author: Arundell:

text:
    Thomasville Ice & Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8527.
    Promulgated December 29, 1927.

      James L. Respess, G. P. A., for the petitioner.

      W. F. Wattles, Esq., for the respondent.
   OPINION.

Arundell:

An overassessment having been found for the year 1920, we have no jurisdiction for that year and the proceeding with respect thereto is dismissed. Cornelius Cotton Mills, 4 B. T. A. 255.

As to the years 1918 and 1919 the petitioner’s complaint is that the respondent has not allowed as depreciation deductions the amounts “ which he states has been allowed.” The Commissioner, in his brief, concedes that the amounts set forth in the deficiency letter as depreciation allowances are not the amounts he actually allowed in computing the deficiency. He further says that the amounts actually allowed are less than those given in the deficiency letter, and on this the parties agree. The only evidence offered in this case consists of the letters from the Commissioner’s office, which are referred to in the findings of fact. They do not in any respect show wherein, if at all, the Commissioner erred. No proof was offered to show the amount of depreciation to which the petitioner is entitled and until that is shown we can not say that the Commissioner erred in his determination of the amount allowable. No effort was made by the petitioner to show error on the part of the Commissioner either in the rates, used or the basis to which the rates were applied.

Judgment wild he entered for the respondent.

Considered by LaNSdoN, Sternhagen, and GkeeN.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    W. S. Bronson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 20527.
    Promulgated December 29, 1927.

      'William T. Black, Esq., for the petitioner.

      W. F. Gibhs, Esq., for the respondent.
   OPINION.

Smith:

Section 214(a) (6) of the Eevenue Act of 1924 provides:

Losses sustained during the taxable year, of property not connected with the trade or business (but in the case of a nonresident alien individual only property within the United States) if arising from fires, storms, shipwreck, or other casualty, or from theft, and if not compensated for by insurance or otherwise. The basis for determining the amount of the deduction under this paragraph, or paragraph (4) or (5), shall be the same as is provided in section 204 for determining the gain or loss from the sale or other disposition of property.

Petitioner insists that the loss resulting from damage to his automobile while being driven by his daughter on a pleasure trip is deductible from gross income in his income-tax return for 1924, under the above-quoted provision of the taxing act. He relies in support of this contention upon the opinion of the Circuit Court of Appeals, Second Circuit, in Shearer v. Anderson, 16 Fed. (2d) 995.

The Board has had occasion to consider a number of similar cases. In Clinton Graham, 1 B. T. A. 775, the claim of the petitioner to deduct the loss from gross income was denied but no opinion stating the grounds for the denial was written. In Fred J. Hughes, 1 B. T. A. 944, the question before the Board was the right of the petitioner to deduct from gross income in 1920 certain expenses of litigation paid during that year for the recovery of liquors seized by police officers or an estimated amount for the value of the liquor not returned to him in 1921. We stated:

At the hearing counsel for the taxpayer argued that storage charges for the liquor and court costs were a legal deduction from gross income under the provisions of the taxing act which permits the deduction from gross income of losses sustained from a casualty. Section 214 (a) (6) of the Eevenue Act of 1918. We do not thinlc that the storage charges and court costs are deductible from gross income as a loss from a casualty similar to “fires, storms, shipwreck,” and the rule of ejusdem generis is applicable here. In order that a loss sustained by an individual may be deductible from gross income as a casualty under this provision of law it must be made to appear that the casualty was of a similar character to a fire, storm, or a shipwreck. We do not discover such a similarity in the case at bar. The seizure by police officers and revenue agents of the taxpayer’s private stock of liquors was not such a casualty as is contemplated by section 214 (a) (6) of the Revenue Act of 1918. furthermore, it is tó be noted that the payment by the taxpayer of the storage charges and court costs, and the premium upon the bond, was purely voluntary upon his part, although we may assume that it was to the taxpayer’s interest to protect his right to the possession of the private stock of liquors, the expenditure of the money for the storage charges, etc., was purely a personal expense.

In Charles N. Burch, 4 B. T. A. 604, a claim for the destruction of an automobile similar to the claim made by the petitioner at bar was disallowed upon the basis of the decisions of the Board in Clinton Graham, supra, and Fred J. Hughes, supra. The Graham and the Burch decisions are not in line with the decision of the Circuit Court of Appeals, Second Circuit, in Shearer v. Anderson, supra, which we now regard as correctly construing the statute. Upon the authority of that decision the claim of the petitioner is sustained.

Reviewed by the Board.

Judgment will he entered on 15 days' notice, under Rule 50.

Littleton, Trammell, and MoRRis dissent.


author: Smith :

text:
    Union Paper Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6402.
    Promulgated December 31, 1927.

      James D. Williams, Esq., for the petitioner.

      Grawoille S. Borden, Esq., for the respondent.
   OPINION.

Smith :

The petitioner contends that the patent application which it owned on March 1, 1913, and for which the patent was issued by the United States Patent Office the following year, had a definite minimum value at March 1,1913, of $35,000, and that for each of the taxable years 1917 and 1918 it is entitled to a deduction on account of the exhaustion of the patent equal to one-seventeenth of the March 1, 1913, value of the patent application. The respondent contends that the patent application had no determinable value at March 1, 1913, and that since the patent was acquired by the petitioner subsequent to that date the only basis for the statutory deduction for exhaustion of the patent is its cost to the petitioner and not the March 1, 1913, value of the patent application.

In'support of its claim for a March 1, 1913, value of $35,000 for the patent application, the petitioner has shown its earnings over a period of four years next preceding the basic date and has shown the savings and labor cost which resulted to it from the use of the invention in carrying on its manufacturing business. For the four-year period 1909 to 1912 the petitioner’s net earnings, as shown by its books of account, were approximately $63,500. The petitioner claims that its net earnings for this period and for several prior years are understated in its books by reason of the fact that many items of maintenance, renewals and replacements of machinery and equipment had been erroneously charged to the expense account, whereas under proper bookkeeping and accounting methods many of such items might have been charged to the capital account. It claims that certain items representing salaries paid to employees engaged in developing new machinery, including the invention here under consideration, which were charged to the expense account should have been charged to the capital account and that certain losses which it sustained during the period and which are reflected in the net income shown in its books were not connected with its regular business and should not be considered in determining net earnings for the purpose of valuing the patent application.

The petitioner has submitted in evidence numerous schedules and computations prepared from its books by accountants showing the result to be reached in determining net income over the four-year period in question by revising the books as indicated and making necessary adjustments for depreciation. Capitalizing the average net earnings over the four-year period at 10 per cent and allowing a fair rate on the average tangibles, the petitioner has determined an average value for the patent application and the other patents used in its business of approximately $110,068.72. Deducting $75,000, which the Commissioner is said to have allowed as the value of other patents, the petitioner has determined a value for the patent application under consideration of approximately $35,000, which it contends is the proper value upon which to base the deduction for exhaustion now sought. The respondent has objected to the materiality of this evidence and contends that the total earnings of the petitioner over such period are not competent evidence to prove the March 1, 1913, value of the patent application.

The petitioner’s contentions that a patent application is property and as such is capable of definite valuation and that the value of the property must be determined by a consideration of all the facts which tend to establish value on the basic date are sound. Individual Towel & Cabinet Service Co., 5 B. T. A. 158. But the earnings of a business in which a patent or an invention is used taken alone are not a criterion of the value of such patent or invention. The fact that the petitioner here had developed an invention which it had used in its business along with other patents in earning substantial profits over a period of years prior to March 1, 1913, certainly does not establish the fair market value of the application for a patent on the invention which was pending on that date. In the cases referred to by the petitioner and others, where we have used prior and subsequent earnings as the basis for determining the value of patents and patent applications at a given date, we have first ascertained that these earnings or a certain part of them were attributable to the particular patent or patent application under consideration and that all of the attending circumstances supported the value thus determined. We can not determine from the evidence here what part, if any, of the petitioner’s earnings over the period 1909 to 1912 may be certainly attributed to the box-machine invention. During these years the petitioner used several other patented inventions each of which performed an important function in its manufacturing process. Assuming that the Commissioner has previously placed an aggregate value of $75,000 upon the other patents used, of which there is no direct evidence before us, still we can not say that such value ,is a proper basis to be used in allocating the petitioner’s earnings to the several patents and inventions used. Moreover, the evidence fairly establishes that the petitioner had good will of a substantial value to which its earnings must in part have been attributable.

It has been shown that the box machine performed a necessary function in assembling the boxes and that it did the work more economically than it was done by hand before the machines were brought into use; that by use of the box machines the petitioner was enabled to increase its output of certain types of boxes and perhaps was able to secure and fill larger contracts for these boxes than it could have without the use of the box machines. We may conclude, therefore, that the box-machine invention was of some value to the petitioner in carrying on its business. We do not know, however, what this value was in terms of dollars or that it had any marketable value whatsoever. It is not shown that there was ever any demand for the invention by other manufacturers of paper boxes. It is not shown that the invention was in any way unique. The evidence indicates that there were other machines available or capable of performing the same functions. We have no evidence showing the state of the art as it existed on the basic date. Certainly, a reasonably prudent investor would have inquired into these things before purchasing the patent application. Cf. Cheatham Electric Switching Device Co., 1 B. T. A. 984.

