text:
    T. O. Cremin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9198.
    Promulgated January 25, 1927.

      R. L. Slaughter, Esq., for the petitioner.

      R. A. Littleton, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax for the year 1920 in the amount of $1,447.06, and an over-assessment of $1,570.89 for the year 1919.
    FINDINGS OF FACT.
    The petitioner is an individual, residing at Tulsa, Okla.
    During the years 1919 and 1920 the petitioner was a stockholder of the Eastern Torpedo Co., a corporation, and was also an officer of the company, at a salary of $10,000 per year. He was not, however, actually paid any salary for the year 1919 until January 1, 1920, at which time he was paid the entire amount of $10,000. The corporation, during the year 1919, had earned sufficient money to pay the petitioner’s salary and the full amount thereof was available for that purpose in that year. The corporation, in its income and profits-tax return for the year 1919, claimed no deduction on account of salaries paid or accrued to its officers, and in fact did not actually pay or accrue any such salaries in that year. In the year 1919 the corporation paid the petitioner $4,500, which was due him as salary for the year 1918. In adjusting the tax liability of the corporation for the years 1916 to 1919, inclusive, the Commissioner, in the year 1925, permitted the corporation to rewrite its books upon what is known as the accrual basis, to file amended returns, and to accrue upon its books and to deduct from gross income for the year 1919 the amount of $10,000 paid to the petitioner on January 1, 1920, as. salary for the year 1919.
    In the year 1920 the Eastern Torpedo Co. was dissolved and its assets were distributed to its stockholders, of which the petitioner was one, as liquidating dividends. The corporation did not set up a reserve to take care of additional income and profits taxes that were subsequently, in the year 1925, found to be due for the years 1916 to 1919, inclusive, in the amount of $12,972.86. On the liquidation of the corporation, the petitioner received his pro rata share of the assets, and in the year 1925 he paid, on behalf of the dissolved corporation, his pro rata share, or $3,154.05, of the additional taxes for the years 1916 to 1919, inclusive. In his income-tax return for 1920 he included in his gross income the entire amount received by him as a liquidating dividend from the corporation.
    The petitioner kept his books and filed his income-tax returns for the years 1919 and 1920 on the cash receipts and disbursements basis. Upon audit of the returns for these years, the Commissioner included as income for the year 1919 the amount of $4,500 paid to the petitioner in that year by the Eastern Torpedo Co., as salary for the year 1918, and included in income for the year 1920 the amount of $10,000 paid to the petitioner in that year by the Eastern Torpedo Co. as salary for the year 1919.
   OPINION.

Marquette:

The facts in this proceeding are identical with those in E. F. Cremin v. Commissioner, 5 B. T. A. 1164, decided this day, except in that proceeding there was also involved the question of the amounts of deductions for depreciation of oil-well drilling equipment that should be allowed to certain partnerships of which E. F. Cremin was a member. Upon the authority of our decision in E. F. Cremin v. Commissioner, we hold (1) that we have no jurisdiction of this proceeding in so far as it relates to the petitioner’s tax liability for the year 1919; (2) that the amount of $10,000 paid to the petitioner on January 1, 1920, by the Eastern Torpedo Co., as salary for the year 1919, was income to him for the year 1920; and (3) that the amount included in the petitioner’s income for the year 1920, as liquidating dividends received from the Eastern Torpedo Co., should be reduced by the amount of income and profits taxes that were subsequently paid by him for the company.

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


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Hart-Wood Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2984.
    Promulgated January 25, 1927.
    1. Certain losses sustained in business operations allocated to the years 1919 and 1920 and allowed as deductions from petitioner’s gross income for such years.
    2. Loss claimed on account of construction of a building on land held on an oral month-to-month lease not allowed in the absence of evidence establishing petitioner’s rights under such oral lease or agreement.
    3. Where a debtor without resources notifies his creditor of his intention to commit suicide and thereafter disappears, the debt becomes worthless and may not be reduced to the extent of the face value of a policy of insurance on the life of the debtor in which the creditor is named as beneficiary, since ultimate collection by the creditor of the proceeds of the policy is too uncertain to warrant consideration of the policy as a security of value.

