author: MaRquette

text:
    Appeal of DAVID A. TER BUSH.
    Docket No. 4015.
    Decided September 23, 1926.
    Certain amounts credited to the taxpayer on the books of a corporation held not to be dividends.

      Fred A. Woodis, Esq., and Luther F. Speer, Esq., for the petitioner.

      Benj. E. Saunders, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income tax for the year 1919, in the amount of $916.87.
    FINDINGS OF FACT.
    The petitioner is an individual, residing at Schenectady, N. Y. During the year 1919, he was the owner of 256 shares, or about 51 per cent of the capital stock of Ter Bush & Powell, Inc., a corporation organized under the laws of the State of New York and engaged in the general insurance business. The remainder of the capital stock was owned by one Powell. The petitioner was president of the corporation and in the year 1919 received a salary of about $14,000.
    Some time in the year 1919, the petitioner and Powell were advised by an attorney that Ter Bush & Powell, Inc., was a personal service corporation and that they would be required to report in their personal income-tax returns the entire income of the corporation, whether or not it was actually distributed. At the suggestion of the attorney, the entire surplus of the corporation as of October 31, 1919, was credited to the personal accounts of the petitioner and Powell, in proportion to the amounts of capital stock owned by them. The amount of such surplus credited to the petitioner was' $12,786.33. On December 31, 1919, the personal account of the petitioner was credited with the amount of $5,075.95, representing his distributive share of the corporation’s earnings for the year 1919. On that date Powell was also credited with his distributive share of the earnings for the year 1919.
    When the amounts aforesaid were credited to the accounts of the petitioner and Powell, there was no dividend declared, and there was no intention that a dividend should be declared, or that the entire amounts so credited should be withdrawn from the corporation’s business. At no time between October 31, and December 31, 1919, were the amounts so credited to the petitioner actually available to- him if he had desired to withdraw them. He did, however, withdraw $1,957.21 on or before December 31, 1919.
    The balance sheet of the corporation at December 31, 1919, was as follows:
    Assets Liabilities
    Cash_;_ $1,141.43 Capital Stock_$25, 000.00
    Notes Heceivable_ 10,992. 90 Suspense_ 21. 34
    Premiums Heceivable_ 95,391.48 Premiums Payable_ 77, 591. 82
    Furniture and Fixtures_ 5, 953.02 Notes Payable_I_ 4,000.00
    G. ,S. McKearin, Inc_ 292. 05 Travelers Insurance Co_ 402. 39
    Liberty Bonds_ 5, 350.00 Commerford and Dolau'_ 536. 25
    Suspense_ 3,153. 76 Return Premiums Pending- 305. 90
    Accounts Receivable_ 143. 00 Liberty Bonds_ 87. 00
    Good WiU_ 25, 000. 00 Premiums Eec. Suspense_ 3,798. 60
    147,417. 64 Depreciation Reserve_ 2, 334. 06 Accounts Payable:
    D. A. Ter Bush_ 15, 905. 07
    L. C. Powell_ 15,159.51
    G. S. Whitney_ 1,137.85
    C. A. Haines_ 1,137.85
    147, 417.64
    Ter Bush & Powell, Inc., reported as a personal service corporation for the year 1919, and the petitioner included in his personal return of income for that year his distributive share of the corporation’s earnings. The Commissioner, however, determined that Ter Bush & Powell, Inc., was not entitled to personal service classification; that the amounts credited to petitioner on the corporation’s books as of October 31 and December 31, 1919, were dividends to him, and that there is a deficiency in tax in the amount of $916.87.
   OPINION.

MaRquette

: We are of the opinion that there was no intention on the part of the stockholders and officers of Ter Bush & Powell, Inc., to declare dividends on October 31, and December 31, 1919, or that the entire amount credited to the stockholders on those dates should be withdrawn by them. They were advised by an attorney that Ter Bush & Powell, Inc., was a personal service corporation and that they would have to report the corporation’s income in their personal returns, regardless of whether or not it was actually distributed, and the distribution was made on the books although it was not intended that the amounts so distributed should actually be withdrawn. It is apparent to us that the petitioner and Powell did not intend to withdraw these amounts from the business and that the book distribution would not have been made except for the fact that they were advised by their attorney that Ter Bush & Powell, Inc., was a personal service corporation and that they would be charged with the income of the corporation, even if it were not distributed. It may be further pointed out that the corporation did not have sufficient cash or other liquid assets to pay to the petitioner and Powell the amounts credited to them on the corporation’s books. Since there was no intention to declare a dividend of the full amount of surplus and earnings or that they should be withdrawn, we are of the opinion that the petitioner should be charged only with the amount of such surplus earnings as he actually withdrew.

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


source: Caselaw Access Project

author: MoRRis:

license: Public Domain

text:
    Appeal of DAVID SONENBLICK.
    Docket No. 3665.
    Decided September 23, 1926.

      Drnid Sonenblich pro se.

      F. 0. Graves, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax in the amount of $256.93 for the calendar year 1923. The error alleged is the failure of the Commissioner to allow a deduction of $5,904 claimed to represent traveling expenses.
    FINDINGS OF FACT.
    The taxpayer is an individual residing in Hew York City. During 1923 he was employed as a traveling salesman on a straight commission basis. During the year he spent 252 days on the road, during which he incurred and paid expenses which he itemized as follows:
    Railroad fares- $915
    Pullman fares- 195
    Excess baggage charges- 610
    Hotels_1,260
    Meals-1,135
    Sample carriers_ 378
    Models_ 400
    Baggage transfer- 258
    Entertaining customers-.-- 365
    Tips to porters and bellboys_ 190
    Telephone dnd telegraph-'--- 45
    Laundry_,- 72
    Yalet_ 36
    Busses and taxi fares- 45
    Total_5, 904
    The total amount of commissions earned by him during 1923 was $7,400.
   OPINION.

MoRRis:

The evidence is not sufficient to warrant the deduction of $378 for sample carriers, $400 for models, $365 for entertaining customers, $190 for tips to porters and bell boys, $45 for telephone and telegraph, and $45 for busses and taxi fares. The amounts of $72 for laundry and $36 for valet represent personal expenses and therefore are not deductible. We are satisfied that the other amounts were expended as itemized above. They are therefore deductible under section 214 (a) (1) of the Revenue Act of 1921.

Order of redeterrrdnation will be entered on 10 days’ notice, under Rule 50.


author: Moeeis :

text:
    Appeal of WASHINGTON PIECE DYEING & FINISHING CO.
    Docket No. 4619.
    Decided September 24, 1926.
    On the facts stated, held, that expenditures for copper rolls should be capitalized and not charged to expense.
    Depreciation rate on said rolls determined.

      Wm. SurosJcy, Esq., for the petitioner.

      F. O. Graves, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency of $3,025.94 in income and profits tax for 1921, arising.from the disallowance of $6,135.97 as depreciation on copper rolls and $9,425.05 charged to expense as the result of purchases of copper rolls.

      FINDINGS OF FACT.
    The petitioner is a New Jersey corporation with its principal office in Paterson. In 1920 it went into the silk printing business. Copper rolls were used in connection with engraving designs according to specifications selected by the trade.
    About the middle of 1920 the petitioner purchased some of these rolls. Additional purchases were made from time to time during 1920, 1921, and 1922. The rolls purchased in 1920 and part of 1921 amounting to $10,983.12 were capitalized, but early in 1921 and for the balance of that year the purchases, amounting to $9,425.05, were charged to expense. Purchases in 1922 were again capitalized. During 1920 and 1921, 250 rolls were purchased. By the end of 1921, 50 of these were discarded as worn out. In 1922, 100 additional rolls were purchased.
    The petitioner was not experienced in handling copper rolls and was handicapped during 1920 and 1921 by lack of funds. This lack of funds prevented it from carrying copper rolls above bare requirements for operations. The rolls on hand were engraved, used to print the design, and then scraped and a new design engraved thereon. At the date of purchase the copper rolls were 16 inches in circumference. When they had been scraped down to 13 inches in circumference they became useless. The ordinary useful life of these rolls is about five years.
    The Commissioner capitalized the purchases of rolls made in 1921, which the petitioner had charged to expense, and allowed depreciation at the rate of 10 per cent on all rolls.
   OPINION.

Moeeis :

The petitioner capitalized part of its purcháses of rolls and took depreciation thereon, and charged other purchases of rolls to expense. The Commissioner contends that the cost of all rolls should be capitalized. On the evidence presented we are of the opinion that the copper rolls were capital items and that the cost thereof should therefore not be charged to expense.

. The facts show that the petitioner was not experienced in handling copper rolls, and further that it was handicapped by a lack of finances. The lack of available funds made it necessary constantly to scrape the rolls on hand for the purpose of engraving new designs thereon. As a result the rolls depreciated very rapidly so that about fifty were worn out in 1921. We are satisfied that the useful life of these rolls did not exceed five years, and that a depreciation- rate of 20 per cent should be allowed on the cost thereof for the taxable year in question.

Order of redeterininoMori will be entered on 10 days’ notice, under Rule 50.


author: Phillips:

text:
    Appeal of THE JOHN HILTZ & SONS CO.
    Docket No. 5395.
    Decided September 24, 1926.

      John Holt Richardson, Esq., for the petitioner.

      M. N. Fisher, Esq., for the Commissioner.
   Phillips:

Taxpayer appeals from the determination of a deficiency of $4,211.27, income and profits tax for 1919, alleging that the Commissioner erred in determining the March 1, 1913, value of certain property sold during the year.

FINDINGS OF FACT.

The taxpayer is a Maryland corporation with its principal office in Baltimore, and is engaged in the carpentry and building business. In 1907 it acquired title to certain property in that city at a cost of less than $35,000.

