author: Smith :

text:
    Iver J. Boyum, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11190.
    Promulgated August 15, 1927.

      J. B. Harlaeher, Esq., for the respondent.
   Smith :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1921 in the amount of $380.62. The point in issue is whether the petitioner should be required to account for $3,000 bonus paid to him in January, 1921, as of the year 1920, or as of the year' 1921.

FINDINGS OF FACT.

The petitioner is an employe of the Fergus Falls Woolen Mill, Fergus Falls, Minn. He was employed at a salary of $3,600 a year. On January 6, 1921, the board of directors of the woolen mill voted him a bonus of $3,000 for the year 1920. He returned this as income of the year 1920. The respondent has excluded it from the income of 1920 and included it in*the petitioner’s income for the year' 1921. The petitioner kept his books and made his returns on the cash receipts and disbursements basis.

Judgment will he entered for the respondent.

Considered by Littleton.


source: Caselaw Access Project

license: Public Domain

text:
    Max Sarnoff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10674.
    Promulgated August 15, 1927.

      D. D. Shepard, Esq., for the respondent.
   Smith :

This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1924 in the amount of $2,703.40 arising from the disallowance by the respondent of a deduction from gross income of $1,000 for contributions and $25,600 representing a loss sustained during the calendar year 1923. At the hearing of the proceeding on March 17, 1927, at which the petitioner did not appear in person or by counsel, the respondent moved to increase the deficiency for the purpose of correcting a mathematical error shown on the face of the return, the total deductions enumerated on the return amounting to $27,340, whereas the petitioner totaled them as $28,340. This claim for an increased deficiency was made in accordance with section 274(e) of the Revenue Act of 1926. The respondent also acknowledged that $650 of the $1,000 claimed by the petitioner as a deduction from gross income on account of contributions to charitable and religious organizations was deductible from gross income. The allowable deductions from gross income were:

Taxes paid_ $740
Contributions_ 650
Total_1,390

Upon the evidence of record the claim for the deduction of $25,600 loss sustained for the year 1923, and $350 of the amount claimed for contributions, is disallowed.

Judgment xoill he entered on 15 days' notice, under Buie 50.

Considered by Littleton.


author: SteRNhagen :

text:
    Emily A. Lynes, Petitioner, v. Commissioner of Internal Revenue, Respondent. Samuel Lynes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7089, 7090.
    Promulgated August 15, 1927.

      Louis Goldschmidt, Esq., fqr the petitioners.

      Donald D. Shepard, Esq., for the respondent.
   SteRNhagen :

These proceedings were duly consolidated for hearing and decision. They involve deficiencies for the year 1920 of $299.22 in the case of Emily A. Lynes, and $648.'T2 in the case of Samuel Lynes, arising from the inclusion by respondent in gross income of alleged profits on the sale of certain lots. The only issue is the value of the property on March 1, 1913.

findings of fact.

The petitioners, in June, 1920, sold for $26,000 six lots with houses on them, situated on Lynes Place, Norwalk, Conn., which they had acquired by their mother’s death before March 1, 1913. They each owned an undivided half interest. The fair market value of this property on March 1, 1913, was $25,000, which was more than its value when acquired by petitioners. They realized a taxable gain of $1,000 for both or $500 for each.

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

Considered by ARündell and Milliken.


author: Maequette:

text:
    Daniel Brothers Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10840.
    Promulgated August 20, 1927.
    1. Where property is acquired prior to March 1, 1918, and sold in 1919 for an amount greater than cost, but less than the March 1,1913, value, there is neither a gain nor a loss under the provisions of the Revenue Act of 1918.
    2. Where property is purchased on a deferred payment plan and interest is not provided for in the contract, no part of the deferred payments are deductible from gross income as interest.

      Harold Hirsch, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income and profits taxes for the fiscal years ended August 31, 1920, and August 31,1921, in the amounts of $25,647.64 and $3,028.14.
    FINDINGS OF FACT.
    The petitioner is and was during the years 1912 to 1921, inclusive, a Georgia corporation with its principal office and place of business at Atlanta, Ga., engaged in the business of buying and selling real estate. In the year 1912 the petitioner purchased the real estate at 129-131-133 West Peachtree Street, and the real estate at 416 Peachtree Street, Atlanta, Ga., at a cost of $94,377.15. At about the same time it purchased the real estate at 127 West Peachtree Street and the real estate at 410 Peachtree Street. These parcels formed a continuous tract of land fronting 155 feet on Peachtree Street and extending 573 feet to West Peachtree Street, on which the frontage was 147 feet.
    In the year 1912 and subsequent to the time it acquired the real estate described, the petitioner opened, graded, and paved a street 30 feet wide, running through said real estate from Peachtree Street to West Peachtree Street, which it named Grant Place. The real estate was also graded and subdivided into lots for resale, and sewers and gas mains were installed and other improvements made.
    During the fiscal year ending August 31, 1920, the petitioner sold the real estate hereinbefore described at 129-131-133 West Peachtree Street, and 416 Peachtree Street, for $150,000. The respondent determined that the depreciated cost of the property at the date of sale was $91,362.15; that the sale price was $149,000, and that the petitioner realized a profit of $57,637.85. The depreciated cost of the property was in fact $93,337.15. The fair market value of the property on March 1,1913, was at least $160,000.

      On June 1, 1920, the petitioner entered into a written contract with Mrs. Josephine I. Richardson, to purchase from her the real estate at 45 Peachtree Street, Atlanta, and at the same time she executed a deed to the property which was placed in escrow to be delivered to the petitioner upon the performance by it of its obligations under the contract. The terms of the contract were that the petitioner should pay to Mrs. Richardson $3,000 per month for a period of 144 months, with the privilege of paying the entire amount under the contract at any time after six years from the date thereof, in which event it would be allowed “ six (6%) per cent for the actual time represented by the prepayment of the then unpaid payments.” The contract also provided that if the petitioner failed to make any of such monthly payments of $3,000 and should remain in default of such payment for 30 days after receiving notice thereof from Mrs. Richardson, the petitioner’s interest in the property should be forfeited and that Mrs. Richardson would refund to the petitioner $500 of each monthly payment theretofore made and would retain $2,500 of each monthly payment, which would be considered as rent for the property.
    During the fiscal years ending August 31, 1920, and August 31, 1921, the monthly payments provided by the contract were made by the petitioner. On its books of account the petitioner charged $2,500 of each monthly payment to expense as rental for the property, and set up $500 of each payment as an asset. The charge to expense was disallowed by the respondent. The record does not disclose whether the amounts so charged to expense were deducted in computing the petitioner’s net income for the fiscal years involved.
   OPINION.

Maequette:

Several errors on the part of the respondent in determining the deficiencies involved herein are' alleged in the petition, but only two of them were pressed at the hearing, the others being-abandoned by the petitioner. The first issue is whether the petitioner realized any profit, and if so what amount, upon the sale in the fiscal year ended August 31, 1920, of the property at 129-131-133 West Peachtree Street, and 416 Peachtree Street. The parties are in accord as to the sale price of the property and its depreciated cost'as of the date of sale, but it is contended by the petitioner that the value of the property on March 1, 1913, was in excess of cost and should be used as a basis for determining gain or loss from the sale. The petitioner claims a March 1, 1913, value of from $163,650 to $169,200.

In support of its contention as to the March 1, 1913, value of the property under consideration the petitioner introduced a number of real estate operators and brokers, several of whom were members of the appraisal committee of the Atlanta Real Estate Board, and were familiar with the property and other property in the vicinity, and who had many years of experience in buying and selling and appraising real estate in Atlanta. Their testimony is at length, and we will not attempt to set it forth in detail here. It is, however, sufficient to satisfy us that after the petitioner had acquired the several parcels of real estate set forth in the findings of fact and had subdivided and improved them, the parcel in question had a fair market value of at least $160,000 on March 1, 1913, and we so hold. It is not necessary for us to determine the exact value on that date for the reason that since the sale price was in excess of cost but less than the March 1, 1913, value, the petitioner sustained neither a taxable gain nor a deductible loss under the Revenue Act of 1918. Goodrich v. Edwards, 255 U. S. 527; United States v. Flannery, 268 U. S. 98; McCaughn v. Ludington, 268 U. S. 106; Appeal of River and Rail Storage Co., 1 B. T. A. 1098.

The petitioner also contends that each of the monthly payments made to Mrs. Richardson on the purchase price of the property at 45 Peachtree Street, should be considered as including interest and that in computing its net income for the fiscal years ended August 31, 1920, and August 31, 1921, it should be allowed to. deduct as interest so paid the amounts of $4,567.34 and $17,590.94, respectively. The respondent has treated the entire amount of each monthly payment as a capital expenditure.

The same question here presented was considered by this Board in Appeal of Marsh & Marsh, Inc., 5 B. T. A. 902, and Appeal of Anderson & Co., 6 B. T. A. 713, in which it was held that where sales are made on the deferred payment plan, interest not being provided for in the contract of sale, no part of the deferred payment will be considered as interest. But the petitioner contends that the contract between it and Mrs. Richardson, providing that if the petitioner should, at the end of six years, exercise its option to pay the entire amount due under the contract, it would be allowed “ six (6%) per cent for the actual time represented by the prepayment of the then unpaid payments,” shows that the deferred payments were intended to include interest.

