author: GoodRIch :

text:
    Morganite Brush Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 26369.
    Promulgated November 12, 1931.

      Benjamin Mahler, Esq., for the petitioner.

      Miles J. O'Gonnor, Esq., for the respondent.
   OPINION.

GoodRIch :

Respondent seeks to hold petitioner liable as transferee for a deficiency alleged to be due from the Morgan Crucible Company of America, a corporation with which petitioner was affiliated during the period here in issue and which, upon subsequent dissolution, transferred all its assets to petitioner, of a net value in excess of the deficiency asserted. The petition, as amended, charges that this action is erroneous on the following grounds: That petitioner is liable only as an original taxpayer, not as a transferee within the meaning of section 280 of the Revenue Act of 1926¡.that the assessment and collection of the deficiency asserted against the Crucible Company can not now be made against petitioner as original taxpayer because barred by the statute of limitations; that the Crucible Company should be charged with tax only on that part of the consolidated income proj)erly allocable to it, rather than to assert against it the entire deficiency on the consolidated income, as has been done.

It appears that when respondent asserted the liability against petitioner for payment of the taxes of the Crucible Company, the statute had run upon any deficiency which might be due from petitioner as original taxpayer. It was admitted by counsel that the statute had not run against the liability, if any, of petitioner as transferee of the assets of the Crucible Company to pay the taxes of that company. Petitioner takes the position that, since it filed one consolidated return with the Crucible Company, any liability on its part must be as a taxpayer and not as a transferee. We believe this position to be unsound. The law provides for a consolidated return of income by two or more affiliated corporations and the computation of the total tax upon the basis of the consolidated income, but it also provides for the allocation of the tax among the consolidated corporations. Each is a taxpayer and liable for its part of the total tax. But there is no reason why, if one of these affiliated corporations takes over all the assets of another, leaving nothing from which to pay taxes, the transferee should not be liable for the tax of the trans-feror. That tax was not one for which the transferee was liable as a taxpayer, but represents a liability for which it became responsible by reason of the transfer. See Caughey-Jossman Co., 8 B. T. A. 201; Great Bear Spring Co., 12 B. T. A. 383; New York Talking Machine Co., 13 B. T. A. 154; Ameñcan Creosoting Co., 12 B. T. A. 247; and Thompson Scenic Ry. Co., 21 B. T. A. 718.

We are therefore of the opinion that the liability now asserted is not barred from collection because of the expiration of the statute upon taxes which might originally have been due from the petitioner as a taxpayer, and that petitioner is liable as a transferee under section 280 of the Revenue Act of 1926 for that portion of the total tax properly allocable to the Crucible Company.

But petitioner also complains that, even if liable as a transferee for taxes properly assessed against the Crucible Company, it is not so liable for that portion of the deficiency representing tax on that part of the consolidated net income jR'operly assignable to it and as to which the statute has run. Section 240 of the Revenue Act of 1918 provides for the apportionment of the tax among affiliated companies upon the basis of their net incomes in the absence of any agreement with respect thereto. Here there is no evidence as to the existence or nonexistence of any such agreement between these corporations. The returns filed contain no specific notice of such an agreement but, on the other hand, they are filed in the name of the parent company (the Crucible Company) and might be assumed to indicate that the entire liability disclosed thereby was undertaken by that company. Whether or not the specific notice of an agreement required by the Commissioner’s regulations was filed, the record does not disclose. It is our opinion that the mere absence of proof of such an agreement can not be construed to mean that the agreement did not exist, and, consequently, that the tax liability of an affiliated group must be assessed against the members thereof on the basis of their respective net incomes, for we must treat as correct respondent’s determination of petitioner’s tax liability until petitioner, by positive evidence, has proved the same to be erroneous. The rule that the burden of proof is on petitioner is too well established to require citation or further discussion. The proof of the existence or nonexistence of an agreement between corporations as to the allocation of tax among them is, beyond doubt, a part of the taxpayer’s burden. The facts concerning such an agreement lie in the taxpayer’s hand and can be proved with ease. . It may be that respondent, in allocating this tax liability upon a basis other than the net incomes of the affiliated corporations, had knowledge of some agreement between them. That we do not know, but we are bound to assume that his action was in accordance with the statute and that his determination of tax liability, and his allocation of the same, were correct, until the contrary is proved. We therefore sustain respondent in asserting the entire tax liability against the Crucible Company and hold petitioner liable therefor as the transferee of that company.

In its argument, petitioner strongly relies upon the decisions in Phoenix National Bank et al., 14 B. T. A. 115, and Essex Coal Co. v. Commissioner, 39 Fed. (2d) 892. In the Phoenix case it was found as a fact that no agreement existed, and therefore the decision approved the allocation of tax liability as made by the Commissioner. The principle governing that decision is not in conflict with our conclusion here. We believe the. decision in the Essex case is based strictly on the facts in that case and is not controlling of the case at bar. See American Textile Woolen Co. et al., 23 B. T. A. 670. In passing, it should be noted that the records in Cincinnati Mining Co., 8 B. T. A. 79; Cleveland Trinidad Paving Co., 14 B. T. A. 1209; Crystal Block Coal & Coke Co., 15 B. T. A. 600; Aragon Mills, 17 B. T. A. 257; Angier Corporation, 17 B. T. A. 1376, and other cases relied on by petitioner, disclose positively that there was no agreement between the various affiliated corporations as to the allocation of tax. See also Popular Price Tailoring Co. v. Commissioner, 33 Fed. (2d) 464; Temtor Corn & Fruit Products Co. v. Commissioner, 299 Fed. 326; Woodside Cotton Mills Co., 13 B. T. A. 266; American Textile Woolen Co., supra.

With respect to petitioner’s claim for a deduction from income in the amount of $9,000 on account of notes ascertained to be worthless and charged off within the taxable period, it appears from the record that respondent has two conflicting theories regarding these notes. First, he claims that the loss should be disallowed because the notes never had a value; next he claims the loss should be disallowed because the notes were not determined to be worthless within the taxable period. The evidence does not justify either position. The evidence is that when Knott gave the three notes, he was apparently prosperous and not considered dishonest, and petitioner’s officers had faith that he would make payment on them. To oppose this testimony respondent’s counsel sought to show that the amount of Knott’s property was unknown to the officers and that they were in no position to conclude that he was capable of making payment. But even if he had insufficient assets with which to meet these obligations when made, that fact is not sufficient reason for holding that the notes were then worthless and that their worthlessness could not be subsequently ascertained. As said in W. Van E. Thompson, 10 B. T. A. 1125:

A person may Lave credit to sucii an extent that he could borrow money upon his promissory note without having any other assets than his good name and character and yet circumstances may subsequently occur which would warrant the payee of the note in ascertaining that it was worthless and charging it off.

See also Roy Nichols, 17 B. T. A. 580. The notes were treated as collectible when given, and nothing occurred to destroy faith in their value until Knott’s failure to meet the first, maturing in the taxable period. Such an event, followed by the attorney’s inability to collect the judgment, the loss of Knott’s new position and his removal from the country, constituted good reason to regard them all as worthless.

We have consistently held that an ascertainment of worthlessness is to be reached by the exercise of sound business judgment in the light of surrounding facts and circumstances which would lead a reasonably prudent business man to conclude the debt worthless. A remote hope of ultimate salvage is insufficient to defeat deduction (John E. Saddler, 2 B. T. A. 1305; Howard McCutcheon, 18 B. T. A. 834), for no taxpayer is required to be an incorrigible optimist. United States v. White Dental Mfg. Co., 274 U. S. 398. To the same effect see Selden v. Heiner, 12 Fed. (2d) 474. Nor is the fact that two small collections were later made of controlling significance. A. C. Kreipke, 7 B. T. A. 777; affd., 32 Fed. (2d) 594; American Warehouse Co., 19 B. T. A. 8; Douglas County Light & Water Co. v. Commissioner, 43 Fed. (2d) 904; and Farish & Co. v. Commissioner, 31 Fed. (2d) 79. The deduction of $9,000 on account of bad debts should be allowed.

Let us now consider petitioner’s claim for relief under the provisions of sections 327 and 328 of the Revenue Act of 1918. The facts place this claim under subdivisions (a) and (c) of section 327, which read in part as follows:

(a) Where the Commissioner is unable to determine the invested capital as provided in section 326.
* ⅝ ⅜ * * ⅜ *
(c) Where a mixed aggregate of tangible property and intangible property has been paid in for stock * * * and the Commissioner is unable satisfactorily to determine the respective value of the several classes of property at the time of payment, * * *

It was the intent of the London company to transfer to the Crucible Company all the assets, tangible or intangible (except the $100,000), which had belonged to its American branch. The Crucible Company actually took possession of these assets and, with petitioner, continued the American business. In addition to the physical assets mentioned in the list later compiled, the bill of sale expressly permits the free use of the London company’s valuable patents, trade-marks and trade names, and authorizes the transfer of the lease on its New York premises. The list compiled for the purpose of valuation was not a part of the bill of sale, and does not limit the assets exchanged for stock to those specifically mentioned thereon. The good will, license to use patents and trade-marks, and the lease were equally a part of the consideration for which the Crucible Company’s stock was issued, and should be included in a computation of its invested capital, or if their value is undeterminable, then special assessment should be granted under subdivisions (a) or (c). But a taxpayer should be held to a reasonable diligence in determining his invested capital, and only after a showing of such diligence and a resulting inability to establish it do the relief provisions apply. Edwin M. Knowles China Co., 9 B. T. A. 1292; Cramer & King, 13 B. T. A. 399; (affd., 41 Fed. (2d) 24); Cohn Goldwater Co., 15 B. T. A. 970; Clemson Bros., Inc., 15 B. T. A. 1145.

