author: Phillips:

text:
    Aransas Compress Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4378.
    Promulgated September 22, 1927.
    Payments made to a public utility corporation by a citizens’ committee to induce it to erect a cotton compress and warehouse, such citizens receiving no direct benefit from the corporation for such payments, held, not to be income.

      W. R. Brown, Esq., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This proceeding arises upon the petition of the Aransas Compress Co. for a redetermination of deficiencies of $2,647.80 and $5,112.74 determined by the Commissioner for the fiscal years ended May 31, 1920, and May 31,1921, respectively. The petitioner alleges that the Commissioner committed error in including as income for the taxable years involved certain 'cash and the value of certain lands received from citizens of two communities in consideration of the erection of plants therein.
    FINDINGS OF FACT.
    The petitioner is a Texas corporation with its principal office at Corpus Christi.
    Prior to June 1, 1919, the petitioner owned a compress plant at Sinton, Tex. During the fiscal year ended May 31, 1920, the petitioner moved its plant from Sinton to Robstown, Tex. This removal ^ was pursuant to a written contract between the petitioner and certain citizens of Robstown, the material portions of which are as follows:
    This Agreement entered into this day by and between the Aransas Compress Co., acting through its Sec’y.-Treas & Gen’l Manager J. K. Cain, party of the first part, and the Citizens of Robstown, Texas acting through their Committee, party of the second part, to-wit:
    That, the party of the first part agree to build, erect and put in a first class Webb Cotton Compress complete on the piece or parcel or tract of land to be conveyed by said second party to first party, plat of which is attached hereto and forming a part of this contract.

      That, the party of the first part agree to build not less than Seventy Five Thousand (75,000) square feet of Platform adjacent to said Compress with not less than Sixty Thousand (60,000) square feet of sheds covering said platform.
    That the party of the first part agree to have said Compress Platform and Sheds ready for operation for the coming cotton season of 1919, barring accident or causes beyond the control of said Compress Co. Party of the first part agree to operate said compress during the season of 1919.
    * * * # * * *
    That the party of the second part agree to furnish site for said Compress as per sketch attached. Title to said land to remain in the name of second party until Compress, platform and sheds are built and ready for operation, at which time the parties of the second part are to deliver their Warranty Deed conveying said land to the party of thfe first part.
    Prior to September 10, 1919, the petitioner completed the erection of the compress, platform and sheds and placed them in operation on or about September 10,1919. The committee of citizens of Robstown who had executed the contract above recited conveyed the property to the petitioner. This conveyance recited the contract and set forth that all of the obligations of the Aransas Compress Co. thereunder had been fully performed.
    The funds with which to purchase said property were raised by public subscription in Robstown. There was no consideration to such subscribers or to the committee making the conveyance other than such benefits which might result from the erection of the compress plant. At the time of the conveyance the property so conveyed was of the fair market value of $3,000. The Commissioner has included in the taxable income of the petitioner for the fiscal year ended May 31, 1920, $3,000 on account of the receipt of said land.
    In March, 1920, a committee of citizens of Sinton, Tex., entered into a written agreement with the president of the petitioner, the material portions of which are as follows :
    This Agbeement, made and entered into, this 18th day of March, A. D. 1920, by and between J. K. Cain and associates of Nueces County, Texas, parties of the first part, and D. Odem and W. C. Sparks of the County of San Patricio County, Texas, parties of the second part,
    Witkesseth:: That parties of the first part, in consideration of the agreement and guarantee upon the part of parties of the second part hereinafter stipulated, do hereby agree and bind themselves to erect at Sinton, San Patricio County, Texas, a first class 90 inch Morse Compress, together with other necessary machinery in connection therewith, with ground floor of shell and runways, or a wooden platform of not less than 60,000 square feet of floor area, together with sheds of not less than 50,000 square feet, and do hereby agree and bind themselves to have the same ready for operation during the cotton season of 1920, barring accidents and other causes entirely beyond the control of said parties of the first part.
    In consideration of the above agreement and obligation being carried out and completed upon the part of parties of the first part, parties of the second part hereby agree and guarantee that they will pay or cause to be paid to parties of the first part a cash bonus in the sum of Five Thousand Dollars ($5,000.00), one half of which amount or the sum of $2,500.00 shall be paid, when said press machinery arrives and is unloaded at Sinton, Texas, and the balance of said amount shall be paid when said press is erected, tested and ready for operation. And said parties of the second part do hereby further agree that upon the completion of said agreement by parties of the first part, they will give free of cost to parties of the first part, title to Lot No. — in Block No. — in the town of Sinton, title to said lot being now in the Coleman-Fulton Pasture Co., it being the only lot in said block not now owned by the Aransas Compress Co.
    Pursuant to said agreement the petitioner erected on said land a compress plant and proceeded to operate the same. Within the taxable year ended May 31, 1920, the petitioner received a deed to said land and received in addition cash in the amount of $4,912.50. The lot-had a fair market value of $150 at the time of the conveyance. The funds with which to purchase said property were raised by public subscription in Sinton. There was no consideration to such subscribers or to the committee making the conveyance other than such benefits which might result from the erection of the compress plant.
    Early in 1921 the petitioner began negotiations with the citizens’ committee of Sinton for the erection of a cotton warehouse and loading platform in Sinton, which negotiations lead to an oral contract under the terms of which the petitioner was to erect such warehouse and platform and was to receive from the committee a conveyance of the land upon which it was to be erected. Construction of the warehouse was started in May and completed in July, 1921. The property upon which the warehouse was built was conveyed to the petitioner by deed dated April 8,1922. As of May 31,1921, this land was set up on the books of the taxpayer at a value of $5,000. In computing the deficiency the Commissioner has added to the income of the petitioner for 1921, $9,912.50, being the sum of $4,912.50 in cash received as aforesaid, and $5,000 as the value of the land upon which the warehouse was erected.
    The rates for compressing cotton during 1920 and 1921, as now, were prescribed by the Railroad Commission of Texas, as also was the liability of compresses for broken bands and spiders and reconditioning cotton.
    Under the laws of the State of Texas, since 1913 persons or corporations storing cotton are made public warehousemen, required to file certificate and bond, and their charges for storage are subject to regulation by the Commissioner of Markets and Warehouses. Taxpayer had complied with all the requirements of the law.
   OPINION.

Phillips:

Citizens of certain communities contributed land and cash to the petitioner to induce it to erect cotton compresses and warehouses in such communities. Such facilities became public utilities, subject to regulation as such by the State. Those making the donations received no direct benefit, nor was any service to be performed for them by the petitioner.

In Edwards v. Cuba Railroad Co., 268 U. S. 628, the Supreme Court had a similar situation before it and determined that no income was received by the beneficiary of a Government subsidy. That case was stronger for the Government than was the present one, for there the Government obtained certain concessions in respect to Government transportation. Here no argument can be made that the payments to the corporation could be construed as advances for services to be rendered. Since both the railroad in that case and the petitioner in this are public utilities, bound to serve the public indiscriminately, the only possible distinction would appear to be that in the one case aid was extended by the Government and in the other from private sources. The Supreme Court in its opinion, however, indicates that no distinction is to be drawn between “such aids, gifts and grants from the Government, subordinate political subdivisions or private sources ”; in each case such subsidy payments are not made as mere gratuities but to advance the public benefit and do not constitute income.

In Appeal of Liberty Light & Power Co., 4 B. T. A. 155, the Board considered at some length a somewhat similar situation and there reached the conclusion that no taxable income was received. This case is governed by those cited.

Reviewed by the Board.

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


source: Caselaw Access Project

author: Milijken :

license: Public Domain

text:
    Henrietta Bendheim, Petitioner, v. Commissioner of Internal Revenue, Respondent. Julius Bendheim, Executor, Estate of A. M. Bendheim, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 7963, 7964.
    Promulgated September 22, 1927.
    1. A trustee’s commissions which are attributable solely to receipt and disbursement of income are deductible from the gross income of the trust.
    2. Neither capital losses incurred by a trust nor depreciation on capital assets of the trust may be deducted by a beneficiary of the trust from her gross income.
    3. A life tenant is not taxable on gain made in a sale of the fee simple.

      John W. Townsend, Esq., James Graig Peacock, Esq., and G. E. Koss, Esq., for the petitioners.

      J. Arthwr Adams, Esq., for the respondent.

      These proceedings involve deficiencies in income tax and were, by motion made and granted, consolidated.
    The deficiencies in the case of Henrietta Bendheim are for the calendar year 1920, $10,934.65, and for the calendar year 1921, $17,-277.45. The deficiency for the year 1920 results from respondent’s determination that petitioner’s taxable income from a trust wjis greater than that which she had reported. This excess resulted from the respondent’s refusal to permit the deduction from gross income of commissions paid to the trustees to the extent of $11,034.50; from his refusal to permit the deduction of depreciation suffered by the corpus of the trust; from his refusal to permit petitioner to deduct losses incurred in the sale of trust property; and, by his holding that certain sales made by the trust were not made on an installment basis. The deficiency for the year 1921, results from the inclusion in petitioner’s gross income of the gain made in that year from the sale of a certain parcel of real estate in which petitioner had only a life estate.
    In the case of the estate of A. M. Bendheim, the deficiency is for the calendar year 1919 and is in the amount of $1,369.92. Petitioner, in this case, contends that respondent erred (a) in determining that the basis for computing gain arising from certain sales was the value at which the property was appraised at the death of the decedent; (b) in computing the gain or loss on certain property sold by the estate; (c) in determining that losses should be reduced and gains increased by the amount of depreciation sustained; and (d) in not allowing as a deduction in computing net income, the sum of $4,000 paid in 1919 to the executors as commissions for receiving and disbursing the income of the estate. Contentions (a) and (b) were withdrawn at the hearing, and contention (c) was withdrawn in the brief filed on petitioner’s behalf.
    BINDINGS OB BACT.
    A. M. Bendheim died a resident of and domiciled in the State of New York, on January 19, 1914, having first made and published his last will and testament, the material parts of which read:
    Third : — I give and bequeath unto my beloved wife the sum of Ten Thousand Dollars ($10,000) ; I also devise to my wife for life any real property owned by me which may be used by me as a residence at the time of my decease.
    Sixth : — All the rest, residue and remainder of my property, real and personal, wherever situate, I devise and bequeath to my Executors hereinafter named, in trust nevertheless for the uses and purposes following, that is to say:
    1. — To collect the rents, issues, income and profits thereof and apply the same to the use of my wife during her life.

