for the year 1945. The facts herein disclose that in August 1944 liquidation and dissolution of petitioner was voted by its stockholders; petitioner distributed practically all of its assets; petitioner was not thereafter engaged in the business of buying and selling lumber or manufacturing and selling wooden products; a trustee in liquidation was appointed to receive the remaining assets, to pay petitioner's remaining debts, to collect any outstanding accounts receivable, to settle its affairs, and to adjust among the three stockholders any inequalities in their respective interests occasioned by the distribution. Petitioner, as a going corporation, was engaged in necessary and orderly liquidation not beyond the taxable year 1944, and when it entered the next succeeding taxable year, 1945, only the corporate shell was left, with continued existence for the mere purpose of enabling the trustee in liquidation to settle up its affairs; and, accordingly, for the purpose of petitioner's claim for excess profits carry-back credit from 1945 under section 710 (c) (3) (A) of the code, petitioner must be regarded as de facto dissolved prior to 1945 and not entitled to the claimed credit. Wier Long Leaf Lumber Co., 9 T. C. 990; modified as to one year in Wier Long Leaf Lumber Co. v. Commissioner, 173 Fed. (2d) 549; and Rite-Way Products, Inc., 12 T. C. 475.
The principle announced in the Acampo Winery case, supra, and applied in the fourth issue herein, that a net operating loss carryback deduction is not to be denied under section 23 (s) and 122 of the code to corporations in process of liquidation and dissolution, is not apposite to this issue, since it is effectively distinguishable here for the same reasons as it was distinguished in this Court's opinion in the Wier case, supra. It is unnecessary to here repeat those reasons. On the sixth issue we hold that respondent did not err. Reviewed by the Court.
Decision will be entered under Rule 50.
CARL MARKS & Co., PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Docket No. 15187. Promulgated June 30, 1949.
Petitioner, a dealer in foreign securities, transferred all of its domestic securities and certain of its foreign securities out of its inventory to an investment account on December 29, 1941. Held, that the securities so transferred were thereafter held for speculative or investment purposes only and that the profits from the sale of the securities involved are taxable in accordance with sections 117 and 711 (a) (1) (B) of the Internal Revenue Code.
Jacob J. Mertens, Jr., Esq., and Orrin Judd, Esq., for the petitioner. W. A. Schmitt, Esq., for the respondent.
4. Trusteed Property. Accumulated income increases value to be in-
cluded. Estate of Cyrus C. Yawkey--.
(3) Transfers, Contemplation of or Effective at Death.
5. Contemplation of Death. Where transfer was to compensate wife for
investment losses due to decedent's management and to reduce income tax,
thought of death is absent and no value is includible. Estate of Charles J.
Rosebault...
6. Id. Reduction of estate tax is incidental to all gifts and such motive
is not to be presumed. Id.
7. Effective at Death. Trust naming wife as income beneficiary provided
she was trustor's wife at date of his death is a transfer effective at death.
Estate of Merritt J. Corbett__
8. Id. Insurance Proceeds. Election to take proceeds in form of life
income, remainder payable to children, is a transfer effective at death.
Estate of Mabel E. Morton___
9. Id. Election to take lower annuity with life income to widow is a
transfer effective at death. Estate of William J. Higgs-_-
10. Id. Purchase of joint and survivorship annuity with a younger sis-
ter is a transfer effective at death. Estate of Mary L. Pruyn......-
11. Id. Employees' Life Insurance Trust. Employer who was under
no contractual obligation made all contributions; beneficiaries had no
powers except to make testamentary disposition of proceeds. Held,
amount paid heir was not a transfer by decedent-beneficiary. Estate of
Eugene F. Saxton_
12. Id. Possibility of Reverter, Reservation of Power of Appointment or
Control Over Income renders transfers effective at death. Estate of Martha
M. Tremaine___
Estate of Mary H. Hays__
City Bank Farmers Trust Co.
Estate of Anna Scott Farnum_
Estate of Charles M. Sheaffer-
Estate of Cyrus C. Yawkey ---
13. Id. Power to Revoke. Decedent created a revocable trust; wife pre-
deceased decedent leaving her estate in trust with income payable to him,
corpus at his death to be added to his revocable trust. Held, power extends
to corpus of wife's trust and its value is includible in husband's estate.
