text:
    R. P. Ellingson, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. P. Ellingson, Administrator, Estate of C. K. Ellingson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6528, 6529.
    Promulgated August 25, 1927.

      J. Harry Byrne, Esq., for the respondent.
   Smith:

The above entitled appeals are consolidated for the purpose of decision. R.. P. Ellingson appeals from the determination by the respondent of a deficiency in income tax for the year 1920 of $1,487.94, and as administrator of the estate of C. K. Ellingson appeals from the determination of a deficiency for the year 1920 of $1,155.10.

The facts established in the first appeal are that R. P. Ellingson received in 1913, as a gift from his father, 10 shares of stock of the Ellingson Lumber Co.; that in 1917 he received, as a gift from his father, 90 shares of the stock of the same corporation; that in 1917 he purchased 100 shares at a price of $105 per share; that in determining the petitioner’s taxable income the respondent, in arriving at the basis for determining the gain on the sale of the 10 shares acquired by the petitioner in 1913, determined that the value was $137.36 per share. The petitioner claims that the fair market value on March 1, 1913, was $150 per share.

The admitted facts with respect to the appeal of the estate of C. K. Ellingson are that during the year 1920 the estate received in liquidation of 631 shares of the stock of the Ellingson Lumber Co., a corporation, the sum of $153.41 per share; that the 631 shares of stock above referred to were owned by the estate at March 1, 1913; that in determining the estate’s taxable income the respondent, in arriving at the basis for determining the gain on the liquidation of the 631 shares of stock owned by the estate at March 1, 1913, relies on the valuation of $137.36. The petitioner contends that the value was $150 per share. No facts in addition to the facts admitted by the respondent have been proven.

Judgments will ~be entered for the respondent.

Considered by Littleton.


source: Caselaw Access Project

author: Phillips:

license: Public Domain

text:
    B. S. Roberts and Vincent G. Roberts, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5344.
    Promulgated August 27, 1927.

      G. D. Hunt, Esq., and Lloyd. B. Smith, G. P. A., for petitioners.

      S. S. Faulkner, Esq., for the respondent.
    The taxes in controversy arise from the determination of deficiencies in income taxes for 1920 in the amount of $1,483.44 for each of the petitioners. The petitioners assign the following errors:
    The Commissioner of Internal Revenue erred in his finding that any profit resulted to the the taxpayers in the year 1920 from an exchange of real estate because—

      (a) In the exchange so made the taxpayer, B. S. Roberts, did not receive property having a fair market value in excess of, or even equivalent to, the property he parted with.
    (b) The transaction covering the exchange of the real estate was not a closed transaction, since a portion of the property which the taxpayer, B. S. Roberts, was to receive through the exchange, to-wit, a series of promissory notes, did not come into his possession and control, but were impounded under an escrow agreement.
    The Gommissioner of Internal Revenue erred in his finding that the cost value of the land given in exchange by the taxpayer was $225.00 per acre instead of $250.00, and in his finding that the value of the land received in exchange was $220.00 per acre instead of $175.00.
    The findings of fact proposed by the petitioner have been followed so far as they were sustained by the evidence, with such changes and additions as seem necessary. The respondent filed no proposed findings.
    FINDINGS OF FACT.
    The taxpayers are husband and wife, residents of Terrell, Tex.
    In December, 1918, the petitioners and one I. L. Brin purchased a tract of 1927 acres of land in Hunt County, Texas, at a cost of $385,880. The land was conveyed to the said Brin alone, but by a declaration of trust made by him he recognized that he held the legal title to an undivided one-half interest therein in trust for the taxpayer, B. S. Roberts. Of the consideration of $385,880, the amount of $32,230 was paid in cash by Brin, a preexisting vendor’s first lien of $35,000 upon the land was assumed by him, and purchase money notes of $318,650, secured by a vendor’s second lien, were executed by him.
    On January 1, 1920, Brin and the petitioner, B. S. Roberts, exchanged 814% acres out of 1,527 acres remaining of the 1,927-acre tract, 400 acres thereof having previously been sold to one C. M. Orr, with one J. L. Kelley for 379% acres of land owned by Kelley in Rockwall County, Texas, and a series of 10 promissory notes, executed by Kelley to Brin, secured by a vendor’s lien on the 814% acres. The 10 notes were as follows: the first for $5,000, due January 1, 1921; the second for $10,000, due January 1, 1922; the third for $10,000,- due January 1, 1923; the fourth for $10,000, due January 1, 1924; the fifth for $12,375, due January 1, 1925; the sixth for $14,575, due January 1, 1926; the seventh for $15,000, due January 1, 1927; the eighth for $15,000, due January 1, 1928; the ninth for $25,000, due January 1, 1929; the tenth for $34,111.50, due January 1, 1930; aggregating the sum of $150,861.50.
    A deed conveying the 814% acres to Kelley was executed by Brin, and recited a consideration of $238,264.65, of which $87,403.15 was stated to be cash, and the remainder of $150,861.50 to be in notes, 10 in number, as above described, executed by Kelley to Brin. In fact no cash was paid, $87,403.15 representing the 379% acres in Rock-wall County that were conveyed by Kelley to Brin to effectuate the exchange as made.
    In the deed from Brin to Kelley conveying the 814% acres there was no stipulation that Kelley assumed the payment of any part of the first and second vendor’s liens on the 1927-acre tract of which the 814% acres were a part, the first lien being still $35,000, but the second lien being reduced from $318,650 to $255,880 after the sale of the 400 acres to Orr. Nor were these two vendor’s liens mentioned in the conveyance, which contained covenants of general warranty of title, but the land conveyed, 814% acres, was treated as if it had been free of liens.
    Upon the execution of the ten notes aggregating $150,861.50 by Kelley, they were deposited under the terms of two agreements reading as follows:
    The State of Texas 1 County oe Kaueman J
    This agreement is to witness a contract by and between I. L. Brin, party of the First Part and J. L. Kelley, and C. M. Orr, parties of the Second Part, WITNESSETH :
    That, Whereas, the said party of the First Part purchased 1929.06 acres of land on the W. H. Hopkins Survey in Hunt County, Texas from J. R. Nichols et als. as shown by deed records of said County, and as part of consideration said Brin was to discharge a loan or mortgage for $35,000.00 held by the Union Central Life Insurance Co. against said land, and due January 1, 192- — , and the said Life Insurance Co. will not agree to receive payment of said $35,090.00 which has been tendered by said Brin to them.
    Now, Thebefobe, We, the said J. L. Kelley and C. M. Orr separately have agreed that it will be satisfactory with us for said Brin to place one note for $5000.00 due January 1, 1921, and three notes for $10,000.00 each, due respectively January 1, 1922, 1923, and 1924, signed by said Kelley in favor of said Brin, a vendor’s lien against 814.58 acres of said Hopkins Survey deeded by said Brin to said Kelley in Greenville National Exchange Bank of Greenville, Texas, to be held by them as a guarantee that said Brin will pay off said $35,000 loan and interest thereon at maturity, and should he fail to do so said Kelley owner of said 814.58 acres and said Orr owner of 400 acres of said land heretofore conveyed to him by said Brin, acting jointly shall be allowed to collect or negotiate said notes and pay said $35,000.00 to said Bank, which. money shall be used by said Bank to pay off said loan and get release of same.
    And the said Orr hereby releases $8,000.00 Liberty Bonds held by said Bank and agrees herein that said Bank shall deliver said Bonds to said Brin as said Bonds were put in escrow at said Bank guaranteeing release of said loan to be secured for his said 400 acres, and the said <$35,000.00 in notes signed by said Kelley are put up with said Bank guaranteeing said Kelley and said Orr separately or jointly against said $35,000.00 loan held by said Union Central Life Insurance Company.
    It being specially understood that the said Orr and Kelley shall cooperate with said Brin in reloaning amounts paid by said Kelley at the same rate of interest, or more, said notes provide, and said notes secure by reloaning said amounts paid by said Kelley shall be placed in said Bank in place of said money, to be held in same manner as remaining Kelley notes until said loan is paid by said Brin, or said Brin may put up Liberty Bonds for amount so paid by Kelley at time of payment and secure money paid by said Kelley, and upon full payment by said Brin of said $35,000.00 loan said Bant sliall return all notes signed by Kelley and all money, interest or bonds accruing from same to said Brin.
    And tbe said I. L. Brin hereby binds himself, his heirs and assigns that on the 1st day of January, A. D. 1022 he will pay said $35,000.00 loan to said Union Central Life Insurance Company, and procure and have duly recorded the release thereof; thereby permitting the delivery to him by said Bank of such notes of the said J. L. Kelley or the proceeds thereof as may then remain in the possession of said bank.
    A copy of this contract in hands oE said Brin, said Kelley, said Orr and said Bank, and all of said parties hereby agree to abide the above contract, and authorize said Bank to carry out same as outlined herein.
    Witness our hands, this the 20th day of December A. D. 1919.
    I. L. Burn

      Party of First Part.

    J. L. Kellet
    C. M. Ore

      Parties of Second Part.

    We hereby acknowledge receipt of said notes, and agree to hold same in escrow as provided in above contract.
    Greenville National Exchange Bank By C. B. Jones, Vice President.

