author: Aeundell :

text:
    H. C. Wiess, Petitioner, v. Commissioner of Internal Revenue, Respondent. Olga Wiess, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7615, 7637.
    Promulgated June 23, 1927.
    1. Transaction held, to have been a bona fide gift of stock and no gain realized on the sale of all but one share thereof on the day the gift was made. Loss allowed on sale of remaining share for less than the value established by the prior sale.
    2. On the evidence held the warrants sold by petitioner were those acquired by gift, and as the sales price was substantially the same as the value at the time of acquisition, no gain was realized.
    3. Held, the dividend was a stock dividend and did not constitute taxable income. Norvell v. Commissioner, 6 B. T. A. 56.

      Fred R. Angevine, Esq., for the petitioners.

      Brice Toole, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies for the calendar year 1920, as follows:
    H. 0. Wiess_$9,059.95
    Olga Wiess_ 9, 025.41
    The questions for decision are: (1) Whether an alleged gift of stock by Wiess to his wife was a valid gift, (2) whether certain warrants sold by Wiess were received by gift, and (3) whether a dividend received in 1920 was a cash or stock dividend.
    By stipulation of the parties the two appeals were consolidated for trial and decision.

      FINDINGS OF FACT.
    The petitioners are husband and wife residing at Houston, Tex. For the year 1920 they filed separate returns, reporting income on the community property basis.
    During the taxable year H. C. Wiess was engaged in the oil business. Owing to the hazardous nature of that business Wiess desired to establish a separate estate for his wife and with that object in view he made several gifts of property to her prior to the transaction here involved. On March 19, 1920, Wiess gave to his wife 51 shares of stock of the Magnolia Petroleum Co., which he had acquired in 1918 at their par value of $100 per share. This gift constituted a comparatively small part of his wealth at that time. On the same date, March 19, 1920, Mrs. Wiess sold through Neuhaus & Co., a firm of brokers in Houston, 50 shares of the stock for $21,749. The funds received from that sale were left on deposit with the brokers and through them, on the same date as the sale, Mrs. Wiess purchased 50 shares of Gulf Oil Corporation stock for a total of $22,500, paying the difference in cash. Mrs. Wiess has since held the Gulf Oil Corporation stock purchased at that time and has received the dividends paid on it.
    Each of the petitioners kept books of account. In the journal of Wiess the following entry recording the gift of the stock to Mrs. Wiess was made:
    April 30. Donations_$5,100. 00
    Magnolia Pet. Oo. stock 51 sliares given Mrs. H. O. Wiess 3/19/20. Cost par. Certificates #967-1218-1477-1532-1744-2159-3062_$5,100. 00
    In the journal of Mrs. Wiess the stock transactions of March 19, 1920, are recorded by the following entries:
    Apr. 30. Neuhaus & Co_$21, 824. 00
    Dividend 50 Gulf Oil at 1%- $75. 00
    Magnolia Pet. Co. stock 50 shares given me by H. C. Wiess sold 3/19/20 at_ 21, 749.00
    Apr. 30. Magnolia Pet. Co. Stock_ 21,749. 00
    Mrs. H. C. Wiess Investment a/c The 50 shares above were given me by H. C. Wiess at time of sale- 21,749. 00
    The remaining share of Magnolia Petroleum Co. stock was subsequently sold by Mrs. Wiess through Neuhaus & Co. for $370, the sale being recorded in her ledger under date of July 31, 1920.
    The above book entries were made on April 30,1920, by one White-hurst, whose principal employment is with several corporations. He is paid a nominal salary by the petitioners for keeping their boobs. He keeps a memorandum indicating the state of the bank balances of the petitioners, so as to give them a statement thereof whenever they call for it. The actual posting to the books is done in the spare time of the bookkeeper after office hours, at intervals ranging from one month to three months or more.
    In 1920 the petitioner, H. C. Wiess, was a stockholder in the Humble Oil & Refining Co. By virture of his stock ownership the petitioner received 1256 of wliat were known as Humble Oil & Refining Co. “ B ” warrants, each of which gave him the right to subscribe for three-fourths of a share of stock at $250. In addition to the “B ” warrants issued to him, Wiess acquired 809 by gift from his mother, Mrs. William Wiess.
    Prior to April 30, 1920, the petitioner disposed of all of the “ B ” warrants. Of the 1256 issued to him, the petitioner gave 120 as a bonus for a loan, exercised his subscription rights under 84 and bought stock, and transferred the remaining 1052 to the Houston Land & Trust Co., in trust for his minor children. Of the 809 warrants received by gift from his mother, the petitioner sold 25 to A. K. Gordon, 400 through Emanuel Parker & Co., brokers, and 384 through a pool managed by R. L. Blaffer, an associate of the petitioner. The petitioner gave his bookkeeper a memorandum showing the disposition of the warrants and under date of April 30, 1920, the bookkeeper entered the sale of the 809 shares in the petitioner’s journal as follows:
    Apr. 30 Humble B. Warrants_$45, 515. 35
    H. O. Wiess Investment- $45, 515.35
    Account: Mrs. Wm. Wiess
    25 gave me tlie 25 shares sold A. K. Gordon at $45.00_ 1,125. 00
    400 400 sold H. P. & Oo. at $57.50_ 23, 000. 00
    384 384 sold through Pool at $55.704_ 21, 390. 35
    S09
    There was no material change in the value of the warrants sold between the time they were given him and the time he sold them.
    On March 4, 1920, petitioner, H. C. Wiess, was a stockholder in the American National Bank of Beaumont, Tex., holding on that date capital stock of the said American National Bank of the par value of $4,500.
    On March 4, 1920, the stockholders of the American National' Bank of Beaumont passed the following resolution:
    Resolved, that under the provisions of the Act of May 1, 1886, the capital stock of the American National Bank of Beaumont be and the same is hereby increased in the sum of $150,000, making the total capital $250,000, to be divided into 2500 shares of the par value of one hundred dollars each.
    Resolved, that a stock dividend of one hundred per cent be and the same is hereby declared, payable out of the surplus fund on hand prior to March 1, 1913, and that the President and Cashier of this bank are hereby directed to issue one thousand shares of the capital stock of this bank to the present stockholders in proportion to the amount of stock now owned by them respectively.
    On the same date the directors of the bank passed the following resolution:
    Be it resolved that the resolution this day adopted by the stockholders of this bank increasing the capital stock from one hundred thousand dollars, its present capital, to $250,000. and the declaration of a stock dividend of one hundred thousand dollars, payable out of the surplus account prior to March 1, 1913, be and the same is hereby ratified and confirmed and the proper officers of this bank are hereby directed to issue one thousand shares of the capital stock of the bank to the present stockholders, in proportion to the amount of the stock now owned by them respectively.
    Following the dividend declaration so made by the Board of Directors, the bank, on March 5, 1920, issued its check to the petitioner, H. C. Wiess, in the amount of $4,500. On the face of the check was written “ Stock Dividend Check from surplus earned prior to March, 1913.”
    Upon receipt of the check petitioner endorsed it and returned it to the bank, whereupon the bank issued to him $4,500 par value of its capital stock.
    The accumulated earnings of the bank for the period beginning March 1, 1913, and ended March 4, 1920, were sufficient to cover a 100 per cent dividend as of March 4,1920.
    Prior to December 19, 1921, the Comptroller of Currency held that a national bank could not legally declare a dividend payable in stock of such bank.
   OPINION.

Aeundell :

The first question is whether H. C. Wiess made a valid gift of 51 shares of Magnolia Petroleum Co. stock to his wife on March 19, 1920. If it was a valid gift, no taxable income resulted from the sale of 50 shares through a firm of brokers on the same day. The Commissioner found the transaction to be “ colorable ” and determined that a profit had been realized on it.

All of the evidence before us indicates that a bona fide gift was made by Wiess to his wife. Realizing that the business in which he was engaged was hazardous he had it in mind to provide protection for his wife and family and to that end he had made several gifts to his wife prior to the transaction here involved. The stock was sold through a firm of brokers who accounted to the wife for the proceeds, and such proceeds were used by the wife for the purchase of other stock which she has since held and upon which she has received dividends. Each of the petitioners kept a set of books in which were recorded the several steps in the transaction. If a question arises from the fact that the transaction was not recorded in the books of the petitioners until April 30, 1920, a satisfactory answer is found in that such was the usual practice due to the bookkeeper’s devoting only his spare time to posting their books. There is also the fact, and we deem it corroborative of the petitioners’ claims, that the remaining one share of the stock involved was not sold until some time later in 1920 and it, too, was entered in the books of Mrs. Wiess as a transaction of her own. Considering all the evidence, we are of the opinion that Wiess made a bona fide gift of the 51 shares of stock to his wife on March 19, 1920, and that no taxable income arose from the sale of 50 shares thereof on the same date. As to the remaining share, a loss was sustained by Mrs. Wiess of $65, being the difference between $435, established as the value at the time of the gift, and $870, the selling price of the one share.

As to the “ B ” warrants of the Humble Oil & Refining Co., the question is whether the 809 warrants sold by the petitioner in 1920 were the ones acquired by gift from his mother, or whether they were a part of those he acquired through stock ownership in the company. The petitioner endeavored to keep the warrants received by gift separate from the others, and when he sold some of the warrants he sold only the number acquired by gift. We see no reason to doubt the uncontroverted testimony of the petitioner that the warrants he sold were the ones given him by his mother. As the sales price of the warrants was substantially the same as their value at the time acquired by the petitioner, no taxable gain resulted from the sales.

The transaction whereby the petitioner H. C. Wiess received from the American National Bank a check which he turned back for stock, is the same as that involved in B. R. Norvell v. Commissioner, 6 B. T. A. 56. We reach the same conclusion in this case.

