author: Steenhagen :

text:
    Donaldson Iron Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5762.
    Promulgated January 7, 1928.

      G. J. McGuire, Esq., J. Marvin Haynes, Esq., W. C. Magathcún, Esq., and D. M. Bussell, G. P. A., for the petitioner.

      John D. Foley, Esq., for the respondent.
   OPINION.

Steenhagen :

The petitioner presented four issues in its pleading but only two of these were pressed at the hearing or supported by evidence and need therefore be considered here or decided. By the first issue raised the petitioner contends that the surplus to be included in its invested capital should include numerous capital expenditures (properly depreciated) for plant and equipment which from the time of its organization in 1886 until March 24, 1916, had been entirely written off as current expenses. The second contention is that by reason of this accounting practice the book value of its depreciable assets on March 1, 1913, was less than the fair market value and that it is entitled to a determination of such fair market value as the basis for its annual deductions within the taxable years for exhaustion, wear and tear and obsolescence. These are both questions of fact to be decided upon a preponderance of the evidence, and it should be said at the outset that all of the evidence in the record has been carefully considered. It would, however, serve no useful purpose to recount the evidence covered by a trial which consumed several days.

It is well settled as a matter of law that in ascertaining the earned surplus to bo included within invested capital as provided by section 207 of the Revenue Act of 1917 and section 326 of the Revenue Act of 1918, the capital accounts shown by the books are not conclusive and that there may be restored to such surplus any amounts which truly represent capital investment at the beginning of the year but which by reason of inadvertence or irregular accounting practices were written off the accounts. Union Metal Mfg. Co., 1 B. T. A. 395; Gilliam Mfg. Co., 1 B. T. A. 967; Goodell-Prastt Co., 3 B. T. A. 30; Rockford Brick & Tile Co., 4 B. T. A. 313; James T. Clark Co., 5 B. T. A. 1291. To do this, however, a taxpayer must establish by a preponderance of the evidence that such capital expenditures were in fact made and that after proper allowance for depreciation and other intervening circumstances the amount claimed to be restorable is in fact an existing asset of the cost claimed. It must also be reasonably clear that the amount claimed for restoration does not include appreciation in value since acquisition. La Belle Iron Works v. United States, 256 U. S. 377. Simply stated, the amount to be restored is original capital cost less actual depreciation to the beginning of the taxable year.

In the present case the taxpayer charged to expense practically all of its capital expenditures for 30 years preceding 1916. It seeks to restore the depreciated cost of all its property in existence on January 1, 1917, and the beginning of each year thereafter. It has in its records the actual cost of some of these assets, but as to most of the assets the actual cost is not available. As to those which are covered by actual cost records there is substantially no dispute. In order to prove the surplus remaining in the assets not covered by its existing cost records, the taxpayer has caused a careful study to be made by an appraisal company and has proved in detail, through the testimony of all of the persons engaged in the study, the various steps used in arriving at the probable actual cost and the intervening depreciation. Every item of plant assets was examined, and by reference to existing data its probable cost fully installed upon the date of acquisition was determined. By reference to its observed condition, an estimate was made of the accrued depreciation subsequent to acquisition, and by applying this to the probable original cost the depreciated capital cost was arrived at as of March 24, 1916, when the study was completed. The probable correctness of these figures was supported by putting in the record all of the data used in the course of the study; and thus we have a complete inventory and history of the petitioner’s assets, with source references for every fact or assumption used, and an oral exposition of the method by which this data was translated into an. ultimate depreciated cost.

The respondent introduced no countervailing evidence either to support the figures used by him or to establish any figures other than those proposed by the taxpayer. He contented himself with testing by cross-examination the soundness of the petitioner’s study.

In the main we have found the figures of the petitioner to be supported by the evidence. In so far as they included items in contravention of earlier decisions of the Board, such as so-called indirect costs like taxes, interest, and insurance during construction, we have adjusted the valuations downward. Columbia Theatre Co., 3 B. T. A. 622; Ottawa Park Realty Co., 5 B. T. A. 474; Spring Valley Water Co., 5 B. T. A. 660; Eastern Rolling Mill Co., 5 B. T. A. 663. We have also eliminated items acquired in 1886, presumably from tire Orm-rod Fisher Co., as part of the original acquisition upon organization. These, so far as the record shows, were not excluded by the respondent in the determination of invested capital and ought not therefore to be involved in any demand for restoration. Obviously to the extent that the costs of 1886 covered property which had been purchased originally by the petitioner’s predecessor and turned over to the petitioner in exchange for stock, it would be included in invested capital not as surplus but as property paid in for stock or shares, and unless it can be shown that this is not the situation, such property (except where actual cost is shown) must be excluded. The exclusion must be of entire original cost undepreciated, since the evidence does not disclose the extent or amount of its depreciation. The result of these adjustments has been to find the asset costs set forth in our findings of fact, and invested capital should therefore be adjusted to include plant assets at $476,437.50 plus later additions as found and such land items the actual cost of which appears in evidence. Since the respondent’s computation is not clear, we can not find specifically how this amount is allocated as between capital stock and surplus.

The second issue, although somewhat similar in its proof, is entirely different in its legal nature. The respondent, finding that the books disclosed certain asset values on March 1, 1913, applied depreciation rates thereto and limited the deduction for exhaustion, wear and tear and obsolescence of the taxable years to such book assets. The taxpayer contends that by section 234 (a) (7) it is entitled in the taxable years to an allowance for the exhaustion of all its plant properties owned on March 1, 1913, upon the basis of their fair market value on March 1, 1913; and that since the books have incorrectly eliminated many capital items, it is entitled to prove their existence and value on March 1, 1913, as the basis for the exhaustion allowance. The parties have agreed, as stated in the findings, upon the rates to be applied after the March 1,1913, values are determined. In determining such values the petitioner, in a manner similar to that already described in the ascertainment of original costs, satisfactorily proved the cost of reproduction new less depreciation to March 1, 1913, of all assets owned and in existence on that date. Confronted with the decisions of the Board in Rockford Malleable Iron Works, 2 B. T. A. 817; Tibby-Brawner Glass Co., 2 B. T. A. 918, and others, and guided by Paducah Water Co., 5 B. T. A. 1067, the petitioner then introduced some evidence to prove fair market value. It appears, however, that the alleged fair market value on March 1, 1913, also included certain factors of so-called indirect cost which are not depreciable and are therefore not properly to be included in the valuation of the physical properties to which the depreciation rate is to be applied. Paducah Water Co., supra. See also Columbia Theatre Co., supra; Ottawa Park Realty Co., supra; Spring Valley Water Co., supra; Eastern Rolling Mill Co., supra. We have therefore eliminated from the March 1, 1913, valuation claimed such amounts as the record indicates are properly attributable to these nondepreciable items, and have found the values as shown by the foregoing findings of fact. To these values it is a simple matter to apply the stipulated rates of depreciation in order' to- ascertain the exhaustion allowances.

In computing both the restored depreciated costs for invested capital purposes and the exhaustion allowances, it is of course necessary to make the adjustments by way of intervening additions up to the beginning of each of the taxable years involved, and also whatever intervening depreciation has occurred. These facts are clear in the record and need not be stated here in detail. What we have said is sufficient to indicate the basis for the computation of the correct deficiencies, if any.

Judgment will 5e entered on 15 days’ notice, under Rule 50. ■

Considered by Lansdon, Gkeen, and Arundell.


source: Caselaw Access Project

author: MoRkis : Steknhagen, Phillips, Murdock,

license: Public Domain

text:
    Haskell & Barker Car Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7009.
    Promulgated January 7, 1928.

      Jannes H. Winston, Esq., and Edward G. Ince, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
   OPINION.

MoRkis :

The first allegation of error is the failure of the respondent to allow as a deduction for the fiscal year ended January 31, 1919, an amount of $17.50 per share (difference between the stipulated market price of $42.50 and sale price to employees) on the stock which had not been paid for in full in the computation of net income. The respondent alleges and contends that there was no binding obligation upon the petitioner, certainly not more than contingent liability until the stock in question was fully paid for by the employee and his certificate of stock delivered to him. Therefore, the respondent contends, the bonus of $17.50 should not be allowed as a deduction until the payments are completed by the employee. The petitioner, on the other hand, contends that there was a binding and enforceable contract between the petitioner and its employees and that the bonus sought to be paid by this agreement was for services actually rendered within the fiscal year ended January 31, 1919, and therefore the sum claimed as a deduction in that year should be allowed as provided for in section 234 (a) of the Revenue Act of 1918. Section 234 (a) (1) of the Revenue Act of 1918 provides that in computing the net income of a corporation subject to the tax imposed by section 230, there shall be allowed as deductions, “(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.” The words “ paid or incurred ” as used in the above section are defined in section 200 of the same Act as follows:

The term “paid,” for the purposes of the deductions and credits under this title, means “ paid or accrued ” or “ paid or incurred,” and the terms “ paid or incurred ” or “ paid and accrued ” shall be construed according to the method of accounting upon the basis of which the net income is computed under Section 212.

