author: KokneR, Chairman:

text:
    Appeal of THE GEORGE WIEDEMANN BREWING CO. and WALTER B. WEAVER, as a Stockholder, etc.

    Docket No. 7955.
    Decided July 31, 1926.
    Under the laws of Kentucky a corporation may continue, after its dissolution, to act for the purpose of closing up its business, for a period of time reasonable for such purpose. Sold, under the facts of this case, that the petitioner corporation may properly maintain this proceeding, although dissolved under the laws of Kentucky on December 29, 1920.

      ■ James B. O'

       Donnell, Esq., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income and profits taxes against The George Wiedemann Brewing Co. for the fiscal year ended September 80, 1919, in the amount of $32,'712.56. The Commissioner has moved to dismiss the appeal on the ground that the petition shows on its face that the taxpayer corporation has been dissolved and is no longer in existence, that Walter B. Weaver, who signed the petition, has not joined with him the remaining stockholders of the corporation as of the date of dissolution as parties to this appeal, and, further, that the petition does not show on its face that Weaver or any other stockholder received any of its assets on the dissolution of the corporation. The Commissioner contends in his motion that neither the corporation, the said Weaver, nor any stockholder of the defunct corporation should be permitted to have and maintain this appeal.
    BINDINGS OB FACT.
    1. The George Wiedemann Brewing Co. was organized under the laws of Kentucky on May 1. 1890, and was dissolved on December .29, 1920.
    2. Under date of August 13, 1925, the following letter (on the reverse side of which was stamped the date August 15, 1925) was mailed to the taxpayer corporation:
    IT: OR: D Form NP-2
    EBW
    Treasury Department, 'Washington, Aug. 18, 1925.

    The  Geo. Wiedemann Brewing Company,

      Sixth and Columbia Streets, 'Newport, Kentucky.

    Sirs : An examination of your income and profits tax returns and of your books of account and records discloses an additional tax for the year 1919 of $32,712.56 as shown in the attached statement. .
    In accordance with the provisions of Section 274 of the Revenue Act of 1924, you are allowed 60 days from the date of mailing of this letter within which to file an appeal to the United States Board of Tax Appeals contesting in whole or in part the correctness of this determination.
    Where a taxpayer has been given an opportunity to appeal to the United States Board of Tax Appeals and has not done so within the 60 days prescribed and an assessment has been made, or where a taxpayer has appealed and an assessment in accordance with the final decision on such appeal has been made, no claim in abatement in respect of any part of the deficiency will be entertained. . , ,
    If you acquiesce in this determination and do not desire to file an appeal, you are requested to sign the inclosed agreement consenting to the assessment of the deficiency and forward it to the Commissioner of Internal Revenue, Washington, D. C., for the attention of IT:CR:D-EBW. In: the event that you acquiesce in a part of the determination, the agreement should be executed with respect to the items agreed to.
    Respectfully,
    (Signed) J. G. Bright,
    Inclosures: Deputy Commissioner.
    Statements
    Agreement — Form A

      3. On October 10,1925, this appeal was filed with the Board. The designation of the appeal and the paragraphs of the petition pertinent to the issue here involved appear in the petition as follows:
    ' UNITED STATES BOARD OF TAX APPEALS
    Appeal of The Geo. Wiedemann Brewing Co., and Walter B. Weaver as a stockholder of said company since dissolved, for himself and all other stockholders of record of said company at the date of its dissolution, Sixth & Columbia Streets, Newport, Kentucky. Docket No. 7955.
    PETITION
    The above named taxpayer hereby appeals from the determination of the Commissioner of Internal Revenue set forth in his deficiency letter IT: CR: D-EBW, dated August 13th, 1925, and as the basis of its appeal sets forth the following:
    (1) The taxpayer was a Kentucky corporation but was duly dissolved under the laws of the State of Kentucky on the 29th day of December, 1920, and this appeal is filed and prosecuted in the name and on behalf of said corporation and by Walter B. Weaver, a stockholder, for himself and all other stockholders of record at the time of said dissolution. The principal office of said company is at Sixth & Columbia Streets, Newport, Kentucky. This is also the office of Walter B. Weaver, a stockholder, and the office of other stockholders of said dissolved corporation.
    (2) The deficiency letter (a copy of which is attached hereto) was mailed to the taxpayer on August 13th, 1925.
    (3) The taxes in controversy are income and profits taxes for the fiscal year ending September 30th, 1919, and are more than $10,000.00, to-wit: $32,712.56.
    4. The petition was verified by Walter B. Weaver as the last duly elected vice president of The George Wiedemann Brewing Co. in the following manner:
    State of Ohio, 1 Hamilton County, f

    Walter B. Weaver, being duly sworn, says that he was the last duly elected Vice-President of The Geo. Wiedemann Brewing Company, above named, and as-such is duly authorized t.o verify the foregoing petition; that said company was dissolved on the 29th day of December, 1920, and that he was a stockholder of record at said date and that he verifies this petition in an individual capacity as a stockholder for himself and all other stockholders of record at said time; that he has read the said petition and is familiar with the statements therein contained, and that the facts therein stated are true except such facts as are stated to be upon information and belief and those facts he believes to be true.
    (Signed) Walter B. Weaver.
    Sworn to before me and subscribed in my presence this 8th day of October, 1925.
    [seal.] (Signed) Alberta Wood,

      Notary Public in and for Hamilton County, Ohio.

      The docket title of this case is : Appeal of The George wiedemann • Brewing Co. and Walter B. Weaver, as a stockholder of said company since dissolved, for himself and all other stockholders of'record of said company at the date of its dissolution,

   OPINION.

KokneR, Chairman:

The issue here involved is whether or not the petitioners are competent to maintain this appeal. The petition, which was filed by Walter B. Weaver as vice president of the taxpayer corporation on behalf of the taxpayer and its stockholders, shows on its face that the corporation was dissolved on. December 29, 1920. The Commissioner has filed a motion to dismiss the appeal for the reason that the corporation is no longer in existence, and, being no longer in existence, is incapable of maintaining this appeal, and for the further reason that all the stockholders are not joined as parties to - the appeal. These stockholders have replied with a motion ratifying the action of W. B. Weaver in bringing this appeal on their behalf, and further moving that, in the event the Board should find that the motion of the Commissioner is well taken because of the absence of the remaining stockholders, they be made parties to the appeal.

The first question presented by the Commissioner’s motion is whether or not, on the facts stated, The George Wiedemann Brewing Co. is still in existence and is capable of maintaining this appeal. If this question is answered in the affirmative, it will not be necessary to proceed further in the consideration of the Commissioner’s motion, nor will it be necessary to pass upon the motion of the stockholders that they be made parties.

In considering the nature of a corporation, Mr. Chief Justice Marshall, in Dartmouth College v. Woodward, 4 Wheat. 518, at page 634, said:

A corporation is an artificial being, invisible, intangible, and existing only in contemplation of law. Being the mere creature of law, it possesses only those properties which the charter of its creation confers upon it, either expressly, or as incidental to its very existence.

In Bank of Augusta v. Earle, 13 Pet. 519, 588, the following statement appears:

It is very true, that a corporation can have no legal existence out of the boundaries of the sovereignty by which it is created. It exists only in contemplation of law, and by force of the law; and where that law ceases to operate, and is no longer obligatory, the corporation can have ho existence.

From the decisions cited, it appears that the life of a corporation is wholly dependent on the provisions of law creating it, and, if by the provisions of its charter or the statute creating it the period of its existence is limited, its life can not extend beyond the end of that period unless by statute of the State creating the corporation its life is extended. Most if not all of the States have statutes extending the life of corporations for the purpose of winding up their business and distributing their assets among the stockholders. See National Bank v. Colby, 21 Wall. 609; and Dundee Mortgage & Trust Investment Co. v. Hughes, 77 Fed. 855.

Inasmuch as The George Wiedemann Brewing Co. was created by and under the laws of Kentucky, it is necessary to examine the laws of that State to determine whether or not it is in existence at the present time for the purpose of winding up its business and is capable of maintaining this appeal. The dissolution of corporations in Kentucky is governed by section 561 of the Kentucky Statutes, which reads as follows:

Ail? corporation organized under this chapter may, by the consent in writing of the owners of the majority of its shares of stock, unless otherwise provided in the articles of incorporation or amendments thereto, close its business and wind up its affairs; and when any corporation expires by the terms of the articles of incorporation, or by the voluntary act of its stockholders, it may thereafter continue to act for the purpose of closing up its business, but for no other purpose; and it shall be the duty of the officers to settle up its affairs and business as speedily as possible; and they shall cause notice to be published, for at least once a week for four consecutive weeks, in some newspaper printed and published in the county, if any, of the fact that it is closing up its business; and all debts and demands against the corporation shall be paid in full before the officers receive anything.

From this provision it appears that the life of a given corporation is extended beyond the term fixed by its charter, or beyond the date of the voluntary dissolution by action of its stockholders, but only for the purpose of closing up its business. The legislature of Kentucky has not seen fit to fix a specific period as the time necessary to wind up the affairs of such a corporation, and it would appear that the length of time for which the life of a corporation is so extended depends upon the exigencies of the particular case.

