text:
    Gatliff Coal Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11084.
    Promulgated October 10, 1927.
    1. In determining tbe March 1, 1913, value of a coal mine for depletion purposes, the future expected profits from a commissary operated in conjunction with said mine can not be included in the future expected profits from the sale of coal.
    2. Under the circumstances of this case, petitioner is entitled to deduct from the expenses theretofore charged against the mining of coal certain expenses attributable to the operation of the commissary in determining the March 1, 1913, value of the leasehold for depletion purposes.

      H. B. Lindsay, Esq., for the petitioner.

      A. George Bouchard, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits taxes for the year 1919 of $6,297.94. Two questions are raised by the pleadings: (1) Whether the future profits realized from the operation of the petitioner’s commissary should be taken into consideration in determining the March 1, 1913, value of its property for depletion purposes, and (2) if not, whether gross profit per ton of coal should be increased by the allocation of certain expenses to the commissary which were charged against coal, the March 1, 1913, value having been determined by present-value method.
    FINDINGS OF FACT.
    The petitioner is a corporation organized in 1909 under the laws of the State of Kentucky, with principal offices at Williamsburg, Ky. The purposes of the corporation as set out in its charter were (a) the mining, selling and shipping of coal, (b) the building and renting of houses, (c) the erecting and maintaining of commissaries in connection with the mining, shipping and sale of coal and products of these and a general mercantile business.
    The petitioner on March 1, 1913, was the owner of a lease on a certain boundary of coal land situated in Kentucky, which lease provided that the lessee should pay a fixed rental, whether coal was mined or not, of $5,000 for the calendar year 1910 and $6,000 per year for each year thereafter; that the lessee should not assign nor transfer said lease nor any interest therein nor sublet said premises, nor any part thereof, without the written consent of the lessors, except it may rent houses to its employees.
    The leasehold is situated in a mountainous country. There was no population on or near the property from which labor could be obtained to operate the property and no adequate mercantile establishments on or near the property to supply the laborers and employees of the petitioner with the necessities and comforts of life. Consequently it was necessary, in order to carry on and maintain its corporate functions, for the petitioner to construct the necessary houses for use of its employees, to establish and maintain an adequate commissary and mercantile business, and to provide suitable building's therefor.
    It is customary and desirable for coal-operating companies situated similarly to the petitioner to operate a commissary and store in connection with their business because of the profits derived therefrom and for the purpose of keeping the employees contented and satisfied.
    The petitioner located a camp on the property near the head of a small stream in a little valley between 300 and 400 feet in width, between parallel ranges of mountains, and a railroad about 19 miles in length was constructed to the camp. The petitioner also installed and maintained a commissary and erected houses for its employees.
    By 1913 there were about 400 men in the employ of the petitioner and about 2,500 people living in the camp. The petitioner had practically a monopoly on the trade of the people living in its camp and consequently realized large returns from its commissary. The commissary accounts were kept separate on the books of the company and showed gross sales, inventories, and expenses, such as cost of goods, freight, and salaries of commissary employees, but no charge was made for taxes, insurance, officers’ salaries, director's’ fees and other overhead expenses. The profits on sales from the commissaries thus shown by the books were as follows:

      The books further show merchandise inventories as follows:

    The overhead and general expenses of the petitioner were as follows:
    Salaries and Pees

    Each of the officers performed duties in connection with the operation of the commissary. A large part of the secretary-treasurer’s work was connected with that branch of the business. All of the above salaries, fees, and taxes were charged against the mining and selling of coal. One-third thereof is a reasonable apportionment to the commissary business for the years in question. The expense of heating the two commissary buildings from 1911 to 1915, inclusive, was $800 annually, all of which was also charged to the mining of coal.
    On March 1, 1913, there remained unmined from the leases then owned by the petitioner, 4,548,355 tons of coal. The amount of coal mined from the leased premises was as follows:

   OPINION.

MoRRis:

The petitioner contends that in determining the value of the leasehold for depletion purposes there should be included in the future estimated profits the anticipated profits from the commissary. Its argument is based on the fact that the conducting of a mercantile business was a necessary incident of its mining operations and customary for the coal mining industry to maintain such stores in order to hold the men in their employment. The commissary business was profitable for the petitioner and undoubtedly necessary in the operation of its mine. Such considerations, however, are not determinative of the question involved.

Section 234 (a) (9) of the Revenue Act of 1918 provides, “ In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) on that date shall be taken in lieu of cost up to that date: * * * ”

The only value upon which depletion is allowable is the value of the mineral deposit in the ground at the basic date. The right to operate a commissary is not such an asset as is subject to a depletion allowance. Whatever value that right may have therefore can not be taken into consideration in determining the value of the petitioner’s property for depletion purposes. The action of the respondent in eliminating from the estimate of future expected profits to be derived from the leasehold’s certain expected future profits from the commissary, was correct.

The second contention raised by the petitioner is that the respondent undervalued its leasehold interest for depletion purposes, although the commissary right may not be included therein, in that certain expenses were charged to coal which were attributable to the commissary, thereby decreasing the profits from the mining of coal and reducing the March 1, 1913, value based on anticipated profits. We are satisfied from the evidence that the expenses for the period 1909 to 1915, used by the respondent in the ascertainment of profits, on which the March 1, 1913, value was based, erroneously included charges against the cost of production of coal which were attributable to the commissary. The commissary accounts were kept separate on the books of the company but only showed such expenses as cost of goods, freight and salaries of commissary employees. Ro charge was made for taxes, insurance, officers’ salaries, directors’ fees, and other overhead expenses which were all charged against the mining and selling of coal. In our opinion, a reasonable apportionment of the officers’ salaries and taxes for the years 1909 to 1915 is one-third to the commissary and two-thirds to the mining of coal. As all of these expenses Avere charged against the mining of coal, the profits from that branch of the business from 1909 to 1915 should be recomputed by eliminating therefrom one-third of the officers’ salaries and taxes, as set forth in the findings of fact. In addition, there should be deducted from the expenses of mining coal, $800 for heating the commissary buildings for each of the years 1911 to 1915, inclusive. The March 1, 1913, value of the property for depletion purposes should then be computed by the same method as that employed by the respondent, and not controverted by petitioner.

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

Considered by Trammell and Littleton.


source: Caselaw Access Project

author: MoRRis:

license: Public Domain

text:
    Philip Green, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7715.
    Promulgated October 10, 1927.
    Petitioner owned the Grant Theatre and he later purchased the Parkway for the purpose of eliminating competition in the immediate neighborhood, which latter theatre was dismantled by petitioner and closed. Bel<L, there is not sufficient evidence that the business and good will of the Parkway Theatre were transferred to the Grant and subsequently sold as a part of the assets of the Grant. Accordingly respondent’s inclusion of the original cost of the Parkway in determining petitioner's net worth at December 31, 1923, approved.

      Victor E. Blanc, Esq., for the petitioner.

      L. L. Eight, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income taxes for the calendar years 1919, 1920, 1921, 1922, and 1923 of $7,055.94. The approximate amount in controversy is $3,294.
    The sole question in this case is whether or not the respondent erred in determining the net worth of the petitioner at December 31, 1923, on which basis petitioner’s taxes were computed, by including in said net worth the Parkway Theatre property at its cost value of $40,000 instead of $16,000, the value contended for by the' petitioner.
    FINDINGS OP FACT.
    Petitioner is an individual doing business at 4018 Girard Avenue, Philadelphia, Pa.
    Petitioner erected the Grant Theatre, hereinafter referred to as .the Grant, at 4024-4026 Girard Avenue, Philadelphia, Pa., which theatre was completed in January, 1921, and was thereafter owned and operated by him until its sale to one Eli Resnick, in July, 1923.

