text:
    Appeal of ANNIE S. KENNEDY et al., Executors, Estate of D. J. KENNEDY, Deceased.
    Docket No. 5244.
    Decided July 23, 1926.
    1. The value oí certain shares of stock forming a part of the gross estate of the decedent determined.
    2. Loans on insurance policies on the life of the decedent, in which the widow of the decedent was beneficiary, deducted from the face of the policies in making settlement thereunder, held not to constitute claims against the estate of the decedent.

      'William B. Secrist, Esq., for the petitioners.

      J. F. Greaney, Esq., for the Commissioner.
    Before Smith, Littleton, and TRussell.
    The petitioners admit a deficiency in estate tax in the amount of $20,379.11, but appeal from the determination of a deficiency of $16,418.57 in excess of that amount. The points in issue are the valuation of certain shares of stock owned by the decedent at the date of his death, and the right of the executors to deduct from the gross estate certain loans on insurance policies on the life of the decedent deducted from the face of the policies in making settlement thereunder.
    FINDINGS OF FACT.
    The petitioners are executors of the estate of D. J. Kennedy, who died August 5, 1923, a resident of Pittsburgh, Pa.
    The return for Federal estate tax filed by the petitioners showed a net estate of $800,026, and a tax due of $35,500.02. The Commissioner determined the net estate to be $1,207,976.96 and the total tax liability to be $72,297.70, or a deficiency in tax of $36,797.68.
    At the date of death, the decedent owned 2,098 shares out of a total issue of 2,100 shares of stock of the Bulger Block Coal Co., a Pennsylvania corporation, the value of which stock was returned for estate-tax purposes at $712,152. The value of this stock was placed by the Commissioner at $1,026,131.80. This stock is not dealt in on any stock exchange and its value was arrived at by the Commissioner by an appraisement of the corporate assets. In his. appraisement the Commissioner included among the assets of the company an insurance policy for $15,000 on the life of the decedent, which policy named the company as beneficiary. This asset was computed to have a value of $15,000, even though the surrender value at the date of death of the decedent was only $3,000. The Commissioner also included among the assets of the company 1,060 shares of stock of the Superior Mining Co., upon which he placed a value of $60 per share, total $63,600. The taxpayer alleges error in appraising these two assets at any amount in determining the value of the 2,098 shares of stock of the Bulger Block Coal Co.
    The Superior Mining Co. was organized in 1917 but did not start profitable operation until 1919. During the year 1923 it had 5,900 shares of capital stock outstanding of a par value of $100 each. These shares were all paid for in cash at par. This company acquired and owned 1,600 acres of coal land, and up to January 1, 1925, it had mined out 184 acres. The results of operations for the years 1920 to 1923, inclusive, were as follows:
    1920 earnings-$148,829.07
    1921 earnings_ 36,625.95
    1922 earnings--- 31, 308. 76
    1923 earnings- 9, 922. 65
    The company also operated at a loss after deducting from gross income allowable amounts for depreciation and depletion for the years 1924 and 1925. On July 31, 1923, it had capital stock outstanding and a surplus of $590,000 and $18,120.19, respectively. Among its assets it had coal lands which were carried at a value of $433,025.07, and miners’ houses, and machinery and equipment at $200,681.24 and $298,093.66, respectively. It had bonds outstanding of $320,000 and notes payable and accounts payable of $50,194.39, and accrued bond interest of $1,600.
    In May, 1925, 100 shares of the stock of this company .put up as collateral for a loan were sold at $10 per share. This is the only sale of the stock known to the officers of the Superior Mining Co.
    The decedent also owned 1,812 shares of a total issue of 1,814 shares of stock in the D. J. Kennedy Co., a Pennsylvania corporation. Those shares of stock were returned by • the petitioners for estate-tax purposes at $280,860. The value determined by the Commissioner was $298,690.06. Shares of stock of this company were not dealt in on any market and their value was arrived at by the Commissioner by an appraisement of the corporate assets. In arriving at this value the Commissioner included in the corporate assets $10,000, which was the face amount of an insurance policy on the life of the decedent in which the D. J. Kennedy Co. was beneficiary and on which the premiums had been paid by it. The surrender value of the policy at the date of the death of the decedent was $2,000.
    At the date of death, the decedent’s life was insured by a number of policies for a total of $115,669.26. The widow of the decedent was the beneficiary under all of these policies. No part of this insurance was included in the gross estate, as shown by the estate-tax return filed by the petitioners, but there was deducted from the gross estate $50,613.90, which represented loans made to the decedent in his lifetime by the insurance companies upon the policies as collateral. The Commissioner added to the gross estate shown by the estate-tax return the face value of the policies in excess of $40,000, or $15,669.26, but did not disallow the deduction of the $50,613.90 as represented by loans made upon the policies.
   OPINION.

Smith:

The Commissioner increased the value of the gross estate of D. J. Kennedy, deceased, in the amount of $407,950.96 but did not change the amount of the deductions. The petitioners took exception to only a portion of the increase made by the Commissioner in the value of the gross estate.

The Commissioner now admits error .in adding to the gross estate $75,669.26, which is the amount of the proceeds of insurance policies paid to the widow of the decedent in excess of $40,000, but by appropriate pleading claims that there should be disallowed from the deductions $50,613.90, representing the amount of loans upon the policies, which amount was deducted from the face of the policies in making settlement to the widow.

(1) The Commissioner determined the value of 2,098 shares of Bulger Block Coal Co. owned by the decedent at the date of his death by appraising the value of the assets of that company and by deducting from such appraised value the liabilities. In making this determination he valued an insurance policy owned by the Bulger Block Coal Co. upon the life of the decedent at its face value, $15,000, although the surrender value at the date of his death was only $3,000. Petitioners allege error in this respect, claiming that the insurance policy should not be included at any value whatever. The}»' also allege that he erred in valuing 1,060 shares of stock of the Superior Mining Co. owned by the Bulger Block Coal Co. at $60 per share, total $63,600. They contend that these shares had no value whatever at the date of the death of the decedent. The net result of their contentions with respect to the valuation of the 2,098 shares of Bulger Block Coal Co. stock is an allegation that the Commissioner overvalued this stock to the extent of $78,600; . that, valuing the stock upon the basis of the value of the assets, the Commissioner should have increased the returned value only $232,379.80 and that the further increase to $313,979.80 was error.

Relative to the value at which the insurance policy should be included in the assets of the Bulger Block Coal Co., the Commissioner cites the decision of the court in In re Einstein's Estate, 186 N. Y. S. 931, affirmed 193 N. Y. S. 931. In that case the decedent assigned certain policies of insurance in contemplation of death. In determining the value thereof for purposes of the state inheritance tax, the policies were included at the full amount payable on death, although the act provided that the value to be included was the value as of the date of the transfer. The surrogate rejected the claim of the taxpayer that the insurance policies should be valued at their cash surrender value and hold that the value at the time of the transfer was the value at the date of the death of the decedent three days later.

The taxing statute requires assets to be included in the gross estate at their value at the time of the death of the decedent. This was not the value at any time before death but at the exact moment’ of death. In our opinion, the value of the insurance policy now under consideration was, at the moment of death, its face value, which is the amount used by the Commissioner.

Relative to the value of the shares of stock of the Superior Mining Co. owned by the Bulger Block Coal Co., the evidence of record shows that the bituminous coal business was much depressed in 1923, and that although the Superior Mining Co. had large coal reserves and a large plant, it had only a small amount of current assets. The company had to meet a large amount of interest on its bonds each year and had to pay off $35,000 of its bond indebtedness each year. Whether it would be able to make such payments from the profits of operation during the succeeding years was in 1923 very uncertain. We are of the opinion, however, that the stock had a cash value in 1923, and upon the entire evidence we determine that value to have been $10 per share.