Ewald Iron Co. v. Commonwealth, 140 Ky. 692; 131 S. W., 774, is often cited in support of the proposition that the period for which the life of a corporation may be extended after the date of dissolution has been limited by the courts to a period of two years. The corporation there in question was organized under the General Statutes of Kentucky on November 5, 1880, for a term of 25 years. Its principal place of business was located in Lyon County. By the terms of its charter the corporation expired on November 5, 1905. Subsequent to that date, L. P. Ewald, who had previously acquired all of the stock in the company, continued the business in the same manner and without change, taking no steps to wind up the affairs of the corporation. At the time of Ewald’s death in 1909, $1,800,000 was oh deposit in the name of the corporation in various banks in St. Louis, Mo., and the question arose as to whether the money on deposit was taxable in Jefferson County, where Ewald resided at the time of his death, or in. Lyon County, where the principal office of the corporation had been located. In deciding that question the court, after citing section 561 of the Kentucky Statutes, quoted above, said:

While the existence of the corporation continues after the expiration of its articles of incorporation, for the purpose of winding up its business, this continuance of its existence is for that purpose and no other. The continued existence of the corporation cannot be extended by the failure of its officers to comply with the statute. They have a reasonable time to wind up its business ; but, when such reasonable time has expired, they cannot be heard to say that the corporation is still in existence, and thus defeat their liability for taxes at their residence. After the expiration of a reasonable time for closing up the business ef the corporation, it is not in existence under the statute, and the title to its property vests in the • stockholders for the purpose of taxation; for the law will not allow one to profit by his own wrong. On the contrary, the law will hold that as done, in such cases, which ought to have been done. Two years is a reasonable time ordinarily for closing up the business of a corporation, and, where the provisions of the statute are entirely disregarded, the parties will not be heard to say that two years is not a reasonable time. We therefore conclude that the corporate existence of the Ewald Iron Company expired for all purposes long before the death of JD. P. Ewald, and that the money here in controversy is taxable as his property at his residence.

From the facts of,, the case just cited and the language of the court in deciding the issue therein involved, we are of the opinion that the doctrine there laid down that two years is a reasonable time under the statute for winding up the affairs of a corporation can not be given general application. In fact, the Court of Appeals of Kentucky has, subsequent to that time, in two different cases, stated that the two-year period prescribed in the Ew.ald case was arbitrary and applied only to the peculiar facts there involved. Smith v. Commonwealth Land & Lumber Co., 172 Ky. 607; 189 S. W. 912; and Young v. Fitch, 182 Ky. 29; 206 S. W. 29. In Smith v. Commonwealth Land & Lumber Co., the court said:'

The facts in this case and the law proposition involved are in no sense similar to those in the Ewald Cases, where only a question of the continued existence of a corporation for taxation was- involved, and this court held that a corporation, having continued its business after its corporate existence had terminated, could not hold title to property in the corporation’s name, to fix the situs of the property for taxation at the corporation’s domicile, longer than 2 years after the expiration of its corporate existence, which was arbitrarily assumed to be a reasonable time, when no effort had been made to settle up its affairs. In the ease here the corporation has not continued in the business for which it was incorporated beyond the period fixed for its corporate existence; in fact it ceased all such business long before the expiration of that period, and has had no existence since, except in the courts engaged in the final settlement of its intricate affairs, and the rule announced in the Ewald Oases can have no application whatever in the case at bar, since what was assumed in that case to be a reasonable time to settle the affairs of that corporation because it had made no effort to wind up its affairs, is shown by the facts of this case not to have been a reasonable time for such purpose, by the corporation here engaged in protracted litigation necessary to a settlement.

The case of Young v. Fitch, supra, involved a settlement and a distribution of the assets of the Kentucky Three Forks Mineral Land Co., which was incorporated under the laws of Kentucky in June, 1888, for a period of 25 years. At the time of the expiration of its charter in June, 1913, this corporation owned a large tract of mineral land which at that time was considered to be of little value. Part of the land was sold on or about the date of the expiration of the charter, but nothing further was done with reference to the remainder until 1917, when this suit was brought by the four surviving directors of the corporation against certain of the stockholders for the purpose of selling the land and mineral rights and. distributing the proceeds among the stockholders, there being no creditors or liabilities. To this petition a general demurrer was interposed, which was overruled, and a judgment was entered directing the sale of the property. On appeal, the question was raised as to whether or not, in view of the decision in Ewald, Iron Co. v. Commonwealth, supra, such suit .could be maintained in view of the fact that more than two years had expired between the date of the expiration of the charter of the corporation and the. date of bringing the suit. The court distinguished this case from the Ewald case as follows:

The question, however, before the court in the Ewald Case related purely to matters of taxation and particularly involved the situs of corporate property for purposes of taxation, and it was not intended in that case to set down any hard and fast rule as to the time in which the affairs of a corporation should be wound up by its officers after its corporate life had expired. Smith v. Commonwealth Land & Lumber Co., 172 Ky. 607, 189 S. W. 912.
The question we have in this case stated in simple terms is this: Can the officers of' a corporation — that is, the directors or a majority of them— bring a suit more than two years after the life of the corporation has expired for the purpose of settling up its affairs and distributing the property owned by the corporation, or its proceeds, among the persons entitled thereto? The statute quoted makes it the duty of the officers of a corporation whose life has ended to wind up its affairs,' and manifestly it is necessary that some person or persons should be vested with authority to do this, not only for the protection of the creditors of the corporation, but the stockholders as well, and it appears to us that, when the only purpose of the suit is to settle the affairs of the corporation, the right to bring such a suit should not be limited to two or any specified number of years, although of course so long a time might be allowed to intervene between the death of the corporation and the institution of such a suit as to affect the interest of other persons not officers or stockholders and therefore give them the right to interpose the defense that the long delay on the part of the officers of the corporation barred their right to maintain the action. But where, as in this case, no person is complaining that any injustice will be done on account of the delay, and the only purpose of the suit is to dispose of the property of the corporation in order that the rights of all persons interested may be protected, we are clearly of the opinion that the length of time that may have elapsed between the death of the corporation and the bringing of the suit is not material, and, this being so, we find no statutory or other obstacle to the suit brought by the officers for the purpose heretofore set out.

From the language of the court in the two cases last cited, we are of the opinion that corporations organized under the laws of Kentucky, regardless of whether their existence is terminated by the terms of the articles of incorporation or by the voluntary action of stockholders, are continued in existence so long as may be necessary to do all acts necessary in connection with the closing up of their business. It is also well to note that section 561 of the Kentucky Statutes puts the duty of winding up the affairs of dissolved corporations on the officers of such corporations, the only restriction being that the business and affairs shall be settled as speedily as possible. In this case, the corporation was advised of a proposed additional assessment of income and profits taxes, and upon receipt of such notice Walter B. Weaver, vice president of the taxpayer corporation as of the date of its dissolution, promptly filed this appeal with the Board for the purpose of contesting the liability on behalf of the corporation, in order that its affairs might be properly settled. We are of the opinion that this action was, under the laws of Kentucky, proper, and that the corporation will be continued in existence by such laws during the pendency of this appeal, and until the liability of the corporation for such taxes as those proposed by the Commissioner has been finally determined. In Economy Building & Loan Ass’n. v. Paris Ice Mfg. Co., 113 Ky. 246; 68 S. W., 21, the Kentucky Court of Appeals stated:

But even it it should be held otherwise, we then conclude, from the text and intent of the statute, that the preliminary steps of dissolution must all be dependent upon the corporation’s discharging its debts and liabilities; that, till its debts are paid, it continues to be a corporation,' to the extent of allowing it to be sued, or to take other steps toward discharging all its liabilities.

Such, we believe, is the law in this case.

Motion to dismiss denied. Commissioner may answer within 60 days.


source: Caselaw Access Project

author: Trammell:

license: Public Domain

text:
    Appeal of BAUMANN RUBBER CO.
    Docket No. 6745.
    Decided July 31, 1926.

      Albert Marmheimer, Esq., for the petitioner.

      Arthur H. Fast, Esq., for the Commissioner.
    Before Phillips and Trammell.
   Trammell:

This is an appeal from the determination of deficiencies in income taxes for the years 1919 and 1921 in the amounts of $626.08 and $6,246.38, respectively. The deficiencies result from the disallowance of depreciation claimed by the taxpayer (decrease made by the Commissioner in the opening inventory in 1919), and the disallowance of bad debts in 1921.

FINDINGS OP PACT.

The taxpayer is a Connecticut corporation organized in 1891, having its principal office at New Haven. ' It is engaged in the manufacture and sale of rubber specialties.

A building, part frame and part brick, in which petitioner conducted its business, was erected in 1895 — with some additions made a short time thereafter — at a total cost of $50,000.

In 1917 a new brick building was erected and both buildings were used by the taxpayer in carrying on its business. In 1918 a portion of the new building was leased to. the McTal Rubber Co., a corporation. This company also used part of the equipment and some of the supplies of the Baumann Rubber Co. The rent for the building and the equipment and the goods obtained from the taxpayer were not paid for when due. The amount due for rent and for the goods obtained by the McTal Rubber Co. was reported as income each year and carried as merchandise sales. At the close of the j^ear 1921 the McTal Rubber Co. was indebted to the taxpayer in the amount of $10,232. This amount was taken as a deduction by the taxpayer as a bad debt in 1921, because the president of the McTal Rubber Co. claimed that his company was financially embarrassed and unable to pay its creditors. The McTal Rubber Co. had not ceased doing business in 1921, but continued as a tenant and used the building and equipment of the taxpayer. In the early part of 1922 it turned over to the taxpayer machinery of the value of $800 to apply on account.