We can not, however, agree with this contention. We think that the decisions in the cases above cited are controlling here and we therefore hold that no part of the monthly payments included herein should be considered as interest. See also Appeal of Carl Lang, 3 B. T. A. 417.

Order of redetermination will be entered on 15 days’ notice, wader Rule 50.

Considered by Phillips, Milliken, and Van Fossan.


author: Maequette :

text:
    H. K. Gardiner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5218.
    Promulgated August 20, 1927.
    1. Deduction for obsolescence of shoe lasts and patterns disallowed.
    2. The amount of a debt ascertained to be worthless and charged oil within the taxable year held, properly deductible from gross income of that year.

      Charles E. DiPesa, O. P. A., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $6,036.46. The petitioner alleges that the respondent erred in disallowing deductions from gross income claimed on account of obsolescence of shoe lasts and patterns, bad debts, and reserves for discounts.
    FINDINGS OF FACT.
    The petitioner is a corporation organized in the year 1919, and it is and has been since its organization engaged in manufacturing shoes. Its principal place of business is now at Pittsfield, N. H.
    In the year 1919 the petitioner purchased the shoe-manufacturing business of Lyman O. Berry, an individual, paying therefor the amount of $75,000. Among the assets of the business so acquired were lasts and patterns for making shoes. Some of these lasts and patterns were found to be defective and about two truck loads were discarded in the year 1919 as obsolete and worthless. The record does not disclose the cost to the petitioner of the lasts and patterns acquired from Lyman O. Berry, or the cost of those discarded.
    In the year 1919 the firm of O’Connor Brothers was indebted to the petitioner in the amount of $4,512.36. At the end of that year O’Connor Brothers was in bad shape financially and was unable to pay their debts and the petitioner charged off the account as worthless. O’Connor Brothers failed in the year 1920 and the petitioner realized a negligible amount on its account.
    The petitioner in its income and profits-tax return for the year 1919 deducted the amount of $4,860.19 on account of lasts and patterns discarded as worthless or obsolete in that year; the amount of $5,663.65 on account of debts claimed to have been worthless and charged off in that year, and the amout of $5,785.96 as a reserve for discounts. The respondent disallowed the deductions.
   OPINION.

Maequette :

The first question presented by the record in this proceeding is whether the petitioner is entitled to any deduction in computing its net income for the year 1919 on account of the lasts and patterns discarded by it in that year as obsolete and worthless. All the material allegations of the petition are denied by the respondent in his answer, and the only evidence presented was the testimony of H. K. Gardiner, organizer and former owner of the petitioner, contained in a deposition. His testimony is to the effect that the petitioner purchased the assets of a going business; that among these assets were lasts and patterns which were found to be defective and worthless, and that “ two double horse truck loads ” were discarded in the year 1919 as obsolete or worthless. Some of the lasts and patterns included in the assets purchased were not discarded, however, but were retained and used in 1920. There is no testimony or other evidence to show what the petitioner paid for the lasts and patterns in question. When they were discarded Gardiner “ estimated what they cost me,” and the estimated amount was claimed as a deduction. The petitioner no doubt discarded certain lasts and patterns and is entitled to deduct their cost from gross income for the year in which they were discarded if the cost can be ascertained, but since there is no evidence as to their cost we can only affirm the action of the respondent in disallowing the deduction claimed.

With reference to the deduction to which the petitioner alleges it is entitled on account of certain debts charged off as worthless in the year 1919, the testimony shows that the firm of O’Connor Brothers was indebted to the petitioner at the close of the year 1919; that the firm was in bad financial condition, and that the debt was charged off at that time. Gardiner testified that O’Connor Brothers had practically failed in the year 1919 and could not pay its bills; that the debt due the petitioner was ascertained to be worthless and was charged off by it at the end of 1919; that O’Connor Brothers did fail in 1920, and that the petitioner in that year was paid a small amount on its account. The evidence is sufficient to show that the debt was ascertained to be worthless and was charged off within the taxable year. We are of the opinion that the petitioner had reasonable grounds for such action, and that it is properly allowable as a deduction from gross income in that year.

No evidence was introduced as to the other error alleged by the petitioner.

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

Considered by Phillips, Millikun, and Van Fossan.


author: Milliiien:

text:
    Nabors Oil & Gas Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7962.
    Promulgated August 22, 1927.
    Actual cash value oí mineral rights paid in for capital stock in 1911 determined for invested capital purposes.

      E. W. B. Ewing, Esq., for the petitioner.

      Granmille S. Borden, Esq., for the respondent.
    This proceeding results from the determination of deficiencies in income and profits taxes for the years 1918 to 1921, inclusive, aggregating $6,922.08. Petitioner avers error was committed in the determination of invested capital with reference to the value of mineral rights paid in for capital stock of the petitioner in 1911, claiming the value when paid in was $183,500 instead of $36,705, the amount allowed by respondent.
    findings of fact.
    The petitioner is a Louisiana corporation with its principal office at Mansfield, and was incorporated in June, 1911, with an authorized capital stock of $200,000 par value. During the year 1904 the Louisiana Coal & Lumber Co. acquired the mineral rights to 7,215 acres of land located about 7 miles from Mansfield, La., and about 40 miles from Shreveport, La., issuing therefor its capital stock upon a valuation of $50 per acre for the lands. This valuation was based on information and advice received from a mining engineer who investigated the value of the property for the company. Lignite outcropped on the property in ledges of water courses showing strata 6 to Q1/^ feet thick. There was more than one horizontal stratum and the deposits were estimated to run about 7,100 tons per acre. The entire acreage, however, was not underlaid with lignite. An entry was made in 1904 in a horizontal stratum of lignite, 7 feet thick, and an entrance about 4feet wide was extended horizontally 75 feet. Several carloads of lignite were sold at $5 per ton, which yielded a profit of about $1 per ton. Sales were made in 1904 to the president of a college in Mansfield, La., and one carload was given to the Kansas City Southern R. R. The lignite was of high quality.
    In 1909 the Louisiana Coal & Lumber Co. sold to a trustee, who was acting for its stockholders, the Nabors family, and S. Gr. Semple, all of its mineral rights upon the 7,215 acres of land for a cash consideration sufficient to enable it to discharge all of its liabilities, amounting to about $900, and thereafter it dissolved.
    The property had given indications of gas and oil through leakages and seepages for many years, but it was in March, 1911, that the drilling of wells was started so that in April, 1911, a producing gas well was bro'ught in at a depth of 840 feet, by a firm of drillers operating under a lease providing to the lessors a royalty of one-eighth of the oil produced and a payment of $200 for each producing gas well. Immediately after the first producing gas well came in the mineral rights rose sharply in value. Four producing gas wells had been drilled prior to August, 1911, when the petitioner acquired the mineral rights. The gas wells w-ere capped and their flow diverted into the gas supply line leading to Mansfield, La.
    Natural gas was preferred over lignite by the consumers where-ever available and after discovery of gas under the lands no attempt was made to mine the lignite.
    The petitioner was organized in 1911, and issued in that year $183,500 par value of its capital stock, including 47'shares turned over to an attorney for professional services in connection with the organization of the petitioner, 4 shares turned over to M. A. McHenry in recognition of cash he had contributed to the Louisiana Coal & Lumber Co., and capital stock issued to members of the Nabors family for the mineral rights to the 7,215 acres of land which they acquired from the Louisiana Coal & Lumber Co. The mineral rights were set up on the petitioner’s books by entries in the cash book in August, 1911, debiting “ Mineral Eights Account ” $183,500 — ■ “Minerals taken in payment of stock subscribed,” and crediting “ Capital Stock Account ” $183,500 — ■“ Stock which was Subscribed and paid for in mineral rights on lands.”
    The mineral rights to the 7,215 acres of land had an actual cash value when paid in for capital stock of at least $25 per acre.
    Discovery oil wells were brought in early in 1913.
    One share of. capital stock, par value $100, was issued in 1914 for $75 cash and the mineral rights upon one acre of land.

      On November 10, 1919, mineral rights to 240 acres of the land acquired in 1911 for capital stock were sold to the Grand Bayou Planting Co. at a price of. $25 per acre in exchange for $6,000 par value of the petitioner’s capital stock and the capital stock thus acquired was canceled.
    The excess-profits taxes for 1918, 1919, and 1920 were computed, by the respondent, under section 802 of the Eevenue Act of 1918.
   OPINION.

Milliiien:

The issue here presented is solely a question of fact, and relates to the actual cash value for invested capital purposes of certain mineral rights when paid in to petitioner for capital stock in 1911. The mineral rights were set up on the books of petitioner when acquired at a valuation amounting to $183,500, which was the par value of all of the capital stock of petitioner issued in 1911. The respondent in revising the balance sheets of the petitioner prior to December 31, 1919, has shown a value for the mineral rights of $36,705, which he calls “cost” and he sets up, as a separate item, the remainder of the book value as “ appreciation.” It developed at the hearing of this cause that neither of these valuations is correct, for the respondent erred in the number of acres acquired and the petitioner erred through including in the value of the rights an amount paid for personal services in capital stock. No evidence was adduced of the value of the services and that question is not before us.

Eespondent has allowed a value for the mineral rights of $5 per acre, applied to the entire acreage, but he now pleads that such an allowance is excessive, relying upon the failure of the petitioner to define the areas and the reserves comprehended within the total acreage which contained deposits of gas or lignite. Eespondent has offered no evidence thereof.