Judgment will be entered on 15 days'1 notice under Rude 50.


source: Caselaw Access Project

author: Akundell :

license: Public Domain

text:
    R. S. Newbold & Son Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5698.
    Promulgated June 23, 1927.
    Petitioner established that drawings and patterns were capital assets having a useful life of at least 20 years, and also proved the cost thereof. Held, that the depreciated cost of the drawings and patterns should be included in invested capital and depreciation allowed at 5 per cent per annum, regardless of the. practice of the petitioner of treating such costs as operating expenses.

      Virgil T. Moore, Esq., for the petitioner.

      A. E. Fast, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1917 to 1920, inclusive, in the respective amounts of $1,197.68, $2,051.65, $3,707.39, and $27.25, a total of $6,983.97. At the hearing petitioner abandoned an allegation of error respecting the respondent’s failure to include in invested capital the claimed value of assets paid in for stock in excess of the par value of stock issued therefor. The remaining two issues are whether or not the cost of patterns and drawings may be included in invested capital, and if so, the rate of depreciation applicable to such patterns and drawings.
    FINDINGS OP PACT.
    The petitioner is a Pennsylvania corporation with its principal office at Norristown. It was incorporated in 1895 and took over the assets and assumed the liabilities of the former individual owner of the business. Its authorized capital stock was $100,000, of which $75,000 was issued to the former owner for property conveyed to the petitioner, and the remaining $25,000 was sold for cash.
    The business of the petitioner, which is that of manufacturing heavy mill machinery, was founded by ft. S. Newbold about 1852. A part of the assets taken over by the petitioner consisted of drawings and patterns used by its predecessor in the manufacture of machinery. The few changes in the past 40 years in the type of machinery manufactured by the petitioner have been mostly incidental, such as the size and capacity and from belt to motor drive. The useful life of such machinery is from 30 to 40 years.
    The petitioner maintained both a drawing room, in which were employed from six to eight draftsmen, and a pattern room, in which it employed at times as many as ten pattern makers. After the preparation and use of a drawing and a pattern for an original order of machinery, both are stored by the petitioner for future use. It is frequently called upon by customers to replace parts or whole machines, which in some cases it had manufactured 15 or 20 or even 30 years before. It also often receives orders for a similar machine from other customers. In practically all such cases it is able to and does use the original drawings and patterns with such changes as are found necessary. When an order is received for a replacement or a machine similar to one theretofore made the drawing-room employees remove from storage the original drawing and a draftsman notes thereon the needed changes. This drawing is then sent to the pattern room and the original pattern is located and taken from storage and patterns are made for such additional parts as are needed. Due to the fact that few changes are made in the type of machinery manufactured by the petitioner, it is seldom that entirely new patterns and drawings are required. The cost of new drawings and patterns is a considerable item in the manufacture of a machine and the large stock of the same which the petitioner has on hand constitutes an important factor in enabling it to meet competition. Competition in the field of the petitioner’s business is so keen that often the petitioner expects but little profit on the first machine for which new drawings and patterns are made, and depends for its profit on subsequent orders for which the same drawings and patterns can be used.
    The patterns acquired by the petitioner in 1895 occupied two floors of a building about 30 by 20 feet in size. Later an additional large building with two floors was acquired and filled with accumulated patterns. In 1910 the petitioner erected, at a cost of $10,000, a corrugated iron building, 100 by 120 feet in size, for the storage of patterns. Five floors in this building were filled with patterns. In addition to these the petitioner has two brick buildings and a part of another building filled with its patterns, making a total of six buildings used in whole or in part for pattern storage.
    Only once has the petitioner discarded any patterns. That occurred about 1905, when in enlarging its plant it was necessary to cut through one of the buildings in which patterns were stored. At that time a number of the oldest patterns, all of which were made prior to 1895, were discarded. Within a week thereafter it received an order for a piece of machinery the pattern for which had been discarded. Since that time it has retained and stored all patterns.
    The drawings have accumulated to a number in excess of 10,000. They are stored- flat and occupy 56 drawers. None have ever been discarded.
    The petitioner carried insurance on both the drawings and patterns. The insurance was increased from time to time until in 1919 it amounted to $30,000 on the drawings and $50,000 on the patterns. About 1921 it purchased a photostat machine at a cost of $1,500, made photostatic copies of all its drawings and placed the copies in a safe away from the storage room. Since then all drawings have been photostated as made and the copies stored in the safe. These steps were taken as additional precautions against loss of the drawings by fire.
    The cost to the petitioner of its drawings over the period 1895 to 1916, inclusive, was $116,769.53, and the cost of its patterns $124,421.01. The drawings and patterns have an average useful life of 20 years. Accumulated depreciation on both drawings and patterns at the rate of 5 per cent over the period 1895 to 1916, inclusive, amounts to $119,185.73. The cost in 1917 of drawings was $6,132.04 and of patterns $10,485.73.
    During the entire period from 1895 to and including the taxable years here involved petitioner charged the cost of drawings and patterns to expense. This method of accounting was adopted because the officers of the company objected to any bookkeeping procedure which would increase the capital over the original amount of $100,000. However, in its return for the year 1917 the petitioner claimed the depreciated cost of patterns and drawings as an item of invested capital. The Commissioner, in a letter dated February 14,1924, advised the petitioner of the computation of its tax liability for 1917 by allowing the inclusion in invested capital of the cost of patterns and drawings in the amount of $122,004.81. For the year 1918 the petitioner claimed the cost of patterns and drawings as a deduction from income, believing that it had the right to do so under the Commissioner’s regulations, and protested against the action of the Commissioner as set forth in his letter of April 10,1924, in adding such cost to invested capital. Subsequently the Commissioner disallowed the cost of patterns and drawings as a capital item for the years 1917 to 1920, inclusive, and on that basis computed the deficiency from which this appeal is taken.
   OPINION.

Akundell :

The petitioner has amply established that its patterns and drawings were exceedingly valuable assets in the operation of its business and the producing of its income. Officers who have been with the company for many years expressed the opinion that in case of the destruction of the drawings and patterns it would be forced to go out of business. They were regarded of such value that the petitioner constructed special fireproof storage facilities, carried $80,000 insurance, and as an additional precaution phostostated all of its drawings and stored the photostats in a safe.

The petitioner has also fully established that the drawings and patterns had a useful life of at least 20 years. Many of them have been in use a longer period, some with no alterations and others with such changes as are necessary to meet incidental changes in the type of the machine manufactured. It was testified by the president of the petitioner, who has at various times exercised supervision over all departments, that “ a couple of hundred ” castings could be made from one pattern, and it was seldom that orders were received for that number. Based upon the evidence, our opinion is that 20 years represents the useful life of the drawings and patterns and depreciation should be allowed at the rate of 5 per cent per year.

The cost of drawings and patterns to the petitioner for the period 1895 to December 31, 1916, was $241,190.54, and the depreciation sustained during the same period at the rate of 5 per cent amounts to $119,185.73, leaving a net value of $122,004.81, which should be included in invested capital for the year 1917. During the year 1917 the petitioner made additional drawings and patterns at a cost of $16,617.77, and sustained depreciation in the amount of $12,335.33, making a net amount of $126,287.25 to be included in invested capital for the year 1918.

During its early years from 1895 to 1908 the petitioner did not segregate drawing-room and pattern costs, but carried them in one account. In making its proof of cost of patterns and drawings it arbitrarily allocated to each of the two items 50 per cent of the total cost. This method, of course, does not establish accurately the cost separately of the two items, but as we have found that in each case the assets are capital items and subject to the same rate of depreciation, this failure to allocate costs in the early years does not affect the result.

It is a matter of little consequence that the petitioner claimed the right in one year to capitalize the cost of drawings and patterns and in another year sought to deduct such costs as expenses. We have found that the costs should have been capitalized and the fact that they were erroneously treated as expenses does not preclude the petitioner from now correcting its error. Appeal of Goodell-Pratt Co., 3 B. T. A. 30.

Judgment will be entered on 15 days' notice, v/nder Rule 50.


text:
    Cohn-Goodman Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7167.
    Promulgated June 23, 1927.
    1. Prior to June 3, 1924, the Commissioner assessed additional taxes for the fiscal years ended November 30, 1917, and November 30, 1918. Abatement claims were filed and by letter of July 21,
    1925, the Commissioner advised that overassessments had been found for those years. The overassessments were less than the amounts of the additional assessments. An appeal was pending at the time the Revenue Act of 1926 was enacted. Held, That under section 2S3 (f) the Board has jurisdiction.
    2. Under the facts herein held that the earnings of the petitioner credited to the accounts of its stockholders constituted loans to the petitioner and may not be included in invested capital.
    3. On May 31, 1920, the capital stock of the petitioner was increased, the stockholders paying in for the increase the amounts credited to them on petitioner’s books and giving notes for the balance. Held, that from that date petitioner is entitled to include in its invested capital the amount of the increase in its capital stock.