’ The taxpayer claims depreciation on the old building for the years in question at the rate of 5 per cent on depreciated cost. The Commissioner has allowed 3 per cent depreciation. There was no proof whether such allowance was on original cost, on depreciated cost, or on the March 1, 1913, value.

After the taxpayer had entered its opening inventory for 1919, it discovered that it had more crude or raw rubber on hand than the actual inventory disclosed, and added $7,500 to its opening inventory. The Commissioner allowed $3,813.46 to be added, which was all that could be substantiated by vouchers or other evidence, and disallowed such part as was based on unsubstantiated estimates.

The deficiencies are $626.08 for 1919 and $6,216.38 for 1921. Order of redetermination will he entered accordingly.


author: SteRnhagen: Trammell,

text:
    Appeal of BLOCK & KOHNER MERCANTILE CO.
    Docket No. 4576.
    Decided July 31, 1926.
    Where under a contract a corporation is obligated to pay a salesman in addition to a fixed salary a percentage of profits over a period of years, it may on the accrual basis deduct such percentage of profits at the end of the first year notwithstanding subsequent losses reduce the amount ultimately paid under the contract.

      II. A. Mihills, O. P. A., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    Before Graufner, Trammell, and Phillips.
    The petitioner deducted, as an ordinary and necessary business expense of 1919, an amount of $5,193.27 credited to the account of a salesman under a contract to share profits. The Commissioner disallowed the deduction and determined a deficiency of $2,184.42.
    FINDINGS OF FACT.
    The petitioner, a Missouri corporation making its return on the accrual basis, made, on February 1, 1919, the following contract with one Weinbach and his wife:
    This agreement, made and entered into this First Day of February, 1919, by and between the Block & Kohner Mercantile Company, a corporation, party of the first part, Jake Weinbach, of the City of St. Louis, State of Missouri, party of the second part, and Mollie Weinbach, wife of Jake Weinbach, party of the third part, witnesseth :
    The said parties, for and in consideration of the mutual covenants and agreements herein contained and by each of them respectively to be kept and performed, have made and do hereby enter into the following agreement:
    Whereas, the party of the first part has heretofore been engaged and is now engaged in the business of selling shoes in wholesale job lots and also regular lines of shoes at wholesale and is desirous of opening and carrying on a special department of its business for the selling of regular lines of shoes at wholesale under the name and style of the Acme Shoe Specialty Company; and,
    AVhereas, the said party of the second part is experienced in the wholesale shoe business and desires to undertake the management of the said department to be known as the Acme Specialty Company; and,
    AVhereas, the party of the first part desires to engage the said party of the second part as said manager; and,
    Whereas, the parties of the second and third part desire to participate in some manner in the profits of said department and of the entire business of the party of the first part;

      Now, therefore, it is agreed between tbe parties as follows:
    Party of tbe second part shall be manager of tbe said regular department, tbe Acme Shoe Specialty Company, and shall travel and call on tbe trade during tbe regular season, for a period of three years from tbe date hereof at a salary of Forty-eight Hundred Dollars ($4800.00) a year, payable monthly, or such other salary from time to time during said period as Charles Block and Louis Kokner, President and Secretary respectively of the said party of the first part, shall draw as officers of said corporation; and the said party of the second part agrees to devote his entire time, energy, attention and services to the interest of the party of the first part, and of the said Acme Shoe Specialty Company, the business of which shall be conducted in the said name.
    The said parties of the first part and second part shall have the right at any time during the continuance of this contract to terminate the same upon the one giving to the other six months' written notice of intention so to terminate, and upon the termination of said period, unless a shorter period be mutually agreed upon by all the parties hereto, the said contract shall be terminated and at an end.
    If the party of the second part shall die during the period of this agreement, or if fee erases te render aetfve serviee fer the party ef tfee first part (exeept feeeause el temporary illness), [sic] the right to the said monthly compensation of Four Hundred Dollars ($400.00) shall terminate, and the right to the division of profits, hereinafter mentioned, shall also terminate.
    The party of the third part as an inducement to the party of the first part to engage the party of the second part, and as a guarantee for the agreements hereinafter made, shall pay to and deposit with the party of the first part, the sum of Five Thousand Dollars ($5000.00) upon the execution of this contract, the receipt of which sum is hereby acknowledged by the party of the first part.
    In further consideration of the services to be rendered by party of the second part, and the deposit of said sum of Five Thousand Dollars ($5000.00) by party of the third part, the party of the first part shall pay to the party of the third part one-third (%) of the net profits earned by party of the first part during the continuance of this contract, including the business conducted under the name of the Acme Shoe Specialty Company, and the parties of the second part and third part shall likewise share any losses in said business during said period.
    Parties of the second part and third part agree to accept the inventory taken by the party of the first part on December 31st, 1918, as the basis of the invested capital and surplus of the party of the first part, towit, the sum of $47,238.52. it is agreed? farther,- between the pasties hereto that interest at fee rate ef six per eent (©■%) shall fee paid te the party ef the first part upen fee stun ef $37;238t62 as an expense before divieien ef earnings [sic] no interest, however, being paid either on the said $5000.00 advanced by the party of the third part or upon $10,000.00 out of the total of said capital and surplus invested to offset the advance made by the party of the third part.
    It is further agreed between the parties that in the event any of the .outstanding accounts on the books of the party of the first part included in the inventory of December 31, 1918, shall prove bad and uncollectible, and shall be charged off, such items shall not be considered as losses to be shared by the parties of the second part and third part in the computation of net earnings. All losses on new accounts Receivable from the date of this contract, however, are to be shared equally by the parties in computing net earnings. Any differences or disputes as to what constitute “ net earnings or losses ” shall be determined by the rules applicable in connection with the computation of the Income Tax.
    Upon the termination of this contract, either by expiration, cancellation, or otherwise, the profits shall be figured to the date of such termination and any net losses to be shared by the parties of the second part and third part shall be deducted from the said sum of Five Thousand Dollars ($5000.00). deposited by the party of the third part; and the party of the first part shall pay to the party of the third part said sum of Dive Thousand Dollars ($5,000.00) so deposited, less any deductions made, as hereinaboye stated, for losses incurred, or, if there be no losses, then plus the proper share of profits.
    In case of any difference or dispute which the parties hereto are unable to adjust, it is agreed that in such event the matter shall be settled by arbitration ; the party of the first part shall name on [sic] arbitrator and the parties of the second part and third part shall name a second, and if the said two persons so selected cannot determine the matter in dispute, they shall call in a third disinterested party whose decision in the matter shall be binding on the parties hereto.
    It is expressly agreed and understood that nothing contained in this instrument shall give or be construed to give either of the parties of the second part or third part any interest in the business or the management thereof, or in the capital, surplus, property or capital stock, or obligations of the party of the first part other than herein expressly set out, that is, to a right to share in one-third (%) of the profits or losses during such, period as the engagement of said party of the second part continues; provided, however, that the parties of the second and third parts shall, at all times, have free access to the books.
    Party of the third part does hereby appoint party of the second part as her attorney-in-fact for her and in her name, place and stead to make all settlements, accounts and adjustments of both profits and losses with the party of the first part; to execute all releases and receipts and settlements both for her share of the profits and earnings as well as for her said deposit of Five Thousand Dollars ($5000.00) and adjustments thereon.
    The contract was performed until May 27, 1921, when because of losses it was terminated by mutual agreement.
    The petitioner on its books of account credited to Weinbach as of December 31, 1919, $5,756.34, which was later corrected to $5,193.27. There was a loss in 1920 and until May 27, 1921..
    Mollie Weinbach was a nominal party to the contract.

         This decision was prepared during Mr. Graupner’s term of office.

   OPINION.

SteRnhagen:

The petitioner is entitled to this deduction on the ground that the one-third share of its profits was at the end of the year definitely committed to Weinbach, subject only to be defeated by a subsequent net loss, over which the petitioner had no control. There is no doubt that the petitioner received the full amount of profits and that these profits accrued to it in its own right. See Traylor Engineering & Mfg. Co. v. Lederer, 271 Fed. 399; certiorari denied, 257 U. S. 638. Coincidently, however, as part of its ordinary business it incurred the obligation to pay Weinbach an amount measured by a percentage of those profits. Weinbach had no right to have part of the profits impounded or intrusted. He merely had a cause of action in contract the damages of which would be measured by the percentage of profit. This is an accrual deduction.

It is said that the liability is not determined until the end of the contract period, which, so far as payment is concerned,- is true. Weinbach could not have sued to recover before the termination of the period. But this is too rigid a test. As a reasonably prudent person the petitioner was committed not to impair this percentage. It was only by a business loss which the petitioner would not reasonably be supposed to bring about voluntarily that the amount could be impaired, and since such a subsequent loss would not be taxable the petitioner here would be in no better tax position in any event.

Judgment for petitioner.

