text:
    Appeal of BRYANT & DETWILER CO.
    Docket No. 3463.
    Submitted September 14, 1925.
    Decided November 12, 1925.
    Tbe taxpayer constructed a building and leased it to a corporation engaged in the production of articles contributing to the prosecution of the war. Held, that the taxpayer was not entitled to amortization under the provisions of section 234(a) (8) of the Revenue Act of 1918.

      G. J. McGuire and W. A. Boling er, Esqs., for tbe taxpayer.

      A. B. Marts, Esq., for the Commissioner.
    Before James, Littleton, and Smith.
    This is an appeal from the determination of deficiencies in income and profits taxes for the fiscal year ended January 31, 1917, a fiscal period ended December 31, 1918, and the calendar years 1919 and 1920, in the amounts, respectively, of $232.39, $14,050.13, $4,409.11, and $172.33, and an overassessment for the fiscal year ended January 31, 1918, in the amount of $209.70, a net deficiency of $18,654.26. Not all of the deficiencies are in issue.
    FINDINGS OE FACT.
    The taxpayer is .a Michigan corporation, organized January 1, 1910, and, prior to the war, was engaged in the business of general contracting. In December, 1915, Ward A. Detwiler and John A. Bryant, the principal stockholders of the taxpayer, organized a corporation under the name of the Ferro Stamping & Manufacturing Co., to engage in the manufacture and sale of automobile body hardware. Detwiler and Bryant were large stockholders of the Ferro Co., but substantially 50 per cent of its stock was owned and controlled by one W. D. Devereaux, not associated with them in the taxpayer company.
    During the year 1918 the Ferro Co. became active in war contracts, obtaining two contracts for the manufacture of 5,000,000 cartridge clips and 1,000,000 magazines for automatic pistols.
    In order to provide the extra facilities required by the Ferro Co. for the purpose of manufacture under the above-mentioned contracts, the taxpayer erected at its own expense a three-story brick and reinforced-concrete building, at a total cost of $77,362.13, of which the War Department ultimately paid $6,000. The taxpayer leased the building to the Ferro Co. at an anuual rental of $13,875, which rental was paid to the taxpayer during the year 1918, and has been so paid continuously to the present time. Soon after the termination of the war the Ferro Co. was temporarily unable to meet its rental payments when due, but all rental was ultimately paid.

      In its income-tax returns for the period ended December 31, 1918, and for the years 1919 and 1920, the taxpayer claimed amortization upon the building constructed and leased as above set forth, in the amounts of $31,311.63, $20,818.42, and $10,439.21, and thereafter-made claim for amortization in the total amount of the cost of the said building of $71,362.13. The Commissioner denied the taxpayer any deduction on account of amortization of the said building.
    Although temporarily out of use after the close of the war, the Ferro Co. has since made full use of the building so constructed. It was not, however, such a type of building as would have been constructed solely for the post-Avar purposes of the Ferro Co.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

James:

The taxpayer constructed and leased a building to another corporation for the purpose of manufacture by that corpora* tion of articles contributing to the prosecution of the war. It received an agreed rental for the use of its facilities, has continued to receive that rental up to the present time, and, since the period of readjustment subsequent to the war, the building and facilities have been in constant use by the lessee.

The taxpayer is certainly in no better situation than was the taxpayer in the Appeal of Moore Investment Co., 2 B. T. A. 579. Little can be added to the reasoning set forth therein, and the determination of the Commissioner in this appeal must be approved upon the authority of that decision.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Appeal of AGENZIA FUGAZI.
    Docket No. 3749.
    Submitted October 19, 1925.
    Decided November 12, 1925.
    Tbe principal stockholder of a corporation who receives no salary from it but is of assistance to it through social activities is not regularly engaged in the active conduct of the affairs of the corporation, Avithin the meaning of the definition of a “personal seivice corporation ” contained in section 200 of the Revenue Act of 1918.

      K. N. Parkinson, Esq., for the taxpayer.

      J. A. Adams, Esq., for the Commissioner.
    Before Smith, James, Littleton, and Teussell.
    The taxpayer appeals from the determination of a deficiency in income and profits tax for 1919 in the amount of $1,821.26. The sole question in issue is whether the taxpayer is a personal service corporation for the calendar year 1919.
    FINDINGS OF FACT.
    The taxpayer is a California corporation with its office in San Francisco. Its business is the securing of passengers for steamship companies. It represents several steamship companies operating trans-Atlantic steamships. It sells tickets for these on an established commission basis. From January 1 to some date in March, 1919, its 5,000 shares, $1 par value, were held as follows:
    Sam B. Fugazi_2,499
    James Fugazi_2, 500
    F. A. Griffin (Attorney)_ 1
    Total_5, 000
    Some time in March, 1919, Sam B. Fugazi purchased the 2,500 shares of stock owned by his brother, James Fugazi, and gave the same to his wife, Katherine Fugazi. This was the only change in stock ownership during the year.
    Sam B. Fugazi and his brother were both well acquainted with the Italian element in San Francisco, and also were well known among the Irish element, the Swiss element, and the French element. Sam B. Fugazi was, during 1919, a member of approximately 22 fraternal organizations and social clubs. He made it a point of joining such organizations and clubs for the purpose of enlarging his acquaintance among the people who were natives of Europe and who would be likely to return to Europe either for a visit or permanently. Much of the business of his agency is attributable to his social activities. Katherine Fugazi also made a point of circulating among Italians socially. She was a member of six or seven clubs and societies. She would go to the social functions of these societies and when she would hear some one speak of going to Europe she would endeavor to get them to purchase tickets through her husband’s ticket agency. She would cultivate their acquaintance and good will and often call on them or ring them up on the telephone in order to get. them to make inquiries at her husband’s ticket agency. She performed these same services from 1917 forward. She was no more active in the business of the agency after March, 1919, than she was-before. She never received any salary for this work. Her only income from Agenzia Fugazi was the dividends which she received upon her 50 per cent ownership of the stock.

      From March to December 31, 1919, Sam B. Fugazi was president of the taxpayer corporation and Katherine Fugazi was secretary. Her duties as secretary were only nominal.
    During the year 1919 the taxpayer corporation employed five persons besides Sam B. Fugazi. The last named received a salary of $2,700 per year. The corporation paid the same amount of salary to two of its employees. The three other employees received a smaller salary.
    Capital was not an income-producing factor in the taxpayer’s business. All tickets were sold for cash and the taxpayer was not required to account to the steamship companies for any tickets which were not sold. The only tangible assets of the taxpayer, in addition to cash, were ofiice furniture and fixtures.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Smith:

The taxpayer is a ticket agency. During the year 1919 capital was not a material income-producing factor. The principal stockholders of the taxpayer from March to December 31, 1919, were Sam B. Fugazi and Katherine Fugazi, his wife. These two owned all of the stock outstanding, with the exception of one share held by the attorney for the taxpayer to comply with the statutes of California, which require three stockholders. Katherine Fugazi owned 50 per cent of the stock of the corporation. She received no salary from the corporation during the year 1919, but was of assistance to it in social activities. The only material question presented by this appeal is whether a principal stockholder who engages only in social activities for the benefit of a corporation is “regularly engaged in the active conduct of the affairs of the corporation,” within the meaning of the definition of a “personal service corporation” contained in section 200 of the Kevenue Act of 1918.

The evidence is to the effect that Katherine Fugazi only occasionally visited the ticket office of the taxpayer corporation. She appears, however, to have been of assistance to the corporation through her connections with church and various societies, wherein she met and became acquainted with people of southern Europe or their descendants, from whom the major part of the business is derived. She could not state definitely what proportion of the business coming to her husband’s agency was attributable to her social activities. She thought, however, that some of it was.

We do not think that the principal stockholder of a corporation who simply engages in social activities for the benefit of the corporation is “ regularly engaged in the active conduct ox the affairs of the corporation,” within the meaning of the definition of a “ personal service corporation” as contained in the Eevenue Act of 1918. In our opinion this language implies the actual performance of definite services and not merely the cultivation of acquaintances for the purpose of inducing them to have business transactions with the corporation. We have so held in the Appeal of Joseph Emsheimer Insurance Agency, 1 B. T. A. 649. Cf. Appeal of the Boyd Tax Service Corporation, 1 B. T. A. 346.


text:
    Appeal of VERNER S. GAGGIN.
    Docket No. 4631.
    Submitted September 28, 1925.
    Decided November 12, 1925.

      M. J. Marcus, Esq., for the taxpayer.

      R. P. Smith, Esq., for the Commissioner.
    Before Smith, James, Littleton, and Trussell.
    The taxpayer appeals from the determination of a deficiency in income tax for the years 1920 and 1921 in the aggregate amount of $286.65. The only question in issue is the right of the taxpayer to deduct from the gross income of each.year $900 claimed to be a legal deduction from gross income for rent of office.
    FINDINGS OE FACT.
    The taxpayer is a physician and a resident of Pittsburgh, Pa. He has his office in his home, which is owned by his wife. He uses one-half of the first floor for his office and for business purposes. His income-tax returns for the years 1920 and 1921 were made upon a cash receipts and disbursements basis. Upon the returns he deducted $900 for each year as rent for his offices, but the evidence does not show that he paid the rent to his wife. The taxpayer kept accurate account of cash received and expended, but no entries were made to show payment of rent. The item of $900 for rent alleged to have been paid by the taxpayer was returned as income by the taxpayer’s wife in income-tax returns filed by her.
   DECISION.

The determination of the Corumissioner is approved.


author: Teussell:

text:
    Appeal of BURNSIDE STEEL CO.
    Docket No. 3292.
    Submitted June 18, 1925.
    Decided November 12, 1925.
    Tbe depreciated cost of a portion of a building demolished in order to make place for a larger and better addition to factory-buildings is an allowable deduction from gross income under the Bevenue Act of 1918. Appeal of The First national Bank of Fvanston, Wyo., 1 B. T. A. 9, followed.

      James W. Good, Esq., for the taxpayer.

