text:
    Appeal of MOBERLY OIL CO.
    Docket No. 3552.
    Submitted October 21, 1925.
    Decided November 25, 1925.

      Raymond E. ScTmltz, Esq., and G. J. Anderson, G. P. A., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before SterNI-iagen, LaNsdoN, and Arttndell.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1918, 1919, and 1920, in the amount of $4,885.50. Three issues are presented: (1) The disallowance of officers’ salaries for each of the years involved; (2) capitalization of certain expenditures by the Commissioner, which the taxpayer alleges should be deducted from gross income as operating expenses; and (3) rates of depreciation on buildings used by the taxpayer for business purposes.
    FINDINGS OF FACT.
    The taxpayer is a Missouri corporation with its principal office at Moberly, where it is engaged in the business of buying and selling oil and gasoline. It operates oil stations at 21 points in Missouri. It was organized and incorporated in 1912 by C. E. Ripple and E. H-Gamble, who subscribed for equal amounts of the original authorized capital. Ripple was a director, secretary and general manager, and Gamble was a director, financial manager and president from the date of incorporation to and through the years involved in this appeal.
    Each of the two incorporators subscribed for 160 shares of stock of the par value of $25 each and paid in therefor,, in cash, the amount of $5,500. In 1916 the authorized capital was increased to $16,000 and the additional shares were issued in equal amounts to Ripple and Gamble as a stock dividend. In 1917 the authorized capital was increased to $32,000 and the additional shares were issued to Ripple and Gamble as a stock dividend. In 1920 the authorized capital was increased to $125,000, of which $75,000 was common and $50,000 preferred. The common stock was issued in equal amounts to Eipple and Gamble as a stock dividend. Preferred stock in the amount of $10,000 was sold to the public.
    Gamble lived in Knoxville, Iowa, about 75 miles from Moberly, where he was engaged in the farm-loan business. During the years involved in this appeal he was president and financial manager of the taxpayer. He visited Moberly and the other places where oil stations were maintained at least once each month, arranged with a bank in Knoxville for credit for the business in the amount of $20,000, and supervised the bank accounts and all the financial affairs of the taxpayer. During the years 1918, 1919, and 1920, he devoted at least one-half his time to such activities.
    By agreement between himself and Eipple, Gamble received salary for the years in question in the following amounts: 1918, $900; 1919, $1,200; and in 1920, for the first six months, $600. For the second six months of 1920 his salary was fixed by the board of directors and on December 31, 1920, the board voted to him and he received during that year a bonus of $1,500, so that he drew from the taxpayer as compensation for his services during 1920 the total amount of $3,000.
    Eipple lived in Moberly and devoted his entire time to the affairs of the taxpayer. By agreement with Gamble he was to receive actual living expenses for himself and family as full compensation for his services. Pursuant to such agreement he received the amounts of $1,423 during 1918 and $3,007 during 1919. His actual living expenses in 1918 amounted to $2,125.64 and in 1919 to $3,007. Under this same agreement he received $1,200 during the first six months of 1920. His salary for the second six months was fixed by the board of directors. On December 31, 1920, the directors voted to him and he received a bonus in addition to his salary for that year in the amount of $1,500, so that he drew from the taxpayer as compensation for his services for the year 1920 the total amount of $3,600.
    By agreement between Eipple and Gamble, the only stockholders of the corporation, and by proper corporate action affecting the last six months of 1920, officers’ salaries for the years in question were paid or accrued in the amounts of $3,025.64 for 1918; $4,207.85 for 1919; and $6,900 for 1920. During the same years the gross sales of the taxpayer amounted to $247,660.70 for 1918; $417,140.18 for 1919; and $563,680.59 for 1920.
    The taxpayer’s operations were profitable from the date of incorporation. In order to accumulate working capital adequate for the needs of their growing business, the two stockholders drew out none of the earnings, except the amounts specified above as salaries, and the corporation never distributed any of its profits, except in the form of stock dividends, as hereinbefore described. As surplus accumulated from operations it was distributed as stock dividends and, in excess of requirements for such distributions, there were ample funds at all times for the payment of the salaries agreed to by and between the two stockholders.
    During the years 1918, 1919, and 1920, the taxpayer expended the respective amounts of $2,200, $1,899, and $1,508, in repairing buildings and equipment, and charged such payments against income as ordinary and necessary expenses.
    The taxpayer owns 21 buildings, located at various points in Missouri, which it uses as oil stations. Some of these structures were erected in 1912 and, during the years in question, were used only for storage purposes. These buildings are constructed of wood, with concrete block foundations and rubberoid roofs, and their useful life for business purposes is not more than 12½ years. Eight per cent per annum on a straight-line basis is a reasonable rate of depreciation for such structures.
    Upon audit of the taxpayer’s income and profits-tax returns for the years 1918, 1919, and 1920, the Commissioner disallowed all amounts deducted from gross income as salaries, except $1,200 in each of the years 1918 and 1919, and $1,500 in 1920; held that the amounts expended for repairs should be capitalized, and reduced the taxpayer’s rate of depreciation on its buildings from 8 per cent to 4 per cent per annum.
   DECISION.

The deficiency determined by the Commissioner is disallowed.


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of JAMES S. MUIR.
    Docket No. 3648.
    Submitted October 27, 1925.
    Decided November 25, 1925.

      Harold H. Seaton, Esq., for the taxpayer.

      L. O. Mitchell, Esq., for the Commissioner.
    Before Smith, Littleton, and Tkossell.
    The taxpayer appeals from the determination of a deficiency in income tax for the year 1921 in the amount of $577.81.
    findings of fact.
    During the year 1921 the taxpayer, a resident of New York City, was an employee of the Northwestern Leather Co. Under the terms of his contract, he received a salary and a commission, consisting of a percentage upon profits of the New York branch of his employer.His agreement required him to turn over to his employer any commissions which he might earn as a representative of other concerns. During the year 1921, he was paid commissions by William Amer Oo. of $1,450.59, and by Besse Osborn <& Odell, Inc., of $3,009.72. Checks in payment of these commissions were sent to the taxpayer by the above-named concerns. He endorsed them and turned them over to the Northwestern Leather Co., by which company they were deposited in bank as its own funds. The taxpayer did not report any income from these commissions, inasmuch as they did not belong to him. The information returns filed by William Amer Co. and by Besse Osborn & Odell, Inc., showed the payment of these commissions to the taxpayer, and the Commissioner added the amount of these commissions to the income reported by the taxpayer in his tax return. The deficiency in tax is predicated upon the adjustment made in the taxpayer’s return as above indicated.
   DECISION.

The deficiency determined by the Commissioner is disallowed. Appeal of Richard T. Gillespie, 2 B. T. A. 1317.


text:
    Appeal of SIDNEY P. DINE, as Executor of the Estate of PHILLIP DINE, Deceased.
    Docket No. 3783.
    Submitted November 4, 1925.
    Decided November 25, 1925.

      Stanley Matthews, Esq., for the taxpayer.