      2. — Upon her death to divide said residuary estate into four (4) equal parts, which I dispose of as follows:
    A. — I give, devise and bequeath unto my son Julius one of said parts, and in the event of his then being deceased, to his issue him surviving per stirpes, and in default of issue to his sisters and brother and the issue of any deceased sister and brother per stirpes.

    J3. — I give, devise and bequeath one of said parts to my son Edwin, and in the event of his being then deceased, to his issue him surviving per stirpes, and in default of issue, to his sisters and brother and the issue of any deceased sister and brother per stirpes.

    C. — I give, devise and bequeath one of said parts to my sons Julius and Edwin and my daughter Jennie, in trust nevertheless, to collect the rents, issues, income and profits thereof and apply the same to the use of my daughter Gertrude for life, and upon her death, to pay over the same in such manner as she may direct by her Last Will and Testament, and if she die intestate, then to pay over the same to her issue per stirpes; and in default of issue, to her brothers and sister and the issue of any of them who may be deceased, per stirpes.

    D. — I give, devise and bequeath one of said parts to my sons Julius and Edwin and my daughter Gertrude, in trust nevertheless, to.collect the rents, issues, income and profits thereof and apply the same to the use of my daughter Jennie for life, and upon her death, to pay o-ver the same in such manner as she may direct by her Last Will and Testament, and if she die intestate, then to pay over the same to her issue per stirpes; and in default of issue, to her brothers and sister and the issue of any of them who may be deceased, per stirpes.

    Seventh : — I hereby nominate, constitute and appoint my wife Henrietta and my sons Julius and Edwin Executors hereof. In the event of the death of either of my sons during the lifetime of my wife, I appoint in the place and stead of the one so dying, my daughters Gertrude and Jennie as Executrices; and it is my wish that both of them shall qualify, and if not then of the age of twenty-one years, that they shall qualify when they attain such age.
    Biohth : — I authorize and empower my Executors to sell my property, real and personal, at public or private sale, and upon such terms as they may deem proper, and to mortgage and lease my property; to construct buildings upon any vacant land which I may own, and to alter and modify existing buildings which I may own or be possessed of, I also authorize and empower my Executors and Trustees herein appointed, to invest any trust funds coming into their hands pursuant to the provisions hereof, in bond secured by first mortgage, on improved real property located in the City of New York, as such Oity may be constituted at the time of my decease, such mortgage not to exceed seventy per cent (70%) of the value of such property, as it may be appraised by them; to invest in all securities in which savings banks may be permitted to invest their funds pursuant to law; or in bonds secured by mortgages of railroads operated in the United States, which railroads shall have paid dividends on their common stock for at-least five (5) consecutive years prior to investment therein; or in bonds secured by mortgage of industrial corporations doing business in the United States, which shall have paid dividends on their common stock for at least ten (10) consecutive years prior to investment therein, providing such common stock shall have been listed on the New York Stock Exchange for at least ten consecutive years prior to such investment. But it is my wish and I direct that not more than twenty percent (20%) of any funds held in trust for either of my daughters shall be invested in any one bond or mortgage, and not more than ten per cent (10%) of such trust funds in the bonds issued by any one corporation.
    The will was admitted to probate on February 10, 1914, and on the same day letters testamentary were issued to Edwin Bendheim, Julius Bendheim and Henrietta Bendheim.
    From the death of testator to March 31, 1921, the executors and trustees received and disbursed income arising from the estate in the following amounts:

    In the year 1919, Julius Bendheim and Edwin Bendheim paid to themselves out of the income of the estate, as commissions on income received and disbursed, the sum of $4,000, and in the year 1920 the same persons paid to themselves as commissions on income received and disbursed, the sum of $12,571. In 1921, the executors and trustees filed their intermediate account of settlement in the Surrogate’s Court for the County of New York. This account was approved by the court in 1922. The court allowed the executors the following commissions for receiving principal:
    Julius Bendbeim-$4, 044.21
    Henrietta Bendbeim_ 4,044.21
    Estate of Edwin Bendbeim- 4, 044.21
    12,132.63
    The executors were allowed the following commissions for paying out principal:
    Julius Bendbeim-$2, 392.81
    Henrietta Bendbeim_ 2, 392. 81
    Estate of Edwin Bendbeim_ 2,392.81
    7,178.43
    The same persons, as trustees, were allowed the following commissions for receiving principal:
    Julius Bendbeim-$1,893.44
    Henrietta Bendbeim- 1, 893.44
    Estate of Edwin Bendbeim- 1,893.44
    5,680.32

      The same persons, as trustees, were allowed the following commissions for paying out principal:
    Julius Bendlieim_ $977.64
    Henrietta Bendheim_ 977.64
    Estate of Edwin Bendheim_ 977. 64
    2, 932. 92
    With respect to the trustees’ commissions for receiving and paying out income, the order of the surrogate’s court, reads:
    Each Trustee is entitled to one-half commissions for receiving:
    The amount of income as per Schedule H_$745,278.79
    1% on $745,278.79=_$7,452.78
    7,452.78-1-2=_ 3, 726. 39 and to one-half commissions for paying out the following:
    The amount as per Schedule I_ 378,312.12
    The amount as per Schedule J_$112,221.53
    Less amount paid to Trustees on account of commissions on income as per Schedule I_ 16, 571.00
    - 95, 650. 53
    $473, 962. 65j>
    1% on $473,962.65=_ $4, 739. 62
    $4,739.62+2=_ 2, 369. 81
    Edwin Bendheim and Julius Bendheim, however’, at various times during the period covered by the present account, have each taken on account of their commissions on income, the sum of $8,285.50, said payments appearing in Schedule J of the account. There has been heretofore filed herein the duly acknowledged consent of Henrietta Bendheim the life beneficiary consenting to and approving the account as filed.
    Therefore, commissions for receiving and paying out income should be fixed and allowed to the Trustees as follows:
    To Henrietta Bendheim_$6,096.20
    “ Julius Bendheim_ 8, 285. 50
    “ Edwin Bendheim_ 8,285. 50
    Petitioner Henrietta Bendheim sought to deduct from her gross income for 1920, the $12,571 which the trustees paid to themselves in that year. Respondent disallowed this deduction to the extent of $11,034.50 and allowed it to the extent of $1,536.50, which amount he determined to be applicable to the income received and disbursed in 1920.
    The books of account of both the trustees and of Henrietta Bend-heim were kept on a cash receipts and disbursements basis.
    The capital tangible assets of the estate in 1920, suffered depreciation in the amount of $10,890.
    In 1920, the trustees sold certain bonds at a loss of $34,890, and during the same year, sold certain real estate on which they made a gain, of $16,666.67. The net loss to the estate on all sales for the year 1920, was $18,223.33.
    In 1921, the property at Deal Beach, N. J., which was the residence of the testator and in which a life estate was devised by the third clause of his will to his wife Henrietta, was sold at a profit of $11,413.19. The proceeds of this sale were paid to the trustees and were reported by them to the surrogate’s court, as part-of the corpus of the trust.
   OPINION.

Milijken :

The trustees, including the widow, Henrietta Bend-heim, treated the trust estate as the individual property of the beneficiary. They charged her with depreciation and capital losses, and credited her with capital gains. Her income-tax return for 1920 was a reflection of this accounting; so also was the return of the trustees. Apparently the only exception to this procedure was that the trustees reported the gain arising from the sale of the residence at Deal Branch, N. J., and the beneficiary did not report it. This gain respondent shifted to the life tenant. It becomes our duty therefore, to unravel this tangled skein insofar as the pleadings raise questions relative thereto, and to that extent point out the adjustments which should be made.

Under the will of her husband, Henrietta Bendheim was entitled to receive the net income of the estate after the payment of all legal charges of the trust which related to its production. The first question is whether the commissions paid to the trustees for the receipt and disbursement of income are proper deductions by the trustees, with the result that the beneficiary would receive just that much less taxable income, and if deductible, how much of the paymeats made in 1920 should be allowed as a deduction in that year.

