author: Teammbll:

text:
    Magnolia Farmers Elevator Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6853.
    Promulgated March 16, 1927.
    A corporation operating a grain elevator received for storage grain which it sold instead of storing it, and when the owners of the grain authorized its sale the corporation paid them the market price of the grain on the day the sale was authorized. When grain was received for storage the corporation set up on its books a liability to the owner in bushels but not in dollars. Held, that gain or loss did not arise until an obligation to pay for the grain arose.

      John 0. Loeffler, Esq., for the petitioner.

      F. 0. Graves, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for the fiscal year ended May 31, 1920, and the fiscal period June 1, 1920, to June 30, 1920, in the total amount of $1,508.96. The deficiencies arise on account of the action of the respondent in disallowing the amount of $11,886.10, claimed by the petitioner as storage liability, for which amount no liability was set up on the balance sheet of the petitioner.
    FINDINGS OF FACT.
    The petitioner is a Minnesota corporation with its principal place of business at Magnolia. It was engaged in the business of operating a grain elevator. It received for storage corn, oats, barley, and ñax. The amount of grain received each year was greater than the storage capacity of the elevator and quantities of grain were shipped out and sold instead of actually being stored. It was the custom of the trade, which was followed by the petitioner, to receive grain from farmers, to issue a warehouse receipt for the number of bushels, and if it did not have space in which to store the grain in its warehouse at Magnolia, to ship it to other places for storage or to sell it at the market price.
    During 1920 the petitioner received — up to May 31 — 5,251 bushels of corn which it sold and shipped. It received the market price therefor. It, however, did not account to the farmers who brought in the corn until they authorized the sale thereof. When the petitioner was authorized to sell the corn, instead of selling it at that time, it issued its check in payment therefor at the market price prevailing on that particular day.
    The petitioner set up on its journal the amount in bushels as a liability for all corn which it had received and sold instead of actually storing it, but did not set up any liability in dollars. The liability in dollars was determined by the market price of grain, which fluctuated from day to day. This was the custom of the petitioner and was in accordance with the custom of the trade in that locality. It included in its inventory at the end of each year only the grain on hand in its warehouse.
    The above-mentioned 5,251 bushels of grain which the petitioner received for storage but which were sold and shipped on or before the close of its fiscal year which ended May 31, 1920, were authorized to be sold by the farmers who brought the grain into the warehouse subsequent to May 31, and also subsequent to June 30, 1920, and the petitioner paid to the farmers the market price thereof on the dates, on which it was authorized to be sold.
    Between June 1 and June 30 the petitioner received for storage 1,459 bushels, which it sold and shipped and for which it paid to the farmers who brought it in the market price on the dates when the farmers authorized it to be sold, which dates were subsequent to June 30,1920.
    The market value of corn of the highest grade on June 30, 1920, was $1.64 per bushel. The price was different for different grades. There would be a variation of from 2 to 2y2 cents per bushel on lower grades on that date. Since the books of the petitioner did not reflect any liability in dollars at the close of the respective taxable periods, the respondent disallowed any liability and restored to income the amount of $11,886.10, which the petitioner claimed was the liability which actually existed on June 30, 1920.
    The petitioner kept its books and accounts on the basis of a fiscal year ended May 31 of each year. In 1920, however, it changed the closing of its fiscal year from May 31 to June 30.
   OPINION.

Teammbll:

The petitioner has proceeded in its presentation of the case upon the theory that the return for the fiscal year 1920 was made on the basis of 13 months and allocated the proportionate part of the income to the respective taxable periods. In our opinion, a separate return should have been made for the period from May 31 to June 30,1920, in accordance with section 226 of the Revenue Act of 1918, which, in so far as it is pertinent, provides as follows:

If the change is from one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.

The net income should be computed on the basis of the period for which separate returns are required.

The question then is, What was the taxable income for the respective periods? The petitioner contends that there was a liability at the end of any period determined by the market price of grain on that date. ■ It was undoubtedly liable to pay to the farmers who delivered grain the market value on the day they authorized the sales, less charges for storage or other charges, but it had no means of knowing the amount which it would actually be required to pay. The petitioner might have made a profit or suffered a loss. This fact, however, could not be known until the farmer authorized the sale when the petitioner was required to make payment. Its profit was not measured by the difference between the liability at the end of the year and the sales price of the grain, but by the difference between what it was required to pay and the sales price. This might have been materially different. In our opinion, the sale of the grain by the petitioner was only a part of the transaction resulting in gain or loss. The other part of the transaction was the request or authority of the farmer to sell. The transaction was not complete until this had occurred. Until then no fact had occurred which established gain or loss. The petitioner’s liability on a particular day to pay for the grain which it had sold has no material bearing on the amount of actual gain or loss derived from the transaction.

In our opinion, the petitioner should have reported no gain or profit frofti these transactions until it had received a request or authority from the farmers to sell the grain. This definitely fixed the price which the petitioner paid for the grain. The method adopted by the petitioner for keeping its books and accounts did not clearly reflect its income in that it ignored a fundamental principle on which gain or loss is determined. The tax should be computed upon the basis of completed transactions during the fiscal periods involved.

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


source: Caselaw Access Project

author: MaRquette:

license: Public Domain

text:
    First National Bank of Sonora, Texas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3213.
    Promulgated March 22, 1927.
    1. Where the books of a bank are kept on the cash receipts and disbursements basis, bank discount neither earned nor received within the taxable year does not constitute income for that year.
    2. All amounts which constitute income within the year under the .method of accounting employed, must be returned for taxation in that year, even though a part thereof was improperly reported as income and the tax paid thereon in a prior year.

      L. W. Elliott, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amounts of $1,612.68 and $1,902.76, respectively.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the United States and is and was during the years 1918 to 1921, inclusive, engaged in the banking business at Sonora, Tex. During the years 1918, 1919, and 1920, its books were kept on the cash receipts and disbursements basis.
    The respondent, upon audit of the petitioner’s income and profits-tax returns for the years 1919 and 1920, determined that its net income was $23,294.57 for the year 1919, and $25,653.22 for the year 1920.
    The parties hereto have stipulated that the petitioner’s net income for the year 1919, as determined by the respondent, should be reduced by the amount of $5,844.31, representing discounts on notes made in the year 1919 but which were not earned or received until the year 1920; and that the petitioner’s net income for the year 1920, as determined by the respondent, should be increased by said amount of $5,844.31 and decreased by the amount of $5,751.32, representing discounts on notes made in 1920 which were not earned or received until the year 1921.
    The parties hereto have also stipulated that in its income and profits-tax return for the year 1918 the petitioner included as income, and paid the tax thereon, the amount of $5,733, representing discounts on notes made in the year 1918 which were not earned -or received until the year 1919. The respondent now asks that said amount of $5,733 be added to the petitioner’s income for the year 1919.
   OPINION.

MaRquette:

The parties hereto have agreed, that certain adjustments set forth in the findings of fact should be made in the petitioner’s income for the years 1919 and 1920. This leaves for our determination only the question of whether or not the amount of $5,733, representing discounts on notes made in 1918 but which were not earned or received until 1919, should be included in the petitioner’s income for the latter year. The petitioner now admits that the amount in question is properly income for 1919, but ‘contends that, having returned the amount as income for 1918 and paid the tax thereon, it should not now be required to include it in income for 1919.

The situation here presented is identical with that in the Appeal of Chatham & Phenix National Bank, 1 B. T. A. 460, wherein we held that bank discount neither earned nor accrued within the taxable year does not constitute income for that year, and that all amounts which constitute income within the year under the method of accounting employed must be returned for taxation in that year, even though a part thereof was improperly reported as income and the tax paid thereon in a former year. In that appeal we said:

The taxpayer, however, in adopting the accrual method for reporting discount has failed to include as income for 1918 the amount of $308,577.27 earned in 1918 on discounts made in 1917. Its contention, of course, is that having paid income tax upon this amount it can not now be compelled to again include this amount in income for another year and pay the tax thereon. As we have endeavored to show, this amount was not income within the year 1917, and the fact that a tax was paid thereon for that year will not excuse it from paying the tax in the year in which it is properly to be accounted for as income.

See also Appeal of Bank of Hartsville, 1 B. T. A. 920.

During the years 1918 and 1919, the petitioner’s books were kept upon the cash receipts and disbursements basis. It is, therefore, clear that the discounts on notes made in 1918, which were neither earned nor received until the year 1919, were income for 1919, and upon the authority of our decisions in the Appeals of Chatham & Phenix National Bank and Bank of Hartsville, supra, we are constrained to hold that these discounts should be included in the petitioner’s income for the year 1919, even though they have heretofore been erroneously included in income for the year 1918 and the tax paid thereon.

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


author: MaRquette :

text:
    W. S. Curlee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1638.
    Promulgated March 22, 1927.

      Don T. Haynes, Esq., for the petitioner.