      R. M. O'Hara, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    The Commissioner has determined deficiencies for the fiscal years ended November 30, 1919, and November 30, 1920, in the amounts respectively, of $3,688.95 and $1,454.17, and overassessments for the fiscal years ended November 30, 1917, and November 30, 1918, in the amounts of $1,551.38 and $2,567.92.
    The dispute between the parties arises from the action of the Commissioner in eliminating from invested capital the amount of a special surplus account. An error alleged by the petitioner as to the comparatives selected by the respondent was withdrawn at the hearing. The Commissioner has moved to dismiss as to the fiscal years ended November 30, 1917, and November 30, 1918, for the reason that he has not asserted a deficiency for those years.
    FINDINGS OP FACT.
    The petitioner is an Ohio corporation with its office and place of business at Cleveland, and is engaged in the business of manufacturing and selling women’s coats. Petitioner was incorporated in 1902 with an authorized capital stock of $50,000 and is a successor to a copartnership. It ivas the practice of Albert A. Cohn and Louis Goodman, stockholders and active managers of the business, to permit a certain portion of the profits accruing to them as stockholders to remain in the business, their personal accounts being credited with the amounts not withdrawn.
    On or about March 1, 1911, the balance in the personal account of Albert A. Cohn was $50,000 and in the account of Louis Goodman $47,000. On that date it was agreed between Messrs. Cohn and Goodman and the corporation that the former would advance to the. latter the respective sums appearing to their credit on the corporation’s books, viz., $50,000 and $47,000, with the understanding that these sums could not be drawn upon prior to the 1st day of December, 1915, and that the corporation would pay interest thereon at the rate of 6 per cent. The minutes of the directors’ meeting dated March 1, 1911, provided for the issuance of the following certificate:
    This is to certify that Albert A. Cohn has deposited with The Cohn, Goodman Company of Cleveland, O. the sum of $50,000.00, which has been placed upon the books of the said Company to the credit of the said Albert A. Cohn, with the understanding that the Company shall have the use of said money until the first day of December, 1915, upon payment to the said Albert A. Cohn of interest at the rate of sis per cent per annum, payable monthly, and computed from the first day of March, 1911.
    A similar certificate was issued to Louis Goodman covering the amount left with the company by him.
    No formal action was taken by the directors declaring a dividend, but it was the practice at the end of each year to credit to the personal account of the stockholders the amount of the profits to which each was entitled. In the early days of the corporation and before the taxable years in question the two stockholders, Albert A. Cohn and Louis Goodman, each received 37% per cent of the profits although their combined stock ownership was only about 50 per cent of the outstanding issue. The stockholders were credited with the respective amounts of the profits at the direction of Cohn and without any formal action on the part of the directors that this course be followed. The amounts placed to the credit of the respective stockholders but not withdrawn by them were never reported as income in their personal returns.
    On January 14, 1918, an agreement was entered into by the petitioner on the one hand and Albert A. Cohn, Louis Goodman, and A. R,. Cohn on the other hand. This agreement recited that at that time the stock was owned in the following proportion:
    Albert A. Colin- 255 shares
    Louis Goodman-125 shares
    A. R. Cohn-120 shares
    It was agreed, however, that the profits should be distributed in the following proportions:
    Albert A. Cohn-Four-eighths
    Louis Goodman-Three-eighths
    A. R. Cohn-One-eighth
    The agreement contains the following material statements:
    Whereas, the following amounts are credited to said stockholders on the books of the Company as of the 30th day of November, 1917, which amounts, but for the execution of this agreement, would be subject to the unrestricted control and right to withdrawal on the part of said stockholders, namely:
    To the credit of the said Albert A. Cohn on the books of the Company, the sum of-$72, 282. 30
    To the credit of the said Louis Goodman on the books of the company, the sum of_ 61, 086.71
    To the credit of the said A. R. Cohn, on the books of the company, the sum of-1- 2,195. 58
    and
    Whereas, said parties desire for their mutual protection, and to promote the financial stability of the Company, to restrict the right of the stockholders to withdraw the said amounts to their credit, as hereinafter provided.
    Said parties do therefore mutually covenant and agree to and with each other, as follows, to wit:
    (1) The said amounts to the credit of the stockholders, as aforesaid, shall be hereafter designated on the books of the Company as a Special Surplus Account; the aggregate amount of said Special Surplus Account, to wit, the sum of $135,564.52 shall nevertheless continue to be owned by the stockholders, as follows:
    By the said Albert A. Cohn_$72,282.30
    By the said Louis Goodman_ 61,086.71
    By the said A. R. Cohn_ 2,195.58

      (2) All net profits earned by tbe Company after tbe 30tb day of November, 1917, shall be divided or apportioned among said stockholders, as follows:
    To the said Albert A. Cohn 4/8ths thereof;
    To the said Louis Goodman S/8ths thereof;

    To the said A. R. Cohn l/8th thereof;
    and such portion of said net earnings which is not distributed to said stockholders in cash, in the above proportions, shall be credited to the stockholders in the above proportions under said Special Surplus Account, and this agreement shall operate and be tantamount from time to time to declarations of dividends or other distribution on the part of said Company, or the directors thereof, for the purposes herein expressed, of all net profits earned by said Company after November 30, 1917.
    The agreement further provides that upon the death of any stockholder the proper legal representatives of such deceased stockholder shall have the right to withdraw the amount “ owing to such deceased stockholder at the time of his death, in said Special Surplus Account, in five equal annual installments, the first to be withdrawn six months after the death of such deceased stockholder, and the remaining at annual intervals thereafter, and the deferred payments to which such stockholder’s estate shall so be entitled shall bear interest at the rate of eight per cent per annum.” . The agreement further provides that it should go into effect as of the 30th day of November, 1917, and be valid and binding upon the parties for a period of 10 years thereafter.
    On the same date there was an agreement entered into by Albert A. Cohn and Louis Goodman which gave to Cohn the right to purchase Goodman’s interest in the corporation should the latter desire to sell the same and provided in detail the method of determining the value of Goodman’s shares of stock in the corporation. The agreement between the parties also contained the following provision:
    (2) The said Albert A. Cohn shall pay to the said Louis Goodman the aggregate sum of the book value of the said stock of the said Louis Goodman determined as aforesaid, together with the amount to the credit of the said Louis Goodman under said Special Surplus Account, as of the date of the inventory as of which said book value is determined as follows: * * *
    (3) Upon the payment of said sums to the said Trust Company by the said Albert A. Cohn for the said Louis Goodman, the said Albert A. Cohn shall become fully and legally possessed of and entitled to the said shares of the capital stock of the Company theretofore owned by the said Louis Goodman, together with the entire right, title and interest of the said Louis Goodman in and to said Special Surplus Account.
    On May 31, 1920, a meeting of the directors of the petitioner was held, at which it was voted to reorganize the corporation, and the following resolution, among others, was adopted:
    Resolved, further, that the present surplus and undivided profits of the company be and the same are hereby ordered transferred from the Surplus, or Undivided Profits Account, to Capital Account, to the extent of $271,787.64 thereof, and that stock of the company, as re-organized, be issued to the present stockholders or their assigns in such manner and in such proportions as they as stockholders, may be entitled thereto, subject to the further action of the Board of Directors subsequent to the authorization of the proposed re-organization of the company; said new stock so issued to be issued as fully paid and non-assessable, and to be deemed as haying been so fully paid by reason of the transfer of the aforesaid sum from surplus and undivided profit account to the Capital Account of the company.
    On the same date a stockholders’ meeting was held at which a reorganization was agreed upon, the certificate of reorganization containing the following pertinent provisions:
    6. The capital stock of said Corporation, Common and Preferred, shall be Three Hundred Fifty-two Thousand Five Hundred Dollars ($352,500.00), consisting of three thousand shares of Preferred stock of the par value of $100 per share, and fifteen hundred shares of common stock without nominal par value.
    7. The amount of common capital with which the Corporation will carry on ousiness is Fifty-two Thousand Five Hundred Dollars ($52,500.00) consisting of fifteen hundred shares of said Common stock without nominal or par value, and being a sum equivalent to Thirty-five Dollars ($35.00) for each share of Common stock to be issued.
    8. The terms upon which the new shares of stock of said Corporation shall be issued, in place of outstanding shares of stock, are as follows, to wit: The new shares of the stock of said corporation as re-organized shall be issued to the holders of the present capital stock of the company, or their assigns, in exchange for the surrender and cancellation of all of the present outstanding shares of stock in the following proportions, to wit: for each twenty (20) shares of stock now issued and outstanding there shall be issued one hundred thirteen (113) shares of the new preferred stock, and for each one (1) share now issued and outstanding there shall be issued three (3) shares of the common stock of the reorganized company; said allotment being based upon the exchange of one share of the new preferred stock for each share of the old common stock, and the balance being a distribution of a stock dividend this day authorized and declared by the Board of Directors of the Company.
    The directors wlio were elected at tlie stockholders’ meeting held a special meeting on the same day at which resolutions were adopted ratifying the action of the former directors and setting forth the terms upon which the new stock of the reorganized company was to be issued.
    A stockholders’ agreement relating to the reorganization was entered into setting forth the allotment of stock to be made to each stockholder and providing in part as follows:
    And we do further agree that there shall remain in the Treasury of the company, unissued for the present, one hundred seventy-five (175) shares of the preferred stock of the re-organized company.
    Second: For the purposes of this agreement, at the time of the execution hereof, the respective interests of the parties hereto in and to the capital, surplus, or other claim against the said company, is as follows, to wit:
    A. A. Cohn_ Surplus, $115,004.10; stock, $25,500.00; total, $140,504.10.
    Louis Goodman__ Surplus, $87,502.43; stock, $12,500.00; total, $100,002.43.

