text:
    Mobile River Saw Mill Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8700.
    Promulgated September 29, 1927.
    Petitioner’s closing inventory of lumber on band determined.

      George E. H. Goodner, Esq., for the petitioner.

      J. L. Deveney, Esq., for the respondent.
    Proceeding for the redetermination of a deficiency of $4,569.11 for 1920. The issues are: (1) Respondent erred in increasing the inventory at the close of the year by $11,843.88, resulting in a corresponding increase in net income; and (2) respondent decreased invested capital by $1,622,03 on account of income and profits taxes for 1919.
      No evidence was submitted in support of the material averments of the petition. Such findings of fact as we are enabled to make are based upon the pleadings and the admissions of the parties at the hearing.
    FINDINGS OF FACT.
    Petitioner, an Alabama corporation with its principal office at Mount Vernon, is engaged in the manufacture and sale of hardwood lumber.
    In its return for 1920, petitioner reported a closing inventory of 4,790,778 feet of lumber of the value of $106,594.81. Respondent determined the value of the inventory to be $118,438.69, based upon 5,323,087 feet and a market value of $22.50 per thousand feet, and, accordingly, increased net income by $11,843.88. The total quantity of lumber on hand at the close of the year was 4,790,778 feet. Respondent reduced petitioner’s invested capital by $1,622.03, on account of income and profits taxes for 1919 prorated from the dates the several installments became due.
   OPINION.

Littleton:

Petitioner raises no issue with respect to the market price of $22.50 per thousand feet fixed by the respondent in the deficiency notice for the purpose of valuing the inventory at the close of 1920. At the hearing, respondent conceded that the total quantity of inventoriable lumber on hand was 4,790,778 feet, instead of 5,323,087 feet shown in the deficiency notice. Based upon a total quantity of 4,790,778 feet, and a market price of $22.50 per thousand feet, the value of petitioner’s closing inventory for 1920 is $107,792.51, rather than $118,438.69 shown in the deficiency notice.

Respondent’s reduction of invested capital for 1920 by $1,622.03 on account of 1939 income and profits taxes is in accordance with the provisions of section 1207 of the Revenue Act of 1926, and, therefore, correct.

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

Considered by Smith and Love.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    Rome Wire Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8759.
    Promulgated September 29, 1927.
    Certain bonuses paid the president, vice president and secretary of the petitioner, plus the regular salaries and other bonuses thereafter voted, constituted no more than a reasonable compensation for services rendered.

      O. R. Dewey, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency of $90,949.67 declared by the respondent for the year 1917. The petitioner admits that $61,309.67 of this was a true deficiency, leaving $29,640 in controversy. This amount arises from the restoration of $47,500 paid by the company as a bonus to its three principal officers, to the taxable income.
    PENDINGS OP PACT.
    The petitioner is a domestic corporation having its factories and offices at Rome, 1ST. Y. During the year 1917 it was engaged in manufacturing copper wire and electrical wires and cables of all kinds. It had as a subsidiary during that year the Electric Rod Mills, Inc., a small concern which was affiliated with it during that year and was operated at a loss slightly in excess of $4,000. The operations of the subsidiary have been given no consideration by the parties to this appeal.
    For the year 1917 the directors of the petitioner voted to pay the three principal executive officers thereof the following compensation:

    The respondent allowed the payment for the regular salaries and the bonuses voted December 26, 1917, and disallowed the deduction from the corporation’s income of the bonuses voted January 16, 1917. It is from this disallowance of $47,500 that petitioner appeals. Ro other amount is involved. The minutes of the directors’ meeting of January 16, insofar as material, are as follows:
    A motion was proposed by Mr. Ferris and seconded by Mr. Thomas as follows:
    Kesolved that a bonus be paid to the officers as follows:
    H. T. Dyett___$25,000
    F. M. Potter, Jr- 20,000
    C. R. Keeney- 2, 500

      Also that the salaries of the officers for the ensuing year be as follows:
    H. T. Dyett_$15, 000
    D. M. Potter, Jr_ 13, 000
    O. It. Keeney_ 6,000
    This motion was discussed at some length, the officers stating that the proposition of a bonus was entirely unexpected and that they felt very much averse to accepting the amount proposed.
    The question was then put to vote with the following result:
    Yes — A. JT. Carpenter, T. H. Perris, H. A. Hammond, C. R. Keeney.
    Noes — H. T. Dyett, P. M. Potter, Jr. Carried.
    The stock of the corporation consisted of 3,500 shares preferred and 6,187 shares common. The par value of each was $100 and both had the same voting privileges. Dyett owned 385 shares of the preferred and 1,923 shares of the common, approximately 11 per cent and 31 per cent respectively; Potter owned 340 shares preferred and 1,263 shares common, approximately 10 per cent and 20 per cent respectively, and Keeney owned 19 shares preferred and 11 shares common, approximately one-half of 1 per cent and one-fifth of 1 per cent, respectively. The three had a combined ownership of 21 per cent of the preferred and 52 per cent of the common, and had approximately 41 per cent of the voting strength of the corporation. The largest four stockholders in the order of their holdings were Dyett, Carpenter, Ferris and Potter.
    The three stockholders to whom the bonuses were voted devoted their whole time to the duties of their respective offices. Dyett, who was president, treasurer, and general manager, devoted himself principally to financing, sales, and purchases. During the year he purchased approximately 1,881,000 pounds of rubber, 1,158,000 pounds of cotton yarns, and 31,000,000 pounds of copper. Copper fluctuated much during the year, reaching a maximum price of 35y2 cents per pound in March and a minimum of 23y2 cents in November and December, a change of nearly 34 per cent. Some cotton yarns varied in price approximately $1 per pound, and the price of rubber varied from 53 cents to 83 cents per pound. He kept in touch with New York daily, either by long distance telephone or personal visits, making a continual study of market conditions. Potter was the vice president in charge of research and experimental work and manufacturing. On him devolved the carrying on of the company’s manufacturing operations, building up the equipment, bringing out new products, and handling a very trying labor situation. The company employed on its day and night shifts about 900 men and the labor turnover was remarkably large. The company was building almost continuously and Potter had charge of the designing and construction of all buildings. The amount expended under his supervision during the year for buildings was $153,000 and that for new machinery was $141,000. He also had charge of all experimental work in the plant. Owing to the constant changes in the market, he was compelled to change the materials used in the manufacture of compounds of rubber goods in order to secure as cheap a compound as possible and yet meet the requirements of the trade. Keeney was in charge, under Dyett, of the sales and some of the purchasing and acted as secretary of the company. These three executives had entire charge of financing, production, sales, collections and care of the property of the corporation.
    The capital stock of the petitioner for the year 1917 was $968,700; the surplus was approximately $1,535,205.32, making the total operating capital approximately $2,503,905.32. The total sales during the year were $12,775,000, and the net income before the accrual of the income tax was $1,007,407.55. After all deductions and additions, it was $955,881.12.
   OPINION.

Lansdon :

The only matter before the Board for determination is as to whether the several amounts paid to Messrs. Dyett, Potter, and Keeney during the year 1917 were paid in compensation for services performed by them during the year. United States v. Philadelphia Knitting Mills Co., 273 Fed. 657. About 24 per cent of these payments were denominated by the directors as salaries and 76 per cent as bonuses. All the evidence before the Board in this proceeding is to the effect that the amounts paid by the corporation were compensation for services actually performed during the taxable year and that the amounts were all paid during that year. From the evidence, we ' think the amounts constituted no more than reasonable compensation for services.

Judgment will be entered for the petitioner on 10 days’ notice, under Rule 50.

Considered by Steknhagen and Arundell.


author: Smith :

text:
    Watt & Holmes Hardware Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8872.
    Promulgated September 29, 1927.
    1. The evidence is insufficient to show that the method employed by the Commissioner in his determination oí deficiencies for the years 1917 and 1919 did not correctly reflect income.

      2. The petitioner having filed a consent within the period of the statute of limitations for the determination of the correct tax liability for the year 1917, and the assessment thereof upon such determination, and having filed renewals of such consent keeping the same alive: Bold,, the assessment of the deficiency found for the year 1917 is not barred by the statute of limitations.

      James L. Fort, Esq., for the petitioner.

      Shelby S. Faulkner, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the years 1917, 1918, and 1919, in the net amount of $5,525.99. There are deficiencies in tax for the years 1917 and 1919 of $2,991.61 and $2,789.32, respectively, and an over-assessment for 1918 of $254.94. Under section 274 (g) of the Revenue Act of 1926 the Board has no jurisdiction with respect to the year 1918.
    The petitioner alleges error on the part of the Commissioner in determining deficiencies for 1917 and 1919 in that he has overstated the charge sales; it also alleges with respect to the year 1917 that the assessment and collection of the deficiency is barred by the statute of limitations.
    FINDINGS OF FACT.
    The petitioner is a Georgia corporation, with its principal place of business at Cordele, Ga., but with branches at Fitzgerald, Ocilla, and Douglas, Ga. It is engaged in the retail hardware business.
    Petitioner took a physical inventory on February 12, 1917, and on June 15, of the years 1918, 1919, and 1920. Since it had no general ledger it did not actually close its books upon these dates, or any other date.
    The petitioner kept no double-entry set of books. A cash book, a day book, and a ledger were kept at each of the stores. Each of the branches was required to report to the main store at Cordele at the close of- each month the cash receipts for the month, the charge sales, and sundry other information from which D. Holmes, the pi-'sident of the corporation, obtained an idea as to operating results. When the Commissioner attempted to check the returns filed for the taxable years 1917,1918, and 1919, it was found impossible accurately to determine net income. No inventories had been taken other than as above indicated and in the filing of the original returns the inventories taken on June 15 were assumed to have been taken as of June 30. The petitioner then employed a public accountant to make a thorough audit of its accounts and to prepare amended returns, first upon the basis of a fiscal year ended June 30, and then upon the basis of the calendar years 1917, 1918, and 1919. A revenue agent then attempted to check the correctness of the amended returns, but could not do so from the books of record. In order to determine the calendar-year income, he computed the income from June 15 in one year to June 15 in the next year, using that whole year as a unit for income; he then took that income and prorated it into calendar years. He did this for the reason that no actual inventories were taken at the end of each calendar year. The public accountant who prepared the amended returns on the basis of the calendar year estimated an inventory as of December 31 of each of the taxable years involved.
    There is also a question as to the correctness of the charge sales of each of the years in question. The Commissioner accepted the following method as correctly rejecting the charge sales:—
    Accounts at end of year_$-
    Collections during the year (actual books and records)- -
    Total_ _
    Accounts at beginning of year (memorandum balance sheets)_ _
    Charge sales for period (as estimated)_ _
    The public accountant determined the charge sales from certain memorandum balance sheets, a portion of which were verified with the books of account.
    On January 6, 1921, the petitioner filed a consent whereby it waived any. and all statutory limitations as to the time in which assessments for the year 1917 might be made. On January 18, 1924, the consent was renewed with respect to the year 1917, and again on November 8, 1924, there was a further renewal of the waiver relating to the years 1917, 1918, and 1919.
   OPINION.