We find in the situation in 1911, as presented by the record, reason to believe that there attached to all of this acreage a considerable value. Lignite outcropped in the water courses in thick strata, and it had been known for some time that there were surface traces of oil. Shortly before acquisition of the mineral rights by petitioner, the first gas well came in, and the value of the rights increased sharply.

We are not concerned with an exact definition of the extent and location of the mineral deposits, for we are satisfied after a careful consideration of the record that the actual cash value of the mineral rights claimed by the petitioner is supported by the evidence adduced. For invested capital purposes we find that the rights had an actual cash value in 1911 of at least $25 per acre and this value per acre should be applied to 7,215 acres which were acquired in 1911.

Judgment will be entered upon 15 days’ notice, under Bule 50.

Considered by Marquette, Phillips, and VaN FossaN.


author: MilliKEN :

text:
    P. P. Griffin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11546.
    Promulgated August 22, 1927.
    1. Loss resulting from actual and J>ona fide sale of stock allowed.
    2. Claimed loss on sale of stock disallowed for lack of evidence.
    3. Interest paid for a corporation by an individual not allowed as a deduction to the individual.

      George W. Zeigler, Esq., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
    This proceeding results from the determination by the respondent of deficiencies in income tax for the calendar years 1920 and 1921, in the amount of $7,989.10. Two errors are assigned: (1) The respondent erred in his failure to allow losses sustained in the year 1920, resulting from the sale of stock; (2) respondent erred in his failure to allow a deduction for interest paid in the year 1921.
    FINDINGS OF FACT.
    Petitioner resides at Lock Haven, Pa., where he is engaged in the lumber business. Subsequent to March 1, 1913, he acquired 610 shares of the capital stock of the Bee Tree Lumber Co., a West Virginia corporation, paying cash therefor in the amount of $61,000. Between the date of acquiring the stock and the year 1920, the Bee Tree Lumber Co. was not prosperous and became involved financially. Petitioner’s attorney advised him to sell a part of his stock in the year 1920, in order that his books of account would not show as appearing thereon an asset of questionable value, and also that he might derive the benefit of the sale in being able to claim a deduction for the loss in his income-tax return for the year 1920. Petitioner sold the 610 shares of stock of the Bee Tree Lumber Co. to his brother and secretary in the month of November, 1920, for the sum of $6,100. No agreement or understanding existed between petitioner and the purchasers of the stock, concerning the repurchase of the same. Checks in payment of the stock in amounts of $6,100 were received by petitioner in the year 1920. During the year 1921 petitioner repurchased the stock.
    Petitioner acquired, prior to 1920, shares of stock in the Basic Refractories Co. located at Natural Bridge, N. T. He owned, in the year 1920, between 68 and 78 shares of the par value of $100 per share, and in the year 1920 or 1921, sold the same, either to his brother or secretary, for $10 per share.
    During the year 1920 and 1921, the Bee Tree Lumber Co. was in need of additional funds with which to carry on its business, and petitioner agreed to endorse the promissory notes of the corporation to enable it to secure the desired funds. In either the year 1920 or 1921, petitioner paid interest due on the promissory notes of the corporation, in the amount of $6,278.44.
   OPINION.

MilliKEN :

The respondent disallowed the losses claimed to have resulted from the sale of the stock of the Bee Tree Lumber Co. and the Basic Refractories Co., for the reason that he did not consider the sales to be actual and bona fide. Petitioner testified that he made an actual sale of his shares of stock in the Bee Tree Lumber Co. to his brother and secretary, in the year 1920, that title to the stock passed to the purchasers, and payment was received from them in the year 1920 for the stock so sold. He also testified that no understanding or agreement existed between the seller and the buyer concerning the repurchase of the stock. On the evidence presented, the sale of the stock of the Bee Tree Lumber Co. was an actual and a bona fide sale, and petitioner is entitled to the loss claimed for the year 1920. We are unable, from the evidence, to determine the cost, date of sale, or amount of stock sold, relative to the loss claimed to have resulted from the sale of the capital stock of the Basic Refractories Co., and accordingly, the determination of the respondent is approved.

The petitioner seeks to take a deduction of the interest which he paid for the Bee Tree Lumber Co. We are unable to determine, from the evidence, the year of payment, but in any event the deduction claimed merely represents the obligation of the corporation, which petitioner paid for it and against whom he had the right to look for repayment. The respondent did not err in his failure to allow the interest deduction claimed.

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

Considered by Makqtjette, Phillips, and Van Fossan.


author: Van Fossan:

text:
    Peter McCourt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2156.
    Promulgated August 22, 1927.

      Robert D. Charlton, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    Petitioner appeals from the determination by the Commissioner of a deficiency of $665.32 in income taxes for the year 1920. It is alleged that the Commissioner erred in including in petitioner’s taxable income the sum of $6,500 paid to him by the McCourt Amusement & Investment Co.
    FINDINGS OP PACT.
    At the hearing on this proceeding, a stipulation of facts was entered into by the counsel for taxpayer and for the Commissioner in the following form:
    1. That the taxpayer, Peter McCourt, is an individual with his office at the Broadway Theatre, Denver, Colo.
    2. That the deficiency letter (a copy of which is attached to the taxpayer’s petition) was mailed to the taxpayer on January 7, 1925, and subsequently received by him.
    3. That the taxes in controversy are income taxes for the calendar year 1920 and are less than Ten Thousand ($10,000.00) Dollars, to-wit: Six-Hundred Sixty-five and Thirty-two one-hundredths ($065.32) Dollars.
    4. That the taxpayer’s appeal from such determination of the Commissioner of Internal Revenue was properly and duly initiated with this Board within the sixty (60) day period allotted by law.
    5. That the McCourt Amusement and Investment Company, a Colorado corporation, was formed in 1907 for the purpose of operating two Denver theatres with a capital stock of One Hundred Thousand ($100,000.00) Dollars divided into one thousand shares of the par value of One Hundred ($100.00) Dollars each. The consideration for the capital stock was the transfer of the leases on the theatres to the corporation.
    6. That Peter McCourt, the taxpayer herein, is and was at all times hereinafter mentioned the owner of Nine Hundred Ninety-eight (998) shares of the capital stock of the said McCourt Amusement and Investment Company.
    7. That from the year 1911 to the end of 1916, the Company sustained annual operating losses which were made good by the taxpayer. These losses aggregated Seventy-two Thousand Nine Hundred Fifteen and eighty one-hundredths ($72,915.80) Dollars. That for the year 1917, the theatres were operated at a gain of Two Hundred Thirty-nine and five one-hundredths ($239.05) Dollars. In the year 1918, an operating loss of Three Thousand Three Hundred Ninety-five and sixty-nine one-hundredths ($3,395.69) Dollars was sustained. In the years 1919 and 1920 there was a gain of Fifteen Thousand Three Hundred Four and four one-hundredths ($15,304.04) Dollars. Thus a net operating loss for the ten-year period (1931 to 1920) of Sixty Thousand Seven Hundred Sixty-eight and sixty one-hundredths ($60,768.60) Dollars was sustained by the Company.
    8. That in the year 1920 the taxpayer received the following payments from the Company: One Thousand ($1,000.00) Dollars on January 12; Dive Hundred ($500.00) Dollars on February 13; Five Thousand ($5,000.00) Dollars on July 8.
    No other testimony was introduced and the case was submitted on the above findings.
   OPINION.

Van Fossan:

From the stipulated facts set forth above, we are asked to determine whether or not the sum of $6,500, which the taxpayer received from the McCourt Amusement & Investment Co., was taxable income to petitioner. The argument of petitioner is that the payment of said sum was a return of capital in repayment of sums advanced by petitioner in preceding years to make up operating deficits, and therefore nontaxable. The position of Commissioner is that the $6,500 payment constituted a dividend within the meaning of the Revenue Act of 1918 and was taxable as such.

On the submitted facts it is impossible for us to determine either as a matter of law or as a matter of fact, the nature of the payment made to petitioner. The language of the stipulation is simply that “ in the year 1920 taxpayer received the following payments from the Company: * * We have no information from which we may determine whether the payments were made pursuant to a resolution declaring a dividend, or were in repayment of loan, or interest on the loans, or were return of capital advanced. The stipulation does not use the statutory word “ distribution.” We have simply the bare statement that taxpayer received the payments. The word “payment ” may comprehend any number of transactions. It is susceptible of innumerable interpretations. Any attempt to determine from the above facts the legal effect of the payments would be bare speculation.

The argument of counsel contains certain statements, which, if proved as facts, might have given us a basis for a decision on the merits, but argument is not evidence, and facts so stated can not be assumed.

In the absence of facts sufficient to enable us to form a conclusion as to whether or not the Commissioner erred, we have no alternative. The deficiency is approved.

Judgment will he entered for the respondent.

Considered by Maequette, Milliken, and Phillips.


text:
    Fontius Shoe Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9944.
    Promulgated August 22, 1927.
    Depreciation on furniture and fixtures based on unexpired term of lease allowed.

      Arthur H. Laws, Esq., and Richard M. Oreme, O. P. A., for the petitioner.