      L. 0. Mitchell, Esq., for the Commissioner.
    Before James, LittletoN, Smith, and Tkussell.
    This is an appeal from the determination of a deficiency in income taxes for the years 1918 and 1919 in the amount of $16,391.81. Only so much of the tax is in controversy as arises from the disallowance by the Commissioner of a deduction representing the alleged unex-tinguished cost of a portion of a building demolished by the taxpayer in the year 1918.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized under the laws of the State of Illinois on September 27, 1916, with its principal office at Chicago, and it is, and has been since its organization, engaged in the manufacture of steel castings.
    Shortly after the corporation was organized, it began the construction of a factory building, which was completed in March, 1917. An addition to the original building was made by the taxpayer during the period July to September, 1917. The business of the taxpayer increased rapidly and in the year 1918 it was found that the original building and the addition thereto were inadequate for the corporation’s operations. Therefore, in July, 1918, a second addition or annex to the building was begun and it was completed in November, 1918. In order properly to make this addition, it was necessary.to demolish a part of the original building and the addition thereto erected in 1917. The portion of the building so demolished had a depreciated cost at that time of $4,700.17.
    The taxpayer in its income-tax return for the year 1918 claimed a deduction of the unextinguished cost of that portion of the building demolished in that year. This deduction was disallowed by the Commissioner.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   "opinion.

Teussell:

The only question presented by the record in this appeal is whether the taxpayer, in computing its net income for the year 1918, is entitled to a deduction on account of the demolition of a part of its factory building in that year. It is conceded by the Commissioner that the depreciated cost of the demolished portion of the building was $4,100.17.

It is not necessary to enter into an extended discussion of this appeal. The facts presented by the record are similar to those presented in the Appeal of The First National Bank of Evanston, Wyo., 1 B. T. A. 9, and the decision therein is controlling here. In that appeal the evidence established that the taxpayer, in making certain alterations of its banking building, tore out a wall, discarded floors, dropped window openings and installed new- windows, discarded certain doors, changed the roof and ceiling, and took out the old entrance. The depreciated cost of the portion of the building so demolished was held by this Board to be a proper deduction from the taxpayer’s gross income for the year in which the demolition occurred. The taxpayer in this appeal demolished a portion of its building in the year 1918, in order to make additions' and alterations necessary for the operation of its business, and it is entitled to deduct from gross income for that year the depreciated cost of the part demolished. The deficiency for the year 1918 should be modified accordingly.


author: James

text:
    Appeals of JOHN MOIR, FRANCIS W. KIMBALL, HARRY L. JONES, CHARLES R. SUTLER, FREDERICK A. FLOOD, and WILLIAM T. RICH.
    Docket Nos. 3188-3193.
    Submitted June 18, 1925.
    Decided November 12, 1925.
    In 1923 the taxpayers claimed credits under section 222 (a) (1) of the Revenue Act of 1921, on account of taxes paid to foreign governments, and further claimed credits under section 1200 (a) of the Revenue Act of 1924, of 25 per cent of the amount of tax shown on their returns before deducting the said credit for foreign taxes. Held,, that the credit provided in section 1200 (a) of the Revenue Act of 1924 is to be computed after the deduction of the credit provided for in section 222 (a) (1) of the Revenue Act of 1921.

      J. A. Bricket, Esq., for the taxpayers.

      B. G. Bimpieh, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Teussell.
    The above-mentioned appeals involve deficiencies in amounts, respectively, of less than $10,000 for the year 1928. The amounts are not stated in the several petitions, but 'all involve the same question, and the appeals were joined for the purpose of hearing.
    FINDINGS OF FACT.
    The taxpayers are individuals, citizens, and residents of the United States.
    The taxpayers duly filed income-tax returns for the year 1923, showing thereon various sums of tax due as computed under the Kevenue Act of 1921, and amounts of tax credited against the tax so shown to be due on account of payments of income taxes to foreign governments. Subsequent to the passage of, the Kevenue Act of 1924, the collector of internal revenue in whose district the returns were filed credited the taxpayers with 25 per cent of the net amount of tax shown to be due on their returns after deducting the aforementioned credits on account of taxes paid to foreign governments. The taxpayers thereupon filed claims for abatement for credits of additional amounts, based upon 25 per cent of the amount of tax shown on their returns before taking credit for payments to foreign governments. The Commissioner disallowed such claims for abatement and credits and from such disallowance, the taxpayers bring these appeals.
    DECISION.
    The determinations of the Commissioner are approved.
   OPINION.

James

: The Commissioner in his answer pleaded that the Board is without jurisdiction to hear and determine these appeals for the reason that he has not, since the passage of the Kevenue Act of 1924, determined a deficiency in tax in respect to these taxpayers. The Commissioner’s position in this plea is that the taxpayers have been assessed on the basis of the tax shown upon the taxpayers’ returns, and that a deficiency is only an amount of tax determined by him to be due in excess of that shown on the taxpayer’s return. This is true in the ordinary case, but in cases in which the taxpayer shows an amount of tax upon his return but does not admit that that amount of tax is due and collectible, it is the amount which he admits to be due and not the amount which appears upon the face of his return which is deemed the starting point in the computation of a deficiency. Appeal of Continental Accounting & Audit Co., 2 B. T. A. 761. The Commissioner’s motion to dismiss is therefore denied, and we pass to a determination of the merits of the appeals, considering as true the allegations of the several parties.

Section 1200 of the Revenue Act of 1924, provides for a credit upon the tax for the year 1923 in the following language:

(a) Any taxpayer making return, for tlie calendar year 1923, of the taxes imposed by Parts I and II of Title IX of tlie Revenue Act of 1921 shall be entitled to an allowance by credit or refund of 25 per centum of the amount shown as the tax upon his return.
(b) If the amount shown as the tax upon the return has been paid in full on or before the time of the enactment of this Act, the amount of the allowance provided in subdivision (a) shall be credited or refunded as provided in section 281 of this Act.
(c) If the taxpayer has elected to pay the tax in installments and, at the time of the enactment of this Act, the date prescribed for the payment of the last installment has not yet arrived, the amount of the allowance provided in subdivision (a) shall be prorated to the four installments. The amount so prorated to any installment, the date for payment of which has not arrived, shall be applied in reduction of such installment. The amount so prorated to any installment, the date for payment of which has arrived, shall be credited against the installment next falling due after the enactment of this Act.
(d) If the taxpayer has been granted an extension of time for payment of the tax or any installment thereof to a date subsequent to the enactment of this Act, the amount of the allowance provided in subdivision (a) shall be applied in reduction of the amount of tax shown upon the return, or, if the tax is to be paid in installments, shall be prorated to the four installments. The amount so prorated to any installment, the date for payment of which has not arrived, shall be applied in reduction thereof. The amount so prorated to any installment, the date for payment which has arrived, shall be credited against the installment next falling due after the enactment of this Act.
(e) Where the taxpayer at the time of the enactment of this Act has not paid in full that part of the amount shown as the tax upon the return which should have been paid on or before the time of the enactment of this Act, then 25 per centum of any amount already paid shall be applied in reduction of the amount unpaid (such unpaid amount being first reduced by 25 per centum thereof) and any excess shall be credited or refunded as provided in section 281 of this Act.

The taxpayers’ claim is that the language. “ of the amount shown as the tax upon his return ” is the gross amount of tax thereon and not the amount of tax as reduced by the credits provided in section 222 (a) (1) of the Revenue Act of 1921. Standing alone, the language of section 1200 (a) might be susceptible of this construction, although the result of such a construction would produce manifest absurdities. But detailed provisions contained in section 120Ó (b) (c), (d), and (e), above, negative any construction other than that placed upon the Act by the Commissioner. Section 1200 (b) reads:

If the amount shown as the tax upon the return has been paid, in full * * * the amount of the allowance * * * shall be credited or refunded ⅜ * *. [Italics ours.]

It is clear from the foregoing that the amount by which the tax is reduced is intended to balance the taxpayer’s account for taxes due the Government, and if he overpays the taxes due he is entitled to a credit or refund. It is clearly inconsistent with the provisions of subdivision (b) to hold that a taxpayer may be entitled to a refund on account of the 25 per cent credit in excess of the amount actually paid to the collector, yet this is the inevitable result which would follow from the position claimed by the taxpayers. It could readily happen, in the case of a citizen of the United States whose entire income is derived from sources abroad, that the tax due the foreign government would equal or exceed the tax due the United States and the credit would equal that tax. The taxpayers here claim, in effect, that under such circumstances they would be entitled to a payment from the United States of 25 per cent of the amount of tax shown on their returns without the above-mentioned credit, although no tax would be due the United States and none would be paid. The language “ shall be ■ credited or refunded ” involves an indebtedness against which a credit is to be applied or as to which a refund is to be made, and does not imply a gratuitous payment from the Treasury on account of taxes paid to governments other than the United States.


text:
    Appeal of ALICE GRACE D’OENCH.
    Docket No. 3231.
    Submitted October 6, 1925.
    Decided November 12, 1925.

      Jacob Mertens, Jr., Esq., for the taxpayer.

      Arthur H. Murray, Esq., for the Commissioner.
    Before Smith, James, LittletoN, and Tbtjssedl.
    This is an appeal from the determination of a deficiency in income tax for the calendar year 1919 in the amount of $7,267.68, arising from the disallowance by the Commissioner of a deduction of $16,200 claimed by the taxpayer under section 214 (a) (5) of the Revenue Act of 1918 as a loss on the sale of residential property.
    FINDINGS OF FACT.
    Taxpayer is a resident of Manhasset, Long Island, N. Y. About December, 1913, she purchased certain residential property located at 35 East Seventy-second Street, New York City, for $75,000, for use as a residence, title thereto being taken in her name. At the time of the purchase taxpayer and her husband, Albert F. D’Oench, owned and occupied another residence in New York City. This they abandoned in December, 1913, occupying the property above described as their residence from that date until some time in July, 1918, at which time the husband died. Taxpayer thereupon, preferring to live at her country home on Long Island, ceased to occupy the residence as her home, and, on August 12, 1918, placed it in the hands of certain real estate agents for sale at $15,000 or for rent, furnished, at $6,000 per annum. Active efforts were made by her agents to sell or rent the property, and, finally, it was sold in July, 1919, to the Guardian Holding Co. for $60,000. The taxpayer paid commission on the sale of this property amounting to $1,200, and in her income-tax return for 1919 deducted $16,200 as a loss.
   DECISION.