Section 2753, New York Code of Civil Procedure, in part provides:

Sec. 2753: Commissions of executor, administrator, guardian or testamentary-trustee.
On tile settlement of the account of any executor, administrator, guardian or testamentary trustee, the surrogate must allow to him his lust, reasonable and necessary expenses actually paid by him, and if he be an attorney and counselor-at-law of this state, and shall have rendered legal services in connection with his official duties, such compensation for such legal services as shall appear to the surrogate to be just and reasonable; and in addition thereto the surrogate must allow to such executor, administrator, guardian or testamentary trustee for his services in such official capacity, and if there be more than one, apportion among them according to the services rendered by them respectively;
For receiving and paying out all sums of money not exceeding one thousand dollars, at the rate of five per centum.
For receiving and paying out any additional sums not amounting to more than ten thousand dollars, at. the rate of two and one-half per centum.
For all sums above eleven thousand dollars, at the rate of one per centum.
The value of any real of personal property, to be determined in such manner as the surrogate may direct, and the increment thereof, received, distributed or delivered, shall be considered as money in making computation of commissions. But this shall not apply in the case of a specific legacy or devise.
If an executor acting as trustee, or if a trustee or guardian, is required to receive income and pay over the same, and such executor, trustee or guardian pays over said income and renders an annual account to the beneficiary of all his receipts and-disbursemnts on account thereof, he shall be allowed, and may retain, the same commission on the amount so accounted for as he would be allowed upon' principal on a judicial settlement; if he does not render such annual account, he shall be allowed, upon his judicial settlement, his commission upon the total income from any money or property then payable to such beneficiary.
If the gross value of the principal of the estate or fund accounted for amounts to one hundred thousand dollars or more, each executor, administrator, guardian' or testamentary trustee is entitled to the full compensation on principal and income allowed herein to a sole executor, administrator, guardian or testamentary trustee, unless there are more than three, in which case the compensation to which three would be entitled must be apportioned among them according to the services rendered by them, respectively.

Under the above statute and in accord with the settlement made in the surrogate’s court, it is clear that the $16,871 paid to Julius Bendheim and Edwin Bendheim represented commissions paid solely on income received and paid out. These commissions were a charge on income. See In re Smith, 149 N. Y. S. 131. It was not necessary that the trustees report annually to the surrogate’s court. It was sufficient that they accounted annually with the beneficiary. See In re Martin, 196 N. Y. 415; 90 N. E. 46. In an estate like this, where the income was derived from the management, renting and selling of property, the commissions for receiving and paying out such income are in the nature of ordinary and necessary expenses paid in carrying on a trade or business and do not differ in nature from commissions paid to an agent for the management of the property of his principal. They are, therefore, deductible under section 214(a) (1) of the Revenue Act of 1918. Cf. William W. Mead, et al., Executors, v. Commissioner, 6 B. T. A. 752.

The next question is whether the whole of this $12,571 paid in 1920 to Julius and Edwin is deductible in that year from the gross income of the estate, or only a part thereof, and, if only a part, how much. Such deduction will result in a corresponding diminution of the taxable income of Henrietta.

The surrogate’s court allowed, in 1922, this amount as compensation for the collection and disbursement of income. So much of this amount as was allowed for services rendered after 1920, can not be held to have been paid for ordinary and necessary business expenses for that year. Such excess had not been earned in 1920, and there is nothing in the will which gave the trustees the right to pay themselves unearned commissions. Besides, on this point, we have before us only the year 1920. The trust terminates at the death of the widow and with such termination end all rights to commissions on income. Therefore, so much of the payment to Julius Bendheim and Edwin Bendheim as covered services rendered after 1920, should not be allowed as a deduction in that year.

Julius and Edwin received $4,000 in 1919 and $12,571 in 1920, or $16,571 in all, and this was in excess of the commissions allowed them by the law of New York. This excess was allowed by the surrogate’s court, not for extraordinary services, but because the widow consented to the payment. This consent on the part of the widow was tantamount to an assignment by her of her income to Julius and Edwin. The widow can not cut down her taxable income by in effect assigning to the other trustees a part of her income, to which they would not have been entitled but for her consent.

Respondent vigorously contends that if any deduction be permitted in this respect, then the only deduction that should be allowed is that part of the commissions which Was paid on income received and disbursed in 1920. In response to this, it is pointed out that the accounts of the trustees and of the beneficiary were kept on a cash receipts and disbursements basis. Under this method of accounting, commissions can not be accrued. They can be taken into account for income-tax purposes only when in fact paid, just as the executors can be held to have received taxable income from the commissions only when they receive them. The estate was, therefore, entitled to deduct in 1920, from its gross income, so much of the $12,571 paid in that year, which, plus the $4,000 paid in 1919, represented 1 per cent of all amounts of income received and disbursed up to and including December 31, 1920.

The trustees are entitled to a deduction from the gross income of the estate in 1919, of the $4,000 paid in that year as commissions for receipt and disbursement of income since that amount was less than what was due them in that year.

Respondent did not err in refusing to permit the beneficiary, Henrietta Bendheim, to deduct from her gross income capital losses suffered by the trust and depreciation applicable to trust property. See Baltzell v. Mitchell, 3 Fed. (2d) 428; Arthur H. Fleming v. Commissioner, B. T. A. 900; and Estate of Virginia I. Stern v. Commissioner, 7 B. T. A. 853.

It is not necessary to consider the question whether certain sales of trust property, made in 1920, were or were not made on the installment Basis since the beneficiary, Henrietta Bendheim, who is the only person appealing on this question, is not taxable on the income derived from such sales.

The gain made on the sale of the Deal Beach, N. J., property was a capital gain which accrued to the remainderman, and not to the life tenant. Henrietta Bendheim is not taxable on such gain. See Gibbons v. Mahon, 136 U. S. 549; United States Trust Co. v. Heye, 224 N. Y. 242; 120 N. E. 645.

Reviewed by the Board.

Judgment will be entered on 15 days'1 notice, v/nder Rule 50.


author: Van Fossan:

text:
    Blue River Placer Mining Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6299.
    Promulgated September 22, 1927.
    Value to be used in computing depreciation of property acquired by gift determined.

      James Grafton Rogers, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    This appeal is taken from the determination by the Commissioner of a deficiency of $2,105.42 in income taxes for the calendar year 1921. It is alleged that respondent refused to allow sufficient depreciation on a certain dredge owned by petitioner.
    FINDINGS OF FACT.
    Petitioner is a Colorado corporation with principal offices at Colorado Springs, and is the lessee of certain placer gold-mining property in Summit County, Colo., in the operation of which a floating dredge is used. The property, formally leased to petitioner by the Long Island Mining Co. under agreement dated February 10,1921, consists of approximately 320 acres, comprising four and a fraction patented claims, and in 1918 contained approximately 9,000,000 cubic yards of dredgeable ground. It is bounded on the north and east by property of the Tonopah Placers Co., a dredging company, on the south by the local cemetery, and on the west by high ground, not dredgeable.
    The mine was worked by means of a continuous bucket line dredge, especially erected upon and adapted to the particular property. The dredge floats in an artificial pond of water, picks up the gravel in an endless chain of buckets, and carries it onto the boat, where it is washed and the gold separated.
    In the year 1918 the dredge in question was constructed upon the property subsequently leased to petitioner by a partnership composed of Mark Gr. Evans and W. P. Hammon. In 1919 or 1920, in consideration of an exchange of other property of equal or greater value. Hammon transferred his interest to Evans. During 1918, 1919, and 1920 the dredge was unsuccessfully operated by successive lessees. In the fall of 1920 Evans arranged with his son-in-law, W. J. Rad-ford, an experienced mining engineer, to take over the operation of this dredge for the benefit of his (Evans’) family, it being understood that a corporation would be organized for the purpose and that Evans would donate and convey the dredge to it. The petitioner was incorporated January 12, 1921, and its capital stock was issued in equal proportions to W. J. Radford, Olive E. Radford, Mrs. Frank Shaw and Mrs. Mark G. Evans, who were respectively the son-in-law, daughters, and wife of Mark G. Evans. Evans, himself, owned no interest in the corporation. The dredge was donated to petitioner by a letter dated January 12, 1921, and formally accepted the same date by resolution of the board of directors of petitioner. A formal transfer was effected by deed reciting a nominal consideration of $10, in July, 1921.
    In the fall of 1920, when the gift of the dredge was suggested by Evans, the dredge was in as good condition as when built, some wear and tear excepted. Some changes were necessary because of the improper design of the boat for operation on the particular property. The necessary changes were made prior to the incorporation of petitioner, which assumed the indebtedness incurred for that purpose. At the time of incorporation of petitioner all other placer mining property in that locality had been worked out or was being worked by other companies.
    The original cost of the dredge was $189,270.28. Additions to the dredge made by the donor amounted to $5,500. The cost of changes in the design of the boat, made by the incorporators of the petitioner prior to incorporation, and later assumed by it, was $14,500. The total cost of the dredge at the beginning of operations by petitioner was $209,270.23. The fair value of the dredge at the beginning of the taxable year was not less than its cost. The salvage value of the dredge is $10,000. The total dredgeable gravel originally in the property was 9,000,000 cubic yards. The amount of gravel dredged in 1921 was 1,088,029 cubic yards. The rate of depreciation on the dredge per cubic yard of gravel extracted is 2.214 cents.
   OPINION.

Van Fossan:

At the hearing of this case counsel for respondent conceded that the dredge was a depreciable asset; that the depreciation should be based on the probable life of the dredgeable land in the particular, property; that the dredge originally cost $189,270.23; that in the year 1921 there were excavated 1,088,029 cubic yards of gravel; that in the event petitioner’s contention is sustained, the factor of depreciation is 2.214 cents per cubic yard dredged.

It was proved that, in addition to the original cost to donor, $20,000 was expended on the dredge prior to operation by petitioner, and that its salvage value at conclusion of operation would be $10,000.

