author: LittletoN:

text:
    Appeal of COVERT GEAR COMPANY, INC.
    Docket No. 7101.
    Decided September 25, 1926.

      Lawrence A. Balcer, Esg., for the petitioner.

      John D. Foley, Esg., for the Commissioner.
   LittletoN:

On October 8, 1918, petitioner filed an income and profits-tax return, Form 1031, under the provisions of the Revenue Act of 1916, as amended by the Revenue Act of 1911, for the fiscal year ending July 31, 1918, showing a tax amounting to $41,390.97, which was assessed on November 9, 1918.

On February 24, 1919, the Revenue Act of 1918 was approved and became effective from January 1, 1918. On September 29, 1919, petitioner filed a return, Form 1120, for the same fiscal year ending July 31,1918, under the provisions of the Revenue Act of 1918, showing a total tax for the year of $15,978.62.. No assessment in respect of the tax for the fiscal year ending July 31, 1918, other than that of November 9, 1918, has been made. The petitioner requested the Commissioner to abate the amount of the tax assessed upon its return, Form 1031, filed October 8, 1918, in excess of the tax shown upon its return, Form 1120, filed under the provisions of the Revenue Act of 1918. In December, 1924, the Commissioner allowed an overassessment of $9,450.05. On July 16, 1925, the Commissioner made a further audit of the returns for the fiscal year and notified the petitioner of a further overassessment of $2,191.24, computed as follows:

Tax previously assessed_$41, 390. 97
Less overassessment allowed December, 1924- 9, 450. 05
31, 940. 92
Correct tax liability_ 29, 749. 68
2,191. 24

From this determination, petitioner appealed on September 14. 1925, claiming that the Commissioner erred in not allowing its claim for a deduction for amortization of war facilities under the provisions of the Revenue Act of 1918.

The Commissioner moved to dismiss the appeal upon the ground that he had not determined that there was a deficiency in tax for the fiscal year ending July 31, 1918, and that therefore the Board is without jurisdiction to consider the appeal. The petitioner takes the position that the return filed on September 29, 1919, is the return required by the Revenue Act of 1918, upon which the tax for the fiscal year ending July 31, 1918, under the provisions of the Act of 1918, is to be determined, and since that return showed a tax of $15,978.62, and the Commissioner has finally determined that the correct tax for the taxable year is $29,749.68, a deficiency of $13,-771.06 has been determined and should be reduced by the amount of the deduction which it claims for amortization of war facilities.

We are of the opinion that the position of the petitioner is correct. The return filed September 29, 1919, was the return required by the Revenue Act of 1918, Appeal of Davis Feed Company, 2 B. T. A. 616, and superseded the return, Form 1031, filed under the provisions of the Revenue Act of 1916, as amended by the Revenue Act of 1917. Section 283(f) of the Revenue Act of 1926 provides that if any deficiency in tax imposed by the Revenue Act of 1921 or prior Revenue Acts was assessed before Jime 3, 1924, but was not paid in full before that date, and if the Commissioner after June 2, 1924, but before the enactment of the Act of 1926, finally determined the amount of the deficiency, and if the person liable for such tax appealed to the Board before the enactment of the Revenue Act of 1926, and the appeal is pending at the time of such enactment, the Board shall have jurisdiction.

Although the assessment by the Commissioner on November 9, 1918, of the tax shown due on the return filed under the provisions of the Revenue Act of 1917 was not an assessment of a deficiency, the portion of the assessment became a deficiency when, pursuant to the Revenue Act of 1918, the petitioner’s return required by that Act showed a tax at less than the amount assessed. When the Commissioner, therefore, on July 16, 1925, finally determined petitioner’s claim for abatement and determined that the correct tax for the year was in excess of the amount shown upon its return, he determined a deficiency within the meaning of the statute and, while the situation may not come within the letter of section 283(f) of the Revenue Act of 1926, it, in our opinion, comes well within the spirit thereof. *

Motion to dismiss denied. /Sixty days allowed to answer.


source: Caselaw Access Project

author: SteRnhagen:

license: Public Domain

text:
    Appeal of NATHAN KONIGSBERG.
    Docket No. 6016.
    Decided September 25, 1926.

      Meyer Bernstein, G. P. A., for the petitioner.

      D. D. Shepard, Esq., for the Commissioner.
   SteRnhagen:

The Commissioner disallowed the petitioner’s deduction of an alleged loss of $17,300 sustained in the sale in 1919 of securities, the disallowance being based on the petitioner’s failure to supply the Commissioner with sufficient proof of loss. The Commissioner determined a deficiency of $7,739.58 income tax.

FINDINGS OF FACT.

During 1919 petitioner bought and sold stocks on margin. Among others, he bought 1,000 shares of V. Vivaudou, Inc., in September 1919, for $31 a share and sold them in December, 1919, for $21 a share, thereby sustaining a loss of $10,000. In September, 1919, he bought 400 shares of Transcontinental Oil for $60 a share and sold them in December, 1919, for $40 a share, thereby sustaining a loss of $8,000.

Judgment for the petitioner.


author: Lansdon:

text:
    R. J. PALMER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 3587.
    Decided September 25, 1926.
    Upon the evidence, held, that the petitioner is not entitled to a deduction from his income for the taxable year under the provisions of section 204(b) of the Revenue Act of 1921.

      R. J. Palmer pro se.

      George E. Adams, Esq., for the respondent.
    The Commissioner asserts a deficiency in income tax for the year 1922 in the amount of $5,197.10, all of which is in controversy, and all of which arises from the Commissioner’s determination that the petitioner is not entitled to deduct a net loss claimed to have been sustained in 1921 in making his income-tax return for the taxable year.
    BINDINGS OP PACT.
    The petitioner is an individual residing in Los Angeles, Calif. For many years, both before and after becoming a resident of Los An-geles, he was engaged in the business of promoting and financing corporations and especially companies engaged in mining operations.
    Some time in the year 1910, the petitioner undertook to refinance a gold-mining property located in the district now designated as Canon County, Nev., and known as the Rockland Mine. It was necessary to pay debts owed by the mine, and to provide funds for further development and for increasing facilities for reducing the ore. For these purposes the petitioner advised the organization of a corporation to take over the property and business of the Rockland Mine. This was done, the corporation being called the Pittsburg-Dolores Mining Co. Its capitalization was 1,500,000 shares of stock cf the par value of $1 each, with an authorized bond issue in the amount of $175,000.
    After the refinancing provided for by the incorporation of the Pittsburg-Dolores Mining Co., a new reducing mill was built and the mine was operated profitably for a short time. The World War upset conditions in the gold-mining industry to such an extent that the Pittsburg-Dolores Mining Co. again began to lose money, and obligations that could not be met accumulated in such volume that another attempt at refinancing ivas made. Late in 1917, or early in 1918, the bondholders and stockholders of the company agreed on a reorganization plan which resulted in the incorporation of the Rock-land Mining Co. This was a friendly arrangement. The bondholders of the Pittsburg-Dolores Mining Co. accepted stock in the reorganized corporation for their bonds in the ratio of $3 of par value of stock for $1 par value of the bonds held by them.
    During several years prior to the second reorganization of the property, the petitioner was its secretary and manager of operations. He rendered many services in connection with both reorganizations, as well as in operating the property, and, from time to time, advanced his own funds for the payment of his expenses in connection with the operation of the property, and for the payment of the costs of the two successive incorporations. All records of services rendered and of funds advanced have been lost, except certain cancelled checks, not offered in evidence, in the amount of $23,619.56, which the petitioner testified had been drawn in payment of expenses incurred in connection'with the property.
    Upon the organization of the Rockland Mining Co. in 1917 or 1918, all the parties interested recognized that the petitioner had a substantial equity in the property by reason of services rendered and cash advanced and voted to issue stock in the new company to him in the par value of $50,000. Subsequently, the Rockland Mining Co. failed, its assets were disposed of at a receiver’s sale, and nothing was realized for the liquidation of the common stock, which became worthless in the j^ear 1921.
    The petitioner’s income-tax return for 1921 discloses a net operating loss for that year in the amount of $47,987.27. This net loss was determined by subtracting $50,000, the par value of the stock of the Rockland Mining Co. issued to the petitioner in 1918, from his operating income for the year 1921. In his income-tax return for the year 1922, the petitioner deducted such net loss from his gross income for that year as having been sustained in his business operations in the year 1921. Upon audit of the petitioner’s return for 1922, the Commissioner disallowed the deduction of the 1921 net loss and determined the deficiency which is in controversy in this proceeding.
   OPINION.