      There was another motion-picture theatre a short distance away known as the Parkway Theatre, hereinafter referred to as Parkway, located at 1106-1108 North Fortieth Street, Philadelphia, Pa.
    Prior to the spring of 1921 the Parkway was owned and operated by a widow, and later by her brother-in-law. One Louis Hirsh, realizing that the Parkway was not doing a good business but thinking that he could make money out of -that property as a motion-picture theatre, purchased it in the spring of 1921 and immediately advertised that extensive alterations and repairs would be made. Hirsh paid $31,500 for the Parkway.
    The petitioner having learned that Hirsh had purchased the Parkway and knowing Hirsh’s reputation in the motion-picture industry and fearing the competition that would be offered by the Parkway under the management of Hirsh, offered to purchase the Parkway from Hirsh for the sum of $40,000. On May 21, 1921, the petitioner and Hirsh entered into articles of agreement whereby petitioner purchased the said Parkway from Hirsh for the sum of $40,000. The pertinent provisions of that' agreement are as follows:
    The said party of the first part agrees to sell and convey to the said party of the second part, who agrees to purchase
    All That Certain lot or piece of ground with the messuage or tenement thereon erected Situate on the West side of Fortieth Street, at the distance of Fifty-two feet Northward from the North side of Poplar street, in the Twenty-fourth Ward of the City of Philadelphia: Containing in front or breadth on the said Fortieth street Seventeen feet and extending Westward of that width in length or depth between lines parallel with said Poplar street, One hundred feet to a certain Ten feet wide alley leading from said Poplar street to Eaglesfield street.
    Also All That Certain lot or piece of ground with the messuage or tenement thereon erected Situate on the West side of Fortieth street at the distance of Sixty-nine feet Northward from the North side of Poplar street, in the Twenty-fourth Ward of the City of Philadelphia: Containing in front or breadth on the said Fortieth street Seventeen feet and extending Westward of that width in length or depth between lines parallel to said Poplar street One hundred feet to a certain ten feet wide alley leading from said Poplar street to Eaglesfield street.
    Being Known And Numbered As 1106-9 North 40th Street. On the Terms and Conditions Following, to Wit: For the price or sum of Forty Thousand ($40,000) Dollars, payable as follows.
    *******
    It is further understood and agreed that all fixtures including machines, electric signs and other equipment contained on the premises, with the possible exception of the seats now installed or recently removed, which belong to the party of the first part, are included in this sale without additional consideration or payment.
    Shortly after the purchase of the Parkway, petitioner dismantled the building and later rented it for a public market. The premises were never used as a moving-picture theatre after the petitioner purchased it.
    On June 15, 1923, one Eli Resnick, agreed to purchase the Grant from the petitioner and the purchase price was fixed. Before Resnick would conclude the purchase of the Grant from petitioner, Resnick required a covenant to the effect that petitioner would never engage in the moving-picture business either at the site of the Parkway or at any place within ten city squares of the Grant, which covenant was made by the petitioner in a separate writing.
   OPINION.

MoRRis:

The petitioner contends that when he purchased the Parkway he purchased the real estate, fixtures and good will, as a going business, and that the purchase price of $10,000 represented $16,000 which he paid for the land and $24,000 which he paid for the good will of the business. He further contends that when he closed the Parkway and dismantled the building, he transferred the business of that theatre, together with the good will, to the Grant and that the good will having been so transferred, it became part of the assets of the Grant. Therefore, as the petitioner contends, when he sold the Grant to Eli Resnick in July, 1923, he disposed of his good will which had been acquired in the purchase of the Parkway and consequently the respondent should not have included the Parkway property in the computation of his net worth at the cost price of $40,000 but should have included it at $16,000, excluding the value of the good will which had been transferred to and had become a part of the Grant, which was sold in July, 1923.

The record does not show by what method the respondent computed petitioner’s net worth, nor has any evidence been offered with respect to the total values used by respondent as of December 31, 1923; therefore, we are not called upon to determine the correctness of the computation or the values used as of that date.

The parties having made no segregation of the purchase price of $40,000, nor having made any reference at all with respect to good will in the articles of agreement effecting this sale, we must first determine whether the Parkway was the possessor of a good will of the value claimed by the petitioner and if so whether said good will passed to the petitioner as a part of the purchase price of $40,000, and further, whether good will, as such, can be transferred as contended under the circumstances of this case.

If the Parkway was the possessor of a valuable good will at the time the petitioner purchased it, that fact was certainly not borne out by the testimony offered. ' Hirsh, the party from whom the petitioner purchased the Parkway, testified that when he purchased it, it was not doing a good business, and that it was not a worthwhile moving-picture show, but that he hoped to purchase it and make an up-to-date house of it and then build up a good business, but that before he had had an opportunity to realize his ambition or had justified his expectations he sold the Parkway to the petitioner.

It is perfectly clear from the testimony that the uppermost thought in the mind of the petitioner, at the time of the purchase of the Parkway, was to eliminate the probable competition that would be offered by Hirsh. The articles of agreement entered into between these parties not only did not segregate the purchase price of $40,000 into component parts, but failed to make any reference whatsoever to the fact that good will was intended to be a part of the transaction. It certainly does not appear from all the circumstances surrounding the purchase of the Parkway that good will was an influencing factor in the transaction.

No attempt was made by the petitioner to prove the value of the alleged good will at the date of acquisition of the Parkway, except indirectly. The petitioner offered the testimony of several real estate appraisers as to the value of the real estate at the date of acquisition, on which the Parkway Theatre was located, but not conceding that those values are satisfactorily established, we can not assume that the difference between the appraised value and the purchase price of $40,000 represents the value of good will.

Petitioner’s counsel states in his brief:

The taxpayer is not contending in his appeal that merely the good will of the Fortieth Street Theatre was transferred to the Girard Avenue Theatre in May, 1921. Were this the case, it is admitted that this appeal should fail, for it is unquestionably the law that good will can not be transferred from one business to another unless the business to which the good will formerly attached also is transferred. It is equally true, however, that a business plus the good will that attaches to it may be transferred from one place to another, and may be combined with another business and its own good will.

In Widdall v. Garsed, 17 Atlantic 418, it was said:

The “ transfer of the business ” is an uncertain, equivocal expression, and may mean property, or it may mean good will.

We find nothing in the evidence submitted which would warrant the conclusion that the business and/or good will or any other property of the value of $24,000 was transferred from the Parkway Theatre. Of course the petitioner testified that when the Parkway was closed the receipts of the Grant were increased, but that we deem was due to the elimination of the competition in the immediate neighborhood and not to any valuable asset that had been transferred from the Parkway to the Grant.

Finding as we do that no good will passed to the petitioner upon the acquisition of the Parkway, it is not necessary for us to discuss the question of whether or not good will of the Parkway could under the law be transferred to and become a part of the assets of the Grant. We are of the opinion, however, that had good will existed at the time the petitioner acquired the Parkway it could not possibly have been transferred to the Grant under the circumstances of this case because as this Board said in the Appeal of Pevely Dairy Co., 1 B. T. A. 385-

Gooa will is not something which can be delivered like merchandise, but as recognized in all the definitions, it is the probability or expectation of retaining the old customers and that probability or expectation is all a purchaser can acquire.

The deficiency of $7,055.9^ as set forth in deficiency letter of August 26, 1925, is approved and judgment will be entered on 15 day’s notice, under Bule 50.

Considered by Teammell and Littleton.


text:
    Sam Greengard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7716.
    Promulgated October 10, 1927.
    1. In the absence of books of account, or satisfactory evidence that the petitioner’s method of accounting clearly reflects his income, the determination of the respondent that the cash receipts and disbursements method should be used is approved.
    2. The Board is authorized by law to prescribe its own rules of procedure and practice, and the rules prescribed by equity courts of the District of Columbia as to procedure and practice before such courts are inapplicable.

      Leo 8. Le BosJcy, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income taxes of $12,937.04 for 1920. Deficiencies and delinquent penalties were asserted for 1917 and 1918 and deficiencies for 1919 and 1920, but only the deficiency for 1920 is in controversy. The deficiencies and penalties asserted for the various years are:

      The deficiency for 1920 results from the disallowance of commissions paid in 1921, which were deducted from 1920 income, the petitioner claiming they had accrued and were deductible from gross income of 1920.
    FINDINGS OF FACT.
    The petitioner, during 1920, was the owner of certain businesses known as the English Woolen Mills of Dallas, Tex., the English Woolen Mills and the Dundee Woolen Mills of Fort Worth, Tex., and the Regent Coat'Shop of Chicago, Ill. The books kept by the petitioner trading as the English Dallas Woolen Mills were a check book, a day book, inventory sheets, and an account of the Regent Coat Shop which showed accounts due them. The records kept by the other stores consisted of daily report sheets showing an analysis of their day’s business.
    The petitioner had a written contract with his sons, Max and David C. Greengard, and his nephew, Max Meyer, whereby they were to receive a percentage of the profits as commissions in lieu of compensation and in consideration of their managing and conducting the various businesses. The commissions payable under the contract for 1920 amounted to $34,708.96, which was determined and paid in 1921.
    On his 1920 return petitioner deducted these commissions as an accrued expense of that year. Respondent disallowed the deduction, holding that petitioner was on the cash receipts and disbursements basis of reporting income. The return for 1920 states that income was reported on the accrual basis. The 1919 return is silent as to the basis of the return. Neither return had balance sheets attached, but both showed that inventories were used at the beginning and end of the years.
   OPINION.

MoRRis:

The correctness of the respondent’s determination as to the deficiencies and penalties for 1917 and 1918 and the deficiency for 1919 are not in dispute. The determination of the deficiency for 1920 is disputed, and this proceeding presents the question whether certain commissions paid in 1921 are deductible items for 1920. The petitioner alleges that being on the accrual basis he properly accrued the commissions and deducted the same as an expense in 1920. The respondent denies that petitioner is on the accrual basis and asserts that petitioner’s books of account do not clearly reflect income, and that section 212 (b) of the 1918 act provides that in such a case the computation is to be made in the manner which in the opinion of the Commissioner will clearly reflect income.

The only witness called by the petitioner was a public accountant through whom he attempted to introduce certain documentary evidence. The witness, however, had only recently been employed by the petitioner, had no personal knowledge of the book entries, nor did he know' that they were the petitioner’s books other than that they had been so represented to him. He was therefore incompetent to testify as to the documents or their contents and the same were excluded when offered in evidence. The records kept by the petitioner were incomplete and in several of the businesses in which he was interested, no books of account were kept.