We therefore think that the Commissioner was justified in increasing the reported value of the shares of the Bulger Block Coal Co. owned by the decedent to the extent of $260,979.80, but that the further increase of $53,000 was error.

(2) The petitioners contend that the ■ Commissioner erred in his valuation of 1,812 shares of stock of the D. J. Kennedy Co. by including among the assets of the company an insurance policy of $10,000 at its face value rather than at $2,000, its cash surrender value. This insurance policy, the same as that owned by the Bulger Block Coal Co., was on the life of the decedent and was payable to the company. For reasons above stated, we are of the opinion that the insurance policy was properly included by the Commissioner at its face value rather than at its cash surrender value.

(3) The petitioners deducted from the gross estate in the estate-tax return $50,613.90, which represented the amount of loans which had been made upon certain insurance policies upon the life of the decedent, the beneficiary named in these policies being Annie S. Kennedy. The Commissioner allowed these deductions to stand on the return but added to the gross estate $75,669.26, this being the amount of the insurance in excess of $40,000. The Commissioner now admits that this addition was in error, under the decision in Llewellyn v. Frick, 268 U. S. 238, but by appropriate pleading claims that the $50,618.90 claimed as a deduction from the gross estate was not a proper deduction in that it was not a “ claim against the estate ” within the meaning of section 403(a) (1) of the Revenue Act of 1921. In support of his contention he cites the case of Orleans Parish v. New York Life Insurance Co., 216 U. S. 517, in which case the United States Supreme Court held that certain amounts loaned or advanced to policyholders in Louisiana upon the security of the policies were advancements of the insurance reserve by the company rather than loans. The petitioners, on the other hand, rely upon the decisions of the courts in Equitable Life Assurance Society v. De Lisle, 194 Mo. App. 42; 182 S. W. 1026; Travelers' Insurance Co. v. Lazenby, 16 Ala. App. 549; 80 So. 25; and contend that loans made on insurance policies are claims against the individual to whom the money is loaned.

The petitioners have not placed in evidence the agreements made between the decedent and the insurance companies relative to these loans. Apparently, in all cases Annie S. Kennedy was the beneficiary of the policy at the time the loans were made. The policies invariably provided that the insurance company, in making settlement under them, would deduct from the amount payable to the beneficiary any and all indebtedness to the company in respect of the policy. Such deductions were actually made in making settlement for the policies.

The cases cited by the petitioners in support of their contention that the amounts borrowed on the policies were claims against the estate of the decedent are not in point; for in those cases the insurance companies were not able to deduct from the face amount of the policy at the time of settlement the amounts borrowed on the policies, and the courts held, in view of the undertakings of the borrowers, that they were personally liable-for the amounts borrowed. In the instant proceeding the insurance companies were able to deduct from the face of the policies, in making settlement thereunder, the amount of the loans upon the policies. Since they were enabled to make such deductions, there was no claim against the estate of the decedent for the payment of the loans, even though the decedent himself may have obligated himself to make payment. We are therefore "of the opinion that upon the record before us there is no pb^of that the insurance companies had any claim against the estate of the decedent for the amounts loaned upon the policies, and that the motion of the Commissioner to disallow the proposed deduction of .the $50,613.90 is correct. - ■.

Order of redetermination will Tie entered on 15 days’ notice, under Rule 50.


source: Caselaw Access Project

author: Teammell

license: Public Domain

text:
    Appeal of GEORGE A. GILES CO.
    Docket No. 5387.
    Decided July 23, 1926.
    1. Actual casli value of leases of theatre buildings in excess of rentals remaining to be paid at time of acquisition of sucb leases for stock determined, for invested capital and depreciation purposes, upon basis of testimony of witnesses familiar with the buildings in question and qualified by experience to testify as to their value.
    2. Additional value claimed for good will in connection with such leases denied for insufficiency of evidence.
    3. A promise by an individual of financial assistance is not an asset which a corporation may set up on its books and capitalize.
    4. A corporation issued to G., for assets owned by him absolutely, less than 50% of its stock, and issued its remaining stock to G’s wife, whose only contribution was a promise “ to help financially.”

      Held, upon the evidence, that the issuance of the entire capital stock was within the control of G., and, therefore, sec. 331 of the Revenue Act of 1918 should be applied in valuing the assets so transferred.

      Harry F. R. Dolan, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the Commissioner.
    Before GRaupNer, Trammell, and Pi-iillips.
    This is an appeal from the determination of a deficiency in income and profits tax for 1918 in the amount of $1,127.30. The errors alleged are that the Commissioner excluded from invested capital the.value claimed for certain leaseholds and good will acquired by the taxpayer for stock, and granted special assessment under the provisions of section 328 of the Revenue Act of 1918 on the ground that the invested capital could not be determined. The correctness of the action of the Commissioner in granting ■ special relief under section 328 is not in question here. The taxpayer alleges that the leaseholds in question had a value at the time of acquisition and that the invested capital can be determined, and claims a deduction on account of the exhaustion of the leaseholds.
    FINDINGS OF FACT.
    1. The taxpayer is a Massachusetts corporation organized on March 29, 1917. The authorized capital stock was $1,000,000, consisting of 5,000 shares of preferred stock and 5,000 shares of common stock, both of the par value of $100 per share. One-half of the common stock and approximately 800 shares of the preferred stock were issued to George A. Giles and the balance was issued to his wife, as hereinafter set forth.
    2. On or subsequent to November 1, 1917, and prior to the beginning of the taxable year, George A. Giles assigned to the taxpayer certain leases and property, hereinafter referred to as:
    1. Gorman Theatre.
    2. Gardner Theatre.
    3. Orpheum Theatre.
    4. Princess Theatre.
    5. Stoneham Theatre.
    The facts and circumstances surrounding each lease were as follows:

      Gorman Theatre. — This theatre was located at Framingham, Mass. It was a brick theatre building used solely for theatrical purposes, containing a stage, orchestra and balcony. It had 800 seats, was fully equipped, and was used for motion pictures, vaudeville and road shows. In 1917 Framingham had a population of about 14,000, but had a theatre-drawing population of 25,000, including the surrounding districts. It was an industrial city, the industries of which were stable and not fluctuating. This theatre, together with the Princess Theatre, hereinafter referred to, were the only theatres in the city.
    , The lease that was assigned to the taxpayer was originally executed November 18, 1911, for five years, with two renewal periods of two and one-half years each. The lease provided for a rental of $75 per week for the first two years; $100 per week for the next three years; $105 per week for the next two and one-half years; and $110 per week for the last two and one-half years. At the time of the assignment (November 1, 1917) the lease had approximately four years to run. The-lease also contained an option to buy at $45,000 on nine months’ notice. At the time of the assignment of the lease to the taxpayer, Giles was also negotiating for the purchase of the property and intended to give the taxpayer a ten-year lease. During the taxable year, however, the deed had not been consummated. Giles valued the leasehold at $30,000, basing the value on a ten-year tenure. He valued the good will at $20,000.

      Princess Theatre. — This was a motion-picture house in Framing-ham, Mass. It was a metal building, built on piles, and had accommodations for 450 people. This building was conveyed by Giles to the taxpayer on November 1,1917. Giles was then owner of the land. In 1919 the building was torn down and a new $250,000 theatre was built by Giles. This property, together with the Gorman Theatre, created a monopoly of the theatre business in Framingham.

      Gardner Theatre. — This theatre was located in Gardner, Mass. It was a brick building, with stores on the first floor. The theatre was on the second floor and contained about 1,000 seats. It was fully equipped and was used for motion pictures, road shows and other theatrical purposes. Gardner was a town of about 15,000 people and had a theatre population of 25,000, including the outside districts. It was also a stable industrial town. On this theatre was a four-year lease dated April 17, 1915, with two renewal periods of two years each. The annual rentals for the first four years were $1,800; the next two years $2,400; and the remainder of the term $2,700. The said Giles, on November 1,1917, transferred the lease to the taxpayer. This theatre, together with the Orpheum Theatre, hereinafter referred to, were the only theatres in the town.

