text:
    C. C. Wyman & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10676.
    Promulgated September 30, 1927.
    1. Good will acquired by petitioner in exchange for $50,000 par value of capital stock bad a cash value of $25,000.
    2. The petitioner transferred five memberships in the Minneapolis and Duluth Chambers of Commerce, and acquired from the transferee five like memberships in payment therefor. Held,, the transaction was an exchange of property for property of a like kind and use from which no gain or loss was derived.

      J. H. Kirby, Esq., and P. J. Ooffey, Esq., for the petitioner.

      Joseph B. Harlacher, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the fiscal years ending in 1921 and 1922, in the respective amounts of $4,800.86 and $2,473.42. At the hearing all allegations of error were waived except the following:
    (1) That the Commissioner erroneously held that for the fiscal years ending in 1921 and 1922 the petitioner is not entitled to include as a part of its invested capital good will in the amount of $25,000;'

      (2) That the Commissioner erroneously held that for the fiscal year ending in 1922 the petitioner is not entitled to the deduction of any loss resulting from the sale of certain memberships in the Minneapolis and Duluth Chambers of Commerce.
    FINDINGS OF FACT.
    The petitioner is a Minnesota corporation, engaged in the grain commission business. Its principal business is receiving and selling cash grain for independent grain shippers of the Northwest, largely farmers’ elevator companies, which it finances to a great extent. The business was established in 1883 as a partnership, under the name of Martin & Wyman. On April 30, 1903, Wyman took over the business and carried it on individually under the name of O. C. Wyman & Co. during the years 1903, 1904, and 1905. In 1905, he, together with others, incorporated the petitioner with a capital stock of $100,000, $25,000 of which was issued for tangible assets, $25,000 additional for cash, and $50,000 for the good will of the predecessor business. Wyman had traveled over the country and established the business and he did all the exchange business. While the business was conducted by him as an individual and after the organization of the corporation, one or more traveling salesmen were employed to purchase the grain and to keep on friendly relations with producers. After the business was incorporated Wyman made it a practice of covering the territory once a year to hold his clientele. The income of the business was from commissions, interest upon money advanced to farmers, and from profits on the purchase and sale of grain. The principal reason for the incorporation of the business was to enable employees to acquire a stock interest therein. The profits for the fiscal years ended April 30,1903 to 1908, inclusive, after the payment of a salary of $3,000 per year to Wyman, were as follow:

    The earnings for the years 1903,1904, and 1905 were on an invested capital which at no time exceeded $25,000.
    The cash value at the date paid in for $50,000 par value of capital stock was $25,000.
    When the corporation was organized, Wyman turned over to the corporation two memberships in the Minneapolis Chamber of Commerce and one membership in the Minneapolis Clearing House. These were turned in at their then market value of $4,450 for each of the memberships in the Chamber of Commerce and $300 for that in the Minneapolis Clearing House.
    It was the practice of the petitioner to value its memberships in the Minneapolis Chamber of Commerce and in the Duluth Chamber of Commerce at the end of each year at their then market value. Subsequent to the organization of the corporation it acquired an additional membership in the Minneapolis Chamber of Commerce and two memberships in the Duluth Chamber of Commerce. The value of these memberships at March 1, 1913, was $3,600 each. The value had declined in 1921 and the petitioner, desiring to make note of that fact in its balance sheet for the purpose of establishing its credit with the banks and in order to take a deduction in its income-tax return, transferred the five memberships in December, 1921, to the Hoover Grain Co. at the then market price, and on the same date acquired five like memberships from the Hoover Grain Co. at a like price. A certificate and a trading room card are issued with each membership and the transfers of the memberships above indicated were carried out in the usual manner. The transfers were effected on the boobs of the exchanges. In its income-tax return for the fiscal year ended in 1921 the petitioner claimed the deduction of a loss of $9,000 in respect of the memberships transferred, which deduction was disallowed by the Commissioner.
   OPINION.

Smith:

The first point raised by this proceeding is the value of the good will of the sole proprietorship of C. C. Wyman & Co. which was transferred to the petitioner in 1905 in exchange for $50,000 par value of capital stock. The evidence is to the effect that C. C. Wyman had built up a large and lucrative commission grain business with shippers of grain in the Northwest. The business of the partnership of Martin & Wyman had been conducted from 1883 to 1902 on a capital of not to exceed $20,000 or $25,000. The profits of the years 1903, 1904, and 1905 were made oh a capital of not to exceed $25,000.. Wyman had been successful over a long series of years in retaining his clientele. He testified that some grain producers had been shipping their grain to him to sell for more than 40 years. The profits of the corporation for the years 1906, 1907, and 1908 averaged greater than the profits of the business conducted by Wyman as an individual. The good will of the individual business was paid into the corporation in exchange for shares of stock.

Good will is not necessarily confined to a name. It may as well attach to a particular location where the business is transacted or to a list of customers or to other elements of value in the business as a going concern. Metropolitan Bank v. St. Louis Dispatch Co., 149 U. S. 436, 446.

The evidence warrants the conclusion that the good will of the individual business of C. C. Wyman & Co., paid in to the petitioner for $50,000 capital stock, had a cash value at the date paid in of $25,000.

The petitioner claims that it sustained a loss upon the sale of certain memberships in the Chambers of Commerce of Minneapolis and Duluth in 1921. In its original petition it claimed the amount of the loss was $9,000, but this was amended to $2,100.

Section 202(c) of the Revenue Act of 1921 provides as a basis for determining gain or loss:

For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property, no gain or loss shall be recognized unless the property received in exchange has a readily realizable market value; but even if the property received in exchange has a readily realizable market value, no gain or loss shall be recognized—
(1) When any such property held for investment, or for productive use in trade or business (not including stock-in-trade or other property held primarily for sale), is exchanged for property of a like kind or use.

Section 234 of the same Act permits a corporation to deduct from gross income in making its tax return.

(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise; * * * No deduction shall be allowed for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities made after the passage of this Act where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, unless such claim is made by a dealer in stock or securities and with respect to a transaction made in the ordinary course of its business. * * *

The petitioner claims that the transaction by which it transferred five memberships in the Minneapolis and Duluth Chambers of Commerce for five like memberships with the Hoover Grain Co. was a sale of such memberships, and that it is entitled to deduct from its gross income the loss which was sustained on the sale of at least two of the memberships. The actual details of the transaction are not in evidence. The evidence shows, however, that the petitioner transferred five memberships to the Hoover Grain Co. and the Hoover Grain Co. transferred on the same day five like memberships to the petitioner. There is no evidence that there was any cash transaction between the parties. We think that it is immaterial that the transfers took place at the then market price of the memberships. The substance of the transaction was an exchange of property for like property within the meaning of section 202(c) of the Revenue Act of 1921, above quoted. No deductible loss resulted to the petitioner from such transaction.

Judgment will be entered on 15 days1 notice, under Bule 50.

Considered by Littleton and Love.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Samuel Kurzman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10659.
    Promulgated September 30, 1927.
    Partners agreed with their sister that she should be paid 20 per cent of the partnership profits as withdrawn by them for services rendered to the partnership. The partnership kept its books on the accrual basis. Held that the sister was not a partner, and that the compensation payable to her was a legal deduction from gross income in partnership returns.

      John W. Townsend, Esq., J. G. Peacock, Esq., and G. E. Koss, Esq., for the petitioner.

