text:
    Harry F. Robertson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 5436.
    Promulgated December 8, 1926.
    Tbe difference between tbe fair market value of land conveyed to petitioner and the amount paid therefor held to be a gift, and the taxable gain arising from the sale of the land is the difference between the fair market value at the time received and the selling price thereof.

      Charles II. Davis, Esq., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income tax of $765.36 for 1921.
    FINDINGS OF FACT.
    The petitioner is a resident of Excelsior, Minn., where he has resided since 1920. From 1907 until 1920 he resided at Colon, Saunders County, Nebr., where he was engaged in farming. During a portion of the time that petitioner resided in Saunders County. Nebraska, his mother-in-law, a Mrs. Scofield, made her home with the petitioner and his wife. On February 15,1919, Mrs. Scofield was the owner of 160 acres of land adjoining the farm owned by petitioner. Her indebtedness amounted to about $6,000, which she had borrowed in order to get money to advance to a son who was living in California in 1919. Mrs. Scofield liad no living children other than her son in California and her daughter, the wife of petitioner.
    Mrs. Scofield had told petitioner and his wife a number of times that she appreciated what they had done for her and that she expected to provide for them.
    Some time prior to February 15, 1919, Mrs. Scofield, who was at that time making her home with petitioner and his wife, had talked over with them-the matter of transferring her land to them for the care and treatment they had shown her.
    The petitioner and Mrs. Scofield had on different occasions discussed the sale price of different tracts of land situated in the vicinity in which they lived, and she was conversant with land values locally. Some sales were being made at around $400 an acre. About February 15, 1919, she decided that she would execute conveyances of her land to petitioner and his wife, and set a day when they would see a lawyer in another town and have the proper papers prepared. When the appointed day arrived, a blizzard was raging. However, she insisted on carrying out her plans. She offered to sell 80 acres to petitioner at $165 per acre. He stated, “Mother, we will give you more,” and offered her $200 per acre; and the sale was consummated at that price. He had that amount of cash on hand. The night before the transaction, Mrs. Scofield said, “ I want this fixed up and I want to make it right so if anything happens to me you will have your share of the property. * * * I have never done anything but spend money for the boy. * * * I have never given you anything except just small gifts * * * That [the amount petitioner agreed to pay] would give me enough to get a little home in Fremont. * * * ” She also said that if anything happened to her she would feel that she had done the right thing by the petitioner and his wife.
    It was stipulated that the fair market value of the 80 acres of land, when acquired by petitioner from Mrs. Scofield, was $24,000.
    In 1921 the petitioner sold the land for $28,000. In preparing his income-tax return for that year he computed his profit on the basis of a cost price of $24,000, instead of $16,000. The difference between the $16,000 and $24,000 petitioner considered to be a gift. The respondent, in the audit of petitioner’s return, used a cost price of $16,000 in computing the profit and determined a deficiency.
   OPINION.

Trammell:

From a consideration of the evidence, we are of the opinion that the difference of $8,000 between the amount paid by the petitioner for the 80 acres of land and the fair market value of the land represents a gift. The gain on the sale, therefore, should be based on the fair market value of the land when acquired by the petitioner, instead of on the cost.

Judgment will be entered for the petitioner.


source: Caselaw Access Project

author: Trammell:

license: Public Domain

text:
    Katz & Besthoff, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4707.
    Promulgated December 8, 1926.
    Salaries deducted by petitioner in its 1918 return for services rendered by its officers during tlie year held to be reasonable.

      Isom J. Guillory, Esq., and E. Barrett Prettyman, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   Trammell:

This is a proceeding for the redetermination of a deficiency in income and profits tax for the year 1918, in the amount of $10,357.32, of which the petitioner admits $469.32, leaving in issue $9,888. The deficiency results from the action of the respondent in reducing the amount deducted by the petitioner as salaries for services rendered to it by its officers.

FINDINGS OF FACT.

The petitioner is a Louisiana corporation with its principal office in New Orleans. It was organized in 1905 with a capital stock of $29,000, of which S. J. Besthoff, secretary and treasurer, and Gustav Katz, president, each owned 48 per cent.

Until 1910 the petitioner operated one drug store, which was located in the downtown section of New Orleans. In 1910 a second store was opened in the same section of the city and a block away from the first store. Other stores were subsequently opened and operated with success. During the year involved in this proceeding, the petitioner operated two retail drug stores and manufactured from 150 to 200 proprietary medicines, perfumes and toilet goods which it sold.

From 1905, when the business began, Besthoff and Katz, both of whom were registered pharmacists of several years’ experience, were actively engaged in the conduct of the business, including the development of formulae for the manufacture of proprietary medicines, toilet goods and perfumes. In 1918 the petitioner employed approximately 150 persons.