The property was approximately 60 by 80 feet, was situated in the block bounded by Clay, Charles, Lexington and Little Shop streets, but had no frontage on any of those streets, access being obtained through two 12-foot alleys, one of which was owned by the taxpayer in 1913. In 1913 it was renting a portion of this property for $700 annually and using the balance as its office, shop and warehouse.

In 1911 the taxpayer received an offer of $35,000 for the property. The property was sold in 1919 for $50,000. The Commissioner determined the March 1, 1913, value to be $35,000 and, after making adjustments for depreciation which are not questioned, computed a profit on that basis. ■

The deficiency is redetermined to be $ Infill 37. Order will be entered accordingly.


text:
    Appeal of THE STAR PORCELAIN CO.
    Docket No. 5002.
    Decided September 24, 1926.
    On the facts stated, held, that the Washington Porcelain Oo. was affiliated with the Star Porcelain Oo. and the ETenchtown Porcelain Co. for the years 1920 and 1921.

      Arthur B. Foye, Esq., for the petitioner.

      M. N. Fisher, Esq., for the Commisisoner.
    This appeal is from the determination of deficiencies in income and •profits taxes against the Washington Porcelain Co., one of the petitioning affiliated companies, of $14,108.18 and $10,237.02 for the years 1920 and. 1921, respectively. The question involved is whether that company was affiliated with the Star Porcelain Co. and the Frenchtown Porcelain Co. for the taxable years in question.
    FINDINGS OF FACT.
    The Star Porcelain Co., the Frenchtown Porcelain Co., and the Washington Porcelain Co. were all incorporated under the laws of New Jersey in 1899,1914, and 1917, respectively. The first and last-named were engaged in the manufacture of porcelain electric specialties at Trenton and Washington, respectively, and the Frenchtown Porcelain Co. was engaged in the manufacture of porcelain for spark plugs at Frenchtown. The Star Porcelain Co. was organized by McKenzie, Britten, and Herbert Sinclair. Sinclair purchased a controlling interest in 1909 and the balance of Britten’s interest in 1911. Prior to 1914 it had a department in its plant at Trenton which was very highly unionized, as result of which it could not compete with its competitors. It was felt that the easiest and best thing was to start a plant somewhere to manufacture’this particular line, which was porcelain for spark plugs; so the plant was started in French-town to get away from the union problem. The plant at Trenton had had considerable labor trouble. One strike had run for several months and crippled some of the largest customers. Again, in 1916, a strike lasting three or four months took place. Four of the customers who took approximately 80 per cent of the business advised its officers that if they did not get another plant and give them another source of supply, they would develop an outside source. For that reason the Washington plant was started.
    During the years 1920 and 1921 the stockholders of the three companies were as follows:

      McKenzie was not active in the business during that part of 1920 preceding his death, which took place in November. Herbert Sinclair was treasurer and manager of the Star and Frenchtown -companies in 1920 and 1921 and president of the Washington Porcelain Co. George C. Sinclair, a brother of Herbert Sinclair, was secretary of the Star and Frenchtown companies and manager of production of all three plants. Gardinor was first vice president and assistant manager of the Star and Frenchtown companies and Fenton was second vice president and superintendent. Humphrey, who had been in the employ of the Star Porcelain Co. prior to the organization of the Washington Company, was vice president and manager of the Washington plant. He went to the Frenchtown plant once or twice a week and checked up on manufacturing and production. The Sinclairs, Gardinor and Fenton received compensation from all three plants.
    The majority of the orders for the three plants were solicited by Herbert Sinclair and taken through the office of the Star Company and there distributed to the other companies. The Washington Company had no separate sales organization; 95 per cent of its production was for the four customers who had insisted in 1916 that another source of supply be obtained. They had been doing business with the petitioner for twenty years. The Washington plant secured its foremen and department heads from the Star Company which also sent workmen there for periods of a month or two. Humphrey’s assistant also spent a day a week at the Trenton plant and a day or two at the Frenchtown plant. There was also an exchange of dies and materials between the plants. Practically all the machinery for the Washington plant was made at the Trenton plant and sold to it at cost. The Trenton plant also made the saggers for the Washington plant. An emergency machine shop was built midway between Washington and Trenton and operated as such on practically a “ fifty-fifty ” basis. The books of the companies were all kept at the Trenton plant by its employees.
    The Star, Frenchtown, and Washington companies filed consolidated returns for the years in question but the Commissioner eliminated the Washington Company from the affiliated group.
   OPINION.

MoRRis:

The question involved in this appeal is whether the Washington Porcelain Co. was affiliated with the Star and Frenchtown companies for the years 1920 and 1921. The five stockholders who owned all the stock of the Star and Frenchtown companies owned 92 4/10 per cent of the stock of the Washington Company. The Frenchtown and Washington companies were outgrowths of the Star Company. There was a centralized management, an interchanging of employees and materials between the three plants, all directed toward (be profitable operation of one business. In our opinion the Washington Company was affiliated with the Star and Frenchtown companies for the years in question. Appeal of Wright Cake Company , 2 B. T. A. 58; Appeal of American Cream of Tartar Company, 2 B. T. A. 847.

Order of redetermination will be entered on 10 days' notice, under Bule 50.


text:
    Appeal of THOMAS S. FULLER.
    Docket No. 5241.
    Decided September 24, 1926.
    The Commissioner’s method of averaging the cost in the case of the sale of stock upon which a stock dividend has been declared and rights to subscribe for additional stock have been issued and exercised, approved.

      William U. White, Jr., Esq., for the petitioner.

      P. J. Bose, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax of $6,726.62 for the year 1919. It involves the method of computation employed by the Commissioner in determining the gain realized by the taxpayer on the sale of certain stock in that year.
    FINDINGS OF FACT.
    In January and February of 1915 and 1916 the taxpayer purchased 500 shares of the capital stock of P. Lorillard & Co. for $88,663.75. In the spring of 1918 he received on these 500 shares a stock dividend of 100 shares. During the latter part of that year he was offered the right to subscribe, along with all other stockholders, to new stock to be issued by the company to the extent of one-third of his holdings at $100 per share. He exercised his right and subscribed for 200 shares for which he paid $20,000. During the year 1919 he sold for $107,980.00 the 500 shares originally purchased and reported his profit thereon as follows:
    Selling price of 500 shares->$107, 980. 00
    Cost of same 500 shares- 88, 663. 75
    Profit returned_ 19, 316.25
    The taxpayer still owns the 100 shares received as a stock dividend and the 200 shares purchased in 1918 by virtue of his subscription rights. The Commissioner computed the profit from the sale of the 500 shares as follows:

      Original purchase of 500 shares-$S8, 663. 75
    Stock dividend of 100 shares-:_ _
    Cost of 600 shares- 88, 663.75
    Stock rights received and subscribed for — 200 shares for_ 20, 000. 00
    Total cost of 800 shares--108, 663. 75 ■
    Sale price of original 500 shares- 107, 080. 00
    Cost of 500 shares — %ths of $108,663.75 -_ 67,014.84
    Net profit--- 40, 065.16
   OPINION.

MoRRis:

The taxpayer’s contention that there is no provision of the Revenue Act of 1918 which authorizes or permits the Commissioner to compute profits by averaging the cost of such sales with additional shares acquired through a stock dividend and the exercise of the right to purchase additional shares; that neither gain nor loss can be determined with regard to the stock dividend shares and/or the shares purchased in 1918 until they have been disposed of and the Commissioner’s method of computing gain on the transaction results in effect in levying a tax on a stock dividend and/or the right to subscribe for stock, have been ruled on adversely in so far as they relate to averaging cost in the case of a sale of stock upon which a stock dividend has been declared in the Appeal of D. W. Cowden, 3 B. T. A. 816.

That the Commissioner’s method was correct in also including the cost of shares acquired through the exercise of the right to purchase additional shares in arriving ar the average cost is apparent from the decision of the Supreme Court in Miles v. Safe Deposit Trust Co., 259 U. S. 247, in which the following language was used:

Tbe right to subscribe to tlie new stock was but a right to participate, in preference to strangers and on equal terms with other existing stockholders, in the privilege of contributing new capital called for by the corporation — an equity that inheres in stock ownership under such circumstances as a quality inseparable from the capital interest represented by the. old stock, recognized so universally as to have become axiomatic in American corporation law. * * * The District Court proceeded correctly in treating the subscription rights as an increase inseparable from the old shares, not in the way of income but as capital; in treating the new shares if and when issued as indistinguishable legally and in the market sense from the old; and in regarding the sale of the lights as a sale of a portion of a capital- interest that included the old shares.

The court also quoted with approval article 1547 of Regulations 45 which prescribes the method followed by the Commissioner in determining the cost of the stock sold by this taxpayer.

Judgment for the Commissioner.


author: Lansdon :

text:
    DAVID R. COHEN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 2969.
    Decided September 24, 1926.
    Upon tiie evidence, held, that certain notes were not ascertained to be worthless and charged off the books of the petitioner during the taxable year.

