author: Love :

text:
    Georgiana McFetridge, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11210.
    Promulgated December 22, 1927.

      D. D. Shepard, As-y., for the respondent.
   OPINION.

Love :

The respondent in his notice of deficiency, dated November 25,1925, proposed a deficiency in tax for the year 1924 in the amount of $297.52. The petitioner appealed from his action in determining that deficiency and alleged that the respondent erred in disallowing the application of 25 per cent reduction to that portion of her income returned for 1924 which came from the proportionate 1923 earnings of her partnership, which had a fiscal year. The entire deficiency resulted from such action by the respondent and consequently the issue presented is determinative thereof.

As is set forth in the findings of fact, the parties hereto by stipulation agreed that the respondent had erred in computing the surtax, as stated in his notice of November 25, 1925, and that the notice of February 11,1926, was simply a correction of that error and that the correct computation of the deficiency appealed from was $465.47.

The issue presented as to whether the respondent erred in disallowing the application of 25 per cent reduction to that portion of petitioner’s income returned for 1924 as came from the proportionate 1923 earnings of her partnership, which had a fiscal year, and upon which the deficiency of $465.47 is predicated, must be resolved in favor of the respondent upon the authority of the Board’s decision in Charles Colip, 5 B. T. A. 123, as the identical issue was presented therein. Having resolved the sole issue presented by the pleadings and upon which the deficiency of $465.47 is predicated in favor of the respondent, it is necessary for us to consider the respondent’s motion to increase that deficiency to $686.35 as disclosed by his notice of December 23, 1926.

The increased deficiency as shown in the notice of December 23, 1926, arises by reason of the findings of a revenue agent that the petitioner’s partnership income should be increased by the amount of $1,339.50, and that the amount of $312.66 foreign interest should be included in income, which results in a net increase of the deficiency to the extent of $220.88. The petitioner did not appeal from the respondent’s determination as evidenced by his notice of December 23, 1926. That notice, therefore, does not constitute the basis of this appeal, and it being before us only in support of a motion to increase the deficiency, does not carry with it a presumption of correctness.

By his motion to increase the deficiency appealed from the respondent introduces into this proceeding new issues, to wit: Error with respect to partnership income and foreign interest, and in respect of such issues the burden of proof is on him.

As before stated, in support of the motion to increase the deficiency appealed from, the respondent offered in evidence the deficiency notice of December 23, 1926, together with a revenue agent’s report showing certain findings in regard to petitioner’s partnership income and foreign interest. These documents were permitted to go into the record, subject to a ruling upon a consideration of the case as to their competency as evidence. In our opinion, these documents are not competent proof of the facts asserted by the respondent and, consequently, we decline to increase the deficiency from $465.47 to $686.35.

Reviewed by the Board.

The deficiency for 19%J¡. is $465.fl. Judgment will be entered accordingly.


source: Caselaw Access Project

author: Love:

license: Public Domain

text:
    Martha G. McFetridge, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11209.
    Promulgated December 22, 1927.

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

Love:

It is unnecessary to discuss the issues herein presented, as the identical issues were considered and decided by the Board in Georgiana McFetridge, 9 B. T. A. 759. Accordingly, the decision of the questions involved in this proceeding is governed by the Board’s decision therein.

[Reviewed by the Board.

The deficiency for 19%J¡. is $1¡.1¡.%.7%. Judgment will be entered accordingly.


text:
    Edward P. McFetridge, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11503.
    Promulgated December 22, 1927.

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

Love:

The first contention of the petitioner is that the Commissioner erred in disallowing the application of the 25 per cent reduction provided by section 1200 of the Revenue Act of 1924 to that portion of his income for 1924 which came from the proportionate 1923 earnings of his partnership, which had a fiscal year. The issue thus presented has heretofore been considered by the Board in Charles Colip, 5 B. T. A. 123, wherein it was held that the Commissioner did not err by reason of such action. Accordingly, his action in this respect herein is approved.

The petitioner’s next contention is that the Commissioner erred in reducing his earned income from $10,000 as reported by him, to $5,985.84, thereby reducing the earned-income tax credit of $55, as claimed. It is also contended by the petitioner that the earned-income tax credit of $12.18 as computed by the Commissioner on earned income of $5,985.84 is erroneous on its face.

The petitioner alleged that for the year 1924 he received as salary from the Island Woolen Co., a corporation, the amount of $25,416.67, of which amount he reported as earned income the maximum allowed by the statute, to wit, $10,000, which amount, it is alleged, was erroneously reduced to $5,985.84. .In his answer, the Commissioner admits that the petitioner reported the amount of $25,416.67 as salary but denies the receipt thereof and he further admits that the earned-income tax credit of $12.18, as computed by him, was based upon the amount of $5,985.84. The burden of proof with respect to the amount of salary received, is, therefore, on the petitioner.

In support of a motion to increase the deficiency herein, which motion will be considered hereinafter, the Commissioner, by his attorney, introduced in evidence, solely for the purpose of showing the method of computing the increased deficiency, a revenue agent’s report covering the year in question, a memorandum from the assistant to the Commissioner to the General Counsel of Internal Revenue and the notice of deficiency, dated December 23, 1926, which notice sfets forth the increased amount in respect of which the motion was made. All of these documents, introduced for the limited purpose of showing the method of computing the increased deficiency, if considered as evidence for any other purpose, tend to substantiate the petitioner’s allegation with respect to the amount of salary received and his consequent right to report and have his earned-income tax credit computed on the basis of $10,000. We are of the opinion, however, that the above-described documents have been introduced in evidence for the limited purpose stated. They do not constitute proof of the receipt of the alleged salary or overcome the presumption of correctness with respect to the Commissioner’s action in reducing earned income to $5,985.84.

We agree, however, with the petitioner’s contention that the earned-income tax credit of $12.18 computed on earned income of $5,985.84 is erroneous on its face. The Commissioner’s computation in the notice of deficiency of December 8, 1925, is as follows:

Computation of Tax.
19. Earned Income_$5,985. 84
20. Less Personal Exemption and Credit for Dependents_ 2, 500. 00
21. Balance (Item 19 minus 20)_ 2,485.84
22. Amount taxable at 2% (not over the first $4,000 of Item 21)_ 2,485. 84
23. Amount taxable at 4% (not over the second $4,000 of Item 21)_ None
24. Amount taxable at 6% (balance over $8,000 of Item 21)_ None
25. Normal Tax (2% of Item 22)_ 48. 72
26. Normal Tax (4% of Item 23)_ None
27. Normal Tax (4% of Item 24)_ None
28. Total Normal Tax Computed on Earned Net Income_ 48.72
29. Credit of 25% of Tax on Earned Net Income_ 12.18

It is apparent that in subtracting Item 20 from Item 19, an error of $1,000 was made. The correct computation is:

Earned income_$5, 985. 84
Less personal exemption and credit for dependents_ 2, 500. 00
Balance-¿_ 3,485.84
Taxable at 2%_ 69. 72
Total normal tax_ 69.72
Credit of 25%_ 17.43

The remaining point for consideration, the Commissioner’s motion to increase the deficiency for 1924 from $923.10, as proposed in the notice of December 3, 1925, and from which this appeal is brought, to $1,316.27, as proposed in the notice of December 23, 1926, has been decided adversely to the Commissioner in Georgiana McFetridge, 9 B. T. A. 759. Accordingly, the motion herein is denied.

The deficiency proposed in the notice of December 3, 1925, should be recomputed, giving effect to the correct earned-income tax credit of $17.43.

Reviewed by the Board.

Judgment will T>e entered on 15 days’ noti'ce, under Rule 50.

Teussell dissents.


author: Milliken:

text:
    Corning Glass Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9826.
    Promulgated December 22, 1927.

      Laurence Graves, Esq., for the petitioner.

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

Milliken:

Six questions are presented for decision. Four of them relate to petitioner’s invested capital in the year 1921, and two to deductions.

We will first consider petitioner’s contention that respondent erred in excluding from its invested capital for the year 1921, intangibles consisting of good will, patents, and a contract, all of which it asserts it acquired in 1911 in exchange for the whole of its then existing capital stock. Petitioner asserts that these intangibles had, at the beginning of the year 1921, a value of at least $233,750 for invested capital purposes.

Respondent contends that, since the primary purpose sought to be accomplished by the consolidation of the Corning Glass Works and the Houghton Glass Co. was to increase the capital stock of the former company, we should disregard the corporate entity of petitioner and hold that the assets of the Corning Glass Works were not bona fide paid in for petitioner’s capital stock; and if not sustained in this position, then, that there is not sufficient evidence in the record upon which to base a computation of the value of the intangibles, if any, acquired by petitioner or by reason of the consolidation.

