Fidelity Title & Trust Co. v. Commissioner

FIDELITY TITLE & TRUST CO. AND MIRIAM G. HOSTETTER, EXECUTORS UNDER THE WILL OF D. HERBERT HOSTETTER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Fidelity Title & Trust Co. v. Commissioner Docket No. 2795. United States Board of Tax Appeals 10 B.T.A. 482; 1928 BTA LEXIS 4096; February 2, 1928, Promulgated *4096 1. The taxpayer received a letter from the office of the Commissioner of Internal Revenue stating that an examination disclosed an additional tax and, under section 250(d) of the Revenue Act of 1921, he would be granted 30 days in which to file an appeal and show cause or reason why the additional tax should not be paid. Such letter was signed by a Deputy Commissioner. Held, that such letter does not constitute an assessment. 2. The provisions of the Revised Statutes, so far as applicable, govern the assessment of taxes. Under section 3182 an assessment of tax must be the act of the Commissioner. 3. March 1, 1913, value of stocks and bonds determined. H. F. Stambaugh, Esq., for the petitioners. L. C. Mitchell, Esq., for the respondent. PHILLIPS *482 The petitioners, as executors under the will of D. Herbert Hostetter, deceased, petition for a redetermination of a deficiency of $137,181.30 determined by the respondent to be due upon income received by the decedent in 1919. The petitioners allege that the Commissioner erred in determining the amount of loss suffered upon an exchange by the decedent of bonds of the Consolidated*4097 Gas Co. of the City of Pittsburgh for other securities and in disallowing the decedent's claim for a loss upon the exchange of certain shares of stock of the Allegheny Heating Co. for other securities. The petitioners also allege that collection of any additional tax is barred by limitation and that any liability has been extinguished by section 1106(a) of the Revenue Act of 1926. In his answer the respondent alleges that a profit was realized upon the exchange of stock of the Allegheny Heating Co. and asks that the taxable income as determined by him be increased accordingly. FINDINGS OF FACT. D. Herbert Hostetter was an individual residing at 4848 Fifth Avenue, Pittsburgh, Pa. He died on September 28, 1924. The Fidelity Title & Trust Co. and Miriam G. Hostetter qualified and are acting as executors under his last will and testament. (1) On March 17, 1920, said D. Herbert Hostetter (hereinafter referred to as the taxpayer) filed his income-tax return for the year 1919. Under date of May 23, 1923, the office of the Commissioner *483 of Internal Revenue addressed to said taxpayer a letter, signed by a Deputy Commissioner, reading as follows: SIR: An examination*4098 of your income tax returns and of your books of account and records for the years 1918-1920, inc., discloses an additional tax liability for the years 1919 and 1920 aggregating $203,998.58, and overassessments for the year 1918 amounting to $139.38 as shown in detail in the attached statement. In accordance with the provisions of Section 250(d) of the Revenue Act of 1921, you are granted thirty days within which to file an appeal and show cause or reason why this tax or deficiency should not be paid. No particular form of appeal is required, but if filed it must set forth specifically the exceptions upon which it is taken, shall be under oath, contain a statement that it is not for the purpose of delay, and the facts and evidence upon which you rely must be fully stated. The appeal, if filed must be addressed to the Commissioner of Internal Revenue, Washington, D.C., for the specific attention of IT:PA:FR-CTN-702 and will be referred to the Income Tax Unit before transmittal to the agency designated for the hearing of such appeals. You may, if you desire, request a conference before the Income Tax Unit in connection with the appeal, to be held within the period prior to the*4099 expiration of five days after the time prescribed for the filing of the appeal. If the Income Tax Unit is unable to concede the points raised in your appeal, it will be transmitted, together with the recommendation of the Income Tax Unit, to such agency as the Commissioner may designate for final consideration. Where a taxpayer has been given an opportunity to appeal and has not done so, as set forth above, and an assessment has been made, or where a taxpayer has appealed and an assessment in accordance with the final decision on such appeal has been made, no claim in abatement of the assessment will be entertained. This assessment is in addition to all other outstanding and unpaid assessments appearing upon the Collector's lists. Payment should not be made until a bill is received from the Collector of Internal Revenue for your district, and remittance should then be made to him. Attached to said letter was a statement showing the basis for the computation of the additional tax liability. Enclosed with such letter was also a form reading as follows: AGREEMENT CONSENTING TO ASSESSMENT OF ADDITIONAL TAX. I hereby consent