    The State oe Texas County oe Kaufman
    This contract this day entered into by and between I. L. Brin, party of the first part, and J. L. Kelley, party of the second part, Witnesseth:
    That, Whereas, said Brin has sold and conveyed to said Kelley 814.58 acres of land, a part of the W. H. Hopkins Survey in Hunt County, Texas, as shown by recorded deed, for a consideration of $238,264.65; $87,403.15 paid in cash, or its equivalent, and ten notes aggregating $150,861.50, described in deed, and,
    Whereas, J. H. Nichols»of Austin, Texas holds notes for purchase money against said 814.58 acres and other land, and said Nichols being unwilling at this time to accept said above described notes as credit on said Brin notes and thereby releasing his lien from said 814.58 acres, occasioned by said Nichols requiring 7% interest, when said Kelley notes only bear 6%,
    Now, Therefore, as a safeguard to said Kelley, and as a guarantee that a release of said Nichols lien on the said 814.58 acres will be furnished, the said I. L. Brin has placed the last six of above ten Kelley notes, aggregating $115,861.50, in the American National Bank, Terrell, Texas, to be held by them and collected in on said notes until such time as said Brin may instruct them to pay same to said Nichols as credit on his notes held by said Nichols, or until such time as said Brin may reloan said accumulated cash in such a way as will be satisfactory to said Kelley and as considered safe by said Bank, and all notes taken in said new. loan shall be held by said Bank for performance of this Contract in same manner and is here instructed to turn said notes and all cash and interest from payments made by Kelley, or others, less any amounts that may have been paid to Nichols, back to said Brin at such time that he can secure release of said 814.58 acres from all liens held by said Nichols, and if for any reason said Brin shall fail to secure release from said Nichols my maturity of all of said Kelley’s ten notes, the said Bank may apply returns from said notes to payment of said Nichols notes held against said Brin, and secure said release for said Kelley, or may hold said funds until such time as said release can be secured, provided same can be loaned out by them at interest not less than 6% per annum.
    It being understood that the first four of said ten Kelley notes, amounting to $35,000.00, above mentioned have been put in escrow at Greenville National Exchange Bank guaranteeing payment of a $35,000.00 loan held by Union Central Life Insurance Company against said 814.58 acres of land, and other lands, as shown by separate contract signed by I. L. Brin, J. L. Kelley and C. M. Orr.
    This contract this day entered into and signed in triplicate, one copy to be held by I. L. Brin, one by J. L. Kelley, and the third one by said Bank, and we bind ourselves to carry out same.
    Witness our hands at Terrell, Texas, this the 30th day of December A. D. 1919’
    I. L. Bum,

      Party of First Part.

    J. L. Kelley,

      Party of Second, Part.

    We, the undersigned, hereby acknowledge receipt of said above six notes signed by J. L. Kelley in favor of said Brin, aggregating $115,861.50 and agree to hold same in accordance with this contract.
    American National Bank.
    By W. P. Allen, Sr., Pres.

    I. L. Brin having transferred one-half interest in above J. L. Kelley notes to me, I hereby agree to carry out above contract with said Brin.
    B. S. Roberts.
    At the time of the trial the last three of the notes falling due in 1928, 1929, and 1930, respectively, aggregating $74,111.50, remained unpaid, and in the hands of the American National Bank of Terrell under the terms of the second of the agreements quoted above, all of the preceding notes of the series having been paid and the proceeds used to discharge the first lien of $35,000 and to partly discharge the second lien of $255,880. #
    The entire 1,927 acres cost Brin and the petitioners an average of $200 per acre. The 81434-acre tract, on account of the character of its soil and the fertility thereof, the smoothness of its surface, its proximity to the City of Greenville, its service from the city’s utilities, has a value in excess of the remainder of the tract, which was not as desirable. Upon a proper allocation of the cost of the entire tract, the cost to Brin and the petitioners of the 814% acres sold was $250 per acre.
    The 379% acres of land in Rockwall County which were received in exchange for the 814% acres in Hunt County had a reasonable market value of $175 an acre at the time of the exchange. The Commissioner computed the profit realized upon the sale as follows:
    Sale price received for 814% acres; 379% acres taken in exchange at $230 per acre-$87, 285. 00
    Less: $10 per acre trade inflation_ 3, 795.00
    Fair market value land taken in exchange. 83,490. 00

      Vendor’s lien notes bearing 6%, as follows:
    No. 1 1-1-21_$5,000. 00
    No. 2 1-1-22_ 10, 000.00
    No. 3 1-1-23_ 10, 000.00
    No. 4 1-1-24_ 10, 000. 00
    No. 5 1-1-25_12, 3T5. 00
    No. 6 1-1-26_ 14, 375.00
    No. 7 1-1-27_ 15,000.00
    No. 8 1-1-28_ 15, 000. 00
    No. 9 1-1-29_ 25, 000.00
    No. 10 1-1-30_34, 111. 50
    - $150,861.50
    Total amount received by vendors- 234,351.50
    Oost December, 1918:
    1927 acres $200 per acre_,-$385,400. 00
    Less: Oost value of land retained: 1112% acres at $181.70 per acre- 202,137.50
    Oost value of land sold 814% at $225 per acre_ 183,262. 50
    Less: Depreciation on improvements, estimated $7,500 at 4% 1 year_ 300. 00
    (3) Adjusted cost of land sold- 182, 962. 50
    Profit realized_ 51, 389. 00
    One-half of this profit the Commissioner allocated to the petitioners, dividing such one-half equally between them.
   OPINION.

Phillips:

In 1919 the petitioners acquired a one-half interest in certain real estate, a portion of which was exchanged on January 1, 1920, for certain other real estate and the notes of the purchaser. The tract first acquired was 1927 acres in extent and the acreage varied greatly in value. The evidence shows that by reason of its location, freedom from creeks and gullies, and fertility, the portion sold had a greater value than the remainder. The Commissioner recognized this fact in assigning a value of $181.70 an acre to the land retained and $225 an acre to the land exchanged. All of the evidence sustains the petitioners’ claim that an even greater difference in value existed. Several witnesses were produced who were acquainted with the value of such lands and after considering their testimony, we conclude that the purchase price of the entire tract must be so allocated as to assign $250 an acre to the property transferred.

The value of the property received in exchange is also in dispute. The value fixed by the deed seems to give no accurate index to the actual value, for apparently both parties to the exchange “ inflated ” the value for the purposes of the trade. The property received is described as gray land, inferior in quality to the black land conveyed and not so well situated. The testimony of several witnesses familiar with values of such lands was adduced by the petitioners and upon the record we reach the conclusion that the value of the land received was $175 per acre.

The property conveyed was held in the name of Brin, in whose name all conveyances and agreements were made. Since the one-half interest of the petitioners arises through Brin, we treat his acts as those of the petitioners for the purposes of our discussion of the case.

The property was acquired subject to two mortgages. Upon the exchange a warranty deed was given, but since the vendors were unable to secure a release of the property from the lien of the mortgages, it was agreed in substance that the purchase-money notes should be deposited in two banks and the proceeds used to discharge these mortgages. We see no substantial difference between such a situation and one where the vendee assumes the mortgage. In either case the vendor may remain liable on his bond, but no additional burden is created on the property.

It is contended that the vendee’s notes were third liens upon the property. While in form this is so, we find when we look at the transaction that any sums paid on the notes served to reduce the prior mortgages. Had there been occasion to foreclose on the property, any amount realized would not only have reduced the first and second mortgages, but would also either have reduced the notes by the same amount or discharged them entirely. The vendors were under obligation to discharge the first and second mortgages and it was because they could not do this that the notes, which would otherwise have been a first lien on the land, were deposited under an agreement designed to assure the discharge of these mortgages.

The mortgages are treated as part of the cost of the land. As soon as the petitioners pay this cost, these notes become first liens. In attempting to value the notes as third liens, the petitioners are in the position of claiming that the first and second mortgages are to be considered at par in determining the cost of the property to them, but that the vendee’s notes, which rank in security with these mortgages because of the terms of the agreement under which they were deposited, have no fair market value. The petitioners overlook the fact that these mortgages represent a part of the cost of the property to them, which they have not yet paid. Let us test the contention of the petitioners by assuming that the entire purchase price had been paid in cash, but became a release from the mortgages could not be obtained, a part of the cash was deposited in a bank under an agreement similar to that under which the notes were deposited. Would it be contended that the cash so deposited had a value only to the extent that it exceeded the amount of the mortgages and that therefore in computing the sales price, such cash was to be included at such reduced value, while in computing cost the mortgages were i o be included at their face value? If it would be proper to consider that in such circumstances the sales price was the amount of cash, in excess of the mortgages, surely those mortgages could not be considered as a part of the purchase price, payment never having been made. Either they do not enter the equation or they are to be entered on both sides.

It is urged that because of the agreement there was no delivery of the notes to the petitioners. The notes were in fact deposited by consent of the petitioners under an agreement that they be used to pay an indebtedness of the petitioners or held as security for the payment of such indebtedness. The escrow agreement was not one which affected the sale, but ivas collateral to it. The sale was completed; the notes were made subject to the agreement only to assure payment of liens. The maker was in no position to thereafter contend his notes had never been delivered, nor could the petitioners say the purchase price had not been paid. The situation is entirely different from one where no title passes, and the transaction is incomplete, until certain acts are performed. The difference is that which exists between notes which are executed and placed in escrow to be delivered when the terms of the escrow are performed and notes which, when delivered, are placed in escrow under a collateral agreement. Here a sale took place, title passed, and the notes were received by an agent of both parties with their consent. We have no doubt that the sale took place, that the purchase price was received by the petitioners and that the notes are to be considered in determining gain or loss.

The gain should be computed as follows:

Sales price:
Value of 379.5 acres at $175 per acre-$66,412. 50
Notes received in lieu of securing release of property from mort-gages_ 150, 861. 50
217,274.00
Cost, 814.5 acres at $250 an acre-$203, 501. 25
Depreciation as used by Commissioner- 300. 00
- 203,201. 25
Gain_ 14,072.75

One-quarter of such gain constitutes taxable income in 1920 to each of the petitioners.

Decision will he entered on 15 days’ notice, under Rule 50.

Considered by Marquette and MillikeN.


author: Milliken :

text:
    C. L. Whiting, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11046.
    Promulgated August 29, 1927.
    1. Alleged errors in the books oí account of petitioner and in its return (a) in differentiating between farm expenses of petitioner and personal expenses of president of petitioner, and (b) in understating the salary of the president of petitioner, are not susceptible of determination due to lack of evidence.
    2. Value of a contract of agency paid in for capital stock is not susceptible of determination due to lack of evidence, and is not allowable under section 331 of the Revenue Acts of 1918 and 1921, for invested capital purposes.
    3. Advances to a stockholder held to be loans and not dividends or withdrawals of capital.
    4. No evidence adduced of abnormality of either income or capital entitling petitioner to special relief under the provisions of sections 327 and 328 of the Revenue Acts of 1918 and 1921.