Section 212 (b) of the same Act provides that, “The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer.” In this case there seems to be no dispute over whether the sums in question were “ ordinary and necessary ” or whether the sums constitute a “ reasonable allowance.” Nor is there any doubt expressed as to the right of the petitioner to deduct a bonus as such in computing its net income. Appeal of W. H. Harris Grocery Co., 3 B. T. A. 216. Therefore we are only called upon to determine whether or not the $17.50 per share on stock contracted to be sold to the employees but not already paid for within the fiscal year ended January 31,1919, is “ paid or incurred during the taxable year ” as provided for in the statute. In deciding this point in issue it will be necessary, not only to construe the writing entered into between the parties, but to determine from the oral testimony of witnesses and all the surrounding circumstances which caused the parties to contract with each other, what the intention of these parties was. Appeal of Converse & Co., 1 B. T. A. 742, and Appeal of Arthur B. Grover, 3 B. T. A. 508.

Let us first, therefore, examine briefly some of the pertinent terms of the minutes of the board of directors of November 21, 1918, referred to in the findings of fact. The committee appointed to work out the plan of the stock bonus “ for the purpose of providing compensation to the president, chief executive and operating employees of the company, in addition to their respective salaries for services actually rendered during the year * * * ” recommended the purchase of 5,000 shares of stock in addition to the 5,000 shares held in the treasury and that 5,000 shares be sold to the president at $25 per share, the committee stating with respect to this sale “ the difference between that price on said 5,000 shares and the present market price, is a reasonable compensation to the president, in addition to his salary, for his services actually rendered to the company during the year.” There was also a similar provision with respect to the chief executive and operating employees. The terms of the above committee’s recommendation were adopted by resolution of the board of directors.

Therefore, insofar as the intention of the petitioner is concerned, there can be no question but that it intended the amount in controversy to cover compensation in addition to the salaries already paid for services actually rendered to the company “ during the year.” Some obligation was certainly incurred within the taxable year in question. An agreement was drawn up to carry out the resolution of the board of directors by the vice president of the company, who was not a lawyer and skilled in the drafting of legal instruments. The 'preamble to the contract simply recites that the company is desirous of compensating the employee further and that it has authorized the offer of a bonus in the form of subscription right.

The first numbered paragraph of the contract recites “the company offers you a right to subscribe for_shares of the above-mentioned stock of the company, at a price of $25.00 per share.”

The second numbered paragraph provides for the manner of payment and specific provisions that the failure to complete payment within the specified period shall cause the subscription right to lapse. That paragraph further provides “ and the company will return to you the net profit, if any, accruing to you, over the carrying charges.”

The third numbered paragraph provides that the company shall have possession of the certificate of stock pending completion of payment.

The fourth numbered paragraph provides that the company shall pay dividends on this stock pending completion of the payment therefor, which dividends were to be credited on the balance of the employee’s subscription.

The fifth numbered paragraph provides for the charge of interest on the balance. That paragraph also provides “but in any event the interest charged shall not exceed the amount of dividend credited on your subscription during the year.”

The sixth numbered paragraph provides briefly that in the event of the death of an employee before payment, the company will, at the option of the employee’s personal representative, either return to his estate the entire amount, if any, credited on his subscription “ without deduction for carrying charges ” and cancel the contract, or will accept complete payment from his personal representative and deliver the certificate of stock to such person.

Paragraph seven of the contract, which seems to be the one in controversy, or at least more so than any other one, reads as follows:

In tlie event of your departure from the employ of this company, for any cause, prior to the completion of payment of this stock, or upon your written request at any time while still in its employ, the company will pay to you the net credit, if any, accrued to you on this subscription and your subscription will thereupon be canceled with no further interest to you therein.

The eighth numbered paragraph provides that the contract is not transferable or assignable without consent of the company in writing. The final paragraph provides, “ This subscription offer has been executed in duplicate on the part of the Company and your acceptance thereof in writing in the form appended will constitute this a contract between yourself and the Company, but only for the purpose and to the effect herein stated.” This contract was executed by the president for the petitioner, attested by the secretary and signed by the employees. All the elements of a binding contract to sell stock, on the one hand, and to purchase, on the other, are present. There is the element óf offer and acceptance required in all binding contracts. It is true that the acceptance on the part of the employee is not in the exact words of the offerer, but as we understand it, that is not necessary to create a legally binding contract. At page 128, Volume I, of Williston on Contracts, the author sáys, “ in order to make a bargain it is necessary that the acceptor shall give in return for the offerer’s promise exactly the consideration which the offerer requests. If an act is requested, the very act and no other must be given. If a promise is requested, that promise must be made absolutely and unquali-fiedly. This does not mean necessarily that the precise words of the requested promise must be repeated, but by a positive and unqualified assent to the proposal the acceptor must in effect agree to make precisely the promise requested.” In Justice v. Lang (New York), 1 Am. Rep. 516, cited by the petitioner, wherein the agreement between the parties was that the defendant deliver certain riñes, the plaintiff did not in terms agree to buy the rifles nor did he promise in terms to pay for them. The court said, “clear and explicit words were used to express the terms of the contract and agreement, leaving no doubt as to the subject matter thereof, the time and place for the delivery of the goods to be delivered, and the price or sum to be paid, and when such payment was to be made; and the assent of both the contracting parties also appears, that of the sellers, by subscribing their firm name at the end of the contract, and that of the buyer by the acceptance thereof. Although there is no distinct and express promise in terms by the plaintiff to pay the price specified, the terms, cash on delivery,’ imply a promise, and create an obligation to make such payment when the rifles are delivered.” In the light of the words used in the above citation it seems clear that in this case there was clearly an offer and acceptance.

Let us consider for the moment paragraph seven of this contract, which simply says, in effect, “ if you wish to return your stock any time before payment of your subscription, you may do so.” We can see no reason why this provision in the contract should alter its legal efficacy. The testimony of the officers of the company with respect to paragraph seven of the contract was to the effect that the company wished to give the employee every advantage, that it wished to protect him in the event of a possible decline in the market value of his stock. Indeed, we are inclined to the belief that if such a provision had not been made in this contract, it might have been inconsistent with the giving of a bonus and would have amounted to nothing more than a strict contract between the parties for the sale and purchase of stock. If the stock in question had not been protected by that provision a decline in the market value of the stock could have deprived the employee not only of the $17.50 sought to be paid to him as a bonus, but also could have deprived him of a portion or all of his purchase price.

We can not segregate paragraphs in this contract and consider them separately from all of the other provisions. The entire contract must be construed in the light of all of the terms therein and of the surrounding circumstances which tend to show the intention of the parties. In O'Brien v. Miller, 168 U. S. 287, the court said:

The elementary canon of interpretation is, not that particular words may ba isolatedly considered, but that the whole contract must be brought into view and interpreted with reference to the nature of the obligation between the parties, and the intention which they have manifested in forming them.

The testimony discloses that all of the 68 contracts in question were executed in the presence of one of the officers of the company and as each employee executed his contract, the terms thereof were clearly explained to him. He was told that the company proposed to pay him additional compensation for services rendered during the year; that the sum which the company would give him would be the difference between $25 which he would pay and $42 or $43 per share; that by accepting and signing this contract the employee created an obligation to pay the sum of $25; he was told that he could take the stock up at any time he wanted to and sell it or do anything else that he wanted to with it; that he could borrow money at the bank and take it up. Furthermore, he was told the company would protect him in the event of a decline in value. The testimony was clear that the company offered this stock to its employees without any obligation on the employee other than to pay the $25 mentioned in the contract.

Some of the employees testified that they understood that this was a contract between the company and themselves and they were obligated to pay $25 per share; that they understood that paragraph seven was designed for their protection in case of a decline in the market value; that they understood that'they could take this stock up at any time they wanted to. It seems to us that the practical construction placed upon the contract by the parties should be considered rather than a theoretical construction. In Insurance Company v. Dutcher, 95 U. S. 269, 273, the court said, “The practical interpretation of an agreement by a party to it is always a consideration of great weight. The construction of a contract is as much a part of it as anything else. There is no surer way to find out what parties meant, than to see what they have done.”

It was further said in District of Columbia v. Gallagher, 124 U. S. 505, “ We think that the practical construction which the parties put upon the terms of their own contract, and according to which the work was done, must prevail over the literal meaning of the contract, according to which the defendant seeks to obtain a deduction in the contract price.”

The testimony of all the parties concerned was to the effect that they understood and intended that this writing between themselves was a contract. Another important consideration is the fact that the company credited dividends to the account of each employee on the amount of stock so purchased from the date when the contract was entered into.

Taking into consideration the purpose for which this contract was designed and the intention of the parties as expressed in oral testimony and all of the surrounding circumstances, we believe that the petitioner is entitled to deduct in the fiscal year ended January 31, 1919, not only $11.50 per share for the stock paid for and taken up by the employee, but also that amount per share for the stock covered by the contracts, but not paid for.

