Alvord
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Apr 3, 1959
32 T.C. 1 (U.S.T.C. 1959)

Docket Nos. 62747 64407.

1959-04-3

ELLSWORTH C. ALVORD AND KATHARYN W. ALVORD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Harry L. Brown, Esq., for the petitioners. William Schwerdtfeger, Esq., for the respondent.


Harry L. Brown, Esq., for the petitioners. William Schwerdtfeger, Esq., for the respondent.

1. Patenotre owned 95 per cent of the shares of Hekor, a Canadian corporation, whose assets consisted of securities held for its account in New York City by Hutton & Co. On September 29, 1949, Patenotre assigned the 9,500 shares to the Treasury as security for substantial tax liabilities of his and his mother's for the years 1931 to 1949, inclusive, in consideration for tax clearance to leave the United States. On October 26, 1949, Patenotre agreed to assign at some future date the 9,500 shares to petitioner, a United States citizen ‘free and clear of any prior liabilities and assignment’ for $475,000 and cancellation of a $700,000 liability. It was also agreed that Hekor's assets would not be used to pay Patenotre's liabilities. In July 1951, Patenotre died and on September 8, 1951, petitioner became the holder and owner of the 9,500 shares of Hekor previously owned by Patenotre, subject to whatever liens the Treasury had against the stock. During 1951, 1953, and 1954, the Treasury, on account of the liens which it held against Hekor's assets and against the 9,500 shares of Hekor's stock formerly owned by Patenotre, refused to allow Hekor to pay dividends equal to its undistributed earnings. Respondent determined that Hekor was a foreign personal holding company and that 95 per cent of its undistributed Supplement P earnings is includible in the gross income of petitioner for those years. Held, that Hekor was a foreign personal holding company under section 331(a), I.R.C. 1939, and similar provisions of the 1954 Code, and petitioner is taxable on his proportionate part of the Supplement P net income of Hekor under section 337, 1939 Code, for the taxable years as determined by the Commissioner.

2. Petitioner contends in the alternative, should we hold that he is taxable on his proportionate part of Hekor's Supplement P net income for the year 1951, that nevertheless he would be taxable only on his proportion of Hekor's Supplement P net income for that year as would be embraced in the period from September 8, 1951, to the end of the calendar year 1951, the corporation being on the calendar year basis. Petitioner's contention in this respect is based on the fact that he did not become the owner of 9,500 shares of the 10,000 shares of outstanding stock of Hekor until September 8, 1951. Held, petitioner is not sustained in this alternative contention. Under the terms of section 337, 1939 Code, and similar provisions in the 1954 Code, petitioner is taxable on 95 per cent of Hekor's Supplement P net income for the entire year 1951 and not just for the period claimed.

The respondent determined deficiencies in income tax as follows:

+-------------------------------+ ¦Docket No. ¦Year ¦Amount ¦ +-------------+------+----------¦ ¦62747 ¦1951 ¦$50,081.94¦ +-------------+------+----------¦ ¦64407 ¦(1953 ¦53,571.60 ¦ +-------------+------+----------¦ ¦ ¦(1954 ¦59,735.22 ¦ +-------------------------------+

The deficiency for each year is due on one adjustment, viz, the addition of ‘Foreign Personal Holding Company’ income. The adjustment for 1951 is explained in the notice of deficiency as follows:

(a) It is held that the amount of $58,485.61, representing your share of the undistributed net income of Hekor Investment Holding Company, Ltd., a foreign personal holding company as defined by section 331 of the Internal Revenue Code of 1939, is taxable to you under the provisions of section 337.

The explanations for the years 1953 and 1954 are similar except for amount and except that the explanation for 1954 refers to the applicable provisions of the Internal Revenue Code of 1954.

None.
Decisions were entered by the Court pursuant to such stipulations on November 23, 1955.
On November 21, 1955, by administrative action, the income tax liabilities of Eleanor, Patenotre, and the estate of Patenotre for that portion of the period 1931 through 1953 which was not involved in the cases docketed in the Tax Court were established to be as follows (exclusive of interest);

Decisions will be entered for the respondent. All section references are to the Internal Revenue Code of 1939, except where noted otherwise.

Return showed estimated tax payment greater than this figure. Check for estimated tax payment not honored by J.P. Morgan & Co. by reason of account being under tax lien.

Pursuant to section 3804, 1939 Code.
No portion of these surtaxes was paid and they, in their entirety, were abated early in 1954.
On June 19, 1953, a copy of a revenue agent's report was mailed to the estate of Patenotre. In this report, deficiencies in income taxes of the estate were recommended, as follows:

The following schedule shows Hekor's income and expense for the portion of 1951 prior to and after Sept. 8, 1951, the day petitioner acquired control of his shares of Hekor:


By appropriate assignments of error the entire deficiencies are placed in issue.

FINDINGS OF FACT.

A stipulation of facts has been filed and is incorporated herein by this reference.

Ellsworth C. Alvord, hereinafter sometimes referred to as Alvord or petitioner, and Katharyn W. Alvord, husband and wife, with a business address at 918 Sixteenth Street NW., Washington 6, D.C., filed their individual Federal income tax returns jointly on the cash basis for the calendar years 1951, 1953, and 1954, with the district director of internal revenue at Baltimore, Maryland.

Hekor Investment Holding Company, Ltd., sometimes hereinafter referred to as Hekor, is a corporation organized on April 26, 1934, under the laws of the Dominion of Canada. At all times material hereto it had outstanding 10,000 shares of authorized common stock, representing its entire capital stock issue. Its statutory head office is at 105 St. James Street, West, Montreal, Canada. Hekor maintains its books and records and reports its income for Federal tax purposes on the calendar year basis and on the cash basis of accounting.

During all times relevant hereto 500 shares of Hekor's capital stock were owned by Pierre du Pasquier, who was at all times relevant, a citizen and resident of France.

Prior to September 8, 1951, 9,500 shares of Hekor's capital stock were owned by Raymond Patenotre, hereinafter referred to as Patenotre, who was at all times material hereto a citizen of France. During the period February 14, 1947, to September 30, 1949, he was a resident of the United States and at all other times material hereto he was a resident of France.

The assets of Hekor, which consisted mainly of securities, were held by E. F. Hutton & Co., hereinafter referred to as Hutton & Co., a New York stockbrokerage firm. J. P. Morgan & Co., hereinafter referred to as Morgan & Co., New York City, at all times relevant held securities and other assets for the account of Patenotre and Eleanor Patenotre, hereinafter referred to as Eleanor, mother of Patenotre.

On March 1, 1943, respondent made a jeopardy assessment of income tax, additions thereto, and interest for the calendar year 1930 against Eleanor, as follows:

+-------------------------------+ ¦Tax ¦$1,279,465.87¦ +-----------------+-------------¦ ¦Additions to tax ¦639,732.94 ¦ +-----------------+-------------¦ ¦Interest ¦917,762.62 ¦ +-----------------+-------------¦ ¦Total ¦2,836,961.43 ¦ +-------------------------------+

A notice of deficiency was issued pursuant to the jeopardy assessment and a petitioner for redetermination, Docket No. 1492, was filed with the Tax Court of the United States on May 1, 1943. With respect to such jeopardy assessment, a notice of lien, No. 433359, in the amount of $2,842,557.62, was filed with Morgan & Co. on March 15, 1943. Another notice of lien, No. 453521, in the amount of $3,345,088.42, including interest to date, was filed with Morgan & Co. on February 14, 1946. A third notice of lien, No. 493761, also in the amount of $3,345,088.42, was filed with Hutton & Co. on September 22, 1949. The notice to Hutton & Co. stated, inter alia, that it ‘applied to any right, title, or interest which Eleanor E. Patenotre may have in any securities or cash held by you for * * * Hekor.’

