*3742 1. The decedent acquired 82 shares of stock of Stott & Son, Inc., in 1918 at a cost of $38,592.16. Held, that such cost is the basis to be used in computing gain realized or loss sustained upon the liquidation of the corporation in 1920.
2. On December 31, 1919, the board of directors of Stott & Son, Inc., adopted a resolution "that all of the bills and accounts receivable of the company, as shown by its books December 31, 1919, be paid out to stockholders of record on that date as a dividend on their stock out of corporate earnings and surplus, and that appropriate transfer of such bills and accounts receivable be made to the stockholders." At the time the corporation was not in liquidation and the amount of the dividend was less than the earnings which had accrued from March 1, 1913, to December 31, 1919. Held, that the amount distributed was not in liquidation of the corporation and that the amount received by the decedent was exempt from normal tax.
3. Stott & Sons, Inc., was liquidated during 1920 and 1921. Held, that such portion of the gain realized by the decedent from such liquidation as represented a distribution of earnings of the corporation from*3743 March 1, 1913, was subject to normal income tax.
4. In 1920 the decedent sold his residence for $7,000 which had a cost or March 1, 1913, value of $6,900. The decedent returned a profit of $100 from the transaction. The respondent increased the profit to $250 by reducing the depreciated cost at date of sale to $6,750. Held, that the profit from the sale was $100 and that such profit should not be increased by depreciation assumed to have been sustained from March 1, 1913, to the date of sale, since such depreciation was not a legal deduction from gross income.
5. The decedent and his wife filed a joint return of income for the year 1920. Held, that the basis should not be changed after the tax liability became fixed and that the deficiency should be determined on the basis on which the income was reported.
*707 This is an appeal from the Commissioner's determination of a deficiency in income tax for the year 1920 in the amount of $38,016.70. Certain of the errors assigned in the petition were waived at the hearing and no evidence was*3744 submitted in support of certain others. The errors alleged which were not abandoned and upon which evidence has been presented are as follows:
(1) That the Commissioner erred in including in gross income 326/330 of a dividend of Stott & Son, Inc., amounting to approximately $30,153.82 for the reason that said dividend was an ordinary dividend subject only to surtaxes.
(2) That the Commissioner erred in taxing a certain dividend at both normal and surtax rates instead of at the surtax rate only.
(3) That the Commissioner erred in computing the cost of 82 shares of stock in the amount of $9,430 instead of $38,592.16.
(4) That the Commissioner erred in subjecting to tax that part of the dividend which represented earnings on the 82 shares of stock made prior to March 1, 1913.
(5) That the Commissioner erred in computing losses arising from the sale of real estate in the sum of $407.82 instead of $557.82.
*708 (6) That the Commissioner erred in not permitting the petitioner and his wife to file separate returns for 1920.
FINDINGS OF FACT.
The petitioner is the executor of the estate of Enoch Stott, who died June 16, 1923.
During 1919 and for a considerable*3745 number of years prior thereto Enoch Stott had been the principal owner and managing director and officer of a corporation known as Stott & Son, Inc., which was engaged in the business of manufacturing leather and cotton gloves and mittens. The stockholdings of the company at the close of 1919 were as follows:
| Owner. | Preferred stock. 1 | Common stock. 1 |
| Sophia Gerlicher | 8 | 3 |
| Enoch Stott | 318 | |
| Emma Stott (wife of Enoch Stott) | 8 | |
| E. Erickson | 1 | |
| Total issued and outstanding | 8 | 330 |
The distribution of the stock ownership of the corporation had continued without change since prior to March 1, 1913, except as to the ownership of 82 shares which were sold to Wells Levens on January 2, 1918, at a price of $35,269.84. Under the agreement entered into between Enoch Stott and Levens the latter was to become active manager of the corporation. Levens did not pay for the stock in cash but gave to Stott his note for $35,269.84, with interest at 6 per cent per annum. The shares of stock were held by Stott as security for the note. Stott was to have the right to repurchase the stock at its book value if Levens should resign his position*3746 as manager. Under this agreement Stott reacquired Levens' stock on January 2, 1919, at its then book value of $38,592.16. Interest at 6 per centum per annum was computed upon the note from January 2, 1918, to January 2, 1919, and the excess amount of the book value of the stock on the latter date over the sale price on January 2, 1918, plus interest was paid by Stott to Levens in cash.