Trammell,

dissenting: This appeal involves, first, an interpretation of the contract set forth in the findings of fact. It is undisputed that the share of Weinbach in the profits of the taxpayer for the year 1919 was $'5,193.27, and that, at the termination of the contract, this was wiped out, together with a substantial portion of the $5,000 deposit. The real question is whether this amount was in fact an incurred obligation on December 31, 1919. If the contract contemplated a settlement only at the expiration of the contract and not before, it is my opinion that the taxpayer could not take the deduction for 1919, as the amount was not determinable, nor was it definitely known that it would have to pay out anything.

To sustain the taxpayer’s contention, it is pointed out that Wein-bach and his wife reported the amount of the profits for 1919 as in-colne for that year to the State of Missouri and that the corporation paid the tax, charging the amount to them. The taxpayer now claims the Weinbachs could have withdrawn this amount at any .time, but the revenue agent reported, in his report which was introduced in evidence, that the officers of the taxpayer corporation stated that Weinbach could not withdraw any profit until the termination of the contract. The contract wras for three years unless terminated by consent or notice, as provided therein, and it in fact was not terminated until May, 1921. The following provisions of the contract have a bearing on this point:

In further consideration of the services to be rendered by party of the second part, and the deposit of said sum of Five Thousand Dollars ($5000.00) by party of the third part, the party of the first part shall pay to the party of the third part one-third (%) of the net profits earned by party of the first part during the continuance of this contract, including the business conducted under the name of the Acme Shoe Specialty Company, and the parties of the second part and third part shall likewise share any losses in said business during said period.
Upon the termination of this contract, either by expiration, cancellation, or otherwise, the profits shall be figured to the date of such termination and any net losses to be shared by the parties of the second part and third part shall be deducted from the said sum of Five Thousand Dollars ($5,000.00) deposited by the party of the third part; and the party of the first part shall pay to the party of the third part said sum of Five Thousand Dollars ($5,000.00) so, deposited, less any deductions made, as hereinabove stated, for losses incurred, or, if there be no losses, then plus the proper share of profits. (Italics mine.)

.These provisions of the contract indicate that the salary was to be paid monthly and the one-third of the profits or losses was to be computed only at the termination of the contract. This is substantiated by the actual acts and conduct of the parties. During the continuation of the contract, the $5,000 deposit was credited to Weinbach; at the end of 1919, one-third of the profits was also credited, followed by the credit of undrawn salaries. These amounts were not withdrawn. At the end of 1920, one-third of the losses was debited. At the termination of the contract, May 27, 1921, one-third of the losses for the remaining period between January 1, 1921, and May 27, 1921, was debited, together with the bad debts ascribed to Weinbach. The balance was paid back to “Weinbach as provided in the contract. The losses were deducted from the profits and only the net amount of profits calculated on the full duration of the contract was distributed. So then, in actual practice, the taxpayer paid salaries monthly but did not make any actual settlement of profits or losses until the termination of the contract. It was only then that it could be determined what the profits were for the period set out in the written contract. It seems clear that it was the intention of the parties — and it is borne out by their acts — that the profit and loss was to be determined at the end of the contract and not at any intervening period.

It is true that the tax is based on annual periods and each year should stand on its own basis. If a taxpayer has gains or profits in one year, or pays or incurs expenses in one year, the taxable income is arrived at by allocating to each year the gains or profits oi expenses of that year. Based upon this principle, it is argued that, since the corporation had profits in 191.9, the taxpayer incurred a liability to pa3^ out a proportion thereof as they were earned in order to satisfy the terms of the contract providing for a division of the profits for the contract period. The fallacy in 'this argument lies in the fact that under the contract the taxpayer did not incur a liability to pay out any proportion of the profits for any particular year. It was only the profits for the entire period -which were to be divided. There was no obligation to pay out a proportion of the 1919 earnings. It was a percentage of the earnings of the entire contract period which was to be paid to Weinbach. It was not known in 1919 whether there would be any profits to be divided at all. It depended entirely upon future and unknown conditions and circumstances. The fact is the taxpayer was never required to pay out anything except the stated salary, as there were no profits to divide.

It can not be said that the taxpayer incurred a liability or became obligated to Weinbach in 1919 because it had earnings in that year, when, under the contract, it was not liable to him for a division of profits unless it. had profits for the contract period. The parties evidently contemplated that a situation might arise, as did in fact arise, whereby there would be no profits for the contract period, and the taxpayer iindertook by the contract to avoid, and did avoid, incurring any liability to divide each year’s earnings separately as they were' earned.

In my opinion, the contract must be given effect, and by doing so it follows that no part of the earnings was required to be divided and no liability on account thereof arose until the contract was terminated. It is readily conceded that if it were not for the contract the taxpayer would have been entitled to deduct as expense one-third of the earnings as they were earned. The same would be true if a division of the earnings was contemplated or provided for, but we are confronted by the facts as we find them and the ordinary rule is altered by the terms of the contract. It is not a question only of when the profits were to be divided, but were there going to be any profits for the period to be divided at all. It is not a question of the difference between an accrued or incurred obligation, but was there a liability at all ever incurred to make a division until it could be determined at the expiration of the whole period. When a note is executed payable three years from date, an obligation is incurred when the note is signed, but the obligation does not accrue until it becomes payable. This distinction is fully recognized, but the question here is, Did the taxpayer incur a liability in 1919 to divide the profits of that year when it agreed by contract that it was to divide the profits, not for 1919, but for the entire period? I think it did not. The statute provides for a deduction of expenses paid or incurred. If a taxpayer is on the cash basis only amounts paid out are deductible. If on the accrual basis, only the expenses incurred during the year are deductible. When a taxpayer by contract obligates itself to divide or pay out a proportion of earnings for a period greater than a year and is only obligated to do so provided there are earnings for that entire feriod, no obligation is incurred until it is known that there will be profits for the period provided in the contract. The liability was only contingent. It depended on undeterminable and future events.

As a matter of accounting it would undoubtedly have been 'proper to have set up a reserve in 1919 out of the earnings of that year to meet what might have been a liability in the future, but reserves are not deductible in determining net income. Appeal of William J. Ostheimer, 1 B. T. A. 18; Appeal of Uvalde Company, 1 B. T. A. 932; Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008; Appeal of Consolidated Asphalt Co., 1 B. T. A. 79.

For the foregoing reasons I am unable to concur in the majority opinion.


author: Steknhagen

text:
    Appeals of ESTATE OF GEORGE W. RANDALL.
    Docket Nos. 5850, 6765.
    Decided August 2, 1926.
    Under the Revenue Act of 1921, a wife in California was entitled to lile a separate return and be taxed separately upon her separate earnings.

      A. Colder Mackay, Esq., for the Commissioner.
    Proceeding to annul the Commissioner’s determination of deficiencies of income tax arising from the shifting to decedent the separate income of his wife.
    FINDINGS OF FACT.
    George W. Randall was in 1922 and 1923 married and domiciled in California, where he resided with his wife, Alice J. Randall. He died in June, 1924, and Alice J. Randall is the administratrix of his estate.
    Alice J. Randall received in each year, 1922 and 1923, a salary of $6,000, separately and apart from any salary, or income of her husband. This she included in her separate return. The Commissioner included this salary in decedent’s income and determined deficiencies of $708.40 for 1922 and $804.59 for 1923. The tax has been refunded to the wife.
   opinion.

Steknhagen

: This case has been submitted to the Board upon the pleadings alone, from which the admitted facts appear. No argument, either orally or by way of brief, has been presented.

The liability arose originally under the He venue Act of 1921, which, in section 223 (b) provides:

If a husband and wife living together have an aggregate net income for the taxable year of $2,000 or over, or an aggregate gross income for such year of $5,000 or over—
(X) Bach shall make such a return, or
(2) The income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income.

Each spouse made a separate return, the wife returning- her separate salary.

The tax was imposed by sections 210 and 211 levying the normal tax and surtax “ upon the net income of every individúa!” Section 216 (c) allowed the following credits:

In the case of a single person, a personal exemption of $1,000; or in the ease of the head of a family or a married person living with husband or wife, a personal exemption of $2,500, unless the net income is in excess of $5,000, in which case the personal exemption shall be $2,000. A husband and wife Jiving together shall receive but one personal exemption. The amount of such personal exemption shall be $2,500, unless the aggregate net income of such husband and wife is in excess of $5,000, in which case the amount of such personal exemption shall be $2,000. If such husband and wife make separate returns, the personal exemption may be taken by either or divided between them. In no case shall the reduction of the personal exemption from $2,500 to $2,000 operate to increase the tax, which would be payable if the exemption were $2,500, by more than the amount of the net income in excess of $5,000.

Regulations 62 contains the following:

Abt. 31. * * * A husband and wife domiciled in Texas, Washington, Arizona, Idaho, New Mexico, Louisiana, and Nevada, in rendering separate income tax returns, may each report as gross income one-half of the income which, under the laws of the respective States becomes simultaneously with its receipt community property. .

The article is silent as to California. Article 301 (b) contains the following:

A husband and wife living together have but one personal exemption, the amount of which depends upon whether their combined net income is in excess of $5,000. If they make separate returns, such exemption may be taken by either or divided between them.