      A. G. Bouchard, Esq., for the respondent.
    This is an appeal from the determination by the respondent of a deficiency of $1,819.36 in income and profits taxes for the fiscal year ended February 28, 1919. The petitioner alleges that the depreciation allowed by the respondent is insufficient. The petitioner also alleges that the respondent erred in reducing its invested capital for the taxable year, and the respondent admits error in this particular.
    FINDINGS OF FACT.
    The petitioner is, and during the taxable year was, a Colorado corporation with the principal offices in Denver, Colo. The petitioner is and during the taxable year was engaged in the retail shoe business.
    During the taxable year the petitioner occupied a store room under a ten-year lease entered into November 14,1913, for a term beginning January 1,1914, and ending December 31,1923. The lease contained no right of renewal. About seven years prior to the expiration of the term of said lease, the petitioner sought to arrange for an extension thereof and was advised that the lease could not be renewed. At that time the premises occupied by the petitioner had been leased by the owners to a third party for a term to begin at the expiration of petitioner’s lease. About two months before the termination of its lease, the petitioner vacated the premises, which have since been occupied by the new lessee, and the petitioner moved into another store room.
    The furniture and fixtures of the petitioner during the taxable year consisted of shelving, balconies, linoleum, settees and mirrors. The mirrors were attached to large pillars in the building and had been cracked and damaged during the term of the lease. None of the furniture or fixtures could be used by petitioner after moving to its new store room, except some of the shelving, which have been used in its basement department. The petitioner has been unable to sell any of the old furniture and fixtures, although it has offered them for sale for several years.

      The admitted depreciated cost of the furniture and fixtures as at March 1, 1918, -the beginning of the taxable year, was $19,037.55. The value of the furniture and fixture as at the termination of its lease was $100. The unexpired term of the lease was five years and ten months. The petitioner knew at, and before, the beginning of the taxable year that its lease would not be renewed.
   OPINION.

Van Fossan:

Petitioner is entitled to an allowance for depreciation based on the depreciated cost of furniture and fixtures above found, less salvage value, and prorated over the remaining term of the lease. See Appeal of H. Citrin, 2 B. T. A. 626; Appeal of Kunkel & Co., 3 B. T. A. 133.

Judgment will be entered on IS days’ notice, under Buie SO.

Considered by Maiíqtjltte, Milliken, and Phillips.


text:
    Sidney W. Sinsheimer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11068.
    Promulgated August 22, 1927.
    Loss sustained on sale of a residence property allowed.

      B. H. Hart, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    This is an appeal from the determination by respondent of a deficiency of $1,549.48 in income tax for the year 1919. It is alleged that respondent erred in disallowing a deduction from gross income of $9,418.57, the loss sustained by petitioner upon the sale of a residence and adjoining building lots.
    findings op pact.
    The petitioner is an individual, a citizen of the United States, and during the years 1917, 1918, and 1919 was a resident of Denver. Colo.
    In 1917 petitioner purchased a parcel of unimproved land 150 by 290 feet, comprising twelve building lots in that section of Denver known as Country Club Place. This block was the edge block of a fairly well developed district, but at the time of the purchases by petitioner there was only one house on this particular block. He purchased the land as an investment, with the intention and expectation of reselling at a profit, and did not then expect to build on it. He was advised by real estate brokers with whom he consulted that it was a good speculation, and that the city would develop in the direction of this property. * Land values, however, did not increase as rapidly as he had anticipated, and he decided that improved property would be more attractive. Accordingly, some months later he began construction of a house on a part of the land, expecting to supervise the work himself. His duties with the Holly Sugar Corporation, of which he was vice president and general manager, which took him out of the city about half of his time, and as a member of the Sugar Distributing Committee of the United States Food Administration, prevented his supervising the construction of the house to the extent he had expected, with the result that it cost more than he had anticipated.
    Ground was broken for the house on January 18, 1918, the house and lawn together covering three or four lots. The construction of the house was partly completed, i. e., it was equipped against the elements, in October, 1918, but practically none of the interior work, decorating, etc., was finished nor was it entirely completed at any time during petitioner’s ownership. Certain features were incorporated in the construction of the house that would have been unnecessary had petitioner built for his own occupancy. It was larger than he needed; the electric light wiring was duplicated to permit of central or side lighting; the plumbing was so installed that the laundry might be placed either on the first floor or in the basement; some of the rooms and halls were so arranged that they might be used as part of the house proper or set apart as servants’ quarters; and the first-floor windows were cut to the floor and then boarded up so that French windows might be installed if desired.
    The house was exceptionally well built and readily adaptable to the tastes of any owner. The whole parcel of land was at no time subdivided into building lots. Petitioner constructed his house upon a small portion thereof so that the remainder of the parcel could be divided and sold independently of the improved portion. The balance of the property was not improved during petitioner’s ownership.
    In 1917 petitioner had been married for thirteen years and was then living with his wife. He had no children except one adopted son, aged five years. At the time he purchased this property domestic difficulties had arisen between him and his wife, who was then threatening to seek a divorce. She objected to his building the house and continued to object strenuously throughout the eight-month period of its construction, all the while continuing her threats of divorce. Before and during construction of the house she consulted a lawyer relative to a divorce.

      When construction of the house was sufficiently advanced to be habitable, petitioner moved into it, installing only such furnishings as he required. Later, about the 22d or 25th of October, 1918, his wife moved in and remained until some time in December, when she left. In the spring of 1919 she returned and lived in the house for approximately a month, during which time she was again consulting with her lawyer relative to a divorce. With the exception of these two brief periods she at no time occupied the house. Petitioner’s adopted son was with his mother most of this time and subsequently was in a boarding school. In March, 1919, petitioner’s wife directed her attorney to begin action for a divorce and in May, 1919, her bill of complaint was filed. She obtained an interlocutory decree in July, 1919, and a final decree in February, 1920.
    Before the house was completed petitioner advised his real estate broker that he desired to sell the entire parcel as soon as possible and placed it in his hands for sale. The broker secured a purchaser for the house and the entire parcel, but at a price less than the cost. He advised petitioner that there was not a ready market for as good a house as his and that, although he might get more in six months or a year, it would be better to sell at a loss and thereby save the carrying charges. Because of the burden of carrying it, and also because he needed money to settle his divorce matters, petitioner decided to sell the property even at a loss. The entire property was sold in November, 1919, and delivered to the purchaser in December, 1920.
    Petitioner did not construct the house as a residence for himself, his wife or his adopted son. He built with the view of selling at a profit and making the remainder of the parcel more attractive to purchasers.
    The property cost the petitioner $66,225.32 and he sold it for $56,806.75. Petitioner sustained a loss of $9,418.57, not compensated for by insurance or otherwise.
   OPINION.

Van Fossan:

Section 214(a)(5) of the Revenue Act of 1918, so far as material, provides :

That in computing net income there shall be allowed as deductions:
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *

The uncontradicted facts in this appeal convince us that petitioner purchased this parcel of land and .constructed a house on a portion thereof with the intention of selling the same at a profit. It is also clear that petitioner did not build the house as a residence for himself and family or any of them. Under the peculiar circumstances here the fact that he and his wife occupied the house for a brief period does not render the transaction any the less one entered into for profit. See Appeal of Helen Converse Thorpe, 3 B. T. A. 1006. We are of the opinion that the loss suffered by petitioner upon the sale of this property was sustained in a transaction entered into for profit and that he is entitled to deduct such loss in computing his net income for the year 1919. Cf. Tindle v. Heiner, 18 Fed. (2d) 452.

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

Considered by Marquette, Milliken, and Phillips.


author: Van Fossan :

text:
    New Albany Hotel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7969.
    Promulgated August 22, 1927.
    On the evidence of this case special assessment denied.

      Arthur H. Lancs, Esq., and R. M. Crane, C. P. A., for the petitioner.

      W. H. Lafwder, Esq., for the respondent.
    This appeal is taken from the determination by the Commissioner of deficiencies aggregating $9,825.19 in income and excess-profits taxes for the calendar years 1919, 1920, and 1921. It is alleged that the Commissioner erred in failing to compute petitioner’s excess-profits taxes for the taxable years under section 328, pursuant to the provisions of section 327 of the Revenue Acts of 1918 and 1921.
    FINDINGS OF FACT.
    Petitioner is a Colorado corporation, organized on or about June 1, 1908, and is engaged in the operation of a commercial hotel in the City of Denver. At the time of incorporation petitioner issued capital stock in the amount of $144,903.54 for certain assets. The total outstanding capital stock issued upon incorporation was of the par value of $300,000, of which $20,000 was retired by the payment of cash in each of the years 1919, 1920, and 1921, or a total of $60,000 retired during the taxable years. Up to December 31, 1925, $120,000 of the capital stock had been retired. At the time petitioner was organized there was set up on its books an asset of good will in the amount of $144,903.54, and no increase in the value of good will is reflected by the books. In his computation of invested capital the respondent allowed a value for good will to the extent of 25 per cent of the outstanding stock at the beginning of each of the taxable years.
    The gross income (as to which respondent made no adjustment), net income, officers’ salaries, invested capital, excess-profits tax and total tax of petitioner for each of the taxable years, as adjusted and computed by the respondent, are:

    In computing invested capital the respondent excluded therefrom the values claimed by petitioner for a leasehold and good will alleged to have been acquired for stock.
   OPINION.

Van Fossan :

Petitioner seeks the computation of its excess-profits taxes under section 328 of the 1918 and 1921 Revenue Acts, relying upon section 327 (d) of said Acts for the relief sought. It is incumbent upon petitioner to establish that abnormal conditions affecting its capital or income existed before it is entitled to the benefit of these sections.