The determination of the Commissioner is approved. Appeal of John J. Madden, 2 B. T. A. 102.


text:
    Appeal of CHAPIN CONSTRUCTION CO.
    Docket No. 3200.
    Submitted June 16, 1925.
    Decided November 12, 1925.
    A corporation engaged in tbe business of road and street construction contracting, keeping its accounts on the basis of completed contracts and treating the total contract price as gross income in the year when the original construction work is finished, may not deduct therefrom a • reserve for estimated expense of maintenance during the following years specified in the contract. Following Appeal 0† Uvalde Go., 1 B. T. A. 932.

      Mrs. G. G. Lewis for the taxpayer.

      F. O. Graves, Esq., for the Commissioner.
    Before James and Teussell.
    This is an appeal from the determination of deficiencies in taxes for the years 1919 to 1921, inclusive, aggregating $10,718.84, and an overassessment of $662.97 for the year 1922. The appeal was submitted on the pleadings.
    FINDINGS OF FACT.
    The taxpayer is a Texas corporation organized on May 18, 1916, under the name of “ Chapin-Colglazer Construction Co.” On June 27, 1923, the name of the corporation was changed to Chapin Construction Co.
    The taxpayer filed an income-tax return for the year 1920 upon the basis of which tax was assessed in the amount of $4,423.90. In June, 1922, it filed an amended return for the year 1920 and, upon the basis of the amended return, additional tax was assessed in the amount of $4,309.31. The Commissioner subsequently determined that additional tax is due from the taxpayer for the year 1920 in the amount of $6,822.42. The amount of the additional tax now proposed to be assessed was arrived at by the Commissioner on the theory that there had been theretofore assessed against the taxpayer only the amount of $4,423.90, assessed on the original return, and there was not taken into consideration the fact that additional tax in the amount of $4,309.31 was assessed on the amended l’eturn filed in June, 1922.
    The taxpayer is, and has been since its organization, engaged in the business of constructing roads and streets. Its contracts for the construction of roads and streets usually contain the provision that the corporation shall keep the roads and streets so constructed in repair and maintain them for a certain period. A copy of the provision contained in the contract relating to one of the roads constructed by the taxpayer during one of the years involved herein is attached to the petition and is admitted to be typical of all such contracts entered into by the taxpayer. The provision is that—
    The said contractor further agrees to begin the work within ten days after being notified to commence, and complete same not later than fifty days and to keep the road maintained during construction and for three years after completion and acceptance of the work.
    However, the contracts for some of the roads and streets constructed by the taxpayer provided for a maintenance period of only one year.
    The taxpayer did not report as income the profits on any contract until the construction portion of the contract had been completed. It then, in computing its profits, took the difference between the total amount of the contract price and the total cost of the construction done under such contract, and deducted therefrom an amount set up as a reserve to cover the expense estimated to be necessary to carry out the repair and maintenance clause of the contract. The net amount thus arrived at was reported as income. During the years 1919 to 1921, inclusive, it deducted on account of reserves for repair and maintenance the amount of $27,063.25, but the amount thereafter actually spent for the repairs and maintenance, for which the reserves were set up, was only $7,382.92. The Commissioner, upon audit of the taxpayer’s return, disallowed the reserve so set up by the taxpayer, but allowed as deductions from gross income the amounts actually expended by the taxpayer during the years 1919 to 1921 for the repair and maintenance of the streets» and roads which it was obligated to repair and maintain.
    On the basis of the adjustments of the taxpayer’s income, as herein above outlined, the Commissioner determined that there is a deficiency in tax in the amount of $1,393.26 for the year 1919, $6,322.42 for the year 1920, and $3,003.06 for the year 1921, and an overassessment in the amount of $662.97 for the year 1922.

      DECISION.
    The determination for the year 1919 is approved. The deficiencies for the years 1920 and 1921 should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, pursuant to Rule 50.
   OPINION.

Teussell:

The Commissioner has filed a plea in bar to the right of the taxpayer to maintain its appeal as to the year 1922 on the ground that there has not been, since the enactment of the Kevenue Act of 1924, a determination by the Commissioner that a deficiency in tax is due from the taxpayer for that year and that the Commissioner has not, since the enactment of the Kevenue Act of 1924, proposed to assess a deficiency in tax against taxpayer for the year 1922. The record discloses that the Commissioner has determined that there is additional tax due from the taxpayer for each of the years 1919, 1920, and 1921, and an overassessment for the year 1922, making a net deficiency from which the taxpayer has appealed. The plea in bar is overruled on the authority of the Appeals of E. J. Barry, 1 B. T. A. 156; and Hickory Spinning Co., 1 B. T. A. 409.

The record in this appeal shows that the Commissioner proposes to assess additional tax against the taxpayer for the year 1920 in the amount of $6,322.42. The amount of this proposed additional assessment was arrived at on the theory that the only tax heretofore assessed against the taxpaper for the year 1920 was that assessed on the original return in the amount of $4,423.90, whereas there had theretofore been assessed, on an amended return, an additional tax in the amount of $4,309.31. The Commissioner, in his answer filed herein, admits that the additional tax in the amount of $4,309.31, assessed against the taxpayer on its amended return in the year 1922, was not taken into consideration in determining the deficiency for the year 1920, involved in this appeal. It therefore follows that the deficiency for the year 1920, as determined by. the Commissioner, should be reduced by the amount of tax assessed on the taxpayer’s amended return for that year.*

This taxpayer appears to have consistently followed a system of accounting based upon completed contracts and, without any reference to the time when contract moneys have been received or the work actually performed, the total contract price has been treated as gross income and the total cost of performance of the contract has been treated as deductions in the year in which the original construction work under the contract was completed. This method of accounting for road, paving, and similar contracting appears to be in accord with generally approved accounting methods. Practically all of these kinds of contracts require that the contractor shall maintain and repair the roads or streets built or paved by it for a specified term of years, and experience has demonstrated that under the repair and maintenance provisions of such contracts the contractor will be required to expend various sums of money for repairs during the maintenance period. Whether the relationship between the gross price of the contract and the cost of future repairs has ever been or can be worked out to a reliable percentage basis has not been shown in the record of this appeal and is not known to the Board. However, in total disregard of the merits, if any, of this accounting question, the Board has determined in other appeals that reserves for repairs and maintenance under conditions such as those existing in this appeal can not be allowed as a deduction from gross income. Appeals of Uvalde Co., 1 B. T. A. 932; Consolidated Asphalt Co., 1 B. T. A. 79.

We therefore find: That there is no reason for modifying the deficiency determined by the Commissioner for the year 1919; that the deficiency for the year 1920 should be reduced by the amount of $4,309.31, assessed upon an amended return; and the excess profits tax, if any, for the year 1921 should be computed upon the basis set forth in Appeal of Guarantee Construction Co., 2 B. T. A. 1145.


text:
    Appeal of CARSO PAPER CO., INC.
    Docket No. 4930.
    Submitted October 13, 1925.
    Decided November 12, 1925.

      William M. Smith, Esq., for the taxpayer.

      F. O. Graves, Esq., for the Commissioner.
    Before Smith, James, Littlf/ton, and Trussell.
    This appeal is from the determination of a deficiency in income and profits tax for the year 1920 in the amount of $485.60. The point in issue is the right of the taxpayer to deduct from gross income, in its income and profits-tax return for the year 1920, $1,000 paid by the taxpayer toward the establishment of a hospital in the village of Dansville, N. Y.
    FINDINGS OF FACT.
    The taxpayer is a Massachusetts corporation with its principal office at Dansville, N. Y. It is engaged in the manufacture and sale of paper. It employs labor at Dansville. In 1920 it contributed $1,000 toward the establishment of a hospital in the city or village in which its principal plant was located and deducted the amount of the contribution from gross income in its income-tax return for 1920. The deduction was disallowed by the Commissioner.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of PERU CHAIR WORKS.
    Docket No. 3408.
    Submitted July 14, 1925.
    Decided November 14, 1925.

      James W. Good, Esq., for the taxpayer.

      P. 8. Crewe, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Trussell.
    This is an appeal from the determination of deficiencies in income and profits taxes for the years T918 and 1919 in the net amount of $7,081.76. The issue is whether the taxpayer was, during the taxable year in question, affiliated with the Wolverine Cedar & Lumber Co. and the Chute & Butler Co., the Commissioner having denied affiliation.
    FINDINGS OP PACT.
    The taxpayer is an Indiana corporation with its principal office in Peru. The taxpayer was incorporated in 1915. The Wolverine Cedar & Lumber Co. was incorporated some time prior to 1915, and the Chute & Butler Co. was incorporated in 1901.
    The stockholdings in the taxpayer, the Wolverine Cedar & Lumber Co., the Chute & Butler Co., and the Oakdale Improvement Co., during the taxable years in question, were as set forth in the following table:

      E. A. Edwards was the directing head of the above corporations, president of the Peru Chair Works, the Wolverine Cedar & Lumber Co., the Chute <& Butler Co., and the Oakdale Improvement Co. His wife, Alice S. Edwards, was the owner of shares of stock as set forth in the foregoing table, as was his son, E. E. Edwards. M. A. Edwards is also a son of E. A. Edwards.
    During these taxable years substantially all the stock of the Peru Chair Works, the Wolverine Cedar & Lumber Co., and the Chute & Butler Co. was owned or controlled by the same interests. It was stipulated by the taxpayer and the Commissioner that the Oakdale Improvement Co. was not affiliated with the other companies named during the period in question.
   DECISION.