Smith :

In its petition the petitioner alleges errors on the part of the respondent in determining deficiencies for the years 1917, 1918, and 1919, as follow:

(A) That tbe Commissioner arrived at tbe income for each of tbe years by an erroneous method wbicb necessitated bis determining tbe income on tbe basis of a fiscal year ended June 15tb, and (lien prorating tbe income to tbe calendar year basis, altbougb tbe figures for tbe taxable income on tbe basis of tbe calendar year were not only available, but submitted to bim in accordance with bis request, tbe Commissioner having held that the return should be made on tbe calendar year basis:
(B) That the Commissioner determined the charge sales from memorandum balance sheets, in tbe manner described by tbe agent in bis report, instead of from tbe books and records of the company; that is to say, bis procedure of determining charge sales is merely the employment of a balancing amount inserted and included in bis computation of income.
(C) That the tax for tbe calendar year 1917 is barred by tbe statute of limitations and can not now be assessed.

The only evidence which the petitioner has submitted to the Board from which to determine the correctness of its contentions with respect to the true tax liability of the tax years in question consists of certain memorandum balance sheets showing cash sales and collections of the Cordele store for portions of the taxable years, the day books showing the charge sales of the same store during the taxable years, and the cash book of the branch store at Douglas. This evidence does not enable the Board to determine the true tax liability of the petitioner for the tax years involved. The revenue agent’s report was admitted in evidence with the approval of both petitioner and respondent. This shows that he spent a large amount of time in compiling his data from original sources, which data are not before the Board. We can discover nothing inherently wrong with the method used by the revenue agent and adopted by the Commissioner in determining taxable income and for lack of sufficient evidence to overcome the Commissioner’s determination of the deficiencies his determinations are approved.

It appears that the petitioner filed a consent whereby it waived its right to object to the determination of the correct tax liability for the year 1917 and the assessment thereof upon such determination after the statutory period. This consent was made within the statutory period and was continued by the filing of subsequent waivers. We think that the claim of the petitioner that the respondent is barred from collecting the deficiency for the year 1917 is without merit.

Judgment will be entered for the respondent.

Considered by Littleton and Love.


author: MaRquette :

text:
    Hinz & Landt, Inc., of Los Angeles, Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket No. 7776.
    Promulgated September 29, 1927.
    The income involved herein for the period January 1, to May 17, 1920, held to be the income of the petitioner.

      J. S. larnson, Esq., for the petitioner.

      Thomas M. Mather, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1920 in the amount of $16,224.48. The issue raised is whether the income upon which the deficiency is based was income to the petitioner, or to the partnership of Hinz & Landt of Los Angeles.

      FINDINGS OS PACT.
    The petitioner was incorporated about the year 1904 under the laws of the State of California and remained in existence until it was dissolved on October 5, 1920. It was engaged in the wholesale and retail millinery business at Los Angeles. During the year 1919 and until the corporation was dissolved the capital stock was held by the following persons :
    Stares.
    A. L. Daves_ 235
    Nannie B. Daves, wife of A. L. Daves_ 95
    Henry A. Hinz- 50
    J. 0. Berendsen_ 76
    A. B. 0. Dohrmann, trustee for J. G. Berendsen_ 339
    A. B. C. Dohrmann, trustee for the Hinz Estate_ 204
    Dora Hinz_ 1
    1,000
    J. C. Berendsen was president of the corporation and A. L. Daves was secretary and treasurer. Daves was in active charge of the business, and with the exception of Henry A. Hinz, who acted as his assistant, was the only person interested in the corporation who resided in Los Angeles or was actively engaged in the business there. The directors of the corporation were J. C. Berendsen, A. B. C. Dohrmann, Henry A. Hinz, Dora Hinz and A. L. Daves. Dohrmann owned no stock in the corporation, but served on the board of directors as an old friend of and representing the Hinz family.
    For some time prior to September, 1919, the organization of the business had not been satisfactory to Daves. He was the active head of the business, but Berendsen was president of the corporation and he, Daves, ivas nominally under Berendsen’s direction, and he felt the lack of prestige. Also Daves and Mrs. Daves had only a minority interest in the corporation and Daves felt that his position was more or less precarious. In order to remedy these conditions which were unsatisfactory, it had been suggested that a partnership be formed to take over the business of the corporation, and the matter had been discussed “ now and then ” for some time.
    On September 25, 1919, a special meeting of the petitioner’s board of directors was held at the office of Hinz & Landt, Inc., of San Francisco, located at San Francisco. Hinz & Landt, Inc., of San Francisco was also a California corporation in which some of the petitioner’s stockholders were interested. The purpose of the directors’ meeting was to ascertain if there were sufficient funds available for the payment of a dividend, and, if there were, to declare a dividend. Later in the same day, and after the business for which the special meeting of the board of directors was called had been transacted and the meeting had adjourned, Berendsen, Dohrmann, and Daves met again, informally, and agreed orally that they would form a partnership to take over the petitioner’s business on January 1, 1920, Berendsen, Dora Hinz and Daves to be general partners, and the other stockholders to be special partners. Daves was to be the managing partner in charge of the business and Dohrmann was to represent the Hinz heirs, but was not to become a general partner. The interests of the several persons in the partnership were to be in the same proportion to their stockholdings in the corporation. The only persons interested in the corporation who were not present or represented at. the informal meeting on September 25, 1919, were Henry A. Hinz and Mrs. Daves. Shortly thereafter they were informed what had been done there and Henry Hinz and Mrs. Daves acquiesced.
    Immediately after the informal meeting of September 25, 1919, ■ Berendsen left for Europe and did not return until some time in January, 1920. Upon his return he discussed with an attorney the matter of taking over the petitioner’s business and was advised that a special partnership should be formed and articles prepared therefor. After some discussion with the attorney, Berendsen left for Europe in March, 1920, and gave Dohrmann power of attorney to execute the special partnership agreement on his behalf, and on May 15, 1920, articles of agreement of special partnership were entered into by J. C. Berendsen, A. L. Daves, and Dora Hinz, as general partners, and L. H. Berendsen, Nannie P. Daves, Henry Hinz, Gertrude Hinz Walsh, Anita Hinz Gundlach, Helen Hinz Davis, and Bruce Buttler, as special partners, to engage in the business of manufacturing, buying and selling millinery, in all its branches, under the firm name and style, Hinz & Landt of Los Angeles, with a capital of $200,000.
    On May 17, 1920, the partnership made a written offer to the petitioner to purchase all of the petitioner’s assets as of January 1, 1920, for $193,683.06, that amount representing the net value of the assets as they appeared on the petitioner’s books on January 1, 1920, the partnership also to assume all of the petitioner’s indebtedness existing on May 17, 1920. The offer so made was accepted by the petitioner’s board of directors at a special meeting held on May 17, 1920, and on the same day a bill of sale was executed and delivered, transferring to the partnership all of the petitioner’s assets.
    As hereinbefore set forth the petitioner conducted a wholesale and retail millinery business. The books of the wholesale business were usually closed as of December 31, but the boobs of the retail business were not closed until January 31, of each year. The retail inventories were not taken until the end of January of each year, and the usual procedure as to closing the books and of taking the retail inventory was followed in December, 1919, and January, 1920. After the taking of the retail inventory in 1920 the books of the petitioner were audited by an auditor in accordance with the petitioner’s custom, and on February 28,1920, at the suggestion of the auditor the petitioner’s board of directors called a special meeting of the stockholders for May 15, 1920, for the purpose of increasing the capital stock from $100,000, to $200,000, it being the opinion of the auditor that the par value of the capital stock should approximate the book value of the assets. Later, however, the board of directors was advised by the petitioner’s attorney that the proposed increase in the capital stock was unnecessary, and the idea was abandoned, and the stockholders meeting called for May 15,1920, was not held.
    During the period January 1, 1920, to May 17,1920, no new books for the business were opened by the partnership, all transactions concerning the business being entered in the books of the corporation. All purchases were made in the name of the corporation, and were paid for with the corporation’s checks, duly signed by A. L. Daves, as treasurer. All bank accounts were in the name of the corporation.
    The partnership of Hinz & Landt of Los Angeles made an income and profits-tax return for the year 1920 and„reported therein all of the income of the business herein mentioned for the period January 1, to May 17, 1920. The respondent upon audit of the return determined that the income of the business for said period belonged to the petitioner corporation, and not to the partnership, and that there is, as to the petitioner, a deficiency in tax for the year 1920 in the amount of $16,224.48.
   OPINION.

