author: Littleton:

text:
    Continental Trust Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Fourth National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 1944, 1945.
    Promulgated June 24, 1927.
    1. Losses on account of worthless debts and Investments determined.
    2. The evidence fails to establish that the Fourth National Bank owned directly or controlled through closely affiliated interests, all or substantially all of the stock of the trust company during 1918 and 1919.
    S. Value of intangible assets of a trust company purchased by a national bank determined for invested capital purposes.
    4. Amount paid for acquisition of a going business held to be a capital expenditure, and allowed as a loss when the business was discontinued.
    5. Architect’s fee for building plans, which were never used and were abandoned within the taxable year, allowed as a deduction from gross income.

      George 8. Jones, Esq., and Fred L. Van Dolsen, Esq., for the petitioners. •

      M. B. Leming, Esq., for the respondent.
    These proceedings were consolidated for the purpose of hearing and decision. The deficiencies as determined by the Commissioner are as follows: Continental Trust Co., 1918, $87,741.96, and 1919, $8,115.47; Fourth National Bank, 1918, $24,081.67, and 1919, $3,806.37; and Fourth National Bank as affiliated with the Continental Trust Co., for 1920, $7,712.24.
    FINDINGS OF FACT.
    The Continental Trust Co. is a Georgia corporation, with its principal office in Macon, and was originally incorporated under the name of Continental Bank & Trust Co., its name having been changed from time to time to Home Savings Bank, Continental Bank & Trust Co., and Continental Trust Co., no change being made in its corporate existence. Unless otherwise indicated, it is referred to in these findings of fact as Trust Company. This corporation had been in existence since about 1890.
    The Fourth National Bank is a National Banking Association with its office and place of business in Macon, Ga.
    In 1914, the Trust Company agreed to act as liquidating agent for the Commercial & Savings Bank, located in Macon, Ga., hereinafter referred to as the Savings Bank, which had become involved in financial difficulties. Prior to entering into the aforesaid agreement, the Trust Company made an examination of the Savings Bank and found that its liabilities exceeded its assets. In order to make the Trust Company secure as to any deficit which might occur upon liquidation, the directors of the Savings Bank gave personal guarantees to the Trust Company in the aggregate sum of $100,000 and four national banks in Macon, Ga., additionally guaranteed the Trust Company to the extent of $73,000 against any loss by reason of any deficiency after exhausting the liability of the aforementioned directors on their guarantee. With these guarantees, totaling $173,000, the Trust Company proceeded to liquidate the Savings Bank, taking over the assets and assuming the liabilities. Among the assets of the Savings Bank were certain notes payable to it, to which were attached as collateral certain Eagle River Mining Co. bonds and coupons.
    In 1915, the president of the Trust Company visited the properties of the Eagle River Mining Co. in Alaska and upon the basis of the information thus obtained by him, the Trust Company agreed with the makers of these notes, who had not paid the notes when they became due, to accept the bonds of the Eagle River Mining Co., which were attached as collateral, together with certain accrued interest, in satisfaction of the notes at a face value of $33,211.37. When settlement was made in 1915 with the four national banks and with directors of the Savings Bank on their aforementioned guarantees, the bonds of the Eagle River Mining Co. were shown at a valuation of $33,211.37 on the books of the Trust Company and so considered by the Trust Company as an asset at this value in arriving at the amount which the aforementioned guarantors were ultimately required to pay. The guarantors were not required to pay the total of $173,000 guaranteed by them, though the difference between what they paid and $173,000 was less than $33,211.37.
    At the time the aforementioned bonds were accepted by the Trust Company at a valuation of $33,211.37, a sale of the Eagle River Mining Co. properties was pending, though it never materialized. The Eagle River Mining Co. was not successful thereafter, and had not been for some time prior thereto, no interest being paid on the bonds from the time of their receipt by the Trust Company. In 1918, the properties of the Eagle River Mining Co. were finally abandoned and no amount was realized by the Trust Company on account of the Eagle River Mining Co. bonds held by it.
    In its return for 1917, the Trust Company claimed as a loss $20,266.37 on account of the Eagle River Mining Co. bonds, this amount being charged off its books, and in 1918 the balance of $12,945 was likewise charged off and claimed as a deduction in its 1918 return.
    The loss claimed in 1917 was disallowed by the Commissioner on the ground that it had not been determined in 1917; that the bonds were entirely worthless and that there was no provision in the Revenue Act of 1917 for allowing a partial loss of this nature. Subsequently, he disallowed the loss for 1918 on the ground that the worthlessness of the bonds was determined in 1917.
    On February 19, 1918, Charles B. Lewis, J. N. Neel, A. T. Small and J. C. Walker, president and directors, respectively, of the Fourth National Bank, and George S. Jones, general counsel and director of the Fourth National Bank, made the following offer to R. J. Taylor, B. P. O’Neal, N. M. Block and A. W. Smith, president and directors, respectively, of the Trust Company:
    We hereby offer One Hundred and Twenty-two ($122.00) Dollars per share for not less than two-thirds (2-3) of the entire capital stock of the Continental Bank & Trust Company, Macon, Georgia; this stock to be delivered to us or to our assigns, and the money to be paid as soon as the papers can be drawn and the stock gotten in and transferred and not later than the 25th instant. If this offer is accepted and the stock delivered to us, we also offer to purchase at the same price any or all of the balance of the stock which may be offered to us within thirty (30) days from this date.
    Prior to the sale, neither the group offering to buy (Lewis and associates) nor the group accepting the offer (Taylor and associates) owned a majority of the stock in their respective banks.
    The offer was accepted on the same day, and between this date and February 23, 1918, a majority of the stock of the Trust Company was delivered to Lewis and associates.

