text:
    Appeal of NATIONAL FILM PUBLICITY CO.
    Docket No. 1807.
    Submitted November 24, 1925.
    Decided June 21, 1926.
    1. Capitalized value of contracts acquired without cost may not be included in statutory invested capital or exhausted ratably for the purpose of taking annual deduction from gross income.
    2. Taxpayer’s request for inventory adjustments denied.

      John V. lee, Esq., and John W. Snider, O. P. A., for the petitioner.

      A. H. Fast, Esq., for the Commissioner.
    Before SteeNhageN, LaNsdoN, and AettNdell.
    This appeal is from the' determination of a deficiency in income and profits taxes for the years 1920 and 1921, in the amounts of $3,352.97 and $3,029.42, respectively, or a total of $6,382.39. Three issues are involved in this controversy: (1) depreciation of certain so-called theatre leases for 1920 and 1921; (2) the refusal of the Commissioner to include any value of such so-called leases in the taxpayer’s statutory invested capital; and (3) alleged overstatement of inventories.
    FINDINGS OF FACT.
    The taxpayer is a Delaware corporation with its principal office in St. Louis, Mo., where it is engaged in purchasing, manufacturing, exhibiting, and selling motion-picture films for advertising purposes. Its business operations consist in purchasing advertising-films, in manufacturing such films, either in its own studio or in the plants and places of business of its clients, in the sale of both negative and positive films, and in securing the exhibition of such films in various motion-picture theatres.
    To secure the exhibition of advertising films, the taxpayer, during the years in question, had contracts with approximately 100 motion-picture theatres. These contracts, designated in the petition as leases, were for terms that averaged, approximately, five years. The contracting theatre displayed the films and charged the taxpayer an agreed amount for such service. In some instances payments for exhibitions were made in advance, b.ut such payments were always thereafter deducted from amounts due under the contracts involved. Nothing was ever paid for the contracts as such.
    The taxpayer estimated the value of the leases or contracts that it had with motion-picture theatres on December 31, 1919, at $100,000. In its income and profits-tax returns for 1920 and 1921 it included the value assigned to such contracts in its invested capital in amounts not disclosed by the record. In its income and profits-tax return for the year 1921, it deducted the amount of $9,364.87 from its gross income as exhaustion of the capitalized value of such so-called leases, although it had taken no such deduction in any previous year.
    In the operation of its business it was necessary for the taxpayer to keep considerable quantities of completed motion-picture films in stock. These films were of at least three kinds, viz, negative films from which positive films for sale to customers were printed from time to time; positive films, either manufactured in its own studio or purchased from other producers in anticipation of orders; and special stock negative films made for the purpose of illustrating and advertising particular plants and industries. A portion of this stock of films was stock in trade. Another portion was negative films used for the production of positive films to supply orders. The taxpayer’s accountants depreciated the value of films, and deducted such depreciation from gross income for the years in question. At December 31, 1919, 1920, and 1921, the taxpayer’s book inventories of alleged stock in trade films were $23,660, $23,171.38, and $34,553, respectively.

      Upon audit of the taxpayer’s income and profits-tax return for the year 1919, the Commissioner added to income the amount of $6,537.63, alleged to have been deducted on account of exhaustion of so-called theatre leases, although no such charge was made to profit and loss account for that year. This amount represents certain adjustments of the book value of theatre leases, and was not included in the taxpayer’s deduction from gross income for the year 1919.
   OPINION.

Lansdon:

Since the taxpayer’s first two contentions involve the value of the so-called theatre leases, these points may be regarded as a single issue. No copy of the instruments evidencing the alleged leases was offered at the hearing, but the testimony indicates that the contracts, made for an average term of five years, are of such a nature as to entitle the taxpayer to exhaust or depreciate their cost, if any, for the purpose of ascertaining its invested capital and correct income for the years in question. It is well established that the proved cost of leases, patents, and contracts may, within the statutory limits, be included in the computation of statuory invested capital for excéss profits purposes, that such cost, or March 1, 1913, value, may be exhausted ratably during the useful life of such property, and that such exhaustion is a proper deduction from gross income for each of the years in which it occurs. In the instant appeal, however, there is no evidence of any cost of the so-called leases. On the contrary, the testimony of the president of the taxpayer discloses that such leases were obtained without cost, except that in some instances an advance payment was made which invariably was deducted from the contract amounts specified for services under the lease.

The taxpayer obviously has capitalized its estimate of the earning power of the leases or contracts. The capitalized value of such property is not included in the statutory definition of invested capital, and was properly excluded by the Commissioner in his computation of the taxpayer’s liability for profits taxes. As the so-called leases were acquired without any cost that the taxpayer has established, there is no basis in law or in fact for their inclusion in invested capital for profits tax purposes. The action of the Commissioner in disallowing exhaustion of such leases for the year 1921 must be approved.

The evidence discloses that the Commissioner erroneously added the amount of $6,537.63 to the taxpayer’s income for the year 1919, as such amount was not taken as a deduction from gross income on account of exhaustion of theatre leases, but represents the taxpayer’s own adjustment of the book value that it ascribed to the capitalized earning power of the leases in question. The Board, therefore, holds that such amount should not be included in the taxpayer’s gross income for the year 1919.

The record of this appeal is not clear in respect to the taxpayer’s contention as to over-statement of closing inventories and consequent over-statement of profits earned during the taxable years in the respective amounts of $4,596.13 and $4,151.24. The petitioner asserts that its closing inventories for such years were erroneously computed by adding costs of purchases and of production to the opening inventories for the respective years, without making any adjustments for sales and abandonments on account of obsolescence, and that an actual physical inventory at the close of each of such years showed that films in stock at December 31, 1919, December 31, 1920, and December 31, 1921, had cost $23,660, $18,575.25, and $26,294.25, respectively.

The evidence on this point, which we have been able to include in our findings of fact, indicates that some of the inventoried films were capital items, and that some were stock in trade. There is nothing in the record that enables us to distinguish between the two classes of films or to find any definite value for either. Nor is there any satisfactory evidence of the value or cost of such films. The testimony discloses that some of them were purchased from other producers, and that some were manufactured by the petitioner, but there is no evidence that the figures of value on the inventories represent cost or cost or market, whichever is lower, even as to such items as might be properly classified as stock in trade. The Board, therefore, approves the action of the Commissioner in refusing to readjust the figures of the petitioner’s original or book inventories.

Order of redetermination will l>e entered on 15 days' notice, under Rule 50.


source: Caselaw Access Project

author: Geaupnee

license: Public Domain

text:
    Appeal of COTTON CONCENTRATION CO.
    Docket No. 4625.
    Submitted December 15, 1925.
    Decided June 21, 1926.
    1. Where expenditures were made, partly for a new roof and partly for an old roof, held, that only the amount which can be identified as having- been expended for repairs may be deducted.
    2. In determining gain or loss on conversion of capital assets, due allowance must be made for depreciation.
    3. Where the taxpayer owned two buildings, one of which was entirely destroyed and the other partly destroyed by fire, and only one was reconstructed, of larger size and at greater cost than the amount of insurance received to cover damage to both, held, that any gain realized from the insurance is offset by the deduction permitted under section 234(a) (14) of the Eevenue Act of 1921.

      Morris D. Kofple, Esq., for the petitioner.

      L. G. Mitchell, Esq., for the Commissioner.

      Before GeaupNee, TeamMell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes in the amount of $1,826.13 for the calendar year 1920 and an overassessment of $74.27 for the year 1921, a net deficiency of $1,751.86. The questions for determination are whether the Commissioner erred in determining (1) that the taxpayer realized a profit from insurance received following the destruction of buildings by fire, (2) that a profit had been realized by deducting depreciation from the cost of the buildings, and (3) in disallowing a claimed deduction of the cost of repairing a roof on one of the buildings occupied by the taxpayer.
    PINDINGS OE PACT.
    The taxpayer is a Texas corporation with its principal office at Galveston, and is engaged in the storage of cotton and merchandise.
    In 1920 the taxpayer owned and occupied two sheds, which it had constructed on land owned by the Galveston Wharf Co. The right of occupation of the land was acquired by lease dated July 31, 1918, under which the taxpayer agreed, as a part of the rent, to reimburse the Galveston Wharf Co. for a specified percentage of the taxes and assessments on the land and improvements, and, as the balance of the rent, to pay a sum equal to its entire net profits in excess of $5,000 for each year ending August 31.
    The sheds owned and occupied by the taxpayer were designated, respectively, as the “ east shed ” and the “ west shed.”
    In 1919 the taxpayer engaged a roofer to replace a part and to repair a part of the roof of the west shed. Two payments on account of this work were made in 1919 and are not involved in this appeal. The final payment in the amount of $1,922.25 was made by the taxpayer on February 14, 1920.
    The east shed was 110 feet wide and the west 120 feet. They were each about 700 feet in length, and consisted in the main of wooden posts supporting a roof covered with prepared paper roofing. They were separated by two railroad tracks with the necessary space between tracks to allow passage for cars, and a gangway of six feet, making a total distance of 31 feet between the sheds. They were joined at one end by an embankment or berm of mud shell filling, which was used at times as a passageway to hand-truck bales of cotton from cars to the sheds. The east shéd had á capacity of about 6,000 bales of cotton and the west, about 7,000 bales.
    The two sheds were at all times operated as a unit, under the direction of one superintendent. The cost of both sheds and of subsequent repairs and improvements was carried in one account on the taxpayer’s books and designated “ Plant.”
    The total cost of both sheds, exclusive of the cost of mud shell filling, was $30,950.57. The cost of the east shed was $14,802.42, and the cost of the west shed was $16,148.15.
    No depreciation on the sheds was ever entered on the taxpayer’s books.
    They were insured under policies covering both sheds.
    On September 30, 1920, a fire occurred which entirely destroyed the west shed, 56.25 per cent of the east shed, and mud shell filling of the cost of $4,582.37. The depreciated value of the east shed at that date was $11,265.17, and that of the west shed was $12,289.32. The depreciated cost of that part of the property destroyed was $18,625.98. Insurance on the sheds in the amount of $34,681.42 was received by the taxpayer in July, 1921. Of this amount $22,848.12 was properly assignable to the destruction of the west shed, and the balance, $11,833.30, to the partial destruction of the east shed. No insurance was received for the destruction of the mud shell fining.
    The taxpayer did not rebuild the west shed but did reconstruct and enlarge the east shed, completing it in 1921, at a cost of $39,733.33. This reconstructed shed was improved by the addition of fire walls, galvanized iron sides, walls four feet higher, and by raising the floor, and was enlarged by the addition of 10 feet to the width and 20 feet to the length and by increasing the height so as to permit double-decking the bales of cotton. Thus enlarged, its storage capacity was slightly greater than the combined capacity of the two sheds had been before the fire.
    The Commissioner determined that the taxpayer had realized a profit from the insurance applicable to the west shed, by the following method of computation:
    Insurance applicable to west sited._ $22, .848.12
    Cost of west sited (52.174 per cent of combined area)-_-$16,148.15
    Less depreciation March 1, 1913, to September 30, 1920- 3, 858. 83
    12,289. 32 Depreciated cost_
    4, 582. 37 - 16,871.69 Loss from washed-out fill not. compensated for by insurance_
    Taxable gain- 5, 976.43

       This decision was prepared by Mr. Granpner during his term of office.