MaRquette :

The sole question presented for determination in this proceeding is whether the income for the period, January 1, to May 17,1920, inclusive, upon which the deficiency herein is based, belonged to the petitioner, or to the partnership of Hinz & Landt of Los Angeles. The petitioner contends that a partnership was formed by oral agreement on September 25, 1919, which took over all of the petitioner’s assets and business on January 1, 1920, and that all of the income accruing to the business after that date belonged to the partnership, although the partnership articles were not formally executed, or the formal transfer of the business made until May 17, 1920. The respondent urges that the business was not in fact transferred to the partnership until May 17, 1920, but belonged to the petitioner until that date, and that the income in question should be taxed to the petitioner.

It may be conceded without discussion that, as suggested by the petitioner, no particular form of contract is necessary to the creation of a valid partnership, and that the "Ontract may be oral or written. We may even concede for the purpose of this opinion that the several stockholders of the petitioner did at the informal meeting of September 25, 1920, and shortly thereafter, enter into a valid partnership agreement, but the formation of the partnership was not of itself sufficient to vest it with title to the petitioner’s assets, and whether it acquired the petitioner’s business on January 1, 1920. or at a later date, is a question of fact to be determined from the evidence. While it may have been the intention of the persons who formed the partnership, and who were also directors of the corporation, to acquire and take over the assets of the corporation on January 1, 1920, we are of the opinion that the evidence is not sufficient to warrant us in holding that they did in fact acquire them at that time. The greater weight of the evidence is against that view. The evidence shows that during the period in question the business was conducted under the corporate name, all purchases were made in the name of the corporation and were paid for with its checks duly signed by its treasurer. The evidence further shows that as late as February 28,1920, the board of directors contemplated an increase of the corporation’s capital stock and actually called a stockholders meeting for that purpose. These facts are all inconsistent with the petitioner’s claim that the business was taken over and belonged to the partnership on and after January 1, 1920. The petitioner continued after that date and until May 17, 1920, to hold the title thereto and to hold itself out to the world as the actual owner, and all of the circumstances surrounding the conduct of the business support the conclusion that it was in fact the owner, and the respondent properly taxed to it the income involved herein, and we so hold.

The petitioner has cited several decisions of this Board as authority for its position. These cases, however, turned upon their own particular facts and circumstances, which are not present herein, and they do not support the petitioner’s conclusion.

Judgment wül be entered for the respondent.

Considered by Phillips, Milliken, and Van Fossan.


author: Maequette:

text:
    Edward Cerruti, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2945.
    Promulgated September 29, 1927.
    A deduction for obsolescence of good will resulting from national prohibition denied.

      John J. Goldman, Esq., for the petitioner.

      A. George Bouchard, Esq., for the respondent.

      This proceeding is for the redetermination of a deficiency in income tax for the year 1919 in the amount of $1,561.30. The' deficiency arises from the disallowance by the respondent of a deduction of $25,000 claimed by the partnership of E. H. Lancel Co., of which the petitioner was a member, on account of obsolescence of good will and trade-marks.
    FINDINGS OP FACT.
    The petitioner is and has been for many years a resident of California. In the year 1903 he, as sole proprietor, engaged in the wholesale and retail wine and liquor business at San Francisco, under the name Cerruti Mercantile Co. In the year 1905 he incorporated his business under the same name with a capital stock of 500 shares of the par value of $100 each, of which he owned 255 shares, the remainder being owned by his four brothers. The corporation conducted the business of making wine and selling wines, liquors and kindred products until 1914, when it either changed its name to Promotion Wine & Liquor Co., or transferred its assets to a new corporation of that name. The Promotion Wine & Liquor Co. engaged in the wine and liquor business until the year 1916, when it was dissolved and all of its assets were transferred to the petitioner, who had acquired all of its capital stock and who continued the business as a sole proprietor until July 1, 1918. The Cerruti Mercantile Co. and the Promotion Wine & Liquor Co. had a registered trademark, “ Old Promotion,” and they sold wines and liquor under that name.
    For many years prior to 1906 E. H. Lancel was engaged in the business of making and distributing wine at San Francisco under his own name. In that year he incorporated his business under the name of E. H. Lancel & Co. The corporation continued in business until the year 1915, when it appears to have been dissolved and its assets transferred to Lancel, who continued the business as an individual until July 1,1918. Lancel and E. H. Lancel & Co., during the period mentioned, had built up their business and distributed their products under the trade-mark “ L ” crossed by a lance, and their products became known by the name “ Lancel.”
    On July 1, 1918, the petitioner and E. H. Lancel merged the wine and liquor businesses then being conducted by them, into a partnership under the firm name of E. H. Lancel Co. The partnership articles recite that the petitioner contributed in merchandise at agreed prices the amount of $17,500, and that Lancel contributed in merchandise at agreed prices the amount of $10,000 and gave to the petitioner his promissory note for $3,750, payable one day after date. No mention of good will was made in the partnership articles, it being considered by the petitioner and Lancel that their respective good wills, if any, were of equal value. However, neither the petitioner nor Lancel, nor either of the corporations with which they had been identified, had ever carried any good will on his or its books. The partnership continued in business until December 31,1919, when it was dissolved. During its existence it made, sold and distributed wines and liquors under the trade-marks and names thereof used by the Cerruti Mercantile Co., the Promotion Wine & Liquor Co., and E. H. Lancel & Co.
    The partnership of E. H. Lancel Co. in its income and profits-tax return for the year 1919 deducted the amount of $25,000 as an allowance for obsolescence of its good will and trade-marks. The respondent disallowed the deduction and increased the petitioner’s distributive share of the partnership income accordingly, and determined that as to the petitioner there is a deficiency in tax in the amount of $1,564.30.
   OPINION.

Maequette:

It is the contention of the petitioner that the partnership of E. H. Lancel Co. had good will and trade-marks of the value of at least $25,000, which upon the advent of national prohibition became worthless, and that the partnership in computing its net income for 1919 is entitled to deduct the amount of $25,000 as an allowance for obsolescence of such good will and trade-marks. He further contends that if we should hold that the partnership is not entitled to a deduction for obsolescence of good will and trade-marks, it should be permitted to deduct the value thereof from gross income for 1919 under section 234(a) (4) of the Eevenue Act of 1918 as a loss “ sustained during the taxable year and not compensated for by insurance or otherwise.”

This Board has heretofore held in the Appeal of Manhattan Brewing Co., 6 B. T. A. 952, and Appeal of Standard Brewing Co., 6 B. T. A. 980, that under the Eevenue Act of 1918 a taxpayer is not entitled to any deduction on account of obsolescence of good will. See also Red Wing Malting Co. v. Willcuts, 15 Fed (2d) 626; Haberle Crystal Springs Brewing Co. v. Clark, 20 Fed. (2d) 540. These decisions, from which we see no reason to depart, effectively dispose of the petitioner’s first contention, even though it be conceded that the partnership had valuable good will which was destroyed by national prohibition.

However, it is not necessary for us to rest our decision here on the decisions just cited. The record in this proceeding fails to show that the partnership ever had any good will or, if it did have good will, the evidence does not show either its cost or value. Testimony was introduced by the petitioner in an effort to establish that the corporation, E. H. Lancel & Co., had valuable good will on March 1,1913, but there is no evidence from which we can find that the petitioner and Lancel received good will of any value when they dissolved their respective corporations in 1915 and 1916, or that either of them transferred or had any good will to transfer to the partnership in 1918. Since the record failed to establish that the partnership had any good will it follows that it is not entitled to the deduction claimed and it is not necessary for us to discuss the legal question raised by the petitioner’s second contention.

Judgment will he entered for the respondent.

Considered by Phillips, MilliebN, and VaN FossaN.


author: Smith.

text:
    Osborne & Clark Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10493.
    Promulgated September 29, 1927.
    Amounts paid to the president of the petitioner corporation as additional compensation during the years 1919 and 1920 held to be deductible from gross income.

      W. Yale Smiley, Esq., and Harry Harper, G. P. A., for the petitioner.

      J. Hcorry Byrne, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the calendar years 1919 and 1920 in the respective amounts of $1,869.50 and $2,3T5.86. All issues in the proceeding have been waived except that with respect to the disallowance by the Commissioner of additional amounts paid as compensation to the president in 1919 and 1920.
    FINDINGS OP PACT.
    The petitioner is a Minnesota corporation with its principal office at Minneapolis. It is engaged in the hardwood lumber business with an authorized capital stock in 1919 and 1920 of $150,000, of which approximately $52,000 capital stock was outstanding. Of this amount D. F. Clark, president of the corporation, owned $50,000 and his wife and son the balance. Immediately prior to 1919 the president had been receiving a salary of $10,000 per annum. By reason of the increase in the cost of living and of the fact that Clark was performing services which were formerly performed by him and another it was decided by the stockholders and directors in 1919 that Clark should receive increased compensation. The amount of such compensation was to be the difference between the market price of hardwood lumber and the price at which Clark was enabled to buy it for the corporation by reason of certain friendly connections and of bis knowledge of the hardwood lumber market. This differential was charged on the petitioner’s books of account as part of the purchase price of the lumber and Clark was credited with the difference. The amounts of the credits in 1919 and 1920 were $3,032.63 and $4,574.79, respectively. These amounts were claimed as deductions from gross income in income-tax returns of the corporation for the taxable years. The deductions were disallowed by the respondent.
    In his original individual income-tax returns Clark, through mistake, reported as his compensation from the corporation only the amount of $10,000. He later filed amended individual income-tax returns reporting as his compensation for the year 1919 the amount of $13,032.63 and for 1920 $14,574.79.
    A copy of the deficiency notice attached to the petition shows that the net income reported by petitioner on an amended return for 1919 was $14,515.36, and for 1920 was $9,671.59, which, by adjustments not here in issue, were increased by the Commissioner to $19,135.36 and $14,186.07. These net incomes were after the deduction from gross income of the full amounts claimed as compensation by Clark.
   OPINION.

