author: Sternhagen:

text:
    Appeal of A. B. Kirschbaum Co.
    Docket No. 6165.
    Decided October 13, 1926.
    Payment received in 1919 by a taxpayer under an agreement canceling a war-supply contract made between April 6, 1917, and November 11, 1918, is income attributable to a Government contract, within section 301 (c) (1) Revenue Act of 1918.

      James C. Peacoclc, Esq., and C. E. Ross, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    Proceeding to redetermine a deficiency of $32,489.64 income and profits tax for 1919. The error alleged is that the Commissioner determined that an amount received by petitioner in 1919 was, under section 301 (c) of the Revenue Act of 1918, subject to tax proportionately at 1918 rates as income derived from Government contracts, whereas the petitioner contends that the amount was derived from subsequent “cancellation agreements” made in 1919 and taxable at 1919 rates.
    FINDINGS OP FACT.
    The petitioner is a Pennsylvania corporation, engaged in the manufacture of clothing.
    On November 11,1918, there was an uncompleted contract between it and the United States Government, entered into April 25, 1918, for the manufacture of approximately 300,000 wool coats for use in connection with the war. For the manufacture of each coat the petitioner was to receive $1.T5.
    The quantities called for by this unfilled contract being in excess of the Government’s requirements after the Armistice, the Government undertook negotiations for the termination of the contract and an adjustment agreeable to both parties.
    On February 5, 1919, the petitioner and the United States Government entered into a so-called “ cancellation agreement,” relating to the original contract of April 25, 1918, the material provisions of which, for the p’urpose of this inquiry, are as follows:
    ■ Whereas the furnishing and delivery of further articles or work, under said original contract, would exceed the present requirements of the United States; and
    Whereas it is in the public interest to terminate said original contracts as herein provided; and
    Whereas the contractor, in pursuance of the original contract, has incurred expenses and obligations for the purpose of furnishing and delivering articles or work remaining undelivered under said original contract and is relinquishing prospective profits on the unexecuted portion thereof;
    Now, therefore, in consideration of the premises and of the mutual covenants herein contained, it is agreed between the parties hereto as follows;
    I. The contractor shall not furnish or deliver and the United States shall not accept or pay for any further articles or work agreed to be delivered under said original contract, to wit, 254,920 Wool Coats which are hereby cancelled; contractor to be paid at the rate of $.43 for each Coat so cancelled.
    II. The United States shall pay forthwith to the contractor the sum of One Hundred Nine Thousand, Six Hundred Fifteen. Dollars and Sixty Cents ($109,615.60), which sum, together with payment for the finished articles or work heretofore delivered to the United States and not yet paid for, shall constitute full and final compensation for articles or work delivered, services rendered, and expenditures incurred by the contractor under the original contract.
    III. The contractor does hereby, for itself, its successors, heirs, legal representatives, and assigns, upon receipt of payment set forth in paragraph II supra, remise, release, and forever discharge the United States of and from all and all manner of debts, dues, sum or sums of money, accounts, reckonings, claims, and demands whatsoever due or to become due in law or in equity under or by reason of or arising out of said original contract.
    On August 27, 1919, an award was made to the petitioner by the Government which, referring to the original contract, recited in part as follows:
    It appearing * * * that there have theretofore been delivered by the claimant and accepted by the United States under the said agreement 45,080 Wool Service Coats at $1.75 of the fair aggregate value of $78,890.00 that the said sum of $78,890.00 paid or to be paid for said articles or work heretofore delivered and accepted together with the additional sum of $109,615.80 will adjust, pay, and discharge such agreement upon a fair and equitable basis, and that such sum will not include prospective or possible profits on any part of the agreement beyond the goods and supplies delivered to and accepted by the United States thereunder and a reasonable remuneration for expenditures and obligations - or liabilities necessarily incurred in performing or preparing to perform said agreement:
    The Secretary of War hereby awards to said claimant the sum of $109,615.60 which sum, in conjunction with the payments herein above mentioned, made or to be made for the articles, work or services heretofore delivered and accepted shall be in full adjustment, payment, and discharge of said agreement.
    And further:
    This award confirms settlement contract made with this claimant, dated February 5th and numbered 535 and is for the same amount and the same items, and payment of the amount of said settlement contract or of this award shall operate as full adjustment and discharge of the said agreement.
    There were also six other subsisting contracts on November 11, 1918, made prior to that date and subsequent to April 6, 1917, between the petitioner and the United States Government, for the manufacture of large quantities of coats, trousers, bandoleers, and similar articles for use in connection with the war.
    The quantities called for by these unfilled contracts'were in excess of the Government’s requirements after the Armistice. The Government undertook negotiations for the termination of the contracts and adjustments agreeable to both parties thereto. As a result of these negotiations cancellation agreements were entered into and awards were made to the petitioner. The pertinent portions of these cancellation agreements and of the award forms are the same as those quoted from the contract of April 25, 1918, except as to amounts, number and kind of articles, etc.
    As a final result of these negotiations there were paid by the Government to the petitioner in 1919 the following amounts as awards under the settlement contracts: $109,615.60, $15,615.60, $10,454.23, $8,600.65, $1,229.23, $7,547.10, and $745.59, making a total of $153,808. The parties agree that the petitioner is entitled to deductions from this gross amount which will leave a net income involved of $119,882.59.
   OPINION.

Sternhagen:

When on February 24,1919, Congress passed the Revenue Act of 1918, the bill having originated in the House in the preceding September, before the Armistice, it was known to all that the Government had made many contracts for war supplies at war prices, that the Armistice had necessitated their abrogation, and that settlement of the Government’s obligations must be fairly and promptly made. To this end the Dent Act was under consideration and was soon enacted on March 2,1919. Since “ the purpose of the high rates was, in effect, to confiscate so-called war profits and to prevent the making of extortionate profits from the war,” Walcott Lathe Co., 2 B. T. A. 1231, 1236, consistency required that war profits derived from the Government should be subjected to such high rates, even although by the delay of settlement they were not realized until 1919 after the war emergency was over. By section 301 there was imposed the profits tax at the higher rates for 1918 and the lower rates for 1919 and thereafter, “except corporations taxable under subdivision (c).” Subdivision (c) imposed a different tax for 1919 and thereafter “upon the net income of every corporation which derives in such year a net income of more than $10,000 from any Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive,” and this tax was the sum of a proportionate tax at 1918 rates allocable to the income “ attributable to such Government contract or contracts” and a proportionate tax at 1919 rates allocable to the income not so attributable. Thus the statute clearly taxes at this composite rate the corporation which “derives” net income from a Government contract made between the dates mentioned, and imposes the higher 1918 rates proportionately upon the income “ attributable ” to such contract.

The petitioner made seven such contracts which had not been fully performed at the time of the Armistice and by reason of which it was entitled to receive substantial profits. If these profits had been received either by way of performance or by way of liquidation directly, they would clearly have been attributable to the Government contracts and thus measured the tax at 1918 rates. Whether there was such a situation in respect of contracts of this petitioner other than the seven in question does not appear, and in the absence of a showing by petitioner to the contrary we must assume that the petitioner was within the class of corporations deriving income from Government contracts. The Commissioner has found petitioner to be in that class and the petitioner does not establish error in that respect unless it proves a complete negative — that none of its income was so derived. Even if we were to hold with petitioner in its principal contention that the particular income in question was not attributable to the seven contracts made before November 11, 1918, and thus not subject to 1918 rates, it might still be true that, by reason of other income derived from Government contracts, the corporation would be subject to the composite rate of subdivision (c). We therefore hold, for lack of evidence to the contrary, that the petitioner was within the class of corporations taxable under subdivision (c).

The petitioner’s principal concern, however, is to prove that the income in question is not within the portion of its income which goes to measure the 1918 rates; and hence, instead of proving literally, as it seeks to do, that this income was not “ derived ” from Government contracts, — a matter, as we have seen, which concerns only the question of whether a corporation is within the subdivision at all, — it must prove that the income in question is not subject to “the rates specified in subdivision (a)” because it is not “attributable to such Government contract or contracts.” This it seeks to do by an ai'gument that the so-called cancellation agreements were complete new contracts made after the Armistice and superseded the supply contracts, and that, since the amounts received were in fulfillment of the cancellation agreements, they can not be attributed to the statutory war contracts. It cites authority that the two contracts are separate and distinct and that disputes under a cancellation contract are determinable by reference to the new contract and not the one superseded.

The argument is in our opinion too superficial to dispose of the merits of the question. It leaves out of consideration the outstanding intendment of the statute to impose 1918 rates upon income from war contracts irrespective of the year of receipt, and imputes to the legislation a difference in tax measured by the adventitious circumstance of the time and form of settlement. It is not to be supposed that Congress would impose high taxes upon those who received settlement later under the Dent Act and low taxes on those who were fortunate enough to negotiate an early agreement of settlement.

Furthermore, we are of opinion that not only is the Commissioner acting within the intendment of the Act but also within its letter. The original contracts were alone the cause of petitioner’s receipt of the income. Without them there would have been no settlement, no subsequent agreement, no award, or no payment. From them the Government derived some of its supplies and its obligation to compensate, and the petitioner derived its compensation both for the supplies furnished and for the situation confronting it by reason of the Armistice. The cancellation agreement only expedited and regulated the settlement of this compensation. When it was received or accrued it was directly attributable to the Government contracts made before November 11, 1918.

Judgment will be entered for the Commissioner.