Competent witnesses testified that, while they could not assign to the patents, good will, and trade-marks a specific monetary value, there was no doubt but that these assets had a very substantial value and their use contributed largely to the earnings. For instance, by use of the patent covering the insertion of the pigtail a saving of 42 cents a hundred on the manufacture of brushes was effected. From the evidence, the London company appears clearly to have been a leader in this specialized industry throughout the world, and to have spent considerable money in experiment and development, and in investigation of competitor’s methods. It had developed superior combinations in the composition of its brushes and in the detail of cable contact with the machine. The adoption of this latter method by competitors upon the expiration of the patent corroborates the witnesses’ opinion that in 1920 the patent was very valuable. 'All these assets' the Crucible Company, and through it the petitioner, acquired and used, and they were material factors in the production of its income.

The right given for the exclusive purchase in the country of the rough carbon blocks from the London company was also of substantial value, carrying as it did the benefits of the expensive technical experiments looking toward the improvement of the product, conducted by the London company both in laboratory and field, carrying also the benefits of reduced production costs resulting from use of the patent eliminating the kilning operation and the established superiority of the product, recognized by the electrical trade throughout the world. The London company’s reputation for a superior brush was based upon the result of these experiments and activities, carried on over a long period. To duplicate this product a far greater working capital would have been required by the American companies than that with which they were equipped. There is good reason to agree with the witnesses that no specific value can be given the good will, trade-marks and patents. The business naturally resulting from the reputation of the London company for a superior product redounded to the benefit of the American companies and .their sales in the United States. A mixed aggregate of this resulting good will, together with tangible assets of a value equal to the shares issued, was exchanged for the Crucible Company’s capital stock. This situation is one contemplated by section 327 and, since the evidence establishes that these intangibles, the patents, good will and trade-marks did constitute material factors in the production of income, special assessment should be granted. D. N. & E. Walter & Co., 4 B. T. A. 142; Clarence Whitman & Sons, Inc., 11 B. T. A. 1192; Rothschild Colortype Co., 14 B. T. A. 718; and Farnsworth, Hoyt Co., 16 B. T. A. 309.

Having granted special assessment, it is unnecessary to consider the other issues relating to petitioner’s invested capital.

We sustain respondent in disallowing as a deduction from income the sum of $3,591.20, representing the expense of organizing these domestic corporations. The rule that organization expenses are not deductible as ordinary and necessary business expenses is so well settled as to merit no further discussion or citation herein.

At the hearing petitioner’s counsel orally amended his petition, complaining further that the Commissioner erred in not excluding from income of the consolidated group (1) the sum of $9,033.93 income shown applicable to the Morganite Brush Company; (2) in not excluding $1,795.60, one-half of the organization expenses charged off by the Morganite Brush Company; and (3), in not excluding from income the sum of $12,838.33, representing the rent paid by the Morganite Brush Company to the Morgan Crucible Company in excess of the amount paid by the Morgan Crucible Company to outsiders.

The first two errors have already been covered. Respecting the third, petitioner is correct in its insistence that the $12,833.33 is merely an intercompany transaction, and intercompany transactions should be eliminated in the computation of consolidated net income. Gulf Oil Corporation v. Lewellyn, 248 U. S. 71; Utica Knitting Co. v. United States, 68 Ct. Cls. 77; certiorari denied, 281 U. S. 739. But while there is testimony to the effect that an intercompany charge and credit of this amount was made on the books, as would normally be done, there is no evidence that it was not properly reported in the return, nor do the deficiency notice and letters on which the computation of the deficiency is based show that respondent has failed to exclude the amount from taxable income. The allegations supporting this belated assignment are covered by a blanket denial, and as the burden of showing error in the respondent’s acts rests on petitioner, it must here fail for lack of proof in substantiation of its allegations.

Reviewed by the Board.

Judgment will be entered under Buie 6B (c).


source: Caselaw Access Project

author: MaRquette:

license: Public Domain

text:
    Stephen Peabody and J. Woodward Haven, as Executors of the Estate of Cornelia Haven Peabody, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39647.
    Promulgated November 13, 1931.

      Charles H. Werner, Esq., and George M. Morris, Esq., for the petitioners.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

MaRquette:

One issue here presented is whether the value of the real estate transferred by Cornelia Haven Peabody by deed of trust July 6, 1920, should be included in her gross estate subject to Federal estate tax. The respondent admits that the transfer was not made in contemplation of death, but he contends that the property should be taxed under section S02 (c) of the Revenue Act of 1924, as a transfer intended to take effect in possession or enjoyment after the death of the grantor. The petitioners contend that by the trust deed the decedent made an absolute and immediate transfer of the property, irrevocable, and not taxable as part of her estate. On this issue our decision is in favor of the petitioners. Reinecke v. Northern Trust Co., 278 U. S. 899; May v. Heiner, 281 U. S. 238; Nichols v. Bradley, 27 Fed. (2d) 47; Morsman v. Burnet, 283 U. S. 783; 51 Sup. Ct. 343; Colonial Trust Co. et al., Executors, 22 B. T. A. 1377. The case of Klein v. United States, 283 U. S. 231, relied upon by the respondent is not in point. In that case the grantor specifically conveyed a life estate only, which was to ripen into a fee simple “ in the event that said grantee shall survive the said grantor.” This is exactly the reverse of the situation now before us. In the Klein case the vesting of a fee simple in the grantee was wholly dependent upon the happening of an uncertain condition precedent, while in the present proceeding full title was conveyed to the grantees, subject to defeasance only upon the happening of an uncertain condition subsequent. There is a wide distinction between the two.

With respect to the bonds transferred by the decedent under the written instruments of June 1, 1918, and February 14, 1924, the respondent admits that the transfer was not made in contemplation of death, but he contends that the value should be included in the gross estate under section 302 (d) of the Bevenue Act of 1924. Whether the decedent had any actual or beneficial ownership in the bonds constituting the corpus of the trust we do not deem it necessary to decide, for, assuming that she had, we think the corpus of the trust was not a part of her gross estate. The trust instrument was not made in contemplation of death, and at the date of decedent’s death the trust was not subject to change through the exercise of a power either by the decedent alone or in conjunction with any other person. When the event occurred, no interest in the property held under the trust passed from decedent to the beneficiaries, she having conveyed her entire estate therein. The principles announced in May v. Heiner, supra, and Reinecke v. Northern Trust Co., supra., are controlling here and the value of the trust corpus should, therefore, be excluded from the gross estate.

Judgment will be entered under Rule 50.


author: McMahon:

text:
    Harvey Coal Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43194.
    Promulgated November 13, 1931.

      J. H. Armstrong, Esg., and B. I. DahTberg, G. 'P. A., for the petitioner.

      L. A. Luce, Esg., for the respondent.
   OPINION.

McMahon:

It is the contention of the petitioner that it is entitled to a deduction for depreciation in an amount larger than that allowed by the respondent, for the reason that the respondent’s computation does not allow depreciation upon the assets which had been installed upon the leased premises by the Hazard-Jellico Coal Company. The evidence discloses that these assets did not appear on petitioner’s books at any figure and that respondent did, in fact, fail to take these assets into consideration in computing the deduction for depreciation.

Section 204 (a) and (c) of the Revenue Act of 1924 provides that the basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property acquired after February 28, 1913, shall be the cost of such property, with certain exceptions. One of those exceptions is where one corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities of another corporation a party to the reorganization. Petitioner’s witnesses refer to tlie transaction between the petitioner and the Harvey Coal Company as a reorganization. However, from the evidence it does not appear that it was a reorganization or that the petitioner comes within any of the exceptions to the rule that the depreciation to which it is entitled must be based upon the cost of the assets to the petitioner. The evidence discloses that the assets of the Harvey Coal Company were transferred to the petitioner for stock.

To establish its right to a deduction for depreciation a taxpayer must show that it owns the property and must also show the amount of its capital investment in such property. Frank Holton & Co., 10 B. T. A. 1317; J. Kearsley Mitchell, 19 B. T. A. 83; and Belt Railway Co. of Chicago, 9 B. T. A. 304; affd., Belt Railway Co. of Chicago v. Commissioner, 36 Fed. (2d) 541; certiorari denied by Supreme Court, 281 U. S. 742.

We have been furnished with evidence as to the cost of certain assets to the Hazard-Jellico Coal Company and witnesses for petitioner testified that the value of these assets, when they were turned over to the Harvey Coal Company, was their cost, to the Hazard-Jellico Coal Company less ordinary depreciation. However, there is no evidence to show how much stock petitioner issued for such assets, the value of the stock issued therefor, or the value of the assets at the time they were acquired by petitioner. We are thus unable to determine the cost of the assets to petitioner. Furthermore, the lease whereby Harvey Coal Company originally acquired possession of the mine in question is not in evidence and we can not determine whether or not, under the terms of that lease, the Harvey Coal Company acquired title to any additional assets installed by the Hazard-Jellico Coal Company. It is possible that title to such assets vested in the owner of the premises, that under the order of the receivership court the Harvey Coal Company simply reacquired the lease and that there was no sale of the additional assets in question to this petitioner. In such a situation we are precluded from allowing petitioner any deduction for depreciation upon such assets.

It is also contended by the petitioner that the respondent, in computing the deduction to which the petitioner is entitled on account of depreciation on buildings, tipples, and furniture and fixtures, erred in using a rate of 5 per cent instead of 10 per cent.