   OPINION.

Geaupnee

: Counsel for both parties call our attention to the provisions of the lease as being determinative of the improvements and repairs which the taxpayer was required to make and of the expenditures which it was permitted to deduct in determining the net earnings payable to the lessor under its lease. These net earnings, as pointed out by the Commissioner, are obviously not the same as net income upon which the taxpayer’s liability to tax is based. We are not determining here the net earnings or profits of the taxpayer upon which the rental to be paid the lessor was to be based. Consequently, we are not concerned with the improvements and expenditures therefor provided for under the lease. These are purely matters for adjustment between the parties to the lease. The evidence is clear that on February 14, 1920, the taxpayer paid a roofer the sum of $1,922.25, and our concern is to determine whether this amount is deductible from gross income as an ordinary and necessary expense or whether it should be capitalized. The Commissioner refused to allow a deduction of this expenditure, contending that it was made for the construction of a new roof and was accordingly a capital item. The testimony of the man employed to perform the labor is that he “ put on shell and gravel roofing ” and that “ a portion of that roof was entirely gone and I put a new roof on it.” While the testimony is also to the effect that, in addition to the construction of a new roof, some repairs were made to a part of the old roof which was on the shed, apparently no separation was made between the cost of the new roofing and the repairs. The determination of the Commissioner with respect to the expenditure of $1,922.25 is accordingly approved insofar as it applies to the cost of the new roof. Appeal of Simmons & Hammond Manufacturing Co., 1 B. T. A. 803; Appeal of Salo Auerbach, 2 B. T. A. 67. If any portion of the amount paid can be allocated to repair work alone, it may be allowed as a deduction.

The taxpayer also contends that if the cost of replacing and repairing the roof is not deductible as an ordinary and necessary expense, then, under its contract, the amount expended becomes payable to the lessor as additional rent. That the term “rentals” does not include payments made for improvements has been settled by the Supreme Court in Duffy v. Central R. R. Co., 268 U. S. 55; 45 Sup. Ct. 429; 5 Am. Fed. Tax Rep. 5377.

The Commissioner’s method of computation in determining that a profit was realized from insurance received is set forth in the findings of fact above. The taxpayer objects to the deduction of depreciation from March 1, 1913, value of the sheds, as no depreciation was entered on its books, and contends that an adjustment for depreciation would necessitate an adjustment of rent for past years between it and the lessor.

With respect to the first of these objections, the Board has held in the Appeal of Even Realty Co., 1 B. T. A. 355, that in determining gain or loss, due allowance must be made for depreciation, whether or not deductions therefor had been taken by the taxpayer in prior years. There appears to be no objection on the part of the taxpayer to either the basis or rate used by the Commissioner in determining the amount of the depreciation if the Board finds that allowance therefor should be made. As to the contention that shch an allowance would require a recomputation of rent between the lessor and lessee, we repeat what we said above with respect to the roofing expenditures — that that is a matter for adjustment between the parties to the lease and does not concern us in adjusting the items in dispute between the taxpayer and the Commissioner.

The amount of $18,625.98, set forth in the findings of fact as depreciated cost of that part of the property destroyed, was arrived at on the basis of the total destruction of the west shed and 56.25 per cent destruction of the east shed. The amount of the insurance received allocated in the findings to the sheds separately was found on the basis that the depreciated cost of the west shed was 65.88 per cent of the total amount of the destruction. In other words, 65.88 per cent of the insurance received, amounting to. $22,848.12, is the amount to be allocated to the west shed which was totally destroyed, leaving the balance, $11,833.30, to cover the partial destruction of the east shed. There is no dispute between the taxpayer and the Commissioner as to these figures.

The Commissioner determined that a gain had been realized from the insurance received, as set forth above, on the theory that the two sheds were separate units in the taxpayer’s business and that in rebuilding and enlarging the east shed the insurance received was used only in the replacement of one unit of the business, leaving a profit realized on the insurance on the. west shed.

The sheds were both used for the same purpose — the storage of baled cotton. After the cars in which the cotton was shipped for storage were placed on the tracks between the sheds, the bales were removed and stored in the sheds. At times cotton was taken from cars on the west track and stored in the east shed and from cars on the east track and stored in the west shed. This was done when there were cars on both tracks by bridging through the cars, and when only one track was loaded with cars the cotton was taken by truck across the passageway, or berm, which connected the buildings at the north end. Both sheds were carried on the taxpayer’s books under one account. From these facts we draw the conclusion that the two sbeds must be considered as constituting a single unit in the taxpayer’s business.

Section 234(a) (14) of the Bevenue Act of 1921, which is made expressly applicable to prior years, permits the deduction from gross income of gains derived through the involuntary conversion of property when the proceeds are used to acquire “ other property of a character similar or related in service or use to the.property so converted.” Under the Commissioner’s interpretation of this section, it would be necessary for a taxpayer in order to receive the benefit of it, to reconstruct destroyed property in exactly the same physical condition as the original property^ This is not in accordance with the plain terms of the Act, quoted above and repeated here for emphasis, which refer to “ other property of a character si/milar or related in service or use to the property so converted.” (Italics ours.)

In the Appeal of Piedmont-Mt. Airy Guano Co., 3 B. T. A. 1009, the facts were that the taxpayer used the proceeds of use and occupancy insurance to replace the physical property destroyed. We held in that appeal that, under section 234(a) (14), when physical property is destroyed by fire, that portion of the proceeds of use and occupancy insurance which is used to replace such property may be deducted from the gain derived from such insurance.

Considering the facts in the present appeal, we find that the reconstructed east shed, when completed, occupied a slightly larger area than did the former east shed, and, by increasing its height to allow double-decking the bales of cotton, its storage capacity was slightly more than the combined capacity of the two sheds destroyed. The capacity of the shed as thus increased permitted the taxpayer to care for the volume of business which had formerly required the facilities of two sheds. The improvements added, such as fire walls and galvanized iron sides, were made to meet conditions prescribed by the • underwriters. It is evident from this, we believe, that the reconstructed east shed constituted a replacement of the two destroyed and was sufficiently related in service or use to the former sheds to come within the provisions of section 234(a) (14). As this shed was reconstructed at a cost greater than the amount of the insurance received on the destruction of the two, any gain that the taxpayer may have derived from the insurance is offset by the deduction permitted by section 234(a) (14), and the determination of the Commissioner that a taxable gain was realized from the insurance is disallowed.

Order of redetermination will he entered on 15 days' notice, u/nder Rule 50.


author: Gkatjpner

text:
    Appeal of HAMILTON E. SHAVER, LAURA A. HUGHES, and LOUIS H. PORTER, Executors of the Estate of JOHN McMULLEN, Deceased.
    Docket No. 4775.
    Submitted December 15, 1925.
    Decided June 21, 1926.
    1. A transfer tax paid by tbe executors from the residuary fund of the estate to the State Tax Commissioner of West Virginia is a proper legal deduction from gross income.
    2. An inheritance tax paid by the executors to the State of Connecticut is allowable as a deduction from the gross income of the estate.

      F. Garroll Taylor, Esq., for the petitioners.
    Z. 0. Mitchell, Esq., for the Commissioner.
    Before Graubner, Trammell, and Phillips.
    This is an appeal from the determination of deficiencies in income tax for the period from decedent’s death, August 29, 1921, to December 31, 1921, in the amount of $23,721.91, and for the calendar year 1923, in the amount of $653.96, making a total deficiency involved of $24,375.87. The questions involved are whether inheritance taxes paid to West Virginia in 1921, and to Connecticut in 1923, may be deducted in determining the net income of an estate.
    FINDINGS OF FACT.
    John McMullen died a resident of the State of Connecticut on August 29, 1921, leaving a will in which he appointed as executors Hamilton E. Shaver, Laura A, Hughes, and Louis H. Porter, who are the petitioners in this appeal. Letters testamentary were issued by the Probate Court of Norwalk, Connecticut, on November 15, 1921, to the appointed executors, who duly -qualified and at the time of filing this appeal were acting as the executors of the estate.
    The will of the decedent provided for a number of devises, bequests, and trusts, and named Cornell University at Ithaca, New York, as residuary legatee. Among the directions contained in the will was one that all inheritance taxes be paid from the residuary fund.
    In the year 1921, the executors of the estate paid a tax to the State of West Virginia, which was imposed by the inheritance tax laws of that State, in the amount of $100,000. The tax was imposed by reason of the fact that the decedent at the time of his death was the owner of 10,189 shares of the Atlantic Gulf and Pacific Company and 6 shares, of the Atlantic Gulf and Pacific Company of Manila, corporations organized and existing under the laws of the State of West Virginia. A receipt for this payment was issued by the State Tax Commissioner, reading in part—

      * * * that the executors of the estate of said John McMullen have paid to the State of West Virginia the sum of One Hundred Thousand Dollars ($100,000.00) in full of the inheritance tax due the said state upon the transfer of said shares of stock.
    None of the beneficiaries or fiduciaries of the estate resided in West Virginia.
    In 1923 the executors of the estate paid a tax to the State of Connecticut, which was imposed under the inheritance tax laws of that State, in the amount of $6,873.01. A receipt for the tax was issued showing payment “Received from the Estate of John McMullen * * * >;
    In the income-tax returns for the estate filed for 1921 and 1923, the amounts of $100,000 and $6,873.01, paid to the States of West Virginia and Connecticut, respectively, were claimed as deductions from gross income. The Commissioner disallowed the claimed deductions, which resulted in the determination of the deficiencies from which this appeal was taken.
    The accounts of the estate were at all times kept upon the cash receipts and disbursements basis.