The March 1, 1913, value of the entire capital stock was $107,263.36, or $100 per share for the preferred and $322.62 per share for the common. The surplus on the same date, after adding to the book value of the assets $10,000 for good will, was $73,463.36.
In October, 1919, the stockholders of the corporation, namely, Enoch Stott, Emma Stott, Sophia Gerlicher, and E. Erickson, as parties of the first part, and Albert E. Rowe, as party of the second *709 part, entered into an agreement for the sale by the corporation to Rowe of certain assets of the corporation, consisting of merchandise, machinery, office furniture and fixtures, and good will, as of January 1, 1920, Rowe agreeing to pay for such assets the inventory value thereof. The agreement provided that all accounts and bills payable*3747 by Stott & Son, Inc., on January 1, 1920, including all personal property, real estate, income and excess-profits tax for the year 1919, and all unpaid taxes, if any, should be paid by the parties of the first part, namely, the stockholders; further, that it was expressly understood and agreed by and between the parties to the contract that all moneys on hand in the name of Stott & Son, Inc., and all accounts owing to and bills receivable of Stott & Son, Inc., on January 1, 1920, should be and remain the property of the parties of the first part, namely, the stockholders, and should be distributed among them in proportion to their respective holdings of stock in Stott & Son, Inc., the same as any other assets of the corporation, and that they were not to be included or considered in the sale and purchase of "said stock by said second party."
The board of directors of Stott & Son, Inc., met on December 31, 1919, and the minutes of that meeting show as follows:
Moved by Sophia Gerlicher that all of the bills and accounts receivable of the company, as shown by its books Dec. 31, 1919, be paid out to stockholders of record on that date as a dividend on their stock out of corporate*3748 earnings and surplus, and that appropriate transfer of such bills and accounts receivable be made to the stockholders.
On December 31, 1919, Stott & Son, Inc., had accounts and bills receivable which brought in in cash or its equivalent the following amounts:
| General accounts receivable | $18,247.25 |
| Accounts previously charged off and collected subsequentto | |
| December 31, 1919 | 1,015.94 |
| Enoch Stott account receivable | 42,676.64 |
| Total | 61,939.83 |
The above accounts receivable other than the amount due from Enoch Stott were collected during the year 1920 and paid over to the stockholders during the year.
On or after January 1, 1920, Stott and Rowe took an inventory of the assets of the corporation to be acquired by Rowe, which inventory showed as follows:
| Merchandise | $163,069.14 |
| Machinery | 1,129.93 |
| Office furniture and fixtures | 741.62 |
| Good will | 10,000.00 |
| Total | 174,940.69 |
*710 At a special meeting of the stockholders of Stott & Son, Inc., held January 22, 1920, "for the purpose of selling, transferring and conveying the merchandise, machinery and office furniture of said Stott & Son, Inc., as set forth and contained in its inventory*3749 of January 1, 1920, together with the prestige, good will and trade name of said Stott & Son, Inc., to Stott & Son Co., a Minnesota corporation, for the sum of One Hundred Seventy-four Thousand, Nine Hundred Fifteen and 19/xx Dollars ($174,915.19)," the following resolution was passed:
"Resolved" That all merchandise, machinery and office furniture of Stott and Son Incorporated, as set forth and contained in its inventory of January 1, 1920, together with the prestige good will and trade-name of said Stott and Son Incorporated be sold, transferred and conveyed to Stott and Son Company, a Minnesota corporation, for the sum of One Hundred Seventy-four Thousand Nine Hundred Fifteen and 19/100 ($174,915.19/100) and the President and Secretary of said Stott and Son Incorporated are authorized and directed to make, execute and deliver to said Stott and Son Company a good and sufficient Bill of Sale or conveyance of the property above described upon the payment of the sum specified.