Under these facts counsel for respondent contends that the basis for determining depreciation should be the fair value of the property at date of acquisition.

Petitioner contends on the other hand that in such a situation depreciation on the dredge should be based on the cost to donor plus costs to donee.

In the instant case it falls out that it is immaterial in determining the amount of the tax which view is taken. The uncontradicted evidence is that the dredge was worth in 1921 at least as much as the original cost and it was so capitalized by petitioner.

The basic amount which should be used in determining depreciation is $209,210.23. The salvage value is $10,000. The yardage removed and the factor to be applied thereto are stated in the findings of fact.

Reviewed by the Board. •

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


author: Lansdon : Littleton,

text:
    Rochester Last Works, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6511.
    Promulgated September 22, 1927.
    Proof insufficient to establish claim for deductions from gross income for the taxable year of bad debts and exhaustion of investment in a leasehold.

      H. Earlton Hanes, Esg., for the petitioner.

      D. D. Shepard, Esg., for the respondent.
    This is a proceeding for the redetermination of a deficiency of $216.32 in income taxes for the year 1920. Two issues are involved: (1) Whether petitioner is entitled to annual deductions from income on account of advances to a certain corporation in which it owned 45 per cent of the capital stock, with which advances said corporation constructed and acquired buildings and equipment used in cutting timber under the provisions of a certain contract, hereinafter mentioned; and (2) whether a certain debt owed to the petitioner was ascertained to be worthless and charged off so as to constitute a deduction from gross income for the year 1920.

      FINDINGS OF FACT.
    The petitioner is a New York corporation having its principal office at Rochester, where it is engaged in the manufacture and sale of wooden boot and shoe lasts.
    Under date of December 9, 1919, Mobbs & Lewis, Ltd., an English corporation duly organized and incorporated under the laws of Great Britain, having its head office at the town of Kettering, Northampton County, England, entered into a five-year contract with the Nash-waak Pulp & Paper Co., Ltd., a corporation organized under the laws of the Province of New Brunswick, having its head office at Union Point in the Parish of Lancaster, New Brunswick, for the cutting of maple and birch timber to be used in the manufacture of last blocks. By the terms of the contract, Mobbs & Lewis, Ltd., was required in each year after the cutting season of 1919-1920, to cut certain minimum quantities of timber each year and to convert the same into sawn or manufactured lumber or last blocks during the following sawing season ending not later than September 30.
    Mobbs, of Mobbs & Lewis, Ltd., and Henry F. Loewer, petitioner’s president and manager, had been friends for many years and they decided that the two companies which they represented should be practically equal partners or sharers in a lease of maple and birch timber land in Canada for the production of last blocks, both as to the leasehold and cutting and manufacture of the timber into blocks. In furtherance of this agreement the foregoing described contract for timber was negotiated between Mobbs & Lewis, Ltd., and the Nash-waak Pulp & Paper Co., the owner of the timber and timber land involved. By the terms of the contract Mobbs & Lewis, Ltd., had the privilege of renewal at the end of the term. The contract describes the land, provides in some detail as to the method to be used in the cutting of timber, requires that the owner with the approval of the purchaser shall lay off a certain tract or acreage each year and that the purchaser shall cut at least 3,000,000 superficial feet of sawed timber and last blocks each year for which it shall pay the owner $5 per thousand superficial feet. There is no language in the contract indicating any interest of the petitioner therein.
    The contract of December 9, 1919, contains the following pertinent clauses:
    (e) At the expiration of four years from the date hereof and within three months thereafter the Nashwaak Company will state a rate of stumpage to be charged during a further or second term of five years to commence at the expiration of the first term of five years hereby agreed upon and it shall then be at the option and election of the said Mobbs & Lewis within three months thereafter fiy written notice thereof executed by said Mobbs & Lewis under their corporate seal and mailed postpaid and registered duly addressed to the Nashwaak Company to accex)t the rate of stumpage so stated by the said Nashwaak Company for the said second period of five years. If such rate of stumpage shall be so accepted by Mobbs & Lewis within said three months then this agreement shall be extended and be in force for said second term of five years next ensuing the term hereby granted without any change except that the stumpage during said second term shall be at the rate so stated and accepted. If, however, said rate so stated shall not be so accepted by said Mobbs & Lewis within said three months then this agreement and all rights to cut logs given hereunder shall at the end of said first period of five years end and terminate and cease to be of any force or effect so far as cutting logs is concerned but shall during the then ensuing sawing season continue in force in all other respects to permit of the sawing of all logs theretofore cut and to preserve the lien of the Nashwaak Company until all stumpage and interest if any shall have been fully paid. Provided however that in the case of this agreement not being continued for a second period under above option nevertheless the said Mobbs & Lewis shall have the right to store and warehouse on the permitted section or sections sawn or manufactured lumber for a period of twelve months next after the expiration of the first term of five years in order to season and remove such sawn and manufactured lumber.
    * * * * ¡¡: ‡
    (i) That they will on their own account and at their own expense provide the necessary logging and lumbering outfit mills machinery and other plant necessary for such logging sawing and manufacturing operations and will manufacture such logs at such mills and not elsewhere into sawn and manufactured. lumber and last blocks and that all such sawing lumbering and logging outfit mills machinery and other plant and also any sawn and manufactured lumber and last blocks shall from time to time and at all times be kept on the reserved blocks at some place or places designated from time to time by the Nashwaak Company and that all such operations shall be carried on within the limits of said reserved blocks and no lumbering or logging outfit mills machinery or other plant or logs or sawn or manufactured lumber or last blocks shall be removed therefrom while any amount may be due or owing from the said Mobbs & Lewis to the Nashwaak Company.
    * * * * * * *

    8. This contract is not assignable or divisible and said Mobbs & Lewis shall not assign this contract or sub-let or sub-permit hereunder except to a Company formed by Mobbs and Lewis Limited to operate on said lands.
    9. In the event of this contract being so assigned the said Mobbs & Lewis shall however continue liable and responsible to the Nashwaak Company for the faithful performance hereof.
    The agreement between Messrs. Mobbs and Loewer was not in writing. It was consummated through the formation of the Mavis Last Block Plant, an operating company organized under the Canadian law and having its principal office at Toronto, Canada. This concern is variously denominated in the record as the Mavis Mills Block Co., Mavis Block Corporation Plant, Mavis Timber Co'., and hereinafter will be referred to as the Mavis Company. The petitioner and Mobbs & Company purchased all the stock of the Mavis Company for some consideration not disclosed by the record. One share of such stock was issued to Loewer, the president of the petitioner to qualify him to serve as a director, and 899 shares were issued to him as trustee for the petitioner. Mobbs & Lewis, Ltd., received 1094 shares of such stock.

      The books of the petitioner show advances beginning July, 1919, up to and including 1922, under the heading “ Mavis Block Advances.” At the end of 1920 the company’s books show advances amounting to $64,816.94; at the end of 1921 the company’s books show advances in a total amount of $100,055.54; and at the end of the year 1922 the company’s books show additional advances of $7,023.71. These advances were made by the petitioner to the Mavis Company in the amounts above specified. They were used in 1920 by the Mavis Company in the construction and acquisition of saw mill machinery, buildings and other equipment installed by said company for the purposes of the timber contract above mentioned, and equalled about 45 per cent of the cost thereof. The remaining 55 per cent of such cost was advanced by Mobbs, of Mobbs & Lewis, Ltd.
    In 1924 and prior to the expiration of the contract above mentioned, it was determined that the timber on the property was practically cut over. After some negotiation, and in 1924, Mobbs & Lewis, Ltd., paid the petitioner the sum of $30,000. In 1924 the amount of $30,000 was credited on the petitioner’s books to the account of “ Mavis Block Advances,” hereinabove referred to. In the same year (1924) the balance of this account was charged off the company’s books by a correcting entry charging off 20 per cent of the amount of the advances appearing on the books as of December 81, 1920; for the year 1921 by a correcting entry charging off 25 per cent of the advances made in 1921, to wit, $35,238.60, and 20 per cent of the amount of advances as of December 31, 1920, $64,816.94; for the year 1922 by a correcting entry charging off 33% per cent of the advances made in 1922 ($7,023.71); 20 per cent of the advances made in 1920 ($64,816.94); and 25 per cent of the advances in 1921 ($35,238.60), and adjustments similar to these made in 1922 were made for the year 1923.
    The company’s books show in 1924 that by these correcting adjustments there remained a debit balance of advances amounting to $14,-661.31 against which is credited the $30,000 received in 1924, herein-before referred to.
    The petitioner maintained no leasehold account during the year in controversy or subsequently thereto, wherein said advances appearing in the Mavis Block account are set up, nor are such advances set up in the company’s books as a capital charge to leasehold.
    The maple and birch timber which formed the subject matter of the contract in question, was practically all cut and manufactured prior to the end of the year 1924 and the agreement was not renewed.
    From some time in 1911 and up to the first of the year 1920, the petitioner advanced certain amounts of money to one E. R Wash-burn, who was engaged in the manufacture of lasts and last blocks at Franklinville, 1ST. Y., with* the understanding that such advances were anticipated payments for the products manufactured by Wash-burn. The credit balance of such advances at December 31, 1920, was $5,190.74. During the year 1920 the petitioner made many attempts to secure last blocks or cash in liquidation of such balance and was unable to make any collection on the account. Loewer made several trips to Franklinville and after investigation decided that the debt was worthless at December 31, 1920. The unpaid advances were carried as open accounts on the petitioner’s books, further unsuccessful attempts being made to collect in 1921 and at December 31, 1924, they were charged off the books of the petitioner by a correcting entry as of December 31, 1920.
   OPINION.