       This decision was prepared by Mr. Graupner during his term of ofliee.

   OPINION.

Gkatjpner

: The petitioners, who are the executors of the estate of John McMullen, deceased, seek to deduct from the gr<jes income of the estate the inheritance taxes paid by them to the States of West Virginia and Connecticut. The right to this deduction is claimed under section 214(a) (3) of the Revenue Act of 1921, which permits the deduction of “ Taxes paid or accrued within the taxable year * *

Counsel for both parties concede that there are no decisions of the West Virginia courts construing the inheritance tax laws of that State. We must therefore turn to the Act itself and interpret it by application of general legal principles.

Counsel for the Commissioner directs our attention to the title of the Act, which reads:

An Act to amend and re-enact Sections 1, 2, 2(a), 2(b), 6, 9, and 19 of Chapter 33, of Barnes Code of West Virginia, of 1918 relating to taxes on inheritances, devises, distributive shares and legacies and to provide for the appraisement of estates subject to such taxes.

He also calls attention to the comment on the title of a taxing act made in Knowlton v. Moore, 178 U. S. 41, 65:

On the very threshold, the theory that the tax is not on particular legacies or distributive shares passing upon a death, but is on the whole amount of the personal property of the deceased, is rebutted by the heading, which describes what is taxed, not as the estates of deceased persons, but as “ legacies and distributive shares of personal property.” This, whilst not conclusive, is proper to be considered in interpreting the statute, when ambiguity exists and a literal interpretation will work out wrong or injury.

To the same effect is Smythe v. Fiske, 23 Wall. 374, 380, where it is said, Where doubt exists as to the meaning of a statute, the title may be looked to for aid in its construction.” But, as said in the Knoiolton case, the words used in a title are not conclusive, and we find, in Shields v. Bennet, 8 W. Va. 74, 86, it is said, “ Still, brevity is a prevailing attribute in the character of a title. Consequently, its language should be construed in the most comprehensive sense * * And johnson v. Harrison, 47 Minn. 575; 50 N. W. 923, it is held, “ The title was never intended to be an index of the law.” We must therefore look further than the title of the Act for the basis upon which to build a proper interpretation of it.

A brief outline of the statute, with pertinent portions quoted, is as follows:

Section 1. Inheritances, devises, distributive shares and legacies subject to tax. — A tax payable into the treasury of the State shall be imposed- upon the transfer in trust, or otherwise, of any property, or interest therein, real, personal, or mixed, of five hundred dollars or more if such transfer be * * *
(b) By will or by laws regulating descents and distributions, of property within the State, or within its jurisdiction, and the decedent was a non-resident of the State at the time of his death.

Sections 2 .and 2a prescribe the rates of tax upon transfers, measured by the degree of relationship of the beneficiary to the deceased.

Section 2b exempts certain transfers from tax.

Section 3 provides for the method of determining market value of property.

Section 4 provides for a tax on devises and bequests in payment of debts.

Section 5 provides for the apportionment of tax on contingent interests, life estates, etc.

Section 6. Taxation of property of nonresidents — Penalty for transfer before payment of tax. The provisions of this act shall apply to the transfer of the following property belonging to deceased persons, non-residents of this state, which shall pass by will or inheritance under the law of any other state, or country, and such property shall be subject to the tax imposed by this chapter, to wit:
* * * # si* * *
(e) The transfer of shares of capital stock of all corporations organized and existing under the laws of this state, the certificates of which shares of stock shall be within or without this state.
* * * 5}! * * *
The transfer of shares of stock mentioned in subdivision (c) of this section, after the decease of the person owning the same, shall not be legal until the inheritance tax, or transfer tax. has been paid into the state treasury and certificates of release to that effect executed by the state tax commissioner. * * * Any * * * person having in his possession such property, before the inheritance tax is paid, or before official consent of the state tax commissioner thereto is obtained, shall he liable to the state of West Virginia for such amount of inheritance tax as may be collectible upon the transfer, together with any interest that may accrue thereon, and in addition thereto, a penalty of five hundred dollars * * *.
Section 7. Lien of tax on property- — Liability of executors, etc. All such taxes upon any transfer, and the interest that may accrue thereon, shall, until paid, be and remain a charge and lien upon the property transferred, superior to any lien created after such transfer, and no title shall vest or be transferred as to any such property, except subject to the lien for such taxes, and no such property shall be paid, transferred or delivered, in whole or in part, until the payment into the treasury of the state of the amount of such tax. The person to whom the property is transferred, if he shall receive the same before the tax thereon is paid, and the executors, administrators and trustees having charge of every estate so transferred, shall be personally liable for such tax and interest until its payment, and no statute of limitations shall be a defense to any action for the recovery thereof.

Section 8 provides for the suspension of payment in certain cases.

Section 9 provides that the tax is due and payable 90 days after the qualification of the executor, or within four months of the death of the decedent in case letters testamentary are not issued. This section also provides for the imposition of a penalty and interest on delinquent payments.

Section 10. Duty of executors, administrators, trustees, guardians, etc., as to payment of tax. Every executor, administrator, trustee, guardian, committee or other fiduciary having charge of an estate, any part of which is subject to such tax, and every person to whom property is transferred which is subject to such tax, but is not in charge of any such fiduciary, shall pay the same upon the market value of all the property subject to tax, whether there are or are not devises or bequests of successive interests in the same property, and whether such successive interests, if any, are defeasible or indefeasible, absolute or contingent. Such payment shall be made out of said estate in the same manner as other debts may be paid. Any such fiduciary may sell personal property for that purpose when necessary, and the circuit court may authorize him to sell real estate for the payment thereof in the same manner as it may authorize the sale of real estate for the payment of debts.
Section 11. Duty of foreign executor, administrator or trustee as to payment of tax. Whenever any foreign executor, administrator or trustee shall assign or transfer in this state any stock, bond or other security liable to any such tax, standing in the name of, or in trust for a decedent, he shall have the tax assessed on such transfer by the state tax commissioner, and shall pay the tax into the state treasury on the transfer thereof; otherwise any person having authority to make or permit such transfer, who shall make or permit it, shall be liable to pay the tax if he then had knowledge, or reasonable cause to believe, that the property was liable to tax.

Section 12 prescribes the duty of county courts and clerks to report transfers.

Section 13. Executor, administrator or trustee to file statement showing transfers subject to tax. With the inventory of every estate the executor, administrator or trustee shall file a statement showing, to the best of his judgment, whether any transfer of any property mentioned in such inventory is taxable hereunder * * *.

It will at once be apparent that the foregoing provisions of the statutes of West Virginia are similar to those of New York, which were involved in the Appeal of Farmers Loan & Trust Co., 3 B. T. A. 97, and which are therein set forth at some length. In that appeal, after thoroughly reviewing the cases relied upon by both parties, the conclusion was reached that the tax is primarily imposed upon the transfer of an estate, the tax in the first instance being payable out of the taxable shares in the estate before they are transferred.

Under the statutes of both New York and West Virginia, the inheritance tax is “ imposed upon the transfer ” of property, and is graduated both by the degree of relationship of the legatee or heir and by the amount of property received. In the statute of West Virginia we find the additional provision that “ Such payment [of tax] shall be made out of said estate in the same manner as other debts may be paid.” (Section 10.) This provision, by placing the inheritance tax in the same category as debts of the estate, we believe, contemplates payment by the estate as distinguished from payment by individual distributees of the estate.

The Commissioner comments on section 7, which provides that the tax shall be a lien “ upon the property transferred,” and contends that under this provision the tax does not attach to the estate as a whole. This contention becomes groundless when it is recalled that the tax is upon neither the property transmitted nor the property received, but is a tax upon either the right of transmission or succession. The taxable right, of course, is closely connected with the property, for without property the right itself would be valueless, and the lien is placed upon the property merely as a means of safeguarding the collection of the tax.

The Commissioner also refers to section 9, which provides for the suspension of payment in case there is litigation pending at the time the tax is due, and reasons that if the tax were imposed on the whole estate there would be no reason for deferring collection of the tax under such circumstances. In view of the fact that the tax is graduated by the degree of relationship of the recipient and the amount of property received, it may be necessary to postpone collection until the beneficiaries and the extent of their rights can be determined, regardless of whether the tax is imposed on the estate as a whole or upon the individual shares of the legatees or heirs.

The provisions of the West Virginia statutes, being so nearly similar to the New York statutes in their terms and operations, may well be given the same construction. United States v. Mitchell, 271 U. S. 9.