Section 234 (a) (7) of the Kevenue Act of 1924 provides as follows:

(a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
*******
(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

The rate of depreciation is the only question presented by this allegation of error. The respondent has calculated depreciation upon the assets in question for the entire year 1924 to be $3,576.25, by using a rate of 5 per cent and for the taxable period in question has allowed petitioner two-twelfths of that amount as a deduction. Two well qualified witnesses for the petitioner testified that at the time petitioner acquired such assets their useful life was 10 years. This evidence was not controverted in any way and we therefore hold that the petitioner is entitled to depreciation upon such assets at the rate of 10 per cent, resulting in a deduction for depreciation on such assets in the amount of two-twelfths of $7,152.50, instead of two-twelfths of $3,576.25. Adjustment will accordingly be made under Rule 50. See Murphy Oil Co., 15 B. T. A. 1195, and Western Wheeled Scraper Co., 14 B. T. A. 496.

Judgment will Toe entered under Rule 50.


text:
    R. P. Shea, Petitioner, v. Commissioner of Internal Revenue, Respondent. Joseph F. Logel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37762, 37835, 40034, 40071.
    Promulgated November 13, 1931.

      Ralph W. Smith, Esq., John B. Millilcen, Esq., and George H. Roster, Esq., for the petitioners.

      M. B. Leming, Esq., for the respondent.
   OPINION.

McMahon:

Petitioner Shea contends that he paid $18,069.50, or gave credit in that amount, to purchasers of lots in order to induce them to assist him in selling other lots. This amount, it is alleged, represents the down payment on the lots which we have listed in our findings of fact, and petitioner Shea contends that it is deductible in 1923. The evidence upon this assignment of error is vague and confusing. From it we can not find that he actually paid out in 1923 more than $5,280 as down payments. That amount was paid out by Shea in 1923 as down payments on four Hancock Park lots, which petitioner sold as agent for Allen Hancock, and there is nothing in the evidence to indicate that there was any agreement that the amount of the down payment should be returned to him. On the other hand, in cases where Brentwood Country Club Estates lots were reconveyed to Shea, he gave the persons reconveying the lots his check in the amount of the credit which bad previously been given as down payments on the purchase price of the lots. By agreement between Shea and Logel each was to bear individually the amount of expense which he individually incurred. Any deduction allowable is therefore limited to the amount of $5,280, since we must assume that petitioner Shea operated upon a cash receipts and disbursements basis. In view of the fact that this expenditure was made to induce others to direct business to petitioner Shea, we consider it an ordinary and necessary business expense and therefore deductible in 1923.

Shea also alleges that the respondent erred in disallowing as deductions from gross income for 1924 and 1925 amounts of $15,000 and $31,500, respectively, claimed by him in his return as “sales promotion and entertainment expense.” He kept no records of amounts expended for this purpose, but testified that at the time-he rendered his returns he had the facts before him showing that those were the proper amounts. He further testified that he spent all of the amounts which he claimed in his returns. In this situation, where petitioner Shea did not keep records, but testified that he knew that the amounts claimed were spent for the purpose of furthering his business, we are of the opinion that such amounts constitute allowable deductions from his gross income of the respective years. We believe that such a conclusion is required by the decision in Cohan v. Commissioner, 39 Fed. (2d) 540. See also A. F. Bees, 21 B. T. A. 698.

Shea alleges that the respondent erred in computing his tax liability for the year 1925 in disallowing a claimed deduction of $4,950 for inadequate' electrical equipment abandoned in that year. From the evidence it seems clear to us that the ranch upon which the electrical equipment was installed was devoted primarily to Shea’s pleasure purposes rather than to business purposes. While there is evidence to show that at some time Shea engaged in the stock business to a limited extent, we are not informed as to whether this occurred in the years in question. We therefore hold that the respondent did not err in disallowing the claimed deduction.

Shea further contends that the respondent erred in computing his income-tax liability for the year 1924 in that he failed to give him the benefit of the 25 per cent reduction, provided in section 1200 (a) of the Bevenue Act of 1924, on that part of the deficiency attributable to his distributive share of income from the Brentwood Country Club Estates taxable at 1923 rates.

Section 1200 (a) of the Bevenue Act of 1924 provides as follows:

Any taxpayer making return, for the calendar year 1923, of the taxes imposed by Parts I and II of Title II of the Revenue Act of 1921 shall be entitled to an allowance by credit or refund of 25 per centum of the amount shown as the tax upon his return.

This identical question was presented in Charles Colip, 5 B. T. A. 123, and we there held contrary to the contention of the petitioner. To the same effect is William, A. W. Stewart et al., 18 B. T. A. 393, affirmed in Stewart v. Commissioner, 52 Fed. (2d) 17. In affirming the Board’s decision the Circuit Court expressly disagreed with the case of White v. Maddison, 45 Fed. (2d) 335, which holds to the contrary. In conformity with our prior decisions, we hold that respondent did not err in refusing to allow the 25 per cent credit. We also hold that the respondent did not err in refusing to allow, the petitioner, Logel, a credit of 25 per cent as alleged by petitioner Logel in Docket No. 40071.

The petitioner, Logel, contends that the respondent erred in disallowing amounts of $7,200.96 and $13,055.44 claimed by him in his returns for the years 1923 and 1924, respectively, as “entertainment and promotion expenses.” Logel testified that he entertained prospective purchasers of lots in his own home for the purpose of promoting his sales. He kept no detailed records of expenses incurred in this connection, but asks us to find that those amounts were spent for that purpose, because so-called “ household expenses ” increased from $11,434.32 in the year 1922 to $23,966.97, $29,745.08 and $28,253.79, in the years 1923, 1924 and 1925, respectively. Logel testified that the so-called “ household expenses ” for 1923 and 1924 included amounts spent in entertaining prospective customers for business purposes, but admitted that there is no way to segregate such expenditures from his personal expenses. There is no testimony that Logel knew at the time of the hearing or at the time the return was filed that the amounts claimed as deductions were correct. This situation is somewhat analogous to that presented in O. J. Morrison, 19 B. T. A. 635, in which we stated:

* * * The petitioner himself kept no record of his disbursements and was entirely unable to recall the facts relating to any of them or to testify how any item had been spent. He testified generally as to his belief that the amount claimed was practically all ” used to pay traveling expenses, but this leaves an intimation that some of it may have been otherwise spent.
In this condition of the evidence we find no warrant for a finding of fact that any part of the amounts so withdrawn in 1923 constituted ordinary and necessary expenses of carrying on petitioner’s business. The Board is in no position from this record to make such an estimate as is suggested in Cohan v. Commissioner, 39 Fed. (2d) 540, even if it were to assume from the evidence that some such amounts were paid and that no part thereof had been allowed as a deduction by the respondent.
♦ # * * * * *

Following our bolding in that proceeding, we hold that petitioner Logel in the instant proceeding is not entitled to the claimed deduction in question.

The evidence discloses that Logel, in 1924, spent an amount of $1,552.65 for traveling expenses on a trip to Florida for the purpose of assisting himself and Shea in the pricing of the lots which they were attempting to sell in California. From the evidence we are of the opinion that this expenditure was made on behalf of the two partnerships rather than on behalf of Logel individually. It is therefore our opinion that one-half of that amount is deductible by each partnership. The partnership of Logel and Shea made its return upon a calendar-year basis and, since Shea and Logel each owned a 50 per cent interest in that partnership, the distributive share of each in the income of that partnership for the calendar year 1924 should be reduced by one-fourth of the amount of $1,552.65. However, since tbe partnership known as the Brentwood Country Club Estates operated upon the basis of a fiscal year ending August 31, and since we are not informed as to when, during the year 1924, the expenditure was made, we are unable to determine that the one-half of such expenditure attributable to that partnership is deductible by it in the fiscal year ended August 31, 1924. There is, therefore, no basis in the record for holding that the share of each in the income of that partnership which was distributable in 1924 should be reduced by any portion of the amount of $1,552.65.

There is no evidence whatsoever in the record as to the allegation of error concerning an amount of $860 paid by Logel as club dues and deducted by him as a business expense. Logel makes no mention of it in his brief and has apparently abandoned the issue. The respondent’s determination in this regard will therefore not be disturbed.

Judgment will be entered under Bule 50.


author: Seawell:

text:
    Emma C. Hopkins, Executrix of the Estate of Albert J. Hopkins, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 25868.
    Promulgated November 13, 1931.

      David J. Defers, Jr., Esq., for the petitioner.

      Arthur Oarnduf, Esq., for the respondent.
   OPINION.

Seawell:

With reference to the value of the stocks which were given a higher value by the respondent than was returned by the petitioner, the issue is one of fact. The correctness of the determination of the respondent as to the value of the stock in question is presumed and there is no evidence adduced sufficient to overcome the same.

The evidence shows that the four notes, amounting to $9,000 and claimed as a deduction, did not mature until after decedent’s death; that they were made for the son’s benefit and that the decedent’s liability thereon was contingent upon the son’s failure to pay the same; and that the son would be liable to his father in the amount of the notes if he had to pay same because of his son’s failure to do so. The evidence further indicates that the son’s share in his father’s estate was of as much or more than the face value of tbe notes. In the circumstances of the case, it is not shown that the estate will eventually sustain any loss by reason of the contingent liability which rested on decedent or his estate by reason of his contingent liability on said notes.

If the estate is compelled to pay all of said notes, it will have the right to subrogation and may recover the amount from the son by subjecting his interest in his father’s estate to the satisfaction of the same.

