author: Arundell:

text:
    Appeal of Williamson Milling Co.
    Docket No. 1042.
    Promulgated December 15, 1926.
    1. The principal stockholders of the petitioner owned property used to produce power which was furnished the petitioner. Petitioner .credited the power organization for power furnished on a unit production basis and debited it for expenditures made in its behalf, and claims as a deduction the excess of the credits over the debits. As no payments were made by the petitioner for the power furnished nor any liability for payment shown, the amount claimed held not deductible.
    2. Officers’ salaries not shown to have been authorized, accrued or paid in 1918, but entered on petitioner’s books in 1919, held not deductible from 1918 income.
    8. Claim for deduction for repairs disallowed on account of lack of evidence to identify the items making up the amount claimed.
    4. Claim for deductions for bad debts and losses denied for lack of evidence.
    5. In view of evidence, held, there was no intent on the part of petitioner to evade tax, and 50 per cent penalty asserted by Commissioner disallowed.

      W. E. Bavrd, G. P. A., for the petitioner.

      Briggs G. BimpicK, Esq., for the Commissioner.
    The Commissioner determined deficiencies in income and profits taxes for the calendar years 1918 and 1919 in the amounts of $3,183.54 and $2,404.10, respectively, and asserted a 50 per cent penalty for the year 1918. The petitioner alleges error on the part of the Commissioner in disallowing power expenses, deductions for officers’ salaries, deductions for repairs, maintenance and supplies, deductions for bad debts, loss on sale of stock, and in the assertion of the fraud penalty for the year 1918.
    FINDINGS OF FACT.
    The petitioner, a Kansas corporation with its principal office at Clay Center, was organized in 1908, and during the taxable years was engaged in the business of milling flour and feed and in buying and selling grain. The principal stockholders were A. L. Williamson, F. L. Williamson, and A. C. Williamson. A. L. Williamson died in April, 1918.
    In 1918 the three Williamsons owned jointly a dam across the Republican River at Clay Center and certain other property, which were used to develop water power, and also an auxiliary steam plant. These properties were held for convenience in the name of A. L. Williamson, who was also the active manager of the plant, which operated under the name of the Williamson Power Co. There was no written agreement between the Williamsons regarding the ownership or operation of the power properties.
    The Williamson Power Co., during the years here involved and for a number of years prior thereto, furnished the power produced by its properties to the petitioner. For the power thus furnished, the petitioner at the close of each month credited the Williamson Power Co. with an amount computed on the basis of the number of barrels of flour produced. The rate of computation for the period January, 1918, to May, 1919, was 10 cents per barrel. No credit for power was entered for June, 1919. For the period July to November, 1919, and for a part of December, 1919, the power credit was computed at 20 cents per barrel. For the remainder of December the computation was made at the rate of 16 cents per barrel of flour produced. Other credits, representing sales of sand, machinery, and crops produced on the company properties, were entered in the Power Company account from time to time by the petitioner. Expenditures made by the petitioner on behalf of the Power Company for labor, supplies, raising of farm crops, and other items, were entered as debits in the Power Company account carried by the petitioner. No payment was made by the petitioner to the Power Company for the power furnished by the latter. For the year 1918 the credits in the Power Company account exceeded the debits by $7,480.06, and for the year 1919 the credits exceeded the debits by the amount of $6,167.21. The Commissioner disallowed these amounts claimed as deductions representing charges for power.
    For the year 1918 the petitioner entered on its books the amount of $750 as the salary of F. L. Williamson, and made no entry to cover any salary to A. L. Williamson. As of June 30, 1919, an adjustment on account of salaries was entered, charging surplus with salaries stated to be for 1918 in the amount of $2,250, and crediting $600 of this amount to A. L. Williamson and $1,650 to F. L. Williamson. This additional amount of $2,250 was claimed as a deduction for 1918 and was disallowed by the Commissioner.
    During the last six months of the year 1918 the petitioner entered numerous items in the “repair” column of its cash journal. For the six-month period these items totaled $6,702.84. The monthly totals of this column were posted to the debit of a ledger account for repairs and a monthly entry then was made debiting the account of depreciation reserve and crediting the account of repairs, thereby transferring monthly the total amount appearing in the repair account to the debit of the depreciation reserve and leaving none of the alleged repairs in expense accounts. The total- depreciation charge for the year, including the claimed repairs, was $12,000. Of this amount the Commissioner disallowed $7,214, which includes the amount of $6,702.84 alleged by the petitioner to represent repairs. Adjustments affecting this account have been made amounting to $725.33, leaving $5,977.51 now claimed by the petitioner as a deduction on account of repairs.
    During the year 1918 the petitioner charged off a number of items aggregating $9,894.51, and credited to surplus as recoveries on accounts charged off the sum of $70.81, leaving a net amount charged off of $9,823.70. Of the gross amount of $9,894.51 charged off, $6,181.49 was charged against surplus of that amount for the period July 1, 1913, to December 31, 1917, and the balance, $3,713.02, was charged against earnings for the year 1918. Of the net amount of $9,823.70 charged off in 1918 the amount of $7,823.70 is claimed by the petitioner as a deduction on account of bad debts. The Commissioner has not allowed the amount claimed as a deduction.
    Included in the amount of $9,823.70 charged off in 1918 is an item of $2,000, claimed to represent a loss on investment in stock of the Kansas Milling & Export Co., which became financially involved about 1916 or 1917 and some time during those years went into the hands of a receiver. No liquidation dividends were ever received by the petitioner. The Commissioner disallowed the loss claimed on account of this investment.
    To the deficiency found for the year 1918 the Commissioner has added a penalty of 50 per cent under'section 250 (b) of the Revenue Act of 1918. The understatement of tax in the return of the petitioner for 1918 was not made falsely or fraudulently with intent to evade tax.
   OPINION.

Arundell:

The Williamson Power Co. was given credit on the books of the petitioner for power furnished at a rate based on the number of barrels of flour produced and for income realized from the Power Company properties. The expenses incurred in the production of power and the operation of the Power Company properties were paid by the petitioner and charged on its books against the Power Company. The credits to the Power Company account exceeded the charges against it in both years. It is the difference between the charges and credits in the Power Company account that the petitioner now seeks to have allowed as an operating expense, but there is no evidence as to the liability of the company to pay their stockholders the amount set up on the books, and as a matter of fact no payments were ever made. The Williamson Power Co., as such, never made a return of the amount now sought to be deducted by petitioner, nor did the three Williamsons treat this amount as income in their individual tax returns. The evidence rather indicates that the power plant was operated as an integral part of the mill plant.

Evidence was introduced on the question of the allowance of officers’ salaries for both of the years 1917 and 1918. As the year 1917 is not before us for determination, we have made no reference to that year in our findings of fact. As to the year 1918, the petitioner entered on its books as officers’ salaries for that year only the amount of $750. A revenue agent’s report in evidence and a stipulation filed show that the agent attributed a part of the mill wages and salaries to officers’ salaries. While the action taken by the Commissioner is not clearly brought out, it appears that he allowed as mill wages and salaries the full amount shown in that account and did not allow any part of it as officers’ salaries. At any rate the petitioner now seeks an additional allowance, as salaries of its principal officers for the year 1918, of $2,250, which was entered on its books in 1919. As the evidence does not show any authorization, accrual on the books of the petitioner, or payment of these salaries in 1918, they are not an allowable deduction for that year. Appeal of Columbia Textile Co., 2 B. T. A. 472, 474, and cases therein cited.

The Commissioner allowed in part and disallowed in part the amount of $12,000 shown on the petitioner’s books as a depreciation charge for the year 1918. The amount disallowed included items aggregating $6,702.84, which were originally entered in a so-called “ repair account ” but which at the end of each month were transferred to depreciation account. Some of these items are obviously not deductible. Others may well be, but no evidence in explanation of the several items was offered. Only the account as disclosed by petitioner’s books was placed in evidence. The general statement that orders issued by the United States Food Administration requiring the production of flour in a manner different from the usual practice of petitioner necessitated more than the average amount of repairs can not serve to establish the deductibility of particular so-called repair items where not a single word of testimony is offered as to their nature.

The deductibility of certain alleged bad debts and of a loss on account of stock held by the petitioner in the Kansas Milling & Export Co. must likewise be denied for lack of evidence. As to what steps the petitioner had taken to secure payment or to determine the worthlessness of the accounts sought to be charged off we are not informed, nor is there any clear testimony as to the year in which the loss was sustained on account of stock owned in the Kansas Milling & Export Co. The mere fact of a receivership is not sufficient to prove the worthlessness of the item.

The 50 per cent penalty added by the Commissioner to the additional tax found due for 1918 was asserted, it appears, on the ground that the Williamson Power Co. was nothing more than a fiction in the accounts of the petitioner and the credits made to its account were solely for the purpose of reducing the petitioner’s income. The Williamson Power Co. made no return of income. After hearing the testimony of the president of the petitioner and examining the documentary evidence in the case, it is our opinion that the condition of affairs which occasioned the assertion of the penalty was due to lax methods of bookkeeping and not to any intent on the part of the petitioner or its officers to evade tax.

We accordingly approve the determination of deficiencies in tax for the years 1918 and 1919 and disapprove the determination that a penalty is due for the year 1918.

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


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Lord Motor Car Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4718.
    Promulgated December 16, 1926.
    Petitioner is entitled to inventory its used cars at bona, fide selling prices, less selling cost.