to immediate assessment of the additional tax, *4100 aggregating $203,998.58 as indicated by letter from the Commissioner of Internal Revenue, Washington, D.C., dated May 23, 1923, and bearing the symbols IT:PA:FR-VPK-711. (SIGNED) DATE Street Address City State District For your information you are advised that Section 250(d) of the Revenue Act of 1921 provides that tax discovered upon the basis of an examination of the taxpayer's return shall not be assessed until the taxpayer has been notified of the proposed assessment and has been granted a period of thirty *484 days from the date of such notice in which to file an appeal and show cause or reason why the tax or deficiency should not be paid. Inasmuch as there is an overassessment discovered in the audit of your return, if you agree to the findings of the Bureau, action on the overassessment can be expedited if you will sign and return to this office without delay the agreement consenting to immediate assessment of the tax as indicated in the accompanying letter. Under date of March 4, 1924, there was mailed to the taxpayer from the office of the Commissioner of Internal Revenue a letter signed by a Deputy Commissioner and reading as follows: *4101 SIR: An examination of your income tax return and of your books of account and records for the year 1919 discloses an additional tax liability amounting to $133,964.50, as shown in detail in the attached statement. In accordance with the provisions of Section 250(d) of the Revenue Act of 1921, you are granted thirty days within which to file an appeal and to show cause or reason why this tax or deficiency should not be paid. The appeal, if filed, must be addressed to the Commissioner of Internal Revenue, Washington, D.C., for the specific attention of IT:PA:5-VPK-506-App. Treasury Decision No. 3492, setting forth the privileges of taxpayers in cases of appeal, is attached for your information and guidance. Where a taxpayer has been given an opportunity to appeal and has not done so, as set forth above, and an assessment has been made, or where a taxpayer has appealed and an assessment in accordance with the final decision on such appeal has been made, no claim in abatement of the assessment will be entertained. This assessment is in addition to all other outstanding and unpaid assessments appearing upon the Collector's lists. Payment should not be made until a bill*4102 is received from the Collector of Internal Revenue for your district, and remittance should then be made to him. Attached to such letter was a statement showing the basis on which the additional tax liability was computed and stating that information submitted at a conference held with a representative of the taxpayer had been considered. Enclosed with such letter was a form reading as follows: AGREEMENT CONSENTING TO ASSESSMENT OF ADDITIONAL TAX. I hereby consent to immediate assessment of the additional tax, aggregating $133,964.50, as indicated by letter from the Commissioner of Internal Revenue, Washington, D.C., dated March 4, 1924, and bearing the symbols IT:PA:5-VPK-506-App. (SIGNED) DATE Street Address City State District For your information you are advised that Section 250(d) of the Revenue Act of 1921 provides that tax discovered upon the basis of an examination of the taxpayer's return shall not be assessed until the taxpayer has been notified of the proposed assessment and has been granted a period of thirty days from the date of such notice in which to file an appeal and show cause or reason why the tax or deficiency should not be paid. *4103 If you agree to the *485 findings of the Bureau, action can be expedited if you will sign and return to this office without delay the agreement consenting to immediate assessment of the tax as indicated in the accompanying letter. Under date of January 27, 1925, there was mailed to the petitioners a letter from the Commissioner of Internal Revenue reading as follows: The determination of your income tax liability for the year 1919, as set forth in office letter of March 4, 1924, disclosed a deficiency of $133,964.50, which has been changed to $137,181.30, in accordance with the decision of the Solicitor of Internal Revenue. The adjustments made are explained in detail in the attached statement. In accordance with the provisions of Section 274 of the Revenue Act of 1924, you are allowed 60 days from the date of this letter within which to file an appeal to the Board of Tax Appeals contesting in whole or in part the correctness of this determination. Where a taxpayer has been given an opportunity to appeal to the Board of Tax Appeals and has not done so within the 60 days prescribed and an assessment has been made, or where a taxpayer has appealed and an assessment*4104 in accordance with the final decision on such appeal has been made, no claim in abatement in respect of any part of the deficiency will be entertained. If you acquiesce in this determination and do not desire to file an appeal, you are requested to sign the