      E. Earlton Hanes, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income and profits taxes for the fiscal year ended June 30, 1921, amounting to $3,799.17.
    Petitioner avers that errors were committed with reference to the following issues: (1) The net income determined by the respondent is overstated in the amount of $3,549.91; (2) invested capital determined by respondent is understated due to two errors — (a) the failure to allow a value of $50,000 paid in for capital stock in 1920 of a contract of agency, and (b) the deduction of the prorated average of alleged dividends which were in fact loans to a stockholder; (3) failure to compute the excess-profits tax under sections 327 and 328 of the Revenue Act of 1921. At the hearing of this cause petitioner moved to amend its petition to include an averment of error that the salary of its president was actually $30,000 per annum and should be allowed as a deduction in that amount, and not $15,000 as claimed, deducted and allowed in the original return.
    FINDINGS OF FACT.
    Petitioner is a New York corporation with its principal office at Rochester, N. Y., and conducts an agency for the sale and repair of automobiles.
    Petitioner was organized on July 1,1920, to take over and continue the business then belonging to C. L. Whiting, of the sale and repair of automobiles. Included in the assets paid in by C. L. Whiting for the capital stock of the petitioner was a written contract of agency with the Buick Motor Co. The contract was valued on the books of the petitioner at $50,000. Whiting owns all of the outstanding capital stock of petitioner with exception of two qualifying shares.
    At a meeting of the incorporators and directors, held in Rochester, N. Y., on July 12,1920, it was resolved to accept a proposal made by C. L. Whiting to transfer to the petitioner certain property described in a schedule, appraised at $300,000, and good will at $50,000, in consideration of the issuance to C. L. Whiting of 2,998 shares of the stock of petitioner.
    A resolution was adopted on July 12, 1920, authorizing petitioner to enter into a contract with C. L. Whiting, for Whiting to become general manager for a term of one year commencing July 1, 1920, at a salary of $30,000 per year, payable monthly during the term. Entries were made on the books of petitioner of salary payments to Whiting as follows: July 13, 1920, salary for the month of July, 1920, $2,500, paid by check; August 25, salary for the month of August, $2,500/ Petitioner deducted in its return filed for the fiscal year 1921 on line 13 “ Compensation of officers ” the sum of $15,360. During the year charges for cash paid to Whiting and for his account aggregated $75,305.39.
    No dividends were declared by petitioner during the fiscal year ended June 30,1921.
    The petitioner owned and operated a farm located near Rochester, N. Y. An entry on the books of petitioner in the fiscal year 1921, placed there by an auditor in the employ of petitioner, debited the personal account of C. L. Whiting and credited farm sales account with an amount of $5,000. After the books of account of petitioner were closed for the fiscal year ended June 30, 1921, the secretary-treasurer and a public accountant, upon an examination of the books, were able to identify items of an aggregate of $1,405.09, properly in their opinion, the subject of such an entry. Whiting made his home on the farm part of the time, mainly during the summer months. The servants included one maid and one chauffeur he employed there, who were on the pay roll of the petitioner, and all costs or expenses of the farm were paid by petitioner. All automobile expense items of Whiting were paid by petitioner.
    Respondent reduced invested capital for the fiscal year 1921 by an amount $10,139.84 on account of payments or credits to the account of C. L. Whiting during the year, the same being deemed withdrawals of capital, or dividends, by respondent.
    Petitioner kept its books and made its Federal income-tax return on the accrual basis.
   OPINION.

Milliken :

The first error concerns a credit of $5,000 to farm income which was intended to compensate the farm department for items of persona] expense of the president of the petitioner. It is averred that such credit was in error. No details showing how the amount of $5,000 was determined are now available. An accountant employed by petitioner, and the secretary-treasurer of the petitioner made, after the books of account for the fiscal year ended June 30, 1921, were closed, an analysis of the expenses of petitioner’s farm and as a result were of the opinion that the entry should have been for $1,405.09. The difference is a matter of speculation. The record affords no conclusive basis upon which we might determine that either the $5,000 added to farm income on the return or $1,405.09 now claimed, represented convincingly the farm expense as differentiated from the personal expenses of the president of petitioner. The assigned error at the hearing of this cause concerns the salary deduction claimed for the president of petitioner. On July 12, 1920, the petitioner was authorized to enter into a contract with O. L. Whiting, providing for the payment of a salary of $30,000 per annum. We are unable to determine if this contract was entered into and fulfilled. Whiting was paid or credited with $5,000 for the months of July and August. Further than this we are unable to determine. We are able to find from the record that the return filed by petitioner for the fiscal year ended June 30, 1921, claimed a deduction for salaries of officers amounting to $15,360, and apparently that amount was actually charged on the books, for the return reconciles in Schedule L the income reported in the return and the surplus and undivided profits shown by the books. The petitioner is a close corporation, with the entire capital stock, save two shares, held by its president, whose salary is now under consideration. The president drew a large amount of cash during the year, which was charged to his account. If Schedule L of the return is correct all of the intended salary of the president was not credited to his account and charged to expense, but we are unable to determine the amount that was actually charged up and included in the deduction of $15,360.

In the second issue, petitioner seeks to include in invested capital a value of $50,000 for a written contract of agency paid in for capital stock in 1920. The entire capital stock, save two shares, of petitioner was issued to Whiting and it is obvious that an interest and control of more than 50 per cent in the property taken over from Whiting remained in the same person and the limitations provided under section 331 of the Revenue Acts of 1918 and 1921, are applicable.

There is an entire lack of evidence of the cost of the agency contract to Whiting, if any, and no evidence of the value of the contract other than the most general opinion of Whiting, unsupported in any manner. The contract itself was not placed in evidence and we are uninformed as to its terms and provisions. We are unable to find any value allowable for the contract for invested capital purposes.

The second issue concerns withdrawals of cash by Whiting, president of the petitioner. It is in evidence and uncontroverted that they were loans and that no dividends were declared during the year by petitioner. We have before us no ground for an assumption that the payments were withdrawals of capital, and, therefore, find for the petitioner, reversing the respondent.

In the third issue, petitioner has failed to adduce evidence of an abnormality of either income or capital which would entitle petitioner to special assessment under the provisions of sections 327 and 328 of the Eevenue Acts of 1918 and 1921. Respondent is sustained.

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

Considered by Phillips, Marquette, and Van Fossan.


text:
    Fred Dennett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11498.
    Promulgated August 29, 1927.

      Fred Dennett, Esq., pro se.

      Bruce A. Low, Esq., for the respondent.
   Milliken :

This proceeding results from the determination of a deficiency in income tax for the calendar year 1923, amounting to $94.04.

Petitioner avers error was committed with reference to the dis-allowance by respondent of a deduction amounting to $1,245, for traveling expenses of the wife of petitioner on a trip to Seattle, Wash., to attend to business affairs in connection with real estate located at Seattle, the property of petitioner and his wife.

Petitioner and his wife formerly lived in Seattle, Wash. They have resided in Washington, D. C., since 1907. They filed a joint return for 1923.

In 1905 or 1906 they acquired real estate in Seattle, Wash. A slump in the real estate market occurred in 1907 and thereafter petitioner experienced great difficulty in managing their property, and in protecting their interests therein. Taxes and assessments for paving, sidewalks and sewers were a heavy drain on their finances. The services of agents were very unsatisfactory. In 1922 it was determined that the wife of petitioner should visit Seattle and canvass the situation with a view to bettering conditions, and she proceeded to Seattle, going via San Francisco, Calif. She arrived in Seattle on August 11, 1922, and remained there until March 14, 1924.

The property they owned was described as follows:

Lots 11 and 12, Block G, W. N. Bell's 4th addition, unimproved, no paved road in front and surface 20 ft. above grade, two small fractions of lots Block 63, D. T. Denny’s Park Addition, with small old buildings thereon hard to rent because of their age.
North 52 ft. lot 3, Block 3, Eden’s addition, with one old, small building thereon, surface 18 to 20 ft. above grade.
Lot 4, Block 3, Eden’s Addition, unimproved, surface 18 to 20 ft. above grade.
Lot 4, Block 80, Gilman’s addition, surface 18 to 20 ft. above grade.
Lot 19, Block 146, Gilman’s addition, surface 18 to 20 ft. above grade.
Lot 20, Block 146, Gilman’s addition, surface 18 to 20 ft. above grade.
South 40, lot 3, Block 51, Nagle’s 2nd [sic].

Mrs. Dennett made an exhaustive investigation of conditions in Seattle, interviewed real estate dealers, city officials and business men whom she believed were informed of actual conditions. Although advised to abandon some of the property and not to improve other property, Mrs. Dennett actively persisted in her investigations and interviews. She found a prospective tenant for a store building which she planned to erect on lot 3, Block 51, Nagle’s Subdivision, whereupon she determined questions of cost, style of buildings, method of procedure, business conditions and probabilities, secured the drafting of a set of plans, invited bids, considered the bids, and received and awarded the contract. She then engaged actively in the superintendence of the construction, and after a great deal of trouble with the builder she engaged the services of an architect to assist in the superintendence. Upon completion of the building she supervised the letting of it. Mrs. Dennett was next employed in securing the support and acquiescence of property owners in the passage by the city council of an ordinance providing for the paving of Second Avenue where it bounded lots 10, 11, and 12, Block G, W. N. Bell’s Addition. She was successful after great trouble and effort. The ordinance was passed and the paving constructed. Mrs. Dennett then was active in devising an economical method of leveling the lots. She secured bids, awarded the contract and superintended the work, having located a tenant for one-half of the area to take possession after the grading was completed. Mrs. Dennett occupied herself actively with community meetings and sessions of the city council. The entire year 1923 was thus occupied. Mrs. Dennett’s trip was entirely in the interest of the property and not for visiting friends and relatives. Mrs. Dennett stopped at the Calhoun Hotel, where the charges for rooms were from $30 per week up.