      H. W. Reynolds, Esq., and T. R. Dempsey, Esq., for the petitioner.

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

      The Commissioner found a deficiency in income and profits tax for the year 1919 in the amount of $1,503.75. Only that part of the deficiency which results from the Commissioner’s addition to gross income of the amount of $5,225.45, by which he reduced the closing inventory of the petitioner for the taxable year, is in controversy.
    FINDINGS OF FACT.
    Th® petitioner was a California corporation during the year ended December 31, 1919, with its principal office- in Los Angeles, where it was a dealer in new and used automobiles. It was its custom to take used automobiles in part payment for new cars which it sold, and to recondition and resell them to its customers. At December 31, 1919, it had 25 such used cars in stock, which it included in its inventory of unsold merchandise attached to its income and profits-tax return as of that date at a value of $15,676.34. In the audit of such return the Commissioner increased such inventory value to the amount of $20,901.79. The parties stipulate that the inventory sheet in evidence shows that the total cost of the second-hand cars on hand at the end of the year 1919 was $20,901.79, and that such amount was reduced by 25 per cent, or an amount of $5,225.45, the difference being the inventory value of used cars on hand at that date.
    Upon the receipt of a used automobile as part payment for any car sold the petitioner took such car into its accounts at a value arrived at by its own appraisal and that represented the difference between the price of the car sold and the cash payments to be received therefor. To this figure of value it subsequently added the cost of conditioning the used car and so arrived at cost and the resale price. It was in this way that the total of $20,901.79, as cost of used cars on hand at December 31, 1919, was determined. From this total the petitioner deducted 25 per cent as the cost of selling such used cars.
   OPINION.

Lansdon:

It is impossible to reconcile the figures shown on the exhibits adduced in evidence with the amounts in controversy in this proceeding, but, as counsel for the respective parties have stipulated that the cost of the used cars on hand at December 31, 1919, as shown by the petitioner’s books, was $20,901.79, and that, in its inventory of its stock, the petitioner deducted 25 per cent from such cost, this is not material. The facts are that on December 31, 1919, the petitioner had used cars that had cost it $20,901.79, and that it wrote down such cost on its own books and in its income-tax return to $15,676.34 which, it avers, was the market value of such cars at that date. In support of its action it relies on the regulation of the Commissioner, which requires that unsold merchandise on hand at the end of any taxable period shall be inventoried at cost or at cost or market, whichever is lower, and provides that second-hand goods may be inventoried at bona fide selling prices, less cost of selling.

The Commissioner restored the amount written down to the petitioner’s inventory apparently on the theory that it was based on an estimated market value rather than on the cost of replacement at that date. The petitioner admits that the write-down, was its opinion as to selling cost, but asserts that long experience in handling used automobiles had enabled it to form such an opinion with accuracy, and, in this connection, shows that the used cars in question were sold in 1920 for an amount substantially less than $15,676.79.

The statutory provision governing the making of inventories for Federal tax purposes in the Revenue Act of 1918 is as follows:

Sec. 203. That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Pursuant to the powers granted in the above section, the Commissioner, with the approval of the Secretary, made and promulgated the rules for inventorying stock in trade, in which the following is included in Regulations 45, as amended by T. D. 3296:

* * * Any goods in an inventory which are unsalable at normal prices or unusable in the normal way because of damage, imperfections, shop wear, changes of style, odd or broken lots, or other similar causes, including secondhand goods taken in exchange, should be valued at bona fide selling prices less cost of selling, whether basis (a) or (b) is used * * *.

The Commissioner interpreted this regulation and applied it in a specific case in A. R. R. 3549, C. B. II-2, p. 35.

The evidence adduced by the petitioner has convinced us that the cost of selling used cars is at least 25 per cent of their sale price. The market value of a used automobile is something very different from the market value of new merchandise. In case of the latter the cost of replacement on the market at date is a fair measure of value, but the cost of replacing a used automobile can not be ascertained. We are of the opinion that the petitioner’s inventory of its used cars at January 1, 1920, is in conformity with the statute and the regulations of the Commissioner and clearly reflects income.

Judgment will be entered after HO days' notice, under Rule 50.


text:
    Pioneer Laundry Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4739.
    Promulgated December 16, 1926.
    Value of good will acquired in exchange for stock determined.

      Louis 8. Beedy, Esq., and D. A. Sargent, O. P. A., lor the petitioner.

      George G. Witter, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1919, 1920, and 1921, in the respective amounts of $619.76, $807.56, and $261.21. The only issue is the value of the good will acquired by the petitioner from a predecessor in exchange for capital stock at the date of incorporation.
    FINDINGS OF FACT.
    The petitioner is a California corporation with its principal office at Emeryville, which is adjacent to Oakland. It was incorporated in 1916, with an authorized capital of $100,000. The purpose of the incorporation was to acquire the assets and business of a co-partnership of the same name which was established in 1907. The original capital contribution to the partnership was $7,500, subsequently increased by the amount of $2,000, which was paid in some years after the business was established. ,
    The opening balance sheet of the petitioner at April 1, 1916, was as follows:

      Capital stock in the amount of $55,000 was issued in payment for the tangible and intangible assets of the partnership. In its income and profits-tax returns for the taxable years, the petitioner included in its computation of invested capital the amount of $19,000 as the value of good will acquired by purchase from its predecessor. The Commissioner disallowed all good will and determined the deficiencies involved in this proceeding.
    The petitioner and its predecessor owned all the property and drivers’ routes used in the business. It conducted what is known in the trade as an “ inside laundry,” which is one in which the delivery equipment and the drivers’ routes are the property of the operating company. At the date of incorporation it acquired nine drivers’ routes and 1,800 weekly customers from its predecessor. The minimum of weekly cash receipts from each customer was 50 cents, and the minimum of weekly cash receipts of the business at the date of incorporation was $900. The drivers’ routes acquired by the petitioner had a capital value of not less than $20 for each one-dollar’s worth of weekly receipts therefrom. The value of the intangible property acquired by the petitioner in exchange for stock at April 1, 1916, was $18,000.
   OPINION.

Lansdon:

The petitioner has proved that it acquired nine drivers’ routes with 1,800 weekly patrons, each paying not less than 50 cents per week for laundry. Several witnesses, who qualified as laundry operators and as having knowledge of the cash value of “ inside laundry ” routes, testified that the fair market value of such routes is at least $20 for each dollar of weekly receipts. The Commissioner contends that the petitioner acquired no good will, and relies on the fact that, at the date of incorporation, the predecessor was not making very much money, and that there is no basis for determining the value of intangibles by applying a formula for capitalizing net earnings in excess of a fair return on tangibles used in the business.

We have repeatedly held that the capitalization of earnings in excess of some fixed return on tangibles is only one of several methods that may be used to ascertain the value of intangible assets. The lists of customers and drivers’ routes of a laundry correspond very closely to the circulation structure of a newspaper which we have held is intangible property, the value of which, when proven, should be included in the computation of statutory invested capital. Appeal of Herald-Despatch Co., 4 B. T. A. 1096.

We are of the opinion that the petitioner acquired good will in exchange for shares of its capital stock at date of incorporation of the value of $18,000, and that this amount, subject to the limitations of section 826(a) (4) of the Revenue Act of 1918, should be included in the computation of its statutory invested capital for the years 1919, 1920, and 1921. Appeal of Metropolitan Laundry Co., 2 B. T. A. 1062.

Jkidgment will be entered on 20 days’ notice, under Rule SO.


author: Trammell:

text:
    Harry S. Kaufman, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8154, 11845.
    Promulgated December 16, 1926.
    The petitioner was not a personal service corporation during the years 1919 and 1920.

      J. Robert Sherrod, Esq., and Ralph J. Schwarz, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the respondent.
   Trammell:

This is a proceeding for the redetermination of deficiencies in income and profits taxes for 1919 and 1920 in the amounts of $6,072.10 and $7,811.06, respectively, resulting from the disallowance by the Commissioner of personal service classification for each year and the inclusion in taxable income for 1919 of $333.12, representing dividends on stock owned by the petitioner.

FINDINGS OF FACT.

The petitioner is a Louisiana corporation with its principal office at New Orleans. During the years 1919 and 1920 it conducted an insurance agency dealing in all kinds of insurance except life. It acted as general and local agent for a number of insurance companies. In its capacity as general agent the petitioner had general supervision of from sixty to seventy-five agents of various insurance companies in about fifteen towns in different parts of the State. The insurance obtained by these agents was forwarded by them to the home offices through the office of the petitioner, who passed on questions of risk. The inspection of risks locally and throughout the State was done by an employee of the petitioner.

In its capacity of local agent the petitioner was engaged in securing business in New Orleans and vicinity. In 1919, in addition to certain stockholders, there were two employees and three solicitors who engaged in soliciting business. During 1920 a third employee was engaged in this phase of the work.

The petitioner’s office force consisted as a rule of about seven employees. The turnover in office help was large, as in 1919 there were a total of thirty-four persons who had been employed in the petitioner’s office at various times during the year. During 1920 this number had increased to thirty-six.

The petitioner was allowed ninety days within which to make remittance to the home offices on insurance obtained locally and by agents in different parts of the State. The agents in the various parts of the State were allowed sixty days within which to make remittance to the petitioner. Most of the local business was collected for by the end of thirty days, and where the premium was small the business was on a cash basis. On local business, where the premium was large, terms of 50 per cent at the end of thirty days and 50 per cent at the end of sixty days were often allowed. No extensions were allowed beyond sixty days when the policy was canceled if payment had not been made. Notes were never accepted for premiums. Commissions due agents and the petitioner were deducted by petitioner in making monthly remittances to the home offices. Expenses for labor, clerk hire and stenographic help were $19,925.67 for 1919, and $29,338.44 for 1920. Other expenses, not including officers’ salaries, interest, or taxes, were $8,597.28 for 1919, and $12,187.28 for 1920.