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    Gardner Governor Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 321.
    Decided October 13, 1926.
    1. A deduction for exhaustion, wear and tear and obsolescence of buildings at 5 per cent per annum, and of machinery at 10 per cent per annum, during the taxable years, held reasonable in the circumstances of this proceeding.
    2. The earnings available for the payment of a dividend on a given date during the taxable year should not be reduced by the amount of a tentative tax computed upon such earnings to such distribution date. Appeal of L. 8. Ayers & Go., 1 B. T. A. 1135.
    3. In the absence of evidence showing the amount of current earnings available on March 15, 1920, for the payment of a dividend declared and paid on that date, the determination of the Commissioner of the amount of such earnings by allocating to the period from January 1 to March 15, 1920, the proportion of the earnings for the entire year as the number of days to the distribution date was to the entire year, is approved.

      Robert Ash, Esq., for the petitioner.

      A. JS. Fast, Esq., for the respondent.
    On May 6, 1924, the Commissioner determined deficiencies in income and profits tax for the calendar years 1919, 1920 and 1921, in the amounts of $6,111.95, $21,329.94, and $3,792.83, respectively. Certain issues have been eliminated by stipulation, and the questions submitted to the Board are as follows: (1) Should the petitioner be allowed a deduction for exhaustion, wear and tear and obsolescence of buildings at the rate of 5 per cent per annum, instead of 2 per cent? (2) Should the deduction for exhaustion, wear and tear and obsolescence of machinery and tools have been computed at the rate of 10 per cent per annum, instead of 8 per cent? (3) Should the current earnings available for the payment of dividends declared during the taxable year be reduced by the amount of a tentative tax? (4) Whether, in computing invested capital for 1920, a loss of $53,205.71 on the sale of Liberty bonds on September 8, 1920, should have been taken into consideration by the Commissioner in determining the amount of earnings from January 1 to March 15, 1920, available for the payment of a dividend on the last-mentioned date. ■ . -
    FINDINGS OF FACT.
    The petitioner is an Illinois corporation, engaged in the manufacture of pumps, air compressors and governors, with principal office at Quincy.
    Fifteen or twenty years prior to the taxable years the petitioner constructed certain factory and office buildings with stone walls and wood roofs, having poor light and ventilation. At that time its principal product consisted of steam engine governors, and no consideration was given to the use of heavy foundry machinery which it was subsequently found necessary to install, or traveling cranes for transportation of heavy material from place to place within these factory buildings. Little consideration was given to the lighting effect, and the only source of light was small windows placed at a considerable distance apart. The lasting quality of the walls and the exterior beauty of the buildings was the principal thought in the minds of the officers of the corporation. These buildings conformed substantially to the general type of foundry buildings at the time of their construction, and were then considered adequate for the petitioner’s use. A few years later, however, industrial conditions changed materially, and by reason of this fact, together with the changes and development -of petitioner’s business, petitioner found itself greatly in need of new and more modern buildings, both for manufacturing and office purposes. The nature of petitioner’s business had changed from a production of 80 per cent of light castings to 80 per cent of heavy castings. As stated by the petitioner’s principal officer, “ The business originally was the manufacture of steam engine governors, but the introduction of gasoline and oil engines, and later the distribution of electric power, both from the steam generated power stations and the hydraulic electric power stations, has so revolutionized our business that today the governor business amounts to about 5 per cent, and the manufacture of pumping machinery and air compressors is about 95 per cent.” As a result of these changes, the petitioner prior to and during the taxable years constructed entirely new and modern buildings of steel framework and glass sidings, and installed therein the necessary equipment, including overhead and bridge cranes for transporting heavy material and machinery manufactured, so as to be in a position to compete with other manufacturers in this field, and also to obtain greater production, as well as to provide workmen with facilities conducive to the best workmanship.

      As quickly as the new buildings could be constructed on ground adjacent to the old ones, the old ones were abandoned for manufacturing purposes and thereafter utilized to a small extent only for storage purposes. Petitioner claimed a deduction for exhaustion, wear and tear and obsolescence during the taxable years at a composite rate of 5 per cent on all of its buildings. The Commissioner computed the deduction at 2 per cent.
    Prior to and during the taxable years, petitioner installed machinery necessary in the manufacture of pumps and compressors. In connection with its product it is necessary to manufacture what is known as hydraulic castings, which must withstand high pressure tests, in which the maximum tolerance allowable is one two-thousandths of an inch, and their character requires the highest degree of workmanship. Due to the rapid progress in the engineering and manufacturing art and the changing needs of trades and businesses in which petitioner’s principal product was used, and the necessity of manufacturing new designs, it was necessary to acquire new and different machinery. The obsolescence of a large proportion of petitioner’s machinery and tools was rapid. Petitioner formerly used machine tools made of carbon steel. These tools were replaced “ by the introduction of tungsten and other methods that developed a steel that could, in cutting, get so hot it would not draw the temper. The speed of machine tools with carbon steel is always limited to how much heat is generated at the cutting point, beyond which point you could not go, because if you did the carbon steel would just melt away and the edge was gone. With the introduction of high speed steel, this meant you could get double the cutting speed, and as development went on you could increase it 300 to 500 per cent. The result was that you could not get the benefit from high speed cutting tools with the old machinery, because if you tried to, the machine would either stand still through inadequate power or break down at some point. The introduction was somewhat slow owing to the hesitancy of owners of machine shops to recognize this new and very radical departure. Some were more farsighted than others and took advantage of it very quickly.”
    Through the use of high speed steel, petitioner’s production was greatly increased and operating costs were reduced.
    The petitioner operated two foundries, one at Quincy and one at LaGrange, Ill. During 1919 and 1920 the machine shop at the Quincy plant was operated 55 hours and the foundry at the La-Grange plant was operated 59 hours a week, instead of the usual period of 48 hours. During the taxable years petitioner was compelled to employ a great many unskilled laborers and its machines were operated by inexperienced mechanics, which caused the machinery and equipment to depreciate more rapidly than otherwise.

      Petitioner claimed a composite rate of 10 per cent for the exhaustion, wear and tear and obsolescence of all of its machinery, tools, and foundry equipment. The Commissioner computed the deduction at the rate of 8 per cent.
    On March 15, 1920, the petitioner declared and paid a dividend of $108,975.
    For the purpose of determining the amount of available earnings on March 15, 1920, for the payment of a dividend declared on that date, in connection with the computation of invested capital, the Commissioner allocated 74/366 of the income for the entire year to the period from the beginning of the year to that date. On September 8, 1920, petitioner sold certain Liberty bonds at a loss of $53,205.71.
    In determining the amount of current earnings available for the payment of dividends, the Commissioner computed a tentative tax upon the income allocated to the date of the dividend and reduced the available current earnings accordingly.
    The parties have 'stipulated as follows—
    (1)Petitioner is entitled to the following deductions representing contributions and bonuses:
    1919-$4, 527.28
    1920 - 2, 965. 77
    1921_ 917.28
    (2) Petitioner is entitled to a deduction of $901.22 for 1919, as a loss on the sale of office furniture, and a deduction of $553.85 for 1920, as a loss on the sale of machinery and equipment.
    (3) On January 1, 1919, a dividend of $22,500 was paid, and on January 2, 1919, a dividend of $45,000 was paid.
   OPINION.

Littleton:

The proper allowance for the exhaustion, wear and tear and obsolescence of property is a question of fact in each case. The evidence submitted on this point consists of the testimony of numerous witnesses well qualified to state all the facts and to express an opinion on the subject of the useful life of petitioner’s property. The record evidence is in detail and goes into every phase of the question of exhaustion, wear and tear, and obsolescence of petitioner’s buildings, machinery, tools, and foundry equipment and is in no wise contradicted. In our opinion, the evidence fully justifies the claim that a deduction for exhaustion, wear and tear, and obsolescence of buildings during the taxable year at a composite rate of 5 per cent per annum, and for the exhaustion, wear and tear and obsolescence of machinery, tools, and foundry equipment at the rate of 10 per cent per annum, is conservative and should be allowed.

The next question relates to the correctness of the Commissioner’s action in reducing the amount of current earnings found to have been available for the payment of a dividend by the amount of tentative tax computed thereon to such dividend date. The Board has held that current earnings available for the payment of a dividend should not be reduced by the amount of a tentative tax computed thereon. Appeal of L. S. Ayers & Co., 1 B. T. A. 1135. We find no reason for changing the decision reached in that appeal.

The next point in controversy concerns the correctness of the Commissioner’s determination of the amount of current earnings available for the payment of dividends on March 15, 1920.

The petitioner’s plants were operated overtime and its operations were profitable throughout the year 1920. The return for 1920 showed a gross income of $1,134,440.95, and a net income of $666,542.02, upon which it paid a tax of $196,495.53. On March 15, 1920, it declared and paid a dividend of $108,975. On September 8, 1920, the corporation sold certain Liberty bonds purchased in a prior year, at a loss of $53,202.71. When auditing the return for 1920 the Commissioner, after determining the net income for the year by the allowance of the loss of $53,202.71 on the sale of Liberty bonds on September 8, 1920, and through certain other adjustments took 74/366 thereof, and after computing a tentative tax thereon from January 1 to March 15, 1920, subtracted the amount so determined as earnings for the period available for the payment of the dividend, from the amount thereof, and reduced earned surplus by the difference. The petitioner claims that the Commissioner fell into error when he failed to take into consideration in his computation the fact that the loss of $53,202.71 occurred six months after the payment of the dividend and should not have operated to reduce the current earnings available on March 15, 1920.

The petitioner does not claim that the Commissioner’s formula for determining the amount of earnings available on any given date was erroneous, but it insists that, under the facts of this case, the amount of the available earnings on March 15, 1920, determined by the method of allocating to the period from January 1 to March 15, the proportion of the earnings for the entire year as the number of days to the date of the dividend (which in this case was 74/366) was to the whole year, should have been increased by the amount of $53,202.71.

