author: Lansdon:

text:
    Appeals of W. S. Buck Mercantile Co.
    Docket Nos. 86, 2007.
    Promulgated February 21, 1927.
    1. Petitioner is engaged in tbe merchandise business on the installment sales plan. At the close of each operating year it set up on its books an account designated “ Reserve for cost to collect bad accounts,” and, in its income and profits-tax returns for such years, deducted from its gross income the amounts so added to the reserve as collection expense. Held, that such method of accounting does not clearly reflect income.
    2. Evidence of abnormalities in income or invested capital held insufBcient to entitle petitioner to relief under the provisions of section 328 of the Revenue Act of 1918.

      Battle MeCardle, Esq., for the petitioner.

      Briggs G. JSimpieh, Esq., for the Commissioner.
    These are appeals from determinations by the Commissioner of deficiences in income and profits taxes for the years 1918, 1919, and 1920, in the amounts of $3,206.37, $4,596.73, and $7,690.51, respectively. The issues are: (1) The addition, by the Commissioner, to the net income reported for the years 1918, 1919, and 1920, of the amounts of $7,362.76, $12,027.98, and $17,499.33, respectively, deducted by the petitioner as anticipated cost of collection and losses, in future years, of the outstanding accounts receivable at the close of each year; and (2) whether petitioner is entitled to have its profits taxes for the year 1918 determined in accordance with the provisions of sections 327 and 328 of the Revenue Act of 1918. Except for the issue of special assessment, which applies to the year 1918 only, the facts and issues, except as to the amounts involved, are identical for all years; therefore, by agreement of counsel, the appeals were consolidated and heard together.
    FINDINGS OF FACT.
    Petitioner, a Kansas corporation with its principal office at Kansas City, was organized on or about July 11, 1917, for the purpose of taking over that part, known as the Lincoln (Nebraska) branch, of the business theretofore conducted by the Price Mercantile Co. Throughout the years under consideration, it was engaged in the retail sale, on the installment plan, of house furnishings, such as bedspreads, blankets, clocks, lace curtains, rugs, silverware, and table linens. The, business policies, as they related to sales, collections, and methods of accounting, were precisely the same as those in effect during the ownership of the business by its immediate predecessor.
    Generally, petitioner’s sales are made through solicitors or agents who canvass industrial centers and country districts, going from borne to home, selling direct to the purchaser. The goods are usually carried on trucks by the agents, and delivery is made upon payment by the purchaser of the initial payment and reconveying title to the petitioner by deed of trust, without investigation as to the financial standing of the purchaser. The purchasers are usually of the laboring class, which is more or less transient.
    Salesmen are employed on a salary and commission basis. The initial payments for each sale, as received, are applied in their entirety by the petitioner to the payment of the salesman’s commission until the said commission has been paid in full. The salesman is held responsible for the sale, and accountable for the goods delivered, but after the purchaser makes the first installment payment, the salesman is relieved of any further responsibility for any loss which may occur through failure of the purchaser to meet subsequent installment payments. Should the purchaser default in the first payment, the salesman is required to stand one-half of any loss which may result from the transaction.
    The average sale seldom exceeds the sum of $25. The initial payment usually is from 5 to 10 per cent of the selling price, the balance being paid in weekly installments. The weekly installments are fixed in such amounts that the account will be paid within six months.
    Not more than 5 per cent of the total installment payments are made by mail or at the petitioner’s offices. The balance of the collections are made by the petitioner’s collectors. The latter are employed on a salary and commission basis, the commission being computed at a fixed percentage of the collectible accounts on the collector’s books. Frequently collectors find 'it necessary to make ' more than one call upon a customer to collect an installment which has become due.
    It is the accounting practice of the petitioner to charge oil, as bad debts, accounts of customers residing within the limits of territory covered by a city collector, after failure to make installment payments for a period of 60 days. In the cases of customers residing in districts covered by rural collectors, the accounts are charged off as bad debts after 90 days have elapsed from the date of the last installment payment. If, and when, further collections of installment payments are made upon accounts previously charged off as bad, these accounts are restored on the books. Only the net amount, representing the difference between the total accounts charged off and the total accounts restored, in any year, has been claimed as a deduction for bad debts in income-tax returns.

      The merchandise sold by the petitioner is subject to rapid and considerable wear and tear. It has been the petitioner’s experience that repossessed merchandise is usually in such condition that its resale can only be made at a loss. When goods are repossessed because of failure to meet installment payments, the customer’s account is credited with the amount of the unpaid balance of the selling price, and, at the same time, a like amount is charged on the books as the cost of repossessed merchandise. If the repossessed merchandise is still on hand at the close of the year, it is included in the inventory at its original cost.
    The petitioner’s books of account have been maintained in accord-anee with the accrual method .of accounting, and the net income reported in the income-tax returns, for the three years under consideration, has been computed in accordance with that method.
    At the time of taking over the business, the petitioner, following in principle the accounting practice of the predecessor owner, set up in its books of account an account designated “Reserve for cost to collect and bad accounts,” in the amount of $5,061.46, which represented 26 per cent of the book value of the accounts receivable taken over. Thereafter, and during the years under consideration, the petitioner has added annually to this reserve an amount equal to 26 per cent of the increase in the accounts receivable outstanding at the close of the year. The amounts thus added to the reserve each year have been deducted from income in the petitioner’s tax returns as collection expense. The amounts so deducted are, for the year 1918, $7,362.76; for the year 1919, $12,027.98; and for the year 1920, $17,499.33. The accounts receivable outstanding at the close of the year 1921 were, in the aggregate, $20,932.38 less than the aggregate outstanding at the close of 1920; hence, the petitioner reduced the reserve by the sum of $5,441.55, or 26 per cent of the decrease, which it included in taxable net income for that year. Upon audit of the petitioner’s income and profits-tax returns for the years involved, the Commissioner added the amounts so deducted to gross income for each of the several, respective, taxable years.
    The purpose for which this reserve account was established was to provide a reserve out of each year’s earnings, to take care of (1) the cost of collecting, in a later year, the accounts receivable outstanding at the close of each year, (2) such of those accounts which may in a later year prove to be worthless, and (3) losses which may be sustained in a later year upon the sale, at less than cost, of repossessed merchandise. This accounting practice has been adopted by at least two competitor companies. The following shows the condition of the reserve account at the close of each of the years under consideration, and the manner in which it was built up:

      Amount credited to reserve at time of taking over the business_$5, 061.46
    Amount added to reserve in 1917 (26% of increase of $16,848.98 in accounts receivable)_ 4,380.74
    Amount of reserve at close of 1917_ 9,442.20
    Amount added to reserve in 1918 (26% of increase of $28,182.35 in accounts receivable)- 7,362.76
    Amount of reserve at close of 1918- 16, 804. 96
    Amount added to reserve in 1919 (26% of increase of $46,397.45 in accounts receivable)- 12,027.98
    Amount of reserve at close of 1919- 28, 832. 94
    Amount added to reserve in 1920 (26% of increase of $67,308.12 in accounts receivable)_ 17,499.33
    Amount of reserve at close of 1920- 46, 332.27
    The entire collection expense incurred in each of the years under consideration, and the total bad debts charged off on the books during each of those years, have been claimed as deductions in the petitioner’s income-tax returns.
    From the date of organization until at or about October 1, 1919, the business of petitioner company was carried on at the personal residence of its secretary. During that period the petitioner maintained no other place for the transaction of its affairs. The facilities of the secretary’s residence, such as light and telephone, were used in the conduct of petitioner’s business. During the period stated, no rental was paid to the secretary for the use of his residence and its facilities for office purposes.
    Until June 1, 1918, the secretary was in the employ of the predecessor owner of the business, notwithstanding which he attended to a considerable part of petitioner’s business affairs, matters of office routine, and keeping the books of account. For these services he was paid, during the first five months of the year 1918, compensation at the rate of $120 per month.
    Prior to the organization of the petitioner, its president had been employed for approximately twenty years by the ¡iredecessor owner of the business, as general manager. His compensation, including commissions, was from $10,000 to $12,000. During the first five months of 1918, he devoted his entire time to petitioner’s business affairs, and during that period, was paid compensation at the rate of $250 per month, His salary has since been increased to $16,000 per annum.
    The gross sales shown by the return for the year 1918 amounted to $227,402.18. The total deduction claimed in that return, as compensation of officers, is $8,100.
    During the year 1918, the total capital stock outstanding was $50,000, and the petitioner’s average indebtedness for the last nine months of that year was $59,192.47.
   OPINION.

Lansdon:

It should be stated at the outset, that while the petitioner was engaged, during all of the years under consideration, in the sale of merchandise on the installment plan, the appeal raises no question as to its right to compute its net income on the installment basis. The books of account were maintained in accordance with the accrual method of accounting; the net income reported in the returns of the several years under consideration was computed in accordance with that same method; and the petitioner contends that no other method of accounting will clearly reflect its net income.

The first issue raised is whether the additions made to the “Re- ■ serve for cost to collect and bad debts,” in each of the years under consideration, represent unrealized profits which should be excluded from gross income, or, in the alternative, whether the amounts thus set aside to the reserve in each year constitute allowable deductions in computing taxable net income. The petitioner contends that a portion of the annual increase in accounts receivable represents unrealized profits and should be excluded from gross income, because, in a later year, there will be expenses incurred in the collection of these accounts and some of the accounts will prove to be worthless. It submits an alternative contention, that the annual additions to the reserve are allowable deductions from income, under the provisions of section 234 (a) (4) of the Revenue Act of 1918, as losses sustained during the taxable year, and not compensated for by insurance, or otherwise.

