1924 BTA LEXIS 210 | B.T.A. | 1924
Lead Opinion
The first question before the Board arises out of the dis-allowance by the Commissioner of a deduction of $200,000 claimed by the taxpayer in his 1919 return, that amount representing a sum paid by him to two trustees of a trust, under which he was the sole beneficiary, in consideration of their resignations as such trustees.
The taxpayer was the sole beneficiary of a trust created by the will of his father, the terms of which provided that he shouid receive
The taxpayer, in his income-tax return for 1919, treated this payment as a business expense and deducted it from his gross income. The Commissioner disallowed the deduction in its entirety. The elimination of the other trustees and the qualifying of the taxpayer as trustee did not vest in him a full ownership of the property, but merely put him in sole control under the instrument creating the trust and the laws governing trust estates. He was not, in effect, buying an asset which forthwith would become his property and the purchase price of which he could not take into consideration in computing his income until he should dispose of the property acquired, but he was rather buying the right to be sole trustee without interference over a period of 12 years. We think the Commissioner was wrong in not allowing any deduction, and that the taxpayer was wrong in claiming in one year, deduction of the entire amount paid. The taxpayer should be regarded as having for the purpose of insuring his interest in the estate against waste, purchased a right to do certain things for a period of time, and the cost to him of that right should be spread over the period of time during which he would be in a position to exercise it.
If he had been buying outright an asset with an indefinite life, the Commissioner would be correct in his contention that the taxpayer was entitled to no deduction, but could offset the cost against the sale price at such time as he might sell the asset; but the thing that the taxpayer bought had a definite life of 12 years, and under the well-established rules for recovery of capital he should be allowed to recover the cost over the period of the life of the asset.
In 1919 the taxpayer was the owner of real property consisting of land with concrete and steel buildings thereon in New York City. He had held these properties on the average for a period of a year and a half. They had originally cost him $7,386,766.23, and in his income tax returns he had not claimed any depreciation upon them. For convenience in managing these properties he caused a corporation to be formed in 1919 and conveyed the properties to the corporation in exchange for its entire capital stock. Not regarding the transaction as one yielding a then realized profit, he caused this stock to be issued in par value exactly equal to the cost to him of the properties, less the outstanding mortgages thereon. The amount of this capital stock in dollars and cents does not appear from the record and is unimportant, but for purposes of convenience m this opinion we will say that the stock so issued had a par value of $®. The taxpayer had bought land and buildings for %x and held them for a year and a half and had exchanged them for $* par value of corporate stock.
Counsel for the Commissioner reasons as follows: The cost of this property to the taxpayer was $*. He held it for a year and a half, during which time the buildings thereon depreciated, according to our methods of allocating cost to buildings and land, respectively, and of computing depreciation on this type of buildings, to the extent of $228,650.77. This depreciation should have been deducted by the taxpayer, and his failure to deduct it does not entitle him to treat the property as not having depreciated. So the depreciated cost to the taxpayer at the time he made the exchange in 1919 was $.9j minus $228,650.77. However, he sold the property for the equivalent in stock of $*, and by this transaction derived a profit of $228,650.77.
The fallacy in this reasoning is that it requires a presumption that the stock received in exchange for the property was worth par. If the taxpayer had received %x in cash, the reasoning of the Commissioner’s counsel might be sound. But he did not receive cash. It appears that the stock has never been on the market and none of it has ever been transferred for valuable consideration since its original issue in exchange for the property. The usual method of appraising stock issued for property where there is no evidence of the market value of the stock is to say that the stock is deemed equivalent in value to the property for which it was issued, and by determining the value of the property one can determine the value of the stock. In this case the Commissioner made no attempt to determine the value of the property except by reference to the par value of the stock, and he reasoned in a circle thus: We must determine the value of the stock received by the taxpayer. To do this we will look at the value of the property given. We have no evidence of the value of the property given except that stock to the extent of $,r par value was issued for it. Therefore, the value of the property must have been $», and, consequently, the value of the stock received by the taxpayer must have been $*. This amounts to nothing but saying that since the par value of the stock was $*, its real value was $*, a proposition to which the Commissioner would be
When the taxpayer learned the position of the Commissioner, he said in effect: “ Our bookkeeping must have been wrong and I will have the books corrected.” He returned to the corporation $237,-259.21 par value of stock, and the corporation wrote down on its books the cost to it of the property to $® minus $237,259.21. The Commissioner refused to accept this as affecting the taxpayer’s liability, but treated it as a gift by the taxpayer to the corporation. We think the only effect of the transaction was to place the corporate records on a proper basis, for we can not see how it could make any difference in the taxpayer’s profit or loss whether he received for the property stock to the par value of $®, of $x minus $237,259.21, of $2®, of $10®, of $14*, or a number of shares of no par value. The stock received being the entire capital stock of the corporation was worth exactly the value of the property exchanged for it, and the par value of the stock so received is no evidence of the value of that property. If the buildings actually depreciated to the extent assumed by the Commissioner, that is, if they had a normal life of 50 years (a fact denied by the taxpayer), and if there were no appreciation of the market value of the property as a whole, the property would have been worth at the time of the transfer %x minus $228,-650.77. There is no evidence that the market value of the property was greater or less than the depreciated cost to the taxpayer, and consequently no evidence that the stock received in exchange for the property (even disregarding the fact of the return of stock to the corporation) was worth more than that depreciated cost. Accordingly, there is no basis for the Commissioner’s conclusion that the taxpayer derived a profit of $228,650.77 from his exchange of property for stock. In the absence of such evidence, it must be presumed that the property, at the time of its exchange, was worth no more than its depreciated cost, especially in view of the fact that the time between purchase and exchange was only on the average a year and a half. In the absence of at least prima facie evidence, property can not be deemed to have increased in value to an amount exactly offsetting normal depreciation.
The addition of $228,650.77 to the taxpayer’s gross income for 1919 was clearly erroneous, and any deficiency in tax resulting from such addition must be disallowed.
On consideration by the Board, SterNhageN and LittletoN dissented as to the first point because they were of the opinion that the entire amount of $200,000 is deductible in the year in which it was paid.
Dissenting Opinion
dissented as to the first point because they were of the opinion that the amount of $200,000 is not deductible in whole or in part in any year,