Lansdon:

The proof of loss adduced by the petitioner is insufficient. The evidence that the stock of the par value of $50,000 became worthless in 1921 is conclusive, but the testimony does not disclose the cost of such stock and, therefore, we are unable to determine the amount of the loss sustained. Moreover, even if proved as to time and amount, the loss, if any, resulted from an unfortunate investment and was not the result of the operation of the petitioner’s trade or business in 1921, and was not deductible from the petitioner’s income for 1922, under the provisions of section 204(b) of the Revenue Act of 1921.

Judgment for the Commissioner.


author: Littleton:

text:
    Appeal of INTER-URBAN CONSTRUCTION CO.
    Docket No. 4387.
    Decided September 25, 1926.

      William D. Biter, Esq., and T. Ellis Allison, Esq., for tbe petitioner.

      P. J. Rose, Esq., for the Commissioner.
   Littleton:

The Commissioner determined a deficiency in income and profits tax of $2,020.44 for the calendar year 1919, and by this proceeding petitioner .questions the correctness of a portion of that amount, alleging as its reason, first, that it should have been allowed a deduction of $18,308.27 instead of $16,168.90 on account of bond discount, and secondly, that it should have been permitted to deduct $13,000 as compensation paid to its general manager.

FINDINGS OF FACT.

The petitioner and the Salt Lake-Utah Railroad Co. were, during 1919, affiliated corporations. They were both organized under the laws of Maine and during the taxable year had their principal offices at Salt Lake City, Utah. The petitioner was engaged in general construction work and the railroad company was organized for the purpose of building and operating an electric railroad extending from Salt Lake City to Pason, Utah, a distance of approximately 75 miles. The railroad company and the construction company entered into a contract about 1912, whereby the latter was to construct a railroad and deliver it to the former. This work was completed about 1916, at which time the railroad company concluded to construct á branch line approximately 15 miles in length and the contract for this work was given to the construction company. The branch line was completed in 1917.

During the year 1919, the outstanding common stock of the railroad company amounted to $3,000,000 and the outstanding preferred stock amounted to $1,980,000 par value. The petitioner owned nine-tenths of the common stock and all of the preferred stock.

W. C. Orem was in 1912, and since that time has been, general manager of the construction company and president and general manager of the railroad company. At the time the contract for the construction of the railroad was entered into in 1912, it was contemplated that the work would be completed within two years, and the directors of the construction company adopted a resolution on October 8, 1912, providing that “said Orem’s compensation in full for his services shall be $50,000.00 payable at the ratq of $25,000 each year, in such installments as may be specified in the contract.”

On November 7, 1914, the directors of the construction company adopted a resolution which read “On motion of Mr. Murphy, and seconded by Mr. Fisher, W. C. Orem was continued as manager of the company at his old salary, his services to be discontinued at the pleasure of the Board.”

On October 6, 1915, the directors adopted another resolution reading as follows:

The Secretary reported that the General Manager, W. C. Orem, had suggested that inasmuch as his third year as general manager of the Interurban Construction Company would be up_ in a few days and he had the company’s needs largely financed for the present, that his salary for general manager be discontinued at the close of the year for the present, leaving future salary to be accrued upon such basis as was deemed fair when the time should come.
On motion of F. S. Murphy, seconded by Frank Fisher, it was unanimously voted to discontinue the salary of the general manager at his own suggestion and have the minutes show that the Board considered the suggestion of the general manager a very generous one, especially in view of the fact that he would still be required to give a great deal of time and energy to the company’s affairs.

On January 20, 1916, the directors of the construction company considered the matter of salary of its general manager and adopted the following resolution relative thereto:

At this point W. C. Orem retired from the meeting in order that the Board of Directors and other interested parties present might consider the question as to whether his services during the present year as general manager of the Construction Company, were needed, and if they decided in the affirmative, to fix his salary. After full discussion, it was unanimously decided by those present that the company did need his services and that his salary 'should be fixed at $1,000 per month, having in mind that during the year, they probably wanted to build a line to Magna but not do any other new construction of any magnitude, also having in view that during the year a number of questions and deals involving policy and interests of the company would have to be handled.
In case it was decided to do any considerable amount of new construction, thus increasing the duties and responsibilities of our general manager in excess of what was contemplated, his salary should be fixed accordingly.

Under authority of this resolution, and with the knowledge and consent of the directors of the construction company, but without any further formal resolution, Orem was regularly paid a salary of $1,000 a month, throughout and subsequent to the taxable year in question. In December, 1919, the company paid Orem $2,000. The petitioner kept its books on the cash receipts and disbursements basis.

Subsequent to 1911, the petitioner carried on no construction work and its only asset consisted of the stock of the railroad company. The duties performed by Orem as petitioner’s general manager were in protecting and advancing its interest as owner of the stock of the railroad company, of which he was president and general manager. He was paid no compensation by the railroad company.

At the conclusion of the hearing, it was stipulated by the parties that $17,909.45 should be allowed as a deduction for 1919, as bond discount.

Judgment for the petitioner. Order of rede-termination will be entered' on 15 days’ notice, under Rule 50.


author: ARTjndell:

text:
    Appeal of WALTER H. SCHOELLKOPF.
    Docket No. 6212.
    Decided September 25, 1926.

      Meld, under tbe facts in this case, where the petitioner entered into a contract in 1910 for the sale of a piece of real estate for a definite sum and thereafter, in 1920, made a conveyance thereof for the amount theretofore agreed upon, depreciation of the buildings on the property is not a factor entering into the determination of gain or loss on the sale.

      George G. Davidson, Jr., Esq., for the petitioner.

      A. H. Fast, Esq., for the Commissioner.
    The petitioner has appealed from the determination of a deficiency in income tax for the year 1920 in the amount of $10,928.79, of which the sum of $6,443.83 is in dispute. The Commissioner has determined the profit on the sale of certain real estate of the petitioner by making an adjustment for depreciation. The petitioner contends that under the terms of an agreement which he entered into in 1910 he thereafter owned no interest in the real estate which was the subject of depreciation.
    FINDINGS OF FACT.
    In the year 1910, the petitioner, Walter H. Schoellkopf and his sister, Genevieve S. vom Berge, were the owners of certain real estate in the City of Buffalo, N. Y., in which city they reside. On January 11, 1910, they entered into an agreement, under seal, with the King Sewing Machine Co. This agreement required the former to acquire title to certain additional premises and to furnish a title company’s search, showing good title, clear of incumbrances, after which both parties were to enter into another agreement, the terms of which were specifically set out and which was to be executed and acknowledged like a deed.
    An agreed value was assigned to the land already owned, for the purposes of both agreements. The agreement was to bind the heirs, executors, administrators, successors and assigns of the respective parties. The petitioner’s wife joined in the agreement to waive her clower. Sears, Roebuck & Co. guaranteed performance by the King Sewing Machine Co.
    This agreement was signed and acknowledged by all parties and thereafter all parties performed their parts according to the terms of the agreement.
    On July 12,1910, the following agreement or contract was entered into according to the terms of the former agreement:
    THIS AGREEMENT AND LEASE
    Made and entered into this 12th day of July, A. D. Nineteen Hundred and ten, by and between WALTER H. SCHOELLKOPE and GENEVIEVE S. VOM BERGE, of the City of Buffalo, Erie County, New York, parties of the first part, hereinafter designated as the lessors, and KING SEWING MACHINE COMPANY, a domestic corporation, of the same place, hereinafter designated as the lessee, WITNESSETH:
    WHEREAS, in and by the terms and provisions of a certain agreement in writing made and entered into by the parties hereto, bearing date on the eleventh day of January, A. D. 1910, said lessors promised and agreed to negotiate for and acquire good title to certain premises particularly described in said agreement, and also hereinafter particularly described, including any part not owned by them on the 31st day of December, 1909; and that upon the acquisition of such title to all said premises, said lessors should furnish to said lessee a Guaranty Company’s searcji or searches showing good and sufficient title to all said premises, clear of incumbrances; and thereupon, within thirty days after furnishing such search, said lessee should make known to said lessors in writing its objection, if any, to said title, and in default thereof that said title should be deemed good and satisfactory to said lessee; and thereupon said parties should forthwith enter into a further agreement, for the erection upon said premises of certain specified buildings, and for the lease and demise unto said lessee of said premises, including the buildings so to be erected, containing provisions for the sale of said premises by the lessors to said lessee, and the purchase thereof by said lessee; and
    WHEREAS, said lessors have, in accord with their said agreement, acquired title to and now own all of the premises mentioned in said agreement of January 11, 1910, and hereinafter particularly described, and have likewise furnished to said lessee, more than thirty days since, a Guaranty Company’s searches showing good title to said premises in them, free from incumbrances, which searches said lessee has examined and finds, and has made, no objection to said title, and said title is therefore deemed good and satisfactory to said lessee, and is hereby acknowledged so to be, and
    WHEREAS, the claim of the City of Buffalo mentioned in said agreement has been liquidated and satisfied and contracts have been entered into by the King Sewing Machine Company for the construction of the improvements on said premises which are satisfactory to the lessors,
    NOW, THEREFORE, in further accord with the terms of said agreement of January 11, 1910, said parties hereto, said lessors and said lessee, do hereby mutually agree to and with each other as follows:
    SAID lessors, WALTER H. SCHOELLKOPE and GENEVIEVE S. VOM BERGE, do hereby let and demise unto said KING SEWING MACHINE COMPANY, said lessee, and said lessee does hereby lease from said lessors:

      ALT, THAT TRACT OR PARCEL OF LAND, situate in the City of Buffalo, County of Erie and State of New Tort, bounded and described as follows:
    [Description of Premises]
    for a term of ten (10) years to begin on the 1st day of April, A. D. nineteen hundred and ten and to end on the 1st day of April, A. D. nineteen hundred and twenty, at twelve o’clock noon, of said day.
    AND said lessors do hereby promise and agree to erect upon said premises above described, at their own cost and expense, buildings for factory purposes, and buildings for foundry purposes according to plans and specifications heretofore furnished by said lessee, and under its supervision, at a cost not to exceed Two Hundred Thousand Dollars ($200,000) to the lessors, any excess to be paid by the lessee, the same to be erected under contracts entered or to be entered into by the said lessee for the erection of the same with responsible contractors, upon the best terms obtainable, which shall provide for partial payments as the work progresses. It shall insure said improvements in satisfactory companies as the work progresses. The amounts becoming due upon said building contracts shall be duly ascertained by said lessee from time to time and duly certified- by it to the lessors, who shall thereupon pay said amounts to the parties entitled to receive the same under said building contracts.
    FOR the annual rental for said land, and for said improvements so to be made, said lessee shall pay, and does hereby agree to pay, quarterly, in advance, during said term, a sum equal to six per cent per annum upon the amount of the said lessor’s investment for land and improvements, as hereinafter stated and provided, and shall also pay as the same may ^respectively be incurred, imposed or become due, or payable or chargeable upon said premises or any part thereof from time to time during said term, the amount of all expenses connected with the upkeep and maintenance of said premises and improvements, including taxes, ordinary and extraordinary, repairs, gas, electric lighting and power, water rates, insurance premiums upon policies of insurance equaling the full value of the improvements; and said lessee agrees to keep said improvements insured for the benefit of the lessors in an amount equal to the full value of said improvements, and deposit the policies of insurance with said lessors; and the lessee does also hereby covenant and agree t* fulfill and perform all governmental and municipal requirements and regulations affecting or relating to said demised premises and property.
    IT IS HEREBY FURTHER AGREED AND STIPULATED, that the value of the lands hereinabove described and hereby demised is the sum of thirty-four thousand five hundred fifty-six and 14/100 dollars ($34,556.14), upon which amount rental is to be computed at the rate of six per cent per annum, so far as the investment in land is concerned, and inasmuch as the work of construction of said buildings was actually begun on or before the first day of April, A. D. 1910, rental at the rate of six per cent per annum upon the Sum of thirty-four thousand five hundred fifty-six and 14/100 dollars ($34,-556.14), being the agreed value of said land, shall begin to run from the first day of April, 1910, and be payable quarterly in advance as above provided.
    AND when, and so soon as, said buildings are completed so that said lessee may begin the occupancy or use thereof, the rental based on the cost of said buildings and improvements shall begin and be payable, and as soon as the cost of said buildings and improvements has been ascertained, such cost shall be added to the sum of thirty-four thousand five hundred fifty-six and 14/100 dollars ($34,556.14), being the agreed value of the land, and on the total sum so obtained said rental of six per cent per annum on the lessors total investment, shall be computed and thereafter paid quarterly, in ádvanee, as hereinbefore provided.
    AND it is hereby further agreed, that if at any time or times during' the continuance of this lease, or of any extension or renewal thereof, said lessee shall fail to pay at maturity, as above provided, the amount of any tax,' assessment or municipal charge of any kind chargeable against said land, buildings and premises or any part or parts thereof, or shall fail to pay, as aforesaid, the amounts of insurance premiums for insurance on said improvements, or any expense whatsoever chargeable against the premises, and to be paid by said lessee as hereinabove provided, then and in any such case the lessors may pay the same; and the sum or sums so paid at any time or times by said lessors shall be thereupon due and owing from said lessee to said lessors as a part of the rental óf said premises and improvements, and said lessee promises and agrees to pay the same accordingly, and said lessors may, after sixty days notice of default in such payment, sue therefor as for rental past due, or resort to any other remedy provided for default in payment of rent.
    SAID parties do hereby further mutually agree that if, at the expiration of the above mentioned term of ten years, said lessee shall have well and faithfully paid all rentals, and the amount of all taxes, repairs, insurance premiums and other expense and charges for the upkeep and maintenance of said premises and improvements, and shall have faithfully kept and fulfilled all of the terms of this lease on its part to be kept and fulfilled, then ánd in such case said lessee may have a renewal of this lease for the further term of ten (10) years, on said lessee giving to said lessors six months written notice prior to the expiration of said original term of ten (10) years, of its desire and intention to so renew the same, and which notice, if so given, shall operate to renew this lease accordingly.
    AND said lessors, WALTER H. SCHOELLKOPE and GENEVIEVE S. VOM BERGE, do hereby covenant and agree to sell and convey to said lessee, said KING SEWING MACHINE COMPANY, and it, said lessee, does hereby covenant and agree to buy from said lessors and to pay therefor to said lessors, the said premises and improvements hereinbefore referred to, and let and demised as aforesaid to said lessee, at and for the price of the sum and amount of the lessors’ total investment in land and buildings computed as aforesaid, and on which said rental of six per cent per annum shall be based after the completion of said buildings, and use thereof by said lessee shall be begun, and which sale, conveyance and purchase shall be made at the time of the expiration of the original term of ten (10) years of this lease, in case the same is not renewed, and if this lease be renewed as herein provided, then such sale, conveyance and purchase shall be made at the expiration of the renewal term, and said lessors shall convey the said lands, premises and improvements to said lessee by Warranty Deed, conveying the same good title shown by said title searches heretofore furnished to said lessee, continued to the date of such sale and purchase, showing said premises free and clear of all incumbrances.
    PROVIDED, however, said lessee may, if it shall so desire, purchase said lands, premises and improvements at the price aforesaid at any time during said original term, or said renewal term, without waiting for the expiration thereof; whenever, under the terms of this agreement, said sale and purchase may be consummated, it shall be made subject to any mortgage which may be placed on said lands, premises and improvements by said lessors, but which mortgage shall not draw interest at any greater rate than that at which the lessee shall be able to place a loan of corresponding amount and conditions, the amount of which mortgage shall be allowed on the purchase price, and that upon the tender of a deed of said premises said lessee will pay said purchase price, as follows: by assuming the payment of any mortgage then a lien upon said premises and property; twenty-five per cent or more,. of the remainder of said purchase price in cash, and the balance by executing and delivering in due form its purchase money bond and mortgage to bear the same date as said deed and covering the same land, premises and improvements, providing for the payment of the remainder of said purchase price in three equal annual installments from the date thereof, with interest from the date thereof at the rate of six per cent per annum payable semi-annually, with the privilege to the mortgagor of paying with any such installment one or more additional installments, "or at its option at any time the whole amount unpaid, upon giving the mortgagee thirty days notice in writing of such intention, and which bond and mortgage shall contain the usual tax, interest and insurance clauses, in the ordinary New York State standard form.
    IT IS HEREBY ALSO FURTHER AGREED, -that in case any of said lands or premises shall be lawfully taken by condemnation proceedings and an award made therefor, the amount received therefrom shall be paid to said lessors, and applied upon the payment of the purchase price of the premises and the rental shall from thenceforth be accordingly reduced.
    THE undersigned ANNA J. SCHOELLKOPF, wife of the above named WALTER H. SCHOELLKOPF, in consideration of one dollar ($1.00) to her in hand paid, agrees to waive any dower right she may have in said lands and premises, and for that purpose only she joins in executing this instrument, and will unite for the same purpose in the execution of any conveyance of said premises to be made hereunder.
    The agreements and covenants herein contained' shall apply to and be obligatory upon the heirs, assigns, legal representatives and successors of the respective parties hereto.
    IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written.
    (Signed) Walter H. Schoellkope. [L. S.]
    (Signed) Genevieve S. vom Berge. [L. S.]
    (Signed) Anna J. Schoellkope. [L. S.]
    [seal.] KING SEWING MACHINE COMPANY
    By (Signed) W. Grant King,

      Vice President.