The accrual method of accounting.requires that at the end of every accounting period all income which has been earned must be accounted for as income accrued in that period. This is true notwithstanding that the income is not due and will not be collected until some future date. Appeal of Owen-Ames-Kimball Co., 5 B. T. A. 921. The increase in the accounts receivable, in any one of the years under consideration, resulted from sales transactions entered into and completed within the year. All of the incidents which entitled or required the petitioner, under the method of accounting employed, to accrue these accounts receivable and the profits represented thereby on its books of account, had taken place before the close of the year. There remained nothing further to be done on the part of the petitioner lawfully to entitle it to receive the full amount of these accounts. The acts of sale and the performance by the petitioner of all of its obligations under the sales contracts, determined the earning of the income. There can hardly be any question that the income represented by the increase in the accounts receivable in each of the years under consideration was earned in those respective years. The statutory definition of gross income, as laid, down in section 213(a) of the Bevenue Act of 1918, does not differ from the accounting conception of gross income. In a merchandising business, such as that in which the petitioner is engaged, the “gains, profits, and income derived * * * from * * * sales” are represented by the excess of the aggregate selling price over the cost of goods sold. This is a simple and elementary principle of accoiinting, which is generally understood, and needs no elucidation on the part of this Board. If the income is to be reduced in some manner by the estimated expenses of collecting it at some time in the futiire and the estimated amount thereof which may not be collected, then, the reduction must take the form of a statutory deduction from income, authority for which must be found under the provisions of section 214 (a) or section 284 (a) of the Bevenue Act of 1918. The estimated amounts, if actually earned, can not be excluded from gross income on the ground that they are unrealized profits.

It is apparent from the mere reading of the provisions of section 214 (a) (4) of the Bevenue Act of 1918, and the corresponding provisions of section 234 applicable to corporate taxpayers, upon which the petitioner relies as authority for its alternative contention that the annual additions to the reserve are proper deductions from gross income as losses, that those sections afford no basis for its contention. Both of the sections referred to provide for the deduction of “Losses sustained durmg the taxable year” and. not of Josses which may or may not be sustained in some future year. Nor do we upon examination of the provisions of those entire sections— and they constitute the whole authority for the deduction of business expenses — find any basis for the deduction of these annual additions to the reserve. On the contrary, we find that the deduction to be allowed for bad debts is the total debts ascertained to be worthless and charged off within the taxable year,” and in the case of business expenses “ all the ordinary and necessary expenses paid or incurred during the taxable year.” There was no ascertainment during the taxable years in question that a portion of the outstanding accounts receivable, at the close of each of those years, were worthless; nor were the expenses incident to the collection of those accounts at some future date, paid or incurred within the taxable years. See Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008.

Certain facts were developed by testimony during the hearing which, though not so indicated at the time by counsel, were apparently intended to show that the petitioner was entitled to have its profits taxes for the year 1918 determined under the special relief provisions of the applicable act. íliose facts are entirely too meager and insufficient to warrant a conclusion that there existed, during the year 1918, any abnormalities affecting net income or invested capital to such an extent as to work upon the petitioner an exceptional hardship which, if true, would have entitled it, under the provisions of section 327 (d) of the llevenue Act of 1918, to have its profits tax liability determined in accordance with section 328 of the Act. Therefore, the relief for which petitioner prays must be denied.

Judgment will he entered for the Commissioner.

Phillips dissents.


source: Caselaw Access Project

author: MoRRis:

license: Public Domain

text:
    J. W. Forgeus, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2881.
    Promulgated February 21, 1927.
    1. Certain expenditures helé to be deductible as ordinary and necessary expenses.
    2. Useful life of building determined.
    3. Legal expenses paid in defending a suit arising out of a trans- • action directly connected with the petitioner’s business are ordinary and necessary expenses and as such are deductible.

      J. S. Lamson, Esq., and Fred D. Bullock, C. P. A., for the petitioner.

      A. C. Maclcay, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $1,180.86, income tax for 1919. Three questions are presented, namely, whether certain expenditures constituted capital items or ordinary and necessary expenses, the proper rate of depreciation allowable on petitioner’s building, and the deductibility of certain legal expenses sustained in defending a suit.
    FINDINGS OF FACT.
    The petitioner is a resident of Santa Cruz, Calif., and is engaged in farming and in buying, selling and developing farm properties.
    In 1915 he acquired a business property at Tenth and Broadway, Oakland, consisting of a two-story brick building which had been erected in 1869. The first floor was occupied by stores and the upper floor contained offices. The building had a frontage on Broadway of 100 feet, 6 inches and a depth and frontage on Tenth Street of 125 feet. The useful life of the building at the date of acquisition was 15 years.
    The basement under a portion of the sidewalk had been excavated at the time the building was erected. This part of the sidewalk was supported by 3 by 12 timbers which had become rotten and decayed. In 1919 the danger of a cave-in of the sidewalk necessitated the immediate repair thereof. The petitioner contracted with an architect to make all necessary repairs and also to remodel' a saloon in the building for use as a drug store. In the repair of the sidewalk it was necessary to remove most of the supporting timbers and replace them by new timbers. The old construction of 8 by 12 timbers supported 2-inch planks, on top of which was a layer of sand and then the sidewalk. Removal of the planks and timbers allowed the sand to filter through, so that the new timbers had to be wedged up to support the sidewalk. In some places the new timber had to be placed alongside of old, decayed supports infected with dry rot. The new lumber was of all sizes and was sprayed with creosote to resist infection. The holes in the sidewalk were repaired; leaking ventilators and sidewalk lights were cemented and made water tight. Basement floors were repaired, and in one place a new floor was put in to replace one that had decayed, the new flooring constituting about one-eighth of the total basement floor area. Window cords were replaced, and locks and other sundry items repaired. In the saloon certain repairs were made, such as painting of the old woodwork, wiring and plumbing. This work was exclusive of remodeling. The total cost of all the work was $7,500, of which $2,800 was for repairs to the sidewalks, $500 for the floors, locks, window cords and miscellaneous work, and $300 for wiring, plumbing and repainting in the saloon, exclusive of the new work.
    On or about November 24, 1905, the petitioner and one Daniel W. Johnston purchased a ranch of approximately 14,000 acres, situated in Colusa County, California, with certain personalty thereon, consisting of sheep, hogs, cattle, horses, mules, and farm implements of all kinds. In 1919 the agents who negotiated the sale of this property to petitioner and Johnston filed suit for an accounting, alleging that there was an oral agreement whereby the former were to receive as compensation for making the sale a one-fourth interest in the moneys and property to be received on the subsequent sale thereof. The complaint alleged that there had been sales of portions of the property and that the petitioner and Johnston had never accounted to the complainants for their one-fourth share. The allegations of the complaint were denied, and, upon trial, judgment was rendered for the defendants.
    The petitioner in defending this suit paid out in 1919 attorney fees and expenses of trial $2,552, distributed as follows: Attorney fees, $2,150; cost of taking depositions, $235; and expenses incident to trial, $167. During the taxable year petitioner paid $12.50 to an attorney for preparing certain papers connected with his business, and also $50 for the preparation of his income-tax return.
    The Commissioner disallowed the deductions for repairs and legal expenses, holding that the items should be capitalized. He allowed a depreciation rate on the building of 2y2 per cent, based on a cost of $60,000.
   OPINION.

MoRRis:

We are satisfied from the evidence that of the $7,500 expended in the year 1919, $3,600 constituted ordinary and necessary expenses which are deductible in computing the petitioner’s net income for that year. See Appeal of Illinois Merchants Trust Co., 4 B. T. A. 103. The building acquired by the petitioner in 1915 was constructed in 1869. Based on the uncontroverted evidence that its useful life from the date of acquisition was from 10 to 15 years, we are of the opinion the petitioner is entitled to a depreciation allowance at the rate of 6% per cent on the cost of $60,000, which was used by the Commissioner.

The Commissioner contends that the expenses incident to the suit which was brought against the petitioner in 1919 are capital -expenditures, as they represent the cost of quieting title to property. It appears, however, that the complainants did not contest the validity of the title of the defendants, but instituted suit for an accounting under an oral agreement that they were to share, as compensation for making the sale, in the proceeds of the subsequent sale thereof. It was a suit on a contract for compensation and not an attack on the title to the property. The business of the petitioner was, in addition to farming, developing country properties and buying and selling lands. The litigation in question clearly arose out of a transaction directly connected with his business. The expenses incident to such litigation, amounting to $2,552, are therefore deductible.

The items of $12.50 paid to an attorney for preparing certain papers connected with his business, and $50 for the preparation of his income-tax returns are also deductible as ordinary and necessary business expenses. In the Appeal of Charles Henry Mattlage, 3 B. T. A. 242, we held that an amount paid for the preparation of an individual Federal income-tax return was not deductible. It did not appear in that case, however, that the expenditure was in connection with the taxpayer’s trade or business.

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


author: SteRniiagen:

text:
    Nature’s Rival Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5147.
    Promulgated February 24, 1927.
    The entire capital stock of taxpayer corporation was issued to its organizers solely for tangible property paid in, and there was paid in, at the same time, the good will and iiatent rights of a predecessor corporation, whose capital stock had been purchased by the organizers of the taxpayer and canceled. Held, that the value of the good will and patent rights may not be included in invested capital.