      John D. Foley-, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income tax for the years 1919 and 1920 in the amounts of $3,464.52 and $819.50, respectively.
    FINDINGS OF FACT.
    The petitioner was, during the years 1919 and 1920, a married man residing with his wife at Wichita Falls, Tex., and was engaged in the oil business, farming, and dealing in real estate.
    The petitioner in his income-tax return for the year 1919 reported the amount of $4,500 as salary received from one H. F. Welden. In fact, he was not employed by Welden and did not receive any salary from 'him. However, the petitioner did, in the year 1919, purchase an oil lease from the firm of Welden & Lillard, which he sold later in the same year at a net profit of $4,500, which profit he did not report in his return. The respondent, upon audit of the- petitioner’s return, increased the income reported therein by the amount of the net profit realized from the sale of the oil lease, but did not eliminate therefrom the amount reported as salary received from Welden.
   OPINION.

MaRquette :

We are satisfied from the evidence that the petitioner in his income-tax return for the year 1919 erroneously reported as salary received from Welden the amount of $4,500, and failed to report the profit realized on the sale of an oil lease. The respondent has increased the petitioner’s income as reported by the amount of the profit arising from the sale of the oil lease, but has not eliminated from income the amount included therein as salary. It is clear, we think, that the petitioner received no salary from Welden and that he is entitled to have his income for 1919, as determined by the respondent, reduced by the amount of $4,500.

Other errors on the part of the respondent in determining the petitioner’s income for 1919 and 1920 are alleged in the petition herein, but they were either specifically abandoned at the hearing or the petitioner has failed to produce any competent evidence from which we can make findings of fact or conclusions relative thereto.

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


text:
    Daniel Hunt, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7703.
    Promulgated March 22, 1927.
    1. No profit was realized by the petitioner from the conveyance by him to his daughter in the year 1920 of certain real estate involved herein.
    2. An allowance for the exhaustion, wear and tear of a certain building owned by the petitioner, computed at the rate of 2 per cent, held to be reasonable.
    3. Amounts drawn by the petitioner in the years 1920 and 1921 from a corporation in which he held a controlling interest, held to constitute distributions of profits, and therefore are taxable as dividends.

      Phil D. Morelock, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income taxes for the years 1920 and 1921, in the amounts of $1,345.53 and $2,676.67, respectively.
    FINDINGS OP PACT.
    The petitioner is an individual residing at Tulsa, Okla.
    On February 18, 1920, the petitioner conveyed to his daughter, Sarah Elizabeth Casebeer, by warranty deed, certain real estate situated in Tulsa, Obla, On March 19, 1923, he executed and delivered to his daughter a quitclaim deed correcting an error in the description of the real estate conveyed by the deed of February 18, .1920. The deed of February 18, 1920, recited a consideration of $3,000, and the deed of March 19, 1923, a consideration of $1. The real estate covered by these deeds was in fact conveyed by the petitioner to his daughter as a gift and he was paid no consideration in money or money’s worth.
    During the years 1920 and 1921, the petitioner was the owner of a building located in Tulsa and known as the “ Marquette Building.” This building was erected in the years 1913 and 1914 and was a three-story and basement brick and steel structure, with plaster and wood interior. The useful life of the building was 50 years.
    During the years 1920 and 1921 the petitioner was the owner of 467 shares of the capital stock of the Hunt Company, a corporation operating a department store. The remainder of the capital stock of the company, consisting of 190 shares, was owned by the petitioner’s children.

      No dividends were ever declared by the corporation, but in the year 1920 the petitioner withdrew from the corporation, out of earnings, the amount of $15,698.76, and in the year 1921 he withdrew the amount of $39,101.30. These amounts were in addition to the salary paid him by the corporation, and they were charged to his account and notes therefor were subsequently given by him to the corporation. The money so withdrawn was invested by the petitioner in real estate, the title to which was taken in his own name. In the year 1920 there was charged to petitioner’s sons on the books of the corporation the amount of $21,278.13, and to his daughter, Mrs. Oasebeer, the amount of $2,401.09. In the year 1921 there was charged to the petitioner’s sons on the books of the corporation the amount of $10,877.92. Part of the amounts charged to the sons was for merchandise purchased and the remainder was for cash withdrawn, and the entire amounts so charged were in addition to salaries paid them by the corporation. The sons afterwards gave notes for the amounts charged to them. The notes given by the petitioner and his sons to the corporation to cover the amounts charged to them in 1920 and 1921 were subsequently charged off as uncollectible. The corporation was dissolved in the year 1924.
    The respondent, upon audit of the petitioner’s income-tax return for the years 1920 and 1921, determined that the petitioner had realized a profit of $1,941.80 in the year 1920 on the sale to his daughter of the real estate mentioned, and that the amounts of $15,698.76 and $39,101.30, withdrawn by him from the corporation in those years as herein set forth, constituted dividends to him. The respondent also allowed the petitioner in each year a deduction for the exhaustion, wear and tear of the petitioner’s building, computed at the rate of 2 per cent.
   OPINION.

MaRquette:

The evidence shows that in the year 1920 the petitioner conveyed to his daughter certain real estate referred to in the findings of fact; that the conveyance was made to the daughter as a gift and that the petitioner received no consideration therefor in money or money’s worth. The petitioner, therefore, did not realize any profit from the transaction.

The evidence also shows that in the years 1913 and 1914 the petitioner erected a building in Tulsa, Okla. The petitioner and the respondent are in accord as to the cost of the building but do not agree as to the rate that should be used in computing the allowance for the exhaustion, wear and tear thereof. The respondent has determined that the building has a useful life of 50 years, while the petitioner contends that its useful life is not to exceed 25 years, and that the allowance for exhaustion, wear and tear should be computed at the rale of 4 per cent. The only evidence submitted by the petitioner in support of his contention was the testimony of a real estate dealer of Tulsa, who testified that while the physical life of the building might be more than 50 years, in his opinion it would have to be torn down not later than 10 years from the present date, for the reason that the ground on which the building is situated is becoming so valuable that the building would not, after that time, bring adequate returns on the increased value of the ground.

The property was sold by the petitioner in 1924 at a very large profit and at the present time is apparently producing an adequate return on the investment. There is no satisfactory evidence before us that it will not continue to produce an adequate return over its useful life as determined by the respondent, or that it will become obsolete before that time.

The respondent has determined that the amounts withdrawn by the petitioner from the Hunt Company in the years 1920 and 1921, under the circumstances set forth in the findings of fact, represent distribution of profits and should be taxed to the petitioner as dividends. The petitioner contends that they represent advances to him by the corporation, which he intended to repay and that they do not constitute income. Upon consideration of the evidence, we are of the opinion that the Hunt Company was a close corporation owned by petitioner and his children, and that while no dividends were ever formally declared, the petitioner and his children helped themselves to the corporation’s earnings at such times and in such amounts as they saw fit. While notes were given to the corporation by the petitioner and his sons for the amounts so withdrawn, these notes were charged off as worthless, although it is clear that the petitioner could have paid the notes he gave. The evidence does not lonvince us that it was ever intended that these notes would be paid, and we therefore hold that the amounts in question, withdrawn by the petitioner from the corporation, constituted distributions of profits and that they should be treated as dividends and taxed as income to the petitioner.

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


author: Maequette :

text:
    A. O. Campbell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5631.
    Promulgated March 22, 1927.
    The debts involved herein were ascertained to be worthless and charged of£ within the taxable year 1920, and constitute proper deductions in computing the petitioner’s net income ior that year.

      Hubert L. Bolen, Esq., for tlie petitioner.

      Bruce A. Low, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $948.51.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Oklahoma City, Olda.
    On September 22, 1914, the petitioner loaned to his brother, O. D. Campbell, $3,500, and received from the said C. D. Campbell his promissory note dated September 22,1914, due in one year from date and bearing interest at the rate of 6 per cent. On February 10,1915, the petitioner made a further loan to C. D. Campbell in the amount of $3,000, and received from C. 1).’ Campbell his promissory note dated February 10,1915, due in one year from date and bearing interest at the rate of 6 per cent. During the years 1913, 1914, and 1915, the petitioner made other loans to C. D. Campbell in the amount of $1,005.61. These loans were carried as an oj)en account with C. D. Campbell on the books of the petitioner.
    In November, 1915, C. D. Campbell died at Omaha, Nebr. At the date of his death he was indebted to the petitioner on account of the loans heretofore referred to, in the total amount of $1,505.61, exclusive of accrued interest. After the death of C. D. Campbell, the petitioner retained an attorney to collect the amount due him from the estate of C. D. Campbell. Within the time required by law, the petitioner’s attorney filed a claim on behalf of the petitioner against the estate of C. D. Campbell for the amount of $7,505.61. This claim was allowed in full by the court and the petitioner was awarded a junior judgment as one of the unsecured creditors. During the years 1915 and 1916, part of the assets of the estate of C. D. Campbell were sold, and early in the year 1917 the assets remaining unsold consisted of two pieces of real estate, certain shares of stock and a small amount of cash, the total value of these assets being estimated at about $19,200. At that time the total amount of the secured and unsecured claims against the estate which had been allowed and remained unpaid was about $23,000. In the year 1917, the attorney representing the petitioner attempted to secure a compromise settlement of the petitioner’s claim against the estate of O. D. Campbell by having some of the properties owned by the estate transferred to the petitioner. This attempt was unsuccessful for the reason that all the property of the estate was held as security by secured creditors. The petitioner’s attorney was, however, advised by the attorney for the estate that there was a possibility that within the next two years the indebtedness due a certain bank would be paid off and property belonging to the estate and held by the bank as security would be released, and that at that time an adjustment might be made of the petitioner’s claim.
    In the year 1918 the petitioner went to Lincoln, Nebr., in order to make a personal investigation of the status of his claim against the estate of C. D. Campbell. At that time he failed to secure any settlement but was advised by his attorney that there was a possibility of recovering a part of the amount due him at some future date. In the year 1920 the petitioner again went to Lincoln, Nebr., to make a further investigation of the status of his claim against the estate of C. L. Campbell. At that time he found that the principal remaining asset of the estate consisted of the York Opera House, at York, Nebr., which was a brick building about 21 years old, which was encumbered for more than the amount for which it could be sold.
    From the information obtained through his personal investigation in 1920,' and on the advice of his attorney, who resided at Lincoln, Nebr., and was familiar with the condition of the estate of C. D. Campbell, the petitioner determined that his claim against the estate was worthless, as the assets of the estate were not sufficient to pay any of the unsecured creditors. He thereupon, in the year 1920, caused the amounts due him from the estate of C. D. Campbell, to wit, $7,505.61, to be charged off on his books as a loss, and in his income-tax return for that year he deducted the amount as debts ascertained to be worthless and charged off within the taxable year. The respondent disallowed the deduction.
   OPINION.