      J. Sterling Halstead, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Trussell.
    This is an appeal from the determination of a deficiency in estate tax in the amount of $2,900.34, arising from the denial by the Commissioner of the claim of the executor, a son of the decedent, that, at the time of the death of Phillip Dine, he had an interest of $50,000 in a store operated by the decedent at Covington, Ky., and that Morris Bomanow, a son-in-law of the decedent, had an interest of $10,000 in a store operated by the decedent at Newport, Ky. By amended petition the executor also alleged that, in making the estate-tax return, he erroneously included therein, as a part of the decedent’s estate, an undivided one-half interest in certain real estate when, in truth, the decedent owned only a one-fourth interest. The executor claims, therefore, that, since the Commissioner has valued a one-half interest at $30,000, which value is not questioned, the same should be reduced to $15,000 to correspond with the decedent’s interest.
    FINDINGS OF FACT.
    Sidney P. Dine is the duly qualified and acting executor of the estate of Phillip Dine, who died May 20, 1921. For many years prior to his death Phillip Dine had been engaged in the retail furniture business under the name of Dine’s Furniture House, with a store at 530 Madison Avenue, Covington, Ky., and another at 518 York Avenue, Newport, Ky. Up to 1911 the Covington store had been conducted as a partnership, composed of the decedent and Harry Dine, each owning an undivided one-half interest therein. In 1911 Phillip Dine purchased the interest of Harry Dine for $28,300. A complete set of books was kept by each store. The books of the Covington store reflected the existence of the partnership until Phillip Dine became the sole proprietor in 1911, since which time the business has been shown as a sole proprietorship. The books of the Newport store have always shown the business as belonging to Phillip Dine.
    In August, 1910, the decedent employed his son, Sidney P. Dine, in the Covington store, at a salary of $5,000 per annum, which was increased from time to time thereafter. In 1911, or in 1912, Sidney P. Dine was made general manager of and buyer for that store, in which position he continued until his father’s death. In 1908, Morris Eomanow,- who at that time was a resident of Boston, Mass., and engaged in the practice of dentistry, married a daughter of the decedent. In the summer of 1909, Eomanow was advised by the decedent that his nephew, employed in the Newport store, desired to resign and go into business for himself, and asked Eomanow if he would come to' Newport and take charge of the store at that place. In January, 1910, Eomanow moved to Cincinnati, Ohio, and took charge of the decedent’s store at Newport, Ky., as general manager and buyer, at a salary of $2,600 per annum, which was increased from time to time thereafter. The decedent was active in the supervision of the business of both stores until his death in 1921.
    The decedent left the following will:
    1. I give and devise to my beloved wife Rebecca all my real estate for tbe period of ber natural life. I also give ber tbe power to sell same, or any part tbereof, excepting tbe real estate Nos. 530-532 Madison Ave., Covington, Ky., for tbe use and sale of wbicb I bave hereinafter specially provided without any restraint upon such power. If she shall sell same, she shall bave tbe right to use tbe proceeds tbereof as she may desire for ber own benefit. It is my will that she assume and pay off any mortgage or other liens wbicb may be upon said property at tbe time of my death. And out of the estate given her she shall turn over to my Executor tbe sum of Ten Thousand ($10,000.00) .Dollars, which sum of money I hereby bequeath to such charity as my beloved wife may select and my Executor shall pay said sum over to such designated . Charity.
    2. I give and bequeath to my beloved daughter Hannah Dine Romanow my interest in the business now located at #518 York St., Newport, Ky. which interest, however, shall be sold at my death and the proceeds invested by my Executor, who shall pay the income therefrom only, to my daughter for a period of Fifteen (15) years after my death, at which time he shall turn over the whole fund to her to be used by her for the term of her natural life as she pleases, both principal and interest, any balance left at her death I bequeath to her children equally in fee.
    3. I give and bequeath to my beloved son Sidney P. Dine, the business now located at 530-532 Madison Ave., Covington, Ky. This includes the bank account kept in connection with said business, truck, stock, notes and accounts •owing said business and every thing used in connection with said business, ■and he is to assume all liabilities of said business existing at my death.
    4. After the death of my beloved wife, I give and devise to my children for life, excepting Jesse S. Dine, for whom I have made special provision, all my real estate remaining after her death, to be enjoyed by them equally. I also give them the power, with the advice of my Executor first to be given for said purpose, to sell said property or any part thereof, excepting the real estate 530-532 Madison Ave., Covington, Ky., in which the business bequeathed to my son Sidney is conducted shall not be sold without his individual consent while he is alive, nor be sold after his death without the consent of his Executor and it is my will that this real estate may be sold at any time at the wish of said Sidney Dine or of his Executor without the consent of my other children, without any restraint upon such power. And they may reinvest the proceeds of sale or use same in any manner approved by my executor without having to account for same to my grandchildren. Upon the death of all my children, any real estate remaining, I give and devise to my grandchildren in fee, or to the issue of any dead grandchildren in fee.
    5. I give and devise to my beloved wife all the residue of my property.
    6. It is also my will that the rents charged against the business house at 530-532 Madison Ave., at my death shall not be raised by my Executor or children so long as the business therein is continued by my son Sidney or his children, but they can, at any time, lower same, by agreement.
    7. I have provided for payment to my son Jesse S. Dine of several amounts of money and in certain events to his wife a certain sum and to his children in a paper signed by me and entrusted to my son Sidney P. Dine, my executor, which paper is never to be made public as I have implicit faith and confidence in my said son Sidney to carry out its provisions, and my said son Sidney P. Dine shall be credited in his settlement as Executor with any sums he may pay out according to the provisions of said paper.
    The individual income-tax returns of the decedent for years prior to his death were prepared by his son, Sidney P. Dine, manager of the store at Covington, Ky.' The decedent reported the entire profits and deducted the entire expenses, including salaries paid at both stores, in his individual income-tax returns. The decedent also filed information returns, Form 1099, showing salaries, wages, bonuses, etc., paid to Sidney P. Dine, Covington, Kv., and Morris Romanow, Newport, Ky. The amounts shown upon the information returns as having been paid were returned by Sidney P. Dine and Morris Romano w, under Schedule B of their returns, as salaries, wages, bonuses, etc., received from Phillip Dine. In 1902, Rebecca Dine, wife of the decedent, inherited the fee in certain real estate located at 1123 Main Street, Cincinnati, Ohio. On September 23, 1902, Rebecca Dine conveyed by deed, in which the decedent joined, an undivided one-half jnterest in this property to Harry Dine and wife, Esther Dine, for their joint lives, with remainder to the survivor in fee. Esther Dine, wife of Harry Dine, died on September 8, 1908. On November 22, 1911, Harry Dine by quitclaim deed conveyed to Phillip Dine, the decedent, and his wife, Rebecca Dine, the undivided one-lialf interest theretofore conveyed to himself and wife by Rebecca Dine on September 23, 1902.
   DECISION.

The decedent and his wife, Rebecca Dine, were tenants in common of the undivided one-half interest conveyed to them by Harry Dine. The deficiency should be computed by including as a part of the decedent’s estate an undivided one-fourth interest in the property located at 1123 Main Street, Cincinnati, Ohio, at the value of $15,000. Sergeant v. Steinberger, 2 Ohio, 305; Wilson v. Fleming, 13 Ohio, 68; Penn v. Cox, 16 Ohio, 30; Farmers’ & Merchants' National Bank v. Wallace, 45 Ohio St. 152; Thompson on Real Property, Vol. II, p. 942, §1738. The determination is otherwi&e approved. Final determination will be made on 15 days’ notice, under Rule 50.


author: Trammell

text:
    Appeal of MUELLER METALS CO.
    Docket No. 4395.
    Submitted October 16, 1925.
    Decided November 25, 1925.
    Under tbe evidence, held, tbat tbe amount of $40,000 due under a contract witb tbe Port Huron Chamber of Commerce was not taxable income in tbe fiscal year 1919.

      H. A. Mihills, O. P. A., for the taxpayer.

      Thomas P. Dudley, /r., Esq., for the Commissioner.
    Before Graupner, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency for the fiscal year ended November 30, 1919, in the amount of $23,918.09, of which $15,802.41 is in controversy. The taxpayer alleges error on the part of the Commissioner in allocating as income to the taxable year 1919, instead of 1918, an amount of $40,000, which was payable to the taxpayer by the Port Huron Chamber of Commerce upon the location and construction of a plant at Port Huron, Mich.

      FINDINGS OF FACT.
    1. The taxpayer is a domestic corporation with its principal place of business located at Port Huron, Mich., and was organized November 30, 1917.
    2. The H. Mueller Manufacturing Co., Ltd., was a Canadian corporation, engaged in the business of making munitions for the Canadian and British Governments. This corporation had developed a process for forging brass which materially reduced the cost of manufacturing fuses. Upon the entry of the United States into the World War this company was solicited to manufacture these brass forgings in the United States. Upon searching for a desirable location for its American plant, it received an attractive offer from the Port Huron Chamber of Commerce. Port Huron, Mich., was just across the border line of Canada from the town of Sarnia, the location of the Canadian plant. The Port Huron Chamber of Commerce made an offer of $40,000, provided the Canadian company would construct and operate a plant in Port Huron. Negotiations resulted in a contract, which was entered into September 8, 1917, by the Port Huron Chamber of Commerce and the H. Mueller Manufacturing Co., Ltd., the pertinent parts of which are as follows:
    Memorandum of agreement made and entered into this Eighth Day of September, A. D., 1917.

      Between: R. Mueller Mfg. Go., Limited, of Sarnia, Ontario, Canada, hereinafter called the “ Party " of the First Part, And

      The Chamber of Commerce of Port Huron, Michigan, hereinafter called the “ Party ” of the Second Part.

    Whereas the Party of the First Part has agreed to locate a Manufacturing Plant in the City of Port Huron, for the purpose of manufacturing Brass Rod, Forgings, Castings and kindred lines, and whereas, the Party of the Second Part in consideration thereof, and in order to induce such establishment in the City of Port Huron, had agreed to assist the Party of the First Part as hereinafter set out.
    Now therefore this agreement witnesseth that:
    In consideration of the mutual covenants, and terms herein, the Parties hereto covenant and agree each with the other as follows:
    1. The Party of the First Part agrees to expend the sum of Four Hundred Thousand Dollars ($400,000.00) in the City of Port Huron, for the purchase of a site, erection of buildings, purchase of manufacturing equipment, etc.
    2. The party of the Second Part agrees to purchase for the Party of the First Part, and to transfer to it in fee simple, free from encumbrance, the following Real Estate, Fixtures and Office Equipment, for a sum not to exceed Forty-five Thousand Dollars ($45,000.00).
    *******
    [Description of Land.]
    3. The Party of the Second Part agrees to have properly installed before the First day of November, 1917, the following water mains, without expense to the Party of the First Part.

      [Description of Water Mains.]
    4. [Relates to Sewers.]
    5. The Party of the Second Part in consideration of the promise by the Party of the First Part to expend the sum of Four Hundred Thousand Dollars ($400,000.00) on its plant, site, buildings, equipment, etc., agrees to pay to the Party of the First Part Ten per cent (10%) of the wages and salaries paid by the Party of the First Part in connection with its business and plant in Port Huron; the first payment to be made March first, 1918, and thereafter quarterly until the sum of Forty Thousand Dollars ($40,000.00) has been paid by the Party of the Second Part to the Party of the First Part. The said Ten per cent (10%) shall be based upon all wages and salaries as herein mentioned, but no one payment shall be greater than the sum of Ten Thousand Dollars ($10,000.00) and any amount owing, or any balance owing to the Party of the- First Part on the First day of March, 1918, or any quarterly date thereafter exceeding the said sum of Ten Thousand Dollars ($10,000.00) shall be added to and included in the subsequent payments.
    3. The H. Mueller Manufacturing Co., Ltd., was owned and controlled by five Mueller brothers and a sister: On or about November 30, 1917, the taxpayer was incorporated in the United States, with the same stockholders as the Canadian corporation. The above contract was assigned to and taken over by the taxpayer. It was understood by the Port Huron Chamber of Commerce that such a corporation would be organized for the purpose of constructing and operating this plant.
    4. The taxpayer thereupon constructed the plant, expending thereon prior to the expiration of the fiscal year ended November
    30, 1918, the following:
    Buildings_ $419,118.40
    Fixed machinery and tools_ 754, 930.02
    Operating labor_ 447,047.32
    1, 621,095.74
    5.Prior to the expiration of the fiscal year ended November 30, 1918, the said Port Huron Chamber of Commerce paid to the taxpayer on said contract $26,015, the payments being shown upon the books and records of the taxpayer as follows:
    Mar. 31, 191S_$5, 000
    Apr. 30, 1918_ 5,000
    June 3, 1918_ 5,000
    July 31, 1918_ 1, 000
    Aug. 30, 1918_ 3, 015
    Sept. 30, 1918_ 5, 000
    Oct. 31, 1918_ 1,000
    Nov. 30, 1918_ 1,000
    Total. 20,015 .

