author: Maequette:

text:
    Appeal of Real Estate Trust & Insurance Co. and Courtney Realty Corporation.
    Docket No. 3541.
    Promulgated July 30, 1927.
    The petitioners were not personal service corporations during the year 1919.

      Abram R. Serven, Esq., for the petitioners.

      J: Arthur Adams, Esq., for the Commissioner.
    This appeal is from the determination of deficiencies for the year 1919 against the Real Estate Trust & Insurance Co. (hereinafter sometimes referred to as the Trust Company), and the Courtney Realty Corporation (hereinafter sometimes referred to as the Courtney Company), in the amounts of $6,341.74 and $2,589.03,. respectively. The petitioners are affiliated corporations.
    The sole error alleged is the Commissioner’s refusal to accord the petitioners classification as personal service corporations for the year 1919.
    FINDINGS OF FACT.
    The Real Estate Trust & Insurance Co. and the Courtney Realty Coporation are Virginia corporations with their principal places of business at Norfolk.
    The Trust Company was organized at about 1904 to take over the business of two real estate firms and an insurance agency then operating in Norfolk. Its capital stock was issued for. the good will of these three firms.
    Some time prior to 1909 the Trust Company and R. A. Wainwright and Charles Mcl. Tunstall, two of its stockholders, entered into an agreement to lease a business building to be erected in Norfolk. Under the agreement the owners of the building were to be paid an amount equal to 6 per cent per annum on construction cost plus the land value. The rent accrued as the owners’ investment was made in the progress of construction.
    A formal lease was entered into by the parties on January 1, 1909. It provided for a 20-year term at an annual rental of $15,648, free of all taxes, assessments, maintenance, insurance, etc., and required the lessees to post bond for faithful performance of their covenants. Shortly after its execution Wainwright and Tunstall assigned their interests in the lease to the Trust Company. To January 1, 1909, the lessees had incurred or assumed a deficit of approximately $21,000 in connection with this lease.
    The Courtney Realty Corporation was organized in 1907 and commenced business in 1909 when the lease above described was assigned to it by the Trust Company. The Courtney Company’s sole business during 1919 was the operation of the six-story building covered by the lease, which is known as the Dickson .Building.
    The Courtney Company issued $25,000 in stock to the Trust Company in payment for the lease. This stock was subsequently transferred to the Trust Company’s stockholders and it represents all of the Courtney Company’s outstanding stock during 1919.
    The stockholders and officers of the two companies during 1919 were:

    The balance sheet of the Trust Company at December 31, 1919, follows :
    Assets
    Cash: Funds in banks and office- $1,180. 61
    Notes receivable: Schedule 1- 15, 762. 53
    Accounts receivable:
    Tenants and clients_$6, 923. 70
    Courtney Realty Corporation_ 76, 583.75
    Charles Mcl. Tunstall, personal_ 6, 095.28
    Richard Tunstall, personal_ 1, 944.26
    Charles McDermott, personal- 9, 434. 91
    - 100, 981. 90
    Investments:
    Stocks and bonds, schedule 2_ 30, 850. 00
    Real estate_ 10, 674. 70
    - 41, 524. 70
    Equipment: Office furniture and fixtures_ 2,116.30
    Good will- 50, 000. 00
    211, 566. 04
    Liabilities .. — —:
    Notes payable: Schedule 3- 78,269. 00
    Accounts payable:
    Landlord’s accounts_$8,352. 92
    Courtney Realty Corp- 46,000. 00
    Martha Taliaferro- 50. 00
    Mrs. L. W. Childress_ 70. 00
    Elvira J. Wainwright_ 125. 00
    - 54, 597.92
    Reserves:
    Accrued interest on mortgage- 110.00
    For bad and doubtful accounts_ 688. 54
    - 798.54
    Over and short account- . 98
    Reserves: Depreciation on office furniture and fixtures_ 531.23
    Mortgage: First mortgage — Princess Ann property_ 10, 000. 00
    Capital stock: 500 shares common stock, par value $100 per share- 50, 000. 00 Surplus:
    Balance per ledger — Dec. 31, 1918_ —$53.53
    Add: Net gain for year-$17, 588. 75
    Less: Adjustment of notes payable_ 166.85
    -17,421.90
    - 17,368. 37
    211, 566. 04

      “Notes receivable — Schedule 1,” $15,762.53, represents 14 notes. Three of these notes, totaling $9,888.32, were given to cover, in -part, stockholders’ open accounts. The Trust Company had been unable to pay adequate regular salaries to its officers. It had therefore made advances to them over a period of years, such advances being represented in part by the notes mentioned. When financial conditions permitted, earnings were credited against these notes in a manner effecting a distribution according to stockholdings.
    Two of the notes, totaling $5,000, were given by Richard Tunstall to Charles Mcl. Tunstall and Charles McDermott in payment for his stock and had been transferred to the Trust Company by the payees to be credited on their accounts. Eight of the notes, totaling $374.21, represent rent payments by a tenant of a company client.
    The last note, in the amount of $500, was received by the Trust Company as commission for securing a loan and it was the only note held by the Trust Company on which interest was payable.
    Accounts receivable. — “ Tenants and clients ” represents the balance of charges against landlords for repairs, taxes, etc. Sums so expended by the Trust Company were recovered by deductions from subsequent monthly rents.

      “ Courtney Realty Corporation ” represents advances to the Courtney Company over a long period.
    “ Personal ” represents the balance above that covered by notes of the Trust Company’s advances to the officers in lieu of adequate salaries.
    “ Accounts receivable ” were all noninterest bearing.
    “ Investments — Stocks and bonds — Schedule 2 ” represents the Trust Company’s stockholdings in three corporations, totaling in par value $6,350; bonds of the Courtney Company of the par value of $12,500; Victory Loan bonds, $7,000, and a 5/33 interest in a brickyard.
    Two items of the stock and the interest in the brickyard were received as organizing commissions:
    The third stock item consisted of $1,000 capital stock of the Tidewater Insurance Co. The Trust Company had purchased this stock at the solicitation of the Insurance Company with which it did a large volume of business and payment had been made by crediting dividends.
    “ Courtney Realty Corporation bonds ” represents mortgage notes issued by the Courtney Company against its capitalization of the Dickson Building lease.
    “Victory Loan bonds” were bought for patriotic motives rather than as an investment.

      '• Real Estate ” consisted of two items. The Trust Company had managed the organization of the Princess Ann Hotel Co., receiving stock as commissions. Upon subsequent burning of the hotel and failure of the hotel company, the Trust Company took over the property, assuming a mortgage of $7,000, which was later increased to $10,000. This item is offset on the balance sheet by a mortgage liability of $10,000.
    The second real estate item, in the amount of $674.40, represents a personal transaction of the stockholders. It is not a company asset.
    The “ good will ” was paid in for capital stock on organization.
    “ Notes payable — Schedule 3 ” represents the following:
    (1) 16 sixty and ninety day notes to six Norfolk banks, all dated during October, November and December, 1919, and totaling $59,625.00.
    (2) One demand note to R. W. Galt, $16,644.
    (3) One three year note dated July 10, 1916, to J. J. McCormick, $2,000.
    These notes represent renewals of notes accumulated over a period of years. The loans were made on the personal endorsements of the stockholders rather than on the Trust Company’s credit.
    Accounts payable. — “Landlords accounts” represents rentals collected and remaining unremitted to the landlords, meanwhile being used in the business.
    “ Courtney Realty Corporation- — $46,000 ” represents proceeds of sales of $30,000 of the Courtney Company’s bonds and $16,000 of its notes.
    Three items totaling $245 represent salaries due employees.
    “ Reserves — Accrued interest on mortgage,” refers to a mortgage item charged off prior to this statement.
    The Trust Company’s profit and loss statement for the calendar year 1919 follows:
    Income
    Commissions on rents-$13,164.21
    Commissions on real estate sales-1- 17, 003.16
    Commissions on loans_ 8, 597.37
    Rents- 1, 970. 35
    - $40,735. 09
    Expense
    Operating:
    Salaries-$14,475.81
    Stamps- 116. 00
    Traveling- 305. 44
    Advertising- 311. 66
    Automobile_ 261. 32
    Charity- 280. 00
    Christmas gilts_ 150.00
    Printing and stationery_ 242.20

      Operating — Continued.
    Office expense- $44.84
    Office rent_ 1, 655. 00
    Telephone and telegraph_ 884.64
    Legal expense_ 217. 53
    Sundries_ 879.31
    -$19,223. 25
    Overhead:
    Insurance — Life_ 2, 616. 85
    Interest on mortgage bonds- 1,112. 50
    Interest_ 6, 057. 28
    Taxes- 800.32
    Depreciation_ 213. 65
    - 10, 890. 60
    $30,113. 85
    10, 621. 24

      Net ;profit for year — Loss and gain

    Commissions on rents and sales represent the usual real estate brokers’ commissions for effecting the rental or sale of property.
    The Trust Company represented an insurance company as a loan agent- Loan applications were passed upon by it, and, subject to the approval of agents of the insurance company, loans were effected through mortgages running directly to the insurance company. The Trust Company’s commission was paid by the borrower.
    “ Rents ” represents the Trust Company’s net income from a lease it held on a five-story business building known as the “ Chamberlaine Building.”
    “ Expense — Salaries ” in the amount of $14,473.81 includes those paid the three stockholding officers which amount to approximately $10,000. The balance of this item was paid to office employees.
    “ Overhead — Interest,” represents interest paid on bank loans during the year.
    “Net Gain from sale Marlborough Apartments” represents the selling price of stock received about ten years prior to 1919 as a commission for sale of the apartment. The par value of this stock was $2,500.