Lansdon :

There are two questions involved in this proceeding. For convenience in treatment we shall consider them in reverse order from that in which they appear in the findings of fact, and dispose first of the claim for bad debts on account of money advanced to E. R. Washburn to aid the latter in the conduct of his business of manufacturing lasts at Franklinville, N. Y.

The record discloses that these advances were made between 1911 and 1920 with the intention that they should be repaid in last blocks, the product of the debtor’s business. No payments of any kind were made on this account in the year 1920. Petitioner’s president and manager visited the plant several times within the year, and became convinced that no collection could be made. The full amount of the debt, $5,190.74, was thereafter charged off the petitioner’s books on December 31, 1924, by an adjusting entry as of December 31, 1920. It appears that this account was carried on the books of the petitioner for nearly four years after its worthlessness is alleged to have been ascertained and finally charged off by a so-called correcting entry as of the close of the taxable year. In these circumstances, we are unable to find that the debt was ascertained to be worthless and charged off in 1920.

Petitioner advanced to the Mavis Company between July, 1919, and December 31, 1920, $64,816.94 for the use of the latter in erecting necessary buildings and purchasing necessary machinery and equipment for the production of last blocks. All this was used during the year 1920 for such purposes. This was petitioner’s 45 per cent of the whole amount used for these purposes during the year 1920. Mobbs & Lewis, Ltd., advanced its proportionate share of 55 per cent of the cost of such facilities. The petitioner claims that the full amount advanced by it was invested in plant facilities the useful life of which was limited to the five-year term of the timber-purchase agreement, and that under the provisions of section 214 (a) (8) of the Revenue Act of 1918, it should be entitled to exhaust such investment ratably as deductions from its income for each of such five years.

The record does not disclose whether these so-called advances were payments for the stock of the Mavis Company issued to the petitioner, or loans to the Mavis Company on payment for a 45 per cent interest in the timber contract. The salvage value of the buildings and equipment at the end of the five-year term is not proved. We have no knowledge of whether the Mavis Company has been dissolved, or of the value of said company’s assets at date of dissolution or of the value of the petitioner’s interest therein. There is no testimony that all available raw material suitable for the manufacture of* last blocks was exhausted at December 31, 1920. From the evidence we are unable to determine whether there was any proportional satisfaction of these so-called advances by reason of any exhaustion of the life of the contract under which the Mavis Company was operating.

Reviewed by the Board.

Judgment wUl he entered for the respondent.

Littleton,

dissenting: I dissent from the decision on the second point. See Electric Reduction Co. v. Lewellyn, 11 Fed. (2d) 493, and Appeal of Cornelius Lumber Co., 5 B. T. A. 215.


author: Phillips :

text:
    Appeal of Elizabeth S. Sprague.
    Docket No. 6740.
    Promulgated September 22, 1927.
    1. Under section 219 of the Revenue Acts of 1918 and 1921, income of the trust for the taxable year which becomes distributable during the taxable year is taxable to the beneficiary, although the beneficiary was unknown until the exercise of a power within the taxable year.
    2. Certain trust instruments provided that income should be added to the principal thereof, except that upon written request of the petitioner such income should be paid to her. Held,, that such income is taxable to the fiduciary except to the extent to which the power was exercised by the petitioner to request such income be paid to her, and that to such extent the income was distributable and taxable to the petitioner.
    3. Although the interest of the beneficiary may be contingent until the trustee makes a determination as to the amount of income which is distributable, after such determination is made and the contingency removed the income becomes distributable and taxable to the beneficiary and not to the fiduciary.

      Francis V. Barstow, Esq., for the petitioner.

      J. W. Fisher, Esq., for the Commissioner.

      The taxpayer appeals from the determination by the Commissioner of deficiencies of $47.33, $7,907.86, and $48,596.90 in income tax for 1919, 1920, and 1921, respectively. She alleges that the Commissioner has committed error in allocating to her and including in her income, in computing the deficiencies, the income received by the trustees under various indentures of trust and in refusing to determine an overpayment of tax on account, of income alleged to have been erroneously reported as received from some of said trusts.
    FINDINGS OF FACT.
    The taxpayer is a resident of Boston, Mass.
    In the determination of the deficiency here in question the Commissioner has included as income to the taxpayer for the respective years income received by trustees under indentures of trust made by her husband, Phineas W. Sprague, as follows:

    By an indenture of trust dated May 13, 1919, executed by said Phineas W. Sprague, husband of the taxpayer, and delivered to the First National Bank of Boston and accepted by that bank on July 14, 1919, said Phineas W. Sprague, having insured the taxpayer’s life for $300,000 and the life of his son for $100,000 by endowment policies, transferred to the trustees shares of stock of corporations to hold as a fund upon various trusts, including the following:
    Prom the income of the fund the Bank shall pay the annual premiums on all of the said policies, applying the dividends payable upon said policies to increasing the amount of the insurance and adding surplus income, if any, to the principal of the fund.
    Upon the maturity of the policies the insurance monies and the funds then in the hands of the trustee became a trust fund for the benefit of the settlor’s children and their issue with contingent remainders over to the settlor and his wife. The settlor reserved the right to revoke the trust or amend the terms thereof at any time. The settlor amended the trust indenture on September 9,1920, to omit the provision quoted above and to substitute therefor the following:
    Prom the income of the Fund the Bank shall pay the annual premiums on all of the said policies, applying the dividends payable upon said policies to increasing the amount of the insurance, and, unless my wife shall request that the same be paid to her as hereinafter provided, shall add the surplus income, if any, to the principal of the fund. Upon the written' request of my wife the Bank shall pay over to her from time to time any of said surplus income when and as the same has been received and found to he unnecessary for the payment of said premiums; or from time to time, upon her written request the Bank may pay over to my said wife from principal an amount equivalent to the aggregate face amount of any such surplus income which has been previously added to the principal of the Premium Trust and not theretofore withdrawn by her under this provision.
    The settlor further amended the trust indenture on September 10, 1920, making it irrevocable and not subject to amendment.
    By indenture of trust dated October 15, 1919, executed by said Phineas W. Sprague and delivered to the Old Colony Trust Co., accepted by said company of said date, said Sprague, having insured the taxpayer’s life for $100,000 by an endowment policy, transferred to the trust company shares of stock of corporations to hold as a fund upon various trusts, including the following:
    From the income of the fund the trustee shall pay the annual premiums on the said policy, applying the dividends payable upon said policy to increasing the amount of the insurance, and adding the surplus income, if any, to the principal of the fund.
    Upon the maturity of the policy the insurance monies and funds then in the hands of the trustee become a trust fund, the principal of which is payable to the wife at certain times or, in the event of her death, the income and principal are payable to the children of the settlor and their issue. The settlor reserved the right to revoke the trust or amend the trust indenture at any time. The settlor amended the trust indenture on September 1, 1920, to omit the provision quoted above and to substitute therefor a provision which is identical in its terms with the provision, quoted above, made on September 9, 1920, with reference to the trust indenture of which the First National Bank of Boston is trustee. The settlor further amended the trust indenture on September 10, 1920, making it irrevocable and not subject to amendment.
    By indenture of trust dated January 24, 1920, executed by said Phineas W. Sprague and delivered to the International Trust Co. of Boston and accepted by that company on January 28, 1920, said Sprague, having insured the taxpayer’s life for $100,000 by an endowment policy, transferred to the trustee shares of stock of corporations to hold as a fund upon various trusts, including the following:
    From the income of tbe fund the Bank shall pay the annual premiums on said policy, applying the dividends payable upon said policy to increasing the amount of the insurance, and adding the surplus income if any to the principal of the fund.

