author: SteRNhagen:

text:
    Appeals of The Pictorial Review Co.
    Docket Nos. 4487, 6661, 11303.
    Decided November 10, 1926.
    1. A corporation advanced sums of money to three of its principal stockholders, who promised to repay and were at all times solvent. The amounts were carried as accounts receivable. Held, the accounts are properly included in invested capital.
    2. A corporation, having paid a dividend, needed credit, and the stockholders adopted a resolution that the dividend be “rescinded,” and gave their notes. Held, the notes are properly included in invested capital.

      Nelson T. Hartson, Esq., for the petitioner.

      Benjamin H. Saunders, Esq., for the Commissioner.
    These proceedings were consolidated by agreement of the parties. They involve deficiencies in income and profits taxes for 1918 and 1919 aggregating $57,259.13 which result from the Commissioner’s exclusion from invested capital of (1) the face value of promissory notes of three principal officers given in exchange for the withdrawal by them from the corporation of cash, (2) promissory notes given by stockholders to the corporation in the amount of a dividend theretofore declared and later rescinded, and (3) the amount of prior year’s taxes. The facts are to a substantial degree admitted in the answer and to some extent derived from oral testimony.
    FINDINGS OF FACT.
    The petitioner is a New York corporation, organized in 1903, having its principal office at New York, N. Y.

      During 1918 and 1919 the petitioner had an authorized capital in the amount of $600,000, which was divided into 120,000 shares of a par value of $o each and which was all outstanding and fully paid.
    The petitioner’s books of account reflected surplus at the following dates and in the following amounts:
    December 81, 1917_$1, 943,890.02
    December 31, 1918_ 2,059,683.91
    December 31, 1919- 2,241, 669.49
    From time to time during 1917 and prior years the petitioner made certain cash loans from its capital or surplus to William P. Ahnelt, the president and principal stockholder of the corporation, which were charged to the account of Ahnelt on the books of account of the corporation. Ahnelt had promised to repay said loans upon demand by the corporation. During the same period Ahnelt made certain cash payments to the corporation which were credited to his account. At the close of business on December 31, 1917, he owed the petitioner on this account the amount of $536,946.58, which was carried on the petitioner’s books of account and balance sheet as an account receivable.
    During 1918 additional loans were made to Ahnelt and charged to his account on the books of the petitioner corporation. He had promised to repay said loans upon demand by the corporation. During the same year repayments were made to the corporation by Ahnelt and credited to his account as follows: February 5, cash $10,000; February 5, cash $15,000; March 8, cash $15,000; June 18, cash $4,000; June 30, Liberty bonds of a market value of $1,700; August 31, stock of The Texas Co. of a market value of $153,000; November 9, cash $10,000; and December 18, cash $1,500. At the close of business on December 31,1918, he owed the petitioner on this account the amount of $679,728.13, which was carried on the petitioner’s books of account and balance sheet as an account receivable.
    During 1919 additional loans were made to Ahnelt and charged to his account on the books of the corporation. He' had promised to repay said loans upon demand by the corporation. During the same year repayments were made to the corporation by Ahnelt and credited to his account as follows: January 3, cash $3,000; May 8, cash $100,000; October 20, cash $7,500; October 22, cash $2,000; October 23, cash $28,037.50; October 25, cash $5,000; October 29, cash $4,000; November 25, cash $50,000; November 26, cash $50,000. At the close of business on December 31, 1919, he had reduced his indebtedness to the petitioner on this account to the sum of $559,022.17, which was carried on the petitioner’s books of account and balance sheet as an account receivable.