On February 8, 1946, respondent made a jeopardy assessment of income tax, personal holding company surtax, and interest to that date aggregating $544,470.04 against Hekor for the taxable years 1934 through 1942. On March 29, 1946, respondent issued a deficiency notice to Hekor determining that of the $544,470.04, $27,809.24 had been assessed in error. Appeal was taken to the Tax Court, Docket No. 19313. A notice of lien with respect to the jeopardy assessment made against Hekor was filed with Hutton & Co. on September 22, 1949.

On March 23, 1948, respondent made a jeopardy assessment of income tax and additions thereto totaling #324,789.48 against Patenotre for the taxable years 1934 through 1940, as follows:

+---------------------------------------+ ¦ ¦ ¦Additions to tax ¦ +----+----------+-----------------------¦ ¦Year¦Deficiency¦ ¦ ¦ +----+----------+-----------+-----------¦ ¦ ¦ ¦50 per cent¦25 per cent¦ +----+----------+-----------+-----------¦ ¦1934¦$551.88 ¦$275.94 ¦$137.97 ¦ +----+----------+-----------+-----------¦ ¦1935¦6,114.81 ¦3,057.41 ¦1,528.70 ¦ +----+----------+-----------+-----------¦ ¦1936¦4,003.22 ¦2,001.61 ¦1,000.81 ¦ +----+----------+-----------+-----------¦ ¦1937¦88,059.38 ¦44,029.69 ¦22,014.85 ¦ +----+----------+-----------+-----------¦ ¦1938¦45,912.31 ¦22,956.16 ¦11,478.08 ¦ +----+----------+-----------+-----------¦ ¦1939¦36,326.98 ¦18,163.49 ¦9,081.75 ¦ +----+----------+-----------+-----------¦ ¦1940¦4,625.39 ¦2,312.70 ¦1,156.35 ¦ +---------------------------------------+

185,593.97 92,797.00 46,398.51

Jeopardy assessment was also made of interest in the amount of $101,943.30. On April 9, 1948, respondent mailed his notice of deficiency to Patenotre asserting taxes and additions thereto in the amounts assessed. Appeal was taken to the Tax Court, Docket No. 19543. A notice of lien, No. 483645-C, with respect to the jeopardy assessment made against Patenotre was served upon Morgan & Co. on March 25, 1948, in the amount of $426,732.78. Another notice of lien, No. 493760, in the same amount, was served upon Hutton & Co. on September 22, 1949. The latter notice stated, inter alia, that it ‘affects all right, title and interest of Raymond Patenotre to any securities or cash held by you for the account of Hekor.’

On January 6, 1947, Patenotre stated that his sister, Yvonne de Castellane, was possessed of an interest in the assets in the account of Eleanor held at Morgan & Co. amounting to approximately 30 per cent thereof. In February 1947, Yvonne created two trusts to which her interest was assigned, delivery of which could not then be effected because of the various tax liens against the property. In 1949, Yvonne revoked such assignments to permit Patenotre to pledge the account to secure the asserted tax liabilities of him and his mother. She continued, however, to claim an interest in these assets to the extent of approximately 30 per cent.

Petitioner is, and at all times material hereto was, a citizen of the United States and the senior partner in the Washington law firm of Alvord and Alvord. Prior to and during 1949, petitioner and his law firm rendered substantial services to Patenotre and Eleanor and advanced certain sums of money to them. On January 25, 1949, petitioner and Patenotre entered into an agreement relative to the obligations of the latter. Therein, Patenotre agreed (1) that he owed Alvord and Alvord the amount of $687,186.67 plus a possible contingent fee of $25,000, plus an amount determined by Patenotre, in his sole discretion, for the petitioner's personal services; (2) that he would pay forthwith $32,450.38; (3) that he would immediately pay any sums which became available to him from Hekor or Morgan & Co.; (4) that as security for the debts he would transfer to Alvord and Alvord the stock of Hekor; (5) that in the event the Government undertook to enforce its liens upon the assets of Hekor or the accounts at Morgan & Co., he would take steps to secure the enforcement of the liens on the Morgan & Co. accounts prior to those on the Hekor assets; and (6) that he would obtain the consent of Eleanor to the agreement.

During 1949, respondent's agents were investigating the income tax liability of Patenotre for the years 1932 and 1933 and the income tax liability of Eleanor for the years 1931 through 1948.

On September 29, 1949, Eleanor and Patenotre contemplated departing from the United States. In order to obtain Federal tax clearance it was necessary to make arrangements for the payment of certain liabilities and for the securing of certain other proposed liabilities for Federal income taxes.

On September 29, 1949, the Tax Court case of Eleanor Patenotre, Docket No. 1492, was disposed of by stipulation filed. The settlement, including interest, was in the amount of $2,000,000, which sum was paid. No release of liens relative to Eleanor's 1930 tax liability was issued by respondent, however, until March 2, 1955.

Also, on that date, the following agreements were entered into:

(1) Patenotre and Eleanor, in a letter to Joseph Pirozzi, Chief, Alien Tax Division, Bureau of Internal Revenue, New York City, stated as follows:

The purpose of this letter is to set forth sufficient information to induce you to issue to the undersigned the necessary Federal tax clearance to permit them to depart from the United States.

As you know, there is now pending a criminal case in the United States District Court for the Southern District of New York against the undersigned with respect to the alleged non-payment of income taxes by Eleanor Patenotre for the taxable year 1930. There is also pending in the Tax Court of the United States a civil case entitled ‘Eleanor E. Patenotre v. Commissioner of Internal Revenue,‘ involving such unpaid taxes for the taxable year 1930.

In addition to the foregoing, the following matters are pending with respect to the alleged tax liabilities of the undersigned:

(a) There is pending in the Tax Court of the United States an action entitled ‘Raymond Patenotre v. Commissioner of Internal Revenue’ which involves approximately $387,000 in taxes, penalties and interest for the taxable years 1934 through 1940, inclusive.

(b) There is pending in the Office of the Internal Revenue Agent, Second New York Division, claims against Eleanor Patenotre covering taxes, penalties and interest in the sum of approximately $2,534,000. for the taxable years 1931 through 1948, inclusive.

(c) There are further possible claims against Raymond Patenotre for the taxable years 1941 to 1948, inclusive of approximately $102,000.

The 1930 civil and criminal cases have been settled upon the following basis:

(1) Eleanor Patenotre is to plead guilty to the criminal charge pending against her in the United States District Court for the Southern District of New York.

(2) The criminal case in the United States District Court for the Southern District of New York against Raymond Patenotre is to be dismissed.

(3) The civil liabilities for the taxable year 1930 for taxes, penalties and interest are to be settled by a lump sum payment of $2,000,000.

We hand you herewith the 1949 tentative income tax returns for the undersigned covering income to the proposed date of sailing. The payment of any Federal income tax liabilities of the undersigned for the year 1949 is to be secured by an escrow agreement which we have authorized J. P. Morgan & Co., Incorporated to enter into with you. In addition, all of the other Federal income tax liabilities of the undersigned hereinbefore specified are to be secured by said escrow agreement. A copy of our instructions to J. P. Morgan & Co., Incorporated authorizing it to enter into such escrow agreement is attached hereto. Moreover, we hand you herewith an assignment to the Collector of Internal Revenue of the Second District of New York by Raymond Patenotre as sole stockholder of Hekor Investment Holding Co. Ltd. all of his right, title and interest in and to the issued and outstanding stock of said corporation and in and to the assets of said corporation as additional security for the aforementioned Federal income tax liabilities.