The tax paid by the executors to the State of Connecticut was imposed by the General Statutes of 1918;, as amended by certain chapters of Laws 1919 and Laws 1921, effective July 1, 1921. These statutes follow in form earlier inheritance tax acts of the State, some of Avhich have been construed by the courts in cases hereinafter cited. The Connecticut statute provides that all property owned by a resident at the time of his decease, which shall pass by will, shall be subject to the tax herein prescribed. (Sec. 1261.) The net estate is to be ascertained by determining the gross estate, and deducting certain specified charges (sec. 1263) upon information to be furnished by the executor (sec. 1267). The rate of tax depends upon the degree of relationship of the person to whom the estate passes, and upon the amount so passing. (Sec. 1264.) The statute provides that the tax shall be paid * * * by the administrator, executor, or trustee, * * * from property passing to the donee, beneficiary, or trustee, unless such recipient shall pay to the administrator, executor or trustee the amount thereof,” except as otherwise provided in the will. (Sec. 1268.) The executor, administrator or trustee is liable for the tax and his accounts can not be settled until the tax is paid. (Secs. 1268, 1269.)

A provision of the will of the decedent directs that all inheritance taxes be paid from the residuary fund. This direction is in accord with express provision of the law and places the direct obligation for the tax upon the estate. Under this provision the only beneficiary under the will to suffer a diminution is the residuary legatee.

Both parties in their briefs cite the Appeal of Nettleton, 76 Conn. 235; 56 Atl. 565. However, in that case the court did not rule upon the question here involved, saying that the distinctions between so-called probate, succession, or legacy taxes “ are of no practical importance in this case, and we do not consider the questionable claim that the act before us imposes a legacy tax, as distinguished from a tax on the estate.”

The Commissioner relies upon Appeal of Gallup, 76 Conn. 617; 57 Atl. 699; Appeal of Hopkins, 77 Conn. 644; 60 Atl. 657; Sherman v. Moore, 89 Conn. 193; 93 Atl. 241; and Corbin v. Townsend, 92 Conn. 501; 103 Atl. 647, all of which are cited in petitioners’ brief. We are not satisfied that these decisions are material to the issue here involved.

The Revenue Act of 1921 permits an estate in process of settlement to deduct from gross income “estate, inheritance, legacy, and succession taxes.” The statute of Connecticut (sec. 1268) provides that the inheritance tax must be paid by the “ administrator, executor, or trustee ” of the estate, even though the portion of the tax allocable to a specific legacy be deducted therefrom on distribution. The statute further recognizes a testamentary direction as to how such taxes shall be paid and here we find the will directing that all inheritance taxes be paid from the residuary fund — the fund that suffers diminution from all other expenses of administration and probate.

The Connecticut inheritance tax law is sufficiently similar in effect to the transfer tax of New York for us to hold that the amount of the tax is deductible from the gross estate. Appeal of Farmers Loan & Trust Co., 3 B. T. A. 97. Although the legacies may be reduced by the amount of the tax, the estate pays the tax, and the assets of the estate are reduced by the payment. The only right which a legatee has is that of receiving his legacy, reduced by the amount of the tax. United States v. Perkins, 163 U. S. 625; 4 Am. Fed. Tax Rep. 4659.

In Keith v. Johnson, 271 U. S. 1, the Supreme Court, in holding that New York transfer taxes paid by the executor are legal deductions from the gross income of an estate, used this language, which well applies to the present proceeding:

It [the transfer tax) was primarily payable * * * out of moneys and other property of the estate; * * *. While this lessens the amount for distribution among the heirs, it cannot be said that they bore any part of that tax. As well might it be claimed that they paid the funeral expenses and debts, if any, of the intestate. No part of the transfer tax so paid could be taken by the heirs as a deduction in calculating their federal income taxes.

See United States v. Mitchell, 271 U. S. 9.

The estate of John McMullen, deceased, is entitled to deductions on account of the transfer tax paid to the State of West Virginia and the inheritance tax paid to the State of Connecticut, and those parts of the deficiencies arising from the denial of such deductions must be disallowed.

Order of redetermination will be entered on 10 days’ notice, under Rule 50.


author: Smith:

text:
    Appeal of THE LEICHNER & JORDAN CO.
    Docket No. 4867.
    Submitted November 4, 1925.
    Decided June 21, 1926.
    After taxpayer had paid a general contractor for the construction of a building, but before subcontractors and material men had been paid, the general contractor became insolvent, and the subcontractors and material men recovered judgments against taxpayer, which were paid by taxpayer in 1920. Held, that the amounts so paid constituted a loss deductible by taxpayer in 1920 and were in no sense a part of the cost of the building.

      H. Glernn Duis, Esq., for the petitioner.

      R. P. Smith, Esq., for the Commissioner.

      Before Smith, James, LittletoN, and Thus,sell.
    This is an appeal from the determination of a deficiency in income and profits tax for the year 1920 in the amount of $547.76. The point in issue is the right of the taxpayer to deduct from gross income an alleged loss of $5,477.54, arising from the fact that the taxpayer, after paying for a building constructed in 1918, was also required to pay mechanics’ liens in 1920 of $5,646.95, offset by additional depreciation allowed by the Commissioner to the extent of $169.41.
    FINDINGS OF FACT.
    The taxpayer is an Ohio corporation with its principal place of business at Portsmouth. In 1918 the taxpayer let a contract for the erection of a certain building to be used in carrying on its business of wholesale produce and the manufacture of ice. The contract provided that the general contractor was to reimburse the owner for any amounts that the owner might be compelled to pay to subcontractors in excess of the amount due to the general contractor and for which the general contractor was liable. After the building was completed and the general contractor had been paid practically all that was due it, the general contractor failed to pay all subcontractors and material men for labor done and material furnished on the building. The general contractor became insolvent, the subcontractors and material men filed mechanics’ liens on the building, and, after suit, secured judgment. The liens and judgments paid during the year 1920 were as follows:
    Liens and judgments paid-$7,103. 33
    Less: Amount due to general contractor not paid- 1, 456.38
    Amounts paid on liens and judgments in excess of amount due general contractor_ 5, 646. 95
    The taxpayer deducted the above amount as a loss in its income-tax return for 1920. The Commissioner disallowed the deduction and added the above amount to taxable income for 1920 as representing additional cost of building, as follows:
    Amount added by Commissioner to income as representing additional cost of building-$5, 646.95
    Depreciation allowed by Commissioner on said addition for 1920_ 169.41
    That amount added by Commissioner to income for 1920_ 5. 477. 54

       This decision was prepared during Mr. James’ term of office.

   OPINION.

Smith:

The taxpayer claims the right to deduct from gross income in its income-tax return for 1920 amounts totaling $5,646.95, paid to subcontractors who had filed mechanics’ liens against its building. The deduction of this amount is claimed under section 234(a) (1) of the Revenue Act of 1918, which allows the deduction of “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business;” or under subdivision_ (4) of the same section, which allows the deduction of “ losses sustained during the taxable year and not compensated for by insurance or otherwise;” or under subdivision (5) of the same section, which allows the deduction from gross income of “ debts ascertained to be worthless and charged oif within the taxable year.”

The Commissioner has disallowed the deduction upon the ground that the amount paid to subcontractors was a part of the cost of the building. We are of the opinion, however, that in no proper sense was this so. The taxpayer had neglected to take a proper business precaution and had paid the general contractor without receiving a release from persons who had furnished material and performed labor upon the building. By reason thereof it was compelled to pay a sum of money in settlement of liens filed and judgments obtained by subcontractors and material men. The general contractor was insolvent and the taxpayer had no way of recovering its loss. The loss sustained was deductible from gross income. Electric Reduction Co. v. Lewellyn, 11 Fed. (2d) 493.

Judgment for the -petitioner.


author: Phillips:

text:
    Appeal of WESTFIELD & FALL RIVER LUMBER CO.
    Docket No. 4765.
    Submitted October 30, 1925.
    Decided June 21, 1926.
    1. Evidence held insufficient to show any error by tbe Commissioner in adjusting inventories.
    2. Evidence held insufficient to show any payment for good will.

      Fred B. Silsbee, Esq., for the petitioner.

      R. P. Smith, Esq., for the Commissioner.
    Before Phillips and Trammell.
    This is an appeal from the determination by the Commissioner of deficiencies in income and profits taxes of $4,255.39 for 1919 and $171.27 for 1920, only a part of the deficiencies being involved. It is alleged that the Commissioner erred in increasing the net income for 1919 on account of inventory adjustments and in disallowing a deduction of $1,000 from 1919 income as an amount paid for good will which no longer has a value. A third error set forth in the petition was withdrawn at the hearing.

      FINDINGS OF FACT.
    The taxpayer is a Wisconsin corporation with its principal office at Mosinee. During the years involved it owned and operated eight lumber yards. In making its income-tax returns it included in its inventories accounts receivable and cash balances at some of its yards, as well as merchandise on hand. The merchandise on hand was included in the inventories at the average cost and a deduction of approximately 10 per cent was taken.
    The Commissioner caused a revaluation of the inventories to be made, eliminating non-merchandise items and including the merchandise items at cost. The results are as set out in the following table, which is accepted by both the taxpayer and the Commissioner.

    Column 2 of this tabulation sets out the inventory used by the taxpayer in its return, including non-inventory items. Column 3 sets out the merchandise items at the value at which they were included by the taxpayer. Column 4 sets out the value of the merchandise as determined by the Commissioner.
    Upon its income-tax return for 1919 taxpayer computed its income from sales as follows:
    Gross sales-$355,956.02
    Merchandise bought for sale_$246, 713. 61
    Inventory January 1, 1919_ 159, 988. 09
    406, 701. 70
    Inventory December 31, 1919_ 134, 655. 72
    Cost of goods sold- 272, 045. 98
    Profit on sales- 83, 910. 04
    In computing the deficiency for 1919 the Commissioner used the net income shown upon taxpayer’s return and increased such net income by “ inventory adjustment $8,563.90.” This amount is the sum of the following adjustments:
    Inventory of December 31, 1918, decreased_$4, Oil. 47
    Inventory of December 31, 1919, increased_ 3, 952. 43
    8, 563. 90
    In March, 1915, the taxpayer purchased from F. C. Smith and Amos G. Smith a lumber business operated by them in Harvard, Ill., including the lumber inventory, furniture, fixtures, and good will, paying therefor the sum of $7,802.63. As a part of the contract-of sale-the vendors agreed not to go into the same or any similar business in competition with the taxpayer in Harvard, Ill., for a period of ten years.
   OPINION.