      The payments made to the taxpayer on said contract during the. fiscal year ended November 30,1919, were as follows:
    Dec. 31, 1918_$4, 000
    Jan. 31, 1919_ 1,000
    Feb. 28, 1919_ 1, 000
    Mar. 31, 1919_ 1, 000
    May 31, 1919_ 1,128
    Aug. 31, 1919_ 1,000
    Total_ 9,126
    The balance of account due the taxpayer, as shown on the books of the taxpayer at the end of the fiscal year November 30, 1919, after making certain adjustments of additional debits, was $5,931.05.
    6. The books of the taxpayer were kept on the accrual basis.
    7. The books of the taxpayer disclosed that a journal entry was made March 12, 1918, charging the Port Huron Chamber of Commerce with $40,000 and crediting the H. Mueller Manufacturing Co.., Ltd., with $40,000. This entry was subsequently corrected November-30, 1919, by an entry in the journal which canceled the credit entry to H. Mueller Manufacturing Co., Ltd., and substituted a credit to-an account of “losses and recoveries.” This latter account was opened in 1919 and also kept during 1920 and 1921 and used to receive debit and credit entries of surplus transactions which affected prior years. The taxpayer has heretofore treated this $40,000 as a donation and not taxable income, but has since abandoned this claim and now alleges that it is income for the fiscal year ended November 30, 1918, and that the Commissioner was in error in allocating it to the fiscal year ended November 30, 1919.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be made on 15 days’ notice,, under Rule 50.
   OPINION.

Trammell

: In this appeal the taxpayer alleges that the Commissioner was in error in allocating to the fiscal year ended November-30, 1919, the amount of $40,000, derived from its contract with the-Port Huron Chamber of Commerce. From the evidence in the record, we sustain the contention of the taxpayer. The facts are simple. By the terms of the contract the H. Mueller Manufacturing Co., Ltd., or its assigns, was to expend at least $400,000 in the construction of; a manufacturing plant, and the Chamber of Commerce was to pay the said company $40,000. Payments were to be made by the; Chamber of Commerce on a basis of 10 per cent of the money expended for labor. The taxpayer, composed of the same stockholders, as the Canadian Company, took over the contract and assumed the-obligations. Over this there is no dispute. The taxpayer has more than fulfilled its part of the contract. Prior to November 30, 1918,. it had expended $419,118 for buildings, $754,930.02 for machinery and equipment, and $447,047.32 for operating labor, or a total of $1,621,095.74. In addition to this, it was actually manufacturing and delivering its products. The Chamber of Commerce during this fiscal year had paid $26,015 in cash. The reason for the delay in paying the balance of the $40,000 does not appear in the record, but it was subsequently paid. Under the terms of the contract, according to the evidence adduced, the entire amount of $40,000 was clearly earned prior to November 30,1918. The books of the taxpayer were kept on the accrual basis. It is true there was a book entry of March 12, 1918, charging this amount to the Port Pluron Chamber of Commerce and crediting the H. Mueller Manufacturing Co., Ltd., and a subsequent correction November 30, 1919, under a loss and recovery account, but this has been satisfactorily explained. Irrespective of these entries, however, the undisputed facts clearly indicate that this amount did not accrue to the taxpayer during the fiscal year ended November 30, 1919.


author: Teammell

text:
    Appeals of A. B. NICKEY & SONS, ESTATE OF A. B. NICKEY, W. E. NICKEY, and S. M. NICKEY.
    Docket Nos. 1235-1239, 1961, 1962, 1967.
    Submitted April 21, 22, 1925
    Decided November 25, 1925.
    1. Valuation of timber on March 1, 1913, for depletion purposes determined.
    2. Under the evidence, held, that no taxable income was realized in the year 1917 from the liquidation of Nickey & Sons Go.

      Homer K. Jones, G. P. A., for the taxpayers.

      Benjamin H. Saunders, Esq., for the Commissioner.
    Before SteRNHAgen, Teammell, Phillips, and Love.
    These appeals are from determinations of deficiencies in income and profits taxes for 1917, 1918, and 1919. The deficiencies arise from the disallowance of parts of deductions claimed by the partnership of A. B. Nickey & Sons as allowances for depletion of timber; from clerical 'errors whereby the taxpayers’ incomes were erroneously increased, which errors were conceded at the hearing; and from the action of the Commissioner in adding to the gross incomes of the Estate of A. B. Nickey, W. E. Nickey, and S. M. Nickey amounts received by them as liquidating dividends from Nickey & Sons Co. The above appeals were heard together and it was agreed that the testimony in each should be applicable to all, in so far as it is pertinent.
    FINDINGS OF PACT.
    A. B. Nickey & Sons is a partnership with its principal office at Memphis, Tenn. It was organized about the year 1894, and, from the date of its organization until August 4, 1917, was composed of A. B. Nickey and his two sons, S. M. Nickey and W. E. Nickey. A. B. Nickey died August 4, 1917. By consent of all the persons concerned, the business was continued as before and it still exists under the name A. B.- Nickey & Sons, the Estate of A. B. Nickey taking his place in the distribution of earnings. It is and has been since its organization engaged in buying and selling hardwood timber. The partnership did not own any mills but purchased standing timber and sold it to the Green Eiver Lumber Co., a corporation. Ninety-five per cent of the stock of the Green Eiver Lumber Co. was owned by A. B. Nickey, S. M. Nickey, and W. E. Nickey in equal amounts. A. B. Nickey, S. M. Nickey, and W. E. Nickey were also officers and directors of the corporation.
    During the year 1917, A. B. Nickey & Sons was the owner of a portion of a tract of land in northern Mississippi, known as the Marks tract. The tract originally contained 2,856 acres, of which 2,772 acres were timberland. The price paid for this land, includ-' ing timber, was $37,500, or $13.13 per acre. The tract of land was divided into two parts by a railroad, about 600 acres thereof lying east of the railroad, all of which was sold prior to 1917 to the Green Eiver Lumber Co. That part of the tract of timber lying east of the railroad, which was sold as above mentioned, was of greater value per acre than the remainder of the tract, due to the fact that the timber could be cut and marketed at a lower price. It also had a heavier stand of timber than the part lying west of the railroad. The timber upon a portion of the property lying west of the railroad was sold in 1917, 1918, and 1919.
    The March 1, 1913, value of the timber which was cut in those years from the tract of land in question was $3.75 per 1,000 feet. There is no dispute between the taxpayers and the Commissioner ás to the amount of timber cut in the years involved.
    Nickey & Sons Co. was, during the years 1916 and 1917, a corporation having capital stock of the par value of $100,000, all of which was issued for cash. A. B. Nickey, S. M. Nickey, and* W. E. Nickey were three of the incorporators of the company; each of them furnished $18,000 of its capital and each was a stockholder in the years 1916 and 1917. On January 10,1916, the board of directors, by resolution, decided to dissolve the corporation and liquidate its assets. The corporation at that time had a surplus of $144,862.98. During the period January 10,1916, to June 30,1916, the corporation made an operating profit of $10,528.51, and distributed $90,000 in dividends, leaving a surplus of $65,391.49 on June 30, 1916. During the period June 30 to December 31, 1916, it showed a loss of $1,876.50, and $90,000 was distributed to the stockholders, leaving at December 31, 1916, no surplus and only $73,614.99 in the capital account. Of the amount remaining in the capital account at December 30, 1916, $5,503.72 was lost in the year 1917 through shrinkage in the value of assets, $68,000 was distributed to the stockholders during that year, and the balance, $111.27, was reserved to pay final expenses. The final expenses were paid and the charter of the corporation was surrendered in the year 1918. The Commissioner determined that each of the taxpayers W. E. Nickey and S. M. Nickey received in the year 1917 from the corporation liquidating dividends in the amount of $6,203.34; that A. B. Nickey received during the period January 1 to August 4,1917, liquidating dividends in the amount of $4,763.34; and that the Estate of A. B. Nickey received liquidating dividends in the amount of $1,440, during the period August 5 to December 31, 1917, and he increased their respective incomes accordingly.
    During the year 1919, S. M. Nickey and W. E. Nickey sold their interests in certain real estate known as the Sledge farm. In his return for that year, each of these taxpayers reported his profit from the sale of the Sledge farm as $824.56, which the Commissioner, upon audit of the return, increased to $3,845. At the hearing it was agreed by the taxpayers and the Commissioner that the profit of each taxpayer on this transaction, as computed by the Commissioner, should be reduced by the amount of $845.41.
    At the hearing the Commissioner conceded that a clerical error was made in computing the net income of the partnership of A. B. Nickey & Sons for the year 1917 and that its income, as set forth in the deficiency letter, should be decreased by $16,375.03.
    DECISION.
    The deficiencies should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice, under Bule 50.
   OPINION.

Teammell

: The Commissioner conceded at the hearing that the income of the partnership of A. B. Nickey & Sons' for the year 1917, as computed and set forth in the deficiency letter, should be reduced by the amount of $16,375.03, and that the income of the members of the partnership should be reduced pro rata, and, also, that the profit of each of the taxpayers W. E. Nickey and S. M. Nickey from the sale of the Sledge farm in the year 1919, as computed by the Commissioner, should be reduced by the amount of $845.41. These concessions leave for consideration only the question of the allowance to which the partnership of A. B. Nickey & Sons is entitled for depletion of timber sold in the years 1917, 1918, and 1919, and whether or not the taxpayers, W. E. Nickey, S. M. Nickey, A. B. Nickey and the estate of A. B. Nickey, realized any taxable income in the year 1917 from the liquidation of Nickey & Sons Co.

The taxpayers insist that the sale made by the partnership prior to the year 1917 to the Green River Lumber Co. established that the Marks tract contained, on March 1, 1913, 27,720,000 feet of timber of the value of $8.20 per 1,000 feet, and that in computing its allowance for depletion of that timber in the year 1917 and subsequent years it is entitled to use the rate of $8.20 per 1,000 feet.

The Commissioner contends that the sales to the Green River Lumber Co., prior to. the year 1917, were not arm’s length transactions, since the members of the partnership were in control of the Green River Lumber Co., and that an allowance for depletion of the timber involved computed at the rate of $3.75 per 1,000 feet of timber cut in 1917 and subsequent years is adequate.

