author: Milliken:

text:
    Northwestern States Portland Cement Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5763, 10456.
    Promulgated July 29, 1927.
    1. The purchase price paid by petitioner’s incorporators for limestone lands, shortly before petitioner was organized, and the land exchanged for stock, establishes the value of such lands for invested capital purposes.
    2. The value of such lands exchanged for stock, together with sales of common stock, provides a basis for allocating the selling price of blocks of stock, the sales purporting to be of preferred stock at par with common stock issued as bonus to purchasers between the respective classes of stock, thereby determining the value of the common stock.
    3. The March 1, 1913, value of limestone and clay lands determined and the value of such lands as of January 1, 1914, determined by reducing the March 1, 1913, value proportionate to the extraction in the interim, and such value allowed as invested capital for 1917 (under section 207 of the Act of 1917) to the extent that such value does not exceed the par value of the stock specifically issued therefor.
    4. An accurate estimate of the deposit content accepted as a basis for depletion, though such estimate was made subsequent to the basic date.
    5. The book reserve for depreciation in prior years, representing the judgment of an experienced officer with intimate knowledge of construction, operation and care, may not be increased for invested capital purposes by computing depreciation for such years on a straight line basis.
    6. Current earnings available for dividends may not be reduced by a tentative tax.
    7. In the absence of evidence, claim for special assessment under sections 327 and 328 denied.

      John Thomas Taylor, Esq., and Briggs G. Simpieh, Esq., for the petitioner.

      A. George Bouchard, Esq., and Granville S. Borden, Esq., for the respondent.
    These proceedings result from the determination by respondent of deficiencies in income and profits tax for the calendar years 1917 to 1920, inclusive, amounting to $475,828.82. The proceedings for all years were consolidated for hearing and decision. Petitioner avers errors with reference to the following issues: (1) The failure to include in invested capital the aptual cash value of land and personal services paid in for stock; (2) the fair market value of the deposits of limestone and clay owned by the petitioner on March 1, 1918, have been incorrectly determined, as well as the tons thereof in. reserve on that date for depletion purposes; (8) invested capital has been erroneously reduced for all years by reason of an adjustment with respect to depreciation sustained prior to January 1, 1917; (4) the value has been erroneously determined as of January 1, 1914, of tangible property, paid in for capital stock, allowable in invested capital in 1917; (5) the deduction of a tentative tax in determining current earnings available for dividends in the years 1917 and 1920, was in error; (6) the excess-profits taxes for the years 1918, 1919, and 1920 should have been computed pursuant to the provisions of sections 327 and 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    Petitioner is a West Virginia corporation with its principal office and place of business at Mason City, Iowa. It was organized to acquire and develop properties containing deposits suitable for the manufacture and sale of Portland cement. A partnership known as the Cowham Engineering & Construction Co. caused the petitioner to be incorporated for the purpose designated. Since 1898, W. H. L. McCourtie and W. F. Cowham had been associated under the name of the Cowham Engineering & Construction Co. in the development of properties containing cement-making materials. As early as 1900, they had organized a cement-manufacturing company, fapiown as the Peninsula Portland Cement Co., to develop certain cement deposits in the State of Michigan. The cement business, at the time of the development of the Michigan properties by the Cowham Engineering & Construction Co., was in its early stage of usefulness and expansion. Cowham and McCourtie decided to organize a partnership to erect plants and further develop the possibilities of the cement-manufacturing business. A large technical staff was employed, consisting of staff prospectors, mineralogists, chemists and engineers capable of rendering services necessary to develop a cement business from preliminary prospecting for suitable deposits to promotion of an operating organization and construction of needed plant facilities. Prior to the organization of petitioner, the partnership had constructed five cement mills and developed what was then known as the “ Cowham System,” the outcome of their long experience in designing, constructing, and actually operating cement mills.
    Being of the opinion that the northern part of Iowa would be a desirable location for a Portland cement mill, they prospected the States of Iowa and Minnesota, finally selecting the vicinity of Mason City, Iowa, as the most promising in the combination of available raw materials and proximity to a future market. A certain tract of 160 acres was considered the most desirable and adjacent tracts were also selected to a total of 286 acres. These properties were acquired by Cowham and McCourtie through the purchase of options held by Cruickshank & Ritter (a firm which had previously built a cement mill at Neodesha, Kans.) and of the fee from various individuals. Title was actually acquired in the early part of the spring of 1906, and very shortly thereafter, on April 6,1906, the petitioner was incorporated in West Virginia with an authorized capital stock of 36,000 shares, par value $100; 20,000 shares preferred and 15,000 shares common. At incorporation, 300 shares had been subscribed for.
    On the following day, the apportionment was changed to 17,500 shares of preferred and 17,500 shares of common, the par value of $100 each and the total shares, 35,000, remaining unchanged. The preferred stock was entitled to a fixed dividend rate of 7 per cent per annum, beginning July 1,1907, cumulative, and payable annually if declared, with preference extending to assets as ivell as earnings and with voting power equal to that of the common stock, share for share. The corporation was organized with a very broad charter, but its interests and activities were centered in the manufacture and sale of Portland cement, the principal raw materials being quarried from its own lands. The principal office was at first located at Jackson, Mich., and was later changed to its present location at Mason City, Iowa. The first meeting of the stockholders was held at Jackson, Mich., on April 7, 1906. W. F. Cowham presented a proposition to subscribe for 1,850 shares of preferred stock and 5,300 shares of common stock on conditions embodied in a contract submitted to petitioner. The Cowham Engineering & Construction Co. presented a proposition to subscribe for 4,375 shares of common stock and pay therefor in services in construction of a plant as per written contract presented at the meeting. The board of directors was authorized and directed to execute both contracts. The sale at par value (with adjustment to allow interest to July 1, 1907) of the preferred stock with a bonus, without additional charge, of one-half share of common stock for each share of preferred stock, was authorized. The issue was authorized of common stock to each of the incorporators, of one-half share per each share of preferred stock subscribed for in connection with the organization. The first meeting of the board of directors was held at Jackson, Mich., on April 7, 1906. The vice president and treasurer were ordered to execute contracts as follows:
    Articles of Agreement, made and entered into this 6th day of April,-1906, by and between Tlie Northwestern Portland Cement Company, a corporation organized nnder the laws of West Virginia, of the first part, and William F. Cowham and W. Herbert L. MeCourtie, of Jackson, Michigan, of the second part:
    Witnesseth: that whereas, the said parties of the second part have subscribed for five thousand three hundred (5,300) shares of the Common Stock of said Company, and one thousand eight hundred and fifty (1,850) shares of its Preferred Stock, and,

      Whereas, said Cowham has achieved a conspicuous success in the organization, management and control of Portland Cement Mills, and said McCourtie has been associated with him in the control of the sale of stock in corporations organized therefor, and said Company is desirous of availing itself of their services in connection with its operation, and the sale of its stock, and said Cowham and McCourtie are now the equitable owners of certain lands being two hundred and eighty-six (286) acres, or thereabouts, near Blasón City, Iowa, which are very valuable because of rich mineral deposits suitable for the production of Portland Cement, said land being also suitable for a mill site in. connection therewith, all of which said Company is desirous of securing.
    Therefore, these presents witness, that the said W. P. Cowham and W. H. L. McCourtie, hereby agree to convey, or cause to be conveyed, to said Company, by good and sufficient deed of conveyance, all and singular the above lands and mineral rights, together with the tenements and appurtenances thereunto pertaining, and also agree to render the said Company in the organization, management and control of its said business, their experience, skill, time and service, as General Manager and Manager of Stock Sales, respectively, on such terms as shall be agreed upon with the Directors of said Company, and use their best endeavors to contribute thereby to its prosperity to the extent that is consistent with and permitted by like obligations to other plants of similar character, with which said Cowham and McCourtie are now, or may be hereafter, connected.
    In consideration of the premises, said party of the first part, by its officers duly authorized hereto by unanimous vote of its stockholders in regular meeting, hereby agrees to transfer to said W. F. Cowham and W. II. L. McCourtie the said one thousand eight hundred and fifty (1,850) shares of its Preferred stock and five thousand three hundred (5,300) shares of its Common Stock fully paid and non-assessable, upon delivery of proper title to said lands, free from all encumbrance.
    Witness the hands of the parties, the said Company by its Vice-President and Treasurer, duly authorized the day and year aforesaid.
    Articles of Agreement made and entered into this sixth day of April, 1906, by and between the Northwestern States Portland Cement Company, a corporation organized under the laws of West Virginia of the first part, and the Cowham Dngineering and Construction Company of Jackson, Michigan, of the second part.
    Witness, Whereas: said party of the second part has control through its organization of engineers of great proven skill in the construction of Portland Cement Mills, who have demonstrated the great success of the system of construction and processes of manufacture followed by them, in what has become known as the Cowham System of Portland Cement Mills, and said party of the first part is desirous of availing itself of said skill and experience of the engineering force so controlled by the said party of the second part in the construction and installing of its proposed plant at Mason City, Iowa.
    Now, Therefore, These Presents Witness: That the said party of the second part agrees to furnish through its engineering force complete plans and specifications and a competent engineer to supervise and direct in the execution thereof, and in the erection of all necessary buildings and machinery therefor, and for the full installation of the system of manufacture adopted.
    In consideration thereof, said party of the first part agrees to issue to said party of the second part certificates for four thousand three hundred and seventy-five shares of its common capital stock fully paid and non-assessable, and further agrees to pay to said party of the second part a sum equal to ten percent of the entire cost of construction and equipment and to pay all traveling and other expenses that are necessarily incurred in such service.

