author: MaRqttette

text:
    Appeal of JOHN B. NORDHOLT.
    Docket No. 3766.
    Decided July 29, 1926.
    The fair market value of shares of stock, received by the taxpayer as compensation for personal services, determined.

      Thomas O. Marlar, Esq., and Harry J. Gerrity, Esq., for the'petitioner.

      George G. Witter, Esq., for the Commissioner.

      Before Makqtjette, Geeek, and Love.
    This appeal is from the determination by the Commissioner of a deficiency for the year 1916 in the amount of $712.08, consisting of a proposed additional tax in the amount of $474.72 and a penalty in the amount of $237.36 added to the tax for failure on the part of the taxpayer to file an income-tax return for the year 1916.
    EINDINGS OE PACT.
    The taxpayer is an individual residing at Toledo, Ohio.
    The Toledo Steel Casting Co. is a corporation organized in the year 1904 under the laws of the State of Ohio; On July 30, 1912, the outstanding capital stock of the corporation consisted of 850 shares of preferred stock of the par value of $100 each, of which 844 shares were held by S. D. Carr and Curtis T. Johnson. At that time the corporation had a book deficit or impairment of capital in the amount of about $33,000, due to operating losses in prior years.
    On July 30, 1912, The Toledo Steel Casting Co. and S. E>. Carr and Curtis T. Johnson entered into a contract with the taxpayer and Clarence C. Smith, by which the taxpayer and Smith agreed to assume the management of the company for a joint compensation of $5,000 per annum, the transfer to them by Carr and Johnson of $42,500 par value of the company’s stock when the net value of the company’s assets should have increased by $50,000, and the issuance to them by the company of $15,000 par value additional stock, when the “stock and materials on hand, plus good and collectible credits, accounts, notes and bills receivable, shall equal the unsecured indebtedness of” the company. The contract stipulated that the net value of the company’s assets at that time was $80,523.67.
    In November, 1916, Carr and Johnson transferred to the taxpayer and Clarence C. Smith, as compensation under the contract of July 30, 1912, capital stock of The Toledo Steel Casting Co. of the par value of $42,500, which was divided between them in equal amounts.
    The assets and liabilities of The Toledo Steel Casting Co. on December 31, 1912, 1913, 1914, 1915 and 1916, respectively, as shown by its books, were as follows:

      The capital stock of The Toledo Steel Casting Co. is and has at all times been closely held. There were no sales of the stock between July 30, 1912, and the end of the year 1916, it having been held in trust during that period to guarantee performance of the stockholders’ liability under the contract of July 30, 1912. A few small lots of the stock were sold during the years 1919, 1920, and 1921, the purchaser in nearly every instance being a relative of the taxpayer.
    The fair market or reasonable value of the capital stock of The Toledo Steel Casting Co. in November, 1916, was at least $100 per share.
    The taxpayer did not file an income-tax return for the year 1916, and a return was made for him by the Commissioner sometime subsequent to the enactment of the Revenue Act of 1918. The Commissioner determined that the capital stock of The Toledo Steel Casting Co. received by the taxpayer in the year 1916, for services rendered by him under the contract of July 30, 1912, had a value of $21,250 at the time of its receipt by the taxpayer, and he included that amount in the taxpayer’s income for that year and determined that there is a deficiency in tax for the year 1916, in the amount of $474.72, to which he added 50 per cent of the amount of the tax as a penalty for failure to file an income-tax return within the time prescribed by law.
   OPINION.

MaRqttette

: The taxpayer concedes that the stock of The Toledo Steel Casting Co. received by him in the year 1916 as compensation for services performed by him under the contract of July 30, 1912, would constitute income to him in that year to the extent of its fair market value. He contends, however, that the stock in question had only a nominal value at the time and that, therefore, he received no taxable income. The Commissioner contends that, upon the receipt of the stock, the taxpayer realized income in the amount of the market or reasonable value of the stock, which market or reasonable value he has determined to be equal to its par value.