The second allegation of error relates to the deduction from invested capital for 1920 by the respondent of the balance due from employees on the contracts as of January 31,1919, less the payments made on those contracts during the following year prorated in accordance with the date received. We have held that the agreements between the company and the 68 employees were binding contracts. The question therefore narrows itself down to the proposition whether the accounts receivable, secured by stock held as collateral by a trustee, the fair market value of which was in excess of the amount due, may be included in invested capital under section 326 of the Revenue Act of 1918. That section provides, “ That as used in this title the term invested capital ’ for any year means (except as provided in subdivisions (b) and (c) of this section): (1) Actual cash bona fide paid in for stock or shares; (2) Actual cash value of tangible property, other than cash bona fide paid in for stock or shares at the time of such payment * * * Section 325 (a) of the same statute defines the term “tangible property ” to mean “ stocks, bonds, notes, and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property.” Under the facts in this proceeding there can be no question that the actual cash value of the accounts receivable is equal to their face value. We are therefore of the opinion that these accounts receivable evidenced by the contracts should be included in invested capital and that the respondent was in error in reducing invested capital by the amount of the balance due from employees on the contracts as of January 31, 1919. See Appeal of Hewitt Rubber Co., 1 B. T. A. 424.

Reviewed by the Board.

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

Milliken did not participate.

Teammell dissents.

Steknhagen,

dissenting: In my opinion, the decision should be for the respondent on the first point. I can not see how the purchase by a corporation of its own stock and its subsequent transfer can be an expense either paid or incurred. The only outlay by the corporation was the purchase price of some outstanding stock. This was not an expense. The resale or reissuance of the stock for less than the purchase price involved no loss, Simmons & Hammond Mfg. Co., 1 B. T. A. 803, and since it carried with it no further outlay or liability, it seems to me there was no expense to deduct. The employees bought at a cheap price, but so far as the corporation was concerned there was simply a change in the personnel of its stockholders. The corporation avoided an expense by giving the employee at an advantageous price an opportunity of sharing in future earnings or liquidation.

Phillips,

dissenting: Upon the basis of the decision of the Supreme Court in American National Co. v. United States, 274 U. S. 99; 47 Sup. Ct. 520; 6 Am. Fed. Tax Rep. 6747, I concur in the decision that the bonus to be paid the employees of the petitioner was a deduction in the fiscal year ended January 31, 1919.

I can not, however, agree with the result reached upon the second point involved. The agreement between the employees and the company appears to me to be no more than an accepted subscription agreement. Certainly there was a meeting of the minds of the parties, and certainly there was a contract; but it does not follow that the employees thereby became stockholders of the corporation or that the amount of their unpaid subscriptions became accounts receivable. Nor do we know that they ever would become stockholders. For example, under parapraph 7 of the agreement, if an employee severed his relationship with the company, his only right was to recover the “ net credit accrued to you on this subscription and your subscription will thereupon be canceled with no further interest to you therein.” Entirely aside from the language used in designating the agreement as a subscription, how is the result consistent with the theory that the subscriber was the owner of the stock? If he was he would be entitled to pay his obligation to the company and receive his stock, for there was no agreement to resell. What is the purpose and effect of paragraph 8th if the employee owns the stock? What is the meaning of the last paragraph of the contract and especially of the words of limitation contained in the last sentence ?

That dividends should be credited and interest debited on the balance due seems an equitable arrangement for the protection of both parties, but is far from establishing that the subscriber owned the stock. My opinion is that we have here only an executory contract for the purchase of stock under which the subscribers become stockholders only when the subscription price is paid. I therefore conclude that the respondent was correct when ho included in invested capital only the amounts paid on these subscriptions.

Murdock,

dissenting: I dissent on both of the points covered by the prevailing opinion. However, I concur in the dissent of Mr. Sternhagen on the first point.


author: Littleton : GeeeN,

text:
    Noaker Ice Cream Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11397.
    Promulgated January 7, 1928.

      Albert B. Arbmgh, Esq., for the petitioner.

      J. A. O'Callaghan, Esq., for the respondent.
   OPINION.

Littleton :

As a practical matter the question in this case is the amount of the gain or loss resulting from thé demolition of a building. The parties are in accord as to the cost; the rate of depreciation from the date of acquisition to March 1, 1913; the March 1, 1913, value; the rate of depreciation from that date to its demolition, and the amount received as 'salvage. Thus we have the requisite facts to determine the amount of loss sustained on the demolition of the building in question, but it becomes necessary to pass upon one question of law which must be applied to the foregoing facts in order to. arrive at the loss to which the petitioner is entitled as a deduction from gross income in 1919. While the question of law which is raised by the error assigned in the petition is the extent to which depreciation sustained prior to March 1, 1913, is to be taken into consideration in determining the deductible loss in question, the question is really broader than this and makes necessary a decision as to the extent to which depreciation sustained both prior and subsequent to March 1, 1913, must be considered in this case.

Since cost was less than the March 1, 1913, value, the respondent determined the deductible loss in question by reducing cost by depreciation sustained from date of acquisition to March 1, 1913, plus depreciation allowed on the March 1, 1913, value from March 1, 1913, to date of sale and then taking the difference between the resulting remainder and the selling price, which in this instance was the amount recovered as salvage, whereas the petitioner takes the position that the foregoing determination is erroneous to the extent that depreciation sustained prior to March 1, 1913, is used to reduce cost for the reason that there was no income-tax law in effect prior to March 1, 1913, under which any deduction could be taken or allowed for such depreciation. The petitioner concedes in its brief that the holding of this Board in Appeal of Even Realty Co., 1 B. T. A. 355, is opposed to its view, but invites our attention to case of Ludey v. United States, 61 Ct. Cls. 126, decided subsequent to the Even Realty case. After the petitioner’s brief was filed the Ludey case was considered by the Supreme Court and a decision rendered thereon on May 16,1927. See United States v. Ludey, 274 U. S. 295. It becomes necessary, therefore, to consider whether there is anything in the decision of the court in United States v. Ludey, supra, which is in conflict with, and therefore requires a change in our holding as set out in the Even Realty case.

In the Appeal of Even Realty Co., supra, the Board said:

The same considerations that lead us to the conclusion that adjustment for recoveries of capital by allowance for exhaustion, wear and tear, and obsolescence must be made in computing gain upon the sale of property, compel us to the belief that similar adjustments should be made to cost before comparing it with value on March 1, 1913, for the purpose of deciding which of them should be the "basis for that computation. If the taxpayer recovered a part of the cost of his property before March 1, 1913, only the balance of that cost can properly be recoverable thereafter. The Constitution certainly does not entitle a taxpayer to recover any part of his cost more than once, before becoming accountable for taxes upon his gain. If, after proper adjustment for partial recoveries, it appears that the cost exceeds the value at March 1, 1913, that adjusted cost rather than the March 1, 1913, value should be taken as the basis for all subsequent computations; if it be less than the March 1, 1913, value the latter is the proper basis. Thus, if a taxpayer in 1903 buys a building with a normal life of 20 years for $10,000, and recovers in rents one-half of that cost by 1913, he is entitled to recover thereafter through deductions or upon the sale of the property either $5,000 or the market value at March 1, 1913, whichever is higher. To allow more would be permitting him a double recovery of part of his capital investment before accounting for profit, and certainly the Constitution does not compel that.

The case of United States v. Ludey, supra, involved a situation where the taxpayer held on March 1, 1913, certain assets which were acquired prior to March 1, 1913, the value of which on March 1, 1913, .was in excess of the original cost. Other assets were acquired between March 1, 1913, and date of sale, but we will leave these out of account as there can be no dispute as to the meaning of the decision on this point. The assets (meaning assets acquired prior to March. 1,1913) were sold in 1917 at a price which exceeded the March 1, 1913, value, less depreciation and depletion from March 1, 1913, to date of sale. There was, therefore, involved a gain on the sale of property where the March 1, 1913, value exceeded cost. With respect to the amount of depreciation and depletion which must be deducted from cost or March 1,1913, value, the court held:

Congress doubtless intended that the deduction to he made from the original cost should be the aggregate amount which the taxpayer was entitled to deduct in the several years.

As to the meaning of “ cost ” as used in the opinion, the following footnote appears in the opinion:

Some of the properties were purchased before March 1, 1913. As to these the term cost is used, throughout the opinion, as meaning their value as of March 1, 1913, that value being higher than the original costs.

It would seem, therefore, that what the court said was that where the March 1, 1913, value of depreciable assets exceeds cost and the sale price exceeds the March 1, 1913, value, after adjustment for depreciation and depletion, the taxable gain is represented by the difference between the March 1,1913, value, less allowable depreciation and depletion from March 1, 1913, to date of sale, and the selling price. Obviously, it was unnecessary in that case to consider depreciation or depletion which was sustained on cost prior to March 1, 1913, for the reason that cost was less than the March 1,1913, value, and, therefore, when we! have a selling price which exceeds either the cost or the March 1,1913, value, we need concern ourselves only with the higher of two, which in this case was the March 1, 1913, value. The reason which prompted the court to limit the depreciation and depletion to be deducted to that allowable as a deduction from 1913 to 1917 is not only explainable, but is also entirely logical when we consider that the allowable depletion under the ^Revenue Act of 1913 was not on the basis of depletion sustained, but was limited to a percentage of the output of a mine. In any other manner, it is difficult to see the necessity for making a distinction between “ sustained ” and “ allowable ” since when applied to depreciation the amount sustained in any one year could hardly be said not to be the reasonable allowance contemplated by the statute (except under the 1913 Act applicable to individuals entitled to such a deduction on account of mining property).