      E. E. Gore, G. P. A., for the petitioner.

      A. II. Fast, Esq., for the respondent.
    This proceding involves an aggregate deficiency of $1,246.55 for 1919, 1920, and 1921, arising from the refusal of the respondent to include in invested capital certain good will alleged to have been acquired by the petitioner, and also from his reduction of invested capital by the amount of additional tax claimed to be due for previous years, by reason of the same alleged error.
    FINDINGS OP PACT.
    The petitioner is an Illinois corporation with its principal place of business at Chicago. It is engaged in the business of manufacturing corset accessories.
    Clarence Mayer and Samuel YafEe are the organizers and sole stockholders of the petitioner. On or about October 8, 1909, they entered into the following agreement with E. I. Rosenfeld and Wm. F. Johnson, sole stockholders of the Natures Rival Co., an Arizona corporation, as follows:
    This agreement entered into this 8th clay of October, 1909, between E. I. Rosenfeld and Wm. F. Johnson, parties of the first part, and Clarence Mater and Samuel Yaffe, parties of the second part, Witnesseth :
    That Whereas the parties of the first part being the owners of all the capital stock in Nature’s Rival Company, a corporation organized under the laws of Arizona, and being desirous of selling the same, and the parties of the second part being desirous of purchasing said capital stock,
    It Is Therefore Aoreed that the parties of the first part will assume and pay • and obtain releases from all liabilities of said Nature’s Rival Company to The Fiduciary Company, E. W. Pardridge and Mrs. E. Wainright.
    The parties of the second part agree that in payment for the above stock they will give their notes of even date with this agreement, payable to Wm. F. Johnson, Trustee for the aggregate of Twelve Thousand Seven Hundred and Fifty ($12,750.00) Dollars, due as follows:

      $100.00 clue ten (10) days from date;
    500.00 “ January 1st, 1910;
    500. 00 “ July 1st, 1910;
    500. 00 “ January 1st, 1911;
    500.00 “ July 1st, 1911;
    1150.00 “ January 1st, 1912;
    1250.00 “ July 1st, 1912;
    1250. 00 “ January 1st, 1913 ;
    1750. 00 “ July 1st, 1913 ;
    1750.00 “ January 1st, 1914;
    1750.00 “ July 1st, 1914;
    1750,00 “ January 1st, 1915;
    said notes to bear interest at the rate of seven (7%) per cent up to and including January 1st, 1912, and six (6%) per cent thereafter until all are fully paid.
    It is understood by all the parties hereto that the parties of the second part upon the delivery to them of the stock above named are to make such arrangements with the remaining creditors of said Nature’s Rival Company as will enable said second parties to and that they will at once organize a corporation of the same name under the laws of the State of Illinois with a fully paid up capital stock of ten thousand dollars ($10,009.00), and that all of said capital stock will be delivered to Wm. F. Johnson, Trustee, to be held by him as security on the notes above mentioned, to be released by said Wm. F. Johnson at the ratio in which said notes are paid.
    It Is Further Agreed that the parties of the second part shall have thirty days in .which to complete the organization of the last named corporation, and in the event that such organization is not completed by the parties of the second part, the stock hereby transferred to the parties of the second part shall be re-transferred to the parties of the first part with the assets of the said Nature’s Rival Company in the same condition as at the present time and the notes above mentioned returned to the parties of the second part.
    (Signed) E. I. Rosenfeld
    (Signed) Wm. F. Johnson
    Parties of the first part
    (Signed) Clarence Mayer
    (Signed) Samuel Yafire
    Parties of the second part.
    The notes agreed upon in the contract were delivered and were subsequently paid in full.
    The Nature’s Rival Co. of Arizona owned the right to manufacture certain bust forms under a patent owned by the Nature’s Rival Form Co. It had done extensive advertising before the sale of its stock to Mayer and Yaile, and it possessed lists of its customers. These were its only assets.
    The Nature’s Rival Co. of Arizona was indebted to the Nature’s Rival Form Co. for unpaid royalties. To insure the proper completion of its plans, it entered into a contract on or about October 21, 1909, with W. F. Johnson, as trustee for the Nature’s Rival Form Co., providing for the payment of $3,250, to settle the claims of that company against the Arizona corporation. Notes were issued for that amount and were subsequently paid.
    The petitioner was duly organized and Mayer and Yaffe put $10,000 into the business in cash and merchandise, receiving therefor capital stock at par in a like amount, which was deposited with the trustee as provided in the agreement set forth above.
    The stock of the Nature’s Rival Co. of Arizona was canceled and Mayer and Yaffe turned over to the petitioner all rights and privileges in the good will and patents of that company and the Nature’s Rival Form Co. which they had acquired in their individual capacities.
    It was agreed that the petitioner should reimburse them as soon as it was financially able to do so, but, in order that its credit might not be impaired, the liability would not be placed on the books.
    By 1913 the petitioner had accumulated a surplus of $40,000 and new stock was issued to Mayer and Yaffe.
    The outstanding capital stock of the petitioner on March 3, 1917, was in excess of $138,000.
   OPINION.

SteRniiagen:

From the evidence it is not possible to decide that the petitioner’s invested capital should include any amount for the alleged good will or other intangible property. The statutory invested capital includes intangible property only when “ paid in for stock or shares.” The evidence clearly shows that the only property paid in for stock or shares at the time of organization was $10,000 cash and merchandise which was paid in for $10,000 of stock. This has been allowed in invested capital by respondent. The evidence is also clear that the intangible property acquired from the Arizona Company and the Form Company was turned in to the petitioner at the same time. It was of such a nature that apart from the business it was of no value and hence it would be idle to argue that it was withheld by the individuals until 1913. And the witnesses testified that it was not withheld but was at once turned in to the new company. This being so, such value as it had could onfy be a paid-in surplus. If so, it was not within the statute. Herald-Despatch Co., 4 B. T. A. 1096. The $40,000 new stock which was issued in 1913 was for earned surplus which was, of course, within invested capital as such, and a stock dividend gave it no new or additional status under the statute. Valdosta Grocery Co., 2 B. T. A. 727. Neither the original minutes nor those covering the 1913 dividend are in evidence and it is difficult to know the true legal significance of what happened. There is also no clear evidence of how the 1913 capitalization was accounted for on the books. In this state of the record, and considering what we l’egard as the probabilities, we must sustain the Commissioner.

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


author: Littleton:

text:
    E. L. Thomas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9213.
    Promulgated February 24, 1927.

      Forrest Andrews, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
   Littleton:

The Commissioner determined a deficiency in income tax of $1,176.10 for the calendar year 1921, which petitioner claims is erroneous in so far as it results from the disallowance of a deduction from gross income of a debt of $8,700 alleged to have been determined to be worthless and charged off within the taxable year 1921.

FINDINGS OF FACT.

Petitioner is a resident and citizen of Knoxville, Tenn., where he is employed as southern manager of the Sullivan Machinery Co. On January 1, 1920, one C. A. Bray was indebted to petitioner in the amount of $6,000 for which petitioner held Bray’s note for that amount, to which was attached 60 shares of the capital stock of the Thomas-Bray Co., an Ohio corporation engaged in selling automobile accessories. On October 20, 1920, Bray became further indebted to the petitioner in the amount of $2,700 for which he gave his promissory note in that amount, to which was attached as collateral 27 shares of the stock of the Thomas-Bray Co. These notes fell due in the latter part of 1920 and were not paid. Petitioner’s efforts to collect the debts were unsuccessful. Bray was without funds or property from which petitioner could collect any portion of the amount due. All of Bray’s assets other than the stock which the petitioner held as collateral to the notes had been taken over and sold by the other creditors, and, at the end of 1921, Bray was indebted in considerable amounts to persons other than petitioner. The 87 shares of stock which petitioner held as .collateral to the notes were worthless at the end of 1921. Petitioner determined the debt of $8,700 to be worthless at the end of 1921 and charged off the same and deducted the amount thereof from gross income in his income-tax return for that year.

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


text:
    Mary E. Kavanaugh, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9781.
    Promulgated February 24, 1927.

      Mary E. Kavanaugh pro se.

      W. F. Gibbs, Esq., for the respondent.
    The Commissioner determined a deficiency of $258.19 for the calendar year 1920. Petitioner claims that the Commissioner erred in subjecting a liquidating dividend of $3,739.87 to normal tax.
    FINDINGS OF FACT.
    Petitioner is a resident of Wausau, Wis., and during the taxable year 1920, and prior thereto, she was a stockholder in the Kavanaugh-Farrell Co., a Wisconsin corporation. During the year 1920 the Kavanaugh-Farrell Co. disposed of its stock of goods and went out of business. The petitioner owned 17 shares of the stock of the said Kavanaugh-Farrell Co. which were purchased by her on January 31, 1913, at par of $1,700. The amount received by petitioner as a final distribution in 1920 was $5,439.87.
    The petitioner filed an income-tax return for the calendar year 1920 and included therein her distributable share of the proceeds of liquidation in excess of the original investment, subject, however, to surtax only. In the audit of the return the Commissioner subjected the distribution above referred to to both normal and surtax.
   OPINION.

Littleton:

The facts in this proceeding are stipulated and the only issue presented is whether the liquidating dividend in excess of the cost of the 17 shares of stock of the Kavanaugh-Farrell Co., which was dissolved in 1920, is subject to the normal tax. The Commissioner held that it was and the petitioner claims that this was an error. The Board has heretofore held that under the provisions of the Revenue Act of 1918 a liquidating dividend is subject to both the normal and surtax. See Appeal of John K. Greenwood, 1 B. T. A. 291, and Appeal of J. E. Chandler, 3 B. T. A. 146.

