text:
    J. Henry Neal, Edmund C. Campbell, William F. Kenney, William R. Sampson, William H. Hitchcock, Trustees of the First Peoples Trust, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45403.
    Promulgated June 29, 1932.

      William H. Hitchcock, Esq., for tlie petitioners.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

Van Fossan:

In this case we are confronted with the question whether or not a specific ruling, made by the Commissioner in 1920 and applicable only to the petitioners, of which ruling personal notice was sent to and received by petitioners, ivas reversed or revoked by court opinions, general rulings and promulgations, no specific notice of revocation being sent to petitioners until 1927.

Petitioners base their case on the provisions of section 704 (a) of the Kevenue Act of 1928, which provides:

Ií a taxpayer filed a return as a trust ior any taxable year prior to the taxable year 1925 such taxpayer shall be taxable as a trust for such year and not as a corporation, if such taxpayer was considered to be taxable as a trust and not as a corporation either (1) under the regulations' in force at the time the return was made or at the time of the termination of its existence, or (2) under any ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue applicable to any of such years, and interpretative of any provision of the Revenue Act of 1918, 1921, or 1924, which had not been reversed or revoked prior to' the time the return was made, or under any such ruling made after the return was filed which had not been reversed or revoked prior to the time of the termination of the taxpayer’s existence.

For the purpose of clarity of understanding we recapitulate the salient facts. The First Peoples Trust was formed in 1919 by a declaration of trust and began business January 1,1920. On December 2, 1920, the Commissioner, over his personal signature, wrote a letter to petitioners specifically holding the organization to be a trust, taxable as such. Thereafter, until 1928, when an adverse decision by the United States Circuit Court of Appeals was rendered, petitioners filed income-tax returns in accordance with the Commissioner’s ruling, i. e., as a trust. On February 9, 1923, the collector advised petitioners that his superiors had ruled that petitioners need not file capital-stock-tax returns.

On May 12, 1924, the United States Supreme Court decided Hecht v. Malley, 265 U. S. 144, and certain other cases and on June 7,1924, the Secretary of the Treasury approved a revision of the regulations relating to capital-stock tax, giving effect to the recent decisions and dividing trusts into two classes, i. e., holding trusts and operating trusts, the former being nontaxable and the latter taxable. On August 11, 1924, the Commissioner declared the above interpretation applicable to income-tax situations under the Revenue Acts of 1918 and 1921, and on August 18, 1924, a similar ruling as to the 1924 Act was published.

On October 6, 1924, the Commissioner and the Secretary promulgated Regulations 65, including article 1504, which purported to indicate the distinction between an association and a trust, and on December 5, 1924, the Deputy Commissioner wrote petitioners in reference to their controversy over the classification of petitioners for capital-stock-tax purposes, offering to grant further hearing on tlie matter, if desired. Petitioners requested such a hearing and the same was held December 17,1924. On January 15, 1925, the Acting Deputy Commissioner sent petitioners a letter containing a tabular statement of computation of capital-stock-tax liability and on March 25, 1925, petitioners received notices of assessment of such taxes. The taxes were paid under protest, claim for refund was filed and rejected, and suit was brought for recovery. The District Judge ruled favorably to petitioners’ claim, but the Circuit Court of Appeals on October 80, 1928, reversed the District Court and held petitioners to be an association taxable as such for capital-stock-tax purposes.

On August 27, 1927, the collector advised petitioners by letter that the Commissioner “ has ruled that the (petitioner) is an association ” for income-tax purposes. Attached to the letter was a copy of a letter from the Commissioner to the collector dated August 23, 1927, stating that the “ status of the organization in question for the purpose of income tax has *been reconsidered * * * ” and holding that “ the organization is, therefore, held to be an association and not a trust, and is, accordingly subject to tax as a corporation. The former ruling dated December 2, 1920, is, accordingly, hereby revoked.”

In considering the question presented we start with the premise that section 704 (a) is a statute of repose, calculated to give taxpayers freedom from reversals of opinion, retroactive in character, as to the proper classification of an organization under the law as interpreted by the administrative rulings. Such a statute, being remedial in character, should be liberally construed in favor of the taxpayer. E. A. Landreth Co., 15 B. T. A. 665.

Looking to the facts of the case, we find that the Commissioner had specifically ruled on petitioners’ status in 1920 and had committed himself to a holding that taxpaj^ers were a trust and not an association for income-tax purposes; This ruling remained unre-voked, unless revoked by analogy or indirection, until August 27, 1927, when, after reconsideration, it was specifically revoked. The language of the statute affords relief in any situation where a return was filed as a trust “ under any ruling of the Commissioner * * * which had not been reversed or revoked prior to the time the return was made * * Admittedly, the return for 1924 was filed under the ruling of 1920, which ruling had not been specifically or directly reversed or revoked prior to such filing. The question thus arises, can a specific ruling be reversed or revoked by indirection ? That the Commissioner was of the opinion that a specific revocation was necessary is evident from his action in revoking the same in 1927. The language used was that of the present tense. “ The 'former ruling * * * is * * * hereby revoked.”

It would seem to be fundamental that the revocation of a ruling, like the revocation of an offer in the law of contracts, must be equal in scope and manner with the ruling. See Shuey v. United States, 92 U. S. 73. If the ruling was made and published generally, an effective revocation may be accomplished by employing the same means. If the ruling was specific and directed to one individual, then a revocation must be effectively brought to the attention of the same individual and generally by the same means.

In the instant situation petitioners did not rely on a general published ruling or interpretation; they had a specific ruling personal to their trust. Had the reliance been on such a generalization it would seem to be unquestionable that a reversal or revocation of such generalization might be accomplished by a subsequent generalization. Such was the case in various cases previously before the Board. Commercial Trust Co., 18 B. T. A. 1248. See also E. A. Landreth Co., supra; Van, Cleve Trust Co., 18 B. T. A. 486; Mary L. Dutton et al., 18 B. T. A. 1151. Here the question is narrower.

Nor need we concern ourselves with the question whether the Commissioner was correct in his ruling in 1920 that petitioners were taxable as a trust. That was his ruling and it stood unreversed or unrevoked until 1927.

The above conclusion makes unnecessary a consideration of the effect on the general situation of Hecht v. Malley and the Commissioner’s rulings in other cases. Petitioners are relying on the personal ruling of 1920.

Similarly, the capital-stock-tax ■ controversy is immaterial. It may be observed in this connection, .however, that the Commissioner in his revocation letter of 1927 makes no mention of such a controversy and does not suggest that the rulings of his office subsequent to Hecht v. Medley on the capital stock-tax issue had any bearing on the income-tax question or had worked a reversal or revocation of the ruling of 1920. The whole tenor of the letter suggests that the outstanding ruling of 1920 was alive and in full effect. Moreover, the capital-stock-tax issue was not definitely settled as to petitioners until the notice of assessment of March 25, 1925, which was after the date of filing of petitioners’ 1924 income-tax return.

We are of the opinion that petitioners should prevail.- Their tax return for 1924 was duly filed as a trust under a specific personal ruling by the Commissioner made in 1920, which stood unreversed and unrevoked at the date of filing. They are entitled to the shelter afforded by section 704 (a) of the Kevenue Act of 1928.

Decision will be entered for the petitioners.


source: Caselaw Access Project

author: Trammell :

license: Public Domain

text:
    Gould Paper Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 22356.
    Promulgated June 30, 1932.

      George E. H. Goodner, Esq., and Frederick O. Bohwerder, O. P. A.. for the petitioner.

      H. A. G ox, Esq., for .the respondent.
   OPINION.

Trammell :

The petitioner contends that in determining its taxable net income for 1917, 1918 and 1919 the respondent has erroneously understated the depletion allowance to which it is entitled for those years. There is no controversy between the parties as to the quantity or number of cords of pulpwood timber ten inches or more in diameter standing on the petitioner’s Tug Hill and Moose Eiver tracts on March 1, 1913. They are, however, in disagreement as to the fair market value per cord of such timber on that date. In amended income-tax returns for the taxable years before us the petitioner, on the timber used, took depletion on the basis of a fair market value of $4.75 per cord on March 1, 1913. In its Form T filed with the respondent, the petitioner stated that it believed that amount was a “ conservative average estimate ” of the fair market value of its timber on the basic date. In determining the deficiencies here involved the respondent, for depletion purposes, determined that the fair market value of the timber on the basic date was $3.50 per cord. However, due to a misunderstanding as to the number of cords on which the petitioner had claimed depletion, the amount of depletion actually allowed on the number of cords used was, for 1917 and 1918, at values below $3.50 per cord, and for 1919 at a value in excess of that amount.

In its petition the petitioner alleges that the fair market value of its pulpwood timber on the basic date was not less than $4.75 per cord. However, in its brief it asks that we find such value on that date to be from $5.50 to $6 per cord. The respondent contends that the value was not in excess of $3.50 per cord.