The wife of petitioner paid or incurred during the calendar year 1928, ordinary and necessary expenses including meals a,nd lodging, amounting to at least $1,125.50, which are properly allowable as a deduction by petitioner from income under section 214 (a) (1) of the Revenue Act of 1921.

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

Considered by Phillips, Marquette, and Van Fossan.


author: MaRQuuttb :

text:
    New Orleans Can Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11994.
    Promulgated August 29, 1927.
    The amount of an interest-bearing promissory note, tona fide paid in for capital stock, should be included as a part of petitioner’s invested capital, under the circumstances herein.

      E. M. Gahn, Esq., E. M. Calm, Jr., Esq., and Charles E. Werrrmth, C. P. A., for the petitioner.

      W. F. Wattles, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1921 in the amount of $381.61.
    FINDINGS OP PACT.
    The petitioner is a Louisiana corporation with its principal office and place of business at New Orleans.
    In November, 1918, the petitioner increased its capital stock and gave its stockholders the privilege of subscribing to the new issue in proportion to their holdings. A. J. Munch was president of the petitioner and the owner of about 75 per cent of its capital stock and was entitled to and did subscribe to 149 shares of the new issue. Instead of paying for the new shares in cash he gave his note for $14,900, payable on demand and bearing interest at 5 per cent per annum. At the end of the year 1918 the petitioner owed Munch $7.277.02 on account of commissions earned by him and that amount was credited on the note of $14,900. The interest to December 31, 1918, was also paid by Muneh and the old note was canceled and a new note for $7,622.98, dated January 1, 1919, payable on demand and bearing interest at 5 per cent per annum, was executed by Munch and delivered to the petitioner. The new note has, since it ivas made, been held by the petitioner and kept in its vaults, and the interest has been paid thereon. The petitioner was satisfied to receive interest upon the note and it did not at any time make demand upon Munch for payment thereof.
    Munch had credits to his personal drawing account on the books of the petitioner between January 1, 1918, and December 31, 1921, which could have been but were not applied to his note. On January 1, 1919, there was a balance of $1,091.46 in the account which was withdrawn by Munch on January 11, 1919. At the end of the year there was a balance of $5,048.37. At the end of 1920 there was a debit balance of $978.05 in the account, and at the end of 1921 there was a credit balance of $2,794.37, which was withdrawn by Munch on January 1, 1922. Munch was at all times between November, 1918, and March, 1926, solvent and able to pay the note mentioned. He died in March, 1926, leaving a net estate of about $200,000, and the note mentioned has been or will be paid by his executor.
    The respondent, upon audit of the petitioner’s income and profits-tax return for the year 1921, excluded from invested capital the amount of the note given by Munch on January 1, 1919, and also reduced invested capital by the amount of income and profits taxes for 1920 prorated from the date of payment.
   OPINION.

MaRQuuttb :

The first question presented for determination herein is whether the petitioner is entitled to include in invested capital for the year 1921 the amount of $7,622.98, representing a promissory note given by A. J. Munch on January 1, 1919, in renewal of a part of the amount of a note given in payment for shares of the petitioner’s capital stock. The respondent urges that no amount should be included in invested capital on account of the note in question. (1) because it was not bona fide paid in for stock, and (2) because the stock was issued for the note in contravention of the constitution and laws of Louisiana.

We have carefully considered the evidence presented and we find no reason for holding that the issuance of the petitioner’s capital stock to Munch and the giving of a note in payment thereof was not a bona fide transaction. The evidence discloses that Munch was entitled to and did subscribe to $14,900 par value of the petitioner’s capital stock, for which he gave his note for $14,900. Within a short time more than $7,000 was paid on that note and a new note given for the balance, payable on demand and bearing interest at 5 per cent per annum. The corporation apparently did not need the money and was content to carry the note as an investment and it did not at any time make demand on Munch for payment. At all times after he gave the note Munch was solvent and worth many times the amount thereof, and there is nothing in the evidence to show that he did not intend to pay the note and would not have paid it had he been requested so to do. The note either has been or will be paid in full by Munch’s executor.

Wo are of opinion that the note in question was given as a renewal of part of the amount of a prior note which was executed as a bona fide payment for shares of the petitioner’s capital stock.

Both the constitution and the laws of Louisiana at the time the stock mentioned herein was issued, provided that:

Corporations shall not issue stock or bonds except for labor done, or money or property actually received, and all fictitious issues of stock shall be void; and any corporation issuing such fictitious stock shall forfeit its charter.

Similar provisions are found in the constitution and laws of many other States. The laws of Louisiana at the time the stock mentioned herein was issued also provided:

Sec. 9. * * * That subscriptions to the capital stock of a corporation shall bo paid at such times and in such installments as the board of directors may direct, unless otherwise provided by this Act. If default be made in the payment of any installment, the board of directors may sue and recover the' unpaid balance of the subscription, together with a reasonable attorney’s fee/
Sec. 17. * * * That if stock be issued for property in violation of the provisions of this Act, or if any dividend or other distribution of the assets be made other than from net profits, or if a reduction of the capital be made under the guise of a loan to stockholders, or if any report or statement or public notice shall not be made as required by law, or if made, shall be false in any material representation, the directors of such corporation voting or assenting thereto shall be jointly and severally liable to the creditors of the corporation for any loss or damage arising therefrom, and in the ease of reports, statements, and public notices required by law, the officers shall be jointly and severally liable with the directors, as provided above; provided, however, that if the knowledge required for the making of any statement or report prescribed by this section, be not practically obtainable, the officer or director making it shall not be liable as herein set out.

We are unable to find any decisions of the courts of Louisiana bearing on this question, but we have carefully examined the authorities from other jurisdictions, including the cases cited by the respondent, and we find no case holding that sales of stock, made under the circumstances surrounding the sale involved herein, are void. On the contrary we find numerous cases holding that the sales are not void and that the notes are at least valid to the extent that they may be enforced and collected by receivers of insolvent corporations for the benefit of creditors and in the hands of purchasers for value without notice. In the Appeal of Hewitt Rubber Co., 1 B. T. A. 424, we were called upon to consider a situation similar to the one under consideration here, except that it arose under the corporation laws of the State of New York. In holding that the note involved in that appeal should be included in the taxpayer’s invested capital, we said:

In order to exclude from invested capital a note given in good faith for stock issued, it is not enough to point to a defense which might be interposed as between the parties in the event of a suit on the note. It must be shown that the sale was void and not enforceable, or that the purchase of the stock and the giving of a note was in bad faith and for the purpose of evading the provision of the revenue law, neither of which is true in this case.

See also Appeal of American Steel Co., 1 B. T. A. 839; Knutson Hardware Co. v. Commissioner, 5 B. T. A. 9.

We are of opinion that the note in question was not rendered void by either the constitution or the laws of Louisiana, and since it was bona fide paid in to the petitioner in payment for stock and was worth its face value, it should, for the reasons set forth in the decisions above cited, be included in the petitioner’s invested capital for the year 1921 at that amount.

The only other question is whether the respondent erred in reducing the petitioner’s invested capital for 1921 by the amount of income and profits taxes for 1920 prorated from the date of payment. That issue must be decided in favor of the respondent. Section 1207 of the Revenue Act of 1926; Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168.

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

Considered by Phillips, Millikeív, and VaN FossaN.


author: MaRquette :

text:
    Alabama Hardware Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10332.
    Promulgated August 29, 1927.
    The Board has no jurisdiction of a proceeding where a jeopardy assessment was made under the provisions of section 274(d) of the Revenue Act of 1924, and no claim for the abatement thereof was filed.

      Kiel P. Sterne, Esq., for the petitioner.

      W. F. Wattles, Esq., for the respondent.
    In this proceeding the petitioner appeals from the determination of the respondent, as set forth in a letter mailed October 30, 1925, that there is a deficiency in tax for the fiscal year ended May 31, 1919, in the amount of $1,269.78, and an overassessment for the fiscal year ended May 31, 1918, in the amount of $3,159.71. The petitioner alleges that the deficiency for the fiscal year ended May 31, 1919, should be reduced and that the overassessment for the fiscal year ended May 31, 1918, should be increased.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the State of Alabama, with its principal office and place of business at Anniston. Ala.
    Under date of November 11, 1924, the respondent mailed to the petitioner a letter advising it that an additional assessment of income and profits tax in the amount of $4,857.15 was proposed for the fiscal year ended May 31,1918. The petitioner filed a protest against the proposed assessment in December, 1924. A jeopardy assessment was, however, made in the amount of $4,857.17 on the February, 1925, list and on February 12, 1925, a letter was mailed by the respondent to the petitioner notifying it that “ in accordance with the provisions of Section 274(d) of the Act of 1924, there has been assessed against you income and profits taxes amounting to $4,857.15 for the taxable year 1918, the details of which are set forth in the attached papers,” and that “under the provisions of Section 279(a) of the Act you have the right to file with the Collector of Internal Revenue within 10 days after notice and demand for payment, a claim for abatement of this tax or any part thereof.” On February .18,1925, the collector gave notice of the assessment and made demand for payment but no claim for the abatement of the tax was ever filed by the petitioner.
    Under date of October 30, 1925, the respondent mailed to the petitioner a deficiency notice notifying it that there was a deficiency in tax for the fiscal year ended May 31,1919, in the amount of $1,269.78 and an overassessment of $3,159.71 for the fiscal year ended May 31, 1918. It is from this letter that this appeal is taken.
    At the hearing it was conceded by the respondent that he had erred in disallowing as part of the cost of goods sold by the petitioner in the fiscal year ended May 31, 1919, the amount of $4,485.21, and that the petitioner’s income for that year, as set forth in the deficiency notice, should be reduced by that amount.
   OPINION.