      Orphewn Theatre. — This theatre was also located in Gardner, Mass. It was a hew theatre building containing 1,200 seats. It was fully equipped and was used for moving pictures and vaudeville. On this theatre was a lease dated May 24, 1912, for a term of twelve years from date of completion of the theatre building, which was May 29,1913. The lease provided for an annual rental of 10 per cent of the cost of the building, amounting to $6,000 or $6,050 per year. This lease was assigned to the taxpayer by the said Giles November 1. 1917.

      Stoneham Theatre. — This theatre was located in Stoneham, Mass. It was fully equipped as a moving-picture theatre and had a seating capacity of 700 to 800. Stoneham was a small town and was not regarded as a good theatre town, as it was the centre of a farming district. It had but one theatre,' although there was a hall that could be converted into a moving-picture house. On May 1, 1918, the taxpayer acquired a lease on this theatre by assignment from one Ralph Pratt, in consideration of the issuance of $22,000 par value of stock. The lease was dated November 1, 1917, and was for a term of five years, with two renewal periods of five years each. The annual rentals were as follows:
    Nov. 1, 1917 to Nov. 1, 1918_$3,000
    Nov. 1, 1918 to Nov. 1, 1919_ 3,200
    Nov. 1, 1919 to Nov. 1, 1920_ 3, 300
    Nov. 1, 1920 to Nov. 1, 1921-,_ 3,400
    Nov. 1, 1921 to Nov. 1, 1927_,._ 3, 500
    Nov. 1, 1927 to Nov. 1, 1932_ 4, 000
    3. No amounts in excess of the stipulated rentals were paid for any of the leaseholds, either by the said Giles or by the taxpayer, except in the case of the Stoneham Theatre. Upon the assignment of the leases to the taxpayer on November 1, 1917, the taxpayer issued to Giles $250,000 par value of the common stock and $80,000 of the preferred stock. Mrs. Giles, his wife, was issued a like amount of common stock and approximately $120,000 par value preferred stock. She did not pay cash. Her entire contribution was “her willingness and promise, which she carried out, to help financially.”
    4. In its petition the taxpayer claimed, as part of its invested capital for 1918, $132,582.24, and a deduction on account of exhaustion of $14,120.89 with respect to these leaseholds, as follows:

    The leases on the theatres had the following actual cash values in excess of the rentals to be paid at the time they were acquired for stock, which values represent cost for the purpose of the deductions allowed by statute on account of the exhaustion thereof :
    Gorman Theatre_$30, 000
    Gardner Theatre_ 30, 000
    Orpheum Theatre-¿- 20, 000
    Stoneham Theatre_ 14, 000
    In its return for the year 1918, the taxpayer did not claim a deduction for exhaustion of .the leaseholds. The Commissioner refused to allow any value for the leaseholds and good will and, being unable to determine the invested capital, assessed the tax under section 328 of the Revenue Act of 1918, which resulted in the deficiency in question.

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

   OPINION.

Teammell

: In this appeal the taxpayer contends that the leaseholds and good will of the theatres in question, acquired by it for stock, had an actual cash value in excess of the rentals stipulated to be paid, that such value should be included in invested capital, and that it is entitled to a deduction on account of the exhaustion of said leases.

We think that the contention of the taxpayer is supported by the evidence. The testimony of the principal witness for the taxpayer was corroborated by other witnesses, the qualifications of whom are such that we are disposed to attach much weight to their testimony.

In the first place, the witness George A. Giles, president and manager of the taxpayer, had long been identified with theatre projects, including the buying and selling of leaseholds. He had been in the real' estate business for twenty-five years, dealing in apartment houses, dwellings, hotels and theatres, the last twelve years being almost exclusively devoted to the theatre business in and about Boston, Framingham, Gardner and Waltham, Mass.

The witness Richard M. Drown was secretary of the Allied Theatres of Massachusetts. For the last sixteen years he had been in the theatre business, owning, buying, selling, leasing, operating and managing theatres in the New England States. He was personally familiar with the theatres in question in November, 1917, and also knew the character of the populations and the nature or rather lack of competition and the general theatrical situation in Framingham and Gardner.

The witness Harry F. Campbell was for eleven years the New England district manager for the Fox Film Corporation and in charge of selling pictures under contract to New England cities and towns. He had been in the theatrical business for twenty-five years, the last eighteen years of which was exclusively in motion pictures. For over sixteen years he had been buying and selling, leasing and operating theatres for himself and others in New England, some of which were within a few miles of the town of Framingham. In the course of his business he was familiar with the theatres in question and the theatrical situation in Framingham and Gardner in November, 1917.

The witness Joseph Lawren dealt exclusively in theatre real estate in and about the New England States. In 1919 he went to New York and thereafter dealt solely in theatre real estate. In New England alone he consummated thirty-five to forty transactions involving theatre real estate. He was also employed by the Famous Players to investigate and report on theatres, and had made a special study and collected vast data on theatrical conditions. In the course of his business be had occasion to make a special study of the theatres situated in Framingham and Gardner for clients. He was familiar with the Stoneham Theatre and the theatrical situation there.

Based on the testimony of such witnesses, and from a consideration of all the evidence, we are convinced that the leases had a value in excess of the stipulated rentals in the amounts as set forth in our findings of fact. As to the so-called good will acquired we attribute no value. The evidence as to the good will was hazy, meagre and entirely insufficient to base a value over and above the factors included in leasehold values.

The question now presents itself as to whether section 331 of the Revenue Act of 1918 prevents the inclusion in invested capital of the taxpayer of the cash value of the leases which we have set out in our iindings of fact. Section 331 is as follows:

In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development, but no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such, previous owner for purposes of taxation.

After the transfer of the assets to the corporation, Giles received less than 50 per cent of the stock issued therefor and his wife received the balance of the stock. This would appear on its face to be a case which does not come within the scope of section 331, but it requires further analysis. Giles was the owner of the leases for which the corporation issued its stock to him and his wife. His wife did not own any of the leases and had no interest therein. Her entire contribution to the corporation was her willingness and promise' to help financially. Nothing was contributed by Mrs. Giles at the time the stock was issued to her. The fact that she was willing to contribute and to assist financially was not such an asset as the corporation could set up on its books and capitalize.

Our conclusion from the evidence is that the entire capital stock which was issued for the leases owned by Giles was under his control and was issued to’ his wife at his direction. The transaction, in substance, amounted to Giles having some of his own stock issued to his wife instead of having it issued to himself; he had the right to say to whom it should be issued by virtue of his transferring the leases to t,he corporation. The ownership of the stock existed and was in Giles, who transferred assets for it before the certificate by which it was evidenced was issued.

Reaching the conclusion that Giles, who owned the assets which were exchanged for the stock, actually had control of the issuance of all the stock, we conclude that a situation is presented which brings the case within the scope of section 331 of the Revenue Act of 1918. The fact that the case comes within the scope of section 331, however, applies only to the invested capital feature and has no relation to the valuation of the leases for the purpose pf deductions on account of the' exhaustion thereof.

The taxpayer is entitled to take a pro rata proportion of the cost of the respective leases as a deduction in its income tax returns for the year in question. It is the cost of the leases which the taxpayer is entitled to have returned by deductions on account of the exhaustion thereof. In the absence of any other evidence in respect to the cost of such leases, the value of the leases which were paid in for stock represents the cost thereof to the corporation.