In support of value of $4.75 per cord as alleged in the petition and the higher value contended for in its brief, the petitioner submitted evidence indicating a value of $6.23 computed on a “ back-to-the-stump ” method. Under this method the petitioner takes the average price for 1913 of $11.58 per cord for Canadian pulpwood delivered in the Watertown District and subtracts therefrom the average cost of $5.35 per cord for tbe five-year period 1910 to 1914 of cutting, preparing and delivering logs from its Tug Hill and Moose River tracts to its mills in tbe same condition as tbe Canadian wood was delivered, thereby arriving at an amount of $6.23 per cord. In this computation no allowance is made for burdens inherent in tbe ownership of property of this character, such as taxes, insurance and losses from fire, insects, wind and storms. The petitioner offered no evidence as to what would be a fair and reasonable allowance for such purposes, but sought to dispose of this point by submitting testimony to the effect that the growth of the timber would be sufficient to provide for these items. The evidence in the case was that the petitioner’s timber was very largely virgin and that such timber would grow very little. The petitioner urges that a further element to be considered in connection with the “ back-to-the-stump ” value of $6.23 is that pulpwood from the Adirondacks is worth $1 per cord more than Canadian wood. Conceding that to be true, since there is testimony to support it, it is to be observed that the selling price of Canadian wood in the Watertown District included an element of profit to the Canadian producer. No allowance for selling expenses and profit is made in the petitioner’s computation under its “ back-to-the-stump ” method. It is hardly reasonable to conclude that an intelligent purchaser would pay for property as great an amount as that which he could reasonably expect to realize from resale of it over a period of years.

The petitioner submitted testimony of four witnesses, three of whom expressed the opinion that the timber had a fair market value of $6 on the basic date. Their testimony shows that their opinions were based on a “ back-to-the-stump ” method as outlined above. The fourth witness testified to a value in 1913 of $5.50 per cord for the timber acquired by the petitioner in township 4 in 1907, stating that the value was about the same on both dates. This witness was also a witness in the proceedings by which the State of New'York acquired the Taggarts Paper Company’s timber lands, which compared favorably to the petitioner’s Moose River tract from the standpoint of quality of timber and logging conditions. In 1916 he testified in that proceeding that in 1908-1909 The Taggart wood at that time would be worth as much as any wood that you could find ” and that it was worth from $3 to $3.50 a cord. When confronted in the instant case with the apparent conflict in his testimony as to value in the Taggarts ease and in the instant case he at first had no recollection of testifying in the Taggarts case, or of what tract was involved. Later he was able to recall the details of the case and stated that the decision of the court in that case as to the value of the timber involved had since caused him to change his opinion upward with respect to the value of timber in that region. When it is observed that the court found a value for pulpwood of only $4.25 a cord in the Taggarts case, it is difficult to understand how this witness could revise his opinion upward to such an extent as to think that the timber had a value of almost twice that testified to by him in 1916.

In further support of its contention that the respondent has determined too low a value for its timber on March 1, 1918, the petitioner relies on the decision of the Court of Claims of the State of New York in the Taggarts case, which according to the record in the instant case was rendered after a very exhaustive hearing. Although giving full consideration to that decision, we do not think it should be accepted as controlling here, since, with the exception of the instance referred to above, we do not know what the testimony was in that case. The instant case must be decided on the basis of the record made in it.

In support of his determination of a fair market value of $3.50 per cord on March 1, 1913, the respondent submitted the testimony of three witnesses. One of these was of the opinion that the timber on the two tracts had a fair market value on March 1, 1913, of from $2.50 to $3 per cord. Another was of the opinion that the timber on the two tracts had a value of $3 a cord on that date, while the third witness was of the opinion that the value of the timber on the Moose River tract on the basic date was $3 a cord.

Giving due consideration to all the evidence on this point, we are unable to find that the fair market value on March 1, 1913, of the petitioner’s softwood timber ten inches and over in diameter on its two tracts was in excess of $3.50 per cord, the amount determined by the respondent. This rate should be applied to the timber used by the petitioner during the taxable years instead of the timber cut. Clearfield Lumber Co., 3 B. T. A. 1282.

The petitioner contends that the respondent erred in disallowing a deduction for 1918 of $2,916.21 taken by it as representing a repayment made in that year to the Adirondack League Club on account of excess interest credits erroneously allowed to the petitioner in 1916 and 1917 under the circumstances set out in our findings of fact. The respondent denies that his action was erroneous. Over a period of years the petitioner was a purchaser of timber from the Adirondack League Club. Under the contracts of purchase the petitioner advanced money to the Club from time to time. Such advances drew interest until the wood was removed by the petitioner. In 1916 and 1917, in adjusting the accounts between itself and the petitioner, the Club allowed the petitioner credit for interest in the amount of $2,916.21 in excess of the amount to which the petitioner was entitled. The record does not disclose for what years such excessive interest was allowed or what amount was allowed in 1916 and what amount in 1917, nor does it disclose whether the same error was made in accruing the interest on the petitioner’s boohs and reporting it as income as was made by the Club in allowing it. For all the record discloses the petitioner may have accrued the correct amount on its books in the years prior to the taxable year. If any amount had been received as interest in addition to what was properly accrued or accruable in those years, the record does not disclose how it was reported or treated in its return.

Where a taxpayer is on the accrual basis, as was the petitioner, interest receivable accrues ratably, and is properly reportable as income for the year or years in which it accrues. The date of receipt is immaterial. Cf. J. B. Jemison, 18 B. T. A. 399; Higginbotham-Bailey-Logan Co., 8 B. T. A. 566. If during 1916 and 1917 or prior years the petitioner erroneously accrued on its books greater amounts of interest than it was entitled to, or if during those years it accrued only the correct amounts of interest but actually collected amounts in excess of those to which it was entitled and reported the excess as income, the proper -return or returns in which to make adjustment of the error are the returns for the year or years in which the error was made and not in the return for 1918, the year in which repayment was made. A taxpayer may not erroneously overstate its income for one or more years and then correct the error by taking deductions therefor in its return for a subsequent year. The action of the respondent is sustained as to this issue.

The petitioner contends that the respondent erred in disallowing as deductions for 1917, 1918 and 1919 the amounts of $6,348.25, $12,750 and $16,173, respectively, representing advances made to the Glendale and Western Railroad Company under an agreement whereby the petitioner and the holder of the other half of the stock of that company were to advance to that company, equally as between themselves, amounts sufficient to meet the excess of the road’s expenses over its revenues. The petitioner urges that the amounts thus advanced are deductible as operating expenses to it and that they constituted part of the cost of getting its logs from its Tug Hill tract to its mill. The respondent contends that the amounts are not so deductible, but represent loans made by the petitioner to the railroad company.

In support of its contention the petitioner submitted the testimony of its president and treasurer, H. P. Gould, who testified among other things to the advances and the agreement under which they were made. He also testified that the amounts advanced by the' petitioner were carried on its books as indebtedness owing to it by the railroad company. No attempt was made in his testimony to reconcile such action with the contention now advanced by the petitioner.

The amounts in controversy were carried by the petitioner on its books as assets, were shown as such by the petitioner in its various tax returns, and were determined to be such by the respondent in determining the deficiencies here involved. No explanation is offered by the petitioner as to why, if the amounts actually constituted operating expenses, it so consistently treated them as assets. In our opinion the evidence fails to sustain the petitioner’s contention. The determination of the respondent is sustained on this issue.

In determining the petitioner’s invested capital for the years here involved the respondent determined the petitioner’s reserve for depreciation at March 1, 1913, to be $206,098.33, or the total of the amounts entered by the petitioner on its books for depreciation for 1909, 1911 and 1912 and for two-twelfths of 1913. Such amounts were taken as deductions by the petitioner in its returns of annual net income for the respective years and were allowed by the respondent.

The petitioner contends that the respondent has overstated the amount of the reserve for depreciation at March 1, 1913, and that the amount determined by the respondent should be reduced by $80,214.84. In support of this contention the petitioner submitted evidence showing that prior to March 1, 1913, it was its practice to charge to expense certain expenditures which under its present methods of accounting would be capitalized and that during the period between March 1, 1897, and March 1, 1913, it expended a total of $80,214.84 for replacements of and additions to depreciable assets which were charged to expense. The evidence also shows that no part of the $80,214.84 is included in the cost of depreciable assets at March 1, 1913, as determined by the respondent and that no depreciation deductions have been taken or allowed with respect to the items for which the amount was expended. The evidence however does not show what portion of the amount was for additions or what portion was for replacements. Nor does it show whether the assets that were replaced were retired from the petitioner’s accounts as they were replaced or whether they were continued on the books. The evidence does not indicate whether the items for which the $80,214.84 was expended remained in use on and after March 1,1913. Although the evidence shows the amounts of depreciation entered by the petitioner on its books for the period 1909, the first year for which depreciation was entered on the books, to March 1, 1913, we do not know what amount was sustained in years prior to 1909. From the evidence before us we are unable to find that the reserve for depreciation at March 1, 1913, as determined by the respondent should be reduced as the petitioner contends.

In an amended answer the respondent claims that the reserve for depreciation at March 1, 1913, of $206,098.33 as determined by him should be increased to $259,039.41, or by the amount of $52,941.08 representing depreciation deducted by the petitioner in its annual return of net income for 1910 but not entered by the petitioner on its books. The petitioner denies that the reserve should be so increased.