MaRquette :

The only error alleged by the petitioner as to the fiscal year ended May 31,1919, is that the respondent failed to allow as part of the cost of the goods sold in that year the amount of $4,485.21. The respondent concedes that he erred as alleged by the petitioner and that the petitioner’s net income for the fiscal year ended May 31, 1919, should be reduced by the amount of $4,485.21.

The respondent has moved to dismiss this proceeding in so far as it relates to the fiscal year ended May 31, 1918, on the ground that the Board is without jurisdiction to hear and determine the same. For the reasons hereinafter set forth we are of the opinion that the respondent’s contention is well founded and that the motion to dismiss should be sustained.

The additional tax for the fiscal year ended May 31, 1918, was assessed in February, 1925, under the provisions of section 274(d) of the Revenue Act of 1924, which is as follows:

Sue. 274. (d) Ii tile Commissioner believes that the assessment or collection of a deficiency will be jeopardized by delay such deficiency shall be assessed immediately and notice and demand shall be made by the <• .¡led or for the payment thereof. In such case the assessment may be made (I) without giving the notice provided in subdivision (a) of this section, or (2) before the expiration of the 60-day period provided in subdivision (a) of this section even though such notice has been given, or (8) at any time prior to the final decision by the Board upon such deficiency even though the taxpayer has filed an appeal. If the taxpayer does not file a claim in abatement as provided in section 279 the deficiency so assessed (or, if the claim so filed covers only a part of the deficiency, then the amount not covered by the claim) shall be paid upon notice and demand from the collector.

The only provision for' an appeal to this Board from an assessment made by the Commissioner under the authority of section 274(d) of the Revenue Act of 1924 is found in section 279 of that Act, which is in part as follows:

Sec. 279. (a) If a deficiency has been assessed under subdivision (d) of section 274, the taxpayer, within 10 days after notice and demand from the collector for the payment thereof, may file with the collector a claim for the abatement of such deficiency, or any part thereof, or of any interest or additional amounts assessed in connection therewith, or of any part of any such interest or additional amounts. Such claim shall be accompanied by a bond, in such amount, not exceeding double the amount of the claim, and with such sureties, as the collector deems necessary, conditioned upon the payment of so much of the amount of the claim as is not abated, together with interest thereon as provided in subdivision (c) of this section. Upon the filing of such claim and bond, the collection of so much of the amount assessed as is covered by such claim and bond shall be stayed pending the final disposition of the claim.
(b) If a claim is filed as provided in subdivision (a) of this section the collector shall transmit the claim immediately to the Commissioner who shall by registered mail notify the taxpayer of his decision on the claim. The taxpayer may within GO days after such notice is mailed file an appeal with the Board of Tax Appeals. If the claim is denied in whole or in part by the Commissioner (or by the Board in case an appeal has been filed) the amount,' the claim for which is denied, shall be collected as part of the tax upon notice and demand from the collector, and the amount, the claim for which is allowed, shall be abated. A proceeding in court may be begun for any part of the amount, claim for which is allowed by the Board. Such proceeding shall be begun within one year after the final decision of the Board, and may be begun within such year even though the period of limitation prescribed in section 277 has expired.

In Caribou Oil Mining Co. v. Commissioner, 6 B. T. A. 511, the facts were that the taxpayer filed an income and profits-tax return for the calendar year 1919, showing a total tax liability of $50,503.33. On February 26, 1925, the Commissioner, by a so-called 30-day letter bearing that date, notified the taxpayer of a deficiency in income and profits taxes for the year 1919 in the amount of $44,051.48. On March 10, 1925, the taxpayer filed with the collector a claim for refund of 1919 income and profits taxes in the amount of $11,147.10, on the ground that it was entitled to have its profits taxes for that year determined under the provisions of section 327 (d) of the Revenue Act of 1918. On March 14, 1925, the Commissioner made a jeopardy assessment of the amount set forth in the 30-day letter, and notified the taxpayer by letter mailed on that date. On March 18,1925, the taxpayer replied to the 30-day letter of February 26, 1925, protesting against the assertion of the deficiency of $44,051.48. On March 24, 1925, the collector gave notice and made demand upon the taxpayer for the payment of the deficiency to which the jeopardy assessment related. The taxpayer did not make payment nor did it within 10 days from the date of the collector’s notice and demand file a claim for abatement of the deficiency, or any part thereof, accompanied by proper bond as provided by section 279(a) of the Revenue Act of 1924. On or about April 2, 1925, the Commissioner by telegraph requested the collector to withhold collection of the deficiency. On March 12, 1926, and May 14, 1926, the Commissioner addressed letters to the taxpayer stating that the taxpayer’s claim for refund, which the taxpayer had filed shortly after its receipt of the 30-day letter, had been acted upon and that in accordance with that claim, special assessment had been allowed under sections 327 and 328 of the Revenue Act of 1918 and that as the result of special assessment the taxpayer’s total tax liability for 1919 was reduced to $80,806.23. A certificate of overassessment in the amount of $13,748.58 was thereupon issued and was applied by the collector against the deficiency of $44,051.48 to which the jeopardy assessment related, leaving a balance due of $30,302.90. The taxpayer refused to pay this balance and filed an appeal with this Board alleging as the basis thereof the Commissioner’s letter of May 14, 1926. The Commissioner moved to dismiss the appeal for lack of jurisdiction in the Board to hear and determine the same. In sustaining the Commissioner’s motion- the Board said:

It is apparent that the Commissioner’s letter of March 12, 1926, constituted only a voluntary abatement of prior assessments pursuant to his allowance of special assessment under the provisions of sections 327 and 328 of the Revenue Act of 191S. It was not in any sense a rejection in whole or in part of a claim in abatement against such assessment, for no claim in abatement had been, or has since been, filed. The petitioner had protested the jeopardy assessment made in March, 1925, and had applied for special assessment. The letter of March 12, 1926, advised the petitioner of the abatement growing out of the allowance of its application.
The letter of May 14, 1926, was but a reiteration and affirmation of the action theretofore taken of which petitioner had been notified on March 12, 1926. It should be noted that the letter of May 14, 1926, was in no sense an advice of action taken with respect to an abatement claim. It could not have amounted to the determination by the Commissioner of a deficiency, for the reason that no claim in abatement of the outstanding assessment had been filed.
Section 283(k) of the Revenue Act of 1926 continues the procedure outlined in the Revenue Act of 1924 with respect to appeals following jeopardy assessments made under the provisions of the Revenue Act of 1924. Under that procedure the right of the taxpayer to appeal to the Board is based solely on the final determination by the Commissioner of a deficiency in his rejection of a proper claim in abatement, filed within 10 days of the receipt of the collector’s notice and demand for the tax so assessed. Since no such claim was ever filed by this taxpayer, the letter of May 14, 1926, does not constitute such a final determination of deficiency, and no appeal lies to the Board therefrom.

It is clear, we think, that where the Commissioner has made a jeopardy assessment under the provision of section 274(d) of the Revenue Act of 1924, no appeal lies to this Board except from the action of the Commissioner rejecting in whole or in part a claim for abatement filed within 10 days after notice and demand from the collector for the payment of the tax so assessed and accompanied by a proper bond. In the case at bar it appears that the petitioner filed neither the claim for abatement nor the bond required by the statute. The situation thus presented is practically identical with that in the appeal above mentioned and upon the authority of the decision therein we must sustain the respondent’s motion and dismiss this proceeding insofar as it relates to the fiscal year ended May 31,1918-

The petition insofar as it relates to the fiscal year ended May 31, 1918, is dismissed■ Orden of redetermination for the fiscal year ended May 31,1919, will be entered on 15 days’ notice, under Bule 50.

Considered by Phillips, Milliken, and VaN FossaN.


author: Van Fossan:

text:
    Bills Bros. Memorial Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1346.
    Promulgated August 30, 1927.
    Amount of invested capital determined.

      William H. Diclcson, Esq., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
    This is an appeal from the determination of a deficiency of $1,822.76 in income taxes for the year 1919. It is alleged that the Commissioner erred (1) in reducing petitioner’s invested capital, and (2) allowing insufficient depreciation for the taxable year.
    FINDINGS OF FACT.
    Petitioner is a Colorado corporation with principal offices at Denver, organized in January, 1918, for the purpose of acquiring the assets of the Bills Brothers Monumental Co., also a Colorado corporation with principal offices at Denver.
    The Monumental Co. was incorporated in 1908 and was engaged in the business of supplying granite and marble markers or monuments for the graves of deceased persons. Approximately 90 per cent of its business was obtained through agencies established by it throughout the States of Wyoming, Nebraska, Kansas, Oklahoma, New Mexico, Arizona, Utah, Idaho, and Colorado. The company supplied the agents with samples of granite and marble, photographs of monuments or markers, catalogues, stationery, advertising matter and a case for carrying the equipment. A representative of the company would visit the agents, and, in the case of a new agent, would spend several days training and familiarizing him with the business. The cost of establishing an agency was approximately $100, which included all samples, etc., supplied and the expenses of the company’s representative, the latter item constituting the major portion of such cost. The company had 219 agents in the latter part of 1917. The agents were not employees of the company, but received a commission on orders sent in to the company. Upon the withdrawal of an agent the samples and other supplies, as a rule, were not returned to the company. More than 20 per cent of the agencies were lost to petitioner during the taxable year.
    Prior to June 1, 1917, the Monumental Co. had a capital stock of $10,000, and on that day increased its authorized capital to $30,000, divided into 30,000 shares of $1 par value each. The increase was based upon an alleged earned surplus consisting of cash in the bank, supplies on hand, and agencies established, the latter item being valued at approximately $25,000 of the total $30,000 capital. Of the increased capital there were issued 15,000 shares to Charles It. Slusser, for which he paid $6,000, evidenced by his note in that amount, 14,985 shares to H. C. Hefner, and 5 qualifying shares to each of three employees, the last mentioned 15 shares belonging in fact to Hefner. In December, 1917, or January, 1918, Slusser negotiated with Simon Bitterman for the sale of Hefner’s half interest to Julius Wallbrunn, it being understood that Wallbrunn and Slusser would each give 1,000 shares of stock to Bitterman as a commission. As a result of these negotiations Hefner received $11,000 cash, $10,000 from Wallbrunn and $1,000 from Slusser, the cash balance and accounts receivable of the company, for which he assumed the liabilities of the company and transferred his half interest to Wallbrunn. Before final completion of the transaction it was decided to organize a new corporation to take over the business.
    Petitioner was incorporated about the middle of January, 1918, with 80,000 shares of capital stock, par value $1 each. Pursuant to an agreement between the parties, 14,000 shares were issued to Wall-brunn and 6,000 shares were issued to Slusser in consideration of the assets and business of the Monumental Co., exclusive of the cash balance and the accounts receivable, and free from all liability; Slusser gave 100 of his 6,000 shares to Hefner; and 10,000 shares were issued to Bitterman in consideration of $2,000 cash, the establishment of a $15,000 line of credit with the bank, and services rendered.
    The assets of the Monumental Co., exclusive of accounts receivable and cash in bank, consisted of a stock of marble and granite, machinery and fixtures, and agencies and equipment. The merchandise cost $5,151 while the company valued the agencies and equipment at approximately $25,000 and the machinery and fixtures at $1,036. The petitioner, in taking over these assets, valued the merchandise at its replacement cost, based upon current market prices, as of the date acquired and made an adjustment in the agencies and equipment account. Petitioner’s assets and its valuation thereof, as appears from the opening entry upon its books, were :
    First National Bank, Denver (cash on hand)-$2,000
    Merchandise:
    In store_$6, 405
    In warehouse_ 783
    - 7,188
    Machinery and fixtures- 1, 036
    Equipment (printed matter, etc.)- 2,493
    Agencies’ equipment-17, 283
    To capital stock- 30, 000
    The respondent adjusted petitioner’s invested capital, reducing the merchandise account to $5,151 and the combined equipment and agencies’ equipment accounts (totaling $19,776) to $4,813, and determined invested capital to be $13,000.
   OPINION.