It is true that the use of inventories may indicate that the return is filed on the accrual basis and that books of account are kept on the same basis. But such evidence is by no means conclusive. Here we have the testimony of an accountant who stated that certain records maintained by the petitioner would, in his opinion, have been sufficient to prepare therefrom and file a return on the accrual basis, but he did not state that the books were so kept. However, the books and records are not in evidence and we are unable to determine whether petitioner kept his accounts on the accrual or cash receipts and disbursements basis. We therefore approve the determination of the respondent.

Counsel for petitioner contended at some length on brief that the allegations of fact of the petition should be accepted as true since the respondent’s answer was not verified. In support of this contention counsel cited numerous Federal court cases and decisions of the District of Columbia courts, also the rules of practice of the Board, and the rules of the equity courts of the District of Columbia. The particular section of the law upon which counsel relies is section 907(a) of Title IX of the Revenue Act of 1924, as amended by section 1000 of Title X of the Revenue Act of 1926, which states, “ The proceedings of the Board and its divisions shall be conducted in accordance with such rules of practice and procedure (other than rules of evidence) as the Board may prescribe and in accordance with the rules of evidence applicable in courts of equity of the District of Columbia.”

Counsel then refers to Rule 39 of the rules of practice before the Board, which says: “Rule 39. — Evidence. The rules of evidence applicable in courts of equity of the District of Columbia shall govern the admission or exclusion of evidence before the Board or any of its Divisions.” Counsel also refers to Rule 8 of the equity rules of the District of Columbia Supreme Court: “ Every pleading must be subscribed by the party or his attorney, and every pleading of fact, except as otherwise provided, must be verified by the affidavit of the party, his agent or attorney; * * * and when the United States or any officer thereof in its behalf is a party, the verification may be made by any person acquainted with the facts, the Attorney-General or the attorney prosecuting or defending the action * *

We are unable to agree with the argument of counsel and we are of the opinion that the proposition advanced is not well founded in law. The statute expressly provides that the Board shall have the power to prescribe the rules of procedure and practice before it. Part of the provision contained in section 907 (a) supra, applies to evidence and its admission or rejection. Where questions of evidence are involved the Board is governed by the rules applicable in courts of equity of the District of Columbia, but where the question is one of procedure or practice, the rules applicable to the equity courts of the District of Columbia are inoperative. Having been vested by law with the authority to prescribe its own rules of procedure and practice the Board has promulgated the same. The Board has not promulgated a rule which requires that the answer shall be verified.

Judgment will be entered for the respondent.

Considered by Trammell and Littleton.


text:
    M. A. Long, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7721.
    Promulgated October 10, 1927.
    1. A partnership did not exist between the petitioner and his wife during the taxable years in question.
    2. Certain payments to the wife allowed as deductions in determining petitioner’s net income.

      Franklin O. Parks, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income taxes of $6,683.18 for 1920 and $8,771.48 for 1921. The questions presented are whether a partnership existed between the petitioner and his wife and the payment of $15,000 to her in each of the years was a distribution of partnership profits or whether said payments were deductible as interest or compensation for the use of her securities.
    FINDINGS OF FACT.
    The petitioner, a resident of Baltimore, Md., was for about 20 years prior to 1919, an architect for the Baltimore & Ohio Railroad Co. On September 15, 1919, he resigned to enter the general contracting business. Prior to tendering his resignation he had been promised that if he bid reasonably he could secure the contract on the McCormick Building which would cost approximately $1,500,-000. During the taxable years 1920 and 1921 his construction work included the McCormick Building and another building costing about $4,500,000, besides certain smaller construction jobs. Petitioner’s business was operated during both of these years without change as the M. A. Long Co.
    At the time he resigned petitioner had a limited amount of capital which was insufficient to finance his McCormick contract. He attempted to borrow capital but found that interest rates and proposals to share in the profits were too high to be considered. One party offered to furnish the necessary capital for 10 per cent interest plus 25 per cent of the profits. Petitioner then turned to his wife who owned some securities. He explained the business, the hazards involved, and the possibilities of a loss, but at the same time pointed out the opportunities which were afforded and promised to pay a ..'easonable share of the profits for the use of her securities as collateral for loans. The length of time during which the securities vere to be so used was not determined, nor was the agreement definite as to the share of the profits other than that such share should be ■easonable. The wife consented to and did advance certain securi-ies which Long used to obtain loans during 1920 and 1921. The igreement between husband and wife was not in writing. The net nan value of the securities advanced by the wife was determined by the bank to be $139,150. Part of the securities furnished by Mrs. Long consisted of 2,000 shares of American Bolling Mill Co. common stock. This stock, which was previously owned by the petitioner, had i loan value of $90,000 and stood in the name of her brother, B. Froom Morris. Long pledged the securities with the Baltimore Commercial Bank, and from time to time, as needed, secured loans thereon during 1920 and 1921.
    On September 5, 1919, the M. A. Long Co. furnished a signed statement to B. G. Dun & Co., for the purpose of establishing a credit rating, in which it was stated that the M. A. Long Co. was a partnership of which the partners were M. A. Long and wife; this statement set forth in detail the individual assets of the taxpayer and wife, including in the case of his wife, not only the securities which had been furnished at that date for use as collateral in the business, but also other assets of his wife and in particular the home and residence of the taxpayer and his wife, which was the separate property of Mrs. Long.
    On June 1, 1920, the M. A. Long Co. notified B. G. Dun & Co. by letter as follows:

      This is to advise you that on May 1, Anne M. Long and R. Froom Moms withdrew as partners of the business, but the financial assets of the company will only be affected by the real estate therein listed at $30,000.00.
    The real estate herein referred to valued at $30,000 was the home of taxpayer and his wife.
    The business of the M. A. Long Co. during 1920 and 1921 was profitable and petitioner paid his wife $15,000 during each year. The payment for 1920 was made by check dated December 20, 1920, which was endorsed to Halle & Stieglitz, a Baltimore brokerage firm. The payment for 1921 was made by petitioner’s purchasing $19,000 of securities through Halle & Stieglitz and turning over $15,000 thereof to his wife. The book entry of the same was dated April 25, 1921.
    M. A. Long and wife filed separate returns for 1920 and 1921. The M. A. Long Co. filed returns as a partnership for each of the years. The respondent determined that a partnership did not exist between the petitioner and his wife, and that therefore the payment to her of $15,000 in each of the years in question was not a distribution of partnership profits and also denied the deduction thereof as a business expense.
   OPINION.

MoRRis:

The petitioner’s first contention that a partnership existed between himself and wife is not sustained by the evidence introduced in support thereof- The evidence shows that the petitioner promised to pay a reasonable share of the profits for the use of her securities .as collateral for loans. An agreement that a portion of the profits are to be paid as compensation for money advanced, in the absence of other elements of a partnership, does not create such a relationship. Fechteler v. Palm Bros. & Co., 133 Fed. 462. The fact that the petitioner referred to his wife as his partner, and for credit purposes notified R. G. Dun & Co. to that effect, does not establish that a partnership in fact existed. There are certain well defined incidents of a partnership relation, which we are unable to find in the relationship which existed between the petitioner and his wife.

Several of the well recognized tests of the existence of a partnership are sharing of profits and losses, mutual agency and community of interest. The two last named essentials are entirely lacking in the instant case. The evidence is indefinite as to the sharing of losses, and the profits were to be distributed not upon an agreed percentage, but the wife was to receive whatever share the husband determined to be reasonable. As a partnership did not exist between the petitioner and his wife the $15,000 payments to her in each of the years in question were not a distribution of partnership profits.

The second contention of the petitioner is that if a partnership did not exist, the $15,000 payments to her were compensation for the use of her securities and therefore deductible from his gross income. Section 214 (a) (1) of the Revenue Acts of 1918 and 1921 allows as a deduction from gross income “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” It was necessary for the petitioner to obtain capital or credit from some source in order to carry on his business. In our opinion the $15,000 payments to the wife for the use of her securities that he might obtain the necessary capital were an ordirary and necessary expense of his business, and are deductible in determining his net income.

The respondent raised the question of fraud in his brief, but our decision makes it unnecessary to pass upon it.

Judgment will be entered on 10 days' notice, rnider Rule 50.

Considered by Trammell and Littleton.


author: Trammell :

text:
    Estate of R. J. Mackenzie, Bruce Heathcote, Administrator, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11141.
    Promulgated October 10, 1927.
    On the evidence, held, that the administrator of decedent’s estate properly omitted certain land from gross estate in the estate-tax return.

      Nat 8ekm/tdowits, Esq., for the petitioner.

      A. 11. Mwrray, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in estate taxes. The deficiency arises through the action of the Commissioner in including among the assets of the estate 640 acres of land in Kings County, California, which land was not reported in the estate-tax return.
    FINDINGS OF FACT.
    R. J. Mackenzie died March 1, 1923. He was a resident of Winnipeg, Manitoba. Bruce Heathcote was appointed ancillary administrator in California where the land in question is situated.
    The decedent did not at any time own any lands in Kings County, California, but Mae E. Mackenzie, wife of decedent, owned 640 acres of land in section 33, township 24, range 23 east, Mount Diablo Base and Meridian, in Tulare County, California, having received a warranty deed to the same on May 8, 1919, from Luther J. Holton and Mary Elizabeth Holton. This was the land erroneously referred to as being in Kings County, California, in the deficiency notice.
    The above described land was not the property of R. J. Mackenzie and was properly omitted by the administrator in the estate-tax return.
   OPINION.