The Commissioner’s determination as to the value of the stock was made under authority of section 2(a) of the Revenue Act of 1916, and under article 4, paragraph 21, of Regulations 33, pertaining to the Revenue Act of 1916, which respectively provide in part as follows:

Section 2(a) of the Revenue Act of 1916:
That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid. * * *
Article 4, paragraph 21, of Regulations 33:
Compensation not paid in money. — 'Where service is rendered for a stipulated price, wage, or salary and paid with something other than money, the stipulated value of service in terms of money is the value at which the thing taken in payment is to be considered for the purpose of the income tax.
Where there is no stipulation as to the value of service and payment for service is made with something other than money, the maricet or reasonable value of the thing taken in payment is the amount to be included as income for the purposes of the income tax. (Italics ours.)

Income is, for purposes of taxation, measured in money, and therefore since, by section 2(a) of the Revenue Act of 1916, the net income of taxable persons includes income derived from compensation for personal service of whatever kind and in whatever form paid, where compensation for such services is paid with something other than money, it is necessary to express that “ something ” in terms of money in order that the tax due thereon may be determined. The Commissioner, with the approval of the Secretary, has made and promulgated the above-quoted regulation as á basis for expressing in terms of money compensation paid in something other than money. The regulation provides a reasonable basis for such expression, and is, we think, not inconsistent or in conflict with any statutory provision.

The evidence herein clearly shows, and.it is conceded by the taxpayer, that in the year 1916 the taxpayer received as compensation for services rendered by him stock of The Toledo Steel Casting Co. of the par value of $21,250. It likewise shows that the stock was closely held and that there were ho sales or efforts to make sales thereof during the year 1916. In fact, there were no sales of stock until the year 1919. However, the absence of sales in the year 1916 does not in itself prove that the stock had no market or reasonable value at that time, nor do the sales made in the year 1919 and later years establish value for the stock in the year 1916, since conditions existing in those years were materially different from conditions existing in the year 1916. The evidence shows that The Toledo Steel Casting Co. had been making money for several years prior to the year 1916 and that during the year 1916 it made a net profit of more than $37,000. During the period January 1, 1913, to, December 31, 1916, inclusive, the book value of the company’s stock had increased from approximately $52,000 to about $122,000, and each share of its capital stock had a book value on December 31, 1916, of at least $142 per share. The business at that time was good and industry was flourishing, and there was every reason to believe that the existing prosperity would continue. The evidence herein not only fails to establish that the stock in question did not have a market or reasonable value when received by the taxpayer, but, on the other hand, supports the determination of the Commissioner that its value was at least $100 per share. We must therefore approve the action of the Commissioner.

The next question involves the 50 per cent penalty which was added to the taxpayer’s tax for the year 1916 for failure to file an income-tax return for that year. The record fails to show definitely when the return on behalf of the taxpayer was made by the Commissioner, but it is clear that it was made after the enactment of the Revenue Act of 1918, pursuant to the authority of section 3176, Rev. Stats., as amended by the Revenue Act of 1918. That section, as amended, was reenacted without change in the Revenue Act of 1921 and was not changed by the Revenue Act of 1924. It provides that—

Sec. 3176. If any person, corporation, company, or association fails to make and file a return or list at the time prescribed by law or by regulation made under authority of law, or makes, willfully or otherwise, a false or fraudulent return or list, the collector or deputy collector shall make the return or list from his own knowledge and from such information as he can obtain through testimony or otherwise. In any such case the Commissioner may, from his own knowledge and from such information as he can obtain through testimony or otherwise, make a return or amend any return made by a collector or deputy collector. Any return or list so made and subscribed by the Commissioner, or by a collector or deputy collector and approved by the Commissioner, shall be prima facie good and sufficient for all legal purposes.
If the failure to file a return or list is due to sickness or absence, the collector may allow such further time, not exceeding thirty days, for making and filing the return or list as he deems proper.
The Commissioner of Internal R.evenue shall determine and assess all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section. In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. In case a false or fraudulent return or list is willfully made, the Commissioner of Internal Revenue shall add to the tax 50 per centum of its amount.
The amount so added to any tax shall be collected át the same time and in the same manner and as part of the tax unless the tax has been paid before the discovery of the neglect, falsity, or fraud, in which ease the amount so added shall be collected in the same manner as the tax.