For lack of evidence sufficient to overcome the presumption of the correctness of the respondent’s determination, it is approved.

Judgment will be entered for the respondent.


author: Trammell:

text:
    Jessie Smith, Executrix of the Estate of Louis Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jessie Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 18876, 22313.
    Promulgated November 13, 1931.

      Samuel V. Jenhins, Esq., for the petitioner.

      W. F. Wattles, Esq., for the respondent.
   OPINION.

Trammell:

The first question to be decided is whether we have jurisdiction of this proceeding. The Commissioner sent the notice of deficiency to Jessie Smith as executrix of her husband’s estate. At the time of the sending of the notice she had been discharged as executrix and the estate completely wound up. However, in this respect section 281 (b) of the Bevenue Act of 1926 provides as follows:

Upon notice to the Commissioner that any person acting in a fiduciary capacity for a person subject to the liability specified in section 280, the fiduciary shall assume on behalf of such person the powers, rights, duties, and privileges of such person under such section (except that the liability shall be collected from the estate of such person) until notice is given that the fiduciary capacity has terminated.

There is no evidence in this case that Jessie Smith as executrix notified the Commissioner that she had been discharged as such prior to the sending of the notice of deficiency. We think, therefore, that under the above quoted section the notice of deficiency mailed to Jessie Smith as executrix is sufficient to give us jurisdiction. Any liability, however, for taxes against the estate of the decedent must be collected from that estate, or as a transferee under section 280, which includes the liability under section 3467 of the Bevised Statutes. It appears that the estate of the decedent has been distributed and settled and the executrix discharged.

The former executrix in her individual capacity is before the Board in the transferee case, and while the Commissioner does not appear to have asserted liability against the former fiduciary under section 3467 as provided in section 280 (a) (2) of the Revenue Act of 1926, we think that this is not important. She is properly before us on a notice of deficiency which asserts her liability under section 280.

The petitioner takes the position that she is not liable as transferee and does not have any other liability under section 280 of the Revenue Act of 1926. She contends that she is not liable as transferee because everything she received, other than the personal property, which she paid out, aside from the wrecked automobile, consisted of real estate held by her at the time of decedent’s death as a tenant by the entirety and that a tenant by the entirety is not a transferee of assets.

Was she liable under sections 8466 and 3467 of the Revised Statutes upon the ground that she paid out funds in satisfaction of creditors’ claims before satisfying a prior claim of the Government for taxes ? If the petitioner, as executrix of her deceased husband’s estate, paid out money in satisfaction of debts without fully satisfying the claims of the Government for tax which had priority over such debts, she is liable under section 3467 of the Revised Statutes as provided in section 280 (a) (2) of the Revenue Act of 1926.

In order, however, to impose a personal liability upon the petitioner, it must appear that the assets which she received from the estate were paid out by her in satisfying the debts of the estate over which the tax liability to the Government had priority. If all the assets which she received from the estate of her deceased husband were paid out by her in satisfying obligations which had priority over the claim of the Government for taxes, then she would not be liable personally for any amount on account of taxes. Sections 3466 and 3467 of the Revised Statutes are as follows:

Sec. 8466. Whenever any person indebted to the United States is insolvent, or whenever the estate of any deceased debtor, in the hands of the executors or administrators, is insufficient to pay all debts due from the deceased, the debts due to the United States shall be first satisfied; and the priority established shall extend as well to cases in which a debtor, not having sufficient property to pay all his debts, makes a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor are attached by process of law, as to cases in which an act of bankruptcy is committed.
Sec. 8467. Every executor, administrator, or assignee, or other person, who pays any debt due by the person or estate from whom or for which he acts, before he satisfies and pays the debts due to the United States from such persons or estate, shall become answerable in bis own person and estate for the debts so due to the United States, or for so much thereof as may remain due and unpaid.

The priority given Federal- taxes does not extend to debts due or created in preserving or collecting the assets, nor to administration expenses. In re Wyley, 292 Fed. 900; State v. Lovell, 179 Fed. 321; certiorari denied and cited with approval in Richmond v. Bird, 249 U. S. 174.

The priority of Federal taxes given by statute, section 3466, R. S. (see Price v. United States, 269 U. S. 492) in any event, is over debts, not payments required by law to be made to a widow as her statutory allowance out of the estate of her deceased husband. Such statutory allowance is not a debt and the payment thereof therefore is not a payment of a debt. Under the Illinois law this takes priority over all debts except funeral expenses. See par. 75, ch. 3, Callaghan’s Illinois Statutes Annotated, vol. 1, p. 410. The priority of the United States on account of taxes extends to any assets or funds available for the payment of debts. United States v. Johnston, 5 Fed. (2d) 951. The widoAv’s allowance not being available for the payment of debts, we do not think the Government’s claim for taxes has priority over it. The widow’s allowance and the expenses of preserving and defending the estate together exceed the entire amount received by the executrix from the estate. The real estate, title to which was held as tenants by the entirety, was not a part of the assets of the decedent for the purposes of administration of the estate. In any event, she did not receive it as executrix and did not hold it in her fiduciary capacity. .

Section 3467, which creates a personal liability upon the executrix if she pays any debts before paying the prior claim of the Government for taxes, relates to the payment of debts out of funds or assets coming into her hands as executrix. The funds in her hands as executrix, after the payment of only a portion of the widow’s allowance and the expenses of protecting the estate, amounted to nothing. We do not think, therefore, that she is liable in her own person for the Government taxes under section 3467 of the Eevised Statutes.

If the real estate held by the petitioner as a tenant by the entirety should be held to be received from the decedent burdened with the tax liability of the decedent, then the petitioner would be liable as a transferee, even though not liable under section 3467 of the Eevised Statutes. This property was sold by the petitioner for $10,000 and it does not appear that this entire amount has been paid out in satisfying claims not having priority over the Government’s claim for taxes.

However, if this property held as tenants by the entirety is held to be property transferred from the decedent to the petitioner, then she would be liable as transferee, provided only that the property was subject to the decedent’s debts. Even*if this property were received from the decedent, but was not subject to his debts, then it could not be held that the petitioner was a transferee thereof.

We think that the correct rule is that while property so held is subject to the debts of either spouse, the survivor takes the property unencumbered by debts of the deceased. The right of survivorship takes precedence over claims against decedent. At common law an estate by the entirety is during coverture subject to sale on execution against the husband, but such a sale can not affect or deny the seisin or use of the wife in the estate, and if she survives her husband the whole estate goes to her. In Illinois the rule seems to be established by the Supreme Court of that State that the estate of the wife in property held as tenants by the entirety is protected from the husband’s sole creditors. See Orthwein v. Thomas, 13 N. E. 564. This is a rule established by many other States. Davis v. Clark (Ind.), 89 Am. Dec. 471, and other decisions of that State; Shinn v. Shinn (Kans.), 21 Pac. 813; McCubbins v. Stanford (Md.), 37 Atl. 214. This rule is followed also in Michigan, Kentucky, Tennessee and Vermont. Thompson on Real Estate, vol. 2, p. 961, states the rule as follows:

The purchaser upon execution of the husband’s interest (in real estate held as tenants by the entirety) acquires only a right to use his interest during his lifetime, in ease his wife survives him, for the entire estate then goes to her.

The same authority, on the same page, states:

Such an estate is the real estate of a married woman, although her husband is joined with her in the title. It is the real estate of each. If the claim of the plaintiff is upheld, then the interest of the husband in his wife’s right to her real estate is taken upon the sole debt of the husband. This would annul the statute. The estate of the wife, and her husband’s interest therein in her right in the property in question, is protected from tire husband’s sole creditors by the spirit and letter of the statute.

The Supreme Court of Michigan, in regard to estates by entirety, after citing Washburn Real Property, 5th ed., states:

The same author lays down the rule that no charge like a rent or a right of way or a judgment created by one co-tenant, can bind the estate in the hands of the survivor, unless the charge be created by the one who becomes such survivor, or the creator of the charge releases his estate to a co-tenant, who, as releasee, accepts, with that part of the estate, the charge inhering therein by his own act. But the charges made by a joint tenant and judgment against him will bind his assignee and himself as survivor. Midgley et al. v. Walker, 101 Mich. 588; 60 N. W. 296. To the same effect see C. J. 33, page 903.

The surviving tenant not being liable at law or in equity for unpaid obligations of the cotenant, is not a transferee within the meaning of section 280 of the Revenue Act of 1926.

We might reach the same conclusion based upon the nature of the interest of the tenancy of such an estate. The rights of the survivor became enlarged, but the question is, Does such survivor actually receive any property? In view of our decision reached above, we do not think it necessary to pass upon this question, as in any event we do not consider that the survivor is liable for any debts, including taxes, which might have been owing by the deceased co-tenant. This being true, the survivor is not a transferee of property of the decedent and liable as such. This is in accordance with the rulings made by the Commissioner in I. T. 1571, C. B. II-1, p. 133, where it is stated:

In the case of real estate owned by ⅛ husband and his wife as tenants by the entirety, upon the death of the husband the real estate passes to the wife by the right of survivorship and the liability for taxes of the deceased husband does not attach to such property, the wife being liable for the taxes only to the extent of any personal property received.

Having reached the foregoing conclusion, it becomes unnecessary for us to determine whether the decedent owed the taxes here involved.

Judgment will be entered u/nder Bule 50.


author: MtxRdoce: :

text:
    W. H. Martin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34138.
    Promulgated November 13, 1931.

      Ralph S. Scott, Esq., and Edwin M. Neiss, Esq., for the respondent.
   OPINION.

