author: Morris :

text:
    Benjamin Electric Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5300.
    Promulgated April 30, 1927.
    1. The Board has no jurisdiction over 1918 as the Commissioner asserted no deficiency for that year. Gonielms Cotton Mills, 4 B. T. A., 255.
    2. The petitioner and the Starrett Manufacturing Co. were not affiliated during 1919.

      Briggs G. Simfich, Esq., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.
    This proceeding is for the redetermination of income and profits taxes for 1918 and 1919. The Commissioner asserts that for 1918 there is an overassessment of $45,081.50 and for 1919 a deficiency of $11,769.91. The petitioner alleges that the Commissioner erred in refusing to affiliate it with the Starrett Manufacturing Co.
    FINDINGS OF FACT.
    The Benjamin Electric Manufacturing Co., hereinafter referred to as the Benjamin Company, is an Illinois corporation, organized in 1901, located at Chicago and engaged in the manufacture and sale of electrical supplies and equipment. The business of the corporation was carried on by four men, B. B. Benjamin, inventor; Walter D. Steele, engineer; W. Clyde Jones and Keene H. Addington, lawyers. The capital stock of the petitioner until 1918 consisted solely of common stock, which was held as follows: Benjamin, one-third; Steele and Jones, one-fourth each; Addington, one-sixth.
    Some time in 1912, H. F. Starrett, who had invented a line of panel switchboards, brought the same to the attention of Jones, who is a patent attorney. Jones interested the other stockholders and they decided that the corporation should acquire the invention. The proposed plan of acquiring the panel switchboards was by the organization of a new corporation, the four stockholders of the Benjamin Company to own a two-thirds interest and Starrett the remaining third. Due to the fact that the petitioner, the Benjamin Company, was promoting its Canadian corporation, this plan had to be abandoned. Starrett thereupon secured other capital and undertook the manufacture and sale of his inventions under the corporate name of the Starrett Electric Co.
    While so operating, Starrett was from time to time in touch with and consulting Steele, the sales manager and vice president of the Benjamin Company. At the same time, Jones and Addington were acting as attorneys for Starrett’s company. In 1916 the Starrett Electric Co. became bankrupt. Steele and the other stockholders determined to carry out the plan which had been abandoned in 1912. Accordingly the Central West Manufacturing Co. was organized for the express purpose of purchasing the assets of the bankrupt company. Funds in the amount of $40,000 were provided by the Benjamin Company to effectuate the purchase. The assets were purchased by the Central West Co. at a public sale. After acquiring these assets the Central. West Co. entered into a contract with Star-rett, the inventor, whereby he was issued $20,000 of stock in consideration for his personal-service contrast, a certain amount of cash, patents issued to him and the rights to his future inventions. The company was capitalized at $60,000, the name was changed from Central West Manufacturing Co. to Starrett Manufacturing Co., and business resumed. The stock of the Starrett Manufacturing Co., was held one-third by Starrett, one-half by the fonr Benjamin Company stockholders, and one-sixth by Kodjbanoff, sales manager of the eastern offices of the Benjamin Company. Originally the one-sixth interest held by Kodjbanoff had been divided equally between himself and one Poss, the western sales manager of the Benjamin Company. However, prior to 1918, Kodjbanoff secured the permission of the four Benjamin Company stockholders to purchase the shares held by Poss, so that during the taxable years here in question, Kodjbanoff was the owner of a one-sixth interest in the Starrett Manufacturing Co. The one-half interest in the Starrett Company owned by the four stockholders of the Benjamin Company was held in the same ratio as the stock which they owned in the Benjamin Company.
    On July 3, 1916, before the Central West Manufacturing Co. had changed its name, it entered into a contract with the Benjamin Electric Co., which provided that the latter company should be the sole and exclusive agent for all products of the former, that sales should be promoted through the sales organization of the Benjamin Company. It was .to receive for its services as selling agent 25 per cent of the selling price on all products and merchandise. The terms of this contract were strictly adhered to by the contractual parties during the taxable years.
    The officers and directors of the Benjamin Company and the Starrett Manufacturing Co., during 1918 and 1919 were:

    The by-laws of the Starrett Manufacturing Co., contained the following clause: “Article 4 Section 7. The majority of the Board of Directors may at - any time remove any officer and elect his successor.” There has been no occasion to invoke this provision since incorporation of the Starrett Manufacturing Co.'
    The ownership of the outstanding stock of the Benjamin Company and the Starrett Manufacturing Co., on December 31, 1918, and December 31, 1919, was as follows:

    The percentage of total stock outstanding held by each stockholder was:

    Starrett attended the stockholders’ meetings of the Starrett Company and voted his stock. There has always been harmony among the stockholders and Starrett has not opposed the actions of the other stockholders of the Starrett Company.
    From time to time and as needed the Benjamin Company made advances to the Starrett Company. The advances were made in various amounts but at no time did the total exceed $20,000. The Benjamin Company made the advances by their check and received in exchange therefor the note of the Starrett Company signed by its officers. It was a matter of several years before the Starrett Company became self-supporting.
    J. H. Fall, Jr., became a stockholder, officer, and director of the Benjamin Company early in 1918 in a transaction whereby the petitioner acquired the Royal Enameling & Mfg. Co. The latter company had been the principal source of supply of reflectors and other products needed by the Benjamin Company. The Royal Company was largely owned by J. H. Fall, Jr., and there had always been the closest business relations between Fall and the Benjamin Company stockholders. A consolidation was effected whereby Fall became the fifth principal stockholder in the Benjamin Company. In order to bring about the consolidation it was necessary to recapitalize the Benjamin Company. The authorized capital stock was increased to $3,000,000 divided into three classes of stock consisting of $1,000,000, first preferred; $1,000,000 second preferred, and $1,000,000 common.
    The first preferred was offered to the public to provide working capital and was sold as an investment stock. This stock paid 8 per cent dividends and the dividends were cumulative. The stock was sold subject to retirement at $110 per share on 60 days’ notice. The company was authorized to redeem each year 5 per cent of the maximum amount of outstanding stock at any one time. A total of 1,500 shares of this stock was sold in small lots to the public, and each year 5 per cent of this total was redeemed. The amount redeemed, beginning in 1919 and each year thereafter, amounted to 375 shares per annum. None of the purchasers of first preferred stock held any second preferred or common stock.
    The second preferred stock was used in part to acquire the interests of Fall in the Royal Company and in part to cover assets of the Benjamin Company. Fall received in exchange for his interest in the Royal Company $400,000 of the second preferred stock of the Benjamin Company. Of the remainder $510,000 was distributed, one-third to Benjamin, one-fourth each to Steele and Jones, and one-sixth to Addington. The balance of the second preferred stock, amounting to $90,000, was sold to employees of the Benjamin and Royal Companies as compensation for faithful services. The amount offered each employee was allotted on the basis of time and the service and usefulness to their respective companies, so that by December 31, 1919, all of the second preferred stock was outstanding. Only 6,600 shares of the common stock were issued; 5,400 shares were divided between Benjamin, Steele, Jones, and Adding-ton in the same proportion as they had formerly held prior to the recapitalization. Fall secured the remaining 1,200 shares in accordance with an agreement with the four stockholders of the Benjamin Company, whereby he exchanged a part of his second preferred for this amount of common stock.
    Prior to the recapitalization the officers, directors and stockholders of the petitioner were Benjamin, Steele, Jones, and Addington; after the consolidation and recapitalization the board of directors was increased from four to seven. The new directors were Fall, Forgan, and Stuart. Forgan and Stuart owned a small amount of first preferred which they purchased on the open market upon their own initiative. They had strong business connections which added materially to the strength of the directorate. Forgan was president of the National City Bank of Chicago. Stuart was treasurer of the Quaker Oats Co., and a relative and partner of Jones. Stuart had been consulted from time to time by the Benjamin Company’s stockholders as to certain corporate actions and was interested in the company.
    All the stock of the petitioner had voting rights. The first preferred stock was held in small lots by a large number of people and was widely scattered. Very few of thq first preferred stockholders exercised their right to vote except by way of proxy. The second preferred stockholders outside of the five directors were all employees of the petitioner or the consolidated company. The. common stock was held by five directors of the Benjamin Company, viz., Benjamin, Fall, Steele, Addington and Jones. At the annual stockholders’ meetings for 1918 and 1919, the stockholders present and their holdings were as follows:
    List of stockholders present at the annual meeting on February 11, 1918.
    Name Number of shares.
    Reuben B. Benjamin- 3, 900
    Walter D. Steele_ 2,925
    J. Horton Fall, Jr- 3, 684
    W. Clyde Jones- 2, 925
    Keene H. Addington (represented by Walter D. Steele as proxy)_ 1, 950
    J. Horton Fall (represented by J. Horton Fall, Jr., as proxy)_ 110
    George W. Holman_ 152
    A. E. Clarke_¿,_ 90
    Total 15, 700
    List of stockholders present at the annual meeting March 11, 1919.
    Name. Number of shares.
    Reuben B. Benjamin r- 3,860
    J. Horton Fall, Jr_ _ 3,610
    W. Clyde Jones_ _ 2,895
    Walter D. Steele- - 2,895
    David R. Forgan- - 25-
    Robert Stuart_ - ' 100
    E. C. Wyman_ - 25
    J. W. Martin_ - 5
    C. T. Warden_ - 10
    Henry Pollard_ - 20
    O. T. Johnson_l- —'- 5
    O. F. Westphal_ - 25
    A. E. Lubeck_ - 5
    J. H. Taylor_ - 3
    R. J. Aldrich_ _ 10
    J. J. Rayspis_ _ 5