      P. J. Bose, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income tax for the years 1920, 1921, and 1922, of $791.23, $518.90, and $2,452.58, respectively. The question in issue is the right of the petitioner to deduct from gross income certain amounts of money paid by him to his sister for services rendered to a partnership of which he was a member.
    FINDINGS OF FACT.
    1. Petitioner resides in New York, N. Y., and for the years 1920, 1921, and 1922 filed his Federal income-tax returns on the cash receipts and disbursement basis.
    2. During those years he was a member of the firm of M. Kurzman Sons, a copartnership engaged in the millinery, dressmaking and ladies’ wearing apparel business. The firm was organized in 1910, to succeed to the business theretofore conducted by petitioner’s father. At the time the partnership was organized, Mamie Mayer, a sister of the partners, wished to become a member but her father advised her against doing so. She was, therefore, not taken into the partnership as a member but the partners agreed that in addition to a stipulated salary she should receive 20 per cent of the profits of the partnership business, which additional compensation under the agreement was to be credited to her on the books each year when the profits were determined, but to be paid to her pro rata by each partner as and when his share of the profits was withdrawn from the business. When this agreement was entered into it was the purpose to leave the profits in the business, its capital being small, and this purpose was carried out, no large withdrawals being made by the partners until 1919. The members of the partnership aiid the percentage of profits to belong to each were as follow:

      Per cent.
    Samuel Kurzman_37%
    Charles C. Kurzman_37%
    Julius C. Kurzman_25
    The firm was dissolved by the death of Julius C. Kurzman on February 20, 1922. The petitioner’s duties related principally to the financial end of the business; Charles C. Kurzman’s to foreign buying, and Julius C. Kurzman’s to the selling.
    3. Mamie Mayer was employed during the taxable years 1920, 1921, and 1922 as domestic buyer and assistant manager. She also did some foreign buying. She had been with the firm since its organization in 1910, and also was with the preceding business conducted by petitioner’s father, having been connected with the business altogether between 35 and 40 years. She gave her full and exclusive time to the business of the firm in the years herein involved. In addition to her duties as buyer she waited on some of the firm’s best customers but did not receive any selling commissions such as other employees received on their sales. She had general supervision of the clerks and did not confine her work to any one department. For the years 1920 and 1921 Mamie Mayer was paid for her services a basic salary of $100 per week. Beginning with 1910 she was, at the end of each year, credited with 20 per cent of the year’s profits and also debited with her share of the losses in the only two years in which losses occurred. When withdrawals were made by the partners each paid to her 20 per cent of such withdrawals and debited her account therewith.
    4. In the private ledgers of the partnership there were thus credited to Mamie Mayer in the three accounts of the individual partners an aggregate of $11,473.46 at December 31,1920, and $7,202.83 at December 31, 1921, these amounts being 20 per cent of the firm’s profits for the respective years. No credits were entered for 1922, the partnership having been dissolved and the arrangement terminated on February 20, of that year.
    5. Pursuant to the agreement of 1910, the petitioner paid to Mamie Mayer $2,000 in 1920, $3,541.43 in 1921, and $18,636.10 in 1922, the amount paid in the latter year including the balance standing to her credit in her account with petitioner.
    6. At the termination of the partnership in February, 1922, upon the death of Julius C. Kurzman, Mamie Mayer left the firm and a dispute arose between her and the petitioner relating to the payment of the balance of profits credited to her on the books in her account with him. It was agreed to settle matters by arbitration, Judge Herman Joseph being selected by the parties. Mamie Mayer claimed before the arbitrator that she was entitled to the money as she had earned it. He held that she was entitled to payment in cash of the balance of the amounts standing to her credit since the partnership had terminated. The petitioner accordingly paid Mamie Mayer such balance and received a receipt dated May 15, 1922, stating in part:
    I hereby acknowledge that I have accepted the said two checks in full payment of any and all claim against Samuel Kurzman arising out of the account between us, wherein he agreed to pay me 20 per cent of the share of the profits of the business of M. Kurzman’s Sons from January 1,1910 to February 20, 1922.
    The two other members of the firm likewise carried out their agreement to pay Mamie Mayer 20 per cent of their withdrawals.
    7. In 1921, when the 1920 returns of the firm, its members, and that of Mamie Mayer were being prepared, the question of how the amounts credited to her should be treated for tax purposes arose. She did not suggest that the amounts to be received by her were gifts, but claimed and admitted that they were taxable to her as additional compensation, the question being whether she should report them when credited or when received. She claimed that she was not liable to income tax in respect of any compensation until it was received by her.
    8. In the partnership return for 1920, a deduction of $16,692.04 was claimed as compensation of the domestic buyer, Mamie Mayer, this representing her basic salary of $100 a week and the additional compensation credited to her on the private ledgers of the individual partners. In the partnership returns for 1921 and 1922 claim was made for the deduction of only the basic salary paid to Mamie Mayer, but the partners in their individual returns for those years claimed deductions for the amounts actually paid to her. The books of the partnership were kept and its tax returns rendered on the accrual basis.
    9. In 1920, 1921, and 1922, each of the three partners received a salary of $100 per week. Some of the sales people received more than that, the highest salaried employee besides Mamie Mayer receiving between $6,500 and $7,000 per annum. A new partnership was formed in February, 1922, to carry on the business and Mamie Mayer was reengaged at a salary of $200 per week. She was required to work only a part of the time for this compensation. A reasonable allowance as compensation for the personal services actually rendered to the partnership by Mamie Mayer is $16,773.54 for 1920 and $12,402.83 for 1921, which amounts are in each year the totals of the basic weekly salary of $100 paid and the additional compensation of 20 per cent of the profits credited to her.
    10. The Commissioner held that the amounts credited and paid to Mamie Mayer under the agreement of 1910 were in the nature of gifts to her, disallowed the deduction claimed in the partnership return for 1920 as compensation for Mamie Mayer, and hence increased petitioner’s taxable distribc .table share of the partnership profits for that year $4,812.68. He also disallowed the deductions of $3,541.43 and $19,122.25 claimed in the petitioner’s return for 1921 and 1922, respectively. The deficiencies result from such disallowances.
   OPINION.

Smith:

The issues in this case are set forth by the respondent as follows:

1. Whether the petitioner in computing 1920 income is entitled to a deduction of $4,535.47 as an expense incurred on account of compensation of an employee;
2. Whether the petitioner in computing 1921 income is entitled to a deduction of $3,541.43 as an expense incurred on account of compensation of an employee;
3. Whether the petitioner in computing 1922 income is entitled to a deduction of $19,122.25 as an expense incurred on account of compensation of an employee;
4. Whether the petitioner’s distributive share of partnership profits was overstated for 1920 in the amount of $4,302.58, and for 1921 in the amount of $2,701.06.

The first three issues must be decided in favor of the respondent. Mamie Mayer was not an employee of the petitioner. She was an employee of the firm of which he was a member. The evidence warrants the finding that she was not a partner. Although her additional compensation over a series of years was to be reduced by her share of the losses in years in which losses were sustained there was no agreement that she was to share losses beyond such a point. Such a contract would not operate to make her a partner. The amounts referred to above for the years 1920, 1921, and 1922 are not legal deductions from the gross income of the petitioner as an ordinary and necessary expense of doing business. Clearly the amount paid in 1922 was an indebtedness owed by the petitioner to his sister and not a deductible expense. M. Kurzman’s Sons kept its books of account upon an accrual basis. Mamie Mayer was an employee of the firm. Amounts paid to her were paid as compensation for' services rendered. These amounts were in no sense a gift by the partners to their sister.

A partnership is entitled to the same deductions as an individual with certain exceptions not here material. It is entitled to accrue as an ordinary and necessary expense the compensation payable to Mamie Mayer, an employee. It is quite immaterial that that compensation was a percentage of the profits or that the books of account were so kept as not to show the accrual of the expense prior to the determination of profits distributable to the partners. The private ledgers of the partners ¿ire to be considered as a part of the general bookkeeping system of the partnership, which were kept on the accrual basis. The partnership is entitled to compute its income on the accrual basis in accordance with the decisions of the court in United States v. Anderson, 269 U. S. 422, and American National Co. v. United States, 274 U. S. 99. The partnership correctly reported its net income for 1920 and the petitioner is liable to income tax only upon his pro rata share of such profits. The net income of the partnership for 1921 should be recomputed in accordance with this opinion and the petitioner held liable to income tax upon his distributable portion of such net profits. The petitioner is not entitled to deduct from his gross income for 1922 any amount in respect of the $19,122.25 paid by him to his sister in 1922.

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

Considered by Littleton and Love.


text:
    John B. Murphy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6675.
    Promulgated September 30, 1927.
    The petitioner was a member of a syndicate which sold certain assets to a corporation in exchange for shares of stock. For his contribution to the syndicate the petitioner received 184 shares of stock of the corporation. Held, the evidence is insufficient to show that the Commissioner erred in finding that the fair market value of the shares received by the petitioner was $20 per share and in computing the profit on the transaction.

      Maynard Teall, Esq., for the petitioner.