      From time to time during the said years Ahnelt executed and delivered his several promissory notes payable upon demand to the corporation as evidence of his promises to repay to the corporation the amounts borrowed by him, and also deposited with the corporation, as collateral security for the repayment of said moneys, 77,405 shares of stock of the Pictorial Review Go., the petitioner, which said shares were during said years owned by him in his own right.
    From time to time during 1917 and prior years the petitioner corporation made certain cash loans from its capital or surplus to Charles W. Nelson, a stockholder and a vice president of the corporation, which were charged to his account on the books of the corporation. Nelson had promised to repay said loans upon demand by the corporation. During the same period Nelson made a cash repayment to the corporation which was credited to his account on the books of the corporation. At the close of business on December 31, 1917, he owed the corporation on this account the amount of $9,000, which was carried on the books of account and balance sheet of the corporation as an account receivable.
    During 1918 additional loans were made to Nelson and charged to his account on the books of the corporation. He had promised to repay said loans upon demand by the corporation. At the close of business on December 31, 1918, he owed the corporation on this account the amount of $57,587.73, which was carried on the books of account and balance sheet of the corporation as an account receivable.
    During 1919 additional loans were made to Nelson and charged to his account on the books of the corporation. He had promised to repay said loans upon demand by the corporation. At the close of business on December 31, 1919, he owed the corporation on this account the amount of $79,587.73, which was carried on the books of account and balance sheet of the corporation as an account receivable.
    From time to time during 1918 the petitioner corporation made certain cash loans from its capital or surplus to Everett D. Trumbull, a stockholder and the second vice president of the corporation, which were charged to his account on the books of the corporation. Trumbull had promised to repay said loans upon demand by the corporation. At the close of business on December 31,1918, he owed the corporation on this account the amount of $5,500, which was carried on the books of account and balance sheet of the corporation as an account receivable.
    During 1919 additional loans were made to Trumbull and charged to his account on the books of the corporation. He had promised to repay said loans upon demand by the corporation. At the close of business on December 31, 1919, he owed the corporation on this account the amount of $17,500, which was carried on the books of account and balance sheet of the corporation as an account receivable.
    At all times during 1917, 1918, and 1919, Ahnelt, Nelson, and Trumbull were solvent and financially responsible and able to repay to the petitioner on demand at any time the amounts loaned to them by the petitioner.
    During 1918 and 1919 the petitioner had authorized an outstanding capital stock of 120,000 shares, which was owned by 29 stockholders, and of which Ahnelt owned 77,405 shares, Nelson 20,657 shares, and Trumbull 6,010 shares.
    The capital stock of the taxpayer had a book value as follows:
    December 31,1917_$2, 543, S90. 02
    December 31,1918_ 2, 659, 683.91
    December 31, 1919_ 2, 841, 669. 49
    During 1918 and 1919 the capital stock of the petitioner had a market value equal to or in excess of its book value.
    The Commissioner reduced the petitioner’s surplus by eliminating entirely the accounts receivable of Ahnelt, Nelson, and Trumbull, and reduced the invested capital accordingly.
    On March 19, 1917, the board of directors of the petitioner corporation declared an extra dividend equal to 50 per cent of the capital stock of the company, which was on March 21, 1917, paid to the stockholders of record.
    Some time later it became apparent that the petitioner would be required to construct its own printing plant. In order to secure credit at the banks for this purpose it was necessary to improve the financial condition of the company by increasing the ratio of the current assets to the current liabilities.
    At a meeting of the board of directors held November 15, 1917, further consideration was given to the matter of the dividend declared on March 19, 1917, and it was decided that the dividend was improvidently declared and that the best interests of the company, as disclosed by subsequent events and general business conditions, did not warrant or justify the declaration of the dividend. A resolution was adopted authorizing and directing the calling of a special meeting of the stockholders for the purpose of obtaining their consent to rescind and revoke the action of the board of directors in declaring said extra dividend.
    At a special meeting of the stockholders held November 27, 1917, a resolution was unanimously adopted containing the following:
    Alter due deliberation upon the resolution of the Board of Directors in pursuance of which this Special Meeting was called, said resolution having been read to, and considered by the stockholders, and after counsel for the Company stated to the stockholders present at the meeting that in his opinion, the proposed resolution was not violative of any provisions of law, and after the auditor of the Company stated that, in his opinion, the financial affairs of the company required the action proposed by the resolution of the Board of Directors, it was, on motion duly made by Mr. Post and duly seconded by Mr. Vance, unanimously
    Resolved that the extra dividend equal to fifty per centum of the capital stock of the company, declared by the Board of Directors on the 19th day of March, 1917, and paid on the 21st day of March, 1917, may be rescinded, revoked and cancelled, and that each stockholder return to the company the amount received by him as such extra dividend.
    On November 27, 1917, after the special meeting of the stockholders, and pursuant to the foregoing resolution, certain of the stockholders gave their several promissory notes payable on demand to the petitioner corporation in the aggregate amount of $299,920.
    The remaining $80 of the $300,000 dividend was owed by certain small stockholders who later consented to have their proportion of the dividend charged to their accounts, which was done.
    Upon declaration of the extra dividend of 50 per cent on March 19, 1917, the surplus account of the petitioner’s books was reduced by the amount of $300,000, and on November 27, 1917, after the action at the meeting of the stockholders and upon receipt of the promissory notes of the stockholders, the surplus account was increased by the amount of $300,000.
    During 1917 the following cash payments were made on account of said promissory notes: December 4, $520; December 7, $125.
    The following cash payments were made in 1919 by William P. Ahnelt in full payment of his promissory note given to cover his proportionate part of the rescinded dividend: June 21, $30,000; June 27, $300; July 10, $60,000; September 30, $50,000; October 23, $51,962.50.
    During 1918 and 1919 said promissory notes, or the unpaid balance thereof, were carried on the books of account and balance sheets of the petitioner as notes receivable. The makers thereof were at all times solvent and financially responsible and able to pay the notes in full upon demand at any time.
    The Commissioner reduced the petitioner’s surplus for 1918 and 1919 by the amount of these promissory notes and reduced the petitioner’s invested capital accordingly.
    The Commissioner in auditing the petitioner’s return for 1918 determined the income and profits-tax liability of the petitioner to be the amount of $58,528.35, and in his determination of the tax liability for 1919 made a deduction from the petitioner’s invested capital as of the beginning of the taxable year for such taxes averaged for the proportionate part of the taxable year after the date when such taxes were due and payable.
   OPINION.

SteRNhagen:

The Commissioner has reduced the petitioner’s invested capital for 1918 and 1919 by excluding three items, (1) promissory notes of three stockholders and directors given for cash withdrawals, (2) promissory notes of all stockholders given in November, 1917, by way of rescinding a dividend paid in March, 1917, and (3) the amount of Federal taxes paid in each year upon the previous year’s income.

1. The Commissioner’s position in respect of the first item is in our opinion clearly unsound. That notes and accounts receivable are properly within a taxpayer’s invested capital is clear from the statute itself, which in section 325 (a) defines tangible property to include “ notes, and other evidences of indebtedness, bills and accounts receivable,” and in section 326 (a) defines invested capital to include actual cash value of tangible property paid in for stock or shares and paid in or earned surplus and undivided profits. Notes paid in for stock or shares have been held to be within invested capital. Hewitt Rubber Co., 1 B. T. A. 424; American Steel Co., 1 B. T. A. 839; Cross Mountain Coal Co., 2 B. T. A. 587; Stamey-Mackey Construction Co., 4 B. T. A. 383. From the evidence it is entirely clear that the makers of the notes were solvent and that the corporation’s receivables due from these three persons were worth no less than their face value, and they appeared upon the corporation’s books and balance sheets as assets in this amount. The facts that the debtors were large stockholders and that they were, as directors and officers of the corporation, in a position to influence the corporation in making the loans, do not change the character of the accounts receivable or make them in this respect different from what they would have been had the debtors been otherwise related to the corporation. The bona ftdes of the loans or the liability of the debtors for their full repayment is upon this record beyond question. There is likewise nothing from which we could decide that the value of the accounts was less than it appeared to be upon the books. Not only were the debtors solvent and prosperous, with no history of impaired or doubtful credit, but in addition the payment of the accounts of Ahnelt was secured by the deposit of stock endorsed in blank.

There are of course situations where a full consideration of all of the attendant circumstances requires that a withdrawal from the assets of a corporation by a stockholder should serve to reduce invested capital because there is in fact no genuine asset left or intended to be left in the corporation. The bona fides, the intention as disclosed from the direct and circumstantial evidence, and the value of the alleged debtors’ credit are matters to be considered. In the instant case the petitioner has so thoroughly marshaled its evidence'in these respects as fully to support its claim. We therefore hold that the amounts of $742,815.86 in 1918 and $656,109.90 in 1919 due from Ahnelt, Nelson, and Trumbull were properly within the petitioner’s invested capital for- those years.

