author: Trammell:

text:
    Appeal of Olt Bros. Brewing Co.
    Docket No. 1392.
    Promulgated April 22, 1927.
    Obsolescence of intangible assets disallowed. '

      W. W. 8folding, Esg., for the petitioner.

      John I). Foley, Esg., for the Commissioner.
    This appeal involves a deficiency in income and profits taxes for the calendar year 1919, amounting to $10,158.43, based upon the disal-lowance of a deduction of $74,193.62 as obsolescence of good will and trade brands.
    FINDINGS OF FACT.
    The taxpayer is an Ohio corporation, with its principal office at Dayton. It was organized in March, 1912, as the successor of the Olt Brewing Co., a corporation, which was organized in November, 1906, and which began the business of brewing and selling beer and ale in August, 1907.
    The capitalization of the predecessor corporation was $60,000, of which Charles J. Olt and his brothers and father owned $30,000 par value of stock.
    In November, 1910, Charles J. Olt and his brother entered into negotiations for the purchase of the other half interest in the Olt Brewing Co. and in 1912 purchased the same, paying therefor the amount of $175,000, $50,000 in cash and $125,000 in notes, which notes were later paid in full.
    In March, 1912, all of the assets of the Olt Brewing Co. were transferred to the taxpayer corporation in accordance with and pursuant to the following offer dated March 14, 1912:
    The Olt Bbos. Beewing Company,
    Dayton, Ohio.
    Gentlemen :
    We hereby offer to assign, transfer, sell and convey to your Company all of the assets of The Olt Brewing Company consisting of ail of its real estate, .brewery, brewery property, machinery and equipment, bottling department, bottling machinery and equipment, bottles, cooperage, horses, wagons, harness and stable equipment, motor trucks for delivery, book accounts, bills and notes receivable secured and unsecured together with, tlie securities tlierefor, eboses in action, raw and manufactured material on band at tbis date as well as all contracted for, good will, trade marks, leases and in fact'every and all of the assets of the said The Olt Brewing Company in consideration of your'Company executing and delivering to the undersigned Eighteen Hundred (1800) shares of the capital stock of your Company as fully paid up and non-assessable together with One Hundred and Fifty Thousand ($150,000) Dollars worth of your first mortgage bonds: Said bonds to be of the denomination of One Thousand Dollars and to be in serial number and fifteen (15) of them to be retired each year in succession for ten (10) years and to draw six (6%) per cent per annum interest payable semiannually and the trust deed or mortgage securing the same to be in manner and form to be approved by our Attorney, George W. Ozias, Esq.; in addition, to the said stock and bonds aforesaid, your Company is also to assume a current indebtedness of our Company not exceeding $33,950.00.
    ' Xours truly,
    The Out BREWING Company.
    (Signed). Chaelbs J. Out, Pres.
    (Signed). Fred Oly, See’y & Treas.
    After that transfer the balance sheet of the taxpayer' representing the assets so assigned was as follows:

    The business expanded after March, 1912, and -the assets had not diminished in value by March 1, 1913. The bonds of the taxpayer in the amount of $150,000 so transferred to the predecessor corporation were sold at par during 1912.
    The taxpayer manufactured and sold beer and ale up to May 26, 1919, when it ceased, that date being the effective date of the Ohio prohibition law. Up to that date, the taxpayer had used in its business the trade brands “ Olt’s Superba ” applied to beer, and “ Olt’s Cream Ale ” applied to ale, and had, sold at wholesale in barrel lots to about 100 saloons and bottled goods in case lots to about 5,000 retail customers or home buyers.
    After May 26, 1919, the- taxpayer abandoned those trade brands as not adaptable to the business in which -it thereafter‘engaged, which was that of making and selling ginger ale, root beer, other carbonated beverages, and cereal beverages (commonly known as “near beer”). For tbe cereal beverage the taxpayer used the name “ Olts ” and the label used was not the same in appearance or design as those formerly used for beer and ale. ' ’

      By the end of 1919 not more than five or six of the former wholesale customers remained, and the same class of customers did not buy the new product as did the old.
    The gross and net income of the business for the years set out below was as follows:

    The value of the good will, including trade-marks and trade brands, on March 1, 1913, was $169,193.62.
   OPINION.

Trammell:

The deduction claimed on account of obsolescence of intangible assets is disallowed upon the authority of the Board’s decision in Appeal of Manhattan Brewing Co., 6 B. T. A. 952.

Judgment will be entered on 15 days notice, u/nder Bule 50.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    Appeal of Mary M. Dowling.
    Docket No. 2394.
    Promulgated April 22, 1927.
    1. Obsolescence of stipulated value of certain tangible property allowed.
    2. Obsolescence of intangible property as a result of war-time and national prohibition legislation is not deductible from taxpayer’s income for years in question.

      H. A. Mihills, G. P. A., for the petitioner.

      A. PL. Fast, Bsg., for the Commissioner.
    This appeal is from a determination of deficiencies in income and profits taxes for the years 1919, 1920, and 1921 in the respective amounts of $1,549.10, $131.76, and $7,276.01. The only issue is whether the taxpayer is entitled to certain deductions from gross income for each of the taxable years on account of obsolescence of tangible and intangible property resulting from war-time and Federal prohibition legislation.

      FINDINGS OF FACT.
    1. The taxpayer is an individual residing at Lawrenceburg, Ky. Prior to the enactment of war-time prohibition legislation and the adoption of the Eighteenth Amendment to the Constitution of the United States, she was engaged in the business of manufacturing, storing, bottling, and selling whiskey. This .business she inherited from her husband, deceased in 1903, who had been a distiller for about 40 years.
    2. During the years involved in this appeal, the taxpayer owned two distillery properties. The first, hereinafter designated as Plant No. 41, is located at Tyrone, about four miles from Lawrenceburg, on a site difficult of access by wagon road and at considerable distance from any railway. The other property, hereinafter designated as Plant No. 59, is located at Lawrenceburg.
    3. Plant No. 41 was used exclusively for the production of whiskey sold under the trade name of Waterfill and Frazier, which was first used in 1810. This whiskey was matured in wood in the plant storage warehouse, and none of it was ever bottled and offered for sale through retail trade until it was at least eight years old. The usual retail price of this whiskey was from $2 to $2.50 each for bottles containing one-fifth of a gallon. On March 22, 1904, the taxpayer entered into a contract for the sale of her entire output of Waterfill and Frazier Whiskey to Grommes & Ullrich, a firm of liquor brokers located at Chicago, for a period of twenty years at prices that assured profitable returns. This contract contained a provision which allowed the purchaser the privilege of cancellation at the end of any five-year period on written notice served on the taxpayer at least six months prior thereto. On December 14, 1917, convinced that the future of the whiskey business was hopeless as a result of prohibition agitation and legislation, Grommes & Ullrich notified the taxpayer of their desire and intention to cancel the above-mentioned contract at the termination of the five-year period ended March 22, 1919. The taxpayer accepted such notice and agreed to immediate cancellation without reference to the termination of the five-year period. Production of Waterfill and Frazier Whiskey was discontinued in 1916, and Plant No. 41 was thereafter» used only for storage and bottling purposes.
    4. Plant No. 59 produced “ Old Dowling ” and other brands of whiskey for sale to the general trade. This property was not utilized in manufacturing whiskey or spirits after 1917, in which year there was a production of 1,241 barrels. Subsequently the plant was 'used only for storage and bottling purposes.