It is not necessary to enter into an extended discussion on this point. The statute clearly and explicitly provides that if any person, corporation, company, or association, fails to make and file a return or list at the time prescribed by law, the Commissioner shall add to the tax due from such person, corporation, company or association 25 per cent of its amount, except when a return is filed after such time and it is shown that the failure to file was due to a reasonable cause and not to willful neglect.

In this case, it-appears that the taxpayer did not file any return for the year 1916 and that a return was made by the Commissioner under the provisions of section 8176, Rev. Stats., as amended by the Revenue Act of 1918. Since no return was filed by the taxpayer, it was mandatory upon the Commissioner to assess the penalty provided by section 3176 Rev. Stats., as amended, regardless of the fact that such failure to file might have been due to reasonable cause and not to willful neglect. The Commissioner, however, clearly had no authority to add to -the tax a penalty of more than 25 per cent of the tax.

The taxpayer in his petition alleged that he is entitled to deduct, in computing his net income for the year 1916, certain interest and taxes paid by him in that year. These allegations were denied by the Commissioner and the taxpayer has failed to produce any evidence in support thereof. His claim for these deductions is therefore denied.

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


source: Caselaw Access Project

author: Marquette

license: Public Domain

text:
    Appeal of CLARENCE C. SMITH.
    Docket No. 3767.
    Decided July 29, 1926.
    The fair market value of shares of stock, received by the taxpayer as compensation for personal services, determined.

      Thomas 0. Marlar, Esq., and Harry J. Gerrity, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    Before Marquette, GreeN, and Love.
    This appeal is from the determination by the Commissioner of a deficiency for the year 1916 in the amount of $712.08, consisting of a proposed additional tax in the amount of $474.72 and a penalty in the amount of $237.36 added to the tax for failure on the part of the taxpayer to file an income-tax return for the year 1916.
    FINDINGS OF FACT.
    The taxpayer is an individual residing at Toledo, Ohio.
    The Toledo Steel Casting Co. is a corporation organized in the year 1904 under the laws of the State of Ohio. On July 30, 1912, the outstanding capital stock of the corporation consisted of 850 shares, of preferred stock of the par value of $100 each, of which 844 shares were held by S. D. Carr and Curtis T. Johnson. At that time the corporation had a book deficit or impairment of capital in the amount of about $33,000, due to operating losses in prior years.
    On July 30, 1912, The Toledo Steel Casting Co. and S. D. Carr and Curtis T. Johnson entered into a contract with the taxpayer and John B. Nordholt, by which the taxpayer and Nordholt agreed to assume the management of the company for a joint compensation of $5,000 per annum, the transfer to them by Carr and Johnson of $42,000 par value of the company’s stock when the net value of the company’s assets should have increased by $50,000, and the issuance to them by the company of $15,000 par value additional stock, when the “ stock and materials on hand, plus good and collectible credits, accounts, notes and bills receivable, shall equal the unsecured indebtedness of ” the company. The contract stipulated that the net value of the company’s assets at that time was $80,523.67.
    In November, 1916, Carr and Johnson transferred to the taxpayer and John B. Nordholt as compensation due under the contract of July 30, 1912, capital stock of The Toledo Steel Qasting Co. of the par value of $42,500, which was divided between them in equal amounts.
    The assets and liabilities of The Toledo Steel Casting Co. on December 31, 1912, 1913, 1914, 1915 and 1916, respectively, as shown by its books, were as follows—

    The capital stock of The Toledo Steel Casting Co. is and has at all times been closely held. There were no sales of the stock between July 30, 1912, and the end of the year 1916, it having been held in trust during that period to guarantee performance of the stockholders’ liability under the contract of July 30, 1912.' A few small lots of the stock were sold during the years 1919, 1920 and 1921.
    The fair market or reasonable value of the capital stock of The Toledo Steel Casting Co. in November, 1916, was at least $100 per share.
    The taxpayer did not file an income-tax return for the year 1916 and a return was made for him by the Commissioner some time subsequent to the enactment of the Revenue Act of 1918. The Commissioner determined that the capital stock of The Toledo Steel Casting Co., received by the taxpayer in the year 1916, had a value oí $21,250 at the .time of its receipt by the taxpayer, and he included that amount in the taxpayer’s income for that year, and determined that there is a deficiency in tax for the year 1916 in the amount of $474.72, to which he added 50 per cent of the amount of the tax as a penalty for failure to file an income-tax return within the time prescribed by law.
   OPINION.