The deficiencies for the years in question should be computed on the basis of consolidated returns for the three companies above set forth. Final determination will be settled on 15 days’ notice, under Eule 50.


author: Korner, Chairman:

text:
    Appeal of GOODELL-PRATT CO.
    Docket No. 287.
    Submitted December 5, 1924.
    Decided November 14, 1925.
    The deduction, concurrently, as operating expenses, of expenditures made in the development of patents, processes, etc., does not bar their restoration to surplus upon a clear showing that they were in fact capital expenditures. Appeals of Gilliam Mfg. Co., 1 B. T. A. 967, and Union Metal Mfg. Co., 1 B. T. A. 395, cited and approved.

      Ralph L. P. 'Wallace, Esg., for the taxpayer.

      John D. Foley, Esq., for the Commissioner.
    Before MaRquette and KoeNee.
    This is an appeal from the determination of a deficiency in income and excess profits taxes for the years 1917, 1918, and 1919. The amount of the net deficiency for those years is $29,243.43.
    BINDINGS OF FACT.
    1. The taxpayer is a corporation organized under the laws of Massachusetts in the year 1895, with its principal office at Greenfield. It is, and has been since the date of its organization, engaged in the business of manufacturing and selling tools. The stock of the corporation is closely held.
    2. When the taxpayer commenced business it manufactured only one tool, namely, an automatic punch drill. From time to time it developed and placed on the market other tools, until at the present time it manufactures and carries in stock over 2,000 different mechanics’ tools. When a tool is developed and found to be successful, it is listed in the taxpayer’s catalogue, which is issued once a year. A tool once brought out and listed is thereafter in stock, so that it is possible to-day to purchase any tool that the taxpayer has ever made and placed on the market. The taxpayer maintains, and has maintained for many years, a separate department for the purposes of working out new ideas and developing new tools, patents, secret processes, methods of manufacture, and special machinery. The expenses of this department consist and have consisted largely of salaries and amounts paid for consumable materials.
    3. During the years 1909 to 1916, inclusive, the taxpayer expended $280,513.26 in developing certain patents, secret processes, methods of manufacture, special machinery, and new. tools, in developing foreign markets, in gathering and compiling information relative thereto, and in establishing agencies, etc. These expenditures were charged to current expenses and claimed as deductions on income-tax returns for the years in which such returns have been required. From* time to time appraisals were made of the intangible assets created through these expenditures and the appraised values thereof were set up on- the taxpayer’s books and credited to surplus.
    4. The good will and other intangible assets, created by the taxpayer through the expenditure of the amount of $280,513.26 during the years 1909 to 1916, inclusive, as above set forth, had, on January 1, 1917, a total value of at least $280,513.26.
    5. Upon audit of the returns for the years 1917, 1918, and 1919, the Commissioner eliminated from the taxpayer’s invested capital the entire amount of good will shown by its books. The taxpayer thereupon claimed that, in lieu of the good will eliminated by the Commissioner, it should be allowed additional invested capital for the years 1917, 1918, and 1919, through the restoration to surplus of the amount of $280,513.26 expended during the years 1909 to 1916, inclusive, as above set forth, and charged to expense. The Commissioner disallowed the taxpayer’s claim, and determined that there is a deficiency in tax in the amount of $71,863.09 for the year 1919, and overassessments of $36,889.83 and $5,729.83, respectively, for the years 1917 and 1918, making a net deficiency of $29,243.43.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, in accordance with Eule 50.
   OPINION.

Korner, Chairman:

The only question presented by the record in this appeal is whether or not the taxpayer may include in invested capital for the years 1917, 1918, and 1919 the amount of $280,513.26 expended during the years 1909 to 1916, inclusive, for development of patents, secret processes, methods of manufacture, special machinery and new tools, foreign markets, etc., charged to expense concurrently with the transactions and deducted from gross income for income-tax purposes in those years.

The Commissioner admits that the amount involved was expended for the purposes stated, but contends, nevertheless, that the taxpayer is not legally entitled to restore this amount to surplus for invested capital purposes, for two reasons: (1) That as a matter of good accounting it is optional with the taxpayer whether expenditures of the character here under consideration shall be charged to a capital account or treated as cost of current operations, and since the taxpayer elected to treat them as cost of current operations concurrently with the transactions a revision of that election can not now be permitted; and (2) that though the Board should find that these expenditures were of a capital nature and erroneously treated on the taxpayer’s books as charges against current earnings, the taxpayer has failed to show that through such expenditures it acquired anything of value.

The first contention of the Commissioner is in keeping with a policy long in vogue in the Bureau of Internal Revenue, which is best expressed by quoting below certain articles and excerpts from articles of Regulations 45 promulgated by the Commissioner under the authority conferred upon him by the Revenue Act of 1918 :

Art. 840. Surplus and- undivided profits: additions to surplus account. — A corporation’s books of account will be presumed to sbow the facts. If it claims that its capital or surplus account is understated the burden of proof will rest upon it. Additions to such accounts will be accepted to the following extent:
* * * ⅜ * * j|c
(3) Amounts which have been expended in the past for intangible property of any kind can be restored to capital or surplus account only to the extent that the corporation specifically paid such amounts for the intangible property as such.
Art. 841. Surplus and undivided profits: limitation of additions to surplus account. — Additions to surplus which a corporation may desire to make under the preceding article fall broadly into two classes:
(1) To correct returns of net income for prior years in which actual errors have been made, as for example where excessive depreciation has been deducted, additions to plant and equipment or other capital charges have been charged off as an expense, inventories have been taken upon a wrong basis of valuation, etc.
(2) To reinstate in surplus deductions from income which are as a matter of good accounting to some extent optional, such as experimental expenses, patent litigation, development of good will through advertising or otherwise, etc.
Adjustments falling in class (1) will "he permitted for all years whether before or after March 1, 1913, provided amended returns of net income are filed for each year in which an erroneous return has been made. * * * Adjustments falling in class (2) can not be permitted, as in such cases it is considered that the corporation has exercised a binding option in deducting such expenses from income. An election of this sort which was made concurrently with the transaction can not now be revised, and amended returns in respect thereof can not be accepted.
ART. 843. Surplus and, undivided profits: patents.— * * * Where a corporation has charged to current expenses the cost of developing or protecting patents, no amount in respect thereof expended since January 1, 1909, can be restored in computing invested capital. In respect of expenditures made before January 1, 1909, a corporation now seeking to restore them must be prepared to show to the satisfaction of the Commissioner that all such items are proper capital expenditures * * ⅜. Due consideration will be given to the facts in any case in which this rule seems obviously unreasonable.

Thus, in the Commissioner’s first contention, there is brought sharply before us for consideration - the question as to whether or not that part of Regulations 45, more particularly articles 841 and 843, which, basing itself on so-called good accounting, permits the restoration to surplus of certain capital expenditures previously recorded on the books as current expenses, and excludes others from like restoration, is in conflict with section 207 of the Revenue Act of 1917 and section 326 of the Revenue Act of 1918.

We have had occasion before to consider this question, in a somewhat limited way, in Appeal of Gilliam Mfg. Co., 1 B. T. A. 967, citing Appeal of Union Metal Mfg. Co., 1 B. T. A. 395. In the Gilliam Appeal the issue presented involved the right of the taxpayer to restore to surplus account and capitalize, for the purpose of computing the gain or loss resulting from the sale of patents, all expenditures made in the development of those patents which had previously been deducted in tax returns as ordinary and necessary business expenses. We considered the issue presented there from the standpoint of the law as we interpreted it and then stated our opinion, as follows:

If the amounts expended were actually paid out In acquiring patents, the deduction of such amounts as ordinary and necessary expenses of carrying on a trade or business was not proper. The fact that a taxpayer did deduct such items or considered them as expenses does not alter the situation. Such treatment was erroneous. The taxpayer has no option to treat expense items as capital or capital expenditures as ordinary and necessary expenses of carrying on a trade or business and bad a right, as it did, to change its erroneous accounting methods. The patents, when acquired, formed a part of the capital investment of the taxpayer and the costs thereof were not ordinary and necessary expenses of carrying on its trade or business.

What we said there should be a sufficient answer to the question presented in the case at bar. It applies with equal force in every case where tie taxpayer, through erroneous accounting practice in years prior to the inception of the profits taxes, recorded on its books, as ordinary and necessary business expenses, expenditures made in the acquisition of additional assets, whether of a tangible or intangible nature. The Revenue Acts have consistently excluded such expenditures as deductions in computing taxable net income, and the fact that the taxpayer has deducted them in its income-tax returns, without any revision of that action by the Commissioner, does not bar their restoration to surplus upon a clear showing that they were in fact capital expenditures.

So much for the legal aspects of the question. However, we find that the Commissioner’s action in this appeal in refusing to permit the restoration to surplus of the amount contended for by the taxpayer is predicated on a theory that the whole amount is made up of expenditures which, from the standpoint of good accounting, the taxpayer at its own option was at liberty to treat as additions to its capital investment or as proper charges against the current earnings of the years in which such expenditures were made. This gives rise to the question, as to whether, from the standpoint of good accounting, it is possible so to divide accounting facts of an obviously homogeneous nature as to subject the subdivisions so created to two radically different treatments. For its answer we must venture for a moment into the field of accounting in search of the principles underlying the theory of accounting for expenditures of this character.

One of its leading practitioners has defined accounting as the science of accounts embracing their construction, classification, and interpretation. Another suggests that it is nothing more than a system of philosophy resting on the broad basis of business embracing the whole range of human endeavor. Like all other sciences not susceptible of mathematical demonstration, accounting is not an exact science. Whatever it has acquired in the way of wisdom has been the result of a thorough and painstaking study of the aspirations, efforts, successes, and reverses of business in all its ramifications. But it is founded upon certain fundamental principles which are -universal and immutable and which give recognition to the fact that there is only one truth in everything and no half truth, or quarter truth, or approximations of the truth.

