Beaumont v. Helvering

• Decision Date: 30 June 1934
• Docket Number: No. 5870.,5870.
• Citation: 73 F.2d 110,63 App. DC 387
• Parties: BEAUMONT v. HELVERING, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

63 App. DC 387, 73 F.2d 110 (1934)

BEAUMONT v. HELVERING, Commissioner of Internal Revenue.

No. 5870.

United States Court of Appeals for the District of Columbia.

Decided June 30, 1934.

Rehearing Denied October 12, 1934.

James Craig Peacock, Claude E. Koss, and John W. Townsend, all of Washington, D. C., for petitioner.

E. Barrett Prettyman, Thomas M. Mather, Helen R. Carloss, G. A. Youngquist, Sewall Key, and C. M. Charest, all of Washington, D. C., for respondent.

Before MARTIN, Chief Justice, and ROBB, HITZ, and GRONER, Associate Justices.

HITZ, Associate Justice.

This is an appeal from a decision of the Board of Tax Appeals, and while a number of questions were argued there, only two are in issue here. These items relate to the petitioner's returns for the years 1925, 1926, 1927, 1928, and the questions are:

(1) Do certain sums received by the petitioner from American corporations while he was residing abroad constitute compensation for services rendered by him without the United States, and thus fall within the class of exempt income?

(2) Do certain losses sustained by the petitioner in gambling at Monte Carlo constitute losses incurred in transactions entered into for profit, and thus fall within a proper category of deductions?

I. Compensation for Services.

The petitioner is an American citizen who has resided in France for eighteen years, and during the three years in question, 1926, 1927, 1928, he made one visit to the United States of about two weeks' duration. He was the president and sole stockholder of the Beaumont Investment Company and the Beaumont Investment Trust (a Massachusetts trust), and was president of the Dayton Securities Company, all of whose stock was owned by the Beaumont Investment Trust until 1928, when it was acquired by the petitioner personally. He was also vice president and minority stockholder of Commercial Investment Trust, Inc., a subsidiary of Commercial Investment Trust Corporation. The first three companies were personal holding companies, and the nature of their business can be inferred from their income tax returns for the years in question, which show the great bulk of their income derived from dividends on stock which were exempt from the taxable income of the corporations. For each of the three years in question, the petitioner received the sum of $17,500 from the Dayton Securities Company; $12,500 from the Beaumont Investment Company; $5,000 from the Commercial Investment Trust, Inc.; and $10,000 from the Beaumont Investment Trust, except that he received from the last-named company only $5,000 in 1926.

The relevant statutes allow to citizens of the United States who are bona fide nonresidents abroad for over six months of the taxable year an exemption from gross income for amounts received from sources without the United States, if such amounts constitute earned income. Revenue Act of 1926, c. 27, 44 Stat. 9, §§ 209 (a), 213, 214 (a), U. S. C. App., title 26, §§ 940 (a), 954, 955 (a), 26 USCA §§ 940 (a), 954, 955 (a); Revenue Act of 1928, c. 852, 45 Stat. 791, §§ 22 (a) (b) (9), 31, 116 (a), 119 (c), 26 USCA §§ 2022 (a), (b) (9), 2031, 2116 (a), 2119 (c).

The petitioner did not include the abovementioned amounts in his returns, and the Commissioner made a deficiency assessment. The Board of Tax Appeals affirmed the determination of the Commissioner on the ground that the evidence did not show that the sums were "compensation for personal services actually rendered," within the statutory definition of earned income.

The government concedes that the sums were received from sources without the United States, if they constituted compensation for services performed without the United States. See Ingram v. Bowers, 47 F.(2d) 925 (D. C. S. D. N. Y.). But the government contends that the petitioner rendered no services abroad; that the sums claimed represented not reasonable compensation for services rendered, but a distribution of profits; and that the Board rightly decided to this effect.

The petitioner maintains that the decision of the Board of Tax Appeals was erroneous because the Commissioner had determined, in his deficiency letters to the petitioner, that the sums in question were earned income; that this determination is presumed to be correct, and the Commissioner is estopped to deny it; that the uncontradicted and unimpeached testimony of the petitioner shows that the salaries were received as compensation for services actually performed; and that this testimony was confirmed by other evidence.