Order of redetermmation will he entered on 15 days’ notice, under Rule 50.


author: MoRRis:

text:
    Appeal of MANDEL BROTHERS.
    Docket No. 1977.
    Decided July 23, 1926.
    1. Taxpayer exchanged its capital stock for a mixed aggregate of tangible and intangible property. Held, that the amount thereof should be allocated to the classes of assets according to their cash value at the time paid in, and that the taxpayer may include ■ in invested capital as paid-in surplus the excess of the actual cash value of the tangibles over the par value of the capital stock allocated thereto and good will to the extent of the par value of the stock allocated thereto, subject to the limitations. Appeal of St. Louis Screw Go., 2 B. T. A. 649.
    2. A sum paid to a prior tenant by the taxpayer in order to secure possession of certain property and charged to expense, may not be restored to surplus and included in invested capital for the taxable years in question.
    3. Taxpayer expended certain sums in 1901 and 1902 in making improvements on leased premises under a lease expiring in 1918. This lease was superseded by a new lease agreement in 1906 requiring the taxpayer to tear down the old building and erect a new one. The unamortized cost of the improvements may not be spread over the term of the new lease,' but is deductible as a loss in the year in which the improvements were demolished.
    4. Amounts received by the taxpayer in 1913 and 1914 under a party-wall agreement ¿'epresent a return of capital, thereby reducing its capital investment in the building.

      5. The value of certain leaseholds as of March 1, 1913, can not he determined from the evidence submitted. An annual allowance for the exhaustion thereof is therefore denied.
    6. Commissioner’s determination that invested capital for the taxable years in question should be reduced on account of insufficient depreciation taken in prior years approved.

      George F. Von Kolnitz, Jr., Fsg., for the petitioner.

      E. 0. Lake, Esq., for the Commissioner.
    Before Maequette and MoeRis.
    This is an appeal from a determination of deficiencies in income and profits taxes of $37,472.83, $92,609.23, $81,542.23, and $36,825.45, respectively, for the years 1917 to 1920, inclusive, aggregating $248,449.74.
    Eight questions are presented by this appeal, as follows:
    (1) Whether there should be included in invested capital, under the Bevenue Acts of 1917 and 1918, subject to the limitations, the value of the good will of a partnership, transferred to the taxpayer in exchange for its capital stock.
    (2) Whether the sum of $51,058.11, paid by the taxpayer to a prior tenant to secure possession of certain property, should, after proper deductions for exhaustion, be included in the taxpayer’s invested capital.
    (3) Whether the sum of $376,808.35, representing the amount expended by the taxpayer in remodeling a building upon leased land, should, after proper deductions for depreciation, be included in taxpayer’s invested capital, when, as a condition to the execution of a new lease canceling the old one, the building was to be demolished and a new building erected at the lessee’s expense.
    (4) Whether the amounts referred to in (2) and (3) should be amortized over the term of the lease existing at the dates of the expenditures or over the term of the lease as extended by a new agreement.
    (5) 'Whether the amounts received by the taxpayer in 1913 and 1914 from the owner of adjoining property, under a party-wall agreement, where the party wall was erected by the taxpayer at its expense, should be treated as reducing the taxpayer’s investment in the building, or whether the amounts received constituted income of the years 1913 and 1914, and as such should be included in the taxpayer’s surplus for invested capital purposes.
    (6) Whether certain leaseholds owned by the taxpayer at March 1, 1913, had any values at that date which may be made the subject of deductions for exhaustion for the years involved in this appeal.

      (7) Whether the taxpayer is entitled to an annual deduction on account of the exhaustion of the March 1, 1913, values of the leaseholds referred to in (6).
    (8) Whether the taxpayer’s invested capital, as shown on its books of account as of January 1, 1917, should be reduced in the amount of $771,573.70, on account of insufficient depreciation taken by the taxpayer in years prior to 1917.
    FINDINGS OF FACT.
    The taxpayer, an Illinois corporation with its principal office at Chicago, was engaged, during all of the years in question, in the business of operating a department store in the aforementioned city.
    For many years prior to 1898 there existed in Chicago a retail merchandise and department store business owned and operated by Leon Mandel, Emanuel Mandel, and Simon Mandel, as co-partners, under the firm name and style of Mandel Brothers. Desiring to separate the business of their department store from their other operations, the partners caused the incorporation of Mandel Brothers, the taxpayer herein, on May 4, 1898, with an authorized capital stock of a par value of $1,000,000, all of which, with the exception of three qualifying shares, was issued to the partners in exchange for the assets, including good will, of the department store business theretofore owned and conducted by them. The tangible assets, other than leaseholds, thus transferred were carried on the books of. the partnership at an aggregate value of $1,762,629.18, which value has been recognized and approved by the Commissioner for the purpose of computing the taxpayer’s invested capital. The leaseholds acquired by the taxpayer from the predecessor partnership were as follows:
    (1) Lease from the Hovey estate of the premises then known as Nos. 121-123 State Street, Chicago, expiring August 31, 1915, at an annual rental of $25,000, which land was acquired by purchase prior to 1915.
    (2) Lease from Marshall Field of the premises then known as Nos. 125-127 State Street, Chicago, expiring April 30, 1918, at an annual rental of $40,000 per year.
    (3) Lease from Davis to Mackey of the premises then known as Nos. 111-113-115 Wabash Avenue, Chicago, expiring May 1, 1909, at an annual rental of $12,000 per year, which lease the said partnership had purchased from Mackey for the sum of $102,500 in cash.
    In the computation of the taxpayer’s invested capital for the taxable years 1917 to 1920, the Commissioner has allowed a paid-in surplus of $48,241.81 in respect of the Marshall Field lease, and a paid-in surplus of $60,984 in respect of the Davis lease.

      For the five calendar years immediately preceding taxpayer’s organization, the net income of the partnership and the book value of the tangible property employed in the partnership business were as follows:

    The actual cash value of the good will acquired from the partnership was, at the date of acquisition, $600,000.
    At the time the taxpayer acquired from the partnership the lease, hereinafter referred to as the Field lease, from Marshall Field, covering the premises then known as Nos. 125-127 State Street, said premises were occupied by a prior tenant. To secure possession of the premises' and in liquidation of certain expenses the taxpayer paid to the then occupant the sum of $51,058.11, which it charged to expense on its books of account.
    During the years 1901 and 1902, the taxpayer expended the total sum of $376,808.35 in remodeling the building standing upon the premises covered by the Field lease, all of which sum was charged to expense on the books of account.
    When the Field lease was acquired by the taxpayer it had a remaining life of 20 years, less 4 days. On November 15, 1906, the taxpayer and representatives of the estate of Marshall Field agreed to the cancellation of this lease and entered into a new lease for a term of 99 years from May 1, 1908.
    On January 27, 1903, the taxpayer entered into an agreement with Chas. A. Stevens & Co., the owner of property adjoining the premises occupied by the taxpayer, wherein and whereby each party agreed to pay ascertainable sums to the party first entering upon the construction of a new party wall, if the party not undertaking the construction of the wall should make use of it. This agreement pertained to any party wall which might be erected by either party upon the boundary or dividing line of Lots 4 and 5, Block 14, Fort Dearborn Addition to Chicago. On May 20, 1903, these parties entered into a similar agreement in respect of any party wall which might thereafter be erected by either party upon the boundary or dividing line of Lots 10 and 11, Block 14, Fort Dearborn Addition to Chicago. On August 11, 1913, and February 21, 1914, Chas. A. Stevens & Co. paid to the taxpayer the sums of $45,250 and $51,889, respectively, in accordance with, the terms of one or both of these agreements. The said sums of $45,250 and $51,889 were credited, respectively, on the taxpayer’s books to accounts denominated “ Wabash and Madison Investment ” and “ State Street Building ”.
    At March 1, 1913, and during the taxable years in question, the department store building occupied by the taxpayer, located in the center of the retail business district of -Chicago and situated on State Street, Madison Street and Wabash Avenue, consisted of sixteen floors above the ground and three floors below. It covered five separate lots of land and a public alley known as Holden Court, which ran from Madison Street right through the height of the first floor of the building with a width of 40 feet and a length of approximately 150 feet. Of the five lots comprising the land oh which the building stood, two were owned in fee, and three, which will be hereinafter referred to as lots “ A,” “ B ” and “ C,” were held under three separate lease agreements,' which will be referred to as the “ Fiéld ” lease, the “ Mandel ” lease, and the “ Davis ” lease.
    Lot “A,” held under the Field lease, is situated at the corner of Madison and State Streets, being about 53 feet on the former and about 151 feet on the latter. It was leased to the taxpayer by the trustees under the last will and testament of Marshall Field, by an instrument dated November 15, 1906, for the term of 99 years from M^y 1, 1908, at an annual rental of $50,000 from May 1, 1908, to April 30, 1918, and a rental thereafter of $60,000 per annum. The taxpayer agreed to pay all water rates, taxes and assessments, general and special, ordinary and extraordinary, of every kind and nature, except income and inheritance taxes, levied or assessed upon the demised premises or upon any buildings or improvements at any time situated thereon; to rebuild, or repair, within eighteen months, the building standing on the premises in the event it is damaged by fire or otherwise; to erect and construct upon the demised premises a mercantile or office building, not less than ten stories in height, of first-class, modern fire-proof construction, covering substantially the whole area of the premises, said building to be built upon caissons and to cost not less than $300,000, and to be completed and ready for occupancy not later than May 1, 1918; and to keep the then building standing on the premises insured for not less than $70,000, until the erection of the new building, and after the erection of the new building to keep the same insured at 80 per cent of its full insurable value. The lessors agreed that the taxpayer might have, without making any payment therefor, all materials of or wreckage from the old building standing on the premises, which was to be demolished.

