author: Littleton:

text:
    Appeal of VIRGINIA LUMBER & BOX CO.
    Docket No. 3546.
    Submitted July 15, 1925.
    Decided January 16, 1926.
    In 1919 taxpayer changed its annual accounting period from a fiscal year ending November 30 to one ending October 31, and filed a return for the 11-month period commencing December 1, 1918, and ending October 31, 1919. The Commissioner denied that he had approved the computation of the net income upon the basis of the new accounting period. Held, that the net loss for the 12-montli period ending November 30, 1919, should be applied against the net income for the taxable year ending November 30, 1918, and any excess thereof applied against the' net income for the year 1920.

      J. M. Gumming, G. P. A., for the taxpayer.

      Willis D. Nance, Esq., for the Commissioner.
    Before James, LittletoN, and Smith.
    This is an appeal from the determination of a deficiency in income and profits tax for the fiscal year ended .November 30, 1918, in the amount of $4,160.19.
    EINDINGS OE PACT.
    Taxpayer is a Virginia corporation with its principal office at Petersburg. Prior to 1919 its accounting records were maintained on the basis of an annual accounting period ending November 30. The return for the year 1918 was filed on such a basis.
    In 1919, without first obtaining the permission of the Commissioner to do so, taxpayer changed its annual accounting period to one ending October 31. It filed a return for the 11-month period commencing December 1, 1918, and ending October 31, 1919, in which it showed a net loss.
    For the 11-month period ended October 31, 1919, the taxpayer sustained a net loss of $20,085.76, and for 12-month period ended November 30, 1919, a net loss of $19,265.97.
    In computing the tax liability for the fiscal year 1918, the Commissioner did not deduct from the net income of that year the loss sustained during the 11-month period ended October 31, 1919, or the loss sustained during the 12-month period ended November 30, 1919.
    DECISION.
    The deficiency should be computed in accordance with the following opinion. Final determination will be settled on 10 days’ notice in accordance with Bule 50.
   OPINION.

Littleton:

In its petition taxpayer alleges error on the part of the Commissioner in failing to deduct either the net loss for the 11-month period ended October 31, 1919, or, as an alternative, that of the 12-month period ended November 30, 1919, from the net income of the fiscal year under consideration and with respect to which the Commissioner has determined a deficiency.

One of the alleged facts upon which taxpayer relies in support of its allegation of error is that, in the month of July, 1919, it requested permission from tbe Commissioner to change its accounting period from one ending on November 30 to another ending on October 31, and that such permission was granted. In his answer the Commissioner denies that permission was granted the taxpayer to change its fiscal closing from November 30 to October 31. No evidence was adduced by either party upon this point.

Under the provisions of section 212 (b) of the Revenue Act of 1918, where a taxpayer changes its annual accounting period from one fiscal year to another, the net income must, with the approval of the Commissioner, be computed on the basis of such new accounting period. We interpret that section as requiring the taxpayer to secure the approval of the Commissioner to a computation of its net income upon the basis of the new accounting period as a condition to the filing of a return for that period. Appeal of The Clendening Co., 1 B. T. A. 622.

In this appeal we have no evidence that the Commissioner approved the change in the accounting period. On the other hand, the Commissioner expressly denies that he extended such approval. We are forced, therefore, to conclude that the taxpayer did not, with the approval of the Commissioner, change its accounting period to enable it to make a return for the 11-month period ended October 31, 1919, and that the net loss for the taxable year 1919 must be computed upon the basis of the full 12-month period ended November 30, 1919, such period being the only fiscal year which the taxpayer'has established under the provisions of section 212(b).

The taxpayer sustained a net loss of $19,265.97 for the 12-month period ended November 30, 1919, which, under the provisions of section 204 of the Revenue Act of 1918, it is entitled to have deducted from the net income of the fiscal year ended November 30, 1918, and it is entitled to have its tax liability for the latter year redetermined accordingly.

In view of the foregoing we find it unnecessary to pass upon the contention of the Commissioner that the provisions of section 204 (a) of the Revenue Act of 1918 are inapplicable to a period of less than 12 months.


source: Caselaw Access Project

author: Tiutssell

license: Public Domain

text:
    Appeals of LEE S. SMITH & SON CO. and DENTAL COMPANY OF AMERICA.
    Docket Nos. 3328 and 3331.
    Submitted September 14, 1925.
    Decided January 16, 1926.
    Tbree corporations, all organized by the same persons, all engaged in related businesses and operated as a single enterprise, and all the stock of which is owned by the organizers and a few of the employees, held, affiliated corporations under the provisions of section 240 of the Revenue Act of 1918.

      /S'. Leo Ruslander, Esq., for the taxpayers.

      P. 8. Crewe, Esq., for the Commissioner.
    Before Littleton, Smith, and Trtjssell.
    These are appeals from determinations of deficiencies in income and profits taxes for the calendar year 1919 against the taxpayers, Lee S. Smith & Son Co. in the sum of $5,305.28, and the Dental Company of America in the sum of $2,163.62, all of which is in controversy. The deficiencies arose from the refusal of the Commissioner to permit the taxpayers to file a consolidated return as affiliated corporations.
    FINDINGS OF FACT.
    1. This appeal involves the consolidation of the returns of three corporations, to wit, Lee S. Smith & Son Co., Dental Company of America, and Lee S. Smith & Son Manufacturing Co. The taxpayer Lee S. Smith & Soil Co. was held affiliated with the Lee S. Smith & Son Manufacturing Co., but the taxpayer Dental Company of America has been denied such affiliation by the Commissioner.
    The Lee S. Smith Son Co. was incorporated December 29, 1915, with a capitalization of $200,000, divided into 8,000 shares of the par value of $25 each, and was engaged in the business of selling-dental supplies. The original incorporators were Lee S. Smith and his son, W. L. Smith, who had been operating this business as a partnership for many years. Lee S. Smith founded the business in 1866.
    Lee S. Smith & Son Manufacturing Co. was incorporated in 1912 with a capitalization of $100,000, divided into 500 shares of common stock and 500 shares of preferred stock of the par value of $100 each, and was engaged in the business of manufacturing cement and other dental supplies, for which the taxpayer Lee S. Smith & Son Co. was the exclusive selling agent.
    The taxpayer Dental Company of America was organized in 1917 to manufacture teeth, for which Lee S. Smith & Son Co. was also the exclusive selling agent. Its capitalization was $100,000, divided into 1,000 shares of the par value of $100 each.
    2. Lee S. Smith was president of the Lee S. Smith & Son Co. and the Lee S. Smith & Son Manufacturing Co. At this time, however, he was quite an old man and left the active management of these companies in the hands of his son, W. L. Smith. W. L. Smith was vice president and general manager of the Lee S. Smith & Son Co. and the Lee S. Smith & Son Manufacturing Co., and also president and general manager of the taxpayer Dental Company of America. One Charles Petersen was treasurer' and director of all three companies. Prior to January 1, 1916, the father and son owned all the stock in the Lee S. Smith & Son Co. and the Lee S. Smith & Son Manufacturing Co. At that time they began the policy of allowing some of the employees to purchase stock to be paid for out of dividends, the stock to be returned upon their severing connections with the company, so that, in the year 1919, 18 per cent of the stock of the Lee S. Smith & Son Co. (taxpayer) was in the name of five employees, and 8 per cent of the common stock of the Lee S. Smith <& Son Manufacturing Co. was in the name of four employees. The father did not take any stock in the Dental Company of America, but left this wholly to the son, W. L. Smith,- who owned all the stock, except 16 per cent, which was sold to four employees under arrangements similar to those made by the other companies. The stock sold to employees of the Lee S. Smith & Son Co. was in accordance with written contracts, which specifically provided that it was to be paid for out of dividends and turned back if the employees left the company. Similar agreements were made with the employees of the other companies, except that the agreements were oral. In every instance where an employee left one of these companies, the stock was turned back in accordance with the agreement. A typical written agreement read as follows.:
    MEMORANDUM OF AX AGBEEMENT
    Made and entered into this Fourth day of January, 1916, between Charles Petersen, of the Borough of Wilkinsburg, County of Allegheny and State of Pennsylvania, and Lee S. Smith, of the City of Pittsburgh, County and State aforesaid;
    Witnesseth, That for the consideration hereinafter mentioned, as well as other valuable consideration thereunto moving, the said Lee S. Smith hereby agrees to transfer to the said Charles Petersen two hundred forty (240) shares of the capital stock of Lee S. Smith & Son Co., a corporation of the State of West Virginia, the said transfer to be made immediately upon the signing of this agreement, and the said Charles Petersen agrees to pay the sum of Six Thousand ($6000) Dollars for the said capital stock, being the par value thereof, in the following manner:

      By paying to the said Lee 8. Smith all the dividends which shall he declared upon the said stock at the time they are paid hy the Company until the dividends declared and paid thereon shall aggregate the sum of Sins Thousand ($6000) Dollars, with the full and express understanding that the said Charles Petersen is not personally liable for the payment of any sum whatsoever, except the sum which shall he declared and paid from time to time as dividends on the said stock as aforesaid until the same shall aggregate the sum of Six Thousand ($6000) Dollars and that the unpaid balance thereof shall not bear any interest.