Maequette :

We are satisfied from the evidence in this proceeding that the debt due to the petitioner from his brother’s estate was not ascertained to be worthless until the year 1920. It is true that the brother died prior to 1920 and that his estate was badly involved, yet it appears that both the attorney for the petitioner and the attorney for the estate considered that there was a possibility that at least a part of the petitioner’s claim would be paid. That the petitioner did not consider his claim worthless prior to the year 1920 is evidenced by the fact that he employed an attorney to look after it, and that in the years 1918 and 1920 he went to Lincoln, Nebr., to give it his personal attention, the estate still being in process of settlement. He did not determine that the debt was worthless until the year 1920, when it was definitely ascertained that the assets of the estate would not be sufficient to pay the preferred creditors. We think that the amount of the debt in question was a proper deduction in computing the petitioner’s net income for the year 1920 and we so hold.

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


text:
    J. H. Bloch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10076.
    Promulgated March 22, 1927.
    Loss on the sale of certain stock allowed.

      F. R. Angevine, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax for the year 1920 in the amount of $8,943.04. The question involved is whether or not the petitioner, in computing his net income for the year 1920, is entitled to a deduction on account of a loss claimed by him to have been sustained on the sale of certain shares of stock.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Tulsa, Okla.
    In the year 1912, the petitioner, who was at that time unmarried, acquired an oil lease for $33,000. In the year 1917 he and two other men formed the Bloch Oil Co. and the said oil lease was transferred to the company in exchange for 3,300 shares of its capital stock of the par value of $10 each. The petitioner was at that time in financial difficulties and for that reason he caused a certificate for 3,295 shares of the said stock to be issued in the name of his wife, E. G. Bloch, whom he had married in the year 1915. The certificate for the remaining 5 shares was issued to the petitioner in his own name. The certificate for 3,295 shares, issued in the name of E. G. Bloch, was not actually delivered to her but was held by the petitioner. In the year 1919, E. G. Bloch, at the request of the petitioner, endorsed said certificate for 3,295 shares in blank and returned it to the petitioner, who retained it until the year 1920, when he sold said 3,295 shares, together with the 5 shares standing in his own name, for $13,200. In the petitioner’s income-tax return for the year 1920, a deduction from gross income was claimed in the amount of $19,800 as a loss on the sale of said stock. The respondent disallowed the deduction.
   OPINION.

MaRquette :

It does not appear from the record that the respondent disputes either that a loss was sustained in the year 1920 from the sale of the stock of the Bloch Oil Co. involved herein, or that the loss was in the amount claimed. On the contrary, the record indicates that the respondent refuses to allow the petitioner to deduct the amount of the loss on the ground that the stock belonged, not to him, but to his wife. However, regardless of the grounds upon which the respondent has disallowed the deduction claimed by the petitioner, we are satisfied that a loss in the amount claimed was sustained in the year 1920 on the sale of the stock in question, which loss the petitioner is entitled to deduct in computing his net income for that year. The evidence shows that the lease which the petitioner turned over to the oil company was acquired by him prior to his marriage for $33,000. It also shows that the certificate of stock issued in the name of the petitioner’s wife was never delivered to her and that the petitioner never intended her to have possession or control of the stock but intended it to be his own property. From the time it was issued until 1919, it remained in the petitioner’s possession and in that year the petitioner’s wife, at his request, endorsed it in blank and returned it to him. So far as the record discloses, she knew nothing of the stock standing in her name until the petitioner brought her the certificate for her endorsement. We are satisfied that the wife never had any real interest in this stock; that it was the petitioner’s property at all times, and that the loss sustained on the sale of the stock in 1920 was the petitioner’s loss.

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


author: Phillips :

text:
    John W. Mercer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8233.
    Promulgated March 22, 1927.

      John W. Mercer pro se.

      J. L. Deveney, Esq., for the respondent.
   Phillips :

The petitioner seeks a redetermination of a deficiency of $103.60 in income tax for 1923, determined by the Commissioner and arising from the disallowance of a loss of $1,062.50 alleged to have been sustained from an investment in stock.

FINDINGS OF FACT.

The petitioner in 1912 purchased 100 shares of the capital stock of the Naumkeag Copper Co. for $1,062.50. On March 1, 1913, the market value of the stock was $1,062.50. The company continued active exploration work for some years after 1912. In 1923 the company definitely abandoned operations and was liquidating its assets, consisting mainly of mining machinery, the value of which was less than the claims against the company having priority over the stockholders. The stock became worthless in 1923. In his 1923 income-tax return petitioner deducted the cost of the stock as a loss sustained. The Commissioner disallowed the deduction.

Decision will Toe entered for the pelitionei on 15 days’ notice, under Rule 50.


text:
    Corsicana Gas & Electric Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4499.
    Promulgated March 22, 1927.
    Under the evidence herein, the petitioner is entitled to deduct a reasonable allowance for obsolescence of its power plant.

      G. Drummond Hunt, Esq., J. G. Harris, G. P. A., and Loyd B. Smith, Esq., for the petitioner.

      Benjamin H. Scmmders, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in im come and profits taxes for the year 1919 in the amount of $3,570.31. The question involved is the amount of the deduction to which the petitioner is entitled as an allowance for the exhaustion, wear and tear, including obsolescence, of certain assets owned by it.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of Texas, with its principal office and place qf business at Corsicana, Tex. During the years mentioned herein its business was to generate electricity and convey it over its distribution lines to customers, the electricity so generated and conveyed being used for street lighting and for commercial and domestic purposes.
    The petitioner’s power plant was constructed and installed in the year 1904 and consisted of two units of a capacity of 150 kilowatts each. A unit consisted of an engine and a generator, and the two units were operated by a battery of three boilers. In the year 1910 one of the units was discarded and was replaced by a larger unit of 250 kilowatts capacity and another boiler was added. After this change the plant contained two units consisting of two engines, two generators and four boilers, with a total capacity of 400 kilowatts. The engines in the plant were of the reciprocating type.
    During the years 1904 to 1913, inclusive, the petitioner produced in its own plant the electric current which it conveyed over its distribution lines and sold to its customers. However, in the year 1913, the Texas Power & Light Co., hereinafter called the Power Company, built a high-voltage power line into Corsicana, and the petitioner, finding that it could purchase electric current from the Power Company at a lower cost than it could produce current in its own plant, entered into a contract with the Power Company whereby the Power Company agreed to furnish the petitioner the current it required in order to supply its customers. In the year 1913 the petitioner held a franchise from the City of Corsicana which required it to furnish good and dependable service.
    The contract between the petitioner and the Power Company was for a term of forty years from and after 1913, but at the end of ten years from the date of the contract the petitioner had the right to modify or cancel it. One of the inducements offered by the Power Company to the petitioner to enter into the contract was that the Power Company would build a second high-voltage power line into Corsicana. After the petitioner began buying current from the Power Company, it was necessary for the petitioner to retain and maintain its own plant to generate current for the use of its customers whenever there was an interruption of current furnished by the Power Company, and the petitioner’s plant was, during the years 1914 to 1923, inclusive, used only for that purpose.
    The petitioner expected to sell or otherwise dispose of its power plant as soon as the Power Company should build a second high-voltage’line into Corsicana, because its plant- would not then be required as a reserve. However, on account of the financial stringency due to the outbreak of the World War in 1914, the Power Company did not then build a second high-voltage power line, although it continued to promise, and tlffe petitioner believed, that it would be built. In the year 1918, the Power Company began paying the petitioner a large part of the expensé of maintaining and operating its plant, because of the Power Company’s failure to build a second high-voltage line. .
    During the years 1914 to 1917, inclusive, the petitioner, when interruptions occurred in the service furnished by the Power Company, was able to give fairly satisfactory service to its customers through the operation of its own power plant, although in the year 1917 the maximum demand for several months exceeded the capacity of the petitioner’s plant. In the year 1918 the demand for current exceeded the capacity of the petitioner’s plant in every month except one, and in that month the demand equaled the capacity. In November, 1918, the demand for current was more than double the capacity of the petitioner’s plant, and in December, 1918, it reached 1,055 kilowatts. In every month during the year 1919 the maximum demand for current was more than twice the capacity of the petitioner’s plant, and the demand continued to increase after that year. At no time after April, 1918, was the capacity of the petitioner’s plant adequate to supply the demand of its customers, and in the event of interruption in the service of the Power Company, the petitioner was compelled to divide the City of Corsicana into circuits and to furnish current to one part of the city at a time, thereby leaving the other parts of the city without current at that time.
    At or prior to the beginning of the year 1919, there were in Texas several large power plants for the generating and transmission of electric current. One was the plant of the Power Company at Dallas, one was at Houston, and another was at San Antonio. As a result of the construction and operation of these large central power plants, smaller companies, such as the petitioner, purchased current at less cost than they could produce it in their own plants. On account of this fact the market for small plants, like the one owned and operated by the petitioner, was limited and their sale value was diminished. Furthermore, internal combustion engines were at that time being used in generating electricity instead of the reciprocating engines used by the petitioner.
    At the beginning of the year 1919, the petitioner’s officers knew that if a second high-voltage power line were not built into Corsicana by the Power Company in or before the year 1923, the petitioner’s plant would have to be rebuilt in order to meet the demands of its customers. It was also known by the petitioner’s officers that it would not be practicable to rebuild the plant before 1923 because it was under contract to purchase current from the Power Company until that time. In the year 1919 it was believed by the petitioner’s officers that in the event the petitioner’s plant were rebuilt it would not be economically advantageous to add additional units to its existing plant, because such additional units would be of a more up-to-date type of machinery and could not be profitably operated in connection with the old machinery. In the year 1919. it was known to the petitioner’s officers that if a second high-voltage power line were built into Corsicana by the Power Company in or before the year 1923, the petitioner’s plant would have no further useful value and would have to be junked or sold.