Article 401 is as follows:

Bor each taxable year every single person whose gross income, as defined in section 213 of the statute, is $5,000 or over, or whose net income, as defined in section 212 of the statute and articles 21-26, is $1,000 or over, must make a return of income. The return shall be for his taxable year, whether calendar or fiscal. Whether or not an individual is the head of a family or has dependents is immaterial in determining his liability to render a return. If an individual is a married person living with husband or wife, no return need be made unless their aggregate gross income is at least $5,000 or their aggregate net income is at least $2,000; but a separate return must be made by each of them, regardless of the amount of the individual income of each, where their aggregate gross income is $5,000 or over, or their aggregate net income is $2,000 or over, unless tliey join in a singlo joint return. Where the income of each is included in a single joint return, the tax is computed on the aggregate income and all deductions and credits to which either is entitled shall be taken from such aggregate income. The husband shall include in his return the income derived from services rendered by the wife or from the sale of products of her labor if she does not file a separate return or join with him in a return setting forth her income separately. * * *

The Revenue Act of 1924 left these unaffected under the 1921 Act.

Looking at this statute and the Commissioner’s idea of its effect as expressed in the regulations, it indicates a right to elect between a joint return and separate returns, such election being equally available where the community system prevails as elsewhere. And it has not been suggested that in a State not under the community system a wife’s separate earnings could not be shown in a separate return and separately taxed to her. We see no reason to hold otherwise as to California. It would be strange indeed if a wife who enjoys the supposedly more independent status provided by the community system were taxed upon a theory that her separate salary belonged to her husband, while the wife elsewhere is taxed upon the theory of independent ownership. Is the mere expectancy of the wife in her husband’s income less than or different from his interest in her independent earnings ? The Supreme Court’s opinion in United States v. Robbins, 269 U. S. 315, did not so decide, nor did it pass upon the taxation of the wife’s separate earnings. It dealt only with the power of Congress to tax the husband for the whole of the income from community property and his own earnings, holding that such power existed and that Congress had exercised it in the Revenue Act of 1918.

The husband here was in our opinion not required to file a return of his wife’s separate earnings with his own, but the wife had the right to file a separate return and be taxed thereon.

The determination of deficiency against the husband is therefore invalid.

Judgment for the 'petitioner.

Marquette and Moeeis dissent.


author: Littleton:

text:
    Appeals of D. CERRUTI et al.

    Docket Nos. 6235, 2489, 2490, 6350, 6598, 3234, 4036, 7105, 7359, 8870, 2603, 6237.
    Decided August 2, 1926.
    Petitioners and their wives, residents of California, were not entitled, under the provisions of the Revenue Acts of 1921 and 1926, to file separate returns for the calendar years involved upon the community property basis and be taxed each upon one half of the income of the community.

      F. R. Gibbs, Esq.^ Adrian O. Humphreys, Esq., and Chester A. Gwinn, Esq., for the petitioners.

      A. Colder Maehay, Esq., for the Commissioner.
    Before Littleton, Smith, and Trussell.
    These appeals are from determinations of deficiencies as follows, — D. Cerruti, $345.22, for 1923; Nicholas Alaga, $510 and $141.52, for 1921 and 1922, respectively; Paul Alaga, $510.62 and $311.78, for 1921 and 1922, respectively; M. F. Bracher, $188.49 for 1923; William M. Cannon, $748.83, $1,759.20, $1,469.55, and $4,785.45, for 1919 to 1922, inclusive, respectively; A. M. Braddock, $197.13 for 1921; E. S. Carpenter, $8,994.01 for 1921 and 1922, respectively; Robert Behlow, $617.80 for 1921 and 1922; Frank E. Wall, $140.75 for 1921 and 1922; Dudley Baird, a deficiency of less than $10,000 for 1920 and 1921; Guiseppe Filice, $2,445.86 for 1919; H. L. Weaver, $3,758.21 for 1923.
    The question presented in each of the appeals is whether, under the law of California and the Revenue Acts of 1921 and 1926, the petitioners, residents and citizens of California, married and living with their wives, were liable for income tax upon more than one-half of the income received during the calendar years mentioned.
    FINDINGS OF FACT.
    During the calendar years above mentioned, the petitioners were residents and citizens of California and were married and living with their wives. At the time required by law, each petitioner and his wife filed separate returns for the year or years involved, reporting one-half of the income of the marital community for said year or years. It is not shown whether the income reported by the wives in any year was derived from their separate property. The Commissioner held that the entire income in each instance belonged to the husband and increased the income, as shown due by his return, by the amount of income reported by his wife, and computed his determination of deficiency or deficiencies as set forth above.

       The following appeals wore heard with the above and are decided herewith: Nicholas Alaga, No. 2489 ; Paul Alaga, No. 2490; M. F. Bracher, No. 6850 ; William M. Cannon, No. 6598; A. M. Braddock, No. 3234; E. S. Carpenter, No. 4036 ; Robert Behlow, No. 7105 ; Frank E. Wall, No. 7359 ; Dudley Baird, No. 8870; Guiseppe Filice, No. 2603; Hart L. Weaver, No, 6237,

   OPINION.

Littleton:

Prior to 1917 the statutes of California relating to property termed community property, provided that the husband shall have entire management and control of the common property with the like absolute power of disposition as of his separate estate.” (Section 9, Statutes 1850, p. 254.) Section 172, Civil Code, as enacted March 21, 1872, provides as follows:

The husband has the management and control of the community property, with the like absolute power of disposition (other than testamentary) as he has of his separate estate.

By statutes 1891, p. 425, section 172 of the Civil Code was amended to read as follows:

The husband has the management and control of the community property, with the like absolute power of disposition (other than testamentary) as he has of his separate estate: Provided, however, that he cannot make a gift of such community property, or convey the same without a valuable consideration, unless the wife, in writing, consent thereto.

Under the statutes as they thus stood and under the provisions of the various Revenue Acts prior to the Revenue Act of 1921, the District Court for the Northern District of California, in Robbins v. United States, 5 Fed. (2d) 690, involving the question of whether the husband was liable upon the entire income for the year 1918 from community property acquired before 1917, held that the husband and wife were entitled to file separate returns, each reporting one-half of the income of the community. This decision was reversed by the Supreme Court, and in an opinion by Mr. Justice Holmes, United States v. Robbins, 269 U. S. 315, the court said:

We.can see no sufficient reason to doubt that the settled opinion of the Supreme Court of California, at least with reference to the time before the later statutes, is that the wife had a mere expectancy while living with her husband. * * *
But the question before us is with regard to the power and intent of the Revenue Act of February 24} 1919 * * *. Even if we are wrong as to the law of California and assume that the wife had an interest in the community income that Congress could tax if so minded, it does not follow that Congress could not tax the husband for the whole. Although restricted in the matter of gifts, &c, he alone has the disposition of the fund. He may spend it substantially as he chooses, and if he wastes it in debauchery the wife has no redress. See Garrozi v. Dastas. 204 U. S. 64.

The court held that the husband was liable for the tax upon the entire income.

On May 23, 1917, section 172 of the Civil Code of California was further amended to read as follows:

The husband has the management and control of the community personal property, with like absolute power of disposition, other than testamentary, as he has of his separate estate; provided, however, that he can not make a gift of such community personal property, or dispose of the same without a valuable consideration, or sell, convey, on encumber the furniture, furnishings, or fittings of the home, or the clothing or wearing apparel of the wife or minor children that is community, without the written consent of the wife. [Amendment approved May 23, 1917; Stats. 1917, p. 829.]

In the same year the following new section, designated section 172a, Civil Code (Deering’s 1917 Supplement) was enacted on May 23:

The husband has the management and control of the community real property, but the wife must join with him in executing any instrument by which such.community real property or any interest therein is leased for .a longer period than one year, or is sold, conveyed, or encumbered; provided, however, that the sole lease, contract, mortgage or deed of the husband, holding the record title to community real property, to a lessee, purchaser or encumbrancer, in good faith without knowledge of the marriage relation shall be presumed to be valid; but no action to avoid such instrument shall be commenced after the expiration of one year from the filing for record of such instrument in the recorder’s office in the county in which the land is situate. [New section added May 23, 1917; Stats. 1917, p. 829.]

In tlie same year some change was made in the inheritance tax statute (see Codes and General Laws, Deering’s 1917 Supplement, p. 1284) being statutes 1917, p. 880, approved May 23, 1917, effective July 27, 1917, but in our view the inheritance tax statute has no particular bearing upon the question before us of whether the husband and wife may each make 'a return for federal income-tax purposes of one-half of the community income for any year.

As will be seen from the opinion of the court in United States v. Robbins, supra, it was held that, under the law of California prior to 1917, the income belonged to the husband and that Congress had not indicated any intention of taxing it to any one other than to him. It is contended here that the changes above mentioned in the California statutes gave to the wife a vested interest in the real and personal property acquired or received thereafter; that one-half of the income of the community belonged to her, and that under the provisions of section 1212 of the Revenue Act of 1926, the husband is not liable for the deficiency determination by the inclusion in the income reported by him that which was reported by the wife for the years involved. We think this contention is without merit. Whatever the situation may be in respect to whether the wife has a vested interest in community real property as relating to the question whether the whole of the real property should be included in determining the gross estate on the prior death of the husband, it seems clear to us that, under the amendments oí the California law, as well as under the prior statutes, the wife had no vested interest in the personal property, and the income here involved was personal property, but that the same belonged to the husband under section 172, approved May 23, 1917, which provided that “ the husband has the management and control of the community personal property, with like absolute power of disposition, other than testamentary, as he has of his separate estate.” The new section enacted May 23, 1917, and designated section 172a, Civil Code, providing that the wife must join with the husband in executing any instrument by which such community real property or any interest therein is leased, sold, or encumbered, and the new inheritance tax statute enacted May 23, 1917, providing that one-half of the community property which goes to the surviving wife on the death of the husband shall not be deemed to pass to her as heir of her husband, but shall for inheritance tax purposes be deemed to go, pass and be transferred to her for valuable and adequate consideration, do not, in our opinion, change or modify the law upon which the court in the Robbins case based its conclusion that the husband was liable for the tax upon the entire income; nor does the provision contained in section 1212 of the Revenue Act of 1926 change the situation. As we have pointed out, the statutes of California (Civil Code, section 172), do not give the wife a vested interest in the personal property, since the husband has the management and control and absolute power of disposition thereof, which was the situation in the Robbins case.