Of the sale price of $174,940.69 shown by the inventory, $10,000 was specifically for good will. The March 1, 1913, value of good will of Stott & Son, Inc., was at least $10,000.
Of the surplus earned*3750 by Stott & Son, Inc., subsequent to February 28, 1913, $91,944.73 remained available for distribution subsequent to December 30, 1919.
Between December 30, 1919, and January 26, 1921, the stockholders of Stott & Son, Inc., received in cash the sum of $199,208.09, of which amount Enoch Stott and Emma Stott received $196,003.13, on 326 shares of stock.
During 1920 Enoch Stott sold his homestead, which had a cost or March 1, 1913, value of $6,900 for $7,000. In his income-tax return for 1920 the decedent reported a profit of $100 upon this transaction. The respondent in determining the deficiency for 1920 increased the profit in the amount of $150, representing depreciation assumed to have been sustained upon the residence from March 1, 1913, to the date of sale.
The decedent filed a joint income-tax return with his wife for the year 1920.
In determining the deficiency for the year 1920, the Commissioner computed the cost of 82 shares of stock owned by Enoch Stott in the amount of $9,430 instead of $38,592.16, the consideration paid for same by Enoch Stott in acquiring said shares from Wells Levens on January 2, 1919. He also determined that the total liquidating dividends*3751 received by Enoch Stott and Emma Stott during the year 1920 were $196,003.13, and held that the excess of the amount received on *711 each share of stock in excess of cost or March 1, 1913, value, whichever was higher, was subject to both normal and surtax.
OPINION.
SMITH: 1. On March 1, 1913, Enoch Stott owned 318 shares of a total of 320 shares of common stock of Stott & Son, Inc. The March 1, 1913, value of each share of stock was $322.62, which was in excess of cost to Enoch Stott. Emma Stott, his wife, owned eight shares of stock of the company at the same date which cost her less than $322.62 per share. In 1918, Enoch Stott sold 82 shares of his common stock to Wells Levens at a price of $35,269.84, the book value thereof. He reacquired the same 82 shares in 1919 at a price of $38,592.16. For the purpose of determining the profit realized by Enoch Stott upon the liquidation of the corporation in 1919 and 1920, the respondent determined that those shares of stock cost Enoch Stott $9,430. This was in error. The cost to Enoch Stott of those shares was $38,592.16.
2. In October, 1919, the stockholders of Stott & Son, Inc., entered into an agreement with Albert*3752 E. Rowe to sell to him the assets of the corporation less cash on hand and accounts receivable at their inventory value, the inventory to be taken as of January 1, 1920. The board of directors of the corporation on December 31, 1919, declared a dividend to the stockholders of all the bills and accounts receivable of the company. The principal account receivable was $42,676.64 owing to the corporation by Enoch Stott for withdrawals made by him in past years. The evidence does not show whether this amount was collected from Stott and then paid back to him in 1920, but since there was no occasion for such a procedure, and since the amount theretofore withdrawn by Stott was less than his proportionate part of the accounts receivable on December 31, 1919, it is assumed that the withdrawals by Stott were not repaid by him to the corporation in 1920 but that he was allowed to retain the same as a part of his dividend. The balance of the accounts receivable was collected by Sophia Gerlicher and distributed to the stockholders, principally in 1920, although there was one payment that was made either from the accounts receivable or from amounts received from Rowe in January, 1921, the amount*3753 of the last payment not being shown by the evidence. The evidence does not show any assignment or transfer of the accounts receivable by the corporation to Sophia Gerlicher in 1919 or whether she collected the accounts receivable as an officer of the corporation or as trustee for the stockholders. The respondent determined that the amount received by Enoch Stott and Emma Stott in 1920 was $196,003.13 and at the *712 hearing counsel for the petitioner admitted that these stockholders received this amount in 1919 and in 1920. No question was raised that the total amount was received in 1920 with the exception of their pro rata shares of the accounts receivable included in the dividend declared on December 31, 1919. The petitioner claims that the dividend declared on December 31, 1919, was a dividend in ordinary course and that Enoch Stott and Emma Stott received income in 1919 to the extent of their pro rata shares of $61,939.83, which dividend is exempt from normal tax since it was paid out of earnings and profits acquired subsequent to February 28, 1913.