Subsection (e) of section 201 of the Revenue Act of 1918 provides as follows:

Any distribution made during the first sixty days of any taxable year «hail be deemed to have been made from earnings or profits accumulated during preceding taxable years; but any distribution made during the remainder of the taxable year shall be deemed to have been made from earnings or profits accumulated between the close of tbe preceding taxable year and the date of distribution, to the extent of such earnings or profits, and if the books of the corporation do not show the amount of such earnings or profits, the earnings or profits for the accounting period within which the distribution was made shall be deemed to have been accumulated ratably during such period.

We construe the above provision of the statute to contemplate that the extent to which earnings are available for distribution, after the first sixty days, shall be determined in one of two ways. If the books of account clearly show the earnings between the close of the preceding taxable year and the date of distribution, such earnings are deemed to have been available for the distribution. ■ On the other hand, if the books of account do not show the earnings to the distribution date, the earnings for the taxable year in which the distribution is made are deemed to have been accumulated ratably during the year, and the earnings available at any distribution date are deemed to have been that proportion of the earnings of the taxable year which the period of time between the close of the preceding taxable year and the distribution date bears to the whole period of time constituting the taxable year. If the second or alternative method must be used to ascertain the earnings available for distribution at any given date, the statute contemplates that the earnings shall be deemed to have been accumulated ratably over the taxable year, without regard to particular events which may be singled out and shown to have affected the earnings before or after the distribution date. In other words, if the method is to be used, it must be used in its entirety and not partially. Congress must have realized the endless and hopeless confusion and disputes which would arise if, in those cases in which the books do not show the earnings to the distribution date, the earnings available for distribution were to be determined upon any other theory than that the earnings of the year in which the distribution was made were accumulated ratably over the year. The theory advanced by petitioner is neither the one nor the other of the two tests prescribed by the statute, but, rather, a mixture of both; and the fact that it can be applied only just so far as the petitioner chooses to do so is sufficient ground for its rejection.

It is therefore the duty of the petitioner to show the earnings to the date of distribution. If it fails in this regard, the earnings available at any distribution date must be determined by spreading the earnings of the taxable year ratably over the year, without regard to the particular time at which they may have been earned during the taxable year or to their so'urce of derivation.

Certain other issues were raised in the pleadings but were disposed of by stipulation or abandoned by the petitioner at the hearing.

Judgment will be entered on 15 days' notice, umder Rule 60.


author: Littleton :

text:
    George A. Fink Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.

    Docket No. 1369.
    Decided October 13, 1926.
    Tbe taxpayers were each one of a group of corporations which, filed a consolidated return for the year 1920. Theretofore Commissioner Williams had held the taxpayers to be affiliated with other corporations for the year 1919, and the conditions respecting affiliation were identical as to the year 1920. The taxpayers advanced the funds with which to pay their share of the tax, which amounts were more than their pro rata shares of the consolidated tax. The parent corporation thereafter became insolvent. Commissioner Blair, thereafter, determined correctly that the taxpayers were not affiliated with the parent corporation in the year 1920. Helé, that the determination by Commissioner Blair was not an overruling of Commissioner Williams with respect to the year 1920. Helé, further, that in the computation of the deficiency against the taxpayers, credit should be given for the pro rata portion of the tax paid by the parent corporation theretofore advanced by the taxpayers.

      Ojiarles E. Moore, Esq., and Joseph M. DoJian, Esq., for the petitioners.

      Percy 8. Or&we, Esq., for the respondent.
    These proceedings are from determinations of deficiencies for the calendar year 1920 as follows:
    George A. Fink Co_$1, 487.27
    Shuttleworth, Wollny Co., Inc_ 1, 646.92
    C. E. Dartt Co_ 3,070.52
    Gallen Paper Co__ 1, 894.62
    The questions presented in all of the proceedings are the same and are — (1) whether petitioners were affiliated with Shuttleworth, Keiller & Go.; (2) whether the Commissioner could modify his predecessor’s ruling relating to affiliation; and (3) whether the tax paid by each of the companies upon the consolidated return filed for the year 1920 should be credited against the deficiency determined by the Commissioner in the event it is held that they were not affiliated as claimed.
    FINDINGS OF FACT.
    Petitioners are New York corporations. During the year 1920, Shuttleworth, Keiller & Co. owned and controlled the following percentages of the stock of the petitioners: George A. Fink Co., 88.6 per cent; Shuttleworth, Wollny Co., Inc., 51 per cent; Gallen Paper Co., 51 per cent; C. E. Dartt Co., 85.4 per cent. The persons who owned the 11.4 per cent minority stock of George A. Fink Co., 49 per cent of Shuttleworth, Wollny Co., Inc., 49 per cent of Gallen Paper Co., and 14.6 per cent of C. E. Dartt Co., owned no stock in Shuttleworth, Keiller & Co., and were not connected with that company.
    For the year 1920, Shuttleworth, Keiller & Co., as the parent corporation, filed a consolidated return with the following corporations:
    Congress Warehouse & Forwarding Co.
    George A. Fink Co.
    Shuttleworth, Wollny Co., Inc.
    Gallen Paper Co.
    Shuttleworth Holly Co. (changed prior to 1920 to C. E. Dartt Co., one of the petitioners herein).
    W. E. Shuttleworth & Co.
    Shuttleworth Dumouchel Co. and
    Shuttleworth, Hogg & Mather, Inc.
    The Commissioner of Internal Revenue, who was in office on November 1, 1920, determined that these, corporations were affiliated for 1919. He did not consider the question whether the corporations were affiliated for the year 1920. The present Commissioner of Internal Revenue, who assumed office in 1921, when auditing the returns for 1920, determined that the corporations were not affiliated for that year.
    The Shuttleworth, Keiller & Co., prior to the filing of the consolidated return, as above set forth, notified each of the corporations proposed to be included therein that a consolidated return was required and requested each of them to send statements to it, together with their checks for the amount of tax shown to be due upon a separate computation of their tax liability. The petitioners forwarded such statements, together with remittances of the amounts of tax computed upon their several statements, as follows: George A. Fink Co., $1,466.01; Shuttleworth, Wollny Co., Inc., $2,115.11; Gallen Paper Co., $565; Shuttleworth Holly Co. (C. E. Dartt Co.), $3,048.93. By reason of the losses incurred by Shuttleworth, Keiller & Co. in the calendar year 1920, the amount of income and profits tax due by it and the companies included by it in the consolidated return was $27,135.52, which Shuttleworth, Keiller & Co. duly paid to the collector for the second district of New York. Thereafter, and on July 24, 1922, Shuttleworth, Keiller & Co. was adjudicated bankrupt, and on August 11, 1922, subject to the approval of the court, which was given on or about October 18, 1922, all the remaining assets of the bankrupt were sold to W. E. Shuttleworth, the presi- . dent of the company, and the sale included “ claims against the United States of America and the State of New York for a refund of taxes improperly paid.” Thereafter, on November 21, 1923, the Commissioner notified George A. Fink Co., Shuttleworth, Wollny Co., Inc., and C. E. Dartt Co. that they were not affiliated with any of the corporations with which they had filed a consolidated return, and notified George A. Fink Co. of a deficiency of $1,487.27, Shut-tleworth, Wollny Co., Inc., of a deficiency of $1,545.92, and C. E. Dartt Co. of a deficiency of $3,070.52. He held that the Gallen Paper Co. was, during the year 1920, affiliated with Shuttleworth, Hogg & Mather, Inc. (subsequently Mather Paper Co.) and notified it of a deficiency of $1,894.62. In the computation of the deficiencies the Commissioner gave no credit whatever for the payments or any part thereof theretofore made by the petitioners to Shuttleworth, Keiller & Co. and by it paid in part to the collector of internal revenue as tax upon the consolidated return.

       The following cases were consolidated and heard with the above case and are decided herewith: Shuttleworth, Wollny Co., Inc., Docket No. 1362; C. E. Dartt Co., Docket No. 1372; Gallen Paper Co., Docket No. 1377.

   OPINION.

Littleton :

The evidence does not show that Shuttleworth, Keiller & Co., or any other corporation with which the petitioners claim they should have been .affiliated, in any way controlled the minority stock hereinbefore mentioned. In these circumstances we can not hold that Shuttleworth, Keiller & Co. owned and controlled substantially all of their stock. Appeal of Mather Paper Co., 3 B. T. A. 1.

The next question is the same as one of the issues involved in the Appeal of Mather Paper Co., supra, in which it was stated:

Under the provisions of section 273 of the Revenue Act) of 1924 it is the duty of the Commissioner to determine the deficiency upon the basis of the correct amount of tax, less the amount of tax shown by the taxpayer upon his return, with other adjustments not here in issue. Upon its return, this taxpayer, through the medium of the Shuttleworth Co., indicated an amount of tax shown to he due in the proportion of the net income returned by this taxpayer in the consolidated return to the total net income, exclusive of minus quantities. This amount the Commissioner has not credited in connection with the computation of the deficiency here in question. It should be credited in the determination of this deficiency. The return of the taxpayer filed as a part of the above consolidated return is in evidence and the proper computation can be made therefrom.

In the computation of the deficiencies against these petitioners they should be given credit for their proportional part of the tax shown due by the consolidated return hereinbefore mentioned.

As to the last issue, it appears that the present Commissioner of Internal Revenue did not overrule the determination made by his predecessor, since the former Commissioner made no determination as to the year 1920. Appeal of Mather Paper Co., supra. See Appeal of Canyon Lumber Co., 4 B. T. A. 940.