Trammell :

The only reason why the respondent included the land set out in the findings of fact in the assets of the decedent appears to have been the fact that one Matthew O’Brien filed a claim against the decedent’s estate in connection with the property. There was no testimony as to the nature of the claim or any evidence which would indicate that R. J. Mackenzie, the decedent, had any interest whatever in the property. The claim of O’Brien against the estate was not paid by the administrator. The property in question was acquired by Mae E. Mackenzie by warranty deed and in the absence of evidence to show that the decedent had some interest in this property, it was properly omitted from the estate-tax return.

Judgment will be er+ered for the petitioner on 15 days’ notice, una.s Rule 50.

Considered by MoRRis and Smith.


author: Van Fossan :

text:
    Royal Fuel Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9386.
    Promulgated October 10, 1927.
    The March 1, 1913, value of a lease of coal mining property determined.

      Robert G. Bosworth, Esq., and L. E. ’Williams, C. P. A., for the petitioner.

      A. George Bouchard, Esq., for the respondent.
    This is a proceeding for the redetermination of income and profits taxes for the calendar year 1919, for which the Commissioner has determined a deficiency of $6,693.57. It is alleged that the Commissioner erred in the computation of taxable income by reason of an insufficient allowance for depletion and depreciation upon the lease of a coal mine.
    FINDINGS OF FACT.
    The petitioner is a Colorado corporation, with principal offices at Denver, and is engaged in the operation of a coal mine known as the Royal Mine. Prior to March 1,1913, petitioner acquired a lease upon certain coal property in Las Animas County, Trinidad District, near Aguilar, Colo., upon which the Royal Mine is located.
    On June 20, 1910, the Aguilar Land Association leased to Harry Yan Mater 920 acres of coal land in Las Animas County, Colo., for a term of years ending January 1, 1926, upon a royalty basis of 8 cents per ton (minimum production 30,000 tons) for 1911, 9 cents per ton (minimum production 50,000 tons) for 1912, and 10 cents per ton (minimum production 70,000 tons) for 1913 and each year thereafter. On May 5, 1911, Van Mater assigned his lease to the petitioner in exchange for all its capital stock of $100,000 par value. On July 29, 1912, the term of the lease was extended to January 1, 1932. The property contains three veins of coal, the Cameron, the Walsen (or Peerless), and the Robinson, but only the Walsen vein has been worked in the operation of the mine.
    The mine had been operated prior to 1902, when it was closed down because of explosions therein resulting in the death of several miners and injury to others, and remained idle until leased to Yan Mater in 1910. Because of the reputation of the mine as a dangerous and gaseous mine the petitioner for some time had difficulty in obtaining miners, and in 1913 a strike of coal miners in Colorado was called, which was terminated in the latter part of 1914, all of which retarded the development and operation of the mine. The effect of the strike was felt by petitioner for two or three years thereafter, as most of its customers and potential customers had made long-term contracts with mines in other States to meet their requirements, thus further curtailing the output of the mine. The estimated normal production of 600 tons per day or 150,000 tons per year was first reached in 1917. During this period, from 1911 to 1917, some coal was mined and sold and a loss was sustained in each year until 1917. The operations of the petitioner show tonnage produced and profits and loss per ton as follows:

    In 1913 petitioner unsuccessfully sought a reduction of its royalty rate, to 6 cents per ton, but secured more favorable conditions with reference to the time of making royalty payments. Shortly after its incorporation petitioner offered for sale a bond issue of $150,000, none of which were sold and it had to borrow funds from Denver banks upon the personal security of Yan Mater.

      ' By March 1, 1913, the gaseous condition and other hazardous conditions of the mine had been overcome by the petitioner, the mine was free from excessive gas and water, and the extent of the recoverable coal in the property established. On that date it was known that there were 760 acres of recoverable coal lying in a 6-foot vein (the Walsen) on a 7 per cent pitch toward the coal body, with a hard sandstone roof and shale floor, and with well defined slips or natural breaks in the face of the coal parallel to the pitch of the vein. The average recoverable coal in an acre foot is 1,000 tons and in a 6-foot vein is 6,000 tons per acre. The coal is high-grade bituminous, having a b. t. u. content of 13,500, which is greater than that found in most Colorado coal, and is an excellent steam coal for locomotive and industrial use and a suitable coal for domestic or commercial use.
    The natural structure and the location of the mine were such that it could be economically operated and was readily accessible to a large market. The slips in the coal face allowed it to be mined by pick or hand mining, which, in this district, is more economical and produces a higher grade of mine-run coal than machine mining. Because of the gradual pitch of the vein very little power was necessary in removing the coal, and the empty cars were returned to the mine by gravity. The character of the roof and floor of the mine eliminated the necessity for extensive timbering. The mine is located within one or two miles of two main line railroads, the Colorado & Southern and the Denver & Bio Grande, being connected'with both by spur tracks, and enjoyed a 25-cent freight differential over 60 per cent of the coal mines in the Trinidad district. Petitioner produced and sold locomotive coal principally, but also produced and sold some commercial coal. The demand for locomotive coal is more constant and less affected by climatic conditions than commercial coal, and since it is practically all run-of-mine coal, requiring no screening, it is more economical to produce.
    The improvements and development of the property when acquired by Van Mater in 1910 and the March 1, 1913, values thereof to the owner of the land were: a main hoisting shaft 8 feet 6 inches by 14 feet by 273 feet deep, $20,000; an air shaft, 6 feet by 8 feet by 168 feet deep vertically, and a 45-degree slope 204 feet long, $16,000; work shaft bottom-, $4,000; 1,700 feet of main entries and air courses, $5,100; 1,400 feet of cross entries, $2,800; small pump for water, $500; railroad connections, $5,000; hoisting engine, $4,000; preliminary ground preparation, $5,000; and supervision of the work, $5,000; a total of $67,400.
    On March 1, 1913, the known coal content in the Boyal Mine was approximately 4,560,000 tons, and making due allowance for development, the estimated coal recoverable over the remaining life of the lease, 18 years and 10 months, was 2,461,255 tons. The value of petitioner’s lease on March 1, 1913, was $50,000.
   OPINION.

Van Fossan :

The determination of the March 1, 1913, value of a lease upon coal lands and the proper depreciation, depletion, or exhaustion allowance thereon in computing petitioner’s taxable income, is the only question before us in this case. The petitioner claims a value of at least $100,000, inclusive of improvements. The respondent contends that the lease had no value at March 1, 1913, and that, therefore, depreciation, depletion or exhaustion is not allowable.

The petitioner relies upon the testimony of four witnesses, including the principal stockholder of the petitioner, all of whom were familiar with the property. One of the witnesses, an expert valuation engineer, made several appraisal reports upon the property and testified in detail relative to the values fixed by him. The substance of the testimony and these appraisals related principally to the coal content of the property, its minability and the quality of the coal. Two of the witnesses gave their opinion of the March 1, 1913, value of the lease, $150,000 being assigned as the value by one and $323,810 by the other. The greater of these valuations was based principally upon an estimated profit of 50 cents per ton of coal to be mined. The evidence establishes, however, that petitioner suffered a loss upon the coal produced in each year from 1911 to 1916, inclusive, and realized a profit for the first time in the year 1917. It is also noted that although petitioner under its lease was required to produce in 1913 and subsequent years not less than 70,000 tons per year, or in any event to pay the stipulated royalty upon that tonnage, it was not until the year 1915 that it reached a production equal to the specified minimum, and it was not until 1917 that it reached the normal prodiTction of 150,000 tons per year. The basis of the lesser valuation is not clear, but it apparently was also predicated on anticipated profits which were not justified by petitioner’s operating record. In the light of all the facts the values assigned to the lease by these witnesses can be given little weight. It is also noted that no evidence was introduced in explanation of the wide divergence between the two valuations testified to by these witnesses.

We must determine the March 1, 1913, value of this lease in the light of the facts and circumstances existing or known with reasonable certainty on that date. This record discloses that the petitioner in 1911 acquired a mining property which had the reputation of being a very dangerous and hazardous mine. It appears that the petitioner had extreme difficulty in obtaining labor for the working of the mine and that for a period of six years it sustained annual net losses per ton on all coal produced, which amount was considerably less than its estimated normal annual production. In a later year, to wit 1919, it again sustained a loss, although the tonnage produced exceeded its estimated normal production. It further appears that during the early years there was no available market in which the petitioner could reasonably expect to dispose of its product even if its estimated normal production of 150,000 tons per year had been reached. The royalty which the petitioner was required to pay under its lease was the average rate obtaining in that district, and on March 1, 1913, its lease had approximately 19 years to run. We are unable to find upon this record that the coal in place gave petitioner’s lease any capital value on March 1,1913.