Marquette

: The facts in this appeal are identical with the facts in the Appeal of John B. Nordholt, decided this day, ante, 509, and for the reasons set forth in the opinion in that appeal, the penalty involved herein should be reduced to 25 per cent of the tax. In all other respects the determination of the Commissioner is approved.

Order of redetermination will be entered on 15 days' notice, wider Rule 50.


author: Smith

text:
    Appeal of PETER W. ROUSS.
    Docket No. 5769.
    Decided July 29, 1926.
    An individual conducted a business as a sole proprietor and took inventories and determined profits as of June 30, and December 31 of each year. On May 13, 1918, the business was incorporated and taken over by the corporation as of January 1, 1918. The Commissioner determined the profits of the individual from his individual business for the year 1918 by taking such proportion of the profits of the business for the entire calendar year 1918 as the number of days from January 1 to May 13 is to 365. Hell, that, in the absence of evidence showing the true profits of the business from January 1 to May 13, 1918, the action of the Com-missioner in making his allocation of profits should not be disturbed.

      J. kS'. T. Ivins, Esq., for the petitioner..

      Ward Loveless, Esq., for the Commissioner.
    Before Smith, Littleton, and Teussell.
    This is an appeal from the determination of deficiencies in income tax for the years 1918 and 1919 in the respective amounts of $134,-883.27 and $5,813.65. The deficiency for the year 1918 arises from the action of the Commissioner in determining that the taxpajrer derived income from an individual business from January 1 to May 13, 1918, which business was sold to a corporation on the last-named date, the sale being made effective as of January 1, 1918. The issue raised for the calendar year 1919 was abandoned by the taxpayer at the trial of the appeal.

      FINDINGS OF FACT.
    Charles Broadway Rouss, the taxpayer’s father, built up a large wholesale business in New York City and sold goods to stores throughout the country. The father died in 1902 and the taxpayer inherited the business from him. On May 13, 1918, he caused the formation of two corporations — the Charles Broadway Rouss Realty Corporation and Charles Broadway Rouss, Inc. He transferred the real estate, building, machinery, and furniture and fixtures connected with the business to the former and the operating assets, including inventory and accounts receivable, but excluding cash on hand at December 31,1917, to Charles Broadway Rouss, Inc. The transfers were made as of January 1, 1918, although the corporation did not come into existence until May 13, 1918. The books of the merchandising business were not closed as of May 13, 1918. The last prior closing was December 31, 1917. The corporation, Charles Broadway Rouss, Inc., paid a dividend on July 25, 1918, of $222,000.
    The earnings of the business for the entire calendar year 1918 were $666,831.20. The taxpayer included no part of these earnings in his individual income-tax return for 1918, but returned as income the full amount of the dividends received upon his shares of stock in the corporation, namely, $133,224. The Commissioner amended his ; income-tax return by adding to his income from the business conducted as an individual 132/365ths of the earnings of the merchandising business for the year 1918, or $241,155.39. The fraction represents the ratio between the number of days elapsing from January 1 to May 13,1918, and the total number of days in the year. He further amended his return by reducing the amount of the taxable dividend from $133,224 to $65,404.51, the difference being considered by the Commissioner as a return of capital.
    The books of account of both the taxpayer and the corporation were kept upon the accrual basis.
   OPINION.

