author: Seawell :

text:
    Tennessee Consolidated Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33383.
    Promulgated October 20, 1931.

      George E. 3. Goodner, Esq., for the petitioner.

      F. B. Schlosser, Esq., for the respondent.
   OPINION.

Seawell :

The first error assigned is that, “ In computing taxable net income for 1920, the Commissioner has erroneously disallowed a loss of $52,312.06 sustained by petitioner upon the abandonment of its coke ovens in that year.” We are unable to agree that the facts presented justify the deduction. The ovens in question were originally constructed in and about 1883 and were operated by the predecessor owner until 1903, when a strike occurred which kept them idle until acquisition by the petitioner in 1905. They were likewise not operated from date of acquisition by petitioner until 1917, when, apparently due to the great demand for coke, the petitioner leased them to the Sewanee Fuel & Iron Company, which operated them during 1917, 1918 and 1919, discontinuing operations in the latter part of 1919. The petitioner then attempted operations in 1920, but before the end of the year found it unprofitable and ceased operations. They were not thereafter operated except for a short period in 1922 when, as an incident to a proposed sale of petitioner’s properties, they were fired for the purpose of demonstrating that petitioner’s coal would produce coke. In the meantime, in 1913, a new type oven, known as the “ by-product,” came into existence, which, because of certain advantageous features, made it very difficult by 1920 for the “ beehive ” oven (type here in question) to operate in competition therewith, and by 1931 had almost entirely superseded the latter type. The railroad leading to the ovens was spiked down in 1927 and taken up in 1930.

On the foregoing facts we are unable to agree that abandonment of the ovens in 1920 has been substantiated. Aside from the facts set out in our findings, further testimony was offered by petitioner’s president as follows:

Q. Did you reach any determination as to these coke ovens at the end of 1920?
A. We reached the conclusion we could not operate them at a profit and therefore decided to abandon them.
Q. And did you let the fires go out and abandon them?
A. We did.

When the same witness was asked why the petitioner had not operated the ovens prior to 1920, he replied that “ we never thought we could operate those ovens at a profit.” Of course, a different situation existed in 1905 from that in 1920 due to the perfection of a new type of coke oven, but the mere fact that the ovens were found unprofitable and therefore were withdrawn from operation is not conclusive that they were not held with the intention of future use, should a favorable occasion arise. We have no evidence of corporate action tending to show abandonment other than shown above; in fact, in the balance sheets accompanying the returns for 1920 and 1922 the ovens are still carried as an asset at a value of $18,000, and apparently no deduction was claimed in the 1920 return on account of such abandonment. The first overt acts tending to show physical abandonment occurred in 1927 when the railroad leading to the ovens was spiked down and in 1930 when the rails were removed, and as late as 1922 they were still in an operating condition.

On the whole, we are not satisfied that abandonment has been shown in 1920, but even if so shown, we could not allow the loss claimed, for the reason that we have no evidence as to their value on March 1, 1913. At that time they had been idle for ten years when the petitioner was of the opinion that they could not be profitably operated. In its return for 1914 the petitioner offered the following-explanation for a depreciation rate of 10 per cent claimed on “ Coke Ovens & Equipment ”: “ Equipment rotted and ovens not in use.” Further, it ivas in 1913 that the “ by-product ” oven which was later to replace the “ beehive ” oven made its appearance. Under such circumstances, we certainly are not justified in accepting cost in 1905, even after allowing for depreciation to March 1, 1913, as the same as fair market value at March 1,1913. It is our understanding that the loss allowable, if any, under the circumstances here presented, would be based on the lesser of two amounts, namely, cost or fair market value on March 1, 1913, after proper allowance for depreciation. Jackson County State Bank, 2 B. T. A. 1100, and Birmingham Machine & Foundry Co., 22 B. T. A. 483. Since we have no evidence as to the March 1,1913, value, we are in no position to sustain the claim for deductible loss.

In the next place, it is contended by the petitioner that the Commissioner has erroneously understated invested capital in the amount of $52,312.06, representing the depreciated cost of coke ovens on December 31, 1919. The facts which give rise to this issue are that in the adjustment of the returns prior to 1920 the Commissioner determined a rate of depreciation on the coke ovens of 7 per cent, that is, an approximate life of 14 years, and since the ovens were acquired in 1905, they were considered as fully depreciated by the beginning of 1920, and therefore no credit was allowed on account thereof in determining invested capital for 1920. The contention of the petitioner is that the rate used by the Commissioner is excessive and in lieu thereof a rate of 2 per cent should be used. In support of this position, testimony was offered to the effect that, aside from the linings, the ovens would last almost indefinitely with proper repairs, but that under the terms by which petitioner obtained them they would revert to the predecessor owner at the end of 50 years unless sooner removed from the premises, and therefore a rate of 2 per cent is proper. When a rate of 2 per cent is used the residual value shown in the error assigned remains.

We, however, are not convinced that the facts presented substantiate the petitioner’s contention. The statement that a given asset can be made to last indefinitely with proper repairs means little without a full showing as to what repairs were made and how they were taken care of. Apparently, the total cost of some $73,000 in 1905 included oven linings and we are shown nothing as to whether they were ever replaced or repaired other than that they constituted about the only item which would ordinarily need repair. It was further shown that when the ovens were leased to the Sewanee Fuel & Iron Company in 1917, after they had been idle for 14 years, the lessee was required to bear the cost of placing them in an operating condition, but what repairs were necessary or were made is not shown. Some contradiction appears in the testimony as to depreciation suffered while ovens are not in use. The petitioner’s president testified that when not in use and without any repairs or upkeep the weather would have no effect on the ovens and that brush and small trees would not grow in the walls and cause them to separate. The testimony of the Commissioner’s witness was to the contrary and this was further substantiated by his statement of what had'occurred in the case of these ovens after they had been idle from 1920 to 1931. We think the latter view more reasonable.

The evidence is also confusing and unsatisfactory as to the depreciation previously claimed by the petitioner. Its treasurer, who testified that he was familiar with its books and records and the various issues which had arisen with the Department since 1912, was unable to furnish, on cross-examination, any information as to the depreciation claimed prior to 1920 or the value at which the ovens were carried on the books at the beginning of 1920, though on direct examination he was able to state that 7 per cent was used by the Commissioner for all years prior to 1920 and that his action resulted in the entire elimination of the ovens from the capital account for invested capital purposes. The petitioner further insists that the returns which were submitted in evidence from 1914 to 1920 do not show an attitude inconsistent with their present position. We are not convinced that this is true. As heretofore stated in connection with another issue, the return for 1914 shows a rate of 10 per cent claimed on “ Coke Ovens & Equipment,” with the explanation, “ Equipment rotted and ovens not in use.” The petitioner insists that since both ovens and equipment were included, it does not show anything as to depreciation claimed on ovens alone, though the amount claimed, $8,000, is well in excess of 10 per cent of the agreed cost of ovens of some $73,000. In a letter written to the Collector of Internal Eevenue at Nashville, Tenn.. in 1914, the petitioner’s president stated that it (petitioner) had more than 300 coke ovens “which had been lying idle for several years and for this reason they are depreciating even more than we have been taking credit for.” Of course, we do not know what depreciation was theretofore being taken, but such a statement is hardly consistent with his present testimony to the effect that the elements have no effect on idle coke ovens and that their life is almost indefinite. Other reasons for our conclusion could be given, though we regard it sufficient to say that on the whole record as presented we are not convinced that the rate of 2 per cent claimed by the petitioner is substantiated.

On the other hand, we are of the opinion that the Commissioner was not justified in the entire elimination of the coke ovens from the asset account as at the end of 1919. While we know little of their condition prior to 1917, we do know that in 1917 they were leased to a company which placed them in operating condition and continued to operate them until the latter part of 1919. The petitioner itself operated them during 1920 and they were still in an operating condition as late as 1922. The first dismantling acts connected with the ovens seem to have occurred in 1927 and 1930. Obsolescence was, of course, an important factor by 1920, due to the perfection of an improved type of oven, but the old type was still being used by one or two operators in petitioner’s district as late as 1931 and we are not convinced that petitioner’s ovens were obsolete in 1920. They were shown in the balance sheet which accompanied the return for 1919 at a value of $18,000 as of December 31, 1919, and we are of the opinion that cost of at least that amount remained unextinguished at that date and that accordingly that amount should be allowed in determining invested capital for 1920.

The final issue relates to the deductibility of the expenditures for mine equipment set out in our findings. We are unable to distinguish the character of these items from those involved in West Virginia-Pittsburgh Coal Co., 24 B. T. A. 234, wherein deductions on account thereof were allowed, and accordingly the petitioner’s contention on this point is sustained.

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: ARUNdell : Teammell,

license: Public Domain

text:
    Albert Lea Packing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Pennsylvania Investors Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wilson Commission Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wilson & Company, Inc., of California, Petitioner, v. Commissioner of Internal Revenue, Respondent. Union Lard Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Standard Beef Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sells Sporting Goods Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mississippi Packing Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. John Reardon & Sons Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fame Canning Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Drexel Packing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Central Rendering Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 20765-20776.
    Promulgated October 21, 1931.