      Lot “ B,” held uder the “ Mandel ” lease, is situated to the north of Lot “A” on State Street, the two lots being separated by a lot which is owned by the taxpayer in fee. It has a frontage on State Street of about 48 feet and a depth to Holden Court of about 151 feet. It was leased to the taxpayer under an indenture dated November 13, 1909, for the term of 99 years from February. 1, 1909, at an annual rental of $48,000. The taxpayer agreed to pay all water rates, taxes and assessments, general and special, ordinary and extraordinary, of every kind and nature, except income and inheritance taxes, levied or assessed upon the demised premises or upon any buildings or improvements at any time situated thereon; to rebuild or repair, within 18 months, the building standing upon the premises in the event it is damaged by fire or otherwise; to erect and construct upon the demised premises a mercantile or office building, not less than ten stories in height, of first-class, modern fire-proof construction, covering substantially the whole area of the premises, said building to be erected upon caissons and to cost not less than $300,000, and to be completed and ready for occupancy not later than May 1, 1918; and to keep the then building standing upon the premises insured for not less than $50,000, until the erection of the new building, and after the erection of the new building to keep the same insured at 50 per cent of its full insurable value. The lessors agreed that the taxpayer might have, without making any payment therefor, all materials of or wreckage from the old building standing on the premises, which was to be demolished.
    Lot “ C ”, held under the Davis lease, is situated on Wabash Avenue, approximately 70 feet from the corner of Madison Street, having a frontage of about 72 feet and a depth to Holden Court of about 163 feet. It was leased to the taxpayer under an indenture dated May 1, 1900, for the term of 99 years from that date, at an annual rental to May 1, 1909, of $12,000, and $18,000 per annum thereafter. The taxpayer agreed to pay all taxes and assessments, water rates, special assessments, and all governmental impositions of any and every kind or nature whatsoever, levied or assessed upon the demised premises; to rebuild or repair, within two years, the building standing upon the premises in the event it is damaged by fire or otherwise; to erect upon the demised premises, on or before May 1, 1908, a new fire-proof construction modern building, not less than eight stories and basement in height, covering substantially the whole area of the premises; and to keep the building standing upon the premises insured to the amount of $75,000. The lessors agreed that all materials of and salvage from the building then standing on the premises should belong to the lessee.

      The three foregoing leases were in existence and owned by the taxpayer at March 1,1913* and during the taxable years in question.
    In its income-tax returns for years prior to 1917, the taxpayer made deductions from income, on account of depreciation of buildings, in amounts computed at a uniform rate of 1 per cent. Similar deductions were made from income in the returns for the years 1917, 1918 and' 1919, in amounts computed at a rate of 2 per cent, and for the year 1920 in an amount computed at a rate of 2y2 per cent. The Commissioner has allowed deductions for all of the years in question, on account of depreciation of buildings, -in amounts representing 2 per cent of their cost. For invested capital purposes, the Commissioner has computed the accumulated depreciation to January 1, 1917, by going back to the date of original acquisition of each asset and applying to the cost thereof, according to the straight-line method of depreciation, the same rates he has used in computing the deductions for the taxable years in question. The total depreciation credited to asset accounts on the taxpayer’s books, in respect of all depreciable assets, to January 1, 1917, amounted to $1,040,162.66. The total accumulated depreciation to January 1, 1917, as computed by the Commissioner, is $1,809,508.55, an increase over the depreciation shown by taxpayer’s books of $769,345.89.
    Taxpayer’s sales for the years 1898 to 1920, inclusive, were as follows:
    1898_$5, 924, 804 1899_ 7, 086,768 1900_ 7,417,028 1901_ 8, 806, 016 1902_ 9, 684,662 1903_ 9, 777,184 1904_ 9,193, 851 1905_ 9,107,392 1906_$9,960,318 1907_ 9, 979, 981 1908_ 9, 525, 541 1909_ 9, 570,179 .1910_ 10,396,517 1911_ 9, 599, 583 1912_ 9,813,543 1913_ 12,107, 828 1914_$11,465,037 1915_ 11,155,180 1916_ 12,773,540 1917_l 13,976,185 1918_ 14, 956,725 1919_ 20,992,116 1920_ 27, 804,367
   OPINION.

MoRRis:

The questions will be considered in the order in which they appear in our opening statement. The first question is whether the taxpayer is entitled to include in invested capital, subject to the limitations prescribed by the Eevenue Acts of 1917 and 1918, good will acquired from the predecessor partnership for capital stock. The taxpayer acquired from the partnership, a mixed aggregate of tangible and intangible property for -capital stock. The actual cash value at the date of acquisition of the tangible property, other than leaseholds, was, by the admission of the parties, $1,762,629.18. The Commissioner placed a value, as of the same date, upon the leaseholds of $109,225.81, to which no objection has been raised by the taxpayer. It will be noted from the schedule set out in our findings of fact that for the-five-year period immediately preceding the organization of the taxpayer company, the earnings of the partnership averaged $324,699.83, or an amount approximately $2,300 higher than the earnings of the first year of the five-year period. During three years of the five-year period the earnings were from $5,600 to $42,000 less than the first year of the period. The earnings of the fourth year were $94,000 less than those of the third year, and the earnings of the fifth year were $23,000 less than those of the fourth year, which would indicate that the earnings were decreasing at the time the taxpayer took over the partnership business. In contrast to that situation the tangible assets employed in the partnership business were increasing during the five-year period. From the low figure of the first year of - $1,275,000 they increased to $1,796,000 in the fifth year. The tangible assets employed in the fifth year were approximately 140 per cent of those employed in the first year, while the earnings of the" fifth year were approximately 91 per cent of those of the first year. The earnings of the first year represented a return of approximately 25 per cent on the tangibles, while the earnings of the fifth year represented a return of approximately 16 per cent.