The amount of $259,039.41 as now contended for by the respondent represents the total amount of the deductions for depreciation taken by the petitioner in its returns for the period 1909 to March 1,1913, and allowed by the respondent. With the exception of the amount of $80,214.84 expended by the petitioner for additions and replacements and considered by us above, the petitioner does not contend that the deductions taken and allowed were in excess of the amount of depreciation actually sustained prior to March 1, 1913. Nor does the record indicate that such was the case. No attempt was made by the petitioner to show what amount of depreciation had been actually sustained by it prior to March 1, 1913. It simply sought to offset or reduce a portion of that determined by the respondent by submitting evidence as to expenditures for additions and replacements, which we have held above was insufficient for that purpose. The petitioner having claimed in its returns and having been allowed deductions for depreciation in the amount of $259,039.41 for the period prior to March 1, 1913, and the evidence failing to show that such amount had not been sustained, we think that it should be considered to be the proper amount of the reserve for depreciation at March 1, 1913, for invested capital purposes. W. T. & M. Co., 11 B. T. A. 122; Moraine Hotel Co., 15 B. T. A. 910; aff'd., 41 Fed. (2d) 725.

In determining the petitioner’s invested capital for each of the years here in controversy the respondent arrived at the cost of timber included therein by deducting from the petitioner’s total cost depletion on the total amount of timber cut to the end of the preceding year, irrespective of the fact that the petitioner had several thousand cords of timber in the woods which had been cut but had not been removed or used. This cut, unremoved and unused timber was not taken into an inventory or asset account of any kind and consequently was excluded from invested capital.

The petitioner contends that the respondent erred in excluding such timber from invested capital. The petitioner urges that the timber should be included in invested capital at its fair market value on March 1, 1913, since depletion was sustained at the time the timber was cut, because at that time it was converted from a natural resource to an asset of another form. The respondent concedes that he erred in excluding the timber from invested capital, but contends that it should be included therein at cost, since to include it at the fair market value on March 1, 1913, would result in including in invested capital unrealized appreciation on the timber which was still owned by the petitioner.

To grant the petitioner’s contention would in effect be holding that invested capital may include a “marking up of the valuation of assets upon the boobs to correspond with increase in market value,” a thing the Supreme Court in La Belle Iron Works v. United States, 256 U. S. 377, held could not be done. The cut but unremoved timber was excluded by the respondent from the petitioner’s invested capital on the basis of cost. In view of the foregoing decision of the Supreme Court, we think it should be restored to invested capital on the same basis and not at its fair market value on March 1, 1913, as contended for by the petitioner.

In 1907 the petitioner, for 3,400 shares of its capital stock of a par value of $100 per share, acquired from the International Paper Company about 17,000 acres of timber lands in township 4 and the Kosterville property consisting of two ground wood-pulp mills, including buildings, equipment, etc., and two developed water-power sites which furnished the power for operating the mills. In amended returns for the years here involved the petitioner showed the value of those properties at the time of acquisition in 1907 to have been as follows: timber lands, $263,416.35; the two pulp mills, including buildings, equipment, etc., $84,420.47; and the two water-power sites, $91,192.08, or a total value of $439,028.90. In determining the petitioner’s invested capital the respondent accepted the value shown by the petitioner for the timber lands, but determined the value of the two mills to have been $123,112.55 and the value of the two water-power sites to have been $52,500, or a total of $439,028.90, the same amount shown by the petitioner in its returns.

In its petition the petitioner alleges that the respondent erred in understating the value of the mill property, water-power rights and timber lands and alleges that the value of such property at the time of acquisition was at least $740,000. At the hearing and in its briefs the petitioner has accepted as correct the value of $123,112.55 determined by the respondent for the two ground wood-pulp mills, including buildings, equipment, etc. In its brief the petitioner contends that the actual cash value of the timber lands at the time of acquisition was $991,500 and that of the water-power sites was $329,060, or a total amount much in excess of that set forth in its petition. In accepting the determination of the respondent as to the value of the two mills and by contending for the foregoing amounts as values for the timber lands and water-power sites, the petitioner is contending that for $840,000 par value of its capital stock it acquired assets having an actual cash value of $1,443,673.55 at the time of acquisition, or a value of $1,103,672.55 in excess of the par value of the stock issued therefor. The respondent denies that the timber lands and the water-power sites had the values contended for by the petitioner.

The amount of $991,500 contended for as representing the value of the timber lands is computed as follows: 271,000 cords of softwood ten inches and above in diameter at $3 per cord, $813,000; 17,000 acres of land with the hardwood timber and the softwood timber under ten inches in diameter standing thereon at $10.50 an acre, $178,500. The value of $10.50 an acre is composed of $5 an acre for the land, $5 for the softwood timber under ten inches in diameter ($2 a cord for 2y2 cords to the acre) and 50 cents per thousand feet of hardwood timber to the acre.

There is no controversy between the parties as to the quantities of the different classes of timber acquired, but they are in disagreement as to the values of such timber as well as to the value of the land.

In support of the values contended for for the land and the timber the petitioner submitted the testimony of three witnesses. One of these, J. B. Todd, was of the opinion that the value of the softwood timber ten inches and above in diameter as well as that less than ten inches in diameter was $5.50 a cord in 1907. He placed a value on the hardwood of 50 cents per thousand feet. He valued the land with the softwood under ten inches and the hardwood thereon at $12 an acre. Since there were 2y2 cords per acre of softwood under ten inches and 1,000 feet of hardwood per acre, the value of such softwood and hardwood per acre according to this witness was $14.25, or $2.25 an acre in excess of the value of $12 testified to by him as being the value of the land plus the small softwood and the hardwood. His valuations would indicate that he did not consider the land as having any value. Another witness, John E. Johnston, was of the opinion that the softwood timber ten inches'and above in diameter had a value in 1907 of $3 per cord; that the softwood timber under ten inches had a value of $3 a cord when removed with the larger timber, or $2 a cord when left on the land; and that the hardwood timber had a value of 50 cents per thousand feet. He was of the opinion that the land with the hardwood and the softwood under ten inches had a value in 1907 of from $10 to $12 an acre. His valuations for the softwood timber under ten inches and the hardwood timber would indicate that he considered the land as having a value of from $2.50 to $6.50 an acre. Another witness, H. P. Gould, was of the opinion that the softwood timber ten inches and above in diameter had a value of $3 a cord in 1907, and that the softwood timber under ten inches in diameter had a value of from $2 to $3 a cord. He was of the opinion that the land, the hardwood timber and the softwood timber had a value in 1907 of $10.50 an acre. The use of the value placed on the hardwood by the petitioner’s other witnesses and the values placed by this witness on the softwood under ten inches indicate that this witness considered the land as having a value of from $3 to $5 an acre.

In support of his determination with respect to the land and timber the respondent submitted the testimony of a witness who placed a value of $1.50 per cord on the softwood timber eight inches and above in diameter. He was of the opinion that the land, the softwood timber less than eight inches in diameter, and the hardwood timber, had no value.

In 1904 or 1905 a tract of 5,000 acres of softwood timber lands adjoining the petitioner’s Moose Eiver tract was sold for $60,000, or at the rate of $12 an acre. The witness who testified to this sale stated that the timber standing on the tract sold in 1904 or 1905 was similar to that on the petitioner’s 17,000-acre tract here being considered and that the timber on both tracts was good. While he did not testify directly to the number of cords on the 5,000-acre tract, he was of the opinion that there were eight cords of softwood eight inches and above in diameter per acre on the petitioner’s tract in 1907, which, when considered with his testimony as to the similarity of the two tracts, would indicate that he was of the opinion that there were eight cords to the acre on the 5,000-acre tract. Without allowing any value for the land or for any hardwood timber that might have been on it, this would give a value of not more than $1.50 per cord for the softwood timber on the 5,000-acre tract that was sold in 1904 or 1905.

About 1906 there was a sale of about 20,000 acres of softwood timber lands situated near to and comparable to the petitioner’s Tug-Hill tract at $6 an acre. There were from nine to ten cords of softwood timber per acre on this land. Allowing no value whatever for the land or for any hardwood that might have been on it, gives a value of from 60 cents to 66% cents per cord for the softwood timber.

While shortly after acquiring the 17,000 acres of timber lands the petitioner sold back to the International Paper Company 21,000 cords of softwood timber at $2.50 per cord, this was the price paid for the timber as and when it was cut over a period of several years and was not a price paid at the time of purchase. The International Paper Company was operating on the same side of the divide on which this timber was situated, and it was worth more to that company than to the petitioner, whose operations were on the opposite side of the divide.

Considering all of the evidence in the case, we are of the opinion that the 271,000 cords of softwood timber ten inches and above in diameter on the 17,000-acre tract when acquired by the petitioner in 1907 had an actual cash value of $2 per cord; that the 42,500 cords of softwood timber under 10 inches in diameter had the same value at that time; that the 17,000,000 feet of hardwood timber had an actual cash value at that time of 50 cents per thousand feet; and that the land had an actual cash value of $2.50 per acre on the same date, or a total of $678,000 for the land and the timber thereon.

The petitioner contends that the two developed water-power sites had an actual cash value of $329,060 at the time of acquisition in 1907. In support of its contention the petitioner submitted the testimony of a witness who testified to that value. He arrived at this value by multiplying the number of horsepower years of primary energy, 717, and of secondary energy, 1,729, available at the sites by $30 and $15 respectively, representing the average prices paper mills in the Black Eiver District were paying for purchased electric power in 1907. This gives a total of $47,445 for both classes of power per year. By capitalizing the latter amount at 12% per cent, which he considered a reasonable rate, he arrived at $379,560. From this amount he deducted $50,500, which he considered represented depre-ciable property such as dams, flumes and machinery, thereby arriving at $329,060 for the power sites.