      Upon the maturity of the policy the insurance money and the funds then in the hands of the trustee became a trust fund, the income of which is payable to the taxpayer during her life and after her death to the children of the settlor with provision for payment of the principal to such children and their issue. The settlor reserved the right to revoke or amend the trust at any time. The settlor amended the trust indenture on September 1, 1920, to omit the provision quoted above and to substitute therefor a provision which is identical in its terms with the provision, quoted above, made on September 9, 1920, with reference to the trust indenture of which the First National Bank of Boston is trustee.
    The said three trusts hereinabove enumerated are hereinafter referred to as the “ insurance trusts.”
    By indenture of trust dated February 19, 1919, executed by said Phineas W. Sprague and delivered to the First National Bank of Boston and accepted by that bank on said date, said Sprague transferred certain shares and securities to the trustee to hold upon various trusts including the following:
    Until and including the 1st February 1923 the trustee shall pay to my wife, Elizabeth Shaw Sprague, from the income of the trust fund such sums as I (or my guardian in case I shall become of unsound mind), shall from time to time request in writing.
    It was also provided that such income as is not paid to Mrs. Sprague should be added to and become part of the principal of the trust fund. After February 1, 1925, the income is payable to the settlor’s children or their issue and at certain times the principal is payable to such children and their issue. The settlor reserved the right to terminate the trust, in which event the settlor is to receive all of the property of the trust. The settlor amended the trust indenture on February 18, 1921, to omit the provision quoted above and to substitute therefor the following:
    Until and including the 1st of February, 1925, the trustee shall pay to my wife, Elizabeth Shaw Sprague, from the income of the trust fund, such sums as she shall from time to time request in writing.
    The income of such trust from January 1, 1921, to February 17, 1921, was $11,256.40.
    By indenture of trust dated May 26, 1919, executed by said Phineas W. Sprague and delivered to the State Street Trust Co. and accepted by that company on said date, said Sprague transferred certain shares of stock to the trustee to hold upon various trusts including the following:
    Until and including May 1, 1929, to collect invest and reinvest income and to pay to my wife, Elizabeth Shaw Sprague from time to time if she so requests in writing any or all of the income of the trust fund, either in cash or securities or property into which said income may have been invested, and on May 1, 1929 to add to the principal of the trust fund all accumulated income not paid as aforesaid.
    The income is thereafter to he accumulated until May 1, 1934, and after that date is to be paid to the settlor’s children, and after their death the principal is to be divided among the settlor’s issue. The trust instrument contains no provision for amendment or alteration.
    By indenture of trust dated February 19, 1919, and executed by said Phineas W. Sprague as settlor, and Robert G. Dodge, George Hawley, and George A. Butman, as trustees, said Sprague transferred certain shares of stock to the trustees to hold upon various trusts including the following:
    Until the expiration of a period of ten years from the date of this instrument the trustees shall pay over the net income of the trust fund to my wife, Elizabeth Shaw Sprague, from time to time as she may request, and if she shall not request them to pay her all of the income the surplus shall be invested and added to the trust fund, subject to her right at any time during said period to require the payment to her of such accumulated income or any part thereof.
    At the end of the ten-year period the trustees were directed to pay the principal to Mrs. Sprague, the petitioner herein, if living, and otherwise to divide it among the surviving children of the settlor and Mrs. Sprague. The trust further provided:
    The provisions of this instrument may be amended by the trustees at any time during my life or the life of my said wife; provided, however, that no amendment shall become effective unless embodied in a written instrument signed by the three trustees for the time being and approved by me if I am living and otherwise by my said wife.
    On October 19,1921, this trust instrument was amended to provide that the settlor might terminate it at any time during his life upon written notice, in which event the trust funds, together with all accumulations, were to be transferred and paid over to him. On October 27, 1921, the trust instrument was further amended to provide that if the settlor died within the period of 10 years from the date of its execution, the trustees might terminate the trust and pay the trust funds to the estate of the settlor provided they were of the opinion that such provision will be for the best interests of the family.
   OPINION.

Phillips :

The question presented for our determination is whether the income, or any part of the income of the trust funds, is taxable to the petitioner. The provisions of the Revenue Act of 1918, so far as applicable, are as follows;

Sec. 219. (a) That tbe tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212 * * * and in cases under paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of each beneficiary’s distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary * * *. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(d) In cases under paragraph (4) of subdivision (a) * * * the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable years * * *.

The provisions of subdivision (a) of section 219 of the Revenue Act of 1921 are the same as those of the same subdivision of the 1918 Act. The remaining subdivisions of the 1921 Act, so far as material, are as follows:

(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212 * * *. In cases in which there is any income of the class described in paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable to each beneficiary, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraphs (1), (2), or (3) of subdivision (a) or in any other case within subdivision (a) of this section except paragraph (4) thereof the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary * * *.
(d) In cases under paragraph (4) of subdivision (a) * * * the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not
(e) In the case of an estate or trust the income of which consists both of income of the class described in paragraph (4) of subdivision (a) of this section and other income, the net income of the estate or trust shall be computed and a return thereof made by the fiduciary in accordance with subdivision (b) and the tax shall be imposed, and shall be paid by the fiduciary in accordance with subdivision (c), except that there shall be allowed as an additional deduction in computing tlie net income of the estate or trust that part of its income of the class described in paragraph (4) of subdivision (a) which, pursuant to the instrument or order governing the distribution, is distributable during its taxable year to the beneficiaries. In cases under this subdivision there shall be included, as provided in subdivision (d) of this section, in computing the net income of each beneficiary, that part of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable during the taxable year to such beneficiary.

The principles to be applied in determining whether income from a trust fund is taxable to the fiduciary or to the beneficiary have been laid down by the Board in the cases of William E. Scripps, 1 B. T. A. 491, and Mary L. Barton, 5 B. T. A. 1008. Those cases arose under the same Acts with which we are here concerned. There we held that income which was properly accumulated was taxable to the fiduciary while income which was properly distributed or distributable was taxable to the beneficiary.

It is unnecessary to repeat here the reasons which led us to these conclusions.

Substantially the same conclusion was reached by the Circuit Court of Appeals of the Eighth Circuit in Willcuts v. Ordway, 19 Fed. (2d) 911, where it is held that the beneficiary and not the fiduciary is taxable upon so much of the income as is severed from the trust estate so that it no longer forms any part thereof. In its opinion the Court said:

In eacb of these Acts, the intent is that annual income to a particular beneficiary from a trust estate shall be taxed to him as a separate unit of taxation where that income is “ distributed ” to him. “ Distribution ”, as there used, does not necessarily mean passing into the uncontrolled possession or disposition of the beneficiary. It means separation and segregation from the trust fund so that it no longer forms any part or parcel thereof. The test set up by the statute is whether the income passes from the trust estate which produced it and ceases to be subject to the terms and control of that trust. If this trust instrument authorized such incomes to be so separated and segregated and they were so treated in fact, the Oommissioner was in error and the trial Court properly overruled the demurrer to this petition and entered judgment for the refund.

The Commissioner held that because the petitioner could receive the income of the trust funds by making a written request therefor, the entire income is taxable to her, and determined the deficiency accordingly. This position can not be Sustained. The trust instruments all provided that the income should be added to the principal. To this extent such income was accumulated for unascertained persons or persons with contingent interests. There was the further provision that upon written request (by the settlor in one case and' by the petitioner in the others) certain portions of the income were to be paid to the petitioner. Any such request constituted the exercise of a power which, to the extent that such power was validly exercised, removed such income from the provision for accumulation and made it distributable. Such distributable income was thereupon severed from the trust property and was taxable to the beneficiary under the provisions of section 219, quoted above. So much as was not distributable pursuant to the exercise of the power given .by the trust instrument, remained a portion of the trust property, taxable to the fiduciary.

Nor can the petitioner be sustained in her contention that the trusts fall within paragraph (a) (2) of section 219, and that no part of the income is taxable to the beneficiary.

At the time the trusts were created and as the income was received from time to time, it may be that the ultimate beneficiary was uncertain but to the extent that the power was exercised within the year, this uncertainty was removed and the beneficiary became known.

With respect to the “ insurance trusts ” petitioner contends that even though the power was exercised to require payment of all' the available income, her interest would still be contingent because it was not until surplus income was “ found to be unnecessary for the payment of said premiums ” that any amount became distributable. Unquestionably the duty to determine whether the retention of surplus income was necessary or unnecessary for that purpose rested upon the trustees, and until that duty was performed there was no distributable income. The determinations of the trustees are factors to be considered before we may arrive at the available income upon which the petitioner may exercise the power granted her to demand payment of such income, but when the trustees have made their determination and the petitioner has exercised the power, her interest is no longer contingent.

Reviewed by the Board.

Decision will he entered on W days' notice, under Rule 50.


author: Aeundell :

text:
    Walter J. Ball and Morison R. Waite, Coexecutors, Estate of Ophelia Duhme, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6858.
    Promulgated September 22, 1927.
    Loss sustained in 1920 oil sale of property acquired prior to Marcii 1, 1913, for residence purposes, but abandoned for such use in 1911 and thereafter rented and held for sale, held deductible.

      Tindle v. Semer, 18 Fed. (2d) 452.

      Morison R. Waite, Esq., for the petitioners.

      W. F. Gihhs, Esq., for the respondent.

      This appeal is from the determination of a deficiency in income taxes for the calendar year 1920 in the amount of $5,539.22, only a part of which is in controversy.
    FINDINGS OF FACT.
    Ophelia Duhme died testate in 1921, a resident of Cincinnati, Ohio. The petitioners are the executors of her will. On April 24, 1889, Ophelia Duhme purchased a lot of ground in the City of Cincinnati, Ohio, having a frontage of 195 feet by a depth of 320 feet, for which she paid the sum of $15,000. On the 27th day of July, 1891, she entered into a contract for the construction of a residence on said lot, at a cost of $26,600. This house she occupied as a residence from the date of its completion until May or June, 1911. On April 1, 1892, she purchased the adjoining 60 feet of ground. The purchase price of this lot is not shown, except to the extent that she assumed and paid a mortgage for $2,200, then a lien on the land. The value of the property on March 1, 1913, was $36,500, the lot being then worth $23,000 and the house and outbuildings being worth $13,500. The March 1, 1913, value was less than the cost. In the early part of the summer of 1911, Ophelia Duhme definitely abandoned this property as a residence. She then determined to sell the property and until it could be sold to lease it. The property was under lease from 1911 until 1920, when it was sold for $22,500. The residence was a large brick house, two stories, an attic and basement. There were also certain outbuildings, but of what construction does not appear. The residence and outbuildings depreciated after March 1, 1913, to the extent of 2 per cent per annum, making a total allowance for depreciation on these buildings of $1,890.
    In 1920 Mrs. Duhme sold two farms in Indiana, and in her income-tax return for that year she reported a profit of over $9,000 incident to their sale. The respondent increased the amount of the profit on the sale of these two farms by decreasing their March 1, 1913, value. Petitioner acquiesced in the action of the respondent in this particular.
    The respondent disallowed the loss claimed by Mrs. Duhme on the sale of her residence on the ground that the loss did not result from a transaction entered into for profit.
   OPINION.