In view of these facts, we are of the opinion that a capitalization of the average earnings, in excess of a return of 8 per cent on the tangibles, on the basis of a rate of 20 per cent, produces a result which is considerably in excess of the actual cash value of the good will at the date of acquisition. From the evidence before us we find that such value was not in excess of $600,000. The total of all the assets acquired from the partnership was, therefore, $2,471,854.99. For these assets the taxpayer issued its capital stock of a total par value of $1,000,000. The Commissioner assumes that the capital stock was first issued for the tangibles, and, since the value of the tangible property alone exceeded the par value of the capital stock issued for all the assets, he contends that the good will may not be included in invested capital, for to do so would result in the allowance of a paid-in surplus in respect of intangible property, which is not permitted by the Revenue Acts of 1917 and 1918. We had a similar situation under consideration in the Appeal of St. Louis Screw Co., 2 B. T. A. 649. After consideration of the pertinent provisions of the Revenue Acts of 1917 and 1918, it was there held:

It is no more correct to say that the capital stock was issued for the tangibles than it is to say that it was issued for the patents and good will. * * * Inasmuch as the entire capital stock .was specifically issued for three classes of assets, we think that the amount thereof should be allocated to the three classes of assets according to their cash value at the time paid in.

Following that conclusion, we held that the taxpayer was entitled, under the Revenue Acts of 1917 and 1918, to include in invested capital, as a paid-in surplus, the excess of the actual cash value of the tangibles over the par value of the capital stock allocated thereto, and to include also, good will to the extent of the par value of the capital stock allocated thereto, subject to the limitations, applicable to intangibles, prescribed by the statutes. Allocating the capital stock issued by the taxpayer, for the assets of the partnership, in accordance with the rule laid down in Appeal of St. Louis Screw Co., supra, we find the par value thereof issued for each of the two classes of assets to be as follows:

Accordingly, we hold that the taxpayer is entitled to include in its invested capital, for the years in question, the sum of $1,114,-587.68, representing the excess value of the tangibles over the par value of the capital stock issued therefor, and good will in the sum of $242,732.69, subject to the limitations, applicable to intangibles, prescribed by the statutes.

The second question relates to the. proposition whether the taxpayer is entitled to restore to surplus and to include in invested capital, after proper deductions for exhaustion, the sum of $51,058.11, paid to a prior tenant to secure possession of certain property and for other expenses. As pointed out in our findings of fact, at the time the taxpayer acquired, by transfer from the partnership, the “ Field ” lease, covering the premises then known as Nos. 125-127 State Street, said premises were occupied by a prior tenant, and in order to secure possession thereof the taxpayer paid to said tenant the sum of $31,058.11, which it charged to expense on its books of account. The “ Field ” lease was to expire on April 30,1918; but on November 15,1906, the taxpayer and the representatives of the estate of Marshall Field agreed to the cancellation of this lease and entered into a new lease agreement for the term of 99 years from May 1, 1908. The taxpayer contends that the amount paid to the prior tenant was a capital expenditure which should have been recorded as such on its books and amortized on the basis of the remaining term of the original lease until November 15, 1906, the date of the new lease agreement, and the unamortized portion thereof at the latter date treated as a capital investment to be amortized over the period from November 15, 1906, to the date of expiration of the new lease agreement. The. circumstances under which the prior tenant occi^ pied the premises at the time the taxpayer acquired the original lease have not been made known to us by any proper evidence. It is difficult, therefore, to deduce from the record the real character of this expenditure. Counsel for taxpayer stated at the hearing that the said amount was paid to a tenant, “ who had the right to retain possession two years,” and that the result of making said payment was “ to give the taxpayer the right to enter into these premises two years earlier than he would otherwise.” If this statement is correct, then, under the view most favorable to the taxpayer, the expenditure in question should have been written oil over the two-year period, leaving nothing to be restored to surplus and included in invested capital for the years in question. Ordinarily an expenditure made in order to obtain possession of premises for a period prior to the time as of which the person making the payment will, of his. own right, come into possession thereof, affords no benefits beyond the period for which the payment is made. It represents an amount paid for the right to enjoy the possession of the premises specifically for said period, and, therefore, an expenditure which must be amortized ratably over that period. This is not inconsistent with our decision in the Appeal of The Columbia Theatre Co., 3 B. T. A. 622. In the latter case, the payment by the taxpayer to the sub-lessee was made in order that the taxpayer might enter into full possession of the premises for the purpose of commencing building operations to enable it to enjoy its lease fof the full term thereof. The benefits following from such payment accrued to the taxpayer throughout the term of the lease. We therefore held that the amount paid to the sub-lessee constituted a cost in connection with the acquisition of the lease. In t-he case at bar, the payment to the prior tenant was made in order to secure possession of the premises for the purpose of carrying on the taxpayer’s merchandising operations. The two cases are not analagous. Unless the prior tenant was entitled to occupy the premises during all or a part of the taxable years in question, no part of the total sum paid by the taxpayer to secure possession of the premises can be deemed to represent an expense of those years; hence there is nothing in respect thereof which the taxpayer would be entitled to include in invested capital as an unamor-tized expense. Since all the facts necessary to a disposition of this question in accordance with the foregoing principles have not been made known to us by proper evidence, we are unable to determine to what extent, if any, the taxpayer is entitled to include the amount in question in invested capital; hence we are forced to sustain the Commissioner’s action in disallowing the whole amount as invested capital.

The third question is whether the taxpayer is entitled to include in invested capital, subject to proper deductions for depreciation, the sum of $376,808.35, representing the amount expended by it in making improvements to the premises covered by the “ Field ” lease. These expenditures were made during 1901 and 1902, at a time when the original “ Field ” lease, expiring in 1918, was in effect. This lease was superseded by the lease agreement of November 15, 1906, the latter containing a covenant on the part of the taxpayer to tear down the building then standing on the premises and to erect a new building, the lessor agreeing that the taxpayer might take, without any payment therefor, all materials of and wreckage from the demolished building. These covenants on the part of the lessee were fully complied with prior to January 1, 1917. The expenditures making up the total sum in question were charged to expense on the books of account. The taxpayer contends that the sum in question constituted a capital expenditure which should have been recorded as such on its books of account and amortized on the basis of the remaining term of the original lease until November 15, 1906, the date of the new lease agreement, and the unamortized portion thereof at the latter date treated as a capital investment to be amortized over the period from November 15, 1906, to the date of the expiration of the new lease agreement. All of the improvements constructed, erected, installed, or however acquired by the taxpayer, through the expenditure in 1901 and 1902 of the total sum of $376,808.35, were demolished prior to January 1, 1917, in accordance with the agreement of November 15, 1906. The undepreciated or unamortized cost of these improvements at the date of their demolition does not constitute a part of the cost of the new lease. The taxpayer sustained a deductible loss in the year in which these improvements were demolished in an amount representing the unextinguished cost thereof. It is not entitled to include any amount in the invested capital of any of the taxable years in question in respect of such improvements. Appeal of First National Bank of Evanston, Wyo., 1 B. T. A. 9; Appeal of Wigwam Amusement Co., 1 B. T. A. 335.

Our conclusion with respect to the second and third questions necessitates a conclusion, in respect of the fourth, that the taxpayer is not entitled to amortize the amounts referred to over the term of the lease as extended by the new agreement of November' 15, 1906.

The fifth question relates to the proper treatment of the amounts received by the taxpayer in 1913 and 1914 from Chas. A. Stevens & Co., the owner of adjoining property, under a party-wall agreement. The taxpayer contends that the amounts so received constituted income for the years 1913 and 1914 in the nature of rentals for' the use of the wall; that it erroneously treated these transactions on its books by crediting the amounts so received to its building accounts; and that the amounts in question should be restored to the building accounts and the earned surplus correspondingly increased for invested capital purposes. The Commissioner has held that these payments did not constitute income to the taxpayer, but represent a return of capital, thereby reducing the taxpayer’s capital investment in the building. The relation of the parties to the party-wall agreement is to be determined by the law of Illinois. It is not one of lessor and lessee, but one of joint owners. See Mickel v. York, 175 Ill. 62; 51 N. E. 848; Beidler v. King, 209 Ill. 302; 70 N. E. 763; Kuh v. O'Reilly, 261 Ill. 437; 104 N. E. 5. In Mickel v. York, supra, the court stated:

But where a party wall is constructed on tlie line between adjacent lots, resting partly on each, by one of the lot owners, under a parol or written agreement, by which agreement the other owner agrees to pay one-lialf the value of the wall when he elects to use it, the builder of the wall owns it absolutely, with a permanent right in him and his grantees to have one-half the wall stand on the land of the other while the other retains title, and also after it has passed to an assignee with notice of the rights of the owner of the wall. If, however, by agreement, the owner of the lot who did not build the wall, has a right to elect to pay one-half its value and use the same, and he does so, he thereby becomes the owner of not only the one-half standing upon his own land, but has an easement in the other half, standing on the lot of the one who built the wall.