We have carefully considered the evidence presented by the taxpayer in this appeal and we do not think that it has sufficient probative value to warrant us in changing the allowance for depletion made by the Commissioner. The burden is upon the taxpayer to establish by competent evidence that the tract of timber in question had a value on March 1, 1913, other than the value determined by the Commissioner, before this Board would be justified in holding that the Commissioner’s determination was erroneously made. This the taxpayer has failed to do. The taxpayer relied upon sales of other timber in the territory in which the Marks Tract was located as establishing the value of the timber in question. Testimony was introduced to the effect that early in 1913 the partnership sold to the Green River Lumber Co. the timber on 460 acres included in the 600 acres, which was a part of the Marks Tract as originally acquired, under an oral contract whereby the Green River Lumber Co. was given the right to enter upon the land and cut and remove the timber, the amount of timber removed and the price to be paid therefor to be determined at the end of each six months. The timber so sold was cut and removed during 1913 and it averaged 9,765 feet per acre, for which the corporation paid the partnership at the rate of $7.03 per 1,000 feet. The amount fixed and paid at the end of each six-month period was based upon the average price paid for logs during that period on the Memphis, Tenn., market. The timber on the remaining 160 acres east of the railroad was sold to the Green Liver Lumber Co. in 1914 on the same terms as the timber on the 460 acres. The sale in the year 1913 to the Green Liver Lumber Co. did not, in our opinion, reflect the value of the standing timber on the Marks Tract and should not be used as a basis for that purpose. It was a sale of the timber on a part of the tract made by the taxpayer to a corporation controlled and practically owned by its several partners. The corporation did not buy the timber standing en bloc, but merely acquired the right to cut and remove the timber, and to pay for it at the end of each six months at a price then determined. It is obvious that the corporation did not assume the same risks and obligations that a purchaser of standing timber usually incurs or assumes, and that the price actually paid for the timber after it had been cut and removed can not be considered as the fair market value of the timber in place. Furthermore, the timber sold in 1913 to the Green Liver Lumber Co. was located on the most accessible part of the tract and the most of it was of a heavier stand than the remainder of the tract. Assuming that the sale in 1913 was an arm’s length transaction, which we do not hold, it was not such a sale as would fairly reflect the value of the entire tract of standing timber at that time.

The taxpayer also introduced evidence of the sale of timber in 1913 to Taylor and Crate by the Fish-Lamb Lumber Co. The timber on a tract of about 2,500 acres of land in the vicinity of the Marks tract was sold for approximately $93,000. This tract of timber was somewhat inferior to the Marks tract but there was a freight differential of about $2 per 1,000 feet in its favor. The freight differential was offset to some extent by the fact that the timber on the Marks tract could be logged at a lower cost than the timber on the Fish-Lamb tract. The Fish-Lamb tract contained about 19,000,000 feet of timber, making the cost thereof to Taylor and Crate about $4.75 per 1,000 feet. The taxpayer also introduced evidence of the sale, in 1913 or the first part of 1914, of a large tract of timber located in the vicinity of the Marks tract for approximately $40 -per acre for the land and timber.

The partnership did not at any time have a survey of the timber on the Marks tract made by a timber cruiser in order to determine the fair market value of the tract on March 1, 1913.

The value of the Marks tract of timber, as determined by the Commissioner, was arrived at after a careful cruise thereof made by an experienced timber cruiser and graduate forester. He accepted the taxpayer’s figures as to the acreage sold in 1913 and 1914 and the amount of timber cut therefrom, and he made a cruise of the uncut part of the tract, which seems to be the approved and accepted method of computing the footage of standing timber and is the basis upon which it is usually bought and sold. The value per acre of the timber involved here, as determined by him and as approved and adopted by the Commissioner, is equal to or possibly a little greater than the price at which other tracts of timber in the vicinity of the Marks tract were sold during the year 1913. We see no reason to disturb the determination of the Commissioner as to the value of the Marks tract of timber on March 1, 1913, or as to the rate at which the taxpayer’s allowance for depletion thereof should be computed.

With reference to the remaining question presented, the evidence establishes that the directors of Nickey & Sons Co. decided on January 10, 1916, to dissolve the corporation and to liquidate its assets. At that time it had capital stock outstanding of the par value of $100,000, and it had a surplus of $144,862.98. Between January 10, 1916, and December 31, 1916, distributions were made to the stockholders, and on January 31, 1917, the corporation had no surplus and its capital account was reduced to $73,614.99. The balance remaining in the capital account was distributed to the stockholders during the year 1917.

In Appeal of James Dobson, 1 B. T. A. 1082, this Board held that distributions made in the year 1917 by a corporation in liquidation are within the provisions of section 31 (b) of the Revenue Act of 1916, added by section 1211 of the Revenue Act of 1917, and, to the extent that they are paid out of profits accumulated after March 1, 1913, are taxable as dividends; and that, where all profits were so distributed in 1917, any further distribution in the year 1918 must have been out of capital. In that appeal the Board said:

' Considerable doubt arose as to the taxability of distributions of surplus accumulated prior to tlie adoption of tlie Sixteenth Amendment, both when made as ordinary dividends and when made as part of a general liquidation. The United States District Court, in January, 1916, and the Circuit Court of Appeals for the Eighth Circuit, on September 4, 1916, decided that such distributions, whether as ordinary dividends or in liquidation, were not taxable to the recipient stockholders. Lynch v. Hornby, 236 Fed. 661; Lynch v. Turrish, 236 Fed. 653. Before these cases reached the Supreme Court, the Revenue Acts of 1916 and 1917 had been passed and definitions of “ dividends ” were included in them. The Supreme Court, in Lynch v. Hornby, 247 U. S. 339, expressed the view that the new provisions were not intended to be declaratory of the intent of the 1913 Act, but rather constituted a concession to the equity of stockholders.
Section 2 (a) of the 1916 Act defined net income as including dividends,' but contained this proviso:
Provided,, That the term ‘ dividends ’ as used in this title shall be held to mean any distribution made or ordered to be made by a corporation, joint-stock company, association, or insurance company, out of its earnings or profits accrued since March first, nineteen hundred and thirteen, and payable to its shareholders, whether in cash or in stock of the corporation, joint-stock company, association, or insurance company, which stock dividend shall he considered income, to the amount of its cash value.”
In the Revenue Act of 1917, section 2 (a) of the 1916 Act was amended by being repeated without the proviso, while the proviso was inserted as a new section 31 (a), and to it was added a new subsection, (b), as follows:
“(b) Any distribution made to the shareholders or members of a corporation, joint-stock company, or association, or insurance company, in the year nineteen hundred and seventeen, or subsequent tax years, shall be deemed to have been made from the most recently accumulated undivided profits or surplus, and shall constitute a part of the annual income of the distributee for the year in which received, and shall be taxed to the distributee at the rates prescribed by law for the years in which such profits or surplus were accumulated by the corporation, joint-stock company, association, or insurance company, but nothing herein shall be construed as taxing any earnings or profits accrued prior to March first, nineteen hundred and thirteen, but such earnings or profits may be distributed in stock dividends or otherwise, exempt from the tax, after the distribution of earnings and profits accrued since March first, nineteen hundred and thirteen, has been made. This subdivision shall not apply to any distribution made prior to August sixth, nineteen hundred and seventeen, out of earnings or profits accrued prior to March first, nineteen hundred and thirteen.”
Subsequently, the Supreme Court, on June 3, 1918, affirmed Lynch v. Turrish, 247 U. S. 221, and reversed Lynch v. Hornby, 247 U. S. 339. Then, in the Revenue Act of 1918, approved February 24, 1919, Congress dropped those provisions of section 31 (b), Supra, which taxed dividends at the rates in effect for the years in which the distributed profits had been earned, and added the provision of section 201 (c), as follows:
“(c) A dividend paid in stock of the corporation shall be considered income to the amount of the earnings or profits distributed. Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.”
In the circumstances, it would seem that Congress, when it passed the Acts of 1916 and 1917, intended to treat ordinary dividends and distributions in liquidation alike, as they had been treated by the District Court and the Circuit Court of Appeals, but in the 1918 Act decided to make a distinction between them as the Supreme Court had done in interpreting the 1913 Act. This being the case, we can hardly regard the provisions of section 201 (c) of the Act of 1918 as declaratory of the intent of the 1917 Act.
The 1917 Act, treating ordinary - dividends and distributions in liquidation alike, provided that “ any distribution ⅜ * ⅞ shall be deemed to have been made from the most recently accumulated undivided profits or surplus.” And in “ any distribution ” must be included distributions made in liquidation as well as those made in ordinary course of business. The term distribution, in its commonly accepted meaning, certainly includes payments made to stockholders in liquidating a corporation. The Supreme Court so used it in its opinion in Lynch v. Turrish, supra.

The Kevenue Act of 1916 is silent with respect to the assets out of which distributions by corporations should be deemed to have been made. However, we are of the opinion that, in the absence of express statutory provisions directing otherwise, we should give the same effect to distributions made by a corporation during the year 1916 as to those made in the year 1917, namely, that they «ball be deemed to have been made out of profits and surplus, rather than out of capital, so long as there were undivided profits and surplus existing. It follows that, in the year 1917, W. E. Nickey, S. M. h'ickey, and A. B. Nickey had nothing left in Nickey & Sons Co., except an interest in undistributed capital, and, upon distribution thereof in 1917, they realized no taxable income.


author: Sternhagen

text:
    Appeal of THE RHODE ISLAND TOOL CO.
    Docket No. 2832.
    Submitted May 13, 1925.
    Decided November 28, 1925.
    Invested capital computed under tbe decisions in Appeal of L. 8. Ayers & Oo., 1 B. T. A. 1135, and Appeal of Guarantee Construction Co., 2 B. T. A. 1145.

      Edward McCarthy, Esq., and George M. Wolcott, Esq., for the taxpayer.