      W. B. Brown, Esq., for the petitioner.

      J. M. Leinenkugel, Esq., and T. G. Histon, Esq., for the respondent.
   OPINION.

ARUNdell :

Petitioners contend that the assessments made in January, 1922 and 1923, are now uncollectible by reason of the statute of limitations. We agree with that contention. The assessments were timely made, but at the time the deficiency notices were mailed, August 27, 1926, collection was barred under the decision in Russell v. United States, 278 U. S. 181.

In the case of only one of these petitioners, namely Wilson & Company, Inc., of California, has collection been enforced since the statute against collection became operative. It is claimed that the amount collected from that petitioner on January 3, 1927, constitutes an overpayment under section 607 of the Revenue Act of 1928 and should be refunded. That section, however, is limited by section 611 of the same act, which provides that where a tax was timely assessed, abatement claim filed and collection stayed, then the tax paid before or within one year after the enactment of the 1928 Act shall not be considered an overpayment. The facts in this case bring it within section 611. The application of that section is not affected by the fact that collection was enforced by dis-traint warrant as it has been specifically held that that section “ embraces involuntary payments.” Graham v. Goodcell, 282 U. S. 409. That case and the group of related cases decided the same day hold section 611 to be a valid enactment of Congress and overrule various objections that had been advanced as to the validity of the section. The application of section 611 in our opinion is not affected by the fact that payment was made after a petition for redetermination was filed with the Board. We had similar facts in F. A. Gillespie, 20 B. T. A. 1068, and we held that section 611 applied, although not making specific mention of that phase of the case. While section 284(e) of the Revenue Act of 1926 and the amendment thereof by section 507 of the Revenue Act of 1928 give us jurisdiction to determine overpayments and provide that over-payments so found shall be credited or refunded, it is our opinion that section 611 must be considered a limitation on those provisions, and where the circumstances detailed in section 611 are present we are prohibited from finding that the payments made are over-payments. To hold otherwise would be to say that section 611 places a limitation on the finding of overpayments by the Commissioner and by any court in which suit may be brought for refund but not on the Board. In Graham v. Goodcell, it was argued that the section applied to the Commissioner, but not to judicial proceedings. This the Supreme Court rejected, saying:

It would be anamolous that the right of the taxpayer to obtain a refund from the Department, to which he was under obligation to resort (K. S. 3226, U. S. C., Title 26, section 156), should be denied, while the right to recover by suit the same amount under exactly the same circumstances should remain unaffected. * * * tVe think it was intended to prevent refunds in the circumstances stated and not merely a particular way of getting the money from the Treasury: that the effect of the provision was to deny a right to recover the amount paid and that the provision governs equally wherever the right is asserted. [Italics supplied.]

The reasoning of the court is applicable here and we accordingly hold that the amount collected from Wilson & Company, Inc., of California, on January 3, 1927, is not an overpayment.

Petitioners argue that the assessments made in 1922 are invalid because of lack of notice and opportunity for hearing as prescribed by section 250 (d) of the Kevenue Act of 1921. We think there is no merit in this contention. The deficiencies had been determined and the petitioners notified thereof prior to the enactment of the Kevenue Act of 1921.

It is also claimed that the jeopardy assessments made in 1923 are void because the provision of the statute authorizing such assessments fails to provide for notice or opportunity for hearing and hence violates the due process clause of the Fifth Amendment to the Constitution. We considered the same objections to the jeopardy assessment provision of the Kevenue Act of 1924 in Continental National Bank & Trust Co., 20 B. T. A. 829, and held adversely to the claims made here. We hold the same in these cases.

It is stipulated that on September 27, 1927, the respondent determined that the parent company, Wilson & Company, Inc., of New York, had overpaid its taxes for 1918, and before refunding the overpayment he credited certain amounts on the assessments against the several petitioners. At the time the credit was so made collection of the assessment was barred.

No issue is raised in the pleadings with respect to the credits made by respondent and the petitions contain no prayer for relief in respect of them. In petitioners’ brief it is argued that the attempt of the respondent so to credit the taxes refundable to the parent company “ is of no effect.” To dispel any confusion that may arise through the similarity of names, we point out here that the parent company is Wilson & Company, Inc., of New York and the subsidiary that is a party to these proceedings is Wilson & Company, Inc., of California. The parent company is not before us asking for a refund and so we have some difficulty in determining what point the petitioners are trying to make with regard to the credit.

It may be, as held in Hart Glass Manufacturing Corporation v. United States, 48 Fed. (2d) 434, that, in the absence of an agreement, the Commissioner may not credit an overpayment by one member of an affiliated group against the deficiency of another member. But even if the pleadings clearly raised this issue, it would avail the parent company nothing for us to so hold, because that company is not before us as a party to the proceedings. We do not understand that petitioners are seeking a refund of the amounts credited to the assessments against them. The determination of refunds is beyond our jurisdiction, but we may in proper cases determine overpayments, which the statute directs shall be credited or refunded. If this — the determination of overpayments- — -is the issue, we hold that the crediting of the parent company’s overpayment to the assessments against petitioners does not constitute any overpayment on the part of petitioners. The petitioners have paid nothing. It is conceivable that the parent company might in a proper proceeding secure a refund of its overpayment which was credited against the barred assessments, and if we were to hold that the credit constituted over-payments of petitioners, the result would be a double refund.

As the result of the stipulations filed there remain only two questions for decision on the merits. Both arise under the invested capital issue and are (1) whether or not the earned surplus of four of the subsidiaries at the time their stock was acquired by the parent company should be included as a part of consolidated invested capital, and (2) whether or not the stock of Schwarzschild & Sulzberger Company, received by the parent company in exchange for its capital stock, had a value in excess of the amount allowed by the respondent in his determination of the consolidated invested capital.

In relation to the first question, the parties have stipulated and we have found that, at the time the parent company acquired the stock of the said four subsidiaries, they had earned surpluses in the total amount of $118,590.74, which amount respondent disallowed in its entirety in computing consolidated invested capital for the taxable year 1917. These are the only relevant facts disclosed by the record. We do not know when the parent company acquired the stock of the subsidiaries, except that obviously it was prior to 1917; nor do we know whether the said amount of earned surplus was in the possession of the subsidiaries at the beginning and end of the taxable year. Unless the subsidiaries had the earned surplus at the beginning of the taxable year, it may not be included in consolidated invested capital.

The facts are not sufficient to bring this case within our decisions to the effect that earned surplus of subsidiaries should be included in determining consolidated invested capital. See Farmers Deposit National Bank et al., 5 B. T. A. 520; Grand Rapids Dry Goods Co., 12 B. T. A. 696; American Bond & Mortgage Co., 15 B. T. A. 264.

On this question we think what we said in Middlesex Ice Co. et al., 9 B. T. A. 156, is applicable:

In the instant case, it appears that on May 1, 1919, the Cambridge Ice Company’s surplus (whose stock was acquired by the Middlesex Ice Co. for its own stock) was in excess of the amount existing at the date when the holding company acquired the Cambridge Ice Company’s stock. That surplus, not having been distributed to the stockholders or dissipated in operations, may not be eliminated from the consolidated invested capital * * ⅜.

In this case, however, we do not know whether or not at the beginning of the taxable year 1917 the subsidiaries had any earned surplus. It may have been distributed or dissipated in operations long-prior to the taxable year. We therefore approve the Commissioner’s determination in eliminating these surpluses from consolidated invested capital.

The second question under the invested capital issue arises from the petitioner’s claim that the stock of Schwarzschild & Sulzberger Company, all of which, except 40 shares, was acquired by the parent company in exchange for shares of its capital stock, had a value in excess of the amount allowed by the respondent in computing consolidated invested capital.

The respondent determined the value of said stock to be $15,130,-319.96, which he included in the consolidated invested capital. This determination is presumed to be correct.

The petitioners contend that the value of said stock, for invested capital purposes, is the par value of the shares issued therefor, plus the amount of cash paid for a portion thereof for which stock was not issued.

In April, 1910, the parent corporation acquired 43,581 shares of stock in the Schwarzschild & Sulzberger Company in exchange for 52,278 shares of its preferred stock, of the par value of $5,227,800, and 200,000 shares of its common stock, of the par value of $20,000,-000, or stock of the total par value of $25,227,800. Thereafter, on September 5, 1910, the parent corporation purchased an additional 40 shares of Schwarzschild & Sulzberger stock for $24,000 cash. The aggregate of the par value of the parent company stock, plus the cash, or the amount of $25,251,800, is the value of the Schwarzschild & Sulzberger stock which the petitioners contend should be included in computing their consolidated invested capital.

This question is governed by the Revenue Act of 1917, which provides in material part as follows:

Sec. 207. That as used in this title, the term “ invested capital ” * * * means * ⅜ *:
(a) In the case of a corporation * * * (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation * * * at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no case to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year: * * *

The petitioners argue that the minute book of the parent corporation shows that its directors were personally familiar with the property, business and prospects of Schwarzschild & Sulzberger Company, and that they valued the business at $28,000,000, which valuation should be accepted by us, but because of the limitation contained in the above quoted statute, the value of the stock can' be included in invested capital only at the par value of the shares of stock issued therefor, plus the $24,000 cash paid for the additional 40 shares. Thus, they seek to fix the value of said stock, for invested capital purposes, at $25,251,800 at the time when acquired by the parent corporation in 1910.