It is understood that neither this letter nor the escrow agreement which we have authorized J. P. Morgan & Co., Incorporated to enter into with you, constitutes any admission by either of us that there are any taxes, penalties and interest due and owing the United States for any taxable years by either of the undersigned with the exception of the liability of Eleanor Patenotre to pay $2,000,000. in settlement of her 1930 Federal income tax liability, nor any admission by the undersigned as to the actual ownership between them of the assets held in their names or for their account by J. P. Morgan & Co., Incorporated.

(2) Patenotre and Eleanor, in a letter to Morgan & Co., after reciting that they had settled Eleanor's 1930 tax liability for $2,000,000 and that the liability of Patenotre and Eleanor for the years 1931 to 1949, inclusive, is presently estimated at $3,133,000, directed Morgan & Co., and the latter agreed thereto, as follows:

1. Pay forthwith two million dollars ($2,000,000.) to the ‘Collector of Internal Revenue’ for the Second District of New York out of our accounts in your possession pursuant to written advice from such Collector, in form satisfactory to you, to the effect that payment of such amount will constitute a complete satisfaction of all Federal income tax liability of Eleanor Patenotre for the year 1930.

3. Pay the sum of five hundred thousand dollars ($500,000.) to the undersigned or pursuant to the instructions of either of them.

4. You are to hold in escrow for the benefit of the United States of America and/or the Collector of the Internal Revenue for the Second District of New York all the remaining assets of whatsoever kind or nature which you now hold in our names or for our account, together with any interest, cash or stock dividends and other income which may accrue thereon, to secure the payment of any and all Federal income tax liabilities for the calendar years 1931 to 1949, inclusive which may be finally determined to be due from the undersigned Eleanor Patenotre and Raymond Patenotre, either or both of them. For the purpose of this agreement, any income tax liability shall be deemed to be finally determined to be due in any of the following three events:

(a) The execution and delivery by the undersigned, either or both of them, or their duly authorized representative, to the Bureau of Internal Revenue of a waiver of restrictions on assessment and collection of deficiency in tax;

(b) A determination of the Commissioner of Internal Revenue which has become final under the Internal Revenue laws;

(c) A decision by the Tax Court of the United States or a judgment, decree, or other order by any other court of competent jurisdiction, which has become final.

5. (Convert securities to cash in order to make payments to collector when due ‘in whole or part.’)

6. (Pirozzi, in his sole discretion, if he believes the United States interest to be in jeopardy is authorized to direct the sale of securities, and in which event you shall hold the proceeds under this escrow agreement.)

7. (Upon direction of Patenotre or Eleanor you shall convert securities to cash or United States bonds and hold under this escrow agreement.)

9. You are directed to enter into an escrow agreement with Mr. Joseph Pirozzi, Chief of the Alien Tax Division, Bureau of Internal Revenue in order to carry out the foregoing instructions, which escrow agreement shall be in the form attached hereto.

Upon the termination of said escrow agreement, you shall hold any securities and other assets then remaining subject to the written instructions of the undersigned or either of them, or their duly authorized representative.

3. Morgan & Co., pursuant to its aforementioned agreement with Patenotre and Eleanor, agreed with Pirozzi to carry out the abovementioned escrow agreement. It represented to Pirozzi that it held cash, securities, and other assets in the names of or for the account of Patenotre and Eleanor, with a present market value of at least $3,200,000 to secure the payment of any and all Federal income tax liabilities which may be finally determined to be due from Patenotre and Eleanor for the years 1931 to 1949, inclusive.

In addition, on September 29, 1949, Patenotre executed and delivered a document to the acting collector of internal revenue, second district of New York, which provided, inter alia:

That the undersigned Raymond Patenotre for himself, his heirs, executors, administrators and assigns, in consideration of the issuance by Joseph Pirozzi, Chief of the Alien Tax Division of the Bureau of Internal Revenue, to the undersigned assignor and Eleanor Patenotre of the necessary tax clearance permitting the said assignor and Eleanor Patenotre to depart from the United States, and hereby assigns, transfers and sets over to Raymond F. Ryan, as Acting Collector of Internal Revenue for the Second District of New York and his successor or successors in office, all his right, title and interest in and to all of the issued and outstanding stock of the Hekor Investment Holding Co., Ltd., a corporation organized under the laws of the Dominion of Canada, consisting of . . . shares of common stock, and all his right, title, interest and equity in and to the assets of the said corporation, to secure the payment of any and all Federal income tax liabilities for the calendar years 1931 to 1949, inclusive, which may be finally determined to be due from Eleanor Patenotre and Raymond Patenotre, either or both of them. * * *

The undersigned assignor hereby represents that subject to any valid liens that may exist he is the sole owner of all the issued and outstanding capital stock of the above mentioned corporation.

When the tax liabilities secured hereby have been fully satisfied, this assignment shall be null and void, otherwise to remain in full force and effect.

Morgan & Co., pursuant to its agreement of September 29, 1949, by letter dated October 7, 1949, notified Pirozzi that it had transferred the cash and securities standing in the name of (1) Eleanor, (2) Patenotre, (3) Hope & Co. Special Account Free Account, and (4) Hope & Co. Special Tax Lien Account, to a new account entitled: ‘J. P. Morgan Co. Incorporated as Escrow Depositary under Agreement dated September 29, 1949.’

On October 26, 1949, petitioner and Patenotre (with du Pasquier joining them) reached a supplemental agreement which provided, inter alia:

Raymond Patenotre agrees to transfer immediately to Ellsworth C. Alvord all the stock he owns in Hekor Investment Holding Company Limited which is ninety five percent of all the outstanding stock, free and clear of all liabilities and prior assignments.

In consideration of the above transfer being duly completed and in full payment thereof, Ellsworth C. Alvord agrees to pay Raymond Patenotre the sum of Four Hundred and Seventy Five Thousand dollars, at whatever place Raymond Patenotre may specify, immediately upon the release of all liens of the Treasury Department upon the assets of Hekor.

Raymond Patenotre, Pierre Wolff and Pierre du Pasquier agree that Raymond Patenotre, Pierre du Pasquier, Jean-Pierre Beaujon and Jean Galos, will execute such documents as may be necessary and appropriate to establish the true tax liabilities of Hekor Investment Holding Cy (sic) Ltd. and to carry out this agreement.

Upon delivery to Ellsworth C. Alvord of all the documents prepared by Ellsworth C. Alvord, and duly executed, for the above transfer, every agreement which has been entered heretofore between Mrs Jules Patenotre, Mr. Raymond Patenotre, and Ellsworth C. Alvord and/or Messrs Alvord & Alvord, will thereupon be cancelled, and all liabilities of Mrs Jule Patenotre and Raymond Patenotre to Ellsworth C. Alvord or Messrs Alvord & Alvord, will thereupon be fully satisfied and extinguished.

Every one agrees that all Hekor liabilities for taxes in the United States and Canada will be paid without any possible recourse to either Mrs Jule Patenotre and/or Raymond Patenotre, and reciprocally Raymond Patenotre agrees that none of the assets of Hekor in the United States will be subject to any other liabilities.

It is understood that the account in the name of Hekor Investment Holding Company Limited at Hope & Company in Amsterdam, remains the property of Raymond Patenotre and is not included in the present agreement.

It is also understood that if any assignment or pledge of any of the assets of Hekor Investment Holding Company Limited has been made or has been agreed to be made, then Raymond Patenotre agrees to revoke such agreement pledge or agreement, prior to such transfer.