      A. S. Lisenby, Esq., for the respondent.
    This proceeding involves alleged deficiencies' of income taxes in the amount of $4,261.13 for the year 1919, $4,328.66 for the year 1920, and $1,297.78 for the year 1921. The principal point in issue is whether the petitioner derived any income from an investment in a syndicate which turned over certain assets to a corporation in exchange for shares of stock, the petitioner receiving 184 shares in the distribution thereof by the syndicate. An error alleged in paragraph 4(d) in the petition was withdrawn at the hearing. The facts as found were stipulated.
    FINDINGS OF FACT.
    (1) Subsequent to March 1, 1913, the petitioner, in association with others, acquired certain oil leases covering property in Ohio and referred to herein as the “ Ohio Leases,” for the sum of $2,000. The petitioner and his associates continued to own and hold the leases until 1917, the petitioner’s interest in them being one-third. Without any operations ever having been carried on, the petitioner and his associates sold the leases in 1919 for $4,444, or at a total profit of $2,444, to a group of individuals or a syndicate, of which the petitioner was a member by reason of a .cash investment of $1,200 on his part. His interest or share of the profit on the sale to the syndicate was $814.66. The syndicate acquired the leases in contemplation of organizing a corporation to take them over (together with certain other property) and to carry on operations under them. At or about the time of acquiring the lease the syndicate organized or caused to be organized the Emerald Petroleum Co., to which on May 17, 1919, it transferred the leases and other property in consideration of the issuance by the corporation to it or to its nominees of 2,392 shares of its capital stock of the par value of $26 per share. Of the total 2,392 shares received, 184 were distributed to the petitioner as one of the members of the syndicate that had organized the corporation and transferred the leases and other property to it. The stock of the corporation was never listed on any exchange. The total shares outstanding at any time up to May 31, 1919, were 5,775, of which 2,392 were issued on May 17,1919, as aforesaid, to the members of the syndicate in exchange for the leases and other property. The corporation had no working capital, however, and to supply that need shares were sold to syndicate members and their friends for cash, at the rate of 5 shares for $100, which was considered as 4 shares at par, and 1 share as bonus. Such cash sales to syndicate members were:

    Such cash sales to friends of syndicate members were:

    The only evidence of the stock having a market value on May 17, 1919, consists of the above-mentioned cash sales to syndicate members and their friends. In his income-tax return for 1919 the petitioner accounted for a profit of only $814.66 from the syndicate transaction. This was increased by the Commissioner in the determination of the deficiency by the amount of $2,480, computed as follows:

      184 shares of stock at $20 per share_$3, 680
    Investment in syndicate_ 1,200
    Profit_ 2,480
    (2) In 1919 the petitioner owned an interest in certain oil leases covering properties in the States of Ohio and Illinois, known as the “Murphy Brothers Co.” leases. In such ownership the petitioner was associated with others. The petitioner’s share of the cost of said leases and of equipment acquired in connection with them, plus additions and development costs, and less depreciation and depletion to date of sale was $51,950.70. In 1919 the petitioner sold his interest to a corporation for $49,309.24, which was paid partly in cash and partly in stock. In his income-tax return for 1919 the petitioner claimed the deduction of a loss sustained on the transaction of $8,641.45, which was disallowed by the Commissioner.
    (3) Petitioner was the owner of residential property on Main Street, in the City of Washington, Pa. This property was acquired by the petitioner at a cost of $5,000. In 1919 he sold it for $6,000, receiving in cash at the time of sale the sum of $1,000, the balance of the agreed purchase price, to wit, the sum of $5,000, remaining on an installment mortgage. The mortgage was not turned into cash either in full or in part in 1919, and did not have a market value at that time in excess of $4,000.
    In his income-tax return for 1919, the petitioner accounted for no profit in respect of the sale of the residential property. The Commissioner added to the net income reported $1,000 for profit on the sale of the residence.
   OPINION.

1. In his income-tax return for 1919 petitioner accounted for a profit of $814.66 from the syndicate transaction by which he received 184 shares of stock of the Emerald Petroleum Co., his investment in the syndicate being $1,200. The respondent has determined that the fair market value of the shares of stock received was $20 per share and has computed a profit of $2,480 from the transaction. The basis for this computation is the sale by the syndicate to the syndicate members and their friends of shares of stock at the price indicated. We have no evidence that the petitioner could not readily have sold his shares of stock at a price of $20 per share at the date of receipt. For lack of proof that the respondent erred in his determination that the fair market value of the shares was $20 per share at date of receipt, the determination of the respondent upon this point is approved. Cf. George H. Wheary, 5 B. T. A. 829; Cuba Grapefruit Co., 6 B. T. A. 260.

2. The parties have stipulated with respect to the second allegation of error, facts concerning which are set forth under paragraph (2) of the findings of fact, that the petitioner sustained a loss of $3,711.15 on the transaction.

3. The petitioner and the respondent have likewise stipulated with respect to the third allegation of error, which is concerned with the profit realized upon the sale of a residential property in Washington, Pa., that the petitioner realized a profit of $166.67 in 1919.

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

Considered by Littleton and Love.


author: Lansdon :

text:
    American Lace Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8293.
    Promulgated October 1, 1927.
    Petitioner’s invoices to customers witbin the United States all contain as a statement of terms of sale the phrase “ 7% — 10 days—
    60 extra.” Purchasers pay the face of such invoices, less 7 per cent, regardless of settlement. Held, that a deduction of 7 per cent from the total of such invoice amounts is proper in the computation of gross sales for the taxable year.

      George E. Bradbury, Esq., and F. E. Bryan, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    The Commissioner has asserted a deficiency in income and profits tax for the year 1921 in the amount of $3,081.11, all of which is in controversy. The only error alleged by the petitioner is “ that the Commissioner has not allowed the deduction claimed by the petitioner covering discounts on its 1921 sales unpaid at the close of 1921.”
    FINDINGS OF FACT.
    The petitioner is an Ohio corporation with its principal ofiice at Elyria, where it is engaged in the manufacture and sale of laces. Invoices of all sales to customers within the United States contain, as a statement of terms, the phrase “ 7% — 10 days — 60 extra,” which is the ordinary and usual method of billing employed in the lace business.
    On December 31, 1921, the petitioner had on its books, against customers within the United States, accounts receivable in the amount of $97,476.85, which represented gross of sales to such customers which had been invoiced and charged, as above indicated, and were unpaid at that date. In its income and profits-tax return for 1921, in the computation of its gross income, the petitioner deducted 7 per cent of this amount, or $6,823.38. Upon audit of such return the Commissioner included the amount so deducted in gross income and determined the deficiency in controversy.
   OPINION.

Lansdon :

All the facts pertinent to the issues herein are either admitted by the respondent or proved by the evidence adduced by the petitioner. The only question for us to answer is whether the 7 per cent allowance to customers was a trade discount arising out of market conditions or a cash discount made to expedite payments for merchandise purchased by customers.

The petitioner contends that the billing, which it proves is a trade custom in the lace business, indicates a trade discount and that the actual sales represented by all its invoices to customers within the United States was, in all cases, 7 per cent less than the figures at which its merchandise was invoiced. The evidence in support of this contention is convincing, and it follows that the deductions claimed are allowable either in reducing the amount of gross income for the year in which sales and charges are made or as business expenses to be applied against income for the year in which payments are made.

Standard accounting authorities sustain the contention of the petitioner. Colonel Montgomery in his work, entitled, “Audit Theory and Practice,” vol. 1, p. 331, says:

Many so-called cash discounts are 7% flat. When such a rate is used it is not logical to deal with it in any other way than as a deduction from sales. The concern making such sale should deduct the discount (in an aggregate sum, if more convenient) from outstanding accounts and the purchasers should deduct the discount from their cost prices and from their inventories. The rule is a somewhat rough and ready one, hut it is accurate enough. It is not inflexible, but should be followed unless a better general rule can be devised. In defining “ cost and net sales ” there must be some uniformity, even though precise formulae are not always possible.

At page 533 of the same volume the author says:

Trade discounts should be deducted directly from purchases on the one hand, and from sales on the other hand, that is, no ledger account should be kept for trade discounts. The term itself rarely appears on books of account

In Appeal of Thomas Shoe Co., 1 B. T. A. 124, in which the Board has passed on a similar question in harmony with the position of this petitioner, we say:

It also appears that, by trade practice, as abundantly proven by evidence, these discounts are, as a rule, actually deducted in making payments for goods, whether payment is made on the due date or not. The real nature of a transaction is to be judged by all the evidence, not by isolated items or partial extracts.

The evidence is conclusive that customers of the petitioner always deducted 7 per cent from the face of their invoices entirely regardless of the date of payment. To our minds this means that the petitioner’s sales price to be used as the basis for computing gross income from sales was always 7 per cent less than the invoice figures. We are of the opinion, therefore, that the deduction of $6,823.38 from the gross amounts of accounts receivable for merchandise sold to customers within the United States was necessary in order to ascertain the true amount of the gross sales of the petitioner for the taxable year.

Judgment will be entered for the petitioner on 15 days'1 notice, under Rule 50.

Considered by Sternhagen and Arundell.


author: Arundell:

text:
    Irene Coffin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5930.
    Promulgated October 1, 1927.