      The “ Church Street ” property had been purchased by Charles Mcl. Tunstall at a mortgage sale, principally to protect a friend whom he had induced to become a mortgage endorser for a client of the Trust Company. Because Charles Mcl. Tunstall’s purchase of the property had arisen through the Trust Company’s relation to the mortgagor, the other stockholders of the Trust Company had agreed that the matter should be handled as a company transaction, it appearing at the time that a loss would result.
    Through providential circumstances a sale of the property was effected during 1919, from which the Trust Company derived a profit of $5,125.

      “ Dividends ” relates to the securities held by the Trust Company.
    The balance sheet of the Courtney Company at December 31, 1919, follows:
    ASSETS
    Cash: Funds in bank and office- $600.20
    Accounts receivable:
    Beal Estate, Trust and Insurance Company—
    Proceeds bonds, Dickson Building-$30, 000.00
    Proceeds notes, payable- 16,000.00
    - 46,000. 00
    Unexpired equity in Dickson Building lease- 11,249.12
    57,849.32
    LIABILITIES
    Notes payable — Schedule 1- 12,300.00
    Accounts payable:
    Beal Estate Trust & Insurance Company- 76, 583.75
    W. O. Dickson, rent paid in advance- 1,304.00
    - 77,887.75
    Reserves:
    Accrued interest on 6% mortgage notes- $900. 00
    Accrued interest on floating debt- 173.98
    - 1,073.98
    Mortgage:
    First mortgage — 6% coupon notes—
    Total issued- 40, 000. OO
    Redeemed- 10, 000. 00
    - 30,000. 00
    Capital stock: 250 Shares common stock par value $100 per share_ 25,000. 00
    Deficit:
    Balance as per ledger — December 31, 1918_ 95,421.96
    Add: Net gain for period- 7,009. 55
    -88,412.41
    57,849. 32

      “Accounts receivable — $46,000,” represents the proceeds of bonds and notes of the Courtney Company credited-to it on the accounts of the Trust Company.
    “ Unexpired equity in the Dickson Building lease ” arises from the Courtney Company’s capitalization of the lease, against which $25,000 in capital stock and $40,000 in mortgage bonds secured by notes had been issued. Of these bonds, $30,000 were outstanding at December 31, 1919.
    “Notes payable — Schedule 1,” represents the following described notes:

    These notes were issued for funds to meet current expenses.
    “Accounts payable ” to the Neal Estate Trust & Insurance Co. represents the balance of advances to the Courtney Company by the Trust Company. The Courtney Company had operated at a deficit for approximately 10 years and the Trust Company had borrowed money to make continual advances to cover these deficits.
    “Accrued interest on 6% mortgage notes ” refers to the Courtney Company’s mortgage' bond secured by note.
    “Mortgage — First mortgage — 6% coupon notes,” refers to the Courtney Company’s mortgage bond secured by notes. The $30,000 of these mortgage notes outstanding or the proceeds thereof were held by the Trust Company to the credit of the Courtney Company.
    “ Capital Stock ” was the stock issued in payment for the Dickson Building lease.
    At December 31, 1919, the Courtney Company had a deficit of $88,412.41 accumulated over the period of its existence.
    The profit and loss statement of the Courtney Company for the year 1919 follows:
    INCOME
    Rentals-$65,942.30
    Loss: Commissions. 2, 568.67
    - $53,373. 63
    EXPENSES
    Operating:
    Salaries-_$2,250.00
    Wages_ _ 7, 539.00
    Rent oí building. _ 15,654.50

      Operating — Continued.
    Light and power-$1, 751. 95
    Fuel_ 1, 555. 73
    Water_ 100.75
    Miscellaneous_ 2, 717.78
    Building supplies and expenses. 1,911.11
    Repairs to building_ 606. 90
    Repairs to offices_ 307. 65
    Repairs to elevators_ 311.13
    Loss and damage_ 433.36
    Telephone and telegraph_ 19.55
    Printing and stationery_ 31.82
    - $35,191. 23
    Overhead:
    Bond interest_ 1, 800. 00
    Interest_ 1, 086. 89
    Amortization of lease_ 1,250. 88
    Taxes-5,974.95
    Insurance_ 1, 060.13
    - 11,172.85
    - $46, 364. 08
    Net profit for period_ 7,009. 55
    The entire income of the Courtney Company was derived from rentals under its lease of the Dickson Building.
    The expense for “ rent ” refers to the lease of the Dickson Building.
    “Bond interest” refers to the $30,000 of outstanding 6 per cent mortgage bonds.
    “ Interest ” refers to bank loans, etc.
    “ Taxes ” refers to the Dickson Building the lease of which obligated the lessee to pay taxes.
    During 1919 the three stockholders were actively engaged in the businesses of the appellant corporations, devoting all of their time thereto with the exception that Richard Tunstall was incapacitated by illness for several months. The stockholders secured and transacted all business of the corporations, the only employees being-clerical workers.

       Indicates deficit.

   OPINION.

Maequette:

A personal service corporation is defined by section 200 of the Revenue Act of 1918 to be one “whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor :J« si«

The statutory elements above set forth must concur. Appeal of Bryant & Stratton Commercial School, Inc., 1 B. T. A. 32; Appeal of Scheffler Hair Colorine Co., 1 B. T. A. 61; Appeal of Cliver- Wright-Rainey Co., 2 B. T. A. 561; Appeal of George A. Springmeier Co., 6 B. T. A. 698; Conklin-Zonne-Loomis Co. v. Commissioner, 6 B. T. A. 795.

We believe that the appellant corporations herein fall so far short of meeting the statutory requirements that extended discussion is unwarranted.

A sufficient statement of the Trust Company’s divergence may be made in the mention of four items; first, ownership and income from its lease of the Chamberlaine Building; second, profits from sale of the “ Church Street ” property; third, dividends; and fourth, the borrowing of large sums used to make advances to the Courtney Company and to some extent to the Trust Company clients, etc. See Appeal of Seaboard Mills, Inc., 5 B. T. A. 575; Appeal of George A. Springmeier Co., supra; Conklin-Zonne-Loomis Co., supra, and Matteson Co. v. Willcuts, 12 Fed. (2d) 447.

The entire income of the Courtney Company was derived through its lease of the Dickson Building. The lease was a capital asset. This petitioner falls squarely within the Board’s decision in the Appeal of Newam Theatre Corporation, 1 B. T. A. 887. See also Appeal of J. L. Kelso Co., 1 B. T. A. 1264, and Cotton Hotel Co. v. Bass, 7 Fed. (2d) 900.

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

Considered by Phillips, Milliken, and Van FossaN.


source: Caselaw Access Project

author: MaRquette:

license: Public Domain

text:
    Eva G. Halle, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4139.
    Promulgated July 30, 1927.

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

      F. 0. Graves, 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 $1,766.67. It was submitted for decision on the pleadings and depositions.

FINDINGS OF FACT.

The petitioner is an individual residing at Memphis, Tenn. During the year 1920 the petitioner was a member of the partnership of “ Phil A. Halle,” and owned a one-half interest therein. She filed an original and an amended income-tax return for the year 1920 and in the latter return she reported her distributive share of the partnership income as $12,575.81. An examination of the partnership books was subsequently made and the respondent disallowed deductions in the amount of $2,446.54 and premiums paid on life insurance policies on the life of one of the partners in the amount of $4,482.94, increased the petitioner’s distributive share of the partnership income accordingly, and determined a deficiency in tax as above set forth.