      If the said Charles Petersen shall sever Ms connection with the said Lee 8-Smith & Son Co., the said Lee S. Smith, his executors, administrators or assigns, may at his or their option take ove»' the said two hundred forty (240) shares hy paying to the said Petersen the hook value thereof, less the amount

      that shall he due thereon in accordance with the above agreement as to payment and the said Charles Petersen reserves the right to pay the said Six Thousand ($6000) Dollars or such part as shall remain due and unpaid in accordance with the above agreement at any time in cash.
    It is also expressly understood and agreed that the certificate or certificates issued by the said Company for the said two hundred forty (240) shares of-the capital stock and all transfers representing the same or any part thereof, until this agreement has been fulfilled, shall be marked as follows on the face thereof: “ This certificate is issued and is subject to that certain written agreement made and entered into between the said Charles Petersen and Lee S. Smith, dated Pittsburgh, Pa., the Fourth day of January, 1916.”
    In witness whereof, the parties hereto have hereunto set their hands and seals at Pittsburgh, Pa.-, this 19th day of April, A. D. 1916. (Italics ours.)
    In each instance, at the stockholders’ meetings of the corporations, the stock held by the employees ivas voted in accordance with the desires of the Smiths.
    3. The respective holdings of the stockholders in the three corporations in 19.19 were as follows:

    The three corporations occupied the same general offices, and the rental, telephone, and other office expenses were paid by the Lee S. Smith & Son Co. W. L. Smith was the general manager and dominating factor in all three companies. He directed the business policy and could hire and dismiss employees at will. He lent his personal credit to the three corporations to the extent of $50,000 each a year. When he organized the Dental Company of America to manufacture teeth, he caused the taxpayer, Lee S. Smith & Son Co., to drop an old-established and well-known brand of teeth in order to introduce and sell the new brand manufactured by the Dental Company of America. The latter company made no profits, so in 1920 the said W. L. Smith bought in all the o'utstanding stock, sold the assets, and liquidated.
    DECISION.
    The deficiencies in the above appeals should be computed in accordance with the following opinion. Final determination will be settled on 15 days’ notice, under Rule 50.
   OPINION.

Tiutssell

: Congress, in considering the Revenue Act of 1918, recognized the fact that many corporations were closely affiliated in ownership and unity of management and control, and that the proper ascertainment of liability to income and profits taxes might necessitate the grouping of such corporations for the purpose of computing income and profits taxes. That portion of the statute relevant to these appeals is as follows :

Sec. 240. * * * (b) For tbe purpose of tbis section two or more domestic corporations shall be deemed to be affiliated * * * (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

The history of the taxpayers in the instant appeals is interesting. One Lee S. Smith, in the year 1866, established himself in business as a selling agency for dental supplies. In the course of time his son, W. L. Smith, became associated with him and then the business was conducted as a partnership until it was incorporated in 1915 as Lee S. Smith & Son Co. Prior to this date, however, and in the year 1912, the two Smiths had caused to be organized another corporation, known as the Lee S. Smith & Son Manufacturing Co., all of the stock of which was then owned by the two Smiths. This Company manufactured dental supplies. Gradually, owing to advancing age, the elder Smith relaxed his personal control and influence in the business until, in 1917, the son, W. L. Smith, was the dominating factor in both corporations. In that year W. L. Smith caused to be incorporated the Dental Company of America and established said company in the business of manufacturing other dental supplies. We thus have presented the original business of Lee S. Smith & Son Co., selling agents of dental supplies, the Lee S. Smith & Son Manufacturing Co., making certain dental supplies, the Dental Company of America, making other dental supplies, and the parent company controlling and supervising the activities of all and being the exclusive selling agents of the products of the two manufacturing companies.

As shown in the findings of fact, all of the stock of all of these companies is owned by Lee S. Smith and his wife, W. L. Smith, and several employees of tlie different companies. This Board has held in the Appeals of Hagerstown Shoe & Legging Co., 1 B. T A. 666, and Schloss Brothers Co., 1 B. T. A. 581, that the ownership of all the stock of two or more corporations by the principal stockholders and employees whose stock is controlled by them is an ownership or control of substantially all the stock by the same interests. See Appeal of Hamilton & Chambers Co., 1 B. T. A. 694.

We are, therefore, of the opinion that not only are the two taxpayers named in these appeals affiliated, but that these two taxpayers, together with the Lee S. Smith & Son Manufacturing Co., should all be placed in one affiliated group and their tax liability determined upon the basis of a consolidated return.


author: Lansdon Sternhagen,

text:
    Appeal of STEINBACH CO.
    Docket No. 2888.
    Submitted June 12, 1925.
    Decided January 16, 1926.
    1. Taxpayer may include in its statutory invested capital, as paid-in surplus, the proved value of tangible property paid in to a corporation in excess of the par value of its outstanding stock.
    2. Unextinguished cost of demolished assets allowed as a deduction from gross income.
    3. Depreciation allowed on assets acquired by way of paid-in surplus.
    4. Invested capital must be reduced by the amount of the cost to a corporation of the acquisition of its own stock.

      W. A. Staub, O. P. A., H. A. Tufel, Esq., and O. J. McGuire, Esq., for the taxpayer.

      Ellis W. Marming, Esq., for the Commissioner.
    Before Sternhagen, LaNsdoN, Greek, and Love.
    This is an appeal from the determination of a deficiency in income and profits taxes. The taxable periods involved are the fiscal years ended January 31, 1919, 1920, 1921, and 1922. For the years 1919, 1921, and 1922 the deficiencies are $3,934.89, $6,671.34, and $488.95, respectively, or a total amount of $11,195.18. For the year 1920 the Commissioner admits an overassessment of $5,871.81. The taxpayer concedes that the deficiency in the amount of $6,671.34 for the year 1921 is correct. The total deficiency in controversy is in the amount of $4,423.84.
    FINDINGS OF FACT.
    1. The taxpayer is a New Jersey corporation with its principal ;place of business at Asbury Park, where it conducts a department .store. It was incorporated in 1897 as the successor of a sole proprietorship, which had been established by John Steinbach about 1872.
    2. At February 1, 1919, the taxpayer had 4,000 shares of common and 5,350 shares of preferred stock outstanding of the par value of $100 per share. At that date John Steinbach owned 3,892 shares of the common and 3,248 shares of the preferred stock. His combined holdings of common and preferred shares represented 76 per cent plus of the taxpayer’s total outstanding capital stock. The remaining outstanding stock, in the respective amounts of 108 and 2,102 shares of common and preferred, was owned by A. C. Steinbach and Walter Steinbach, sons of John Steinbach.
    3. Prior to February 1, 1919, the buildings in which the taxpayer conducted its operations, the land occupied by such buildings, and the furniture and fixtures used in the business of the taxpayer were owned by John Steinbach and occupied by the taxpayer as a tenant.
    4. As early as 1917, John Steinbach, then a man of advanced years, evidenced, through conversations with his sons, a desire to relinquish his active control and retire from the business. The means of bringing about the change of ownership and control were discussed at various times throughout 1917 and 1918, and culminated on February 8, 1919, when, at a meeting of taxpayer’s board of directors, John Steinbach submitted to the board two definite offers which, when accepted, would bring about the desired change. The first offer provided that said Steinbach would convey to the taxpayer “ the real estate in the City of Asbury Park, oAvned by him, and now occupied by the company for its business, together with all the personal property appurtenant thereto, for the sum of $300,000, from which price the company might deduct the amount due on his debit balance as the same appears on its books, and which amounts to $239,765.17, as of February 1, 1919.” The balance of the purchase price, to wit, $60,-234.83, was to be paid in cash and securities of companies other than the taxpayer. The second offer provided that said Steinbach would sell to the taxpayer “ all of his shares of common stock therein, now consisting of 3,892 shares and also 1,748 shares of his preferred stock in this company, in consideration of an annuity to be paid him by the company, during hié lifetime, in the sum of $6,083.33 per month.”
    5. Both of the above offers were accepted by the taxpayer’s board of directors, and under the terms thereof became effective as of February 1, 1919. Immediately after the transfer to the taxpayer of the real property with its appurtenances and the shares of stock described in the second offer, all of which real and personal property was transferred simultaneously, said John Steinbach’s sole interest in the taxpayer was represented by 1,500 shares of preferred stock out of 3,602 shares then outstanding and not in the corporate treasury.

      6. The real property and appurtenances thereto received from John Steinbach were entered upon the taxpayer’s books in the aggregate amount of -$800,000, which amount is equivalent to the purchase price paid by the taxpayer. Later this amount was increased on taxpayer’s books to $850,860.15, in order that the book value of the assets would appear at an amount equivalent to the alleged cost of the assets to Steinbach, less the aggregate of all depreciation deductions claimed by him in his individual returns for prior years.
    7. The property acquired by the taxpayer as a result of the sale and transfer set forth above had a value greatly in excess of the amount of $300,000. This excess value was paid in to the taxpayer by John Steinbach for the benefit of his sons, A. C. Steinbach and Walter Steinbach, who, on February 1, 1919, became the owners of all of the common stock and, except 1,500 shares, of all the preferred stock of the taxpayer then outstanding, and, by reason of such ownership of common stock, acquired complete control over the affairs and assets of the taxpayer.
    8. The fair market values of the real property and appurtenances acquired by the taxpayer on February 1, 1919, were: Land $418,500; buildings $224,020.80; furniture and fixtures $102,127.84 — or a total of $744,648.14.
    9. The shares of taxpayer’s stock sold by Steinbach to the taxpayer were transferred on the stock ledger and taken into the treasury as of the date of sale. Such sale and transfer was unconditional and vested absolute title in the taxpayer. The life annuity to John Steinbach became an absolute obligation of the taxpayer as of the date of sale, was not secured by any pledge of the stock so acquired, and the monthly payments on account of such annuity were not installments on the purchase price of the stock but were in discharge of a contractual obligation between John Steinbach and the taxpayer.
    10. The transaction through which the taxpayer acquired this stock from Steinbach was not recorded at the time in the taxpayer’s general ledger accounts. No asset account was set up to show the cost of this stock to the taxpayer, nor was there any entry in the accounts recording the taxpayer’s liability under its contractual obligation to Steinbach. In lieu of such entries, the taxpayer has monthly charged to a treasury stock account the annuity payments actually made to Steinbach. In the computation of its invested capital for the years under review, the taxpayer failed to give consideration to the amount of liability incurred to acquire the treasury stock from Steinbach or to its actual liability to that individual.
    11. On February 1,1919, John Steinbach was 78 years of age, and, according to the standard American mortality tables, had a life expectancy of 5.11 years.

