem to
me to be no doubt as to the Government s rght to prorty of payment, provded
ony that there be funds n e stence propery chargeabe wth such payments.
nd n ths connecton t must be remembered that the ta es here sought are
camed as havng accrued on the varous dates when, under the ncome ta :
aws then n force, they orgnay became due and payabe. There Is no dspute
but that, on these varous days, there were actua funds n beng, vountary
eft by rezn and Schaefer among the partnershp moneys, and whch, f
they had been camed by the partners as ndvduas as wth perfect
proprety they coud have been camed under the artces of copartnershp
woud have more than suffced to put the Indvduas In possesson of re-
sources out of whch these ta es coud have been pad and satsfed. as
the refusa or negect of the partners to cam ther ndvdua rghts from
tme to tme ther eecton to eave ther respectve persona moneys n ther
busness enterprse so changed the character of those moneys so undermned
the Government s cam as practcay to nufy t, and, at the same tme,
put n possesson of the trustee, for the beneft of partnershp credtors,
many thousands of doars whch, as the resut of the partners mere eecton,
an1 sted as partnershp funds, whereas they were actuay, at a tmes
throughout the perod heren nvoved, ndvdua funds, even though un-
camed I beeve not, and athough, as camed by counse for the trustee,
there s under the terms of secton 3180, Revsed Statutes, no specfc statutory
en In ths case, I am yet of the opnon that secton 340 , Revsed Statutes,
and 4-a of the ankruptcy ct do gve the Government a prorty rght n
the premses, and that such prorty rght as thus set forth Is a decaraton of
the common-aw rght of the soveregn to be frst pad. (U. S. v. Natona
Surety Co., 5 L. d., Sup. Ct, 143. 254 U. S., 73.)
t common aw the Crown of Great rtan, by vrtue of a prerogatve
rght, had prorty over a sub|ects for the payment out of a debtor s property
of a debts due t. The prorty was effectve ake whether the property re-
maned n the hands of the debtor, or had been paced n the possesson of a
thrd person, or was In cu toda egs. The prorty coud be defeated or post-
poned ony through the passng of tte to the debtor s property, absoutey or
by way of en, before the soveregn sought to enforce hs rght. The
rght of prorty has been kened to an equtabe en. State v. Rowse (49
Mssour, 58 ), Marsha v. New York (254 U. S., 382-38 ).
t a tmes, durng the years n queston, as aready sad, there were funds
n the busness to whch each partner, under the artces of copartnershp,
mght have ad cam as hs own. They were hs to do wth as he peased, and
they were the very funds whch, In part, served as the foundaton for the m-
poston of the ta , coecton of whch s heren sought. The fact that each
partner was wng to forego the physca wthdrawa of these funds can not,
n my opnon, succeed n defeatng the Government s equtabe en.
It shoud be borne n mnd that ths proceedng Is not desgned to ta the
partnershp for ta es due from the ndvduas, and therefore runs n nowse
counter to the Revenue cts of 1917 and 1918. The ta es heren have been
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331
250, rt. 1012.
assessed aganst the ndvduas and a that s now sought s an avaabe
and proper fund out of whch to coect the same, as so assessed.
The Government s cam for ta es s not to be cassed wth a credtor s
cam for the payment of an ordnary debt, for ta es are not debts, but n-
poss eved for the support of the Government. (17. S. v. Proctor, 285 ed.,
272 New ersey v. nderson, 203 U. S., 483.)
See aso Lane County v. Oregon (7 Wa. (U. S.), 71) Merwether v. Garrett
(102 . S.. 472) Crabtree v. Madden (54 ed., 431) Cty of Camden v. en
(2 utcher (N. .), 398).
Therefore, n my opnon, the Government s cam, beng n the nature of au
equtabe en, has foowed the property nto the hands of the trustee n bank-
ruptcy , where t awats satsfacton. nd ths satsfacton, so far as ugo
Schaefer s concerned, shoud frst be had by appyng to the Government s cam
the 1,000 found by the referee to be hs Indvdua property.
Concernng the referee s fndng that no assets of any knd beongng to the sad
Indvdua partners came nto possesson of the trustee n bankruptcy, and that
nether of the ndvdua partners had any ta abe ncome for the years n-
voved whch coud form the bass of a ta cam aganst them, t Is worthy
of note that the bankrupts themseves do not agree wth that concuson, as
evdenced by the sworn schedues of assets and abtes fed by them n the
bankruptcy proceedng.
n e amnaton of these schedues shows that they charge themseves as
owng the Unted States 3,SS7.19 and 3,921.21, respectvey, for ncome ta es,
the same beng appro matey the totas of the amounts camed to be due from
them on orgna returns fed for the years 1918 and 1919. These statements
are, of course, not bndng on the trustee, but n vew of the fact that they
are so ceary decaratons aganst nterest, ta es not beng dschargeabe
cams, they woud seem to be strongy confrmatory of the Government s con-
tenton that the funds to whch, under the artces of copartnershp, the nd-
vdua partners were entted to ay cam and yet eft In the partnershp, were,
n truth, Indvdua moneys, so far as a Government ta coecton matter Is
concerned. To argue otherwse were to estabsh the rght of the ndvdua
connected wth a partnerstdp to determne argey what shoud or shoud not
be sub|ected to ta aton.
The 1921 Revenue ct, as dd the 1918 ct, provdes that Indvduas carryng
on a partnershp busness sha be abe for ncome ta n ther ndvdua
capacty ony and that there sha be ncuded n computng the net ncome of
each partner hs dstrbutve share, whether dstrbuted or not, of the net n-
come of the partnershp for the ta abe year, or f hs net ncome s computed
upon the bass of a perod dfferent from the bass upon whch the net ncome
of the partnershp s computed, then hs dstrbutve share of the net ncome
of the partnershp for any annua accountng perod of the partnershp endng
wthn the fsca year or caendar year upon the bass of whch the partner s
net ncome s computed.
In the nstant case there were admttedy net profts accrung to each part-
ner durng the years 1917, 1918, and 1919, and whe It may be true that n
1920 there occurred a oss of more than 40,000, whch n effect wped out the
pror profts, I am yet of the opnon that nasmuch as the undstrbuted net
profts of each Indvdua partner for 1917. 1918, and 1919 were more than
spffcent to pay the Government s ta and were n nowse so earmarked as to
o ntfy them wth the funds pad out n connecton wth the oss n 1920. that
the funds remanng In the trustee s hands are abe n ther entrety for the
Gnverment s en unt the same s pad n other words, that each ndvdua
partner, durng those years, had n reaty a ta abe Income formng the bass
for a ta cam aganst hm.
The oss n 1920 can not n any event he charged aganst the profts of the
three prevous years, for the reason that the Revenue ct of 1918, secton 204,
n force when ths oss occurred, provdes that the ony net oss whch a ta -
pyer mght deduct was a oss In the operaton of hs busness occurrng after
October 31, 1918, and before anuary 1, 1920.
Ths oss, havng occurred subsequent to ths ast-named perod, s ony de-
ductbe on a return of ncome for 1920.
Inasmuch as the undstrbuted profts n a partnershp are to he used, so
far as they e tend as the bass for the computaton of an ndvdua ncome
ta . a partner possessed of such profts certany has a ta abe ncome and
such ncome, even n the guse of partnershp funds, s avaabe for coecton
as we as computaton purposes.
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332
I am, therefore, of the opnon that the Government Is rght n ts contenton
(1) that the so-caed partnershp assets of rezn Schaefer, made up ns
they were, are abe for the payment of ta es owed by the ndvdua partners,
and (2) that both of the ndvdua partners had ta abe ncomes for the
years 1917, 1918, and 1919 propery formng the bass of a ta cam aganst
them.
The order of the referee, therefore, so fur as t dsaows the Government s
demand and nstructs the trustee that the same does not consttute a cam
aganst the estate n hs hands, s reversed.
n order n conformty wth the vews heren e pressed may be presented
and w be sgned.
ktce 1012: ssessment of ta . 111-11-1420
I. T. 1947
R NU CT O 1921.
Secton 57(n) of the Natona ankruptcy ct of 1898 has no
appcaton to the Unted States and therefore operates n no way
as a bar to the coecton of edera ta es.
dvce s requested as to whether secton 57 (n) of the Natona
ankruptcy ct of 1898, as amended, appes to edera ta cams.
Subdvson (n) of ths secton provdes as foows:
Cams sha not he proved aganst a bankrupt estate subsequent to one year
after the ad|udcaton
Ths statute of mtatons has no appcaton to edera ta cams,
snce the courts hod that a soveregn can not be bound by such a
statute uness specfcay named.
The Crcut Court of ppeas for the Second Crcut has recenty,
n a case entted u In the matter of . Menst Co., Inc., bankrupt
made a decson affrmng the dstrct court and hodng that secton
57 (n) has no appcaton to the Unted States and therefore operates
n no way as a bar to the coecton of edera ta es.
To the same effect are: In re Ceanfast osery Co. (4 . . R.,
702) In re Stoever (127 ed., 394) In re Prnce Water (131
ed., 540) In re sher Co. (148 ed., 907) and Unted State
v. rmngham Trust cf Savngs Co. (258 ed., 5 2).
rtce 1012: ssessment of ta . 111-12-143
T. D.35 4
N RUPTCY D CISION O COURT.
1. ankruptcy Ta es ursdcton.
Under secton 04(a) of the ankruptcy ct, the dstrct court
has the power to nqure nto and determne the amount of ta es
due the Unted States.
2. Ta es Prorty edera and State.
Ta es due the Unted States have ony such prorty or en as
s gven by statute and under secton 4(a) of the ankruptcy ct
where assets are Insuffcent to satsfy ta cams of both the
Unted States and a State the amount dstrbutabe s prorated.
3. Ta es Prorty dmnstratve penses.
Reasonabe and necessary costs of admnstraton take pror-
ty over the payment of ta es.
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250, rt. 1032.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To coectors of nterna revenue and others concerned:
The appended decson of the Unted States Dstrct Court for
the Northern Dstrct of Georga n the case of In re Wyey Com-
pany, ankrupt (292 ed., 900), s pubshed for the nformaton
of nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved March 13, 1924.
. W. Meon,
Secretary of the Treasury.
Unted States Dstrct Court kor the Northern Dstrct of Georga.
In re Wyey Company.
In the matter of the Wyey Company, bankrupt. On appcaton by trustee for drec-
tons. ppcaton granted.
October 18, 1923.
Sbey, Dstrct udge: The Wyey Company was ad|udcated a bankrupt
n ugust, 1922, and the estate reduced to cash and partay dsbursed. In
December, 1922, the Unted States camed 3,975.51 as addtona ncome ta es
|ust assessed for the years 1918 and 1919. bout . 2,200 of ths s admtted
to be correcty assessed the remander s contested. State ta es amountng
to 400 are kewse due. The estate n hand s ony about 2,300, wth most
of the fees and e penses of admnstraton unpad. Drecton s sought by the
trustee touchng the stuaton. The questons to be decded are: (1) The cor-
rect amount due the Unted States (2) the prorty of ths amount over the
State ta es (3) ts prorty over e penses of admnstraton.
1. The court has power to nqure nto and f the amount due as ncome
ta es to the Unted States. ( ankruptcy ct, 4a (Comp. St., sec. 9 48).) The
dfference n dspute arses by reason of the company s ta returns havng
shown as saares to ts offcers amounts argey greater than those shown by
the ndvdua returns of the offcers to have been receved by them. These
offcers were ntroduced as wtnesses by the Unted States, and testfed that
the amounts reay pad and receved by them were the nmounts they nd-
vduay returned, whereas the amounts deducted n the company s returns
are those credted to them on the company s books as saares accrued. The
testmony s that the saares were f ed by the drectors at the amounts
credted on the company s books. One wtness says the saares were based
on a supposed proft, whch, as t ater deveoped, had not reay been earned,
and the saares were not drawn because of ths deveopment. nother wt-
ness says the saares were f ed absoutey, but not pad for want of ready
cash. If the frst wtness s to be beeved, the ta returns shoud be cor-
rected to emnate the supposed proft, whch dd not e st. If the other wt-
ness s correct, the returns, beng evdenty made on the bass of accruas
rather than actua recepts and dsbursements, the deducton of the amounts
absoutey due these offcers was correct, though they were never pad, and, of
course, now never can be. In ether event, the addtona ta es assessed on
account of these tems s hed to be erroneous and the true amount due the
Unted States s to be f ed accordngy.
2. Ta es due the Unted States and bankruptces are ake whoy sub|ect
to the power of Congress. Congress may make such provsons for the payment
of the one through the other as t sees ft. ta has such en and prorty,
and ony such, as s gven t by statute. (37 Cyc, 1138, 1143.) The common-
aw preference of the soveregn s sad not to e st n favor of the Unted
States, save as contnued by statutes. (Unted States v. ank of North Caro-
na, Pet., 29 8 L. d., 308.) en s provded for edera ta es by Re-
vsed Statutes, secton 318 (Comp. St., sec. 5908), but no speca prorty s
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334
stted. Debts due the Unted States are gven a frst prorty, apparenty e -
tendng to cases of bankruptcy, by Revsed Statutes, secton 34 0 (Comp. St.,
sec. 372), but ta es are hardy to be consdered debts Neo ersey v. nder-
son, 203 U. S., 483, 492 27 Sup. Ct., 137 51 L. d., 284). ankruptcy ct,
secton 4a, deas specfcay wth the payment of ta es from bankrupt estates,
provdng:
The court sha order the trustee to pay a ta es egay due and owng
by the bankrupt to the Unted States, State, county, dstrct, or muncpaty
n advance of the payment of dvdends to credtors.
Ths ays the duty on the court to pay, perhaps wthout forma proof, a
such known ta es, to the e tent at east that funds are avaabe, to the end
that no arm of the Government may be deayed or embarrassed n ts revenue.
The pacng of ths provson frst n the secton suggests that the payment s
to be made before any of the payments afterwards provded for n secton G4I ,
but the mtng words, before payment of dvdends to credtors, suggests
a postponement ony of such persons as are credtors and who are to have
dvdends. The Supreme Court, n Rchmond v. rd (249 U. S., 174 3U
Sup. Ct. 18 3 L. d., 543), has hed that a muncpa ta havng no en
under the State aw s not to be pad before a vad en protected by secton
7d of the ankruptcy ct (Comp. St., sec. 9 51). Ths decson, however, s
not hepfu here, because under Georga aw a ta es have a en and are to
be pad before any other debt, en, or cam whatever. (Code Ga., 1140.)
There s no competton here between any but ta ens. Consderng the dua
nature of our Government, and that nether the Unon nor the States may de-
stroy or hnder the other n ther severa functons, and a havng equa need
of ther revenues, t s concuded that the ntent of Congress was that there
shoud be a pro rata payment upon a the ta es named n secton 4a, when
the avaabe fund s not suffcent to pay n fu, the ta es due the Unted
States havng no prorty over the others.
3. The queston remans: What fund s avaabe Is t a the money n
the trustee s hands, or a that has ever been there, or ony the net sum after
payng the e penses of rasng and preservng t aryng answers have been
gven by the courts. Secton 4a gves the payment of ta es e press prorty-
ony over dvdends to credtors. The fees and e penses of offcers of the
court are hardy to be so descrbed. Ou the other hand, there s no e press
prorty over ta es gven these n secton 4b as there was n the ankruptcy
ct of 18 7 (14 Stat., 517). The far concuson s that Congress has not e -
pressy and defntey deat wth the matter, but that t s to be controed by
genera prncpes. On such prncpes the fund must pay ts own e penses,
when they can not otherwse be met, no matter what the dgnty of the en
upon t Ths was rued n the ffth crcut as to a fund e hausted by a en
n Ouge v. New Oreans ank (239 ed., 7 , 152 C. C. ., 510) the e penses
to be pad, however, not beng necessary the whoe e penses of bankruptcy,
but ony such as were reasonabe and necessary to rase or preserve the fund.
(See In re ansen rch, 292 ed., 898, ths day decded.)
The same prncpe manfesty shoud be apped to a fund e hausted by ta
prortes. In the case of State ta es varyng costs are f ed by aw for the
coectng offcers, (Code Ga., ees. 11 1, 11 2.) Saes are made through
sherffs and constabes, whose fees and e penses are f ed by genera statutes.
When these costs and e penses can not be made out of the denquent ta -
payer, t has aways been the practce to deduct them from the fund rased by
a sae, and credt ony the net baance on the e ecuton, athough no statutory
authorty for dong so e sts, and athough code, secton 1140, requres that
ta es be pad before any other debt, en, or cam whatsoever. In the case
of edera ta es. Revsed Statutes, secton 3191 (Comp. St., sec. 5913), e -
pressy permts the coector who ses property to frst pay the e penses of
the sae. Revsed Statutes, secton 3207 (Comp. St, sec. 5929), provdes for
equtabe proceedngs to sub|ect rea estate to ta es. It s unthnkabe Lst
the costs of so dong are not to be pad from the fund, f no other source of
payment e sts.
Under Revsed Statutes, secton 34 , gvng prorty to debts due the Unted
States, so far as I am nformed, costs of admnstraton have been aways frst
pad. See U. S. v. ggesUm (25 ed. Cas. 979, No. 15,027). The e penses of
coecton of ta es, had no bankruptcy court ntervened, may propery be con-
sdered n f ng fees and commssons, though that s of ess weght n cases
where the ta cams have not been presented or known unt the costs and
e penses have been ncurred. In a cases due care w be observed to con-
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335
250, rt. 1012.
serve the pubc revenues, but the reasonabe and necessary e penses of rasng,
preservng, and dsbursng the fund ought to be pad from t, the remander
ony beng avaabe for dstrbuton. See State v. Love (179 ed., 321, 102
C. C. ., 505, 31 L. R. . (N. S.), 988 certorar refused 219 U. S., 58T, 31
Sup. Ct., 471, 55 L. d., 347), and cted wth approva n Rchmond v. rd
(249 U. S., 174 39 Sup. Ct, 18 3 h. d., 543).
4. What remedy, f any, the ta offcers have respectng sums pad out by
the trustee before knowng of the ta cams w not now be consdered, as no
evdence touchng such payments has been presented, and the reference to
them n the peadngs s merey genera, and no reef s sought by tne ta
offcers at ths tme.
The referee w f the e act amount due the Unted States, and the e penses
proper to be charged accordng to the rungs of ths opnon, and prorate the
remander among the severa ta cams accordng to ther amounts.
rtce 1012: ssessment of ta . III-S -1457
S.M. 1404
R NU CT O 1921.
The fve-year perod of mtaton upon assessments of ncome
and profts ta es, provded n secton 250(d) of the Revenue ct
of 1921, begns to run from the date of the fng of the compete
return, and not from the date the tentatve return was fed.
n opnon has been requested as to whether n the case of ta -
payers who took advantage of the genera e tenson of tme granted
for competng ther ncome and profts ta returns for the caendar
year 1918 by fng on or before March 15, 1919, tentatve returns on
orms 1031T and 1040T and ater fng compete returns on orms
1120 and 1040, the tme from whch the fve-year perod of mtaton
upon assessments of ncome and profts ta es provded n secton
250(d) of the Revenue ct of 1921 begns to run s from the date of
the fng of the tentatve return or from the date the compete return
was fed.
It s stated that:
In vew of the short tme between the date on whch the forms were avaabe
and the due date (March 15, 1919) of caendar-year returns requred under
the Revenue ct of 1918, notce was gven through the pubc press and other-
wse that tentatve returns ( orms 1031T and 1040T), accompaned by a frst
nstament of one-fourth of the estmated ta due, woud be accepted on th t
date, and that n such cases 45 days woud be gven n whch to fe compete
returns, but that nterest at the rate of one-haf of 1 per cent per month upon
the amounts by whch such nstament payments fa short of the correct
amounts woud be coected. In I. T. Mmeograph 2101, dated pr 14, 1919,
a further e tenson of tme, where needed, to une 15, 1919, was granted n
whch to fe compete returns on orm 1120 n the ease of corporatons whch
fed orm 1031T on or before March 15, 1919, wth the requrement that a
such corporatons pay on or before une 15, 1919, a sum suffcent, wth the
amount pad on March 15, 1919, to equa one-haf of the ta due as shown by
the return on orm 1120, together wth nterest t the rate of one-haf of 1 per
cent per month on any defcency n the frst nstament.
Secton 250(d) of the Revenue ct of 1921 reads n partus foows:
The amount of ncome, e cess-profts, or war-profts ta es due under any
return made under pror ncome, e cess-profts or war-profts ta
cts sha be determned and assessed wthn fve years after the
return was fed .
It w be noted that the statute makes no reference to a tentatve
return, nor s any reference made thereto n any of the sectons of ha
Revenue ct of 1918. Tentatve returns were fed n conformty
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250, rt. 1012.
33
wth reguatons promugated by the Commssoner wth the ap-
prova of the Secretary under the authorty conferred by secton 1309
of the Revenue ct of 1918. It seems cear that ony one return s
contempated by the statute and that s the orgna compete return
nqured to be fed by the ta payer (see sec. 227, 239, 254-25 , and
33 of the Revenue ct of 1918). It has been consstenty hed by
ths offce that the fng of an amended return does not e tend the
date for the begnnng of the runnng of the statute of mtaton
as outned n secton 250(d) of the 1921 ct, but that the return
referred to n subdvson (d) of sad secton has reference to the
orgna return and not to an amended return. There s, however,
one e cepton to ths rung to the effect that, n so far as addtona
ta es are dscosed by an amended return, such return amounts to
a mted waver of the ght of the ta payer to have such addtona
tu es determned, assessed, and coected wthn fve years from the
date of -the fng of the orgna return. (I. T. 1714, C. . II-2,
229.) _
So n cases where a tentatve return was fed, the return re-
ferred to n secton 250(d) of the Revenue ct of 1921 can have
reference ony to the orgna compete return requred to be fed
by the ta payer, no other return beng contempated by the statute.
so-caed tentatve return s a mere appro maton of the
correct return requred to be fed by the statute and s n fact no
return at a wthn the meanng of secton 250(d). The resut n so
far as the above subdvson s concerned s the same as though the
Commssoner had granted an e tenson of tme for the fng of
the orgna compete return and had not requred any tentatve
return to be fed at a.
ccordngy, ths offce s of the opnon that the fve-year perod
of mtaton upon assessments of ncome and profts ta es provded
n secton 250(d) of the Revenue ct of 1921 begns to run from the
date of the fng of the compete return and not from the date the
tentatve return was fed.
Neson T. artson,
Soctor of Interna Revenue.
rtce 1012: ssessment of ta . 111-14-1479
I. T. 19 8
R NU CT O 1921.
Returns may be ree amned and the ta redetermned and add-
tona assessments made as often as the Commssoner deems
advsabe, wthn the prescrbed tme for assessments, uness an
agreement n wrtng s made cosng the case under secton 1312
of the Revenue ct of 1021. Treasury Decson 3240 (C. . 5,
313) does not prohbt such procedure.
n opnon s requested as to whether the Government s barred
from coectng a defcency n ncome and profts ta cue from the
ta payer.
It appears that the ta payer fed hs returns for 1917 wthn the
prescrbed tme, showng a tota ta abty of 31a doars. Ths
amount was assessed and pad. Upon the bass of an offce audt, 5 -
doars of the amount pad was refunded to the ta payer n ugust,
1922. Subsequenty a fed nvestgaton was made whch showed
that the ta payer s correct ta abty was 28 doars, and n eb-
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337
250, rt. 1012.
ruary, 1923, a further assessment was made n the amount of 2
doars to cover the defcency n ta due.
t the tme the fed nvestgaton was started, n anuary, 1923,
the ta payer made an unsuccessfu attempt to obtan an agreement
under secton 1312 of the evenue ct of 1921. The attorney for
the ta payer contends that nasmuch as the ncome and profts ta
orgnay assessed aganst and pad by the ta payer for 1917 s n
e cess of the amount now determned to be hs correct ta abty
for that year, the Government s precuded from coectng the add-
tona assessment of 2 doars. Ths contenton s based upon the
opnon of the ttorney Genera n the ostettcrs tters case (32
Op. tty. Gen., 481), wheren he sad that where an assessment was
made and coected n fu ths dscharged any obgaton whch the
ta payer owed n the way of ta es. It s aso contended that the
reopenng of the case after the aowance of the refund n 1918 s
contrary to Treasury Decson 3240 C. . 5, 313 .
So far as the evdence before ths offce shows, no contenton s
made that the addtona ta assessed s not propery due.
The Revenue ct of 1917 contans no speca provson as to |ust
how and when assessments sha be made and the ta coected, but
secton 212 of that ct provdes:
That a admnstratve, speca, and genera provsons of aw, ncudng the
aws n reaton to the assessment, remsson, coecton, and refund of nterna
revenue ta es not heretofore specfcay repeaed, and not nconsstent wth the
provsons of ths tte are hereby e tended and made appcabe to a the pro-
vsons of ths tte and to the ta heren mposed, and a provsons of Tte
I of such ct of September 8, 191 , as amended by ths ct, reatng to returns
and payment of the ta theren Imposed, ncudng penates, are hereby made
appcabe to the ta mposed by ths tte.
Secton 9(a) of the ct of September 8, 191 , provdes:
That a assessments sha be made by the Commssoner of Interna Revenue
and a persons sha be notfed of the amount for whch they are respectvey
abe on or before the 1st day of une of each successve year, and sad amounts
sha be pad on or before the 15th day of une,
Secton 3182, Revsed Statutes, provdes that
The Commssoner of Interna evenue s hereby authorzed and requred to
make the nqures, determnatons, an assessments of a ta es and penates
mposed by ths tte, or accrung under any former nterna revenue ct, where
such ta es had not been duy pad by stamp at the tme and n the manner pro-
vded by aw, and sha certfy a st of such assessments when made to the
proper coectors respectvey, who sha proceed to coect and account for the
ta es and penates so certfed.
Secton 250(d) of the Revenue ct of 1921 e tended the tme
n whch to make assessments of ncome and profts ta under pror
cts to fve years from the date the return was fed, and n the ast
paragraph thereof provdes:
(d)
If upon e amnaton of k return made under the Revenue ct of 191 , the
evenue ct of 1917, the Revenue ct of 1918, or ths ct, a ta or a defcency
n ta s dscovered, the ta payer sha be notfed thereof and gven a perod
of not ess than 30 days after such notce s sent by regstered ma n whch
to fe an appea and show cause or reason why the ta or defcency shoud
not be pad. Opportunty for a hearng sha be granted and a fna decson
(hereon sha be made as qucky as practcabe. ny ta or defcency n ta
then determned to be due sha be assessed and pad, together wth the penaty
and nterest, f any, appcabe thereto, wthn 10 days after notce and demand
by the coector as herenafter provded .
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250, rt. 1012.
338
Under the above sectons of the aw the Commssoner s specf-
cay authorzed to make nqures, determnatons, and assessments
of ta es accrung under the varous nterna revenue aws. There
s no provson of aw whch woud prohbt the Commssoner from
makng ree amnatons of ncome returns as often as he desres, un-
ess he enters nto a wrtten agreement that the determnaton and as-
sessment aready made sha be fna. The provsons of secton 1312
specfcay recognze that uness and unt an agreement s made n
wrtng between the Commssoner and the ta payer cosng the case
t may be ree amned and the ta redetermned and addtona
assessments made as often as the Commssoner deems advsabe
wthn the prescrbed tme. If such was not the case, secton 1312
woud be unnecessary.
The ostetters case may be dstngushed from the nstant case on
two grounds: rst, the aw under whch the ta was assessed n
that case s fundamentay dfferent from that governng the nstant
case second, the assessment coverng the fu ta abty was pad
n fu, the amount refunded, and before t was decded that the re-
fund shoud not have been made the tme for makng another assess-
ment had e pred.
Secton 303 of the Revenue ct of 1917, under whch the ta n
the ostetters case was assessed, reads as foows:
That upon a dsted sprts produced In or Imported nto the Unted States
upon whch the ta now mposed by aw has been pad, and whch, on the day
ths ct s passed, are hed by a retaer n a quantty n e cess of 50 gaons
In the aggregate, or by any other person, corporaton, partnershp, or assoca-
ton n any quantty, and whch are ntended for sae, there sha be eved,
assessed, coected, and pad a ta of 1.10 (or, f ntended for sae for
beverage purposes or for use n the manufacture or producton of any artce
used or ntended for use as a beverage, a ta of 2.10) on each proofagaon,
and a proportonate ta at a ke rate on a fractona parts of such proof
gaon.
Under ths secton of the aw a straght foor ta was mposed
upon each proof gaon of beverage. Ony one tem entered nto
the assessment. When the assessment was made t naturay covered
tbe fu ta abty. Therefore, no provson was made for grant-
ng the ta payer a hearng before any addtona assessment was
made upon a further e amnaton of hs return.
Under secton 250(d) of the Revenue ct of 1921, specfc author-
ty s gven for assessng ncome and profts ta dscovered upon the
e amnaton of returns made under pror cts. Ths provson ceary
refers to e amnatons subsequent to the orgna e amnaton. It
was a we-known fact at the tme the 1921 ct was under consder-
aton n Congress that returns fed under pror cts were beng
e amned and ree amned and arge defcences were beng ds-
covered. Congress ceary had ths n mnd when the above prov-
son was nserted.
The statement of the ttorney Genera prncpay reed upon by
the attorney for the ta payer s as foows:
The assessment was made and coected n fu. Ths undoubtedy dscharged
any obgaton whch the company owed n the way of ta es.
That statement ceary coud not be apped to assessments of n-
come and profts ta es. Such a rung woud absoutey precude the
assessment of any addtona ta es after the frst assessment had been
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339
250, rt. 1012.
pad, and woud be n drect confct wth the specfc provsons of
the aw. The statement must therefore be read n connecton wth
the facts n the case under consderaton and construed wth reference
to those facts.
In that case the orgna assessment had been dscharged and no
further assessment or reassessment had been made or coud be made,
as the tme n whch to make such assessment had e pred. The fact
that the ttorney Genera had the partcuar assessment (whch had
been dscharged) n mnd s borne out by hs statement |ust pror
to the one above quoted, where he sad I do not thnk t s possbe
to concude that the assessment s st n force, or, ndeed, that tho
company owes the Government any ta es, and aso by hs statement
a tte ater on, where he sad I do not thnk that when ta es are
assessed and the amount assessed pad n fu to the Government, tho
assessment can any onger be sad to have any force or effect. or
the foregong reasons, t s beeved that the opnon shoud be mted
Ths offce has aways taken the poston that the Commssoner
may assess any ta found to be due even though sad ta may have
prevousy been abated or refunded, provded such assessment s
made wthn the tme prescrbed by statute. If there s a wfu
attempt to defeat or evade the ta , the assessment may be made at
any tme. Secton 1322 of the Revenue ct of 1921.
If the ta payer s nterpretaton of the ttorney Genera s opnon
shoud be accepted and adopted wth reference to the ad|ustment of
ncome ta t woud necesstate the wthhodng of a refunds unt
a compete and thorough nvestgaton had been made of every tem
connected wth tho return, because after such refund had been made
no assessment coud then be made to cover ta subsequenty dscov-
ered regardess of the bass of the assessment. Such a procedure
woud work a great hardshp on the ta payers and woud aso re-
qure the Government to pay mons of doars n nterest on
amounts ceary refundabe. Such a resut certany coud not have
been contempated by the ttorney Genera n deverng the opnon
n queston.
In vew of the foregong, t s the opnon of ths offce that the
Government was not barred from makng the addtona assessment
aganst the ta payer n ebruary, 1923, for further ta due. from
hm for the year 1917. coecton of the amount assessed w there-
fore be proper.
Wth reference to the contenton that a reopenng of the case at
ths tme s prohbted by Treasury Decson 3240, t s suffcent to
case of ths knd. carefu readng of the Treasury decson w
ceary ndcate that the ta payer s contenton wth reference thereto
can not be sustaned. The attorney for the ta payer dd not urge
ths pont n hs ora argument.
rtce 1012: ssessment of ta .
(See I. T. 19 sec. 219, art. 341.) Rght to assess a ta notwth-
standng a prevous abatement thereof.
say that that Treasury
never ntended to appy to a
p m _ ____ _ _ 11
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250, rt. 1012.
340
rtce 1012: ssessment of ta . 111-18-153
T. D.358
federa ta es bankruptcy decson of court.
1. ankruptcy Prorty of Ta Cams Wagk Cams.
Under the provsons of sectons 4(a) and 4(b) of the ank-
ruptcy ct, s cam for edera tu es takes prorty over payment
of wane cams where the assets of the estate are nsuffcent to
pay a cams n fu.
2. Cases oowed.
Guarantee Co. v. Tte Guaranty Co. (224 U. S., 152) Unted
States v. Over (290 ed., 1 0) (T. D. 3501 C. . II-2, 341 )
In rc Wesmtan (178 ed., 115) In re ttenpan (285 ed., 2)
(T. D. 3405 C. . 1-2, 218 ), foowed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coector s of nterna revenue and others concerned:
The attached decson of the Unted States Crcut Court of p-
peas for the Seventh Crcut In the matter of ssenkay Products
Company, ankrupt, ohn C. Cannon, Coector, v. rank M.
Mchey, Trustee n ankruptcy, s pubshed for the nformaton of
nterna-revenue offcers and others concerned.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved pr 24, 1924.
. W. Meon,
Secretary of the Treasury.
Unted States Crcut Court of ppeas for the Seventh Crcut.
In the atter of sscnkay Products Company, ankrupt, ohn, C. Cannon,
Coector, etc., pettoner, v. rank M. Mc ey, Trustee n ankruptcy, etc.,
respondent.
pr 14, 1924.
efore akes, vans, and Page, Crcut udges.
vans, Crcut udge: Does the cam of the Government for ta es take
precedence, under the ankruptcy ct, to wage cams
Ths s the soe queston presented by the record before us.
Much refnement of dstncton over ta es and debts mght be at-
tempted, and the purpose of egsaton preferrng ta es, coud be ponted out
but as we vew ths queston, t s one of statutory constructon wth recognzed
ob|ects and purposes as a background.
Consderng sectons 34 and 3180 of the Revsed Statutes, as we as
sectons 4(a) and 4(b) of the ankruptcy ct, the concuson that ta es
were paced ahead of a other debts seems unavodabe. The anguage of
secton 34 admts of no e cepton.
Whenever any person ndebted to the Unted States s nsovent, the
debts due to the Unted States sha be frst satsfed.
The ankruptcy ct confrms ths e presson of pubc pocy. Secton 4(a)
provdes:
The court sha order the trustee to pay a ta es egay due and owng by
the bankrupt to the Unted States, n advance of the payment of
dvdends to credtors, .
Ths provson not ony s decaratve of the pocy of the Government
respectng ta es due t, but ays down a rue of practce governng the dstrbu-
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341
250, rt. 1013.
ton of the assets of a bankrupt estate. It provdes the authorty for those
n charge to proceed, before questons of payment of dvdends arse, to pay
and to pay prompty the ta es due the soveregn.
The dvdends referred to are not merey those payabe to genera credtors,
but ncude any dvdend. It s urged that a dvdend s a parta payment of
a cam, and does not contempate a payment n fu. Yet the Congress was
speakng of dvdends n the abstract, and the present case s an ustraton
of the possbty of a dvdend beng pad to a wage earner preferred by sec-
ton 4(b).
Moreover, there s much of mert n udge Gbert s observaton n Unted
States v. Over (290 ed., 1G0) :
It Is true that the term dvdends to credtors ordnary refers to
dvdends to genera credtors. ut t does not necessary have that meanng.
dvdend s that whch s to be dvded. In bankruptcy t s the sum of
money whch s to be dvded among two or more credtors. It Is not neces-
sary a parta payment. It s obvous that t may at tmes be a payment
n fu even as to genera credtors.
These concusons fnd support In the anguage of varous decsons for
e ampe, n Guarantee Co. v. Tte Guaranty Co. (224 U. S., 152) the court sad:
Labor cams are gven prorty, and t s provded that debts havng
prorty sha be pad n fu. The ony e cepton s ta es egay due and
owng by the bankrupt to the Unted States, State, county, dstrct or munc-
paty.
In /a re acobson (2 3 ed., S83) ths court sad:
Sectons G4a and 4b of the ankruptcy ct are n par matera wth secton
34 . Debts due the Unted States, other than ta es, are not gven the same
protecton n the two cted sectons of the .nnkruptcy ct as e sted under
the genera statute, secton 3400, or under the ankruptcy ct of 18 7.
See, aso, Unted States v. Over (290 ed., 1 0) In re ttenpan (285 ed.,
2) In re Wessman (178 ed., 115) emngton on ankruptcy, second
edton, secton 2190 ack on ankruptcy, secton 21.
The order s reversed, wth drectons to enter a decree drectng payment of
the ta es.
The concusons heren reached were concurred n by udge aker before
hs death.
rtce 1013: Decaraton of termnaton III-14-1480
of ta abe perod. T. D. 3573
rtces 1013 of Reguatons 2 are hereby amended
.
m. 1013. Decaraton of termnaton of ta abe penod. Secton 250(g)
provdes that n the case of a ta payer who desgns by Immedate departure
from the country or otherwse to avod payment of the ta for the precedng
or current ta abe year, the Commssoner may upon evdence satsfactory to
hn decare the ta abe perod for such ta payer Immedatey termnated and
cause the servce upon hm of a notce and demand for mmedate payment of
the a decared due and any other ta unpad. In such a case the ta payer
s entted to a fu persona e empton and credt for dependents, f otherwse
aowabe, but hs net ncome sha be paced on an annua bass as provded
by secton 22 (c). See secton 21 of the statute and artces 301-30 . ens
departng from the Unted States w be requred to obtan certcates of
compance wth ncome ta obgatons from the coector or revenue agent n
charge. ens, whether resdent or nonresdent, who ntend to depart from
ths country shoud appear before the coector or revenue agent n charge for
the dstrct In whch they resde and satsfy a Income ta obgatons wth
respect to ncome receved up to and ncudng the caendar month ne t pre-
cedng that of ther ntended departure. Upon payment of such obgatons or
upon satsfactory evdence that no ta s due and payabe the coector or
revenue agent n charge w ssue a certfcate of compance to the appcant.
certfcate of compance ssued by a coector or revenue agent n charge
must e presented at the offce of the revenue agent at the pont of departure,
who w ssue an ncome ta cearance whch w be taken up at the per.
ens presentng themseves at the pont of departure wthout such certfcates
of compance w be e amned by nterna revenue offcers at that pont and
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250, r. 1013.
342
such ta es as appear to be due and owug w e coected. mercan ctzens
departng from the Unted States w not be requred to procure certfcates
of compance or to present any other evdence of compance wth ncome ta
obgatons. If sut s necessary to coect the ta made due and payabe y
te provsons of secton 2f t)(g) of the statute, the Commssoner s fndng s
presumptve evdence of the ta payer s desgn. ta payer who s not n de-
faut n mkng returns or n payng other ta es may procure the postponement
unt the usuu tme of the payment of ta es whch are or may be due pursuant
to ths artce by depostng wth the Commssoner Unted States bonds of a
prncpa amount doube the estmated amount of ta es due for the ta abe
year or by furnshng such other securty as may be approva by the Comms-
soner, - ee secton 1329. If a ta payer voates or attempts to voate ths
subdvson of secton 2r 0, there sha, n addton to a other penates, be
added as part of the ta , 25 per cent of the amount of the ta , or defcency
theren, together wth nterest at the rate of 1 per cent per mouth from the
tme the ta became due.
D. . ar,
Commssoner of Interna Revenue.
pproved March 27, 1924.
. W. Mkon,
Secretary of the Treasury.
rtce 1013: Decaraton of termnaton 111-14-1481
of ta abe perod. L T. 19 9
R NU CT O 1021.
ctzen of Porto Rco who s a resdent of the Unted States s
treated as any other ctzen of the Unted States for ncome ta
purposes. u ncome ta cearance s not requred when such a
person eaves the Unted States.
It s stated that s a natve of Porto Rco and has resded n the
Unted States for the ast 14 years that at present he s n the em-
poy of the M Company, as ther traveng representatve that for
the ast 3 years he has made perodca trps to South and Cen-
tra merca n the nterest of hs company, aways sang from the
port of R and has never been requred to secure a sang permt.
few months ago was nstructed to go to the Centra mercan
countres on a busness trp and arranged to sa from the cty of S.
t the tme of purchasng hs tcket the agent requred hm to show
hs passport and advsed hm that as he was an mercan ctzen he
dd not need an ncome ta cearance. owever, at the tme of
boardng the steamer, a cerk from the offce of the revenue agent n
the cty of S ooked over hs passport and refused to aow hm to sa
on the ground that he was a natve of Porto Rco and, therefore,
coud not eave the Unted States wthout an ncome ta cearance
from the revenue agent s offce. In vew of the fact that was un-
abe to produce hs ncome ta recepts for the ast three years n the
short tme before the sang of the steamer, hs frm s representatve
n the cty of S sgned an affdavt guaranteeng hs return and the
payment of hs ncome ta , and the ncome ta cearance was ssued
to .
desres to know why a natve of Porto Rco, who s an mercan
ctzen by ct of Congress and who served n the Unted States rmy
durng the Word War, s cassfed as an aen and dened the same
prveges en|oyed by other mercan ctzens who eave the Unted
States temporary.
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343
252, rt. 1031(a).
Secton 2 0 of the Revenue ct of 1921 provdes n part as foows:
That any ndvdua who s a ctzen of any possesson of the Unted States
(but not otherwse a ctzen of the Unted States) and who s not a resdent of
the Unted States sha be sub|ect to ta aton under ths tte ony as to ncome
derved from sources wthn the Unted States, and n such case the ta hn
be computed and pad n the same manner and sub|ect to the same condtons
as n the case of other persons who are ta abe ony as to ncome derved from
such sources.
The other persons referred to are nonresdent aens. Secton
2 1 of the same ct provdes:
That n Porto Rco and the Phppne Isands the ncome ta sha be
eved, nssessed, coected, and pad as provded by aw pror to the passage
of ths ct.
The Porto Rcan or Phppne Legsature sha have power by due enact-
ment to amend, ater, modfy, or repea the ncome ta aws n force n Porto
Rco or the Phppne Isands, respectvey.
The Revenue ct of 1921 s not n effect n Porto Rco, and under
the provsons of secton 2 0 a ctzen of Porto Rco who s not a
resdent of the Unted States s sub|ect ony to those provsons of
the Revenue ct of 1921 whch are appcabe n the case of non-
resdent aens. ctzen of Porto Rco who s a resdent of the
Unted States, however, s treated as any other ctzen of the Unted
States for ncome ta purposes. n ncome ta cearance shoud not
have been requred n s case.
S .CTION 252. R UNDS.
rtce 1031 (a): Refund, credt and abatement 111-11-1421
ad|ustments. I. T. 1948
R NU CT O 1917.
The ta payer was aowed, nnder the provsons of secton 1009
of the Revenue ct of 1917, a dscount for the payment n advance
of the amount shown due on the return for the year 1917 and the
net amount was assessed. The correct ta abty was deter-
mned n 1921 to be n e cess of ths amount. In computng the
amount of an overassessneut the net amount assessed n 1917
shoud not be used, the ta payer beng entted to the dscount.
The queston s rased reatve to the certfcate of overassessment
n the amount of doars prepared n the case of the M Company
for the caender year 1917.
The ta abty as shown by the corporaton s orgna return for
1917 was 534a doars the coector aowed, under the provsons of
secton 1009 of the Revenue ct of 1917, a dscount for payment n
advance of 2 doars and the net amount 532a: doars was assessed.
n addtona assessment for the year 1917 was made n pr, 1921.
The correct ta abty of the corporaton, as fnay determned
and approved by ths offce, s 873a: doars. In computng the
amount of the overassessment as shown by the prevous certfcate,
the net amount assessed at the tme of fng the orgna return was
used. The dscount aowed the ta payer was not consdered. The
present certfcate of overassessment s for the purpose of ad|ustng
the dscount.
Inasmuch as the correct ta abty s n e cess of the amount
shown on the orgna return, and the net amount was used n com-
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252, rt. 1032.
344
putng the pror certfcate, the ta payer s entted to a certfcate
n the amount of the dscount aowed by the coector. See Treasury
Decson 2 22 (not pubshed n uetn servce).
rtce 1031(a) : Refund, credt and abatement ad|ustments.
(See Mm. 3207 sec. 250, art. 1001.) Instaments of ncome ta
due une 15, 1924, on ndvdua returns.
rtce 1032: Cams for abatement of ta es 111-11-1422
erroneousy assessed. I. T. 1949
R NU CTS O 1013, 1010, 1018, ND 1021.
Ta es erroneousy or Iegay assessed or whch are abatabe
under remeda cts are, by the Commssoner of Interna Rev-
enue, remtted to the party and abated to the coector, whereas
tu es uncoectbe are smpy abated by the Commssoner to the
coector aganst whom they are charged. In the frst nstance the
ta es shoud be abated on orm 843 , whereas If the ta es are
smpy uncoectbe they shoud be abated on orm 53.
Snce the ta of an nsovent bank whch has not suffcent assets
to pay ts depostors s abated from the bank under the provsons
of secton 3417 of the Revsed Statutes, such ta shoud be abated
on orm 843 . (I. T. 1428 (C. . 1-2, 220) modfed.)
dvce s requested whether orm 53 or orm 843 shoud be
used for abatng ta es n the case of nsovent banks fang wthn
the provsons of secton 3417 of the Revsed Statutes.
Secton 3417 of the Revsed Statutes, so far as reevant, provdes
as foows:
Whenever and after any bank has ceased to do busness by reason of n-
sovency 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.
It s apparent from the above-quoted provson of aw that where a
bank has not suffcent assets to pay ts depostors, the Government s
precuded from recevng or coectng any ta from such bank on or
after the date on whch t has ceased to do busness on account of
nsovency.
In determnng the proper form to use n abatng the ta of banks
fang wthn the provsons of secton 3417 of the Revsed Statutes
t s necessary to consder the uses to whch orms 53 and 843 have
been put.
The uses of orm 53 are e paned n artce 1033 of Reguatons
2. Ths artce provdes that When a ta s found to be uncoect-
be, the coector or deputy coector who made the demand for pay-
ment and s conversant wth the facts may prepare a cam for abate-
ment on orm 53. The same artce then goes on to state that It
s the duty of the coector to use the same dgence to coect a ta
after t has been abated as uncoectbe as before abatement.
orm 843 , whch s the banket orm 843, superseded abatement
cam orm 47. So far as the atter form s concerned, Reguatons
14, revsed, provde n part as foows:
Cams for the abatement of ta es or penates erroneousy or egay as-
sessed or whch are abatabe under remeda cts, etc., must be made out upon
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345
252, rt. 1034.
orm 47, and must be sustaned by the affdavts of the partes aganst whom
the ta es were assessed, or of other partes cognuaut of the facts, and must be
accompaned by affdavts of the deputy coectors of the dvsons n whch tho
cams arse.
It s evdent that ta es erroneousy or egay assessed or whch
are abatabe under remeda cts are, by the Commssoner of In-
terna Revenue, remtted to the party and abated to the coector,
whereas ta es uncoectbe are smpy abated by the Commssoner
to the coector aganst whom they are charged. In the frst nstance
the ta es shoud be abated on orm 843 , whereas f the ta es are
smpy uncoectbe they shoud be abated on orm 53.
It s hed, therefore, that snce the ta of an nsovent bank whch
has not suffcent assets to pay ts depostors s abated from the bank
under the provsons of secton 3-117 of the Revsed Statutes, such ta
shoud be abated on orm 843 . (I. T. 1428 (C. . 1-2, 2-20)
modfed.)
rtce 1034: Cams for credt of ta es III-4-1332
erroneousy coected. I. T. 1921
R NU CT O 1921.
cam for credt or refund, to be aowabe, must be actuay
receved n the offce of the Commssoner or the coector pror to
the e praton of the statute of mtatons.
There s no authorty of aw under whch the Commssoner may
aow a cam for credt or refund whch s not fed wthn suffcent
tme to meet the requrements of secton 252 of the Revenue ct of
1921, as amended by the ct of March 4, 1923. The fact that the
cam was paced n the mas n ampe tme to reach the offce of the
coector or the Commssoner before the e praton of the statutory
perod s not suffcent. The cam must be actuay receved n the
offce of the Commssoner or the coector pror to the e praton of
the statute of mtatons.
rtce 1034: Cams for credt of ta es 111-15-1502
erroneousy coected. S. M. 1712
R NU CT O 19 21.
The fve-year perod aowed for the fng of a refund or credt
cam for the fsca year ended une 30, 1917, dd not begn to run,
as to the 4 per cent war ncome ta and the e cess-profts ta m-
posed by the Revenue ct of 1917, unt the suppementa return
requred by the ct of October . , 1917 was due that s, pr 1,
1918.
certfcate of overassessment s submtted n favor of the M
Company for the fsca year ended une 30, 1917, n the amount of
77| doars, whch represents the amount of addtona assessment
made on March , 1923.
It s noted that an apparent overpayment n the amount of y5
doars s omtted from the certfcate of overassessment, upon the
ground that refund s barred by the statute of mtaton. The
record aso contans a etter to the company proposng to re|ect a
4177 24 23
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252, rt. 1034.
refund cam fed by t on March 31, 1923, for the fsca year ended
une 30, 1917, upon the ground that sad cam was not fed wthn
the perod prescrbed by secton 252 of the Revenue ct of 1921,
as amended.
Ths offce s of the opnon that the fve-year perod aowed for
fng of refund or credt cam for the year ended une 30, 1917,
dd not begn to run, as to the 4 per cent war ncome ta and the
e cess-proft ta mposed by the Revenue ct of 1917, unt the
suppementa return requred by the ct of October 3, 1917 was
due that s, pr 1, 1918. The refund of any amount due for
ths fsca year, ether of the 4 per cent ta or the e cess-profts ta ,
appears to be aowabe upon the refund cam fed March 31, 1923.
Neson T. artson,
Soctor of Interna Revenue.
rtce 1034: Cams for credt of ta es 111-18-1534
erroneousy coected. L T. 1993
R NU CT O 1918.
The stockhoders of a persona servce corporaton can not assgn
overnssessments due to them to the corporaton so as to enabe the
corporaton to appy the amounts due to Its stockhoders aganst
the amount of an addtona ta assessed aganst t.
The stockhoders of a persona servce corporaton can not assgn
overassessments due to them to the corporaton so as to enabe the
corporaton to appy the amounts due to ts stockhoders aganst the
amount of an addtona ta assessed aganst t. Under the ct of
1918, and to anuary 1,1922, under the ct of 1921, a speca method
of ta ng the ncome of a persona servce corporaton was foowed,
n connecton wth whch the ta was assessed aganst the stock-
hoders of the corporaton nstead of aganst the corporaton tsef,
but ths method of assessng the ta dd not destroy the separate
ndentty of the corporaton and ts stockhoders. The stockhoders
of a persona servce corporaton are n no dfferent poston wth
reference to assgnng the benefts of overassessments aganst them-
seves to the corporaton than are the stockhoders of other corpora-
tons. The rue that credts may be made between the accounts of
ndvduas and partnershps of whch the ndvduas are members
and vce versa wth reference to 1917 overassessments and ta es, and
whch s recognzed n . R. R. 859 (C. . 1-1, 31 ) and n L T.
13 1 (C. . 1-1, 318), does not e tend to corporatons and ther
stockhoders, ether for 1917 or any other ta abe year.
rtce 1034: Cams for credt of ta es ITI-18-1537
erroneousy coected. Mn. 3201
( so Secton 233, rtce 401.)
Procedure for fng amended returns and cams under Treasury
Decsons 35 8 and 35 9, reatng to communty property n the
State of Caforna.
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347
2 2, rt. 1034.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0., pr 2 , 192 .
Coectors of nterna revenue, nterna revenue agents n charge,
and ot/vers concerned:
Under the provsons of Treasury Decsons 35 8 p. 84 and 35 9
p. 91 , husband and wfe domced n the State of Caforna may
render separate ncome ta returns and each report as gross ncome
one-haf of the ncome whch under the aws of Caforna becomes
communty property smutaneousy wth ts recept.
mended returns and cams may be fed, sub|ect to the mta-
tons mposed by secton 252 of the Revenue ct of 1921, as amended
by ct approved March 4, 1923, and ct approved March 13, 1924.
In a cases n whch the husband and wfe desre to take advantage
of the rung for pror years, each shoud fe a separate return on
the stock forms heretofore used for each of the years nvoved, n-
cudng theren one-haf of the communty ncome and one-haf
of the deductons propery chargeabe aganst such ncome.
Cam for credt of the net amount of ta es overpad for any of
the ta abe years may be fed for the amount of any assessment
outstandng, and cam for refund for the baance. Cam for abate-
ment, nstead of cam for credt, shoud be fed for the e cess of the
ta assessed for 1923 over the ta shown to be due on the amended
separate returns for that year. Cam for refund may be fed for
the entre overpayment of ta f no assessment s outstandng. In
order that the ad|ustment of ta es by the ureau may be factated,
cams n such cases shoud be accompaned by an agreement sgned
by husband and wfe consentng to the ad|ustments theren de-
manded. d|ustment of ta es due on amended separate returns w
be made between husband and wfe as a matter of accountng, and
no cam for credt shoud be fed.
In a cases where separate amended returns are fed as the resut
of the Treasury decsons referred to, and the ncome shown on
such returns has been dscosed n a pror return or returns, penaty
on account of denquency w not be asserted, and nterest on ac-
count of faure to pay the ta shown by the returns on the date
payment, as requred by aw, w not be assessed.
No bond w be requred n the case of cams for credt based
upon separate returns fed n the manner above stated.
speca form of return. orm 1040CP, and a cam on orm
843GP have been prepared to assst ta payers n makng ther
amended returns and cams for the years 1919 to 1922. The etter
e panng ths procedure to ta payers s as foows:
There are ncosed abstracts of your Indvdua Income ta returns, to whch
are attached two return forms for each year especay prepared for your use
to assst In securng an ad|ustment of your ncome ta abty under the
recent opnon of the ttorney Genera, Treasury Decsons 35 8 and 35(59.
These ad|ustments w cover the years 1919 to 1922, ncusve, and dupcate
copes of the abstracts and returns, orm 1040CP, w not be supped for re-
tenton by ta payers.
These abstracts are desgned to show the ncome and deductons as reported
on your orgna returns or as ad|usted, and to suppy the bass of the dvson
thereof to husband and wfe under the communty property rung.
There are aso ncosed Treasury Department orms 843CI for your use
In compyng wth the reguatons of the Department, whch requre that cams
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5252, rt. 1034.
348
be fed. statement as to the bass upon whch the ad|ustment Is to be
made as been prnted on these cam forms.
The agreement at the foot of the abstract form must be sgned by husband
an wfe In order that the ad|ustment of ther ta abty may be made by
the ureau of Interna Revenue.
Your carefu attenton s drected to the statement on the returns to be
rendered under ths decson wth respect to your domce. Ths statement,
to the effect that your ega domce on the ast day of your ta abe perod
was n the State of Caforna, w, of course, be made under oath.
The Incosed abstracts and returns, together wth the cams on orm 843CP.
after beng propery e ecuted, must be sent to the coector of nterna revenue
for your dstrct not ater than 15 days from date of recept
D. . ar, Commssoner.
rtce 1034: Cams for credt of ta es 111-23-1593
erroneousy coected. I. T. 2020
R NU CT O 921.
ddtona ta for the year 1918 was assessed aganst , e ecutor
of the estate of . It appears that overpad hs ndvdua n-
come ta for 1918. e has tendered a cam for credt and con-
tends that such overpayment shoud be apped aganst addtona
ta due from the estate of whch he s the soe benefcary.
as e ecutor of the estate of and as an ndvdua are
dstnct and separate ta payers. The overpayment made by as
an ndvdua may not be apped aganst addtona ta due from
the estate.
ddtona ta for the year 1918 was assessed aganst , e ecutor
of the estate of . It appears that overpad hs ndvdua ncome
ta for 1918. e has tendered a cam for credt, and contends that
such overpayment shoud be apped aganst addtona ta due frpm
the estate of whch he s the soe benefcary.
The authorty of the Commssoner to credt or refund ncome,
war-profts, or e cess-profts ta es s contaned n secton 252 of the
Revenue ct of 1921 as amended. cept n the case of wthhodng
agents fang wthn subdvson (b), ths secton provdes that a
credt or refund of e cess ta es pad must ony be made to the ta -
payer. The answer to the frst, nqury, therefore, depends upon
whether or not as an ndvdua and as e ecutor of the estate
of 15. deceased, are separate and dstnct ta pa|rers.
The abty of an ndvdua for ta es assessed aganst hm n hs
fducary capacty as e ecutor or admnstrator s separate and ds-
tnct from hs abty for ta es assessed aganst hm as an ndvd-
ua. In the former case hs abty s mted to the amount of the
assets of the estate and n the atter case to the amount of hs prvate
or ndvdua property. The prncpe s we estabshed that pror
to dstrbuton no part of the assets of an estate may be sezed n
pa3 ment of the persona ta obgatons of the ndvdua actng as
admnstrator or e ecutor regardess of whether or not he s the soe
benefcary of the estate.
In vew of the foregong, t s cear that as e ecutor of the estate
of , deceased, and as an ndvdua are dstnct and separate ta -
payers. ccordngy, the aeged overpayment made by hm as an
ndvdua may not be apped aganst addtona ta due from the
estate.
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349
252, rt. 103 .
rtce 103 : Cams for refund of ta es III-9-1393
erroneousy coected. S. M. 1538
R NU CT O 1021.
Where an overpayment of ta has been made by the e ecutor of
an estate who has rendered hs fna account and has been ds-
charged, the rght to fe a cam for refund or credt passes to
those who suffered a dmnuton of ther benefca nterests be-
cause of the overpayment. ach benefcary of the estate may fe
a cam for refund or credt of that porton of the overpayment
whch corresponds to hs nterest n the proceeds of the estate.
n opnon has been requested as to the rght of ndvdua
benefcares to fe cams for refund or credt of an overpayment
of ncome ta made by an e ecutor pursuant to a return fed for an
estate for the year 1918. The queston was submtted by the coector
and hs etter of nqury reads n part as foows:
or the year 1918 an e ecutor fed a ta return for an estate whch he was
admnsterng and a certan amount of ta was pad thereon. It has now
been determned that an overpayment was made by reason of the fact that
proper deducton was not taken for nhertance ta es. The e ecutor fed
hs fna account n 1919, whch was duy accepted by the probate court.
ueston s now rased as to whether or not the ndvdua benefcares, of
whch there were two, each havng a share of 50 per cent n the estate, shoud
fe refund cams, and, aso, queston s rased as to whether these ndvdua
benefcares can take 50 per cent of the overpayment made by the estate as a
credt on ther current ndvdua ta abty.
Under the facts as stated, t appears that there were two bene-
fcares, each of whom receved a share of 50 per cent of the estate:
ccordngy, each of these benefcares are entted to a ke share of
any overpayment of ta made by the estate. The e ecutor s, of
course, prmary the proper person to fe a cam for refund or
credt of any overpayment of ta made by the estate durng the
process of admnstraton. owever, the e ecutor havng been
dscharged, the rght to fe such cam passes to those ndvduas
who suffered a dmnuton of ther benefca nterests by reason of
the overpayment. ccordngy, n the nstant case the two bene-
fcares referred to may fe a cam for the refund or credt of 50
per cent of the overpayment. The cams shoud be accompaned by
a certfed copy of the court order grantng the dscharge of the
e ecutor and a certfed copy of the order of dstrbuton, or, f such
order does not fuy dscose the dentty of the person or persons
entted to receve any amount that may be refundabe and the per-
centage or proporton thereof to whch each s entted, there shoud
be submtted a copy of the decedent s w, f any, and such further
proof as may be requste to estabsh both the dentty of such per-
son or persons and the percentage or proporton of the amount
sought to be refunded to whch each s entted.
Inasmuch as the benefcares are entted to fe cams for credt
or refund as above set forth, t foows that such amounts as they
are entted to receve may be apped as a credt on ther current
ndvdua ncome ta abty.
Neson T. artbon,
Soctor of Interna Revenue.
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252, rt. 103 .
350
rtce 103G: Cams for refund of ta es
erroneousy coected.
111-11-1423
L T. 1950
R NU CT OP 1921.
The return of undstrbuted net Income on orm 1112 for 1917
was requred to be fed wthn GO days after the e praton of
s nont from the cose of that ta abe year (that s, the
caendar year, or fsca year, f dfferent from the caendar
year). ccordngy, f a ta payer fed ts returns for 1017 on
the bass of the caendar year, the fve-year perod of mtaton
under .secton 2, 2 of the Revenue ct of 1921, as amended, e -
pred In connecton wth the return on orm 1112 on ugust 29,
1923, and the s -year perod woud e pre on ugust 29. 1924.
The ta payer fed durng the year 1918 on orm 1112, corporaton
undstrbuted net ncome ta return, a return settng forth the un-
dstrbuted ncome for the year 1917. On behaf of the ta payer, t
s stated that upon e amnaton of ths return t s found that the
fgures shown thereon shoud be revsed. Inqury s made whether
an amended return may be fed at ths tme, and, n the event a re-
fund s determned to be due, whether a cam for refund w be
entertaned.
There s no f ed tme wthn whch amended returns must be fed
uness they are caed for by ths offce, and the date of fng specfed.
Cams for refund, however, must be fed n suffcent tme to meet
the requrements of secton 252 of the Revenue ct of 1921 as
amended by the ct of March 3, 1923.
Under the provsons of secton 252 of the Revenue ct of 1921,
as amended, cams for refund coverng overpayments for 1917 must
be fed wthn fve years from the tme the return was due, or wthn
two years from the tme the ta was pad, e cept that where a waver
for 1917 was fed wthn the fve-year perod a cam for refund may
be fed wthn s years from the date the return for that year was
due.
The return of undstrbuted net ncome on orm 1112 for 1917 was
requred to be fed wthn 0 days after the e praton of s months
from the cose of that ta abe year (that s, the caendar year, or
fsca year, f dfferent from the caendar year). ccordngy, f
the ta payer fed ts returns for 1917 on the bass of the caendar
year, the fve-year perod n connecton wth the return on orm
1112 e pred ugust 29, 1923, and the s -year perod w e pre on
ugust 29, 1924.
rtce 103 : Cams for refund of ta es 111-21-1571
erroneousy coected. L. 0.111
DMINISTR TI CL IM OR R UND R OP NING O R CT D CL IM
R GUL TIONS 14, R IS D (U 1 DITION) S CTIONS 131 , 1318, ND
1324(a), NU CT O 1921.
Where an orgna cam for refund of a ta s made, aegng
severa separate and specfc grounds for aowance, and demand-
ng the fu amount pad as such ta , whch cam s re|ected
toto, t can not be reopened for consderaton of a new and dstnct
ground, but camant may make a new cam n the manner and
form prescrbed by the reguatons, f the statutory perod has not
e pred.
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351
252, rt. 103 .
n Informa cam for refund made by etter to the Comms-
soner of Interna Revenue wthn four years ne t after payment
of the ta sought to be refunded must be perfected by fu com-
pance wth Reguatons 14, revsed (191 edton), before t
w be consdered on ts merts.
Refem s made to the severa memoranda of the deputy com-
mssoner reatve to the queston of reopenng the cam for refund
fed on behaf of the estate of .
It appears that the sad ded on March , 1917: that on De-
cember 30, 1920, a cam on behaf of the estate was fed on orm
4 for the refund of 59.8a doars, beng the tota amount of estate
ta pad that the sad cam was based on three specfc grounds,
vz, (1) the rght to a refund of the amount coected on the nhert-
ance ta pad to the State of New ersey, (2) the rght to deduct
from the gross estate the dower rght of the wdow, and (3) the
rght to deduct an amount for one year s support of the wdow
and that the sad cam was re|ected n toto on anuary 9, 1922. It
further appears that under date of May , 1922, the attorneys for
the estate made wrtten request for reconsderaton of the cam, for
a reason not prevousy specfed, vz, the aeged rght of the estate
to a deducton on account of the payment by t of decedent s ncome
ta for 191 . On behaf of the estate, t s contended that the paren-
thetca cause n tem 4 of orm 4 amount now asked to be re-
funded (or such greater amount as s egay refundabe) s a sav-
ng cause appcabe to ths case, and that the estate may, at any
tme, rase questons thereunder, snce the entre ta pad by the
estate was orgnay camed n the space provded for the nserton
of the amount n sad tem 4.
It s to be observed that the Cam for refund ( orm 4 ) s so
prepared and prnted that a ta payer s cam s made, not n the form
of a mere unverfed statement, but n the form of an affdavt, n
whch the camant states, under oath, that the facts stated beow
wth reference to the cam are true and compete and that de-
ponent very beeves that the amount stated n tem 4 shoud bo
refunded and camant now asks and demands refund of sad amount
for the foowng reasons. Then foows, n the nstant case (the
affdavt havng been duy made and e ecuted), a st of the three
reasons, above enumerated, why 59.8a doars, the fu amount of the
ta pad, shoud be refunded.
ut the camant, after the re|ecton of hs orgna cam, at-
tempts by etter of May , 1922, to set up an addtona and entrey
new ground for refund, vz, the rght of the estate to a deducton on
account of the payment of a edera ncome ta for the year 191 .
The fact that such a ta had been pad was of course known to the
estate when the orgna cam-affdavt for refund was fed Decem-
ber 30, 1920, as t s stated to have been pad by the estate after de-
cedent s death, yet t was not assgned n the orgna cam as one
of the reasons for demandng a refund. owever, the sad cam
urported to be and was n fact sworn to as a compete cam,
as t, then, at the tme of fng, actuay compete, or was t sub|ect
to revson at the w of the camant, merey because the tota ta
pad was demanded as a refund
The word compete s defned to mean fed up, wth no part,
tem, or eement ackng free from defcency entre perfect con-
summate. (Webster s New Internatona Dctonary.)
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352
The camant s theory seems to be that n such a cam there may
propery be an tem or eement ackng unt the estate has from
tme to tme ntroduced, and eventuay e hausted, every ground on
whch a refund mght possby be based. That much s cear from
the statement of the estate s representatve, as set forth n deputy
commss oner s etter of May 19, 1922, that artce 4 of orm 4
s a savng cause and the estate ma , at any tme, rase questons
thereunder, snce the entre ta pad by the estate was orgnay
camed by the attorneys n answer to ths artce. It s evdent,
therefore, that the estate ntended ts cam to be a banket cam,
a catch-a, and that the savng cause was e pected to save t
from the operaton of the statute mtng the tme wthn whch
a cam may be fed, thereby affordng unmted opportunty for
reopenng and revsng the cam, not merey for amendment by the
eaboraton or correcton of grounds aready specfed, but for the
sottng up of entrey new grounds. The. more ogca nterpreta-
ton of the so-caed savng cause n tem 4 s that t was n-
tended to cover cases n whch, through gnorance of the aw or
the proper method of computaton, camants mght have nserted n-
correct amounts and, on e amnaton of ther cams, be found to be
entted to more than the amounts specfed on the tems then set
forth as grounds for refund. urther, t s qute evdent that an
amount so stated was sub|ect to be ncreased ony by the Comms-
soner as a resut of hs determnaton of the amount that s egay
refundabe, wth whch duty he aone s charged, and that the cause
was not desgned to permt a camant to ater enarge and e pand
hs cam by substtutng a arger amount n tem 4.
Reguatons 14, revsed (191 edton), pages 2 , 27, and 29, n
part provde that:
Cams for the refundng of assessed ta es and penates must be made out
u on orm 4 . In ths case, as In that of cams for abatement upon orm 47,
the burden of proof rests upon the camant. the facts reed upon n sup-
port of the cam shoud be ceary set forth under oath. The cam shoud be
st further supported by an affdavt of the deputy coector of the proper
dvson, and by the certfcate of coector.
amendments u the statement of facts n cams must be made under oath.
The foregong e tracts ndcate ceary that the makng and fng
of a cam for refund s more than a purey perfunctory proceedng
that certan acts on the part of the camant, as we as of nterna
revenue offcers, are requred, and that these acts are of a forma
nature of ega sgnfcance.
In astngs v. Ierod (184 ed., 759, 7 4) the Unted States Cr-
cut Court for the Dstrct of New ersey used the foowng an-
guage :
The Secretary of the Treasury has provded two forms, Nos. 4 and 47, for the
purposes |ust mentoned (makng cams) 4 s made appcabe to the re-
turn oC ta es and penates egay or mpropery assessed, and 47 for an
abatement of ther assessment. orm 40 s appcabe to cases where the ta es
and penates have been pad, and 47 to cases where they have not been pad.
These reguatons of the Secretary have the force of ac, and the edera
courts are obged to take notce of them. (Caa v. Unted States, 152 U. S.,
211, 221.) urthermore, then are obvousy bndnp upon the Commssoner, and
he obtans |ursdcton to pass upon a cam ony rhen and as they have been
comped roth. The merts of the case come before hm when a proper cam has
been made.
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353
252, rt. 103 .
The bndng force of such reguatons was aso asserted by the
Court of Cams n Stotesbury v. Unted States (23 Ct. Cs., 285,
292), when t sad:
The court Is aso of the opnon that the reguatons prescrbed by the Secre-
tary of the Treasury were propery wthn the dscreton reposed n hm by the
statute, and beng authorzed by aw, had the force of aw.
Reguatons 14, revsed, requre that a cam for refund must
be made out upon orm 4 . It s, however, beeved that such re-
qurement was ntended to be merey drectory and not mandatory,
n the sense that ony the offca prnted form of the Treasury De-
pa -tment, bearng the number 4 , coud be used, and that a cam pre-
pared n any manner, whether on a prnted form or not, so ong
as t was sworn to and met the other essenta requrements of orm
4 and the reguatons, woud therefore be accepted and consdered
by the Commssoner. If a cam s submtted whch does not suff-
centy compy wth the reguatons to entte t to consderaton upon
ts merts by the Commssoner, t s, however, as w hereafter be
shown, suffcent to to the statute of mtatons reatng to the fng
of cams, and may aso be consdered a cam, sub|ect to beng per-
fected ater, for the purpose of aowng nterest thereon from s
months after the date of fng, under the provsons of secton
1324(a)3 of the Revenue ct of 1921.
That there must be proper compance wth the essenta re-
qurements of the reguatons governng cams for refund, however,
s estabshed by the decson n cks v. ames (48 ed., 542-544)
(affrmed ames v. cks, 110 U. S., 272). In that case a cam was
fed by the ta payer ebruary 8, 18 , n the offce of the Comms-
soner of Interna Revenue, on orm 47, for recovery of egay co-
ected ta es. That was not the proper form to use, as orm 4 was
ntended for that purpose. cam on the atter form was fed n
March, 18 , and both cams were re|ected by the Commssoner
May 10, 18 . The cam made on orm 4 acked the certfcate of
the proper nterna revenue offcer, as requred by the reguatons of
the Treasury Department. On anuary 8, 18 8, the cam was agan
fed wth the Commssoner by pat n on the proper form. No. 4 ,
and wth the proper certfcate.
In ts opnon the Crcut Court for the astern Dstrct of r-
gna sad:
Thus t seems ths cam was never, unt anuary 8, 18 8. before the de-
partment n a form n whch t coud be consdered and re|ected on ts merts,
n accordance wth what I conceve to be the meanng of secton 1 ) of the ct
of uy 13, 18 . (14 St. at Large, 152.)
The Commssoner nssts that t (the cam) was re|ected then (May 10,
1S ), whe counse for pantff contends that the cam was never before the
Commssoner n form to be consdered on ts merts unt the 8th anuary,
18 8, when t was propery presented on orm 4 , and suffcenty supported by
offca certfcaton. / thnk m/sef that not unt anuary 8. SCS, dd the
pantff s cam come before the department n a form n whch t coud he
decded on ts merts. I thnk, moreover, that secton 19 of the ct of uy 13,
180 , contempates that before sut can be brought for the refundng of a ta
camed to have been mpropery coected t must have been re|ected by (e
Commssoner of Interna Revenue on ts merts otherwse camants coud
ntentonay present ther cams n rreguar form for the purpose of enabng
themseves, by ther re|ecton, to brng suts n the courts n contraventon of
the ob|ect of the aw.
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354
ths cam (presented March 9, 18GG, on orm 4G), by not havng
the certfcate requred by the reguatons of the department, was not before
the Commssoner n a manner n whch t coud be consdered on ts merts, or
consdered at a, e cept for the purpose of re|ecton for rreguarty. The
cam, therefore, was before the Commssoner for the frst tme n a manner
to be consdered on ts merts on anuary 8, 18C8
n appea from the decson n the above case was taken to the
Supreme Court of the Unted States, where the decson of the ower
cout was affrmed n wnes v. cks (110 U. S., 272-274).
The Supreme Court quoted the fndng of fact by the tra court
n part as foows:
The sut was brought wthn s montbs after the fna re|ecton
of the pantff s appea made to the Commssoner of Inferna Revenue at
Washngton, the same havng been pendng before the Commssoner from the
tme the appea was perfected on orm 40, accordng to the provson of ate
and the reguatons of the Secretary of the Treasury made n pursuance
thereof.
In ts decson the court sad:
It Is aeged as error n the frst pace, that the court shoud have treated
the appea re|ected for nformaty as the bass for determnng the me
wthn whch the sut ought to have been brought. ut that appea was not
so treated by the Commssoner, who re|ected t for mere nformaty and
entertaned the subsequent appea, made n proper form, as rghty prose-
cuted. The atter, n our opnon, was the appea contempated by the statute.
It w be observed that the cam was hed to be mperfect and
not sub|ect to consderaton upon ts merts unt the certfcate of
the revenue offcer requred by the reguatons was furnshed.
s the above decson requres fu compance wth the regua-
tons, even wth respect to a mere matter of form n the e ecuton
of a cam, t appears that the rue ad down woud appy a fortor
to the presentaton of the sub|ect matter of such cam.
Whe t was hed n 14 Op. tty. Gen., 814, that a cam may be
consdered as havng been presented to the proper authorty for the
purpose, for e ampe, of defeatng a pea or mtaton, even
though fatay nforma, the nference to be drawn from that
opnon s that such nforma cam woud ater be perfected as
requred by the Commssoner, ese t mght be dsmssed because
of gross nformaty. It s very doubtfu whether that opnon can
be construed to drecty sancton the consderaton, on ts merts, of
tons of the department. t any rate, that opnon was rendered
n 1873, whe the Supreme Court ad down the rue of proper com-
pance wth the reguatons n ames v. cks, supra, n 1884.
If the reguatons under consderaton are consdered as havng
the force ot statutory aw, ther e pct requrements can not be
dsregarded, as n the anguage of the Supreme Court of the Unted
States n rd v. Unted States (187 U. S., 118, 124) :
There s a presumpton aganst the constructon whch woud render a
statute neffectve or neffcent.
It s beeved to be true aso that reguatons estabshed n pur-
suance of aw can not be waved or modfed for the beneft of any
poson e cept by aw, or by some other reguaton estabshed
pursuant to aw.
urthermore, the terms of secton 322 of the Revsed Statutes, as
amended by secton 1318 of the Rpvon e ct of 1921, are qute
an nforma cam
perfected under the
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355
252, rt. 103 .
sgnfcant n connecton wth the asserton that fu force and effect
must be gven to Reguatons 14. That secton n part s as
foows:
Sec. 322 . No sut or proceedng sha be mantaned n any court for the
recovery of any nterna-revenue ta aeged to have been erroneousy or e-
gay assessed or coected, or of any penaty camed to have 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 Commssoner of Interna Revenue, accordng to the provsons
of ate n that regard, and the reguatons of the Secretary of the Treasury
estabshed n pursuance thereof.
It s apparent from the above quotaton that n order to enabe a
camant to mantan a sut n any court to obtan a refund of ta es
hs cam for such refund must have been fed wth the Commssoner
accordng to the provsons of aw n that regard, and the regu-
atons of the Secretary of the Treasury estabshed n pursuance
thereof. The provson |ust quoted ndcated the obvous ntenton
of Congress that the reguatons prescrbed by the Secretary must be
foowed by the camant n makng hs cam no ess than the terms
of the statute tsef, and t s cear that wthout compance wth both
the aw and the reguatons no adequate bass for such sut has been
estabshed.
It s, of course, not the ntenton of the camant n ths case to
nvoke the ad of the hodng n 14 Op. tty. Gen., 14, permttng
an nforma cam to be fed and ater perfected, but t nssts that
the new ground for aowance of the cam sha be consdered as part
of the orgna cam. The atter, avowedy compete n substance,
accordng to the affdavt then made, was orgnay fed on orm 4 ,
and an attempt s now beng made to add, as an amendment, an en-
trey new eement to the grounds assgned for aowng the same
cam.
It appears, however, that nstead of presentng under oath the new
matter reed upon, as prescrbed n the reguatons, the estate,
through ts attorneys n fact, merey addressed the above-mentoned
etter of May , 1922, to the ureau, requestng that the rght of the
estate to deducton on account of payment of edera ncome ta for
191 be consdered as part of the orgna cam.
Such a request| whether t be consdered n the ght of an amend-
ment of the orgna cam or as a new cam, s fatay defectve n
that t does not compy, n the form of ts submsson, wth regua-
tons ssued by the Secretary of the Treasury, whch reguatons have
the force of aw and are bndng both on the camant and on the
Commssoner. (See astngs v. erod and Stotesbury v. Unted
States, supra.)
It s therefore the opnon of ths offce that the sad etter of May
, 1922, can not be consdered as propery presentng grounds for re-
openng the orgna cam, whch was re|ected on anuary 9, 1922.
The matera queston st remans, however, whether the new
ground asserted by the camant on May , 1922, can n any event,
even f the defect n form were cured, be consdered as part of the
orgna cam, or whether t must be consdered and treated ony
as a new cam.
It s qute evdent that the request made on May , 1922, by attor-
neys for the estate, for reopenng the orgna cam for consdea-
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35
ton of a new fact aeged to consttute a ground for aowance of
part of the amount orgnay camed, presented to the Comms-
soner no new evdence or facts n substantaton of any of the three
grounds specfed n the orgna cam, but that t set forth, as a
reason for aowance, a ground entrey foregn to the frst three,
vz, the payment of edera ncome ta for 191 .
It s concevabe that an eaboraton of the grounds reed upon by
a camant to obtan a refund of ta es mght, after hs cam was
fed, be desrabe or necessary, and the nserton, under the pre-
scrbed reguatons, of such addtona matter n support of the
grounds specfed woud propery be denomnated an amendment
of the cam. Ths, however, s not such a case. ere the camant
set up an entrey new ground havng not even the remotest connec-
ton wth or reference to the grounds orgnay specfed, and, t
s to be noted, not unt some months after the orgna cam had
been fnay re|ected.
If the ntroducton of a new ground for aowance were permtted
as an amendment of an orgna cam, t woud have the practca
effect of keepng the cam ave ndefntey and, f aowed m whoe
or n part, requrng nterest to be pad, upon the amount aowed as
a refund, from s months after the date of fng the orgna cam.
(Secton 1324(a)3, Revenue ct of 1921.)
If the prncpe for whch the camant contends were recognzed
and adopted, a cam coud never be consdered as cosed unt every
concevabe ground for reopenng and reconsderaton were e -
hausted, whch mght easy ead to the anomaous stuaton where,
after a consderabe number of years, the accrued nterest on an
tem eventuay dscovered as aowabe woud e ceed the amount of
the tem tsef. It s not beeved that ths resut was ntended by
Congress n enactng secton 1324, provdng for the payment of n-
terest on refunds or credts, partcuary n a case such as ths, where
the ground for refund was not ony known to the camant at the
tme of fng the. orgna cam but had, n reaty, e sted for more
than two years pror to the date of such fng. In fact, n recom-
mendng the proposa to the Senate, the nance Commttee n ts
report stated:
Ths provson s nserted for the purpose of e pedtng the refund of t es
and compeng the Government, In the event that such refund s unnecessary
deayed, to pay nterest ut the ordnary rate. (Senate Report No. 275, S ty-
seventh Congress, frst sesson, page 33.)
Consequenty, the provson was ntended to penaze the Govern-
ment for deay, and was ceary not ntended to permt a camant,
through hs aches n presentng separate tems of a snge cam, to
accumuate nterest on an tem not orgnay presented to the Gov-
ernment for ts consderaton.
Whe the Government, n deang wth those who make cams
aganst t, shoud afford such camants every reasonabe and proper
facty whch may awfuy be e tended, t s to be noted that the
rght to recover amounts erroneousy or egay coected as ta es
s governed entrey b statutory aw and reguatons of the Treasury
Department made pursuant thereto, whch, together wth nterpreta-
tons thereof by competent trbunas, are bndng upon offcers of
the Government as we as upon the camants.
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357
252, rt. 103 .
The opnon s succncty e pressed by ttorney Genera ack
n 9 Op. tty. Gen., 32, 34, that
There must e an end at some tme or another, even of a cam aganst the
Government. Interest repubca, tt st fns tum, Is a ma m as appcabe
to pubc credtors, urgng ther cams upon an e ecutve department, as to
any other cass of tgarts.
Speakng of pantff s faure to make a cam for refund on orm
4f, as requred by the aw and reguatons ssued thereunder, the
Supreme Court, n ngs County Savngs Insttuton v. ar (11
U. S., 200, 205), sad:
the safeguards prescrbed by the Secretary of the Treasury for the pro-
tecton of the pubc nterests, n hs reguatons respectng cams for the re-
fundng of ta es, have been dsregarded. There has been no cam whatever n
the sense of the aw.
In o v. dwards (280 ed., 413, 414) the court stated:
It appears from the compant, to whch defendant demurred, that the money
for the recovery of whch sut was brought was pad vountary n March,
15)19. as and for a part of pantff s ncome ta for the year 1918. The tem
of oss, upon account of whch pantff now beeves hmsef entted to a re-
fund, was not caed to the attenton of any Government offca pror to
March, 1921. The orgna ta havng been transmtted to the Treasury wthout
protest or compant upon the part of pantff, t seems to me that as aganst
the coector there woud be no recovery at common aw, nor under the statutes
reatng to hm or hs ofce.
The ta was pad by pantff wth fu knowedge of a the facts, and
wthout any nterposton of the Government or any of ts offcas, and to bod
that a ta payer s entted for years after the payment of a ta to harass and
annoy the ta ng offcas and the courts as to the unwsdom, mproprety or
oversght of what he hmsef dd, when under no coercon and compuson on the
part of the Government, s somethng I am unwng to do.
The decson of the dstrct court n the atter case has been re-
centy affrmed by the Unted States Crcut Court of ppeas for
the Second Crcut.
s sad by the Supreme Court n Rock Isand, . L. R. R. Co.
v. Unted States (254 U. S., 141,143 (C. . 4, 342) ) :
Men must turn square corners when they dea wth the Government. // t
attaches even purey forma condtons to ts consent to be sued, those cond-
tons must be comped wth. La non praecpt nuta (Co. Lt., 127b) e -
presses rather an dea than an accompshed fact. ut n ths case we can
not pronounce the second appea a mere form. t a events the
v.-ords are there n the statute and the reguatons, and the court s of opnon
that they mark the condtons of the camant s rght.
There s no dfference n prncpe between the prosecuton of a
sut aganst the Government n a court of the Unted States and the
prosecuton of a cam aganst the Government before the offcers of
an e ecutve department the Government, partay renouncng ts
soveregn rghts n ether case, merey determnes the forum n whch
the queston at ssue sha be heard. rom the above quotaton t s
evdent the Supreme Court consders that the words of the statute
and reguatons thereunder must be hed to defne and govern the
rghts of a camant aganst the Government.
In the case ast cted the Supreme Court, wthout specfcay re-
ferrng thereto, comes to the same concuson wth respect to the duty
of camants aganst the Government, as set forth n the aw and
reguatons ssued pursuant thereto, as t dd n the case of Tea
v. cks, supra.
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252, rt. 103 .
358
rom the phraseoogy of Reguatons 14 t s evdent that the
Treasury Department contempated the presentaton, n good fath,
of refund cams on a form desgned for the purpose, or at east n
a manner substantay as outned on the prnted form, and that the
reasons or grounds for refund woud be set forth franky and com-
petey, under oath, so that, as so submtted, the Commssoner
woud have before hm a the grounds on whch camant reed and
that t dd not contempate that cams shoud be made n banket
form, wth obvousy nadequate grounds for demandng the amount
camed, or that a camant shoud ask the refund of ony a nomna
sum, wth the apparent ntent of fng a cam to be amended or
added to at w or one to merey defeat the statute of mtatons.
In fact, n cks v. ames, supra, the Crcut Court for the astern
Dstrct of rgna specfcay caed attenton to the possbty of
camants presentng ther cams n rreguar form for the purpose
of contravenng the ob|ect of the aw.
s the reguatons prescrbed that a the facts eed upon n
support of the cam be ceary set forth under oath and the form of
cam-affdavt requred the camant to take oath that the cam made
s compete n substance, a cam so submtted must be treated as
a compete cam, provded the other provsons of the reguatons
have been foowed n the preparaton nd presentaton thereof.
In Unted States v. Land Co. (192 U. S., 355) the Supreme Court
stated that
The whoe tendency of onr decsons Is to requre a pantff to try hs whoe
cause of acton and hs whoe case at one tme he can not even spt up hs
cam (1 Sak, 11 Trask v. R. Co. (2 an (Mass.), 331 reem. udge
(4th ed.), sec. 238, 241) and, a fortor, he can not dvde the grounds of re-
covery. Uness the statute of 1889 put the former sut upon a pecuar footng,
the Unted States was bavnd then to brng forward a the grounds t had for
decarng the patents vod and when the bU wa dsmssed wtts barred as to
a by the decree. ( uthortes cted.)