Smith.

The only question before us is the reasonableness of the amounts of compensation paid to Clark, the president of the petitioner corporation, in the years 1919 and 1920. These amounts aggregated $13,032.63 and $14,574.79 for the taxable years, respectively.

In the light of the evidence we are of the opinion that they constituted only reasonable amounts for compensation. The fact that these amounts were not classified on the books as salaries is immaterial. They were paid as compensation for services.

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

Considered by Littleton and Love.


author: Smith:

text:
    Vaudreuil Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6908.
    Promulgated September 29, 1927.
    1. Compensation of president of petitioner corporation for the years 1919 and 1920 determined.
    2. Loss on shares of stock of Northern Hotel Co. disallowed.
    3. Loss on shares of stock of Prudential Tire & Rubber Co. which became worthless in 1920 allowed.
    4. Correct rate of depreciation on farm buildings determined.

      Abbott L. Fletcher, Esq., for the petitioner.

      J. Marry Byrne, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the years 1919, 1920, and 1921 in the respective amounts of $1,059.40, $2,138.17, and $306.71. The points in issue are (1) the amount of compensation paid to the president of the corporation allowable as a deduction from gross income; (2) the deductibility of alleged losses on shares of stock alleged to have become worthless in the years 1920 and 1921, respectively; (3) the correct amount of depreciation upon farm buildings for the purpose of computing profit derived upon the sale of a farm in 1920.
    FINDINGS OF FACT.
    Petitioner is a Wisconsin corporation with its place of business at Chippewa Falls. Practically all of its stock was owned by L. J. Vaudreuil, the president of the corporation. One share was owned by Vaudreuil’s wife and another by his son. For several years prior to 1919 the stockholders of the petitioner agreed that the only salary to be taken by Vaudreuil was living expenses for his family. Vau-dreuil had a large family and for the years 1917, 1918, and 1919 he planned to live upon $3,500 per year and that was the only amount charged as his salary. Withdrawals in excess of that amount were charged on the petitioner’s books of account as family expenses. For the year 1919 the additional amount withdrawn by Vaudreuil was $1,000, which was charged to expense as labor, and $1,575.26 was charged on the books for solicitation and travel. For the year 1920 the amount charged as Vaudreuil’s salary was $5,000 and the amount charged up to solicitation and travel was $2,461.29. The $1,000 charged to expense — labor for 1919 and the $1,575.26 for solicitation and travel for 1919, and the $2,461.29 charged to the same account for 1920 were charged to profit and loss at the close of the year and claimed as deductions from gross income in the petitioner’s income-tax returns. These were disallowed as deductions by the respondent upon the ground that they constituted personal expenses and not ordinary and necessary expenses.
    The amounts paid to Vaudreuil were paid as compensation for services rendered and constituted only reasonable compensation for such services.
    In 1920 a hotel company was organized in Chippewa Falls, which constructed a hotel at a cost of approximately $300,000. The petitioner subscribed for $2,000 of the stock and paid for it largely in sales of lumber. The stock was donated by the petitioner to the Benevolent Order of Elks during the year 1920. It had little or no market value at the time that it was donated but was worth as much at that time as when acquired by the petitioner. In its income-tax return for 1920 the petitioner claimed a deduction from gross income of $2,000, the cost of the stock. The deduction was disallowed by the respondent in the computation of the deficiency.
    In 1919 or 1920 the petitioner acquired stock of the Boone Tire & Eubber Co. at a cost of $1,000. The name was later changed to Prudential Tire & Eubber Co. and the petitioner exchanged his stock in the Boone Tire & Eubber Co. for a promise of an equal number of shares in the Prudential Tire & Eubber Co. The latter company was adjudged bankrupt in 1921 and a receiver was appointed in April. L. J. Yaudreuil determined that the stock was worthless in 1921. The receiver filed his accounting in 1922 which showed that the stock was clearly worthless. In his income-tax return for 1921 the petitioner claimed the deduction of $1,000 in respect of the worthless stock. This deduction was disallowed by the respondent in determining the deficiency.
    In 1916 the petitioner acquired a farm. In 1916 and subsequent years it erected a number of buildings upon it, including a barn and a hog house. In its income-tax returns for 1916, 1917, 1918, and 1919 the petitioner deducted from gross income depreciation upon the farm buildings at the rate of 2 per cent per annum. The farm was sold in 1920 at a net price of $42,248.02. In computing the profit on the sale the respondent reduced the original cost of the farm and improvements by computing depreciation upon the farm buildings at the rate of 4 per cent for the years 1916, 1917, and 1918 but allowed the depreciation to remain at 2 per cent for the year 1919. The depreciation sustained was at the rate of 2 per centum per annum and the profit realized upon the sale of the farm property was $8,702.44.
   OPINION.

Smith:

1. The first point raised by the petition is the correct amount of salary to be allowed the petitioner’s president for the years 1919 and 1920. The corporation was a close corporation and the agreement had been made among the directors that only living expenses should be paid the president as salary. This was charged under two items, one as officer’s salary and the other as expense. This segregation of the compensation thus -paid was the act of the bookkeeper. The respondent has disallowed the deduction from gross income of the amount paid to the president in excess of that shown upon the books as his salary. We are satisfied from the evidence, however, that the entire amount was paid as compensation for the services of the president and that the amount was only reasonable compensation for those services. The amounts deductible from gross income for the president’s salary for the years 1919 and 1920 are $6,075.26 and $7,461.29, respectively.

2. The petitioner subscribed to stock of the Northern Hotel Co., Chippewa Falls, Wis., to the extent of $2,000 and paid for the same. The Northern Hotel Co. constructed a hotel at Chippewa Falls, Wisconsin, at a cost of approximately $300,000. During the year 1920 the petitioner donated its stock to the Benevolent Order of Elks. The evidence is to the effect that the stock had as great a value at the time that it was donated as at the time that it was acquired by the petitioner. It is the contention of the petitioner, however, that the stock had no value whatever at the time that it was donated and that since it had no value, petitioner is entitled to deduct from its gross income for 1920 the $2,000 paid for the stock. The evidence warrants the conclusion that the amount was not a loss of the corporation. Since the stock had as great a value when it was donated to the Benevolent Order of Elks as at the time it was acquired it sustained no deductible loss in respect of the transaction.

3. In 1919 or 1920 the petitioner acquired $1,000 capital, stock of the Boone Tire & Rubber Co., which was later exchanged for a like amount of stock of the Prudential Tire & Rubber Co- This corporation went into the hands of a receiver in April, 1921. The petitioner was reliably informed during the year 1921 that the stock was worthless. The cost thereof was therefore a legal deduction from gross income.

4. The last point in issue is the correct rate of depreciation on farm buildings for the years 1916, 1917, 1918, and 1919. The books of account show that depreciation was charged at the rate of 2 per cent per annum and such amount was claimed as a deduction in the income-tax returns filed. The farm was sold in 1920. In computing the profit upon the sale of the farm the respondent computed depreciation for the years 1916, 1917, and 1918 at the rate of 4 per cent instead of at the rate of 2 per cent. The evidence is to the effect that the farm buildings were frame buildings on stone and cement foundations and that they had a useful life if kept in repair of at least 50 years; that many other farm buildings in the same locality had stood for a period of 40 to 50 years and that they were still in good condition. Upon the record we are of the opinion that depreciation was not sustained at a rate in excess of 2 per centum per annum. The profit realized upon the sale of the farm computed after the allowance of depreciation on farm buildings at the rate of 2 per centum per annum was $8,702.44.

Judgment will be entered on 15 days’ notice, u/nder Rule 50.

“Considered by LittletoN and Love.


text:
    Troy Cold Storage Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Droste & Snyder Co., Inc., Petitoner, v. Commissioner of Internal Revenue, Respondent. Lawlor & Cavanaugh Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 11024, 11025, 11026.
    Promulgated September 29, 1927.
    The petitioners held not to be affiliated with Bock Island Butter Oo. and Fairmont Creamery Co. for the fiscal year ending March 31, 1920.