enclosed agreement consenting to the assessment of the deficiency and forward it to the Commissioner of Internal Revenue, Washington, D.C., for the attention of IT:PA:5-ATH-505. In the event that you acquiesce in a part of the determination, the agreement should be executed with respect to the items agreed to. Respectfully, D. H. BLAIR, Commissioner. Enclosures: Statements Agreement - Form A. (By) (Signed) J. G. BRIGHT, Deputy Commissioner. Attached to such letter was a statement showing the basis of the computation of the deficiency. (2) Prior to March 1, 1913, the taxpayer acquired, at a cost of $19,640,167 shares of stock of the Allegheny Heating Co., a Pennsylvania corporation. In 1919 the taxpayer exchanged such 167 shares of stock for 3,006 shares of the 6 per cent cumulative preferred stock of the Philadelphia Co. The contract for this exchange was entered into on January 3, 1919, by the*4105 taxpayer and the Philadelphia Co. On January 3, 1919, the market value of the 6 per cent cumulative preferred stock of the Philadelphia Co. was $32 per share. The fair market value of the stock of the Allegheny Heating Co. on March 1, 1913, was $603.13 per share. Upon his return the taxpayer claimed a loss of $4,530.71 on the exchange of such stock of the Allegheny Heating Co. for such preferred stock of the Philadelphia Co. The Commissioner determined that the March 1, 1913, value of the stock of the Allegheny Heating Co. was $603.13 per share and that upon the *486 exchange the petitioner realized no taxable gain and sustained no deductible loss, and computed the deficiency accordingly. (3) Prior to March 1, 1913, the taxpayer acquired, at a cost of $577,524.42, a total of 560 of the 5 per cent first mortgage bonds, due February 1, 1948, of the Consolidated Gas Co. of the City of Pittsburgh, a Pennsylvania corporation, each in the principal sum of $1,000. In 1919 the taxpayer exchanged these 560 bonds for 10,360 shares of the 6 per cent cumulative preferred stock of the Philadelphia Co., a Pennsylvania corporation. The contract for this exchange was entered into on*4106 January 15, 1919, by the taxpayer and the Philadelphia Co. On January 15, 1919, the market value of the 6 per cent cumulative preferred stock of the Philadelphia Co. was $33.50 per share. On March 1, 1913, the fair market value of the 5 per cent first mortgage bonds due February 1, 1948, of the Consolidated Gas Co. of the City of Pittsburgh of the principal sum of $1,000 was $700. The Commissioner determined the value of such bonds on March 1, 1913, to be $700 per bond and allowed a deductible loss on the exchange of such bonds for the bonds of the Philadelphia Co. in the amount of $44,940. OPINION. PHILLIPS: Counsel argues that the deficiency here involved was assessed prior to the effective date of the Revenue Act of 1924 and that under the decisions of the United States District Courts in United Statesv. Cabot, 5 Am.Fed. Tax Rep. 6172, and United States v. Whyel, 19 Fed.(2d) 260, the provision of the Revenue Act of 1924 which granted six years from the date of assessment in which to collect had no application. It is, therefore, contended that it was necessary that collection be made within five years from the date on which the*4107 return was filed. Petitioner's contention is based upon the erroneous assumption that the deficiency was assessed before the effective date of the Revenue Act of 1924. They rely upon the letter of May 23, 1923, as constituting an assessment. The letter upon its face indicates that assertion of the additional tax liability is tentative and not a final action and that pursuant to the provisions of section 250(d) of the Revenue Act of 1921 an appeal might be filed within 30 days. That section, so far as here material, provides: If upon examination of a return made under * * * the Revenue Act of 1918, * * * a tax or a deficiency in tax is discovered, the taxpayer shall be notified thereof and given a period of not less than thirty days after such notice is sent by registered mail in which to file an appeal and show cause or reason why the tax or deficiency should not be paid. Opportunity for hearing shall be granted and a final decision thereon shall be made as quickly a practicable. *487 Any tax or deficiency in tax then determined to be due shall be assessed * * *: Provided, That in cases where the Commissioner believes that the collection of the amount due will*4108 be jeopardized by such delay he may make the assessment without giving such notice or awaiting the conclusion of such hearing. There is nothing to indicate that the Commissioner believed that the collection of the additional tax would be jeopardized by the delay or that any assessment was made on that ground. On the contrary the letter clearly indicates that the petitioner was granted 30 days in which to file an appeal and show cause or reason why the additional tax should not be paid. Under the provisions of the law no assessment was to be made until this hearing was had, except