Upon the evidence we are unable to determine what, if any, was the fair market value at March 1, 1913, of the patent application under consideration, or the cost of the patent when subsequently acquired. It is, therefore, not necessary to consider the question whether exhaustion of the patent for the years 1917 and 1918 should be computed upon the basis of the March 1, 1913, value of the patent application or the cost of the patent to the petitioner.

Judgment will be entered on 15 days’ notice, under Bule 50.

Considered by Trussell, Love, and Littleton.


author: Love:

text:
    Edward S. Phillips, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2376.
    Promulgated December 31, 1927.

      LeRoy L. Wallace, Esq., for the petitioner.

      W. F. Wattles, Esq., for the respondent.
   OPINION.

Love:

The stipulation disposes of the controversy with respect to amounts of gain or loss on real estate sales, the inclusion in income of dividends received, and deductions of interest. This leaves for. decision only the questions, (1) whether or not a deductible loss was sustained upon the reacquisition of the McGrath farm by petitioner in 1920; and (2) whether or not he is entitled to deduct as bad debts the notes mentioned in the stipulation, in paragraph 3, under 1920.

The sale of the McGrath farm in 1918 constituted a completed transaction, and the profit thereon was properly included in income of that year. The reacquisition in 1920, at foreclosure sale, was a separate transaction and the price paid therein is the basis upon which to compute gain or loss on future disposition of the property. Appeal of Manomet Cranberry Co., 1 B. T. A. 706. Therefore, no part of the profit on the sale in 1918 may be deducted as a loss in 1920. However, the petitioner received as a part of the consideration on that sale a second mortgage of $4,000, given by the purchaser. This mortgage was reckoned at face value in arriving at the profit. Petitioner thereafter assigned it to a third party and guaranteed its payment. Upon the mortgagor’s default, petitioner was obliged to pay. In the foreclosure proceedings, after payment of the amount due on the first mortgage and the expenses, there remained only $127.14 applicable to the second mortgage. As to the balance of $3,872.86 of principal, this mortgage became worthless. The petitioner is entitled to deduct the latter amount as a bad debt.

There were also given, as part of the consideration in the sale in 1918, notes totaling $900, payable January 1,1919. Counsel for petitioner in his brief states these notes also were not paid, but the evidence does not disclose whether they were paid or not, and we cannot accept this statement as a substitute for evidence.

During the tailing of the depositions, the respondent moved to strike out the testimony relating to the notes made by Mowbray, Jones, Bowley and Jackson. This motion must be granted, since these notes are not within the issues raised by the pleadings. For the same reason, we are precluded from considering the testimony in regard to the notes of Milford Phillips and J. H. Phillips. See W. A. Roth v. Commissioner, 4 B. T. A. 834; Appeal of Dixie Manufacturing Co., 1 B. T. A. 641.

Judgment will be entered on 15 days’ notice, under Rule 50.

Considered by Tkttssell, Smith, and Littleton.


author: MaRQuette:

text:
    Langley & Michaels Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6420.
    Promulgated January 3, 1928.

      Warren Olney, Jr., Esq., and Edwm S. Pillsbury, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   MaRQuette:

This proceeding is for the redetermination of a deficiency in income and profits tax for the year 1920 in the amount of $2,287.43. Only so much of the deficiency -is in controversy as arises from the exclusion from the petitioner’s invested capital of certain promissory notes given to the petitioner in payment for shares of its capital stock.

FINDINGS OF FACT.

The petitioner is and was during the year 1920 a California corporation engaged in the wholesale drug business at San Francisco. Its outstanding capital stock during the year 1920 was of the par value of more than $1,200,000, of which more than 66 per cent was owned by Henry Michaels and his son, C. F. Michaels.

On January 2, 1920, the petitioner’s board of directors adopted the following resolution:

Resolved, that the president and the secretary of this corporation, Lañóles & Michaels Company, be and they are hereby authorized and empowered, in their discretion, to issue shares of the common capital stock of this corporation to any employee or stockholder thereof at not less than par nor more than the book value of each share on the thirty-first day of December next preceding said date of sale, less the amount of dividends declared on each of said shares subsequent to said date. The president and secretary are hereby authorized to accept the promissory note of the purchaser in substantially the form set out in the following agreement as full or part payment for any shares of such common capital stock, sold as aforesaid. Any certificate of stock so issued, however, must be endorsed by the party to whom issued and deposited with O. F. Michaels as escrow — holder upon the terms and conditions set forth in the following form of agreement.

Pursuant to the resolution of January 2, 1920, the petitioner issued on that date 950 shares of its capital stock to the persons, in the amounts, and for stated considerations, as follows:

In payment for the stock so issued to them the persons named gave to the petitioner on the same date their promissory notes in the aggregate amount of $119,061.50. The petitioner credited the amount of the notes to capital and surplus, $95,000 to capital and $24,061.50 to surplus, and a charge of the same amount was made to bills receivable. The promissory notes were payable in 10 monthly installments, with interest at the rate of 5 per cent per annum, and all of them, except two on which there is an aggregate balance due of $4,437.95, have been paid in full of principal and interest. Dividends, including two stock dividends, have been paid on the stock, but the payment of the dividends was entirely disconnected from and bore no relation to payments on the notes.

The persons named to whom the petitioner’s capital stock was issued pursuant to the resolution of January 2, 1920, were old and faithful employees of the petitioner of from 15 to 41 years of service and included the petitioner’s secretary, its treasurer and certain salesmen and department managers. Their financial responsibility and solvency was known to the petitioner’s officers and the promissory notes which they gave to the petitioner in payment for the shares of stock were considered to be and were worth their face value.

When the certificates for the 950 shares of stock mentioned were issued they were immediately endorsed by the employees to whom they were issued and deposited with C. F. Michaels in accordance with the. agreement of purchase, which provided that the stock certificates should be held in escrow by Michaels, and that if and when any of the stockholders should cease to be employed by the petitioners, his shares of stock should revert to the petitioner upon his being paid therefor in cash, the book value of the stock as of December 31 of the preceding year, less any dividends paid subsequent thereto. The following recital is found in the opening paragraph of the escrow agreement:

Whereas the stockholder has concurrently herewith purchased from the company amcl is now the owner of fully paM shares of its common capital stock evidenced by certificate No.-. * * *

The rights of the stockholders to vote their stock, their right to share in the dividends and the other incidents of ownership, were not restricted by the escrow agreement and it especially provided that the stockholders should be liable to assessment and calls upon their stock.

The petitioner in its income and profits-tax return for the year 1920 included in invested capital the face value of the notes mentioned. The respondent, however, excluded the amount of said notes in excess of the amount of the cash installments which were paid to the petitioner on the notes during the taxable year.

Judgment will be entered for the petitioner on the issue raised on 15 days' notice, under Rule 50.

Considered by Phillips and Milliken.


author: Maequette :

text:
    Associated Dental Supply Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5650.
    Promulgated January 3, 1928.

      Neil E. Larlcin, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Maequette :

The only question raised by this proceeding is whether the salaries of $25,000 and $18,750 paid by the petitioners to Parker in the years 1920 and 1921, respectively, are unreasonably large.

The Revenue Act of 1918 makes the following provision:

Seo. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.

The question of reasonableness of salaries paid by corporations has been frequently before the- Board and no extended discussion is necessary. The evidence shows that the volume of business was large and that it was due almost entirely to the efforts of Parker. He gave to the business his entire time and energy, with very successful results. Measured by the results accomplished, we think that the salaries paid to Parker for the taxable years in question were not excessive or unreasonable for the services rendered. See Appeal of Woodcliff Silk Mills, 1 B. T. A. 715; Appeal of Union Dry Goods Co., 1 B. T. A. 833; Appeal of Frank-Sievers Undertaking Co., 3 B. T. A. 94; Appeal of A. R. Swartz & Co., 5 B. T. A. 264.

Judgment will be entered on 15 days' notice, under Bule 50.

Considered by Phillips and Milliken.


author: Maequette:

text:
    Pelican Bay Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6354.
    Promulgated January 3, 1928.

      Clarence Goonan, Esq., and A. Porter Bobinson, O. P. A., for the petitioner.

      Thomas P. Dudley, Esq., for the respondent.
   OPINION.

Maequette:

The petitioner contends that as the result of the destruction of its mill and the subsequent replacement thereof, it sustained a loss in the amount of $123,278.81, and that as it did not know in 1919, the year in which the fire occurred, what the replacement cost of the mill would be, it is entitled to deduct the amount of the loss in the year 1920, when the replacement was completed and the cost thereof fixed and ascertained. The respondent contends that the petitioner in fact sustained no loss but on the other hand realized a gain which, but for the relief provided by section 234 (a) (14) of the Revenue Act of 1921, would be taxable, and that the excess of the cost of the new mill over the amount of the insurance received on the old mill should be capitalized.