      J. Harry Byrne, Esq., for the Commissioner.
    Before Steeni-iagen, Green, and Love.
    This is an appeal from the determination of a deficiency in income and profits taxes for the years 1918 and 1919 in the amounts of $26,777.54 and $1,217.17, respectively. The facts are not in dispute, the issues being whether, under the Revenue Act of 1918, the Commissioner properly reduced the invested capital of the taxpayer (1) on account of dividends paid in the taxable years, and (2) on account of the prorating of the Federal income and profits taxes payable .within such years. In its petition the taxpayer alleged that the Commissioner erred in his selection of comparatives on the basis of which the taxpayer’s application for special assessment for the years 1918 and 1919 had been denied, and that the Commissioner further erred in reducing the taxpayer’s 1918 and 1919 invested capital, respectively, by prorating the amounts of dividends paid on January 15, 1918, and January 15, 1919. At the hearing of the appeal these two grounds were withdrawn by the taxpayer.
    FINDINGS OF FACT.
    The taxpayer is a Rhode Island corporation with its principal office in the city of Providence.
    The Federal income and excess-profits taxes of the taxpayer for the year 1917, amounting to $165,289.52, were paid on June 15, 1918., The Commissioner reduced the taxpayer’s invested capital for (lie year 1918 in the amount of $90,569.60, representing the prorated 1917 Federal income and excess-profits taxes, and by $12,887.53, representing the prorated amounts of dividends in excess of current earnings after accruing and deducting from these earnings the so-called “ tentative tax.” The dividends paid by the taxpayer in the taxable year 1918 amounted to $103,500 and were paid as follows:
    Date of payment. Amount of dividend.
    Jan. 15, 1918-_$19, 500
    Apr. 15, 1918-_ 34,500
    June 1, 1918-_ 15,000
    July 15, 1918-_ 34,500
    Total 103, 500
    The Federal income and excess-profits taxes of the taxpayer for the year 1918 were paid in quarterly installments during the year 1919 in amounts of $34,767.90 each. The Commissioner reduced the taxpayer’s invested capital for the year 1919 in the amount of. $58,771.66, representing the prorated 1918 Federal income and excess-profits taxes, and by $6,443.02, representing the prorated amounts of dividends in excess of current earnings after accruing and deducting from these earnings the so-called “ tentative tax.” The dividends paid by the taxpayer in the taxable year 1919 amounted to $138,000 and were paid as follows:
    ■Date of payment. Amount of dividend.
    Jan. 15, 1919-_$19, 500
    Apr. 15, 1919-_ 34,500
    May 1, 1919— _ 15,000
    July 15, 1919_ _ 34,500
    Oct. 15, 1919-_ 34,500
    Total 138, 000
    DECISION.
    The deficiency should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be made on 15 days’ notice, in accordance with Bule 50.
   OPINION.

Sternhagen

: Since this appeal was filed the Board has decided the Appeal of L. S. Ayers & Co., 1 B. T. A., 1135, and the Appeal of Guarantee Construction Co., 2 B. T. A. 1145. From the opinions in those cases, which we need not now repeat, it is clear that the position of the taxpayer as to the proper determination of invested capital in respect of Federal income and profits taxes based on the income- for preceding years must be sustained, except in so far as concerns the dividends paid January 15 of each year, which dividends are deductible in full from invested capital of the year from the date paid. Sec. 201 (e), Revenue Act of 1918.


text:
    Appeal of VON HOFFMANN PRESS.
    Docket No. 2352.
    Submitted October 27, 1925.
    Decided November 28, 1925.

      E. D. Holmes, Esq., for the taxpayer.

      A. H. Fast, Esq., for the Commissioner.
    Before Sterni-iagen, LansdoN, and AruNdell.
    The Commissioner determined a deficiency for the year 1919 of $2,892.54, under section 328 of the Revenue Act of 1918. Section 328 was applied because the Commissioner recognized that the taxpayer used a substantial amount of borrowed capital during the taxable year, which, upon audit of the taxpayer’s return, was excluded from invested capital. The taxpayer now concedes that such borrowed capital is properly excluded from invested capital, and that its tax liability should be determined under section 328. But the taxpayer contends that the tax asserted under section 328 is too great. There was no evidence of the corporations used by the Commissioner for comparison, reliance being placed upon the general statement of two witnesses that the ratio of profit or income to investment which the proposed tax reflects is greater than that commonly known in the printing business. From this it is argued that the tax and deficiency are necessarily excessive.
    The evidence submitted is wholly insufficient to enable the Board to make findings of fact.
   DECISION.

The determination of the Commissioner is approved.


author: SteRNhagen:

text:
    Appeal of REX MACHINERY & SUPPLY CO.
    Docket No. 1791.
    Submitted July 24, 1925.
    Decided November 28, 1925.
    1. In 1919 tbe taxpayer agreed to pay the income tax that might be assessed against its president personally upon the receipt by him in 1919 of shares of stock of the taxpayer issued as compensation for services, and it paid the amount thereof in 1920. Held, not deductible in 1919.
    ■ 2. Taxpayer 7tel<J entitled to special assessment.

      Tom F. Carey, O. P. A., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.

      Before Sternhagen, Lansdon, and Love.
    The Commissioner determined a deficiency of $6,902,664 in income and profits taxes for 1919, from which determination this appeal is brought. The petition specifies three alleged errors: (1) Disallowance as a deduction of $1,008.10, alleged by the taxpayer to have been paid under an agreement to its president, this sum representing the amount of income tax assessed against the president individually on shares of stock of the taxpayer issued to him for services; (2) refusal to treat the taxpayer as a personal service corporation; and (3) failure to allow special assessment under sections 327 and 328 of the Revenue Act of 1918. Upon motion of the taxpayer at the hearing, the second allegation of error was stricken from the petition.
    FINDINGS OF FACT.
    The taxpayer is a Delaware corporation, with its principal office in Tulsa, Okla. It was formed and commenced business on or about July 18, 1919. At the time of organization $6,500 was paid in for stock. Between August 6 and December 31, 1919, additional capital of $16,200 was paid in.
    The taxpayer made an agreement with its president and treasurer, C. W. Lord, under which it issued to him, in 1919, $10,000 par value of its shares of capital stock as compensation for services, and it also agreed to pay any income tax accruing to Lord as a result of the receipt of said stock. The $10,000 of stock was reported by Lord in his income-tax return for 1919, and he ivas assessed thereon and paid in March, 1920, a tax of $1,008.10. This amount was repaid to Lord by the taxpayer during 1920. The $10,000 paid to Lord in stock was allowed by the Commissioner as a deduction. The taxpayer’s books were kept on an accrual basis.
    The Commissioner determined net income for 1919 of $42,351.25, and income and profits taxes of $15,141.55. A revenue agent, after a field examination, fixed the average capital at $4,873.69; the Commissioner found it to be $6,498.69.
    The taxpayer was engaged in selling oil-well drilling tools, machinery, and supplies. It was organized by C. W. Lord, who was its president from the date of organization until the early part of 1922. Prior to’ the incorporation of the taxpayer, Lord had been employed by the Lucey Manufacturing Corporation as district manager in charge of sales in Oklahoma and Kansas.
    The Lucey Manufacturing Corporation manufactured oil-well drilling machinery and tools. It had been doing business in those States through jobbers. In 1919 its relations with the jobbers were severed. It had no sales organization of its own and did not wish to go into the retail trade. The taxpayer was thereupon formed by Lord to distribute the Lucey products in the States named. The trade had already been established, having been built up by the Lucey Manufacturing Corporation.
    The taxpayer made the sales on its own account, billing the customer itself. Some of the goods it received on consignment, and the balance it bought on long-term credits. The terms were 90 days, on trade acceptance, without interest, and with 2 per cent discount if paid before the 20th of the month following the purchase by the taxpayer. In many cases the trade acceptances were renewed. The Lucey Manufacturing Corporation gave the taxpayer its lowest prices. It also permitted the taxpayer to purchase under its contracts with other manufacturers other kinds of goods to be sold in the oil-well district.
    The return of the taxpayer covers a period of operation of about five and a half months.
    DECISION.
    The deficiency should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be made on 20 days’ notice, under Bule 50.
   OPINION.

SteRNhagen:

The deduction in 1919 of $1,008.10, paid by the taxpayer in 1920 to Lord in reimbursement of his income tax for 1919, was properly disallowed by the Commissioner. The liability of the corporation was in effect one of indemnity, and clearly it could not precede the liability of Lord for the tax. This, in accordance with our decision in the Appeal of L. S. Ayers & Co., 1 B. T. A. 1135, accrued in 1920 as to Lord, and we are of opinion that it did not accrue prior thereto as to the corporation. Even though it were not a contract of indemnity, the liability did not accrue until the succeeding taxable year. Appeal of Norwich & Worcester R. R. Co., 2 B. T. A. 215; Appeal of American Telegraph & Cable Co., 2 B. T. A. 991.

The circumstances existing during the taxable year disclose, in our opinion, such an abnormal condition as to bring the taxpayer within the terms of section 327 of the Bevenue Act of 1918. The Commissioner should apply the provisions of section 328 of said Act and his computation thereunder shall be deemed final, since the taxpayer introduced no . evidence with respect to comparatives. Appeal of H. T. Cushman Manufacturing Co., 2 B. T. A. 39.


author: Smith

text:
    Appeal of EDGAR MUNSON, Executor of the Estate of HARRIET A. CURTIS, Deceased.
    Docket No. 442.
    Submitted January 17, 1925.
    Decided December 1, 1925.
    Tbe New York State transfer tax paid by the executor of the estate of a decedent is a legal deduction from gross income in the income-tax return filed for the decedent’s estate in the process of settlement for the year in which such tax was paid, under the provisions of section 214 (a) (S) of the Revenue Act of 1918.

      Russell L. Bradford, Esq., for the taxpayer.