Under the authorty of the above decson, a pantff can not spt
up hs cam or dvde the grounds of recovery, and can not, after
beng defeated n an acton, successfuy mantan a second one
smpy upon a ground or reason addtona to that set up n support
of the former acton. ( rown v. etcher, 182 ed., 9 3, 970, ctng
eren v. New Oreans, 177 U. S., 390, 399.)
Whe the rues |ust cted ead to the concuson that a cam,
when fnay decded by the Commssoner, can not be reopened for
the consderaton of new grounds for aowance, ther strctness as
to the presentaton of such new grounds n a subsequent cam s
mtgated by the provson of secton 131 of the Revenue ct
of 1921:
That secton 3228 of the Revsed Statutes s amended to read as foows:
Sec. 3228. cams for the refundng or credtng of any nterna
revenue ta aeged to have teen erroneousy or Iegay assessed, or co-
ected, or of any penaty aeged to have been coected wthout authorty, r
of any sum aeged to have been e cessve or n any manner wrongfuy co-
ected, must be presented to the Commssoner of Interna Revenue wthn
four years ne t after payment of such ta , penaty, or sum.
Ths secton, e cept as modfed by secton 252. sha appy retroactvey
to cams for refund under the Revenue ct of 191 , the Rerenue ct of
1917, and the Revenue ct of 1918.
cept as modfed by secton 252, whch has no appcaton to the
nstant case, the anguage of secton 3228, Revsed Statutes, that a
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359
252, rt. 1GS .
cams for the refundng of any ta must be presented to the Com-
mssoner wthn four years ne t after payment of the ta sought
to be refunded, may be construed to permt the fng of separate
cams for refund of a snge ta or porton thereof, so ong as a
the cams are fed wthn the four-year perod of mtatons. To
permt the fng of addtona cams settng up new grounds for
refund, as amendments of an orgna cam, wth no mt as to
the tme for such fng, after the orgna cam has been decded and
after the statutory perod has e pred, woud to a arge e tent
nufy the ntent of Congress n provdng a statute of mtatons
for rng of cams. On the other hand, no hardshp s mposed
upon the ta payer n requrng hm to fe new cams f he wshes
to set up dfferent grounds for refund wthn the four-year statutory
perod, for the reguatons aready requre hs cam or any amend-
ment to be made under oath, and the most convenent method of
compyng wth that and other requrements of the reguatons s
to use ether the form provded by the department for that purpose
or one prepared by the camant hmsef suffcenty ke orm 8-13 to
compy wth the reguatons.
or the reasons stated, ths offce s of the opnon that the new
matter presented by camant on May , 1922, can not be consdered
as an amendment or part of the orgna cam but must be con-
sdered, f at a, as a new cam, and that the orgna cam can not
hereafter be reopened for the consderaton of any other new ground
for aowance. ,
It s at once apparent that the etter of May , 1922, does not
consttute the forma cam contempated by Reguatons 14, as t
s nether presented on a form provded by the department or one
smar thereto, nor s t n the form of an affdavt. owever, under
the authorty of 14 Op. tty. Gen., 14, supra, t meets the requre-
ments of an nforma cam, sub|ect to beng perfected by submsson
n proper form n compance wth Reguatons 14.
Secton 3228, Revsed Statutes, as amended, supra, appes to the
present case, as ths s a cam for refund under the Revenue ct of
191 .
The nforma cam presented on May , 1922, f perfected by the
camant, may be consdered on ts merts as a new cam f t can
be shown that t was presented to the Commssoner wthn four
years ne t after payment of the ta .
ccordng to notatons on the ta return of the estate, a pay-
ments due thereon had been made by March, 1918, wth the e cep-
ton of the sum of .25a doars, whch was pad n uy, 1918. Con-
sequenty, the estate woud be entted to fe a cam for refund,
not e ceedng that amount, wthn four years from uy, 1918. The
facts ndcate that the sum that mght be refunded, f the cam were
aowed, s we wthn that amount. s an nforma cam was,
as stated above, made on May , 1923, that cam may now be
perfected by the camant, n pursuance of the reguatons, the
forma new cam reatng back to May , 1922, as the tme of
presentaton for the purpose of tong the statute of mtatons
and computng nterest under secton 1324(a) 3 of the Revenue ct
of 1921.
Neson T. artson,
Soctor of Interna Revenue.
4
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252, rt. 103 .
3 0
rtce 103 : Cams for refund of ta es 111-23-1594
erroneousy coected. S. M. 1919
R NU CT O 1918.
Those persons who suffered a dmnuton of ther benefca n-
terests under a w by reason of the overpayment of the ta by
the estate are the ones who are entted to the refund, and n the
proporton n each case whch the amount of such dmnuton s
of the tota amount of ta pad provded, however, that f the
resduary estate was not suffcent to satsfy the ta . wth the
resut that egaces to other benefcares were n part abated, then
such atter benefcares are entted to frst be made whoe before
any refund s made to (he resduary egatee or egatees.
n opnon has been requested as to whether an overpayment of
ncome ta by the estate of , deceased, may be refunded to the
resduary egatee. , pursuant to a cam fed on behaf of the
atter.
Those persons who suffered a dmnuton of ther benefca n-
terests under the w by reason of the overpayment of the ta by
the estate are the ones who are entted to the refund, and n the
proporton n each case whch the amount of such dmnuton s of
the tota amount of ta pad provded, however, that f the re-
sduary estate was not suffcent to satsfy the ta , wth the resut
that egaces to other benefcares were n part abated, then such
atter benefcares are entted to frst be made whoe before any
refund s made to the resduary egatee or egatees.
In the nstant case, s the resduary egatee, and the statement
s made n the cam that the ta es were pad out of the resduary
estate. owever, t s beeved that somethng more than the mere
sef-servng affdavt of the camant s necessary before the Govern-
ment woud be |ustfed n makng the refund.
rtce 9 (2) of Reguatons 3, reatng to the estate ta , reads
as foows:
Where the e ecutor or admnstrator has been dscharged and no admns-
trator de bons non has been apponted and quafed, there shoud be sub-
mtted, n eu of the certfcate above mentoned, (a) a certfed copy of te
court order grantng the dscharge, and (b) a certfed copy of the order of
dstrbuton, or, f such order does not fuy dscose the dentty of the pe sou
or persons entted to receve any amount that may be refunded and the per-
centage or proporton thereof to whch each, f more than one. s entted,
there shoud be submtted a certfed copy of the decedent s w, f any. and
such further proof as may be requste to estabsh both the dentty of such
person or persons and the percentage or proporton of the amount sought to
be refunded to whch each, where there are more than one, s entted.
The same safeguards shoud be observed n makng refunds of
overpayments of ncome ta . ccordngy, ths offce has secured,
through the attorney for the camant, certfed copes of the e ecu-
tors accounts fed wth the probate court of Y whch refect the
payment by the estate of the ncome ta es sought to be recovered.
It further appears from the appcaton fed wth the court by the
e ecutors that after the payment of a debts and cams of the
estate there st remaned a great amount of property, whch was
dstrbuted n accordance wth the terms of the w to the resduary
egatee, , the camant n ths case. Snce, under the terms of the
w, a ta es were pad out of the resduary estate, s entted to
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3 1
252, rt. 1039.
the refund of any overpayments made, and accordngy t s sug-
gested that the attached cam be prepared for aowance.
Neson T. artson,
Soctor of Interna Revenue.
rtce 1039: Lmtaton upon refunds. III-9-1394
I. T. 1934
R NU CT O 1921.
waver duy e ecuted by the ta payer and the Commssoner,
consentng to a determnaton, assessment, and coecton of 1017
ta es wthn a perod of s months from the date the waver was
fed, compes wth the requrements of the second provso of sec-
ton 252 of the Itevenue ct of 1921 as r mended. ny overpayment
of ta dscosed n the audt of the ta payer s returns for the year
1917 may, there/ore, he refunded or credted wthn s years from
the tme such returns were due. The statute makes no provson
as to the perod of tme durng whch a waver sa be n effect.
The M partnershp fed returns on orms 10 5 and 1102 for the
caendar year 1917 on March 2 , 1918. On ebruary . 1923, a
waver was e ecuted by the partnershp consentng to a determna-
ton, assessment, and coecton of ts 1917 ta es wthn a perod of
s months from the date the waver was fed. The waver was ap-
proved by the Commssoner on ebruary 2 , 1923. The audt of
the partnershp s returns n connecton wth the reports of the reve-
nue agent now dscoses an overassessment aganst the partnershp
for 1917 of ncome and e cess-profts ta es n the amount of do-
ars. The queston presented s whether the Commssoner of In-
terna Revenue s now precuded from aowng a refund or credt
of such overpayment.
Secton 250(d) of the Revenue ct of 1921 provdes that the
amount of ncome, e cess-profts, or war-profts ta es due 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
Secton 252 of the Revenue ct of 1921, as amended (C. . II-,
241-242), provdes n part:
That f the ta payer has, wthn fve years from the tme the
return for the ta abe year 1917 was due, fed a waver of hs rght to have
the ta es due for such ta abe year determned and assessed wthn fve years
after the return was fed, such credt or refund sha be aowed or made
f cam therefor s fed ether wthn s years from the tme the return
for such ta abe year 1917 was due or wthn two years from the tme the ta
was pad:
It w be noted that the statute makes no provson as to the perod
of tme durng whch a waver sha be n effect, and an agreement
upon a prescrbed form duy e ecuted by the ta payer and Comms-
soner whch s mted to s months s |ust as much a waver by the
ta payer of hs rght to have the ta es due for such ta abe year
determned and assessed wthn fve years after the return was fed
as though the agreement was wthout a tme mtaton.
rom the wordng of the statute t appears to ths offce that the
aw makes the wavng of the mtaton aganst assessments a matter
4177 24 24
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252, rt. 1039.
3 2
of agreement between the Commssoner and the ta payer. There
appears to be no ega ob|ecton to an agreement whch woud mt
the makng of an assessment to a certan perod.
In vew of the foregong, ths offce s of the opnon that n the
nstant ease the ta payer has comped wth the requrements of the
second provso of secton 252, as amended, through the tng of a
waver upon the proper form and wthn the prescrbed perod, whch
was duy accepted and e ecuted by the Commssoner. ny over-
payment of ta dscosed n the audt of the ta payer s returns for
the year 1917 may, therefore, be refunded or credted wthn s years
from the tme such returns were due.
rtce 1039: Lmtaton upon refunds. III- 1-1424
I. T. 1951
- R NU CT 1921.
Cam for refund of e cess-profts ta pad by a partnershp upon
Its return for tte fsca year ended une 30, 1917. s not barred
from aowance when fed wthn fve years of pr 1, 191S. snce
by Treasury Decson 2050 (not pubshed n uetn servce), ap-
proved ebruary 9, 1918, the tme for fng returns due after
October 1 , 1917, and on or before March 1, 1918, pursuant to
the Revenue cts of 191 and 1917 for ncome and profts ta pur-
poses, whether made on the bass of the caendar year or of a fsca
year ended durng the year 1917, was e tended to pr 1, 1918.
The M Company, a partnershp, kept ts books upon the bass of
the fsca vear ended une 30 and fed an e cess-profts ta return
for the fsca year ended une 30, 1917. On March 21, 1923, the
partnershp fed a cam for refund coverng an overpayment of
the ta pad on account of such return. Upon the bass of the
cam, a certfcate, of overassessment of doars was prepared. The
acton was based upon I. T. Mm. 3080 (C. . II-, 180). In I. T.
Mn. 3080 t Mras hed that a genera e tenson of tme was granted
under the Revenue ct of 1917 up to and ncudng pr 1, 1918,
wthn whch to fe returns for the ta abe year 1917. rung s
requested as to whether the cam for refund fed by the ta payer s
now barred from aowance under secton 252 of the Revenue ct of
1921, as amended. It s understood that a waver as not been ted
by the partnershp.
Under secton 252 of the statute, as amended, the cam for refund
fed by the M Company can not be aowed uness such cam was
fed before the e praton of fve years from the date the return for
1917 was due, nasmuch as such fve-year perod has now eapsed
and the cam was not fed wthn two years from the tme the ta
was pad. Treasury Decson 2 32 (not pubshed n uetn serv-
ce), approved anuary 21, 1918, provded that a partnershp whose
fsca year ended wth the ast day of any month n the year 1917,
other than December, mght, not ater than 30 days before March 1,
1918, gve to the coector a notce n wrtng of the date thus f ed
as the cosng of ts fsca year but that uness such notce was gven,
the return, for the purposes of the e cess-profts ta , was requred to
be fed upon the bass of the caendar year 1917. It was provded
n Treasury Decson 2 77 (not pubshed n uetn servce), ap-
proved March 23, 1918, that n any case where a partnershp kept ts
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252, rt. 1039.
books on the bass of a fsca year and as the resut t was mprac-
tcabe to make a satsfactory return for purposes of the e cess-profts
ta upon the bass of the caendar year, the coector mght accept a
return upon the bass of the fsca year, even though notce was not
gven wthn the tme prescrbed n Treasury Decson 2 32. y
Treasury Decson 2 50, approved ebruary 9, 1918, the tme for
fng returns due after October 1 , 1917, ana on or before March 1,
1918, pursuant to the Revenue cts of 191 and 1917, for ncome and
profts ta purposes, whether made on the bass of the caendar year
or of a fsca year ended durng the year 1917, was e tended to pr
1,1918. It was stated n Treasury Decson 2 50 that the e tenson
to pr 1, 1918, was granted beeause of the unavodabe deay n
the preparaton of forms and reguatons for the war e cess-profts
ta and hence n the preparaton of the reated forms and regua-
tons for the ncome and war ncome ta es and n order to afford
ta payers a necessary perod for the preparaton of returns after re-
cevng the forms and reguatons. That Treasury decson does not
refer to any partcuar cass of ta payers e cept to state that, so far
as the e tenson theren granted apped to returns of corporatons
to be made on the bass of a fsca year other than the caendar year,
t amended the provsons of Treasury Decson 25 1, as amended by
Treasury Decsons 2 15 and 2 33 (not pubshed n uetn servce).
It s Cear that under these Treasury decsons t was ntended to
grant partnershps an e tenson of tme to pr 1, 1918, wthn
whch to fe e cess-profts ta returns for any fsca year ended n
1917. Whe the tabe of genera e tenson of tme .for fng returns
for 1917 and subsequent years, appearng on page. 191 of Cumuatve
uetn II-2 as I. T. 1752, s sent wth regard to any e tenson of
tme havng been granted to partnershps for 1917, that rdng was
ntended to cover ony a those genera e tensons of tme e pressy
granted by Treasury decsons and mmegraph etters.
It s therefore hed that the aowance of the cam for refund of
e cess-profts ta pad by the M Company upon ts return for the
fsca year ended une 30, 1917, s not barred from aowance, nas-
much as such cam was fed wthn fve years from the date the
return was due.
rtce 1039: Lmtaton upon refunds. 111-12-1437
R UNDS ND CR DITS.
n ct to amend secton 252 of the Revenue ct of 1921 n
respect of credts and refunds.
e t enacted by the Senate and ouse of Representatves of the
Unted St-ates of merca n Congress assembed, That the second
provso of subdvson (a) of secton 252 of the Revenue ct of 1921
as amended by the ct entted n ct to amend the Revenue ct of
1921 n respect to credts and refunds, approved March 4, 1923, s
amended to read as foows: Provded further, That f the ta payer
has wthn fve years from the tme the return for the ta abe year
1917 was due, fed a waver of hs rght to have the ta es due for
such ta abe year determned and assessed wthn fve years after the
return was fed, or f he has, on or before une 15, 1924, fed such a
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252, rt. 1039.
3 4
waver n respect of the ta es due for the ta abe year 1918, then such
credt or refund reatng to the ta es for the year n respect of whch
the waver was fed sha be aowed or made f cam therefor s fed
ether on or before pr 1, 1925, or wthn two years from the tme
the ta was pad.
pproved March 13, 1924.
rtce 1039: Lmtaton upon refunds. 111-14-1482
T. D.3571
Refunds and credts.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The appended ct, approved March 13, 1924, s pubshed for the
gudance of revenue offcers and others concerned n passng upon
cams for refunds and credts.
D. . ar,
Commssoner of Interna Revenue.
pproved March 27, 1924.
. W. Meon,
Secretary of the Treasury.
(PU LIC NO. 43 G8T CONG SS.)
( . It. 901.)
n ct to amend secton 252 of the Revenue ct of 1921 n re-
spect of credts and refunds.
e t enacted by the Senate and ouse of Representatves of fc Unted
States of merca n Congress assembed, That the second provso of subd-
vson (a) of secton 252 of the Revenue ct of 1921 as amended by the ct
entted n ct to amend the Revenue ct of 1921 n respect to credts and
refunds, approved March 4, 1923, s amended to read as foows :
Provded further, That f the ta payer as, wthn fve years from the tme
the return for the ta abe year 1917 was due, fed a waver of hs rght to have
the ta es due for such ta abe year determned and assessed wthn fve years
after the return was fed, or f e as, on or before une 15, 1924, fed such a
waver n respect of the ta es due for the ta abe year 1918, then such credt
or refund reatng to the ta es for the year n respect of whch the waver
was fed sha be aowed or made f cam therefor s fed ether on or before
pr 1, 1925, or wthn two years from the tme the ta was pad.
pproved by the Presdent March 13, 1924.
rtce 1039: Lmtaton upon refunds. 111-17-1520
S. M. 1733
R NU CT O 1021.
If n any case t s deemed nadvsabe to permt the ta payer
to wave hs rghts wth respect to the determnaton, assessment,
and coecton of 1918 ta es, the Commssoner may propery refuse
to consent to a waver, and n such cases the ta payer w not be
entted to the beneft of the e tended perod of tme wthn whch
to secure a credt or refund of overpayments of 1918 ta es.
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252, rt. 1039.
n opnon has been requested as to whether wavers for the ta -
abe year 1918, whch are now beng fed, are as a matter of fact re-
qured to be accepted by the Commssoner, or whether t s wthn
the dscreton of the Commssoner to accept or deny them as the par-
tcuar case warrants. The queston arses n connecton wth the
amendment to the second provso of secton 252(a) of the Revenue
ct of 1921. approved March 13, 1924 T. P. 3571: see p. 3 4 . The
provso as amended reads as foows:
Provded further, That f the ta payer has wthn fve years from the tme
the return fur the ta abe year 3917 was due. ter a waver of hs rght to
have the ta es due for sue ta abe year determned and assessed wthn fve
years after the return was fed, or f he has. on or before une 15, 1924,
fed such a waver n respect of the ta es due for the ta abe year 1018. (hen
such credt or refund reatng to the ta es for the year n respect of whch the
waver was fed sha be aowed or made f cam therefor s fed ether on or
before pr 1, 1925, or wthn two years from the tme the ta was pad.
It w be noted that under the provsons of the statute ta payers
credts or refunds of 1918 ta es ony n the event that wavers of
ther rght to have such ta es determned and assessed wthn fve
years are fed on or before une 14, 1924. Whe the statute does
not specfcay defne the term waver, the ony provson author-
zng the e ecuton of a waver by the ta payer s contaned n sec-
ton 250(d), wheren t s provded that ta es due sha be determned
and assessed wthn fve years from the date the return was fed
uness both the Commssoner and the ta payer consent In wrtng
to a ater determnaton, assessment, and coecton of the ta .
Thus t w be seen that the statute requres somethng more than
a mere offer by the ta payer to permt of the determnaton, assess-
ment, and coecton of the ta after the perod of mtaton has
e pred. There must be a wrtten agreement n whch both the ta -
payer and the Commssoner consent to such ater determnaton, as-
sessment, and coecton. Wthout the wrtten consent of the Com-
mssoner a paper e ecuted by the ta payer and purportng to be a
waver s, n fact, no waver at a wthn the meanng of secton
250(d). Ceary, the waver referred to n secton 252, as amended,
s the waver authorzed by secton 250(d), no other waver beng
contempated by the statute.
It s my opnon, therefore, that f n any case t s deemed nad-
vsabe to permt the ta payer to wave hs rghts wth respect to the
determnaton, assessment, and coecton of 1918 ta es, the Comms-
soner may propery refuse to consent to a waver, and n such cases
the ta payer w not be entted to the beneft of the e tended perod
of tme wthn whch to secure a credt or refund of overpayments of
are granted an addtona
wthn whch to secure
1918 ta es.
Neson T. artson,
Soctor of Interna Revenue.
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252, rt. 1039.
3GG
ktce 1039: Lmtaton upon refunds. 111-20-15 1
S.M. 1893
R NU CT O 1D21.
If a ta payer on or before .Tune 15, 1024. fes a waver of hs
rght to have the ta es due for the ta abe year 1918 determned
and assessed wthn fve years after the return was fed, he may
fe eams for refund or credt wthn the e tended perod specfed
by secton 252 of the Revenue ct of 1921 as amended by an ct
approved March 13, 1924, and the waver referred to theren does
not nvove the consent n wrtng provded for n secton 250(d)
of the Revenue ct of 1921. Soctor s Memorandum 173 (see p.
3 4) revoked.
The rung contaned n Soctor s Memorandum 1733 (see p. 3 4)
to the effect that the Commssoner of Interna Revenue may refuse
to accept wavers submtted by ta payers for the year 1918 and that
n such cases the ta payer w not have the beneft of the e tended
perod specfed n secton 252 of the Revenue ct of 1921, as amended
by an ct approved March 13, 1924, wthn whch to fe cams for
refund or credt, s n confct wth the prncpes ad down n
Treasury Decson 3457 (C. . IT-1, 177).
Treasury Decson 3457 appes specfcay to the amendment to
secton 252 of the Revenue ct of 1921, approved March 4, 1923,
whch reates to refunds for the year 1917, whe Soctor s Memo-
randum 1733 reates to refunds for the year 1918 under the provsons
of the amendment approved March 13, 1924. owever, the anguage
used n the two amendments s smar and the same prncpes wth
respect to the fng of wavers and cams w appy under both
amendments. Treasury Decson 3457, n so far as here matera,
provdes that:
The statute provdes for the e tenson of the perod wthn whch a cam
may be fed n cases where the ta payer as fed a waver of hs rght to
have the ta es due for the ta abe year 1917 determned and assessed wtha
fve years after the return was fed, and the waver provded for theren does
not nvove the consent n wrtng, provded for n secton 250(d) of both the
Commssoner of Interna Revenue and the ta payer to a determnaton,
assessment, and coecton of the ta at a tme ater than fve years from the
tme the return was fed. Consequenty, the acceptance by the Commssoner
of a waver fed by a ta payer wthn fve years from the tme the return for
the ta abe year 1917 was due s not necessary n order to brng the case
under the second provso of secton 252, as amended, am to e tend the perod
wthn whch a cam for refund may be fed to s years from the tme the
return for such year was due.
Whe the queston presented s not entrey free from doubt, ths
offce has concuded, after further carefu consderaton of both ru-
ngs, that the prncpes announced n Treasury Decson 3457 are
correct, and that the rung contaned n Soctor s Memorandum
1733 s n error. Due effect must be gven to the postve anguage
empoyed by Congress n secton 252, as amended, whch provdes
for the e tenson of the perod n whch a cam may be fed n cases
where the ta payer has fed a waver of hs rght to have the ta es
due for such ta abe year (1917) determned and assessed wthn
fve years after the return was fed, or f he has on or before une
15, 1924, fed such a waver n respect of the ta es due for the ta -
abe year 1918. It appears that the ta payer has done everythng
requred of hm when he fes the waver. Ths offce s, therefore,
G
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3 7 254, rt. 10 0.
constraned to hod that cams for refund or credt may be fed
wthn the e tended perod where a waver has been fed by the
ta payer wthn the tme prescrbed.
Soctor s Memorandum 1733 s accordngy hereby specfcay
revoked.
Neson T. artson,
Soctor of Interna Revenue.
S CTION 254. R TURNS O P YM NTS O
DI ID NDS.
rtce 10 0: Return of nformaton as to pay- III-9-1390
ments of dvdends. T. D. 3558
INCOM T R NU CT O 1921.
Returns of nformaton for caendar year 1923 requred wth
respect to payments of dvdends made by corporatons to nd-
vduas, partnershps, and fducares.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
Secton 254 of the Revenue ct of 1921 provdes that every cor-
poraton sub|ect to ncome ta and every persona servce corporaton
sha, when requred by the Commssoner, render a correct return,
duy verfed under oath, of ts payments of dvdends, statng the
name and address of each stockhoder, the number of shares owned by
hm, and the amount of dvdends pad to hm. rtce 10 0 of Regu-
atons 2 provdes that when drected by the Commssoner, ether
specay or by genera reguaton, every domestc or resdent for-
egn corporaton and every persona servce corporaton sha render
a return on orm 1097 of ts payments of dvdends and dstrbu-
tons to stockhoders.
In accordance wth the foregong, a domestc corporatons not
specfcay e empted from ta aton are hereby drected to fe re-
turns of nformaton on orm 1097, showng the amount of pay-
ments of dvdends and dstrbutons to stockhoders who are nd-
vduas, fducares, or partnershps. Returns of nformaton w
aso be requred of resdent foregn corporatons to the .e tent that
dvdend payments and dstrbutons are made to ctzens or res-
dents of the Unted States and domestc partnershps and fducares.
These returns sha be fed not ater than March 15, 1924. and sha
cover a such payments made durng the caendar year 1923.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 25, 1924.
. W. Meon,
Secretary of the Treasury.
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3C8
rtce 10 0: Return of nformaton as to pay- III-9-1390
ments of dvdends. T. D. 35 1
INCOM T R NU CT O 1921.
tenson of tme n whch to fe returns of nformaton as to
dvdend payments.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
To coectors of nterna revenue and others concerned:
n e tenson of tme up to and ncudng une 15, 1924, s hereby
granted n whch to fe returns of nformaton on orm 1097 wth
respect to dvdend payments made hy domestc and resdent foregn
corporatons requred under Treasury Decson 3558 (see p. 3 7) for
the caendar year 1923. These returns when fed sha be addressed
to the Commssoner of Interna Revenue, Sortng Secton. Wash-
ngton, D. C.
D. . ar,
Commssoner of Interna Revenue.
pproved March 1, 1924.
. W. Meon,
Secretary of the Treasury.
rtce 10 0: Returns of nformaton as to pay- III-9-1397
ments of dvdends. Mn. 3184
Returns of nformaton as to dvdend payments made durng
caendar year 1923.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 1,1924.
To coectors of nterna revenue and others concerned:
Under the provsons of Treasury Decson 3558 (see p. 3 7) re-
turns of nformaton are requred wth respect to dvdend pay-
ments made by domestc corporatons to a ndvduas, partner-
shps, and fducares, whether domestc or foregn. Returns of n-
formaton arc aso requred as to dvdends of resdent foregn cor-
poratons pad to ctzens or resdents of the Unted States, and
domestc partnershps and fducares.
The data caed for w consst of the name and address of the
stockhoder, the number and cass of shares owned by hm, the date
and amount of each dvdend pad hm, and when the surpus out of
whch t was pad was accumuated. These returns w be n st
form, ega sze, and are now beng prnted. Dstrbuton of these
forms w be made at the earest possbe date. The returns shoud
be rendered under oath and forwarded to the Commssoner of
Interna Revenue, Sortng Secton, Washngton, D. C. n e tenson
of tme n whch to fe such returns has been granted to une 15,
1924.
D. . ar,
Commssoner of Interna Revenue.
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rtce 10G0: Return of nformaton as to pay- 111-11-1425
ments of dvdends. Mn. 3187
Returns of Informaton ns to dvdend payments amountng to
oss thn 500 not requred.
Treasurt Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 8, 192 t.
To coectors of nterna revenue and others concerned:
Return of nformaton wth respect to payment of dvdends caed
for by Treasury Decson 3558 (see p. 3 7) w not be requred n
cases where the amount pad to the sharehoder durng the caendar
year 1023 s ess than 500. Stock dvdends and other nonta abe
dstrbutons shoud not be reported. Lqudatng dvdends shoud
not be reported e cept to the e tent that they are pad out of earn-
ngs accumuated snce ebruary 28, 1913. When fng n orm
1097 ony the name and address of the sharehoder and the aggregate
amount of dvdends pad need be entered.
D. . ar,
Commssoner of Interna Revenue.
S CTION 25 . IN ORM TION T SOURC .
rtce 1074 : Return of nformaton as to III-8-1377
nterest on corporate bonds. I. T. 1923
R NU CT O 1921.
bank whch cashes or accepts for depost checks representng
regstered nterest on bonds not contanng a ta -free covenant cause,
ssued by a domestc or resdent corporaton, s not requred to fe
returns of nformaton, orms 1099 and 109 . The responsbty
for fng such returns fas upon the obgor who makes payment
of the nterest by check.
rtce 1074: Return of nformaton as to 111-14-1483
nterest on corporate bonds. I. T. 1970
R NU CT O 1921.
The assumpton by a corporaton of payment of bonds ssued by an
ndvdua does not render the obgatons corporate bonds.
S CTION 257. R TURNS TO PU LIC
R CORDS.
rtce 1090: Inspecton of returns.
(See I. T. 1902 sec. 214(a) 10, art. 218.) Schedues of essees, at-
tached to ther returns, for nformaton as to depeton aowance
camed by essor.
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370
rtce 1090: Inspecton of returns. ff-12 143
T. D. 35G
CT O 1913 R NU CTS O 191 , 1917, 1918, ND 1921.
Reguatons governng the nspecton of returns of Indvduas,
partnershps, estates, trusts, corporatons, assocatons, |ont-stock
companes, and nsurance companes, made pursuant to the re-
qurements of secton 2, Tarff ct of 1913 Tte I, Revenue ct
of 191 : Tte II, Revenue ct of 1917 Ttes II and III and sec-
ton 1000. Tte . Revenue ct of 1918 and Ttes II and III
and secton 1000, Tte , Revenue ct of 1921. ormer regua-
tons bearng on the same sub|ect superseded.
Treasury Department,
Washngton, D. G.
To coectors of nterna revenue and others concerned:
Secton 2 of the Tarff ct of October 3, 1913, mposes an ncome
ta on ndvduas, corporatons, |ont-stock companes or assoca-
tons, and nsurance companes, and paragraph Gr (d) of sad sec-
ton provdes:
When the assessment sha be made, as provded n ths secton, the returns,
together wth any correctons thereof whch may have been made by the Com-
mssoner, sha be fed n the offce of the Commssoner of Interna Revenue
and sha consttute pubc records and be open to nspecton as such: rrovded.
That any and a such returns sha be open to nspecton ony upon the order of
the rresdent, under rues and reguatons to be prescrbed by the Secretary
of the Treasury and approved by the Presdent: .
Tte I of the Revenue ct of 191 mposes an ncome ta on n-
dvduas, estates, trusts, corporatons, |ont-stock companes, asso-
catons, and nsurance companes, and secton 14 (b) of sad tte
provdes:
When the assessment sha be made, as provded n ths tte, the returns,
together wth any correctons thereof whch may have been made by the Com-
mssoner, sha be fed n the offce of the Commssoner of Interna Revennc
and sha consttute pubc records and be open to nspecton as such: Provded.
That any and a such returns sha be open to nspecton, ony upon order of
the Presdent, under rues and reguatons to be prescrbed by the Secretary of
the Treasury and approved by the Presdent: .
Tte II of the Revenue ct of 1917 mposes a war e cess-profts
ta on ndvduas, partnershps, corporatons, |ont-stock companes,
assocatons, and nsurance companes, and secton 212 of sad tte
provdes:
That a admnstratve, speca, and genera provsons of aw, ncudng the
aws n reaton to the assessment, remsson, coecton, and refund of nter-
na-revenue ta es not. heretofore specfcay repeaed and not nconsstent wth
the provsons of ths tte, are hereby e tended and made appcabe to a
the provsons of ths tte and to the ta heren mposed, and a provsons
of Tte I of such ct of September 8, 191 , as amended by ths ct. reatng
to returns and payment of the ta theren mposed, ncudng penates, are
hereby made appcabe to the ta mposed by ths tte.
Tte II of the Revenue ct of 1918 and Tte II of the Revenue
ct of 1921 mposes an ncome ta on ndvduas, estates, trusts,
corporatons, assocatons, |ont-stock companes, and nsurance com-
panes, and secton 257 of each of sad ttes provdes:
That returns upon whch the ta as been determned by the Commssoner
sha consttute pubc records hut 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:
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257, rt. 1090.
Tte III of the Revenue ct of 1918 and Tte III of the Revenue
ct of 1921 mpose a war-profts and e cess-profts ta on corpora
tons, assocatons, |ont-stock companes, and nsurance companes,
n addton to other ta es mposed by such cts, and secton 330 of
each of sad ttes provdes:
That every corporaton, not e empt under secton sm make a return
for the purposes of ths tte. Such returns sha be made, and the ta es
n |sed by ths tte sha be pad, at the same tmes and paces, n the same
manner, and sub|ect to the same condtons, as s provded n the case of
returns and payment of ncome ta by corporatons for the purposes of Tte
II, and a the provsons of that tte not nappcabe, ncudng penates,
are hereby made appcabe to the ta es mposed by tbs tte.
Secton 1000, Tte , of the Revenue ct of 1918 mposes on cor-
poratons, assocatons, |ont-stock companes, and nsurance com-
fanes a speca e cse ta wth respect to carryng on or dong
usness, and subdvson (d) of sad secton provdes:
Secton 257 sha appy to a returns fed wth the Commssoner for pur-
poses of the ta mposed by ths secton.
Secton 1000, Tte , of the Revenue ct of 1921 mposes on cor-
poratons, assocatons, and |ont-stock companes a speca e cse
ta wth respect to carryng on or dong busness, and subdvson
(c)-of the sad secton provdes:
Secton 257 sha appy to a returns fed wth the Commssoner for pur-
poses of the ta mposed by ths secton.
Pursuant to these provsons of aw the Presdent orders that re-
turns of ndvduas, partnershps, estates, trusts, corporatons, asso-
catons, |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 191 , Tte II of the Revenue ct of 1917,
Ttes II and III and secton 1000, Tte , of the Revenue ct of
1918, and Ttes II and III and secton 1000, Tte , of the Revenue
ct of 1921 sha be open to nspecton n accordance and upon
compance wth the foowng rues and reguatons:
1. These reguatons dea ony wth nspecton of returns, as the statutes
e pressy requre the approva of the Presdent of reguatons on ths sub|ect.
Other uses to whch returns may be awfuy put, wthout acton by the
resdent, are not covered by these reguatons.
2. The word corporaton when used aone heren sha, uness otherwse
Indcated, ncude corporatons, assocatons, |ont-stock companes, and nsur-
ance companes. The word return when so used sha, uness otherwse
ndcated, ncude Income 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 1018 and 1921.
3. Wrtten statements fed wth the Commssoner of Interna Revenue
desgned to be suppementa to and to become a part of ta returns sha be
sub|ect to the same rues and reguatons as to nspecton 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 Inspecton of returns n
accordance wth these reguatons. The appcaton w be consdered by the
Commssoner and a decson reached by hm whether the appcant has met
the condtons Imposed by these reguatons and whether the reasons advanced
for permsson to nspect are suffcent to permt the nspecton. Such wrtten
appcaton s not requred of the ofcers and empoyees of the Treasury
Department whose offca dutes requre nspecton of a return, or of the
Soctor of Interna Revenue.
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257, rt. 1090.
372
5. The return of an ndvdua sha be open to nspecton as foows:
(a) Ry the offcers and empoyees of the Treasury Department whose ca
dutes requre such nspecton and by the Soctor of Interna Revenue (b)
by the person who made the return, or by hs duy consttuted attorney u fact
c) by the admnstrator, e ecutor, or trustee of the ta payer s estute, or by
the duy consttuted attorney n fact of such admnstrator, e ecutor, or trus-
tee, where the maker of the return has ded and ( ) n the dscreton of tbe
Commssoner of Interna Revenue, by one of the hers at aw or ne t of kn
of such deceased person upon showng that he has a matera nterest whch
w be affected by nformaton contaned n the return.
t. |ont return of u husband and wfe sha be open to nspecton (a) by
the offcers and empoyees of the Treasury Department whose offca dutes
requre such nspecton and by tbe Soctor of Interna Revenue and ( ) by
ether spouse for whom the return was made (or hs or her duy consttuted
attorney n fact or ega representatve), upon satsfactory evdence of such
reatonshp beng furnshed.
7. The return of a partnershp sha be open to nspecton (h) by the offcers
and empoyees of the Treasury Department whose offca dutes requre such
nspecton and by the Soctor of Interna Revenue and (b) by any nd-
vdua (or bs duy consttuted attorney n fact or ega representatve) 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.
8. The return of an estate sha be open to nspecton (a) by the offcers
and empoyees of the Treasury Department whose offca dutes requre such
nspecton and by the Soctor of Interna Revenue ( ) by the admnstrator,
e ecutor, or trustee of such estate, or by hs duy consttuted attorney n fact
and (c) by one of the hers at aw or ne t of kn of the deceased person wose
estate s beng admnstered upon a showng of a matera nterest whch w
be affected by nformaton contaned n the return.
0. The return of a trust upon whch a ta has been determned sha be open
to nspecton (a) by the offcers and empoyees of the Treasury Department
whose offca dutes requre such nspecton and by the Soctor of Interna
Revenue ( )) by the trustee or trustees, or the duy consttuted attorney n
fact of such trustee or trustees and (e) by any ndvdua (or hs duy const-
tuted attorney n fact or ega representatve) who was a benefcary under
such trust durng any part of the tme covered by the return, upon satsfactory
evdence of such fact beng furnshed.
t. The return of a corporaton sha be open to nspecton (a) by the offcers
and empoyees of the Treasury Department whose offca dutes requre such
nspecton and by tbe Soctor of Interna Revenue (b) upon satsfactory
evdence of dentty and offca poston by the presdent, vce presdent, secre-
tary, or treasurer of such corporaton, o r, f none, ts prncpa offcer and (c)
by a stockhoder of such corporaton as provded n paragraph 11 hereof.
11. stockhoder of record ownng 1 per cent or more of the shares of the
outstandng stock of a corporaton may be permtted to nspect ts return.
Such permsson w ony be granted upon an appcaton n wrtng to the Com-
mssoner of Interna Revenue accompaned by an affdavt showng appcant s
address, the name of the corporaton, the perod of tme covered by the return
he desres to nspect, and a certfcate from the offcas of the corporaton
or other satsfactory evdence showng the amount of the corporaton s out-
standng capta stock, the number of shares owned by the appcant, the date
when such stock was acqured, and satsfactory proof of dentty. Ths
prvege of nspecton s persona and w be granted ony to the stock-
hoders. Ths rue has no appcaton to the return of, a corporaton fed
pursuant to the Revenue cts of 1918 and 1021 specfc provson, ndependent
of presdenta reguaton, beng made n those cts for nspecton by a stock-
hoder of a return of a corporaton fed thereunder (second provso of sec-
ton 2. )7).
12. When the head of an e ecutve department (other than the Treasury
Department), or of any other Unted States Government estabshment, de-
sres to nspect or to have some other offcer or empoyee of hs branch of the
servce nspect a return n connecton wth some matter offcay before ra,
the nspecton may, n the dscreton of the Secretary of the Treasury, he per-
mtted upon wrtten appcaton to hm by the head of such e ecutve depart-
ment or other Government estabshment. The appcaton must e 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 aud ofa
desgnaton of the one t s desred sha Inspect the return. When the head
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373
257, rt. 1090.
nf a bureau or offce In the Treasury Department, not a part of the Interna
erenue ureau, desres to nspect a return n connecton wth some matter
offcay efore hm, other than an ncome, profts ta , or corporaton e cse
ta matter, the nspecton 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 reasons submtted for permsson
to nspect as provded n ts paragraph sha be consdered by the Secretary
and a decson readed by hm whether the reasons are suffcent to permt I he
nspecton.
13. Inspecton of any return sha be afforded to any commttee of the Senate
or ouse of Representatves or |ont commttee of Congress of the Unted
Sates by the Secretary of the Treasury upon appcaton duy made by the
charman of such commttee, pursuant to a resouton of Congress or ether
ouse thereof, whch sha enumerate the partcuar returns desred. Such
nspecton s sub|ect to paragraph 17 hereof.
14. When t becomes necessary for the department to furnsh returns or
copes thereof for use n ega proceedngs, nspecton of such returns or
copes that necessary resuts from such use s permtted.
15. cept as provded n paragraph 13, returns may be nspected ony
n the offce of the Commssoner of Interna Revenue, Washngton, D. C.
1 . person who, under these reguatons, s permtted to nspect a return
may make and take a copy thereof or a memorandum of data contaned
theren.
17. y secton 31G7, Revsed Statutes, as amended by the Revenue ct
of 1918, and reenacted wthout change n secton 1311 of the Revenue ct
of 1921, t s made a msdemeanor for any person to prnt or pubsh n any
manner whatever not provded by aw any Income return, or any part thereof
or source of ncome, profts, osses, or e pendtures, appearng n any n-
come 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.
18. former reguatons bearng on the sub|ect of nspecton of returns are
hereby superseded.
19. These reguatons sha reman n force unt e pressy wthdrawn or
overrued.
. W. Meon,
Secretary of the Treasury.
pproved March 15,1924.
Cavn Coodge,
The Whte ouse.
CUTI ORD R INSP CTION O INCOM T R TURNS.
Pursuant to authorty conferred upon the Presdent by paragraph
G (d), secton 2, of the Tarff ct of October 3,1913 secton 14 b),
Tte I, of the Revenue ct of 191 secton 212, Tte II, of the
Revenue ct of 1917 secton 257, Tte II, secton 33 , Tte III,
and secton 1000, Tte , of the Revenue ct of 1918 and secton
257, Tte II, secton 33 , Tte III, and secton 1000, Tte , of
the Revenue ct of 1921, t s hereby ordered that ta returns fed
under secton 2 of the Tarff ct of October 3, 1913 Tte I of the
Revenue ct of 191 Tte II of the Revenue ct of 1917 Ttes
II and III and secton 1000, Tte , of the Revenue ct of 1918
and Ttes II and III and secton 1000, Tte , of the Revenue
ct of 1921, sha be open to nspecton n accordance and upon
compance wth rues and reguatons prescrbed by the Secretary
of the Treasury and approved by me, bearng even date herewth.
Cavn Coodge.
The Whte ouse,
March 15,1924.
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257, rt. 1091.1
374
rtce 1091: urnshng of copes of ncome 111-14-1484
returns. I. T. 1971
R NU CT OP 1021.
The coectors of nterna revenue at Daas and ustn, Te ., are
authorzed to furnsh agents duy desgnated to take charge of n-
sovent banks paced under the contro of the bankng commssoner
of the State of Te as for the purpose of qudaton a statement
showng as to each bank the date and amount of ta es pad durng
the perod of ts nsovency.
rtce 1091: urnshng of copes of ncome 111-14-1485
returns. I. T. 1972
R NU CT OP 1921.
The request of an e ecutr of the estate of , deceased member
of a partnershp, that returns be sent to the nterna revenue
agent for her dstrct for her nspecton Is dened.
Request s made by , as e ecutr of the estate of her deceased
husband, that the partnershp returns of the M Company coverng
the years durng whch her husband was a member of the partner-
shp be sent to the nterna revenue agent for her dstrct so that
she may make an nspecton n hs offce.
Paragraph 14 of the reguatons ssued under secton 257 of the
Revenue ct of 1921 provdes that:
cept as provded n paragraph 13, returns may be nspected ony n the
offce of the Commssoner of Interna Revenue, Washngton, D. C.
Paragraph 13 of those reguatons s as foows:
When t becomes necessary for the Department to furnsh returns or copes
thereof for use n ega proceedngs, nspecton of such returns or copes that
necessary resuts from such use s permtted.
The ega proceedngs referred to n paragraph 13 are those n
whch the Unted States s nterested n the resut. ed, that the
request be dened.
rtce 1091: urnshng of copes of ncome 111-15-1503
returns. L T. 1978
LL R NU CTS.
person makng request as admnstrator or e ecutor for n-
formaton respectng the ta abty of a decedent or estate s
requred to submt evdence of hs authorty to act n the matter..
If e has been dscharged or succeeded by another he s not
entted to nformaton requested even though he fed the return
as fducary.
rung s requested whether authentcated copes of etters tes-
tamentary, etters of admnstraton, or court certfcates shoud be
secured showng the appontment of one who represents hmsef to
be an e ecutor or admnstrator before a repy can be made to hs
nqures when they are of the foowng nature:
1. Dd the deceased fe ncome ta returns for certan years dd
he fe as an aen or a ctzen what ta es dd he pay, etc.
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375
257, rt. 1093.
2. Dd he report any ncome from rents or royates and f so,
from whom was the ncome receved and n what amount
3. as the ta abty of the estate on account of ncome re-
ceved by the decedent been determned, or what s the status of the
returns of the deceased
4. What s the bass of an addtona ta aganst the estate
Shoud nformaton reatve to the abatement of certan ta es
aganst an estate be gven to an aeged e ecutor or admnstrator
wthout securng documentary evdence of hs authorty When
an e ecutor or admnstrator or other fducary requests that a ta es
due on account of ncome receved by and durng the fetme of
the decedent be determned wthn one year n accordance wth the
provsons of secton 250(d) of the evenue ct of 1921, shoud
documentary evdence of the ega representatve s authorty be
secured before advsng hm that hs request w be granted, or that
the abty has been determned
Where an ncome ta return has been fed by the person makng
the nqury, as an e ecutor or admnstrator, shoud nformaton
of the above descrpton be furnshed wthout securng evdence of
hs appontment
The nformaton referred to s of such a nature that t woud not
be furnshed to an agent uness he presented a power of attorney
to act for hs prncpa. In many nstances persons who formery
acted as admnstrators or e ecutors have requested nformaton
respectng the ta abty of decedents or estates after they have
been dscharged or succeeded by others.
It s, therefore, beeved necessary as a precautonary measure to
requre persons makng requests as admnstrators or e ecutors for
nformaton of the above character to submt evdence of ther
authorty to act n the matter. Tn s practce shoud be foowed
even though the persons representng themseves as admnstrators
or e ecutors fe the returns on whch the ta was overpad, on
account of the fact that n fng such returns and payng the ta
dscosed thereon to be due they were actng n ther representatve
capacty as fducary. The evdence as to the authorty of the ad-
mnstrator or e ecutor to act n the matter shoud consst of a
short form of certfcate from the cerk of the court showng the
ssuance of etters testamentary or etters of admnstraton. If
the certfcate dscoses that the e ecutor or admnstrator has been
dscharged or succeeded by another he s, of course, not entted to
the nformaton requested.
rtce 1093: Inspecton of returns by stock- 111-23-1595
hoder. S. M. 1889
R NU CT O 1021.
n e ecutor for the estate of a deceased stockhoder hodng
1 per cent or more of the o tstandtog stock of a corporaton may
e amne the ncome ta returns of such corporaton a e ecutor of
the estate provded he compes wth a other requrements of the
reguatons.
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G2, rt. 1135.
37
Request s made by to e amne the ncome ta returns of the M
Company. makes the request for nvestgaton as e ecutor for the
estate of , who ded possessed of certan shares of stock n the M
corporaton. These shares are now n the possesson of , as
e ecutor.
rtce 1093 of Reguatons 2, whch reates to the nspecton of
returns, states that the prvege of nspecton of returns by stock-
hoders hodng 1 per cent or more of the shares of I he outstandng
stock of a corporaton s persona and w ony be granted to such
stockhoders. In vew of the provsons of the reguatons, request
s made for an opnon of ths offce as to whether an e ecutor for
the estate of a deceased stockhoder hodng 1 per cent or more of
the outstandng stock of a corporaton may e amne the ncome ta
ret n ns of such corporaton as e ecutor of the estate.
The e ecutor or admnstrator of an estate s the ony representa-
tve recognzed by aw n regard to the persona assets of an estate,
and hs tte to such assets s e cusve. Ths offce s therefore of
the opnon that as to the ownershp of stock n the corporaton for
the purpose of nspecton of returns, the e ecutor s to be regarded as
the. stockhoder, and as such s entted to make nspecton of the
returns, provded he compes wth a other requrements of the
reguatons.
Neson T. artson,
Soctor of Interna Revenue.
S CTION 2 2. INCOM ROM SOURC S WIT IN
T POSS SSIONS O T
UNIT D ST T S.
rtce 1135: Ctzens of the Unted States de- 111-14-148
rvng ncome from sources wthn a posses- I. T. 1973
son of the Unted States.
R NU CT O 1021.
If a ta payer has been conductng a trade or busness n a posses-
son of the Unted States for a number of years precedng the cose
of hs ta abe year December 31, 1923, the three-year perod app-
cabe to hs case s the perod anuary 1, 1921, to December 31, 1923.
If hs ncome derved from sources n the possesson durng that
perod satsfes the 80 per cent and the 50 per cent condtons of
secton 2 2 he s entted to the benefts of that secton. If, however,
the ta payer has been conductng a busness n ths possesson for
ess than three years, the perod that s appcabe to hs case s the
perod precedng the cose of hs ta abe year that he was engaged
n conductng a busness there. In such case the 80 per cent con-
dton and the 50 per cent condton must be satsfed wth respect
to hs ncome durng ths perod.
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377 304, rt, 752.
TITL III. W R-PRO ITS ND C SS-PRO ITS
T OR 1921.
P RT II. IMPOSITION O T .
S CTION 304. MPTIONS.
rtce 752: Net ncome e empt from ta . III-5-1504
. It. R. 0011
R NU CTS O 1017 ND 1921.
ed that, n the case of a god mnng property operated under
the trbute ease system, ncome accrung to the owners thereof
from such operatons consttutes net ncome derved from the
mnng of god, sub|ect to the provsons of secton 304(c) of
the evenue ct of 1921.
The Commttee has consdered the appea of the M Company, par-
ent, and the O Company, subsdary, from the acton of the Income
Ta Unt n denyng to the appeants the refund of e cess-profts
ta es pad for 1917. The appeants cam that the provsons of
secton 304(c) of the Revenue ct of 1921 appy to ther entre n-
come and accordngy that they shoud be fuy e empt from the
ta es mposed by Tte II of the Revenue ct of 1917.
The M Company, a corporaton organzed under the aws of the
State of R, owns certan god mnng property near the cty of S.
The O Company hods tte to that porton of the property org-
nay acqured by the M Company whch es wthn the cty mts of
the cty of S. It was organzed soey for the purpose of hodng
separate the property sub|ect to ta es n the cty of S, thereby smp-
fyng ta matter wth that cty. Its stock s hed entrey by the M
Company and a of ts operatons and transactons are carred on
through that company.
Secton 304(c) of the Revenue ct of 1921 provdes:
(c) In the ease of any corporaton engaged In the mnng of god, the por-
ton of the net ncome derved from the mnng of god sha be e empt from
the ta mposed by ths tte or any ta mposed by Tte II of the evenue ct
f 1917, and the ta on the remanng porton of the net ncome sha be the
same proporton of a ta computed wthout the beneft of ths subdvson whch
such remanng porton of the net ncome bears to the entre net ncome.
The appeants operate a porton of ther mnng property them-
seves, operate some outsde eased propertes, and a porton of ther
property s operated under what s known as the trbute ease
system.
Under the trbute ease system a certan drft, or porton
thereof, n the mne s turned over to certan ndvdua mners, or
a group thereof, who e tract the ore there found. It s stated that
n the present nstance a of the arge toos used n ths e tracton
of ore are the property of the appeants, who aso furnsh the com-
pressed ar used n the mnng operatons, do a of the hostng and
4177 24 25
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30-1, t. 752.
378
haung of the ore, and e ercse genera supervson over the mnng
operatons.
The ore from a sources s shpped to reducton ms n the name
of the M Company. The proceeds receved from the reducton com-
pany are pad drect to the O Company. fter recept of the pro-
ceeds that porton of the recovered god due to trbute ease ore
s apportoned between the mners who e tracted the ore under the
trbute ease and the appeants n accordance wth the ease
agreements, the appeants keepng a separate record of each ore shp-
ment. t no tme does tte to the ore pass from the appeants, and
ther return from the trbute ease produced porton thereof s not
a fat amount per ton nor a mnmum amount per year, but vares
drecty wth the actua producton and the god content thereof,
beng on the bass of a sdng scae percentage, the percentage rsng
wth the god content.
In substance, the trbute eases as here operated are tte more
than proft-sharng arrangements whereby the essee mners perform
the manua abor of gettng out the ore, furnsh some porton of the
suppes consumed theren, and receve n return therefor an agreed
percentage of the god n the ores e tracted. n e ampe of the
type of contract used n such eases s on fe, as are aso statements to
the effect that a the appeants ncome, e ceptng a sma amount
of nterest, resuted ether from ts own drect god mnng opera-
tons or from ts proporton of the god e tracted from the ore mned
under ths trbute ease system, whch n ts annua report to stock-
hoders for the caendar year 1917 s termed royates.
The Unt n ts transmtta memorandum desres a recommenda-
ton as to whether or not the ncome from ths trbute ease system
of mnng god ores s ncome derved from the mnng of god. It
s the thought of the Commttee that, as here operated, t can not
be consdered otherwse.
In the nstant case the appeants records dscose an ncome from
nterest of doars. Whe ths s sma n ths nstance, t s
thought that such ncome can not be consdered as derved from the
mnng of god. To so consder t woud be to treat nterest ncome
dfferenty n ths nstance from the treatment accorded such ncome
n a other cases.
fter a fu consderaton of the evdence of record t s the
opnon of the Commttee that the ncome receved by the appeants
from ther own god mnng operatons and from ther operatons
under the trbute ease system s to be consdered as ncome de-
rved from the mnng of god and e empt from the ta es mposed
by Tte II of the Revenue ct of 1917, as provded n secton 304(c)
of the Revenue ct of 1921.
The Commttee accordngy recommends that the appea be sus-
taned.
Chares D. ame,
Charman Commttee on ppeas and Revew.
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379
3 2, rt. 791.
P RT III. C SS-PRO ITS CR DIT.
S CTION 312. C SS-PRO ITS CR DIT.
rtce 791: cess-profts credt.
( so Secton 32 , rtce 833.)
111-5-1345.
. R. R. 4959
R NU CT O 1917.
The busness of the M Company s ubttantap a contnuaton
of a busness carred on by the N Company pror to anuary 2,
1913, wthn the purvew of secton 204 of the Revenue ct of 1917.
The character of the busness conducted by both companes s the
. same. The prncpa stockhoder of the appeant n whom the
management Is vested hed a smar reatonshp to the defunct
N Company. The appeant acqured every asset of the former
company, ncudng utangbes, notwthstandng whether the vaue
of the atter be arge or sma, and the appeant has en|oyed the
trade of the centee but up by the predecessor company. The
company s not entted to a deducton n e cess of 7 per cent n the
absence of prewar data whch woud warrant the aowance of a
deducton n e cess of 7 per cent for the purpose of computng the
e cess-profts ta for 1917.
The subscrpton of to doars par vaue of capta stock
was not bona fde pad n to the appeant company at any tme
pror to anuary 1, 1921. The Commttee s satsfed that up to
the tme when was advsed by hs accountant of the effect whch
the payng n of the note dated anuary 1, 1921, woud have upon
the nvested capta of the company there hud been no ntent u
the part of , who controed the company, to make any payment
upon ths subscrpton uness at some future tme the fnanca
condton of the company became such that the credtors coud
force such payment.
The Commttee has carefuy consdered the appea of the M
Company from the acton of the Income Ta Unt (1) n hodng
tat the company s not entted to a deducton n e cess of 7 per
cent for the purpose of computng the profts ta for 1917 and (2)
n dsaowng as nvested capta for 1917 and subsequent years
subscrptons to capta stock n the amount of doars.
rom the evdence of record and the facts deveoped at the hear-
ng t appears that n 1910 the N Company, whch had been n e st-
ence durng the prewar perod, became, serousy nvoved nan-
cay, resutng n the busness beng taken over by credtors and
fnay n the sae of ts assets at a recever s sae ate n that year
that , who was the prncpa stockhoder n the defunct company
and n absoute contro thereof, organzed the appeant company on
October , 191 , and as ts agent purchased the assets of the defunct
company at the recever s sae that upon the organzaton of (e
new company the sad subscrbed to doars of the tota author-
zed capta of 1.5a doars that appeant company contnued to
carry on the same busness as that n whch the defunct company
was engaged, athough at a new ocaton that the books of the
defunct company are apparenty not now avaabe from whch may
be gathered the prewar data necessary to support a deducton n
e cess of 7 per cent for the purpose of computng the e cess-profts
ta for the year 1917 that n renderng ts return for the year 1917,
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312, rt. 791.
380
appeant company stated thereon that ts busness was a contnuaton
years and n the absence of prewar data camed a deducton of ony
7 per cent that subsequenty an amended return was fed wheren an
8 per cent deducton was camed on the ground that the busness of
the company was not a contnuaton of that carred on durng the
prewar years and that the Income Ta Unt has refused to aow a
deducton n e cess of 7 per cent on the ground that the busness has a
prewar hstory wthn the purvew of secton 204 of the Revenue ct
ppeant company contends that ts busness s not the contnua-
ton of that carred on durng the prewar years by ts mmedate
predecessor, as the atter became nsovent and ts affars competey
wound up through the sae of ts assets at a recever s sae, and that
t s entted, therefore, to be cassed as a corporaton whch was not
n e stence durng the whoe of any one caendar year durng the
prewar perod and ts deducton computed at 8 per cent under the
provsons of secton 204 of the Revenue ct of 1917.
Secton 204 of the ct referred to, after f ng the deducton to
be aowed for the purpose of computng the e cess-profts ta n the
case of a corporaton, partnershp, or ndvdua not n e stence dur-
ng the whoe of any one caendar year of the |rewar perod, provdes
as foows:
trade or busness carred on by a corporaton, partnershp or ndvdua,
athough formay organzed or reorganzed on or after anuary 2, 1913, whch s
substantay a contnuaton of a trade or busness carred on pror to that date,
sha, for the purposes of ths tte, be deemed to have been n e stence pror to
that date .
The busness of the M Company s substantay a contnuaton of
a busness carred on pror to anuary 2, 1913, wthn the purvew of
secton 204 of the Revenue ct of 1917. The character of the busness
conducted by both companes s the same. The prncpa stockhoder
of the appeant n whom the management s vested hed a smar
reatonshp to the defunct company. The appeant acqured every
asset of the former company, ncudng ntangbes, notwthstandng
whether the vaue of the atter be arge or sma, and the appeant
has en|oyed the trade of the centee but up by the predecessor
company.
In the absence of prewar data whch woud warrant the aowance
of a deducton n e cess of 7 per cent for the purpose of computng
the e cess-profts ta for 1917, t s recommended that the acton of
the Income Ta Unt be sustaned.
It further appears that subscrbed for doars of the capta
stock of appeant, company at the date of organzaton that no
part of ths subscrpton was pad n to the company pror to anuary
1, 1921 that n renderng ts orgna returns for 1917 to 1919, n-
cusve, appeant ncuded n the computaton of ts nvested capta,
capta stock of .a doars, whch amount had been fuy pad n
that no evdence of ndebtedness was pad n to appeant company
pror to anuary 1, 1921, by sad , other than the stock subscrp-
ton that the subscrpton was not entered on the books of the com-
pany unt anuary 1, 1921 that no nterest on ths subscrpton
was pad by sad that on anuary 1, 1921, foowng the advce
company durng the prewar
of 1917.
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38,1
312, rt. 791.
of hs accountant, e ecuted a s -year note for the amount of the
subscrpton, sad note bearng nterest at 5 per cent per annum
that amended returns were prepared for the years 1917 to 1919,
ncusve by the accountant, camng addtona nvested capta
of doars, on the ground that the subscrpton of had been fuy
pad n and that the Income Ta Unt has refused to aow the
subscrpton of as nvested capta for the years under consdera-
ton on the ground that no enforceabe obgaton appears on the
corporate books pror to anuary 1, 1921 that nothng was receved
on the subscrpton pror to that date, and that the stock was never
ssued.
ppeant contends that the subscrpton of was an enforceabe
obgaton, and that the company coud have demanded payment of
the subscrpton at any tme durng the years under consderaton,
and that under the provsons of artce 833 of Reguatons 45 the
subscrpton shoud be ncuded n the computaton of nvested
capta.
fter gvng thorough consderaton to a the facts presented, the
Commttee concudes that the subscrpton of to doars par
vaue of capta stock was not bona fde pad n to the appeant com-
pany at any tme pror to anuary 1, 1921. The Commttee s
satsfed that up to the tme when was advsed by hs accountant
of the effect whch the payng n of the note dated anuary 1, 1921,
woud have upon the nvested capta of the company there had been
no ntent on the part of , who controed the company, to make
any payment upon ths subscrpton, uness at some future tme the
fnanca condton of the company became such that the credtors
coud force such payment.
ccordngy, t s recommended that the acton of the Income Ta
Unt be sustaned and the appea dened.
Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 791: cess-profts credt. 111-13-1458
. R. R. 725
R NU CTS O 1017 ND 1918.
In determnng the deducton provded by secton 203 of the
Revenue ct of 1917 and the credts provded by sectons 311 and
312 of the Revenue ct of 1918 of the M Company, a corporaton
n e stence durng the whoe of the prewar perod and whch n
1917 purchased the assets of a soe propretorshp whch had aso
been n e stence durng the prewar perod, the combned prewar
hstory of the corporaton and the soe propretorshp must be
consdered.
The Commttee has carefuy consdered the appea of the M
Company from the acton of the Income Ta Unt n hodng that
n the determnaton of the deducton to be aowed for the purpose
of computng the e cess and war-profts ta es for the years 1917 and
1918 no consderaton s to be gven the prewar hstory of a busness
purchased n 1917.
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312, rt. 791.
382
ppeant company was n e stence durng the whoe of the pre-
war perod. In November, 15)17, t purchased the assets and bus .ness
of , whch had been conducted as a soe propretorshp and whch
was aso n e stence durng the whoe of the prewar perod. The
appeant contends that n determnng the deducton provded for
by secton 203 of the Revenue ct of 1917 and the credts provded
by sectons 311 and 312 of the Revenue ct of 1918 the combned
prewar hstory of the corporaton and the soe propretorshp must
be consdered. The Income Ta Unt has hed that the prewar hs-
tory of the soe propretorshp must be dsregarded and the de-
ducton computed soey upon the bass of the prewar hstory of
the corporaton.
Secton 204, paragraph 2, of the Revenue ct of 1917 provdes as
foows:
trade or busness carred on by a corporaton, partnershp, or ndvdua,
athough formay organzed or reorganzed on or after anuary 2, U)13, whch
s substantay a contnuaton of a trade or busness carred on pror to that
dae, sha, for the purposes of ths tte, be deemed to have een n e stence
pror to that date, and the net ncome and nvested capta of ts predecessor
pror to that date sha be deemed to have been ts net Income and nvested
capta.
Secton 330, paragraph 1, of the Revenue ct of 1918 provdes as
foows:
That In the case of the reorganzaton, consodaton, or change of owner-
shp after anuary 1, 1911, of a trade or busness now carred on by a corpora-
ton, the corporaton sha for the purposes of ths tte be deemed to have been
n e stence pror to that date, and the net ncome and Invested capta of such
predecessor trade or busness for a or any part of the prewar perod pror to
the organzaton of the corporaton now carryng on such trade or busness sha
be deemed to have been the net ncome and nvested capta of such corporaton.
Whe the anguage of the sectons of the cts above quoted does
not cover precsey such a stuaton as s presented by the nstant
case, t s the Commttee s concuson and opnon that a bera con-
structon of those sectons may ready comprehend the nstant case
as beng wthn the sprt and ntent thereof. The Commttee s
therefore of the opnon that the deducton for 1917 and the e cess
and war profts credts for 1918 of appeant company must be deter-
mned by reference to the combned prewar hstory of the appeant
corporaton and the soe propretorshp.
ccordngy, t s recommended that the acton of the Income Ta
Unt be reversed and that the appea be sustaned.
Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 791: cess-profts credt.
(See . R. R. 9 5 sec. 32 . art. 8 5.) mount for whch good
w sha be ncuded n nvested capta for prewar perod for the
purpose of determnng the war profts credt.
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383
325, rt. 812.
P RT . IN ST D C PIT L.
S CTION 325. T RMS R L TING TO
IN ST D C PIT L.
btce812: orrowed capta: securtes. I 1 -1511
S. M. 17-22
R NU CT O 1017.
The M corporaton purchased a certan amount of ts own stock.
The purchase prce conssted n part of frst mortgage bonds of the
company at par.
ed, that the face vaue of the bonds represented borrowed cap-
ta and shoud not have been ncuded n computng ts nvested
capta. Ths s so even though the bonds confer rghts on the
hoders Inferor to the rghts of the corporaton s genera credtors.
The M corporaton purchased from , one of ts stockhoders, y
shares of ts own stock at an agreed prce of y doars per share.
The purchase prce conssted of doars n cash and 9, 582 do-
ars n frst mortgage bonds of the company. In computng ts
ta es for 1917, the Unt emnated from the ta payer s camed n-
vested capta the fnce vaue of ts bonds.
t an ora hearng, counse for the ta payer urgenty nssted ts
nvested capta shoud not be reduced by the amount of the bonds
for the reason that the same assets, pant and nventores, were used
by the company after the transacton as before.
Ths contenton mght have some mert f nvested capta and
economc capta were the same, but the statute specfcay provdes
what mght or mght not be ncuded n nvested capta for ta
purposes. The statute specfcay e cudes borrowed money and
borrowed property from nvested capta. The bonds ssued by
the company were receved by n payment for hs stock. e thou
ceased to be a stockhoder and became a mere bondhoder. Ths
transacton had the same effect upon the corporaton as f t had
actuay borrowed suffcent money on the bonds from a thrd
party to pay for hs stock. The bonds representng borrowed
capta woud, therefore, not be part of the corporaton s nvested
capta. The mere fact that s cam on the bonds aganst the
corporaton mght be nferor to the rghts of the corporaton s
credtors does not change the nature of the corporaton s abty,
cor brng that obgaton wthn the statutory defnton of nvested
capta.
Therefore, t s the opnon of ths offce that the amount represent-
ng the bond obgaton can not propery be ncuded n the cor-
poraton s nvested capta.
Neson T. ahtson,
Soctor of Interna Revenue.
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(32G, rt. 831.
384
S CTION 32 . IN ST D C PIT L.
rtce 831: Meanng of nvested capta.
( so Secton 214 (a) 8, rtce 1 4.)
III-2-1303
. R. R. 4799
R NU CT O 17.
Three essees n 900 organzed a corporaton and mmedatey
transferred the easehod to t n consderaton of the ssue to
them of capta stock of a certan par vaue.
ed, that no vaue shoud be aowed for the ease for nvested
capta purposes because t was acqured for the corporaton ou
an annua renta bass and had no bonus vaue.
essee s not entted to an aowance for deprecaton of a
ease based upon Its vaue as of March 1, 1913.
The Commttee has carefuy consdered the appea of the M
Company from the acton of the Income Ta Unt (1) n dsaow-
ng as nvested capta for the year 1917 any vaue for a certan ease
acqured n 190 wth capta stock of a par vaue of 7 .5,t doars
and (2) n refusng to aow any deducton from ncome on account
of the amortzaton of the March 1, 1913, vaue of ths ease.
rom the evdence of record and the facts deveoped at the hear-
ng, t appears that on ebruary , 190 , , , and C secured a
25-year ease upon a certan parce of ground, stuated n the cty
of S that the tota renta payments for the 25-year perod amounted
to 420.r doars, payabe monthy and progressng graduay from
doars per month durng the frst fve years to 1.8o doars per
month durng the ast fve years that n addton to the monthy
renta payments the essees agreed to erect two budngs, one at a
mnmum cost of 24a doars and the other at a mnmum cost of 1 |s
doars, and to assume a the ordnary and necessary e penses nc-
dent to the upkeep and mantenance of these budngs that the
essors agreed to purchase both budngs upon the termnaton of
the ease at ther then apprased vaues, whch was not to e ceed
the orgna costs, ess deprecaton at the rate of 1 per cent per
annum that the three essees on March , 190 , organzed the
appeant company and mmedatey turned over the ease to t n
consderaton of the ssue to them or ther nomnees of capta stock
of a par vaue of 7 .5. doars that n the computaton of ts n-
vested capta on the return for 1917, the company ncuded the
ease theren to the fu e tent of the par vaue of stock ssued there-
for and, that the Income Ta Unt has dsaowed any vaue for
ths ease for nvested capta purposes, on the ground that t was
acqured for the corporaton on an annua renta bass and that t
had no bonus vaue.
It further appears that n renderng ts return for the year 1917
appeant made no cam for a deducton from gross ncome on ac-
count of the wrtng off of an aquot part of the purchase prce of
the ease based upon the number of years t had to run that sub-
sequenty t made cam for such a deducton based upon a Marc 1,
1913, vaue of 200# doars and that the Income Ta Unt has re-
fused to aow such a deducton on the grounds (1) that the ease
had no bonus vaue at the tme acqured and (2) that under the
provsons of Treasury Decson 3411 (C. . 1-2, 90) the company
may not base an aowance for deprecaton of a ease upon the
March 1, 1913, vaue thereof.
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385
32 , rt. 831.
The appeant contends that the ease was actuay worth the par
vaue of capta stock ssued therefor, as evdenced by the acton of
the board of drectors n authorzng the ssuance of the stock there-
for, and by the further fact that n the eary part of 1913, D made
an otter of 4r doars for an opton to purchase the ease of 200a
doars. n affdavt of D to ths effect s attached to the appea.
fter carefu consderaton of a the evdence presented, both
wrtten and ora, the Commttee has reached the concuson that the ac-
ton of the Income Ta Unt shoud be sustaned on both ponts. ny
possbe vaue whch may have been ascrbed to the ease was purey
specuatve. The essees were deang at arm s ength n the negota-
ton and e ecuton of the ease wth partes who had no nterest n
the embryo company, and a reasonabe regard for human nature
woud ead to the-concuson that the essors e acted, under the renta
and mprovement causes of the ease, a stpend equvaent to the fu
measure of a far return upon ther propertes determned upon n
the ght of a the condtons then e stng wth due regard for
future condtons, so far as t was humany possbe to prognostcate
them.
The facts that these eases were acqured for capta stock ong
before the ncome and profts ta es were naugurated, and that the
drectors who authorzed the ssue of capta stock therefor were
e perenced rea estate men acquanted wth rea estate vaues,
appear to be nsgnfcant when t s consdered that the funds re-
qured for the constructon of the budng were to be rased through
bonded ndebtedness, whch under the aws of the State of T may not
e ceed the tota par vaue of the capta stock.
The offer to purchase the ease n 1913 for 200.): doars, seven years
after the date of acquston, s of tte vaue as evdence of the
vaue of the ease at the date acqured.
Under the provson of Treasury Decson 3414, a essee s not en-
tted to an aowance for deprecaton of a ease based upon ts
March 1, 1913, vaue.
ccordngy, t s recommended that the acton of the Income Ta
Unt be sustaned and the appea be dened.
rtce 831: Meanng of nvested capta. III-3-131
( so Secton 203, rtce 1582.) . . R. 4884
R NU CTS O 1917 ND 1018.
The revson of the nventores of the M corporaton at the
cose of the fsca years 1917 and 1018 on the bass that 50 per cent
of the amount by whch the physca nventory nt March 31, 1918,
e ceeded the perpetua nventory at that date s appcabe to each
of those years s equtabe both to the Government and the corpora-
ton and shoud stand n the absence of evdence whch w permt
of an accurate apportonment of the e cess as between these
years.
No evdence has been submtted by the M Conpnny to show what
was the far vaue of the servces rendered by n securng a ease
for the M Company, and for whch servces (here was ssued to hm
capta stock, and the vaue of the servces s not susceptbe of
measurement. Such servces are of tte f any vaue, snce the
easehod had no bonus vaue.
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32 , rt. 831.
38
The Commttee has carefuy consdered the appea of the SI Com-
pany, and the N Company, affated n a cass consodaton,
from the acton of the Income Ta Unt (1) n revsng the net n-
come as reported by the N Company for the fsca years ended
March 31, 1917 and 1918, on account of a certan nventory ad|ust-
ment and (2) n dsaowng as nvested capta for the fsca years
March 31, 1917 to 1920, ncusve, a certan ease acqured by the
M Company n 1913 wth capta stock of a par vaue of 7.99a doars.
rom the evdence of record and the facts deveoped at the hear-
ng, t appea s that the N Company s engaged n a reta busness
that for a ong perod of years n keepng ts accounts t has man-
taned a perpetua nventory that purchases are charged n the
perpetua nventory at cost, whe merchandse sod s credted
thereto at 0 per cent of the seng prce notwthstandng any
market fuctuatons or mark-ups and mark-downs from orgna
seng prce that a physca nventory s taken every second year
and the perpetua nventory ad|usted to conform therewth, one
such physca nventory havng been taken on March 31, 191( that
the physca nventory of March 31, 1918, taken at cost, showed
merchandse on hand amountng to 1.5 a doars n e cess of the
perpetua nventory that the nventory reported on the orgna
return for the fsca year ended March 31, 1917, s that shown by
the perpetua nventory that n renderng ts return for the fsca
year ended March 31, 1918, the company reduced ts net ncome n
the amount of 1.17a doars, whch amount represents three-fourths
of 1.5 a doars, the company contendng that three-fourths of the
amount of the ad|ustment necessary to brng the perpetua nventory
to conform wth the physca at March 31, 191 , was propery app-
cabe to the precedng year and, therefore, the openng nventory
for the fsca year 1918 shoud be ncreased accordngy, thereby
ncreasng the cost of goods sod wth a correspondng owered net
ncome and that the Income Ta Unt has apped the e cess of
1.5 ./: doars rataby over the perod pr 1, 191 , to March 31,
1918, resutng n an aocaton of 50 per cent of the e cess to each
of the fsca years 1917 and 1918, on the ground that t s mpoasbe
to determne accuratey what proporton of the ad|ustment shoud
be apped to each year.
The grounds upon whch the company bases ts contentons are
set forth n ts bref dated March 5, 1923, but are too engthy to
ncorporate n ths recommendaton. Suffce t for the Commttee
to say they are not we founded nor supported by evdence of any
character whatever. The acton of the Unt n revsng the nven-
tores at the cose of the fsca years 1917 and 1918 on the bass that
50 per cent of the amount by whch the physca nventory at March
31, 1918, e ceeded the perpetua nventory at that date s appcabe
to each of those years s equtabe both to the Government and the
appeant and n the absence of evdence of gross error on the part
of the Unt, and evdence whch w permt, of an accurate appor-
tonment of such e cess as between these years, the acton of the
Unt shoud be sustaned.
It further appears that the M Company was ncorporated pr
10, 1913, and on the same date the board of drectors authorzed the
presdent and secretary to enter nto a ease wth the N Company
for the entre budng, known as the O udng that on the same
date the ease was e ecuted for a perod of fve years, wth an opton
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387
32 , rt. 831.
to renew for an addtona perod of smar duraton, the ease pro-
vdng for a tota renta payment of 37.2 doars, payabe monthy
at the rate of .55a: doars per month, for the frst 20 months and pro-
gressng graduay thereafter to .2 doars per month for the ast
20 months that the cash depost of 2 doars requred to be made
by the essee under the terms of the ease was made for and n ts
behaf by one , a drector of the company, who aso appears to have
conducted the negotatons for the ease that on pr 1(5, 1913, the
board of drectors authorzed the ssuance to sad of y shares of
capta stock of a par vaue of 9.99 doars, beng a but fve shares
of the authorzed ssue of the company, n consderaton of the ad-
vance of 2 doars made by that ndvdua for the beneft of the
company and servces rendered n securng the ease that n openng
the books of the company the capta stock ssue was recorded thereon
as foows:
Doars.
Dr. Cash . 005
Lease depost 2. 000
Leasehod 7. 995:f
Cr. Capta stock ur
It further appears that on pr 30, 1915, the ease above referred
to was canceed and a new ease e ecuted for a perod of fve years
wth an opton to renew for an addtona perod of smar duraton,
the ease provdng for a tota renta payment of 39 doars, payabe
monthy, .55 doars per month durng the frst year and . a
doars per month durng the ast four years that on pr 1 , 1915,
the entre capta stock of the company of a par vaue of 10 doars
was sod to brothers for a cash consderaton of 3.5 doars,
whereupon new accounts were opened on the books as foows:
Doars.
Dr. qupment 1. fur
Lease depost 2. 0
Cr. Capta stock O
That n renderng ts returns for the fsca years 1917 to 1920, n-
cusve, the company ncuded, n the computaton of ts nvested
capta, easehod at a vaue of .5 doars and that the Income
Ta Unt has dsaowed any vaue for ths easehod for nvested
capta purposes on the ground that no cash vaue therefor at the
date of acquston has been satsfactory demonstrated.
In support of the easehod vaue camed, appeant has submtted
the affdavts of four ndvduas, a of whom aver that n ther
opnon the ease at the date acqured had an actua cash vaue of
8a doars. ppeant company further cas attenton to the fact
that the ease was sod n 1920 for 80 doars.
fter carefu consderaton of a the evdence presented, both
wrtten and ora, the Commttee concudes that the rea queston at
ssue s not one as to the vaue of the easehod at the date acqured,
but rather as to the vaue of the servces rendered by n securng
the ease for the company and for whch servces there was ssued to
hm capta stock of a par vaue of 7.99 doars. No evdence of
any character has been submtted by the company to show what was
the far vaue of the servces rendered by sad and the Cormttee
does not beeve that the far vaue of such servces s susceptbe of
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320, rt, 831.
388
measurement. If the vaue of the easehod at the date acqured s
any crteron of the vaue of the servces rendered n securng such
easehod, then the Commttee s of the opnon that such servces
were of tte f any vaue, as the Commttee s satsfed that the
easehod had no bonus vaue. The ast s ampy demonstrated by
that fact that two years after the acquston of the ease a new one
was substtuted therefor at a reduced renta.
ccordngy, t s recommended that the acton of the Income Ta
Unt be sustaned on both ponts at ssue and that the appea be
dened.
rtce 831: Meanng of nvested capta. III-4-1333
. R. R. 3275
R NU CT O 1917.
The amount representng mere subscrptons to capta stock,
even though certfcate or shares of stock have been ssued to the
subscrbers therefor, may not be ncuded n nvested capta.
The M Company protests the e cuson from nvested capta of
r doars capta stock subscrptons. Ths tem s shown n the
ta payer s baance sheet under the name Due on Stock ccounts.
The ta payer states that the tem represents actua coectbe ac-
counts coverng the baance due on shares of capta stock whch
have been fuy ssued and devered. These accounts (three n
number) were |ust the same as any other accounts recevabe and
|ust as much sub|ect to coecton. In other words, they were actua
assets fuy evdenced whch coud be turned nto cash whenever
desred.
Secton 207 of the Revenue ct of 1917 permts the ncuson
n nvested capta of (1) actua cash pad n, (2) the actua cash
vaue of tangbe property pad n other than cash for stock or
shares n such corporaton or partnershp at the tme of such pay-
ment, and (3) pad-n or earned surpus and undvded profts used
or empoyed n the busness, e cusve of undvded profts earned
durng the ta abe year. There s no provson of the aw or the
reguatons for the ncuson n nvested capta of mere subscrp-
tons to capta stock even though certfcates or shares of stock have
been ssued to the subscrbers.
The acton of the Income Ta Unt n e cudng from the nvested
capta the tem of a doars s ceary n accordance wth the aw
and reguatons and the Commttee recommends that that acton be
sustaned and the appea dened.
rtce 831: Meanng of nvested capta III-5-134
. R. R. 223
R NU CT O 1018.
In 1910 certan ndvduas purchased for 5ar doars n cash, the
busnesses owned and conducted by , together wth offce equp-
ment pertanng to such busnesses. Later n the same year the
busnesses and offce equpment were transferred to the M Com-
pany, a corporaton, n consderaton of the ssuance of that com-
pany s stock n the amount of 5 doars par vaue. The vaue of
the tangbe property so transferred was comparatvey sma.
ed, that the facts stated show ths to be a case where a cor-
poraton acqured ntangbe property for stock, and that as such
t must be governed by the provsons of secton 32 (a)4 of the
Revenue ct of 1918.
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389
32 , rt. 831.
The M Company has appeaed from the acton of the Income Ta
Unt n re|ectng ts cam for the abatement of .18 doars of an
addtona ta assessed for the year 1919.
The records n the case show that n 191 certan ndvduas pur-
chased for 5 doars n cash a rght, tte and nterest of, n and
to certan busnesses owned and conducted by , together wth a
offce furnture, f tures, and equpment pertanng to such bus-
nesses: that the frst meetng of the appeant ncorporators and
stockhoder was hed ugust , 191 , at whch meetng one, ,
actng as agent or trustee for those persons who had purchased such
busnesses from , offered to se to the appeant company a of
such busnesses, together wth ther furnture, f tures, and equp-
ment, n consderaton of the ssue of stock of ths company to the
amount of 5# doars par vaue that at the frst meetng of the
appeant company s board of drectors, hed ugust , 191 , such
offer was accepted and t was agreed n consderaton of sad sae
and upon the devery of sad property to t (the company) to ssue
to the vendor or hs nomnees as herenafter provded, and to such
other nomnees as the vendor sha n wrtng herenafter drect, at
such tmes and n such amounts as they sha respectvey drect,
certfcates of stock of the company to the agreed amount of y shares,
and sad shares sha be deemed to be and are hereby decared to be
fuy pad shares. The tota par vaue of the stock ssued under
ths agreement was 5 doars. Nothng whatever appears n the
records to show what vaue was paced upon the tangbe assets ac-
qured by the appeant company from , such as offce furnture,
f tures, and equpment, but apparenty ther vaue s comparatvey
sma, nasmuch as some two years ater the company s furnture and
f ture account, whch may or may not have ncuded tems acqured
subsequent to ugust , 191 , as shown by the company s baance
sheets, amounted to ony doars.
It s now the contenton of the appeant company that the tang-
be assets busness good w, agency contracts, etc., whch were
acqured n e change for capta stock shoud be treated for 1919
nvested capta purposes as though they had been acqured for b
doars n cash, nasmuch as the company s ncorporators and orgna
stockhoders pad that amount n cash for such assets |ust pror to
turnng the assets over to the appeant company for stock.
Secton 32 (a) of the Revenue ct of 1918 states n part
That as used n ths tte the term nvested capta for nny year means
(e cept as provded n subdvsons (b) and (c) of ths secton) :
(4) Intangbe property bona fde pad n for stock or shares pror to March
3, 1917, n an amount not e ceedng ( ) the actua cash vaue of such property
at the tme pad n, (t) 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 on March 3, 1917, whchever s owest.
In the nstant case t has been ceary shown that the ntangbe
assets n queston were pad n to the appeant company n e -
change for capta stock of the par vaue of 5 doars and that such
e change took pace pror to March 3, 1917. Such beng the case,
the Commttee can not, n vew of the e pressed provson of the 1918
aw, as set forth n secton 32 (a)4, do otherwse than recommend
that the acton of the Income Ta Unt n e|ectng the appeant
company s sad cam for abatement of addtona ta n the amount
of .18a doars for the year 1919, whch cam s based on the con-
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32 , rt. 831.
390
tent on that secton 32G(a)4 of the Revenue ct of 1918 shoud
not be apped n the nstant case, be sustaned and the appea here
under consderaton dened.
It as aso been ceary shown that there was pad n to the appe-
ant company at the (ne of organzaton for capta stock a m ed
aggregate of tangbe property n the form of offce furnture, f -
tures, and equpment, and ntangbe property n the form of busness
good w, agency contracts, etc., the respectve vaues of whch two
casses of property at the tme of payment can not now be defntey
determned, and t s evdent that the corporaton acqured for stock
ntangbe assets of a very substanta vaue under crcumstances
whch precude ther ncuson n statutory nvested capta at more
than 25 per cent of ther true cash vaue, and n vew of these facts
the Commttee further recommends that f the appeant company
makes request for assessment of profts ta for the year 1919 under
the provsons of sectons 27 and 328 of the Revenue ct of 1918
that such request be granted.
Chares D. ame,
Chaman Commttee on ppeas and Revew.
rtce 831: Meanng of nvested capta. IIT-1 -1512
. R. R. 970
R NU CTS O 1017 ND 1918.
When and agreed to pay to the M corporaton for ts pre-
ferred stock ssue Its par vaue, 12.04 doars n cash and a note
of 1.9 a doars, they had a contract wth a fnanca house for
the resae of the stock for 12.04a: doars. few days after the
ssue of the stock to and the note was canceed. The gvng
of the note was merey a form gone through for the pur ose of
mkng the stock fu pad, and was not cash bona tde pad n
for stock, and may not be ncuded n nvested capta.
and dd not se the stock to nvestors but merey aowed
t to pass through ther names on ts way to deaers who actuay
sod It There s nothng to show that the canceaton of the note
was for servces rendered by and I .
n amount pad to In 1039 represented the dfference be-
tween the pur vaue of the stock pad n by and the amount
for whch he resod the stock to the fnancng house whch actuay
dsposed of t to nvestors.
The amount n queston was not actuay commssons pad by
the corporaton for the sae of ts captn stock but n fact meas-
ured the dscount at whch the stock was sod and accordngy
can not be ncuded n nvested capta.
The dfference between the prce at whch the ssue of preferred
stock was sod to the fnanca house and the prce at whch It was
resod to Investors may not be Incuded n nvested capta.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt wth reference to the severa ques-
tons set forth beow.