Considering first the question as to whether the stockholders received their income from the dividend declared December 31, 1919, in*3754 the year 1919, or in 1920, we have stated above that the evidence indicates that Stott was allowed to retain as his own $42,676.64 representing withdrawals made during 1919 or prior years. The declaration of the dividend served to vest in Stott this $42,676.64 in 1919. We think he derived no income from this portion of the dividend in 1920. The balance of the accounts receivable had to be collected by Sophia Gerlicher. They were paid over to the stockholders by her in 1920. We have held in ; ; and ; that dividends declared in one year but received by stockholders during the succeeding year constituted taxable income of the stockholders in the year in which the dividend was actually received where the stockholder made his return on a receipts and disbursements basis, and that this was true even under section 213 of the Revenue Act of 1921, which provides in part:
* * * The amount of all such items (except as provided in subdivision (e) of section 201) shall be included in the gross income for the taxable year in which received by the taxpayer, *3755 unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; * * *
We are not informed in the proceeding at bar as to the basis upon which Stott kept his books of account and made his income-tax returns. The respondent has determined that this dividend was income of the petitioner in the year 1920, the year of receipt by the stockholders, and in the absence of evidence showing error upon this point it must be held that such part of the dividend declared on December 31, 1919, as was paid over to the stockholders by Sophia Gerlicher in 1920, was income of the stockholders in 1920.
The status of the dividend declared by Enoch Stott & Son, Inc., on December 31, 1919, is the same as that of the dividend referred to in the case of . In that case we said:
At the time the dividends were declared the corporation was not in dissolution and there was no retirement of the capital stock in whole or in part, *713 nor was there any impairment of the capital of the corporation. The dividends were declared wholly from surplus and earnings. Even*3756 if it be conceded, as the respondent apparently contends, that the declaration of the dividend was in anticipation of the dissolution of the corporation and a step taken preliminary thereto, it is our opinion that the dividend would not fall within section 201(c) as made "in liquidation of a corporation."
We are of the opinion that this dividend declared on December 31, 1919, was not a liquidating dividend and that the stockholders receiving it are not liable to normal tax upon it.
3. The corporation was apparently in liquidation from some time in January, 1920. In that month it sold all of its assets to Albert E. Rowe, and during the year 1920 received payment therefor. The proceeds of this sale were distributed to the stockholders pro rata. In our opinion these distributions made in 1920, aside from the distributions based upon the dividend declared December 31, 1919, were liquidating dividends within the meaning of section 201(c) of the Revenue Act of 1918, which provides in part:
* * * Amounts distributed in the liquidation of a corporation shall be treated as payment in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee*3757 as other gains or profits.
The petitioner contends that any profit realized from the liquidation of the corporation is subject only to surtax and relies upon the decision of the Circuit Court of Appeals, Eighth Circuit, in . This case was, however, reversed by the Supreme Court of the United States in a decision handed down on February 20, 1928, . In accordance therewith it must be held that any profit realized by Enoch Stott and Emma Stott from the liquidation of the corporation is subject to both normal and surtax.