Estate of Charles M. Shaeffer....
14. Id. Trustees are liable as transferees to extent of values in trust
at date of death. City Bank Farmers Trust Co.--.
15. Exclusive Management by wife does not result in separate ownership
eliminating one-half of husband's estate from estate tax. Estate of Ralph
Rainger---
16. Id. State court decree that property was separately held is not
binding for Federal tax purposes.
II. DEDUCTIONS FROM GROSS ESTATE.
1. Separation Agreement in which former husband relinquished right to
earnings of son, a minor, held not a consideration in money or money's
worth and payment by wife's estate is not deductible. Estate of Rosalean
B. Ottmann__.
2. Support of Dependents. Amount claimed held reasonable and al-
lowed. Estate of Ralph Rainger.
3. Claims. Decedent's liability as endorser was secondary; primary
debtor was solvent. Held, payment made by executor is not deductible.
Estate of Margaret Ruth Brady Farrell__.
1. Computation of Deceased Partner's Interest. Excess value of partner-
ship inventories at date of death, used for estate tax purposes, over cost
or market method, used to compute income, is not deductible from dis-
tributable share due estate. Estate of Aaron Lowenstein ---
in the course of business, obtains a considerable amount of information,
such as that certain debts of various foreign countries may be settled
over a period of time, or that certain countries are going to get loans, or
that certain interest is going to be paid on defaulted securities. By
going into the investment business in a more substantial way the firm
could take speculative advantage of such information, and realize the
appreciation in value which such information indicated might occur.
Petitioner's selection of the particular foreign securities to be with-
drawn from those held for sale in the ordinary course of business and
held thereafter as investments was based upon Marks' knowledge of
the interest which the securities represented, their price, and his judg-
ment as to the securities which would be best suited for investment and
speculative purposes.
On December 29, 1941, petitioner transferred from the dealer ac-
count to an investment account securities having a value of $354,-
526.36, of which domestic securities amounted $139,858.79 and
foreign securities amounted to $214,667.57. The domestic securities
transferred to the investment account constituted petitioner's entire
holding of such securities.
Securities transferred to the investment account at that time were
not inventoried or otherwise treated as dealer items on petitioner's
books of account at any time after that date. At the time of such
transfer petitioner retained in inventory for resale to customers in the
ordinary course of its business certain identical foreign securities of
a value of $109,180.59. This was done partly because petitioner
desired at that time to transfer only round amounts of foreign secu-
rities to the investment account and partly because it wished to retain
certain securities in the dealer account so as not to interfere with
petitioner's dealer business. Petitioner did not acquire for the invest-
ment account after December 29, 1941, any further amounts of such
identical securities. Activity in such securities was confined to the
dealer account. Of the 1,500 foreign securities dealt in by petitioner,
17 were of the same type of those held for investment. Other than
those above mentioned, no further transfers of securities were made
before or after that date from the dealer to the investment account.
During the taxable year no transfers were made from the investment
to the dealer account.
When both the foreign and domestic securities were transferred
to the investment account on December 29, 1941, the following steps
were taken to segregate those securities from the others which were
held by petitioner for sale to customers.
The particular trader of any of the nine which petitioner employed
in charge of the specific foreign securities was advised by order of
Marks of the intended withdrawal for investment account and of the
EXCESS PROFITS TAX-Continued.
5. Id. For failure to allocate income between manufacturing and job-
bing; to prove results from development of new line; or to establish basis
for allocation to prior years, relief under sec. 721 is denied. Atlumor
Manufacturing Co---
6. Corporations in Liquidation. Credit Carry-Back is not available to
corporations in liquidation. Rite-Way Products, Inc..
7. Id. Unused excess profits credit for year dissolution is completed is
not deductible for preceding year. Gorman Lumber Sales Co----
8. Id. Annualization for Fractional Period. Where certain assets were
retained during tax year and dissolution was not completed, corporation
is not required to use fractional year. Union Bus Terminal, Inc..
Allegheny Broadcasting Corp-----
9. Deductions. State Franchise Tax, measured by preceding year's
income, is deductible for year assessed, not preceding year. Gorman
Lumber Sales Co------
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1. Relief Under Sec. 722. Claim denied for failure to prove that average
base period income under growth formula was an inadequate standard.
Irwin B. Schwabe Co...