The Revenue Act of 1918 provides that in computing the net income of a corporation there shall be allowed as a deduction “losses sustained during the taxable year and not compensated for by insurance or otherwise.” It also provides that the basis for ascertaining the gain derived or loss sustained from the “ sale or other disposition ” of property acquired after March 1, 1913, shall be the cost thereof. Section 234 (a) (14) of the Revenue Act of 1921 provides that:

(14) If property is compulsorily or involuntarily converted into casia or its equivalent as a result of (A) its destruction in whole or in part, (B) theft or seizure, or (0) an exercise of tlio power of requisition or condemnation, or the threat or imminence thereof; and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, or in the acquisition of 80 per centum or more of the stock or shares of a corporation owning such other property, or in the establishment of a replacement fund, then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds. The provisions of this paragraph prescribing the conditions under which a deduction may be taken in respect of the proceeds or gains derived from the compulsory or involuntary conversion of property into cash or its equivalent, shall apply so far as may be practicable to the exemption or exclusion of such proceeds or gains from gross income under prior income, war-profits and excess-profits tax Acts.

We can not subscribe to the petitioner’s contention that as the result of the destruction of its mill and equipment by fire it sustained a loss within the meaning of the Revenue Act of 1918. It appears that the mill and equipment were erected or acquired subsequent to March 1, 1913, at a cost of $124,641.25; that their depreciated cost at the date of the fire was $98,202.83, and that insurance was collected in the amount of $164,852.64. The petitioner, therefore, by this involuntary conversion of the property, instead of sustaining a loss, realized a taxable gain to the extent that the amount of .insurance collected exceeded the depreciated cost of the property. Appeal of Piedmont-Mt. Airy Guano Co., 3 B. T. A. 1009. However, since the petitioner used the entire amount of insurance in replacing the destroyed property, it is entitled, under section 234 (a) (14) of the Revenue Act of 1921, to deduct from gross income an amount equal to the gain derived from the receipt of the .insurance. In other words, the deduction exactly offsets the gain. But section 234 (a) (14) can not be construed to authorize in any case a deduction greater than the amount of gain actually realized from the conversion of the property.

The petitioner has cited several decisions of this Board in support of its petition but we do not consider that they are in point here and we deem it unnecessary to discuss them.

For the reasons stated we are of the opinion that the petitioner did not sustain a loss from the destruction of its mill, and we are also of the opinion that the respondent properly capitalized the amount by which the cost of the new mill exceeded the amount of the insurance collected on the old mill.

Judgment will be entered for the respondent.

Considered by Phillips and Milliken.


text:
    B. F. Joel, Petitioner, v. Commissioner of Internal Revenue, Respondent. L. B. Joel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6801, 6802.
    Promulgated January 3, 1928.

      Arthur Reyman, Esq., for the petitioners.

      M. N. Fisher, Esq., for the respondent.
   OPINION.

Maequette:

The only issue in this proceeding is whether or not the petitioners received a liquidating dividend from the Bass Dry Goods Co. in the year 1920. The petitioners contend that the corporation was dissolved by operation of law on March 13, 1917, and that the business was conducted by them as a partnership after that date. The respondent urges on the other hand that during the period March 13, 1917, to January 31, 1920, the business was either continued as a corporation or was an association, and is therefore taxable as a corporation under section 1 of the Revenue Act of 1918, which provides that—

The term “corporation” includes .associations, joint stock companies, and insurance companies.

There can be no question that the corporate life of the Bass Dry Goods Co. ended on the 13th day of March, 1917. The charter, as granted March 13, 1897, limited the life of the corporation to 20 years from that date. A corporation exists only by permissive grant from the sovereign State and its powers and privileges are determined by that grant. The laws of such sovereign State, so far as they are applicable, are an implied part of the contract granting the franchise. The statutes of Georgia provided:

Every corporation is dissolved, (1) by expiration of its charter * * *. Sec. 2241, Georgia Code.

The courts of that State have held that where a corporate franchise expires by limitation the corporation is then and thereby defunct and no longer exists either de facto or by estoppel. See Venable Bros. v. Southern Granite Co., 135 Ga. 508; 69 S. E. 822; Logan v. W. & A. R. R. Co., 87 Ga. 533; 13 S. E. 516; R. R. Co. v. City Council of Augusta, 100 Ga. 701; 28 S. E. 126. Section 2823 (i) of the Georgia Code provides that:

See. 2823 (i). Method of Reviving Charters.
In all cases where a charter of any corporation, incorporated by an act of the legislature or by a certificate of the Secretary of State or the State of Georgia, or by any superior court of this state, has expired, and such corporation has continued in business in ignorance of such expiration, said charter may be revived * * *' at any time within five years from the date of such expiration.

It will be noted that such revivor may be had when the “ corporation has continued in business in ignorance of such expiration.” In the present case both petitioners, who were the only stockholders in the company, knew that the corporate charter had expired; knew it at the time, or shortly thereafter. Having continued the business with full knowledge of such expiration of the charter, they would be barred, apparently, from seeking any renewal of that charter under the statute. We are therefore of the opinion that the corporation ceased to exist on March 13, 1917, and that on that date the title to its assets passed to the petitioners, subject to the corporation’s debts, under section 2245 of the Georgia Code, which is as follows:

Upon the dissolution of a corporation, for any cause, all of the property and assets of every description belonging to the corporation, shall constitute a fund, first — -for the payment of its debts and then for equal distribution among its members. To this end the superior court of the county where such corporation was located, shall have power to appoint a receiver, under proper restrictions, properly to administer such assets under its direction.

It is true that a business may be a partnership under the laws' of a State and still be, within the meaning of the revenue acts of the United States, an association taxable as a corporation. Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110. That, however, is a rule of taxation and not a rule of property. Regardless of the manner in which the income of the business in question for the period March 13, 1917, to January 31, 1920, may be taxed by the United States, the property rights in the assets were fixed by the laws of Georgia and under those laws the Bass Dry Goods Co. ceased to exist as a corporation on March 13, 1917, and the title to its assets immediately vested in the petitioners as the sole stockholders, subject to its debts; and if there was any taxable gain accruing to the petitioners as the result of the dissolution, it was received at the date of dissolution and not in 1920. It may be, as contended by the respondent, that the petitioners so conducted the business from March 13, 1917, to January 31, 1920, as to subject it to taxation as a corporation, but since we hold that the liquidating dividend, which is the only item in dispute here, was received by the petitioners in 1917, it is not necessary for us to decide whether subsequent to that date the business was conducted as a partnership or as an association.

Judgment will be entered on 15 days' notice, under Bule 50.

Considered by Phillips and Milliken.


author: Siefkin :

text:
    George P. Wigginton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11425.
    Promulgated January 3, 1928.

      John E. Hughes, Esq., for the petitioner.

      John F. Greaney, Esq., for the respondent.
   OPINION.

Siefkin :

The question of the March 1,1913, value of two patents is presented by the parties. On that date petitioner had, by contract, granted an exclusive license for five years with privileges of further renewals for further five-year periods, covering the two patents and improvements thereon which should be made. The considerations flowing to petitioner by the contract were the payment of a royalty of 10 per cent of the net profits of the company, petitioner’s employment by the company at a stated salary as manager, and an agreement that in case of his death the company should pay to his estate the value of the patents at the time of death. A similar clause provided for payment to the petitioner of the value of the patents in the event that the company sold out or consolidated. The contract provided that petitioner should assign the patents to the company but should have them reassigned to him should the company not renew the agreement.

Petitioner thus had, on March 1, 1913, his patent rights largely merged in, or at least limited by, his rights and duties under the contract, effective January 1, 1913. The patents had been granted late in 1911 and in 1912 and neither petitioner nor the company had developed the market for the patented articles to the extent that the earnings therefrom up to March 1, 1913, standing alone, were any fair indication of a fair market value on that date. All of the other circumstances affecting the patents must be considered. One such circumstance is an offer to purchase the patents for $150,000 early in 1913, which offer the prospective purchaser was able and willing to carry out. Others are testimony of witnesses familiar with the devices covered by the patents as to the probable market as it existed on March 1, 1913, the steps taken by the company which acquired the rights to manufacture under the patents in enlarging its plant, the acceptance of the devices by various purchasing agencies of the Federal Government and numerous sales made to such agencies before March 1, 1913, as well as the opinions of experienced witnesses and the subsequent history of the earnings to petitioner. When we consider all this evidence, we are led to the conclusion that the fair market value of petitioner’s interest in the patents on March 1, 1913, was far in excess of the amount determined by respondent. However, the subsequent history of the company and the earnings from the patents fully justified the expectations of petitioner, yet, even under such favorable conditions, the patents yielded him in royalties and sales price the total sum of $215,150 in a period of six years. Under such circumstances we believe the facts show the estimates of the witnesses to be unduly optimistic and that $175,000 more nearly represents the value. In computing the gain or loss on the sale in 1919, that amount should be reduced by the deductions for exhaustion allowable to petitioner, based upon an expiration date of December 11, 1928, the expiration date of the earlier patent, since we have no information showing that after that date the other patent will maintain the monopoly held by both up to that time.