      In witness whereof tlie said parties have hereunto set their hands and seals (the said corporation acting herein by its Vice-President and Treasurer duly authorized by the stockholders hereof) the day and year aforesaid.
    Deeds to the lands described in the contract set forth above were presented by the promoters and accepted at a special meeting of the board of directors held at Chicago, Ill., on June 2, 1906.
    All of the preferred shares with a bonus of one-half share of common stock were sold for cash at a price equal to the $100 par value of the preferred stock. Certain shares of stock due Cowham and McCourtie as part consideration for 286 acres of land, being 1,860 shares of preferred and 925 shares of common, were, at their request, sold for $185,000 cash by petitioner and the proceeds credited to their account by the petitioner. There were also issued to them, 4,375 shares of common stock for the land. The 286 acres of land transferred by Cowham and McCourtie to the petitioner had cost the former $247,000 in cash, and they had also agreed to cause to be issued to the prior owners of the land 100 shares of preferred stock and 1,250 shares of common stock of the corporation to be organized. Cowham and McCourtie received from petitioner, 1,850 shares of preferred stock and 5,300 shares of common stock in consideration of the transfer to the petitioner of the 286 acres of land in question. A share of preferred stock had a value of $88.66 and a share of common stock had a value of $22.68 at the date when 286 acres of land were turned in to the petitioner for its capital stock. The cash value of the 286 acres of land paid in for capital stock was $284,225, and the par value of the capital stock issued specifically therefor was $715,000.
    The plant was erected under the direction of the Cowham Engineering & Construction Co. and commenced production in 1908, with a capacity of 4,000 barrels per day.
    The services of the Cowham Engineering & Construction Co., for which 4,375 shares of common stock were issued, had a value of $99,225.
    Additional lands were acquired subsequent to 1906 at various dates by purchase for cash, and they included deposits of limestone and clay.
    In 1912, a dealer in real estate in Mason City, Iowa, was commissioned by petitioner to purchase limestone lands lying immediately south of petitioner’s quarry, at a price not to exceed $5,000 per acre.
    Prior to January 1, 1914, estimates of the qualities and quantities of limestone and of clay deposits underlying the lands of the petitioner were based mainly on surface indications, outcroppings, exposures of strata in ravines, and a few scattered holes or test pits. Petitioner lias never operated more than one quarry and one clay pit.
    On March 1, 1913, lands belonging to the petitioner of an area of 194 acres, were underlaid with available limestone deposits suitable for use in the manufacture of Portland cement, and these lands had a value of $5,000 per acre.
    The fair market value of the available limestone deposits of the petitioner, on March 1, 1913, was $970,000.
    On March 1, 1913, lands 'belonging to the petitioner, of an area of 83.3 acres, were underlaid with beds of available clay deposits suitable for use in the manufacture of Portland cement and these lands had a value of $5,000 per acre.
    The fair market value of the available clay beds of the petitioner, on March 1, 1913, was $416,500.
    The 286 acres of land acquired for capital stock in 1906, together with the deposits of limestone and clay underlying them, on January 1, 1917, had an actual cash value as of January 1, 1914, in excess of the par value, $715,000 of the capital stock specifically issued therefor.
    A systematic survey of the limestone-bearing and clay-bearing lands of the petitioner by means o f core borings and chemical analyses, was begun in 1922, with the result that at the end of 1923 the amount, character, and availability of the limestone deposits then existing were satisfactorily ascertained and similar information relative to the clay was ascertained in 1924. From this survey and from statistics of production prior thereto, the following reserves are determined:

    The respondent has reestimated the depreciation sustained prior to January 1, 1917, arriving at an amount $985,625.91 in lieu of the amount $702,039.88 shown on the books on December 31, 1916, and has reduced invested capital accordingly. The plant was well constructed, frequently improved, constantly inspected, and was at all times kept up to the highest state of efficiency.
    The reserve shown on the books was the aggregate of annual depreciation allowances computed on a rate per barrel of cement produced, based on the judgment of the officers of the petitioner that it was adequate. The respondent recomputed the depreciation sustained to January 1, 1917, on the straight line method, using an annual composite rate of 5 per cent.
    Despondent, in computing invested capital for the years 1917 and 1920, reduced current earnings available for the payment of dividends by tentative taxes estimated for the current years.
   OPINION.

Milliken:

The first issue relates to the action of respondent in holding that nothing of value which may be included in invested capital was paid in for petitioner’s common stock. Petitioner avers that the common stock was issued in part payment for land and plant assets, both being of substantial value. The problem is to determine the actual cash value of that which was paid in for the stock of petitioner. We must determine not the value of the stock in and of itself for invested capital purposes, but the actual cash value of the land and services paid for the same. There is not sufficient direct evidence upon which we may depend, in fixing a value of the property and personal services for which a large block of common stock was issued. However, we are of the opinion, in this case, that we should take into account the various considerations that entered into the various transactions, by reason of which the stock was issued or sold, and from the same we will be enabled to determine the value of the preferred and common stock of petitioner, with a resultant value of the land and personal services paid in for the same.

We find cash of $30,000 was paid for 300 shares of preferred stock subscribed for at the date of incorporation, and petitioner caused to 'be issued to the subscribers 150 shares of common stock as a bonus. There were sold for cash in the open market, 15,350 shares of preferred stock and 7,675 shares of common stock, for $1,535,000. To Cowham and McCourtie were issued 1,850 shares of preferred and 5,300 shares of common in payment for 286 acres of land, and the petitioner, as their agent, sold in the open market for their account 1,850 shares of preferred and 925 shares of common, crediting the proceeds of $185,000 to their account. In addition to a cash payment, the Cowham Engineering & Construction Co. received 4,375 shares of common stock in payment for their services incident to the construction of the plant.

One of the most important assets which the petitioner acquired at date of incorporation was the valuable 286 acres of limestone lands, which McCourtie and Cowham had acquired. Only a short time elapsed after the date McCourtie and Cowham acquired the lands before they were transferred to petitioner. What was the cost of the lands to them? They purchased the lands on their own account, paying therefor, in cash, $247,000, and agreed to cause to be issued to the persons from whom they acquired the lands, 100 shares of preferred stock and 1,250 shares of common stock of a corporation to be organized. The persons from whom they purchased the lands were in a position to be informed as to their true value and certainly McCourtie and Cowham knew of their value when transferring the lands to the petitioner.

That which was paid in for one share of preferred stock and one-half share of common stock, is clearly evidenced by the sales in the open market and the sales of the 1,850 shares of preferred stock and 925 shares of common stock of Cowham and McCourtie, on the basis of $100 for the combination. If we had only the issuance of the 17,500 shares of preferred and 8,750 shares of common stock sold for cash at rate of one share preferred and one-half share of common for $100, our problem would be simple of solution, but we have an additional block of 8,750 shares of common stock, which were issued in part payment for land and services of substantial value.

Cowham and McCourtie paid for the 286 acres of mineral lands, $247,000 in cash and agreed to pay McNider $10,000, or a cost of $257,000, and they received from petitioner, from the sale of 1,850 shares of preferred stock and 925 shares of common stock, $185,000. After the transaction incident to the sale was concluded, whereby all parties to the transaction had received the stock to which they were entitled, we find Cowham and McCourtie left with $185,000 in cash and 8,175 shares of common stock in payment for the transfer of the lands to the petitioner. The difference between $257,000 (cost to Cowham and McCourtie) and the cash received, $185,000, leaves an amount of $72,000, and we think this correctly reflects that which was paid in for the 3,175 shares of common stock held by them, and results in a value of $22.08 for each share of common stock. That which was paid for so large a block of common stock is also representative of that which was jKiid for the entire issue of common stock. We are of the opinion that the services of Cowham Engineering & Construction Co., being a part of the cost of the plant and for which 4,375 shares of common stock were issued, were of a value equal to $22.68 for each share of common stock, or a value for the services paid in of $99,225. It has been shown that large blocks of preferred stock were sold for $100 per share, with a bonus of one-half share of common stock. By subtracting from the sale price of $100, the value of one-half share of common stock, or $11.34, we find a value for the preferred stock of $88.66 per share. Application of the value per share of the common stock to the total issue, 17,500 shares, results in a value of $396,900, and application of the value per share of the preferred stock to the total issue of 17,500 shares, results in a value of $1,551,500, or a total value for both issues of stock of $1,948,450. Eespondent has allowed in invested capital only the par value of the preferred stock, or $1,750,000, thus understating invested capital for all the years by the difference here allowed, or $198,450.

The second issue relates to the value as of March 1, 1913, of the deposits of limestone and clay owned by the petitioner. The issue is common to all the years, due to the deductions allowable for depletion. The determination of quantity, as well as value, is involved.

We are satisfied that the survey of the petitioner’s properties, begun in 1922 and completed in 1924, was careful and thorough- — very much more so than the original prospecting- — and that the results shown satisfactorily establish the content in tons of the deposits of limestone and of clay. We have previously held that an accurate estimate of available reserves was acceptable for computations of depletion, notwithstanding that it was made several years subsequent to the basic date. Kehota Mining Co., 3 B. T. A. 885, and the principle is of evident application in the instant case, where the deposits are fixed in character. Accordingly, the survey is accepted and the reserves are determined, as indicated in the findings of fact.