      The Power Company built the second high-voltage power line into Corsicana in the year 1923, and until that time the petitioner continued to use its plant as a reserve. When the second high-voltage line was built by the Power Company the petitioner had no further use for its plant and, therefore, after attempting without success to sell its plant, it had the plant wrecked and salvaged it for its junk value.
    In his answer to the petitioner’s amended petition the respondent admitted that he made an error in computing the deduction to which the petitioner is entitled for the year 1919, on account of the exhaustion, wear and tear of its distribution system, and that the deduction as heretofore computed should be increased by the amount of $390.08.
   OPINION.

MaRquette:

The parties hereto appear to be in accord as to the cost of the petitioner’s power plant, the rates that have been used in computing the exhaustion, wear and tear thereof, and the depreciated cost as of December 31, 1918, using those rates. The petitioner contends, however, that the allowance made by the respondent for exhaustion, wear and tear of the plant during the year 1919 is inadequate in that it does not take into consideration the fact that the plant was obsolescent in the year 1919 and became obsolete in the year 1923. The respondent denies that the plant was obsolescent in the year 1919.

Section 234 (a) (7) of the Revenue Act of 1918 provides that, in computing the net income of a corporation subject to tax, there shall be allowed as a deduction “ a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence,” and it is under the authority of that provision that the allowance involved herein is claimed.

Obsolescence is a state or process of becoming obsolete. It is a process more or less gradual, and a deduction is spread over the years from the time the process begins until the property becomes obsolete. Appeal of Jackson County State Bank, 2 B. T. A. 1100. However, whether or not property belonging to a taxpayer is obsolete is a question of fact to be determined from the evidence in each case. In the Appeal of Columbia Malting Co., 1 B. T. A. 999, we had occasion to pass upon the question of obsolescence of property used in a trade or business and the discussion therein is applicable here. In that appeal we said:

In order tliat the taxpayer may bo entitled to the obsolescence deduction in the years involved, there must have been substantial reasons for believing that the assets would become obsolete prior to the end of their ordinary useful life, and second, it must have been known, or believed to have been known, to a reasonable degree of certainty, under all the facts and circumstances, when that event would likely occur. The purpose of the statute is to permit the capital invested in assets to be returned to a taxpayer out of earnings over the life of the property in the business. A reasonable deduction is allowed on account of the exhaustion, wear, and tear of property. This includes obsolescence, if the property is becoming obsolete, so that by the time it reaches that state the entire cost thereof will be restored. While it is known that physical property is ordinarily subject to exhaustion, wear, and tear from use in the business, it may not be known that it is also becoming obsolete. Whether it is, is a question of fact in each case. When it is found that property is becoming obsolete, a deduction on that account can only be determined by ascertaining, as accurately as possible, when the property may be expected, under the circumstances, to be no longer commercially useful notwithstanding its physical condition. In the ease of a deduction on account of exhaustion, wear and tear of property used in the business, if it can not be determined that the property is subject to wear, tear, and exhaustion, or what the approximate life of the property, under all the facts and circumstances, is, there is no basis for determining the deduction. With respect to obsolescence, if it can not be determined that the assets will become obsolete prior to the estimated date of the physical exhaustion thereof, or if a reasonably definite date can not be ascertained, there are no means of determining what is a reasonable allowance on that account.

We are satisfied from the evidence presented herein that the petitioner’s power plant became obsolete in the year 1923, and that the process or state of obsolescence began as early as January 1, 1919, and was known to the petitioner’s officers at that time. During the years 1917 and 1918, the demand for electric current on the part of 111© petitioner’s customers became so great that it was manifest that by the year 1923 the petitioner would either have to acquire more adequate service through the medium of a second high-voltage power line to bo built by the Power Company, or rebuild its own plant. The petitioner’s contract with the Power Company was subject to adjustment or cancellation in the year 1923. If the.Power Company should build a second high-voltage line by that time the petitioner would be assured of current adequate for its needs at a less cost than it could produce current in its own plant, and in that event its plant would be obsolete and worthless. If the Power Company should fail to construct a second high-voltage line by the year 1923, the petitioner would be compelled to generate current to supply its customers and would be under the necessity of constructing an entirely new plant for that purpose, as its existing plant was wholly inadequate and it was not economically feasible to add additional units thereto. In any event, it was known to the petitioner’s officers as early as the year 1919, at least with a reasonable degree of certainty, that the petitioner’s plant would become obsolete in the year 1923, and would have to be sold or dismantled. We are, therefore, of the opinion that the petitioner is entitled in computing its net income for the year 1919, to deduct a reasonable allowance for the obsolescence of its plant.

We will not attempt here to determine the rate that should be used in computing the allowance to which the petitioner is entitled on account of the obsolescence of its power plant. It appears that the respondent has determined that the useful life of the unit installed in 1904 will expire in 1927; that the useful life of the unit installed in 1910 will expire in 1939, and that the allowance for exhaustion, wear and tear has been computed on each unit separately. However, as we have stated above, there appears to be no dispute as to the depreciated cost or value of those units at December 31, 1918, and we therefore hold that the allowance for exhaustion, wear and tear, including obsolescence, of these units for the year 1919 should be an amount equal to one-fifth of their depreciated cost or value as of December 31, 1918. An allowance of the same amount and for the same purpose in each of the years 1920, 1921, and 1922, would leave the remaining one-fifth of such depreciated cost to be recovered for the year 1923.

The deduction heretofore allowed by the respondent for the exhaustion, wear and tear of the petitioner’s distribution system for the year 1919 should be increased by the amount of $390.08.

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


author: MuRdook:

text:
    F. G. Bishoff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3993.
    Promulgated March 22, 1927.
    1. The imposition of a fraud or negligence penalty is not justified.
    2. Where the evidence fails to show the petitioner's true net income, or the fact that he had a loss, or that the determination of the Commissioner can not be correct, it is insufficient to show that the method used by the Commissioner in determining the deficiency under section 212 (b) of the Revenue Act of 1918 is faulty and less likely to reach a correct result than could be reached from the records of the petitioner.