We have repeatedly held that the par value of stock issued for assets is not the measure of their actual cash value. Richmond Dairy Lunch, 1 B. T. A. 876; Barnes Coal & Mining Co., 3 B. T. A. 891; Wallis Tractor Co. et al., 3 B. T. A. 981, nor is the value determined by directors, as evidenced solely by a corporate resolution, sufficient to overcome the presumption of correctness of the Commissioner’s determination.

It does not appear that the Schwarzschild & Sulzberger Company was included in a consolidated return with the petitioners during the taxable year. It is clear that the transaction occurred prior to the taxable year, and both parties hereto have acted upon the theory that this is not a question of consolidated invested capital as between Wilson & Company and Schwarzschild & Sulzberger Company. The latter corporation is not included in the list of affiliated corporations set out in the stipulation. We think, therefore, that the invested capital of Wilson & Company with respect to the stock of Schwarz-schild & Sulzberger is governed by our decision in Regal Shoe Co., 1 B. T. A. 896.

Capital stock of a corporation is regarded as tangible property for invested capital purposes, Regal Shoe Co., supra; United Cigar Stores of America v. United States, 62 Ct. Cls. 134, and where paid in for stock prior to January 1,1914, invested capital under the 1917 Act must be computed on the basis of the actual cash value of the stock paid in, as of that date. West End Consolidated Miming Co., 3 B. T. A. 128; Duguesne Steel Foundry Co., 15 B. T. A. 467; Arizona Commercial Mining Co. v. Casey, 32 Fed. (2d) 288.

It is deemed unnecessary to discuss in detail objections to the petitioner’s argument or the insufficiency of the proof, other than to point out that value is a question of fact which must be determined from the evidence before us in each case, and that in the present record there is no evidence respecting the value of the Schwarzschild & Sulzberger stock as of January 1, 1914. The petitioners contented themselves with attempting to fix the value of said stock as of 1910. If we should accept the argument of the petitioners as sound, we could not assume, in the absence of proof, that the value in 1910 remained the same on January 1, 1914. On the latter date, the value might have been more or it might have been less. The petitioners offered no evidence, nor does the record otherwise disclose any fact, respecting the value of the stock as of the basic date fixed by the statute. For lack of evidence to show error, respondent’s determination on this point is approved.

As indicated above, the parties have disposed of some of the issues by stipulation. The matters so agreed upon are stipulated in paragraphs numbered 2, 8, and 4 of the agreed statement of facts filed at the hearing and will be settled under Rule 50.

Reviewed by the Board.

Decision will be entered under Rule 50.

Teammell,

dissenting: It must be kept in mind that the collection from Wilson & Company was made while the proceeding was pending before the Board. This being true, in my opinion, not only section 611 of the Revenue Act of 1928, but other provisions of the 1928 Act and provisions of the 1926 Act, should be considered on the question of whether the Board has the authority by statute to determine an overpayment of tax when it is paid after a petition has been filed with the Board after the running of the statute of limitations. In my judgment the following provisions are applicable:

Bevemie Act of 1926.
Seo. 284. (d) If the Commissioner has mailed to the taxpayer a notice of deficiency under subdivision (a) of section 274 and if the taxpayer after the enactment of this Act files a petition with the Board of Tax Appeals within the time prescribed in such subdivision, no credit or refund in respect of the tax for the taxable year in respect of which the Commissioner has determined the deficiency shall be allowed or made and no suit by the taxpayer for the recovery of any part of such tax shall be instituted in any court except—
*******
(3) As to any amodnt collected after the statutory period of limitations upon the beginning of distraint or a proceeding in court for collection has expired; but in any such claim for credit or refund or in any such suit for refund the decision of the Board which has become final, as to whether such period has expired before the notice of deficiency was mailed, shall be conclusive.
* * * * * * *
(e) If the Board finds that there is no deficiency and futher finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the taxpayer * * *.
Revenue Act of 1928
SEO. 507. OVERPAYMENTS POUND BY BOARD OP TAX APPEALS.
Section 284 (e) of the Revenue Act of 1926 is amended to read as follows:
“(e) If the Board finds that there is no deficiency and further finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the taxpayer as provided in subdivision (a). Unless claim for credit or refund, or the petition, was filed within the time prescribed in subdivision (g) for filing claims, no such credit or refund shall be made of any portion of the tax paid more than four years (or, in the case of a tax imposed by this title, more than three years) before the filing of the claim or the filing of the petition, whichever is earlier.”

(See also section 322 (c) and (d) of the Revenue Act of 1928, and section 601 of the 1928 Act, which amends sections 906. and 907 (a) and (b) of the 1924 Act.)

Section 906 (e) of the Revenue Act of 1924, as amended by section 1000 of the Revenue Act of 1926, provides as follows:

If the assessment or collection of any tax is barred by any statute of limitations, the decision of the Board to that effect shall, for the purpose of this title and of the Revenue Act of 1926, be considered as its decision that there is no deficiency in respect of such tax.

The Revenue Act of 1928 (section 601) amends sections 906 and 907 (a) and (b) as amended by the 1926 Act, but reenacts the above provision.

The Revenue Act of 1928, which contains section 611, also contains the other provisions above quoted or cited.

Section 507 of the 1928 Act specifically relates to overpayments or refunds in cases before the Board. It provides the manner and circumstances of making a refund if the Board determines that there is no deficiency and further finds that the taxpayer has made an overpayment.

Section 322 (c) of the 1928 Act specifically relates to cases where the Commissioner has mailed a notice of deficiency and the taxpayer has filed a petition with the Board. It provides as follows:

(c) Effect of Petition to Board. — If the Commissioner has mailed to the taxpayer a notice of deficiency under section 272 (a) and if the taxpayer files a petition with the Board of Tax Appeals within the time prescribed in such subsection, no credit or refund in respect of the tax for the taxable year in respect of which the Commissioner has determined the deficiency shall be allowed or made and no suit by the taxpayer for the recovery of any part of such tax shall be instituted in any court except—
(1) As to overpayments determined by a decision of the Board which has become final; and
(2) As to any amount collected in excess of an amount computed in accordance with the decision of the Board which has become final; and
(3) As to any amount collected after the period of limitation upon the beginning of distraint or a proceeding in court for collection has expired; but in any such claim for credit or refund or in any such suit for refund the decision of the Board which has become final, as to whether such period has expired before the notice of deficiency was mailed, shall be conclusive.

(d) Overpayment Found by Board. — If the Board finds that there is no deficiency and further finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect, of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the taxpayer. No such credit or refund shall be made of any portion of the tax paid more than two years before the filing of the claim or the filing of the petition, whichever is earlier.

That section, after setting out that no credit or refund might be made in respect of the tax for the taxable year for which a deficiency has been asserted when a proceeding has been instituted before the Board, provides exceptions. One of the specific exceptions to the making of refunds in a case before the Board is with respect to any amount collected after the period of limitations has expired and the determination by the Board as to whether the statute of limitations had expired before the notice of deficiency was mailed shall be conclusive. These provisions relating to refunds in cases before the Board are special and specific provisions in those particular cases. The effect of section 322 (c) and (d) in connection with section 601, which amends section 906 (e), is that when notice of deficiency has been mailed and a petition has been filed with the Board, the Commissioner can not make a refund except as to any amount collected in excess of the amount computed in accordance with the decision of the Board and except as to any amount collected after the period of limitations has expired as determined by the Board. If the Board finds that the statute of limitations has expired such decision shall be considered as a decision that there is no deficiency and any amount paid therefore would be an overpayment. The Board is given authority by section 322 (d) to find an overpayment, which that section provides shall be credited or refunded to the taxpayer when the decision of the Board becomes final.

The specific provisions of the statute relating to credits and refunds in cases after notice of deficiency has been mailed and the petition filed with the Board contain no reference to section 611.- Section 611 is a general provision'relating to refunds generally under the conditions therein stated and section 322 (c) of the 1928 Act and the other provisions relating to cases before the Board and the Board’s jurisdiction are specific and particular provisions relating to refunds and credits in cases after the mailing of the notice of deficiency and after the filing of the petition.

Section 322 (c) and the other provisions relating to the Board and Its jurisdiction are contained in the same Revenue Act with section 611. If section 611 be held to be applicable in cases within section 322, the latter section, especially subdivision (c) thereof, is modified thereby by implication, yet section 322 specifically refers to any amoiont collected after the expiration of the statute in oases before the Board. It contains no exception with respect to section 611. If Congress intended in such cases that section 322 did not apply to any amount collected, but only to amounts collected except as provided in section 611, it would have been a simple matter to have so provided. If section 611 governs cases pending before the Board, the question naturally arises as to why Congress specifically provided that in those cases before the Board refunds might be made as to any amount collected after the period of limitations has expired. While section 611 provides that a payment after the expiration of the statute of limitations in case the .collection was stayed by an abatement claim is not to be considered an overpayment under section 607, still by express language a payment made after the expiration of the statute in cases fencing before the Board is to be refunded as provided in section 322 (c). In other words, in cases where a notice of deficiency had been mailed and a petition filed with the Board, it is not a question as to whether there was an overpayment under section 607, referred to in section 611, but an overpayment as provided in section 322.