We have heretofore held that the value of water-power sites may not be determined by capitalizing the estimated savings resulting from the use of water power instead of steam power or electricity. Georgia Manufacturing Co., 5. B. T. A. 893; M. S. Brooks & Sons, 10 B. T. A. 510. To approve the method of valuation used by the petitioner’s witness would require us to go a step further than we refused to go in the foregoing cases 'and to hold that the value of a water-power site can be determined by capitalizing an operating expense on the basis of the cost of electricity, which, so far as the record shows, might have been the most expensive kind of power that could have been used. While the evidence shows the price that paper mills paid for purchased electric power in 1907, it also shows that water power was used almost exclusively for grinding pulpwood. It also indicates that the use of electricity for that purpose would have been prohibitive from the standpoint of cost, since ground wood pulp was a cheap commodity which required a cheap form of power for its production.

The petitioner also relies on the sale of the power site by the St. Eegis Paper Company to the Power Corporation of New York. As this sale occurred at some undisclosed date subsequent to 1920, we are of the opinion that it is too far removed from 1907 to be of much help in determining the value of the petitioner’s water-power sites at the time of acquisition.

The respondent submitted the testimony of two witnesses as to the value of the water-power sites in 1907. One of these was of the opinion that the sites had a value of $60,000 in 1907,. while the other was of the opinion that the value was $69,000.

Considering all the evidence on this point, we are of the opinion that the water-power sites had at the time of acquisition in 1907 an actual cash value of $91,192.08, the amount shown by the petitioner in its returns.

In determining the deficiency for 1917 the respondent determined that the value of the buildings and equipment composing Mills A and B was $123,112.55. This amount was accepted by the petitioner. We have determined that the actual cash value of the timber lands when acquired in 1907 was $627,000 and the value of the water-power sites was $91,192.08. The total of the values thus determined for the three groups of assets is $841,304.63. The respondent contends in his brief that, since these assets were acquired by the petitioner for $340,000 par value of its capital stock, they may not, under the limitations contained in section 207 (a) (2) of the Revenue Act of 1917, be included in petitioner’s invested capital for that year at any amount in excess of the amount of the par value of the stock issued therefor,

The pertinent portions of section 207 of the Revenue Act of 1917 are as follows:

That as used in this title, the terra “ invested capital for any year means * * . *
*******
(a) In the case of a corporation or partnership: (1) Actual cash paid in, (2) the actual cash value of tangible property paid in other than cash, for stock or shares in such corporation or partnership, at the time of such payment (but in case such tangible property was paid in prior to January first, nineteen hundred and fourteen, the actual cash value of such property as of January first, nineteen hundred and fourteen, but in no ease to exceed the par value of the original stock or shares specifically issued therefor), and (3) paid in or earned surplus and undivided profits used or employed in the business, exclusive of undivided profits earned during the taxable year.

Inasmuch as the respondent in determining the deficiency for 1917 allowed the assets in the petitioner’s invested capital at a total value of $439,028.90, which is in excess of the amount of $340,000, the par value of the stock issued for the assets, the import of his contention, if granted, is to increase the deficiency without his having moved with respect to this point either at or before the hearing. To this extent his contention presents an issue not raised by the pleadings. We think it is sufficient, however, to say that the question presented by his contention has heretofore been decided adversely to him in our decisions in St. Louis Screw Co., 2 B. T. A. 649, and Mandel Brothers, 4 B. T. A. 341.

While the petitioner did not submit any evidence directed to the actual cash value on January 1, 1914, of the timber lands and waterpower sites acquired in 1907, the evidence shows that the value of properties of those classes gradually increased in years subsequent to 1907. Subject to adjustment for depletion resulting from the sale or use of timber from the timber lands, we conclude that the value on January 1, 1914, was not any less than that at the time of acquisition. For 1917, 1918 and 1919 the petitioner is therefore entitled to include the timber lands and water-power sites in its invested capital at their actual cash values at the time of acquisition as determined by us, subject to the adjustment indicated in the preceding sentence. The buildings and machinery (Mills A and B) remain in invested capital at the value determined by the respondent, since no controversy exists with respect to them.

The remaining issue relates to the deductibility of an amount of $26,210.98 deducted by the petitioner in its return for 1917 for legal expenses incurred and paid in that year. In determining the deficiency for 1917 the respondent allowed the deduction, but in an amended answer alleges that he erred in doing so and asks that we hold that the amount is not deductible and that the deficiency should be increased accordingly. The respondent contends that the amount was expended by the petitioner in defending itself, its then president, and the News Print Manufacturers Association, of which the petitioner and its president were members, in litigation prosecuted by the United States for violation of the antitrust laws. The petitioner contends that the amount was expended in defending its president in the criminal proceeding with respect to which the indictment was dismissed on motion of the prosecution and that the petitioner’s president, thus not having been convicted of a criminal offense, the amount is allowable as a deduction.

The evidence shows that prior to the time any legal proceedings were instituted against the petitioner or its president, its president employed Henry A. Wise to represent the petitioner and its interests. Thereafter the petitioner’s then president, along with others, was indicted, being charged with unlawfully having engaged in a conspiracy in restraint of trade and commerce. The trial of the defendants was begun on November 15, 1917, but was adjourned to November 26, 1917, at which time certain of the defendants changed their pleas to nolo contendere, but as to the petitioner’s president the indictment was dismissed on motion of counsel for the Government. Prior to tbe beginning of the trial certain negotiations were begun between attorneys for the Government and representatives of certain of the corporations whose officers had been indicted. These negotiations resulted in an agreement dated November 26, 1917, between the Attorney General and the manufacturers, the pertinent parts of which are mentioned in our findings of fact. Wise, as attorney for the petitioner, participated in the preparation of the agreement and signed it for the petitioner. Pursuant to this agreement the Attorney General, on November 26, 1917, instituted a proceeding-in equity against those individuals who were defendants in the criminal proceeding, including the petitioner’s then president, and against certain corporations, among which were the petitioner, alleging that such individuals and corporations had engaged in the restraint of trade and commerce contrary to the law of the United States and asking, among other things, that the court find that they had so done as alleged and that the court enjoin them from further doing so. Wise appeared as counsel for the petitioner and its then president in this proceeding and attended to the framing of the final decree. This decree recites that it was entered upon the consents thereto in writing and in open court by the defendants in that proceeding, including the petitioner and its president, and that said consents were duly given by their respective solicitors to the entry thereof before any testimony was taken. The court, as set forth in the decree, found among other things that the defendants by becoming and acting as members of the News Print Manufacturers Association had entered into and engaged in an unlawful combination in restraint of trade and commerce in newsprint paper, in violation of the Act of July 2, 1890, entitled “An Act to protect trade and commerce against unlawful restraints and monopolies,” and enjoined them against a continuation thereof. From the evidence before us we think that the legal expenses incurred by the petitioner were for. services rendered not only in behalf of its president in the criminal proceedings, but also in behalf of it and its president in the equity proceeding, and we have so found as a fact. While the indictment in the criminal proceeding was dismissed on motion of the Government, in the equity proceeding the court found, upon the written consents of- the petitioner and its president, duly given by their counsel, in open court, that they had engaged in an unlawful combination in restraint of trade. Whatever may have been the reasoxi of the prosecuting officer of the Government in moving the dismissal of the indictment, the petitioner and its president in the equity proceeding consented to the court entering a decree finding that they had violated the antitrust laws of the United States because of their connection with the News Print Manufacturers Association, the same connection on which the indictment of the petitioner’s president was based.

To be deductible the amount of legal expenses here involved must constitute ordinary and necessary expenses incurred by the petitioner in the maintenance and operation of its business and properties. These expenditures were incurred in connection with criminal proceedings against the petitioner’s president and equitable proceedings against him and the petitioner. These proceedings resulted from the parties having been members of and having participated in the activities of the News Print Manufacturers Association, which organization was an unlawful combination of the petitioner, its president, and others in the restraint of trade and in violation of a Federal statute. This being true, we do not think that the legal expenses resulted proximately from the maintenance and operation of the petitioner’s business and properties. Consequently, they do not constitute an allowable deduction in determining the petitioner’s net income. See Atlantic Terra Cotta Co., 13 B. T. A. 1289; Sanitary Earthenware Specialty Co., 19 B. T. A. 641; Burroughs Building Material Co. v. Commissioner, 47 Fed. (2d) 178, affirming 18 B. T. A. 101.

Judgmént will be entered v/nder Bule 50.


author: Lansdon :

text:
    Colorado & Utah Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53799.
    Promulgated June 30, 1932.

      Tyson Dines, Esg., for the petitioner.

      T. M. Mather, Esg., for the respondent.
   OPINION.

Lansdon :

In its income-tax return for 1927 the petitioner deducted the amount of $67,827.47 representing the cost of the exploration of the Wolf Creek coal seam in the circumstances set forth in the stipulation. Upon audit of such return the respondent disallowed this item and also the amount of $63.58 representing excessive depletion of the Wolf Creek seam, made other minor adjustments not in controversy and determined the deficiency under review. Petitioner now admits that the loss claimed should be reduced by the amount of $2,534.24 representing salvage realized from the sale of portions of the equipment used in the abandoned development and that an item of $503.80 representing, worthless debts charged off in the taxable year was properly disallowed. Since no evidence as to the correct amount of depletion sustained in the operation of the petitioner’s mine in the taxable year was adduced by stipulation or otherwise, the amounts representing salvage, bad debts and depletion will be the elements of a settlement under Rule 50 in conformity with the admissions set forth above.