As to the values of the limestone and clay, on March 1, 1913, reliance by the petitioner rests on opinion evidence. The opinions are those of the promoter of the enterprise, and of an experienced dealer in real estate, who had resided all his life in the vicinity in which the property is located. Their opinions coincided in values of $5,000 per acre for both limestone and clay lands, as of March 1,1913. The real estate dealer testified that in 1912, representing the petitioner, he had offered as high as $5,000 an acre for land immediately south of petitioner’s quarry, but the offer was refused. He further testified that cement and clay lands around Mason City, in 1912 and 1913, were under great demand, amounting to a “flurry.” The only evidence before us as to the fair market value of the property at March 1, 1913, leads to the conclusion that $5,000 per acre is supported for the lands of the petitioner containing limestone and clay, not heavily overburdened, but that such value is of application limited to lands of large available deposits and was the result of peculiar local conditions.

The petitioner lays claim to an area of 274 acres of limestone land to which the value of $5,000 attaches, but we are not convinced that two areas, referred to as divisions 3 and 4, stated to contain 40 acres each, or a total of 80 acres, are properly to be included at such a value. A railroad right of way of undisclosed area through the lands, raises a doubt that the area actually owned by the petitioner was a full 80 acres in extent and a majority of the acreage, due to the heavy overburden and the low content of available limestone, does not classify reasonably as land worth $5,000 an acre. Claim is made to an area of 200 acres of clay lands, but it is in evidence that the clay was found to extend to only a small amount under one of the arbitrary divisions of 40 acres, and we are not satisfied that the entire area of the remaining 160 acres was underlaid with clay so as to have a total value of $800,000.

After careful consideration of all the evidence, we are satisfied that on March 1, 1913, the limestone-bearing lands of the petitioner, of the value of $5,000 an acre, comprised an area of at least 194 acres and its clay lands of the value of $5,000 an acre comprised an area of at least 83.3 acres and we are of the opinion that these lands had a fair market value on that date of $970,000 for the limestone lands and $416,500 for the clay lands.

Relative to the third issue, it is in evidence that the plant was constantly maintained in a condition of the highest efficiency and repair and in the judgment of an experienced official of the petitioner, based on an intimate knowledge of operating conditions, plant construction and care, the reserve of $702,039.88 charged off of the petitioner’s books at December 31, 1916, was ample, and truly reflected the depreciation actually sustained to that date. There is no evidence whatever, to show that the depreciation sustained was greater than the amount charged off on the books. The respondent has set up a computation of estimated depreciation based on cost, and applying a fixed percentage rate per annum, thereby endeavoring to substitute a “ straight-line ” method for the years gone by, in lieu of the depreciation which was charged off on the books. We have repeatedly held that depreciation is a question of fact and that a readjustment of the depreciation reserve, resulting in a reduction of invested capital, may not be based merely on a formula or method of computation. Cleveland Home Brewing Co., 1 B. T. A. 87; Russell Milling Co., 1 B. T. A. 194; Rub-No-More Co., 1 B. T. A. 228; Otis Steel Co., 6 B. T. A. 358. See also Haugh & Keenan Storage & Transfer Co. v. Heiner, 20 Fed. (2d) 921.

In view of the evidence, we are of the opinion that the reduction of invested capital by the respondent, in the amount of $283,586.03, was unwarranted and should be restored to invested capital for each of the years 1917 to 1920, inclusive.

The fourth issue relates to the amount of invested capital allowable for the year 1917, under the provisions of section 207 of the Revenue Act of 1917.

It is in evidence that 286 acres of land were acquired in 1906 for 7,150 shares of capital stock and were still owned by the petitioner on January 1, 1917, having been depleted in the interim by the extraction of limestone deposits aggregating a definite tonnage. There is an entire absence of evidence that the lands declined in value between March 1, 1913, and January 1, 1914, save to an extent measurable by the tonnage of limestone extracted during that period. From the value determined above, as of March 1, 1913, based on the fair market value, $5,000 per acre for limestone lands and a commensurate value of all other lands, we are satisfied that the lands and reserves owned on January 1, 1917, had a value as of January 1, 1914, in excess of the par value of the capital stock specifically issued for them and find the amount allowable in invested capital for 1917, to be $715,000, the par value of the stock issued for the lands in question.

In the fifth issue, the action of the respondent in reducing current earnings available in 1917 and 1920, for dividends, through the accrual of a tentative tax, is reversed. Appeal of L. S. Ayers & Co., 1 B. T. A. 1135.

The respondent is sustained in the sixth issue, involving special relief under sections 327 and 328 of the Revenue Act of 1918. We discern no abnormality of capital or income and there is, in the record, no evidence thereof, or of gross disparity of tax.

Eeviewed by the Board.

Judgment will he entered on 30 days’ notice, wider Bule 50.


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Hugo F. Urbauer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7356.
    Promulgated July 29, 1927.
    A slirinkage in the value of 60,000 kronen deposited in a bank in Budapest, Hungary, between the date deposited in 1916 and October, 1920, when withdrawn, is not a deductible loss in the latter year.

      Dwight D. Currie, Esq., for the petitioner.

      J. E. Man-shall, Esq., for the respondent.
    The Commissioner determined a deficiency in income tax of $1,649.92 for the year 1920 and $26.24 for the year 1921.
    Petitioner claims that the Commissioner erred in refusing to allow as a deductible loss for the year 1920 the sum of $13,728, representing the shrinkage in the value of a deposit held by petitioner in a bank in Budapest, Hungary, said deposit being made in 1916 and withdrawn in 1920, and being then of a value of only $132.
    The 1921 deficiency is not questioned.
    FINDINGS OF FACT.
    The petitioner is a resident of St. Louis, Mo., where he is engaged in the contracting and manufacturing business.
    He had a sister, Mrs. Johanna Fuchs Urbauer, living in Hungary and married to George Fuchs. The husband died there in 1915. Prior to 1915, petitioner loaned his sister and her husband various amounts of money, later taking their joint notes for the same, secured by a mortgage on the property of his sister there. The notes so secured were dated May 3, 1911, the principal note being for $6,087, falling-due in five years, and five interest notes for $304.35 each, falling-due in one, two, three, four, and five years after date, respectively.
    At the time of this loan, Hungary was on a gold basis, the loan representing in value about 40,000 Hungarian kronen, a kronen being-then of about 21 cents value in American money. Austria-Hungary then existed.

      At later dates, petitioner loaned other sums to his sister and brother-in-law aggregating $2,200, or 12,560 kronen in value.
    After the death of her husband in 1915, petitioner’s sister, out of insurance money on the life of her husband, repaid petitioner all the money loaned her and her husband, payment in full being made in March, 1916, in the sum of 66,620 kronen. On the 11th of March, 1916, 60,000 kronen of the amount were, by direction of the petitioner, placed to his credit in the W.ener Bank Yerein at Budapest, subject to withdrawal by him after due notice, and to draw the highest rate of interest the bank would pay on his deposit, which was 3% per cent. The interest on the same was to be paid monthly, to petitioner’s sister, and 6,620 of the 66,620 kronen were deposited in the same bank for her benefit, 100 kronen of which were to be paid her monthly. Subsequent to the death of the husband of petitioner’s sister, he made it a practice to give her money from time to time.
    In January, 1920, petitioner was advised by letter from the bank, dated December 10, 1919, that it wished petitioner to dispose of his account on deposit, then amounting to 64,327 kronen, as the result of accrued interest. He was later advised that no further interest would be paid on the deposit and he thereupon directed the amount to be paid to his sister, which was done in October, 1920. Hungary was then a separate country.
    On the date when the 64,327 kronen were paid or credited by the bank to his sister, they were of the value in American money of $132.
   OPINION.

Littleton:

The evidence shows that the debt which petitioner’s sister and her husband owed him, was fully repaid in 1916 in the sum of 66,620 kronen. Of said amount, 60,000 kronen were deposited to petitioner’s account in the Wiener Bank Yerein at Budapest, and on the date when withdrawn in October, 1920, there were by accrual of interest 64,327 kronen, which had a value of $132 in American money.

If the deposit be considered as a debt from the bank to the petitioner, he is not entitled to deduct the amount of $13,728 as a bad debt in computing his net income for the year 1920 for the reason that said debt was not found to be worthless and charged off by the petitioner during the taxable year, and under the provisions of section 214 of the Revenue Act of 1918 a debt may not be deducted in part.

The petitioner insists however if $13,728 is not deductible as a bad debt he is entitled to deduct the same as a loss sustained in 1920.

The claimed loss is based upon the shrinkage it? value of the kronen between the date deposited in the bank in Budapest in 1916 and October, 1920, when withdrawn. The shrinkage in value of property does not constitute a deductible loss under the statute. Theodore Tiedemann & Sons, Inc., 1 B. T. A. 1077; E. O. Walgren, 4 B. T. A. 1066; W. P. Davis, 6 B. T. A. 1267; Corn Exchange Bank, 6 B. T. A. 158; New York Life Insurance Co. v. Edwards, 271 U. S. 109.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Millticen:

text:
    Edward H. Alsop, Executor, Estate of Edward B. Alsop, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6519.
    Promulgated July 29, 1927.
    Where a person in 1912, created a trust, the- income of which was payable to him during his life and at his death the corpus vested in his sons, and where, in 1917, he created a second trust, the income of which, except a small part which was reserved to himself, was payable to a divorced wife, the corpus at the death of the wife to be paid to the grantor if alive, otherwise to his sons, and when the divorced wife survived the grantor, and when both trusts were revocable only with the consent of all beneficiaries; B.'eld, that since both trusts were created prior to the enactment of the Revenue Act of 1921, the corpus of neither trust is subject to the estate tax imposed by that Act as part of the grantor’s gross estate.