There are no admissions in the pleadings nor was there any evidence presented showing that the adjustment made by the respondent in the income of the partnership and in the petitioner’s distributive share thereof was erroneous, and in the absence of such admissions or evidence we must affirm the determination of the respondent.

Judgment will be entered for the respondent.

Considered by Milliken, Phillips, and VaN Fossan.


text:
    Roubaix Mills, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4628.
    Promulgated July 30, 1927.
    Additional compensation voted to tlie officers of petitioner in 1920 held not deductible from 1919 income.

      J. B. little, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1919 in the amount of $12,495.74. Only so much of the deficiency is in controversy as arises from the disallowance by the respondent as a deduction from gross income of the amount of $18,500 paid by the petitioner to its officers as additional compensation for the year 1919.
    FINDINGS OF FACT.
    The petitioner is a New York corporation with its principal office and place of business at Clinton, Mass. It is and was during the years 1919 and 1920, engaged in manufacturing woolen cloth. All of its capital stock was, during the year 1919, owned by Benjamin F. Haas and Albert Haas in the proportion of about 65 per cent and 35 per cent, respectively. Paul E. Meissner was president and general manager of the corporation, B. F. Haas was vice president and financial manager, Albert Haas was assistant treasurer and sales manager, C. B. Speckman was secretary and treasurer, and Louis Haas was assistant treasurer. P. E. Meissner, B. F. Haas and Albert Haas constituted the board of directors of the corporation. Meissner resided at Clinton, Mass., and B. F. Haas and Albert Haas resided and had their place of business at New York City.

      The meetings of the board of directors of the petitioner were usually informal and were conducted about as follows: When Meissner was in New York, which was usually about once each month, Louis B. Epstein, attorney and business adviser of the corporation, would be called to the office of B. F. Haas and Albert Haas, and the affairs of the corporation would be considered and matters of policy agreed upon by the three directors and Epstein. Occasionally Epstein would have the minutes of these informal meetings recorded but that was not the usual practice.
    At a formal meeting of the board of directors of the corporation held at its New York office on August 8, 1919, the compensation of its officers for the year 1919 was fixed by resolutions duly adopted as follows:
    The Chairman then stated that the business before the board was to provide payment for the salaries to the officers and managers of the corporation for the services rendered by them in the past, and to arrange for their salaries for services to be rendered in the future, and also to discuss, in a general manner, the matter of the building operations to be undertaken by this corporation.
    The Chairman further stated that he, both as President and General Manager of the corporation, had rendered considerable service to the corporation to date, as had also Benjamin P. Haas, as financial manager of the corporation and vice-president thereof, and also Albert Haas, assistant manager and sales manager of the corporation. That as yet no payment had been made for these services and that it was requisite that due compensation should be made to these officers and managers for the services rendered by them in the past, which have been very valuable and beneficial to the corporation, and that an arrangement be made for payment for their future services.
    On motion duly adopted, it was
    Resolved, that this corporation pay to Paul E. Meissner, the sum of $6,000, in payment of the services rendered by him in the past up to the 1st day of July, 1919, as president and general manager, and that for the period from July 1st to the end of the year 1919, his salary be fixed at the rate of $1,000 per month.
    Mr. Meissner, although present, took no part in the vote upon this resolution.
    On motion duly adopted, it was
    Resolved, that this corporation pay to Benjamin P. Hass the sum of $6,000, in payment of the services rendered by him in the past up to the first day of July, 1919, as financial manager of this corporation, and also vice-president thereof, and that for the period from July 1st to the end of the year 1919, his salary be fixed at the rate of $1,000 per month.
    Mr. Benjamin P. Haas although present, took no part in the vote upon this resolution.
    On motion duly adopted, it was
    Resolved, that this corporation pay to Albert Haas the sum $6,000, in payment of the services rendered by him in the past up to the first day of July, 1919, as sales manager and assistant general manager of the corporation, and that for the period from July 1st to the end of the year 1919, his salary be fixed at the rate of $1,000 per month.
    Mr. Albert Haas, although present, took no part in the vote upon this resolution.

      On motion duly adopted, it was
    Resolved, that Louis B. Haas be appointed assistant treasurer of the corporation to serve in accordance with the by-laws until the next annual election, and that his compensation be fixed at the rate of $1,000.
    On motion duly adopted, it was
    Resolved, that this corporation pay to Louis S. Haas the sum of $500 as payment for services rendered by said Louis S. Haas for this corporation in the past.
    On motion duly adopted, it was
    Resolved, that the salary of Miss Bertha O. Speekman as secretary of the corporation, be fixed at $500 per year.
    On motion duly adopted, it was
    Resolved, that this corporation pay to Miss Bertha O. Speekman the sum of $250 in payment of the services heretofore rendered for this corporation by the said Miss Bertha O. Speekman.
    It was also informally agreed by the directors that in addition to the salaries of the officers formally authorized and recited in the minutes, additional compensation would be paid them for the year 1919, provided the same standard of efficiency in the operation of the mills was maintained during the period July 1, to December 31,1919, as had been maintained during the period January 1, to January 30.
    At informal meetings of the board of directors held during the remainder of the year 1919, the matter of additional compensation for the officers was discussed and, it being shown that the operation of the mills was being maintained at the same degree of efficiency that had obtained during the first six months of the year, it was understood among the directors that additional compensation would be paid.
    At a formal meeting of the board of directors of the petitioner held on January 16, 1920, additional compensation for the year 1919 was voted and ordered paid by a resolution which is in part as follows:
    The Chairman then stated that the Board should consider the question of additional compensation to be paid for services rendered by the officials and employees of the corporation.
    That at a meeting of the board of directors held on August 8th last, such additional compensation had been voted up to the first day of July, and that the Board should now consider the additional payment from said date to December 31st.
    After due discussion, it was on motion duly adopted:
    Resolved, that this corporation pay to Paul E. Meissner the sum of $6,000, as additional payment for services rendered by him as president and general manager from July 1st, 1919, to December 31st, 1919. (Mr. Meissner, although present, took no part of the vote on this resolution.)
    On motion duly adopted, it was
    Resolved, that this corporation pay to Benjamin P. Hass the sum of $6,000 as additional payment for services rendered as vice-president and financial manager from July 1st, 1919, to December 31st, 1919. (Mr. Haas, although present, took no part of the vote on this resolution.)

      On motion duly adopted, it was
    Resolved, that this corporation pay to Albert Haas the sum of $6,000, as additional payment for services rendered as Sales Manager and Treasurer from July 1st, 1919, to December 31st, 1919. (Mr. Haas although present, took no part of the vote on this resolution.)
    On motion duly adopted, it was
    Resolved, that this corporation pay to Louis S. Haas the sum of $500 as additional payment for services rendered as Assistant Treasurer from July 1st, 1919, to December 31st, 1919.
    On motion duly adopted, it was
    Resolved, that this corporation pay to Bertha O. Speckman the sum of $250.00 as additional payment for services rendered as secretary from July 1st, 1919, to December 31st, 1919.
    The additional compensation so authorized was accrued on the books of the corporation as of December, 1919, before the books of that year were closed, and it was paid to the several persons named by vouchers and checks dated January 21, 1920. The petitioner’s books were kept on the accrual basis.
    The respondent disallowed $18,500 of the additional compensation paid to the petitioner’s officers pursuant to the resolution of January 16, 1920, as a deduction from petitioner’s gross income for the year 1919.
   OPINION.

Maequette:

Two questions are presented by the record in this proceeding, namely, were the additional salaries for the year 1919 authorized by the petitioner’s board of directors on January 16, 1920, reasonable in amount and, if so, are they proper deductions in computing the petitioner’s net income for 1919?