To hold that in every accountant or individual entrusted with the supervision or the keeping of the accounts of a business enterprise, or in the executive officers of such an enterprise, vests an option to treat certain expenditures in one of two ways, is entirely repugnant to the principles of accounting. It would deny accounting the true status which it has enjoyed in its' relations to the progressive business body, that of a faithful adjunct, ever ready to interpret, by its own system of philosophy, every business transaction according to the true facts.

The motive power behind any human endeavor is the purpose of that endeavor. So in business the motive power behind every business transaction is the purpose for which the transaction was entered into. - Accounting seeks only to so record the facts as to bring forth and make evident the success or failure of the effort made to accomplish the purpose. This is the philosophy of accounting. Upon that solid foundation are its principles founded. So it is clear that the question of two or more diametrically opposite options in regard to the accounting treatment of certain facts never arises and never can arise.

True, as in all sciences which can not be mathematically demonstrated, we find any number of conflicting theories expounded by the leading practitioners of accountancy, but it is a far cry from the preachment of these theories to their consecration as sacred principles of accounting.

So we believe that from the standpoint of good accounting no right ever vested in any business enterprise to treat certain expenditures according to either of two diametrically opposed theories.

This brings us to the question as to whether or not the expenditures which this taxpayer seeks to restore to surplus account for invested capital purposes may be properly regarded as capital expenditures which were erroneously treated by the taxpayer as ordinary and necessary business expenses and deducted as such in its income-tax returns during the years 1909 to 1916, inclusive.

The term “ capital expenditures ” is largely an accounting term and belongs to the accountants’ nomenclature. Since in the nature of human affairs, the effect of an expenditure concurrently with the transaction can not in any case be foreseen with absolute certainty, the accountant manifestly must be guided by the purpose and hope or expectation both as to the possible increase in income and as to permanency.

In his Applied Theory of Accounts, page 226, Paul J. Esquerré, C. P. A., defines capital expenditures as follows:

When subjected to a theoretic analysis, this term appears to apply to such expenses as, in the aggregate, represent the cost of the increased earning capacity of the enterprise as a whole or of particular parts thereof, which has been secured over the earning capacity known to exist before the said expenses were incurred.

So, too, William M. Lybrand, C. P. A., in his article on “Accounting of industrial enterprises,” (Journal of Accountancy, December, 1908) defines the same term as follows:

With respect to items which may properly be considered as capital expenditures, it has been suggested as a working basis that no addition should be made to the property accounts unless it can be clearly shown that they hare increased the earning capacity of the plant. A simple, positive rule such as this might be all that is required, if the changes in the plant and the resulting increase in earning capacity were occasioned only by actual extensions or additions of property which had never before existed. But such is not the case. In every progressive manufacturing concern, alterations or additions to the plant are constantly being made for the purpose of simplifying the manufacturing processes and thereby increasing the output with the same expenditure for labor and materials, or in order to decrease those operating charges which are in the nature of overhead expenses required to be taken up in the cost of the product. As no alteration or addition to the plant is probably ever undertaken except for the purpose of increasing the earning capacity thereof, directly or indirectly, the literal application of the rule referred to is not possible, and it will be necessary to consider the nature of the various alterations, improvements, and additions, before an intelligent decision can be made as to their ultimate disposition.

To what extent these views are concurred in by the judiciary is best evidenced by the language of the United States Supreme Court when, in the case of the LaBelle Iron Works v. United States, 256 U. S. 377, after a most exhaustive discussion of the meaning under the law of the term “ invested capital,” it laid down the following definition:

When speaking of the capital of a business corporation or partnership, such as the act deals with, “ to invest ” imports a laying out of money, or money’s worth * * * by the concern itself in acquiring something of permanent use in the business; in either case involving a conversion of wealth from one form into another suitable for employment in the making of the hoped-for gains.

All accounting authorities will agree that this definition of the court is in harmony with sound accounting principles.

The Commissioner admits that the expenditures which this taxpayer seeks to restore to surplus were made for the purposes here-inbefore stated. That they constitute capital expenditures we have no doubt. They were expended expressly for the purpose of increasing the earning capacity of the enterprise — in acquiring something of permanent use in the business.

That the taxpayer’s efforts to accomplish the purposes for which these expenditures were made were successful is evident from a reading of our findings of fact. From a small enterprise whose products in 1895 consisted of a line of a score or so of tools and a limited local market it has grown to be a leader in its industry with a line of 2,000 different tools, all manufactured in its own plant, marketing its products throughout the entire world. It is for these reasons that we are unable to concur in the Commissioner’s contention that, notwithstanding this large outlay of capital, the taxpayer acquired nothing of value which may be restored to its surplus account and included in invested capital. The evidence before us and our findings of fact justify no such conclusion.

Taxpayer is entitled to restore to its surplus account and include in its invested capital the sum of $280,513.26, representing capital expenditures previously charged as current expenses on its books and income-tax returns in error.


text:
    Appeal of P. P. SWEETEN
    Docket No. 4331.
    Submitted October 6, 1925.
    Decided November 14, 1925.

      P. J. Daly, G. P. A., for the taxpayer.

      F. 0. Graves, Esq., for the Commissioner.
    Before Phillips and Trammell.
    This is an appeal from the determination of a deficiency in income tax for the calendar year 1920 in the amount of $146.68. The deficiency arises from the action of the Commissioner in adding to the taxpayer’s income $2,000 as representing merchandise withdrawn from stock in trade for personal use.
    FINDINGS OF FACT.
    The taxpayer is an individual owning a general grocery and mer-chandisé store at Pedricktown, N. J.
    During 1920 the taxpayer withdrew from his stock in trade, for the use of himself and his wife, groceries and other goods. The cost of the merchandise was approximately $1,000, and such cost was included by taxpayer in computing his income as a part of the cost of goods sold.
   DECISION.

The deficiency should be computed by adding the value of the merchandise withdrawn, $1,000, to the taxpayer’s gross income for 1920. Final determination will be settled on 10 days’ notice, under Bule 50.


text:
    Appeal of BARKER, FROST & CHAPMAN CO.
    Docket No. 2753.
    Submitted September 16, 1925.
    Decided November 14, 1925.
    Taxpayer held not entitled to classification as a personal-service corporation for tbe years 1919 and 1920.

      Homer Sullivan, 1Esq., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes in the amount of $2,344.78 for the calendar years 1919 and 1920. The only issue involved is whether the taxpayer is entitled to personal-service classification.
    FINDINGS OF FACT.
    The taxpayer is an Ohio corporation, organized in 1912, with its principal office at Toledo, and is engaged in the business of conducting an insurance agency.
    During the years here involved the taxpayer’s income consisted of fees and commissions on the writing of insurance policies. It represented and wrote insurance policies for a number of insurance companies. Business was solicited by some of its stockholders, foreign brokers, office brokers, and subagents.
    The president of the taxpayer corporation testified that the gross income from commissions for 1919 and 1920 was as follows:

    Schedules attached to the income-tax returns for 1919 and 1920, showing income produced by office brokers and agents, are as follows:

    The persons listed above were not stockholders.
    Office brokers are persons employed on full time by the taxpayer and are paid a salary and commission. They are not stockholders. Foreign brokers or outside brokers are those located in other States but licensed to do business in the State of Ohio. Approximately 90 per cent of the taxpayer’s business which was handled through outside brokers had originally been procured and handled by the taxpayer itself, but during tbe years here involved, for business reasons, had been handled through the offices of the outside brokers and the commissions divided between such brokers and the taxpayer.
    The corporation had an authorized capital, stock of $75,000, of which only $48,100 was issued. It was held as follows:

    Of the above stockholders, L. L. D. Chapman, Calvin Barker, J. D. Nolan, F. J. Bogers, J. J. Lovett, and P. H. Chapman devoted their entire time to the conduct of the.business of the taxpayer.
    When the corporation was organized in 1912 it took over the business which had been successfully operated since 1878 by a partnership. The partnership in 1912 was composed of L. L. D. Chapman, Calvin Barker, and Andrew Plunker. The corporation issued $34,000 of its capital stock for the good will of the partnership and the balance of the stock for the tangible assets, including the bank account.
    The taxpayer borrowed no money during the years 1919 and 1920.
    In April and October, 1919 and 1920, the premiums on policies written by the taxpayer and the payments made by it to insurance companies in advance of receipt of the premiums from policy holders were as follows:

    At the close of the year 1919, the taxpayer’s books showed $102,-216.73 due from agents, customers, and brokers, and $93,620.83 due to insurance companies, agents, and brokers.
   DECISION.

The determination of the Commissioner is approved.


author: Morris

text:
    Appeal of EDWARD M. LAWRENCE.
    Docket No. 3961.
    Submitted July 22, 1925.
    Decided November 14, 1925.
    The burden of proof to show that an assessment has been, barred by the statute of limitations is on the taxpayer.

      Ernest H. Griswold, G. P. A., for the taxpayer.

      B. G. /Simpich, Esq., for the Commissioner.
    Before Marquette and Morris.
    This appeal is from the determination of a deficiency in income tax for 1918 in the amount of $3,941.60. The question involved is whether assessment of the deficiency is barred by the statute of limitations.
    FINDINGS OF FACT.
    The taxpayer is a resident of Rockland, Me. Under date of March 7, 1919, while in Florida, he signed and made oath to a return of his income for the year 1918 on Form 1040, said return showing no net income. On April 29, 1925, the collector at Augusta, Me., acknowledged in writing that the taxpayer’s return for 1918 had been located, “which was filed on Form 1040 disclosing no tax liability and is now on file in this office.” The return was produced by the Commissioner and submitted in evidence by the taxpayer, but there was nothing on the face thereof to indicate when it was filed. A purported amended return for the year 1918, signed and sworn to June 18,1924, was forwarded to the Commissioner by the taxpayer’s representative on July 14, 1924, showing a tax of $3,941.60, which amount is the deficiency determined by the Commissioner, from which this appeal is taken. The deficiency letter is dated March 11, 1925.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Morris

: The taxpayer contends that the facts in this appeal raise a presumption that his return for the year 1918 was filed on or before March 15, 1919, which is conclusive, in the absence of proof by the Commissioner that it was not so filed, and that, therefore, the assessment of the deficiency is barred by section 277 (a) (2) of the Revenue Act of 1924, which reads in part as follows:

The amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1918 * * * shall be assessed within five years after the return was filed, * * *.