      5.The parties agree that on March 1,1913, the taxpayer’s tangible property had a cash value of $200,850, and that the depreciated value of such property on January 1, 1918, was $143,287.92. • The parties further agree that the tangible property of the taxpayer, classified as to uses, had cash values as follows on March 1,1913:
    Fácflitiés used exclusively for manufacturing whiskey_i— _$47, 000
    Buildings and plant for warehousing operation__1_121, 500
    Plant and equipment -for bottling purposes — ,.___ 32,350
    6. Since discontinuing the production of whiskey, the taxpayer has spent no money for the maintenance or upkeep of either buildings or 'machinery, except such amounts as were necessary to keep roofs in good condition while the buildings were in use for bottling and storage purposes. Since November 1, 1923, the effective date of legislation requiring the concentration of all whiskey in warehouses designated by the Government, the taxpayer’s buildings have not been used, and since that date buildings and machinery of both plants have had only salvage or junk value-. On May 4, 1925,' a wrecking company offered $800 for all the buildings and equipment of Plant No. 59.
    7. After she discontinued the commercial production of whiskey the taxpayer unsuccessfully endeavored in 1918 to obtain permission to continue the manufacture of whiskey for medicinal and other lawful purposes under Government Supervision. She also made application to have her property designated by the Government as a concentration warehouse. This application was rejected. Subsequently other efforts were made to utilize the property for industrial purposes, but all such attempts failed because of the inaccessibility of the plants, and because, without large expenditures, the buildings and equipment were suitable only for the man'ufacture, storage, and bottling of whiskey and other spirits.
    8. When the taxpayer discontinued production she had in storage ■about 22,000 barrels of whiskey owned by other parties, and since that time her only business operations have been the continued storage and the bottling of such whiskey. This business' was discontinued as a result of Government concentration orders on November 1, -1923.
    9. The average annual production of the Waterfill and Frazier brand for the five years preceding March 1,T913, was 2,500 barrels of an average content of 46 gallons,'and the manufacturing profit for the same period averaged 18 cents a gallon. Some time within the calendar year 1915, Grommes, of the firm of Grommes & Ullrich, offered to purchase the' Waterfill and Frazier brand and Plant No. 41, and to pay therefor the amount of $500,000. The offer was not in writing, but was made personally to the taxpayer, who refused it because she believed that the brand and property were worth more money than the purchase price offered. The value, on March 1, 1913, of the taxpayer’s intangible property was $230,000.
   OPINION.

Lansdon :

The facts with respect to the tangible property of the taxpayer used for distilling purposes are well established by the evidence. The parties have stipulated that at March 1, 1913, the aggregate value of buildings and machinery was $200,850; that depreciation sustained and allmved by the Commissioner from March 1,1913, to December 31,1917, was $57,562.08; and that the depreciated value of such assets, at January 1, 1918, was $143,287.92. Prior to January 1, 1918, the taxpayer discontinued the use of her property for distilling whiskey and thereafter none of the assets in question were used except for the purpose of storing and bottling goods theretofore manufactured.

On December 18, 1917, Congress adopted the joint resolution submitting the prohibition amendment to the Constitution to the States for ratification. In January, 1918, unexpected, favorable action on the amendment by several States indicated the certainty of early ratification by the requisite three-fourths of the States.

The effective date of the Eighteenth Amendment was January 16, 1920, and the Federal order requiring concentration of whiskey for storage purposes was promulgated November 1, 1923. These facts establish an obsolescence period extending from January 1, 1918, to November 1, 1923, during which the tangible property of the taxpayer used for distilling, bottling and storage purposes sustained obsolescence on account of Federal prohibition legislation.

The evidence discloses that at the termination of the obsolescence period the property in question had only a small salvage value. In 1925 an offer of $800 was made for Plant No. 59.- We have no information as to the relative value of the two plants and believe that $2,000 is a fair estimate of their combined salvage value at the date of their final abandonment by the taxpayer for the purposes of her business. The period of obsolescence is 5% years from December 31, 1917. We are of the opinion that the taxpayer is entitled to deduct aliquot parts of $143,287.82 for exhaustion, wear and tear, including obsolescence, in each income and profits-tax return made during such period, with due consideration for a salvage value of $2,000. Appeal of Manhattan Brewing Co., 6 B. T. A. 952.

The taxpayer also claims the right to deduction from gross income for each of the taxable years on account of the obsolescence of intangible assets consisting of trade names and good will. We are convinced that such intangibles had a value of at least $250,000 at the beginning of the period of obsolescence and that such value was lost during such period as a result of legislation. As the courts have held that intangibles of the nature here involved are not used in trade or business in a manner that subjects them to exhaustion, wear and tear and that obsolescence is merely an extension, or addition to the meaning of the words exhaustion, wear and tear, the taxpayer’s contention on this point is denied. Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626; certiorari denied, 273 U. S. 763.

Judgment will he entered on 10 days’ notice, under Rule 50.

SteRNhagen dissents.


author: Marquette:

text:
    Appeal of Standard Brewing Co.
    Docket No. 193.
    Promulgated April 22, 1927.
    1. The petitioner is not entitled, under the Revenue Act 'oí 1918, to any deduction from gross income on account of obsolescence of trade-marks and good will.
    2. An amount deposited by the petitioner in the year 1920 with a collector of internal revenue as an offer in compromise of certain taxes and penalties, which offer was subsequently increased in 1921 and accepted in that year, is not a proper deduction from gross income for 1920.
    3. The petitioner in the year 1916 took out a policy of insurance on the lives of certain of its officers. In the years 1916 to 1919, inclusive, it paid premiums on the policy in the amount of $11,178.50, which it capitalized on its books, and in the year 1920 it surrendered the policy for $6,647, the amount of its cash surrender value. In its income and profits tax-return for the year 1920 the petitioner deducted as a loss the difference between the total amount of premiums paid and the cash surrender value of the policy. Held,, that the petitioner sustained no loss on the surrender of the policy and that the deduction claimed was properly disallowed.

      W. W. Spalding, Esg., for the petitioner.

      John D. Foley, Esq., for the Commissioner.

      Arthur A. Ballantme, Esq., and George E. Gleary, Esq., as amiei curiae.

    This appeal is from the determination of deficiencies in income tax for the years 1919 and 1920 in the total amount of $4,124.4-2.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the Commonwealth of Pennsylvania, with its principal office and place of business at Scranton. For many years prior to March 1, 1913, it was engaged in the manufacture and sale of beer, ale and porter under the trade-marks “ True Age Beer,” “ Crystal Ale,” and “Atlas Porter,” and on that date it had developed for its products and the trade-marks under which they were sold, good will of substantial value. It continued to manufacture beer, 'ale, and porter until some time in the year 1919 when, the National Prohibition Law having been' enacted, it discontinued the manufacture of these products.
    In the year 1917, the petitioner began the manufacture of a cereal beverage or “ near beer,” containing less than one-half of one per cent alcohol, which is sold under the name “ Curo.” It continued the manufacture of “ Curo ” until July 1, 1922, at which time it ceased manufacturing and began the liquidation of its assets. The sales of “ Curo ” were continued until September, 1922. When the petitioner ceased to manufacture beer, ale and porter in the year 1919, it abandoned the trade-marks “ True Age Beer,” “ Crystal Ale,” and “Atlas Porter,” and made no attempt to transfer them to its “ near beer ” for the reason that it had built up a value in the trade-mark “ Curo ” which it did not see fit to abandon in favor of any of its older trademarks.
    The sales of beer, ale, and porter in the years 1910 to 1920, inclusive, were as follows:

    Shortly after the beginning of the year 1920 such sales ceased. The sales of “ Curo ” were as follows:
    Year. Barrels.
    1918_ 620
    1919_ 3, 054
    1920_ 29, 957
    1921_ 39,010
    1922_21,437
    In its income and profits-tax return for the year 1919, the petitioner claimed a deduction from gross income in the amount of $94,874.70, as an allowance for obsolescence of its good will. The Commissioner disallowed the deduction.
    In the year 1920, the petitioner was accused of manufacturing, contrary to law, beverages containing more than one-half of one per cent of alcohol and the Commissioner seized its plant and demanded a large sum in taxes and penalties and threatened forfeiture proceedings under the National Prohibition Law. On December 30, 1920, the petitioner deposited with the collector of internal revenue at Scranton, Pa., $25,000 as an offer in compromise of all claims against it by the United States arising from said alleged violation of law.- On or about March 16, 1921, the amount of $20,000 was deposited by the petitioner with the collector of internal revenue at Scranton as an additional offer in compromise of the claims of the United States against it growing out of said alleged violation of law. On May 10, 1921, the Commissioner of Internal Revenue, with the advice and consent of the Secretary of the Treasury, accepted the amount of $45,000 so paid by the petitioner to the collector “ in compromise of all civil liabilities and forfeiture proceedings involved in alleged violation by your company of Sections 3339 and 3244, R. S., Section 608 of the Revenue Act of 1918, and Sections 3, 6, 10 and 25, Title II, of the National Prohibition Act,” with the condition that “ acceptance of the offer shall not be so construed as to affect any criminal liability of your company or of its officers under Internal Revenue laws or the National Prohibition Act, nor the right of the Government to revoke the permit of your company to manufacture cereal beverages.” No criminal proceedings were commenced against the petitioner nor was its permit to manufacture cereal beverages revoked.
    The petitioner in its income and profits-tax return for the year 1920, deducted as a business expense the amount of $25,000' deposited in that year with the collector of internal revenue at Scranton as herein set forth. The Commissioner disallowed the deduction.
    In the year 1916, the petitioner took out a life insurance policy on the lives of certain of its officers in the amount of $50,000. The premiums paid on the policy in the years 1916 to 1919, inclusive, amounted to $11,178.50. The policy was surrendered by the petitioner in the year 1920, at which time its cash surrender value was $6,647. The petitioner in its income and profits-tax return for the year 1920 deducted as a loss the amount of $4,531.50, that amount being the difference between the total amount of premiums paid on the said policy of insurance and the amount realized by the petitioner upon its surrender. The Commissioner disallowed the deduction.
   OPINION.