Van Fossan:

Petitioner was incorporated for the purpose of taking over the assets and business of a predecessor corporation, but from an examination of the stockholdings of the two corporations it appears that there was not a 50 per cent interest or control in the business remaining in the same persons. In the valuation of its assets for invested capital purposes therefore, petitioner is not limited by the provisions of section 331 of the Revenue Act of 1918.

The principal item in controversy is the valuation of the asset termed “ equipment and agencies’ equipment.” It consisted of some two hundred agencies which supplied petitioner and its predecessor with orders for its product and received a commission as compensation. The bulk of the business was obtained through these agents, to whom the company furnished the necessary equipment. The predecessor company valued this item at approximately $25,000, upon the basis of which it increased its capital stock from $10,000 to $30,000 on June 1, 1917, and petitioner at the time of the reorganization, valued it at $19,776. The basis of these valuations does not clearly appear. Some tangible equipment, the value of which is not shown with definiteness, was supplied, but the bulk of the cost of establishing these agencies consisted of the expenses of the company’s representative incurred in visiting them, which was clearly not a capital expenditure, but rather a current business expense. The real value of these agencies to the company was in the business produced by them. They can not be said to be a tangible asset, but are rather in the nature of good will. It is evident that when the company increased its capital in 1917 upon the basis of its valuation of these agencies, it was attempting to capitalize the good will of the business.

When petitioner acquired the business it set up in its accounts a value for these agencies and equipment in the sum of $19,776. The value of the good will attached to a trade or business, when clearly established, may properly be included as intangible property, with certain limitations, in the computation of invested capital. In this case, however, no adequate proof of the value of these agencies, the good will of the business, is submitted. No evidence was offered that would form a proper basis for a valuation of this asset There is no definite proof of the receipts, expenses, earnings, or other essential facts of either the petitioner or its predecessor over a period of years, which are necessary to any proper valuation of the good will of a business. We have only an approximated figure of what they cost the predecessor to establish.

Even though petitioner had established the value claimed for such agencies, the ultimate relief sought, viz, depreciation thereon, could not be allowed, since they consisted chiefly of the good will of the business, and good will is not a depreciable asset. (See Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626; Appeal of Manhattan Brewing Co., 6 B. T. A. 952.) The respondent has allowed a value of $4,813 for equipment and agencies equipment in his computation of invested capital. We are not advised of the basis of this valuation, but since it appears that some tangible property was supplied-to the agents, and since the petitioner has failed to establish a higher valuation than that allowed by respondent, we will not disturb the computations of respondent so far as this item is concerned.

The other item in controversy, the merchandise stock, cost the predecessor company $5,151, which is the amount allowed by respondent, apparently upon the theory that section 331 of the 1918 Act applied. At the time acquired by petitioner the replacement cost of this merchandise was $7,188, at which figure it valued this item in its computation of invested capital. Since we have held that section 331 is not applicable, petitioner is entitled to include the merchandise in invested capital at its actual cash value. (See section 326(a)(2), 1918 Act.) The cost of this merchandise to the petitioner, which Avas paid for in stock, was $7,188, based upon current market prices, and, we think, fairly represents the actual cash value, which should be allowed in the computation of invested capital. The respondent erred in reducing the value of this item in his computation of invested capital.

It is further alleged that the respondent erred in refusing to allow the sum of $3,727.96 for exhaustion, wear and tear (including obsolescence), but this allegation is in reality a corollary of the error assigned in the reduction of invested capital, and is disposed of by our decision of that issue, no question having been raised as to the rate of depreciation applied by respondent.

Petitioner’s invested capital and the alio Avance for depreciation should be recomputed in accordance with this opinion.

Judgment will he entered on 15 days' noUee, wider Rule 50.

Considered by Makqtjette, Milliken, and Phillips.


text:
    Denver Powerine Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11951.
    Promulgated September 1, 1927.

      Frank O. Myers, Esq., for the petitioner.

      A. E. Fast, Esq., for the respondent.
    This is an appeal from a determination of deficiencies in income and profits taxes aggregating $18,165.69 for the years 1919, 1920, and 1921. It is alleged that the Commissioner erred in that (1) the allowance made for depreciation is insufficient, and (2) he refused to compute petitioner’s excess-profits tax under sections 327 and 328 of the Revenue Acts of 1918 and 1921. The petitioner also assigns as error the alleged understatement by the Commissioner of invested capital for the taxable years, but counsel for petitioner in his opening statement waived this error as an independent issue and relies upon if merely in support of the claim for special assessment.
    At the hearing petitioner moved to strike the answer upon the ground that it was not filed within the time prescribed by the Rules of the Board. The petition was filed February 12, 1926, and the answer was filed March 30, 1926.
    FINDINGS OP PACT.
    Petitioner is a Colorado corporation organized February 3, 1913, with principal office in the City of Denver and is engaged in the business of distributing gasoline and oil. During the taxable years the principal stockholders were Fred C. Cramer and wife, and the officers were Fred C. Cramer, president, a Mr. Anderson, vice president, (only two officers in 1919) Carl B. Meaus, secretary, and Harold F. Cramer, treasurer.
    Prior to 1918 petitioner did not calculate depreciation on its assets. Its depreciable assets consisted of gasoline filling stations and equipment, delivery trucks and automobiles for collectors and salesmen. The method of computing depreciation employed by petitioner for the taxable years was to classify its assets and depreciate the same at a percentage based upon the estimated life of the assets, using their cost as shown by the books. The depreciation was computed upon the entire asset account and not upon the individual assets. Often items having a remaining useful life, or not fully depreciated, were replaced and the asset account was credited with the amount realized on the old item and charged with the cost of the new item. Some items theoretically fully depreciated were not so in fact. The method of computing depreciation employed by petitioner was accepted and adopted by respondent for the year 1919, the adjustments in the amount claimed by petitioner being due to elements not in dispute here. For the years 1920 and 1921 respondent, in computing depreciation, eliminated from the asset account those items which theoretically had been wholly depreciated.
    At the time of incorporation and during the taxable years petitioner owned a registered trade mark known as “ Powerine ” and an unregistered trade mark known as “AutOKrat.” “ Powerine ” designates a certain quality of gasoline and “AutOKrat” designates a certain quality of lubricating oil. Petitioner has spent a large sum in advertising “ Powerine.” These products were favorably received by the consuming public, and by reason of its high-grade products and service a valuable good will accrued to petitioner’s business.
    Based upon figures, as adjusted by the respondent relative to net income and allowable invested capital, petitioner realized a gross profit on its gross sales of 17.15 per cent in 1919; 14.16 per cent in 1920; and 21.76 per cent in 1921. The percentage of net income to gross sales was 4.79 per cent in 1919; 3.12 per cent in 1920; and 4.32 per cent in 1921. Its net income was 44.83 per cent of its allowable invested capital in 1919; 39.63 per cent in 1920; and 32.55 per cent in 1921. Petitioner paid to its executive oificers salaries aggregating $10,940 in 1919; $17,298 in 1920; and $15,298 in 1921. The ratio of these salaries to gross sales was 1.46 per cent in 1919; 1.73 per cent in 1920; and 2.08 per cent in 1921. The excess-profits tax as computed by respondent was 27.18 per cent of the net taxable income for 1919; 23.95 per cent for 1920; and 20.90 per cent for 1921. The capital turnover or the number of times the allowable invested capital was turned in the ordinary course of business (gross sales divided by the allowable invested capital) was 9.35 times in 1919; 12.69 times in 1920; and 7.53 times in 1921. The merchandise inventory turnover (determined by dividing the average inventory into the cost of merchandise sold) was 35.31 times in 1919; 38.91 times in 1920; and 16.56 times in 1921. The ratio of borrowed capital to invested capital was 11.89 per cent in 1919; 39.21 per cent in 1920; and 54.91 per cent in 1921. The average invested capital for the three years as determined by respondent was $85,477.42, and the average income was $32,953.50.
    During the taxable years petitioner’s business was mercantile in character, consisting almost entirely of buying and selling gasoline and oils at wholesale and retail, for cash and credit. The business was no more hazardous than other mercantile businesses, although the commodity dealt in was more dangerous to handle than some other commodities.
   OPINION.