The petitioner claims the right to deduct the cost, less salvage, of its abandoned development as a loss sustained in the year of abandonment azid relies on our report in Belridge Oil Co. 11 B. T. A. 127, which appears to be exactly in point and in conformity with purposes and meaning of article 143 of Regulations 69. Cf. Sheridan Coal Co., 4 B. T. A. 563; C. U. Connellee, 4 B. T. A. 359; and Fraser Brick Co., 10 B. T. A. 1252.

In our opinion the petitioner sustained a deductible loss in the taxable year equal to the capitalized cost of the development of the abandoned mine, less the salvage realized from the disposition of equipment used in the exploration and no longer suitable for any work in which it was engaged.

Decision will be entered under Rule 50.


author: Van Fossan:

text:
    Rogers Hornsby, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary Jeanette Hornsby, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39817, 59013, 59014.
    Promulgated June 30, 1932.

      Arnold Market, O. P. A., for the petitioners.

      J. D. Kiley, Esq., for the respondent.
   OPINION.

Van Fossan:

The respondent determined deficiencies against Rogers Hornsby for the years 1926 and 1927 in the respective amounts of $1,627.80 and $7,026.69. For the year 1927 a penalty of $1,756.62 was asserted for delinquency in filing. The deficiency and penalty against Mary Jeanette Hornsby are for the year 1927 and are in the amounts of $90.22 and $22.56, respectively. The first issue involves the question of petitioners’ domicile, the petitioners contending that they were domiciled in Texas and entitled to file returns on a community property basis. The second issue is raised as to the assertion of the penalty for delinquent filing. A third issue as to capital net gain for 1927 was withdrawn by petitioners.

Rogers Hornsby is a professional baseball player. Mary Jeanette Hornsby is his wife. Hornsby was born and lived in Texas until 1915, when he joined the St. Louis National League baseball team. He remained with the St. Louis team until 1927, when he was transferred to the New York team of the same league. In 1928 he was traded to the Boston team, and later to the Chicago team.

Prior to his first marriage, which occurred in 1918, Hornsby boarded at various addresses while in St. Louis. After his marriage he and his wife resided in St. Louis during the baseball seasons. In 1917 he bought a home for himself and his mother at 1304 North Commerce Street, Fort Worth, Texas, where he resided during the fall and winter months. After his marriage he and his wife used this property as a home. In 1923 Hornsby was divorced from his wife. As a part of the settlement coincident with the divorce he deeded his wife the Fort Worth property. Since that time he has owned no property in Texas.

In early 1924 Hornsby married his present wife, the petitioner, Mary Jeanette Hornsby. She was a resident of St. Louis, having lived there all her life. During 1924 and 1925 Hornsby and his wife resided in St. Louis with her mother during most of the time. In 1926 Hornsby and his wife’s mother purchased an apartment house in St. Louis and the petitioners lived in one of the apartments up to the time of his transfer to New York in 1927. During 1927 they lived in a furnished apartment in New York. In 1928 Hornsby purchased a farm or country place outside St. Louis, paying $60,000 for the same. This place is their present home.

During 1926 and 1927 Hornsby had no income arising from sources in Texas. He voted in Texas in 1918 and has voted nowhere since. He paid no taxes on property in Texas during the taxable years, but paid taxes in Missouri.

During 1924,1925 and part of 1926, after the transfer of the home at 1304 North Commerce Street, Forth Worth, Texas, to his divorced wife, Hornsby maintained a home for his mother at 920 Macon Street, Fort Worth, and after her death in September, 1926, bought a home for. his sister at 4075 Bunting Avenue, Fort Worth.

In their tax returns for 1925 and 1926 both petitioners gave 1304 North Commerce Street (the property deeded to the divorced wife) as their address. In the 1927 returns they gave 4075 Bunting Avenue (the home of Hornsby’s sister) as their address.

During the years in controversy Hornsby often visited his mother and sister during the months of October to January, sometimes staying at their homes and sometimes at a hotel. He also made extensive visits to other relatives and went on hunting trips in Texas. These visits were of varying duration, from a few days to two weeks or more.

Hornsby declared to various persons that after his baseball days were over he expected to return to Texas.

The tax returns for 1927 of both petitioners were prepared and signed by them and sworn to on February 17, 1928. Hornsby gave them to his wife with instructions to file the same on March 15, 1928, leaving a check in partial payment. He then left for the spring training trip. Mrs. Hornsby voluntarily filed them on May 17, 1928, having forgotten to file them at the proper date.

On the above facts petitioners ask us to hold that they were legally domiciled in Texas during the taxable years. This we are unable to do.

Prior to 1923 it seems clear that Plornsby had a legal domicile at 1304 North Commerce Street, Fort Worth. During that year, however, he was divorced from his wife and deeded her the property as part of the settlement. Thereafter Hornsby had no interest in that property and no right to live there. It would seem so clear as to require no elaboration in argument that he necessarily gave up any and all rights to claim it as a domicile. He and his second wife had no right to use this address in their 1925 and 1926 tax returns. Thereafter he maintained a home for his mother at 920 Macon Street and after her death bought a home for his sister at 4075 Bunting Avenue. Speaking of the year 1924, Hornsby testified: “I claimed that [Fort Worth] was as much my legal residence as any place else, because I had maintained and taken care of my mother there. I had no regular residence in 1924.” None of the witnesses, not even Hornsby himself, testified that he bought or maintained either of the two places as a “ home ” for himself. He characterized his trips to them as “ visits,” just as visits to other relatives. Sometimes he stayed at hotels. The general tenor of statements employed by the witness was to the effect that Hornsby always called Texas his home and expected to return there after his baseball days were past. This general language and an expectation to return to the State of Texas are not enough to establish the domicile for the purpose of income-tax returns. There must first be an established domicile, a specific place to which there must be a persisting intention to return. Hornsby was precluded by his divorce from claiming the North Commerce Street property as a domicile. In determining whether he had a domicile in Texas subsequent thereto we are not limited to, or necessarily bound by, expressions of the party. We may consider all facts and circumstances that bear on the question at issue. Nor are we called on in these cases to determine where the legal domicile of petitioners is, if not in Texas. Our problem is to determine whether or not their legal domicile is in the State of Texas. The burden of proving the case rests on petitioners, and on the record we are unable to say that during the taxable years they had a domicile in Texas.

The above conclusion is the same as reached in Lee Rosenberg, 10 B. T. A. 601; affd., 87 Fed. (2d) 808, in which case will be found a full discussion of the question of domicile. •

The only question remaining relates to the tardy filing of petitioners’ returns for 1927. The penalty may be avoided only if the tardy filing was due to a reasonable cause and not to willful neglect. Both conditions must exist. Here the only excuse is that one of the petitioners forgot to file them. This can scarcely be said to be a “ reasonable cause ” for failing to perform such an important act. Gus V. Winston et al., 22 B. T. A. 1194. See also Eagle Piece Dye Works, 10 B. T. A. 1360. The penalties were properly imposed.

Decision will be entered for the respondent.


author: Aeundell :

text:
    R. B. George Machinery Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61218.
    Promulgated June 30, 1932.

      Richard B. Barker, Esq., for the petitioner.

      E. L. Corbin, Esq., for the respondent.
   OPINION.

Aeundell :

The answer to the question is to be found in the proper construction of section 23 (b) of the Revenue Act of 1928, which reads as follows:

Interest. — All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.

The parties have proceeded on the theory that the money obtained from the bank by petitioner was a loan, with the deficiency warrants of the state and its political subdivisions being hypthecated as security therefor. This we think is the correct approach. Prior to the transaction in question the various state and municipal obligations had become the property of petitioner and were fully paid for by it, as they represented payments to petitioner for machinery sold" to the state and its subdivisions. It is quite apparent, then, that the money advanced to the petitioner on the warrants did not represent “ indebtedness incurred or continued to purchase * * * obligations or securities * * * the interest upon which is wholly exempt - from taxation * * This brings us to the real question, and that is, Was the interest here in controversy interest paid on “ indebtedness incurred or continued * * * to carry obligations or securities * * * the interest upon which is wholly exempt from taxation?”

We have been referred to no authoritative decision on the question. Opposing counsel both referred to First National Bank of Wichita, 19 B. T. A. 744; aff'd., 57 Fed. (2d) 7; and to Brown Crummer Co., 19 B. T. A. 750, but these cases offer little help. Denman v. Slayton, 282 U. S. 216, construed section 214 (a) (2) of the Revenue Act of 1921, which section corresponds to section 23 (b) of the Revenue Act of 1928, but the facts there involved, as well as the question, were different.

The statute was manifestly designed to prevent the purchaser of tax-exempt securities from deducting interest paid for borrowed money, which money was used to acquire securities the interest on which could not be taxed by the Federal Government. Denman v. Slayton, supra. We think the exception in the statute should not be construed more broadly than to effect its obvious purpose. It was not intended to penalize legitimate business or to deny to it the right to deduct interest paid for borrowed money, which money was used for the purpose of carrying on its regular functions. The warrants held by petitioner were received in payment for goods sold and they were apparently given because the state or its subdivisions could not at the time pay cash. They in no true sense of the word represented investments by petitioner, as it preferred at all times to get its cash out of them. The fact that in making the loan the petitioner hypothecated the warrants does not alter the fact as stipulated that the cash as borrowed was for the purpose of operating its business. It was not used to buy or secure the warrants in any sense of the word.