      LeslAe J. Aker, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
   Arundell:

Deficiency in income taxes for the year 1922 in the amount of $202.15.

FINDINGS OF FACT.

In 1922, and prior thereto, petitioner was the owner and holder of a promissory note in the principal sum of $3,500, which note was dated April 10, 1917, and payable six months after date- The note was given by the Bar Y Cattle Co., a corporation of Boise, Idaho, and B. W. Walker, son-in-law of petitioner, as accommodation maker. Ho security of any kind was ever given to secure the payment of the note and no payments of principal or interest have ever been made upon the note.

The original maker of the note, the Bar Y Cattle Co., became insolvent during the year 1922, its assets were entirely disposed of to satisfy mortgage loans and creditors, and its corporate charter was revoked under the Idaho laws for failure to pay license fees. The accommodation maker of the note, B. W. Walker, in 1922 owned no property and ivas entirely insolvent. The wife of Walker was the owner of separate property and assets worth $30,000 or more, all of which was in her own name. A part of the property owned by Mrs. Walker is income-producing property and the income therefrom is community property. No suit or action or other legal proceeding was ever brought against the Bar V Cattle Co. or B. W. Walker to recover upon the note, and the note was never legally protested or notice of protest given to Walker. The statutes of Idaho provide that an action may be brought on written instruments within five years. More than five years had elapsed between the due date of the note and December 31, 1922.

Petitioner deducted, on her personal income-tax returns for the year 1922, $3,500 representing the face amount of the note, and this amount was disallowed upon audit by the Commissioner. The indebtedness of $3,500 was ascertained to be worthless and charged off within the taxable year 1922.

Judgment will be entered for the •petitioner on 15 days’ notice, wider Rule 50.

Considered by SteRnhagen and Lansdon.


author: Love:

text:
    Ox Fibre Brush Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8153.
    Promulgated October 1, 1927.
    Additional compensation in the amount of $48,000 voted and accrued by the petitioner in May, 1920, to its president and treasurer was in excess of reasonable compensation for personal services actually rendered in that year.

      Marry B. Butter, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the calendar year 1920 in the amount of $24,091.60. The entire amount of the deficiency is not in dispute but only so much thereof as arises from the disallowance by the Commissioner of the additional salaries paid by the petitioner to its president and treasurer in that year and deducted from gross income as ordinary and necessary business expenses.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the State of West Virginia. It was, during the year 1920 and for many years prior thereto, engaged in the manufacture of brushes. Its factory is located at Frederick, Md. Its executive offices and principal sales headquarters are located in New York City. The petitioner also has branch sales offices at St. Louis, Cincinnati, Philadelphia, and Boston.

      J. K. Robinson, Jr., was petitioner’s president during the year 1920 and had been its president since 1905 or 1906. Alfred McEwen joined the petitioner in 1907, became its treasurer at that time and continued in that office through the year 1920. Both the president and treasurer of the petitioner from 1907 until and including 1920, devoted their entire time to the promotion of its interests. During the year 1920 and in years prior and subsequent thereto they lived in or near blew York City and performed their duties primarily at the executive offices located there.
    In the year 1907, when Robingon and McEwen assumed control of the petitioner, the'factory was in a chaotic state and was operating at a loss. In a large measure due to their efforts, the petitioner progressed to a foremost position in the brush trade and was frequently importuned by competitors to buy them out or combine with them.
    Prior to the year 1917 a technical expert managed the petitioner’s factory, for which he received $10,000 per annum. In the year 1917, Robinson and McEwen took over the general management of the factory. The services of the technical expert were dispensed with and in his place a factory superintendent was employed at a much lower salary to supervise routine work. In addition to their regular executive duties the president and treasurer handled all large purchases, directed all sales, directed the hiring of personnel and directed the policies of the petitioner and lines of factory development. These services were rendered from 1917 until and including 1920. •
    During the early part of the year 1920 the petitioner was negotiating with two large brush-manufacturing concerns relative to purchasing those concerns. These negotiations were dropped in April, 1920, but while pending they necessitated on the part of Robinson and McEwen considerable traveling, visiting of plants and work pertaining to the possible reorganization thereof. The plants, the purchase of which was under consideration, subsequently failed.
    In addition to the annual salaries of $12,000 and $15,000 paid respectively to the president and treasurer, the board of directors at a meeting held on May 6, 1920, pursuant to notice to all directors, unanimously voted to pay each of these officers additional compensation of $24,000. The minutes of the meeting, so far as pertinent here, are as follows:
    This meeting having been specially called for the purpose of considering and acting upon the proposal for a grant of additional compensation to Mr. J. K. Robinson, Jr., and to Mr. Alfred McEwen, for their past services to the company. * * *
    Resolved, That this Board hereby authorize and direct the payment of ihe sum of Twenty Four Thousand ($24,000) Dollars to Mr. J. K. Robinson, Jr., as extra compensation for his past services to this company as an officer thereof, and in any other capacity, the same to he paid when in the discretion of the officers, funds of this corporation for this purpose are available.
    * * * * % * *
    Resolved, That this Board authorize and direct the payment of the sum of Twenty Four Thousand ($24,000) Dollars, to Mr. Alfred McEwen as extra compensation for his past services to this company as an officer thereof and in any other capacity, the same to he paid when in the discretion of the officers, funds of this corporation for this purpose are available.
    The petitioner’s books were k$pt on the accrual basis and in May, 1920, proper entry was made therein by crediting the accounts of the president and treasurer with the additional compensation voted and charging the expense accounts therewith.
    The total compensation of $36,000 and $39,000 for the president and the treasurer, respectively, accrued and paid in the year 1920, was voted by the board of directors, having regard for the past services rendered by these officers, for the fact that they had to live in New York City, and as a reward for good efforts given to the business as demonstrated by the results accomplished.
    The directors of the petitioner were J. K. Robinson, Jr., Alfred McEwen, John G. Crawford, a former vice president who. was originally employed and brought into the business by McEwen, and Emory L. Coblentz, a banker of Frederick, Md., with whom the petitioner transacted a large part of its banking business. J. K. Robinson, Jr., and Alfred McEwen and their families owned approximately 36 per cent of the stock of the petitioner. Of the remaining outstanding stock of the petitioner a portion was owned by employees and a portion by Robinson’s mother and sister.
    Officers’ salaries, gross sales, amounts carried to surplus after deducting officers’ salaries and other expenses, dividends declared and paid, and the amount of capital stock outstanding for the years •1908 to 1914, inclusive, and 1918 to 1922, inclusive, were as follows:

      The regular, additional, and total salaries paid or accrued to the petitioner’s president and treasurer in the year 1920 were not in proportion to the number of shares of stock held by them.
    In computing the petitioner’s taxable income for the year 1920 the Commissioner disallowed as a deduction the additional compensation of $48,000 voted and accrued in 1920 to the president and treasurer under the circumstances above set forth.
   OPINION.

Love:

The sole issue in this proceeding is whether the additional compensation in the amount of $48,000 voted and accrued in the year 1920, pursuant to the action taken by the board of directors on May 6, 1920, to the petitioner’s president and treasurer may be deducted from gross income for that year.

It is necessary, first, for us to determine the status of the additional compensation in question. Was it voted as and for salaries for 1920, although measured by services rendered prior to that year, or, was it voted and accrued in 1920 as and for salaries for services performed in prior years? If the additional compensation comes within the latter classification, then, in our opinion, it may not be deducted in the year 1920. Vaughan & Barnes, Inc., v. Commissioner, 6 B. T. A. 1279.

The resolution of May 6,1920, is ambiguous and might be susceptible to either interpretation. The resolution, in part, says:

This meeting having been called for the purpose of considering and acting upon the proposal for a grant of additional compensation to Mr. J. K. Robinson, Jr., and Mr. Alfred McEwen, for their past services to the Company * * *.

At the hearing, the history of the petitioner was opened up and evidence was introduced with respect to the action taken by the board of directors and of their intention in connection therewith. We have held in the Appeal of Union Dry Goods Co., 1 B. T. A. 833, that the minute as written is not conclusive as to the year for which additional compensation was authorized. From all of the evidence adduced, we are of the opinion that the additional compensation voted and accrued in May, 1920, was intended to be as and for, and was as and for, salaries for the year 1920. The motivating or impelling influence, however, in determining the amount to be paid as additional compensation for the year 1920 was the service rendered by the officers in question prior to that year. In other words, the additional compensation for 1920 was based upon efficiency and ability of the officers as demonstrated by past performances and results achieved over the preceding period of years.

Section 234(a)(1), which provides for the deduction of salaries reads, in part, as follows:

(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.