Judgment will be entered for the Commissioner.


author: Littleton :

text:
    Frederick Bloomfield, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6501.
    Promulgated February 24, 1927,

      Theodore B. Benson, Esq., for the petitioner.

      L. C. Mitchell, Esq., for the respondent.
   Littleton :

The Commissioner determined a deficiency of $1,585.68 for the calendar year 1922. In computing the gain or loss upon the sale of 8.23 acres of land in the year 1922 the Commissioner determined that the fair market price or value thereof on March 1, 1913, was $19,000, whereas petitioner claims that the value on that date ■was $32,000.

' The parties are in agreement as to the cost and sales price of the property, and the only dispute between them is the March 1, 1913, value, and this is the only question urged at the hearing.

FINDINGS OF FACT.

Petitioner is a resident and citizen of Los Angeles, Calif., and during the year 1922 was married and living with his wife. In the year 1922 petitioner sold 8.23 acres of land on Sunset Boulevard, Los Angeles, Calif., the fair market price or value of which on March 1, 1913, was $20,500.

Decision will be entered on 15 days'1 notice, under Rule 50.


text:
    Wm. A. Pringle and Alton A. Richardson, Executors, Estate of Wm. A. Philpott, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7176.
    Promulgated February 24, 1927.

      George M. Tuttle, Esq., for the petitioners.

      W. F. Gibbs, Esq., for the respondent.
    The Commissioner determined a deficiency in estate tax of $131.95.
    FINDINGS OF FACT.
    Wm. A. Pringle and Alton A. Richardson are the duly qualified and acting executors of the estate of Wm. A. Philpott, Jr., who died December 29,1922. At the time of his death Philpott was the owner of 49 shares of the capital stock of the Philpott & Leuppie Co. and 5 shares of the capital stock of the J. L. Morrison Co. of Illinois.
    The executors included the 49 shares of stock in the estate-tax return at the value of $7,840 at the date of the death of Philpott. The Commissioner determined that the value at that time was $13,865. The 5 shares of stock were returned by the estate at a value of $500 and the Commissioner determined that these shares had a total value of $8,000.
   OPINION.

Littleton :

The executors claim in the petition filed that the value placed by the Commissioner upon the stock mentioned was excessive and asked that the Board fix the value of the 49 shares at $11,025 and the value of the 5 shares at $625.

The petition alleges that the Commissioner based his determination upon the book value of the stock and that this value was in excess of the price at which the stock could have been sold by a willing seller to a willing buyer on December 29, 1922. In his answer the Commissioner denies that his valuation of the stock was based upon an estimated book value and that the valuation placed thereon by him is in excess of the fair market value of the stock.

No evidence was submitted by petitioner to show that the Commissioner’s valuation was erroneous. The evidence submitted by the estate to the Commissioner at the time the question of the tax liability was pending before him in support of their contentions is not before the Board and the allegations of the petition are not proof of the facts. See Buie 29 of the Board’s Buies of Practice, April 1, 1926. In these circumstances we affirm the Commissioner’s determination.

Judgment will he entered for the Commissioner.


text:
    L. S. Weeks Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2604.
    Promulgated February 24, 1927.

      Held, that the petitioner is entitled to compute its income under the provisions of section 212(d) of the Revenue Act of 1926.

      T. J. Riordan, Esq., and P. G. Sheehy, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    The respondent has asserted deficiencies for the fiscal period May 12, 1918, to April 30, 1919, the fiscal period May 1 to December 31, 1919, and the calendar year 1920, in the respective amounts of $918.63, $591.25, and $3,510.39. But one issue is involved: Whether the petitioner is entitled to have its taxable net income, for the periods and year under consideration, determined upon the installment sales basis.
    FINDINGS OF FACT.
    Petitioner, a California corporation with its principal office at Stockton, is engaged in the business of selling automobiles, automobile accessories and parts, and in the conduct of a general service station. It commenced business on or about May 12, 1918.
    During the periods and year under consideration, the petitioner sold automobiles on a cash basis and also on a deferred payment or conditional sales plan. Under the latter plan purchasers executed a conditional sales contract which provided, among other things, that title to the automobile described therein remained in the vendor until full payment was made. The initial payments varied; in some cases they exceeded and in other cases they were less than 25 per cent of the full purchase price. In some cases used cars were accepted from purchasers as part payment, and in such cases the value allowed on the used car was treated as the initial payment.
    The petitioner maintained a ledger account with each purchaser of an automobile on the conditional sales plan. Upon execution of a conditional sales contract, the purchaser’s account was charged with the full purchase price of the automobile and credited with the initial payment, including the “ trade-in ” value of the used car. Thereafter, the account was credited with the deferred payments as and when made.
    The petitioner’s books of account were maintained on the accrual basis, and were so kept that an accurate determination of its net income, for all of the accounting periods under consideration, may be made upon the installment sales basis. The net income reported in the original returns which the petitioner filed for the fiscal periods ended April 30, 1919, and December 31, 1919, was computed on the straight accrual basis, all sales under conditional sales contracts being treated as closed and completed transactions. In an amended return which it filed for the fiscal period ended April 30, 1919, and in the original return for the calendar year 1920, the net income shown was computed according to the petitioner’s conception of the installment sales method. The respondent has held that the petitioner is not entitled to compute its net income according to the installment sales method; and the deficiencies which he has asserted are based upon the net income computed upon the straight accrual basis.
   OPINION.

Lansdon:

The petitioner, relying upon the provisions of sections 212(d) and 1208 of the Revenue Act of 1926, contends that the income from sales of automobiles under conditional sales contracts, for the accounting periods under consideration, should be determined on the installment sales basis. The respondent has refused to compute the income upon the basis contended for by the petitioner and denies that the petitioner is entitled to have its income computed upon such basis, because the books of account were not maintained upon that basis. The respondent, in defense of his action, relies upon the provisions of section 212(b) of the Revenue Act of 1918, and the same section of the Revenue Act of 1926, which provide that “the net income shall be computed * * * in accordance with the method of accounting regularly employed in keeping the books.” Section 212(d) of the Revenue Act of 1926, so far as pertinent to the matter under consideration, provides as follows:

Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price.

B37 the provisions of section 1208 of the Revenue Act of 1926, the above provisions of section 212(d) are to be retroactively applied in computing the net income under the Revenue Act of 1918. This method of reporting income from installment sales is commonly referred to as the “ installment sales method.” The right to return income from installment sales in accordance with this method is extended to any person “ who regularly sells or otherwise disposes of personal property on the installment plan.” Nothing is found in the provisions of section 212(d) which can be construed as limiting them, in their application, to persons who employed the installment sales method in keeping the books of account. Had Congress intended so to limit these provisions of the statute, it could have expressly made their application subject to the provisions of subdivision (b) of the same section. The fact that Congress did not do so indicates quite clearly to our minds that the provisions of subdivision (d) were intended as an exception to the hard and fast rule laid down in subdivision (b) that the net income is to be computed in accordance with the method of accounting regularly employed in keeping the books of account.

Under the authority conferred upon him by the above provisions of section 212(d) to prescribe regulations for the proper enforcement thereof, the respondent, in his Regulations 69, has laid down the rules for the reporting of income upon the installment sales basis. In article 42 of those Regulations, it is provided:

The provisions of tbis article shall be retroactively applied in computing income from the sale of personal property under the Revenue Acts of 1916, 1917, 1918, 1921, and 1924, or any such Acts as amended. (See section 1208.) Any dealer in personal property on the installment plan whose boohs of account contain adequate information and were tept so that income can he accurately computed on the installment basis in accordance with the provisions of this article may file amended returns accordingly, and the excess of the amount of any tax previously paid over tlie tax as computed on tlie installment basis as herein provided shall, subject to the statutory period of limitations properly applicable thereto, be credited or refunded as provided in section 284 and articles 1301-1806.

Thus it will be noted that the attitude which the respondent has assumed toward the rights of the petitioner in the case at bar is distinctly in contravention of the policy enunciated in his regulations. We think the above quoted provisions of the regulations correctly construe the statute; and are applicable to the facts in the case at bar. During the fiscal periods and year under consideration, the petitioner was regularly engaged in the sale of personal property on the installment plan; its books of account were so kept that adequate data is available therefrom upon which to predicate an accurate computation of income from installment sales; and it has elected to exercise the right to report its income from installment sales upon the installment sales basis. Nothing further is required by the statute.

The evidence is insufficient to enable us to determine whether the petitioner’s computations of income from installment sales are accurate or not. What the record contains in that respect is not entirely clear. It would appear that the petitioner is attempting to exclude from the income of each of the accounting periods, a pro rata part of the profits as unrealized, without including the same in the income of the next succeeding year when the deferred payments were completed. For these reasons, we are unable to approve the petitioner’s computations of income. It is entitled, however, to have its income from sales of automobiles on the conditional sales plan determined in accordance with the provisions of section 212(d) of the Revenue Act of 1926.

Judgment will be entered on 15 days’ notice, umder Rude 50.


text:
    J. F. Irwin Fuel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9030.
    Promulgated February 24, 1927.
    During tbe years 1918 and 1919 petitioner was entitled to classification as a personal service corporation.