Phillips:

The principal question involved is whether the Commissioner has erred in the adjustment made to the net income due to a recomputation of the taxpayer’s inventories. In the computation of its net income taxpayer used opening and closing inventories which included cash on hand, bank deposits, and accounts receivable at some of its yards as well as merchandise. The Commissioner first eliminated the non-merchandise items and then revalued the merchandise. Tie then added to the net income shown on taxpayer’s return an amount which adjusted the difference between his valuation of the merchandise and the taxpayer’s valuation of the merchandise. The Commissioner has decreased the opening inventory by $4,611.47, representing the difference between $104,829.85 and $100,218.38. In a similar manner the Commissioner has increased the closing inventory by $3,952.43, which is the difference between $68,215.90 and $72,168.33. The taxpayer points out that in computing the cost of goods sold taxpayer did not use such inventory amounts but used inventories of $159,988.09 and $134,655.72, and that, using these as a basis, there is a reduction in the opening inventory of $59,769.71 and in the closing inventory of $62,487.39, a net reduction of $2,717.68 and not a net increase of $8,563.90 as computed by the Commissioner.

Stated in another way, the taxpayer included, in his opening inventory, non-inventory items of $55,158.24 and, in his closing-inventory, non-inventory items of $66,439.82. The difference of $11,281.58 represents an increase during the year in accounts receivable and cash, and has no bearing whatever on the cost of goods sold. By using such inventories in computing its net income, the taxpayer included this net increase as a part of its income and the adjustments made by the Commissioner appear to assume that this increase is correctly included as income.

If we are to consider that only the computation of the cost of goods sold is involved, the adjustment made by the Commissioner is clearly erroneous, since any increase in non-inventory items must be taken out. But the cost of the goods sold is only one item in the computation of profit, and it is not clear whether this increase in non-inventory items was reflected by the taxpayer in its computation of the gross sales. Unfortunately, the report which is made the basis of the Commissioner’s determination does not go into the amounts of gross sales, or cost of goods sold, but merely makes these inventory adjustments and adds the sum to the net income shown on the return. Nor do we have any records before us which would enable us to determine whether gross sales are reported from all the yards or whether the profits of some of the yards are reflected in income only by way of showing an incease in. their net worth by including non-inventory items in the inventory. Either the latter was true of the original returns made by the taxpayer over a series of years, or the income has been grossly distorted by the taxpayer in its returns for those years.

The report adopted by the Commissioner is supported by balance sheets and the surplus from year to year has been reconciled, but taxpayer points out that in the opening balance sheet for 1919, before adjustment, inventories have been included by the Commissioner at $151,296.40 and not at $159,988.09, the amount used by the taxpayer, and that the adjustments and reconcilement have been made from the basis of $151,296.40. The balance sheet used by the Commissioner as his basis varies in other respects from that used by the taxpayer and appears to have been based on adjustments made from prior years, which, if the reconcilement of surplus is correct, do not affect the income of the present year.

The matter is not entirely free from doubt, but the records of the taxpayer were available to the two agents whose reports were ac~ cejffed by the Commissioner. Adjustments upon similar bases for 1917, 1918, and 1919, appear to have been accepted by the taxpayer. Upon the record as it is before us, we can not find that any error was committed by the Commissioner in the adjustment he has made.

The taxpayer claims to have paid $1,000 for the good will of a business which it purchased in 1915, including a covenant on the part of the vendors not to carry on a similar business for a period of ten years. It is the contention of the taxpayer that it has built up a good will of its own, that the covenant not to engage in a similar business is no longer of any value and that it is entitled to a deduction in its return for 1919 of the amount paid for such good will and covenant. Without passing upon the question whether any such deduction could be taken, it is sufficient to point out that a lump sum was paid for all of the assets of the business and there is no evidence from which we may ascertain the value of the tangible assets for the purpose of determining what, if anything, was paid for the good will.

The deficiencies are $4,fl'55.39 for 1919 and $17137 for 19W. Order will i>e entered accordingly.


text:
    Appeal of DESLOGE CONSOLIDATED LEAD CO.
    Docket No. 5162.
    Submitted December 10, 1925.
    Decided June 21, 1926.
    1. Upon tbe evidence, held, that the taxpayer did not, in the year involved, ascertain a debt to be worthless.
    2. Where the recollection of a witness as to the date upon which a certain transaction took place several years past conflicts with accounting records made at the time of the transaction, and no basis is shown for believing the recollection of the witness to he more accurate than the written record, the latter is entitled" to the greater weight.

      George H. Moore, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    Before GRaupNee, Teammell, and Phillips.
    Taxpayer appeals from the determination of a deficiency of $162,634.31, income and profits taxes for the calendar year 1918. The petition alleges that the Commissioner erroneously refused a deduction of $236,613.83 as the amount of a debt ascertained to be worthless during the taxable year.
    FINDINGS OF FACT.
    The taxpayer is a Missouri corporation with its principal office in the City of St. Louis. During the taxable year it was engaged in mining, principally of lead ores, in the State of Missouri, and also in smelting the ores mined, reducing them to commercial or pig lead. The taxpayer sold part of its lead products to a corporation in St. Louis known as the Lead Products Co. The sales began on June 4, 1909, and increased in volume from year to year until about December, 1918. All sales were made on open account.
    The balance due the taxpayer on December 31, 1917, was $233,-447.46, and on December 31, 1918, it was $257,873.27.
    Against this amount standing unpaid upon its books, the taxpayer held drafts drawn by the Lead Products Co. upon its customers, accepted by them and endorsed to the taxpayer, amounting to $21,-299.48. On December 31, 1918, the taxpayer charged off on its books $136,573.83 of the amount due on this account, at the same time charging the account with interest of $4,042.83. This left a balance upon the account of $121,299.44 of which $21,299.44 represented the unpaid drafts referred to above.
    A large block of the stock of the Lead Products Co. was owned by the same persons who owned the stock of the taxpayer. In March, 1919, a purchaser was found for this stock who offered $60,-000 for it, one of the conditions of the purchase being that the liability of the Lead Products Co. to the taxpayer should be discharged. The sale was made on this basis and $47,500 of the amount so received was paid over to the taxpayer and $12,500 was distributed among those who transferred their stock interests in the Lead Products Co.
    The debt of the Lead Products Co. to the taxpayer was not ascertained to be worthless and charged off within the taxable year 1918.

       This decision was prepared during Mr. Graupner’s term of office.

   OPINION.

Phillips:

The sole question involved in the appeal is whether a certain debt was ascertained to be worthless and charged off within the taxable year 1918. It is conceded that only a part was charged off and claimed by the taxpayer as a deduction on its return. The taxpayer now claims, however, that the entire amount was ascertained to be worthless during 1918 and should be allowed as a deduction. After a careful examination of the evidence, we are convinced that there was no ascertainment of worthlessness during 1918.

The oral testimony is to the effect that in the fall of 1918 one of the officers of the taxpayer became doubtful as to the correctness of the financial statements furnished the taxpayer by the Lead Products Co., whereupon an inspection of their plant was made and a report made to the officers of the taxpayer that the assets of the debtor then on hand were not of the value stated. There is the further testimony that on or about December 1, 1918, a financial statement was furnished the taxpayer by the debtor and that, upon receiving that statement, the president of the taxpayer prepared a demand for the payment of $136,573.83 and prepared a statement as follows:

Mr. W. H. Rowley,
Secretary & Treas. Lead Products Co.
Dear Sir:
Our account against the Lead Products Co_$257, 873.27
when drafts we hold are paid_ 21, 299. 44
will leave a balance still due_ 236, 573. 83
We have made demand for payment on account of_ 136, 573. 83
Still showing an indebtedness to the Desloge Consolidated Lead
Company of_ 100, 000. 00
We have made the demand for the above payment based on your inventory of December 1, 1918, representing convertible assets of_ 126, 203. 64
Open Ledger Accounts_ 40,122. 94
Liberty Bank-$3, 645. 60
Petty cash- 77. 44
City of St. Louis_1_ 29.68
3, 752. 72
$170, 079. 30

Trial balance shows investment in ¡Machinery, Buildings, Laboratory Fixtures, Insurance, Licenses_ 175,130.66

Total Assets-1-$345, 209.96
Against which we have asked a payment of_ 136, 573.83
If paid should leave approximately invested_$208,636.13

The oral testimony is to the further effect that this statement was furnished the treasurer of the Lead Products Co. on or about December 16, 1918, at a conference between the president of the taxpayer and the treasurer of the debtor; that at such conference the treasurer of the debtor stated that the buildings of the debtor were on leased ground, and that if their lease rentals were not paid the buildings would be forfeited; that the machinery in said buildings was special and could not be used for any other purpose to advantage, and if not continued in their present use would be worth no more than their junk value, which would be a nominal sum; that their equipment consisted of kilns and furnaces built up from the ground and could not be removed, so that they were useless unless the business was continued at its then location; that the accounts receivable listed at $40,122.94 were largely worthless; that the inventory of lead products was fictitious, and that if a sale was forced its assets would be worthless.

There was also introduced in evidence a copy of the account as it appeared on the books of the • taxpayer. This account indicates that on December 16 the unpaid balance due to the taxpayer was not $257,873.27, but was $258,808.92 and that the drafts held by the taxpayer on December 16 amounted to $26,577.92 and not $21,299.44, as stated in the statement. It was not until after interest of $4,042.83 was charged to the account as of December 31 and a draft of $5,278.48 was collected on December 30, 1918, that the balance of the account became $257,873.27, the amount set forth in the statement alleged to have been prepared on December 16.