      Robert A. Littleton, Esq., for the Commissioner.
    Before Lansdon, Littleton, and Smith.
    This appeal is from the determination of a deficiency of $3,036.08 in income tax, for the year 1920, of the estate of Harriet A. Curtis, deceased. From the pleadings and documentary evidence introduced, the Board makes the following
    FINDINGS OF FACT.
    Edgar Munson is the sole surviving executor of the estate of Harriet A. Curtis, deceased. As such executor he made an income-tax return for the estate for the year 1920, which showed a total income of $30,196.47. From the gross income the executor claimed a deduction of $33,611.45, which represents the amount of the New York State transfer tax paid by him as executor of the estate of the decedent to the Comptroller of the State of New York on July 23 and July 24, 1920. The return showed no net income. The Commissioner amended the return by disallowing the deduction of the $33,611.45 transfer tax paid. The deficiency in tax is due to such disallowance.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

Smith

: This appeal raises the single question of the right of an estate in the process of settlement in 1920 to deduct from the gross income shown in an income-tax return of the estate for 1920 the New York transfer tax paid by the executor during the year. In accordance with the provisions of section 219 of the Revenue Act of 1918, the executor of the estate of Harriet A. Curtis, deceased, filed an income-tax return of the income of the estate for which he was acting for the calendar year 1920 and deducted from the gross income $33,611.45, which is the amount of the New York transfer tax paid by him on July 23 and July 24, 1920. This deduction was made under the provisions of section 214 (a) of the Revenue Act of 1918, which permits the deduction from gross income of

(3) Taxes paid or accrued within the taxable year imposed * *• * (c) by the authority of any State or Territory * * ⅜ not including those assessed against local benefits of a kind tending to increase the value of the property assessed * * ⅜.

The Commissioner has disallowed the deduction on the ground that the New York transfer tax is imposed not upon the estate of the decedent but upon the heirs, legatees, or devisees; that the tax which is paid by the administrator or executor is paid by him only as agent; and that the tax is a legal deduction from the gross income of the distributees only for whom it is paid. (I. T. 1474; C. B., 1-2, p. 103.)

The New York transfer tax is imposed by section 220, et seq., of the New York Tax Law. In section 220 it is provided:

A tax shall be and is hereby imposed upon the transfer of ⅜ ⅜ * property * * * to persons or corporations in the following cases, * * *
1. When the transfer is by will or by the intestate laws of this state * * *
4. When the transfer is * * * by deed * * * intended to take effect in possession or enjoyment at or after such death. * * *
8. The tax imposed hereby shall be upon the clear market value of such property at the rates hereinafter prescribed.

Section 224 of the tax law reads in full as follows:

224. Lien of tax and collection by executors, administbatobs and trustees. — Every such tax shall be and remain a lien upon the property transferred until paid and the person to whom the property is so transferred, and the executors, administrators and trustees of every estate so transferred shall be personally liable for such tax until its payment. Every executor, administrator or trustee shall have full power to sell so much of the property of the decedent as will enable him to pay such tax in the same manner as he might be entitled by law to do for the payment of the debts of the testator or intestate. Any such executor, administrator or -trustee having in charge or in trust any legacy or property for distribution subject to such tax shall deduct the tax therefrom and shall pay over the same to the state comptroller or county treasurer, as herein provided. If such legacy or property be not in money, he shall collect the tax thereon upon the appraised value thereof from the person entitled thereto. He shall not deliver or be compelled to deliver any specific legacy or property subject to tax under this article to any person until he shall have collected the tax thereon. If any such legacy shall be charged upon or payable out of real property, the heir or devisee, shall deduct such tax therefrom and pay it to the executor, administrator or trustee, and the tax shall remain a lien or charge on such real property until paid; and the payment thereof shall be enforced by the executor, administrator or trustee in the same manner that payment of the legacy might be enforced, or by the district attorney under section two hundred and thirty-five of this chapter. If any such legacy shall be given in money to any such person for a limited period, the executor, administrator or trustee shall retain the tax upon the whole amount, but if it be not in money, he shall make application to the court having jurisdiction of an accounting by him, to make an apportionment, if the case require it, of the sum to be paid into his hands by such legatees, and for such further order relative thereto as the case may require. (Thus amended by L. 1921, chap. 476, in effect July 1, 1921.1

The obligation, for the payment of the tax is placed upon the executor, administrator, or trustee. He is authorized to sell so much of the property,of the decedent as will enable him to pay the tax in the same manner as he 'might be entitled by law to do for the payment of the debt's of the testator or intestate. If a legacy be money, the executor shall deduct from the legacy such portion of the transfer tax paid or payable by him as is properly apportionable to the legacy; if the legacy is in some other form of personal property than money, the executor shall collect from the legatee the amount of the transfer tax properly apportionable to the legacy and shall not pay over to the legatee the bequeathed property until the transfer tax has been paid; if the testator has devised real property, the executor shall collect from the devisee the portion of the total transfer tax properly apportionable to the real estate in question, and the tax shall remain a lien upon the real property until it is paid. If the decedent is an intestate, the transfer tax is collected from the heirs in a similar manner.

Is the New York transfer tax thus payable by the executor, administrator, or trustee such a tax as is comprehended by the words “taxes paid or accrued,” contained in section 214 (a) (3) of the Revenue Act of 1918? These words are comprehensive. They include all taxes except those specifically excepted. In United States v. Woodward (1921), 256 U. S. 632, 634, the United States Supreme Court said, relative to the words “ taxes paid or accrued within the taxable year,” as follows:

Tfiis last provision is the important one here. It is not ambiguous, but explicit, and leaves little room for construction. The words of its major clause are comprehensive and include every tax which is charged against the estate by the authority of the United States. The excepting clause specifically enumerates what is to be excepted. The implication from the latter is that the taxes which it enumerates would be within the major clause were they not expressly excepted, and also that there was no purpose to except any others. Estate taxes were as well known at the time the provision was framed as the ones particularly excepted. (Italics ours.)

At the time of the enactment of the Revenue Act of 1918, the New York transfer tax was as well known as the Federal estate tax; the latter was not enacted until September 8, 1916, whereas the New York transfer tax has been upon the statute books continuously from 3885. We do not think that it can be doubted that the New York transfer tax is a tax comprehended by the words “ taxes paid,” as used in section 214 (a) (3) of the Revenue Act of 1918.

If the New York transfer tax is deductible from the gross income of some taxpayer, from the gross income of what taxpayer is it deductible? It clearly is not deductible from the gross income of the decedent, for it was neither paid nor accrued during the decedent’s lifetime. Is it deductible from the gross income of the beneficiary of the estate or is it deductible from the gross income of the estate as a taxable entity when paid by the executor, administrator, or trustee during the period of settlement? The Commissioner formerly held that the tax was not a legal deduction from the gross income of a legatee or beneficiary. This was upon the theory that the amount paid as transfer tax was not in reality a tax. The question whether it was deductible from the gross income of the legatee or beneficiary was before the courts in the case of Prentiss v. Eisner, 260 Fed. 589, affd. 267 Fed. 16. The higher court held that the New York transfer tax was not a deduction from the income of the legatee of an estate, on the ground that it was not paid by the legatee nor was the tax paid on his or her behalf. It held that the New York transfer tax is one imposed upon the right to dispose of property. This was in accordance with the decision of the United States. Supreme Court in the case of United States v. Perkins, 163 U. S. 625, and the court said that, until the Court of Appeals of New York took a different view of the New York transfer tax from that taken by the Supreme Court of the United States in the above-mentioned case, it would follow that decision. A writ of certiorari for a review of the decision of the circuit court of appeals in the case of Prentiss v. Eisner was denied by the United States Supreme Court in 254 U. S. 647.

Thereafter the United States Supreme Court rendered its decision in United States v. Woodward, supra, and held that the Federal estate tax was a tax within the meaning of the words “ taxes paid,” contained in section 214 (a) (3) of the Revenue Act of 1918. Thereupon, the Commissioner reached a conclusion that the New York transfer tax was also a tax deductible from gross income in an income-tax return, but held that it was deductible from the gross income of the beneficiary and not from the gross income of an estate in process of settlement (I. T. 1474, C. B., 1-2, p. 103), thus rejecting the decision of the courts in Prentiss v. Eisner, supra.

In the Matter of Merriam, 141 N. Y. 479, the question of the nature of the transfer tax was squarely raised in New York. The decedent, William W. Merriam, bequeathed his estate to the United States and the question arose, naturally, whether the State of New York could levy a tax on the transfer to the United States. It was held by the court of appeals that the tax as imposed was rightly exacted. In the course of its opinion the court said (p. 484) :

This tax, in effect, limits the power of testamentary disposition, and legatees and devisees take their bequests and devises subject to this tax imposed upon the succession of property. This view eliminates from the case the point urged by the appellant, that to collect this tax would be in violation of the well-established rule that the State can not tax the property of the United States. Assuming this legacy vested in the United States at the moment of testator’s death, yet, in contemplation of law, the tax was fixed on the succession at the same instant of time. This is not a tax imposed by the state on the property of the United States. The property that vests in the United States under this will is the net amount of its legacy after the succession tax is paid.

This case was appealed to the United States Supreme Court under title of United States v. Perkins, 163 U. S. 625, 628, and that court upheld the right of the State of New York to impose the tax, saying:

Thus the tax is not upon the property, in the ordinary sense of the term, but upon the right to,dispose of it. * * * (Italics ours).

After tracing the right of the State to impose restrictions on the transfer of property by descent or distribution, both in the common law and subsequent to the Statute of Wills enacted in the reign of Henry VIII, the court said (p. 628) :

In this view, the so-called inheritance tax of the State of New York is in reality a limitation upon the power of the testator to bequeath his property to whom he pleases; a declaration that, in the exercise of the power, he shall contribute a certain percentage to the public use; in other words, that the right to dispose of his property by will shall remain, but subject to a condition that the State has a right to impose. Certainly, if it be true that the right of testamentary disposition is purely statutory, the State has a right to require a contribution to the public treasury before the bequest shall fa he effect. Thus the tax is not upon the property, in the ordinary sense of the term, hut upon the right to dispose of it, and it is not until it has yielded its contribution to the State that it becomes the property of the legatee. (Italics ours).

The Court of Appeals of the State of New York, as late as October 24, 1922 (234 N. Y. 115) in the Matter of Hubbard, in speaking of the New York transfer tax, said:

The transfer tax is imposed upon the estate of the decedent as it exists at the hour of his death, and its value is to be fixed as of that time.