The ponts nvoved are as foows: (1) Whether or not a note n
the amount of .S doars, pad to the appeant corporaton on
pr , 1917, by two of ts offcers, and R, as part payment for 7v
shares of preferred stock, par vaue doars per share, ssued on
that date to the sad offcers, and canceed by the corporaton 19 days
ater, consttutes part of appeant s nvested capta (2) whether
or not .48. doars, pad to n 1919 as a commsson n connecton
wth the ssue of 3y shares of preferred stock, consttutes part of
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391
32 , rt. 831.
appeant s nvested capta (3) whether or not there shoud be
ncuded n nvested capta the dfference between the prce at whch
an ssue of preferred stock was sod to a fnanca house and the prce
at whch t was resod to nvestors.
L t the tme when and agreed to pay the corporaton for
the preferred stock ssue ts par vaue, 12.04a doars n cash and
1.9 doars n a note, they had a contract wth a fnanca house for
the resae of the ssue for 12.04a- doars. It s obvous that the gv-
ng of the note (canceed a few days after the stock had been ssued)
was purey forma and for the purpose of compyng wth the State
aws as to fu payment. It s therefore equay obvous that t does
not come wthn the requrement of the statute as beng cash bona
fde pad n for stock. It was not bona fde n the sense that t was
n any sense the rea consderaton for the stock or meant to const-
tute an actua and permanent part of the corporaton s capta. The
record contans nothng whatever to support the acton that the can-
ceaton of the note was n reaty n consderaton of servces ren-
dered or that any servces of matera vaue were rendered. and
1 dd not se the stock to nvestors but merey aowed t to pass
through ther names on ts way to deaers who actuay sod t, the
whoe transacton bearng every ndcaton of beng merey a form
gone through for the purpose of makng the stock fuy pad. ur-
thermore, t s a tte dffcut to support the payment of a seng
commsson to the purchaser of stock. The amount nvoved, there-
fore, can not be ncuded n nvested capta.
2. The .48,/ doars pad to represented the dfference between the
par vaue of the stock, pad n by hm, and the amount 5.52a doars
for whch he resod the stock to the fnancng house whch actuay
dsposed of t to nvestors. Thus, f s servces n connecton wth
the sae of the stock were of any vaue he receved nothng actuay
for those servces. It s evdent that the stuaton wth respect to
ths 1919 stock sstte s the same as the 1917 stuaton e cept that
cas was empoyed nstead of a note. urthermore, as n 1917 wo
have the anomaous contenton that a seng commsson was pad to
the purchaser of stock. The Commttee s accordngy const raned to
concude that the .48 doars n queston was not actuay commsson
pad by the corporaton for the sae of ts capta stock but n fact
measured the dscount at whch the stock was sod and accordngy
can not be ncuded n nvested capta.
3. The transmtta etter does not refer to any ssue connected wth
the sae of preferred stock other than the ssues descrbed under 1 and
2 above. owever, at the hearng appeant s representatves urged
that f permsson were refused for the ncuson n nvested capta of
the amounts pad to and n 1917 and the amount pad to n
1919, at east there shoud be ncuded the dfference between the prce
at whch the preferred stock was sod to the pubc and the prce at
whch t was sod to the fnanca house whch conduc ted the saes
to the pubc. The 7 shares sod n 1917, for whch there was pad
by a deaer 12.04// doars, were sod to the pubc for 12.9 doars
and the 3y shares sod n 1919, for whch there was pad by the same
deaer 5.52a doars, were sod to the pubc for 5.72 doars. It s
accordngy contended that n any event .8 doars shoud be added
to nvested capta as of the date of sae n 1917 and .2 doars as
of the date of sae n 1919.
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32 , rt. 831.
392
There s much to be sad for ths contenton, snce n substance
there s tte dstncton between the case of securtes sod to a deaer ,
at a note fgure and by t sod to nvestors at a proft and the case
of securtes sod through a deaer (actng as broker) to nvestors at
par or above accompaned by an underwrtng commsson, athough
n some cases a merchandsng proft may be nvoved n the frst
stuaton whch s not present n the second. owever, the pertnent
porton of the governng revenue ct mts nvested capta to
actua cash pad n and the Commttee s therefore unabe to see
any |ustfcaton for ncudng n nvested capta more than the
amount actuay pad upon the purchase of the stock even though
the stock be purchased by a merchandser of securtes for mmedate
resae.
CI L S D. aM L,
Charman Commttee on ppeas and Revew.
rtce 831: Meanng of nvested capta.
R NU CT O 19IT.
(See T. D. 3592 sec. 200, art. 1523.) Corporaton whose capta
conssts entrey of borrowed capta.
rtce 831: Meanng of nvested capta. 111-2 -1 3
I. T. 2041
R NU CT O 1018.
corporaton may pay the saares of ts offcers or empoyees
wth shares of ts own stock provded the transacton Is bona fde
and the saares of ts offcers are reasonabe. The par vaue of
the shares can be ncuded n the capta stock of the corporaton
n ts baance sheet as at the begnnng of the succeedng ta abe
year, but n such case the actua vaue of the shares ssued must
be consdered n determnng the amount by whch nvested capta
s to be affected.
Subsequent to the organzaton of the M Company, was em-
poyed as ts genera manager. s saary was to be, not ess than 3,f
doars per year and he was to receve aso a commsson of per
cent of the net annua profts of the busness. In addton to the
foregong, there were ssued to 12 / shares of the company s stock,
havng a par vaue of 24.5. doars, whch he agreed shoud be m-
medatey transferred to three trustees. The trust nstrument under
whch ths stock was hed provded that the certfcate shoud be
retaned by the trustees for the fu perod of fve years from October
, 1017, and at the end of ths perod t was to be devered to n
consderaton of hs servces as genera manager that f for any
reason, e cept death, empoyment of as genera manager shoud
cease before the e praton of the fve-year perod he shoud receve
ony such porton of the stock represented by the trust certfcate as
the perod of hs actua servces shoud bear to the entre perod of
fve years that under such crcumstances the baance of the stock
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393
32 , rt, 833.
shoud be mmedatey forfeted to the corporaton that n the event
of the death of before the e praton of the perod mentoned, and
whe n the empoyment of the corporaton as ts genera manager,
a of the 2y shares of stock shoud go to hs estate and that
shoud receve a dvdends earned and decared on the stock n the
same manner as other stockhoders n the company. s empoyment
commenced October , 1917, and e tended to and ncuded October
, 1923. It aso s stated that the assets of the corporaton e ceeded
ts abtes at October and no doubt s entertaned by as to the
vaue of the stock, whch s stated to be par, amountng n a to 24.5|
doars.
Inqury s made as to whether the amount of 24.5| doars shoud
e charged as an operatng e pense aganst the earnngs of the cor-
poraton for the fsca year ended September , 1918, or whether t
shoud be dstrbuted through the perod of fve years, commencng
October , 1917. Other questons nvoved are whether the 24.5|s
doars n stock pad for servces rendered s a proper credt to the
nvested capta of the corporaton, and amounts pad to as
dvdends, f any, whch were n e cess of the dvdends attrbutabe
to the number of shares he had earned under hs contract up to the
date of the dvdend decaratons, were permssbe deductons from
the ncome by the corporaton for the year n whch pad.
ed, a corporaton may pay the saares of ts offcers or empoyees
wth shares of ts own stock, provded the transacton s bona fde
and the saares of ts offcers are reasonabe. The actua vaue of
the shares ssued n payment for servces performed n any ta abe
year may be deducted as an e pense n determnng the net ncome
of the corporaton for such year. The par vaue of the shares can be
ncuded n the capta stock of the corporaton n ts baance sheet
as at the begnnng of the succeedng ta abe year, but n such case
the actua vaue of the shares ssued must be consdered n determn-
ng the amount by whch nvested capta s to be ncreased.
transacton such as the one nvoved s equvaent to the payment n
cash to the offcer or empoyee of the corporaton n an amount equa
to the actua vaue of the shares of ts stock whch he s to acqure
and the mmedate nvestment of ths cash by hm n shares of the
corporaton s stock. s the genera manager was to receve a dv-
dends pad durng the fve years of servce, athough hs rght to the
stock from whch they were derved was ony proportonate to the
ength of servce rendered, any dvdends receved by hm whch
were n e cess of the dvdends dstrbutabe to the number of shares
he has earned under hs contract at the date of the dvdend decara-
ton were n the nature of addtona compensaton and were perms-
sbe deductons from ncome by the corporaton for the years n
whch they were pad, provded they dd not ncrease the genera
manager s saary beyond a reasonabe amount.
rtce 833: Tangbe property pad n : evdences
of ndebtedness.
(See . R. R. 4959 sec. 312, art. 791.) Subscrpton to stock not
bona fde pad n pror to anuary 1, 1921.
4177 24 20
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320, rt. 837.1
rtce 835: Tangbe property pad n: m ture
of tangbe and ntangbe property. -
(See . R. R. 092 sec. 214(a)8,. art. 1 3.) owance of vaue
of manufacturng contract acqured wth tangbe property taken
over at tme of reorganzaton n 1911 where the tangbe property
was n e cess of capta stock ssued therefor.
rtce 837: Surpus and undvded profts: III-2-1304
pad-n surpus. . R.R.4123
R NU CTS O 1917 ND 1918.
Patents, beng n substance an ntangbe asset, may not be n-
cuded as pad-n surpus under the Revenue cts of 1917 and 1918.
That porton of . R. R. 70 (C. . 2, 287) nconsstent wth ths
recommendaton Is revoked.
The Commttee has consdered the appea of the M Company
from the acton of the Income Ta Unt n dsaowng as nvested
capta (1) good w n the amount of doars and (2) patents
n the amount of 10a doars for the years 1917 to 1920, ncusve.
The record ndcates that appeant corporaton was organzed
anuary , 1917, to take over the busness of whch prevousy
had been conducted as a soe propretorshp. n tem of 1.238,2
doars was set up on the openng Daance sheet under the capton
good w. The amount was dsaowed by the Unt on the ground
that the vaue had not been proven.
On ebruary , 1917, offered to se to the corporaton four
patents of whch he was soe owner for O doars n cash. Ths
offer was accepted, and a b of sae was made out and sgned for
the same, but the money was never pad. Pad-n surpus of 10a
doars was dened by the Unt because of nsuffcent evdence as to
vaue.
ppeant contends that the good-w account ncuded a quantty
of patterns and toos of uncertan vaue, beng an accumuaton of
severa years and not n constant use. These assets were estmated
to have a vaue of 1.238a doars, and t s camed that tme has
proven the estmate to be correct. ppeant further contends that
the offer to purchase the four patents for cash f es ther vaue
and pad-n surpus of 10a doars shoud be aowed.
In the opnon of the Commttee, the evdence furnshed fas to
prove that the good-w tem had the vaue camed or any other
ascertanabe vaue. It s aso the opnon of the Commttee that
patents can not be ncuded as pad-n surpus under the Revenue
ct of 1917, beng n substance an ntangbe asset.
patent s an ntangbe. It s so recognzed n secton 207(b) 3
of the Revenue ct of 1917 and secton 325(a) of the Revenue ct
of 1918, but the 1917 ct, unke the 1918 ct, permts a patent to
be ncuded n nvested capta at ts actua cash vaue or the par
vaue of the stock ssued therefor, whchever s ower.
or ths purpose, patents and copyrghts were paced on the sant
bass wth cash and tangbe property, but n a separate cass by
themseves. It mght be sad a patent occuped a mdde ground, and
a corporaton acqurng one for ts stock was paced n a favom
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395
( 32 , rt. 830.
poston by havng t treated on somewhat the same bass as tangbe
property, nstead of havng t treated as an ntangbe, n whch
cass t rghtfuy beongs and where t was paced n the 1918 ct
Patents beng cassed as ntangbes under the ct of 1918, may
not-be ncuded n nvested capta as pad-n surpus for 1918 or
subsequent years.
The dena of patents as pad-n surpus for 1917 s n confct
wth . R. . 70, whch provdes n part as foows:
It w be seen by ths dvson that Congress manfesty ntended n the
Revenue ct of 1917 to cassfy copyrghts and patents us tangbe property
and trade-marks, good w, and other property as ntangbe and t aso
provded that where patents were turned n for stock the fgure at whch they
coud be taken nto nvested capta s the actua cash vaue or the par vaue
of te stock ssued therefor, whchever s ower, but ths does not necessary
precude the recognton of actua vaue of patents turned n as pad-n surpus.
Whe ths statement was not necessary for the determnaton of
the ssues n that case, t authorzes the ncuson of the cash vaue of
patents n nvested capta as pad-n surpus under the 1917 Revenue
ct. It does not seem that secton 207 of that ct s capabe of ths
constructon. It s beeved, therefore, that n order to avod ms-
understandng that part of . R. R. 70 whch refers to patents as
tangbe property and permts ther ncuson as pad-n surpus
shoud be revoked.
fter carefu consderaton of a the evdence of record, the Com-
mttee concudes (1) that the tem entered on appeant s openng
baance sheet as good w n the amount of 1.238a doars shoud be
dsaowed as nvested capta, snce the vaue thereof has not been
proven (2) that patents n the amount of 10a doars can not be
aowed as pad-n surpus under the Revenue cts of 1917 and 1918.
ccordngy, the Commttee recommends that the appea be dened.
btce 839: Surpus and undvded profts: III-5-1347
aowance for depeton and deprecaton. . R. R. 127
R NU CTS O 1917 NO 1818.
Under the provsons of artce 839 of Reguatons 45 and . It.
M. 108 (G. . 4, 390), appeant woud be entted to make ad-
|ustment n respect of deprecaton n pror years upon the bass
of affrmatve evdence that as at anuary 1, 1917, the amount of
deprecaton wrtten off n pror years was e cessve. owever,
such ad|ustments can not be predcated upon the mere workng out
of some theoretca formua whch the ureau has consstenty hed
does not consttute affrmatve evdence. The Commttee s not
prepared to accept the costs stated n the amended deprecaton
schedue as beng even appro matey accurate. It s, therefore,
recommended that the acton of the Income Ta Unt In refusng
to aow the restoraton to earned surpus as at anuary 1, 1917,
of the amount of doars, aeged e cessve deprecaton of pror
years, be sustaned and the appea dened.
The Commttee has carefuy consdered the appea of the M Com-
pany from the acton of the Income Ta Unt n denyng t the rght
to restore to the earned surpus at anuary 1, 1917, aeged e cessve
deprecaton charged off n pror years.
rom the evdence of record and the facts deveoped at the hear-
ng, t appears that appeant company was organzed n 1902, and
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320, rt, 839.
39
has snce been contnuousy engaged n a certan busness that n
years pror to 1917 no systematc bass was used n chargng off de-
precaton, the amount charged off n each year beng dependent
upon how much the proft and oss account woud bear that such
amounts as were charged off each year were kewse camed as
deductons on the returns of ta abe net ncome that as a resut of
such a pocy the tota amount of deprecaton wrtten off to anuary
1, 1917, represented appro matey 77 per cent of the orgna cost
of pant and subsequent addtons that the revenue agent who con-
ducted an e amnaton of appeant s books for the years 1917 to
1921, ncusve, made no change n the surpus account at anuary
1, 1917, on account of such e cessve deprecaton that subsequent
to the agent s e amnaton appeant company submtted amended
deprecaton schedues for the years 1902 to 1921, wheren depreca-
ton s computed at a unform rate based upon the estmated fe of
each cass of deprecabe assets, and upon the bass of the showng
made n the amended schedues cams the rght to restore to surpus
account as at anuary 1, 1917, aeged e cessve deprecaton n the
amount of doars and that the Income Ta Unt has refused to
permt the restoraton of the atter amount to surpus on the ground
that appeant has faed to show as contempated by artce 839 of
Reguatons 45 and . R. M. 10 that deprecaton charged off n
years pror to 1917 was the resut of foowng an erroneous athough
conservatve pocy.
There can be tte doubt that the method used by appeant com-
pany n chargng off deprecaton n years pror to 1917, resutng n
showng the net cost of ts pant and equpment at anuary 1, 1917,
at ony 23 per cent of ts actua cost, s ceary erroneous and has
serousy mpared the company s nvested capta. Under the pro-
vsons of artce 839 of Reguatons 45 and . R. M. 10 , appeant
woud be entted to make ad|ustment n respect of deprecaton n
pror years upon the bass of affrmatve evdence that as at anuary
1, 1917, the amount of deprecaton wrtten off n pror years was
e cessve. owever, such ad|ustments can not be predcated upon
the mere workng out of some theoretca formua whch the ureau
has consstenty hed does not consttute affrmatve evdence. ur-
ther, after consderaton of the statement of the revenue agent to the
effect that rreguartes n the method of bookkeepng make t prac-
tcay mpossbe to ascertan the correct cost of pant and equp-
ment actuay on hand at anuary 1, 1917, whch statement the Com-
mttee, upon nterrogaton of the company s representatve at the
ora hearng, fnds to be substantay correct, the Commttee s not
prepared to accept the costs stated n the amended deprecaton
schedue as beng even appro matey accurate. It s, therefore,
recommended that the acton of the Income Ta Unt n refusng to
aow the restoraton to earned surpus as at anuary 1, 1917, of the
amount of doars, aeged e cessve deprecaton of pror years, be
sustaned and the appea dened.
Chares D. amf ,
Charman Commttee on ppeas and Revew.
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397
32 , rt. 839.
rtce 839: Surpus and undvded profts: III-8-1378
aowance for depeton and deprecaton. . R. R. 040
( so Secton 214(a)8, rtce 1 5.)
R NU CTS O 1017 ND 1018.
Snce the record dscoses affrmatve evdence tat the hook
vaue of the M Company s deprecabe assets ns at the begnnng of
the ta abe year 1917 was n e cess of ther sound vaue as of
such tme, that company s surpus shoud be reduced as at the
begnnng of the ta abe years 1917-1920, ncusve, on account of
deprecaton sustaned but not charged off the books.
Deprecaton for each of the years nvoved shoud be com-
puted on the bass of the average of the cost of deprecabe assets
as shown at the begnnng of the year and at the cose of the year
nstead of on the bass of the entre cost shown at the cose of the
year.
The M Company has appeaed from the proposa of the Income
Ta Unt to reduce the amount of nvested capta camed for
each of the fsca years ended uy 31, 1917, 1918, 1919, and 1920,
by the amount of deprecaton estmated to have occurred n years
pror to 1917 but not charged off on the books, and to compute de-
precaton for each of such years on the bass of the average of the
cost of deprecabe assets as shown at the begnng of the year and
at the cose of the year nstead of on the bass of the entre cost
shown at the cose of the year.
s shown by the records, the appeant company was organzed
October , 1902, and s engaged n the busness of buyng, seng,
and shppng gran and manufacturng four. Durng the ora hear-
ng t was stated by the appeant company s representatve that the
four m whch ths company operates s of sma capacty and one
of the odest ms n the vaey n whch t s ocated and that t s
far from modern as to constructon and mng equpment.
Pror, to 1917 the appeant company charged off practcay no de-
precaton on ts books, athough deprecaton was camed for a
years from 1908 as deductons for edera ta purposes. The amount
of deprecaton camed by the appeant company on returns
rendered for ta purposes, the amount charged off on ts books, and
the amount set up by the revenue agent who nvestgated such re-
turns for nvested capta purposes snce 1912 are as foows:
pent s
Year.
Deducton
camed.
CharRed o
on books.
Deducton
aowed.
reducton
nvested
capta.
009
Doar .
2. t
Doars.
None.
Doars.
1911.
2. I
2. I
2. I
1912
...do
1913
...do
2.2 I
2.2 I
2.2 I
2.451
1914.
1.2 I
1.2 t
.m
...do
1915.
.10
.041
...do...
...do
Tota
10.54
.20
None.
9.051
Deprecaton deductons camed for 1909-191 were dsaowed
by the revenue agent on the ground that no deducton had been
charged off the books.
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S32 , rt. 839.
39S
The revenue agent accepted the book vaue of the deprecabe
assets as at the begnnng of the ta abe year 1913 as representng
ther sound vaue as of that date for nvested capta purposes.
The cost of the appeant company s deprecabe assets as at the
cose of the ta abe year ended uy 31, 191 , and as shown by the
deprecaton schedue prepared by the revenue agent was 30.e do-
ars, whch, f reduced by the amount of deprecaton whch the
appeant company, n sworn returns, had stated as a reasonabe
aowance, woud show a baance of 19.5 doars, athough depre-
caton had been set up on the books at that date ony n the amount
of .2 S doars.
The revenue agent n hs nvestgaton reduced the amount of
nvested capta shown by the books at the begnnng of the ta abe
year 1917 by the amount of deprecaton he estmated had been
sustaned snce the cose of the ta abe year 1912, whch reducton
amounted to 9.05a doars, whch s 1.49a doars ess than the
amount of deprecaton the appeant company had camed up to
the begnnng of the ta abe year 1917 for edera ta purposes.
It s from ths reducton of nvested capta that the appea here
beng consdered s taken, t beng camed that norma deprecaton
from date of acqurement of the deprecabe assets at the begnnng
of the ta abe year 1917 was stayed or offset by repars and repace-
ments, the cost of whch had been charged to e pense, and such
beng the case the deprecaton reserve s not, under the rung
set. forth n artce 839, Reguatons 45, and n . R. M. 10 (C. .
4, 390), propery to be set up as a abty and the amount of n-
vested capta shown by the books reduced by the amount of such
a reserve.
rtce 839 of Reguatons 45 reads n part as foows:
Depeton, ke deprecaton, must be recognzed In a cases n whch It
occurs. d|ustments In respect of deprecaton or depeton n
pror years w be made or permtted ony upon the bass of affrmatve
evdence that as at the begnnng of the ta abe year the amount of depreca-
ton or depeton wrtten off n pror years was nsuffcent or e cessve as
the case may e.
. R. M. 10 reads n part as foows:
It s the udgment of the Commttee that there s no warrant for reducng
earned surpus because of aeged faure to charge off suffcent deprecaton
In the past, uness the deprecabe assets of the corporaton are vaued on
ts books at the begnnng of the ta abe year at an amount n e cess of
ther actua vaue at that tme. Nothng heren s to be construed
as precudng the Income Ta Unt from ad|ustng deprecaton, ether by way
of ncrease or decrease, where there s at hand affrmatve evdence that as
at the begnnng of the ta abe year the amount of deprecaton wrtten off
n pror years was nsuffcent or e cessve.
The revenue agent computed deprecaton n the nstant cast- for
each of the ta abe years 1913-191 at the rate of per cent on
budngs and 10 per cent on machnery and equpment and furn-
ture and f tures, and t s not contended by the appeant company
that such rates are too hgh. or the years from 1909 to 191 , both
ncusve, or a perod of eght years, the appeant company camed
as reasonabe deprecaton deductons on ta returns rendered a
tota of 10.54a doars, whch deductons were ony dsaowed be-
cause of the fact that deprecaton had not been charged off on the
books. ad the tota amount of deprecaton whch the appeant
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399
32 , rt. 839.
company reported as a reasonabe amount been set up n a reserve
account, such account woud show a tota, as at the begnnng of the
ta abe year 1917, 1.49a doars greater than the reserve account set
up by the revenue agent. That the vaue of the appeant company s
deprecabe assets as at the begnnng of the ta abe year 1917 was
equa to ther tota cost vaue s greaty to be doubted. It s under-
stood that the greater part of the m budngs and m equpment
was acqured by the appeant company at the tme the company
was organzed n 1902. The sad company s representatve ad-
mtted that the m was one of the odest n ts secton of the
country and that t contaned but tte modern mng machnery
and equpment and so far as coud be ascertaned from the com-
pany s books but tte had been e pended for repars and repace-
ments, whch woud tend to stay deprecaton or to proong the
usefu fe of the assets, athough t s the cam of the appeant
company that durng sack tmes certan of ts empoyees devoted
ther tme and attenton to the makng of repars and that the wages
of such empoyees whe engaged on repar work were charged to the
reguar pay-ro account. s between the appeant company and
the revenue agent who nvestgated ts returns t was apparenty
agreed that the m budngs had a usefu fe of but 15 years
beyond uy 31, 1912, whch woud ndcate an admsson on the
part of the appeant company that such budngs had ost a arge
part of ther usefu fe.
fter gvng the matter carefu consderaton, the Commttee con-
cudes that the cams of the appeant company n returns made
under oath for the aowance of reasonabe deprecaton deductons
n the tota amount of 10.54a doars for the perod 1909-191 , both
years ncusve, ts acceptance of the revenue agent s fndng that
the m budngs had a usefu fe of but 15 years from uy 31,
1912, the admsson on the part of the appeant company s repre-
sentatve that such m budngs, machnery, and equpment were
a of consderabe age and ong n use, and the fact that, so far as
shown by the appeant company s books of account, comparatvey
sma amounts ony had been e pended for repars and repacements,
consttute affrmatve evdence that the book vaue of the appeant
company s deprecabe assets as at the begnnng of the ta abe year
1917 was n e cess of ther sound vaue as of such tme and that the
proposa of the Income Ta Unt to reduce the appeant company s
surpus as at the begnnng of the ta abe years 1917-1920, both
ncusve, on account of deprecaton sustaned but not charged off
the books shoud be sustaned.
The Income Ta Unt proposes to compute the amount of deprec-
aton aowabe for each of the ta abe years n queston by addng
to the tota cost of the appeant company s deprecabe assets as at
the begnnng of each ta abe year the tota cost of such assets as at
the cose of the year, to dvde the rebt thus obtaned by 2, and use
the average cost thus obtaned as the bass of computaton. The ap-
peant company contends that deprecaton shoud be computed on
the bass of the tota cost as shown at the end of each year because
of the fact that the amount of ad|ustment to be made n ts depreca-
ton reserve account for each year, f the Unt s method of computa-
ton s foowed, s too sma to warrant a reopenng of ts books. It
s the opnon of the Commttee, however, that the method of compu-
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32 , rt. 840.
400
taton proposed by the Income Ta Unt s correct and that nasmuch
as other ad|ustments are to be made n the sad company s depreca-
ton reserve account no hardshp w be mposed upon the company
through requrng t to make the ad|ustments whch necessary
foow the adopton of the method of computaton to whch e cepton
has been taken.
In vew of the foregong, the Commttee recommends that the pro-
posed acton of the Income Ta Unt wth respect to both ponts at
ssue stated above be sustaned and the appea of the M Company ac-
cordngy dened.
Chares D. aste,
Charman Commttee on ppeas and Revew.
rtce 840: Surpus and undvded profts: III-4-1334
addtons to surpus account. . R. It. 4972
( so Secton 214(a) 1, rtce 105.)
R NU CTS O 1017 ND 1918.
The amounts pad by the M Company durng the years 1917,
1918, and 1919 to , who devoted practcay a, her tme to the
busness of the corporaton, are hed to be saary payments and
deductbe as such.
n tem of SG.b doars for znc thographc pates s em-
nated from the nvested capta of the SI Company for the years
1917, 191S, and 1919, nasmuch as t appears that the cost of sad
pates had, so far as can be determned, been receved n whoe or
n prncpa part through charges made for abes or posters
prnted from such pates, and that such cost had been aowed
n ts entrety to the appeant company as deductons from gross
ncome n computng ts ta abty for the years pror to 1917.
The M Company has appeaed from the acton of the Income Ta
Unt n (1) dsaowng a deducton of 1.39 doars camed for the
year 1917 as saary pad to , a smar deducton of .27 doars
camed for the year 1918, and a smar deducton of 1.3 3 doars
camed for the year 1919 (2) emnatng from nvested capta
for each of the years 1917, 1918, and 1919, 3G.5 doars representng
the vaue paced on znc thographng pates, and dsaowng de-
ductons camed to cover deprecaton on such pates durng 1917
and 1918 and (3) n hodng that a proft of 23.2 a doars was de-
rved from the sae of the appeant company s thographng pant
n 1919.
The records n the case show that the revenue agent who n-
vestgated the appeant company s returns dsaowed a deducton
of 1.39 doars camed for the year 1917, .27 doars camed for
the year 1918, and 1.3 doars camed for the year 1919, as saary
pad to , hs ony comment beng that
Items of wrtten off represent the drawng account of ths, the prncpa
stockhoder.
In a bref fed n behaf of the appeant company appears ths
statement:
The corporaton aowed .04 doars per week for tme and servce gven
sad corporaton. She devoted the man porton of her busness tme to such
servce. She drew ths amount weeky and the amounts were charged to her
account nstead of to saary then at the end of the year the debt baance
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#
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401
32 , rt, 8-10.
aganst her was ceared by chargng t to surpus the charge to surpus was,
from an accountng pont, erroneous. Saary shoud have been charged
nstead of surpus. Ths baance of .Z doars represented the amount to
her debt, there havng been a credt n her favor at the begnnng of the year.
If ths tem s not aowed t means that has worked a fu year wthout
ermttng the corporaton to consder her servces ns a deductbe
e pense, and ta payer respectfuy requests that ths tem of . 9 doars- be
aowed as deductbe, the same as orgnay ncuded n the return of the
corporaton.
Smar cams n dfferent amounts are aso made for the years
1918 and 1919. In an affdavt e ecuted November , 1923, and
sgned M Company by , secretary, t s stated that
Devoted practcay a of her tme, durng the year 1917, to attenton to the
busness, actng n the capacty of genera assstant n the shop, etc.
Nothng appears n the records to controvert the statement made
under oath that devoted practcay a of her tme durng the
year 1917 n the capacty of genera assstant n the shop of the
appeant company, or that the amounts deducted for the years 1917,
1918, and 1919 were pad to her soey as compensaton for servces
rendered. It appears that she was pad .O doars for each week
she rendered such servces, and therefore the Commttee concudes
that the amounts so pad are aowabe as deductons for the years
n queston.
Pror to November , 191 , the appeant company, whch was
organzed n 1909, had accumuated a arge number of znc tho-
graph pates, and the cost of producng the same had been charged
to current e pense. s of September 30, 191 , an nventory of the
company s assets was taken and the od books of account were then
cosed. In openng a new set of books a new tem was set up among
the assets as
7 0 enveopes contanng orgna pates, at .Oo doars 3G.O doars
The vaue so paced upon such pates appears to have been an
estmated one, arbtrary estabshed, and the revenue agent n
commentng on ths tem, whch he emnated from nvested capta,
states:
Ths tem, t s sef-evdent, s a restoraton of tems prevousy, and rghty,
charged to e pense n pror years, and taken as a deducton n ncome ta
returns. It represents pates on dfferent obs of thographng, and the cost
of such property represented e pense of the partcuar |ob, as the future vaue
s probematca. The fgure can not be shown to be the cost of the pates.
nd, furthermore, the corporaton dd not In the foowng years captaze such
tems. It s pany a restoraton of tems charged to e pense n pror years.
Ths tem and that of deprecaton computed on the assets accounts for most
of the ncrease n the pant, and t seems advsabe to gnore the dfference.
nd n hs report he further states that
The former presdent admtted before beng advsed of the proposed ad-
|ustments that the pant was overvaued and that the pates carred on the
books at 3 .5a doars dd not consttute an asset.
rom a statement made by the appeant company under date of
pr , 1923 t appears that the pates n queston range n sze
from nches to nches and that ther cost ranges
from .05 doars to .25a doars each that on November , 191 ,
the company empoyed a pubc accountant to nsta a proper sys-
tem of accounts and he brought to the attenton of the company the
fact that the cost of these pates shoud have been captazed
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32 , rt, 840.
and not charged to operatons. n nventory was thereupon taken
and a prce of .05 doars was agreed upon as a far and conserva-
tve vauaton wth due consderaton of deprecaton from frst and
orgna costs. Such pates were made for the producton of stock
abes used on cans and bo es of frut. In the affdavt of November
, 1923, referred to above, appears ths statement:
It s hard to say f the cost of these pates had been recovered through
havng been ncuded n the prce of the |obs, and furthermore when such
pates were manufactured t was ntended that they be used for other |obs
than the frst ones n fact t happened n many cases that pates were frst
manufactured and then hed watng for the frst |ob to come aong.
rtce 840, Reguatons 45, provdes, n part, that f a corpora-
ton cams that ts capta or surpus account s understated the
burden of proof w rest upon t and that no amount sha be restored
n whch the cost of the property has been recovered through beng
ncuded n the prce of goods or servces, as, for e ampe, n the case
of patterns, des, pates, speca toos, etc rom such evdence as
has been submtted to the Commttee, t woud appear that the sad
pates were produced for use n prntng abes or posters for cans
and bo es contanng frut sod oy a partcuar company, and no
evdence has been submtted to show that the cost of the pate or
pates produced for use n prntng a partcuar ot of abes or
posters was not charged aganst that |ob, as s the usua practce n
such cases, and ncuded n the charge made for such abes or
posters, and t s admtted that t s mpossbe now for the appeant
company to say that such was not the case. It s cear, however,
that such costs were charged to e pense and camed as deductons
for the years durng whch the e pense was ncurred. It s, there-
fore, the opnon of the Commttee that the acton of the Income
Ta Unt n emnatng the sad tem of 3 .5a doars from n-
vested capta for each of the years 1917, 1918, and 1919 and n ds-
aowng as a deducton the amount of deprecaton n the vaue of
the sad pates camed for each of such years shoud be sustaned.
On ugust , 1919, the appeant company sod ts thograph-
ng busness and property as a whoe, ncudng ts name and good
w, e ceptng ony ts bs recevabe, for 57a doars, and showed
a book oss of 18.79a doars, as foows:
Sae of pant: Doar
Unfnshed work (materas and suppes) 5.53a
nshed work (stock abes, etc.) 1.89
Pant (ncudng pates, 3U.5.T doars) 98.42a
105. 84ar
Less deprecaton reserve (Incudng deprecaton
camed on pates for 1917 and 1918) 30
Pant net 75. M
Proceeds 57 |r
I )ss 18. 84a:
The revenue agent emnated the cost of znc pates, 3 .5a doars,
and deprecaton camed on same n 1917 and 1918, as factors n the
computaton of gan or oss resutng from the sad sae, and re-
ported that a proft of 23.24 doars had been derved therefrom,
whch fndng has been approved by the Income Ta Unt.
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403
32 , rt. 841.
In the opnon of the Commttee, the fndng of the revenue agent
as approved by the Income Ta Unt shoud be sustaned, nas-
much as t woud appear that the cost of the sad pates had, so far
as can be determned, been recovered n whoe or n prncpa part
through charges made for abes or posters prnted from such
pates, and that such cost had been aowed n ts entrety to the
appeant company as deductons from gross ncome n computng
ts ta abty for the years pror to 1917.
In vew of the foregong, the Commttee recommends:
(1) That the acton of the Income Ta Unt n dsaowng the
deductons camed for the years 1917, 1918, and 1919 on account of
saary pad to be reversed, and the appea of the appeant com-
pany on ths pont be sustaned
(2) That the acton of the Income Ta Unt n emnatng the
sad tem of 3 .5a doars from nvested capta for each or the
years 1917, 1918, and 1919, and n dsaowng the deprecaton de-
ductons camed for the years 1917 and 1918 on znc thograph
pates, be sustaned and
(3) That the acton of the Income Ta Unt n hodng that the
appeant company derved a proft of 23.24a doars from the sae
of ts thographng pant and busness n 1919 be sustaned.
Char.es D. ame,
Charman Commttee on ppeas and Revew.
rttc|b 841: Surpus and undvded profts: 111-23-159
mtaton of addtons to surpus account. S. M. 1831
R NU CT O 1918.
The actvtes of the ta payer from 1902 to 1908 were devoted
entrey to commerca e potaton of a certan devce whch ts
patents covered. The e penses so ncurred come wthn the mean-
ng of artce 841(2) of Reguatons 45, whch provdes that e -
penses for the deveopment of good w through advertsng or
ofherose, whch as a matter of good accountng may be treated
as e pense or as capta e pendtures, may not be restored to
capta where they have been charged to e pense currenty.
Ths offce does not agree wth the decson of the Unt whch per-
mts the ta payer to restore to capta account the net oss sustaned
n ts operatons from the tme of ts organzaton n 1902 to and
ncudng 1908. On behaf of the ta payer t has been represented
that ts actvtes durng ths perod were devoted entrey to com-
merca e potaton of a certan devce whch ts patents covered.
It s camed that the net oss of 100a doars ncurred n pror years
shoud be treated as the cost of such commerca e potaton, whch
by anaogy7 to artce 231 of Reguatons 45 shoud be consdered to
be deveopment e pense, whch can now be restored to capta account.
It s the opnon of ths offce that the e penses n queston come
wthn the meanng of artce 841 (2) of Reguatons 45, whch pro-
vdes that e penses for the deveopment of good w through adver-
tsng or otherwse, whch as a matter of good accountng may e
treated as e pense or as capta e pendtures, may not be restored o
capta where they have been charged to e pense currenty, as n
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532 , rt. 845.
404
such cases t s consdered that the ta payer e ercsed a bndng
opton n treatng such tems as e pense. The terms of ths pro-
vson of the reguatons are specfc and do not admt of the con-
structon whch the ta payer seeks to pace upon t to the effect that
the chargng to e pense of such tems s a bndng eecton ony to
the e tent that they may be apped to current ncome or to a pre-
e stng surpus.
There s no evdence on fe to show that the restoraton n queston
was actuay made by the company pror to the ncdence of the
ta ng cts, but t woud appear that such restoraton has been
.suggested snce the abty of the ta payer came under the con-
sderaton of the ureau. ccordngy, t s the opnon of ths
offce that the ta payer s cam to the restoraton of the net oss n
queston to capta account shoud be dened.
Neson T. aktson,
Soctor of Interna Revenue.
rtce 845: Surpus and undvded profts: III 15 1505
reserve for ncome and e cess-profts ta es. . It. It. 745
( so Secton 239, rtce 21.)
R NU CT O 1918.
I computng the nvested capta, as a corporaton, under author-
ty of secton 330 of the Revenue ct of 1918, for the year 1918,
of the busness of , whch had been conducted as n soe propretor-
shp and was ncorporated une 27, 1919, the unpad ta es of for
1917 may be ncuded n nvested capta unt due and payabe.
n Item owng by the ndvdua busness to , shown as a abty
on anuary 1, 1919, when the ndvdua busness was taken over
by the corporaton and ater e tngushed by the ssue of capta
stock to at the date of ncorporaton, shoud be treated as bor-
rowed money unt the ssuance of the capta stock therefor n une,
1919.
In computng the ta es for 1918 and 1919 under secton 330. the
ta es shown to be due for 1918 and for the perod anuary 1. 1919,
to une 2 , 1919, are hed to be abtes of the ndvdua, and the
tu es shown to be due on ncome from une 27, 1919, to December
31, 1919, abtes of the corporaton. The requrements of secton
330 can ony be met for 1919 by the fng of a separate return as a
corporaton for the perod anuary 1 to une 20, 1919, and a deter-
mnaton of the ndvdua s abty on that bass, and by the fng
of a separate return for the corporaton for the perod une 27.
1919, to December 31, 1919, and a determnaton of the corporaton s
abty on that bass.
The Commttee has consdered the appea of the M Company
(ncorporated une 27, 1919) from the acton of the Income Ta
Unt n makng certan protested ad|ustments affectng ta abty
for the years 1918, 1919, and 1920.
The ponts rased by appea -w be covered separatey n the
foowng:
Pont I: Pror to 1917, durng 1917 and unt une 27, 1919. the
busness of the appeant, was conducted as a soe propretorshp by
. In 1917 and 1918 returns were fed as an ndvdua. ta
abty of 32.07 ) doars was dscosed for 1917 and pad une 15,
1918. On une 27, 1919, the M Company ncorporated, and then
nvokng the authorty of secton 330, Revenue ct of 1918, eected
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405
320, rt, 845.
(hat the busness n 1918 shoud be ta ed as a corporaton proceeded
to fe a return as a corporaton, and computed the ta accordngy.
Nether the Unt nor the Commttee dsputes the rght of the appe-
ant to fe a return as a corporaton for 1918, despte the fact that a
prevous return for that year had been fed as an ndvdua. The
queston arses, however, as to whether, n computng the nvested
capta, as for a corporaton, for 1918, the unpad ta es for 1917,
amountng to 32.07./ doars, assessed aganst , the ndvdua,
shoud be e cuded entrey or ncuded n such computaton, to the
e tent and n the manner provded by artce 845 of Reguatons 45.
The Unt contends that such ta es shoud be e cuded entrey, and
(he appeant cams the rght to ad|ustment accordng to artce
845. Reguatons 45.
The Commttee has consdered secton 330 of the Revenue ct of
1918 and artce 933 of Reguatons 45 n connecton wth ths ssue.
Secton 330 provdes n part:
In the case of (e organzaton as a corporaton before uy 1, 1919 ,
n whch event the net ncome and nvested capta of such trade or busness
sha be computed as f such corporaton had been n e stence on and after
anuary 1, 1018, .
It s the Commttee s opnon that n determnng the nvested
capta for the purpose of ta ng ths busness as a corporaton n
1918, under the authorty of secton 330, Revenue ct of 1918, the
ta es due and unpad for 1917, assessed aganst , ndvdua, shoud
he treated accordng to the provsons of artce 845 of Reguatons
45. (See aso . R. R. 2190 C. . 11-2,270.)
It s, therefore, recommended that the appea be sustaned on ths
pont.
Pont II: Whether an tem of 4 doars, owng by the ndvdua
busness of to and shown as a abty on anuary 1, 1919, and
ater e tngushed by the ssue of capta stock at the date of ncor-
poraton, une 27, 1919, shoud be treated as borrowed money, or as
nvested capta from anuary 1, 1919, n computng ta abty
based on the return fed as a corporaton return for the fu year
1919.
copy of the offer made by and accepted by the company at
(he date of ncorporaton shows that t was ntended that the n-
dvdua busness was to be taken over as of anuary 1, 1919. The
appeant contends that ths abty, converted nto capta stock on
une 27, 1919, shoud be aowed as nvested capta n the return
fed as by a corporaton for the fu year 1919, because the ndvdua
busness was taken over as of anuary 1, 1919, and because no n-
terest was credted or pad on such abty from that date to the date
of ncorporaton. It s the Commttee s opnon that ths ndebted-
ness ranked wth that of genera credtors unt an actua e tngush-
ment was accompshed by the ssuance of capta stock at the tme
of ncorporaton, une 27, 1919. It s, therefore, recommended that
the appea be dened on ths pont and that the amount nvoved be
treated as nvested capta, propery averaged, ony from une 27,
1919.
Pont III: The proper ad|ustment of ta abty for 1918 and
1919 as between the ndvdua, , and the corporaton organzed
une 27,1919.
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32 , rt. 852.
40
It woud appear that the Unt proposes to assess a ta es shown
by the corporate returns fed for 1918 and 1919 under secton 330
aganst the corporaton organzed une 27, 1919. The appeant
cams that any and a ta es shown to be due by such return for
1918 and such ta es as are due upon the bass of corporate ta
computaton fo the perod anuary 1, 1919, to une 2 , 1919, are
abtes of the ndvdua, aso that such ta es as are shown
to be due on ncome from une 27, 1919, to December 31, 1919, are
a abty of the corporaton. The Commttee, after carefuy con-
sderng secton 330 n connecton wth the appeant s contenton,
s of the opnon that the appeant s correct, and, therefore, that
ad|ustment for 1918 and 1919 shoud be made accordngy. ow-
ever, t s noted that the appeant n determnng the respectve
abtes of the ndvdua and the corporaton for 1919 computes
the ta as that of a corporaton for a fu year and aocates of
such ta as the ndvdua abty and the remander as a corporate
abty. In connecton wth ths method, the Commttee has agan
referred to secton 330, whch provdes n substance that upon the
ncorporaton before uy 1, 1919, of a trade or busness prevousy
carred on by an ndvdua or partnershp, there may be an eecton
to be ta ed as a corporaton from anuary 1,1918, to the do.te of such,
ncorporaton. Under such condton, t appears that the secton
above referred to prescrbes a measure of ta for the perod from
anuary 1, 1918, to the date of ncorporaton dfferent from that
whch woud measure the ta aganst the partnershp or ndvdua
as such. The secton nowhere |ustfes a commngng of ta ab-
tes, as aganst the ndvdua and succeedng corporaton, such as
s nvoved by the appeant s proposed respectve ta computatons
of ndvdua and corporaton for 1919. It s the Commttee s
opnon that the requrements of secton 330 can ony be met n the
nstant case for 1919 by the fng of a separate return as a corpora-
ton for the perod anuary 1 to une 2 , 1919, and a determnaton
of the ndvdua s ( ) abty on that bass and by the fng
of a separate return for the corporaton for the perod une 27,
1919, to December 31, 1919, and a determnaton of the corporaton s
abty on that bass.
Recommendaton s made, therefore, that ths pont be ad|usted
as above ndcated.
Chah-es D. amts,
Charman Commttee on ppeas and Revew.
rtce 852: Percentage of nadmssbe assets. I 13-145 )
. R. R. 572
R NU CT O 1918.
The provsons of secton 32f(c) are appcabe n the computa-
ton of the nvested capta of a deaer n securtes. The fact that
such securtes consttute a part of ts stock n trade does not
remove them from the restrctons mposed by the above secton.
The Commttee has carefuy consdered the appea of the M Com-
pany from the acton of the Income Ta Unt n reducng ts n-
vested capta for the years 1918 to 1920, ncusve, on account of n-
admssbe assets.
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407
32 , rt. 858.
ppeant company s a deaer n securtes wthn the meanng
of that term as defned by artce 1585 of Reguatons 45.
In computng the nvested capta of appeant company for the
year s under consderaton, the Income Ta Unt has made an
ad|ustment on account of nadnssbes n accordance wth artce
852 of Reguat ons 45. ppeant company contends that the pro-
vsons of that artce shoud not be apped n the case of a deaer
n securtes.
Secton 32 (c) of the Revenue ct of 1918 provdes as foows:
There sha be deducted from nvested capta as above defned a percentage
thereof equa to the percentage whch the amount of nadmssbe assets Is of
the amount of admssbe and Inadmssbe assets hed durng the ta abe
year.
The provsons of the above secton are appcabe n the com-
putaton of the nvested capta of a deaer n securtes. The fact
that such securtes consttute a part of ts stock n trade does not
remove them from the restrctons mposed by the secton above
quoted.
In I. T. 1155 (C. . 1-1, 344), t was hed that
corporaton whch s a deaer n securtes wthn the meanng of artce
1585 of Reguatons 45 s not entted to Incude n nvested capta amounts
Invested n nadmssbe assets, even though such assets are hed as merchandse,
e cept under condtons enttng It to the benefts of artce 817 of Regua-
tons 45.
The Income Ta Unt has accorded the appeant company the
benefts of artce 817 of Reguatons 45.
ccordngy, t s recommended that the acton of the Income Ta
Unt be sustaned and that the appea be dened.
Chares D. ame,
Charman Commttee on ppeas and Revew.
rtce 8 8: ffect of ordnary dvdend. 111-10-1408
So. Op. 155
IN ST D C PIT L: R NU CT O OCTO R 3, 1917.
arnngs vaabe fob Dvdends : Reazaton of pprf.caton.
Under the Revenue ct of 1917, Invested capta shoud not be
reduced by dstrbutons durng the year whch do not e ceed earn-
ngs and profts, ncudng the reazaton of apprecaton of assets
on March 1, 1913, In e cess of cost.
The Income Ta Unt n ad|ustng the ta abty of the O Com-
pany for 1917 has treated that porton of the depeton reserve
based upon a vauaton as of March 1, 1913, whch s n e cess of
cost, reazed durng the ta abe year, as beng avaabe for ds-
trbuton as dvdends wthout frst reducng accumuated surpus
at the begnnng of the year.
The ta abe net ncome of the corporaton (e cusve of reazed
apprecaton) for the ta abe year was 35. 8.7 doars. In comput-
ng ths amount of net ncome depeton was aowed n the sum
of 9.55a doars, of whch 1.12a doars was depeton based on
cost and the baance, 8.42y doars, was depeton aowed based on
the vaue of the assets on March 1, 1913, whch was n e cess of
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32 , rt. 858.
408
cost. In determnng the amount avaabe for dvdends the amount
of reazed apprecaton was added to the above amount of net
ta abe ncome.
Dvdends were pad durng the ta abe year as foows:
There Mas surpus at the begnnng of the ta abe year n the
The queston presented s whether the e cess of the dvdend at
the date of any dstrbuton over the avaabe prorated ta abe net
ncome (after accrua of ta ) sha be deemed for nvested capta
purposes to be a dstrbuton from the accumuated surpus e st-
ng at the begnnng of the year or whether the ncrease n vaue
of property accrung pror to and e stng on March 1,1913, reazed
durng the year sha be deemed a part of avaabe earnngs for the
ta abe year n so far as nvested capta s concerned.
Secton 31 of the Revenue ct of 191 as amended by the Revenue
ct of 1917 s as foows:
(n) That te term dvdends as used n ths tte sha he hed to mean
any dstrbuton made or ordered to be made by a corporaton, |on-stock
company, assocaton, or nsurance company, out of ts earnngs or profts ac-
crued snce March 1, 1913, and payabe to ts sharehoders, whether n cash
or n stock of the corporaton, |ont-stock company, assocaton, or nsurance
company, whch stock dvdend sha be consdered ncome, to the amount of the
earnngs or profts so dstrbuted.
(b) ny dstrbuton made to (e sharehoders or members of a corporaton,
|ont-stock company, or assocaton, or nsurance company, n the year 1917,
or subsequent ta years, sha be deemed to have been made from the most
recenty accumuated undvded profts or surpus, and sha consttute a part
of the annua ncome of the dstrbutee for the year n whch receved, and
sha be ta ed to the dstrbutee at the rates prescrbed by aw for the
years n whch such profts or surpus were accumuated by the corporaton,
|ont-stock company, assocaton, or nsurance company, but nothng heren
sha be construed as ta ng any earnngs or profts accrued pror to March
1, 1913, but such earnngs or profts may be dstrbuted n stock dvdends
or otherwse, e empt from the ta , after the dstrbuton of earnngs and profts
accrued snce March 1, 1913, has been made. Ths subdvson sha not appy
to any dstrbuton made pror to ugust C, 1917, out of earnngs or profts
accrued pror to March 1, 1913.
Invested capta s purey a creature of statute. It conssts of
actua contrbutons made by the stockhoders n e change for stock
and pad-n or earned surpus used n the busness e cusve of un-
dvded profts earned durng the ta abe year. La ee Iron
Works v. Unted States, 25 U. S., 377.) It can not be ncreased
e cept by statutory provson, and n the absence of specfc statutory
authorty, t can not be reduced uness one or more of the eements of
whch t s composed s n fact mpared or wthdrawn.
Secton 31 of the 1917 ct contans the presumpton as to the source
of dstrbutons by corporatons. It provdes that earnngs or profts
whch accrued pror to March 1, 1913, coud ony be dstrbuted ta
free to stockhoders after the current earnngs and profts have been
dstrbuted. It has been hed that ths presumpton s concusve
and s equvaent to an absoute rue of aw. (Douq as v. dwards,
287 ., 919 arder v. Irwn, 285 ed., 402.) y ts terms, however,
March , 3917
une , 1917
September , 1917 __.
December , 1917
Doars. 10
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409
32 , rt. 858.
secton 31 of the 1917 ct refers ony to Tte I of the ct, whch
has reference to ncome ta es and not to e cess-profts ta es. Snce
t has no reference to nvested capta, the statutory nvested capta
s not affected uness and to the e tent ony that t s n fact reduced
by the dstrbutons. In ths case, the ordnary ta abe earnngs
and the profts reazed durng the year from the ncrease n vaue
of property e stng on March 1,1913, n e cess of cost, together were
suffcent to cover the dstrbutons made. If the reazed appreca-
ton consttutes earnngs or profts durng the year, the dstrbutons
made were entrey from earnngs and profts durng the ta abe
year, and consequenty t woud not be necessary to resort to the
earned surpus at the begnnng of the year to meet any of the ds-
trbutons.
The fact that the reazed apprecaton when receved coud be
dstrbuted ta free does not mean that t was not an earnng and
there woud be no consttutona obstace to ta ng t. Lynch v.
ornby, T. D. 2731 not pubshed n uetn servce .) The rev-
enue cts subsequent to the 1918 ct provded that such dstrbu-
ton to stockhoders from earnngs whch accrued pror to March 1,
1913, woud not be sub|ect to ta . Ths dd not mean that dstrbu-
tons from the reazaton of apprecaton were not made from earn-
ngs or profts durng the year when reazed. The queston as to
whether a gan or proft s ta abe ether to the corporaton when
reazed by t or to a stockhoder when dstrbuted s not matera.
The amount reazed from the converson of capta assets durng
the year n e cess of the cost thereof was n the hands of the corpora-
ton when t made the dstrbutons n queston. Such amount beng
n e cess of cost was an earnng or proft. It was a gan whch be-
came separated from the capta nvestment wthn the meanng of
sner v. Macomber (252 IT. S., 189). Ceary the earned surpus
was not n fact reduced when the corporaton actuay had earnngs
on hand durng the year out of whch to make the dstrbutons.
The queston whether a reazaton durng the year of an appreca-
ton e stng on March 1, 1913, consttutes earnngs or profts durng
the vear was consdered by ths offce n the case of the M Company
(I. T. 1791, C. . II-2, 2 8), and t was hed that apprecaton
n the vaue of property was an earnng n the year n whch t was
reazed, and beng such, affected nvested capta ony as of the
begnnng of the ne t year. eng an earnng of the year reazed,
no eement of nvested capta s mpared when a dstrbuton of t
s made to the stockhoders.
In vew of the foregong, t s the opnon of ths offce that nvested
capta shoud not be reduced on account of dstrbutons to stock-
hoders durng the year whch do not e ceed the earnngs and profts
on hand ncudng the reazaton of apprecaton n the vaue of
property on March 1, 1913, n e cess of cost.
Neson T. aktson,
Soctor of Interna Rereme.
4177 24 27
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32 , rt. 859.
410
rtce 859: ffect of stock dvdend. 111-17-1521
S. M.1747
R NU CTS O 1917 ND 1918.
stock dvdend ssued to stockhoders of the 51 Company repre-
sentng unreazed apprecaton bused upon the apprasa of ts
assets s not to be ncuded n nvested capta, athough there was
a consodaton or reorganzaton n progress by whch the M cor-
poraton was combnng wth other corporatons and the share-
hoders n the M Company surrendered ther od stock certfcates
and receved new certfcates n ther stead.
In arrvng at the corrected ta abty of the M corporaton for
1917 and 1918 t s noted that the Unt has ncuded n the nvested
capta for each year an amount of 291a doars under the foowng
condtons:
The N Company n 1913 had ssued 12 / shares of capta stock
of a par vaue of 100 each, and was the owner of z vesses engaged
n the freght-carryng trade. t that tme the company had fve
drectors. In order to effect a savng on nsurance whch, n the
opnon of the partes, coud be accompshed by the company carry-
ng ts own nsurance provded t owned 5z number of vesses, nego-
tatons were undertaken wth s other corporatons ownng vesses
adapted to smar use, whch resuted n the foowng procedure:
The vesses of the severa companes, ncudng those of the N
Company, were apprased, and the atter company amended ts char-
ter so as to change ts name to the M Company, and to ncrease ts
capta stock to ,500. doars, dvded nto 5|y shares at a par vaue
of 100. In order to secure to ts od stockhoders the accumuated
surpus mentoned as 1 w doars and to gve them the advantage of
the apprecaton n vaue of ts z vesses, the company decared a
so-caed stock dvdend dstrbutabe to them n the amount of 291a
doars and ssued some of the new stock to the other s corpora-
tons for ther vesses. It has been represented that these companes
drecty thereafter qudated and went out of busness. Two and three-
sevenths z vesses were aso purchased from the recever of a de-
funct corporaton. The sharehoders n the N Company surrendered
ther od stock certfcates and receved new certfcates n ther stead.
It s aso represented that through ssue of the addtona stock, con-
tro of the corporaton passed nto other hands, and the by-aws
were amended to provde for seven drectors nstead of fve. ues-
ton has arsen as to the proprety of ncudng n nvested capta the
amount of the so-caed stock dvdend of 291./- doars, n so far as t
represents the stock ssued to the od sharehoders of the N Company
n 1913, based upon the apprasa vaue.
conference was hed n ths offce and a bref was submtted on be-
haf of the company. In ths bref t s argued that what took pace
n 1913 was a reorganzaton that there was n effect a sae by the
od corporaton to a new corporaton that there was a new corpora-
ton, datng from 1913 and that the z vesses consttute capta pad
n as of 1913. It appears by the company s contenton that because
the transactons above outned occurred pror to .March 3, 1917, and
because there was, n fact, a reorganzaton, the nvested capta of
the company s not mted to the orgna nvestment or cost vaue
of the z shps beongng to the N Company.
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411 32 , rt. 850.
Whe the wordng of secton 208 of the 1917 aw s not dentca
wth secton 331 of the 1918 aw, t does not appear that ether sec-
ton contans a defnton of the words reorganzaton or con-
sodaton used theren. consodaton n ts restrcted sense
means the unon of two or more corporatons effected through or-
ganzaton of a new (successor) corporaton, whereas a merger s a
unon of two (or more) corporatons effected through the absorpton
by one of the e stng companes of the other (merged) corporaton.
The words merger, reorganzaton, and consodaton at tmes have
been used as synonymous. Generay a reorganzaton s effected by
the dssouton of an e stng corporaton and the organzaton of
an entrey new and dstnct corporaton to take over the former s as-
sets and property and contnue ts busness. Whe ths offce s of the
opnon that Congress had n mnd such a reorganzaton n sad
sectons 208 and 331, especay when t s noted that both sectons
refer to transfer of assets from one corporaton or trade or busness
to another corporaton or trade or busness, t does not appear neces-
sary to decde here whether there was a reorganzaton or a consoda-
ton n 1913.
Secton 207 of the Revenue ct of 1917 and secton 32 of the Reve-
nue ct of 1918 defne nvested capta, as to what may awfuy be
ncuded theren. Sectons 208 of the 1917 aw and 331 of the 1918
aw do not defne what may be ncuded n nvested capta, and are
not to be deemed n e tenson of rghts granted n sad sectons 207
and 32 . Rather are they, n addton to the restrctons found n
sad sectons 207 and 32 , provsons of mtaton as to the ma mum
amount aowabe n nvested capta, and not a guaranty of a
mnmum amount, where there has been a reorganzaton, consoda-
ton, or change of ownershp of a trade or busness, or change of own-
ershp of property, after March 3, 1917.
ttenton s caed to the facts set forth n the case of La ee
Iran Works v. Unted States (25 U. S.. 377 C. . 3, 359 C. . 4,
373). In that case, whch arose under the 1917 aw, n the year 1912
fhe corporate owner of assets costng 190,000 ncreased the vaue of
such assets upon ts books n the amount of 10,000,000, whch amount
was carred to surpus, and n the same year was made the bass of
a stock dvdend n the sum of 9,915,400, representng ths ncrease
n vaue of the assets. urthermore, the od stock was surrendered
and e changed for the new stock, whch was party common and
party preferred stock, upon te bass of 1 od share of common stock
for 1 share each of new common and preferred stock. The Supreme
Court emphaszed the defnton of nvested capta made by Congress,
statng that secton 207 under the 1917 aw shows a domnant pur-
pose of Congress to pace the pecuar burden of the e cess-profts
ta upon the ncome of trades and busnesses s e ceedng what was
deemed a normay reasonabe return upon the capta actuay em-
barked. The court further hed that causes (1) and (2) of secton
207 refer to actua contrbutons of cash or of tangbe property at
ts cash vaue contrbuted n e change for stock or shares specfcay
ssued for t and that nether these causes, nor cause (3), whch
reates to surpus, can be construed as ncudng n nvested capta
any markng up of the vauaton of assets upon the books to corre-
spond wth ncrease n market vaue, or any paper transacton by
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32 , rt, 8 4.
412
whch new shares are ssued n e change for od ones n the same cor-
poraton, but whch s not n substance and effect a new acquston of
capta property by the company.
It can not be sad that the 291a- doars of stock ssued to the od
N Company stockhoders represented the passng of any nterest
from one owner to another, or the nvestment by anyone of addtona
capta n the company, or the acquston of, or nvestment n, any-
thng whch the company dd not aready have. It must be conceded
(hat the nvestment of the company was no greater after the decara-
ton of the dvdend than before such decaraton. It embarked no
new or addtona capta n ts busness nor dd any of ts share-
hoders do so, n recevng the stock dvdend. Ths stock was a
stock dvdend because t was made up of shares of the company
tsef, dstrbuted to the od stockhoders upon the bass of ther stock
hodngs at the tme the new stockhoders dd not partcpate n the
dstrbuton. The corporate entty was preserved throughout.
Therefore, there coud have been no assgnment of the z vesses from
the N Company to the M Company, and therefore no reazaton of
the apprecaton, no converson of the assets. The prncpe of the
case cted, as to apprecaton and nvested capta, s ceary app-
cabe as we to nvested capta under the 1918 aw.
Ths offce has therefore concuded that whether or not the var-
ous transactons consttuted a reorganzaton or a consodaton wth-
n the meanng of secton 208 of the 1917 aw and secton 331 of the
1918 aw, the nvested capta for ether year may not ncude the
stock ssued to the stockhoders of the N Company, representng the
unreazed apprecaton based upon the apprasa n 1913.
Neson T. artson,
Soctor of Interna Revenue.
rtce 8C4: ffated corporatons: n- 111-20-15 2
vested capta. L. 0.1108
( so Secton 1331, rtce 1735.)
INCOM ND C SS-PRO ITS T S S CTION 208, R NU CT O 1917
S CTIONS 240 ND 331 O 1 T R NU CT O 1918 S CTION 1331 O
T R NU CT O 1921.
Transactons whch occurred between corporatons affated
wthn the meanng of the Revenue ct of 1917 or the Revenue ct
of 1918 but not durng a year for whch such corporatons fed a
consodated return, shoud not be emnated n computng, for sub-
sequent years, the consodated nvested capta of the affated cor-
poratons, uness the transactons occurred after March 3, 1917,
and fa wthn the provsons of secton 208 of the Revenue ct of
1917 or secton 331 of the Revenue ct of 1918.
The queston has arsen n connecton wth cases submtted to me
for opnon wth references to the emnaton of ntercompany trans-
actons n cases of consodated returns. The queston may be stated
as foows:
Where two or more corporatons are affated, shoud ntercompany
transactons, whch occurred at a tme when the corporatons were
affated but pror to the years for whch consodated returns of the
corporatons were fed, be emnated n preparng a consodated re-
turn of net ncome and nvested capta
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413
32 , rt, 8 4.
Secton 1331(a) of the Revenue ct of 1921 and secton 208 of
the Revenue ct of 1917 provde:
Sec. 1331. (a) That Tte II of tbe Revenue ct of 1917 sha be construed to
mpose the ta es theren mentoned upon the bass of consodated returns of
net ncome and nvested capta n the case of domestc corporatons and
domestc partnershps that were affated durng the caendar year 1017.
Sec. 208. That n case of the reorganzaton, consodaton or change of
ownershp of a trade or busness after March 3, 1017, f an nterest or contro
n such trade or busness of 50 er centum or more remans n contro of the
same persons, corporatons, assocatons, partnershps, or any of them, then n
ascertanng the nvested capta of the trade or busness no asset transferred or
receved from the pror trade or busness sha be aowed a greater vaue than
woud have been aowed under ths tte n computng the nvested capta of
such pror trade or busness f such asset had not been so transferred or
receved, uness suc asset was pad for specfcay as such, n cash or tangbe
property, and then not to e ceed the actua cash or actua cash vaue of the
tangbe property pad therefor at the tme of such payment.
nd sectons 240 and 331 of the Revenue ct of 1918 are as
foows:
Sec. 240. (a) That corporatons whch arc affated wthn the meanng of ths
secton sha, under reguatons to be prescrbed by the Commssoner wth the
approva of the Secretary, make a consodated return of net ncome and n-
vested capta for the purposes of ths tte and Tte III, and the ta es there-
under sha be computed and determned upon the bass of such return: Pro-
vded, That there sha be taken out of suc consodated net ncome and
nvested capta, the net ncome and nvested capta of any such affated cor-
poraton organzed after ugust 1,1914, and not successor to a then e stng bus-
ness, 50 per centum or more of whose gross ncome conssts of gans, profts,
commssons, or other ncome, derved from a Government contract or contracts
made between pr , 1917, and November 11, 1918, both dates ncusve. In
such case the corporaton so taken out sha be separatey assessed on the bass
of ts own nvested capta and net ncome and the remander of such affated
group sha be assessed on the bass of the remanng consodated nvested
capta and net ncome.
Sec 331. In the case of the reorganzaton, consodaton, or change of owner-
shp of a trade or busness, or change of ownershp of property, after March
3, 1917, f an nterest or contro n such trade or busness or property of 50
per centum or more remans n the same persons, or any of them, then no
asset transferred or receved from the prevous owner sha, for the purpose
of determnng nvested capta, be aowed n greater vaue than woud have
been aowed under ths tte n computng the nvested capta of such pre-
vous owner f suc asset had not been so transferred or receved: Provded,
That f such prevous owner was not a corporaton, then the vaue of any
asset so transferred or receved sha be taken at ts cost of acquston (at
the date when acqured by such prevous owner) wth proper aowance for
deprecaton, mparment, betterment, or deveopment, but no addton to the
orgna cost sha be made for any charge or e pendture deducted as e -
pense or otherwse on or after March 1, 1913, n computng the net ncome of
such prevous owner for purposes of ta aton.
The queston presented may be we ustrated by the use of a
hypothetca case. The Company and the Company are aff-
ated, and under the Revenue ct of 1917, as suppemented by sec-
ton 1331 of the Revenue ct of 1921, and under the Revenue ct
of 1918, the two companes are requred to fe a consodated return.
In computng the nvested capta of the affated group the ques-
ton arses as to whether a proft of 50,000 derved by the Com-
pany n 1915 from the sae by t of property to the Company
shoud be ncuded n computng the consodated nvested capta
that s, shoud the asset whch the Company sod to the Com-
pany be ncuded n the consodated nvested capta at ts cost to
the Company or at ts cost to the Company.
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32 , rt. 8 4.
414
Transactons between two affated corporatons occurrng durng
a year for whch the affated corporatons fe a consodated return
are ntercompany ones, whch shoud be emnated. Ths pont was
consdered and e pressy decded n Soctor s Opnon 131 (C. .
1-1, 18), and w not be dscussed further n ths opnon.
The soe queston for consderaton, therefore, s wth reference
to transactons whch occurred between affated corporatons dur-
ng the years pror to 1917, for whch years consodated returns were
not requred. Pror to the year 1917, the frst year of the statutory
requrement for consodated returns n the case of affated corpo-
ratons, corporatons were consdered as separate and dstnct ta -
abe enttes, even though one of the corporatons owned 100 per
cent of the stock of the other or others, or a of the stock of two
or more corporatons was owned by the same person or persons.
Dvdends pad by one corporaton to another corporaton, ownng
a of the stock of the frst corporaton, consttuted ta abe ncome
transactons between two corporatons, such as saes of property,
resuted n ta abe ncome or deductbe oss, n spte of the fact
that one of the corporatons owned 100 per cent of the stock of the
other. See Soctor s Opnon 131 and Law Opnon 1002 (C. .
4, 1 8).
Do the provsons of the Revenue cts of 1917 and 1918, requr-
ng a consodated return of net ncome and nvested capta for the
ta abe years 1917, 191S, 1919, and 1920, affect those transactons
whch occurred between corporatons pror to 1917 and whch were
gven fu force and effect n determnng the net ncome and re-
sutng ta abty of the corporatons for the earer years
constructon of the provsons of the Revenue ct of 1917, as sup-
pemented by the Revenue ct of 1921, and of the Revenue ct of
1918, requrng the emnaton of such transactons n computng
consodated nvested capta, woud be retroactve n ts effect. It
woud resut n gnorng, n computng the nvested capta of an
affated group for 1917 and subsequent years, transactons whch
occurred between the dfferent members of the group when the df-
ferent members were separate ta abe enttes: t woud resut n
gnorng transactons occurrng n pror years between the members
of the group, whch transactons were recognzed, for ncome ta
purposes, n the pror years as resutng n ta abe gan or n de-
ductbe oss.
There s no anguage n the provsons of the revenue cts requr-
ng consodated returns whch authorzes the gvng of a retroactve
effect to the sectons. In fact, the anguage of the sectons negatves
such a constructon. Secton 240 of the Revenue ct of 1918 requres
that corporatons whch are affated sha make consodated re-
turn of net ncome and nvested capta for the purposes of ths tte
and Tte III and the ta es thereunder sha be computed and deter-
mned upon the bass of such return. nd secton 1331 of the
Revenue ct of 1921 provded that Tte II of the Revenue ct of
1917 sha be construed to mpose the ta es theren mentoned upon
the bass of consodated return of net ncome and nvested capta,
There e sts at aw a very strong presumpton aganst any construc-
ton of a statute whch gves t a retroactve effect or whch makes t.
appy to transactons occurrng pror to ts passage. (Shwab v. Doye,
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415
32 , rt. 8 4.
decded by the Supreme Court May 1.1922, unreported to date d-
man v. Martnez, 184 U. S., 578 Whte v. Unted States, 191 t . S.,
545 Unted States v. Ieth, 3 Cranch, 398 Unted States v. urr,
159 U. S., 78.)
It s beeved, therefore, that the anguage of the sectons of the
cts requrng the fng of consodated returns does not requre, nor
n my opnon does t permt, a constructon whch woud be retro-
actve n ts effect and whch woud resut n gnorng, n computng
consodated nvested capta under the Revenue ct of 1917 and the
Revenue ct of 1918, transactons whch occurred pror to the years
for whch consodated returns were requred and whch were fuy
recognzed n determnng the net ncome and the resutng ta a-
bty of the corporatons for such pror years.
ddtona ght on the queston presented, f any s needed, s
gven by secton 331 of the Revenue ct of 1918 and the correspond-
ng secton of the Revenue ct of 1917. Secton 331 provdes that n
the case of the change of ownershp of property after March 3, 1917,
f an nterest or contro n such property of 50 per centum or more
remans n the same person or any of them, then no asset transferred
or receved from the prevous owner sha, for the purpose of deter-
mnng nvested capta, be aowed a greater vaue than woud have
been aowed n computng the nvested capta of such prevous
owner. Tn the supposttous case presented, there was a change of
ownershp of property pror to March 3,1917, and no nterest or con-
tro n such property of more than 50 per cent remaned n the same
persons. Thus, the transacton s precsey the one whch s covered
by secton 331, e cept that t occurred pror to March 3, 1917. The
natura nference to be drawn from secton 331 s that n the case of
such a change of ownershp before March 3,1917, the assets sha be
vaued as of the date of the transfer to the new corporaton, for the
purpose of determnng the nvested capta, and not at ts cost or
aowance vaue for nvested capta purposes to the former owner.
See Soctor s Opnon 41 (C. . 3, 3 4).
In vew of the above, t s my opnon that transactons whch
occurred between corporatons, affated wthn the meanng of the
Revenue ct of 1917 or the Revenue ct of 1918, but not durng a
year for whch such corporatons fed a consodated return, shoud
not be emnated n computng, for subsequent years, the conso-
dated nvested capta of the affated corporatons, uness the trans-
actons occurred after March 3, 1917, and fa wthn the provsons
of secton 208 of the Revenue ct of 1917 or secton 331 of the
Revenue ct of 1918.
rtce 8 4: ffated corporatons: nvested capta.
(See S. M. 1530 sec. 240, art. 37.) ueston of reducton of n-
vested capta by prorated amount of ta es due for precedng years.
aue at whch stock of subsdares purchased by parent company
shoud be ncuded n nvested capta.
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32 , rt. 8 5.
rtce 8 5: ffated corporatons: ntang- 111-13-14 0
be property pad n. . . R. 9 5
( so Secton 312, rtce 791.)
R NU CT O 1918.
Where n the case of a reorganzaton comng under secton 330,
Revenue ct of 1918, good w was n e stence both durng the
ta abe year and any prewar year and s ncuded In nvested capta
for the ta abe year but s not ncuded n nvested capta for
such prewar year, or s vaued on a dfferent bass n computng
the nvested capta for the ta abe year and such prewar year, re-
spectvey, then good w sha be ncuded n nvested capta for
the prewar year n an amount not e ceedng (n) ts actua cash
vaue at the begnnng of the prewar perod (b) an amount bear-
ng the same proporton to such actua cash vaue as the par vaue
of the stock ssued for good w at the tme of reorganzaton
bears to the actua cash vaue of good w at that me (c) n
the aggregate (wth other ntangbes) 2- per centum of the par
vaue of the tota stock or shares of the corporaton outstandng
on March 3, 1917, whchever s owest.
The Commttee has consdered the appea of the M Company
from the acton of the Income Ta Unt n appyng the fourth para-
graph of secton 330 n such a manner as to ncude good w n ts
prewar nvested capta at the same vauaton as n the ta abe vear
1918.
Inasmuch as the queston nvoved was one of aw t was submtted
to the Soctor and the Commttee has receved from the Soctor
the foowng opnon:
corporaton known as the O Company was organzed n 1892. It was re-
organzed n 1910, and on December of that year the M Company was ncor-
porated as ts successor. Durng ts e stence the O Company deveoped a
vauabe good w, hut no account therefor was ever kept on ts books, nor
was any ever purchased or pad n for stock. Upon the reorganzaton, however,
a good-w vaue was set up and stock ssued therefor.
n opnon s requested of ths offce upon the varous constructons of the
ast paragraph of secton 330 of the Revenue ct of 191S whch are suggested
by the Income Ta Unt and the Commttee as to the bass to be empoyed n
computng prewar nvested capta n respect to the asset good w for the pur-
pose of determnng the war profts credt.
Secton 311(a) of the 1918 ct reads as foows:
(a) That the war-profts credt sha consst of the sum of:
(1) specfc e empton of 3,000 and
(2) n amount equa to the average net ncome of the corporaton for the
prewar perod, pus or mnus, as the case may be, 10 per centum of the dffer-
ence between the average nvested capta for the prewar perod and the n-
vested capta for the ta abe year. If the ta s computed for a perod of
ess than 12 mouths such amount sha be reduced to the same proporton
thereof as the number of months n the perod s of 12 months.
The pertnent portons of secton 330 (frst and fourth paragraphs) are as
foows:
That In the case of the reorganzaton, consodaton, or change of owner-
shp after anuary 1, 1911, of a trade or busness now carred on by a corpora-
ton, the corporaton sha for the purposes of ths tte be deemed to have been
n e stence pror to that date, and the net ncome and nvested capta of
such predecessor trade or busness for a or any part of the prewar perod
pror to the organzaton of the corporaton now carryng on suc trade or
busness sha be deemed to have been the net ncome and nvested capta of
such corporaton.
If any asset of the trade or busness n e stence both durng the ta abe
year and any prewar year s ncuded n the nvested capta for the ta abe
year but s not Incuded n the nvested capta for such prewar year, or s
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417
32 , rt, 8 5.
vaued on a dfferent bass In computng the nvested capta for the ta abe
year and such prewar year, respectvey, then under rues and reguatons to
be prescrbed by the Commssoner wth the approva of the Secretary such
read|ustments sha be made as are necessary to pace the computaton of the
Invested capta for such prewar year on the bass empoyed n determnng the
nvested capta for the ta abe year.
Secton 32 s aso mportant n ths connecton, because t sets forth the
genera prncpes for determnng Invested capta, not ony for the ta abe
year, but as s ndcated n the ast paragraph thereof, for the prewar perod
as we.
Subdvson (4) thereof, whch appes n these cases, s as foows:
(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) n the aggregate 25 per centum of the par vaue of the tota
stock or shares of the corporaton outstandng on March 3, 1917, whchever s
owest.
The Income Ta Unt, n appyng secton 330 (supra), added to prewar
nvested capta an amount correspondng to the good w aowance n the
ta abe year.
The Commttee as suggested two soutons:
1. That n the computaton of prewar nvested capta good-w vaues
shoud be ncuded to the e tent that such vaues e sted at that tme, not to
e ceed n the aggregate 25 per cent of the par vaue of the tota stock or shares
of the corporaton outstandng at the begnnng of each prewar year .
2. The nvested capta n respect of good w for eac year of the prewar
perod, to be used n determnng the war profts credt, w be the same pro-
porton of the actua good-w vaue for each year of the prewar perod whch
the nvested capta for the ta abe year n respect of good w s of the actua
good-w vaue tor the ta abe year.
The Commttee s suggested soutons appear to gve to the term bass the
sense of fundamenta prncpes. Ths, t s beeved, s authorzed (see
Cent. Det. Webster s New Inter. Det.) and, consderng ts conte t, prefer-
abe to the nterpretaton of the Unt, whch s to the effect that t means the
actua fgures or amounts used. of these soutons are, however, sub|ect
to crtcsm. In that they do not appy a or as neary a as possbe of the
same fundamenta prncpes n computng prewar nvested capta as are
empoyed n determnng nvested capta for the ta abe year, . e., those set
forth n secton 320(4) (supra).
Secton 330 (supra) requres a supposton that the successor corporaton
was n e stence snce pror to anuary 1, 1911, and that therefore, the read-
|ustments to be made n order to pace the computaton of nvested capta
upon the same bass as that empoyed n the ta abe year woud seem to
necesstate the settng up of hypothetca fgures for some of the factors present
n the ta abe-year bass but ackng n that of the prewar year or years. Of
those factors, fgures for frst and thrd ony are present for the prewar perod,
(n) the actua cash vaue of the asset, and (c) 25 per centum of (e par
vaue of the stock outstandng on March 3. 1917. The second factor, (b) the
par vaue of the stock or shares ssued for the asset, does not e st because
stock was not ssued for good w unt after those years. Ths test, however,
s essentay concerned ony wt the rato of par vaue stock to the actua
vaue of the ntangbes for whch t was ssued.
To compete the bass n accordance wth that empoyed n the ta abe year
t woud, therefore, appear necessary to assume that stock had been ssued
for good w n the same proporton to actua vaue as was n reaty done n
the reorganzaton.
In other words, where n the case of a reorganzaton comng under secton
330, Revenue ct of 1918, good w was n e stence both durng the ta abe
year and any prewar year and Is ncuded n nvested capta for the ta abe
year but s not ncuded n nvested capta for such prewar year, or s vaued
on a dfferent bass n computng the nvested capta for the ta abe year and
such prewar year, respectvey, then good w sha be ncuded n nvested
capta for the prewar year n an amount not e ceedng ( ) ts actua cash
vaue at the begnnng of the prewar perod (b) an amount bearng the same
proporton to such actua cash vaue as the par vaue of the stock ssued for
good w at the tme of reorganzaton bears to the actua cash vaue of good
w at that tme (c) In the aggregate (wth other ntangbes) 25 per centum
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327, rt. 901.
418
of the par vaue of the tota stock or shares of the corporaton outstandng on
March 3, 1017, whchever s owest
The concusons heren e pressed are beeved to be not nconsstent wth
artce 934 of Reguatons 45. That reguaton smpy provdes that the dffer-
ence resutng from the nonncuson of the asset n nvested capta, etc., sha
not be ncuded n determnng the dfference, 10 per cent of whch s added to
or deducted from the war profts credt under secton 311 (a)2. It prohbts
the ncuson of 10 per cent of the dfference n the war profts credt where
the asset s not ncuded n the prewar nvested capta but s ncuded n the
nvested capta for the ta abe year or s ncuded at a dfferent vaue than
n the prewar year where, however, nvested capta for the prewar year s
reconstructed under secton 330 and the asset s vaued on the same bass as
n the ta abe year, then the prohbton aganst the ncuson of 10 per
cent of the dfference does not appy. The effect of ths opnon s, therefore,
not to overrue the reguaton, but merey to ampfy t. Nether s the genera
rue set forth n . R. R. 709 (C. R. 1-1, 374-382) n confct wth the forego-
ng. There may be a seemng dfference n the appcaton of the prncpes,
but, as s ndcated by the dscusson on page 382, ths may be attrbuted to the
pecuar facts of that case.
The Commttee recommends that the appea be sustaned and that
good w be ncuded n the appeant s prewar nvested capta on
the bass of a computaton made pursuant to the foregong opnon
of the Soctor.
Chares D. ame,
Charman Commttee on ppeas and Revew.
S CTION 327. SP CI L C S S.
rtce 901: Treatment of speca cases. III-13-14 1
SoL Op. 158
C SS PRO ITS T , S CTION 210, R NU CT OP 1917 S CTIONS 327
ND 328, R NU CT O 1918.
Speca assessment under secton 210, Revenue ct of 1917, or
secton 328, Revenue ct of 1918, s not requred when the ta
computed under secton 201, Revenue ct of 1917, or secton 301,
Revenue ct of 1918, upon the bass of the known nvested capta
s ess than that computed under speca assessment.
The opnon of ths offce has been requested reatve to the app-
caton of secton 210 of the evenue ct of 1917 and sectons 327 and
328 of the evenue ct of 1918 n cases where a part of nvested
capta can be determned and a part can not, wth a specfc refer-
ence to the cases of the M Company, O Company, P Company, and
the Company.
In these cases the statutory nvested capta coud not be fuy
determned because certan tems whch shoud have been captazed
were charged to e pense pror to the ncdence of the ncome ta
aws, and, owng to the nadequacy of the ta payer s records, coud
not be restored to surpus.
Two theores have been suggested for the treatment of such cases
frst, that the ta be assessed under the speca assessment secton,
e cept for those years for whch the ta computed upon the bass
of such statutory nvested capta as the ta payer coud estabsh was
ess than the ta computed under sectons 210 and 328. The other
constructon, whch s based argey on subdvson (a) of secton
327, evenue ct of 1918, s to the effect that f the nvested capta
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419
( 327, rt. 901.
for any year can not be fuy estabshed t s mproper to compute
the ta for such year upon nvested capta as a bass.
The statutory provsons referred to are, so far as pertnent, as
foows:
R NU CT O 1SI17.
Sec. 210. That f the Secretary of the Treasury s unabe n any case
satsfactory to determne the nvested capta, the amount of the deducton
sha 1 . (The statute then prescrbes how the deducton sha be
arrved at.)
U CT O 1918.
Sec 327. That n the foowng cases the ta sha be determned as provded
n secton 328:
(a) Where the Commssoner s unabe to determne the nvested capta as
provded n secton 320
( ) In the case of a foregn corporaton
(c) Where a m ed aggregate of tangbe property and ntangbe property has
been pad n for stock or for stock and bonds and the Commssoner s unabe
satsfactory to determne the respectve vaues of the severa casses of prop-
erty at the tme of payment, or to dstngush the casses of property pad n
for stock and for bonds, respectvey
(d) Where upon appcaton by the corporaton the Commssoner fnds nnd
eo decares of record that the ta f determned wthout beneft of ths secton
woud, owng to abnorma condtons affectng the capta or ncome of the
corporaton, work upon the corporaton an e ceptona hardshp evdenced by
gross dsproporton between the ta computed wthout beneft of ths secton
and the ta computed by reference to the representatve corporatons specfed
n secton 32S.
rtce 52 of Reguatons 41 s aso quoted n part, because t repre-
sents the ureau s nterpretaton of the statutory anguage of sec-
ton 210: If the Secretary of the Treasury s unabe n any case
satsfactory to determne the nvested capta.
- rt. 52. Scope of secton 210. Secton 210 provdes for e ceptona cases n
whch the nvested capta can not be satsfactory determned. (See
artces 18 and 24.) Such e ceptona cases may consst, among others, of tte
foowng:
(1) Where, through defectve accountng or the ack of adequate data, t Is
mpossbe accuratey to compute nvested capta.
(2) Where upon appcaton by a foregn ta payer the Secretary of the
Treasury fnds that the e pense of securng the data necessary for the computa-
ton of the nvested capta woud be unreasonabe n vew of the amount of
ta nvoved, or that t s mpractcabe to determne ether the entre nvested
capta or the entre net ncome.
(3) Long-estabshed busness concerns whch by reason of utraconservatve
accountng or the form and manner of ther organzaton woud, through the
operaton of secton 207, be paced at a serous dsadvantage n competng
wth representatve concerns n a ke or smar trade or busness.
(4 Where the nvested capta s serousy dsproportonate to the ta abe n-
come.
The queston then may be resoved as foows: Does the anguage
f the Secretary of the Treasury s unabe n any case
satsfactory to determne the nvested capta, n the 1917 ct, or
where the Commssoner s unabe to determne the nvested cap-
ta as provded n secton 32 , as n the 1918 ct, ndcate that n
cases where a part of the nvested capta can be determned, and a
part can not, the ta must be computed under the speca assessment
sectons or reduced to ts owest terms Do the words, the nvested
capta mean a of the nvested capta
Under sectons 201 of the 1917 ct and 301 of the 1918 ct nvested
capta s made an essenta eement n the bass for computng the
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327, rt. 901. 420
ta . In commentng upon the statutory defntons the Supreme
Court has sad:
that t was the domnant purpose of Congress to pace the pecuar
burden of ths ta upon the ncome of trades and busnesses e ceedng what
was deemed a normay reasonabe return upon the capta actuay embarked.
ut f such capta were to be computed accordng to apprecated market vaues
based upon the estmates of nterested partes (on whose returns perforce the
Government must n great part rey), e aggeratons woud be at a premum,
correctons dffcut, and the ta easy evaded. Secton 207 shows that Con-
gress was fuy ave to ths and desgnedy adopted a term nvested cap-
ta and a defnton of t, that woud measuraby guard aganst nfated
runatons. (La ee Iron Works v. Unted States, 25 U. S., 378-387.)
It seems obvous that when a bass for assessng the ta s ds-
cosed, and when t s ascertaned that no e aggerated raues, bor-
rowed money, etc., are ncuded n nvested capta, the purposes of
sectons 207 of the 1917 ct and 32 of the 1918 ct have been
satsfed.