Marquette:

The first question presented by the record in this appeal is whether the petitioner is entitled to a deduction for obsolescence of good will and trade-marks in computing its net income under the Revenue Act of 1918. Counsel for the Commissioner admit that the petitioner had built up a good will of substantial value but contend that such good will did not become worthless when the petitioner abandoned the manufacture of beer, ale, and porter, but on the other hand was of value in the “ near beer ” business in which the petitioner continued to engage.

In passing on this question it is not necessary, for us to determine the value of the petitioner’s good will and trade-marks, or whether that value was destroyed by the advent of national prohibition. We have heretofore held in the Appeal of Manhattan Brewing Co., 6 B. T. A. 952, that under the Bevenue Act of 1918 a taxpayer is not entitled to any deduction from gross income on account of obsolescence of property of the character involved herein.. The. discussion in the opinion in that appeal is at length and fully sets forth the reasons upon which our conclusion is based, and its repetition will serve no useful purpose here. Upon the authority of the decision in the Appeal of Manhattan Brewing Co., supra, we hold that the petitioner herein is not entitled to any deduction in the year 1919 on account of obsolescence of its good will and trade-marks. See also Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626; certiorari denied, 273 U. S. 763.

The second question is whether the petitioner in computing its net income for the year 1920 is entitled to deduct the amount of $25,000 deposited with the collector of internal revenue at Scranton, as an offer in compromise of certain claims of the Government against it arising from alleged violations of the National Prohibition Act. The petitioner contends that the amount in question represented a business expense.

We are of the opinion that the petitioner is clearly not entitled to the deduction claimed, regardless of whether an expenditure of the kind under consideration constitutes an ordinary and necessary business expense, which question we do not feel called upon to decide. The amount deposited by the petitioner with the collector in 1920 was for the purpose of compromising certain taxes and penalties to which the United States claimed the petitioner had become liable. The offer was not accepted, and, in March, 1921, it was increased to $45,000. The total offer was accepted by the Commissioner on May 10, 1921, and until that date the money so deposited with the collector remained the property of the petitioner. If the offer in compromise had not been accepted the Government would have been required to return the amount thereof to the petitioner. It is, therefore, apparent that the amount which the petitioner seeks to deduct from gross income for 1920 does not in fact represent an expense either paid or incurred in that year.

The third question involves the right of the petitioner to a deduction from gross income for the year 1920 on account of a loss claimed to have been sustained by it in that year upon the surrender of a certain policy of insurance. The record discloses that in the year 1916 the petitioner took out a life insurance policy on the lives of certain of its officers. During the years 1916 to 1919, inclusive, it paid in premiums on this policy the amount of $11,178.60, which it capitalized upon its books. In the year 1920, the petitioner surrendered the policy and received as the cash surrender value thereof $6,647. In computing its net income for the year 1920, it claimed as a deduction the difference between the total amount of premiums paid and the amount received upon the surrender of the policy. The deduction was disallowed by the Commissioner.

’ We regard the action of the Commissioner as correct. To the extent that the premiums paid by the petitioner created in it a right to a surrender value, they constituted a capital investment. To the extent they exceeded the surrender value, they constituted payment for earned insurance and were current expenses. Appeal of E. A. Armstrong, 1 B. T. A. 296. The surrender value of the policy was the measure of the investment and upon the surrender there was no capital lost.

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


author: Smith:

text:
    Yochim Brothers Co., Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4559.
    Promulgated April 22, 1927.
    1. The evidence fails to show that the good will, formulas, trademarks, and trade brands paid in to the petitioner for shares of capital stock on September 1, 1911, had any fair market value on March 1, 1913.
    2. The amount included in invested capital for intangible property paid in for stock before March 3, 1917, should not have exceeded 25 per cent of the par value of the stock. outstanding on that date.
    IF. E. Hayes, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the years 1918 and 1919 in the amounts of $22,476.90 and $698.97, respectively. In its income-tax return for each of these years the petitioner deducted from gross income $41,815.24 as property loss arising from obsolescence of good will, formulas, trade-marks, and trade brands. The question in issue is the right of the petitioner to make such deductions. In his answer the respondent alleges error in the computation of invested capital for the year 1919.

      BINDINGS OB BACT.
    Joseph 0. Yochim and his brother, A. R. Yochim, of Yew Orleans, La., in the year 1898 organized a partnership known as Yochim Brothers, and engaged in the business of rectifiers and compounders of cordials and bitters. The basic ingredients of these cordials and bitters were alcoholic spirits. The partnership was the predecessor of Yochim Brothers Co., Ltd., the petitioner, which was incorporated on September 1, 1911. The partnership began business with borrowed capital of $500. It originated and owned certain secret formulas from which it manufactured cordials, bitters, and other alcoholic drinks and endeavored to compete in the local market with certain cordials imported from France. It built up an established business and sold its products to liquor dealers in Yew Orleans and after a few years a demand developed for its products in many places outside of Yew Orleans in the States of Louisiana, Texas, and Mississippi. In Yew Orleans its clientele included such well known places as the Hotel Grünewald, Monteleon, St. Charles Hotel, H. T. Remus, Conrad Kolb, Arnold’s Restaurant, and Absinthe House. The cordials and bitters manufactured were special concoctions originated and manufactured by the Yochim Brothers partnership, and contained special ingredients and differed from other blends and brands by reason of the flavor of the concoctions resultant from the particular ingredients and blends known only to Yochim Brothers. The rectifying work ivas at all times done by one of the partners, Joseph C. Yochim, and all blending of the secret formulas was done by him.
    Although the partnership started with a borrowed capital of $500 it did not owe a dollar to any one at the end of 18 months and at the end of 3 years was discounting all bills and buying in considerable quantities. Out of the earnings of the partnership and before incorporation in 1911, the two brothers purchased a number of parcels of real estate and made other investments, some of which were not profitable.
    In addition to the secret formulas, the partnership owned trade brands, trade names, and trade-marks, and these, together with the secret formulas and good will, were transferred on September 1, 1911, to the corporation. The three trade-marks owned by the partnership were secured from the United States Government, one in 1900, one in March, 1903, and another about the same time for aromatic bitters. All of the products of the partnership manufactured under its formulas were marketed under special label’s. The sales increased from year to year.
    As of September 1, 1911, the petitioner corporation, which had an authorized capital stock of $125,000, issued stock at par value to the amount of $105,000 for the assets of the partnership turned over to it. The three stockholders at September 1, 1911,' and the shareholdings of each were as follows:
    snares
    J. 0. Yochim_ 400
    A. R. Yochim_.._ 400-
    O. D. Jones_ 250
    Jones was taken into the corporation for the purpose of operating a soft-drink department. It was expected that he would obtain for the coi’poration agencies for certain liquors. The 250 shares of stock issued to him were held in escrow by Yochim Brothers to be turned over to Jones when he should have accomplished certain results. When he failed to fulfill the terms of the escrow agreement these shares of stock were issued to the two Yochim brothers.
    The assets and liabilities of the corporation immediately after organization were as follows:

    The principal tangibles were set up on the books of account as—
    Merchandise inventories_^_$18,706.43
    Stamp machines’ inventories_ 1,187.61
    Merchandise on consignment_ 644.43
    Customers’ accounts- 11, 675. 75
    The intangibles were set up on the journal as follows:
    Formula and Trade Marks
    Standard American Aromatic Bitters_$15,000.00
    Yochim Bros. Celebrated Stomach Bitters_ 15, 000. 00
    Yochim Bros. Aromatic Bitters_ 10,000. 00
    Yochim Bros. Absinthe_ 5, 000. 00
    Yochim Bros. Kummel Cordial_ 2, 500. 00
    “ “ Creme de Menthe_ 2,500. 00
    “ “ “ “ Rose_ 1,000.00
    “ “ “ “ Nayoux_ 1,000.00
    “ “ “ “ Coco_ 1,000.00
    “ “ “ “ Vanilla_ 1,000.00
    “ “ “ “ Pous Cafe_ 1,000.00
    “ “ Blackberry Brandy_ 1,000.00
    “ “ Apricot Brandy- 2,000.00
    “ “ Prunello_j._ 1, 000. 00
    “ “ Anisette_’ 1, 000.00
    “ “ Ojen Cordial-i_ 5,000. 00
    “ “ Standard Dry Gin_ 500.00
    “ “ Dry Gin_ . 500.00
    “ “ Holland Gin- 500.00
    “ “ Sloe Gin_1_ 500.00
    “ “ Key Gin_ 500.00
    Good Will- 9,130.48
    Total paid at organization. 83, 630. 48

      The principal liabilities were:
    Bills payable_$2, 000. 00
    Purchase accounts_11, 517. 90
    During the years 1911, 1912, and 1914, 45 shares of treasury stock were sold to 12 different individuals at par, making the outstanding capital stock after May 19,1914, $109,500.
    From September 1, 1911, to some time in 1912, C. E. Jones was vice president of the corporation and had authority to purchase materials necessary for the manufacture of soft drinks. He purchased merchandise in excess of the immediate requirements of the business. The result was disastrous. An audit of the petitioner’s books of account for the fourteen-month period ended October 31, 1912, showed sales of $96,609.16 and a net loss from operations of $20,651.21. A certified public accountant who made an audit of the petitioner’s books for the period in question reported to the petitioner under date of December 6,1912, in part as .follows:
    "When it was shown that the business was going behind, instead of making a careful study of your condition and the causes leading thereto, expenses were allowed to remain the same and your officers resorted to check and note kiting and other questionable financial methods to raise the necessary funds to keep the ship afloat.
    Jones was ousted from the corporation in 19.13. The petitioner immediately began to dispose of the goods which had been purchased for the soft-drink department. An audit of the petitioner’s books for the fourteen-month period ended December 31,1913, showed sales of $69,287.08 and a net profit for the period of $318.08. In his report of. February 18, 1914, the same certified public accountant reported:
    While your statement shows only a small profit on operations for the past 14 months, still when account is taken of the large amount of dead stock which had to be disposed of at a loss, and the bad debts charged off, as well as the poor credit standing of the company fourteen months ago, it is a splendid showing to say that the company has been able to more than hold its own during this period and should mean good return upon your investment under normal conditions.
    The sales and net' profits of the business for the years 1914 to 1919, inclusive, as shown by the audit reports were as follows:

      The net profits shown for the years 1918 and 1919 are before the deduction of any amount for obsolescence or loss of intangibles rendered worthless by prohibition legislation.
    In 1912 or 1913 one R. L. Yiguerie, a wholesale and retail liquor dealer in New Orleans, who purchased from the petitioner certain products and conducted a large mail-order business and had annual sales of approximately $250,000, desired to become associated with the petitioner and offered to purchase $30,000 of itj= capital stock at par, provided the petitioner would take in part payment Viguerie’s stock of liquors at the invoice price estimated at from $22,000 to $25,000. He agreed to pay cash for the balance. This was at a time when the business of the petitioner was at its lowest ebb oiving to the operation of the soft-drink department and at a time when its credit was poor. The offer was not accepted by the Yochims since they were afraid Viguerie might have a considerable amount of immovable stock. This offer was made by Yiguerie after he had spent between $10,000 and $12,000 in an unsuccessful venture to duplicate the cordials and bitters made by Yochim Brothers.
    In computing invested capital for the year 1918 the Commissioner included intangibles to an amount equal to only 25 per cent of the par value of the capital stock outstanding ($109,500). In computing invested capital for 1919 he failed to make any reduction of invested capital by reason of the limitation imposed by the law upon the inclusion in invested capital of intangibles paid in for shares of capital stock.
    The petitioner sold all of its tangible assets and dissolved during the year 1919. Its intangibles were not sold. In closing its books of account for the year 1918 it charged off as a loss $83,630.48, its book value of formulas, trade-marks, trade brands, and good will. One-half of this amount was claimed as a deduction from gross income in its income-tax return for 1918 and the balance from gross income in its income-tax return for 1919. The Commissioner disallowed these deductions and increased net income accordingly. The deficiencies herein complained of result from such disallowances.
    Many of the records of the petitioner were destroyed in 1919 or 1920. Duplicate records filed with the collector of internal revenue have also been destroyed.
   OPINION.

Smith:

The questions presented by this proceeding are (1) the cost and actual cash value of certain intangibles consisting of good will, formulas, trade-marks, and trade brands paid in to the petitioner corporation at organization on September 1, 1911, for $83,968.26 par value of its capital stock, and the value of such intangibles at March 1, 1913; (2) whether the petitioner is entitled to deduct from gross income of 1918 any amount representing the loss through obsolescence or otherwise of such intangibles; (3) whether the petitioner is entitled to deduct from gross income of 1919 any amount in respect of the loss of the value of such intangibles in 1919; and (4) if it is entitled to any such deduction for 1919, whether the deduction may be made for the purpose of computing a “ net loss ” under section 204 of the Revenue Act of 1918.

The most important question for consideration is the fair market price or value on March 1,1913, of the intangibles paid in for shares of stock in 1911. If they had no such value on that date the petitioner is not entitled to deduct any amount from gross income of the years 1918 and 1919 in respect of them. The predecessor partnership apparently operated at a considerable profit. Although the two Yochim brothers started in business on borrowed capital, in the course of a few years they had paid off their debts and had accumulated some property. At the date of incorporation the tangibles had a clear value in excess of $20,000. The corporation operated either at a net loss or with a negligible profit for the first five or six years of its existence. It did not even earn a fair return upon its tangibles. The evidence would indicate that this showing is due in large part to an unfortunate venture which the corporation entered into in the manufacture and sale of soft drinks. We can not, however, determine from the evidence the amount of the loss attributable to the soft-drink business. The auditor’s report for the year 1913 indicates that most of the stock purchased for the manufacture of soft drinks had been disposed of prior to the close of 1913. The corporation operated at some profit for the year 1914; sales for the year 1915 were much less than those for 1914, and it is not in evidence whether there was a net profit for that year; the net profits for the years 1916 and 1917 were small.

At the hearing it was attempted to prove the value of the intangibles at March 1, 1913, by an offer made by one Viguerie to purchase $30,000 of the petitioner’s capital stock at par. This offer was not accepted because Viguerie was to turn in a stock of liquors owned by him at the invoice price of from $22,000 to $25,000 and the Yochim Brothers had some doubt as to the salability of this stock at the invoice price. The only other important evidence of value of the intangibles at the basic date is the sale of a few shares of stock at par during the years 1911, 1912, and 1914. We think, however, that the sale of these few shares of stock furnishes little evidence of the value of the intangibles of the petitioner in 1913. It appears to us that the earnings afford the most satisfactory evidence of value and those earnings indicate that the intangibles had little more than a nominal value. In the absence of evidence showing a fair market price or value for the intangibles on March 1,1913, the determination of the respondent that thejr had no value on the basic date and that the petitioner sustained no loss when the worthlessness of them- was made apparent by national prohibition in 1918 or 1919, must be sustained.

In view of this conclusion, it is not necessary to consider the other allegations of error-made by the petitioner.

In his answer to the petition the respondent alleged error in computing the invested capital for the year 1919. This was computed without applying the 25 per cent limitation to intangibles provided for by section 326 (a) (4) of the Revenue Act of 1918. The limitation imposed by the statute should be applied in determining the correct deficiency for the year 1919.