It follows, therefore, that if the regular annual salaries of the petitioner’s president and treasurer plus the additional salaries of $48,000 constituted reasonable compensation for services actually rendered by those officers in 1920, the deduction on account thereof is properly allowable. The petitioner urges that the total compensation for 1920 was reasonable in amount for services actually rendered in that year by the officers in question and the respondent insists that it was unreasonable.

In support of its contention that such amount was reasonable compensation for 1920, the petitioner takes the position that the action of the board of directors of a corporation in authorizing salaries for a given year raises a presumption that the amount voted is reasonable and complies with the statute until the contrary be proven. In other words, the petitioner insists that the burden of proof is on the respondent to show that the salaries for 1920 were unreasonable. We are unable to agree with the petitioner in this respect.

Our attention is called to the case of United States v. Philadelphia Knitting Mills Co., 273 Fed. 657, as supporting the petitioner’s position that the compensation in dispute is presumed to be reasonable until the presumption, is overcome. In that case the court was construing the Corporation Excise Tax Act of 1909, which provided for a tax at a named rate upon the net income of a corporation, to be ascertained by deducting from its gross income “ all ordinary and necessary expenses.” The statute did not specifically make salary an allowable deduction, though it was so construed by the Bureau of Internal Revenue when the salary is a “reasonable and fair compensation for services rendered regardless of the amount of stock such officer may hold.” The court in holding that, under the statute, the Government may not determine whether salary paid corporation officers is a reasonable and fair compensation, but may determine whether it is salary that is paid, or whether it constitutes profits diverted to a stockholding officer under the guise of salary, stated :

Confining our inquiry to tbe statute, it appears that the basis on which a salary may be allowed as a valid deduction is that it was in fact an “ ordinary and necessary expense (of the corporation) actually paid * * * in the maintenance and operation of its business.” To be a necessary expense it must have been paid for services actually rendered. Jacobs & Davies, Inc., Anderson 288 Fed. 505, 506, 143 C. C. A. 87. Whether services were rendered and whether also they were commensurate with the salary paid are matters of judgment and discretion reposed by general law in the board of directors of the corporation. As the board of directors is charged with the duty and clothed with the discretion of fixing salaries of the corporation’s officers, the Government has no right (until expressly granted by statute) to inquire into and determine whether the amounts thereof are proper, that is whether they are too much or too little. But, while the amount of salary fixed by a board of directors is presumptively valid, it is not conclusively so, because the Government may inquire whether the amount paid is salary or something else. Admittedly the Government has a right to collect taxes on net income of a corporation based on profits after all ordinary and necessary expenses, including salaries, are paid. It has a right, therefore, to attack the action of a board of directors and show by evidence, not th.at a given salary is too much, but that, in the circumstances, the whole or some j rt of it it not salary at all but is profits diverted to a stock-holding officer under the guise of salary and as such is subject to taxation * * *. The question of fact here was whether the money paid was all salary or part profits. The presumption arising -from the action of the hoard of directors was that it was all salary. In order to overcome the presumption the burden was on the Government to produce evidence, not necessarily conclusive, but sufficient to raise a valid inference that some definite part of the compensation was not salary but profits. (Italics ours.)

It is apparent from the foregoing statement that the court was not considering the reasonableness of the compensation sought to be deducted. The only question before it was whether the amount sought to be deducted was in fact salary, and with respect to the amount fixed as salaries the court stated that there was a presumption that it was in fact all salary. That is simply another way of saying that the acts of the board of directors of a corporation are presumed to be regular and valid.

The Revenue Act of 1918 differs from the Corporation Excise Tax Act of 1909 with respect to the deduction of salaries, in that section 234(a)(1), supra, specifically provides for a deduction for “a reasonable allowance for salaries or other compensation for personal services actually rendered.” Pursuant to this provision, as stated in the case of William S. Gray & Co. v. United States, decided by the Court of Claims, June 6, 1927, “ it is undoubtedly the right, as well as the duty, of the Commissioner of Internal Revenue under the provisions of the 1918 Revenue Act to determine the reasonableness of the salaries of which a deduction is asked by the taxpayer, as well as to decide whether or not the salaries are ordinary and necessary expenses in the maintenance and operation of the business.”

In the Appeal of Gustafson Manufacturing Co., 1 B. T. A. 508, we stated:

Counsel for taxpayer contends that the directors of the corporation are the sole judges as to what constitutes reasonable compensation and that since they determined upon §20,000 as a salary to be paid the president and general manager for 1918 the Commissioner has no authority to reduce the amount notwithstanding the fact that the salary was based upon earnings or was a .istrlbution of profits of the corporation in the form of compensation. This contention, of course, cannot be sustained.
* * * sjt * * *
Under the provision of this section (234(a) (1) supra) the Commissioner not only has the authority but it is his duty to determine under all of the facts obtainable the reasonableness or unreasonableness of deductions by a corporate taxpayer of compensation paid. The Commissioner, upon the evidence before him, determined that a deduction of $16,000 for compensation for the services rendered taxpayer by its president and general manager during the year 1918 was reasonable. The evidence before us does not justify a deduction for compensation of an amount in excess of that determined by the Commissioner.

In W. K. Henderson Iron Works & Supply Co. v. Commissioner, 6 B. T. A. 92, we stated in part:

It may be that such additional salaries paid in 1919, when added to the regular salaries paid in 1919, constitute a reasonable compensation for personal services actually rendered in that year, but we have no evidence before us concerning the salaries paid, service performed, or the volume or character of business done during the year 1919, and we are, accordingly, without the necessary facts to determine the issue for that year. •

We conclude, therefore, that the action taken by the board of directors in voting the total compensation to the officers in question for 1920, does not raise a presumption that the amount voted was in fact reasonable for services actually rendered, thereby complying with the terms of the statute. The Commissioner having determined that the additional compensation voted in May, 1920, was unreasonable for services actually rendered in that year, it becomes necessary for the petitioner, if the deduction is to be allowed, to show that he erred in his determination. We, therefore, must be guided in our determination as to the reasonableness of the compensation in dispute by the evidence adduced in this proceeding.

It will be noted from the table set out in the findings of fact that the petitioner was prosperous in years prior to 1920. It will also be noted that the compensation for 1920 to the officers in question was more than two times the amount received in any other year. There is nothing in the record to indicate that additional salaries might be expected or would be granted in the future, and there is nothing to indicate that the duties performed were materially different from those performed in preceding or succeeding years. It is not intimated that the compensation received prior to and subsequent to 1920 was inadequate. Under these circumstances, we are of the opinion that the salaries paid by the petitioner to its officers in years prior to and subsequent to 1920 are the best evidence of their reasonableness and their value to the petitioner in that year. The deliberate, bona -fide action of the board of directors over a period of years is persuasive in such matters.

It may be conceded that the officers in question were efficient, and brought prosperity to the petitioner and that the additional compensation was a merited recognition on the part of the board of directors of the valuable services rendered prior to 1920, but all of the evidence tends to the conclusion that the extra compensation for 1920 was in excess of reasonable compensation for services performed in that year.

We approve, therefore, the respondent’s determination in disallowing as a deduction for the year 1920 the additional salaries in the amount of $48,000.

Judgment will he entered for the respondent.

Considered by Smith and Littleton.

       No data furnished for 1915 to 1917.

       Cash.

       Stock.


text:
    Thomas Cronin Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7995.
    Promulgated October 1, 1927.
    On the evidence helé that certain noninterest-bearing demand promissory notes were not bona fide paid in for stock of the petitioner and may not be included in its invested capital for the years 1920 and 1921 under section 326(a)(2) of the Revenue Acts of 1918 and 1921.