      On February 23, 1918, the Trust Company conveyed to the Fourth National Bank all of its assets, except its fiduciary and trust business; the Fourth National Bank assuming all the liabilities of the Trust Company and paying to it the sum of $305,000 in cash. The tangible assets so transferred had a book value of $1,727,769.45 and the liabilities on the books of the Trust Company amounted to $1,450,-228.89. The cash received, $305,000, exceeded the net book value of the tangible assets, $277,540.56, by $27,459.44.
    The tangible assets transferred, consisted of cash, deposits in banks, interest-bearing loans and physical and other properties, and the liabilities included commercial deposits, savings deposits, and other deposits and liabilities of a smaller character.
    Subsequent to the sale of the majority of the stock of the Trust Company to Lewis and associates and sale of the assets of the Trust Company to the Fourth National Bank, the president of the Trust Company advised the stockholders of the Trust Company, in part, as follows:
    The controlling interest in tlie Continental Bank & Trust Company has been sold to Mr. Charles B. Lewis and his associates representing the Fourth National Bank oí Macon. The price paid for the majority stock was $122.00 per share. This represents a substantial premium over the book value of the stock, and is very considerably in excess of the price at which the stock has been selling for some time. In buying the control, the purchasers have contracted to purchase at the same figure and upon precisely the same terms all of the stock which may be offered to them on or before March 22, 1918. If you desire to avail yourself of this offer, you may forward your certificate, properly endorsed, to Mr. Charles B. Lewis, or present the same at the Fourth National Bank, and a check for $122.00 per share will be given'.
    After the sale of more than two-thirds of the stock had been consummated, the Board of Directors at a meeting held today passed a resolution transferring the assets of the Bank to the Fourth National Bank at a price which will net the stockholders $122.00 per share, the Fourth National Bank assuming as a part of the consideration all the liabilities of this Bank.
    Thereafter and within a few days the remaining stockholders of the Trust Company availed themselves of the offer of Lewis and associates and the entire stock was thus acquired by these individuals.
    In order to secure funds with which to acquire this stock, a loan of $305,000 was arranged by the cashier of the Fourth National Bank with certain banks in Atlanta, in the name of Lewis and associates, the shares of stock so purchased being attached to the notes of Lewis and associates as collateral, and the money received on the loan being used to acquire the stock. From time to time, new certificates of stock were issued to Lewis and associates and appropriate exchange made for the old stock which was pledged as collateral.
    After the receipt by the Trust Company of the $305,000 for the sale of its assets, a dividend of $22 per share was declared by the Trust Company, on the 2,500 shares of stock outstanding, which amount, $55,000, was used by Lewis and associates to reduce their liability on account of the money borrowed to purchase the stock of the Trust Company. Subsequently, the Trust Company retired 1,500 shares of its capital stock and as a result $150,000 was turned over to Lewis and associates, which was likewise used by them to reduce their liability on account of the aforementioned loan.
    On July 24, 1918, Lewis and associates executed the following instrument:
    The undersigned who are officers and stockholders of the Fourth National Bank of Macon, Georgia, hereby acknowledge that they hold 1,000 shares of the Capital Stock of the Continental Bank & Trust Company of Macon, Georgia, in trust for the sole pro rata use and benefit of the holders from time to time of the stock of the Fourth National Bank of Macon.
    Said stock was issued to the undersigned who paid in to the Continental Bank & Trust Co. $100,000.00 therefor, and said stock is now attached as collateral security to certain notes for the sum of $100,000.00 principal signed by the undersigned, all dividends declared on said stock to be applied first to the payment of the interest on said notes and from time to time to the reduction of the principal of said notes and any renewals or extensions thereof or substitutions therefor. As soon as said notes are fully paid and the indebtedness incurred for the money used in acquiring said stock is fully paid, said stock shall then and thereafter continue to be held by the undersigned and their successors in this trust for the sole pro rata use and benefit of said stockholders of said Fourth National Bank and future dividends shall be distributed to said stockholders pro rata.
    Their holdings of this stock shall, however, impose no obligation Or liability upon either said Fourth National Bank or Macon or its stockholders.
    After the retirement of 1,500 shares of the stock of the Trust Company, there were outstanding 1,000 shares of a par value of $100,000 and the indebtedness of Lewis and associates was likewise $100,000, which situation continued until April 28, 1920. At this time the stockholders of the Fourth National Bank paid in to the Fourth National Bank $150,000, its capital stock being increased from $850,000 to $500,000, and in addition paid in pro rata on their stock in the Fourth National Bank $100,000. This amount was paid to Lewis and associates who used this amount to liquidate the loan incurred to acquire the stock of the Trust Company, and each stockholder in the Fourth National Bank received one share of stock in the Trust Company in proportion to five shares held by him in the Fourth National Bank, the stock of the two banks being printed on the same certificate.
    The interest on the money borrowed by Lewis and associates and the interest on all renewals of the notes given for the money so borrowed was paid out of dividends declared by the Trust Company up to and including April 28,1920. The dividends were not sufficient to pay the entire interest which became due and in order to make up the deficiency for 1918, the Fourth National Bank paid $350 of- the said interest, including the same in its “ Interest Paid ” account and deducting it from its return for income and profits taxes for 1918.
    After the sale of the stock of the Trust Company to Lewis and associates, the Trust Company did not engage in active trust business for a short time, but during the year 1918 this business was resumed, the activities being conducted in the same building with those of the Fourth National Bank. While the officers of the two banks were not identical from this time until April 28,1920, in various instances executive officers in one bank held executive offices in the other bank. Salaries of the executive officers of the two banks, during this period, were either paid entirely by one bank or divided between the two banks, and the operations of the Trust Company were largely under the supervision of the Fourth National Bank.
    For 1918 and 1919, the Trust Company and the Fourth National Bank each filed separate returns. When the Commissioner requested information as to the affiliated status of the two banks, the banks advised him on at least four occasions, during 1921 and 1922, that they considered that no affiliation existed between them as contemplated by the Revenue Act of 1918. The reasons of the banks for considering themselves not affiliated were stated in a letter, dated May 5, 1921, from the Trust Company to the Commissioner, as follows :
    Replying to your valued favor of the 23rd ult., (Initial IT: SA: OR: E-FRM), we have not attempted to fill out questionnaires enclosed in your letter because the Continental Trust Company was not in any wise affiliated with any other company prior to April 28th, 1920.
    For the year, 1917, the stockholders of the Continental Trust - Company were entirely separate and distinct from the stockholders of any other corporation, so far as we are advised — certainly a majority of the stock was not owned by persons who constituted the majority of the stockholdings of any other corporation.
    The same thing was true in 1918. About July, 1918, the name of the Continental Bank and Trust Company was changed to Continental Trust Company. The capital stock was reduced to $100,000.00 and from July, 1918, to April, 1920, all the stock of the Continental Trust Company was held and owned by C. B. Lewis, Geo. S. Jones and John C. Walker, who borrowed from independent banks the money invested in the stock. There was an oral agreement that the stockholders of the Fourth National Bank might acquire this stock by purchasing it at par from C. B. Lewis, Geo. S. Jones and John C. Walker. This purchase was not accomplished until April, 1920. Neither C. B. Lewis, Geo. S. Jones nor John C. Walker, nor the three of them together, represented a majority of the stockholdings of the Fourth National Bank or any other corporation, except that Chas. B. Lewis and Geo. S. Jones were majority stockholders of Cornell-young Company, which was a construction company, having no connection whatever with the Continental Trust Company or the Fourth National Bank.
    Under these facts, it seems to us that it is impossible to fill out the questionnaires, for, as we are advised there are no affiliations in contemplation of the Federal Income Tax Law.