      G. V. Rowe, G. P. A., and Osear T. Barber, Esq., for the petitioner.

      A. Galder Machay, Esq., for the respondent.
    The Commissioner has determined deficiencies in income and profits taxes for the years 1919 and 1920, in the respective amounts of $10,615.04 and $2,224.51, or a total of $12,839.55, of which approximately $7,800.15 is in controversy. The petitioner alleges that the Commissioner erred in disallowing certain deductions from its gross income for the taxable years which, it avers, were business losses and bad debts. It admitted at the hearing that the amount of $7,300 was properly disallowed and added to its gross income for the year 1919.
    FINDINGS OF FACT.
    At the time involved in this proceeding, the petitioner was a Washington corporation, with its principal office at San Francisco, Calif., where it was engaged in the wholesale and retail lumber trade; Bergren and Sons was a partnership, engaged in building operations in California, with headquarters at San Francisco; and the Fidelity & Deposit Co. was a bonding corporation, with its principal office at Baltimore.
    Bergren and Sons had contracts with the United States for the construction of buildings at Mare Island and with the State of California for the construction of buildings at Napa and Healds-burg. The Fidelity & Deposit Co. was surety on the bonds given by Bergren and Sons to assure the discharge of their obligations under such contracts. The petitioner, which had agreed to sell lumber to Bergren and Sons for use in its building operations, had made a bond to indemnify the Fidelity & Deposit Co. for any losses the latter might sustain on account of its surety contracts for Bergren and Sons.
    Sometime in 1919, finding that Bergren and Sons were hopelessly involved and actually insolvent, and that it must suffer heavily on account of their inability to meet their contractual obligations, the petitioner took over the Napa State Hospital construction and completed the work. In November, 1918, the petitioner arranged with L. G. Bergren to execute a deed in its favor for certain real estate in San Francisco, in partial recoupment for the losses it might sustain on account of the failure of the partnership to meet its obligations. The deed was in fee and was executed November 26, 1918. The property was mortgaged for about $6,000 and the grantee assumed the mortgage. It was known to both the parties in interest that the losses would exceed the value of the property conveyed and no arrangement was made looking to the return of any part of the value of the property deeded. The market value of the petitioner’s equity in the property at the date of acquisition was $7,300, and that amount was realized from it by sale in 1921.
    During the year 1919 two of the Bergren contracts were closed out at a loss, which was paid in full by the Fidelity & Deposit Co., and the petitioner made a compromise settlement of its obligations as indemnitor and paid that company 75 per cent of the loss sustained in the amount of $12,535.96, and, in its income-tax return for that year, deducted the amount so paid as a loss sustained during the taxable year. The Commissioner disallowed the deduction and added the amount thereof to the petitioner’s gross income for such year. In 1920 a third Bergren contract was closed out and the loss sustained thereon was paid in full by the Fidelity & Deposit Co. In a compromise settlement of its obligations under the indemnity bond, the petitioner paid 75 per cent of this loss in the amount of $9,859.39 to said Fidelity & Deposit Co. in 1920, and deducted the same from its gross income in its income and profits-tax return for 1920 as a loss sustained during the taxable year. The Commissioner disallowed this deduction and added the amount thereof to the petitioner’s gross income for such year.
    In 1919 the petitioner erected a planing mill, at a cost of $2,322.80, on land which it occupied and used by virtue of an oral lease from month to month from the Southern Pacific Railroad Co., the owner.
    At the beginning of the year 1920, J. S. Rae owed the petitioner $9,999. The only security for this indebtedness was an insurance policy for $5,000 on the life of Rae, in which the petitioner was named as beneficiary. During the year 1920, the petitioner received a message from Rae, intimating that he intended to commit suicide, and since then petitioner has not heard from him. The insurance policy was issued less than one year before Rae’s disappearance. The petitioner realized nothing from this policy during the taxable year, charged ofl the total amount of the Rae account as a bad debt in 1920, and deducted it from its gross income in its income and profits-tax return for that year. The Commissioner disallowed $5,000 of this deduction.
   OPINION.

Lansdon:

The facts as to the first point in this proceeding are not in dispute. The petitioner paid the amounts of $12,535.96 and $9,859.39, respectively, in the years 1919 and 1920, to the Fidelity & Deposit Co. in discharge of its indemnifying bond to that concern on account of the Bergren and Sons contracts. In 1918, Bergren and Sons deeded to it property which had a fair market value of $7,300, which was to be applied on their obligation to the petitioner. The only issue here is whether such property was received, as suggested by the Commissioner, as security for the entire obligation of Bergren and Sons to the petitioner, or as a part payment of obligations known to be accrued at the time of transfer. The evidence convinces us that this payment was unconditional and that title passed as the result thereof. The petitioner concedes that its deduction from gross income for 1919 should be reduced by the amount of $7,300. On this point we are of the opinion that the petitioner is correct. It is entitled to deduct from its gross income in its income and profits-tax returns $12,535.96, less $7,300 for 1919, and $9,859.39 for 1920, as losses sustained during such years.

The evidence is conclusive that the petitioner expended the amount of $2,322.80 in 1919 in the construction of a building on land which it did not own, but which it occupied and used under an oral lease from month to month. This item was not included in any form in the petitioner’s income and profits-tax return for 1920, and so has not been allowed or disallowed by the Commissioner, either as an operating loss or as an ordinary business expense. The petitioner now pleads that,- as it had no lease on the land authorizing the use or occupancy thereof, the building, under the laws of California, became the property of the owner of the land, and its cost became a total loss to the petitioner at date of completion. It admits that it had some sort of oral lease or agreement with the owner of the land. In the absence of evidence, we are unable to determine the nature or terms of such agreement, or the rights of the petitioner thereunder, and we can not sustain its contention on this point.

In the year 1920, Eae owed the petitioner $9,999, and had no resources. He disappeared in May and sent the petitioner a message that he proposed to commit suicide. The petitioner held an insurance policy on the life of Eae taken out in March of 1920, in which it was designated as the beneficiary. The Commissioner does not dispute that Eae was unable to pay or that, as to him, the debt was worthless, but contends that the life insurance policy was security for such debt in the amount of $5,000, and that, to that extent, the debt was not worthless in the taxable year. The ultimate recovery of any part of the debt by the collection of the insurance policy depends on so many contingencies that it is hardly possible to regard such policy as security of any value. There may be a clause in the policy providing for cancellation in the event of suicide within twelve months of its issue. If death is not proved, seven years must elapse before it can be conclusively presumed. Calif. Code of Civil Procedure, 1923, sec. 1963, subdiv. 26. During such seven years the petitioner must keep the policy alive by the payment of annual premiums. Eae may not be dead or may reappear before the end of the seven-year period. We are of the opinion that the petitioner is entitled to deduct the entire amount of $9,999 from its gross income in its income and profits-tax returns for 1920.

Judgment will be entered on %0 days’ notice, under Rule 50.

Murdock concurs in the result only.


text:
    Appeal of First National Bank of Goodland, Kansas.
    Docket No. 1280.
    Promulgated January 25, 1927.
    1. Loss on account of unextinguished cost of discarded parts of a. reconstructed building determined and allowed.
    2. Loss on account of unextinguished cost of discarded furniture disallowed.