Aeundell :

The petitioners contend that they should be permitted to deduct from the gross income of the decedent for the year 1920 the loss she suffered by reason of the sale in that year of the property which prior to June, 1911, had been occupied by her as a residence and since that date had been regularly rented and was at all times offered for sale. Section 214 (a) (5) of the Revenue Act of 1918 provides that in computing net income there shall be allowed as deductions, “ Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business.”

The United States Circuit Court of Appeals for the Third Circuit, at its March, 1927, term, decided the case of Tindie v. Heiner, 18 Fed. (2) 452, which case is on all fours with the instant appeal. The facts in that case were that in 1887 and 1888 the late Senator Philander C. Knox purchased a lot of ground in the City of Pittsburgh, and built a residence thereon at a total cost for both grounds and house of $172,000. In 1901 he abandoned the property as a residence and leased it. Its first lease began in October, 1901, and ran for 3% years. He then leased it for 10 years and thereafter for shorter terms until the property was sold in 1920 for $73,706.79. The court held that the loss arising from the sale of the house was deductible by the taxpayer under the same section of the same Revenue Act which is involved in this case. Among other things the court said:

With the giving up of his residence all sentimental connection in the use of the house as a home ended and thereafter the use of the property was by others under lease from him during the running of the first lease for three years, to-wit from October 1, 1901, and then from April 1, 1905, for ten years. During the running of these leases he was of course unable to sell the property by reason of the use he was making of it and the leases he had given for his own profit. Such being the status of the transaction, the ordinary one of owning real estate for leasing purposes, the situation of the property under the second or ten-year lease when the income tax law of 1913 was passed, was a distinctly nonresidential and distinctively business leasing of real estate for profit. We think we are justified in regarding the transaction here involved by its then and subsequent status. The situation was in no wise different than it would have been had he always owned and used the property for renting purposes and never for residential purposes, because the residential use had finally and forever ceased at the time of the passage of the income tax law. What then was the fact and status in money value of this property when the income tax law of 1913 was passed? It was a distinctively renting transaction and in this transaction was involved the use for renting of property of the agreed upon then value of $120,000. Any system of bookkeeping in this transaction would have had charged against it an investment of $120,000 represented by real estate and the rents upon the same would have been profits. What then would have been the result of this transaction when it was finally closed? Clearly instead of profits a loss represented by the shrinkage in value of the property during that time of $46,293.21.
But, assuming the situation was one where some might contend, as did the Court below, that the language of Congress was intended to treat the transaction as a purchase and sale of property without reference to what its use was during the interim, it seems to us the opposite view might reasonably be taken of holding Mr. Knox’s tenure as made up of two transactions, one, the residential one, which had ceased to exist long before and to which the law did not apply, the other, a purely business venture, unfortunate in its results, but one which the law fairly contemplated should be oft-set against other items of income which the owner of the property sustained. It seems to us, therefore, with this double interpretation in the balance that the law would then resolve that uncertainty against the government in favor of the taxpayer. Assured as we are that this latter transaction was one entered into and carried on for profit, the decedent in the assessment of his net income should have been allowed credit for the loss resulting therefrom.

As in the Knox case, petitioner had, prior to March 1, 1913, abandoned all sentimental connection with the premises as a whole, and on that date held the property distinctly as a business proposition. Under such circumstances and on authority of the circuit court of appeals decision in the Knox case quoted above, we are of the opinion that the respondent erred in refusing to permit petitioner to deduct the loss resulting from the sale of the property as a deduction from gross income for the year 1920. The proper basis for ascertaining the loss is the value of the property on March 1, 1913, since the value on that date is lower than cost. United States v. Flannery, 268 U. S. 98; McCaughn v. Ludington, 268 U. S. 106. Depreciation should be computed at 2 per cent. Appeal of Helen Converse Thorpe, 3 B. T. A. 1006.

Reviewed by the Board.

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


author: Lansdon:

text:
    Excelsior-Leader Laundry Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9221.
    Promulgated September 22, 1927.
    Tbe excess of insurance received over tbe book value of machinery and equipment destroyed by firfe was so invested in like property as to be exempt from tax under tbe provisions of section 234 (a) (14), Revenue Act of 1921.

      John O. Bigelow, Esq., and Edward R. Burt, O. P. A., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.
    This appeal is from the determination of a deficiency of $6,909.66 arising from the disallowance of petitioner’s deduction from its income for 1921 of $22,384.53 cash collected on fire insurance policies in excess of the book value of the assets destroyed. At the hearing petitioner abandoned that part of its claim relating to the deduction of use and occupancy insurance, amounting to $6,720.48, and the premium of $1,000 on bundle insurance, a total of $7,720.48, leaving the disallowance of a deduction of $14,664.05 in controversy.
    FINDINGS OF FACT.
    From some time prior to January 1, 1921, the Excelsior-Leader Laundry Co., a Missouri corporation, conducted a laundry in St. Louis, Mo. George W. Burley, B. T. Kearns and Charles B. Schaum each owned one-third of its capital stock. At the same time George W. Burley and B. T. Kearns each owned one-half of the capital stock of the Leader Laundry Co., a Missouri corporation, also located in St. Louis, except that their wives each held a qualifying share. The Excelsior Company had a maximum earning capacity of $4,000 per week and the Leader Company of $2,500 per week. The two were conducted independently of each other. The Excelsior Laundry was conducted in a leased building. The Leader Company owned its building.
    On the evening of May 23, 1921, the Excelsior Laundry building and practically all of its contents, were destroyed by fire. Thereafter, on the night of the 23rd, the stockholders of the two companies met and discussed plans for the immediate future, and continued their discussion until late the next morning, with the result that the Leader Company opened its doors to the Excelsior Company so that, in addition to its own force, as many of the employees of the latter as could be accommodated in the laundry building of the Leader Company continued work and as much of the laundry work of the Excelsior Company as possible was done in the Leader Company building. Charles B. Schaum was employed on the morning of May 24th to take entire charge of the work of the two companies, and continued in such employment throughout the remainder of the calendar year. On May 31, Mrs. Mary A. Kearns and Mrs. Hattie A. Burley, wives of Messrs. Kearns and Burley, resigned their respective positions of vice president and general manager and director of that company and Chester P. Schaum, having purchased a one-third interest in the Leader Company, was on the same day elected to the positions thus made vacant. From that day on the laundry business of the two corporations was conducted as nearly as practicable as if they were one business organization, with identical stockholders, directors, officers and plant.
    Insurance for the fire losses of the Excelsior Company was paid as follows:
    Customers’ bundle insurance, approximately_$26, 000. 00
    Premium insurance on bundles_ 1, 000. 00
    Use and occupancy insurance_ 6, 720.48
    Machinery and fixtures_ 52, 792.56
    Total. 86, 513. 04