During 1920 the petitioner purchased for $45,000 an office building into which it moved. The financing of this purchase was done temporarily by bank loans, a mortgage having been issued subsequently.

Until the latter part of March, 1919, the outstanding capital stock of the petitioner was $10,000, which was owned as follows:

Per cent.
Harry S. Kaufman- 54
Otto J. Mayer_ 23
Joseph Levy- 23
100

In the latter part of March, 1919, the capital stock was increased to $25,000. For the additional stock, $15,000 was paid in cash. During the remainder of the time under consideration the stockholders’ holdings were:

Per cent.
H. S. Kaufman_52.0
Otto J. Mayer_16.8
Joseph Levy_16. 8
James E. Hassenger_ 4. 8
Stanhope H. King- 4. 8
George Hammer- 4. 8
100.0

During the years under consideration the stockholders served in the capacities indicated and drew salaries as follows:

Of the stockholders, Harry S. Kaufman, George Hammer, James E. Hassenger, and Stanhope H. King devoted their entire time to the active operation of the business. Otto J. Mayer, •who had an office in petitioner’s office, was interested in other corporations, of one of which he was president, and of another he was secretary-treasurer. While in his office he was available to the other stockholders and to the employees for conferences and advice about the business whenever they desired to consult with him. When called on in particular instances he discussed with the employees matters relating to the extension of credit and with respect to collections. If a customer was slow in paying and Mayer’s advice was asked about him, he would some times suggest that the company “go after him ” or “ go easy with him,” or words to that effect. He would some times suggest that a certain person be interviewed with the object of securing business. He occasionally advised with respect to the manner of keeping the books. He assisted in the preparation of the income-tax returns. These are illustrative of the activities performed by him in behalf of the petitioner. He from time to time gave advice as to general policies to be pursued, but he was not regularly engaged in the active conduct of the business. Joseph Levy took no part in the active conduct of the business.

For 1919 and 1920 the total gross income from insurance was $77,616.04 and $100,988.22, respectively. Gross earnings from the general agency business were $10,453.48 for 1919, and $10,998.06 for 1920.

Dividends amounting to $333.12 were received by petitioner in 1919 on stock owned by it.

The petitioner’s balance sheets for the years involved were as follows:

The accounts receivable on December 31, 1918, of $64,085.98 represented premiums due on local business of $81,646.80, and premiums due on business from outside New Orleans of $30,022.95, the remainder being composed of small amounts owed by insurance companies and loans of small amounts made to stockholders.

The accounts receivable of $99,304.93 on December 31, 1919, were made up of $57,585.43 representing premiums due on local business, $38,520.86 due on business from outside New Orleans, and $3,198.64 due from stockholders and employees on account of loans.

The $111,727.40 representing accounts receivable on December 31, 1920, consisted of $78,040.20 due on local business, $30,887.27 due on business outside of New Orleans, and $2,799.93 representing loans to stockholders, miscellaneous items, and petty cash.

The accounts payable of $53,852.86, $89,514.58, and $85,653.03, outstanding at the close of the years 1918, 1919, and 1920, respectively, represented the net amounts due the home office by the petitioner.

The item of $40,000 representing bills payable on December 31, 1920, resulted from petitioner’s temporarily financing the purchase of an office building by bank loans made during the year.

On March 21 and 22, 1919, a dividend of $14,997.67 was paid. On December 31, 1919, an amount of $12,500 was set aside from which to pay a dividend. A dividend of $12,500 was declared on December 31,1920.

The petitioner was not a personal service corporation.

Judgment will be entered on 10 days' notice, under Bule 50,


author: Littleton:

text:
    Wm. J. Robb, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7740.
    Promulgated December 16, 1926.
    A net loss sustained by petitioner in tbe year 1921 as a result of tbe liquidation of a corporation, stock in wbicb be bad purchased as an investment and to which be bad made occasional loans, was not a net loss from the operation of a trade or business regularly carried on by him, and tbe excess of the loss sustained in 1921 over bis income for that year was not a proper deduction, under tbe provisions of section 204 of tbe Revenue Act of 1921, from bis income for the calendar year 1922.

      Wm. J. Robb pro se.

      W. F. Gibbs, Esq., for tbe respondent.
    The Commissioner determined a deficiency of $907.56 for the calendar year 1922. Petitioner claims that the Commissioner erred in refusing to allow him a deduction in 1922, under the provisions of section 204 of the Revenue Act of 1921, of $4,797.57 representing a net loss sustained by him in the year 1921 as a result of the liquidation of a corporation in which he had purchased certain shares of stock and to which he had made occasional loans.
    FINDINGS OF FACT.
    Petitioner is a merchant and is regularly employed as vice president and treasurer of Judkins & McCormick Co., of New York, importers and manufacturers. In 1914 he purchased 150 shares of stock at $100 a share in the millinery concern of Francois, a Fifth Avenue shop. He rendered financial assistance, as well as other assistance in the form of business advice and time, in an attempt to make the business of Francois a profitable one between the years 1914 and 1921. During the years 1915, 1916, and 1918, he loaned the corporation $86,819.97 and received notes therefor. In 1921 the corporation known as Francois was determined to have been unsuccessful and was liquidated. Petitioner received $15,883.59 in liquidation. His total loss on the investment in stock and the loans was $35,936.38. Francois was a close corporation, 50 per cent of the stock being owned by petitioner and 50 per cent by E. L. Judkins. At the time of liquidation the creditors were paid in full and petitioner and Jud-kins suffered the entire loss. Petitioner and Judkins had received no compensation at any time in consideration of time, advice and assistance in the management of the corporation and the purchasing of merchandise. Judkins suffered a loss similar to that of petitioner, but bis income from other sources was in excess thereof and he received the full benefit of the deduction in the year 1921.
    In his income-tax return for 1921 petitioner took a loss of $35,936.38 and reported a net loss for 1921 of $4,197.57. In his income-tax return for the year 1922 petitioner deducted this net loss of $4,797.57 from gross income for that year. The Commissioner disallowed the deduction upon the ground that the amount did not “constitute an allowable deduction on your 1922 return, because the loss of $35,936.38 did not result from the operation of any trade or business regularly carried on by you.”
   OPINION.

Littleton:

Section 204 of the Revenue Act of 1921 provides that:

The term “net loss” means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business).

In the opinion of the Board the facts stipulated do not bring the petitioner within the provisions of this section. They fail to show that he was regularly engaged in carrying on a trade or business of his own. He rendered personal and financial assistance to the corporation in which he had made an investment, but the business was that of the corporation. All that he did was to make an investment in and an occasional loan to a corporation which was regularly engaged in carrying on a millinery business. In the opinion of the Board, the evidence does not warrant the conclusion that petitioner’s loss in 1921 was from the operation of a trade or business regularly carried on by him within the meaning of section 204, and the Commissioner correctly denied the deduction of $4,797.57 from 1922 income.

Judgment will he entered for the Commissioner.


text:
    Caroline W. B. Atkinson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11259.
    Promulgated December 16, 1926.

      Caroline W. B. Atkinson pro se.

      W. F. Cihhs, Esq., for the respondent.
   Littleton:

The Commissioner determined a deficiency of $136.85 for the calendar year 1922 as a result of his decision that petitioner realized a profit of $5,583.06 upon the sale of certain real property, instead of a profit of $4,233.06 as claimed by the petitioner.

FINDINGS OF FACT.

Petitioner is a resident of Scarsdale, N. Y. Prior to and on March 1, 1913, she was the owner of certain land upon which was situated a four-story residential building containing two apartments. The apartment consisting of the first and second floors was used and occupied by petitioner as her residence, and the other apartment consisting of the third and fourth floors was rented. The value of the entire property on March 1, 1913, was $20,000, of which $5,000 represented the value of the land and $15,000 the value of the building. The land enhanced in value steadily from 1913 to the date of sale of the property in 1922. Due to increased costs of building and materials, the replacement cost of the building would have exceeded the cost or March 1, 1913, value at any time between 1913 and 1922. Similar houses in the same vicinity showed constantly increasing sales prices during the period from 1913 to 1922.

In the year 1922 petitioner sold the property above mentioned for $24,233.06 and reported in her return for that year a profit of $4,233.06, being the difference between the March 1, 1913, value and the sales price.

The Commissioner determined a profit of $5,583.06, computed as follows:

Selling price-$24,233.06

Value of building at March 1, 1913_$15,000

March 1, 1913, value of 1/2 of building rented_ 7,500

Depreciation, 9 years at 2% per annum on $7,500_ 1,350.00

Total- 25, 583.06

Less: March 1, 1913, value_ 20, 000.00

Profit- 5, 583.06

Judgment will he entered for the Commissioner. Ajjpeal of Even Realty Co., 1 B. T. A. 355.


text:
    George H. Wheary, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4799.
    Promulgated December 16, 1926.

      Virgil Y. Moore, Esq., Andrew T. Smith, Esq., and John B. Simmons, Esq., for the petitioner.

      B. Toole, Esq., for the respondent.
   Littleton:

The Commissioner determined a deficiency of $12,-021.54 for the calendar year 1922. In 1922 the petitioner exchanged certain patents for $100,000 par value of the capital stock of the Wheary-Burge Trunk Co. The Commissioner held that the patents had a value on March 1, 1913, of $15,000 and that the stock received had a readily realizable market value equal to the par value thereof, and determined a taxable gain of $85,000. Petitioner claims that the stock received in exchange had no readily realizable market value at the time.

FINDINGS OF FACT.