      H. L. Washington, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the Commissioner.
    The Commissioner has determined a deficiency in income and profits taxes for the year 1921 in the amount of $325.42. The deficiency arises from the disallowance of a deduction of $5,021.35 claimed on account of a loss sustained by the petitioner in rebuilding and refurnishing its place of business, $2,000 for rebuilding, and $3,021.35 for refurnishing.

      FINDINGS OF FACT.
    The petitioner is a national banking corporation with its principal office at Gooclland, Kans. In 1901 it purchased a brick building which it used as its place of business continuously until some time in 1921. The parties agree that the cost and capital addition to the building amounted to $6,833.14; that it had a remaining useful life of 60 years; and that its unextinguished cost at December 31, 1920, was $4,382.40.
    The petitioner remodeled and reconstructed its building in 1921, taking off the roof and tearing down and removing practically all of three of the walls. Only an inside or party wall was left standing. The building was changed from a two-story to a one-story structure. The reconstruction was for the purpose of securing better office room in which to conduct the banking business of the petitioner.
    In its income and profits-tax return for 1921, the petitioner deducted the amount of $2,000 from its gross income on account of unextinguished cost of the building at the date of reconstruction, and the amount of $3,021.35 on account of the unextinguished cost of furniture discarded in that year. These deductions were disallowed by the Commissioner.
   OPINION.

Lansdon:

The proof of the cost of the building, the nature of its construction, and the date of acquisition is conclusive. The Commissioner has allowed exhaustion, wear and tear at the rate of 2 per cent on the cost in 1901, and the petitioner agrees that such rate is reasonable. We are convinced that the unextinguished cost of the building at December 31,1920, was not less than $4,382.40, and that the salvage value of that part of such building utilized in the new structure was not more than $1,000. We are of the opinion, therefore, that the petitioner is entitled to deduct the amount of $3,842.40 from its gross income for the taxable year on account of loss sustained in the partial demolition and reconstruction of its building. Appeal of First National Bank of Evanston, 1 B. T. A. 9; Appeal of Steinbach Co., 3 B. T. A. 348.

The petitioner failed to prove the cost, the value at March 1, 1913, or the salvage value of the furniture and fixtures discarded in 1921. On this point the determination of the Commissioner is approved.

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


author: Marquette:

text:
    First State Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2581.
    Promulgated January 25, 1927.

      R. G. Wiley for the petitioner.

      Bruce A. Low, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax for the year 1921 in the amount of $55.80.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of Texas in the year 1917 and engaged in the banking business at Tell. During the years 1917 to 1921, inclusive, the petitioner purchased certain furniture and equipment as follows:
    Safe-$125.00
    Furniture and fixtures_ 521. 00
    Adding machine_ 290. 00
    Typewriter- 50.10
    Desk-+- 15.00
    Lighting plant-!_ 360. 00
    Posting machine_ 700.00
    Desk- 97.10
    Check tray_ 10. 58
    The adding machine and the posting machine each had a useful life of 6 years; the useful life of the typewriter was 5 years, and the useful life of the furniture and fixtures and desks was 10 years. The useful life of the safe and lighting plant is not shown by the record. The respondent has refused to allow the petitioner any deduction from gross income for the'year 1921 for the exhaustion, wear and tear of the furniture and equipment herein listed.
   OPINION.

Marquette:

We are satisfied from the evidence that the petitioner’s furniture and equipment was acquired by it subsequent to March 1, 1918, and that its cost and useful life were as set forth in the findings of fact. Petitioner is therefore entitled to a deduction for the exhaustion, wear and tear of its furniture and equipment computed on the basis of such cost and useful life. In all other respects the Commissioner’s determination is approved.

The petitioner also alleges that it is entitled to deductions on account of certain worthless debts, but there is nothing in the record from which we can ascertain the facts relative to these alleged worthless debts.

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


text:
    Hiram T. Hunter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8228.
    Promulgated January 25, 1927.

      Hiram T. Hunter pro se.

      Bruee A. Low., Esq., for the respondent.
   Marquette:

This is a proceeding for the redetermination of, a deficiency in income tax for the years 1920 and 1921 in the amount of $166.23. The question involved is the amount of gain realized by the petitioner on the sale of certain real estate in the year 1921.

FINDINGS OF FACT.

The petitioner is an individual residing in Enid, Okla. In the year 1921 he sold for $15,000 a cértain tract of land, consisting of 160 acres, which he had acquired prior to March 1, 1913. The respondent determined that the value of the land on March 1, 1913, was $9,790 and that the petitioner realized a profit of $5,210 from the sale thereof; and he accordingly included that amount in the petitioner’s income for the year 1921. There is nothing in the record that would justify a finding that the value of the land on March 1, 1913, was other than as determined by the respondent.

Judgment will be entered for the respondent.


author: SMITH:

text:
    Pearsall & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12722.
    Promulgated January 26, 1927.
    The amount of debts ascertained to be worthless and charged off in 1920 determined.

      Edward G. Graft, G. P. A., for the petitioner.