Judgment wiU be entered on 15 days’ notice, under Rule 50.

Considered by Trammell, Morris, and Murdock.


author: Murdock :

text:
    Wilmer C. Staley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10750.
    Promulgated January 3, 1928.

      Robert E. Klme, Jr., Esq., for the petitioner.

      G. H. Gurl, Esq., for the respondent.
   OPINION.

Murdock :

The tax liability of this petitioner for the calendar year 1920 is before ns. In the early part of that year he received two things as a result of the fact that he held 182 shares of stock in the Tipp Whip Co. First he received 182/500 of $10,000, or $3,640, being his share of a 20 per cent cash dividend declared and paid by the Tipp Whip Co. He admits that all of this was taxable, being paid out of earnings accumulated since February 28, 1913. Second, he received 273 shares of stock in a new corporation, organized by the group of men who owned the Tipp Whip Co. to take over its only active business. He received this stock because the Tipp Whip Co. had agreed to transfer the assets connected with its soap business to the new company provided the new company would issue its stock to the Tipp Whip Co. stockholders in the proportion of one and one-half of the new for one of the old. The petitioner contends that after the cash dividend the Tipp Whip Co. had no more “ earnings accumulated since February 28,1913,” to distribute and that anything which he received from this company was not taxable upon receipt by him. He also had an alternative contention.

The Commissioner, in determining the deficiency, did not compute a normal tax on the income in question in this case, but treated this income as an ordinary dividend subject to surtax only. He has never since contended that it was a distribution of assets or a liquidating dividend, in whole or in part. Therefore, we do not feel called upon to discuss that question.

The Commissioner’s statement enclosed with the deficiency letter referring to these items is as follows:

Xon further state that you were in error in reporting $12,740.00 in Schedule H, as income for the year 1920, as this amount consisted of your share of the surplus and profit of the Tipp Whip Company, which was earned and acquired before January 1, 1909. You are advised that information on file in this office indicates that of the total amount of dividends declared by the Tipp Whip Company in 1902, 90.3% were taxable, and 9.7% were nontaxable. Schedule H has been adjusted disclosing that of the amount of dividends reported from this source, $11,504.22 was taxable.

Counsel for the respondent filed no brief and he has never explained how the Commissioner arrived at his conclusion. We can not find any justification for the Commissioner’s action. On the other hand, the books of the Tipp Whip Co. and the testimony and other evidence which is before us support the petitioner’s contention as it is stated above. When we analyze the books and records of the Tipp Whip Co. in connection with the other facts established by the evidence to find the amount of earnings accumulated between February 28, 1918, midnight, and the last of January, 1920, when the petitioner received the stock from or through this company, we find that only a negligible amount, if any, of such earnings remained undistributed after the payment of the January, 1920, dividend of $10,000. Consequently, our decision on this point must be for the petitioner and we do not deem it necessary to discuss the petitioner’s alternative contention.

Judgment will be entered in accordance with the foregoing opinion on notice of 16 days, v/nder Rule 60.

Considered by Mourns, Siefkin, and Teammell.


author: MuRdock:

text:
    Federal-American National Bank, Successor to the American National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8932.
    Promulgated January 3, 1928.

      Robert M. Heth, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
   OPINION.

MuRdock:

In Appeal of Simmons & Hammond Manufacturing Co., 1 B. T. A. 803, and Appeal of Illinois Merchants Trust Co., 4 B. T. A. 103, we discussed at some length the difference between those expenditures properly designated ordinary and necessary expenses and those which are capital items. From the discussion in the latter case, it is apparent that the cost of repairs for the purpose of mending property or restoring it to a sound state, or for the purpose of keeping property in an ordinarily efficient operating condition is deductible as an ordinary and necessary expense, while the cost of alterations or improvements not needed for such purposes or which make the property adaptable to a different use is to be considered a capital expenditure. The Supreme Court has indicated the difference between the two classes of expenditures in Union Pacific R. R. Co. v. United States, 99 U. S. 402, p. 420, as follows:

* * * Theoretically, the expenses chargeable to earnings include the general expenses of keeping up the organization of the company, and all expenses incurred in operating the works and keeping them in good condition and repair; whilst expenses chargeable to capital include those which are incurred in the original construction of the works, and in the subsequent enlargement and improvement thereof.

and again, in Illinois Central R. R. Co. v. Interstate Commerce Commission, 206 U. S. 441, pp. 462, 463, the court states as follows:

* * * It would seem as if expenditures for additions to construction and equipment, as expenditures for original construction and equipment, should be reimbursed by all of the traffic they accommodate during the period of their duration, and that improvements that will last many years will not be charged wholly against the revenue of a single year.
* $ * $ $ * $
* * * We think it is clear, that instrumentalities which are to be used for years should not be paid for by the revenues of a day or year; and this is the principal of returns upon capital which exists in durable shape.

Much of the work performed on the banking room was not in the nature of repairs. The appearance of the whole interior was greatly altered and the location and style of tellers’ cages, executive offices and waiting rooms were changed. These were undoubtedly alterations and were in no sense made for the purpose of restoring the property to a sound state or of keeping it in an ordinarily efficient operating condition. The fact that very little new material was used is not controlling; much of the old material was recut and refinished and adapted to new uses and purposes. In this sense it was an improvement which facilitated the business of the bank and made its offices more attractive and more accessible to its patrons according to the testimony of the only officer of the bank who was called as a witness.

The petitioner in its pleadings admitted that $2,331.98 of the total amount in dispute was a capital expenditure and not deductible, but it did not state what item this sum represented. At the trial it abandoned its claim for deduction of the following items:

B. Stanley Simmons, architect's feo_$1, 000. 00
B. Stanley Simmons, sundry items_ 415. 57
National Mosaic Co_ 43.39
Fred S. Gicbner->_ 56. 00
Total_ 1, 515. 56

The petitioner offered in evidence three architect’s certificates with receipts of the contractor attached, in the respective amounts of $1,500, $1,200 and $1,500.10, or a total of $4,200.10, but none of the certificates or receipts stated the nature or extent of the work oi materials for which such certificate was issued and for which payment was made.

Although some of the expenditures may have been ordinary and necessary expenses, since neither their character nor cost has been shown, we are unable to segregate any such items and can not determine what part, if any, of the expenditures is deductible. North Street Trust v. Commissioner, 6 B. T. A. 947; Appeal of Sentinel Publishing Co., 2 B. T. A. 1211.

Judgment will be entered for the respondent*

Considered by MoRRis, Siefkin, and Trammell.


author: Muedocii:

text:
    Arthur J. Marks, Petitioner, v. Commissioner of Internal Revenue, Respondent. Harry S. Graham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6808, 6810.
    Promulgated January 3, 1928.

      David A. Tiohtin, Esq., for the petitioners.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

Muedocii:

The petitioners on their 1921 return deducted as an operating expense for that year the purchase price of a blackboard installed in their offices in 1920. The respondent denied this deduction, claiming that it was a capital expenditure, and assigned a ten-year useful life to the blackboard, allowing depreciation accordingly.

Petitioner Marks testified that the cost of such a blackboard was mostly in the backing, the slates themselves having to be replaced, while the backing would remain for 50 years, perhaps; that they did not move the blackboard installed in their offices on the fourteenth floor, inasmuch as the expense of so doing and reconditioning the walls would have been greater than the cost of the new blackboard. The one which was installed in the offices on the fifteenth floor in 1920 is still in use, only two of the slates having been replaced, one in 1923, and the other in 1926. Nevertheless, the petitioners maintain that they are entitled to deduct the purchase price of this blackboard as an operating expense of the business in the year 1921, under the provisions of section 214 (a) (1) of the Revenue Act of 1921, which are as follows:

Sec. 214. (a) That in computing net income there shall be allowed as deductions :
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *

However, section 215 (a) (2) of the same Act provides as follows:

Sec. 215. (a) That in computing net income no deduction shall in any case be allowed in respect of—
* * * * # * *
(2) Any amount paid out for now buildings or for permanent improvements or betterments made to increase the value of any property or estate ■ * * *

Since, from the testimony of the petitioner, it is apparent that the blackboard has been in use for seven years, and is still in use, the ten-year life assigned to it by the Commissioner does not appear to be unreasonable and the purchase price would therefore seem to be such an expenditure as is contemplated in section 215 (a) (2) of the Act, set forth above.

The determination of the Commissioner in this respect is therefore approved. Appeal of Wemple State Bank, 1 B. T. A. 415; Appeal of Banna Manufacturing Co., 1 B. T. A. 1037.