      12. The building used in tbe operations of the taxpayer was enlarged from time to time as the growing business required more space.' At the beginning of 1921 only a portion of such building was five stories in height. More floor space having become necessary, the taxpayer voluntarily demolished the old fractional fifth floor for the purpose of raising the entire building to the height of five stories. An architect, representing the taxpayer, and the contractor who had undertaken to do the work of demolition for ten per cent of the unextinguished useful value of the property to be removed, estimated that such unextinguished useful value was $20,093, taking into consideration the original cost in 1905, the accrued depreciation and the increased cost of construction in 1921. The original cost of the demolished fifth floor was $14,500; the cost of demolition was $2,009.50. Nothing was realized‘from salvage, and such original cost was exhausted to the extent of 48 per cent at the date of demolition.
    13. Upon audit of the taxpayer’s income and profits-tax returns for the taxable years involved in this appeal, the Commissioner excluded from invested capital the amount of $444,648.14, the value over cost of assets acquired as above set forth on February 1,1921; disallowed the deduction of $21,097.65 as a loss resulting from the demolition of the fifth story of the building owned by the taxpayer, but included such net loss in the computations of the taxpayer’s invested capital; and computed depreciation on the taxpayer’s building at 3 per cent annually on a valuation of $159,960, and on the furniture . and fixtures at the rate of 10 per cent annually on a valuation of $73,350 as of February 1, 1919.
    DECISION.
    The deficiency, if any, should be computed in accordance with the following opinion. Final determination will be made on 10 days’ notice, under Rule 50.
   OPINION.

Lansdon

: This appeal presents three issues for determination by the Board: (1) Whether the assets which the taxpayer acquired at February 1, 1919, should be included in the computation of its statutory invested capital for each of the fiscal years ended January 31, 1919, 1920, and 1921, at a total value in excess of the consideration paid therefor; (2) the deductibility from the taxpayer’s gross income for the fiscal year ended January 31, 1919, of a loss of the unextinguished useful value alleged to have been sustained as a result of the voluntary demolition of the fifth story of the taxpayer’s building; and (3) whether the taxpayer is entitled in the computation of its tax liability to an allowance for depreciation on the fair market value of the tangible assets acquired as above set forth from the date of such acquisition.

The evidence in support of the facts upon which the taxpayer relies to establish its first contention is clear and convincing. Properly qualified experts on real estate and other asset values testified as to the fair market values of the properties acquired by purchase and gift at February 1, 1919. Such proof of value was not weakened or in any way discredited either by cross examination of witnesses or the introduction of testimony in rebuttal. The Board is of the opinion that the property in question had a fair market value of $744,648.14 at the date of its transfer to the taxpayer.

Having determined that the property received by the taxpayer had a definite value at the date of its acquisition, it still remains for the Board to consider whether such value shall be included in the computation of the taxpayer’s statutory invested capital for the years in question. The pertinent parts of section 326 (a) of th% Revenue Acts of 1918 and 1921 provide:

That as used in this title [Title III War Profits and Excess Profits Taxes] llie term “invested capital” for any year means * * * :
(3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year.

For the proper administration of the provision herein quoted, the Commissioner formulated and promulgated article 837 of Regulations 45,' as follows:

Where it is shown by evidence satisfactory to the Commissioner that tangible property has been paid in by a stockholder to a corporation as a gift or at a value definitely known or accurately ascertainable as of the date of such payment clearly and substantially in excess of the cash or other consideration paid by the corporation therefor, then the amount of the excess shall be deemed to be paid-in surplus. * ⅜ *

General accounting practice also supports the contention of the taxpayer.

Paid-in surplus also arises where donations for working capital purposes or otherwise are made to the corporation. Premiums from the sale of capital stock,' donated stock and gifts to corporations are examples. Kohler, Accounting Principles Underlying Federal Income Taxes, 1925, p. 115.

The Supreme Court, in La Belle Iron Works v. United States, 256 U. S. 377

recognizes that in some cases contributions are received from stockholders in money or its equivalent for the specific purpose of creating an actual excess capital over and above the par value of the stock.

It is clear that there is ample legal basis for the taxpayer’s contention that the value of the property paid in in excess of the consideration paid therefor should be deemed to be paid-in surplus. On this point the law, the authority of decided cases, the administrative regulations of the Commissioner, and the best accounting practice are clear and harmonious.

The only remaining question involved in the taxpayer’s first contention is whether the transaction through which the assets in question were acquired is within the provisions of section 331 of the Revenue Act of 1918 and the possible resulting limitations in the amounts that can be included in invested capital. The pertinent provisions of that section are as follows:

In tlie case of the ⅜ * ⅜ change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: Provided, That if such previous owner was not a corporation, then the value of any asset so transferred or received shall be taken at its cost of acquisition (at the date when acquired by such previous owner) with proper allowance for depreciation, impairment, betterment or development. * ⅜ *

Three questions must be considered in the application of this provision of the law to the facts of the instant appeal: (1) Whether an interest of 50 per cent or more in the assets transferred remained in the same parties; (2) whether, by reason of the annuity contract, John Steinbach retained either an actual or contingent ownership of a sufficient number of the shares transferred for 50 per cent of the value of the assets in question to remain in him; and (3) if this provision applies, what was the value, in the hands of the prior owner, of the assets transferred.

The evidence proves that John Steinbach made an unconditional sale of all of his common or voting stock to the taxpayer and that, subsequent to February 1,1919, his only property interest in the taxpayer was that of an owner of a minority of the nonvoting preferred stock. It is true that the consideration was an annuity to be paid by the taxpayer, but Steinbach was not protected against default of such payment by any actual or implied pledge of the transferred shares of stock as collateral and in no event had any contingent or rever-sionary interest or title in such stock. The transfer was absolute. The taxpayer’s title to the stock was perfect. It therefore follows that an interest or control of 50 per cent or more of the assets transferred did not remain in the same persons or any of them, and that the provisions of section 331 of the Revenue Act of 1918 do not apply to the transfer in question. The first two points having been so decided, it is unnecessary to discuss the question of the value of the transferred assets as determined by their cost to the prior owner.

The Board is of the opinion that the taxpayer is entitled to have the amount of $444,648.14, the value of the property paid in on February 1, 1919, in excess of the consideration paid therefor, included in t'he computation of its invested capital as paid-in surplus for each of the fiscal years ended January 31, 1919, 1920, 1921, and 1922, respectively.

We have pointed out in our findings of fact the failure of the taxpayer to record upon its books of account the transaction through which it acquired 3,892 shares of its common and 1,748 shares of its preferred stock. It is our opinion that the method adopted in recording this transaction on the books of account, by charging to treasury stock account the monthly annuity payments to Steinbach as they are made, does not correctly reflect the taxpayer’s invested capital.

.With the conveyance of this stock to the taxpayer by Steinbach the sale became absolute, and title to the stock vested thereafter solely in the taxpayer. At the same moment the taxpayer’s liability to Steinbach for the purchase price or the stock became fixed and determined. It remained only to ascertain the amount of the purchase price and that depended upon the length of time Stein-bach would live. To have properly recorded the transaction upon the books, treasury stock account should have been debited with the probable purchase price, determined as. hereinafter indicated, and a corresponding credit entry made to a liability account set up for the purpose of evidencing the taxpayer’s obligation to Steinbach on account of the purchase price of the stock.

We have found that at the date of the transaction Steinbach was 78 years of age, and, according to American mortality tables, had a life expectancy of 5.11 years. Since the taxpayer agreed to pay Steinbach an annuity of $6,083.33 per month as long as he should live, it is apparent that the probable purchase price of the stock at the date of acquisition was $373,029.80 ($6,083.33X12X5.11), and this is the amount which should have been recorded on the books as the cost of this stock and as the amount of the taxpayer’s liability on account of the purchase price thereof. Actual expenditures in excess of the above estimate add to the cost of treasury stock when made.

The requirement that this liability be recorded upon the books as of the date of the transaction is sound, since it represents a liability actually incurred as of that date to pay to Steinbach a stipulated monthly annuity as long as he should live. It represents an actual liability, and, therefore, borrowed money, just as truly as if the taxpayer had issued to Steinbach a series of notes payable evidencing the payments to be made to him during his life expectancy.

In tbe computation of invested capital the cost of acquiring treasury stock must be eliminated from the assets, on the theory that the amounts representing such cost have been withdrawn from the business and returned to the stockholders. Hence, the invested capital of this taxpayer for each of the years under consideration should be reduced by the cost of the stock purchased from Steinbach, such cost, when predicated upon the agreed annuity based upon a life expectancy of 5.11 years, being $373,029.80.

The taxpayer adduced no evidence that convinces us that it is entitled to deduct the amount of $21,097.30 from its gross income and profits tax return for the fiscal year ended January 31, 1921. The fractional fifth story of the building in question had been constructed in 1905. To secure more floor space and better operating facilities the taxpayer voluntarily demolished the said fractional fifth story and erected a new fifth story extending over the entire structure. The unextinguished cost at the date of demolition was $7,540, and this amount, together with the cost of demolition, should be allowed as the deduction.