      Nathan Rosenberg_ Surplus, $11,455.32; withdrawn, $1,455.32; balance, $10,000.00.
    W. E. Clarke-Due from Company and not withdrawn, $3,485.12.
    J. H. Lichtig_Due from Company and not withdrawn, $2,159.42.
    C. P. Jacobs_Due from Company and not withdrawn, $1,136.57.
    A. R. Cohn_ Stock, $12,000.00.
    It is understood that in addition to the interest of the respective parties aforesaid, the net earnings of the company down to and including the 30th day of April, 1920, shall he transferred to Surplus Account and from Surplus Account to Capital Account and credited to the new stockholders in proportions corresponding with the proportions in which the new common stock shall be issued to them, as hereinabove set forth.
    Thibd: Any deficiency between the amount due from such new stockholders upon the stock allotted to them as aforesaid, after crediting their present holdings, together with their respective interests in surplus and earnings as aforesaid, shall be paid either in cash or note, at the option of the subscriber, and for the purposes of this agreement the adjustment as between the company and the stockholders shall be as follows:
    Upon issuance of stock as aforesaid and surrender and cancellation of his old shares, the company shall pay to A. A. Cohn the sum of Eour Dollars Ten Cents_$4.10
    Upon issuance of stock as aforesaid and surrender and cancellation of his old shares, the company shall pay to Louis Goodman the sum of Two Dollars Eorty-three Cents- 2.43
    Shares as aforesaid, upon surrender of their old shares, together with any interest or claim in surplus or earnings to date, shall be issued to Nathan Rosenberg and A. R. Cohn without adjustment either way.
    Shares as aforesaid shall be issued to W. E. Clarke, and the company shall receive from the said W. E. Clarke either cash or in lieu thereof his promissory note for the difference between $10,000.00 and $3,485.12, secured by a deposit of his preferred and common stock as collateral to such note, such note to bear interest at seven per cent, and to be payable November 30, 1920.
    Shares as aforesaid shall be issued to J. H. Lichtig, and the company shall receive from the said J. E. Lichtig, either cash or in lieu thereof his promissory note for the difference between $5,000.00 and $2,159.42, secured by a deposit of his preferred and common stock as collateral to such note, such note to bear interest at seven per cent, and to be payable November 30, 1920.
    Shares as aforesaid shall be issued to C. P. Jacobs, and the company shall receive from the said C. P. Jacobs either in cash or in lieu thereof his promissory note for the difference between $5,000.00 and $1,136.57, secured by a deposit of his preferred and common stock as collateral to such note, such note to bear interest at seven per cent, and to be payable November 30, 1920.
    Stock certificates, representing the increased stock, were issued on May 31, 1920.
    On June 9, 1920, a certificate of reorganization was filed with the Secretary of State of the State of Ohio.
    It was the uniform practice of the corporation in all credit statements made by it to Dun and Bradstreet and also to the various banks to treat the special surplus account as a part of the capital and surplus of the corporation and based on these credit statements large sums were borrowed by the corporation which at times equaled almost half a million dollars.
    Under date of January 30, 1924, the then Deputy Commissioner Bright advised petitioner of the intention of the Commissioner to make an immediate assessment of the additional tax asserted for the fiscal years ended November 30, 1917, and November 30, 1918, inasmuch as the statute of limitations was about to run, and in said letter stated that the Bureau would entertain a claim in abatement if filed within ten days of receipt of notice and demand from the collector. An assessment was made and thereafter abatement claims were filed and the letter of July 21, 1925, which served as a basis of the taxpayer’s appeal in this case contained the Commissioner’s action on the abatement claim.
   OPINION.

ARtjndell : At the hearing of this case the respondent moved that the appeal be dismissed in so far as it relates to the years 1917 and 1918, as overassessments have been found for those years and the Board is therefore without jurisdiction. The amounts of the original assessments for the years 1917 and 1918 were $2,535.40 and $15,220.11, respectively. The Commissioner subsequently assessed additional taxes for those years in the respective amounts of $6,046.22 and $6,138.38. Of these amounts the notice appealed from sets forth $1,551.38 for 1917 and $2,567.92 for 1918 as overassessments. There is then, for each year an amount in excess of the amount reported by the petitioner which was assessed prior to June 3, 1924, concerning which the Commissioner made a final determination prior to the enactment of the 1926 Act, and an appeal from such determination was pending before the Board when that Act was enacted. The case therefore comes within the provisions of section 283 (f) of the Revenue Act of 1926 and we have jurisdiction over the appeal for the years 1917 and 1918. Appeal of Covert Gear Co., 4 B. T. A. 1025; Appeal of William A. Slater Mills, Inc., 5 B. T. A. 971. The respondent’s motion to dismiss is denied.

In considering the merits of the case it may be divided conveniently into three periods: First, the fiscal year ended November 30, 1917; second, the period December 1, 1917, to May 30, 1920; third, the period May 31, to November 31,1920.

First period. By the directors’ resolution of March 1, 1911, the amounts of $50,000 and $47,000 then standing on the petitioner’s books to the credit of Cohn and Goodman, respectively, were recognized as borrowed funds and clearly those amounts can not be included in invested capital for the period here under consideration. While thereafter in this period there was no formal corporate action taken to convert the earnings into dividends, the earnings were credited to the accounts of the individual stockholders and were considered by the officers of the petitioner as belonging to the stockholders as is evidenced by the agreement of January 14, 1918, set forth in the findings of fact.

Second period. By the resolution of January 14, 1918, the amounts standing to the credit of the stockholders as of November 30, 1917, were recognized as obligations of the petitioner. Such amounts, therefore, can not be included in invested capital. Appeal of Kelly-Buckley Co., 1 B. T. A. 1154; Appeal of O'Neil Construction Co., 4 B. T. A. 401. That certain restrictions were placed on the stockholders’ right of withdrawal does not change the character of the amounts involved. Most loans carry certain restrictions, such as to the time of payment. The same situation exists as to the amounts credited to the special surplus account during the balance of this period. Under the resolution of January 14, 1918, it was not necessary that formal declarations of dividends be made in order to make a distribution of surplus as it was agreed that entering a portion of the profits in the special surplus account should “operate and be tantamount from time to time to declaration of dividends or other distribution on the part of said Company.” The amounts involved being separated from the petitioner’s earnings and recognized by it as obligations to its stockholders, we are of the opinion that they constituted borrowed capital and can not be included in invested capital. See Appeal of Wm. H. Davidow Sons Co., 1 B. T. A. 1215; Appeal of Webb Press Co., Ltd., 3 B. T. A. 247; Appeal of William Greilich & Sons, Inc., 3 B. T. A. 1333; Lobsitz Hardware Co. v. Commissioner, 5 B. T. A. 295.

The petitioner cites Eaton v. English & Mersick Co., 7 Fed. (2d) 54, and Davidson & Case Lumber Co. v. Motter, 14 Fed. (2d) 137, in support of its contentions. These cases are readily distinguishable from this one. In the English & Mersick case the court found that the resolutions set forth did not constitute the declaration of dividends and did not create an indebtedness of the corporation. In the Davidson case it was found that there had been no declaration of a dividend and that the amount involved at all times belonged to the corporation.

In the present case the resolution relating to the amounts entered in he special surplus account clearly shows that both the petitioner and its stockholders recognized the entering of the credits as the declaration of dividends and the amounts appearing therein as the property of the stockholders.

Third period. On May 31, 1920, the petitioner, by its stockholders and directors, took appropriate action to increase its capital stock from $50,000 represented by 500 shares of common stock, to $352,-500 represented by 3,000 shares of preferred at a par value of $100 each and 1,500 shares of common without par value but valued by the petitioner at $35 per share. Of the new stock 2,825 shares of preferred and all of the common, 1,500 shares, were issued, the petitioner receiving therefor, in part, the surplus standing to the credit of its stockholders, and for the balance, notes of the stockholders with the stock as collateral security, as shown by the findings of fact. The evidence shows that the petitioner deemed the new stock to be fully paid and the respondent does not deny nor does the record show that the items paid in, namely the surplus account and notes of stockholders, were not equal in value to the par value of the preferred stock and the value of $35 per share ascribed to the common. For the period beginning May 31, 1920, the petitioner is therefore entitled to have included in its invested capital the amount of $285,000 by which its capital stock was increased at that date. Pictorial Review Co., 5 B. T. A. 416.

Judgment will 5e entered on 15 days'1 notice, %mder Rule 50.


author: GREEN:

text:
    Appeal of Cheney D. Washburn.
    Docket No. 2475.
    Promulgated June 23, 1927.
    1. Petitioner filed returns of income for the fiscal years ended June 30, 1919,1920, 1921, 1922, and 1923, on the due dates for filing calendar year returns. The returns hore notations indicating they were fiscal year returns. The income reported in these returns was the income earned during the respective fiscal years. The taxes shown on the returns by the petitioner were computed as though they were calendar year returns. Held,, that the returns referred to were returns of the fiscal years 1919, 1920, 1921, 1922, and 1923; and that the Commissioner, in determining the deficiency in, or overassessment of, taxes for those years, properly credited the tax shown by the petitioner on each fiscal year return against the correct tax of the respective fiscal years.
    2. The Commissioner having determined an overassessment for the year 1919, the Board is without jurisdiction of the issues raised for that year. Appeal of Gornelms Cotton, Mills, 4 B. T. A. 255; Appeal of R. P. Harneará, Go., 4 B. T. A. 150.
    3. The 25 per cent penalty for delinquency in filing the return for the fiscal year 1920, asserted by the Commissioner under the provisions of section 3176 of the Kevised Statutes, as amended by section 1317 of the Revenue Act of 1918, and covered by the petitioner by a claim in abatement, represents a previous deficiency assessment, within the purview of section 273 of the Revenue Act of 1926, and the Commissioner erred in failing to take into account the amount of the penalty previously assessed, in determining the deficiency in, or overassessment of, tax for the fiscal year 1920.