      R. M. T. McOready, Esq., for the petitioner.

      J. F. Greaney, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $37,590.87 in estate tax arising under the provisions of the Revenue Act of 1921. The question presented is whether the corpus of two trust estates created by Edward B. Alsop in the years 1912 and 1917, respectively, should be included in his gross estate. The facts are stipulated.
    FINDINGS OF FACT.
    Edward B. Alsop died testate on November 12, 1922, leaving no widow and as his sole descendent, his son, Edward H. Alsop. By a deed dated February 14, 1912, he convej^ed certain tracts of land in Allegheny County, Pennsylvania, which he had acquired from his first wife, to himself and Reese L. Alsop, upon the following trusts:
    To Have and To Hold the said premises, with all and singular the appurtenances thereunto belonging, In Trust Nevertheless, for the following uses and purposes:
    To pay over a^id apply the rents, issues and profits therefrom to the use of myself, Edward B. Alsop, during my life. Upon my decease, the said Reese D. Alsop shall continue to hold said properties or the profits derived therefrom under the terms of this Trust, and pay over the rents, issues, and profits arising therefrom, to or for the use and benefit of my two sons, Harold P. U. Alsop and Edward H. Alsop, share and share alike, until my youngest son shall have reached the age of thirty years. If, however, he shall have arrived at the age of thirty years prior to my decease, then upon my decease to pay over the principal, together with any accumulated' interest derived therefrom, to my said sons, share and share alike. I declare it to be my intention and purpose of this Trust that my said sons shall receive share and share alike the principal and interest as herein provided, of said trust property and if either of my said sons shall die, then his share shall be divided equally among his children, if any, and if he shall have no children, then his share shall go to his wife. If he shall leave no wife or children surviving him, the said surviving son and his issue shall be entitled to the whole of said trust funds.
    The Trustee under this Trust shall have the powers, by and with the consent of my two said sons, to annul or change the terms of this trust. Said trustee shall not be required to give any bond and shall have full power and authority to sell, convey, assign, transfer said real estate either at public or private sale and to make, execute and deliver deeds therefor; shall have power to mortgage said i>roperty or any part thereof; shall have power to 'invest and re-invest the proceeds or funds received from the sale of any of the property, in such manner and in such property or securities as the said trustees may deem proper, whether said investments be permitted to Trustees under the Laws of the State of Pennsylvania, or otherwise.
    Edward H. Alsop and Harold P. TJ. Alsop were the children of the first wife. The consideration for the conveyance was the moral obligation which the grantor felt he was under to see to it that the sons of his first wife should ultimately acquire the property which he had received from their mother. Harold P. U. Alsop died on December 10, 1914, intestate, unmarried, and without issue. On December 17, 1914, Edward B. Alsop delivered to Edward H. Alsop the following paper:
    Know all men by these presents
    That for and in consideration of the sum of One Dollar to me paid and for other valuable considerations I hereby assign and set over to Harold P. U. Alsop and to Edward H. Alsop and their heirs any and all rents or profits of any kind whatsoever that may be derived from the property known as 347 Fifth Avenue, Pittsburgh, Pa., or from properties at Sewickley Heights, property in First Ward, Pittsburgh, property in Seventh Ward, Pittsburgh, property in 14th Ward Pittsburgh, Pa., property in 26th Ward, North Side, Pittsburgh, Pa., And any interest of any kind whatsoever I may have directly or indirectly in any and all of said properties. The above properties are set forth in detail in a certain Trust deed or agreement made by A. B. Alsop to E. B. Alsop and Reese D. Alsop Trustees.
    Witness my hand and seal this sixth day of November, A. D., 1914.
    Witnesses: E. B. Anson [seal]
    Herman G. Veeder
    Donald McRae
    Owing to the death of Harold P. U. Alsop, I this day hereby eliminate the name of said Harold P. U. Alsop from the above assignment, thus leaving Edward H. Alsop as sole beneficiary under this assignment. Witness my hand and seal this 17th day of December, A. D. 1914.
    Witness) (Donald McRae E. B. Alsop [seal].
    (Herman 6. Veeder.
    Edward B. Alsop continued after tbe date of the assignment to return for Federal income-tax purposes, the income from the trust properties. Edward H. Alsop arrived at the age of 30 years on January 21, 1922.
    By a written instrument dated December 3, 1917, Edward B. Alsop transferred to the Union Trust Company of Pittsburgh, twenty-four Pittsburgh, Cincinnati, Chicago & St. Louis Railway Co. 4y2 per cent, Consolidated Mortgage Gold Bonds, Series “J,” due May 1,1964, of the face value of $1,000 each, upon the following trusts:
    Eirst. To collect all of the interest upon said bonds that may become due during the term of the natural life of Effie Pope Hill Alsop, formerly wife of Edward B. Alsop, the Donor herein, and to pay over to the said Effie Pope I-Iill Alsop, free from all of her debts, contracts and engagements of every kind, and without right of anticipation, as said interest is paid, the sum of Five Hundred ($500) Dollars out of the semi-annual installment of interest thereafter paid to it, said The Union Trust Company of Pittsburgh, trustee as aforesaid, upon said bonds, during the term of the natural life of said Effie Pope Hill Alsop; such interest being payable in accordance with the terms of said bonds on May 1st, and November 1st, of each year the said payments to be made free from all tax saving and excepting such income tax as may be imposed by the United States Government and required to be collected at the source.
    Second. To take for the own proper use of it said trustee, from the interest collected upon said bonds in excess of said semi-annual payments of Five Hundred ($500) Dollars each, during the existence of this trust, the sum of Thirty ($30) Dollars per annum as compensation in full for the services of it the said trustee under this Deed of Trust.
    Third. To pay over the further excess of said interest, less any further required tax, annually to the said Edward B. Alsop during the joint lives of him and the said Effie Pope Hill Alsop, and if the said Edward B. Alsop shall die during the lifetime of said Effie Hill Alsop, then thereafter to Edward H. Alsop, son of Edward B. Alsop, now a resident of the city of Atlanta, State of Georgia, his heirs, executors, or administrators.
    Fourth. In the event that said Effie Pope Hill Alsop shall be alive when said bonds mature and are paid, then to reinvest the whole of the proceeds of said bonds for the same uses and purposes, subject to the written approval of said Effie Pope Hill Alsop and of the person or persons then living who under this Deed would be the beneficiaries of the corpus of said trust were said Effie Pope Hill Alsop then to die, as to the manner and form of reinvestment, and with like approval to sell the securities held hereunder at any time and reinvest the proceeds.
    Fifth. Upon the death of said Effie Pope Hill Alsop to transfer and deliver the whole of the corpus of this trust in such form as it may then be, together with any interest or other increment not otherwise applicable under the terms hereof, unto Edward B. Alsop, the donor herein, if he be then alive, and if he be not then alive, to his son, said Edward H. Alsop, or if he be not then alive, then to such person or persons then living as would have been entitled to inherit and take the personal property of said Edward H. Alsop under the intestate laws of the State of Pennsylvania then in force had the said Edward H. Alsop died simultaneously with the said Effie Pope Hill Alsop; sucn persons should they be more than one, to take hereunder under the same conditions and in the same proportions that they would take under said intestate laws.
    Sixth. The trust hereby created may be terminated at any time by written agreement filed with the trustee, duly executed by said Effie Pope Hill Alsop and by the person or persons then living who would be the beneficiary of the corpus of said trust under Paragraph Fifth hereof, were said Effie Pope Hill Alsop then to die. And in the event that this trust shall be so terminated by agreement, the corpus of the trust, and any and all increments thereof in the hands of the trustee, shall be disposed of by the trustee in accordance with the terms of the written agreement under which the trust is terminated.
    Effie Pope Hill Alsop survived Edward B. Alsop. The Commissioner included in the gross estate, $6,995.88, that being the present value of the remainder interest in said bonds.
    Of the deficiency, $27.04 is not in controversy.
    The value of the trust estate created by the deed of February 14, 1912, and the value of the remainder interest under the trust conveyance of December 3, 1917, were included in the gross estate of the decedent on the sole ground that he had created trusts to take effect in possession or enjoyment at or after his death.
   OPINION.

Millticen:

This proceeding is governed by the decision in Nichols v. Coolidge, 274 U. S. 531. The facts in that case, which are material to this proceeding, are thus stated by the court:

Mrs. Julia Coolidge, of Massachusetts, survived her husband and died January 6, 1921. As required by the Revenue Act approved February 24, 1919, c. 18, 40 Stat. 1057, 1090, the executors returned a schedule to the Collector. He estimated the gross estate at $180,184.73 and allowed $77,747.74 deductions. They paid the amount assessed upon the balance. Their return did not include certain property transferred by the decedent through duly executed deeds and without valuable consideration, some to trustees and some directly to her children. The Commissioner of Internal Revenue held that under Section 402(c) the value of all this property at her death must be included in the gross estate. He raised the assessment accordingly and demanded the additional tax — $84,662.65—here challenged.
July 29, 1907, Mrs. Coolidge and her husband owned certain real estate in Boston, also valuable personal property, which they transferred without consideration to trustees, who agreed to hold it and pay the income to the settlors, then to the survivor, and after his death to distribute the corpus among the settlors’ five children or their representatives. The deed directed that the interest of any child predeceasing the survivor should pass as provided by the statute of distribution “ in effect at the time of the death of such survivor.” The trustees were authorized to sell the property, to make and change investments, etc. April 6, 1917, the settlors assigned to the children their entire interest in the property, especially any right to the income therefrom. At the death of Mrs. Coolidge the trustees held property worth $432,155.35, but through sales and changes much of what they originally received had passed from their possession.