Nowhere throughout the debates n Congress nor n ts commttee
reports upon the 1918 ct nor n the reguatons under the 1917 ct,
s any ntenton evnced that the speca assessment sectons shoud
be apped when a workabe nvested capta bass s dscosed, e -
cept n those abnorma cases where otherwse e ceptona hardshps
or dsadvantages woud be sustaned by ta payers. On the contrary,
they were constanty referred to as reef measures, and are so
characterzed n Law Opnon 1109 (C. . 1-2, 253).
Nor does the anguage of ether ct, above quoted, necesstate these
sectons beng construed to ncrease the ta over the resut arrved at
by the usua procedure. It has been |udcay sad that n decdng
whether or not the defntve ad|ectve the shoud be construed to
mean a of the much must of necessty be eft to the conte t,
and to the ob|ects and purposes of the statute n whch t s found.
( nundsen v. Standard Prntng Company (a.), 105 N. W., 424,
42 .) Certany t s atogether possbe and practcabe to compute
the ta under sectons 201 of the 1917 ct or 301 of the 1918 ct
even though there may be n addton to the ascertanabe tems of
nvested capta other vaues or capta e pendtures whch, because
of nsuffcent data, can not be proven. nd t does not seem con-
sstent wth secton 327(d) of the 1918 ct to say that speca assess-
ment shoud be enforced where, by the ordnary method, no e cep-
tona hardshp s worked upon the ta payer. (See Law Opnon
1109. supra.)
In . R. R. 209 (C. . 3, 3 0), construng the 1917 ct, t was sad:
The ta payer shoud not be deprved of hs rght to have the assessment tased
upon such statutory nvested capta as he can show .
Ths offce, therefore, concudes that speca assessment s not re-
qured by ether the Revenue ct of 1917 or the Revenue ct of 1918
when the ta computed upon the bass of the known nvested capta
s ess than that computed under speca assessment. Ths, of course,
has no bearng on such cases as are provded for n subdvson 2,
artce 52, Reguatons 41, and secton 327(b), Revenue ct of 1918,
referrng to foregn corporatons, nor to secton 327(c) of the 1918
ct whch has to do wth cases where tangbe and ntangbe vaues
can not be segregated from a m ture of both.
Neson T. aktson,
Soctor of Interna Revenue,
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421
331, rt. 941.
P RT I. R ORG NIZ TIONS.
111-11-142
. R. . 712
On anuary , 1918, , the soe owner of the capta stock
of the I Company, a corporaton, conveyed to the corporaton
certan rea estate for the same cash consderaton t had cost
hm. Ths rea estate at the tme of transfer was apprased at
a vaue far n e cess of cost.
ed, that snce an nterest or contro n the corporaton of 50
per cent or more remaned n , and the transfer took phce sub-
sequent to March 3, 1917, secton 331 of the Revenue ct of 1918
s appcabe and the e cess of the apprased vaue over the cost
to the corporaton and pror owner shoud be dsaowed n comput-
ng nvested capta.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt n dsaowng 29.91| doars,
camed as a pad-n surpus n respect to certan rea estate.
was the soe owner of a the capta stock of the M. Company,
ncorporated une , 190-. under the aws of the State of S to carry
on the busness of a department store. On anuary , 1918,
conveyed to the corporaton certan rea estate for a cash consdera-
ton of 10. 8a doars. t the tme of the transfer the rea estate
was apprased at a vaue of 40.59a doars. ppeant has n-
cuded the dfference between the purchase, prce and the apprased
vaue, namey, 29.91# doars, as a part of ts nvested capta n the
form of pad-n surpus. Ths amount has been dsaowed by the
Income Ta Unt on the theory that the transfer havng taken
pace subsequent to March 3, 1917, the vaue of the rea estate for
nvested capta purposes must be mted to ts cost to at the
tme of ts acquston by hm of 10. 8./ doars, whch was kewse
the cash cost to appeant.
ppeant contends that the cam for a pad-n surpus shoud be
consdered n accordance wth secton 32 of the Revenue ct of
1918 and artces 83 -837, Reguatons 45, wthout reference to sec-
ton 331 of the same ct and artce 941, Reguatons 45. It s aso
contended that secton 331 and artce 941 are not appcabe to
tangbe property when the same s pad n to a corporaton as pad-
n the opnon of the Commttee, the anguage of secton 331 s un-
ambguous and therefore not open to constructon. Secton 32 ays
down the genera defnton of nvested capta. Secton 331 makes
an e cepton to the genera rue n the case of a change of owner-
shp of property subsequent to March 3, 1917. where an nterest or
contro of 50 per cent or more remans n the same persons. In ths
case t s not dsputed that there was a change n the ownershp of
property after March 3, 1917, and that an nterest or contro n such
property of 50 per centum or more remaned n the same person. In
such cases secton 331 provdes:
That f such prevous owner was not a corporaton, then the vaue of any
asset so transferred or receved sha be taken at ts cost of acquston (at the
date when acqured by such prevous owner)
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51300, 1307. and 1308, rt. 1711. 422
The anguage of the statute as appcabe to ths case s so cear
that no e tended argument as to the theores underyng sectons 32
and 331 s deemed necessary. The Commttee s not caed upon to
pass upon the queston of the appcaton of secton 331 f appeant
had pad cash for the rea estate n an amount n e cess of or ess
than the orgna cost to the pror owner.
fter carefu consderaton of a of the evdence of record, to-
gether wth the arguments made at the ora hearng, the Commttee
concudes that the Unt s acton n dsaowng a pad-n surpus of
29.9I doars, representng the e cess of apprased vaue of the rea
estate at date of acquston by appeant over cost to the corpora-
ton and cost to the pror owner, s n compance wth secton 331
of the Revenue ct of 1918 and artce 941 of Reguatons 45. as
amended by Treasury Decson 3259 (C. . 5, 313), and shoud be
sustaned.
ccordngy, the Commttee recommends that the appea be dened.
Chares D. ame,,
Charman Commttee on ppeas and Revew,
TITL III. G N R L DMINISTR TI
PRO ISIONS.
S CTIONS 1300, 1307, ND 1308. L WS M D PPLI-
C L R TURNS MIN TION O
OO S ND WITN SS S.
rtce 1711: ds to coecton of ta es. III-7-13
T. D. 354
G N R L DMINISTR TI PRO ISIONS R NU CT O 1921 D CISION
O COURT.
1. amnaton of ooks and ecokds.
The Government has the rght to requre the empoyees or
agents of a bank who know facts as to deposts or nvestments or
any deangs of partes who owe ncome ta es to testfy to the
entres made on the books of the bank reatng to such transactons.
2. Same Consttutona Rnrrs Searches and Sezures.
The fourth amendment to the Consttuton, whch prohbts Tn-
reasonabe searches and sezures, does not authorze a thrd person
who has books and papers whch may he reevant to edera ta
abty to refuse to produce such books or papers and testfy
as to the facts.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue- and others concerned:
The foowng decson of the Unted States Dstrct Court for the
Southern Dstrct of abama n the case of Unted States v. rst
Natona ank of Mobe s pubshed for the nformaton of nterna
revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 7, 1924.
. W. Meon,
Secretary of the Treasury.
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423 1300 1307, and 1308, rt. 1711.
kvtn, Dstrct udge: Ths s a petton fed uuder secton 1,310 of te Rev-
enue ct of 1921, voume 43, part 1, of the Pubc Laws of 1921-2.3, page 312,
askng the assstance of the court to requre the rst Natona Pank to fur-
nsh nformaton as to the transactons had by Wam . auou and hs
wfe, nne . anon, wth the bank nvovng deposts of money and nvest-
ments by sad unon and hs wfe.
Secton 1308 provdes:
That the Commssoner, for the purpose of ascertanng the correctness of
any return or for the purpose of makng a return where none has been made,
s hereby authorzed, to e amne any books, papers, records, or memo-
randa bearng upon the matters requred to be ncuded n the return, and
may requre the attendance of tte person renderng the return or of any offcer
or empoyee of such person, or the attendance of any other pernon havng
knowedge n the premses, and may take hs testmony wth reference to the
matter requred by aw to be ncuded n such return, wth power to admnster
oaths to such person or persons. Itacs mne.
Secton 1310(a) provdes:
That f any persons summoncd under ths ct to appear, to testfy, or to
produce books, papers or other data, the Dstrct Court of the Unted States
for the dstrct n whch such person resdes sha have |ursdcton by appro-
prate process to compe such attendance, testmony, or producton of books,
papers, or other data.
Secton 1300 provdes:
nd every person abe to any ta mposed by ths ct, or for the coecton
thereof, sha keep such records and render, under oath, such statements and
returns, and sha compy wth such reguatons as the Commssoner, wth the
approva of the Secretary, may from tme to tme prescrbe.
The petton sets out that the sad nnon and hs wfe have not made fu,
true, and correct statements of ther respectve ncomes of the years 1918, 1919,
1920, 1921, and 1922, and that the edgers and other books of te bunk contan-
ng the accounts of the sad anons w be of matera assstance to the Unted
States n arrvng at the true and correct ncomes of sad ndvduas of te
respectve years. That summons to appear nnd testfy and produce te books
had been served on D. P. Pester, r., as presdent of the hank, and that the sad
bank and ts offcers had faed to appear at the tme and pace desgnated n
the summons and they now refuse to appear and permt the duy authorzed
agents of the nterna revenue of te Unted States to have access n any man-
ner to the records and accounts of sad bank and prays for te assstance of
the court to requre the bunk offcers and empoyees to testfy and the bank to
produce ts books and accounts.
Sad bank refuses to testfy and produce the hooks and contends that they
ore protected by the fourth amendment to the Consttuton from dong so. s
1 understand the fourth amendment, t protects te partes to crmna prosecu-
ton aganst unreasonabe searches and sezures of ther papers and I do not
understand ths to authorze a thrd party who has books and papers whch
may e reevant to the nqury to refuse to produce such books and papers be-
cause of ths amendment.
Ths s not a queston of a search and sezure of a party s books and papers
but of whether a wtness who has nformaton as to a party s deangs may be
requred to testfy to those facts and produce book entres as to such entres n
connecton wth and supportng such testmony.
The bank further contends I bat there s no specfc showng of any deposts
or nvestments by te anons or to the materaty of te bonks and entres
In the hr.nk accounts aganst sad anon. It s true that such entres as may
be found n the bank s books wthout more are nadmssbe aganst anon
and wfe as showng any ncome receved by them, but the bank not ony refuses
to produce the books but refuses to have ts presdent testfy as to the facts.
Many cases have been read to me where evdence had been sought under
subptena duces tecum and ob|ecton has been made that no showng of the
materaty and reevancy of ths evdence bad been made. In the present
matter, however, t appears cear to me that f nnon and wfe are shown
by the testmony of the agents and empoyees of the hank to have deposted
funds n the bank at varous dates and to have made nvestments n securtes
that the entres n the books n connecton wth the testmony of te offcers
and agents of the bank as to transactons w be oth matera and reevant
aganst anon and hs wfe to show moneys or ncome whch they had
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1300, 1307, and 1308, rt. 1711. 424
receved. It Is not necessary to say that many accounts In the bank are
accounts of partes who hande money for other partes and don t show any
Indvdua recept of ncome n such cases of fducary funds. These trans-
actons, of course, ke those of use of funds comng In fducary reaton,
can he e paned, but unt e paned they tend to show Income receved.
Nor s t any e cuse for refusng to testfy and gve the facts to say that
moneys whch pass through a man s bank account are not aways ncome re-
ceved by hm. Ths may be conceded, and yet It s evdence from whch n-
come can be nferred and does tend to show ncome. Lke other transactons,
however, t may be e paned by anon and wfe.
It s monstrous, t seems to me, to say that because sometmes money whch
s deposted In banks doesn t show ncome and because the bank desres to
protect the deangs of ts customers from unauthorzed nvestgaton by
thrd partes, that the Government coud not nqure as to the moneys of ts
ctzens who owe ncome ta es and trace these moneys through ts varous
agences, such as natona banks, In order to ascertan the correct ncome ta
that s owng by the ctzen.
. or these reasons I am of the opnon that the Government has the
rght to requre any of the empoyees or agents of a bank who know facts as
to deposts or nvestments or any deangs of partes who owe ncome ta es
to testfy to the entres made on the books of the bank as to such transactons
so the Government may be correcty nformed as far as possbe of the ncome
whch has been receved by ts ctzens.
n order w therefore be ssued orderng the bank to furnsh the nforma-
ton desred.
htce 1711: ds to coecton of ta es. III-8-1379
I. T. 1929
R NU CT O 1921.
There s no specfc provson of aw mposng a penaty for
faure to keep permanent records. If a defcency n ta s ds-
covered n the case of a ta payer who coud have ready ascer-
taned hs correct ta abty by mantanng permanent records
n accordance wth the provson of Treasury Decson 3408, such
ta payer woud be abe to the 5 per cent penaty and 1 per cent
per month nterest mposed by secton 250(b) of the Revenue ct
of 1921.
There s no specfc provson of aw mposng a penaty for faure
to keep permanent records. Secton 250(b) of the Revenue ct of
1921, n reference to defcences n ta , provdes n part as foows:
If any part of the defcency s due to neggence or ntentona ds-
regard of authorzed rues and reguatons wth knowedge thereof, but wthout
ntent to defraud, there sha be added as part of the ta 5 per centum of the
tota amount of the defc ency In the ta , and nterest n such a case sha be co-
ected at the rate of 1 per centum per month on the amount of such defcency n
the ta from the tme t was due (or, f pad on the nstament bass, on the
amount of the defcency In each nstament from the tme the nstament was
due), whch penaty and nterest sha become due and payabe upon notce an
demand by the coector.
ccordngy, f a defcency n ta s dscovered n the case of a
ta payer who coud have ready ascertaned hs correct ta abty
by mantanng permanent records n accordance wth the provsons
of Treasury Decson 3408 (C. . 1-2, 2 0), such ta payer woud
be abe to the 5 per cent penaty and 1 per cent per month nterest
mposed by secton 250(b) of the Revenue ct of 1921. If t becomes
necessary for the coector or deputy coector to prepare a return un-
der secton 317 of the Revsed Statutes and the ta payer refuses
to suppy any nformaton whch he has bearng on matters requred
to be ncuded n the return, the ta pa| er w, of course, be abe to
the penates mposed by secton 253 of the Revenue ct of 1921.
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425
1303, rt. 1800.
S CTION 1303. RUL S ND R GUL TIONS.
rtce 1800: Promugaton of reguatons.
III-3-1317
Mm. 317
Procedure wth respect to submttng nqures to the ureau
of Internn Revenue regardng tu abty.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, anuary 12, 192. ,.
Coectors of nterna revenue, nterna revenue agents n charge,
offcas and empoyees of the ureau of Interna Revenue, and
others concerned:
Requests are beng receved day for rungs and advce upon
abstract cases or prospectve transactons nvovng questons of n-
come ta and profts abty. These requests are so numerous and
the nsstence on prompt acton so great that t seems advsabe at
ths tme defntey to outne the ureau s pocy whch w govern
the consderaton of these requests.
The Revenue cts of 1918 and 1921 depart wdey at many ponts
from pror aw or practce, and have gven rse to new questons of
such mportance, compe ty, and number that the resources of the
ureau are no more than adequate to advse ta payers prompty of
ther present abtes arsng out of past transactons. It s m-
possbe to answer every queston whch the nventon or ngenuty
of the nqurer may devse wthout negectng the fundamenta duty
of determnng ta abty upon the bass of actua happenngs.
Under these crcumstances, the admnstratve necessty s obvous
of gvng precedence over abstract or prospectve cases to actua cases
n whch the ta payer desres to know what are hs mmedate a-
btes under the aw.
It w be the pocy of the ureau not to answer any nqury e -
cept under the foowng crcumstances:
(a) The transacton must be competed and not merey proposed
or panned.
(b) The compete facts reatng to the transacton, together wth
abstracts from contracts, or other documents, necessary to present
the compete facts, must be gven.
(c) The names of a the rea partes nterested (not dummes
used n the transacton) must be stated, regardess of who presents
the queston, whether attorney, accountant, ta servce, or other
representatve.
(d) request for a rung must be sgned by the ta payer, or n
case e s represented by an attorney or agent, the request must be
accompaned by propery e ecuted power of attorney. anks, how-
ever, w not be requred to furnsh powers of attorney wth respect
to nqures affectng ther depostors..
(e) copy of a rung addressed to a ta payer w not be fur-
nshed to hs attorney or agent uness the ureau s specfcay au-
thorzed to do so by the ta payer.
D. . ar, Commssoner.
4177 24-
2S
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1318,1319, and 1320, rt. 1050. 42
S CTIONS 1318, 1319, ND 1320. LIMIT TIONS UPON
SUITS ND PROS CUTIONS.
rtce 1050: Suts for recovery of ta es erro- III-9-1395
neousy coected. T. D. 3552
INCOM T SUIT TO R STR IN COLL CTION O T D CISION O COURT.
1. In|uncton Dstrant Secton 3224, Revsed Statutes.
Under the provsons of secton 3224, Revsed Statutes, n|unc-
ton w not e to restran a coector from the coecton by ds-
trant of a edera ta .
2. Same Remedy at Law.
n aegaton that dstrant s a sut or proceedng and s
barred after ve years from the fng of a return by secton
250(d) of the Revenue ct of 1921 does not gve a edera court
|ursdcton to restran a coector, there beng an adequate remedy
at aw by payng the ta and sung for ts recovery.
3. Case oowed.
Graham v. du ont (2 2 U. S., 234 T. D. 348 C. . 11-1, 220 ).
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To coectors of nterna revenue and others concerned:
The appended decson of the Unted States Crcut Court of
ppeas for the fth Crcut n the case of M. . ashara v. Geo. C.
opkns, coector, s pubshed for the nformaton of nterna
revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 18, 1924.
. W. Meon,
Secret art/ of the Treasury.
In the Unted States Crcut Court of ppeas, fth Crcut.
II. /. ashara, appeant, v. Geo. C. I o|kns, coector of nterna revenue,
appeee.
ppea from the Dstrct Court of the Unted States for the Northern DUtrct of Te as.
The appeant fed hs h n equty to en|on the appeee, ndvduay and
as coector of nterna revenue, from evyng a dstrant to coect the sum of
2,522.(54, assessed aganst the appeant by the Commssoner of Interna
Revenue.
The b avers that on pr 1, 1918, the appeant fed wth the coector of
Interna revenue an ncome ta return for the year 1917 showng a tota ta
abty of ,904.81, whch he prompty pad that on March 17, 1923. the
Commssoner of Interna Revenue notfed the appeant that hs tota ta
abty for the year 1917 was 2,522. 4 n e cess of hs return, and that au
assessment for ta es n the addtona amount woud be made that such
assessment was made, and thereafter, on pr 2, 1923, the appeee made a
wrtten demand for payment that the appeant Is possessed of vauabe
property consstng chefy of rea estate, and aso has on depost In varous
banks the money necessary for the conduct of hs busness, for the mantenance
of hmsef and famy, and for the payment of hs obgatons and that the
appeee, uness en|oned, woud seze the sad bank accounts and approprate
the same to the satsfacton of the assessment for ta es.
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427 1318,1319, and 1320, rt. 1050.
The dstrct court dened the appcaton for an n|uncton, and upon ap-
peee s moton dsmssed the b of compant.
The b does not aver that the assessment s ncorrect, and t s a far
nference from the averments t does contan that the appeant s ampy abe
to pay the amount whch the Government s seekng to coect. We are of
opnon that the appeant has an adequate remedy at aw, n that he may,
after payng the amount of the assessment, sue the coector for ts return.
We take |udca notce that pr 1, 1923, fe on Sunday. The st contanng
the assessment aganst the appeant was n the hands of the coector n
Te as on Monday, pr 2, 1023. and must therefore have been sgued by the
Commssoner of Interna Revenue and maed from Washngton before the
1st day of that mouth. It thus appears that the assessment was made wthn
the statutory perod of fve years from the date of appeant s return, whch
was fed pr 1, 1918.
The b s sought to be mantaned upon the theory that under secton
250(d) of the Revenue ct of 1921 (42 Stat., 227), any proceedng for the
coecton of tu es for the year 1917 s barred, because fve years had eapsed
snce the appeant fed hs return, and that R. S. secton 3224, whch provdes
that no sut for the purpose of restranng the assessment or coecton of
any ta sha be mantaned n any court, s nappcabe. The Supreme
Court has rued drecty aganst ths poston n raham v. duPont (2 2 U. S ,
234). In that case the assessment was made after the e praton of the
statutory perod, but t was hed nevertheess Uat n|uncton woud not e,
because of secton 3224. It Is true n ths case, as t was In the cted case,
that under the ct of March 4, 1923 ( 42 Stat, 1004), the companant has
two years after payment of the ta to brng sut to recover t hack, n whch
sut he can rase any queston affectng the vadty of the assessment.
The order of the dstrct court s affrmed.
(Orgna fed December , 1923.)
rtce 1050: Suts for recovery o ta es erro- III-10-140S)
neousy coected. T. D. 35GU
ncome ta sut to restran coecton of ta decson of co rt.
In|uncton Dstbant.
Where a ta for the year 1917 s assessed wthn fve years
from the date the return was fed, as prescrbed by secton 250(d)
of the Revenue ct of 1921, n|uncton w not e to restran a
coector from proceedng by dstrant, athough the dstrant
warrant s ssued after fve years from the date of the fng of
the return.
Treasury Department,
Offce of Commssoner of Interna evenue,
Washngton, D. O.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Dstrct Court for
the Northern Dstrct of New York n the case of nne . Wther-
ee v. Cyrus Durey, coector, s pubshed for the nformaton of
nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 2 , 1924.
. W. Meon,
Secretary of the Treasury.
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1318, 1319, and 1320, rt. 1050. 428
Unted States Dstrct Court, Northern Dstrct of New York.
nne . Wtherbee, companant, v. Cyrus Durey, Indvduay, and as Coector
of Interna Revenue for the ourteenth Dstrct of New York, defendant.
Cooper, .: Ths s a sut for nn n|uncton restranng the coector of n-
terna revenue for the fourteenth dstrct of New York from e ecutng a war-
rant of dstrant ssued aganst the pantff for the coecton of an aeged
addtona ncome ta aganst her for the year 1917, amountng, wth nterest
and penaty, to the sum of S,542.9 . The pantff rees on secton 250(d) of
the Revenue ct of 1921.
Though the warrant of dstrant was not ssued unt after n e years from
the date of fng the return for the year 1917, the assessment of the aeged
addtona ta , and two demands for payment, were made upon the pantff
wthn fve years from the date of fng the return. y reason of such assess-
ment and demands, secton 250(d) of the Revenue ct of 1921, on whch the
pantff rees, does not appy. The facts trng the case nto cose anaogy to
Graham v. duPont (202 T. S., 234 T. D. 348 C. . II-, 2 (5)). whch s con-
trong here. See aso a hara v. optns (290 ed.. 592 T. D. 3552. see
p. 42 .)
ad no assessment, demand, or attempt to coect the ta been made wthn
the fve-year perod pantff woud have been entted to the reef sought.
The temporary n|uncton s dened. The moton of the defendant for the
dsmssa of the compant s granted.
rtce 1050: Suts for recovery of ta es erro- III 14 1487
neons v coected. T. D. 3572
( so Secton 250, rtce 1009.)
R NU CT O 1921 INCOM T SUIT TO R STR IN COLL CTION-
D CISION O COURT.
1. In|uncton Dstrant Secton 3224, Revsed Statutes.
Under the provsons of secton 3224, Revsed Statutes, n|unc-
ton w not e to restran a coector from the coecton by ds-
trant of a edera ta .
2. Dstrant Lmtaton.
n aegaton that dstrant s a sut or proceedng and s
barred after fve years from fng of a return by secton 250 (d) of
the Revenue ct of 1921 does not gve a edera court |ursdcton
to restran the coector, there beng an adequate remedy at aw
by payng the ta and sung for the recovery. .
3. Case owwkd.
Graham v. du ont (2 2 U. S., 234 T. D. 348 C. . II-, 22 ).
Treast|rt Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted Staes Crcut Court of p-
peas for the Seventh Crcut n the case of Leon Sgman v. Mabe 0.
Reneckc, coector, s pubshed for the nformaton of nterna reve-
nue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved March 27, 1924.
. W. Meon,
Secretary of the Treasury.
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429 1318, 1319, and 1320, rt. 1050.
In the Unted States Crcut Court of ppeas for the Seventh Crcut.
No. 3350. October Term, 1923, anuary Sesson, 1924.
Leon Sgman, appeant, v Mabe O. Rcnccke, Indvduay and as Coector of
Interna Revenue or the rst Dstrct of Inos, appeee.
ppea from the Dstrct Court of the Unted States for the Northern Dstrct of Inos,
astern Dvson.
efore schuer, vans, and Page, Crcut udges.
schuer, Cr. .: The appea s from decree dsmssng, on moton, b
for n|uncton to restran the Unted States coector of nterna revenue from
coectng an e cess-profts ta for the year 1917.
Pror to pr 1, 191S, a return for the ta of the prevous year was fed
and the amount of the ta as returned was pad. There was afterwards
further assessment made, reduced n part, and the baance pad n September,
1922. In ebruary, 1923, notce was gven of further tu abty for 1017
of 1,45 .51, and appeant was nformed therewth that he mght appea
from such ta but woud be requred to e ecute a waver of the statutory
mtaton. e refused to make waver, and dd not appea. The b states
that after pr 1, 1923, the coector made demand of payment, and threatened
sezure of appeant s property, aegng rreparabe n|ury f ths were carred
out, and prays temporary and permanent n|uncton upon the ground that
there was no rght or power n the coector to proceed wth the coecton of
the ta after apse of fve years from the makng of the orgna return under
secton 250(d) of the Revenue ct of 1021, whch provdes:
nd 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, or of
any ta es due under secton 38 of such ct of ugust 5, 1000, sha be begun
after the e praton of fve years after the date when such return was ted.
or the Government t s contended that words sut or proceedng, as
empoyed n the ct, hare reference ony to |udca acton, and do not ncude
dstrant or other e ecutve acton for the purpose of coectng a ta that
n ths case the b shows the ta to have been assessed wthn the fve-year
perod, and that f the word proceedng s broad enough to ncude any
acton for coectng the ta , the assessment of the ta was a proceedng
commenced wthn the fve-year perod and that n any event n|unctve
reef aganst coecton of the ta s forbdden by secton 3224, Unted States
evsed Statutes, whch provdes:
No sut for the purpose of restranng the assessment or coecton of any
(a sha be mantaned n any court.
If the secton ast quoted appes, appeant s remedy s not by n|uncton,
but through the means provded by the ct, not necessary to be here
set forth. The appcabty here of secton 3224 we do not consder an open
queston, snce the Supreme Court on May 21. 1023. handed down ts opnon
n Graham v. duPont (2 2 U. S., 234) (T. D. 348 ), where the bar of the
statute was set up as ground for an n|uncton to restran the coecton of a
ta assessed more than fve years after return was made.
Ths case seems to be concusve upon the proposton that secton 3224
does appy, and that whatever remedy appeant may have, t s not through
n|uncton, but ony through the statutory provsons authorzng recovery
back of a ta whch ought not to have been assessed aganst hm.
Snce the promugaton of that opnon a number of courts have hed that
ths s ts effect, and our attenton has not been caed to a dfferent nter-
pretaton of t. ( a hara v. opkns, 290 ed., 502, I). C, affrmed 5th C. C. .
Pec. , 1023 (T. D. 3552) Seaman v. Rocers, Coector, U S. Dst Ct. Southern
Dst. N. Y.. May 31. 1023 Crawford, et a., v. Cotse . U. S. Dst. Ct. La.,
une 1, 1023 ecutors v. turgess, U. S Dst. Ct. N. . (now pendng on
appea n 3d C. C. .) Wthcrbec v. Durey, Coector, . S. Dst. Ct. Northern
Dst. N. Y. (T. D 35 0) ernandez v. McGhec, 8th C. C. ., Dec. term, 1023.)
It may be sad n further support of the appcabty of secton 3224 that
the fve-year mtaton of secton 250(d) s not ahsoute and unquafed, but
s sub|ect to mportant provsos, one beng that n case of a fase or fraudu-
ent return wth ntent to evade ta , or a faure to fe a requred return,
the amount of the ta may be determned, assessed, and coected, and a sut or
proceedng for the coecton of such amount may be begun, at any tme after t
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1318, 1319, and 1320, t. 10 0. 430
becomes due, thus mposng on the ta ng authortes the duty to Investgate
and pass upon facts bearng n any case upon the appcaton of the mtaton.
Secton 3224 dd not eave t wthn the power of a court of chancery to en|on
the coecton of the ta unt the court mght n the frst nstance nvestgate
and determne whether, notwthstandng fve years have eapsed snce fng
the return, the crcumstances are such as mase the mtaton appcabe.
ecause secton 3224 appes, the decree of the dstrct court s affrmed.
rtce 1050: Suts for recovery of ta es erro- 111-14-148S
neousy coected. T. D. 3574
R CO RY O T S R NU CT O 1918 D CISION O COURT.
1. ctons Pabty Defendant.
n acton aganst an nterna revenue coector to recover n-
terna revenue ta es pad s persona, and can not be brought and
mantaned aganst a successor n offce of the coector coectng
them.
2. ountary Payment Protest.
sut aganst a coector of nterna revenue to recover ta es
pad vountary and wthout protest can not be mantaned.
3. Same Secton 252, Revenue ct of 1918.
Secton 252 does not gve a rght of acton aganst a coector
nor emnate the necessty for payment of ta es under protest as
a prerequste to sut.
4. Cases oowed.
Smetanka v. Indana Stee Company (257 U. S., 1 (T. D.
3304 Ct. D. 17 , C. . 5, 251)) o v. dwards (287 ed., W9
(T. D. 3445 C. . - , 218)).
Treasurt Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Crcut Court of
ppeas for the ghth Crcut n the case of ames Coffey, as In-
terna Revenue Coector, etc., et a., v. The change ank- of Len-
no s pubshed for the nformaton of nterna revenue offcers
and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved March 27, 1924.
. W. Meu-on,
Secretary of the Treasury.
Unted States Crcut Court of ppeas, ghth Crcut. No. 342.
Dkcemher Term, . D. 1923.
ames Coffey, as Interna Revenue Coector, etc., et a., pantffs n error.
v. The change ank of Lenno , defendant n error.
In error to the Dstrct Court of the Unted States for the Dstrct of South Dakots.
efore Sanborn, Crcut udge, and Treukr and Munoeb, Dstrct udges.
Tt R, Dstrct udge, devered the opnon of the court
The defendant n error, hereafter referred to as the pantff, nsttuted ths
acton aganst the pantffs In error to recover aeged e cess payments of n-
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431 1318, 1319, and 1320, rt. 1050.
come and proft ta es. There are three counts n the compant, to recover for
aeged e cessve payments n three years. In each count t s aeged that,
durng the years 191 , 1017, 1918, 1919, and unt anuary 2 , 1920, the defend-
ant Coffey was coector of nterna revenue for the dstrct of North and South
Pakota that the aeged e cess ta es pad, whch t s sought to recover )n the
frst and second counts, were pad to hm whe such coector. That from
anuary 2 , 1920, to May 15, 1920, the defendant Mee was such coector, and
thereafter e was coector of nterna revenue for the dstrct of South Dakota
ony, the States of North and South Dakota havng been made each a separate
dstrct. The aeged e cessve ncome ta set out n the thrd count of e
compant, t s aeged, was pad to the defendant Mee as nterna revenue
coector for the dstrct of South Dakota. udgment was asked and was ren-
dered aganst both defendants for the fu amounts camed n a three counts,
wth nterest and costs. The compant states fuy the reasons pantff cams
to be entted to recover |udgment, but does not aege that any of the pay-
ments were made nvountary under duress, or under protest, but t s aeged
tbat on November 1 , 1921, t fed an amended return for each of the three
years, camng that t had erroneousy faed to cam a deducton of certan
payments made by It as State and county ta es, and asked for refunds of these
amounts, amountng to three hundred and forty-one and 7/100 doars.
On pr 1, 1922, the Commssoner of Interna Revenue nformed the pan-
tff how the computatons of ts returns were made, and uness an appea s
fed wthn 30 days from recept of ths etter the assessments woud stand.
The appea was prompty made, and on uy 19, 1922, t was re|ected by the
Commssoner, whereupon ths acton was nsttuted on ebruary 10, 1923.
ach of the defendants fed a separate demurrer to the compant, reyng
on two grounds. The frst ground n each of the demurrers s that t appears
from the compant that the ta es were pad vountary and wthout com-
puson or duress and wthout protest on the part of the pantff.
The second ground of the demurrer of the defendant Mee s that the ta es
sought to be recovered n the frst and second counts of the compant were not
pad to nor receved by hm, ether n hs offca or ndvdua capacty, but as
shown n these counts they were pad to and receved by hs codefeudant, Coffey,
then the coector of nterna revenue for that dstrct.
The second cause of demurrer of the defendant Coffey Is npon the same
ground as that of the defendant Mee, e cept that t appes ony to the thrd
count, whch aeges that the ta was pad to and receved by hs codefeudant,
Mee, who was then the coector of nterna revenue for that dstrct. The
demurrers were by the court overrued and the defendants decnng to pead
further, |udgment was entered aganst both defendants for the entre amounts
camed In a three counts, wth Interest at 7 per cent per annum, and the costs
of the snt.
s to the second grounds of demurrer, the court was ceary In error. ach
defendant acted separatey, and f pantff s entted to |udgment, t can ony
recover from the coector to whom t made the payments. (Sage v. Unted
States, 250 U. S., 33 Smetanka, Coector, v. Indana Stee Co., 257 . S., 1
Unon Trust Co. v. Warde, 258 U. S., 537.) In Patton v. rady, ecutr
(184 U. S., 08), It was hed that such an acton aganst the coector survves
hs death, and hs e ecutor s the proper and ony party to be substtuted as the
defendant, as the acton s persona aganst the coector who receved the ta .
Ths s reaffrmed, and the reasons therefor are fuy set out n Smetanka v.
Indana Stee Co., supra, pages 4 and 5.
s to the frst grounds of the demurrers, the aw, uness changed by the cts
of Congress reed on by counse for pantff, hereafter referred to, prevents
a recovery n such an acton, f the ta was pad vountary, wthout coercon
and wthout protest. eadng authorty on that pont s Cty of Phadepha
v. The Coector (72 U. S., 720, 731, 732). It was there hed:
pproprate remedy to recover back money pad under protest on account
of dutes or ta es erroneousy or egay assessed, Is an acton of assumpst
for money had and receved. Where the party vountary pays the money, he
s wthout remedy but f he pays t by compuson of aw, or under protest, or
wth notce that he ntends to brng sut to test the vadty of the cam, he
may recover t back, f the assessment was erroneous or ega, In an acton of
assumpst for money had and receved.
When a party, knowng hs rghts, vountary pays dutes or ta es egay
or erroneousy assessed, the aw w not afford hm redress for the n|ury
but when the dutes or ta es are egay demanded, and he pays the same
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1318, 1319, and 1320, rt. 1050. 432
under protest, or gves notce to the coector that he ntends to brng a sut
aganst hm to test the vadty of the cam, the coector may be compeed to
refund the amount egay e acted, and foowed ever snce. (Ceesebrouffh
v. Unted States, 192 U. S., 253 Unted Stoen v. Neto York Cuba Ma
S. S. Co., 200 U. S., 488.)
ut t s contended on behaf of the pantff that sectons 252 and 131 of
the Revenue ct of ebruary 24. 1919 (40 St., 1085 and 1145), and amendments
by the ct of November 23, 1921 (42 St., 227), amendng secton 252 on page
2 8, and secton 1315 on page 314 amendng secton 131 of the ct of 1919.
bot cts amendng secton 3220, Revsed Statutes, permt a recovery n
an acton aganst the coector, athough the ta sought to be recovered was
pad vountary and wthout protest.
Wthout quotng these sectons n fu, t w be found upon e amnaton
that secton 252 of the ct of 1921 ony provdes that f any ta has een
pad n e cess of that propery due, then, notwthstandng the provsons of
secton 3228, Revsed Statutes, the amount of the e cess sha be credted
aganst any ta es, or nstament thereof, then due from the ta payer
under any other return, and any baance of such e cess sha be mmedatey
refunded to the ta payer. That secton makes no provson authorzng suts
aganst coectors. Secton 1315 of the ct of 1921, agan amendng secton
3220, Revsed Statutes, authorzes the Commssoner of Interna Revenue
to remt, refund, and pay back a ta es erroneousy or egay
assessed or coected aso to repay to any coector or deputy co-
ector the fu amount of such sums of money as may be recovered aganst
hm n any court, etc. Nowhere does t appear n that secton or any ct of
Congress that an acton, to recover such e cess ta es, may be mantaned
aganst the coector. No doubt Congress ddn t deem t desrabe to ncude
actons aganst coectors. In actons aganst coectors the successfu pantff
s entted to nterest and costs of suts, whe no nterest or costs can be
aowed by the Commssoner of Interna Revenue or by a court n an acton
aganst the Unted States under these provsons of the cts.
ad pantff nsttuted ths acton aganst the Unted States, whether under
the Tucker ct or n the Court of Cams, and obtaned a |udgment, t coud
not have recovered nterest or costs, whe n the case at bar the |udgment
ncuded both, as s permssbe n actons aganst coectors.
s hed by the Unted States Crcut Court of ppeas for the Second Crcut
n o v. dwards (287 ed., 9, 72, 73), pror to that enactment (referrng
to the ct of 1919) the Commssoner of Interna Revenue had no authorty
to credt or refund overpayments of ta es, uness appea was duy made to hm
n the manner prescrbed by secton 3220, Revsed Statutes. Secton 252 makes
no reference to the coectors of nterna revenue or actons aganst them. Nor
does secton 131 of the ct of 1919 or secton 1315 of the ct of 1921 appy to
coectors. rom what was there decded t foows that an acton aganst a
coector of nterna revenue to recover e cessve ta es, pad vountary, under
no duress, and wthout protest can not be mantaned, athough such an acton
may be mantaned aganst the Unted States ether under the Tucker ct, sub-
paragraph 20 of secton 24, udca Code, f the amount nvoved does not
e ceed 10,000, and n the Court of Cams, regardess of the amount nvoved.
(Sec. 145, ud. Code.)
The same concuson was readed by udge Morton of the Dstrct Court for
the Dstrct of Massachusetts n utmeweU v. G (257 ed.. 857). The au-
thortes whch, t s camed, sustaned pantff s contentons are not n
pont, as appears from an e amnaton of them. They were actons aganst
the Unted States and not coectors of nterna revenue.
Unted States v. vosef (237 U. S., 1) was an acton aganst the Unted
States under the Tucker ct, and was based on the ct of uy 27. 1912 (37
St., 240). That ct. n e press terms, authorzed the Secretary of the Treasury
to pay camants who had presented ther cams to the Commssoner of In-
terna Revenue and estabshed them, regardess of whether the ta es were
pad vountary or under duress and protest, and the court so hed.
and v. Unted States (249 U. S., 503) was nsttuted n the Court of Cams
aganst the Unted States to recover ega payments under the ct of 1912,
and not aganst the coector, and the court foowed the vosef case.
Counse has faed to ca our attenton to a snge authorty, nor have we
been abe to fnd one, hodng that the sectons of the ct of 1919 or of the ct
of 1921, reed on and herenbefore referred to, authorze an acton aganst a
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433 1318, 1319, and 1320, rt. 1050.
coector to recover e cess or Iega ta es pad vountary and wthout duress
or protest.
The court erred n overrung the demurrers and shoud have sustaned them
on bot grounds.
It foows that the |udgment must be and s reversed.
rtce 1050: Suts for recovery of ta es erro- 111-14-1489
neousy coected. T. D. 3579
( so Secton 250, rtce 1009.)
R NU CT O 1921 INCOM T SUIT TO R STR IN COLL CTION-
D CISION O COURT.
1. In|uncton Dstrant Secton 3224, Revsed Statutes.
Under the provsons of secton 3224, Revsed Statutes, n|unc-
ton w not e to restran a coector from the coecton by ds-
trant of a edera ta .
2. Dstrant Lmtaton.
n aegaton that dstrant s a sut or proceedng and s
barred after fve years from fng of a return by secton 250(d) of
the Revenue ct of 1921 does not gve a edera court |ursdcton
to restran the coector, there beng an adequate remedy at aw by
payng the ta and sung for the recovery.
3. Case oowed. ,
Graham v. dvPont (2 2 U. S. 234 T. D. 348 Ct. D. 33 , C. .
II-, 22 ).
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Crcut Court of p-
peas for the Thrd Crcut n the case of Cadcaader, et a., rrs, of
Roebng, v. Sturgess, Coector, s pubshed for the nformaton of
nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved March 28, 1924.
. W. Meon,
Secretary of the Treasury.
In tub Unted States Crcut Court or ppeas for the Thrd Crcut. No.
3058. October Term 1923.
my R. Cadcaader and een R. Tyson, .recutors of state of Chares O.
Roebng, deceased, appeants, v. dward L. Sturgess, Indvduay and as
Coector of the Unted States Interna Revenue for the r t Dstrct of
the State of New ersey, appeee.
On ppea from the Dstrct Court of the Unted States for the Dstrct of New ersey.
efore Wooev and Davs, Crcut udge.-, and W. . S. Thompson, Dstrct
udge.
Woo.ey, Crcut udge: Ths case rases a queston of the proper procedure
to be foowed by one who seeks to avod payment of edera ta es whch he be-
eves have been egay assessed or are about to be egay coected. It does
not concern any queston of the egaty of the assessment or coecton of ta es,
athough to ths statement, we are qute aware, the appeant w not agree.
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1318, 1319, and 1320, rt. 1050. 434
In September, 1919, the Commssoner of Interna Revenue assessed an
addtona ta of 35 ,178.95 aganst the e ecutors of Chares G. Roebng on
persona ncome of ther decedent for the year 1917. fter notce and demand
for payment, made October 10, 1919, the e ecutors fed a cam for abatement.
The Commssoner of Interna Revenue aowed the cam by emnatng the
nterest, amountng to 0,594.70, and by reducng the prncpa by 75,290.38,
and re|ected t n the sum of 220,293.80. Wthn the tme provded by aw the
e ecutors fed a cam for abatement of the assessment as revsed, amountng
wth Interest to 240,120.31. The record does not dscose that ths cam
has been determned. fter notce and demand for payment of the ast named
sum and nterest, made pr 2 , 1923. the e ecutors of Chares O. Roebng,
nso.d of payng the amount demanded and proceedng for ts recovery In the
usua way, brought ths sut by b n equty to restran ts coecton, aegng,
n substance, that the coector of nterna revenue named theren s threaten-
ng to coect from them by dstrant the sum assessed as addtona ta that
the threatened dstrant s prohbted by the fve-year mtaton contaned n
the edera statute that there s no authorty In aw for the coecton of
the ta for whch dstrant s threatened and that, f the threatened dstrant
Is not en|oned, tey. the e ecutors, w be wthout ega remedy, or, f any
tey have, t w be whoy nadequate. On moton of the coector, the dstrct
court dsmssed the b by force of secton 3224 of the Revsed Statutes and on
authorty of Graham v. duPtmt (2 2 U. S., 234 (T. D. 348 )). The case s here
on the companant s appea.
The camed statutory nhbton aganst the coecton of the ta by ds-
trant arses under secton 250(d) of the Revenue ct of 1921 (42 Stat.,
227), whch provdes generay for the assessment of ta es under the ct and
partcuary that
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 .
On May 5, 1923, when ths acton was nsttuted, more than fve years had
eapsed snce pr 1, 1918, when the return of Chares G. Roebng was fed,
and, accordng to the companants contenton, the threatened dstrant or
sezure of hs property, then or ater, woud consttute a sut or proceed-
ng prohbted by the quoted provson of the ct. The companants further
mantan that If such camed ega proceedng for the coecton of ta es
houd be nsttuted by the coector of nterna revenue and the ta be co-
ected, they woud be prevented from assertng ts egaty and recoverng
t back by an acton at aw because of the bar of two provsons of the statute
frst, that of secton 252(a) of the Revenue ct of 1918 (40 Stat., 1085. ch.
18), reenacted In the Revenue ct of 1921 (42 Stat., pt 1, p. 2 8, ch. 13 ).
whch aows a credt on an ncome ta of any e cess pad on a prevous ta
and a refund of the baance, Provded, That no such credt or refund sha
be aowed or made after fve years from the date when the return was due,
uness before the e praton of such fve yearn a cam therefor s fed by the
ta payer and second, the bar of secton 322 of the Revsed Statutes, s
amended by secton 1318 of the Revenue ct of 1921, whch 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 Iegay as-
sessed or coected. nnt 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. No such sut or proceedng sha be begun
before the e praton of s months from the date of fng such cam uness
the Commssoner renders a decson thereon wthn that tme, nor after the
e praton of fve years from the date of the payment of such ta , .
On the contenton that these statutory mtatons of tme n whch cam
for a refund can be fed and sut be brought to recover a ta pad upon an
ega assessment deprve thom of a remedes at aw, the companants fed
ther b n equty nnd rest ther rght to n|uncton reef aganst the threat-
ened coecton of the ta . ut they were mmedatey confronted wth secton
3224. Revsed Statutes, whch provdes that
No sut for the purpose of restranng the assessment or coecton of any
ta sha be mantaned n any court.
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435 1318, 1319, and 1320, rt. 1050.
The companants meet ths provson of the statute by the statement that,
for reasons presenty to be mentoned, It does not appy to ther case.
We sha frst Inqure, very brefy, nto the purpose and force of ths gen-
era statutory provson.
The Congress, by ta measures enacted from tme to tme, provdes the
revenue wth whch the Natona Government s sustaned. It s necessary to
the mantenance of the Government that the coecton of ta es mposed for
ths purpose sha not be hndered or deayed, ether by those who are charged
wth ther payment or by the courts n ther behaf. Therefore, the aw re-
qures, broady, that a ta es, even those erroneousy or egay assessed,
sha be pad when due. The Congress knew, of course, that n|ustce woud
occasonay be done by the enforcement of ths necessary rue. Therefore t
prescrbed a method by whch one who has pad a ta erroneousy or egay
assessed or coected may recover t Ths method contempates, frst, pay-
ment of the ta . It then provdes for an appcaton to be made by the ag-
greved ta abe and addressed to the Commssoner of Interna Revenue for
refund of the ta . If hs appcaton be granted, hs grevance has been sats-
fed f t be re|ected, he may brng sut aganst the coector n a court of
aw to recover the amount of the ta and there succeed or fa accordng to
the merts of hs case. These proceedngs have often been referred to by the
Supreme Court as a compete and e cusve system of correctve |ustce
and as provdng the soe remedy for a ta payer aganst the ega and er-
roneous assessment and coecton of ta es. vdenty, ths method was es-
tabshed under the rght beongng to the Government to prescrbe the
condtons on whch t woud sub|ect tsef to the |udgment of the courts n the
coecton of ts revenues. In the e ercse of that rght, t decared by secton
3224, Revsed Statutes, that ts offcers sha not be en|oned from coectng
a ta camed to have been un|usty assessed, when those offcers, n the course
of |ursdcton over the sub|ect matter n queston, have made the assessment
and cam that t s vad.
Ths has ong been the vew of the Supreme Court. (State R. R. Ta Cases,
92 U. S., 57 Snyder v. Marks, 109 U. S., 189 Sheton. v. Pate, 159 U. S., 591
Pttsburgh Ry. v. oard of Pubc Works, 172 T . S., 32 Pacfc Whana Co. v.
Unted States, 187 U. S., 447, 452 Dodae v. Osborn, 240 U. S., 118, 121
(T. D. 2301 not pubshed n uetn servce) Graham v. duPont, 2(52 T . S.,
234 (T. D. 348 ). The companants do not chaenge ths constructon of
secton 3224, Revsed Statutes, but deny the appcaton of ts provsons to the
case at bar on two grounds: The frst s that, the provson havng to do wth
the coecton of a ta by a coector of nterna revenue, the coector n ths
ease has ost |ursdcton over the ta he threatens to coect by reason of hs
faure to act wthn the fve-year mtaton of secton 250(d), supra the ne t
s, that the fve-year mtaton for the coecton of the ta havng e pred, the
ta tsef, whether egay or egay assessed, has ceased to e st and the
ta abe has ceased to be abe for ts payment
ut these are questons on whch, n vew of the snge ssue of procedure
here nvoved, we are not caed upon to e press an opnon. They are, ad-
mttedy, questons of aw tryabe some tme, somewhere. They are not try-
abe n a court of equty when a court of aw s equpped to try them and
when t affords a pan and adequate remedy. (Dove v. Cty of Cheano, 11
Wa., 108, 112 en v. Puman Paace Car Co., 139 T . S., 38, 42 secton
2 7 of the udca Code.)
The companants b shows qute ceary that they have a pan, adequate,
and compete remedy at aw, and that ther case, argey on the facts and d-
recty on the aw, fas wthn the decson n Graham v. duPont (202 T . S.,
2: 4 (T. D. 348 )). In that case the Supreme Court, arrvng at the concuson
that the companant there tad a remedy at aw and therefore fndng t un-
necessary to consder whether secton 252 of the Revenue ct of 1921, n con-
necton wth secton 322 of the Revsed Statutes, as amended by the Revenue
ct of 1921, barred the companant s rght to pay the ta and sue to recover
t at the tme of fng ths b, sad:
It s certan that by the amendments to secton 252 and secton 322 ,
Revsed Statutes, by the ct of March 4, 1923 (42 Stat., 1504), the companant
s gven the rght now to pay the ta , and sue to recover t back, and In such
a sut to rase the questons as to the vaue of the stock and the amount of
the resutant ta and aso as to the bar of tme aganst the assessment (co-
ecton) whch he attempted to rase n the b.
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f 324, rt. 1040.
43
oowed n ashara v. opkns, Coector (290 ed., 592 affrmed, ed.
(T. D. 3552. see p. 42 )) Seaman v. owers, Coector (D. C. So. D. . Y., not
reported) Crawford, enkns ooth, Ltd., v. Cousns (D. C. La., not re-
ported) Syman v. Renecke, Coector (D. C. N. D., 111., not reported).
The amendment of March 4, 1923, concernng suts to recover ta es egay
assessed or coected, adds to secton 322 , Revsed Statutes, before quoted,
these words: Uness such sut or proceedng s begun wthn two years after
the dsaowance of the part of such cam to whch such sut or proceedng
reates, .
What the Supreme Court sad of the companant n Graham v. du ont may
he sad of the companants n ths case, where, by force of the amendment of
March 4. 1923, enacted pror to the nsttuton of ths sut, they had fu op-
portunty, and st have, to pay the ta . ask for a refund, and, f re|ected,
nsttute a sut at aw and there try out the questons they have rased n ths
sut n equty.
or these reasons the decree of the dstrct court dsmssng the b must
be affrmed.
rtce 1050: Suts for recovery of ta es erroneousy
coected.
(See S. M. 1530 sec. 240, art. 37.) nd of protest necessary to
ay a foundaton for a sut to recover ta es egay coected.
S CTION 1324. INT R ST ON R UNDS
ND UDGM NTS.
rtce 1040: Interest on refunds and |udg- III 14 1490
nents. T. D.3575
D CISION O COURT.
Sut udgment Intebest.
Where a |udgment s recovered aganst a coector of nterna
revenue n the dstrct court wth nterest to the date of |udgment
and on appea the |udgment s affrmed wth costs and pad, a sut
w not e aganst the Unted States to. recover nterest on the
|udgment, the proper proceedng beng to appy to the Crcut
Court of ppeas for a rehearng to modfy ts mandate to ncude
nterest.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Dstrct Court for the
Dstrct of Coorado, n the case of erbert M. DeWtt v. Unted
States, s pubshed for the nformaton of nterna revenue offcers
and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved March 27, 1924.
. W. Meon,
Secretary of the Treasury.
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437
1324, rt. 1040.
In the Dstrct Court of the Unted States for the Dstrct of Coorado.
No. 7170.
erbert M. DeWtt, pantff, v. The Unted States of merca, defendant.
Decded uy 28, 1923.
|udge s memorandum.
ennedy, Dstrct .: Ths acton s brought for the recovery of nterest
aeged to have accrued upon a |udgment recovered by the pantff aganst
Mark . Sknner, coector of nterna revenue, on anuary 30, 1917. The
facts for the purposes of the matter now before the court have been stated
by counse for the defendant n ther bref, as foows:
On ugust 23. 1913, the pantff commenced an acton aganst Mark .
Sknner, coector of nterna revenue for the dstrct of Coorado, to recover
S12.078, nterest thereon from ugust 19, 1913. and costs, beng the oss of
pantff by reason of payment to the Unted States under protest of a ta
(n aeged aduterated butter. tra was had and |udgment rendered for
the pantff on anuary 30, 1917. aganst Mark . Sknner, coector of nterna
revenue, n the sum of 1 ,171.49. whch was the prncpa sum pad by the
pantff, wth nterest thereon at 8 per cent, per annum to the date of |udg-
ment. anuary 30, 1917. Costs were assessed at 501.05, n favor of the
pantff.
The Unted State attorney appened and, on Decem er 30, 1918, the Cr-
cut Court of ppeas ssued ts mandate, affrmng the udgment. Ths man-
date contans the foowng command:
On consderaton whereof. It s now hero ordered and ad|udged by ths
court, that the |udgment of the sad dstrct court, n ths cause, be, and the
same s. hereby affrmed wth costs and that erbert M. DeWtt have and
recover aganst Mark . Sknner, coector of nterna revenue, etc., the sum of
20 for hs costs heren and have e ecuton therefor.
,
You, therefore, are hereby commanded that such e ecuton and proceedngs
he had n sad cause, as accordng to rght and |ustce, ought to be had, the
sad wrt of error notwthstandng.
On anuary , 1919, ths court ssued a certfcate of probabe cause, and,
nn uy 22. 1919. the Treasurer of the Unted States ssued a warrant to pan-
tff for . 1 , |92.54. whch represents the amount of the orgna udgment and
costs. The pantff accepted the above amount under protest and demanded
nterest on the anuary 30, 1917, |udgment from that date to-the date of ssue
of the warrant, uy 22, 1919. Ths request was refused, and the pantff
brngs acton for that nterest at 8 per cent per annum ( 3,200.4 ) and nterest
on that amount from uy 22, T919, unt pad.
The compant s met on behaf of defendant by a demurrer whch ehnonges
the court s |ursdcton of the sub|ect of the acton, as we as the suffcency
of the facts contaned n the compant to consttute a cause of acton.
hearng upon the demurrer was had and brefs submtted. number of
ponts n respect of the demurrer have been presented by the dstrct attorney,
and among them s the one, that because of the fact that the appeate court dd
not provde for nterest n ts mandate, such nterest s not recoverabe. Counse
for pantff earnesty mantans that rue 30 of the Crcut Court of ppeas
specfcay provdes that nterest n such cases sha he cacuated and eved
by the tra court whether ncuded n the mandate or not. The pertnent
porton of rue 30 of the Court of ppas of the ghth Crcut reads as
foows:
1. In eases where a wrt of error s prosecuted n ths court, and the
|udgment of the nferor court s affrmed, the nterest sha be cacuated and
eved, from the date of the |udgment beow unt the same s pad, at the same
rate that smar |udgments bear nterest n the courts of the State or Terr-
tory where suc |udgment was rendered.
3. The same rue sha be apped to decrees for the payment of money n
cases n equty, uness otherwse ordered by ths court.
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It s contended by the dstrct attorney tat ths rue as nterpreted by the
courts s ony for the drecton of the appeate court tsef and not for the tra
court, and that the mandate of the appeate court must be foowed e pcty
by the tra court wthout change or enargement n any form.
The Court of ppeas of the S th Crcut, n construng a rue of the
Supreme Court wth smar provsons, seems to sustan the contenton of
counse for defendant. In the case of Green v. Chcago, S. t C. R. Co. (49 ed.,
907), the anguage used wth reaton to such rue s as foows:
The rue as reference aone to the acton of the Supreme Court on the
sub|ect of nterest upon the affrmance of |udgments and decrees of nferor
courts. It was ntended to prescrbe the genera rue and reguaton of ts
own practce n the matter of nterest. It s not to be enforced by nferor
courts to whch the mandates of the Supreme Court are sent, to e ecute and
carry nto effect |udgments or decrees on whch that court has not awarded
or drected the aowance or payment of nterest Whether nterest sha be
aowed ou the affrmance of a |udgment or decree of the ower court from the
date of ts rendton s a queston for the consderaton soey of the Supreme
Court, especay where nterest s not awarded as a part of such |udgment
or decree by the nferor court.
The Crcut Court of ppeas of the Nnth Crcut has a smar rue, whch
s aso rue 30 of that court, and n agerman v. Moran (75 ed., 97) t s
construed n dentcay the same manner n the foowng anguage:
Rue 30 s a rue for the gudance of ths court ony. It s not a rue for
the crcut or dstrct courts. The method by whch the successfu tgant
n a case n ths court may acqure the nterest whch s contempated by the
rue s ony through the mandate of ths court drectng ts aowance n the
court beow.
In the case of In re Washngton and Georgetotcn R. R. Co. (140 U. S., 91),
tte Supreme Court has ad down the genera proposton, wthout any ds-
cusson of a rue of the court, that where a mandate of that court does not
provde for nterest that the ower court had no power to aow It
I therefore come to the concuson that ths s an nsuperabe obstace to
the pantff n the prosecutou of hs cam. The reef sought by the pantff
mght have been secured at the tme by appcaton for a rehearng n te
Crcut Court of ppeas wth the purpose of securng a modfcaton of the
mandate to ncude nterest
The demurrer w therefore be sustaned, reservng to pantff hs proper
e ceptons n the premses.
S CTION 1325. P YM NT O T S Y C C
O UNIT D ST T S S CURITI S.
rtce 1731: Payment of ta by certfrcates III-3-1318
of ndebtedness. T. D. 3543
Instructons as to acceptance of Treasury certfcates of ndebt-
edness for ncome and profts ta es, caendar year 1924.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
1. Coectors of nterna revenue, are authorzed and drected to
receve at par Unted States Treasury certfcates of ndebtedness of
seres TM-1924, dated March 15, 1928, and seres TM2-1924, dated
September 15, 1923, both maturng March 15, 1924, n payment of
ncome and profts ta es payabe on March 15, 1924. Coectors are
authorzed and drected to receve at par Treasury certfcates of n-
debtedness of seres T -1924, dated December 15, 1923, maturng
une 1 , 1924, n payment of ncome and profts ta es payabe on
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439
1325, t. 1731.
une 1 , 1924 Treasury certfcates of ndebtedness of seres TD-
1924, dated December 15, 1923, maturng December 15, 19-24, n pay-
ment of ncome and profts ta es payabe on December 15, 1924. The
15th of une, 1924, beng a Sunday, t has been rued that ta es whch
by the terms of the Revenue ct of 1921 are due on that date become
due on une 1 , 1924. Coectors are further authorzed and d-
rected to receve at par, n payment of ncome and profts ta es pay-
abe at the maturty of the certfcates, respectvey, Treasury certf-
cates of ndebtedness of any other seres whch may be ssued matur-
ng on March 15, une 1 , September 15, or December 15, 1924,
respectvey, and e pressed to be acceptabe n payment of ncome
and profts ta es. Coectors are not authorzed hereunder to receve
n payment of ncome and profts ta es any Treasury certfcates of
ndebtedness not e pressed to be acceptabe n payment of ncome and
profts ta es, nor any Treasury certfcates maturng on a date other
than the date on whch the ta es are payabe. Coectors are au-
thorzed to receve Treasury certfcates of ndebtedness whch are
acceptabe as heren provded n payment of ncome and profts ta es
n advance of the respectve dates on whch the certfcates mature.
Treasury certfcates acceptabe n payment of ncome and profts
ta es have one or more nterest coupons attached, ncudng as to
each seres a coupon payabe at the maturty of the certfcates, but
a nterest coupons must n each case be detached by the ta payer
before presentaton to the coector, and coected n ordnary course
when due. The amount, at par, of the Treasury certfcates of n-
debtedness 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
accept them for an amount other or greater than ther face vaue.
2. Deposts of Treasury certfcates of ndebtedness receved n
payment of ncome and profts ta es must be made by coectors, un-
ess otherwse specfcay nstructed by the Secretary of the Treas-
ury, wth the edera reserve bank of the dstrct n whch the co-
ector s head offce s ocated, or n case such head offce s ocated n
the same cty wth a branch edera reserve bank, wth such branch
edera reserve bank. Specfc nstructons may be gven to co-
ectors by the Secretary of the Treasury n certan nstances for the
depost of the certfcates wth edera reserve banks of other ds-
trcts and branch edera reserve banks. The term edera re-
serve bank where t appears heren, uness otherwse ndcated by
the conte t, ncudes branch edera reserve banks. Treasury cer-
tfcates accepted by the coector pror to the dates when the certf-
cates respectvey mature shoud be forwarded by the coector to
the edera reserve bank, to be hed for account of the coector unt
the date of maturty, and for depost on such date.
3. Coectors of nterna revenue are not authorzed, uness e press
nstructons otherwse are gven by the Secretary of the Treasury,
to receve n payment of ncome or profts ta es nterm recepts
ssued by edera reserve banks n eu of defntve certfcates of
the seres heren descrbed.
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51325, rt. 1731.
440
son f the coector s ocated n the same cty, and n a other cases
forwarded by regstered ma unnsured:
, 92__.
Ths certfcate has been accepted n payment of ncome and
profts ta es and w not be redeemed by the Unted States e cept
for credt of the undersgned.
Coector of Interna Revenue
for the- Dstrct of
5. When certfcates of ndebtedness are devered to the edera
reserve bank n person, rather than by regstered ma unnsured,
where the coector s head offce and the edera reserve bank are
ocated n the same cty, coectors shoud make n tabuar form a
schedue n dupcate of the certfcates of ndebtedness to be pre-
sented to the edera reserve bank, showng the sera number of
each certfcate, the date of ssue and maturty, wth sera desgna-
ton, and face vaue. Certfcates of ndebtedness accepted pror to
the. date of maturty must be schedued separatey. t the bottom
of each schedue there shoud be wrtten or stamped Income and
Profts Ta es , whch amount must agree wth the tota
shown on the schedue. One copy of ths schedue must accompany
certfcates presented to the edera reserve bank and the other be
retaned by the coector. The ncome and profts ta deposts re-
sutng from the deposts of such certfcates must n a cases be
shown on the face of the certfcate of depost (Natona ank orm
15) separate and dstnct from the tem of msceaneous nterna
revenue coectons (formery caed Ordnary).
. Where the coector s head offce and the edera reserve bank
are not ocated n the same cty, and t s necessary to transmt the
certfcates to the edera reserve bank by regstered ma unnsured,
the foowng requrements, wth respect to the preparaton of shp-
ments, must be observed. The certfcates must n a cases be stamped
on the face thereof as ndcated n paragraph 4. The schedue of
certfcates transmtted shoud be prepared as prescrbed n para-
graph ) hereof, e cept that t shoud be prepared n trpcate. The
orgna copy of such schedue shoud be forwarded to the edera
reserve bank by separate regstered ma, and shoud bear a certfcate
sgned by two empoyees of the offce of the coector, statng (a)
that they nspected and checked the shpment before seang: (b)
that each certfcate sted was propery canceed by stampng on
the face thereof the prescrbed egend (c) that the shpment was
seaed n ther presence before t eft ther mmedate contro: and
(d) that each and every certfcate sted was n the package when
maed. The dupcate copy of the schedue shoud be ncosed wth
the certfcates and the trpcate retaned by the coector. It s
mportant that the coector s retaned copy be carefuy preserved,
and n ths connecton t s recommended that the certfcate of the
two empoyees be entered aso on the retaned copy, n order that no
compcaton may arse n the event that the orgna copy shoud he
ost or destroyed.
7. Unt certfcates of depost are receved from the edera
reserve banks, the amount represented by the certfcates of ndebted-
ness forwarded for depost must be carred by coectors as cash
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441
133 , rt. 1735.
on hand or n banks, and not credted as coectons, as the dates of
certfcates of depost determne the dates of coectons.
8. or the purpose of savng ta payers the e pense of trans-
mttng such certfcates as are hed n edera reserve ctes or
edera reserve branch bank ctes to the offce of the coector n
whose dstrct the ta es are payabe, ta payers desrng to pay n-
come and profts ta es by such Treasury certfcates of ndebtedness
acceptabe n payment of ta es shoud communcate wth the co-
ector of the dstrct n whch the ta es are payabe and request
from hm authorty to depost such certfcates wth the edera
reserve bank n the cty n whch the certfcates are hed. Co-
ectors are authorzed to permt deposts of Treasury certfcates of
ndebtedness n any edera reserve bank wth the dstnct under-
standng that the edera reserve bank s to ssue a certfcate of
depost n the coectors name coverng the amount of te certf-
cates of ndebtedness at par and to state on the face of the certf-
cate of depost that the amount represented thereby s n payment of
ncome and profts ta es. The edera reserve bank shoud forward
the orgna certfcate of depost to the Treasurer of the Unted
States, wth ts day transcrpt, and transmt to the coector the
dupcate and trpcate, accompaned by a statement gvng the
name of the ta payer for whom the payment s made n order that
the coector may make the necessary record and forward the dup-
cate to the offce of the Commssoner of Interna Revenue.
9. Ths Treasury Decson amends and suppements the provsons
of artces 1731 and 1732 of Reguatons 2, and supersedes Treasury
Decson 3421 C. . 11-1, 230 but does not supersede Treasury
Decsons 3510 C. . II-2, 280 and 3512 C. . II-2, 282 .
D. . ar,
Commssoner of Interna Revenue.
pproved anuary 11, 1924.
. W. Meon,
Secretary of the Treasury.
S CTION 1331. CONSOLID T D R TURNS
OR Y R 1917.
rtce 1735: Consodated returns for year 111-11-1427
1917. . R, R. 03
R NU CTS O 1017 ND 1921.
The statutory e presson cosey reated busness contaned
n secton 1331(b) of the Revenue ct of 1921 does not refer to the
method of conductng the busness but to the knd of busness done,
a smarty of the products manufactured or deat In.
The Commttee has consdered the appea of the M Company from
the acton of the Income Ta Unt n hodng that the appeant com-
pany and the O Company were affated durng the ta abe year 1917.
The queston of stock ownershp s not nvoved n ths case, as the
appeant company s shown to have owned 100 per cent of the stock
of the other company referred to durng the year 1917. urther-
more, a ntercompany transactons appear to have been at market
4177 24 29
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1331, rt. 1735.
442
rates. The Unt s contenton s that the two companes were en-
gaged n the same or a cosey reated busness wthn the purvew
of secton 1331(b) of the e venue ct of 1921.
The evdence shows that the M Company conducted a reta umber,
coa, and budng matera busness on an ownershp bass, whe
the O Company conducted a whoesae coa and budng matera
busness on a brokerage bass.
The Commttee s of the opnon that the statutory e presson
cosey reated busness does not refer to the method of conduct-
ng the busness, but to the knd of busness done that s, a smarty
of the products manufactured or deat n.
ccordngy, t s recommended that the appea be dened.
Char.es D. a met,,
Charman Commttee on ppeas and Revkw.
rtce 1735: Consodated returns for year 1917.
(See L. O. 1108 sec. 32 , art. 8 4.) ueston of emnaton of
ntercompany transactons whch occurred at a tme when the cor-
poratons were affated but pror to the years for whch consodated
returns of the corporatons were fed.
rtce 1735: Consodated returns for year 1917. 111-25-1 22
I. T. 2033
R NU CTS O 1917 ND 1921.
The M Company may not ncude n ts consodated return for
the year 1917 subsdary corporatons engaged n numerous and
varous enterprses, some of whch are pubc servce corporatons,
operatng street raways, eectrc ght and power pants, others
operatng o and gas wes and ppe nes and others operatng ra-
roads, steamshp nes, etc., many of whch are unreated and oper-
ated ndependenty.
The fact that substantay a the stock n the varous compa-
nes was owned by the same parent company, and the companes
and busnesses operated n accordance wth the poces prescrbed
by that company as the hoder of ther stock, does not mean that
they were not operated ndependenty wthn the meanng of sec-
ton 1331 of the Revenue ct of 1921.
The fact of ntercompany transactons can not obvate the
necessty of owners-hp or contro of substantay a the stock.
The stock ownershp or contro must e st before the queston of
ntercompany transactons can be consdered under the provsons
of the statute.
Carefu consderaton has been gven to the cams of the M Com-
pany and affated companes on the queston of affatons for 1917.
Incuded n the consodated return of the M Company were sev-
era corporatons engaged n numerous and varous enterprses,
many of whch are whoy unreated. Some of the companes are
pubc servce corporatons operatng street raways, eectrc ght
and power pants, others are operatng o wes, gas wes and ppe
nes, bot separatey and n connecton wth other corporatons oper-
atng smar busnesses, others operate raroads and steamshp nes,
constructon companes and other enterprses. The M Company was
organzed as a hodng company but subsequenty became aso an
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1331, rt. 1735.
operatng company. It owns a or substantay a of the stock n
the subsdary corporatons, e cept the foowng: The N Company,
the O Company, the P Company, and the Company. In the O
Company the M Company owns ony 25 per cent of the stock and
has no contro over the ma|orty thereof. The fact of ntercompany
transactons can not obvate the necessty of ownershp or contro
of substantay a the stock. The stock ownershp or contro must
e st before the queston of ntercompany transactons can be con-
sdered muter the provsons of secton 1331 of the Revenue ct of
1921. The ntercompany transactons mentoned n the statute must
be n addton to the stock ownershp or contro. No provson s
made for affatons on account of property contro or management.
Whte n the case of the N Company, the P Company, and the
Company the stock ownershp s greater, beng 50 per cent, 5.07
per cent, and 2.05 per cent, respectvey, there s nothng n the te
to ndcate any contro over suffcent of the baance of the stock to
gve the ownershp or contro of substantay a thereof, as con-
tempated by the statute, to the M Company, nor does any nforma-
ton appear n the rte whch woud ndcate that these companes
have any such ntercompany transactons as mentoned n the
statute whch woud authorze or permt affaton among them-
seves or wth other corporatons ncuded n the consodaton.
Whe t appears that the M Company contros and manages the
property and assets of the above-named companes, such contro and
management s not such an ntercompany transacton as s con-
tempated by the statute.
It aso appears that numerous pubc servce corporatons have
been affated one wth another and aso wth other corporatons.
arge number of the pubc servce corporatons, as we as other
corporatons, were operated ndependenty and were not physcay
connected or merged. Such affatons are specfcay prohbted
from beng ncuded n consodated returns for 1917 by secton 1331
of the Revenue ct of 1921. The fact that substantay a the stock
n the varous companes was owned by the same parent company
and the companes and busnesses operated n accordance wth the
poces prescrbed by that company as the hoder of ther stock
does not mean that they were not operated ndependent wthn
the meanng of the statute. The owner of the stock of severa cor-
poratons may operate them ndependenty of each other. Ths was
ceary done n the case of numerous corporatons n ths case. Those
corporatons whch were not physcay connected or merged, whose
ony connecton wth the other corporatons or busnesses was by
vrtue of the common stock ownershp of the parent company, whch
were not operated as pant factes of another or others, or were
not ntegra parts of a group organzaton operated as a snge en-
terprse and whch had no ntercompany transactons of any knd
wth any other corporaton, were, operated ndependenty wthn the
meanng of secton 1331 of the Revenue ct of 1921.
It s not camed that reatons of any knd e sted between the
Company and the S Company. There s no connecton between
the T Company and the U Company. The Company had no
connecton wth and had no deangs of any knd wth the W Com-
pany or any of ts subsdares. The Company has had no dea-
ngs of any knd wth the Y Company or the Z Company. The
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444
Company has had no deangs of any knd wth the C Company.
The above companes are merey cted as ustratons of the absoute
ndependent operaton of numerous pubc servce corporatons
whch have been ncuded n the consodated returns. Many others
whch have been ncuded are operated equay as ndependenty
and separatey.
In the case of corporatons other than pubc servce corporatons
whch have been ncuded n the consodated return, many are en-
gaged n dfferent busnesses, are entrey separate and ndependent
and n no way connected wth each other, and have had no deangs
of any knd wth any other corporaton ncuded n the group, and
there are no arrangements or connectons of any knd between them
e cept the ownershp of ther stock and n many nstances the opera-
ton and the management of the busnesses and propertes by a com-
mon parent company. The statute requres n addton to stock
ownershp or contro that n order that two or more corporatons or
partnershps may be affated n 1917 they must be engaged n the
same or a smar busness, or that one buy or se to the other, prod-
ucts or servces above or beow market, thus effectng an artfca
dstrbuton of profts, or that one corporaton or partnershp so ar-
range ts fnanca reatonshp wth other or others as to assgn
to t or them a dsproportonate share of net ncome or nvested cap-
ta. The above provsons of the statute set forth the ony ntercom-
pany transactons whch permt affatons for 1917, whch ntercom-
pany transactons are |ust as essenta to the affaton as stock
ownershp or contro. No provson s made for affaton on account
of the contro or management of busness or propertes n the absence
of such transactons above mentoned.
The purpose of ths rung s merey to set forth the ega prn-
cpes nvoved and not to set out n deta whch of the corporatons
are propery affated and whch shoud be omtted from the con-
sodated return.
rtce 1735: Consodated returns for year 1917.
(See I. T. 2032 sec. 240, art. 33.) ueston whether votng
contro e ercsed through the hodng of pro es consttutes contro.
TITL I . G N R L PRO ISIONS.
S CTION 1400. R P LS.
m-25-1 2
T. D. 3 0-2
ffectve date of repea of certan ttes and sectons of the
Revenue ct of 1921.
Treasury Department,
O nc of Commssoner of Interna Revenue.
Washngton, D. C.
To coectors of nterna revenue and other concerned:
Under the provsons of secton 1100(a) of the Revenue ct of
10-24 the foowng ttes and sectons of the Revenue ct of 1921 are
repeaed as of the date and tme specfed:
Tte II (caed Income Ta ), as of anuary 1, 1924.
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Tte I (caed state Ta ), 4.01 p. m., Washngton tme, une
2,1924, the date and tme that the ct was sgned by the Presdent at
Washngton, D. C.
Tte v (caed Ta on Teegraph and Teephone Messages ),
e cept subdvson (d) of secton 500, on mdnght, uy 2, 1924.
Sectons 02 and 03 of Tte I (beng the ta es on certan
beverages and consttuent parts thereof), 4.01 p. m., Washngton
tme, une 2, 1924.
Tte II (caed Ta on Cgars, Tobacco and Manufactures
Thereof ), 4.01 p. m., Washngton tme, une 2, 1924.
Tte III (caed Ta on dmssons and Dues ), on mdnght,
uy 2, 1924.
Sectons 901, 902, 903, and 904 of Tte I (beng certan e cse
ta es), 4.01 p. m., Washngton tme, une 2, 1924.
Secton 900 of Tte I (beng certan e cse ta es), and secton
905 of Tte I (beng the ta on |ewery and smar artces), on
mdnght, uy 2, 1924.
Tte (caed Speca Ta es ), on une 30, 1924.
Tte I (caed Stamp Ta es ), on mdnght, uy 2, 1924.
Secton 1100(b) of the Revenue ct of 1924 provdes that:
The parts of the Revenue ct of 1921 whch are repeaed by ths ct sha
(e cept as provded n sectons 280 and 310 and e cept as otherwse specfcay
provded In ths ct) reman n force for the assessment and coecton of a
ta es Imposed by such ct, and for the assessment, mposton, and coecton
of a nterest, penates, or forfetures whch have accrued or may accrue n
reaton to any such ta es, and for the assessment and coecton, to the
e tent provded n the Revenue ct of 1921, of a ta es mposed by pror
ncome, war-profts, or e cess-profts ta cts, and for the assessment, m-
poston, and coecton of a nterest, penates, or forfetures whch have
accrued or may accrue n reaton to any such ta es. In the case of any ta
Imposed by any part of the Revenue ct of 1921 repeaed by ths ct, If
there s a ta mposed by ths ct n eu thereof, the provson mposng
such ta sha reman n force unt the correspondng ta under ths ct
takes effect under the provsons of ths ct.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved une 1 , 1924.
. W. Meon,
Secretary of the Treasury.
MISC LL N OUS.
n-o-1410
I. T. 1941
Of nterest to attorneys and agents havng busness before the
ureau of Interna Revenue s a rung approved by the Treasury
Department Commttee on nroment and Dsbarment, permttng
messengers or runners empoyed by agents or attorneys practcng
before the Income Ta Unt to ne papers pertanng to ncome
ta returns and to receve nformaton as to the status of ncome
ta cases though not themseves enroed to practce before the De-
partment. The attorney or agent of the ta payer s requred to s-
sue to the messenger or runner a substtute power of attorney gvng
hm authorty to act n such matters before the Unt. In a cases
a substtute power of attorney can be gven ony by the attorneys
or agents of record. The rung s mmedatey effectve.
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III-21-1S72
T. D. 35S9
MUNITIONS M NU CTUR RS T R NU CT O 1 18 D CISION O
COU T.
1. Muntons Manufacturer s Ta posves Pchc cd 10
I ( NT WaT .
person who manufactures and ses for mtary purposes pcrc
acd contanng 10 per cent water s a manufacturer of an e po-
sve wthn the meanng of secton 301, subdvson 1(a), of the
Revenue ct of 391 and hence sub|ect to the muntons manu-
facturer s ta eved under Tte III of that ct.
2. Decson ffrmed.
The decson of the dstrct court (290 ed., 101S T. D. 3477
C. 13. II-, 214 ) s affrmed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Crcut Court of
ppeas for the Second Crcut n the case of ohn . oes, Re-
cever of mercan Synthetc Dyes, Inc., v. dwards, Coector, s
pubshed for the nformaton of nterna-revenue offcers and others
concerned.
D. . ar.
Commssoner of Interna Revenue.
pproved May 17,1924.
. W. Meon,
Secretary of the Treasury.
Unted States Crcut Court of ppeas, Second Crcut.
ohn . oes, a Recever of mercan Synthetc Dyes, Inc., pantff n error,
v. Wam II. dwards, Coector of Interna Revenue for the Second D-
trct of New York, defendant n error.
May 5, 1924.
efore ough, Manton, and Mayer, Crcut udges.
Wrt of error to the Unted States Dstrct Court for the Southern Dstrct
of New York. cton by ohn . oes. as recever of mercan Synthetc
Dyes, Inc., aganst Wam . dwards, coector of nterna revenue for the
second dstrct of New York, o recover ta es pad under protest under the
Revenue ct of September 8, 191 (39 Stat, 780). udgment for defendant
Pantff appeas. ffrmed.
Manton, Crcut udge: The mercan Synthetc Dyes, Inc.. was a rgna
corporaton and contracted wth the Impera Russan Government and the
Repubc of Prance, (urng the Word War, for the manufacture and sae of
14,000,000 pounds of pcrc acd. It reazed durng the year 191 a net proft
on these transactons amountng to . 1,823,270.24. The Government bus assessed
and coected a ta of 12 per cent on ths net proft, amountng to 227,908.78,
wth nterest Ths ta was assessed upon the cam that the pcrc acd so
manufactured and sod s an e posve wthn the purvew of secton 301 of
Tte III of the Revenue ct of 191 (39 Stat, 781). It was sod, coneededy,
through agences to the Governments of rance and Russa durng a war pe-
rod, and, whe there Is no drect evdence, the crcumstances ustfy the cam
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Msc.
of the Government that t was for war purposes. The statute mposng the ta
s a revenue measure and provdes (secton 301) :
That every person manufacturng (a) gunpowder and other e posves,
e ceptng bastng powder and dynamte used for Industra purposes
sha pay for each ta abe year, n addton to the ncome ta mposed by Tte
I, an e cse ta of T2 per centum upon the entre profts actuay receved or
accrued for sad year from the sae or dsposton of such artces manufactured
wthn the Unted States: Provded, however, That no person sha pay such
tu upon net profts receved durng the year 1910 derved from the sae and
devery of the artces enumerated n ths secton under contracts e ecuted
and fuy performed by such person pror to anuary 1. 1 )1 .
It s conceded that pcrc acd, so sod under these contracts, contaned 10
per cent mosture, and further that dry pcrc acd, t. e., pcrc acd contanng
ess than 1 per cent of water, s an e posve under secton 301 of the ct.
ta on dry pcrc acd s conceded to come wthn the purvew of the ta ng
statute. Much testmony was adduced at the tra as to the chemca propertes
of pcrc acd, and ts behavor when dry and when there s the presence of
10 per cent mosture. Pcrc acd s the product of the ntraton of pheno or
carboc acd. In manufacturng t, the mercan Synthetc Dyes, Inc., m ed
pheno and suphurc acd and to the resutng product, caed pheno su-
phonc acd, added water n quantty. The m ture was then treated wth
ntrc acd, producng a yeow scum whch s pcrc acd. The crystas were
than transferred to tanks and more water added to ceanse the substance of
a qud acds and mpurtes. The upper ayer of water contanng the qud
cds was then syphoned off and a but 10 per cent of the water removed
from the pcrc acd by means of centrfuges. The centrfuges were stopped
when ths percentage vus reached and the pcrc acd was transferred to bns
fnd ater packed n pa:affn ned barres for shpment. The mosture content,
athough hed as cose to 10 per cent as possbe, vared a trfe above or beow
that percentage. The foreman n charge of the centrfugatng process |udged
the mosture content by the ength of tme the centrfuges were n operaton.
The record dscoses that pcrc acd was used e tensvey durng the war as an
e posve by the rench and Russan Governments. or ths purpose, pcrc
acd s desred n a dry state. It s unsafe to shp whe dry and the practce
s to eave the mosture content so as to avod e podng whe n shpment.
To dry t requres a dryng process of from 3 to 72 hours. The process s
merey e posng t to the atmosphere under proper atmospherc condtons,
when t w dry down to a pont when t may be nsed as an e posve. Dry
pcrc acd s e tremey senstve to shock and frcton. The presence of water
has a dsenstzng effect on the acd crystas.
The shpments n queston to the rench and Russan Governments were
made to the mtary departments of those Governments. aborate provson
was made for nspecton and testng. The packng was carefuy prepared
so as to prevent the evaporaton of mosture. The ony queston presented on
ths appea s whether pcrc acd contanng 10 per cent wnter Is an e posve
wthn the meanng of the ct. If so, the ta was propery assessed and was
payaba The purpose of ths ta ng statute was to reach profts derved from
the busness of manufacturng and song war muntons. It was ntended that
the Government mght ava tsef of such profts and the ta was to be meas-
ured by the profts so derved. (Carbon Stee Co. v. Letceyn, 251 IT. S., 501.)
The contracts made wth the Governments n queston ndcate a vast quantty
of acd runnng nto arge fgures. Tme was the essence of the contracts and
apparenty substanta profts were provded for. They were made wth the
mtary authortes, ndcatng ceary that the uses to whch the pcrc acd
was to be put were mtary n ther nature and were not to be used for the
ordnary ndustres of peace tme. It was to be used as an e posve or mun-
ton of war.
Whether wet or dry, t s manufactured by the same process. The yeow
scum formed by the chemca reacton resutng from the treatment of the
pheno suphonc acd wth ntrc acd consttutes pcrc acd. The chef func-
ton of the water n the manufacturng process appears to be the purfcaton of
the pcrc acd by removng a foregn mpure acds created n the course of
manufacture. There s ro chemca assocaton or combnaton of the 10 per
cent water retaned wth the pcrc acd crystas, and when the water s ap-
ped t s conceded to be competey manufactured. The argument of the
pantff n error proceeds upon the cam that the rght to recover s based
upon the behavor of the pcrc acd when wet wth 10 per cent or more of
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448
water as beng dfferent from the behavor when dry that s to say, t s
e posve when dry and not so when wet. ut the pcrc acd crystas, whch
s the e posve substance, s found n wet and dry pcrc acd. The contracts
e pressy provded t to be pad on a net dry weght bass, and the fact s not
controverted that wth the 10 per cent mosture It coud be dred and made
avaabe as an e posve by merey e posng the acd to a dry atmosphere.
Merey provdng for mosture or water to guard aganst e poson durng
shpment does not change the character of the manufactured product. (Unted
Mates . etna posves Co., 25 U. S., 402 osrcke Runyan Co. v. Unted
States, 12 ed., 1018 Unted States v. uttroff Pekhardt Co., 147 ed., 758,
affd. 154 ed., 1004.)
It s argued that pcrc acd mght be used n manufacture as a dyestuff.
owever, the record dscoses when used as a dye, pcrc acd as a much
greater duton than 10 per cent water. ut the purpose of the manufacture
and use here s easy nferabe and, ndeed, pan. There s some testmony f
an e pert character that pcrc acd contanng 10 per cent water can be com-
petey and effectvey e poded by commerca detonators. The queston s
presented, When s manufacturng done, and when s manufactured
attaned (Carbon Stee Co. v. Lcceyn, supra.) In Worth ros. v. Lcderer
(251 U. S., 507), nvovng the same statute, the pantff made the stee and
dd the forgngs on stee she bodes under an order of the Mdvae Stee Co.
to enabe the atter to carry out a contract t had wth the rench Government
for certan e posve shes. The stee was made and the forgngs done by the
pantff n accordance wth specfcatons requred by the rench Government.
The forgngs so sod were 80 per cent short of the pont where they coud be
reated to or combned wth any other component of the she structure. The
forgngs had to he sub|ected by the stee company to 20 addtona, separate, and
dstnct manufacturng processes before t was made nto a compete she body.