2. We are likewise compelled by the evidence to hold that the Commissioner erroneously excluded from invested capital the amounts of notes received from the stockholders in November, 1917, in an attempted rescission of the earlier dividend. The Commissioner argues that after the dividend was declared and paid in March, when it very properly served to reduce invested capital, it could not be rescinded because it had vested in the stockholders. Whether this be true or not, the real question before us is whether the receipt by the corporation in 1917 of the notes of the stockholders served to increase its invested capital. The notes were on their face valid. They were voluntarily given by the stockholders with full knowledge of all of the circumstances and considerations upon which they were based. The corporation received them, included them in its assets, and persuaded third parties to finance it upon the strength of these notes. No one has attempted to repudiate the notes and so far as the record shows there is no circumstance to impair their value or validity. Union Bank of Brooklyn v. Sullivan, 214 N. Y. 332; 108 N. E. 558. Just as the preceding dividend had served to diminish surplus, so the receipt of valuable accounts receivable must serve to increase the surplus to the extent of their value. The value of demand notes of a solvent maker is no less than its face merely because the payee does not choose to demand. So far as this record discloses, demand would be met by the payment promised. We can not assume otherwise. As has been said in respect of the previous point, a case might well be imagined where the circumstances would overcome the presumption of bona fides and disclose that the notes were not in truth valid or perhaps not assets at all. But this is not such a case. We hold that the amount of the notes in question, together with the $80 not covered by notes, should be included within the petitioner’s invested capital for 1918 and 1919.

3. The petitioner’s contention that the previous year’s taxes should not serve to reduce invested capital is met by the Board’s decision to the contrary in Russel Wheel & Foundry Co., 3 B. T. A. 1168, and upon the authority of this decision we sustain the Commissioner.

Judgment in accordance with the foregoing opinion will be entered on 15 days’ notice, wnder Rule 50.


source: Caselaw Access Project

author: Trammell :

license: Public Domain

text:
    Appeal of Pacific Coast Redwood Co.
    Docket No. 1847.
    Decided November 10, 1926.
    1. Taxes and other expenses paid in carrying property over a period of years may not be capitalized and added to the cost.
    2. The realization of the appreciation in value of property existing on March 1, 1913, over the cost thereof by sale in 1920 is a current earning and as such can not be included in invested capital for that year.
    3. Held, the sale of property was on the installment basis.

      Charles A. Strong, Esq., A. DeWitt Alexander, C. P. A., and A. Porter Robinson, C. P. A., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    This appeal is from the determination of a deficiency in income and profits taxes for 1920 in the amount of $21,413.18. Three questions are involved: (1) Whether taxes and business expenses paid over a period of years should be treated as carrying charges of property and added to the cost thereof for the purpose of determining gain or loss on the sale of the property; (2) whether the difference between the cost and the March 1, 1913, value of property, when the property is sold on May 15, 1920, may be included in invested capital of the corporation prior to the beginning of the next taxable year; (3) whether the gain derived from the sale of property in 1920 should be reported on the installment basis.
    The appeal was heard upon the petition, answer, and a stipulation filed by the parties.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized and existing under the laws of California, with its principal office in San Francisco.
    On March 1, 1913, it owned lands and timber which had cost it prior to that date $564,215.06. On March 1, 1913, this property was worth $2,300,000.
    Subsequent to March 1, 1913, and prior to May 15, 1920, the taxpayer had the following transactions with respect to its property:
    (a) It purchased additional timber land for $1,900.
    (b) It incurred and paid certain direct expenses on its property, which were allowed by the Commissioner in the amount of $189.05, as an addition to cost of the property.
    (c) It sold 47 acres of land for $3,475.
    (d) It sold certain fallen timber for $3,643.96.

      It was stipulated that items (c) and (d) above should be credited to the cost of the property.
    The entire property of the taxpayer was sold on May 15, 1920, for $2,500,000. The expenses incurred in connection with the sale were $80,000 for commission and $20,000 for legal expenses, leaving a net realization of $2,400,000.
    The Commissioner ascertained the gain on the sale of the property in the following manner:
    Net proceeds of sale_$2,400,000. 00
    Less:
    Value of property at March 1, 1913_$2, 300, 000. 00
    The cost of purchases since_ 1,900.00
    The expenses allowed_ 789. 05
    2, 302, 089.05
    Less:
    $3, 475.00 Sales of land_
    3, 043. 96 Sales of timber.
    - 7,118.98
    - 2,295,570.09
    Gain on sale of property_ 104,429. 91
    The taxpayer ascertained the gain on the sale of the property in the following manner:
    As ascertained by the Commissioner_$104,429. 91
    Less:
    Expenditures for taxes and other charges from 1913 up to date of sale on May 15, 1920_$86,114.10
    Less:
    Allowed by the Commissioner as part of cost of property_ 789. 05
    - 85,325.05
    Gain on sale admitted and originally returned by taxpayer_19,104.80
    The 1920 taxes and expenses in connection with the property, designated by the taxpayer as “carrying charges,” were allowed by the Commissioner as deductible expense for 1920.
    The taxes and expense in connection with the property for 1919 were considered in the same manner by the Commissioner. Such amounts, however, were allowed by the Commissioner as a deduction from the net income of 1920 under the net loss provision of the statute.
    The amount of taxes and expenses in connection with holding and carrying the property from March 1, 1913, up to the end of 1918, in the amount of $64,241.81, is the only question now in dispute with respect to the carrying charges on the property, taxpayer having received the benefit of deductions in 1920 for the taxes and expenses for 1919 and 1920.

      This amount is made up as follows:
    Payments:
    Taxes- $63,241.28
    Salaries, office and general expense_ 6, 014. 25
    Legal expense- 2, 083.39
    Interest paid_ 433.28
    70,772. 20
    Receipts: Rental of land_ 6. 530.33
    64, 241. 87
    The paid-in capital stock of the corporation on January 1, 1920, was $694,600, which represented the amount of actual cash paid in to the corporation for stock or shares. The property owned by the corporation increased in value during the period between the time of its purchase and March 1, 1913, to $2,300,000. If the expenses for taxes and other charges, designated as carrying charges by the taxpayer, be added to the cost of the property, the cost of the property at March 1, 1913, was $630,376.35. If such expenditures be not added to the cost of the property, the cost up to March 1, 1913, was $554,215.06.
    The taxpayer entered into an agreement to sell the property, as stated above, for the consideration of $2,500,000. Six hundred thousand dollars was paid in cash on May 15, 1920, on the execution of the contract, and deferred payments were made as follows:
    1920 — Oct. 11- $1,264.98
    Dee. 13_ 2, 853. 60
    Total, year 1920. - $604,118. 58
    1921 — Feb. 17_ 5, 059. 54
    Apr. 14_ 14, 215. 39
    May 16_ 300, 000. 00
    June 16_ 200, 000.00
    June 19_ 33,249. 66
    Oct. 12_ 43, 793. 48
    Nov. 10_ 39,066. 89
    Dec. 20_ 42,380.08
    Total, year 1921. 677, 764.99
    1922 — ^Feb. 28_ 16, 784.41
    Apr. 14_ 8, 554. 31
    May 15_ 500, 000. 00
    June 15_ 45,149. 83
    Aug. 1-39, 906.45
    Oct. 6_ 51, 930. 80
    Dee. 6_ 42, 801. 33
    Total, year 1922. 705,127.13