Applying this explanation of the Ludey case to this proceeding we find that here we have cost less than the March 1, 1913, value, but with the selling price less than either cost or March 1, 1913, value. Were there no adjustments necessary for depreciation, we would say that the deductible loss is the difference between cost and selling price. United States v. Flannery, 268 U. S. 98. The question here is, what adjustment shall be made on account of depreciation? Shall it be only an adjustment for the allowable depreciation sustained between March 1, 1913, and the date of sale, which adjustment shall be considered in connection with whatever basis — whether cost or March 1, 1913, value — is used?

The result which would follow from an affirmative answer to the foregoing question may be illustrated by the following example of a building purchased in 1908 and sold in 1918:

Cost (1908)_$8, 000
Value (Marcli 1, 1913)_10,000
Life of building (years)- 25
Depreciation on cost for 5 years to March 1, 1913-$1,600
Depreciation on March 1, 1913, value for 5 years from March 1, 1913, to 1918_ 2,500
Sale price_ 3, 000

The deductible loss on this theory would be obtained by deducting the depreciation allowable on the March 1,1913, value, to wit, $2,500, from the March 1, 1913, value and from cost — without making any adjustment for depreciation sustained prior to March 1, 1913 — and then allowing as a loss the remainder which results when the sale price is deducted from the smaller of the two remainders. The result would be a loss of $2,500 (cost $8,000 less depreciation, $2,500 and less sale price of $3,000).

We are of the opinion that there are two valid objections to this result:

First, the amount used as a basic figure from which the sale price is deducted is not depreciated cost, even if we concede that depreciation sustained prior to March 1, 1913, is not to be considered, since the depreciation allowable subsequent to March 1, 1913, is the depreciation on the March 1,1913, value and not on cost alone. The March 1, 1913, value of $10,000 is made up of two amounts, viz, depreciated cost and appreciation to March 1, 1913, which in the case stated would bo, depreciated cost $6,400 and appreciation $3,600. Hence, when we allow depreciation of $2,500 on the March 1, 1913, value to 1918, $1,600 is being allowed on cost and $900 on the appreciation. Therefore, if we desire to compare true cost reduced by depreciation on cost allowed subsequent to March 1, 1913, with depreciated March 1, 1913, value, we should reduce cost by only $1,600 instead of $2,500. To do otherwise would mean a reduction of the loss by the depreciation on appreciation and thereby increasing taxable income for 1918 to this unwarranted extent; in effect, taxing income which it appears Congress intended should be exempt.

The other objection to this result is the failure to consider depreciation sustained’prior to March 1,1913. Admittedly, in the TMdey case the court took into consideration only depreciation and depletion allowable subsequent to March 1, 1913, but is the case authority for the proposition that depreciation sustained prior to March 1, 1913, is not to be considered where the assets were acquired prior to March 1,1913, and a loss is involved, that is, both cost and the March 1,1913, value exceed the selling price? We are of the opinion that it is not. There a gain resulted and not a loss, and hence it was obviously unnecessary to consider cost or adjustments to cost prior to March 1, 1913. So long as we start with the March 1, 1913, value in excess of cost and must consider only the higher of the two as was true in the Ludey case, cost and adjustments thereto can be forgotten and only the March 1, 1913, value considered. This is precisely what the court did.

The reasoning which would disregard depreciation sustained prior to March 1,1913, proceeds on the theory that the March 1,1913, value is capital which is to be returned to a taxpayer before taxing income, and that the return contemplated is that allowable as deductions from gross income under the taxing statutes in force for 1913 and subsequent years to the date of sale. That this was held to be true in a case involving a taxable gain where it was unnecessary to consider depreciated cost, does it follow that the same rule should apply with respect to the determination of a deductible loss? We think not. We are of the opinion that there can be a return of capital (cost) when it is not deductible in the same sense as when deductible. A depreciable asset used in a trade or business is being continually returned to the owner thereof. In the hypothetical case stated, the $1,600 depreciation sustained from 1908 to March 1, 1913, was a proper charge against operations for those years and represented a gradual sale of the asset during those years. That the court in the Ludey case did not have a different theory is shown by the following statement:

We are of opinion that the revenue acts should be construed as requiring deductions for both depreciation and depletion when determining the original costs of oil properties sold. Congress, in providing that the basis for determining gain or loss should be the cost or the 1913 value, was not attempting to provide an exclusive formula for the computation. The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, 'during the year, of the capital assets through wear and tear of the plant used. The amount of the allowance for depreciation is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost. The theory underlying this allowance for depreciation is that by using up the plant a gradual sale is made of it. The depreciation charged is the measure of the cost of the part which has been sold. When the plant is disposed of after years of use, the thing then sold is not the xohole thing originally acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties. Any other construction would permit a double deduction for the loss of the same capital assets. (Italics supplied.)

In view of the foregoing, we are of the opinion that only by taking into consideration depreciation sustained both prior and subsequent to March 1, 1913, on cost, can we obtain a true depreciated cost which we can compare with the depreciated March 1, 1913, value for the purpose of determining a deductible loss in 1918 of assets acquired prior to March 1,1913. When this is done, the hypothetical case hereinbefore mentioned is solved in the following manner:

Original cost- $8, 000
Less—
Depreciation' to March 1, 1913, on cost_$1, 600
Depreciation on cost from March 1, 1913, to 1918— 1, 600
- 3,200
Net depreciated cost-$4, 800
March 1, 1913, value-$10, 000
Less — Depreciation on March 1, 1913, value to 1918_ 2, 500
Net depreciated March 1, 1913, value_ 7, 500
Sale price_ 3, 000
Deductible loss ($4,800 — $3,000)_!_ 1,800

Consistent with the foregoing, the Board is of the opinion that where a depreciable asset was acquired prior to March 1, .1913, at a cost which, when depreciated to March 1,1913, is less than the March 1, 1913, value and the asset is sold or disposed of in 1919 at a price which is less than either the March 1, 1913, value or cost, properly depreciated to date of sale, the deductible loss is the difference between the selling price and cost properly depreciated from date of acquisition to date of sale or disposition, which depreciation would represent not only depreciation sustained on cost prior to March 1, 1913, but also depreciation sustained on cost from March 1, 1913, to date of sale.

Reviewed by the Board.

Judgment will he entered, on 10 days' notice, trnder Rule 50.

GeeeN,

dissenting: I can not agree with the conclusion reached in the opinion adopted by the majority of the Board. As was therein stated, we have all the facts before us. It is necessary only to pass upon one question of law in order that we have a complete formula for the solution of the problem. The question of law is whether the basis (cost or March 1, 1913, value, as the case may be) for the purpose of determining gain or loss on a sale or other disposition of property shall be reduced by the amount of the exhaustion, wear and tear sustained prior to March 1, 1913. The exhaustion, wear and tear are commonly referred to as depreciation.

The Revenue Act of 1913 and all subsequent acts, have provided foi an annual deduction from gross income for depreciation, but not until the Revenue Act of 1921 was there any expressed statutory requirement that depreciation be considered in the computation of the gain or loss resulting from the sale or other disposition of depreciable property. Prior to the passage of the 1921 Act, the authority for such consideration was found only in the Commissioner’s regulations and the decisions of the Bureau of Internal Revenue.

We held in the Appeal of Even Realty Co., 1 B. T. A. 355, that when computing the amount of the gain or loss resulting from the sale or other disposition of property, the basis for such computation, whether that basis be cost or March 1,1913, value, should be reduced by the amount of the depreciation. This case arose under the Revenue Act of 1918, which contained no provision with reference to the use of depreciation in the computation of gain or loss. The Supreme Court in United States v. Ludey, 274 U. S. 295, held that such reduction should be in the amount of the allowable depreciation or depletion. This it held upon the theory that the deduction for depletion is “to be regarded as a return of capital,” and it is obvious that depreciation is to be similarly regarded.

Prior to the Revenue Act of 1921, none of the revenue acts specified the basis for depreciation of property acquired prior to March 1,1913, but I think it is now commonly conceded that under such prior acts the value on that date is the basis. See Appeal of J. J. Gray, 2 B. T. A. 672. It is the value on that date which is to be returned to the taxpayer through the annual deductions. Regardless of the depreciation sustained prior to that date, he is entitled to have his deduction computed and allowed upon that basis, and the sum of such allowable deductions must be deducted from the cost or March 1,1913, value in the computation of gain or loss.

In every case where property was acquired prior to March 1, 1913, and sold or disposed of after that date, the March 1, 1913, value must be considered in determining accurately the amount of the taxable gain or deductible loss. It may or may not be a limitation on the gain or the loss depending upon, in the first instance, whether such value is greater than the cost, and in the second instance, whether it is less than cost.