Judgment will be entered on 15 days’ notice, under Bule 60.


author: Phillips :

text:
    Appeal of Max Schott.
    Docket No. 4895.
    Decided October 13, 1926.
    1. Where one Commissioner of Internal Revenue, with full knowledge of the facts, held certain income to be taxable in 1916 and collected a tax thereon, and his successor, on the same facts ancl after the statute of limitations on a refund for 1916 had expired, held srch income to be taxable in 1917 and sought to collect tax thereon, helé, that the decision of the first Commissioner, even if it has no greater influence, should be considered as prima facie correct by his successor in office.
    2. Held, upon the evidence in the instant appeal, that the ruling of the first Commissioner should not be disturbed.
    3. Quaere: Whether in such circumstances and while the Government retains the tax paid for 1910, it is estopped to collect a tax upon the same amount as income for 1917?
    4. Quaere: Whether the decision of one Commissioner, with full knowledge of the facts, is binding upon his successor in office in the absence of fraud or mistake in mathematical calculation?

      Arthur B. Hyman, Esq., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.

      Joseph B. Cotton, Esq., Samuel Brermer, Esq., and Roy F. Wrigley, Esq., as amici curiae.

    This is an appeal from the determination by the Commissioner of deficiencies of $18,612.36 for 1917 and $35,760.16 for 1920, and an overassessment for 1919 of $24,753.57, which arise principally from the action of the Commissioner in determining that amounts reported by the taxpayer as income for 1916,1918, and 1919 are income for the years 1917, 1919 and 1920, respectively. Substantially all of the facts were stipulated.
    FINDINGS OF FACT.
    The taxpayer is a resident of Santa Barbara, Calif. During the years 1916 to 1919, both inclusive, and for several years prior thereto, the taxpayer was the western manager of The American Metal Co., Ltd., hereinafter called the Company.
    The Company was and is a corporation organized under the laws of the State of New York by the late Jacob Langeloth and Berthold Hochschild. It was incorporated in 1887 and has ever since that time had its principal office in the City of New York. At the time of its incorporation a contract was entered into between Langeloth, Hochschild and the Company whereby Langeloth and Hochschild drew nominal specified sums yearly and were to be paid for their services in building up the business in the following manner: After paying or setting aside 6 per cent dividends on the outstanding stock of the Company, a sum not exceeding 40 per cent of the remaining net profits was to be paid to Langeloth and Hochschild as additional compensation for services, and the balance was to be applicable for dividends or other company purposes. These payments for services were and are called tantiemes. This contract continued in force from 1887 through the years in question in this appeal.
    The Company from its inception has always carried on the business of buying and selling ores, concentrates, and metals, and has been a large dealer therein. It has also had subsidiary companies and carried on through such companies mining and treatment operations, both in the United States and foreign cotmtries. Its business has been conducted all over the world and its officers and managers have been the men who have enlarged the business and have been responsible for and contributed to its financial success. These officers and managers knew in a general way from month to month approximately what the net profits of the Company were for the preceding month, but its actual net profits were never ascertained until after the close of each fiscal year. When so ascertained for the year, such net profits were set up on the books of the Company, the tantieme part thereof charged to ojoerating expenses for the fiscal year and simultaneously credited to the tantieme recipients in the percentages to which they were entitled upon the books of the Company, with interest allowed either from the end of the fiscal year or from the time when said accounts 'were actually written up on the books.
    As the business in the earlier years grew and was extended, Lange-loth and Hochschild permitted other officers, managers, and employees to participate with them in such tantiemes. During the life of Langeloth, who died in August, 1914, he and Hochschild designated each year what persons should participate and the percentages in which they should participate in these yearly tantiemes. The men thus permitted to participate were those whose work and efforts were in part responsible for and who contributed to the financial success of the business. Each participant know during any given period that he was a participant in the tantiemes and the percentage of such net profits over and above the dividends to which he was entitled for such period. These tantieme recipients during the years in controversy received nominal salaries and relied upon the successful operation of the Company and the payment of these tantiemes for compensation for their services to the Company.
    Prior to 1921 the Company had very few stockholders — not exceeding 34 in number — and these were for the most part the officers, managers, and employees and their relatives and associates in the United States and abroad.
    During all the years in which the Company has been in existence, including the years in controversy, the tantieme recipients have been in entire control of tbe management of the corporation and they constituted its board of directors and, with their relatives and associates, have been in control of the stock of the Company and have directed its business and dominated its policies.
    During the years 1916 to 1919, both inclusive, the taxpayer had these tantieme contracts of employment with the Company pursuant to which contracts the taxpayer was entitled to receive and did receive during said years a percentage of the net profits of the Company’s business for each fiscal year. The contracts in question were made pursuant to a provision of the charter of the corporation which authorized the payment to its officers, directors, and employees, as compensation for services rendered, of a certain percentage of the net profits remaining after the payment of 6 per cent dividend upon the outstanding capital stock. This method of payment to officers, directors and employees of the Company in lieu of specific salaries had been in vogue, as aforesaid, since the year 1887.
    From its incorporation to June 20,1916, the fiscal year of the Company ended on June 30 of each year.
    As an integral part of the system of accounting adopted and in use during the years in question by the Company and since the inception of the Company, it kept accounts for the individual tantieme recipients, including the above-named taxpayer, in which were credited the tantiemes to which they were entitled and in which were entered all other sums to which they were entitled from the Company or which they deposited with the Company to their credit. The Company acted as banker for said tantieme recipients, including the taxpayer, selling stocks, bonds and other properties for them and crediting their accounts with the proceeds thereof, and also purchasing stocks, bonds and other properties for them and debiting their accounts with the amount of such purchases when received. These accounts were kept in the regular books of account of the Company. The usual practice was to allow interest to the tantieme recipients upon their credit balances.
    The tantieme recipients controlling the Company agreed, in the latter part of 1916, to change its fiscal year to a calendar year basis, such change to take effect from July 1, 1916. Instructions were given to the accounting department accordingly. A resolution of the board making the change was passed April 6, 1917.
    The books of the Company were thereupon in April, 1917, closed as of December 31, 1916, and the tantiemes to which the tantieme recipients were entitled for the last six months of 1916 were determined on or about April 6, 1917, and the same were then credited to the account of said tantieme recipients upon the books of the Company as of December 31, 1916.

      Upon inquiry of the then collector of internal revenue for the second district of New York, the Company was instructed by him to accrue the same upon its books to December 31, 1916, and to treat the same as additional operating expense for the calendar year 1916. The corporation acted accordingly and filed an amended return for said calendar year on or about April 12, 1917, setting up the amount of said tantiemes accrued from June 30, 1916, to December 31, 1916, as an additional operating expense for the said calendar year 1916. Said amended return was with full knowledge of the facts duly accepted by the Government, duly audited, and the amount of said tantiemes finally allowed as a proper item of expense for the year in question.
    The said collector of internal revenue for the second district of New York also advised that said tantieme recipients should amend their individual returns for the year 1916 by including therein the said tantiemes for the last six months of 1916 entered to their credit on the books of the Company as of December 31, 1916.
    In April, 1917, the Company advised the taxpayer that it had changed its fiscal year to the calendar year, had closed its books at December 31, 1916, and had credited him with tantiemes for the last six months of 1916, of $177,642.05, in addition to those already credited to him upon its books for the year ended June 30,1916, and that, under a ruling made by the collector of internal revenue for the second district of New York, all the tantieme recipients, including the taxpayer, must make amended returns of income for the calendar year 1916 by adding the said tantiemes so credited to them for the last six months of the calendar year 1916.
    After the receipt of such notice from the Company, the taxpayer consulted the collector of internal revenue for the district of Colorado, where he then resided, giving him all the' facts and the ruling of the collector of internal revenue for the second district of New York, and the said collector of internal revenue for the district of Colorado made the same ruling, to wit, that the taxpayer should amend his return for 1916 by adding to the income reported on his original return the tantiemes credited to him by the Company for the last six months of 1916.
    The taxpayer duly filed an amended return of income for the year 1916 in accordance with said ruling in the office of the collector of internal revenue for the district of Colorado, including in said amended return the tantieme credited to him by the Company for the last six months of 1916 in addition to the tantiemes reported by him and credited to him upon the books of the Company at June 30, 1916.
    To the said amended return the taxpayer attached a copy of a letter reading as follows:

      April 11, 1917.
    Honorable William H. Edwards,

      Collector of Internal Revenue,

      Custom Souse Building, Sew YorTc.

