Gladstone Company, Limited v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 30 March 1937
• Docket Number: Docket No. 79155.
• Citation: 35 BTA 764
• Parties: GLADSTONE COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

35 B.T.A. 764 (1937)

GLADSTONE COMPANY, LIMITED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 79155.

Board of Tax Appeals.

Promulgated March 30, 1937.

Frank W. Chambers, Esq., for the petitioner.

W. Frank Gibbs, Esq., and Bernard D. Daniels, Esq., for the respondent.

OPINION.

ARNOLD:

This proceeding involves a deficiency in income tax in the amount of $15,765.12 for the calendar year 1931 and a delinquency penalty of $3,941.28.

Two questions are presented — (1) whether under the facts of this case in the computation of petitioner's net income it is entitled to deductions allowed under section 23 (p) of the Revenue Act of 1928, (2) whether the item of $99,960 received by petitioner in 1931 from the Brady Realty & Securities Co. was in fact a dividend received by petitioner on the stock of a domestic corporation within the United States, or whether it represented a capital transaction.

The petitioner is a corporation, organized under the laws of the Colony of Newfoundland, with its principal office at Columbus Hall, St. Johns, Newfoundland. It was organized in December 1930. The only assets owned by petitioner were 1,428 shares of stock of the Brady Realty & Securities Co., a domestic corporation located within the United States, and petitioner's only source of income was the dividends received on that stock.

The Brady Realty & Securities Co. was organized by James Cox Brady in 1923. The total stock issued by the corporation was issued to James Cox Brady in his name in trust for his wife and five children, one of whom was Ruth Brady Scott. James Cox Brady died in 1930 and each of the children received one-seventh of the stock so held and Mrs. Brady received two-sevenths.

During the year 1929 Ruth Brady married Michael F. Scott, a citizen of England. Shortly after the marriage they went to England, where they have continuously resided except for visits to the United States.

The Brady Realty & Securities Co. paid no dividends during the lifetime of James Cox Brady, the earnings of the company being allowed to accumulate. On August 20, 1930, after the death of James Cox Brady, the company declared an initial dividend of $70 per share, payable December 31, 1930, to stockholders of record September 2, 1930.

On December 30, 1930, Ruth Brady Scott transferred 1,428 shares of stock of the Brady Realty & Securities Co. to petitioner, receiving for the stock $492,000 in bonds of the petitioner and $5,000 of its capital stock. The bonds were payable serially, $12,000 at a time, over a period of years. At the same time Ruth Brady Scott assigned and transferred to petitioner the dividends payable to her on December 31, 1930, on the 1,428 shares of Brady Realty & Securities Co. stock, for which she received one bond having a face value of $100,000. This was designated as an "A" bond and was not a part of the series received for the stock. The dividend check in the sum of $99,960 was paid to the petitioner pursuant to the assignment order on or about January 7, 1931. When the $100,000 bond was issued in payment for the dividend check it was understood that the bond was to be retired with the dividend. Upon receipt of the dividend petitioner immediately paid to Ruth Brady Scott the $100,000 face value of the "A" bond.

The petitioner received dividends on the 1,428 shares of Brady Realty & Securities Co. stock during the calendar year 1931 as follows: March 30, $7,140; May 29, $7,854; September 1, $7,854; and December 12, $8,568.

During the summer of 1933 a revenue agent investigated the records of the Brady Realty & Securities Co. During the course of the investigation the agent inquired of the assistant secretary of petitioner, one John Cox, whether he had filed a return for the petitioner, to which Cox answered, "No." The investigating agent prepared and filed a return for petitioner on August 7, 1933, pursuant to section 3176 of the Revised Statutes. On November 13, 1933, the Commissioner mailed to petitioner a preliminary audit letter proposing a deficiency in tax. Thereafter, on December 7, 1933, petitioner filed with the collector of internal revenue for the second district of New York, a corporation income tax return on form 1120, signed by John Cox, assistant secretary, in which $131,376 was reported as dividends on stocks of domestic corporations and on line 19 of page 1 a similar amount was deducted as dividends. No net income was reported, nor were there any schedules or information of any description attached to the return.

John Cox, who signed and filed the return for petitioner, was not familiar with the requirements and the law of making returns for foreign corporations. It was his understanding that unless a foreign corporation had taxable income it was not required to file a return and that dividends were a returnable deduction of either foreign or domestic corporations and not taxable.

In determining the deficiency here in question the respondent disallowed the deductions claimed on line 19 of petitioner's return (dividends of corporations from schedule H) under section 233 of the Revenue Act of 1928,¹ on the ground that petitioner's return filed December 7, 1933, did not comply with the requirement of the statute and therefore did not entitle it to the deduction claimed.

The petitioner contends that, although its return was filed late, it has complied with the provisions of section 233 and is entitled to the deduction claimed. It further contends that the item of $99,960 received by it on January 7, 1931, was purchased by it and did not constitute income, being a return on a capital transaction.

Section 23 of the Revenue Act of 1928, provides among other things, that:

In computing net income there shall be allowed as deductions:

* * * * * * *

(p) Dividends received by corporations. — * * *

(1) from a domestic corporation, * * *

* * * * * * *

The deduction allowed by this subsection shall not be allowed in respect of dividends received from a corporation organized under the China Trade Act, 1922, or from a corporation which under section 251 is taxable only on its gross income from sources within the United States by reason of its receiving a large percentage of its gross income from sources within a possession of the United States.

Section 235 of the Revenue Act of 1928 provides that in the case of a foreign corporation the return shall be made on or before the fifteenth day of the sixth month following the close of the fiscal or calendar year as the case might be.

Petitioner argues that the requirement of section 233 that the return shall be filed "in the manner prescribed in this title" does not include the element of time, and that the purpose of the section is administrative and not penal in character.

The Commissioner argues that under section 233 the filing of a timely return is a necessary prerequisite to any deductions and credits to which a foreign corporation may be entitled, but insists that regardless of the late filing of the return petitioner should be denied the benefits of the deduction claimed because it has failed to include in its return "all the information which the Commissioner may deem necessary for the calculation of such deductions and credits."

The Revenue Act of 1928 authorizes the Commissioner, with the approval of the Secretary of the Treasury, to prescribe and publish all needful rules and regulations, and under that authority the regulations provide that corporations must make returns of form 1120 prescribed by the Commissioner. This form is furnished the taxpayer for use in making up the return. Attached to and as a part of the return prescribed are certain instructions for the guidance of the taxpayer in making up the return.

An examination of the return filed by petitioner discloses that it did not include any information whatever concerning the deduction claimed except that it consisted of dividends in the amount of $131,376.

Section 233 provides that a foreign corporation is entitled to the deduction of dividends from domestic corporations "only by filing, or causing to be filed, * * * a true and accurate return of its total income received from all sources in the United States, including therein all the information which the Commissioner may deem necessary for the calculation of such deductions and credits." In corporation return form 1120 is "Schedule H — Dividends Deductible", in which the name of the corporation paying the dividend sought to be deducted is required, together with the amount received as dividends, for the...