      'William G. Reiner, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income and profits taxes for the calendar years 1920 and 1921 in the respective amounts of $1,521.10 and $9,001.32. The sole issue presented is whether the petitioner is entitled to include in its invested capital for the years involved, the amount of $112,000, being the face value of certain noninterest-bearing demand promissory notes paid in for stock of a par value of the same amount under the circumstances set forth below.
    FINDINGS OF FACT.
    The petitioner is a Pennsylvania corporation with its principal office and place of business at Pittsburgh, Pa.
    The petitioner had issued and outstanding, prior to March 31,1917, 780 shares of capital stock of the par value of $100 per share, or a total outstanding capital stock of $78,000. Of the 780 shares of stock outstanding at that time, Thomas Cronin owned 728 shares, 49 shares were owned by Ms son, Harry Cronin, and the remaining three shares were owned by other children of Thomas Cronin. Thomas Cronin was petitioner’s president and Harry Cronin was its secretary.
    At a meeting of the board of directors of the petitioner held on March 31, 1917, the following resolution was adopted :
    Whereas, said Thomas Cronin has subscribed íor, and has agreed to take and pay for one hundred twenty (120) shares of the capital stock of the said Thomas Cronin Company, fully paid and non-assessable, and has agreed to give his promissory note payable on demand and dated March 31, 1917, in the amount of $12,000 in payment for said one hundred and twenty (120) shares of said capital stock of Thomas Cronin Company.
    Now, Therefore, be it and it is hereby
    Resolved, That the proper officers of Thomas Cronin Company are hereby authorized, empowered and directed to issue certificates to said Thomas Cronin for one hundred twenty (120) shares of the capital stock of said Thomas Cronin Company at par value fully paid and non-assessable and to accept in payment therefor, said Thomas Cronin’s promissory note, payable on demand, in the amount of $12,000.
    Pursuant to this resolution, Thomas Cronin executed and delivered to the petitioner his noninterest-bearing demand promissory note for $12,000, dated March 81, 1917, and received from the petitioner a certificate, properly executed, for 120 shares of its stock. At the time of executing and delivering to the petitioner his demand promissory note for $12,000, Thomas Cronin was entirely responsible and solvent and at all times until his death was fully able to pay the amount on demand.
    Subsequent to March 31,1917, and before July 16,1918, the Thomas Cronin Co. issued a stock dividend in the amount of $10,000, thereby increasing its outstanding capital stock to $100,000.
    At a special meeting of the board of directors held on July 16,1918, the following resolution was adopted:
    Whereas, at a special meeting of the stockholders of the Thomas Cronin Company, held at the office of the said Company at 17th and Muriel Streets, South Side, Pittsburgh, Pa., on June 4, 1918, at 2 P. M., an election was held for the purpose of voting on the increase of capital stock of said company from $100,000 to $200,000, said election being held at the request of the stockholders.
    And, whereas, Mr. Thomas Cronin has offered to purchase the total amount of said increase of $100,000 of capital stock giving therefor in payment his promissory note for said sum of $100,000, payable to the order of the Thomas Cronin Company, * * *
    We, the undersigned, being all of the stockholders of the Thomas Cronin Company, a Pennsylvania corporation, do hereby agree that the full amount of the increase of the capital stock of said company, voted by the Board of Directors at a meeting held June 4, 1918, may be issued to Thomas Cronin and we hereby waive all interest, right or title which we may have to share any said increase in favor of the said Thomas Cronin.
    Now, Therefore, be it and it is hereby resolved, that the proper officers of this company be and they are hereby authorized, empowered and directed to issue certificates to said Thomas Cronin for 1,000 shares of the capital stock of the said Thomas Cronin Company at’par value, fully paid and non-assessable, upon delivery by him of said promissory notes properly signed by him to the said officers of the Thomas Cronin Company.
    Pursuant to this resolution Thomas Cronin delivered to the petitioner his noninterest-bearing demand promissory note for $100,000, dated July 16, 1918, and received from the petitioner a certificate properly executed for 1,000 shares of its capital stock. At the time of executing and delivering to the petitioner his demand promissory note for $100,000, Thomas Cronin was entirely responsible and solvent and at all times until his death his assets were sufficient to liquidate the note within a reasonable time after demand.
    Thomas Cronin died on October 31,1918, and up to the time of his death nothing had been paid on the above-mentioned notes.
    By the will of Thomas Cronin, 52 per cent of his stock in the petitioner was bequeathed to Harry Cronin and 48 per cent to two sisters of Harry Cronin. Shortly thereafter the interest of the sisters in the petitioner was purchased by Harry Cronin, after which he owned all but one share of the capital stock of the petitioner.
    On November 20,1919, the petitioner released the estate of Thomas Cronin from all liability on account of the indebtedness represented by the above-mentioned notes. The minutes of the meeting held on November 20, 1919, read as follows:
    Minutes.
    Of a Directors’ Meeting of the Thomas Cronin Company, held, pursuant to a call of the President, on Thursday, November 20, 1919, at 9:30 o’clock A. M., at the office of the Commonwealth Trust Company of Pittsburgh, No. 312 Fourth Avenue, Pittsburgh.
    Present: Harry Cronin, George H. Stengel and Alice C. Parrish, being all of the directors of the company.
    Mr. Stengel offered the following resolution:
    “ Whereas the estate of Thomas Cronin is indebted to the Thomas Cronin Company in the sum of $112,000, with interest, and
    “ Whereas suit has been brought by this company against the said estate at No. 60S, January Term 1920 for the purpose of preserving the lien of said indebtedness against the estate of the decedent, and
    “ Whereas, Harry Cronin has agreed to assume the said indebtedness, therefore, be it,
    “ Resolved, that in consideration of the foregoing assumption of the indebtedness by Harry Cronin, and for value received, the Thomas Cronin Company does hereby release the estate of Thomas Cronin, Deceased, and Alice Cronin Parrish and James Cronin Dali, residuary legatees and devisees under the will of said decedent, from said indebtedness, and from all liability for the same.”
    On motion of Mr. Stengel, seconded by Mrs. Parrish, the resolution was unanimously adopted.
    Adjourned.
    (Signed) George H. Stengel,

      Secretary.

      The agreement by Harry Cronin to^ assume the indebtedness of the estate to the petitioner, which is referred to in the above-mentioned resolution, reads as follows:
    For value received, I, Harry Cronin, do hereby assume and agree to pay the following two (2) notes made by Thomas Cronin to the order of the Thomas Cronin Company, namely,
    Demand note, dated March 31, 1917 for $12,000.
    Demand note, dated July 16, 1918, for $100,000.
    And I do hereby promise and agree to procure from the Thomas Cronin Company on or before September 30, 1919, a proper, legal discharge of the Estate of Thomas Cronin, Deceased, from any and all liability by reason of said notes.
    Witness my hand and seal this 7th day of August, 1919.
    Habbt Crojsin [Seal]
    Witness:
    George H. Stengel.
    The financial condition of Harry Cronin at the time of the assumption of the estate’s indebtedness was such that the petitioner could not have collected the full sum of $112,000 upon demand.
    The notes for $12,000 and $100,000 were carried on the books as accounts receivable but at no time were they ever pledged for any purpose whatsoever. In fact they have always remained in the files of the petitioner. The petitioner, however, borrowed and used in its business amounts ranging from $20,000 in 1917 to $195,000 in 1920.
    Thomas Cronin while he was president of the petitioner always endorsed personally and individually, all of the notes of the petitioner.
    In computing the petitioner’s invested capital for the years 1920 and 1921, the Commissioner excluded the amount of $112,000 represented by the two notes given to the petitioner by Thomas Cronin in payment for its stock of a like par value.
   OPINION.

Love:

The respondent in denying the petitioner’s contention that the two notes amounting to $112,000 paid in by Thomas Cronin for stock of the petitioner should be included in its invested capital for the years 1920 and 1921, takes the position that: (1) Under the laws of the State of Pennsylvania it is unlawful for a corporation to issue stock for notes, and that notes received in violation of such laws can not be included in invested capital under the provisions of section 326(a)(2) of the Revenue Acts of 1918 and 1921; (2) the notes were not in fact bona fide paid in for stock if the parties to the transaction intended that they were not to be collected; (3) in no case may the notes paid in for stock be included in invested capital in an amount in excess of their actual cash value at the time paid in. We will consider the respondent’s contentions in the order that they are stated.

In the Appeal of American Steel Co., 1 B. T. A. 839, the Board held that the notes involved therein, -which do not differ from those involved in the instant appeal except in that they were interest-bearing notes, were not illegal or void under the laws of Pennsylvania, and that they satisfied in every respect the provisions of section 326 (a) (2) of the Revenue Act of 1918, being tangible property paid in for stock. In respect of notes paid in for stock, the Revenue Act of 1921 does not differ from the Revenue Act of 1918. The notes paid in by Thomas Cronin for stock of the petitioner may be included in its invested capital for the years involved provided that they comply with the provisions of section 326(a)(2) of the Revenue Acts of 1918 and 1921 in other respects which are prerequisite to their inclusion therein.

On the second point it was contended by the respondent that the notes were not in fact bona fide paid in for stock within the meaning of section 326 (a) (2) of the 1918 and 1921 Revenue Acts, his contention apparently being based upon the fact that nothing has ever been paid on the notes either by Thomas Cronin before his death or by Harry Cronin, since he purported to assume the indebtedness on account thereof, and upon the further fact that the estate of Thomas Cronin was released from all liability on account of the notes given by the decedent.