Section 214 (a) (7) of the Revenue Act of 1921, reads as follows:

Sec. 214. (a) That in computing net Ineoráe there shall be allowed as deductions:
****** *
(7) Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; * * *

Under this section a taxpayer may do one of two things, to wit, deduct the debts ascertained to be worthless and charged off within the taxable year, or, in the discretion of the Commissioner, he may deduct a reasonable addition to a reserve for bad debts. The Commissioner has made the following regulations pertaining to this section of the Act:

Article 151 of Regulations 62 is, in part, as follows:

Akt. 151. Bad debts. — Bad debts may be treated in either of two ways— (1) by a deduction from income in respect of debts ascertained to be worthless in whole or in part, or (2) by a deduction from income of an addition to a reserve for bad debts. For the year 1921 taxpayers may, regardless of their previous practice, elect either of these two methods and will be required to continue the use in later years of the method so elected unless permission to change to the other method is granted by the Commissioner.

Article 155 of Regulations 62 is, in part, as follows:

Art. 155. Reserve for bad debts. — Taxpayers who have, prior to 1921, maintained reserve accounts for bad debts may deduct a reasonable addition to such reserves in lieu of a deduction for specific bad debt items. Taxpayers who have not heretofore maintained such reserve accounts may now elect to do so, and in such ease shall proceed to determine the amount of the reserve that should reasonably have been set up as at December 31, 1920 (which shall not be deducted in computing net income), and in respect of 1921 and subsequent years may add a reasonable addition to such reserve and deduct the amount in computing taxable net income. Where a reserve account is maintained, debts ascertained after December 81, 1920, to be worthless in whole or in part, * * * (b) if such debts arose after December 31, 1920, should be charged against the reserve and not deducted from income. What constitutes a reasonable addition to a reserve for bad debts must be determined in the light of the facts, and will vary as between classes of business and with conditions of business prosperity. A taxpayer using the reserve method should mate a statement in his return showing the volume of his charge sales (or other business transactions) for the year and the percentage of the reserve to such amount, the total amount of notes and accounts receivable at the beginning and close of the taxable year, and the amount of the debts which have been ascertained to be wholly or partially worthless and charged against the reserve account during the taxable year.

The partnership of which the petitioners were members has followed neither the Act nor the Commissioner’s regulations. Prior to 1921, it appears that they had not maintained a reserve for bad debts. On their 1921 return for the first time they set up a reserve for bad debts and on the return they deducted the entire amount of the reserve thus set up and they also deducted $1,292.67, representing debts ascertained to be worthless and charged off within the taxable year. The deficiency letter is mot before us and we do not know exactly what the Commissioner has done, but from the petition and answer it appears that he has reduced the total bad debt deduction in the amount of $15,000, and it is of this action that the petitioner complains.

The petitioner was not entitled to deduct both the amount of debts ascertained to be worthless and charged off in the taxable year and an addition to a reserve for bad debts. He had to make his election between the two. Appeal of Transatlantic Cloch & Watch Co., 3 B. T. A. 1064. The Commissioner has allowed an addition to a reserve for bad debts in an amount more than ten times greater than the amount of the debts ascertained to be worthless and charged off within the taxable year and in addition has apparently allowed the deduction of the total amount of debts ascertained to be worthless and charged off within the taxable year. It seems to us that the taxpayer has already had the benefit of deductions in a total amount far exceeding the amount to which he was entitled and we can not give him any further deductions. On the other hand, the Commissioner has never asserted a claim for any increase in the deficiency over the amount of the deficiency as determined by him. Consequently, we hold that the deficiency determined by the Commissioner shall not be changed.

Judgment will he entered in accordance with the foregoing opinion on notice of 15 days, under Bule 50.

Considered by Moekis, Sieekin, and Tkammell.


author: Mokris:

text:
    David A. Cunningham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5253.
    Promulgated January 3, 1928.

      Edmond, Smith, Esq., and Louis E. Smith, O. P. A., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

Mokris:

We have heretofore considered both of the questions raised by this petitioner adversely to his contentions, and we have been unable to find facts in this proceeding which would distinguish it from our previous determinations.

The credit which petitioner is seeking to apply is provided for by section 222 (a) (1) of the Revenue Act of 1921, which is as follows:

(a) That the tax computed under Part II of this title shall be credited with:
(1) In the case of a citizen of the United Slates the amount of any income, war-profits and excess-profits taxes paid during the taxable year to any foreign country or to any possession of the United States. (Italic supplied.)

The applicability of this credit was specifically considered in Appeal of Albert D. Hewinson, 1 B. T. A. 1080. In that case the petitioner was also on a cash receipts and disbursements basis, and he paid the Dominion of Canada income taxes for 1923 in April, 1924. The respondent’s action in refusing to allow this payment as a credit for 1923 was sustained by the Board. The instant case is on all fours with the Hewinson appeal except that here we have three years involved. In each year here involved the Canadian taxes were paid in the early part of the following year, and, under his method of accounting, such payments can only be a credit for the year in which paid.

The second issue has been discussed fully by the Board in Appeal of John Moir, et al., 3 B. T. A. 21, wherein we held that the credit provided for by section 1200 (a) of the Revenue Act of 1924 is to be computed after the deduction of the credit provided for in section 222 (a) (1) of the Revenue Act of 1921.

Judgment will be entered for the respondent.

Considered by Trammell, Murdock, and Siefkin.


author: Moeris :

text:
    J. D. Taylor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9560.
    Promulgated January 3, 1928.

      Theodore B. Benson, Esq., for the petitioner.

      Brice Toole, Esq., for the respondent.
   OPINION.

Moeris :

In determining the questions presented by this proceeding we will address ourselves only to those years for which the respondent has determined deficiencies. As to the remaining years we are without jurisdiction. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The allegation of error found in the petition is sufficiently broad to cover the income of the petitioner from all sources. The evidence submitted related to but three sources, viz, the income received from two partnerships, the dividends received on capital stock, and the taxable interest received on Liberty bonds. The brief which was submitted by counsel for the petitioner related only to the first mentioned source of income. For the purpose of this opinion we will consider the principal question to be whether the income from such partnership interests constituted community income, or separate income, when the same was received while petitioner was residing in a community property State.

The petitioner states that the question to be decided is whether income from the partnerships in Georgia and Massachusetts, both engaged in the cotton brokerage business and in both of which the petitioner was a member, was income from services or income from property, and concludes that it was income from services rendered to his associates and himself in conducting the Arizona branch of the business, and therefore under the laws of Arizona (section 3850, Revised Statutes, 1913) community income. The contention of the respondent is that the petitioner came into Arizona possessed of certain property, that such property constituted his separate property, and that any increase, rents, issues or profits from such separate property remained his separate income. Section 3848 of the Arizona statutes.

The sections of the Revised Statutes of Arizona (1913) relied on by both parties are as follows:

Chapter HI
Rights of Maeeied Persons
3848. A11 property, both real and personal, of the husband, owned or claimed by him before marriage and that acquired afterward, by gift, devise or descent, as also the increase, rents, issues and profits of the same, shall be his separate property, and all property, both real and personal of the wife, owned or claimed by her before marriage, and that acquired afterward by gift, devise or descent, as also the increase, rents, issues and profits of the same, shall be her separate property.
3850. All property acquired by either husband or wife during the marriage, except that which is acquired by gift, devise or descent, or earned by the wife and her minor children while she lived or may live, separate and apart from her husband, shall be deemed the common property of the husband and wife, and during the coverture personal property may be disposed of by the husband only; but husband and wife must join' in all deeds and mortgages affecting real estate except unpatented mining claims, which may be conveyed by the husband or wife only, as provided by the laws of this state relating to conveyances; provided that either husband or wife may convey or mortgage separate property without the other joining in' such conveyance or mortgage.

It is clear that whatever property was acquired by the petitioner while a resident of the State of Georgia was his separate property. The statutes of Arizona have but one section, as far as we can ascertain, which relates to property rights of nonresidents who move into that State. Section 3851 of the Revised Statutes of Arizona (1913) provides that, “ The marital rights of persons married out of this State, who may move to this State, shall, in regard to property acquired in this State during the marriage be regulated by the laws of this State.” If the income in question was derived from separate property taken into Arizona by the petitioner it was separate income as under the provisions of section 3848 of the Arizona statutes, the increase, rents, issues and profits from such property remain the separate property of the spouse owning the same. In Brookman v. Durkee, 90 Pac. 914, the court, in considering the question of property brought into the State of Washington, had this to say: *

Therefore without entering into reasons for the rule we are clear that personal property acquired by either husband or wife in a foreign jurisdiction is by law of the place where acquired, the separate property of one or the other of the spouses, continues to be the separate property of that spouse when brought within this state; and it being the separate property of that spouse owning and bringing it here, property in this State, whether real or personal, received in exchange for it, or purchased by it, if it be money, is also the separate property of said spouse.