      1923 — Feb. 23_$18,034. 94
    Apr. 2_ 29, 836.27
    May IB_ 465,118. 09
    Total, year 1923_ $512,989.30
    Total payments under contract_ 2, 500,000. 00
    The pertinent parts of the contract are as follows:
    This agreement made and entered into this 15th day of May, 1920, by and between Pacific Coast Redwood Company, a corporation under the laws of the State of California, hereinafter called the seller, and Albion Lumber Company, likewise a corporation under the laws of the State of California, hereinafter called the buyer,
    WITNESSETH :
    That the seller agrees to sell, and the buyer agrees to buy, for the price, and upon the terms hereinafter mentioned, all of the right, title and interest of the seller in and to all those certain lots, pieces or parcels of land situate, lying and being in the County of Mendocine, State of California, more particularly described as follows, to wit:
    The buyer agrees to pay to the seller for the seller’s interest in the above described property the sum of Two Million Five Hundred thousand ($2,500,-000.00) Dollars, as follows:
    Six hundred thousand ($600,000.00) Dollars upon the execution and delivery of this instrument, the receipt whereof is hereby acknowledged; the balance of said purchase price, together with interest on the deferred payments at the rate of six per cent (6%) per annum from the date hereof shall be paid in the following manner:
    On the 15th day of August, 1920, and each sixty days thereafter until said purchase price is fufly paid, the buyer shall pay to the seller, a sum equal to five dollars ($5.00) per thousand feet, log scale, for each one thousand feet of timber removed by the buyer from said premises during the two months next preceding one month before said days of payment; for example on August 15, 1920, the buyer shall pay for all timber removed between May 15, 1920, and July 15, 1920.
    On the 15th day of May 1921, the said buyer shall pay an additional sum of Five Hundred thousand ($500,000.00) Dollars.
    On the 15th day of May 1922, the buyer shall pay further sum of Five hundred thousand ($500,000.00) Dollars.
    On the 15th day of May 1923, the buyer shall pay to the seller, the balance then remaining unpaid on said purchase price. Provided, however, that whenever the buyer shall have completed the payment of the full purchase price and interest on deferred payments, no further payments on account of said purchase price need be made.
    All deferred payments shall bear interest at the rate of six per cent (6%) per annum from the date of this instrument, which said interest shall be payable semi-annually commencing on the loth day of November, 1920.
    It is also agreed between the buyer and seller, as follows:
    The buyer, so long as it shall not be in default hereunder, shall be entitled to the possession of said lands and premises, and the rentals for such portions thereof as are under lease accruing after the date of this instrument, shall belong to the buyer. * * *

      The quantity of timber removed during any one year, and for which payments are to be made on the purchase price as hereinafter provided, shall be determined by a sealer to be agreed upon by the parties hereto. In the event of a failure of the parties hereto to agree upon such scaler, he shall be selected by Hr. C. R. Johnson or his successor in office as President of Union Lumber Company. The expense of making such scale shall be borne and paid by the buyer. Until said purchase price is fully paid, the seller shall have the right to examine the books of account of the buyer wherein are kept the logging and lumber records for the purpose of checking the quantity of timber and bark cut or removed from the above described premises.
    The contract also provided as follows:
    Time is of the essence hereof, and the due performance of all covenants and agreements on the part of the buyer is a condition precedent, whereupon depends the performance of the agreements on the part of the seller. In the event of a failure of the buyer to comply with the covenants and agreements, or any thereof, on its part entered into, the seller shall be released from all obligations in law or in equity to transfer and convey said property, or any part thereof, and the buyer shall surrender possession thereof to the seller free and clear of any and all liens or encumbrances suffered or permitted by the buyer, and shall forfeit all rights under said agreement, and all rights to any and all moneys which it shall theretofore have paid hereunder, as liquidated damages for such default, and not as a penalty.
    Upon full payment of the said purchase price, the seller shall make, execute and deliver to the buyer, a deed of said lands and premises sufficient in form and substance to vest in the fJuyer, all the right, title and interest of the seller in and to said lands, premises and property hereinabove described.
    This agreement shall not be assigned by the buyer nor shall the buyer’s rights hereunder be transferred without the previous written consent of the seller.
   OPINION.

Trammell :

The statute allows, as a deduction from gross income in determining net taxable income, business expenses and taxes. The statute does not leave the question open to taxpayers to consider such expenditures capital items. The statute provides that such payments shall be allowed as deductions from gross income in determining net income. They can not be added to the cost of the property as capital expenditures in determining gain or loss on the sale thereof. Westerfield v. Rafferty, 4 Fed. (2d) 590.

The second question is whether the increase in value of property existing on March 1, 1913, over the cost when such appreciation in value is realized by sale of the property in 1920, may be included in invested capital for 1920. That such appreciation in value existing on March 1, 1913, is not taxable when realized subsequently, is well settled. It is only the gains or profits arising or accruing since March 1, 1913, that are subject to the tax. This is conceded by both the Commissioner and taxpayer, but the taxpayer contends that, notwithstanding the fact that unearned increment existing on March 1, 1913, is not subject to tax, when it is realized by sale of the property in 1920 it should be included in invested capital from the date of realization.

Section 326 of the Revenue Act of 1918 provides that the term invested capital ” means:

(1) Actual cash bona fide paid in for stock or shares;
(2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * *
(3) Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year * * *.