MtxRdoce: :

The correct decision of the present case does not depend upon how the Commissioner, in determining the tax liability of the lessee, may have or should have treated the expenditure of $10,209.31 for the improvements. The petitioner seeks to avoid paying the amount of the deficiency resulting from including the $10,209.34 in.income by contending that there was no agreement between the lessor and the lessee in regard to these improvements. He concedes that article 48 of Regulations 62 and a number of decided cases are correct interpretations of the law, but argues that this is so because they are predicated upon an agreement of the lessee to improve the leased-premises. This argument is certainly not persuasive where, as here, the petitioner owned all but 2 per cent of the stock of the lessee and, with his wife, was the lessor. In such a situation the petitioner and his wife were free to do as they pleased so far as any leasing and improving of this building by the corporation were concerned. We do not know why they proceeded without a lease providing for a definite term and for improvements, but the fact that they did is no reason why they should escape tax when improvements were made by the corporation. They voluntarily used a lease having no definite term; consequently, they could have refused to renew it for the next year and thus have repossessed themselves of the building. The improvements became a part of the building when made and were income to the owners at that time. Cf. Miller v. Gearin, 258 Fed. 225; certiorari denied, 250 U. S. 667; Cryan v. Wardell, 263 Fed. 248. Even if this income could be reported ratably over the term of the lease, here the only term we know of is the one year, so we can not say that the Commissioner erred in this connection. Henry I. Brown, 4 B. T. A. 1129; Shelby D. Scott, 9 B. T. A. 1219; Joseph L. B. Alexander, 13 B. T. A. 1169; James M. Butler, 19 B. T. A. 718.

Reviewed by the Board.

Judgment will be entered under Rule 50.

McMahon concurs in the result only.

Matthews dissents.


author: TRAmmel :

text:
    Ethel P. Young, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 38868.
    Promulgated November 16, 1931.

      A. Oalder Maolcay, Esq., and Thomas B. Dem-psey, Esq., for the petitioner.

      B. M. Goon, Esq., for the respondent.
   OPINION.

TRAmmel :

The decision of the one issue involved in this proceeding is controlled by Angie E. Reid, 22 B. T. A. 1150, wherein we held that under the Revenue Act of 1921, which governs in the instant case, the donee of an interest in property known to be oil béaring is entitled to an allowance for depletion based upon the fair market value of the property interest at the date of acquisition.

The respondent’s determination is erroneous and this petitioner is entitled to a deduction, from her gross income for 1923, of depletion computed in accordance with this decision and the findings of fact hereinbefore set forth.

Judgment will be entered u/nder Rule SO.


author: Seawall:

text:
    Staples Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34490.
    Promulgated November 16, 1931.

      John B. Sullivan, Jr., Esq., and Howard V. Foullee, Esq., for the petitioner.

      J. M. Leinenlcugel, Esq., and T. G. Histon, Esq., for the respondent.
   OPINION.

Seawall:

It is stipulated that in the instant case the base for depreciation was determined by the Commissioner in accordance with G. C. M. 2826, C. B. VII-1, p. 234, by taking, in the case of each vessel, the depreciated cost of the old vessel which it had replaced, plus the sum paid for the new vessel over and above the amount of the replacement fund. The contention of the petitioner is that the basis should be the entire sum paid for the new vessel, including the full amount of the replacement fund. The fiscal year involved ended March 31, 1923. The applicable law is found in the Revenue Act of 1921, the pertinent provisions of which read as follows:

Sec. 202. (d) (2) "Where property is compulsorily or involuntarily converted into cash or its equivalent in the manner described in paragraph (12) of subdivision (a) of section 214 and paragraph (14) of subdivision (a) of section 234, and the taxpayer proceeds in good faith to expend or set aside the proceeds of such conversion in the form and in the manner therein provided, the property acquired shall, for the purpose of this section, be treated as taking the place of a like proportion of the property converted.
Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
*******
(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the ease of such property acquired before March 1, 1913, this deduction shall be computed upon the basis of its fair market price or value as of March 1, 1913;
(14) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (O) an exercise of the power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacment fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax Acts.

The evidence shows that the petitioner acquired certain vessels as a result of involuntary conversion of other vessels. To replace the vessels originally held, the petitioner expended the funds acquired at the time of the conversion, plus certain additional amounts, and now contends that the actual cost of the newly acquired vessels should be used as the depreciation base in accordance with the decision in National Grocer Co., 1 B. T. A. 688.

There was a question of invested capital involved in the case of National Grocer Co., supra, which distinguishes it .from the instant case, and the decision in the former case should not be considered as controlling in the latter.

The petitioner insists that section 202 of the 1921 Revenue Act has no application in the instant case; that it deals solely with the matter of gain derived or loss sustained from sales or other disposition of property and has nothing to do with depreciation as considered in the instant case. It is true section 202 (d) (2) of said act provides specifically only for the basis in determining gain or loss, but the provisions of that section may nevertheless be considered in determining what is a reasonable allowance for depreciation, section 234 (a) (I) of said act providing that in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions “ a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.”

In its statement of the changes made in the Revenue Act of 1921 by H. R. 6715 and the reasons therefor the Committee on Finance of the United States Senate said, in regard to section 204 (c) of the Revenue Act of 1924:

(9) Tbe first part of subdivision (c) of tibe bill, that is, the part preceding an exception, does not correspond to any provision of the existing law, but is the same as the interpretation placed upon the existing law 6y the Department. It provides that the basis of computing depreciation and depletion shall be the same as the basis of computing gain or loss from the sale of property, and represents what is obviously the correct rule, since the theory in setting a basis for depreciation and depletion is the same as in setting one for determining gain or loss from the sale; that is, to insure a taxpayer a return of his capital free from tax. [Italics supplied.]

The question we are considering, it is true, arises under the Revenue Act of 1921 and not under the 1924 Act. The statement made by the Finance Committee, however, and the subsequent enactment by Congress of section 204 (c) of the 1924 Act, were a recognition of the correctness and justice of the interpretation placed upon the then existing law by the Treasury Department and such should not be lightly regarded. Ordinarily, the basis for determining gain or loss is cost less depreciation sustained.

In the instant case, the respondent adopted cost less depreciation to date of conversion on the old vessels as the proper basis for depreciation purposes. To said amount was added such sums as were paid for the new vessels over and above the replacement fund. This, in our opinion, is correct and in accord with the principle of the decision in United States v. Ludey, 274 U. S. 295.

From the record it seems evident that, had there been no conversion, no issue as to depreciation would have arisen. The petitioner having claimed the benefits of section 202 (d) (2), on the basis of no gain or loss from the transactions, should not now claim a new cost basis for depreciation. Having been given the full benefits of the statute with respect to depreciation prior to converting its property, which effected no material change in its capital structure except by the addition of new capital, to which credit has been given, the petitioner fails to show any error committed by respondent in his determination of the deficiency asserted.

Judgment will be entered for the respondent.


author: Teammell :

text:
    Reid Ice Cream Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37051.
    Promulgated November 17, 1931.

      D. B. Priest, Esq., for tbe petitioner.

      B. O. Steele, Esq., and Miles J. O'Connor, Esq., for tbe respondent.
   OPINION.

Teammell :

No question is raised by petitioner as to the correctness of the amount of the unpaid income taxes of the Polar Products Company, the only issue raised being as to the existence of a liability on its part as transferee of the assets of that company. Petitioner contends that the contract under which these assets were acquired and the agreement of indemnitj'- given the seller did not place upon it a libility to pay this tax due upon income accruing to the seller from the sale of these assets. It is insisted by petitioner that the debts of the selling corporation which it is obligated to pay are only such debts as arose through the usual and customary operations of the company in transaction of its business. Petitioner further contends that even though the debt in question was one for which it was obligated under its contract, it is a liability under contract and not as a transferee and is not such a liability as is contemplated by section 280 of the Revenue Act of 1926.

In the distribution made by the transferor of the cash consideration received, no part thereof was received by petitioner or its stockholders. It follows that no liability exists on its part for the unpaid debts of the transferor and arising merely from the receipt of the assets by it and distribution of the cash, consideration by the seller. Fostoria Milling & Grain Co., 11 B. T. A. 1401. If it has a liability, it is one specifically assumed and upon this point we do not agree with petitioner’s contention that a liability assumed by contract in acquisition of assets is not a liability as transferee in contemplation of section 280 of the Revenue Act of 1926. We can see no distinction in so far as the liabilities contemplated by that section are concerned, between one attaching to transferred property by reason of the circumstances of the transfer and one attaching by reason of specific agreement as a condition of such transfer. In fact, if petitioner has agreed to pay the income tax for 1925 as one of the considerations for the transfer of the taxpayer’s assets, it has not paid the full consideration until it satisfies such obligation and may not, until suck condition is met, claim immunity from liability as a purchaser for value.

The issue here presented appears to us to turn upon whether this petitioner has in fact assumed a liability for the Polar Products Company income taxes for the calendar year 1925, including such portion of that tax as may have accrued by reason of the receipt by that corporation of income from the sale of its assets.

The determination of this question is by ascertainment of the actual intent of the parties as evidenced by the contract of purchase and sale and the contract of indemnity, considered together, and in the light of the conditions which they were executed to meet. Huyler’s v. Bits Carlton Restaurant & Hotel Co., 1 Fed. (2d) 491; Metropolitan Securities Co. v. Ladd, 173 Fed. 269.