      Frederick Schwertner, Esq., L. Harold Sothoron, Esq., and J. Clarence Brennan, Esq., for the petitioner.

      Arthur H. Fast, Esq., for the respondent.
    The petitioner, believing that it was entitled to classification as a personal service corporation, filed personal service corporation returns for the calendar years 1918 and 1919, and its four stockholders included in their individual income-tax returns their distributive shares of the net income of the corporation and paid the tax thereon.
    The Commissioner denied the petitioner’s claim for personal service classification upon the ground that its income could not be ascribed primarily to the activities of the principal stockholders and that capital was a material income-producing factor, and determined deficiencies in income and profits tax of $18,061 for the year 1918 and $1,627.14 for the year 1919. Petitioner claims that the Commissioner’s action in refusing to classify it as a personal service corporation is erroneous. Petitioner also alleges that if its claim for classification as a personal service corporation is denied, the Commissioner is barred by the statute of limitations from assessing any tax against it for the reason that it was dissolved in 1920 and that the agreements entered into with the' Commissioner and filed by J. F. Irwin, president of the J. F. Irwin Fuel Co., in 1924 and 1925, were void and of no effect.
    STNDINCfS OP PACT
    Petitioner is a Pennsylvania corporation organized on March 1, 1917, and during the taxable years was engaged in selling coal for others upon commission, with principal office at Latrobe. From 1902 to 1908, J. F. Irwin was engaged as a mining and civil engineer. From 1908 until March, 1917, he was vice president and general manager in charge of production and sales of the Unity-Connells-ville Coke Co., Latrobe, Pa. In this work he devoted practically all of his time and efforts to selling coal and became well known to the coal consuming public. In 1917 petitioner entered into contracts with certain corporations and individuals engaged in mining and selling coal to sell coal for them upon a commission of usually 10 cents a ton. Petitioner’s activities throughout the years involved consisted of selling coal under the terms of these contracts, all of which were the same, and were as follows:
    Whereas, the said party of the first part [the operating company] hereby appoints the party of the second part [petitioner] its sole selling agent for its entire production of coal and coke, on the terms and conditions following:
    Now therefore in consideration of a commission fixed at the end of each month by the party of the first part, but in no case to exceed ten per centum (10%) of the gross sales of the party of the second part; the said party of the second part agrees and binds himself as follows:
    The said party of the second part agrees that it will not quote or accept prices for coal or coke except those fixed daily by the party of the first part.
    The said party of the second part has the right to buy coal and coke from sources outside the operations owned by the party of the first part, but both, the commissions allowed the party of the second part and the price paid to the producer as well as the price charged the consumer must be assented to by the party of the first part.

      This agreement can be cancelled by either party upon sixty days notice in writing.
    It is agreed between the said parties that the party of the second part will not guarantee any account but all uncollectible accounts or losses due to failure to accept shipments are to be charged to the party of the first part.
    The party of the second part is to pay all salaries, selling, traveling, office expenses and any other expenses incurred in the conduct of the business, from the commissions received from the party of the first part.
    Petitioner neither purchased nor sold coal on its own account. Persons from whom petitioner obtained orders for coal made payment therefor to it, and petitioner, in turn, remitted the amounts collected to the particular operating company less its fixed commission. Petitioner was not required to make remittances to the operating company for coal shipped to persons who had given orders through petitioner until the purchase price of the coal had been paid by the purchaser, and any loss on account of failure of the purchaser' to pay was borne by the coal operator who had shipped the coal.
    Petitioner’s outstanding capital stock during the taxable years 1918 and 1919, and the persons by whom it was held, are as follows:

    The stockholders of the corporation paid in to the corporation for stock the sum of $8,500, as follows:
    April 4, 1917-$4,000
    April 9, 1917- 250
    May 3, 1917- 1,250
    May 6, 1918- 3,000
    The money paid in by the stockholders was used in equipping the office and defraying necessary organization and operation expenses in the early days of its activities. J. F. Irwin was responsible for the making of all contracts with operating companies and he was on the road practically his whole time. He made 95 per cent of the total sales in 1918 and 85 per cent of the total sales in 1919. All the stockholders were regularly engaged in the active conduct of the affairs of the corporation and the petitioner’s income during the years involved was due entirely to their activities. The employees of the petitioner, in addition to its officers and stockholders, consisted of three persons who did clerical and stenographic work. The total salaries of these employees amounted to $2,340 per annum. Capital was not material in the production of petitioner’s income.
    The by-laws of the petitioner defined the duties and powers of the president of the corporation as follows:
    Art. III. Section I. The President shall preside at all meetings of the Board; shall be ex-officio, a member of all committees; shall employ and discharge all clerks, employees and agents, subject, however, to the right of the Board to direct by the majority vote the employment or dismissal of any agent or employee. He shall sign all checks, all certificates of stock and conveyances of real estate, and any other instrument in writing requiring a signature, and perform such other duties as may be required of him from time to time by the directors.
    On December 10, 1919, the petitioner’s directors adopted the following resolution;
    Be it Resolved that the J. F. Irwin Puel Company close up its business on the 30th day of Dec., 1919 and secure a dissolution of the corporation as soon thereafter as the same can be done, and that a stockholders meeting be called for Dec. 15th, 1919, at 10 o’clock A. M. to secure the approval and ratification of this action.
    On December 15 the stockholders passed a resolution as follows:
    Resolved, that the J. P. Irwin Puel Company close up its business on the 30th day of Dee. 1919 and secure a dissolution of the corporation as soon thereafter as the same can be done.
    On February 25, 1920, petitioner filed a petition in the Court of Common Pleas of Westmoreland County, Pennsylvania, asking that the court enter a decree of dissolution. The court on December 13, 1920, entered a decree dissolving the corporation, which decree was filed with the Secretary of the Commonwealth on December 14, 1920.
    On March 5, 1924, the petitioner and the Commissioner agreed in writing to the determination and assessment of any tax due for the year 1918 beyond the period of limitation provided by law as follows:
    In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, J. P. Irwin Puel Company, of Latrobe, Pa., and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said J. P. Irwin Puel Company for the year 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned. This waiver signed with the understanding that the rights of the stockholders to claim refund for overpayment of tases in 1918, if personal service status is denied, is also extended for one year.
    J. F. Iewin Fuel Company,
    Taxpayer.
    By J. F. Iewin, Pres.
    D. H. Blaie, Commissioner.
    Seal
    Coepoeate
    If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed.
    On January 20, 1925, petitioner and the Commissioner similarly agreed in writing regarding any tax due for the year 1918 as follows:
    INCOME AND PROFITS TAX WAIVER.
    (For taxable years ended prior to March 1, 1921.)
    In pursuance of the provisions of existing Internal Revenue Laws, J. F. Iewin Fuel Company, a taxpayer of First Nat. Bank Building, Latbobe, Pennsylvania, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1918 under existing revenue acts, or under prior revenue acts. This waiver of the time for making- any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
    J. F. Iewin Fuel Company,
    Taxpayer.
    By I. F. Iewin, Pres.
    D. H. Blaie, Commissioner.
    Seal
    Coepoeate
    If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed.
    On January 20, 1925, tlie petitioner and the Commissioner entered' into the following written agreement respecting any tax due for the year 1919 as follows:
    INCOME AND PROFITS TAX WAIVER.
    (For taxable years ended prior to March 1, 1921.)
    In pursuance of the provisions of existing Internal Revenue Laws J. F. Iewin Fuel Company, a taxpayer of First National Bank Building, Lateobej-Pennsylvania, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1919 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
    J. IT. Irwin Fuel Company,
    Taxpayer.
    By J. F. Ihwin, Pres.
    D. H. Blair, Commissioner.
    Weal
    CORPORATE.
    If this waiver is executed on behalf of a corporation, it must be signed by such officer or officers of the corporation as are empowered under the laws of the State in which the corporation is located to sign for the corporation, in addition to which, the seal, if any, of the corporation must be affixed.
    Each of the above written instruments bore the corporate seal of the J. F. Irwin Fuel Co.
   OPINION.

Littleton :

The evidence submitted sustains petitioner’s claim that it was during the calendar years 1918 and 1919 a personal service corporation within the meaning of section 200 of the Revenue Act of 1918. The Commissioner, therefore, erred in determining that petitioner is liable for any income or profits tax for these years.

Petitioner alleged that it was dissolved prior to the execution of the written agreements with the Commissioner that any tax found due for the calendar years 1918 and 1919 might be assessed without regard to the statutory period of limitation; that J. F. Irwin was without power or authority to execute the agreements and that they were, therefore, of no effect; that the running of the statute of limitations ivas not suspended by these instruments, and that assessment and collection of any tax which might be found due for the calendar years 1918 and 1919 is therefore barred. In view of our conclusion that petitioner was a personal service corporation, it is unnecessary to discuss the question of the statute of limitations.

Judgment of no deficiency will be entered for the fetitioner.

Murdock not participating.


author: Korner, Chairman:

text:
    F. William Morf, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8921.
    Promulgated February 24, 1927.
    An individual wbo kept bis books and filed bis returns on the calendar year basis and wbo was a member of a partnership which kept its books on the basis of a fiscal year ended in the calendar year 1924, is not entitled to the benefit of the 25 per cent reduction in tax provided in the Revenue Act of 1924, for the year 1923, with respect to his share of the partnership profits for the fiscal year ended in the calendar year 1924.

      Fayette B. Dow, Esq., for the petitioner.