Smith

: The taxpayer contends that for the year 1918 he received no income from the merchandizing business carried on by himself from January 1 to May 13, 1918, and by Charles Broadway Rouss, Inc., for the balance of the year, other than the dividend which he received on shares of stock in the corporation in the amount of $133,224. He contends that because it was impossible to determine the Value oí the business at May 13, 1918, or even what the business actually consisted of, due to lack of inventories, the sale was made as of January 1, 1918; that the business was sold as it stood at January 1 with all changes that had iaken place between January 1 and May 13, such changes being undetermined; that the taxpayer retained for himself the cash that had been on hand on January 1, 1918, but sold the inventory and accounts receivable as they had stood on January 1,1918, subject to liabilities with all increases and decreases that had taken place between January 1 and May 18. In other words, the taxpayer contends that the business was sold “ sight unseen ” at the value shown by the balance sheets at January 1. He further contends that without inventories there can be no computation of gain from the sale of the business and without computation there can be on accrual of income. The Commissioner contends, on the other hand, that the taxpayer is liable to income tax in respect of any profits from the conduct of the individual business from January 1 to May 13, and that a failure on the part of the taxpayer to take an inventory at May 13 for the purpose of determining the amount of gain or profit, -if any, is not proof that the conduct of the individual business from January 1 to May 13 was without profits; that in a case where a taxpayer has not taken steps to determine the amount of the profit resulting from the conduct of a business, the Commissioner has authority under section 212(b) of the Revenue Act of 1918 to determine such profits.

The taxpayer admits that the merchandizing business is not entitled to be taxed as a corporation for the entire calendar year 1918 under section 330 of the Revenue Act of 1918, since the earnings of the business for the year were less than 20 per cent of its invested capital.

The taxpayer contends that the sale of his business to the corporation on May 13, 1918, is analogous to the sale by an individual of an interest-bearing bond between interest-paying dates at a fiat price ; that if such price is the same as the cost of the bond there can be no gain to the individual from the sale of the bond, even though interest has acci’ued upon the bond from the last interest-paying date to the date of sale. It is argued that, since in such case there would be no profit liable to income tax, so in the instant case the taxpayer would have derived no profit from the sale of his business to the corporation.

We can not see any analogy in the instant case to the sale of bonds at a flat price between interest-paying dates. The Commissioner does not contend that the taxpayer made a profit from the sale of his business to the corporation but that the individual is liable to income tax in respect of the income derived by him from his individual business from January 1 to May 13, 1918, and that, in the absence of a determination of the profit by the taxpayer, the Commissioner is authorized to take such part of the profits of the business for the entire year as the,number of days elapsing from January 1 to May. 13 is to 365.

Section 212 of the Revenue Act of 1918 provides:

(a) That in the case of an individual the term “net income” means, the gross income as defined in-section 213, less the deductions allowed by section 214.
(b) The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of. such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such .basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than,a fiscal year as defined in.section 200 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year. * * *

Section 213(a) of the Revenue Act of 1918 provides in part:

That for the purposes of this title * * * the term “ gross income •
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. # h*

We can not doubt that under the statute the taxpayer is required to include in his gross income for the taxable year any profits of the business derived therefrom during the period January 1 to May 13, 1918. The corporation did not come into existence until the last-named date, and whatever may have been -the intention of- the incorporator, the corporation is liable to income tax only upon earnings from the date of incorporation. The fact that the business was sold to the corporation as of January 1, 1918, will not suffice to relieve the individual from income tax in respect of profits derived from the business prior to the date of incorporation. We can not agree with the taxpayer that he is relieved from income tax in respect of the profits to May 13, 1918, simply because he failed to take an inventory as of that date. If there were any profits they are chargeable with income tax. Our problem is simply to determine the amount of the income from the business, if any, from January 1 to May 13,1918.

The taxpayer has offered no evidence showing the income of the business for this period. He admits that the figures determined by the Commissioner by. apportioning the income are correct, so far as a mathematical computation is concerned; that is to say, if such a method of apportionment is correct, the amount of the income of the taxpayer derived from the business from January 1 to May 13, was $241,155.39.

In view of the fact that the taxpayer neglected to take the necessary steps to determine the amount of his income, if any, from the business from January 1 to May 13, 1918, we are of the opinion that it was entirely proper for the Commissioner to make that determination upon some proper basis. In the absence of evidence showing that the method of proration used by the Commissioner was incorrect, and in the absence of any better method being suggested for such determination, we are of the opinion that the method of proration used by the ■ Commissioner should not be disturbed. This method of proration has heretofore been approved by this Board. Appeal of L. S. Ayers & Co., 1 B. T. A. 1135.