We are of the opinion that the additional salaries in question are not properly deductible in the year 1919 even if they are reasonable compensation for the services rendered by the persons to whom they were paid, and it is therefore not necessary to decide whether or not they are reasonable. The record fairly established that when the directors formally fixed the compensation of the petitioner’s officers for the first six months of 1919 and the regular salaries for the last six months in 1919, they informally agreed or understood among themselves that if the efficiency of operations and the consequent profits were maintained for the last six months of the year at the same high level that had obtained during the first six months, extra compensation would be paid for that period. However, this appears to have been a mere understanding or agreement among the directors which had no binding effect and it did not create an obligation that could have been enforced against the petitioner. Furthermore, even if the informal agreement or understanding among the board of directors may be construed as binding on the corporation, there is no evidence that there was any agreement as to the amount of extra compensation that would be paid. In the Appeal of Van De Kamps Holland Dutch Bakers, 2 B. T. A. 1247, in considering when additional compensation authorized and paid under circumstances similar to that in the instant case was deductible, we said:

It remains to determine in what year the deduction is to be allowed. Was the obligation incurred in the year when the services were rendered or was it incurred when the additional compensation was voted. Until it was voted there was nothing-more than a moral obligation; there was no legal obligation which could be enforced. We must accordingly hold that the $7,000 of additional compensation, voted in 1920 for services rendered in 1919, was an obligation incurred in 1920 and is deductible in that year and not in 1919.

In the Appeal of Arter Paint & Glass Co., 2 B. T. A. 1256, the facts were that in December, 1919, at an informal conference, the stockholders of the corporation agreed that the salaries paid in the past to two of its officers were insufficient and should be increased for 1919, but no amount was agreed upon and no formal action taken by the stockholders until 1920, when additional salaries for the two officers were authorized for the year 1919. This Board approved the determination of the Commissioner that the additional salaries were not proper deductions from the taxpayer’s income for 1919. The two decisions cited were followed by the Board in the Appeal of Randall Brothers, Inc., 4 B. T. A. 291.

Upon the authority of the decisions in the Appeals of Van De Kamps Holland Dutch Bakers, Arter Paint & Glass Co., and Randall Brothers, Inc., supra, we affirm the determination of the respondent in disallowing the additional salaries in question as a deduction from petitioner’s gross income for 1919.

Judgment will be entered for the respondent.

Considered by Phillips, Millikeh and VaN FossaN.


author: MaRQuette :

text:
    James Otis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4711.
    Promulgated July 30, 1927.
    1. The petitioner is entitled to deduct from gross income losses sustained in the operation of the farm herein.
    2. The respondent did not err in taxing the entire income from the community to the petitioner.

      W. W. Spalding, Esq., for the petitioner.

      John W. Fisher, Esq., and Frank S. Easby-Smith, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income tax for the years 1920 and 1921 in the amounts of $10,756.98 and $2,233.55, respectively.

      BINDINGS OB BACT.
    The petitioner was, during the years 1920 and 1921, a married man residing with his wife in the State of California. All of the income received by him in those years was derived from community property.
    In or about May, 1918, the petitioner purchased a tract of land of about 610 acres located in.Selano County, California, for $20,000, which consisted of “ salt land ” and was subject to overflows of water. Immediately after the petitioner acquired the tract of land he built a levee around it at a cost of about $12,000. The levee was completed in the year 1918 or 1919. The purpose of this surrounding levee was to protect the land from overflows of water, to cause the land to dry out, and to make it fit for farming. During the year 1919 the petitioner built a cross levee which divided the tract of land into approximately two equal parts. During the years 1918 and 1919 the petitioner built a barn on the land at a cost of about $1,500, and a small house containing two bedrooms and a kitchen. These buildings and a few out buildings were all of the buildings on the land during the years 1920 and 1921.
    After the petitioner had caused the cross levee to be built he had drained one of the two tracts into which the original tract was divided, and in the fall of 1919 he had part of that tract plowed. In the years 1920 and 1921 that part of the land was again plowed and was sown in barley. However, no crop was made in 1920 and only a small crop in 1921, because of the heavy rains which flooded the land and also because of the fact that it takes several years of cultivation to bring reclaimed land of this sort to a state where it can be farmed profitably. The petitioner’s farming operations in 1920 and 1921 were carried on only on the half of the original tract which had been drained. The other one-half of the tract was not drained or cultivated in those years but duck-shooting privileges on this part of the land were leased to two individuals for $500 in 1920 and $600 each in 1921, which amounts constituted the entire receipts from the land in those years. The duck-shooting season in the locality where the petitioner’s land is located lasts from about October 1 to January 15, and is by custom limited to two days per week during that period. During the duck-shooting season the petitioner visited his farm about once or twice a week for the purpose of shooting ducks. All of his other visits to the farm were in connection with his farming operations. Because of the extreme heat and the presence of mosquitoes in the summer time, and the cold winters, the property was not suitable as a place of recreation or pleasure.
    Since April, 1920, the petitioner has employed one H. C. Johnson, a practical farmer with many years’ experience, to operate and manage his farm. Johnson lives on the farm and devotes most of his time to operating it. The land referred to herein is good land and is capable of being cultivated profitably. The petitioner acquired the land with a view to farming it for profit.
    In his income-tax returns for 1920 and 1921, the petitioner included in gross income all receipts from the tract of land mentioned and he claimed the amounts of $10,208.58 and $14,034.14 as deductions in connection with the operation of that part of the tract of land which was cultivated. The deductions represented amounts expended for labor, seed, fuel and oil, taxes, insurance, provisions, repairs, and depreciation on farming tools and tractors. The respondent disallowed the deduction. The respondent also taxed to the petitioner for 1920 and 1921 the entire community income claimed for those years.
   OPINION.

MaRQuette :

It is the contention of the petitioner that he purchased the tract of land in question with a view to farming it for profit and that he is entitled to deduct the operating expenses for the years 1920 and 1921 in computing his net income for those years. The respondent contends that the petitioner acquired the land for the purpose of using it as a duck-shooting preserve, and that after-wards he decided that if part of the land could be transformed into a farm it would be a more attractive place to go on his duck-shooting trips.

We can not agree with either the reasoning or conclusions of the respondent. If the petitioner purchased the tract of land as a duck-shooting preserve it is difficult to understand why he would, at a large expense, surround it with a levee designed to keep off the overflow of water and to cause it to dry out. One need not possess the erudition of an ornithologist or the experience of a nimrod to know that ducks, whether domesticated or ferae natwrae, are aquatic birds and are more at home on water than on dry land, and the petitioner must have been aware that in surrounding his land with a levee he was doing that which was obviously calculated to lessen its usefulness as a duck-shooting preserve.

The evidence establishes to our satisfaction that other land in the vicinity of the petitioner’s land had been reclaimed and brought to a state of agricultural usefulness, and that the petitioner, when he purchased the land in question, intended to and believed that he could reclaim it and make it profitable as a farm. He has testified to that effect and his actions in constructing buildings and levees, draining the land and plowing and cultivating it, are corroborative of his expressed intentions. Certainly these actions are not in harmony with the theory that he acquired the land as a duck-shooting preserve. Whether he used poor judgment in purchasing the land with a view to farming it is none of our concern. It is sufficient that he acquired it for that purpose. The deduction claimed should be allowed.

The action of the respondent in taxing to the petitioner for the years 1920 and 1921 the entire income from the community property for these years is proper- and is approved. Appeal of D. Cerruti, 4 B. T. A. 682.

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

Considered by Phillips, Milliicen, and VaN Fossan.


author: MaRqtjette:

text:
    Wilson Banking Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4802.
    Promulgated July 30, 1927.
    Amounts deposited with a bank by an officer and stockholder and credited to his personal account, are not part of the bank’s invested capital.

      G. A. Wilson, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the years 1919 and 1920 in the amount of more than $10,000.
    BINDINGS OB BACT.
    The petitioner is a Mississippi corporation engaged in the banking business at Greenwood, Miss. It was organized in the year 1913 with a capital stock of $25,000, all of which, with the exception of qualifying shares, was issued to G. A. Wilson. Wilson, in addition to paying in $25,000 for the petitioner’s capital stock, transferred to it at about the date it was organized, eight promissory notes which he held, these notes being of the face value of $174,100. The accrued, interest on these notes at the time they were transferred to the petitioner amounted to $12,131. The amount of the notes was credited to Wilson’s personal account and the accrued interest was credited to the petitioner’s undivided profits account. The notes were paid at maturity. The amount so deposited to G. A. Wilson’s account was not withdrawn by him and it remained in his account during the years 1919 and 1920. The account did not bear interest.

      In the year 1913 the petitioner borrowed money from a New York bank and at that time G. A. Wilson, president of the petitioner, wrote to said bank as follows:
    Greenwood, Miss,, June 17, 1918.

    Mr, A. J. Oxenham,

      Asst. Cashier, National Bank of Commerce of New York, New York.