The court said, with reference to this transfer: “ But the conveyance by Mrs. Coolidge to the trustees ivas in no sense testamentary, and bears no circumstantial relationship to transfer by death.” The court concluded their opinion as follows:

The statute requires the executors to pay an excise ostensibly laid upon transfer of property by death from Mrs. Coolidge to them but reckoned upon its value plus the value of other property conveyed before the enactment in entire good faith and without contemplation of death. Is the statute, thus construed, within the power of Congress?
Undoubtedly, Congress may require that property subsequently transferred in contemplation of death be treated as part of the estate for purposes of taxation. This is necessary to prevent evasion and give practical effect to the exercise of admitted power, but the right is limited by the necessity.
Under the theory advanced for the United States, the arbitrary, whimsical and burdensome character of the challenged tax is plain enough. An excise is prescribed, but the amount of it is made to depend upon past lawful transactions, not testamentary in character and beyond recall. Property of small value transferred before death may have become immensely valuable, and the estate tax, swollen by this, may leave nothing for distribution. Real estate transferred years ago, when of small value, may be worth an enormous sum at the death. If the deceased leaves no estate there can be no tax; if, on the otheivhand, he leaves ten dollars both that and the real estate become liable. Different estates must bear disproportionate burdens determined by what the deceased did one or twenty years before he died. See Frew v. Bowers, Collector, 12 Fed. (2d) 625.
This court has recognized that a statute purporting to tax may be so abri-trary and capricious as to amount to confiscation and offend the Fifth Amendment. Brushaber v. Union Pacific R. R., 240 U. S. 1, 24; Barclay & Co. v. Edwards, 267 U. S. 442, 450. See also Knowlton v. Moore, 178 U. S. 41, 77. And we must conclude that Section 402(c) of the statute here under consideration, in so far as it requires that there shall be included in the gross estate the value of property transferred by a decedent prior to its passage merely because the conveyance was intended to take effect in possession or enjoyment at or after his death, is arbitrary, capricious and amounts to confiscation. Whether or how far the challenged provision is valid in respect of transfers made subsequent to the enactment, we need not now consider.

The transfer of February 14, 1912, was made before Congress had enacted any estate tax statute whatever and the transfer of December 3, 1917, was made before the enactment of the Revenue Act of 1921, under which the tax here involved was imposed, and neither transfer was under the rule laid down in the Coolidge case testamentary in character. Under this decision, judgment must go for petitioner. (Compare Shukert v. Allen, 273 U. S. 545.)

Reviewed by the Board.

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


author: Miixiicen :

text:
    Estate of Virginia I. Stern, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert B. Stearns (formerly Stern), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9646, 9647.
    Promulgated July 29, 1927.
    1. Where the trustees create an unauthorized reserve out of trust income to replace depreciated assets of the corpus, the depreciation withheld was distributable.
    2. The construction placed on a State taxing statute is not authoritative in the construction of a Federal taxing statute.

      B. B. Toungman, Esq., for the petitioners.

      M. N. Fisher, Esq., and Paul L. Peyton, Esq., for the respondent.
    These proceedings were by agreement consolidated and involve the following deficiencies in income tax for the year 1921:
    In the case of the estate of Virginia I. Stern the deficiency is $4,187.01. In the case of Robert B. Stearns, the deficiency is $559.59.
    The question presented is whether certain amounts withheld from petitioners by certain trustees, in order to create a sinking fund to take care of depreciation, constitute distributable income of a trust.
    FINDINGS OF FACT.
    While this proceeding was pending, Virginia I. Stern died testate. Robert B. Stearns, Gustav Wertheim Van Henkelan, and Arthur H. Harlow were, on the 29th day of April, 1927, granted letters testamentary by the Surrogate’s Court for the County of New York, State of New York, and such executors have been substituted as petitioners in the place of Virginia I. Stern.
    Isaac Stern died in the year 1910, a resident of the City and State of New York. The pertinent parts of his will read:
    Second : I hereby nominate, constitute and appoint my wife, Virginia Stern, my son Robert B. Stern, and my sons-in-law, Arthur A. Hahlo and Gustav A. Wertheim, to be the Executrix and Executors of and Trustees under this my Last Will and Testament.
    In no event shall my Executrix, Executors or Trustees or any of them be required to give or furnish any bond, undertaking or security for the performance of any of the trusts hereby delegated to them in any State or Territory of the United States or in any foreign country, either by reason of non-residence, change of residence or for any other reason, any law now existing or that may hereafter be passed to the contrary notwithstanding.
    4%: I give, devise and bequeath unto my nephew Frederick Kugelman and my niece Marion Kugelman each the sum of Twenty-five hundred dollars.
    Seventh : I hereby direct my Executors and Trustees to withdraw from the assets of my estate the sum of Two hundred thousand dollars and to pay One hundred thousand dollars thereof in cash to my son-in-law Arthur H. Hahlo and One hundred thousand dollars to my son-in-law Gustav A. Wertheim so as to furnish each of my sons-in-la,w with capital with which to enter into business.
    Eighth : I hereby give and bequeath to the United Hebrew Charities in the City of New York the sum of Two Thousand dollars; to the Hebrew Benevolent and Orphan Asylum Society, in the City of New York, the sum of Two Thousand dollars; to the Educational Alliance, in the City of New York, the sum of Two thousand dollars; and to the Home for Aged and Infirm Hebrews, in the City of New York, the sum of One thousand dollars.
    Having heretofore subscribed the sum of Five thousand dollars toward the Building Fund of the Montefiore Home for Chronic Invalids in the City of New York, on account of which a payment of One thousand dollars has been made, my Executors and Trustees are instructed to pay the balance as the same matures by the terms of the subscription.
    Ninth: I give and bequeath to the Mount Sinai Hospital, in the City of New York, the sum of Ten thousand dollars for the general purposes of the Hospital. It is my wish, but it is not made a condition of this bequest, that the said sum shall be devoted by the Hospital to the creation of the “ Isaac and Virginia Stern Endowment Fund ” to be applied to such purposes of the Hospital as the Directors thereof from time to time may determine.
    Tenth: I give and bequeath unto my beloved wife, Virginia Stern, in addition to the other bequests to her contained in this Will, and without in any way limiting or affecting the same, the sum of One million dollars, which shall be paid to her by my Executors and Trustees for her sole use and benefit, and without restriction.
    Thirteenth : All the rest, residue and remainder of my estate, real and personal, of whatsoever kind, nature and description and wheresoever situate, I give and devise to my Executors and Trustees, hereinbefore named, upon the trust that they shall sell and dispose of the same or any part thereof in their unrestricted discretion, and shall invest, reinvest and keep invested the same in securities satisfactory to them and shall receive and collect the rents, interest, income and profit thereof and pay over one equal third part of said rents, interest, income and profits semi-annually to my beloved wife so long as she shall live, and upon the death of my wife I give and devise that portion of my estate so set apart to yield the income herein provided for her benefit, to my children and to their lawful issue then surviving in equal shares to be held for or distributed among them on the like trusts and in a like manner as is provided in the Fourteenth article hereof for their respective shares of the remaining two thirds of my residuary estate.
    The provisions of this and of the Tenth and Eleventh articles of this my Will, for the benefit of my wife, are to be in lieu of dower and every other claim of my wife upon my estate and are conditioned upon the execution and delivery by my said wife to my said Executors and Trustees of effective releases of .such dower within two months after this Will shall have been admitted to probate.
    Fourteenth : My residuary estate, other than that provided to be set apart, the income of which is to be paid to my wife during her life, in the preceding article of this my Will, shall be divided into as many parts or shares as shall equal the number of my children who shall survive me, and the then deceased child or children who shall have died, leaving lawful issue him or her surviving, the lawful issue of any deceased child to have equally divided between them the share of their deceased parent.
    1. Subject to the limitations and trusts in this Article contained I hereby give and devise one of said shares to each of my children then living and one of said shares in equal parts to the issue collectively of any child that shall have died lawful issue him or her surviving.
    2. The share set apart for my son shall be held by my said Executors and Trustees upon trust to invest, reinvest and keep invested the same and to receive the rents, income and profit thereof and apply the Same to the use of my son so long as he shall live, and upon his death, leaving lawful issue, such trust shall cease, and the said share shall he distributed equally to and among his lawful issue, share and share alike, the issue of a deceased child taking collectively the share which would have fallen to the parent if living; provided, however, that one-half of the share set apart for my son shall, with the consent and in the discretion of my wife, if then living, he granted and paid over to him on his attaining the age of twenty-five years, or at any time thereafter, upon the death of my son without lawful issue him surviving, said share shall be distributed to and among and shall be paid over to such persons and in such proportions as he shall by his Last Will and Testament appoint, and in default of such appointment or in the event of his death before attaining the age of twenty-five years without leaving lawful issue surviving such share shall go to his then surviving sisters equally, share and share alike. If either of said sisters shall die before him, leaving issue, such issue shall take collectively the share which would have fallen to their parent if living. It is further provided that in the discretion of a majority of iny then surviving Executors and Trustees other than my said son, they may at any time after my son attains the age of thirty years, grant and pay over to him all or any portion of his share so held in trust.
    3. The shares set apart for my daughters respectively shall be held by my said Executors and Trustees upon separate trusts to invest, reinvest and keep invested the same and to receive the rents, income and profits thereof and apply and pay over the same annually to the use of such daughter so long as she shall live; and upon her death such share shall be equally distributed among her lawful issue then surviving, share and share alike, the issue of a deceased child taking collectively the share which would have fallen to their parent if living. In the event of her dying without lawful issue the said share shall go to her surviving brother and sister equally, share and share alike; and in the event of the death of her said brother or sister, both or either of thorn, before her, leaving issue, such issue shall take collectively the share which would have fallen to their parent if living.
    4. Such part of the income of each child (and of the issue of any child that shall have predeceased me) as may be necessary for the care, maintenance, education and support of such child or grandchild shall be paid semi-annually for such maintenance and education, during minority, and the remainder of such Income shall be accumulated during such minority.
    Fifteenth : I hereby authorize and empower my said Executors and Trustees to sell at public or private sale and on such terms as to credit, security and otherwise, as they may determine, or to mortgage, exchange, lease, release or otherwise dispose of all or any part of my property and estate except my country residence herein specifically devised to my wife and son (which they may dispose of upon the conditions prescribed by the Eleventh paragraph hereof) and to deliver to the purchaser good and sufficient deeds, mortgages, leases, releases and other assurances therefor. I hereby further authorize and empower my Trustees in their discretion to invest from time to time the proceeds of any of my real or personal estate in productive real estate in the City of New York, such purchases, however, to be made only with the concurrence of all my Trustees then living and acting.