      W. F. Gibhs, Esq., for the respondent.
    -Proceeding to redetermine deficiency in income tax for the year 1924 determined by the Commissioner in the amount of $3,998.52.
    FINDINGS OF FACT.
    The petitioner is -an individual residing in Chicago, Ill., and was, at the time here in question, a copartner in a business trading as C. H. Weaver & Co. The partnership operated and filed its tax returns on a fiscal year basis. Its fiscal year ended March 31, 1924. The petitioner’s share of the profits of the partnership for the fiscal year ended March 31, 1924, attributed to the year 1923, was $54,-215.41. This amount was reported in the petitioner’s income-tax return for the calendar year 1924 as taxable at 1923 rates. This return of income was reported on regular printed return “ Form 1040 FY,” which provided “ for Calendar year 1924 if income is derived from a partnership or fiduciary computed on a fiscal year basis.” Such form of return provided for separate computation of taxes on income taxable at 1923 rates and a deduction of 25 per cent of such taxes computed at 1923 rates. The total tax on petitioner’s income, taxable at 1923 rates, without the deduction of 25 per cent, is in the amount of $14,813.62. Twenty-five per cent of this amount is $3,718.40. The total tax on petitioner’s income, taxable at 1923 rates, less a deduction of 25 per cent, would be $11,155.22.
    The Commissioner disallowed the deduction of 25 per cent above referred to.
   OPINION.

Korner, Chairman:

The sole issue presented here is the right of the petitioner to deduct 25 per cent of his income received in 1924 as his share of partnership profits for the fiscal year ended March 31, 1924, under the provisions of sections 1200 and 1201 of the Bevenue Act of 1924. The resolution of this issue is controlled by the prior decisions of the Board in Charles Colip, 5 B. T. A. 123, and C. A. Weaver, 5 B. T. A. 313.

Judgment will he entered for the respondent.


author: Phillips:

text:
    Appeal of J. H. Paget.
    Docket No. 4279.
    Promulgated February 26, 1927.
    Loss from demolition of building allowed in year in which demolished, and not in year in which a business theretofore carried on in the building was abandoned, use of the building for other purposes haying been continued.

      C. M. Grider, C. P. A., for the petitioner.

      F. O. Graves, Esq., for the Commissioner.
    This is an appeal from the determination of a deficiency in income tax for the year 1923 in the amount of $362.27, arising from the disallowance by the Commissioner of $7,076 as a loss sustained in 1923.
    BINDINGS OB PACT.
    The petitioner is a citizen of the United States and during the year 1923 resided in El Paso, Tex. In 1917 he expended $7,876 for improvements upon certain property at San Elizario, Tex., which he used as a sanatorium. This property was used as a sanatorium by him until 1919 when, on account of the unsettled conditions in Mexico and the difficulty in securing patients by reason thereof, the business was abandoned until conditions should become more settled. After he abandoned the business, petitioner allowed tenants to occupy the building without rent. It was continuously so occupied until 1923, when it was demolished and salvaged in the amount of $800.
    The building had 22 rooms, was built of adobe, with walls from 18 to 24 inches thick, and had an adobe foundation. Around the foundation and extending up on the sides of the building for about 18 inches, was a coping of concrete on metal lath, about 2 inches thick, placed there to protect the foundation from high water. On account of this coping, the foundation and lower walls of the building could not be observed.
    In 1919 there was a rise in the water table of that vicinity. Due to the fact that the building was plastered inside and out and that there was a coping of cement around the foundation, the damage to the foundation from the water, if any, was not apparent at that time. The high level of the water table continued, and in 1923 there was apparent a discoloration for about 6 inches above the cement coping, showing that the foundation had been saturated with water. The walls were cracked in several places and the building was torn down and salvaged. When the building was razed, it was found that the foundation had disintegrated but it could not be ascertained when this disintegration took place.
    The petitioner claimed a deduction in 1923 of the difference between the amount invested by him and the amount salvaged, namely $7,016, as a loss sustained in that year. This was disallowed by the Commissioner in determining the deficiency.
   OPINION.

Phillips:

The Commissioner disallowed the loss here claimed upon the ground that it was sustained in 1919 when the sanatorium project was abandoned by the taxpayer and when he asserts the damage to the foundation took place by reason of the rise in the water table. The disallowance on such ground does not appear to be justified by the evidence. The abandonment of the sanatorium project was temporary, caused by disturbances in Mexico which made it difficult to secure patients. It can not be determined when the damage to the foundation of the building took place. While the foundation was of adobe, it had a concrete facing. How long it resisted the seepage of the water is uncertain. The building was in use until 1923 and it was not until it was demolished in that year that any disposition of the property took place giving rise to a loss for the purposes of the income tax.

Decision will be entered on 15 days' notice, under Bule 50.


author: Marquette:

text:
    J. R. Perryman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 2735, 6301.
    Promulgated February 26, 1927.

      J. B. Perryman pro se.

      Bruce A. Low, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income tax in the amounts of $193.83 for the year 1922 and $93.34 for the year 1923. The deficiencies arise from the disallowance by the Commissioner of deductions claimed by the petitioner as allowances for ordinary and necessary business expenses. The proceedings were consolidated for hearing and decision.

      BINDINGS OB BACT.
    The petitioner is an individual residing in Dallas, Tex. During the years 1922 and 1923 he was employed as a traveling salesman and he spent nearly all of that time on the road. His traveling was done both by automobile and train and covered territory as far east as New York. During the year 1922 he drew from his employers $3,948.84, and during the year 1923, $3,245.81, for traveling expenses, all of which was charged to his personal account and was expended for the purpose for which it was drawn. The money so drawn was included by the petitioner in his gross .income and was deducted in computing his net income for the years 1922 and 1923. The Commissioner disallowed the deductions.
   OPINION.

Marquette:

The Commissioner refused to allow the petitioner to deduct the items- in controversy from his gross income for the years 1922 and 1923, for the reason that the expenditures were not properly substantiated. At the hearing the petitioner produced evidence to show that the amounts set forth were drawn by him by check or draft in the years 1922 and 1923; that they were charged to his expense account on the books of his employers, and that they were expended by him in the legitimate and necessary conduct of his employment. We are of the opinion that he is entitled to the deductions claimed.

Judgment will J>e entered for the 'petitioner.


author: MoRkis:

text:
    Ralph L. Hinckley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4193.
    Promulgated February 26, 1927.
    A one-third interest in the Hinckley Beach Canning Co., a partnership, stood in petitioner’s name. One-half of the amount required for the acquisition of that interest was the separate property of the petitioner’s wife. She may report, therefore, in her separate return, one-half of the profit realized on the sale of the partnership’s assets, all of which was charged to the petitioner by the Commissioner.

      Ralph W. Smith, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency of $10,-823.05 in income taxes for the year 1920. The deficiency arises from the inclusion by the Commissioner in the petitioner’s gross income for the taxable year in question of profit realized from the sale of certain partnership assets.
    FINDINGS OF FACT.
    The petitioner is an individual residing in Los Angeles, Calif., having come to California with his family after having been thrown into bankruptcy in Denver, Colo., in 1907. His father joined him there soon after his arrival. Shortly thereafter a hardware business was incorporated in Glendale, in which the petitioner’s father invested $2,600; a brother, $800; and his wife, $650, for which stock was issued. The investment of Mrs. Hinckley was from a gift of $800, which she had just received from her mother. Mrs. Hinckley worked for the company on a salary and also received dividends. With these she acquired additional stock. She also purchased the stock of petitioner’s brother with money which she received from her mother’s estate. In 1915 her interest and that of the elder Hinck-ley were practically the same and they were the sole stockholders. On March 1, 1916, the father disposed of his stock to the petitioner in consideration of petitioner’s paying him a certain sum of money as long as he lived. In 1917 petitioner and his wife sold the business for about $20,000, which was invested in the R. L. Hinckley Co., a wholesale plumbing and contracting business started by the petitioner in Hollywood, in the Hinckley Beach Canning Co., a partnership started in 1918, in which the petitioner was shown on the books as owning a one-third interest and the wife did not appear as a partner, and in real estate. When the hardware business was sold in 1917, petitioner and his wife had an understanding that the proceeds were owned jointly and that their interests in future transactions were to be mutual and equal. Title to real estate acquired by them was taken as joint tenants.
    During the year 1920 the canning factory building site and machinery of the Hinckley Beach Canning Co. were sold for $100,000. The Commissioner included one-third of the profit realized from the sale of said partnership assets in the determination of petitioner’s additional tax. Mrs. Hinckley’s return for the year 1920 was sworn and subscribed to on April 28, 1924. In it she reported no items of business, but returned “ one-half of community income as shown by report of husband (Ralph L. Hinckley)
   OPINION.

MoRkis:

The only question raised by the pleadings is whether the profit realized upon the sale of certain assets of the Hinckley Beach Canning Co. is taxable to the petitioner, as determined by the Commissioner, or whether, as contended by the petitioner, his wife may report one-half thereof as income from her separate property or from a partnership existing between them.