It follows that interest paid by petitioner in the amount of $13,543.04 constitutes a proper deduction.

An order will issue finding an overpayment of tax for the year 1929 in the sum of $Slfi.38.


author: AkuNdell :

text:
    B. F. Sturtevant Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. B. F. Sturtevant Company (of California), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 16007, 22743, 28576, 40824, 47304.
    Promulgated June 30, 1932

      Philip Nichols, Esq., for the petitioner.

      Eld'en McFarlcmd, Esq., and Arthur Claris, Esq., for the respondent.
   OPINION*

AkuNdell :

Wo have no doubt that the individual business of B. F. Sturtevant had a valuable good will at the time of its transfer to petitioner. But where such an intangible asset is acquired, as here conceded, without a payment of stock or other consideration, may all or any part of its value be included in invested capital? The question was fully considered in Herald-Despatch Co., 4 B. T. A. 1096, and the conclusion reached that good will acquired under such circumstances may not be included in invested capital as a paid-in surplus. There has been no departure from this rule. Stephens-Adamson Manufacturing Co., 16 B. T. A. 41, and Concrete Engineering Co., 19 B. T. A. 212. The courts have adopted the same principle. Daily Pantagraph v. United States, 37 Fed. (2d) 783; 68 Ct. Cls. 251; Colorado Continental Lumber Co. v. United States, 42 Fed. (2d) 33; 70 Ct. Cls. 413; Baker & Taylor Co. v. United States, 26 Fed. (2d) 187; certiorari denied, 278 U. S. 615; LaFayette-South Side Bank v. Commissioner, 33 Fed. (2d) 646, affirming 7 B. T. A. 1307. This issue is decided in favor of respondent.

The major issue involves the value at March 1,1913, for exhaustion purposes of patents and licenses to use patents employed by petitioner in the taxable years in the production of some of its products. Considerable evidence was submitted in the form of testimony, sales charts, earnings, etc., and many facts, including the remaining life of the patents at the basic date, were stipulated.

The parties differ considerably in their contentions as to the value of the patents. Of the fifty-nine patents in' force and use by petitioner on March 1, 1913, sixteen, divided into four groups classified as multivane fan patents, fuel economizer patents, slow-speed fan licenses, and turbine patents, are the subject of valuation. The petitioner is contending for a valuation of $1,175,000 for the four groups of patents. The respondent has allowed depreciation on a value of about $100,000 based upon costs of purchase and development, and asks that his allowance be sustained. In support of its claimed valuations petitioner introduced opinion evidence and a great mass of statistical data, the latter being designed to show the earnings attributable to patented articles.

In the absence of actual sales of property, evidence of this sort is of aid in determining what a willing buyer might reasonably be expected to pay. We do not understand, however, that either opinion evidence or a calculation based on conjectural earnings are conclusively determinative of value. Tracy v. Commissioner, 53 Fed. (2d) 575; Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893; Reinecke v. Spalding, 280 U. S. 227. It is our right to determine the weight to be given to the evidence upon which either party relies in the light of other facts developed in the case. Anchor Co. v. Commissioner, 42 Fed. (2d) 99.

The petitioner here is undoubtedly confronted with a difficult case to prove. It manufactured a variety of devices under a number of patents, and in addition it apparently had a substantial good will, so that even if its earnings were larger than would ordinarily be attributable to tangibles, it is no easy matter to segregate the earnings and allocate so much to this or that particular intangible. Petitioner has attempted to segregate the profits on the patented articles and those on the nonpatented articles for the 5%-year period prior to 1913 and to fix a value for the patents by capitalizing as income attributable to the patents the amount by which the profit on each group of patented articles is claimed to exceed the profit which would have been derived from an equal volume of gross sales if the percentage of profit to gross sales were no greater than in the case of nonpatented articles. Assuming that this method might be of aid in fixing values under some conditions, in this particular case we are unable to accept the result reached, because of the obvious lack of accuracy in the basic figures. Petitioner’s records for the period before 1913 were not sufficiently detailed to permit of a direct and accurate computation of'the profits on either patented or nonpatented articles, and so it resorted to a circuitous method which was described in this way: The amount of sales of all products was determined. From this figure the amount of sales of patented articles was deducted, giving the sales of nonpatented articles. Next, the cost of all products was set down, from which was subtracted the cost of patented articles and the difference represented cost of nonpatented articles. Then the profit on nonpatented articles was determined by subtracting the cost thereof from the sales, and on these figures the percentage of profit to sales was determined. When this percentage was determined, each group of patents was taken separately, the cost of sales deducted from sales, and from that figure there was subtracted an amount computed by multiplying the sales of each group by the percentage arrived at as above described. The resultant figure in the case of each group of patents is claimed to be the excess profit attributable to the patents. The procedure may perhaps be more readily understood by setting out the figures submitted for one of the several years:

This computation showing how the claimed excess earnings on multivane fans for one year was reached is illustrative of the computation made with respect to each of the groups of patents for each of the fiscal years in the period July 1, 1907, to June 30, 1912, and the last six months of 1912. The method above outlined is called the “ primary method ” by petitioner. A further computation was made on each group of patents by deducting from the profits 8 per cent of the tangible assets used in the manufacture of each article, the amount of the assets so used being determined by applying to the total tangibles the percentage representing the ratio of sales of patented articles to total sales. This method is called the “ secondary method.” The resultant figures under each method were capitalized by applying a formula of 10 per cent for income and 4 per cent for sinking fund. Under each method the result is practically the same. These results, petitioner says, establish the values of the several groups of patents.

The first figure used, sales of all products, is taken from petitioner’s books. This figure, it appears, includes outside erection costs. The amount of such costs is given for only one year, the year ended June 30, 1908, when they amounted to $253,535.91, or something over 12 per cent of the figure listed as total sales for that year. The amount of erection costs was not allocated to both patented and nonpatented articles in the segregation subsequently made, but was all carried into the figure claimed to represent sales of nonpatented articles.

The second item in the computation is called sale of patented articles, i. e., multivane fans, turbines, fuel economizers, and slow-speed fans. These figures were compiled from sales orders in petitioner’s files. The tabulations as submitted to us contain numerous omissions of prices. In these instances, it is explained, no prices were shown on the orders. Some idea of the extent of the omissions may be gained from the following examples. On one page listing twenty-eight sales of multivane fans the sale price is omitted in twelve instances; one sheet of nineteen sales has ten omissions; another listing fifty-seven sales contains no sale price for thirty-eight items. There are thirteen sheets listing sales of turbines and of these only fonr are complete. Greater accuracy was possible with sales of fuel economizers. Out of about two hundred sales listed, the selling price is disclosed in all but four instances. There are thirteen sheets listing sales of slow-speed fans and none of these is complete.

It is impossible to state accurately what percentage of total sales is omitted, but from the list prices contained in the tabulations it would appear that the omissions represent substantial portions of total amounts. For example, in the fiscal year 1909 the list prices of items omitted amount to over $49,000, against sales recorded of $179,686.64; for the fiscal year 1912 list prices omitted are over $98,000 and sales recorded amount to $617,288.80.

Moreover, there is such a wide variation of sales prices shown in the case of slow-speed fans — which is the only group susceptible of being readily checked in this respect — that we are reluctant to accept the figures as accurate. For example, the sale prices of the Number 40 fan varies from $58.50 to $150. Between these two extremes are prices of $67.50, $76.50, $90 and $99. In each instance the same amount, $49.55, is listed as cost. The Number 50 fans, according to the sales sheets, were sold at prices ranging all the way from $73.50 to $180, with a cost of $68.27. The following are a few of the various sales prices' given for the Number 70 fans: $31.34, $73.81, $227.50, $276.25, $363, and $552.50. Against each of these a cost of $116.75 is listed.

A possible explanation of the above extreme variations may lie in the fact that in many cases petitioner sold a combination of its products as a unit; for instance, a fan and a turbine to operate it were sold to a customer and installed as one article rather than as component, parts. In at least some of such cases it appears that petitioner recorded one article as sold at a profit and another at a loss. A few examples will suffice to illustrate the method. Under order No. 171690 it sold four multivane fans and four turbines. The selling price of the fans is given as $876 and turbines, $1,377, against which costs of $472.72 and $1,775.80, respectively, are shown. This reflects a gain of $403.28 on the fans and a loss of $390.80 on the turbines. Computing the sale as that of a unit, the actual profit was but $4.48. Order No. 228951, obtained August 9, 1912, was for one multivane fan and one turbine. A profit of $308.87 is shown for -the fan and a loss of $36 for the turbine. A gain of $138.82 is shown under order No. 230200 for the sale of two multivane fans and a loss of $343.50 on the two turbines sold with the fans, resulting in a loss of $204.68 on the two units. It might be argued that this method would not affect the final result when the patents are considered as a whole. The difficulty is that we do not know that the practice was confined to patented articles. If patented and non-patented articles were sold as units, an arbitrary allocation as above illustrated might seriously distort the profits on either group. An example of this occurs in the last six months of the year 1912, in which the alleged profits from the several groups of patents are set forth as follows:

In this period it is claimed that the net earnings were only $82,619.66, and the difference of $47,111.38 is said to be a loss sustained on non-patented articles. According to petitioner’s figures for this period sales of patented articles aggregated only $390,263.20, as against sales of nonpatented articles of $1,017,847.45. Even conceding that the patented articles gave a somewhat higher margin of profit, it is difficult to believe that there was such a wide variation as petitioner’s figures purport to show. It is also to be remembered that the items omitted from the tabulations would, if included, further increase the alleged profit on patented articles and increase the claimed loss on the nonpatented items. To accept petitioner’s figures, we would have to believe that the greater part of its products were deliberately sold at a loss.