      Sixteenth : My Executors and Trustees are further authorized to hold any real or personal property, stocks, bonds, securities and other interests or assets that may come into their hands as part of my estate or that they may see fit to purchase or acquire on the sale or conversion of any part of my estate, and to apportion the same,'or any part thereof, in their discretion, among the trusts created by my Will, without converting the same or any part thereof into investments of the character required by law to be made by trustees, and without accountability to any of my cestui que trust or otherwise for the character of such investments, and with the same force and effect as though there had been apportioned in lieu thereof securities of the character in which trustees are required to invest according to the laws of the State of Now York.
    . Seventeenth : I hereby direct that the bequests contained in this my Will shall be paid whenever in the discretion of my Executors and Trustees the same can with due justice to the proper administration of my estate be paid.
    The petitioner, Robert B. Stearns, is the same person as Robert B, Stern, the son of testator, mentioned in the will of Isaac Stern, and Virginia I. Stern was the widow of Isaac Stern and was the same person as Virginia Stern, named in the will. The corpus of the trust set apart to Virginia I. Stern depreciated during the year 1921 in the amount of $11,679.19, and the corpus of the trust set apart to Robert B. Stearns depreciated during the same year in the amount of $7,786.18. The executors and trustees of the will of Isaac Stern deducted from the amount due and payable to Virginia I. Stern during the year 1921 the said amount of $11,679.19, and from the amount due and payable to Robert B. Stearns during that same year said amount of $7,786.13.
   OPINION.

Miixiicen :

Petitioners in their brief filed in this proceeding contend: (1)- That Robert B. Stearns was entitled outright to his share of the trust; (2) that the estate of Isaac Stern was in course of administration in the year 1921; (3) that under the income-tax statute of the State of New York the petitioners were allowed to take deductions to the extent of the amount reserved by the executors and trustees; and (4) that the amounts reserved by the trustees were not distributable to petitioners under the terms of the will of-Isaac Stern, and therefore, were not taxable to them.

The first three contentions made may be disposed of briefly. With respect to the contention that Robert B. Stearns was entitled to his share outright, it may be pointed out that under the fourteenth clause of the will of his father he was entitled at the age of twenty-five years to have one-half of his share paid to him, provided his mother consented thereto, and that he was entitled to have the whole of his share paid over to him at the age of thirty years if a majority of the trustees other than himself in their discretion so decided. There is nothing in the record which indicates that either of these events has happened. On the other hand, petitioner Robert B. Stearns in his petition states that he “ is one of the beneficiaries under a trust created by the will of the late Isaac Stern * * Until the corpus of the share of Robert B. Stearns is paid over to him in accordance with the provisions of the will of his father, it remains a part of the corpus of the trust and devolves on his death as provided in the will. Until so paid Robert B. Stearns has only an equitable life estate in the corpus.

There is nothing in the record from which it can be inferred that the estate of Isaac Stern was still in course of administration in the year 1921. The testator died in 1910 and every inference is that his estate has been settled and the corpus of the trust turned over to the trustees, who were the same persons as the executors, long prior to 1921. As above pointed out, Robert B. Stearns referred to himself as the beneficiary of a trust created in his favor and not as a beneficiary of an estate in process of administration. The petition of Virginia I. Stern contains the same allegation. We can decide this proceeding only upon the facts found in the record.

The construction placed on a state taxing statute is not authoritative in the construction of a Federal taxing statute, and therefore the action taken by the New York authorities with reference to the taxation of the income of this petitioner has no bearing on the question presented. Compare Florida v. Mellon, 273 U. S. 12, decided by the Supreme Court January 3, 1927, and J. Percival Smith, 6 B. T. A. 911.

This brings us to the last and controlling contention, which is, that so much of the income as was withheld by the trustees was not distributable to the petitioners and therefore not taxable to them. At the outset it is well to point out that the petitioners err when they state in their brief that it was stipulated at the hearing that “ the depreciation reserve set up by the executors was withheld from the beneficiaries and was not distributed nor distributable to them under the will.” No stipulation is found in the record to the eifect that this reserve was not distributable under the will of Isaac Stem. This is the question which is in issue in this case. The facts stipulated are correctly and fully stated in the findings of fact.

In this case petitioners refer to the seventeenth clause of the will of Isaac Stern and contend that under this provision the income of the trust was distributable at the discretion of the trustees. It is only necessary to point out that this clause relates solely to the payment of “ bequests ” and has no bearing on the payment of income arising fropi the trusts created by the will. This income the testator directs shall be paid annually in some cases, and semi-annually in others. As to the income payable to Robert B. Stearns, the mandatory direction is that the trustees apply all the rent, income and profits to his use. The only reason advanced by petitioners why the amounts retained by the trustees and which are in issue in this proceeding should not be returned by them as income is the contention that the trustees had the right to retain this sum in order to rebuild such structures as might by lapse of time or use become valueless through depreciation.

Section 219 of the Revenue Act of 1921 in part provides:

(a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
*******
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct. * * * .
*******
(d) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not, or if his taxable year is different from that of the estate or trust, then there shall be included in computing his net income his distributive share of the income of the estate or trust for its taxable year ending within the taxable year of the beneficiary. * * *

Section 219 of the Revenue Act of 1918 was construed in Baltzell v. Mitchell, 3 Fed. (2d) 428; 5 Am. Fed. Tax Rep. 5230. This decision is applicable to section 219 of the Revenue Act of 1921. See Arthur H. Fleming, 6 B. T. A. 900. In the Baltzell case it was said:

In considering Section 219 alone and apart from the other sections of the act, it is evident that in it Congress employed words which lead to confusion of thought. It states under subdivision (d) that the income under paragraph 4 on which the tax is to be assessed and collected shall be “ his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year.” The beneficiary clearly has no distributive share in the net income of the estate or trust; but he has a distributive share of income to be paid him under and in accordance with the terms of the trust, and resort must be had to them to ascertain his proportion of the income or his distributive share. The beneficiary is not interested in the capital of the trust, but only in ihe income. If there are accretions to the capital, these are not distributable as income, so that the beneficiary may receive any part of them; and if there are capital losses they cannot be made good out of the income. The capital may be depleted by such losses; but the income for that taxable year is not. It may in future years be diminished because of the diminution of the capital.

We must therefore look to the will of Isaac Stern to discover what was the distributable share of income of each petitioner. The thirteenth clause of the will directs the executors and trustees to “ receive and collect the rents, interest, income and profit thereof and pay over one equal third part of said rents, interest, income and profits semi-annually to my beloved wife so long as she shall live * * The fourteenth clause directs the executors and trustees “ to receive the rents, income and profit thereof and apply the same to the use of my son so long as he shall live * * A careful reading of the will as a whole discloses no provision which directs the trustees to provide a sinking fund to rebuild structures which have become valueless by reason of depreciation. In the absence of such a direction the trustees were governed by the rule applicable to ordinary trustees. That rule is thus stated in Stevens v. Melcher, 152 N. Y. 551; 46 N. E. 965.

Ordinarily the duty devolves upon tenants in common in possession, life tenants, or trustees for equitable life tenants, of preserving the premises, defraying the expenses of ordinary repairs, and of paying the taxes and the accruing interest upon mortgages which may incumber the premises. In re Albertson, 113 N. Y. 434, 439, 21 N. E. 117.