      J. Robert Sherrod, Esq., and Ward Loveless, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    The taxes in controversy are income taxes for the calendar years 1918 and 1919. The Commissioner determined a deficiency of $2,294.33 for the year 1918 and a deficiency of $2,064.54 for the yeai 1919, or a total deficiency of $4,358.87, all of which is in controversy. The returns filed by the petitioner for the two years in question showed losses from the business conducted by him. The Commissioner, contending that the petitioner’s books did not clearly reflect income, computed the income from the petitioner’s business for each year, taking as such income a percentage of gross sales by the use of an average-percentage table. At a hearing the Commissioner was allowed to amend his answer to allege that the petitioner was guilty either of fraud or of negligence in filing his returns for these two years and to request the imposition of the proper penalty. He was also granted permission to amend his answer to allege that for 1918 the petitioner failed to report $15,096.23, received as income from sales and trucking, and that for 1919 “ the taxpayer considered $5,092.81 as a deduction for automobile repairs, and thereby reduced auto expenses and repairs on his return by that amount to $5,197.12.”
    BINDINGS OB BACT.
    The petitioner is an individual residing at Braddock, Pa. During the years in question he was there engaged in business as a retail grocer and also did some motor truck hauling and sold some gasoline.
    He had been in the grocery business since 1886, in the trucking business since 1917, and in the gasoline business since the first part of 1918, when he sold some gas at his garage. It was not until March, 1918, that he had a part of a “ drive-in ” station at his store in operation.
    During the taxable years his grocery business was largely “ credit and delivery ” rather than “ cash and carry.” Several “ cash and carry ” chain stores were located near his place of business and were in competition with his store.
    As Braddock had become more and more an industrial town, many of the better class of his customers had moved to the outlying districts. He maintained a corps of solicitors who visited those nearby communities twice weekly, taking orders for groceries.
    In 1918 there was a so-called “ Federal Price Dictator ” in the vicinity who set “ fair prices ” on standard commodities and published the list daily. This affected the petitioner’s business. Wages of employees were also higher than usual in 3918 and 1919, and it was not possible to get as good employees as at other times.
    The petitioner’s bookkeeper had been in his employ for many years. She had never taken any course in bookkeeping. Two other employees, cashiers, compiled daily sheets showing cash sales and credit sales. Weekly sheets of the same were made from these and at the end of the month the bookkeeper made appropriate entries on the books.
    Customers’ accounts were kept in a register which provided a separate little book for each account, from which, as a sale was made, a duplicate slip was furnished to the purchaser and the original was filed by the store. The total was carried forward on each slip and showed the amount receivable. These slips were audited monthly and then filed in the cellar of the store.
    The accounts of the store consisted of a daily tabulation of sales as above described, the stubs of checks issued, and an estimate of the cash expenditures. On March 5, 1918, a Baker-Vawter Combined Cash and Daily Statement book was opened, but was later discarded and was not used in making out the income-tax return for either year here involved. As kept by the petitioner’s bookkeeper it did not clearly reflect income. The daily sales sheets were used to make out the income-tax returns.
    Purchases by petitioner of bread, cakes, pies, local produce and poultry and express and freight charges were paid in cash from the cash drawer. All invoices, bills and receipts for 1918 are now missing, as are the original register slips of sales. Check stubs for the period January 1 to 18,1918, are also missing.
    During 1919 a ledger was kept containing a record of the expenditures, total monthly salaries paid, and automobile expenses. The bookkeeper did not know how much salary was paid to each employee.
    The petitioner had only one bank account. From it he loaned money to other concerns in which he was interested, paid some of his personal expenses, and in addition paid some of the expenses of his business. The bookkeeper in 1925, relying upon her memory for the information, made pencil notations on some of the check stubs. The following are examples of her notations: “Mdse,” “Personal,” “ Interest,” “ Loan,” “ Ilepairs,” “Auto parts,” “Auto expense.”
    The following are typical examples of the chocks, stubs and notations :

    The books carried no cost of buildings, equipment, or automobiles used in the business. The store building was of brick, 80 by 80 feet, three stories high, with glazed brick front, white tile trim, composition roof, and had four storerooms downstairs and apartments upstairs. It was completed in 1909 at a cost of $49,856.20. This did not include the cost of furnishings and equipment. The petitioner had purchased and was using the following:
    Item. Cost.
    1 Cash register_$960. 00
    7 Scales- 1000.00
    1 Box- 1500. 00
    Other butcher’s equipment- 2500.00
    1 Electric slieer- 250. 00
    1 Coffee mill- 150. 00
    1 McCaskey register_ 500.00

      During the taxable years the petitioner used automobiles for delivering, hauling, and soliciting in connection with his business. He maintained his own garage where some of his own repair work was done. He had several garage employees. The streets were bad in the vicinity of Braddock. Checks and stubs are the only record of the amount paid for repairs to automobiles and trucks.
    In 1918 he was using a number of trucks and automobiles. Some' of these were traded in 1918 and 1919 as part payment for new ones.
    He purchased a 5 ¡4-ton Mack truck in 1917 for $4,800. In 1919 he traded three Ford cars for three new ones and paid about $600 in addition, gave an old car and $3,500 for a new Howe, gave nine or ten old cars and $6,400 for eight new Reos, and also bought two Auto-cars at $2,200 each, one 214-ton Mack truck at $2,600, and one 4-ton Mack truck at $4,000.
    During 1918, he employed about 37 people regularly and about 7 extra on Saturdays and holidays. He paid all employees in cash and kept no record of the amount paid. On the 1918 return $29,600 was deducted as wages. This amount was arrived at by multiplying the December payments by twelve.
    In 1919 he employed the following number of people:
    During— Number. January_ 34 February_ 35 Mareli_ 35 April_ 31 May_ 34 June_ 33 During— Number. July_ 33 August_ 34 September_ 33 October_ 33 November- 30 December_ 31
    At the end of each month in 1919, the petitioner told his bookkeeper the total amount which he had paid in wages during that month. He also paid bonuses during the year and at the end of the year estimated the amount of them for the purpose of his income-tax return.
    The petitioner looked over his stock of groceries and estimated its value in a lump sum. This constituted his inventory. He tried to keep the same amount of stock on hand at all times. The increase of $5,000 in the estimated inventories during 1918 was made because of an estimated increase in coat, rather than in amount of goods.
    The total amount of wages paid for 1919 was computed to be $40,095, but was entered on the return as $38,595 because petitioner received $1,500 from the B. B. Stroud Co. of which he ivas president. The petitioner’s bookkeeper kept the books of the B. B. Stroud Co. at petitioner’s office and received $15 a week extra from the petitioner for this work.
    The petitioner refunded to a hospital 10 per cent of the amount of his monthly sales to that hospital. These repayments amounted to $2,285.45 in 1918 and to $1,260.98 in 1919.

      The petitioner made from 2 to 3 cents gross profit per gallon on sales of gasoline. In 1918 and 1919 gasoline sold for from 32 to 35 cents per gallon.
    During 1918 the total gross sales from grocery, gasoline, and trucking businesses amounted to at least $326,665.99, instead of $311,-569.06 as reported.
    For the purpose of making the original income-tax returns for the years in question, the petitioner’s bookkeeper prepared figures from the records and submitted them to a representative of a local trust company who “worked up the figures” and one-or the other of these two people wrote the figures on the return. The petitioner then signed it. The bookkeeper had no financial interest in the business. The representative of the trust company gave his services. The original return for the calendar year 1918 was signed and sworn to by the petitioner on March 15, 1919. The original return for the calendar year 1919 was signed and sworn to by the petitioner on March 10, 1920. Amended returns for the years 1918 and 1919 were signed and sworn to by the petitioner on January 22, 1924. In each instance the returns were promptly filed with the collector of internal revenue.
    The original return for 1918 showed the following:
    A. Income from Business as Retail Grocer.
    Total sales and income from business-$311, 569. 26
    Cost of Goods Sold:
    Merchandise_$263, 085. 36
    Inventory at beginning of year_ 20, 000. 00
    Total-$273,085.36
    Less inventory at end of year_ 25, 000. 00
    Net Cost of Goods Sold- 258,088. 36
    Other business deductions:
    Salaries, wages, etc-$29, 600. 00
    Interest- 6,132.36
    Taxes on business and business property_ 1, 367.99
    Repairs, wear and tear, obsolescence, depletion, etc_ 21, 354.79
    Other expenses_ 550. 00
    - $317, 090. 50
    Net Loss from business_[Red] $5, 521. 44
    B. Income from Director’s Bees_ $123. 00
    D. Profit from Sale of Land_ $4, 350. 00
    E. Income from Rents_ $3, 720. 00
    H. Total Net Income from above sources- $2, 671.56
    I. Interest and Contributions not included above_ 2, 324.90
    J. Total Net Income for Normal Tax_ $346. 66
    K. Dividends_ 5, 768. 50
    L. Total Net Income subject to surtax- $6,115.16
    Calculation of Total tax, sur-tax only- $12.30

      Explanation of deductions claimed in Schedule A. — Brick business and apartment, acquired 1909 — Cost of Property, or Market Value March 1,1913, $42,000— Rate 2% — Amount charged off this year, $840.
    Brick Garage and apartment — Cost of property, or Market Value March 1, 1913, $11,000 — Rate 2% — Amount charged oft this year, $220.
    Repairs to Autos, $12,516.93. Depreciation — Autos, $6,625.
    The original return for 1919 showed the following:
    A. Income from Business as Retail Grocer — Total sales and income
    from business_$309, 860. 02
    Cost of Goods Sold_$250, 710. 22
    Other costs- 14, 679. 75
    Inventory at beginning of year_ 25, 000. 00
    $290, 389. 97
    Inventory at end of year- 25, 000. 00
    - 265,389.97
    Gross Income_ $44,470. 05
    Other Business Deductions:
    Salarios (and Wages)-$38,595.00
    Interest_ 3, 718. 07
    Taxes on business and business property_ 2,117. 59
    Repairs, wear and tear, obsolescence_ 254.21
    Bad Debts_ 3,025.05
    - 48, 309.92
    Net Loss from Business-[Red!— $3, 839. 87
    B. Income from Salaries and Director’s Fees- $5, 729. 00
    E. Income from Rents- $2, 060. 00
    (Apartment over store and frame garage-$3,120. 00
    Less: Repairs, wear and tear, obsolescence, depletion and property losses- 1, 060. 00)
    II. Total net income from above sources_ $3, 949.13
    I. Interest and contributions- 1, 656. 00
    ,T. Total Net Income subject to Normal Tax- $2, 293.13
    K. Dividends- 9, 645. 00
    L. Total Not Income subject to sur-tax- $11, 939.13
    Computation of total tax- $199.29
    Explanation of Schedule A. — 16. Depreciation (1919)