We are thus met at the threshold with the question, What were the legal consequences of the consolidation of the Corning Glass Works and the Houghton Glass Co. ? If respondent’s first contention is sound, the result will be that the corporate existence of petitioner must be disregarded and the additional stock, which was issued, held to be in fact a stock dividend paid by the Corning Glass Works. While it was at first the purpose of the officers and stockholders of the Corning Glass Works to increase its capital stock, this plan was abandoned when they discovered that, if adopted, it would result in reducing the corpus of certain trusts to the extent of seventeen-eighteenths of the value of all the stock of the Corning Glass Works included in the trusts. They then resorted to the plan of consolidation set forth in the findings of fact. This plan, when carried into effect, resulted in the dissolution of the Corning Glass Works and the Houghton Glass Co. and the organization of petitioner, which was a new corporate entity entirely distinct from the two old corporations. See sections 7, 8, 9, and 10 of the Business Corporations Law of New York; People v. New York, Chicago & St. Louis R. Co., 129 N. Y. 474 ; 29 N. E. 959; People v. Rice, 11 N. Y. S. 249; affd. 128 N. Y. 591; 28 N. E. 251. By virtue of the consolidation, petitioner acquired, without deed or other formal transfer, all the assets, tangible and intangible, of the Corning Glass Works. See section 10 of the Business Corporations Law of New York, and Tonawanda Power Co., 3 B. T. A. 1195. Thus a new and distinct corporation acquired the tangible and intangible assets of another corporation in consideration of the issue of its capital stock, or to put the matter in the language of the Bevenue Act (section 326 of the Bevenue Act of 1921), the assets, tangible and intangible, of the old corporation, were paid in for the stock of the new corporation. No contention is made to the effect that petitioner is not a corporation de jure. If respondent’s contention is sustained, we would be forced to hold that the issue of stock by petitioner, to the extent that it exceeded the amount of the outstanding stock of the old corporation, was a stock dividend of the latter corporation. Compare LaBelle Iron Works v. United States, 256 U. S. 377; 3 Am. Fed. Tax Bep. 3113. But this is the very thing which did not happen.

We have before us for consideration, entities and realities which we can not and should not disregard. In Regal Shoe Co., 1 B. T. A. 896, we were urged to disregard a corporate entity and substitute therefor what was suggested to have been the intention of the parties. We there said:

* * * A corporation is not a mere form; it is a substantial legal being •whose existence, rights and obligations are matters of substance, the recognition of which has permeated the entire economic existence of the Nation, and neither the Government nor the taxpayer will be heard in a bona fide case, except in extraordinary circumstances, to say that it is a mere fiction to be lightly disregarded. Cannon Mfg. Co. v. Cudahy Packing Co., 267 U. S. 333.

Again we said:

We must, therefore, hold that the subsequent expression of original intent can not convert the fact of stock issued for stock into a transaction of stock issued for tangible and intangible corporate assets. We must give heed to the statement of the Supreme Court in United States v. Phellis, 257 U. S. 156, that “ in such matters, what was done, rather than the design and purpose of the participants, should be the test.”

In this, as in the Regal Shoe Co. case, the proceedings which we are asked to disregard occurred long prior to the adoption of the Sixteenth Amendment and when it could not possibly have been anticipated that there would have been any tax liability under that Amendment. There is no suggestion of lack of good faith.

The first step in the computation is the determination of petitioner’s invested capital. Invested capital is purely a statutory concept which is defined in technical and arbitrary terms. In many respects, this conception differs from that adopted in the accounting world. It matters not how inequitably this concept may work out in so far as the taxpayer is concerned, it must be applied strictly. The taxpayer is entitled to have the same character of construction placed upon the statute when it works in his favor as when applied to his detriment. In this proceeding, petitioner has brought itself squarely within the words of the Eevenue Act and we should not deprive him of its benefit by speculating as to what might have been the result if another method of procedure had been adopted.

This brings us to the question whether the Corning Glass Works possessed intangibles, whether such intangibles were bona fide paid in for petitioner’s capital stock; and what value should be attributed to such intangibles at the date of the consolidation, and in 1921, for the purpose of invested capital in the latter year.

Petitioner, in 1911, acquired in consideration of the issue of its then whole capital stock, a business which had been in successful operation since 1868, which out of earnings after the payments of dividends had increased its net worth in the period 1875-1911, thirty-four fold; which owned patents under one of which was produced about 100 per cent of the clinical thermometers used in this country, and others on signal lighting devices which resulted in the revolution of the signal systems of the great railroads, and which had a very valuable contract with the General Electric Co. Since all the assets, both tangible and intangible, of the Corning Glass Works were paid in for the entire capital stock of petitioner, both the tangibles and intangibles of the old company should be held to have been paid in for petitioner’s capital stock and such stock should be allocated between them in proportion to the cash value of each to the date of consolidation. See St. Louis Screw Co., 2 B. T. A. 649.

In finding that the intangibles of the Corning Glass Works had at the date of the consolidation a value of not less than $1,200,000, we have taken into consideration the fact that some of the factors which go to make np the real valuation, such as the remaining life of the patents, are not shown by the evidence. We have attributed to the average value of the tangibles for the five years next preceding the consolidation, an earning capacity of 10 per cent, and then capitalized the average net earnings for the same period on the basis of a five-year purchase. This is a formula applicable to a business of a hazardous nature and, generally speaking, would not be applicable to the business of the Corning Glass Works, which at the date of the consolidation, had a record of 43 years of successful, solid, business achievements. The use of this formula in this case takes care of all the absent factors. On the whole case, we are satisfied that the intangibles of the Corning Glass Works, at the date of consolidation, were worth at least the amount found. Compare Otis Steel Co,, 6 B. T. A. 358; Hamipton Company, 2 B. T. A. 302.

Petitioner should be permitted to include in its invested capital for the year 1921, intangibles acquired in the consolidation to the amount of $233,750, which is 25 per cent of the par value of petitioner’s outstanding capital stock on March 3, 1917. This amount is less than the actual cash value of the intangibles at the date of consolidation, is less than the par value of petitioner’s capital stock attributable to their purchase, and is less than 25 per cent of the par value of the total stock of petitioner outstanding at the beginning of the year 1921.

Petitioner, in its income-tax return, sought to deduct from its gross income for that year, $6,000 of the $240,000 paid to Estabrook & Co. in that year. In its return for 1922, it sought to deduct from its gross income for that year, the remaining $234,000. Respondent refused to allow both deductions. The deduction for the year 1921, was based on the theory that the whole $240,000 paid was a capital expenditure which should be amortized through the remaining life of the corporation, which was 40 years. The remaining $234,000 was sought to be deducted in 1922, for the reason that since the preferred stock was retired in that year, the corporation did not, thereafter, receive any further benefit from the expenditure.

It may be pointed out by way of parenthesis, that it is difficult to say that the life of the stock and the remaining life of the corporation would be the same, since the stock could be retired at any dividend pay period, and was in fact retired in the year 1922.

The first question for solution is whether the whole or any part of the $240,000 paid Estabrook & Co. is deductible at any time. Petitioner has introduced no evidence to add to the provisions of the contract between it and Estabrook & Co. as evidenced by their respective letters of December 3, 1920, and December 7, 1920. We have before us only the written words of the contract and testimony as to how the contract was performed. The fact that a lump sum of $240,000 was agreed upon as the compensation of Estabrook & Co., the fact that Estabrook & Co. were to take up and pay for all of the $3,000,000 issue before June 30, 1921, and the fact that the whole issue of $3,000,000 was taken by them, clearly indicate that the whole issue was in fact sold. Taking these facts into consideration, the pertinent parts of the contract can be stated in few words. By the contract, Estabrook & Co. agreed to purchase the whole issue of stock ($3,000,000) and pay par therefor. Petitioner agreed to sell the whole issue at that price and to pay Estabrook & Co. $240,000, or $8 per share, for their services and in consideration of the contract, the payments to be made at the option of Estabrook & Co. pro rata as they took the stock.

What is the real meaning and what is the actual result of this contract ? On this point we make the following excerpt from Heryford v. Davis, 102 U. S. 235:

What, then, is the true construction of the contract? The answer to this question is not to be found in any name which the parties may have given to the instrument, and not alone in any particular provisions it contains, disconnected from all others, but in the ruling intention of the parties, gathered from all the language they have used. It is the legal effect of the whole which is to he sought for. The form of the instrument is of little account.
Though the contract industriously and repeatedly spoie of loaning the cars to the railroad company for hire, for four months, and delivering them, for use for hire, it is manifest that no mere bailment for hire was intended.

In Kelly, Maus & Co. v. Sibley (C. C. A.), 137 Fed. 586, it was held that the recital in a contract that a certain amount was to be paid as a “ commission ” did not convert *a contract of sale into a contract of agency. So in this case the recital in the contract that the sum of $240,000 was to be paid to Estabrook & Co. for their services is of no importance if in fact that firm was not the agent of petitioner. The contract does not attempt to create the relation of principal and agent. The only obligations which Estabrook & Co. owed petitioner were to purchase at an agreed price and take and pay for within a specified time, the whole of the issue of petitioner’s preferred stock. When they did this they discharged every obligation imposed upon them by the contract. Nor does the recital, that this sum was to be paid in consideration of the contract, serve to make its payment the true consideration. That consideration is to be found in the mutual promises to sell and to buy. Based upon this consideration, petitioner agreed to sell to Estabrook & Co., its stock at par and upon the receipt of any part of the purchase price to at once return 8 per cent thereof. Boiled down to its essence, the contract was one of purchase and sale of petitioner’s preferred stock for' the net price of $92 per share. Compare Emerson Electric Manufacturing Co., 3 B. T. A. 932. Petitioner incurred no deductible loss by reason of the fact that it sold its stock below par. See Simmons & Hammond Mfg. Co., 1 B. T. A. 803; Cooperative Furniture Co., 2 B. T. A. 165; Chas. H. Lilly & Co., 2 B. T. A. 1058; and Emerson Electric Manufacturing Co., supra.

If, however, we go behind the contract and indulge in the supposition that this was a transaction in which Estabrook & Co. acted as the agent of petitioner, the result would be the same. See Simmons Company, 8 B. T. A. 631.

We are of the opinion that respondent did not err in refusing to permit petitioner' to take the deductions sought. We are further of the opinion that the $240,000 paid Estabrook & Co. is not deductible in any event.