      John, F. Malley, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.
    This appeal is from a determination of deficiencies in income taxes for the fiscal years 1920, 1921, 1922, and 1923, in the amounts of $268.78, $178.12, $924.12, and $37.96, respectively.
    FINDINGS OF FACT.
    Petitioner is a resident of Springfield, Mass., where he is engaged in the undertaking business. During the fiscal years under consideration, and for several years prior thereto, he computed his net income upon the basis of an annual accounting period which was a fiscal year ending on June 30.
    The returns for the taxable years 1917 and 1918 were filed as returns for the calendar years 1917 and 1918 but the income reported in those returns was, respectively, the income earned during the fiscal years ended June 30, 1917, and June 30, 1918.
    The returns for the taxable years 1919 to 1923, inclusive, were filed as returns for the fiscal years ended June 30, 1919, 1920, 1921, 1922, and 1923. The income reported in each of these returns was the income earned during the respective fiscal years.
    The taxes shown on the returns filed for the calendar years 1917 and 1918, and actually paid, were computed at the rates prescribed by the statutes for those particular calendar years; that is to say, the tax shown on the return for the calendar year 1917, and actually paid, was computed at the rates prescribed by the Revenue Act of 1917 for the calendar year 1917, and the tax shown on the return for the calendar year 1918, and actually paid, was computed at the rates prescribed by the Revenue Act of 1918 for the calendar year 1918.
    The taxes shown on each of the returns for the fiscal years 1919 to 1921, inclusive, and for the fiscal year 1923, and actually paid, were computed at the rates prescribed by the Revenue Acts of 1918 and 1921 for the respective calendar years in which the fiscal years ended; that is to say, that the tax shown on the return for the fiscal year 1919, and actually paid, was computed at the rates prescribed by the Revenue Act of 1918 for the calendar year 1919, and so on for the succeeding fiscal years. A return showing no tax due was filed for the fiscal year 1922.
    The taxes shown to be due on the returns for the taxable years 1917 to 1923, inclusive, are as follows:
    Calendar year 1917_ $623.29
    1918- 3,322.63
    Fiscal year 1919-^- g, 733. 82
    1920- 4,262.32
    1921- 1,220.17
    1922- 00. 00
    1923- 149.36

      On the May, 1921, List, at page 82, line 2, as shown by the certificate of the collector of internal revenue at Boston, Mass., which certificate was admitted in evidence as petitioner’s Exhibit No. 1, there was assessed additional income tax for the year 1918 in the amount of $574.91, which amount was paid on September 1, 1921.
    On the December, 1923, List, at page 32, line 3, as shown by the certificate of the collector, there was assessed additional income tax for the year 1919 in the amount of $505.13, which amount was paid on January 11, 1924. Said certificate further shows a debit against the petitioner’s account in the collector’s accounts, which in terms and figures is stated to be “Add’l. per Dept. Superficial Audit— $1,065.58.” This item has not been paid but was covered by a claim for abatement for the full amount thereof which was filed on May 6, 1922, and with respect to which claim the Commissioner, up to the time the appeal was submitted, had taken no action. The only evidence in the record tending to show the nature of, or the reasons for, these two additional assessments is the following quotation from the revenue agent’s report:
    On October 27, 1923, the taxpayer was notified that an additional tax oí $505.13 was due for the fiscal year ended June 30, 1919. The additional tax was based on the fact that the Bureau decided the return was a fiscal year ended June 30, 1919, instead of a calendar year 1919, and computed the tax under the rates for 1918 and 1919. The taxpayer paid this amount.
    In May, 1922, the taxpayer was notified by the collector that there was an additional assessment of Yi of the tax for the year 1920, or $1,005.58. This amount was based on the fact that the taxpayer’s return was received on March 12, 1921, for the fiscal year ended June 30, 1920, and it was therefore, delinquent. The taxpayer protested this assessment and filed an affidavit mentioned above explaining that he had relied upon what he had considered competent advice. Nothing has been done further about this assessment, and it is believed the taxpayer’s explanation was satisfactory and the penalty was not asserted.
    The revenue agent’s report does not cover any year prior to the fiscal year ended June 30, 1919. With respect to the latter year and years subsequent thereto, the report shows a deficiency or overassessment for each year as follows:

      Year ended June 30, 1919

    Total tax liability for the year-$4, 041.89
    Deduct tax previously assessed:
    One-half of $3,322.63 assessed for 1918_$1, 661.31
    One-half of $4,238.95 assessed for 1919_ 2,119.47
    - 3,780.78
    Deficiency- 261.11

      Tear ended June SO, 1920

    Total tax liability for the year_$4,531.10
    Deduct tax previously assessed:
    One-half of $4,238.95 assessed for 1919-$2,119.48
    One-half of $4,262.32 assessed for 1920_ 2,131.16 .
    - 4,250.64
    Deficiency_ 280.46

      Tear ended, June 30, 1921

    Total tax liability for the year_$1, 398. 27
    Deduct tax previously assessed:
    One-half of $4,262.32 assessed for 1920_$2,131.16
    One-half of $1,220.17 assessed for 1921_ 610. 09
    - 2,7,41.25
    Overassessment_ 1,342.98

      Tear mded June SO, 1922

    Total tax liability for the year_ $944.12
    Deduct tax previously assessed: One-half of $1,220.17 assessed for 1921_ 610.08
    Deficiency_ 334.04

      Tear ended June SO, 192S

    Total tax liability for the year- $199. 98
    Deduct tax previously assessed- 149. 36
    Deficiency_ 50. 62
    The Commissioner rejected the revenue agent’s computations of the deficiency or overassessment for each year, and forthwith redetermined the deficiency or overassessment for each year in the following manner:

      Tear ended June SO, 1919

    Correct tax liability as shown by revenue agent’s report_$4, 041. 89
    Less tax assessed on calendar year return_ 4, 238. 95
    Overassessment_ 197.06

      Tear ended June SO, 1920

    Correct tax liability as shown by revenue agent’s report_$4,531.10
    Less tax assessed on calendar year return_ 4, 262. 32
    Deficiency in tax- 268. 78

      Tear ended June SO, 1921

    Correct tax liability as shown by revenue agent’s report_$1, 398. 27
    Less tax assessed on calendar year return_ 1, 220.17
    Deficiency in tax. 178.10

      Year ended June SO, 1922

    Tax liability as shown by revenue agent’s report_ $944.12
    Less error in surtax at 1922 rates_ 20. 00
    Correct tax liability- 924.12
    Less tax assessed- 0. 00
    Deficiency in tax_ 924.12

      Year ended June SO, 1928

    Tax liability as shown by revenue agent’s report_ $199.98
    Less 25 per cent reduction under the 1924 Act_ 50. 00
    Correct tax liability-•--- 149. 98
    Less tax assessed on return-$149. 36
    Less 25 per cent reduction_ 37.34
    ■- 112. 02
    Deficiency in tax_ 37.96
    No credit has been allowed by the revenue agent or the Commissioner, in their respective computations of the deficiency in tax for the fiscal year ended June 30, 1920, for the item of $1,065.58 assessed as a penalty against the taxpayer for that year, for delinquency in filing the return. Full credit has been allowed for the additional assessment of $505.13 for the year 1919.
    The result of the revenue agent’s computations for the fiscal years 1919 to 1923 is a net overassessment of $416.75. The Commissioner’s computations for the same years result in showing a net deficiency of $1,211.90. The difference is $1,628.65, which is made up as follows:
    Credit by revenue agent of one-half of taxes assessed on 1918 calendar year return against tax liability of fiscal year ended June 30, 1919, not allowed by Commissioner_,._$1, 661.31
    Add 25 per cent reduction in credit allowed by Commissioner for taxes assessed on return for fiscal year 1923_ 37. 34
    Total_ 1, 698. 63
    Deduct:
    Error in revenue agent’s computation of surtaxes for fiscal year 1922_$20. 00
    Reduction in tax liability made by Commissioner for fiscal year 1923-:- 50. 00
    - 70.00
    Total_ 1,628.60
    In a so-called thirty-day letter to the petitioner under date of September 27, 1924, which letter has been admitted in evidence as Commissioner’s Exhibit “A,” the Commissioner explained the reason for the difference noted above between his determination of a net deficiency and. the revenue agent’s determination of a net overassessment, as follows:
    In determining the deficiency in tax, and the overassessment for the respective years 1919 to 1922, the Agent allowed as credits against the correct tax liability, one-half of the sum of the total tax assessed for the current years, and the preceding years respectively. Since the adjustments of income reported in your return are not due to any changes in accounting period, but due to errors in compiling the correct figures, the taxes assessed for each calendar year should be allowed as a credit against the correct tax liabilities for each respective fiscal year.
   OPINION.

GREEN:

The petitioner alleges as errors the following:

(1) That the Commissioner, in determining the deficiency in, or overassessment of, taxes for each of the fiscal years 1919 to 1922, inclusive, has erroneously credited against the tax liability of each of those years, the assessments made against this petitioner for the particular calendar year in which the fiscal year ended.

(2) Failure of the Commissioner to alloy? proper credits for the additional assessment of $574.91 for the taxable year 1918, and the asserted penalty of $1,065.58 for delinquency in filing the return for the year 1920.

The petitioner accepts as correct the tax liability for each of the fiscal years 1919 to 1923, inclusive, as determined by the Commissioner.

With respect to the first allegation of error, the petitioner contends that because of the Commissioner’s action in crediting against the correct tax liability of the fiscal years 1919, 1920, 1921, and 1922, respectively, the taxes assessed for the calendar years 1919, 1920, 1921, and 1922, he has been deprived of a credit of $1,661.31, which amount is one-half of the taxes originally assessed and paid by him on the basis of the return for the calendar year 1918. He further contends that a proper determination of the deficiency or overassessment for each of the fiscal years under consideration would result by crediting against the tax liability for each of the fiscal years one-half of the tax assessed for the calendar year immediately preceding that in which the fiscal year ends plus one-half of the tax assessed for the calendar year in which the fiscal year ends.

It appears that the petitioner’s contentions are based in part upon the false presumption that the returns for the taxable years 1919 to 1922, inclusive, were filed as calendar year returns. The evidence shows conclusively that those returns were filed as returns for fiscal years. The returns bear notations that they are fiscal year returns, and the income reported in each of them is the net income earned during the respective fiscal years. True, these returns were not filed until the due dates for filing calendar year returns, and the taxes shown thereon were computed at the rates prescribed for the calendar years as set forth in our findings of fact. But these facts of themselves do not make these returns calendar year returns, but are indicative only of the delinquency of the petitioner in filing them and of the error of his computations of the taxes due.

In view of the foregoing we are constrained to hold that the Commissioner, in determining the deficiency in, or overassessment of, taxes for the fiscal years 1919 to 1922, inclusive, quite properly credited against the tax liability of each of those years, the taxes assessed on the original returns of the respective fiscal years.

But the petitioner contends that the Commissioner, in reaching a determination as to the overassessment for the fiscal year 1919, should have credited against the tax liability of that year, not only the taxes assessed with respect thereto, but also one-half of the taxes assessed on the return for the calendar year 1918, and that if this had been done the resulting overassessment for the taxable year 1919 would be greater than that which the Commissioner has determined, and the deficiency would be correspondingly less. Whether this be true or not, it raises a question which is without the jurisdiction of this Board, since, under the provisions of section 274(a) of the Revenue Act of 1926, the Board is without jurisdiction to change the Commissioner’s determination of overassessments for any year. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255; Appeal of R. P. Hazzard Co., 4 B. T. A. 150; Jay N. Darling v. Commissioner, 4 B. T. A. 499.