The opinion of the Board, supra, in respect of the taxpayer’s invested capital, controls the third issue in this appeal. Depreciation of the value of the tangible assets acquired by way of paid-in surplus, and included in invested capital, should be allowed at proper rates and considered in the computation of the invested capital and tax liability of the taxpayer for the fiscal years ended after February 1, 1921.

Sternhagen,

dissenting, in part: I disagree with so much of the decision as is based upon the reduction of invested capital by the amount of the estimated cost of the stock received from Steinbach.

On reference to the Board, Trusseul joins in the dissent.


text:
    Appeal of JOSIAH WEDGWOOD & SONS, LTD.
    Docket No. 3647.
    Submitted August 3, 1925.
    Decided January 16, 1926.
    1. Wlien it is shown that liability for additional compensation, based upon a graduated percentage of net profits, accrued during the year, such additional compensation should be allowed as a deduction from gross income for such year, notwithstanding the amount was not entered upon the books or paid until the subsequent year, due to the fact that the amount could not be definitely fixed until approval by the home office in England of the audit of the books.
    2. Under the provisions of the Bevenue Act of 1918 the profits tax of foreign corporations should be computed under the provisions of section 328.

      Kingmiam, Brewster, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Littleton, Smith, and Tettssell.
    This is an appeal from the determination of a deficiency in income and profits tax in the amount of $9,071.50 for the calendar year 1918. In its original petition taxpayer, which is a foreign corporation, alleged that the Commissioner erred in denying a deduction of $6,773.89, as additional compensation accrued during the year, and that the Commissioner mathematically erred in his computation of the profits tax under section 302 of the Revenue Act of 1918. At the hearing taxpayer amended its petition so as to allege that its profits tax should have been computed under section 301 of the Revenue Act of 1918, subject to the limitations in section 302, and not under section 328, subject to section 302, as was done by the Commissioner.
    FINDINGS OF FACT.
    Taxpayer is a corporation organized under the laws of England. The home office was at Etruria, Stoke-on-Trent, England; the office and place of business of the American branch was at 255 Fifth Avenue, New York City. The corporation was engaged in the manufacture and sale of earthenware, pottery, and like products, while the American branch was engaged wholly in the sale of these products within the United States and Canada, under the management and direction of K. L. Wedgwood.
    Under the terms of an agreement with the home office, the regular salary of K. L. Wedgwood was $4,850. The agreement provided that, in addition to this amount, he shotild receive 25 per cent of the profits not in excess of £1,000, 33⅛ per cent of the profits in excess of £1,000 and not in excess of £2,000, and 50 per cent of the profits in excess of £2,000. The regular and additional compensation of K. L. Wedgwood for 1918 was fixed and agreed upon during the year by correspondence between him and the officers and manager of the home office in the same manner and by the same method from 1912. The additional compensation for 1918, based upon the varying percentages of profits, and originally computed upon the operating book profits of $20,215.30, amounted to $8,086.81. This latter amount was deducted from gross income in the return for 1918 in computing the tax for that year.
    . The books of the American branch for 1918 could not finally be closed until after the approval of its accounts by the home office, based upon the auditor’s report prepared for that purpose on March 8, 1919. The American auditor’s report was approved by the home office, except that the home office construed the agreement with K. L. Wedgwood as providing for additional compensation based upon net operating profits, after provision for Federal taxes, in the arbitrary amount of $2,625.90, and, accordingly, allowed such additional compensation to the extent of $6,773.89, the amount now in controversy, computed as follows:
    Compensation.
    25 per cent on first £1,000 ($4,850)-$1, 212. 50
    33 ⅛ per cent on second £1,000 ($4,850)- 1,616.67
    50 per cent on balance of profits ($7,889.40)- 3,944.72
    Total additional compensation- 6,773. 89
    Under the agreement this compensation was payable upon demand, and K. L. Wedgwood drew the same in the amounts and on the dates following:
    Jan. 13, 1919_$2, 000. 00
    Mar. 20, 1919_ 2, 000. 00
    Apr. 28, 1919_ 2,773.89
    Total_ 6, 773. 89
    These withdrawals were entered upon the cash books and corresponding charges were made in the ledger. The taxpayer’s accounts were kept upon the accrual basis.
    Upon audit of the return for 1918, the Commissioner disallowed the claimed deduction of $6,773.89, upon the ground that no liability was incurred for the additional compensation and that the same was neither paid nor accrued during the year 1918. He also computed the profits tax under section 328 of the Revenue Act of 1918, upon the ground that section 327 (b) of that Act requires the profits tax of every foreign corporation to be determined under section 328. The profits tax computed under the provisions of section 302 of the Revenue Act of 1918 was lower than the tax computed under section 328, and the Commissioner, accordingly, determined the profits tax under section 302.
    DECISION.
    The deficiency should be computed in conformity with the following opinion. Final determination will be settled on 7 days’ notice, under Rule 50.
   OPINION.

Littleton:

The questions presented by this appeal are: (1) Whether the additional compensation of $6,773.89 was a legal deduction for the year 1918; and (2) whether the profits tax of a foreign corporation should be computed under the provisions of section 301 or section 328, subject to the limitations provided in section 302 of the Revenue Act of 1918.

As to the first point, it appears that for several years it had been the practice of the home office in England to enter into an agreement by correspondence with the manager of the American branch for the payment of additional compensation based upon a certain percentage of the profits. During the year 1918 the taxpayer incurred liability for the additional compensation for services actually rendered and the same accrued within that year. Due to the fact that the auditor’s report of the American branch had to be approved by the home office, the books were not closed'for some time after the end of the year; and, as the additional compensation for the year was based upon the profits, it was not entered upon the books until the auditor’s report had been approved. The auditor’s report was completed March 8, 1919; and, before it had been approved, the manager of the American branch made a return for the calendar year 1918 and deducted $8,086.81, which he regarded as the amount of additional compensation to which he was entitled for the year under the terms of the agreement. The home office, however, deducted an amount as Federal taxes before subjecting the profits to percentages for the determination of additional compensation. This resulted in the additional compensation being reduced to $6,773.89, which was the amount disallowed by the Commissioner and now claimed as a deduction under section 234 (a) (1).

The change in the final amount to be paid upon audit of the accounts by the home office did not affect the deductibility of the additional compensation from gross income. It was an ordinary and necessary expense incurred during the year 1918, as compensation for personal services actually rendered, and as such was a legal deduction. Any adjustment in the amount of additional compensation by the home office affected only the amount and not the right to the deduction. Appeal of American Express Co., 2 B. T. A. 498. Whatever change was made in the taxable income as a result of an increase or decrease of the amount of the additional compensation was subject to correction upon audit or by an amended return. Appeal of Producers Fuel Co., 1 B. T. A. 202. The taxpayer should, therefore, be allowed the deduction of $6,773.89. .

The next question is whether the provisions of section 301 of the Revenue Act of 1918 are applicable to foreign corporations, or whether the profits tax of every foreign corporation must be computed under the provisions of section 328 of that Act. By reference to section 230 we find that an income tax at certain rates is imposed upon the net income of every corporation, and by reference to section 236 we find that only domestic corporations are allowed a credit of $2,000. Section 301 imposing the profits tax provides:

That in lieu of the tax imposed by Title II of the Revenue Act of 1917, but in addition to the other taxes imposed by this Act, there shall be levied, collected, and paid for the taxable year 1918 upon the net income of every corporation a tax equal to the sum of the following:
⅜ ⅜ £ £ £ £ *

Section 302 prescribes a limitation upon the tax imposed by section 301, as follows:

That the tax imposed by subdivision (a) of section 301 shall in no case he more than 30 per centum of the amount of the net income in excess of $3,000 and not in excess of $20,000, plus 80 per centum of the amount of the net income in excess of $20,000; the tax imposed by subdivision (b) of section 301 shall in no case be more than 20 per centum of the amount of the net income in excess of $3,000 and not in excess of $20,000 plus 40 per centum of the amount of the net income in excess of $20,000; and the above limitations shall apply to the taxes computed under subdivisions (a) and (b) of section 301, respectively, when used in subdivision (c) of that section. Nothing in this section shall be construed in such manner as to increase the tax imposed by section 301.,

Section 304 (b) states that “Any corporation whose net income for the taxable year is less than $3,000 shall be exempt from taxation under this title.”

Section 310 defines the pre-war period and section 311, relating to the war-profits credit, declares:

(a) That the war-profits credit shall consist of the sum of:
(1) A specific exemption of $3,000; and
(2) An amount equal to the average net income of the corporation for the prewar period, plus or minus, as the ease may be, 10 per centum of the difference between the average invested capital for the prewar period and the invested capital for the taxable year.
£ • £ £ £ £ £ £
(e) A foreign corporation shall not be entitled to a specific exemption of $3,000.

Section 312 defines the excess-profits credit as follows:

That the excess-profits credit shall consist of a specific exemption of $3,000 plus an amount equal to 8 per centum of the invested capital for the taxable year.
A foreign corporation shall not be entitled to the specific exemption of $3,000.

The above-quoted provisions, if taken alone, would indicate that Congress intended that the profits tax upon the net income of foreign corporations should be computed under section 301, subject to the limitations provided in section 302, in the same manner as domestic corporations. However, these sections should be construed in the light of other sections under Title III relating to the same subject-matter, and in the light of the changes made in the law as it existed at the time of the enactment of the Eevenne Act of 1918. Section 827 of the 1918 Act reads in part as follows:

That in the following cases the tax shall he determined as provided in section 328:
* * * * * * *
(b) In the case of a foreign corporation.

Congress further provided for the determination of profits tax in the cases specified in section 327 under section 328 in the following manner:

(a) * * * In the ease of a foreign corporation the tax shall be computed without deducting the specific exemption of $3,000 either for the taxpayer or the representative corporations.