Upon this record we are unable to find that there existed abnormal conditions affecting petitioner’s capital or income during the taxable years. So far as is disclosed by the evidence the invested capital was normal, officers’ salaries were reasonable, and the net income, while substantial, was not an unusual or abnormal return on the investment. While the exclusion from invested capital of intangible assets, such as leaseholds and good will, might result in abnormalities, it must appear that, such assets have a recognized and ascertained value, which does not appear from the evidence in this case. There is no evidence before us as to what are normal capital, normal income (gross or net), or normal executive salaries for a business of the character engaged in by petitioner.

We must hold, therefore, that petitioner has failed to establish any abnormalities affecting its capital or income that entitle it to the benefit of sections 327 (d) and 328 of the Revenue Acts of 1918 and 1921.

Judgment will be entered for the respondent.

Considered by MaRquette, Milliken, and Phillips.


text:
    Joseph J. Walsh, Executor, Estate of Richard Pinhorn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6388.
    Promulgated August 22, 1927.
    Value of property for estate-tax purposes determined.

      Joseph J. Walsh, Esq., pro se.

      A. G. Bouchard, Esq., for the respondent.
   Van Fossan:

This is an appeal from the determination by the Commissioner of a deficiency of $1,260.49 in estate taxes. It is alleged that the Commissioner erred in increasing the value, as of May 30, 1922, the date of decedent’s death, of a warehouse from $85,000 to $100,000 and of a restaurant business from $10,558.38 to $49,000.

FINDINGS OE FACT.

Petitioner is the duly qualified executor of the estate of Richard Pinhorn, deceased, late of the City and County of Denver, Colorado. Richard Pinhorn died on or about May 30, 1922, leaving a last will and testament which was duly admitted to probate in the County Court of the City and County of Denver on August 7, 1922, and on the same day petitioner, under and by virtue of the terms of said will and orders of said court, duly qualified as executor of the estate. At the time of his death Pinhorn was the owner of a warehouse, known as the Pinhorn Fireproof Warehouse, and a restaurant business, known as the Manhattan Restaurant.

Construction of the warehouse was begun in the winter of 1912 and completed in the spring of 1913. It was built by what is known in the industry as the Turner System, a flat slab type of construction, at a cost of $54,690, including wiring, plumbing, heating, and elevator. The building was originally designed for light storage and was intended for use as a furniture warehouse, but it was never used as such. Shortly after the completion of the building Pinhorn accepted for storage and did store sugar therein in such quantities that the fourth, fifth, and sixth floors cracked and sagged, necessitating. extensive repairs, which were made. The per foot capacity of the building was 150 pounds live load, and at the time the floors cracked they had been loaded to 600 pounds per foot live load. The building is well located for warehouse purposes and is in a growing district of increasing values. By 1922 building costs had so increased that to replace the warehouse would cost much more than the original cost. Prior to January 1, 1921, Pinhorn operated the warehouse and received a net return of $8,566.10 in 1917; $10,556.93 in 1918; $9,668.29 in 1919; $10,611.35 in 1920; and a gross return of $9,800 in 1921.

On March 12, 1920, Pinhorn leased the warehouse to the Carter Pice & Carpenter Paper Co. for a term of twelve years, commencing January 1, 1921, and ending January 1, 1933, at a gross annual rental of $9,800, with the option to renew for a term of ten years at a gross annual rental of $9,000 upon the same terms and conditions, and with the further option to purchase for $120,000. The lessee was obligated to make all ordinary repairs, bear the cost of upkeep and maintenance of the premises, and to make all desired alterations at his own expense, while the lessor was obligated to pay the taxes, water rent, insurance, and to make extraordinary repairs. The expense of the building to the lessor in 1922 was $2,361 for taxes, $214 for water tax, $175 (estimated) annual repairs, and $250 insurance, or a total of $3,000, leaving a net return to the lessor under the first term of the lease of $6,800, and of $6,000 under the second term of the lease (should the lessee exercise his option to renew).

Shortly after the death of Pinhorn the warehouse was appraised for state inheritance-tax purposes by a board of three appraisers, experienced real estate brokers of Denver, one of whom was appointed by the petitioner, the second by the Inheritance Tax Department of Colorado, and the third by the two previously designated appraisers. The property was valued by this board of appraisers at $100,000 as of May 30, 1922, which represented a compromise between the valuation of $115,000 set by the appraiser for the Inheritance Tax Department and the valuation of $85,000 set by the appraiser for the petitioner. The official appraiser for the County Court of the City and County of Denver, valued the property in May, 1922, at $100,000.

The fair value of the Pinhorn Fireproof Warehouse was $100,000 as of May 30,1922, the date of Pinhorn’s death.

The Manhattan Restaurant was started in 1896 by Pinhorn upon one lot, No. 25, known as 1635 Larimer Street, which premises he rented at that time. During the succeeding years he enlarged the business, leasing additional space adjoining the original location and making extensive repairs and additions to the premises at his own expense, so that at the time of his death the restaurant was being operated on four lots, viz, all of lots 24 and 25 and the rear portions of lots 23 and 26, the front portions of the last named lots being occupied by a pawn shop.

Pinhorn conducted the restaurant upon a cash receipts and disbursements basis, -with merely a daily record of receipts and expenditures.

The gross business of the restaurant during the five years preceding Pinhorn’s death was $390,026.60 for 1917, $469,822.25 for 1918, $609,895.80 for 1919, $712,624.81 for 1920, and $677,467.57 for 1921, and the net income during the same period was $4,949.35 for 1917, $14,172.27 for 1918, $10,755.96 for 1919, $27,123.64 for 1920, and $20,069.47 for 1921. After the death of Pinhorn the estate adopted a fiscal year basis of accounting ending on May 31. The gross receipts of the restaurant following Pinhorn’s death were $566,333.28 for the fiscal year 1923, $531,842.19 for the fiscal year 1924, and for the fiscal year ending August 6, 1925, (a new year being established for the purpose of executing the terms of decedent’s will) the receipts were $483,079.99 plus cigar sales of $9,648.42, or a total of $492,728.41. By the terms of decedent’s will petitioner was directed to, and did, operate the restaurant for a period of two years following his qualification as executor, at the expiration of which the business was turned over to the designated beneficiaries. The fiscal year ending August 6, 1925, was the first year of operation by the beneficiaries and for that year the business sustained a loss of $479.20.

In the early years of its operation by Pinhorn, the restaurant was situated in what was considered the heart of the business district, at 16th and Larimer Streets. During the succeeding years business moved eastward up 16th Street, until in May, 1922, the center of business was consido-ed to be at 16th .and Stout Streets, approximately five or six blocks from the Manhattan Restaurant, and the only restaurants remaining in the locality of the Manhattan Restaurant were of a cheaper character, the better class having moved uptown with business generally. During the time the business was operated by Pinhorn he practiced the policy of serving the best quality merchandise at the lowest possible price, and he devoted practically all his time from 7 a. m. to 11 p. m. each day to the business. The restaurant was open for business the entire 24 hours of the day.

Pursuant to the terms of the will, petitioner, after operating the business for two years, conveyed the restaurant to the designated beneficiaries, one of whom was William J. Pack, a nephew of the decedent, to whom a one-fourth interest had been bequeathed. In January, 1923, two of the beneficiaries purchased the one-fourth interest of Pack for $8,500.

The fair value of the Manhattan Restaurant was $34,000 as of May 30, 1922, the date of Pinhorn’s death.

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

Considered by Maequbtte, Milliken, and Phillips.


author: Millieen :

text:
    Wm. Ward, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10471.
    Promulgated August 22, 1927.
    The unextinguished cost of a building removed in order to obtain a ten-year lease upon the land, represented the cost to the lessor of such lease and should be exhausted over the term of the lease.

      Frank G. Myers, Fsq., for the petitioner.

      J. A. O’GaZlahan, Esq., for the respondent.
    This proceeding results from the determination by the respondent of a deficiency in income tax for the calendar year 1920, in the amount of $918.50. Two errors are assigned: (1) The respondent refused to allow as a deduction a loss of $2,000 sustained in the year 1920, due to the demolition and tearing down of a building; (2) respondent refused to allow a deduction for exhaustion, wear and tear of a building used in trade or business, at the rate of 15 per cent per annum.
    FINDINGS OP PACT.
    Petitioner is a resident of Brooklyn, N. Y., and is engaged in the banking and real estate business at Coney Island. In 1918, he acquired, by inheritance, a lot and building located on the south side of the Bowery, Coney Island, about 50 feet east of Thompson’s Walk. The lot was 35 by 149% feet. The building was 35 by 45 feet, and consisted of two stories. The first floor was used for store purposes and the second floor contained an apartment. The depreciated value of the building in 1920 was $2,000. In 1920, the building and lot were leased to a corporation known as “ The Virginia Reel Co.” for a period of ten years, at a minimum rental of $7,000 per year. Prior to the execution of this lease, the rent received from the premises was $2,750 per year. “ The Virginia Reel Co.” used premises adjoining the lot owned by petitioner and they found it desirable to secure the use of petitioner’s lot, in order that their business might be expanded. The contract of lease did not provide for a renewal of same at expiration. The lessee was given permission to remove or demolish the building if desired, and if a building remained on the lot at the expiration of the lease, the lessee was given permission to remove or demolish the same.
    In 1913, petitioner acquired, at the cost of $20,000, a building located on the Bowery and Jones’ Walk, Coney Island, N. Y., and known as “ Rough Riders.” The building was 64 feet front by 60 feet depth and was three stories in height. It was built of heavy timbers and reinforced with steel. The remaining useful life of the building, on March 1, 1913, was 20 years.
   OPINION.