We can not agree with his contention. In our opinion tl „ statute of limitations on assessment is an affirmative defense and the burden of proving that the assessment has been barred thereby is on those seeking to avail themselves of its benefit. A return showing no tax due, for the year 1918, was filed by the taxpayer prior to the purported amended return, which was forwarded to the Commissioner July 14, 1924, but the date of filing is not stamped thereon, nor was any evidence of the date of its mailing to the collector introduced. We are, therefore, unable to determine that such return was filed more than five years prior to the mailing of the 60-day letter.


author: Phillips:

text:
    Appeal of JAMES L. EASTLACK.
    Docket No. 4240.
    Submitted September 21, 1925.
    Decided November 14, 1925.
    Net taxable income determined from the evidence.

      K. N. Parkinson, Esq., and H. A. Walbum, G. P. A., for the taxpayer.

      Arthur J. Seaton, Esq., for the Commissioner.
    Before Geaupner, Trammell, and Phillips.
    This is an appeal from determinations of deficiencies in income taxes for 1919, 1920, and 1921, of $4,854.91. Taxpayer alleges that the Commissioner incorrectly computed the gross income, expenses, and net income of taxpayer’s business for 1919 and 1920.
    FINDINGS OF FACT.
    During 1919 and 1920 taxpayer was engaged in the purchase and sale of automobiles, at Eichwood, N. J., and was sales agent for Ford and Buick cars. He also conducted a garage and service station.
    His gross income from such business for 1919, after allowing for credits and discounts, was $280,205.22. The cost of the goods sold and other business deductions were $208,790.34.
    DECISION.
    The determinations of the Commissioner for. 1920 and 1921 are approved. The deficiency for 1919 should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days’ notice, under Buie 50.
   OPINION.

Phillips:

For 1919 taxpayer takes issue witli the Commissioner as to the correct amount of the gross income, deductions, and net income of his business. There have been submitted to us the original return, the original internal revenue agent’s report, an amended return prepared for the taxpayer by an accountant, and a supplemental report of the revenue agent based upon such amended return. There have also been submitted the taxpayer’s books of account.

The Commissioner accepted the revenue agent’s supplemental report and used it as a basis for the determination of the deficiency involved. This report increases taxpayer’s income from the sale of cars in 1919 by $6,906.18 and from the sale of accessories by $995.58. An examination of accessory sales, shown upon taxpayer’s books of account, which are fairly complete as to such sales, shows no justification for such increase of $995.58 and it has been disallowed. The increase from car sales is made up of two items, one of which is $4,086.80, stated to be “items on which dates were changed.” The only record of car sales kept by taxpayer was upon a perpetual inventory. When cars were received a description was entered upon such inventory specifying the make and design of the car and the engine and body number, together with the price paid. When the car was sold there was inserted against this entry the name of the purchaser, the date of sale, and the sales price. It appears from the testimony and from the taxpayer’s boobs that in three instances 1919 sales were recorded against the incorrect motor number. When the error was found the entry of the sale was erased and the same information recorded against the proper motor number. The cars against which such incorrect entries had been made in 1919 were sold in 1920 and notations made showing the 1920 sale. Because of such erasures the internal revenue agent included in 1919 sales not only the three cars actually sold, but also the three cars against which improper entries were originally made, thus duplicating gross sales to the extent of $4,086.80. In the findings of fact this duplication has been disallowed. The remainder of the $6,906.18 item is unexplained. Because of the method which taxpayer pursued in keeping his books, it is possible to determine gross sales of cars only by taking individual sales from the perpetual inventory and adding such sales. No record of accounts receivable and no cash book was available. In the absence of records from which we can satisfactorily determine whether the taxpayer or the Commissioner is correct, we do not propose to disturb the Commissioner’s determination with respect to this item.

Taxpayer also alleges that the Commissioner committed error in reducing the cost of its goods sold by $3,788.03, stated to be “ freight charges duplicated.” The cost of goods sold, as computed by the Commissioner, is taken from a summary account upon taxpayer’s books. Taking such summary and comparing it with the perpetual inventory, we find that the freight charges have been included in the cost of cars sold. To include such freight charges again as a separate item would duplicate the deduction, and for that reason the Commissioner’s computation has been sustained with respect to such item.

Taxpayer claims that the Commissioner incorrectly computed the cost of goods sold in 1920. Taxpayer has submitted a record which summarizes his purchases of supplies and cars by monthly totals. Following the entry for the month of December, 1920, the record contains additions which purport to show the purchases for the year. These additions were used by the Commissioner in computing 1920 purchases. Following these additions is an entry of $9,292.22, which purports to be purchases made during the course of the year and not previously entered. Testimony was given by the bookkeeper that such purchases were made by the taxpayer by checks not recorded at the time in the check book, but the taxpayer’s records are so deficient that it is impossible to verify such purchases on its books in any manner that is at all satisfactory, or to verify the sale or inventory of such goods for the purpose of determining whether the sales price was reported in income or whether they were included in inventory, if unsold, and for that reason the determination of the Commissioner has been approved.


author: Trammell:

text:
    Appeal of BAY STATE SECURITIES CO.
    Docket No. 3685.
    Submitted October 5, 1925.
    Decided November 14, 1925.
    Under tbe evidence, two corporations held to be affiliated from December 4, 1919.

      Harold, L. Clark, Esq., for the taxpayer.

      M. N. Fisher, Esq., for the Commissioner.
    Before Phillips and Teasimell.
    This appeal is from the determination of a deficiency in income and profits taxes for the calendar year 1919 in the sum of $997.64. The deficiency results from a determination by the Commissioner that the taxpayer was affiliated with the American Insulator Co., a corporation, commencing September 15, 1919, instead of from December 4,1919.

      FINDINGS OF FACT.
    1. The taxpayer was a Delaware corporation organized on- or about July 24, 1919. It filed a separate income-tax return for the taxable period July 24,1919, to December 31,1919.
    2. On or about November 9, 1919, the stockholders of the American Insulator Co. gave a written option on its stock to one F. C. Keller running to November 21, 1919. This option was later extended to November 28, 1919. On November 26 this option was assigned to the Industrial Co., a corporation, which shortly thereafter reassigned it to the taxpayer corporation. Negotiations were concluded between the taxpayer and the American Insulator Co. between December 1 and December 4, 1919. Payment was made for the stock December 4, 1919. Formal transfer of the stock and the corporation resolutions necessary to legally transfer the stock were consummated December 5, 1919.
    3. Prior to December 4, 1919, there had been no business relations between the taxpayer and the American Insulator Co.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Rule 50.
   OPINION.

Trammell:

The sole question here is to determine the date of affiliation of the taxpayer with the American Insulator Co. The Commissioner alleges the date was September 15, 1919, while the taxpayer claimed the date of affiliation was December 4, 1919. The taxpayer has presented in evidence the written option, letters and communications and records of the American Insulator Co., which conclusively show that negotiations for the stock did not commence until November 9, 1919; that the taxpayer did not determine to exercise its option to buy the stock until November 26, 1919, and the determination then was subject to a further examination. The sale did not take place until December 4, 1919. Prior to that date there is no evidence of any control of the stock by the taxpayer. The option did not vest any control whatever until or unless it was exercised. We therefore hold that the affiliation took place December 4,1919.

In this case it is conceded that the corporations have not entered into an agreement between themselves as to the proportion of the tax to be assessed to each, so the tax should be allocated upon the basis of the net income properly assignable to each company in accord-anee with section 240 (a) of tbe Revenue Act of 1918, and computed on the basis set forth in the Appeal of American La Dentelle, Inc., 1 B. T. A. 575.


text:
    Appeal of GLASSER GRAIN CO., INC.
    Docket No. 4189.
    Submitted October 28, 1925.
    Decided November 14, 1925.

      Martin Auslánder, O. P. A., for the taxpayer.

      F. 0. Graves, Esq., for the Commissioner.
    Before Phillips and TRammell.
    Taxpayer appeals from the determination of income and profits taxes for 1918, 1919, and 1920, in the sum of $2,613.94, alleging that in computing net income various errors have been made, and further alleging that the invested capital has been understated by reason of the computation of the income and profits tax for 1917.
    FINDINGS OP PACT.
    In computing 1917 income the Commissioner overstated gross sales of taxpayer by $1,197.31, and overstated cost of goods sold by $705.68, resulting in an overstatement of net income by $491.63. Taxpayer claimed a deduction of $2,253.93 for debts alleged to have been ascertained to be worthless and written off in 1917. As to all other adjustments, taxpayer acquiesces in the Commissioner’s computations. The Commissioner concedes the overstatement of income by $491.63. No competent testimony as to the alleged bad debts was introduced.
    In computing 1918 income the Commissioner overstated gross sales by $1,217.66, and understated cost of goods sold by $405.78, resulting in a net overstatement of income of $1,623.44. Taxpayer claimed deductions for repairs of $1,780.76, and for refunds and allowances of $590.61. Taxpayer acquiesces in the Commissioner’s determination as to all other items and the Commissioner conceded the overstatement of $1,623.44. No competent evidence was introduced to show the expenditures for repairs or to sustain any deduction for refunds and allowances.
    In computing 1919 income the Commissioner overstated gross income from sales by $419.53, and understated cost of goods sold by $2,605.12, resulting in an overstatement of taxpayer’s income of $3,024.65. Both parties conceded such errors and further conceded that in all other respects the computation of the Commissioner is correct.