    [Acknowledgements of all parties.]
    [Guarantee of performance oh part of King Sewing Machine Company by Sears Roebuck & Company, acknowledgement of same.]
    The King Sewing Machine Co. went into immediate and continuous possession under this contract, made improvements which cost in excess of $200,000, and from time to time made further improvements so that on the last day of December, 1919, the total cost of the real estate and buildings erected thereon amounted to $701,648.92, of which amount the petitioner and his sister had contributed $34,556.14, the agreed value of the land, and $200,000 towards the erection of the buildings, and the balance, $467,092.78, had been paid by the King Sewing Machine Co. Both parties carried out the terms of the agreement in every way and on April 1, 1920, in accordance -with provisions of the contract, the King Sewing Machine Co. paid the petitioner and his sister $234,558.14 and received from them a deed for the premises.
    The Commissioner has determined a gain on the sale of this property by adding to the sale price depreciation sustained from March 1, 1913, to the date of sale and deducting from the total amount so ascertained the March 1, 1913, value, plus the selling expenses.
   OPINION.

ARTjndell:

We have held in the Appeal of Even Realty Co., 1 B. T. A. 355, that depreciation is a factor to be considered in arriving at the basis for determining the gain or loss on the sale of property. Does the fact that petitioner was under a contract obligation to sell his property for a definite amount and the King Sewing Machine Co. was under an equally binding obligation to purchase the property, serve to render inapplicable the rule in the above case here sought to be invoked by $be Commissioner ?

There is no question but that the buildings erected pursuant to the contract suffered physical depreciation from the date of their erection to the date of sale in 1920. But it does not follow that this depreciation is to be charged against the interest of the petitioner. The contract provided that the petitioner and his sister were to receive $234,556.14 for their interest in the property, plus 6 per cent on that agreed price up to the date of the transfer of title. It seems clear from a reading of the contract that the interest of petitioner and his sister in the property here involved constituted on July 12, 1910, and also on March 1, 1913, an asset of a basic value of $234,-556.14. The exact nature of this asset, however, must be determined by reference to the terms of the contract. Although petitioner and his sister retained the bare legal title to the property, they had put it beyond their power to reclaim the full rights and privileges of ownership. By the terms of this contract they acquired a right to receive a principal sum of $234,556.14, together with an annual income of 6 per cent of this amount from the date of the contract up to the payment of the principal sum. They reserved a further right to hold the legal title to the property until the other party to,the contract fully performed its obligations. The obligations of the parties and the time within which these obligations were to be performed were specificalty fixed. The petitioner had the right to receive a fixed sum of money on a determinable date. The King Sewing Machine Co. had the right to receive the full legal title to the property with all the appurtenant rights and privileges. These rights were definite and unchangeable. The time of performance did not vary either the amount to be paid or the right to be transferred. In 1920 when the transaction was completed by performance the petitioner and his sister still held the same asset and it was still worth $234,556.14. It had not appreciated nor had it depreciated in value.

Pursuant to the terms of the contract, certain buildings had -been erected, in part by the use of their own money, on the land to which petitioner and his sister held the legal title. Though petitioner and his sister held the legal title it was only a bare legal title subject to the provisions of the contract. When the right to receive the fixed principal sum was extinguished by performance, the legal title was transferred to the second party. But this action was only a foi’mality. The important thing 'was the wiping out of the contract right to receive the payment of $234,556.14. When it was extinguished the King Sewing Machine Co. could compel delivery of a deed. The buildings erected on the land may have depreciated, but there was no depreciation of the contract right above described. The reservation of title in petitioner and his sister was only as security for the protection of thi% contract right. When the right was relinquished in 1920 they received in return $234,556.14. This is the same sum they would have received had the right to purchase been exercised by the King Sewing Machine Co. in any previous year.

The conclusion here reached finds support in the well known and generally accepted principle of equity which is stated in Thompson on Beal Property, Yol. 5, §4290,-as follows:

Equity treats the executory contract as a conversion, whereby an equitable interest in the land is secured to the purchaser for whom the vendor holds the legal title in trust.

The vendor owns the purchase money and holds the legal title as security. See also Lenman v. Jones, 222 U. S. 51; Rexford v. Southern Woodland Co., 208 Fed. 295, affirmed in 225 Fed. 1022; Sewell v. Underhill, 111 N. Y. S. 85, affirmed in 197 N. Y. 168; 90 N. E. 430; Wagstaff v. Marcy, 54 N. Y. S. 1021. Especially is this true where the vendees under the contract to purchase have entered into possession and have made valuable - improvements. Carthage Tissue Paper Mills v. Village of Carthage, 200 N. Y. 1; 93 N. E. 60.

We conclude therefore that petitioner realized no gain upon the final transfer of his interest in the property pursuant to the contract entered into by him in 1910.

Order of redetermination in accordance with the foregoing fmdings of fact and opinion will be entered on 15 days’ notice, under Bule 50.

TRammell dissents.


author: SteRNhagen :

text:
    Appeal of Estate of HELEN S. PENNELL.
    Docket No. 2588.
    Decided September 25, 1926.

      Harry B. Walker, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.
    The Commissioner disallowed an expense deduction taken by decedent for 1920 and found a deficiency of $330 individual income tax.
    FINDINGS OF FACT.
    The decedent’s husband died in February, 1920, leaving a substantial fortune. During the decedent’s life she employed a lawyer to look after her interests. The greater part of his service was devoted to advising and protecting her against an effort which was being made by others to have her relinquish some of her rights in her husband’s property, a matter of no concern in this proceeding. The lawyer also performed “ a lot of other services for her, not in getting the estate, not in getting the property, but in disposing of it afterwards, and wrote her will and re-wrote it on account of some changed conditions arising, and did a lot of work for her.” He “ looked after the straightening of her personal affairs, including the disposition and investment to some extent of her money.” She had her regular agent, to whom she paid a salary, who looked after her investments, “but in large matters she would ask [the lawyer] to take part and [he] did.” Fie “ estimated and charged for the service other than getting the property for her $3,000.” To this she did not disagree.
    The lawyer in 1920 sent decedent a bill for $20,000 which included $17.,000 for the services in getting the property and $3,000 as above set forth. In 1920 decedent paid $10,000 and in 1921 the remaining $10,000. In her return for 1920 she deducted $3,000 representing the aforesaid payment, and this the Commissioner disallowed entirely.
   OPINION.

SteRNhagen :

The payment by an individual for general personal legal services, including the preparation of a will, are obviously not “ordinary and necessary expenses paid or incurred in the taxable year in carrying on any trade or business,” as provided in section 214(a) (1) of the Revenue Act of 1918. If any part thereof could be so classified the burden of allocation must be on the petitioner and not on the Board. We need not therefore discuss the question whether, since the payment of the entire bill of $20,000 was equally divided as between 1920 and 1921 without any earmarking, the petitioner could properly allocate the $3,000 entirely to the first payment in 1920.

Judgment for the Commissioner.


author: Akundell :

text:
    Appeal of CLEVELAND AND MAHONING VALLEY RAILWAY COMPANY.
    Docket No. 3692.
    Decided September 25, 1926.
    Affiliation.- — Petitioner held not affiliated with a company which owned all the capital stock of a third company to which the petitioner leased its property under a long-term lease.

