Court Opinion

ID: 4634114
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:15:20.833114+00
Date Added: 2024-06-11T08:00:03.668645
License: Public Domain

T. W. PHILLIPS, JR., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Phillips v. CommissionerDocket Nos. 35469, 41580.United States Board of Tax Appeals23 B.T.A. 1272; 1931 BTA LEXIS 1742; July 28, 1931, Promulgated *1742  Section 204(a)(8) of the Revenue Act of 1926 is not unconstitutional.  J. M. Cumming, C.P.A., for the petitioner.  Eugene Harpole, Esq., for the respondent.  VAN FOSSAN *1272  These proceedings were brought to redetermine the deficiencies in the income tax of the petitioner for the years 1925, 1926 and 1927.  In Docket No. 35469 the respondent asserted a deficiency of $8,822.04 for the year 1925 and in Docket No. 41580 he asserted deficiencies of $5,573.11 and $24,021.95 for the years 1926 and 1927, respectively.  The proceedings were consolidated for hearing and report.  The sole issue is the constitutionality of section 204(a)(8) of the Revenue Act of 1926.  FINDINGS OF FACT.  The facts were stipulated.  The pertinent portions thereof are as follows: The petitioner is a corporation, organized February 9, 1925, under the laws of the State of Delaware, and has an office and place of business at North Main Street, Butler, Pa.  On or about February 9, 1925, the petitioner acquired from T. W. Phillips, Jr., of Butler, Pa., in consideration of the issue to him of its capital stock of a par value of $1,015,448.75, certain securities whose*1743  market value at February 9, 1925, was as follows: 200 shares American Sugar Refining Co$12,900.001,500 shares Atchison, Topeka & Santa Fe Ry176,250.00400 shares Baltimore & Ohio Railroad Co32,150.001,000 shares Chesapeake & Ohio Railway Co94,625.00100 shares Delaware & Hudson Co14,550.0050 shares General Electric Co11,900.00200 shares Great Northern Railway Co14,000.00300 shares Illinois Central Railroad Co34,537.501,200 shares New York Central & Hudson R.R. Co147,750.00300 shares Nevada Consolidated Copper Co4,612.50100 shares Northern Pacific Railway Co$7,025.00210 shares Oklahoma Natural Gas Corporation6,431.251,960 shares Pacific Gas & Electric Co89,200.00100 shares Philadelphia Co5,550.0010,500 shares Shell Union Oil Co4,200.001,200 shares Union Pacific Railroad Co180,300.001,000 shares United States Steel Corporation126,500.00440 shares Westinghouse Electric & Mfg. Co31,680.00$19,500 Nevada Consolidated 5% debentures21,287.50Total1,015,448.75*1273  Immediately after the aforesaid transfer of securities to the petitioner in exchange for its capital stock, the transferor, T. W. *1744  Phillips, Jr., owned all of petitioner's capital stock.  No gain or loss was recognized in the transaction whereby the said securities were transferred to the petitioner and no taxable profit or income therefrom was reported by the said transferor.  During the years 1925, 1926 and 1927 all of the aforesaid securities were sold by the petitioner, the amount received from the sale during each of the three taxable years in question being as follows: 1925$310,525.501926268,412.791927635,073.90Total1,214,012.19In the preparation of its income-tax returns for the taxable years 1925, 1926 and 1927 the petitioner reported profits of $28,350.50, $11,481.54 and $158,731.40, respectively, or a total of $198,563.44, the said amount of profit being computed upon the difference between the selling price and the cost of $1,015,448.75 to the petitioner.  All of the securities involved herein were purchased by the transferor subsequent to March 1, 1913, and prior to February 9, 1925.  The cost to the transferor of the said securities, as to those sold during the respective taxable years, was as follows: 192519261927American Sugar Refining Co$10,505.00Chesapeake & Ohio Ry. Co56,765.00Pacific Gas & Electric Co20,405.06$4,715.00$17,995.00Philadelphia Co3,415.00United States Steel Corporation84,805.00Delaware & Hudson Co9,165.00General Electric Co6,560.00Nevada Consolidated Copper Co3,030.00Nevada Consolidated 5% debentures15,972.50Oklahoma Natural Gas Co4,231.50Union Pacific Railroad Co138,202.50Westinghouse Electric & Mfg. Co5,491.0012,695.00Atchison, Topeka & Santa Fe. Ry. Co123,010.00Baltimore & Ohio Railroad Co14,022.50Great Northern Railway Co14,937.50Illinois Central Railroad Co25,982.50Northern Pacific Railway Co8,737.50New York Central Railroad Co83,652.50Shell Union Oil Co1,946.66Total175,895.06187,367.50302,979.16*1745 *1274  In the respondent's determination of the petitioner's tax liability contained in the deficiency letters aforesaid, the amount of profit reported by the petitioner was increased as follows: Profit reported increasedYearFrom - To - 1925$28,350.50$134,630.44192611,481.5481,045.291927158,731.40332,094.74The basis used by the Commissioner in computing the amount of profit on these transactions, as shown by the deficiency letters, represents the cost of the said securities to the transferor, T. W. Phillips, Jr.  The decrease by the respondent in the basis and the resulting increase in the taxable income is explained by the Commissioner in the following statement in the deficiency letter dated January 23, 1928: A profit on the sale of securities is increased as follows by using the cost to Mr. Phillips instead of the value at date of exchange.  OPINION.  VAN FOSSAN: Section 204(a)(8) of the Revenue Act of 1926 provides as follows: (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that - * * * *1746  (8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made; * * *.  Section 203 is, in part, as follows: (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.  * * * (b)(4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities *1275  in such corporation, and immediately after the exchange such person*1747  or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.  The question of the constitutionality of section 204(a)(8) of the Revenue Act of 1924, the language of which is identical with that of the same section of the 1926 Revenue Act, was considered in ; certiorari denied, ; while in Newman, saunders & ; certiorari denied, , the Court of Claims had before it the same question under both the 1924 and 1926 Acts.  In both cases the section was held to be not unconstitutional.  See also . Judgment will be entered for the respondent.