Also it stands to reason that the transfer of the shares of Hekor to E. C. Alvord can only take place in exchange of the 475,000 dollars when we have succeeded in removing this asset from the actual escrow agreement.

On November 18, 1949, Pirozzi wrote Hutton & Co. as follows:

In accordance with our telegram of even date notice is hereby given that Raymond Patenotre has assigned to the Collector of Internal Revenue of the Second District of New York all his right, title and interest in and to all of the issued and outstanding stock of the Hekor Investment Holding Co., Ltd., and all his right, title, interest and equity in and to the assets of the said corporation, to secure the payment of all Federal income taxes for the calendar years 1931 to 1949 inclusive, which may be finally determined to be due from him or his mother, Eleanor Patenotre. The above-mentioned stock and assets are now held by you.

A photostatic copy of the aforementioned Assignment executed by Raymond Patenotre on September 29, 1949 is herewith enclosed.

On July 21, 1950, the respondent issued two notices of deficiency, one to Patenotre and one to Eleanor, both of which were appealed to the Tax Court. The amounts involved were as follows:

+----------------------------------------+ ¦Raymond Patenotre—Docket No. 30853 ¦ +----------------------------------------¦ ¦ ¦ ¦Additions to tax ¦ +-----+----------+-----------------------¦ ¦Year ¦Deficiency¦ ¦ ¦ +-----+----------+-----------+-----------¦ ¦ ¦ ¦50 per cent¦25 per cent¦ +-----+----------+-----------+-----------¦ ¦1932 ¦$98,559.55¦$53,354.67 ¦$26,677.34 ¦ +-----+----------+-----------+-----------¦ ¦1933 ¦43,965.88 ¦21,982.94 ¦11,729.51 ¦ +-----+----------+-----------+-----------¦ ¦Total¦142,525.43¦75,337.61 ¦38,406.85 ¦ +----------------------------------------+

Eleanor Patenotre—Docket No. 30852 1931 $54,862.58 $27,431.29 $13,715.65 1932 184,545.57 92,272.79 46,136.39 1933 80,435.36 40,217.68 20,108.84 1934 62,279.82 31,139.91 15,569.96 1935 121,487.94 60,743.97 30,371.99 1936 7,650.81 3,825.41 1,912.71 1937 55,704.44 27,852.22 13,926.11 1938 34,009.58 17,004.79 8,502.40 1939 21,960.23 10,980.12 5,490.06 1940 82,199.53 41,099.77 20,549.88 1941 76,273.63 1942 85,824.31 1943 84,265.68 1944 88,058.07 1945 87,583.31 1946 85,483.15 1947 102,045.27 25,511.32 1948 81,809.77 20,452.44 Total 1,396,479.05 352,567.95 222,247.75

No Jeopardy assessments were made relative to these determinations.

For each of the calendar years 1941 through 1949, Patenotre filed Federal income tax returns. The following schedule relates to Patenotre's taxes for those years. (cents omitted):

+-------------------------------------------------------------------------+ ¦ ¦ ¦ ¦ ¦ ¦ ¦Assessed ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦Reported ¦Reported ¦and ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦Year ¦Date ¦Reported¦Assessed¦paid by ¦as due ¦unpaid ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦ ¦filed ¦ ¦ ¦withholding¦but not ¦Dec. 31, ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦assessed ¦1951, 1952,¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦1953, 1954 ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1941 ¦Mar. 15, 1947¦$83,887 ¦$83,887 ¦$13,213 ¦ ¦$70,673 ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1942 ¦Mar. 15, 1947¦88,789 ¦88,789 ¦13,912 ¦ ¦74,876 ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1943 ¦Mar. 15, 1947¦90,894 ¦90,894 ¦15,178 ¦ ¦75,715 ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1944 ¦Mar. 15, 1947¦99,065 ¦99,065 ¦15,997 ¦ ¦83,067 ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1945 ¦Mar. 15, 1947¦100,650 ¦100,650 ¦15,327 ¦ ¦85,322 ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1946 ¦June 12, 1947¦100,016 ¦100,016 ¦21,176 ¦ ¦78,839 ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1947 ¦July 15, 1948¦92,796 ¦ ¦18,621 ¦1 $74,174¦ ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1948 ¦June 23, 1950¦79,313 ¦79,313 ¦ ¦ ¦2 78,313 ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦1949 ¦Sept.29, 1949¦21,024 ¦ ¦ ¦1 21,024 ¦ ¦ +-----+-------------+--------+--------+-----------+-----------+-----------¦ ¦Total¦ ¦756,437 ¦642,616 ¦113,427 ¦95,199 ¦546,810 ¦ +-------------------------------------------------------------------------+

On October 31, 1950, the respondent filed an amended answer in Docket No. 19543 (Patenotre, 1934 to 1940) increasing the claimed deficiency from $324,789.48 to $1,267,167.01. The latter amount is composed of the following:

+-----------------------------------------+ ¦ ¦ ¦Additions to tax ¦ +-----+-----------+-----------------------¦ ¦Year ¦Deficiency ¦ ¦ ¦ +-----+-----------+-----------+-----------¦ ¦ ¦ ¦50 per cent¦25 per cent¦ +-----+-----------+-----------+-----------¦ ¦1934 ¦$116,296.79¦$58,148.40 ¦$29,074.20 ¦ +-----+-----------+-----------+-----------¦ ¦1935 ¦147,809.66 ¦73,904.83 ¦36,952.42 ¦ +-----+-----------+-----------+-----------¦ ¦1936 ¦8,280.39 ¦4,140.20 ¦2,070.10 ¦ +-----+-----------+-----------+-----------¦ ¦1937 ¦169,173.92 ¦84,586.96 ¦42,293.48 ¦ +-----+-----------+-----------+-----------¦ ¦1938 ¦106,974.14 ¦53,487.07 ¦26,743.54 ¦ +-----+-----------+-----------+-----------¦ ¦1939 ¦80,180.84 ¦40,090.42 ¦20,045.21 ¦ +-----+-----------+-----------+-----------¦ ¦1940 ¦95,379.68 ¦47,689.84 ¦23,844.92 ¦ +-----+-----------+-----------+-----------¦ ¦Total¦724,095.42 ¦362,047.72 ¦181,023.87 ¦ +-----------------------------------------+

In computation of the liabilities for tax and additions thereto asserted against Eleanor and Patenotre for the period 1931 through 1949, approximately $2,700,000 of the same alleged income was included in the gross income of each.

On June 19, 1951, Patenotre died in Paris, France, Franz Martin Joseph being appointed, in June 1953, as the ancillary administrator of his estate in the United States.

On September 8, 1951, petitioner became the holder and owner of the 9,500 shares of Hekor stock formerly owned by Patenotre or his estate. He (petitioner) continued to own these shares thereafter throughout the period involved, the remaining 500 shares being owned by de Pasquier.

On November 24, 1951, petitioner wrote letters to the collector of internal revenue for the second district of New York and to Pirozzi regarding the proposed payment of a dividend by Hekor for 1951, in which he stated, inter alia, as follows: (1) That the maximum unpaid tax liabilities of Hekor, including interest, to December 31, 1951, for the years 1934 to date, do not exceed $30,500; (2) that since the income tax liability of Eleanor for 1930 has been paid the lien with respect to those taxes has been extinguished; (3) that the maximum tax liabilities of Patenotre for the years 1934 to 1940 with interest to December 31, 1951, do not exceed $410,000; (4) that as of November 15, 1951, the fair market value of Hekor's assets was $2,000,000 or 8 times the maximum corrected tax liabilities in regard to which the liens were filed; (5) that the assets in the ‘escrow’ account with Morgan & Co. had, as of November 15, 1951, a fair market value in excess of $3,300,000; (6) that the aggregate maximum tax liabilities of Eleanor and Patenotre for the years 1931 to 1949, including interest, cannot possibly exceed $2,800,000; and (7) that Hekor declare a dividend prior to the close of 1951 in the amount of its estimated undistributed Supplement P net income.