The next question grows out of the one just discussed. It is whether petitioner is entitled to include in its invested capital, as of January 1,1921, the amount of $122,858, which had been paid in to it prior to January 1, 1921, by its employees in full, for their subscriptions for 1307 shares of its preferred stock. Respondent insists that since petitioner had, previous to accepting the subscriptions of its employees, sold the entire issue to Estabrook & Co., it had no stock to issue to its employees, and that the payments made to it were received by it for the purpose of being paid over to Estabrook & Co. He further insists that the restrictions placed upon these subscriptions were such as to show that the stock did not belong to the employees until it was actually delivered to them in the year 1922.

We have just held that petitioner sold its stock to Estabrook & Company at $92 per share. It thereupon acquired from Estabrook & Co. an option on a certain number of shares at $94 per share. Some of these shares it at once sold to its employees. Of the shares so subscribed, 1,307 were fully paid up prior to January 1, 1921. Looking through all the forms of bookkeeping and check exchanging, we find that petitioner sold its stock at $92, bought it back at $94 and sold again at $94. To the extent of $92 a share, the money paid in by the employees pursuant to their subscriptions never in fact left petitioner’s treasury. To that extent the money paid in by the employees for the shares of stock subscribed by them was at once available to the petitioner as capital which it could use in its operations. The fact that the stock was not issued and delivered until 1921, does not alter the fact that petitioner had invested capital to the extent of $92 per share prior to January 1, 1921. Cf. Manville Jenckes Co., 4 B. T. A. 765, and Middleton Compress & Warehouse Co., 1 B. T. A. 1145. Neither do we think that the restrictions placed upon the subscribers affect the conclusion which we have reached. The stock belonged to the employees from the time they paid for it. The fact that they could not sell it for a certain period was only a temporary limitation on the right of disposition and did not go to the fact of ownership itself. The right of petitioner to repurchase this stock under certain conditions did not transfer to it ownership of the stock. An unexercised option does not confer ownership. See Western Union Telegraph Co. v. Brown, 253 U. S. 101. Petitioner should, therefore, be permitted to include in its invested capital as of January 1, 1921, the 1,307 shares which it had sold to its employees and which were fully paid for at the rate of $92 per share, or in all, $120,244, if not already allowed to petitioner.

Petitioner asserts that the $25,000 paid the Corning Hospital in 1922 was an ordinary and necessary expense and was, therefore, deductible from gross income under section 234(a) (1) of the Revenue Act of 1921. It is to be noted that a corporation does not, like an individual, possess the right to deduct up to a certain percentage of its income, donations made to charities. In cases like this, a donation to a charity can be sustained as a deduction only when it is an ordinary and necessary expense of its business. We have held that payments made to assist in the erection of or repair to churches or similar charities were deductible as ordinary and necessary business expenses in those cases where the payments were made pursuant to a consistent policy of welfare work, and where the result of such payments had a direct and reasonable effect upon the corporation. See Superior Pocahontas Coal Co., 7 B. T. A. 380, and cases cited. In nearly all of these cases, the church or other building was erected in a mill village, the population of which was almost exclusively composed of employees of the corporation and their dependents. In the present case, the hospital was not erected in a village where nearly all of the inhabitants were employees or represented by employees of the corporation, but in a city of over 15,000 people. It also served a large manufacturing plant about two miles from Corning. It was erected at a cost of between $250,000 and $300,000, for the benefit of the whole city. While the fact that petitioner’s employees were liable to suffer and did suffer numerous accidents, and while it was a benefit to the corporation that its employees could be hospitalized in their home city, and while no doubt the hospital conferred benefits upon the families of petitioner’s employees, it is our opinion that the benefits were incidental, rather than direct. This view is confirmed by the comparatively small amounts paid by petitioner to the hospital during 1921 and 1922. The amount paid in 1922 was less than would have paid for one patient for a whole year. A business expense which is deductible under section 234 (a)(1) must be both an ordinary and necessary expense. While not giving to these words a too narrow construction, we can not hold, in this case, that the contribution to the Corning Hospital was a necessary and ordinary business expense. We are, therefore, of the opinion that respondent did not err in refusing to permit the deduction.

The next question is whether petitioner should have restored to his invested capital as of January 1, 1921, the $250,740.09, which had theretofore been taken as depreciation on petitioner’s books and in its income-tax returns and which had been disallowed by respondent.

The facts relative to this i'ssue were stipulated and our findings correspond with the stipulation. While it might have been better if the stipulation had not been stated in such narrow terms, we are of the opinion that upon the facts as stipulated, petitioner should have restored to its invested capital the amount that has heretofore been disallowed by respondent as depreciation for the years 1917 to 1920, inclusive. We are confirmed in this conclusion by the fact that respondent’s counsel, at the hearing, in effect confessed error.

Petitioner contends that in computing its invested capital for the year 1921, respondent erred in computing its tax liability for the year 1920. The facts with reference to this issue were stipulated and our findings of fact correspond with the stipulation. Petitioner’s invested capital should be readjusted in this respect in accordance with the facts found.

Reviewed by the Board.

Judgment will be entered on W days' notice, wider Bule 60.


author: Milliicen :

text:
    Appeal of George Wiedemann Brewing Co. and Walter B. Weaver, as a Stockholder, etc.

    Docket No. 7955.
    Promulgated December 22, 1927.

      James B. O'Donnell, Esq., for the petitioners.

      Maxwell E. McDowell, Esq., for the Commissioner.

       This proceeding is filed as Appeal of The George Wiedemann Brewing Co. and Walter B. Weaver, as a stockholder of said company since dissolved, for himself and other stockholders of record of said company at the date of its dissolution.

   OPINION.

Milliicen :

Shortly after the appeal was filed, respondent filed motion to dismiss for the reason that the petitioner corporation was dissolved. This motion was denied on July 31, 1926. At the hearing subsequently, on the merits, petitioner made oral reference to the statutory limitation on the assessment of additional taxes for the year involved, but did not pursue the subject in their brief filed three months later.

This appeal involves a determination of the deductions from income allowable in the fiscal year 1919, to a corporation engaged in the manufacture and sale of lager beer, for obsolescence of assets occasioned by prohibition legislation. We have had occasion to fully consider the development of prohibition legislation and the principles generally applicable to the issues here involved; see Appeal of Manhattan Brewing Co., 6 B. T. A. 952. The instant case is broadly similar to the Manhattan Brewing Co. case, but differs in the important particular in that the instant taxable year is a fiscal year ended September 30, 1919, encompassing within its 12-month period an extraordinary number of the changes so disastrous to the breweries, such as the war-time prohibition proclamation of November 1918, the ratification of the Amendment in January, 1919, the cessation of the sale of beer July 1, 1919, and the certainty at its end (September 30, 1919), that national prohibition was but a few months off.

In the first issue, the petitioners claimed the right to a deduction from income for obsolescence of intangibles, but, making brief reference to Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626, they abandoned the issue at the hearing and adduced no evidence relative to the losses claimed. Respondent is sustained.

In the second issue, concerning the obsolescence of tangible assets rendered useless by prohibition, it is not denied by the respondent that a loss was sustained, but the parties are in disagreement as to the amount of the deduction from income properly allowable on this account in the fiscal year 1919. The respondent accepted the depreciated cost, according to the books, of the assets under consideration, and deducted therefrom the amount of the salvage value estimated by the petitioners, considering the remainder the amount of the loss. The petitioners now conclude that their estimate of the salvage value grossly overstated the true amount and consequently the amount of the loss in value should be increased. The evidence before us in this relation was adduced by the petitioner and indicates little or no remaining value of the assets. The respondent relies on the argument that the estimate of salvage value was made by petitioner in 1923, a time sufficiently late to enable accuracy and to preclude further revision. We do not find respondent’s argument persuasive as applied to a mere estimate of the salvage value probably adhering to the assets. We are of opinion, from the evidence before us, that the previous estimate of the petitioners was unduly optimistic and their loss as now claimed, amounting to $184,977.51 is more nearly correct in the aggregate. The parties differ also as to the proper method of allowing the deduction of the obsolescences. The petitioners claim the deduction as a loss through abandonment, which is deductible in its entirety in the fiscal year 1919, being the year in which the abandonment took place. The respondent argues that the amortization period is well established to extend from January, 1918, to January, 1920, and he proposes to prorate on a time basis the deduction of the amount of the obsolescence as follows: Two hundred and forty-two seven-hundred-and-fifteenths to 1918, three hundred and sixty-five seven-hundred-and-fifteenths to 1919, and one hundred and eight seven-hundred-and-fifteenths to 1920. We are unable to entirely agree with the contentions of either party. We are satisfied that obsolescence actually set in, in January, 1918, and that at the beginning of the fiscal year 1919, the assets under consideration had actually suffered an amount of special obsolescence. Attention has been directed above to the succession of events occurring during the fiscal year of the petitioner, and to the certainty with which it was possible, at the end of that year, to conclude that the manufacture and sale of lager beer by it would not be resumed. It follows that the inclusion of the period subsequent to the fiscal year 1919 is erroneous and that the remainder of the obsolescence is deductible in 1919. Accordingly, a deduction in 1919, for obsolescence of tangible assets rendered useless by prohibition legislation, amounting to $122,369.74, is found reasonable. Respondent reversed. Cf. Manhattan Brewing Co., supra; Levine Brothers Co., 5 B. T. A. 689; Multibestos Co., 6 B. T. A. 1060.

The third issue concerns losses in value of tangible assets, the amounts of which the petitioners have computed by various methods more ingenious than convincing, and which they claim the right to deduct in 1919, although representing decreases in value of assets which were used in subsequent years. We have had occasion, heretofore, to consider similar contentions and have reached the conclusion that the deduction representing the decreasing value in use of assets continued in the same or related business is not allowable. Cf. Yough Brewing Co., 4 B. T. A. 612; Rienzi Co., 4 B. T. A. 1011; Star Brewing Co., 7 B. T. A. 377. Respondent sustained.