Petitioner’s counsel calls our attention to certain excerpts from these agreements as indicating a limitation upon the liability for debts assumed by petitioner beyond the specific limitation set out in respect of tax liabilities of the Polar Products Company for periods prior to the calendar year 1924, and were we to consider these portions of the contracts alone there would be weight in petitioner’s contention. Plowever, when the two instruments are considered as a whole, we must reach the conclusion that the agreement of the parties as evidenced thereby was that the seller or its stockholders would pay all taxes in respect to transactions prior to the calendar year 1924, and that the purchaser would pay all liabilities, including income taxes, arising out of matters transpiring in the year 1924 and that 'portion of the year 1925 beginning on January 1 and ending on the date the selling corporation ceased to do business, the contract contemplating that this should immediately follow the transfer of the assets and receipt of the consideration, and the record shows that it did so follow, the only additional act of the selling corporation being the distribution to its stockholders of the proceeds of the sale.

It must have been apparent to the parties to this agreement that the seller, before the cessation of business provided for, would be in receipt of the proceeds of the sale and would have to account for any income represented thereby. Petitioner insists that the tax upon such income was not intended to be assumed by it, but under the contract the exception to its general assumption of liability for debts placed upon the selling corporation only responsibility for income taxes arising from transactions prior to the calendar year 1924.

Our conclusion is that under the contract of February 7, 1925, and the agreement of indemnity of February 16, 1925, petitioner assumed the payment of the tax liability here in question and, the taxpayer having ceased business and having no property, that liability is one enforceable by the United States against petitioner. Keller v. Ashford, 133 U. S. 610; Silver King Coalition Mines CVo. v. Silver King C. M. Co., 204 Fed. 166; Dancel v. Goodyear Shoe Machinery Co., 137 Fed. 157; Mobile Shipbuilding Co. v. Federal Bridge & Structural Co., 280 Fed. 292.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: TRAmmell :

text:
    John H. Humbert, Petitioner, v. Commissioner of Internal Revenue, Respondent. Arthur M. Rein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37052, 37053.
    Promulgated November 17, 1931.

      Allen G. Gartner, Esq., and Bernhard Kohlenberg, Esq., for the petitioners.

      B. U. Steele, Esq., and Miles J. O^Gonnor, Esq., for the respondent.
   OPINION.

TRAmmell :

By these appeals petitioners ask redetermination of an asserted liability in the amount of $28,371.34, representing unpaid income tax of the Polar Products Company, Inc., for the calendar year 1925, this liability being determined by respondent for assessment against each individually under section 280 of the Revenue Act of 1926, as representing the several obligation of each as distrib-utees in liquidation of assets of the taxpayer corporation. These appeals were consolidated with the appeal of the Reid Ice Cream Corporation, Docket No. 37051, decided this date and in which this same unpaid tax liability was asserted as a liability of that petitioner. Our findings of fact as set out in that proceeding are here incorporated by reference and need not be repeated. These two petitioners were stockholders of the Polar Products Company. That company in 1925 sold all of its assets to the Reid Ice Cream Corporation for a cash consideration of $337,500, which the seller distributed in liquidation on the following day to its stockholders in proportion to their holdings of common and preferred stock. In this distribution these two petitioners, as stockholders, received cash as follows:

John H. Humbert_$55, 488. 64
Arthur M. Rein_:_ 60, 773. 28

Petitioners do not deny that there is an unpaid income-tax indebtedness of the Polar Products Company for the calendar year 1925 in the sum of $28,371.34. They merely contend that they are not individually liable for such tax, in view of the fact that the transferor corporation in selling its assets prior to liquidation entered into a contract with the purchaser whereby the latter company assumed liability for the former’s debts, including the liability for income taxes for 1925. They contend that, the Reid Ice Cream Corporation being liable for the debt represented by this tax deficiency, they have no liability subject to assessment and collection under section 280 of the Revenue Act of 1926 until the United States has first exhausted its remedies against that company.

Petitioners’ contention calls for no extended discussion. The Polar Products Company distributed all of its assets to its stockholders and has left unpaid income tax due for the calendar year 1925. The fact that it may have contracted with another corporation to pay that liability for it does not relieve it from its liability. The corporation can not divest itself of liability for tax by execution of a contract to which the United States is not a party. These two petitioners received as stockholders on liquidation of the taxpayer corporation cash in excess of the tax due from it for 1925. They are severally liable for the total amount of the unpaid tax in question. Grand Rapids National Bank, 15 B. T. A. 1166.

Reviewed by the Board.

Judgment will be entered in each proceeding for the respondent.


text:
    Summerfield Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33651, 36869, 47462.
    Promulgated November 18, 1931.

      George M. Morris, Esq., and Frederick L. Pearce, Esq., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Seawell:

It is the insistence of the petitioner that the net losses sustained in 1924 and in the period January 1 to March 20, 1925, by the Taylor Furniture Company, prior to affiliation with petitioner, should be allowed as deductions in computing net. income, consolidated, for the affiliated period, March 21. to December 31, 1925.

Section 200 (a) of the Eevenue Acts of 1924 and 1926 provides that the term “ taxable year ” includes, in the case of a return made for a fractional part of a year, the period for which such return is made. See Strain Brothers, Inc., 19 B. T. A. 601; Pennsylvania Electric Steel Casting Co., 20 B. T. A. 602, 605; Corno Mills Co., 21 B. T. A. 712.

Our decision on similar facts in General Box Corporation, 22 B. T. A. 725, is not applicable here, being under the Eevenue Act of 1921, in which the definition of “ taxable year ” is different from such in the 1924 and 1926 Acts and includes no reference to periods of less than twelve months.

Treasury Eegulations 69, promulgated under the Eevenue Act of 1926, in article 634, requires separate returns prior to affiliation and a consolidated return thereafter. See American La Dentelle, Inc., et al., 1 B. T. A. 575; Weber-King Lumber Co., 20 B. T. A. 1011; and article 1523 of Regulations 69.

In view of the revenue law and regulations mentioned, the period from January 1 to March 20, 1925, in the instant proceeding, is one “ taxable year ” and the period from March 21 to December 31, 1925, is another “ taxable year.”

The provisions of the Revenue Act of 1926 in regard to net losses, so far as here pertinent, are in part as follows:

Seo. 206. (b) IE, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “third year”) ⅜ * *.
H< ⅜ ⅜ ⅜ ⅜ ⅜ sp
(e) * * * if for the taxable year 1924 a taxpayer sustained a net loss within the provisions of the Revenue Act of 1924, the amount of such net loss shall be allowed as a deduction in computing net income for the two succeeding taxable years to the same extent and in the same manner as a net loss sustained for one taxable year is, under this Act, allowed as a deduction for the two succeeding taxable years.

With respect to the year 1924, the period from January 1 to March 20, 1925, is the “ succeeding taxable year ” (“ second year ”), and the period from March 21 to December 31, 1925, is the next succeeding taxable year (“ third year ”).

The succession of the taxable years having been thus determined and the net incomes and net losses having been stipulated as indicated in our findings of fact, there remains to be determined merely the method of' application of the net losses to the proper years under the statute and our decisions.

The basic principles of the application of net losses of affiliated companies to other years have been laid-down by the Board in a number of cases. Alabama By-Products Corporation et al., 18 B. T. A. 919; Buckie Printers’ Ink Co., 19 B. T. A. 943; General Box Corporation, supra; Arrow Coal & Ice Co. et al., 22 B. T. A. 1341; Hawley Investment Co. et al., 23 B. T. A. 953; and others.

The principles enunciated by the Board in the foregoing cases have been approved by the Circuit Court of Appeals for the Third Circuit in National Slag Co. v. Commissioner, 47 Fed. (2d) 846, and upon a somewhat analogous issue by the Fourth Circuit in Burnet v. Moore Cotton Mills Co., 49 Fed. (2d) 59.

On November 2, 1931, the Circuit Court of Appeals for the Second Circuit reversed the Board in Ben Ginsburg Co., 19 B. T. A. 81, which was decided on the authority of Alabama By-Products Corporation et al., supra, which latter case is now pending on appeal before the Circuit Court of Appeals for the Fifth Circuit, and the principles enunciated therein have been approved, as heretofore stated, by the Circuit Court of Appeals for the Third Circuit in National Slag Co., supra.

In the instant case, the facts are similar to those in the Ben Ginsburg Co. case, supra, and it, therefore, becomes necessary for the Board to determine whether it will decide the instant case on the authority of the decision of the Circuit Court of Appeals for the Second Circuit in the Ben Ginsburg Co. case, supra, or adhere to the principles enunciated by the Board in Alabama By-Products Corporation et al., supra, and other cases, approved by the Circuit Court of Appeals for the Third Circuit in National Blag Co., supra, and upon a somewhat analogous issue by the Circuit Court of Appeals for the Fourth Circuit in Burnet v. Moore Cotton Mills Co., supra.

As was well said by the United States District Court in Planters’ Oil Co. v. Hopkins, 47 Fed. (2d) 659: “ The question is troublesome. The use that may be made of a loss is not clear.” But in view of the conflicting decisions in the United States Circuit Courts of Appeals on the question in issue and the fact that the case of Alabama ByProducts Corporation et al., supra, which we have followed since deciding the same, is yet undecided by the Circuit Court of Appeals for the Fifth Circuit, we now hold, on the authority, of that case and Arrow Coal & Ice Co., supra; Hawley Investment Co. et al., supra; and National Slag Co. v. Commissioner, supra, that the net losses of the Taylor Furniture Company for the calendar year 1924 and the period January 1 to March 20, 1925, may be carried forward and allowed as deductions in computing the consolidated net income of petitioner and the Taylor Furniture Company for the period March 21 to December 31, 1925.