Petitioner is a resident of Hacine, Wis. For more than thirty years he has been continuously engaged in the business of manufacturing trunks. About twenty-four years ago he was employed by the Hartman Trunk Co., of Hacine, as an expert trunk maker. Shortly thereafter he was placed in charge of the manufacture of trunks which he had designed. During the period from 1903 to 1922 petitioner was granted 130 United States patents covering both open and wardrobe trunks and various features thereof. He was the originator of the wardrobe trunk in use generally at the present time. Up to 1912 he assigned all patents obtained by him unconditionally to the Hartman Trunk Co. In that year an agreement was entered into between Wheary and the Hartman Trunk Co. whereby the latter gave Wheary a right to manufacture and sell trunks covered by patents theretofore assigned by him to it. The agreement further provided that the Hartman Trunk Co. should have the right to purchase a shop right under subsequent patents granted Wheary. At the time when the Wheary-Burge Trunk Co. was organized in 1922, as hereinafter mentioned, the Hartman Trunk Co. exercised its right under the agreement and purchased a shop right in Wheary’s patents, so that at the date of organization of the Wheary-Burge Trunk Co. the Hartman Trunk Co. possessed a right to manufacture and sell trunks under all of Wheary’s patents granted up to that time.

During the period of Wheary’s experience, and particularly during his connection with the Hartman Trunk Co., he became personally acquainted with and well known to persons engaged in dealing with trunks, as well as those engaged in the manufacture and sale of trunk hardware. A number of Wheary’s close friends in these lines urged him to sever his connection with the Hartman Trunk Co., organize a company of his own, and engage in the manufacture and sale of trunks. They believed that by reason of his knowledge and experience in the manufacture and sale of trunks he could successfully compete with other trunk manufacturers. He hesitated for some time but finally, about September 1,1922, after conferring with his friends, F. J. Greene, Milton Luce, Harry Burge, M. E. Walker, George F. Grube, and Fred McFawn, who indicated that they would invest in a corporation to be operated and managed by Wheary, he withdrew from the Hartman Trunk Co. and proceeded forthwith to organize the Wheary-Burge Trunk Co. to engage in the manufacture and sale of trunks. His contract with the Hartman Trunk Co. expired on September 8, 1922.

F. J. Greene owned the Greene Manufacturing Co., engaged in the manufacture of trunk hardware, and he contemplated selling his product to the new trunk company. Upon organization he subscribed for $50,000 par value of stock. Milton Luce owned and operated a chain of retail trunk stores and he contemplated selling the company product. Upon organization he subscribed for $30,000 par value of stock. Harry Burge was the western representative of the Hartman Trunk Co., west of Denver. He severed his connection with the Hartman Trunk Co. at the same time as Wheary, it being a part of the plan that he should become vice president of the Wheary-Burge Trunk Co., that Wheary should have full charge of the manufacture, and that Burge should have charge of sales. Burge was to receive a salary of $500 a month during the remainder of 1922 and $10,000 for 1923. Upon organization Burge subscribed for $50,000 par value of stock. M. E. Walker had been Wheary’s personal attorney for fifteen years. He organized the corporation and became its attorney. He subscribed for $20,000 par value of stock. George F. Grube had formerly been connected with the Hartman Trunk Co., but some time prior to 1918 had withdrawn and organized a company of his own and later sold his business in 1918. Upon organization he subscribed for $50,000 par value of stock and became active in the affairs of the corporation as treasurer. His salary was $500 a month during the remainder of 1922 and $10,000 for 1923. Fred McFawn was engaged in the manufacture and sale of trunk hardware and parts at. New London, Conn. He subscribed for $15,000 par value of stock with the expectation of selling hardware and trunk supplies to the company. He paid for only $7,500 par value of stock for which he had subscribed.

Wheary’s association with all of these men had been very close for a period of twenty years. They had strong faith in his ability successfully to operate and manage the company and in his inventive ability, and it was due entirely to this fact and the fact that Wheary agreed to take charge of the business that they were willing to invest in the new enterprise. The whole organization was built around Wheary. The subscribers for its stock were investing in the business and inventive ability of Wheary. Wheary agreed to devote his entire time, energy, and inventive ability to the company and tq work exclusively for its best interests,

Upon organization in September, 1922, Wheary transferred to the corporation all his right, title and interest in and to all of the patents which had theretofore been granted to him, and agreed to assign to the corporation any further patents which might be granted to him during such time as he might remain with the corporation, for which the corporation issued to him $100,000 par value of its stock. At the time the stock was issued the company possessed in the way of a plant only a lease of three upper floors of a building in Racine. It had no other property or equipment for manufacturing purposes. It had no established trade. The investments in the corporation by the individuals mentioned were purely speculative. No attempt was made to sell the company’s stock to the public generally. Efforts were made at the time of organization to induce certain wealthy business men in Racine, not connected in any way with the trunk business, to invest in the corporation, and although they knew Wheary and had confidence in his ability they declined to invest any amount in the stock of the corporation for the reason that they considered the investment entirely too speculative and for the reason that, if Wheary should die or withdraw from the corporation, they would in all probability lose their investment. They felt also, that the competition which the company would have to meet and overcome was such that the purchase of its stock was not, for this reason,, a good investment.

The Wheary-Burge Trunk Co. began manufacturing operations in the latter part of December, 1922. No dividends have ever been paid by the corporation upon its stock.

Soon after the company began operations, McEawn, not having received the amount of business he had expected from the new company, began to make an effort to sell his stock. He endeavored for a year to do so without finding a purchaser at any price. Finally Greene, from whom the new company had purchased practically all of its hardware and supplies, took over McFawn’s stock at less than par in payment of a portion of McFawn’s indebtedness to him. Soon after incorporation Burge became ill and endeavored to sell his stock but could find no purchaser. His illness was partially due to worry over his investment in the corporation and the fact that he might lose it. Finally, Wheary, Luce, Greene, and Grube, at whose suggestion Burge had subscribed for the stock, feeling that if they should take over Burge’s stock this would aid his recovery, gave Burge their promissory notes totaling the amount which Burge had paid for the stock and had the same transferred in their names upon the books of the company.

The Commissioner held that the patents transferred to the corporation had a value ox¡l March 1, 1913, of $15,000 and that the 1,000 shares of stock, par value of $100 a share, received by Wheary in 1922 in exchange therefor had a readily realizable market value at the time of exchange within the meaning of section 202 (c) of the Revenue Act of 1921 of $100,000, determined a taxable gain to Wheary of $85,000, and computed a deficiency of $12,021.54.

The 1,000 shares of capital stock of the Wheary-Burge Trunk Co. received by Wheary in exchange for his patents had no readily realizable market value at the date of exchange.

Judgment will be entered for the ‘petitioner upon the issue raised on 15 days’ notice, v/nder Bule SO.


author: Korner, Chairman:

text:
    American Ironing Machine Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 16048.
    Promulgated December 17, 1926.
    An appeal does not lie to this Board from the rejection of a claim filed for the abatement of taxes reported on the tax return of the petitioner. Estate of Ballot, 3 B. T. A. 583.

      George B. Jaclcson, Esg., for the petitioner.

      G. H. Gurl, Esg., for the respondent.
    This proceeding came on for hearing on the motion of the respondent to dismiss on the ground that the Board is without jurisdiction in the premises. The taxes in controversy are income and profits taxes for the calendar year 1920 in the amount of $26,000.
   opinion.

Korner, Chairman:

Petitioner is a corporation with its principal office in Chicago, Ill. On March 11, 1921, it filed its return of income for the calendar year 1920, pursuant to the Revenue Act of 1918. On such return it reported income and profits taxes in the amount of $141,549.54. At or about the time of filing this tax return, the petitioner paid to the collector the first installment of the tax reported. This payment was in the amount of $35,387.38, and left a balance unpaid of the tax reported in its return of $106,162.16.

The Commissioner assessed the tax of $141,549.54, as shown by the petitioner’s return, on the March, 1921, assessment list. The list was signed by the Acting Commissioner on May 27, 1921. On July 27, 1922, an amended assessment list, covering the March, 1921, assessments, was signed by the Commissioner. The amendment to the assessment list thus made is not material to the issue here.

Thereafter, the petitioner discovered that it had made errors to its detriment in the computation and report of its income for 1920 and, accordingly, on April 14, 1923, filed with the Commissioner a claim in abatement in the amount of $105,826.26. This claim in abatement covered approximately the three unpaid quarterly installments of the 1920 tax reported by it. Thereafter, on November 5, 1924, the petitioner filed a so-called “Amended Return,” in which it set up a recomputation of tax liability alleged by it to be a correct report of its tax liability for the calendar year 1920. The amount of tax shown therein was $78,810.81.

The Commissioner caused an examination to be made of the matter under consideration and the r„eport of such examination recommended that the tax reported and assessed, as above set out, should be abated by the amount of $23,351.37. After certain hearings and negotiations in the premises,' the Commissioner allowed the claim in abatement to the amount of $24,467.74 and rejected it in the amount of $81,358.52. He notified the petitioner of his action in respect of its claim in abatement, by letter dated April 27, 1926.

The petitioner filed a petition with this Board on May 17, 1926. On June 29, 1926, the Commissioner filed a motion to dismiss on the ground that the tax in question was duly assessed in 1921 on the return, and in the amount shown in such return by the petitioner, and that the Commissioner has not, at any time since, determined a deficiency in respect of the petitioner’s tax for the year 1920; but that the only action taken by him has been to abate, at the request of the petitioner, a portion of the tax reported by it on its return. The Commissioner, accordingly, contends that there has been no determination of a deficiency in tax, and that he has not at any time notified the petitioner of a deficiency, so as to give the petitioner a right of appeal to this Board.