The investment of Mrs. Hinckley in the hardware business at Glendale consisted of money given to her by her mother, of money acquired from her mother’s estate, dividends on her stock, and salary. Section 162 of the Civil Code of California provides that all property of the wife owned by her before marriage and that acquired after-wards by gift, bequest, devise or descent, with the rentals, issues and profits thereof, is her separate property. The Supreme Court of California thus epitomizes the law concerning the property of a married woman:

A married woman unconnected with separate property of her own is, in this State, under disability to contract. She may hold property jointly with her husband, in community, as tenant in common, or as joint tenant, but her interest in the community property she holds in subjection to her husband. As head of the family he is entitled to the management and control of such property. He may dispose of it without the consent of his wife, and it is not liable in law for any contracts which may be made by her after marriage, unless by his consent manifested according to law. It is otherwise as to the wife’s separate property; that belongs exclusively to her' — her husband has no interest in it. She has the absolute right to use and enjoy it and the rents, issues, and profits thereof, and to dispose of the same, by her own act and deed, without the consent of her husband. She is, as to her separate property, considered a femme sole, and she may make any contract respecting the same with her husband, or any one else competent in law to contract. It is primarily liable for any or all of her contracts made before or after her marriage, and to the full extent of it she is bound for the performance of the obligation which she has incurred by reason of any of them. Alexander v. Bouton, 55 Cal. 15, 19.

So far as concerns the property acquired by the wife by gift, bequest or devise, and the income therefrom, there is no question, therefore, that it was her separate property. It appears, however, that she worked for the corporation at a salary some time before the father’s interest passed to the petitioner and invested part of the money so received in the stock of the corporation. Such salary was community property. Section 164, Civil Code of California; Martin v. Southern Pacific Co., 130 Cal. 285; 62 Pac. 515. Husband and wife may, however, under the California law, enter into an agreement whereby the earnings of the wife shall not become community property, and where such an agreement exists the salary of the wife is her separate property. In Wren v. Wren, 100 Cal. 276; 34 Pac. 775, the court held;

There can be no doubt that a husband and wife may agree between themselves * * * that money earned by the wife in performing any work or service which does not devolve upon her by reason of the marriage relation shall belong to her as her own, and, when money has been earned by the wife under such an understanding or agreement with the husband, it is her separate property.

See also Kaltschmidt v. Weber, 115 Cal. 596; 79 Pac. 272; Larson v. Larson, 15 Cal. App. 531; 115 Pac. 340; Cullen v. Bisbee, 168 Cal. 695; 144 Pac. 968; Smith v. Smith, 47 Cal. App. 650; 191 Pac. 60; Rayburn v. Rayburn, 54 Cal. App. 69; 200 Pac. 1064.

It has been field that the courts will resort to circumstantial evidence furnished by the general conduct of the spouses with reference to their property in determining the existence or non-existence of a contract, where the exact terms of the alleged agreement have escaped the memory of one or both of the parties to it. Perkins v. Sunset Tel. & Tel. Co., 155 Cal. 712; 103 Pac. 190. The acts and conduct of the parties consistent with such an understanding are accepted as proof that such an understanding was in fact had.

The facts indicate to our minds that such an understanding existed in respect to the wife’s salary. She acquired stock with it which was issued in her name. Hinckley and his wife both testified that he owned no interest whatever in the hardware company until about March 1, 1916, when his father sold him his one-half interest therein. He testified that the one-half interest acquired from his father was the first property he owned after his arrival in California in 1908, and that Mrs. Hinckley owned a one-half interest at the time of the sale to him and when he and his wife sold the business the following year.

As her interest in the hardware business was separate property, one-half of the proceeds of the sale of that business remained her separate property. Those proceeds were invested in the Hinckley Beach Canning Co., a plumbing business in Hollywood, and' real estate. It was understood between them that she was equally interested in those ventures. There was no record on the books of the Hinckley Beach Canning Co. of the wife’s owning any interest therein, but the petitioner’s investment of her separate property did not effect a change in its status, in the absence of a gift by her to him. The evidence not only refutes the idea of any gift, but establishes a retention by her of her property interest. In Lewis v. Johns, 24 Cal. 98, 103, the Supreme Court of California said:

It follows from what has been already said that the husband cannot, by any independent act of his, acquire an interest in the separate estate of the wife. It is even doubtful whether the legislature can confer upon him, against her consent, a dominion over her property sufficient for the purposes of management or control. However that may be, it cannot go beyond that point, as we have already seen. That the husband cannot, by his management, supervision, or labor, acquire any interest in the estate itself, is conceded, and by parity of reason he cannot acquire any interest in the increase, for that is hers also, and upon the same terms — the latter being a corollary ot the former proposition. There is no magic in the touch or manipulation of the husband by force of which separate is transferred into common property.

See also Valensin v. Valensin, 28 Fed. 599.

We are therefore of the opinion that one-half of the profits arising from the sale of certain assets of the Hinckley Beach Canning Co., which the Commissioner determined was taxable to the petitioner was the wife’s separate property, upon which she is subject to tax.

Judgment will he entered for the petitioner on 15 days’ notice, v/nder Bule 50.


text:
    Adaskin-Tilley Furniture Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5530.
    Promulgated February 26, 1927.
    Petitioner and Flint-Adaskin Co. were not affiliated during- 1920.

      Roger T. Olapp, Esq., and Frederich W. Tillinghast, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $2,611.21 in income and profits tax for 1920. The question presented is whether the petitioner and the Flint-Adaskin Furniture Co. were affiliated during 1920.
    FINDINGS OF FACT.
    Herman Adaskin, merchant and resident of Springfield, Mass., conceived the idea of a chain of retail furniture stores. His initial step in establishing the chain was the purchase of the assets and business of John Tilley & Co., in Holyoke, Mass. On September 8, 1919, he incorporated this business, under the laws of Massachusetts, as the Adaskin-Tilley Furniture Co., Tilley being treasurer and a stockholder of the new corporation. Adaskin exchanged the assets which he had purchased for all of the stock of the corporation, consisting of 1,500 shares of preferred and 1,000 shares of common stock. Only the common stock had voting rights. Adaskin raised additional capital by selling the preferred stock, giving some common stock as a bonus, but retaining the majority of the common stock to assure himself of control of the corporation.
    On December 5, 1919, the Flint-Adaskin Furniture Co., a Rhode Island corporation, was organized to operate a retail furniture business in Providence, R. I. This corporation, the second unit in Adaskin’s chain, was organized to take over the assets and business of Flint & Co., Inc., and the Anthony Furniture Co., both doing business in Providence. Adaskin was issued all the preferred stock amounting to 1,155 shares, and 1,306 out of 2,381 shares of the common stock. As in the case of the petitioner, voting rights were limited to the common stock. The preferred stock was sold to raise additional capital, Adaskin retaining sufficient common stock to have a majority.
    Adaskin added additional units to his chain by establishing stores at New Haven, Conn., two at Fall River, Mass., an additional store in Holyoke, Mass., and one at Worcester, Mass. These stores were all acquired by the Adaskin system, which has been outlined as to the Adaskin-Tilley and the Flint-Adaskin companies, which are the only companies here involved. In acquiring each of his units, Adaskin agreed to purchase only upon condition that he should have explicit control of every phase of the business. If a preliminary understanding of this nature was not obtainable, Adaskin would cease negotiations for the business.
    From the beginning of the two corporations in question Adaskin inaugurated an entirely different policy of doing business. He installed standardized forms, equipment, and methods of selling, buying and delivery. A new accounting system was installed so that books and records would be kept the same in each store. He increased advertising, placed floor men in each store to direct the customers to the different departments, placed his salesmen on a commission basis, dictated the lines of merchandise to be carried and the amounts, approved or rejected lines of merchandise suggested by the buyers of the store, compared the monthly statements of the store managers, and checked up on discrepancies either as to store, department or personnel. He insisted on interchange of merchandise and trade acceptances; he named the officers and directors, arranged for loans from the bank and credits from the factories. He was president of both companies.
    The stockholders and directors have never disputed or objected to the policies of Adaskin or his methods of conducting the business. There were no rival factions or dissenting stockholders. At only one meeting, and that a meeting of the Adaskin-Tilley Co., was there a stockholder present in addition to the necessary quorum. The stockholders’ meetings merely elected directors and approved the acts of the directors. Proxies were sent out with the notices of annual stockholders’ meetings, and these proxies were usually returned to Adaskin or Richard E. Smith. Smith was general manager of the Flint-Adaskin Co., and never objected to Adaskin’s business policies or methods. He had been president and general manager of Flint & Co., Inc., and was the largest stockholder in the new corporation with the exception of Adaskin.

      The common stock of the petitioner outstanding during 1920 was 1,000 shares. The common stock of the Flint-Adaskin Co. outstanding on January 1, 1920, was 2,401 shares, and on December 31, 1920, 2,413 shares. The following table shows the shares held by the principal stockholders, the changes during the year, and the percentage of holdings to the total outstanding capital stock.

    J. Palmer Barstow was treasurer of the Flint-Adaskin Co. Ninety-nine and 87 shares of that company were held as treasury stock on January 1 and December 31, 1920, respectively.
    The petitioner and the Flint-Adaskin Co. filed a consolidated return for 1920 in which a loss sustained by the latter company was taken as a deduction, and the capital items referable to that company were included in invested capital. The Commissioner determined that the companies were not affiliated, denied the loss claimed, and eliminated the capital items of the Providence company from petitioner’s invested capital.
   OPINION.

MoRRis:

Section 240 (b) of the Revenue Act of 1918 provides in part that two or more corporations shall be deemed to be affiliated if substantially all of the stock is owned or controlled by the same interests. In the present case, Adaskin and Tilley owned 90.4 per cent in the petitioner and 53.1 per cent in the Providence company during 1920. These percentages standing alone would not be sufficient to meet the requirement of “ substantially all ” laid down by the statute. Appeals of United Metal Spinning Co., 2 B. T. A. 520; Rishell Phonograph Co., 2 B. T. A. 229. The petitioner, however, contends that, in addition to the stock owned outright by Adaskin and Tilley, the former controlled all of the minority stock of both companies. If, as a matter of fact, he controlled such additional stock, there would be no question that substantially- all of the stock was owned or controlled by the same interests.