      In computing 1920 income the Commissioner erroneously overstated income from gross sales by $1,607.94, and understated cost of goods sold by $1,837.24, resulting^ in an overstatement of net income by $3,445.18. Taxpayer also claimed that the Commissioner erroneously understated the closing inventory by $2,887.17, but introduced no competent evidence to sustain its contention. In all respects the taxpayer acquiesces in the action of the Commissioner. The Commissioner concedes the overstatement of net income by $3,445.18.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 15 days’ notice, under Rule 50.


text:
    Appeal of ROGERS & BALDWIN HARDWARE CO.
    Docket No. 3355.
    Submitted October 14, 1925.
    Decided November 14, 1925.

      Lewis Luster, Esq., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arttndell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the fiscal year ended April 30, 1919, in the amount of $3,147.36. The deficiency arises from the refusal of the Commissioner to include in invested capital $50,000, which the taxpayer claims was paid to the corporation by its chief stockholder, A. A. Baldwin, and also from the refusal of the Commissioner to grant relief under section 328 of the Revenue Act of 1918, although the Commissioner concedes an abnormality with respect to the taxpayer’s invested capital.
    FINDINGS OF FACT.
    The taxpayer is a Missouri corporation with its principal place of business in Springfield.
    On July 29,1901, A. A. Baldwin had acquired practically all of the stock of the taxpayer and thereafter during his life directed and managed its affairs. Some years thereafter Baldwin gave to his four children one-half of the outstanding stock represented by 1,000 shares and retained in his own name 1,000 shares. The corporation throughout its existence, and particularly during the year in question, remained a family affair, in which A. A. Baldwin was the dominating factor.

      The accounts of A. A. Baldwin were carried on the books of the taxpayer designated, respectively, as “ Investment account,” “ Building account,” and “ Personal account.” There were credited to the investment account dividends declared by the corporation and interest on balances remaining in that account. The building account represented amounts due Baldwin for the rental of the building in which the taxpayer carried on its business. After April 30,1918, the taxpayer did not pay any interest to Baldwin on amounts remaining to his credit on the books of the corporation. The minutes of the taxpayer show the following record under date of September 15, 1920:
    Mr. A. A. Baldwin expressed his wish that of the amount now shown to the credit of his personal account, fifty thousand dollars ($50,000) of this be charged to his account and passed to the credit of surplus account of the Company. Motion seconded and carried. Change was ordered made.
    Under the same date the investment and building accounts of Baldwin were charged with $50,000 and a credit to surplus entered.
    The Commissioner conceded an abnormality with respect to the taxpayer’s invested capital, but claimed that no relief could be given as the profits taxes paid by the taxpayer are not in excess of the average profits taxes paid by representative concerns.
   DECISION.

The determination of the Commissioner is approved.


author: Trussell

text:
    Appeal of L. R. DAVIDSON.
    Docket No. 2593.
    Submitted June 15, 1925.
    Decided November 14, 1925.
    Evidence held insufficient to establish a March 1, 1913, value of oil wells in.exeess of the value fixed by the Commissioner.

      Jos. A. Albrecht, Esq., for the taxpayer.

      F. O. Graves, Esq., for the Commissioner.
    Before James and Trussell.
    This is an appeal from the determination of a deficiency in income tax for the year 1919 in the amount of $2,011.94. The question involved is the amount which the taxpayer, in computing his net income for that year, is entitled to deduct as an allowance for the depletion of certain.oil wells owned by him. The appeal was submitted on the pleadings, stipulations by the parties, and the deposition of the taxpayer.

      FINDINGS OF FACT.
    The taxpayer resides at Buffalo, N. Y. In the year 1894 he-purchased a farm located in Beaver County, Pa., and during the years 1898 to 1912 drilled thereon nine oil wells, all of which were producing oil on March 1, 1913, and continued to produce oil imtil some time subsequent to the year 1919. The oil content of these wells on March 1, 1913, was stipulated to be 26,258 barrels and the avérage daily settled flow on that date was 10.82 barrels of oil.
    The property involved herein consists of the nine oil wells mentioned and the machinery and equipment necessary to work them. On March 1,1913, value of the machinery and equipment was $5,500,. and in computing his net income for the year 1919 the taxpayer is entitled to a deduction for depreciation thereof, based upon that value. The remaining value of the entire property on March 1,1913, was the value of the oil content of the wells on that date, which the Board finds to be $32,460. The amount of oil produced in the year 1919-was 1,670.46 barrels.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Trussell

: The only question presented by the record in this appeal is the amount the taxpayer is entitled to deduct, in computing his net income for the year 1919, as an allowance for the depletion of the oil wells referred to in the findings of fact. These wells were acquired by the taxpayer prior to March 1,1913, and he is therefore entitled to recover through depletion allowances their fair market value as of that date, the amount recoverable in any one year being the percentage of the total value of the wells on March 1,1913, which the oil produced in the year for which the allowance is made is of the total oil content of the wells on March 1, 1913. Appeal of The Royal Collieries Co., 1 B. T. A. 369. The taxpayer and the Commissioner agree that the oil wells referred to had an oil content on March 1, 1913, of 26,258 barrels; that their average daily flow at that time was 10.82 barrels of oil, and that the production in the year 1919 was 1,670.46 barrels of oil. This leaves for determination only the question of the value of the wells on March 1, 1913.

The Commissioner has allowed a March 1, 1913, value of the taxpayer’s oil wells in the amount of $3,000 per barrel of average settled flow of oil, resulting in a total- value of $32,460. The taxpayer contends that this value per barrel should be $4,500 and the total value $48,690.

It is incumbent on the taxpayer to introduce sufficient evidence to show that the Commissioner committed error in determining the deficiency appealed from before the Board can disallow such a deficiency. Appeal of J. M. Lyon, 1 B. T. A. 378. Therefore, in this appeal, unless the taxpayer has established by competent evidence that the March 1, 1913, value of his oil wells was greater than the amount fixed by the Commissioner, this Board may not set aside the determination of the Commissioner and substitute a greater value as a basis for computing depletion of the wells. The only evidence introduced by the taxpayer as to the March 1, 1913, value of the wells is his own testimony, which we think wholly fails to establish his claim. That part of his testimony pertinent to this issue is as follows:

Q. Did you ever buy any producing wells?
A. No. ;
Q. Did you ever sell any?
A. No.
Q. Do you know of any such sales which occurred in the vicinity of your wells ?
A. No.
Q. Was there in 1913 a price which you understood to be the quoted price at which oil wells could be sold?
A. I can’t answer that.
Q. Could you have sold your oil wells on a basis of $3,000 per barrel production per day?
A. Well, I was told I could but when you get down to delivering up and getting the $3,000 its a different thing.
Q. Could you have sold them for more than that per barrel?
A. Yes, I was supposed to have been able to have gotten five or six thousand.
Q. Mr. Davidson, were you ever offered a price for this farm, this oil field, in 1913 or thereabouts?
A. Why, I have been offered different times, I can’t just tell when it was.
Q. Did you ever offer the plot for sale?
A. No.
Q. You say you were offered in 1913?
A. I have been offered at different dates. I am not so certain about 1913.
Q. Do you remember the amount?
A. Well, it was not a cash offer. It was a trade for Pittsburgh East End residence property.
* * * * * * *
Q. In the same form, page 5, schedule II, question 3. The question is “If value was ascertained by comparison with values of other properties established by actual sales of these properties, give details regarding each transaction so used and your basis of Comparison.” In answer to this question you have stated “ Wells in vicinity were quoted during the period around 1913 afc $4,500 per barrel per day, settled flow, and that basis is used in arriving at the answer to question 2(a).” My question is how did you determine the $4,500? '
A. I did not determine it. That is oil field valuation. I didn’t know whether I could sell it for that, half of it or double it. I got my information from this man Wright who was raised in the fields.

This testimony falls far short of establishing that the value of the taxpayer’s oil wells on March 1, 1913, was more than $3,000 per barrel of average production. It therefore follows that the taxpayer is not entitled to a greater deduction for the depletion of his oil wells in the year 1919 than the Commissioner has allowed.


author: Graupner:

text:
    Appeal of IRA A. KIP, Jr.
    Docket No. 3510.
    Submitted October 1, 1925.
    Decided November 16, 1925.

      James L. Dohr, Esq., for the taxpayer.

      Ward Loveless, Esq., for the Commissioner.
    Before Grattpner and Phillips.
    This is an appeal from the determination of a deficiency of $4,337.80 income tax for 1920. The only issue involved is whether an amount of $25,000 received by the taxpayer in 1920 was a payment for services rendered or a gift.
    FINDINGS OP PACT.
    The taxpayer is an individual having an office at 120 Broadway, New York, N. Y.
    In 1920 he was president of the Duratex Co., a manufacturer of artificial leather, which it supplied to the Willys-Overland Co., a manufacturer of automobiles. John N. Willys, president of the Willys-Overland Co., was a large stockholder of the Duratex Co. and a close business friend of the taxpayer.
    About 1920 the Willys-Overland Co. found it difficult to secure the kind of material it desired for use in the interior lining or upholstering of its automobiles and was anxious to be placed in touch with a new source of supply of the desired material. In the course of conversations early in 1920 the taxpayer advised Willys that he was acquainted with one Timmie, who was a manufacturer of fabrics suitable for the interior lining of automobiles, and that he believed that if a meeting of Willys and Timmie were arranged it might result in the Willys-Overland Co. securing a new source of supply for its fabrics at an advantageous price. The suggestion met with the approval of Willys. Thereupon, the taxpayer called upon Tim-mie and suggested that it would be to his advantage to do business with the Willys-Overland Co., and later arranged a meeting between Timmie and Willys at the office of the latter. In the negotiations which followed Willys acted as a representative of the Willys-Overland Co.
    During a conversation with the taxpayer, Willys stated it would be worth $25,000 to have a source of supply of the desired fabrics. The taxpayer, relying on this, statement, purchased a house and intended applying against the purchase price the $25,000 which he expected to receive from Willys. Failing to receive the payment when he expected it, the taxpayer wrote Willys asking that a check for the amount of $25,000 be forwarded. "" '
    Willys paid the taxpayer $25,000 by his personal check dated' March 10, 1920, and was later reimbursed for this expenditure by the Willys-Overland Co.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Graupner:

It is evident that the payment of $25,000 was not a gift, as the taxpayer contends, but was a payment for services rendered. The testimony shows that in 1920 the Willys-Overland Co. found it difficult to secure proper material for upholstering its cars and was willing to pay for being placed in contact with a manufacturer from whom it could obtain the material at an advantageous price. The evidence is clear that Willys was acting for the Willys-Overland Co. in the negotiations with Timmie, and had discussed the matter of the payment of the taxpayer with other officers of the company. In his testimony Willys stated, “* * * corporations do not give presents unless they get something for it financially.” This statement is at least persuasive in determining the intent which prompted the payment to the taxpayer. See Appeal of Herschel V. Jones, 1 B. T. A. 1226.