    Dear Sir :
    In accordance with your request, I submit herewith the substance of the income tax question discussed with you at our conference yesterday. The facts involved are as follows:
    Certain officers and directors of the American Metal Company, Limited, receive as compensation for their services nominal salaries, plus a percentage of the profits of the business. Eor many years, the fiscal year of the corporation has ended on June 30th. The annual meeting was held in October, at which time the share of profits belonging to each of the officers out of the Company’s profits for the fiscal year ended the preceding June 30th was paid over to them. On February 28th, 1917, these individuals filed personal tax returns including their income derived from the profits of the business for the corporate fiscal year from June 30, 1915, to June 30, 1916, as they had done the previous February for profits earned from June 30, 1914, to June 30, 1915.
    At a meeting held on April 6th of this year, the Board of Directors decided to change the Company’s fiscal year from June 30th to December 31st, so that it would coincide with the calendar year and thereby eliminate the many perplexities arising out of the conflict of its accounting system with the prescribed tax returns. The profits of the corporation were therefore figured for the six months from July 1st to December 31st, 1916, and the Board ordered paid over to the officers their respective percentage of these profits, instead of holding them until the end of its new fiscal year ending December 31st, 1917.
    The question immediately arose whether these profits so received by the individuals should be included in their personal returns of income for the year 1916 and, if so, whether the individuals should make a supplemental return or amend the returns already filed on February 28, 1917.
    Pursuant to your suggestion, I discussed this question with Mr. Stinson and Mr. Fath of your office, and Mr. Fath expressed the opinion that as these profits were entirely earned in the last half of the year 1916 the individual returns should be amended so as to include them in the personal income reports already filed for that year. The only case I discussed with Mr. Fath was that of Mr. C. M. Loeb. However, other officers and directors of the American Metal Company, Limited, who are similarly situated and who, under this ruling, should amend their personal tax returns are the following.
    B. Hochsehild S. Adler Henry Bruere
    T. Sternfeld H. K. Hochsehild Julian B. Beaty
    Otto Sussman H. V. Putzel H. BernStorfE
    Julius Loeb S. Boos
    M. Schott M. Boos
    Mr. Schott lives in Denver; Mr. S. Boos lives in St. Louis, and their amended reports will therefore be filed in these districts. My own report is filed in the third district, where I reside. The amended reports for all of the other gentlemen are transmitted herewith, with the exception of Mr. Julius Loeb, who is out of the city. He is expected to return next week, at which time he will file an amended report.
    The American Metal Company, Limited, has already filed a statement showing the 1% of income withheld at the source, pursuant to the provisions of the law. The foregoing action will necessitate its filing a supplemental statement of income withheld at the source to cover 1% additional on the above distribution of profits for the last half of 1910. This supplemental report is likewise transmitted herewith.
    It also becomes necessary for the corporation to amend its income return for the year 1916, inasmuch as that return includes all profits up to December 31, 1916, but no deductions were made for the sums now paid to the above named individuals as compensation for their services for the July/December period. These i)ayments would, in the usual course, be deducted from its return for 1917, but as the individuals are receiving these payments as of 1916 and paying personal income tax thereon, it is evident that they should be deducted from the corporate return. An amended return for the corporation also is therefore transmitted herewith.
    1 trust that the foregoing statement is sufficiently explicit, but if any additional facts are desired by the Department, they will be gladly furnished upon request.
    Very truly yours,
    Julian B. Beaty.
    Said amended return, witli the copy of the letter attached, was duly received by the collector of internal revenue at Denver, Colo., and by him transmitted to Washington for audit and approval.
    Thereafter, the Commissioner caused a field examination to be made of the books and accounts of the taxpayer in connection with the said amended return. The report of the field examiner was duly examined by the Commissioner in connection with said amended return, the same was duly audited by him, and he thereupon addressed to the taxpayer a letter dated July 1, 1918, which was duly received by the taxpayer, the material portions of which read as follows:
    An investigation of your income tax liability for 1913 to 1916, inclusive, based on report of Revenue Agent Drakeford, dated May 15, 1918, indicates tbat there is due from you a further tax of $31.31 for 1916.
    Assessment of this amount will be made on the next list. The Collector of Internal Revenue of your district will notify you as to the time and manner of making payment of this tax.
    Income has been increased to include profits from the sale of stocks amounting to $652.06 and from interest on notes increased $227.99. Dividends have been decreased $390.00. Deduction for losses on the sale of stock has been increased $276.22.
    * * * * * * *
    The investigation also discloses that you overpaid by $91.22, the amount of tax due on your 1916 income. If you will file in the office of the Collector of your district a claim for the refund of this amount on the enclosed Form 46, the Department will give due consideration thereto.
    The taxpayer duly paid the additional tax of $81.31 therein found by the Commissioner to be due and received the refund therein allowed.
    For the calendar years 1917 to 1919, both inclusive, the Company, on the closing of its books as of December 31, credited to the taxpayer the tantiemes to which he was entitled as compensation for services, as follows:
    1917_$131,753.12
    1918_ 19, 022. 66
    1919_ 83,462. 73
    The taxpayer duly filed his income-tax returns for each of the years mentioned, including therein for each of said years the amount so credited to him on the books of the Company as of December 31 in each of said years as compensation for the year for which it was so credited, which was also the year in which it was earned.
    Thereafter, the said reports were duly transmitted by the collector for the district in which they were filed to the Commissioner and were duly received by him, and thereafter he caused a field examination to be made of the books and accounts of the said taxpayer, covering the years 1917, 1918 and 1919, and said report of the field examiner was duly transmitted to the said Commissioner and by him audited in connection with the said income-tax returns.
    The said income-tax returns and the report of the field examiner made in connection therewith were duly approved by the said Commissioner, with exceptions not material to this appeal, and upon said examination and audit said Commissioner found a net overpayment of tax for the years in question in the sum of $239.07, of which he advised taxpayer under date of February 2, 1922, and which was thereafter duly refunded to the taxpayer. At that time David H. Blair was, and continues to the present time to be, Commissioner of Internal Revenue.
    Thereafter, and on or about the 20th day of March, 1923, the Commissioner assessed an additional income tax for the year 1917 against the taxpayer in the sum of $94,265.81. The return of the taxpayer for the year 1917 was filed with the collector on March 28, 1918. The additional tax so assessed resulted almost in its entirety from the inclusion in income in the year 1917 of the tantiemes credited to the taxpayer by the Company for the last six months of 1916, that is to say, the Commissioner added to the tantiemes credited to the taxpayer by the Company in the year 1917 and reported by him as income for 1917, the sum of $177,642.05, the tantiemes credited by the Company to the taxpayer as of December 31, 1916, which had been reported by said taxpayer as income for 1916 in his said amended return and upon which the tax had been paid, as hereinbefore set forth. At the time of making this adjustment, and as a result thereof, an overassessment for 1916 resulted in the sum of $19,540.62, the amount of tax previously paid by the taxpayer upon the inclusion of said amount of tantiemes in his income-tax return for 1916. This overassessment of $19,540.62 the Commissioner declined and still declines to credit, upon the ground that it is barred from allowance either as a credit or refund by the statute of limitations.
    Said additional assessment for 1917 having been made without compliance with section 250(d) of the Revenue Act of 1921, an application to abate the same was duly filed by the taxpayer, and various proceedings were had upon said claim for abatement, resulting in a determination by the Commissioner in May, 1925, which abated the tax to the extent of $75,653.45, leaving assessed and unabated a tax for 1917 of $18,612.36. It is from a letter notifying taxpayer of this determination that the appeal is taken.
    This result, as well as the alleged deficiency in tax for the year 1920 in the sum of $35,760.16 and the overassessment for 1919 of $24,753.57 shown in the letters appealed from, arises from the action of the Commissioner in excluding, from the return of the taxpayer the tantiemes reported therein for the year for which they were credited to him upon the books of the Company and including them in the year immediately following.
    Taxpayer kept an open account with the Company upon which he received credit for the tantiemes due him, dividends from stock of the Company, interest on certificates of indebtedness, sums resulting from the sale of property by the Company in his behalf, and sums deposited by him from time to time with the said Company, and was debited with payments made to him or on his behalf for the purchase of stocks, bonds, and liabilities incurred. Dividends and interest on securities of the taxpayer held by the Company and sums received by the Company upon the sale of property of the taxpayer were credited to the taxpayer in said account as and when received by the Company. Dividends and interest on stock and securities of the Company owned by the taxpayer were credited in said account when due and payable. Practically all taxpayer’s transactions were carried on through his said account with the Company. Upon his credit balances interest at various rates was allowed to him by the Company.
    The taxpayer in the years 1916 to 1920, both inclusive, at all times kept a book or books of account which were duly examined by the representatives of the Commissioner, as hereinbefore set forth.
    Said book or books of account exactly reflected the taxpayer’s account with the Company as it appeared upon the books of the Company, that is to say, whatever income was carried to his credit on the books of the Company was likewise entered as income in the taxpayer’s books, when the taxpayer was advised of such credit, although said amounts were neither paid to the taxpayer nor withdrawn by him. Upon this book, under the account with the Company, the taxpayer, under date of April 12, 1917, znade the following entry: Tantieme for 6/30-12/31/1916 due 12/31/1916— $177,642.05.
    Taxpayer entered upon this book interest due him as it became due and payable, whether or not collected, and entered interest payable by him in the same manner. Taxes were entered in the year in which they became due and payable. Taxpayer’s income-tax returns for the years in question were made upon the same basis on which this book was kept.
   OPINION.

Phillips :

The Commissioner moves to dismiss the proceeding as to 1917 and 1919 upon the ground that as to those years the Board is without jurisdiction. The motion is denied as to 1917, Appeal of J. S. Hoskins Lumber Co., 3 B. T. A. 846; Revenue Act of 1926, sec. 283 (f); and is granted as to 1919, Revenue Act of 1926, sec. 274(g); Appeal of R. P. Hazzard Co., 4 B. T. A. 150; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The facts, most of which were stipulated, are set out in full above, and will not be repeated here. Co'unsel for petitioner cites a number of decisions of the courts and rulings of the Attorney General to the effect that public officers can not open and reexamine cases decided by their predecessors except for fraud, mistake in matters of fact arising from errors in calculation, or newly discovered material evidence, and contends that the decision made by Commissioner Roper, with full knowledge of all the material facts, that tantiemes earned in 1916 were 1916 income to the taxpayer, is binding upon his successor. As further authority for his position, counsel cites section 1007 of the Revenue Act of 1924, which reads:

In the absence of fraud or mistake in mathematical calculation, the findings of facts in and the decision of the Commissioner upon (or in case the Secretary is authorized to approve the same, then after such approval) the merits of any claim presented under or authorized by the internal-revenue laws shall not, except as provided in section 900, be subject to review by any other administrative or accounting officer, employee, or agent of the United States.

It is further contended that the authorized agents of the Government having, with knowledge of all material facts, ruled that such amount was income for 1916, and having collected and retained a tax thereon, the Government is, so long as it retains the tax so collected and refuses to refund or otherwise return the same to the taxpayer, estopped to collect a further tax by now claiming that such amount was not income in 1916, but was income in 1917.