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


author: Gkeen :

text:
    Appeal of Keller Mechanical Engineering Corporation.
    Docket No. 6741.
    Promulgated April 25, 1927.
    DErnEciATiON. — March 1, 1913, value of two patents determined for tlie purpose of computing depreciation.

      Laurence A. Tamer, Esq., and James G. Peacock, Esq., for the petitioner.

      Ellis W. Harming, Esq., for the Commissioner.
    This is an appeal from a determination of a deficiency in income tax for the calendar year 1920 in the amount of $681.91, growing out of the disallowance by the Commissioner of any deduction for the exhaustion of the March 1, 1913, value of two certain patents numbered 817,436, issued January 21, 1908, and 956,769, issued March 30, 1910.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of the State of New York, having its principal place of business in the Borough of Brooklyn in that State. It is the successor in interest, through a merger consummated in 1923, of the Keller Mechanical Engraving Co., also a New York corporation, which in 1904.suc-ceeded and took over a business formerly conducted by a partnership known as the Keller Mechanical Engraving Co.
    The petitioner and its predecessor corporation and prior partnership are, and have been since 1896, engaged in the business of manu-f acturing and selling dies and die-sinking and mold-cutting machines and stamped and perforated metal work and similar articles, and the business from the beginning has been based chiefly upon certain patents, principally for machines to cut dies automatically.
    At the inception of its business in 1896, it acquired "by purchase what was then known as the “ Campi ” patent, which covered a certain die-cutting machine. This machine was known as a reducing machine.
    In 1904 the Keller Mechanical Engraving Co. was incorporated and acquired the assets of the business including the patents covering the reducing machine referred to above. It issued $251,650 par value of its capital stock for intangibles, consisting principally of the said patents.
    For a number of years the petitioner manufactured and sold reducing’machines and dies made by the reducing process. Its officers became acquainted with the field of die-using industries. This field is a broad one. It includes, among others, automotive industries, locomotive and car works and railroad shops, drop forgers, navy yai'ds, small arms factories, Government arsenals, mints, builders, malleable steel foundries, and rubber factories; also manufacturers of hand tools, cutlery, scissors, manicure goods, surgical instruments, marine hardware, harvester machinery, saddlery and harness hardware, silverware and novelties, medals, badges and jewelry, lighting fixtures, cabinet and trunk hardware, plumbing' supplies, glassware, molded and pressed compositions, dolls, electrical parts and insulating materials.
    The experience of the business developed the fact that only a small part of the demand of the die-using industries for die-making machinery could be met by the reducing machine. The reducing machine was useful for ornamental work and for other kinds of fine work to which the reducing process was most appropriate. In the case however of the larger number, constituting also the more important part of the die-using industries, including, among others, the industries using drop forgings, the reducing machine-was either impractical or unduly expensive, requiring as it did the use of a master three or four times the size of the finished die, with the necessity of a correspondingly large machine and of powerful cutting tools.* In these industries there existed during the entire period' of the petitioner’s experience, a demand' for a machine which would cut dies from a master die of the same size — herein referred to as a duplicating machine as distinguished from a reducing machine, which works from a larger master die.
    At the time when the petitioner entered the field, no practical duplicating machine capable of handling the work of the industries referred to had been placed on the market. It was known that such a machine, if it could be developed and marketed, would effect a great saving in the die-using industries over the cost of cutting dies by hand labor, the process then employed. It was also known that there were among the die-using industries a number of strong and powerful concerns which would require duplicating machines, if developed, and which could afford to and would pay for such duplicating machines a price yielding a substantial profit in excess of the profits which the petitioner had been able to realize on the reducing machines.
    Among the assets acquired by the Keller Mechanical Engraving Co. at the time of its incorporation in 1904, was an invention for a duplicating machine. The petitioner proceeded to develop this invention to the point of obtaining patents thereon. Two patents were issued for this invention — No. 877,436, issued January 21, 1908, for a belt-driven duplicating machine, and No. 956,769, issued March 30, 1910, for a motor-driven duplicating machine. After obtaining the patents the petitioner addressed itself to the task of designing and developing a type of machine under these patents which could be effectively marketed and used. After experimenting for some time, petitioner succeeded in 1912 in developing and constructing a duplicating machine which met the requirements of the trade. This machine had been developed and was ready to be placed on the market prior to March 1, 1913, and met with success. The so-called duplicating machines constructed under the patents of January 21, 1908, and March 30, 1910, after a period of experimentation, on March 1, 1913, had been actually developed and constructed and were ready to be' put on the market. In the light of the petitioner’s experience of 17 years with the reducing machine, the known conditions in the die-using industries, and the demand existing in those industries for a duplicating machine, it was clear on and before March 1, 1913, that the duplicating machine patents could cover a field larger than that theretofore served by the reducing machines, and at a profit greater than that theretofore realized from the reducing machines, and that the petitioner could on March 1, 1913, have reasonably anticipated profits arising from the sale and use of the duplicating machines largely in excess of the profits theretofore derived from the sale and use of the reducing machines.
    During the period from July 1, 1913, to December 31, 1922, the petitioner had employed in its business net tangible assets and produced net earnings as follows:

    During the two fiscal years ended June 30, 1914 and 1915, the 18-month period ended December 31, 1916, and the calendar years 1911 to 1922, inclusive, petitioner made sales of duplicating machines, reducing machines, special machines,* dies' made on duplicating machines, and other items (miscellaneous and gallery), in the following amounts:

      Gross Sales.

    Fiscal year 1914_ $66,212. 92
    1915_ 73, 994.42
    18 months to Dec. 31, 1916- 725, 502.21
    Calendar year 1917_ 409, 449.84
    1918_ 287, 594. 92
    1919_ 369,353.98
    1920_ 430, 252. 49
    1921_ 260,152. 38
    ' 1922 _ 444, 942.25
    Total_ 3, 067,455.41
    The accessories sold as shown above were special fixtures such as mills, cutters, and tractors, for. use with the three types of machines in special work. They could not be used on any oilier than the machines manufactured by the petitioner. During the nine and one-half years from July 1, 1913, to December 31, 1922, all sales of accessories, except those sold with machines and billed to customers on the same invoice with machines, were carried in one account in the petitioner’s books. Sales of accessories made in connection with sales of machines, and billed on the same invoices with machines, were carried in the machines sales account. It is therefore impractical to accurately classify the accessories sales according to the three types of machines to which they were adapted in order to determine what part of those sales were sales of accessories for use in connection with duplicating machines only.
    No duplicating machines had been set up in petitioner’s plant, for the purpose of manufacturing dies, prior to the fiscal year 1915.
    The gross profits for the years 1917 to 1922, inclusive, from sales of machines and accessories, and dies manufactured on duplicating machines, and from gallery and miscellaneous sales, were as follows:

    Prior to the year 1917 petitioner’s books of account were not maintained in such a manner that the gross profits from sales can be determined separately for the four classifications shown above. In 1917 a cost accounting system was installed, making possible the ascertainment of the profits on the four classifications separately, from 1917 to 1922, inclusive.

      The profit on each duplicating machine during the years 1917 to 1922, inclusive, was as great.as the profit on each reducing and each special machine for the same period.
    In auditing the petitioner’s income-tax return for the year 1920, the Commissioner refused to allow a deduction for exhaustion of the patents covering the duplicating machine.
    The fair value of the two patents in question on March 1, 1913, was $218,000. .
   OPINION.

Gkeen :

Specifically, the issue on appeal is the March 1, 1913, value of United States letters patent Nos. 877,436 and 956,769, issued under dates of January 21, 1908, and March 30, 1910, respectively, and owned by the petitioner on the basic date, covering a belt-driven duplicating machine and a motor-driven duplicating machine, and the deduction to which the petitioner is entitled under the provisions of section 234(a) (7) of the Revenue Act of 1918 for exhaustion of these patents. The petitioner claims a fair market value for these patents at March 1,1913, of $300,000, and a deduction for exhaustion in the amount of $23,061.54, based upon the claimed value. The Commissioner denies that these patents had a fair market value at March 1, 1913, which may be made the subject of an allowance for exhaustion over the remaining life thereof.