    Dear Sir: We have your favor of the 14th inst., with credit memorandum of $19,627.25, proceeds of our note of June 12th, and also a note drawn on one of your forms for the $20,000, and note your request that we sign the enclosure to be substituted for the note we sent you.
    It is our pleasure to comply with your request and to that end we hand you herein, the said note on your form and will ask that you mark on the note we sent you, “ cancelled and substitute taken on our form,” and mail the note to us.
    We also have this day passed the order giving authority to our President, Vice President and Cashier, to borrow funds of your bank, and herein hand you a certified copy of said order.
    The writer has also given his personal endorsement to the enclosed note and now begs to say so that you may rely on it for all future dealings with this bank, that he is the owner of all the shares, except one share each owned by his two sons and one each by his two sons-in-law.
    That the writer has on deposit in this bank $240,000 which represents his interest in the bank, plus the capital stock. It is not the intention of the writer to withdraw his deposit. We went into the banking business in order to handle the writer’s funds and put the capital stock as low as the law would permit in order to save taxes.
    The writer is personally and individually liable and responsible for any and all debts and liabilities of this bank to whomsoever, now and in the future. Thus, you see, that instead of being a small concern, we are really the “ biggest ” bank in Greenwood.
    We note that you remark on the size of our receivables. We beg to say that we have customers who are wealthy planters and in order to do business with them we must let them have large sums, and we do this, but of course it is with full knowledge of their honesty and ability to give us ample security.
    The writer draws no salary of the bank and my two sons who do the work, have very small salaries.
    We are frank with you from the foregoing information, because we think you are entitled to know the very truth about us and hope that what we have said will not be considered boastful.
    Yours very truly,
    (Signed) G. A. Wilson,

      President.

    The petitioner in its income and profits-tax returns for the years 1919 and 1920, included the amount of $174,100 deposited to the account of G. A. Wilson as aforesaid in its invested capital for those years. The amount included by the petitioner was excluded by the respondent.
   OPINION.

MaRqtjette:

The petitioner contends that the amount of $174,100 deposited with the petitioner by G. A. Wilson under the circumstances set forth in the findings of fact, was intended by Wilson to remain permanently for the use of the petitioner, and should be considered as part of and included in its invested capital for the years 1919 and 1920. We can not agree with this contention. Invested capital under the Revenue Act of 1918, which was in force during the years 1919 and 1920, meant: (1) Actual cash bona fide paid in for stock or shares; (2) actual cash value of tangible property, other than cash bona fide paid in for stock or shares; (3) paid in or earned surplus and undivided profits; (4) intangible property bona fide paid in for stock or shares, subject to certain limitations. The deposit made by Wilson with the petitioner does not fall within any of the classes named. Notwithstanding what Wilson may have intended when he transferred the notes, the fact is that they and the proceeds thereof were carried and remained as a deposit standing in his name which he could have withdrawn at any time. Neither the notes nor the money belonged to the petitioner. It may be that as between Wilson and the bank or banks to which he specifically represented that he did not intend to withdraw the deposit, he would be estopped from claiming the right to withdraw it, but as to all other persons or corporations he would stand on the same footing as any other of the petitioner’s depositors. The petitioner cites several court decisions in support of its contention but they are so obviously not in point that we do not deem it necessary to discuss them.

Judgment vMl be entered for the respondent on 15 days’ notice, u/nderr Rule 50.

Considered by Phillips, Milliken, and Yah Fossan.


author: Maequette :

text:
    Edward C. Striffler, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5533.
    Promulgated July 30, 1927.
    Under the facts herein the petitioner is entitled to include in its invested capital for the year 1920 the value of the good will acquired from its predecessor.

      ‘William D. Harris, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits tax for the year 1920 in the amount of $1,707.66. The only question for decision is whether the petitioner is entitled to include in invested capital for 1920, good will of the value of $10,000 acquired from a predecessor business.

      FINDINGS OF FACT.
    The petitioner is a New York corporation organized in the year 1918 for the purpose of acquiring an iron and steel hardware business owned and operated by Edward C. Striffler. Its principal office and place of business are at New York City.
    In or about the year 1870, the father of Edward C. Striffler founded an iron and steel hardware business in New York City. About January, 1897, Edward'C. Striffler and Emil Budolph purchased the business of Edward C. Striffler’s father, paying about $40,000 for the tangible assets and $10,000 for the good will thereof. In the year 1907, Edward C. Striffler purchased from Emil Budolph his one-half interest in the business for $66,525.84, of which $5,000 was paid specifically for Budolph’s interest in the good will. On January 1, 1919, Edward C. Striffler conveyed all of the assets of the business, including good will, to the petitioner in consideration of the issuance to him by the petitioner of its capital stock, consisting of 1,250 shares of the par value of $100 each. The good will of the business at the time it was transferred to the petitioner was of the cash value of $10,000. The par value of the stock issued by the petitioner for the business of Eward C. Striffler exceeded the value of the tangible assets conveyed by more .than $10,000.
    The respondent refused to permit the petitioner to include in invested capital for the year 1920 any amount of the good will acquired from Edward C. Striffler as hereinabove set forth.
   OPINION.

Maequette :

Edward C. Striffler acquired for $10,000 the good will of the business founded and operated by his father, and he was entitled to include in the invested capital of his business on account of said good will the amount of $10,000. When he sold his business to the petitioner in 1919 the value of the good will in question was still $10,000. He received therefor stock of the par value of more than $10,000. The lowest of the three limitations on the inclusion in invested capital of intangible assets acquired for stock is in this case the value of the intangibles, to wit, $10,000, and the petitioner is not prevented from including that amount in its invested capital by section 331 of the Bevenue Act of 1918, since it is not in excess of the amount at which Striffler was entitled to include it in the invested capital of his business.

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

Considered by Phillips, Yan Fossan, and Milliicen.


text:
    Rakestraw-Pyle Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7294.
    Promulgated July 30, 1927.

      Harry G. Lank, Esq., for the petitioner.

      A. B. Marrs, Esq., for the respondent.
   Maequette:

This proceeding is for the redetermination of deficiencies in income and profits taxes for the fiscal years ended Juñe 30, 1920, June 30, 1921, and June 30, 1922, in the amounts of $111.12, $2,341.85, and $1,669.11, respectively. The only question for decision is whether the petitioner is entitled to include in invested capital for the years involved any amount on account of good will, all of the other allegations of error set forth in the petition having been abandoned at the hearing.

FINDINGS OP PACT.

The petitioner is a Pennsylvania corporation with its principal office and place of business at Kennett Square, Pa. It was organized in the year 1901 for the purpose of purchasing the business of Rake-straw and Pyle, a partnership composed of Thomas Rakestraw and J. W. Pyle, which was and had been for many years engaged in operating a nursery for growing trees and shrubbery. The capital stock of the corporation consisted of 500 shares of preferred stock and 500 shares of common stock of the par value of $100 each. The incorporators were J. W. Pyle, Thomas Rakestraw, C. J. Pennock, J. M. Worrall, F. T. McDonald, and S. Jones Philips.

Shortly after the petitioner was organized, it issued and sold its bonds in the amount of $30,000 and it purchased “ all the property, real and personal” of the partnership of Rakestraw and Pyle for $63,000, paying therefor $29,500 in cash and 344 shares of its preferred stock. One hundred shares of the preferred stock were issued for cash at par to J. M. Worrall, C. J. Pennock, F. T. McDonald, and S. Jones Philips in equal shares. The record does not disclose when or to whom the remainder of the preferred stock was issued.

At or about the time that it acquired the tangible assets of the partnership of Rakestraw and Pyle, the petitioner issued all of its common stock, 500 shares of the par value of $100 each, to J. M. Worrall, C. J. Pennock, F. T. McDonald, and S. Jones Philips, for the good will of the business of nurserymen, theretofore conducted by Thomas Rakestraw and J. W. Pyle as a copartnership, trading under the name of Rakestraw & Pyle. The record does not disclose how Worrall, Pennock, McDonald and Jones acquired said-good will, nor is there any competent evidence in the record showing that the good will so acquired had any value.

The respondent, upon audit of the petitioner’s income and profits-tax returns for the fiscal years ending June 30, 1920, June 30, 1921, and June 30, 1922, excluded from invested capital the amounts claimed by the petitioner on account of said good will and determined that there are deficiencies in tax as above set forth.

Judgment mil ~be entered for the respondent.

Considered by Phillips, MillikeN, and YáN FossaN.


author: Marquette :

text:
    Sumter Coca-Cola Bottling Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9079.
    Promulgated July 30, 1927.
    1. The value of an exclusive right to bottle and sell Coca-Cola within certain territory ascertained for the purpose of determining gain or loss upon the sale of the business to which it appertained.
    2. Under the circumstances herein, certain debts ascertained to be worthless within the taxable year, allowed as deductions from gross income.