      The returns of the two banks for 1918 and 1919 were audited by the Commissioner on a separate basis, but after an examination by a revenue agent in 1923 on the basis of which examination an additional tax was proposed, the petitioners contended that they should be ruled affiliated.
    The return of petitioners on a consolidated basis for the entire year 1920 was accepted by the Commissioner.
    ■ Among the assets of the Trust Company, which were transferred to the Fourth National Bank in the sale of February 23, 1918, were 40 shares of the capital stock of Lamar, Taylor & Riley Drug Co., which cost the Trust CoKqjany $13,500. On January 20, 1918, the Trust Company appreciated this stock on its books to a valuation of $32,000, on which basis it was carried on its books on February 23,1918, and transferred to the Fourth National Bank.
    In July, 1918, a national bank examiner, who was conducting an examination of the Fourth National Bank, advised the Fourth National Bank that it was in violation of the national banking statutes for this bank to carry this stock and that therefore, it should be disposed of. To meet this demand, the Fourth National Bank transferred the stock to the Trust Company, from which it had been acquired, and received therefor the amount paid, namely, $32,000.
    This stock was sold by the Trust Company in 1920 for $32,000, and income reported in the consolidated return of the Fourth National Bank and the Trust Company on account of this sale of $18,000 ($14,000 instead of $13,500 being erroneously considered as the original cost to the Trust Company). The Commissioner reduced the com solidated taxable income for 1920 by $18,000 and made a corresponding increase in the taxable income of the Trust Company for 1918.
    Another asset transferred to the Fourth National Bank in the acquisition of the assets of the Trust Company was a claim against E. N. Lewis and Mrs. Tero C. Amos which was considered by both parties at a valuation of $20,910.36 and was so carried on the books of the Fourth National Bank, although the claim was in litigation at the time taken over. Subsequently, during the latter part of 1918, the claim was settled out of court for $5,000 less than its agreed valuation at date of acquisition.
    Among the liabilities of the Trust Company which were assumed by the Fourth National Bank on February 23, 1918, but which did not appear on the books of the Trust Company at that time, were two items of taxes for 1918 aggregating $3,117.72.
    Rental items, totaling $2,125, on buildings previously occupied by the Trust Company which were not accrued at the date of the sale, but which were paid by the Fourth National Bank during 1918, are now conceded by the Commissioner to have been properly treated by the Fourth National Bank in its return for 1918.
    In 1919, the Trust Company decided to engage in the stock and bond business and entered into negotiations with W. M. Davis & Co., a firm composed of W. M. Davis and his brother, who were experienced stock and bond dealers in Macon. As a result of these negotiations, Davis and his brother discontinued their business and came to the Trust Company to carry on a similar business for this-institution, bringing with them their lists of customers, office furniture and rotarystyle. W. M. Davis was elected vice president of the Trust Company and put in charge of its stock and bond business and his brother was employed in- the same department.
    In bringing Davis and his brother to the Trust Company, the Trust Company paid Davis $15,000, which it charged to expense and deducted from gross income in its income and profits-tax return for 1919. The minutes of the trust company authorizing this transaction are as follows:
    It was moved and carried that the officers of the Continental Trust Company he authorized to absorb the stock and bond business of W. M. Davis Co., and to pay therefor $5,000 for the fixtures, instruments, and office supplies and paraphernalia, including mailing lists, and $10,000 for the good will of said business, and the partners therein; a contract to be made that the said W. M. Davis and E. S. Davis, or either of them, will not enter business of a like character, directly or indirectly, for a period of five years from the termination of service with the said Continental Trust Company.
    It was moved and carried that W. M. Davis be elected Vice President of the Continental Trust Company.
    The stock and bond business as conducted by Davis not only was unsatisfactory to the Trust Company, but also was severely criticized by the national bank examiner. As a result, Davis was released from his contract in 1920, his mailing lists and paraphernalia being returned to him because of no value to the Trust Company and no amount was received from him on account of the original payment of $15,000. The stock and bond business was thereupon discontinued.
    In 1919, the Fourth National Bank acquired 164 shares of stock of the Crawford-Morrow Co., at a cost of $6,319.60, in the settlement of a debt due it. During 1919, the Fourth National Bank received $5,000 which was credited against the cost of this stock. The stock was turned over to the Trust Company in 1919 and charged off the books of the Fourth National Bank, a loss being claimed in the return of the latter bank for 1919 of $1,879.60. In 1920, $2,000 was received on account of this stock by the Trust Company and reported as taxable income by it in 1920.
    The Fourth National Bank employed an architect in 1919 to prepare preliminary plans for the erection of a building, agreeing to pay the architect $6,000 for the preliminary plans, and, in the event it should decide to erect the building, a total commission amounting to 5 per cent of the cost of the building, which it was estimated would cost $800,000. The preliminary plans were completed, but no final or working plans were asked for or prepared, the entire plan of erecting a new building being abandoned during 1919 when an estimate from a local contractor showed a probable cost much in excess of the architect’s estimate. The proposed building was not erected then and has not subsequently been erected. During 1919, the Fourth National Bank paid the architect $6,000 and terminated the contract.
    During 1919, E. F. Taylor became indebted to the Fourth National Bank in the sum of $54,707.66, which amount was still owing on February 28, 1920, when a national bank examiner instructed the petitioner to charge it off, which it did.
    This indebtedness arose through dealings of Taylor in buying and shipping peaches. When shipments were made, he drew drafts on the consignees, which were cashed by the Fourth National Bank. In many instances the consignees dishonored the drafts because of the defective character of the peaches when received. A controversy then arose between Taylor and the carriers, Taylor contending that the loss was caused by the carriers in handling the peaches whereas the carriers contended that certain peach diseases, which were prevalent in that year, were responsible for the loss.
    Taylor was a man without means and the only source from which anything could be realized on the amount due from him was from the amounts which might be secured from the claims which he had against the carriers. At the time the bank examiner instructed the bank to write off this amount, petitioner was of the opinion that a considerable portion of the debt due from Taylor would be realized, though prior to the end of 1920 it had determined that there was no basis for the claims of Taylor against the carriers and that ho value attached thereto, beyond a nuisance value which might be assigned to them on account of the amount which the carriers might pay to get rid of the lawsuits.
    During 1920, $2,120.50 was realized on account of a part of this indebtedness, but it was not credited to the indebtedness until 1921 when it was reported as income. During 1921 an attorney for Taylor settled with the carriers at a value less than 10 per cent of the amount claimed by him, which amount was accepted in final settlement of all these claims, the Fourth National Bank receiving $8,831.22 on account thereof, and returning the same amount as taxable income in 1921.
    The Commissioner allowed the difference between the total indebtedness and the amount realized as a deduction from gross income in 1921.
   OPINION.

Littleton:

While some of the items listed below have various subdivisions, the major issues are as follows:

1. Loss on Eagle River Mining Oo. bonds.
2. Affiliated status of the Fourth National Bank and the Trust Company from February 23, 1918, to April 28, 1920.
3. Manner in which cash paid by the Fourth National Bank to the Trust Company in excess of the net book value of the assets of Continental Trust Co. when these assets were acquired by the Fourth National Bank is to be treated in the returns of both banks.
4. Appreciation and disposition of Lamar, Taylor & Riley Drug Co. stock.
5. Loss on Lewis and Amos note.
6. Amount paid W. M. Davis & Co. when this firm discontinued its business and established a similar business for the Trust Company.
7. Architect’s fee.
8. Loss on Crawford-Morrow stock.
9. Year in which debt of E. F. Taylor was determined worthless.

The first issue to be considered is the loss on Eagle River Mining Co. bonds. In order to decide the extent of the loss sustained in this connection, cost of these bonds to the Trust Company must first be ascertained.

These bonds came to the Trust Company as a result of its acting as liquidating agent for the Savings Bank, a bank in Macon, Ga., which became involved in financial difficulties. In 1914, before the Trust Company agreed to liquidate this bank, it ascertained that the assets were less than the liabilities and, therefore, was unwilling to undertake the liquidating contract by taking over the assets and assuming the liabilities until directors of the Savings Bank and four national banks in Macon agreed to be responsible for the estimated deficiency of $173,000.

Among the assets taken over were notes which had Eagle River Mining Co. bonds attached thereto as collateral. None of these notes were paid by the makers. In 1915, the president of the Trust Company became convinced, after an inspection of the properties of the Eagle River Mining Co., that at least the face value of- the bonds and certain accrued interest could be realized in a sale of the properties. Accordingly, the Trust Company in 1915 agreed with the makers of the notes to surrender the notes and take the collateral at its face value of $33,211.37 in satisfaction of the notes. At the same time, or shortly thereafter, in making settlement with the guarantors under their contract, the Savings Bank was given credit for an asset equal to the face value of the bonds, namely, $33,211.37.

We are of the opinion that the foregoing amount, $33,211.37, represents cost of these bonds to the Trust Company. That they may not have been worth this amount is probably true, and it is certainly true that subsequent events show that the Trust Company made a bad investment. The fact can not be overlooked, however, that the Trust Company considered the bonds were worth par, or more, when it relieved the makers of the notes from obligation thereon, and there is nothing to show that recovery could not have been had on the notes, apart from the value attaching to the collateral. Apparently the Trust Company was of the opinion that by acquiring the bonds, it could dispose of the Eagle River Mining Co. properties, and not only realize the face value of the bonds, but also have something left for the stockholders, of which it was one.

The fact that only the balance of the debt was charged off in 1918 does not bar the allowance of the entire amount in that year. As the Board said in the Appeal of Mason Machine Works Co., 3 B. T. A. 745, this amounts to substantial compliance with the provision of the statute with respect to charging off the debt since at this time, 1918, the debt was finally determined to be worthless and finally charged off, the amount previously charged off in 1917 being, in effect, consolidated with the amount charged off in 1918.

We have found that the properties of the Eagle River Mining Co. were finally abandoned in 1918 and the bonds determined to be worthless in that year when they were charged off. A deductible loss was, therefore, sustained by the Trust Company in 1918 of $33,211.37.

The second issue involves the question of affiliation which arises on account of an acquisition of the stock of the Trust Company by certain stockholders of the Fourth National Bank.

On February 19, 1918, certain officers and directors of the Fourth National Bank who owned considerably less than a majority of the stock of the Fourth National Bank (otherwise referred to as Lewis and associates) made an offer to persons occupying similar positions with the Trust Company and who likewise owned a minority of the stock of the Trust Company (otherwise referred to as Taylor and associates) to pay $122 per share for not less than two-thirds of the capital stock of the Trust Company, which offer was accepted. Pursuant to this contract, all of the stock of the Trust Company was acquired by Lewis and associates within a few days, though only the controlling interest had been acquired by February 23,1918. The financing of the acquisition of this stock was handled for Lewis and associates by the Fourth National Bank, though the loans made were in the name of Lewis and associates and new stock was issued in their names. On July 24, 1918, Lewis and associates executed a writing in which they stated that the stock issued to and held by them was held for the use and benefit of the stockholders of the Fourth National Bank, but that no obligation or liability, was thereby imposed either upon the Fourth National Bank or its stockholders. Lewis and associates continued to hold the entire stock of the Trust Company until April 28, 1920, at which time each stockholder of the Fourth National Bank contributed pro rata to an amount which was used to acquire the stock, and the stock was accordingly transferred to the various stockholders, so that thereafter each stockholder of the Fourth National Bank held one share of the stock of the Trust Company for every five shares of stock of the Fourth National Bank held by him.