With respect to the second issue raised by the petitioner, it is alleged that the Commissioner has failed to allow proper credits for the additional assessment of $574.91 for the taxable year 1918, and for the asserted penalty of $1,065.58 for delinquency in filing the return for the taxable year 1920. Whether or not proper credit has been allowed for the additional assessment of $574.91 with respect to 1918, is material only in determining whether or not there has been an overpayment of taxes for the short period January 1 to June 30,1918, which may be credited against the deficiency which the Commissioner has determined for the years under consideration. This too is a question as to which we are denied jurisdiction by the provisions of section 274(g) of the Revenue Act of 1926.

The additional assessment of $1,065.58, for the fiscal year 1920, is a penalty asserted by the Commissioner, under the provisions of section 3176 of the Revised Statutes, as amended by section 1317 of the Revenue Act of 1918, for delinquency in filing the return. Section 3176 of the Revised Statutes provides that the 25 per cent penalty to be added for delinquency in filing the return is to be collected at the same time and in the same manner and as a part of the tax. In computing the total tax liability for 1920, in the deficiency notice, the Commissioner did not include a penalty for delinquency; consequently, we must take it for granted tbat tbe Commissioner has determined that the delinquency penalty should not be asserted. The only question, then, is: In computing the deficiency for 1920, should the Commissioner have taken into consideration and credited against the total tax liability, the amount previously assessed as a penalty? Undoubtedly the question should be answered in the affirmative. The penalty for delinquency is assessed, collected, and paid in the same manner as, and as a part of, the tax; and, therefore, when asserted, is assessed as a deficiency in tax. The term “deficiency” is defined in section 213 of the Revenue Act of 1926 as the amount by which the correct tax exceeds the tax shown on the return; but the tax shown on the return is to be first increased by any amounts previously assessed or collected without assessment as a deficiency, and decreased by amounts previously abated, credited, refunded, or otherwise repaid. The deficiency for 1920 is the amount by which the total tax shown in the deficiency notice exceeds the amount shown by the petitioner on its return, plus the amount previously assessed as a penalty. Since the Commissioner did not take into account the amount previously assessed as a penalty, and as said amount exceeds the deficiency shown in the deficiency notice, there is no deficiency for 1920.

Judgment will be entered after 15 days’ notice, under Rule 50.


author: Aiutndell :

text:
    Charles H. Boulden, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7965.
    Promulgated June 23, 1927.
    Amount claimed by petitioner as advances on behalf of a corporation held deductible from 1920 income as a debt ascertained to be worthless and charged off in that year.

      R. Kemp Slaughter, Esq., and Hugh O. Bickford, Esq., for the petitioner.

      Henry Ramenel, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1920 in the amount of $620.14. The only issue presented is whether the petitioner is entitled to a deduction for a claimed bad debt.
    FINDINGS OF FACT.
    The petitioner is a real estate broker having his office in Baltimore, Md.
    In 1902, at the solicitation of one L. R. Coates, now deceased, the petitioner advanced to Coates about $5,000 for the development of coal properties. The venture was successful and in 1911 the petitioner disposed of his holdings at a profit. Shortly thereafter, in 1911, Coates approached the petitioner with a proposition for the development of other coal fields which gave promise of yielding larger profits than the prior venture. In March, 1911, the petitioner agreed to join in the new venture. In June of that year the Pine Swamp Big Yein Coal Co. was organized. Beginning with March 4, 1911, the petitioner advanced various sums for traveling expenses of Coates, options on and purchases of coal properties, expenses of engineers and attorneys, supplies for the company, maps and blue prints, and for other items in connection with the organization of the company. The sums so advanced prior to May 15, 1912, aggregated $5,806.82. During the same period he paid for the company $199.94 as discounts and interest on mortgages and loans.
    On May 15, 1912, the company issued to the petitioner, for the funds advanced, six of its first mortgage 5 per cent interim bonds of the aggregate face value of $43,500.
    Thereafter the petitioner paid discounts and interest in various amounts and made other advances in behalf of the company, the last of which was $250 paid on August 4, 1916, at the request of Coates, for the renewal of options on land in which the company was interested.
    The petitioner’s boohs of account consisted of two cash books— one containing records for 1911 and prior years and the other for years subsequent to 1911 — and a ledger. In the cash books he kept an itemized record of daily receipts and expenditures. At the end of each year he transferred the totals of the receipts and expenditures, by months, to the ledger. The ledger account in which he recorded his transactions with the Pine Swamp Big Yein Coal Co. shows the company indebted to him as of August 4, 1916, in the amount of $6,826.12.
    From 1916 to the middle of the year 1920 the petitioner talked with Coates every month or two regarding the project. On those occasions Coates advised the petitioner that he was attempting to have the company financed and gave favorable and optimistic reports. On July 26, 1920, Coates phoned the petitioner to the effect that the Pine Swamp Big Vein Coal Co. was “wiped out” and that he could get no one to finance it. The next day the petitioner called on Coates at the latter’s office and received very discouraging reports as to the condition of the company. Coates reported at that time that he had not been able to get any one to take up the financing of the company and that he was sick and could not go on with the work. He advised the petitioner that the latter had “ better charge it off.”

      Thereafter the petitioner charged the Pine Swamp Big Vein Coal Co. account off his ledger by drawing a line through the account and made a notation to the effect that the account was charged off in his 1920 return.
    In his income-tax return for 1920 the petitioner claimed as a bad debt deduction $6,315.51 of the amounts advanced for the company.
    The collector’s office subsequently questioned the deduction claim. In 1924 the petitioner wrote the Secretary of State of the State of West Virginia in regard to the company and received from that official a reply dated June 26, 1924, reading as follows:
    I acknowledge receipt of yours of June 25tb in re: The Pine Swamp Big Vein Coal Co.
    This corporation was dissolved by a decree of court on February 23, 1917.
   OPINION.

Aiutndell :

The petitioner advanced a total, as shown by his accounts, of $6,826.72 on behalf of the Pine Swamp Big Vein Coal Co. For a part of those advances the company issued bonds to the petitioner. In making the advances the petitioner relied upon the promoter Coates for the successful promotion of the venture. Coates furnished favorable reports concerning the company until in 1920 when the petitioner learned for the first time that the company, as he put it, was “wiped out.” At that time he ascertained the debt of the company to be worthless and charged the amount of the advances off his books. Although the company was dissolved in 1917 the petitioner was unaware of that fact. The petitioner is entitled to a deduction as a bad debt for the year 1920 of $6,315.57, the amount he claims. At the hearing counsel for the petitioner waived all claim for a deduction in excess of that amount. We; therefore, express no opinion as to whether the advances in excess of the amount claimed are deductible.

Judgment will be entered on 15 days’ notice, wider Rule 50.


author: Phillips :

text:
    Pratt & Letchworth Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4644.
    Promulgated June 23, 1927.
    Reasonable allowance for amortization of foundry determined.

      F. J. Maguire, Esq., and E. N. Mills, Esq., for the petitioner.

      A. R. Mcvrrs, Esq., for the respondent.
    The taxes in controversy are income and profits taxes for 1920, of $92,760.96. It is alleged that taxes for 1918 and 1919 are involved. It does not appear that any deficiency has been determined for those years. The petitioner assigns as error the refusal of the Commissioner to allow as a deduction from gross income any allowance for amortization of the cost of a certain building constructed after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German government.
    FINDINGS OF FACT.
    The petitioner is a corporation organized in the year 1895 under the laws of the State of New York, having its principal place of business in the City of Buffalo.
    In the years 1918 and 1919 petitioner constructed a new malleable iron foundry building at a cost of $391,237.88, all of which cost was borne by the petitioner. The said building was acquired for the production of articles contributing to the prosecution of the war and was used during 1918 and to some extent during 1919 for the production of such articles.
    The petitioner duly filed claims for amortization in its original income-tax returns for the years 1918 and 1920.
    The said building was used after the cessation of the war in the business of the petitioner. The replacement cost of the said building as of March 1, 1921, was $297,981.64. The replacement cost of the said building as of March 1,1922, was $301,635.09. The replacement cost of the said building as of March 1, 1923, was $302,807.24. The replacement cost of the said building as of March 1, 1924, was $305,110.70.
    Depreciation was allowed as a deduction on the cost of said building at the rate of 3 per cent for 1918, 3 per cent for 1919, 2 per cent for 1920, 2 per cent for 1921, iy2 per cent for 1922 and l% per cent for 1923.
    In the year 1918 the total net sales of the petitioner were $4,514,-202.55 and in the year 1919 they were $2,509,426.44. For the year 1918 the gross income was $687,427.57 and for the year 1919, $337,321.71. For the year 1918 petitioner’s taxable net income without deduction for amortization was $126,915.92 and for the year 1919 there was a net loss amounting to $115,886.19 after adjustments for exempt income. The taxable income of the petitioner for 1920, without deduction for amortization or for any net loss in 1919 was $645,155.11.
    In computing the deficiency no amortization on said foundry building was allowed by the Commissioner. A reasonable allowance for amortization of such building in 1918 was $90,000.
   OPINION.

Phillips :

While it appears that 1920 is the only year for which a deficiency has been determined, a net loss was sustained in 1919, before the allowance of any deduction for amortization, and it becomes necessary to determine the 1918 income and the correct amount of the 1919 net loss before we may determine how much, if any, of such net loss may be deducted in 1920.

In the deficiency letter it was admitted by the Commissioner that the foundry building was constructed and used in the production of articles contributing to the prosecution of the war. In the respondent’s answer this is denied. The proof, however, shows that the petitioner was engaged in 1918 and to some extent in 1919 as a subcontractor in the production of castings for railroad locomotives for the United States Government for use in France and of castings for automobiles and trucks. In order to do this work, it secured the consent of the British Government to discontinue the production of steel billets, which it had theretofore undertaken, such billets being used in the manufacture of shells. It was granted priority classification by the War Industries Board and was under constant pressure to complete this work. There can be no question that this building was constructed and used for the production of articles contributing to the prosecution of the war.