The taxpayer has not alleged any error with respect to the determination of the income received by the taxpayer from the dividend paid by the corporation, Charles Broadway Bouss, Inc., on July 25, 1918.

Judgment for the Commissioner.


author: Lansdon:

text:
    Appeal of THE KOLYNOS CO.
    Docket No. 4130.
    Decided July 29, 1926.
    The petitioner and Kolynos, Inc., were affiliated during the fiscal. years ended August 81, 1917, 1918, and 1919, respectively.

      K. N. Parkinson, Esq., and S. G. Morehouse, Esq., for the petitioner.

      E. G. Lake, Esq., for the Commissioner.
    Before Sternhagen, LaNsdoN, and AeuNdell.
    In this appeal the Commissioner asserts a deficiency in the income and profits taxes of the petitioner for the fiscal year ended August 31, 1920, in the amount of $10,619.15. The deficiency arises from the refusal of the Commissioner to permit The Kolynos Co. and Kolynos, Inc., to make a consolidated return for the fiscal year ended August 31,1920, and from certain deductions from the invested capital of the petitioner for the same year.
    FINDINGS OF FACT.
    1. The petitioner is a Connecticut corporation organized in 1908 to manufacture and sell Kolynos dental cream. The formula for this preparation was developed by Newell S. Jenkins, who had been a successful practitioner of dentistry in Europe and the United States since about the year 1866.

      2. The organizers and original stockholders of the petitioner were Newell S. Jenkins; his wife, Clara Elizabeth Jenkins; his son, Leonard A. Jenkins; Calvert Townley, Henry E. Hosley, and Herbert W. Carter, who were close friends of the Jenkins family, and Klewe & Co., Inc., a corporation of which Newell S. Jenkins was the only beneficial owner of stock. The stock originally allotted to this corporation was all transferred to Newell S. Jenkins and Leonard A. Jenkins in 1910.
    3. In 1911 the stockholders of the Kolynos Co. organized Kolynos, Inc., under the laws of Connecticut, for the sole purpose of distributing Kolynos products outside of continental North America, and especially within Great Britain and her dependencies. On account of the exigencies of the World War the two companies established a factory in Great Britain for the manufacture of their products.
    4. In the years 1917, 1918, and 1920, the stock of the two corporations was owned and held as follows:

      5. James D. Lockhead was manager of the New York office of the petitioner; William- E. Gilbert was a close friend of the Jenkins family; Clifford C. and Donald C. Townley are sons of Calvert Townley, to whom their father gave the stock standing in their names, with the verbal understanding that he retained the right to vote and sell the same; Edith J. Carter is the widow of Herbert J. Carter, an original incorporator of each company, from whom she inherited her shares in both concerns. Financial necessity forced Mrs. Carter to sell her shares in The Kolynos Co. to other shareholders of that corporation.
    6. Kolynos, Inc., was organized and, until its absorption by the parent company subsequent to the taxable year, was always conducted as a subsidiary of The Kolynos Co. Except as' indicated above, the stockholders of the two corporations were identical in the year involved in this appeal. They had the same officers and were operated as a single business unit. The parent company directly, or by the stock subscription of its shareholders, financed all the operations of the subsidiary and at all times, from 1911 to 1922, exercised complete control over it. No dissenting vote was ever cast at any of the directors’ or stockholders’ meetings of the company.
    7. The petitioner made a separate income and profits-tax return for its fiscal year ended August 81, 1917, but thereafter filed a consolidated return for both corporations. It made a similar consolidated return for its fiscal year ended August 31, 1918. The Commissioner allowed affiliation for both such years, and settlement of taxes was so made. In September, 1924, after the statute of limitations contained in section 250(d) of the Kevenue Act of 1918 had run, the Commissioner reaudited the returns for the fiscal years ended August 31, 1917 and 1918, and held that the companies were not entitled to file a consolidated return for either of such years. He thereupon determined deficiencies for each year in the amounts that would have been due the Government if the statute had not run against their collection, and deducted such amounts from the- invested capital of the petitioner for the year 1920.
   OPINION.