It seems to us clear that the statement could not have been prepared until December 30, 1918, at the earliest, and that the interview between the president of the taxpayer and the treasurer of the debtor could not have taken place prior to that date. In other respects the oral testimony is indefinite and, after the lapse of such a long period of time, we feel that the written record is more reliable than the present recollection of the witnesses.

There is the additional factor to be considered that the debtor on December 30, 1918, was the owner of considerable assets, the value of which we do not know. In the early part of 1919 the capital stock of the debtor, held by the individuals who also own,ed the capital stock of the taxpayer, was disposed of for $60,000, one of the considerations of the sale being that the debt should be wiped out. What portion of the entire stock of the debtor was held by these stockholders and was the subject of the sale we do not know. It does appear, however, that in December, 1918, an effort was being made to consummate such a sale as took place in 1919 and that the officers of the taxpayer had some hope that a substantial amount could be realized.

The Board has already held that a deduction can not be taken under the Revenue Act of 1918 for a debt ascertained to be worthless only in part. Appeals of Steele Cotton Mill Co., 1 B. T. A. 299; The Murchison National Bank, 1 B. T. A. 617. We believe this to be the situation in which the taxpayer found itself at the close of 1918.

The deficiency is $16%,63If.31. Order will he entered accordingly.

ARUNDell and Millieen not participating.


author: Trammell:

text:
    Appeal of D. N. & E. WALTER & CO., INC.
    Docket No. 4006.
    Submitted December 24, 1925.
    Decided June 21, 1926.
    1. Held,, that the evidence establishes that the taxpayer acquired good will for stockj but is insufficient to establish the value thereof.
    2. The taxpayer is entitled to have its profits tax assessed under section 328 of the Revenue Act of 1918.
    3. The amount paid for services rendered in procuring a lease is a capital expenditure which should be spread over the life of the lease.

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

      Briggs G. Simpich, Esg., for the Commissioner.
    Before GraupneR, Trammell, and Phillips.
    This is an appeal from a determination of a deficiency in income and profits taxes for 1918 in the amount of $9,517.68: The deficiency arises from the refusal of the Commissioner to include in the taxpayer’s invested capital any amount on account of good will alleged to have been purchased by it, or the depreciated cost of a certain lease acquired by the taxpayer in 1909, and to allow as a deduction from gross income any part of the cost of the lease.
    FINDINGS OF FACT.
    The taxpayer is a corporation organized under the laws of California in 1896 to take over the business of the partnership of D. N. & E. Walter & Co., which had continuously since 1858 been engaged in the business of buying and selling carpets, rugs, curtains, draperies and other household furnishings in San Francisco. The business of the partnership had become firmly established. It was a successful and stable enterprise. Its sales territory covered California, Washington, Idaho, Oregon, Nevada, and a portion of Arizona. The corporation, in exchange for all the assets of the partnership, including good will, issued to the members of the partnership, according to their respective interests therein, 648 shares of its capital stock of the par value of $1,000 per share. The corporation also assumed all the liabilities of the partnership. The value of the tangible assets in excess of liabilities alone equaled the par value of the stock, that is, $648,000. The tangible assets and the liabilities of the partnership, as they appeared on its books, were set up on the books of the corporation, but no entry was ever made on the corporation books of any good will acquired from the partnership.
    The taxpayer’s outstanding capital stock during each of the years 1897 to 1900, inclusive, was of the par value of $718,000.
    The net tangible assets in excess of the liabilities of the taxpayer at the beginning of the years 1897, 1898, 1899, and 1900, respectively, and the net earnings for those years, were as follows:

      Tangible assets Net earnings

    1897_$782, 620. 00 $131, 633. 09
    1898_r_ 849, 633. 09 54, 209. 00
    1899_ 78S, 962. 09 120, 071.14
    1900_ 858, 733. 23 138, 760. 80
    3,279, 988. 41 444, 673. 91
    Average. 819, 997.10 111, 168. 48
    The sales of the partnership for the four years preceding the date of the organization of the corporation were:
    1892-$1,150,727.24
    1893_ 952, 430. 56
    1S94- 773, 778. 85
    1895- 881, 032. 48
    Average- 939, 492. 28
    The sales, after the corporation took over the business, were as follows:
    1896- $776, 202. 76
    1897- 885, 346. 80
    1898- . 786, 608.18
    1899- 959, 655. 22
    1900- 1, 211, 485. 86
    Average- 925, 859. 76
    In the year 1907 the taxpayer purchased the business of the Me Cann Allen Co., a partnership, -which was engaged in a business similar to that conducted by the taxpayer. The purchase was made not only to acquire the tangible assets of the McCann Allen Co., but also to secure for the taxpayer the services of McCann, whom it thereafter employed at a regular salary plus an interest in the net profits. The taxpayer paid'to the McCann Allen Co. $35,000 or $40,000 for its tangible assets, and also paid to McCann $10,000. The $10,000 paid to McCann was charged to expense on the taxpayer’s books.

      In the year 1908, the taxpayer secured a lease upon a certain building for a term of ten years from about September 1, 1909, at a large annual rental. In January, 1909, the taxpayer paid to Baldwin and Howell, real estate agents, $5,000 for services rendered by them in procuring the lease.
    The Commissioner, upon audit of the taxpayer’s income and profits-tax return for the year 1918, refused to include in invested capital any amount on account of the good will alleged to have been acquired from the partnership of D. N. & E. Walter & Co. and the McCann Allen Co., or on account of the lease mentioned, or to allow the taxpayer any deductions from gross income on account of the exhaustion of the lease.

       This decision was prepared during Mr. Graupner’s term of office.

   OPINION.

Trammell:

The principal issue presented by this appeal is whether the taxpayer is entitled to include in its invested capital for the year 1918 any amount on account of good will, if any, acquired by it from the partnership D. N. & E. Walter & Co. in exchange for shares of its capital stock. The taxpayer contends that good will was so acquired; that it had an actual cash value of $268,777.00, and that it should be included in invested capital subject to the limitations on intangibles.

The evidence establishes that in the year 1896 the taxpayer, in exchange for 648 shares of its capital stock of the total par value of $648,000, acquired all of the assets of the partnership mentioned, including its good will. No good will was set up on the books of the taxpayer, but witnesses for the taxpayer testified that this was because of the fact that it is a “ family corporation,” and that the assets were transferred just as they stood on the books of the partnership. The fact that good will was not set up on the books of the taxpayer is onty an evidentiary fact to be considered in connection with all other facts, but is not controlling. Since the value of the tangible assets acquired by the taxpayer from the predecessor partnership equaled the par value of the stock issued for all the assets, the question arises as to whether good will was specifically acquired for stock. We are convinced from the evidence that such good will as the predecessor partnership had was included among the assets transferred to the taxpayer. It is clear also that stock of the taxpayer corporation was the sole consideration for all assets which it received.

It then becomes necessary to determine the value of the good will acquired from the predecessor partnership. The partnership had been engaged in business since 1858 and had become firmly established as a successful enterprise so that its business extended through several States. The books of the partnership have been lost or destroyed and the net profits and the amount of the tangible assets for the years prior to 1896 are not now shown. The sales of the partnership for the years 1892 to 1896, inclusive, were as large as they were after the corporation took over the business.

These facts lead us to the conclusion that the corporation acquired good will for stock, but are not sufficient to enable us to determine the value thereof. Pertinent facts relating to the business and assets of the partnership are lacking. It does not necessarily follow that the partnership had good will of the same value as the good will which the successor corporation is shown, by the capitalization of its earnings, to have had, and we have no other evidence upon which to determine the value thereof. The net earnings and assets of the partnership might have been greater or less than the net earnings and assets of the corporation, and the conditions under which it carried on business might have been entirely different. While the gross sales of the partnership were as large as the gross sales of the corporation, we have no evidence as to what its profits were. It might have been that the business methods of the corporation were so superior to those of the partnership as to enable it to realize profits while the partnership’s business had no net profits above a fair return on tangible assets. At any rate, the profits realized by the corporation, in the absence of other evidence, are not sufficient evidence to establish the actual value of good will of the partnership.

We are convinced, however, that the taxpayer acquired a mixtqre of tangible and intangible assets for stock the pro rata values of which can not be segregated.

The taxpayer, therefore, comes within the scope of section 327 and it is entitled to have its profits tax determined under the provisions of section 328, if it would receive relief thereby. The determination of the tax under that section, if the Commissioner finds that the application of comparatives will give any relief, shall be final.

With reference to the amount of $10,000 paid by the taxpayer to McCann, we are not satisfied that it was paid for the good will of the McCann Allen Co. While the witnesses in the case testified that the payment to McCann was for the good will of the business in which he was then engaged, they also testified that it was paid with the object of securing McCann’s services for the taxpayer. It may be pointed out that the payment is not claimed or shown to have been made to the firm of McCann and Allen whose good will the taxpayer claims to have purchased, but was made to McCann as an individual. The transaction savors more of a payment in the nature of a bonus to McCann for entering into the taxpayer’s employ than of a purchase of the good will of the McCann Allen Co. In our opinion, the evidence does not establish that the expenditure in question was of a capital nature and the taxpayer’s claim for the inclusion of the amount thereof in its invested capital should be denied.

The evidence relative to the payment of $5,000 to Baldwin and Howell in the year 1909 satisfies us that it was for services rendered by them in procuring a lease of certain real estate for the taxpayer. The payment was, therefore, a capital expenditure and represented a part of the cost to the taxpayer of the lease acquired. It follows that the taxpayer is entitled to deduct from gross income, during each year of the life of the lease, an aliquot part of the cost thereof, and to include in invested capital for the year 1918,. as a part of its earned surplus, the depreciated cost of the lease as of January 1, 1918.

Order of redetermination will be entered on 10 days' notice, under Rude 50.


text:
    Appeal of L. R. EAKIN.
    Docket No. 5973.
    Submitted January 19, 1926.
    Decided June 21, 1926.