2. Id. A general business depression which affected income of every
business is not a basis for granting the relief. George Kemp Real Estate Co.
3. Abnormalities; Bad Debts Deduction. Held, that abnormal deduction
resulted from overextension of credit, not, as claimed by Commissioner, to
increased income or change in operations, and may be restored. Lorenz
Co....
4. Id. Where abnormal deductions for base period years are restored
no reduction in the restored amount is to be made for additional income
tax which would have been due had the adjustment been currently made.
Carborundum Co.---
5. Id. Sales Promotion Expense and Retirement Annuities in base period
allowed to be restored.
6. Id. Introduction of a new model of a product regularly manufactured
is not a change in type of business. Id.
7. Id. Increased telephone and telegraph expense and increased cost
of group life insurance plan held to result from increased business and may
not be restored. Id.
8. Id. Salaries of telephone operators may not be restored. Id.
9. Id. Sick Benefits paid were not compared with those of prior years
and may not be restored. Id.
10. Id. Loss sustained as guarantor on foreign loan may not be restored
for failure to prove similar losses for other years. Id.
11. Id. Fire loss claimed for base year may not be restored.
(2) Invested Capital Method.
12. Equity Invested Capital. Valuation of Assets Paid in for Stock was
not supported by evidence and Commissioner properly computed credit
on income basis. American Radio Telephone Co..
13. Id. Appraisal for fire insurance purposes is not proof of value. Id.
14. Id. Assets acquired for stock in a taxable exchange are includible
at cost or market value at date of acquisition. Mojonnier & Sons, Inc---
15. Id. Reduction in invested capital when assets are distributed is
original cost, not market value when distributed. Reynolds Spring Co...
16. Id. Surplus and Accumulated Earnings. Advances by president
carried as accounts payable held not paid-in surplus. Tri-State Realty Co.
17. Id. Accrual Basis. Income and excess profits taxes for preceding
year held correctly eliminated from earnings at beginning of tax year.
lumor Manufacturing Co---
18. Id. Unrealized profits on installment sales may not be included.
Hart Furniture Co. - -.
19. Id. Postwar refund credit held to be an asset and may be included.
Gorman Lumber Sales Co...
$5,433.37. As pointed out above, respondent has conceded that it was
proper for petitioner to treat these securities as capital assets.
In 1941 and prior years it had been the practice of petitioner to
determine gross income by taking each security account and deter-
mining gain or loss thereon, by using the market value or cost, which-
ever was lower, of the securities in the particular account as of De-
cember 31 of the preceding year, entering the cost of purchases and the
proceeds of sale, and also dividends and interest received, and enter-
ing the market value or cost, whichever was lower, as of the close of
the taxable year, of the securities in the account unsold and remaining
on hand. The difference between the debits and credits of each ac-
count reflected the gain or loss in such account. That method of
determining income was continued as to all securities retained in the
dealer account in 1942.
In determining whether investment securities had been held for six
months or more petitioner used the date December 29, 1941, as the date
of acquisition in the case of foreign securities and the date of acqui-
sition in the case of the domestic securities. All of the securities on
which net capital gain was reported in the 1942 return had been held
for six months or more from December 29, 1941, except for three
domestic securities having a total cost of $7,092. Including that
amount, the total cost of the investment securities sold in 1942 and
acquired prior to that year was $191,642.84.
As the idea of the investment business proved successful, petitioner
began to enlarge the investment branch of its business. New securi-
ties were acquired during 1942 for the investment account whenever
Marks thought it desirable to do so.
At the end of each of the years indicated petitioner held for invest-
ment and speculation securities having the following values:
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Petitioner's total cash receipts and disbursements in the dealer
account during 1942 amounted to $25,000,000, whereas its sales in the
investment account during that year amounted to $399,000.
On December 31, 1941, petitioner had securities pledged as collateral
with banks of $431,291.45 against loans of $290,700. On December
29, 1941, petitioner's balance sheet reflected securities on hand of a
value of $1,210,854.54, although as pointed out above, it owned at
that time securities having a value of $1,642,145.99. The net value
of the pledged securities during the taxable year was included in the
balance sheet as an account receivable.
1 Of this amount securities of a value of $148,416.52 had been acquired prior to January
1, 1942, and $493,879.47 had been acquired for investment during the taxable year.
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