      L. L. Hamby, Esq., for the petitioner.

      P. J. Bose, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits taxes for the calendar jrears 1918 and 1919 in the respective amounts of $758.94 and $292.6¿, a total of $1,051.60. The petitioner claims (1) that it is affiliated with the Erie Railroad Co.; (2) that the Commissioner may not reverse a decision of his predecessor in office; (3) that it is entitled to have its tax computed under the provisions of section 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is an Ohio corporation with its principal offices at Cleveland.
    By an agreement dated March 9, 1917, the petitioner leased all of its property, real, personal, and mixed, with the exception of its ■franchise, to the Nypano Railroad Co. for a term of 999 years, at an annual rental of $550,967.38, the lessee to pay all taxes, duties, and assessments that may be levied against the property, the receipts, the business, or the petitioner. The petitioner however reserves the right to pay any such taxes, duties, or assessments in the event of failure of the lessee to do so, subject to being reimbursed by the lessee. The lessee is given complete control of the management, operation, and use of the leased premises, the right to determine rates of toll and charges for transportation and to make collection thereof and appropriate the receipts to its own use. The petitioner agrees, upon the written request of the lessee, to acquire at the expense of the lessee any additional rights of way or other property that may be necessary or convenient for the conduct of the business, such property, and all other property acquired by the petitioner, to become subject to the lease. The lessee agrees to assume all the obligations imposed by law on the petitioner as to erection of fences, grade crossings and similar items; to assume and perform the petitioner’s- obligations under contracts theretofore made by the petitioner for transportation of freight or passengers; and to indemnify and save harmless the petitioner from all claims and liabilities arising out of the operation of the leased railroads or use of other leased property.
    The lessor has the right to issue preferred stock to an amount not in' excess of seven-eighths of its authorized common stock, such preferred stock to bear dividends at such rate as may be determined by the lessee, but not to exceed 5 per cent, and to be without voting power unless it may be legally impossible or agreed by the parties to be inadvisable to issue it without voting power. The proceeds of such issue of preferred stock are to be used only for the elimination of grade crossings or for improvements or additions to the leased property. The issuance and sale of the preferred stock is to be at the expense of the lessee and the lessee is to pay as additional rental an amount equal to the dividends payable on such stock or it may at its option, in lieu of such additional rental, pay the dividends direct to the holders of the stock.
    The petitioner is to maintain its corporate existence during the continuance of the agreement and to do all things necessary for the maintenance of its existence and any extension or renewal thereof, and for the preservation and protection of the leased property.
    The lessor has the right of repossession of the leased premises in the event of the continuance for 60 days of a default by the lessee in the performance of covenants of the lease.
    The Erie Eailroad Co. owns all of the stock of the Nypano Railroad Co., but owns none of the stock of the petitioner. The stockholders of the petitioner are different from the stockholders of the Erie Railroad Co. and different from the stockholders of the Nypano Railroad Co.
   OPINION.

Akundell :

The petitioner seeks affiliation with the Erie Railroad Co., not on the basis of stock ownership, but on the grounds (1) that the Erie Railroad Co. controls through closely affiliated interests, or by a nominee or nominees, substantially all of the petitioner’s stock, and (2) that substantially all of the stock of the petitioner is controlled by the same interests, namely, the Erie Railroad Co.

The Erie Railroad owns all the stock of the Nypano Railroad, and the Nypano controls by means of a long-term lease all the property, excepting the franchise, of the petitioner. The Erie owns none of the petitioner’s stock and the stockholders of the petitioner are different from those of the Erie and the Nypano.

We are not asked to determine whether there was a statutory affiliation between the Erie and Nypano companies. Assuming however for the purpose of discussion, that these two companies were affiliated, their control or the control of either of them over the property of the petitioner by virtue of the lease alone would not result in affiliation with the petitioner. Appeals of Old Colony Railroad Co., 1 B. T. A. 1067; Norwich & Worcester Railroad Co., 2 B. T. A. 215; Tunnel Railroad of St. Louis, 4 B. T. A. 596.

The petitioner says that control, within the meaning of the statute, is in the hands of the Erie Railroad by reason of the terms of the lease which impose limitations on its invested capital, its issuance of stock, its income, its expenditures for improvements, and its power of dissolution. These limitations on the acts of the petitioner perhaps do place a great measure of control over the petitioner in the hands of the Erie Railroad, but such control at most is a control over the property and business of the petitioner and does not constitute control of the stock. It is apparent that under the terms of the lease the petitioner is limited in the scope of its actions and it follows that to the extent of such limitation the stockholders are divested of the control which is ordinarily in the hands of the stockholders. Such control, however, is but a partial control and in our opinion does not meet the requirements of the statute. It will be noted that the words “ controls ” and “ controlled ” as used in section 240(b) of the Revenue Act of 1918 are not in any manner limited or qualified. In the absence of any qualification these words must be taken to mean full and complete control.

The petitioner alleges that the notice of deficiency from which it appeals constitutes a reversal of the holding of a former Commissioner on the question of affiliation and contends that one Commissioner is without authority to reverse the decision of his predecessor in office. The Commissioner in his answer to the petition filed denies that the petitioner and the Erie Railroad Co. were formerly held to be affiliated. No proof on this issue was offered by the petitioner and in view of the Commissioner’s denial we have no facts before us upon which to base a decision.

The petitioner also failed to offer any evidence in support of its claim for the computation of tax under section 328 of the Revenue Act of 1918, and we must accordingly approve the action of the Commissioner in this respect.

Judgment for the Commissioner.

SterNi-iageN dissents.


author: SteRNHageN :

text:
    Appeal of JAMES F. HOEY.
    Docket No. 6155.
    Decided September 25, 1926.

      William E. Howe, O. P. A., for the petitioner.

      George G. Witter, Esg., for the Commissioner.
   SteRNHageN :

The petitioner sold his laundry business in 1922 for $200,000 and in his tax return he included no part thereof, on the theory that the price was not in excess of its value on March 1, 1913. The deficiency letter is not before us, but we are told that the Commissioner regarded part of the sale price as gain and so determined the deficiency of something over $28,000. The petitioner now contends that the business assets had a certain value on March 1, 1913, including a value for good will and a value for buildings. But there is nothing in the record which attains the dignity of evidence. The petitioner took the witness stand but had no facts. His recollection was dim as to actual cost, he had kept no systematized accounts and such as he kept were not in court, and his idea of value on March 1, 1913, was based on no knowledge of what an intelligent estimate might require. Any findings of fact supported by such a record would be futile.

The petitioner now urges that if he is to be taxed on a gain from the sale, he is entitled to have such tax computed under section 206 of the Revenue Act of 1921. The Commissioner admits that the properties sold were capital assets but relies on the petitioner’s failure when he filed his return to elect to be so taxed. The statute does not restrict the time of election. Here the petitioner says he expressed no election because he believed he had a net loss and hence there -was no occasion for an election. We are of opinion that under such circumstances the capital net gain provision is still available to him to the extent it may be applicable. Since the facts before us are inadequate to enable us to apply this section we can only affirm the Commissioner’s determination.

Judgment for the Commissioner.


author: Lansdon :

text:
    Appeal of DETROIT VAPOR STOVE COMPANY.
    Docket No. 5663.
    Decided September 25, 1926.
    The amounts deducted by the petitioner as salaries of officers and employees for the taxable year were reasonable, and the income and profits-tax return for such year was made without fraudulent intent.

      Jesse I. Miller, Esg., for the petitioner.

      Harold Alien, Esg., for the Commissioner.

      The Commissioner has asserted a deficiency in income and profits taxes for the fiscal year ended June 30, 1920, in the amount of $33,860.92, to which he has added $16,930.46 as a penalty for alleged fraud. The controversy arises (1) from the Commissioner’s determination that certain amounts alleged to have been paid as salaries to officers and employees of the petitioner are unreasonable and incommensurate with services respectively rendered, and (2) that a part of such amounts was, in fact, a distribution of treasury stock, in the guise of salaries, made for the purpose of securing unauthorized deduction from the petitioner’s gross income for the taxable year, and that the income and profits-tax return in which such deductions were made for the benefit of the petitioner was false and fraudulent.
    FINDINGS OF FACT.
    The petitioner was incorporated under the laws of Michigan in 1895 by John S. Sherman and George H. Harms, for the manufacture and sale of vapor oil stoves, under patents previously granted them. Sherman’s two sons and Harms’ three sons were taken into the business in 1900, and since then the fathers and their five sons have devoted all their time to it. Since 1900 all have been stockholders in the company. Three of them have been directors for many years. C. J. Scheiman of Ft. Wayne, Ind., the third largest stockholder, is also a director. He attended the annual meetings of the board of directors, visited the plant two or more times each year, and had rendered very valuable services in the conduct of the business, especially in regard to financial- matters. P. C. Dulitz owned one share of common stock in 1920.
    The common stock was owned as follows:
    Shares.
    G. IT. Harms, Sec. & Treas- 4, 067
    J. S. Slierman, President_ 3, 297
    C. J. Scheiman, Director_ 3, 046
    L. A. Sherman, Gen’l. Supt___ 1, 975
    A. G. Sherman, Gen’l. Manager- 976
    E. P. Harms, Vice President_ 868
    A. G. Harms, Asst. Sec_ 410
    O. O. Harms, Collection Mgr_ 360
    P. O. Dulitz_¡_ 1
    Total_L_15, 000
    For more than twenty years the growth of the business was comparatively slow. The first few years the sa^es averaged about $50,000, but by 1914 had increased to $300,000. ¡ In 1916 the company inaugurated an extensive system of nationajl advertising which resulted in a rapid expansion and increase in the volume of business. Beginning with 1917 the sales in round figures were as follows:

      1917___ $670, 000
    1918_ 1, 000, 000
    1919___ 2.000,000
    1920- 3, 200, 000
    The number of employees for these years were approximately-

    The salaries as fixed for the company’s executives during the four years of expanding business from 1917 to 1920, inclusive, were as follows:

    The invested capital, net income, percentage of net income to invested capital and percentage of salaries to net income plus salaries were:

    In order to meet the large seasonal demand of the business for cash during the months of April, May, and June, each executive was paid only about one-half of his salary, monthly, from the beginning of the year. This was called his “ drawing account.” At or near the close of the fiscal year he could draw the remainder. All were encouraged, however, to leave what they could in the business— not as donations, but as loans. The company was a heavy borrower, usually at 90 days, and not infrequently its collections were slow. The dealers in its stoves usually stocked up for the ensuing year during the early spring months, and when, as sometimes occurred, they were slow in meeting their bills, the petitioner found it quite difficult to meet its own obligations. A very large percentage of the April and May orders were for immediate delivery. This required that the manufacturer have a large stock on hand by April 1, and that it meet payments for materials and labor before it received any large amounts from its customers. On June 30, 1920, the petitioner had outstanding $800,000 on 90-day notes, and other bills payable amounting to more than $200,000 of which some were overdue. Against these it had $90,000 cash, $750,000 accounts receivable, due in from two to four months, and $750,000 worth of raw materials and goods in process of manufacture. Collections were slow and dealers were not purchasing beyond their known needs. There was a considerable slump in sales during the last four months of the fiscal year.
    The sons of Sherman and Harms demanded increased pay for their services as executives. Their fathers, who had retained for themselves the authority to fix salaries, granted an increase from 50 to 100 per cent to the younger men but made no change in their own pay. This arrangement continued throughout the fiscal year 1919. The fiscal year ended J une 20, 1920, began remarkably well. At the end of the first six months it. was evident that total sales for the year would exceed $3,000,000 in volume. Some time in January, 1920, the younger executives again demanded an increase in salaries which was granted and by proper corporate action salaries were fixed for the elder Harms and for each of the three Shermans at $25,000, and each of the three younger Harms at $12,500 for the fiscal year, but the amounts withdrawn during such year were little, if any, in excess of the salary withdrawals in previous years.
    A slump in business developed in the late spring months of 1920; by J une there was a general and growing business depression, and the financial affairs were in such condition that it became apparent that the salaries fixed in January could not be paid without jeopardizing the credit and the solvency of the petitioner. All the executives drew as little as possible against their salary accounts with the result that at the end of the year their credit balances on the books were, respectively:
    J. S. Sherman. $27, 004. 00
    E. P. Harms_ 24, 349.42
    L. A. Sherman. 24,114.35
    G. H. Harms— 23, 066. 50
    A. G. Sherman. 20,305. 77
    O. G. Harms_ 11, 220. 00
    A. G. Harms_ 9, 554. 00
    Total-140,814.04
    The company had in June, 1920, unissued preferred capital stock of the par value of $113,760. It was agreed by proper corporate action that this should be issued in liquidation of the salary credits, with certain exceptions, the creditors to take the stock at par pro rata to the credits in their favor. E. P. Harms, although his salary for the year 1920 was only $12,500, had credit at the close of the year of $24,349.42, which was slightly in excess of 17 per cent of the total credits. The credit of J. S. Sherman was $2,604 in excess of his salary and that of each of the others from $900 to $4,700 less than his individual salary. The actual value of the preferred stock was about 70 per cent of par. E. P. Harms objected to taking 17 per cent of the preferred stock, and it was agreed that he should take 13 per cent and that the 4 per cent difference should be divided equally among G. H. Harms and the three Shermans. The distribution was made on or about June 30, 1920, and was as follows:

    In the latter part of July, 1920, at an informal meeting of five of the resident stockholders, the question arose as to whether the corporation should pay C. J. Scheiman some compensation for his valuable services to the company. It was decided that a payment of $13,000 would be a fair recognition of such services, and that such amount should be paid to him. On August 12, 1920, the regular directors’ meeting was held, and, for the first time, the matter was brought to the attention of Scheiman. It was decided that the stockholders who had received the preferred stock in June on account of credit balances on their salary accounts should, sell to the company, pro rata, $13,000 par value of their stock, taking credit on the company’s books therefor, and that such stock should be reissued to Scheiman. This was done.
    The petitioner filed its income-tax return for the taxable year in November, 1920, and deducted from its gross income the amount of $137,500, "which was the total of salaries authorized for the year for the seven executives involved. Of this amount, $62,500, the total of salaries authorized for the president, vice president, and secretary-treasurer, was included under the head of “ Officers Salaries ” and the balance was included under the head of “ Office Salaries.” Upon audit of such return, the Commissioner disallowed $110,500 of such deductions, and held that the payment of the authorized salaries in the manner hereinbefore set forth was an issue of capital stock in the guise of salaries for the- purpose of securing an unauthorized deduction from gross income for the benefit of the petitioner, and that the return in which such deduction was. taken under the heads of “ Officers ¡Salaries ” and “ Office Salaries ” was" false and fraudulent.
    Each of the seven exectitives' involved in this proceeding included the preferred stock received in liquidation of his salary credit in his income-tax return for the calendar year 1920 at the market value of such stock at the date of its receipt, which was about 10 per cent of its .par value.
    The balance sheets of the petitioner as of June 30, 1919, and June 30, 1920, are as follows:
    BALANCE SHEET

   OPINION.

Lansdon :

The case involves two questions.

1. Is the taxpayer’s claim of $131,500 as salaries for its seven officials “A reasonable allowance for salaries or other compensation for personal services actually rendered?”

2. Is the Commissioner’s claim that the taxpayer’s return is “ false or fraudulent ” sustained by the facts ?

Prior to June 30, 1919, the salaries of the officials and employees of the company had been conservatively low. In 1918 and 1919, two executives had received $5,000 each; two others, the president and secretary and treasurer, $4,000 each; and the other three, $3,000 each. Of these amounts, about 50 per cent had been considered by each of the payees as a drawing or checking account, payable semi-monthly, and the balance as not to be paid until near, the close of the fiscal year June 30, when the peak of the demand of the company’s seasonal need for funds had passed. During each of these years the net income of the company, including the salaries of its officials, was about $100,000. By the end of the calendar year 1919 it was manifest that the sales for the fiscal year would reach, and probably exceed, $3,000,000. The five younger executives, all stockholders of the petitioner and régularly employed in its operations, were of the opinion that their remuneration was entirely, incommensurate with the services required and performed. They were devoting all their time, and much overtime, to their duties, often leaving the office or plant as late as midnight. The period was one of inflation, when increasingly high salaries were the rule. They chafed under the comparatively low pay which they were receiving.

The salaries had up to this time been fixed by the two founders of the business. Early in January, 1920, at a general informal meeting of the officials, the sons freely expressed their discontent and demanded compensation ranging from $12,500 to $26,000 per year. The fathers took the matter under consideration, and, in a few days, announced that they had increased their own salaries and those of the general superintendent and general manager to $25,000 each pei year, and those of the three younger Harms to $12,500 each, and that such increases would be effective for the fiscal year ending June 30,1920. This was a regular and legal determination of the salaries. Appeal of Reub Isaacs & Co., 1 B. T. A. 45; Appeal of Max Levy & Co., 3 B. T. A. 422.

Taking into consideration the rapid expansion and the great volume of the business of the petitioner, the increased compensation was not incommensurate with the services and responsibilities of the executives. In view of this fact, and the facts that the salaries previously paid were meager, that the petitioner was a close corporation, and that the net profit available for dividends after the deduction of the increased salaries was nearly 38 per cent of the invested capital, we are of the opinion that the salaries, regularly determined in January, 1920, for the fiscal year ended June 30, 1920, in the total amount of $137,500, were reasonable, and that the taxpayer was entitled to deduct such amount from its gross income in making its income and profits-tax return for each year.