The pantff contended that the artce manufactured and sod by t was not
a she or part of a she wthn the meanng of the aw and that the term
part meant a substantay competed part, a part so far advanced n con-
structon that wthout further manufacturng t coud be ncorporated nto a
competed she. In answerng the argument, the court sad:
Congress dd not ntend to sub|ect ts egsaton to such artfcates and
make t depend upon dstnctons so refned as to make a part of a she not the
ta abe part of the aw. esdes, pettoner understates ts work. It dd
not dever raw matera to the Mdvae Company. Certan processes had been
performed on the matera gvng t a shape adapted to ts destnaton. It was
made cyndrca, hoow, wth one end cosed. It was rough, t s true, but
an advance upon the raw matera.
Congress n deang wth the mposng of ta es as the man ob|ect, and wth
the work done as mere ncdent to ad n determnng the ta , dd not regard
the quantum of the work done as matera. The cruca queston s not the
quantum of the manufacture measured by the steps, but the fact of manufac-
ture resutng n profts. The fundamenta dea of a manufactured artce s
that t must he so neary competed as to be servceabe for the pur| ose for
whch t was desgned. ( orged Stee Whee Co. v Leweyn, 251 U. S., 513.)
In the nstant case, t can not be successfuy argued that the pcrc acd
manufactured by the mercan Synthetc Dyes, Inc., was no more than a ma-
tera enterng nto and used as a component part of the manufacture of the
e posve. The debates n Congress do not support the cam of the pantff n
error. The product manufactured was ceary an e posve wthn the mean-
ng of the ct. (Dayton rass Co. v. Ofran, 277 ed., 227.) It s known to
he one of the most voent and commony used e posves empoyed e tensvey
durng the recent Word War. We regard ths resut as consstent wth the
manfest and e pressed ntenton of Congress.
udgment affrmed.
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S L S T RULINGS.
TITL T ON T L GR P ND T L P ON
M SS G S. (1921)
Secton 502, Reguatons 57, rtce 32: Credt. III-4-133
( so Secton 1302(a), Reguatons 57, rtce 41.) S. T. 440
Where a teegraph company receves and transmts messages on
credt and subsequenty fas to coect the charge fnd the ta , the
company s not abe to the ta but Is abe to the penaty mposed
for faure to coect the ta .
dvce s requested as to the proper nterpretaton to be paced
upon artce 32 of Reguatons 57, deang wth the ta mposed by
secton 500 of the Revenue cts of 1918 and 1921, upon teephone
factes, etc. Ths artce reads as foows:
Where credt s e tended by a carrer to a sender or addressee for the pg ment
of charges for the transmsson of a message, or to the essee of speca serv-
ce for the payment of charges for such servce, and such charges are not pad,
the ta nevertheess appes and the carrer s abe for the coecton thereof.
It s the practce of the teegraph companes to accept over the
teephone as we as over the counter messages from responsbe
busness concerns wthout demandng mmedate payment of the
charges or the ta , and t sometmes happens that the person sendng
a teegram under the crcumstances above set out fas to pay for
the message and kewse fas to pay the ta . It s suggested that
artce 32 of Reguatons 57 shoud not be construed as appyng to
such cases as these, but ony n case credt s e tended for servce
beyond the usua and customary tme for payment. It s further
suggested that shoud the transmsson company after grantng ths
further e tenson of tme fa to coect the ta es due, then ony the
penaty coud appy and the ureau coud not hod the transmsson
conrpan r abe for the ta whch t fas to coect, whether ths fa-
ure be due to nabty to coect or due to e tendng credt.
Secton 501 of the Revenue cts of 1918 and 1921 provdes that
the ta es mposed by secton 500 sha be pad by the person payng
for the servces or factes rendered, and secton 502 provdes that
each person recevng any payments referred to n secton 500 sha
coect the amount of the ta , f any, mposed by such secton from
the person makng such payments, . It s apparent, there-
fore, that Congress has paced the burden of payng the ta upon the
person payng for the servces rendered and the burden of coectng
the ta upon the person furnshng the servces or factes. Ceary,
the Department may not by reguaton shft ths burden. Therefore,
(449)
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5503(d), Reg. 58, rt. 21.
450
the provson of the reguatons n queston may not be so construed.
Such a constructon s not, however, necessary or requred under the
anguage of ths provson, as t merey mposes the same obgaton
upon the person furnshng the servce -whch the aw tsef does
that of coectng the ta from the person to whom or for whom the
servce has been rendered. urthermore, n Soctor s Opnon 44
(S. T. C. ., 1920, 122) t was hed that the person requred by
sectons 500, G30, 800, 801, and 904 of the Revenue ct of 1918 to
coect and account for the ta es mposed thereby, who fas to co-
ect the same, ncurs abty for the penates prescrbed, but not
for the ta es mposed, . gan, n Law Opnon 1047
(S. T. C. ., 1920, 125), deang wth the ta mposed by secton
500 of the Revenue ct of 1918, t was concuded that a carrer
whch fas to coect the ta , where, the aw e pressy states that t
sha make such coecton, s denquent n ts duty, and that am
cam whch the Government may have aganst such carrer for such
denquency must be n the nature of a penaty.
You are accordngy advsed that ths offce s of the opnon that
a teephone or teegraph company whch fas to coect the ta m-
posed by secton 500 of the Revenue cts of 1918 and 1921 s not
abe for the ta t shoud have coected, but s abe for the penaty
mposed by secton 1308 of the Revenue ct of 1918 or secton 1302
of the Revenue ct of 1921 for faure to coect.
TITL . T ON TR NSPORT TION ND OT R
CILITI S, ND ON INSUR NC . (1918)
INSUR NC .
Secton 503(d), eouatons 58, rtce 21: 111-20-15 3
Insurers e empt from ta . S. M. 1819
( so secton 800(b), Reguatons 43-1, rtce 19.)
S CTION SOS, R NU CT O 101S, ND S CTION D04, R NU CT O 1917.
certan poce eneft assocaton, under the condtons of ts
organzaton, s not e empt from ta on the nsurance afforded
by t.
ttenton s nvted to artce 19, paragraph 4, Reguatons 43,
Part 1 (revsed anuary, 1922), n whch t s hed that a poce reef
assocaton s a chartabe organzaton wthn the meanng of the
e empton provsons (secton 800(b) of the Revenue cts of 1918
and 1921) of the admssons ta statutes, and the queston s presented
whether the M Poce P eneft ssocaton, Inc., s e empt from ta es
under secton 231 of the Revenue ct of 1918 and the correspondng
secton of the Revenue ct of 191 and secton 504 of the Revenue
ct of 1917 and secton 503 of the Revenue ct of 1918.
The M Poce eneft ssocaton was ncorporated n 1907 for the
purpose of untng fraternay a members of the M poce depart-
ment. ny member of that department, havng served hs proba-
tonary perod, may become a member of the assocaton upon sgn-
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451 R50S(d), Reg. 58, rt. 2L
ng the by-aws and payng an ntaton fee. The corporaton s
controed by a board of drectors consstng of the presdent, secre-
tary and treasurer, and four members of the assocaton, a of whom
are eected annuay by the members of the assocaton. The funds
of the assocaton are derved from dues and assessments pad by
members and from donatons. It does not appear that the assoca-
ton receves any support from pubc funds or s n any way con-
troed by the State or muncpaty, e cept n so far as the State
aws appy to smar organzatons. Under the by-aws of the asso-
caton t s agreed that upon the death of a member a stated sum
w e pad to hs desgnated benefcary, and upon the death of the
wfe of a member a esser sum s pad. No certfcates of membershp
or poces are ssued.
It s apparent from the foregong that the M Poce eneft sso-
caton s not e empt, from ta as a State or muncpa govern-
menta nstrumentaty.
In Law Opnon 371 (not pubshed n uetn servce) t was hed
that an organzaton operatng under artces of ncorporaton, by-
aws, or smar form of wrtten agreement estabshng the reaton-
shp of the members to the organzaton and to each other, whch
ssues poces or any documents or papers whereby contracts of fe,
nsurance are effected, s abe for the ta n queston. urthermore,
ths offce has hed that contrbutons to the M Poce eneft sso-
caton were not deductbe under secton 214(a) (11) of the Revenue
ct of 1918 as contrbutons to a chartabe organzaton or assoca-
ton.
The M Poce eneft ssocaton does not operate under the odge
system and, as t s not engaged n nsurng property, t s not a farm-
ers or other mutua ha, cycone, or fre nsurance company, or ke
organzaton hence t s not e empt under secton 231(3) or secton
231(10) of the Revenue ct of 1918 or the correspondng provsons
of the Revenue ct of 191 . ( ankers Ss Panters Mutua Insur-
ance ss n. v. Waker, 279 ed., 53, 5 T. D. 3318, C. . 1-1, 259.)
rtce 19, paragraph 4, Reguatons 43, Part 1 (revsed anuary,
1922), provdes:
reef assocaton, orgnnzed by the poce of a certan cty for the soe pur-
pose of provdng a fond for the reef of dependents of deceased pocemen, gves
a baseba game and turns the proceeds nto ts treasury. dmssons to the
gfme are e empt from ta .
Ths ony appes where the assocaton s organzed for the soe
purpose of provdng a fund for the reef of dependents of deceased
pocemen. urthermore, the assocaton must under the artce
compy wth the condtons outned n artce 1 , and one of the
condtons s that none of the funds must be pad or dstrbuted to
any of ts members e cept as charty or as reasonabe compensaton
for servces rendered. The assocaton here n queston does not com-
py wth these condtons, as funds are pad to a member on the death
of hs wfe and ts funds are not mted to the reef of dependents.
In the opnon of ths offce, therefore, the M Poce eneft sso-
caton s abe for the ta mposed by secton 504(a) of the Revenue
ct of 1917 and secton 503(a) of the Revenue ct of 1918.
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. 28(a), Reg. 52 (1919), rt. 13.
452
TITL I T ON R G S.
(1918)
Secton 28(a), Reguatons 52 (1919), rtce
13: Soft drnks.
111-14-1491
T. D. 3578
T ON R G S R NU CT O 1918 D CISION O COURT.
Sweet Cder Soft Drnk.
Sweet cder s not ta abe as a soft drnk under the provsons
of secton 28(a) of the Revenue ct of 1918.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To coectors of nterna revenue and others concerned:
The appended decson of the Unted States Crcut Court of p-
peas for the rst Crcut n the case of Casey, ormer Coector, v.
Sterng Cder Company s pubshed for the nformaton of nterna-
revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved March 28, 1924.
. W. Meon,
Secretary of the Treasury.
Unted States Crcut Court of ppeas for the |st Crcut.
ndrew . Casey, ormery ctng Coector of Interna Revenue, defendant,
pantff n error, v. Sterng Cder Company, pantff, defendant n error.
rror to the Dstrct Court of the Unted States for the Dstrct of Massachusetts.
ngham, .: Ths acton s brought by the Sterng Cder Company, a
Massachusetts corporaton, to recover the sum of 4,248.1 assessed by and
pad to the defendant as coector of ta es for a ta assessed under secton
28(a) of the Interna Revenue ct of 1918. approved ebruary 24, 1919 (40
Stat, at Large, 1057, 111 ), upon saes made by the pantff, between Septem-
ber 1, 1919, and anuary 1, 1920, of sweet cder and the barres contanng
the same, the vaue and saes prce of the cder beng 41,229.99 and of the
ban-es 1,549.01.
The pantff duy fed wth the coector a cam for refund of the ta on
the ground that nether the sweet cder nor the barres were ta abe under
the ct. The cam was dened, and he appeaed to the Unted States Com-
mssoner of Interna Revenue, who kewse re|ected the cam, and ths sut
was brought.
The defendant. In hs answer, admtted a the aegatons contaned n
pantff s decaraton, e cept that the ta assessed and coected by hm was
wthout authorty of aw, whch he dened, and averred that the ta was
awfuy assessed and coected. In the dstrct court t was found and rued
that the sweet cder was not ta abe as a soft drnk under secton 28(a)
of fc Revenue ct of 1918. and t was agreed that |udgment for the pantff
mght e entered, upon the fndng of the court, for the sum of 4,29 .1
damages, wth nterest amountng to 807.09 and costs and |udgment, havng
been entered therefor, the defendant brought ths wrt and assgns the foow-
ng errors: (1) That the court erred n refusng to rue that the sweet
cder manufactured by the pantff was a soft drnk ta abe under secton
efore ngham, ohnson, and nderson, udges.
December 21, 1923.
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453 28(a), Reg. 52 (1919), rt. 13.
28(a) (2) that It erred In refusng to rue that the vaue or prce of the
contaners n whch the sweet cder was sod was propery ncuded n the
saes prce on whch the ta was eved wthn the meanng of secton 28(a)
(3) that t erred n refusng to rue that artce 11 of Reguatons 52, ap-
proved May 3, 1919, was addressed to and reasonaby adapted to the enforce-
ment of secton 28(a) (4) that t erred n refusng to rue that artce 13 of
Reguatons 52, approved May 3, 1919, was addressed to and reasonaby
adapted to the enforcement of the Revenue ct of 1918 (5) that t erred
n refusng to rue that |udgment shoud be entered for the defendant
( ) that t erred n rung that the sweet cder manufactured by the pantff
was not a soft drnk and not ta abe as such under secton 28(a) and
(7) that t erred n rung that |udgment shoud be entered for the pantff.
Secton 28 reads as foows:
Sec. 28. That there sha be eved, assessed, coected, and pad n eu
of the ta es mposed by sectons 313 and 315 of tte Revenue ct of 1917
(a) Upon a beverages derved whoy or n part from cereas or sub-
sttutes therefor, and contanng ess than one-haf of 1 per centum of acoho,
sod by the manufacturer, producer, or mporter, n bottes or other cosed
contaners, a ta equvaent to 15 per centum of the prce for whch so sod
and upon a unfermented grape |uce, gnger ae, oot beer, sarsapara, pop,
artfca mnera waters (carbonated or not carbonated), other carbonated
waters or beverages, and other soft drnks, sod by the manufacturer, pro-
ducer, or mporter, n bottes or other cosed contaners, a ta equvaent to
10 per centum of the prce for whch so sod and
(b) Upon a natura mnera waters or tabe waters, sod by the producer,
botter, or mporter thereof, n bottes or other cosed contaners, at over 10
cents per gaon, a ta of 2 cents per gaon.
Upon an dentca state of facts the Crcut Court of ppeas n the Second
Crcut, n Monroe Cder neyar d rut Co. v. ordan (280 ed., 24), had
under consderaton the same questons rased by the present assgnment of
errors and hed that sweet cder was not ta abe as a soft drnk under secton
28(a) that artce 13 of Reguatons 52 whch provdes that the term
other soft drnks ncudes, among other drnks, appe |uce and
other frut |uces sod as beverages by the manufacturer In bottes or other
cosed contaners was nconsstent wth the statute that t amounted to
wrtng nto the statute the term sweet cder whch was not there and
that the artce n queston was nothng more than an e presson of opnon
by an admnstratve offcer and not by a court, and was of no vaue. We are
n fu agreement wth the concuson readed n that case, nnd, as the matters
there under consderaton were deat wth at great ength, we fnd t unneces-
sary to restate them.
We w, however, say that It seems to us that a further reason for the
concuson there reached In the constructon of secton 28(a) mght be stated.
It w be noted that n the secton unfermented grape |uce s specfcay
named as an artce sub|ect to the ta and that, foowng t, the artces gnger
ae, root beer, sarsapara, pop, artfca mnera waters (carbonated or not
carbonated), other carbonated waters or beverages, and other soft drnks are
named. ecause the enumerated artces that foow unfermented grape
uce are confessedy soft drnks, t s contended that unfermented grape
|uce s kewse a soft drnk that grape |uce beng the e pressed |uce of
the grape and a soft drnk, sweet cder, whch s the e pressed |uce of the
appe, s aso a soft drnk and ncuded wthn the words and other soft
drnks. ut unfermented grape |uce, as such and n ts natura state, s
not drunk as sweet cder s n ts natura state. Unfermented grape |uce s
commony drunk when water or water and sugar are added, and when so used
s a compounded or m ed drnk. When so used, t undoubtedy becomes a
soft drnk. That unfermented grape |uce becomes a soft drnk when water
or water and sugar are added Is specfcay recognzed n secton 02(b) of
the Revenue ct of 1921, where t s cassed as an unfermented frut |uce,
whch n ts natura form s not used as a beverage, but Is
ntended fbr consumpton as a beverage wth the addton of water or
water and sugar. though unfermented grape |uce, as such, s ta abe under
the ct of 1918, t can not propery be cassed wth gnger ae, root beer,
sarsapara, pop, etc., as a soft drnk, or be sad to be referred to as beongng
to that cass by the words and other soft drnks. Ths beng so, t s pan
that sweet cder, a natura frut |uce not a m ed drnk was not ntended
to be ncuded n the term and other soft drnks as used n secton 28(a).
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800(a), Reg. 43-1, rt. 4.
454
The pantff n error has taken a further poston n hs bref and argument,
apparenty not covered by hs assgnments of error, to the effect that secton
(528(a) s a reenactment, wthout change, or substanta change, of the pro-
vsons of secton 313(b) of the Revenue ct of 1917 that on or about May 31,
1918. the Treasury Department promugated artce 31, Reguatons 44. con-
strung secton 313(b) as makng sweet cder ta abe that Congress was
famar wth the provsons of Reguatons 44 when t enacted secton 82S(,
n ebruary, 1019, and dd so wth the Intenton that sweet cder shoud be
ta abe thereunder. If t be assumed that the queston s propery before us,
ths contenton can not be sustaned, for we do not regard secton 28(a) as a
reenactment of secton 313(b) wthout substanta change. Then ngau we can
not. on the facts n ths case, assume that Congress knew of aud consdered
Reguatons 44 as statng the true constructon of secton 313(b). The regua-
ton had not been n e stence for any consderabe ength of tme when secton
028(a) was enacted, and there s nothng to show that t had been consstency
enforced and acquesced n even durng that ength of tme, so that t woud
be key to have been known to Congress. The tme that eapsed between
the promugaton of the reguaton and the enactment of the Revenue ct of
1918, of whch secton 28(a) was a very sma part, was ony about nne
months, and the ct was undoubtedy drafted aud ntroduced ong pror to
ts fna adopton. urthermore, counse for the defendant has presented
photostatc copes of etters comng from the offce of the Commssoner of
Interna Revenue n the Treasury Department, wrtten n October, 1917, and
September, 1918, before and after the promugaton of Reguatons 44, statng
that sweet cder was not ta abe under the ct of 1917 and he further states,
wthout contradcton, that, whe the reguaton may have been enforced n
some paces, t was not generay throughout the country a of whch n-
dcates that there was no unform enforcement of or genera acquescence n
the reguaton as the true constructon of secton 313(b).
The |udgment of the dstrct court Is affrmed.
TITL IIL DMISSIONS ND DU S. (1918 ND 1921)
rtces 4, 29, and 31, Reguatons 43 (Part 1) (revsed anu-
ary, 1922), amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
Reguatons 43 (Part 1) (revsed anuary, 1922) s hereby
amended as foows:
rtce 4, e ampe (4), page 7, to read:
The foowng w ustrate the appcaton of the ta to charges made n
connecton wth swmmng poos where there s a snge undvded charge and
where there are separate and dstnct charges:
. Where a specfc charge s made for admsson to the budng or n-
cosure n whch a swmmng poo ocated, or to the swmmng poo tsrf.
su h charge s sub|ect to ta .
. Where no specfc charge s made for admsson to the hudng or n-
cosure n whch a swmmng poo s ocated, or to the swmmng poo tsef,
but a charge s made for a swm or otherwse, whch charge ncudes the
use of equpment or factes:
T ON DMISSIONS.
Secton 800(a), Reguatons 43-1, rtce 4:
Charges for renta of property or servces.
I-24-1 10
T. D. 3599
admssons ta .
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455
800(a) (2), Reg. 43-1, rt. 10.
(1) Tf a persons must pay ths charge n order to secure admsson to the
budug or neosure or to obtan physca access to the poo, whether or not
they ava themseves of the equpment or factes, such charge s sub|ect to
ta .
(2) If persons who furnsh ther own equpment and do not use any of the
factes other than the poo tsef are charged ess than the tota charge, whch
sum must be pad n order to secure admsson to the budng or ncosure
or to obtan physca access to the poo, such porton of the tota charge s
the bass of ta wth respect to a persons admtted.
certan bathng estabshment at a const resort makes a renta charge
of 50 cents, for whch t furnshes a bathng sut, towe, and a dressng room.
The patrons bathe n the ocean from an unncosed beach. ere the 50 cents
s ceary for renta and s not pad for admsson wthn the meanng of
te ct.
T S ON C RG S IN C SS O ST LIS D PRIC .
Secton 800(a) (2), Reguatons 43-1, rtce 10: 111-2 -1 38
Scope and bass of ta es. T. D. 3 03
DMISSIONS T S C SS O R ST LIS D PRIC R NU CT O
3918 D CISION O COURT.
1. dmsson Ta es Charges n cess of stabshed Prce.
person who has the rght to the permanent use of a bo n an
opera house who ses the rght to use such bo for more than 50
cents n e cess of the estabshed prce for such bo s abe to
the ta of 50 per cent of the amount of such e cess under the
provsons of paragraph (3) of secton 800(a) of the Revenue ct
of 1918.
2. Same stabshed Prce,
Where a person havng the rght to the permanent use of a bo
n an opera house ses the rght to use such bo , the estabshed
prce for the purpose of ta aton under paragraph (3) of secton
800(a) of the Revenue ct of 1918 s the prce charged for the
most neary smar accommodatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The appended decson of the Court of Cams of the Unted
States n the case of Georgne Isen v. The Unted States s pub-
shed for the nformaton of nterna-revenue offcers and others
concerned.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved une 1 , 1924.
. W. Meon,
Secretary of the Treasury.
Coubt of Cams of the Unted States. No. I-9
Georync Isen v. The Unted States.
Decded May 5, 1924.
ay, udge, devered the opnon of the court:
The pantff Is the owner and hoder of 300 shares of the capta stock of
the Metropotan Co., and thereby s entted to a cense to use bo No. 15 upon
the parterre ter of the Metropotan Opera ouse.
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800(a) (2), Reg. 43-1, rt. 10.
45
On December 30, 1919, the pantff wthout protest made a return and pad
ta thereon under the provsons of secton 800(a), paragraph (5), of the
Revenue ct of 1918, sad return beng based upon an admsson prce of 10
per performance durng the opera season e tendng from November, 1919, tn
pr, 1920, both ncusve.
On December 24, 1010, the Commssoner of Interna Revenue made a ru-
ng that any stockhoder of the Metropotan Co. seng a tcket for admsson
to any of the bo es hed by the stockhoders of sad company, whether the sae
of tckets was drect or through the opera house bo offce, was sub|ect to the
ta mposed by paragraph (3) of secton SOO(a) of the Revenue ct of 1918.
In compance wth that rung the pantff on anuary 28. 1920. made a
return to the coector of nterna revenue for the second dstrct of New York,
settng fort that she had. n consderaton of the sum of 9,525. sod tckets
to her bo n the sad opera house for 47 performances durng the grand opera
season from November, 1919, to pr. 1020, both ncusve and the pantff
pad to the sad coector the sum of 3,352.50, beng a ta equvaent to 50 per
centum of the e cess of sad sum of 9,525 over an amoun equa to 0 for
each of sad 47 performances, sad return beng fed and sad payment eng
made under protest. Thereafter, on October 23, 1920, the pantff presented
to the Commssoner of Interna Revenue a cam for the refundng of sad ta
and neged that the same was erroneousy or egay coected. On May 27,
1921, the Commssoner of Interna Revenue rendered a decson on sad cam
and re|ected the same. Whereupon the pantff brought ths sut to recover
from the dked States the sad sum of 3,352.50.
Te decson of ths case depends upon the constructon whch s to be paced
upon paragraph (3) of secton S00(a) of te Revenue ct of 1018, taken n
connecton wth paragraph (5) of the same secton and ct.
Paragraph (5) reads as foows:
In the case of persons havng the permanent use of bo es or seats n an
opera house or any pace of amusement or a ease for the use of such bo or
seat n such opera house or pace of amusement (n eu of the a mposed hy
paragraph (1)), a ta equvaent to 10 per centum of the amount for whch a
smar bo or seat s sod for each performance or e hbton at whch the
bo or seat s used or reserved by or for the essee or hoder, such ta to be pad
by the essee or hoder
1 nder ths paragraph the pantff made a return and pad the ta . In mak-
ng sad return she f ed the prce of the bo whch she hods at 00, whch
was equvaent to 10 for each tcket sod for sad bo , t appearng that s
tckets for sad bo for each performance are ssued to the hoder of the bo ,
pror to the openng of the opera season. Te pantff n ths case empoyed
an agent to se and dspose of te sad tckets for her. The agent sod the
tckets, and after deductng hs commsson for hs servces turned over the
proceeds of sad saes to the pantff. Te ta es were pad by the pantff
wthout protest, nnd she does not now make any cam for the refund of the
ta es pad by her under paragraph (5).
Paragraph (3) of secton (800) (a) of the Revenue ct of 1918 reads as
foows:
T pon tckets or cards of admsson to theaters, operas, and other paces of
amusement, sod at news stands, hotes, and paces other than the tcket
offce of such theaters, operas, or other paces of amusement, at not to e ceed
50 cents n e cess of the sum of the estabshed prce therefor at such tcket
offces pus the amount of any ta mposed under paragraph (It, a ta equva-
ent to 5 per centum of the amount of such e cess: and f sod for more than
50 cents n e cess of the sum of such estabshed prce pus the amount of any
ta mposed under paragraph (It. a ta equvaent to 50 per centum of the
whoe amount of such e cess, such ta es to be returned and pad, n the
manner provded n secton 903, by the person seng such tckets:
It w be observed that under ths paragraph the ta s mposed on the
persons seng the tckets.
The ta s mposed upon persons who se tckets at news stands, hotes, and
paces other than the tcket offces of theaters, operas, or other paces of
amusement. rom the wordng of the statute, then, t makes no dfference
where the tckets are sod by the person seng them. It s enough f they
are sod, and t can not be sad that n order to bo sub|ect to the ta the
person seng them must se them at news stands, hotes, and paces of ke
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457 800(a) (2), Reg. 43-1, rt. 10.
character. If that were so the ntent and purposes of the ct woud be de-
feated and the payment of the ta coud very easy he evaded.
Manfesty t was the ntent and purpose of Congress that f tckets were
sod for more than 50 cents n e cess of the estabshed prce, pus the amount
of the ta mposed under paragraph (1), a ta equvaent to 50 per centum of
the whoe amount of such e cess shoud he mposed. Such ta was not con-
fned to tckets sod at news stands, hotes, and smar paces, but was to ap-
py to a saes of tckets and to a persons seng them wherever sod. The
pfntff s not e empt from the ta mposed by paragraph (3) uness she can
demonstrate that the tckets sod by her are not ncuded n the provsons of
that paragraph.
The pantff n order to do ths contends that havng pad the ta mposed
by paragraph (5) she s e empt from payng the ta mposed by paragraph
(3). no matter at what prce she may have sod the tckets for her bo .
When Congress enacted paragraph (5) of the statute the evdent purpose
was to reach by a arger ta persons who were abe to have the permanent use
of bo es n an opera house, or who had a ease for such bo es. It was not as-
sumed that such person woud se tckets for these bo es, or f t was, Congress
mght we have consdered that paragraph (3) woud appy as we to such per-
sons as to other seers of tckets. There s nothng n paragraph (5) whch
of tseff e empts the hoders of bo es from the provsons of paragraph (3).
The pantff ays much stress upon the aeged fact that tere was no
estabshed prce for the tckets sod by her, and argues that f there was no
estabshed prce for sad tckets she does not come under the provsons of
paragraph (3) that an estabshed prce for sad tckets must be shown to
e st, or to be n effect at the tme of the sae, before the ta can be mposed.
The Government n ascertanng the ta for whch the pantff was abe
under paragraph (5) f ed the prce of the bo of the pantff at 0, or 10
for each tcket. She pad ths ta wthout protest and thereby acquesced n
and agreed that 0 was the prce of the bo for purposes of ta aton under
paragraph (o). If, then, 0 was the prce whch was recognzed bot by the
pantff and the Government as beng the prce estabshed for purposes of
ta aton under paragraph (5), t necessary became the estabshed prce upon
whch to base the ta mposed by paragraph (3) f pantff was abe for sad
ast-named ta , as any person woud be who sod tckets for more than 50
cents n e cess of the sum of the estabshed prce.
It seems to be the contenton of the pantff that a prce must be estabshed
by some person havng the power of estabshment. Who other than the pan-
tff had the power to estabsh the prce of a bo , or seats n a bo , over whch
she had absoute contro nd so when t came to estabshng a prce .for her
bo for purposes of ta aton she acquesced n the prce.
It s true that she sod her bo for the 47 performances for a prce whch was
far n e cess of the 0. ut because she estabshed one prce at one tme
and another prce at another tme, can she thereby be reeved of ta aton by
aegng that there was no estabshed prce as requred by the statute If
so, then the statute s nugatory, not ony as to the pantff but as to a others
who mght have t n ther power to estabsh prces for tckets at frst one
prce and then another.
The statute must )e construed n the ght of reason and common sense, and
t s not perceved why the pantff shoud be e empted from the ta mposed
by paragraph (3). She sod the tckets and obtaned for them more than 50
cents n e cess of the sum of the estabshed prce. The ntent and purpose
of Congress was to mpose a ta n |ust such a case, and the fact that the
pantff pad another and a dfferent ta upon a bo whch she owned can
not e cuse her from payng the ta . Nor does t seem a great hardshp even
f the 3,000 assessment pad by her s taken nto consderaton, for after
payng the assessment on her shares of stock and the ta she has st some-
thng over 3,000 as the resut of her tcket saes.
These beng the vews of the ma|orty of the court, the petton of the
pantff must be dsmssed. It s so ordered.
4177 24 30
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800(c), Rog. 43-1, rt. 31. 458
Secton 800(b), Reguatons 43-1, rtce 19:
Chartabe organzatons.
(See S. M. 1819 sec. 503(d), Reg. 58, art. 21 (p. 450).) certan
poce beneft assocaton s hed not entted to e empton from ad-
mssons ta .
Secton 800 (b), Reguatons 43-1, rtce 29: 111-24-1 11
Cam for e empton. T. D. 3599
Reguatons 43 (Part 1) (revsed anuar , 1922), s hereby
amended as foows:
The frst sentence of artce 29 to read:
The benett of e empton from ta es on admssons or ta es on e cess
charges shoud be secured by e ecutng and fng an affdavt, on orm 755
(revsed), whch may be obtaned from any coector of nterna revenue.
Secton 800(c), Reguatons 43-1, rtce 31: 111-24-1012
Tckets or other means to check admssons T. D. 3399
requred.
Reguatons 43 .(Part 1) (revsed anuary, 1922), s hereby
amended as foows:
The frst sentence of subdvson (2), artce 31, page 43, to read:
The name of the pace to whch n tcket or card Is vad for a ta abe
admsson must n a cases be shown thereon.
The paragraph headed ceptons n subdvson (2), artce
31, page 44, to read:
(a) Snce tckets or cards of admsson whch are sod for 10 cents or ess
are not ta abe, they need not be seray numbered, dated, nor need they
have the name of the pace to whch they are vad prnted thereon. They
must, Ifowever, show the prce.
(b) In a mted cass of cases, the use of so-caed hard tckets used
for repeated performances s permtted wthout requrng that they be
seray numbered or dated. These tckets must, however, show the prce
and f te admssons are ta abe, must have prnted thereon the name of
the pace to whch they are vad.
rtce 31, subdvson (4), top of page 45, add a paragraph to
read:
In any case where tckets have become obsoete due to a chance n prce,
or unusabe for any other reason, they sha not be destroyed e cept n the
presence of a representatve of the coector s offce. They may he taken
to the coector s offce for destructon or may be hed at the theater unt
a deputy coector can ca. fter destructon a statement w he Issued
settng forth the numbers of the tckets destroyed, ther denomnaton, and
a other pertnent nformaton. Ths statement w be ssued n dupcate,
one copy to be retaned n the fes of the theater and the other copy by
the coector.
D. . ar,
Commssoner of Interna Revenue.
pproved une 7, 1924.
. W. Meon,
Secretary of the Treasury.
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459
801, Reg. 43-11, rt. 10.
T ON DU S.
Secton 801, Reg t tons 43-11, rtce 10:
Intaton fees.
111-18-1538
S.M. 1781
The amount whch s requred to be deposted nto a certan fund,
known as the depost fund, by each prospectve member of the cub
n order to gan membershp theren s ta abe as an ntaton
fee under secton 801.
It appears from the evdence submtted that the M Country Cub
was organzed as a soca cub that n 1923 t adopted by-aws whch
provde, among other thngs, that reguar membershps n the cub
sha be sod for one hundred doars ( 100) transfer fee and such
depost as the board of drectors may desgnate by resouton.
No person eected to membershp sha be deemed to e
a member or admtted to the prveges of the cub nnt he sha have
pad a transfer fee and depost, or unt the frst year s dues are pad
f the membershp s n a cass where no transfer fee s requred.
It appears from the fe that the board of drectors have determned
upon y doars as the amount to be deposted n order to secure mem-
bershp n the cub. The by-aws provde that ths depost may be
wthdrawn under the foowng crcumstances:
t the termnaton of fe membershp, the estate- of such member
sha be entted to receve the same payment from the depost fund
as a reguar member who resgns from the cub. When the combned
number of fe and reguar members equas 350, any reguar member
n good standng who resgns from the cub sha be entted to wth-
draw the amount of the depost at the tme of wthdrawa, e cept
that no member sha wthdraw a greater amount than s deposted
uness he has been a member n good standng for fve years or more.
ny member e peed from the cub sha not forfet any rght
he may have n the depost fund, but any moneys he may owe the
cub sha be deducted from the amount due hm from such fund
when payment s made.
It appea-s, however, that regardess of the provsons of the by-
aws the cub has made a practce of returnng the fu amount of
the depost to each member of the cub upon hs resgnaton.
rtce 10, Reguatons 43, Part 2, n so far as t s reevant, pro-
vdes:
The term ntaton fee ncudes any payment to the cub requred for
ecomng a member, whether evdenced by a certfcate of membershp or a
share of stock n the cub or not.
Whe n practce, these deposts may be refunded upon resgnaton
of a member, the ureau must regard them as beng hed by the
cub sub|ect to the restrctons contaned n the by-aws. They can
not be regarded strcty as beng the property of the. person makng
the depost for the reason that t does not appear to represent a oan
to the cub or an ndebtedness whch the cub s requred to pay some
tme n any event.
fter a carefu consderaton of the case, ths offce s of the opnon
that the amount whch s requred to be deposted nto the depost
fund as a condton of membershp n the cub s ta abe as an nta-
ton fee under secton 801.
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900(3), Reg. 47, rt. 15. 4 0
TITL I . - CIS T S. (1918 ND 1921.)
S L S Y T M NU CTUR R.
Secton 900, Reguatons 47, rtce 27:
Manufacturer aso retaer.
111-12-1439
S.T.444
manufacturer who ses ony at reta must compute hs ta es
on the reta prces at whch saes are made.
Secton 900 of the Revenue ct of 1921 provdes that f a manu-
facturer customary ses both at whoesae and at reta, the ta
n the case of any artce sod by hm at reta sha be computed on
the prce for whch ke artces are sod by hm at whoesae. Ths
provson of the aw does not authorze a manufacturer who ses
entrey at reta to compute hs ta on a fcttous whoesae prce
or on a fcttous accountng charge made by the manufacturng pant
to the saes department. In other words, a manufacturer who ses
ony at reta must compute hs ta on the prces for whch hs
artces are sod and there beng no other saes than at reta, then
the reta prces necessary consttute the bass of the ta . (Sec
The rung made n S. T. 395 (G. . 1-2, 205) s modfed and
t s now hed that as a genera proposton eaf sprngs used on
automobes are automobe parts, and are ta abe as such under
secton 900 of the Revenue cts of 1918 and 1921.
rom consderaton of certan facts and evdence submtted, the
ureau hed n S. T. 395 (C. . 1-2, 295) that t appeared that
e acty the same sprng n type and otherwse can be and s used
for automobe and other purposes, that there was nothng n de
desgn or constructon of the ordnary vehce eaf sprng used on
automobes to make t prmary adapted ony for such use, and
that t may be and s used for other purposes. It was further hed,
n vew of the facts whch appeared to e st, that vehce eaf sprngs,
as dstngushed from hghy specazed eaf sprngs, such as au -
ary shock-absorbng devces usng the eaf-sprng prncpe, whch
were not prmary adapted ony for use as a component part of an
automobe or motor cyce, were not sub|ect to ta under secton
900 of the Revenue cts of 1918 and 1921.
urther nvestgaton and carefu consderaton have been made
of the facts upon whch the above rung was based. It has been
found that athough the sprngs used on automobes and motor
cyces may embody the same genera desgn and prncpe as those
found n eaf sprngs manufactured and used on other vehces,
nevertheess, as a genera proposton, the sprngs used on automo-
bes and motor cyces are prmary desgned and manufactured
for that specfc purpose. It has been found that not ony are
sprngs manufactured specfcay for dfferent makes of automo-
bes, but they are manufactured specfcay for the dfferent modes
of the dfferent makes.
S. T. 412
C. . II-, 283.)
Secton 900(3), Reguatons 47, rtce 15:
Defnton of parts.
III-8-1319
S. T. 438
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4 1 900(3), Reg. 47, rt. 15.
Whe t s obvous that eaf sprngs n genera are adapted for
other uses than for automobe sprngs, the eaf sprngs whch are
used on automobes are, however, as a genera proposton par-
tcuary desgned and are prmary adapted ony for such use.
Ths s evdenced by the sprng specfcatons recommended as
standard by the Socety of utomotve ngneers. (See S. . .
andbook, vo. 1, p. 11.)
It s evdent from the nature of these specfcatons that there s
a cose reaton between the sprng desgn and the characterstcs of
the car on whch t s to be used. consderaton of the fundamenta
prncpes underyng the desgn of eaf sprngs w bear ths pont
out. rom the pont of vew of the purchaser of eaf sprngs for
repacement of automobe parts, t s necessary to order the sprng
by the car name, date of manufacture, as we as the a e on whch
t s to be used, . e., front or rear, and not from dmensons aone. n
e amnaton of the parts sts of accessory deaers seng eaf
sprngs for automobes w bear ths out. Practcay no sprngs
for two dfferent cars have the same dmensons.
The fact that sprngs manufactured for some mode of cars, as
the Dodge, mght be sutabe and mght be occasonay used for
some other purpose does not defeat the concuson that such sprngs
were prmary desgned and manufactured for use on automobes.
urthermore, the fact that eaf sprngs used on farm wagons or
bugges mght n a genera way resembe sprngs used on automobes
does not |ustfy the concuson that sprngs whch were desgned and
manufactured as automobe sprngs are not parts of automobes.
s a matter of fact, many parts of automobes, such as tops, whees,
fenders, amps, etc., have ther counterparts n bugges.
In vew of the above facts, S. T. 395 s hereby modfed, and t s
now hed that as a genera proposton eaf sprngs used on auto-
mobes are automobe parts, and are ta abe as such under secton
900 of the Revenue cts of 1918 and 1921. Ths rung aso appes
to sprngs used on automobe trucks, automobe wagons, and
motor cyces. In any case, however where t can be shown to the
satsfacton of ths offce that a partcuar eaf sprng used on such
vehces was not desgned or manufactured or prmary adapted
ony for use as a component part thereof, the above rung does not
appy.
Secton 900(3), Reguatons 4 rtce 15: III- -1357
Defnton of parts. S. T.441
osts desgned and adaptabe for use on automobe trucks and
automobe wagons are fnshed parts and sub|ect to ta as such
on srfe by the manufacturer.
In the past ths offce has consdered hosts for automobe trucks
and automobe wagons as raw matera and not sub|ect to ta under
secton 900(3) of the Revenue ct of 1921. owever, addtona
facts have been gathered concernng the status of hosts as fnshed
parts and t was found that the prevous hodng of the ureau was
erroneous and t s hereby revoked.
It s now hed that hosts desgned and adaptabe for use on auto-
mobe trucks and automobe wagons are fnshed parts wthn the
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900(13), Reg. 47, rt. 2 .1
4 2
meanng of the aw and reguatons and sub|ect to ta at the rate
of 5 per cent of the prce for whch they are sod by the manufac-
turer thereof.
Secton 900(3), Reguatons 47, rtce 15: 111-19-15 52
Defnton of parts. S. T. 448
Radator parts that are not capabe of beng assembed or
Instaed other than by sked radator men or manufacturers
are not ta abe as fnshed parta
Radator cores and upper and ower tanks were formery hed
to be fnshed parts and sub|ect to the ta . owever snce t ap-
pears from the evdence presented that radator cores, upper and
ower tanks, overfow ppes, fer ppes, and other artces used n
the constructon of compete automobe radators are of such a
nature that they are ncapabe of beng satsfactory used or n-
staed by any person other than a sked radator man or a manu-
facturer of radators, t s now hed that such artces are not
fnshed parts wthn the meanng of the aw but are raw materas
and therefore not sub|ect to the ta mposed by secton 900 when sod
separatey.
Where, however, such artces are assembed nto the form of a
compete radator (wth or wthout she) adaptabe for use on an
automobe truck, automobe wagon, or other automobe, the sae
of such compete radator by the manufacturer or assember thereof
s sub|ect to ta .
Secton- 900(5) (1918), Reguatons 47, 111-12-1440
rtce 18: Sportng goods. S. T. 445
The so-caed markers n baseba poo are not ta abe as parts
of games. They serve merey as a record of the pay, ther fund on
beng cosey anaogous to that of the score cards used n brdge whst
whch were hed not to be parts of games. Modfcaton s accord-
ngy made of O. D. 151 (S. T. C. . uy to December, 1921, p. 43).
Secton 900(13). Reguatons 47, utcf. 25: 111-18-1539
untng and shootng garments and rdng S. T. 447
habts. m
In conformty wth the prncpe ad down n the ast paragraph
of artce 1 of Reguatons 47, ths offce has hed that huntng and
shootng garments and rdng habts mght be sod by the manufac-
turers thereof ta -free provded the purchaser furnshed a certfcate
to the effect that the garments were to be used for purposes other
than huntng, shootng, or rdng.
owever, the ony certfcate effectve n evdencng e empton
from ths ta s one n whch the purchaser certfes specfcay that
such garments w be used by hm for purposes other than huntng,
shootng, or rdng. Manufacturers of such garments w not 1
permtted to se them ta -free to |obbers and deaers, as they are not
n poston to furnsh such certfcates.
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905(a), Reg. 48, rt. 21.
Secton 903, Reguatons 47, rtce 39 111-12-1441
Reguatons 48, rtce 3 : Penates. S. T. 44
certan ta payer has made mproper returns of ta es over a
ong perod of tme, overpayments havng been made for some
months and addtona ta es beng due for others. In connecton
wth the case the queston arses as to the proper computaton of the
5 per cent penaty and the nterest of 1 per cent a month mposed
under secton 903 of the Revenue ct of 1921 for faure to pay
when due manufacturer s e cse ta es mposed by sectons 900, 902,
or 904 of the same ct. Secton 903 of the Revenue ct of 1921
provdes as foows:
That every persou abe for any ta Imposed by secton 900, 902, or 804,
sha make monthy returns under oath In dupcate and pay the ta es m-
posed by such sectons to the coector for the dstrct n whch s ocated the
prncpa pace of busness. Such returns sha contan such nformaton and
be made at such tmes and n such manner as the Commssoner, wth the
approva of the Secretary, may by reguatons prescrbe.
The ta sha, wthout assessment by the Commssoner or notew -from the
coector, be due and payabe to the coector at the tme so f ed for fng
the return. If the ta s not pad when due, there sha be added as part of
the ta a penaty of 5 per centum, together wth nterest at the rate of 1 per
centum for each fu month, from the tme when the ta became due.
Carefu readng of secton 903 dscoses that the ta s to be re-
turned and pad upon the bass of monthy perods. ach month
therefore consttutes a separate and dstnct ta abe perod. or
the purpose of coecton the amount due for each month consttutes
therefore a separate ta . The aw states that f the ta s not pad
when due there sha be added as part of the ta a penaty of 5
per centum together wth nterest at the rate of 1 per centum for
each fu month from the tme when the ta became due. It s
therefore necessary to compute and add to the addtona ta due for
any partcuar month a penaty of 5 per cent and nterest at the
rate of 1 per centum for each fu month from the tme when the
ta for that partcuar month became due. The correct method of
computaton aows a credt for the overpayments of ta aganst
the tota addtona ta due, the penates and nterest beng com-
S uted for each month for whch addtona ta s due and no credt
or penates and nterest beng aowed on the overpayments.
S L S Y T D L R.
Secton 905 (a), R GtrL ToNS 48, rtce 21: III-7-13 9
ewery. T. D. 3549
CIS ta .
rtces 21, 22, and 24, Reguatons 48 (approved May 2, 1919)
and Reguatons 48 (revsed December, 1921), amended.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
rtces 21, Reguatons 48 (approved May 2, 1919) and
Reguatons 48 (revsed December, 1921), deang wth the ta m-
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905, Reg. 48 (1921), rt. 24. 4 4
posed under the provsons of secton 905 of the Revenue cts of
1918 and 1921, respectvey, are amended to read as foows:
kt. 21. ewery. The foowng artces are ta abe as |ewery:
rtces to be worn on the person or appare for the purpose of adorn-
ment, whch accordng to genera custom or ordnary usage are worn so as
to be dspayed, such as brooches, rngs, chans, cufC buttons, neckaces, fobs,
etc. Such artces are ta abe regardess of the substance of whch made,
and regardess of (her uttaran vaue or purpose.
The term worn on the person as used n ths artce does not ncude
artces to be carred n the hand or bung over the arm, such as bags or
purses. rtces to bo carred n the hand, or hung on the arm. or carred or
worn conceaed on the person, whether n pocket or bag or under the outer
garment, such as cgarette cases, eyegass cases, pencs, powder bo es, mesh
bags, or garter buckes, are not ta abe as |ewery but are ta abe f made
of or ornamented, mounted or ftted wth precous metas or mtatons
thereof or vory, or ornamented, mounted or ftted wth pears, precous or
semprecous stones, or mtatons thereof.
Thus t w e noted from the above thSt artces may be ta abe ether
by reason of ther beng commony or commercay known as |ewery, rea
or mtaton, or by reason of the fact that they are ornamented, mounted or
ftted n the manner descrbed.
Secton 905(a), Reguatons 48, rtce 22: III-7-1370
rtces not ta abe. T. D. 3549
rtces 22 , Reguatons 48 (approved Mav
2, 1919) and Reguatons 48 (revsed December, 1921),
amended to read as foows:
rt. 22. rtces not ta abe. The foowng artces of persona adornment,
or whch may be susceptbe of such use, are not ta abe under secton 005
uness ornamented, mounted or ftted wth precous metas or mtatons thereof,
or Ivory, or ornamented, mounted or ftted wth pears, precous or semprecous
stones, or mtatons thereof: (a) rtces made of te tes or feathers ()
hat trmmngs (ncudng hat pns) (c) shoe trmmngs (ncudng buckes)
(d) dress trmmngs and buttons ordnary worn permanenty attached to
wearng appare.
at and dress trmmngs of sma ntrnsc vaue are not consdered mta-
tons of pears, precous or semprecous stones merey because they ma| re-
sembe them In appearance.
Secton 905, Reguatons 48 (1921), rtce 24: III-7-1371
rtces made of, or ornamented, mounted or T. D. 3549
ftted wth precous metas or mtatons thereof
or vory.
rtces 24, Reguatons 48 (approved May 2, 1919)
and Reguatons 48 (revsed December, 1921), amended
to read as foows:
rt. 24. rtces made of, or ornamented, mounted or ftted th preeou
metas or mtatons thereof or vory. The term precous metas ncudes
sver, god, patnum and a other metas more vauabe than these. The term
mtaton thereof Incudes ony patngs or aoys of any of the above ma-
teras.
The foowng artces are not ta abe under the cause of secton 905 con-
strued In ths artce: (1) rtces made of mtaton vory (2) surgca n-
struments, eyegasses and spectaces: (8) artces merey ornamented or over-
ad wth god or sver eaf or pant, such as pcture frames, books, and
Chrstmas cards.
Gassware, chna, pottery and ke artces are ta abe If ornamented,
mounted or ftted wth precous metas or mtatons thereof, but are not ta abe
when ornamented wth god or sver eaf or pant.
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4 5
905(a), Reg. 48, rt. 24.
It shoud be carefuy noted thnt there are many artces, athough not ta -
abe as artces made of, or ornamented, mounted, or ftted wth precous
metas or mtatons thereof or vory, that may be ta abe as |ewery. or
artces ta abe as |ewery see artce 21.
Shoe buckes, f they are ornamented, mounted or ftted wth pears, precous
or semprecous stones or mtatons thereof, or made of, or ornamented,
mounted or ftted wth precous metas or mtatons thereof, or vory, are
ta abe under secton 905.
ountan pens equpped wth god pen ponts are ta abe on the tota prce
for whch such pens are sod.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 9, 1924.
. W. Meon,
Secretary of the Treasury.
Secton 905(a), Reguatons 48, rtce 24: rt- III-3-1320
ces made of, or ornamented, mounted or ftted wth S. T. 439
precous metas or mtatons thereof or vory.
Regous artces made of or ornamented, mounted, or ftted wth
precous metas or mtatons thereof or vory, pears, precous or
semprecous stones, or mtatons thereof, are ta abe under secton
905 when sod by or for a deaer or hs estate for consumpton or
use.
Secton 905(a), Reguatons 48, rtce 24: rt- III- -1358
ces made of, ornamented, mounted or ftted wth S. T. 442
precous metas or mtatons thereof, or vory.
Readng gasses do not come wthn the e empton e tended to
eyegasses, and the ta on saes by a deaer for consumpton or use
appes to the sae of readng gasses when ornamented, mounted or
ftted wth precous metas or mtatons thereof or vory.
Secton 905(a), Reguatons 48, rtce 24: rt- 111-25-1 23
ces made of, or ornamented, mounted or ftted S. M. 20 8
wth precous metas or mtatons thereof or
vory.
Phonographs and ctroas ornamented, mounted, or ftted wth
precous metas, or mtatons thereof and sdeboards and buffets
wth sver-pated draw pus are not ta abe under secton 905(a)
of the Revenue ct of 1921.
Consderaton has been gven the queston whether phonographs,
ctroas, etc., are ta abe under secton 905 of the Revenue ct of
1921 f ornamented, mounted or ftted wth precous metas or mta-
tons thereof.
Secton 905(a) provdes:
That on and after anuary 1, 1922, there sha be eved, assessed, coected,
and pad (n eu of the ta mposed by secton 905 of the Revenue ct of
1918) upon a artces commony or commercay known as ewery, whether
rea or mtaton pears, precous and semprecous stones, and mtatons
thereof artces made of, or ornamented, mounted or ftted wth, precous
metas or mtatons thereof or vory (not Incudng surgca nstruments, eye-
gasses, and spectaces) watches cocks opera gasses orgnettes marne
gasses fed gasses and bnocuars upon any of the above when sod by or
for a deaer or hs estate for consumpton or use, a ta equvaent to 5 per
centum of the prce for whch so sod.
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05(a), Reg. 48, rt. 24.
4
In Law Opnon 882 ths offce had occason to consder the mean-
ng of practcay the same anguage appearng n secton 905 of the
Revenue ct of 1918 and nterpreted the same as foows:
It appears that Congress ntended to ta such artces as are desgned for
persona use or adornment or for ornament or dspay n connecton wth
the home. Ths ntenton Is evdenced by the fact that practcay a artces
whch are commony or commercay known as |ewery serve such pur-
poses. The same s true of those artces whch are specay mentoned, such
as watches, cocks, opera gasses, orgnettes, etc. It woud seem therefore
that the reason for nsertng the words artces made of, or ornamented,
mounted or ftted wth, precous metas or mtatons thereof, or vory was
to sub|ect to ta a other artces of smar character whch are desgned
for smar uses but whch are not known as |ewery and are not specay
mentoned In the aw. /
It w be noted that the ony artces specfcay named n the
aw that come wthn the cass of those desgned for ornament or
dspay n the home are cocks. very other artce named s com-
prehended n the other genera cass mentoned n the aw opnon,
namey, such artces as are desgned for persona use or adorn-
ment. ven a cock partakes of the nature of artces desgned for
persona use.
Ths offce rued n anuary, 1924, that the ta apped to ctroas
ftted wth god-pated turntabes. Later, arguments aganst ths
rung were heard based upon the aegatons (1) that phonographs
are not n any sense |ewery and shoud not be ta ed as such: (2)
that Congress never ntended to pace the ta upon artces orna-
mented wth precous metas n such an ncdenta way as the c-
troas or phonographs n queston and (3) that t woud be n-
equtabe to. mpose a ta on the seng prces of such an nstrument
merey because of ths ornamentaton ot nconsequenta vaue.
If the secton of the aw under consderaton s to be strcty con-
strued ctroas and phonographs wth meta parts covered wth
god woud be ta abe. God s certany a precous meta and any
artce ornamented therewth certany cones wthn the strct word-
ng of the aw sub|ectng such artces to the ta . It s ponted out
by representatves of the musc ndustres, however, that precous
metas are used for a wde varety of purposes. Many scentfc n-
struments and even combuston engnes contan sma parts made
of patnum. Sdeboards now and then have keyhoes or draw pus
1dated wth sver or god, chefy to prevent corroson of the parts,
rvate yachts sometmes contan a sma god pate showng the
name of the buder and the date of aunchng. The representatves
contend that such ob|ects, even though ornamented, mounted or
ftted wth a precous meta, are n nowse reated to the cass of
artces specay named n the aw. They aso pont out that the
ureau has aready recognzed ths fact by e emptng from the ta
coffns so ornamented or ftted. (ST. 1-20-55, S. T. C. . 1920, 0.)
It must be conceded that a ctroa or phonograph s not n any
sense a pece of |ewery. Nether of them resembes n any way any
of the artces named n the secton of the aw under consderaton.
Moreover, from the standponts of sze, weght, appearance, or
purpose they dffer very materay from the artces specfed. p-
pyng the we known rue of constructon, nosctur a socs. no
evdence can be found n the ta ng secton of any ntenton to m-
pose a ta thereunder on any such artce as those now n queston.
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4 7
1304, Reg. 47, rt. 40.
urthermore, the ornamentaton of ctroas or phonographs s
confned to partcuar parts and, as compared wth the vaue of the
nstrument tsef, ts vaue s nconsequenta and trfng. It s
stated that god s used on such parts n the form of a very thn
patng suffcent to protect the e posed meta part from corroson
and that the vaue of the god so used vares from ffteen one-hun-
dredths of 1 per cent to twenty-seven one-hundredths of 1 per cent
of the st prces of the nstruments.
Upon consderaton of the facts (1) that a phonograph or c-
troa s not an artce desgned for persona use or adornment (2)
that t does not resemhe any of the artces specfcay named n
the aw as sub|ect to the ta :,and (3) that the precous meta used
n the ornamentaton s so sght n vaue as to be neggbe, ths
offce s now of the opnon that nether of the nstruments so orna-
mented s sub|ect to the ta mposed by secton 905 of the Revenue
ct of 1921.
Thus rung aso appes to sdeboards and buffets wth sver-
pated draw pus.
Neson T. artson,
Soctor of Interna Revenue.
TITL I. G N R L PRO ISIONS. (1924)
Secton 1100(a): Repeas effectve dates of.
(See T. D. 3 02 p. 444.) ffectve dates of repea of certan
ttes and sectons of the Revenue ct of 1921.
TITL III. G N R L DMINISTR TI
PRO ISIONS.
Secton- 1302(a), Reguatons 57, rtce 41: Penates.
(See S. T. 440 sec. 502, Reg. 57, art. 32 (p. 449).) Penaty n-
curred by teegraph company transmttng messages on credt and
fang to coect charge and ta .
CR DITS ND R UNDS.
Secton 1304, Reguatons 47, rtce 40: Credts IIT- -1359
and refunds. S. T. 443
S CTION t3I0( ), R NU CT OP 1918.
The recever or trustee n bankruptcy may not take credt for
the overpayment of ta es made by a ta payer pror to hs ad|ud-
caton as n bankrupt but such trustee or recever shoud make
cam for refund.
Inqury s made whether a recever or trustee n bankruptcy may
be permtted to take credt on returns fed under secton 900, Tte
I , of the Revenue ct of 1918 for overpayments of ta es made by
the ta payer pror to hs ad|udcaton as a bankrupt, resutng from
the return of ta abe goods, or whether cams for refund of such
overpayments shoud be requred.
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1324(a).
4 8
Secton 1310(a) of the Revenue ct of 1918 provdes that:
In the case of any overpayment of any ta mposed by
Tte I , the person makng such overpayment may take credt
therefor aganst ta es due upon any monthy return .
rtce 41, Reguatons 47 (1919 and 1920), provdes that:
If a manufacturer overpays the ta due wth one monthy return,
he may take credt for the overpayment aganst the ta due wth a
succeedng return .
rtce 5 of Reguatons 47 (1919 and 1920) provdes that:
If artces sod are returned and the sae entrey rescnded, no ta s pay-
abe, and f pad t may be credted aganst the ta ncuded n a subsequent
monthy return. (See artce 41.) If a part ony of the artces sod at one
tme s returned, and credt or rebate aowed by the vendor therefor, the por-
ton of te ta to be credted w be ony the proporton of the tota ta pad
whch the amount aowed as a credt or rebate bears to the tota saes prce
of a the artces.
In S. T. 378 (C. . 1-1, 440) t was hed that such a ta payer
was a ta abe entty separate and dstnct from the recever or trus-
tee n bankruptcy. Under the aw and reguatons credt for over-
payments of ta may be taken ony by the person makng the over-
payments. It foows, therefore, under the above opnon, athough
n one sense a trustee or recever n bankruptcy stands n the shoes
of the bankrupt, that there s no authorty for permttng such re-
cever or trustee to take credt for overpayments of ta made by the
ta payer pror to hs ad|udcaton as a bankrupt. urthermore, t
woud seem hazardous to permt such procedure n vew of the dff-
cuty of verfyng the credts taken pror to the bankrupt s dscharge.
Cams for refund are therefore the proper recourse n such cases.
Secton 1324(a) : Interest on refunds and credts. 111-25-1 24
S. M. 2029
ssessments for months for whch no payments at a were made
under sectons 900 of the Revenue cts of 1918 and 1921 are
orgna assessments and not addtona assessments wthn
the meanng of secton 1324(a) of the Revenue ct of 1921.
It appears that the ta payer faed to pay the ta for a few
months, whereupon an assessment was made for those months.
cam for refund of a porton of the ta pad was fed, and t s con-
tended that ths assessment was an addtona assessment wthn
the meanng of secton 1324(a) of the Revenue ct of 1921.
The ta n queston was mposed by secton 900 of the Revenue ct
of 1921. Secton 903 of that ct provdes that the persons abe for
the ta sha make monthy returns. It aso provdes that the ta
ha, wthout assessment by the Commssoner or notce from the
coector, be due and payabe to the coector at the tme for fng
the return. The secton further provdes that f the ta s not pad
when due there sha be added as part of the ta a penaty of 5
per centum, together wth nterest at the rate of 1 per centum for
each fu month, from the tme when the ta became due. Ths pen-
aty and nterest attaches automatcay and wthout assessment. It
w thus be seen that the month s the perod of payment for the
ta as we as for the penaty.
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1324(a).
In f ng the date from whch nterest shoud he aowed upon the
refund of an nterna revenue ta , secton 1324(a) provdes, n sub-
dvson (2), that f such amount was not pad under protest but
pursuant to an addtona assessment, nterest shoud be aowed
and pad from the tme such addtona assessment was pad. The
term addtona assessment s defned n ths secton to mean a
further assessment for a ta of the same character prevousy pad
n part.
s an e cse ta s payabe monthy, the words prevousy pad
n part, used n secton 1324, can ony reate to a parta payment
for some partcuar month and an addtona assessment must
necessary be confned to a further assessment for the partcuar
month n whch a defcency occurred. The month beng the ta abe
perod, assessments for months n whch no payments at a were
made can ony be vewed as orgna assessments and nterest on
refunds n such cases can not be aowed from the date the assess-
ments were pad. (See I. T. 1758, C. . II-2, 279.)
Neson T. artson,
Soctor of Interna Revenue.
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ST T T RULINGS.
TITL I . ST T T . (1918 ND 1921.)
GROSS ST T G N R L.
Srerrosr 402(a), Reguatons 3, rtce 15: 111-13-14 2
auaton of annutes, and of fe and re- Mm. 3188
nander nterests.
Correcton n Reguatons 3, 1922 edton.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, March 11, 192
To coectors of nterna revenue, nterna revenue agents n charge,
estate ta nterna revenue agents and nspectors, and a others
concerned:
ttenton s nvted to page 18, Reguatons 3,1922 edton, under
Tabe , coumn 2, ne , under age of 5 years. There s a ds-
crepancy n fgures n coumn 2 entted nnuty, or present vaue
of 1 due at the end of each year durng the fe of a person of specfed
age. The fgures under nnuty at present readng 10. 0982
shoud be made to read 10. 982. Ths dscrepancy s a cerca
error and you are nstructed to correct these fgures n a copes of
ths tabe now n your possesson.
D. . ar, Commssoner.
GROSS ST T TR NS R Y D C D NT IN IS LI TIM
Secton 402(c), Reguatons 37, rtce 24 III-4-1337
Reguatons 3, rtce 20: Reservaton of T. D. 3544
ncome.
estate ta revenue act of 1018 decson of court.
1. Gross state Tenances by the ntretes.
tenancy by the entretes Is not created by a deed whch
conveys property n trust to pay the ncome from a part to the
husband for fe and from another part to the wfe for fe wth
remanders over to the survvor for fe.
2. Gross state Transfers Intended to .take ffect at Death.
conveyance of property to a trustee, reservng the Income
for fe, wth |ont power of revocaton In the husband and wfe,
Is a trust ntended to take effect at or after death wthn the
meanng of secton 402(c) of the Revenue ct of 1918.
(470)
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471 402(c), Reg. 37, rt. 24.
3. Gross state Gfts Intended to Take ffect at Death-
Con S D R TION.
Where a husband conveys property to a trustee n trnst to
pay the ncome therefrom to hm for hs fe, then to hs wfe for
her fe, and then to dstrbute the corpus, and the wfe conveys
other property of a ess vaue to the same trustee n trnst to
pay the ncome therefrom to her for her fe, then to her husband
for hs fe, then to dstrbute the corpus, the transacton s not
a buna fde sae for a far consderaton wthn the meanng
of secton 402(c) of the Revenue ct of 1918.
4. Consttutonaty.
Secton 402(c) of the Revenue ct of 1918 s not unconsttu-
tona, athough t ncudes transfers or trusts made ether before
or after the passage of the ct.
Treasuut Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
Coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Dstrct Court for the
Dstrct of Maryand n the case of Safe Depost Trust Company,
ecutor of Tabot . bert, deceased, v. Gaen L. Tat, Coector
of Interna Revenue for the Dstrct of Maryand, s pubshed for
the nformaton of nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved anuary 18, 1924.
. W. Meon,
Secretary of the Treasury.
Ik the Dstrct Court of the Unted States for Mstrct of Maryand.
Safe Depost Trust Company, ecutor of Tawt . bert, deceased, v.
Gaen L. Tat, Coector of Interna Revenue for the Dstrct of Maryand.
M MOR NDUM O D CISION.
Soper, Dstrct udge: Ths case arses on the demurrer of the Unted States
to the sut of the e ecutor to recover back the sum of 3,095.2 pad by t
under protest to the Unted States as a tar on the estate of Tabot . bert
under the Revenue ct of 1918, whch became effectve ebruary, 1919.
Mr. bert ded March 18, 1919. The Commssoner of Interna Revenue n-
cuded n the net estate, upon whch the ta was computed, property covered
by a deed of trust e ecuted n 1911 and by certan addtons thereto n 1917
and 1918.
The frst deed was e ecuted by bert and hs wfe, each of whom conveyed
certan propertes to the trust company the vaue of the property conveyed
by bert was 10 ,944.28, and of Mrs. bert, 137,500. Three subsequent
grants of property by bert to the trustee upon the same trusts brought the
tota of hs contrbutons to 215,8 8.15. The deed provded that the ncome
from the property transferred by bert shoud be pad to hm for fe, and
that from the property transferred by Mrs. bert to her for fe the ncome
from a of the property, at the death of ether, to be pad to the survvor for
fe, wth certan remanders over. The trust was rrevocabe e cept by |ont
consent, and the powers of sae and renvestment of property, vested n the
trustee, coud ony be e ercsed wth the approva of both grantors, durng
ther |ont ves.
Te assessment s camed to be unawfu on three grounds:
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402(c), Reg. 37, rt. 24.
472
rst. It s camed that secton 402(c) of the ct, whch n terms ap-
pes to transfers made before or after t e passage of the ct, s unconsttu-
tona, as retroactve. Ths queston has been passed upon by the Crcut
Court of ppeas for the S th Crcut n the case of Schtcab v. Doye (2G9
ed., 321 T. D. 3119, not pubshed n uetn servce .) Ths decson re-
fers to the ct of 191 , whch the court nterpreted to appy to transfers made
before as we as after the passage of the aw. The decson was reversed by
the Supreme Court of the Unted States n Sehcab v. Doye (258 U. S., 529
T. D. 3339 C. . 1-2, 312 ), on the soe ground that the Crcut Court
of ppeas had msnterpreted the ct, and that the ct was not ntended to
appy to transfers made pror to ts passage. There was no ntmaton that
the argument of the Crcut Court of ppeas as to the unconsttutonaty
of the ct, f retroactve, was unsound. The decson of the Crcut Court of
ppeas |ustfes the concuson n ths case that secton 402(c) of the ct of
1918 s not unconsttutona because t ncudes transfers or trusts made ether
before or after the passage of the ct.
Second. It s contended that the deed of trust created an equtabe tenancy
by the entrety- n Mr. and Mrs. bert. The decson of Schwab v. Doye
(258 T . S., 529) s conceded by the Government to be decsve f such a tenancy
was created. Snce secton 402(d), sub|ectng suc an nterest to the ta , has
no cear statement to the effect that t appes to tenances created before the
ct, t must be hed to appy ony to those created after the ct.
tenancy by the entretes s created by a conveyance to husband and wfe,
whereupon each becomes sezed and possessed of the entre estate, and after the
death of one, the survvor contnues to take the whoe. No speca form of
words need be used. On the other hand, such a tenancy s not created f the
terms of the conveyance evdence a contrary ntenton. The deed n ths case
dd not convey the whoe estate to husband and wfe. It conveyed the hus-
band s property n trust, to pay hm the ncome therefrom for fe, and the
wfe s property smary for her beneft. ach dd not become sezed of the
w|oe estate. The deed gave them certan |ont powers of revocaton and
supervson of nvestments, but no other |ont nterest. Masterman v. Master-
man (129 Md., 1 7) s cted as authorty for the proposton that a |ont n-
terest n ncome s not an ncdent of a tenancy by the entretes, but the case
merey decded that because of the marred women s act (Maryand Code, art.
45, sees. 1 and 21), the husband s no onger entted, as at common aw. to the
whoe ncome of such a tenancy. The concuson s that the deed dd not
create a tenancy by the entretes.
Thrd. It s aso camed that the ta was mpropery coected under secton
402(c), because, athough ths secton appes to transfers In respect to whch
a trust s created, or whch are made n contempaton of death, or ntended
to take effect n possesson at or after death, there s the foowng e cepton:
of a bona fde sae for a far consderaton n money or money s worth. It
s urged that the conveyance by bert to the trustee of hs property upon the
trusts theren named, and the smar conveyance of hs wfe of her property,
were e ecuted each n consderaton of the other n such a way as to amount
to a bona tde sae for a far consderaton. It may be sad from one vewpont
that the conveyances were not absoutey wthout consderaton, as s usuay
the case n transfers made n contempaton of death, but even n such case,
t can hardy be sad that the crcumstances consttuted a bona fde sae for a
far consderaton. There was no attempt on the part of ether husband or wfe
to e act eac from the other a far prce for ther respectve conveyances. The
property conveyed by Mr. bert n 1917 was consderaby n e cess of the
vaue of that conveyed by Mrs. bert. In 1917 and 1918, he conveyed add-
tona property worth 48,923.87 wthout pretense of consderaton. The trans-
acton was not a sae. It was a famy arrangement for the dsposton of the
property of husband and wfe, for the beneft and protecton of themseves
and ther chdren, and savored far more of a testamentary dstrbuton than
of a bargan and sae. The demurrer w e sustaned.
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473
402(c), Reg. 3, rt. 20.
Secton 402(c), Reguatons 37, rtce 24 III-7-13 8
Reguatons 3, rtce 20: Reservaton of T. D. 3545
ncome.
ST T T R NU CT O 1918 D CISION O COURT.
1. Gross state Trust to Take ffect at Death.
Where the creator of a trust reserves the ncome for fe, the
vaue of property passng under the nstrument s part of the gross
estate of the creator wthn the wordng of secton 402(c) of the
Revenue ct of 1918.
2. Same Consderaton.
reease of dower ncdenta to the creaton of a trust under
the terms of whch the wfe s to get one-s th of the corpus and
undstrbuted ncome does not consttute a bona fde sae for a
far consderaton n money or money s worth wthn the meanng
of secton 402(c) of the Revenue ct of 1918.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. O.
Coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Dstrct Court for
the astern Dstrct of Mssour n the case of Mercante Trust
Company, guardan of the estate of I evs Rey mrn and orence .
SchU, v. rnod . emch s pubshed for the nformaton of
nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved ebruary 7, 1924.
. W. Meon,
Secretary of the Treasury.
Dstrct Court of the Unted States IN and for the astern Dvson of
the astern udca Dstrct of Mssour. No. 451.
Mercante Trust Company, guardan of the estate of evn epburn and
orence . Seht, pantffs, v. rnod . emch, defendant.
memorandum opnon of the court.
ars, .: Ths case was submtted to the court a few days snce on a
demurrer to the petton. The petton tsef docs not fuy set forth the trust
ag-eement whch forms the bone of contenton. If the petton stood absoutey
aone, wthout the brefs of counse n the case, t s hghy probabe, as
a strcty technca matter, that the demurrer ought to be overrued, merey
eoause the facts upon whch the demurrer s bottomed do not appear n the
petton. oth sdes, however, In ther brefs have referred to the terms of
te trust agreement. Roth sdes, both n ther arguments and ther brefs, have
seen ft to bottom the fed of contenton absoutey upon the terms of that trust
agreement. I thnk, then, that I am warranted n consderng the terms of
that agreement, whch were set out fuy In the bref of the defendant, and
whch s referred to n the bref of the pantffs n short, both sdes con-
sder the matter as turnng upon the terms of the trust agreement, and seem
to concede the power of ths court, regardess of the precse anguage of the
petton tsef, to determne the matter upon a fu consderaton of the
qnostou of utmate abty.
4177 24 31
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402(c), Reg. 3, rt. 20.
474
On the 24th of une, 1912, one, medee . Reyburn, |r., oned wth hs wfe,
orence, and who now seems to be orence . Sch, n a certan trnst
agreement by whch the setter of that trust, the sad Reyburn, conveyed to
the pantff, Mercante Trust Company, n trust, a of hs property. Under
the terms of that trust agreement, whch took argey. If not whoy, the
form of the nstrument commony caed a spendthrft trust, Reyburn was
to he pad the sum of 750 per month out of the net Income for the term of hs
natura fe. If there were ncome over 750 per month, such ncome couk .,
n the dscreton of the trustee, Mercante Trust Company, be pad to the
setter, or to any other person whom he mght seect.
t the death of the setter, Reyburn, the trust created n the Mercante
Trust Company censed, or t was so provded n the trust agreement, and
thereupon one-s th of the corpus and undstrbuted ncome of the trust estate,
t was provded, shoud go to and vest n orence eey Reyburn, now. as
stated, orence eey SchU.
There was a provso to ths provson, however, to the effect:
That f, after the date of ths nstrument and durng the fe of sad
medee . Reyburn, |r.. there sha not have been pad by the sad trustee,
to or for the use of sad orence eey Reyburn, annuay, a sum equa
to at enst one-s th of the annua net ncome dstrbuted by the trustee each
year, then nnd n that event, nstead of ony the foregong one-s th of the
corpus and undstrbuted ncome, one-fourth of the corpus and undstrbuted
ncome of sad trust estate sha go to and vest n and be pad and devered
to orence eey Reyburn, absoutey and n fee smpe, f she be then
vng.
It was provded further that a the baance and resdue of the estate, save
and e cept that |ust referred to, shoud, upon the death of medee . Rey-
burn, |r.. vest n the ega hers of sad setter, and that each strpes shoud
share equay.
The setter ded about the year 1920, eavng, t seems, ony one grand-
daughter survvng hm, who seems to be Tevs Reyburn, for whom the Mer-
cante Trust Company s guardan, and for whom the Mercante Trust Com-
pany sues here.
1 thnk there can be no queston that, so far as regards the property hed hy
the Mercante Trust Company for Tevs Reyburn, that the ta pad, a recovery
of whch s here sought, was correcty pad, and can not be recovered. ut
tte contenton seems to be made touchng that proposton. Ceary, the
.property whch came to Tevs Reyburn came to her ony upon the death of the
setter. If ths be true, then there can be no queston that the Mercante Trust
Company was entted to pay tn the defendant here the nhertance ta sought
here to be recovered back, so far as concerns such part of that payment as was
due from Tevs Reyburn.
The statute on whch the ta n ths case was mposed and pad frst pro-
vdes for the evyng of a certan percentage of ta n favor of the Unted
States upon the net estate of every decedent dyng after the passage of the ct.
Ths provson s found n secton 401 of the ct of 1918 (40 Statutes, 1057).
Secton 402, subdvson (c), provdes for the evy of ths ta :
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 at any tme created a trust,
n contempaton of, or ntended to take effect n possesson or en|oymeut at
or after hs death, whether such transfer or trust s made or created before or
after the passage of ths ct, e cept n a case of a bona fde sae for a far
consderaton n money or money s worth.
s stated, upon the facts presented n ths controversy, there s absoutey
no queston that so much of ths estate as has come to Tevs Reyburn, and
whch was ta ed, was abe to ths ta , for, ceary, the estate came to her ony
after the death of the setter. So much seems to be conceded, but the conten-
ton s made In behaf of orence eey Sch, that she ought to recover back
the amount pad to defendant by her, because there was a bona fde sae for a
far consderaton, n money or money s worth, to her. Ths proposton s
bottomed upon the theory that when orence eey Sch, as the wfe of the
setter, |oned n the trust agreement, she Inevtaby conveyed away from her-
sef a dower rghts n the property, and n effect she took, by the provsons
of that trust agreement, upon the death of her husband, the setter, other prop-
erty, namey, a one-s th nterest n the estate, whch was ess than the statu-
tory one-thrd, and that therefore the conveyance of her dower was n fact a
bona fde sae to the trustee In trust for a far consderaton, n money or
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475
403(a)(), Reg. 3, rt. 39.
money s worth, and that therefore she fas wthn the e cepton of the statute
named.
I thnk, however, that a far readng of the trust agreement shows concu-
svey that orence eey Sch benefted by the trust agreemeut that she
was heped and not hurt by the makng of t In short, that she took more,
perforce Us terms, than she woud have taken had she not made t, and reed
upon the provsons made for her by the Mssour statutes touchng dower.
That, however, w not necessary sette the case. further consderaton
comes n, and that s whether such a sae, such a conveyance of dower (whch,
t w be noted, happened ony ncdentay n ths case) fas wthn the pur-
vew of that bona fde sae for a far consderaton n money mentoned n the
e cepton contaned n the statute. I am of the opnon that t does not. or-
ence eey Sch, whe |onng n the trust agreement wth the setter, neces-
sary conveyed her dower nterest, but such a conveyance, n ray vew, does
not consttute a bona fde sae for a far consderaton n money. The anguage
far consderaton n money has been construed by varous courts of the
Unted States. The defnton of the term, n my opnon, does not ncude a.
stuaton smar to that here presented.
I thnk the demurrer ought to be sustaned, and so t w be ordered.
D DUCTIONS.
Secton 403(a) (1), Reguatons 37, rtce 45 111-2 -1 39
Reguatons 3, rtce 39: Cams aganst T. D. 3 07
the estate.
ST T T R NU CT O 191S D CISION O COURT.
1. Deductons dmnstraton penses Property Ta es.
County and cty ad vaorem ta es mposed upon persona pro -
erty In the hands of the e ecutor after the decedent s death are
not deductbe as admnstraton e penses wthn the meanng of
secton 403(a) (1) of the Revenue ct of 1918.
2. state Ta es Deductons Cams ganst the state.
Cams aganst the estate wthn the meanng of secton
403(a) (1) of the Revenue ct of 1918 are such demands or cams
of a pecunary nature whch coud have been enforced aganst the
decedent durng hs fetme and county and cty ad vaorem ta es
assessed upon personaty n the hands of the e ecutor after de-
cedent s death do not consttute a deductbe cam.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
Coector of nterna revenue and others concerned:
The foowng decson of the Unted States Dstrct Court for the
astern Dstrct of North Carona n the case of ohn Sprunt
and ones uer, ecutors of George W. Watts, deceased, v.
Gam Grssom, Coector of Interna Revenue for the astern Ds-
trct of North Carona, s pubshed for the nformaton of nterna
revenue offcers and others concerned.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved une 20, 1924.
. W. Meon,
Secretary of the Treasury.
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403(a) (1), Reg. 3, rt. 39. 47
In the Dstrct Court of the Unted States for the astern Dstrct of
North Carona.
ohn Sprunt and anes uer, rs. of Oeorpe W. Watts, deceased,
pantffs, v. Gam Orssom, Coector of Interna Revenue for the astern
Dstrct of North Carona and Gam Orssom, ndvduay, defendant.
Decded May 10, 1924.
Connor, Dstrct udge: Pantffs aege, that George W. Watts, atey a
ctzen and resdent of the cty and county of Durham, N. C, ded on the
7th day of March, 1921, eavng a ast w and testament, wheren he nomnated
and apponted pantffs e ecutors thereto. That sad w was duy admtted to
probate n the approprate court of sad cty and county, and pantffs duy
quafed as e ecutors and entered upon admnsterng, accordng to the pro-
vsons of sad w and e ecutng the trusts mposed upon them thereby, the
persona estate and property of ther testator. That among other dutes m-
posed upon them as such e ecutors, was the duty of payng to the Unted
States Government, after the apprasa of the vaue of sad estate, as provded
by the Revenue ct of 1918 (40 Stat. L., 1057), the estate or successon ta
mposed upon sad estate by the aws of the Unted States. That, n order
to arrve at the amount of sad ta for whch the estate of ther testator was
abe, t was necessary to apprase and f the net vaue of sad estate at the
date of the death of ther testator. Pantffs had severa conferences wth
the duy authorzed offcers of the Government, upon whom was mposed the
duty of makng apprasa of sad estate, as the bass for f ng the amount of
ta due thereon. The net vaue of the estate was apprased, wthout con-
troversy, e cept as to one tem, to wt, the amount of ta whch was assessed
aganst the persona estate of ther testator, In the possesson of pantffs,
by the county and cty of Durham, under and pursuant to the provsons of
the revenue aws of the State of North Carona, for the year 1921, amount-
ng to 105,110. 4, whch pantffs were requred to pay, and whch they dd
pay, on the 28th day of November, 1921. That, as requred by the revenue
aws of North Carona, sad persona property was sted for ta aton by
pantffs, n sad cty on May 1, 1921, and the ta thereon eved or assessed
as.provded by the aws of North Carona. The county ta thereon was
eved or assessed on September 7, 1921, and such ta so assessed and eved
became a en or charge upon the persona property In the possesson of pan-
tffs, havng prorty over and n preference to the cams of credtors, devsees,
or dstrbutees of sad estate. That pantffs were requred, by the aws of
North Carona, to st, as of anuary 1, 1921, a compete temzed st of debts
owng by ther testator anuary 1, 1921, for the purpose of deductng aganst
such debts, sovent credts, a as of anuary 1, 1921. (Pubc Laws of North
Carona, 1921, eh. 38, sec. 40.) That the ta es eved upon sad persona
property were the persona abty of ther testator as of anuary 1. 1921,
and upon hs death a charge upon the whoe of hs estate n the possesson of
hs e ecutors.
Pantffs contended, before the ofcers of the Unted States, and now con-
end, that ths sum of money, to wt, 105,110. 4, was an tem whch shoud
be deducted from the apprased vaue of sad estate before the net vaue of
same was f ed and apprased, or that, n any event, the sad 105,110. 4 was
a abty of ther testator, or of hs estate, or a cam or charge thereon, or
e pense thereof of the admnstraton whch pantffs, as e ecutors, were
requred to pay before makng dstrbuton thereof, or pay any egaces to
the egatees named n the w of ther testator. That, durng the month of
une, 1922, pantffs, as e ecutors, wth ther attorneys, apped, to tnc
Treasury Department at Washngton for a reducton n the assessment of the
vaue of sad persona estate to the amount of 105,110. 4 pad as ta to the
cty and county of Durham, as herenbefore aeged, and a consequent reduc-
ton of the estate, or successon ta , whch pantffs were requred to pay to
the Unted States. That a hearng was granted by the state Ta Unt, of
the stute Tu Dvson of the Treasury Department of the Unted States.
That sad state Ta Dvson, regardng tsef as bound by the Reguatons of
the Treasury Department, refused to reduce the assessed or apprased vaue of
sad estate, on account of the payment by pantffs of sad ta to the cty and
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477 1403(a) (1), Reg. 3, rt. 39.
county of Durham, or to abate any part of sad ta pad, as aforesad. Pan-
tffs were notfed thereof and requred to pay the estate ta assessed aganst
sad estate, ncudng the ta on sad sum of 105,110. 4. That, n obedence
to the demand of defendant coector of nterna revenue for the eastern ds-
trct of North Carona, and under compuson of the threatened enforcement of
sad ta by dstrant and process, wth the penates ncdent thereto, pantffs
on, or thereafter on, the 1st day of September, 1922, pad to the defendant the
baance of the fu amount of the estate ta upon the estate of ther testator,
ncudng the sum of 2 ,277. , beng the amount of ta mposed upon ana
attrbuted to the sum of 105,110. 4, pad to the county and cty of Durham,
N. C, upon the persona property of the estate of ther testator, as herenbefore
set forth. Sad amount of 2 ,277. was pad to defendant by pantffs as
e ecutors, under protest, and the sum was accepted by defendant wth notce
of the cam that sad payment was made under protest, etc. That, pantffs
advsed defendant at the tme of makng such payment, that they woud, n
the approprate way, contest ther abty for sad amount by nsttutng an
acton to recover sad amount of 2 ,277. , demanded and pad as aforesad.
That the apprased vaue of the estate of sad George W. Watts was such that
the sum of 105,110. 4, f t was a part of the net vaue of sad estate, was
sub|ect to, and abe for, ta at the rate of 25 per cent. That f sad amount
sha be aowed as a deducton and t sha be deducted before the net vaue of
sad estate s ascertaned and f ed, the amount of estate ta overpad to the
Unted States woud be 25 per cent, or the sum of 2 ,277. .
Cam for abatement or refund of sad amount was duy fed and presented
to the Commssoner and upon hearng had before the state Ta Unt, and
the same was re|ected by the Commssoner. Pantffs have, therefore, e -
hausted ther remedy n the Treasury Department of the Unted States, have
comped wth a of the premnary requrements of secton 1318 of the
Revenue ct of 1921. That more than s months eapsed from the date of
tng the cam wth the Commssoner, and more than s months have eapsed
snce the Commssoner dsaowed or re|ected sad cam. The acton s brought
under and pursuant to the ct permttng such acton, etc. Defendant demurred
to the compant. The case was submtted to the court upon the compant and
demurrer.
It s conceded that the soe queston presented upon the peadngs s whether,
under the provsons of secton 403 of the Revenue ct of 1918 (40 Stat. L.,
1057), the ta pad by the pantffs on the vaue of the persona estate of
ther testator to the cty and county of Durham for the year 1921, requred
by the revenue aw of North Carona, 1921, as of May 1, 1921, may be de-
ducted from the apprased vaue of the estate made as provded by the
Revenue ct of 1918. Ths queston s narrowed to the queston whether such
ta comes wthn the meanng of the words admnstraton e penses or
cams aganst the estate. The defendant contends that the ad vaorem ta
assessed aganst the property of the testator n the possesson of the e ecutors
as of May 1, 1921, dd not consttute a cam aganst the estate, the testator
havng ded March 7, 1921, and the vaue of the estate, as the bass for
assessng the estate ta , beng f ed as of that date, from whch certan
specfed deductons may be made.
It s abundanty setted by decsons of the Supreme Court that the estate
or successon ta mposed by the Revenue ct s not a ta upon the property
of the decedent, but s a ta mposed upon the transfer of the net estate of
every decedent, graduated accordng to the vaue, as ascertaned by deductng,
n the case of a resdent, from the vaue of the estate, f ed at the date of
hs death, funera e pense, cams aganst the estate, admnstraton e -
cuses. (New York Trust Co. v. sner, 250 U. S., 345 T. D. 32 7 rener v.
Leweyn, 258 U. S., 354 T. D. 332 C. . 1-1, 42 .)
It Is true, as suggested by pantffs, that by the provsons of the statute
of North Carona the e ecutor Is requred, to enabe a persons havng
cams.aganst the estate to present them wthn a reasonabe tme f ed by the
statute at one year, to retan the estate n hs possesson durng that perod.
(Consodated Statutes, 101, 105, and 109.)