The issue raised by this appeal is identical with the one which came before the Board in an appeal by this petitioner, Docket Ño. 2087, relating to the years 1918 and 1919, which is reported in 1 B. T. A. 1183. By stipulation of the parties, all of the evidence, documentary and oral, which was had in the trial of the earlier appeal, was placed in evidence for the purposes of the present appeal. Such new evidence as was adduced may be said to be confined to the deposition, with accompanying exhibits, of Edward N. Anderson, petitioner’s auditor and office manager, relating to the sales and earnings, which are set out in tabulated form in the findings of fact, and the accounts carried on petitioner’s books.

After a careful consideration of the evidence, we can not escape the conclusion which the Board reached in its .opinion in the earlier appeal — that the two patents in question, immediately upon their issue and on March 1, 1913, had a very considerable capital value. For 17 years prior to March 1,1913, the petitioner had been engaged in manufacturing dies, die-sinking and mold-cutting machines, and stamped and perforated work. It had also manufactured and sold reducing machines and dies made by the reducing process, which constituted a chief part of its operations. Its officers were intimately acquainted with the die-using industries and their particular needs. Among others, the die-using industries included automobile manufacturers, locomotive and car works, railroad shops, drop forgers, navy yards, munitions factories, Government arsenals, mints, malleable steel foundries, rubber manufacturers, and manufacturers of miscellaneous cutlery, surgical instruments, marine hardware, harvester machinery, jewelry, plumbing supplies, toys, electrical parts and insulating materials. Experience had taught the petitioner that only a small part of the demands of the die-using industries could be met by the reducing machine. The latter was particularly appropriate and useful for ornamental and other kinds of fine work, but in the case of the greater number and more important of the die-using industries the reducing machine was not adaptable to their needs. The petitioner knew that the demand of the latter industries was for a machine which would cut dies from a master of the same size. The principle involved in the reducing machine was the cutting from a nr iter three to four times the size of the die desired. This machine was too large, expensive, and' necessitated the use of powerful cutting tools.

It was with visions of supplying the needs of the greater number and more important of the die-using industries that the petitioner, prior to 1908, undertook to perfect and construct a machine which would cut dies from a master of the same size. By 1908 it had succeeded in perfecting such a machine, a so-called duplicating machine, to the point where it was enabled to secure a patent. This was a belt-driven machine. In 1910 it secured a patent on a motor-driven machine. Four or five of these machines were manufactured and sold prior to 1913, but little had been done toward marketing them prior to that year, as the petitioner desired to make certain improvements before offering them as a completed and perfected machine.

At March 1, 1913, the petitioner was ready to manufacture and furnish the perfected duplicating machine to the die-using industries. The sales of duplicating machines from the basic date, on to 1922 are set out in the findings .of fact.

The inability of the Board to reach a conclusion as to the March 1, 1913, value of these patents in its opinion in the earlier appeal was due to the deficiency in the evidence as to the earnings which could fairly be allocated to the duplicating machines covered by these patents. Though it submitted evidence as to the earnings of the period July 1, 1913, to December 31, 1922, the petitioner failed to show a proper segregation of these earnings as between the three types of machines sold. This situation does not exist in the present appeal. The facts relating to sales and profits set out in the findings of fact make possible a fair and equitable segregation of the earnings, and when considered together with all the other evidence, enable us to reach a conclusion as to the fair market value of the patents in question at March 1, 1913.

The use of subsequent earnings for the determination of an asset value, at any basic date, is justified, if from past experience and facts definitely known at the time, such earnings might reasonably have been anticipated. Appeal of J. J. Gray, Jr., 2 B. T. A. 672. Considering the circumstances which existed at March 1,1913, as we have previously outlined them, we think the petitioner was in a most favorable position to anticipate the future earnings of these patents; and, therefore, the earnings subsequent to the basic date may be considered in reaching a conclusion as to the value of the patents.

After a careful consideration of all the evidence before us, we have reached the conclusion that the fair value of the two'patents in question at March 1,1913, was $218,000.

At March .1, 1913, patent No. 877,436 had a remaining life of 11 years 10 months and 20 days, and patent No. 956,769 had a remaining life of 14 years 1 month and 1 day. The average remaining life of the two patents at March 1, 1913, was 12 years 11 months and 25 days. The petitioner is entitled to a deduction for the year under consideration, on account of exhaustion of the March 1, 1913, value of its patents, in the sum of $16,787.17.

Judgment will be entered on 15 days’ notice, in accordance with Bule 50.


author: Phillips :

text:
    George H. Fraser, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5929.
    Promulgated April 25, 1927.
    No entry was made on tlie books of account charging off an amount due from a citizen and resident of an enemy country due to the belief of the petitioner that to make such an entry would be to extend credit to such enemy in violation of law. Such account was eliminated from the balance sheet and from credit statements. Held, that under a reasonable construction oi the Revenue Act such debt had been charged off.

      Almet Reed Latson, Esq., for the petitioner.'

      W. Frank Gibbs, Esq., for the respondent.
    The petitioner appeals from the determination by the Commissioner of a deficiency of $1,791 in income tax for 1920 and from the rejection by the Commissioner of a claim for refund of $29,458.29 income tax for 1919. He alleges as error the refusal of the Commissioner to permit the deduction of a debt which he asserts was ascertained to be worthless and charged off during 1919, or, in the alternative, in 1920.
    BINDINGS OB BAOT,
    George H. Fraser, the petitioner, is a resident of the Borough of Brooklyn, City and State of New York, and now is, and during 1919 and 1920 was, engaged in business under the trade name of Kent Mill Co. The petitioner has been so engaged in business for upwards of thirty years. The petitioner’s business is the manufacture of machinery including what is known as a Kent mill, a machine for pulverizing granite and rock for cement. The Kent mill was a patented device, the patents for which were owned by the petitioner. These mills were massive and cost about $2,500 each.
    In or about the year 1905, the petitioner made a contract with one Curt Yon Greuber, a resident and citizen of Berlin, Germany, under the terms of which the petitioner thereafter sold to Yon Greuber mills manufactured by, the petitioner under the patent above described.
    The purchase price of said mills was payable by Yon Greuber in American dollars or their equivalent in German marks.
    Von Greuber maintained his office in Berlin, Germany, and also maintained a separate office in England. Shipments were made by the petitioner to Yon Greuber in Germany and to such other points in Europe as Yon Greuber directed, some shipments being made directly to the customers of Yon Greuber. Yon Greuber’s activities were largely outside of Germany and relatively few of the machines were sold in Germany. The machines were shipped complete in some cases and knocked down in others. Yon Greuber maintained a stock of complete machines, parts, and accessories at various points. When sales were made, the terms of sale were entirely within the discretion of Yon Greuber, the petitioner looking to him alone for compensation. Shipments to Yon Greuber averaged from ten to thirty machines a year.
    At the inception of the relations, payments for machines were made rather promptly but later payments became somewhat slower and at the time of the outbreak of the war between Great Britain and Germany in 1914, Yon Greuber was indebted to the petitioner in the sum of $119,910.82 for machines and parts which had been theretofore shipped to him. The last shipment was made in 1918.
    At the time of the outbreak of the war, the petitioner was in receipt of a letter from Von Greuber indicating that the business was still continuing with good and sound orders for more than $250,000, that Von Greuber had enlisted in the German army and that he had appointed one Hansen, a Norwegian subject, as general director of his business.