That principle received approval in the other two cases cited above. We hold that the Commissioner’s treatment of the amounts so received by the taxpayer in 1913 and 1914, under the party-wall agreement, is correct.

The sixth question presented involves a determination of the March 1, 1913, value of three leases owned by the taxpayer at that date and during the taxable years in question. The taxpayer contends that these leases had an aggregate fair market value at March 1, 1913, of not less than $1,700,000, which it is entitled to amortize over the remaining terms of the leases from that date. The Commissioner denies that such leases had any fair market value at March 1, 1913, which may be made the subject of a deduction for exhaustion. In May, 1925, these leaseholds were made the subject of an appraisal by an appraisal company, and a value, as of March . 1, 1913, was placed thereon by the latter, in the amount of $1,828,100. The employee of the appraisal company who conducted the appraisal was present at the hearing and was subject to the examination of both parties. The appraisal report was submitted in evidence only for the purpose of a chronological presentation of the facts an*d figures to which this witness would testify. His testimony demonstrated clearly that he was incompetent to give expert opinion as to value of real property in the loop district of Chicago, as of March 1, 1913, or any other date. He had no personal knowledge along this line. Whatever opinion he entertained as to the value of these leaseholds at March 1, 1913, was the result of the working out of a formula adopted by the appraisal company for making valuations of this character. He was in no position to testify as to the accuracy of the result obtained by the use of such a formula. An executive officer of the appraisal company testified that he worked in collaboration with the appraiser in the preparation of the appraisal report, and that the formula used in arriving at the appraised value was the same one which is in general use by the company in the appraisement of real properties. The appraisal report itself evidences the use of erroneous factors in applying this formula, hence any opinion based thereon must be erroneous. Briefly stated, the application of this formula necessitates as a first step the ascertainment of the fair market value of the leased property at March 1, 1913. To obtain that value the appraiser determined the average ratio of assessed values to selling values in respect of certain properties which were sold or leased during the period July 1, 1910, to August 5,1914. This average ratio was then applied to the assessed values of the lands leased by the taxpayer and the result obtained adopted as the fair market value of those lands at March 1, .1913. Upon such value provision was made for a return of 5 per cent, which was assumed to represent a fair rental for these properties at March 1, 1913. The difference between this assumed fair rental and the annual rentals stipulated in the lease agreements was deemed to represent the savings or earnings attributable to the leasehold, and treated as an annuity, the present worth of which at March 1, 1913, determined in accordance with Hoskold’s Tables on the basis of a risk rate of 5 per cent, was adopted as the March 1, 1913, value of the leaseholds. When asked as to why he thought 5 per cent represented a fair rental return upon property in the loop district of Chicago at March 1, 1913, the appraiser replied, “ It was found that money was borrowed on property at that time, at or near that time, at 5 per cent per year.” But we have no reason to accept money rates as a criterion to what constitutes a fair rental on real prop-, erties. In the determination of the annual savings in rentals which will result through the ownership of these leaseholds, the appraiser has entirely disregarded the fact that the taxpayer was obligated, under the terms of the three leases, to erect three new buildings upon the leased premises, two of the leases providing that the new building should cost not less than $300,000. Further, if 5 per cent upon property values represents a fair return to the lessor who is relieved entirely of the burdens of management, upkeep, and maintenance of the property, certainly a risk rate of 5 per cent in the determination of the present worth at March 1, 1913, of the expected rental savings can not be considered as proper in the case of a lessee who undertakes to assume all such burdens. That the leaseholds had a considerable value at March 1,1913, seems certain. What that value was has not been proven by proper evidence.

The seventh question is whether the taxpayer is entitled to an annual deduction, in computing net income for income-tax purposes, on account of the exhaustion of the March 1,1913, value of the leaseholds referred to above. The right of the taxpayer to make such deductions has been settled by the decision of this Board in the Appeal of Grosvenor Atterbury, 1 B. T. A. 169. Since the taxpayer has failed to establish by competent evidence the March 1, 1913, value of its leaseholds, we are unable to determine the amount of the deduction to which the taxpayer is entitled. Accordingly, we can not disturb the Commissioner’s action in refusing to allow a deduction of this character in the computation of the net income for the taxable years in question.

The eighth and last question is whether the taxpayer’s invested capital, as shown by its books of account as of January 1, 1917, should be reduced in the amount of $769,345.89, on account of in-sufficent depreciation taken in years prior to 1917. The petition sets forth that the reduction of invested capital made by the Commissioner on this account amounts to $771,573.70. The latter amount is the actual reduction made by the revenue agent, but the deficiency letter shows that the Commissioner revised the revenue agent’s action to the extent of reducing the. depreciation reserve computed by the agent and adding back to earned surplus the sum of $2,227.81.

The taxpayer contends that the entries shown upon its books are conclusive since no contradictory evidence was submitted by the Commissioner. It relies upon our decisions in Appeal of Rub-No-More Co., 1 B. T. A. 228; Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87; and Appeal of Russell Milling Co., 1 B. T. A. 194.

The taxpayer used upon its books a 1 per cent rate for the years prior to 1917, a 2 per cent rate for the years 1917, 1918, and 1919, and a 2yz per cent rate for 1920. It claimed that each respective rate, when applied to the cost values, constituted a reasonable allowance for the periods covered. In other words, for the years prior to 1917 the rate was predicated on a life for the buildings of 100 years, between 1917 and 1919 of 50 years, and for 1920 of 40 years. The only explanation given by the taxpayer for the 100 per cent increase in rate for 1917-1919 over the years prior to 1917 and the 25 per cent increase in rate for 1920 over 1917-1919, was that the wear and tear on the property increased as evidenced by its sales increase. That explanation is not satisfying. The mere volume increase in dollars of sales has no reference to the use of the property, in the absence of other evidence. The price increase and the depreciation of the dollar, during the years following 1913, are matters of common knowledge. The relative ratios are matters of record. It is quite generally conceded that, between 1913 and 1920, there was an increase in prices, both at wholesale and retail, of over 100 per cent. The taxpayer’s sales increased in dollars in substantially the same ratio, being $12,100,000 in 1913, and $27,800,000 in 1920. Certainly, in the absence of any evidence of the comparative number of persons who visited the taxpayer’s store during the years in question, or the increased number of articles sold over the counter, or how the actual use of the property caused greater deterioration, we can not say that a money increase in sales shows additional wear and tear on the property, but, rather, must deem the dollar increase in sales as merely normal and in conformity with the economic trend of the period. That evidence was the sole justification, voluntarily submitted by the taxpayer, for the use of a 2 per cent rate after 1917 as compared with 1 per cent prior thereto.

The Commissioner has determined that a 2 per cent rate for all of the years 1909 to 1920, is reasonable. The taxpayer has not rebutted the prima facie case by the mere production of its books. These show only that the return correctly reported the book entries. A line of reasoning which concluded that the presumption of the correctness of the Commissioner’s determination is rebutted by the production of the very evidence which the Commissioner examined and found to reflect an unreasonable allowance and so found not from the books themselves, but from the surrounding circumstances, would be most peculiar. The Commissioner’s allowance does not contradict the fact of what the books showed. It is the determination of a “ reasonable allowance,” and the burden is upon the taxpayer to rebut the presumption of the correctness of that determination.