Millieen :

In the case of Chas. N. Manning v. Commissioner, 7 B. T. A. 286, we had occasion to consider the identical question presented by the first issue in this proceeding. On the authority of that decision, the unextinguished cost, $2,000, of the building removed in order to obtain a ten-year lease upon the land, represented the cost to petitioner of such lease and should be exhausted over the ten-year term of the lease.

Concerning the second issue, counsel for petitioner, in brief filed, requests a depreciation allowance of 5 per cent per annum on the building known as the “ Rough Riders.” The building should be depreciated on the basis of its cost in 1913, i. e., $20,000. It had a remaining useful life on March 1, 1913, of 20 years and petitioner is therefore entitled to a deduction for depreciation of 5 per cent per annum.

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

Considered by MaRquette, Phillips, and Van Fossan.


author: Milliken :

text:
    Hardwick Realty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10498.
    Promulgated August 22, 1927.
    1. In ascertaining gain or loss upon the sale of capital assets, due allowance must be made for depreciation occurring during the period of ownership.
    2. Amount of depreciation determined.

      F. S. Bright, Esq., and Brison Howie, Esq., for the petitioner.

      A. 8. Lisenby, Esq., for the respondent.
    This proceeding results from the determination by the respondent of a deficiency in income and profits taxes for the calendar year 1920, in the amount of $10,058. The question involved is the correctness of the action of the respondent in computing the profit on the sale of an apartment house acquired in 1915, and sold in 1920, in reducing the cost thereof by the depreciation deducted on the petitioner’s return for years 1916 to 1919, inclusive.
    FINDINGS OF FACT.
    Petitioner is a corporation, organized and existing under the laws of the State of New York, having its principal office at No. 41 Park Iiow in the Borough of Manhattan, City of New York. On November 12, 1915, it purchased premises No. 2 West 120th St., New York City, which is a seven-story-and-basement brick-and-steel apartment house of the type known as semifireproof, for the sum of $254,908.72.
    During the year 1915, the receipts from rents exceeded the expenses by the sum of $47.16.
    During the year 1916, the receipts from rents and telephones were less than the expenses by $1,031.02.
    During the year 1917, the receipts from rents and telephones exceeded the expenses by $308.32.
    During the year 1918, the receipts from rents and telephones were less than the expenses by $1,227.42.
    During the year 1919, the receipts from rents and telephones exceeded the expenses by $4,739.42.
    Receipts and expenditures for each year are calculated exclusive of any deduction for depreciation.
    In May, 1920, petitioner sold the premises No. 2 West 120th St., for $269,444.75. In the income-tax returns filed by it during its years of ownership of the property, the following amounts were claimed as deductions for depreciation:
    1916_$5, 250.00
    1917_ 6, 092. 50
    1918_ G, 840. 00
    1919_ 5, 601. 53
    Total- 22,784.03
    ' Petitioner had no other property nor other source of income except from the building in question. The building was erected about the year 1900.
   OPINION.

Milliken :

Counsel for petitioner makes several points in the brief filed in this cause, which, in the light of the now settled law on the question of whether deductions for depreciation are to be made from original cost in determining gain or loss on the sale of properties, it appears unnecessary to discuss. The points are as follows: (1) Congress has power to tax income and profit only and can not, by any definition, create income and profit where actual income and profit as defined and understood at the time of the Sixteenth Amendment to the Constitution, do not exist; (2) the allowance for depreciation can only be deducted from income, and where there is no income, the depreciation provisions of the statute can not operate; (3) Congress has no power to compel the deduction for depreciation; (4) where there is income, the allowance for depreciation can not exceed the income. The points enumerated are fully answered by the decision of the United States Supreme Court in the case of United States v. Ludey, 274 U. S. 295. Depreciation is not made dependent on income or the lack of it, but is a sum which should be set aside each year, in order that at the end of the useful life of a building, the aggregate sums will provide an amount equal to the original cost. As the Supreme Court points out in United States v. Ludey, supra

Tlie theory underlying the allowance ior depreciation is that by using up the plant, a gradual sale is made of it. The depreciation charged is the measure of the cost of the part which has been sold. When the plant is disposed of after years of use, the thing then sold is not the whole originally acquired. The amount of depreciation must be deducted from the original cost of the whole, in order to determine the cost of that disposed of in the final sale of the properties.

A gradual sale of properties by the allowance for depreciation is not dependent on profits, it takes place irrespective of profits. A manufacturing concern might operate its plant and facilities for twenty-four hours each day during a given year, and for business reasons, sell its product at the actual cost of production. Has the failure to earn profits during such year caused depreciation to cease on its plant and facilities'( We think not. Also see Rieck v. Heiner, 20 Fed. (2d) 208, and Appeal of Even Realty Co., 1 B. T. A. 355.

Counsel also submits that in no event should depreciation be more than 1.6 per cent per annum on the cost of the buildings. In the first place, we do not have the cost of the buildings as separate from the land on which situate, but if we did and the depreciation deducted by the respondent for the years 1916, 1917, 1918, and 1919 was in excess of the sums to which petitioner was entitled, or was less than the sum to which it was entitled, it should, no doubt, be adjusted.

In its income-tax returns for the calendar years 1916, 1917, 1918, and 1919, petitioner deducted the amounts for depreciation as set forth in our findings of fact, which are precisely the sums which the respondent has used in determining the gain derived from the sale of the building in 1920. The secretary and treasurer of petitioner was called as a witness by petitioner. He has been in the real estate business since 1910, engaged in the general real estate brokerage business, buying and selling property for clients, managing property, appraising real estate, and placing mortgage loans. He was secretary and treasurer of petitioner during the years 1916 to 1920, inclusive. He appraised the property ívlien purchased by petitioner in 1915. He has had experience in considering and determining the useful life of buildings and improvements in connection with his work as appraiser. He rendered, under oath, the income-tax returns of petitioner for years 1916, 1917, 1918, and 1919.

He testified, as follows, on cross-examination:

Q. At the time you signed those returns, Mr. Du Cret, what was your opinion as to the annual depreciation sustained on those premises?
A. The depreciation as recited in the return.
Q. The items or amounts of depreciation stated in the return of the Hard-wick Realty Company for each of those years, and deductions from gross income thereon then represented, Mr. Du Cret, your then opinion from your then . knowledge of the circumstances as to the proper amount of depreciation?
A. Xes.
Q. Were you at all times, during each of those years, in touch with the property and familiar with it?
A. Xes.
Q. Xou have had charge of the property and its management and control?
A. Xes.
Q. No other person had charge of the property, or its management and control?
A. No.

Counsel for petitioner also called a witness, who first saw the building in 1927, whose views on depreciation were somewhat confused, and who estimated the life of the building was at least 80 years. Despite the fact that the building was 27 years old when seen by the witness, it was his opinion that the structure had suffered practically no depreciation from the time erected.

We are of the opinion that the depreciation taken on the income-tax returns filed by petitioner for the years 1916,1917,1918, and 1919, when considered in connection with the qualifications of the officer who caused them to be made reflects the depreciation to which petitioner was entitled and the respondent did not err in this respect.

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

Considered by MaRqtjette, Phillips, and Yah Fossah.


text:
    Elisha Roper, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Elisha Roper, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8642, 8643.
    Promulgated August 22, 1927.
    1. Evidence held- not sufficient to show that the Commissioner erred in his determination of depletion based on discovery value.
    2. Income from an exchange of property was received in 1920.
    3. Amount of deduction allowable for taxes, determined.