Reviewed by the Board.

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


author: Phillips:

text:
    E. G. Perry, Petitioner, v. Commissioner of Internal Revenue, Respondent. V. K. Perry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9023, 9022.
    Promulgated December 22, 1927.

      George S. Atkinson, Esq., for the petitioners.

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

Phillips:

The question involved in the present proceeding is whether a certain dividend of the Lone Star Motor Co., declared on June 30, 1919, from the surplus and profits of the corporation on that date, is subject to both the normal and surtax, or is subject only to surtax.

The pertinent provisions of the Revenue Act of 1918 are as follows:

Sec. 201. (a) That the term “ dividend ” when used in this title * * * means (1) any distribution made by a corporation, other than a personal service corporation, to its shareholders or members, whether in cash or in other property or in stock of the corporation, out of its earnings or profits accumulated since February 28, 1913, or (2) any such distribution made by a personal service corporation out of its earnings or profits accumulated since February 28, 1913, and prior to January 1, 1918.
(b) Any distribution shall be deemed to have been made from earnings or profits unless all earnings and profits have first been distributed. Any distribution made in the year 1918 or any year thereafter shall be deemed to have been made from earnings or profits accumulated since February 28, 1913, or, in the case of a personal service corporation, from the most recently accumulated earnings or profits; but any earnings or profits accumulated prior to March 1, 1913, may be distributed in stock dividends or otherwise, exempt from the tax, after the earnings and profits accumulated since February 28, 1913, have been distributed.
(c) * * * Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits.
Seo. 216. That for the purpose of the normal tax only there shall be allowed the following credits:
(a) The amount received as dividends from a corporation which is taxable under this title upon its net income, and amounts received as dividends from a personal service corporation out of earnings or profits upon which income tax has been imposed by Act of Congress.

If the declaration of this dividend stood alone there would seem to be no cause to doubt that it was such a dividend as fell within the provisions of section 216 (a) and was exempt from normal tax. It appears, however, that on the following day the stockholders executed a consent to the dissolution of the corporation and four of the five stockholders formed a partnership to continue the business, taking over the corporate assets. Because of this action the Commissioner took the position that the dividend of June 30, 1919, was “ in liquidation of a corporation ” within the meaning of section 201 (c) and not exempt from normal tax under section 216 (a). See Langstaff v. Lucas, 13 Fed. (2d) 1022; 5 Am. Fed. Tax Rep. 6125; Appeal of John K. Greenwood, 1 B. T. A. 291; Renfro v. Commissioner, 8 B. T. A. 1295. But see Hellmich v. Hellman, 18 Fed. (2d) 239; 6 Am. Fed. Tax Rep. 6633, now pending before the Supreme Court on certiorari, which is in conflict w,ith the decisions cited above and on which the petitioners rely should it be determined that the dividends were in fact in liquidation of the corporation.

At the time the dividends were declared the corporation was not in dissolution and there was no retirement of the capital stock in whole or in part, nor was there any impairment of the capital of the corporation. The dividends were declared wholly from surplus and earnings. Even if it be conceded, as the respondent apparently contends, that the declaration of the dividend was in anticipation of the dissolution of the corporation and a step taken preliminary thereto, it is our opinion that the dividend would not fall within section 201 (c) as made “ in the liquidation of a corporation.”

A dividend in liquidation of a corporation implies that there has been either an impairment of its capital by a distribution thereof to its stockholders or a retirement of the capital stock in whole or in part. It will be noted that section 201 (c) provides that liquidating dividends “ shall be treated as payments in exchange for stock or shares.” While by no means conclusive, the language is indicative of an intention to confine the use of the term to those distributions which affect the stock or shares of the corporation. The dividend here in question distributed profits only without in any way affecting the capital of the corporation. The corporation might or might not liquidate later, but in either event the dividend would remain as an indebtedness to the stockholders. We are of the opinion that whether or not there was an intention on June 30, 1919, to later dissolve the corporation, no liquidation took place on that day and that the character of the dividend then declared would not be changed by subsequently carrying out any intention to dissolve which might then have existed.

Reviewed by the Board.

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


author: Mokris:

text:
    Faircloth & Shore, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19685.
    Promulgated December 22, 1927.

      Russell Snow, Esq., and 3. T. Amason, Esq., for the petitioner.

      W. E. Lawder, Esq., for the respondent.
   OPINION.

Mokris:

The only assets upon which we have sufficient information to determine a reasonable allowance for exhaustion, wear and tear are the logging equipment and the trucks. Such evidence indicates that the depreciation rate used by the respondent is too low. On the planing mill and milling equipment in Plants No. 1 and No. 2, which comprise the major portion of petitioner’s plant, the evidence is too meager to determine a reasonable allowance. As the respondent applied a rate of 10 per cent to all the assets and the petitioner has proved that that rate is incorrect only as to a small portion thereof, the respondent’s determination is approved. Appeal of Citizens Trust Co. of Utica, 2 B. T. A. 1239; Appeal of Art Metal Construction Co., 4 B. T. A. 493; Boucher-Cortright Coal Co. v. Commissioner, 7 B. T. A. 1.

Judgment will be entered for Che respondent.

Considered by MuRdock and Siefkin.


author: Smith :

text:
    West Florida Naval Stores Co., West Florida Grocery Co., and Pensacola Warehousing Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7352.
    Promulgated December 22, 1927.

      Philip D. Beall, Esq., for the petitioners.

      Henry Ravenel, Esq., for the respondent.
   OPINION.

Smith :

In determining a deficiency for the year 1918 the respondent denied the claim of the petitioners for assessment under the provisions of section 328 of the Revenue Act of 1918. He appears to have considered the petitioners’ claim for relief under section 328 for the calendar year 1919 but in his deficiency letter stated:

After careful consideration and review your application under the provisions of section 327 for assessment of your profits tax as prescribed by section 328 of the Revenue Act of 1918 has been denied inasmuch as the audit disclosed no exceptional hardship evidenced by gross disproportion between the tax computed without benefit of the above section and the tax computed by reference to the representative corporations specified in section 328.

Counsel for the petitioners contends that their inability to reflect in invested capital the value of good will and contracts acquired by them at or about the time they were organized, coupled with the amount of borrowed capital employed in their business, created abnormalities affecting invested capital.

The only information which we have with regard to any value of the good will of the Pensacola Grocery Co. is the earnings of that company for the years 1906 to 1910, inclusive, upon the capital and surplus of the company. Although such good will may have had a value, we are of the opinion that the earnings alone do not prove such value. Apparently the good will did not attach to the name of Pensacola Grocery Co. for the name was abandoned upon the organization of the West Florida Naval Stores Co. There appears to be no basis for the contentions of petitioners that the Pensacola Grocery Co. had good will of the value of $125,000, which was paid into the West Florida Naval Stores Co. at the date of its organization. We have no means of knowing the value, if any, which the contracts made by certain stockholders with certain producers of naval stores in 1911, and which were paid in to the West Florida Naval Stores Co. upon its organization had at the date of assignment to the new corporation. The evidence indicates that the most successful companies dealing in naval stores had arrangements with producers of naval stores such as the West Florida Naval Stores Co. had. We are not apprised of the value of such contracts. We can not determine whether this fact was of such importance as to produce an abnormality of invested capital.

We are furthermore of the opinion that the borrowings made by the petitioners Avere not of such moment as to produce an abnormality in invested capital. The petitioners paid a good rate of interest upon such borrowings and the interest paid was deductible from gross income in income-tax returns.

In proof of the petitioners’ contention that the income and profits tax determined to be payable by them would, without relief under section 328, Avork upon petitioners an exceptional hardship evidenced by gross disproportion between the tax computed without the benefit of the section and the tax computed by reference to representative corporations, it instances the tax paid by the Jacksonville Naval Stores Co. The only evidence which we have with respect to the tax paid by that company is that it was 11.8 per cent of its net income for 1918, and 9.85 per cent of its net income for 1919. We can not determine from these facts alone that the Jacksonville Naval Stores Co. is similarly circumstanced with respect to gross income, net profits per unit of business transacted, and capital employed, and therefore a proper comparative to be used in determining tax liability under section 328.

For lack of evidence as to such abnormalities affecting invested capital as would warrant the determination of tax liability under section 328 and of evidence as to what tax proper comparatives paid, the denial of relief under section 328 made by the Commissioner is sustained.

Judgment will be entered for the respondent.

Considered by Tettssell, Love, and Littleton.


text:
    Elsie B. Lord, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 17189.
    Promulgated December 22, 1927.

      Oourtlandt Nieoll, Esq., for petitioner.

      L. O. Mitchell, Esq., for respondent.
   Smith :

This proceeding is for the redetermination of a deficiency in income tax for the year 1921, in the amount of $437.38.

FINDINGS OF FACT.

The petitioner is an individual, residing at Morristown, N. J.

On her income-tax return for the year 1921, the petitioner reported net income in the amount of $16,816.36. She claimed a deduction of $2,967.59 for contributions, of which $2,807.59 represented contributions to the Home of Truth. The Commissioner disallowed the contributions to the Home of Truth as deductions and restored the sum of $2,807.59 to income. This action on the part of the Commissioner resulted in the disclosure of an additional tax amounting to $437.38.

The Home of Truth was founded in Boston, Mass., in the year 1919 by Eleanor Mel, who for some time previous thereto had been engaged in the study and in the teaching of religious principles similar to those underlying spiritual healing and the New Thought movement.