      Value

    Store fixtures & equipment-$13, 900. 00 10%— $1, 390. 00
    Autos & Trucks_$19,354.53 33%%— 6,451.51
    $7, 841. 51
    Schedule E. Depreciation.
    Brick Store & apartments-$45, 000. 00 2%— $900. 00
    Garage_ 1,800.00 2%__ 36.00
    $936. 00
    Repairs to buildings-,- 254. 21
    $1,190. 21

      (A.7) Other Costs
    Freight & Express- $1, 064. 53
    Light & Heat_ 2, 213. 82
    Sundry Mise. Expenses_ 3, 710.42
    Water_ 588. 74
    Insurance- 151. 31
    Truck Repairs Gasoline & Oil_ 5,179.12
    Telephone_ 563. 96
    Licenses Mercantile & Trucks_ 850. 80
    Advertising_ 357. 05
    $14, 679.75
    The method of accounting regularly employed in keeping the books of this petitioner does not clearly reflect the income. Two representatives of the Commissioner examined the books and accounts of the petitioner for the taxable years. One spent eight days, the other spent three days, in the examination.' Each reported that he was unable to audit the accounts and determine the true income for the taxable years.
    The Commissioner computed the profits from the petitioner’s business for the taxable years by the use of an average percentage table, known as Serial No. 264. Serial No. 264 was compiled by the Statistical Section of the Income Tax Unit of the Bureau of Internal Revenue, from returns filed by corporations reporting themselves as in the grocery business for the year 1919.
    The portion of this table used is as follows:

    In compiling Serial No. 264, there was no segregation of cash and carry stores from those which had credit and delivery systems; the return of no corporation showing gross sales in excess of $150,000, or showing losses, was considered; some of the returns had been audited, some had not. The instructions for the use of Serial No. 264 in the application of the formula to determine the proper net income based on gross sales for the year are as follows:
    Amount of gross sales X Average percentage of profit from sales — Probable gross income.
    Probable gross income X Average percentage of net income to gross income=Probable net income.
    The Commissioner computed the petitioner’s net income from the retail grocery, gasoline and trucking business to be $10,094.84 for the year 1018 and $10,089.46 for the year 1919, and using these figures determined the deficiencies as above stated.
   OPINION.

MuRdook:

This petitioner either failed to keep records which clearly reflect the income from his business, or else he failed to so place those records before us that from them we can compute that income. We do not know all of his credit items, nor do we know all of his debit items, and therefore we can not determine whether he had a gain or a loss, nor the amount of whichever he had. Certain links in the chain to measure his income are missing. They were capable of proof and having failed to prove them the petitioner can expect no relief from the deficiency as determined by the Commissioner.

We are asked to compute the expenditures made by this petitioner in his business during the taxable years by an examination of his checks and by an analysis of the testimony in regard to certain payments which he made in cash. From the testimony we are not satisfied of the amounts paid in cash for either year. Bills, invoices and receipts for 1918 are missing. The petitioner kept no accurate record of the amount he paid out in salaries. He contends that he paid wages to extra help and never deducted the amount in his income-tax return. He estimated the amount involved in this discrepancy.

All of his checks were put in evidence, but they were not self-explanatory even when read with the stubs. To remedy this the petitioner’s bookkeeper, in 1925, made pencil notations on the stubs, as set out in the findings of fact. The stubs for part of 1918 are missing.

In placing the pencil notations on the stubs the bookkeeper relied upon her memory. She was not examined as to any of the checks, stubs, or items, but merely said in a general way that her notations were correct. This applies to both years. From evidence such as this we are unable to properly allocate and separate the different expenditures, some of which are deductible, some of which are not, some of which apparent^ belong to one year, some to another. An accountant’s compilation from this same source is of no assistance to us.

Taking into consideration all of the evidence we are unable to say whether the petitioner made a profit or suffered a loss in either year. Nor can we say that the income from his business was not as great as that attributed to this source by the Commissioner. Counsel for the petitioner admitted that we can not now accurately compute and determine what was the correct income. Here the evidence proves nothing from which we would be j ustified in taking any other figure to represent the true deficiency than that determined by the Commissioner.

We are not convinced that the petitioner was guilty of either fraud or negligence in filing his income-tax returns for the two years here in question, as those terms are used in the Revenue Act.

The deficiencies are: For 1918, $%fi91{..33; for 1919, $%,0Glt£J±. Order will be entered accordingly.


author: Teusselu:

text:
    Mary B. Brauer and Caspar Brauer, Executors, Estate of Paul Brauer, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 730.
    Promulgated March 22, 1927.
    1. Deductions. — An annual payment made by the taxpayer to his sister, pursuant to the terms of an agreement, held, not to be an allowable deduction from gross income.
    2. Compensation of Officebs. — An officer of a corporation receiving compensation in an amount in excess of the reasonable compensation allowed as a deduction to the corporation may nevertheless be liable to income tax upon the amount so received.
    3. Exhaustion of Lease. — Deduction of an amount equivalent to the March 1, 1913, value of a leasehold prorated over the term allowed.

      Herman A. Fischer, Jr., Esq., for the petitioners.

      John W. Fisher, Esq., for the respondent.
    This action seeks a redetermination of deficiencies in income taxes for the years 1919 and 1920, aggregating $15,122.92, proposed to be assessed against Paul Brauer, since deceased, and petitioners allege errors as follows:
    (1) That the Commissioner included in income in each of the years the entire net profit from rentals from a certain leasehold, without deducting in each year a certain amount. paid to Marie Brauer, his sister, due to an alleged life interest in the leasehold.
    (2) That the Commissioner included in income as compensation in each of the years the amount of $10,000, received from the Schick-Johnson Co., a corporation, of which the decedent was a stockholder and officer, after disallowing deductions by that company of the said amounts as a bonus or additional salary for the decedent’s services.
    The petitioners have been granted leave to file an amended petition wherein, for the first time, they set up a claim for a deduction on account of the exhaustion of the leasehold.

      FINDINGS OF FACT.
    The petitioners are the executors of the estate of the taxpayer, Paul Brauer, who died January 15,1924. The taxpayer will be hereinafter referred to as the decedent.
    On May 1,1904, the decedent entered into a 99-year lease from the Equitable Trust Co., as trustee under the last will of John D. Jennings, for the premises known as Nos. 229 and 231 South State Street, Chicago, Ill. The stipulated annual rental was $20,000 for the first fifteen years, ending April 30, 1919; $22,500 for the next ten years, ending April 30, 1929; and $25,000 for the remaining term of the lease, ending April 30, 2003. For several years the decedent and his sister, Marie Brauer, operated a restaurant on the said premises, Which business was discontinued on May 1,1912.
    On August 12, 1911, the decedent entered into a lease with The Hub, a corporation, whereby The Hub, the sublessee of the above-described premises, was to enter into possession on May 1,1912. This sublease provided that the annual rental to be paid to Paul Brauer, lessor, be $30,000 for the first five years ending April 30, 1917; $32,500 for the next twelve years, ending April 30, 1929; and $35,000 for the remaining term of the sublease, ending April 30, 2003.
    Some time during the month of May, 1912, the decedent made an oral agreement with his sister Marie to pay her $2,000 annually, from that time until her death. Under date of October 20, 1917, the decedent wrote the following letter to his sister Marie:
    Dear Sister:
    I am writing this letter tliat I may Rave a record among my papers and that you may liave evidence of our agreement made in May, 1912, at tlie time we disposed of the State Street business.
    At that time I agreed, and I now renew the agreement, to pay you an annuity of $2,000 per year in equal monthly installments beginning with the month of May, 1912, and continuing until the time of your death. My intention and custom have been to pay this out of the proceeds of the income from my leasehold interest in the State Street business. This payment is made to you as part of our settlement for services rendered in the State Street business and for your proportionate interest under our working agreement.
    In my will which I have recently revised, I am providing for the payment to you of an annuity of $2,000 per year as long as yon live. In making this provision I am intending to take care of the agreement above mentioned, and accordingly this agreement is not to be provable as a claim against my estate unless the will fails to be effective or for any other reason you prefer to rely on the claim and to surrender the provision in the will.
    If the foregoing is acceptable to you, will you kindly indicate it by signing a copy of this letter?
    Very truly yours,
    (Signed) Paul Brauer.
    Accepted:
    (Signed) Marie Brauer.