If a house becomes so valueless that in the judgment of the trustees it should be torn down and rebuilt, the cost of rebuilding is an expenditure chargeable to capital. Stevens v. Melcher, supra. No case has been cited to us where in a situation like this a trustee has been permitted to set up a sinking fund to take care of depreciation and in our research Ve have found only two cases in which this question is involved. These cases are In re Chapman, 66 N. Y. S. 235, and Smith v. Keteltas, 70 N. Y. S. 1065. In the first case an executor had set up such a sinking fund and his action was disapproved. In the second case a trustee had used certain funds in the building of new houses on lots on which houses had been torn down because they had become worthless by reason of depreciation. A remainderman contended, among other things, that the trustees should have set up a sinking fund to meet this very event. This contention was denied. So it becomes apparent that the amounts set aside in this case by the trustees were parts of the shares of income which should have been distributed to petitioners. The fact that the trustees for family reasons desired to provide this sinking fund, has no effect on the taxa-bility of these amounts to petitioners. These amounts were distributable under the will of Isaac Stern and are taxable to them “ whether distributed or not.” The only material difference between the facts of this case and the facts in Arthur H. Fleming, supra, is that in this case the amounts representing depreciation were reserved by the trustees and in that case they were paid to the beneficiaries. As we have pointed out, the action of the trustees in this respect was in excess of the authority conferred upon them by the will of Isaac Stern, and, therefore, the case falls within the rule laid down in the Fleming case.

Reviewed by the Board.

Judgment •will be entered for the respondent.


author: Marquette:

text:
    The Goerke Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5992.
    Promulgated July 29, 1927.
    1. The amount received by the petitioner in 1915 as consideration for the cancellation of an existing lease is income .to the petitioner for that year.
    2. The petitioner and Walter Goerke Go. were affiliated during the fiscal year ended February 28, 1921.

      Mark Eisner, Esq., and Ferdinand Tarmenbawn, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the fiscal year ending February 28, 1921, in the amount of $30,171.86.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the State of New Jersey and it is and has been for many years engaged in operating a department store at Newark, N. J.
    In the year 1901 the petitioner took a long-term lease from one Jackson on certain real-estate hereinafter called “ the Market Street property,” and in 1912 it underlet that property to Sebastian S. Kresge for a term of fifteen years, with renewal privileges. Kresge assigned the sublease to the S. S. Kresge Co. From this sublease the petitioner realized a profit of about $20,000 per year. In the year 1915 the petitioner was greatly in need of money and its officers offered to sell to the Kresge Company the petitioner’s lease on the Market Street property. The Kresge Company agreed to buy the lease and to pay $140,000 therefor, but the petitioner discovered that because of certain provisions contained therein the lease between it and Jackson could not be sold. Therefore, on September 30, 1915, the petitioner and the S. S. Kresge Co. entered into a new sublease whereby the Kresge Company agreed to pay to the petitioner for a term of eleven years and eight months an annual rental for the Market Street property equal to the annual rental which the petitioner was obligated to pay Jackson under the original lease, the Kresge Company to have the privilege of renewing the sublease in 1927 for a period of ten years at an increased rental. The Kresge Company when it entered into the new sublease paid the petitioner $140,000 for the cancellation of the old sublease, which payment and cancellation were specifically covered by article 13 of the new sublease, as follows:

      13. In consideration of the payment by the said tenant to the said landlord of the sum of One Hundred and Forty Thousand ($140,000) Dollars, concurrently with the execution of this lease, the receipt of which said sum is hereby acknowledged, the indenture of lease dated April Nineteenth, Nineteen Hundred and Twelve, made and entered into between the landlord as party of the first part and one Sebastian S. Kresge as party of the second part, for the premises hereby demised, which said lease was thereafter assigned by the said Sebastian S. Kresge to the tenant, who is now the holder thereof, is hereby terminated and surrendered.
    In the year 1913 a certain building in the City of Newark, upon which the petitioner had a long-term lease, became vacant and in order to stop the loss arising from such vacancy the petitioner decided to operate a branch store in the building under a separate corporate name. A corporation known as the Walter Goerke Co. was thereupon organized.
    During the fiscal year ending February 28, 1921, the capital stock of the petitioner was owned by the following persons:
    Shares
    Rudolph J. Goerlce_5,450
    Ottilie M. Goerke_1,456
    R. J. Goerke, Jr_ 2
    George O. O. Yelsor- 2
    Ottilie M. Goerke was the wife of Eudolph J. Goerke and she received her stock from him as a gift. She did not at any time question her husband’s acts in respect to the corporation, rarely attended a stockholders’ meeting, and her stock was always voted by her husband. E. J. Goerke, Jr., and George O. C. Yelsor were respectively son and brother-in-law of Eudolph J. Goerke. Yelsor held his shares of stock in the corporation for qualifying purposes only.
    The capital stock of the Walter Goerke Co. during the fiscal year ending February 28, 1921, was owned by the following persons:
    Shares
    Rudolph J. Goerke_60
    R. J. Goerke, Jr_52
    Walter Goerke_82
    Edmund Goerke_52
    The 52 shares of stock standing in the name of E. J. Goerke, Jr., were paid for by his father, Eudolph J. Goerke, and were assigned to and actually held by Eudolph J. Goerke, with the understanding that the son would pay for them if he made any money. At the time the Walter Goerke Co. was organized the son was about twenty-one years of age. Walter Goerke, who was a nephew of Eudolph J. Goerke, came into the business at the request of Eudolph J. Goerke because his name was desired in the corporate title. He was not requested to invest in the capital stock of the company, but having made an investment therein Eudolph J. Goerke guaranteed him against any loss arising therefrom. It was distinctly understood between Rudolph J. Goerke and Walter Goerke that the petitioner was to manage the Walter Goerke Co. in every way, and Walter Goerke also agreed to and did let Rudolph J. Goerke vote his, Walter Goerke’s, stock as he, Rudolph J. Goerke, saw fit.
    Edmund Goerke was also a nephew of Rudolph J. Goerke and was an employee of one of the petitioner’s subsidiary corporations. He purchased his stock in the Walter Goerke Co. by borrowing $3,000 from the Union Trust Co. of Elizabeth, N. J., on the endorsement of Rudolph J. Goerke, who held the stock as collateral.
    The buying personnel of the petitioner was used by the Walter Goerke Co., but no charge was made by the petitioner for buying the merchandise of the Walter Goerke Co., nor was any commission of any kind ever charged. The greater part of the fixtures of the Walter Goerke Co. were built by carpenters employed by the petitioner without charge either for the fixtures or the labor. Some of the original merchandise of the Walter Goerke Co. belonged to the petitioner and was billed to the Walter Goerke Co. at cost. ■
    When the Walter Goerke Co. sent goods back to the petitioner they were credited by the petitioner at full price. The treasurer and head bookkeeper of the petitioner were in charge of the Walter Goerke Company’s books but their compensation was paid entirely by the petitioner. The petitioner made loans to the Walter Goerke Co. for which no interest was charged, and any unsalable merchandise of the Walter Goerke Co. was taken back by the petitioner at full price. The only rent which the Walter Goerke Co. was required to pay for the building it occupied, was the amount which the petitioner was obligated to pay to the owner of the property. After the Walter Goerke Co. had been operating for about two years a tenant was found for the property occupied by it and the company’s stock of merchandise was liquidated or taken over by the petitioner.
    The respondent, upon audit of the petitioner’s income and profits-tax return for the fiscal year ending February 28, 1921, included in gross income for that year $12,173.90 of the amount received by it in 1915 as a consideration for the cancellation of the sublease mentioned, excluded from invested capital $86,231.94 of the amount so received in 1915 and also determined that the petitioner and the Walter Goerke Co. were not affiliated within the meaning of section 240 of the Revenue Acts of 1918 and 1921.
   OPINION.

Marquette:

The petitioner contends that no part of the amount paid it in the year 1915 by the Kresge Company as a consideration for the cancellation of the sublease then existing between the two companies was income for any subsequent year; that "the entire amount was income in 1915 and should be reflected in invested capital for subsequent years, and that the petitioner and the Walter Goerke Co. were affiliated during the fiscal year ending February 28,1921, and were entitled to file a consolidated return of income and invested capital. The respondent contends that the amount received by the petitioner from the Kresge Company should be considered as advance rental and that it should be prorated as income over the life of the new lease and included in invested capital only as it is earned or accrued. The respondent also denies that the petitioner and the Walter Goerke Co. were affiliated during the year under consideration.

We find ourselves unable to agree with the contention of the respondent as to either of the issues raised. The $140,000 paid by the Kresge Company to the petitioner was, as stated in the written instru-* ment executed on September 30, 1915, a consideration for the cancellation of an existing lease, and the petitioner having canceled the lease had done all that it was required to do to receive and retain that consideration. When the existing lease was canceled and the consideration paid the transaction in regard to that existing lease and that consideration was completed, and no breach of the new lease on the part of the petitioner would have given rise to a cause of action for the recovery by the Kresge Company of the $140,000 or any part thereof. In the Appeal of Denholm & McKay Co., 2 B. T. A. 444, the facts were that the taxpayer prior to the year 1919 leased certain real estate for twenty-one years. The terms of the lease became burdensome to the taxpayer and it therefore in the year 1919 entered into a new lease for the property it was occupying and paid $60,-128.08 for the cancellation of the old lease, which amount it deducted from gross income for 1919 as an ordinary and necessary business expense. The Commissioner disallowed the deduction and an appeal was taken to this Board, which sustained the taxpayer’s contention. The situation presented in that appeal is different from the instant appeal in that we there considered the deductibility from the lessee’s gross income of the amount paid for the cancellation of the lease, while here we are considering the inclusion in the lessor’s income of the amount so paid. However, the reasoning in the Denholm & McKay Co. appeal applies with equal force here. For the reasons stated we are of the opinion that the entire amount paid by the Kresge Company to the petitioner in the year 1915 as a consideration for the cancellation of the then existing lease was income to the petitioner for the year 1915. The petitioner’s income and invested capital for the fiscal year ending February 28, 1921, as determined by the respondent should be adjusted accordingly.