where jeopardy existed. The letter uses the words "this assessment" and it is upon these words that the petitioners rely. Reading the letter as a whole, however, it is clear that it did not constitute a final action and that it was a step preliminary to assessment. There is a further ground upon which it would be necessary to determine that the letter of May 23, 1923, is not an assessment. Under the provisions of the various revenue acts imposing income taxes, the portions of the Revised Statutes which relate to the assessment and collection of tax are made applicable. (Section 1300 of the Revenue*4109 Act of 1921 and section 1000 of the Revenue Act of 1924.) Section 3182 of the Revised Statutes provides in part: The Commissioner of Internal Revenue is hereby authorized and required to make the inquiries, determinations and assessments of all tax and penalties, * * * and shall certify a list of such assessment when made to the proper collectors, respectively, * * *. The only person authorized to make an assessment is the Commissioner of Internal Revenue or, under certain circumstances, an Acting Commissioner. While the determination of the amount of any tax must be left in the usual case to others, the action which constitutes the assessment must be the act of the Commissioner. The letter of May 23, 1923, upon which the petitioners rely as constituting an assessment of tax, is not and does not purport to be an action by the Commissioner. It is signed by a deputy and it informs the taxpayer of the action which subordinates in the office of the Commissioner will recommend that the Commissioner take. The taxpayer is advised that he may file his appeal, which appeal will be considered by such agents as the Commissioner may designate for final consideration. Presumably the Commissioner*4110 will act upon the recommendation of the agency to which he recommends it for such consideration but until the Commissioner acts there has been no assessment. Even if it could be conceded that an assessment had been made prior to the effective date of the Revenue Act of 1924, it would still *488 appear, under the decision of this Board in Art Metal Works v. Commissioner,9 B.T.A. 491, that the provisions of the Revenue Acts of 1924 and 1926 with respect to collection apply and that under section 278(d) of those Acts there would be six years within which to collect. (2) It appears that prior to March 1, 1913, taxpayer acquired 167 shares of stock of the Allegheny Heating Co. at a cost of $19,640 and that in 1919 he exchanged this stock for stock of the Philadelphia Co. of an agreed value of $96,112. In making his return the taxpayer asserted that the March 1, 1913, value was in excess of $96,112 and claimed a loss. Since the return was filed and since the petition herein was filed the Supreme Court in *4111 United States v. Flannery,268 U.S. 98; 45 Sup.Ct. 420; 5 Am.Fed. Tax Rep. 5373, has determined that a loss is not to be based solely upon the March 1, 1913, value and can be claimed only if and to the extent that there is an actual loss. Under that decision it is clear that the respondent properly disallowed the loss claimed. In an amended answer filed prior to the hearing, the Commissioner alleged that the value of the stock of the Allegheny Heating Co. on March 1, 1913, was less than the value of the stock received in exchange and that the taxpayer realized a gain. The evidence, however, does not sustain these allegations. It discloses that for some years prior to 1913 the Allegheny Heating Co. had net earnings of approximately $50 per share and that it paid dividends of 44 per cent in 1908, 42 per cent in 1909, 50 per cent in 1910, and 55 per cent in 1911 and in 1912. The evidence is not such as to indicate that on March 1, 1913, there was any reason to believe that such earnings would decrease. In fact, they increased in subsequent years. There were no sales of the stock of this company and we must look to this record of earnings*4112 and dividends for the determination of value. Considering this record and also considering that this company was operating as a public utility and that its business was stable, we see no reason for disturbing the determination of $603.13 originally made by the Commissioner. Certainly the evidence is insufficient to justify us in fixing the value of $440 per share for which his counsel now contends. (3) This brings us to a consideration of the March 1, 1913, value of the bonds of the Consolidated Gas Co. of Pittsburgh. Prior to March 1, 1913, the taxpayer had acquired a total of $560,000 par value of such bonds at a cost to him of $577,524.42. These were exchanged in 1919 for preferred stock of the Philadelphia Co. having an agreed value of $347,060. There was here an actual loss of $230,464.42, but since the March 1, 1913, value was less than the cost, the deductible loss is limited to the difference between such March 1, 1913, value and the value of the stock received in exchange. The Commissioner determined the March 1, 