      W. W. Wallace, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    The Commissioner has determined deficiencies in income taxes for the years 1919 and 1921 in the respective amounts of $3,217.81 and $2,098.87, and has found an overassessment for the year 1920 in the amount of $911.11. The petitioner abandoned his contentions as to the years 1919 and 1920, and only the deficiency for the year 1921 is involved in this proceeding. This deficiency arises from the Commissioner’s addition of $16,922.79 as the petitioner’s share of the distributive net earnings of the partnership of David R. Cohen Co., and of $5,394.06, alleged profit from the sale of certain shares of stock of David 31. Cohen Co., a corporation, to the petitioner’s gross income for the taxable year. The petitioner seeks to offset a part of such additions to income by deducting the amount of certain debts alleged to have been ascertained to be worthless during the year 1921.
    FINDINGS OF FACT.
    David R. Cohen was the principal stockholder of the David R. Cohen Co., a corporation which acquired the business and assets of a partnership of the same name at July 1,1921.
    Upon the formation of the partnership, the petitioner sold certain interests therein to .Julius and Edward Eliscu and received some cash and the unsecured notes of such vendees in payment therefor in amounts not disclosed by the record, with an oral agreement that the principal and interest of such notes should be paid from the distributive shares of the partnership earnings accruing to the makers. Credits on account of cash and partnership profits were made on such notes in amounts not proved in this proceeding. A renewal note in the amount of $1,650, made on July 1, 1921, for the balance due by Julius Eliscu at that date was introduced in evidence. This note bears endorsements of interest paid on April 4, 1922, and August 29, 1922, in the respective amounts of $50 and $143. The original note of Edward Eliscu, in the amount of $3,900, dated July 1, 1921, showing payments on January 1, 1921 [sic], and October 1, 1921, in the respective amounts of $250 and $200, was also introduced in evidence.

      Some time in the year 1923, the David R. Cohen Co. made an assignment for the benefit of its creditors, and, at that time, the petitioner made a demand on the makers of the notes for payment of the same, but received nothing then or at any other date.
   OPINION.

Lansdon :

The petitioner seeks to have the unpaid balances of the notes of Julius and Edward Eliscu at December 31, 1921, deducted from his gross income for the taxable years. The evidence offered does not convince us that these notes were ascertained to be worthless and charged off during such year. The Commissioner’s determination of a deficiency in the amount of $2,098.87 should not be disturbed.

Judgment for the Commissioner.


author: Littleton :

text:
    Appeals of ROBERT P. WHITE, et al.

    Docket Nos. 5554, 5555, 5621-5623.
    Decided September 24, 1926.

      Harry Friedman, Esq., for the petitioners.

      Ward Loveless, Esq., for the Commissioner.

       The following appeals were heard with the above and are decided herewith — Julia A. White, Docket No. 5623; James White, Jr., Docket No. 5622; Rosena W. Bradshaw, Docket No. 5621; Frances White Yow, Docket No. 555*5.

   Littleton :

These appeals question the correctness of the determination of deficiencies for the calendar year 1920, of $1,242.17 as to Robert P. White, $411.97 as to 'Frances White Yow, $2,865.97 as to Rosena W. Bradshaw, $3,072.14 as to James White, Jr., and $2,727.25 as to Julia A. White, in so far as these deficiencies result from the disallowance of deductions on account of a debt alleged to have been worthless and charged off on December 31, 1920.

FINDINGS OF FACT.

Petitioners are residents of Athens, Ga. On or about September 24,1920, they loaned to Mrs. M. R. Welch, of Athens, the following amounts: Robert P. White, $10,000; Frances White Yow, $5,000; Rosena W. Bradshaw, $25,000; James White, Jr., $25,000; Julia A. White, $25,000.

These loans were due 12 months after date. Mrs. Welch was the mother of John P. Welch, who was engaged in the cotton-warehouse business. At the time the loans were made to Mrs. Welch, petitioners inquired carefully into her financial condition and found that she was worth at least $300,000, and, while she had outstanding indebtedness as endorser of her son’s notes, and otherwise, it was decided by the petitioners that, notwithstanding this fact, she was fully solvent and that her indebtedness was fully and amply secured. Her son, as was the custom of the business in which he was engaged, advanced large sums of money to farmers on their notes, which he discounted at the banks and on which he was liable. He had also borrowed considerable sums from banks on his notes, upon which his mother was'endorser. This situation was fully investigated by the petitioners prior to making the loans.

At that time cotton was selling for 28% cents and 29% cents a pound. Between the dates of the loans and December 31, 1920, conditions changed materially. The cotton crop in southern Georgia was almost a complete failure and the price of cotton declined from 2814 cents and 29% cents to 12 cents and 14 cents. The farmers were unable to pay their debts. There was no market’ for stock, farming-implements or land. As a result of this situation, many notes became due and were not paid by the farmers. In addition, loans made by John P. Welch, through banks, became due and the collateral given by him became of little value as a result of existing conditions. Mrs. Welch was- required by reason of these circumstances to pay the notes which she had endorsed. The banks held prior liens upon her property. The debts due petitioners by Mrs. Welch were worthless on December 31, 1920. The petitioners determined the debts to be worthless and charged them off. Mrs. Welch died in the early days of 1921. Her estate was immediately settled and nothing was paid upon the accounts due these petitioners; They' deducted the aforementioned amounts from the gross income for 1920 as worthless.

The Commissioner denied the deduction for 1920, holding that the debts should have been deducted from gross income for 1921.

Judgment for the petitioners.


author: Littleton:

text:
    MacDONALD-KAITCHUCK PRINTING CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 279.
    Decided September 24, 1926.

      William T. Church, Esq., for the petitioner.

      L. C. Mitchell, Esq., for the respondent.
    This proceeding involves deficiencies of $2,128.68 for 1918, $4,449.28 for 1919, $1,009.32 for 1920, and $15,056.18 for 1921. The questions are, (1) the proper allowance for the exhaustion, wear and tear of machinery, tools, and equipment, (2) the deductibility of 1920 and 1921 Cook County personal property taxes, (3) loss for 1920 and 1921 on the sale of automobiles and machinery, (4) the amount deductible for 1919 for compensation of officers, (5) the extent to which income for 1918 and 1919 should have been increased on account of amounts expended for Liberty bonds, (6) whether the deficiency for 1918 should be reduced in the amount of $48, alleged to have been the tax paid on the original return for that year, (7) the propriety of a claimed deduction of worthless accounts, and (8) the amount of commission paid or incurred for 1921.
    FINDINGS OF FACT.
    Petitioner is a corporation engaged in job printing in Chicago, Ill. From 1915 to 1918, it carried on operations in a small way. In 1918, Y. E. MacDonald and Win. Kaitchuck, being the owners of the entire capital stock, with the exception of qualifying shares, began a systematic effort to increase the sales of the company. Eegular solicitors were employed to secure commercial printing and the two stockholders, together with their friends, solicited printing from city, county and state political campaign committees, clubs and other political organizations, and from various city, county, and state officers, boards and commissions.
    The regular solicitors were paid a commission of 10 per cent and the petitioner made it known to persons who were in a position to obtain orders for it from the above mentioned sources that it wo'uld pay to them its regular commission of 10 per cent on all orders secured, with the result that commissions were paid, totaling $2,457.90 for 1920, and $19,223.66 for 1921. The Commissioner declined to allow the deduction of any portion of the 1920 commissions, and of the $19,223.66 paid or incurred in 1921 he allowed only $6,938.41/
    The petitioner’s gross sales and pay roll for the taxable years were as follows:
    Gross sales Pay roll
    1918_$56,705.29 1918-$21,660.21
    1919_ 112,953.61 1919_ 31,349. 74
    1920_ 173,365.18 1920_ 48, 480. 39
    1921_ 222,480. 60 1921_ 50,441.25
    As a result of the increased volume of business, petitioner’s machinery, metal and type were subjected to greater wear and tear. During 1918 and 1919, the plant was operated the usual 8 hours a day, but during 1920 and 1921 it was operated 22 hours and 24 hours a day, respectively.
    The petitioner claims that the deduction for exhaustion, wear and tear for 1918 and 1919 should have been computed at the rate of 10 per cent on machinery, 33% per cent on type and metal and 10 per cent on tools and furniture, and for 1920 and 1921 at the rate of 20 per cent on machinery, 33% per cent on type and metal and 10 per cent on tools and furniture. The Commissioner computed the deduction for 1918 on all of the equipment at the rate of 10 per cent and for 1920 and 1921 at the rate of 15 per cent.
    In August, 1920, MacDonald and Kaitchuck turned over to petitioner two Essex automobiles owned by them, which it immediately exchanged for two new Marmon cars. The unextinguished cost to MacDonald and Kaitchuck of the first mentioned cars in August, 1920, was $5,359.06. The petitioner was given credit for them on the new cars of $1,363.75 and $1,513.75, respectively, or a total credit of $2,877.50. The cost of the two Marmon automobiles was $5,250 and $5,677.50, as follows—
    First ear; credit on Essex_$1, 363. 75
    Oasli_ 3, 886.25
    Total_ 5, 250.00
    Second car; credit on Essex_ 1, 513.75
    Cash_ 4,163. 75
    Total_ 5, 677. 50
    In September, 1921, petitioner sold the two Marmon automobiles at a loss of $4,008.95. In addition to the loss on the sale of the automobiles, the petitioner suffered a loss in 1921 of $8.95 on the sale of an item of machinery.
    State, county, and city personal property taxes were assessed against the petitioner for 1920 and 1921, amounting to $727.65 and $1,771.20, respectively, which became due and payable in December of the years for which assessed. The Commissioner denied the petitioner’s claim for deduction of these taxes in 1920 and 1921.
    On or about March 15,1919, petitioner filed a tentative income and profits-tax return and paid a tax of $48. On June 16, 1919, it filed a complete return, showing no further tax due. In determining the deficiency for 1918 here involved, the Commissioner failed to give petitioner credit for the amount theretofore paid.
    Prior to 1919, the salary of each of the two officers was fixed at $2,600 per annum. During 1919, the corporation increased the annual compensation of these two officers to $3,600 each, and that amount was entered upon the books of account. The Commissioner allowed a deduction for 1919 of only $5,200 for officers’ compensation.
    During 1918, petitioner expended $1,085 for Liberty bonds and during the same year received $717 from its employees for certain of these bonds. Likewise, in 1919 it expended $1,260 for similar bonds and during the same year received $128 from its employees for certain of these bonds purchased by them. In computing the income for 1918 and 1919, the Commissioner increased the same in the amounts of $1,085 and $1,260, respectively, failing thereby to make due allowance for amounts received by petitioner from employees for certain of the bonds sold to them, which it properly entered upon its books.