In the deficiency letter from which the appeal was taken, the Commissioner had conceded that the building was acquired for the purpose of producing articles contributing to the prosecution of the war, but no deduction for amortization was allowed for the reason stated in the letter that “ it has been decided that the action of the Unit based on the engineer’s report that the building could not be replaced at postwar costs for less than the actual cost of construction in 1918, should be sustained.” This position taken by the Commissioner was in accordance with his regulations which provide that when such property is not sold or discarded the amount of the amortization allowance shall be the difference between the cost of the facilities (with adjustments for depreciation, losses, etc.) and “the estimated value to the taxpayer in terms of its actual use or employment in his going business, such value to be not less than the sale or salvage value of the property and not greater than the estimated cost of replacement wider normal postwar conditions less depreciation and depletion.” Article 184, Regulations 62. Without holding that under all circumstances the postwar replacement cost represents the maximum value to a taxpayer of property which has a present existence and is therefore capable of use for immediate production, this may be a fair measure of the maximum value in many cases. Where, as in the present appeal, the parties have framed and tried the issues upon that basis, and there is nothing to indicate that the property had a value in excess of its replacement cost, we see no sufficient reason for departing from the measure of value which the parties have adopted.

Evidence of the replacement cost was given by testimony of those who had constructed the building. Complete records had been kept by them of the vario'us kinds and amounts of material and labor entering into the construction. They had done similar construction in the same vicinity in the postwar years and were thoroughly familiar with prices and labor conditions. We are satisfied that the replacement costs fixed by them, after adding fees of supervision, etc., are as accurate as may be obtained.

It appears that the building cost $391,237.88 and that replacement cost varied from $297,981.64 in March, 1921, to $305,110.70 in 1924. We conclude that a reasonable allowance for amortization was $90,000.

It is the contention of the petitioner that any allowance should be distributed between 1918 and 1919. Since the amount allowed is less than the income in 1918, and a loss was sustained in 1919 which must first be applied against 1918 income, the question presented appears to become unimportant in this proceeding. The record indicates that most of the work on articles contributing to the prosecution of the war was done in 1918 and we are without any definite information as to the amount of s'uch work done in 1919. We have therefore concluded that if the matter of allocation of the deduction is necessary, it should be allowed for 1918. As the petitioner had net income in 1918 and none in 1919, before any deduction for amortization, this allocation is in accord with the Board’s decision in Appeal of G. M. Standifer Construction Corporation, 4 B. T. A. 525.

In recomputing the deficiency, depreciation of the foundry buildings for 1919 and 1920 should be adjusted by reducing the basis for the computation by the amount allowed for amortization.

Decision will ~be entered on 15 days' notice, under Rule 50.


author: Phillips:

text:
    Mrs. W. M. Bludworth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6285-6292.
    Promulgated June 23, 1927.
    1. Pair market value of real estate and bank stock, as of the date of the death of the testator, determined.
    2. Where property is sold without any cash payment, but more than 25 per cent of the sales price is later paid during the taxable year in which the sale was made, the profit may not be reported on the installment sales basis.

      J. M. McMillm, Esq., for the petitioners.

      George G. Witter, Esq., for the respondent.
    The petitioners pray for the redetermination of deficiencies in income taxes for 1919 determined by the Commissioner as follows:
    Mrs. W. M. Bludworth_ $133.57
    Myrtle B. Watson_ 226.09
    P. A. Bywaters_ 288.36
    K. Hunter Bywaters_ 289. 88
    R. S. Bywaters_ 302. 59
    Claud Morgan_ 590. 71
    Phoebe High_2, 016. 86
    Ollie Hunter_1,710. 56
    Phoebe High having died during the pendency of the proceeding and no representative of her estate having been appointed, the beneficiaries under her will were, on motion ordered substituted as petitioners in the proceeding instituted by her. The same issues being involved in each of the appeals, they were consolidated and heard together.
    The petitioners allege that the Commissioner erred in his determination of the fair market value, at the date of death of J. K. By-waters, of certain property inherited by thé petitioners in 1916 from said deceased, which value was used as the basis for determining the gain from the sale of such property in 1919. They further allege that the Commissioner erred in determining that the entire profit from the sale of such property was to be reported in the year of the sale.
    FINDINGS OF FACT.
    J. K. Bywaters died on or about March 23, 1916, leaving an estate which he disposed of by will, which was duly admitted to probate. The probate proceedings were closed and the executors were discharged in 1918. The heirs were of the opinion that a partition of the estate was inadvisable and appointed E. R. Hunter, C. G. Shull, and Walter By waters as their attorneys in fact to manage the properties, collect the income from same, dispose of such properties as it was deemed advisable to sell, and distribute the income and proceeds of the sales to the heirs.
    In 1919, the attorneys in fact, acting for the heirs of said J. K. Bywaters, sold 142 acres of land located near Paris, Tex., to E. R. Hunter for $33,390. There was no cash payment. The entire sale price was paid by a note of Hunter for $33,390 dated January 17, 1919, and due September 1, 1922. It was secured by a vendor’s lien on the property sold. An agreement was made in respect to payments to be made on said note which was endorsed on said note, as follows:
    It is agreed between the maker and the payees of this note that the same is to be paid out of the interest of the maker in the collections to the credit of the J. K. Bywaters estate, and I, the maker hereof, do hereby authorize the said Walter Bywaters and Graves Shull, as Attorneys in Fact, to apply my interest in the collections to the credit of said estate in the payment of this note.
    (Signed) Edsab Hunter.
    The purchaser was an assignee of an interest in the estate. Payments were made on said note as follows:
    April 2, 1919, cash_$8,828. 02
    November 11, 1919, cash_ 10, 000. 00
    April 6, 1922, cash_ 5,000.00
    January 11, 1923, cash_ 5,000. 00
    The Commissioner determined the fair market value of said land on March 23, 1916, to be $21,700. The fair market value thereof on said date was $29,680.
    In 1919, the attorneys in fact, acting for the heirs of said J. K. Bywaters, sold certain properties to C. G. Shull for $46,425. There was no cash payment made on this sale. The entire sale price was paid by a note of Shull dated January 1, 1919, and due September 1, 1922, and was secured by a lien on the property sold. An agreement was made with respect to payments to be made on said note, which was endorsed on said note, as follows:
    It is agreed between the maker and the payees of this note, that the same is to be paid out of the interest of the maker in the collections to the credit of the J. K. Bywaters Estate, and I, the maker hereof do hereby authorize the said Walter Bywaters and Edgar Hunter, as Attorneys-in-fact, to apply my interest in the collections to the credit of said Estate to the payment of this note.
    (Signed) O. G. Shull.
    Payments were made on said note as follows:
    April 2, 1919, cash_$10,000.00
    November 11, 1919, cash- 10,000. 00
    April 6, 1922, cash_ 5,000.00
    December 11, 1922, cash_ 16,000. 00
    January 11, 1923, cash_ 500.00
    May 11, 1926, cash_ 425. 00
    The Commissioner determined the profit on the sale to C. G. Shull to be $17,759.97.
    In the year 1919 the attorneys in fact, acting for the heirs of J. K. By waters, sold 15 shares of stock of the City National Bank of Paris, Tex., and 40 shares of the stock of the First National Bank of Paris, Tex., for a total sale price of $10,910. The Commissioner determined the fair market value of such stock to have been $5,500, at the date of the death of J. K. Bywaters. The fair market value of said stock at the date of the death of J. K. Bywaters was $5,500.
    In 1919, the attorneys in fact, acting for the heirs of J. K. Bywaters, sold 50 shares of stock of the First State Bank of Paris, Tex., for $9,750. The Commissioner determined the fair market value of said stock at the date of the death of J. K. Bywaters to be $5,000. The fair market value of the 50 shares of said stock at the date of the death of J. K. Bywaters was $5,000.
    The petitioners were heirs of J. K. Bywaters and by reason thereof held undivided interests in the properties sold as follows:
    Mrs. W. M. Bludworth. 2/65ths
    Myrtle B. Watson-2/65ths
    P. A. Bywaters_ 2/65ths
    K. Blunter Bywaters_. 2/65ths
    R. S. Bywaters-2/65ths
    Claud Morgan_ l/13th
    Plioebe High_ 2/13ths
    Ollie Hunter_ 2/13ths
    The Commissioner determined that the gain from each of the sales was the difference between the sales price and the fair market value at the date of the death of the decedent and that the full amount of such gain was taxable in 1919. He allocated a part of such gain to each of the taxpayers, in accordance with the interest of each in the property and determined the deficiencies here in issue accordingly.

       Proceedings instituted by the following named petitioners were consolidated with the above-entitled proceeding and are decided herewith : Myrtle B. Watson, No. 6286; P. A. Bywaters, No. 6287; K. Hunter Bywaters, No. 6288; R. S. Bywaters, No. 6280; Claud Morgan, No. 6290; Horace S. High and Margaret High Norment, as sole beneficiaries under the last will and testament of Phoebe High, deceased, No. 6291; Ollie Hunter, No. 6292.

   OPINION.

Phillips:

The pleadings raise two questions: (1) The fair market values of certain properties at the date of death of J. K. Bywaters on March 23, 1916, and (2) whether the gain should be reported by the heirs in 1919 or on the installment basis as payments were received. Upon the latter issue the petitioners rely entirely upon section 212(d) of the Bevenue Act of 1926 which, by section 1208 of the same act, is to be retroactively applied in computing income under prior acts. Section 212(d) provides:

(d.) Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

Here the “ taxable period in which the sale is made ” was the calendar year 1919. The payments received in cash during such period were in excess of one-fourth of the purchase price. Since such payments are expressly included within the term “initial payments,” it appears that the petitioners have failed to bring themselves within the provisions permitting the income from a casual sale of personal property or a sale of real property to be returned on the basis described in that subdivision of the statute. We do not understand that petitioners claim that they meet the requirements of the first sentence of the subdivision, as persons “ who regularly sell or otherwise dispose of personal property on the installment plan.” Therefore, so far as this issue is concerned, we must affirm the determination of the Commissioner that any gain is taxable in 1919.