The work was carried on at first by Eleanor Mel with the help of a few part-time workers or associates. In 1920 one of the workers became a full-time associate and secretary of the institution, and in 1921 its activities were carried on principally by Eleanor Mel as leader and two full-time associates, one of whom. was the secretary. The building in which the Home of Truth was housed was acquired in 1920 or 1921, the title thereto being taken in the name of Eleanor Mel. In 1923 the institution was incorporated under the laws of Massachusetts as a religious corporation and in the same year Eleanor Mel was ordained a minister of the gospel. At no time did it have a charter, constitution or by-laws, and no articles of association or other formal plan of organization was ever promulgated or entered into between the founder and her associates. Members of the congregation were not required to sign any agreement or obligate themselves in any way.

The activities carried on in the name of the institution were wholly religious in their nature. A Bible school and regular periods of prayer and divine worship were conducted on Sundays by the leader. On week days courses of instruction were given in the application of the teachings of Jesus Christ to the activities of everyday life, and periods of prayer were held. The general public was invited to attend all these services. The personal services of the leader and her associates were available to the public at all times for purposes of private spiritual consultation and healing. The Home of Truth also maintained a reading room containing religious literature and information pertinent to its activities.

No charge was made for any of the services rendered by the leader or her associates. The institution had no income and depended for its financial support on contributions and gifts, some of which consisted of clothing and food. Gifts of money were made indiscriminately to the institution, the leader, or her associates. All money so received was deposited in bank to the credit of an account entitled “ Home of Truth.” Disbursements were made by checks signed by Eleanor Mel. The words “Home of Truth” were printed on all checks and stationery. Neither the leader nor any of the associates were paid a salary, the only employe of the Home of Truth receiving remuneration being the janitor. Questions relative to disbursements other than routine were discussed by the leader and her associates. In such discussions the judgment of the leader was respected, due to her greater experience, but her decisions were not necessarily final.

The petitioner’s gifts to the Home of Truth in the year 1921, amounting to $2,807.59, were contributions to a fund, none of the earnings of which inured to the benefit of any private individual and which was maintained exclusively for religious purposes.

Judgment of no deficiency will ~be entered.

Considered by Teussell, Littleton, and Love.


text:
    Archer-Strauss Rubber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 17194, 25188.
    Promulgated December 22, 1927.

      Frederick W. Otto, Esq., and Myer L. Orlov, Esq., for the petitioner.

      L. 0. Mitchell, Esq., for the respondent.
   OPINION.

Smith :

In view of the fact that Calvin B. Archer, who owned all of the stock of the A & A Rubber Co. received only 499 shares of stock of the petitioner and 501 shares of stock were issued to Aaron L. Strauss and Albert Gutterman for $30,000 cash, the respondent has determined that the assets of the A & A Rubber Co. paid in to the petitioner for shares of stock had a cash value of slightly less than $30,000. The'evidence shows, however, that the assets of the A & A Rubber Co. were worth very much more than $30,000. Archer was glad to have Strauss associated with him. He had the reputation of being a successful business man and manufacturer. With his assistance Archer knew that the business would be a success and was willing to turn over the assets of the A & A Rubber Co. to a new corporation in which he should hold substantially 50 per cent of the stock. These assets were not turned in to the corporation, however, for 499 shares of stock but for 700 shares of stock. By a collateral undertaking Archer agreed to turn over to Strauss 201 shares of the capital stock which would be issued to him for the assets of the A & A Rubber Co. The evidence warrants a finding that the fair cash value of those assets was at least $70,000 and they should be held to have that value in computing invested capital.

There is no question before the Board as to the correctness of the rates used by the respondent in computing depreciation. The cash values of the depreciable assets paid in to the petitioner upon organization on January 2,1917, are set forth in the findings of fact.

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

Considered by Teussell, Love, and Littleton.


author: GReen :

text:
    Charles H. Merillat, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10594.
    Promulgated December 23, 1927.

      Charles H. Merillat, Esq., pro se.

      W. H. Lawder, Esq., for the respondent.
   OPINION.

GReen :

We are of the opinion that the total payments of $1,203,-45 itemized in the findings of fact constitute rentals and as such are deductible under section 214(a) (1) of the Revenue Act of 1921, which provides that in computing net income there shall be allowed as deductions:

* * * Rentals or oilier payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

Some of the payments were termed in the leases as “advanced royalty” and by the express provisions of the leases they could not be credited against any production other than that of the current year. Under such circumstances, we believe the amounts paid as such are deductible in the current taxable year.

The petitioner gave some testimony as to payments in 1921 of $50 for a bond, $5 for making a record, and $10 for certain desired information, but as the petition did not assign any error with respect to such items we have not considered thorn in this opinion.

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

Considered by Sternhagen, Lansdon, and ARtjndell.


author: Milliken :

text:
    Mayer & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4703.
    Promulgated December 23, 1927.

      Byron V. Graham, Esq., Hugh G. Bickford, Esq., and R. Kemp Slaughter, Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.
   OPINION.

Milliken :

Petitioner complains that respondent refused to permit it to return so much of its income as was derived from installment sales on the basis provided by section 212(d) of the Revenue Act of 1926. This section is made retroactive by section 1208 of the same Revenue Act. Section 212(d) provides in part:

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

Section 1208 reads:

The provisions of subdivision (d) of section 212 shall be retroactively applied in computing income under the provisions of the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, the Revenue Act of 1921, or the Revenue Act of 1924, or any of such Acts as amended. Any tax that has been paid under such Acts prior to the enactment of this Act, if in excess of the tax imposed by such Acts as retroactively modified by this section, shall, subject to the statutory period of limitations properly applicable thereto, be credited or refunded to the taxpayer as provided in section 284.

Respondent does not take the position that petitioner did not regularly sell or otherwise dispose of its personal property on the installment plan but confines himself to the contention that the books and records of petitioner were not kept in such a manner as to disclose sufficient information upon which to base a return on such a basis.

The facts stipulated disclose that petitioner was engaged in the retail furniture business; that it sold for cash, for credit, and on the installment plan; and that it kept its books on the accrual basis. Petitioner employed accountants to ascertain from its books and records the facts detailed in the findings of fact. We are thus placed in possession of the amount of gross sales, of the amount of sales of cash and credit, and the amount of sales on the installment plan. We know the cost of all goods sold and the amount of gross profits attributable to such sales. We know the amount of cash received each year on installment sales. The element which is absent is the exact amount of gross profit attributed to the installment sales. This hiatus results from the fact that while we know the cost of all goods sold, whether for cash or credit or on the installment plan, we do not know the precise cost of all goods sold on the installment plan. This was the situation which presented itself in the Appeal of Blum's, Inc., 7 B. T. A. 737. We there applied a composite percentage rate of gross profit on all sales and said with reference to such method:

* * * Where, as in the case of this petitioner, cash sales are made at a profit considerably less than that to be realized on the installment sales made within the year, it is true that the composite percentage rate of gross profit will be less than the actual percentage of gross profit on installment sales alone; and it might appear, at first hand, that by using this composite percentage rate of gross profit the petitioner would escape taxation on a portion of the profits from installment sales. However, while the petitioner would apply the lower composite percentage rate to the installment payments, at the same time it would apply the same percentage rate to the receipts from cash sales, showing a much greater profit from cash sales than actually realized. The method works out so that the petitioner would return as income, in any taxable year, on account of sales made within that year, an amount in excess of the actual profit on cash sales plus the profits actually realized through collection of installment payments relating to installment sales made in the same year; and such excess will always be the difference between an amount obtained by applying the composite percentage rate to the gross contract price of all installment sales made within the year and that obtained by applying the actual percentage rate of gross profit on installment sales to the same base. The excess reported is taken care of in subsequent years, during which the remaining installment payments will be received, through the application of the same composite percentage rate to the collections made in those years on account of the sales made in the prior year. Under this method the petitioner will ultimately return all of its income — nothing more nor anything less. We believe the suggested method is a reasonable interpretation of the statute in the fulfillment of its underlying purpose, and will clearly reflect income to be returned by the use of the installment sales method. As the Board said in the Appeal of B. B. Todd, Inc., 1 B. T. A. 762, “The entire plan of income taxation recognizes the fact that income is a matter, at best, of estimate; and can never be reduced to absolutely definite terms in the case of a large modern business institution.”

We are of the opinion that petitioner’s income from installment sales should be computed under the provisions 0f section 212(d) and that the rules and procedure laid down in Blum's Inc., supra, should be followed so far as applicable. Cf. L. S. Weeks Co. v. Commissioner, 6 B. T. A. 300; Warren Reilly v. Commissioner, 7 B. T. A. 1327; Redlick-Newman Co. v. Commissioner, 8 B. T. A. 719, and Mrs. C. H. Robinson v. Commissioner, 8 B. T. A. 972.

Petitioner’s last contention is that it should not be required to report in the year received, installment payments on goods sold in previous years where the income from such sales has been returned for taxation. The principal ground for this contention is that it results in double taxation. Double taxation is not to be presumed, but if the taxing statute is clear it is not invalid. Cf. Ernest M. Bull, Executor, v. Commissioner, 7 B. T. A. 993. Here the express words of section 212(d) require that all installments received in the taxable year shall be returned. That the Congress contemplated that double taxation might result is shown by provision in section 1208 for credits and refunds, but,' and this is quite important, makes such credits or refunds subject in each case to the period of limitation applicable. If the period of limitation has expired, no credit or refund can be made.