      F. O. Graves, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $6,469.69. The question in issue is the right of the petitioner to deduct from gross income $35,577.24 for bad debts charged off within the year, in addition to the amount of $5,288.46 allowed by the Commissioner.
    FINDINGS OF FACT.
    The petitioner is a North Carolina corporation engaged in the sale of fertilizers and fertilizer materials. It had been in business for some ten or fifteen years prior to 1920. Its sales of fertilizers were to farmers, principally for the growing of cotton and tobacco. Liberal credit was extended to purchasers. In some cases the credit was extended upon the reputation and past experience of the petitioner with the purchaser, in others upon their financial standing, and in others upon crop liens and secured notes. The cotton and tobacco crops for 1920 turned out very poorly and sold at very low prices, with the result that farmers were generally unable to pay their debts from crop returns. At the end of the year 1920 petitioner’s notes receivable amounted to $111,579.33, and its accounts receivable at December 31, 1920, prior to charging off any worthless debts, amounted to $39,222.71. All of the notes receivable had been given in 1920 and matured prior to December 31, 1920. The petitioner made every reasonable effort to collect its notes receivable and accounts receivable during the year 1920. It made investigations of the records at the county seats in which its debtors lived, got information by personal visits as to the ability of its debtors to pay, checked up the crops where it had crop liens, and obtained the advice of the best attorneys not only in its home town, but in adjoining towns where the attorneys knew the conditions and the ability of the parties to pay. As a result of its investigations the petitioner reached the conclusion prior to December 1, 1920, that $29,691.48 of its notes receivable and $11,174.22 of its accounts receivable were bad and uncollectible, and it charged such bad and uncollectible notes and accounts, in the total amount of $40,865.70, to profit and loss in 1920 and claimed that amount as a deduction from gross income in its income-tax return for that year.
    In the audit of petitioner’s tax return for 1920, the Commissioner addressed a letter of inquiry to the petitioner asking for information as to how the worthlessness of the notes receivable and accounts receivable was determined, and the answer received showed an itemized statement of the notes and accounts and the year in which many of them were paid and collected. The Commissioner noted that a great majority of the accounts included in the list were collected in 1921 to 1925, inclusive. The Commissioner went over the list and out of the total selected the accounts upon which no collection had been made, and allowed such total, in the amount of $5,288.46, as a deduction from gross income and disallowed the deduction of $35,577.24.
    In 1921 and subsequent years the petitioner did not cease its efforts to collect all outstanding accounts. In some cases it made additional sales and extended further credit to its debtors and took back a crop lien note for the sale of fertilizer plus the amount of the indebtedness of the purchaser as of December 31,1920. Wherever the petitioner received cash or a renewal note in payment of a note or account that had been charged off in 1920, such amount was restored to the books of account and was taken up in income in the year for which the cash or note was received. The records of Pearsall & Co. disclose that notes and accounts charged off in 1920 were put back through the books in cash and renewals as follows:
    1921-$18, 942. 94
    1922- 4, 986.49
    1923- 4,155. 50
    1924- 3, 507.15
    1925- 409.67
    32,001.75
   OPINION.

SMITH:

At the hearing of this appeal the Commissioner admitted the right of the petitioner to deduct from gross income for the year 1920, in addition to the amounts allowed by the Commissioner, the following:

Auditing services contracted and paid for in 1920_$550. 00
Depreciation disallowed_ 33.99
Additional depreciation_ 15.55

The only question submitted to the Board for its consideration is the right of the petitioner to deduct from gross income of 1920 $35,577.24 for bad debts disallowed as a deduction by the Commissioner, upon the ground that they were not ascertained to be worthless in 1920. The evidence satisfies us that the accounts charged off as worthless at December 31, 1920, were ascertained to be worthless in 1920 within the purview of section 234(a) (5) of the Revenue Act of 1918.

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

Trammell dissents.


author: Murdock:

text:
    Providence Coal Mining Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7199.
    Promulgated January 26, 1927.
    The amount paid in 1923 in settlement of a damage suit, instituted in December, 1921, growing out of the wrongful mining of another’s coal, was not deductible from 1920 income.

      Lee I. Park, Esq., for the petitioner.

      M. E. McDoweU, Esq., for the respondent.

      The taxes in controversy are income and profits taxes in the amount of $74.46 for the calendar year 1919, and $298.27 for the calendar year 1920.
    The respondent in his answer admitted that the depletion allowed in determining the deficiencies was in error and that the depletion rate should be 2.54 cents per ton, instead of the rate used in determining the deficiency. There remains for our consideration the alleged error of the Commissioner in refusing to allow a deduction of $4,500, which the petitioner claimed in 1923 on an amended return for the year 1920, as additional cost of coal removed in that year, under section 234(a) (1) of the ^Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is a Kentucky corporation with its principal office in the City of Providence. During the year 1919 it removed from its leasehold 153,249.50 tons of coal, and during the year 1920 it removed therefrom 173,907.55 tons of coal. The Commissioner applied a depletion rate of 2.4 cents per ton for 1919 and 2.06 cents for 1920. The correct depletion rate for each of the years 1919 and 1920 was 2.54 cents per ton.
    On January 1, 1919, the petitioner owned a leasehold of coal property in Webster County, Kentucky, with the exclusive right to mine the coal. Some time later, while it still owned the leasehold, the petitioner, by mistake, mined and sold some coal underlying a cemetery, and reported as income' for that year the money received from the sale. The cemetery contained one acre of ground and the owner, D. H. Cullen, had reserved and owned the coal thereunder.
    Some time in 1921, the petitioner first knew it had mined another’s coal. On December 22, 1921, the owner of the cemetery brought suit in the Circuit Court of Webster County, Kentucky, for damages for removal of the coal. The case was tried in April, 1922, at which time the jury returned a verdict for the plaintiff in the sum of $9,000 and judgment was entered on the verdict. On March 16, 1923, while an appeal was pending, the petitioner settled the suit and satisfied the judgment in full by paying $4,500 to the plaintiff.
    The petitioner thereupon filed an amended income-tax return for the year 1920, claiming the $4,500 paid in settlement of the suit as additional cost of coal removed and sold in 1920. The respondent refused to allow any part of the $4,500 as a deduction.
   OPINION.

Murdock:

The answer admits that an incorrect depletion rate was used in calculating the deficiencies for the years in question and that the correct rate is 2.54 cents per ton. We have found the tonnage mined and it only requires a mathematical calculation to arrive at the proper depletion deduction for each of the two years.