During 1918, Katz was in charge of the first store. His duties consisted of looking after the manufacture of goods, making purchases, taking care of the office, the finances and the books of account, originating and devising formulae, making up new preparations and marketing and selling them. He also looked over the charge prescriptions every day to see that they had been properly priced. Occasionally he waited on customers.

During 1918, Besthoif was in charge of the second store. In addition to his duties there, he looked after the advertising for the two stores and the hiring of help for both places, and assisted Katz in looking after the finances of the corporation, making purchases, and developing formulae for use in the petitioner’s business.

The duties of Katz and Besthoif during 1918 required them to be at the respective stores during business hours each week-day, a portion of the day on Sundays, and until midnight on alternate nights during the week. The night Katz was on duty Besthoff was off, and vice versa.

At times during 1918, on account of the influenza epidemic, the respective stores had to operate with about one-half the usual number of employees, even though the epidemic furnished the stores with increased business.

¾ ¾ On account of the difficulty of obtaining many drugs in the business and because of the frequent advance in pneesftlig of the business was more difficult and more caution wi& ’‡⅛ 1918 than in preceding or subsequent years. "⅞ ⅞ ^ <a ⅛

It was the practice of the corporation to increase the sals^ae^ of its officers as their duties and responsibilities grew heavier. ¾⅞⅛ 1906 the salaries of Katz and Besthoff were $3,000 each per year. In 1908 they were increased to $4,200, at which figure they remained until 1911, when they were increased to $6,000 a year. In 1912 they were raised to $7,800. Increases were made in 1913 and 1916 to $12,000 and $15,000, respectively. At a meeting of the board of directors on February 8, 1918, the salaries were increased from $15,000 to $18,000 a year. At another meeting of the board of directors on December 30, 1918, the salaries were increased from $18,000 to $24,000, to be retroactive to January 1, 1918. This increase had been decided upon between Katz and Besthoff during the fall of 1918. For years subsequent to 1918 their salaries have been $30,000 each per year.

The petitioner in its return for 1918 claimed a deduction of $48,000, representing salaries of $24,000 paid to Katz and Besthoff, respectively, for services rendered by them. In an audit of the return the respondent reduced the amount deducted by the petitioner from $48,000 to $36,000, upon the ground that $36,000 was reasonable compensation for the services rendered.

The net income before and after deducting officers’ compensation, the capital and surplus, and the percentage of the amount deducted by the petitioner for officers’ salaries to net income before such deduction for the years 1917 through 1920 were as follows:

ere declared in 1918.

s were opened by others and began operation in -.he petitioner’s first store between the date peti-s opened and 1918, five of which had gone out of /ear 1918.

ieducted by the petitioner is a reasonable allowance on for services rendered to it by its officers.

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


author: Littleton:

text:
    Appeal of Tisdale Lumber Co.
    Docket No. 5529.
    Promulgated December 8, 1926.
    The Board is unable from the evidence submitted to determine the value of alleged good will acquired for stock in 1910.

      James Madison Blackwell, Esq., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits tax for the years 1918 and 1919 in the amounts of $5,217.54 and $6,679.18, respectively. Only so much of the deficiencies as results from the Commissioner’s action in disallowing good will, in the amount of $50,000, as invested capital is in controversy.
    FINDINGS OR FACT.
    The petitioner, a New York corporation with its principal office at Astoria, Long Island, was organized in 1910, at which time it succeeded to the business which had been conducted by J. B. Tisdale, as a sole proprietorship, from about 1899, and since the date of its organization has been continuously engaged in the manufacture of sash, trim, and doors, and in the wholesale and retail coal and lumber business. Prior to 1899 the business had been owned and conducted by Tisdale’s father for a period of more than thirty years.
    By a bill of sale dated April 12, 1910, Tisdale sold and transferred all of the assets, including good will, of his business to the petitioner, for which the petitioner issued to Tisdale its common and preferred capital stock of a par value of $200,000 and $50,000, respectively, and agreed to assume the outstanding liabilities of the business, which Tisdale guaranteed not to exceed the sum of $165,-000. The values of the several assets sold and transferred were not listed in the bill of sale.
    The books of the sole proprietorship had been maintained according to the single-entry method of accounting. They were continued in use by the petitioner without change in the method of accounting, and without any record entry of the change in ownership of the assets and business. The books had not been closed from 1906 to 1916. At or about December 31, 1916, an audit of the books was made by a firm of accountants, a double entry system of bookkeeping was installed, and an attempt made to restate the accounts so as to reflect the acquisition of the assets and business by the petitioner and the results of operations from the date of organization to the date of audit.
    The petitioner claimed as a part of its invested capital for the years under consideration an item of good will in the amount of $50,000, which the Commissioner disallowed.
   OPINION.