      Name. Number of shares.
    Wilsene MaeNaughton_ 5
    Ruthella B. Howe- 25
    E. 0. Mott_ 10
    Joseph Estes_ 20
    E. A. Drake_ 20
    H. H. Haylett_1- 15
    P. M. Lewis_ 10
    165 stockholders represented by J. Horton Fall, Jr., and W. D. Steele, proxies- 6,134
    19, 737
    The first preferred stockholders present at the annual meeting of March 11, 1919, besides Forgan and Stuart, directors, were Wyman, Martin and Warden. The remaining stockholders owned second preferred stock and outside of the four directors were employees of the Benjamin Company. The proxies held by Steele and Fall included proxies for a considerable amount of first preferred stock.
    For the year 1918 the petitioner on its original return showed $159,884.42 as the correct tax. The respondent determined the tax to be $114,802.92 and notified the petitioner of an overassessment of $45,081.50. For 1919 the respondent determined the deficiency of $11,709.91. The petitioner appeals as to both years, alleging that it should have been affiliated with the Starrett Manufacturing Co.
   OPINION.

Morris :

The respondent contends that the Board has no jurisdiction as to 1918 because no deficiency has been asserted as to that year. We must sustain his contention. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255. See also Appeal of Stange-Elliott Coal Co., 4 B. T. A. 745; Appeal of John F. Cook, 4 B. T. A. 916; Appeal of Florence M. Smith, Executrix, 5 B. T. A. 225; Appeal of C. Willenborg & Co., 5 B. T. A. 788.

The remaining question is whether the petitioner should be affiliated with the Starrett Manufacturing Co. Affiliation, if it exists, must be based on ownership or control of substantially all the stock. Appeal of Tunnel Railroad of St. Lows, 4 B. T. A. 596. The control required by the statute is control of the voting stock, and this control must be shown to be genuine, and must be actually exercised. Appeal of Isse Koch & Co., 1 B. T. A. 624. Control of the business with a quiescent minority is not sufficient, nor is the fact that there is unity of purpose and harmonious cooperation sufficient to satisfy the statutory requisites for affiliation. Rishell Phonograph Co., 2 B. T. A. 229. Tunvnel Railroad of St. Louis, supra. We have also said, in the Appeal of Cleveland & Mahoning Valley Railway Co., 4 B. T. A. 1040, that it will be noted that the words controls ’ and ‘ controlled ’ as used in section 240 (b) of the Revenue Act of 1918 are not in any manner limited or qualified. In the absence of any qualification these words must be taken to mean full and complete control.” Whether or not in the instant case the same interests control substantially all of the stock will be determinative of whether or not affiliation should be allowed.

It appears from the facts that two-thirds of the stock of the Star-rett Company was owned outright by stockholders of the petitioner during 1919. The remaining one-third was owned by Starrett who was president of the company and closely connected with the principal stockholders of the petitioner. The Board has held that where there has been a two-thirds ownership of the stock of one company, that this is not sufficient to constitute substantially all as required by the statute. Appeal of Madera Yosemite Big Tree Auto Co., 2 B. T. A. 346; Appeal of United Metal Spinning Co., 2 B. T. A. 520; Appeal of Greenville Coaling & Export Corporation, 4 B. T. A. 183. There is no evidence that the stock held by Starrett was controlled by the stockholders of the Benjamin Company. The fact that Star-rett worked with and did not oppose the actions of the majority stockholders is not sufficient evidence in our opinion to hold that the stock owned by Starrett was controlled by the other stockholders. Nor do we believe that the by-law giving to a two-thirds majority of the directors the right to remove an officer of the corporation, is a good and sufficient reason for saying that the Benjamin stockholders exercised control over the stock held by Starrett. We are not unmindful of the powers conferred upon a two-thirds vote of the stockholders of a corporation by the Illinois statute. Such powers, although seemingly unlimited, relate to the control of the corporation, and not to the minority stock, and such statute can not supplant the express wording of section 240 that substantially all of the stock must be owned or controlled by the same interests.

Our decision in this case, however, need not rest upon the percentage of ownership, and control, if any, that was exercised over Starrett’s stock. Assuming that substantially all of the stock of the Starrett Company was owned or controlled by stockholders of the Benjamin Company, those said stockholders did not own or control substantially all of the stock of the latter company. An examination of the stock held by stockholders common to both corporations shows that the same interests owned 49.1 per cent on January 1, 1919, and 48.5 per cent on December 31, 1919, of the outstanding stock of the petitioner. At no time during 1919 did the same interests own 50 per cent of the outstanding stock. While we recognize that ownership and control are both provided for by the statute, we do not find that there has been sufficient evidence adduced to show control by Benjamin, Steele, Jones, Addington, and Kodjbanoff of the stock held by the other stockholders.

The petitioner would have us exclude from consideration all the stock held by the first preferred stockholders for the reason that it was offered and sold as an investment stock and the holders thereof took no active part in the corporate affairs. In support of its position the petitioner cites the decision of the Board in the Appeal of Mahoning Coal Railroad Co., 4 B. T. A., 923. It should be noted that the closely affiliated interests in the Mahoning case held 74 to 80 per cent of the stock, while here the same interests held no more than 49.1 per cent in one corporation and 66% per cent in the other. We believe that under these facts the cases are easily distinguishable.

The petitioner has also laid considerable stress upon our opinion in the Midland Refining Co., 2 B. T. A. 292, and asserts that the instant case and the facts in the Midland case are practically identical. We do not feel that this argument is tenable in view of the facts in that case. The facts in the Midland case show that 62.71 per cent of the stock of one company and 51.07 per cent of the stock in the other corporation were owned by three men, and that approximately 80 per cent of the stock was held by persons owning stock in both corporations. Here the same interests never owned more than 49.1 per cent of the petitioner and 66% per cent of the Starrett Company.

We do not feel therefore, that the same interests owned or controlled substantially all of the stock of the two corporations. It is true that Fall worked with the principal stockholders toward an harmonious end, and it seems likewise to be true that the two corporations worked together as a business unit but control of the business is not sufficient to meet the requirements for affiliation. Appeal of Norwich & Worcester Railroad Co., 2 B. T. A. 215; Appeal of Watsontown Brick Co., 3 B. T. A. 85; Appeal of Tunnel Railroad of St. Louis, 4 B. T. A. 596; Adaskin-Tilley Furniture Co. v. Commissioner, 6 B. T. A. 316. In the Tunnel Railroad of St. Louis case we said “we could not so far disregard the language of the statute as to hold that control of the property and business of the corporation is control of the stock.”

Judgment will he entered for the respondent.


source: Caselaw Access Project

author: MoRRis:

license: Public Domain

text:
    Charles H. Touzalin Agency, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11540.
    Promulgated April 30, 1927.
    Personal service classification denied.

      Lewis K. Torbet, Esq., for the petitioner.