Petitioner had no accurate cost records in the period prior to 1913. The cost figures used in the computation before us were made up from a few figures compiled by the cost department from time to time and forwarded to the general manager. The method of compiling the figures was to add 10 per cent to cost of material to cover handling and waste, 100 per cent to labor cost to cover shop administration, factory overhead, depreciation, and nonproductive labor and supplies, and then add to the sum of these figures 15 per cent to cover selling costs. The witness who prepared the costs testified that he checked the accuracy of the method and that for the 5%-year period prior to 1913 there was only a difference of about $19,000 on a total of about $11,000,000. But no satisfactory explanation was given of how the check was made. He was asked how he applied the check and he replied that he took the materials purchased during the year, added 10 per cent, then took productive labor and added 100 per cent, and added 15 per cent to the total. We think that we are entitled to a better explanantion than this before being asked to accept a result in which the possibility of error is so manifest.

It also appears that some of petitioner’s so-called nonpatented articles were not such in fact. In each of the years 1908 to 1913 petitioner owned the following numbers of patents: 1908,21; 1909,25; 1910, 28; 1911, 85; 1912, 46; 1913, 59.

Only one witness, Ernest P. Freeman, was questioned as to the patents other than those sought to be valued here. Freeman has been connected with petitioner since 1903 and has been general manager and vice president since 1909. At first he said he did not know of any other patents, and later he mentioned several others, but said they were not regarded as of importance. Inasmuch as one of the basic factors in petitioner’s computation is the segregation of its products into the two classes, patented and nonpatented, we think it was incumbent on petitioner to furnish at least enough information to permit us to form some idea as to the importance of the other patents. On the meagre evidence on this phase of the case we do not feel that we can accept petitioner’s classification of its products into patented and nonpatented groups.

Under petitioner’s so-called secondary method, as explained above, an attempt was made to allocate to the patented articles an 8 per cent return on the tangibles used in their manufacture and then to capitalize the balance of the earnings from such articles. It does not appear clearly just what was included in the term “ net tangible assets ” upon which the computation is based. From the testimony of the accountant who made the computation we gather that only plant and physical equipment were included and no consideration was given to other assets such as cash, accounts receivable, and inventory. Another objection to the computation is the manner in which the portion of tangibles allocated to patented articles was determined. This was found by applying to the total of the so-called tangibles the percentage that the sales of patented articles bore to total sales. We have no way of determining whether the resultant figures are even approximately correct. Several of petitioner’s witnesses have been connected with it for a long time. Eugene N. Foss, petitioner’s president, has been with it and its predecessor business for fifty years. Ernest P. Freeman, above mentioned, has been associated with petitioner since 1903; Eugene B. Williams, since 1905; Merton S. Leonard, since 1901; and Herbert M. Fish, since 1902. All of these men held important positions with petitioner. It does seem to us that, with the testimony of these witnesses available, it would have been possible for petitioner to have produced more accurate evidence as to the extent assets were used in the manufacture of patented' articles if the patents really played as important a part in the business as we are now asked to believe. It is seldom that a taxpayer comes before us with such an array of witnesses who have grown up with the business as in this ease. Yet with these witnesses available we are asked to accept as a basis for determining values a set of figures which throughout arc compiled in an arbitrary method. On the meagre evidence that we have concerning petitioner’s tangibles, it appears that the 8 per cent return used is too low. Freeman’s testimony is that in a businesss such as that of petitioner’s it is customary to figure a 10 per cent return. F reeman further testified that it was petitioner’s practice to charge off many items that other companies would capitalize, and so even if the figures used by the accountant in making; up the computation before us represented book assets, the actual assets used in the business very probably had a considerably greater value. The method used is also subject to the criticism that in figuring the percentage of tangibles the sales figure used as a basis is inaccurate because of the omissions in the tabulations of patented sales which we referred to above.

We accordingly conclude that the formula worked out by petitioner can not be accepted as establishing values at March 1, 1913.

We might further point out that even if the figures purporting to show earnings in excess of a fair return on tangibles were accurate, we still would not be able to say that the excess should be attributed entirely to patents. Petitioner’s witnesses, Foss, Freeman, and Orrok, were unanimous in their testimony that petitioner had a valuable good will. Several of petitioner’s witnesses expressed opinions of the value of the patents. These, for the ¡most part, are based on calculations above discussed and which, as we have pointed out, contain too many inaccuracies and arbitrary premises to be of aid in fixing any value. For example, Freeman, in giving his opinion on the multivane fan patent, said it was based on a showing of earnings attributable to that patent of over $100,000 a year. He a dmitted that if the figures are wrong as regards that point, my testimony is wrong, but I thoroughly believe it is right * * Freeman was further ox the opinion that the petitioner’s net tangible assets amounted to between three and four millions of dollars prior to 1913, on which it ought to receive a return of 10 per cent before attributing anything to intangibles. As petitioner’s average earnings were only a little over $200,000, it is clear that Freeman’s opinion lacks a reliable basis. When asked whether he thought that the patent could have been sold to a prospective purchaser at the figure he named, Freeman said that there were one or two competitors that would have paid the price “ with our figures before them.” As to the other items sought to be valued here, Freeman testified that he fixed their value along the same general line.

Petitioner’s other witnesses, Orrok and Williams, who gave opinions on the multivane fan patent, based their conclusions largely on the sales and earnings figures above discussed.

Freeman was the only witness called to express an opinion as to the values of the fuel economizer patents. On direct examination his testimony was that they were worth “ appreciably more than the $178,000 that the formula shows.” Upon being asked on cross-examination as to the value he had expressed, he said that it was $115,000 or $120,000.

When it came to valuing turbine patents petitioner did not rely on its formula applied to the other items, apparently for the reason that the figures made up show losses in all years except the period July 1, 1911, to December 31, 1912, in which profits of only $849.67 •are shown. According to the tabulations in evidence, turbines were made and sold during all of the period from 1907 to 1911, but at a loss. This situation probably may be accounted for by petitioner’s method, as explained above, of arbitrarily assigning large profits to fans where fans and turbines were sold as units, and little or no profit to the turbines. Orrok’s opinion of the value of the turbine patents was based on purely hypothetical factors. He estimated the amount of horse power that might be developed by turbines, and that petitioner might expect to receive a certain portion of the turbine business. On that basis he estimated the amount of profit at the rate of $2 per horse power after allowing for an 8 per cent return on tangibles. The record does not show that Orrok had any idea of the amount of tangibles that petitioner had or might be required to have in order to produce the estimated horse power. Difference in turbines made by two concerns and difference in management might easily result in a wide variation in this factor. Furthermore, the evidence shows that in fixing his value Orrok was not aware of the infringement suit of the Terry Company that was pending on March 1, 1913, and gave it no consideration.

At March 1,1913, petitioner’s nearest comparable competitor in the turbine business was the Terry Steam Turbine Company, which manufactured nothing but turbines. In 1913 that company’s gross sales were $410,000 and net income was $33,000. We do not consider that these facts furnish any aid in determining the question here. If petitioner’s business in turbines was expected to amount to the same volume as that of the Terry Company it would be at some unknown time in the future after it had succeeded in meeting the competition of the several companies which the evidence shows were then in the field, and after it had built up plant and equipment of an unknown amount. We are not informed as to the amount of the Terry Company’s tangibles, nor as to whether it earned anything beyond a reasonable return thereon.

Bentley, the inventor of petitioner’s turbines, was of the opinion that the patents were very valuable to the Sturtevant Company.” Our problem is to determine fair market value and Bentley’s testimony does not aid in establishing this. Moreover, it is shown that prior to the sale of his patents to the petitioner, Bentley had offered them to other concerns and his best offer was $3,000 from the General Electric Company, which was then in the turbine business and presumably was in a position to know the value of turbine patents. It is difficult to believe that patents purchased for the sum petitioner paid in 1911 would increase so tremendously in value by 1913, as claimed here, when operations under them had shown a profit of only about $800 (using petitioner’s figures) and had resulted in an infringement suit.

Petitioner did not own the three patents relating to slow-speed fans, but manufactured the fans under license from the owner. The license was acquired without cash consideration or any agreement to pay royalties. The only consideration was that petitioner agreed to use on certain types of work a dust collector on which the licensor held the patents and to pay a royalty therefor. The license was terminable by either party on six months notice. There is in evidence a memorandum signed by the licensor stating that it intended the petitioner should have an exclusive license as long as the conditions of previous agreements were performed. This, however, does not abrogate the cancellation provisions of the license agreement. Under these circumstances it would require a very clear showing to establish that the license had any substantial value. The only evidence directed to proof of value consists of figures based on the alleged earnings, which we are unable to accept.

Considering all the evidence, we are of the opinion that petitioner has failed to establish the fair market value at March 1, 1913, of its several patents and the license under which it manufactured the slow-speed fans, and we are unable to find that it is entitled to use as a basis for exhaustion any greater amount than that used by the respondent.