But it is settled that the findings of the Board of Tax Appeals must be accepted on appeal if there is evidence to support them. Phillips v. Commissioner, 283 U. S. 589, 51 S. Ct. 608, 75 L. Ed. 1289; Kekaha Sugar Co. v. Burnet, 60 App. D. C. 172, 50 F.(2d) 322. The petitioner's contention can be supported only on the theory that the Board of Tax Appeals indulged a mistaken presumption as to the correctness of the Commissioner's determination. But this contention cannot be supported for several reasons.

First, because it does not clearly appear that the Commissioner determined in his deficiency letters that the sums constituted earned income. For the statement accompanying the letter relating to the 1926 and 1927 returns said: "You are advised that it is necessary that a taxpayer actually earn salaries in foreign countries when residing abroad in order that it may be exempt from income under section 213 (b) (14) of the Revenue Act of 1926 26 USCA § 954 (b) (14)." The statement relating to the 1928 return said: "This office holds that the salaries indicated above are not exempt under section 116 (a) of the Revenue Act of 1928, and Solicitor's Memorandum 5446, V-1, Cumulative Bulletin 49, for the reason that you, a citizen of the United States, resided in France by choice, and not in connection with your duties as an officer of the above corporations." It is true that the Commissioner allowed a credit for earned income on these amounts. Yet the statement of his reasons for denying the exemption is so ambiguous as to negative an inference that such statement was a determination that the sums constituted earned income, but could not be exempted because earned within the United States.

Second, it does not appear that the Board of Tax Appeals gave controlling weight in its decision to a presumption in favor of the determination by the Commissioner that the sums were not exempt.

Third, such a presumption would have been proper even if the Commissioner advanced before the Board of Tax Appeals a reason why the amounts were not exempt which he had not assigned in his deficiency letters. The question of the effect of a change in argument by the Commissioner upon the presumption in favor of his determination of taxability has been considered in at least three circuits. In each it was held that the presumption persists, since it is the Commissioner's determination of taxability and not his reasoning which is presumed to be correct. See Crowell v. Commissioner, 62 F.(2d) 51 (C. C. A. 6th), where the deficiency letter indicated that the determination of value of stock received as compensation was based on the existence of readily realizable market value, while the decision in the Board of Tax Appeals rested on the ground that such value was immaterial. See Alexander Sprunt & Son v. Commissioner, 64 F.(2d) 424 (C. C. A. 4th), involving the deduction of commissions as an ordinary and necessary expense; the Commissioner disallowed part of the amounts on the ground that they were not reasonable, while the decision in the Board of Tax Appeals was upon the ground that they were a distribution of profits. See, also, J. & O. Altschul Tobacco Co. v. Commissioner, 42 F.(2d) 609 (C. C. A. 5th), where the Commissioner found that the corporation did not have a merely nominal capital because it owned a one-half interest in a farm, while the Board of Tax Appeals relied upon the ground that the corporation had a cash surplus which was capital within the meaning of the statute. Compare, also, Darcy v. Commissioner, 66 F.(2d) 581, 585 (C. C. A. 2d), where the court said: "The burden is upon the petitioners to show the correct amount of the tax in order to show that the commissioner's determination was wrong. * * * In a situation like this, that requires proof that the amount of the deficiency is erroneous, for it is that fact, and not the method of computation, which controls."

The petitioner cites a number of cases holding that where new matter is pleaded by the Commissioner the burden of proof, in respect of such matter, shall be upon him. This is the rule of practice in the Board of Tax Appeals. Crider Brothers v. Commissioner, 10 B. T. A. 338, 350; Schilling Grain Co. v. Commissioner, 8 B. T. A. 1048, 1057; Evangeline Gravel Co. v. Commissioner, 13 B. T. A. 101, 104; Falck v. Commissioner, 26 B. T. A. 1359. But these cases clearly demonstrate that the new matter with respect to which the burden rests upon the commissioner is new matter pleaded to support an additional liability, rather than an additional reason for the liability previously in question. In the present case, no such new matter was pleaded, nor did the Commissioner admit in his answer any of the elements relied upon in the Board of Tax Appeals. The petitioner could not have been surprised by the argument since the statute obviously indicated the necessary elements of his case.

Thus the question reverts to the existence of evidence upon which the decision of the Board of Tax Appeals may rest. Or, as stated by Judge Learned Hand in Jewett & Co. v. Commissioner (C. C. A.) 61 F.(2d) 471, the question is whether the petitioner's evidence was "so compelling" that the Board should have found the facts in his favor. This petitioner's evidence was largely his own deposition upon written interrogatories, in which he stated that the sums were paid to him "for personal services performed as an officer of the companies. ...