      L. L. Might, Esq., for the respondent.

      This proceeding is for the redetermination of deficiencies in income and profits taxes for 1919, 1920, and 1921 amounting in the aggregate to $6,324.34. The deficiencies arise from the refusal of the respondent to grant personal service classification to the petitioner.
    FINDINGS OF FACT.
    The petitioner was incorporated in 1911 under the laws of Illinois with its principal office located in Chicago.
    Prior to the incorporation of the petitioner, Charles H. Touzalin was employed for many years as an advertising solicitor by the firm of Lord & Thomas. In 1911 Lord & Thomas announced a change in its business policy whereby accounts under $10,000 a year were to be discontinued. Touzalin decided to start an agency of his own using the discarded business of Lord & Thomas as a nucleus. The severance of his relations with Lord & Thomas was very amicable and for a period of about six months the general impression existed that Touzalin Agency was owned by Lord & Thomas. Touzalin took with him approximately $300,000 of advertising business.
    Upon incorporating Touzalin paid in $5,000 cash and was issued $10,000 of the capital stock. One, Westman, paid cash for $5,000 of the capital stock and the remaining $5,000 was held as treasury stock. Shortly after the incorporation, a friend of Westman’s took $5,000 of the stock paying for the same with a promissory note.-Touzalin got back this stock by threatening the holder and by paying him $200.
    Thereafter, the accounts of an agency known as the National Agency were absorbed by the petitioner, and Paul Watson, one of its employees, was employed by the petitioner and given $500 of stock which was subsequently returned. ■
    In 1916, William B. Swann became a stockholder of the petitioner, coming from the Mahin Agency, bringing with him a substantial amount of business. The outstanding stock during the years 1919, 1920, and 1921 was divided between Swann and Touzalin. Qualifying shares were held by Mrs. Charles H. Touzalin, Mrs. William B. Swann, and by the attorney of the petitioner.
    Touzalin and Swann solicited most of the business. Solicitors were employed and brought in some profitable business but the losses on the bad accounts acquired through the solicitors more than wiped out the profit on the good.
    Business was secured by approaching the prospect as an expert in the advertising field. The advertiser was sold the service and assistance of the agency in the preparation and presentation of his merchandise to the public. The agency helped select the advertising medium, prepared the copy, presented same for approval and cooperated with the advertiser in every way. Having contracted with the advertiser for a certain amount of space, the agency then arranged with the publisher for the required space by a contract between itself and the publisher or advertising medium selected. The contract between the agency and the advertiser was made at the publisher’s rates. The contract between the agency and the publisher allowed a commission to the agency which amounted to 15 per cent of the contract price. In addition to the commission the agency was allowed a 2 per cent cash discount if payment was made promptly. The agency gave this discount to the advertiser if the latter made prompt monthly settlements. In any event the agency paid for the space and secured the cash discount allowed by the publisher or advertising medium. Where the advertiser failed to make prompt monthly settlements, the agency retained the 2 per cent discount. The policy of the agency was to bill the advertiser for each month’s business five days in advance of the due date. The publisher or advertising medium billed the agency for the space for which the latter had contracted. In 1921 the petitioner charged off $13,210.57 owing from advertisers.
   OPINIOTST.

MoRRis:

The petitioner is here seeking to be classified as a personal service coloration under the provisions of section 200 of the Revenue Act of 1918 and section 200 (5) of the Act of 1921. The definition of a personal service corporation provided in both acts is identical—

The term “ personal service corporation ” moans a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor * * *.

This section provides three essential elements for classification as a personal service corporation, the lack of any one of which defeats such classification. From the meager evidence offered we are of the opinion that the petitioner is not entitled to be so classified. The evidence, such as we have, indicates that capital was a material income-producing factor. We do not know how much income was received or to whom it should be ascribed, or many other facts which are essential to the determination of the question involved.

Counsel for the petitioner on brief, submitted balance sheets, a table of stockholdings and shares held, the volume of business for each of the taxable years, and various additional facts which are quite material, but as to which there was no testimony.

Judgment will be entered for the respondent.


author: Thammell :

text:
    Opperman Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 3317, 14729, 15792.
    Promulgated May 4, 1927.
    1. Value of a leasehold of coal lands determined for purposes of invested capital and exhaustion.
    2. Deductions for exhaustion of the value of a leasehold, acquired by way of paid-in surplus, should be allowed at reasonable rates and considered in the computation of the tax liability.

      Charles D. Hamel, Esq., Lee /. Park, Esq., and J. E. Campbell, Esq., for the petitioner.

      M. E. McDowell, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income and profits taxes as follows: For the calendar year 1917, in the amount of $13,190.10 (Docket No. 3317); for the calendar years 1918 and 1919 in the respective amounts of $563.26 and $1,373.42 (Docket No. 15792); and for the calendar year 1920 in the amount of $17,689.70; also a deficiency in income tax for the calendar year 1923 in the amount of $736.99 (Docket No. 14729).
    The only question at issue under the pleadings and record herein is the value for purposes of invested capital and exhaustion, of a certain leasehold of coal lands as of April 28, 1913, the date of acquisition by petitioner.
    FINDINGS OF FACT.
    Petitioner is a corporation organized under the laws of West Virginia, with its principal office at Blair. It had a capital stock of $50,000, divided into 500 shares of a par value of $100 each. Practically all of the stock of petitioner was owned by Thos. E. Richards and J. H. Opperman, except necessary qualifying shares, which stock was later transferred to members of the Richards and Opper-man families. Petitioner was organized on or about March 20, 1913, for the sole purpose of taking over and operating a certain leasehold of coal lands theretofore obtained by Thos. E. Richards on December 28, 1911, from the Boone County Coal Corporation, a West Virginia corporation. In obtaining the lease contract in question Richards was acting jointly for himself and his father-in-law, J. II. Opperman. The lease contract contained, inter alia, provisions to the following effect:
    (1) For the consideration of the sum of $1 and the performance of the terms and conditions of said contract, the lessor granted to the lessee the exclusive right to mine coal and manufacture coke from such veins or seams of coal as might be found above water level upon or under a certain tract of land, described by metes and bounds, situated on the waters of Spruce Fork of Little Coal River, in Boone County, West Virginia, containing approximately 1,000 acres.
    (2) The term of the lease was for a period of 28 years from its date, or until the first day of January, 1940, with the privilege of renewal for a further period of 10 or 20 years, upon the same terms and conditions, except that the rent or royalty reserved by the lessor during the renewal period should be mutually agreed upon by the parties before the expiration of the original term.
    (3) The lessee was required to commence mining operations upon the leased premises within 60 days after railroad connections were made to the property.
    (4) The following rents and royalties were required to be paid by the lessee to the lessor: 8 cents per ton of 2,000 pounds of coal run of mine, carried away from or used upon the premises during the term of the lease, to be paid monthly on the twenty-fifth day of each calendar month for the calendar month immediately preceding, with a minimum rental or royalty to be paid as follows:
    Bor the first year after railroad is built to connect property, the actual amount of coal mined shall be paid for at the rate of 8‡ per ton above mentioned. The second year the amount of coal mined on the above basis, with the understanding it shall be at least one-half of the minimum tonnage requirements, which shall after the second year be computed as follows: For each acre of lease a minimum output of 100 tons of coal per year * * *.
    (5) In connection with the payment of the minimum royalty required, the contract contained the following stipulation:
    It is, however, understood and agreed upon, that in the event of said lessee failing to mine an amount of coal equivalent, at the royalties aforesaid, to said minimum rent, that the said lessee shall have the right and privilege of mining the amount of shortage, which the minimum as above provided for is in excess of the amount of coal actually mined at any time within a period of five years next thereafter; thus reimbursing said lessee for such deficiency.
    (6) Taxes upon the leased premises were to be paid as follows:
    That the said lessee will promptly pay at the several times they become due ail taxes, levies and assessments upon all improvements put by them upon the demised premises and upon the estate hereby created, however such levies and taxes may be assessed; all taxes against the fee in the real estate herein demised shall be paid by the lessor.
    (7) The lessor agreed to erect an electric plant, centrally located, from which electric power should be sold to the lessee at a price to be agreed upon, which should not be more than 2y2 cents per kilowatt hour of direct current as measured by an approved meter to be supplied by the lessor.
    (8) The lessor agreed to construct or cause to be constructed a railroad to connect the then present branch of the Chesapeake & Ohio Railway Co. with the siding of the lessee at its mine or mines; the said railroad to be begun and pushed as rapidly as possible to completion, but said completion was to be attained within a period of twelve months next after the date of said lease contract.
    By an instrument of writing dated April 28, 1918, Thos. E. Richards, joined by his wife, assigned and transferred said lease contract to the Opperman Coal Co., petitioner herein. The deed of assignment recited a consideration of “ Five Dollars ($5 00) and other valuable considerations,” and contained a clause, executed by the Boone County Coal Corporation, Avhereby said lessor released and discharged Richards individually from further liability under said contract, and consented to the assignment and transfer of said lease to the said Opperman Coal Co. By resolution dated March 21, 1913, the stockholders of petitioner authorized the board of directors to issue and deliver to Thos. E. Richards 53 shares of the capital stock of the corporation, having a par value of $5,300, or $100 per share, in exchange for the lease contract, which was thereafter transferred to the corporation under date of April 28, 1913. However, it was not intended that the 53 shares of stock issued to Richards should represent the value of the lease contract transferred to petitioner, but said stock was given to Richards for the purpose of reimbursing him and Opperman for money theretofore expended upon the leased property by way of preliminary development work.
    At the time the leasehold was acquired by Richards on December 28, 1911, practically no development work had been done on the property. Some openings had been made around the boundaries, which indicated that the property was underlaid with coal, but neither the quantity nor quality of the coal was definitely known. At that time the railroad had not been completed to the property but was then about four miles away. The railroad was completed to the leased premises about the first of March 1913.
    In December, 1911, there was no property in the immediate vicinity of the Opperman lease, which had been developed. The nearest developed properties were about three or four miles to the east and possibly two miles to the west.
    Between the date of the acquisition of the lease by Richards in December, 1911, and the date of its transfer to petitioner in April, 1913, certain development work had been done by Richards and Opperman. A tipple had been constructed, houses had been built for employees, drillholes put down, and entries driven into the coal at various points, some of the tunnels extending as far as 300 feet. Also, railroad connections to the property had been completed and sidetracks constructed. This development work demonstrated the quantity and quality of the coal and the character of the roof in the tunnels. It also disclosed that the leased property contained above drainage three seams of minable coal, that is, seams of a thickness and containing coal of a purity to make them marketable and merchantable. The three seams disclosed were as follows: commencing at the top of the hill, the first was the No. 5 Block Seam, averaging about 126 inches in thickness, which contained coal adaptable for steam and domestic purposes; the second was the Coalburg Seam, averaging 66 inches and containing coal of a good quality adaptable for steam and domestic purposes, with a possible use of the slack for by-product purposes or to produce gas; the third and last, the Chilton Seam which came out at about tipple height, averaging approximately 84 inches, contained coal of excellent quality, being low in ash and sulphur and high in heat units, making an excellent coal for domestic purposes, for steam purposes, and also for byproduct purposes. In general, the slate conditions were good; there was very little slate in the coal.
    The total recoverable quantity of coal in all three seams was estimated at nineteen to twenty million tons, which, upon the basis of an annual production of 250,000 tons, was sufficient to last beyond the life of the lease. The water conditions in the Opperman mine were good; there was very little water, most of it draining out naturally.
    The prevailing royalty rate in West Virginia, on coal mines comparable to the Opperman property, beginning in 1913 and continuing to 1916, was 13 cents per ton. Taxes on mining property in this field averaged about 5 cents per ton, including the improvements and fee, one-half, or 2y2 cents per ton being applicable to the improvements and the same amount being applicable to the fee. It was not customary for the lessor to ¡Day the taxes on the fee.
    The customary recovery period on minimum royalty was two years, and in some leases it was only one year, while a recovery period of five years was unusual. A long recovery period is desirable from the standpoint of the lessee, as it enables him to recover back the royalty paid in case the minimum amount of coal is not mined in any one year. The Opperman mine was equipped for a production of about 250,000 tons per year, or about 1,200 tons per day. The average profit of the producing coal companies in the field in which the mine of taxpayer is situated, was 30 cents per ton for the ten-year period preceding the year 1913.
    A lease known as the “ Spruce Bend Lease,” in the immediate vicinity of the Opperman lease was sold to the Boone County Coal Corporation in 1915 for $250,000. An offer of $150,000 was made for petitioner’s lease in October, 1920. Based upon an average annual output of 250,000 tons of coal, the value of the power clause to the lessee under the lease contract herein as of April, 1913, was $35,600,