It is claimed by the Commissioner that if the realization of the appreciation of the value of property existing on March 1, 1913, is to be included in invested capital at all, it can only be included under section 326 (a) (3) which provides for a paid-in or earned surplus. Clauses (1) and (2) of section 326 refer to actual contributions of cash or of tangible property in exchange for stock or shares. The realization during the taxable year by sale of the increase in value which existed on March 1, 1913, clearly does not come under clauses (1) or (2). It is equally clear that it is not a paid-in surplus. That phrase contemplates an actual contribution to the capital of the corporation by a stockholder in money or its equivalent resulting in an excess capital contribution over and above the par value of the stock. Earned surplus or undivided profits must come to the taxpayer in the form of income. An earned surplus is an accumulation of gains and profits. The gain or profit from the sale of the property having been realized during 1920 was surplus or undivided profits of that taxable year and as such can not be included in invested capital for that year under the express language of section 326 (a) (3).

With respect to the contract to sell the real property, the buyer agreed to pay $2,500,000 to the taxpayer. Six hundred thousand dollars was paid on the execution of the contract and the balance was to be paid in installments within a period of three years. The contract had the usual provisions reserving the title in the seller until all payments were made, gave the seller the right of repossession in case of failure to make payments, and provided for forfeiture of all rights and all money paid as liquidated damages in case of default. The buyer had the right of possession and the right to remove timber. He could not assign the contract without the written consent of the seller. There were no notes, mortgages,- or other securities given by the buyer other than the provisions of the contract. Payments subsequent to the initial payment of $600,000 were made as set out in the findings of fact.

Section 212 (d) of the Revenue Act of 1926 is as follows:

(d) Under regulations prescribed by tbe Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either ease the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term “ initial payments ” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

Section 1208 of the Revenue Act of 1926 makes the above section retroactive to the Revenue Act of 1918, under the provisions of which the tax liability of the taxpayer must be determined.

The initial payment is less than one-fourth of the purchase price and the balance of the purchase price was to be paid in installments. The transaction, therefore, comes within the purview of the above-quoted section of the statute. The proportionate part of the profit to be reported in 1920 is of $104,429.97. 2,500,000.00

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


author: Phillips:

text:
    Appeal of Harrolds Motor Car Co.
    Docket No. 6184.
    Decided November 10, 1926.
    1. Money advanced to a corporation for permanent improvements by its stockholders in proportion to their stockholdings and evidenced by promissory notes, held, not to be invested capital prior to the date when stock was issued in payment of such advances.
    2. Interest credited on such advances held to be a proper deduction.

      E. W. Forbes, Esq., and M. E. Peloubet, G. P. A., for the petitioner.

      B. G. Simple h, Esq., for the Commissioner.
    The petitioner appeals from the determination of a deficiency of $11,101.53 in income and profits taxes for 1919, alleging error in computing the invested capital of a subsidiary company with which it is affiliated.

      FINDINGS OF FACT.
    In 1912, the taxpayer was the distributing agent in New York City for Pierce Arrow cars. It had only two stockholders, Robert D. Garden, who owned two-thirds of its stock, and S. A. Miles, who owned one-third of its stock.
    By agreement with the Pierce Arrow Co. the taxpayer was required to maintain a service station for Pierce Arrow cars and trucks. In order to provide such service station, the two stockholders organized the Arrow Motor Realty Co. in 1912, with an authorized capital stock of $3,000, which was subscribed and paid for by Garden and Miles in the same proportions in which they owned the stock of the taxpayer.
    The Realty Company immediately purchased property and proceeded to construct a service station, which was thereafter operated by the taxpayer.
    Between $360,000 and $370,000 was spent for the service station. A part of the money was raised upon bond and mortgage and the balance was advanced by the two stockholders from time to time in the same proportions in which they owned stock, namely, two-thirds by Garden and one-third by Miles. Such advances were credited upon the books of the Realty Company to the personal accounts of the two stockholders, and from time to time amounts were transferred therefrom to a bills payable account and notes issued to the stockholders. The greater part of the money was advanced prior to March 1,1914, and notes were issued therefor upon which interest at the rate of 6 per cent per annum was credited monthly to these stockholders on their personal accounts.
    In May, 1918, the authorized capital stock of the Realty Company was increased to $100,000, and $64,000 of such additional stock was issued to Garden and $32,000 to Miles in payment of the amounts standing to their credit on their personal accounts and of portions of the amounts shown in the bills payable account. On January 1,1919, the unpaid balance of such advances, evidenced by notes, was $167,921.21. During 1919 interest at the rate of 6 per cent per annum was credited monthly to the stockholders. The amount so credited during 1919 for the period from January 1,1919, to August 31,1919, was $6,716.88.
    Dividends on the capital stock at the rate of 6 per cent per annum were declared and paid annually.
    On September 4, 1919, the Realty Company was merged with the taxpayer. On such merger additional stock was issued to the two stockholders in the proportions of two-thirds to Garden and one-third to Miles. Of such additional stock, $167,921.21 was issued in payment of the balances due to the two stockholders as shown in the bills payable account of the Realty Company.

      From the time the Realty Company was organized in 1912 until the merger on September 4, 1919, the stock of both companies was owned by the two stockholders in the proportions of two-thirds and one-third, and the advances made by them to the Realty Company were always in the same proportions.
    These two corporations filed one return. The Commissioner determined that the companies were affiliated prior to the merger and computed the deficiency accordingly.
    In computing the deficiency, the Commissioner included the amount of $167,921.21 in invested capital only from September 4, 1919, and allowed no deduction from income for the amount of $6,716.88 credited during 1919 as interest on such amount.
    The Commissioner, in computing the alleged deficiency, reduced invested capital by $92,717.48, being a pro rata amount of the income and excess-profits tax of the taxpayer for the year 1918, paid during 1919.
   OPINION.

Phillips:

It is not disputed that the taxpayer and the Arrow Motor Realty Co. were entitled to file a single return for the year involved. The principal contention of the taxpayer is that certain amounts advanced to the Arrow Company, for which stock was issued at the time a statutory merger of the two took place, were invested capital during the taxable year, and not borrowed capital as treated by the Commissioner.

The evidence discloses that for some six years these loans were evidenced by promissory notes upon which interest was credited monthly. To overcome this petitioner’s counsel point to the uniform practice of the stockholders in making advances in accordance with stockholdings and to the testimony of one of the stockholders, who stated that he considered the advances not as loans but as a permanent investment for which stock would be issued “ after we got it going.” This is entirely consistent with the ruling of the Commissioner that such advances were borrowed capital until the stock was issued, and upon the entire record we are not convinced that such ruling was erroneous.