4. Enoch Stott sold his residence in 1920 for $7,000, the cost or March 1, 1913, value of which was $6,900. In his return for 1920 he computed a profit of $100 upon the sale. The respondent has increased the profit to $250 upon the ground that the depreciation sustained on the residence between March 1, 1913, and the date of sale amounted to $150. The petitioner has submitted no evidence tending to disprove the reasonableness of this amount for depreciation, provided depreciation is to be taken into account in determining the gain upon the sale. The petitioner insists, however, *3758 that, since in his income-tax returns Enoch Stott was never privileged by the statutes in force from 1913 to the date of sale of his residence to deduct depreciation on the residence, the same should not be taken into account in determining the profit. In support of this contention the petitioner cites ; Am. Fed. Tax Rep. 6754. The question before the Supreme Court in that case was whether a taxpayer selling oil-mining properties in 1917, which *714 he had purchased prior to March 1, 1913, was required in computing the gain to deduct from the original cost the aggregate of depreciation and depletion items, deduction of which from annual income-tax returns was authorized. The court held that he was required to do so but in the course of its opinion stated:
* * * On the other hand, we cannot accept the government's contention that the full amount of depreciation and depletion sustained, whether allowable by law as a deduction from gross income in past years or not, must be deducted from cost in ascertaining gain or loss. Congress doubtless intended that the deduction to be made from the original cost should be the*3759 aggregate amount which the taxpayer was entitled to deduct in the several years.
Although the case before the Supreme Court did not involve the question of profit realized on the sale of property, except where depreciation was allowable as a deduction from gross income, we are of the opinion that the principle enunciated has equal application here and that in determining the gain or loss on the sale of residence property there is no requirement that the excess of the selling price over the cost or March 1, 1913, value, whichever is higher, be increased by depreciation sustained, which depreciation was not deductible from gross income. In section 202 of the Revenue Act of 1918, Congress has specifically provided the basis for determining gain or loss and has not specifically provided for depreciation. The scheme of the statute appears to be that depreciation shall not be taken account of in determining the gain except where the statute has provided for the deduction of depreciation in returns of net income. We can not believe that it was the intention of Congress that individuals, for instance, should take into account depreciation in the determination of gain or loss on the sale*3760 of numerous articles of property, depreciation upon which is not a legal deduction from gross income. For instance, if a taxpayer acquired an automobile for pleasure in 1918 at a cost of $2,000, and in 1919 sold the same automobile at a price of $2,000, it is inconceivable that the individual should be required to return as income an assumed profit upon the sale of the automobile representing an amount for depreciation of the automobile for the year during which he had used it for purposes of pleasure. We think that the same principle applies in the case at bar. The only taxable profit realized by Enoch Stott on the sale of his residence in 1920 was $100, the difference between the selling price and the March 1, 1913, value, which was the same as or in excess of cost.
5. Enoch Stott and Emma Stott, his wife, filed a joint return of income for 1920. The petitioner alleges error in that the Commissioner has refused to compute the deficiency for 1920 upon the basis of separate returns of income for husband and wife.