      The payments were made in accordance with the agreement and the decedent paid to his sister Marie $2,000 in each of the years here in question. These payments were made out of the proceeds of the income from his leasehold interest in the above-described premises.
    The decedent was an officer and stockholder of the Schick-Johnson Co. The decedent received from the said company as a bonus for services rendered the sum of $20,200.48 for the year 1919, and the sum of $30,000 for the year 1920. In his audit of the said company’s income-tax returns for 1919 and 1920, the Commissioner disallowed a deduction in each of the years of $10,000 of said amounts because they were deemed excessive as compensation.
    During the year 1919 the decedent turned in to the Schick-Johnson Co., 542 shares of its stock, which had cost him $11.21 per share.
    The decedent had never claimed a deduction in his income-tax returns for the exhaustion of his leasehold interest. The March 1, 1913, value of the leasehold was $166,967, and from that date it had a term of 90 years and 2 months to run. The annual deduction for the exhaustion of the decedent’s leasehold should be $1,851.08.
   OPINION.

Teusselu:

In accordance with the terms of the aforesaid letter, the decedent paid his sister $2,000 annually and has claimed a deduction of that amount from his income on the ground that the $2,000 represents the sister’s life interest in the leasehold. The record fails to disclose that Marie Brauer had any interest whatever in the original lease executed in 1904 in which the decedent was named the lessee. There is nothing in the record to show that the decedent transferred to Marie Brauer any interest in the original lease or in the sublease executed in 1912. The $2,000 annual payments were made in part settlement for her services rendered in the restaurant business and under some working agreement between the parties, but as to that, no evidence has been submitted. It would appear from the record that these payments were made for her services rendered prior to May 1, 1912, and for the purchase of whatever interest she held in the restaurant business which had been conducted by the decedent and his sister under a working agreement and which business was discontinued to enable the decedent to sublease the premises. On this issue the determination of the Commissioner in disallowing a deduction of the $2,000 in each of the years 1919 and 1920 must be approved.

The decedent has claimed a deduction of $10,000 in each of the years 1919 and 1920, on the ground that the Commissioner disallowed the deduction of those amounts by the Schick- Johnson Co. as excessive compensation and taxed the company thereon. The decedent received those two amounts of $10,000 each as a part of a bonus or additional salary for each of the years and they were income in the years in which received. It is immaterial as to what action the Commissioner took as regards the Schick-Johnson Co., for that determination by the Commissioner is not before the Board in this proceeding and that corporation and this petitioner are separate entities. In the case of Hayner v. United States, 62 Ct. Cls. 189, the court said in its opinion:

It is admitted that the plaintiff received as salary .$13,195.79 and returned it as such for taxation. It does not appear that he has returned or has been called upon to return, any of it to the company. Although the Treasury Department held that a part of the sum paid him should be accounted for by the company as a dividend, this does not alter the fact that plaintiff received it as salary. Having received it as salary, he was called upon to account for it as such in his return.

The record does not disclose that there was any connection between the bonuses received and the decedent’s return of certain stock to the company during 1919. As to this issue, the determination of the Commissioner must be approved.

The decedent was entitled to a deduction for exhaustion of his leasehold interest and we have found as a fact that this deduction should be in the amount of $1,851.08 in each of the years 1919 and 1920.

Order of redetermination wUl be entered in accordance with the above decision upon W days’ notice, rmder Bule 60.


author: Teussell:

text:
    Walter G. Pietsch, Executor, Estate of Amy Lake Pietsch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5424.
    Promulgated March 22, 1927.
    Geoss Estate. — Inclusion of properties acquired from a prior estate and taxed within five years.

      Roger Z. Foote, Esq., for the petitioner.
    Z. O. Mitchell, Esq., for the respondent.
    The petitioner in this proceeding complains of the Commissioner’s letter dated May 25, 1925, asserting a deficiency in the amount of $2,110.54, in estate taxes levied under the Revenue Act of 1921, against the estate of Amy Lake Pietsch, deceased.
    The petitioner alleges that the Commissioner erred in including in the gross estate the value of certain securities acquired by the decedent through the investment of the proceeds of sales of certain securities acquired by the decedent as a share in the estate of her father, who died within five years prior to the death of the decedent and on whose estate the estate taxes were paid.
    The Commissioner in his original and amended answer filed at the hearing of this proceeding avers that in his determination he allowed as a deduction, under section 403 (a) (2) of the Revenue Act of 1921, the sum of $47,447, representing investments in securities made by Amy Lake Pietsch, deceased, out of $48,000 cash received by her from the estate of her deceased father, R. C. Lake, but that in so doing he erred for the reason that, in fact, the $47,447 did not represent investments in securties made out of cash received from the prior estate; and he further avers that the amount of estate tax in controversy is in excess of the sum of $2,170.54, shown in the deficiency letter dated May 25, 1925, and amounts to $4,068.42.
    FINDINGS OE FACT.
    1. The petitioner is the executor of the last will of Amy Lake Pietsch, deceased, is a resident of Cook County, Ill., and was duly appointed such executor by the Probate Court of Cook County, November 1, 1923.
    2. Amy Lake Pietsch, the decedent, died September 17, 1923. She was a daughter and one of the legatees under the last will of R. C. Lake, who died July 10, 1919, and on whose estate an estate tax was paid.
    3. In the distribution of the assets of the estate of R. C. Lake, the decedent received as her share, among other properties, the following securities on the following dates:
    57 Shares, Continental & Commercial Ñational Bank, in November, 1919.
    250 Shares, Goodrich Company preferred, in November, 1919.
    800 Shares, Goodrich Company common, in February, 1920.
    4. The decedent sold, through John Burnham & Co., brokers, of the securities received by her as set forth in paragraph three above, 57 shares of Continental & Commercial National Bank, as follows:
    January 20, 1920, 5 shares at 318_$1, 690
    January 20, 1920, 50 shares at 319_15, 950
    January 29, 1920, 1 share at_ 319
    January 31, 1920, 1 share at- 321
    Total-18,180
    This amount was left with the said brokers for the purchase of other securities, and on January 30, 1920, the decedent purchased 30 shares of Eastman Kodak for the sum of $18,180. The commissions on, and the cost of the sales, in the amount of $58.14, were paid by the decedent by check on February 5, 1920, and the account with the said brokers was closed. At the time of her decease, Amy Lake Pietsch owned Eastman Kodak stock of the total value of $61,425, of which the $18,180 above described was a part.
    5. Prior to her decease,' Amy Lake Pietsch had acquired from sources other than the estate of her father not less than 530 shares of Goodrich preferred, and not less than 87 shares of Goodrich common stock. On or about March 17, 1921, she placed in the hands of Noyes & Jackson, stock brokers, 780 shares of Goodrich preferred and 887 shares of Goodrich common stock. On March 18 and 21, 500 shares of Goodrich preferred, and 800 shares of Goodrich common stock were sold by the brokers for $69,112.99. On March 21 to 24, inclusive, the brokers purchased for her account 200 shares of Allis Chalmers preferred, and 200 shares of Corn Products, and on March 31 and April 1 the same brokers purchased 200 more shares of Allis Chalmers preferred, and 200 more shares of Corn Products; the total cost of stock so purchased, including commissions and other, charges, aggregated $69,112.91. All of the shares of stock so purchased by these brokers were delivered to the said Amy Lake Pietsch on or before April 7, 1921. The 400 shares of Allis Chalmers preferred thus acquired were a part of the securities owned by the said Amy Lake Pietsch at the time of her death.
    6. From March 17,1921, until July 22,1923, the decedent’s account with Noyes & Jackson, brokers, was kept open and the said brokers’ statement to the decedent shows the purchase and sale of numerous securities and the final balance figures of $214,188.65.
    7. The decedent had received gifts from her father during his lifetime, and at the time of his death possessed an individual estate consisting mostly of securities and a bank account. It had always been her practice to keep her capital invested, and upon the sale or maturity of any securities the money received was deposited to her bank account and later reinvested, except as to the transactions made through John Burnham & Co., and Noyes & Jackson, brokers. In the transactions made through Noyes & Jackson, many securities were bought by the brokers, delivered to the decedent and later redelivered to the said brokers by her and sold, and with the proceeds therefrom other securities were purchased. In several instances the brokers made out checks to the decedent for the balance of cash from the sale of certain securities not used in the purchase of other securities. These checks were deposited in her bank account. The decedent had always deposited to the same bank account interest and dividends received from her investments, from which she withdrew from time to time for personal expenses.

      8. In the distribution of the estate of her father, R. C. Lake, Amy Lake Pietsch received $48,000 in cash and caused the same to be invested in securities. The dates of the receipt of cash, and the dates and names of the securities purchased, are as follows:

    Of the $48,000 received in cash from her father’s estate, $47,447 went into the above-named securities, and said securities constituted a part of the estate of Amy Lake Pietsch at the time of her death.
   OPINION.