The taxpayer contends that, in the various sections relating to the profits tax preceding section 327, Congress used language clearly embracing both foreign and domestic corporations, specifically mentioning foreign corporations in connection with the tax imposed by section 301, and that subsection (b) of section 327 was for the purpose of bringing foreign corporations within the class of corporations entitled to claim the benefits of the relief provisions of the Act. It further contends that sections 327 and 328 are relief provisions by which Congress was seeking to prevent inequality in taxation due, among other things, to inability satisfactorily to determine invested capital, and where, due to abnormal conditions affecting invested capital or income, exceptional hardship would be worked upon corporate taxpayers.

The Commissioner contends that, notwithstanding the provisions of sections 301, 311, 312, etc., section 327 (b) is mandatory and requires that the profits tax of every foreign corporation shall in every case be computed under section 328, subject to the provisions of section 302.

The question .before the Board is, What did Congress really intend to direct? We must seek this intention from the Act taken as a whole and the provisions of the law relating to this question as they existed at the time of the enactment of the Revenue Act of 1918.

Section 207 of the Revenue Act of 1917, after defining invested capital, provided:

In the case of a foreign corporation or partnership or of a non-resident alien individual the term “ invested capital ” means that proportion of the entire invested capital, as defined and limited in this title, which the net income from sources within the United States bears to the entire net income.

Section 326 of the Revenue Act of 1918, so far as this question is concerned, defines invested capital of corporations in substantially the same manner as section 207 of the Revenue Act of 1917, except that the 1918 Act, as finally enacted, omitted entirely the provision for the determination of the invested capital of foreign corporations, and provided in section 327, That in the following cases the tax shall be determined as provided in section 328: * * * (b) In the case of a foreign corporation; * * ⅜.”

By reference to the legislative history of the Revenue Act of 1918, it appears that section 326 of House Bill 12863, as passed by the House, contained the following provision in subsection (d) : “ In the case of a foreign corporation the term £ invested capital ’ includes only its invested capital used or employed in the United States.” Section 327 of that bill contained no provision relative to foreign corporations.

Upon consideration the Senate Finance Committee struck out of the bill subsection (d) of section 326 relative to invested capital of a foreign corporation and amended section 327 relative to cases in which the tax should be computed under section 328 by adding thereto subsection (b) “In the case of a foreign corporation.” The bill, as amended by the Finance Committee, was passed by the Senate and went to the Conference Committee of the House and Senate. The conference report relating to this matter stated:

Amendent No. 262: This amendment strikes out the definition provided in the House bill of the invested capital of a foreign corporation (see amendment No. 263), makes clerical changes in the method of computing the invested capital for a fractional part of a year, and defines the average invested capital for the pre-war period; and the House recedes.
Amendment No. 263: The House bill in the so-called “ relief provisions ” provided that in certain specified cases the invested capital of a corporation shall be the amount which bears the same ratio to the net income of the corporation for the taxable year as the average invested capital for the taxable year of representative corporations engaged in a like or similar trade or business bears to their average net income for such year.
The Senate amendment increases the classes of cases in which the tax is to be fixed by reference to the experience of representative corporations; includes therein all foreign'corporations (see amendment 262), and provides that in such cases the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year as the average tax of representative corporations engaged in a like or similar trade or business bears to their average net income (in excess of the specific exemption of $3,000) for such year.
The House recedes with amendments: * * *.

The amendments following the above quotation do not relate to the question here involved.

From the foregoing it appears that it was the intention of Congress that the profits tax of domestic corporations should be computed under section 301 and that the profits tax of all foreign corporations should be computed under the provisions of section 328.

It is apparent from the language of section 302 that its provisions were not intended to apply to the tax computed under the provisions of section 328. Since the profits tax of a foreign corporation must be computed under the provisions of section 328, the Commissioner erred in applying'the provisions of section 302 in his determination of the deficiency involved in this appeal.


author: Littleton

text:
    Appeal of JOHN W. BAILEY.
    Docket No. 3901.
    Submitted November 2, 1925.
    Decided January 16, 1926.
    Upon the evidence submitted, held, that the taxpayer did not realize a profit in the years 1919 and 1920 upon the sale of certain stock of which he had made an absolute gift prior to the date of the sale, and that his returns for the years 1919 and 1920 were not willfully false and fraudulent with intent to evade the tax by reason of his failure to report as income to him the difference between the cost of the stock to him and the price at which it was sold by the donees.

      W. D. Janúson and Paul E. Short, Esqs., for the taxpayer.

      Bruce A. Lowe and G. H. Curl, Esqs., for the Commissioner.
    Before Jambs, Littleton, Smith, and Tkussell.
    This is an appeal from the determination of deficiencies in income tax for the calendar years 1919, 1920, and 1921, in the amounts of $17,663.02, $5,596.10, and $314.84, respectively, and 50 per cent o3 valorem fraud penalty for the calendar years 1919 and 1920, in the amounts of $8,831.51 and $3,212,14, respectively. Only the deficiencies including penalties for the years 1919 and 1920 are in controversy. The questions presented are: (1) Whether an alleged profit arising from the sale of certain stock constituted income to the taxpayer or to six other individuals to whom he claims to have made gifts of stock prior to the sale thereof; and (2) whether the taxpayer willfully filed false and fraudulent returns with intent to evade the tax' for each of the years 1919 and 1920 in failing to include therein as income to him the alleged profit resulting from the sale of the stock.
    FINDINGS OF FACT.
    Taxpayer is a resident and citizen of Battle Creek, Mich., where he has been engaged for many years in the practice of law. Prior to July 17, 1919, he was the owner of 160 shares of common capital stock of the Consolidated Press Co. at Hastings of the par value of $100 per share. For many years he had rendered financial assistance to his five sisters, three of whom had always lived at his home. For some weeks prior to July 17, 1919, taxpayer talked with his wife and five sisters and made known to them the fact that he was making them a gift of certain shares of the stock owned by him in the Consolidated Press Co. On July 17, 1919, he transferred and conveyed by gift and delivery to his wife, five sisters and his private secretary shares of stock of the Consolidated Press Co., as follows:
    Shares. Par value.
    Lillian C. Bailey, his wife_ 70 $7,000
    Julia Bailey, sister- 25 2, 500
    Catharine Bailey, sister_ 4 400
    Helen B. Murphy, sister- 4 400
    Mary McLee, sister_ X 100
    Anne Bailey, sister_ 1 100
    Altine McKee, private secretary_ ⅜ 20
    At the time of delivery of the said shares of stock, taxpayer executed to each of the donees a bill of sale of equal import, except as to name and number of shares transferred, the bill of sale executed to his wife, Lillian C. Bailey, being in words and figures as follows :
    Know all men by these presents, that I, John W. Bailey of the City of Battle Creek in the County of Calhoun and State of Michigan, party of the first part, for and in consideration of the sum of One Dollar ($1.00), lawful money of the United States, to me paid by Lillian C. Bailey, of the same place, party of the second part, the receipt whereof is hereby acknowledged, have bargained and sold, and by these presents do sell, grant and convey unto the said party of the second part, her heirs, executors, administrators or assigns, the following,—

      70 Shares of the face value of $100.00 each, of the capital stock of Consolidated Press Company;
    To have and to hold the same unto the said party of the second part, her heirs, executors, administrators and assigns, fokeveb.
    And the said party of the first part for himself, his heirs, executors and administrators, does covenant and agree to and with the said party of the second part, her heirs, executors, administrators and assigns, to wabkant and defend the sale of said stock hereby made, unto the said party of the second part, her heirs, executors, administrators and assigns against all and every person or persons whatsoever.
    Neither at the time nor prior to the date of the gifts of stock had there ever been made to the taxpayer or the stockholder's of the Consolidated Press Co. a definite offer to purchase the stock of that company, nor had the taxpayer or the other stockholders of the Consolidated Press Co. made any offer to sell their stock in that company. On July 17, 1919, taxpayer was advised by H. B. Sherman, the principal officer and owner of 70 per cent of the entire capital stock of the Consolidated Press Co., who resided at Hastings, Mich., that the E. W. Bliss Co., of Brooklyn, N. Y., had informed .him that they were desirous of having a conference in New York for the purpose of discussing the matter of a possible purchase by them of the plant of the Consolidated Press Co., and requested taxpayer to go to New York with him. Taxpayer accompanied Sherman to New York about July 20, where, after a conference lasting until July 22, an agreement was signed by H. B. Sherman, who held power of attorney to act for other stockholders, and the É. W. Bliss Co., the agreement providing as follows:

      Mr. Sherman agrees:

    I.
    That, on the 28th day of July, 1919, he will sell and deliver to the Company One thousand nine hundred and sixty (1;960) shares of the Capital stock of Consolidated Press Company, a Corporation created and existing under the laws of the State of Michigan, of the par value of One hundred and ninety six thousand dollars ($196,000.00) all in negotiable form duly indorsed in blank and properly stamped for transfer.
    II.
    That, on said 28th day of July, 1919, Mr. Sherman will deposit with the Equitable Trust Co. of the City of New York, Two thousand and forty (2,040) shares of said Consolidated Press Co., of the par value of Two hundred and four thousand dollars ($204,000.00), all in negotiable form, duly indorsed in blank and properly stamped for transfer, and will also execute and deliver to said Trust Company, the document hereto attached marked “A.”
    III.
    The 1,960 shares referred to in paragraph I above and the 2,040 shares referred to in paragraph II above together, constitute all the shares of stock of said Consolidated Press Company.
    The Company agrees in consideration of Mr. Sherman selling and delivering the stock referred to in paragraph 'I above and depositing the stock referred to in paragraph II above and of the guarantees and agreements of Mr. Sherman hereinafter set forth.
    IIII.
    That, it will simultaneously with the delivery to it of the shares described and specified in paragraph I, and the delivery to the Equitable Trust Company of the shares and agreement marked “A,” referred to in paragraph II, pay to Mr. Sherman the sum of Nine hundred and eighty thousand dollars ($980,000.00) in payment for the shares referred to in paragraph I.
    As a part of the consideration for the payment to be made to him by the Company as provided in paragraph IIII, Mr. Sherman agrees and guarantees to the Company
    (a)
    That, the Consolidated Press Company is a Corporation duly organized and existing under the laws of the State of Michigan with a Capital stock of Four hundred Thousand Dollars ($400,000.00) divided into 4,000 shares of the par value of $100.00 each, all of which stock has been duly issued, full paid and nonassessable.