*715 In *3761 ; ; ; and , we held that where husband and wife have filed a joint return of income, such return is a proper return under the statute, and that the date of filing is the beginning of the period within which an assessment may lawfully be made. We have held in ; ; ; ; ; ; and , that under the provisions of the Revenue Act of 1921 a joint return filed by husband and wife is the return required by statute and that husband and wife may not elect after the passage of the date for the filing of a return to file separate returns and have their tax liability computed upon the basis of such separate returns. The same question was in issue before the United States District Court, Northern District*3762 of Georgia, in . In the course of its opinion the court stated:
4. The joint return of Mr. and Mrs. Grant was made under section 223 of the Act of 1921 (Comp. St. § 6336 1/8 KK), providing: "If a husband and wife living together have an aggregate net income for the taxable year of two thousand dollars or over * * * (1) each shall make such a return, or (2) the income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income." Husband and wife living together frequently do not keep their affairs separate, and probably for this reason they are allowed to make returns as quasi partners. This may result on the one hand in disadvantage to them in increasing the rates of normal tax and surtaxes, or advantage in absorbing in the joint income losses which would exceed the separate income of the loser. There is nothing in the law to prohibit the choice of joint or separate returns according to the result on the taxes to be paid, although husband and wife actually have kept their affairs entirely separate. On the other hand, there is nothing in the act to extend the right of choice*3763 beyond the time for making the returns. It is not unreasonable to claim a right to substitute one form of return for the other up to the last day for making returns, but, after that, and especially after the returns have been reviewed and assessments made, there are strong administrative reasons for not permitting the upsetting of the whole basis of calculation. The statutes make no provision for amendment of returns, but, in order to correct mistakes and prevent inequities and injustices, they ought manifestly to be, and are, freely allowed. Prior to 1922 it was the practice under the guise of amendment to substitute a joint return of husband and wife for separate ones and vice versa, not because of any necessity or mistake, but because it turned out that something might be saved to the taxpayers by so doing. This practice was discontinued by the department, after public notice, long prior to the filing of the joint return in this case. I hold that the statutory right of choice is exhausted on expiration of the time for filing returns. There is no right, and it seems to me no propriety, in allowing any change later to the disadvantage of other classes of taxpayers. The contrary*3764 practice which was established by the department could be abolished by it. The expectation on the part of Mr. Grant that he would be allowed fire losses more than equal to his separate *716 income which induced him to include them in a joint return is not such a mistake of fact when disappointed as calls loudly for relief.
In the proceeding at bar it is to be noted that any additional assessment against Emma Stott is barred by the statute of limitations; therefore, if the Board determines a tax due from her the same may not lawfully be assessed and collected. At the hearing counsel for the petitioner stated for Emma Stott that if any tax liability were determined against her the same would be cheerfully paid. It does not appear, however, that the attorney for the petitioner had any authority to bind Emma Stott to pay any tax found to be due.
The only return from which the appeal was taken was a joint return of Enoch Stott and Emma Stott. We think that at this late date no valid claim can be made that the tax liability of Enoch Stott and Emma Stott should be determined upon the basis of separate returns which never have been filed. The denial of such right by the respondent*3765 is sustained.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50
TRUSSEL did not participate.
ARUNDELL dissents on the second point.
PHILLIPS, dissenting: It is my opinion that in determining gain or loss upon the sale of residence property, proper adjustment must be made for the depreciation which took place while the property was so used.
It is not questioned that depreciation takes place in all such property. When one buys depreciable property and sells it after years of use, that which is sold is not the whole thing originally acquired. ; . The residence has been used up in part; a part of its original cost has been recovered by use over the years. The amount of the cost which is used up in this manner by the owner represents a personal or living expense. Each of the revenue acts has expressly stated that such expenses shall not be deducted in computing taxable income. If, however, the owner is entitled to recover the full amount of his original cost, the effect is to allow him to deduct, in the year*3766 of sale, the depreciation which has taken place over the preceding years. Although he has used up a part of his property, he is permitted to recover the cost of the property so used. To adapt a familiar apothegm, he has consumed a part of the loaf in his living, yet he is compensated for a full loaf. This, it seems to me, is not only contrary to the intendment of the revenue acts, but contrary to their express terms.
*717 I do not regard this conclusion as contrary to the decision of the Supreme Court cited above and in the prevailing opinion; rather, I regard it as the logical application of the principle enunciated, applied in connection with the provisions of the revenue acts prohibiting the deduction of personal and living expenses. I therefore dissent from the conclusion reached in the prevailing opinion with respect to this issue. As to the remaining issues, I concur in the result.
STERNHAGEN, TRAMMELL, MORRIS, VAN FOSSAN, and MURDOCK concur in the dissent.
Footnotes
1. Par value $100 each. ↩