In this position of the Commissioner we concur. The facts set forth herein are on all fours with those appearing in Estate of Ballot, 3 B. T. A. 583, and the decision there is controlling in the instant proceeding.

The Board is without jurisdiction and the appeal must be dismissed for that reason.

So ordered.


text:
    Vail Blydenburgh, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9921.
    Promulgated December 17, 1926.

      Horace N. Taylor, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
   Littleton:

The Commissioner determined a deficiency of $119.31 for the calendar year 1923, and the petitioner contests the correctness of this deficiency in so far as it results from the disallowance as a deduction of $1,015 contributed by him to the Smithtown Village Green Corporation, organized and operated exclusively for charitable, educational and recreational purposes. The Commissioner held that this corporation did not come within the purview of section 214 (a) (11) of the Eevenue Act of 1921.

BINDINGS OB BACT.

Petitioner is a resident of New York City, N. Y. In 1923 he donated the sum of $1,015 to the Smithtown Village Green Corporation, a corporation organized in October, 1923, by petitioner and others under article T of the General Municipal Law of the State of New York, which provides as follows:

§ 140. Trusts for public parles and, libraries. It shall be lawful to grant and devise real estate, and to give and bequeath personal property to trustees and their successors in trust, for the purpose of creating, continuing and maintaining, according to the terms, conditions- and provisions of such grant, gift, devise or bequest, one or more public parks, or a public library, or for the purpose of aiding and instructing children, or for any one or more of such purposes, in any city, village or town of this state. The number of such trustees shall not be less than three nor more than nine.
§ 141. Trustees a corporation. Whenever any grant, gift, devise or bequest shall have been made, under the provisions of this article, such trustees shall thereupon become and be a body politic and corporate with the name which shall have been specified by the donor in making the donation, and with the number of trustees, within the foregoing limits, named by the donor; and such corporation shall have full power to take and hold all property which shall have been and also which shall thereafter be granted, given, devised or bequeathed to it as aforesaid for said uses and purposes, and shall possess the powers and be subject to the provisions and restrictions contained in general corporation law. If no name shall have been specified by the donor as aforesaid, the name of the corporation shall be such as the said trustees shall adopt, certify and file in the county clerk’s office of the county in which the interested city, village or town is located.
§ 142. Eligibility of trustees. In case of the death of a trustee or of his resignation,' removal from office, or inability to discharge the duties of his office, his place shall be deemed to be vacant, and may be filled by the remaining trustees; and, in default of their so making an appointment within three months, the appointment to fill the vacancy shall be made by the supreme court, on the petition of any inhabitant of the interested city, village or town, and after due notice to the other trustees and to the mayor of the city, president of the village or supervisor of the town. Said trustees shall be subject to removal by said court for malfeasance or misfeasance in office, upon such notice and after trial in such manner as said court shall direct.
§ 143. Management and appropriation of property. Trustees created under' the provisions of this article shall have the custody and management of all the property of such corporation, and shall appropriate the same, so far as the terms, provisions and conditions of the donations will permit, for the purpose of aiding and instructing children, or for providing suitable grounds for such a public park or parks and properly preparing, beautifying, embellishing and keeping up and maintaining the same, or for furnishing and supplying such library with a suitable and proper edifice, rooms, furniture, books, maps, magazines and whatever may be necessary to make, keep up and maintain a good and complete library, or for one or more of such purposes, and paying the expenses of the trust. Demising lands donated to the corporation and investing and keeping money invested at interest, and using the rents and interest therefrom for aiding and instructing children or for park purposes or library purposes, shall be deemed to be an appropriation of such property for said purpose.
§ 144. Parles and libraries to be free. All parks and libraries existing under this article shall be free and open to the public for use and enjoyment, subject only to such reasonable rules and regulations as the trustees from time to time shall adopt and promulgate.
§ 145. Subject to visitation of supreme court. All corporations existing under this article, together with their books and vouchers, shall be subject to the visitation and inspection of the justices of the supreme court, or of any person or persons who shall be appointed by the supreme court for that purpose; and it shall be the duty of the trustees or a majority of them, in the month of December in each year, to make and file in the office of the county clerk of the county in which the interested city, village or town is situate, a certificate under their hands, stating the names of the trustees and officers of such corporation, with an inventory of the property, effects and liabilities thereof, with an affidavit of the truth of such inventory and certificate. Said trustees shall be entitled to such compensation as said court shall fix. Said court shall also have power to control the discretion of said trustees in determining what property may be demised and for how long; also how much money may be invested and kept invested on interest to produce an income for the purpose of aiding and instructing children or to keep up and maintain the parks or libraries, or either of such purposes; and also in a summary way to determine the reasonableness of any rules and regulations, upon complaint of any inhabitant of the interested city, village or town, and upon notice to said trustees.

Certain real and personal property situated in the Village of Smithtown Branch, Town of Smithtown, Suffolk County, New York, was donated by the petitioner and others, as donors, to the petitioner and other residents of the Town of Smithtown, as trustees, under a certain indenture in October, 1923, the said trustees to have and to hold the said real estate and personal property to themselves, their successors and assigns forever, in trust exclusively for charitable, educational and recreational purposes as set forth in the said indenture, which provided:

FIRST: Such Trustees and their successors shall be a corporation under the names of Smithtown Village Green Corporation, and they shall take and hold the said real and personal property as a corporation under and pursuant to Article 7 of the “General Municipal Law” aforesaid, for the charitable, educational and recreational purposes hereinafter set forth.

The indenture further provided:

Fourth : The purposes of this trust and of the said corporation shall be to hold and manage the real and personal property hereby conveyed and any other real and personal property acquired by said corporation exclusively for charitable, educational and recreational purposes in the form of a park or playground for the use and benefit of the public and especially of the school children of the said Town of Smithtown, and to prepare, beautify, embellish, keep up and maintain the same for said charitable, educational and recreational purposes. And the said Board is authorized to provide occasional music for the pleasure and instruction of the people; to allow the use of the park for community pageants, celebrations, fetes, memorial services, public meetings and other gatherings and to contribute to the expense thereof in its discretion, to erect such buildings thereon as may conduce to the greater enjoyment or beautifying of the park, and to erect and maintain a museum; to provide benches, electric lighting, band stands, swings, refreshment booths, athletic apparatus, games and general furniture and paraphernalia in any [sic] conducive, in its judgment, 'to the health, enjoyment and instruction of the school children and of the public and of the residents of Smithtown.
The Board may, for educational purposes, permit or authorize the erection of an historical museum or other educational buildings on said premises, and it may permit or authorize the erection of monuments or any edifices or structures of any character suitable and appropriate for the commemoration of the memory of residents of Smithtown; provided, however, that they, or any of them, shall be erected pursuant to plans to be approved by the Board, and provided the Board shall retain control of everything connected therewith.
The park shall be called “ Smithtown Village Green.”
Fifth : Any money, securities or personal property of any kind now or hereafter assigned to said Trustees or their successors shall be held by them and by said corporation as a trust fund for the charitable, educational and recreational purposes herein mentioned, with full power to sell such securities and other personal property, and to invest and re-invest the proceeds in any investments that other trustees are permitted to invest in by the Laws of the State of New York.
The said Board is, however, expressly authorized to continue to hold any investments which shall come into its hands for such time as in its judgment it shall seem [sic] for the best interest of the Corporation.
The Board shall collect income arising from the investments and apply it to the purposes enumerated in this deed.
The corporation shall have power to accept other gifts of lands, money, securities or personal property, provided the same be not subject to conditions inconsistent with the provisions of this deed. The power of acceptance or rejection of a gift offered to the Corporation shall be absolute with the Board.
Sixth. The Board and the Corporation shall have all the powers enjoyed by other eleemosynary corporations of a similar class, and necessary or convenient to carry out the purposes for which this trust is established, subject to the express limitations herein contained and to the laws applicable thereto.
Such purposes shall be liberally construed, it being the intention hereof that said park and fund shall be so managed as to contribute, to the greatest extent possible, to the health, education and recreation of the people of Smithtown.
No trustee shall be held responsible for the acts of his cotrustees, in which he shall not have affirmatively participated; nor shall said trustees be held liable for loss through unfortunate investments, provided they exercise their best judgment.
The Board shall organize itself as it shall deem convenient, elect its own officers, and make its by-laws. The custodian, or custodians, of the corporate funds and securities shall give a bond or bonds in such amount as the Board may require. He or they shall collect all monies due the corporation, and his or either of their receipts shall be a sufficient voucher therefor.
The Board shall have authority to employ such agents, servants, and employees as may be necessary, including a secretary and treasurer and a manager, superintendent, or engineer, legal counsel whenever necessary, and shall pay them such compensation as may be proper, subject to the provisions of the Second Article hereof.
It shall make rules and regulations governing the use of the Park, and may exclude any persons from the park for breach of the rules, or for any conduct deemed by it improper; and it may employ one or more peace officers whenever necessary.
While the intention of this deed is that the park shall be free to all, nothing herein contained shall restrain the Board from charging moderate fees of admission to such concerts, pageants, theatricals, or other amusements or spectacles as the regular income shall be insufficient to pay for, as to which said Board shall be the judge. It is, however, the intention hereof that the park and all the activities carried on therein shall be popular to the greatest degree possible, and no function or spectacles of an exclusive nature shall be held in said park.
The Board in its discretion may take out any policies of insurance and pay the premiums thereon.
The recital of powers herein contained shall not operate to exclude others, not expressly withheld under the rule ejusdem generis, or otherwise.