In its return petitioner treated the amounts so advanced as invested capital and in computing its net income failed to take any deduction for interest accrued and credited thereon. In eliminating these advances from invested capital the Commissioner overlooked the interest item and failed to allow it as a deduction. This is clearly error.

The adjustment of invested capital by a pro rata amount of the income and profits taxes of the preceding year is in accord with section 1207 of the Revenue Act of 1926, and the determination of the Commissioner in this respect must be approved. Russel Wheel & Foundry Co., 3 B. T. A. 1168.

Decision redetermining the deficiency will be entered on 10 days’ notice, v/nder Rule 50.


author: Littleton:

text:
    Matteson-Fogarty-Jordan Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5596.
    Decided November 10, 1926.

      H. W. Welsch, Esq., for the petitioner.

      L. 0. Mitchell, Esq., for the respondent.
   Littleton:

This proceeding involves the determination of a deficiency in income and profits taxes for the period of five and one-half months from July 15,1919, to December 31, 1919, in the amount of $3,213.64, resulting from the Commissioner’s denial of the petitioner’s claim for classification as a personal service corporation under section 200 of the Revenue Act of 1918.

FINDINGS OF FACT.

The petitioner is an Illinois corporation organized in July, 1919, to operate, manage and conduct a general advertising business, with principal office in Chicago. Its authorized capital stock of $25,000 was subscribed and paid for in cash by the following stockholders, who were also directors and officers of the company:

The petitioner expended $3,808.52 for office furniture and equipment. Each of the three stockholders took out a life insurance policy for $50,000, payable to his estate, the premiums upon which, amounting to $2,087.50, were paid by the petitioner. Petitioner purchased for $100 and owned during the period involved one share of stock in the American Association of Advertising Agencies. These expenditures left a balance in cash of about $19,000. Throughout the remainder of the year an average cash balance of $18,392.23 was maintained, ranging from $3,489.27 to $38,300.45.

The three stockholders were regularly engaged in the active conduct of the affairs of the corporation and devoted their entire time thereto. No solicitors were employed. All business from advertisers was secured by the three stockholders. The petitioner did not employ any artists or printers. Petitioner contracted with outside artists and printers to do this work and charged the advertiser with the cost thereof, plus a stated amount in addition. At December 31, 1919, petitioner had fourteen employees on its payroll — eleven women and three men — who did clerical, filing, typing and stenographic work in the office.

When petitioner had been engaged by anyone to prepare an advertisement Matteson, Fogarty, or Jordan, or the three of them, would make a thorough investigation of the best methods of merchandising the product or article, which the advertiser had for sale — whether it would be more advantageous to sell by mail or direct, or through agents or dealers. • The investigation included a study of the markets in territories in which there was a possible demand for the product or article to be sold, together with a study of similar products and competitive market prices. In the case of a new product or article, they would make suggestions as to the price at which it should be sold and the territory in which it could best be sold. Through their experience and training in advertising methods, in making analyses of markets, together with their knowledge of publications, circulation and rates, petitioner’s stockholders would suggest to the advertiser the procedure which, in their opinion, should be followed and the publications which should be used to introduce the product or article to the public. In general, after they had made a study of the advertiser’s business, product and sales organization, they would advise him as to the best and most advantageous method of advertising the product or article and the price at which it should be sold.

As a part of their work the stockholders prepared the advertising copy. After the copy had been prepared and the media of advertising had been approved by the advertiser, the petitioner would forward the completed advertisement to the publisher with instructions concerning its insertion in the publication.

When the publication had been agreed upon, petitioner would transmit to such publication an order, disclosing the name of the advertiser, for a certain number of lines of space in current publications or issues. Usually, but not always, the order would be accompanied by a copy of the advertisement. At times when an advertiser had agreed to use space in future issues, the petitioner would forward to the publisher an order reserving space for the advertisement of the particular advertiser. The object of making reservations in advance was to secure a preferred location, and when a large amount of space was reserved a better rate could be secured.

The income of the petitioner consisted of commissions allowed by publishers at a rate of 15 per cent of the amount of the cost of the advertisement and a charge made to the advertiser upon the cost of art work and printing. The publisher rendered its statement for the cost of the advertisement to the petitioner and allowed a discount if the same was paid within a specified time. Petitioner always paid the publisher on or before the discount date, whether it had been paid by the advertiser or not. Petitioner rendered a statement to the advertiser which called for payment of the cost of the advertisement, including its 15 per cent commission, on a date prior to the date on which it was required to pay the publisher. If the advertiser paid the petitioner before the discount date fixed by the publisher, petitioner in turn allowed the advertiser the discount obtained from the publisher; otherwise petitioner retained the discount.

During the taxable period total billings by petitioner to advertisers aggregated $301,027.78, and of this amount 56 per cent, or $168,370.48, was received by the petitioner prior to the date on which it paid the publisher, and $132,657.30, or 44 per cent, was received by the petitioner from the advertiser after the publisher had been paid. There were no written contracts between either the advertiser and petitioner, or between the petitioner and the publisher, the matter being agreed upon between the advertiser and the petitioner in conference, and the publisher acted upon the written order forwarded by the petitioner. The advertiser was privileged to withdraw his account from petitioner at any time and transfer it to another, retaining the advertising space in his own name under the same terms. The Curtis Publishing Co. did not see fit during the early months of petitioner’s operations to receive and publish advertisements upon petitioner’s orders, and required payment for advertisements to be made in advance. Petitioner made such payments in excess of $5,000. Thereafter petitioner rendered statements to the advertiser for the cost of advertisements inserted in publications of this company in the same manner as statements were rendered for charges made by other publishers who did not require advance payment. The Curtis Publishing Co. discontinued this requirement in December, 1919, and thereafter billed petitioner after publication of the advertisement. The extension of credit by publishers and the continued recognition of the petitioner as one entitled to the 15 per cent commission upon the cost of advertisements, were dependent upon prompt payment of the publishers’ charges.

The gross income and deductions for the taxable period from July 15,1919, to December 31, 1919, were as follows:

The balance sheet at December 31, 1919, was as follows:

The accounts receivable due from advertisers which the petitioner had paid to publishers at the end of the year, amounted to $32,415.34. Petitioner’s commission from said amount at the rate of 15 per cent was $4,862.30. Deducting the commission and accounts payable of $7,699.21 from the amount paid by petitioner to publishers prior to collection from advertisers, leaves $19,853.83.