      H. A. MiMlls, ü. P. A., for the petitioners.

      P. J. Rose, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income and profits tax for the fiscal year ended March 31, 1920, as follows:
    Troy Cold Storage Co___ $146.84
    ■Droste & Snyder Co., Inc- 5,877.64
    Lawlor & Cavanaugh Co- 937.00
    6, 961.48
    The proceedings were consolidated for the hearing and decision. The single issue raised relates to the affiliation status of the petitioners with the Rock Island Butter Co. and the Fairmont Creamery Co. for the fiscal year ended March 31, 1920. Separate returns were originally filed on behalf of each of the petitioners, but under instructions of the Commissioner an amended return was filed in the form of a consolidated income-tax return for the fiscal year involved. A subsequent investigation was made by the Commissioner with respect to the affiliation status of the petitioners and three associated companies, with the result that the Commissioner held that the petitioners and W. W. Reed Co. were affiliated for the fiscal year ended March 31, 1920, but that the Rock Island Butter Co. and the Fair-mont Creamery Co. were not affiliated with each other or with the petitioners or W. W. Reed Co. The W. W. Reed Co. sustained a net loss for the fiscal year ended March 31, 1920, and is, therefore, not a direct party to these appeals.
    FINDINGS OF FACT.
    Droste & Snyder, Inc., is engaged in the business of buying and selling dairy products. It purchases butter, eggs, etc., as far west as the Pacific Coast. The larger portion of its purchases is made in the Middle West and in the States of Ohio, Illinois and Indiana. The products are marketed through either Droste & Snyder, Inc., or through Lawlor & Cavanaugh Co., located at Troy, N. Y., or the W. W. Need Co., located at Albany, N. Y.
    Droste & Snyder, Inc., hereinafter referred to as the parent company, was incorporated in 1914, succeeding a predecessor copartnership which had been in existence for the previous 20 years. In 1903 it acquired a stock interest in the Fairmont Creamery Co., located at Fairmont, Minn., which had been in business during the preceding 3 or 4 years. The Fairmont Creamery Co. had been operated by three individuals, one of whom owed Droste & Snyder, Inc., a considerable sum of money, and upon whose failure the debt was extinguished by the acquisition of his 10 shares of stock. When this company became involved one Fowler, secretary-treasurer of the company, called upon Droste & Snyder, Inc., and laid a proposition before it to take over the controlling interest in the business. Fowler stated to J. F. Hoff, special representative of Droste & Snyder, Inc., in these negotiations, that he was entirely in their hands and would turn the business right over to Droste & Snyder, Inc. He was thereafter guided by instructions received from the parent company.
    The entire output of the Fairmont Creamery Co. was taken by the parent company, either through its house in New York City or under special shipping instructions the product was sent to certain definite points.
    The Bock Island Butter Co. was organized under the laws of the State of Michigan, in 1903, and continued in the marketing of dairy products until 1910 when the business was reorganized and incorporated under the laws of the State of Ohio. The total authorized and outstanding capital stock of this company was, in 1910, 150 shares of an aggregate par value of $15,000. Fifty shares of this stock were owned by Samuel J. Bailey, secretary-treasurer of the company, and the remaining 100 shares were owned by Tiedtke Brothers. Bailey made a proposal to J. F. Hoff of the parent company that it should acquire the stock owned by Tiedtke Brothers and thereby secure the control and management of the business. This proposition was accepted and the capital stock of the company was increased from $15,000 to $50,000. Of the increased amount of stock the parent company acquired $25,000 and an additional 50 shares were issued to Samuel J. Bailey for which he gave his note for $5,000. During 1911 or 1912, $1,000 was credited by way of dividends to Bailey’s note, and an additional amount of $400, representing accumulated credits on Bailey’s account, was applied against the note in 1914. The note had been issued in favor of Droste & Snyder, Inc., but in 191G Charles Droste took up the note personally, his estate holding the sapae at the date of hearing. The note is secured by the $5,000 of capital stock as collateral. No interest has ever been paid by Bailey on the note.

      During the fiscal year ended March 31, 1920, Droste & Snyder, Inc., owned 71% per cent of the total outstanding stock of the Rock Island Butter Co., the remaining 28% per cent being owned by the manager of the company. Droste & Snyder, Inc., also owned 73 per cent of the total outstanding stock of the Fairmont Creamery Co., the remaining 27 per cent being owned by the manager of that company.
    Set out in graphic form, the stock ownership of the six associated companies during the taxable year involved is as follows:

    The officers of the companies were as follows:

    Article XIII of the by-laws of the Fairmont Creamery Co. reads as follows:
    Section I. Shares of stock of this Corporation may be transferred at any time by the holders hereof, by Attorney in fact legally constituted, or by endorsement on the certificate of stock. But no transfer shall be binding upon the Corporation until the surrender of the certificate, and the acknowledgment of such transfer by the person to whom transferred, on the books of the Corporation. All shares offered for Sale shall first be offered to the remaining share holders and if they conclude to buy they may have sixty days to pay for same.
    A common understanding existed among all of the stockholders that any stock available for sale in the Rock Island Butter Co. or the Fairmont Creamery Co. was first to be offered for sale to Droste & Snyder, Inc. This same arrangement existed with respect to the Rock Island Butter Co. wben Tiedtke Brothers had the controlling interest prior to the entry of Droste & Snyder, Inc.
   OPINION.

Smith:

The respondent has held that the petitioners and W. W. Reed Co. were affiliated for the fiscal year ended March 31, 1920. The petitioners contend that the Rock Island Butter Co. and the Fairmont Creamery Co. should also be included in the affiliated group. This claim is predicated mainly upon the proposition that Droste & Snyder, Inc., and the Fairmont Creamery Co. and Rock Island Butter Co. were closely allied in operation as an economic unit; that the companies had an interlocking directorate under which the Fairmont Creamery Co. and Rock Island Butter Co. operated solely under specific orders issued through John F. Huff of the parent company.

The law applicable to the determination of the issue involved herein is found in section 240 of the Revenue Act of 1918, the pertinent part of which reads as follows:

Sec. 240. (b) For tbe purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

We think it very clear that the evidence does not warrant a finding of fact that substantially all of the stock of two or more interests is owned or controlled by the same corporations, within the meaning of subdivision (2) of the above provision of law. Furthermore, the evidence does not show that the parent corporation owned directly or had any control through closely affiliated interests of 28% per cent of the outstanding stock of the Rock Island Butter Co. and of 27 per cent of the outstanding stock of the Fairmont Creamery Co. So far as appears from the record, the holders of the uncontrolled stock were free to vote it in any manner in which they saw fit and indeed, the evidence shows that in some instances the holders protested to the parent company with respect to the way the Rock Island Butter Co. and the Fairmont Creamery Co. were operated. Although no particular percentage can be interpreted as amounting to substantially all of the stock of a company, as was said in the Appeal of Rishell Phonograph Co., 2 B. T. A. 229, we are clearly of the opinion that in the circumstances which obtain in this case ownership or control of the 71% per cent of the stock of the Rock Island Butter Co. and of 73 per cent of the Fairmont Creamery Co. by the parent company, can not be considered substantially all of such stock within the meaning of the statute. See Wadhams & Co., 2 B. T. A. 569; Goldstein Bros. Amusement Co., 3 B. T. A. 408; Greenville Coaling & Export Corporation, 4 B. T. A. 183.

Judgment will be entered for the respondent.

Considered by Littleton and Love.


text:
    Charles Finsilver, Petitioner, v. Commissioner of Internal Revenue, Respondent. George W. Still, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6468, 6521.
    Promulgated September 29, 1927.
    As of January 2, 1917, the surplus of a corporation was placed to the credit of its two stockholders and a third stockholder acquired one-third of the capital stock. Portions of the amounts credited to the two stockholders were paid to them in 1917 and 1918. In 1919 the private ledger was discontinued and the balances standing to the credit of the stockholders in March, 1919, were transferred to the accounts of the stockholders on the general ledger and the amounts were paid to the stockholders in 1920, 1921, and 1922, with accrued interest payable upon the balances. Held, that the petitioners derived no taxable income from the transfer of the balances from the confidential ledger to the general ledger in 1919.

      'William Katz, Esq., for the petitioners.

      F. S. Easby-Smith, Esq., for the respondent.
    These proceedings, consolidated for the purpose of decision, are for the redetermination of deficiencies in income tax for the year 1919 in the amount of $4,379.75 in the case of Charles Finsilver, and in the amount of $2,657.81 in the case of George W. Still. The deficiencies were occasioned by the addition to the net income reported by Charles Finsilver of $11,141.07 and in the case of George W. Still of $8,629.06, shown as a credit to their accounts upon the books of Finsilver, Still & Moss, Inc., in 1919.
    FINDINGS OF FACT.
    On January 1, 1917, Finsilver & Still Co., a corporation, had a capital stock of $100,000 and a surplus, accumulated during the years 1912 to 1916, inclusive, of $38,131.16. Fifty-one per cent of the capital stock was owned by Finsilver and 49 per cent by Still. On January 1, 1917, Sol Moss purchased one-third of the stock of the corporation at par. Under the agreement between the two petitioners and Moss, the surplus was to be divided between Finsilver and Still, in the proportion of their stock ownership, that is, 51 per cent was to be credited to Finsilver and 49 per cent to Still, and was to be subject to withdrawal at their pleasure or at the pleasure of the corporation, and the amounts retained by the corporation were to draw interest at the rate of 5 or 6 per centum per annum. It was further agreed that a new corporation, to include the name of Moss, was to be formed in the fall of 1917 to take over the business.

      On January 2, 1917, Finsilver and Still were credited with their distributive shares of the surplus of the corporation, namely, $19,241.84 and $18,889.32, respectively. They drew against these balances in 1917 and 1918; then interest was credited on the undrawn amounts. In 1919 the undrawn amounts standing to the credit of Finsilver and Still were $11,141.07 and $8,629.06, respectively. A rearrangement of their accounting system took place on March 1, 1919, and transfer items of this nature were posted in a controlling account (the confidential ledger page of the general ledger) to close out and discontinue the keeping of a separate confidential ledger.
    Pursuant to agreement a new corporation was formed in November, 1917, under the name of Finsilver, Still & Moss, Inc., which took over' the business of the predecessor corporation, continuing the same books and standing in the same relation to the stockholders as the prior corporation. The new corporation was organized with a capital stock of $150,000. The profits of the business from January 1, 1917, to the date of organization of the new corporation amounted to $33,808.75. The $150,000 capital stock of the new corporation was issued for $100,000 tangible assets of the old corporation, $33,808.75 profits of the new corporation, plus $16,191.25 for good will.
    The $11,141.07 transferred from the private ledger to the general ledger in 1919 and placed to the credit of Finsilver was paid to him as follows:
    January 17, 1921-$1, 000. 00
    January 20, 1921_ 700.00
    January 3, 1922 — __ 199.07
    February 17, 1922_ 9,192.00
    Total-11,141. 07
    The $8,629.06 transferred from the private ledger to the general ledger and placed to the credit of Still was paid to him by the corporation as follows:
    December 31, 1920_$2, 000. 0®
    January 5, 1921- 2, 000. 00
    February 17, 1921- 2, 000. 00
    January 3, 1922- 2, 629.06
    Total- 8, 629. 06
    Upon the audit of the tax returns of the petitioners for the year 1919, the Commissioner added to the net income reported by Finsilver $11,141.07, and to the net income reported by Still $8,629.06, shown as credits on the general ledger for the first time in 1919.
   OPINION.