Further provision was made for the sale of any or all of the said real property of the Smithtown Village Green Corporation in the event that the board of trustees should at any future time determine that the best interests of the trust and of the people of Smithtown should thereby be served, and for the application of the proceeds of the sale to the purchase of other real property to be devoted to the same purposes, or, in the event such other purchase be impracticable, to invest the proceeds as provided with regard to* the trust fund specified in article 5 of the indenture, and to apply the income therefrom to the general educational, charitable and recreational purposes of the corporation.

Said Smithtown Village Green Corporation created and is continuing and maintaining a public park for the benefit of the public in the manner and for the purposes set forth in the said indenture of October, 1928.

Judgment will be entered for the - 'petitioner on 15- days' notice, wnder Bule 50.


text:
    Pan-American Bank & Trust Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2070.
    Promulgated December 17, 1926.
    The petitioner held on the evidence not to have been a dealer in securities during 1918, and was not, therefore, entitled to inventory unsold securities at the market value.

      Eugene J. McGvoney, Esg., Isom J. GmLlory, Esq., and E. Barrett Prettyman, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1918 in the amount of $1,154.05. The principal question involved is whether the petitioner bank was a dealer in securities in 1918, and, if so, whether it suffered a loss in the decline of the value of its securities.
    FINDINGS OF FACT.
    During the year 1918 the petitioner was engaged in the general banking business at New Orleans, La., under the name of The Metropolitan Bank. During the year 1919 the name was changed to Pan-American Bank & Trust Co.
    In addition to its general banking business, the petitioner bought and held corporate stocks and bonds and municipal bonds as investments. The petitioner also sold corporate and municipal bonds to its depositors. It also bought Liberty bonds and other securities of the Federal Government and sold them to its clients from patriotic motives. Some of the Liberty bonds were sold for cash, and some were sold on a subscription or installment basis. During 1918 the petitioner concentrated its selling efforts on Liberty bonds. The petitioner’s sales of Liberty bonds were:

      The petitioner’s sales of corporate and municipal bonds to depositors were:
    1917.
    June 26. $8, 000 New Orleans Ry. & Elec. Light bonds- $6, 568. 00
    June 26. 7, 000 Southern Pacific 5% bonds_ 7, 105. 00
    July 2_. 1, 000 Public Improvement bonds- 958. 67
    16, 000 14, 631. 67
    1918.
    April and May. 35, 000 La Fourche Levee District bonds_ 35, 000. 00
    July 8_ 5, 000 La Fourche Levee District bonds_ 5, 000. 00
    July 9_10,000 La Fourche Levee District bonds_ 10, 000. 00
    July 10_15, 000 La Fourche Levee District bonds_ 15, 000. 00
    November 11__ 1, 000 Audobin Bldg, bond_ _ 1, 000. 00
    66, 000 66, 000. 00
    The sales made in 1917 were to two depositors of the bank. Those made on June 26, 1917, were made to the same person. The sales in 1918 were also made to two depositors. The sales made in April, May and July, 1918, were to the same depositor. The parties to whom sales were made in 1918 were not the same as those to whom sales were made in 1917. The balance sheets filed with petitioner’s 1918 return show the following securities at the end of the years 1917 and 1918:

    The bank followed the consistent practice of inventorying its securities every six months. The board of directors, regularly in May and November of each year, appointed a committee to investigate the affairs of the bank, and this committee regularly included in its activities an examination of the securities carried by the bank and determined the then market value thereof. The values at which securities were carried on the books were adjusted to conform to the market values as determined by the committee.
    The market values and reductions recommended by the committee at various dates were:

      May 18, 1916.

    152,000 N. O. Kailway & Light Co. bonds, at- $86. 00
    50,000 Little Koek Railway & Light Co. bonds, at_ 104. 00
    6,300 Arcadia Parish 5% bonds, at_ 100.00
    Iberville Parish, balance_ 174.37
    2.500 Buras Levee District 6% bonds, at- 100. 00
    12,000 Nashville Railway & Light Co. bonds 5%_ 103. 00
    1.500 Southern Pine Co. 6% bonds, at_ 100. 00
    10,300 Smoke Bend Drainage District 5% bonds_ 100. 00
    464 shares Nashville Railway & Light Co_ 78. 00
    1,347shares River Front Realty Co_ 2. 50
    1 share New Orleans Stock Exchange_ 1, 500.00

      Deo. 5, 1916.

    152,000 N. O. Railway & Light Co. bonds, 85_$129,200.00
    50,000 Little Rock Railway & Light Co., 104- 52,000. 00
    15,000 Joubert & Goslin M. & E. Co., 100_ 15, 000. 00
    17,000 Nashville Railway & Light Co., 102_ 17,340. 00
    500 N. C. Land Company bonds, 100_ 500.00
    10,000 Smoke Bend Drainage District, 100_ 10, 000. 00
    4,200 Arcadia Parish School Bd. 5% bds., 100_ 4,200.00
    2.500 Buras Levee District bonds, 100_ 2, 500. 00
    1.500 Southern Pine Co. bonds, 100_ 1, 500.00
    Balance Iberville Parish bonds___ 174.37
    464 shares Nashville Railway & Lt. Co. Preferred, 75_ 84, 800. 00
    1,347shares River Front Realty Co., 2.50_ 3,367. 50
    1 share New Orleans Stock Exchange_ 2, 000. 00
    Total- 272, 581. 87

      May SI, 1917.

    No reduction recommended.

      Nov. SO, 1917.

    $160,000 N. O. Rway. & Lt. Co. 4½ bonds, to 76.00.
    50,000 Little Rock Ry. & Lt. Co. 5% bonds, to par.
    17,000 Nashville Ry. & Lt. Co. 5% bonds, to 97.00.
    464 shares, Nashville Rway. & Lt. Co. Preferred stock, to 70.00.
    1,347shares River Front Realty Co. stock, to nothing.

      May SO, 1918.

      * * * That the bonds of the New Orleans Railway & Light Company owned by the bank be reduced in value as carried on the books to 70 cents.

      Nov. 27, 1918.

    $160,000 N. O. Ry. & L. Co. bonds, at 70, reduced 5, 65-$8, 000. 00
    50,000 L. R. Ry. & L. Co. bonds, at 100, reduced 5, 95_ 2, 500.00
    17,000 Nash. Ry. & Lt. Co. bonds, at 97, reduced 2, 95- 310. 00
    The reduction made June 12, 1918, as a result of the committee’s recommendations of May 30, amounted to $9,600. The reduction made December 31, 1918, as a result of the recommendations of November 27, amounted to $10,840. The total reductions made during the year amounted to $20,440. No claim for this amount was made in the income-tax return filed by the petitioner, but, in an affidavit filed with the respondent by the petitioner in the course of the audit of the return, the amount iyas claimed as a loss. The respondent refused to allow the petitioner’s contention.
    The bid and asked prices on December 31,1918, on the New Orleans Stock Exchange of the securities thus reduced were:

    The nearest available dates to December 31, 1918, on which sales of these bonds were made on the New Orleans Exchange were: Little Eock Electric 5’s on November 12, 1918, at 85½; New Orleans Eailway and Light 4½⅛ on December 31, 1918, at 57½; Nashville Eailway and Light 5’s on December 12, 1918, at 90.
    The petitioner’s ledger contained a “ Stocks and Bonds ” account. In this account were recorded petitioner’s dealings in stocks and bonds held as investments, those purchased for resale, those which petitioner had borrowed, and those which it had held previously as collateral for loans and on which it had foreclosed. Until 1918 a portion of the transactions in Liberty bonds were recorded in this account, but during that year separate accounts were kept for the different issues of Liberty bonds.
    The ledger of the petitioner contained an “ Exchange ” account to which was carried any commissions or profits received by the petitioner from the sale of stocks and bonds. To this account was also carried exchange on drafts and on collections. The “ Exchange ” account was carried into the profit and loss account.
    The vice president of the petitioner bank owned a share of stock in the New Orleans Stock Exchange. The ownership of the share of stock vested no trading rights in the owner, nor did it make him a member of the exchange.

      In Schedule A (3) attached to the petitioner’s income-tax return, its income “From Discounts” is shown as $95,551.94, and “From Exchange ” as $13,059.39.
    The correct amount of tax for 1917 to be prorated for the purpose of adjusting the 1918 invested capital is $7,619.94.
    Invested capital for 1918 was understated by $22,650, representing a loss charged off on the books of the petitioner in 1917 on account of a decline in its inventory of securities.
   OPINION.

Trammell:

The question presented is whether the petitioner is entitled to a deduction on account of the shrinkage in value of securities which it had on hand at the end of the taxable year.

It claims a deduction upon the ground that it was a dealer in securities and that it comes within the scope of article 1585, Regulations 45, as amended by T, D. 3296, C. B. 1-1, p. 40, which provides as follows:

A dealer in securities, who in his books of account regularly inventories unsold securities on hand either (a) at cost or (6) at cost or market, whichever is lower, or (c) at market value, may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purpose of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation, and not in the course of an established business, and officers of corporations and members of partnerships, who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule. * * *

The above article of the Regulations is based upon section 203 of the Revenue Act of 1918, which provides as follows:

That whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

The above article, in our opinion, in so far as it is pertinent to the issue now before us, is consistent with and reasonably adapted to carrying out the provisions of the statute. A dealer in securities, who has securities on hand at the end of the year, is, in our opinion, as much entitled to inventory them, and an inventory thereof is just as necessary clearly to determine the income, as is a dealer in merchandise, strictly speaking. To such a dealer securities are his merchandise. The question now is whether the petitioner was a dealer in securities.