That the legislature intended, notwithstanding the provisions of the inheritance tax statute, that the husband should at all times have absolute dominion over all personal property and also the absolute power of disposition is further indicated by the amendment of 1923 (Statutes 1923, p. 30) which provides:

Upon the death of either husband or wife, one-lialf of the community property belongs to the surviving spouse; the other half is subject to the testamentary disposition of the decedent, and in the absence thereof goes to the surviving spouse, subject to the provisions of section 1402 of this code.

Section 1402, Civil Code, as amended in 1923, provides that—

Gommunity property passing from the control of the husband, either by reason of his death or by virtue of testamentary disposition by the wife, is subject to administration, his debts, family allowance and the charges and expenses of administration; but in the event of such testamentary disposition by the wife, the husband, pending administration, shall retain the same power to sell, manage and deal with the community personal property as he had in her lifetime. (Italics ours.)

See section 172, Civil Code, hereinbefore quoted. Cf. also Opinion of the Attorney General, June 24, 1926, Treasury Decision 3891.

We are of the opinion that the decision of the Court in United States v. Robbins, supra, is applicable to the income of the community for years subsequent to May 23, 1917; that under the law of California the provisions of section 1212 of the Revenue Act of 1926 are inapplicable, and that the Commissioner’s action in taxing the entire income to the husband was proper.

Judgment for the Commissioner.


text:
    OSCAR FRIEND, Executor, Estate of HERMAN A. MEYER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 1062.
    Decided August 2, 1926.

      Osear Friend for the petitioner.

      W. H. Lawder, Esq., for the respondent.
    Before SteRnhagen, Littleton, and Trtjssell.
   Littleton:

This proceeding was instituted on December 13, 1924, for the purpose of contesting the correctness of the Commissioner’s determination of a deficiency in income tax in the amount of $337.67, for the calendar year 1919, resulting entirely from the denial by the Commissioner of a loss on a sale of a stock of merchandise. Herman A. Meyer died on December 4,1925, and this proceeding was revived in the name of his estate.

FINDINGS OF FACT.

During the year 1919, and for several years prior thereto, Herman A. Meyer was engaged in the retail clothing business at Dubuque, la. He kept an inventory of merchandise on hand at the beginning and end of each year, also a record of merchandise purchased and sales made during the year. The return for the year 1919 purported to be upon the basis of cash received and disbursed. It was in fact, however, made upon the accrual basis, and it was necessary for the taxpayer’s return to be made upon the accrual basis in order correctly to reflect his income.

On December 31, 1919, Meyer sold his entire stock of merchandise on hand at approximately 85 per cent of cost, resulting in a loss of $2,835.48. Instead of adding the amount of $19,936.26, received for the stock of merchandise, to the sum of $62,347.17, gross sales to customers during the year, giving a total of $82,283.43, and deducting therefrom the cost of goods sold, together with expenses amounting to $74,111.58, which would have shown the net income from the business of $8,171.85, he included in Schedule A of his return the cost of goods sold, less inventory on December 81, the date of the sale of the entire stock taken at cost, and deducted, among other items of expense, the amount of $2,835.48, representing the difference between the cost of merchandise and the amount received therefor as “ depreciation of stock,” and reported á net income from his business of $8,171.85. The Commissioner increased the income reported in the amount of $2,835.48 and determined the deficiency here in controversy.

There is no deficiency for the year 1919. Order will he entered accordingly.


author: Trammell Sterni-iagen,

text:
    BELL-ROGERS & ZEMURRAY BROTHERS CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 1220.
    Decided August 2, 1926.
    Contribution to chamber of commerce for purchase of camp site disallowed.

      L. B. Liles, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent. ,
    This is a proceeding for the redetermination of deficiencies in income taxes for 1918, the amount of which is undeterminable from the record but is less than $10,000. The deficiencies result from the disallowance by the Commissioner of depreciation on trucks in the amount of $1,778.25, and the disallowance of a $250 contribution to the Chamber of Commerce for the purchase of a site for Camp McClellan.
    BINDINGS OF FACT.
    The taxpayer is an Alabama corporation with its office and place of business at Anniston, and is engaged in the wholesale fruit and produce business.
    Camp McClellan was, during 1917, located 5% miles north of Anniston. Beginning in 1917, and extending throughout 1918, there were trained at Camp McClellan between 40,000 and 60,000 soldiers. There was only one road between Anniston and the camp, except a rough mountain pass by which it was possible to enter the rear of the camp at times when the other road was impassable. The main highway was an ordinary dirt road and the traffic of heavy trucks and a large number of automobiles made the road almost impassable a large part oDihe time during the year 1918. In 1918 the Government began the construction of a brick road from Anniston to the camp which was not completed until the summer of 1919. During the rebuilding of the road it was necessary to make detours in order to travel from Anniston to the camp, making travel very difficult and destructive to trucks and automobiles.
    The taxpayer delivered large quantities of produce to the camp and in the first part of October, 1918, it purchased three trucks, one Pierce Arrow, one Service and one Master truck, for a total sum of $11,855.65. These trucks were put into service on October 10th and were used continuously with very heavy loads between Anniston and the camp during the months of October, November and December of that year.
    The taxpayer has claimed a deduction on account of depreciation of 20 per cent on trucks for the three months’ service in 1918. Such deduction amounted to $2,371.13. The Commissioner allowed only one-fourth of above amount, as the trucks were used only three months of the year. On account of the condition of the road over which the trucks were used and the continuous and heavy service required, a reasonable deduction on account of the wear and tear and exhaustion of the trucks is determined to be 33^ per cent per annum, instead of 20 per cent for the three months’ service in 1918.
    In order to obtain the location of Camp McClellan near Anniston, the business men of the city, through the Chamber of Commerce, purchased for the Government a site for the camp. The taxpayer contributed $250 to the Chamber of Commerce for this purpose, with the object in view of helping the business interests of the city and its own business. The business of the taxpayer increased during 1918 fourfold over previous years, primarily on account of the fact that the camp was located near Anniston.
    Zemurray was manager of the taxpayer corporation during the year 1918. The salary of $450 per month paid him for services rendered is reasonable and the total salary paid him that year is an allowable deduction.
   OPINION.

Trammell

: The decision in this case, in so far as it relates to the contribution to the-Chamber'of Commerce, is controlled by the opinion in the Appeal of Thomas Shoe Co., 1 B. T. A. 124, and it is not necessary to repeat here what was said there. The contribution was not an ordinary and necessary expense of the taxpayer’s business.

Order of redetermination mil he ’ entered on 10 days’ notice, wider Rule SO.

Sterni-iagen,

dissenting: I dissent on the authority of the Board’s decision in the Appeal of Anniston City Land Co., 2 B. T. A. 526.

Green, Morris, and Murdock concur in the dissent.


author:
Tkammell
      Sternhagen,

text:
    ANNISTON AUTO CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 1335.
    Decided August 2, 1926.
    A contribution to chamber of commerce held, not an ordinary and necessary business expense.

      L. B. Liles, Esq., for tbe petitioner.

      Henry Ravenel, Esq., for the respondent.
    This is 'a proceeding for the redetermination of a deficiency in income tax for 1918, the amount of which is undeterminable from the record but is less than $10,000. The deficiency results from disallowing as a deduction a $500 contribution to the Chamber of Commerce for the purchase of a site for Camp McClellan.
    FINDINGS OF FACT.
    The taxpayer is an Alabama corporation with its office and principal place of business at Anniston, and was engaged in the retail sale of automobiles, automobile accessories and a general automobile repair business.
    In 1917 the Chamber of Commerce of Anniston took steps to get an Army post located at that city. To accomplish this it was necessary to raise sufficient funds to purchase a site in the immediate vicinity of Anniston. The taxpayer contributed $500 in 1918 to the Chamber of Commerce for the purchase of the camp site. The camp was secured and about 60,000 soldiers were trained there during 1918. The taxpayer contemplated that this camp, being located near the city, would benefit the city and business generally, as well as its own business. The taxpayer sold Dodge automobiles which had been adopted by the Army. It sold many automobiles in 1918 to officers and men connected with the camp and its repair business was also greatly increased during that year.
    The contribution was not an ordinary and necessary expense of carrying on the taxpayer’s trade or business.
   OPINION.

Tkammell

: The decision in this appeal is governed by the Appeal of Thomas Shoe Co., 1 B. T. A. 124; and Appeal of Bell-Rogers & Zemurray Brothers Co., ante, p. 687. The contribution was not an ordinary and necessary business expense.