The petitioner urges that under the provisions of the Revenue Acts of 1918 and 1921, it need only show that Thomas Cronin was solvent and responsible at the time the notes were paid in to entitle it to include the notes in its invested capital. It is obvious that this contention carries with it the assumption on the part of the petitioner that the notes were in fact bona fide paid in for stock. Whether the notes were bona fide paid in for stock is one of the questions we are called upon to decide, the respondent having denied that such was the fact. If the parties to the transaction intended that the notes should not be collected, then we must hold that they were not bona fide paid in for stock. We must look, therefore, to all of the circumstances surrounding the transaction in order to determine that fact.

It is necessary to bear in mind that at the date of the execution of the $12,000 note Thomas Cronin owned 728 out of a total of 780 shares of stock of the petitioner and was its dominating spirit. His son owned 49 out of the 52 remaining shares. The will and intention of Thomas Cronin may, to all intents and purposes, be held to have been the will and intent of the corporation. The question, therefore, is, Did Thomas Cronin, as president of petitioner, intend to demand of Thomas Cronin, the individual, payment of that note? The conditions under which the $100,000 note was given were practically the same as when the $12,000 note was given. All the circumstances incident to these transactions, both prior and subsequent to the execution of the notes, point unmistakably to the conclusion that no such intention was present in the mind of Thomas Cronin.

The evidence in this proceeding shows that Thomas Cronin was solvent and financially responsible at the time he gave to the petitioner his demand notes in payment for its stock. Although 19 months had elapsed since the date of the first note, no payment had been made. At the time of his death his estate was sufficiently large to liquidate the notes, yet, notwithstanding that fact and the fact that nothing had been paid thereon, the petitioner released his estate from all liability on account thereof and Harry Cronin, who at the time of the release was petitioner’s president, purported to assume the indebtedness. At the time the petitioner released the estate of Thomas Cronin from liability on account of the notes and permitted Harry Cronin to assume the obligations, the financial condition of Plarry Cronin was such that he could not have paid the notes in full if called upon to do so. In fact, his total assets, exclusive of his holdings in the petitioner, were not more than $61,500 at that time. The record herein does not disclose his liabilities and consequently the net worth of Harry Cronin can not be determined. It is clear, however, that the petitioner released a solvent debtor, the estate of Thomas Cronin, and permitted the debts owing by it to be assumed by a person, who, it is admitted, could not pay the notes in full on demand.

The petitioner’s president testified at the hearing in this appeal that its capital stock was -increased and sold to Thomas Cronin for his demand notes for the purpose of augmenting its borrowing power and strengthening its credit rating. It will be observed, however, that the notes were kept in the petitioner’s files and never pledged or used for any purpose whatsoever, during which time nothing was paid thereon. While the notes were thus held by the petitioner, amounts ranging from $20,000 in 1917 to $195,000 in 1920 were borrowed and used in conducting its business. Although it wTas necessary to borrow money to conduct its business, the notes in question were not made part of petitioner’s working capital.

In Appeal of Citizens Underwriters Agency, 2 B. T. A. 1116, the petitioner therein carried on its books, as bills receivable, $5,350 representing demand notes from stockholders given in 1907 for stock. These notes were never paid, notwithstanding the fact that the makers were financially responsible, nor was demand ever made for payment, although the petitioner borrowed money for its own use during the period. We found in that case that the notes were not bona fide paid in for stock.

Viewing all the circumstances incident to the transactions carried on by and between Thomas Cronin and the petitioner, and to the subsequent action taken by the petitioner, we are of the opinion that the notes given by Thomas Cronin were not bona fide paid in for stock. See Ready Auto Supply Co., 2 B. T. A. 730. It is unnecessary, therefore, for us to discuss the third point raised by the respondent.

Judgment will be entered for the respondent.

Considered by Littleton and Smith.


author: Aeundell :

text:
    Rose L. McBride, Administratrix, Estate of F. T. McBride, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4885.
    Promulgated October 3, 1927.
    Estate Tax. — Value of buildings included in decedent’s gross estate determined. Evidence insufficient to determine value of stock.

      Frederick H. Drake, Esg., for the petitioner.

      Shelby S. Fcmlkner, Esg., for the respondent.
    The Commissioner has determined a deficiency in estate taxes in the amount of $879.95. The question involved is the valuation to be placed on certain property embraced in decedent’s gross estate. Respondent concedes that the proper value of a one-third interest in the Helper claim is $100 as returned by the petitioner and that item 11 should be $187.50 as returned and not $1,875 as found by the respondent.
    FINDINGS OF FACT.
    Decedent died on October 8, 1922, leaving an estate consisting of real and personal property in the States of Oregon and Montana. The return was made by Rose L. McBride, administratrix of the estate in Oregon.
    Included among the assets was Lot No. 3, Block 42, Butte, Mont. The land was improved by a two-story brick-and-frame structure which was constructed between the years 1905 and 1908. The sale and rental value of property in Butte was materially affected by the price of copper, and during the years 1916 and 1917, when copper was high, this building rented for $275 per month, and during the year 1922, when the price of copper had dropped to 13^4 cents per pound, the gross income was only $2,150 and the net income, before computing depreciation, was $1,040. The Commissioner determined a valuation of $22,500 at the date of death and the administratrix reported a valuation of $18,000. The value of the property on October 8, 1922, was $18,000.
    On Lots 5 and 6, Block 58 of Butte, Mont., which were returned as part of decedent’s estate, was an old building about 20 feet in depth, in which were two store rooms. The building was located in an undesirable neighborhood. The gross rental for the building in 1922 was $350. The petitioner reported a valuation for estate-tax purposes of $4,500 and the Commissioner determined a value of $6,000. The value of the property on October 18,1922, was $4,500.
    Included among the assets of the estate were 499 shares of Bear Paw Mining stock. The company was organized primarily to hold certain mining claims, but also owned improved real estate in the cities of Butte, Mont., and Tacoma, Wash. The mining property consisted of 10 to 15 undivided interests in mining claims, development work having been done on only one claim from which ore was shipped. This mine was later abandoned. The Wolf Block in Tacoma, owned by this company, was rented, two stores therein being rented for $2,700 and $1,210, respectively, and the upstairs part for $840. The net return for the year 1922 was $2,809.89 without deduction for depreciation. The Thompson Block in Tacoma, also owned by the Bear Paw Mining Co., was rented for $7,000, but the net return before depreciation in 1922 was only $3,815.76.
    The average net income of the corporation over the period 1917 to 1921 was $5,141.67 and the net income for 1922 was $5,081.10. The value returned by petitioner for the 499 shares of Bear Paw Mining Co. stock was $39,920, and the value determined by respondent was $76,491.71.
    Decedent owned 1,000 shares of the Calusa Leonard Extension Copper Co. Petitioner returned the stock at a value of $130 and respondent determined its value to be $520.
   OPINION.

Aeundell :

The evidence introduced by petitioner is entirely insufficient for us to determine the value of the shares of stock in the Bear Paw Mining Co. and the shares in the Calusa Leonard Extension Copper Co. The respondent must, therefore, be affirmed.

The properties located on lot No. 3, block 42 and on lots 5 and 6, block 58, both in Butte, Mont., should be included in decedent’s gross estate at the value fixed in the findings of fact.

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

Considered by Lansdon and Gkeen.


author: ÁRundell:

text:
    Neapolitan Ice Cream Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11793.
    Promulgated October 3, 1927.
    Affiliation granted.

      John J. Barry, O. P. A., for the petitioner.

      P. J. Bose, Esq., for the respondent.
   ÁRundell:

The Commissioner has determined a deficiency in income and profits taxes for the year 1921 in the amount of $1,679.68. The error assigned is the refusal of the Commissioner to affiliate the petitioner with the Cambridge Factory Co. The respondent concedes that the amount allowed by him for depreciation on an automobile is $202.78 less than it should be.

FINDINGS OP PACT.

Petitioner was, during the year 1921, a Massachusetts corporation and was engaged in the manufacture and sale of ice cream. The Cambridge Factory Co. was the owner of the building in which petitioner conducted its business.

During the year in question the stock of petitioner was held as follows:

Shares
Walter R. Comfort_ 6
Franklin Kronenberg- 18
Justin Kronenberg_ 1
Total_ 25

During the same period the stock of the Cambridge Factory Co. was owned as follows:

Shares
Walter R. Comfort_200
Franklin Kronenberg_ 99
Justin Kronenberg_ 1
Total_300

The building owned by the Cambridge Factory Co. was built in 1913 by Walter R. Comfort and Franklin Kronenberg at a cost of $18,000, of which amount $6,000 was paid by Kronenberg and the balance by Comfort. The building was constructed for use by petitioner and has always been so used by it.