Both contentions present interesting questions, the 'decision of which would deserve serious consideration, but, as we view the instant appeal, it becomes unnecessary to discuss these contentions, other than to state them.

It would seem that in circumstances such as we have here the decision of a Commissioner should, even if it has no greater influence, be considered as pilma facie correct by his successor in office. In the courts and before this Board, the findings and decision of the Commissioner are presumed to be correct until the contrary is shown, and the decision of one Commissioner should be entitled to at least the same weight with his successor in office. An examination of the record leads us to believe that the first ruling was correct and convinces us that it should not be disturbed.

Passing without discussion the contention that because the tan-tieme recipients were in control of the Company there was constructive receipt by them of these tantiemes, we find that this taxpayer kept an account book in which he recorded his various transactions. Included in this are accounts and notes receivable and payable, upon which interest is annually accrued, whether or not paid or payable. Taxes were entered in the year in which payable. Sums credited to his account by his employer were entered as of the date credited, whether paid or not. While there are departures from a strict accrual system of accounting, it is manifest that the primary purpose of the taxpayer’s accounts is to reflect income and expense upon an accrual basis, and the returns of the taxpayer were uniformly made upon that basis. In such circumstances it is immaterial that some items may not have been treated upon a strictly accrual basis. Appeal of Bartles-Scott Oil Co., 2 B. T. A. 16; Appeal of John F. Cook, 4 B. T. A. 916. In such cases the net income will be adjusted to correctly reflect it upon the accrual basis.

It seems evident that these tantiemes were accruable for the year in which earned. The amount which each person was to receive was a mere matter of computation, being a percentage of the profits for the year. When such amounts are definitely ascertainable as of the close of the year, the fact that the computation and entry on the books is made after the close of the year is immaterial. In such a case the amounts are properly to be accrued as an expense by the corporation for the year in which the services were rendered. The Commissioner has so treated the amounts so far as the corporation is concerned. Upon the same facts, the amounts are to be accrued as income for the same year by a taxpayer upon an accrual basis. The deficiencies, so far as they arise from the errors alleged in the petition, are disallowed.

Orders of redetermination of the tax liability for 1917 and 19W will be entered on 10 days' notice, under Bule SO.


author: Phillips:

text:
    Appeals of Emil Stern and Jules Stern.
    Docket Nos. 2186, 2187.
    Decided October 13, 1926.
    1. In determining whether the cost of securities of an American citizen seized by the German Alien Property Custodian may be deducted, it is necessary to distinguish between a loss sustained and a debt ascertained to be worthless and charged off.
    2. The cost of bonds seized by the German Alien Property Custodian can not be deducted as debts ascertained to be worthless in the absence of any showing of the financial condition of the debtor.
    3. Where bonds of an American citizen were seized by the German Alien Property Custodian in 1918, the citizen lost all right, title, and interest in said bonds; his only remedy being to request his Government to assume his claim as its own and attempt to. secure redress from the German Government. In such circumstances, held, that a deductible loss was sustained in 1918.

      Riohcard E. Dwight, Esq., Oscar R. Ewing, Esq., and J. R. Ditile, Esq., for the petitioners.

      Percy 8. Or ewe, Esq., for the Commissioner.
    The taxpayers appeal from the determination by the Commissioner of deficiencies in income tax for 1918 and 1919 as follows:
    1918. 1919.
    $162,349.61 Emil Stern $36,333.20
    154,306.99 Jules Stern 27,311.99
    The deficiencies are due in part to the refusal of the Commissioner to allow certain deductions for alleged losses or bad debts to a partnership composed of the taxpayers, and the appeals have been consolidated.
    FINDINGS OF FACT,
    The taxpayers in these appeals are, and during all the times- mentioned herein were, American citizens and equal copartners in the firm of Stern & Stern, 79 Fifth Avenue, New York City. This firm has been engaged in business since 1888 as importers and converters of silk fabrics, cotton goods, etc.
    Prior to the outbreak of the World War in 1914, the taxpayers regularly purchased large quantities of goods in Germany. To finance these purchases, the taxpayers had funds on deposit with the Prussian State Bank of Berlin, as well as securities having a value of several hundred thousand marks. Payments for goods so purchased were made by drafts drawn on the Prussian State Bank, and, if the firm did not have on deposit with said bank fimds sufficient to pay such drafts, the bank nevertheless paid them, holding the securities as collateral for such overdrafts. Such securities were owned in equal shares by the taxpayers.
    On March 25, 1918, all of the securities so held by the Prussian State Bank and the aforesaid bank deposit were seized by the German Custodian of Alien Property. The taxpayers had no knowledge of such seizure until the early part of 1919.
    After the Armistice, Emil Stern, in New York, wrote to his brother, J ules Stern, in Paris, to sell both their French and German securities. Jules Stern got in touch with another brother in Berlin, a director of the Prussian State Bank, but was unable to secure possession of the seized property.
    In April, 1919, Judge Max Stern, a brother of these taxpayers and President of.the highest Court of Appeals in Berlin, called upon the German Custodian of Alien Property at the request of these taxpayers in order to find out what had become of their securities. Judge Stern ascertained that said securities had been seized by such custodian. This was the first definite knowledge the taxpayers had that their securities and bank deposit with the Prussian State Bank had been seized.
    In the early part of 1919, Jules Stern had written the American Embassy in Paris and Emil Stern had written the State Department in Washington, advising both that the taxpayers had property enumerated in said communications within Germany, which taxpayers feared had been seized by the German Custodian. These communications were acknowledged by letters in which the taxpayers were informed that “ in receiving it and malting it of record no assurance can be given that it will be deemed proper to take any action in the matter in your behalf.”
    In October, 1919, attorneys for the taxpayer wrote to the Prussian State Bank on behalf of these taxpayers and asked the present status of the taxpayers’ account with said bank and whether they could sell the securities as they wished. The bank replied that it could not give any information, inasmuch as the Alien Property Custodian had refused to grant the required permission.
    In the fall of 1919, the taxpayers’ firm sent buyers to Germany and began again to purchase goods. In connection with the financing of these purchases, the taxpayers requested the Prussian State Bank again to pay drafts of taxpayers against the deposit or on the security of the securities so seized by the German Custodian, but the bank refused to honor such drafts or to lend anything on such security. Taxpayers purchased marks with other funds to pay for such purchases.
    The taxpayers were advised at the end of 1919 that they had no title under German law to the securities and deposit in question. by reason of their seizure by the German Custodian of Alien Property. At the end of 1919 the taxpayers had no expectation ¿.hat the Government of the United States might secure the return of this property to them.
    Under the German law, after the property of American citizens had been seized they had no title in such property. The legal title to such property vested in the German Custodian and the American citizens whose property had been seized could not sell it, as it was incapable of being assigned, transferred or mortgaged, nor could they transfer any interest that they might have in it.
    There were no means under the German law by which these taxpayers could recover their property. At the end of 1919 these taxpayers did not have any claim against Germany which could be enforced under any treaty or under any existing principle of international law, and there was no tribunal in existence wherein these taxpayers might have proven and enforced their claims.
    At the end of 1919 the Government of the United States had not adopted a policy with respect to the collection of claims against Germany. At that time the State Department uniformly advised American citizens desiring to know whether their property seized by the German Custodian would ever be returned, that the question was so far in the future that it depended upon considerations which could not be foretold at that time.
    At the end of 1919 the United States and Germany were still technically at war and it could not be foreseen at that time when peace would be made between them. The Senate had rejected the Treaty of Versailles and there was a deadlock between the President and the Senate which had engendered such bitterness that no one could then say when a treaty of peace would be made. It was impossible at that time to know what provision such treaty, when made, would contain with respect to property of American citizens which had been seized by the German Custodian.
    On June 30,1917, the securities on deposit with the Prussian State Bank included bonds of the German Government, of German municipalities and German railway and commercial companies; stocks in German companies and bonds of the Japanese, Chinese and Moroccan Governments. The bonds of the German Government, municipalities and companies so held on that date had cost the taxpayers 955,719.75 marks. The March 1, 1913, value of such bonds as were acquired prior to that date, plus the cost of those acquired thereafter, was 866,848.60 marks. As to each of such securities, the March 1, 1913, value was less than cost. The stocks in German companies so held on June 30, 1917, had cost taxpayers 95,152.50 marks, and the March 1, 1913, value was 87,702 marks. On the same date there was on deposit in that bank to the credit of the partnership 332,392.25 marks. All of such securities and credit had been acquired by taxpayers at the normal rate of exchange of the mark, namely, 23.80 cents per mark.
    As interest coupons were clipped and as bonds were redeemed or paid, the proceeds were deposited in the account, both before and after the seizure of such account by the German Alien Property Custodian. The taxpayers had no knowledge of this on December 31, 1919, or prior thereto. The seizure by the German Alien. Property Custodian included all of such bonds and stocks and the cash balance on deposit, including the proceeds of any of such bonds paid or redeemed between June 30, 1917, and the date of seizure.
    In December, 1919, the taxpayers charged off the cost of such bonds, stocks and bank balance on their books, excepting the bonds of the Japanese, Chinese and Moroccan Governments.
    No part of the loss claimed by the taxpayers as a result of the seizures was compensated for by insurance.
    In 1921 the Alien Property Custodian returned to the taxpayers the property which had been seized or the proceeds of such part thereof as had been disposed of by him. In preparing their income-tax return for that year the taxpayers included as income the value of the securities and marks then received.
    In computing the deficiencies the Commissioner refused to allow the taxpayers any deduction, either in 1918 or 1919, for debts ascertained to be worthless or for losses sustained.
   OPINION.