      The actual cash value of petitioner’s leasehold on April 28, 1918, was $200,000. On January 1, 1914, its value was the same as on April 28, 1913, less exhaustion sustained for the intervening period.
   OPINION.

Thammell :

Petitioner avers that the value of its leasehold of coal lands as of April 28, 1913, the date of acquisition, was over $200,000 and that such valuation should be used as the basis for invested capital purposes in 1918 and subsequent years. Petitioner further asserts that the value of the leasehold on January 1, 1914, was the same as on April 28, 1913, less adjustment for exhaustion during the intervening period, and that such adjusted valuation should be used for invested capital purposes in 1917. Also, that it is entitled to an exhaustion allowance for each of the years involved herein upon the basis of a valuation of $200,000 as of April 28, 1913. Respondent allowed a valuation for the lease as of April 28, 19‡3, of $5,300, for all purposes, and denies that it had a greater value. It is apparent, therefore, that the only issue raised for determination here is the value of the leasehold as of the basic date, both for purposes of invested capital and exhaustion.

In the case of tangible property, such as a leasehold, acquired by a corporation in exchange for stock if the value thereof is clearly and substantially in excess of the par value of the stock exchanged, such excess may be treated as paid-in surplus in the computation of invested capital. Appeal of St. Louis Screw Co., 2 B. T. A. 649; Appeal of Henderson Overland Co., 4 B. T. A. 1088.

From a careful consideration of the evidence in the record before us, we can not escape the conclusion that the value of the leasehold of petitioner on April 28, 1913, was clearly and substantially in excess of the sum of $5,300, the value allowed by respondent and which represented the par value of the stock exchanged therefor. This conclusion is supported by the testimony of two disinterested expert witnesses, who appear to have been peculiarly and eminently qualified to testify with respect to the value of the leasehold in question, and is corroborated by other well established and uncon-troverted facts.

Krebs, a witness for the petitioner, testified that he was a mining engineer and geologist, having practiced his profession for over thirty-two years, principally in West Virginia; that he had had extended experience in the development of mining properties, such as coal, oil, and gas, and particularly in the valuation of such properties for prospective buyers, for bondholders, and parties wishing to issue bonds; that from 1921 to 1923, he was consulting engineer to the State Tax Commissioner of West Virginia in making valuations of coal properties in that State for taxation purposes. He has known of the activities of petitioner since it began operations in West Virginia, and has been familiar with the property covered by petitioner’s lease since about 1909. He testified in substance that, in his opinion, petitioner’s leasehold had a value, as of April, 1913, of $231,255, and a value as of January 1, 1914, of $217,615. This did not take into consideration the value of the electric power clause, amounting to $35,600. He further testified that, upon his estimate of the value, he recommended to a client the purchase of this property in 1920 for $750,000, and that his client thereafter made such an offer of purchase.

Taylor, a witness for the petitioner, testified that he was a consulting engineer and operator of mines, and was a graduate of the University of Pittsburgh, with degrees of Civil Engineer and Doctor of Science. Since 1887, he has been engaged, among other things, in the development and operation of mines, coke ovens and coking plants, principally in Pennsylvania, Ohio, and West Virginia. He has made many valuations of mining properties for prospective buyers and for other parties. He was familiar with petitioner’s property, and made a valuation of the leasehold as of April, 1913. Using a basis of computation entirely different from that of the witness Krebs, Taylor reached substantially the same conclusion as to its value.

The evidence also established the fact that the Spruce Bend Lease, in close proximity to petitioner’s property, was sold in 1915 for $250,000. At that time the prevailing royalty rate was the same as at the beginning of 1913. This property contained less acreage than that of petitioner, and the mining conditions were not as favorable. Other corroborative facts, of more or less minor importance, are disclosed by the record, such as the large quantity and excellent quality of coal contained in the property leased to petitioner, the location and advantageous mining conditions and timber rights, which it is not necessary to discuss in detail here.

, From all the evidence of record, it is our opinion that the leasehold of petitioner had an actual cash value of $200,000, on April 28, 1913, as claimed by the petitioner, and that the value of this leasehold in excess of the par value of the stock exchanged therefor, should be deemed to be paid-in surplus. Such valuation should, therefore, be reflected in the computation of invested capital of petitioner for all of the years involved.

Deductions for exhaustion of the value of the leasehold acquired by way of paid-in surplus, should be allowed at reasonable rates and considered in the computation of the tax liability of petitioner. Appeal of Steinbach Co., 3 B. T. A. 348. See also Appeal of Hotel DeFrance Co., 1 B. T. A. 28; Appeal of Farmers Grain Co., 1 B. T. A. 605.

The value of the lease should be spread over the unexpired life or term thereof, computed from the date of acquisition, which is 26% years.

While this proceeding purports to include the years 1921 and 1922, it appears that no deficiency has been determined by respondent for either of said years, and that the Board has no jurisdiction in respect thereof. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255. The appeals for the years 1921 and 1922 are hereby dismissed.