      These payments were mostly made in July, 1921. The bundle insurance all went to customers for laundry work which they had in the building at the time of the fire. The policies were written and losses paid on this account. The use and occupancy insurance was for deprivation of laundry facilities during a stated number of days.
    On the date of the fire the book value of the property destroyed was $22,384.53 less than the insurance so paid. This was' all expended for new machinery of a character similar or related in service to that destroyed, which was installed in a new building begun by the two companies and completed by the consolidated company. The petitioner claimed credit for this in its tax return for the year 1921 under the provisions of section 234 (a) (14). The respondent disallowed the claim and held that the whole amount was taxable gain. The petitioner admitted at the hearing that the amounts received as insurance on bundles and for use and occupancy were taxable, thus reducing the amount of income in controversy to $14,664.05.
    The following resolutions were read into the record from the minutes of a meeting or meetings of the stockholders of the Leader Laundry Co. held August 1, 1921:
    Resolved: That this corporation join the Excelsior Laundry Company, a corporation, in borrowing from the Lafayette South Side Bank the sum of $100,000 payable as follows: * * *
    Resolved : That the proper officers of this corporation execute for and in behalf of this company, the note last above described and mentioned, and for the purpose of securing the same, to also execute a deed of trust to Otto J. Gossrau, trustee for Oscar L. Kupperer, conveying the following described real estate and personal property situated in the city of St. Louis, State of Missouri, to-wit: * * * notes to bear interest from maturity at the rate of 8 per cent per annum; all the said notes to be also executed by the Excelsior Laundry Company.
    Resolved : That this company borrow from the Excelsior Laundry Company all of its available cash and execute the company’s note therefor, payable on or before 5% years after date, provided the loan obtained this day from the Lafayette South Side Bank in the sum of $100,000 shall have been paid for and discharged, and if not then whenever such loan shall have been paid, said note to include the purchase price of its machinery now situated and located at 1012 North Grant Avenue in the City of St. Louis, Missouri.
    Resolved : That the proper officers of this corporation accept a bill of sale made to it of all the machinery and equipment of the Excelsior Laundry Company formerly used or intended to be used in connection with the operation of that company’s business and situated and located at 1012 North Grant Avenue, in the City of St. Louis, Missouri and to pay the Excelsior Laundry Company the sum of $5,000 therefor.
    On the same date the Excelsior Laundry Company adopted the following resolutions:
    Resolved : That all the cash and bonds belonging to this corporation be loaned to the Leader Laundry Company for a period of 5% years from and after the date hereof without interest and until such time as the $100,000 loan this day made by this company and the Leader Laundry Company from the Lafayette South Side Bank be paid for and discharged and that this company accept the note of the Leader Laundry Company in accordance, with the terms hereof, and that there shall be included in the said notes the purchase price of machinery and equipment in the sum of $5,000, the consideration moving to this company from the Leader Laundry Company for the purchase of said equipment.
    Resolved : That the proper officers of this corporation execute and deliver to the Leader Laundry Company a bill of sale conveying to it all the machinery and equipment of this corporation formerly used or intended to be used in connection with the operation of this company’s business and situated and located at 1012 North Grant Avenue in the City of St. Louis, Missouri, for the sum of $5,000 to be included in note to this company as specified in the foregoing resolutions.
    Entries read into the record from the cash book and journal of the Excelsior Laundry Co. indicate clearly that action was taken in accordance with these resolutions insofar as they relate to loans from the Excelsior- Laundry Co.
    By the first of July, 1921, all preparations had been made and the plans drawn for the erection of a new building on vacant land belonging to the Leader Company, designed to accommodate and take care of the custom of both of the old companies. The building operations were pushed as rapidly as possible and on March 5, 1922, the old Leader Company building was vacated and the new occupied. All the insurance money received by the Excelsior Company for itself, except that for premiums and bundles, was for loss of machinery, furniture and equipment, and this was all expended for property of a character similar or related in service or use to the property so destroyed. The old building remained vacant a short time and was then leased to outside parties.
    December 21, 1921, the capital stock of the Excelsior Laundry Co, was increased from $30,000 to $90,000. In petitioner’s tax return for 1921 it reported the Excelsior Company’s assets as follows:
    Surplus-$39,061.46
    Eire Loss_ 24,622.22
    Capital stock- 90,000.00
    Total- 153,683.68
    The following language appears on the minutes of a special meeting of the stockholders of the Excelsior Laundry Co., bearing date of December 22, 1921:
    A proposition was thereupon submitted by Bernard T. Kearns to amalgamate consolidate and unite this company with the Leader Laundry Co., as by the laws of this State provided, such consolidation and amalgamation as the capital stocks, debts, properties, assets or franchises of said companies, to be upon the following terms, to wit:
    1. That the said consolidation and amalgamation shall be made forthwith and that the name and style of said consolidated corporation shall be “Excelsior-Leader Laundry Co.” and that it shall continue in existence for a period of fifty years.
    2. That the several capital stocks, debts, assets and properties both real and personal, of every kind and character, wheresoever situated, including good will and franchises held, owned or possessed by each of said corporations, shall be vested in said consolidated and amalgamated corporation, Excelsior-Leader Laundry Co. as fully as the same are now severally held, owned and enjoyed by them respectively, subject, however, to all of the conditions, stipulations, contracts, liens, claims and charges thereon, and to all debts and obligations of the said respective corporations; and the consolidated corporations shall fully compleie, carry out, and perform all valid conditions, stipulations and contracts heretofore made by said corporations or either of them, and shall pay and discharge all of the liens, claims and charges heretofore created or suffered by either of them on their respective properties, shall pay and discharge all valid debts and obligations of every name, kind and description heretofore incurred or assumed by, or now existent against either of said corporations.
    On that day the board of directors approved the proposition to consolidate the two companies and the following action was taken:
    It was thereupon moved, seconded and unanimously carried that the president and secretary of this company execute such agreement and articles of consolidation, and such other papers, as may be necessary to file with the proper officers of this State to effect and completely carry out such consolidation, and that they be further authorized and empowered to execute all papers, documents and instruments as may now or hereafter be necessary to properly and legally transfer the properties, franchises, assets and liabilities of this company to such consolidated corporation, in such manner that the rights of the creditors of this corporation shall not be affected or impaired, and the rights of the stockholders of this corporation fully protected in such consolidated corporation. And the officers of this company are hereby fully authorized, directed and empowered to so make, execute and deliver any and all instruments, deeds, conveyances and papers, which are now or may at any future time be necessary to fully effectuate the transfer of all the properties, real, personal and mixed, of every character, to such consolidated company, its successors and assigns.
    The Leader Laundry Co.’s stockholders and directors took like action on the same day. On the 28rd of December, a certificate of consolidation was signed and sealed by the Secretary of State of the State of Missouri. The books of the consolidated company were opened January 1,1922.
    In March, 1922, after the new building had been completed and all the machinery and equipment installed, the consolidated Excelsior-Leader Laundry Co. had a maximum earning capacity of $10,000 per week.
   OPINION.

Lansdon:

The petitioner having abandoned its claim for deduction from its income of the $7,720.48 received for use and occupancy and bundle insurance, the only question before the Board for decision is whether the amount collected for loss of machinery and equipment in excess of the book value thereof at the time of the fire was so invested as to require that it be included in income, within the purview of section 234 (a) (14) of the (Revenue Act of 1921.

Section 234 (a) (14), insofar as relevant here, is as follows:

Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* ******
(14) If property is compulsorily or involuntarily converted into cash or its equivalent as a result of (A) its destruction in whole or in part, * * * and if the taxpayer proceeds forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, to expend the proceeds of such conversion in the acquisition of other property of a character similar or related in service or use to the property so converted, * * * then there shall be allowed as a deduction such portion of the gain derived as the portion of the proceeds so expended bears to the entire proceeds.

We have found as facts that the Excelsior Laundry Co. owning the machinery and equipment destroyed, immediately affiliated itself with the Leader Laundry Co. and was continuously so affiliated until December 22, 1921, when by the joint and several action of the two companies, they were consolidated into one company bearing the names of both; that a tax return was rendered by and for the consolidated company for the full year, showing on its face that it included the earnings and gains and the disbursements of the original companies during the year, both as independent and affiliated companies, and also of the consolidated company.

The effect of the consolidation was to extinguish the two original companies and establish the consolidated or amalgamated company in their stead. The revised statutes of the State of Missouri for 1919 under which the consolidation was effected, provides as follows:

Sec. 10,165. Consolidation of companies, how effected. — Any two corporations now existing under general or special laws, or which may be hereafter created, whose objects and business are in general of the same nature, may amalgamate, unite and consolidate said corporations and form one consolidated corporation, holding and enjoying all the rights, privileges, power, franchises and property belonging to each, and under such corporate name as they may adopt or agree upon; such consolidation shall be made by agreement in writing, by or under the authority of the board of directors and the assent of the owners of at least three-fifths of the capital stock of each of said corporations, and a certificate of the fact of such consolidation, with the name of the consolidated company, shall be recorded in the office of the recorder of deeds of the city or county in which such corporation is located and a certified copy of such recorded instrument shall be filed in the office of the secretary of state. Provided,, that no such consolidation shall in any manner affect or impair the rights of any creditors of either of said corporations.

The Court of Appeals of the State of Missouri has decided that:

The consolidation produces a new corporation which succeeds to all the rights and liabilities of the old corporations and a surety on a bond to one of the consolidating concerns remains liable for the default of his principal to the new corporation. Springfield, etc., Co. v. Hobart, 98 A. 227, 68 S. W. 942. In a suit pending against one of the consolidating corporations at the time of consolidation, plaintiff may proceed to judgment against the original corporation, and the united corporation need not be made a party. Wells v. Electric Co., 108 A. 607, 84 S. W. 204.

See also Queen City Furniture & Carpet Co. v. Crawford, 127 Mo. 356; 30 S. W. 163.

If the Excelsior Company had made the purchase of the machinery and equipment direct and installed it in the new building, there could have been no question as to the allowance of the deduction now claimed. Piedmont-Mt. Airy Guano Co., 3 B. T. A. 1009; Cotton Concentration Co., 4 B. T. A. 121; The Davis Co., 6 B. T. A. 281. But, it appears to have loaned all its cash and bonds to the Leader Company. Be that as it may, the money derived from the fire loss was all invested in new machinery which was installed with due expedition in the new building, the erection of which was paid for from moneys borrowed by the two companies on their joint note. The interests of the two companies were identical in that they were both owned by the same stockholders, each having a like interest with each of the other two in the stock, and the officers of the two companies were identical.

Prior to the close of the year for which the return was rendered, the two companies had become amalgamated or consolidated into one, and had ceased to exist as separate entities. But one return, that of the amalgamated company, was rendered for the 12-month period and the respondent accepted it. This indicates that both considered that at the close of the year there was but one of the three legal entities then in existence and that as to matters of Federal income and excess-profits taxes, this one represented both of the others. Under such circumstances, it would be a far cry to hold that the methods resorted to in the expenditure of the gain resulting from the excess of the insurance over the book value of the machinery and equipment destroyed were such as to deprive the petitioner of the benefits of section 234 of the Bevenue Act of 1921. We see nothing in the methods adopted by the two companies destructive of the property rights of either, but even if the methods had been such as to cast a doubt as to the intention of the parties at some time during the year, it is from results rather than methods that the allowance or disallowance of deductions under section 234 (a) (14) must be determined. The property was involuntarily converted into cash as a result of its destruction. The petitioner proceeded forthwith in good faith to expend and did expend the proceeds of the conversion in the acquisition of other property of a character similar or related in service or use to the property so converted. Neither the methods followed by it, nor the results obtained were in contravention of the regulations prescribed by the Commissioner of Internal Revenue under this section made and provided.

Reviewed by the Board.

The deficiency will be determined in accordance with this opinion, on 15 days' notice, wider Bule 50.