We are' also of the opinion that the petitioner and the Walter Goerke Co. were affiliated during the fiscal year ending February 28, 1921, and that their tax liability for that year should be computed upon the basis of a consolidated return of income and invested capital.

The evidence establishes to our entire satisfaction that the Walter Goerke Co. was in reality only a branch of the petitioner, and that Rudolph J. Goerke either owned or controlled the entire capital stock of both corporations. As to this point there is no conflict in the testimony and an extended discussion thereof is not necessary.

The petitioner also alleges that the respondent erred in reducing its invested capital as of March 1, 1920, by deducting therefrom the prorated amount of the income and profits taxes for that fiscal year. This contention must be decided adversely to the petitioner. Section 1207, Revenue Act of 1926.

Reviewed by the Board.

Judgment will 5e entered on 15 dags’ notice, wider Rule 50.


author: MaRquette:

text:
    J. L. Reinschmidt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4681.
    Promulgated July 30, 1927.

      Russel Snow, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
   MaRquette:

This proceeding is for the redetermination of a deficiency in income tax for the year 1920 in the amount of less than $10,000.

FINDINGS OF FACT.

The petitioner is an individual residing at Quitman, Ga. Fie is and was during the year 1920 engaged in the business of manufacturing and selling staves and barrels.

During the year 1920 the petitioner was also a member of a partnership which was engaged in the manufacture and sale of staves under the name of the Standard Stave Co. The petitioner, in addition to operating his own stave and barrel business, acted as selling agent for the Standard Stave Co. and handled its entire output for a commission of 15 cents per bundle. In the year 1920, the market for staves having declined, one of the other members of the Standard Stave Co., W. J. Booth, made an agreement with the petitioner by which the petitioner was to sell the partnership staves ior such an amount as he coulcl get for them and allow the partnership credit for the staves at a stipulated price. The petitioner sold the staves according to the agreement and his profit thereon amounted to $2,589.25, more than the regular commission of 15 cents peí bundle. In the year 1921 Booth repudiated his agreement and claimed that he had not made it, and that the petitioner was entitled only to the regular commission of 15 cents per bundle on the staves sold. The petitioner finally acceded to the position taken by Booth and in September, 1922, credited the partnership with the amount in controversy, to wit, $2,589.25. The petitioner now claims that the amount of $2,589.25 should be eliminated from his income foi the year 1920.

In the year 1920 the petitioner found that his cash book showed his bank balance to be $4,380.01 more than his balance as shown by the books of his bank. He was not able to reconcile the discrepancy and he therefore charged off the amount of $4,380.01 to expense and deducted that amount in computing his net income for the yeai 1920. The respondent disallowed the deduction.

Judgment will he entered for the resfondent.

Considered by Milltken, Phillips, and Van Fossan.


author: MaRquette :

text:
    Pinkus Happ, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lee M. Happ, Petitioner, v. Commissioner of Internal Revenue, Respondent. Morris Michael, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 2870-2782.
    Promulgated July 30, 1927.
    1. Additional allowance for wear, tear and exhaustion of machinery disallowed.
    2. The evidence is insufficient to show that certain county warrants were ascertained to be worthless within the taxable year.

      J. J. Willingham, Esq., and George M. Stanton, Esq., for the petitioners.

      W. E. Wattles, Esq., for the respondent.
    By these proceedings the petitioners seek redetermination of their income-tax liability for the years 1919, 1920, and 1921. The deficiency letter in the case of Pinkus Happ asserts deficiencies of $436.87 for the year 1920 and $44.74 for the year 1921, and an overassessment of $72.78 for the year 1919. In the case of Lee M. Happ and Morris Michael, the deficiency letter asserts a deficiency of $162.63 for the year 1919 and a deficiency of $425.42 for the year 1920, and in the case of Morris Michael the deficiency letter asserts deficiencies for the years 1919 and 1920 in the amounts of $168.56 and $428.90, respectively. The petitioners allege that the respondent erred in not allowing the partnership of Happ Brothers Co. adequate depreciation on machinery for the fiscal years ending June 30, 1919, and June 30, 1920, for the six-month period ending December 31, 1920, and for the calendar year 1921, and in disallowing deductions claimed by the partnership in the fiscal year ending June 30,1920, on account of certain debts alleged to be worthless. The three proceedings were consolidated for hearing and decision.
    FINDINGS OF FACT.
    The petitioners are individuals, residing at Macon, Ga. During the years 1919 and 1920 they were members of Happ Brothers Co., a partnership engaged in the business of manufacturing overalls at Macon. The partnership was organized in the year 1917 for the purpose of taking over the business conducted by Happ Brothers, a corporation. Among the assets so acquired by the partnership were electric sewing machines and electric cording machines which had been used by the corporation for a number of years. These machines were set up on the partnership books at $14,409.45, the amount at which they were carried on the corporation’s books. Whether this amount represented the original cost or the depreciated cost to the corporation, the record does not show. New machines were also installed by the partnership subsequent to June, 1917, and before the end of the calendar year 1921.
    The partnership filed its income and profits-tax returns on the basis of a fiscal year ending June 30, until June 30, 1920, after which date its returns were made on the calendar year basis.
    The partnership, Happ Brothers Co., sold goods to a majority of the counties in the southern States that worked convict labor. At the close of the fiscal year ended June 30,1920, it had warrants which it had received for goods sold as follows:
    Butts County, Ga.:
    December 13, 1918. $616.40
    April 9, 1919_ 126. 75
    May 7, 1919_ 953.15
    September 6, 1919. 507.90
    March 11, 1920_ 939. 50

      Baker County, Ga.:
    June 6, 1918_ $90. 50
    December 6, 1918- 125.00
    January 10, 1919_ 39.74
    April 3, 1919_ 134.85
    May 8, 1919_ 96.02
    Early County, Ga.:
    November 22, 1918_ 796.00
    November 22, 1918_1,122.35
    May 13, 1919_ 171.90
    November 8, 1919_ 1,680.25
    Henry County, Ga., June 3, 1918- 1, 054.32
    These warrants had, prior to June 30, 1920, been placed in the hands of the partnership’s attorney for collection but he was unable to collect them at that time, and he advised the partnership that the counties were in bad shape financially and that he did not know whether or not collection could be made. However, he retained the warrants and some of them were subsequently paid. The warrants were never repudiated by the counties issuing them and the uncollected ones are still retained by the petitioners’ attorney. The partnership at the close of the fiscal year ending June 30, 1920, charged off said warrants as worthless and deducted the amounts thereof in computing its net income for that year.
    The partnership in its income and profits-tax returns for the fiscal years ending June 30, 1919, and June 30, 1920, and for the calendar year 1921, claimed and was allowed depreciation on its machinery computed at the rate of 10 per cent.
   OPINION.

MaRquette :

The respondent has not asserted any deficiency in tax against the petitioners Lee M, Happ and Morris Michael for the year 1921, and in the case of Pinkus Happ he has determined an over-assesement for the year 1919 which does not arise from the disallowance of a claim for abatement. We therefore have no jurisdiction to hear and determine the appeals of Lee M. Happ and Morris Michael in so far as they relate to the year 1921, or the appeal of Pinkus Happ in so far as it relates to the year 1919.

The petitioners claim that the partnership of Happ Brothers Co. has not been allowed adequate depreciation on its machinery for the period July 1,1918, to December 31,1921; that the partnership allowance for depreciation should be computed at the rate of 15 per cent, and that the petitioners’ individual income for that period should be adjusted accordingly. We are unable to sustain the petitioners’ contention. The evidence as to this issue is vague, contradictory and conflicting. It does show, however, that the partnership in 1917 acquired at cost from the corporation, certain machinery which at that time bad been in use from six to eight years. The machinery was set up on the partnership books at the same amount it was carried on the corporation’s books. We are, however, unable to determine from the evidence whether this amount represented the original cost or the depreciated cost of the machinery. The witness for the petitioner did not know how many machines were acquired from the corporation, how many, if any, were discarded during the years involved, or the number or cost of new machinery installed. The record shows that the corporation had claimed and been allowed depreciation on these machines computed at the rate of 10 per cent, and depreciation computed at the same rate was claimed and allowed the partnership during the years involved in this appeal, and also for the year 1922. When the partnership filed its return, depreciation computed at the rate of 10 per cent appears to have been considered adequate, and there is no evidence in the record which would justify us in now increasing that rate.

With reference to the county warrants involved herein we are unable to say from the evidence presented that they were ascertained to be worthless at the end of the fiscal year ended June 30, 1920. It does appear from the evidence that the counties which had issued these warrants were in bad shape financially and that the warrants were not collected at the end of the fiscal year mentioned. The record does not show that the counties had repudiated these warrants or did not intend to pay them, but, on the other hand, it does show that some of them, at least, have been paid. It was intimated by the petitioners’ counsel that the several counties had issued warrants in excess of the amounts they were authorized to issue and that there was a legal bar to their collection. However, there is no evidence in the record to show that this contention is correct. In view of the unsatisfactory state of the record in these proceedings we tan only affirm the determination of the respondent.

Judgment will be entered for the respondent.

Considered by Phillips, VaN Fossan, and Milliken.