Judgment will be entered for the Commissioner.


text:
    Appeal of Mianus Motor Works, Inc.
    Docket No. 6052.
    Decided November 10, 1926.
    Where the books of account of the taxpayer are kept upon the accrual basis, a payment received in 1920 of an amount which accrued in 1918 for work done in that year is properly returned as a part of 1918 gross income.

      Joseph B. Miller, Esq., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits taxes for the fiscal years ended November 30, 1919, and November 30, 1920, in the respective amounts of $467.36 and $3,068.95. At the hearing counsel for the taxpayer withdrew the errors alleged with respect to the fiscal year 1919, leaving in issue here only the deficiency for the year ended November 30, 1920.
    FINDINGS OF FACT.
    The taxpayer is a Connecticut corporation with its principal office at Stamford, and is engaged in the manufacture and sale of engines.
    Its books were kept on an accrual basis.
    In November, 1920, the taxpayer received a settlement of $30,-689.33 for work done on war contracts prior to November 11, 1918, and, pursuant to internal revenue regulations then in effect, it filed an amended return for 1918, including the amount as income for the fiscal year ended November 30, 1918, as it had accrued within that year. The Commissioner then in office assessed an additional tax of $1,715.77 on this income, which was thereafter paid by the taxpayer.
    The present Commissioner proposes the assessment of tax for the fiscal year 1920 upon the amount of $30,689.33, received by the taxpayer in that year and the refund of so much of the tax paid for 1918 as has not been barred by statute.
   OPINION.

Phillips:

At the hearing the appeal was submitted upon the admitted allegations of the petition, which are set out in the findings of fact. It is alleged and admitted that the payment received in 1920 accrued in 1918. Although such an admission necessarily involves both conclusions of law and fact, we must regard the pleadings as admitting such primary facts as would establish an accrual in 1918, since we do not have before us any of the facts upon which the ultimate conclusion is based.

Apparently, therefore, we are called upon to determine whether, when the taxpayer keeps his books on the accrual basis and receives in 1920 settlement of an amount which accrued in 1918, such amount should be included in 1920 income. The law is well settled that, when books are kept on an accrual basis, gross income is to be reported in the year in which it accrues. Sections 212 and 213, Revenue Act of 1918. Appeal of B. B. Todd, Inc., 1 B. T. A. 762. Upon the record we conclude that the payment in question was properly reported as a part of 1918 gross income.

Decision redetermining deficiency will be entered on 10 days' notice, under Rule 50.


author: Littleton :

text:
    Appeal of Fred S. Stewart Co.
    Docket No. 5975.
    Decided November 10, 1926.

      Laurence Graves, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
   Littleton :

This appeal is from the determination of deficiencies of $5,456.77 and $34.71, respectively, for the fiscal years ended January 31, 1920 and 1921. The Commissioner increased petitioner’s opening inventory of shoes and hosiery for the year beginning February 1, 1919, in the amount of $6,310.10, the closing inventory at January 31, 1920, in the amount of $11,882.64, and the closing inventory at January 31, 1921, in the amount of $11,641.23, upon the ground that the inventory was taken neither upon the basis of cost nor upon the basis of cost or market, whichever was the lower. Petitioner claims that its inventories were consistently taken upon the basis of cost or market, whichever was lower.

FINDINGS OF FACT.

The petitioner is a Massachusetts corporation engaged in selling shoes at retail, with principal office at Atlanta, Ga. It was organized in 1910, since which time it has followed a consistent method of pricing its inventories on the basis of cost or market, whichever was the lower. At the end of each year a physical inventory of all shoes and hosiery on hand was taken at actual cost, in which the various kinds and grades of shoes and the hosiery were listed and priced separately. The figures shown by this inventory were then extended by Fred S. Stewart, who had been president of the company for many years and who was thoroughly familiar with the cost and the market of the shoes and hosiery at the time the inventories were taken, so as to show the cost and the market value of the merchandise when the market value was less than the cost. In some' years no change would be made in the inventories of certain departments taken at cost.

On January 31, 1919, the total physical inventory of the fifteen departments in which the various kinds of merchandise were carried, taken at cost, amounted to $05,748.20. The figures on this inventory were then extended by Stewart and the merchandise valued by him at cost or market, as follows:

At January 31, 1920, the total inventory at cost amounted to $101,338.67. This figure was reduced by Stewart to $89,456.03 to bring it to cost or market, whichever was lower, the reduction being $11,882.64.

The total inventory at cost and the amount by which it was reduced to bring it to the basis of cost or market at January 31, 1921, follow:

The reasons given by the Commissioner for refusing to approve the petitioner’s inventories were that “ The adjustments made to inventories represent mark-downs from the purchase price of the goods affected. The greater part of the mark-downs shown in the inventory as at January 31, 1920, represent arbitrary mark-downs at $1,000 each and not taken on any particular goods. It further appears that the inventory was not taken at cost or market whichever [was] lower, as required by the law, and that you have failed to establish that the mark-down price represents actual market or replacement cost.”

Judgment will he entered for the petitioner upon the issues raised on 15 days’ notice, under Rule 50.


author: Smith :

text:
    Robert Long, Petitioner, v. Commissioner of Internal Revenue, Respondent. Haimon Long, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 4204, 4205.
    Decided November 11, 1926.
    Petitioners were partners engaged in business as wholesale and retail dealers in general merchandise. On January 10, 1919, their father, who had no interest in the partnership, transferred, sold, and conveyed to them eleven lots, upon one of which was located a two-story brick building, and upon another a storehouse occupied and used by the partnership in carrying on its business. On the same day that the deed to the lots and buildings was executed, petitioners gave to their father a written agreement to pay to him, as consideration for the property transferred, an amount equal to one-third of the partnership profits for that year, and for each year thereafter an amount not less than $1,200 during his life. Held, that the amount paid to the father in 1920 was not deductible by the partnership as an ordinary and necessary expense as interest paid for the purpose of determining the distributive shares of the petitioners.