Petitioner next contends that in no event should installments received in payment for goods sold prior to the effective date of the Bevenue Act of 1916, be returned, since section 1208 does not amend any Bevenue Act of prior date. This contention overlooks the fact that in this case we are not called upon to compute any taxes under the Bevenue Act of 1913 (38 Stat. 114) but that the taxes in this case are to be computed under the Bevenue Acts of 1918 and 1921. Lastly, these contentions disregard the vital fact that petitioner was not compelled to make its returns under section 212(d) but did so of its own volition. When it changed its method of reporting from the accrual method to the installment method, it was called upon to report all of its income from installment sales under that method. It must treat all such items of income consistently. It can not return under both methods. To follow both methods would result in distortion of income. See Appeal of B. B. Todd,, Inc., 1 B. T. A. 762; Warren Reilly v. Commissioner, supra. These contentions are similar to the contentions which were considered at length under the Appeal of Blum's, Inc., supra, and we adhere to the views there expressed.

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

Considered by Phillips and Marquette.


text:
    Freedom Oil Works Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Craig Oil Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9707, 17882, 20128, 9706, 20230.
    Promulgated December 23, 1927.

      Kenneth Parkinson, Esq-, and J. K. Ilulse, G. P. A., for the petitioners.

      A. B. Marrs, Esq., for the respondent.
   OPINION.

Phillips:

Several errors alleged in the petitions were abandoned at the hearing. As to certain others, the respondent admitted error.

It is urged that the Commissioner erred in his determination of the March 1, 1913, value of the refining plant and equipment of the Freedom Oil Works Co. for the purpose of computing depreciation. Prior to 1910 this plant at Freedom, Pa., was equipped to properly refine about 18,000 barrels of crude oil per month. Its buildings were mostly of frame construction. During 1910, 1911, and 1912 the plant was reconstructed and enlarged to a capacity of 1,000 barrels per day. The frame buildings were destroyed and brick and concrete buildings erected. Substantially all of the old equipment was retained and new equipment was installed. The books of the company show the March 1, 1913, depreciated cost as $210,-691.42, and in computing depreciation this was used by the Commissioner as the value of the plant on that date. In this amount is included only $20,000 for the equipment in use prior to 1910, which equipment was sufficient to care for two-thirds of the capacity of the plant as reconstructed. It is obvious that this figure greatly understated the value of this older equipment. Moreover, it appears that some of the labor entering into the reconstruction was not charged to construction'but was written off as an expense. It is evident from the testimony that on March 1,1913, the Freedom plant was equipped to operate efficiently and was completely equipped to utilize the crude oil to best advantage. The petitioner has produced much opinion evidence as to its value on the basic date, some of which is entitled to little, if any, weight and some of which appears entitled to full credence. No witnesses as to value were produced by the Commissioner. [Reviewing all of the testimony, we reach the conclusion that the refining plant of the petitioner had a value of $400,000 on March 1, 1913, exclusive of any value which may attach to the land. The parties have stipulated the cost of subsequent additions and have agreed that the composite rate of 7yz per cent per annum used by the Commissioner in determining depreciation was proper. The amount allowed as a deduction for depreciation should be recomputed accordingly.

The Freedom Oil Works Co. also questioned the March 1, 1913, value used by the Commissioner in determining depreciation on its branch station properties. The evidence as to such value is most unsatisfactory and forms no basis on which we might disturb the Commissioner’s determination of value. Apparently this is recognized by counsel for petitioner, for in their brief they accept the Commissioner’s determination except as applied to two stations sold during the year and concerning the March 1, 1913, value of which there is competent testimony. The cost of additions made subsequent to March 1, 1913, is stipulated and both parties agree that the rate used by the Commissioner in computing depreciation was correct.

It appears that in 1919 the Freedom Oil Works Co. sold three of its branch stations, two of which were owned on March 1, 1913. The parties can not agree as to the fair market value of these stations on that date, to be used as a basis for computing petitioner’s profit from the sale. We have found such value from the evidence submitted. The parties are agreed as to the cost of all these properties and as to the cost of subsequent additions thereto; also that the rate of 10 per cent for station properties and 33y3 per cent for automobile trucks, used by the Commissioner in computing depreciation, is reasonable.

It is admitted that in computing the depreciation allowable in 1918 to the Freedom Oil Works Co. upon its automobiles, the Commissioner determined the cost of such assets as of the beginning of the year to be $36,029.12, whereas such automobiles cost $56,329.12 and that the depreciation allowance should be computed accordingly. The parties are agreed that the rate used by the Commissioner was correct.

It is also admitted that in computing depreciation for such year the Commissioner made no allowance for' changes occurring during the year. It is stipulated that there was an addition to automobile account of $48,241.79 and reductions as follows: tank cars, $1,198.05; station property, $1,026.63; teams and wagons, $1,026.63 and that adjustments should be made accordingly, using one-half of the same rates fixed by the Commissioner for annual depreciation on each class of assets.

It is further stipulated that during 1918 the Freedom Oil Works Co. paid for' repairs and rental of tank cars $6,135.91, which amount was not allowed as a deduction by the Commissioner, but which should be allowed.

With respect to the Craig Oil Co. the principal issue is the March 1, 1913, value of its refinery. Here again we are dependent upon opinion evidence produced by the petitioner which is not impeached or successfully attacked on cross-examination or contradicted by any evidence produced by the respondent. The value has been fixed upon the basis of such testimony.

It should be noted that while the crude-oil capacity of this plant was in excess of that of the Freedom Oil Works Co., this oil was not subject to such complete refining as that handled by the latter company, consequently the plant was not nearly so complete.

The two petitioners claim that they are entitled to have theii profits tax for 1918 computed under the provisions of section 328 of the Revenue Act of 1918. Two grounds are urged: (1) That because of the family relationships involved in the stock holdings, three of the stockholders who were the presidents and vice presidents of these companies and who devoted their entire time to the management, drew salaries of only $6,000 each; and (2) that since the plant of the Freedom Company was carried on the books at less than its cost, the cost can not be determined for invested capital purposes. The first ground is clearly insufficient in the absence of any showing of what was a reasonable salary to these three officers and that the salary paid was so small as to abnormally affect the income. So far as the second ground is concerned, it is sufficient to point out that we are without any information as to the basis upon which the Commissioner computed invested capital or what he included as the cost of the plant. So far as we know, he may have gone back to the original cost of the plant and by recomputing depreciation allowed a proper valuation in invested capital. One of the errors alleged in the petition but waived at the hearing would lend credence to such a thought. We should not be asked to guess that he took book figures and then asked to base a decision upon such a guess.

Petitioner contends that while no deficiency has been determined against the Craig Oil Co. for 1917, the deficiency of the Freedom Oil Works Co. for that year can not be determined without also considering the income of the Craig Oil Co. The position appears to be well taken and, in computing the deficiency due from the Freedom Oil Works Co. for that year, the income of the Craig Oil Co. should be recomputed upon the basis of the findings made above.

Decision will he entered on %0 days’ notice, vmder Bule 50.

Considered by Marquette, MillikeN, and VaN Fossan.


author: 'GREEN:

text:
    Appeal of Herbert E. Fales.
    Docket No. 4362.
    Promulgated December 23, 1927.

      Allison L. E. Newton, Esq., for the petitioner.

      A. H. Murray, Esq., for the Commissioner.
   OPINION.

'GREEN:

The petitioner alleges that the respondent erred in refusing to allow as a deduction from gross income the amounts paid to several alleged charitable and educational corporations under the provisions of section 214(a) (11) of the Revenue Act of 1918, which reads as follows:

(a) That in computing net income there shall be allowed as deductions: *******
(11) Contributions or gifts made within the taxable year to corporations organized and operated exclusively for religious, charitable, scientific, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to the special fund for vocational rehabilitation authorized by section 7 of the Vocational Rehabilitation Act, to an amount not in excess of 15 per centum of the taxpayer’s net income as computed without the benefit of this paragraph. Such contributions or gifts shall be allowable as deductions only if verified under rules and regulations prescribed by the Commissioner, with the approval of the Secretary. In the case of a nonresident alien individual this deduction shall be allowed only as to contributions or gifts .made to domestic corporations, or to such vocational rehabilitation fund.

In order to be exempt, the corporation or association must meet three tests: (a) It must be organized and operated for one or more of the specified purposes; (b) it must be organized and operated exclusively for such purposes; and (c) no part of its income must inure to the benefit of private stockholders or individuals.

It appears that all of the societies to which the petitioner contributed meet the third test, i. e., no part of the income inured to the benefit of the stockholders or to an individual. As to the other two tests, we will discuss each corporation or association separately in the order in which they were previously mentioned.

The “ Y. D. Club ” is a social club organized and maintained as a center for the former members of the Twenty-sixth Division, and to serve as a memorial to its dead. A further purpose was that of education and the fostering of good citizenship. We are of the opinion that it was not organized exclusively for educational purposes and hence not within the exemption.

The North American Civic League for Immigrants, the Massachusetts Anti-Cigarette League, and the Massachusetts Anti-Saloon League are all unincorporated associations. The evidence does not satisfy us that these associations meet the statutory requirements as “ corporations organized and operated exclusively for religious, charitable, scientific or educational purposes.” See Appeal of Sophia G. Coxe, 5 B. T. A. 261, and Appeal of Thomas Nevins, 1 B. T. A. 1162. The evidence sLloavs that the Scientific Temperance Federation was incorporated. It also sIioavs that it, together with the Massachusetts Anti-Saloon League and the Massachusetts Anti-Cigarette League, were formed to disseminate controversial or partisan propaganda and were not educational Avithin the meaning ofj the statute.

The International Reform Bureau (now called the International Reform Federation), both from the purpose as stated as well as from the fact that it supported candidates for public office who stood for the principals advocated, fails to meet the above mentioned tests.

Judgment will he entered for the Commissioner.

Considered by Steknhagen, LaNsdoN, and Arundell.


author: Phillips :

text:
    Harry P. Kelley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6891.
    Promulgated December 23, 1927.