We áre not unmindful of the fact that there are a number of decisions of the courts of the State of New York which speak of the New York transfer tax as a tax upon the legatee or beneficiary. Thus, in the case of In re Gihon's Estate, 169 N. Y. 433; 62 N. E. 561, the court said:

The federal tax [section 29 of the Revenue Act of June 13, 1898] is exactly of the same nature as the state tax — a tax not on property, but on succession; that is to say, a tax on the legatee for the privilege of succeeding to property. Knowlton v. Moore, 178 U. S. 41, 20 Sup. Ct. 747, 44 L. Ed. 969. The federal tax is necessarily of this'character; for a direct tax, unless apportioned according to population, would be repugnant to the constitution of the United States. Under that statute, also, it is the amount of the legacy, not of the estate, that determines the rate of taxation. Therefore, though the admin istrator or executor is required to pay the-tax, he pays it out of the legacy for the legatee, not on account of the estate. The requirement of the statute that the executor or administrator shall make the payment is prescribed to secure such payment, because the government is unwilling to trust solely to the legatee. No one questions that where a legacy is given for a specified amount the tax must be deducted from the amount of the legacy and the balance only given to the legatee. A testator may direct that the tax on a particular legacy shall be paid out of his estate; nevertheless, in reality, the tax is still paid out of the legacy, the effect of the direction of the testator being merely to increase the legacy by the amount of the tax. * ⅜ * The full amount of the legacy is in law paid to the legatee, and- the deduction made from it and paid to the state or federal government is paid on account of the legatee from the legacy which he receives. * * * (Italics burs).

This decision was under consideration by the United States Circuit Court of Appeals in the case of Prentiss v. Eisner, 267 Fed. 16, and the court said relative to it and other cases:

We admit that the Now York cases on the subject of taxable transfers are confused and not always clear and consistent. But, until the New York Court of Appeals authoritatively states that the law of New York is not what the Supreme Court of the United States said it was in the Perkins Case, this court has no alternative but to hold that the New York Transfer Tax Act does not impose a tax on a legatee’s right of succession which is deductible in her income tax return. The legacy which the plaintiff herein received under the will of her father did not become her property until after it had suffered a diminution to the amount of the tax, and the tax that was paid thereon was not a tax paid out of the plaintiff’s individual estate, but was a payment out of the estate of her deceased father of that part of his estate which the state of New York had appropriated to itself, which payment was the condition precedent to the allowance by the state of the vesting of the remainder in the legatee.

In Rome Trust Co. v. Law (1923), 204 App. Div. 590, affirmed by the court of appeals without opinion, 236 N. Y. 607, the question of the character of the New York transfer tax was squarely presented to the appellate division of the Supreme Court of New York. The question in issue was whether the New .York transfer tax paid by the executor of an estate in process of settlement was deductible from the gross income of the estate in the State income-tax return filed for the estate by the executor. The New York State income-tax law was patterned after the Federal income-tax law, and in all respects here material was the same as the Federal income-tax law. The appellate division held that the transfer tax was imposed upon the estate and was therefore deductible from the gross income of the estate in process of settlement. As above indicated, this decision of the lower court was approved without a written opinion by the highest court of the State of New York.

As above noted, the United States Circuit Court of Appeals, in Prentiss v. Eisner, supra, stated that it had no alternative but to hold that the New York transfer tax does not impose a tax upon a legatee’s right of succession which is deductible in the legatee’s income-tax return unless or until the New York Court of Appeals authoritatively states that the law of New York is not what the Supreme Court said it was in the Perkins Case, supra. Since that time the New York Court of Appeals has held not that the New York transfer tax is otherwise than what it was construed to be in the Perkins case, but has put its stamp of approval upon the proposition that the tax is on the right of the decedent to dispose of property by will or to transfer title to his heirs-at-law in case the decedent was an intestate. It is a cardinal, principle of statutory-construction that the interpretation of a State statute by the highest court of that State is controlling upon the Federal courts. Massingill v. Downs (1849), 7 How. 760; Des Moines National Bank v. Fairweather (1923), 263 U. S. 103; Cudahy Packing Co. v. Parramore (1923), 263 U. S. 418.

The exact question in point in the appeal at bar has been decided in the case of Johnson v. Keith, 294 Fed. 964. In that case the-United States District Court for the Eastern District of New York held that the New York transfer tax is a tax imposed on the right to dispose of property and that it is not until the property has-yielded its contribution to the State that it becomes the property of the beneficiary, and hence that the tax is payable by the estate,, and not by the beneficiary. This case was appealed to the United-States Circuit Court of Appeals for the Second Circuit and, on November 21, 1924, the decision of that court was handed down affirming the decision below. The circuit court of appeals in this case said:

The case at bar therefore turns on whether the New York inheritance tax is “ imposed ” on him. At least, if it is so imposed, section 5 covers him, That is a question of New York law, and we are bound by the decisions of the-New York Court of Ai>peals on that question. Keith v. Johnson, 3 Fed. (2d) 361.

We have carefully considered the arguments of the Commissioner to the effect that the New York transfer tax paid by an executor is-not a legal deduction from the gross income of the estate in an income-tax return filed for the estate during the period of settlement. His principal argument appears to be based upon language used by the United States Supreme Court in the case of New York Trust Co. v. Eisner, 256 U. S. 345. That court held that the New York inheritance tax was not a deduction in calculating the net estate-liable to the Federal estate tax. In commenting upon this case the-United States Circuit Court of Appeals for the Second Circuit, in Keith v. Johnson, supra, decided on November 21, 1924, said:

That case turned on the meaning of section 203 (a) (1) of the Act of 1916, especially the words “ such other charges against the estate as are allowed by the laws of the jurisdiction * * * under which the estate is being administered.” It is quite true that the reason given was that inheritance taxes were “ taxes on the right of individual beneficiaries,” and for that reason not “ charges that affect the estate as a whole.” Literally the first clause quoted contradicts U. S. v. Perkins, supra, but the cases may be reconciled by understanding that the “charges” intended are only such as are imposed on the executor as successor strieti juris, like the income tax itself, and not such as arise because he must distribute the estate, as is the inheritance tax. There was reason to impute such a distinction to Congress, since the income tax is collected yearly, while the inheritance tax is levied once and for all. Both sovereigns might well insist upon an exaction on the whole estate for the privilege of its transfer.

We are of the opinion that the decision of the United States Supreme Court in New York Trust Co. v. Eisner, supra, is not controlling in the appeal at bar. Cf. Appeal of Farmers Loan & Trust Co., 3 B. T. A. 97.

Phillips concurs in the result only.


text:
    Appeal of JOANNA LOVETT, Executrix of the Estate of THOMAS J. LOVETT, Deceased.
    Docket No. 2940.
    Submitted July 1, 1925.
    Decided December 1, 1925.

      B. G. Simpich, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tkussell.
    This is an appeal from the determination of a deficiency in income tax for the year 1923 in the amount of $228.19. The sole issue is whether the New York State transfer tax is deductible by an estate in determining taxable net income.
    FINDINGS OF FACT.
    Thomas J. Lovett died a resident of the city of Buffalo, N. Y., prior to the year 1923, and Joanna Lovett was duly appointed executrix of his estate. During the year 1923 the executrix filed a New York State transfer-tax return upon which was assessed a transfer tax of $5,650.29, which tax was paid by her in the year 1923. In making the income-tax return for the estate for that year the .executrix deducted, as tax paid by the estate, the said amount of $5,650.29, and the Commissioner in the audit of the said return disallowed the said deduction and assessed the deficiency here in issue.
   DECISION.

The deficiency determined by the Commissioner is disallowed. Appeal of Farmers Loan & Trust Co., 3 B. T. A. 97; Appeal of Edgar Munson, 3 B. T. A. 185.


author: MaRqijette

text:
    Appeal of MAY S. YOUNG, Executrix of the Estate of DAVID G. LEGGETT, Deceased.
    Docket No. 3847.
    Submitted July 9, 1925.
    Decided December 1, 1925.
    The New York transfer tax is deductible from the income of an estate in the year in which the tax is paid.

      Bussell L. Bradford, Esq., for the taxpayer.

      E. O. Lake, Esq., for the Commissioner.
    Before Marquette and MoRRis.
    This appeal is from the determination of a deficiency in income tax for the period from April 27, 1923, to December 31, 1923, inclusive, in the amount of $222,958.15.
    Two questions are raised: (1) Whether the amount of $800,000, paid by the executrix to the State of New York as a transfer tax, is deductible from the income received by the executrix; and (2) whether the amounts of rentals and bond interest, which had accrued during the lifetime of the decedent and were included within the gross estate of the decedent for Federal estate tax purposes, but were actually paid to the executrix, should be included within the income of the executrix.
    FINDINGS OF FACT.
    The taxpayer is the duly nominated and appointed executrix under the will of David G. Leggett, who, at the date of his decease, was a resident of New York.
    Leggett died on April 27, 1923, leaving real and personal property within the State of New York having a gross value of $21,104,-336.84, subject to deductions for New York transfer tax purposes of $1,056,567.66, or a net estate subject to New York transfer tax of $20,047,769.18. Leggett left real estate within the State of New York of a value of $2,710,400, which, by the ninth clause of his will, he specifically devised to his nephew, David G. Leggett, and his niece, Mary S. Young. Leggett left no real estate within the State of New York which was not specifically devised as aforesaid.
    The executrix, on or about October 24, 1923, paid to the State of New York, on account of transfer tax against the estate of Leggett, the sum of $800,000, which constituted a partial payment in advance.
    By the fifth clause of his will, Leggett specifically bequeathed to J. de Ii. Whitehouse certain jewelry of the value of $750, and by the ninth clause of his will, he specifically bequeathed to David G. Leggett, the nephew, certain personal effects of a value of $28,-046.55, the total value of specific bequests subject to tax being $28,796.55.