The community property theory in Arizona is in accord with the view prevailing in the State of Washington, which is that the wife’s interest in the community estate is a vested legal one, the same as the interest of any other partner in partnership property. Olive Co. v. Meek, 102 Wash. 467; 175 Pac. 33; Marston v. Rue, 92 Wash. 129; 159 Pac. 111. The leading case in Arizona on this question is La Tourette v. La Tourette, 131 Pac. 426.

The only foundation for the petitioner’s conclusion that the income in question was derived from services is his statement in the brief that the nature of the business was such that capital was usually unnecessary and not a material factor in the production of income. He introduced no evidence, however, in support of the fact basis upon which his conclusion rests. The case was submitted on the pleadings and the revenue agent’s report which was introduced in evidence by the petitioner. We are unable to satisfactorily analyze the character of the interests acquired by the petitioner in the two partnerships for the reason that the partnership contracts are not before us, nor was there any testimony with respect thereto. An interest in a partnership is acquired by contract, either express or implied. The terms of the partnership contracts are determinative of the kind and character of each partner’s interest. This interest is acquired by a contribution to the common fund, and such contribution may be services, capital or a combination of both. If the petitioner’s interests were acquired by a contribution of capital, they would be his separate property in Georgia. The record is silent as to the date he acquired his partnership interests, and how he acquired them, but it is a fact that he was a member of both partnerships and actually engaged in their business while domiciled in Georgia. We do not know how the partnerships operated the businesses, how much capital was invested therein or whether capital was an essential factor in the production of income. The revenue agent’s report shows that salary was reported in the returns, and presumably it was received as manager of the Arizona corporation. If that be true, the parties themselves have placed a value upon the services rendered by the petitioner in Arizona, and the respondent has allowed the amount thereof as community income.

The petitioner contends that if it be admitted that he had substantial investments in the partnerships of Georgia and Massachusetts, the income from such partnerships in excess of interest on his investment would still be community income, and relies in support thereof on the California case of Peireira v. Peireira, 103 Pac. 488. We have examined that case and also its companion cases of the Estate of Gold, 151 Pac. 12, and McDuff v. McDuf, 191 Pac. 957, but are of the opinion that they are not controlling of a community property status existing under the Arizona statutes and their interpretation by the courts of that State. Section 3848 of the Revised Statutes of Arizona (1913) specifically provides that the increase, rents, issues and profits of separate property shall be separate property.

It is therefore our opinion that the evidence introduced is not sufficient to overcome the presumption of the correctness of the respondent’s determination with respect to the income from the petitioner’s partnership interests. It also follows from the foregoing opinion that the dividends on the stocks and interest on the Liberty bonds are the petitioner’s separate property.

Judgment will be entered for the respondent.

Considered by Trammell, Murdoch, and SiefkiN.


author: MoRRis:

text:
    Estate of Mary Aylward, Elizabeth Aylward, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9270.
    Promulgated January 3, 1928.

      Louis F. DaKling, Esg., for the petitioner.

      B. E. dopes, Esg., for the respondent.
   OPINION.

MoRRis:

The petitioner’s qounsel has expressly withdrawn the second issue herein, leaving for our consideration the sole question of whether the respondent correctly disallowed as a deduction the sum of $75,375 received by the decedent from the estate of Mary E. Aylward in determining the amount of the net estate under section 403 of the Revenue Act of 1921. The pertinent provisions of the Revenue Act of 1921 are as follows:

Sec. 403. That for the purpose of the tax the value of the net estate shall he determined—
(a) In the case of a resident, hy deducting from the value of the gross estate—
*******
(2) An amount equal to the value of any property forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent where such property can be identified as having been received by the decedent from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received: Provided, That this deduction shall be allowed only where an estate tax under this or any prior Act of Congress was paid by or on behalf of the estate of such prior decedent, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate and not deducted under paragraphs (1) or (3) of subdivision (a) of this section. This deduction shall be made'in case of the estates of all decedents who have died since September 8, 1916.

It will be seen, therefore, that there may be deducted in arriving at the amount of the net estate the value of any property forming a part of the gross estate of any person who died within five years prior to the death of the decedent, where the property can be identified as having been received from such prior decedent by gift, bequest, devise or inheritance. However, that deduction is only allowable where an estate tax under this or any prior act of Congress was paid by or on behalf of the estate of such “ prior decedent.”

The property here in question was originally taxed to the Estate of Richard L. Aylward presumably as a gift in contemplation of death. Upon the death of Mary E. Aylward (the person under whom the decedent herein took), the amount of the property was held to be deductible under the provisions of section 403 supra, and therefore no tax was paid by the estate of Mary E. Aylward.

In the Appeal of John Parrott, Jr., 7 B. T. A. 134, John Parrott died in January, 1918, leaving as a part of his gross estate certain personal property valued at $120,261.54, which passed in the first instance to his administrators and thence to his son, Edmund A. Parrott. Edmund was killed in action in the military service of the United States in September, 1918, leaving no will. Under the laws of California the entire property of Edmund passed to Mary Emilie Parrott, Edmund’s mother, as an inheritance. The estate of John Parrott duly paid the Federal estate tax on the sum of $120,267.54. The estate of Edmund A. Parrott was exempted from estate tax by reason of the fact that he was killed in action while in the service of the United States. The petitioners in that case contended that they should be allowed to deduct the sum of $120,267.54 because the deaths of John Parrott and Mary Parrott were within five years of one another; that the estate of John Parrott paid the tax, and the property on which same was paid passed to Edmund A. Parrott by will of John Parrott. The Board in considering that case said, “ We think under the 1921 Act it was intended to let only one transfer of an estate escape the tax and that was the estate of the ‘ prior decedent ’ when included in the decedent’s gross estate and on which the tax had been previously paid and the estate or property was acquired by the decedent from the prior decedent by gift, bequest, device, or inheritance.” The Board held in that case that no tax having been paid on the sum in controversy by the estate of the “ prior decedent ” it was not a deductible item under the provisions of 403 (a) (2).

No tax having been paid on the property here in question by the estate of the prior decedent (estate of Mary E. Aylward), the deduction claimed is not allowable under section 403 (a) (2).

Judgment will be entered for the yrespondent.

Considered by Trammell, Murdock, and Sieekik.


author: TRAmmell :

text:
    Frank H. Buck Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9451.
    Promulgated January 3, 1928.

      H. H. Tooley, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
   ORINION.

TRAmmell :

The question involved here is whether the petitioner comes within the provisions of section 303 of the Revenue Act of 1918,- the pertinent portions of which are as follows:

That if part of the net income of a corporation is derived (1) from a tra»de or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of “ personal service corporations,” then (under regulations prescribed by the Commissioner with the approval of the Secretary) the tax upon the first part of such net income shall be separately computed (allowing in such computation only the same proportionate part of the credits authorized in sections 311 and .312), and the tax upon the second part shall be the same percentage thereof as the tax so computed upon the first part, is of such first part. * * *

If that part of the business which consisted of the selling of fruit on a commission basis was a distinctly separate branch of the petition’s trade or business which if constituting the sole trade or business would bring it within the scope of section 2Ó0 of the Revenue Act of 1918, then the petitioner is entitled to have its tax assessed under section 303. There is no serious controversy that an amount in excess of 30 per cent of the petitioner’s total net income was derived from selling fruit on a commission basis.

We will discuss first the question as to whether that part of the business which consisted of selling fruit on a commission basis would, if it constituted a sole trade or business, constitute the petitioner a personal service corporation. If it did not, then it becomes unnecessary to determine whether it was a distinctly separate branch of a trade or business within the meaning of section 303.

We find from the evidence that Frank H. Buck owned 531 shares of a total of 1000 outstanding shares. He was the only person who could fairly be said, from the evidence, to have been regularly engaged in the active conduct of the affairs of the corporation. This leaves 469 shares of the outstanding capital stock in the hands of persons who were not regularly engaged in the active conduct of the business. Under this state of facts, in our opinion, the provisions of section 200 of the Revenue Act of 1918 have not been met. The principal stockholders are not regularly engaged in the active conduct of the business as contemplated by that section. This being true, the petitioner, if it had been engaged solely in carrying on business on a commission basis, would not be classified as a personal service corporation. It therefore does not meet the test prescribed by section 303 and could not be taxed under the provisions of that section. The petitioner contended that if it was not entitled to be taxed under the provisions of section 303, then in the alternative it was entitled to the benefit of section 328 of the Revenue Act of 1918 in that there were abnormalities affecting its income or capital. We have no evidence relating to the invested capital of the petitioner, nor have we any evidence from which we could conclude that there were abnormalities affecting its income. We, therefore, approve the action of the Commissioner in assessing the tax under the provisions of section 301.

Judgment will be entered on 15 days’ notice, under Rule 50.

Considered by Morris, Muedook, and Siefkin.


author: Teammell :

text:
    Hart Cotton Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9032, 12781.
    Promulgated January 3, 1928.