There is no doubt but that Adaskin had absolute control of the business methods, policies and relations of the two corporations. He dominated and managed the business of each. He settled questions of policy, expediency and methods of operation. He organized both corporations with the understanding that he should have control of the business. We have heretofore held, however, in the Appeal of Canyon Lumber Co., 1 B. T. A. 473, that the control “referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock.” We further held in the Appeal of Watsontown Brick Co., 3 B. T. A. 85, that “ control of the business is not control of the stock of a corporation conducting a business, nor, where a minority of stockholders are present, even though quiescent, representing 27.04 per cent of the stock, can we hold that the stock owned or controlled by the parent company constitutes substantially all of such stock.” In the Appeal of Rishell Phonograph Co., supra, we used the following language:

It is obvious that the two corporations constituted a single economic unit with an arbitrary assignment of profits to the phonograph company, which in fact employed no capital and was practically nothing but an order-soliciting department of the furniture company. But this alone is not necessarily sufficient to bring the corporations within the provisions of section 240 (b) of the Revenue Act of 1918.

The petitioner attempts to show control of the voting stock by the facts that Smith and Barstow, the owners of approximately 22 and 14 per cent, respectively, of the stock of the Flint-Adaskin Co., were subject to discharge without notice by Adaskin, that Smith and Barstow had worked harmoniously and had never interfered or objected to the business policies or methods of Adaskin, and that the minority stockholders, other than Smith or Barstow, never attended stockholders’ meetings or attempted to exercise their right to vote other than by certain proxies made out in favor of Adaskin and Smith. The fact that the stockholders worked harmoniously does not establish control of the stock of one by the other. Appeal of Sutherland Manufacturing Co., 3 B. T. A. 1224.

Barstow and Smith, who together owned approximately 36 per cent of the stock of the Flint-Adaskin Furniture Co., owned no stock in the petitioner and there is no showing that the other minority stockholders, owning 10 per cent additional, had any interest therein. To hold upon such facts that Adaskin controlled that stock by reason of his control of the business through a majority stockholding would, in our opinion, lead to the inevitable conclusion that a bare majority stock holding, or even less than a majority, where the ownership is widely scattered, brings about an affiliation, a result which is inconsistent with the express wording of the statute that there must be ownership or control of substantially all the stock. Appeal of Tunnel Railroad of St. Louis, 4 B. T. A. 596.

The petitioner relies chiefly upon three decisions of the Board, namely, Appeals of Monroe Furniture Co., 2 B. T. A. 743; Midland Refining Co., 2 B. T. A. 292, and Mahoning Coal Railroad Co., 4 B. T. A. 923. These cases are. clearly distinguishable. In the first-named case, the same stockholders owned in excess of 90 per cent of the stock of two of the corporations involved and approximately 80 per cent of the other two. In the Midland case, fifteen stockholders owned stock in both companies, their holdings amounting to approximately 80 per cent of both. In addition to the ownership of stock by the parent company in the Mahoning Coal Railroad Co. case in excess of 58 per cent and by the parent company and its officers and stockholders of 74 to 80 per cent, there were additional factors which influenced the decision in that case which are not present in the instant case.

Judgment will be entered for the respondent.


author: Lansdon :

text:
    Hall-Luhrs & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3954.
    Promulgated February 26, 1927.
    Value at March 1, 1913, of good will, trade-marks, and trade brands of the liquor department of a wholesale business not established by the evidence as distinguishable or separable from the value of the combined intangible assets of the petitioner at such date. Loss of intangibles during the taxable years not proven.

      Eustace Oullmam,, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    The Commissioner has determined deficiencies for the years 1918, 1919, and 1920, in the respective amounts of $3,345.05, $645.59, and $179.73. The only error alleged by the petitioner is that it was not permitted to take a deduction from gross income for any of the years involved on account of obsolescence of good will, trade-marks, and trade brands, appertaining to the portion of its business engaged in the sale of intoxicating liquors.
    FINDINGS OF FACT.
    The petitioner is a California corporation with its principal office at Sacramento. It is the successor of a partnership which conducted a similar business from some time in 1887 to January 12, 1907, when it was incorporated. From 1887 until June 30, 1919, the partnership and its successor, the petitioner, was a wholesale dealer in groceries and intoxicating liquors. It owned several copyrighted trade brands and trade-marks under which it sold liquors, and, for many years, it had the exclusive agency for Northern California and Nevada of Sunnybrook Whiskey, a commodity which was manufactured in Louisville, Ky. At June 30, 1919, in obedience to wartime prohibition legislation, the petitioner ceased the sale of intoxicating liquors and distributed its stock of such merchandise then on hand as a dividend to its stockholders, and since that date has been engaged only in the sale of groceries and non-alcoholic beverages.
    From 1907 to 1919, inclusive, sales of intoxicating liquors averaged 8 per cent of the petitioner’s gross sales, and about the same percentage of its employees devoted their entire time to the liquor business. No separate accounts reflecting sales of liquors were kept with customers who purchased both groceries and liquors. The percentage of profit from the sales of liquors was greater, at all times, than from the sales of groceries. The only separate accounts kept for the liquor business were gross purchases, gross sales, and inventories.
    For the years 1908 to 1912, inclusive, the petitioner’s average capital and surplus was $61,003.85; its average annual net receipts from sales of liquor were $82,581.38. During the same period its annual average net sales of groceries and liquors were $1,095,300.65, and its annual average net income from all-its business operations was $20,938.05.
    For the taxable years the income and profits-tax returns of the petitioner show the following:

    In its original income and profits-tax return for the year 1918, filed in April, 1919, the petitioner took no deduction for obsolescence of intangibles on account of prohibition legislation. In September, 1919, it filed an amended return in which it claimed such an allowance in the amount of $71,985.02. Upon audit of such returns and of returns for 1919 and 1920, the Commissioner disallowed the petitioner’s claim for obsolescence, made some minor adjustments which are not in dispute, and determined the deficiencies here in question.
   OPINION.

Lansdon :

The only issue here is whether the petitioner' is entitled to deduct the amounts of $81,187.99 and $20,052.71, respectively, from its gross income for the years 1918 and 1919 as allowances for obsolescence of intangible assets resulting from wartime prohibition legislation. The petitioner relies primarily on the following provisions of the Revenue Act of 1918:

Sec. 234. (a) Tliat in computing the net income of a corporation Subject to the tax imposed by section 230 there shall be allowed as deductions:
* s¡: * * * * , ■ 'jJ:
(7) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for' obsolescence.

If the Board decides adversely on the question of obsolescence, the petitioner makes the further' contention that the amounts in question should be allowed under subdivision (4) of the same section, which provides for deductions from gross income of “ losses sustained during the taxable year and not compensated for by insurance or otherwise.”

It appears, therefore, that this proceeding involves first the proof of certain facts. Did the petitioner own intangibles pertaining to its liquor business consisting of good will, trade-marks, and trade brands? Since obsolescence, if allowable, must be regarded as included in exhaustion, it follows, in the light of our decision iri the Appeal of Grosvenor Atterbury, 1 B. T. A. 169¿ that the value of such intangibles at March 1, 1918, must be established as the basis for computing any amounts that may be allowed on account of obsolescence. If the evidence adduced at the hearing establishes the essential facts, it then becomes our duty to determine whether 'such facts bring the petitioner within the provisions of :the statute.-. '

For a long time prior to the taxable years the petitioner was a wholesale dealer in groceries and liquors. The evidence that at March 1,1913, it owned intangibles of some value is conclusive. Was the business of such a nature, and. was it conducted in such manner that at that date, or during the taxable years, the intangible valué pertaining to the trade in liquors could be determined and segregated from the total value of such property that was owned by the petitioner? The evidence discloses that all the accounts of the two alleged departments of the petitioner’s business were kept together, except that there was a record, though not in the ledger or any other set of controlling accounts, of the purchases, sales, and inventories of liquors. The liquor sales were about 8 per cent of the volume of transactions, and. it is in evidence that the profits from, such sales were proportionately greater than from the sales of groceries,, but, prior to March 1, 1913, there Avere no accounts that reflected such profits as separate items of income. Later an attempt was made to segregate the profits of the two branches of the business, but it is obvious‘from the evidence that the results obtained by accountants employed for that purpose were largely estimates, based on an analysis of books that Avere in fact the records of a single business,

The proof of loss resulting from prohibition legislation is not conclusive. The record shows that the liquor business was abandoned at June 30,1919, but, for that year, measured by the results of previous years, there were normal profits. For the year 1920, without any trade in liquors, the petitioner enjoyed the largest volume of business in its history up to that time. It is true that there was loss in Operations in 1921, but there is no evidence that such loss resulted from the abandonment of the .liquor trade. It may well have been due to the shrinkage of inventories incident to postwar adjustments.

From all the evidence we conclude that the petitioner has failed to prove the value of that part of its good will that pertained to its tr'ade in liquors at March 1, 1913, or, in fact, that it had any such good will at any time that could be ascertained as a separate asset. It is unnecessary, therefore, to discuss or decide the question of law involved.'

Judgment wül de entered on W days’ notice, under Bule 50.