None of the three decisions cited by the taxpayer state any different position.

In Appeal of Cleveland Home Brewing Co., supra, there was affirmative evidence, other than the books, supporting the depreciation allowance. In Appeal of Rub-No-More Co., supra, an appraisal corroborated the surplus shown upon the books. In Appeal of Russell Milling Co., supra, there was evidence explaining the depreciation taken by that company upon its books and we found the same to be substantiated. On the other hand, in the present appeal there has been neither corroboration nor substantiation of the book entries. The taxpayer has told us that it used 2 per cent after 1917, as compared with 1 per cent prior thereto, and justified that solely by evidence of sales increase, to which reason we can give little if any weight. But the Commissioner has found and determined that a 2 per cent rate effects a reasonable allowance for the entire period. The taxpayer has not sustained the burden of showing wherein that determination was erroneous by proof that its books reflected a proper and reasonable depreciation allowance over the years here involved. Accordingly, the action of the Commissioner in reducing the invested capital by $769,345.89 is approved. See, also, Appeal of City National Bank, 2 B. T. A. 623.

Order of redetermination will be entered on 15 days'1 notice, under Rule 50.


author: Phillips

text:
    Appeal of CLARK & CO.
    Docket No. 5785.
    Decided July 23, 1926.

      Leon F. Cooper, Esq., and R. E. Qlessner, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.
    Before Phillips and Teammell.
   Phillips

: Taxpayer appeals from the determination of deficiencies in income and profits taxes of $2,287.37 for 1919 and $3,674.74 for 1920. The sole question involved is the March 1, 1913, value of taxpayer’s building, the Commissioner having used cost, as shown by taxpayer’s books, for the purpose of computing depreciation.

FINDINGS OP FACT.

The taxpayer is a corporation, organized in 1891 under the laws of the State of New Jersey, with its principal office at Newark, and since its organization has' been engaged in the retail lumber and mill-work business.

During 1919 and 1920 the taxpayer owned and used in the conduct of its business certain buildings erected upon its property prior to March 1,1913. The fair market value of such buildings on March 1, 1913, and the probable useful life thereof on that date were as follows:

The net income and the deficiencies for 1919 and 1920 should be recomputed by allowing depreciation on the March 1, 1913, values. Order of redetermination will be entered on 15 days' notice, under Rule 50.


author: Green

text:
    Appeal of MASAJIRO FURUYA.
    Docket No. 1765.
    Decided July 24, 1926.

      Dale D. Drain, Esq., for the petitioner.

      Laurence Graves, Esq., for the Commissioner.
    Before Gkatjpner, Lansdon, and Giíeen.
    This appeal involves a deficiency in income tax for the years 1918 and 1920, totaling $546.21.
    FINDINGS OE FACT.
    The taxpayer and his wife, Hatsu Fnruya, are residents of Seattle, Wasln The husband and wife, from their - community property, made certain loans or advances to one Hattori, a business associate. The first of these advances was made in 1909 and the last in 1913. They totaled $10,166.70. The statute of limitations on this indebtedness expired in 1916. Hattori died in April, 1914. From the affirmative allegations of both the petition and answer, it appears that the estate had practically no assets but that some of the heirs of Hattori had indicated an intention to assume his indebtedness.
    The taxpayer and his wife owned and operated a private bank. This bank, in 1913, loaned three individuals small sums of money totaling $360. This bank and another were consolidated and the community paid the indebtedness of these individuals to clear the bank’s records.
    In 1918 the taxpayer and his wife filed separate returns in which each set up as a deduction one-half of the debts above mentioned. Subsequently such deductions were disallowed by the Commissioner and the additional tax paid. A claim for refund for the amount so paid was made and allowed. The taxpayer’s return was again audited and the deduction again disallowed. This resulted in the deficiency now under consideration.

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

   OPINION.

Green

: This appeal presents two questions. The first is the right of the taxpayer to take as a deduction in 1918 the alleged bad debts. Section 214(a) (7) of the Revenue Act of 1918 reads: “ Debts ascertained to be worthless and charged off within the taxable year.” There is no evidence before us as to when the taxpayer ascertained the debts to be worthless. The fact that debts were charged off in a particular year raises no presumption that they were in the same year “ ascertained to be worthless.”

The second, question is the right of the Commissioner, in the absence of fraud or mathematical error, to ^reopen, reconsider, and redetermine a case in which he has, after due consideration, determined the tax liability. Section 1006 of the Revenue Act of 1924 and section 1312 of the Revenue Act of 1921 are inapplicable in this case because there is no agreement and no assessment. The original determination of the tax, the refund, and the determination of the deficiency here under consideration were all made by the same commissioner. We express no opinion as to the right of a commissioner to review the acts of his predecessor. We know of no statute or decision which in this "case in any way limits the right of the Commissioner to reopen it as often as he chooses until such time as the statute of limitations has run against him. Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856; Appeal of Warner Sugar Refining Co., 4 B. T. A. 5.

Judgment for the Commissioner.


author: Gkeen

text:
    Appeal of MRS. HATSU FURUYA.
    Docket No. 1766.
    Decided July 24, 1926.

      Dale D. Drain, Esq., for the petitioner.

      Laurence Graves, Esq., for the Commissioner.
    Before Graupner, Lansdon, and GREEN.
    This appeal involves a deficiency in income tax for the years 1918 and 1920, totaling $1,201.05.
    FINDINGS OF FACT.
    The taxpayer and her husband, Masajiro Furuya, are residents of Seattle, Wash. The husband and wife, from their community property, made certain loans or advances to one Hattori, a business associate. The first of these advances was made in 1909 and the last in 1913. They totaled $10,166.70. Hattori died in April, 1914. From the affirmative allegations of both the petition and answer, it appears that the estate had practically no assets, but that some of the heirs of Hattori had indicated an intention to assume his indebtedness.
    The taxpayer and her husband owned and operated a private bank. This bank, in 1913, loaned three individuals small sums of money totaling $360. This bank and another were consolidated and the community paid the indebtedness of these individuals to clear the bank’s records.
    In 1918 the taxpayer and her husband filed separate returns in which each set up as a deduction one-half of the debts above mentioned. Subsequently sucb deductions were disallowed by the Commissioner and the additional tax paid. A claim for refund for the amount so paid was made and allowed. The taxpayer’s return was again audited and the deduction again disallowed. This resulted in the deficiency now under consideration.

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

   OPINION.

Gkeen

: This appeal presents two questions. The first is the right of the taxpayer to take as a deduction in 1918 her half of the debt due the community. Section 21#(a) (7) of the Revenue Act of 1918 reads: “ Debts ascertained to be worthless and charged off within the taxable year.” There is no evidence before us as to when the taxpayer ascertained the debts to be worthless. The fact that debts were charged off in a particular year raises no presumption that they were in the same year “ ascertained to be worthless.”

The second question is the right of. the Commissioner, in the absence of fraud or mathematical error, to reopen, reconsider, and redetermine a case in which he has, after due consideration, determined the tax liability. Section 1006 of the Revenue Act of 1924 and section 1312 of the Revenue Act of 1921 are inapplicable in this case because there is no agreement and no assessment. The original determination of the tax, the refund, and the determination of the deficiency here under consideration were all made by the same commissioner. We express no opinion as to the right of a commissioner to review the acts of his predecessor. We know of no statute or decision which in this case in any way limits the right of the Commissioner to reopen it as often as he chooses until such time as the statute of limitations has run against him. Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856; Appeal of Warner Sugar Refining Co., 4 B. T. A. 5.

Judgment for the Commissioner.