      Thereafter and on October 24, 1914, the petitioner received a communication from Hansen to the effect that one Walker, an employee of Von Greuber in charge of the English branch of Von Greuber’s business, had taken over the English assets and intended to conduct the business in his own name for his own account. The letter charged that Walker was unreliable. This was the first indication that the petitioner had received that Von Greuber had suffered a loss of any assets of his business.
    Thereafter and on February 14, 1915, the petitioner received a further communication from Von Greuber indicating that it was doubtful how much longer the business could be kept going and containing a suggestion that the petitioner reduce his account by at least 50 per cent and provide for payments in installments. Von Greuber stated that if this could be done he probably could interest new capital in the venture. This letter indicated the prevalence of propaganda in the German industries against American capital and American products. The petitioner did not accept the proposition.
    From time to time thereafter the petitioner received from various sources information as to German industrial conditions, the existence of an embargo which prevented Von Greuber from shipping machines outside of Germany and the general restriction of industrial enterprises.
    Thereafter and in the year 1917 Hansen, the general director of Von Greuber’s business, called upon the petitioner at his office in New York and told him that unless the petitioner was willing to advance the sum of $20,000 the Von Greuber concern would be unable to carry on. He advised the petitioner that the Von Greuber factory was mortgaged and that the concern itself was heavily in debt and that they had no money with which to meet their obligations. The proposed advance was not made by the petitioner.
    On June 28, 1919, the treaty of Versailles was signed, imposing heavy burdens upon Germany. In July, 1919, petitioner wrote Von Greuber asking how he was and how he was situated.
    In reply the petitioner received a letter dated August 12, 1919, in which it was stated that Von Greuber was a prisoner of war, that it was doubtful how much longer they could keep the business going and that Hansen was trying to get orders. No further orders were ever received by the petitioner. This particular branch of the petitioner’s business was abandoned and no efforts have been made since that time to reinstate it.
    No further incident transpired until the latter part of 1920 when the petitioner received a call from Hansen. Hansen advised the petitioner that Von Greuber’s business had “gone to pot,” that he had lost his plant and. was engaged in engineering, and that he was hardly able to make a living.
    In 1916 the petitioner made a financial statement to the Carnegie Steel Co. in which he included the Yon Greuber account as a part of his assets. These statements were made about every three years. In June, 1919, shortly before the signing of the treaty of Versailles, the petitioner received a communication from the Carnegie Steel Co. requesting a further financial statement. For the purpose of making up this statement, the petitioner took from his books a statement of the debts and liabilities in the form of pencil mem-oranda and the Von Greuber account was eliminated from this memorandum by the petitioner by a line drawn through it. The word “ out ” was written on the margin of the memorandum opposite this item. The financial statement was given to the Carnegie Steel Co. in July, 1919, from which the Von Greuber account was eliminated.
    In ansAver to a request by the Brier Hill Steel Co. in September, 1920, the petitioner furnished a financial statement. The Von Greu-ber account was not included as an asset in this statement.
    The petitioner during all this time made no entries upon his books of account with reference to the Von Greuber item because of his belief that in so doing he would bo violating the provisions of the “trading with the enemy act,” and that marking the same off upon his books was equivalent to giving credit to an enemy. The Von Greuber item was not deducted upon the petitioner’s report for the year 1919 because under the statute he thought it would be necessary to make physical entries in his books in order to charge the same as a bad debt and this the petitioner did not feel free to do. The Von Greuber account was never claimed by the petitioner as a deduction upon any report subsequent' to 1919 or 1920 nor has he at any time received any credit for it. No attempt was made to charge off the Von Greuber account after 1919 because of the petitioner’s firm opinion that his loss had occurred in that year. The petitioner felt free to eliminate the account from his financial statements because that could be accomplished without physical entries upon his books and for the further reason that, as he viewed it, it did not involve a transaction with an enemy.
    On March 27, 1924, the petitioner made an entry upon his journal charging the Von Greuber item of $119,910.82 to profit and loss account as of December 31, 1919. Thereupon the petitioner applied for leave to file an amended return for the year 1919 embodying the Von Greuber deduction.
    The petitioner filed his tax return for the year 1919 showing a taxable net income of $96,742.35, and a taxable liability of $29^458.29. Upon the reaudit by the Commissioner, the return was approved as filed. The petitioner likewise filed an income-tax return for the year 1920 showing a taxable net income of $104,749.79 and a tax liability of $34,119.87. Upon a reaudit the Commissioner determined an increase in taxable income of $2,985 and an additional assessment of $1,791 for 1920. On neither of these did the petitioner claim as a deduction the debt here in question. A claim for refund of 1919 tax was filed claiming such debt as a deduction in that year or in 1920. Such refund was denied and no deduction was allowed by the Commissioner for either year. Notice of the rejection of the claim for refund of 1919 taxes was mailed by the Commissioner to the petitioner on the same date as the letter notifying petitioner of the deficiency for 1920. The petitioner purports to appeal from the determination for both years.
   OPINION.

Phillips :

The Commissioner has moved to dismiss the appeal, so far as it relates to 1919, for want of jurisdiction in the Board to hear and determine the proceeding. The Commissioner has determined no deficiency for that year. He has denied the petitioner’s claim for refund and permitted the tax liability to remain as shown on the return filed. In such circumstances we have no jurisdiction of the proceeding, under the Revenue Act of 1926, whatever may have been the situation under the Revenue Act of 1924. Section 274 (g) of the Revenue Act of 1926; Appeal of R. P. Hazzard Co., 4 B. T. A. 150; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255. The proceeding will be dismissed as to that year.

It is the contention of the petitioner that the indebtedness of Yon Greuber was ascertained to be worthless in 1919, in which year the treaty of Versailles was executed, imposing heavy burdens upon Germany and German industries. He had learned in 1915 and 1917 that has debtor was in financial difficulties but at the time the treaty was signed had no more definite .knowledge of the financial condition of his debtor than in 1917 when he was advised that if he could not advance $20,000, the business of Von Greuber, which was heavily indebted, could not survive. What had happened in the meantime was to him only a matter of conjecture. Shortly after the treaty was signed he wrote Von Greuber and learned that although he was a prisoner of war, his business was still being carried on, although it was doubtful how much longer it could survive. No further investigation was made to determine the' precise financial condition of the debtor. We do not conceive that in such circumstances it can be said that the debt was ascertained to be worthless in that year within the meaning of the Revenue Act.

While the debt is to be deducted in the year in which the taxpayer ascertains its -worthlessness, and some discretion must be given him to act within sound business judgment, it is our opinion that the information in his possession in 1919 was insufficient upon which to ascertain either worth or worthlessness. In 1920, however, petitioner learned that Yon Greuber’s plant had been sold under foreclosure, that his property had been taken to pay his debts, and that he was earning a precarious living in engineering. This constituted sufficient information of the situation of his debtor upon which to act. We have accordingly reached the conclusion that it was in 1920 that the debt was ascertained to be worthless.

The statute, however, requires that the debts shall not only be ascertained to be worthless, but that they shall be “ charged oif within the taxable year.” The statute is silent as to how or where or in what manner they are to be charged off. If no books are kept, where is the charge-off to be made? If books are kept, must it be done by an entry on the books ? Here it is conceded that books were kept and that no charge-off was made thereon until 1924 when the entry was made as of 1919. This entry, made several years after the taxable year involved, and after the books for that year had been closed, seems to us clearly insufficient to meet the requirements of the statute. The only other act to consider was the elimination of the account from the financial statement. While this was first done in 1919, it would seem that under some circumstances a charge-off in a prior year may satisfy the statute, since in such case nothing remains to be charged off within the taxable year. See Appeal of Mason Machine Works Co., 3 B. T. A. 145.

The purpose of the statute appears to be to require that some record be made of the ascertainment of worthlessness. An interpretation of the statute which would deny any deduction except when a charge-off was made upon books of account within the limits of the calendar year, especially when it is considered that closing entries are not usually made until after the close of the year, would work a hardship which we can not believe was intended or is required and would attach to acts which are merely clerical an importance as great as is to be given to the substance of the situation. The statute must be given a reasonable interpretation, if possible. Clearly it was the intent that a deduction should be allowed for worthless debts in the year in which worthlessness was ascertained and that the charging off of the debt might take other forms than entries on the books of the taxpayer. Milling Moore Mercantile Co. v. Commissioner, 5 B. T. A. 1060. We are of the opinion that the petitioner met the requirements of the statute when he eliminated the account from his financial statements and that he is entitled to the deduction in 1920.

Decision will be entered on 10 days notice, v/nder Rule 50,


author: SteRNHagen:

text:
    Oak Woods Cemetery Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7956.
    Promulgated April 25, 1927.
    Computation of the “ wastage allowance ” allocable to cemetery lots sold after March 1, 1913, out of a tract owned and partly improved prior thereto, held erroneous.