Littleton:

Lack of proper accounting records during the period of the sole proprietorship and thereafter, during the time of petitioner’s ownership of the business, to December 31, 1916, has made it extremely difficult for the petitioner to prove its contention that it acquired good will of a value of $50,000 from the predecessor business, which it is entitled to include in its invested capital. As evidence of the earnings of the business and the investment in tangible assets for a period prior to its acquisition of the business, the petitioner has found it necessary to rely upon periodic statements of the financial condition of the business furnished to the bank by Tisdale for the purpose of securing loans. But Tisdale’s testimony discredits these statements to such an extent that we can not accept them as fairly reflecting the actual facts pertaining to the financial condition of his business.

Tisdale testified that he offered to sell the assets and business to the petitioner for a lump sum which included $50,000 for the good will. The value which he placed upon the good will, for the purpose of the sale, was not determined upon any definite basis, but was simply his opinion as to the value of the good will of a concern doing a yearly business of from $300,000 to $400,000.

The auditor who conducted the audit of the petitioner’s books in 1916 testified as to the methods employed in making the audit, and as to the processes by which he determined the net worth of the business in 1910, when it was acquired by the petitioner, to be $209,953.67, as compared with $279,496.80, shown by Tisdale in a statement furnished to the bank, to have been the net worth at approximately the same date. It was apparently the purpose of the petitioner in placing this witness on the stand to establish by his testimony the approximate degree of accuracy in the financial statements furnished by Tisdale to the bank. The method employed by the auditor in determining the net worth, at the date petitioner acquired the assets and business, briefly stated, is as follows: The net worth at December 31, 1916, was determined by a balance sheet audit of all accounts other than plant and equipment. In the case of plant and equipment, the values thereof were determined by Tisdale as of the date of the audit, and these were accepted by the auditor. From the net worth at December 31, 1916, the auditor sought to eliminate all changes made in plant and equipment from date of acquisition and whatever profits may have been reflected in other accounts. That the results obtained by the auditor can not be accepted as a fair reflection of the facts is evident from his testimony. He had no very definite data to assist him in his work. In numerous instances he found it necessary to accept the date of patent, appearing on items of machinery and equipment, as indicative of the date such items were acquired by the petitioner. He admits that there wore income items which he was unable to trace through the books, and for this reason he disregarded “a lot of sales that were not shown.” He apparently made no effort to check the values placed by Tisdale on the plant and equipment as of December 31, 1916, but accepted them for the purposes of the audit. There were liability accounts appearing on the statement which Tisdale furnished to the bank, and, notwithstanding his own audit indicated that these statements of Tisdale were inaccurate, the auditor accepted the liabilities shown thereon as correct because “ a person will not overstate his liabilities in favor of someone else.” An audit made under such circumstances has little weight as evidence of values. We can not from the evidence before us find that the petitioner acquired good will of value which it may include as invested capital.

Judgment will be entered for the 0ommissioner.


author: Lansdon:

text:
    J. T. Pittard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 3640.
    Promulgated December 8, 1926.
    Net income from a business conducted by petitioner as an individual determined.

      George M. Stanton, Esq., for the petitioner.

      Bniee A. Low, Esq., for the respondent.
    This is a proceeding for the redetermination- of a deficiency in income tax for the year 1917, in the amount of $289.09. The only question at issue is whether part of certain income ascertained as to amount in 1917 shall be taxed at 1917 or 1916 rates.
    findings of fact.
    The petitioner is an individual who resides at Winterville, Ga. During the years involved in this proceeding, as one of several enterprises which he conducted as an individual, he operated a plant for the manufacture of fertilizer. The product of this plant was sold in the fall for grain crops, and, in the spring, for cotton and other summer crops, and the accounts were kept on the basis of a fiscal year ended June 30. For the fiscal year ended June 30, 1917, the parties agree that the fertilizer plant earned net profits in the amount of $5,178.71.
    The petitioner makes his income-tax returns on a calendar year basis. For the year 1917, he included in his gross income only that part of the net earnings of his fertilizer plant for the fiscal year ended June 30, 1917, which the books of that concern indicated had been earned in the calendar year 1917. Upon audit of the return, the Commissioner held that all the profits of the fertilizer plant for the fiscal year ended June 30, 1917, were received by the petitioner in that year, made certain additions to the petitioner’s gross income, and determined the deficiency here in controversy.
   OPINION.

Lansdon:

Section 1(a) of tlie Revenue Act of 1916, applicable to the year 1917, provides, “that there shall be levied, assessed, collected and paid annually upon the entire net income received in the preceding calendar year from all sources by every individual, a citizen or resident of the United States” certain taxes, and other sections of the Act of 1917 set forth normal and surtax rates. 7'he evidence adduced at the hearing of this proceeding is conclusive that income of this petitioner in the amount of $5,178.71, earned in the last six months of 1916 and the first six months of 1917, was ascertained and credited on his books on June 30, 1917. Inasmuch as the petitioner failed to show what part of such income was received in 1916, the determination of the Commissioner is approved.