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


author: Trammell :

text:
    J. W. Kelly, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ida M. Kelly, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6476, 6477.
    Promulgated May 4, 1927.
    In tRe absence of evidence upon which to determine whether a loss contended for by the petitioners was sustained, the action of the respondent in disallowing the loss is approved.

      James A. Councilor, Esq., for the petitioners.

      Thos. M. WiUeins, Esq., for the respondent.
    The above two proceedings which were consolidated for the purpose of trial involve the same question and are for the redetermination of deficiencies in income tax for the year 1921. The deficiency asserted in the case of J. W. Kelly is $3,614.80 and in- the case of Ida M. Kelly it is $3,646.80.
    The deficiencies result in part from the action of the respondent in disallowing a deduction of $30,045.19 taken as a loss on the sale of stock by a partnership' in which the petitioners each owned a one-half interest.
    FINDINGS OF FACT.
    The petitioners are individuals residing at Los Angeles, Calif., and each owned a one-half interest in the partnership of J. W. and Ida M. Kelly.
    From 1908 until the latter part of 1912, the petitioners each owned a one-third interest in the Kelly-Price Co., a California corporation. The remaining one-third interest was owned by S. H. Price. Some time during the period from 1908 to the latter part of 1912 the Kelly-Price Co. acquired 13,754 shares of the capital stock of the Hazelton Crude Oil Co., a corporation organized in November, 1908, with a capital stock of $25,000, divided into 25,000 shares of a par value of $1 each, all of which were issued for cash at par. In the latter part of 1912 the petitioners and Price decided to dissolve the Kelly-Price Co. A petition for dissolution was filed with the clerk of the Superior Court of Kern County, California, and on December 12, 1912, a decree was issued dissolving the company, authorizing the directors to settle the affairs of the corporation and make distribution to the stockholders in proportion to their respective interests.
    At the time of dissolution, the Kelly-Price Co. owned the 13,754 shares of stock mentioned above, a residence, and a one-half interest in the Coons-Price Merchandise Co., in all of which each of the petitioners and Price at that time became the owner of a one-third interest. About the time of dissolution, it was agreed by the parties that Price would transfer to the petitioners his interest in the property of the dissolved corporation. Pursuant to that agreement, a contract was entered into on December 31, 1912, whereby Price disposed of his interest in the assets of the dissolved corporation and received in exchange therefor about 115 or 120 acres of land owned by the petitioners and located in Kern County, Calif.
    For the purpose of the trade, the assets owned by the Kelly-Price Co. were valued as follows:
    Residence_$3,000
    One-half interest in Coons-Price Merchandise Co_15, 000
    13,754 shares of the capital stock of the Hazelton Crude Oil Co_ 30, 000
    Total_ 48, 000
    Price’s one-third interest was accordingly valued at $16,000, which was the agreed valuation given by the three parties to the land conveyed to him.
    In June, 1913, the stock of the Hazelton Crude Oil Co. owned by the Kelly-Price Co. at the time of dissolution was transferred to J. W. Kelly, who, as a matter of convenience, held it in his name for himself and Mrs. Kelly. The stock had the same value in June, 1913, that it had on December 31, 1912. On October 17, 1913, and on November 14, 1913, assessments of 5 cents per share were made against the stock of the Hazelton Crude Oil Co. These assessments were paid by Kelly on the stock standing in his name. On March 8, 1917, a dividend of $700 was declared by the Hazelton Crude Oil Co. Kelly received an amount proportional to the stock owned by him and Mrs. Kelly.
    In November, 1921, the petitioners sold their “ entire interest ” in the Hazelton Crude Oil Co. to W. H. Coons for $5,000.
   OPINION.

Trammell :

The petitions in these proceedings allege that in 1908 the partnership of J. W. and Ida M. Kelly acquired 13,154 shares of the stock of the Hazelton Crude Oil Co.; that the cost to the partnership of the stock, including assessments, was $35,430.35, which should be reduced by $385.11 representing a return of capital; and that in 1921 the partnership sold its stock for $5,000, thereby sustaining a ' loss of $30,045.19.

The petitioners contend that the disallowance of the loss by the respondent and the addition to the income reported by each of his or her proportionate share of the amount of loss disallowed is erroneous.

It is shown by the evidence as stated in the findings, that on the dissolution of the Kelly-Price Co. on December 12, 1912, the petitioners each became the owner of a one-third interest in the 13,754 shares of the Hazelton Crude Oil Co. stock previously owned by the dissolved corporation. It is further shown that on December 31, 1912, they acquired Price’s one-third interest in the stock.

Relative to the basis for determining gain or loss, section 202 of the Revenue Act of 1921 provides as follows:

Seo. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1013, shall be the cost of such property * * *
(b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1,1913, shall be the same as that provided by subdivision (a) ; but—
(1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market price or value;
(2) If its fair market price or value as of March 1, 1913, is lower than such basis, the deductible loss is the excess of the fair market price or value as of March 1, 1913, over the amount realized therefor; and
(3) If the amount realized therefor is more than such basis but not more than its fair market price or value as of March 1, 1913, or less than such basis but not less than such fair market price or value, no gain shall be included in and no loss deducted from the gross income.

In order to determine whether the loss claimed by the petitioners was sustained, it is necessary to know (1) the cost to the petitioners of the two-thirds interest in the 13,754 shares of the Hazelton Crude Oil Co. stock acquired by them on the dissolution of the Kelly-Price Co.; (2) the fair market price or value as of March 1, 1918, of such two-thirds interest; (3) the cost to the petitioners of the one-third interest in the 13,754 shares of the Hazelton Crude Oil Co. stock acquired by them from Price on December 31, 1912; (4) the fair market price or value as of March 1, 1913, of such one-third interest; and (5) the amount received for the shares of stock disposed of in that year. If any one of these is unknown, it can not be determined that the loss contended for by the petitioners was sustained.

There was no attempt made to show what was the cost to the petitioners of the two-thirds interest in the stock acquired by them upon the dissolution of the Kelly-Price Co., which cost was represented by the value thereof when received in dissolution in exchange for stock.

The evidence shows that thé petitioners acquired Price’s one-third interest in the stock on December 31, 1912, along with his interest in certain other assets owned by the Kelly-Price Co. at the time of dissolution, in exchange for certain land which was owned by the petitioners and which for the purpose of the exchange was valued by the three parties at $16,000. The evidence does not show when or at what cost the petitioners acquired the land, or its value when the exchange was made. Consequently, we are unable to determine the cost to the petitioners of Price’s one-third interest in the stock.

No evidence was submitted relative to the fair market price or value of the stock as of March 1, 1913. It is urged in the brief of the petitioners that inasmuch as the stock was given a value of $30,000 for the purpose of the exchange and that as it had the same value in June, 1913, when certificates were issued to Kelly for the stock previously owned by the Kelly-Price Co. as it had on December 31, 1912, the amount of $30,000 represents its fair market value on March 1, 1913. We are unable to agree to that for the reason that the evidence does not show what the value was in December, 1912. There is no evidence that the values agreed upon for the exchange represented the fair market price or value of the property. On the other hand, the evidence clearly indicates that the values placed on the assets for the purpose of the exchange had no necessary relation to the fair market price or values. Kelly testified that the residence, which was given a value óf $3,000 for the purpose of the exchange, really had a value of about $1,500 for sale purposes. In the present situation we do not have willing buyers and willing sellers dealing at arm’s length in the open market, but individuals who have been associated in a business way for several years attempting to wind up' the affairs of a dissolved corporation by adjusting their interests in its assets. In view of the circumstances in this case the acceptance of the contention insisted on in'behalf of the petitioners would be unwarranted.

Of the facts necessary for the petitioners to establish in order for us to determine whether the loss contended for was sustained, only one has been established, that being that in November, 1921, the petitioners disposed of their entire interest in the Hazelton Crude Oil Co. stock for $5,000. The petitioners having failed to establish the facts necessary for a determination of whether a loss had been sustained, the action of the respondent is approved.

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


text:
    St. Paul Abstract Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3006.
    Promulgated May 4, 1927.
    A corporation in which the use of capital is a material income-producing factor held not to be a personal service corporation.