Van Fossan:

At the hearing of this appeal, petitioner moved that the answer of respondent be stricken upon the ground that it was not filed within the time prescribed by - the rules of the Board. Buie 9 as revised to November 1, 1925, in effect at the time of filing the petition and answer herein, provided, so far as material, that

After service upon him of the petition, the Commissioner shall have 60 days within which to file an answer or 20 days within which to move in respect of the petition * * *.

The petition was filed on February 12, 1926, and was served upon the Commissioner on February 19, 1926, and the answer was filed on March 30, 1926. It is apparent that the respondent filed his answer within the time allowed. The motion to strike is denied.

Two issues are submitted for our determination, viz.: (1) depreciation, and (2) special assessment. The error alleged relating to invested capital is not relied upon as an issue in this cause, but is introduced in support of petitioner’s claim for special assessment under section 328 of the 1918 and 1921 Acts.

In support of the alleged erroneous depreciation allowance made by respondent, petitioner contented itself with the testimony of two witnesses to the effect that the method of computing depreciation employed by respondent was different from that employed by petitioner and formerly accepted by respondent, together with a statement of the differences in the aggregate amount of the depreciation arrived at by the respective methods of computation. No evidence was submitted of the character, quantity, cost or useful life of the assets upon which the depreciation allowance is claimed nor is there any evidence of the details of the respective methods employed. Section 214(a) 8 of the Revenue Acts of 1918 and 1921 provides:

That in computing net income there shall be allowed as deductions:
(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

Petitioner is entitled only to a reasonable allowance for depreciation. This record discloses no facts which would indicate that the allowances made by respondent are not reasonable. Indeed, no facts are submitted from which we can determine what, in this case, is a reasonable allowance. The mere fact that the computation of the respondent results in a lesser allowance than that of petitioner does not prove that respondent’s allowance is not reasonable. Petitioner has failed to prove that respondent erred in his determination of depreciation allowances.

The second issue arises from petitioner’s claim for special assessment under favor of section 327(d) of the Revenue Act of 1918, which provides relief—

Where * * * the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328.

The statute continues:

This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital * * *.

The above-quoted sections require that before special assessment is to be decreed there shall be proof of an abnormal condition affecting petitioner’s capital or income. On the record before us, petitioner has failed to prove this fundamental fact.

Before we can find an abnormal condition in capital or income, we must know the facts with respect thereto. From the evidence we know little or nothing of the amount of invested capital, borrowed capital, gross sales, cost of goods sold, merchandise inventory, or income of petitioner. Nor do we have similar evidence as to what petitioner alleges to constitute a normal condition.

Petitioner’s evidence consisted largely of the opinions of two witnesses that certain ratios worked out by petitioner’s accountant, i. e., merchandise turnover to inventory, net income to gross profit, net income to gross sales, invested capital to gross sales, and invested capital to borrowed capital, showed an abnormal condition. In the absence of a showing of unusual qualifications of the witnesses and the facts upon which their opinions are based, we can attach little weight to such opinion evidence.

Furthermore, all of these ratios might exist and yet not prove an abnormal condition under the statute. Upon analysis they are seen to be largely a restatement of the fact that this petitioner earned unusually large profits which condition the statute expressly provides shall not be a basis for special assessment. This matter is one to be best proven by the submission of facts.

Petitioner complains of the exclusion of good will from invested capital, but fails to prove either that the good will was paid in for stock or what amount, if any, was expended in its acquisition or accumulation. (See Appeal of Watt & Shand, Inc., 2 B. T. A. 1273.) He contends that salaries paid executives are low but gives us no inkling of what normal salaries are. (See Appeal of High Shoals Co., 3 B. T. A. 305; Appeal of Bader Coal Co., 2 B. T. A. 239; Pine Bluff Compress & Warehouse Co. Commissioner, 5 B. T. A. 938.)

Judgment will he entered for the respondent.

Considered by Marquette, MillikeN, and Phillips.


author: Mabqttette :

text:
    Jackson Casket & Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5610.
    Promulgated September 1, 1927.
    1. The deduction from gross, income of a reserve for cash discounts and freight charges disallowed.
    2. The record herein presents no evidence of any abnormality in capital or income which would entitle the petitioner to have its taxes computed under the provisions of section 328 of the Revenue Act of 1918.

      Gamer W. Green, Esq., for the petitioner.

      W. F. Wattles, Esq., for the respondent.
    This proceeding seeks the redetermination of a deficiency of $14,780.44 in income and profits taxes for 1918, and alleges that the respondent’s determination is based upon the following errors: (1) Addition to income of $12,515.53 set aside as a reserve for cash discounts and freight allowances; and (2) refusal to grant special assessment under the provisions of section 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    Petitioner, a Mississippi corporation with its principal office at Jackson, was, during the year in issue, engaged in manufacturing and selling caskets for burial purposes.
    Goods were billed to purchasers on the basis of -a cash discount if paid within 30 days, freight charges paid by purchasers to be deducted from invoice prices in making remittances.
    It has been the petitioner’s accounting practice, at least since 1910, to set aside at the close of each month, as a reserve, a percentage of the sales made during the month to cover the cash discounts and freight allowances on those sales. The percentage set aside as a reserve for cash discounts and freight allowances was uniform throughout the year, but varied as between years, and it was determined upon the basis of past experience. As allowances for cash discounts and freight charges were made to customers, the amounts thereof were charged against the reserve. On several occasions the balance in the account at the close of the year was deemed to be in excess of that required to cover allowances which would be made in respect of the sales of that year, in which event the excess was charged against the reserve and credited back to profit and loss. As to this accounting practice, petitioner’s books of account show the following:

    In 1918 petitioner’s sales were greater than for any preceding year and this was due to the demand for caskets and supplies incident to the ravages of the influenza epidemic. The demand for caskets and supplies became so urgent that customers directed shipment by express and most of the shipments made by petitioner in 1918 were made in that way. In the case of orders shipped by express, customers were allowed the usual cash discount, if remittance was made within the required time, but no allowance was made to them for the express charges which they paid.
    In the early part of 1918 freight rates on the class of goods produced by the petitioner were increased 25 per cent. Some time in 1918 the cash discount allowed to customers was reduced from 5 per cent to 2 per cent. At the close of each month of 1918 there was set aside to the reserve for cash discounts and freight allowances 12.3 per cent of the sales made during the month. The total set aside to reserve in that year was $43,604.28, which the petitioner deducted in arriving at net income. The total cash discounts and freight allowances actually made to customers in 1918 was $31,088.70. During the succeeding three years, numerous claims were made by customers for freight allowances on shipments made in 1918. In arriving at net income shown in the deficiency notice, respondent allowed as a deduction the total cash discounts and freight allowances made in 1918, to wit, $31,088.70, in lieu of the deduction taken by petitioner, to wit, $43,604.23, thereby increasing net income $12,515.53.
   OPINION.

Mabqttette :

Whatever may be said as to the consistency with which petitioner has followed the method of accounting employed in its business, which, includes the practice of setting aside each month a reserve to cover anticipated cash discounts and freight allowances to customers, the fact is that taxable net income is not clearly reflected by that method and, for the year on appeal, it must give way to one which will clearly reflect the income. A reserve of the character which the petitioner seeks to deduct from income is a contingent liability, at least to the extent that it includes anticipated cash discounts, and its deduction in arriving at net income is not authorized by the statute. Appeal of William J. Ostheimer, 1 B. T. A. 18; Appeal of Consolidated Asphalt Co., 1 B. T. A. 79; Appeal of Uvalde Co., 1 B. T. A. 932; Appeal of Morrison-Ricker Manufacturing Co., 2 B. T. A. 1008; Appeal of Thatcher Medicine Co., 3 B. T. A. 154. There is no evidence before us showing the amount of freight allowances made in subsequent years on shipments of 1918, or of the extent of the petitioner’s liability for freight allowances at the close of 1918. The petitioner has not shown that the obligations which it paid or incurred in 1918, by reason of eash discounts and freight allowances to customers, were greater than the deduction which the respondent has allowed.

The petitioner has presented no evidence which indicates any abnormality in income or capital for 1918. Its taxes for that year were high, but high taxes, without any showing of abnormality, are not sufficient reason for special assessment. Its sales for 1918 were greater- than those of any preceding year because of the epidemic emergency, but there is no proof that this effected any abnormality in net income. High taxes and unusually large sales are the two grounds upon which petitioner seeks relief under the provisions of section 328 of the Revenue Act of 1918, but there is no proof of any abnormality which might entitle it to the relief which it seeks.

Reviewed by the Board.

Judgment will be entered for the respondent.


text:
    North Texas Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5208.
    Promulgated September 1, 1927.
    1. The petitioner in 1916 granted an option to purchase its property and in that year received notice that the option would be exercised and that the purchaser approved the title. In 1916 there was no delivery or tender of a deed and no delivery of possession of the property. Before the close of 1916 the purchaser was ready, able and willing to perform the contract but had made no tender of the purchase price. In 1917 payment was made and deed delivered. The petitioner kept its accounts and made its returns upon an accrual basis. Held, that title passed in 1917, that the purchase price first accrued ift 1917, and that any gain is to be reported as income in 1917,

      2. A contract to sell property does not pass title to the property or in the absence of tender or delivery of the property or of title thereto, give the vendor a right to maintain an action for the purchase price.

      Joseph J. Eehford, Esq., for the petitioner.