      Leggett made no other specific bequests of personalty, except one to Yera Whitehouse of certain jewelry of the value of $500, which bequest was not subject to the New York transfer tax.
    The executrix rendered a personal income-tax return for the decedent covering the period from January 1, 1923, to April 27, 1923,, and made a return as executrix for the period from April 27, 1923,. to and including December 31, 1923. Both returns were made upon a cash receipts and disbursements basis.
    In rendering her return as executrix the taxpayer excluded from the report of total income the sum of $11,822.67, which represented rentals accrued to the date of the death of the decedent but not collected until after his death, which accrued rentals were included in the Federal estate-tax return as capital. The executrix also excluded from the report of total income the amount of $33,609.80, which represented interest on bonds which had accrued to the date of the death of the decedent but were not collected until after the death, which accrued interest she also included as capital in the Federal estate-tax return and in the New York transfer-tax return.
    The Commissioner included within the income reported by the executrix for the period from April 27, 1923, to December 31, 1923, said amounts of $11,822.67 and $33,609.80, disallowed the deduction of the $800,000 paid to the State of New York as the transfer tax,, and determined the net income of the executrix to be $639,627.22r with a resulting deficiency in tax of $222,958.15.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

MaRqijette

: That the New York transfer tax, paid during 1923r is deductible from the gross income of the estate for that period was-decided in Appeal of Farmers Loan & Trust Co., 3 B. T. A. 97; Appeal of Edgar Munson, 3 B. T. A. 185; and Appeal of Joanna Lovett, 3 B. T. A. 192. Upon the authority of those decisions the deficiency must be disallowed.

Since the deduction of $800,000 exceeds the entire net income of the estate for the period in 1923, it is unnecessary for us to decide-the other questions presented for our consideration.


author: Smith:

text:
    Appeal of AMERICAN PACKING CO., INC.
    Docket No. 1173.
    Submitted May 27, 1925.
    Decided December 1, 1925
    Tbe taxpayer carried on its books a “ Louisiana factory account,” which showed both capital and expense items. The debits to this account for the fiscal year ended June 30, 1919, were $57,-553.32, of which amount the taxpayer determined that $20,000 represented capital expenditures and $37,553.32 expense payments. The expense payments amounted to $26,553.32. Held, that the taxpayer did not file a fraudulent return for the fiscal year ended June 30, 1919, but incurred the negligence penalty of 5 per cent by reason of understating its true net income to the extent of $11,000.

      L. L. Hamby, Esq., for the taxpayer.

      J. E. Marshall, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tkussell.
    The taxpayer appeals from the determination of a deficiency in Income and profits tax, including a 50 per cent penalty, for the fiscal year ended June 30, 1919. At the hearing the Commissioner asked for the imposition of the 5 per cent penalty for negligence, provided for by section 250(b) of the Revenue Act of 1918, if it should be found that the 50 per cent penalty had not been incurred.
    FINDINGS OF FACT.
    The taxpayer was incorporated under the laws of the State of Louisiana on June 30, 1918, and was a reorganization of the Devitt-Clark Packing Co. The stockholders of the dissolved corporation and the shares held by each during the fiscal year ended June 30, 1918, were as follows:
    Name. Shares.
    T. K. Devitt, president- 70
    Charles Redding, vice president- 70
    P. H. Clark, secretary- 70
    Total_210
    The officers and stockholders of the American Packing Co. at time of reorganization on July 1,1918, were as follows:
    Name. Shares.
    T. K. Devitt, president_250
    P. H. Clark, secretary-250
    Charles Redding, vice president-100
    Esther Redding_150
    Total_750

      The books of account of the Devitt-Clark Packing Co. as of June 30, 1918, showed assets as follows:
    Cash_$9,620.29
    Accounts receivable--- 8,048. 95
    Real estate, bouse_ 3, 239. 25
    Real estate, camps_ 2,467.17
    Moating equipment_ 14, 020. 02
    Factory equipment- 9, 604. 46
    Automobile_ 601. 20
    Office equipment_ 197. 85
    Louisiana factory_ 9S1.34
    Total_ 48, 870. 53
    For the gross assets of $48,870.53, less liabilities consisting of notes payable of $2,000, the taxpayer issued $75,000 capital stock and, in order that the book value of the assets less liabilities might equal the capital stock issued:
    “ Real estate, house ” was written up_$2,129.47
    “ Real estate, camps ” was written up_ 3, 000. 00
    “ Moating equipment ” was written up_ 6, 000. 00
    “ Factory eqriipment ” was written up_ 6, 000. 00
    “ Louisiana factory ” was written up_ 11,000.00
    Total_ 28,129. 47
    so that the assets and liabilities of the taxpayer at July 1, 1918, showed on its books as follows:
    ASSETS.
    Cash_$9,620.29
    Accounts receivable_ 8, 048. 95
    Real estate, house_ 5, 368. 72
    Real estate, camps_ 5, 467.17
    Floating equipment_ 20, 020. 02
    Factory equipment_15, 694. 46
    Automobile_ 601. 20
    Office equipment_ 197.85
    Louisiana factory-11, 981. 34
    Total- 77,000.00
    LIABILITIES.
    Notes payable-$2,000.00
    Capital stock- 75,000.00
    Total- 77,000.00
    Shortly after January 1, 1919, the then bookkeeper of the taxpayer made up from the books a statement showing the profits for the six months’ operation from July 1 to December 31, 1918, which statement showed profits for the period of approximately $17,000. The books of account were not closed at the time. In June, 1919, this bookkeeper left the employ of the taxpayer and wrote to it and to several of the stockholders to the effect that he was resigning because he would not be a party to the filing of a false income-tax return of the taxpayer corporation. Thereupon, another person, one Flannagan, was engaged as bookkeeper, who closed up the taxpayer’s books of account for the fiscal year ended June 30, 1919, and compiled the data for the filing of its first income-tax return. This return showed a net loss for the year of $26,296.70.
    In June, 1921, two years after the date of the income-tax return referred to above, the office of the corporation was removed from Biloxi, Miss., to New Orleans. Flannagan superintended the moving of the office books from one city to the other. A great many old papers of various kinds were left behind. These papers were left in Biloxi in order that the taxpayer might not have to pay transportation charges to and storage charges on them in New Orleans. Flannagan had no idea that they would ever be of any use in the future. The vouchers showing the expenditures of money at the Bayou Lafourche plant (Louisiana factory account) were among these papers.
    Upon an audit of the taxpayer’s books of account by a representative of the Commissioner, there was noted a debit to profit and loss as of June 30, 1919, in the amount of $37,437.49. This debit was from an amount called “ Louisiana factory.” This factory was constructed at Bayou Lafourche, La., during the period from June 1 to September 30, 1918. While this plant was under construction, all expenditures connected with it were charged to the account designated as “Louisiana factory.” The debits and credits to this account, as shown by the ledger of American Packing Co., were as follows:

      A memorandum on the ledger sheet shows:
    Land_$4,500
    Buildings_ o, 500
    Floating_ 5, 000
    Machinery and equipment_ 4,000
    Tools_ 1, 000
    Total_ 20, 000
    The plant was located on property of Camille Bebstock, of Golden Meadows, La. It consisted of one frame building 60 by 80 feet, with paper roof. The floating equipment consisted of three small trawl boats, one schooner, and miscellaneous equipment. The machinery and equipment consisted of one boiler, one pump, two process kettles, one engine and piping, etc., all used for the purpose •of packing shrimp.
    Camille Bebstock, upon whose land the Louisiana factory was located, by agreement with the taxpayer had made practically all payments for materials and supplies used at such factory. This was done for convenience. The taxpayer reimbursed Bebstock each month for expenditures made. An inspection of the ledger sheets maintained by Bebstock, showing various amounts of purchases charged "to the taxpayer as well as payments made to him by the ■company, shows that the total amount charged by Bebstock to the company was $25,949.82. There is a lack of proper vouchers supporting entries on the books of the company, and a certified public accountant was unable to check the purchases shown by Bebstock into the “ Louisiana factory ” account. The accountant found, however, a number of cash payments appearing in the said account which agree with cash credits on the books of Bebstock. These payments were made between January 1 and June 30, 1919, and amounted in the aggregate to $7,699.41.
    In transferring from the “ Louisiana factory ” account to profit and loss $37,553.32, instead of $26,553.32, and in filing a tax return reflecting such charge to profit and loss, the taxpayer negligently understated its net income in the amount of $11,000.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, in accordance with Bule 50.
   OPINION.

Smith:

The only issue in this appeal is whether the taxpayer falsified its books of account for the fiscal year ended June 30, 1919, by a debit to profit and loss of $37,437.49, and, as a result thereof, filed a false and fraudulent return for such, fiscal year. The return filed showed a net loss of $26,296.70. It is now admitted that mistakes were made in the preparation of the return. The Commissioner has not, however, imputed fraud with respect to any of the errors alleged to have been committed by the taxpayer, except with respect to the debit to profit and loss above referred to. The taxpayer’s books of account do not make it clear to whom or for what purpose charges to the Louisiana factory account were made. Supporting vouchers have been destroyed or lost.

The debits to.the Louisiana factory account at the close of the fiscal year ended June 30, 1919, amount to $57,558.32. The taxpayer estimated as of the same date that its investment in this plant was $20,000. It is admitted 'that this is an estimate. The balance of the debits to this account is alleged to represent operating expenses, such as purchase of shrimp, cans, etc. The Bayou Lafourche plant was completed by September 30, 1918. Debits to the account were made in nearly every month of the fiscal year.

We are satisfied from the evidence of record that the investment of the taxpayer in the Bayou Lafourche plant (Louisiana factory) at June 30, 1919, was not in excess of $20,000. We are also satisfied that at least a part of the debits to the account were for operating expenses. The taxpayer admits an error in its opening entry of $11,000. This represented simply appreciation in the value of the plant at that time. We are also satisfied that there was no intention or attempt on the part of the taxpayer to misrepresent its profits on its books of account. We are, therefore, of the opinion that the taxpayer was in error only to the amount of $11,000 in the debit to profit and loss of $37,437.49. The deficiency should be determined upon the basis of a correct debit to profit and loss from the “ Louisiana factory ” account of $26,437.49. No fraud was committed by the taxpayer in the filing of its income-tax return for the fiscal year ended June 30, 1919, but it was negligent in understating its net income on that return to the extent of $11,000, and the 5 per cent penalty for negligence, imposed by section 250 (b) of the Revenue Act of 1918, was incurred upon any deficiency in tax caused thereby.