      Louis B. Montford, Esq., for the petitioner.

      R. A. Littleton, Esq., for the Commissioner.
    Before Phillips and Tüammell.
    This is an appeal from the determination of a deficiency in income tax for 1919 in the amount of $581.89. .The deficiency results from the disallowance of a deduction claimed on account of the removal of a store front in a building owned and occupied by taxpayer.
   FINDINGS OF FACT.

From 1892 to 1919 the taxpayer, as lessee, occupied a stone store building in the City of Manhattan, Kans. In 1912 the owners of the building made certain improvements thereto by constructing a new store front at a cost of $3,800.

In April, 1919, the taxpayer purchased this building from the owners for $45,000. About two months thereafter he removed the front built in 1912 and constructed a new front at a cost of $6,510.05, exclusive of the value of materials taken from the front constructed in 1912 of $675.

The design of the front which ivas constructed in 1912 was not in conformity with the modern store windows and fronts of other stores in the-town. Shortly after the purchase of the property the taxpayer tore out and replaced the entire front of the building with what is known as an island front, which he considered more modern.

The taxpayer in his return for 1919 claimed a deduction of $2,641 as the depreciated cost of the old store front. This deduction was not allowed by the Commissioner. '

The deficiency for 1919 is $581.89. Order will be entered accordingly.


author: GeaupneR:

text:
    Appeal of WEST 28TH STREET CORPORATION.
    Docket No. 6032.
    Submitted January 21, 1926.
    Decided June 21, 1926.
    Upon the evidence, held, that the petitioner and Potterton Brothers. Inc., were affiliated.

      Charles E. Bieth, C. P. A., for the petitioner.

      M. N. Fisher, Esq., for the Commissioner.
    Before GeatteNek  and Phillips.
    This proceeding results from the determination of a deficiency in income tax for the calendar year 1921 in the amount of $1,185.17. The sole issue is whether the petitioner and Potterton Brothers, Inc., were afliliated for the year 1921.
    FINDINGS OP FACT.
    The petitioner is a New York corporation with its principal offices in New York. This corporation and Potterton Brothers, Inc., were both organized in 1907.
    Prior to 1907, John H. Potterton and George A. Potterton operated a construction business and owned real estate located on West 28th Street, and on advice of counsel they caused these corporations to be formed for the purpose of separating their real estate holdings from their construction business.
    The original directors and incorporators of the West 28th Street Corporation, Charles Hoffman, Robert Christy, Jr., and George F. Drew, the nominees of the Potterton brothers, on March 2, 1907, entered into a contract with the Potterton brothers on behalf of the corporation, whereby 200 shares of the capital stock of the West 28th Street Corporation were issued as consideration for the acquisition of the real property located at 215, 220 and 224 West 28th Street. The two qualifying shares originally issued on March 1, 1907, to Charles W. Hoffman and George F. Drew were assigned by them in blank on March 2, 1907. One hundred and ninety-eight shares had been issued to Robert Christy, Jr., on March 1, 1907, and the certificate for these shares was assigned by him on March 2, 1907, to one J. A. Tasser, an employee of the Potterton brothers, and when he left their employ on April 2, 1910, the stock was assigned by him to John P. Annarella, another employee. • These shares were later transferred to John H. Potterton, and still later, on April 29, 1915, by him to George A. Potterton. At all times the entire 200 shares were the actual property of the Potterton brothers as individuals. After the death of John Potterton, on November 1, 1921, 95 shares, which was the number owned by him, were transferred to his estate by George A. Potterton.
    The original incorporators and the directors of Potterton Brothers, Inc., were George A. Potterton, John PI. Potterton, and M. E. Hearn. In accordance with a vote taken at a meeting on March 1, 190T, 100 shares of the capital stock of Potterton Brothers, Inc., were on that date issued in payment for the contracting business formerly conducted by the Potterton brothers individually. Upon instructions from the Potterton brothers the stock was issued as follows:
    George A. Potterton_:_ 1 share
    John H. Potterton_ 1 share
    M. B. Hearn_ 1 share
    Anna M. Potterton_48 shares
    Jane Potterton_49 shares
    Miss M. E. Hearn was the bookkeeper for the Potterton brothers, Anna M. Potterton was the wife of John H. Potterton, and Jane Potterton was the wife of George A. Potterton. These three did not contribute any money to the corporation or pay anything to either John H. Potterton or George A. Potterton for the stock issued in their respective names, and they assigned their certificates in blank immediately upon issue, and without such certificates being-detached from the books or delivered to them. After the death of John H. Potterton on November 1, 1921, the one share in his name, and the 48 shares in his wife’s name, were transferred to his estate, the entire 49 shares having been owned by him. The other 51 shares were owned by-George A. Potterton. Neither wife asserted any interest in the conduct of the business, attended meetings of the stockholders, voted the stock standing in her name, or signed proxies covering the same.
    During 1921 the actual ownership of the shares in these two companies was at all times conceded by all parties above named to be as follows:
    West 28th St. Corporation. Potterton Bros., Ine.
    105 George A. Potterton_ 51
    95 John H. Potterton (after Nov. 1, 1921 — Ms estate)-49
    The reason for forming the West 28th Street. Corporation through nominees and for the stock of both corporations being issued as it was, was that at the time of the formation of the corporations and for some time thereafter suits for damages in a large total were pending against the Potterton brothers, and they believed that thereby their interests would be more readily protected in the event of recovery against them.

       This decision was prepared by Sir. Graupner during bis term of oíñce.

   OPINION.

GeaupneR:

The proofs amply sustain the petitioner’s contention that the corporations were affiliated during the year in question. The evidence clearly establishes the fact that the actual ownership of all stock in both corporations was in'George A. Potterton and his brother, John H. Potterton, or his estate, and the relative proportion of their ownership was substantially the same in each company.

Order of redetermination will be entered on 15 days' notice, under Bule 50.


text:
    Appeal of LOUIS GOLDBLOOM.
    Docket No. 6152.
    Submitted January 26, 1926.
    Decided June 21, 1926.

      Louis Goldbloom pro se.

      George G. Witter, Esg., for the Commissioner.
    Before Lansdon and Aeundell.
    This is an appeal from the determination of deficiencies in income taxes for 1919, 1920, and 1921, in the respective amounts of $569, $114.52, and $70.33. No deficiency letter in respect to the tax for 1919 has been issued and the hearing was therefore restricted to the deficiencies alleged for the years 1920 and 1921. No satisfactory proof was offered as to the amount spent as ordinary and necessary expenses.
   FINDINGS OP PACT.

The taxpayer is an individual residing in Pittsburgh, Pa., where he is employed as a traveling salesman by the American Trouser Co. During the taxable years his compensation was 5 per cent of his gross sales, from which he paid his own traveling expenses and cost of subsistence while engaged in selling the merchandise of his employer in the territory assigned to him. In 1920 he was on the road for 40 weeks, traveling to Detroit, Cleveland, and many other cities in Ohio, Michigan, Pennsylvania, and other States. In 1921 he was so employed for not less than 21 weeks. He claims deductions from gross income for the years in question in the respective amounts of $2,500 and $1,395.50, incurred and paid as ordinary and necessary expenses in carrying on his business.

The deficiencies for 1920 and 1921 are $114-52 and $70.33, respectively. Order will be entered accordingly.


text:
    Appeal of R. P. HAZZARD CO.
    Docket No. 4038.
    Submitted February 5, 1926.
    Decided June 21, 1926.
    In the case of an appeal pending before the Board at the time the Revenue Act of 1926 became effective, in which the only allegation of error related to a year for which no deficiency had been determined, held, that the Board is without jurisdiction under the 1926 Act to determine whether an overpayment of tax has been made for such year which may be applied to reduce a deficiency for another year.

      Henry Herrick Bond, Esq., for tlie petitioner.

      Ward Loveless, Esq., for the Commissioner.
    Refore GRaupNER and Phillips.

       This decision was prepared during Mr. Graupner’s term, of office.

   Phillips:

The taxpayer appeals from the determination of a deficiency in income and profits taxes for 1918 amounting to $8,677.62, which determination was evidenced by a notice of deficiency mailed by the Commissioner to the taxpayer on March 12, 1925. The petition was filed with the Board on May 8, 1925. The • petition alleges the following error:

' By letter dated February 14, 1925, a copy of which is hereto annexed, the Commissioner determined an overassessment for the years 1919 and 1920. In the determination of the 1919 tax the Commissioner has refused to allow the taxpayer a certain deduction for commissions. The taxpayer claims that the payment of this commission was a proper expense and deductible under the provisions of the Revenue Act of 1918 from its income of 1919, and that had such deduction been allowed, the overassessment for 1919 would have been increased.
It further contends that it is entitled to take the overassessment for 1919 as a credit against the 1918 tax, there being no other outstanding taxes against this company claimed by the government and that thereby its tax for the year 1918 would have been reduced and the deficiency would have been less in amount.

The deficiency notice of March 12, 1925, determined a deficiency for the year 1918 of $8,677.62 in income and profits taxes. It determined no deficiency or overassessment for 1919 or 1920. The letter of February 14, 1925, referred to in the petition, reads as follows:

The determination of your income and profits tax liability for the years 1918, 1919 and 1920, pursuant to an examination of your books of account and records as set forth in office letter, dated May 12, 1924, discloses a deficiency in tax of $8,677.62 for the year 1918, and overassessments for the years 1919 and 1920, aggregating $4,093.66, as shown in the attached statement.
If you acquiesce in this determination you are requested to sign the enclosed agreement consenting to the assessment thereof and forward it to the Commissioner of Internal Revenue, Washington, D. C., for the attention of IT: CA: 2113-5.
A period of fifteen days from the date of this letter will be granted yon within which to indicate your wishes relative to the above.