Under these circumstances, the petitioners contend that the Fourth National Bank and the Trust Company were affiliated from February 23, 1918, to April 28, 1920, under the provisions of section 240 (bj, Revenue Act of 1918, which reads as follows :

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

It is not set out specifically whether petitioners are contending for affiliation under subdivision (1) or (2) above, though from the argument advanced it appears that they are asking for affiliation under subdivision (1). In effect, their contention is that when the directors and officers of the Fourth National Bank acquired the stock of the Trust Company, they were acting for the Fourth National Bank and that the only reason the stock was not acquired by the bank itself was because of a prohibition against it in the national banking statutes.

It is not contended that the Fourth National Bank owned the stock of the Trust Company, but that there was control by the Fourth National Bank through closely affiliated interests. In the Appeal of Canyon Lumber Co., 1 B. T. A. 473, and subsequent decisions, the Board interpreted the control as referred to in the statute to mean control of the voting rights of stock, whether it be legal or otherwise. Tho stock in this instance was held in the name of Lewis and associates and the record is silent as to how it was voted by these individuals. Certainly, from the record, it would appear the individuals had every right to vote it as they saw fit, and could exercise such complete control over it as flows from their complete ownership thereof. No evidence was introduced of any agreement that the Fourth National Bank may have had with the purchasers other than might be gathered from collateral circumstances surrounding the use and disposition of the stock after its acquisition. We-are convinced that while there was a closeness of relationship- — particularly as to operations — between the two banks and also between the individuals who purchased the stock and the Fourth National Bank, there is not sufficient shown to cause us to reach the conclusion that there was present the control contemplated by the statute of the Fourth National Bank over the stock of the Trust Company from February 23, 1918, to April 28, 1920.

Petitioners further argue that, since they had oral agreements with the stockholders, they were acting for them and since they executed a declaration of trust on July 28, 1918, to the effect that they were acting for them, the act of the stockholders in finally acquiring the stock on April 28, 1920, must be termed a ratification which would relate back to February 23, 1918. To say that ratification could relate back in such a manner as to change the control as contemplated by the statute which had otherwise existed over a period of more than two years is going further than we feel called upon to go in this case. What the oral agreements were, we do not know, but we consider it significant that in the declaration of trust, the signers thereof set out that the “holding of this stock shall, however, impose no obligation or liability upon either said Fourth National Bank of Macon or its stockholders.” Certainly, it would be extremely improbable for all obligations and liabilities with respect to ownership of the stock to attach to Lewis and associates and at the same time either the Fourth National Bank or its stockholders have full control of its voting rights.

Upon the whole record, therefore, the Board is of the opinion that the Fourth National Bank and the Trust Company were not affiliated from February 23,1918 to April 28,1920.

Our next consideration is the manner in which the excess of cash paid by the Fourth National Bank to the Trust Company oyer the net book value of the assets of the latter company shall be treated by both concerns as a consequence of the transaction of February 23, 1918, when the Fourth National Bank acquired the assets and assumed the liabilities of the Trust Company.

The excess in question, as shown by the books of the Trust Company, amounted to $27,459.44, and in addition there were liabilities which had accrued and which were assumed, but which had not been set up on the books of the Trust Company, in the amount of $3,117.72, which would reduce the net book value and increase the excess to $30,577.16.

First we will consider the situation with respect to the purchasing company, the Fourth National Bank. This bank contends that this amount was paid by it to acquire the business of the Trust Company, meaning by “business” primarily the old customers and depositors who thereby became customers and depositors of the Fourth National Bank, and that the amount paid represented an expense to it in the same manner that amounts, which are paid from time to time to solicitors to secure new customers are considered an expense.

That it was expended to acquire the business, we agre* is true, but we can not concur in the proposition that it should be treated as a deductible expense for 1918 by the Fourth National Bank. An important asset to any bank is its line of customers and depositors, as they constitute the very lifeblood of the institution. For reasons of conservatism, national banks are not allowed to carry good will on their books, but this does not alter the fact, as the Board stated in Merchants National Bank v. Commissioner, 6 B. T. A. 1167, that a national bank may have good will, or intangible assets, which may be recognized for invested capital purposes under the revenue acts.

The bank whose assets were purchased had been in existence since about 1890, and assets purchased consisted not only of tangible assets, but assets of every nature and description, exclusive of its trust and fiduciary business. Customers and depositors of the Trust Company became customers and depositors of the Fourth National Bank, representing several classes of deposits amounting to several hundred thousand dollars. Various officers in the Trust Company came over to occupy similar positions with the Fourth National Bank.

In view of the foregoing facts, we are of the opinion that the excess paid, $30,577.16, represented a sale by the Trust Company and a purchase by the Fourth National Bank of an intangible asset of at least this value and that it should be included in the invested capital of the Fourth National Bank from date of acquisition in this amount.

Since this asset was sold by the Trust Company, the question arises as to whether a profit was realized in the sale. From the evidence introduced by the Trust Company, both in the form of expert testimony and earnings,'and invested capital of the Trust Company for five years preceding March 1, 1913, and for the years preceding February 23, 1918, we are convinced that the intangible value was not worth more on February 23, 1918, than on March 1, 1913, and that therefore no profit was realized in the sale to the Fourth National Bank.

We are of the further opinion that interest on the loan of Lewis and associates amounting to $350, which was paid by the Fourth National Bank, does not represent a deductible expense to this bank under the provisions of section 234(a), (1) and (2) of the Revenue Act of 1918, since it does not represent an ordinary and necessary expense, or interest paid or accrued within the taxable year on its indebtedness.

At the time of the aforementioned sals of assets, the Trust Company had certain stock of the Lamar, Taylor & Riley Drug Co., which cost the Trust Company $13,500, but which had been appreciated on its books to $32,000 and was sold to the Fourth National Bank at $32,000. During 1918, a national bank examiner instructed the Fourth National Bank that it was in violation of the national banking statutes to hold this stock and it should dispose of it. Accordingly, the Fourth National Bank sold it hack to the Trust Company for the price paid therefor, $32,000, which bank, in 1920, sold it for a like amount.

We have heretofore held that the two banks were not affiliated and consequently each must be dealt with on a separate entity basis. We must hold, therefore, that there were three separate sales involved in the foregoing transactions. In the first instance, stock which cost the Trust Company $13,500 was sold for $32,000 on February 23, 1918, to the Fourth National Bank and, therefore, a profit of $18,500 realized, no question being raised as to a March 1, 1913, value, or that the stock was acquired prior to March 1, 1913.

In a similar case, Appeal of Farmers & Traders Bank, 4 B. T. A. 753, the Board said:

It was a l)cma fide sale between two corporations, the consideration being cash and an enforceable obligation. The parties to the transaction made their own terms and the taxpayer must be bound by the same in so far as taxation may result on the profit of $9,840.

In the two subsequent sales, cost and selling price were the same, and, consequently, no profit resulted to be accounted for.

The next item is the contention of the Trust Company that it should be allowed a deduction of $15,000 in 1919 on account of such an amount being paid by it to secure the services of W. M. Davis and brother to carry on a stock and bond business. The resolution authorizing this transaction is to the effect that $5,000 was to be paid for the furniture, fixtures, and office supplies of the business formerly conducted by these individuals and $10,000 for the good will of their business. The testimony is to the effect that the Trust Company in seeking to establish a brokerage business negotiated with Davis and his brother because they had what was considered the best stock and bond house in Macon, Ga. These men discontinued their business and brought with them their office furniture and fixtures, which apparently had little value, and also their mailing lists. They came to the Trust Company and conducted for this bank the kind of a business which they had previously carried on in their own capacities. When the business as conducted by them proved unsatisfactory to the Trust Company, they were released from their contract, the business was discontinued and their office paraphernalia returned.to them.

The Board is of the opinion that the foregoing expenditure was of a capital nature and represented an amount paid by the bank to secure what was, in effect, a going business. When, however, the business was discontinued in 1920, a loss was sustained on account of which the Trust Company is entitled to a deduction from gross income. Appeal of Metro Pictures Film Exchange of Pennsylvania, 1 B. T. A. 721.