In my opinion, we are not warranted in saying that section 322 was put in the statute to give the Board jurisdiction to determine over-payments which are refundable. The Board is expressly given that jurisdiction by section 284 of the 1926 Act. This authority of the Board is retained in the 1928 Act in section 507, which amends sec-, tion 284 of the 1926 Act in certain particulars not material for this discussion. Section 322 of the 1928 Act clearly had for its purpose a limitation on the power of the Commissioner to make refunds or credits after a petition had been filed with the Board, except under the circumstances therein mentioned. One of the circumstances under which the Commissioner is authorized to make a credit or refund under that section is where- the Board has determined that any amount was collected after the period of limitations had expired. The power of the Commissioner to make refunds or credits even under this condition is further limited to taxes paid within a certain period. The Committees in charge of the bill in the course of its passage through Congress in their reports stated, however, “ It will be noted that there is-no limitation imposed in the case of amounts paid after the petition is filed.”

It may fairly be assumed that the collection of the tax while a proceeding was pending before the Board was a jeopardy collection; otherwise, it was prohibited by law. We can not assume that the Commissioner did an illegal act. Section 274 (a) of the Revenue Act of 1926, which was in effect when the notice of deficiency was mailed, when the proceeding was instituted before the Board and when the collection was made, prohibits collection of tax after a notice of deficiency has been mailed, except as provided in subdivisions (d) or (f) of section 274, or sections 279, 282 or 1001. Section 272 of the 1928 Act has the same effect. Section 279 of the 1926 Act, relating to jeopardy assessments, also provides for jeopardy collections. Section 279 (f) provides that the taxpayer may obtain a stay of collection of such an assessment by the filing of a bond, but there is no provision that he is required to do so in order to have the benefits of section 279 (i). Section 279 (i) provides, in referring to jeopardy assessments and collections, that, after a determination by the Board has been made, if the amount already collected before the decision of the Board exceeds the amount determined as the amount which should have been assessed, such excess shall be credited or refunded to the taxpayer as provided in section 284.

Section 273 (i) of the Revenue Act of 1928 provides, in the case of jeopardy collections, that, after the decision of the Board, if the amount already collected exceeds the amount determined as the amount which should have been assessed, such excess shall be credited or refunded as provided in section 322 above referred to. No reference whatever is made to any limitations contained in section 611. Since the taxpayer did not exercise its right to secure a stay of the collection after notice and demand, but under distraint proceedings or threat thereof paid the tax, it might be said that a tax so paid is no different from a tax voluntarily paid, but section 273 (i) of the 1928 •Act and section 279 (i) of the 1926 Act make no such distinction, but provide, without any qualifications whatever, for the refund of any amount which exceeds the amount which should have been assessed. Clearly, the statute imposes on us the duty of considering whether the period of limitations had expired at the time of the mailing of the deficiency notice in determining what amount should have been assessed.

The whole purport of the jeopardy assessment and collection provisions in connection with proceedings before the Board and of the other statutory provisions relating to proceedings before the Board is that assessments and collections made while a proceeding is before the Board shall not affect any determination which the Board would have been authorized to make if such assessments or collections had not been made.

I think that the rule of statutory construction to the effect that every word or clause in the statute must be given effect if possible to do so and that the legislative body in enacting statutory provisions did not intend to provide a wholly useless thing, should be applied here. Those rules of construction are too well recognized to require the citation of authorities to support them. Applying this rule, giving effect to section 611 and those provisions relating to cases before the Board, it would seem to follow that section 611 applies to all cases except those referred to in section 322 and other provisions relating to cases before the Board. Section 322 and section 611 are in conflict. This case comes squarely within both provisions, yet both provisions can not be given effect.

It is also a well recognized rule of statutory construction that general provisions in a statute, if in conflict with specific provisions relating to certain particular facts or conditions or things, must give way. Specific provisions control as to situations and facts which come within them over general provisions in a statute. Special provisions of the statute must be read as exceptions to general provisions. See 25 R. C. L. 10; Atkins v. Fibre Disintegrating Co., 18 Wall. 272; Townsend v. Little, 109 U. S. 504; United States v. Chase, 135 U. S. 255; McKee v. United States, 164 U. S. 287; Carroll v. Greenwich Insurance Co., 199 U. S. 401.

The question in applying this rule of construction is to determine whether section 611 or section 322 is the general provision and which is the specific provision. I think that section 611 is the general provision. That is the rule applicable generally to all refunds under the conditions therein stated. It is applicable to all cases before the courts and the Commissioner and, in general, before the Board. But if a notice of deficiency has been mailed and a petition filed with the Board, a different rule is provided. Section 322 relates specifically and particularly to certain classes of cases before the Board and I think that that section and other sections specifically relating to cases before the Board should be read as exceptions to the general rule provided in section 611. Section 322 could have no application generally, while section 611 does have general application to all cases under its provisions — certainly, in any event, a more general provision than section 322. This leads me to the conclusion that section 322 is the specific provision and should be read as an exception to section 611. Manifestly Congress had in mind that many cases coming under section 322 would also come under section 611, but, clearly, it was intended that both sections should be given effect and section 611 can be given effect, except as to cases coming under section 322. Section 611 provides that a refund can not be made if the tax is collected after the statute of limitations has expired where the collection was stayed by a claim in abatement, but section 322 provides that no credit or refund can be made for any reason after a petition has been filed with the Board, except under the conditions therein stated. One of the conditions stated is the Board’s determination that the collection was made after the running of the statute. It contains no exception of a case where the collection was stayed by a claim in abatement, even if this was the reason why the collection was made after the running of the statute. While I think that section 322 is sufficient to give us authority to determine that the taxpayer is entitled to a refund under the facts of this case, in my opinion, under other statutory provisions and other considerations we have such jurisdiction and authority. I also think that my view that this case is governed by section 322 and not by section Gil finds support based on other considerations.

The facts here raise the question whether the Commissioner could, by any action on his part after the petition has been filed with the Board, defeat the Board’s jurisdiction clearly conferred upon it by the statutes above cited by collecting the tax.

At the time the petition herein was filed, the tax had not been collected or paid, and the Revenue Act of 1928 had not been enacted. The period of limitation on collection had expired approximately three and onc-half years previously. We have jurisdiction in a proceeding before us to determine whether the statute of limitations had expired at the time of the mailing of the deficiency notice, and our determination that it had expired at that time is to be considered a decision that there is no deficiency. See section 906 (e) above quoted. Since the statute of limitations had run prior to the mailing of the deficiency notice and thus there was no deficiency, any amount paid as a deficiency is an overpayment. The statute authorizes us to make that determination as of the time of the mailing of the deficiency notice, and does not authorize the Commissioner to defeat that jurisdiction once obtained, take from us the power and duty imposed on us, or prevent us from making the determination which the act authorizes us to make by any action on his part while a proceeding is pending before us, even conceding that if the tax had been paid before the filing of the petition, it would be governed by section 611.

I do not construe the Supreme Court’s decision in Graham v. Goodcell, 282 U. S. 409, or the related cases decided the same day, as being applicable to cases pending before the Board which are governed by specific statutory provisions not applicable to the cases considered by the court. We think that force is given to our view herein by the decision of the Circuit Court of Appeals (Fifth Circuit) in the case of Peerless Woolen Mills v. Rose, 28 Fed. (2d) 661. In that case the Commissioner had asserted a deficiency against the taxpayer, and, while a proceeding was pending before the Board on the issue of whether the statute of limitations barred collection of the tax shown on the return, proceeded to collect by distraint. The court, in holding that the lower court was in error in declining to enjoin collection, said:

By tlie Revenue Act of 1926 it is provided in section 284 (d), 26 USGA § 1065, that, if the taxpayer appeal to the Board, he cannot sue to recover any part of the tax, but under subdivision (e) of that section the Board was given jurisdiction if it should find that there was no deficiency, and that the taxpayer had made an overpayment of the tax, to determine the amount of such overpayment and direct that it be credited or refunded. Therefore, since the passage of the Revenue Act of 1926, the Board has jurisdiction, not only to redetermine a deficiency, but also, where there is no deficiency, to ascertain and order that credit be given for any overpayment of the tax.

Our determination that there is no deficiency because of the running of the applicable statute of limitations is just as effective a determination of no deficiency as if upon the merits.

The specific statutory provisions above quoted, relating to proceedings before the Board and our' jurisdiction appearing in the game act with section 611, is an indication that Congress did not intend to modify them by section 611 in the absence of any exceptions or provisions or in the absence of any specific language in connection therewith. I think that the tax collected while the proceeding was pending before the Board is an overpayment, inasmuch as the statute of limitations barred collection when the deficiency notice was mailed.

I recognize the fact that my view herein is contrary to the conclusion reached by us in the case of F. A. Gillespie, 20 B. T. A. 1068. In that case the tax was collected by the Commissioner after the notice of deficiency had been mailed and while the proceeding was ponding before the Board. Claim in abatement had theretofore been rejected. We based the decision in that case upon the principle subsequently laid down by the United States Supreme Court in the case of Graham v. Goodcell, supra. We did not discuss therein the specific provisions of the statute with respect to our jurisdiction in cases where taxes have been collected while proceedings were pending before the Board, nor did the Supreme Court have such a case before it.