Order of redetermination mil be entered on 10 days’ notice, under Rule 50.

Sternhagen,

dissenting: I dissent on the authority of the Board’s decision in the Appeal of Anniston City Land Co., 2 B. T. A. 526.

Green, Morris, and Murdoch concur in the dissent.


author: Maequette

text:
    Appeal of BLOSSBURG MERCANTILE CO.
    Docket No. 2880.
    Decided August 2, 1926.
    The agreement or contract involved herein held to create a leasehold interest in land, and the value thereof should be included in invested capital as tangible property.

      Freeman Day, Esq., and Charles A. Roberts, Esq., for the petitioner.

      A. Galder Maehay, Esq., for the Commissioner.
    Before Marquette and Love.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1920 in the amount of $3,483.22. The deficiency arises from the reduction by the Commissioner of the taxpayer’s invested capital as hereinafter set forth.
    FINDINGS OF FACT.
    The taxpayer is a New Mexico corporation with its principal office at Eaton, N. Mex., and is engaged in the business of selling merchandise and supplies, including meats, provisions, oils, etc. Prior to the year 1905, the taxpayer maintained stores at the mines of a company known as the Raton Coal & Coke Co-, under arrangements which gave it no definite tenure of its store sites and no rights at all beyond the life of the Raton Coal & Coke Co.
    In July, 1905, a corporation was organized, known as the St. Louis, Rocky Mountain & Pacific Co., hereinafter called the Coal Company, which acquired all of the assets of the Raton Coal & Coke Co., and the latter company was then dissolved.
    On July 26, 1906, the Coal Company and one Charles Springer entered into a written agreement, of which the material part is as follows:
    Witnesseth : That for and in consideration of tbe sum of One Dollar ($1.00) in hand paid by Second Party, the receipt whereof is hereby acknowledged, and in further consideration of the covenants and agreements hereinafter mentioned on part of Second Party, to be kept and performed, First Party has granted, demised and let and does by these presents grant, demise and let unto Second Party, for and during the term of ninety nine (99) years next after the date hereof the exclusive right and privilege of selling merchandise and supplies of every kind, including meats, oil, powder and liquors, at the new Mining Camp of First Party, called Koehler or Prairie Crow Creek, and at any other Mining Camp or place within the limits of the lands now or hereafter owned or controlled by First Party, or at any Mining Camp established by First Party upon lands in which it owns the coal rights, together with the right to select and occupy from time to time such ground or real estate as he or his associates or assigns may require for buildings necessary foi carrying on said business, provided such ground at the time of such selection shall not be required by First Party for other use. * * * This Agreement, shall be binding upon and inure to the benefit of the successors, heirs and assigns of the parties hereto respectively.
    On October 22, 1906, Springer assigned to the taxpayer the agreement of July 26, 1906, together with all rights, privileges or benefits accruing or to accrue to him thereunder, in consideration of the issue to him by the taxpayer of $410,000 par value of the taxpayer’s capital stock.
    On July 26, 1906, the Coal Company was, and at all times since has been, a corporation engaged in the business of mining coal upon more than 500,000 acres of land in New Mexico, owned by it in fee or in which it owned the coal rights.
    Since October 22, 1920, the taxpayer has selected premises at the several mining camps of the Coal Company, and has maintained and erected buildings thereon and occupied said premises and buildings under the terms of the agreement of July 26,. 1906, hereinbefore set forth.
    The Commissioner and the taxpayer stipulated at the hearing that the agreement or contract of July 26, 1906, entered into by the Coal Company and Springer, was on October 22, 1906, the date when it was assigned by Springer to the taxpayer, of the value of $410,000.00.
    The Commissioner, upon audit of the taxpayer’s income and profits-tax return for the year 1920, determined that the rights of the taxpayer under the instrument in question are intangible property, within the meaning of section 325 of the Revenue Act of 1918, and that it should be included in the taxpayer’s invested capital, subject to the limitations on intangible property provided by section 326 of the Revenue Act of 1918. He therefore reduced the taxpayer’s invested capital by the amount of $231,161.64. He also made a certain minor adjustment in invested capital not material here, and determined that there is a deficiency in tax for the year 1920 in the amount of $3,483.22.
   OPINION.

Maequette

: The question presented for determination by this appeal is whether, under section 325 of the Revenue Act of 1918, the rights acquired under the written instrument set forth in the findings of fact are intangible property. The part of section 325 of the Revenue Act of 1918 pertinent here is as follows:

Tlie term “ intangible property ” means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises, and other like property;
The term “ tangible property ” means stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property.

The taxpayer contends that the instrument in question created a leasehold or at least an interest in real estate, and that it is therefore tangible property and should be included in the taxpayer’s invested capital for the year 1920 at its value at the time it was acquired, to wit — $410,000, less depreciation from the date of acquisition. The Commissioner urges that the instrument is only a license and is therefore intangible property, and should be included in invested capital subject to the limitations on intangible property provided by section 326 of the Revenue Act of 1918. The taxpayer and the Commissioner agree that the taxpayer purchased the instrument involved for $410,000 par value of its capital stock, and that at that time it had an actual cash value of $410,000.

We have carefully considered the evidence in this appeal and the arguments of counsel in support of their respective contentions as to the nature of the written instrument under consideration. We are unable, however, to agree with the Commissioner that it granted or created a mere license. On its face, it is an agreement or contract under which Springer, for a certain consideration, is given the exclusive right for a period of 99 years to sell merchandise and supplies of every kind on the lands of the Coal Company, together with the right to select and occupy such part of the Coal Company’s land as he may require for buildings necessary to carry on the business of selling merchandise and supplies. Regardless of what the instrument is denominated by the parties, its true nature must be determined by looking to its terms and legal effect. Appeal of I. Unterberg & Co., 2 B. T. A. 274.

We do not think it necessary here to indulge in an extended and elaborate discussion as to what constitutes a leasehold or license. It is sufficient to define them briefly; the difference between them is obvious. In Washburn on Real Property (4th ed.) Vol. 1, p. 43C, it is said:

An estate for years, as understood in this chapter, is one that is created by a contract, technically called a lease, whereby one man, called the lessor, lets to another, called the lessee, the possession of lands or tenements for a term of time fixed and agreed upon by the parties to the same. By this something more is implied than a mere grant of a certain interest in land; it involves a contract, more or less explicit, as to the terms and conditions upon which the same is to be held and managed; and this contract, in some form, is incident to every proper leasehold estate. * * * In other words, he has an estate in the demised premises for the term prescribed in his lease, and if deprived of the possession and enjoyment thereof, the law supplies a remedy by which he may regain these specifically, instead of recovering damages only for the violation of a contract right. * * *

A license may be defined as follows:

A license is a personal privilege, can be conferred by parol or in writing, conveys no estate or interest, and is revocable at the pleasure of the party making it. There are also other incidents attaching to a license. It is an authority to do a lawful act, which, without it, would be unlawful, and while it remains unrevolced is a justification for the acts which it authorizes to be done. It ceases with the death of either party, and cannot be transferred or alienated by the licensee, because it is a personal matter, and is limited to the original parties to it. A sale of the lands by the owner instantly works its revocation, and in no sense is it property descendible to heirs. De Haro v. United States, 5 Wall. 1599.

In Thompson on Real Property (1924 ed.) Vol. 1, section 282, a license is defined as follows:

A license is a mere permission or personal and revocable privilege without the licensee possessing any estate in the land. A license passes no property in land and no interest in it. It confers a right, for instance, to go upon one’s land when it would be unlawful to do so without a license. It is distinguished in this respect from an easement. While there is a distinction between an ' easement and a license, it is often difficult to make out whether a particular case is the one or the other. But there are certain fundamental principles underlying most of the cases, which enable courts to distinguish an easement from a license, when construed in the light of surrounding circumstances. Thus, an easement implies an interest in the land, while a license does not. An easement must be created by a writing or by prescription, while a license may be created by writing or orally. An easement is a permanent interest in the realty, while a license, at least so long as it is executory, may be revoked at pleasure.

It is apparent that the rights granted by the instrument here in question bear none of the characteristics of a license. They are not merely temporary. They are not founded on personal confidence and they are irrevocable. On the other hand, the instrument does clearly have the characteristics of a lease. It gave to Springer, and through him to the taxpayer, the right to select and occupy the lands of the Coal Company, and, after the lands to be occupied had been selected by the taxpayer, it held them in possession to the exclusion of the world, including the Coal Company. It imposes no condition upon the lessee, reserves no right to the owner of the land after the site or sites had been selected, and gives to the lessee the rights of exclusive occupation of the land for a term of years. If it had been called upon its face a lease and had demised for a term of 99 years the premises now occupied by the taxpayer with the exclusive privilege of carrying on a mercantile business, the taxpayer would not have acquired the rights in any way greater than or different from the rights it has acquired under the instrument involved herein.