      W. W. Ross, Esq., for the petitioner.

      L. O. Mitchell, Esq., for the respondent.
   OPINION.

Teammell :

The cotton factory should be included in invested capital at $200,000. For depreciation purposes the value of the land, $83,000, should be subtracted from that amount. On the question of the additions to the plant during the years 1917,1918,1919, and 1920, • we find that the respondent, in his recomputation of the deficiency under the Board’s prior decision in the case of the same petitioners for 1917, 2 B. T. A. 973, which was introduced in evidence, allowed additions to plant in 1917 and 1918 to be included in the amount stated in the above findings of fact with respect to those years. The evidence satisfies the Board that additions were made as set out in our findings of fact for the respective years: The amounts should be included in invested capital during the years involved and should be considered in determining the allowances for exhaustion, wear and tear.

Judgment will be entered on 15 douys notice, under Rule 50.

Considered by Mourns, MtjRdock, and Siefein.


text:
    Federal Bearings Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9233.
    Promulgated January 6, 1928.

      Carl EKlerma/nn, Esq., and George W. /Smyth, Esq., for the petitioner.

      P. J. Rose, Esq., for the respondent.
   OPINION.

Smith:

At the hearing of this proceeding question was raised by the respondent as to the jurisdiction of the Board so far as it related to a deficiency determined for the year ended January 31,1919. The basis for the argument was that the tax had been assessed and that the respondent had not determined a deficiency for the period, within the meaning of the Revenue Act of 1926. In his brief, respondent admits the jurisdiction of the Board to entertain the proceeding for the three years ending January 31, 1919, January 31, 1920, and January 31, 1921.

The pleadings in this case raise three issues, as follows:

(1) Whether the petitioner is entitled to $250,000 in its invested capital for the fiscal years ended January 31, 1919, January 31, 1920, and January 31, 1921, on account of intangible assets acquired at time of incorporation in 1915, for stock;

(2) Whether the reduction in invested capital for 1920 and 1921 has been overstated by the Commissioner on account of the disallowance of at least $250,000 in invested capital for the immediately preceding year;

(8) Whether the respondent has overstated the deduction for in-admissibles in the amount of $20,331 for the year 1920.

The determination of the first issue will dispose of the second and no further reference will be made thereto. No testimony was taken nor any proof offered relative to the third issue and the respondent’s motion for judgment with respect to that issue is granted.

The petitioner contends that the value of the intangibles paid in to the corporation in exchange for $150,000 par value of its common stock had an actual cash value of at least $400,000. In support of its claim it has submitted a mass of evidence as to the situation which existed with respect to the manufacture of high-grade ball bearings during the period 1912 to the present time. The officers of the company were not desirous of selling the patent rights and getting out of the field of the manufacture of high-grade ball bearings. They were of the opinion that they could make the business a great success. They therefore refused to sell a controlling interest in their common stock in 1916, shortly after the petitioner was incorporated and before it got into production, at a price of $50 per share. At the time they held in excess of 60 per cent of the stock. We are of the opinion that this proves that the intangibles paid in to the corporation for the common stock had a very great value. In addition to all of these proofs of value expert testimony was offered as to the value of the patents. A patent attorney of wide experience in 1927 computed their value on the basis of amounts earned by the Schatz Manufacturing Co. in 1914 and 1915, and the growth of the automobile business as it could reasonably have been foreseen by the end of 1915. He concluded that the value of the patents at that time was between $400,000 and $500,000.

In Nice Ball Bearing Co., 5 B. T. A. 484, 496, we stated:

The value of patents at any given date is, like the value of other property, a question of fact which must be determined upon the evidence.

In the appeals of Dwight & Lloyd Sintering Co., 1 B. T. A. 179; Gamon Meter Co., 1 B. T. A. 1124; and J. J. Gray, Jr., 2 B. T. A. 672, the Board has laid down the rule that in determining the value of patents at any basic date it wcfald take into consideration the history and the volume of profits produced by the use of the patents, the opinion testimony of men experienced in dealings in patents and in the products protected by the patent monopoly and would also consider the subsequent history of such patents, together with the volume of profits produced by their use in business, and upon the basis of such evidence determine the value at the basic date.

From a consideration of all the testimony in this case we are satisfied that the actual cash value of the intangibles paid in to the petitioner corporation in December, 1915, for $750,000 par value of common stock was at least $250,000, the greatest amount which it can legally include in invested capital.

Judgment will be entered on 15 days’ notice, under Rule 50.

Considered by Trussell, Love, and Littleton.


author: Lansdon:

text:
    Rebecca Luscomb, Lizzie S. Luscomb, and Henry M. Luscomb, Executors, Estate of Martin Luscomb, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7143.
    Promulgated January 7, 1928.

      Stoddard M. Stevens, Esq., for the petitioners.

      A. E. Fast, Esq., for the respondent.
   Lansdon:

The respondent has asserted a deficiency in estate tax in the amount of $36,577.81. The petitioners allege that the respondent erroneously included in the gross estate certain amounts as gifts made in contemplation of death.

FINDINGS OF FACT.

The decedent, Martin Luscomb, was a resident of Bridgeport, Conn., where until about, the year 1906 he had been actively engaged in manufacturing operations. He was exceptionally successful in business and in the course of his activities amassed a fortune in excess of $1,000,000. He was a man of fine intellectual ability, and was deeply devoted to his home and his family. He died on April 26, 1923, and at that time was aged 72 years and 21 days. He was survived by his wife, Rebecca Luscomb, a daughter Lizzie S. Luscomb, and a son Henry M. Luscomb.

Fot many years prior to May, 1922, the decedent had suffered from hemorrhoids. Some time in May, 1922, urged so to do by his son, he consulted a physician and underwent a physical examination for the purpose of determining the nature and the necessary treatment of the ailment from which he was suffering. At that date his general health seemingly was good, but he was troubled with pains in the lower abdominal region and subject to recurring attacks of hemorrhoids. The examining physician concluded that the decedent had cancer of the rectum and later in the day reported his conclusion to Henry M. Luscomb, the son. The son and the physician agreed that the nature of his ailment should be kept from the decedent.

Following the physical examination and the conclusion that Lus-comb had cancer of the rectum, the decedent, accompanied by his son and the examining physician, went to New York for the purpose of consulting specialists. Before the physician in New York made any examination he was requested both by the son and the Bridgeport physician to say nothing about cancer. The New York specialists agreed with the Bridgeport physician as to the nature of the ailment and recommended radium treatment. At that time it was impossible to secure such treatment in New York on account of the crowded condition of the hospitals and it was eventually arranged that Lus-comb should go to Baltimore for treatment in a hospital conducted by Dr. Howard A. Kelly, who was at that time the owner of the largest quantity of radium in the possession of anyone in the United States.

The decedent, accompanied by his son, arrived in Baltimore on June 9 and remained for several days at a hotel. As soon as possible radium treatment under the direction of Dr. Kelly was administered. Before the decedent was seen by Dr. Kelly, Henry M. Luscomb had privately conferred with the doctor and requested that his father should not be told of the nature of his disease. Luscomb remained in Baltimore under the treatment of Dr. Kelly for some weeks and then returned to his home. While there and undergoing radium treatment he wrote two letters to his wife and daughter, which indicated that he was in good spirits and very hopeful of recovery from his ailment. In October of 1922, and in January and March of 1923, ha returned to Baltimore and received additional radium treatment at the hospital conducted by Dr. Kelly. His condition seemed somewhat improved as a result of such treatments, but he was seen by his Bridgeport physician quite often during the periods that he was at home between his visits to Baltimore. While at Baltimore decedent was told by Dr. Kelly that his ailment was not hemorrhoids and that his condition might be improved by the radium treatment. He was never told by anyone at any time that he was suffering from cancer of the rectum. On April 26, 1923, Luscomb had a severe attack of angina pectoris and died in something like an hour after his seizure. The physician who attended the decedent in his last illness and was present at his death made a death certificate in which the primary cause of the death was given as cancer and the secondary cause as angina pectoris.

The fact that the decedent was afflicted with cancer of the rectum was known to his wife, daughter and son, to the several physicians who had examined and treated him, and to a considerable number of his family friends and associates. Luscomb knew that his condition was not the result of hemorrhoids and that he was being given radium treatments while in Baltimore. It was a matter of common knowledge in 1922 and 1923 that the radium treatment was being used by reputable physicians in the treatment of cancer, but it also was true that such treatment was and is administered for other diseases.

Until some time in 1919, neither the wife, son, nor daughter of the decedent had any personal income and all were wholly dependent upon Luscomb for the means of living and even for pocket money. Henry M. Luscomb is a graduate of Harvard University and for some five or six years was associated with his father in the management of manufacturing enterprises. When the elder Luscomb retired from active business about 1906, he asked his son also to give up his position and assist in the management of his investments and other business affairs. Thereafter Henry M. Luscomb had no regular occupation and until 1919 no personal funds. In 1919 Luscomb gave to his wife, son, and daughter certain shares of stock which yielded each of them an income of about $1,500 per year.