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

      L. L. Hight, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1918 in the amount of $5,346.27.
    FINDINGS OF FACT.
    The petitioner was incorporated in the year 1913 under the laws of South Carolina to take over the business of a partnership that was engaged in bottling and selling Coca-Cola in Sumter, S. C., and vicinity under a franchise or agreement. The capital stock of the petitioner was of the par value of $5,000 and all of it was issued in June, 1913, for the business and assets of the partnership, including the Coca-Cola franchise. This franchise, which had been granted to the partnership in 1904, gave it the exclusive right to bottle, label and sell Coca-Cola in Sumter, S. C., and certain territory adjacent thereto. The transfer of this franchise to the petitioner was approved and ratified by the Coca-Cola Bottling Co. of Atlanta, Ga., which owned and controlled the bottling rights of Coca-Cola in a number of States, including South Carolina, and it thereafter made shipments of Coca-Cola syrup to the petitioner. The petitioner could buy Coca-Cola syrup only from the Coca-Cola Bottling Co., and that company could sell only to recognized franchise holders. Part of the territory covered by the petitioner’s franchise was sublet so that it operated only in what was known as the Sumter Plant territory. The petitioner had a royalty interest in the subleased territory, which royalty interest was transferred to one J. K. Croswell in the year 1916.
    The actual cash value of the franchise, or right to bottle and sell Coca-Cola in the Sumter Plant territory, at the time it was acquired by the petitioner was $23,622.
    In August, 1918, the petitioner sold its inventories, machinery, equipment, supplies and its Coca-Cola franchise for $47,000, of which $25,000 was represented by five notes for $5,000 each. In computing the profits from this sale the respondent determined that the cost to the petitioner of the physical assets sold was $21,032.58, and that the cost of the Coca-Cola franchise was $15,000, or a total cost of $36,032.58. The respondent also determined that the five $5,000 notes received in part payment by the petitioner were worth their face value and that the petitioner had realized a profit of $11,467.42 on the sale.
    After the sale of its inventories, machinery, equipment, supplies and franchise on August 12, 1918, the petitioner discontinued business except the collection of its outstanding accounts, which business was carried on through the remainder of the year. At the time of the sale of the assets the accounts outstanding amounted to about $1,200. Certain accounts were subsequently collected so that at December 31,1918, the accounts uncollected amounted to $993.83. These accounts were considered worthless at that date and no further attempt was made to collect them, nor were they ever paid. No book entry was ever made charging them off as worthless because the petitioner at that time had ceased to keep books of account.
    The petitioner filed an income and profits-tax return for the year 1918 as provided by law. On November 18, 1923, the respondent notified the petitioner by letter mailed that date that it was proposed to assess additional tax against the petitioner for the year 1918 in the amount of $17,205.75. The additional tax was assessed on or about February 1, 1924. The petitioner on or about March 1, 1924, filed a claim for abatement of the ylditional tax so assessed and for refund of $490.72, the amount of tax originally assessed and paid on the return. On March 10, 1925, the respondent mailed to the petitioner a letter notifying it that its claim for abatement and refund had been allowed for $11,859.48 and rejected for $5,836.99, the deficiency in tax therefore being $5,346.27. The respondent’s letter of March 10,1925, is the basis for this proceeding.
    In computing the petitioner’s net income for 1918 the respondent included therein the amount of $11,467.42, determined by him to have been realized by the petitioner as profit from the sale of its assets in the year 1918, and refused to allow as a deduction from gross income the amount of $993 representing debts claimed by the petitioner to have been worthless on December 31,1918.
   OPINION.

Marquette :

The first question presented for determination by the record in this proceeding is the value of the Coca-Cola franchise at the time it was acquired by the petitioner. The petitioner and the respondent are in accord that the value of the franchise at that time is the proper basis for determination of gain or loss from the subsequent sale in 1918, but they do not agree as to what the value was, the petitioner contending that it was $23,622, and the respondent that it was $15,000. There appears to be no dispute as to the cost of the physical assets sold in 1918.

Charles Y. Rainwater, secretary and treasurer of the Coca-Cola Bottling Co. of Atlanta, which controlled the bottling rights for Coca-Cola in a number of States, testified that he had been such secretary and treasurer since 1906 and had supervision of the making and approving of all contracts and subcontracts involving the right to bottle and sell Coca-Cola in the territory controlled by his company. He was familiar with the amount of Coca-Cola syrup consumed in each territory and the profits realized by the bottlers, and had bought and sold franchises on his own account and owned interests in various bottling plants. He stated that originally selling rights for Coca-Cola were given away in order to induce and stimulate the use of that product, but that by 1913 the franchises or rights to sell in certain territories, had become very valuable and that he considered a first line contract or state right had a value of $5 for each gallon of syrup consumed in the territory per year, and the subcontract, such as the one involved here, a value of $2 for each gallon of syrup consumed in the territory per year. The average consumption of syrup in the Sumter Plant territory during the years 1911, 1912, and 1913 was 11,811 gallons, and he considered the franchise right to that territory worth $23,622 when it was acquired by the petitioner in 1913. The testimony of Rainwater was not impeached or contradicted in any way and we are of the opinion that it establishes that the franchise in question had a value of $23,622 in June, 1913, and we so hold.

The next question is whether the petitioner, in computing its net income for 1918, is entitled to deduct the amount of $993, representing uncollected debts existing on December 31, 1918. The evidence shows that the petitioner had sold all of its assets in August, 1918, and remained in business only for the purpose of collecting its outstanding accounts. Some of these accounts were collected between August and December, 1918, and on the latter- date there remained' the amount of $993 uncollected. These accounts the petitioner’s officers considered worthless and no further effort was made to collect them, and they remained uncollected. No book entry was made charging these debts off for the reason that the petitioner had ceased to keep books. We are of the opinion that the debts were worthless and were so ascertained by the petitioner during the taxable year 1918, and that the deduction claimed should be allowed.

The petitioner also alleged in its petition that the respondent erred in holding that the five promissory notes of $5,000 each, received by the petitioner in part payment for the assets sold in 1918 were worth par. However, the evidence produced as to this issue is not sufficient to warrant us in disturbing the respondent’s determination and the petitioner so concedes in its brief.

Order of redetermination will be entered on 15 days’ notice, under Rule 50.

Considered by Phillips, Milliken, and Van Fossan.


author: Marquette:

text:
    James R. Buchanan, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. James R. Buchanan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9297, 9298.
    Promulgated July 30, 1927.
    Evidence held, insufficient to show that the petitioners sustained a loss through the transaction involved herein.

      Alan H. McLane, Esq., for the petitioners.

      W. F. Wattles, Esq., for the respondent.
    These proceedings are from determinations by the respondent asserting deficiencies in income tax against James R. Buchanan in the amounts of $176.89 for the year 1920 and $244.05 for the year 1922, and deficiencies in income tax against Mrs. James R. Buchanan in the amounts of $176.89 for 1920 and $335.60 for 1922. The deficiency letter in the case of James R. Buchanan also shows an overassessment for the year 1921. It is alleged in each of the pelu-tions that the taxes in controversy are income taxes for the calendar years 1920, 1921, 1922, and 1923. However, the only errors alleged relate to the year 1922.
    FINDINGS OP PACT.
    The petitioners were, during the years 1920 to 1922, inclusive, husband and wife residing at New Orleans, La. Their income was community income and was reported on that basis.

      ■ During the year 1922 James E. Buchanan was a member of a partnership known as the Laguerre Syndicate of Jennings, La., owning a one-fourth interest therein. The respondent concedes that in determining the partnership income for 1922 he erroneously included therein the amount of $9,004.36; that the partnership income as determined by him should be reduced by that amount, and the distributive shares of the several partners adjusted accordingly.
    In the year 1922 the Laguerre Syndicate contracted to drill an oil well for one Montagnet, who had a one-half interest in a certain lease. Montagnet agreed to pay the Laguerre Syndicate $11,000 for drilling the well and also to pay it $9,000 from the first oil produced. The syndicate drilled the well at a cost of $12,246.10, but Montagnet got into financial difficulties and was unable to pay his creditors and the syndicate took over his interest in the lease. It estimated the value of-the interest so taken over at $7,500 and in computing its net income for the year 1922 it deducted the difference between that amount and the cost of drilling the well. The respondent disallowed the deduction.
    The respondent in computing the petitioners’ income for the year 1922 allowed each of them an exemption of $1,000.
   OPINION.