In ascertaining the March 1, 1913, value, theories and formulas should be put aside and the determination made upon actualities. See Rockford Malleable Iron Works, 2 B. T. A. 819. But inevitably, since depreciation, in the sense of wear and tear, takes place to a greater or lesser degree, in all depreciable property, such depreciation affects the March 1, 1913, value and is reflected therein although it may be that other elements, such as appreciation in value, are also reflected. In the instances where the March 1, 1913, value is used as the basis for the determination of gain or loss, the reduction of such basis by the amount of depreciation sustained prior to March 1, 1913, would in itself practically result in the allowance of a double deduction for depreciation. It seems to me quite clear that Congress intended -that only the allowable depreciation should be deducted from the cost or March 1, 1913, value in determining gain or loss. The further reduction of such basis by the amount of the depreciation sustained prior to March 1, 1913, would destroy the mathematical and economical precision of the .fundamental principle.

My conclusion in this respect finds ample support in the legislative history. In section 202 (b) (2) of the Revenue Act of 1926, Congress, for the first time, enacted a statute requiring the reduction of the basis by the amount of depreciation sustained prior to March 1,1913. The last sentence of such paragraph, reads as follows:

In addition, if the property was acquired before March 1, 1913, the basis (if other than the fair market value as of March 1, 1913) shall be diminished in the amount of exhaustion, wear and tear, obsolescence, and depletion actually sustained before such date.

The report of the Ways and Means Committee to the House of Representatives, with reference to this new provision, is as follows:

When property is acquired prior to March 1, 1913, the present law provides that in the ease of a sale of such property the basis for determining' gain or loss shall be cost or March 1, 1913, value, whichever is higher; and also provides that in making adjustments for depreciation, etc., proper adjustment shall be made for depreciation, etc., “previously allowed.” Owing to the fact that there was no income tax prior to March 1, 1913, in cases where property was acquired prior to that date no depreciation has been allowed,” and the taxpayer may receive too large a basis for determining gain or loss. The amendment proposed provides that the deductions for depreciation, etc., to be made in such cases shall be such deductions as were actually sustained with respect to such property, which would inelude such depreciation as had occurred prior to that date.

The report of the Senate Finance Committee with reference to the new provision, reads as follows:

When property was acquired prior to March 1, 1913, the present law provides that in the case of a sale of such property the basis for determining gain or loss shall be cost or March 1, 1913, value, whichever is higher; and also provides that in making adjustments for depreciation, etc., proper adjustment shall be made for depreciation, etc., “ previously allowed.” Owing to the fact that there was no income tax prior to March 1, 1913, in cases where property was acquired prior to that date no depreciation has been “ allowed,” and the taxpayer may receive too large a basis for determining gain or loss. The amendment proposed provides that the deductions for depreciation, etc., to be made in such cases shall be such deductions as were actually sustained with respect to such property, which would include such depreciation as had occurred prior to that date.
Under existing law in the case of determining gain from the sale or other disposition of property, the cost or March 1, 1913, value of such property is required to be reduced by the amount of depreciation or depletion aiLowed under prior income tax laws. It has been claimed that the effect of this provision is to allow a taxpayer to elect to take no depreciation or depletion against his annual income and to permit him to write off the entire cost or March 1 value at time of sale. The bill as passed by the House provides that the cost or March 1, 1913, value in the case of sale shall be reduced by the amount of depreciation or depletion allowable under prior income tax acts in computing the gain subject to tax. It is believed that the rule stated by the House bill is the correct rule and that all taxpayers should be required to take proper annual deductions for depreciation and depletion.

It seems to me clear tliat in the computation of gain or loss resulting from the sale or other disposition of property acquired prior to March 1, 1913, and sold prior to the effective date of the Revenue Act of 1926, the basis, whether such basis be cost or March 1, 1913, value, may be reduced only by the amount of depreciation sustained subsequent to March 1,1913, and allowable under the various revenue acts in effect since such date.

Murdock, Smith, Siefkin, Trussell, Trammell, and Van Fossan concur in the dissent.


author: Lansdon:

text:
    Woodruff Holding Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10930.
    Promulgated January 9, 1928.

      Richard E. Dwight, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
   OPINION.

Lansdon:

Section 240(b) of the Revenue Act of 1918 provides in part that two or more domestic corporations shall be deemed to be affiliated if substantially all the stock is owned or controlled by the same interests. Petitioner contends that ownership by J. B. Taylor and wife of all the stock of the Woodruff Hotel Co. and 51.61 per cent of the common stock of petitioner meets the requirement of “ substantially all ” laid down by the Revenue Act, and that the two corporations constitute a single business unit.

In Canyon Lumber Co., 1 B. T. A. 473, the Board held:

The control, however, referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock.

The evidence does not indicate that J. B. Taylor controlled the voting rights of any of the stock held by the minority interests, representing 48.39 per cent of the total voting stock. The fact that the minority stockholders left the management of the business to him does not establish control of the stock within the meaning of the statute. Isse Koch & Co., 1 B. T. A. 624. There is no doubt that these two corporations were closely related in a business under the management of J. B. Taylor, but the percentage of stock owned by J. B. Taylor in the petitioner is not sufficient to meet the requirement of “ substantially all ” laid down by the Revenue Act. Adaskin-Tilley Furniture Co., 6 B. T. A. 316; Parker Sheet Metal Works, Inc., 3 B. T. A. 607; Rishell Phonograph Co., 2 B. T. A. 229; United Metal Spinning Co., 2 B. T. A. 520; Tunnel Railroad of St. Louis, 4 B. T. A. 596; Wadhams & Co., 2 B. T. A. 569; Ullman Manufacturing Co., 2 B. T. A. 1294.

Judgment will Toe entered for the respondent.

Considered by Sternhagen, Green, and Arundell.


author: Lansdon :

text:
    Northwest Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10650, 15310.
    Promulgated January 9, 1928.

      John E. Hughes, Esq., Forrest E. Ferguson, Esq., and E. J.'Miner, Esq., for the petitioner.

      Granville S. Borden, Esq., for the respondent.
   OPINION.

Lansdon :

Issues 1, 3, and 4, as set forth in our preliminary statement, having been settled by a stipulation of the parties which we have accepted, the only matter left for our consideration is the correct amount of annual deductions from its gross income for each of the taxable years to which the petitioner is entitled for depletion of its timber reserves due to its annual logging operations. The parties have stipulated the quantities of timber cut in each of the taxable years and it remains only for us to determine the basis for the computation of depletion for each of such years.

The respondent and petitioner are in substantial agreement that the timber lands and timber rights in question were acquired in 1907 at a cost of $1,950,000, the mill and other depreciable assets at a cost of $50,000, and that the land so acquired had no value. The respondent determined the deficiencies here in controversy on the basis of a value at March 1, 1913, which is less than cost and in support of such action relies on the provisions of section 234 (a) (9) of the Revenue Acts of 1918 and 1921, which are as follow:

(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * # * * * *
(9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) on that date shall be taken in lieu of cost up to that date: * * *

The petitioner contends, first, that the market value of its timber at March 1,1913, was greater than cost, and, second, that if we should find that the value at the basic date was less than cost, it is entitled to have its annual depletion deductions determined on the basis of cost. We shall first consider the petitioner’s contention that at March 1, 1913, the average unit value of its timber was in excess of the cost thereof.

In support of its contention of value greater than cost the petitioner adduced evidence upon which we have found as fact that its timber was of a higher quality than the average in the Puget Sound district; that logs produced therefrom sold at premiums that averaged $2 per 1,000 board measure feet; that it was located on the main line of a railway and was distant only 35 miles from market; that the timber stand per acre averaged nearly double that of the district tributary to the Puget Sound market; that all but 16 per cent of the timber stand consisted of the most valuable species found in that territory; that about 75 per cent of the fir, spruce and cedar cut into the better grades of lumber; that the prices for the products of the petitioner averaged $1 more per 1,000 board measure feet on the Puget Sound lumber market than were paid for similar grades of lumber in tile Columbia Eiver market; and that between 1907 and 1913 stumpage in the Puget Sound district increased in value from 50 to 75 cents per 1,000 board measure feet.

In further support of its contention, the petitioner introduced a number of experienced lumber and timber operators as expert witnesses. All were familiar with lumbering conditions in the State of Washington, well acquainted with the tract and timber in question and conversant with the processes of logging, manufacturing and marketing timber. The expert opinions of value of the petioner’s timber at March 1, 1913, varied from $4.75 to $5.25 per 1,000 board measure feet.

The respondent proved some sales of alleged similar timber lands at prices that support his contention of an average unit value of $3.25 at March 1, 1913. Upon cross-examination it appeared, however, that such sales were of small and isolated tracts and that the prices obtained were not a fair measure of the value of large timber areas easily accessible for logging and located on lines of transportation to nearby markets. In his brief, counsel for the respondent calls attention to the weakness of opinion evidence, although it is obvious that his determination of these deficiencies and the record that he made at the hearing rest almost entirely on such evidence.