      (b)
    That the amounts and notes receivable and cash on hand and in bank as set forth on the attached sheet, marked exhibit “ B ” and made a part hereof, are correct as of* June 80, 1919. That the inventory of the raw material, work in process, and finished product was equal to the amount set forth in Exhibit “ B.” That on said Exhibit “ B ” the charged off portions have been brought back and the amount set up on the books for taxes and bad accounts have been omitted.
    (c)
    That since June 30, 1919, the transactions and business done by said Consolidated Press Co. are those and only those of a going concern.
    (d)
    That there are no existing' contracts with any of the directors or officers of said Consolidated Press Company except with L. W. Heath for services and with H. B. Sherman, L. W. Heath and Joseph MeKnight for a commission, all of which contracts will be terminated as of June 30, 1919, and commissions earned prior to that only paid.
    (e)
    That all of the officers and directors of the Consolidated Press Company will, when requested by the Company, resign and elect as their successors such persons as the Company may designate.

      The Company Agrees:

    Unless and until it shall exercise the option given it herein that it will not do, nor allow to be done any of the following things:
    (a) Place any mortgage or other lien upon any of the property owned by the Consolidated Press Company, a corporation.
    (b) That it will not permit the Consolidated Press Company, a Corporation, to declare or pay any dividends.
    (c) That it will not sell, assign, transfer, lease or otherwise dispose of the plant of the Consolidated Press Co., a Corporation, or of this agreement.
    (d) That it will not increase the capital stock of the Consolidated Press Company.
    (e) That it shall not permit the Consolidated Press Company to increase the salary or commission given to its officers or directors.
    (f) That it will not increase by contract or otherwise the debts or obligations of the Consolidated Press Co. for the purpose of increasing the present plant or for purchasing machin'ery.
    (g) That it will not amend or change the by-laws of the Consolidated Press Company.
    It is mutually understood and agreed that there are existing Federal and City taxes either matured, or to mature, which the Consolidated Press Company shall pay as and when they mature and become payable.
    This agreement is binding on the Executors, Administrators, and Successors of the parties hereof.
    Attached to this contract was a document addressed to the Equitable Trust Co. of New York, signed by H. 3. Sherman, in which he agreed to deposit 2,040 shares, or 51 per cent, of stock of the .Consolidated Press Co., as follows:
    To the Equitable Teust Company of New Yoek :
    I hand you herewith 2,040 shares of the Capital Stock of the Consolidated Press Company, of the aggregate par value of $204,000.00, all of which shares are in negotiable form endorsed in blank and duly stamped for transfer. You will hold the same, and if at any time after the 2nd day of January, 1920, and before the 10th day of January, 1920, E. W. Bliss Company shall deliver to you a duly certified check to my order or to my account for $998,414.37 you will deliver said 2,040 shares to it, and receive and forward the amount so delivered to me.
    Until said 10th day of January, 1920, you are to hold the same in your possession so that if E. W. Bliss Company make such payment you will be in a position to deliver to it the stock as above-provided.
    If the payment shall not be made by said E. W. Bliss Company on or before said 10th day of January, 1920, then all the stock herewith deposited shall at once be returned to me.
    This deposit and option is made pursuant to. an agreement entered into between the undersigned and said E. AY. Bliss Company, dated July 22nd, 1919, a copy of which is hereto attached.
    The terms of the above agreement were carried out and on July 28, 1919, E. W. Bliss Co. paid PI. B. Sherman, as trustee for the stockholders of the Consolidated Press Co., $980,000 for 1,960 shares, or 49 per cent of the stock of the Consolidated Press Co., and on January 10, 1920, the sum of -$1,020,000 for the remaining 2,040 shares, or 51 per cent. The money received by Sherman from E. W. Bliss Co. on July 28, 1919, and January 10, 1920, was paid over by him on July 81, 1919, and January 24,1920, respectively, to the various stockholders of the Consolidated Press Co., proportionately of the sums received on the basis of $500 per share. The owners of the stock transferred by the taxpayer by gift on July 17, 1919, were paid their proportion of amounts received from E. W. Bliss Co. On August 1, 1919, Lillian C. Bailey, wife of the taxpayer, loaned $16,500 of the $17,150 received by her on July 31, 1919, to her husband, taking his note due in five years from that date, bearing interest at 4 per cent payable annually, which interest has been paid. Upon the receipt by Lillian C. Bailey of the second installment, $17,420, on January 24, 1920, she loaned $16,500 thereof to her husband, taking his note dated January 26, 1920, due on August 1, 1924, bearing interest at 4 per cent payable annually, which interest ivas also paid. The money borrowed by the taxpayer from his wife Avas immediately invested by him in real estate and securities. The amounts due other individuals to whom the taxpayer had made gifts of stock were paid direct to them by Sherman, and taxpayer has at no time had any interest therein, directly or indirectly.
    The Commissioner held that the gifts by taxpayer were not bona -fide; that the taxpayer realized a taxable profit in 1919 and 1920 upon the difference between the cost to him of the 160 shares and the sales price, and that his income-tax returns for 1919 and 1920 were willfully false and fraudulent with intent to evade the tax by reason of his failure to report as his income the claimed profit upon the stock.
    DECISION.
    The deficiencies determined by the Commissioner are disallowed.
   OPINION.

Littleton

: The foregoing findings of fact dispose of the questions involved in this appeal. The evidence presented shows that prior to the date of any offer to purchase the stock in the Consolidated Press Co., before any offer had been made by the taxpayer to sell his stock and prior to any offer to purchase the stock, he made absolute and valid gifts of certain of the 160 shares of stock owned by him in the Consolidated Press Co.; that it was not until five days after the gift that an offer was made to purchase the stock. The evidence further shows that some weeks prior to the date of the actual delivery of the stock taxpayer informed the donees of his intention to make the gift.

The Commissioner contends that the taxpayer knew that the stock was to be sold; that the negotiations had reached the point where the gift by the taxpayer constituted a gift of the proceeds from the sale of the stock; that the gifts were not bona -fide and were made with intent to defraud the Government of the tax upon the sale, and that the returns of the taxpayer for 1919 and 1920, which did not include the profit upon the sale of the stock, were willfully false and fraudulent with intent to evade the tax. There is no. evidence to support this contention. Even if we should find as a fact that the taxpayer had reason to believe that E. W. Bliss Co. or someone else would probably make an offer to purchase the stock, this would not, in view of the other evidence before the Board, have any effect-upon these particular gifts. The gifts here involved were of the stock and not of the proceeds therefrom, and no part of the amounts received by the donees constituted income to this taxpayer. It therefore follows that the determination of the Commissioner that the taxpayer realized a profit upon the sale of 160 shares of stock of the Consolidated Press Co., and that the returns, which did not include this profit, were willfully false and fraudulent with intent to evade the tax, was erroneous.

James dissents.

On reference to the Board, Marquette and Tkammell dissent.


text:
    Appeal of D. A. FISHER, Inc.
    Docket No. 4128.
    Submitted July 15, 1925.
    Decided January 16, 1926.

      O. R. Ewing, G. P. A., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before LittletoN, Smith, and Teussell.
    This is an appeal from the determination of a deficiency in income and profits tax for the calendar year 1918 in the amount of $2,616.68, arising from the denial of taxpayer’s claim that it was entitled to classification as a personal service corporation.
    FINDINGS OP PACT.
    Taxpayer is a Tennessee corporation with principal office at Memphis, engaged in business as an insurance agency, writing all kinds of insurance, except life. The agency was originally started in 1861 by P. A. Fisher. Upon his death the business was carried on by his son, D. A. Fisher. On January 1, 1914, D. A. Fisher incorporated the agency for $50,000, the stock having a par value of $10 per share. Good will was charged with this account and no cash or tangible assets were paid in for the stock. At that time a portion of the stock was issued to D. A. Fisher and to others who were regularly and actively engaged in the business, the remainder being held in the treasury. Shortly after incorporation the taxpayer acquired for 3,000 shares of stock and $300 in cash the insurance agency of Clyde Richert, which possessed no tangible assets.
    The stock of the taxpayer was owned and salaries were paid to the stockholders during the year 1918, as follows:
    Salary.
    D. A. Fisher, president, 26,210 shares-$10,000
    Allan Fisher, vice president, 14,000 shares- 3,150
    Clyde Richert, secretary, 3,000 shares- 3, 300
    Bessie Gardner, 875 shares_ 1, 590
    All of the stockholders were regularly engaged in the active conduct of the taxpayer’s business and devoted their entire time thereto. The services rendered by the corporation consisted of soliciting risks, writing and delivering policies, assuming responsibility for the collection of premiums from the insured, collecting the premiums and remitting them to the insurance companies, less the commissions allowed.
    The assets and liabilities at the beginning and end of the year 1918 were as follows:

    Taxpayer was allowed a period of time by the various insurance companies, beyond the time fixed for the payment to it of the premiums by the insured, in which to remit premiums for which it had assumed liability. During the taxable year the premiums paid by the taxpayer before collection from the insured were negligible.
    During the taxable year, for the purpose of assisting in the fire-protection campaign, and in order to interest property owners generally in the installation of appliances for protection against fire, taxpayer carried a small supply of fire extinguishers, hose, etc., which it sold. It also took orders for fire doors which it ordered shipped direct to the purchaser. The purchaser made payment direct to the shipper and, in addition, paid taxpayer a service charge of 5 per cent of the cost of such doors. The taxpayer’s purpose in having a fire-protection department during the taxable year was to assist in popularizing the fire-protection campaign and to interest its clients and others in the installation of fire-protection apparatus, especially fire doors, which were not sold or carried in stock by any merchant in that territory.
    The income and deductions for the taxable year were as follows:
    Gross income:
    Gross sales, fire-protection department_$44, 827. 29
    Less cost of goods sold_ 33, 336. 80
    11, 490.49
    Miscellaneous income_ 167. 21
    Commissions, fire insurance_ 38, 009.37
    Commissions, casualty insurance_ 10, 292. 73
    Commissions, marine insurance_ 1, 877. 02
    $61,836. 82

      Deductions:
    Ordinary and necessary expenses_$33,343. 56
    Compensation of members_ 16, 300. 00
    Interest_ 555. 73
    Taxes_ 108. 56
    Debts ascertained to be worthless_ 1,438.12
    Exhaustion_ 588. 62
    •-— $52, 334. 59
    Net income_ 9, 502.23
    The income of taxpayer was due primarily to the activities of its stockholders. Capital was a material income-producing factor.
   DECISION.

The determination of the Commissioner is approved.


text:
    Appeal of HOUSEAL-SIMONS AGENCY, INC.
    Docket No. 3418.
    Submitted June 24, 1925.
    Decided January 16, 1926.

      Oscar W. Underwood, Jr., Esq., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Love.
    This appeal is from the determination of a deficiency in income taxes of $897.22 for the year 1919, and $46.88 for 1920.
    The taxpayer assigned seven errors, all of which are involved in and may be epitomized into the one assignment — that the Commissioner erred in refusing personal service classification to the taxpayer for the years in question.
    FINDINGS OF FACT.
    The taxpayer corporation is the successor, through several changes of names, to Bailey-Jones Heal Estate & Insurance Co., with an authorized capital stock of $15,000, with 150 shares of stock.
    In 1918, W. H. Oldham purchased from the stockholders all the stock of the Bailey-Jones Beal Estate & Insurance Co., at $70 per share, with the understanding and agreement that F. L. Kendrick, H. B. Thompson, and W. B. Houseal would take all of said stock off his hands at $80 per share and pay him therefor out of the profits of the business.
    In pursuance of that agreement and as of January 1, 1919, he sold and assigned said stock as follows:
    Sliaves.
    To Kendrick_ 45
    To Thompson_ 18¾
    To Houseal_ 56⅛

      He kept for himself 30 shares, and agreed to assign same to Houseal as soon as Houseal could pay for them. Each of the shareholders drew the dividends, if any, on his shares of stock and exercised all the rights of stockholders.
    The business of the taxpayer was fire insurance, real estate rentals and sales on a commission basis.
    The corporation, at the time Oldham purchased the stock, as well as at the time of its transfer by him to his purchasers, had no tangible assets — nothing except licenses from insurance companies to represent them in that locality; current insurance policies subject to renewal at .termination, at will of policyholders; and rental contracts, on which the taxpayer acquired the right to collect rents, retain its commissions, and remit the net to the landlord. All these rights, or practically all of them, were subject to cancellation at any time. They were kept alive, if at all, by the efforts of Kendrick, Thompson, and Houseal in pushing and going after the business. These persons devoted their entire time to the business of the corporation.
    When an insurance policy was sold, the premium, if paid in cash, was credited to cash, and the net amount due the insurance company was charged to accounts payable, and remittance thereof was made within 60 days. Premiums not paid in cash were credited to accounts receivable and the net charged to accounts payable. The same policy was pursued with reference to rent accounts and commissions on sales of land, except that commissions on sales of land were usually paid in cash, and no entry to accounts payable was due or made.
    The taxpayer had no physical assets other than a small amount of office furniture, and never borrowed any money. The gross income from commissions, per annum, amounted approximately to $50,000.
    On December 31,1919, the condition of the business was as follows: Assets:
    Gash in bank and on band-$6,485. 06
    Bills receivable (money due us on note)- 235.00
    Accounts receivable (being mostly insurance accounts)- 11,273. 70
    Furniture and fixtures and automobile- 1, 982.33
    19,976.09
    Liabilities:
    Amount due insurance companies by us-$7, 760.17
    Accounts payable (amount due landlords for rent, etc.) _ 6, 368. 71
    -14,128. 88
    5, 847. 21

      On December 31,1920, the condition of the business was as follows:
    Assets:
    Cash in bank and on band_$3,626 82
    Furniture and fixtures and automobile_ 1,501.03
    ■Accounts receivable (being mostly insurance accounts)_14,154.34
    19,282.19
    Liabilities:
    Amount due insurance companies by us_$6,020. 93
    Accounts payable (being mostly amount due us to
    landlords for rent collected)_ 10,792.46
    -16, 813.39
    2,468.80
    Oldham, who retained 30 shares of the stock, was regularly employed by, and acted as general manager of, the United Steel Corporation. He was able, through his influence, to throw, and did throw7, profitable business to the taxpayer, He was the only stockholder -who had had much experience in business and the only one who had proven himself a successful business man.
    In addition to throwing insurance and other business which he controlled to the taxpayer, he met in consultation with Kendrick, Thompson, and Houseal, or some of them, as often as once or twice a week, and counseled them in regard to plans of procedure and work to obtain new business.
   DECISION.

The determination of the Commissioner is approved.

On reference to the Board, Sternhagen, Lansdon, and Love dissent.


text:
    Appeal of EMILY N. VANDERPOEL TRUST, DICKINSON W. RICHARDS, Trustee.
    Docket No. 2046.
    Submitted May 9, 1925.
    Decided January 19, 1926.

      Joseph W. Zeller, Esq., for the taxpayer.

      Lee I. Parle, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Trussell.
    This is an appeal from the determination of a deficiency in income tax in the amount of $2,023.19 for the calendar year 1920, arising from the deduction by the Commissioner from the March 1, 1913, value of a certain building of depreciation to the date of sale in Maj7, 1920, for the purpose of determining the gain or loss upon the sale.

      FINDINGS OF FACT.
    Taxpayer is a trust created on March 30, 1901. The corpus of the trust consisted of certain land and buildings, located at 96 Liberty Street and at 205-209 South Salina Street, Syracuse, N. Y. The value of the property, designated as 205-209 South Salina Street, on March 1, 1913, was $251,800, $196,800 representing the value of the land and $55,000 representing the value of the building.
    The trust instrument provided, in part, as follows:
    To have and to hold the above granted premises unto the said parties of the second part, and the survivor of them, and his or their successor or successors, in trust nevertheless to hold and manage the same, and to receive the rents, issues and profits thereof, and after deducting all necessary costs and expenses to apply out of the net rents, issues and profits thereof, the sum of One thousand dollars in each year to the use and education' of Floyd Lewis Vanderpoel, the grandson of the party of the first part, in such school or schools, and college or colleges as the party of the first part shall select, or. in the other expenses of his maintenance and education, as the party of the first part shall direct, subject to the approval in writing of Elizabeth B. Vander-poel, the mother of said Floyd, until said Floyd shall attain the age of twenty-three years, or until he shall die, or until the party of the first part shall die, whichever event shall first occur.
    And said trustees shall pay the balance of the net rents, issues and profits of said trust estate to the party of the first part for and during the term of her natural life by means of quarterly payments in each year unless said trust shall sooner terminate as hereinafter provided.
    On June 1, 1906, the trustees leased the premises at 205-209 South Salina Street for a period of 10 years from May 1, 1909, at an annual rental of $13,000, in which lease the lessee agreed to pay for all ordinary repairs and all alterations and additions, together with all charges against the said property during the term of the lease.
    On November 27, 1912, the original lease was amended and extended for a period of seven years to expire April 30, 1920, the taxpayer agreeing to contribute $4,000 toward the cost of the removal of the party wall between the leased building and the building next south thereof occupied by the lessee and the substitution of steel columns and girders in place thereof, in consideration of an increased rental of $240 a year and the restoration of alterations by the lessee at the termination of the lease as amended.
    On February 26, 1915, the original lease was further extended to expire on April 30, 1929. During the period from February 1, 1913, to February 1, 1920, the lessee expended approximately $24,000 for repairs, alterations and additions to the leased premises. On April 26, 1920, by mutual agreement between the lessor and the lessee, the lease was canceled as of May 1, 1920, on which date the trustees sold the premises at 205-209 South Salina Street to the former lessee for $275,000.

      The net income of the trust was regularly paid to the life beneficiaries. The trustees rendered fiduciary returns which showed no taxable income prior to the year 1920 against which any deduction for exhaustion, wear, and tear of the trust property could be taken. For the year 1920 the trust reported a net profit of $17,257.20, being the difference between the value on March 1, 1913, and the sales price of the property, less $5,542.80 expenses of the sale. The Commissioner computed depreciation at the rate of 3 per cent upon the March 1, 1913, value of the building of $55,000 from, that date to the date of sale and increased the profit from the sale in the amount of $11,275.
   DECISION.