1913, value to be $700. *489 This is the price at which two lots, each of ten of such bonds, were sold early in 1913. Conceding that such sales*4113 may not satisfactorily establish the market price of such a block as was owned by the taxpayer, the record fails to establish a greater value. There were $5,000,000 par value of these bonds outstanding in 1913. They were secured by a mortgage upon all of the assets of the Consolidated Gas Co., including $2,000,000 par value of the bonds and $2,000,000 par value of the stock of the Allegheny Illuminating Co., owned by the Consolidated Gas Co., being all of the stock and bonds of the Illuminating Co. The principal assets of these companies were real estate, franchises and mains. Through franchises which it owned or which it controlled by the ownership of such stock and bonds, the Consolidated Gas Co. had an exclusive right to manufacture and sell artificial gas for lighting, heating, and fuel in the City of Pittsburgh and the former City of Allegheny and in 1913 was supplying all the illuminating gas sold in the city. Natural gas, however, had been introduced into the city and was being sold by other companies for heating and fuel. It could be supplied at a less cost than artificial gas. Electricity was taking the place of gas for lighting purposes. The income and profits statements*4114 of the Consolidated Gas Co. show that it was not earning interest on its bonds and had not done so for some time. All of the common stock of the Consolidated Gas Co. was owned by the Philadelphia Co. It also appears that the latter company owned the stock of one or more of the companies supplying natural gas and of the company supplying electricity. It owned a large tract of oil and gas producing property. In 1907, as the result of differences which had arisen between holders of the 6 per cent cumulative preferred stock of the Consolidated Gas Co. and the Philadelphia Co. with respect to the operation of the former company, the latter company had guaranteed dividends of 4 per cent upon such preferred stock, and this guarantee had been accepted by the owners of about 75 per cent of the $2,000,000 par value of outstanding preferred stock. It is urged in substance that we should assign some substantial value to the franchises and mains of the Consolidated Gas Co. and of the Allegheny Illuminating Co., which value should be added to the value of certain parcels of real estate for the purpose of determining the intrinsic value of the bonds. The evidence is not sufficient to indicate*4115 that the franchise had any value, or what, if any, value the mains had. The annual losses of the company were substantial. The use of gas for lighting was decreasing and natural gas for heating and fuel could be sold for less. Whether the mains of the natural gas companies paralleled those of the Consolidated Gas Co. we do not know. What their value might have been to a company supplying natural gas or for the purpose of *490 combining with such a company, is not shown, but it seems evident that the Consolidated Gas Co. could not have hoped in 1913 to continue alone successfully. Petitioners point out that the Philadelphia Co., which operated a natural gas company, owned all the stock of the Consolidated Gas Co. and had guaranteed dividends of 4 per centum upon its preferred stock, totaling $2,000,000 par value, and argues that the Philadelphia Co., in the event of a foreclosure of the mortgage, would not have permitted this property to have been purchased by another and desired to acquire it for itself in order to increase its hold on the public utilities of the city. It is equally conceivable that the Philadelphia Co. would so operate the Consolidated Gas Co. as to*4116 depreciate the value of its bonds, that they might be acquired at a lower price. It seems that there may have been some ground to fear such a step, for it was after the preferred stockholders had raised some question as to the method of operation that the Philadelphia Co. had guaranteed dividends of 4 per cent per annum upon this stock. Furthermore, it appears that in 1916 the company ceased to pay interest on these bonds and acquired them in 1919 for much less than $700 per bond. We are not of the opinion that the relationship of the Philadelphia Co. to the Consolidated Gas Co. served to increase materially the value of its bonds. The March 1, 1913, value fixed by the Commissioner for $5,000,000 par value of these bonds outstanding was $3,500,000. The real estate securing them, owned by the Consolidated Gas Co. or by the Allegheny Illuminating Co., was worth approximately $3,100,000. In attempting to fix an intrinsic value for the bonds we must consider the possibilities of foreclosure with its expenses and loss of interest. We see nothing in the record which would justify us in increasing the value beyond that fixed by the Commissioner. The deficiency is redetermined*4117 to be the amount determined by the Commissioner, and decision will be entered accordingly.