Pirozzi, on December 21, 1951, answered petitioner's letter stating, inter alia, as follows:

In September 1949, Raymond Patenotre executed an assignment purporting to be all of the stock of this corporation as security for taxes owing by himself and his mother. This assignment is today in full force and effect. The taxes asserted against these two individuals for many open years, as you know, amounts to several million dollars. In addition to this, there are substantial taxes outstanding due from Hekor Investment Holding Company itself. Furthermore, Raymond Patenotre is now deceased, and this office is advised that very substantial estate taxes will probably be due from his estate, and that the United States has a statutory lien for such taxes on all assets of the decedent.

Under these circumstances, this office is unable to accede to your request.

Petitioner, on December 26, 1951, replied to Pirozzi, stating, inter alia, as follows:

(1) In September 1949, Raymond Patenotre executed a contract to assign— not an assignment as you state. This contract was subject to Raymond Patenotre's prior obligations and liabilities with respect to the stock of Hekor. The Bureau of Internal Revenue was duly advised that Raymond Patenotre had executed, prior thereto, an assignment to me of all the Hekor stock he then owned and the stock has been duly transferred to me. Although his contract to assign may be, as you state, ‘in full force and effect’, it was and is of no value.

(2) the Taxes asserted against Raymond Patenotre and his mother for ‘the open years' do not amount to more than $2,300,000— at least $1,000,000 less than the assets at Morgan in the escrow account.

(3) The taxes due from Hekor are insignificant in amount— being less than $50,000.

(4) If you have been advised that very substantial estate taxes will probably be due from Raymond Patenotre's estate, I am happy to inform you that that advice is, in my opinion, without foundation either in fact or in law.

With respect to the last paragraph of your letter, I assume you are speaking for the Bureau of Internal Revenue, and I conclude that any liability on the part of any of the stockholders of Hekor, to include in their 1951 returns any of Hekor's undistributed net income for 1951, is now extinguished.

The maximum fair market value of the assets of Hekor during the calendar year 1951 was $2,241,019.58; the fair market value of these assets on December 31, 1951, was $2,106,637.19; the maximum fair market value of the assets in the special escrow account at Morgan & Co. during the calendar year 1951 was $3,827,335.85; the fair market value of these assets on December 31, 1951, was $3,759,839.60.

On December 17, 1952, respondent and Hekor filed with the Tax Court a settlement stipulation in Docket No. 19313 (Hekor, 1934— 1942) agreeing to deficiencies in income tax, personal holding company surtax, and additions to tax in the aggregate amount of $128,700.67, and providing for the entering of a revised decision in the event Hekor's income was erroneously computed. On December 17, 1952, the Tax Court entered its decision in accordance with the stipulation. Such deficiencies were paid by Hekor on December 18, 1952, together with interest in the amount of $68,089.68. On February 28, 1955, a certificate of discharge of lien No. 493759 was issued.

On March 24, 1953, respondent made a jeopardy assessment of estate tax, additions thereto, and interest against the estate of Patenotre in the amount of $908,448.12. Notice of lien relative to this assessment, No. 523826-C, was filed with Hutton & Co. on June 15, 1953. On June 23, 1953, a notice of lien, No. 523826-D, relative to the same assessment was filed with Morgan & Co.

On May 15, 1953, respondent issued notices of deficiency to the estate of Patenotre, one addressed to Morgan & Co., the other addressed to Hutton & Co., both as ‘statutory executors.’ The notices, except for the addressee, were identical. Morgan & Co.‘s petition to the Tax Court was assigned Docket No. 50023, while that of Hutton & Co. was assigned Docket No. 49950. Franz Martin Joseph, as ancillary administrator, also filed a petition from the two letters, his petition being assigned Docket No. 50038. The three petition were in the name of and on behalf of the estate. In the deficiency notices respondent determined a deficiency in estate tax in the amount of $709,633.96, and additions thereto in the amount of $177,408.49.

On November 27, 1953, the board of directors of Hekor declared a dividend equal to Hekor's undistributed Supplement P net income for 1953, subject to the approval of the director of internal revenue, New York City. Petitioner, in letters dated November 27, 1953, to the director of internal revenue, and Pirozzi, regarding the proposed payment of a dividend by Hekor for 1953, stated: (1) That in view of the liens asserted against the assets of Hekor held by Hutton & Co. it is requested that you authorize the payment of the dividend free and clear of such liens; (2) that lien No. 493759, dated September 22, 1949, filed with respect to Hekor's taxes for the years 1934 to 1942, inclusive, has been extinguished because the tax liabilities of Hekor covered by the lien have been redetermined by the Tax Court pursuant to stipulation and paid in December 1952; (3) that lien No. 493761, dated September 22, 1949, filed with respect to Eleanor's 1930 taxes has been extinguished since the tax for that year was paid in 1949; (4) that Patenotre's taxes for 1934 to 1940, covered by lien No. 493760, will not exceed $475,000; (5) that Patenotre, other than as stockholder, never claimed any interest in Hekor's assets and that a Federal tax lien extends only to the taxpayer's payment; (6) that as of November 15, 1953, the fair market value of Hekor's assets exceeded $2,000,000, or 4 times the maximum tax liabilities; (7) that the assets in the ‘escrow’ account had a fair market value as of November 15, 1953, in excess of $3,500,000; (8) that Eleanor's and Patenotre's maximum tax liabilities for 1931 to 1949 cannot exceed $3,000,000; and (9) that the imposition of a tax upon the undistributed Supplement P net income of Hekor upon me (petitioner) would be an unwarranted hardship.

The director, by reply dated November 30, 1953, stated that the status of the Hekor account was the same as it was on December 31, 1951, and that the request could not be acceded to.

The maximum fair market value of the assets of Hekor during the calendar year 1953 was $2,199,648.27; the fair market value of these assets on December 31, 1953, was $2,136,412.69; the maximum fair market value of the assets in the special escrow account at Morgan & Co. during the calendar year 1953 was $4,001,524.58; the fair market value of these assets on December 31, 1953, was $3,882,915.83.

For the calendar years 1943 through 1946 and for 1950, personal holding company tax returns were filed by Hekor setting forth personal holding company surtax liabilities as follows:

+-------------------------------------------+ ¦ ¦ ¦Personal holding ¦ +------+-----------------+------------------¦ ¦ ¦ ¦company surtax ¦ +------+-----------------+------------------¦ ¦ ¦Filed on ¦reported and ¦ +------+-----------------+------------------¦ ¦Year ¦or about ¦assessed ¦ +------+-----------------+------------------¦ ¦1943 ¦June 12, 1948 1 ¦$23,173.61 ¦ +------+-----------------+------------------¦ ¦1944 ¦June 12, 1948 1 ¦29,198.38 ¦ +------+-----------------+------------------¦ ¦1945 ¦June 12, 1948 1 ¦31,029.43 ¦ +------+-----------------+------------------¦ ¦1946 ¦June 12, 1948 1 ¦34,377.53 ¦ +------+-----------------+------------------¦ ¦1950 ¦June 4, 1951 ¦56,883.14 ¦ +-------------------------------------------+

174,662.09

At all times during the calendar years 1951, 1953, and 1954, the United States Treasury Department was exercising complete control over the investment and reinvestment of the assets of Hekor.