      During 1921, petitioner had upon its books, certain accounts receivable for printing in that and prior years. During that year, the following amounts were long past due and every effort had been made to collect them without result.
    Association Court_ $17. 50
    Automotive Mfg. & Sales Co_ 61. 75
    Bob Allen_ 140.25
    Chicago Law Enforcement League — '-.- 36. 50
    Chicago Training School_ 154. 75
    The Collegiate World Pub. Co_ 105. 00
    B. E. Davis & Co_ 28. 25
    Fisher and Hightower_ 765. 91
    Dr. E. V. Hill_ 138. 00
    Harry B. Miller_ 40.00
    Mayor’s Office_ 663. 50
    Mr. Carlson_ 35.25
    Wm. H. Wesbey_ 75. 00
    Chas. R. Francis_ 40.00
    Walter Allen_ * 62. 75
    Metro Athletic Club_ 14. 50
    Howard S. Cartwright_ 7. 50
    Sol Bernstein_ 2.00
    National Court G. of L_1_ 360.00
    Beal Estate News Co_ 84. 00
    State Court G. of L_ 17. 50
    Wm. H. Thompson Republican Club_ 819. 45
    E. O. Todd_ 6. 50
    E. C. Triggs- 33. 50
    Visor Sales Co_ 101.75
    Women’s Betterment Assn_ 8, 512. 01
    12,323.12
    Throughout the year 1921, petitioner used every means known to it, except instituting suit, to secure payment of the accounts. Personal visits were made by the officers of the company, letters were written, and finally those of the accounts as to which the officers thought there might be the slightest possibility of collecting were placed in the hands of attorneys. The attorneys returned these accounts with the advice that they were worthless and uncollectible by suit or otherwise.
    During the year 1921, petitioner entered upon its books a reserve of $12,000 for doubtful accounts, and on December 31 credited this reserve with a like amount. In making its return for 1921, it claimed a deduction of $12,000 for worthless accounts. The Commissioner denied this deduction.
   OPINION.

Littleton:

The issues involved in this proceeding are all substantially questions of fact. We are of the opinion from the entire record that the petitioner has sustained the burden of proof and has thereby established its right to all of the deductions claimed, with the exception of the loss upon the exchange of the Essex automobiles for new ones in 1920. Accordingly, in computing the deficiencies for 1918, petitioner should be allowed a deduction for exhaustion, wear and tear of machinery at 10 per cent, type and metal at 33% per cent, tools and furniture at 10 per cent; the income determined by the Commissioner should be decreased in the amount of $717 received from employees for Liberty bonds. The deficiency as finally determined should be reduced by the amount of $48 paid upon the return filed for that year.

The deficiency, for 1919 should be computed by allowing a deduction for exhaustion, wear and tear of machinery at 10 per cent, type and metal at 33% per cent, tools and furniture at 10 per cent. A deduction of $7,200 should be allowed as compensation of officers, and the income should be reduced in the amount of $128 received from employees for Liberty bonds.

The deficiency for 1920 should be computed by allowing a deduction for exhaustion, wear and tear of machinery at 20 per cent, type and metal at 33% per cent, tools and furniture at 10 per cent. Further, commissions of $2,457.90 should be allowed as deductions in that year. In 1920, MacDonald and Kaitchuck each owned an Essex automobile. In August of that year they turned these automobiles in to the corporation, and it exchanged them for two new automobiles, the difference between the exchange value and the tost of the new cars being paid by the corporation. The petitioner claims a loss on the Essex cars of $2,481.56, being the difference between the unextinguished cost to MacDonald and Kaitchuck and the credit received upon the exchange. Petitioner paid nothing for the Essex cars and it is not entitled to deduct as a loss the difference between the depreciated cost and the credit obtained upon them.

The evidence shows that in 1920 Cook County personal property taxes for that year amounting to $717 were assessed and became due in December of the same year. The amount should be allowed as a deduction from gross income for 1920. ■ ■

The deficiency for 1921 should be computed by allowing a deduction for exhaustion, wear and tear, computed at the rates mentioned above for 1920.

The evidence shows that the reserve of $12,000 for 1921 for doubtful accounts was reasonable and should be allowed. The evidence further shows that commissions totaling $19,223.36 were paid or incurred and that they were legitimate business expenses. The Commissioner allowed a deduction of only $6,938.41 on this account. The petitioner is therefore entitled to a further deduction of $12,-285.25.

In 1921 petitioner sold the two Marmon automobiles acq'uired in 1920, at a loss of $4,008.95, and the income for that year should be reduced accordingly. It further appears that certain machinery was sold in 1921 at a loss of $8.95. The Cook County personal property taxes, amounting to $1,771.20, for 1921, constituted a proper deduction for that year. The petitioner kept its books and rendered its returns upon the accrual basis.

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


text:
    FRED L. MANDEL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 8633.
    Decided September 24, 1926.

      F. D. Seifkin, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
   Littleton:

Petitioner claimed a loss in his income-tax return for 1919 upon the sale of a certain building which he acquired by gift from his father in 1902. The Commissioner denied the deduction upon the ground that the property was not originally acquired with a view of profit and the loss claimed could not be considered as a loss sustained in a transaction entered into for profit, and determined a deficiency of $2,432.67.

EINDINGS 03T PACT.

Petitioner is a resident of Chicago, Ill. In 1902 his father purchased certain real estate at 3308 South Michigan Avenue in Chicago, for $25,000, and in that year made a gift thereof to the petitioner as a wedding present. The property was used by petitioner as his residence from the date received until 1911, when, because of changes in the character of the neighborhood due to the acquisition of nearby property by colored people, petitioner discontinued using the property as a residence and rented it. until 1919.

The changes in the population and character of the neighborhood were progressive, with the result that deterioration of property in that vicinity was rapid. In 1919 petitioner’s property had declined in value to such an extent that when in August of that year he was offered $7,750 cash for it, he accepted the offer. The petitioner’s father was living at the time he discontinued using the property as a residence in 1911, and made no objection thereto.

The fair market value of the property on March 1, 1913, was $17,000 and the reasonable allowance for exhaustion, wear and tear thereof between that date and the- date of sale was $2,000. During the period from March 1, 1913, to the date of sale, petitioner derived income from the rental of the property.

Judgment for the Commissioner.


text:
    CHICAGO BINDER & FILE CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 2285.
    Decided September 24, 1926.
    , Donald E. Currier, C. P. A., for the petitioner.

      Arthur H. Fast, Esq., for the respondent.
   Littleton:

This proceeding involves a deficiency in income and profits tax of $2,137.85 for the eight-month period ending August 31, 1920. Petitioner claims that it was entitled to deduct a loss through the disposition of its accounts and notes receivable and accounts payable. The Commissioner denied the claim and determined the deficiency here in controversy.

FINDINGS OF FACT.

The petitioner is an Illinois corporation, engaged in the manufacture and sale of loose-leaf devices at Chicago. It kept its books and rendered its returns on the accrual basis. Its capital stock of the par value of $50,000 was owned by Joseph A. Mudd, Sr., with the exception of a few shares issued to his son and daughter to qualify them as directors.

Early in 1920, Mudd concluded on account of poor health to sell his interest in the business, and in July opened negotiations with one Edward J. Visk, with a view of having him purchase his stock and take over the business of the corporation. In August, 1920, Visk agreed to purchase the entire capital stock of the corporation for $40,000, payable $10,000 in cash and $30,000 by notes, upon condition ^that the corporation transfer to Mudd all of its cash, accounts and Dills receivable and accounts and bills payable and that Mudd execute a bond indemnifying the corporation against all claims for taxes, etc., which might arise as a result of any transactions prior to September 1, 1920. The desire of Visk was that, upon the purchase of the stock by him, the corporation “ start with a clean slate ” and possess only the plant, machinery, stock on hand, and good will. This condition was agreed to by Mudd and it was therefore agreed between the parties that the sale of the stock should become effective on August 31, 1920. On or about August 31, Visk paid $10,000 in cash and executed a promissory note for $30,000 for the 500 shares of petitioner’s stock owned by Mudd. At 11:00 a. m., September 1, 1920, a meeting of the board of directors was held, the minutes of which are as follows:

The meeting was attended by Directors Joseph A. Mudd, Sr., Joseph A. Mudd, Jr., and Anna Mary Mudd, representing the entire capital stock outstanding and also Edward J. Visk, John W. Chesney and Charles J. Viskocil were present.
The meeting was called to order by the President, Joseph A. Mudd, Sr., and the minutes of the previous meetings of the Board of Directors and of the stockholders were read and duly approved as read.
Financial statements were submitted and ordered placed on file for future reference.
A dividend was declared and ordered paid to those stockholders of record on the books of the Company on the 31st day of August, A. D., 1920, covering the surplus of the Company as determined by the records of the Company and credited to the account of the stockholders and payable on demand.
Mr. Joseph A. Mudd, Sr., reported that he was about to accept a proposition of Edward J. Visk, John W. Chesney and Charles J. Viskocil, to purchase all of the stock of the Company and which, at the present, is owned by Mr. Joseph A. Mudd, Sr., Joseph A. Mudd, Jr., and Anna Mary Mudd. Thereupon, it being agreeable to all concerned, Mr. Joseph A. Mudd, Sr., Mr. Joseph Mudd, Jr., and Anna Mary Mudd have, for a good and valuable consideration, assigned their certificates of stock in this Company to said Edward J. Visk, John W. Chesney and Charles J. Viskocil, and tender herewith their resignations as Directors and Officers of the Company, respectively, which said resignations were duly accepted.
By motion duly seconded, Edward J. Visk, John W. Chesney and Charles J. Viskocil were duly elected Directors to fill the vacancies caused by the resignations of said Joseph A. Mudd, Sr., Joseph A. Mudd, Jr., and Anna Mary Mudd.