The item referred to in our findings of fact as a claim against E. N. Lewis and Mrs. Amos, represents another asset which was taken over by the Fourth National Bank from the Trust Company in the transaction of February 23,1918, at its face value of $20,970.36. The testimony was to the effect that Mrs. Amos, the guarantor on the note securing this claim, was solvent at the time the claim was taken over, and, while the claim was then in litigation, counsel for the Fourth National Bank, after an investigation of the defense which Mrs. Amos was setting up, advised the bank that the defense was not good and the Fourth National Bank took it over at its face value. Subsequent to acquisition, additional information was secured which indicated that there might be some basis for the defense of Mrs. Amos. Then on advice of counsel, the claim was compromised out of court for $5,000 less than its face value.

We are of the opinion that such a reduction in the settlement of a claim represents a deductible loss under section 234 (a) (4) of the Revenue Act of 1918. Appeal of George C. Peterson Co., 1 B. T. A. 690; Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168; and Pacific Novelty Co. v. Commissioner, 5 B. T. A. 1017.

In our opinion, the amount paid to the architect for preliminary plans of a building which it proposed to erect, but which plan was abandoned in the same year after the costs were determined, and has not since been carried into execution, is a proper deduction from gross income in the year when paid, namely, 1919. Appeal of C. U. Connellee, 4 B. T. A. 359.

No evidence was introduced at the hearing with respect to the loss on the Crawford-Morrow stock by the Fourth National Bank, this issxxe being submitted on the pleadings. The Commissioner admits that this stock cost $6,379.60 and that prior to its being charged off, $5,000 had been received and applied as a credit on account thereof, but denies that the stock was worthless when charged off by the Fourth National Bank. In the absence of proof that the stock was worthless as contended by the Fourth National Bank, the prima facie correctness of the Commissioner’s determination must be sustained.

The final issue in the case involves a deduction claimed on account of a debt of E. F. Taylor which arose in 1919 and which the Fourth National Bank contends became worthless in 1920. The debt was charged off on February 28, 1920, on instructions from a national bank examiner, at which time the bank was of the opinion that recovery could be had on a part of the indebtedness.

Had the evidence presented as to the worthlessness of the debt been confined to the directions of the bank examiner who instructed the bank to charge it off, it would have been necessary to deny the deduction. Appeal of Murchison National Bank, 1 B. T. A. 617, and Appeal of Farmers & Traders Bank, 4 B. T. A. 753. We have in addition, however, the fact that prior to December 31, 1920, this petitioner determined that there was no value attaching to the debt other than that which might possibly exist in the claims held by Taylor, which had only a nuisance value. The carriers were contesting the claims held by Taylor and the investigation made by the petitioner convinced it that the carriers had a defense which could not be overcome by Taylor, and that, therefore, the only hope of recovery lay in the possibility that the carriers would pay something in order to rid themselves of the various suits which had been filed against them.

We are convinced that the foregoing circumstances are sufficient to satisfy the terms of section 234(a) (5) as to a debt “ascertained to be worthless and charged off within the taxable year.” The debt having been charged off in February, 1920, when it was considered worthless, it is obviously unnecessary to take any further action in this respect, when prior to December 31, 1920, it was determined that the debt was actually worthless. Appeal of Mason Machine Works Co., 3 B. T. A. 745.

As to the determination of worthlessness, we are of the opinion that this was likewise in accordance with sound business judgment and amounted to a substantial compliance with the statute. In Appeal of Egan & Hausman Co., 1 B. T. A. 556, the Board said:

In adjusting their accounts and debts business men are called upon to use sound business judgment and prudence .and are justified in 'eliminating from their assets such accounts and debts as are past due and which they are satisfied that they can not realize upon within some reasonably determinable period. They do not have to await uncertain and future events, nor are they called upon to wait until some turn of the wheel of fortune may bring their debtors into affluence, or to enable the receivers of a bankrupt institution to eke out a liquidating dividend.

Likewise, in Appeal of Pacific Pipe & Supply Co., 2 B. T. A. 870:

The possibility that a small part of the debt may ultimately be recovered will not prohibit the writing off of the debt as worthless for income-tax purposes when every consideration of good business directs that it be charged off.

Also see J. W. Teasdale & Co. v. Commissioner, 5 B. T. A. 1244, and Fort Worth Warehouse & Storage Co. v. Commissioner, 6 B. T. A. 536.

The deduction to be allowed in this instance in 1920 should be reduced by collections which were made during 1920, i. e., the allowable deduction is $54,707.66 less $2,120.50.

Redetermination should be made in accordance with the foregoing.

Judgment will Toe entered on 30 days’ notice, under Rule 60.


source: Caselaw Access Project

author: Geeen:

license: Public Domain

text:
    T. H. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6870.
    Promulgated June 28, 1927.
    1. Loss on sale of stock determined from the evidence.
    2. Petitioner admits increase in income representing his distributive share of partnership income.

      W. W. Boss, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   Geeen:

This proceeding results from the determination by the Commissioner of a deficiency in income taxes for the calendar year 1920 in the amount of $2,164.47. The error assigned in the petition is that the Commissioner refused to allow as a deduction from gross income an alleged loss of $20,800 on the sale in 1920 of stock in the Ohio Consolidated Coal Co. The respondent was granted leave to amend his answer by alleging that the petitioner received $4,927.25 in 1920 as representing petitioner’s distributive share of the income of Glennova Coal Co., a partnership, which was admitted by the petitioner at the hearing.

FINDINGS OF FACT.

The petitioner is a citizen of the State of Ohio. In 1916 he purchased 83 shares of stock in the Lewiston Block Coal Co., for $8,300. In 1917 or 1918, he purchased 165 shares of stock in the Ohio Consolidated Coal Co. for $16,500. About four months later he exchanged the 83 shares of Lewiston stock for 83 additional shares of Ohio Consolidated. The fair market value of each of the stocks on the date of exchange was par, namely, $8,300. The cost of the 83 shares of stock in the Ohio Consolidated was therefore $8,300. In 1920 he sold the 248 shares of the Ohio Consolidated Coal Co. for $4,000, thereby sustaining a deductible loss of $20,800. The Commissioner allowed no part of this loss in determining the deficiency.

During 1920, the petitioner was a partner in the Glennova Coal Co. His distributive share of income for that year was $4,927.25. He did not report any of this amount in his 1920 return.

The income determined by the Commissioner should be increased by $4,927.25 and decreased by $20,800.

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


author: Love:

text:
    Morris Sass, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6922.
    Promulgated June 28, 1927.
    Pursuant to an agreement of guaranty, the petitioner, in the year 1919, paid partly in cash and partly in notes, certain notes, the payment of which he had guaranteed. Held, in the absence of evidence as to the worthlessness of the notes so paid by cash and notes, no deduction may be taken as a worthless debt or as a loss on account thereof.

      Robert Ash, Esq., for the petitioner.

      J. E. Halstead, Esq., for the respondent.
    This proceeding is for a redetermination of a deficiency for the calendar year 1919 in the amount of $2,785.82, and for the calendar year 1921 in the amount of $933.80.
    The sole issue involved herein is the deductibility of $24,153.12 paid by the petitioner to the National Reserve Bank of Kansas City, Mo. (hereinafter referred to as the Bank), under the circumstances outlined below.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Ardmore, Old a. For about thirty years he was engaged at Ardmore and in Davis County, Oklahoma, in the credit supply business, selling bonds to farmers and others in the surrounding territory. Prior to and including part of the year 1917, the petitioner was engaged also in the business of loaning money for the Bank on chattel mortgages.
    The petitioner and the Bank had reached an oral agreement whereby the petitioner was to loan money for it at 10 per cent, taking as security chattel mortgages in the name of the Bank, collecting the loans made upon the maturity thereof and guaranteeing to the Bank any losses sustained by it by reason of the nonpayment of any money loaned through the petitioner. It was further agreed that the petitioner was to receive any interest over and above 10 per cent at which he might arrange loans. Pursuant to this agreement the petitioner arranged, loans at rates above 10 per cent and took notes for the money to be loaned, together with chattel mortgages running to the Bank as security therefor. When he had accumulated several notes and mortgages for money to be loaned, he forwarded to the Bank the notes, copies of the mortgages, and his own note for the aggregate amount of the notes secured by the chattel mortgages plus 10 per cent interest. At the same time he drew a draft on the Bank for the face value of his own note. The proceeds of the draft were then turned over to the persons in the amounts of the notes given by them.