The petitioner, however, acquired a developed mining property containing improvements and development work having a value to the owner of the land of $67,400 on March 1, 1913. The royalty which the petitioner was required to pay was but the average rate obtaining in that district for undeveloped property. Petitioner, having acquired a developed property at the average royalty rate for undeveloped property, obtained a leasehold of some capital value. This value on March 1, 1913, is to be measured by the use of such development and improvement for the remaining life of its lease.

On March 1,1913, petitioner’s lease had a remaining life of 18 years and 10 months. The value to the owner of the land of the development and improvements on that date was $67,400. Under the peculiar circumstance of this case, considering the character of the business, the hazards of gas explosion, labor troubles, and market conditions, we are of the opinion that the value of petitioner’s lease on March 1, 1913, was $50,000, which is subject to exhaustion based upon a tonnage of 2,461,255 tons reasonably recoverable over the remaining life of the lease.

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

Considered by MaRqtjette, Milliken, and Phillips.


author: Milliken :

text:
    J. Newton Seitz Shoe Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11401.
    Promulgated October 10, 1927.
    Petitioner, during tbe year 1921, was not affiliated, within the purview of section 240 of the Hevenue Act of 1921, with the Maryland Shoe Oo. and the Newton Shoe Oo.

      Henry W. /Schultheis, Esq., for the petitioner.

      P. J. Bose, Esq., for the respondent.

      This proceeding results from the determination by respondent of a deficiency in income and profits taxes for the calendar year 1921, in the amount of $2,487.10. The sole question is whether the petitioner was affiliated with two other corporations during the calendar year 1921.
    BINDINGS OP PACT.
    Petitioner is a Maryland corporation, incorporated in 1906, with principal office at Baltimore, and is engaged in the manufacture of shoes and was so engaged during the year 1921. The Newton Shoe Oo. is a corporation, incorporated in the year 1919, and the Maryland Shoe Co. is a corporation, incorporated in the year 1920. The two latter corporations were organized to facilitate the sale of shoes manufactured by petitioner and most of the shoes which they sold were bought from petitioner. Goods were sold to them by petitioner at the regular selling prices.
    The outstanding capital stock of the three corporations during the year 1921 was owned by the following stockholders, in the following percentages:

    J. Newton Seitz and May Seitz are husband and wife, and Pleasant R. Seitz is a brother of the former. None of the stockholders in the other two corporations are related by blood to J. Newton Seitz.
    Charles M. Berlow and Gordon Goldsmith were engaged in the shoe jobbing business, selling also the product of petitioner at the time the Maryland Shoe Co. and the Newton Shoe Co. were organized. They both paid for their stock, in cash or its equivalent, when the corporations were organized, and continued to own the same during the year 1921.
    Joseph W. Hahle was superintendent of the plant of the petitioner, and paid cash or its equivalent for his stock in the petitioner and owned the same in the year 1921. There was no agreement between him and J. Newton Seitz, regarding the control of his stock, and he generally attended all stockholders’ meetings, voting his stock with J. Newton Seitz.
    Laura Sussman was the sister-in-law of Charles M. Berlow. Separate income and profits-tax returns were filed for each of the corporations for the year under consideration.
    When money was borrowed by the Maryland Shoe Co. or the Newton Shoe Co., the banks required the signatures of J. Newton Seitz and/or Charles M. Berlow and Gordon Goldsmith. The books of account of the Newton Shoe Co. were maintained in New York City, where its principal office was located. The Maryland Shoe Co. maintained joint offices with that of the petitioner. In the year 1921, petitioner paid bills of the Maryland Shoe Co. in the amount of $440.97. The banks in Baltimore, where petitioner had its principal office, looked upon the three corporations, for the purpose of determining credit to be extended, as one concern.
    No agreement existed during the year 1921, between J. Newton Seitz and Charles M. Berlow and Gordon Goldsmith, regarding the control of the stock of the latter by the former.
   OPINION.

Milliken :

The only issue to be considered in this proceeding is whether the petitioner was affiliated with the Maryland Shoe Co. and the Newton Shoe Co., for the year 1921, within the meaning of section 240 of the Revenue Act of 1921, which provides as follows:

Sec. 240. (c) For tbe purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

Petitioner does not base its claim for affiliation upon the control or ownership by it of the stock of the Maryland Shoe Co. and the Newton Shoe Co., but the claim is based upon the second provision of the statute just quoted. Petitioner rests its claim for affiliation upon the facts that J. Newton Seitz was in active management of all three corporations, that the three corporations were in fact one economic unit, and that there has been no dissenting voice raised by the other stockholders concerning the business management of J. Newton Seitz. The evidence of record does show that J. Newton Seitz was in active management of the three corporations and there is no evidence to the effect that the other stockholders did other than acquiesce in his management. The statute, however, requires that substantially all the stock be owned or controlled by the same interests. Two corporations may, in fact, represent an economic unit and have a common directing head, but there must exist an ownership or control of the stock by the same interests. We have repeatedly stated that intercompany relations or the absence of them, without the necessary stock ownership or control, as provided by the statute, is not sufficient to permit or require affiliation. Greenville Coaling & Export Corporation, 4 B. T. A. 183.

In the instant case, Charles M. Berlow and Gordon Goldsmith owned, without qualification or limitation, 33⅓ per cent and 50 per cent of the outstanding capital stock of the Newton Shoe Co. and the Maryland Shoe Co., and we are unable to find that they parted with the control of their stock during the year 1921. The same may be said concerning Joseph W. Hahle and Laura Sussman.

Counsel for petitioner, in brief filed in this cause, states the claim of petitioner in the following language:

The claim of petitioner is that, although the ownership of stock is not sufficient, under the revenue law, to permit affiliations, under the decisions of this Board, actual control is sufficient for this purpose.

and cites the decisions rendered in the Appeal of Isse Kooh, 1 B. T. A. 624, Hagerstown Shoe & Legging Co., 1 B. T. A. 666, and Midland Refining Co., 2 B. T. A. 292. When the facts in the decisions relied upon are analyzed, it is evident that there existed facts to support the conclusion that there was control of the stock, which facts are absent in the case at bar. The term, “ substantially all,” is one that should not be given a narrow or technical interpretation, but we can not go so far as to say that the ownership or control of 50 per cent of the stock complies with the statutory requirement that substantially all the stock must be owned or controlled. Nor can we give an interpretation to the statute at variance with its mandate, as suggested by counsel for petitioner.

Our attention is called to the fact that the income for the year in question arises by reason of a book profit resulting from the dealings of petitioner with the two corporations in question, and that this hardship should be overcome by permitting affiliation. We can not make our decisions to fit the exigencies of each particular case so that there may be a relief from or an imposition of a tax. If the three corporations had made earnings during the year in question so that a substantial tax resulted, petitioner could, with force, contend that substantially all the stock was not owned or controlled by the same interests and that each corporation should pay its own separate tax.

Judgment will be ordered for the respondent.

Considered by Marquette, Phillips, and Van Fossan.


author: Gkeen :

text:
    H. B. Moore, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3544.
    Promulgated October 10, 1927.
    1. Petitioner’s net sales, expenses, and amount of taxes paid, determined for tbe taxable year.
    2. Respondent’s determination of the amounts of tbe allowances for depletion and depreciation, approved.
    3. Tbe petitioner’s distributive share of partnership net income determined in accordance with the findings of fact and conclusions of law made in the appeals of the remaining members of the partnership.
    4. The evidence held insufficient to establish a net loss for the year 1919.
    5. The action of the respondent in disallowing as a deduction an alleged loss of $3,000 approved for want of evidence.
    6. Deductions claimed by reason of bad debts allowed in part and disallowed in part.

      Maynard Teall, Esq., for the petitioner.

      A. H. Mwrray, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of his income tax for the year 1920, for which the Commissioner has determined a deficiency in the amount of $5,434.87.
    The petitioner alleges errors as follows:
    (1) The taxpayer erroneously reported $123,695.11 as gross income from the sale of coal, and the Commissioner erroneously determined net sales os $123,695.11. The correct amount is $121,837.39.
    (2) The Commissioner erroneously determined the aggregate of items for materials and supplies and other expense for the Ruth Mine to be $10,569.13, whereas the correct aggregate of such items was $13,802.65.
    (3) The Commissioner allowed deductions for taxes only in the amount of $515.06, whereas the correct amount was $692.10.
    (4) The Commissioner refused to allow as a deduction from gross income the depreciation and depletion sustained by the Ruth Mine property in the year 1920 amounting to $22,224.80.
    (5) The Commissioner of Internal Revenue erroneously increased the amount of the taxpayer’s income received from the Youghiogheny Coal and Coke Company (in which the taxpayer was a partner) by the disallowance of $4,453.10 paid by the partners for Legal Services and $1,000.00 contributed by the partners to the Salvation Army in the year 1920.
    (6) The Commissioner of Internal Revenue refused to allow a deduction of $14,062.33 in 1920, the loss sustained from the operation of the Ruth Mine in 1919; which deduction taxpayer was entitled to in 1920 because his business operated at a loss in 1918.
    (7) The Commissioner of Internal Revenue refused to allow as a deduction from gross income the loss of $3,000.00 sustained by the taxpayer through the sale of real estate.