In the case of A. L. Gump et al., 21 B. T. A. 606, a Division decision, where the tax had been paid after the statute of limitations had run but prior to the mailing of the notice of deficiency, with respect to the rejected portion of the abatement claim filed we held that under section 607 there was an overpayment. This Division decision, upon reference to the full Board, was reversed on authority of the Gillespie case, supra. In the Gump case, however, the tax was not paid after’the notice of deficiency and while the proceeding was pending before the Board as was true in the Gillespie case, and the Gillespie, case is, therefore, not authority for the decision by the Board of the Gump case in 22 B. T. A. 783. The conclusion reached in the Gump case, however, is not necessarily in error because it relies upon the Gillespie decision. The tax having been paid before the notice of deficiency was mailed, to wit, February 12, 1926, and the notice of deficiency having been mailed December 8, 1927, and no proceeding having been instituted before the Board prior to the time of the collection of the tax, the case is governed by section 611 of the 1928 Act, and we properly held that the payment thereof after the rejected claim in abatement was not an overpayment.

In the case of Morris Metcalf, 16 B. T. A. 881, we held that a payment of the tax after the period of limitations constituted an overpayment under section 607. Section 611 was not discussed and was not applicable to the facts of that case, no claim in abatement having been previously filed which stayed the collection.

In the case of J. B. Dortch, 19 B. T. A. 159, we held that payment of the tax having been made after the period of limitations had run constituted an overpayment under section 607. In that case the notice of deficiency was mailed January 8, 1926. A jeopardy collection was made on or before January 19, 1926, and the petition to the Board was not filed until April 21,1926. No claim in abatement was filed which stayed the collection of the tax and the question presented in the case at bar was not present in that case. Section 611 was not involved. It is to be observed that it appears upon the face of the record in that proceeding that we had no jurisdiction thereof. Thus the only one of the above cases which appears to be in conflict with the views herein expressed is the Gillespie case, supra.

In my opinion collection of the tax is barred by limitation, and there is no deficiency. Section 906 (e) of the Revenue Act of 1924, as amended by section 1000 of the Revenue Act of 1926, supra.

There being no deficiency, the amount collected by the respondent while the proceeding was pending before the Board, in my opinion, is an overpayment to be refunded.

Love agrees with this dissent.


author: Smith:

text:
    Connecticut & Passumpsic Rivers Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 25987.
    Promulgated October 21, 1931.

      O. B. Folsom-Jones, Esq., and J. 8. Y. Ivins, Esq., for the petitioner.

      J. T. Haslam, Esq., for the respondent.
   OPINION.

Smith:

The respondent contends for the affiliation of the petitioner and the Newport & Bichford Bailroad Company on the grounds that the petitioner during all of the years involved owned outright all of the outstanding shares of capital stock of that company. The petitioner contends that it was not affiliated with the Newport & Bichford Bailroad Company because of the fact that in the lease of June 1, 1887, it assigned all of its interests in the shares of stock of the Newport & Bichford Bailroad Company to the Boston & Lowell Bailroad Corporation, which lease was in turn assigned to the Boston & Maine Bailroad Company, and that therefore the affiliation, if any, was of the Boston & Maine Bailroad Company and the Newport & Bichford Bailroad Company.

We are of the opinion that the petitioner in executing the lease in question did not divest itself of its ownership of the stock of the Newport & Bichford Bailroad Company. Bead as a whole, the instrument purports to be no more than an ordinary lease by the petitioner of all of the properties described therein, including the shares of stock of the Newport & Bichford Bailroad Company, to the Boston & Lowell Bailroad Corporation for a period of 99 years. It authorizes the lessee, to vote the shares of stock of the Newport & Bichford Bail-road Company and to receive the dividends therefrom. The lessee could not sell or otherwise dispose of the stock without the consent of the lessor. Counsel for the petitioner and for the respondent have stipulated that:

⅜ * * the Connecticut & Passumpsic Kivers Bailroad Company [petitioner] owned 100 per cent of the stock of the Newport & Bichford Bailroad Company at the date of the original lease herein discussed, and has owned that stock continuously from inception of the lease down to date, and including the years 1921 to 1923, inclusive.

The issue before us is whether the petitioner and the Newport & Bichford Bailroad Company were affiliated.

Section 240 of the Bevenue Act of 1921 provides that:

(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

Notwithstanding that under the terms of the lease certain rights constituting virtual control in the shares of the stock of the Newport & Richford Railroad Company were released to the lessee for the period of the lease, the ownership of the stock remained in the petitioner. As the court said in Lavenstein Corporation v. Commissioner of Internal Revenue, 25 Fed. (2d) 375:

* * * Assuming that the pledge transfers to the pledgee the right to control the corporation, which is not true in all cases, the statute provides for affiliation where there is unity of either ownership or control, and does not require that there be unity in both. To so hold would be to amend the statute in a vital particular and to open the door to evasions of the act. If affiliation is to be denied because the stock of one of the affiliated corporations has been pledged by its owners, then all that would be necessary to evade the high rates of a graduated tax would be for the interests which owned the stock in the affiliated corporations to pledge the stock held in one of them.

On the basis of the continued ownership by the petitioner of all of the stock of the Newport & Richford Railroad Company there was a literal compliance with the statutory requirement for affiliation.

The remaining issue raises the question whether the premiums received by the petitioner in 1911 upon the sale of its long-term bonds which were outstanding during the years 1921,1922, and 1923, should be amortized over the life of the bonds and, if so, whether the amortized portions of the premiums allocable to the taxable years constitute taxable income to the petitioner in those years or whether such aliquot portions of the premiums served to reduce the amounts deductible in those years as expenses on account of the annual interest payments by the petitioner on the bonded indebtedness.

In his audit of the consolidated returns filed by the petitioner the respondent included the item of $936.71 representing the aliquot portion of the bond premiums in taxable income for each year. The respondent now takes the position that this item should apply in each year to reduce the deductions allowed on account of the annual interest payments on the bonds, amounting to $17,500; that the deduction allowed corporations by section 234 (a) (2) of the Revenue Acts of 1918 and 1921 of interest paid or accrued within the taxable year on its indebtedness is interest “ computed at the effective or true rate rather than at the nominal interest rate.”

Section 212 (b) of the Revenue Act of 1921, under the provisions of which the petitioner’s income-tax returns for 1921, 1922, and 1923 were filed, provides in part as follows:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period * * * in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *

The Commissioner’s regulations prescribed under the Kevenue Act of 1921 provide in part, in article 545, under the caption, “ Sale and retirement of corporate bonds,” as follows:

(2) (a) If bonds are issued by a corporation at a premium, the net amount of such premium is gain or income which should be prorated or amortized over the life of the bonds. * * *

As appears from Commissioner v. Old Colony R. R. Co., 26 Fed. (2d) 408, railroad corporations since 1914 have been required by the regulations of the Interstate Commerce Commission to take up in income of each year a prorated portion of the premiums received upon bond issues and have been entitled to deduct from gross income a prorated portion of the discount upon bond issues, regardless of the date the bonds were sold. Under such regulations the petitioner accrued upon its books of account for each of the taxable years $936.71 representing the aliquot portion of the bond premiums involved in this proceeding.

The question before us, therefore, is whether the petitioner, in making its income-tax returns for the taxable years in question, may impugn the correctness of its books of account in so far as they reflect the accrued income. We are of the opinion that it may not, unless we can find that the method employed by the petitioner does not clearly reflect its income. We are not prepared so to find. Surely the accrual of the premiums on bonds in income does not work a greater distortion of the gains of the year than does an accrual of bond discount where the bonds have been sold at a discount. Under the accrual system amounts may be included in the gross income which are not received in the taxable year; and amounts may be deducted which are not paid out within the taxable year. The object of the accounting or bookkeeping is simply to reflect the gain of the taxable year.

This sole question of whether the receipt of premiums upon bond issues constitutes taxable income and whether such income should be spread over the life of the bonds was thoroughly considered by the Board in Fall River Electric Light Co., 23 B. T. A. 168, where we held that premiums received upon a bond issue in 1925 constituted taxable income to be amortized over the life of the bonds.

This was the position taken by the United States Circuit Court of Appeals for the First Circuit in Commissioner v. Old Colony R. R. Co., 50 Fed. (2d) 896. The opinion reads in part as follows:

The question to be solved in the ease at bar is whether profit arising from the sale of the bonds may be taken into account in determining the expense to be allowed tbe Old Colony as a deduction. If the books were kept on a cash basis the deduction allowable would be the interest paid on the bonds, and only that, as that would be the cash disbursement for the year. The Commissioner contends, however, that the real expense in connection with the payment of the interest on the bonds is the amount of it less an aliquot part of the profit, apportioned to the year 1921, amounting to $0,960.64, as the bonds cost the company' less than the amount represented by the rate of interest.
There are no authorities precisely in point, and the decided cases in which somewhat similar questions arose relate to companies whose books were kept on a cash basis. See, for instance, Baldwin Locomotive Works v. McCoach, 221 P. 59; Chicago & Alton R. R. Co. v. United States, 53 Ct. Claims, 41. But there is one decided case which is the converse of the ease at bar. In Western Maryland Ry. Co. v. Commissioner, 33 F. (2d) 695, a corporation whose bonds were sold at a discount was allowed to figure the proportionate part of the discount as an expense for the year. The same principle applies to the case at bar. If a corporation is allowed to. show a greater expense for a given year by adding a proportionate part of a loss on the sale of bonds, there seems no reason to deny to the taxing authorities the right to show a smaller expense by deducting the proportionate part of a gain on a sale of bonds.
Such a result may seem contrary to the case in this circuit of Commissioner v. Old Colony Railroad Company, 26 F. (2d) 408, which involved a similar state of facts. The decision was that a profit made in 1904, before the passage of the Sixteenth Amendment to the Constitution of the United States, could not be taxed. The court’s attention was not called to the fact that the profit made in the early years was not being taxed, but that it was being used only to determine the expense for the year 1921 of the payment of interest on the bonds. This is not a tax but an allocation, under proper accounting methods for books kept on the accrual basis, of the expense chargeable to the year 1921. See Chicago, Rock Island & Pacific Ry. Co., 13 B. T. A. 989, 1029.