Phillips:

At the time the United States entered the World War in 1917 the petitioners had certain bonds, stock and bank deposits in Germany, which were seized in 1918 by the German Alien Property Custodian. They seek to deduct as debts ascertained to be worthless and charged off in 1919, the March 1, 1913, value (which was less than cost) of the German Government, municipal and corporation bonds, and the cost to them of the bank deposit. The evidence establishes that such bonds are, under the German law as under our laws, evidences of indebtedness and therefore the subject of such a deduction under proper circumstances. As to the stocks in German companies, it is conceded that these do not constitute an indebtedness, and deduction for a loss is claimed in 1918, the year of the seizure.

The Revenue Act of 1918 provides for the deduction of both debts ascertained to be worthless and losses sustained. If a debt becomes worthless, it would seem that a loss has been sustained. Debts, however, are deductible in the year in which they are ascertained to be worthless and charged off, which may be other than the year in which they in fact became worthless. Since it can not be assumed that a double deduction was intended, it would appear that, if a debt became worthless in one year, but was not ascertained by the taxpayer to be worthless until the following year, deductions could not be taken for a loss in the first year and for a bad debt in the second. Furthermore, a loss may be sustained upon account of an indebtedness without any ascertainment of worthlessness, as, for example, the embezzlement of negotiable securities. In that case, a loss may be sustained in the year of the embezzlement, although there has been no ascertainment that the debt itself is worthless.

It becomes necessary, therefore, in every case to distinguish between a loss sustained and a debt ascertained to be worthless. In the present instance it appears to us that there has been no proof that any of the debts in controversy were worthless. The fact, so far as there is any proof, is that the debtors were solvent; indeed, some of the bonds were redeemed and the proceeds deposited in the seized account during 1918 and 1919. The claim for the deduction is based, not upon the worthlessness of the bonds or of the bank deposit, but rather upon the seizure thereof by the German Government. The fact is that, while uncollectible by taxpayers, the debts did have a value and were collectible by the new owner. It is our opinion that the seizure and continued holding of these bonds by authority of the enemy government does not constitute the basis for a deduction upon the ground that the debts were ascertained to be worthless, and that, if any deduction is allowable, it is upon the basis of a loss sustained by reason of the seizure.

We come then to consider whether any deductible loss was sustained in 1918, when the property was taken over by the German Alien Property Custodian by decree of the Imperial German Government. The undisputed evidence is to the effect that under such decree possession, title, and all interest in the seized property were taken from the taxpayers and vested in the Custodian, but that such decree did not provide what ultimate disposition should be made of the property. The Custodian, however, was an agent of the German Government which possessed the necessary power to enforce its decree. Since no provision was made for the ultimate return of the property or for compensation, the substance of the situation was that possession of and title to the property was taken from the taxpayers and vested in the German Government. All rights of the taxpayers in the property ceased, and it was only in the event that Germany should later, by treaty or otherwise, provide for its return or for compensation that any rights would arise in favor of the taxpayers.

Although the taxpayers no longer had any interest or title in the property, under principles of international law, which the German Government might or might not recognize, a claim arose against the German Government upon the part of the United States on behalf of the taxpayers, which the United States might or might not prosecute as it saw fit and by such means as were available.

One nation treats with the citizens of another only through their government. A sovereign cannot be sued in his own courts without his consent. His own dignity, as well as the dignity of the nation he represents, prevents his appearance to answer a suit against him in the courts of another sovereignty, except in performance of his obligations, by treaty or otherwise, voluntarily assumed. Hence, a citizen of one nation wronged by the conduct of another nation, must seek redress through his own government. His sovereign must assume the responsibility of presenting his claim, or it need not be considered. If this responsibility is assumed, the claim may be prosecuted as one nation proceeds against another, not by suit in the courts, as of right, but by diplomacy, or, if need be, by war. It rests with the sovereign against whom the demand is made to determine for himself what he will do in respect to it. He may pay or reject it; he may submit to arbitration, open his own courts to suit, or consent to be tried in the courts of another nation. All depends upon himself. (United States v. Diekelman, 92 U. S. 520).

Many instances of treaties in which, a government has surrendered the claims of its nationals might be cited, but two recent examples will suffice. In the treaty negotiated with Spain in, 1899, following the Spanish-American War, it was provided:

The United States and Spain mutually relinquish all claims for indemnity, national and individual, of every kind, of either Government, or of its citizens or subjects, against the other Government, that may have arisen since the beginning of the late insurrection in Cuba and prior to the exchange of ratifications of the present treaty, including all claims for indemnity for the cost of the war.
The United States will adjudicate and settle the claims of its citizens against Spain relinquished in this article. (Art. VII, 30 Stat. 1754.)

In the Treaty of Versailles, negotiated June 28,1919, which formed the basis of peace between Germany and the European Allies, it was provided in Part N, section IV, that the property of German nationals within the territory of the Allies should be retained and liquidated by such Allied power and that the proceeds might be charged with the amounts due the nationals of such Allied power arising out of their property in German territory or debts due them by German nationals. Sen. Doc. No. 49, 66th Cong., 1st Sess. Under the treaty of peace between the United States and Germany a similar-power with respect to the property of German nationals within the territory of the United States was reserved to this country.

It would accordingly appear that, after the property was taken by the Custodian, the taxpayers were entirely devested of their property. All that they had was the hope that the treaty of peace would provide for the return, of such property, or its value, or, if not, that the United States would compensate its nationals for seized property which Germany might be permitted to retain under such treaty. Any claim which existed, however, was a claim upon the United States, either to secure a return of the property by Germany or, if it allowed confiscation as part of the terms of the treaty, to compensate those whose propertf was lost.

We are accordingly of the opinion that the taxpayers sustained a loss in 1918 which they are entitled to deduct in their returns for that year.

Orders of redetermination will 5e entered accordingly on 15 days’ notice, v/nder Rule 50.

MaRquette did not participate.


author: Lansdon :

text:
    H. F. Suhr & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 3649, 7568.
    Decided October 19, 1926.
    Upon the evidence, held, that the petitioner has not established its right to have its tax liability for the years 1918, 1920 and 1921, computed under the provisions of section 303 of the Revenue Act of 1918, and is not entitled to relief for such years under the provisions of section 328 of the same Act.

      Perry W. Shrader, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.
    The Commissioner asserts deficiencies in income and profits taxes for the calendar years 1918,1920 and 1921, in the respective amounts of $18,590.05, $947.88, and $420.42, all of which are in controversy. The petitioner presents alternative contentions: (1) That on account of the nature of its business it is entitled to have its tax liability computed under the provisions of section 303 of the Revenue Act of 1918; and (2) that, if such method of computation is refused, it is entitled to special assessment. On motion the two appeals were consolidated.
    FINDINGS OF FACT.
    The petitioner is a California corporation with its principal place of business in San Francisco, where it was engaged in the undertaking business during the taxable years. Its authorized capital is $60,000, divided into 600 shares of the par value of $100 each, all of which was issued fully paid and was owned as follows in 1918: A. W. Nelson, secretary, 50 shares; H. Fred Suhr, Jr., treasurer, 50 shares; E. M. Welch, vice president, 150 shares; C. R. Welch, director, 150 shares; William Welch, director, 150 shares; H. E. Suhr, Sr., president, 50 shares. The stockholdings and stockholders remained the same throughout the taxable years, except that H. F. Suhr, Sr., died prior to December 31, 1021.
    H. Fred Suhr, Jr., and E. M. Welch are licensed embalmers and were regularly engaged in the active conduct of the affairs of the petitioner during the taxable years. Suhr devoted all his time thereto, except one day and two or three evenings of each week, which were required in the discharge of his duties as a member of the Board of Supervisors of San Francisco County. As such supervisor he received a salary of $1,200 per year for the years 1918 and 1920, and of $2,400 a year for the year 1921. Welch devoted his entire time to the business.
    The income of the petitioner resulted from the sale of caskets and other undertakers’ supplies, from services rendered as embalmers, from the hire of automobiles and other vehicles for funeral services, and from various minor sources incident to the business.
   OPINION.

Lansdon :

The petitioner’s first contention is that its tax liability should be computed under the provisions of section 303 of the Revenue Act of 1918 and of the similar provisions of the Revenue Act of 1921, which are as follows:

That if part of the net income of a corporation is derived (1) from a trade or business (or a branch of a trade or business) in which the employment of capital is necessary, and (2) a part (constituting not less than 30 per centum of its total net income) is derived from a separate trade or business (or a distinctly separate branch of the trade or business) which if constituting the sole trade or business would bring it within the class of “ personal service corporations,” then (under regulations prescribed by the Commissioner with the approval of the Secretary) the tax upon the first part of such net income shall be separately computed (allowing in such computation only the same proportionate part of the credits authorized in sections 311 and 312), and the tax upon the second part shall be the same percentage thereof as the tax so computed upon the first part is of such first part: Provided, That the tax upon such second part shall in no case bo less than 20 per centum thereof, unless the tax upon the entire net income, if computed without benefit of this section, would constitute less than 20 per centum of such entire net income, in which event the tax shall be determined upon the entire net income, without reference to this section, as other taxes are determined under this title. The total tax computed under this section shall be subject to the limitations provided in section 302.

The evidence adduced in support of this contention is not persuasive. We are not convinced that this petitioner’s income can be segregated to conform to the terms of the statute. We are not satisfied that any part of such income was “ derived from a separate trade or business ” or from “ a distinctly separate branch of the trade or business.” Supplying caskets and funeral materials and accessories, embalming the dead, furnishing automobiles, and rendering the other services enumerated by the petitioner are all inseparable parts of a single business. Even if the sources of income were within the provisions of the statute there is not sufficient evidence to enable us to make the segregations necessary to compute the petitioner’s tax liability under the provisions of law relied upon for relief.