The increased salaries for the fiscal year ended June 30, 1920, legally determined by the directors, created an enforceable liability against the petitioner. Unfavorable business conditions due to the curtailment of credits throughout the country, beginning about the first of May, 1920, made it impossible for the petitioner to pay such salaries in cash without seriously endangering its credit and solvency. Mail orders had diminished in volume, collections were slow, and the petitioner’s cash position was a matter of grave concern to its executives even before June 30. At that date it had cash obligations due within the next three months in excess of $1,000,000, and its available cash was less than $100,000. Its profits from the year, in excess of $200,000, were frozen in accounts receivable and inventories. In these circumstances it was no more than sound and prudent business procedure to liquidate indebtedness by the issue of preferred stock to creditors willing to accept such payment.

The amount of $13,000 paid to C. J. Scheiman is not involved in (his controversy. It was neither authorized nor paid in the taxable year, nor does it appear from the record that it was deducted from the gross income of the petitioner for such year. We are without any clear evidence as to how this amount.was treated, either by the petitioner in the income and profits-tax returns for the year involved or by the Commissioner upon the audit of such returns, but we are convinced that regardless of the propriety of such payment the amount thereof is not a proper deduction from the petitioner’s gross income for the taxable year.

The evidence is conclusive that the salaries paid, to the executives of the petitioner for the year ended June 30, 1920, in the amount of $137,500 were reasonable, and that its income and profits-tax return for such year was not false and fraudulent.

Order of redetermination will be entered on 15 days’ notice, under Rude 50.


author: Marquette :

text:
    Appeal of ISIDORE STEIN.
    Docket No. 5313.
    Decided September 25, 1926.

      Abraham Tumarojf, Esq., for the petitioner.

      F. 0. Graves, Esq., for the Commissioner.
   Marquette :

This appeal is from the determination of a deficiency m income tax for the year 1920 in the amount of $826.53.

FINDINGS OF FACT.

The petitioner is an individual residing at Brooklyn, N. Y. He filed an income-tax return for the year 1920 and reported a net income of $4,306.77. Upon audit of the return the Commissioner increased the net income reported therein by the amount of $6,140.80, representing the amount which the petitioner had deducted on account of an alleged opening inventory for the year 1920, and by the amount of $2,420, representing salary drawn by the petitioner and not reported in his return. At the hearing the petitioner failed to produce any competent evidence which would warrant a finding that the facts are other than as determined by the Commissioner.

Judgment for the Commissioner.


author: Smith:

text:
    TILLER-GLENN COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 6973.
    Decided September 25, 1926.
    Accounts neither ascertained to have been worthless nor charged oft the petitioner’s books of account in the taxable year are not deductible from gross income.

      George T. Adams, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits tax for the year 1919 in the amount of $396.45, arising from the disallowance of a deduction from gross income of alleged bad debts aggregating $667.25.
    FINDINGS OF FACT.
    The petitioner is a Georgia corporation with its place of business at Carlton. It is engaged in the general mercantile business; it also operates a garage and deals in fertilizers. It does a large credit business. At the close of 1919 it determined that certain of its accounts were worthless and charged them off its books of account. It did not, however, make an exhaustive examination of its accounts receivable for the purpose of determining worthless accounts. Subsequent to 1919, it determined that eleven accounts receivable, aggregating $667.25, were -worthless on December 81, 1919. These accounts had not been charged off the petitioner’s books of account subsequent to the year 1919. In the reaudit of the return the Commissioner has refused to allow a deduction from gross income of alleged bad debts in the amount of $667.25 upon the ground that they were neither ascertained to be worthless nor charged off the petitioner’s books of account within the year 1919.
   OPINION.

Smith:

In this proceeding the petitioner claims the right to deduct from gross income $667.25 for bad debts which it claims were worthless on December 31, 1919. They have never been charged off the petitioner’s books of account. The taxing statute permits the petitioner to deduct from gross income “ debts ascertained to be worthless and charged off within the taxable year.” Section 234 (a) (5). The evidence shows that the petitioner made no ascertainment of the worthlessness of the eleven accounts receivable, totaling $667.25, during the year 1919, and that it did not charge them off its books of account during that year.

Judgment for the Commissioner.


author: Phillips :

text:
    Appeal of WINGOOD REALTY COMPANY.
    Docket No. 6576.
    Decided September 25, 1926.
    In tbe absence of unusual circumstances the price at which property is sold establishes its value, and in the absence of any showing of such circumstances opinion evidence will not be regarded as sufficient to establish a value greatly in excess of that shown by a 6ona fide transaction.

      Benjamin Mahler, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency of $12,-616.01 in income and excess-profits taxes for the calendar year 1919, and alleges three errors — (1) the refusal of the Commissioner to grant-personal service classification; (2) the refusal of the Commissioner to grant special assessment under sections 327 and 328 of the Revenue Act of 1918; and (3) the failure of the Commissioner to allow a paid-in surplus on account of certain leaseholds acquired by the taxpayer upon incorporation. The first assignment of error was withdrawn upon the hearing.

      FINDINGS OF FACT.
    The taxpayer is a New York corporation with its principal office in New York City. It was incorporated in February or March, 1914, with a capitalization of $10,000 par value common stock. Upon incorporation it issued all of its capital stock to William Smith and M. R. Goodwin, and at or about the same time entered into certain leases previously negotiated by these two individuals.
    The leases acquired at the time of organization were as follows:
    A- lease for five years and seven months from March 1, 1914, covering the premises at 55 West 76th Street, Manhattan, at a monthly rental of $683.33. The leased property was a seven-story elevator apartment, 60 feet by 102 feet, 2 inches.
    A lease for five years and seven months from March 1, 1914, covering premises 330 West 95th Street, Manhattan, at a monthly rental of $1,229.17. This lease was negotiated by Smith and ivas executed by the corporation on or about March 1, 1914, and contained a provision for a renewal for five additional years. The leased premises comprised a seven-story, elevator apartment, 100 by 100 feet.
    A lease for four years and seven months from March 1, 1914, covering the premises 566 West 167th Street, Manhattan, at a monthly rental of $1,333.33. This lease was originally made to William Smith in February, 1914, and was assigned to the petitioner on February 25, 1914. The leased premises comprised a six-story, elevator apartment.
    A lease for three years from October 1, 1913, covering the premises 511 West 146th Street, New York City, at a monthly rental of $333.33, with a privilege of renewal for an additional four years. This lease was originally made to William Smith and was assigned by him to the corporation at the time of its organization.
    A lease covering the premises 523 West 187th Street, Manhattan, for three years and seven months from May 1, 1914, at an annual1 rental of $1,500, providing for a renewal for three additional years. This lease was negotiated by Goodwin but entered into by the corporation on May 1, 1914.
    Thereafter during 1914 and 1916 the corporation entered into various other similar leases ■ which had been negotiated by Smith .or Goodwin.
    The Commissioner refused to grant the taxpayer classification •as a personal service corporation and computed the deficiency under ;section 302 of the Revenue Act of 1918.
   OPINION.

Phillips :

The taxpayer was incorporated in February or March, 1914, and upon its incorporation entered into three leases previously negotiated by its incorporators and took by assignment two leases which had been entered into by these incorporators shortly prior to the date of the assignment. No consideration was paid t.o the lessors other than an undertaking to pay the monthly rental. It was shown that the amounts of rent which should be received from the property exceeded the rent to be paid and the estimated expenses, and upon that basis opinion evidence of two qualified witnesses was introduced in an attempt to establish a substantial cash value for each of such leases for the purpose of invested capital and exhaustion deductions. On the other hand, Smith testified:

At that time it was very easy to obtain leases. There were a lot of them around and the owners were very glad to unload their property where you would guarantee them income and I had a chance to pick up dozens of leases I had to be very careful.

The statute provides for the inclusion in invested capital of the “ actual cash value ” of property paid in for stock. In the absence of unusual circumstances, the price at which property is sold ordinarily establishes its value. There has been no showing here that the lessors were defrauded or that they did not know the full rental value of their property. There has been no showing that any greater rental could have been obtained by them under similar leases from any other source. Presumably the lessors secured as great a return as possible.

The testimony establishes that realty was dormant in 1914, that landlords feared losses from the operation of their property and were very willing to enter into leases securing them a certain return. The story of such transactions is not invariably one of profit to the lessee and while the incorporators may have used good judgment and the leases did prove to be profitable, this does not in our opinion establish any cash value at the time of acquisition in excess of the value established by negotiations between lessor and lessee. We are not willing in such cases, with no showing of any unusua] circumstances surrounding the transaction, to substitute opinion evidence of values for those established by an actual transaction.