There are numerous decisions of the State and Federal courts which have a bearing on the question here presented, only a few of which will be referred to. These decisions confirm and substantiate our opinion that the written instrument involved in this appeal created a leasehold and not a mere license. In the case of United States v. Gratiot, 14 Pet. 526, the facts were that the United States was the owner of certain lead mines located in the Indian Territory, and under the Act of March 3, 1807, authorizing him to lease these mines for not to exceed five years, the President, acting through the Secretary of War, entered into a “license for smelting” with P. B. Gratiot and Robert Burton whereby they were given the right—

To purchase and smelt lead ore, at the United States’ lead mines, on the upper Mississippi, for the period of one year, from and after the date hereof, upon the following conditions, viz: 1. All purchases, or other acquisitions of ore, ashes, zinc or lead, to be from persons authorized to wort the mines, either as lessees, smelters or diggers, and from no others; and no ore to be purchased from the leased premises of any person, without his permission. ¡¿. To commence smelting as soon as 100,000 pounds of ore are obtained, and to continue it so long as any is on hand; to weigh a charge of ore for the log furnace, and the lead produced from it, when required to do it by the said first party or his assistant. 3. To keep a book containing an accurate account of all ore, ashes or zinc purchased, or otherwise acquired, and of all lead manufactured; which book shall, at all times, be open to inspection of the said first party or his assistant; and to furnish a transcript or return at the end of every month, agreeably to a form furnished by the said first party; which book and returns to be verified, on oath, if required. 4. The said second party hereby agrees to^pay the first party, for the use of the United States, six pounds of every hundred pounds of all the lead smelted by him, under this indenture, to be paid monthly, in clear pure lead, at the wareroom on Fever River, or at such other place near the mines as the said first party shall direct, and free of expense to the United States. And the said second party is not to sell, or remove from the place of smelting, in any manner whatever, any lead, until the rent be paid as aforesaid. This condition is subject to the revocation of the government, upon giving three months’ previous notice; at which time, it will be optional with the licentiate to accept or refuse the new terms. Upon his refusal to accept, then this license shall cease and determine. 5. The second party is allowed to have as much fuel as will suffice, without waste, for the purpose of this indenture, and to cultivate as much land as will suffice to furnish his teams, &e., with provender.

The question arose as to whether or not the President had the power under the Act of March 3, 1807, to make the contract set forth. The Supreme Court of the United States held that the contract was a lease, which the President was authorized to make under the Act of March 3, 1807, saying:

Does, then, the contract upon which the present action is founded, fall within the authority given to the president to lease the lead-mines? Or, in other words, is this contract a lease, within the meaning of the law? In construing this contract, the bond, and what is called “ the license for smelting,” are to be taken as part of the same instrument; and purport to bave been made with the defendants, with T. C. Legate, superintending the United States’ lead-mines, acting under the direction of the secretary of war, who must be presumed to be acting under the authority of the president; especially, as the permission given by the contract, in terms, is said to be by and with the appropriation [sic] of the president of the United States. This contract purports to be a license for smelting lead-ore; and it is objected, that this is not a lease, within the meaning of the act of congress. But this objection is not well founded. It is a contract for one year, and of course, within the time limited by the law, which gives to the president authority to lease for five years. Is it, then, a lease? The legal understanding of a lease for years is, a contract for the possession and profits of land, for a determinate period, with the recompense of rent. The contract in question is strictly within this definition. The business of smelting is a part of the operation of mining, although it may be a distinct branch from that of digging the ore; but the law ought not to be so construed as to require the whole operation to be embraced in the same contract. They are different operations, requiring different qualifications and distinct regulations. This contract is for the possession of land. The work is to be performed at the United States’ lead-mines, and must, of course, be performed within the limits prescribed by law to be attached to such mines. And there is an express permission to use as much fuel as is necessary to carry on the smelting business, and to cultivate as much land as will suffice to furnish teams, &c., with provender; and there is an express reservation of the rent of six pounds of every hundred pounds of lead smelted, with special and particular stipulation for securing the same. It is not necessary that the rent should be in money. If received in kind, it is rent, in contemplation of law.

In the case of Mehlman v. Atlantic Amusement Co., 119 N. Y. S. 222, a situation was presented which is very similar to that in the instant appeal. In that case the defendant, by an instrument in writing designated as a lease, contracted with plaintiff to “ let ” to plaintiff, who agreed to “ take ” from defendant, “ all that certain right or privilege to maintain three stands in Steeplechase Park, Coney Island, N. Y., for the sale of all kinds of candies, peanuts, and popcorn, the said right being the exclusive right for said business within Steeplechase Park from the beach to Surf Avenue; also, in addition, the storeroom under the Steeplechase tracks, and one of said stands to be located in the main pavilion of Steeplechase Park, as already designated, and its size not to exceed 8x8. feet.” The period of such “ letting ” was to be from the opening day of said park to the 1st day of October, 1901, at a “ rent ” of $1,200, payable $600 on the signing of the instrument, $300 on June 15, 1901, and $300 on July 5, 1907. Plaintiff took possession and made the payments above mentioned. The last of such payments was made on July 5, 1907, which was in full for the whole season. Thereafter, and on July 28, 1907, the entire park was destroyed by fire, and the plaintiff sued to recover that proportion of the said “ rent ” of $1,200 which would cover the period subsequent to July 28, 1907, and between that date and October 1, 1907, when the lease by its terms was to terminate. The Municipal Court for the Borough of Manhattan, Second District, held that the instrument involved was a license. An appeal was taken to the Supreme Court which reversed the judgment of the Municipal Court and held the instrument to be a lease. The Supreme Court in that case said:

Was the instrument a lease or a license? If it was a lease, the rent clue and owing, and paid on July 5th, can not bo recovered, notwithstanding the destruction by fire on July 28, 1907. The test of the distinction between a lease and a license depends, substantially, upon the question whether or not the contract or authority granting the right to enter upon the land of another confers upon the person so entering an interest in the land, so as to affect the other in the exclusive use of his land. While it is true that the mere use of the words “ lease ” and “ let ” in the contract does not necessarily create a lease, as distinguished from a license, nevertheless the instrument in suit must be regarded as a lease, since it gave plaintiff the right to the possession and use, not only of a certain specified space of ground for his stands, hut also of the storeroom under the tracks, which right of use and possession certainly affected defendant’s right to the exclusive use of its land. We are of opinion, therefore, that the learned court below fell into error in holding that 1he instrument was a license, and not a lease.

In the case of Coney Island Co. v. McIntire-Paxton Co., (C. C. A.) 200 Fed. 901, plaintiff owned and conducted an amusement park in which the defendant operated certain devices, paying the plaintiff a percentage of its earnings for the privilege. In settling a disagreement between them, a contract was made by which the defendant transferred to the plaintiff a part of its capital stock and other property. The contract also provided that the defendant should own and operate the devices as previously, and on the same terms as to percentage as long as the present owners continue to hold their stock and the privileges are granted by the Coney Island Company.” The plaintiff brought suit to recover possession of those portions of its premises on which stood the amusement devices owned and operated by the defendant. The United States Circuit Court of Appeals, Sixth Circuit, held that the contract involved was not a mere license revocable by the plaintiff at its pleasure, but that it gave the defendant a certain interest in the qualified use and possession of the land. The court said:

Was the agreement, so far as it attempted to give defendant a right to occupy plaintiff’s land, merely a revocable license? As said in Morrill v. Mademan, 24 Mich, at page 282, 9 Am. Rep. 124;
“A license is a permission to do some act or series of acts on the land of the licensor without having any permanent interest in it. * * * It is founded on personal confidence, and, therefore, not assignable. * * * It may be given in writing or by parol; it may be with or without consideration: but in either case it is subject to revocation, though constituting a protection to the party acting under it until the revocation takes place. Where nothing beyond a mere license in contemplated, and no interest in the land is proiwsed to be created, the statute of frauds has no application, and the observance of no formality is important. But there may also be a license where the understanding of the parties has in view a privilege of a less precarious nature. * * * Wherever, in short, the purpose has been to give an interest in the land, there may be a license; but there would also be something more than a license., if the proper formalities for the conveyance of the proposed interest have been observed. What that interest shall be called in the law may depend upon the character of the possession, occupancy, or use the promisee is to have, the time it is to continue, and perhaps upon the mode in which the compensation, if any, is to be made therefor.”
* * * We think it a misnomer to call the agreement before us a mere license. As construed below, it was not intended to eonLinue merely at the will of the plaintiff. It recognized an interest in defendant in the qualified use and possession of plaintiff’s land. It was intended to constitute a limitation upon plaintiff's sole use and possession of its land, so far as inconsistent with defendant’s qualified and concurrent right of possession, and to the extent necessary for the performance of the contract. It was not for an indefinite or permanent term, in a strict sense, but was to continue during a period whose limits were determined, although as yet uncertain in years. It pertained to the use of personal property, in whose beneficial use, plaintiff was directly interested. It provided for action to be done on plaintiff’s land for its benefit, not merely to be derived from its interest in the defendant, but through compensation to be paid directly to plaintiff for right to so operate. The defendant, moreover, as well as the plaintiff was under express obligation to perform it. Such rights, we think, (if effectively conveyed) amount to an interest in the land, as distinguished from a mere license. * * *

We are of the opinion that the written instrument involved in this appeal created, among other things, a leasehold, and not a mere license. Under the provisions of section 325 of the Revenue Act of 1918, a leasehold is tangible property. It therefore follows that, under the assignment to it by Springer of the written instrument, the taxpayer acquired tangible property, and it should be treated as such in computing invested capital.

Order of redetermination will be entered on 15 days' notice, under Rule '50.

LittletoN and Phillips dissent.