      >Samuel Lipschultz, Esq., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for $1,838.56, $890.88, and $746.36, for the years 1919, 1920, and 1921, respectively. The deficiencies result in part from the respondent having refused to classify the petitioner as a personal service corporation.
    FINDINGS OF FACT.
    J. A. Soucheray, prior to his coming to the United States and while in France, was for many years employed in a mortgage registry office. After he came to the United States he was engaged in the business of abstracting titles. From 1887 to 1889 he was employed in the office of the Abstract Clerk for Ramsey County, Minnesota. Subsequently and until 1891 he was an officer and employee of an abstract company located in that county. During 1891 he and his son H. C. Soucheray were occupied in compiling data and information relating to titles to real estate in Ramsey County for the purpose of forming a new company. In 1892 his collection of data was sufficiently complete for him to prepare abstracts of title from his own records.
    In September, 1892, J. A. Soucheray organized under the laws of Minnesota the petitioner corporation, with a capital stock of $50,000 divided into 1,000 shares of a par value of $50 each, for the purpose of furnishing abstracting service to the public. The incorporators were J. A. Soucheray, Michael P. Ryan, and Charles L. Haas. Immediately following the incorporation of the petitioner, stock was issued as follows:
    Shares.
    J. A. Soucheray- 1
    M. L. Soucheray----1_ 332
    Charles L. Haas_ 600
    M. P. Ryan_ 20
    George Seisander- 27
    Annie E. Haas_ 20
    Total. 1,000

      No money nor anything of value was paid to the corporation for the stock that was issued to these original stockholders. The issuance of stock to Ryan, Seisander, and the Haases was to get the name of Charles L. Haas, Register of Deeds, associated with the petitioner corporation.
    In 1895 as a result of some dishonest practices of a former manager, whose connection as an officer and stockholder had been terminated previously, it became necessary for the company to execute promissory notes totaling $4,310 to make good certain overdrafts and for attorney’s fees in connection therewith.
    In 1902 Ryan had acquired the Haas holdings in the company and in that year he transferred the stock formerly held by him together with that acquired from the Haases to J. A. Soucheray, in exchange for Soucheray’s interest in certain real property to which they both held an interest.
    In 1902 the other two abstract companies then operating at St. Paul were merged with the petitioner. In the merger J. A. Souch-oray parted with $15,000 par value of his stock to W. W. Price, as an individual and as trustee for A. Oathcart and A. O. Maxfield. As a part of the consideration of the merger the petitioner issued bonds amounting to $13,000, which Avere subsequently paid from its earnings. Price, Avho negotiated the merger, turned over to the petitioner the physical assets of the other two corporations which consisted of index books, slips, and some maps and tracings. These were for the most part duplicates of the records and data Avliich the petitioner already had and with the exception of a few maps and tracings, most of them were destroyed. As a result of the merger, petitioner’s two competitors had been eliminated, and there became identified with it W. W. Price, a prominent realtor in St. Paul who at that time had associated with him many people prominent and influential in a financial Avay who were dealing in real estate and making loans.
    In 1892 H. C. and A. T. Soucheray, sons of J. A. Soucheray, were employed by the petitioner and have continued in its employment.
    The service rendered by the petitioner consists in furnishing complete abstracts, extending abstracts or bringing them doAvn to date, and making special reports as to who are the owners of certain real estate and as to what real estate is oAvned by certain individuals. All complete and extended abstracts of title furnished by the petitioner contain the following:
    AVe guarantee our abstracts lor all time as legal tender under contract, and in case of same being refused, we will be willing to step in tile shoes of the holder and enforce the tender or pay the amount necessary to make said abstract a legal tender if it is found not so to be.

      This guarantee was a material factor in securing business — without it the business would not have been so great. The petitioner guaranteed its abstracts and protected against loss resulting from errors or ■ omissions therein any one into whose hands the abstract came.
    During the years 1919, 1920, and 1921 its income was derived from such services. Petitioner conducts its business on a cash basis, most of its customers paying their bills within from 5 to 10 days. In some instances credit is extended beyond a 30-day period. However, the largest account receivable during 1919, 1920, and 1921 was not in excess of $175.
    With the exception of bonds issued in connection with the merger the company has never borrowed any money for the operation of its business, since its earnings have always been sufficient to meet its operating expenses.
    Petitioner’s assets consisted of the úsual office appliances, such as desks, chairs, typewriters, fireproof safe, and its abstract records. The abstract records are composed of eighteen large books which are known as the “basic index.” In these books are contained a series of accounts of platted property by additions, the lot and block descriptions, the definements, and subdivisions. In some instances there are arbitrary divisions made so as to facilitate the finding of instruments referring to certain individual property. In addition to the foregoing, there is another book containing what is called “subdivided land of government subdivisions.” The petitioner also maintains a satisfaction record, judgment record, and a record of miscellaneous instruments such as wills, powers, affidavits and other instruments of a general character, making a total of approximately twenty-five books. The petitioner maintains an index used for free service which reflects in a very concise way all encumbrances against every piece of property covered in the index. This index- is maintained for the purpose of furnishing to the public without cost certain information. The petitioner also has maps and plats. Petitioner’s data and notes relating to real estate go back to 1847. These records and data have been built up on the information compiled byt J. A. and II. C. Soucheray and have been kept up to date. In the event of the destruction of the petitioner’s records, it would still be able to continue its business by using the public records, but could not have rendered the same service, and would not have made as much money. The petitioner by using its own records saves about one-fourth of the time that would be required if it used the public records.
    The following is a statement showing the name of the stockholders, the offices held, and stockholdings and the percentages of the total stock held by each during the years involved in this proceeding:

    J. A. Soucheray died on July 23, 1921, and his holdings passed to his sons, A. F. and H. C. Soucheray, and to his daughter, Marie E. Liedel. The sons’ holdings were thereby increased from 100 shares each to 270 shares each, while the daughter acquired 160 shares. Salaries paid the officers were as follows:

    During 1919, 1920, and 1921, Price, who was president of the petitioner corporation, was engaged in the real estate business, operating individually, and maintaining an office separate from the petitioner. He was secretary and real estate agent of two corporations formed for holding real estate. His duties with these companies consisted of caring for the property held by them, collecting rents, and selling property when any was sold. He was local agent for a number of eastern and foreign estates, and his duties in connection therewith were similar to those with the corporations. He received no salary from the corporations or the estates, but payment for his services was made in the form of commissions. He was also executive secretary of the St. Paul Eeal Estate Board, the duties of which required not more than one-half of an hour of his time each day. He was treasurer of St. Luke’s Hospital, which did not require much of his time, and as such he rendered his services gratuitously. His fixed duties with the petitioner corporation consisted of signing checks. He made frequent but not daily visits to petitioner’s office. During these visits, which averaged about ten minutes each, he consulted with the other officers in regard to the policies of the company and the increased progress of its business. He used his influence in obtaining the enactment by the Minnesota Legislature of a law which permitted an abstract company in Ramsey County to increase its fees to an equality with the charges being allowed -in all other counties in the State. He was also instrumental in securing the adoption by the St. Paul Real Estate Board of an earnest-money contract which provided that all abstracts of title should be fully and completely certified to and required the services of the petitioner corporation. Price turned to the petitioner all of his own abstracting business, and that of the interests which he represented. -
    J. A. Soucheray, who was vice president of the petitioner corporation during 1919, 1920, and until his death in 1921, devoted his entire time to the business, being engaged upon the most important or foundation work of petitioner’s business. His duties consisted of taking off information from the instruments and records in the office of the Register of Deeds and posting such information to the proper place in the records of petitioner. This required him to examine deeds, mortgages, assignments, satisfactions, foreclosures, wills, powers, and leases, making notes of the necessary and salient features contained in such instruments and pose in petitioner’s records to the lot or block, or government subdivision the instruments as he judged they affected the title of various properties. This work was done entirely by J. A. Soucheray, except during his absence on account of illness, or otherwise, when it was performed by his sons. In addition to the foregoing, he prepared abstracts of difficult or complicated titles.
    A. F. Soucheray, who was secretary, devoted his entire time to the business, and his duties were to make extensions of abstracts of title. This required that he check against petitioner’s records the abstract to be extended and from those records prepare such additional data as was necessary to extend or bring the abstract down to date.
    The duties of H. C. Soucheray, who was treasurer, and who devoted his entire time to the business, consisted of preparing complete abstracts. This required him to locate on the government subdivisions the property the title to which was to be abstracted, together with the facts relating to the various titles involved, get together the instruments affecting the title to the particular piece of property and arrange them in what is known as an abstract of title. He also compiled the additional data necessary to completion of an abstract of title in connection with Torrens title reports. He often drew realty conveyances, deeds, mortgages, notes, and other instruments of a similar character.
    All abstracting work of the petitioner was done by the three Soucherays.
    Cathcart, Maxfield and Mrs. Liedel were not in the employ of the company and had no connection with it except through their stock ownership. During 1919, 1920, and 1921 the company employed five or six stenographers or typists. In addition to the above employees Joseph L. Liedel, the husband of Marie Liedel, received in 1919 a salary of $1,550. During that year his duties were to get acquainted with the business and to assist J. A. Soucheray. He performed similar duties in subsequent years. The petitioner had three other men in its employ, one of whom received $1,555 per year and whose duties consisted of making collections, soliciting new business and running a photostat machine. Another man assembled and delivered abstracts, obtained information relative to outstanding and unpaid taxes against the various tracts of land and performed other “ simple ” work. Another man employed in 1919 worked on the judgment book, made property searches and judgment reports. Occasionally an attorney was employed in connection with some point of law that arose in the abstract work when H. C. Soucheray did not have time to look it up. The total salaries paid employees other than officers were as follows:

      1919_$6,986.10

    1920_ 9, 522.25
    1921_10, 781. 75
    The petitioner reported gross income and net income as. follows:

    In' arriving at net income, officers’ and employees’ salaries were considered.
    During 1919, 1920, and 1921, the petitioner was not a personal service corporation.
   OPINION.