      George D. Wick, Esq., for the petitioner.

      P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent.
   OPINION.

Phillips :

The evidence conclusively establishes that the petitioner in 1919, with the consent of his partner, assigned his partnership interest in the Kelley Brothers Coal Co. to his children and ceased to be a partner in that company and that he was not such a partner in 1920. The respondent was in error in treating one-half of the income of the partnership as taxable to petitioner.

It is also contended that this partnership owned a one-quarter interest in another partnership known as the Lucas Coal Co., which interest passed under the assignment of petitioner’s interest in the Kelley Brothers Coal Co. It appears that the investment made in the Lucas Coal Co. by the Kelley Brothers Coal Co., or by the individual members of the latter partnership, ivas from funds advanced by the Kelley Brothers Coal Co. and that this investment was carried on the books of this partnership as a partnership asset. The assignees treated the one-eighth interest in the Lucas Coal Co. as their property. Whether it can properly be said that an assignment of an interest in one partnership will create the assignees partners in another partnership may be doubted. The assignment would, however, be sufficient to entitle the assignees to receive the profits. (See Uniform Partnership Act of Pennsylvania, P. L. 18, part 5, section 26, Act of March 26, 1915; William W. Parshall v. Commissioner, 7 B. T. A. 318.) Moreover, it seems that the assignees have been treated as partners in the Lucas Coal Co., all of the partners being of the same family. In such circumstances, we are of the opinion that error was committed in computing income upon the basis of treating petitioner as entitled to receive any part of the profits from the Lucas Coal Co.

Decision will be entered accordingly upon 15 days’ notice, wider Rule 50.

Considered by Marquette, Milliken, and Van Fossan.


text:
    Thomas F. Kelley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7036.
    Promulgated December 23, 1927.

      George I). Wick, Esq., for the petitioner.

      P. M. Glarh, Esq., and O..G. Holmes, Esq., for the respondent.
   OPINION.

Phillips:

The sole question here involved for determination is whether the petitioner was the owner of a one-fourth interest in the Lucas Coal Co., a partnership, or whether he owned a one-eighth interest, as contended by petitioner.

In Pennsylvania, where her inability to contract with her husband has been removed by statute, a married woman may enter into partnership with her husband. Bernard v. Packard, 64 Fed. 309. From the evidence we are of the opinion that the grocery store and printing shop were their joint enterprises. Each spouse invested capital in the initial undertaking. There is no evidence that the wife advanced her money to petitioner as a loan or as a gift. Both contributed services to both businesses. The evidence is that petitioner and his wife agreed to work as partners. The profits made from their joint enterpi’ises went towards the acquisition of a one-fourth interest in the Lucas Coal Co., which became their joint property. One-half of the earnings from this interest in the Coal Company belonged to petitioner’s wife. We conclude that the Commissioner erred in including more than one-eighth of the earnings of that company in petitioner’s income.

It was alleged in the petition and admitted in the answer that the Commissioner erroneously excluded from income of the petitioner T'rf per cent of the net profits of the Kelley Brothers Coal Co. for 1920. This error should be corrected in the recomputation.

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

Considered by Marquette, Milijken, and Van Fossan.


text:
    Newlyn Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent. Meadow Fork Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9753, 9770.
    Promulgated December 23, 1927.

      W. L. Harrison, G. P. A., and J. B. Grice, O. P. A., for the petitioners.

      O. H. Curl, Esq., for the respondent.
   OPINION.

Smith :

The deficiencies determined by the Commissioner are predicated upon the basis of the affiliation of the petitioners for the year 1917. The petitioners in their appeals and by amendments at the trial assigned the following errors, which are in issue in these proceedings :

1. Respondent allowed petitioners, as a deduction under section 203(a) of the Revenue Act of 1917, 7 per cent of the invested capital as a prewar credit in computing the excess profits deduction for 1917, instead of a 9 per cent deduction.
2. Respondent disallowed an item of, $2,859.25, representing the cost to the Newlyn Coal Co., less scrap value, of an electric locomotive purchased and paid for in 1917, which was charged to expense in that year.
3. Respondent failed to allow, in the computation of petitioner’s taxable income for the year 1917, the fair market value as of March 1, 1913, of the coal mining leasehold, including developments and improvements, of Newlyn Coal Co.
4. Respondent failed to allow, in the computation of petitioner’s taxable income for the year 1917, the fair market value as of March 1, 1913, of the coal mining leasehold, including developments and improvements, of Meadow Fork Coal Co.
5. Respondent failed to allow depreciation, on the fair market value at March 1, 1913, of the developments and improvements on the leasehold of the Newlyn Coal Co. in computing its 1917 income.
6. Respondent failed to allow amortization, on the fair market value as of March 1, 1913, of the coal mining rights of the lessee, Newlyn Coal Co., in computing its 1917 income.
7. Respondent failed to allow depreciation, on the fair market value at March 1, 1913, of the developments and improvements on the leasehold of the Meadow Fork Coal Co. in computing its 1917 income.
8. Respondent failed to allow amortization, on the fair market value as of March 1,1913, of the coal mining rights of the lessee, Meadow Fork Coal Co., in computing its 1917 income.
9. Respondent failed to include in the invested capital of the consolidation for the year 1917 the earned surplus of each corporation at January 1, 1917.
10. Respondent prorated the invested capital of the Meadow Fork Coal Co. from January 1, 1917, to July 16, 1917, instead of including the invested capital for the whole year 1917.
11. Respondent computed profit from the sale of the Meadow Pork Ooal Oo. leasehold on July 16, 1917 on a fictitious cost or value, instead of on the fair market vale as of March 1, 1913, less depreciation and amortization to said date of the sale.
12. Respondent added to the cost of the leasehold sold by the Meadow Pork Ooal Oo. an item of $23,240.94, representing royalities paid lessor in 1917, instead of deducting this expenditure as an operating cost for 1917.
13. Respondent by a mathematical error in his computation overstated, by an amount of $7,292.95, the profit in the year 1917 from the sale of the Meadow Pork Ooal Oo. leasehold.
14. Respondent failed, after committing the foregoing errors, to give petitioners the benefit of special relief, under section-210 of the Revenue Act of 1917, in the computation of their profits-tax liability for the year 1917.

We are satisfied from the evidence that the petitioners had no earnings or at least less than 7 per cent upon their invested capital during the prewar period. The denial by the respondent of a higher prewar credit than 7 per cent on invested capital is sustained.

The Newlyn Coal Co. claims to have sustained a loss in 1917 by reason of the improper functioning of an electric locomotive and that the amount of the deductible loss is the cost thereof less $100 for scrap value. We are of the opinion that the evidence does not prove a loss of this locomotive in the year 1917.

inclusive. The principal contentions of the petitioners are that the respondent has failed to allow the fair market value on March 1, 1913, of the petitioners’ leaseholds, including developments and improvements, for the purpose of computing an exhaustion allowance for 1917 and also for the purpose of computing profit upon the sale of the Meadow Fork Coal Co. leasehold on July 16, 1917. The petitioners have no boobs of account from which the depreciated cost of development and improvements can be determined. They have submitted the testimony of numerous witnesses and mining men as to the fair market value of such improvements and also of the value of the coal-mining rights. Upon the basis of such evidence the Newlyn Coal Co. claims that the value of its developments and improvements at March 1, 1913, was $100,000 and the value of its coal-mining rights was $42,696, and the Meadow Fork Coal Co. claims that the value of its mine developments and improvements on March 1,1913, was $100,-000 and the value of the coal-mining rights, $76,858.80. An accountant, after a painstaking investigation of such records as the petitioners had in 1924, determined that the depreciated cost of the leasehold improvements, including tools and livestock of the Newlyn Coal Co., was on January 1,1917, $73,085.82, and of the Meadow Fork Coal Co. on the same date was $58,959.17. We are of the opinion that these figures constitute as nearly as can be determined the depreciated cost of the leasehold improvements at January 1,1917. We are also of the opinion that on March 1, 1913, the Avalué of such leasehold improvements was not in excess of these figures, exhaustion and depreciation being taken into consideration in reaching such March 1,1913, values.

The petitioners’ claim for a value for their leases on March 1, 1913, in excess of the depreciated cost of the improvements is not sustained by the evidence. The value of $42,696 for the coal-mining rights of the Newlyn Coal Co. on March 1, 1913, was determined by an engineer, who was a witness for the petitioner, upon the assumption that the lessee had a right to mine coal from the lease for a period of 25 years from March 1, 1913, whereas it had that right for a period of only 16 years. The determinations of the values for these mining rights appear also to have been predicated upon the supposition that the per-ton royalty was only 10 cents and that this was somewhat less than the royalties paid by other lessees in the same district. The record shows, however, that it was not practicable or possible with the equipment of the mines to produce the minimum amount of coal which was necessary to meet the minimum royalties at the rate of 10 cents per ton. An engineer testifying for the petitioners stated that these small mines would not warrant the investment of a large amount of money in equipment to produce a large tonnage at these mines. The royalties actually paid during all the years up to 1917 were the equivalent of approximately 20 cents per ton and apparently for some years considerably in excess of that amount. The person who offered $200,000 for the leaseholds in 1906, or 1907, did not undertake to testify as to the value of the leaseholds in 1913. The offer made in 1906 was apparently for the purpose of controlling the market price of coal in the Loup District of West Virginia. The evidence would indicate that at that time there was a prospect that the mines could and would be operated successfully. The experience of the petitioners, however, up to 1913 was that the mines were operated at only a small profit, if any. In the light of all of the evidence, we are of the opinion that the petitioners are not entitled to deduct from the gross income of 1917 any amount upon an assumed value of the mining rights at March 1, 1913. The only allowances for exhaustion and depreciation to be spread over the life of the leases are those based upon the depreciated cost of the improvements and developments on January 1, 1917.