In reaching this conclusion we have not overlooked or failed to consider the testimony of the several witnesses giving the history of the development of the several patented articles. We have given careful consideration to that evidence, but, for reasons above given, we are unable to find that it supports the values claimed or that it gives us any sound basis for fixing any other values.

Claimed Amortization Deduction.

Most of the facts concerning the claimed deduction for amortization of war facilities were stipulated. The facts as stipulated appear somewhat complicated, but as we understand them they are as follows: One of petitioner’s subsidiaries, the Aeroplane Company, in its separate return originally claimed an amortization deduction for the year ended June 30, 1918. Later, on April 1, 1922, petitioner filed consolidated returns on behalf of itself and subsidiaries, for the years ended June 30, 1918 and 1919, in both of which amortization claims were made on account of assets of the Aeroplane Company. The claims made in the consolidated returns were recommended for disallowance by the respondent’s office, whereupon, on March 27, 1924, petitioner withdrew the claims. In February, 1925, petitioner •filed two briefs, one with the respondent and one with the solicitor of internal revenue, claiming amortization deductions which are in controversy here, and which are not related to the claims previously made on account of the Aeroplane Company’s facilities.

The facilities with respect to which claim is now made were installed between October 28, 1917, and March 3, 1919, for the production of articles contributing to the prosecution of the war. It is stipulated that the Navy Department or its agent “ advanced a portion of the cost of approved additions to [petitioner’s] plant and equipment.” The cost of the improvements was $137,4-08.54. After completion in 1919 of petitioner’s war time contract with the Navy Department, it paid the United States $77,000 and received a bill of sale for the improvements. The $77,000 paid by petitioner represented the value of the improvements in the light of the use to which petitioner then expected to put them, namely, the manufacture of additional blowers for the Navy Department. Because of the subsequent curtailment of armaments by the United States, the petitioner did not receive the further orders it expected.

The parties argue various questions under this issue, such as the effect of the 1919 bill of sale, and the effect of the withdrawal of the first claims filed. In the view we take these questions are immaterial. Section 234 (a) (8) of the Revenue Act of 1918 provides that in the case of the construction of facilities on or after April 6, 1917, for the production of articles contributing to the prosecution of the war then in progress, there should be allowed a “deduction for the amortization of such part of the cost of such facili-tioes * * * as has been borne by the taxpayer * * It is clear in this case that the $77,000 cost to the petitioner was not the cost of war-time facilities as such, but was rather the cost to it of facilities which it proposed to use for manufacturing post-war articles. If petitioner’s theory were sound, it would enable taxpayers to secure amortization deductions for war-time facilities in which they had no interest during the war but which were acquired thereafter, even after peace was formally concluded. It seems to •us that it does not matter that the facilities were erected on petitioner’s land and that technically they may have become a part of the realty, for the fact remains that the petitioner had not borne the cost of such facilities while they were used for war-time purposes. We accordingly hold that petitioner is not entitled to the deduction claimed.

Petitioner’s claim for amortization deductions must be denied on the further ground that it was not timely filed. Section 1209 of the Revenue Act of 1926 provides that deductions for amortization of war facilities may be allowed “ if claim therefor was made before June 15, 1924.” The stipulated facts here show that claim with respect to the facilities here involved was first made on February 4, 1925. The claim that had theretofore been filed and withdrawn related to distinctly different facilities. While we have countenanced amendments to claims, United States Refractories Corporation, 9 B. T. A. 671, and have held that a member of an affiliated group may claim amortization deductions with respect to facilities constructed by another corporation within the group, G. M. Standifer Construction Corporation, 4 B. T. A. 525, 550, none of the decided cases go as far as to say that a claim filed by one company and withdrawn will support a claim filed after the statutory period by another with respect to entirely different facilities.

Decision will ~be entered under Rule 50.


author: TRAMMell:

text:
    Blanche B. Burley, Executrix, Estate of Mary Dodson Swift, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44909.
    Promulgated June 30, 1932.

      Douglas D. Felix, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION.

TRAMMell:

The respondent’s deficiency letter dated April 20, 1929, which forms the basis for this appeal, covered the years 1924 to 1927, inclusive, and the period January 1 to January 15, 1928. However, in that letter respondent determined a deficiency only for the year 1925. The original petition filed herein alleged errors in respect of the respondent’s determination of the petitioner’s tax liability for both the years 1925 and 1926, notwithstanding no deficiency was determined for the latter year. The amended petition referred only to the year 1925. At the hearing on March 9, 1932, respondent moved to dismiss as to 1926, which motion, without objection by the petitioner, was granted. Accordingly, this appeal, in so far as it purports to relate to the year 1926, will be dismissed for lack of jurisdiction.

The first issue for consideration here questions the action of the respondent in prorating the amount of $20,000 paid by the petitioner’s decedent during the taxable year 1925 to a broker for negotiating a 99-year lease of certain real estate then owned by the decedent. The lease was surrendered and canceled in 1927. The decedent kept her books on the basis of cash receipts and disbursements, and petitioner contends that the full amount of the commission so paid constituted a business expense and should be allowed as a deduction from gross income for 1925, but further contends that, even if the amount be held to be a capital expenditure, the entire amount should nevertheless be allowed as a deduction for “ depreciation ” in the taxable year. In support of her contention petitioner cites the decision of the United States District Court for the Southern District of New York in Daly v. Anderson, 37 Fed. (2d) 728.

In Central Bank Block Association, 19 B. T. A. 1183; aff'd. 57 Fed. (2d) 5, we held that the total amount of commissions paid by the petitioner for services in procuring the lease of its property for a period of 50 years should be spread ratably over such period and not deducted as an expense in the years in which paid, notwithstanding the petitioner was on a cash receipts and disbursements basis. In that connection we considered the case of Daly v. Anderson, supra, and expressed our dissent therewith.

The petitioner offered no evidence to show that at the time the lease contract was executed, nor at any other time during the calendar year, 1925, it could have been reasonably anticipated that the contract would be surrendered and canceled in 1927 or prior to its expiration. Therefore, the fact that it was subsequently canceled does not affect the amount of the deduction allowable for 1925. The lease contract by its terms extended over a period of 99 years, beginning July 1,1925. The respondent allowed as a deduction from 1925 income % of %9 of the commission paid, and for 1926, he allowed %9, and for 1927,’ the year in which the contract was canceled he allowed the remainder of the total amount not theretofore allowed. On authority of Central Bank Block Association, supra, the respondent’s action on this point, in so far as it affects the tax liability of the petitioner for 1925, is approved. The years 1926 and 1927 are not before us. See also James M. Butler, 19 B. T. A. 718; Evalena M. Howard, 19 B. T. A. 865; Bonwit Teller & Co., v. Commissioner, 53 Fed. (2d) 381; certiorari denied, 284 U. S. 690.

The second issue presented here involves the question whether the amount of $22,070 of the decedent’s income for 1925, which admittedly represents profit comprised in the installment payments received by decedent in said year under the contracts referred to in our findings of fact, should be taxed as capital net gain or as ordinary income.

The Revenue Act of 1926, which is the statute applicable here, provides as follows:

Sec. 208. (a) For the purposes of this title—
(1) The term “capital gain” means taxable gain from the sale or exchange of capital assets consummated after December SI, 1921;
(8) The term “ capital assets ” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * . *

The respondent contends, first, that the sale of the real estate which gave rise to the income in question was consummated prior to December 31,1921, or on April 20,1920, when the decedent entered into the contract or agreement with the Gouchers for the sale of the Greentree Inn, and therefore the amount of profit realized in 1925 was not “ capital gain ” within the meaning of that term, as defined in section 208 (a) (1), supra; and, second, that this property in 1925 was being held by the decedent primarily for sale in the course of her trade or business, since she was then engaged in the real estate business, and hence was not a capital asset as defined in section 208 (a) (8), supra.

The latter contention, we think, is obviously without merit. The evidence shows, and we have so found, that the decedent contracted for the purchase of this property in 1917 solely for investment purposes. At that time she was not engaged in the real estate business, but took possession of the hotel property and thereafter operated it until she made the contract of sale with the Gouchers in 1920. She did not enter the real estate business until 1925, and obviously she was not holding the property during that period primarily for sale in the course of her trade or business. That the property was held by the taxpayer for more than two years is not controverted.

The real question for decision on this point, then, is whether the sale of the property in question was consummated prior to December 31,1921'(on April 20,1920), when the contract for deed was executed between the decedent and the Gouchers, or when the title was passed to the Goucher’s assignees after December 31, 1921, by deed dated March 23, 1925.

In G. Allan Hancock, 25 B. T. A. 607, we held that the sales there involved were not consummated until the purchase money had been paid and the deeds in fact executed and delivered, all of which, in that case as well as in the present case, occurred subsequent to December 31, 1921. The Hancoch case arose under the capital gain provisions of the Revenue Act of 1921, which, so far as material here, are the same as those quoted above from the Revenue Act of 1926. On authority of that decision, the action of the respondent on the second issue in this proceeding is reversed. See also Commissioner v. Swift, 54 Fed. (2d) 746, affirming 20 B. T. A. 1099; and Dahlinger v. Commissioner, 51 Fed. (2d) 662, affirming 20 B. T. A. 176.

As to the year 1986, the proceeding %oill he dismissed for lacle of jurisdiction. As to the year 1985, judgment will he entered under Bule 50.