In Doclet Nos. 33651 and 36869 judgment will be entered for the respondent. In Docket No. PUS®, judgment will be entered under Rule 50.


author: Black :

text:
    William H. Shelmerdine, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32767.
    Promulgated November 18, 1931.

      J. Marvin Haynes, Esq., W. 0. Magathwn Esq., and Horace E. Whitman, G. P. A., for the petitioner.

      A. H. Fast, Esq., and H. D. Thomas, Esq., for the respondent.
   OPINION.

Black :

Upon .the facts which have been detailed in our findings of fact, the petitioner lays down the following propositions:

I.The net loss should be computed solely on the income and deductions of the petitioner.
(a) The fact that in the year of the loss, i. e., 1923, the wife of the petitioner filed her return as a joint return with her husband does not change the method of computation prescribed in Section 204 so as to include her income and deductions in the computation.
(b) The method contended for by the petitioner does not result in a double deduction and is the result called for by the law and the intention of Congress.
II.The proper statutory net loss of the petitioner for 1923 is $93,246.24, computed in accordance with the provisions of Section 2Ó4 (a) of the Revenue Act of 1921.
III.Under the provisions of Sections 206 (f) and (b) of the Revenue Act of 1924 the above net loss of $93,246.24 should be carried forward to 1924.
IY. Under the provisions of Sections 204 (e) and (b) of the Revenue Act of 1926, the amount of the petitioner’s statutory net loss to be carried forward to the year 1925 is $69,940.34.

From these propositions, petitioner in his pleadings and brief raises certain questions, which we will state and rule upon in their numerical order.

1. How shall a net loss be computed where it is sustained solely in the business of the husband when the husband and his wife file a joint return?
(a) Shall it be determined solely from the income and deductions of the taxpayer sustaining the loss, i. e., the husband? or,
(b) Shall it be determined from the income and deductions of both the husband and wife in spite of the fact that the wife had no connection with the business?

The Board has already passed on this question in Samuel G. Adams, 19 B. T. A. 781, and our decision in that case has the effect of answering in the negative petitioner’s question 1 (a) and in the affirmative petitioner’s question 1 (b). We there said:

* * * Certainly, when it is considered that an election to file joint or separate returns gives to a husband and wife the privilege of adopting the method for a given year which is most advantageous to them, they should not be allowed to-use such joint return for the purpose of fixing taxable net income, which may be advantageous to them, and then be allowed to disregard the joint return when it would be less advantageous to determine the “net loss ” on the basis of such joint return. We find no statutory provision that would require such a result. On the contrary, we are of the opinion that when these petitioners elected to file joint. returns they thereby elected to have all determinations of income and losses (for tax purposes) determined on the basis of these joint returns.
What would be the solution where the wife had sustained the loss, or where both the husband and wife had losses, and the joint returns in both instances had been filed in the name of the husband, are not questions now-before us. Suffice it to say that in the situation now presented the individuals now seeking the benefit of the “ net loss ” provisions are the only individuals involved in the joint returns who sustained losses, and the joint returns were filed by them. Under such circumstances we are of the opinion that in determining the “ net loss” which each is permitted to carry forward and use as a deduction in computing net income for the subsequent year on a separate return, such determination must be made on the basis of a joint return which would require the business loss of the husbands to be reduced by the nontaxable income of the respective wives.

The second question raised by petitioner is stated as follows:

2. How shall such net loss be used when carried forward to the second year, in which year the husband and wife again filed a joint return?
(a) Shall the net loss be used in computing the net income of the husband (i. e., the petitioner here) and the wife’s income rendered nontaxable by being offset against the resulting loss? or,
(b) Shall the net loss be offset against the combined income of the husband and wife?

We think the answer to this question has also been given by us in Samuel G. Adams, supra. As we pointed out in that case, when the husband and wife file a single joint return for a given taxable year, all their items of income and deductions are combined on the one single joint return and the resulting net income, if there is any, is taxable as one income. In the instant case, it has been stipulated that for the year 1924 the petitioner and his wife, Susannah E. Shel-merdine, filed a single joint return and that the correct net income of petitioner and his wife for the year 1924, on the basis of a joint return (excluding any deduction for net loss for 1923) was $70,703.09. However, the statute gives petitioner the right to bring forward any net loss incurred in the prior year in his trade or business and use it as a deduction in determining petitioner’s net income for 1924. When effect is given to this statutory provision, it will be found that all of the $70,703.09 income of petitioner and his wife for 1924 is offset by the deduction and petitioner still has some of the net loss for 1923 which he may carry forward into 1925 and use as a deduction in determining his net income for 1925.

Petitioner’s third question is as follows :

3. How shall the amount of loss applicable to the third year (the taxable year here in question) be determined?
(a) Shall the petitioner use the amount of his 1923 net loss less his income for 1924 and apply the balance in computing his 1925 net income? or,
(b) Shall the petitioner use his 1923 net loss, less his income and that of his wife for 1924, and apply the balance in computing his 1925 net income? or,
(c) Does he lose the balance of his 1923 net loss in computing his 1925 net income because he filed a single return rather than a joint return for that year?

We have already answered question 3 (a) in the negative in Samuel G. Adams, supra. The effect of that decision was to say that the income of husband and wife filing a joint return is treated as one consolidated income, and in arriving at that income petitioner’s net loss, for 1923 is used as a deduction against both incomes, instead of deducting such net loss from petitioner’s gross income alone and carrying forward the remainder to use as a deduction in determining petitioner’s net income for 1925.

To the same effect is Kaiwiki Sugar Co., Ltd., 21 B. T. A. 997. Of course, the situation of affiliated corporations combining their incomes and deductions in one consolidated return is not identical with the situation of a husband and wife combining their incomes and deductions in a single joint return, yet we think the situations are so similar as to make cases like Kaiwiki Sugar Co. in point.

To question 3 (b) we answer, yes. That is the method which we consider we have already approved in Samuel G. Adams, supra, and Kaiwiki Sugar Co. The statutory net loss of petitioner in 1923 should be used as a. deduction in computing the consolidated net income of petitioner and his wife in 1924, and the balance of such statutory net loss not used in offsetting income in 1924 should be carried forward to 1925.

To question 3 (c) we answer, no. We must necessarily answer no to this question because we have answered yes to question 3 (b). The answer to question 3 (c) is made necessary by the fact that respondent at the hearing amended his answer so as to allege that, although in his deficiency notice he allowed petitioner a statutory net loss of $25,756.07 brought over from 1923, this was error, because such statutory net loss relates to a year when a single joint return was filed by husband and wife, and that petitioner filed a separate return in 1925, and that none of the statutory net loss can be brought over from a year when a single joint return was filed and used as a deduction in a year when petitioner files a separate return. Respondent moved that the deficiency be increased accordingly.

In Farmers & Merchants Bank, 21 B. T. A. 1383, the Commissioner made the contention that the petitioner was not entitled to deduct its own statutory net loss in 1924, in determining its net income for 1925, because in 1924 it had filed a consolidated return with an affiliated association, whereas in 1925, it had filed a separate return.

We denied the Commissioner’s contention and held that petitioner was entitled to bring forward its own statutory loss incurred in 1924 (none of it having been used to offset the income of its affiliated association because such association had no income) and use it as a deduction in determining petitioner’s net income for 1925.

Following the principles laid down in Samuel G. Adams, supra; Kaiwiki Sugar Co., supra, and Farmers & Merchants Bank, supra, we hold that'petitioner is entitled to bring forward into 1925, and use as a deduction in determining his net income for that year, that part of the statutory net loss of 1923 computed under the rule which we laid down in Samuel G. Adams, supra, which remains after using such statutory net loss as a deduction in determining the net income of petitioner and his wife under the single joint return filed in 1924.

Decision wül be entered under Bule 50.


author: TRAmmell:

text:
    Moline Iron Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 30119.
    Promulgated November 20, 1931.

      Vincent J. Heffeman, Esq., and Theodore Shields, Esq., for the petitioner.

      J. E. Marshall, Esq., and W. S. Delany, Esq., for the respondent.
   OPINION.

TRAmmell:

In the redetermination of the deficiencies due effect will be given the stipulation of the parties with respect to issues 1 and 4 referred to in the preliminary statement. Issues 2, 3, 5 and 0 having been abandoned by the petitioner, the action of the respondent -with respect thereto is affirmed. This leaves as the sole question to be decided whether the petitioner is entitled to have its tax assessed under the provisions of section 328 of the Revenue Acts of 1918 and 1921. In this respect the petitioner contends that invested capital can not be determined because it is impossible to determine the value of assets paid in for stock at the time of the organization of the corporation in 1907, and thus the petitioner comes within section 327 (c). The respondent apparently determined the invested capital by allowing the par value of the stock with adjustment for earned surplus to be considered in the taxable year.

The formula adopted by the petitioner, that is, capital stock and earned surplus, is manifestly not in accordance with the statute which requires that the cash value of tangible property paid in for stock and the cash value of intangibles paid in for stock subject to certain limitations, should be included. If, however, by the method which the Commissioner used he has in fact satisfactorily determined invested capital and that determination, regardless of the formula or method used is not shown to be erroneous and in fact is the same as if the Commissioner had used other and more appropriate terminology in stating how he determined invested capital, and it further appears that he has given the taxpayer the benefit of all invested capital it could under any circumstances be entitled to by the application of section 326, in our opinion, this would not bring the case within section 327 (c).