Smith:

The only question presented by these appeals is whether the petitioners are liable to income tax in 1919 in respect of amounts transferred from the private ledgers of Finsilver, Still & Moss, Inc., in 1919 and placed to the accounts of the petitioners upon the general ledger. The evidence shows conclusively that these amounts represented earnings of a predecessor corporation between the years 1912 and 1916, inclusive. They were subject to their withdrawal at any time after January 1, 1917, and they received interest upon the un-drawn amounts. There is no claim made by the respondent that the petitioners- received in the year 1921 the amounts transferred to them from the private ledger to the general ledger. The evidence is conclusive that the amounts were not paid to them until subsequent years. The record does not show whether the petitioners accounted for the moneys placed to their credit upon the books of the predecessor corporation on January 1, or January 2, 1917, in their income-tax returns for 1917. They contend that the amounts did not constitute income in the year 1919 and the evidence conclusively shows that the most that occurred in that year was a transfer of the amounts in question from the private ledger to the general ledger. They received no portion thereof in 1919. The amounts were not first placed to the credit of the petitioners in 1919. We have no evidence as to the basis upon which the petitioners kept their books and reported their income. But whatever method was employed in keeping their books these amounts were not income in 1919.

Judgment will he entered for the petitioners on 15 days’ notice, under Bule 50.

Considered by Littleton and Love.


author: Marquette:

text:
    Green’s Advertising Agency, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6410, 9388.
    Promulgated September 29, 1927.
    On the evidence, held, the petitioner was not a personal service corporation during the years 1919, 1920, and 1921.

      F. MandeTbaum, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
    These proceedings, which were duly consolidated for hearing and decision, are for the redetermination of deficiencies in income and profits taxes in the amount of $8,020.98 for the year 1919, $19,186.99 for the year 1920, and $17,126.58 for the year 1921. The only issue raised is whether the petitioner was during the years 1919, 1920, and 1921, entitled to classification as a personal service corporation.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of California in the year 1906, with a capital stock of $25,000 divided into 10,000 shares of the par value of $2.50 each. During the years 1919, 1920, and 1921, $4,900 shares of the capital stock were held and owned by I. M. Green, 5,000 shares by T. H. Smith, and 100 shares stood on the books of the corporation in the name of Mrs. I. M. Gre'en, wife of I. M. Green. The shares standing in the name of Mrs. Green were for the purpose of qualifying her as a director of the corporation. All dividends declared by the corporation were paid in equal amounts to I. M. Green and T. H. Smith. Green was president and Smith vice president of the corporation, and each of them received a salary of $6,000 per year.
    The business of the petitioner was that of advertising in theatres on curtains, programs, slides and films. The space on the curtains, programs, slides and films, and the privilege of displaying advertising in the theatres, were purchased by the petitioner either for a determined amount or on a commission basis, and sold to its clients, and the advertising was procured by the petitioner from advertisers and displayed in the theatres by being printed on the programs, painted on the curtains, or shown by means of slides or films.
    Green and Smith devoted their entire time to the petitioner’s business, and they procured all the contracts for space in the theatres and on the programs, slides and films, and all contracts from the advertisers. The only person regularly employed by the petitioner was a young woman bookkeeper.
    The advertisements painted, printed, or shown by the petitioner for ■ its clients, were usually designed by Green or Smith, although in some instances they were designed by the clients, and they were painted, printed or otherwise prepared by persons employed by the petitioner for that purpose. These persons were not, however, regularly employed by the petitioner but were hired as and when there was work to be done.
    Payments to the theatres for space and advertising privileges were usually made by the petitioner at the end of each month. The contracts between the petitioner and its clients usually covered a period of time, payments to be made monthly in advance.
    The balance sheets of the petitioner at the close of the years 1919, 1920, and 1921, were as follows:

    The petitioner’s expenditures during the years 1919,1920, and 1921, and the amounts distributed to its stockholders as dividends in those years, were:

    The dividends declared and unpaid at the end of the year 1920 and the end of the year 1921 were payable during the years 1921 and 1922, respectively, as funds became available for that purpose. The balance in accounts receivable at the close of each year represented amounts which were due and uncollected from advertisers. Bills were rendered each month and were collected as soon thereafter as possible.
    The petitioner’s expenditures during the years 1919,1920, and 1921 were as follows:

      The petitioner made its return of income for the years 1919, 1920, and 1921 as a personal service corporation, and Green and Smith reported their respective shares of its earnings in their individual returns for those years. The respondent, upon audit of the petitioner’s return, determined that it was not a personal service corporation and that there are deficiencies in tax in the amount of $8,020.98 for 1919, $19,186.99 for 1920, and $17,126.58 for 1921.
   OPINION.

Marquette:

The parties to this proceeding are in accord as to the amount of the petitioner’s net income for the years 1919, 1920, and 1921, and the sole issue is whether the petitioner was entitled to classification as a personal service corporation during those years under the Revenue Acts of 1918 and 1921.

Both the Revenue Act of 1918 and the Revenue Act of 1921 define a “personal service corporation ” as a corporation (1) whose income is to be ascribed primarily to the activities of the principal owners or stockholders; (2) whose stockholders are regularly engaged in'the active conduct of the affairs of the corporation; (3) in which capital, whether invested or borrowed, is not a material income-producing factor; (4) but does not include any foreign corporation, or any corporation 50 per centum or more of whose gross income consists either of gains, profits, or income derived from trading as a principal, or of gains, profits, commissions or other income derived from a Government contract or contracts made between April 6, 1917, and November 11, 1918, inclusive.

That the petitioner stockholders were regularly engaged in the active conduct of its affairs, and that the income was primarily due to their activities does not seem to be questioned by the respondent, and the evidence supports those conclusions. Likewise it is clear that no part of the. income was derived from a Government contract or contracts. It is therefore necessary for us to inquire only whether the petitioner meets the other conditions prescribed by the statutes.

That the petitioner was a principal is clear, since it was acting in its own behalf. Was it then dealing in a commodity or thing of such a nature that it was trading as a principal within the meaning of the Revenue Acts of 1918 and 1921? We think that it was. It was trading in a commodity that is as well defined and capable of being bought, sold and delivered as are iron, coal, corn or wheat. It was buying and selling space and the privilege of advertising in certain theatres, and it paid large amounts therefor, because they were valuable and readily salable. It is true that it prepared and displayed advertising for its clients, but there is nothing in the record to show that it attracted the clients, because of the high character or quality of the advertising it produced, or because of the skill, talent or services of its stockholders and officers, but on the other hand, the evidence strongly indicates that it was able to procure business because it owned or controlled the space and privileges in certain theatres where the clients desired their advertisements to be displayed. It seems to us that fundamentally the petitioner’s position is little different from that of a newspaper that offers space in its issues to those persons or corporations who desire to advertise. The fact that the petitioner and the newspaper own space advantageous and available for advertising is the controlling factor in attracting clients, rather than the fact that they are also prepared to design and prepare the advertisements. We are convinced that the petitioner was trading as a principal, within the meaning of the revenue acts cited and since all of its income appears to have been derived from that trading, it follows that it is not entitled to the classification it claims.

Judgment will be rendered for the respondent.

Considered by Phillips, Milliken, and VaN FossaN.


text:
    Harry B. Hooper, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5271.
    Promulgated September 29, 1927.
    1. Amount of deductions on account of expenditures for labor determined.
    2. Depreciation of vineyard and peach orchard determined.

      A. H. Hewitt, Esq., for the petitioner.

      A. George Bouchard, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income. tax for the year 1921 in the amount of $374.33. The deficiency arises from the partial disallowance by the respondent of certain deductions taken by the petitioner on account of payments made for labor, and for depreciation of buildings, vineyards, and orchards.
    FINDINGS OP PACT.
    The petitioner is an individual residing in Sutter County, California. He is and has been since 1912 a vineyardist and orchardist, engaged in growing grapes, peaches, and pomegranates.
    The petitioner had at the beginning of the year 1921, 65 acres of bearing vineyard, consisting of Thompson’s seedless grapes. In that year the vineyard was attacked by a disease known as Phylloxera and damaged to such an extent that the petitioner was compelled to dig up and destroy 10 acres thereof, and the remainder was so affected that it has not since that time produced as large a crop as it did before it was attacked by the disease. The cost of bringing a vineyard to the bearing age is $200 per acre and the average bearing life of vineyards in the vicinity in which the petitioner’s vineyard is located is 1 years. The record does not show when the petitioner’s vineyard was planted, or when it reached the bearing age.
    The petitioner was also during the year 1921 the owner of a bearing peach orchard, consisting of 38 acres. The cost of bringing a peach orchard to the bearing age, which is from 3 to 5 years, is $400 per acre. The petitioner’s peach orchard had a bearing life of 15 years. The record does not show when it was set out or when it reached the bearing age.
    The petitioner in the year 1921 employed men to work in his orchard and vineyard and he paid them $8,314.12 in wages and also furnished them with subsistence at a cost of $1,413.13, making a total labor cost of $9,181.85.
    The petitioner in his income-tax return for the year 1921, deducted from gross income the amount of $9,160.85 on account of expenditures made for labor employed by him in that year, and also took a deduction for the depreciation of his vineyard and peach orchard and for the 10 acres of vineyard he was compelled to destroy. The respondent reduced the deduction taken on account of money paid for labor to the amount of $1,946.01, and also disallowed part of the deduction taken for the depreciation and destruction of the vineyard and orchard.
   OPINION.