Trammell :

The issue involved in this proceeding is whether during 1919, 1920, and 1921 the petitioner was a personal service corporation within the meaning of section 200 of the Revenue Acts of 1918 and 1921. The pertinent provisions of that section are as follows:

The term “ personal service corporation ” means a corporation whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor * * *.

It is clear that the abstract records constituting its plant were capital. While we do not know the amount invested in such assets, we do know that they were used by the petitioner in producing its income. They had been built up over a long period of years. It was necessary to keep them posted from day to day from the public records. Appeal of Record Abstract Co., 2 B. T. A. 628.

The amount of capital used in the business is not important if what was used was a material factor in producing the income. We think that the records and books of the petitioner which it used in making its abstracts of title were a material factor in the production of the income. It was testified that the same service could not have been rendered without them; that petitioner could not have made as much money and that without these records it would have taken at least 25 per cent longer time to prepare the abstracts. Even if it be conceded that it was not necessary to use these records in carrying on the business, the fact is they were actually used with great advantage. The saving of 25 per cent of time by their use is itself a material element of advantage and was a material income-producing factor. The fact also appears that the same service could not have been rendered without them.

In addition to the value to the business of the records, the petitioner guaranteed its abstracts and held itself responsible for their correctness. This guarantee depended for its value upon financial responsibility as well as personal integrity and good reputation of the corporation and its officers, and created a legal liability if any errors occurred in their abstracts. The testimony is to the effect that this added materially to the company’s business. It was a protection not fully afforded by any other abstract office in that county.

In view of these facts, it is our opinion that capital was a material income-producing factor in the petitioner’s business. This being true, one of the tests required to be met is lacking and the company does not come within the scope of section 200 of the statute. It thus becomes unnecessary to discuss the other features of the case as to whether the petitioner lacks or has met the other requirements of the statute.

Judgment will be entered for the respondent.


author: Littleton :

text:
    L. F. Sunlin, Petitioner, v. Commissoner of Internal Revenue, Respondent.
    Docket No. 7483.
    Promulgated May 4, 1927.
    The petitioner and bis wife, prior to their marriage on April 9, 1919, formed a business partnership in Michigan, each contributing property and services, and in the profits of which partnership they were to share equally. The business was conducted in the same manner after marriage as before. The income arising during the period April 9, 1919, to December 31, 1923, from the business, was taxed all to the husband, the petitioner. JBeld, that one-half of the income was the property and income of the wife and should not have been included in petitioner’s income.

      George Maurice Morris, Esq., for the petitioner.

      Thomas M. Wilkins, Esq., for the respondent.
    This proceeding involves a deficiency in income tax for the years 1919 to 1928, inclusive, of $1,206.46, for the year 1922 and $6,530.02 for the year 1923, there being overassessments of $2,403.28 in 1919 and $2,486.98 in 1920, and no tax due in 1921.
    FINDINGS OF FACT.
    The petitioner is a resident of Flint, Mich.
    In February, 1910, the petitioner began the operation of a motion picture theatre in Flint. As assistant manager he employed Miss Hazel Peters, who had had extensive experience as a professional musician, appearing throughout the world. As a result of her endeavors she had from her savings amassed considerable capital.
    On the twelfth day of April, 1918, the petitioner entered into a lease effective for 25 years from May 1, 1918, upon certain premises in Flint suitable for the erection of a moving picture theatre. Lacking capital for the enterprise he proposed to his assistant manager, Miss Hazel Peters,- that they enter into a partnership for the erection and operation of the theatre. This offer was accepted and a partnership was formed shortly prior to May 1, 1918. The partners agreed to share equally in ownership and income. The petitioner contributed his going business, and Miss Peters contributed $25,000 in cash, Liberty bonds, and war savings stamps, took full charge of the business, and operated the theatre. The petitioner on or about May 1, 1918, made public announcement of the partnership by. communicating this information to his architect, employees of the theatre, the mother of Miss Plazel Peters, the president and the assistant cashier of the Citizens & Commercial Savings Bank of Flint, Michigan, and to others, some or all of whom he advised that Miss Hazel Peters had a one-half interest in the business.

      On December 1, 1918, plans were begun for the erection of a new theatre on the premises leased. Such plans were completed on January 20, 1919, the work of razing the old building having been begun on January 15, 1919.
    On April 9, 1919, the taxpayer and the said Miss Hazel Peters were united in marriage in Chicago, Ill.
    Both the petitioner and his wife regularly received the income from the business and divided the same equally between them. Both filed annual income-tax returns in which each reported one-half of the income from the operations of their business.
    The father and mother of petitioner’s wife were both theatrical people, and before her marriage to Sunlin she had had a theatrical career and experience in the management of theatres. In 1919 she took entire charge of the business, her active control being necessitated by the illness of petitioner, he having suffered two paralytic strokes. When the partnership with petitioner was formed, he was about 61 years of age and she about 30 or 31 years old.
    After her marriage to petitioner on April 9, 1919, she continued to have charge of the business, acting as general manager of what was known as' the Savoy Theatre from 1919 to 1923, inclusive. She not only contributed $25,000 of the capital for the partnership mentioned, but also gave her time, energy, and managerial capacity toward its success, while her partner and husband, due to the condition of his illness, played only a comparatively small part in its management; and not until 1925 did she discover that there might be some question as to their legal right to conduct a partnership as husband and wife under the Michigan laws, but that question caused no change in the manner of conducting their business.
    During the entire time, 1919 to 1923, inclusive, after the formation of the partnership, the income from the business was deposited in bank in a joint account in the name of petitioner and his wife.
   OPINION.

Littleton :

The question raised by this proceeding is whether the income arising during the period from April 9, 1919 — the date of the marriage of Hazel Peters and the petitioner — to December 31, 1923, inclusive, from the theatrical business described, was taxable all to the petitioner alone or to him and his wife Hazel on a separate basis.

The Commissioner asserts that the marriage of the partners dissolved and terminated the partnership and that thereafter the business was the sole business of the husband and all of the income therefrom should be taxed to him.

The petitioner insists that the income and the business itself belonged one-half to him and one-half to his wife and should be separately taxed.

The Commissioner insists that at common law, the legal existence of the wife was merged in that of the husband and that they were termed and regarded as one person in law and the husband v/as regarded as that person. He further insists that the Michigan Married Woman’s Act has effected no change in this common law unity of husband and wife and that a contract of partnership with her husband is not included within the power granted by that Act.

The Michigan Married Woman’s Act, 3 Mich. Comp. Laws, 1915, (11485) sec. 1, has very materially changed the common law theory of legal unity of husband and wife, for it provides: . #

That the real and personal estate of every female, acquired before marriage, and all property, real and personal, to which she may afterwards become entitled, by gift, grant, inheritance, devise, or in any other manner, shall be and remain the estate and property of such female, and shall not be liable for the debts, obligations and engagements of her husband, and may be contracted, sold, transferred, mortgaged, conveyed, devised or bequeathed by her, in the same manner and with the like effect as if she were unmarried.

It is true that in some cases decided by the Supreme Court of Michigan and cited by the Commissioner, such language as the following is used: “ The intermarriage of the parties, who had formed a partnership, worked an instantaneous dissolution of the relation ” and that “A contract of partnership with her husband is not included within the power granted by our statute to married women,” but no decision is cited and none has been found which, when properly interpreted and applied to the question here presented, would warrant the holding that either the wife’s interest in the business in which she and her husband were engaged or the income from her property and services become that of the husband.