Thereupon, Joseph A. Mudd, Sr., Joseph A. Mudd, Jr., and Anna Mary Mudd submitted to the stockholders and the directors of the petitioner the following proposition:

The undersigned were the owners of all of the capital stock of The Chicago Binder & File Company upon the 31st day of August, A. D., 1920, at which time, at a joint meeting of the Directors and Stockholders of said Company, a dividend covering the surplus of the Company as determined by the records of the Company, was declared and ordered paid to the Stockholders of record on the books of the Company on said 31st day of August, A. D., 1920. And as such Stockholders of record, the undersigned were entitled to receive the amount of the dividend so declared. Also there is due to one of the undersigned, Joseph A. Mudd, Sr., certain sums of money as President and General Manager and for other services rendered The Chicago Binder & File Company.
We the undersigned, do hereby propose that, in consideration of the assumption and payment by Joseph A. Mudd, Sr., of all liabilities of The Chicago Binder & File Company on August 31st, A. D. 1920, the transfer to Joseph A. Mudd, Sr., of all the cash now in bank, all bonds in the possession of the Company and all accounts and bills receivable as shown by the statement rendered on August 31st, A. D. 1920, shall be in full payment and discharge of all obligations due by The Chicago Binder & File Company to the said Joseph A. Mudd, Sr., and we, the undersigned will consider said transfer to Joseph A. Mudd, Sr., payment in full of all claim or claims that each and all of us may have against said Chicago Binder & File Company by reason of the declaration of the dividend on the first day of September, aforesaid, and every other claim or claims that we may have against said corporation.

There was no liability on the part of the corporation to pay Joseph A. Mudd, Sr., any amount in excess of his regular salary which had been paid.

On the same day, and immediately after the adjournment of the above-mentioned meeting of the directors and stockholders, the new* directors and stockholders of the corporation convened and adopted the following resolution:

The meeting was attended by Edward J. Visk, John W. Chesney, and Charles J. Viskocil, being all of the Board of Directors of the Company, and representing all of the capital stock of the Company.
The meeting was called to order by Edward J. Visk.
The minutes of the previous meeting held on this day, were read and duly approved as read.
On motion duly seconded, Mr. Edward J. Visk, was elected President and Treasurer of the Company, John W. Chesney was elected Secretary of the Company and Charles J. Viskocil was elected Vice President of the Company, to hold their respective offices for the ensuing year and to serve until their successors are elected and qualified.
Upon motion duly seconded, Edward J. Visk, President, was also declared the Manager, and as such President and Manager was duly authorized to conduct the business and make all contracts for the Company.
Upon motion duly carried, the salary of Edward J. Visk, as President and Manager was fixed at four thousand dollars ($4,000) per year, ending August 31st, 1921.
A proposition was received from Joseph A. Mudd, Sr., to the effect that he, the said Joseph A. Mudd, Sr., Joseph A. Mudd, Jr., and Anna Mary Mudd, would accept in payment of dividend declared payable to the holders of the capital stock of record on August 31st, 1920, all the cash now in bank to the credit of the Company, all bonds in the possession of the Company and bills and accounts receivable, as shown by statement submitted herewith; that the same to be delivered to Joseph A. Mudd, Sr., and upon motion duly seconded, it was ORDERED that said proposition of Mr. Joseph A. Mudd, Sr., Joseph A. Mudd, Jr., and Anna Mary Mudd be accepted, and the President and Secretary of the Company duly authorize and make, execute and deliver all proper assignment or assignments and transfers necessary to carry into effect the consummation of the above proposition submitted and accepted by the Board of Directors.

The operating net income of the petitioner for the eight months ■'ending August 31, 1920, amounted to $10,278.03.

On August 31, 1920, the corporation had accounts and bills receivable of $36,121.62, and accounts and bills payable of $2,442.22.

Prior to August 31, 1920, the petitioner obtained permission from the Commissioner to change its accounting period from a calendar year to a fiscal year ending August 31. Accordingly, it filed a return, for tbe eight-month period ending August 31, 1920. The petitioner claimed that it sustained a deductible loss of $33,679.40, being the difference between the accounts and bills receivable and accounts and bills payable. \The Commissioner held that the amounts received by Joseph A. Mudd, Sr., in excess of the duly authorized dividend, represented a payment by the corporation to the retiring stockholders in partial liquidation, as a result of which no deductible loss was sustained by it.

Judgment for the Commissioner.


text:
    A. P. McGLYNN, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 4714.
    Decided September 24, 1926.
    Upon tlie evidence, held, tliat petitioner is entitled to a deduction of debts determined to be worthless and charged off within the year 1923.

      Benjamin H. Flesher, Esq., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
    This is a proceeding to set aside a deficiency of $202.34 for the. calendar year 1923. Petitioner claims that he sustained a loss of his investment of $10,540 in the stock of a corporation, and that $5,000 of various loans made by him from time to time to a corporation was determined to be worthless and charged off within the year. The Commissioner refused to allow any deduction in respect of the investment or loans.
    FINDINGS OP PACT.
    The petitioner is a resident arid citizen of Minneapolis, Minn.' Early in 1921 he organized a corporation known as the Oxford Amusement Co., for the purpose of erecting, equipping, and operating a moving-picture theatre in St. Paul. Pie acquired the capital stock of the corporation, for which he paid $10,540. The cost of constructing and equipping the theatre greatly exceeded the original estimates and petitioner from time to time advanced various sums of money to the corporation and paid certain of its indebtedness for materials and labor in amounts ranging from $12 to $2,800, amounting in all to a total in excess of $17,000, for which the corporation executed its promissory notes to him.
    The theatre was opened on November 30, 1921, and was operated continuously thereafter until J une, 1922, at a loss of a/pproximately $400 a month. The corporation became insolvent in June, 1922. It was indebted in large sums to various persons for materials and labor. The Yellaume Box and Lumber Co. held first and second mortgages on the property. When the first interest installment provided in these mortgages became due, in June, 1922, the corporation was unable to pay it. As a result, certain individuals connected with the Yellaume Box and Lumber Co., to whom this petitioner was well known, proposed to the corporation that they would form a new corporation to assume its liabilities, other than its stock liabilities to petitioner, and its liabilities on various notes payable to him, amounting to approximately $17,000, in exchange for its assets. This proposition was accepted and the transaction was consummated in June, 1922. A new corporation was immediately organized to take over and operate the theatre. The petitioner received no stock in the new corporation. Thereafter, the Oxford Amusement Co. remained in existence but carried on no business and possessed no assets.
    At the time of this transaction, certain of the individuals connected with it verbally stated to the petitioner that if the new corporation should be successful in the operation of the theatre, they would make an effort to see that he should be at least partially reimbursed for his loans to the amusement company. Later in 1922, the prospects of the new corporation for success were not bright and one of the individuals who had participated in the acquisition by the new corporation of the assets informed the petitioner that nothing would be paid to him in reimbursement. Two of the other men interested in the transaction, however, stated to petitioner in 1922 and 1923 that they still had hopes that he might some time be reimbursed to the extent of possibly 35 or 45 per cent of his loans to the old corporation. These statements were not binding, either upon the new corporation or the individuals, but represented merely an expression on the part of the petitioner’s friends of their desire that he should not completely lose the amounts which he had advanced to the old corporation. In 1923, the petitioner, after conferring with his counsel, and with those interested in the new corporation, concluded that at least $5,000 of the loans, totaling approximately $17,000, was worthless and charged that amount off on his books and deducted the same from gross income for 1923.
   OPINION.

Littleton:

Counsel for the petitioner contended at the hearing that in addition to the $5,000 claimed as a deduction by the petitioner in his 1923 income-tax return, he should be allowed a deduction of $10,540 as a loss sustained in 1923 on his investment in the stock of the Oxford Amusement Co. We believe, however, from the. evidence, that the loss of the investment in the stock was sustained in June, 1922, when the corporation became insolvent and disposed of all of its assets in consideration of the assumption of its liabilities. The evidence shows with respect to the notes of that corporation held by the petitioner, that while this indebtedness was not assumed by the purchasers of the assets, the petitioner entertained hopes, based upon their personal representations that they would endeavor to see that he should at least be partially reimbursed therefor in the event of the successful operation of the theatre by the new corporation.

In 1923, after making inquiry concerning the matter, he ascertained that there was little probability that the total indebtedness of the old corporation to him would be repaid, and charged off $5,000 of the several outstanding notes. Whether the amount charged off represented the total of certain of the notes, or the entire amount of some and a portion of others, is not definitely disclosed by the record. However, the Revenue Act of 1921 permitted a debt to be charged off in part.

We are satisfied from the evidence that petitioner was justified in charging off as worthless in 1923 the amount of.$5,000 and that amount is allowed as a deduction from gross income for that year.

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


text:
    Appeal of WAVERLY COTTON MILLS.
    Docket No. 5632.
    Decided September 24, 1926.

      E. S. Parker, J't\. Esq., and J. L. Elliott, O. P. A., for the petitioner.

      Arthur E. Fast, Esq., for the Commissioner.
   Littleton :

This appeal is from the determination of a deficiency of $9,748.76 for the calendar year 1918. The claim advanced by petitioner is that, although the Commissioner approved its claim that abnormalities existed within the meaning of section 327 of the Revenue Act of 1918, he did not use proper comparatives in determining the profits tax under the provisions of section 328 of that Act.

FINDINGS OF FACT.

The petitioner is a North Carolina corporation, engaged in the manufacture of cotton cloth and yarn, with principal office at Laurin-burg.