Although the court there held that the deduction for the interest payment should be reduced by the aliquot portion of the premium on the bond issue allocable to the taxable year, the result is the same if the aliquot portion of the premium be included in the gross income and the taxpayer is permitted to deduct as an expense the total interest paid on the bond issue during the taxable year. We are of the opinion that the Commissioner’s regulations on this point should be sustained.

The same question presented by this proceeding was before us in Chicago & North Western Railway Co., 22 B. T. A. 1407. There we held that the amortized portion of premiums on bonds issued prior to March 1, 1913, should not be included in the gross income of 1920, but that the amortized portion of premiums on bonds issued subsequent to March 1, 1913, should be included in gross income. We there relied on Commissioner v. Old Colony R. R. Co., 26 Fed. (2d) 408. In the light of the later pronouncement of the same court upon this question, we sustain the Commissioner’s regulation and hold that an aliquot part of the premiums upon bond issues is to be included in the gross income regardless of the date of issue.

In accordance with the stipulation of the parties, we find that there is a deficiency for 1921 of $1,602.38, for 1922 of $21,119.50, and for 1923 of $2,195.39.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Aeundell:

text:
    Mente & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39083.
    Promulgated October 22, 1931.

      J. Marvin Haynes, Esq., and IF. 0. Magathan, Esq., for the petitioner.

      T. M. Mather, Esq., and J. M. Morawsld, Esq., for the respondent.
   OPINION.

Aeundell:

Petitioner contends that it should be allowed to take depreciation deductions on the increased value shown by the appraisal of assets taken over from the Burlap Manufacturing Company, Inc., hereinafter called the Burlap Company. Respondent’s position is that the correct basis for depreciation is the same basis upon which the Burlap Company was entitled to compute depreciation.

Section 204(c) of the Revenue Act of 1926 provides as follows:

The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that—

Section 204(a) (7) reads:

The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
* * * ⅜ ⅝ * *
If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

Section 203(b) provides that:

(1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (O) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

It seems to us that the above provisions exactly fit the present case. The assets of the Burlap Company were acquired by petitioner in connection with a reorganization as defined in section 203(h) and immediately after the transfer control remained in the same persons, In such cases the statute — section 204(a)(7) — provides that the basis shall be the same as it would be in the hands of the transferor, with adjustment for gain or loss recognized on the transfer. No adjustment is to be made in this case, as no gain or loss has been recognized to the Burlap Company. Cf. David B. Garm, 23 B. T. A. 999.

Counsel for petitioner admit that the case falls within section 204(a) (7), except for the phrase “in connection with a reorganization.” They say that the petitioner acquired the Burlap Company assets in liquidation and upon the dissolution of that company and they contend that the dissolution of a corporation is not a reorganization within the meaning of the law. We think that this argument is premised on too narrow a view of the matter. It is not enough to look only at the, dissolution, of the Burlap Company and to use that as a basis for deciding the question. The several steps taken by the directors and stockholders of the two companies on the same day must be taken into consideration as they were obviously each a part of the entire scheme. Those steps, stated in brief, were: (a) resolutions of petitioner’s directors to acquire the entire stock of the Burlap Company for stock and bonds of petitioner; (b) the actual exchange of Burlap stock for stock and bonds of petitioner; (c) resolutions to dissolve the Burlap Company and for petitioner to acquire its assets in consideration of petitioner’s assumption of its liabilities; (d) the execution of an act of dissolution of the Burlap Company; (e) the acquisition by petitioner of the Burlap Company’s assets subject to its liabilities. When these several steps were completed the same persons who had owned the stock of the Burlap Company owned all the stock of petitioner. We think that clearly these transactions bring the case within the definition of a “ reorganization” contained in section 302(h) (1), and that upon consideration of these several steps it must be held that petitioner acquired the Burlap Company’s assets “in connection with a reorganization.”

Reliance Investment Co., 22 B. T. A. 1287, cited by petitioner, is not in point. That was not a reorganization case. There the taxpayer issued its stock for securities owned by another corporation. We held that upon the sale of such securities by the taxpayer the basis for gain or loss purposes was cost to the taxpayer as the case did not come within any of the exceptions enumerated in section 204 (a) of the 1926 Act.

Reviewed by the Board.

Decision will te entered for the respondent.


author: Van Fossan:

text:
    Charles T. Kountze, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frederick H. Davis, Petitioner, v. Commissioner of Internal Revenue, Respondent. Walter B. Roberts, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles T. Kountze and Alice A. Kountze, Executors of the Estate of Luther L. Kountze, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Willis Todd, Petitioner, v. Commissioner of Internal Revenue, Respondent. Thomas L. Davis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37323, 37324, 37395, 37534-37536.
    Promulgated October 22, 1931.

      Kenneth S. Finlayson, Esq., for the petitioners.

      B. M. Goon, Esq., for the respondent.
   OPINION.

Van Fossan:

The issue in Docket Nos. 37323 and 37395 relating to a loss of $5,000 invested in stock of the Dort Sales Company was not presented at the hearing or supported by any evidence. Counsel for the petitioners asserts in his brief that the sole issue in the cases is the value of corporate stock as the basis of determining profit. Therefore, we assume that the former issue has been abandoned and affirm respondent’s determination as to it.

The petitioners present two phases of their allegation of the respondent’s errors:

(1) That the basis adopted by them in their returns and by respondent in his notices of deficiency was erroneous and that the proper basis for computing the profit derived from the sale of the common stock of the Union Power and Light Company to the Albert Emanuel Company, Inc., is the value of that stock on September 12, 1917, the date of the reorganization, which val'ue, it is claimed, was at least $130 per share, and

(2) If it be determined that the March 1,1913, value of the capital stock of the Union Company is the correct basis for such computation, the value of that stock ivas at least $100 per share on that date.

The evidence of value introduced by petitioners is so convincing as to leave us practically only a question of law as to the basis for determining gain. Petitioners’ witnesses were men of high standing and eminent qualifications and their testimony stands uncontraclicted.

Passing to the question of law, the petitioners contend that the capital stock of the Union Power and Light Company acquired by them on September 12, 1917, was essentially different in character and worth from the stock of the Union Company held by them before the reorganization. They assert that the situation is governed by the decision of the United States Supreme Court in Marr v. United States, 268 U. S. 536. The respondent maintains that the stockholders of the Union Company possessed the same shares of interest in the assets and business of the enterprise after the reorganization as they did before, and that Weiss v. Stearn, 265 U. S. 242, is controlling.

In the cases at bar the Union Company, on September 12, 1917, sold all of its assets to the Union Power and Light Company for 10,000 shares of the common and 2,500 shares of the preferred stock of the latter company and distributed the stock thus received to its own stockholders in the same proportion as they had held its stock. Twenty-five hundred shares of the preferred stock of the Union Light and Power Company were set aside simultaneously for sale to the public at par and later were sold. The preferred stock of the Union Power and Light Company was charged with the payment of a cumulative dividend of 7 per cent and also was preferred in the distribution of the corporation’s assets upon their sale or other disposition or upon the dissolution of the company. The outstanding 5,000 shares of preferred stock, therefore, imposed the burden of an annual dividend charge of $35,000 on the profits of the Union Power and Light Company. All of the stock of the Union Company was common stock.

In the Marr case, prior to March 1,1913, Marr and his wife owned 339 shares of the preferred and 425 shares of the common stock of the General Motors Company of New Jersey. In 1916 they received in exchange for this stock 451 shares of the preferred and 2,125 of the common stock of the General Motors Corporation of Delaware. The New Jersey corporation had outstanding $15,000,000 of 7 per cent preferred stock and $15,000,000 of common stock, all shares having a par value of $100. The Delaware corporation had an authorized capital of $20,000,000 in 6 per cent nonvoting preferred stock and $82,000,000 in common stock, all shares likewise having a par value of $100. Only 750,000 shares of the common stock of the Delaware corporation were issued in exchange for the common stock of the New Jersey corporation, the remaining shares being held for subsequent sale. The difference between the cost to the Marrs of their stock in the New Jersey corporation and the value of their stock in the Delaware corporation was held to be taxable gain. The court ruled that the Delaware corporation was essentially different from the New Jersey corporation; that a 6 per cent nonvoting preferred stock was essentially a different security from a 7 per cent voting preferred stock; and that a common stock subject to the priority of $20,000,000 preferred stock and a $1,200,000 annual dividend charge was essentially different from a common stock subject only to the priority of $15,000,000 preferred stock and a $1,050,000 annual dividend charge.