Marquette:

The evidence in this proceeding is so meagre that it is difficult to make an adequate finding of facts upon which to base a decision. However, from the evidence that was presented to us, we are convinced that in the year 1921 the petitioner expended $9,181.85, for wages and subsistence of laborers employed in his vineyard and orchard, and that he is entitled to deduct that amount in computing his net income for that year. We are also satisfied that the cost of bringing the petitioner’s peach orchard of 38 acres to a bearing state was $400 per acre, and that it has a bearing life of 15 years. The petitioner is therefore entitled to deduct from gross income for the year 1921 as an allowance for the depreciation of his peach orchard an amount computed on the basis of a cost of $400 per acre and a life of 15 years.

With reference to the petitioner’s vineyard we are satisfied that the cost of bringing it to a bearing state was $200 per acre and that it had a bearing life of 1 years. The petitioner claims that he is entitled to deduct from gross income the entire cost of the vineyard which he was compelled to dig up and destroy and that he is entitled to more than the ordinary depreciation on the remaining 55 acres, because it was damaged by disease. We are not able to ascertain from the record when the 10 acres mentioned were set out or when they reached a bearing age and therefore can not here determine the depreciated cost thereof as of January 1, 1921. The petitioner is not entitled to deduct in the year 1921 the entire cost of bringing the 10 acres in question to a bearing state, but he is entitled to a deduction in the amount of the depreciated cost of the 10 acres as of January 1, 1921, computed on the basis of the cost of $200 per acre and a bearing life of 7 years. The evidence is not sufficient to warrant us in allowing more than the normal depreciation on the remaining 55 acres of vineyard, and we therefore hold that as to that part of the vineyard the allowance for depreciation for the year 1921 should be computed on the basis of $200 per acre and a bearing life of 7 years.

Other errors on the part of the respondent in computing the petitioner’s depreciation allowance were alleged by the petitioner, but he introduced no evidence to sustain them.

Judgment will he entered on 15 days’ notice, under Rule 50.

Considered by Phillips, Milliken, and Van FossaN.


text:
    W. Z. Sharp, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 10598.
    Promulgated September 29, 1927.
    The petitioner held to be entitled to deduct from gross income in his income-tax return for 1921, $3,900, representing the difference between the amount paid for a second mortgage note and the value of the equity represented by said note.

      Joseph H. Kirby, Esq., and P. J. Goffey, Esq., for the petitioner.

      James A. O’CaTlaghcm, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 of $1,323.43. The question in issue is the right of the petitioner to deduct from gross income in his income-tax return for 1921, $3,900 representing a loss sustained by him on the purchase of a second mortgage note.
    FINDINGS OE PACT.
    The petitioner is a resident of Sioux Falls, S. Dak.
    In 1919, or prior thereto, one B. E. Adkins, of Howard, S. Dak., sold to D. Curvo 160 acres of land in Miner County, S. Dak., at a price of $16,700. This land was subject to a first mortgage of $7,000, bearing interest at 5 per cent per annum. The purchaser paid down no cash, but gave to Adkins a second mortgage note of $9,700 bearing interest at 6 per cent per annum. Adkins was then reputed to be worth $150,000. He requested the petitioner, who was president of a bank, to purchase the note at its face value. This the petitioner did upon the endorsement of Adkins, which the petitioner considered ample security therefor. Curvo, the maker of the note, went through voluntary bankruptcy in 1921 and Adkins became hopelessly insolvent during the year. The petitioner then made inquiry of persons familiar with the land in question and was advised that the land could not be sold for more than $12,800. Upon this information the petitioner charged off $8,900 on the note and deducted the same from gross income in his income-tax return for 1921. The deduction was disallowed by the Commissioner in determining the deficiency herein complained of.
    In 1922 Curvo informed the petitioner that he could not pay anything on the note; that the petitioner could either foreclose the mortgage or that Curvo would deed him the land in exchange for the note. Curvo then deeded the land to the petitioner and the petitioner surrendered the note to Curvo.
    The fair market value of the land in question in 1921 and in 1922 was not in excess of $12,800. At no time since then could the land have been sold for that price and the value at the present time is not in excess of $10,000.
   OPINION.

Smith:

Section 214 (a) of the Revenue Act of 1921 permits an individual to deduct from gross income in his income-tax return:

(4) Losses sustained during the taxable year and not compensated ior by insurance or otherwise, if incurred in trade or business;
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *
(6) Losses sustained during the taxable year of property not connected with the trade or business * * * if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. Losses allowed under paragraphs (4), (5), and (6) of this subdivision shall be deducted as of the taxable year in which sustained unless, in order to clearly reflect the income, the loss should, in the opinion of the Commissioner, be accounted for as of a different period. * * *
(7) Debts ascertained to be worthless and charged off within the taxable year * * * and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

The evidence in the case at bar shows that the petitioner had, in 1921, a second mortgage note on land of a value of $12,800. The face of the note was $9,700 and the land was encumbered by a first mortgage of $7,000. The maker of the note and the endorser were both insolvent. The maker had gone through bankruptcy in 1921 and the endorser was found by the petitioner to be hopelessly insolvent and to have no property from which he might hope to recover any part of the face value of the note. In 1921 the petitioner determined that his loss upon the note was at least $3,900. The 1921 Act permits an individual taxpayer to deduct from gross income the part of a debt ascertained to be worthless provided it has been charged off within the taxable year. The petitioner' determined the uncollectible part of the debt due him in 1921 to be $3,900 and charged it off of his books of account.

In United States v. S. S. White Dental Manufacturing Co. of Pennsylvania, 274 U. S. 398, the Supreme Court held that under the Revenue Act of 1918 a loss of an American company represented by the amount of its investment in a subsidiary German corporation was sustained and was deductible in 1918 when the entire property of the German corporation was seized by the German government as enemy property. In the course of its opinion the court stated:

* * * The statute [Revenue Act of 1918] obviously does not contemplate and the regulations (Art. 144) forbid the deduction of losses resulting from the mere fluctuation in value of property owned by the taxpayer. New York Ins. Co. v. Edwards, 271 U. S. 109, 116; cf. Miles v. Safe Deposit Co., 259 U. S. 247. But with equal certainty they do contemplate the deduction from gross income of losses, which are fixed by identifiable events. Such as the sale of property (Art. 141, 144), or caused by its destruction or physical injury (Art. 141, 142, 143) or, in the case of debts, by the occurrence of such events as prevent their collection (Art. 151).

In our opinion the loss in the case at bar was “ fixed by identifiable events” occurring in the year 1921. The petitioner is therefore entitled to the deduction from gross income in his income-tax return of 1921 of the $3,900 claimed.

Judgment will he entered for the petitioner after 15 days'1 notice, under Rule 50.

Considered by Littleton and Love.


text:
    Minnehaha National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10599.
    Promulgated September 29, 1927.
    Debts ascertained to be worthless in 1920 but charged off only In part in 1920 are not legal deductions from gross income of 1920.

      J. H. Kirby, Esq., and P. J. Gofey, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.

      This is a proceeding for the redetermination of a deficiency in income and profits tax for the calendar year 1920 in the amount of $5,248.74. All issues raised by the pleadings were waived at the hearing except that with respect to the disallowance by the Commissioner of $25,142.57 claimed as a deduction from gross income on account of worthless debts representing a percentage of certain notes endorsed by one P. D. Magnusson.
    FINDINGS OP PACT.
    The petitioner is a national bank of Sioux Falls, S. Dak.
    In the latter part of 1919 the petitioner discounted and purchased from the Bank of Springfield, S. Dak., the three following notes:

    In the early part of 1920 the petitioner rediscounted and purchased from the same party the following notes :

    On each of the above notes, except the first, P. D. Magnusson was an endorser and hereinafter these notes will be referred to as the Magnusson paper. All of these notes, except that made by P. D. Magnusson, were supposed to be secured by chattel mortgages on cattle. Magnusson was a very extensive stock rancher. He was reputed to be very wealthy. Notes given by him or endorsed by bim were, during 1919 and the early part of 1920, held to be an excellent risk and were sought after by bankers. On June 8, 1920, tbe petitioner learned of some irregularities on tbe part of Magnusson in the management of his affairs. The petitioner immediately commenced action against him in the Circuit Court of Bon Homme County, S. Dak., and soon thereafter an involuntary petition was filed against him but served some time later. Claims aggregating in excess of $1,700,000 were filed against Magnusson in the bankruptcy proceedings. Creditors’ meetings were held during the summer of 1920 and an investigation disclosed that Magnusson had assets of a value of $500,000 or $600,000; all of which were heavily encumbered. The petitioner then made investigations with respect to the financial responsibility of the makers of the notes endorsed by Magnusson, which it held. It developed that there were duplicate notes in some instances and that L. S. Taylor, brother-in-law of Mag-nusson, had no property and the cattle which were supposed to represent collateral security on some of the notes were nonexistent. The first three notes in the tabulation above aggregating $31,100 were definitely ascertained to be worthless in 1920.
    In 1920 the petitioner charged off 35 per cent of the gross amount of the aforesaid notes aggregating $11,835.90, or $25,142.57; in 1921 it charged off 40 per cent; in 1922 it charged off 17% per cent; and in 1923 it charged off 7% per cent. In the audit of the petitioner’s returns for 1920 and 1921 the Commissioner disallowed the deduction of $25,142.57 taken in the 1920 return but allowed the deduction of 75 per cent of the total or $53,876.90 from gross income in the 1921 return thereby creating a large net loss for 1921.
   OPINION.

Smith:

The only question presented by this proceeding is the right of the petitioner to deduct $25,142.57 from gross income in 1920, representing 35 per cent of the face value of certain notes either made by or endorsed by P. D. Magnusson, $31,700 face value of which was definitely ascertained to be worthless during the year 1920. At the close of 1920 petitioner was in doubt as to whether it would ever recover anything upon the so-called Magnusson paper and up to date only approximately $1,600 has been recovered, that amount being recovered from John Pool, the maker of one of the notes. Although the petitioner had ascertained during 1920 that $31,700 of the notes were worthless it did not charge those notes off specifically. In place thereof it charged off 35 per cent of the total of the Magnusson paper.