With the exception of a few bales, all of the cotton used by petitioner during 1918, consisting of 2,871 bales, was furnished to it by J. F. McNair, one of the largest producers of cotton in the vicinity of petitioner’s plant, who, together with other members of his family, owned 968 shares of a total of 2,500 shares outstanding. He was a director of the corporation and his son, J. L. McNair, was its president and treasurer. All cotton used by petitioner was delivered-to-its warehouse without brokerage, transportation, or carrying charges. Petitioner did not pay for the cotton as received, but used the same as needed and paid J. L. McNair and others who were closely related to the McNair family therefor as payments were received for the manufactured product:-

Petitioner’s gross income for 1918 amounted to $655,915.11, and its net income amounted to $168,560. It paid officers’ salaries totaling only $1,516.68. Its invested capital computed under the provisions of section 326 of the Revenue Act of 1918, was $223,285.88. During the year 1918, it used and employed in its business in addition to its statutory invested capital, an average borrowed capital of $298,839.61. The Commissioner determined a profits tax of $96,769.-82 and advised the petitioner that “ your profits tax is based upon a comparison with a group of representative concerns which in the aggregate may be said to be engaged in a like or similar trade or business, to that of your company.”

Judgment for the Commissioner.


text:
    Appeal of T. F. DRISCOLL.
    Docket No. 6458.

      Decided September 24, 1926.

      David L. Krebs, Jr., Esq., for the petitioner.

      W. F. Gibbs, Esq., for the Commissioner.
   Littleton:

This appeal involves a deficiency of $70.60 for the calendar year 1922.

FINDINGS OF FACT.

.Petitioner is a resident of Chicago, Ill.

. In anticipation of vocal engagements in a professional capacity, petitioner’s wife studied under the instruction of professors of voice culture in New York City and Brookfield, Conn. The cost of such instruction, including subsistence during the period thereof, together with the expenses of traveling from Chicago to New York and Boston, amounted to $900. During 1922, the general health of petitioner’s wife was such that, under the advice of her physician, she abandoned her plans for a professional career.

Petitioner and his wife filed a joint return for 1922, and claimed therein the above-named amount of $900 as a loss sustained in that year. The Commissioner denied the deduction upon the ground that the expenditure at the time made was for educational purposes and of a personal character, and not a proper deduction from gross income as a loss in 1922.

Judgment for the Commissioner.


author: Smith :

text:
    Appeal of EDWARD DEUTSCH, Executor, Estate of MRS. JOHN DEUTSCH, Deceased.
    Docket No. 4995.
    Decided September 24, 1926.

      George G. Witter, Esq., for the Commissioner.
   Smith :

This is an appeal from the determination of a deficiency in income tax for the year 1920 in the amo’unt of $4,550.82.

FINDINGS OF FACT.

In 1908, John Deutsch (the owner of land afterwards sold at a profit) died testate leaving a last will and testament, which reads in part as follows:

FIRST, I order and direct that my Executrix hereinafter named pay all my just debts and funeral expenses as soon after my decease as conveniently may be.
SECOND, After the payment of such funeral expenses and debts, I give, * devise and bequeath to my beloved wife, Louise Deutsch, during her natural life, all my personal property, consisting, or may consist, of money on hands or notes, furniture, beds & bedding, farm utensils, live stock, provisions, grain, hay & straw in field or barn & grainery — Also my farm, to-wit: — The Ea. half of N. East Quarter, and the East half of So. East Quarter in Sec. thirty (30), Town 23, Range two East. To have and to hold the same during her natural life, and manage and till the same farm to the best (with the help of my children or otherwise) of her ability. Keep same in good condition, pay all taxes or other indebtedness thereon, and manage everything the same as I would have done if spared by providence. I also empower her to make disposition as equitable among our now living children, William, John, Louis, Edward, Mathilde, Huida, and Anna, as possibly could be done after her demise, to the best of her own judgment and belief.
LASTLY, I make, constitute and appoint my said beloved wife, Louise Deutsch, without bond, with power to select assistant, to be Executrix of this, my last Will and Testament, hereby revoking all former Wills by me made.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed my seal, the eighth day of April, in the year of our Lord, One Thousand eight hundred and ninety-eight.

JOHN DEUTSCH (SEAL)

The widow was appointed executrix and in a year or two settled the estate and was discharged. She and some of the children continued to occupy the farm while others resided elsewhere. In 1920 the farm was sold at a profit, determined by the Commissioner to be $32,612.28. The widow, on the advice of the collector of internal revenue at Bloomington, Ill., made a tax return for 1920 in.which she charged herself with having made a profit on the sale of $22,-167.52 and paid the income tax figured on that sum. A year or so later she was assessed an additional tax of $2,318.76, based on the claim that there had been more profit on the sale than had been reported owing to the fact that the land in 1913 had been placed at too high a figure.

At the time of the reassessment the widow had died and Edward Deutsch was acting as her executor. He filed a claim on behalf of the estate of his mother for a refund of the tax that had been paid by her and for cancellation of the additional tax that had been levied. Upon evidence filed in support of the claim, the Commissioner ruled that the widow had only a life interest in the property which was sold, and that no profit derived from the sale inured to her, but that there was a profit to the fee owners, and that the amount representing profit from the sale of the farm should be eliminated from the individual return of the widow and that there had been an overassessment of $3,007.76 on the return, which amount would be made the subject of a certificate of overassessinent. In this decision it was held that the profit derived from the sale represented 'undistributable income of a trust entity, and that as the property was not distributable to the mother or children it would therefore be held in a fund during the life of the mother in order that she might have the use of it. The Commissioner prepared a return for the estate or' trust showing the profit as income on which the tax alleged to be due is $4,550.82. It is from the proposed additional assessment that the petitioner has appealed to this Board.

The above constitutes all of the findings of fact which can be made from the record.

Judgment for the Commissioner.


author: Teussell :

text:
    Appeal of CHARLES A. O’NEILL.
    Docket No. 5517.
    Decided September 25, 1926.

      Charles A. O'1 Neill pro se.

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

The petitioner brought this proceeding for the purpose of securing a redetermination of a deficiency asserted in the amount of $1,345.85 for the calendar year 1921. Only that part of this amount is here in controversy as results from the Commissioner’s adjustment of gains and losses from the petitioner’s participation in a stock selling syndicate.

FINDINGS OF FACT.

The'petitioner is a resident of Pottstown, Pa. During the year 1920 he entered into a syndicate organized to purchase and sell stock of a certain corporation. His interest was to cost him $8,650. He paid $4,325 into the syndicate in the year 1920. The balance of the cost of his interest was to be taken out of his share of the profits of the syndicate. The syndicate operated successfully from the time petitioner entered it until November, 1921, when, owing to disagreements among its members, the syndicate discontinued operations and wound up its business in the year 1922. The petitioner received $1,670.54 as his share of gains from selling transactions in the year 1920, and $24,411.10 in 1921. In the year 1922, in the final winding up of the syndicate’s business, he received $346.17 in cash and an automobile valued at $2,000. The petitioner seeks to have his.gains from this venture adjusted over the years 1920 to 1922, inclusive, by being allowed a deduction of all of his capital contribution to the venture in the year 1921.

The Commissioner prorated the deduction for contribution of capital over the years 1920 to 1922, inclusive, in proportion to the number of shares of stock sold in 1920 and 1921 and the number which the syndicate failed to purchase and sell in the year 1922.

Judgment for the Commissioner.


author: TRussell:

text:
    RIENZI COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 717.
    Decided September 25, 1926.
    Obsolescence resulting from prohibition. — Tbe Board is unable to compute and allow a deduction based upon the alleged obsolescence of saloon fixtures and equipment when only the cost of an aggregate of items, some of which continued in use, is furnished and there is no testimony respecting the cost or remaining value of the portion of the property the use of which is continued, or the salvage value of that which ceased to be usable.

      Charles V. Clark, Esq., for the petitioner.

      W. E. Lcmder, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended October 31, 1919, in the amount of $14,097.37.
    The petitioner has alleged that the Commissioner erred in refusing to allow the deduction (1) of $43,200, representing the loss of useful value of saloon and beer garden fixtures and equipment, and (2) of $44,722.40, representing the loss or destruction of good will by the passage of the National Prohibition Act. At the hearing of this proceeding the petitioner withdrew the second allegation of error.
    FINDINGS OF FACT.
    The petitioner is an Illinois corporation with its principal office at Chicago.
    In 1912 it secured the lease of a property to be used as a saloon and beer garden for a term of 25 years and under an agreement that it would make improvements upon the property costing not less than $25,000.- It thereupon entered upon said premises and made improvements including the construction of large brick wall ice boxes and beer coolers with a storage capacity for 200 barrels of beer; the installation of toilets; the construction of a tile floor in the barroom and a brick floor in the open air garden about 80 by 100 feet. It decorated the walls with appropriate paintings and it built a veranda and placed awnings. It also installed a large mahogany bar with appropriate fixtures, large arm chairs, etc. The total cost of the improvements and furniture was $60,836. It immediately began to take depreciation on this investment at a rate which would exhaust the total cost over the period of the lease.
    When prohibition became effective, there- remained 18 years unexpired on the lease and the petitioner charged off on its books on July 1, 1919, $43,200, the entire balance of. the investment account, and deducted that amount in the return for its fiscal year ended October 81, 1919.
    The operation of the beer garden was a seasonal business and was operated only during the summer months. After July 1, 1919, the petitioner continued doing business on a smaller scale, but it was not profitable and the place was soon closed. From February, 1920 until July, 1921, the premises were not used for any purpose.
    The petitioner’s lease provided that if at any time during its term the lessee did not sell beer made by the lessor, the Independent Brewing Company, the rent would be doubled. After prohibition became effective and the petitioner could no longer sell beer, the iessor demanded the payment of double rent, so that in May or June, 1920, the petitioner purchased the property in order to minimize further losses. In July, 1921, the petitioner leased the premises but no consideration was given by the tenant for the saloon equipment. All the beer garden and barroom fixtures were stored in the basement and have since remained there. The new tenant opened a cabaret, and the premises had to be refitted by repainting, placing carpets on the floors and by putting in small tables and chairs. No use was made of the large beer cellars. There was no market for the beer garden and barroom fixtures and the petitioner has never realized anything on them.
   OPINION.