The respondent denied that the coal underlying the cemetery was mined in 1920. It was then incumbent upon the petitioner to prove this point as the first step to entitle it to the deduction of $4,500. Only one witness was called — the president of the petitioner. On direct examination he said that the coal was mined in 1920, but on cross examination, as to the year, he used such phrases as “ I am not positive about it”; “We are not absolutely positive about that”; and, finally, “ I am pretty sure that it was.” Such doubtful statements do not convince us that the coal was mined in 1920.

We, therefore, must approve the determination of the Commissioner on this point over any contention which the petitioner might advance. If we were satisfied, and we are not, that the entire amount, or a definite part of it, represented cost of goods sold, it would not be a question of deduction, but rather a question of reducing the income reported for the year in which the coal was mined by an amount which never should have been included in that income. But we can not do this in the present case, if for no other reason than that we do not know the year in which the coal was mined.

The amount is not deductible under section 234(a)(1), since we know that for income-tax purposes the petitioner neither paid nor incurred the amount in the year 1920, for in that year it did not know it had mined another’s coal. Neither is it deductible as a loss in 1920, under section 234(a). Appeal of New Process Cork Co., 3 B. T. A. 1339; Appeal of Bump Confectionery Co., 4 B. T. A. 50; Appeal of Hamler Coal Co., 4 B. T. A. 947. See also Malleable Iron Range Co. v. United States, 62 Ct. Cls. 425.

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

Phillips concurs in the result only.


author: Littleton:

text:
    Mort L. Bixler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 936.
    Promulgated January 26, 1927.
    The facts in this proceeding fail to establish that amounts expended for railroad fare, meals, lodging, and laundry are ordinary and necessary expenses paid or incurred in carrying on a trade or business, within the purview of section 214 (a) (1) of the Revenue Act of 1921.

      Mort L. Bixler pro se.

      Henry Ravenel, Esq., for the respondent.

      The Commissioner determined a deficiency of $40.31 for the calendar year 1922, which the petitioner claims was erroneous for the reason that he was not allowed a deduction of $1,068 expended for railroad fare, lodging, meals and laundry.
    FINDINGS OF FACT.
    During the year 1922 petitioner maintained a residence at Mobile, Ala., at which place his family remained throughout the year. It was and had been his practice to obtain contracts for the organization and management of state and municipal fairs and expositions, that is to say, he sought employment by the officers or committee in charge of a particular state or municipal fair or exposition, as manager, at the best salary he could obtain. The terms and conditions of petitioner’s employment were embodied in a contract between such officers or committee and himself, and covered the period during which the fair or exposition was to be held. Prior to 1922 the contracts of employment usually covered a period of one year. During the year 1922 he was paid a fixed salary, and upon entering upon the discharge of the duties of his employment he remained at his post of duty at the place where the fair or exposition was being held. He paid his railroad fare in traveling from Mobile, where his family resided, to the point of his employment, as well as his personal living expenses while there. When his contract of employment to manage a fair ended, or in the event of his resignation, petitioner sought employment as manager of a fair or exposition in some other State or municipality.
    Throughout the year 1921, and on April 15,1922, petitioner was in the employ of the Florida Parishes Fair, at Hammond, La., at a fixed salary of $3,000 per annum. While he was so employed he made two or three trips to visit his family in Mobile. Shortly prior to April 15, 1922, he learned that the Houston Fair and Exposition at Houston, Tex., was desirous of obtaining the services of someone, whereupon he went from Hammond to Houston to investigate the matter and to confer with those in charge of the fair with the view of being employed by them. As a result of the conference, a contract was entered into between the parties under the terms of which petitioner was employed at a fixed salary of $5,000 per annum. Petitioner immediately returned to Hammond, resigned his position as manager of the fair at that point on April 15,1922, and forthwith proceeded to Houston and entered upon the discharge of his duties at that place. While at Houston petitioner paid his own living expenses. On one occasion he went to Mobile to visit his family. His contract of employment with the Houston Fair ended December 15, 1922, at which time petitioner returned to his home in Mobile.

      During the year 1922 petitioner was conducting no business at Mobile, Ala. During the entire year 1923 he was in the employ of the Gulf States Fair at Mobile, Ala.
    During the year 1922 petitioner expended $1,068 for railroad fare, lodging, meals, and laundry. Of this amount $191 was for railroad fare in going from Hammond to Houston and return in connection with obtaining employment; Hammond to Houston to enter upon his new employment; Houston to Mobile to visit his family and return, and from Houston to Mobile upon the' completion of his work for the Houston Fair. The remainder of the $1,068, or $877, represented the amount expended for meals and laundry while employed at Hammond, and lodging, meals, and laundry at Houston. Petitioner was not reimbursed by his employers for these expenses.
   OPINION.

Littleton:

Petitioner claims that the amount of $1,068 was expended in the pursuit of a trade or business and was a proper deduction from his gross income for the year 1922. He did not carry on or conduct any trade or business during the year 1922 at Mobile, Ala., his permanent place of abode. He claims, therefore, that amounts expended for railroad fare, meals, lodging, and laundry were deductible as expenditures “ while away from home in the pursuit of a trade or business.” Section 214 (a) (1) of the Bevenue Act of 1921 provides:

(a) That in computing net income there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

Section 215 (a) (1) of this Act provides:

(a) That in computing net income no deduction shall in any ease be allowed in respect of—
(1) Personal, living, or family expenses.