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

      Thomas M. Wilkins, Esq., for the respondent.
    These proceedings result from determinations by respondent of deficiencies in income tax as follows: Elisha Roper, for the year 1921, amounting to $666.16; Mrs. Elisha Roper for the year 1919, amounting to $10,259.82, and for the year 1921, amounting to $182. Upon motion by the parties, made and granted, the appeals were consolidated for hearing and decision.
    Petitioners averred that errors were committed with reference to the following issues: (1) The basis of discovery value for the computation of the deduction from income in 1919 for depletion of oil wells allowable to the lessor who reserved and owned an undivided interest in a one-eighth royalty payable in oil, should be the fair market value of lessor’s interest in the entire acreage included in the tract of land owned, and not the fair market value of the estimated oil reserves which were discovered, as computed by the respondent; (2) the income, amounting to $67,600, from an exchange of an interest in oil royalties for lands was received in 1920 when the exchange was effected, and not in 1919; (3) state, county and city taxes amounting to $6,086.78 were paid in the calendar year 1921 and were deductible from income in that year; (4) interest amounting to $3,510 was paid in the calendar year 1921 and was deductible from income in that year; (5) a sale of real estate to T. C. Campbell and T. L. Flagg in the calendar year 1921 was on the installment basis and not all of the income expected to be derived therefrom was taxable in 1921; (6) a deduction from income for depletion of oil reserves should be allowed in 1921; (7) a loss of $10,000 invested in the stock of the Great Southern Oil & Refining Co. should be allowed as a deduction from income in 1921; (8) a loss of $10,500 by reason of a settlement with Gude and Ward ,of an unpaid balance of $20,' 000 due petitioners for property sold Gude and Ward should be allowed as a deduction from income in 1921; (9) a loss of $12,500 invested in the stock of the Liberty Refining Co. should be allowed as a deduction from income in 1921; (10) income from oil royalties from the separately owned lands of the petitioners was community income and not the separate income of the owner of the land; (11) not any of the income of the petitioners was the separate income of either of them. At the hearing evidence was adduced and arguments presented relative to issues numbered 1, 2, 3, 4, and 5. Relative to the fourth issue the parties agreed during the hearing to a deduction from income in 1921 of interest amounting to $4,936. In the fifth issue it was conceded by respondent that the sale is subject to the provisions of section 1208 of the Revenue Act of 1926, and that the income from this sale should be reported on the installment basis. Relative to all of the remaining issues the petitioner offered no evidence, and they are deemed abandoned.
    FINDINGS OF FACT.
    The petitioners are husband and wife, residing at Plainview, Tex. Prior to 1918 and continuing through 1921, Elisha Roper, one of the petitioners, owned in his separate right 153 acres of land located in the John .York Survey, Eastland County, Texas. During the same period, the petitioners owned jointly as community property 192 acres of land, also located in the John York Survey, Eastland County, Texas. The two tracts adjoined, and the entire aggregate of 345 acres was subject to a lease granted the Texas & Pacific Coal & Oil Co., in 1917, under the terms of which the petitioners were entitled to receive one-eighth of the oil, gas, and minerals produced from the 345 acres.
    The petitioners sold undivided interests in their oil, gas, and mineral rights as follows:
    On September 28, 1918, 3/345 of 1/8 to O. H. Taylor for $2,100, and 3/345 of 1/8 to Lem Hightower for $2,100, and 20/345 of 1/8 to Sikes and Wolf for $14,000; on October 2, 1918, 1/4 of 1/8 to U. M. Simon for $60,375; on March 3, 1919, 28/345 of 1/8 to W. C. Martin for $56,480. By agreement dated October 28,1919, 4096/34500 of 1/8 'to International Crude Oil Co. in exchange for 2,560 acres of land in Lynn County, Texas. This exchange resulted in a gain to petitioners of $67,600 when the exchange was effected some time in January, 1920. The value of the 2,560 acres of land in Lynn County, Texas, when received by petitioners, is not in evidence.

      The deed to W. C. Martin for the 28/345 of 1/8 follows, so far as material:
    Elisha Roper, et ux Pile No. 7871
    To) Mineral Deed The State of Texas Know All Men By
    W. 0. Martin County of Eastland These Presents:
    That we, Elisha Roper and wife, Louise M. Roper, of Eastland County, Texas, for and in consideration of the sum of One Dollar Dollar and other consideration ($1.00) cash in hand paid by W. C. Martin hereinafter called Grantee, the receipt of which is hereby acknowledged, have granted, sold, conveyed, assigned and delivered and by these presents do grant, sell, convey, assign and deliver unto the said Grantee an undivided 28/345ths interest in and to all of the oil, gas and other minerals in and under and that may be produced from the following described land situated in Eastland County, Texas, to-wit: Being a part of the John York Survey and described in three tracts as follows:
    *******
    Said land being now under an oil and gas lease executed in favor of Texas & Pacific Coal & Oil Co. It is understood and agreed that this sale is made subject to the terms of said lease, but covers and includes 28/345ths of all of the oil royalty, and gas rental or royalty due and to be paid under the terms of said lease.
    It is understood and agreed that 28/345ths of the money rentals which may be paid to extend the term within which a well may be begun under the terms of said lease is to be paid to the said Grantee and in event that the above described lease for any reason becomes cancelled or forfeited then and in that event an undivided 28/34Sths of the lease interests and all future rentals on said land fovr oil, gas and other mineral privileges shall be owned by said grantee, he owning 28/345ths of all oil, gas and other minerals in and under said lands together with 28/345ths interests in all future rents.
    *******
    Witness our hands this the 3rd day of March A. D. 1919.
    Elisha Roper
    Louise H. Roper.
    Piled for record April 1st, 1919, at 9 a. m.
    Recorded April 30th, 1919, at 11:15 a. in.
    Oil was first discovered on the 345 acres of land on February 12, 1919. About twenty oil wells, including six discovery wells, were drilled on the property. The first four discoveries were made prior to October, 1919. The posted price of oil at the date of the first four discoveries was $2.25 per barrel; at date of fifth discovery $2.50 per barrel; at date of sixth discovery in the year 1920, $2.75 per barrel. During 1919 there was a boom in oil properties in the vicinity of Eastland, Tex.
    In computing deductions from income for depletion based on discovery value, respondent estimated that the gross reserves recoverable amounted to 933,250 barrels and the aggregate of the petitioners’ shares of the oil discovered under the lands was 69,300 barrels, and he estimated the discovery value of 69,200 barrels, discovered by five wells in 1919, to be $1.6947 per barrel, or an aggregate amount of $117,273.24. This rate per barrel was derived by respondent from the prices of oil at the various dates of discovery and the several estimated reserves of oil discovered, and respondent assumed a discount rate of 25 per cent, ascribed to deferment of production and in recognition of the element of hazard.
    The aggregate of the petitioners’ shares of the oil produced from the 345 acres was 61,977.35 barrels in 1919. Eespondent allowed petitioners in 1919 deductions from income totaling $105,033.01 for depletion, based on the 61,977.35 barrels produced and the average discovery value of $1.6947 per barrel. Eespondent determined that 79 per cent of the total production was derived from the 192 acres of land belonging jointly to the petitioners, and 21 per cent thereof was from the 153 acres of land, the separate property of Elisha Eoper. There is no evidence before us of the locations of the various wells which were drilled on the 345 acres, or of the production of each of them.
    An exchange of property between J. M. Allen and Elisha Eoper was provided for in an agreement reading as follows:
    State of Texas,

      County of Eastland,.

    This Contract and agreement entered into in duplicate this the 28th day of October, A. D. 1919, by and between J. M. Allen of Eastland County, Texas, hereinafter called party of the 1st part and Elisha Roper of Eastland County, Texas, hereinafter called party of the 2nd part,
    Witnesseth: That party of the 1st part, for and in consideration of the exchange of lands and the delivery of good title to lands in Eastland County by party of the 2nd part, said lands described in another part of this contract, hereby agrees to deliver two tracts of land in Lynn County, Texas, to said 2nd party free from all incumbrances by good and sufficient deeds and abstract showing good and merchantable title in the said party of the 1st part, said lands described as follows,
    First Tract: Being 920 acres in Lynn County, Texas, being the same land sold by party of the 1st part to E. B. Anderson and repurchased by said 1st party.
    Second Tract: Being 1,640 acres of land purchased from G. N. Lazenby by said 1st party.
    Both tracts being the two tracts shown party of the 2nd part by said 1st party.
    For and in consideration of the above the said 2nd party hereby binds himself and agrees to deliver good and sufficient deeds together with abstract showing good and merchantable title in him, to said 1st party Forty and Ninety Six One Hundreds (40.96) acres being an undivided interest in and to the S45 acre E. Roper tract out of the John York Survey in Eastland County, Texas, said land being the only E. Roper Tract in Eastland County, Texas, upon which oil is now being produced. Said above interest is made subject to the mineral lease now held by the Prairie Oil and Gas Company.

      It is hereby agreed and made a part of this contract that said parties are to have until December 5th, 1919,' in which to deliver deeds and abstracts as above mentioned, and then to have 15 days in which to have same examined and defects cured if any. That party of the 1st part is to receive royalties on the above from November 1st, 1919 on the runs from that date. That party of the 2nd part is to have possession of the Lynn County Land not later than the 1st day of January 1920.
    Witness our hands this the 27th day of October, 1919.
    J. M. Aim
    Elisha Roper.
    The deed from Elisha Roper conveying title to the 4096/34500 of 1/8 of the oil reads as follows:
    Elisha Roper File No. 9586 Know All Men by
    To) M. Deed The State of Texas These Presents :
    International Crude Oil Co. County of Eastland
    That I, Elisha Roper, of the County of Eastland and the State of Texas, in consideration of Ten Dollars cash and the exchange of lands the receipt of which is hereby acknowledged have granted sold and conveyed and do by these presents bargain, grant, sell and convey unto the said R. L. Shaw, C. E. Berg & B. R. Jones, Trustee for the International Crude Oil Co. an undivided Forty and Ninety Six One Hundred (40.96) acre interest in and to all natural gas, oil, petroleum, coal and all other mineral substances, in, on and under the following described lot, tract or parcel of land, lying and being situated in Eastland County, Texas, and being all those certain lots, tracts or parcels of land, lying and being situated in the County of Eastland and State of Texas, to-wit:
    Being a part of the John York Survey and described in three tracts as follows:
    First Tract: Beginning 1797 vrs. West of the N. E. Cor. of said John York sur. for the N. E. cor. this tract. Thence W. 1166% vrs. to the N. W. cor. this tract; Thence S. 740% vrs. Thence E. 1165% vrs. to the S. E. Cor. this tract; thence N. 740% vrs. to the place of beginning.
    Second Tract: Beginning 867 vrs. West of the N. E. Cor. of said John York Survey for the place beginning of this tract; thence West 930 vrs. to a corner, thence south 740% vrs. thence East 450 vrs. thonce North 32% East to the place of beginning.
    Third Tract: Beginning 740% vrs. South and 1377 vrs. West of the original N. E. Cor. of the said John York Survey, thence West 2382 vrs. to a new cor. thence S. 237 vrs. to corner, thence East 2380 vrs. to a corner thonce in a Northeasterly direction with the Eastland and Ranger Public Road as said road now runs 255 vrs. to the place of beginning.
    All of the above three tracts containing 345 acres of land.
    Together with the right to enter thereon, open mines, drill wells, lay pipe lines and erect all structures and appliances necessary or convenient in searching for, procuring caring for, storing, and removing the above mentioned minerals and mineral substances.
    It is expressly understood that the surface of the above described land is conveyed only for all purposes and uses above set forth. This grant and conveyance is made with the understanding that the Texas & Pacific Coal and Oil Company has a mineral lease on the above described land.