During 1955, counsel for Eleanor and for the estate of Patenotre worked out with respondent an overall settlement of the pending Tax Court cases. Pursuant to that agreement, settlement stipulations were filed with the Court on November 21, 1955, specifying the following deficiencies:

+--------------------------------------------------------------+ ¦Taxpayer ¦Docket¦Kind of tax¦Tax ¦Additions ¦ +-------------------+------+-----------+------------+----------¦ ¦ ¦No. ¦ ¦ ¦to tax ¦ +-------------------+------+-----------+------------+----------¦ ¦Estate of Patenotre¦19543 ¦Income ¦$70,361.27 ¦$23,624.35¦ +-------------------+------+-----------+------------+----------¦ ¦Eleanor ¦30852 ¦Income ¦1,087,005.65¦245,483.72¦ +-------------------+------+-----------+------------+----------¦ ¦Estate of Patenotre¦30853 ¦Income ¦(1) ¦(1) ¦ +-------------------+------+-----------+------------+----------¦ ¦Estate of Patenotre¦49950 ¦Estate ¦(1) ¦(1) ¦ +-------------------+------+-----------+------------+----------¦ ¦Estate of Patenotre¦50023 ¦Estate ¦(1) ¦(1) ¦ +-------------------+------+-----------+------------+----------¦ ¦Estate of Patenotre¦50038 ¦Estate ¦(1) ¦(1) ¦ +--------------------------------------------------------------+

+-----------------------------------+ ¦Year¦Eleanor ¦Patenotre¦Estate of¦ +----+----------+---------+---------¦ ¦ ¦ ¦ ¦Patenotre¦ +----+----------+---------+---------¦ ¦1941¦ ¦$4,741.23¦ ¦ +----+----------+---------+---------¦ ¦1942¦ ¦4,099.38 ¦ ¦ +----+----------+---------+---------¦ ¦1943¦ ¦4,772.23 ¦ ¦ +----+----------+---------+---------¦ ¦1944¦ ¦4,993.94 ¦ ¦ +----+----------+---------+---------¦ ¦1945¦ ¦6,172.58 ¦ ¦ +----+----------+---------+---------¦ ¦1946¦ ¦3,623.36 ¦ ¦ +----+----------+---------+---------¦ ¦1947¦ ¦ ¦ ¦ +----+----------+---------+---------¦ ¦1948¦ ¦24,251.93¦ ¦ +----+----------+---------+---------¦ ¦1949¦$56,105.83¦2,972.65 ¦ ¦ +----+----------+---------+---------¦ ¦1950¦4,228.23 ¦469.80 ¦ ¦ +----+----------+---------+---------¦ ¦1951¦4,172.33 ¦277.89 ¦$185.70 ¦ +----+----------+---------+---------¦ ¦1952¦3,843.87 ¦ ¦427.10 ¦ +----+----------+---------+---------¦ ¦1953¦4,105.49 ¦ ¦456.17 ¦ +----+----------+---------+---------¦ ¦ ¦72,455.75 ¦56,374.99¦1,068.97 ¦ +-----------------------------------+

No penalties were involved.

Harry L. Brown, a partner in the law firm of Alvord and Alvord, played the leading role in negotiating the settlements referred to in the two paragraphs immediately preceding.

An advance payment toward satisfaction of the claimed deficiencies and interest thereon had been made from the special escrow account at Morgan & Co. to the district director, lower Manhattan district, on December 29, 1954, in the amount of $2,200,000. After the settlement effected on November 21, 1955, an additional payment of $143,843.52 was made from that account on November 30, 1955, in complete satisfaction of the Federal income tax liabilities of Eleanor, Patenotre, and the estate of Patenotre for the period 1931 through 1953, including interest to date of payment.

On November 30, 1955, respondent executed and delivered to the representatives of Eleanor and the estate of Patenotre (1) a certificate of termination of escrow agreement relative to the assets at Morgan & Co., (2) a certificate of release of assignment relative to the Hekor stock and assets, and (3) certificates of release of all outstanding notices of lien against the assets of Eleanor, Patenotre, and Hekor, not previously released.

On November 30, 1955, petitioner tendered payment to the French executrices of the estate of Patenotre of the $475,000 referred to in the October 29, 1949, agreement but acceptance was refused. After considerable negotiations petitioner, on September 5, 1956, in lieu of the $475,000, paid the amount of $800,000.

Pursuant to paragraph (z) of the stipulation filed in the Hekor case, Docket No. 19313, that corporation on June 13, 1956, without objection from respondent, filed a motion to submit a supplemental stipulation showing overpayments of income tax, personal holding company surtax, and additions thereto in the aggregate amount of $101,636.66. The motion was granted, the stipulation filed, and the revised decision of the Court entered on June 19, 1956.

OPINION.

BLACK, Judge:

The question involved in these proceedings is whether the Commissioner was correct in including 95 per cent of the undistributed Supplement P net income of Hekor, a Canadian corporation, for the years 1951, 1953, and 1954, in the gross income of petitioner, a United States citizen, for those years.

Hekor had no Supplement P net income for 1952; accordingly, the Commissioner made no determination for that year.

$1,000 was paid with the return.

Includes interest on Federal taxes of $68,089.68.

The Commissioner's determinations were made pursuant to Supplement P (secs. 331-340) which generally taxes United States shareholders on their proportionate part of the undistributed Supplement P net income of a foreign personal holding company. A foreign personal holding company, under section 331(a), is any foreign corporation if (1) it meets a certain gross income test, and (2) ‘(a)t any time during the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals who are citizens or residents of the United States.’

The Commissioner's determination for 1954 was made pursuant to part III (secs. 551-558), subch. G, ch. 1, I.R.C. 1954. Insofar as here involved these provisions are substantially similar and their effect the same as the applicable provisions of the 1939 Code. In these circumstances we will only refer to the applicable provisions of the 1939 Code.

$71,780.65 less basic surtax credit of $5,615.24.


It is agreed that Hekor meets the gross income tests; the controversy revolves around the stock ownership test.

Petitioner disputes the correctness of respondent's determination that he is taxable on Hekor's undistributed Supplement P net income for the years in question. His first and one of his main contentions is that Hekor was not a foreign personal holding company under section 331(a)(2). He argues that this is so because during the taxable years not more than 50 per centum in value of Hekor's outstanding stock was owned by or for not more than five individuals who were citizens or residents of the United States. In support of this position he contends that for the purposes of section 331(a)(2) beneficial interest and control over the stock, rather than bare legal title thereto, is determinative. Section 331(a)(2) reads as follows:

SEC. 331. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY.

(a) GENERAL RULE.— For the purposes of this chapter the term ‘foreign personal holding company’ means any foreign corporation if

(2) STOCK OWNERSHIP REQUIREMENT.— At any time during the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals who are citizens or residents of the United States, hereinafter called ‘United States group.’

The stipulation of facts, which was filed and has been incorporated by reference in our Findings of Fact, contains a paragraph which reads as follows:

23. On September 8, 1951 petitioner became the holder and owner of the 9,500 shares of Hekor stock formerly owned by Raymond Patenotre or his estate. He (petitioner) continued to own said shares thereafter throughout the period involved, the remaining 500 shares being owned by Pierre du Pasquier.