We think the Commissioner in this case correctly held that railroad fare and living expenses paid out by this petitioner during the year 1922 were not deductible from gross income under the provisions of the above-quoted sections. Section 214 (a) (1) -authorizes a deduction only of ordinary and necessary expenses in carrying on any trade or business, and in this classification are included salaries paid or incurred and traveling expenses, including meals and lodging while away from home in the pursuit, or carrying on, of such trade or business. In the opinion of the Board, traveling and living expenses are deductible under the provisions of this section only while the taxpayer is away from his place of business, employment, or the post or station at which he is employed, in the prosecution, conduct, and carrying on of a trade or business.' A taxpayer may liot keep his place of residence at a point where he is not engaged in carrying on a trade or business, as this petitioner testified was true in this instance, and take a deduction from gross income for his living expenses while away from home. We think section 214 (a) (1) intended to allow a taxpayer a deduction of traveling expenses while away from his post of duty or place of employment on duties connected with his employment. During the taxable year this petitioner was not engaged in the carrying on or pursuit of any trade or business at Mobile. A considerable portion of the expenses claimed were incurred by the petitioner in securing employment and in going from his home to such place of employment, and return, and we think amounts expended in seeking employment or returning to his domicile after the termination of such employment are not deductible under the statute, nor are the amounts expended in going from his place of employment to visit his family a proper deduction from gross income. For practically one and one-half years petitioner was employed at Hammond, La. He was not required to travel in connection with his position as manager, but his work required him to remain at Hammond until the period for which he was employed had ended. The same was true in respect to his employment at Houston for nine months. When he was not so employed he was carrying on no trade or business, according to his own testimony. The deduction of amounts expended for railroad fare, meals, and lodging, as ordinary and necessary expenses, depends in each case upon the relation of such expenditures to the trade or business in connection with which they are paid or incurred, and no hard and fast rule can be laid down to cover all cases, It is the opinion of the Board, from the evidence in this proceeding, that the amounts expended by the petitioner fall within the purview of section 215 (a) (1) of the Eevenue Act of 1921 and not within the purview of section 214 (a) (1) of that Act, and, therefore, are not deductible from gross income.

Judgment will he entered for the Commissioner,


author: Phillips:

text:
    M. F. Westergren, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2723.
    Promulgated January 26, 1927.
    Amortization allowed under section 234(a) (8) of the Revenue Act of 1918.

      Wm. L. Wemyle, Esq., for petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
   Phillips:

Petitioner appeals from the determination by the respondent of a deficiency of $2,307.15 in income and profits tax for 1918 of which $1,661.52 is in controversy, alleging as error the refusal of the respondent to allow a deduction of $2,016.31 for amortization of buildings erected for use in the production of articles contributing to the prosecution of the war. A large portion of the findings of fact are based upon the allegations of the petition admitted in the answer.

FINDINGS OF FACT.

The petitioner is a New York corporation with its principal office in New York City.

It has been engaged from the date of its organization in 1902 to the present time in the manufacture of fireproof metal doors and windows and general sheet metal work. During the year 1918 the petitioner occupied leased premises known as 213-221 East 144th Street, Bronx Borough, New York City. Under said lease petitioner was entitled to use not only the building on the premises but also the yard in the rear of the premises extending through to 146th Street and the driveway in said yard. As of January 1, 1918, and at all times during that year, the petitioner had a lease on the said rear yard, which lease extended to March 1, 1922. Under this lease it had no right to remove assets affixed to the realty.

The petitioner received orders from the United States Government between May and December, 1918, for 125,000 fabricated food containers, which were articles contributing to the prosecution of the war referred to in section 234(a) (8) of the Revenue Act of 1918. It did not have sufficient floor space in the leased premises aforesaid on which to manufacture these containers and deliver them as rapidly as the exigencies of war required, and it constructed two temporary one-story sheds in the rear yard aforesaid for use in carrying out the contract. These sheds were approximately 20 by 75 feet and 25 by 15 feet, respectively, and were built of cast ofi materials and concrete. The cost of constructing said sheds was $2,326.63. These sheds were built in 1918, subsequent to May 1.

The main building used by the petitioner was of brick and was several stories in height. Both before and after 1918 the yard in the rear of this building, including the ground space covered by the sheds, was used by petitioner for the storage of materials used in the manufacture of its products. No sheds were necessary for that purpose. After 1918 the manufacturing activities were carried on wholly within the main building.

The contracts for food containers were fully performed between May 1, 1918, and December 31, 1918. The said sheds were built solely as facilities to be used in connection with production of said food containers.

The petitioner returned in its income for the year 1918 the full amount of profit from the manufacture of said 125,000 food containers. In its return for 1918 it deducted the full amount of the cost of these sheds, or the sum of $2,326.63, and has made no further deduction or any deduction of any amount on account of said sheds in any other return, or received or accepted any adjustment of taxes for subsequent years on account of any deduction in net taxable income on account of depreciation or other deductions on account of said sheds, nor has the taxpayer included the cost of said sheds in invested capital for any year subsequent to the year 1918. The Commissioner has allowed a deduction on account of said sheds of $310.32, on the basis of exhaustion of the cost over the life of the lease of the premises.

During the life of the lease on the said rear yard the said sheds were available for use of the taxpayer, but at the termination of the said lease said right to use terminated and the taxpayer received no compensation of any kind whatsoever for said sheds.

The sheds were of no value to the petitioner in the conduct of its business after December 31, 1918.

The deficiency is redetermmed to he $6J¡£.68. Decision will he entered accordingly.


text:
    Appeal of Providence & Worcester Railroad Co.
    Docket Nos. 6297, 7775.
    Promulgated January 26, 1927.
    Petitioner in 1892 leased its premises and property for a term of years, the lessee agreeing to pay all taxes imposed upon the lessor with reference to the rental. The lessee paid the income and profits taxes upon the net income returned by the petitioner for the taxable years. Held, the amount of the tax so paid constitutes additional income to the petitioner for the year in which such tax became due and was paid,

      J- S. Y. Ivins, Esq., and O. B. Folsom-Jones, Esq., for the petitioner.