      The note given by the petitioner was for the purpose of guaranteeing to the Bank collection of the money loaned with interest at the rate of 10 per cent.
    Some time during the year 1917, the petitioner on account of the passage of a usury statute, ceased loaning money under the arrangement with the Bank and in the year 1919 the amount of $24,153.12 of loans made on chattel mortgages and guaranteed by the petitioner remained unpaid. When accounting was made in 1919, the petitioner, pursuant to his agreement, paid to the Bank $4,899.58 in cash and gave his note for $19,258.54 for the balance remaining unpaid.
    The petitioner kept his books and accounts on a cash receipts and disbursements basis. Upon audit of the petitioner’s income-tax return for the year 1919, the Commissioner disallowed as a deduction from gross income the amount of $19,253.54, represented by the note given to the Bank in that year, and allowed as a deduction from gross income the amount of $4,899.58 paid in cash to the Bank.
    After the submission of this appeal, upon leave granted, the respondent amended his answer to deny the propriety of allowing as a deduction from gross income for the year 1919 the amount of $4,899.58, and asked that the deficiency asserted be increased by adding to the gross income for the taxable year 1919 that amount.
   OPINION.

Love:

The petitioner claims that the transaction outlined in the findings of fact constitute a loss sustained under the provisions of section 214 (a) of the Revenue Act of 1918, and that the loss was sustained in the year 1919, since in that year he gave to the Bank his note for $19,253.54 and $4,899.58 in cash to cover unpaid notes held by the Bank, the payment of which the petitioner had guaranteed.

The respondent denies the right of the petitioner to deduct the amount represented, by the note given in 1919 by the petitioner to the Bank and further denies the propriety of his allowing as a deduction for the year 1919 the amount of $4,899.58 paid in cash in that year to the Bank pursuant to his guaranty agreement. In denying the right of the petitioner to deduct either the note given or cash paid in the year 1919, the respondent argues that the petitioner, in fact, borrowed the money from the Bank and loaned that which he borrowed. He further argues in denying the deductions that no particular note given to the petitioner for the money loaned was determined to be worthless or charged off during the year 1919.

We believe that neither position taken is correct. The evidence shows that the loans were made by and in the name of the Bank. It is clear that the petitioner was a guarantor of the loans made by him for the Bank.

In the year 1919, when the petitioner gave to the Bank his note for $19,253.54 and cash in the amount of $4,899.58, he was merely carrying out his agreement of guaranty. Upon carrying out the guaranty agreement the petitioner was subrogated to the rights of the Bank against the makers of the notes remaining unpaid at that time. The petitioner could have then proceeded against the makers of the notes subject, of course, to the defenses available against the Bank. The evidence is silent as to whether the unpaid notes held by the Bank were worthless at the time in 1919 that the petitioner carried out his agreement of guaranty. The evidence is equally silent as to whether the petitioner ascertained and determined any of the notes to be worthless in the year 1919, to which he had been subrogated to the Bank’s rights. The fact that the petitioner as a guarantor of the notes was forced to pay them in cash, notes, or both, does not of itself indicate that he suffered any loss at that time. He may have, and conceivably could have, recovered later the amounts represented by the notes and secured by chattel mortgages.

In the absence of any evidence to show that the petitioner actually sustained a loss in any amount due to the notes in question, we must approve the Commissioner’s determination in denying the deduction from gross income for the year 1919 the amount of $19,253.54 represented by the note given in that year to the Bank and we must also determine that the Commissioner erred in allowing as a deduction from gross income for the year 1919, the amount of $4,899.58 in cash pai(1 to the Bank in that year pursuant to the guaranty agreement between the Bank and the petitioner.

Judgment will T)e entered on 15 days’ notice, under Rule 50.


author: Milliken:

text:
    G. B. Foster, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10849.
    Promulgated June 28, 1927.
    A Joint return of husband and wife having been filed for the calendar year 1923, separate returns may not be subsequently filed for that year.

      Thomas M. WilJcins, Esg., for the respondent.
    This proceeding results from the determination of a deficiency in income tax for the calendar year 1923, in the amount of $34.99. The question to be decided is whether the petitioner, who, together with his wife, filed a joint return of income for the calendar year 1923, may subsequently file a separate return of income for that year, on the basis of the community property law of Texas. There were no appearances for the petitioner and we make our findings of fact from the admissions contained in the answer filed by the respondent.
    FINDINGS OP PACT.
    Petitioner is an individual, residing at Dallas, Tex. During the calendar year 1923, petitioner was a married man, living with his wife, and domiciled in the State of Texas. He filed an original return of income for himself and wife for that year, and subsequent thereto endeavored to file a separate return of income for the same year.
   OPINION.

Milliken:

We have decided, in R. Downes, Jr. v. Commissioner, 5 B. T. A. 1029, that where a man and wife living in Louisiana filed a joint return and included therein the income of both, they could not subsequently file a return on a separate basis under the community property law. This proceeding falls squarely within that decision.

Judgment will be entered for the respondent.


text:
    John T. Burkett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 14001.
    Promulgated June 28, 1927.
    Certain instruments herein construed, as well as rights therein, and held to be oil and gas leases and not sales of capital assets within the meaning of section 206 of the Revenue Act of 1921.

      J. W. House, Esq., for the petitioner.

      J. Arthwr Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1923, in the amount of $36,653.38. The errors assigned by the petitioner áre (1) that the Commissioner refused to tax so much of his income as was derived from an oil and gas lease, under the provisions of section 206 of the ReArenue Act of 1921, and (2) that the Commissioner erred in not apportioning the income from said lease equally between petitioner and his wife.
    FINDINGS OF FACT.
    The petitioner is a resident of Pulaski County, Arkansas, and ivas at all times herein mentioned, the husband of Sula J. Burkett. On April 13, 1923, the petitioner and his wife, executed, acknowledged and delivered to the Gulf Refining Co. of Louisiana, the following oil and gas lease:
    OH. AND GAS LEASE.
    John T. Burkett et ux to Gulf Refining Company of La.
    The State oe Arkansas

      County of Ouachita

    Section 1.
    Paragraph 1.

      Knoto all men hy these presents:

    That John T. Burkett and Sula J. Burkett of the County of Ouachita, State of Arkansas, hereinafter called Lessor (whether one or more) have and by these presents do hereby lease, demise and let unto Gulf Refining Company of Louisiana, hereinafter styled Lessee, the tract of land hereinafter described, with the exclusive right of exploiting the same for and producing oil and gas therefrom, and to that end also grant, the exclusive right of drilling and operating thereon for oil and gas, together with rights of way for telephone and telegraph lines and right to lay pipe lines and operate the same for the purpose of conveying water, oil, steam and gas to erect, maintain and use storage tanks, sheds and buildings for the purpose of storing and caring for the minerals which may be produced, and the right to have and use sufficient water, oil, gas, wood and coal from the premises, free of cost, to operate and drill any wells that Lessee may bore or in the treating, so as to make merchantable, such minerals and also such other privileges as are reasonably requisite for the conduct of said operations, and the right to remove, replace and substitute material and machinery, to draw and remove casing from abortive and abandoned wells, and at the termination of this lease, to remove all property placed thereon by Lessee.
    This said land is situated in Ouachita County, State of Arkansas, and described as follows:
    SW % of SW Yl, Section 6; N Yi of NW Yi ; SW Yi of NW Yi ; S % of NE Yi; NW Yi of NE Yi, N Yi of SW Yi, SW Yi of SW Vi, NW % of SE Yi, SE Yi of NW Yi, Section 7; N % of SW Yi, Section 8; S % of NW Yi, SE Yi of SW Yi, W Yz of SE Yi, Section 16; N Yi of NW Yi, Section 21; all in Township 15 South, Range 16 AVest, also — NW Yi of NE Yi, SE Yi of NE Yi and E Yi of SE Yi, all in Section 12, Township 15 South, Range 17 West. Also NW Yi of SW Yi, Section 8, Township 15 South, Range 16 West.
    It is agreed that for all purposes of this lease, there are embraced in this lease One Thousand (1,000) acres of land.
    Par. 2. To have and to hold unto said Lessee and to Lessee’s successors and assigns for the term of seven (7) years from the date hereof and as much longer thereafter as oil or gas (or other minerals, if produced hereunder) are produced from said land. Provided that this lease shall not remain in force longer than fifty (50) years from this date, and provided, further, that a temporary cessation of production due to cleaning out, working over or drilling deeper of any well, or similar causes oceuring after production secured, shall not terminate this lease. And lessor covenants that Lessor has good title to said land and will protect Lessee in the quiet and peaceable possession thereof.