The determination of the Commissioner is approved.


author: Ahundell

text:
    Appeal of W. C. ARTHURS.
    Docket No. 2468.
    Submitted November 2, 1925.
    Decided January 19, 1926.
    Value as of Marcb 1, 1913, of shares of stock, determined for purpose of ascertaining- loss on sales.

      Irvin V. Barth, Esq., for the taxpayer.

      Briggs G. Birripieh, Esq., for the Commissioner.
    Before SteRNhagen, Lansdon, and AruNbere.
    This is an appeal from the determination of additional income taxes for the calendar year 1919 in the amount of $15,127.54. The deficiency arises from the disallowance of certain claimed losses on the sale of stock in various corporations. The position of the Commissioner is that the stock had no value on March 1, 1913, and, consequently, no deductible loss was sustained.
    FINDINGS OF FACT.
    1. The taxpayer purchased, either during the year 1903 or 1904, 200 shares of stock in the Lumber Mineral Co., of Arba, Miss., for which he paid $20,450. These shares were sold in 1919 for $10. The Lumber Mineral Co. was in the business of logging and sawing timber into lumber and marketing same. It owned large blocks of standing timber, a logging railroad, a mill, and the general appurtenances necessary for the operation of a lumber plant. The company was in active operation until 1916, when its mill was destroyed by fire. Due to the difficulty in securing new machinery, the high cost of the same and the scarcity of labor, the company did not rebuild its plant, blit instead liquidated its assets to the extent of selling its logging road, its standing timber, and the lumber theretofore manufactured by it. The company has not yet dissolved and still owns certain logged-off land. On March 1,1913, it was a going concern in good financial condition and had a surplus in excess of $50,000. The shares of stock owned by the taxpayer on March 1, 1913, were worth an amount not less than that paid for them by him.
    2. On April 12, 1907, the taxpayer purchased 40 shares of stock in the E. W. Grates Lumber Co., of Yellow Pine, Ala., at a cost of $5,000. He sold these shares of stock in 1919 for $10. On February 28, 1913, the E. W. Gates Lumber Co. had assets considerably in excess of the par value of the stock of the company, after allowing for all outstanding liabilities. The shares of stock owned by the taxpayer on March 1, 1913, were worth an amount not less than that paid for them by him.
    3. The taxpayer acquired in July, 1906, 23,750 shares of stock in the Montana Consolidated Gold Mining Co. of the par value of $1 each, for which he paid $10,000. These shares of stock were sold during the year 1919 for $10. The mine of the corporation was located at Jardine, Mont. The taxpayer received no dividends on the stock after the year 1908. On March 1, 1913, the mine was shut down because of the inability of the company successfully to operate it, and in May, 1913, the entire property of the company was sold under foreclosure proceedings by the sheriff. Thereafter, the company had no assets whatever, except the bare right to redeem the property sold by the sheriff within one year after it was sold. The shares of stock owned by the taxpayer in the Montana Consolidated Gold Mining Co. had no fair market value on March 1, 1913.
    4. On February 11, 1907, the taxpayer acquired 400 shares of stock in the Central Life Securities Co. for $5,000. A liquidating dividend of $340 was received. . The taxpayer, during the year 1919, .sold his stock in this corporation for $10. The stock in the Central Life Securities Co. was sold to the public by Rhodus Brothers of Chicago, who failed to account properly for the money received by them from the stock sales. Suit was brought against Rhodus Brothers some time prior to March 1, 1913. A judgment was thereafter obtained, but no money was ever collected on the judgment. Prior to March 1, 1913, the company had ceased to operate because of its financial embarrassment as a result of the peculations of Rhodus Brothers. The shares of stock owned by the taxpayer in the Central Life Securities Co. had no fair market value on March 1, 1913.
    5. The taxpayer purchased on April 18, 1907, 25 shares of the preferred and 25 shares of the common stock of the Harvell Jewelry Co., for which he paid $5,000. The taxpayer sold this stock in the Harvell Company in 1919 for $10. The Harvell Jewelry Co. had places of business located in Litchfield, Mount Yernon, and Gillespie, Ill. On March 1, 1913, the affairs of the Harvell Jewelry Co. were being handled by a trustee in bankruptcy. The bankruptcy proceedings were finally wound up on June 20, 1917. The taxpayer received nothing by way of distribution from the trustee. The shares of stock of the taxpayer in the Harvell Jewelry Co. had no fair market value on March 1, 1913.
    6. The taxpayer purchased on July 17, 1907, 10 shares of stock in the T. B. Arnold Supply Co. for $1,000. He sold this stock in 1919 for $1. The company was engaged as a broker in selling railroad supplies, and the success of the business was entirely dependent on the initiative of T. B. Arnold. The company never made money and never paid dividends. Arnold died in December, 1913. Some months prior thereto he ceased to operate this business and went into another business. The corporation itself ceased to exist at or about that date. The shares of stock owned by the taxpayer had no fair market value on March 1, 1913.
    7. On June 16, 1909, the taxpayer acquired 1,000 shares of the Colorado Land, Loan & Live Stock Co. at a cost of $1,000. This stock was sold during 1919 for $2. The taxpayer conceded at the hearing that he could not prove the March 1, 1913, value of his shares of stock in the Colorado Land, Loan & Live Stock Co.
    8. On November 19, 1906, the taxpayer purchased 2,000 shares of stock in the Anglo Mexican Mining Co. at a cost of $2,000. This stock was sold in 1919 for $2. The taxpayer conceded at the time of the hearring that he could not establish the March 1, 1913, value of the stock in this company.
    9. The taxpayer on June 8, 1908, purchased 10,000 shares of stock in the Black Eagle Mining & Leasing Co., for which he paid $1,000. He sold this stock in 1919 for $1. The taxpayer conceded at the' hearing that he could not establish the March 1, 1913, value of these shares of stock.
    10. The taxpayer acquired on March 20, 1907, 5,000 shares of stock in the American Venture Corporation, for which he paid $1,000. He sold this stock in the year 1919 for $1. The taxpayer conceded at the hearing that he could not establish the March 1,1913, value of these shares of stock.
    11. The taxpayer acquired on December 1, 1904, 500 shares of stock in the Wolverine & Buckeye Oil Co., for which he paid $2,456. The stock was sold in the year 1919 for $5. The taxpayer conceded at the hearing that he could not establish the value of his shares of stock in that corporation on March 1, 1913.

      DECISION.
    The deficiency should be computed in accordance with the foregoing findings of fact and the following opinion. Final determination will be settled on 15 days’ notice, in accordance with Fule 50.
   OPINION.

Ahundell

: This case involves questions of fact, viz, the value on March 1, 1913, of various securities bought by the taxpayer prior to that date and sold in the taxable year at less than cost.

At the hearing the taxpayer conceded that he could not establish the value on March 1, 1913, of the shares discussed in paragraphs 7, 8, 9, 10, and 11 of the findings of fact.

The uncontradicted evidence produced by the taxpayer was that the shares owned by him in the Lumber Mineral Co. and the E. W. Gates Co., were, on March 1, 1913, worth an amount not less than that which the taxpayer paid for them. It is true that this stock was closely held and there is no evidence of actual sales. In the absence of sales, it is entirely proper to examine into the value of the assets and the amount of the company’s earnings over a period of years, and, in view of this and all other evidence before us, determine what is the fair market value of shares of stock in a corporation. The evidence introduced in this case, we think, warrants a finding that the shares of stock held by the taxpayer in the Mineral Lumber Co. and the E. W. Gates Co. were, on March 1, '1913, worth an amount not less than the cost.

It is the taxpayer’s contention that the value of the shares mentioned in paragraphs 3, 4, 5, and 6 of the findings of fact is established as of March 1, 1913, by proof of their cost, coupled with his testimony that he had no reason to believe on that date they were worth less than what he paid for them. -In other words, it is argued that the law indulges in a presumption of the continuing existence of an established fact, and the purchase price of the shares having established their value as of that time, the same value should be presumed to obtain at a later date in the absence of any showing of a condition affecting that value. The only evidence offered being that of the taxpayer, it is argued that the cost price must be accepted as the March 1, 1913, value of the shares in controversy. The taxpayer overlooks the fact, however, that the presumption of continuity of value may be rebutted as well by the cross examination of the plaintiff as by affirmative evidence offered by the defendant. This, we think, has happened in this instance. The plant of the Montana Consolidated Gold Mining Co., in which Arthurs owned 23,750 shares on the sale of which he now claims a loss, was shut down on March 1, 1913, due to financial difficulties. The company had not paid dividends for a number of years prior thereto. As a result of foreclosure proceedings, all of the assets were sold by the sheriff within two or three months after March 1, 1913, and it is a fair inference that these proceedings were in process or at least imminent on that date. The Central Life Securities Co. had, prior to March 1, 1913, ceased to operate, and the Harvell Jewelry Co. was, on March 1, 1913, in the hands of a trustee in bankruptcy. The evidence as to the value of the stock in the T. B. Arnold Supply Co. was of the same tenor and is equally unconvincing. One would indeed be easily persuaded were he to accept the bare statement of the taxpayer that the shares were, on March 1, 1913, worth the price paid for them, as establishing proof of that fact, when the evidence .shows that the companies were on that date either in the hands of a trustee in bankruptcy or had ceased to operate as going concerns.

Section 202 of the Revenue Act of 1918 provides that “for the purpose of ascertaining the * * * loss sustained from the sale or other disposition of property * * * the basis shall be * * * in the case of property acquired before March 1, 1913, the fair market price or value of such property as of that date.” The provision is a limitation on the actual loss that would otherwise be deductible. United States v. Flannery, 268 U. S. 98. It must follow that no loss can be allowed upon the sale of the shares which on March 1, 1913, had no fair market value.