The uncontradicted evidence fully sustains the petitioners’ contention that the 742 acres of land which were sold to E. R. Hunter had a value of $40 per acre at the date of death of J. K. Bywaters. As to the property sold to Shull, no contention is made that the market value determined by the Commissioner is incorrect, the only contention being that the profit should be returned in the years in which payment is made.

It is the contention of the taxpayers that the stock of the City National Bank of Paris, Tex., the First National Bank of Paris, Tex., and the First State Bank of Paris, Tex., had a value of $200 per share at the date of death of J. K. Bywaters. The Commissioner determined a value of $100. To sustain their valuation the petitioners called as witnesses the vice president of the First National Bank of Paris and the cashier of the City National Bank in 1916. Each testified that in his opinion the. value of these stocks at the time of Bywaters’ death was $200 per share. It appeared from their testimony that each of these witnesses had acted as appraisers of the estate of Bywaters and that as such appraisers they had valued such stock at $100 per share, executing as a part of their report the following oath:

We the undersigned appraisers do solemnly swear that the foregoing is a full and fair appraisement of the estate of J. K. Bywaters, deceased, produced before us by Edgar Hunter and Graves Shull, Ex’r.

They testified that it was agreed between the appraisers that all of the bank stock should be put in the appraisal at par and that this accounted for the values used. It further developed that two days prior to the death of Bywaters a fire had occurred in Paris, Tex., which destroyed 80 per cent of the business section of the city; that the effect of the fire on business conditions was not then known and that business was unsettled for some time. The appraisal was made within two months after the death of Bywaters and after the fire.

Considering this uncertainty and considering also the double liability attaching to owners of stock in such banks, we are inclined to believe that the appraisal made two months after the decedent’s death more accurately reflects the situation than an opinion expressed at the present time. The witnesses attempt to support their opinion by references to sales and to the surplus and undivided profits of the banks but the testimony with reference to both is very unsatisfactory, especially with reference to the dates when such sales took place. The witnesses had not attempted to refresh their recollection respecting sales some ten years past and, except as the opinion might be affected by subsequent events, had no more knowledge of the value of the stock when they testified in this proceeding than they had in 1916 when they made the appraisal. After a consideration of all the testimony we believe that the value placed upon this stock by the witnesses at the hearing was unconsciously affected by the successful recovery of the city and the banks from the fire which had taken place two days before the decedent’s death. While the value placed upon the stock in the appraisal made two months after the date of decedent’s death may'have been low, and subsequent events may have shown that circumstances which affected that valuation never materialized, it is our opinion that it more nearly reflects the fair market value of the stock at the date of the death of Bywaters than does the opinion now expressed by the witnesses.

Decision will be entered, on W days1 notice, under Rule 50.


author: Milliken :

text:
    Harry J. Gutman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4764.
    Promulgated June 24, 1927.
    A loss sustained by petitioner in the year 1922 as a result of the liquidation of a corporation, stock of which he had purchased as an investment, was not a net loss from operation of a. trade or business regularly carried on by him and the excess of the loss sustained in year 1922 over his income for that year was not a proper deduction under the provisions of section 204 of the Revenue Act of 1921, from his income for the calendar year 1923.

      A. Walker, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1923 in the amount of $478.58. The deficiency arises by reason of the refusal of the Commissioner to permit petitioner to take as a deduction from his gross income for the year 1923 a loss incurred by him in 1922.
    KINDINGS OK FACT.
    Petitioner is an individual who resides at 1902 Forrest Avenue, Dallas, Tex. Prior to 1922, petitioner purchased stock in the Vogue Company, a corporation organized under the laws of Delaware. He paid for the stock $25,000, which was about all he then possessed. The Vogue Company did a merchandising business. Petitioner was the largest stockholder of the corporation, was its general manager at an annual salary of $6,500, and devoted all of his time to its affairs. In 1922, the Vogue Company became insolvent, its assets were absorbed by its creditors, and petitioner’s stock became valueless in that year. Petitioner in his individual income-tax return for 1922 deducted from his gross income $30,000, which he stated represented this loss. This deduction resulted in his return showing a loss for the year 1922 of $9,101. The value of petitioner’s stock was $25,000 and his loss for 1922 was $4,101.
   OPINION.

Milliken :

The only question presented is whether petitioner suffered in 1922 a “ net loss ” as that term is defined in section 204 of the Revenue Act of 1921. That section in part provides:

The term “ net loss ” means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business) ; * * *.

The petitioner’s ownership of his stock in the Vogue Company bears no semblance to a “trade or business regularly carried on.” The Vogue Company, however, did regularly carry on a business. If the loss sustained by the corporation in 1922 had not resulted in its insolvency; if it had carried on in the next year, it is clear that it and not the petitioner would have been entitled to the deduction of a “net loss ” in 1923. We find nothing in the statute which justifies us in holding that total insolvency of a corporation gives to a stockholder this benefit which he would not possess if the corporation had done business in the succeeding year.

We are asked in this proceeding to disregard the corporate entity and hold that the petitioner was in fact a part owner of the business and that the business carried on by the corporation was his business to the extent of his stockholdings. In this connection our attention is invited to the fact that petitioner was the largest stockholder in the corporation, was its manager, and gave to it the whole of his time. This is true in nearly every case where an owner incorporates his business and assumes the management of the corporation. In such a case the stockholder would ordinarily vigorously call to h,is aid the corporate protection if called upon to respond to corporate liabilities. The corporate entity is just as vital when a stockholder seeks benefits as when he resists liabilities. The ownership of corporate stock, it matters not how great the proportion, does not confer ownership of corporate assets or of the corporate business. Appeal of Regal Shoe Co., 1 B. T. A. 896. Under the facts of this case, it is impossible for us to disregard the corporate entity of the Yogue Company; much less can we hold that concern was a partnership of which petitioner was a member. Cf. J. J. Harrington, 1 B. T. A. 11; William J. Robb, 5 B. T. A. 827; and H. J. Schlesinger, 5 B. T. A. 943.

Judgment will be entered for the respondent.


text:
    Herald News Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10723.
    Promulgated June 24, 1927.
    Claimed deductions on account of additional salaries for the calendar year 1919 disallowed for failure of proof.

      K. S. Mandell, G. P. A., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income and profits taxes for the calendar year 1919, in the amount of $7,749.92. Two errors are alleged in the petition, (1) the disal-lowance as a deduction for 1919 of additional salaries to the officers of petitioner for the year 1919 which were voted and paid in March, 1920, in the amount of $16,100, and (2) the allowance as a deduction in 1919 of an amount covering certain European traveling expenses of H. D. Slater. No evidence was introduced either by oral testimony or depositions and our findings of fact are based upon the allegations of the petition, as admitted by the answer.
    FINDINGS OF FACT.
    Petitioner, a Texas corporation with principal offices at El Paso, filed its return on a calendar year basis and reported its income on an accrual basis. H. D. Slater, president of petitioner, enlisted in the military service of the United States in August, 1917, leaving El Paso at that time, and not returning until March, 1920. He was discharged from the United States Army on May 30, 1919, while a member of the American Expeditionary Forces, and remained in Europe until his return to El Paso in March, 1920. During this period, he traveled extensively, gathering material for the newspaper published by petitioner. At the time of Slater’s departure, in 1917, he made a verbal agreement with J. C. Wilmarth, vice president and general manager of petitioner, to the effect that there would be no change in the salaries of officers of petitioner until after his return, but that after his return, suitable adjustments could be made. Immediately upon his return in March, 1920, additional salaries in the amounts of $8,100 to H. D. Slater, and $8,000 to J. C. Wilmarth, covering the year 1919, based upon a fixed salary and a percentage of gross revenue of petitioner, were paid and ratified by vote of the board of directors of petitioner.
    H. D. Slater paid all expenses incurred in his travels in Europe out of personal funds, there being no agreement, actual or implied, whereby the petitioner assumed any liability for such expenses. Slater was not reimbursed by petitioner for these expenses and he never rendered an expense account; in fact, he kept no record of the amount expended.
   OPINION.

Milliken :

We are asked to decide in this proceeding that respondent committed error in his refusal to allow as a deduction for the calendar year 1919 additional salaries voted and paid to two officers of the petitioner. We have often stated that when a petition is filed alleging error in the determination of the respondent, evidence must be adduced to prove the error by reason of which the proceeding has been instituted. Counsel for petitioner submitted the case upon the admissions contained in the answer filed by respondent and we have set forth the admissions in our findings of fact. From those meagre facts, we are not able to state that the respondent erred. We do not know whether, pursuant to the provisions of section 234 (a) (1) of the Revenue Act of 1918, the additional salaries paid for the year 1919, constitute a reasonable allowance for personal services actually rendered. Indeed, we would have no basis from the state of the record, for indulging in the assumption that the two officers rendered any service to the petitioner during the year 1919.

Counsel for petitioner was cautioned at the hearing of this cause, that the facts admitted by respondent were not sufficient to entitle him to the relief sought. Subsequent to the hearing, a motion was filed to introduce additional evidence. The motion was denied. In brief filed, many facts, not of record, are related which well might entitle petitioner to a judgment in its behalf, but we must be bound by the facts of record as set forth in our findings of fact.

Petitioner averred in petition filed that respondent erred in allowing as a deduction for the year 1919 certain European traveling expenses of H. D. Slater. In answer filed, respondent admitted the error. In the redetermination of the deficiency for the year 1919, the traveling expenses should be disallowed.

Judgment will l>e entered on 15 days’ notice, wider Bule 50.