Section 234(a) of the Revenue Act of 1918 provides that a corporation in computing the net income subject to tax imposed by section 230 of the Act shall be allowed as deductions, “(5) Debts ascertained to be worthless and charged off within the taxable year.”

In numerous appeals this Board has held that under the provisions of the Revenue Act of 1918 a taxpayer may not deduct from gross income in its tax return a portion of a debt ascertained to be worthless. In Steele Cotton Mill Co., 1 B. T. A. 299, we said:

The Commissioner assumes the position that the word debt, as used in the Act of 1918, means a debt in its entirety and does not permit the partition of a debt and the writing off of one part and the retention of the other part. A comparison of the wording of sections 234(a) (5) of the Revenue Acts of 1918 and 1921, respectively, leads us to the conclusion that Congress did not contemplate, in the Act of 1918, the deduction of a part of a debt.

To the same effect see Winthrop Ames, 1 B. T. A. 63; Egan & Hausman Co., 1 B. T. A. 556; Murchison National Bank, 1 B. T. A. 617.

In his notice of deficiency to the petitioner the Commissioner stated:

With respect to 1921, however, it is the opinion of this office that since partial write-offs are permissible in that year, the total amount charged off to date, or $53,876.90, which is 75% of the total loss, should be allowed.

The action of the Commissioner is in accordance with the law.

Judgment will Toe entered for the respondent.

Considered by Littleton and Love.


text:
    Gertrude H. Sweet, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9240.
    Promulgated September 29, 1927.
    Petitioner entered into a contract of sale of land in 1920 under which the vendee paid 25 per cent of the purchase price and during 1920 made additional payments on the purchase price as required by the contract. Held, the petitioner is not entitled to report income from the transaction on an installment basis.

      J. Porter Russell, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiency in income tax for the year 1920 in the amount of $6,697.91. The only allegation of error is that the Commissioner erroneously computed the net income for 1920 in requiring the petitioner to account for the entire profit upon a sale of real estate in 1920 instead of accounting for a proportionate part of the profit, the claim being made that the profit should be spread over the years during which payments were received from the vendee.
    FINDINGS OF FACT.
    The petitioner is the daughter of Albert K. Hunton, of Detroit, Mich., deceased since 1914. At the time of his death he was the owner of a parcel of real estate on Franklin Street, in Detroit, adjoining the Grand Trunk Railroad property, which many years before he had used as a lumber yard but which for many years had been used by a junk dealer. It was in a part of the city where there was a large amount of very poor real estate and for many years the income therefrom had only been sufficient to pay taxes. Upon Hunton’s death in 1914 his appraisers, who were two bankers and business men of Detroit, of several years experience, appraised the property at $25,000.

      From 1914 until 1920 the petitioner’s husband, who was also the executor of Hunton’s estate, endeavored to dispose of the property. He listed it with a prominent firm of real estate brokers in Detroit, but was unable to obtain any offer for the property.
    In September or October, 1920, and after the property had been in the hands of the brokers during the entire period from 1914 to 1920, a firm by the name of Kimball-Eisenberg offered to purchase the property without the intervention of any brokers. They offered $60,000 for the property and agreed to pay $15,000 down and $1,000 per month for 45 months, with interest on deferred payments at the rate of 6% per centum per annum. Accordingly, a contract was entered into on October 4, 1920, by w^ich the petitioner sold to Kimball-Eisenberg the property above referred to upon the terms stipulated. A warranty deed was to be given to the property by the grantor upon the completion of the payments. The vendee was entitled to immediate possession and was required to pay all taxes on the property. The contract provided in part:
    It is Further Agreed, by the parties hereto, that time shall be of the essence of this contract and that if the said party of the second part shall fail to make any of the payments or perform any of the conditions above set forth, in the manner and at the time above limited therefor, the party of the first part shall, immediately after such failure, have the right to declare this contract void, and to retain whatever may have been paid hereon, and the premises, together with the buildings and improvements thereon as stipulated damages, and may consider and treat the party of the second part as her tenant holding over without permission, and may without notice, written1 or otherwise, take immediate possession of the premises and remove the party of the second part therefrom.
    The fair market value of the property in 1920 was between $35,000 and $40,000. The vendee made two payments of $1,000 each in 1920. It failed to meet all of its payments during the years 1921,1922, and 1923. It made nine payments of $1,000 each in 1921, eight payments of $1,000 each in 1922, seven payments of $1,000 each in 1923, and paid the balance of $19,000 due, together with accumulated interest, in 1924, whereupon warranty deed was given to the vendee for the property.
    The petitioner desired to dispose of her land contract soon after it was acquired, but was advised by leading bankers and business men of Detroit that the contract could not be negotiated at anywhere near its face value. Land contracts similar to that held by the petitioner could not be disposed of in 1920 and 1921 in Detroit except at a discount of from 10 to 30 per cent. The fair market value of the land contract held by the petitioner could not have been sold except at a discount of 25 per cent of the aggregate face value of the payments to be made thereon.
   OPINION.

Smith :

There is no contention in this proceeding as to the amount of profit realized by the petitioner upon the sale of the land in Detroit. The only question is the amount of profit which she is liable to income tax upon in the year 1920. The respondent claims that the amount of profit realized in 1920 is the difference between the value of the land at the time acquired by the petitioner and the selling price, or $60,000. Petitioner’s original contention is that the transaction was a deferred-payment contract and if not allowed as a deferred-payment contract it was an installment contract within the meaning of the Commissioner’s regulations. At the hearing the petitioner amended her petition to claim that the transaction was a deferred-payment contract under the provisions of the Revenue Act of 1926.

The evidence of record indicates that the cash value of the land contract received by the petitioner in 1920 was not equal to its face value. Richard G. Lambrecht, a deponent on behalf of the petitioner, deposed that in his opinion the contract could not have been sold except at a discount of from 25 to 30 per cent. Upon the basis of his testimony, we have reached the conclusion that the fair market value of the contract at the date of receipt was 75 per cent of its face value, that is, the face of the deferred payments.

Section 212(d) of the Revenue Act of 1926 provides:

* * * In the case * * * of a sale or other disposition of real property, if * * * 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 above 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.

Section 1208 of the same Act provides that subdivision (d) of section 212 shall be retroactively applied in computing income under the provisions of prior Revenue Acts beginning with the Revenue Act of 1916.

By virtue of the provisions of the Revenue Act of 1926 the petitioner claims the right to have her income from the sale of the property in question computed on the installment basis. It is clear from the facts, however, that she is not entitled to any benefits under the Revenue Act of 1926, since the initial payments, as defined in section 212(d) of that Act, were more than 25 per cent of the selling price. The selling price was $60,000 and the cash received during 1920 was $17,000.

Judgment will be entered on 15 days’ notice, umder Bule 50.

Considered by Littleton and Love.


text:
    Superior Motor Parts Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10348.
    Promulgated September 29, 1927.
    At December 31,1921, the petitioner had on hand certain obsolete parts, and reduced its inventory by the cost thereof. Held,, the reduction was proper.

      Walter W. MeVay, Esq., for the petitioner.

      Joseph K. Moyer, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the years 1920 and 1921, in the amounts of $142.28 and $1,536.93, respectively.
    The errors alleged are:
    1. That the Commissioner erroneously disallowed certain deductions for depreciation of property;
    2. Increased the inventory at the close of 1921 by the cost of certain obsolete merchandise; and
    3. Reduced invested capital for 1921 by a dividend paid in June, 1921, and in the computation of the earnings available for the payment of the dividend deducted an amount for a tentative tax payable for the year 1921.
    FINDINGS OP FACT.
    The petitioner was incorporated under the laws of the State of Pennsylvania on December 8,1919, and is a distributor in the western part of Pennsylvania of certain automobile parts.
    At the time of its organization petitioner acquired considerable amounts of merchandise to be used in the repair of Saxon motor cars. These parts proved to be unsalable. In 1921 it endeavored to sell to the Continental Motor Co., and to other persons the merchandise which it had on hand, but they refused to purchase it at greatly reduced prices. The Saxon Motor Co. was taken over by another concern and few, if any, Saxon cars were manufactured after 1921. Upon its determination that the merchandise was worthless, it charged the cost thereof, $4,152.18, off its books of account at December 31,1921, as obsolete merchandise. The Commissioner added back to the petitioner’s net income for 1921, $2,719.80 in respect of the obsolete merchandise charged off.
    The petitioner paid a dividend on June 1,1921. The Commissioner determined that the dividend paid was in excess of the earnings available for the dividend and accordingly reduced the petitioner’s invested capital for 1921 in the amount of $5,190.01. In the determination of the earnings available for the payment of the dividend, the Commissioner deducted $2,557.46, representing his estimate of the taxes due for the calendar year 1921, which had accrued up to the date of payment.
   OPINION.

Smith:

1. The petitioner has not introduced any evidence from which it can be determined that there was any error on the part of the respondent in his computation of deductible depreciation.

2. In its petition the taxpayer alleges error on the part of the respondent in increasing its net income for the year 1921 in the amount of $2,119.80, representing a part of a reduction in inventory at the close of the year by reason of unsalable merchandise. We are satisfied from the evidence that the merchandise was unsalable and that the respondent was in error in adding back to net income of 1921 the $2,719.80 in question.

3. The parties have stipulated that the respondent in determining the amount of earnings available for the payment of a dividend on June 1, 1921, deducted $2,557.46. This deduction was unwarranted. Appeal of L. S. Ayers & Co., 1 B. T. A. 1135.

Motion for judgment, made on behalf of the respondent, is denied.

Judgment will be entered on 15 days' notice, under Bule 50.

Considered by Littleton and Love.