TRussell:

In the Appeal of Hagemeister Food Products Co., 2 B. T. A. 21, the Board found itself unable to allow a deduction based upon the obsolescence of saloon equipment where neither the cost nor the March 1, 1913, value of such properties was furnished. In the instant case the petitioner has gone one step further and has established the cost of an aggregate of many items of improvements upon leased premises, furniture, and other fittings, appropriate’ to the operation of a saloon and beer garden. It appears from the testimony that some portions at least of the improvements and equipment continued usable and have been used since the business for which they were installed was discontinued. The record, however, is silent as to the continuing value of such articles as were continued in use as well as of the salvage value of those articles which ceased to be usable. Under such conditions the Board can not determine what, if any, was the amount of the actual loss sustained.

In adjusting the petitioner’s tax liability for the year ended October 31,1919, it should be allowed a deduction for depreciation of the properties here under consideration in the amount of one twenty-fifth of their cost. In other respects the determination of the Commissioner must be approved.

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


text:
    Appeal of H. E. and M. C. SADLER.
    Docket No. 3987.
    Decided September 25, 1926.
    A lessor is not entitled to a depletion deduction based on discovery value unless it appears that such value is materially disproportionate to the cost.

      Louis B. Montfort, Esq., for the petitioners.

      Benjamin H. Saunders, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency of $634.40 in income tax for 1920. The question involved is whether the taxpayer, M. C. Sadler is entitled to a depletion deduction based on discovery value for the taxable year in question.
    FINDINGS OF FACT.
    H. E. and M. C. Sadler, husband and wife, filed a joint return for 1920. For that year H. E. Sadler claimed as a depletion deduction on royalty interests $823.06 which was allowed by the Commissioner. M. C. Sadler claimed $5,723.62 as a depletion deduction on royalty interests owned by her, which was disallowed.
    In or about 1904 M. C. Sadler acquired for taxes three tracts of land known as the Akin, Chandler and Johnson farms. At some time thereafter she leased the oil rights to these tracts, reserving to herself a one-eighth royalty interest. Oil was discovered on these tracts by operating lessees as of the following dates:
    1. Akin Farm, September 1, 1919.
    2. Chandler Farm, March 16, 1916.
    3. Johnson Farm, (a) August 15, 1919. (6) October 12, 1919. (c) November 26, 1919.
    The discovery value or the fair market value of the right to exploit the oil reserves to an operating fee owner as of the aforementioned dates, and the estimated cost of drilling and equipping the necessary wells to exploit these reserves on the various tracts are:

      During 1920 the above properties were operated by the lessees, and taxpayer took her depletion deduction based on the discovery value of these properties and the depletion which resulted to her one-eighth interest from such operation by the lessees.
   OPINION.

MoRRis:

The taxpayer contends that as a matter of law she is entitled to an equitable apportionment of depletion on the basis of discovery value regardless of the cost of development sustained by the lessees, as the provision in section 214 (a) (10) of the Revenue Act of 1918 which provides for the equitable apportionment of the depletion allowance between the lessor and lessee is mandatory. That section provides:

In the case of mines, oil and gas wells, other natural deposits and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) on that date shall be taken in lieu of cost up to that date: Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee; * * *. [Italics ours.]

It will be noted that the last sentence upon which the taxpayer relies contains the words “ the deductions allowed by this paragraph.” Before there can be any equitable apportionment of depletion between the lessor and lessee in the case of leases it must be determined that there is an amount allowable. The section provides for a reasonable allowance for depletion based upon cost, the fair market value of the property as of March 1, 1918, when acquired prior thereto, or the fair market value of the property at the date of discovery, when discovery is made by the taxpayer, on or after March 1,1913, and not acquired as the result of purchase of a proven tract or lease, where such fair market value is materially disproportionate to the cost. A prerequisite, therefore, which must be met by either a lessor or lessee in order to sustain a depletion allowance based on discovery value, is a showing that such value is materially disproportionate to the cost.

Article 220 (a) (4) of Regulations 45 provides that cost .includes only the cost of exploration and development work to the time the well was brought in, but counsel for the Commissioner contends that cost includes the total estimated cost of drilling and equipping the wells necessary to exploit the reserves. Which of these positions is correct, or whether only the original cost or March 1, 1913, value of the property should be taken into consideration, it is unnecessary to decide in this appeal. Even taking the position most favorable to the taxpayer, the determination of the Commissioner must be approved, as we have no evidence as to original cost of the tracts in 1904; as to any intervening costs between date of acquisition and the leasing of the premises; as to cost of exploration and development of the properties which resulted in the discovery of oil, or as to value, if any, on March 1, 1913.

Judgment for the Commissioner.


author: MoReis:

text:
    Appeal of LEO STEIN.
    Docket No. 5734.
    Decided September 25, 1926.
    Tbe availability of tbe defense of the statute of limitations in and of itself is not a sufficient ascertainment of worthlessness to justify the charging off of a note as a bad debt.

      James L. Dohr, Esq., for the petitioner.

      Arthur E. Murray, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency of $4,843.93 in income tax for 1919, arising from the disallowance of a deduction for an alleged bad debt.
    FINDINGS OF FACT.
    The petitioner is a resident of the City of Newr York. Prior to December 3, 1910, he had made certain advances to his brother, Jule Stein, and on the aforementioned date he took the latter’s promisory note for $36,302.85 payable on demand three years after date, the note being dated “ New York, Dec. 3, 1910,” and in the usual form. In 1913 the petitioner notified the maker of the due date and on December 3, 1913, demanded payment, but received nothing on the note. .Thereafter the petitioner demanded payment a number of times. The maker’s response to all of these demands was a present inability to meet his obligation but that he would pay when able. No payment was made on the note between 1913 and 1919. At the time the note was due Jule Stein was living in a hotel in New York City and was making $10,000 per annum. The petitioner did not know and made no effort to ascertain whether his brother was the owner of any property or not. The petitioner did not sue because he did not want to embarrass his brother, and because he felt that nothing could be gained thereby. He was aware that the statute of limitations would bar his remedy after December 3, 1919. He deducted the amount of the note as a bad debt in 1919.
   OPINION.

MoReis:

The question is whether the petitioner may deduct in his income-tax return for 1919, as a bad debt, an amount of $36,302.85. We have held in the Appeal of Steele Cotton Mill Co., 1 B. T. A. 299, that before a taxpayer is entitled to take a deduction for a debt ascertained to be worthless, he must take reasonable steps to determine that there is no probability of payment or collection and have prima facie evidence to prove that the debt has no value. No such evidence was introduced in this appeal. All the testimony shows is that the petitioner made repeated demands between the years 1913 and 1919 for payment of the note, which were met by promises to pay the same as soon as the debtor was able. We -were not advised of the financial condition of the debtor other than that he was receiving a salary of $10,000.

The petitioner seems to rely upon the contention that the running of the statute of limitations in and of itself is an ascertainment of worthlessness. With this position wre can not agree. The statute of limitations does not destroy the debt, but is merely a defense to an action and must be affirmatively pleaded. In Maxwell v. Cottle, 25 N. Y. S. 635, 638, the court quoted from Hulbert v. Clark, 128 N. Y. 295; 28 N. E. 638, as follows:

The statute of limitations does not, after the prescribed period, destroy, discharge, or pay the debt, but it simply bars a remedy thereon. The debt and the obligation to pay the same remain, and the arbitrary bar of the statute alone stands in the way of the creditor seeking to compel payment. The legislature could repeal the statute of limitations, and then the- payment of a debt upon which the right of action was barred at the time of the repeal could be enforced by action, and the constitutional rights of the debtor are not invaded by such legislation.

The availability of a possible defense is not a sufficient ascertainment of worthlessness to justify a charge-off of a note as a bad debt.

Judgment for the Commissioner.


author: ARuNdell

text:
    JAMES A. CLAYTON & COMPANY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket Nos. 4320, 11088.
    Decided September 25, 1926.
    Under the conditions of fact existing in this proceeding the petitioner is not entitled to classification as a personal service corporation.

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

      George E. Adams, Esq., for the respondent.
   ARuNdell

This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amounts of $7,564.63 and $8,809.01, respectively. The question involved is the right of the petitioner to report its income on a personal service basis. By agreement of counsel the proceedings have been consolidated.

FINDINGS OF FACT.

Petitioner was organized under the laws of California during the year 1903, and since that date has been engaged in the general real estate business in San Jose. During the taxable years there was outstanding capital stock of the par value of $51,000, which was owned as follows:

Stares
F. O. Reed_‘_150
James A. Clayton_180
Ethel Clayton_179
W. S. Clayton_ 1

The employees of petitioner consisted of one bookkeeper, two stenographers, one rent clerk, one insurance clerk, one general clerk, and five salesmen. The salaries paid to employees during the year 1919, other than to the salesmen who were employed purely on a commission basis, amounted to $6,794.25; during the year 1920 the salaries to employees, other than salesmen, amounted to $8,431.80.