It s aso true that the e ecutor s requred by the revenue aw of the
State to st the property of the estate n hs possesson for ta aton and to
pay the ta assessed upon t. (Secton 242, Machnery ct of 1921.) It s
aso true that, n hs fna settement, the e ecutor s entted to deduct the
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f 103(a) (1), Reg. 3, rt. 39. 478
amount of ta so pad by hm as hs other e penses awfuy ncurred n the
admnstraton of the estate. These propostons are a abundanty sustaned
by the authortes cted by pantff s counse and decded cases n ths and
other States. It s hed by the Supreme Court of ths State that e penses
ncdent to the admnstraton of the estate of a deceased person are not debts
or cams aganst the decedent but are the persona abtes of the e ecutors,
whch are aowed hm as dsbursement for the e penses of admnstraton
of the estate.
In no ton v. Moore (178 U. S., 44 (48)) T. D. 1291, Mr. ustce Whte
revews the hstory of death dutes, estate ta es n ths and other coun-
tres. e thus concudes the dscusson of the sub|ect:
though dfferent modes of assessng such dutes preva, and athough
they nve dfferent accdenta names, such as probate dutes, stamp dutes,
ta es on the transacton or the act of passng an estate, or a successon,
egacy ta es, estate ta es, or prvege ta es, nevertheess ta es of ths nature
n a countres rest ther essence upon the prncpes that death s the generat-
ng source from whch the partcuar ta ng power takes ts beng and that
t s the power to transmt, or the transmsson from the dead to the vng,
on whch such ta es are more mmedatey rested.
In Unted States v. Perkns (1 5 U. S., C25) t s sad:
If t he true that the rght of testamentary dsposton s purey statutory,
the Sate has a rght to requre a contrbuton to the pubc treasury before
the bequest sha take effect. Thus the tu s not on the property n the
ordnary sense of the term, hut upon the rght to dspose of t, and t s not
unt t has yeded ts contrbuton to the State that t becomes the property
of the egatee.
rom ths postuate, whch s not now a sub|ect of debate, t ogcay
foows that the Stute may f both the tme and prncpe, or method, by
whch the ta s to be ascertaned. The ct of 1918 does ths by drectng the
e ecutor to make a return of the gross vaue of hs testator s estate to the
desgnated offcer wth such nformaton as w enabe hm to ascertan and
f the net vaue of the estate as of the date of the death of hs testator, and
ths amount, when ascertaned by makng the specfed deductons, becomes
the bass upon whch the ta s assessed. rom ths amount, among other
specfed tems, the e ecutor s drected toueduct admnstraton e penses
and cams aganst the estate.
It woud seem cear that the ad vaorem ta pad by the e ecutors to the
county and cty of Durham do not come wthn the term admnstraton
e penses, nor are such ta es cams aganst the estate, at the date of the
death of the testator, pror to the date at whch such ta es are assessed and
eved. cam aganst the estate, as defned by a number of cases cted by
counse for defendant, are such demands or cams of a pecunary nature
whch coud have been enforced aganst the decedent durng hs fe.
Whe not concusve upon the court, the constructon put upon edera
statutes by the departments havng ther admnstraton n charge, by mak-
ng reguatons adopted for ther admnstraton, have the force and effect
of aw, f they be not n confct wth e press statutory provsons. (Man/and
Casuaty Co. v. Unted States, 251 U. S., 342 T. D. 3013 .)
rtce 45, Reguatons 37, 1921, regardng deductons, s persuasve.
Cams apanst the estate. The amounts that may be deducted under ths
headng are such ony as represent persona obgatons of the decedent e st-
ng at the tme of hs death, whether then matured or not. Other obgatons
are not deductbe. Ony such cams as are actuay enforceabe aganst the
estate may be deducted.
Whe I do not accept portons of the argument found n the we con-
sdered bref of defendant s counse as formuated by them, especay that
porton whch paces upon the pantffs, to the e tent camed, the burden of
mantanng ther contenton, I am constraned, n the ght of the current
of decsons hearng upon the queston, to hod that pantff can not mantan
ths acton. The demurrer s sustaned. udgment w be entered accordngy.
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479
403(a) (3), Reg. 3, rt. 47.
Secton 403(a) (3), Reguatons 37, rtce 111-17-1522
53: Pubc, chartabe, and smar bequests. T. D. 3584
Reguatons 3, rtce 47: Transfers for
pubc, chartabe, regous, etc., uses.
estate ta revenue act of 1818 decson op court.
1. Deductons equest Resduary state Charty.
Where a decedent after provdng for certan egaces bequeaths
the resdue of hs estate to charty the edera estate ta s not,
under the provsons of secton 403 of the Revenue ct of 1918, to
be deducted from the resdue n determnng the amount of such
chartabe bequest.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
Coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Supreme Court n the
case of Wam . dwards v. oseph erman Socum, et a.,
ecutors, etc., of Ova Sage, s pubshed for the nformaton of
nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved pr 19, 1924.
. W. Meon,
Secretary of the Treasury.
Supreme Court of the Unted States. No. 27 October Term, 1923.
Wam . dwards, formery Coector of Interna Revenue for the Second
Dstrct of New York, pettoner, v. oseph erman Socum, erbert erman
Socum, Stephen L ommedeu Socum, et a.
On wrt of certorar to the Unted States Crcut Court of ppeas for the Second Crcut
ebruary 18, 1924.
Mr. ustce omes devered the opnon of the court.
Ths Is a sut brought by the respondents, e ecutors of the w of Mrs.
Sage, to recover the amount of a ta pad under protest. The ta was eved
under the ct of ebruary 24, 1919 (ch. 18, sec. 400: 40 Stat., 1057, 1090),
whch Imposes upon the transfer of the net estate of every decedent dyng
after the passage of ths ct ta es equa to specfed percentages of the net
estate determned as provded n secton 403. Mrs. Sage eft an estate of
49,129,25 .99. She equeathed specfed sums amountng to 1,285,1 10 for
chartabe purposes, 8, 18,079.55 for purposes other than chartabe, and the
resdue to chartabe and educatona nsttutons named. It s admtted that
n estmatng the ta now n queston there s to be deducted from the gross
estate the sum of 3,789,321.74 for debts and e penses-and the chartabe gfts
of 1,285,000. These wth the gfts to ndvduas above stated woud eave a
resdue of 35,43 ,855.70, whch the e ecutors contend s e empt by the statute.
ddng to the sums admtted to be e empt the resdue thus arrved at. and
the statutory e empton of 50,000 the amount for whch e empton s camed
w be 40,5 1,177.44, eavng a ta abe remander of 8,5 8,079.55. The Gov-
ernment requred the payment of an addtona sum reached by deductng from
the e empted esate the amount of the ta to be pad, or n other words, addng
the amount of the ta to the ta abe estate. The sut Is to recover ths add-
tona sum. The e ecutors prevaed n the Dstrct Court and Crcut Court of
ppeas after a dscusson wth whch the Government we mght have remaned
satsfed. (287 ed. Rep., 51.)
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5403(a) (3), Reg. 3, rt. 47. 480
Te Government s argument turns argey upon the consderaton that a
resdue s ony what s eft after the payment of paramount cams. ut ths
s not a ta upon a resdue t s a ta upon a transfer of hs net estate by a
decedent, a dstncton marked by the words that we have quoted from the
statute, and prevousy commented upon at ength n nocton v. Moore (178
U. S., 41, 49, 77). It comes nto e stence before and s Independent of the
recept of the property by the egatee. It ta es, as ansen, Death Dutes,
puts t n a passage cted n 178 U. S., 49, not the nterest to whch some
person succeeds ou a death, but the nterest whch ceased by reason of the
death. It eves a sum equa to a certan percentage of the vaue of the net
estate, and provdes the crtera by whch the net estate sha be ascertaned.
It thus manfesty assumes that the net estate w be ascertaned before the
ta s computed. The Government offers an agebrac formua by whch t
woud sove the probems rased by two mutuay dependent ndetermuates.
It fary mght be answered, as sad by the Crcut Court of ppeas, that
agebrac formuae are not ghty to be mputed to egsators. but t ap-
pears to us that the structure of the statute s suffcent to e cude the mputa-
ton. s further remarked beow, the theory departs from the ong estab-
shed practce of the aw not to regard the ncdence of a ta n the evyng
of a ta , and the poston of the Government s contrary to the e pressed
ntent of the statute to encourage chartabe bequests. It s nconsstent wth
tsef aso n mantanng that whe the dstrbuton of the burden of ta aton
among the severa benefcares s a matter of State reguaton, the resdue s
not to be dmnshed by the State nhertance ta but ony by the estate ta
of the Unted States. udgment affrmed.
The Chef ustce took no part n the decson of ths case.
D DUCTIONS TR NS RS OR PU LIC, C RIT L , TC.,
US S.
Secton 403(a) (3), Reguatons 37, rtce 53: 111-17-1523
Pubc, chartabe, and smar bequests. Reou- So. Op. 159
atons 3, rtce 47: Transfers for pubc,
chartabe, regous, etc., uses.
revenue act of 19s.
Deductbty of Chartabe equests.
bequest to trustees for the erecton of an audtorum to be
used for the en|oyment, peasure, entertanment, and educaton of
those resdng n the cty of 51 and vcnty s for a chartabe
purpose and accordngy deductbe n determnng the net estate
sub|ect to ta .
S. O. 13 (not pubshed n uetn servce), dated une 4, 1920,
n so far as nconsstent herewth, s e pressy revoked.
n opnon s requested as to the deductbty of a certan aeged
chartabe bequest. The estate s that of , who ded a resdent of
Oho n anuary, 1919. y w e ecuted n 1918, made a bequest
of hs entre resduary estate to fve, ndvduas, n trust for the pur-
pose of securng a proper ste and erectng thereon an audtorum
for the use and beneft of the ctzens of M and vcnty. The tem
of the decedent s w wheren the above bequest s provded for reads
n part as foows:
s soon after my decease as a of my resduary estate sha come nto the
hands of the trustees heren named, sad trustees sha cause the same to he
apprased, and frst determne whether the amount thereof s, n the |udgment
of sad trustees, suffcent to secure a convenent and proper ste and erect
thereon an audtorum sutabe and adequate for the needs of the resdents
and ctzens of the cty of M. In the event my sad trustees sha be of the
opnon that the funds comng nto ther hands as such trustees are suffcent
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481 403(a) (3), Reg. 3, rt. 47.
for the purposes above named, then sad trustees are to proceed as prompty
as to them seems prudent to secure a ste and to erect thereon such an aud-
torum as w, n ther |udgment, meet the requrements and needs of the
resdents and ctzens of the cty of M. In the event sad ste s procured and
sad audtorum erected by sad trustees from the funds derved e cusvey
from my resduary estate, my sad trustees may hod, contro, and manage
the same under such rues and reguatons as to them may, from tme to tme
seem proper, t beng my wsh that sad audtorum, when erected, sha, as
far as possbe, be used for the en|oyment, peasure, entertanment, and edu-
caton of the communty resdng n the cty of M, and contguous thereto and
my trustees are hereby authorzed and empowered, f n ther |udgment t
seems wse and prudent so to do, to transfer or convey sad audtorum, ncud-
ng the ste, to any assocaton or corporaton e stng or to be organzed, or to
the cty of M, under such restrctons and condtons as w nsure the use
of the same for the purposes heren set forth.
Secton 403(a)(3) of the Revenue ct of 1918 provdes that n
determnng the net estate sub|ect to ta there sha be deducted:
The amount of a bequests, egaces, devses, or gfts, to or for the use of
the Unted States, any State, Terrtory, any potca subdvson thereof, or
the Dstrct of Coumba, for e cusvey pubc purposes, or to or for the use
of any corporaton organzed and operated e cusvey for regous, char-
tabe, scentfc, terary, or educatona purposes, ncudng the encourage-
ment of art and the preventon of cruety to chdren or anmas, no part of
the net earnngs of whch nures to the beneft of any prvate stockhoder or
ndvdua, or to a trustee or trustees e cusvey for such regous, char-
tabe, scentfc, terary, or educatona purposes. Ths deducton sha be
made n case of the estates of a decedents who have ded snce December
31,1917,
It becomes necessary to determne |ust what was contempated
by Congress n the use of the word chartabe. There beng no
statutory defnton of the word, t must be construed n accordance
wth ts we understood common aw meanng. In Rce v. Mnne-
sota Northwestern Raroad Company (1 ack, 358) the Supreme
Court of the Unted States sad:
In the constructon of the aws of Congress the rues of the common aw
furnsh the true gude.
The same prncpe s announced n Swearngen v. Unted States
(1 1 U. S., 44 ) Unted States v. Wong m rk (1 9 U. S., 49)
Shck v. Unted States (195 IT. S., 9) Sutherand Statutory Con-
structon, secton 398.
In the eadng ngsh case, Commssoners, etc., Income Ta v.
Pemse (1891), . ( at page 531, Lord Macnaghten sad:
Charty n Its ega sense comprses four prncpa dvsons: Trusts for
the reef of poverty trusts for the advancement of educaton trusts for the
advancement of regon and trusts for other purposes benefca to the com-
munty, not fang under any of the precedng heads. The trusts ast referred
to are not the ess chartabe In the eye of the aw because ncdentay they
beneft the rch as we as the poor, as, ndeed, every charty that deserves the
name must do ether drecty or ndrecty.
Ths defnton s cted wth approva n the case of In re Macduff
(2 Ch. Dv. (189 )).
s fang under the fourth of Lord Macnagh ten s heads, namey,
other purposes benefca to the communty not fang under any
of the precedng heads, Tyssen n hs work entted .Chartabe
equests, second edton, Chapter I , makes reference to the be-
quests n the foowng cases: In re en (1905) (2 ch., 400) (char-
tabe, educatona, or other nsttutons of the town of enda)
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403(a) (3), Reg. 3, rt. 47. 482
Mtford v. Reynods (1 Ph., 185) (chartabe, benefca, and pubc
works at and n the Cty of Dacca, n enga, for the e cusve bene-
ft of the natve nhabtants) Doan v. Macdennot (L. R. 5 q., 0)
(for such chartes and other pubc purposes as awfuy mght be
n the parsh of Tadmarton n the County of O ford).
Other cases are: Wknson v. arber (L. R. 14 q., 90) (ob|ects
of pubc utty n Sheffed) tty. Gen. v. ar of Lonsdae (1
Sm., 105) (purposes conducng to the good of the county of W. and
especay to the parsh of L.) Mayor, etc., of aversham v. Ryder
(18 ea., 318 5 I)e G. M. G., 350) (for the beneft and ornament
of the town of .).
In the Unted States t s no ess ceary brought out n the decded
cases that generay bequests for the beneft and advantage of the
genera pubc are vad as chartes. s stated n 5 R. C. L., Char-
tes,7 secton 3:
gft s a pubc charty when there s a beneft to be conferred on t e
pubc at arge, or some porton thereof, or upon an ndefnte cass of persons.
In Pern v. Carey ( 5 U. S. (24 oward), 4 5) t s stated that:
charty s a gft to a genera pubc use whch e tends to the rch as we
as the poor a property hed for pubc purposes s hed as a char-
tabe use, n the ega sense of the term charty.
In a ater case, Oud v. Washngton ospta (95 U. S., 303),
the Supreme Court of the Unted States sad:
chartabe use, where nether aw nor pubc pocy forbds, may be apped
to amost anythng that tends to promote the we-dong and we-beng of
soca man.
better defnton of a chartabe use, and one often cted wth
approva, and not open to the crtcsm that may we be odged
aganst the breadth of anguage used by the Supreme Court n the
Oud case, supra, s that found n ackson v. Phps (14 en
(Mass.), 539), whch reads as foows:
Charty, n a ega sense, may be more fuy defned as a gft to be apped
consstenty wth e stng aws, for tte beneft of an ndefnte number of
persons, ether by brngng ther hearts under the nfuence of educaton
or regon, by reevng ther bodes from dsease, sufferng, or constrant, by
assstng them to estabsh themseves for fe, or by erectng or mantanng
pubc budngs or works, or otherwse essenng the burdens of ta aton. It
s mmatera whether the purpose Is caed chartabe u the gft tsef f t
s so descrbed as to show that It s chartabe n ts nature.
In the recent case of Trustees of New Caste v. Meggnson (1 ovce
(De.). 3 1 77 t., 5 5) the matera facts were as foows:
Deaware statute e empted from ta property beongng to
any corporaton for chartabe uses. The trustees of New Caste
had been organzed as a corporaton to take tte to certan and
for the use of the nhabtants of New Caste, and owned no other
rea estate. The State ta ng authortes sought to coect the usua
property ta from the corporaton wth respect to that and.
The queston presented, as stated by the Deaware Supreme Court,
was as foows:
Is a donaton of and to trustees for the use and beneft of the Inhabtants
of a certan town a chartabe use or trust
The court hed the property e empt from ta as property hed by
a corporaton for chartabe uses wthn the statute. uotng wth
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483 403(a) (3), Reg. 3, rt. 47.
approva the defnton of chartes by Mr. ustce Gray n ackson
v. Phps, supra, the court sad:
Indeed, there seem to be few f any cases hodng contrawse. The case at
bar s wthn ths defnton. The uses for whch the corporaton was created
was for the use and beneft and behoof of the nhabtants of the town of
Sew Caste,. It s pubc, because t reates to a the Inhabtants of a par-
tcuar communty and not to any cassfcaton of such nhabtants or to any
group thereof separatey from the other nhabtants by any dstncton of race,
creed, soca rank, weath, poverty, occupaton, or busness, or even separated
by .geographca nes subdvdng the communty nto wards, dstrcts, or
otherwse. It s genera, n that the ob|ects to be accompshed are as wde
as possbe. They may he educatona, phanthropc, eeemosynary, or re-
gous. They may be the erecton oC pubc works or budngs, pubc streets,
and any other form of muncpa mprovement. It s ndefnte, because t s
not for any partcuar person or set of persons f ed by any artfca or arb-
trary seecton desgnated n the gft. It s endurng, because t s not for a
day, or a generaton, but has the eement of permanence and contnuty for
comng generatons.
In Wachova ankng d- Trust Company v. Oghurn et a. (N. C.)
(107 S. ., 238) the testator by hs w dsposed of hs resduary
estate, ncudng certan resort property, to a trustee to
(1) Conserve, protect and beautfy sad property (2) contrbute to the
constructon of sutabe roads to and through the premses as we as raroads,
shoud such opportunty offer and (3) erect thereon a commodous and per-
manent audtorum or assemby room for the meetngs and gatherngs of edu-
catona, regous, scentfc, medcna, and other worthy organzatons or as-
socatons. My ob|ect and hope beng that the same may be deveoped nto
and become not ony a waterng resort, but an nsttuton ufter the order of a
Chautauqua.
though t was brought out at the tra of the case that the resort
property was not the most desrabe ocaton for the purposes enu-
merated, the court nevertheess hed that ths was a vad chartabe
bequest.
In Donohug s ppea (8 Pa. St., 30 ) the companant was a
brary founded by en|amn rankn and others. The consttu-
ton authorzed e empton from ta aton of nsttutons of purey
pubc charty. The egsature e empted nsttutons of earnng.
The court hed that the brary was a pubc charty, sayng:
The essenta feature of a pubc use s that t s not confned to prveged
Indvduas, but s open to the ndefnte pubc. The word purey
must be nterpreted so as to confne ts quafcatons of a pubc charty to
those nsttutons soey admnstered by the State hersef, or so as to e tend
t to prvate nsttutons for purposes of purey pubc charty and not ad-
mnstered for prvate gan. We prefer the atter Interpretaton, as decarng
the true meanng of the consttuton.
The decson n Schoos for Industra ducaton v. Ioboken (70
N. . q., 31 2 t., 1) s to the same effect.
egacy to a town for the purpose of erectng a town house for
the transacton of the town busness s one for a genera pubc use,
convenent for both the poor and the rch, and s a good chartabe
bequest. (Coggcsha v. Peton, 7 ohns Ch., 292 11 m. Dec, 471.)
nd so s a grant of ots to trustees n trust for the erectng
thereon of a courthouse for the pubc use and servce of a county.
(Stuart y. aston, 21 C. C. ., 14 39 U. S. pp., 238 74 ed., 854.)
devse of property to consttute and support a botanca garden
wth a museum and brary and casses attached s a vad charty.
(Lackand v. Waker, 151 No., 210 52 S. W., 414.)
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403(a) (3), Reg. 3, rt. 47. 484
In Ltte v. Nevoburyfort (Mass.) (9 N. ., 1032) the court sad:
charty n the ega sense s not confned to mere amsgvng or the reef
of poverty and dstress, but has a wder sgnfcaton, whch ncudes the
mprovement and promoton of happness.
In Peope e re. ert v. Cogswe (Ca.) (45 Pac, 270) t s sad:
charty s a donaton n trust for promotng the wefare of manknd at
arge, or of a communty, or of some cass formng a part of t, ndefnte as
to numbers or ndvduas.
nd n Dayton v. Speers ospta ( y.) (170 S. W., 3 1), n
defnng a charty, the court sad:
If founded for the genera pubc good and not for prvate gan and so con-
ducted that the pubc receve a the beneft of t, t s a purey pubc charty.
rom the authortes cted above t w be observed that charty
has acqured a much broader meanng from a ega standpont than
s ordnary mputed to th term. s heretofore stated, t must be
presumed that Congress had knowedge of ths broad meanng of
the term from a ega standpont at the tme the statute was enacted,
and ntended that t shoud cover a such bequests as nyght prop-
ery be cassfed as chartabe from the standpont of the common
aw. The authortes cted above abundanty estabsh the fact that
a bequest of funds for the purpose of erectng an audtorum such
as contempated by consttutes a vad chartabe bequest. In the
case of Wachova ankng t( Trust Company v. Ogburn et a. the
w provded that a porton of the resduary estate shoud be used
for the purpose of erectng an audtorum or assemby room for the
meetngs of worthy organzatons or assocatons. urthermore, the
erecton and mantenance of pubc budngs are specfcay men-
toned n the cases of ackson v. Phps and Trustees of New
Caste v. Meggn on, supra, as consttutng vad chartabe purposes.
In hs w as provded that the audtorum sha be used for the
en|oyment, peasure, and educaton of the communty resdng n M
and contguous thereto. The bequest s therefore for a pubc use
under the authortes cted above.
The ob|ects for whch the audtorum s to be used are suc as
w promote the genera wefare of the communty through the
estabshment of an open forum for the dscusson of economc ssues,
the hodng of concerts and e hbtons, and such other actvtes
as are generay conducted n a budng of ths character. In vew
of the atttude of the courts both n ngand and n ths country,
as evdenced by the cases referred to, ths offce s of the opnon that
the resduary bequest made by s for a chartabe purpose wthn
the meanng of secton 403(a) (3) of the Revenue ct of 1918 and s
accordngy deductbe n computng the net estate sub|ect to ta .
S. O. 13 (not pubshed n uetn servce), dated une 4, 1920,
n whch a contrary concuson was reached, s e pressy revoked
n so far as nconsstent herewth.
Neson T. artson,
Soctor of Interna Revenue.
pproved.
D. II. ar,
Comtnssoner of Interna Revenue.
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485 1400(b) (1918), Reg. 37, rt. 119.
TITL I . G N R L PRO ISIONS.
Secton 1400(b) (1918), Reguatons 37 (1919), 111-24-1 13
rtce 119: Scope of repea. T. D. 3 00
ST T T R NU CT O 101 S M ND D, R NU CT OP 1018
D CISION O COURT.
. state Ta Repea.
The estate ta provsons of the Revenue ct of 101 were
repeaed by the Rtrenue ct of 1018, but secton 1400 contaned a
genera savng cause contnung n force and effect the provsons
of the pror ct unt the correspondng ta under the Revenue
ct of 1918 took effect at ts passage on ebruary 24, 1919.
2. Same Rates.
The estate ta rates prescrbed by the Revenue ct of 1018
appy to the estates of decedents dyng after the passage of that
ct and the rates prescrbed by the Revenue ct of 191 as
amended by the acts of March 3,1917, and October 3, 1917, appy to
the estates of decedents dyng pror to the passage of the Revenue
ct of 1918.
3. udgment of the Unted States Dstrct Court (203 ed., 4 8
T. D. 3520 C. . II-2, 322 ) affrmed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
Coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Crcut Court of
ppeas for the ghth Crcut n the case of Louse . Page v. Mark
. Sknner s pubshed for the nformaton of nterna revenue
offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved une 7, 1924.
. W. Meon,
Secretary of the Treasury.
Unted States Crcut Court of ppeas, ghth Crcut. No. 440.
December Term, . D. 1923.
Louse . Page, pantff n error, v. Mark . Sknner, defendant n error.
In error to the Dstrct Court of the Unted States for the Dstrct of Coorado.
pr 28, 1924.
efore Stone and Lews, Crcut udges, and rm rs, Dstrct udge.
Lews, Crcut udge, devered the opnon of the court.
Ths s an acton to recover n one count a and n another count a part of
the amount pad as a ta mposed upon the transfer of the net estate of
Wam yrd Page, n accordance wth the provsons of the ct of September
8,101 (39 Stat, 777), as amended by the cts of March 3, 1017, and October 3,
1917 (39 Stat., 1002, 40 Stat, 324). Mr. rage ded testate September 4, 1918.
The pantff n error was hs soe devsee and egatee and named as e ecutr .
The ta became due and payabe one year after decedent s death, and as e -
ecutr she fed Wth the coector on November 21, 1919, her statutory return,
settng forth (a) the vaue of the gross estate of the decedent at the tme of
Is death , ( ) the deductons aowed under secton 203 (c) the
vaue of the net estate of the decedent as defned n secton 203. (Sec. 205.)
The ct of ebruary 24, 1919 (40 Stat., 109 ), was n effect when the return
was fed, and t appears that the e ecutr contended that the pror cts had
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1400(b) (1918), Reg. 37, rt. 119. 48
been repeaed by the ct of ebruary 24 wthout a savng cause, and that no
ta coud he assessed or f assessabe, the amount of the ta shoud he ascer-
taned by computaton on the net vaue of the estate at the rates specfed n
the ater ct, whch were ess than the rates named In the pror cts. oth
contentons were re|ected, the ta was assessed accordng to the rates gven
In the pror cts, and the amount so ascertaned was pad under protest. There
was no controversy as to the net vaue of the estate t was correcty gven In
the return. In a of the cts the net vaue s dvded up nto specfed amounts
or bocks, and the amount of the ta arrved at by takng a named per cent of
each bock and then addng together the sums found. The tota amount thus
ascertaned as to ths estate was amost twce as much, when the per cents
gven under the 191 ct as amended are apped, as t woud have been f the
percentages named In the 1019 ct were apped. The phraseoogy of the two
cts s the same n ts man purpose: That a ta s hereby mposed
upon the transfer of the net estate of every decedent dyng after the passage
of ths ct, the schedue of rates to he apped to the net vaue foows. The
mposton took effect at the tme of death and the ta became at once a en on
the property of the estate, enforceabe by sae, f not pad, on proceedngs n
court. (New York Trust Co. v. sner. 25 U. S., 345.) There was no per-
son : abty. Shorty after the e ecutr made her return decedent s estate
was cosed and she brought ths acton n her persona rght as soe benefcary.
The case cones here from an order sustanng demurrer to each count and
dsmssa of the acton. We thnk t cear, as w appear from further dscus-
son, that t was not the ntenton of Congress to whoy reease estates n e
condton n whch ths was from the ta mposed hy the amended ct of 191t:
the queston that chaenges consderaton s, whether t was ntended by the
ct of ebruary 24, 1919, to substtute the ower rates named n the ct of
1919 for the hgher rates found n the ct of 191 , as appcabe to estates n
whch assessments hud not been made and the ta had not become due and
payabe at the tme the ater ct took effect. The two cts requre n dentca
anguage that the Commssoner sha make a assessments of the ta under
the authorty of the e stng admnstratve speca and genera provsons of
aw reatng to the assessment and coecton of ta es and that the e ecutor
sha make and fe W the coector the same knd of return, settng forth
(a) the vaue of the gross estate (b) the deductons aowed by the ct (c)
the vaue of the net estate and (d) the ta pad or payabe thereon. ach
ct provdes that the ta sha be due one year after decedent s death. ach
aows an e empton of 50,000. There are soma dfferences n the two cts
as to tmes of payment and forfetures to be mposed whch, we thnk, need
not be noted In deta. Notwthstandng the provson n each ct that the
Commssoner sha make a assessments, t may be conceded for our purposes,
as contended by counse for defendant n error, that where a return shows the
net vaue of the estate the aw makes the assessment, and t s ony when no
return or a fase return s made that the coector must go about gatherng
the facts and e ercse the power gven to make an assessment: but n nether
contngency do we thnk t coud be sad that an assessment s made unt the
coector has at hand a statement showng the net vaue. The ta s assessed
on the net vaue of the estate, and whether made by the Commssoner o hy
o eraton of aw, the assessment must awat the ascertanment of the net
vaue. Labtes of the decedent and admnstraton e penses must be ascer-
taned and deducted from the gross vaue for that purpose, and me s gven
by each ct so that may be done. The mposton of the ta mmedatey on
death and the smutaneous en antedate the assessment.
We come to the ct of ebruary 24, 1919, and t s agreed that the egsatve
ntent as to whether the rates whch t prescrbes for purposes of assessment
shoud be apped to the condtons we have here s prmary to be found n
secton 1400 of the ater ct. ut, frst, we make note of secton 401 of the
ater ct, and observe that t sheds some ght on the nqury, whether secton
1400 dscoses an ntenton that estates under the condtons n hand shond
be assessed, at the ower rates f ed by the ater ct. Secton 401 reads:
Sec. 401. That (n eu of the ta mposed by Tte II of the Revenue ct of
191 , as amended, aud n eu of the ta mposed by Tte I of the Revenue
ct of 1917) a ta equa to the sum of the foowng percentages of the vaue
of the net estate (determned as provded n 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:
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487 1400(b)(1918), Reg. 37, rt. 119.
oowng ths and as a part of secton 401 s tve schedue of rates to be ap-
ped, ower than the rates found In the pror cts. The ower rates gven n
Uus secton are to be apped to estates of decedents dyng after ebruary 24,
1919. ut that s a sub|ect separate and apart from the nqury, whether other
parts of the ct (see. 1400) dscose an ntenton that those rates sha be
apped aso to estates of decedents dyng pror to ebruary 25, 1919, the ta
mposed thereon not then beng due and payabe and no assessment aganst
the same havng theretofore been made. )oes secton 1400 of the ater ct ds-
cose such an ntenton It reads:
Skc. 1400. (a) That the foowng parts of cts are hereby, repeaed, sub-
|ect to the mtatons provded n subdvson (b) :
(1) The foowng ttes of the Revenue ct of 1010:
Tte I (caed Income Ta )
Tte II (caed state Ta )
Tte III (caed Muntons Manufacturers Ta )
Tte I (caed Msceaneous Ta es )
(2) The foowng parts of the ct entted n ct to provde ncreased
revenue to defray the e penses of the ncreased appropratons for the rmy
and Navy and the e tensons of fortfcatons, and for other purposes, ap-
proved March 3, 1917:
Tte III (caed state Ta )
Secton 402 (caed Returns of dvdends )
(3) The foowng ttes of the Revenue ct of 1917:
Tte I (caed War Income Ta )
Tte II (caed War cess-Profts Ta )
Tte III (caed War Ta on everages )
Tte I (caed War Ta on Cgars, Tobacco, and Manufactures
Thereof)
Tte (caed War Ta on actes urnshed by Pubc Uttes, and
Insurance )
Tte I (caed War cse Ta es )
Tte II (caed War Ta on dmssons and Dues )
Tte III (caed War Stamp Ta es )
Tte I (caed War state Ta )
Tte (caed dmnstratve Provsons )
Tte II (caed Income-Ta mendments )
(b) Such parts of cts sha reman In force for the assessment and co-
ecton of a ta es whch have accrued thereunder, and for the mposton and
coecton of a penates or forfetures whch have accrued and may accrue n
reaton to any such ta es, and e cept that the une pended baance of any
appropraton heretofore made and now avaabe for the admnstraton of any
such part of an ct sha be avaabe for the admnstraton of ths ct or
the correspondng provson thereof: Provded, That, e cept as otherwse pro-
vded n ths ct, no ta es sha be coected under Tte I of the Revenue ct
of 191 as amended by the Revenue ct of 1917, or Tte I or II of the Revenue
ct of 1917, n respect to any perod after December 31, 1917 : Provded further,
That the assessment and coecton of a estate ta es, and the mposton and
coecton of a penates or forfetures, whch have accrued under Tte II of
the Revenue ct of 191 as amended by the ct entted n ct to provde n-
creased revenue to defray the e penses of the ncreased appropratons for the
rmy and Navy and the e tensons of fortfcatons, and for other purposes,
approved March 3. 1917, or Tte I of the Revenue ct of 1917, sha be ac-
cordng to the provsons of Tte I of ths ct. In the case of any ta
mposed by any part of an ct heren repeaed, f there s n ta mposed by ths
ct n eu thereof, the provson mposng such ta sha reman n force nnt
the correspondng ta under ths ct takes effect under the provsons of
ths ct.
The Important parts of ths ecton hearng on our Inqury are found n
subparagraph (b), readng thus:
Such parts of cts sha reman In force for the assessment and coecton
of a ta es whch have accrued thereunder, and for the mposton and co-
ecton of a penates or forfetures whch have accrued and may accrue n
reaton to any such ta es.
Ths Is a genera savng cause broad enough to cover a of the dfferent
named ta es, ncudng the state Ta , specfed under (a) of the pre-
cedng part of the secton. The ne t part of subparagraph (b) bearng on
the nqury s the second provso, whch takes out of and emnates from
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1400( )(.1M8). Reg. 37, rt. 119. 488
the genera savng cause above quoted state ta es mposed by the two
pror cts to the e tent and for the purposes named. It reads: That the
assessment and coecton of a estate ta es, and the mposton and coecton
of a penates and forfetures, whch have accrued under the two pror
cts, sha be accordng to the provsons of Tte I of ths ct. Tte I
of the ct of ebruary 24 ncudes secton 401 above quoted, the thrd part
of subparagraph (b) bearng on the nqury s ts ast sentence readng thus:
In the case of any ta mposed by any part of an ct heren repeaed, f
there s a ta mposed by ths ct n eu thereof, the provson mposng such
ta sha reman n force unt the correspondng ta under ths ct takes effect
under the provsons of ths ct.
or the purposes of ths case we take the ast sentence as an e presson
of a cear ntenton that the parts of the two pror cts mposng estate ta es
were not repeaed as to a estates of decedents dyng pror to ebruary 25,
1919 and we may add that, mpedy, the ens gven by the pror cts for the
coecton of the ta es whch they mposed were Intended aso to contnue. Ths
sentence w need further consderaton. Nether are we n doubt as to the
meanng of the word accrued, found n subparagraph (b) as contended by
counse amd curae, who appear for another estate n ke condtons, that
t s equvaent to arsng under and refers to a ta es, ncudng estate ta es,
arsng under the pror cts and s not a restrcton to those that were due
and payabe pror to ebruary 25. It s argued that the part of subparagraph
(b) whch determnes or argey determnes the nqury whether t was n-
tended that estate ta es of decedents dyng pror to ebruary 25, whch were
not then due and payabe and had not been nssessed, shoud be at the ower
rate provded for n the ater ct, s the second provso. It says that the
assessment and coecton of a estate ta es and the mposton and coecton
of a penates and forfetures whch have accrued under the pror cts sha
not be made accordng to the provsons of the pror cts but accordng to the
provsons of the ater ct. The rate of ta aton s an ndspensabe eement
n the assessment, as much so as the vaue on whch t s to be ad. Wth-
out ether no assessment can be made.
Let us now go back to the ct of 191(5 as amended. The sectons of the
orgna ct and of the amendng ct whch mpose the ta each contans 8
a part thereof the schedues of rates to be apped to the net vaue of estates
n ascertanng the amount of the ta , and decares that the ta mposed
equas those percentages. Mo ta estmated on net vaue as a bass coud be
mposed wthout a rate, nor coud an assessment be made f Congress had
not f ed the rate drecty, as t dd, or ndrecty. The decaraton that a
ta was mposed on the transfer of the net vaue of estates woud have been
meanngess, wthout a f ed or defntey ascertanabe rate. The f ng of
the rates to be apped to the net estate was requste to mposng the ta ,
an ndspensabe eement In the mposton. It therefore seems pan that the
ast sentence n subparagraph (b) of secton 1400 of the ater ct, In savng
from repea the parts of the pror cts whch mposed an estate ta , retaned
the schedue of rates f ed by the pror cts, ese there woud have been no
parts of those cts mposng the ta . gan, secton 401 of the ater ct,
mposng a ta on the estates of decedents dyng after ts passage, n eu
of the ta mposed by the pror cts, mts the appcaton of the rates found
n that secton to estates of decedents dyng after the date on whch that ct
took effect. These consderatons, we thnk, show the faacy of the contenton
that the net estate of Wam yrd Page shoud have been assessed n accord-
ance wth the rates found n secton 401 of the ct of ebruary 24, 1919. To
accede to the contenton, whch rests, we thnk, on the meanng whch we are
asked to gve to the word assessment, s but to brng the second provso n
drect confct wth the ast sentence of subparagraph (b), whch, as we
have aready hed, saved from repea the ta mposed by the pror cts ac-
cordng to the rates whch they f ed, and at the same tme to appy the rates
found n the ater ct to a purpose not ntended by the secton n whch they
are found.
ut whatsoever may be the functon that the word serves n admnstratve
procedure, the correct amount of ta mposed has been pad, the acton s In
assumpst, and there can be no mped promse for the return of any part
of t. ( aey v. Raroad Co., 22 Wa., 04, 38.)
The acton of the court n sustanng the demurrer to both counts s ap-
proved and the |udgment of dsmssa s affrmed.
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C PIT L STOC T RULINGS.
TITL . SP CI L T S. (1918 ND 1921)
Secton 1000, Reguatons 50 (Rkvskd), 111-24-1 14
rtce 7 Reguatons 4, rtce 8: T. D. 3598
Massachusetts trusts.
Capta stock ta Inabty of trusts.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To coectors of nterna revenue and others concerned:
In order to gve effect to the decson of May 12,1924, by the Unted
States Supreme Court n the case of Iecht v. Maey and n the
other cases named theren (Nos. 99, 100,101, and 119 October Term,
artce 7 of Reguatons 50 (revsed edton, approved une 21,
1920) and artce 8 of Reguatons 4 are amended so as to read as
foows:
Trusts. Two dstnct casses of trusts are recognzed by tc Department,
namey, hodng trusts and operatng trusts.
odng trusts are those n whch the trustees are merey hodng property
for the coecton of the ncome and dstrbutng t among the benefcares and
are not engaged, ether by themseves or n connecton wth the benefcares,
n the carryng on of any busness. Such trusts are not assocatons wthn
tte meanng of the aw and are not sub|ect to the ta .
Operatng trusts are those n whch the trustees are not restrcted to the
mere coecton of funds and payng them over to the benefcares but are
assocated together n much the same manner as drectors n a corporaton for
the purpose of, and are actuay engaged n, carryng on some busness enter-
prse. These trusts, whether of the Massachusetts type or otherwse, are to
deemed assocatons wthn the meanng of the ct, ndependenty of any con-
tro e ercsed by the benefcares, and sub|ect to the ta .
I). . ar,
Commssoner of Interna Revenue.
pproved une 7, 1924.
. W. Meon,
Secretary of the Treasury.
Secton 1000, Reguatons 50 (revsed), rtce 111-23-1598
7: Reguatons 4, rtce 8: Massachusetts T. D. 3595
trusts. Reguatons 38 (revsed), rtce 2:
Corporatons and |ont-stock companes.
C PIT L STOC T R NU CTS O 191 ND 1918 D CISION O
SUPR M COURT.
1. ssocatons Ta abty of Nonstatutory ssocatons
Statutory Constructon evenue ct of 191 .
The capta-stock ta mposed by secton 407 of the Revenue
ct of 1910 upon every corporaton, |ont-stock company or assoca-
ton, now or hereafter organzed n the Unted States for proft
and havng a capta stock represented by shares, and every n-
4177 24 32
(489)
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1000, Reg. 4, rt. 8.
490
surnnce company, now or hereafter organzed under the aws of
the Unted States, or Dy State or Terrtory, does not appy
to assocatons whch are not organzed nndeT any statute, as the
anguage s that used n the ct of 190 ), and the words organzed
In the Unted States have no dfferent effect, as apped to
domestc corporatons, |ont-stock companes and assocatons, from
the word organzed as used n the ct of 1 )9. ( ot v. ree-
man, 220 U. S., 178 T. D. 1R8 ) foowed.)
2. Same Revenue ct or 1918.
ssocatons are sub|ect to the capta-stock ta mposed by-
secton 1000(a) of te Revenue ct of 191S, snce secton 1 of the
ct defned corporatons , as ncudng assocatons. and
the term domestc as created or organzed n the Unted
States, a phrase whch, n marked contrast wth those used n (e
cts of 1909 and f, e tends the ta from one mposed soey
upon organzatons e ercsng statutory prveges to ncude aso
organzatons e ercsng the prvege of dong busness as assoca-
tons at the common aw.
3. Massachusetts Trusts ssocatons.
The word assocaton Is used n the Revenue ct of 1918 n
Its ordnary meanng, and ncudes Massachusetts trusts hav-
ng quas corporate organzatons under whch they are ongr| d
n carryng on busness enterprses Irrespectve of the measure of
contro vested and e ercsed by the benecares, as enetc
certfcate hoders. (Maey v. oudch, 23 ed., 809 Chcago
Tte Co. v. Snretanka, 275 ed., 00 (T. D. 3193 C. . 5, 12 )
foowed Crocker v. Maey, 249 U. S., 223 (T. D. 281 not pub-
shed n uetn servce ) dstngushed.)
4. Capta Stock verage aue.
The capta-stock ta Is based upon the average vaue of capta
stock, ncudng surpus and undvded profts. These words are
not to be gven a technca meanng, but. nterpreted n ther
entrety, are equvaent to the capta nvested n the busness
that s, the net vaue of the property owned and used n the
busness.
5. It T O CTI O ISIONS R NU CT O 1918.
Under the retroactve provsons of the Revenue ct of 1918,
capta-stock ta es were propery coected tor the year endng
une 30, 1919, athough the assessment under the provsons of the
Revenue ct of 191(5 was unauthorzed, snce they thereafter
became due under the provsons of the Revenue ct of 191S. The
ta es were erroneousy coected for the s months perod endng
une 30, 1917, and the year endng une 30, 1918.
T 8URY Department
Offce of Commssoner of Interna Revenue,
Washngton. I). C.
To coectors of nferna revenue and others concerned:
The foowng decson of the Supreme Court of the Unted States,
rendered May 12, 1924. n the cases of echt, et at., Trustees, v. Ma-
ey oward, et at., Trustees, v. Maey: oward, et of.. Trusters, v.
Casey and Crocker, et a., Trustees, v. Maey, s pubshed for your
nformaton. The decson affrms n part and reverses n part f
decson of the Crcut Court of ppeas for the rst Crcut n the
same cases (T. D. 33 8 C. . 1-2, 323 ).
. G. rght,
ctng Commssoner of Interna Revenue.
pproved May 28, 1924.
. W. Meon,
Secretary of the Treasury.
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491
1000, Reg. 4, rt. 8.
Supreme Coubt or the Unted States. Nos. 90, 100, 101, 119. Octobeb
Term. 1923.
(99) Smon Iecht and Summt L. echt, Trustees, pettoners, v. ohn .
Sfaey, ormer Coector of Interna Revenue. (100) rthur L. oward
a Robert 8. arow, Trustees, pettoners, v. ohn . Mary, ormer Co-
ector of Interna Revenue. (101) rthur L. oward and Robert 8. ar-
ow, Trustees, pcttumes, v. ndrew . Casey, ormer ctng Coector of
Interna Revenue. (110) vah Crocker, et at., Trustees, pettoners, v.
ohn . f aey, Coector.
on wrts of certorar to the Unted States Crcut Court of ppeas for the rst Crcut.
May 12. 1924.
Mr. ustce Sanfohd devered the opnon of the court.
These four cases, whch were heard together, nvove the queston whether
the trustees of three Massachusetts trusts are sub|ect to the speca e cse
ta es mposed upon certan assocatons by the Revenue ct of 191 (39
Stat., 750, ch. 4 3), and the Revenue ct of 19181 (40 Stat., 1057, ch. 18),
based upon the vaue of ther capta stock.
The pettoners n case No. 99 are the trustees of the echt Rea state
Trust In Nos. 100 and 101, the trustees of the aymarket Trust : and
In No. 119, the trustees of the Crocker, Rurbank Co. ssocaton. cse
tu es were assessed aganst them under these cts and pad under protest.1
Tey then brought suts for refund n the edera Dstrct Court n Massa-
chusetts, and hud recoveres. (27(5 ed., 830.) The |udgments n ther favor
were reversed by the Crcut Court of ppeas. (281 ed., 3 3.) nd these
wrts of certorar were granted. (200 U. S.. 715,, 717.)
The Massachusetts trust s a form of busness organzaton, common n
that State,1 consstng essentay of an arrangement whereby property s
conveyed to trustees, n accordance wth the terms of an nstrument of trust,
to be hed and managed for the beneft of such persons as may from tme to
tme be the hoders of transferabe certfcates Issued by the trustees show-
ng the shares nto whch the benefca nterest n the property s dvded.
Tese certfcates, whch resembe certfcates for shares of stock n a corpora-
ton and are ssued and transferred n ke manner, entte the hoders to
shre rataby n the ncome of the property, and, upon termnaton of the
trust, n the proceeds.
Under the Massachusetts decsons these trust Instruments are hed to create
ether pure trusts or partnershps, accordng to the way n whch the trustees
re to conduct the affars commtted to ther charge. If they are the prn-
cpas and are free from the contro of the certfcate hoders n the manage-
ment of the property, a trust s c-eated: but If the certfcate hoders are
assocated together n the contro of the property as prncpas and the
trustees are merey ther managng agents, a partnershp reaton between
the certfcate hoders Is created. Wams v. Mton. 215 Mass., 1, 0 rost
v. Thompson. 210 Mass., 3 0.. 305 Dana v. Treasurer, 227 Mass., 5 2, 505
Prestey v. Treasurer, 230 Mass., 452, 45 .)
These trusts whether pure trusts or partnershps are unncorporated.
They are not organzed under any statute and they derve no power, beneft,
or prvege from any statute. The Massachusetts statutes, however, recognze
tter e stence and mpose upon them, as assocatons, certan obgatons
and abtes.
The date of ths ct s ebruary 24, 1019.
In No. 99 the trustees of the Ifeet Trust were assessed under the ct of 1010 wth
ta es for the s months endng une SO, 1017, and the year endng une 30, 101S. and
under the ct of 1918 for the years endng une 30, 1919, and une 30, 1920. In No. ot)
the trustees of the aymarket Trust w re assessed under the ct of 191 wth a ta for
the year endng une 30. 1019, and n No. 101 they were assessed under the ct of 1918
wth on addtona ta for the year endng .Tune 30. 1919. and a ta tor the year endng
une 30, 1920. In No. 119 the trustees of the Crocker ssocaton were assessed under
the ct of t wth a ta for the year endng une 30, 1919, and under the ct of 1918
wth an addtona ta for the same year.
Such trusts aso e st In other States. See seneray. as to ther characterstcs.
Sears Trust states as usness Companes and Wrghtngton s Unncorporated
ssocatons.
Uy chapter 441 of the acts of 1909. the trustees of a vountary assocaton under a
wrtten nstrument or decaraton of trust the benefca nterest of whch Is dvded Into
transferabe certfcates of partcpaton or shares are requred to fe copes of the
Instrument of trust wth desgnated pubc offcers and by chapter 1 4 of the cts .f
191 , such assocatons may be sued for debts, obgatons, or abtes, and ther
property may be sub|ected to attachment and e ecuton as If they were corporatons.
See 2 Genera Laws, 1921, ch. 182.
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1000, Reg. 4, rt. 8.
492
The echt Rea state Trust was estabshed by the members of the echt
famy upon rea estate n oston used for offces and busness purposes,
whch they owned as tenants n common. It s prmary a famy affar.
The certfcates have no par vaue, the shares beng for one-thousandths of
the benefca nterest. They are transferabe, but must be offered to the
trustees before beng transferred to any person outsde of the famy. The
trustees have fu and compete powers of management, but no power to
create any abty aganst te certfcate hoders. There are no meetngs
of certfcate hoders, but they may, by wrtten nstrument, ncrease the
number of trustees, remove a trustee, appont a new trustee f there be
none remanng, modfy the decaraton of trust In any partcuar, termnate
the trust, or gve the trust es any nstructons thereunder.
The aymarket Trust s strcty a busness enterprse. It was estabshed
by the orgna subscrbers who furnshed the money for the purchase of a
budng n oston used for store and offce purposes. The shares are of the
par .vaue of 100 each. cept as otherwse restrcted, the trustees have
genera and e cusve powers of management, but no power to bnd te cer-
tfcate hoders personay. t any annua or speca meetng of the cer-
tfcate hoders, they may f any vacances n the number of trustees, depose
any or a the trustees and eect others n ther pace, authorze the sae of
the property or any part thereof, and ater or amend the agreement of trust.
The ( rocker, urbank Co. ssocaton s aso a busness enterprse. It
was formery entted The Wachusett Reaty Trust, The certfcates have no
par vaue, the shares beng for nnety-s thousandths of the benefca n-
terest n the property. The trustees orgnay hed the fee of certan ands
sub|ect to a ong ease and the stock of a Massachusetts corporaton engnge
n manufacturng paper and ownng and operatng severa ms. In Crocker
v. Mact (249 U. S., 223 (1919)), n whch the orgna trust nstrument was
before the court, t was hed that the trustees were not sub|ect as to the
dvdends receved from the corporaton to the ta Imposed by the Income
Ta ct of 1913 upon the net ncome of every corporaton, |ont-stock com-
pany or assocaton, organzed n the Unted States, but were sub-
|ect ony to the dutes mposed by the ct upon trustees. The orgna trust
agreement nvoved n that case has now, however, been modfed, wth the
assent of the certfcate hoders. y ths modfcaton the form of (the
organzaton was specfcay changed to that of an assocaton, under ts
present name. The trustees were authorzed to surrender the stock of the man-
ufacturng corporaton, to acqure nstead ts entre property, and to carry on
the busness theretofore conducted by t, or any substantay smar busness.
The tte to a the trust property and the rght to conduct a the busness
were vested e cusvey n the trustees, who were authorzed to desgnate
from ther number a presdent and other offcers and to prescrbe ther dutes.
The certfcate hoders were authorzed, at any meetng, 1o remove any trustee
and eect trustees to f any vacances. Snce the modfcaton of the trust
agreement the trustees hnve carred on the manufacturng busness n sub-
stantay the same manner as t was formery conducted by the corporaton.
To determne rghty the scope and effect of the Revenue cts now n
queston t s necessary to bear n mnd the prevous egsaton on the saue
sub|ect, and the nterpretaton gven t by the decsons of ths court.
Secton 38 of the ct of ugust 5, 1919 (ch. , 30 Stat., 11, 12) common
caed the Corporaton Ta Law provded : That every corporaton. ont stock
company or assocaton, organzed for proft and havng a capta stock represented
by shares, and every nsurance company, now or hereafter organzed under the
aws of the Unted States or of any State or Terrtory , or now o
hereafter organzed under the aws of any foregn country and engaged n
busness n any State or Terrtory of the Unted States sha e sub-
|ect to pay annuay a speca e cse ta wt respect to the carryng on or
dong busness , equvaent to 1 per centum upon the entre net
Income over and above 5,0( ) receved by t from a sources or
f organzed under the aws of any foregn country, from busness
transacted and capta nvested wthn te Unted States and ts Terrtores.
In nt v. Stone Tracy Co. (220 U. S., 10T (1911)), the court, n sustanng
the consttutonaty of ths secton of the ct, sad that the domestc corpora-
tons, |ont stock companes or assocatons, as we as the nsurance companes.
Provsons referrng to aska and the Dstrct of Coumba and to certan deductons,
vbcb are mmatera for present purposes, are omtted n tbs and subsequent ctaton
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493
1000, Reg. 4, rt. 8.
must be such as are now or hereafter organzed under the aws of the Unte
States or of any SUte or Terrtory, and that the ta was mposed upon the
dong of busness wth the advantages whch nhere n the pecuartes of cor-
porate or |ont stock organzatons of the character descrbed, that s, upon
the e ercse of the prvege of dong busness n a corporate capacty, as such
busness s done under authorty of State franchses.
In ot v reeman (220 U. S., 178, 185 (1911)), t was hed that ths e cse
ta dd no appy to two typca Massachusetts trusts. The court sad:
Under the terms of the Corporaton Ta Law, corporatons and |ont stock
assocatons must be such as are now or hereafter organzed under the aws
of the Unted States or of any State or Terrtory . The anguage
now or hereafter organzed under the aws of the Unted States,
etc., mports an organzaton dervng power from statutory enactment.
The descrpton of the corporaton or |ont stock assocaton as one organzed
under the aws of a State at once suggests that they are such as are the
creaton of statutory aw. from whch they derve ther powers and are quafed
to carry on fher operatons. ntertanng the vew that t was the
ntenton of Congress to embrace wthn the corporaton ta statute ony such
corporatons and |ont stock assocatons as are organzed under some statute,
or derve from that source some quaty or beneft not e stng at the common
aw, we are of opnon that the rea estate trusts nvoved n these two cases
are not wthn the terms of the ct.
We come now to the consderaton of the cts nvoved n the present cases.
1. Revenue ct of 1 )1 . Secton 407, Tte I , of tds ct provdes (39 Stat.,
789) that: very corporaton, |ont-stock company or assocaton, now or
ureafter organzed In the Unted States for proft and havng a capta stock
represented by shares, and every nsurance company, note or hereafter organ-
zed under the acs of th Unted Sates, or any State or Terrtory ,
sha pay annuay a speca e cse ta wth respect to the carryng on o
dong busness , equvaent to 50 cents for each 1,000 of the far
vaue of ts capta stock, ncudng the surpus and undvded profts, but ess
an e empton of 99,000 from the capta stock.
nd, n a separate paragraph, that: very corporaton, |ont-stock company
or assocaton, or nsurance company, now or hereafter organzed for proft
under the aws of any foregn country and engaged n busness n the Unted
States sha pay annuay a speca e cse ta , equvaent to 50 cents
for each 1,000 of the capta actuay nvested n the transacton of ts busness
n the Unted States.
Secton 10, Tte I, aso provdes that there sha be pad annuay a ta of
2 per centum upon the net ncome receved by every corporaton, |ont-stoc
company or assocaton, or nsurance company, organzed n the Unted States,
no matter how created or organzed.
The b as ntroduced n the ouse of Representatves contaned ths pro-
vson for an ncome ta , but no provson for an e cse ta . It was amended
n the Senate so as to mpose on every corporaton, |ont-stock company or
assocaton, as defned and mted n secton 10, Tte I that s, organzed n
the Unted States, no matter how created or organzed a speca ta of 50
cents for each 1,000 of capta, surpus and undvded profts used n any of
e actvtes or functons of ther busness.
The charman of the Senate Commttee on nance, n reportng the b wth
ths amendment, referred to t as mposng a sma ta upon corporatons n
the nature of a cense ta for dong busness. The ouse, however, dd not
agree to ths amendment. nd Inter, pursuant to the report of a conference
commttee, there was nserted In the b, n eu of the Senate amendment, the
provson for a speca e cse ta now contaned n secton 407 of the ct, n
whch the words no matter how created or organzed were omtted, and the
words organzed under the aws of the Unted States, or any State or Terr-
tory, whch had been contaned In the ct of 1909, were nserted. (04th
Cong., 1st sess., . R. 1 703, and Sen. Rep. No. 793, pt. 1, p. 2 53 Cong. Itec,
pt. 11, p. 10UC3, and pt. 13, p 14020.)
It thus appears that Congress ntended to make a cear dstncton between
the provsons reatng to the ncome ta and to the e cse ta , and purposey
ramed them, as shown by the amendment ncorporated n the b before ts
fna passage, so that whe the ncome ta provson shoud appy to a do-
mestc corporatons, |ont-stock companes or assocatons, no matter how
created or organzed, the e cse ta provson shoud ony appy to such as were
organzed under statutorv aw. See Unted States v. Pubshng Co. (219 U. S.,
1,13) Unted States v. St. rau auay (247 U. S., 310, 31S).
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1000, Reg. 4, rt. 8.
404
The words now or hereafter organzed under the aws of the Unted States
or any State or Terrtory appear n the ct of 191 n precsey the same
pace wth reference to the precedng words every corporaton, |ont-stock
company or assocaton as n the ct of 1009. and are separated from them a
ke manner by the phrase and every nsurance company, foowed by the
ke comma. nd t s cear that n the ntermedate phrase now or hereafter
organzed n the Unted States for proft and havng a capta stock represented
by shares, the words n the Unted States were nserted n the ct of 191
after the word organzed merey by reason of the fact that ths ct refers
to domestc and foregn corporatons, |ont-stock companes aud assocatons
n two separate paragraphs nstead of n the same paragraph as n the ct of
1909. The words organzed n the Unted States have no dfferent effect,
as apped to domestc corporatons, |ont-stock companes and assocatons,
from the word organzed as used n the ct of 1909, and n no wse remove
the ensung genera mtaton that they must be such as are organzed under
the aws of the Unted States, or any State or Terrtory.
nd snce these mtng words, when used n the ct of 1009, had been hed
by ths court, n ot v. reeman, to show the ntenton of Congress to em-
brace wthn the statute ony such corporatons and |ont-stock assocatons as
are organzed under some statute, or derve from that source some quaty
or beneft not e stng at the common aw, they must be gven the same mean-
ng and effect when used In the ct of 1910. In adoptng the anguage used
In an earer ct, Congress must be consdered to have adopted aso the con-
structon gven by ths court to such anguage, and made It a part of the enact-
ment. (Sessons v. Romadka, 145 U. S., 29, 43 Latmer v. Unted States, 223
U. S., 501, 504.) nd here the egsatve hstory of the e cse ta provson
of the ct of 1910, and the marked contrast between ts anguage and that of
the ncome tu provson of the same ct, pany show, asde from ths rue of
statutory constructon, that ths s what Congress n fact ntended.
We concude that as the trusts nvoved n these four cases are not organzed
under any statute and derve from such source no quaty or beneft, they are
not wthn the terms of the e cse ta provson of te ct of 1910.
2. Revenue ct of 1918. Secton 1 of ths ct provdes (40 Stat., 10.r 7) that
when used n the ct the term corporaton Incudes assocatons, |ont-
stock companes and nsurance companes the term domestc when ap-
ped to a corporaton or partnershp means created or organzed n the Unted
Staes and the term foregn means created or organzed out-
sde of the Unted Statea
Secton 1000(a) provdes that n eu of the ta mposed by secton 407 of
the Revenue ct of 19 very domestc corporaton sha pay annuay a
specu e cse ta wth respect to carryng on or dong busness, equvaent to
1 for each (1,000 of so much of the far average vaue of Its capta stock for
the precedng year, Incudng the surpus and undvded profts, as s n e cess
of 0,000 and every foregn corporaton sha pay annuay a speca e cse
ta wth respect to carryng on or dong busness n the Unted States, equva-
ent to 1 for each 1,000 of the average amount of capta empoyed n Ue
transacton of ts busness n the Unted States durng the precedng year.
y secton 1400(a), Tte I of the Revenue ct of 1910 ncudng secton
407, reatng to e cse ta es s specfcay repeaed, e cept for the assessment
and coecton of ta es accrued thereunder aud the Imposton and coecton
of penates and forfetures.
Readng together the defnng and enactng sectons of the ct t s ns f
secton 1000(a) provded n terms that: very corporaton, assocaton. ont-
stock company and Insurance company, created or organzed n the Unted
States, sha pay a speca e cse ta , ns prescrbed, wth respect to the carry-
ug on or dong busness. nd It must be gven effect as thus read.
The terms of ths ct are n marked and sgnfcant contrast wth those of the
cts of 1909 and 191 . Not ony s the ct of 191 specfcay repeaed, but
the we-defned words of mtaton organzed under the aws of the Unted
Sates, or any State or Terrtory, that had been used n that ct as we as n
the ct of 190 ), are omtted and n eu thereof the e cse ta s e tended,
broady, to every assocaton created or organzed In the Unted States and
carryng on or dong busness theren. nd thereby, n our opnon, the n-
Subsecton (c) provdes that the ta Imposed hy ths secton sha not a py n any
year to nny corporaton whch Is not encased In busness.
7 These e cse ta provsons of the Revenue ct of 1018 are reenacted. Id ke term ,
n the Revenue ct of 1021 (42 Stat., 227, 204).
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495
1000, Reg. 4, rt. 8.
ten-on of Congress s pany shown to e tend the ta from one mposed soey
upon organzatons e ercsng statutory prveges, as theretofore, to ncude aso
organzatons e ercsng the prvege of dong busness as assocatons at the
common aw.
It s true that the charman of the Ways and Means Commttee of the ouse
of Representatves n a statement as to the genera prncpes of the b
whch ncuded many knds of ta es whe sayng that the commttee had
made an mportant change n the rates and e emptons n the capta stock
ta . made no reference to any enargement of the cass of organzatons to
whch the ta woud appy and that the charman of the Senate Commttee
on nance, n reportng on the b, whe statng that t provded for the
contnuance of the capta stock ta on the bass of the far average vaue of
the capta stock of the corporaton, and made certan changes n rates, ke-
wse made no reference to any such enargement n the scop - of ts provsons.
(5 Cong. Rec pt, 12, pp., p. 098 ( 5th Cong., . d sess.. Sen. Rep. No. 17,
p. 17.) We can not, however, regard the sght negatve nference whch mght
be drawn from the faure of these charmen to pont out the enargement of
the cass of organzatons made sub|ect to the e cse ta as suceut to over-
come the evdence of the egsatve ntenton drawn from the pan and un-
ambguous anguage o the ct Itsef, emphaszed by the contrast wth that
of the ct of 191 whch t suppanted.
Nor can we agree wth the contenton that the defnton cause of the ct
s not to be hed app .the to the e cse ta provson on the ground that the
ct consodated many former ta ng cts and ts genera defntons may have
been nadvertenty e tended to the e cse ta provson wthout any actua
ntenton of departng from the anguage of the former statute n ths respect.
Ths s not a mere revson and consodaton of former statutes to whch a
new Interpretaton s w.t to he gven wthout some substanta change n phrase-
oogy. (McDonad v. ovcy, 110 U. S., 19 uck Stove Co. v. ckers, 220
U. S., 205.) It s a Lew statute, suppantng and changng the former stat-
utes n many respects, and n whch there s a sgnfcant change of phrase-
oogy, ncorporated n the genera defnton cause made appcabe, e pressy,
to every provson of the ct
Nor does the anguage of the ct In ths respect ca for the appcaton of the
estabshed rue that n the nterpretaton of statutes evyng ta es ther pro-
vsons are not to be e tended by mpcaton beyond the cear mport of the
anguage used, and n case of doubt are to be construed most strongy aganst
the Government and In favor of the ta payer. (Goud v. Goud, 245 U. S.,
151, 153 Unted Sates v. Merram, 2 3 U. S., 179, 187.) ere the anguage of
the ct s specfc, eavng no substanta doubt as to ts meanng and the ta -
payers are seekng by mpcaton to mt ts cear mport.
3. We aso concude that these three trusts are assocatons created or
organzed n the Unted States and engaged n busness, wthn the meanng
of the ct The trustees of the echt and aymurkut Trusts nsst that they
are not such assocatons. The trustees of the Crocker ssocaton, on Ue
pther hand, admtted n the Crcut Court of ppeas and at the bar. that snce
the modfcaton of the orgna trust agreement, the trust consttutes an
assocaton.
The word assocaton appears to be used n the ct n ts ordnary mean-
ng. It has been defned as a term used throughout the Unted States to
sgnfy a body of persons unted wthout a charter, but upon the methods and
forms used bv ncorporated bodes for the prosecuton of some common enter-
prse. (1 bb. Law Det., 101 (1S70) 1 ouv. Law Det. (Rawe s 3rd Rev.),
2 3 m. ng. nc. Law (2d d.), 1 2 and en v. Steven ( pp. Dv.),
54 N. Y. Supp., 8, -3, n whch ths defnton was cted wth approva as
beng n accord wth the common understandng.) Other defntons are:
In the Unted States, as dstngushed from a corporaton, a body of persons
organzed, for the prosecuton of some purpose, wthout a charter, but havng
the genera form and mode of procedure of a corporaton. Webst. New In-
termt. Det. U. S. n orgnnzed but unchartered body anaogous to but
dstngushed from a corporaton. Pract. Stand. Det nd see Maey v.
owdtch (C. C. ) (259 ed., 809, 812) Chcago Tte Co. v. Smetunka
(T). C.) (275 ed.. 0) aso Unted Mne Workers v. Coronado Co. (259 U. S.,
344, 392), n whch unncorporated abor unons were hed to be assocatons
wthn the meanng of the nt-Trust Law.
We thnk that the word assocaton as used In the ct ceary Incudes
Massachusetts trusts such as those heren nvoved, havng quas corporate
organzatons under whch they are engaged In carryng on busness enter-
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1000, Reg. 4, rt. 8.
49
prses. What other form of assocatons, f any, t ncudes, we need not,
and do not, determne.
It s true that n ot v. reeman, supra, at page 18 , t was sad that the
two trusts there nvoved coud hardy be sad to he organzed wthn the
ordnary meanng of that term. owever, the decson was based soey upon
the ground that they were not sub|ect to the ta mposed by the ct of 1909
because they were not organzed under any statute and the nference from the
entre opnon s that f the ct had not requred such a statutory organzaton
they woud have boon hed to e wthn ts terms. nd we thnk that the
present truss are both created and organzed n the Unted States
wthn the meanng of the ct.
The trustees of the echt and aymarket Trusts earnesty rey, however,
upon the decson In Crocker v. Muen, supra, as concusvey determnng that
they can not be hed to be assocatons uness the trust agreements vest
e sharehoders wth such contro over the trustees as to consttute them more
than strct trusts wthn the Massachusetts rue. Ths case arose under Secton
II, G(a), of the Income Ta ct of 1913, mposng a ta upon the net ncome
of every corporaton, |ont-stock company or assocaton organzed
n the Unted States, no matter how created or organzed. Secton II, D,
provded that trustees or other fducares were e empt from ths ta upon
dvdends receved from corporatons ta abe upon ther net ncome. The
precse queston was whether the trustees of the Wachusett Reaty Trust were
sub|ect to the ncome ta u n dvdends receved from a Massachusetts cor-
poraton that was tsef ta abe upon ts net ncome. The trustees nssted that
they were not an assocaton sub|ect to ths ta , under G(a), but merey
trustees, and entted to the e empton as fducares under D. The trust had
been created by a Mane corporaton, whch contempated dssouton, for the
beneft of ts sharehoders. It had transferred to the trustees the fee of
certan ands eased to a Massachusetts manufacturng corporaton engaged
n operatng severa ms, and aso the stock n that corporaton whch t hed.
The purpose of the trust was to convert ths property nto money and ds-
trbute te net proceeds to the benefcares wthn a perod eft to the ds-
creton of the trustees. Meanwhe they were to dstrbute the net ncome, but
coud appy any funds for the repar and deveopment of the property or the
acquston of other property, pendng converson and dstrbuton. Ther func-
ton, as emphaszed n the opnon, was not to manage the ms, but smpy
to coect the rents and ncome, wth a arge dscreton n ts appcaton. The
benefcares had no contro e cept n certan matters n whch ther consent
was requred.
The court, after statng that the decaraton of trust on ts face was an
ordnary rea estate trust of the knd famar n Massachusetts, and that
there coud be tte doubt that n Massachusetts ths arrangement woud be
hed to create a trust and nothng more, sad that as the pantffs unden-
aby are trustees, f they are to be sub|ected to a doube abty the anguage
of the statute must make the ntenton cear and that t woud be a wde
departure from norma usage to ca the benefcares here a |ont-stock asso-
caton when they are admtted not to be partners n any sense, and when
they have no |ont acton or nterest and no contro over the fund. On the
oer hand, the trustees by themseves can not be a |ont-stock assocaton
wthn the meanng of the ct uness a trustees wth dscretonary powers
are such, and the speca provson for trustees n 1) s to be made meanng-
ess. We perceve no ground for groupng the two benefcares and trustees-
together, n order to turn them nto an assocaton, by untng ther contrasted
functons and powers, athough they are n no proper sense assocated.
We presume that the ta aton of corporatons and |ont-stock companes upon
dvdends of corporatons that themseves pay the ncome ta was for the
purpose of dscouragng combnatons of the knd now Id dsfavor, by whch
8 In the present cases the Crcut Court of ppeas sad: It s a matter of ronnma
knowedge that, for most busness and tnanca purposes, a the arger organzatons t
ths sort have for years been ndstngushabe from corporatons. One mght amost say
that they are a devce under whch partes make ther own corporaton code. usness
concerns so organzed have coae to occupy a arge ed n Industry and In fnance. t
east two substanta te tbooks have been wrtten on the aw concernng such orguw
tons and deang wth ther advantages for genera busness purposes. In
Dono v. Treasurer (227 Mass., 502, 505) It appears that the moskeag Manufacturng
Co., commony known to e one of the argest enterprses n New ngand, s so oranwo-
The Peppere Manufacturng Co., before ths court n MuOc|/ v. ocrtch, supra, hud a
captazaton of over 7,.r 00,000 the Crocker Trust operates arge paper maufacnns
ms, empoyng about 1,000 men, wth gross assets of over 10,000,000. (21 ed., at
p. 370.)
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497
1000, Reg. 4, rt. 8.
a corporaton hods controng Interests In other corporatons whch n ther
turn may contro others, and so on, and n ths way concentrates n power that
s dsapproved. There s nothng of that sort here. Upon the whoe case we
are of opnon that the statute fas to show a dear ntent to sub|ect the dv-
dends on the Massachusetts corporaton s stock to the e tra ta mposed by
Gft).
Ths opnon s based prmary upon the vew that the Income Ta ct,
consderng Its purpose, dd not show a cear ntenton to mpose upon the
trustees as an assocaton a doube abty n reference to the dvdends
on stuck n the corporaton that tsef pad an ncome ta when consdered as
trustees they were by another provson of the ct e empt from such pay-
ment. nd the anguage used arguendo n reachng ths concuson that the
trustees coud not he deemed nn assocaton uness a trustees wth dscre-
tonary powers nro such, and that there was no ground for groupng together
the benefcares and trustees n order to turn them uto an assocaton, s to
he read u the ght of the trust agreement there nvoved, under whch the
trustees were, n substance, merey hodng property for the coecton of the
ncome and ts dstrbuton among the benefcares, and were not engaged,
ether by themseves or n connecton wth the benefcares, n the carryng
on of any busness. Zonne v. Western Syndcate, 220 U. S., 187. 190. nd
see Smth v. nderson, I... R., 15 Oh. Dv., 247.)
It resuts tnt Crocker v. Mae) s not an authorty for the broad propo-
ston that under an ct mposng nn e cse ta upon the prvege of carryng
on a busness, a Massachusetts trust engaged n the carryng on of busness
n a quas corporate form, n whch the trustees have smar or greater powers
than the drectors u a corporaton, s not an assocaton wthn the mean-
ng of ts provsons.
We concude, therefore, that when the nature of the three trusts here n-
voved s consdered, as the pettoners are not merey trustees for coectng
funds and payng them over, but are assocated together n much the same
manner as the drectors u a corporaton for the purpose of carryng on bus-
ness enterprses, the trusts are to be deemed assocatons wthn the meanng
of the ct of 1918 ths beng true ndependenty of the arge measure of
contro e ercsed by the benefcares n the echt and aymarket cases, whch
much e ceeds that e ercsed by the benefcares under the Wachusett Trust.
We do not beeve that t was ntended that organzatons of ths character
descrbed .as assocatons by the Massachusetts statutes and sub|ect to
dutes and abtes as such shoud be e empt from the e cse ta on the
prvege of carryng on ther busness merey because such a sght measure
f contro may be vested n the benefcares that they mght be deemed strct
trusts wthn the rue estabshed by the Massachusetts courts.
That the Crocker ssocaton s engnged n carryng on busness wthn the
meanng of the ct s obvous. nd so of the echt and aymarket Trusts.
corporaton ownng and rentng an offce budng s engaged n busness
wthn the meanng of an e cse statute. ( nt v. Stone-Tracy Co., supra,
171 Zonne v. Western Syndcate, supra, 190.)
4. It s urged, however, by the trustees of the Crocker ssocaton that they
are not sub|ect to an e cse ta under the ct of 1918, because the ta mposed
on a domestc assocaton s measured by the far average vaue of ts cap-
ta stock the argument beng that ths ta , of necessty, can appy ony to
assocatons havng a f ed capta stock represented by shares that s,
a desgnated share capta whose amount s f ed by the artces of assocaton
or trust agreement. ence, t s nssted, the ta can rot appy to ths assoca-
ton, whch, t s camed, has no capta stock wthn the meanng of the ct.
The trustees of the echt Trust do not make ths contenton.
The certfcates n ths assocaton, as stated, have no par vaue, the shares
beng for nnety-s thousandths of the benefca nterest n the property. No
capta account s kept by the trustees, but they have a proft and oss ac-
count, n whch they are charged wth a the property transferred to them, at
a vauaton, aganst whch abtes and reserves are shown, the baance beng
carred as the net nterest of the sharehoders. nd ther books show the
dvdends dsbursed to sharehoders. The amount of the present ta was
assessed by the coector by takng the far vaue of the assets of the assoca-
ton over ts abtes and cang the dfference ts capta stock.
It s true that, generay speakng, n the technca sense, the capta stock
of a corporaton s a sum f ed by ts corporate charter as the amount pad
or to be pad n by the stockhoders for the prosecuton of the busness of
the corporaton aud the beneft of ts credtors. (1 Cook on Corporatons (7th
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1000, Reg. 4, rt. 11.
498
ed.), 38, and cases cted In note 2.) owever, In statutes reatng to ta aton,
sometmes drawn wthout regard to the technca meanng of the words, the
courts w construe capta stock to mean the actua property of the cor-
poraton, when necessary to carry out the ntent of the statute. (7 ., 39 Secur-
ty Co. v. artford, 1 Conn., 89, 101 enderson rdge Co. v. Commonweath,
97 y., 23, 41. nd see Peope v. Coeman, 12 N. Y., 433, 439.)
We thnk that n the ct of 1918, n whch the ta upon an assocaton Is
based upon the average vaue of ts capta stock, ncudng surpus and un-
dvded profts, these words are not to he gven a technca meanng, but shoud
be nterpreted, n ther entrety, and, n the absence of a f ed share capta,
as equvaent to the capta nvested In the busness that s, the net vaue of
the property owned by the assocaton and used n ts busness. s was sad
by the Crcut Court of ppeas, the phrase n the statute as to ncudng
surpus and undvded profts puts beyond doubt the queston of the conces-
sona ntent to measure ths ta by busness and fnanca reates, not by book-
keepng forms or mere names. nd ths constructon s n harmony wth the
provson as to the e cse ta on a foregn assocaton, whch s f ed upon the
vaue of ts capta actuay nvested n the transactons of ts busness n the
Unted States.
We therefore concude that the Crocker ssocaton was aso sub|ect to the
ta , and that ths was propery measured by the coector by the net vaue of
ts property no queston beng made as to the correctness of hs vauaton.
5. queston remans In cases Nos. 100 and 119 whch has not been art|ued
by counse as to the ta es for the years endng une 30, 1919, whch vere
assessed aganst the trustees of the aymarket Trust and the Crocker ssoca-
ton under the ct of 191 , and pad by them before the passage of the ct of
1918. The atter ct, whch was approved and became effectve ebruary 2
1919, was retroactve n ts provsons and covered the year endng une IM,
1919. (40 Stat., 112 .) Thereafter addtona ta es were assessed aganst the
trustees, representng the dfferences between the amount of the ta es whch
they had pad under the ct of 191 and those prescrbed by the ct of 1U18.
See note 2, supra.
In vew of the retroactve provson of the ct of 1918, we are of opnon
that the ta es for the year endng une 30, 1919, can not now be recovered, even
though orgnay ther assessment under the ct of 1910 was unauthorzed,
snce they thereafter became due under the ct of 1918: and that they may now
be retaned by the Unted States. (See nderson v. Loan ct Trust Co. (C C. .).
241 ed., 322, 325, and New York Lfe Ins. Co. v. nderson (CC ), 2S1
ed., 527, 530 aso Crocker v. MaUey, supra, 235.)
The decrees of the Crcut Court of ppeas are accordngy affrmed In
cases Nos. 100, 101, and 119 and n No. 99 affrmed as to the ta es assessed for
the years endng une 30, 1919. and une 30, 1920, and reversed as to those
assessed for the s months endng une 30, 1917, and the year endng une
30, 191S.
ffrmed n part.
Reversed n part.
Mr. ustce omes and Mr. ustce randes took no part n the decson
of these cases.
Secton 1000, Reguatons 50 (revsed), rtce III-22-15S5
10 Reguatons 4, rtce 11: ass of the T. D.3593
ta : Carryng on or dong busness.
C PIT L STOC T R NU CT O 1918 D CISION O COURT.
Capta Stock Ta Dong usness.
corporaton organzed for the purpose of buyng and seng
tmbernnds whch hods and offers for sae through agents tracts
of and s dong busness wthn the meanng of secton 1000(n of
the Revenue ct of 1918 and s sub|ect to the payment of a capta
stock ta|t.
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499
1000, Reg, 4, rt. 11.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others cancerned:
The attached decson of the Unted States Dstrct Court for the
astern Dstrct of Lousana n the case of Lane Tmber Company
v. Uynson, Coector, s pubshed for the nformaton of nterna-
revenue ofcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved May 22, 1924.
. W. Meon,
Secretary of the Treasury.
Unted States Dstrct Court, astern Dstrct of Lousana, New Oreans
Dvson.
Lane Tmber Company v. ./. //. ynson, |r.
pr 19, 1924.
SU MITT D ON M RITS.
Rufvs . oster, udge: In ts case t appears tat a ta on (e capta
stock of the pantff amountng to 112 was assessed by the coector of nterna
revenue The corporaton pad under protest and n due course sued to
recover on the ground that the corporaton was not dong busness n the year
endng .Tune 30, 20. penaty of 5. 0 was aso e acted and pad. The
matter was submtted on nn agreed stpuaton.
It appears that the eonwruton was organzed for the purpose of buyng
and seng tmberands. They st hod a arge quantty of such ands, whch
they are offerng on the market through agents, but t does no other busness
am has bought no tmberand for qute a whe, nor as t made saes. I
thnk, however, the cor|oraton s dong busness wthn the meanng of the
aw. It was organzed for the purpose of buyng and seng tmberands and
has not dvested Itsef of that functon. Whe the ands (hey hod are beng
offered by agents, the fna consummaton of the transacton w be In the cor-
poraton. In my opnon a corporaton, wthn e meanng of the aw, can not
be sad to have ceased dong busness when ts corporate actvtes have not
been transferred to some other company or ndvdua and the corporate e st-
ence s preserved for the purpose for whch t was organzed. uthortes aa
to what may consttute dong busness wthn a State for the purpose of cense
ta aton are not n pont.
There w be |udgment for the defendant.
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MISC LL N OUS T RULINGS.
TITL . SP CI L T S.
Secton 1001(1), Reguatons 59, rtce 5: 111-14-1492
rokers persons abe. T. D. 3577
SP CI L T S COMMISSION M RC NTS R NU CT O 1918
D CISION OP COURT.
1. Speca Ta es ISkokek Commsson Merchant.
The defnton of a term or word by Congress prevas over te
ordnary defnton, and factors or commsson merchants are n-
cuded n the term broker as defned In secton 1001(1) of the
Revenue ct of 1918.
2. Statutory Constructon Departmenta Interpretaton
Reenactment.
The reenactment by Congress n the Revenue ct of 1021 of sec-
ton 1001(1) of Ue Revenue ct of 1918 wthout change was an
approva of the constructon gven to that secton by departmenta
reguatons.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To coectors of nterna revenue and others concerned:
The appended decson of the Unted States Dstrct Court for the
Northern Dstrct of Inos, astern Dvson, n the case of bert
11. Schwezer v. arry . Magcr, former coector, s pubshed for
the nformaton of nterna-revenue offcers and others concerned.
D. IL ar,
Commssoner of Interna Revenue.
pproved March 28, 1924.
. W. Meon,
Secretary of the Treasury.
In the Dstrct Court of the Unted States for the Northern Dstrct of
Inos, astern Dvson. No. 3-1580.
bert II. Schwezer, pantff, v. arry . Magcr. formery Coe :or of In-
terna Revenue for the rst Dstrct of Inos, defendant.
Defendant demurs to pantffs decaraton, whch aeges that pantff s 1
the busness of recevng farm produce for sae on commsson whch t ses
as such commsson merchant to others to be resod at reta that the pantff
receves sad goods nto hs possesson, advances a net wnry charges there 1
such as carrage and warehouse and nspecton charges, and ses same u bfa
(500)
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501
1001 1), Reg. 59, rt. 5.
own name, ony recevng te proceeds and transmttng the same to the con-
sgnor, deductng a advancements and hs commsson that he pad a
edera ta Imposed by the Government under secton 1001 of the eveuue
ct of 1018, whch s as foows:
That on and after anuary 1, 1019, there sha be eved, coected, and pad
annuay the foowng speca ta es
(1) rokers sha pay 50. very person whose busness t s to negotate
purchases or saes of stocks, bonds, e change, buon, coned money, bunk
notes, promssory notes, other securtes, produce or merchandse, for others,
sha he regarded as a broker.
That the sad ta was mposed by the Government wthout any authorty and
that he has comped wth the condtons precedent to a recovery of the aeged
ega ta , whch he seeks to recover In the manner prescrbed by aw. The
ony queston s whether under the facts peaded the pantff comes wthn the
cass of peope upon whom, by sad secton, a ta s mposed.
Pantff contends that by the secton n queston, purportng to ta a per-
sons whose busness It s to negotate sae or purchases of merchandse for
others, nasmuch as the precedng sentence refers ony to brokers, t was the
ntent of Congress to ta ony those who are wthn the ordnary ega defn-
ton of broker, who ordnary ses for unothcr n the name of another, wth-
out havng the res Id hs possesson, and thnt Congress by usng the word
broker, coud not have ntended to Incude those who have the custody and
possesson of the res and se n ther own name.
ut Congress does not mt the ta to ordnary brokers t e pressy pro-
vdes that every person whose busness It Is to negotate saes
of , produce or merchandse, for others, sha be regarded as a broker.
Congress has defned the word by a new defnton a ts own. It has not sad
that a peope ncuded wthn the ordnary defnton of broker sha be ta ed,
but has e tended the term to ncude a who buy or se mercfand.se for others.
The ct s remeda n character and to be construed beray. (Cquot s
Champagne, 3 Wa., 114.) The statutory defnton must contro, and there
beng no ambguty the queston of what or who was to e Incuded Is to be
determned from the words used. (Lau Ow ew v. U. 8., 144 U. S., 47-50.)
Where Congress e pressy defnes words that defnton must govern the courts.
(Wampoe f Co. v. 17. 8., 101 ed., 573 Cons v. Te as, 223 U. S. 288 Pub.
t. Com. v. Chcago, etc., Co., 275 111., 555.) In U anen v. Shook (01 U. S.,
704) the court had under consderaton an ct that defned broker as one
whose busness t s to negotate purchases or saes for hmsef or
others. The court refused to mt those ta ed to the cass Incuded ord-
nary wthn the meanng of the term broker, but, In vew of the statutory
defnton of Congress, Incuded wthn the term broker one who deat for
hmsef.
The cts of 1804 and 1S ta ed under dfferent paragraphs whoesae
deaers, brokers, produce brokers, commerca brokers, catte
brokers, and others. In Sack v. Tucker f Co. (23 Wa., 321) the Supreme
Court hed that Tucker Co., who deat n merchandse on commsson for
others, seng n ther own names goods that were ntrusted to them, were
not produce brokers, or commerca brokers, but whoesae deaers, as to Incude
one whose busness It s. for hmsef or on commsson, to se any
merchandse, whose annua saes e ceed 20,000. Ths concuson
was reached despte the fact that the court sad that Tucker Co. were factors,
whch term n the ordnary ega sense ncudes those who nve the possesson
of the goods and se n ther own name. Despte the proper ordnary cass-
fcaton as factors or commsson merchant, the frm was hed to be a whoesae
deaer because Congress had e pressy defned the term so as to ncude factors.
So n the present case Congress has so defned the cass broker as to n-
cude the cass factors. Smar cases of statutory defnton prevang
over ordnary defntons are . 8. v. ants (184 ed., 528 101 ed., 575).
Cochran v. U. S. (270 ed. fU. S.), 48 2S3 ed., 973). s sad n Thompson
v. Unted States (24 ed., 547, 551)
The ntenton of.the Congress s to be sought for prmary n the anguage
sed, and where ths e presses an ntenton reasonaby ntegbe and pan
t must be accepted wthout mofcaton by resort to constructon or con-
|ecture. (Gardner v. Cons, 2 Pet, 5S, 93 Unted States vs. Godcnberg,
1 8 U. S., 95, 102.)
The fact that n the present ct Congress has emnated a the speca
cassfcatons ta ed under dfferent paragraphs In the pror cts mentoned,
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1001(1), Reg. 59, rt. 5.