Lansdon:

The two issues in this proceeding are: (1) Whether the petitioner and Kolynos, Inc., were entitled to make consolidated returns for the fiscal year ended August 31, 1920; and (2) whether the Commissioner erred in reducing the invested capital of The Kolynos Co. for the fiscal year ended August 31,1920, in the amounts which he determined should have been paid as income and profits taxes for the fiscal years ended August 31, 1917 and 1918.

The facts are not in dispute. After the incorporation of Kolynos, Inc., the two corporations were closely associated and operated as a single business. The officials and directors of the two were the same persons. Except as disclosed in the findings of fact, above, the stockholders were, the same. The shareholders who owned stock in one and not in the other were closely drawn together by ties of blood, friendship, and interest. We are of the opinion that during the fiscal years 1917, 1918, and 1920, respectively, The Kolynos Co. and Kolynos, Inc., met all' the conditions required as a basis for affiliation by section 240(b) of the Revenue Act of 1918 and section 1331 (a) and (b) of the Revenue Act of 1921, and were entitled to file consolidated returns for each of such years.- Appeal of Midland Refining Co., 2 B. T. A. 292; Appeal of Isse Koch & Co., 1 B. T. A. 624; Appeal of Stanley Insulating Co., 2 B. T. A. 967; Appeal of Jordan Marsh Co., 3 B. T. A. 553.

Having determined that the petitioner and Kolynos, Inc., were entitled to make consolidated returns for the fiscal years ended, respectively, at August 31,1917 and 1918, it follows that the additional taxes asserted by the Commissioner were erroneously determined, and that the amount of such taxes may not be deducted from the invested capital of the taxpayer for the fiscal year ended August 81, 1920.

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


text:
    Appeal of GEORGIANA M. ROMBERGER and PROVIDENT TRUST CO., Executors of the Estate of HENRY A. ROMBERGER.
    Docket No. 5938.
    Decided July 29, 1926.

      M. Manning Marcus, Esq., for the petitioners.

      W. H. Lawder, Esq., for the Commissioner.
    Before Arundell and Lansdon.
    The Commissioner’s notice which is the basis of this appeal asserts deficiencies in income tax for the years 1919 and 1920, in the respective amounts of $6,840.12 and $5,831.92, and advises of an over-assessment for the year 1921, in the amount of $216.06. The petitioners appeal only as to the year 1920, aver that the amount in controversy is $5,946.35, and contend that the Commissioner erred in disallowing a loss, in the amount of $14,926.36, sustained by Henry A. Romberger in the year 1920 in the sale of a certain residential property.
    FINDINGS OF FACT.
    Henry A. Romberger died May 10, 1925, at which time the tax controversy herein was pending before the Commissioner. By will, duly admitted to probate, Georgiana M. Eomberger and the Provident Trust Co. of Philadelphia were designated as executors of the estate of the deceased, and as such executors are the petitioners in this proceeding.
    At a sheriff’s sale held on January 24, 1910, Eomberger purchased a residential property located at 5426 Wayne Avenue, Germantown, Philadelphia. Such property consisted of a lot improved with a twenty-room dwelling house, constructed of gray stone and a four-car gray-stone, garage, which had second floor accommodations for a chauffeur and family. At the date of such purchase he was a widower, but, in March, 1910, he remarried. After some father hurried repairs to the house he moved into and occupied it as his residence until some time in 1918, when he went to California. Thereafter, during Eomberger’s ownership, the house was occupied, rent free, by one John T. Bougher, who was a close personal friend of the owner.
    The parties agree that the original purchase price of the property in question was $28,200; that during the years 1913, 1914, and 1917, Eomberger made repairs, additions and improvements of a capital nature, at a cost of $24,364.62; and that he sold the property some time in 1920 for $37,500.
    In his income-tax return for the year 1920, Eomberger deducted the amount $14,926.36 as a loss sustained during the taxable years in a transaction entered into for profit. Upon audit of such return the Commissioner disallowed the loss, added the amount thereof to income, and asserted the deficiency which the Board is asked to redetermine.
   OPINION.

Lansdon:

In view of the Board’s decision in the Appeal of Lafayette Page, 1 B. T. A. 400.

Judgment for the Commissioner.