Teussell:

In accordance with the reasoning of the Board in the Appeal of Elmer E. Rodenbough, Executor, 1 B. T. A. 477, we are of the opinion that the record sufficiently establishes the identity of the stock of Eastman Kodak purchased for the sum of $18,180, as an exchange of the stock of the Continental & Commercial National Bank received from a prior taxed estate within the meaning of section 403 (a) (2) of the Revenue Act of 1921, and should be deducted from the gross estate of Amy Lake Pietsch in ascertaining the value of her estate for the purposes of the estate tax.

The stock sales and purchases made through Noyes & Jackson, brokers, present an entirely different situation. The record does not establish whether the 250 shares of Goodrich preferred received by Amy Lake Pietsch from her father’s estate were sold prior to the time of the purchase of the Allis Chalmers preferred. And, although the record does establish that the 800 shares of Goodrich common received from the estate of R. C. Lake were sold, it does not establish whether the sum received from such sale went into the Allis Chalmers stock or into the Corn Products stock. We are, therefore, of the opinion that the identity of the Allis Chalmers stock as acquired in exchange for securities received from a prior taxed estate is not established and can not now be allowed as a deduction from the gross estate of Amy Lake Pietsch.

With respect to the $48,000 of cash received by Amy Lake Pietsch from her father’s estate, the respondent, in his answer and at the trial, undertook to show by cross examination of petitioner’s witnesses that the securities claimed to have been purchased with this cash were not sufficiently identified with the cash to permit their deduction from the gross estate of Amy Lake Pietsch. Cross examination, however, was successful only in developing the facts which are shown in paragraph 8 of the findings of fact hereinabove. We are, therefore, of the opinion that the record clearly establishes the identity of the cash acquired from a prior-taxed estate and the securities purchased and remaining in the estate of Amy Lake Pietsch, and we are, therefore, of the opinion that the deduction of $47,447 should be allowed as set forth in the original deficiency letter.

The deficiency may he redetermined in accordance with the foregoing findings and opinion on 15 days' notice, pursuant to Rule 50, a/nd judgment will be entered in due course.


author: Murdock :

text:
    Morris Cohn, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9870.
    Promulgated March 24, 1927.

      Morris Cohn, Jr., pro se.

      O. H. Gurí, Esq., for the respondent.
   Murdock :

The Commissioner determined a deficiency of $1,158.48 in the petitioner’s income tax for the calendar year 1921, and a similar deficiency of $207.46 for the calendar year 1922, or a total deficiency of $1,365.89. The petitioner contends that a portion of each deficiency was incorrectly determined, due to the fact that the Commissioner erroneously included in 1921 income an item which was not received until 1922 and likewise erroneously included in 1922 income an item which was not received until 1923.

FINDINGS OF FACT.

The petitioner is an individual residing at Niagara Falls, N. Y. He kept his accounts and reported his income on a cash receipts basis. During the taxable years he was a director and a stockholder of the Frontier Finance Corporation with which he had an arrangement whereby he was to receive for services rendered to it a percentage of its net profits for each calendar year. The corporation was engaged in buying and selling securities. Its net profits for any year were not determined until the close of business on the last business day of any such year when an inventory was taken. The petitioner and the corporation had offices in the same building, but on different floors.

On January 5, 1922, the petitioner received a check from the Frontier Finance Corporation, dated December 31, 1921, for $5,501.72, representing compensation for services rendered by him during the year 1921. This check was signed by the manager and treasurer of the corporation in the year 1922. The petitioner reported the amount of the check as part of his 1922 income. The respondent in determining the deficiency treated this sum as taxable income for the year 1921.

On January 2, 1923, the petitioner received a check from the Frontier Finance Corporation, dated December 30, 1922, for $5,601.72, representing compensation for services rendered by him during the year 1922. The petitioner reported the amount of the check as part of his 1923 income. The respondent in determining the deficiency treated this sum as taxable income for the year 1922.

These checks were delivered to the petitioner by an officer or employee of the corporation.

Judgment will be entered for the 'petitioner upon notice of 15 days, wnder Rule 50.


author: Phillips:

text:
    B. B. Greever and Mrs. B. B. Greever, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5690.
    Promulgated March 24, 1927.
    Losses arising from the purchase of oil leases, proven to be worthless in the taxable year and disposed of for a nominal consideration, allowed as deductions.

      Don T. Haynes, Esq., for the petitioners.

      8. 8. Faulkner, Esq., for the respondent.
    Petitioners appeal from the determination by the Commissioner of deficiencies in.income tax for 1920 of $709.54 for each, arising from the refusal of the Commissioner to allow deductions for losses claimed on returns filed on the community property basis.
    FINDINGS OF FACT.
    In 1920 the petitioners were residents of Texas, married and living together. Each filed an income-tax return, including therein' one-half of the community income.
    In 1919 Greever acquired a one-fifth interest in certain oil leases, known as the Five Company leases, for which he paid $1,103.01. These leases were upon approximately 1,000 acres of land in Nolan County, Texas, and were for three years, provided rentals were paid annually. No wells had been drilled in the vicinity of such land at the time such leases were acquired, but one was about to be drilled and it was in the hope that such well would discover oil that these leases were purchased. This well was drilled in 1920 and proved to be dry. ..In November, 1920, Greever transferred his interest in such leases, which he then regarded as worthless, to one E. S. Piper for $1. Thereafter Greever paid no rentals thereunder.
    In 1920 Greever was the owner of an interest in a certain oil lease, known as the Marriott lease, on 200 acres in Wilbarger County, Texas, which had cost him $119.56. This lease was for three years, provided that rentals were paid. At that time a well was about to be drilled about one-half mile to the north of this property. This well was drilled in 1920 and proved to be dry. Another well drilled in 1920 aj)proximately one mile southeast of this property also proved to be dry. Near the close of 1920 Greever assigned his interest in such lease, which he then regarded as worthless, to Piper for $1. No rentals were thereafter paid on such lease by Greever.
    In 1920 Greever was the owner of an interest in several oil leases in several counties in southwest Texas, covering approximately 100,000 acres. His interest therein had cost him $3,100 and during 1920 he paid $2,200 as his portion of rentals becoming due thereunder. It was the intention of Greever .and his associates to acquire these leases and also options on some producing properties, convey them to a company and sell a part of its stock to raise the capital necessary to acquire, develop and operate the properties. They secured options on certain producing property and on a small refinery, after which two of these associates went to New York with their data and plans and attempted to interest capital. After six or seven weeks of unsuccessful effort the project was abandoned in 1920. In that year Greever transferred his interest in such leases to Piper for $5. No rentals were thereafter paid by him.
    In November, 1919, Greever acquired an interest in a certain lease of a ten-acre tract in Wichita County for $1,280.91. In 1920 from six to ten wells were drilled in the immediate vicinity, all of which proved dry. In 1920 Greever transí erred his interest in such lease to Piper for a consideration which was less than $5. Thereafter Greever paid no further rentals thereunder.
    In November, 1919, Greever acquired an interest in a lease upon a thirty-acre tract in Tillman County, Texas, for $3,214.83. This lease was for a period of three years, provided annual rentals were paid. Only one year’s rental was paid thereunder. Leasing and drilling were very active in this section in the early part of 1920. During that year several wells were drilled in the vicinity of this lease, all dry. In November, 1920, Greever transferred bis interest in this lease to one Terrill for $1. Thereafter Greever paid no rentals thereunder.
    Piper was a brother-in-law of Greever and Terrill was secretary to one of Greever’s associates in his various speculations in oil leases. The Commissioner refused to allow any loss as a deduction from income for 1920 and computed the deficiency accordingly.
   OPINION.

Phillips:

The testimony discloses that for several years Greever was engaged with others in speculating in wildcat oil territory. In some cases wells were drilled by them but in most instances leases were acquired and held pending the outcome of drilling by others. If this proved unsuccessful the lease would be deemed worthless and no further rentals would be paid thereafter. We are uninformed whether any of these ventures were successful; it is only with those which proved worthless that we have to do here.

The respondent points out that the interests of the petitioners in four of these leases were conveyed to a brother-in-law of Greever and in the fifth to a secretary of one of his associates; also that the consideration paid by them was nominal. On the other hand, Greever testified that these conveyances were made after a conference with a revenue agent who informed him that, since some of the leases had not then expired by their terms, there might be some doubt whether a deductible loss had been sustained while petitioners remained the owners; wherefore, they made these sales in order that there might be no question that they had divested themselves of any interest in these leases.

The uncontradicted evidence shows that in 1920, by drilling in their vicinity, the leases had been demonstrated to be worthless for all practical purposes. While they might be said to have had a highly speculative value, this was no more than nominal and not sufficient in the opinion of Greever to justify him in paying further rentals. While the transfer of property to a relative or business associate for the purpose of establishing a loss may demand a close scrutiny of the circumstances to determine whether such transfer is bona fide or merely colorable, there can be no doubt that when such a sale and transfer is made in good faith, so that the vendor parts with all interest in the property, a transaction takes place which gives rise to a taxable profit or deductible loss. Upon the record made we conclude that the petitioners parted with all their interest in these leases in 1920, and are entitled to the deduction claimed.

Decision will be entered for the -petitioners on 20 days’ notice, wnder Bule 50.