      8. 8. Faulkner, Esq., for the respondent.
    The petitioner seeks a redetermination of a deficiency of $19,-733.90 in income and profits taxes for 1917, arising from the denial by the Commissioner of a claim for the abatement of an assessment of additional tax. The only question involved is whether the profit from the sale of certain timber lands was income to the petitioner in the year 1916 or in the year 1917.
    FINDINGS OF FACT.
    The taxpayer, a corporation, was organized in November, 1909, under the laws of the State of Texas and was engaged in the business of operating a saw mill, and buying and selling timber land, as well as the manufacture and sale of rough and finished lumber. The corporation conducted the business continuously from its inception in 1909 down to the year 1917, when liquidation was effected subsequent to disposal of the timber land. The authorized and fully paid capital amounted to $50,000. The books of the taxpayer were kept on an accrual basis.
    During the summer or fall of 1916, officers of appellant negotiated with the officers of the Southern Pine Lumber Co. for the sale of timber lands, known as the Knox Lands, title to which was in appellant and also in the Clark & Boice Lumber Co. and a minor, Kelly Morse. On December 27, 1916, the price was agreed upon and an option contract executed at Dallas, Tex., reading as follows:
    State of Texas
    County of Dallas.
    The Following Contract and Agreement is this day entered into by and between Clark & Boice Lumber Company, North Texas Lumber Company, and Wesley Morse, Parties of the First Part, and the Southern Pine Lumber Company, Party of the Second Part:
    In consideration of the sum of One Hundred ($100.00) Dollars to Parties of the First Part paid by Party of the Second Part Parties of the First Part hereby grant, contract and convey to Party of the Second Part an option for the period of ten (10) days from the date hereof, to purchase of one or more of the Parties of the First Part the hereinafter described property upon the terms and for the consideration hereinafter named.
    The property to be purchased from the Clark & Boice Lumber Company consists of the property out of the Jose Maria Mora grant in Anderson County, conveyed to Clark & Boice Lumber Company by Fannie M. Shelton and husband, and Orra O. More, by deed dated July 25, 1910, and duly recorded in Vol. 113, Page 012. Deed Records of Anderson County, Texas, to which deed and the record thereof reference is here made for a more particular description of said property, consisting of about one thousand and fifty four (1054) acres of land.
    From the North Texas Lumber Company — all of the property situated in Anderson and Cherokee Counties, Texas, described in a certain deed from Hiram Knox and Mary S. Knox, to North Texas Lumber Company, dated May-18, 1915, and duly recorded in the Deed Records of Cherokee and Anderson Counties, Texas, to which deed and record thereof reference is here made for a more particular description of said property, consisting of about 14,000 acres of land.
    Also from the North Texas Lumber Company — the timber rights vested in it, the said North Texas Lumber Company, by a certain contract between C. Lombardi and Caroline Ennis Lombardi, and the North Texas Lumber Company, dated March 8, 1915, upon about 1213 acres of land in the Highsmith survey and T. P. Hotchkiss survey in Anderson County; reference being here made to said contract for a more particular description of said land. Also the timber rights vested in James Kelly Morse by a conveyance from the State of Texas upon one hundred (100) acres of land situated in Cherokee County, Texas, the said conveyance from the State of Texas being dated in the year 1916, and the only contract of that nature existing between the State of Texas and the said James Kelly Morse.
    The consideration for said conveyance is the sum of Two Hundred Thirteen Thousand Five Hundred ($213,500.00) Dollars, cash, and the agreement and assumption by the said - Southern Pine Lumber Company of the unpaid purchase money, principal and interest, against any of the properties above named and the obligation of the grantee, as evidenced by the various instruments herein referred to, and all unpaid taxes against said land. Land, timber rights, and other rights is to be conveyed by Parties of the First Part to Party of the Second Part by Special Warranty deed, but any rights that any of said Parties of the First Part may have by reason of warranties and the like, are to be conveyed and vested in said Southern Pine Lumber Company.
    In case said Southern Pine Lumber Company exercises the option herein granted within the time herein named then the One Hundred ($100.00) Dollars paid at the time of the execution of this instrument, receipt of which is hereby acknowledged, is to be credited upon and to be a part of the cash consideration above named of Two Hundred and Thirteen Thousand Five Hundred ($213,500.00) Dollars. The Southern Pine Lumber Company is to make known the exercise of this option by a written instrument delivered to the Clark & Boice Lumber Company at its office in Dallas, Texas, within ten (10) days or mailed to it by registered letter within said ten (10) days from some point in the State of Texas, the date of mailing to be indicated by the post mark upon such letter. A satisfactory indemnity obligation is to be executed by Wesley Morse to the Southern Pine Lumber Company to protect it in accepting a deed from James Kelly Morse to his rights to the one hundred (100) acres herein-above mentioned.
    Witness Our Hands Respectively this 27th day of December, A. D. 1916.
    Nobth Texas LtjmbeR Co.
    By Wesley Morse, Pres. (Signed)
    Clabk & Boice Lumber Co.
    By F. L. Clark, Mgr. (Signed)
    Wesley Morse (Signed)
    Parties of the First Part.
    Southern Pine Lumber Co.
    By L. D. Gilbert, Secy. & CM. (Signed)
    Party of the Second Part.

      Gilbert, the secretary and general manager of the Southern Pine Lumber Co., who negotiated and executed the option on behalf of that company, received on December 27, 1916, from the attorney for the North Texas Lumber Co. an abstract of title and written opinion of the attorney, and stated that he was satisfied with the title and his company would assume one suit with respect to the title which was pending. The Southern Pine Lumber Co. required a few days in which to arrange to borrow the money to complete the purchase.
    On December 29, 1916, the Southern Pine Lumber Co., arranged for a loan of $200,000 from the Boatmen’s Bank of St. Louis, Mo. The notes on which such loan was made were mailed from Tex-arkana, Tex., to said bank on Saturday, December 30, 1916. In the normal course of the mails they would have arrived in St. Louis on Sunday, ■ December 31, 1916. On December 30, 1916, Gilbert telegraphed Clark, vice president of petitioner, that the Southern Pine Lumber Co. would exercise the option and was prepared to complete the transaction and pay over the money as soon as the papers were prepared. Clark received this telegram on December 30, 1916, and telephoned his attorney and the president of his company that the deal was closed and ordered the men who were starting to build a mill on the property dismissed. These employees stopped work on Decembér 30, came home the next day, and were not paid for any work done after December 30, 1916. The written instruments, which were required to complete the transfer, were delivered on January 5, 1917, at which time the balance of the purchase price was paid.
    The Southern Pine Lumber Co., the purchaser, at the date of contract, December 27, 1916, and continuously to December 30, 1916, and afterwards, was amply solvent and ready, willing and able to carry out said contract of December 27, 1916.
    The purchasing company rendered the property in April, 1917, for taxes, the assessment being dated back under the Texas law, to January 1, 1917.
    Appellant did not report the profit from this sale until it filed a supplemental income-tax return for the year 1916, in April, 1918. The Commissioner determined that appellant realized a profit of $79.057.95 from the sale of such land, which was income to it in 1917 and assessed the deficiency accordingly.
   OPINION.

Phillips:

The single question involved in this appeal is whether the profit from the sale of the timber lands of the petitioner to the Southern Pine Lumber Co. is income in 1916 or in 1917. The undisputed evidence is that on December 27, 1916, the parties arrived at an agreement as to the value of the land and the purchaser expressed satisfaction with the title. No contract of sale was made on that date, however, for the purchaser found it necessary to make arrangements for financing the purchase price. A ten-day option was granted the Southern Pine Lumber Co. On December 30, 1916, it gave notice of its intention to exercise such option, thereby creating an enforceable contract between the parties for the sale of the property. It is contended that at that time the sale of the property became executed, that the purchaser acquired title and that the purchase price became due to the petitioner. The deed to the property was delivered and the purchase price paid on January 5, 1917.

In support of its contention, petitioner points out that on December 30, 1916, the purchaser was ready, able, and willing to perform the contract, that it had already passed upon the title of the petitioner as satisfactory, that the petitioner withdrew from the property the workmen who had theretofore been engaged in the construction of a mill, that upon the closing of the title adjustments were made as of January 1, 1917, and that the purchaser paid taxes after January 1, 1917. None of these factors, however, seem sufficient to vest title to the property in the purchaser or to entitle the seller to have maintained an action in 1916 for the purchase price.

We do not question that equitable title passed to the purchaser at the time the option was exercised and a contract to sell came into effect, so that any loss or damage to the property would have been the loss or damage of the purchaser. We do not understand, however, that because equitable title may have vested, the vendor then has a legal right to recover the purchase price, which is the principal question here involved since the books of the petitioner were kept upon an accrual basis.

Ordinarily one who has entered into a contract for the sale of property, whether real or personal, has no right to recover the purchase price until the delivery of the property sold. In the case of real property a right to recover by way of an action for specific performance may exist when a proper tender has been made. Here there was no delivery of the property to the purchaser either by giving it possession of the property, by delivery of a deed, or otherwise, until January 5,1917, and no tender of delivery, and it was not until 1917 that any night to demand or receive payment of the purchase price arose.

Counsel for the petitioner calls attention to the decision of the United States District Court in Davidson & Case Lumber Co. v. Motter, 14 Fed. (2d) 137; 5 Am. Fed. Tax Rep. 6126. The court in that case' appears to decide that title passed to the purchaser despite the fact that no conveyance was made and that the vendor remained in possession. There is room in that case, however, for the belief that the possession of the vendor continued under an agreement with the purchaser and was that of a tenant. We have no such situation here, for, while the taxpayer removed its employees from the property on December' 30, 1916, the purchaser did not go into actual possession either directly or through tenants or otherwise.

In its last analysis the contention of the petitioner is that the vendor of property becomes entitled to receive the purchase price of property at the time a contract for the sale of the property is entered into, if the title is satisfactory and the purchaser able to perform the contract. Certainly this is not the general rule throughout the United States and no decisions have been cited showing it to be the law in Texas. While we have preferred to base our decision upon the broader ground, it might be noted that Kelly Morse, a minor who held title to a part of the tract to be conveyed, was not a party to the contract, and for that reason, even though such a contract could be considered as a sale, the title which the petitioner was to deliver was incomplete.

Reviewed by the Board.

Decision will be entered for the respondent.