The petitioner alleged in its petition that it operated a stock and bond department, but at the hearing no testimony was introduced on this point.

It was also alleged in the petition that petitioner owned a share of stock in the New Orleans Stock Exchange, but the testimony was to the effect that the share of stock was owned by the vice president, who was not a member of the New Orleans Stock Exchange, and that the ownership vested no trading privileges in the owner.

In support of its contention that it was a dealer in securities, the petitioner showed that during the year 1917 it made three sales of corporate and municipal bonds to its depositors, two of which sales were made on the same date to the same individual. Six days later the other sale was made. During 1918 the petitioner made sales of corporate and municipal bonds to two of its depositors. The sales to one of them were made in the months of April, May and July, while the other sale was made in the month of November to another depositor. The testimony does not show whether the bank received a commission on these sales, or what profit, if any, it made on them. Neither is it shown that these transactions were not made by the bank as an accommodation to its depositors.

During 1917 and 1918 the petitioner, in common with other banks of the country and with dealers in securities, out of patriotic motives handled a large volume of Liberty bonds. Such patriotic services precluded charging or allowing commissions on these transactions. These services do not, in our opinion, indicate that the petitioner was a dealer in such securities.

Petitioner’s holdings and dealings in corporate bonds and stocks and municipal bonds were recorded in the “Stocks and Bonds” account. Petitioner has made no attempt to separate its securities into classes such as those purchased for investment and those purchased and held for resale.

In Schedule A (3) accompanying petitioner’s return, its income “ From Exchange ” is shown as $13,059.39, but since the exchange on drafts and exchange on collections were also carried to petitioner’s “Exchange” account, we have no way of knowing what part, if any, of the $13,059.39 represents commissions or profits on transactions in securities bought for sale.

From tbe evidence we are of tbe opinion that tbe infrequent and isolated transactions in corporate and municipal bonds with tbe depositors of petitioner are not sufficient to constitute petitioner a dealer in securities.

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


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    Irwin N. Nelms, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6419.
    Promulgated December 17, 1926.
    The evidence is insufficient to show that the Commissioner’s determination of the value of stock acquired by gift in 1920 was erroneous.

      F. G. Masguelette, G. P. A., for the petitioner.

      F. 0. Graves, Fsg., for tbe respondent.
    The Commissioner determined a deficiency of $391.20 for the calendar year 1922. He determined that 216 shares of stock, when acquired by petitioner by gift in 1920, had a value of $86.38 and that a taxable profit was realized in 1922 when these shares were sold for $145 a share. Petitioner claims that'the 216 shares had a value of at least $150 a share at the time acquired in 1920.
    FINDINGS OF FACT.
    Petitioner is a resident of Houston, Tex. During the years 1918 to 1920 he became the owner of 360 shares of capital stock of the Nelms-Kehoe Dock Co. of Houston, as follows:

    The 216 shares last mentioned were acquired by petitioner in July, 1920, as a gift from his father.
    In October, 1922, the properties of the Nelms-Kehoe Dock Co. were sold to the Shippers Compress Co. for $145,000, which amount equals $145 a share for the outstanding stock consisting of 1,000 shares. The petitioner, as the owner of 360 shares, received $52,200. He reported a profit of $12,005 on the sale of this stock and the Commissioner held that the 216 shares acquired by gift in July, 1920, had a value at that time of $86.38 and increased the profit shown by the petitioner in the amount of $8,686.92.

      The Commissioner’s determination of value was arrived at by capitalizing the average net earnings of $6,911.75 for a period of five years prior to the date of acquisition of the 216 shares of stock at 8 per cent.
   OPINION.

Littleton:

The Board does not feel justified from the testimony of the three witnesses submitted by depositions in making a finding that the 216 shares of stock of the Nelms-Kehoe Dock Co. had a value in 1920 in excess of that determined by the Commissioner. The first witness based his opinion of a value of $150,000 for the properties of the corporation in 1920 upon statements made to him by someone else at some time not disclosed by the record. There is nothing to show that this witness was familiar with the property or the business in 1920 and he had never had any experience in dealing with such properties.

The next witness was a cotton broker. He stated that he was familiar with the property of the Nelms-Kehoe Dock Co. “ just off hand ” and gave it as his opinion that the value of the properties of that company was $150,000 in 1920.

The last witness, who was manager of the Shippers Compress Co., purchaser of the properties and the business of the Nelms-Kehoe Dock Co., stated that in his opinion the value of the properties in 1920 was equal to their value in 1922, plus the amount of two years’ depreciation, and estimated that the value in 1920 was in excess of $150,000. The evidence does not show that this witness was familiar with the business and properties of the corporation in 1920.

We have no evidence concerning the assets or business of the Nelms-Kehoe Dock Co. at that date. There is some reference in the testimony of the witnesses to certain machinery and a lease which, in 1920, had four years to run, with the privilege of renewal for another period of ten years.

Looking to the price at which the stock of Nelms-Kehoe Dock Co. sold in 1918 and 1919 before the capital stock was increased from 500 shares to 1,000 shares, we find that the price paid for the stock in 1918 was equivalent to $53.50 a share, and the price paid in 1919 was equivalent to $75 a share after the stock dividend had been declared.

The familiarity of the witnesses with the property and business of the Nelms-Kehoe Dock Co. in the year 1920, as disclosed by the evidence, was so slight that their opinions of value are not entitled to sufficient weight to overcome the Commissioner’s determination of value of the 216 shares of stock.

Judgment will ~be entered for the Commissioner.


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    Perkins Sash & Door Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9910.
    Promulgated December 17, 1926.
    Petitioner has not shown that it was entitled to a greater invested capital than that determined by the Commissioner, or that the Commissioner’s determination in respect oí the allowance for exhaustion, wear and tear of the property was erroneous; nor has it shown that the Commissioner’s adjustment of the closing inventories for the fiscal years ending July 31, 1920 and 1921, was erroneous.

      G. S. Alexander, Esq., for the petitioner.

      Henry Brnenel, Esq., for the respondent.
    The Commissioner determined deficiencies in income and profits taxes in the amounts of $1,026.44 and $784.09, respectively, for the fiscal years ending July 31, 1920 and 1921. The petitioner claims that the Commissioner erred in his determination (1) in respect of the value of the property, alleged to have been paid in to the corporation, for invested capital and depreciation purposes, (2) in reducing the inventories of July 31, 1920 and 1921, and (3) in reducing surplus in each of the years on account of prior year’s tax.
    FINDINGS OF FACT.
    The petitioner is a Georgia corporation with principal office at Augusta. At some date prior to July, 1913, the National Bank of Augusta had loaned approximately $41,272.05 to the Woodward Manufacturing Co., for which that company gave the bank mortgages on certain of its properties and equipment. The Woodward Company failed and certain of its properties were taken over by the bank. Thereafter, the National Bank of Augusta was liquidated by the officers of the Citizens & Southern Bank of Augusta. During this liquidation the National Bank of Augusta, through its liquidating agents, sold certain miscellaneous property of the Woodward Manufacturing Co. for $8,408.15 and, in July, 1913, they sold the plant of the Woodward Manufacturing Co. to H. R. Perkins and H. C. Maxwell for $15,000; $2,500 being paid in cash, and interest-bearing promissory notes of Perkins and Maxwell were given for the balance, payable $2,500 annually. The National Bank of Augusta gave Perkins and Maxwell a bond for title, in which it agreed to transfer title when the deferred payments had been made.
    At the end of each of the fiscal years involved a physical inventory was taken by petitioner of all of its materials and supplies on hand, including the finished products.

      It -was petitioner’s established custom to price the inventory at selling prices and to reduce the total thereof by 33½ per cent to bring it to cost. For the fiscal year ending July 31, 1920, the inventory of moldings and sundry manufactured articles priced at selling prices amounted to $3,929.90, and before this amount was added to the total of the inventory of all other materials, supplies, and the manufactured product, it was reduced by 33½ per cent, or $1,309.91, making the total of this portion of the inventory $2,619.93.
    The detailed and itemized inventory of all departments was then totaled and summarized, and adjusted to arrive at the total inventory for the year as follows:
    Sheets 1 to 3. Frame Room_$1,242.15
    Sheets 4 to 7. Glass & Glazing Dept_ 2, 543.20
    Sheets 8 to 14. Sash Door & Blind Dept- 4,158. 85
    Sheets 15 to 17 Sundries & Moldings (reduced from $3,927.90 as above stated)- 2,619.93
    Sheets 18 to 23. Lumber and Supplies_17,48(1.08
    Selling Values_ 28, 053.21
    Less: Blythe School Building charged on books — nat made_$1, 000. 00
    33⅛ per cent_ 9, 693. 34
    - 10, 693. 34
    Total closing inventory_!_ 17, 359.87
    The Commissioner adjusted this inventory by eliminating the reduction of $1,309.97 in the inventory price of moldings and sundries, allowing a reduction of 33½ per cent on the total inventory thus determined, after deducting therefrom the Blythe School Building item of $1,000 resulting in a closing inventory for the year of $18,908.79, an increase of the closing inventory as shown by the petitioner of $1,548.92, which it claims was erroneous.
    The petitioner followed the same method in pricing its inventory at July 31, 1921. In this year, before totaling the inventory of all departments and reducing it by 33⅛ per cent to arrive at the cost, the inventory price of lumber, sash weights, feed and supplies, amounting to $12,176.91, was reduced 25 per cent, or $3,044.23, resulting in an inventory value for these departments of $9,132.68. The total selling price of the inventory thus priced amounted to $21,492.16, and this amount was then further reduced by 83½ per cent, or $7,164.05 — the “ difference between cost and selling values ” resulting in a closing inventory for the fiscal year ending July 31, 1920, of $14,328.11. The Commissioner adjusted the inventory by eliminating the arbitrary reduction of $3,044.23, being 25 per cent of the item of $12,176.91 above mentioned, and arrived at a total inventory at a selling value of $24,536.39, which was reduced by 33½ per cent, or $8,178.79, resulting in a closing inventory for the year of $16,857.60, an increase in the inventory as shown by the petitioner of $2,029.49, which it claims was erroneous.
    There was a marked decline in the lumber market shortly prior to July, 1920.
   OPINION.