A careful study of all the evidence adduced by the parties convinces us that the petitioner has sustained the burden of proving that the average unit value of the standing timber in which it owned an interest at March 1, 1913, was greater than cost and was $4.75 per 1,000 board measure feet. Inasmuch as the record discloses that approximately 72 per cent of such timber was subject to a royalty charge of 70 cents per 1,000 board measure feet, it is obvious that the total value and the corresponding unit value of all the timber in question must be reduced by the amount o-f such royalty charge before the value of the petitioner’s interest therein can be ascertained.

The evidence shows that the petitioner owned 960 acres of the tract in question in fee, the right to cut and remove without further payment all the timber on 1,680 acres owned by various persons, and the right to cut and remove all the timber on 6,840 acres owned by the Northern Pacific Railway subject to a royalty charge of 70 cents per 1,000 board measure feet. It is also established by proof that the average stand of timber throughout the tract was uniform. We conclude that the royalty due the Northern Pacific Railway for cutting the timber on its lands, if applied to the entire tract, would result in an average charge of 60 cents per 1,000 board measure feet. We are of the opinion, therefore, that the average unit value of the petitioner’s interest in the standing timber in question at March 1, 1913, was $4.15 per 1,000 board measure feet, which we hold is a reasonable basis for the computation of the annual deduction from gross income to which the petitioner is entitled on account of depletion. Cf. Charles P. Hewes, 2 B. T. A. 1279; California Delta Farms, Inc., 6 B. T. A. 1301.

In addition to the royalty charge of 70 cents per 1,000 board measure feet, the Northern Pacific contract imposes a considerable body of obligations on each of the parties thereto. We assume that their reciprocal undertakings were mutually advantageous and so have no bearing on the value of the timber. Since the parties are in substantial agreement that the land owned by the petitioner has no market value after the removal of the timber we do not regard such land as a factor in determining the reasonable deductions for depletion to which the petitioner is entitled. A part of the purchase price of the property in the amount of $94,548.47 was payable without interest as the timber was cut. We regard this amount as part of the original capital investment and not as a royalty charge. It is not a factor in the determination of the value of the petitioner’s interest in the standing timber at March 1,1913. Having decided that the March 1, 1913, value of the petitioner’s interest in the standing timber was greater than cost thereof, it is not necessary to decide the question of law upon which the parties disagree.

Judgment will he entered on W days’ notice, under Rule 50.

Considered by Sternhagen, Green, and AruNdbll.


text:
    Estate of W. P. Graff, Petitioner, v. Commissioner of Internal Revenue, Respondent. F. M. Graff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 11299, 11300.
    Promulgated January 9, 1928.

      Samuel W. Miller, Esq., for the petitioners.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

Lansdon:

The parties having agreed that the $1,111.10 payment received by F. M. Graff from the Mining Co. was taxable, and that the $5,555.57 credited on the books of such company but not paid in the taxable year was nontaxable, and their agreement being in conformity with the law, it is approved.

This leaves for our consideration only the amount of the loss or gain realized through the transactions relating to the Brick Company and its property. That in 1907 the Graff Coal Co. bought a one-half interest in the Brick Company, paying therefor an equivalent of $40,000 cash, is not disputed, nor is the allegation of petitioners that the Coal Company thereafter paid its one-half of an alleged operating loss of $4,000 in dispute. These two payments, making a total of $42,000, are now claimed by the petitioners to have been the cost of the land which they sold in 1920 for $10,000. In other words, they now claim a loss on account of this purchase, operating loss, and sale, of $16,000 each.

There is no evidence whatever adduced in support of the claim as to the operating loss. It was not a loss of such a nature as could bring it within the purview of section 202 of the Revenue Act of 1918. If it was not simply a necessary and ordinary expense of the business, it was at least sustained and known by petitioners to have been sustained several years prior to 1920. This claim is denied.

The law applicable to the remainder of the claim is found in section 202 of the Revenue Act of 1918, and is as follows:

Sec. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale * * * of property, real, personal, or mixed, the basis shall be—
(1) In the case of property acquired before March 1, 1933, the fair market price or value of such property as of that date * * *.

The nature of the alleged loss is not clear. The record indicates that the petitioners acquired a one-half interest in the land in question in exchange for their certificates of one-half the stock of the Brick Company, which was dissolved in 1917, but we are unable to determine whether this transaction was an exchange of stock for real estate or a distribution in liquidation. In either event, however, the true gain or loss from the sale of such land must be determined by ascertaining the value of the stock at March 1, 1913, since it was acquired prior to that date. As to such value there is no evidence in the record except the fact that before that time the Brick Company had suspended operations. At March 1,1913, the value of the stock was measurable by the value of the assets of the Brick Company.

Neither party has adduced any evidence upon which we can base findings of fact either as to the value of the stock or of the assets of the Brick Company at March 1, 1913. There is, therefore, no basis upon which we can determine whether gain or loss resulted from the sale of the lots in question in the taxable year. The petitioners allege a loss which they seek to deduct in proper proportion from their respective gross income for the year 1920. The respondent holds that such loss has not been established by proof and has disallowed the deductions. The taxpayers have not sustained the burden of proof necessary to establish their allegation that the respondent erred in such determination.

Judgment will be entered on 10 days' notice, imder Bule 50.

Considered by Sternhagen, Green, and Artjndell.


author: Siefkin :

text:
    Grand Rapids National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 21116.
    Promulgated January 9, 1928.

      Franle E. Seidman, O. P. A., for the petitioner.

      Alva 0. Baird, Esq., for the respondent.
   OPINION.

Siefkin :

The question presented for our consideration is whether two affiliated corporations, which merged during the year 1922, must file two returns, one for the period of affiliation and one for the period of merger or, whether one return for the entire period is proper.

The position of the petitioner is that the merger did not create a new corporate entity; that since no new corporate entity was created, no new taxable entity would result, since the two corporations which were the basis of the merger were affiliated prior to the merger and that, therefore, only one taxable entity existed throughout the year 1922 and only one return is required.

We have heretofore held in a number of cases that the theory of affiliation is to tax, as a business unit, what really is a business unit. Appeal of Isse Koch & Co., 1 B. T. A. 624. In Appeal of American La Dentelle, Inc., 1 B. T. A. 575, we stated:

From July 1, 1919, liowever, Congress lias said that the generally recognized principle oí corporate identity was to be overridden for the purpose of the income and profits tax and that a consolidated return should be filed “if substantially all the stock of two or more corporations is owned or controlled by the same interests,” which is the situation here. From July 1, in other words, the separate existence ceased for tax purposes just as effectually as if under State statute the corporations had been consolidated for all corporate purposes.

Likewise, we said in Appeal of H. S. Crocker Co., 5 B. T. A. 537, at page 540:

It is our conception of the law that, for purposes of taxation, the affiliated group must be considered as a single economic unit. The requirement with respect to computing the taxes of an affiliated group upon the basis of a consolidated return was first introduced into the law to prevent avoidance and resulting injustice, either to the Government or to the taxpayer, as the case might be, and not to create that situation. The normal treatment in the case of an affiliated group as a single economic unit, therefore, is to disregard the internal structure, to break down the separate legal existence of subsidiaries, and to treat them in all respects, so far as taxation is concerned, as if they were unincorporated branches.

And again, at page 541, it was said:

The effect oí consolidation, in the language of congressional committees quoted in other decisions of the Board relating to affiliations, is to treat that as an economic unit which really is an economic unit. The statute should be so interpreted that consolidation can not be so carried out as to mate evasion possible, or so carried out as to make accidental differences result in tax. This can only be done by disregarding corporate lines in computing the income and treating the affiliated group as one corporation. When this is done it is clear that a transaction such as we have here results in no profit or loss to the affiliated group, being a change in form of a profit or loss previously realized and reflected in the assets or liabilities of one of the group.

Under the reasoning of these decisions, it appears that from January 1,1922, to March 14,1922, but one return was required.

An Act entitled “An Act to provide for the consolidation of national banking associations” (40 Stat. 1043, 1044), and which was approved November 7,1918, stated:

Any two or more national banking associations located within the same county, city, town or village, may, with the approval of the Comptroller of the Currency, consolidate into one association under the charter of either existing banks, on such terms and conditions as may be lawfully agreed upon by a majority of the board of directors of each association proposing to consolidate, and be ratified and confirmed by the affirmative vote of the shareholders of each such association owning at least two-thirds of its capital stock outstanding.

This Act contemplates a merger in that the associations shall continue under the charter of one of them. There is, therefore, created no new entity.

In Appeal of A. J. Siegel, et al., 4 B. T. A. 186, the first paragraph of the syllabus reads:

Under the 1918 amendment to the National Banking Act, three banking associations agreed to unite their business and assets and to continue the business under the charter of one of such associations, in accordance with the provisions of the statute. Held, that no new corporate entity was created, the effect of the statute being to merge the identity of two of such associations in the third, whose corporate existence continued.

The Revenue Act of 1921, section 239 (a)‘provided:

That every corporation subject to taxation * * * shall make a return, * * *.

Section 240 of the same Act permitted two or more affiliated corporations to make a consolidated return, thus showing that section 239 does not strictly require that “ every corporation ” shall file a separate return. We think that filing a return for the year 1922 meets the requirements of the statute and that “ every corporation ” involved has filed a return.”