Marquette:

The first error alleged by the petitioners is that the respondent, in computing the net income of the Laguerre Syndicate for the year 1922, erroneously included therein the amount of $9,004.36. The respondent concedes that he erred as alleged by the petitioners and that the partnership income as determined by bim should be decreased by the amount of $9,004.36 and the petitioners’ distributive share thereof adjusted accordingly.

The petitioners also allege that the respondent, in computing the net income of the Laguerre Syndicate for the year 1922, erred in disallowing as a deduction from gross income the amount of $4,746.22 claimed as a loss on an oil well drilled in that year for one Mon-tagnet. The evidence relative to this point discloses that in 1922 the Laguerre Syndicate contracted to drill an oil well for Mon-tagnet for which he was to pay $11,000 and also $9,000 from the proceeds of the first oil produced. Montagnet became financially embarrassed and was unable to meet his obligations and the Laguerre Syndicate, by a written agreement, took over Montagnet’s interest in the oil lease. The written agreement was not introduced in evidence and we are not informed as to what its terms were. The evidence does show that Montagnet’s interest in the lease was taken over by the Laguerre Syndicate as a result of “ a kind of creditor’s meeting,” and that Montagnet owed the syndicate at that time more than $25,000, of which amount obviously not more than $11,000 could have been owing on account of the drilling of the oil well in question. Edward Laguerre, a member of the Laguerre Syndicate, testified that he did not know how the estimate of $7,500 as the value of Mon-tagnet’s interest in the oil lease when it was taken over by the syndicate was arrived at. The testimony as to this issue is vague and indefinite. Interpreting it in its aspect most favorable to the petitioners it simply shows that the syndicate drilled a well for one Mon-tagnet at a cost of $12,246.22; that in the same year it took over Montagnet’s interest in the lease, estimated the value thereof to be $7,500 and claimed a loss of $4,746.22 on the transaction. The respondent has determined that no loss was sustained. The evidence produced on behalf of the petitioners does not convince us that the syndicate sustained the loss claimed and we do not feel warranted in disturbing the determination of the respondent.

The petitioners also allege that they were granted exemptions of $1,000 each whereas the proper exemption was $1,250 each. Whether they should receive the one exemption or the other depends upon the amount of their taxable income. If, after adjusting their income in conformity with what we have hereinbefore said, it is found to be more than $5,000, they are each entitled to a personal exemption of $1,000, but if their net taxable income is found to be less than $5,000, they are each entitled to a personal exemption of $1,250. (Section 216(c) of the Revenue Act of 1921.)

No evidence was offered in support of the other allegations of error.

Order of redet&rmination will be entered on 15 days’ notice, v/nd&r Rule 50.

Considered by Phillips, Milliken and Van Fossan.


author: Smith :

text:
    H. Benjamin Marks, Petitioner, v. Commissioner of Internal Revenue, Respondent. Isaac Marks, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10806, and 10875.
    Promulgated July 30, 1927.
    Bonuses were credited upon the books of a corporation to its principal stockholders, the petitioners, but were not actually, paid to them during the taxable year. Held,, that the petitioners did not receive the bonuses during the taxable year and they are not liable to income tax upon them.

      Lawrence A. Baker, Esq., John V. Coffield, Esq., and Leroy Sanders, Esq., for the petitioners.

      D. D. Shepard, Esq., for the respondent.

      These proceedings were heretofore consolidated for hearing by appropriate order. The taxes in controversy are income taxes for the year 1920 in the respective amounts of $1,433.23 and $9,104.83. It is alleged by each petitioner that the Commissioner has erroneously included in income for the year 1920 an amount representing a bonus credited to him upon the books of the corporation of which he was an officer and a principal stockholder, but which he did not actually receive during the taxable year.
    FINDINGS OF FACT.
    The petitioners are individuals residing at Indianapolis, Ind. During the year 1920 they were officers and the principal stockholders of the General Engineering Co., a corporation engaged in the business of dismantling Camp Bowie, near Fort Worth, Tex. They had organized the corporation for that purpose during the year 1919. They each held 498 of the 1,000 shares of stock of the company, and their brother-in-law, one Louis Sakowitz, held 2 shares. The remaining 2 shares were not issued. The contract for dismantling the camp was obtained from the Government by bid at a cost of $66,000. This money was all furnished by Isaac Marks and H. Benjamin Marks, a large portion being borrowed for the purpose.
    During the year 1920 Isaac Marks, president and general manager, and H. Benjamin Marks, vice president of the company, the petitioners herein, received salaries in the amounts of $12,000 and $5,000 respectively. The corporation kept its books and accounts upon a fiscal year basis ending June 30. At the close of the fiscal year ended June 30, 1920, it credited certain amounts as bonuses to the personal accounts of its officers and employees, totaling $82,000. The salaries paid and the bonuses credited, were as follows:

    Moynahan and Bosenberg owned no shares of stock of the General Engineering Co. The net income of the corporation for the fiscal year ended June 30, 1920, after the deduction of the bonuses credited, was $100,595.97. No part of the bonuses credited to the petitioners upon the books of the corporation during the year 1920 was paid to them during the year. The balance sheets set up by the company at June 30, 1920, and at June 30, 1921, showed the following assets and liabilities:

      Balance Sheets

    The item “ notes receivable,” as above shown, represents promissory notes given to the corporation in part payment for houses which it had constructed, partly from the material reclaimed from the camp, upon nearby building lots which it had purchased. This building venture was undertaken in cooperation with certain civic organizations of Forth Worth as a means of providing much needed additional housing facilities to meet the rapid growth of the city. The item “ installment contracts outstanding ” represents the amounts due from purchasers of these houses on the unpaid balance of the purchase price. The item “ land and buildings ” represents property which had been thus acquired by the corporation and which was being held for sale.
    In making its contract with the United States Government for the dismantling of the Army camp, the petitioners on behalf of the corporation assumed full liability for any and all claims and demands for damages that might be made against the Government in respect of the use and occupancy by the Government of the land comprising the camp site. The camp occupied a tract of about 1,400 acres, a part of which had been previously subdivided and sold for building lots. The ownership of the land was, therefore, widely scattered and the liability in respect of the number of claims that might be made was proportionately large. The company deemed it advisable to maintain a reserve sufficient to offset this liability.
    The petitioners kept no individual books of account. They made their income-tax returns for the year 1920 upon a cash receipts and disbursements basis and did not report as income any amounts credited to them as bonuses upon the books of the company.
   OPINION.

Smith :

The sole issue raised in these appeals was whether certain amounts credited to the petitioners upon the books of the General Engineering Co. during the year 1920 were received by them during that year so as to constitute a part of their taxable income for the year. The respondent, relying upon the decision of the Board in the Appeal of John A. Brander, 3 B. T. A. 231, has held that the petitioners are liable to income tax in respect of bonuses credited to their accounts upon the corporation’s books, upon the ground that they were “ constructively ” received by them.

In the Brander appeal we stated with reference to constructive ” receipt:

This doctrine, as we have made clear in several appeals, is not to he applied lightly, but only in situations where it is clearly justifiable. When taxable income is consistently computed by a citizen on the basis of actual receipts, a method which the law expressly gives him the right to use, he is not to be defeated in his bona fide selection of this method by construing ” that to be received of which in truth he has not had the use and enjoyment.

It does not appear that the General Engineering Co. had on hand at any time during the year 1920 sufficient cash, or assets which might be readily converted into cash, to pay the bonuses credited to its officers and employees on June 30, 1920. On that date it had on hand cash in the amount of $2,336.59 and Liberty bonds in the amount of $3,312.56. It had other assets consisting of accounts receivable, notes receivable, installment contracts outstanding, land and buildings and other lesser items. It can not be said that the petitioners had the use and enjoyment of such assets during the year 1920.

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

Considered by Littleton and Love.


author: Green:

text:
    George C. Beidleman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11668.
    Promulgated July 30, 1927.
    1. Petitioner failed to furnish sufficient evidence to support his right to the deductions claimed for bad debts and business expenses.
    2. The petitioner acquired real estate, the title to which subsequently proved defective. Held, that no deductible loss is sustained until there has been a sale or other disposition.

      George G. Beidleman, Esq., pro se.