In 1907 about the time of the organization of the corporation, stock to the extent of $100,000 par value was sold for cash at par. This would indicate that certainly the corporation had no capital or assets at that time which were not capitalized. It seems clear that if the assets had exceeded the par value stock would not have been sold for cash at par at approximately that time, and the fact that stock sold for cash at par would indicate that the value of assets was fairly represented by the par value of the stock. From all the record discloses the sale of this stock for cash was an arm’s-length transaction and represented the actual value of the stock.

It may well be that the petitioner had developed in the course of its long business career prior to 1907 a substantial amount of good will, but this evidently was reflected in the value of the stock which was sold for cash and this sale was at par.

There is evidence that at the time of the organization of the corporation certain patents were acquired. If these patents had materially increased the value of assets, they undoubtedly would have been reflected in the sales price of stock for cash in 1907. It may well be that the Commissioner did actually determine the value of assets paid in for stock in 1907. It is not shown that he did not. He may have considered the stock sales as fixing the values of assets. We think, in the absence of explanation or evidence to the contrary, that it does. Certainly, there is no evidence to show that the invested capital should be greater than that determined by the Commissioner or that any values- have in fact been omitted. We also think that the stock sale to Nutt in 1917 at book value of assets, indicates that the corporation did not have any substantial values in its assets not capitalized. This fact also has application to assets acquired since organization. We do not think that so far as the assets turned in for stock at the time of the organization of the corporation are concerned, any ground is shown to bring this case within section 327 (c).

Another ground assigned for special assessment is that certain employees, two in number, invented, developed and patented a moulding machine. The expenses incident to this invention from 1914 to 1916 were paid by the petitioner and charged to profit and loss and it is now impossible to ascertain the amount of those expenditures. This moulding machine had valuable advantages over other makes of moulding machines. It facilitated the production and reduced the cost thereof. These machines are still in use by the petitioner. The machines were manufactured by the corporation for its own use, but they were also sold to competitors and others who desired them. The petitioner made profits on the sale of these machines in 1919 of approximately $3,500; in 1920 of approximately $16,000; in 1921 of approximately $7,000. These profits from an uncapitalized asset are not shown to have been such a proportionate part of the total income as to amount to an abnormality of income. The expenditures are not shown to have been of such a substantial amount as to constitute an abnormality of capital. Nor do we think that the use of the machine itself created an abnormality. The value of these machines is not shown, or even the approximate value. Competitors and others had the right to purchase the machines if they had seen fit to use them in their own businesses, and having this right, the petitioner by the use thereof would not have an abnormal advantage over its competitors. An abnormal situation, therefore, respecting capital is not shown by the exclusion of this patent from invested capital.

The question is, is the inability to compute the amount of expenditures made by the petitioner in acquiring its patents, including the moulding machine, or the use thereof, sufficient to bring the petitioner within the provisions of section 327 on the ground that invested capital could not be determined. There were only two men working on this machine and the invention and the record does not disclose even approximately the amount of expenditures in connection therewith. If it was only a small amount, relatively speaking, we do not think it would be sufficient. We think that the provisions relating to the inability to determine invested capital must be read in the light of reason and the failure to determine the amount of the cost of some asset, if that cost is small and does not materially affect income or capital, special assessment would not be authorized. For instance, if certain office furniture were made by employees and charged to expense, if the expenditure in any event was a very small amount, the fact that the exact amount could not be determined would not entitle the petitioner to special relief. On the other hand, it is to be observed that the petitioner apparently paid royalties to its employees for the use of the moulding patent. There is no evidence that the patents were assigned to the petitioner or that they belonged to the petitioner by virtue of the payment of labor and material incident to the invention and development thereof. It is to be observed also that the principal sales factor during the taxable years was the ability to make delivery of goods. There was great demand and a small supply. This factor may have entered very largely into the large profits made.

Another factor which is claimed to be the basis for assessing the tax under section 328 is the fact that during the taxable years there was accumulated stock to the extent of from 250 to 350 tons of saddlery hardware that had been considered obsolete in previous jears which had not been included in capital and was sold at good prices. We do not know to what extent any of this hardware was sold during the taxable years nor the price at which sold. It appears that this accumulation of saddlery hardware began to be sold in 1917 on account of war conditions and demands. Since this property began to be sold in the beginning of 1917, we do not know what quantity of it was sold in 1917 or in 1918 prior to the beginning of the fiscal year 1918. It may well be, for all the record discloses, that most of these goods were sold in 1917 when the unusual demand arose or in the fiscal year before us, but we do not know whether the sales were substantial in amount or how these sales compared in income received with the total income received from other sources. We would not be warranted, therefore, in holding that this transaction created an abnormal condition of income or capital.

Another 'ground for special assessment was the contention that the officers’ salaries were low during the taxable years. The compensation of the officers is set out in our findings of fact. We are unable to determine that this factor was such as to abnormally affect the income for these years;

For the foregoing reasons it is our opinion that the evidence does not disclose that the petitioner has brought itself under any of the provisions of section 327 and therefore is not entitled to have its profits tax assessed under the provisions of section 328.

Judgment will he entered under Rule 50.


text:
    H. Milgrim & Bros., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33177.
    Promulgated November 20, 1931.

      Marla Eisner, Esq., and Ferdinand Tannenbaum, Esq., for the petitioner.

      L. W. Greason, Esq., for the respondent.
   OPINION.

Trammell:

On the jurisdictional question, the Commissioner has renewed his motion to dismiss which was heretofore filed and denied by the Board. The deficiency notice sets forth a deficiency for the calendar year 1924. An additional tax is asserted for that year. This is in accordance with the express language of the notice of deficiency. It may well be true that the respondent erred in his determination that a deficiency existed for this period. But when he once determined that there was a deficiency, that fact gives us jurisdiction to determine whether or not it was correctly arrived at. We see no reason to revoke the order previously entered herein and therefore hold that we have jurisdiction of this proceeding.

On the question as to whether Milgrims, Inc., sustained a net loss for the fiscal year ended January 31, 1924, the parties introduced the returns and exhibits attached, the revenue agent’s report, the 30-day letter and notice of deficiency showing how the net loss was determined and its disallowance by the Commissioner. When the returns, together with the exhibits attached, were offered in evidence counsel for the petitioner stated:

It being understood that the figures appearing on the books are the figures which would be testified to by a witness as the figures in this case so far as they are contained in the return introduced.

Counsel for the respondent stated:

That is right; it is conceded that the figures on both of these returns, and the figures and the amounts named on these returns, are in the amounts and as described on the books of account.

If this was not a correct statement of what the parties intended, the statement should have been corrected at the time. We therefore assume that the items designated on the books are to be taken as truly represented and stated. The books of account of Milgrims, Inc., as reported in its income-tax return, showed alleged net loss of $16,291.82 for the fiscal year ended January 31, 1924. In determining this amount the exihibits attached to the return indicate that there was deducted from its gross income organization expenses in the amount of $16,440.45. This was included in the itemized list of expense accounts attached to the return aggregating $181,616.56, mailing the total deduction claimed $211,535.58, which amount, deducted from the gross income reported of $195,243.76, made the net loss which was claimed of $16,291.82. The organization expense is not an allowable deduction. See First National Bank of St. Louis, 3 B. T. A. 807; Emerson Electric Manufacturing Co., 3 B. T. A. 932; Weber-Bunke-Lange Coal Co., 11 B. T. A. 503; Guarantee Bond & Mortgage Co., 14 B. T. A. 1015; affirmed by the Circuit Court of Appeals for the Sixth Circuit, 44 Fed. (2d) 297; Harrisburg Hospital, Inc., 15 B. T. A. 1014. The Commissioner disallowed in the notice of deficiency this item of organization expense and the dis-allowance is presumptively correct. When this amount is taken from the deductible items there would be a net income for that period of $148.63 instead of a net loss. Therefore, there is no net loss for the period ended January 31, 1924, to be carried forward.

With respect to the determination of the consolidated net income for the period ended December 31, 1924, the respondent in his notice of deficiency reduced a claimed loss of Milgrims, Inc., of $28,337.10 by the amount of $2,400.14 to arrive at the consolidated net income of the two companies for said 11-month period.

The Commissioner reduced the loss of $28,337.10 by the amount of $2,400.14 upon the theory that the latter amount represents the proportionate part of the total loss for 12 months ended December 31, 1924, a period of nonaffiliation. In this we think the respondent was in error. The net loss sustained for the nonaffiliated period may be carried forward, and deducted in computing net income for the succeeding year. Alabama By-Products co., 18 B. T. A. 919; National Slag co. v. commissioner, 47 Fed. (2d) 846; Commissioner v. Pittsburgh Gasoline Co., C. C. A., 3d Cir., July 15, 1931, affirming our decision in 21 B. T. A. 297. The respondent in Ms brief does not now contend otherwise, but says that in the taxable period the loss sustained should be reduced by substantially the same amount on the ground that the petitioner in its return deducted certain items as expense which were properly capital expenditures. In so far as this period is concerned, this is a new issue not heretofore presented. If the respondent had desired to raise this issue, he should have done so by proper pleadings.

This is a different problem from that presented with respect to the net loss for the preceding period, in that for that period there was the question whether there was a net loss as claimed. Here the respondent determined the loss in the amount of $28,337.10, but reduced it by a proportionate part thereof which was sustained in the period of nonaffiliation, that is, for the month of January, 1924. If the amount of the loss was incorrect, the respondent should have so claimed in proper pleadings. On this issue we reverse the action of the respondent.

Judgment will be entered under Rule 50.