      (8) The Commissioner of Internal Revenue refused to allow as a deduction from gross income the amount of $5,800.00 representing monies loaned and found to be uncollectible in the year 1920.
    The amended answer of the respondent contains the following allegations:
    Alleges that the deficiency letter is in error, in so far as it has allowed a deduction for salaries and wages in the amount of $56,563.17; and alleges further that no amount whatever should have been allowed.
    Alleges that the deficiency letter is in error, in so far as it has allowed a deduction for bonuses to employees in the amount oe $12,567.73; and alleges further that no amount whatever should have been allowed.
    These affirmative allegations of the answer were not controverted by the petitioner in any pleadings. No proof was offered by either party as to the matters therein set forth.
    FINDINGS OE PACT.
    The petitioner is a resident of Dawson, Pa., and during the year in question was engaged in the mining of coal from what is known as the Ruth mine, which mine is located in the vicinity of Dawson. During the preceding years the petitioner had at times operated this mine under the name of the Parkhill Coal Co. In the year 1913 the petitioner purchased all of the coal in what is known as the Freeport vein underlying a certain tract of land containing 119 acres, together with surface rights sufficient for the operation of the mine, at a total cost of $5,000. Subsequent mining operations disclosed that of the 119 acres only 5.84 acres were underlain by the Freeport vein. Immediately contiguous to the property thus acquired by purchase, there was property in which one Rainey owned the Freeport vein of coal, and, at the time of the purchase by the petitioner, Rainey requested the petitioner to mine out the coal owned by him. The mine purchased by the petitioner had theretofore been developed to a small extent. In 1913 he extended the openings and proceeded to the development of the mine and to the erection of tipple, mine buildings, etc., necessary to the operation thereof. Entries, tunnels, etc., made upon the property owned by the petitioner were continued into the property owned by Rainey, and at a time not disclosed by the record, the petitioner commenced to remove coal therefrom. In 1917 the petitioner procured a lease from Rainey covering the Free-port vein, the consideration of which was the payment of a royalty of 10 cents per ton. So far as the record discloses the petitioner had not paid for the coal removed by him from the Rainey property prior to the execution of the lease.
    All of the coal upon the land owned by the petitioner was mined through what is known as Mine No. 1. Not later than 1915, all the coal having been removed, this mine was abandoned and a new one known as No. 2 opened up some distance away. Facilities other than those within Mine No. .1 were used in connection with Mine No 2. These facilities consisted of the tipple, buildings, etc., above mentioned, and a spur track connecting the mine with the railroad.
    The record establishes certain developments, expenditures, and costs, which, for reasons appearing in the opinion, we have not set forth in detail.
    The tonnage of coal removed from the Ruth mine was as follows:

    The coal mined from January 1, 1917, to October, 1922, amounted to 49,252 tons. It is impossible to ascertain from the record at what point of time the petitioner’s operations crossed the line between the coal owned in fee and coal acquired under the lease. No estimate can be made as to the amount of coal mined from either source.
    For the year 1920, the respondent denied all deductions for royalties, depreciation or depletion. The petitioner’s gross sales from the Ruth mine were $124,679.47. All the coal from the Ruth mine was sold to the Youghiogheny Coal & Coke Co., a brokerage firm. The gross sales represent the aggregate credit to the petitioner’s accounts on the books of the Youghiogheny Coal & Coke Co. There were charges to the petitioner’s account during the year, aggregating $498.65, covering allowances and adjustments made in the prices of coal where disputes arose with purchasers. The books of the Youghiogheny Coal & Coke Co. show further charges of $2,065.46 to the petitioner’s account during the period from January 19, 1921, to August 16, 1921, covering similar allowances and adjustments on shipments of coal made in 1920. The petitioner’s net sales from the Ruth mine in the year 1920 were $124,180.82.
    In the year 1920, the petitioner expended the sum of $11,827.93 for materials and supplies used by him in the Ruth mine. The evidence does not differentiate expenses and capital expense items,, and accordingly no allocation of these amounts can be made. The Commissioner has allowed as a deduction the sum of-$10,569.13.
    During the year 1920, the petitioner owned a one-third interest in a partnership known as Youghiogheny Coal & Coke Co., coal brokers. This partnership was composed of the petitioner, R. D. Henry, and Otto Hass. Beginning with the year 1917, the partnership sold for the petitioner all of the coal mined from the Ruth mine and for such services was paid a commission. In the same year the partnership paid for legal services the sum of $4,453.10 and made a contribution to the Salvation Army in the sum of $1,000. In Affeal of B. D. Henry, 3 B. T. A. 72, the deduction of the above amounts was approved by this Board.
    The petitioner’s returns for the years 1918, 1919, and 1920, were prepared upon the basis of cash receipts and disbursements. For the year 1920, an amended return, upon the accrual basis, was filed. The return for the year 1918 disclosed a loss from the operation of business and profession of $6,641.44. This loss was reduced by other income and increased by other deductions, as set forth in the return, to the sum of $4,093.65. The return for 1918 disclosed a net loss of $1,348.46 resulting principally from a sale in the operation of business in the amount of $1,506.73. Attached to the return for this year is a memorandum of the Commissioner’s office, as follows:
    (1) Form (E) not requested.
    (2) The amount of depletion, if any, would have no bearing on the amount of tax as the taxpayer suffered a loss in this year.
    (3) It is recommended that the ease be audited and closed for 1918.
    This memorandum was signed by a valuation engineer and approved by the chief of the coal valuation section. The memorandum bears the stamp “Approved for audit, November 24, 1922, Head of Natural Resources Division.” Attached to the return is a further memorandum from which it appears that no tax is due for the year 1918, upon which there is stamped, “Reviewed October 16, 1923.” There is also attached to this return a waiver signed by the petitioner, upon which there is a notation “ effective until March 15, 1925.”
    In 1905 or 1906, the petitioner acquired a residence property at a cost of $6,000, upon which in 1907 he expended the sum of $3,500 in making improvements. The property was sold in 1920 for $4,000.
    In the year 1920 the petitioner deposited $800 as margins with a firm of brokers in Uniontown, Pa. In that year the brokerage firm became insolvent and went into bankruptcy and the petitioner’s claim against it was wholly worthless.
    In the year 1920, the petitioner’s nephew was in need of money and the petitioner, either as guarantor or surety, joined with his nephew in the execution of a series of notes aggregating $5,000, the entire proceeds of which went to the nephew. When the notes became due, the nephew was unable to pay and the notes were renewed, the petitioner again signing as guarantor or surety. At the end of the renewal period and before the expiration of the year 1920, the petitioner was compelled to pay the notes. The petitioner’s nephew at that time was insolvent and stated that he did not think he would be able to pay the notes.
   OPINION.

Gkeen :

The errors alleged in the petition will be disposed of in the order in which they appeared in the pleadings.

The first allegation of error relates to the amount of the gross income received from the sale of coal. The petitioner’s accounts were kept on the basis of receipts and disbursements. All of the coal mined in 1920 from the Ruth mine was sold through the Youghio-gheny Coal & Coke Co. The sales for such year amounted to $124,-679.47. During that year the broker paid $498.65 by way of adjustments to the purchasers of this coal and the parties have stipulated that this amount is a proper deduction from gross income. In 1921, in adjusting disputes with customers, the amount of $2,965.46 was paid out on sales which had been consummated in the year. 1920. Such latter amount may not be deducted in the year 1920 inasmuch as the petitioner is upon a cash receipts and disbursements basis and the amounts were not paid out for him or by him during such year. The net sales from the Ruth mine amounted to $124,180.82.

The second allegation of error relates to the amount deductible as expense of operating the mine. Inasmuch as there is nothing in the record which enables us to segregate the capital expenditures from the expenses, we approve the determination of the Commissioner in allowing as a deduction on this item the sum of $10,569.13.

The third allegation of error is disposed of by our findings of fact that in the year 1920 the petitioner paid taxes in the sum of $692.10.

The fourth allegation of error relates to the deduction to be allowed for depreciation and depletion. It is clear from the evidence that, in the year in question, the petitioner mined no coal of which he was the owner. We can not determine from the evidence whether the petitioner had a lease prior to March 1, 1913, or1 the value thereof on that date if such lease was made prior to that date. It is clear that the lease as such cost the petitioner nothing, so that if acquired subsequent to March 1, 1913, there is no capital expenditure to be returned through the depletion allowance and we therefore hold that he is entitled to no deduction for depletion. It is equally clear from the evidence that the petitioner had expended substantial amounts in tracks, buildings, mine equipment and machinery, all of which, of course, are properly the subject of depreciation. The expenditures in this regard were in part made in Mine No. 1, which was wholly abandoned before the taxable year. We are unable to ascertain the amounts of the expenditures which relate only to Mine No. 1. As relates mining property, there are two common methods of determining how much of the total amount to be recovered through the depreciation allowances shall be allowed in any given year. In one method the physical life of the asset or group of assets to be depreciated is determined and the basis for depreciation divided by the years all live. In the other method the total recoverable tonnage of mineral is ascertained and this amount is divided by the cost or their basis of depreciable property to the end that to each ton is allocated its proper proportion of this cost and the annual deduction obtained by multiplying such factor by the number of tons removed in any given year. The evidence in this case is wholly lacking as to the life of the property, the physical life of the depreciable assets, or as to the recoverable tonnage, and without these factors it is impossible to compute the proper allowance for depreciation. It follows, therefore, that we must approve the action of the Commissioner in disallowing the amount of depletion and depreciation claimed.