Based on the foregoing, we agree with petitioner’s contention that but one return was required for the entire year 1922.

Reviewed by the Board.

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

Trammell and Green dissent.


author: Siefkin:

text:
    Stephen J. Slattery, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. J. Cameron, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Robert M. Tietz, Louise C. Tietz, Administratrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9312-9314.
    Promulgated January 10, 1928.

      FranJclin O. Parles, Esg., for the petitioners.

      M. N. Fisher, Esg., for the respondent.
   OPINION.

Siefkin:

As we construe the transaction set out in the above findings each of the three petitioners parted with a one-fourth interest in assets costing $75,000 or $18,750 each, and received (1) a twelfth interest (one-third of Miller’s one-fourth interest) in the remaining assets of the former partnership; (2) a one-third interest in $15,000 cash paid by Millar; arid (3) a one-third interest in a possible right to receive $4,818.94 (depending upon a future event which did not happen). We adopt the valuation placed by the parties upon Miller’s interest. Based upon such value the net assets of the partnership were $180,724.24.

The assets of the partnership excluding the assets sold, were thus of a value of $120,543.18, assuming that the consideration paid by Miller for the contracts was their value. Upon such basis each petitioner, at the time of the transfer, received an interest in property worth $10,045.26, cash of $5,000 and the possibility of getting $1,606.31 more. We, therefore, hold that in 1922, when the contingency governing the last item was still undetermined, each petitioner had sustained a loss of $2,098.43 which was deductible in that year. Until it was determined that each would not receive an additional payment of $1,606.31 that portion is not deductible.

Reviewed by the Board.

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


author: Littleton:

text:
    Wilkens & Lange, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 10649, 29037.
    Promulgated January 10, 1928.

      William /S'. Hammer, Esq., for the petitioner.

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

Littleton:

No deficiency has been determined by the Commissioner for the year 1919 and there is no allegation in the pleadings to that effect. The Commissioner erroneously stated in his deficiency notice mailed November 10, 1925, that the deficiency set forth was for the year 1919 but petitioner was not misled thereby. It filed a petition within 60 days for a redetermination and alleged that although the deficiency notice referred to 1919 the deficiency determined by the Commissioner was for the year 1920. On February 24, before the expiration of five years from the date petitioner filed its fiduciary return, if that return may be considered a proper return under the statute^ which it is not necessary for the Board here to decide, the Commissioner filed his answer with the Board alleging that the deficiency appealed from was for the year 1920, and admitted the allegations of the petition to that effect. This answer was forthwith served upon petitioner by the Board by registered mail. We are of the opinion that assessment and collection of the deficiency for 1920 is not barred.

Reviewed by the Board.

Order restoring the proceeding to the calendar for hearing in due course will he entered.


author: Phillips :

text:
    Terrell Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9681, 10384, 11831.
    Promulgated January 10, 1928.

      V. 0. Biggers, Esq., for the petitioner.

      J. W. Fisher, Esq., for the respondent.
   OPINION.

Phillips :

This proceeding was presented upon a stipulation setting out certain agreed facts and documentary evidence in support thereof. Substantially the same question which is before us was presented to the Supreme Court in Heiner v. Colonial Trust Co., Executor, 274 U. S. 731, and decided (on November 21, 1927) adversely to the position taken by petitioner. The only fact brought to our attention which might distinguish the present proceeding from the situation upon which the Supreme Court ruled is that in the present case the lands of the petitioner are expressly exempted from taxation, while the lands of the Osage Tribe of Indians are not. It was a lease from this latter tribe which the Supreme Court considered in the Colonial Trust Co. case. The members of that tribe could claim exemption from the income tax only upon the ground that the taxing statute should not be interpreted to include them. The lands of the Creek Tribe of Indians, however, are expressly exempted from taxation. Upon authority of Pollock v. Loan & Trust Co., 157 U. S. 429; Peck v. Lowe, 247 U. S. 165, and other decisions, it is contended that if the source of the income is exempt, so are the income and revenues derived therefrom. The situation of the lessee in the instant proceeding, however, appears to be no different from that of the lessee in the case before the Supreme Court. We regard the opinion in that case as controlling the decision of the question raised in this proceeding.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Trammell :

text:
    Philetus W. Gates, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11618.
    Promulgated January 10, 1928.

      Robert W. Be hupp, Esq., for the petitioner.

      A. E. Murray, Esq., for the respondent.
   OPINION.

Trammell :

The only issue in this proceeding is whether a liquidating dividend received in 1922 under the circumstances sot out in the findings of fact is a capital gain under the provisions of section 206 of the Eevenue Act of 1921 and taxable as such under the provisions of that section or whether it is a dividend within the meaning of section 201 and subject to the surtax imposed by section 211 of the Act.

The pertinent provisions of section 201 are:

(a) That the term “dividend” when used in this title * * * means any distribution made by a corporation to its shareholders or members, whether in cash or in other property, out of its earnings or profits accumulated since February 28, 3013, * * *
(b) For the purpose of this Act every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913; * * *
(c) Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 3, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by distributee.

Section 206 provides in part as follows:

(а) That for the purpose of this title:
(1) The term “capital gain” means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921;
(2) The term “ capital loss ” means deductible loss resulting from the sale or exchange of capital assets consummated after December 31, 1921;
(3) The term “ capital deductions ” means such deductions as are allowed under this title for the purpose of computing net income and are properly allocable to or chargeable against items of capital gain as defined in this section;
(4) The term “capital net gain” means the excess of the total amount of capital gain over the sum of the capital deductions and capital losses;
(5) The term “ ordinary net income ” means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions; and
(б) The term “capital assets” as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not conneeted with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or 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.

In Frank D. Barrow, 8 B. T. A. 276, we considered the question of whether income derived from a distribution in liquidation is taxable as a dividend within the meaning of section 201 of the Act of 1921, or is a gain or profit from the sale or other disposition of personal property. After reviewing the various income-tax acts passed subsequent to the adoption of the Sixteenth Amendment and prior to the Act of 1921 insofar as they related to the definition and taxation of dividends, and coming to a consideration of section 201 of the Revenue Act of 1921, we said:

* * * Congress dropped the distinction between liquidating dividends and dividends as defined in section 201 (a) which it has recognized in the 1918 Act, and declared anew its intent to tax as dividends all distributions of earnings accumulated since February 28,1913, whether the same be made in liquidation or otherwise, as was the case under the 1916 and 1917 Acts. This clearly appears from the provision of the new subdivision (c) that “any distribution * * * made * * * othenoise than out of (1) earnings or profits accumulated since February 28, 1913 * * * shall be applied against and reduce the basis provided in section 202 ” for determining gain or loss on the sale or other disposition of property. Earnings or profits accumulated since February 28, 1913, distributed in liquidation are to be excluded from the computation of gain derived or loss sustained from such distribution, and are to be taxed as other dividends, regardless of whether there is a gain derived or loss sustained from such distribution. The intent of Congress to remove the distinction between liquidating dividends and other dividends, and to make its definition of the term in section 201 (a) comprehensive and all-inclusive, so far as earnings or profits accumulated since February 28, 1913, are concerned, appears even more clearly from the history of the 1921 Act in process of enactment. The House Bill provided, in section 201 (c), for the treatment of liquidating dividends in the identical language of the 1918 Act. The Senate amendment eliminated the provision entirely and substituted as subdivision (c) the provision as to stock dividends appearing as subdivision (d) in the Act as passed. The House accepted the amendment with an amendment which appears as subdivision (e) in the Act as finally passed. The statement of the House Managers from the Committee on Conference relative to this provision, is:
“ The House bill provided that amounts distributed in liquidation of a corporation shall be treated as in part or in full payment in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. The Senate amendment strikes out this provision. The House recedes with an amendment, * * * [Referred to above.]”
There would seem to be no doubt that Congress intended its definition of “ dividends ” to include liquidating dividends to the extent of earnings accumulated since February 28, 1913.

The Revenue Act of 1918, section 201 (c) provides in part as follows:

* * * Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.

This provision is omitted in the Revenue Act of 1921.

A capital gain is a gain from the sale or exchange of capital assets. If under the 1921 statute a liquidation dividend is not to be treated as a gain or profit on the sale or exchange of assets, it follows that such a dividend does not come within the scope of section 206 (a) (1), that is, a taxable gain from the sale or exchange of capital assets.

Under section 201 of the 1921 Act the distribution in this case is to be taxed as other dividends. Frank D. Darrow, supra. It being so taxed, there is no provision of the statute which would permit the petitioner to elect to have the distribution taxed under section 206 (a) (1). The action of the respondent is approved.

Reviewed by the Board.

Judgment will he entered for the respondent.


author: Phillips:

text:
    McCabe Lathe & Machinery Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3072.
    Promulgated January 11, 1928.

      Henry Marniix, Esq., for tlie petitioner.