      Par. 3. Lessee agrees to begin operations for the drilling of a well on the premises within twelve (12) months from the date hereof, or, failing so to do, Lessee agrees to pay in the manner below stated for each six (6) months’ period for which such drilling is delayed, not to exceed eight (8) such periods, the sum of five hundred ($500.00) dollars such payment to be made on or before the beginning of each such period and shall be made by paying the same to the Lessor in person or to the Merchants & Planters Bank of Oamden, Arkansas, or Lessee may mail Lessee’s check to Lessor in said sum in care of said Bank, payable to Lessor-, said Bank being hereby constituted Lessor’s agent to receive said funds for Lessor or to receive and deliver said check to said Lessor, as the case may be; in either of the three methods of making such payment Lessee may use Lessee’s check and the mailing of said check shall be deemed making payment; if Lessee shall fail to make such payment in advance as above provided, and such failure or defeat shall continue for thirty (30) days after the due date of such payment, Lessor shall have the right to forfeit this lease.
    Par. 4. In the case of change of ownership of the land herein leased, or some part thereof, whether by descent and partition, devise, conveyance or otherwise, the above designated Bank shall become the Trustee for all the owners to receive and distribute the. rentals among them, and the payment of the rentals to such Bank shall prevent forfeiture of this lease. In case such Bank shall refuse to receive such payment, or shall go out of business, the Lessor or successors in interest, shall have the right to designate in writing some Bank as Trustee, and until such designation is made and Lessee notified in writing sugh rentals shall not be due and no forfeiture of this lease can be declared if such rental is paid within thirty (30) days after receipt of such notice by lessee.
    Par. 5. If while this lease is in force, as herein provided, Lessee shall have begun operations in attempt to find, oil or gas, then without making any further payment, Lessee may continue such attempt, and may make as many attempts as Lessee pleases, but if Lessee shall abandon such attempts or ninety (90) days without finding oil or gas in paying quantities Lessee shall resume payment of the rentals falling due after the completion or abandonment of such well, at the next ensuing rental period beginning after such completion or abandonment provided Lessee shall have at least ninety (90) days from the date of such abandonment of operations in which to make such payment and on resuming payment of rentals Lessee shall have the right to continue making the same or of beginning operations for the drilling of a well and to alternate such rights.
    Par. 6. If operations shall not be begun on or before the expiration of five (6) years from this date, this lease shall wholly terminate, but if, prior to the termination of such five (5) years, Lessee shall have begun operations in attempt to find oil or gas and is engaged in such operations at the end of the five-year period, then Lessee shall have the right to continue such operations and also to make as many additional attempts to find oil or gas as Lessee desires beyond the expiration of said five year period; provided, however, that these attempts so extending such rights beyond such five years must be successive in the sense that, until oil or gas be found in paying quantities, not more than sixty (00) days shall elapse between the abandonment of work on one well and the .beginning of operations on another, and provided further that this right to make attempts before the discovery of oil or gas, shall not continue in any event longer than seven (7) years from the date hereof.