James not participating.


text:
    Appeal of WILLIAM M. ESCAVAILLE, Jr.
    Docket No. 2333.
    Submitted October 10, 1925.
    Decided November 16, 1925.

      Richard D. Daniels, Esq., for the taxpayer.

      A. E. Murray, Esq., for the Commissioner.
    Before Trammell and Phillips.
    This is an appeal from the determination of a deficiency of $127.92, income tax for- 1922, arising out of the disallowance by the Commissioner of $2,400 claimed by the taxpayer as a deduction for business expenses. ■

      BINDINGS OB BAOT.
    The taxpayer is a resident of the District of Columbia, with his office in the District, and in 1922 was engaged in soliciting advertising . for four, semimilitary publications. His compensation for advertising obtained by him was upon a commission basis. All expenses incurred in obtaining such advertising were' paid by the taxpayer. During 1922 he made seven business trips to various portions of the United States for the purpose of obtaining advertising. He spent $2,000 upon such trips for railroad fare, hotel accommodations, meals, and other ordinary and necessary business expenses.
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 10 days’ notice, under Bule 50.


text:
    Appeal of ORENTS DEPARTMENT STORES, INC.
    Docket No. 2400.
    Submitted September 24, 1925.
    Decided November 16, 1925.
    An inventory taken at cost may not be reduced by a straight percentage basis to determine market.

      E. M. Sclt/wafi-aenberg, Esq., for the taxpayer.

      F. O. Graves, Esq., for the Commissioner.
    Before Graupner and Trammell.
    This is an appeal from the determination of a deficiency in income and profits taxes for 1918 in the amount of $2,084.55. The deficiency arises from the disallowance by the Commissioner of the reduction in inventory at the end of 1918 by a straight percentage basis. The taxpayer also claims the benefit of section 328 of the Revenue Act of 1918, upon the ground that its income was abnormally affected for that year on account of the refusal of the Commissioner to accept its closing inventory on the above basis.
    BINDINGS OB FACT.
    The taxpayer was a corporation organized under the laws of Massachusetts, with its principal office at Sagamore. It operated a department store which sold women’s ready-to-wear apparel and shoes and men’s and boys’ clothing and household furniture. The taxpayer took its inventories in 1918 upon the basis of cost and reduced the amount thereof by a straight 10 per cent basis to arrive at market with respect to certain alleged shopworn and out-of-style goods. This method of arriving at market of such goods had been followed by the taxpayer in previous years as well as subsequently. The 10.,per cent reduction did not reflect either cost or market value.
    In 1921 a great part of the merchandise of the taxpayer was destroyed by fire. Its records also were destroyed, including the inventory which had been taken for 1918. A portion of the goods of the taxpayer included in thei inventory was out of style. At the end of 1918 prices on goods were on the increase, the market was on the increase, and. goods which were purchased during the latter part of the year cost more than they did in the earlier part of the year.
    No evidence was adduced to show the proportion of the goods which was shopworn or out of style or the market value of any particular goods at the end of the year.
    No abnormalities affecting income or invested capital existed during the taxable year.
    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Trammell:

The taxpayer took its closing inventory for 1918 on the basis of cost and undertook to reduce it to an alleged market by a straight reduction of 10 per cent with respect to certain goods which were claimed to have been shopworn or out of style. The Commissioner properly disallowed such a reduction. The disallowance of such a reduction in inventory for the close of 1918, if the Commissioner accepted a similar reduction in the closing inventory for the previous year which was the opening inventory for the taxable year, would cause an unwarranted shifting of income. But we have no evidence as to 'what action was taken by the Commissioner for the opening inventory for 1918, and we therefore approve his action in disallowing the reduction in the closing inventory.


text:
    Appeal of HURST, ANTHONY & WATKINS.

      Docket No. 3754.
    Submitted September 23, 1925.
    Decided November 16, 1925.

      L. E. Ruseh, G. P. A., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for the calendar years 1919, 1920, and 1921 in the amount of $995.51. The deficiency arose from the refusal of the Commissioner to classify the taxpayer as a personal-service corporation.
    FINDINGS OF FACT.
    The taxpayer was incorporated in December, 1915, with its principal place of business at Pittsburgh, Pa., and was engaged in the insurance-agency business. The original incorporators were Lloyd V. Watkins, Oliver C. Hurst, and one Anthony. Watkins had been in the insurance business in Pittsburgh about 10 years, Anthony Y years, and Hurst 14 years. Each of them had an extensive business acquaintance and a large number of policy holders and clients. The corporation was organized with a capital stock of $25,000, divided into 250 shares of the par value of $100 each. Two hundred and twenty-five shares were immediately issued to the incorporators, each receiving Y5 shares. The balance was issued one-third to each on January 1, 1918. The three incorporators each paid in $1,8Y5 in cash and turned over their businesses, which were valued at $5,625 each. Watkins, on account of a severe accident, retired from the firm in 1919. The corporation bought the stock of Watkins and placed it in its treasury. All the stockholders devoted all their time to the business and actively solicited insurance.
    The taxpayer represented a number of insurance companies, including fire, auto, casualty, plate glass, etc. The taxpayer collected the insurance premiums for the insurance companies for which it acted as agent and paid these premiums to the various companies, less its commission. In the case of casualty companies, it paid on the 10th day of the second month succeeding the date of the policy. For other companies it remitted on the last day of the third month succeeding the date of the policy. Some of its customers paid in advance, some paid when due and still others were delinquent. Frequently, taxpayer paid the premiums on behalf of delinquent clients. It was customary for the taxpayer to remit the premiums, less commissions, when due, so premiums paid in advance were used to pay for the premiums that were delinquent. On some occasions it was necessary to borrow money or issue checks to be paid when funds were available in order to /emit for its delinquent customers.
    The office force of the taxpayer consisted of nine employees, as follows: One telephone operator, two bookkeepers, two policy writers for casualty and auto insurance, two policy writers for fire insurance, one reporter of losses, and one general bookkeeper. The taxpayer also used 30 to 40 subagents who were paid commissions.
    The assets and liabilities of the taxpayer for the years in question were as follows:

    The gross sales, net income, and expenses for the years in question were as follows:

    The itemized statement of ordinary and necessary expenses set forth above is as follows:

    The income derived from the personal solicitation of the stockholders and its subagents for the years in question was as follows:

      The above amounts represent the taxpayer’s portion of the commissions and not the total premiums.
   DECISION.

The determination of the Commissioner is approved; Appeal of Joseph Emsheimer Insurance Agency, 1 B. T. A. 649.


author: GeaupneR

text:
    Appeal of ALLEN-EATON PANEL CO.
    Docket No. 1639.
    Submitted September 24, 1925.
    Decided November 16, 1925.

      Ha/rry M. Jay, G. P. A., for the taxpayer.

      F. 0. Graves, Esq., for the Commissioner.
    Before Gratipner and Trammell.
    This is an appeal from the determination of a deficiency of $2,578.94, income and profits taxes for 1918, 1919, and 1920. The error alleged is the refusal of the Commissioner to permit the taxpayer to value tangible property at an amount in excess of cash or stock paid for the property, for the purpose of determining the invested capital and the amount deductible for depreciation.
    FINDINGS OE PACT.
    The taxpayer is a Tennessee corporation, organized in 1917, with its principal place of business at Memphis. In 1922 it changed its corporate name to the Waterproof Plywood Co., and in 1924 again changed to the Gause-Beard Plywood Co., under which name it is now operating.
    In April, 1917, Chester B. Allen took an option on certain land and buildings, known as Fenn Bros, plant, located in South Memphis, paying therefor the sum of $600. He had in mind at that time the formation of a corporation for the purpose of manufacturing plywood.
    About May, 1917, the Allen-Eaton Panel Co. was organized with an authorized capital stock of $125,000. Allen subscribed for $20,000 of the stock, which he paid in cash. The corporation took over the option which Allen held on the above-mentioned property and reimbursed him therefor in the amount of $600, representing the cost to him. It later paid the balance due on the property, amounting to $11,900 and $8.40 exchange.
    In 1918 an appraisement of the taxpayer’s property was made and the report submitted therewith showed the replacement cost of the buildings and equipment, with allowances for depreciation as of August 81,1918, to be $135,628.75.

      DECISION.
    The determination of the Commissioner is approved.
   opinion.

GeaupneR

: To establish the value of the taxpayer’s tangible property as of the date of acquisition, counsel relied on depositions of certain stockholders of the taxpayer company, an appraisal report, and the deposition of an officer of the appraisal company. The depositions of the stockholders merely relate the circumstances surrounding the organization of the taxpayer corporation and, in one instance, the approximate rental value of near-by land. No attempt was made to show the area of land, the number, size, condition of the buildings acquired, or their market value.

The officer of the appraisal company in his deposition explained that in preparing appraisal reports the notes of field engineers are sent to the home office with pricing* information taken from local sources and the notes are priced in the home office. The officer frankly admitted that he had never made an examination of the taxpayer’s property and that the report was not even made under his direction. Such evidence is insufficient. Appeal of Stokes Milling Co., 2 B. T. A. 1284.