The Commissioner moved to dismiss the appeal upon the ground that the deficiency letter from which the appeal was taken related solely to the year 1918 and that the only issue presented was with respect to a refund for the year 1919. This came on for hearing before a Division of the Board and was denied. Thereafter, the appeal came on for hearing on the merits and the motion to dismiss for lack of jurisdiction in the Board was renewed, a ruling upon such motion was reserved, and the evidence taken. The appeal was submitted on February 5, 1926. Subsequently, on February 26, 1926, and before this appeal was decided, the Revenue Act of 1926 became effective. That Act provides:

Sec. 1000. Title IX of the Revenue Act of 1924 is amended to read as follows : * * *
Sec. -904. The Board and its divisions shall have such jurisdiction as is conferred on them by Title II and Title III of the Revenue Act of 1926 or by subsequent laws. * * *
Sec. 274. (g) The Board in redetermining a deficiency in respect of any taxable year shall consider such facts with relation to the taxes for other taxable years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.

Irrespective of the question whether the Board had jurisdiction of this appeal under the provisions of the Revenue Act of 1924, there would seem to be no question at the present time that the Board has no jurisdiction under the 1926 Act to determine whether there has been an overpayment of taxes for 1919 and 1920 which can be applied to reduce the deficiency for 1918. The appeal must be dismissed for want of jurisdiction in the Board.

Order of dismissal for want of jurisdiction will be entered accordingly.


text:
    Appeal of ARTHUR WALKER & CO., INC.
    Docket No. 3779.
    Submitted October 22, 1925.
    Decided June 21, 1926.
    For the fiscal year ending March 31, 1921, taxpayer sustained a net loss as defined in section 204 (a) of the Revenue Act of 1921. With the approval of the Commissioner it changed its fiscal year and filed a return for the period beginning April 1, 1921, and ending February 28, 1922, and claimed the right to deduct a portion of such net loss from the income for such period. Held, that no part of such net loss may be .allowed as a deduction.

      Laurence Graves, Esq., for the petitioner.

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

      Before Phillips and Trammell.
    Taxpayer appeals from the determination of a deficiency of $174.81 in income and profits tax for the period beginning April 1, 1921, and ending February 28, 1922, and alleges that the Commissioner committed error in refusing to allow a deduction from net income of one-quarter of the net loss sustained during a fiscal year ending March 31,1921. A second allegation of error was withdrawn at the time of the hearing.
    FINDINGS OF FACT.
    Taxpayer sustained a net loss, within the meaning of section 204 (a) of the Revenue Act of 1921, for the fiscal year ended March 31, 1921,; of ,$16,358.59. Thereafter, taxpayer changed its accounting period to a fiscal year ending February 28, and filed a return for the eleven-month period from April 1, 1921, to February 28, 1922. The Commissioner refused to allow any part of such net loss as a deduction from the net income of the taxpayer for such eleven-month period.
   OPINION.

Phillips:

During the fiscal year ended March 31, 1921, the taxpayer sustained a net loss, within the meaning of section 204 (a) of the Revenue Act of 1921, of $16,358.59. Under the provisions of the remaining subdivisions of section 204, one-fourth of such amount, or $4,089.67, was deductible “ from the net income of the taxpayer for the succeeding taxable year.”

Within the following twelve months the taxpayer changed its fiscal year and filed a return for the period beginning April 1, 1921, and ending February 28, 1922. This change was made voluntarily by the taxpayer, with the consent of the Commissioner, pursuant to section 226 of the Act, which provides, so far as material:

RETURNS FOR A PERIOD OF LESS THAN TWELVE MONTHS.
See. 226. (a) That if a taxpayer, with the approval of the Commissioner, changes the basis of computing net income from * * * one fiscal year to another fiscal year a separate return shall be made for the period between the close of the former fiscal year and the date designated as the close of the new fiscal year.
(b) In all eases where a separate return is made for a part of a taxable year the net income shall be computed on the basis of such period for which separate return is made, and the tax shall be paid thereon at the rate for the calendar year in which such period is included.
(e) In the case of a return for a period of less than one year the net income shall be placed on an annual basis by multiplying the amount thereof by twelve and dividing by tbe number of months included in such period; and tbe tax shall be such part of a tax computed on such annual basis as tbe number of months in such period is of twelve months.

Section 200 of the Act provides:

The term “ taxable year ” means' the calendar year, or a fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or section 232. The term “ fiscal year ” means an accounting period of twelve months ending on the last day of any month other than December. The first taxable year, to be called the taxable year 1021, shall be the calendar year 1921 or any fiscal year ending during the calendar year 1921.

The question presented is whether the period from April 1, 1921, to February 28, 1922, is “ the succeeding taxable year,” within the statutory definition. It has previously been decided by the Board in the Appeal of Tacoma Grocery Co., 1 B. T. A. 1062, that the period between two fiscal years, caused by a change in the fiscal period under section 226 of the 1918 Act, is not a taxable year. In our decision no mention was made of the only court decision to which our attention has been called which interprets that section.

In Bankers' Trust Co. v. Bowers, 295 Fed. 89; 4 Am. Fed. Tax Rep. 3748, the Circuit Court of Appeals for the Second Circuit was called upon to construe the provisions of section 226 of the 1921 Act. In that case it appeared that the executors of the estate of one Glackner, who died April 4, 1921, filed two income-tax returns for 1921, one of which reported the net income of the decedent for the calendar year 1921, and the other the net income received by the executors during the same calendar year. The Commissioner computed, assessed, and collected the tax upon an annual basis under section 226 (c). Claims for refund having been denied, the suit was brought to recover the additional taxes so assessed and collected. The District Court granted a motion by the defendant to dismiss. The judgment of the District Court was reversed by the Circuit Court of Appeals. In its opinion that court says:

The question raised on this review is whether the taxes in question should have been determined in the manner described in section 226 (c) of the Revenue Act of 1921, or by other provisions of the act referred to herein.
*!• í $ ‡ ‡
Subdivision (e) of section 226 applied only to computing tax in case of a return for a period of loss than one year, and the District Court has held that returns necessary to be filed by the plaintiffs were returns for a period of less than a year, and that the tax liability was properly determined. * * *
The fundamental scheme of title 2 of the Revenue Act is for a tax upon the net income of the taxpayer during an accounting period of twelve successive months. This general accounting period seems to be a predetermined measure to be applied to a taxpayer’s income, and is not affected by his death or change of status within the period. The tax is imposed upon the entire net income for such period, and the return of such income constitutes his return for the period of twelve full months, even though he may have lived only a portion thereof. The exception to this is where a voluntary change is made in the accounting period by the taxpayer, or where it becomes involuntary in so far as the taxpayer is concerned by the Commissioner’s declaring the taxable period terminated under section 250 (g). (Italics ours.)

The court then quotes sections 200 and 212 of the Act and comments:

Thus it will be observed that, except where a voluntary change is made, the accounting period is twelve months, which becomes the taxable year.

Other sections of the Act are then cited which have no relation to the present appeal, and the court goes on to elaborate its reasons for its decision as follows:

The time of receipt of income or the ability to receive income has no bearing upon the accounting period. A taxpayer may receive his income for the year on the first day of the year. He may become a non-resident alien, during the year, without property in or income from any source in the United States. As an alien, he may have come to this country during the first taxable year, and he may have attained his majority or become incompetent during the year. When during the year his status changes, and he becomes a taxpayer, or ceases to be one, is immaterial. If he received taxable income during any part of that year, and kept his books on a calendar year basis, a return is required of all such income derived from' or received within the twelve months of such calendar year, and the return is for a period of twelve months. Here the plaintiffs reported all the taxable income received by the decedent during the calendar year 1921; and in their return, they reported all the taxable 'income received by the estate of the decedent during the same calendar year 1921. (Italics ours.)

Following the same reasoning used in this opinion, the Board in Appeal of Carroll Chain Co., 1 B. T. A. 38, held, where a corporation was organized in November, 1921, and adopted a fiscal year ending on June 30, that the period ended June 30, 1922, was its first fiscal year. This decision has been followed in a number of appeals where, by reason of organization or dissolution, the corporation was not in existence during the full fiscal year. In those decisions it was pointed out that the return included all.income received for a period of twelve months prior to the close of the year. We are now asked to go further and to hold that a return which does not include all of the income of the preceding twelve months, due to a change of the fiscal year made pursuant to section 226, is a return for a taxable year, regardless of the statutory definition of a taxable year as a period of twelve months.

The distinction to be drawn between a taxpayer who comes into or goes out of existence during a taxable year and one who voluntarily changes his accounting period, thereby being required to make a return for a part of a year, which does not include all of the income received during the preceding twelve months, is clearly pointed out in the decision in Bankers’ Trust Co. v. Bowers, supra, and in the statute. The statute in section 226 speaks of the interim between one fiscal year and another fiscal year, not as a fiscal or taxable year, but as “ the period between the close of the former fiscal year and the date designated as the close of the new fiscal year ” (subdivision (a)), “ a part of a taxable year,” “ such period for which separate return is made” (subdivision (b)), and “a period of less than one year,” “such period” (subdivision (c)). It is clear that the Act contemplates a distinction between a fiscal period of less than twelve months and a taxable year, and it provides a different method of computing the tax in each instance.

The equities of the taxpayer’s position are strong and have been recognized by Congress in the Revenue Acts of 1924 and 1936, but for the Board to hold that a fiscal period arising under section 226 of the 1921 Act meets the definition of a taxable year as set out in the Act would be no less than an attempt at legislation. That a different method of computing the tax is provided serves to emphasize the distinction between a taxable year and a taxable period of less than a year. As was said by the court in the Bankers’ Trust Co. case, “the taxpayer may change his accounting period under section 226 as he will, and may stand the disadvantage of the tax.” This is the position in which the taxpayer has been placed by his voluntary act. The net loss provision of the 1921 Act is confined in its operation to offsetting a net loss of one year against the income of the succeeding year, and no provision is made for offsetting the loss of one year against the income of only a portion of the succeeding year.

The deficiency is $174-81. Order will be entered accordingly.

Tetjssell dissents.