The returns disclose that the following salaries were paid to the officers of the corporation during the years 1919 and 1920:

During the years 1919 and 1920, petitioner’s income as shown by its returns was received almost entirely from the following sources:

The commissions set forth in the tabulation were primarily earned in the sale of real estate for others. It also covered sums earned in writing insurance on the property sold and for making loans. The petitioner owns stock in seven companies, including banks, abstract companies and the San Jose Water Works, and the dividends listed in the foregoing tabulation were received from these companies.

The major expense items as set forth in the returns for the years 1919 and 1920, together with other deductions, were as follows:

The balance sheets submitted with petitioner’s returns disclose,the following:

The bills receivable represent, in part, commissions not collected in cash and loans to clients to complete purchases. The accounts receivable represent, in part, money advanced by petitioner in floating loans to be thereafter sold. It was the practice of petitioner at times to use money left with it for investment with which to purchase loans in cases where it was assured that another customer would, within a few days, repurchase the loans from it. The accounts payable reflected the money left on deposit with petitioner for investment and on this money no interest was ever paid.

Judgment for the Commissioner.


text:
    CHARLES H. HOOD, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 6990.
    Decided September 25, 1926.

      W.. Yale Smiley, Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
   Littleton:

The Commissioner determined deficiencies of $597.00 and $7.36 for 1920 and 1921, respectively. Only the deficiency for 1920 is now in controversy by reason of petitioner’s claiming that the Commissioner erred in refusing to allow the deduction of $2,509.97 on account of debts alleged to have been determined to be worthless and charged off within the year.

FINDINGS OF FACT.

Petitioner is a resident and citizen of Minneapolis, Minn. During 1920, a corporation known as the Hood Agency was engaged in business as a general insurance agent, all the stock of which was owned by the petitioner. The Commissioner determined that the Hood Agency was a personal service corporation and taxed its income to the petitioner. The corporation at all times kept its books and rendered its returns upon the accrual basis. In 1916 the corporation wrote certain workmen’s compensation insurance policies for C. W. Werdenhoff and Nelson & Nelson, contractors. The premiums upon these policies based upon the estimated payroll of the contractor were paid at the time. Later it was found that the payroll exceeded the estimate and excess premiums became due. These excess premiums were entered upon the company’s books as accounts receivable and later notes were given therefor. The notes were never paid. The corporation made numerous efforts to collect the notes without success. In 1920, the debtors were without assets and the payee determined that the notes were worthless and charged them off and claimed a deduction thereof from gross income in its return .for 1920.

Judgment for the petitioner. Order will he entered on 15 days’ notice, under Bule 50.


author: Marquette :

text:
    Appeal of MOSER AND WACKER, INC.
    Docket No. 4475.
    Decided September 25, 1926.
    1. On the evidence, held, that the taxpayer was a personal service corporation during the years 1918, 1919, and 1920.
    2. “ Trading as a principal,” as the phrase is used in section 200 of the Revenue Act of 1918, does not embrace “trading” in,the “ services ” of persons, regardless of whether such persons ax-e the corporation’s stockholders, employees or independent contractors.

      James A. Taylor, Esq. and O. R. Trobridge, G. P. A., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income and excess profits taxes for the years 1918 to 1920, inclusive, in the amount of $5,516.01. The deficiency arises from the Commissioner’s refusal to accord the taxpayer classification as a personal service corporation.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation with its principal place of business at 9 East 7th Street, New York City.
    The taxpayer was engaged in the business of embroidery designing. The creation of such designs is a highly skilled operation requiring extensive technical training and experience and an appreciation of color or contrast of various cloths.
    The market for these designs lies among shirtwaist, glove and silkwear manufacturers. Designs consisting of drawings in colors are submitted to a prospective customer and upon the selection of one the customer orders what is known as a “ sample order.” A “ sample order ” is a limited number of the design worked on cloth and its purpose is to determine exactly how the design appears when embroidered.
    Upon receiving a sample crder the taxpayer makes a pattern of the design and then a detailed chart showing the exact number of stitches, the position pf each and its color. The design, pattern, chart and thread, together with the material which is furnished by the customer, are then taken to an “embroidery operator,” who produces the sample order.
    Embroidery operators are individuals owning their own machines and specializing in the production of sample orders such as have been described. They are paid on the basis of the number of stitches required by the design, the price varying from 69 cents to 71 cents per hundred stitches according to the character of the work. The operators, of whom there are about twelve, work for anyone who furnishes them such employment. They are not capable of creating designs.
    By means of the chart above described the number of stitches is determinable in advance of the execution of the sample order and accordingly the price to be charged by the operator is likewise known.
    Upon completion of the sample order the operator is paid by the taxpayer. The taxpayer then bills the customer for the exact amount paid the operator, plus the actual cost of the thread, which is furnished by the taxpayer, and the price of the design.
    If the sample order demonstrates that the design is satisfactory the customer purchases the design. If it is considered unsuitable changes are made in the design or another design is selected and made up in a sample order. The customer reimburses the taxpayer’s expense for the sample order even if he does not purchase the design.
    The taxpayer’s stockholders and officers during the years involved were:

    The par value of the shares was $25 each, making the total par value of the capital stock $20,000.00.
    Gafafer and Moser were designers, and in addition the former solicited the trade.
    Maier supervised the production of sample orders by the operators, instructing them in the technical execution of the designs. In addition he conferred, with the designers relative to the artistic features of their work and also directed such employees as the firm had. He is an expert in the selection of silks and dyes. .
    C. Bubin was a stockholder in order tha,t he might qualify as a director.
    The taxpayer’s principal stockholders were regularly engaged in the business, devoting all of their time to it.
    Two girls were employed for the purpose of inspecting sample orders as received from the operators and checking them against the designs to insure their proper execution.
    The only other employee was a man who assisted Gafafer in soliciting the trade. He was paid on a commission basis. Total salaries and commissions paid these employees were, during 1918, $4,856.82; during 1919, $5,977.12; and during 1920, $4,718.16.
    The taxpayer at various times bought materials from which its designers could get ideas. These purchases consisted of wall paper, prints, woven goods, etc. Expenditures for such materials were: 1918, $187.95; 1919, $63.20; 1920, $18.
    Balance sheets of the taxpayer show at the close of each of the years

    The asset account designated “ patterns ” consisted of patterns accumulated over many years by the taxpayer’s stockholders when operating as partners, and valued at $15,000 upon organization of the taxpayer merely for the purpose of paying them in for capital stock. The actual value of these patterns is nominal even to the taxpayer and they have no practical value to others.
    “ Merchandise ” in the asset account represents the dyes, paper, etc., used in drawing the designs and thread furnished the embroidery operators for the production of the sample orders.
    Among the expense deductions claimed by the taxpayer, in addition to others already noted, were:

    Gross income, total expense, and net income were:

      The taxpayer’s only equipment, beyond office furniture, is a camera obscurer. This device is used to project enlargements of a design so that the stitches may be charted.
   OPINION.

Marquette :

Section 200 of the Revenue Act of 1918, in defining a personal service corporation, sets forth four conditions, all of which must concur to entitle a corporation to classification thereunder, and these conditions are each a question of fact.

The term means a corporation (1) whose income is to be ascribed primarily to the activities of the principal owners or stockholders; (2) whose principal stockholders are regularly engaged in the active conduct of the affairs of the corporation; (3) in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include (4) any foreign corporation, or any corporation 50 per centum or more of whose gross income consists of gains, profits, or income derived from trading as a principal, etc.

Upon the facts found we are so clearly of opinion that the taxpayer meets the second and third of these requirements that no discussion of them will be made.

Was the income of the taxpayer ascribable primarily to the activities of its principal stockholders? We believe that it was. Considering the nature of the business and the relative importance of the designing and supervision on one side, and the mechanical execution of the design on the other, it is apparent that the taxpayer’s income is attributable to the skill of its principal stockholders. Without such men the corporation would have no basis for existence. The designing of Gafafer and Moser, and the expert services of Maier in the selection of dyes and silk thread and the supervision of the operators, are the essential factors to which the corporation owes its success.

We are now left with the necessity of determining whether or not “ 50 per centum or more ” of the “ gross income consists of gains, profits or income derived from trading as a principal.” This involves determination of the intendment of the phrase “ trading as a principal,” since computations which it is unnecessary to detail here reveal that if the taxpayer was so engaged it must be denied the classification sought, under the “ 50 per centum ” clause.

That the taxpayer was a “ principal ” admits of no dispute since it acted solely on its own behalf.

We have now to resolve the meaning of the word “ trading ” to determine what its use in the section of the Act under discussion contemplated. That the taxpayer bought the services of the operators is clear, as is the fact that it purchased the thread used. It did not purchase the sample orders and it did not manufacture them— it merely hired the operators to fabricate them. The operators were independent contractors.

The value of the design and of the sample orders was not m the materials which composed them but in the artistic composition of the materials due to the taxpayer’s treatment of them.

Taking this view of the nature of the sample orders, it follows that what the taxpayer furnished its customers was the service of the operators, plus the thread, an immaterial item, and the. service of itself as represented in the creation of the design and the supervision of the operators.

The taxpayer in the broad sense of the term was “ trading ” in personal services. Every lawyer, physician or engineer who uses the services of an employee or who has a brief typed by a public stenographer, a test made by a chemist or a plan traced by a draughts-man, is in this sense “ trading ” in the services of other people. Would it be seriously contended that such “ trading ” was contemplated by section 200 ? We think not.

In short, we hold, that service or labor of the sort performed by the operators and the taxpayer’s officers is not the subject of such “ trading ” as section 200 of the [Revenue Act of 1918 contemplated and therefore that this taxpayer was not “ trading as a principal.” Appeal of Rhoades, Brownson & Kampman, Inc., 2 B. T. A. 194, 199.

We are of opinion that the taxpayer was a personal service corporation during the years 1918, 1919, and 1920.

Judgment for the petitioner.

Phillips concurs in the result only.