      J. Harry Byrne, Esq., for the respondent.
   OPINION.

Phillips:

Petitioner claims a deduction of $25,000 as compensation paid to P. F. Sheeran during 1919 for services rendered. The Commissioner disallowed this deduction on the ground that it was paid for other consideration than salary and treated it as dividends to the estate of J. J. McCabe.

Sheeran had been employed by J. J. McCabe, petitioner’s predecessor, as general sales manager for many years. He had received a salary of $30 a week and, after the end of the year when the profits had been determined, additional compensation varying from $2,065 in 1918 to $9,000 in 1915; $10,000 for 1916, and $15,000 for 1917. When petitioner was incorporated as of January 1, 1918, it took over the business of J. J. McCabe, including his assets and liabilities, in exchange for its stock. It continued the services of Sheeran as secretary and general sales manager on the same basis as he had worked for McCabe, paying him $30 a week as a drawing account during 1918, and for approximately the first four months of 1919. Sheeran devoted all his time to petitioner’s business. There was an agreement between himself and McCabe under which he was entitled to receive additional compensation for 1918. He claimed the amount to be $23,000. McCabe had become a mental incompetent in 1918 and the petitioner corporation disputed its liability to pay this amount. In April, 1919, upon failure to come to any agreement concerning additional compensation to be paid for 1918, Sheeran resigned and instituted suit against petitioner for $23,000 for additional compensation for 1918 and $6,000 for additional compensation for the time he had worked during 1919. At the same time he set up a competing business. The suit was compromised and under the terms of the compromise agreement Sheeran was paid $50,000 in settlement of his claim for compensation, and for other considerations, including giving up of the competing business and the release of all claims against the estate of J. J. McCabe arising out of contract or a will or codicil of J. J. McCabe.

The evidence establishes the existence of an agreement to pay Sheeran additional compensation based on profits, which compensation, judged by the amount paid in prior years, would have amounted to at least $15,000 for 1918 and $5,000 for the first four months of 1919. It is proper to treat the payment made in 1919 as having been made to that extent in discharge of an obligation for services rendered in 1918 and 1919. The question then arises whether the $15,000 paid in 1919 for services rendered in 1918 may be deducted in the year of payment, the petitioner having admitted no liability in 1918, but having disputed such liability and having accrued no amount upon its books in that year.

In computing net income the statute provides for the deduction of “ all ordinary and necessary expenses paid or incurred in the taxable year in carrying on any trade or business, including a reasonable allowance for salaries and other compensation for personal services actually rendered.” In Appeal of Bartles Scott Oil Co., 2 B. T. A. 16, the Board had before it a similar situation arising under the provisions of the statute allowing a deduction of taxes paid or accrued within the taxable year. There certain state inspection fees were payable at the time of inspection. Payment thereof was withheld until litigation instituted to test the validity of the statute had been completed and it was sought to deduct these fees in the 'year when paid. We there held that these fees accrued at the time of inspection and might not be deducted in the subsequent year. In the same manner compensation for services is to be deducted in the year in which the liability arose and the date of accrual may not be postponed by the debtor by disputing either the liability or the amount thereof.

The J. J. McCabe Punch & Shear Co., affiliated with petitioner, had leased a certain tract of land in 1918 for a term of five years and had erected thereon a building, said building to revert to the lessor at the end of the term. This building was to be used for the manufacture of punch and shear machines which were particularly adapted for the requirements of ship-building yards, for punching holes in and shearing the large plates used in the construction of ships.

Upon the signing of the armistice and the termination of the war, the demand for this company’s production ceased. The business was discontinued and the plant shut down early in 1919. The punch and shear company thereupon ceased to use the building for the manufacture of punch and shear machines and leased it for the remainder of the five-year term at a rental of $1,500 per year.

The Commissioner allowed as a deduction for the year 1919 depreciation at the rate of 20 per cent, being predicated on the five-year term of the lease. The petitioner contends that, having abandoned the building in 1919 for the purpose for which it was erected and having sublet it for the balance of the term at a definite amount of rental, it is entitled to a deduction, as obsolescence, of the difference between the net income from its lease and the depreciated cos* of the building as of January 1, 1919.

A deduction for obsolescence clearly contemplates that in addition to actual wear and tear, a further amount should be deducted because, due to some lmown reason, the asset will have to be discarded prior to the expiration of its normal life. In this case the building was not abandoned nor discarded when it ceased to be used for the manufacture of punch and shear machines. On the contrary the building was sublet by petitioner’s affiliated company at a rental which yielded $900 a year for the remainder of its term in excess of the rental which it was required to pay. It did not assign and sell to its lessee its interest in the property, it gave only the possession and use of the property for the remainder of the. term. ' During all the remainder of tfcse term of its lease petitioner’s affiliated company received an income from the use of the building. It is not material that this income was less than it might have been had the Punch & Shear Co. continued the use of the building for the purpose for which it was erected, nor is it material that it was used for a different purpose. The mere fact that a building is used for a purpose different than that originally intended does not determine the building to be obsolete. The loss which will be sustained over the remainder of: the lease, after allowing for exhaustion of the cost of the building, is deductible yearly and can not be anticpated upon the theory that obsolescence has taken place when, in fact, the building continues to be suitable for the purpose of its erection and all that has taken place is a reduction in its income-producing capacity. The determination of the Commissioner as to this issue is, therefore, sustained.

The petitioner claims that the Commissioner overstated the inventory of its affiliated company as of December 31, 1919, by including therein two punch and shear machines at a value of $8,000. It appears that the Commissioner has used the same value for inventory that was used by the affiliated company in making its tax return. While it is demonstrated that these two machines were useless and worth only their scrap value, there is nothing in the record from which we may learn whether or not these machines were included in the inventory in question and, if so, at what value. The inventory was in the records of the company but was not produced at the hearing. The witness thought it probable that these machines were included. Something more than such indefinite testimony is required before we may attempt to find that the inventory used by the company in its tax return and adopted by the Commissioner is erroneous.

Reviewed by the Boaed.

Decision will be entered accordingly upon 15 days’ notice, under Bule 50.


text:
    Wyoming Tie & Timber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 21370, 24574.
    Promulgated January 11, 1928.

      Richard JS. Fillius, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
   OPINION.

Siefkin :

The questions involved in this case are whether petitioner should be allowed a value for invested capital for two contracts paid in in 1915 for common capital stock of petitioner, and whether petitioner should be allowed to take depreciation in the amount of $6,860.15 on permanent improvements for the year 1920.

Section 325 (a) of the Revenue Act of 1918 provides that the term “ intangible property ” means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises, and other like property.

The term “ tangible property ” means stocks, bonds, notes and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property.

Section 326 (a) (4) provides that invested capital for any year means intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporations outstanding on March 3, 1917, whichever is lowest.”

The evidence in this case discloses that prior to April 10, 1915, the Wind River Timber Co. acquired two contracts, one with the United States Government, dated January 23, 1914, providing for the purchase of 125,000,000 feet of timber, and one with the Chicago & North Western Railway Co., dated June 12, 1913, providing for the sale to this company of 3,200,000 railroad ties, deliveries to be at the rate of 350,000 to 400,000 ties per year. The petitioner, shortly after its incorporation, entei’ed into an agreement with the Wind Eiver Timber Co. whereby petitioner, in exchange for $350,000 of its common capital stock, received all the assets and liabilities of the Wind Eiver Co. and the.assets of Wind Eiver Co. actually were taken over June 1,1915. The evidence in the case, which is meagre with regard to the records and operation of the Wind Eiver Co., discloses that the only assets which the petitioner received from the said company for the $350,000 of capital stock, were the two contracts. It is, therefore, necessary to determine the value of the contracts.

The evidence shows that the timber land obtained by the petitioner contained the best kind of tie timber and was located about 100 miles by wagon road from Eiverton, Wyo., but Wind Eiver could be utilized at its flood stage to float logs and ties to Eiverton, which afforded a market for lumber produced, and the by-products, such as sawdust, fence poles, and mine props. The market for lumber products reached as far eastward as Casper and as far westward as Lander. The freight rates on lumber from other sources handicapped the petitioner’s competitors. The contract with the railroad called for the delivery of the ties to a point on Wind Eiver near Eiverton. The price for No. 1 ties was to be 65 cents and for No. 2 ties 45 cents. It is shown that the cost of production of a No. 1 tie was about 46 cents and of a No. 2 tie, about 39 cents, including all expenses. The Wind Eiver Co. had delivered 33,395 ties to the railroad and there remained 3,166,605 ties yet to be delivered.

In view of the foregoing, we find that the value of the contracts is in excess of $197,025, and that amount should be included in invested capital. Since the petitioner has claimed only that amount as invested capital, it is unnecessary to determine whether the contracts are tangible or intangible property, as in either event $197,025 is within the statutory limitation.

With regard to the depreciation claimed for improvements for the year 1920, no evidence is submitted as to the dates on which the improvements were completed. It was testified that some were made in 1919 and some in 1920, and that all were completed and in use by October 31, 1920. From this evidence no determination can be made of the amount of depreciation on such assets up to October 31, 1920, and we are compelled to disallow the claim for the deduction.

Eeviewed by the Board.

Judgment tuill be entered on 15 days notice, under Bule 50.