The documentary evidence shows that salaries in substantial amounts were paid to all the stockholders, that such stockholders were officers or directors, and that only H. Fred Suhr, Jr., and E. M. Welch were regularly engaged in the active conduct of the business of the petitioner. To approximate the percentage of income which the law requires shall be derived from the personal service branch of a business, it is apparent that all salaries must be charged against the merchandise department. The total receipts from embalming, while considerable, never exceeded 10 per cent of the gross income of the petitioner in any year involved in this proceeding. Moreover, such services were rendered for the most part by employees who had no participating interest in the profits of the business. In the light of all the evidence, we must sustain the Commissioner in his refusal to compute the petitioner’s tax liability for the years 1918,-1920 and 1921, under the provisions of section 303 of the Revenue Act of 1918.

The alternative contention of the petitioner is not supported by any convincing proof. There are no abnormalities as to invested capital or other conditions that distinguish this petitioner from other corporations engaged in the undertaking business in San Francisco. We are without knowledge of the rates of excess-profits taxes paid by the concerns suggested as proper comparatives. This whole phase of the petitioner’s appeal rests on a few ex parte statements by an accountant who had prepared the income and profits-tax returns of other undertaking concerns for some of the years here involved. Such evidence is without probative value.

Judgment will l>e entered for the Commissioner.


text:
    Benham Ice Cream Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3401.
    Decided October 19, 1926.
    Depreciation of tangible assets determined.

      Neil E. Larkin, Esq., for the petitioner.

      George E. Adams, Esq., for the respondent.

      The Commissioner has determined a deficiency in income and profits taxes for the year 1919 in the amount of $7,409.47, of which $5,512.99 is in controversy. The petitioner alleges that the Commissioner erred ,in reducing the amounts claimed as deductions from gross income for the taxable year on account of depreciation of certain of its plant assets, but admitted at the hearing that the Commissioner’s computation of such depreciation on tubs, cans and cabinets was correct.
    FINDINGS OF FACT.
    The petitioner is a California corporation with its principal office at Fresno. During the taxable year it was engaged in the manufacture and sale at wholesale and retail of ice cream and water ices. Its trade territory was the San Joaquin valley, covering an area 75 by 200 miles. It delivered 10 per cent of its sales to places outside of Fresno.
    The business of the petitioner is somewhat seasonal, the period of its intensive work and maximum production extending from April to October, inclusive, during which more than 90 per cent of its product is manufactured and marketed. During the taxable year all its departments were operated continuously for 24 hours daily during the busy season, and for that period 40 persons were employed on the day shift and 20 at night.
    It was the custom of the petitioner to make all additions to and replacements of plant and equipment during the first three months of the year. All repair work, except that on account of breakage and accidents, was done during the same period.
    The parties agree that the books of the petitioner showed a total value of depreciable assets at the end of the year 1919 in the amount of $178,631.23. Upon this valuation the petitioner computed depreciation at the rate of 33½ per cent on its auto trucks and automobiles, at 15 per cent on its machinery and equipment, and at 5 per cent on its factory buildings, in the total amount of $33,893.13, which it deducted from its gross income in its income and profits-tax return for the taxable year. Upon audit of such return the Commissioner computed depreciation on auto trucks and automobiles at 25 per cent, on machinery and equipment at 10 per cent, and on factory buildings at 2½ per cent, and applied such rates to the average balances in each of such groups of assets for the year.
    The useful life of the auto trucks and automobiles used, by the petitioner during the taxable year was not more than 3 years; that of the plant equipment and machinery was not more than 7 years; and that of the factory buildings was not more than 25 years. The petitioner admits that the Commissioner correctly determined the depreciation on tubs, cans and cabinets. The value of the buildings should be increased in the amount of $5,064.69, the cost of additional construction prior to April 1, 1919.
   OPINION.

Lansdon :

The two issues involved in this proceeding are (1) the correct basis for depreciating the book values of the tangible assets owned by the petitioner at the close of the taxable year, and (2) the proper rates of depreciation to be applied to such values. We have held that depreciation is a matter of fact to be established by satisfactory evidence. Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87.

The petitioner has proved that substantially all its additions to equipment and machinery were made prior to April 1, 1919, and were in use in the production of not less than 94 per cent of its total output for the year. We are of the opinion that the balances in assets accounts at the end of the year are the proper bases for the computation of depreciation by this petitioner. In the Appeal of the Robert P. Hyams Coal Co., 1 B. T. A. 217, upon which the Commissioner relies to support his method, the conditions were different in that additions to equipment were made throughout the year, and also in that, so far as disclosed in the findings of fact in that appeal, the production of the mine was uniform throughout the taxable year.

The evidence adduced by the petitioner convinces us that the depreciation rates of 33% and 15 per cent on auto trucks and automobiles and machinery and equipment, respectively, used in the manufacture and sale of ice cream is reasonable. Appeal of J. C. Eves, 2 B. T. A. 115. The factory buildings of the petitioner were of concrete, tile and wood construction and were subject to unusual wear and tear on account of the nature of the business and by reason of vibration resulting from the use of heavy machinery. We are of the opinion that the useful life of such structures, so used, is not more than 25 years.

Judgment will be entered on %0 days' notice, under Rule 60.


text:
    Appeal of Lawrence Elmer Burton.
    Docket No. 2689.
    Decided October 19, 1926.

      James Bherier, Esg., for the petitioner.

      F. 0. Graves, Esg., for the Commissioner.
   Sternhagen:

Deficiency of $201.92 income tax for 1922, resulting from the Commissioner’s disallowance of petitioner’s deduction of necessary business expenses.

BINDINGS OF FACT.

Petitioner is a United States citizen, and in 1922 be was employed by H. K. Mulford Co. as salesman in Straits Settlement, Java, Borneo, French Indo China, Siam and Malay States. His employment was under a written contract providing a salary of $200 a month and “necessary approved traveling expenses.” For all sales in excess of $50,000 net per year he was to receive “ a bonus of 5 per cent on such excess providing however that the total amount of his selling cost including salary and expenses shall not exceed 12½ per cent of the total amount of sales.” In 1922 he did not mate sufficient sales to entitle him to a bonus and he received no bonus. He traveled much of the time, and rendered itemized expense accounts to the company upon which the company paid him $4,099.55 as expenses, in addition to the salary of $2,400, a total of $6,499.55.

Petitioner included this entire amount in gross income and deducted the amount of expenses.

Judgment will T)e entered for the petitioner.


author: Steenhagen:

text:
    Appeal of Frances J. Eaton.
    Docket No. 5614.
    Decided October 19, 1926.

      T. Ooleman Andrews, G. P. A., for the petitioner.

      Thos. P. Dudley, Jr., Esq., for the Commissioner.
    Deficiencies in income tax of $133.90 for 1919 and $165.45 for 1920, arising from the Commissioner’s disallowance of petitioner’s depletion deductions on limestone.
    FINDINGS OF FACT.
    Petitioner is the owner of an undivided one-sixth interest in a limestone property located at Marblehead, Ottawa County, Ohio. The property is operated by The Kelley Island Lime & Transport Co. under a lease dated February 15, 1907, for a term of 20 years, by the terms of which the lessee paid a royalty of 4 cents for each ton removed.
    On March 1, 1913, the property contained 9,689,406 tons of un-quarried limestone. In 1919 the number of tons removed was 847,407, from which petitioner received $5,656.04 as her share of the royalty. In 1920 the number of tons removed was 756,176, from which petitioner received $5,041.17 as her share of the royalty.
    In 1919 the Commissioner, before an engineering investigation of the property in question had been made, fixed a depletion rate of 3½ cents per ton for the interests of some of the other owners.

      On May 27, 1907, a deed was given of four parcels of land in the vicinity, consisting of 5, 6, 3, and 0.68 acres, or a total of 14,68 acres, from Patrick Doner to The Kelley Island Lime & Transport Co. for a named consideration of $23,000. Upwards of 12 acres of this property were limestone. The practice in quarrying this limestone is to quarry only to a depth of 20 feet and to figure 166 pounds to a cubic foot of stone, or about 72,200 tons to an acre.
    One James, who was the owner of an interest in the property in question and represented several other owners, filed with the Commissioner on Form F, called “ Schedules for Substantiation of Valuation, Depletion, and Depreciation Inorganic Nonmetallic Mineral Properties,” the statement that prior to March 1, 1913, he estimated that upwards of 3,000,000 tons had been removed from the property, and the following quantities thereafter:

    The Kelley Company had operated the property for many years prior to 1907.
    The Commissioner computed the depletion rate by finding the present worth on March 1, 1913, of the agreed royalty rate over an assumed life of the quarry of 20 years and applying this to the 1913 content of the quarry. The depletion rate thus allowed is 1.76 cents per ton.
   OPINION.

Steenhagen:

The petitioner attacks the Commissioner’s use of Hoskold’s formula in determining the discount value of the agreed royalties. She urges that the Commissioner was not justified in extending the probable life of the quarry to 20 years, based upon a spreading of the prior removal of 3,000,000 tons over the period of six years subsequent to February, 1907. But the petitioner proves nothing better. On March 1, 1913, so far as the evidence shows, the only experience upon which a valuation could be based was that 3,000,000 tons had been removed over a period of more than six years, thus giving a maximum annual average of 500,000 tons. If anyone could have prognosticated a greater output, it does not appear from this record. It can not be doubted that the prospect of 4 cents a ton sometime in the future is worth something- less than that at present. The old adage has it that the ratio is a bird in the hand to two in the bush. The Commissioner applied Hoskold’s formula to the data available, and upon the present record we are not convinced this was in error.

Judgment 'ivill be entered for Gommissioner.