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

      The petitioner filed two appeals which have been consolidated— one from the determination of a deficiency of $8,177.95 in income and profits taxes for 1921, the other from the determination of deficiencies of $5,464.67 and $5,461.71 in income taxes for 1922 and 1923, respectively.
    FINDINGS OF FACT.
    The Providence <& Worcester Railroad Co., the petitioner herein, was, during the years 1921, 1922, and 1923, a corporation existing under and by virtue of the laws of the States of Massachusetts and Rhode Island.
    The New York, New Haven, & Hartford Railroad Co. was, during the years 1921, 1922, and 1923, a corporation existing under and by virtue of the laws of the States of Massachusetts, Rhode Island, and Connecticut.
    Under date of December 17,1892, the petitioner leased its premises and property to the New York, New Haven & Hartford Railroad Co. for a term of 99 years from July 1, 1892, the lease containing, among other provisions, the following clause:
    The lessee further covenants to pay, during each year of said term, all taxes, rates, charges, and assessments, ordinary and extraordinary, which may be lawfully imposed or assessed in any way upon the lessor or lessee with reference to the premises and property hereby demised, the capital stock of the lessor, its indebtedness, franchises and revenues or said rental; said payments to be made to the authority or treasurer entitled by law to receive the same, whether Federal, State or municipal, so that said lessor shall be saved harmless, during the continuance of this lease from any tax, assessment or charge under laws or proceedings made or authorized by the United States or any State or municipality.
    By virtue of the provisions of such lease the New York, New Haven & Hartford Railroad Co. paid, in 1922, 1923, and 1924, the Federal income and profits taxes for the years 1921, 1922, and 1923, respectively, upon the net income returned by or for the petitioner for those years. The Federal income and profits taxes so paid were at least $40,355.77 paid in 1922 on income of $349,716.86 returned for 1921, $43,717.36 paid in 1923 on income of $349,738.84 returned for 1922, and $43,693.72 paid in 1924 on income of $349,549.74 returned for 1923. The taxes so paid on the income for the respective years 1921,1922, and 1923, were not due and payable until on or after March 15, 1922, 1923, and 1924, respectively.
    The deficiencies determined by the Commissioner are predicated upon treating as additional income to the taxpayer for the year 1921 an amount equal to the Federal income and profits taxes computed on income of $349,716.86 originally returned for the year 1921, and upon treating as additional income to the taxpayer for the year 1922 an amount equal to the Federal income tax paid on income of $349,738.84 originally returned for the year 1922, and upon treating as additional income to the taxpayer for the year 1923 an amount equal to the Federal income tax paid on income of $349,549.74 originally returned for the year 1923.
    The petitioner kept its books upon the accrual basis.
   OPINION.

Phillips:

The sole question presented is whether the amount of the payment by the lessee railroad, pursuant to its contract, of income and profits taxes assessed against the lessor constitutes taxable income to the lessor. While conceding that such payment constitutes a benefit to the lessor, counsel for the petitioner contend that nothing was actually or constructively received by it which was subject to tax as income.

From the admitted facts set out above we can not determine definitely whether the income and profits taxes of the petitioner were paid to it by the lessee, and by it to the Government, or paid by the lessee directly to the Government on behalf of the lessor. If the first alternative were the situation, petitioner could scarcely contend that nothing was actually received by it which was subject to tax as income. Does it make any difference if, as seems to be the more literal interpretation of the admitted allegations of the petition, the payment of the tax of the petitioner was made directly to the collector by the lessee ?

In Merchants’ Loan & Trust Co. v. Smietanka, 255 U. S. 509; 3 Am. Fed. Tax Rep. 3102, which arose under the Revenue Act of 1916, the Supreme Court, citing several decisions rendered by it under the Corporation Excise Tax Act of 1909, said:

It is obvious that these decisions in principle rule the case at bar if the word “ income ” has the same meaning in the Income Tax Act of 1913 that it had in the Corporation Excise Tax Act of 1909, and that it has the same scope of meaning was in effect decided in Southern Pacific Co. v. Lowe, 247 U. S. 330, 335, where it was assumed for the purposes of decision that there was no difference in its meaning as used in the Act of 1909 and in the Income Tax Act of 1913. There can be no doubt that the word must be given the same meaning and content in the Income Tax Acts of 1918 and 1917 that it had in the Act of 1913. When to this we add that in Eisner v. Macomber, supra, a case arising under the same Income Tax Act of 1910 which is here involved, the definition of “ income ” which was applied was adopted from Stratton’s Independence v. Howbert, supra, arising under the Corporation Excise Tax Act of 1909, with the addition that it should include “ profit gained through sale or conversion of capital assets,” there would seem to be no room to doubt that the word must be given the same meaning in all of the Income Tax Acts of Congress that was given to it in the Corporation Excise Tax Act, and that what that meaning is has now become definitely settled by decisions of this court.

To the same effect, see Edwards v. Cuba R. R. Co., 268 U. S. 628; 5 Am. Fed. Tax Rep. 5398.

There is no substantial difference between gross income as defined in the Revenue Acts of 1916 and of 1921, and we conclude that we may look to the decisions of the courts under such prior acts for assistance in determining what is income under the Revenue Act of 1921.