502
but bas ncuded n one cassfcaton a those prevousy ta ed under dfferent
paragraphs, manfests ceary an ntenton upon the part of Congress to do
away wth the ordnary dstnctons between factors, commsson agent:-,
brokers, produce brokers, whoesae deaers, and commerca brokers. urther
corroboraton of such ntenton s found n the fact that whereas n earer
cts the defnton of broker was mted to one who buys or ses as u
broker, Congress hts n the 1918 ct entrey emnated such quafyng and
restrctve words.
Congress n the ct of 1921 reenacted secton 1001(1) of the ct of 1918
wtnout change. In the meantme, n anuary, 1920, the Treasury I epart-
ment, n Reguatons 59, artce , provded nter aa that a comnsson mer-
chant recevng merchandse for sae on consgnment for the account of the
consgnor s wthn the term broker us defned by the ct. Wth ths prac-
tca nterpretaton by the e ecutve department before t, by ts rcenactnent
Congress must hare Intended to approve the constructon then beng enforced.
In Natona Lead Co. v. . S. (252 U. S., 140) the court had under cunsM ra-
ton the drawback provson of the revenue aws. The court sad:
To ths we must add that the department s nterpretaton of the statute
has had such mped approva by Congress that t shoud not 1 ds-
turbed,
|.ne reenactng of the drawback provson four tmes, wthout
substanta change, whe ths method of determnng what shoud e pad
under t was beng constanty empoyed, amounts to an mped egsatve
recognton and approva of the e ecutve construct on of the statute f r
Congress Is presumed to have egsated wth knowedge of such an estabsved
usage of an e ecutve department of the Government .
Other authortes to the same effect are: McDonad v. Iovey (110 U. 8., 019,
02 )) Unted States v. Ph-brck (120 U. S.. 52. 58) e.c aven It. It. C . t.
Int. Com. Com. (200 U. S., 3G1, 401) Copper ueen Mnng Compam v.
rzona oard (300 U. S, 474, 479) nted State v. aruch (22:5 II. 3,
101, 199). .
In rown v. U. ff. cted by the pantff the court hed that ve stock are not
wthn the terra merchandse used n secton 1001(1) of the ct of 1918.
Such queston s not nvoved n the case now before the court.
The demurrer s sustaned.
SP CI L T S UPON USIN SS S ND OCCUP TIONS.
SP CI L, T S R NU CT OP 1921 D CISION OP COURT.
1. Occupatona Ta es roker Commsson Merchant.
person who receves produce on consgnment for sae on com-
msson and ses n hs own name, transmttng the proceeds ess
charges pad and commsson, s a broker, and sub|ect to the ta m-
posed by secton 1001(1) of the Revenue et of 1921.
2. Statutory Constructon Leotst.atve Defnton or Term.
The egsatve defnton of a broker In secton 1001(1) of the
Revenue ct of 1921 s bndng upon the courts n construng the
statute.
3. Case of.T.owm.
Te case of Schterzer v. nger (U. S. D. C, No. I T. D.
3577 see p. 500 ) foowed.
Treasury Department,
Offce of Commssoner of Interna. Revenue,
Washngton, D. C
To coector of nterna revenue and others concerned:
The attached decson of the Unted States Dstrct Court for the
Western Dstrct of Pennsyvana n the ense of bert M. Tram
Secton 1001(1), Reguatons 59, rtce 5:
rokers: Persons abe.
111-21-1573
T. D. : S8
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503
IOO(), Reg. 50, rt. 5.
Company v. D. . ener, Coector, s pubshed for the nformaton
of nterna-revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved May 17, 1924.
. W. Me on,
Secretary of the Treasury.
In the Dstrct Coubt of the Unted States for the Western Dstrct of
Pennsyvana. No. 2907. November Term, 1923.
bert f. Travs Company, a Corporaton, v. D. . ener, Coector of
Interna Revenue.
efore Thomson and Schoo maker, Dstrct udges.
per curam opnon
The acton s one to recover the sum of 50 pad by the pantff under protest
as a speca ta eved and coected by vrtue of subparagraph (1) of secton
1001 of the Revenue ct of 1921 (42 Stat. U, 227, 295) for the perod of one
year begnnng uy 1, 1922, and endng une . ( . 1923.
In the frst nstance, an affdavt of defense was fed, rasng a queston of
aw. y consent of the partes, ths was wthdrawn, a |ury tra was waved,
and the case proceeded to tra before the court wthout a |ury as though an
affdavt of defence had been fed, generay denyng the facts set forth n the
pantff s statement of cam.
rom the proofs offeror , the court fnds the foowng facts:
Te pantff s a Pennsyvana corporaton, havng Its pace of busness
at No. 21)7 Twenty-frst Street, Pttsburgh, Pn. Durng the fsca year begn-
nng uy 1, 1922, and endng une 30, 1923. It was engaged n the busness of
recevng farm produce on consgnment for sae on commsson.
In a transactons n whch produce was consgned to the pantff for sae
on commsson t receved such goods nto Its possesson and advanced a
necessary charges thereon, such as freght and thereafter the pantff sod
the same n ts own name, not the name of another, and receved the proceeds
of the sae, transmttng to the consgnor the proceeds receved by t ess the
amount pad by the pantff for such charges and the pantff s commsson.
It appears that the pantff s method of dong bus.ess Is to soct pros-
pectve buyers to attend at the raroad yards or the pantff s pace of
busness, where the prospectve buyers nspect the produce, and then a sae
may be effected as the resut of barganng between the pantff and the
prospectve buyer.
Pursuant to secton 1001(1) of the Revenue ct of 1921, whch provdes,
nter aa:
Rrokers sha pay . 0. very person whose busness t s to negotate
purchases or saes of stocks, bonds, e change, buon, coned money, Innk
notes, promssory notes, other securtes, produce or merchandse, for others,
sha be regarded as a broker.
The pantff fed wth the defendant a broker s speca ta return for tte
fsca year endng une 30, 1923, and pad, under protest, the 50 ta assessabe
aganst brokers. cam for refund was duy fed by the pantff, whch was
re|ected by the Oomrrrssoter of Interna Revenue on anuary 9, 1923.
The pantff contends that t s not a broker wthn the purvew of secton
1001(1) of the Revenue ct of 1921, and therefore not abe to ths ta .
There s no warrant for ths contenton. The pantff corporaton Is pany
a broker wthn the defnton of ths ct Congress has defned n the statute
a broker to be a person whose busness t s to negotate purchases or saes
of produce or merchandse for ohers. The busness conducted by the pantff
comes ceary wthn that defnton. The statute s perfecty pan. There s
no ambguty, and therefore there s nothng for the court to construe. There
Is no prncpe of aw better estabshed than that where Congress e pressy
defnes words, that defnton must govern the courts.
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Sched. - , Reg. 55, rt. 1.
504
The precse queston at ssue here has been decded adversey to the panff
by the Dstrct Court of the Unted States for the Northern Dstrct of Inos,
astern Dvson, n an opnon fed by udge Lndey, on or about March 10,
924. n the case of chtcezer v. Magcr, Coector, etc., No. 345S0. We eowpr
n the vews e pressed n the very abe and eaborate opnon of udge Lmrtty.
The pantff has sought to convnce us that udge Lndey was wrong u s
nterpretaton of the statute n vew of the egsatve hstory of secton 1()01
of the Itevenue ct of 1921 but there Is no mert n pantff s argument on
that pont. Whatever may have beon the egsatve hstory of that secton,
the defnton whch Congress gave to the word broker n the ct of 19:21
s perfecty pan and must contro.
udgment, therefore, may be entered In favor of defendant and aganst th
pantff, wth costs.
TITL L ST MP T S.
SC DUL - . CON Y NC S.
Reguatons 55, rtce 1: Deeds conveyng III-8-1380
property sod under forecosure or e ecuton T. D. 3551
ta . how pad.
ST MP T S R NU CT O 1917 D CISION O COURT.
1. Stamp Ta Conveyance Sherff s Deed.
sherff s deed ssued pursuant to a sae under the forecosure
of a mortgage s sub|ect to stamp ta under the provsons of Tte
III, Schedue , Subdvson 7, of the Revenue ct of 19-17.
2. Same Governmenta uncton State gency.
The ssuance of the sherff s deed pursuant to a sae under the
forecosure of a mortgage s not n pursuance of a governmenta
functon and a edera stamp ta on such deeds does not ta a
State nstrumentaty.
3. Case oowed.
ome Tte Insurance Company v. eth (230 ed., 905 (T. D.
2310)) foowed.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Dstrct Court for the
Dstrct of Idaho, Southern Dvson, n the case of ose Tte and
Trust Company v. van vans, coector of nterna revenue, s pub-
shed for the nformaton of nterna revenue offcers and others
concerned.
D. . ar,
Commssoner of nterna Revenue.
pproved ebruary 14, 1924.
. W. Meon,
Secretary of the Treasury.
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505 Sched. - , Reg. 55, rt. 1.
Is the Dstrct Coubt of the Unted States n and for the Dstrct of
Idaho, Southern Dvson.
ose Tte and Trust Company, a Corporaton, pantff, v. van vans, co-
ector of nterna revenue of the Unted States for the dstrct of Idaho,
defendant.
Detrch, Dstrct udge: In a sut brought u u State court by the pantff
here, for the forecosure of a mortgage, a decree of forecosure was duy en-
tered, and thereupon, pursuant to the practce n such cases, the sherff of
the county, actng under the authorty and pursuant to the drectons of such
decree, offered the mortgaged property for sae. The pantff, beng the
hghest bdder, became the purchaser, and upon the e praton of the perod
of redempton granted by the State statute, no redempton havng been made,
the sherff e ecuted and devered a deed n due form conveyng to t the
property sod. The deed bore no revenue stamps, and that fact havng there-
after come to the knowedge of the defendant, who s the coector of nterna
revenue of the Unted States for the dstrct of Idaho, he demanded of the
pantff payment of the reguar documentary stamp ta . eng threatened
wth approprate coercve measures n case t refused the demand, the pantff
comped, under protest, and aff ed stamps amountng to 23.50. Ths sut
s brought to recover the amount so pad.
Our |ursdcton s conceded, and upon defendant s demurrer, chaengng
the suffcency of the compant, the ony queston submtted s whether or not
the deed s sub|ect to the ta mposed upon deeds and other nstruments, the
precse pont beng whether such deed s an nstrumentaty of State govern-
ment and for that reason e empt. In a mandamus proceedng brought by the
pantff aganst the sherff ( ose Tte Trust Co. v. Pfo t, 188 Pac, 38),
the Supreme Court of ths State adopted the pantff s vew, and hed that
stamps were not requred. The defendant here was not a party to that pro-
ceedng, and accordngy t s conceded that the |udgment theren does not con-
sttute a |udca estoppe. The suggeston that the hodng rests upon a
constructon of State statutes, and s therefore bndng here, s wthout mert.
n Idaho sherff s deed s n n matera respects the same as smar deeds
n other |ursdctons, perforns the same functons, and has the same reaton
to the forecosure proceedng and the court gave no ntmaton that ts con-
cuson was based upon any dstnctve statutory provson.
The ony edera case caed to my attenton, n whch the precse queston
has been decded, s ome Tte Insurance Co. v. eth (230 ed., 905), where
In a we consdered opnon udge Chatfed hed that such an nstrument s
ta abe. In prncpe the decson s strongy supported by armers Loan tG
Trust Co. v. Counc uffs Gas rf . L. Co. (90 ed., 80 ). dmttedy the
utmate decson of the queston s for the edera rather than the State
courts, and the reasonng of these cases eng n harmony wth my own
ndependent vew, I fee constraned to sustan the demurrer and accordngy a
|udgment absoute, dsmssng the compant, w be entered.
It s not thought any usefu purpose woud be subserved by a revew of the
reasonng of the eth case, wth whch I am content.
4177 24 33
-
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Sched. - , Rog. 55, rt. 107. 50
SC DUL -9. P SS G TIC TS.
Reguatons 55(1922), rtce 105: Passage ITT-18-1540
tckets to ports not n the Unted States, T. D. 35S5
Canada, or Me co.
ST MP T S.
Passage tckets: rtces 105, 10 , and 107 of Reguatons 55
(1922 edton) amended.
Treasury Department,
Offce of Commssoner of Interna Revenue.
Washngton-. D. C.
To coectors of nterna revenue and others concerned:
ffectve as of May 1, 1924, artces 105 of Reguatons
5a (1922 edton) are hereby amended to read as foows:
rt. 105. Passage tckets to ports not n the Unted Mates, Canada, or
Me co. (a) Passage tckets from any foregn or domestc port sod or ssued
n the Unted States costng more than 10 whose port of destnaton s nut
wthn the Cued States, Canada, or Me co are sub|ect to ta .
(b) Passage tckets sod or ssued n the Unted States to a port n New-
foundand are sub|ect to ta .
Reguatons 55(1922), rtce 10 : Passage III-8-1541
tckets ssued on e change orders purchased T. D. 3585
wthout the Unted States.
ffectve as of May 1, 1924, artces 100. of
Reguatons 55 (1922 edt on) are hereby amended to read as foows:
rt. 100. Passage tckets ssued on e change orders purchased ckott
the Unted States. Passage tckets ssued wthn the Unted States, other-
wse ta abe, are not e empt from ta by reason of ther ssuance on e change
orders purdmsed wthout te Unted States.
Reguatons 55(1922), rtce 107: Passage III 1R 154 2
tckets to ports n the Unted States, Can- T. D. 35S
ada, or Me co, not sub|ect to ta , uness.
ffectve as of May 1, 1924, artces 107 of Reguatons
55 (1922 edton) are hereby amended to read as foows:
rt. 107. Passage tckets to ports n the Unted States, Canada, or Mc ro.
not sub|ect to ta , uness. Passage tckets sod or ssued n the Unted
States whose ports of destnaton are n the Unted States, Canada, or Me co
are not sub|ect to ta uness sod or ssued n the Unted States as a rou
trp or through tcket for a port not wthn the Unted States, Canada, or
Me co.
C. R. Nash,
ctng Commssoner of Interna Revenue,
pproved pr 24, 1924.
. W. Meon,
Secretary of the Treasury.
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MISC LL N OUS RULINGS.
OL OM RG RIN .
Rf.ot|,atons 9, Secton 39: Oeomargarne ITI-22-158
defned. T. D. 3590
OL OM RG RIN T CT O UGUST 2, 18SG, S M ND D D CISION O
COURT.
1. Oeomargarne egetabe O.
Secton 2 of the ct of ugust 2, 1880 (24 Stat. 209), defnng
oeomargarne, ncudes vegetabe o as an ngredent
2. Statutory Constructon.
Where necessary to gve effect to the egsatve ntent, a comma
may be supped thus, the phrase vegetabe-o annotto, n sec-
ton 2 of the ct of ugust 2, 188 (24 Stat, 209), shoud be read
and construed vegetabe-o, annotto.
3. Oeomargarne Imtaton of utter.
compound of vegetabe os, sat and butttcr coor abeed Nut
Product Prepared for cookng and bakng. marketed n trangu-
ar packages, and not havng the te ture of butter, hed not made
n mtaton or sembance of butter and not ta abe as coored
oeomargarne.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Dstrct Court for
the Dstrct of Rhode Isand n the case of ggns Manufacturng
Company v. rank . Page, Coector, s pubshed for the nforma-
ton of nterna revenue offcers and others concerned.
D. . ar,
Commssoner of Interna Revenue.
pproved May 21, 1924.
. W. Meon,
Secretary of the Treasury.
r sT crr Court ok the Unted States. Dstrct of Rhode Isand. Law,
No. 1548.
ggns Manufacturng Co. v. rank Page, Coector.
OPINION.
pr 15, 1924.
bown, .: Ths s an acton for the recovery of the sum of 1 .50, pad
under protest as a ta , at the rate of 10 cents per pound, upon 1 5 pounds of
a product known as Nut-z-a, a compound contanng no anma fats or
(507)
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Reg. 9, Sec. 39.
508
butter fats but composed of cocoanut o, peanut o, sat, and artfca coor-
ng matter whch gves t a shade of yeow.
The formua for ths compound was devsed by Mr. erbert . ggns, then
presdent of the Nut Grove utter Co., predecessor to the ggns Manu-
facturng Co., who submtted hs formua and a sampe made n accordance
therewth to the ctng Commssoner of Interna Revenue at Washngton,
wth a request for a rung or opnon whether t came under the oeomargarne
statutes. The ctng Commssoner agreed to make an anayss and to nform
hm ater, and ater the foowng etter was receved:
Offce of Commssoner of Interna tovenue. ddress repy to Commssoner of Interna
Revenue and refer to M- -101.
Treasury Department,
Washngton, anuary 20, 1922.
Nut Grove utter Company,
Provdence, It. I.
Srs: Reference s made to your etter of anuary , contanng a formua
for a compound whch you ntend to manufacture and n whch you request
to be advsed whether or not ths product w be ta abe as oeomargarne.
In repy, you are nformed that an anayss of the sampe submtted shows
that the product does not resembe butter n favor, body, te ture, or appear-
ance. If the product under consderaton s paced on the market n good
fath as a ard substtute or cookng compound, ts consttuent parts remanng
the same as n the case of the sampe submtted and e amned, and the mode
of advertsng and packng s such as not to msead the consumer nto the
beef that the product s a butter substtute, then sad product w not be
ta abe as oeomargarne. If, however, the mode of packng or advertsng
ths product woud be such as to msead the consumer nto the beef that he
was recevng a butter substtute, ths rung woud be revoked and the product
hed sub|ect to the ta as oeomargarne.
Respectfuy,
(Sgned) D. . ar, Commssoner.
true copy.
ttest:
The anayss whch s referred to n the etter was made under the super-
vson of W. D. Lnder, chef chemst, ureau of Interna Revenue, by George
P. yer, chemst.
Though the etter states that the product does not resembe butter n
favor, body, te ture, or appearance, the Unted States now rees upon the
ora testmony of Mr. Lnder and Mr. yer to prove that the product shoud
be cassfed as oeomargarne, sub|ect to a ta of 10 cents per pound.
On or about December 1, 1922, the pantff was advsed by the defendant
to the effect that the Commssoner had arrved at a concuson contrary
to that stated n the etter, and that the pantff s product, e cept that aready
on hand, woud be ta abe at 10 cents per pound.
The frst queston s whether ths product s wthn the defnton of the
term oeomargarne contaned n secton 2, ct of ugust 2, 188 (24
Stat, 209) :
That for the purposes of ths ct certan manufactured substances, certan
e tracts, and certan m tures and compounds, ncudng such m tures and
compounds wth butter, sha he known and desgnated as oeomargarne.
namey: substances heretofore known as oeomargarne, oeo, oeomar-
garne-o, butterne. ardne, sune, and neutra a m tures and compounds
of oeomargarne, oeo, oeomargarne-o, butterne, ardne, sune, and neutra
a ard e tracts and taow e tracts and a m tures and compounds of
taow, beef-fat, suet, ard, ard-o, vegetabe-o annotto, and other coorng
matter, ntestna fat. and offa fat made n mtaton or sembance of butter,
or when so made, cacuated or ntended to be sod as butter or for butter.
Does the statute appy to m tures and compounds of vegetabe os free
from anma fats
y the punctuaton of the statute there appears the term, vegetabe-o
annotto. The pantff contends that ths term means annotto n an o sou-
ton. It rees upon the testmony of Prof. . P. Gorham, of rown Unversty,
that as a coorng matter for oeomargarne, butter, and the ke t was aways
used dssoved n vegetabe o. e testfed:
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509
Reg. 9, Sec. 39.
ueston 58. Wether or not It s possbe to use t, practcaby to use t as a
coorng matter n oeomargarne, butter, and kndred products, uness t s
dssoved n whoe n vegetabe o
nswer. It woud be mpossbe to get the coor m ture.
ueston 59. nd ndustray t has aways been used n that fashon, oeo-
margarne and kndred products, snce the tme before 188
nswer. It has yes.
Wam D. Under, chef chemst, ureau of Interna Revenue, testfed that
unnotto s ground n cottonseed o or sesame o, vegetabe os:
Gross-queston 51. ow t was used n oeomargarne for qute a perod
back your study embraced that
nswer. I thnk t has aways been used ground n o.
Cross-queston 02. It has been one of the dstnctve coorng matters an-
notto has t not
nswer. It has been used for years n coorng fats, os.
Cross-queston 53. It has been we known n the trade as a coorng matter
nswer. Oh, yes
Cross-queston 54. nown commercay a over the Unted States for years
as a coorng matter for oeomargarne
nswer. Yes.
Cross-queston 55. nd that has aways been n a souton of o
nswer. I never found t anythng ese.
Cross-queston 5 . nd that, usng t n that fashon, antedated 188 , dd
t not
nswer. I e pect t dd I am not abe to quote any terature on that, but
I have no doubt that has aways been used, used n coorng o and fats.
On the bref for the Unted States t s stated that annotto, when prepared
n o, s sub|ect to duty as an o. (See Summary of Tarff Informaton, 1921,
p. 123 , and Decson of oard of Genera pprasers No. 19944, T. D. 29339.)
There s no evdence that the term vegetabe-o annotto was n ordnary
use before the enactment of the statute, though t appears that there was In the
market a preparaton of annotto n o that mght be so descrbed.
Counse for the Unted States contends that the court shoud read the
statute as f a comma were nserted between the words vegetabe o and
annotto. thus, vegetabe-o, annotto, and other coorng matter.
The effect of nsertng the comma woud be to make vegetabe-o, enumerated
n the statute, one of the norma ngredents or substances.
Readng t as orgnay punctuated, vegetabe-o annotto becomes merey
a coorng matter. y nsertng a comma, the statute has n much broader
scope, and covers under the term vegetabe o a arge cass of ngredents,
some of whch, ke cocoanut o, were not n use at the date of the statute.
It s n evdence that compounds n whch no anma fats or os or butter
fats were used frst came on the market about 10 years ago, or about 17 years
after the passage of the ct.
The pantff argues that the ct does not cover an entrey new commerca
product not known or manufactured at the tme of the passage of the ct.
It s admtted n the bref for the Unted States that oeomargarne and
butter substtutes composed entrey of vegetabe os, sat, and vegetabe coor-
ng matter were unknown at the tme of the passage of the orgna ct, but
t s contended that nevertheess the pantff s product s composed of the
statutory ngredents, as defned n secton 2 of the ct, 1. e., vegetabe o.
ngredents other than vegetabe-o annotto, and other coorng matter
named n the ct are anma products.
It s n evdence, however, that vegetabe os, e. g., cottonseed o, o of
sesame, mustard o, were then used n the manufacture of oeomargarne.
The defendant s contenton that vegetabe-o s not one of the natura
or substanta ngredents of oeomargarne Is not new, however.
In Mo ey v. arts (21 U. S., 344 T. D. 1 71 ) the Soctor Genera
argued:
The true dstncton between natura and artfca coorants s unconnected
wth the statutory enumeraton and must be dscovered n the rea nature of
oeomargarne tsef as unversay recognzed and not atered by statute, or
n the natura reaton of the coorant to the end (butter coor) sought to be
accompshed. y ths test, oeomargarne s an artce manufactured from
anma fats and a vegetabe o s a foregn, and so artfca, addton to t
|ust as much as f t were not named n the statute. . The ony
ngredents whch can be consdered natura to oeomargarne are the anma
(rcudng butter) fats, and the ony natura coorant s butter tsef.
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Reg. 9, Sec 39.
510
In Cff v. Unted States (195 U. S., 159-1G3 T. D. S39 t s apparent
that t was assumed by both partes that vegetabe o was one of the
ngredents or substances named n secton 2, but the secton, as quoted, had
dfferent punctuaton whereby vegetabe-o was separated from annotto.
I do not fnd that ths queston of punctuaton has been rased before, but
I doubt the ntenton of Congress to con a new term, vegetabe-o annotto.
though t s not mprobabe that both vegetabe-o ud annotto were enumerated
as coorants rather than substanta eements of the compounds.
The ne t nqury necessary to determne whether the defendant s product
comes wthn the statutory defnton of oeomargarne Is
Is pantff s nut product made n mtaton or sembance of butter, or,
when so made, cacuated or ntended to be sod as butter or for butter
The trade-dress s not ony not an ad to decepton but s desgned to te
the truth and to avod decepton. The tranguar form of the package, the
abe wth the name Nut-z-a. and the words. Nut Product. Prepared
for cookng and bakng, prove that the pantff has, n these respects, done t
best to avod decepton of a customer. There s no decepton n the package
that s offered to the customer n the shop, and when the package s opened
by a person who has read the abe, the yeow coor of the product woud
probaby not make hm beeve that he had got butter. If t were cut up and
put on the famy tabe on a butter pate, there mght be a momentary decep-
ton, whch woud be corrected at once upon tastng t. It woud not e
eaten on bread as butter.
Putter, however, s used for cookng and bakng. The contenton s that the
yeow coor s used not to deceve but to avod a pre|udce aganst a greasy
food product that s whte or gray.
The pantff s food product s ceary not msbrauded under the ood and
Drugs ct of une 30, 190G (34 Stat, 7G3), and there s no frauduent smu-
aton.
Upon the queston of mtaton or smtude, t becomes necessary, I thnk,
to consder the taste of the product
Oeomargarne as known n the market s ordnary Imtatve of butter n
taste and contans butter or mk fats.
The taste of pantff s product s dstnct. Prof. P. P. Gorham testfed that
t dffers from butter n odor and taste that t does not have the characterstc
butter taste, but as a taste whch woud be descrbed as a nutty favor a
nutty favor whch means cocoanut favor reay.
Mr. yer, a Government chemst, testfed:
I thnk t has the butter taste. I woud not say that t tasted e acty ke
butter, but t has a smar sght butter tnste.
e was asked concernng ts use on the tabe
You thnk the whoe famy woud accept t
nswer. or cookng purposes, I beeve I don t thnk they woud mstake
t for butter on the tabe, to be spread on bread, but for other purposes they
mght take t, mght use t and mstake t.
e aso reped:
I don t beeve the coor makes any dfference In the ktchen.
The Government chemst, W. D. Lnder, testfed as to taste of the product:
We, t resembed butter substtutes It ddn t taste ke pure good
une butter, but t has the butter favor, so much so that I am of the opnon
that t coud be used as a butter substtute.
The fact that the dstnct favor of the pantff s product s due to cocoanut
o and peanut o ony supports Prof. Gorham s testmony as to taste.
I am of the opnon, therefore, that n ths mportant partcuar pantff s
product s not made n mtaton of butter and s not cacuated or ntended
to be sod as butter or for butter.
s tabe butter or butter to bo eaten uncooked, pantff s product Is not
wthn the statute.
or use In cookng the dfference n taste s perhaps of ess mportance, and
coor woud aso seem of ess mportance n the ktchen than on the tabe.
ssumng that, t was the ntent of Congress to put the 10-cent ta on
that whch coud be passed off or sod for tabe butter, t was aso man-
festy the Intenton of Congress to put a much ower ta on oeomargarne
whch coud not be passed off as butter, even though t coud be used as a
substtute for butter n cookng.
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511
Reg. 9, Sec. 39.
Reguatons 9 (revsed une, 1923), sec 40 (b) Is as foows:
anma fats or os, vegetabe os, and a compounds and m tures
of such anma fats or os and vegetabe os, wth or wthout the addton
of coorng matter, whch have been churned n cream, mk, or water, or.
bnthed n a souton of brne, thereby mpartng to the resutant product the
favor, te ture, and appearance of butter, are propery ta abe under the
aw as oeomargarne. Cookng compounds or substtutes for ard whch are
paced on the market n good fath as such and whch do not resembe
butter n genera characterstcs are e empt from ta as oeomargarne.
That the genera characterstcs of the product, rather than coor aone,
are to be consdered n makng te comparson s recognzed by the reguaton.
Upon the meanng of secton 2 of the ct of 18S we can gan no ght
from secton 8, as amended by ct of May 9, 1902 ( 32 Stat.. 1 )4 .
Pror to May 9, 1902, a oeomargarne was ta ed at 2 cents per pound,
whether t was free or not free from artfca cooraton.
See Mo cy v. ertz (210 U. S. at p. 355 T. I). 1 71 , the words, When
oeomargarne s free from artfca cooraton tat causes t to ook ke butter
of any shade of yeow, were not contemporaneous wth the statutory defnton
of secton 2, and do not mt that secton.
The comparson must be not ony as to coor but as to genera characters-
tcs. s ths product s for use n cookng or bakng, t s capabe of use
nstead of ard as we as nstead of butter.
The anguage of Reguatons 9 (revsed une. 1 23) , secton 40 (b)
Cookng compounds or substtutes for ard whch are paced on the market
n good fath as such and whch do not resembe butter n genera characters-
tcs are e empt from ta as oeomargarne
seems appcabe to ths product, and apparenty was apped n the etter of
anuary 20, 1922.
The Department s frst rung of ths product, s supported by the testmony
and opnon of Prof. . P. Gorham, and apparenty by the fomer opnon of
Messrs. ander and 13yer, as s shown n the eter of anuary 20, 1922.
The decson of ths court upon the queston of smarty must rest upon the
testmony of others. Whe my e amnaton of the sampe was enough to es-
tabsh the fact of genera resembance to butter n coor, t dd not e tend
further, and |udgment as to other characterstcs must rest upon testmony
of others. The preponderance of the evdence on the queston of resembawe
to bnter s wth the pantff.
Ths statute must be read as a revenue statute. The Intenton of Congress
to derve a revenue from a ta upon food products made from mma fats and
butter or mk fats s not now dsputabe. The ntent of Congress to derve
a revenue from products whoy of vegetabe orgn and adapted ony for cookng
and bakng s by no means cear.
In makng 100 pounds of Nut-z-a are used 80 pounds of cocoannt o.
20 pounds of peanut o, 3 pounds of sat, per cent of butter coorng.
Ths s substantay dfferent from the product composed of anma fats
aud butter and mk fats whch was known at the date of enactment of the
statute.
The term vegetabe-o appears In the statute and s the soe bass of the
contenton that the pantff s product s to be cassed as oeomargarne. The
torn, however, embraced o used as a coorant and possby used as a mnor
ngredent n a compound that was substantay an anma product.
Whe I doubt whether the statute shoud be gven a constructon whch n-
cudes compounds free from anma fats, a decson of ths queston seems
unnecessary for the dsposton of ths case, for the reason that accordng to the
preponderance of the evdence, the pantff s product. Nut-z-a, s not
made n mtaton or sembance of butter, or, when so made, cacuated or n-
tended to be sod as butter or for butter. Ths was the opnon of the Com-
mssoner as stated n the foregong etter of anuary 20, 1922, and seems to
me the better opnon.
The defendant prefers the foowng requests for fndngs of fact:
1. That the so-caed Nut-z-a was a m ture or compound of vegetabe
os and coorng matter.
Ths request s granted.
2. That the so-caed Nut-z-a was made n mtaton or sembance of
butter.
Ths request s dened.
G
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Msc.
512
The defendant prefers the foowng requests for fndngs of aw:
1. That the phrase vegetabe o annotto, and other coorng matter,
contaned n secton 2 of the ct of ugust 2, 188 (24 Stats., 209), shoud be
.read as though there were a comma after the word o.
Ths request s granted.
2. That a m ture of vegetabe os, sat and coorng matter, made n m-
taton or sembance of butter, s oeomargarne wthn the defnton of secton
2 of the ct of ugust 2, 188 (24 Stats., 209).
Ths request s dened, but ony on the ground that a rung thereon s not
necessary for the purposes of ths case.
3. That the so-caed Nut-z-a manufactured and sod by the pantff
was oeomargarne, coored to resembe butter, and was sub|ect to a ta of
10 cents a pound under the provsons of the ct of ugust 2. 188 ( 24 Stnts.,
209).
Ths request s dened.
udgment w he entered for the pantff.
II1-7-1372
MS. 24
Schedue of oeomargarne produced and materas used duru| the month of
October, 1023, as compared wth October, 1022.
October,
1923.
Oco.cr,
1922.
Tota producton uncoored oeomargarne
Ingrc ent schedue tor uncoore oeomargarne:
Oco o
Cocoanut o
Cottonseed o
Peanut o
Oeostearne
Neutra ard
Oeo sock
Mustard o
Sesame o
dbe taow
Corn o
utter
Sat
Mk
Soda
Msceaneous
Tota.
Tota producton coored ncomarprne
Ingredent schedue tor coored oeomargarne:
Oeo o
Cocoanut o
Cottonseed o
Peanut o
Oeostearne
Neutra ard
Ooo stock
Sesame o
Corn o
utter
Sat
Mk
Soda
Coor
Msceaneous
Pound .
21,521,049
515.1 8
7tS0,3I9
581.9 3
5,09.072
527.770
405,403
235,244
3,545
53,414
3.150
4 ,328
105,088
WS. 934
1 2,822
5,530
25,942,850
95 ,298
273,403
227,814
93, 80
19,827
2,230
159,754
13,075
15,29
1.720
107,399
: n.-,.2
8
1,270
Tota 1,220, 98
Pounds.
17,378.830
3,911. 9
5,278. 44
1,530,095
720.2M
487, m
2,473.1 5
I98.SU
111, 19
I.391.35S
4,908,433
2 S. 419
21,322,003
5 5,234
100.75
5 ,991
1 ,843
2,031
98 302
14, 5
.17S
173,15S
5,027
73,844
I
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513
Msc.
III-8-1381
MS. 25
Schedue of oeomargarne produced and materas used durng the month of
November, 1923, as compared tcth November, 1922.
November,
1923.
November,
1922.
Ingredent schedue for uneoored oeomargarne:
Pounds.
21,473,158
Pounds.
18,357,878
Mustard o
4,479.048
7,095,900
1,752,4 1
578,835
420.940
2,923,895
242.202
1,475
38,974
2, 00
50, 05
182,8 0
1,823.4 1
, 197,177
5,454
3,781,4 7
5, 2 ,913
1,778,022
153 ,904
457,27
2,521,20
191,905
Com o
utter
13 ,089
1, 22,939
5,282,141
Sat
Mk
Soda
908,248
Tota
2 ,395,887
22.940,810
Ingredent schedue for coored oeomargarne:
1,009, .507
0 9,789
2 7, 129
309.429
80,922
25.711
4,753
1 3.7S9
12,520
225
17.841
2,8
88,32
:: . . - ( ,
20
1,415
185,417
124,411
81,01
1 , 109
2, WO
117, 03
14,330
1,380
03,1 2
210,175
Coor
981
,815
1,287, 452
824,229
111-12-1442
MS. 2
Schedue of oeomargarne produced and materas used durng the month of
December, 1923, as compared wth December, 1922.
.
December,
1923.
December,
1922.
Pounds.
21,052.201
Pounds.
20, 2 9, 397
Inrredent schedue for uneoored oeomargarne:
4,035,452
7,825,349
1,701,318
492,949
397, 874
2,970, 153
204, 52
2,031
2 , 21
,050
4,047. 741
, 249.09
1.773.S04
49. 217
3 9,94
2, S8S,.-,1S
1C , 180
Mustard o
dbe taow
53.19
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Msc.
Schedue of oeomargarne produced and materas used durng the month of
December, 1923, as compared wth December, 1922 Contnued.
M
Ingredent schedue for uncoored oeomargarne Contnued.
utter
at
Mk _
Soda.
Sugar...
Mscea
.neous vegetabe o.
Tota producton coored oeomargarne
Dgredent schedue for coored oeomargarne:
Oeo o
Cocoanut o
Cottonseed o
Peanut o
Oeo stearne -
Neutra ard.-
Oeo stock
Sesame o _
Corn o
utter
Mk
Sat
Soda
Coor
Msceaneous vegetabe o _
Msceaneous
Pounds.
1 S3, 454
1,742.929
,144,487
5,097
42
Pounds,
m. 174
1,722.535
t.77 .W7
73 434
25. 792. I2S 24.718. M
1,095,7 1
2 7. m
823, 7 .I3
88. 531
2. OR
105. I
10.398
22. 54
125
1.732
S , M
94,071
28
2,449
1.3M. 281
7 1,375
212,73
1 2.171
101,738
19,3
1.1 5
5. 97
13, 80
1.334
4f..
75,300
,
2,4m
510
972.7 2
III-7- 2o
MS. 27
Schedue of oeomargarne produced and materas used durng the month of
anuary, 1924, as compared wth anuary. 192S.
amarv,
1921.
amarv.
1923
Tota producton uncoored oeomargarne
Ingredent schedue for uncoored oeomargarne:
Oeo o
Cocoanut o -
Cottonseed o
Peanut o
Oeo stearne
Neutra ard
Oen stock --
Mustard o
Sesame o
dbe taow
Soyabean o
Corn o
ana etract
uttfr
Sat
Mk
Soda
Sugar
Msceaneous vegetabe o
Msceaneous
Pounds.
23,598.429
s. ms. ft
4,515,237
9. ns. )
2.0I8.TO1
.5 0.5 4
470,185
3,140. 85
200,801
2,405
12,043
1,200
41
49,700
8
191,340
.d-.y. vr|
,701,734
5.459
70
3,942.451
7,014.533
1,857.954
r 2.2 7
374. SS
2,841 7
17L337
C . 0-1.832
Tota producton coored oeomargarne.
G
e
n
e
r
a
t
e
d
f
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L
n
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a
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Y
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)
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2
0
1
3
-
0
1
-
2
2
0
3
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3
3
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5
4
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#
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515
fMac.
Schedue of oeomargarne produced and materas used durng the month of
anuary, 1924, as compared wth anuary, Contnued.
nnnarv,
1924.
anuary,
1923.
Ingredent schedue for coored oeomargarne:
Pounds.
2119. 787
291. 230
114,729
29,344
3.1 0
1 9,8 0
23,012
13, 370
00
2, 11
87.417
30 , 370
14
Pounds.
198, M
178, 112
92,101
. 4.11 7
2. 0M
129, 437
8,833
Dntter
522
73,432
244, 43
Sat
Mk
Pod
4,708
1,013
2,733
712
1,325,91,3
955, 24
III-22-15S7
MS. 28
Schedue of oeomargarne produced am materas used durng the month, of
ebruary, 1924, as compared wth ebruary, 1023.
ebruary,
1924.
ebruary,
1923.
Ingredent schedue or uncoored oeomargarne:
Pounds.
21.804,8 8
Prrnnds.
17,888.258
,001,837
7, 419, 759
1,810,552
17, 93
429, 128
2,911, 774
231, 188
2,455
21,797
1,375
48, 040
5
3, 28, 255
, 390, 330
1,058,893
5,030
319,514
2, 45 , 527
191, 83
7, 84
4,230
utter
185,050
,293, 930
1,847, 100
5,282
1 1,954
,055, 191
1,495,953
3,488
Sat
2 , 728. 723
22,02 ,739
Ingredent schedue for coored oeomargarne:
1,157, 155
799,944
2 1,933
3 8. 948
108, 4 0
3 . 23
5,385
17 , 204
19,017
13,055
350
1,942
203,925
185,025
9 ,518
18, 544
2 953
13 923
12,820
utter
375. 521
94, 040
2,392
40
210
1.300
249,047
74, 238
873
,
1,454, 129
977,974
G
e
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)
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2
0
1
3
-
0
1
-
2
2
0
3
:
3
3
G
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Reg. 9, Sec. 101.
51
111-25-1 15
MS. 29
Schedue of oeomargarne produced, and materas used durng the month of
March, 1924, as compared wth March, 1923.
March, 1924.
March, 1923.
Pound .
21,189, 173
wat,
Ingredent schedue for uncoorcd oeomargarne:
19, 79 .2 5
Oeo o
4,388,743
7, 82 , 951
1,875,512
495,845
479,227
2, 7 4,949
182,977
2,175
51, 897
1. 25
43,9 5
4.404 1W
, 27,275
1,871,437
592,027
408, 71
2,71 , 35
195.050
,872
dbe Taow
9,532
Torn o
uttct
174, 4 7
103
39
150,75
Sugar
38
Sat
1, 799, 127
, 157. 1 0
4, 578
1. 3,29
5, 95.842
4,277
Mk
Soda
2 , 248, 7 8
24,347,514
Ingredent schedue for coored oeomnrgarne:
1, 229, 417
915,31
188,474
374.252
119. S14
235,195
211.74S
9 ,9
1S.M9
3.534
15 .9 )
13, 70
402
Neutra ard . ..
32,732
3,310
177.972
14.4 5
2,420
150
2,400
312
89,079
284,542
Sat
1.500
99,212
32 ,8 1
31
2, 154
Mk
13
1,293
Soda
1, 343, 347
1,114,9 5
DULT R T D UTT R.
Secton 4 ( ct May 4. 1902), Reguatons 9, Sec- 111-2 -1 40
ton 101: duterated butter defned. T. D. 3 05
ST MP T CTS O UGUST 2, 1SSG, ND M T 9, 1002-D CISION O
SUPR M COURT.
1. duterated utteu Defnton Reguatons.
The test of aduterated butter prescrbed by Reguatons 9 as
butter contanng per cent or more of mosture s not con-
sstent wth the statutory defnton n secton 4 of the ct of May
9, 1902, wbcb defnes aduterated butter as (1) a grade produced
by treatment of dfferent ots of butter to whch a chemca or
other substance s added to deodorze t or to remove rancdty,
(2) a butter product wth whch s m ed a foregn substance to
essen Its cost, and (3) any butter u the manufacture or manpu-
aton of whch any process or matera s used wth ntent or effect
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517 Reg. 9, Sec. Id.
of causng the absorpton of abnorma quanttes of water, mk,
or cream. The ct does not prescrbe any standard of mosture
n butter.
2. duterated utter Reguatons.
Secton 20 of the ct of ugust 2, 188 , authorzng the Comms-
soner of Interna Revenue, wth the approva of the Secretary of
the Treasury, to make a needfu reguatons for the carryng nto
effect of the ct s appcabe ony In respect of the markng,
brandng, dentfcaton, and reguaton of e portaton and mporta-
ton of aduterated butter and does not authorze a reguaton
estabshng what sha be deemed to consttute e cessve mosture
or the absorpton of abnorma quanttes of water, mk, or cream.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. G.
To coectors of nterna revenue and others concerned:
The foowng decson of the Unted States Supreme Court, n the
case of Margaret C. Lynch, ecutr , v. Tden Produce Company,
s pubshed for the nformaton of nterna-revenue offcers and
others concerned.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved une 1 , 1924.
. W. Meon,
Secretary of the Treasury.
Supreme Court of the Unted States. No. 139. October Term, 1923.
Margaret C. Lynch, ecutr , pettoner, v. Tden Produce Company.
Certorar to the Unted States Crcut Court of ppeas, ghth Crcut.
May 28, 1924.
Mr. ustce uter devered the opnon of the court.
Ths acton was brought n the Unted States Dstrct Court for Mnnesota
by the Tden Produce Co. aganst pettoner s testator, R. . Lynch, coector
of nterna revenue for the dstrct of Mnnesota, to recover . 93 stamp ta es,
whch t was compeed to pay on 9,300 pounds of butter sezed as aduterated
by the Commssoner of Interna Revenue. t the tra, n verdct was drected
n favor of the company, and |udgment was entered for the amount pad wth
nterest. The Crcut Court of ppeas affrmed the |udgment. (282 ed., 54.)
The ease s here on certorar under secton 240 of the udca Code. (200
U. S.. 718.)
The queston for decson s whether the butter was aduterated wthn the
meanng of the ct of May 9, 1902 (cb. 784. 32 Stat.. 193).
In 1918. the company manufactured n ts creamery, at St. Pad, 350 tubs of
butter, whch t shpped to Chcago. t the tme It was made, the company
tested the butter and found the mosture content to range between 15 and 1
per cent, and the average to be 15. 8 per cent. Sampes were taken at Chcago,
and tested under the drecton of the Commssoner of Interna Revenue. It
was found that the mosture content of the butter n 15 tubs was 1 per cent
or more, that the range was between 1 and 17.93 per cent, and that the average
was 1 .7 per cent. The butter was made by the company by methods gen-
eray foowed n the manufacture of butter In creameres. It was shown by
the evdence that the mosture content In butter vares greaty that the vara-
ton ranges from 9 to over 20 per cent, and that there s no f ed standard.
The mosture content of mk s over 90 per cent, and of cream over 0 per
cent. The makng of butter nvoves the segregaton of the fat and the em-
naton of water. fter churnng and dranng ofT buttermk, t s the genera
practce of butter makers to use water to wash out curd and quds remanng
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Reg. D, Sec. 101.
518
In assocaton wth the butter. Whe some of the water used for that purpose
mny reman, washng usuay essens the tota mosture. Wthn certan mts,
butter makers are abe to contro water content It s tested wde the butter
s n the churn. It may be reduced by manpuaton, or water may be ncor-
porated nto or m ed wth the butter so as to ncrease the water content, by
workng the butter under condtons cacuated to accompsh that purpose.
In practce, makers sometmes reduce or ncrease mosture content n order to
meet competton n the market.
duterated butter, as defned by secton 4 of the ct of May 9, 1902, ncudes
(1) a grade produced by treatment of dfferent ots of butter to whch a
chemca or other substance s added to deodorze t or to remove rancdty
(2) a buter product wth whch s m ed a foregn substance to essen ts
cost and (3) any butter n te manufacture or manpuaton of whch any
process or matera s used wth ntent or effect of causng the absorpton of
abnorma quanttes of water, mk, or cream.
In 1007, the Commssoner of Interna Revenue, wth the approva of t te
Secretary of te Treasury, promugated Reguatons No. 0, whch contan the
foowng: duterated buter defned: The defnton of aduterated buster
as contaned n the ct of May 9, 1902, embraces butter n the manufacture
of whch any process or matera s used whereby the product s made to
contan abnorma quanttes of water, mk or cream, but the norma con-
tent of mosture permssbe s not f ed by the ct. Ths beng the case t
becomes necessary to adopt a standard for mosture n butter, whch sha n
effect represent the norma quantty. It s therefore hed that butter havng
1 per cent or more of mosture contans an abnorma quantty and s cassed
as aduterated butter.
Pettoner contends that the promugaton of ths reguaton s authorzed
by secton 20 of the ct of ugust 2, 18SG (24 Stat. 212), and Revsed Statutes,
secton 251. It s provded by secton 20 that, The Commssoner of Interna
Revenue, wth the approva of the Secretary of the Treasury, may make a
needfu reguatons for the carryng nto effect of ths ct. To a mted
e tent, ths secton was made appcabe to the ct of May 9, 1902, by sectnn
4 thereof, wnch provdes that t sha appy to manufacturers of aduter-
ated butter to an e tent necessary to enforce the marketng, brandng, dent-
fcaton, and reguaton of the e portaton and Importaton of aduter: ed
butter. Revsed Statutes, secton 251, authorzes the Secretary of the Treas-
ury to prescrbe rues and reguatons not nconsstent wth the
aw, to be used under and n the e ecuton and enforcement of the varous
provsons of the nterna revenue aws and to gve such drectons to
coectors and prescrbe such rues as may be necesary for the proper
e ecuton of the aw
The mere fact that butter contans 1 per cent or more of mosture does
not brng t wthn the terms of the statutory defnton of aduterated butter.
Under the defnton n secton 4, there must be somethng n the manufacture
or manpuaton of the butter causng the absorpton of abnorma quanttes
of water, mk or cream. Ths must resut from the use of some matera or
process. Te use must be wth ntent to cause such absorpton, or must be ca-
cuated to produce that resut. bsorpton shoud be read to ncude the
ntroducton of mosture from the outsde and the ncorporaton of water nto
the butter, whether t s techncay an absorpton or not. Obvousy, t dues
not ncude mosture orgnay contaned n the cream or butter. The ct
does not prescrbe the amount of mosture permssbe or f any rue or cr-
teron by whch to determne te amount that s deemed abnorma or that
awfuy may be absorbed and Incorporated.
The reguaton makes water content the soe test of aduteraton, wthout
regard to other provsons of the ct In support of ts vadty, t s sad
that In decarng 1 per cent of mosture n butter s abnorma, the regua-
ton does no more than to estabsh a scentfc fact. Rut t goes beyond that,
and decares such butter to be aduterated. It omts essenta eements f
the statutory defnton, namey, the use of a process or matera n the manu-
facture of the butter, and te causng of absorpton . e., the ncorporaton
or takng n from the outsde of abnorma quanttes of mosture.
Congress has not deegated power or authorty to make such a reguaton.
Secton 20 of the ct of ugust 2, 188 , does not appy. It s made appcabe
ony In respect of the markng, brandng, dentfcaton and reguaton of
e portaton and mportaton of aduterated butter t does not authorze a
reguaton estabshng what sha be deemed to consttute e cessve mosture
or the absorpton of abnorma quanttes of water, mk, or cream t
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519
Reg. CI, rt. 82.
grants no power to add to or take from the statutory defnton of aduterated
butter. Secton 251 of the Revsed Statutes confers upon the Secretary of the
Treasury authorty to rouke certan rues and refatons, but t grants no
power to the Commssoner of Interna Revenue aone. To make any regua-
ton by hm on the sub|ect effectve, It must be approved by the Secretary,
n whch event t reay becomes a reguaton of the atter. Moreover, the
rues and reguatons authorzed by secton 201 are requred to be not n-
consstent wth the aw. The reguaton prescrbes a standard whc Con-
gress has not authorzed the Conn soner or the Secretary to f . It sets up
a defnton of aduterated butter whch confcts wth that contaned n the
ct. The two can not be read In harmony. If gven effect, the reguaton
woud emnate from the defnton of aduterated butter the condtons spec-
fed n the ct and strke out words and phrases and substtute others for
them. In effect, t woud depart from and put asde the statutory defnton.
In some of the ower courts the reguaton has been hed nvad. Unted
Mate v. 11,150 Pounds of utter, 195 ed.. 057. affrmng 188 ed., 157
ohrn Co-operatve Creamery ssocaton v. Wams, 233 ed., 07 11 en-
nny en Produce Co. v. Whaey, 238 ed., 50.) Rut In Coopersve Co-opera-
tre Creamery Co. v. Lemmon (1 3 ed., 145), t was hed vad. We thnk
that decson fas to take nto account and gve proper weght to the con-
fct between the ct and the reguaton. (See ed v. Cark, 143 U. S., 019
Unted States v. aton, 144 T . S., G77 In re oock, 1 5 U. S., 52 utter-
fed v. Stranahan, 192 U. S., 470 Wamson v. Unted States, 207 U. S., 425
Unted Staes v. Grmaud, 220 U. S., 500.) It must be hed tut the regua-
ton s Invad.
The ct does not prescrbe any standard for mosture In butter. In ts
manufacture, the varaton of mosture ranges above as we as beow the
quanttes found n the butter n queston, and ts mosture content can not
be sad to be abnorma. It was made In the usua way. There was no
process or matera used wth ntent or effect of causng absorpton of ab-
norma quanttes of mosture. It was not aduterated wthn the meanng
of the ct.
udgment affrmed.
PRO I ITION.
TITL I, N TION L PRO I ITION CT.
Reguatons 1, rtce 82: ppcaton and permt III-1-1289
to wthdraw ta -free acoho by muncpa subdv- Mm. 31(57
son of a State or Terrtory.
Muncpates not requred to gve bonds when wthdrawng
ta -free acoho under sccon 11 of Tte III of Natona Proh-
bton ct
Treasury Department,
ureau of Interna Revenue,
Offce of edera Prohbton Commssoner,
Washngton, D. C, December 29, 1923.
To coectors of nterna revenue, edera prohbton drectors, and
others concerned:
ega opnon, known as Prohbton Opnon No. 121, has been
rendered n the matter of the bond abty of a cty whch gave a
bond under Reguatons 1 for the wthdrawa of acoho free of tu
under secton 1L of Tte III of the Natona Prohbton ct. s
such bonds are ega and vod n aw, they shoud not hereafter
be demanded or accepted: and a such bonds now hed under the
crcumstances covered by the opnon shoud be canceed.
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Reg. 1, rt. 82.
520
Omttng the name of the cty gvng the partcuar bond passed
upon, the te t of Prohbton Opnon No. 121 s as foows:
Ths opnon reates to the oss of 33.3 proof gaons of acoho wthdrawn
by the pubc heath department of the cty of , by theft n transt from
the warehouse to the raroad staton at , by reason of whch the queston
s rased of the ega rght of the Government to enter sut aganst the surety
of the pubc heath department of the cty for the sum of 14 .52, as penaty
under ts bond, orm 1448, coverng wthdrawa of ta -free acoho. The cty
refused to pay ths amount or to submt an offer n compromse.
Secton 11, Tte III, of the Natona Prohbton ct provdes that:
coho may be wthdrawn, under reguatons, from any ndustra pant
or bonded warehouse ta -free by the Unted States or any governmenta agency
thereof, or by the severa States and Terrtores or any muncpa subdvson
thereof, or by the Dstrct of Coumba, or for the use of any scentfc
unversty or coege of earnng, any aboratory for use e cusvey n scentfc
research, or for use n any hospta or sanatorum.
ut any person permtted to obtan acoho ta -free, e cept the Unted
states and the severa States and Terrtores and subdvsons thereof, and
the Dstrct of Coumba, sha frst appy for and secure a permt to pur-
chase the same and (|ve the bonds prescrbed under Tte II of ths ct. but
acoho wthdrawn for nonbeverage purposes for use of the Unted States
and the severa States, Terrtores, and subdvsons thereof, and the Dstrct
of Coumba, may be purchased and wthdrawn sub|ect ony to such reguatons
us may be prescrbed.
It w be noted that n the frst paragraph above quoted the rght to wth-
draw acoho ta -free s e tended to two casses, vz, (1) certan governments
and governmenta agences, and (2) to certan nsttutons engaged n work
whch concerns the pubc wefare. The rght s e tended to the frst cass
sub|ect ony to such reguatons as may be prescrbed, whe t s requred that
the second cass sha frst appy for and secure a permt to purchase the
same and gve the bonds prescrbed under Tte II of ths ct.
There s no room eft for nterpretaton or constructon of ths anguage.
When te same prvege s e tended to two casses, wth the provso that any
person, e cept the frst cass of persons (namng them), sha gve bond, ob-
vousy that frst cass of persons, ncudng muncpa subdvsons of a
State or Terrtory, are e pressy e empted from the obgaton to gve bond.
The e empton s so defnte and certan that there s no escape therefrom,
and a reguaton promugated by an admnstratve offcer requrng that bond
be gven s contrary to aw and vod. Whe the concudng anguage of sec-
ton 11, above quoted, provdes that reguatons may be prescrbed for the
wthdrawa of acoho for nonbeverage purposes, obvousy such reguatons
may not be used to nufy an e press provson of the statute.
It has been suggested that a muncpa corporaton, such as the cty of ,
s not a muncpa subdvson of the State. Whe t s true that a muncpa
corporaton s not a potca subdvson of a State, nevertheess t s cear, from
the conte t of the statute, that such a corporaton s, wthn the meanng of
the aw, a muncpa subdvson, and hence entted to the prvege of wth-
drawng acoho ta -free wthout bond. The obvous purpose of Congress was
to e tend the prvege n queston to governmenta agences.
determnaton of ths queston can be reached upon a dfferent theory.
If a muncpa corporaton s not ncuded wthn the meanng of the term
muncpa subdvson, then there s no other provson of the statute author-
zng a muncpa corporaton to purchase, possess, or use ta -free acoho, and
the permt so to do s not authorzed by aw.
In vew of the stuaton, the bond beng contrary to aw and vod, t s nad-
vsabe to attempt to enforce ts provsons.
rtce 82 of Reguatons 1 shoud be amended by strkng therefrom the
provson requrng a muncpa subdvson of any State or Terrtory to
gve bond as a condton of wthdrawng acoho ta -free, for the reason that
athough the bond s gven t can not be enforced f sub|ected to the test of
tgaton.
ames ones,
ctng Prohbton Commssoner.
pproved.
D. . ar,
Commssoner of Interna Revenue.
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52.1
Reg. 0 (rev.), rt. II.
111-25-1 25
T. D. 3 01
Prohbton. mercan- rtsh treaty for ths preventon of the
mportaton of acohoc beverages nto the Unted States. Regua-
tons as to quors carred by vesses as cargo and as sou stores
under the terms of the treaty.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C.
To edera prohbton drectors and others concerned:
The mercan- rtsh treaty for the preventon of the mporta-
ton of acohoc beverages nto the Unted States was sgned at
Washngton anuary 23, 1924: ts ratfcaton advsed by the Senate
March 13, 1924 was ratfed by the Presdent March 31, 1924 was
ratfed by Great rtan pr 30, 1924: ratfcatons were e -
changed at Washngton May 22, 1924 the Presdent s procamaton
of ts effectveness was ssued May 22, 1924. Its te t s as foows:
The Presdent of the Unted States of merca
nd s Ma|esty the ng of the Unted ngdom of Great rtan and
Ireand and of the rtsh Domnons beyond the Seas, mperor of Inda
eng desrous of avodng any dffcutes whch mght arse between them
n connecton wth the aws n force n the Unted States on the sub|ect of
acohoc everages
ave decded to concude a conventon for that purpose
nd have apponted as ther penpotentares:
The Presdent of the Unted States of merca, Chares vans ughes,
Secretary of State of the Unted States
s Ma|esty the ng of the Unted ngdom of Great rtan and Ireand
and of the rtsh Domnons beyond the Seas, mperor of Inda, the Rght
onorabe Sr uckand Campbe Geddes, G. C. M. G., . C. , hs nmbassador
e traordnary and penpotentary to the Unted States of merca
Who, havng communcated ther fu powers found n good and due form,
have agreed as foows:
rtce I.
The hgh contractng partes decare tha t s ther frm ntenton to uphod
the prncpe that 3 marne mes e tendng from the coastne outwards and
measured from ow-water mark consttute tb proper mts of terrtora
waters.
rtce II.
(1) s rtannc Ma|esty agrees that e w rase no ob|ecton to the
boardng of prvate vesses under the rtsh fag outsde the mts of terr-
tora waters by the authortes of the Unted States, ts terrtores or
possessons n order that nqures may be addressed to those on board and
an e amnaton be made of the shp s papers for the purpose of ascertanng
whether the vesse or those on hoard are endeavorng to mport or have m-
ported acohoc beverages nto the Unted States, ts terrtores or possessons
n voaton of the aws there n force. When such nqures and e amnaton
show a reasonabe ground for suspcon, a search of the vesse may be
nsttuted.
(2) If there s reasonabe cause for beef that the vesst has commtted
or s commttng or attemptng to commt an offense aganst e aws of the
Unted States, ts terrtores or possessons prohbtng the mportaton of
acohoc beverages, the vesse may be sezed and taken nto a port of the
Unted States, ts terrtores or possessons for ad|udcaton n accordance
wth such aws.
(3) The rghts conferred by ths artce sha not be e ercsed at a creater
dstance from the coast of the Unted States, ts terrtores or possessons than
can e traversed n one hour by the vesse suspected of endeavorng to com-
4177 24 34
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og. 0 (rev.), rt. II.
522
mt the offense. In oases, however, In whch the quor Is Intended to te con-
veyed to the Unted States, ts terrtores or possessons by a vesse other than
| the one boarded and searched, t sha be the speed of such other vesse and
I not the speed of the vesse boarded, whch sha determne the dstance from
the coast at whch the rght under ths artce can be e ercsed.
rtce III.
No penaty or forfeture under the aws of the Unted States sha be ap-
pcabe or attach to acohoc quors or to vesses or persons by reason of the
carrage of such quors, when such quors are sted as sea stores or cargo
destned for a port foregn to the Unted States, ts terrtores or possessons
on board rtsh vesses voyagng to or from ports of the Unted States, or ts
terrtores or possessons or passng through the terrtora waters thereof, and
such carrage sha be as now provded by aw wth respect to the transt of
such quors through the Panama Cana, provded that such quors shu be
kept under sea contnuousy whe the vesse on whch they are carred re-
mans wthn sad terrtora waters and that no part of such quors sha
at any tme or pace be unaden wthn the Unted States, ts terrtores or
possessons.
rtce I .
ny cam by a rtsh vesse for compensaton on the grounds that t
has suffered oss or n|ur through the mproper or unreasonabe e ercse
of the rghts conferred by rtce II of ths treaty or on the ground tb t t
has not been gven the beneft of rtce III sha be referred for the |ont
consderaton of two persons, one of whom sha be nomnated by each of the
hgh contractng partes.
ffect sha be gven to the recommendatons contaned n any such |ont
report If no |ont report can be agreed upon, the cam sha be referred to
the cams commsson estabshed under the provsons of the agreement for the
settement of outstandng pecunary cams sgned at Washngton the ISt
ugust. 1SI10, but the cam sha not, before submsson to the trbuna, re-
qure to he ncuded n a schedue of cams confrmed n the-manner theren
provded.
rtce .
Ths treaty sha be sub|ect to ratfcaton and sha reman n force for a
perod of one year from the date of the e change of ratfcatons.
Three months before the e praton of the sad perod of one year, ether
of the hgh contractng partes may gve notce of ts desre to propose modf-
catons n the terms of the treaty.
If such modfcatons have not been agreed upon before the e praton of
the term of one year mentoned above, the treaty sha apse.
If no notce s gven on ether sde of the desre to propose modfcatons,
the treaty sha reman n force for another year, and so on automatcay,
but sub|ect aways n respect of each such perod of a year to the rght on
ether sde to propose as provded above three months before ts e praton
modfcatons n the treaty, and to the provson that f such modfcatons are
not agreed upon before the cose of the perod of one year, the treaty sha apse.
rtce I.
In the event that ether of the hgh contractng partes sha be prevented
ether by |udca decson or egsatve acton from gvng fu effect to de
provsons of the present treaty the sad treaty sha automatcay apse, an,
on such apse or whenever ths treaty sha cease to be n force, each hsh
contractng party sha en|oy a the rghts whch t woud have possessed md
ths treaty not been concuded.
The present conventon sh . be duy ratfed by the Presdent of the Unted
States of merca, by and wth the advce and consent of the Senate thereof,
and by e rtannc Ma|esty and the ratfcatons sha be e changed at
Washngton as soon as possbe.
In wtnksh whkkkof, the respectve penpotentares have sgned the present
conventon n dupcate and have thereunto aff ed ther seas.
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523
Reg. 0 (rev.), rt. II.
Done nt the cty of Washngton ths 23 1 day of anuary, n, the year of our
Lord one thousand nne hundred and twenty-four.
R GUL TIONS.
The foowng reguatons governng operatons under the fore-
gong treaty, and partcuary under rtce IIT thereof, are ssued,
effectve forthwth, and w appy to a vesses, foregn and do-
mestc, whch now have, or may hereafter have, rghts or dutes
under sad treaty or other treates of a ke nature whch may here-
after be negotated:
Pabaobaph L Present reguatons. rtce II of Reguatons fn, revsed,
reatng to quors on vesses, sha, e cept as mofed by the foregong treaty,
or by these reguatons, reman In fu force and effect, and no quor may be
used for medcna or other purposes on board any vesse whe n the terr-
tora waters of the Unted States, e cept such as s acqured and hed under
a certfcate of medcna need, orm 1539, or other permt or rpht provded
by aw or reguatons.
Par. 2. Sen stores. Sea-stores quors, e cept such as are duy authorzed
for nonheverage purposes on a vesse, whch are carred by any vesse havng
a treaty or other awfu rght to carry the same n the terrtora waters of
the Unted States, sha be regarded as not sub|ect to the penates of the Na-
tona Prohbton ct f sad vesse provdes a safe and secure room or pace
n whch such quors are securey ocked by the master, as defned n secton
17)4 of Reguatons 0, revsed, durng the contnuous perod whe such vesse
s wthn the terrtora waters of the Unted States, or wthn the dstance
from the coast of the Unted States, ts terrtores or possessons (e cept the
Phppne Isands and the Panama Cana and the Panama Raroad, to whch
terrtores and possessons the above treaty does not appy), whch can he
traversed n one hour by such vesse, or other vesse as provded n rtce
II (3) of the treaty. The room or pace so provded sha be devoted con-
tnuousy to the storage and safe-keepng of such quors whe sad vesse
remans n sad waters and sha not bo used for the storage of other artces,
merchandse, or stores to whch access s requred whe sad vesse s n sad
waters. Such room or pace may he unocked ony n the presence of an offcer
of the Customs Servce of the Unted States or by the wrtten order and
consent of the customs authortes. Such room or pace w be seaed by
customs authortes as soon as may convenenty be done by such authortes
and w be kept under sea contnuousy thereafter whe the vesse on wh en
such quors are carred remans wthn such waters.
Pak. 3. Cargo quor. Uquors carred as cargo quors destned for a port
foregn to the Unted States, ts terrtores or possessons, by any vesse havng
a treaty or other awfu rght to carry the same n the terr tnra waters of
the Unted States, sha be regarded as not sub|ect to the penates of the
Natona Prohbton ct f sad vesse provdes a safe and secure room
or pace n whch such quors are ocked and kept ocked and seaed con-
tnuousy, n the manner provded n paragraph 2 of these reguatons n
reaton to sea stores of Uquors.
Pah. 4. oatons. If any vesse assumes or cams to carry quors n the
waters descrbed n paragraph 2 by vrtue of a rght based on the treaty wth
Great .rtan or any treaty or aw smar thereto, but fas to compy wth
the provsons of these reguatons n respect to ockng sad quors n a
separate room or pace, and the safe storng and seang thereof by customs
authortes, n accordance wth the provsons of these reguatons, such quors
may be sezed under the Natona Prohbton ct n accordance wth sectons
1770, 1771, and 1772 of Reguatons 00, revsed, and such ct and other aws
of the Unted States sha be appcabe to the quors, vesse and persons
nvoved. ny person voatng any customs sea attached as provded n
these reguatons, whether by breakng the same or by enterng any seaed
room or pace wthout breakng the same w be punshabe under secton
598 of the Tarff ct approved September 21, 1022, or other aw appcabe to
the offense commtted. No part of quors ocked up or paced under sea
pursuant to treaty rghts and under these reguatons may be unaden, sod,
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Reg. 35 (rev.), rt. 43.
524
dspose of, or u ed whe such vesse s n the waters-descrbed: Provded,
however, That, actng under a certfcate of medcna need, orm 1539, or
under other permt or awfu rght under Reguatons 0, revsed, or under
the aw, customs authortes may unsea the same and aow the remova of
quors from the room or pace where stored, for use n accordance wth such
certfcate, permt, or rght.
. W. Meon ,
Secretary of the Treasury.
pproved une 7, 1924.
Mc enze Moss,
ssstant Secretary.
D. . ar,
Commssoner of Interna Revenue.
N RCOTIC L W.
Reguatons 35 (revsed), rtce 43: Pro- 111-2 -1 41
curement of drugs. T. D. 3 (M
Modfcaton of artce 43, Reguatons 35 (revsed).
Treasury Department,
Offce ok Commssoner of Interna Revenue,
Washngton, D. C.
To coectors of nterna revenue, narcotc agents n charge, and
others concerned.
rtce 43, Reguatons 35 (revsed), paragraph under the sub-
headng cepton/ s hereby amended to read as foows:
Speca agents and customs agents, for the estabshment of drawback under
customs aws and reguatons, and nspectors of the ureau of Chemstry,
Department of grcuture, n connecton wth ther dutes u enforcng tue
ood and Drugs ct, are entted to procure from any person regstered under
the arrson ct sampes of narcotc drugs or preparatons, and regstrants way
awfuy furnsh to any duy accredted speca agent or customs agent of the
Treasury Department or nspector of the ureau of Chemstry, Department of
grcuture, the requred sampes, takng the recept of suc agent or n-
spector therefor, whch w he fed wth ther offca narcotc order forms
and records. pproprate notaton must be made of such transactons n the
monthy returns of such regstrants who are members of casses 1 and 2.
C. R. Nash,
ctng Commssoner of Interna Revenue.
pproved une 20, 1924.
. W. Meon,
Secretary of the Treasury.
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525
Msc.
MISC LL N OUS.
III-8-1382
D. C. 230 (amended)
Laws and Reguatons Governng the Recognton of ttorneys, gents,
and Other Persons Representng Camants and Others efore tub
Treasury Department and Offces Thereof.
1924. rst Suppement to Department Crcuar No. 230, dated ugust 15, 1023. Chef
Cerk.
Treasury Department,
Offce of the Secretary,
Washngton, anuary 4,19 b-
The reguatons governng the recognton of attorneys, agents,
and other persons representng camants and others before the Treas-
ury Department and offces thereof are hereby amended and suppe-
mented, effectve anuary 1, 1924, as foows:
L The Commttee o nroment and Dsbarment sha consst of s mem-
bers apponted by the Secretary of the Treasury, of whom two sha be de-
taed from the Offce of the Secretary, three from the Offce of the Comms-
soner of Interna Revenue, and one from the Dvson of Customs. The Secre-
tary sha desgnate the charman and vce charman from members detaed
from hs offce. The Secretary sha aso desgnate a secretary of the com-
mttee.
2. The dutes assgned to the chef cerk of the Treasury Department by par-
agraphs 4 and 8 of Department Crcuar No. 230, dated ugust 15, 1023, sha
be performed by the Commttee on nroment and Dsbarment or by ts secre-
tary uuder the drecton of the commttee.
uy provson n Department Crcuar No. 230, dated ugust 15,
1923, n confct wth the foregong s hereby amended accordngy.
. W. Meon,
Secretary of the Treasury.
I -8-1383
D. C. 230 (amended)
Laws and Reguatons Governng the Recognton of ttorneys, gents,
and Other Persons Representng Camants and Others efore the
Treasury Department and Offces Thereof.
1024. Second suppement to Department Crcuar No. 230, dated ugust o. 1023.
Chef Cerk.
Trea su r y Defartm ent,
Offce of the Secretary,
Washngton, ebruary 15, 19 4-
Treasury Department Crcuar No. 230, dated ugust 15, 1923,
as suppemented anuary 4, 1924, s hereby amended by strkng out
paragraph 5 and subparagraph (b) of paragraph 7 of sad crcuar
and nsertng n eu thereof a new paragraph and subparagraph to
read as foows:
5. ormer connecton wth the Treasury Department or pergona knowedge
of mutter n controversy. (a) No attorney or agent sha be permtted to ap-
pear before the Treasury Department n connecton wth any matter to whch
such attorney or agent gave persona consderaton or as to the facts of whch
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Msc.
52
e had actua persona knowedge whe In the servce of the Treasury De-
partment, and kewse no such attorney or asent sha ad or assst another
n any such matter and no attorney or agent sha receve assstant from one
formery n the servce of the Treasury Department and havng such persona
knowedge.
( ) No former offcer, cerk, or empoyee of the Treasury Department sha
act as attorney or agent n any matter or controversy pendng n such De-
.partnent durng hs empoyment theren wthn two years after he has ceased
to be such offcer, cerk, or empoyee wthout frst havng obtaned the consent
of the Secretary of the Treasury or hs duy authorzed representatve and
no enroed attorney or agent sha, wthout frst havng obtaned the con-
sent of the Secretary of the Treasury or hs duy authorzed representatve,
empoy or retan any such former offcer, cerk, or empoyee drecty or Ind-
recty n any such matter or controversy, wthn such two-year perod. Such
consent may ony be granted when t appears (1) that such empoyment s
not prohbted by aw or by the reguatons of the Treasury Department, (2)
that the matter or controversy, to hande whch such consent s sought, was not
pendng n the partcuar otce or dvson (departmenta or fed) n whch
the appcant was formery empoyed. ppcatons for consent shoud be
drected to the secretary of the Commttee on nroment and Dsbarment,
statns the former connecton of the empoyee and the matter or controversy
n whch the appcant desres to appear. The appcant sha thereupon e
prompty advsed as to hs rght to appear n the partcuar matter or con-
troversy, and a copy of such advce sha be fed n the record of the case.
(c) Subparagraph ( ) sha not affect e stng contracts of empoyment,
entered nto pror to the date of ths suppement to Crcuar No. 230, to hande
any specfc matter or controversy now pendng.
7. Causes for re|ecton, suspenson, or dsbarment. (b) Conduct
contrary to the canons of ethcs as adopted by the mercan ar ssocaton.
. W. Meon,
Secretary of the Treasury.
111-15-150
T. D. 3580
INT RN L R NU L WS ND R L T D L WS C NG S.
Statutes of the Unted States, passed subsequent to May 1, 1020,
whch amend, add to, or affect nterna revenue aws.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. 0.
To coectors of nterna revenue and others concerned:
ttenton s nvted to the foowng changes n the aws (other
than Revsed Statute sectons, for whch see T. D. 3534 C. . II 2,
37 ) ) appcabe to nterna revenue whch have occurred snce the
pubcaton of the compaton entted Interna revenue aws n
force May 1,1920.
D. . ar.
Commssoner of Interna Revenue.
pproved March 31, 1924.
. W. Meon,
Secretary of the Treasury.
Changes n Interna Revenue and I rcr. T D Laws (otheb tha Revst|
Statute Sectons) Snce Compaton of 1920.
ct une 5, 1920, secton 23 (41 Stat, 997), Merchant Marne ct, 1020
Skc. 23. That the owner of a vesse documented under the aws of the Unt-1
States and operated n foregn trade sha, for each of the 10 ta abe years
whe so operated, begnnng wth the frst ta abe year endng after the enact-
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527
nent of ths ct, 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 Imposed by
Tte III of the Revenue ct of 1918 an amount equvaent to the net earnngs
of such vesse durng such ta abe year, determned 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 reguatons to be made by the board In a trust fund
for nvestment, n the budng n shpyards n the Unted States of new ves-
ses 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 deduc-
tons aowed under the provsons of ths secton: Provded further. That at
enst two-thrds of the cost of any vesse constructed under ths paragraph
sha be pad for out of the ordnary funds or capta of the person havng such
vesse constructed.
That durng the perod of 10 years from the enactment of ths ct any
person a ctzen of the Unted States who may se a vesse documented under
the aws of the Unted Staes and but pror to anuary 1, 1014, sha be
e empt from a ncome ta es that woud he payabe upon any of the proceeds
of such sae under Tte 1, Tte ft, and Tte III of the Revenue ct of 1918
f the entre proceeds thereof sha be nvested n the budng of new shps n
mercan shpyards, such shps to be documented under the aws of the Unted
States and to be of a type approved by the board.
ct ugust 24, 1021, chapter 8 . The uture Tradng ct. Sectons 3, 4,
and 7 (42 Stat., 187, 190).
Sf.c. 3. That n addton to the ta es now mposed hy aw there s hereby
eved a ta amountng to 20 cents prr bushe ou each bushe nvoved theren,
whether the actua commodty s ntended to be devered or ony nomnay
referred to, upon each and every prvege or opton for a contract ther of
purchase or sae of gran, ntendng hereby to ta ony the transactons known
to the trade as prveges, bds, offers, puts and cas, ndemntes,
or ups and- downs.
Sec. 4. That n addton to the ta es now mposed by aw there s hereby
eved a ta of 20 cents a bushe on every bushe nvoved theren, upon eac
contract of sae of gran for future devery e cept
(a) Where the seer s nt the tme of the makng of such contract the owner
of the actua physca property covered thereby, or Is the grower thereof, or
n case ether party to the contract s the owner or renter of the and on
whch the same s to be grown, or s an assocaton of such owners, or growers
of gran, or of such owners or renters of and or
(o) Where such contracts are made by or through a member of a board of
trade whch has been desgnated by the Secretary of grcuture as a contract
market, as herenafter provded, and f such contract s evdenced hy a
memorandum n wrtng whch shows the date, the partes to such contracts
and ther addresses, the property covered and ts prce, and the terms of de-
very, and provded that each board member sha keep such memorandum
for a perod of three years from the date thereof, or for a onger perod f
the Secretary of grcuture sha so drect, whch record sha at a tmes
be open to the nspecton of any representatve of the Unted States Depart-
ment of grcuture or the Unted States Department of ustce.
Sec. 7. That the ta provded for heren sha be pad by the seer, nnd such
ta sha be coected ether by the aff ng of stamps or by such other method
as may have been prescrbed by the Secretary of the Treasury by reguatons,
and such reguatons sha be pubshed at such tmes and n such manner as
sha be determned by the Secretary of the Treasury.
ct November 23, 1921, chapter 134. n ct Suppementa to the Natona
prohbton ct (42 Stat., 222). Pubshed n fu n T. D. 3257.
ct November 23, 1921, chapter 13 . Revenue ct of 1921 (42 Stat., 227).
Pubshed n fu n T. D. 3258.
ct ebruary 17, 1922. chapter 55. n ct makng an appropraton for the
Treasury Department for the fsca year endng une 30, 1923, and for other
purposes. (See 42 Stat., 3 0.)
Tender the Interna Revenue Servce appropratons the provso In re concen-
traton of sprts s nserted (42 Stat., 375). Ths provson Is pubshed In
fu In T. D. 3332.
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528
ct May 20, 1922 (42 Stat, 59 ). n ct to amend the ct entted n
ct to prohbt the mportaton and use of opum for other than medcna
purposes, approved ebruary 9, 1909, as amended.
That when used n ths ct-
Ma) The term narcotc drug means opum, coca eaves, cocane, or any
.sat, dervatve, or preparaton of opum, coca eaves, or cocane
(b) The term Unted States,1 when used n a geographca sense, ncudes
the severa States and Terrtores, and the Dstrct of Coumba
(c) The term board means the edera Narcotc Contro oard estab-
shed by secton 2 of ths ct and
(d) The term person means ndvdua, partnershp, corporaton, or as-
socaton.
Sec. 2. (a) That there s hereby estabshed a board to be known as the
edera Narcotc Contro oard and to be composed of the Secretary of
State, the Secretary of the Treasury, and the Secretary of Commerce. cept
as otherwse provded n ths ct or by other aw, the admnstraton of ths
ct s vested n the Department of the Treasury.
( ) That t s unawfu to mport or brng any narcotc drug nto the
Unted States or any terrtory under Its contro or |ursdcton e cept that
such amounts of crude opum and coca eaves as the board fnds to be necessary
to provde for medca and egtmate uses ony, may be mported and brought
nto the Unted States or such terrtory under such reguatons as the board
sha prescrbe. narcotc drugs mported under such reguatons sha be
sub|ect to the dutes whch are now or may hereafter be mposed upon sue
drugs when mported.
(c) That f any person frauduenty or knowngy mports or brngs any
narcotc drug nto the Unted States or any terrtory under ts contro or
|ursdcton, contrary to aw, or asssts n so dong, or receves, conceas, buys,
ses, or n any manner factates the transportaton, conceament, or sae of
any such narcotc drug after beng mported or brought n, knowng the same
to have been mported contrary to aw, such person sha upon convcton e
ned not more than 5,000 and mprsoned for not more than 10 years.
(d) ny narcotc drug mported or brought nto the Unted States or any
terrtory under ts contro or |ursdcton, contrary to aw, sha (1) f smokng
opum or opum prepared for smokng, be sezed and summary forfeted to the
Unted States Government wthout the necessty of nsttutng forfeture pro-
ceedngs of any character or (2), f any other narcotc drug, be sezed and
forfeted to the Unted States Government, wthout regard to ts vaue, n the
manner provded by sectons 3075 and 307 of the Revsed Statutes, or the
provsons of aw hereafter enacted whch are amendatory of, or n substtu-
ton for, sue sectons. ny narcotc drug whch s forfeted n a proceedR
for condemnaton or not camed under such sectons, or whch s summary
forfeted as provded n ths subdvson, sha be paced n the custody of the
board and n ts dscreton be destroyed or devered to some agency of the
Unted Staes Government for use for medca or scentfc purposes.
(e) ny aen who at any tme after hs entry s convcted under subdvson
(c) sha, upon the termnaton of the mprsonment mposed by the court upon
such convcton and upon warrant ssued by the Secretary of Labor, be taken
nto custody and deported n accordance wth the provsons of sectons 19 and
20 of the ct of ebruary 5, 1917, entted n ct to reguate the mmgraton
of aens to, and the resdence of aens n, the Unted States, or provsons of
aw hereafter enacted whch are amendatory of, or n substtuton for, such
sectons.
(f) Whenever on tra for a voaton of subdvson (c) the defendant s
shown to have or to have had possesson of the narcotc drug, such possesson
sha be deemed suffcent evdence to authorze convcton, uness the defendant
e pans the possesson to the satsfacton of the |ury.
(g) The master of any vesse or other water craft, or a person n charge o
a raroad car or other vehce, sha not be abe under subdvson (c), f
he satsfes the |ury that he had no knowedge of and used due dgence to
prevent the presence of the narcotc drug n or on such vesse, water craft,
raroad car, or other vehce but the narcotc drug sha be sezed, forfeted,
and dsposed of as provded n subdvson ( ).
Sec. 2. That sectons 5 and of such ct of ebruary 9, 1909, as amended,
are amended to read as foows:
Sec. 5. That no smokng opum or opum prepared for smokng sha 1
admtted nto the Unted States or nto any terrtory under ts contro or
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Msc.
|ursdcton for transportaton to another country, or be transferred or trans-
shpped from one Tease to another vesse wthn any waters of the Unted
States for mmedate e portaton or for any other purpose and e cept wth
the approva of the board, no other narcotc drug may be so admtted, trans-
ferred, or transshpped.
Sec. . (a) That t sha be unawfu for any person sub|ect to the |ursdc-
ton of the Unted States Government to e port or cause to be e ported from
te Unted States, or from terrtory under ts contro or |ursdcton, or from
countres u whch the Unted States e ercses e traterrtora ursdcton,
any narcotc drug to any other country: Provded, That narcotc drugs (e cept
smokng opum and opum prepared for smokng, the e portaton of whch s
ereby absoutey prohbted) may be e ported to a country ony whch has
ratfed and become a party to the conventon and fna protoco between the
1 nted States Government and other powers for the suppresson of the abuses
of opum and other drugs, commony known us the Internatona Opum Con-
venton of 1912. and then ony f (1) such country has nsttuted and mantans,
n conformty wth that conventon, a system, whch the board deems adequate,
of permts or censes for the contro of mports of such narcotc drugs (2)
the narcotc drug s consgned to an authorzed permttee: and (3) there s
furnshed to the board proof deemed adequate by t, that the narcotc drug s
o be apped e cusvey to medca and egtmate uses wthn the country
to whch e ported, that t w not be ree ported from such country, and that
there s an actua shortage of and a demand for the narcotc drug for medca
and egtmate uses wthn such country.
( ) The Secretary of State sha request a foregn Governments to com-
muncate through the dpomatc channes copes of the aws and reguatons
promugated n ther respectve countres whch prohbt or reguate the m-
portaton and shpment n transt of any narcotc drug and, when receved,
advse te board thereof.
(c) The board sha make and pubsh a proper reguatons to carry nto
effect the authorty vested In t by ths ct.
Sec. 3. That secton 8 of such ct of ebruary 9, 1909, as amended, s
amended to read as foows:
Sec. 8. (a) That a narcotc drug that s found upon a vesse arrvng at
a port of the Unted States or terrtory under ts contro or |ursdcton and
s not shown upon the vesse s manfest, or that s anded from any such
vesse wthout a permt frst obtaned from the coector of customs for that
purpose, sha be sezed, forfeted, and dsposed of In the manner provded n
subdvson (d) of secton 2, and the master of the vesse sha be abe (1)
f the narcotc drug s smokng opum, to a penaty of 25 an ounce, and (2)
f any other narcotc drug, to a penaty equa to the vaue of the narcotc drug.
( ) Such penaty sha consttute a en upon the vesse whch may be
enforced by proceedngs by be n rem. Cearance of the vesse from a ort
of the Unted States may be wthhed unt the penaty Is pad, or unt there
s deposted wth the coector of customs at the port, a bond n a pena sum
doube the amount of the penaty, wth suretes approved by the coector,
and condtoned on the payment of the penaty (or so much thereof as s not
remtted by the Secretary of the Treasury) and of a costs and other e penses
to the Government n proceedngs for the recovery of the penaty n case the
master s appcaton for remsson of the penaty s dened n whoe or n part
by the Secretary of the Treasury.
(c) The provsons of aw for the mtgaton and remsson of penates
and forfetures ncurred for voatons of the customs aws sha appy to
penates Incurred for a voaton of the provsons of ths secton.
Sec. 4. That such ct of ebruary 9, 1909, as amended, s amended by add-
ng at the end thereof a new secton to read as foows:
Sec. 9. That ths ct may be cted as the Narcotc Drugs Import and -
port ct.
ct September 19, 1922, chapter 340 (42 Stat., 849). Chna Trade ct, 1922,
sectons 21-27, ncusve (42 Stat., 855, 850).
Sec. 21. Tte II of the Revenue ct of 1921 s amended by addng at the end
thereof a new secton to read as foows:
Sec. 204. (a) That for (e purpose ony of the ta mposed by secton 230
there sha be aowed, n the case of a corporaton organzed under the Chna
Trade ct, 1922, a credt of an amount equa to the proporton of the net n-
come derved from sources wthn Chna (determned n a smar manner to
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that provded In secton 217) whch the par vaue of the shares of stock of
the corporaton owned on the ast duy of the ta abe year by ndvdua ctzens
of the Unted States or Chna, resdent n Chna, bears to the par vaue of the
whoe number of shares of stock of the corporaton outstandng on such date:
Provded, That, n no case sha the amount by whch the ta mposed by secton
23U s dmnshed by reason of such credt e ceed the amount of the speca
dvdend certfed under subdvson (b) of ths secton.
(h) Such credt sha not be aowed uness the Secretary of Commerce Las
certfed to the Commssoner (1) te amount whch, durng the year enOns
on the date of fng the return, the corporaton has dstrbuted as a spec a
dvdend to or for the beneft of such ndvduas as on the ast day of the ta a-
be year were ctzens of the Unted .States or Chna, resdent n Chna, an
owned shares of stock of te corporaton, (2) that such speca dvdend was
n addton to a oter amounts, payabe or to be payabe to such ndvduas
or for ther beneft, by reason of ther nterest n the corporaton, aud (3)
that such dstrbuton has been made to or for the beneft of such ndvduas
n proporton to the par vaue of the shares of stock of the corporaton owned
by each e cept that f the corporaton has more than one cass of stock, the
certfcate sha contan a statement that the artces of ncorporaton provde a
method for the apportonment of such speca dvdend among such ndvduas,
and that the amount certfed has been dstrbuted n accordance wth the
method so provded.