Littleton:

The Board is unable from the evidence submitted to make any modification in the Commissioner’s determination in respect of the invested capital and his allowance for exhaustion, wear and tear of the property owned by the petitioner. The record does not disclose what action the Commissioner took in this regard, nor does it show what property was paid in to the corporation for stock or otherwise, and it contains no information from which the Board can make a finding of the value of any property for invested capital or depreciation purposes. Considerable testimony was taken by depositions, apparently in an effort to show that certain property purchased by Perkins and Maxwell from the National Bank of Augusta at $15,000 had a value in excess of that amount, but there is no evidence to show that this property was acquired by the petitioner for stock or otherwise, or that it was owned by it during the taxable year. We have carefully considered the evidence submitted in support of the claim that the property purchased by Perkins and Maxwell had a cash value of $30,000, and even if we could find that this property was paid in to the petitioner by them we are not convinced from the evidence that its actual cash value was in excess of $15,000.

The Board is unable from the evidence submitted to find that the Commissioner erred in his determination of petitioner’s inventories for the taxable years. The Commissioner has approved petitioner’s method of pricing its inventories, but has declined to allow the arbitrary reductions of the amounts at which certain portions of the inventories were priced by 33½ per cent in the year ending July 31, 1920, and 25 per cent in the year ending July 31, 1921. These inventories were priced by H. C. Maxwell, now deceased. Another official of the company, who listed practically the entire inventory in each of the years and who conferred with Maxwell during the time that he was pricing the same, testified that the reductions made by Maxwell and disallowed by the Commissioner were due to the decline in market. This evidence, however, does not enable the Board to determine that the Commissioner erred in his adjustment of the inventories. We fail to see why the prices placed upon each individual article when pricing the inventories did not represent the correct price according to the method followed, and if they did there was no justification in the arbitrary reductions of 33½ per cent in 1920 and 25 per cent in 1921 of a portion of the inventories. It would appear from the record that, when the entire inventories had been priced, item by item, and totaled, Maxwell concluded that the total figure was too high and arbitrarily made the reductions mentioned before the 33⅜ per cent from the total inventory was taken. Upon the evidence we approve the Commissioner’s adjustment.

The action of the Commissioner in reducing the surplus for each of the years on account of the tax for the preceding years is approved. Appeal of Russel Wheel & Foundry Co., 3 B. T. A. 1168.

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


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    Crescent Cotton Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4558.
    Promulgated December 17, 1926.
    Keserves set up to cover estimated shrinkages in weight of cotton shipped to Europe and reserves for exchange and for “ hedges ” are not allowable deductions.

      W. E. Hayes, Esq., for the petitioner.

      J. A. Adams, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes of $2,183.42 and $16,637.04 for the fiscal years ended August 31, 1919, and August 31, 1920, respectively. The deficiency for 1919 results from the action of the Commissioner in disallowing an amount of $7,975 deducted by the petitioner in its return as a reserve for shrinkage in weight on cotton shipments. The deficiency for 1920 results from the disallowance by the Commissioner of the amounts of $32,471.27, $5,300 and $5,300, representing deductions taken by the petitioner as reserves for shrinkage in weight on cotton shipments, for exchange, and “ hedges,” respectively.
    FINDINGS OF FACT.
    The petitioner is a Louisiana corporation with its principal office at New Orleans. During the years involved in this proceeding it was engaged in exporting cotton to Europe. Its books of account were kept on the accrual basis.
    The cotton was weighed at New Orleans, which was the point of shipment. In invoicing cotton to European purchasers the petitioner added 8 pounds per bale to the actual weight. This was done to get the benefit of any possible increase in weight upon being reweighed at the point of arrival. The addition of an extra amount to provide for an increase in weight is a custom of the trade and in accordance with the rules and regulations of the Liverpool Cotton Exchange by which petitioner’s contracts were governed. Immediately upon invoicing and shipping the cotton, the petitioner received pajunent by drawing against credits available to it in New York and London.
    When the cotton arrived in Europe it was reweighed. If its weight exceeded the amount at which invoiced, the petitioner received no benefit therefrom. If it weighed less than the weight shown by the invoice, the petitioner under its contract was obligated to make an adjustment for the decrease. This was accomplished by giving the purchaser a credit for the amount involved or by making a cash refund. The adjustments for loss in weight are based upon reports from petitioner’s agent in Europe. Sometimes it was two or three months after shipments were made before petitioner received a report from its agent.
    In its gross sales each year the petitioner included as sales the additional 8 pounds per bale which had been shown in the invoices.
    At the close of the years involved in this proceeding the petitioner took the outstanding shipments from which it had received no reports and computed a certain percentage in weight based on the experience of its officials in the business. This shrinkage in weight multiplied by the average sale price of the outstanding shipments gave the amounts which the petitioner set up as reserves for shrinkage in weight of cotton shipped.
    The amount set up on its books and deducted by the petitioner in its 1919 return for such a reserve was $7,915. This deduction was disallowed by the respondent. For 1920 the petitioner set up a reserve for $35,300, of which respondent disallowed $32,471.27. These deductions were disallowed by the respondent upon the ground that they represented contingent reserves. During petitioner’s fiscal year 1920 the company made refunds and credits amounting to $7,143.97. These were allowed by it on account of loss in weight of shipments outstanding on August 31, 1919, and for payments for weighing cotton in Europe. Against the shipments outstanding on August 31, 1920, refunds and credits amounting to $29,916.92 for shrinkage in weight and for weighing cotton in Europe were made by petitioner. An additional amount of $2,115 was also allowed by the petitioner on account of the quality of cotton. The total of the two amounts is $32,031.92. These allowances were made after the petitioner’s taxable years had been closed, upon information received subsequent to such closing. For the fiscal year ended August 31, 1920, allowances were made at dates ranging from September 9, 1920, to January 3, 1921.
    In its 1920 return petitioner deducted $5,300 representing “ reserve for exchange, 90-day draft, net claim $5,300.” This reserve was set up on the books on September 17, 1920, in connection with a 90-day sight draft for some £22,000 drawn by the petitioner on one of its customers in Europe.
    Substantially the amount of the draft was remitted by the customer in the regular course of business. The deduction was disallowed by the respondent, upon the ground that the evidence submitted to him was not sufficient in his opinion to. warrant its allowance.
    At the time the petitioner sold cotton for future delivery it was not always possible for it to buy specific grades or staples. It then bought futures in the open market. Sometimes when petitioner considered that certain grades or staples were selling at a reasonable price it purchased them. Against these purchases it sold contracts in the future market. These trading operations, known as “hedging,” are engaged in by the petitioner for its protection against fluctuations in price. The petitioner traded in future contracts only in connection with transactions in actual cotton.
    During the fiscal year ended August 31, 1920, the petitioner bought a certain amount of actual cotton and sold as nearly as possible the equivalent amount of futures as a hedge. Of the cotton that had been purchased, a certain quantity remained unsold on August 31, 1920. Against the unsold cotton a certain amount of futures had already been sold. On the basis of the market quotations on August 31, 1920, the futures outstanding against the unsold cotton showed a loss of $5,000. The petitioner set up a reserve of $5,300 for losses on hedging operations and deducted that amount in its return for the year. Profits made on other hedging operations during the year amounted to $18,000 and were included in petitioner’s income.
   OPINION.

Trammell:

The petitioner contends that the reserves set up by it for shrinkage were in the nature of accruals and should be allowed as such to the amount of allowances made by it for each year.

At the time these reserves were set up the petitioner was not in possession of the information necessary to determine what adjustments, if any, would be required, nor does the evidence disclose that the cotton had been weighed in order to establish the existence of a liability before the close of the taxable year. The amounts set up on the boobs to provide for necessary future adjustments were nothing more than an estimate of future liabilities which would not result or be determined until the cotton was weighed and found to be short in weight. The fact that the experience of petitioner’s officers enabled it to approximate closely the amounts subsequently allowed is not sufficient to take those amounts out of the class of estimates of future undetermined losses and put them into the class of accruals. See Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008, and cases cited, and Appeal of Helvetia Milk Condensing Co., 5 B. T. A. 271.

The action of the respondent in disallowing the reserves deducted by the petitioner was correct. The credits and refunds of $7,143.97 and $32,031.92 are allowable deductions for the years in which they were made in the absence of evidence that shortages in weight of cotton had been determined prior thereto. We base our decision upon the fact that we have no evidence as to whether the cotton or any part thereof had actually been weighed before the close of the taxable years.

From the evidence submitted in connection with the deduction of $5,300 as a reserve for exchange, we are unable to find that the respondent’s action in disallowing this deduction was erroneous.

On August 31, 1920, a portion of actual cotton against which the future contracts had been sold was still unsold. The future contracts against the unsold cotton had never been closed out, but were still outstanding. The loss of $5,000 computed by the petitioner on its hedging operations was an anticipated loss and not an actually sustained loss. Therefore, the reserve deducted by the petitioner for such loss was properly disallowed.

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