In Weiss v. Stearn, the owners of the entire capital stock ($5,000,000) of the National Acme Manufacturing Company, an Ohio corporation, delivered their certificates of stock to the Cleveland Trust Company as depositary. Eastman, Dillon and Company also deposited there $7,500,000 in cash. A new corporation, the National Acme Company, was thereupon incorporated under the laws of Ohio, with $25,000,000 capital stock and powers similar to those of the old corporation. The National Acme Company then purchased the entire assets and assumed all liabilities of the old corporation in exchange for its entire capital stock issued to the depositary. The National Acme Manufacturing Company thereupon was dissolved. The depositary delivered to the stockholders the $7,500,000 in cash and certificates for $12,500,000 in stock, and to Eastman, Dillon and Company certificates for the remaining $12,500,000 in stock. It was held that each stockholder retained one-half of his interest in the corporation and disposed of the other half for cash. In the Weiss case it was further held that the proportional interest of each stockholder was the same in both corporations, there having been no change in the character of the securities issued and that no gain was derived. The court said: “ Something more is necessary,— something which gives the stockholder a thing really different from what he theretofore had.”

Under the principles established by the above cases, a new basis for computing gain or loss was established in the year 1917 when petitioners exchanged their proportionate stock interests in the Union Company for stock interests in the Union Power and Light Company. Before the reorganization the petitioners owned only common .stock in the Union Company. After the reorganization they owned certain shares of common stock subject to the priority of $500,000 preferred stock, enjoying the preference of a 7 per cent cumulative dividend and also precedence in the distribution of the corporation’s assets upon their sale or upon the dissolution of the corporation. They also owned certain shares of the preferred stock, but not all of them. Twenty-five hundred shares of such stock were owned by numerous stockholders residing in Nebraska, Iowa and neighboring States. These differences in stock classes and priorities and the ownership of such stock by strangers to the original .stockholders of the Union Company constituted such a divergence of interest as to have an important bearing on the rights and, hence, the value of the common stock owned by the petitioners. We conclude that the interests of the petitioners in the Union Company were essentially different from those held by them in the Union Light and Power Company. See Marr v. United States, supra; United States v. Phellis, 257 U. S. 156; Rockefeller v. United States, 257 U. S. 176; Cullinan v. Walker, 262 U. S. 906; United States v. Siegel, 52 Fed. (2d) 63, affirming, in effect, A. J. Siegel et al., 4 B. T. A. 186.

The gain derived from the sale of the Union Light and Power Company stock to the Albert Emanuel Company, Inc., in 1923 should be measured by the difference between the value of that stock on September 12, 1917, as found by us, and its sale price in 1923.

Reviewed by the Board.

Judgment will he entered under Bule 50.


author: McMai-ion :

text:
    Escanaba and Lake Superior Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 22081.
    Promulgated October 22, 1931.

      Perry J. Stearns, Esq., and G. G. Russell, Esq., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

McMai-ion :

The second assignment of error was not referred to at the hearing and not dealt with in the briefs of counsel. Sufficient evidence ivas not presented from which it can be determined that respondent was in error as. alleged in petitioner’s second assignment of error.

The only question, then, to be determined in this proceeding is whether items which accrued in 1923, some of which were reported as income in the 1923 income-tax return, are deductible in 1924, the method of accounting having been prior to January 1,1924, on a cash receipts and disbursements basis.

Petitioner changed its method of accounting upon its own volition on January 1, 1924, from a cash receipts and disbursements basis, used in 1923 and prior thereto, to an accrual basis. The transaction giving rise to the items involved occurred in 1923. It is contended by petitioner that these items could not be accrued prior to January 1, 1924, because petitioner’s method of accounting was on a cash basis. This contention offers no sound reason for the deduction of these items in 1924.

The law provides that in computing net income of a corporation subject to tax there shall be allowed, among other deductions specified, all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 212 (b) of the Revenue Act of 1924 provides that the net income of a corporation shall be computed in accordance with the method of accounting employed in keeping the books of the corporation, providing the method used clearly reflects the income of the' taxpayer.

Journal entries Nos. 812 and 313 represent items in substantial amounts which were treated as income by petitioner in 1923 and prior thereto, when in fact such items represented moneys collected by agents of petitioner covering prepaid interline forwarded freight immediately due foreign lines, but not paid until the following year. The amounts credited in one year as income were deducted the following year as expense. It is stated in Chatham & Phenix National Bank, 1 B. T. A. 460, as follows:

* * * Nor do we think the method of bookkeeping employed in accounting for discount could make income if it did not fall within the definition of income. The mere placing of amounts on the books and reporting them as income can not change the facts any more than the placing of losses on the books constitute them proper deductions if they are not such in fact. The facts must control, and bookkeeping entries are only evidence of the facts.

Clearly such items are not ordinary and necessary business expense and therefore are not deductible as such.

We can not authorize the erroneous computing of income in the taxable year because of erroneous accounting in a previous year. See Cleveland Woolen Mills, 8 B. T. A. 49; Corn Exchange Bank, 6 B. T. A. 158; and Krieg Tanning Co., 4 B. T. A. 1081.

Petitioner contends that because these funds were reported in 1923 as income and income taxes were paid thereon, therefore the deduction should be allowed.

In Chatham & Phenix National Bank, supra, wherein the taxpayer changed its method of accounting, it was held that all amounts which constituted income within the year under the method of accounting employed must be returned for taxation in that year even though a part thereof was improperly reported as income and the tax paid thereon in a prior year. The fact that petitioner paid taxes on an item erroneously reported as income in a prior year does not make that item an allowable deduction.

In Bank of Hartsville, 1 B. T. A. 920, recognizing the effects of a change in method of accounting, it is said:

* * * The difficulty arises through the change from the cash to the accrual basis, for there is a gap or hiatus between the two methods arising from the change where items of income or deductions are left out. * * *

Yet it holds that where a bank changes its methods of accounting from a cash to an accrual basis, all of its accounts which arc accrua-ble must be placed on that basis and it must return as income on the new basis discount earned during the year on bills discounted in the preceding year even though it had erroneously returned such amounts as income and paid the tax thereon in such preceding year.

There is no provision made in law for the allowance in 1924 of items of expense accruing in 1923. See John E. Frymier, 5 B. T. A. 758.

Whether the change in method of accounting results in payment of a greater or less amount of tax is not a controlling factor in deciding the question involved. In MacMillan Co., 4 B. T. A. 251, it is stated:

* * * Tbe fact that a taxpayer has paid lower taxes for prior years than those which were rightfully due, because of erroneous computations of taxable income, and that the statute of limitations now bars the assessment and collection of any deficiency for those years, does not justify an erroneous computation of its tax liability for any subsequent year. Appeal of Goodell-Pratt Co., 3 B. T. A. 30. Income and profits taxes are levied with respect to annual periods, and each annual period must necessarily stand by itself. Appeal of Atkins Lumber Co., 1 B. T. A. 317.

The petitioner contends in its brief that if it could go back to 1923 and eliminate the payments shown as income in that year and thus reduce its income for that year, there would be no objection to the disallowance in 1924 of the deduction, but that this presumably would involve the correction of returns back to the first return filed; and as this is impossible it is equitably entitled to the deduction.

In the case of Chatham & Phenix National Bank, supra, the petitioner refused to accede to the adjustment of its returns prior to 1918 to properly reflect income due to change by petitioner in method of accounting. The Commissioner refused to allow change of accounting. The petitioner, in its returns on an accrual basis, included accrued income, but not income collected which accrued in the preceding year. Although no adjustment could be made, it is stated:

* * * whenever the bar of the statute of limitations does not prevent such action, the prior returns should be adjusted so as to show the correct income. The statute appears to have barred any adjustments herein in prior returns, but the situation is a practical one and we think the taxpayer must be permitted to place its books upon a basis which clearly reflects its income. * * *

It being shown that the net income reported to the Interstate Commerce Commission was arrived at on a different basis than that shown in the income-tax report, it is immaterial that the net income reported to the Interstate Commerce Commission exceeded the net income reported in the income-tax return.

Reviewed by the Board.

Judgment will be entered for the respondent.

Aeundell, Yan Foss an, Murdock, and Goodrich concur in the result only.


author: Trammell :

text:
    North American Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 30183.
    Promulgated October 22, 1931.

      M. Manning Marcus, Esg., for the petitioner.

      Arthur Garnduff, Esg., for the respondent.
   OPINION.

Trammell :

The respondent has determined a deficiency in income tax for 1923 in the amount of $654.73, of which the petitioner admits that $119.16 is correct. A redetermination of the balance of the deficiency is sought on the ground that the respondent erred in disallowing the deduction of a loss in the amount of $4,284.50 claimed in the return. The petitioner is a New Mexico corporation, with principal office at German Valley, Ill.

It is alleged in the petition and admitted in the answer that A. L. Parsons, hereinafter referred to as Parsons, then president of the petitioner, fraudulently issued certificates of capital stock of the petitioner as follows: In 1909 certificate No. 44, for 20 shares, to D. J. Avers, who assigned the stock to H. W. Brockmeier, and certificate No. 57, for 57 shares, to H. W. Brockmeier, in 1910, certificate No. 77, for 12 shares, to H. W. Brockmeier. The petitioner has always disputed the validity of these certificates, aggregating 89 shares, and has refused to pay dividends upon them.