      Louis J. Behan, Esq., and John A. Stolp, O. P. A., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    Deficiencies aggregating $17,869.51 for the fiscal years ended February 28, 1919, 1920, 1921, and 1922. Respondent included in petitioner’s income certain amounts received for the perpetual care of the lots, and at the hearing confessed error as to this. Certain amounts deducted as “wastage” for roads and> pathways were disallowed, and this is the only issue.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under a special charter granted by the General Assembly of the State of Illinois. It has its principal place of business at Chicago, where it is engaged in the business of conducting a cemetery.
    The total area of the cemetery was and is 7,705,042.50 square feet. Of this area 577,018.66 square feet was covered by three artificial lakes. The balance of the land was laid out in sections and some portion was occupied by roadways between the sections. Some of these sections were subdivided into lots, while other sections were not subdivided or improved.
    About 1920 the petitioner had its vacant lands appraised as of March 1, 1913. The vacant land which had been subdivided had an area of 816,355.8 square feet which was given values per square foot ranging from $1.50 to $3, varying according to the section in which it was located. The land which it classified as “ unsub-divided” had a total area of 639,629 square feet, and other land which it classified as “ unimproved ” had an area of 1,258,492 square feet. Both these latter areas were valued at $3 per square foot. Each of the sections denominated “ unsubdivided ” or “ unimproved” was valued as a whole, including, any portion thereof which might subsequently be laid out for paths and driveways. The number of square feet of land in each of the above three classifications of land and of each of the sections composing each group was accepted by the respondent, as well as the values placed on the subdivided land. He, however, lowered the value per square loot of the “ unsubdivided ” and “ unimproved ” land from $3 to $2, which determination was accepted by the petitioner.
    In computing the tax for the years involved in this proceeding, the petitioner, in determining its gain or loss upon the- sale of lots in the “ unsubdivided ” and “ unimproved ” sections, added to the March 1, 1913, value of each lot that portion of the value of the roads and pathways laid out which it considered as properly allo-cable to each lot. It accomplished this by adding 20 per cent to the March 1, 1913, value, which it termed a wastage allowance.
    Section “ T ” of the cemetery, which was classed as “ unimproved,” has an area of 121,433 square feet. In 1912 the petitioner had an offer for this section from a company which desired to utilize the entire section by erecting a community mausoleum thereon. If the transaction had been consummated there would have been no wastage in this section.
    Section “ M ” of the cemetery, which was classed as “ unimproved,” has an area of 415,860 square feet. In the lower portion of this section 6,608.68 square feet have been laid out as pathways.
    At the time of the hearing there had been laid out in roads 563,013 square feet and in pathways 519,844.86 square feet. If the remaining sections of the cemetery are laid out on the same basis as those now laid out, there will be an additional wastage.
   OPINION.

SteRNHagen:

The petitioner owned a tract of land devoted to cemetery purposes. By March 1, 1913, some improvements had been made. The principal roadways around the sections had been laid out, lakes had been completed, some of the sections had been subdivided into lots and pathways, and some of the lots had been sold. Other sections remained unsubdivided and unimproved. The value of the property on March 1, 1913, is agreed, but the petitioner now contends that such value, in so far as it applied to the sections not then subdivided, included land which would be subsequently used for pathways and other unsalable purposes, that this amounted approximately to 20 per cent of the value of the whole, and that its cost should be spread over and added to the cost or basis of lots sold, to arrive at the basis for determining the profit on each such lot. This is the so-called “wastage” allowance in controversy.

The appraisers testified that in -valuing each section they gave each square foot therein its value. The aggregate of the square foot values of each section was then found to be the total value of the section, with no allowance for pathways or other “ wastage ” within the section. It seems clear that., in theory this value of the whole section should be used as the basis of the gain on the salable lots only, and that the gain on each lot should be reduced by the proportionate part of the.total wastage within the section. If this theory only were in issue, petitioner’s claim would be readily sustained. -

But the evidence shows that petitioner, is claiming too much. Twenty per cent appears to be the percentage of value reflecting the wastage of the entire cemetery tract, including the main roadways, lakes and other nonsalable land already laid out on March 1, 1913. The valuation of March 1, 1913,- did not include them. It only included the subsequent further wastage in each unsubdivided and unimproved section, which was loosely said to be “4 or 4% per cent of the entire tract.” Plainly the wastage of main roadways, lakes, etc., which had taken place prior to March 1, 1913, could not be regarded as capital at that time and may not be recovered through a reduction of the gain on the lots subsequently sold in the unsub-divided sections; and this is what petitioner seeks in its claim to a 20 per cent allowance. The respondent is on this issue sustained.

Judgment will be entered on W days' notice, wider Rule 50.


author: Phillips:

text:
    John C. Lee, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Jeanne Lee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 5984, 5985.
    Promulgated April 25, 1927.
    Where income is earned from sources without the United States by a nonresident alien, such income does not become taxable although such alien, prior to the close of the taxable year, changes . his status to that of a resident alien.

      George 8. AtMnson, Esq., for the petitioners.

      S. S. FauTIcner, Esq., for the respondent.
    The deficiencies in controversy herein are income taxes for 1922 in the amount of $114.87 for John C. Lee and $87.82 for Mrs. Jeanne Lee. The two appeals arise from the same state of facts and were consolidated for hearing and decision. They raise the question whether an alien is to be taxed upon income earned from sources without the United States while a nonresident.
    FINDINGS OF FACT.
    The petitioners are and were, during the taxable period involved, husband and wife. During the taxable year involved the petitioners were citizens of Great Britain and prior to July 31 of that year were residing in England. From January 1, 1922, tó May 31, 1922, the petitioner, John C. Lee, was employed by an American firm as its European representative and received in that year for services performed wholly without the United States $2,076.25 of salary and $1,135.50 in commissions. Oh July 31, 1922, the petitioners came to the United States and established their residence in Dallas, Tex.
    During the taxable year and while a resident of Dallas Tex., petitioner, John O. Lee, was paid a salary of $2,600 for services rendered in the United States and realized gains of $881.38 from trading in cotton.
    During 1922 the petitioner, John O. Lee, paid an income tax to Great Britain of $266.02, which was claimed as a credit against the amount of tax shown on the returns. "On December 31,1922, the petitioners had two children under the age of eighteen years.
    In March, 1923, the petitioners filed separate individual income-tax returns with the Collector of Internal Revenue at Dallas, Tex., dividing their income between them. No income taxes for 1922 have been assessed against or paid by either of the petitioners.
   OPINION.

Phillips:

It is the contention of the petitioners that the salary and commissions earned by the petitioner, John C. Lee, for services performed wholly without the United States while he was a nonresident alien are not subject to tax. The Commissioner, on the other hand, contends that since the petitioners were resident aliens on the last day of the taxable year they must include such amount in their income. The Commissioner has filed no brief advising us why he believes his contention to be well founded and the examination we have made of the law discloses nothing to- justify the position taken by him.

The Revenue Act of 1921 in section 212(a) provides that in the case of an individual the term net income ” means the gross income as defined in section 213, less the deductions allowed by section 214. Section 213(c) provides as follows:

In tlie case of a nonresident alien individual, gross income means only the gross income from sources within the United States, determined under the provisions of section 217.

There is no question that at the time the amounts in question became income, the petitioners were nonresident alien individuals and as such were exempt from any tax upon this amount. There is nothing in the law providing that if they became resident aliens, such income shall become subject to tax. It is a familiar rule of statutory construction that taxing statutes should not be extended beyond their clear import.

It might be pointed out that if the position of the Commissioner is correct and the tax liability is to be determined by reason of the status at the close of the year, one who has been a resident alien, and as such subject to tax on income from all sources, could escape liability on income from sources outside.the United States by becoming a nonresident prior to the close of the taxable year. This construction, however, would be in contravention of section 250(g) of the Revenue Act of 1921, providing for the termination of the taxable year by the Commissioner in the event that a taxpayer intends to depart from the United States.

Counsel for the petitioners points out in his brief that section 216(f) of the Revenue Act of 1921 provides as follows:

The credits allowed by subdivisions (e), (d), and (e) of this section shall be determined by the status of the taxpayer on the last day of the period for which the return of income is made * * *.

This appears to be the only provision of the statute providing that the status of the taxpayer on the last day of the taxable period is to govern in computing tax. The subdivisions enumerated do not cover the case of a nonresident, alien who becomes a resident alien. Exprés-alo'imius est exclusio alterius.

Reading the statute as a whole we are of the opinion that income received by a nonresident alien from sources without the United States is not taxable even though such person may become a resident alien subsequent to its receipt and prior to the close of the taxable year.

The deficiencies are redetermined to be $3.63 as to each of the petitioners.

Decision will be entered accordingly.