      To Rave and to hold the same to the said Trustees for the International Orude Oil Co., its heirs, administrators and assigns forever, And I do hereby bind myself my heirs and executors and administrators and assigns forever to warrant and defend all and singular said mineral rights herein conveyed unto the said Trustees for the International Crude Oil Co. its heirs, and assigns, against the lawful claims of every person claiming or the claim the same or any part thereof.
    Witness my hand this 29th day of November A. D. 1919.
    Elisha Roper.
    Filed Dec. 1, 1919 at 2 p. m.
    Recorded Dec. 10, 1919, at 10 a. m.
    Roper handed the deed to his attorney, W. F. St. John, with instructions to deposit it in the bank to be held in escrow until delivery was made by Allen of the deed to the lands to be received in exchange. Roper was unaware that the deed was filed and recorded early in December, 1919, and he could not testify as to the date it was delivered to Allen. Allen experienced difficulty in perfecting the title to the 1,640 acres of land he purchased from Lazenby and it was necessary for him to request and for Roper to grant an indefinite extension of time beyond the date specified in the agreement for curing defects in title.
    E. B. Anderson executed on November 1, 1919, a deed to Allen of the 920 acres of land which Allen agreed to deed to Roper and deposited it with a' bank in Eastland, Tex., to be there held in escrow, and not delivered until payment was made of the cash consideration amounting to $27,600. Anderson was anxious to realize on the sale and visited Eastland, Tex., on December 30 and 31, 1919, to investigate the to him unexpected delay in receiving payment. He was informed the delay was due to difficulties in perfecting title to the Lazenby lands. Anderson remained in Eastland on December 31, 1919, until it was definitely ascertained that the last mail for the day from Waco, Tex. (the place from which the title papers were expected) did not contain the papers, and being satisfied of the impossibility of securing payment, he then left East-land, leaving his deed on deposit with the bank. On January 15, 1920, Anderson received a draft from the Eastland bank for $27,572, being the sale price of $27,600, less $28 for revenue stamps affixed to his deed. Roper received the Allen deed some time in January, 1920. The profit from the exchange was $67,600, and was apportioned to the petitioners by respondent on a basis of acreage owned; 153/345 going to Elisha Roper in his separate right, and 192/345 going equally to the petitioners as community income. The exchange was effected in the month of January, 1920.
    In the calendar year 1921, Elisha Roper paid state, county, school and city taxes aggregating $4,668.98, and taxes for maintenance charges and bond tax for Cameron County Water Improvement District Number Two aggregating $798.79.

      In the calendar year 1921 interest paid by Elisha Roper in that year allowable as a deduction from income amounted to $4,936.
    Elisha Roper and wife sold to T. C. Campbell and T. L. Flagg in 1921, lots 8, 9 and 10 in Block A/2 in the City of Eastland, East-land County, Tex. The consideration was the assumption of all liability to the Texas Bitulith Co. for street pavement in front of the property and the sum of $3/,000, payable $250 on November 1, 1921, $750 on December 1, 1921, and $750 monthly thereafter. The payments actually received by the petitioners in 1921 amounted to $1,000. The respondent conceded the sale was on the installment basis, subject to the provisions of section 1208 of the Revenue Act of 1926.
   OPINION.

Milliken :

The first issue relates to the deduction allowed by reason of section 214 (a) (10) of the Revenue Act of 1918, which provides as follows: *

Sec. 214. (a) That in computing net income there shall he allowed as deductions :
(10) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) on that date shall be taken in lieu of cost up to that date: Provided further, That in the ease of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the ease of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.

Petitioners introduced as evidence of the value of their interest in the oil and gas lease, sales of undivided interests in their holdings both before and after the first discovery was made. The sales prior to the date of the discovery were at the rate of about $700 per acre for the entire royalty interest and the sales after the date of discovery were at approximately $2,000 per acre. The sales prior to the date of discovery obviously have little bearing upon the value upon the date of discovery since it was not known prior to that date whether or not any oil existed in the property and therefore the values were for the most part speculative. The sales both prior and subsequent to the date of discovery were of undivided interests in the entire 345 acres. The record does not disclose the extent of the area which respondent considered proven by the five discoveries made during the year 1919, nor by the sixth discovery made during the year 1920. The fact that a valuation based upon discovery was allowed in the year 1920 demonstrates that the entire area was not considered proven during the year 1919. Petitioner has introduced no evidence showing the estimated oil reserves on the entire 345 acres, but has proceeded on the assumption that the reserves of 117,000 barrels determined by the Commissioner as applicable to the entire royalty interest, applied to the entire 345 acres. There is nothing in the record to show that this assumption was correct. It is not reasonable to assume that a prospective purchaser would have paid $690,000 for the one-eighth royalty interest, as contended for by petitioner, if it were known that only some 117,000 barrels of oil could be recovered from the property and paid over to such interest, since the price of oil was $2.25 per barrel at the time of the first four discoveries in 1919, $2.50 per barrel at the time of the fifth discovery, and $2.75 per barrel at the time of the sixth discovery.

Since there is no information in the record showing the total expected amount of oil to be recovered from the 345 acres, we are unable to determine what the reasonable depletion rate per barrel would be, even assuming that the fair market value was $690,000 for the one-eighth royalty interest. Accordingly we hold that the petitioners have failed to show that the rate of depletion per barrel determined by the respondent was erroneous.

The second issue presents a question arising out of an exchange be - tween Elisha Roper and J. M. Allen. The amount of profit is not disputed. The respondent determined that the exchange was effected in the year 1919, and has included the profit in income for that year The petitioners appeal from this determination, averring that the exchange was made in 1920.

It is clear from the agreement between Allen and Roper that they desired to effect the exchange within the calendar year 1919, and the deed to the nominees of Allen'which Elisha Roper executed on November 29, 1919, and which was filed on December 1, 1919, and recorded on December 10, 1919, might lend probability to the occurrence of the exchange in December, 1919. Allen had difficulty in acquiring a clear title from G. N. Lazenby to 1640 acres of land included in the exchange with Roper and it was necessary for Allen to request and Roper to grant an extension of time of no stated duration beyond the dates specified in their agreement for the delivery of deeds and the perfecting of titles. The record is silent as to the exact date when delivery was made to Roper of the deeds to the lands he was to receive in exchange. In support of Elisha Roper’s testimony that he received these deeds u some time in January, 1920,” petitioners rely- upon what transpired in the acquisition of 920 acres of land by Allen from E. B. Anderson, being the same 920 acres which Boper was to receive under the agreement between Allen and Boper. We are satisfied that Anderson executed a deed on or about November 1, 1919, to Allen for the land and deposited it in escrow in a bank at Eastland, Tex., there to be held until payment of the consideration was made and that thereafter a delay ensued so that the deed was still on deposit undelivered on December 31,

1919. It is also in evidence that Anderson received payment from the bank f,or his tract of land on January 15, 1920. Obviously, Allen could not convey title to Boper in the Anderson land until he acquired title from Anderson in January, 1920. In our opinion, the record supports the contention of the petitioners that the delivery to Boper of the deeds from Allen occurred in 1920.

After a careful consideration of the entire record, we are convinced that the exchange took place in the year 1920, and the income resulting from the exchange was received in the calendar year 1920.

Belative to the third issue, the respondent agreed to a stipulation that state, county and city taxes aggregating $1,379.07 were paid in 1921 and were properly allowable as a deduction from income in that year. Fifteen exhibits were filed by petitioners evidencing the payment of other taxes in 1921, aggregating $4,088.70, and the petitioners contended that the entire amount was deductible. Bespond-ent objected to many of the items, pointing out the possibility of confusion with the taxes of “ E. Boper,” a brother of petitioner. We are relieved of all doubt on this score by the uncontroverted testimony of the petitioner that he paid the taxes and they were on his property and not that of his brother. Many of the items are state, county and school taxes in the same general classification as those agreed to by the respondent, and equally allowable. Claim is made for the deduction of taxes paid to the Cameron County Water Improvement District Number Two, aggregating $798.79, described as follows:

“ The above amount being for maintenance charges and bond tax.” While satisfied of the probablity that a part of this amount is allowable as a deduction, if not all of it, we are unable to determine from the record the amount properly allowable and the entire amount claimed is therefore disallowed. We find allowable a deduction aggregating $4,668.98 for taxes paid in 1921, inclusive of the amount of $1,379.07 agreed to by the parties.

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

Considered by MaRquette, Phillips, and Vai-t FossaN.