The Commissioner computed the deficiency under section 802 of the Bevenue Act of 1918. Neither party introduced any evidence as to what, if any, invested capital the taxpayer had. The determination of the Commissioner must be approved.

The deficiency is redetermined to he $12,-616.01. Order will he entered accordingly.


text:
    ISLAND LINE SHIPPING COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 3414.
    Decided September 25, 1926.
    1. Value of certain property at March 1, 1913, determined from evidence.
    2. Depreciation of buildings must be considered in computing loss or gain from the sale thereof.

      John M. Platt, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    The Commissioner asserts a deficiency in income and profits taxes for the fiscal year ended November 30, 1919, in the amount of $2,327.14, all of which is in controversy. The issues are (1) the value of a certain parcel of real estate at March 1, 1913, and (2) whether accrued depreciation should be considered in the computation of profit realized from the sale of buildings. The parties agree that the value of the property at March 1, 1913, was greater than cost.
    FINDINGS OF FACT.
    The petitioner is a California corporation with its principal office at San Francisco. In 1906 it erected a wooden building on leased land at a cost of $28,221.71, and subsequently, at August 3, 1911, it purchased such leased land, being a portion of Mission Block No. 145 of the City of San Francisco, at a cost of $39,958. In the fiscal year ended November 30, 1919, it sold such land and building and received therefor the net amount of $82,787. In its income and profits-tax return for such year, it included a realized gain in the amount of $14,565.29 in its gross income. This reported gain represented the difference between the cost and the net sales price of the property.
    Upon audit of the petitioner’s income and profits-tax return for the taxable year, the Commissioner held that the realized gain from the transaction in question was $24,731.70, and, on February 20, 1925, issued the notice of deficiency which is the basis of this appeal. In arriving at such result he determined that the value of the land was $41,911.10, and of the building $23,088.90, at March 1, 1913, and in so doing merely accepted the figures of value at which such property was carried on the books of the petitioner at that date. In computing the profit from the sale in 1919, he deducted from the basic value of the building the amount of $6,926.70, on account of depreciation accrued on the building from such date until the date of the sale, and thereby arrived at a cost of land and building of $58,073.30 as the basis for computing gain from the transaction. The result of his computation was that petitioner realized a taxable profit in the amount above set forth.
    The value at March 1, 1913, of the property involved in this controversy was $80,000.
   OPINION.

Lansdon:

The petitioner alleges that the Commissioner erred (1) in adopting the value.of the property as carried on its books at March 1, 1913, as the true market value, which value it alleges was substantially greater at that date, and (2) in the addition of depreciation sustained on the building between March 1, 1913, and the date of sale to the profit actually realized from such sale, which profit it contends must be measured by the difference between the fair market value at March 1, 1913, and the net sales price.

To establish its contention that the market value on March 1, 1913, was higher than that reflected in its books, the petitioner introduced five reputable witnesses, all of whom testified to familiarity with the value of real estate in the neighborhood of the land in question, both at March 1, 1913, and at the date of sale. All agree that such land having a frontage of 100 feet, exclusive of the building, had a value of at least $60,000 at March 1, 1913. It is also in evidence that a corner lot located only 75 feet from the land here in controversy was sold in 1912 or 1913 for $1,400 per front foot and that inside property, such as that of the petitioner, is worth about one-half as much as corner locations. The Commissioner introduced no rebutting testimony, and relies entirely on a value of $65,000, at which the petitioner carried the property on its books at March 1, 1913.

The uncontradicted evidence offered by the petitioner convinces us that the value of the property in question at March 1, 1913, was $80,000, of which the amount of $23,088.90 should be allocated to the building, and is subject to depreciation from March 1, 1913, until the date of sale at an annual rate of 5 per cent, for the purpose of computing the gain realized from the transaction. We have already decided the second issue adversely to the contention of the petitioner. Appeal of Even Realty Co., 1 B. T. A. 355.

Order of redetermination will loe entered oñ W days' notice, wider Rule 50.


text:
    M. F. TARPEY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 2948.
    Decided September 25, 1926.
    Actual losses proved by competent evidence are the only basis for deduction for obsolescence of tangible property.

      Paul N Marrin, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    The Commissioner asserts deficiencies in income and profits taxes for the years 1918 and 1919, in the respective amounts of $19,091.82 and $28,317.62, or a total of $47,409.44. The controversy arises from the disallowance of certain deductions from the income of the petitioner for the taxable years on account of obsolescence of wine vineyards and losses of profits sustained as a result of national prohibition legislation.
    BINDINGS OB BACT.
    The petitioner is a citizen of the United States, and a resident of the State of California at Tarpey’s Vineyard, where he is engaged in the production of wine, raisin and table grapes. At January 1, 1918, he was the owner and operator of vineyards comprising 1,150 acres of which 840 acres were planted to wine grapes and the remainder to raisin and table grapes. In 1918, he abandoned and destroyed the vines on 200 acres of wine-grape vineyards, leaving 640 acres planted to wine grapes.
    In his income and profits-tax returns for 1918 and 1919, the petitioner made the following deductions from his gross income for the respective years on account of losses alleged to have been sustained as a result of national prohibition legislation: 1918, obsolescence $56,539.90, loss of profits $61,727.32, or a total of $118,267.22; 1919, obsolescence $61,879.89, loss of profits $67,338.90, or a total of $129,-018.79. Upon audit the Commissioner disallowed such deductions and determined the deficiencies here involved.
    It is stipulated that the prices per ton received for wine grapes sold by the petitioner were as follows: 1918, $75.36; 1919, $99.92; 1920, $126.48; 1921, $113.84; 1922, $81.52; 1923, $76.72; 1924, $72.56.
   OPINION.

Lansdon :

The petitioner asks for the deduction of $118,267.22 and $129,018.79 from his gross income for the years 1918 and 1919 on account of obsolescence of 640 acres of wine-grape vineyards and loss of profits from operation of the same during the respective years, and relies on the provisions of section 214 (a) (8) of the Eevenue Act of 1918, which is as follows :

A reasonable allowance lor exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

There is no dispute of the reasonable allowance for the exhaustion, wear and tear of the petitioner’s vineyards. The parties agree on the basic value per acre at March 1, 1913, on the useful life of vineyards of the type owned by the petitioner, on the rate of depreciation, and on the total amount of deductible depreciation. Such depredation has been computed, deducted, and allowed. The only question for our consideration is whether the petitioner is entitled to further deductions from his gross income for the taxable years on account of obsolescence and loss of profits, resulting from national prohibition, in the amounts set forth in our findings of fact.

It is obvious that this petitioner seeks to apply the provisions of the law to his advantage on a purely hypothetical basis. If Federal prohibition legislation had totally destroj^ed the market for wine grapes, the petitioner might then have been entitled to a reasonable allowance for the obsolescence of his wine-grape vineyards; but even in such an event, not proved in this proceeding, we know of no law that would authorize the deduction of estimated profits from gross income in the determination of Federal tax liability. The record completely refutes the theory and the argument of the petitioner. The market for wine grapes was not destroyed in 1918. Instead of losses dming the taxable year, it is proved by the stipulation that the taxpayer obtained higher prices for his crops, and it is a fair presumption that such increase in receipts insulted in increased profits.

Judgment for the Commissioner.


author: LaNsdoN :

text:
    JOHN R. McCOY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 6538.
    Decided September 25, 1926.

      M. L. Roberts, Esq., for the petitioner.

      D. D. Sheppard, Esq., for the respondent.
   LaNsdoN :

The Commissioner asserts a deficiency in income tax for the year 1921 in the amount of $151.50. The petitioner alleges that the Commissioner erred in disallowing a loss claimed to have been sustained in the sale of a house. To decide the questions involved, the Board must determine whether the transaction in which the house in controversy was acquired was entered into for profit and, if so, whether the sale of such property in the taxable year resulted in gain or loss.

In the state of the record it is not necessary to determine whether the residence was acquired in a transaction entered into for profit. The property w^as acquired subsequent to March 1, 1913, but the petitioner has furnished no satisfactory evidence of cost. Substantial improvements, estimated to have cost $6,000, were made, but at some date not disclosed by the record. We are not advised as to the nature of the building. Lacking practically all the data necessary to the computation of gain or loss resulting from the sale of a residential property acquired subsequent to March 1, 1913, we are without any basis for disturbing the determination of the Commissioner.

Judgment for the Commissioner.