The fifth allegation of error relates to the net income of a partnership of which the petitioner was a member and to his distributive share of the net income of that partnership. These questions were disposed of in the decision mentioned in the findings of fact, and the net income of the partnership and the petitioner’s distributive share thereof should be computed in accordance with that decision.

The sixth allegation of error relates to a deduction for 1920 in the amount to which it is alleged the petitioner is entitled by reason of net losses alleged to have been sustained in the operation of the mine in the years 1918 and 1919. The mere introduction of returns, to which in one instance the Commissioner’s memorandum was attached, is not sufficient to establish a net loss, particularly where it is apparent that the Commissioner has made no effort to accurately compute the tax for such years, he having proceeded upon the theory that no tax was due, being satisfied as to such fact from the data disclosed on the return. It seems clear that the petitioner does have a net loss but we are wholly unable to ascertain the amount thereof, and accordingly deny the petitioner’s claim therefor.

As to the issue raised by the seventh allegation of error, we must affirm the Commissioner for the reason that the March 1, 1913, value of the property and the allowable depreciation thereon have not been proven. Without these factors the computation can not be made.

The eighth allegation of error involves two questions: First the right to a deduction for an alleged bad debt, and second, the right to a deduction for an alleged loss of $800. After a careful consideration of all the evidence, we are unable to conclude that the petitioner’s claim against his nephew was worthless. It is clear that the nephew was insolvent during the year in question, but in view of all of the circumstances surrounding the creation of this obligation, we are not willing to regard a temporary insolvency as proof of worthlessness. The petitioner contends that he is entitled to deduct $800 as a loss sustained as the result of his transactions with the brokerage concern. We think that the loss was sustained, that petitioner’s position in this regard is well taken, and that he is entitled to deduct the amount claimed in the year in question.

As to the affirmative allegations of the answer, the respondent offered no proof. A presumption of correctness attaches to his original action upon the two items involved and his present decision with reference thereto can not be said to do more than take away this presumption, and we accordingly conclude that the petitioner is entitled to these deductions as previously allowed by the Commissioner.

Judgment will he entered after 15 days’ notice, under Rule 50.

Considered by Sternhagen, Aeundell, and Lansdon.

       Practically none.


author: Green:

text:
    Appeal of Lexington Brewing Co.
    Docket No. 4934.
    Promulgated October 10, 1927.
    1. Obsolescence oe Tangible Properties Due to Federal Prohibition. — Between October 24, 1919, and January 16, 1920, petitioner discontinued tbe use of certain tangible assets Raving a depreciated cost on December 31, 1919, of $37,231.18. On December 31, 1919, it also owned certain saloon fixtures having a depreciated cost of $25,153.52. After January 16, 1920, it continued to use some of these fixtures in manufacturing lager and near beer, gave some away, broke up some for kindling wood and sold some for $75. Evidence did not show that at the close of 1919 petitioner had any special knowledge which would lead it to believe it would never again use the discarded facilities. Held, in the absence of such evidence petitioner is not entitled to an allowance for obsolescence.
    2. Invested Capital. — Petitioner claimed the Commissioner erred in reducing invested capital on account of alleged insufficient depreciation sustained in prior years. Held, that the mere introduction in evidence of statements setting forth what the books show as to amounts charged off in prior years is insufficient to rebut Commissioner’s prima facie case.

      Fred W. Hart, G. P. A., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    The petitioner seeks a redetermination of its income and profits taxes for 1919, for which year the Commissioner has determined a deficiency in the amount of $28,428.29. The issues are: (1) The amount of the depreciation deduction to which the petitioner is entitled; (2) the correctness of the Commissioner’s action in disallowing a deduction for obsolescence of tangible properties alleged to have been sustained as the result of Federal prohibition legislation; and (3) the correctness of his action in reducing invested capital by $70,028.07 because of alleged insufficient depreciation charged off in prior years. As set forth in the deficiency notice, the Commissioner allowed a depreciation deduction in the amount of $44,759.62. The petitioner alleged that it was entitled to a deduction of $57,254.93 for depreciation, which the Commissioner conceded at the hearing. The first issue is, therefore, removed from controversy.
    PINDINGS OP PACT.
    Petitioner is a Kentucky corporation with its principal office at Lexington. In 1924, its name was changed to the Dixie Realty & Products Co. It owned buildings, machinery, and equipment which were designed and used for the purpose of brewing beer, and fixtures which were used in saloons where its products were sold. The capacity of its brewery was approximately 75,000 barrels per year. In 1918, petitioner commenced the manufacture of near beer, and it sold in that year 2,800 barrels of that product. During the year under consideration, petitioner manufactured and sold lager and near beer.
    Between October 24, 1919, and January 16, 1920, petitioner discontinued the use of certain machinery and equipment comprising approximately seven-twelfths of the total facilities employed for brewing beer. None of the machinery and equipment, the use of which was then discontinued, was thereafter used for any purpose. The depreciated cost and book value of the discontinued machinery and equipment was $37,231.18 at December 31, 1919.
    On December 31, 1919, petitioner owned saloon fixtures of a depreciated cost and book value of $25,153.52. These fixtures were located in saloons in which the products of petitioner’s brewery were dispensed. After January 16,1920, the effective date of the Eighteenth Amendment, and enforcement legislation, some of these fixtures were continued in use, some were given away, some broken up for kindling wood, and some sold for the sum of $75.
    In or about June, 1922, petitioner’s brewery was seized by Federal authorities because petitioner was selling lager beer containing an alcoholic content in excess of that allowed by law, and thereafter the manufacture and sale of lager and near beer was discontinued.
    In its return for the year under consideration, petitioner claimed a deduction from income of $114,787.69 for depreciation and obsolescence of the physical properties used in its business. The Commissioner allowed $44,759.62 for depreciation and nothing for obsolescence, and disallowed the remainder of the amount claimed amounting to $70,028.07. As heretofore stated, the Commissioner conceded during the hearing that petitioner is entitled to a deduction of $57,254.93 for depreciation.
    With respect to the depreciable properties employed in petitioner’s business, its books of account show the following:

    The Commissioner has held that the actual depreciation sustained in years prior to 1919 exceeded by $70,028.07 the depreciation charged off on the books of account, and, accordingly, he has included the above listed properties in invested capital at an aggregate value of $241,744.83, which is $70,028.07 less than the book value thereof at the beginning of the year.
   OPINION.

Green:

The net income shown in the deficiency notice should be reduced by the sum of $12,495.31, being the amount of the additional depreciation which the Commissioner has conceded.

Petitioner contends that machinery, equipment, and saloon fixtures, having a total depreciated cost and book value of $62,384.70, and having a total salvage value of $6,185.85, were rendered obsolete and useless by the advent of national prohibition; and that it should be permitted to write off against income, ratably over the period February 1, 1918, to January 16, 1920, the loss occasioned by the aforesaid event in the following amounts: $56,198.85, representing the difference between the depreciated cost and estimated salvage value, of which $28,697.28, or 12/23.5 of the whole, is allocated to the year 1919. There appears to be no question as to the extent of the loss which the petitioner suffered at some time or other, through loss of useful value of certain of its physical assets which were rendered useless by national prohibition. The Commissioner, as shown in the deficiency notice, has allowed a substantial deduction from the income for 1920 on account of such a loss. The’ real question which we are called upon to decide is whether the petitioner, at the close of 1919, had substantial reasons for believing that the assets would become obsolete prior to the end of their ordinary useful life, and knew, to a reasonable degree of certainty, under all the facts and circumstances, when that event would likely occur. If it had such belief and knowledge, then it would appear that petitioner is entitled to a deduction from the income of 1919 for obsolescence of those assets. The evidence does not warrant an affirmative answer to the question as above stated. It goes no further than to show that at December 31, 1919, petitioner had discontinued the use of certain machinery and equipment; that some time after January 16, 1920, certain other assets, referred to as saloon fixtures, were discarded, given away, or sold at a loss; and that subsequent events have demonstrated that these assets had become obsolete for the manufacture and sale of near beer as well as for every other purpose. At the close of 1919, petitioner was engaged in the manufacture of near beer, the processes of which required the use of the same facilities as were used in making real lager beer. Further than that, petitioner continued to manufacture and sell real lager beer, for beverage purposes, in violation of prohibitory legislation, until in or about the month of June, 1922, when its plant was seized or otherwise put under legal restraint by Federal authorities. If petitioner’s executive officers, at the close of 1919, were in possession of any special knowledge that the public thirst or appetite for the potent brew of malt and hops could not be satisfied with the dealcoholized or less stimulating brew, or that the demand for the illegal product which they were marketing would be greatly lessened, so that the facilities discontinued in use would have no further useful value in the business, the evidence is wholly insufficient to show that such was the case. We can not credit them with power, in 1919, to prophesy that the public would not take to petitioner’s products. Under the circumstances we can not disturb the Commissioner’s action in disallowing the claimed deduction for obsolescence.