      D. J. Gantt, Esq., for the petitioners.

      Ward Loveless, Esq., for the respondent.
    For the calendar year 1920 the Commissioner determined that there was a deficiency of $184.65 in respect of the tax of Robert Long and a deficiency of $191.98 in respect of the tax of Haimon Long. Only so much of the deficiencies as resulted from an increase of petitioners’ distributive shares of the profits of ' the partnership of I. Long & Sons, in the amount of $850 each, is in controversy. Petitioners, each of whom during the year 1920 owned a one-half interest in the partnership of I. Long & Sons, paid to their father $1,700 as part consideration for the transfer to them in 1919 of certain real estate. The partnership in determining petitioners’ distributive shares deducted from its gross income this amount as interest paid during the year. The Commissioner denied the deduction.
    FINDINGS OF FACT.
    During the year 1920 petitioners were members of the partnership of I. Long & Sons, engaged in business as a wholesale and retail dealer in general merchandise at Evergreen, Ala., in which partnership they each owned a one-half interest. On January 10, 1919, Israel Long, the father of the petitioners, was the owner of certain real estate in Evergreen, Ala. On that date he transferred and conveyed to Robert Long and Haimon Long eleven lots in the Town of Evergreen, upon one of which was located a two-story brick building and upon another a storehouse occupied and used by the partnership of I. Long & Sons. The deed of transfer was as follows:
    STATE OF ALABAMA,
    CrXECUH COUNTY.
    Know all men by these pbesents : That for and in consideration of the sum of One Dollar ($1.00) and other valuable considerations to the undersigned grantor, I. Long, a widower, in hand paid by Robert Long and II. Long, the receipt whereof is hereby acknowledged, I do hereby GRANT, BARGAIN, SELL AND CONVEY unto the said Robert Long and II. Long all of my right, title, interest and claim in and to the following described real estate, situated, lying and being in the Town of Evergreen, Conecuh County, Alabama, viz: * * *.

      Here follows a description, of nine of the lots, after which, the deed recites:
    Lot Number Three (3) in Block Number Six (6) on East Front Street in the Town of Evergreen, Alabama, being Fifty (BO) feet front and 100 feet deep, also the South Half of Lot Number Two (2) in Block Number Six (6), being 25 feet front on East Front Street and running back 100 feet, being intended to cover and describe those particular lots on East Front Street on which is situated the storehouse formerly owned by D. G. Rutland and now occupied by the firm of I. Long & Sons; also Lot Number Eighteen (18) in Block Number Six (0) being 50 feet front by 100 feet deep, fronting on Desplous Street; also Lot Number Seventeen (17) in Block Number Six (6) being 50 feet front by 100 feet deep, and fronting on Desplous Street. All of said lots being according to the survey of the Town of Evergreen as made by O. P. Rodgers, Civil Engineer, and being intended to cover and describe all of the real estate owned by the late D. G. Rutland on East Front Street and Desplous Street in the town of Evergreen, Alabama.
    I have now no interest in the mercantile establishment run and conducted in the Town of Evergreen, Alabama, under the firm name and style of I. Long & Sons, said business being owned exclusively by my two sons, Robert Long and H. Long, but in order that there may be no controversy over the matter, and that the same shall be clearly understood, for and in consideration of the sum of One Dollar and other valuable considerations to me in hand paid by Robert Long and H. Long, the receipt whereof is hereby acknowledged, I do hereby grant, bargain, sell and deliver unto the said Robert Long and H. Long all of my right, title, interest and claim in and to the mercantile business operated in the Town of Evergreen, Alabama, under the firm name and style of I. Long & Sons, and for the consideration aforesaid, I do hereby grant, bargain, sell, convey and deliver unto the said Robert Long and H. Long all of my personal property of every kind, nature and description which I now own, wherever situated. And for the consideration aforesaid, I do hereby transfer, set over and assign unto the said Robert Long and H. Long any and all accounts, mortgages, notes, choses in action which may stand in the name of or may be due or owing to the said firm of I. Long & Sons.
    To have and to hold unto the said Robert Long and H. Long their heirs and assigns forever.
    Witness my hand and seal, this the 10th day of January, 1919.
    [Signed] I. Long (seal).
    The name of Page, McMillan <& Brooks, attorneys at law at Evergreen, Ala., appeared upon this deed. The deed was duly acknowledged by Israel Long on January 10, 1919, and was duly recorded on the same day in the office of the Judge of Probate of Conecuh County, Ala.
    On the same date, January 10, 1919, Robert Long and Haimon Long jointly executed the following written agreement which they delivered to their father:
    In consideration of the execution of the deed dated January 10, 1919, by Israel Long, to the undersigned Robert Long and Haimen Long, wherein for the sum of One ($1.00) Dollar and other valuable considerations, wherein the said Israel Long, has deeded to us all of his right, title and interest in the partnership of I. Long and Sons, we agree that for the year 1919, his drawing account from the partnership shall be as much as either of the partners therein, to-wit: Robert Long and Haimon Long, and that for the succeeding years after 1919, we are to pay him as interest on the actual value of his share of the partnership, not less than Twelve Hundred ($1200.00) Dollars X)er annum, during the remainder of his natural life.
    During 1920 the partnership of I. Long & Sons paid to Israel Long the amount of $1,100, pursuant to the above-mentioned agreement, and deducted the same from the gross income as interest paid in determining the distributive share of each of the petitioners in the partnership profits for the year. The Commissioner disallowed the deduction and increased the distributive share of each of the petitioners in the amount of $850.
   OPINION.

Smith :

The petitioners claim that the amount of $1,700 paid their father in 1920 was an ordinary and necessary expense of doing business for that year; that the agreement entered into on January 10, 1919, called for the payment of this amount as “ interest,” and that payment of interest is an allowable deduction from gross income of partnerships or individuals.

The amount paid to Israel Long was stipulated and the deed and the agreement of January 10, 1919, were submitted as the only evidente. Upon the evidence before it, the Board must approve the Commissioner’s determination. The $1,700 was not an amount paid the use of money. On the contrary, the evidence submitted would indicate that the amount represented payments by Robert Long and Haimon Long as a part of the purchase price of the real estate transferred to them and, as such, was a capital expenditure. Appeal of Steinbach Co., 3 B. T. A. 348; Appeal of John C. Moore Corporation, 3 B. T. A. 430.

The Commissioner admits that he failed to credit against the deficiency letter of April 16, 1925, $90, representing the sum of three installment payments made by the petitioner, Robert Long, as follows:

The deficiency found by the Commissioner against Robert Long should therefore be reduced by the amount of $90.

Judgment will be entered for the Commissioner redetermining a de-fieieney of $9f.6B due by Robert Long and a deficiency of $191.98 due by Haimon Long for the calendar year 1920.