We think the foregoing stipulation forecloses petitioner on the question of the ownership of ‘more than 50 per centum in value’ of Hekor's outstanding stock during the taxable years. True, the stipulation does not state that the 9,500 shares in question constituted more than ‘50 per centum in value’ of Hekor's outstanding stock. But it is also true that the stipulation says that the only other stockholder of Hekor during the period in question was Pierre du Pasquier, a citizen and resident of France, who owned only 5 per cent of Hekor's outstanding stock. Certainly, under ordinary circumstances, where 95 per cent of the outstanding stock of a foreign corporation was owned by a resident of the United States and only 5 per cent was owned by a citizen and resident of a foreign country it would be true that ‘more than 50 per centum in value’ of the corporation's outstanding stock would be owned by a resident of the United States.

We have no evidence in the record before us which would justify us in making a finding that de Pasquier's 5 per cent of Hekor's outstanding stock had such a value that, although petitioner owned the remaining 95 per cent of such outstanding stock, petitioner's 9,500 shares did not constitute ‘more than 50 per centum in value’ of Hekor's outstanding stock. We have made no such finding of fact nor can we make such a finding on the record which we have before us. We are willing to accept the correctness of petitioner's contention that when the statute speaks of the ownership of ‘more than 50 per centum in value’ of the outstanding stock of a corporation it means ‘beneficial ownership.’ Nevertheless, when the parties stipulate that from September 8, 1951, petitioner was the holder and owner of 95 per cent of Hekor's outstanding stock, we must assume that by the use of the word ‘own’ the parties meant to include beneficial ownership as well as ownership of the bare legal title. We do not think that there is sufficient evidence in the record to justify us in making a finding otherwise. It is true that the Treasury was asserting liens against the 9,500 shares in question, as well as liens against the assets of Hekor, but we do not think that these facts made the Treasury the beneficial owner of the 9,500 shares of stock of Hekor, which it is stipulated petitioner owned on September 8, 1951, and during the rest of the period in question.

Both parties cite and comment upon Renton Investment Co., 46 B.T.A. 279, revd. 131 F.2d 330 (C.A. 3). We have carefully read that case, both the opinions of our Court and that of the Third Circuit but we do not find that case helpful to a decision of the question we have here to decide. It involved facts altogether different from those which are present in the instant case. We, therefore, do not discuss that case.

We think, in view of the stipulation in the record as to petitioner's ownership, that such ownership was ‘more than 50 per centum in value’ of Hekor's outstanding stock. This being true, Hekor was a foreign personal holding company within the meaning of section 331(a)(2) during the period in question. We so hold.

Petitioner's next contention is that the statutes involved are not to be so construed as to tax petitioner a ‘deemed’ distribution from Hekor under the factual circumstances here involved. In other words, that notwithstanding petitioner comes within the literal terms of the statute, we should hold that Congress did not intend that it should be applied to one occupying the situation of petitioner. Section 337 reads as printed in the margin.

SEC. 337. CORPORATION INCOME TAXED TO UNITED STATES SHAREHOLDERS.(a) GENERAL RULE.— The undistributed Supplement P net income of a foreign personal holding company shall be included in the gross income of the citizens or residents of the United States, domestic corporations, domestic partnerships, and estates or trusts (other than estates or trusts the gross income of which under this chapter includes only income from sources within the United States), who are shareholders in such foreign personal holding company (hereinafter called ‘United States shareholders') in the manner and to the extent set forth in this Supplement.(b) AMOUNT INCLUDED IN GROSS INCOME.— Each United States shareholder, who was a shareholder on the day in the taxable year of the company which was the last day on which a United States group (as defined in section 331(a)(2)) existed with respect to the company, shall include in his gross income, as a dividend, for the taxable year in which or with which the taxable year of the company ends, the amount he would have received as a dividend if on such last day there had been distributed by the company, and received by the shareholders, an amount which bears the same ratio to the undistributed Supplement P net income of the company for the taxable year as the portion of such taxable year up to and including such last day bears to the entire taxable year. -------- Notes:

Amount included in petitioner's gross income in the notices of deficiency.

As we have already stated, it has been stipulated that on September 8, 1951, petitioner became the holder and owner of 9,500 of Hekor's 10,000 outstanding shares. The Commissioner has included in petitioner's income for the years 1951, 1953, and 1954, 95 per cent of Hekor's undistributed Supplement P net income. This seems to be in accordance with the terms of section 337 printed in the margin, unless it be for the year 1951, as to which petitioner urges an alternative contention which will be hereinafter discussed. If we assume that the result, if so applied, may be harsh as petitioner contends, that fact would not be sufficient justification for us to say that Congress did not intend that section 337 should apply to a taxpayer occupying the situation of petitioner. Cf. Helvering v. Northwest Steel Rolling Mills, 311 U.S. 46. In this contention, petitioner is not sustained.

Among the other contentions made by petitioner against the determination of the Commissioner are that if the foreign personal holding company provisions are held applicable to petitioner and he is held taxable on the undistributed Supplement P net income of Hekor, then the statutes as thus applied are unconstitutional because they deprive petitioner of property without due process of law in violation of the fifth amendment to the United State Constitution, and also because such applications of the statutes violate the 16th amendment to the Constitution. We have carefully considered petitioner's arguments in support of his contentions as above stated. We have concluded that none of these contentions is valid. Cf. Helvering v. Northwest Steel Rolling Mills, supra. In that case the taxpayer contended that if the statute was construed as the Commissioner contended it should be, then such construction would violate the fifth, 10th, and 16th amendments. The Supreme Court held that none was valid. Petitioner's contentions with respect to the constitutional questions are not sustained.

Petitioner makes the contention in the alternative that even though Hekor is considered to be a foreign personal holding company, he, for 1951, cannot be required to include in gross income, as undistributed Supplement P net income of that corporation, an amount greater than 95 per cent of that which arose after September 8, 1951. It has been stipulated that

27. From January 1, 1951 to September 8, 1951, the gross income of Hekor amounted to.$48,426.42, its allowable deductions from gross income amounted to $2,888.78, and the Federal income tax withheld on its income to that date amounted to $6,716.19. From September 8, 1951 to December 31, 1951, the gross income of Hekor amounted to $34,026.64, its allowable deductions from gross income amounted to $6,236.52, and the Federal income tax withheld on its income amounted to $5,047.77.

Therefore, it can be seen that if petitioner's alternative contention is sustained, it will be possible to compute the amount of Hekor's Supplement P net income for the shorter period in 1951 embraced in petitioner's alternative contention.

In Mary A. Marsman, 18 T.C. 1, we had a somewhat similar issue before us for decision in what was termed in that case ‘Issue 1.’ In discussing that issue, we pointed out that throughout the taxable year 1940 the taxpayer was the sole stockholder of a foreign personal holding company whose taxable year was the calendar year 1940. During most of the taxable year she was a nonresident of the United States. However, on September 22, 1940, she became a resident of the United States. It was the taxpayer's contention that she was only taxable on that part of the foreign personal holding company Supplement P net income which was attributable to the period September 22, 1940, to December 31, 1940. The Commissioner had determined that she was taxable on the Supplement P net income of the corporation for the entire taxable year. We sustained the Commissioner. In this holding, we said:

The fact that such sole stockholder was a resident of the United States on the last day of the company's taxable year is sufficient to subject him to the requirement of reporting as a dividend received the full amount of the company's undistributed net income for said year which remained undistributed on the last day of its taxable year.

Our decision in the Marsman case was reversed by the Fourth Circuit in Marsman v. Commissioner, 205 F.2d 335. In reversing us on this point the court, among other things, said:

Since the last day in this case is the last day of the year 1940, Mrs. Marsman would be required to include in her gross income the Supplement P net income of La Trafagona for the entire year, if the language of the section is to be given a strictly literal interpretation.