In Rensselaer & Saratoga R. R. Co. v. Irwin, 249 Fed. 726; 1 Am. Fed. Tax Rep. 945, the plaintiff had leased its railroad equipment and franchises to the Delaware & Hudson Canal Co., in consideration of which the lessee agreed to pay, among other things, interest upon the bonded indebtedness of the lessor and dividends of 4 per cent per annum to the stockholders of the lessor. In that case the Circuit Court of Appeals for the Second Circuit held that the interest and dividends so paid constituted income to the lessor under the Corporation Excise Tax Law of 1909. In a similar case, the Circuit Court of Appeals for the Fifth Circuit reached the same conclusion. Houston Belt & Terminal Ry. Co. v. United States, 250 Fed. 1; 1 Am. Fed Tax Rep. 949.

In the determination of the income of this lessor, we fail to see any distinction in principle between payments by the lessee of interest to bondholders of the lessor, payment of dividends to stockholders of the lessor, and payments of taxes of the lessor. In each of the cases cited, as in the present case, the payment was made as a part of the compensation for the use of property, and in each case the payment, although it did not pass through the hands of the lessor, was made for its benefit and account. It may be true, as contended by the petitioner’s counsel, that not every benefit derived from the use or disposition of property is taxable as income. In circumstances such as we have here, however, the payment of an indebtedness, pursuant to a contract for the use of property, impresses us as being as truly a part of the income from the property as would be a payment of an equal amount made directly to the petitioner.

We are not unmindful of the statement, cited by counsel for the petitioner, made by the Supreme Court in Duffy v. Central R. R. Co., 268 U. S. 55; 5 Am. Fed. Tax. Rep. 5377, in discussing permanent improvements made by the lessee to the property of a lessor, that—

The term “ rentals,” since there is nothing to indicate the contrary, must be taken in its usual and ordinary sense, that is, as implying a fixed sum, or property amounting to a fixed sum, to be paid at stated times for the use of property * * * and in that sense it does not include payments, uncertain both as to amount and time, made for the cost of improvements or even for taxes.

The court, however, further said:

Nor do such expenditures come within the phrase “or other payments,” which was evidently meant to bring in payments ejustlem generis with “ rentals,” such as taxes, insurance, interest on mortgages, and the like, constituting liabilities of the lessor on account of the leased premises which the lessee has covenanted to pay.

Nor is this similar to the situation presented in Edwards v. Cuba, R. R. Co., supra, where it was held that a contribution to the capital of a corporation in the nature of a subsidy is not income. Here the payment is recurrent and arises from the use of the property.

Although we have already stated our conclusions, certain contentions made by counsel for the petitioner deserve consideration here. It is said that the decision in Duffy v. Pitney, 2 Fed. (2d) 230; 5 Am. Fed. Tax Rep. 5133, in which is was held that the 2 per cent tax paid by a corporate obligor on interest upon so-called tax-free covenant bonds was not additional income to the obligee, is controlling. The law there considered imposed a tax upon the corporate obligor equal to 2 per cent of the interest and provided that the obligee should be entitled to credit for such amount. The effect was to tax the obligor and to reduce the tax of the obligee. The tax paid by the obligor was a tax imposed upon it and not one imposed upon the obligee, even though the same law reduced the amount of tax due from the obligee. In the case before us, however, the tax which was paid was levied by law upon the petitioner and not upon the lessee. The payment by the lessee was in the nature of compensation for the use of the property, was imposed by contract, and was not a part of a tax liability imposed upon it by law.

It is pointed out by counsel for the petitioner that if the tax paid by the lessor is additional income to petitioner, the lessee is obligated to pay the tax on such additional amount, which payment in turn is additional income subject to tax. It is said that, if the contention of the Commissioner be carried to its logical conclusion, the tax must be computed upon each payment of tax until the last computation is a minor fraction of a cent; that such computation requires the use of an algebraic formula and that “ algebraic formulae are not lightly to be imputed to legislators.” Edwards v. Slocum, 264 U. S. 61; 4 Am. Fed. Tax Rep. 3807. In the instant appeal we are not called upon to determine whether the lease requires the interpretation which counsel would assign to it or whether the law requires such an interpretation, for the Commissioner proposes to include as additional income only the amount of the tax assessed and paid upon amounts which are admittedly income, and this computation requires the use of no algebraic formula. It would seem, however, that the necessity for the use of such a formula, if it exists, is not to be attributed to the legislators but to the contract made by the parties. It would scarcely be argued that parties may escape tax because their contracts require the use of such a formula to determine true income. So far as we have been able to ascertain, the quoted expression has been used in cases where the contention was made that the taxing statute was inherently such as to necessitate the use of such a formula in the application of its provisions. No decision has been called to our attention, nor do we know of any, which goes so far as to hold that the use of such formula may not become necessary in computing income or tax liability by reason of dealings by the taxpayer.

The Commissioner has treated as income for each of the taxable years the amount of the tax which became due and was paid in the succeeding year. Under the decisions of the Board in the Appeals of Russell Milling Co., 1 B. T. A. 194; L. S. Ayers & Co., 1 B. T. A. 1135; and Norwich & Worcester R. R. Co., 2 B. T. A. 215, this appears to have been in error. In the last cited case it was held that a tax which became due and was paid by the lessee in 1919 upon 1918 income was not income for 1918, since the tax did not accrue until 1919 and the income could not have accrued prior to 1919. This decision of the Board was followed in the United States District Court, District of Massachusetts, when suit was brought by the United States to recover the amount of tax disallowed by the Board in its decision. United States v. Norwich & Worcester R. R. Co., 16 Fed. (2d) 944. Pursuant to those decisions the deficiency should be recomputed by including as income for 1921 the amount of the tax which became due and payable in that year upon 1920 income; by including as income for 1922 the amount of the tax which became due and payable in that year upon income of 1921, and by including as income for 1923 the amount of the tax which became due and payable in that year upon 1922 income.

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