      Section 2.
    Par. 1. If oil shall be found on said premises Lessee shall deliver as royalty to Lessor, free of expense, one-eighth (%) part of the oil saved from that produced, after deducting such part as may be used for drilling and operating on the land and treating the oil or gas so as to make it merchantable; such delivery to be made either into tanks supplied by Lessor with connections by Lessor provided, or into any pipe line that may be connected with the well; or Lessee may, at Lessee’s option, buy such royalty oil, paying the current market price in the field at the time of production. If lessee shall operate so as to save and utilize casinghead gas from said premises, then Lessee shall pay as royalty to Lessor one-eighth (%) part of the value of such gas, calculated at the rate of four (4) cents per one thousand (1,000) cubic feet of the casing-head gas, calculation as to quantity to be made on the basis of four (4) ounces pressure above atmospheric pressure at the temperature of sixty (60) degrees Fahrenheit, as royalty on such casinghead gas, and such royalty accruing in each six months (period beginning from the date hereof to be paid within thirty (30) days after expiration of such period. If any well on said premises produces gas in paying quantities and such gas is used or marketed off the premises by lessee then lessee shall pay as royalty to lessor one-eighth (%) part of the value of such gas so used, calculated at the rate of two (2) cents per one thousand cubic feet.
    Par. 2. If, as result of any explorations under this contract, any other minerals than oil or gas shall be found in quantities deemed by the lessee to he paying, then lessee shall have the optional right to mine for and produce the same, applying to the Lessor, what, under all the circumstances, may be a reasonable royalty.
    Par. 3. All money royalties may be paid to Lessor as provided in Paragraph 3 of Section 1 hereof. Should the interest owned by Lessor in said land prove to be less than the whole, the royalties and rentals to be paid hereunder shall be paid to the Lessor in proportion only that Lessor’s interest is to the entire interest or whole.
    Section 3.
    Par. 1. It is agreed that, without the valid written consent of both parties hereto, no well shall be drilled, no shaft sunk and no mining operations of any kind shall be carried on, within two hundred (200) feet of any dwelling houses now on said premises, and that the use of the surface of the land is hereby granted only so far as may be necessary or proper and convenient for the exercise of the rights herein granted.
    Section 4.
    Par. 1. The obligation of Lessee to offset wells on adjoining lands shall be to drill such offset wells as a prudent, responsible operator would drill under the same conditions if he owned the land hereby leased, subject to the following provisions, to wit:
    When a well to offset an oil well on adjoining land is demandable under the above provision, the following agreement shall apply in such instance: It is agreed that a well will draw oil to an appreciable extent, for a distance of four hundred (400) feet from its center equally in all directions, and that all wells drilled within four hundred (400) feet of any of the lines of the land hereby leased which produce oil in paying quantities shall, subject to the first part of this Section, and where demandable under said part of this Section, either be offset by a well drilled on the leased land, or at the option of the lessee, a royalty shall be paid to the Lessor based on the production of such well determined as follows: take the well to be offset as a center and transcribe around it a circle with a radius of four hundred (400) feet — that proportion of the total area of such circle which falls within the leased premises will be the proportion of the royalty which shall be paid on the production of the well to be offset; thus if that portion of such circle falling within the leased land is one-fourth (%) of the total area of the circle, then one-fourth (%) of the amount of royalty which would be payable if the well to be offset was on the leased premises, shall be paid; provided, if the Lessee so elects, an offset well may be drilled at any time, even after royalties have been paid, and from the beginning of such well no royalty shall be paid with respect to the well on the adjacent land. Such royalty to be a money royalty determined by the market value of the oil when produced. This provision shall also apply to offsetting gas wells, provided the gas is marketable at the time and place.
    Section 5.
    Pab. 1. Lessee further agrees to pay the actual cash value, at the time of destruction of any growing crops destroyed on said leased premises by operations hereunder, or the reasonable damage to any such crops caused by such operations.
    Section 6.
    Par. 1. Lessee may pay off any lien or taxes now or hereafter due on or against said land, and if Lessee does so, Lessee shall be subrogated to all the rights of the holder of such lien or tax debt, and shall have a lien on all rentals and royalties accruing hereunder for reimbursement.
    Sectton 7.
    Par. 1. When drilling or other operations are delayed or interrupted by storm, flood or other act of God, by fire, war, rebellion, scarcity of water, insurrection, riots, strikes, seai-city of labor, differences with employees, ox-failure of carriers to transport or furnish facilities for transportation or as the result of some order, requisition or necessity of the Government or as the result of any cause whatsoever beyond the conti-ol of the Lessee, the time of such delay or interruption shall not be counted against the lessee any thing in this lease to the contrary notwithstanding.
    Section 8.
    Pab. 1. Lessee is hereby given the right to surrender this lease at any time as to all or any part of the land hereby leased upon paying to the Lessor fifty cents per acre for each acre surrendered in addition to any sums that may be then due and accrued under the terms thereof, in the manner pi-ovided in Paragx-aph 3 of Section 1 hereof, and upon making such surrender the Lessee shall thereupon be released from all further payments, liabilities or obligations as respects the land surrendered, and the rentals provided for in Paragraph 3 of Section 1 hereof shall be reduced by the proportion of acreage surrendered to the whole.
    Section 9.
    Pab. 1. It is further agreed that all the conditions and terms herein shall extend to the heirs, executors, legal representatives, successors in interest and assigns of the parties hereto-, but no change of ownership of the land or part thereof, shall impose any additional obligation or burden on the lessee, and to that and lessor hereby covenants for himself, his heirs, assigns and successors in interest, that in case of any change of ownership of said land, or part thereof, whether by conveyance, will, inheritance, partition, or otherwise, all rentals and royalties accruing hereunder shall be paid to the new owners in proportion to their ownership of the whole of the land hereby leased so that no owner of a segregated part of said land shall be entitled to the whole royalties accruing from developments on said segregated. tract, but only to such part of such royalty as the acreage in his tract is to the whole acreage embraced in this lease this covenant shall be taken and construed as a covenant running with the land and binding on all successors in interest to Lessor heroin. The Lessee shall not be held responsible for the payment of such rentals or royalties to such new owner unless and until the Lessee shall be furnished with the instrument of transfer or a duly certified copy thereof and in case of no transfer in writing, with legally sufficient evidence thereof, such evidence of transfer to be furnished at least thirty (30) days before such royalties or rentals become due. If, by change in ownership, more than ten (10) separate parties become entitled to royalty Lessee may require, before paying royalty, that such parties so entitled designate in a writing furnished to the Lessee, one of their number, or a Trustee to receive the payment of the royalty for all of them.
    Section 10.
    Pab. 1. It is further agreed that in the event this Leasehold shall be assigned as to a part or as to parts of the above described lands (and such right of assignment is hereby given) and the Lessee or assignee or assignees shall fail or make default in the payment of the proportionate part of the rentals due from him or them, such default shall not operate to defeat or affect this lease, in so far as it covers a part or parts of said land upon which the said Lessee or any assignee of the Lessee, shall make due payment of this proportionate part of said rental, but operations begun on any part of the leased premises will keep this lease in force as to all the premises upon which all rentals falling due prior to the beginning of such operations have been paid.
    Pab. 2. It is further agreed that in case of change of ownership of parts of the land, or of this leasehold, that the rentals shall be apportioned in accordance with the acreage each transferee or assignee becomes entitled to.
    Pab. 3. It is further agreed that any rentals paid and received hereunder shall constitute a consideration, not only for delay in drilling the well but for securing the right to pay future rentals to keep the lease in full force and effect until drilling is commenced, and any such rentals so paid shall be deemed and considered as adequate consideration for all the rights hereby granted.
    It is understood that the privileges granted lessee herein includes the exclusive right to construct and operate pick-up stations on the aforesaid land.
    It is also understood that no well shall be drilled for oil or gas on the Southeast quarter of the Northwest quarter of aforesaid Section 7, until oil be first discovered within one mile of same, and in no event shall any such well be drilled nearer than 100 feet of the negro grave yard located on this 40 acre tract of land.
    Lessors covenant and agree with the lessee that said lands above described are wholly and entirely therein own, free from all liens and encumbrances and that they will forever warrant and defend the title to same and to the rights herein conveyed against the claims of all persons whomsoever.
    Section 11.
    Bab. 1. Lessee has this day paid to Lessor the sum of Twenty-five thousand ($25,000.00) Dollars, the receipt of which is hereby acknowledged, which payment is received in full payment and satisfaction and is deemed sufficient consideration for each and every right hereby granted. It is stipulated and agreed that this instrument embraces the entire contract between the parties, and that no promises or representations of any kind not embraced herein, have been made to induce the execution of this contract.
    Section 12.
    Pab. 1. And I, Sula J. Burkett, wife of said John T. Burkett for and in consideration of the said sum of money, paid as a consideration for the foregoing, do hereby release and relinquish unto and in favor of the said Lessee, all my estate and right of dower, present and prospective, and of homestead in and to the above-described land, to the extent of the rights hereinabove set forth.
    In testimony whebeoe, the parties hereto have duly executed this instrument, on this the 13th day of April, A. D. 1923. The parties hereto acting in person or by duly authorized agent.
    (Here follow signatures.)
    The cash consideration paid by the Gulf Refining Co. was $175,000. The total number of acres covered by the lease was 1,040. About fifteen years prior to October 21, 1922, Sula J. Burkett acquired the following parcels of land in Ouachita County, Arkansas, to wit:
    West % of the Northwest 14, West 14 of the Southeast 14, Northeast 14 of the Southwest 14, Section 16, Township 15, Iiange 16; and the North % of the Northwest %, Section 21, Township 15, Range 16.
    By a quitclaim deed dated October 20,1922, acknowledged October 21,1922, and recorded October 27,1922, Sula J. Burkett conveyed the fee simple title to the above-described 280 acres of land to the petitioner for the recited consideration of $1. No valuable consideration passed.
    By deed dated February 24, 1899, W. T. Jones conveyed to the petitioner and his wife, Sula J. Burkett, the following described parcels of land in Ouachita County, Arkansas:
    West 14 of the Northeast 14; East 14 of the Northwest 14; and Southeast 14 of the Southwest 14, all in Section 7, Township 15, Rango 16.
    All of the above land, except the southeast one-fourth of the southwest one-fourth of section 7 was included in the above oil and gas lease. All the remaining parcels of land described in said oil and gas lease were owned by petitioner in fee simple for more than two years prior to the date of said lease. All the property described in the lease was held by petitioner, or by him and his wife jointly, for gain.
   OPINION.

Milliken:

Petitioner’s contention that he and his wife owned in equal parts the property leased to the Gulf Refining Co., is not sustained by the record. All the lands included in the oil and gas lease, excepting that which the petitioner acquired from his wife in October, 1922, and that which he owned jointly with his wife, were purchased by him with his own funds and title taken in his own name. When boiled down, this contention of the petitioner is as stated by him in his testimony that he considered that his wife had a one-half interest in everything that he owned. Outside of this general claim, the record disclosed no fact which justifies this contention. It is not shown, that petitioner recognized this claim in his dealings with his wife. If the income or expenses were ever divided equally between petitioner and his wife, the record does not disclose such fact.

His next claim is that it was not intended when the deed to the 280 acres was executed in October, 1922, that he should be invested with the complete ownership of the property transferred to him by his wife. Petitioner stated at the hearing that the deed was executed in order that he might have complete control of the land for the purpose of leasing it. It appears, however, that no conveyance was made by petitioner’s wife to him of her one-half interest in the 160 acres which they owned jointly. On the other hand, Sula J. Burkett joined in the oil and gas lease, not only for the purpose of leasing her joint interest in the 160 acres owned jointly by her and petitioner, but also for the purpose of relinquishing her dower and homestead rights in the remainder of the property leased. The evidence in the record is not sufficient to show that the deed from Sula J. Burkett to the petitioner, conveyed any title other than that which it purported to convey. It conveyed a fee simple title. There is nothing in the record to show in what proportion the respondent taxed to the petitioner and his wife, the income derived from the oil and gas lease, and, therefore, we can not say that he erred. It is sufficient to hold that petitioner’s contentions that his wife was the owner of a one-half interest in the lands leased to the Gulf Refining Co. and that the deed from her to him, of October 20, 1922, did not vest in him the beneficial title to the 280 acres thereby covered, are not sustained by the evidence in the record.

The claim of petitioner that the oil and gas lease to the Gulf Refining Co. of Louisiana constituted a sale of capital assets, and, therefore, entitled him to the benefit of section 206 of the Revenue Act of 1921, must be denied under the authority of Henry L. Berg, 6 B. T. A. 1287.

It may be pointed ont that petitioner acquired the 280 acres conveyed to him by his wife in October 1922*less than two years before the date of the oil and gas lease.

Judgment will be entered for the respondent.