(c) or the purposes of ths secton shares of stock of a corporaton sha
be consdered to be owned by the person n whom the equtabe rght to the
ncome from such shares s n good fath vested.
(d) s used n ths secton the term Chna sha have the same meanng
as when used n the Chna Trade ct, 1922.
Sec. 22. Subdvson (b) of secton 230 of the Revenue ct of 1921 s amended
to read as foows:
(b) or each caendar year thereafter, 12 per centum of the amount of
the net ncome n e cess of the credts provded n sectons 230 and 204.
Sec. 23. Subdvson (f) of secton 238 of the Revenue ct of 1921 s
amended by addng after the fgures 2 2 the word and fgures or 204.
Sec. 24. Subdvson (c) of secton 240 of the Revenue ct of 1921 s
amended by addng at the end thereof a new sentence to read as foows:
corporaton organzed under the Chna Trade ct, 1922, sha not be
deemed to be affated wth any other corporaton wthn the meanng of ths
secton.
Sec. 25. That secton 2 of the Revenue ct of 1921 s amended by addng at
the end thereof a new paragraph to read as foows:
(12) a corporaton organzed under te Chna Trade ct, 1922, sha for
the purposes of ths ct, be consdered a domestc corporaton.
Sec. 2 . Subdvson (b) of secton 213 of the Revenue ct of 1921 s
amended by strkng out the perod at the end of paragraph (12) thereof an
nsertng n eu thereof a semcoon, and by addng after paragraph (12) a
new paragraph to read as foows:
(13) In the case of an ndvdua, amounts dstrbuted as dvdends to
or for hs beneft by a corporaton organzed under the Chna Trade ct.
1922. If, at the tme of such dstrbuton, he s a ctzen of Chna resdent
theren and the euutabe rght to the ncome of the shares of stock of the
corporaton s n good fath vested n hm.
S:c. 27. Subdvson (a) of secton 21 , paragraph ( ) of subdvson (a)
of secton 234, and paragraph (3) of subdvson (a) of secton 245, of the
Revenue ct of 1921, are amended by nsertng n each after the word and
fgures secton 202 a comma and the words and other than a corporaton
organzed under the Chna Trade ct, 1922.
ct September 21, 1922 ( 42 Stat., 993). n ct to confer upon the terr-
tora courts of Porto eo concurrent |ursdcton wth the Unted States
courts of that dstrct of a offenses under the Natona Prohbton ct and
a cts amendatory thereof or suppementa thereto.
e t enacted by the Senate and ouse of Representatves of the Unted
Rtafe of merca n Congress assembed, Thnt there be, and Is hereby, con-
ferred upon the terrtora magstrates and courts of Porto Rco |ursdcton
concurrent wth the commssoners and courts of the Unted States for the
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531
Msc.
sad Terrtory of a offenses under the ct of October 28, 1919, known as
the Natona Prohbton ct, and a cts amendatory thereof and sup-
pementa thereto, the |ursdcton of sad terrtora magstrates and courts
over sad offenses to he the same whch they now have over other crmna
offenses wthn ther |ursdcton.
ct September 22, 1922. n ct reatve to the naturazaton and ctzenshp
of marred women (42 Stat., 1021). Pubshed n fu n T. D. 340 .
ct March 4, 1023 (Pub., 503) (42 Stat, 1454). grcutura Credts ct,
1923. Secton 210 of Tte I, amendng the edera arm Loan ct (42
Stat., 1459), provdng tu e empton of edera Intermedate Credt anks
reads as foows:
Sec. 210. That te prveges of ta e empton accorded under secton 2
of ths ct sha appy aso to each edera ntermedate credt bank, ncudng
ts capta, reserve, or surpus, and the ncome derved therefrom, and the
debentures ssued under ths tte sha be deemed and hed to be nstrumen-
tates of the Government and sha en|oy the same ta e emptons as are
accorded farm oan bonds n sad secton.
ct March 4, 1923 (Pub., 53 ) (42 Stat, 1511). n ct to amend the
Tradng wth the nemy ct. Secton 24 (42 Stat., 1510), provdng for
payment of egay assessed ta es by en Property Custodan, reads as
foows:
Sec. 24. The en Property Custodan s authorzed to pay a ta es (n-
cudng speca assessments) heretofore or hereafter awfuy assessed by any
body potc aganst any money or other property hed by hm or by the
Treasurer of the Unted States under ths ct, and to pay the necessary
e penses ncurred by hm or by any depostary for hm In securng the pos-
sesson, coecton, or contro of any such money or other property, or n
protectng or admnsterng the same. Such ta es and e penses sha be pad
out of the money or other property aganst whch such ta es are assessed
or n respect of whch such e penses are ncurred, or (f such money or other
property s nsuffcent) out of any other money or property hed for the same
person, notwthstandng the fact that a cam may have been fed or sut
nsttuted under ths ct.
ct March 4, 1923 (Pub., 527). n ct to amend the Revenue ct of 1921
n respect to credts and refunds (42 Stat., 1504). Pubshed n fu n
T. D. 3457.
ct March 4. 1923 (Pub., 531). n ct to amend the Revenue ct of 1921
n respect to Income ta on nonresdent aens (42 Stat., 1507). Pubshed u
fu n T. D. 34 5.
ct March 4. 1923 (Pub., 545). n ct to amend the Revenue ct of 1921
n respect to e changes of property (42 Stat, 1500). Pubshed n fu In
T. D. 34 8.
ct March 13, 1924 (Pub., 43). n ct to amend secton 252 of the Revenue
ct of 1921 n respect of credts and refunds. Pubshed n fu n T. I . 3571.
War Termnaton.
. 3. Res. 382: Pub. Res. 4. March 3, 1921. ont resouton decarng that
certan rts of Congress, |ont resoutons, and procamatons sha be con-
strued as f the war had ended and the present or e stng emergency e pred
(41 Stat., 1359).
S. . Res. 1 Pub. Res. 8, uy 2, 1921. ont resouton termnatng the
state of war between the Impera German Government and the Unted States
of merca and between the Impera and Roya ustro- ungaran Government
and the Unted States of merca (42 Stat., 105).
Treaty of peace between the Unted States and Germany. Sgned at ern
ugust 25. 1921 ratfcaton advsed by the Senate October 18, 1921 ratfed
by the Presdent October 21, 1921 ratfed by Germany November 2. 1921
ratfcatons e changed at ern November 11, 1921 procamed November 14,
1921 (42 Stat, 1939).
Procamaton of the Presdent, of the Unted States decarng war between
the Unted States and Germany termnated on uy 2, 1921 (42 Stat., 1944).
G
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532
111-17-1524
Mn. 3198
Symbos for use n correspondence.
Treasury Department,
Offce of Commssoner of Interna Revenue,
Washngton, D. C, pr 15,1921
Deputy commssoners and heads of dvsons, ureau of Interna
Revenue, coectors of nterna revenue, nterna revenue agents n
charge, edera prohbton drectors, and others concerned:
t tmes there s more or ess deay e perenced n the devery to
the proper pace n the ureau of offca communcatons. Ths s
argey due to a ack of use of proper dentfyng marks n the
preparaton of etters and other papers. To obvate, as far as pos-
sbe, such deays and n other ways to e pedte the dstrbuton of
ma, a system of symbos has been deveoped. These symbos are
shown beow and t s drected that hereafter they be used n the
conductng of correspondence.
very etter prepared n the ureau w bear n the upper eft-
hand corner of the frst sheet or page the proper symbos to ndcate
the offce of orgn.
very etter comng to the ureau from a fed offce of the Serv-
ce, f t be n repy to a communcaton from the ureau, w
carry n the upper eft-hand corner the symbos shown n the etter
beng answered f t be. not n repy to one receved from the
ureau, the symbos of the partcuar offce or unt n the ureau
that t s e pected w hande the sub|ect matter w be shown n
the same manner. If, however, n the atter case, any doubt or
queston shoud e st as to the proper symbos to use, the sub|ect
beng deat wth shoud be ndcated at the head of the etter |ust
beow the address. The same symbos quoted n the etter shoud be
paced n the ower eft-hand corner of the face of the enveope used
to forward the communcaton to the ureau.
Ony one sub|ect shoud be treated n any one etter.
LIST O SYM OLS.
Offce ok the Commssoner.
I ppontment Dvson.
CO Chef cerk.
CD Communcaton Dvson.
SUPPLI S ND UIPM NT DI ISION.
S : P ed Purchase Secton.
S : P ureau Purchases Secton.
S : P Prntng and ndng Secton.
S : SL Space and Leases Secton.
S : P Property Secton.
S :S Statonery and orms Secton.
ccounts and Coectons Unt.
O: DC Deputy commssoner.
C:Cor Correspondence Study Secton.
C: D Dsbursement Dvson.
C:O P Offce ccounts and Procedure Dvson.
C: ed owances Dvson.
C: P ed Procedure Dvson.
C: Stp Stamp Dvson.
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533
Commttee on ppeas and Revew.
C R Charman of Commttee.
Income Ta Unt.
IT: Deputy commssoner.
ssstant deputy commssoners.
IT: : f ffatons Secton.
IT: : PM Producton manager.
IT: :RR Rues and Reguatons Secton.
IT: : | Speca d|ustment Secton.
IT: :SM Speca ssessment Secton.
IT: : S Staff Dvson.
IT: : S : PR Personne Research Secton.
IT: : S : PI Personne Secton.
IT: : S : Tn Tranng Secton.
CONSOLID T D R TURNS UDIT DI ISION.
IT:CR ead of dvson.
IT: CR : Secton .
IT:CR: Secton .
IT :CR:C Secton C.
IT: CR: D Secton D.
IT: CR: Secton .
IT: CR: d dmnstratve Secton.
IT: CR rRR Raroad Secton.
IT: CR R Revew Secton.
CORPOR TION UDIT DI ISION.
IT:C ead of dvson.
IT: C : 21 Secton 21.
IT: C : 22 Secton 22.
IT: C : 23 Secton 23.
IT: C : 24 Secton 24.
IT: C : 25 Secton 25.
IT: C : R Revew Secton.
NGIN RING DI ISION.
IT: n ead of dvson.
IT: n : C Coa auaton Sectons.
IT: n:M Metas auaton Secton.
IT: n : NM Non- Ietas auaton Secton.
IT : n: p pprasa Subsecton.
IT: n : OG O and Gas auaton Secton.
IT : n : T Tmber auaton Secton.
N TUR L R SOURC S UDIT DI ISION.
IT: NR ead of dvson.
IT: NR: Secton .
IT: NR: G Secton G.
IT : NR: Secton .
IT: NR : R Revew Secton.
P RSON L UDIT DI ISION.
IT : P ead of dvson.
IT: P : 1 Secton 1.
IT: P : 2 Sec ton 2.
IT: P : 3 Secton 3.
IT : P : 4 Secton 4.
IT: P : 5 Secton 5.
IT: P : Secton .
IT: P : R Revew Secton.
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534
R CORDS D1 ISIO ,
IT: It ead of dvson.
IT : R: CC Cams Contro Seeton.
IT: :C Correspondence Secton.
IT: It: D Dstrbuton Secton.
IT: R: t ed Reports Contro Secton.
IT: R: P Provng Secton.
IT: It: It Regstraton Secton.
IT: R : S Sortng Secton.
IT: R: UR Unaudted Returns Secton.
S R IC DI ISION.
IT:Rr ead of dvson.
IT: Sr: IS S udng, qupment and Suppy Secton.
IT: Sr: P Photostat Secton.
IT: Sr: S Stenographc Secton.
ST TISTIC L DI ISION.
IT: St ead of dvson.
IT: St: CP Card Punch Secton.
IT: St: C Comptometer Secton.
IT: St: C dt and Code Secton.
IT: St: R Research Secton.
IT: St: ST Speca Tabes Secton.
IT:St:TS Tabuaton and Sort Secton.
Msceaneous Ta Unt.
MT: DC Deputy commssoner.
MT: T state Ta Dvson.
MT:CST Capta Stock Ta Dvson.
MT : ST Saes Ta Dvson.
MT:T M Tobacco and Msceaneous Dvson.
Prohbton Unt.
ofce of tue prohbton commssoner,
Pro.: C Prohbton Commssoner.
Pro: C ssstant Prohbton Commssoner.
Pro:S Speca ssstant to Prohbton Commssoner.
Pro: Inf Informaton Secton.
Pro: M Ma Contro Secton,
O IC O COUNS L.
Pro: CI Counse.
DI ISION O INT RPR T TION.
Pro: I ead, Dvson of Interpretaton.
Pro: 1:1 Secton No. 1.
Pro : 1: 2 Secton No. 2.
DI ISION O LITIG TION.
Pro:D ead of Ltgaton.
Pro:L:P. P.everage Secton.
Pro: L: N Non- everage Secton.
Pro:L:I eer and Wne Secton.
O IC O C I , G N R L PRO I ITION G NTS.
Pro: CG :C Chef, Genera Prohbton gents.
Pro: CO ssstant chef.
Pro: CG : S ed Supervsors Secton.
Pro: CG : IR Chef, Investgaton and Reports Secton.
Pro: CG : PD Chef, Personne and Dsbursements Secton.
Pro: CG : S Statstcs Secton.
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535
Mec.
P I:MIT DI ISION.
Pro:P ead, Permt Dvson.
Pro: P: ond Secton.
Pro:P:C es and Records Secton.
Pro: I : W Wthdrawa Record Secton.
INDUSTRI L LCO OL ND C MIC L DI ISION.
Pro: I C ead of dvson.
Pro:I C:( Chemst n charge.
UDIT DI ISION.
Pro: ead of dvson.
to : : ssessment Secton.
Pro: : P. onded Sprts Secton.
Pro: :D Denatured coho and Wne Secton.
Pro : : M Msceaneous Secton.
Pro: : R Reports Secton.
N COTIC DI ISION.
Pro: ead of dvson.
Pro: N: ed Servce.
Pro: N : L Lega Secton.
Pro: N: R Returns Secton.
Offce of tub Soctor.
SOL: I: I Interpretatve Dvson No. L
SOL: I: II Interpretatve Dvson No. 2.
SOL: P Pena Dvson.
SOL:C Cv Dvson.
SOL: SP : .I Speca d|ustment Secton.
SOL: LI Lbrary.
SOL: DM dmnstraton Dvson.
Speca Integence Unt.
SI Chef, Speca Integence Unt.
Speca Commttee on ppeas.
SpC Charman of Commttee.
D. . ar, Commssoner.
III-19-1S53
D. C.230 (amended)
Laws and Reguatons Govebnnq the Recognton of ttorneys, gents,
and Other Persons Rf.presentng Camants and Others efore the
Treasury Department and Offces Thereof.
1924. Thrd Suppement to Department Crcuar No. 230, dated u|rust 15, 1923. Chef
Cerk.
Treasury Department,
Offce of the Secretary,
Washngton, pr 15, 1924.
Paragraph 7 of Treasury Department Crcuar No. 230, dated
ugust 15, 1923, as amended by the second suppement to sad
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53
crcuar, dated ebruary 15, 1924, s hereby further amended by
strkng out the words or enroment as attorney or agent, n
the fourth ne of subparagraph (d), and nsertng n eu thereof
the foowng: but an enroed attorney or agent may use on hs
etterheads or cards the words enroed to practce before the
Treasury Department, or words of smar mport, and by addng
a new subparagraph (/), so that the paragraph w read as foows:
7. Causes for re|ecton, suspenson, or dsbarment. In genera, any conduct
whch woud precude an appcant from enroment w be suffcent to
|ustfy hs suspenson or dsbarment. Specfcay, the foowng matters,
among others, w be consdered grounds for suspenson or dsbarment:
(a) oaton of the statutes or rues governng practce before the Treasury
Department.
(b) Conduct contrary to the canons of ethcs as adopted by the mercan
ar ssocaton.
(c) ase or mseadng statements or promses made by the attorney or
agent to a ta payer or msrepresentaton to the Treasury Department.
((f) Soctaton of busness by the attorney or agent Ths Incudes et-
ters, crcuars, and ntervews not warranted by prevous assocaton prnted
matter appearng on the etterheads or cards of the attorney or agent nd-
catng prevous connecton wth the Treasury Department (but an enroed
attorney or agent may use on hs etterheads or cards the words enroed
to practce before the Treasury Department, or words of smar mport)
or representaton of acquantance wth Treasury offcas or empoyees. It
ncudes aso the use by attorneys and agents of any ttes whch mght mpy
offca status or connecton wth the Government, such as edera ta
e pert or edera ta consutant. It s not consdered n voaton of
ths reguaton for Treasury empoyees, on severng ther connecton wth the
Department, to send out announcement cards, brefy statng ther former
offca status and announcng ther new assocaton, provded the cards are
addressed ony to persona or busness acquantances, and provded further
that such cards are dstrbuted ony at the tme of severance of the offca con-
necton wth the Government. These cards are regarded by the commttee
not as advertsng but as the customary announcement cards ssued for the
e press purpose of dentfyng the sender wth hs new assocaton or busness.
(c) Neggence n furnshng evdence requred In matters pendng before
the Treasury Department, and n the use of any means whereby the fna
settement of the matter s un|ustfaby deayed.
(f) The empoyment by an enroed attorney or agent as correspondent or
subagent n any matter pendng before the Treasury Department, or the
acceptance by such enroed attorney or agent of empoyment as correspondent
or subagent of or from any person who has been dened enroment or who
has been suspended or dsbarred from practce. It s n voaton of the
reguatons for an enroed attorney or agent to assst n any way or e as-
ssted by an attorney or agent who as boon dened enroment or has been
suspended or dsbarred.
(g) ny other matter whch, n the opnon of the Commttee on nroment
and Dsbarment, s unfar to the ta payer or to the Treasury Department
or nterferes unduy wth the ordery dsposton of matters pendng before
the Department.
(/) No former empoyee of the ureau of Interna Revenue who voated
hs agreement to stay at eust a year n the ureau sha be admtted to
practce unt after two years from hs severance of connecton wth the
ureau.
. W. Meon,
Secretary of the Treasury.
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537
Msc.
111-23-1597
I. T. 2021
The Secretary of the Treasury, after due notce and opportunty
for hearng, and upon the recommendaton of the Commttee on
nroment and Dsbarment, has approved the dsbarment from
further practce before the Treasury Department of the foow-
ng named attorneys or agents:
Name.
ddress.
Date of
dsbarment.
Downs, Geo. R
Mar. 13, 1924
Mar. 15, 1924
May 1, 1924
uy 25,1923
Sept. 2 , 1923
May 17,192
May 1,1921
pr. 15,1924
Mar. 28,1923
Phadepha, Pa
Washngton, D. C
Chcago, I
Stewart, Chas. W
111-2 -1 37
I. T. 2042
The Secretary of the Treasury, after due notce and opportunty
for hearng, and upon the recommendaton of the Commttee on n-
roment and Dsbarment, has approved the suspenson from practce
before the Treasury Department for the perod stated n eac case
of the foowng named attorneys and agents:
Name.
ddress.
Perod of suspenson
ston, . L
a. rank
athrope, . W
ashe, Car
Grady, erbert . ....
peten. yman M
sher, . /
Ofeer, fred
embach, Water W...
erndon, ohn
ohnson, W.
ohnson, Wam W...
Ungdon, W.
Martn, Leondas W. T.
O Tooe. Wam enry
ossmoore, merson .
Smth, Chares II
Stewart. rnest
Sturgeon, Raph
Tropp. oseph N
Wensuenk, Maurce T..
Wnters, R.
Washngton, D. C
Detrot, Mch
ast St. Lous, III...
Mnneapos, Mnn.
eena, Mont
New York, N. Y.._.
Racne, Ws
Wenatchee, Wash...
Long each, Cuf...
Phadepha, Pa
New York, N. Y....
Daas, To
Coumbus. Oho
Denver, Coo
Mnneapos, Mnn.
New York, N. Y....
Cheyenne, Wyo
Los ngees, Caf
St. Lous, Mo
New York, N. Y....
Chcago, 111
bene, Te
(1 months, from une 27. 1923.
30 days, from pr 13, 1923.
00 days, from May 22, 1924.
30 days, from pr. 24, 1924.
30 days, from pr. IS, 1924.
30 days, from pr. 12, 1924.
30 days, from Mny 1, 1924.
30 days, from Mar. 13, 1924.
30 days, from pr. 20, 1924.
80 days, from pr. 20. 1924.
30 days, from eb. 28. 1924.
30 days, from une 21, 1923.
00 days, from pr. 12, 1924.
30 days, from Mar. 31. 1924.
30 days, from Mar. 13, 1924.
1 vear, from Dec. 11, 1923.
rom Oct. 33 to Dec. 31. 1923.
months, from May 22. 1924.
30 days, from Mar. 31, 1923.
90 days, from pr. 20, 1924.
30 days, from une 28, 1923.
30 days, from May 22, 1924.
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IND .
.
batement, rght to assess ta subsequenty
ccommodaton ndorser of notes determned to be worthess,
dedocton
ccountng methods:
ccrua bass
ddtona Wsconsn surta es, deducton
ddtona Wsconsn (a es assessed, deducton
usness on cash bass
cse ta es, pad n subsequent year
anks, comptroer s recommendaton
ccountng perod, change n, amended returns, mandamus
ccrued chartabe contrbutons, unpad
dmnstratve e penses, prorty over ta es
dmssons:
Chartabe organzatons, e empton of
cess of estabshed prce, broker s saes n
emptons, cams for
Rentas or servces, charge for
Tckets, requrements appcabe to
duterated butter defned
dvertsng e penses, deducton by awyer
ffated corporatons. (.See Corporatons.)
gents. (See ttorneys and agents.)
en Property Custodan, property transferred to corporaton
sezed, returns
ens:
Nonresdent
greement that representatve w not fe returns
Dvdends of domestc corporatons
Representatves abty for returns and ta es
Sae abroad of machnes purchased n Unted States
Temporary studyng raroad condtons for foregn
government
Transportaton ser- :ces, ncome from Unted States
sources
Resdent, persona e empton, wfe n asyum abroad
ocaton of profts ta requested on consodated return
mendment, cam for refund re|ected, perfectng new nforma
cam, mtaton
_ s n nterna revenue aws snce 1920 compaton.
Reguatons governng nspecton of returns
Reguatons 35 (revsed)
rtce 43-..,.
Reguatons 43-1
rtce 4
rtce 20
rtce 31
215
1
15 3
450
1 38
455
I u
458
O
454
1 12
458
1 40
51
1391
122
1288
298
1 too
232
1432
210
1535
233
1555
22
1590
209
1473
211
1374
205
1582
301
1571
350
150
52
1438
370
1 41
524
1 10
454
1 11
45 S
1 12
458
(539)
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540
mendments Contnued.
Reguatons 45
rtce 521
rtce 1547
rtce 1549
Reguatons 48
rtce 21
rtce 22
rtce 24
Reguatons 50
rtce 7 -
Reguatons 55 (1922 edton)
rtce 105
rtce 10
rtce 10
Reguatons (50
rtce II, modfed
Reguatons (51
rtce 82
Reguatons 2
rtce :
rtce 305
rtce 421
rtce 431
rtce 511-
rtce 521
rtce 2
rtce 1013
rtce 154
rtce 1548
Reguatons 3
rtce 15, Tabe corrected.
Reguatons 4
rtce 8.
Revenue ct of 1921, secton 252 --.
mercan- rtsh tre ty for preventng mportaton of acohoc
quors for everage purposes nto Unted States
mortzaton:
Cam fed, fna determnaton on or before March 3, 1924..
Lmted-term contracts, March 1, 1913, vaue
Net osses
Pant constructon contnued after suspenson requested
Term saes contract acqured pror to March 1, 1913
ppeas:
ddtona nformaton for revenue agent s report
1917 and 1918 returns, wavers
Requrements n connecton wth 1040 returns
Rues of procedure before Commttee on ppeas and Revew.
pprecaton, accrued pror to March 1, 1913, reazed subse-
quenty, dvdends
rmy offcers:
ddtona compensaton upon dscharge, gross ncome
Subsstence aowance
Upkeep of prvate automobe for busness trps
ssessments:
ddtona, 1917 ta es orgnay dscounted, computaton. ..
Mutua nsurance companes, premum deposts ds-
tngushed
1917 and 1918 returns, wavers -.
Ta prevousy abated
ssets acqured through reorganzaton, deprecaton
1500
283
138
38
1385
37
13 9
4 3
1370
4 4
1371
4 4
1 14
489
1540
50
1541
50
1542
50
1 25
521
1289
519
14 3
84
1472
208
1475
23
147
244
15 7
247
1500
283
1478
301
1480
341
1384
3
1387
38
14 2
470
1 14
4S9
/1437
3 3
1482
3 4
1 25
521
1400
182
141
152
7
15
17
1328
17:
140
321
1315
310
137
:m
1331
1408
to:
14
ot
1495
nt
1298
200
1421
31
1501
L St
1315
1474
215
1 32
174
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541
ssgnment, refunds due stockhoders for persona servce cor-
poraton s credt
ssocatons:
udng and oan. (See empt corporatons.)
Dstngushed from partnershp
ducaton and reef of famy members aw prncpa ob|ect.
ont-stock, unncorporated, Te as..
Massachusetts trusts, ta abty
ttorneys and agents:
nd others, Treasury Department reguatons governng
recognton, amended.
Dsbarments and suspensons
Dsbarments
Suspensons
Insovent banks, Te as, nformaton furnshed
Negotaton of oan, fducary reatonshp
Powers of attorney, substtute, messengers or runners
Retaned by State hghway dstrct, separate undertakngs.
Suspensons. See ttorneys and agents : Dsbarments and
suspensons.)
Wthhodng nterest, ta -free bonds, 25 per cent reducton,
1924 .
ustraa, subdvsons, smar credt requrement
utomobes:
rmy offcer, used for busness trps, e pense of upkeep
Deprecaton, used ony partay for busness purposes
.
ad debts:
ccommodaton ndorser, notes determned to be worthess,
deducton..
Charged off, deducton n subsequent year
Coatera as parta securty undsposed of
Gran commsson brokers, egaty of transactons
Indorsers payng baance on mortgage notes, maker bank-
rupt
Notes
Dvdend e pected, bank e amner orderng parta
charge-off
Perod of mtatons, entucky
Payment of deceased partner s share of partnershp debts
ankruptcy:
dmnstratve e penses
Prorty.... .
Recevershp, deducton
Composton agreement among credtor. , ncome.
Credts and refunds n
edera ta es
Lmtaton on fng cam
Prorty of
anks:
ccountng methods, comptroer s recommendaton, returns
ond nterest, acceptance of, nformaton returns
Converted nto trust company, New York aw, returns
oregn, nterest pad on deposts, 191 and 1918 cts
Insovent
Ta assessed, assets nsuffcent to pay depostors
Te as, nformaton furnshed agents by coectors
Loan department, cost of, oss deducton
Rung
No.
1534
1493
1557
1493
1598
11382
13S3
11553
1597
1 37
1484
1411
1410
1 30
1(534
1433
1298
1391
1 04
1343
129
1528
1579
1578
1415
1498
143
1558
1413
1359
1407
1420
11435
/143
153
1494
1377
1559
1 08
1422
1484
1342
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542
anks Contnued.
Mutua savngs. (See empt corporatons.)
Natona, good w of purchased bank charged off, osses
Testmony of empoyees and agents, rght to requre
enefcares:
state, ta -overpayment by dscharged e ecutor, credts or
refunds
state trust, parta perodca dstrbuton of ncome, returns.
Trust, ncome dstrbuted reguary
everages:
Sweet cder not ta abe
omb e poson destroyng resdence, osses
onds:
Convertbe nto stock, sae of rghts to subscrbe
Dscount, Interstate Commerce Commsson rues
changed for new ssue, same corporaton
oregn foregn nsurance company depostng wth State,
nterest
Interest accepted by banks, nformaton returns
Issued as dvdend, sod to purchase stock
Issued by ndvdua, payment assumed by corporaton
Muncpaty not requred to gve, when wthdrawng ta -free
acoho
Rghts to subscrbe, sae of. (See Saes: Rghts to subscrbe.)
onuses, stock, to empoyees. (See Compensaton: onuses.)
orrowed capta comprsng entre nvested capta, 1917, per-
sona servce corporatons
rokers:
Defnton of, n Revenue ct of 1921, bndng upon courts..
Gran commsson, bad debts, egaty of transactons.,
Persons abe as
udng and oan assocatons. (See empt corporatons.)
udngs damaged by earthquake, rebudng osses
ureau of Interna Revenue, correspondence symbos
usness e penses (see aso Capta e pendtures):
ddtona compensaton, servces n pror year
teratons to budng, capta e pendture
mounts hed to be saary payments
Commerca cub members, raroad rght of way subscrptons-
Compensaton, addtona, pad or credted under contract
Contrbutons
Chamber of commerce member toward ndebtedness
Corporaton to cty hospta
Deprecaton, partner ownng own offce furnture
Dues pad Cavary offcers cub
state and admnstratve e penses
cse ta es, pad n foowng year, accrua bass
Iega trade or busness
Insurance premums, pocy as securty for oan
Itaan persona property ta rchezza mobe .
Lawyer, subscrptons to coecton agences and advertsng.
Leases, mnng, renewabe, deducton of cost
Navy and Marne Corps, tems of equpment..
Nonempoyment agreement, amount pad fund under .
Partnershp, partners saares, 1917, o agreement or pay-
ment
Payment to empoyees dsproportonate to stock hodngs
Perfectng tte to rea estate
Ranch deveopment e pendtures, orgnay capta
ture
Reserve for returns and aowances, 1918
Stock bonuses awarded wth tte reserved
Stockhoder, ma|orty, amounts advanced for corporaton
Wsconsn surta es, addtona assessments, accrua bass
Rung
No.
1514
13
1393
1581
12S
1491
1 31
149
145
1 28
1583
1377
1293
1483
1289
1574
1573
1528
1492
1281
1524
14 8
1452
1334
1497
1341
1407
1509
1 04
1399
1558
1577
1514
1300
1433
1391
14 9
1471
1327
1392
13 0
14 1
1429
1 03
1280
1295
1515
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#
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543
Caforna:
Communty property and ncome
mended returns and cams
Reguatons 2, artce 31, amended.
Returns -
Capta assets, sae of, n 1919, other assets retaned, net oss
Capta e pendtures:
ccounts recevabe, guaranteed, e changed for stock, pay-
ments
teratons to budng
utomobe purchased wth notes, dscount
Capta stock, sae of, ncdenta e penses
Good w, deveopment e penses charged off, restoraton
Partnershp good w, purchase of nterest n, obsoescence
Perfectng tte to rea estate
Ranch deveopment, subsequenty camed as e penses
Ta es, State, pad n securng ta deed
Capta gan, two-year hodng perod, devsed property
Capta stock. (See Stock.)
Capt. -1 stock ta :
ssocatons and Massachusetts trusts
Carryng on or dong busness
Corporatons buyng or seng tmberands through agents
sub|ect to payment of
Massachusetts trusts
Castates, bomb destroyng resdence, osses
Certfcates of ndebtedness, pavment of ta es
Certfcates, ta -e empt securtes hed n trust, nterest
Chartabe contrbutons. (See Contrbutons.)
Chna Trade ct, domestc corporatons, dvdends, nonresdent
aen ndvduas
Cder, sweet, not ta abe as soft drnk
Ctzens:
ntted to beneft of secton 2 2, perod governng return
Nonresdent, ncome from property n foregn country
Cams:
batement
anks, nsovent, assets nsuffcent to pay depostors
Communty property and ncome, Caforna
Re|ecton n part, penaty and nterest
Credt or refund. (See Credt or refund.)
w8 Refund of ta es. (See Credt or refund.)
Commssons:
mercan machnes sod abroad by foregn corporaton
Cash pad purchaser of stock, nvested capta
Commttee on ppeas and Revew, procedure for appea
Communty property and ncome:
Caforna
mended returns and cams
Reguatons 2, artce 31, amended
Returns
Dstrbuton of dvdends, Washngton
Lousana, wfe s separate property admnstered by husband.
Washngton, dstrbuton of dvdends
Compensaton:
ddtona
rmy offcer honoraby dscharged
onus, stock, awarded, tte reserved, dvdends
Pad or credted under contract, busness e pense
Servces n pror year
Rung
No.
1537
14 3
(14 5
1591
1412
1209
1452
1312
135
159
12S2
1451
1429
15 0
1278
1598
1585
1585
1 14
1 31
1318
1308
1432
1491
148
1570
1422
1537
1375
1555
1512
1331
1537
14 3
14 5
1591
1353
155
1353
14
1280
1341
14 8
G
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r
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(
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2
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1
3
-
0
1
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2
2
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3
:
3
4
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#
p
d
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g
o
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g
e
544
Compensaton Contnued.
en temporary studyng raroad condtons for foregn
government
rmy offcer, subsstence aowance
t torney retaned by State hghway dstrct, separate under-
takngs
mpoyment contract canceed
Investgator of State prohbton aw voatons
Nava reservsts, cash aowance for unforms
Navy and Marne Corps ensted men, per dem aowance-..
Ostensbe, wfe as corporate offcer, Washngton
Partners, for actua servces, 1917, deducton where unpad...
Payment dsproportonate to stock hodngs, dvdends
Payments for servces rendered, deducton
Pubc admnstrator, Montana
Stock ssued to offcers and empoyees, nvested capta
Unted States dstrct |udge apponted to crcut court, 1922:.
Computaton of ncome ta , ndvdua returns, 1923
Consodated nvested capta. (See Invested capta: Corpora-
tons ffated.)
Consodated returns. (See Returns.)
Consodaton, manufacturng contract acqured, deprecaton or
amortzaton
Constructon of pant contnued after contract suspenson, amor-
tzaton
Constructve recept:
Dvdends apped aganst stock n escrow
Interest on notes, credted but unpad
Contracts:
ddtona compensaton pad or credted, busness e pense..
mpoyment, amount receved on canceaton
Government, rembursement for oss n constructng post
offce
Lmted-term, deprecaton based on March 1, 1913, vaue..
Manufacturng, acqured through consodaton, nvested
capta
Term saes, acqured pror to March 1, 1913, deprecaton...
Contrbutons:
ondhoders , surpus created n meetng defct, dvdends..
Chamber of commerce member toward ndebtedness
Chartabe -
ccrued but unpad
equests, deductbty of estate ta
Corporaton organzed to dstrbute to chartabe nst-
tutons
Deegate s e penses, church conference and mercan
Legon conventon
15 per cent mtaton, net oss deducton, bass
Commerca cub members subscrbng to raroad rght of
way
Corporaton to cty hospta
mpoyees fund under nonempoyment agreement
ardng Memora ssocaton
Coo cratve assocatons. ( Sce empt corporatons.)
Cooperatve banks. (-See empt corporatons.)
Corporatons:
ffaton
mended consodated returns, aocaton of ta
uyng or seng tmberands through agents sub|ect to
payment of capta-stock ta
Dfferent busnesses, ntercompany transactons, 1917
amy members ownng a stock n varyng percentages.
ng
No.
1590
1495
1 30
1325
1279
1471
1471
1353
1392
13 0
1334
1 1
1 3
1307
1 21
141
15
1448
1354
1341
1325
1545
141
141
1328
1350
14 7
1 17
1/1522
111523
1417
1529
1580
1497
1509
1327
1431
1582
1585
1 22
1 19
G
e
n
e
r
a
t
e
d
f
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L
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Z
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g
(
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t
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)
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2
0
1
3
-
0
1
-
2
2
0
3
:
3
4
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0
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0
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8
9
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5
4
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s
_
u
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#
p
d
-
g
o
o
g
e
545
Corporatons Contnued.
ffaton Contnued.
ames but not ndvduas ownng ke percentages
Intercompany profts emnated from 1918 openng n-
ventory
Intercompany transactons before March 3, 1917, n-
vested capta
Stock hed by husband and by wfe, unty of nterest
otng contro through pro es wthout nterest
ssets sezed by en Property Custodan, ncome
usness e penses, ma|orty stockhoder deductng advances
to corporat on
Chartabe. (See empt corporatons.)
Charter canceed, busness contnued by ndvduas, partner-
shps
Credts, e cess-profts, prewar hstory combned wth pred-
ecessor s
empton. (See empt corporatons.)
tenson of tme for fng returns. (See tenson of tme:
Returns, fng of.)
oregn
Nonresdent, royates earned n Unted States, wth-
hodng ta
Seng abroad machnes purchased n Unted States
Transportaton servces, ncome from Unted States
sources
Intangbes acqured for stock, nvested capta
Lqudaton. (See Lqudaton.)
Persona servce
Invested capta entrey borrowed, 1917
Recever operatng raroad, addtona 1917 ta es,
vendee sued, mtaton
Refunds due stockhoders assgned to corporaton
Restaurant busness, substanta capta empoyed
Substanta capta empoyed, 1917 profts ta
Rent from corporate property pad stockhoders, dvdends..
Proceeds fe nsurance on offcer, wagerng contracts
Reorganzaton. (See Reorganzaton.)
Returns. (See Returns.)
Stock reacqured wth own bonds, nvested capta
Surpus credted to prncpa stockhoder, gfts of stock, dv-
dends
Ta rate for 1923
Correspondence symbos, ureau of Interna Revenue
Court decsons:
mercan Synthetc Dyes, Inc., oes, recever, v. dwards,
coector
ankers Trust Co. and Pearce, e ecutors, v. owers, coector..
ashara . opkns, coector
ose Tte Trust Co. v. vans, coector
ocs, recever, v. dwards, coector
urke Waggoner O ssocaton v. opkns, coector
Cadwaader, e a/.,-e ecutors, v. Sturgess, coector
Cannon, coector, v. Mc ey, trustee n bankruptcy
Casey v. Sterng Cder Co
Coffey, coector, v. The change ank of Lenno
Cook v. Tat, coector
Crocker, et at., trustees, v. Maey, coector
DeWtt v. Unted States
dwards v. Socum, et a., e ecutors
mpre ue Co., Inc., v. ays, coector
Greyock Ms v. ar, Commssoner
ech and ech, trustees, v. Maey, former coector
1592
15 0
15 2
1 09
1 20
1288
1295
1548
1458
1 33
1555
1473
134
1574
1584
1534
1349
1348
1287
1 29
1511
1 01
1 0
1524
1572
13 4
1395
1380
1572
1493
1489
153
1491
1488
157
1598
1490
1522
1574
1292
1598
G
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r
a
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d
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(
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2
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1
3
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0
1
-
2
2
0
3
:
3
4
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#
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e
54
Court decsons Contnued.
ggns Manufacturng Co. v. Page, coector
I, et a., e ecutors, v. Grssom, coector
oward and arow, trustees, v. Casey, former actng coeeUr
oward and arow, trustees, v. M aey, former coector
In re . Menst Company, Inc., bankrupt, dward . ChUU,
trustee, v. Unted Sates
In re Wyey Company, bankrupt --
7 the matter of rezn Schaefer, bankrupts
In the matter of ssenkay Products Company, bankrupt
Isen v. Unted States
Lane Tmber Co. v. ynson, coector
Lynch, e ecutor, v. Tden Produce Co
Marr v. Unted Staes
Mercante Trust Co., et a., v. cmch
New Creek Company v. Lederer, coector
Page v. Sknner
Safe Depost Trust Co., e ecutor, v. Ta, coector
Schwezer v. Mayer
Sgman v. Renecke, coector
Travs, bert M., Co., v. encr, coector
Trndad, nsuar coector, v. Sagrada Orden de Predcadoret..
Unted States v. Chcago astern IUnot Ry. Co
Unted States v. rst Natona ank of Mobe
Unted States v. Suppec- dde ardware Co
Wtherbee v. Durey, coector
Court proceedngs. See Sut.)
Credt for overpayment. (.See Credt or refund.)
Credt or refund:
Cams-
Communty property and ncome, Caforna...
states, ta overpad, resduary egatees, prorty
Lmtaton
1917, partnershp, e praton of mtaton
1917, returns of undstrbuted net ncome
1917 and 1918, e tenson of tme for fng
Overpayment by dscharged e ecutor
Refund due stockhoders assgned to persona servce
corporaton .- -r
Re|ccted, amendment, perfectng nforma cam, mta-
ton
Secton 252 amended
Waver not accepted, 1918 ta es
War-profts and e cess-profts ta es, 1917, mtaton
Duo ndvdua, appcaton to abty as e ecutor
Due stockhoders, assgned to persona servce corporaton..
Interest on
ddttona assessments
udgment, not ncuded n appeate court s mandate, re-
covery
1917
dvance pavment, dscounted, addtona asae|sment,
1921 .
tenson of tme for fng cam . .
Lmtaton, overpayment dscosed n audt, waver fed.
1918, e tenson of tme for fng cam
1923, ncome ta on ndvduas, payment .
Overpayment by dscharged e ecutor
Overpayments (secton 1304, Reguatons 47)
Partncn-hp, e praton of mtaton
Persona e empton, aen, wfe n asyum abroad ...
1435
143
1407
153
1 38
1585
1 40
1389
13 8
1401
1 13
1337
1492
1487
1573
13 7
1584
13
1 29
1409
1537
1594
1332
1424
1423
1437
1393
1534
1571
1482
1520
15 4
1502
1593
1534
1 24
1490
1421
1437
1394
1437
1 21
1393
1359
1424
G
e
n
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r
a
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f
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g
(
N
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Y
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)
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2
0
1
3
-
0
1
-
2
2
0
3
:
3
4
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5
4
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#
p
d
-
g
o
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e
547
Rung
No. 1
Credt or refund Contnued.
Recever or trustee n bankruptcy (secton 1304)
Returns of undstrbuted net ncome, mtaton
Rght to, for 1918 on fng waver
Wavers
ed, secton 252 amended, mtaton
Nature of, to entte to credt or refund, 1918 ta es.
Not accepted, 1918 ta es
Credts:
ganst net ncome, amendment of artce 305, Reguatons
2, -.
Dependents, camed by adut ssters payng board
cess profts. (See Credts : ar profts and e cess profts.)
Ta es
ustraa subdvsons, smar credt requrement
Itay, persona property, rchezza mobe, smar
credt requrement
Unon of South frca subdvsons, smar credt re-
qurement
War profts and e cess profts
Corporaton and predecessor e stng a prewar perod..
Good w, prewar nvested capta, reorganzaton
Suatanta contnuaton of predecessor
D.
Deaer n securtes:
Interest on ndebtedness for ta -e empt securtes
Invested capta, nadmssbes
Decedents:
Income to date of death, computaton of ta
Returns, anma bass
Deductons, busness e penses. (See usness e penses.)
Deed, sherff s ssued under forecosure sae, stamp ta
Defcency. (-Sec Ta es.)
Defntons, premum deposts and assessments, mutua
nsurance companes
Dependents, credts for. (See Credts.)
Depeton:
Copper and sver mnes, 1919 and subsequent years
Deducton n determnng gan or oss
Lessor of o-bearng ands, resort to essees schedues
Lfe tenant
Mne owner easng ore ands, royaty bass
Mnng eases, renewabe.-
O and gas
Propertes, overrdng royates
Wes, royaty nterest n ease -
O eases, e tenson after dscovery
Partner ownng own offce furnture, deducton
Saes, perod between contract and possesson
Deprecaton:
owance n e cess of amount camed on returns
ssets acqured through reorganzaton, bass.. _
utomobe used by awyer n practcng professon
rewery property, e traordnary, not permanenty aban-
doned n 1917 -
Deducton n determnng gan or oss _.
vdence requred n ad|ustment for pror years, nvested
capta
Intangbes, contract wthout assurance of future profts
, based on March 1. 1913, vaue
contracts, Maroh 1, 1913, vaue
1359
1423
15 4
11S2
15 4
1520
115 4
1472
1547
1433
1433
1433
1458
14G0
1345
1527
1459
13 4
1355
1380
1501
1284
144
1297
1329
1
14 9
1330
1285
1517
1 04
151
1344
1 32
1391
13G3
1440
1347
141
1303
141
G
e
n
e
r
a
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e
d
f
o
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L
n
Z
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a
n
g
(
N
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Y
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k
U
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s
t
y
)
o
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2
0
1
3
-
0
1
-
2
2
0
3
:
3
4
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2
7
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3
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0
0
0
0
8
9
0
5
4
3
9
3
P
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_
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#
p
d
-
g
o
o
g
e
548
Deprecaton Contnued.
Ocean freght and passenger steamshps-.
Patents, e ercse of opton to charge off.
Reducton of nvested capta, computaton,.
Reserves, set up on affrmatve evdence
Saes, perod between contract and possesson
Term saes, contract acqured pror to March 1, 1913...
Dsbarments. (See ttorneys and agents.)
Dscount:
dded to notes n payment for automobe
onds, Interstate Commerce Commsson rues
1917 ta es prepad, addtona assessment, 1921, refund.
Dstrant, coecton of ta es, n|uncton aganst
Dvdends:
pped aganst stock n escrow, constructve recept
onus stock awarded wth tte reserved
Cash and bonds to purchaser of outstandng stock
Corporaton dssovng, nterest on notes for assets, defct
Dstrbuton
Communty ncome, Washngton
rom depeton or deprecaton reserves
Domestc corporatons, norma and sur ta es, nonresdent
aens .
arnngs and reazed apprecaton, nvested capta, 1917
cess vaue of assets sod to stockhoder
Informaton returns
Data not requred
orm
Lqudaton
cess over cost of stock n pror year
Parta, cose corporaton, stock ater sod to t
Pad ndvduas, partnershps, and fducares, 1923, nforma-
ton returns
Pad 1917, suffcency of earnngs to cover
Payment to trustees to be nvested for stockhoders
Speca payment to offcers and empoyees, compensaton
Stock
Receved as, sae of (387
Unreazed apprecaton, nvested capta
Stock scrp certfcate, gan or oss from sae
Surpus
Created by bondhoders contrbutons to meet defct
Credted to prncpa stockhoder, stock gven sons..
Drop-nterest pan, budng and oan assocatons
Dry goods deaers, reta, nventores of
Dues:
Cavary offcers cub, busness e penses
Intaton fees
.
arnngs of mnor, Lousana -.
ducatona nsttuton, dssouton, dstrbuton of assets, e emp-
ton
Rung
No.
1310
159
1311
17
1378
397
1283
177
151
1 3
1328
173
1312
202
145
291
1421
343
1409
427
1487
428
11489
433
1448
111
1280
132
1293
82
1588
29
1353
102
1384
3
1385
37
1277
29
1432
210
1408
407
1444
32
1425
3 9
1397
3 8
1445
34
1 27
47
1390
3 7
1290
2
1443
24
1287
291
139
3(W
13 0
2(1
/138
3S
1387
3S
1521
41U
1388
39
1350
27
1 01
24
1550
2 4
13 1
4
1399
122
1538
4.
1 18
231
1301
270
G
e
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a
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(
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2
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1
3
-
0
1
-
2
2
0
3
:
3
4
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8
9
0
5
4
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9
3
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_
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#
p
d
-
g
o
o
g
e
549
mpoyees:
anks, testmony regardng deposts or nvestments, rght to
requre
Messengers or runners of attorneys or agents, substtute power
of attorney
state ta :
nnutes vauaton tabe corrected
Chartabe bequest, deductbty
Deductons persona property ta
Gross estate transfer by decedent n hs fetme
Repea of 191 ct, effect of... -
Reservaton of ncome
states. (.See states and trusts.)
states and trusts (see aso Trusts):
usness and admnstratve e penses
Credt or refund, resduary egatees, prorty
Decedent s busness contnued by e ecutors for egatees
ecutors
state of deceased partner, nspecton of returns
Inspecton of corporaton returns
Inspecton of returns, evdence of authorty
Parta perodca dstrbuton of ncome, returns
Soe benefcary, credt as ndvdua assgned to fducary,
abty
Income durng perod of settement, computaton of ta
Partnershps
Conducted by survvor, persona representatve s abty
as partner
Survvor conductng, agreements among benefcares
Returns, annua bass
Ta overpayment by dscharged e ecutor, credts or refunds.
cess-profts ta es. (S ee Ta es : War profts and e cess-profts.)
change rates, foregn, December 31, 1923
changes:
onds for new ssue of same corporaton
Securtes, oss on reorganzaton
Stock, upon corporate reorganzaton, gan or oss
cse ta es. (See Manufacturers e cse and ewery.)
ecutve order nspecton of ncome ta returns
ecutors. See states and trusts.)
empt corporatons:
ssocaton for educaton and reef of famy members
udng and oan assocatons
Deang n rea estate
Drop-nterest pan
arnngs dstrbuted unequay
unds not a obtaned through stock, mutua bass
Loans not mted to stock hodngs
None empt methods ncuded
Profts not dstrbuted mutuay
Substanta amounts oaned nomna subscrbers
Cooperatve assocatons
armers unons and cubs formng purchasng agency ..
Meat producers, power to make proft
Profts from nonmembers
Cooperatve bank as budng and oan assocaton
ducatona nsttuton, dssouton, dstrbuton
ardng Memora ssocaton
Meat-producers assocaton wth power to make proft
Rung
Page.
No.
13
422
1410
445
14 2
470
11522
479
1523
480
1 39
475
/1337
470
113 8
473
1 13
485
1337
470
1558
292
1594
3C0
1518
218
1485
374
1 95
375
1503
374
1581
225
1593
348
13 4
237
1 05
213
1 05
213
1355
237
1393
349
1305
75
1 28
55
1002
54
1389
50
1438
370
1557
273
1454
259
1550
2 4
1549
2 3
15 8
2
15 8
2
1532
2 1
1508
2 0
1533
2 1
1404
252
1551
290
1314
287
1455
287
1477
259
1301
270
1431
108
1314
287
G
e
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r
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f
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2
0
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3
-
0
1
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2
2
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3
:
3
4
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8
9
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5
4
3
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3
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#
p
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550
empt corporatons Contnued.
Mutua nsurance companes
rtces 521, Reguatons 45 and 2, amended
re, assessment surpus.,
Premum deposts requred, ncome from nonuembers.
Premum deposts and assessments dstngushed..
M utua savngs banks
ank wthout capta stock, mutua savngs bass
mpoyees cub, savngs fund
Unequa nterests n assets and funds
Organzed to dstrbute ncome to chartabe nsttutons
Proof of e empton, artce 511 amended
Regous organzatons, ncome from outsde sources
Returns for years pror to e empton
Stock e change
empt ncome, god mne operated under trbute ease system_
tenson of tme:
Cams, fng of, 1917 and 1918 -
Returns, fng of-
Corporatons
Dvdends
une 15, 1919, appcabty
Partnershps and fducares
Partnershps, fducares, and corporatons
. .
amy members ownng a stock n varyng percentages, affa-
ton.
armers:
usness cosed out 1917, farm prce method 1923
Deveopment e pendtures captazed, subsequenty camed
as e penses
Unons and cubs formng purchasng agency, e empt cor-
poratons
edera |udges, apponted from dstrct to crcut court, 1922, com-
pensaton
ees. (See Compensaton.)
ducares:
Dstngushed from agents, oan handed through trustee ..
Returns. (See Returns: ducares.)
15 per cent mtaton, chartabe contrbutons, net oss deduc-
ton, bass
sca year 1923, computaton, ndvdua returns
ood Contro ct, obsoescence of dstery
orecosure, ndorsers payng baance on mortgage notes, bad
debts
oregn:
anks. (See anks.)
onds. (See onds.)
Corporatons. (See Corporatons.)
change, rates appcabe, December 31, 1923
Go ernment, operatng raroad, empoyee temporary study-
ng mercan condtons
Insurance companes. (See Insurance companes.)
Partnershps. (See Partnershps.)
Property, ncome from, nonresdent Unted States ctzen...
orma assessment of ta . (See Ta es.)
G.
Gan or oss:
Depeton and deprecaton actuay sustaned, deducton
vdence n determnng March 1, 1913, market vaue of and.
ung
No.
1500
1418
1 35
1501
1531
1507
1 07
1417
15 7
13 7
1419
13 5
1504
1437
1373
1390
1403
1453
1599
1 19
1352
1429
1551
1307
1411
1580
1 21
1450
1579
1305
1590
157
144
1338
G
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1
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2
2
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3
:
3
4
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_
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#
p
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55 L
Gan or oss Contnued.
changes. (See changes.)
Land sod before March 1, 1913, repurchase and resae
Lqudaton of corporate assets, stock purchased n pror
year
Sae . ( S e Saes.)
Payment of partner s ndebtedness to partnershp
Stock to sons wthout dstrbuton of surpus, dvdends
Good w:
Deveopment e penses charged off, restoraton, nvested
capta
Invested capta, reorganzaton
Natona bank, purchasng bank chargng off, osses
Partnershp, obsoescence of purchased nterest, Te as
Gross ncome:
ddtona compensaton, rray offcer honoraby dscharged.
Corporate property eased, rent pad stockhoders..
Guarantor, accounts recevabe, payments where e changed for
stock
Guardan, estate of ncompetent, Montana, pubc admnstrator
actng as
1 ssocaton, contrbutons.
ardng
usband and 1
Separate ands cutvated |onty, partnershps, Oregon,
Stock hodngs, unty of nterest, affated corporatons-.
ypothetca questons
.
Income from sources wthn Unted States .
ens, nonresdent, dvdends from domestc corporatons..
oregn corporatons
0 Nonresdent, royates earned, wthhodng ta
Seng mercan machnes abroad
Transportaton servces
Possessons, perod governng return
Royates due foregn corporaton, wthhodng ta
Income from sources wthout Unted States, ctzen resdng
abroad
Indebtedness:
Dscharge of, composton agreement among credtors, n-
come
Payment by partner, deducton
Indans, ve Cvzed Trbes, ncome from restrcted ands
Indorsers payng baance on mortg. ge notes, maker bankrupt, bad
debts
Informa cam for credt or refund, perfectng, mtaton
Informaton at source:
anks, acceptance of bond nterest
Dvdends pad ndvduas, partnershps, and fducares,
year 1923
Payment of ndvdua s bonds by corporaton
Informaton return, dvdend payments, form
In|unctons, coecton of ta es by dstrant.
Runc
No.
Inqures, pocy of ureau as to answerng
Inspecton of returns. (See Returns: Inspecton of.)
Instament saes, amended returns
1351
43
1445
34
1513
109
1 01
24
159
403
11 0
41
1544
145
1282
1 7
14
104
1287
291
1299
202
1 1
117
1431
198
1 00
9
1 09
303
1317
425
1132
210
1 33
22
1 555
22
1473
211
14S
37
1 33
22
157
73
1413
108
1513
109
14 4
85
1579
158
1571
350
1377
3 9
1390
3 7
14S3
3 9
1397
3 8
1395
42
1409
427
14S7
428
14 9
433
1317
425
1291
107
G
e
n
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r
a
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d
f
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L
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(
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2
0
1
3
-
0
1
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2
2
0
3
:
3
4
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3
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8
9
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5
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#
p
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552
It
No.
Insurance:
empton, condtons of
Lfe, proceeds to corporaton, 1918, wagerng contracts
Poces
Lfe, canceed, amount receved ess than premums,
osses
Securty for oan
Premums, pocy as securty for oan
Insurance companes:
oregn, nterest, foregn bonds deposted wth Stee
Mutua. See empt corporatons.)
Tte, premums, when reported, returns
Intangbes, manufacturng contract acqured through consoda-
ton, nvested capta .
Interest:
batement cam, re|ected n part
utomobe purchased wth notes, dscount
onds, accepted by banks, nformaton returns
onds, ssued by ndvdua, payment by corporaton
Certfcates ssued on ta -e empt securtes hed n trust
Defcency n payment of ta
oregn nsurance company s foregn bonds deposted wth
State
Indebtedness for ta -e empt securtes, deaers
udgment, not ncuded n appeate court s mandate,
recovery
Lberty bonds, computaton for ta abe year 1923 -
Nonta abe return fed, ta dscovered ater
Notes, credted but unpad, cash recepts bass
Notes for dssovng corporaton s assets, defct, return of
capta
Pad on deposts, foregn bank, 191 and 1918 cts
Refunds of addtona assessments
Ta -free bonds, wthhodng agent, 25 per cent ta reducton
1924
Ta es-
Defcences
Payment.
Records not mantaned
Snge payment pan eected --
Inventores:
Commandeered goods repurchased and sod at oss
anners, farm-prce method for 1917 requested 1923
Market prce, e ceptons .
Merchandse durng tgaton, sght, drafts not accepted
Revson where physca n e cess of perpetua
Reta dry goods deaers .
Invested capta:
ona fde payments, pro forma note and dscount ncuded -
orrowed capta ony, 1917, persona servce corporatons..
Consodated, ta proraton, subsdares stock and surpus
Contract, manufacturng, tangbes more vauabe than stock
ssued
Corporatons
ffated, ntercompany transactons before March 3,
1917 . _
Stock reacqured wth own bonds
Dvdends, earnngs and reazed apprecaton, ct of 1917..
Dvdends, stocks, unreazed apprecaton
vdence requred n deprecaton ad|ustments for pror years
Good w, deveopment e pense charged off, restoraton
Good w, reorganzaton
Inadmssbe assets, deaer n securtes
15 3
1 29
1414
1300
1300
1583
1510
141
1375
1312
1377
1483
1308
15 9
1583
311
1527
142
1490
43
1428
US
1570
318
1354
102
1588
29
1 08
29
1 24
4 8
1 34
227
15 1
315
1379
424
1302
315
1323
5
1352
2
1324
59
1554
57
131
385
13 1
4
1512
390
1574
14
15 0
307
141
1 9
15 2
412
1511
383
1408
407
1521
410
1347
395
159
403
14 0
41
1459
40
G
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a
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f
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g
(
N
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1
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2
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3
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#
p
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g
o
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553
Rung
No.
rune.
Invested capta Contnued.
Intangbes acqured for stock of corporaton
Lease transferred to corporaton for capta stock
Lthographc pates, znc, cost recovered and aowed
Patents, ncuson under cts of 1917 and 1918.
Stock-
Issued for
Payment of saares
Predecessor s abty -
Servces n securng ease
Not bona fde pad up --
Sae of. (See Saes: Stock.)
Subscrptons
mounts representng
Not bona fde pad up
Surpus
Pad-n, asset purchased from soe stockhoder
Reducton on account of deprecaton not charged off..
Unpad ta es of corporaton s predecessor
Itay, persona property ta , rchezza mobe, deducton
.
ewery:
rtces made of, or ornamented, mounted or ftted wth
precous metas, etc
rtces not ta abe
rtces ta abe
Readng gasses
Regous artces .
ont-stock assocatons. (See ssocatons: ont-stock.)
udges, edera, apponted from dstrct to crcut court, 1922,
compensaton
udgments, nterest not ncuded n appeate court s mandate,
recovery
udca proceedngs. (See Sut.)
.
entucky:
Iega bettng, busness e penses
Notes, perod of mtaton, bad debts
L.
Leases:
Corporate property, rent pad stockhoders
Deprecaton based on March, 1913, vaue
Mnng, renewabe, deducton of cost
O, e tenson after dscovery, depeton
O and gas
Depeton, overrdng royates
Income of royaty nterest purchaser
Stock ssued for securng, nvested capta
Transferred to corporaton for capta stock, nvested capta
Lessees, deprecaton of ease based on March 1, 1913, vaue
Lberty bo/ds, nterest. (See Interest: Lberty bonds.)
Lfe tenant, depeton
Lfe nsurance. (See Insurance.)
Lmtaton:
ddtona assessment, 1917 ta es, recever operatng ra-
road, vendee sued
mortzaton cam, fna determnaton on or before March
3, 1924
4177- 24 3
134
1303
1334
1304
1 3
1505
131
1345
1333
1345
142
1378
1505
1433
1371
11 23
1370
13 9
1358
1320
1307
1490
1514
1415
1287
1303
14 9
1517
1330
1285
131
1303
1303
1329
1584
1400
G
e
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a
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f
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(
N
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)
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2
0
1
3
-
0
1
-
2
2
0
3
:
3
4
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3
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0
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8
9
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5
4
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#
p
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g
o
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e
554
Lmtaton Contnued.
Cam aganst bankrupt for
edera ta es
Unpad ta es
Cams
Credt or refund, actua recept
Refund, re|ected, perfectng new nforma
War-profts and e cess-profts ta es, 1917
praton of fve-year perod
1917 returns of undstrbuted net ncome
1917 ta es, partnershps
ve-vear assessment perod, 1921 ct ,
Net Losses, 1919, deducton 1920, necessty for 1918 compu-
taton
Ree amnaton of returns and addtona ta assessments
Refund or credt, wavers fed, secton 252 amended
Suts aganst coectors for ta es pad wthout protest
Wavers
ssessment of ta , penates
1917 ta es, overpayment dscosed on audt
Lqudaton:
ssets sod to stockhoder, dvdends
Corporate assets e ceedng cost of stock n pror year
Dstrbutons, secton 201, 1921 ct .
Interest on notes for corporate assets, operatng defct, dv-
dends
Parta, cose corporaton, stock ater sod to t ...
Partnershp, deaers n securtes, sae of remander after ds-
souton
Lthographc pates, znc, cost recovered, nvested capta
Ltgaton. (See Sut.)
Losses:
ank , cost of oan department..
udngs razed to erect other budngs
Government contract, rembursement
Guaranteed accounts recevabe e changed for stock, pay-
ments
Iega busness, deducton
Irreparabe damage to factory by earthquake
Lfe nsurance pocy canceed, amount receved ess than
premums
Matng pant, abandoned, deducton
Natona bank, good w of purchased bank charged off
Not. (See Net osses.)
Perfectng tte to rea estate
Resdence destroyed by bomb
Sae and repurchase of securtes, |ont returns, mtaton
Securtes e changed on reorganzaton
Lousana:
arnngs of mnor
Wfe s separate property admnstered by husband, com-
munty ncome
M. I
I
Matng pant, abandoned, oss deducton
Mandamus, change of accountng perod, amended returns
Manufacturer s e cse:
ankruptcy, credts and refunds n
Credts and refunds n bankruptcy
empton of garments, certfcate evdencng .
Games, parts of . .
Rung
No.
1420
1435
1407
1332
1571
1502
1423
1424
1457
15 5
1479
1482
1488
1405
1394
1444
1445
1277
1588
1 27
1575
1334
1342
1309
1545
1299
1514
12S1
1414
1170
1544
1451
1C31
154
1 02
1 18
155
1470
1292
1359
1359
1539
1440
G
e
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f
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g
(
N
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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
3
:
3
4
G
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3
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0
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0
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8
9
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5
4
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9
3
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#
p
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g
o
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e
555
Rung
No.
Manufacturer s e cse Contnued.
osts for trucks as parts
Manufacturer a retaer ony
Radator parts
Sprngs, vehce eaf
Marne Corps ofccrs, hospta fund deductons and equpment
e pendtures
Massachusetts trusts:
ssocatons, ta abty
Under capta stock ta
Mnes:
Copper and sver, depeton for 1910 and subsequent years.
God, operated under trbute ease system, e empt ncome.
Montana, pubc admnstrator, compensaton
Muntons manufacturer s ta , wet pcrc acd..
Mutua nsurance companes. See empt corporatons.)
Mutua savngs banks. See empt corporatons.)
N.
Narcotc aw:
Procurement of drugs
Natona banks. (See anks.)
Nava offcers:
Cost of unforms, deduc ton
ospta fund deductons and equpment e pendtures
Nava reservsts, cash aowance for unforms
Net ncome:
oregn corporatons, transportaton servces
Law partnershp, computaton
Net osses:
mortzaton
Capta asset sod n 1919, other assets retaned
Land for hote ste resod, not reguar busness
1919, deducton for 192(1, necessty for 191 computaton
1923, appcaton aganst 1924 ncome, captazaton reduced.
Tmberand purchased 1919, forced sae 1921
New York bank converted nto trust company, returns
Norma ta , dvdends of domestc corporaton, nonresdent aen
ndvduas
Notes ee aso Securtes):
ad debts, perod of mtatons, entucky
Dscount ncuded n payment for automobe
Interest credted but unpad, cash recepts bass
Unsecured, dvdend e pected, bank e amner drectng o.e
charged off
Obsoescenoe:
rewery proporty, not permanenty abandoned n 1917..
Dstery cosed on account of ood Contro ct
Partnershp good w, purchased nterest n, Te as
O and gas:
Leases, subease by orgna essee, depeton.
Wes, purchaser of royaty nterest n ease, ncome
Oeomargarne:
duterated butter defned-
Defned
Statstcs of producton and materas used
October, 1923 and 1922 --
November, 1923 and 1922.
December, 1923 and 1922_.
anuary, 1921 and 1923
ebruary, 1924 and 1923
March, 1924 and 1923
1357
1439
1552
1319
1471
159S
1 14
1284
1504
1
1572
1 11
1402
1471
1471
1473
13 2
152
1412
1589
15 5
1398
1291
1559
1432
1415
1312
1354
1578
13 3
1450
1282
1330
1285
1 40
158
1372
1381
1442
1525
1587
1 15
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55
Rung
No.
Oregon, husband
partnershps
and wfe |onty cutvatng separate ands,
Parapherna property, Lousana, admnstered by husband, com-
munty ncome
Partnershps:
ssets sub|ect to members ta abty, Government prorty
ssocaton dstngushed from
Corporaton charter canceed, busness contnued by nd-
vduas
Debts, payment of deceased partner s share
Dssoved
Deaers n securtes seng remander afterwards, bass..
Mne operated subsequenty
oregn,abty of mercan branch manager for fng returns
Good w, obsoescence of purchased nterest, Te as
usband and wfe |onty cutvatng separate ands, Oregon
Law, computaton of net ncome
Partner ownng own offce furnture, deprecaton
Partners saares, 1917, no agreement for payment, deduc-
ton
Payment of partner s ndebtedness to, deducton
Returns. (See Returns.)
Survvor conductng, persona representatve s abty as
partner
Patents:
Deprecaton, e ercse of opton to charge off
Good w deveopment e penses charged off, restoraton
Surpus, pad-n, cts of 1917 and 1918
Payment of ta es. (See Ta es.)
Penates. (See Ta es: Payment Penates.)
Pennsyvana profts ta , accrua bass
Perfectng nforma cam for credt or refund, mtaton
Persona e empton, resdent aen s wfe n asyum abroad
Persona e penses:
rmy fnance offcer vsng prvate.automobe
rmy offcer, ratons aowance
Deegate to church conference and mercan Legon con-
venton
Nava offcer, cost of unforms ...
Navy and Marne Corps, hospta fund deducton and equp-
ment e pendtures
Persona representatves. (See states and trusts.)
Persona servce corporatons. ( S e Corporatons.)
Pcrc acd, wet, muntons manufacturer s ta
Porto Rco, ctzen resdng n Unted States, ta cearance. -.
Powers of attorney, substtute, messengers or runners
Premums:
Deposts
Mutua nsurance companes
ssessments dstngushed
Deducton
Tte nsurance companes, when reported
Prewar perod, e cess-profts credt, corporaton and predecessor..
Procedure, rues of, Commttee on ppeas and Revew
Prohbton:
mercan- rtsh treaty for preventng mportaton of aco-
hoc quors for beverage purposes
rtce 82, Reguatons 1, amended
ood Contro ct, obsoescence of dstery
Matng pant abandoned, deducton.
Obsoescence, property not permanenty abandoned n 1917--
1 00
155
1407
1493
1548
1498
1575
1321
1313
1282
1 00
13 2
1 04
1392
1513
1 05
1311
17
159
1304
403
394
1449
139
1571
350
1374
205
1298
200
1495
104
1529
198
1402
200
1471
201
1572
m
1481
342
1410
445
1501
284
1 35
294
1510
311
1458
381
1331
319
1 25
521
1289
519
1450
148
1470
148
13 3
1 2
G
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#
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557
P. oo of e empton, requrements, artce 511 amended..
Protest aganst ta es, tme and manner of makng
Pubc admnstrator, compensaton, Montana
Purchasng agency, farmers unons and cubs formng,
corporatons
p
Raroads:
Recever operatng, addtona 1917 profts ta , sut, mtaton
Rght of way, subscrptons by commerca cub members
Sut aganst vendee, addtona assessment aganst former
recever, mtaton
Rea estate:
udngs razed shorty after purchase, osses
Perfectng tte, capta e pendture
Sae before March 1, 1913, repurchase and resae subsequenty
Recaptazaton, bonds e changed for new ssue of same corpora-
ton
Recevers:
Corporaton returns for years pror to e empton
state and admnstratve e penses
Operatng raroad, addtona 1917 ta , vendee sued, mta-
ton
Records:
Permanent, defcency n ta , penates and nterest
Refusa by thrd person to produce, searches and sezures
Refund, cams for. (See Credt or refund: Cams.)
Refunds. (See Credt or refund.)
Reguatons:
mendments of. (See mendments: Reguatons.)
Changes n nterna revenue aws snce 1920 compaton
Governng
mercan- rtsh treaty re acohoc quors, operaton _ .
ton of attorneys, agents, and others by Treasury
nt, amended
35 (revsed), artce 43, modfed
0, rtce II, modfed .
3, artce 15, Tabe corrected
Pocy of ureau answerng nqures
Regous organzatons, ncome from outsde sources
Rentas:
Leased corporate property, pad stockhoders
Reorganzaton:
onds e changed for new ssue, same corporaton
Deprecaton bass of assets acqured
Good w, nvested capta
Predecessor s unpad ta es and other abtes, nvested
capta
Returns of corporaton and predecessor
Securtes n od corporaton dstrbuted
Stock dvdend, unreazed apprecaton, nvested capta
auaton of asset purchased from soe stockhoder, nvested
capta
Repars, earthquake damage n e cess of amount e pended for
Repeas, 1921 ct, provsons repeaed by 1924 ct
Reserves:
Depeton or deprecaton, dstrbuton from _
Deprecaton, set up on affrmatve evdence
rns and aowances, 1918, busness e penses
destroyed by bomb, osses.
Rung
No.
Page.
15 7
247
15 0
307
1 1
117
. 1551
290
1584
322
1497
123
1584
322
1309
147
1451
203
1351
43
1 28
55
1419
300
1558
292
1584
322
1379
424
13
178
150
52
1 25
521
(1382
525
1383
525
1553
535
11585
498
1 41
524
1 25
521
14 2
470
1317
425
13 7
270
1287
291
1 28
55
1 32
174
14 0
41
1505
404
1505
404
1389
50
1521
410
142
421
1281
143
1 2
444
/1384
3
1385
37
1283
177
1 03
140
1 31
14
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#
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558
Resduary egatees:
Decedent s busness contnued by e ecutors
Ta overpad, prorty of credt or refund
Reta dry goods deaers, nventores of
Retaner pad attorney by State hghway dstrct, separate under-
takngs
Returns:
mended
Change n accountng perod, mandamus,.
Communty property and ncome, Caforna
Merchandse sod on nstament pan
ppeas and hearngs, 1917 and 1918
anks
ccountng methods, comptroer s recommendaton
Converted nto trust company, New York aw, returns..
enefcary and trustee, estate trust ncome, parta perodca
dstrbuton
Communty ncome
Caforna, how reported-
Lousana, husband admnsterng wfe s separate
property
Consodated
mended, aocaton of ta
Cosey reated busness nterpreted, 1917 -.
Dfferent busnesses, ntercompany transactons, 1917...
ames but not ndvduas ownng ke percentages
amy members ownng a stock n dfferent percentages.
Intercompany profts emnated from 1918 openng n-
ventory
Intercompany transactons pror to March 3, 1917
otng contro through pro es wthout nterest
Corporatons
ssets sezed by en Property Custodan, ncome
Charter canceed, stockhoders sharng equay, partner-
shps
tenson of tme. (See tenson of tme: Returns.)
ractona year, amendment of artce 020, Reguatons
G2 .
Predecessor soe propretor
Years pror to e empton
Deceased persons, annua bass
Defcences, nterest computaton
Denquent, ta assessment mtaton waved, penates
Dvdends, e tenson of tme for fng
arnngs of mnor son, Lousana
states, annua bass (
tenson of tme for fng. See tenson of tme: Re-
turns, fng of.)
ducares
gent for borrowng and endng corporatons
mendment of artce 421, Reguatons 2
tenson of tme for tng. (See tenson of tme:
Returns, fng of.)
sca years ended anuary 31 and ebruary 29, 1924,
e tenson of tme
Income of decedent and estate
ractona year, amendment of
rtce 431, Reguatons 02
rtce 2 , Reguatons 2
usband and wfe, separate ands cutvated |onty, part-
nershps, Oregon
Indvdua predecessor ta ed as corporaton... -
Rung
No.
1518
1594
13 1
1 30
1292
1537
1294
1315
1494
1559
1581
/14 5
1591
155
1582
1427
1 22
1592
1 19
15 0
15 2
1 20
1288
1548
1478
1505
1419
1355
15 9
1405
139
1 18
1355
1111
1475
1453
13 4
147
1478
1 00
1505
G
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559
Returns Cont n ued.
Indvduas
orm 1040 , appea requrements
ractona year, amendment of artce 431, Reguatons
2 -.- - --- - -
usband and wfe |onty cutvatng separate ands,
partnershps
1923, tme for payment, credt or refund
Profts from ega transactons
Use of orms 1040 and 1040 , 1923- --.
Informaton
anks acceptng bond nterest
Dvdends
Data not requred
tenson of tme for fuf 1923, pad ndvduas,
partnershps, and fducares
Payments, nformaton form
ton of
gents of nsovent banks, Te as
Corporaton s by e ecutor of decedent stockhoder
ecutors, evdence of authorty
ecutr of deceased partnershp member
Lessee s depeton schedues
Reguatons amended
Insurance companes, tte, premums, when reported
ont
Losses from sae and repurchase of securtes
Separate amended returns
Nonresdent aens
greement that representatves w not fe returns
Labty of representatves
Nonta abe, ta dscovered after fng, nterest
Partnershp
ducary and corporaton, e tenson of tme
sca years ended anuary 31 and ebruary 29, 1924,
e tenson of tme
oregn, abty of mercan branch offce manager
Ree amnaton, mtaton T
Revenue ct of 1921:
mendments, secton 252
Provsons repeaed, secton 1100(a), ct of 1924
Revenue ct of 1924, secton 1100(a), provsons of 1921 ct
repeaed
Rghts to subscrbe to bonds or stock, sae of. (See Saes: Rghts
to subscrbe.)
Royates:
Lessor s o and gas ease, fractona nterest
O or gas ease, amounts receved from essee
Receved by essor of coa mne, ncome ....
Use of nonresdent foregn corporaton s property, wth-
hodng ta
Rues of procedure, Commttee on ppeas and Revew
S.
.Saors:
ospta fund deductons
Per dem aowance, compensaton
ssets, nterest on notes for, operatng defct, dvdends
Capta assets n 1919, other assets retaned, net oss
Captafstock. (See Saes: Stock.)
Commandeered goods, repurchased and sod at oss
Deprecaton, perod between contract and possesson
Rung
No.
Page.
1370
320
147
244
1 00
1 21
1514
1335
9
312
124
231
1377
3 9
1425
3 9
1300
1397
3 7
3 8
1484
374
375
374
374
19
370
311
1595
1503
1485
1297
1438
1510
154
1434
149
228
1499
1535
1570
232
233
318
1599
24
1453
1313
1479
245
234
33
1482
1 2
3 4
444
1 2
444
1330
1285
1401
188
18
192
1 33
1331
22
319
1471
1471
201
201
1588
1412
29
05
1323
1510
5
1 3
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5 0
Rung
No.
Saes Contnued.
vdence n determnng March 1, 1913, market vaue of
and
Instament, amended returns
Land purchased for hote, not reguar busness, net osses..
Land repurchased after sae pror to March I, 1913
Rghts to subscrbe to bonds convertbe nto stock
Securtes
Receved from dssouton of partnershp deang n, bass.
Reconveyed to settor-benefcary
Repurchased, |ont return
Stock
nd rghts, gan or oss
Determnaton of vaue
In escrow, dvdends apped, constructve recept
Incdenta e penses
Purchased pror and subsequent to March 1, 1913
Rghts to subscrbe
To cose corporaton after ts parta cpdaton
Stock scrp certfcate receved as dvdend
Savngs fund, empoyees cub, e empton
Searches and sezures, ta records n possesson of thrd person..
Securtes:
Deaer n, nvested capta, nadmssbes
change of. (See changes.)
Interest on ndebtedness for ta -e empt securtes, deaers..
Muncpa, deposted wth trustee, nterest on certfcates
Sae of. (See Saes.)
Sght drafts for merchandse not accepted, nventores durng t-
gaton
Soft drnks, sweet cder not ta abe ...
Speca assessment, e ceedng ta based on known nvested capta
Sprngs, vehce eaf. (See Manufacturer s e cse.)
Stamp ta es:
Conveyance, sherff s deed
Reguatons 55 (1922 edton) amended
State:
ank e amner drectng charge-off of notes, dvdend e -
pected ---
Insurance department, nterest on foregn company s foregn
bonds deposted
Offcers and empoyees
ttorney retaned by hghway dstrct, separate under-
takngs
Investgator of State prohbton aw voatons
Pubc admnstrator, Montana
Statute of mtatons, notes, bad debts, entucky
Steamshps, ocean freght and passenger, deprecaton
Stock:
ona fde payments, pro forma note and dscount, nvested
capta
onus awarded wth tte reserved, deducton
Corporaton s, reacqured wth ts bonds, nvested capta
Dvdends. (See Dvdends: Stock.)
change upon corporate reorganzaton, gan or oss
ed by husband and by wfe, unty of nterest, affaton..
Intangbes acqured for, nvested capta
Issued for
Payment of saares, nvested capta ,
Predecessor s abty, nvested capta .
1338
40
1294
107
1589
9
1351
43
149
107
1575
4
1543
4
154
149
1339
105
1447
48
1448
111
1350
293
1322
39
132
83
1339
105
1340
105
1 27
47
1388
39
1507
248
13
422
1459
40
1527
142
1308
114
1554
57
1491
452
14 1
57
1380
504
1540
50
1541
50
1542
50
1578
157
1583
311
1 30
1279
1 1
1415
1310
1512
1280
1511
1389
1009
134
1 3
1505
G
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5 1
Stock Contnued.
Outstandng, purchased wth proceeds of dvdend
Receved for guaranteed accounts recevabe, payments
Rghts to subscrbe to, sae of. (See Saes: stock.)
Scrp certfcate, receved as dvdend, gan or oss from sae_.
Subscrpton not bona fde pad n, nvested capta
Subsdary, vauaton for consodated nvested capta
Stock e change, e empton
Stockhoders:
dvances to corporaton deducted as persona busness e -
pense
Dvdends, surpus from contrbutons to meet defct
Interest, notes for assets, operatng defct, return of capta..
Rent receved from eased corporate property
Sut:
ddtona assessment, 1917, recever operatng raroad,
mtaton
Interest on |udgment not ncuded n appeate court s man-
date, recovery
Inventores durng, sght drafts for merchandse unaccepted..
Protests as foundaton, manner and tme of makng
Recovery of ta es, vountary payment to predecessor coector.
Rpstrant, of ta coecton :
ng
No.
1293
82
1299
202
1388
39
1345
379
15 0
307
13 5
275
1295
120
1350
27
1588
29
1287
291
1584
322
1490
43
1554
57
15 0
307
1488
430
1409
427
1487
428
1489
433
1378
397
1 01
24
142
421
15 0
307
1524
532
1530
204
1422
344
1375
314
1421
343
137
320
1315
319
1474
215
1405
314
1435
321
1395
42
1409
427
1487
428
1489
433
13
422
1492
500
15 0
307
1505
404
1 0
24
Surpus:
nd undvded profts, deprecaton not charged off, reducton.
Credted to prncpa stockhoder, gfts of stock, dvdends. -
Pad-n, asset purchased from soe stockhoder .
Subsdary of affated corporaton, restrcton
Surta es. (See Ta es.)
Suspensons. (See ttorneys and agents: Dsbarments and sus-
pensons.)
Symbos, correspondence, ureau of Interna Revenue
Ta deeds, ta es pad n securng, capta e pendtures
Ta -free bonds, nterest on. (See Interest.)
Ta es:
batement
anks, nsovent, assets nsuffcent to pay depostors
Parta, penaty and nterest
ddtona, 1917, orgnay dscounted, computaton
ppeas, requrements n connecton wth 1040 returns
ssessment
1917 and 1918 returns, appeas and hearngs
Subsequent to abatement
Waver of mtaton, penates
Coecton
Cam aganst bankrupt, mtaton
Dstrant, n|uncton aganst.
Thrd persons, requrement to testfy and produce records
Commsson merchants abe for speca
Corporatons
ffated, proraton for nvested capta
Credt or refund. (See Credt or refund.)
Predecessor s unpad, nvested capta
Rate for 1923..
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5 2
Ta es Contnued.
Credt for.
ustraa subdvsons, smar credt requrement .
Unon of South frca subdvsons, smar credt requre-
ment
Credt or refund. (See Credt or
Decedent and estate, computaton
Defcency
Interest
No permanent records, penaty and nterest
Snge payment pan eected, nterest
rroneousy coected, suts aganst coector, mtatons
cess profts. (See Ta es: War profts and e cess profts.)
cse, pad n foowng year, accrua bass
edera-
Cam aganst bankrupt, mtaton.
Prorty.
orma assessment by Commssoner, nterest on defcency
Itay, persona property, rchezza mobe, deducton
Lmtaton, redetermnaton and addtona assessments
1923, ndvduas, credt or refund, payment
Nonresdent
ens, abty of representatves
Ctzen, ncome from foregn property
Overpayment by dscharged e ecutor, credt or refund
Payment
mendment of artce 1013, Reguatons 2
y certfcates of ndebtedness
Defcency, nterest
Interest, nonta abe return fed, ta dscovered ater..
Interest on defcency, computaton
1923 ncome, ndvduas
Ob|ectons to revenue agent s report
Penates
batement cam, re|ected n part
d vaorem, mtaton of ta assessment waved..
5 per cent and nterest, computaton
Ta defcency, no permanent records mantaned..
Porto Rcan, resdent of Unted States, cearance
Pennsyvana profts, accrua bass
Person recevng produce on consgnment for sae abe for
speca, as broker
Protest aganst, tme and manner of makng, suts
Speca, vadty of, mposed upon certan busness organza-
tons
State, pad n securng ta deed, capta e pendtures
Surta es
Dvdends, nonresdent aens
Wsconsn, addtona assessments, accrua bass, de-
ducton
War profts and e cess profts
ddtona, 1917, recever operatng raroad, vondee
sued, mtaton
Credts, substanta contnuaton of predecessor
1917, capta entrey borrowed, persona servce corpora-
tons gr:
Speca assessment e ceedng ta based on known n-
vested capta
Rung
No. 1
15 1
1379
1302
1488
1577
1407
1420
1435
143
1407
153
15 9
I4 s:
1479
1 21
1537
157
1393
1180
131S
15 1
1570
15 9
1 21
140
1375
1405
1441
1379
1481
1449
1573
15 0
1598
1530
1432
1515
1584
1345
1574
14 1
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5 3
Rung
No.
Page-
Ta es Contnued.
Wsconsn
Income, addtona assessment, accrua bass, deducton-
Surta es, addtona, accrua bass, deducton
Teegraph and teephone messages sent on credt
Testmony of empoyees and agents, rght to requre
Te as:
gents of nsovent banks, nformaton furnshed by coectors
Partnershp good w, obsoescence of purchased nterest
Unncorporated |ont-stock assocatons, dstngushed from
partnershp
Tte nsurance companes. (See Insurance companes : Tte.)
Transportaton servce, foregn corporatons, ncome from Unted
States sources
Trbute ease system, god mnng, e empt ncome
Trustees. (See Trusts aso states and trusts.)
Trusts (see aso states and trusts):
Income
Dstrbutabe at drecton of settor-benefcary
Dstrbuted reguary to benefcares
Payments to benefcares specfed by w, deducton..
Parta perodca dstrbuton of ncome, returns
Saes, securtes reconveyed to settor-benefcary, vauaton.
Trustees pad dvdend to be nvested for stockhoders
U.
Unforms, nava, deducton of cost
Unon of South frca subdvsons, smar credt requrement
.
otng contro through pro es wthout nterest, affaton.
W.
Wage cams, bankruptcy, prorty of edera ta es
Wavers:
1918
Lmtaton of ta assessment, penates
Nature of, to entte to refund or credt
1917, mtaton upon refund, overpayment dscosed on
audt
1917 and 1918 returns, appeas and hearngs
Not accepted, credt or remnd
War oan securtes, ta abe nterest, year 1923, computaton
War-profts and e cess-profts credts. ( See Credts.)
War-profts and e cess-profts ta es. (See Ta es.)
Washngton, communty ncome, dstrbuton of dvdends
Wsconsn:
ddtona surta es, accrua bass, deducton
Income ta , addtona assessment, accrua bass, deducton-
Wthhodng, agent, appcabty of 25 per cent reducton, 1924.
Znc thographc pates, cost recovered and aowed, nvested cap-
ta -
1430
1515
133
13
1484
1282
1493
1473
1504
1519
128
1474
1581
1543
1443
1102
1433
1 20
153
1405
15 4
1394
1315
1504
1428
1353
1515
1430
1 34
1334
. 9
140
419
422
374
1 7
21 I
377
223
222
215
225
4
21
200
227
305
340
314
30
3 1
319
300
115
102
140
139
227
400
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DDITION L COPI S
O T IS PU LIC TION M Y P OCC D PROM
T I SUP RINT ND NT OP DOCUM NTS
OOT RNM NT PRINTING OPPIC
W S INGTON, D. C.
T
0 C NTS P R COPY
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