On December 1,1919, a written agreement was entered into between Franklin Kronenberg and Walter R. Comfort whereby the latter agreed to sell to the former all of his stock in both companies, payment for the same to be made in installments over a period of five years, with the privilege on the part of Kronenberg to secure immediate delivery of the stock by making payment of all of the deferred amounts due. Title to the shares was held in the name of Comfort until full payment was made, which event occurred in December, 1924, at which time the stock was delivered to Kronenberg and the title to the shares was transferred on the books of both corporations to him.

After the execution of this agreement, the entire management and control of the business was left with Kronenberg and Comfort did not attend any of the stockholders’ or directors’ meetings or otherwise participate in the control of either corporation. Petitioner paid no rent to the Cambridge Factory Co. after the execution of the agreement between Kronenberg and Comfort for the use of the building, but it did pay the taxes, insurance, water rents and made any necessary repairs, charging the amounts so expended on its own books.

During the year 1921 the petitioner was affiliated with the Cambridge Factory Co. within the meaning of section 240 of the Revenue Act of 1921.

Judgment will he entered for the 'petitioner on 15 days' notice, wider Rule 50.

Considered by Geeen and Lansdon.


author: ARundell:

text:
    Elliott R. Corbett, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henry L. Corbett, Petitioner, v. Commissioner of Internal Revenue, Respondent. Hamilton F. Corbett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 11836, 11837, 16643.
    Promulgated October 3, 1927.
    Value of properties at date of inheritance, for purpose of computing loss on subsequent sales, determined.

      Ben G. Dey, Esq., for the petitioners.

      Warren F. Wattles, Esq., for the respondent.
   ARundell:

These are proceedings for the redetermination of deficiencies in income tax as follows:

The only question presented is the value of certain properties at the date they were inherited by petitioners, for the purpose of determining the amount of loss sustained on sales in 1920 and 1922. The facts as to the useful life of the buildings, the rate of depreciation, and capital expenditures in addition to those allowed by the respondent were stipulated.

FINDINGS OF FACT.

Petitioners are individuals having their offices at Portland, Oreg. On April 1, 1903, they inherited from H. W. Corbett properties known as the Worcester Building and the Hamilton Building in Portland, Oreg.

The property referred to as the Worcester Building consisted of four lots, each 50 feet wide by 100 feet deep, comprising a half city block, having a fronting of 200 feet on Third Street, 100 feet on Oak Street, and 100 feet on Pine Street. The building situate thereon was a six-story office building, the lower floor of which was occupied by stores. The property known as the Hamilton Building consisted of one lot with a six-story office building thereon, the lower floor of which was used for retail store purposes. The lot had a frontage of 50 feet on Third Street between Washington and Alder Streets and was 100 feet deep.

Shortly after the death of H. W. Corbett an appraisal was made of his estate and filed with the probate court. In that appraisal the value of the Worcester Building was returned at $250,000 and the Hamilton Building at $85,000. No attempt was made in that appraisal to arrive at the correct market value of the properties.

In January, 1909, the value of the Worcester Building was set up on the books of the trustees of the estate at $525,000, of which $295,000 was ascribed to the land and $230,000 to the building. The Hamilton Building at that time was placed on the books at $195,000, of which $130,000 was given as the value of the land and $65,000 as the value of the building. The book figures were changed in 1911. The Worcester Building at that time was listed on the books at $613,000, the land being shown at $400,000 and the building at $213,000. The Hamilton Building was valued at $234,026.11, of which $1Y5,000 was ascribed to the land and $59,026.11 to the building. The values placed on the land in 1911 were based on appraisals made by independent appraisers and the building values were based on the appraisal made by an appraisal company.

In 1903 the Worcester land was carried on the assessment roll of the county assessor at $53,000 and the improvements thereon at $115,000. The Hamilton land was carried on the assessment roll at $30,000 and the improvements at $29,500. Property at that time was listed on the comity assessment roll at from 30 to 35 per cent of its market value.

In 1905 land in Portland was assessed on the county assessment roll at 75 per cent of its market value and improvements at 60 per cent. The Worcester land was assessed in that year at $145,000 and the building thereon at $184,000. The Hamilton land was assessed at $60,000 and the building at $47,200.

In 1903 Third Street was the principal retail street in Portland and the highest-priced retail business property was on that street between Morrison and Washington Streets. The Hamilton Building was within that district, and the Worcester Building was only three blocks distant and within the region of high-priced retail property. There was no appreciable change in values of property in that region between the years 1903 and 1905.

The fair values of the properties at April 1, 1903, were as follows:

Worcester Building.
Land_$240,000
Building_ 200, 000
Total_ 440, 000
Hamilton Building.
Land_$80,000
Building_ 65, 000
Total_ 145,000

The buildings in each case had a remaining useful life at April 1, 1903, of 34 years and 11 months. The proper depreciation rate is 2.864 per cent per annum.

Capital expenditures in connection with the properties in addition to those allowed in the determination of deficiencies were made as follows:

The Worcester Building.
1907, special repairs, remodeling office space_$31, 499.12
Betterment, 1907- 338. 68
Betterment, 1910_ 2,479.68
Betterment, 1911- 2, 364. 46
Remodeling, 1907_ 1, 062. 96
Street improvements, 1910 - 743.24
Repairs and renewal items, 1907- 1, 924.71
Total on the Worcester Building- 40,412. 85
The Hamilton Building.
Electric Wiring, 1909_ $1, 551.41
Street Improvements, 1909- 87.51
Street Improvements, 1910- 128. 54
Street Improvements, 1911- 63.00
Total on the Hamilton Building- 1, 830.46

The fair market values of the properties at March 1, 1913, were higher than their values at April 1, 1903.

The Worcester property was sold by petitioners in 1920 for $175,000. Selling expenses amounted to $6,274.20, making a net consideration of $168,725.80.

The Hamilton Building was sold by petitioners in 1922 for $100,000. Selling expenses were $4,241.49, making a net consideration of $95,758.51.

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

Considered by Green and Lansdon.


author: Akundell :

text:
    Yakima Hop Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9527.
    Promulgated October 3, 1927.
    Cost of repairing trellis on hop ranch held deductible as a necessary expense.

      Alfred P. Dobson, Esq., and R. T. Jacob, Esq., for the petitioner.

      Warren F. Wattles, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes in the amount of $2,213.93 for the calendar year 1921. The only question involved is whether petitioner is entitled to a deduction of the amount spent in repairing a hop trellis.
    findings of fact.
    The petitioner is a Washington corporation with its principal office at Portland, Oreg. It owns two hop ranches and is engaged in the business of growing and selling hops.
    In 1913 petitioner acquired an 80-acre hop ranch known as the Moxee Ranch. Substantially all of the ranch was covered with a hop trellis erected in 1912, consisting of wires running at right angles and supported by cedar poles set about 30 feet apart. The poles at the end of each row are braced by means of guy wires fastened to so-called dead men. The entire purchase price of the ranch was entered on the books of petitioner without segregation for the cost of the trellis.
    From the time of acquisition of the ranch it was the practice of the petitioner to repair in each year, by replacing broken poles and wires, any damage suffered by the trellis. The costs of such repairs were entered on the books as expenses. By means of such annual repairs the useful life of the trellis may be maintained indefinitely.
    In 1920 the hop vines on the Moxee Ranch bore an extraordinarily large crop. At about harvesting time in that year, due to the heavy crop, rainfall, and wind, a number of guy wires broke and about one-half of the trellis collapsed, carrying with it many of the poles. As a result of the collapse it was necessary to cut some of the cross wires in harvesting the crop- In 1921 petitioner repaired the damage suffered by the trellis in 1920 by setting in new poles where necessary, salvaging and using such wire as could be utilized, and stringing new wire where necessary. In making such repairs petitioner expended $5,549.89, which included labor and materials. The repairs so made in 1921 added nothing to the value of the ranch over its value prior to the collapse of the trellis. Respondent disallowed as a deduction from income the amount so expended.
   OPINION.

Akundell :

The expenditures made by petitioner in 1921 added no capital asset to its property. Repairs such as were made in 1921, except for the extent thereof, were made every year and were neces-sar3? to keep the property in condition to operate. The cost of the repairs made was, in our opinion, a necessary expense and a proper deduction from income. Illinois Merchant Trust Co., Executor, 4 B. T. A. 103.

Judgment will be entered on 15 days’ notice, v/nder Rule 50.

Considered by Lansdon and Gkeen.