The ninth issue is as to the inclusion of the surplus in the invested capital on January 1, 1917, of the two companies, namely, the Newlyn Coal Co. and the Meadow Fork Coal Co., of $45,241.49 and $29,247, respectively, making a total surplus in the consolidation of $74,788.49. The tenth issue is the right of the Meadow Fork Coal Co. and the consolidation to have the benefit of the invested capital of the Meadow Fork Coal Co. for the entire year 1917, instead of prorating such invested capital from the sale of the leasehold and improvements on July 16, 1917, as has been done by the Commissioner.

The petitioners are sustained upon both of these points.

The Meadow Fork Coal Co. sold its lease and improvements thereon in 1917 for $90,000. The depreciated cost on January 1, 1917, of the improvements, including tools and livestock, was $58,959.17. The company also owed $23,240.94 back royalties and $528.51 for timber cut off the land in 1906, contrary to the terms of the lease. The sum of these three amounts is $82,728.62. Petitioner received $90,000 from the purchaser. The difference represents the profit upon the sale of the mining property. The petitioners make much of the fact that in the determination of the deficiency the respondent has added to the cost of the leasehold sold $28,240.94, representing royalties paid by the petitioner in 1917, instead of deducting this expenditure for an operating cost in 1917. This proposition is as broad as it is long, however, upon the basis of the facts found. The result is the same whether it be added to the cost of the leasehold or treated as an operating expense for 1917.

This issue relating to a mathematical error by the respondent in the computation of the profit from the sale of the Meadow Fork Coal Co. leasehold appears to be well founded. It will bo settled under Rule 50.

The petitioners contend that the respondent has failed to give them the benefit of special relief under section 210 of the Revenue Act of 1917 in the computation of their profits-tax liability for 1917. We are of the opinion that the evidence does not establish that the invested capital can not be satisfactorily determined and a determination of the tax under section 210 is not warranted.

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

Considered by Trussell, Love, and LittletoN.


author: Gkeen :

text:
    W. A. Sheaffer Pen Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9408.
    Promulgated December 23, 1927.

      E. H. Pollard, Esq., and Lawence Graves, Esq., for the petitioner.

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

Gkeen :

The principal issue in this case is whether the petitioner’s invested capital should be computed in accordance with the provisions of section 331 of the Eevenue Act of 1918. The respondent-applied section 331 and his action in this respect is alleged as error. In event it is held that the invested capital should not be computed in accordance with section 331, the petitioner contends that in computing its invested capital it is entitled to have included, in addition to the value of tangible property as to which the parties have stipulated, subject to the statutory limitation on intangibles, the value of the good will acquired, which it alleges was of the value of $224,000.

This transaction took the form of an exchange of stock for stock. The committee of stockholders, holding all of the stock of the Iowa corporation, sold or exchanged all of the stock of that corporation for all of the stock of the Delaware corporation. The assets of the Iowa corporation were immediately transferred to the Delaware corporation and shortly thereafter the Iowa corporation was dissolved.

Does such a transaction come within the provisions of section 331 of the Eevenue Act of 1918 ? That section reads as follows:

Sec. 331. In the case oí the reorganization, consolidation, or change of ownership of a trade or business, or 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, bat no addition to the original cost shall be made for any charge or expenditure deducted as expense or otherwise on or after March 1, 1913, in computing the net income of such previous owner for purposes of taxation.

The petitioner’s contention is that, “ The statute is phrased to cover direct ownership, viz.: a partnership, an individual or unincorporated association where the ownership or control are direct and where there is no well recognized intervening entity. It can not by its very terms effect a case of corporate ownership.” It contends that, “No interest or control in the trade, business or property or in any. asset of a corporation can be vested in a stockholder.” Applying the foregoing to this case, its position is, in brief, that the Iowa corporation' was the sole owner of the assets and that it transferred them to the Delaware corporation and that no “ persons ” ever had any “ interest or control in ” such assets.

The petitioner’s contentions are premised upon well recognized principles of corporation law and it strenuously insists that these principles must be read into the statute and our construction thereof made in the light of such principles. We recognize the principles and the broad extent of their applicability. In the construction of the taxing statute, both the courts and this Board have repeatedly accepted and applied them.

Even a cursory examination of the statute discloses that it is limited in its scope to those cases in which “ 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.” Clearly then we are concerned only with such interest or control as was had by persons. Section 1 of the Revenue Act of 1918 reads, in part, as follows:

That when used in this Act—
The term “ person ” includes partnerships and corporations, as well as individuals.

and when, having in mind the statutory definition, we read the above quoted portion of section 331, it is clear that it is not limited in its application to individuals, partnerships, etc., as contended by the petitioner. This, of course, is not a complete answer to the question, for the Iowa corporation and the Delaware corporation are not the same corporations in any sense and no interest or control remained in the Iowa corporation after the reorganization. It is, however, a complete answer to the petitioner’s first contention.

If this case falls within section 331 it can only be because “ an interest or control in such trade or business or property of 50 per centum or more remains in the same ” individuals. We believe the word “ interest ” as used in the section is intended to cover the rights of individuals in property and may not be used as descriptive of the relationship existing between a stockholder and the corporation or its assets.

In Webster’s New International Dictionary the verb control is defined as follows: “ To exercise restraining or directing influence over; to dominate; to regulate; hence to hold from action; to curb; subject; over-power.” According to this authority it is synonymous with “ restrain, rule, govern, guide, regulate, hinder, direct.”

In Yazoo & M. V. R. Co. v. Searles, 85 Miss. 520; 37 So. 939, 953, the court said, “ Control of the business of a corporation within the meaning of all anti-trust statutes, so far as by our researches we have been able to discover, means power to dictate the corporate action of the corporation.”

Judge Thayer, in the opinion in the case of United States v. Northern Securities Co., 120 Fed. 721, said:

It will not do to say that, so long as eacli railroad company has its own board of directors, they operate independently, and are not controlled by the owner of the majority of their stock. It is the common experience of mankind that the acts of corporations are dictated and their policy is controlled by those who own the majority of their stock. Indeed, one of the favorite methods in these days, and about the only method, of obtaining control of a corporation, is to purchase the greater part of its stock. It was the method pursued by the Northern Pacific and Great Northern Companies to obtain control of the Chicago, Burlington & Quincy Railroad. And, so long as directors are chosen by stockholders, the latter will necessarily dominate the former, and in a real sense determine all important corporate acts. The fact that the ownership of a majority of the capital stock of a corporation gives one the mastery and control of the corporation was distinctly recognized and declared in Pearsall v. Great Northern Railway, 161 U. S. 646, 671, 16 Sup. Ct. 705, 710, 40 L. Ed. 838. The same fact has been recognized and declared by other courts. Pennsylvania R. Co. v. Commonwealth (Pa.) 7 Atl. 368, 371; Farmers’ Loan & Trust Co. v. New York & N. Ry. Co., 150 N. Y. 410, 425, 44 N. E. 1043, 34 L. R. A. 76, 55 Am. St. Rep. 689; People ex rel. v. Chicago Gas Trust Co, 130 Ill. 268, 22 N. B. 798, 802, 8 L. R. A. 497, 17 Am. St. Rep. 319. In opposition to this view counsel cite Pullman Car Co. v. Missouri Pacific Co., 115 U. S. 587, 596, 6 Sup. Ct. 194, 29 L. Ed. 499, but in that case the meaning of the word “ controlled,” as used in private contract, was the point under consideration, and what was said on the subject cannot be held applicable to cases arising under the anti-trust act, when the point involved is whether the ownership of all the stock of two competing and parallel railroads vest the owner thereof with the power to suppress competition between such roads. We entertain no doubt that it does. Indeed, we regard the suppression of competition, and to that extent a restraint of commerce, as the natural and inevitable result of such ownership.

Our views in tbis regard are entirely in accord with those of Judge Thayer. We therefore conclude that the ownership of a majority of the stock of a corporation gives the owner or owners control of the corporation and consequently control of the trade, business, or property of that corporation, and since the holders of all of the stock of the old corporation owned all of the stock of the new, they have the requisite control and come squarely within this portion of the statute. It is not necessary for us to consider whether the owner, or owners of less than the percentage named in the statute have fro tanto a control within the meaning of the statute.

While it is true that the scheme of reorganization contemplated the ultimate disposition by the stockholders as of the date of the reorganization, of stock to the extent that they would no longer hold a majority thereof, it is equally true that no time was fixed for such disposition and it was anticipated that some considerable time would be required to sell the stock as contemplated. Moreover the stockholders were under no obligation to sell. After the reorganization on January 14, 1918, the control was still in the hands of the same persons and remained there until December 31, 1918. In all cases under section 331 wherein it must be determined whether an interest or control remains, at least two factors must be considered. First, whether the “persons” validly retained an interest or control and, second, the time within which any contractual obligations must be performed. Here, the stockholders of the old company lawfully came into possession of all of the issued stock of the new, with no obligation on their part remaining unperformed. Their subequent disposition of stock, both as to time and amount, was entirely discretionary. We therefore hold that the control of 50 per centum or more remained in the same persons and that the invested capital of the petitioner shall be computed as provided in section 331. See E. E. Atkinson & Co., 2 B. T. A. 250, and Shipowners & Merchants Tugboat Co., 4 B. T. A. 403. Our conclusion in this respect makes it unnecessary to consider the contention of the petitioner relative to the inclusion in invested capital of the value of good will.

Judgment will be entered for the respondent.

Considered by SterithageN and AeuNdell.