We do not think, however, that the statute should be applied literally and without reference to the purpose for which it was admittedly enacted. * * *

The Commissioner in his brief in the instant case relies upon our decision in the Marsman case but contends, assuming the correctness of the Fourth Circuit's reversal of the Marsman case, that nevertheless it is not controlling here because it is distinguishable on its facts. It is the feeling of our Court that the Court of Appeals for the Fourth Circuit, if this case is appealed, may want to consider the alternative issue in the light of the factual situation in the present case as compared to that in Marsman v. Commissioner, supra, and with that in mind the Tax Court will not decide this case for the petitioner on the reversal of the Marsman case. We will decide it on what we conceive to be the meaning of the statute.

Section 337(b) provides:

(b) AMOUNT INCLUDED IN GROSS INCOME.— Each United States shareholder, who was a shareholder on the day in the taxable year of the company which was the last day on which a United States group (as defined in section 331(a)(2)) existed with respect to the company, shall include in his gross income, as a dividend, for the taxable year in which or with which the taxable year of the company ends, the amount he would have received as a dividend if on such last day there had been distributed by the company, and received by the shareholders, an amount which bears the same ratio to the undistributed Supplement P net income of the company for the taxable year as the portion of such taxable year up to and including such last day bears to the entire taxable year.

As we have heretofore said, it has been stipulated that on September 8, 1951, petitioner became the owner and holder of 9,500 shares of Hekor's stock out of 10,000 outstanding shares and owned it throughout the periods here in question. Therefore, we think that under the terms of the statute just quoted petitioner is taxable on 95 per centum of Hekor's undistributed Supplement P income for the year 1951. We so hold. It may well be, as petitioners contend, that to so hold produces a harsh result. However, we do not think that fact warrants us in giving the statute a construction which does not seem warranted by what seems to be its plain meaning. See Phanor J. Eder, 47 B.T.A. 235, reversed on another point Eder v. Commissioner, 138 F.2d 27. We think, if the result be harsh, that the remedy is within the province of Congress to enact a change in the law and that it is not within our province to change it by construction.

Reviewed by the Court.

+-------------------------------------+ ¦Year ¦Deficiency ¦Addition to tax ¦ +------+------------+-----------------¦ ¦1948 ¦$345,773.98 ¦ ¦ +------+------------+-----------------¦ ¦1949 ¦122,519.54 ¦$30,629.89 ¦ +------+------------+-----------------¦ ¦Total ¦468,293.52 ¦30,629.89 ¦ +-------------------------------------+

On February 3, 1954, a copy of a revenue agent's report was mailed to Eleanor. In this report, a deficiency in income tax in the amount of $85,068.22 and a 25 per cent addition thereto in the amount of $21,267.06 was recommended against Eleanor for 1949.

The board of directors of Hekor, at a meeting on November 24, 1954, declared a dividend payable December 31, 1954, in an amount equal to Hekor's undistributed Supplement P net income, subject to the approval of the district director of internal revenue, New York City. Petitioner, in a letter dated November 24, 1954, to the director of internal revenue, New York City, and Bertram Sandler, successor to Pirozzi as Chief of the Alien Tax Division, requested authorization for the payment of a dividend by Hekor stating reasons similar to those set forth in his letter of November 27, 1953 (requesting permission for a 1953 dividend), and, in addition, stating (1) that lien No. 523826-C regarding estate taxes on the estate of Patenotre covers an assessment of $908,448.12, which will be completely eliminated pursuant to settlement; (2) that as a result of extensive negotiations with the Internal Revenue Service a tentative settlement with regard to the asserted aggregate tax liabilities of Eleanor and Patenotre for all years up to and including 1953 has been reached in the amount of $2,345,000 (including interest to December 31, 1954); and (3) that the fair market value of the assets in the ‘escrow’ account is in excess of $4,200,000 and the fair market value of the assets of Hekor is in excess of $2,800,000.

The director replied by letter dated November 29, 1954, stating that it cannot be predicted with certainty how long the settlement negotiations would continue and that the authorization requested could not be granted.

The maximum fair market value of the assets of Hekor during the calendar year 1954 was $3,636,050.87; the fair market value of these assets on December 31, 1954, was $3,223,108; the maximum fair market value of the assets in the special escrow account at Morgan & Co. during the calendar year 1954 was $4,257,262.83; the fair market value of these assets on December 31, 1954, was $1,984,532.20.

During each of the calendar years 1951, 1953, and 1954, the entire gross income of Hekor consisted of dividends, interest, and gains on sales of securities, all of which was received and held by Hutton & Co., which partnership held all of the assets of Hekor. Hekor filed its annual information returns (Form 958) for 1951 on February 20, 1952, for 1952 on April 17, 1953, for 1953 on March 3, 1954, and for 1954 on February 22, 1955. The returns showed the following:

+-----------------------------------------------------------------------------+ ¦ ¦1951 1 ¦1952 ¦1953 ¦1954 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Income: ¦ ¦ ¦ ¦ ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Dividends ¦$74,363.99¦$74,700.26¦$79,714.76¦$87,750.80¦ +---------------------------------+----------+----------+----------+----------¦ ¦Interest ¦4,581.53 ¦7,948.76 ¦6,752.02 ¦3,514.57 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Capital gains ¦3,507.54 ¦12.78 ¦1,996.34 ¦1,390.09 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Total income ¦82,453.06 ¦82,661.80 ¦88,463.12 ¦92,655.46 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Deductions ¦9,125.30 ¦2 ¦3,848.26 ¦4,533.37 ¦ ¦ ¦ ¦76,138.52 ¦ ¦ ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Net income ¦73,327.76 ¦6,523.28 ¦84,614.86 ¦88,122.09 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦U.S. income and excess profits ¦11,763.96 ¦12,138.52 ¦12,834.21 ¦13,753.03 ¦ ¦tax ¦ ¦ ¦ ¦ ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Supplement P net income ¦61,563.80 ¦0 ¦71,780.65 ¦74,369.06 ¦ +---------------------------------+----------+----------+----------+----------¦ ¦Undistributed Supplement P net ¦61,563.80 ¦0 ¦3 ¦74,369.06 ¦ ¦income ¦ ¦ ¦66,165.41 ¦ ¦ +---------------------------------+----------+----------+----------+----------¦ ¦95% of undistributed Supplement P¦58,485.61 ¦ ¦62,856.88 ¦70,650.61 ¦ ¦net income 4 ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+

+---------------------------------------------------------------------+ ¦ ¦Jan. 1, 1951 ¦Sept. 8, 1951 ¦ +-------------------------------------+---------------+---------------¦ ¦ ¦to ¦to ¦ +-------------------------------------+---------------+---------------¦ ¦ ¦Sept. 8, 1951 ¦Dec. 31, 1951 ¦ +-------------------------------------+---------------+---------------¦ ¦Gross income ¦$48,426.42 ¦$34,026.64 ¦ +-------------------------------------+---------------+---------------¦ ¦Deductions ¦2,888.78 ¦6,236.52 ¦ +-------------------------------------+---------------+---------------¦ ¦Net income ¦45,537.64 ¦27,790.12 ¦ +-------------------------------------+---------------+---------------¦ ¦Federal income tax ¦6,716.19 ¦5,047.77 ¦ +-------------------------------------+---------------+---------------¦ ¦Undistributed Supplement P net income¦38,821.45 ¦22,742.35 ¦ +-------------------------------------+---------------+---------------¦ ¦ ¦ ¦ ¦ +---------------------------------------------------------------------+