In 1912, it came to the notice of Henry C. Fosha, then assistant secretary of the petitioner, that the above described certificates had been issued by Parsons, whereupon Fosha made a personal investigation of petitioner’s records, which resulted in the conclusion that no cash or other consideration had ever been paid in for the 89 shares and that the board of directors had never authorized the issue of the certificates. These disclosures resulted in the severing of relations of Parsons with the petitioner. H. W. Brockmeier, hereinafter referred to as Brockmeier, refused to surrender the certificates, pointing out that they were duly signed by the president and the secretary of the petitioner. Thereafter Brockmeier was paid dividends upon 452 shares of petitioner’s stock which he admittedly owned, but the petitioner refused to pay him dividends upon the 89 shares above described and Brockmeier made no objection to this action. Brock-meier died in 1921 and in 1922 his widow, as executrix, made demand upon the petitioner for full recognition and the payment of dividends upon said 89 shares and threatened suit to enforce her demands. Thereupon a settlement was effected, whereby the petitioner acquired the 89 shares for a consideration of $4,284.50, which was paid in cash, and the shares were surrendered — all in the taxable year. The par value of the shares was and is $100 per share.

The petitioner claims that it is entitled to a deductible loss on account of the above payment. The primary purpose of the payment was to settle a controversy and avoid embarrassing litigation and not to acquire stock. They did not recognize the stock itself as having value and their object was to get rid of it through this means. It acquired nothing of any recognized value, but paid out money in the nature of damages. It had not recognized the stock as outstanding but knew that it had been fraudulently issued. It sustained no loss until the payment was made — no recovery could be had from Parsons and it had no way of making itself whole. We think the petitioner is entitled to the deduction.

Judgment will be entered under Rule SO.


text:
    Aluminum Products Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 16150.
    Promulgated October 22, 1931.

      Henry W. Wales, Esq., for the petitioner.

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

Trammell :

The petitioner contends that it is entitled to a deduction in 1920 as a business expense incurred in that year the amount of $12,212.40 paid by it to. Doty in 1921 in connection with the settlement of the controversy between them. The respondent contends that the amount constituted a capital expenditure and, even if an expeiise, was not accruable until 1921. We will first consider the question as to whether the amount constituted a business expense or a capital expenditure.

For the payment of the $12,212.40 the petitioner acquired (1) the promise of Doty to discontinue the use of the word “ Lifetime ” on aluminum cooking utensils, (2) all literature and advertising material that Doty had containing the word “ Lifetime,” as well as certain electrotypes and dies, (3) Doty’s entire stock on hand, as well as in transit, of aluminum cooking utensils bearing the trade-mark “ Lifetime,” and (4) all the aluminum cooking utensils imprinted with the word “ Lifetime ” manufactured or in the process of manufacture by the Aluminum Goods Manufacturing Company under orders from Doty.

Doty was selling, through a canvassing organization, aluminum ware bearing the trade-mark of “ Lifetime.” The petitioner had registered in the United States Patent Office the trade-mark “ Lifetime ” and was selling, through retail dealers, aluminum ware manufactured by it and bearing the trade-mark “Lifetime.” As the retail1 dealers did not have any canvassing organization expenses, they were able to sell the petitioner’s products cheaper than they were being sold by Doty through his organization. This brought the interests of the petitioner and Doty in direct conflict. Doty claimed prior use of the trade-mark “Lifetime,” insisting that he had been using it prior to the time the petitioner began its use. He also threatened to institute legal proceedings against the petitioner. Doty’s contention as to prior use was not without basis and the petitioner’s attorneys were so impressed with the claim that it was decided in a conference between them and the petitioner’s stockholders to dispose of the matter by settlement, as was done.

By obtaining the promise of Doty to discontinue the use of the word “ Lifetime ” on aluminum cooking utensils the petitioner acquired the right to the unmolested use, so far as Doty was concerned, of the trade-mark “ Lifetime ” on the aluminum ware manufactured by it. Doty, by abandoning the use of this trade-mark, would no longer be in a position to claim any rights under it, and as for the sale of goods bearing the trade-mark the field was left entirely to the petitioner. Doty was permanently eliminated from the field so far as the use of the trade-mark “ Lifetime ” was involved. These constituted rights of a substantial value, the benefits from which would be available to the petitioner not only throughout the remaining 20-ycar period for which the trade-mark was registered, but to any renewal thereof. The acquisition of these rights by the petitioner constituted the perfection of its right to the free use of the trade-mark without interference of any kind from Doty.

With respect to the aluminum ware that Doty had on hand and that in transit, the language used by the parties in the agreement indicates that the petitioner was purchasing such merchandise from Doty. Payment for this merchandise and that manufactured or under manufacture by the Aluminum Goods Manufacturing Company on orders from Doty was to be made on the basis of that company’s selling or billing prices to Doty. With respect to the aluminum ware manufactured or in the process of manufacture by the Aluminum Goods Manufacturing Company on orders from Doty, the petitioner appears to have stepped into Doty’s shoes so to speak, and so far as the record shows, with the acquiescence of the Aluminum Goods Manufacturing Company. The record does not show when the aluminum ware acquired in connection with the settlement with Doty was actually received by the petitioner or when disposed of by it. There is nothing in the record to indicate that any of it was received or disposed of by the petitioner during the year 1920.

We are of the opinion that, with the possible exception of the literature and advertising matter containing the word “ Lifetime ” and the electrotypes and dies, the petitioner acquired valuable rights as well as merchandise in return for the expenditure of the $12,212.40. No attempt was made by the petitioner to show what part of the amount involved represented payment for the advertising matter and the electrotypes and dies. In fact, no attempt was made by the petitioner to allocate the $12,212.40 to the various items of property acquired.

Inasmuch as the $12,212.40 was expended by the petitioner in the acquisition of assets, the unmolested use of its trade-mark, the perfection of its rights therein and the elimination of competition, the amount constituted an expenditure of a capital nature and as such was not an allowable deduction for 1920. Cf. Market Supply Co., 3 B. T. A. 841; Christensen Machine Co., 18 B. T. A. 256; News Leader Co., 18 B. T. A. 1212.

Since the amount in controversy constituted an expenditure of a capital nature, we are not concerned as to when it might have been accrued if it were an expense deduction.

Judgment will he entered for the respondent.


author: ARxtndell :

text:
    Huyler’s, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 28369, 29154, 39841.
    Promulgated October 23, 1931.

      Lawrence P. Mattingly, Esq., for the petitioner.

      Eugene Meacham, Esq., and G. E. Lowery, Esq., for the respondent.
   OPINION.

ARxtndell :

Petitioner claims that its fixtures had a March 1, 1913, value of not less than $938,914.40 and that that figure is the proper basis for computing depreciation allowances. That figure, as explained in the findings of fact, represents the original cost of the fixtures. Undoubtedly, March 1, 1913, value is the proper basis under the Revenue Act of 1921, which must govern the years 1922 and 1923. In support of its claim that March 1, 1913, value was equal to cost, petitioner offered evidence as to the condition of the equipment here involved. Witnesses were called who were thoroughly familiar with the machinery and fixtures at that date and who testified to the high state of efficiency in which equipment was maintained. The substance of their testimony was that through constant inspection and repairs the equipment was as good as new. Giving entire credence to this evidence, it still does not establish March 1, 1913, value. Fair market value and state of operating efficiency are not synonomous terms. On the evidence we must hold that petitioner has failed to establish fair market value at March 1, 1913, to be the amount claimed.

It is stipulated that respondent, in computing the depreciation deductions allowed, reconstructed fixtures, equipment and machinery account and used cost as shown by petitioner’s books as the basis. That is to say, that, in view of petitioner’s practice of writing down this account, respondent used 25 per cent of cost as the basis. We have consistently held that with respect to property acquired prior to March 1, 1913, the value at that date is the proper basis under the 1918 and 1921 Acts. J. J. Gray, Jr., 2 B. T. A. 672; Moline Dispatch Publishing Co., 11 B. T. A. 934; Nolde & Horst Co., 12 B. T. A. 417. So, taking the stipulation literally, it appears that the respondent used an erroneous basis. But whether his basis was too low or too high is not established. The real question here is whether the respondent has allowed adequate depreciation deductions, and as the case stands we can not say that he did not, even though he used a basis other than the proper one. The burden of showing the amount of the deductions to which it was entitled is on the petitioner, and through lack of proof it has failed to meet it. Cf. Burnet v. Houston, 283 U. S. 223.

With respect to 1924 the situation is somewhat different, because of the change of basis contained in the Revenue Act of 1924. Section 204 of that act, in subsections (b) and (c), provides that the basis for depreciation of property acquired prior to March 1, 1913, shall be either the cost of such property or its fair market value as of March 1, 1913, whichever is greater. Under these provisions it is necessary for a taxpayer to establish only one of the two elements prescribed, i. e., either cost or March 1, 1913, value. If the other element is greater than the one established the taxpayer is the loser and must stand the consequences of his failure of proof. In this case petitioner has been able to establish the cost, as of May 31, 1912, of the property on which it seeks depreciation deductions and that is the proper starting point for computing depreciation allowances. As we understand the real point in issue, it is only the basis for depreciation purposes, and there is no dispute as to the rate or subsequent additions to or disposition of depreciable property. Stated another way, the issue is whether the basis is the $234,128.60 appearing as cost on petitioner’s books at the basic date, or the sum of $938,914.40, which represents actual cost. As we have pointed out above, cost is the proper basis to be used in this case, and accordingly the amount of $938,914.40 should be used as a starting point in computing depreciation for the year 1924.

Decision will be entered under Bule 60.