On January 31, 1923, which was the birth anniversary of his daughter, Luscomb gave to his wife, son, and daughter securities of the respective par values of $94,100, $104,100, and $91,050. On March 27, he made additional gifts to the same persons in the respective amounts of $46,000, $36,000, and $50,000. The result of these gifts was that each member of the decedent’s family, between January 31 and March 27 of 1923, received approximately $141,000, or for the three a total of $421,200.

Upon audit of the estate-tax returns filed by the administrators of the estate of the decedent, the respondent held that such gifts were made in contemplation of death, added the total thereof to the gross estate of the decedent, and determined the deficiency here in controversy. The gifts were made in contemplation of death.

Judgment will be entered for the respondent.

Considered by Sternhagen, Green, and Arundell.


author: Trussell :

text:
    Hannibal Missouri Land Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9084.
    Promulgated January 7, 1928.

      Charles O. Ciarle, Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
   OPINION.

Trussell :

The questions involved pertain to the determination of the amount of profit resulting from the sale of a tract of land by petitioner in October, 1919, for a total consideration of $33,369.95, payable over a term of three years and of which $3,363 was paid within the taxable year involved, petitioner having elected to return the income represented by this profit on the installment plan. The total sale price of this property was $33,369.95. The March 1, 1913, value of the land is agreed by petitioner and respondent to be $21,529, and to this the respondent added commissions on the sale of $5,180.66, clearing costs, $1,076.45, and surveying expenses of $77.70, making a total cost of $27,863.81 and a profit of $5,506.14 on the sale, or 16.5 per cent of the gross selling price. The respondent included in income for the taxable year 16.5 per cent of the installment of the sale price received in that year, or $554.90. The surveying cost allowed by the respondent is that proportion of the total surveying cost of $831.57 for the entire property of 2,304 acres represented by the 215.29 acres sold.

Petitioner insists that in determining the profit resulting from the sale there should be allowed as expense of same four additional items.:

(a) The balance of the survey cost in the sum of $753.97.
(b) Interest of $57.68 rebated the purchaser.
(c) The sum of $98.00 representing abstracts furnished the purchaser in closing the sale in 1921.
(d) A loss of $572.55 in 1921 representing the discount allowed in realizing the cash value of the mortgage note taken in the sum of $16,500.

The survey in question was for the purpose of subdividing the property and fixing the boundaries of various tracts for sale over a period of three years. Although sale was actually effected of only one of the tracts shown by the survey, the expense pertains to all of the tracts. The result of the survey was used before the sale of this particular tract in efforts to sell other portions of the land and was used or available for use subsequent to that time in similar efforts. The cost of survey was a capital expense pertaining to the property as a whole and only so much of it as pertained to the tract sold can be considered as a separate cost of such tract.

The profit realized from this sale of land should be computed as follows:

Sale price_$33, 369. 95
Less allowance made purchaser in settlement_ 1, 557.68
Net sale price_ 31, 812.27
Deduct:
1913 value of land_$21, 529. 00
Clearing cost_ 1,076. 45
Commissions_ 5, ISO. 66
Survey_ 77.70 ’
Abstract_ 98. 60
Cost of realizing cash on mortgage- 572. 55
- 28,534.96
Profit_ 3,277.31

The total price paid by the purchaser for the land was $31,812.27, of which the profit of $3,277.31 is 10.3 per cent. Applying this percentage to the payment of $3,363 received in 1919, we find $346.49 as profit to be included as income of that year. We have found that petitioner’s gross income from other sources for the taxable year 1919 amounted to $20,079.11, and that it had deductible expenses of $14,908.80. Its total net income for that year is accordingly found to be the sum of $5,516.80.

The deficiency should be redetermined in accordance with the foregoing findings of fact and opinion.

Judgment will be entered upon 15 days' notice, pursuant to Rule 50.

Considered by Smith, Love, and Littleton.


text:
    Adams, Payne & Gleaves, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7523.
    Promulgated January 7, 1928.

      II. H. Shelton, Esq., for tbe petitioner.

      J. E. Marshall, Esq., for tbe respondent.
   OPINION.

Love:

The Commissioner concedes that he erred in treating the amount of $36,048.43 paid to Gleaves under the circumstances above described, as a disbursement of capital, thereby reducing the petitioner’s invested capital by that amount. Accordingly, petitioner’s invested capital should be adjusted by including therein the amount erroneously excluded.

The sole remaining issue is whether the additional compensation in the amount of $36,048.43 credited to Gleaves in the year 1919, pursuant to the action taken by the board of directors on August 28, 1919, may be deducted from gross income for that year.

It is necessary, first, for us to determine the status of the additional compensation in question. Was it voted as and for salary for 1919, although measured by services rendered prior to that year, or, was it voted and paid in 1919 as and for salary for services rendered in prior years? If the compensation voted and paid in 1919 was the payment of additional salary as and for prior years, without previous authorization therefor, it would not properly be deductible in 1919. Vaughn & Barnes, Inc., v. Commissioner, 6 B. T. A. 1279.

The petitioner takes the position that the amounts withdrawn by Gleaves, in addition to his fixed or regular salary, in the years from 1906 to and including 1919, constituted additional compensation in the amount withdrawn as and for the year in which the withdrawal occurred, and that the total amount having been authorized in 1919, it is properly deductible in that year.

The record discloses that at the time of petitioner’s incorporation there was a general understanding reached among the three officers, directors, and stockholders that if the business prospered and was a financial success, additional compensation would be paid. But in our opinion, such an understanding falls far short of an authorization of additional compensation. The most that can be said of that agreement or understanding is that it evidenced an intention later to authorize extra compensation if the petitioner prospered. It is clear that during the years prior to 1919 there was no legal obligation to pay additional compensation. It was not until 1919 that corporate action was taken in respect thereto. As we stated in Vaughn & Barnes, Inc., supra:

If the interpretation be that contained in the second query above, then we are of the opinion that the deduction should not be allowed. That is to say, if 'the compensation voted and paid in 1922 was the payment of additional salaries as and for a prior year, without previous authorization therefor, it would not properly be allowable in 1922. The reason is obvious. To hold otherwise would permit a corporation with a large surplus in 1922 to effectually dispose of that surplus by voting salaries over a long series of prior years. No simpler method of evading taxes could be thought of. J. E. Duval Printing Co., 1 B. T. A. 1205; H. T. Cushman Mfg. Co., 2 B. T. A. 39; Matchless Metal Polish Co., 2 B. T. A. 79; Melrose Granite Co., 2 B. T. A. 113; Columbia Textile Co., 2 B. T. A. 472; W. W. Harrison Co., 4 B. T. A. 174; W. K. Henderson Iron Works & Supply Co., 6 B. T. A. 92.

The record discloses that for a period of six years, from 1914 to 1919, without the knowledge of the other officer's, Gleaves “ stuffed ” his regular salary to the extent of $5,000 annually, and that in its returns for those years the amount of $10,000 was deducted as and for salary to Gleaves. It is obvious, therefore, that during each of those years Gleaves received an additional salary of $5,000. In asking for a deduction in 1919 of the amount of $36,048.43 the petitioner is, in effect, claiming a deduction for' additional compensation, part of which is for the years 1914 to 1919, for which years the petitioner has heretofore deducted and the Commissioner allowed additional salary in the amount of $30,000, which amount is in addition to the $36,048.43. However, without considering the fact that the petitioner has heretofore deducted additional salary for Gleaves for 1914 to 1919, and that the Commissioner has allowed the deductions, we are of the opinion that the deduction claimed in 1919 as and for additional compensation for years prior thereto is not properly deductible in that year, it not having been previously authorized.

However, during the year 1919 prior to the corporate action taken in August, Gleaves had withdrawn, in excess of his salary credits, approximately $1,750. Under the petitioner’s contention therefore, this amount having been voted and paid as and for salary for 1919, would be, under certain conditions, deductible.

To constitute an allowable deduction, the salary voted as and for 1919 must be reasonable for services performed in that year. In other words, if the amount of $10,000 deducted by the petitioner and allowed by the Commissioner as salary for Gleaves for 1919 plus the additional amount of $1,750 is reasonable for services rendered by Gleaves in 1919, then it would properly be deductible.

The record shows that subsequent to 1914 and including 1919 the petitioner deducted and the Commissioner allowed the amount of $10,000 as salary for Gleaves. There is nothing in the record to indicate that a salary in excess of $10,000 was reasonable. It is conclusively shown that the services rendered by Gleaves in 1919 were loss valuable than those rendered in prior years, as he was ill and away from his office most of the time during that year. Furthermore, the resolution of August 28, discloses that at that time Gleaves’ services were considered by the petitioner to be worth $5,000 per’ annum.

However, the Commissioner has allowed and now admits that $10,000 was reasonable compensation for Gleaves for the year 1919.

We conclude, therefore, that the petitioner is not entitled to deduct from gross income for the year 1919 the amount of $36,048.43 or any amount in excess of $10,000 as allowed by the Commissioner as compensation for that year.

Judgment will he entered on 15 days' notice, under Bule 50.

Considered by TRtjssell. Smith, and Littleton.