      Dwight H. Green, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of his income taxes for the years 1920 and 1921, for which years the Commissioner determined deficiencies in the amounts of $46.53 and $170.85, respectively.
    The petitioner alleges that the Commissioner erred in not allowing him the following deductions: Taxes assessed but not paid, bad debts, and certain expenses which he alleges were incurred as ordinary and necessary expenses in carrying on his business. The Commissioner in his amended answer alleges that an error was made in allowing a deduction in the amount of $1,575 as loss in connection with a real estate transaction in the year 1920, and seeks to have the deficiency increased.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Okmulgee, Okla., where he is engaged in the practice of law and farming. His accounts are kept on the cash receipts and disbursements basis. In the years 1920 and 1921, he claimed deductions of $447.59 and $280.70, respectively, for state and county taxes assesed but not paid. For the year 1920, $350 was claimed as a deduction for a bad debt, and $551.07 was claimed as a deduction on account of expenses incurred in perfecting title to land owned by the petitioner. A deduction in the amount of $1,447.99 was claimed on account of expenses incurred in connection with the conduct of the petitioner’s law business. He also claimed as a deduction $178.07 alleged to have been expended in law suits which were being prosecuted on a contingent-fee basis.
    In 1919 the petitioner purchased what he thought was fee simple title to 80 acres of land for $1,975. In 1920, as a result of an action to quiet title to the land in question, it was decreed that he was the owner of only an undivided one-seventh interest therein. In computing petitioner’s net income for the year 1920, the Commissioner allowed a deduction of $1,575 as loss in the transaction, which sum represented six-sevenths of the purchase price.

      The Commissioner disallowed the deductions claimed by the petitioner and asserted a deficiency for the year 1920 in the amount of $46.53 and for the year 1921 in the amount of $170.85. The amended answer filed by the Commissioner placed in issue the right to deducí-an alleged loss sustained by the petitioner in a real estate transaction in 1920.
   OPINION.

Green:

Since the petitioner kept his accounts on a cash receipls and disbursements basis, taxes assessed but not paid are not deductible items. He has failed to offer any convincing proof as to any of the other deductions claimed, and accordingly the Commissioner’s determination with reference thereto should be sustained.

The Commissioner in his amended answer has placed in issue the deductibility of $1,575 allowed as a loss in connection with a real estate transaction in 1920. The petitioner, in 1919, purchased certain interests in 80 acres of land at a cost of $1,975. Litigation in 1920 showed that in place of acquiring fee simple title to the property, he acquired only a one-seventh interest in the same. A deduction of six-sevenths of the cost was allowed in computing the net income for 1920. The one-seventh interest cost $1,975 and no gain or loss is sustained until the transaction is closed by sale or other disposition.

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

Considered by Sternhagen and Arttndell. .


author: Milliken :

text:
    Estate of A. J. Schulz, Emma Jane Schulz, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5686.
    Promulgated August 1, 1927.
    Transfers made, while decedent was in good health and active in business affairs, for the purpose of carrying out a prenuptial promise, held not to have been made in contemplation of death.

      Harry O. Weeks, Esq., for the petitioner.

      Thomas M. Wilkins, Esq., for the respondent.
    This proceeding results from the determination by the respondent of a deficiency in estate tax in the amount of $1,643.55. The sole issue involved is whether or not certain transfers by the decedent to his wife were made in contemplation of death and should be included in the gross estate.

      FINDINGS OF PACT.
    Finiría, Jane Schulz is the independent executrix of the Estate of A. J. Schulz. The latter, a resident of Wichita Falls, Tex., died on December 3, 1923. He left an estate of approximately $125,000, exclusive of all properties which the respondent alleges were transferred in contemplation of death.
    The properties included by the respondent as property transferred in contemplation of death, consisted of the following:
    United States bonds_$27,313.68
    War sayings stamps- 1, 000. 00
    Money in savings account, First National Bank, Wicliita Falls, Tex_ 10,608.00
    Money in savings account, City National Bank, Wicliita Falls, Tex_ 1,466.78
    Money in checking account, City National Bank_ 685.09
    Money in checking account, First National Bank_ 7, 984.44
    Stock in First National Bank_ 3, 600. 00
    Notes of T. L. Burnett_ 21, 733.35
    Certificate of deposit, Farmers State Bank of Burk-burnett, Tex_ 8,000. 00
    Prior to the year 1919, A. J. Schulz had been married, reared a family and had secured a divorce from his wife. In the last mentioned year, he wrote his sister, living in Minnesota, requesting her aid in the selection of a second wife. His sister decided upon a person she deemed suitable, and the decedent left his home in Wichita Falls, Tex., to proceed to Minnesota to become acquainted with the person his sister had selected. On June 21, 1919, he married Emma d ane Schulz. The decedent advised his wife, prior to marriage, of his financial condition and promised to give her all Government bonds, which he then owned, and to make other substantial gifts until his wealth was evenly divided between them. At the time of his marriage, decedent was suffering from a throat trouble, and shortly thereafter, he went to a hospital in Minnesota to cause an examination to be made for the same. The examining physician made a general physical examination and found that the decedent was afflicted with an enlarged prostate gland and advised an operation. The operation was successfully performed and the decedent entirely recovered. He and his wife returned to Wichita Falls late in the year 1919. Soon after they returned, he fulfilled his promise and gave to his wife all the bonds which he then owned, as well as made her a gift of a residence.
    All of the United States bonds included in the gross estate of the decedent, were given to his wife in December, 1919, and remained her property at the date of his death. The savings stamps were given to his wife on July 26, 1920.

      The deposits in the savings account in the City National Bank, were deposited for Emma Jane Schulz more than two years prior to the death of the decedent.
    At date of death of decedent, Emma Jane Schulz had in her savings account at the First National Bank, between sixteen and seventeen thousand dollars. Of this amount, respondent included in the gross estate of decedent, $10,608. The entire savings account represented gifts made by the decedent or earnings from her own property.
    The deposits in the checking account of Emma Jane Schulz, in the First National Bank, at death of decedent, amounted to $7,984.44 and represented gifts made from time to time, by her husband. Of this sum, $5,287.42 represented a refund which the decedent had received from the United States Government and which he had promised to give his wife, if and when received. The deposit of the refund check was made between September and November, 1923.
    The stock in the First National Bank of Wichita Falls, had been given by decedent to his wife, on October 30, 1922.
    The Burnett notes were bought on August 3, 1923, by Emma Jane Schulz, and $15,000 of the purchase price of these notes was taken from the savings account of Emma Jane Schulz, in the First National Bank of Wichita Falls. The remainder of the purchase price was supplied as a gift by the decedent.
    The certificate of deposit in the Farmers State Bank of Burk-burnett was issued by that bank to Emma Jane Schulz, on February 1,1923.
    After the return to Wichita Falls, late in 1919, the decedent resumed his business activities. He was a member of a partnership engaged in operating an oil and gas lease. He was in active charge of the business. In 1922, he and his wife toured Europe. His physical condition was good, except for attacks of asthma. In June, 1923, he and his wife went to Mineral Wells, Tex., to secure treatment for asthma. His disability responded to treatment, requiring a shorter time than either he or his physician anticipated. Decedent returned to Wichita Falls to resume his business activities. In October, 1923, his wife became ill and they returned to Mineral Wells to secure treatment for her. The physician treating decedent at Mineral Wells, advised him that he had a life expectancy of 10 or 15 years. In the latter part of November, 1923, decedent contracted dengue fever and died from the same on December 3, 1923. He was 73 years of age at date of deáth.
   OPINION.

Milliken :

For the purposes of this decision, we perceive no reason for dividing the transfers made two years prior to death and those made within two years of death. All the transfers which decedent made to his wife were in conformity with a well considered plan to provide a substantial estate for his wife and fulfill, to the fullest extent, the prenuptial promise he had made. The expectation or anticipation of death, either in the immediate or reasonably distant future, was not the moving cause of the transfers. From late in 1919, when decedent had fully recovered from an operation, until the attack of dengue fever, late in November, 1923, he was actively engaged in his various business pursuits. He had received tfeatment for asthma in 1923, and recovered much sooner than either he or his physician anticipated. His physician had advised him that he had a life expectancy of from 10 to 15 years.

Counsel for respondent emphasizes the age of the decedent, when some of the transfers were made in 1923. It is true, in 1923, the decedent had passed the Biblically allotted period of life. Nevertheless, taking into account the business activities in which he was engaged, together with the prophecy of his physician as to his expectancy of life, he, in common with the rest of humanity, expected to far outlive his allotted time.

We conclude that the transfers in question were not made in contemplation of death and that the evidence is amply sufficient to overcome the statutory presumption raised by section 402(c) of the Revenue Act of 1921.

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

Considered by Maequette, Phillips, and VaN FossaN.