The last issue is that relating to the Commissioner’s action in reducing invested capital by $70,028.07 on account of his conclusion that insufficient depreciation was charged off in prior years. The only evidence bearing upon this issue which has been submitted by the petitioner is an exhibit setting forth what the parties agree are the amounts of depreciation charged off on the books between January 1, 1913, and December 31, 1918, and the statement of the sole witness, who is petitioner’s president and general manager, that, the plant was in good working condition when he became connected with the company in March, 1919. However, the witness testified further that he had no knowledge as to what took place, in the way of charging off depreciation, prior to the time he became connected with the petitioner. The petitioner can not rebut the prima facie case by the mere production in evidence of statements setting forth what the books show as to amounts charged off in prior years. As we stated in Appeal of Mandel Brothers, 4 B. T. A. 341, 355, “A line of reasoning which concluded that the presumption of the correctness of the Commissioner’s determination is rebutted by the production of the very evidence which the Commissioner examined and found to reflect an unreasonable allowance and so found not from the books themselves, but from the surrounding circumstances, would be most peculiar.” And in Union Paving Co. v. Commissioner, 6 B. T. A. 527, we said: “ In every appeal in which the board has reversed the action of the Commissioner on issues similar to this, the petitioner has proved that the amount of depreciation written off was, in view of all the facts, a reasonable allowance for the exhaustion, wear and tear of assets.” There is no evidence upon which we can base findings of fact adverse to the determination of the Commissioner.

Judgment will be entered on 15 days'1 notice, under Rule 50.

Considered by Sternhagen, Arundell, and LaNsdoN.


author: Littleton :

text:
    M. A. Reeb, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9847.
    Promulgated October 10, 1927.
    1. Where a father on January 1,1918, executed a trust agreement in favor of his minor child, making the mother trustee and clothing her with the power to invest the funds constituting the corpus of the trust “ as in her judgment may seem wise and proper, whether or not such investments are now or may hereafter be authorized by law for trust investments,” and where thereafter the father executed a partnership agreement with his adult children and tlie trustee of the minor; and the evidence shows that both agreements were made in good faith, and the trustee is recognized as a partner, and has received as trustee her pro rata of profits from the partnership, as well as income from other investments, and is holding same as the separate estate of the minor, such estate is not the property of the father and should not be included in computing the father’s taxable net income for the calendar years 1919 and 1920.

      Joseph A. Albrecht, Esq., and Edward N. Mills, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    The Commissioner determined deficiencies in income tax of $8,985.91 for the calendar year of 1919, and $50,161.48 for the year 1920. He also determined an overassessment of $11,112.96 for 1921 not arising from the denial of an abatement claim.
    The Commissioner included in the taxable income of the petitioner for the year 1920 the amounts of $17,726.41 on account of investment by him in stock of the Elmhurst Investment Co. and $47,180 as profit arising from the reorganization of the Elmhurst Investment Co. It is, however, now stipulated that those two sums should be eliminated from the taxable income for the year 1920.
    The question remaining is whether the income of the petitioner’s minor daughter arising from a trust created by him for her January 1, 1918, should be included in computing the petitioner’s taxable net income for each of the years involved.
    FINDINGS OF FACT.
    The petitioner is a resident of Buffalo, N. Y. He has four children, the youngest, Virginia C. Eeeb, being a minor.
    On January 1,1918, he created a trust estate for the minor daughter who at that time was about two months old. Her mother, Clara C. Eeeb, was made trustee. The trust instrument executed by petitioner and his wife for the benefit of their minor daughter, clothed .the trustee, the mother, with very broad, general, and discretionary powers in the discharge of her duties in the execution of the trust. The petitioner, at the time of the execution of the trust agreement, granted and delivered to the trustee, for the purposes of the trust, 50 shares of the common stock of the American Steamship Co. and $50 in cash, the minor prior to that date having no separate estate of any character. The trust agreement, among other things, provided :
    The Trustee is hereby authorized and empowered to receive, hold, manage, protect, sell, invest and reinvest any and all of the property comprising this trust; to collect, recover, and receive the income thereof and therefrom; and to pay out all amounts necessary to the proper conduct or administration of this trust. * * *
    The Trustee is hereby authorized and empowered to sell or otherwise dispose of, at such times and upon such terms and conditions as she shall deem proper or expedient any and all of the securities and/or property which shall at any time constitute a part of the corpus of this trust; and the Trustee is hereby similarly authorized and empowered to invest and reinvest the funds and securities which shall at any time constitute a part of the corpus of this trust as in her judgment may seem wise and proper, whether or not such investments are now or may hereafter be authorized by law for trust investments.
    * ******
    The Trustee shall not be responsible for any loss or damage which may result from the exercise of judgment or discretion in carrying out the provisions of this agreement, nor for any moneys or property except such as shall actually and in fact come into her possession by virtue of the provisions hereof.

      On January 2, 1918, a partnership under the name of the Peerless Purchase Sales Co. was created by a written agreement of that date between the petitioner, his three adult daughters and his wife, Clara C. Reeb, as trustee for their minor child, Yirginia C. Reeb. Each of the partners executed and paid into the partnership a $2,000 note, to be used and employed in and for the common benefit of the partnership business, which was a purchasing, selling and exchanging of property, real or personal, tangible or intangible. The notes executed by the various partners, including the note executed by Clara C. Reeb, as trustee, aforesaid, were all to fall due and be payable December 31, 1918.
    The partners, under the original articles of agreement, were to • share gains and losses equally and the copartnership was to continue until dissolved by operation of law or by mutual agreement. Subsequently, the husband of Clara C. Reeb agreed to share equally with his wife his one-fifth interest in the partnership and did so, distributions having been made thereafter in accordance with such arrangement.
    By the tenth article of the partnership agreement, it was provided:
    An» It Is Ageeed by the said copartners hereto that M. A. Reeb shall be the manager of the said business with authority to sign the firm name, hire and discharge employees, contract purchases and sales and conduct each and every transaction for which the partnership is formed or entered into, with .power to compromise debts to the firm, or to collect the same at proper action of law or equity and to do whatever in his judgment appears to him best to accomplish the greatest profit possible from each and every transaction for the benefit of the said copartnership; to keep a record of all transactions and accounts performed by him for the copartnership, and to report the results of the said business to the other parties hereto, as soon after December Slst, of each year as it is possible for him to do.
    The notes executed and given by the several partners for operating the business and so used, were subsequently paid from the profits of the first year’s, 1918, business. The profits were distributed annually among the partners in the proportions heretofore indicated and the trustee of the minor daughter, who was entitled to one-fifth interest in the partnership and profits arising therefrom, received as her share as such, the following:
    1919_$18,424.16
    1920- 27,969.38
    1921_ 24,984.20
    The amounts so received were accumulated, invested and reinvested and are in the possession of the trustee and held by her as a separate fund for the minor.

      From investments other than the partnership, the trustee for the minor received income as follows:

    Such income has also been accumulated and is held by said trustee for the minor’s benefit and is for her kept in a separate safe deposit box. The trustee has always kept and still is keeping a complete set of separate books showing the income and investments of the trust.
    All of the taxable income of the minor’s estate has been included by the Commissioner in the petitioner’s taxable income.
   OPINION.

Littleton :

The Commissioner increased the minor’s income for the year 1920 (included in the petitioner’s income) in the sum of $17,726.41, alleging same to be taxable income resulting from investment in stock of the Elmhurst Investment Co., and increased the petitioner’s income for the same year $47,180, which he alleged to be taxable income resulting from the reorganization of the Elmhurst Investment Co.

These two sums are, however, by stipulation, eliminated from taxable income for the year 1920. The remaining complaint of the petitioner is that in computing his net income for the years involved, the Commissioner included the income of the trust in favor of petitioner’s minor daughter, Virginia C. Eeeb.

The Commissioner’s action in determining deficiencies was apparently, as indicated in his answer, based on the idea that the trust .instrument and the partnership agreement as regards the minor 7 daughter were not bona, fde and did not result in making a legal trust and partnership vesting the minor with any legal interest therein.

The evidence does not disclose that any one was ever appointed guardian of Virginia C. Eeeb, although the mother as trustee for her under the trust agreement entered into a partnership arrange-jbment with the father and adult daughters and received and now \ holds as a separate estate for her minor daughter certain funds, realized from the partnership and from the trust.

There is no indication from the evidence of bad faith on the part of the father in creating the trust in favor of the minor daughter, nor in the partnership arrangement effected with his wife, the trustee, as one of the partners. The father’s property was his own to do with as he desired. His wife could legally serve as trustee and in making her such for their minor daughter, he could impose restrictions and give the trustee the right and power to exercise her discretion in the matter of investments and handling of trust funds, as he did.

The father having legally created a trust and the mother having accepted and undertaken to execute the same as trustee and having acquired certain funds from the partnership and otherwise, which she now holds as a trust fund for the minor, such fund is not the' property of the father and is not taxable to him as such. In creating' the trust, the father made a separate estate for the minor daughter and ceased to have either ownership or control over the same. In such circumstances, the Commissioner erred in including the income of the minor’s trust estate as a part of petitioner’s taxable income.

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

Considered by Smith and Love.