Before marriage, while she was Hazel Peters, the contract of partnership with the petitioner was entered into; she contributed her half of the capital, $25,000 in cash, Liberty bonds, etc., and the success of the business was largely due to her energy, experience and business management, the petitioner being physically incapacitated by reason of two paralytic strokes.

If the marriage of Hazel Peters and the petitioner dissolved their partnership, as contended by the Commissioner, this certainly did not cause her to forfeit her interest in the business or the income.

While the partnership relation under the Michigan law may have been ended by the marriage of the partners, the wife’s interest in the property and her ownership of one-half of the income from the business was not lost, nor acquired by her husband. As stated in Gillespie v. Beecher, 94 Mich. 374; 54 N. W. 167, “ The married woman’s act was passed for the protection of married women. It was intended as a shield and not a sword. Its purpose was to enlarge her rights, not to contract them, and certainly it was not meant to deprive her of the right, either acting alone, or jointly with others, of protecting her interests in property, either real or personal.” After marriage of the partners what had theretofore been a business partnership became a joint venture. The interest of the petitioner and his wife in the property and business and their respective rights to the income therefrom remained unchanged — one-half of the income belonged to the petitioner and one-half to his wife. Certainly, under the Michigan statutes, if the wife devotes her property and services to the production of separate income, such income is her separate property, and if she elects to make a separate return thereof for income-tax purposes, the Commissioner would not be authorized to tax such income to the husband. • We think the income of the wife is none the less her income merely because she joined her property and services with those of her husband in producing it. Cf. Estate of George W. Randall, 4 B. T. A. 679.

In these circumstances the petitioner and his wife were each the owner of one-half of the income arising from the operation of the Savoy Theater during the period April 9, 1919, to December 81, 1928. The Commissioner therefore erred in including in petitioner’s income the one-half of the profits belonging to the wife.

Judgment will he entered on 15 days' notice, wnder Rule 50.


author: Steenhagen :

text:
    Goodell-Pratt Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5884.
    Promulgated May 4, 1927.
    The findings of fact made by the Board in an earlier proceeding as to liability for earlier years are prima facie evidence of the facts therein stated when offered in a subsequent proceeding involving the same question of fact as related to liability for a later year.

      Lawrence A. Baker, Esq., and R. L. P. Wallace, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    Deficiency of $27,818.60 income and profits tax for Í920. The respondent reduced invested capital by eliminating $280,513.26, the alleged capital cost of certain assets which by the Board’s decision in Goodell-Pratt Go., 3 B. T. A. 30, were held to be part of petitioner’s invested capital for 1917, 1918, and 1919.

      FINDINGS OF FACT.
    The taxpayer is a corporation organized under the laws of Massachusetts in the year 1895, with its principal office at Greenfield. It is, and has been since the date of its organization, engaged in the business of manufacturing and selling tools. The stock of the corporation is closely held.
    When the taxpayer commenced business it manufactured only one tool, namely, an automatic.punch drill. From time to time it developed and placed on the market other tools, until at the present time it manufactures and carries in stock over 2,000 different mechanics’ tools. When a tool is developed and found to be successful, it is listed in the taxpayer’s catalogue, wh ch is issued once a year. A tool once brought out and listed is thereafter in stock, so that it is possible today to purchase any tool that the taxpayer has ever made and placed on the market. The taxpayer maintains and has maintained for many years a separate department for the purpose of working out new ideas and developing new tools, patents, secret processes, methods of manufacture and special machinery. The expenses of this department consist, and have consisted, largely of salaries and amounts paid for consumable materials.
    During the years 1909 to 1916, inclusive, the taxpayer expended $280,513.26 in developing certain patents, secret processes, methods of manufacture, special machinery and new tools, in developing foreign markets, in gathering and compiling information relative thereto, and in establishing agencies, etc. These expenditures were charged to current expenses and claimed as deductions on income-tax returns for the years in which such returns have been required. From time to time appraisals were made of the intangible assets created through these expenditures, and the appraised values thereof were set up on the taxpayer’s books and credited to surplus.
    The good will and other intangible assets, created by the taxpayer through the expenditure of the amount of $280,513.26 during the years 1909 to 1916, inclusive, as above set forth, had on January 1, 1917, a total value of at least $280,513.26.
    The same assets heretofore described were in use during 1920 and contributed to the earnings in 1920.
    Upon audit of the returns for the years 1917, 1918, and 1919, the Commissioner eliminated from the taxpayer’s invested capital the entire amount of good will shown by its books. The taxpayer thereupon claimed that in lieu of the' good will elminated by the Commissioner it should be allowed additional invested capital for the years 1917, 1918, and 1919, through the restoration to surplus of the amount of $280,513.26, expended during the years 1909 to 1916, inclusive, as above set forth, and charged to expense. The Commissioner disallowed the taxpayer’s claim, and determined that there was a deficiency in tax in the amount of $71,863.09 for the year 1919 and overassessments of $36,889.83 and $5,729.83, respectively, for the years 1917 and 1918, making a net deficiency of $29,243.43.
    From the foregoing determination of the Commissioner for 1917, 1918, and 1919, the petitioner appealed to the United States Board of Tax Appeals, which, on November 14, 1925, after hearing, duly promulgated its report containing findings of fact and opinion, which report is published in 3 B. T. A. 30. Thereafter, in due course, on October 15,1926, in accordance with the said decision^ the Board entered its judgment in the said appeal.
   OPINION.

Steenhagen :

The petitioner introduced in evidence a copy of the findings of fact made by the Board in its earlier decision in Goodell-Pratt Co., 3 B. T. A. 30, and also asked at the hearing that the Board take judicial notice of its earlier decision. Judicial notice was taken of the fact that such decision had been made, and the copy thereof was received as evidence of the facts therein found, objections thereto being overruled. By oral testimony such facts were then proven to have been no less applicable to 1920 than to the earlier years. No countervailing evidence was introduced.

The respondent argues that since the petitioner chose in earlier years to charge off as expense the cost of the assets in question, it is deprived of the advantages of having them now considered as surplus and so within invested capital. The same argument was'considered and held ineffective in Goodell-Pratt Co., supra, and we adhere to that view.

Respondent attacks the sufficiency of petitioner’s evidence upon the theory that it would be erroneous to take judicial notice of the facts found in the prior case, and that such findings are not frima fade evidence in this case. By thus eliminating from the present record the facts previously found, there would be nothing upon which petitioner could stand. The prior report was actually offered i and received in evidence, and it is therefore unnecessary to consider! the question of the effect or extent of judicial notice. To notice a fact judicially is a substitute for evidence of the fact, Wigmore on Evidence, 2d ed., vol. 5, ch. XC, and as the findings were introduced, we are not called upon to determine whether it would have been sufficient or proper to give judicial notice to the published facts.

It is said by respondent that under the statute, section 906 (f), the findings are frima facie evidence of the facts stated only in a proceeding in court. We are of opinion, however, that there is nothing in the statute, and we are cited to no decision of the equity courts of the District of Columbia, which prohibits the Board from giving it such force. In Union Metal Mfg. Co., 4 B. T. A. 287, the Board decided whether under the Revenue Act of 1924 a decision with its findings of fact as to liability for one year was res adjudicata as to the same facts involved in the question of liability for a later year. The doctrine of res adjudieata was not applied, but as to the effect of earlier findings of fact, the Board said:

When the taxpayer put in the findings of fact formerly made by the Board, the facts so found were prima, facie correct and served as evidence. Without more the petitioner had established its casé, for, irrespective of the doctrine of res adjudicata, the Board’s findings are entitled to the weight of the presumption of correctness. The Commissioner had the burden then of going forward and establishing the preponderance.

This is what the petitioner did in the present case, and added the supplementing evidence to project the premises into 1920 and the concession that for 1920 the computation should be adjusted by reason of the prior years’ taxes.

It seems to us sufficient to make a case. To hold with respondent that it is not sufficient would be tantamount to a requirement that the facts previously found must be established de novo — a mere duplication of the evidence already introduced and fully considered in the prior proceeding. If the prior findings are in truth not correct, their prima faeie effect may still be overcome by either party through the introduction of evidence. This course was open to respondent in the present case but no evidence was introduced in his behalf and no error of fact has been suggested. No substantial reason is advanced for a conclusion at variance with the earlier decision, and in view of the facts already found and the additional evidence, we hold that the invested capital for 1920 should include the amount of $280,513.26 with proper adjustments.

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