Judgment will he entered for the Commissioner.


text:
    Berks Foundry & Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6998.
    Promulgated December 8, 1926.
    1. Surplus of a corporation may not be reduced in determining the extent to which a dividend is paid from current earnings of a year by a “ tentative tax ” theoretically set aside out of such earnings pro rata over such year. Appeal of L. 8. Ayers & Co., 1 B. T. A. 1135.
    2. In determining invested capital for the calendar year 1919 the Commissioner correctly reduced surplus on account of the tax for the year 1919 prorated, and he also correctly excluded from surplus at the beginning of the year the amount of $6,650.06 representing additional tax for the year 1917.

      John W. Jacobs, Esq., and John W. Townsend, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income and profits tax of $772.23 for the calendar year 1920. The issues concern invested capital. The stipulation of facts is set forth verbatim.
    FINDINGS OF FACT.
    The Berks Foundry & Manufacturing Co. is a corporation organized under the laws of Pennsylvania, with principal office at Berks, Pa., and is engaged in the general foundry business.

      The Berks Foundry & Manufacturing Co. rendered its corporation income and excess-profits-tax return for the calendar year 1920, which return was audited and certain adjustments of the income and invested capital shown thereon were made by the Commissioner.
    In determining invested capital the Commissioner reduced surplus as at the beginning of the year by $3,277, on account of certain dividends paid on March 19, 1920, in excess of available current earnings. In computing the current earnings available the Commissioner first deducted a tentative tax. Had no tentative tax been deducted, the current earnings available for dividends would have so been increased that only a reduction of $1,591.83 in surplus as at the beginning of the year would have been occasioned by the payment of such dividends.
    In determining invested capital, the Commissioner reduced surplus as at the beginning of the year in the amount of $61.30, on account of the prorated amount of 1919 Federal income tax.
    In determining invested capital, the Commissioner reduced the surplus as at the beginning of the year by $6,650.05, on account of additional 1917 income and excess profits taxes determined and assessed by the Commissioner during the year 1923.
   OPINION.

Littleton:

Petitioner claims that the Commissioner erred (1) in deducting a tentative tax in computing the current earnings available for the payment of dividends on March 19, 1920; (2) in reducing surplus at the beginning of the year 1920 in the amount of the tax upon the income for the preceding year prorated; (3) in reducing the earned surplus at January 1, 1920, in the amount of $6,650.05, representing an additional tax for the calendar year 1917 determined and assessed in the year 1923.

The first issue is governed by the Board’s decision in the Appeal of L. S. Ayers & Co., 1 B. T. A. 1135. On the authority of that appeal it is held that the amount by which surplus was reduced on account of the tentative tax should be restored to invested capital.

Petitioner’s claims set forth in the second and third issues are not well taken and the Commissioner’s action in this regard is approved. Russel Wheel & Foundry Co., 3 B. T. A. 1168; Hutchins Lumber & Storage Co., 4 B. T. A. 705; Manville Jenckes Co., 4 B. T. A. 765; Burke Electric Co., 5 B. T. A. 553; Levine Bros. Co., 5 B. T. A. 689.

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


text:
    John E. Frymier, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1774.
    Promulgated December 8, 1926.
    Losses and expenses incurred in prior year are not deductible from gross income of tbe taxable year.

      Bertin A. ~Weyl, Esq., and W. H. Teasley, O. P. A., for the petitioner.

      D. D. Shepard, Esq., for the respondent.
    The Commissioner found a deficiency in income tax for the year 1919 in the amount of $682.59. In his original petition the petitioner alleged numerous errors of the Commissioner in determining the deficiency asserted. In an amended petition presented at the hearing, to which the Commissioner made answer in the form of a general denial, the petitioner abandoned some of his allegations of error previously alleged and introduced a new claim for a further deduction from his gross income for the taxable year. The effect of the amendment to the pleadings and the abandonment of issues by the petitioner is to leave two questions for adjudication by the Board, viz: (1) Whether the petitioner is entitled to deduct from his gross income for the taxable year an amount alleged to have been sustained as loss during such year, and (2) whether certain book entries as of the year 1919, and the facts in connection therewith, entitled the petitioner to deduct the amount thereof from his gross income in his income-tax return for such year as ordinary and necessary expenses.
    findings of pact.
    The petitioner is a married man, residing at Long Beach in the State of California. During the years 1916, 1917, and 1918, he was engaged in two enterprises. One was a fish cannery, operated under the fictitious name of the Golden State Tuna Packing Co., of which he was the sole owner, and the other was a cannery or packing house, operated under the fictitious name of Golden West Packing Co., in which he was associated with three partners, viz, Yan Landingham, Koda, and Tegima.
    The Golden West Packing Co. kept its books and made its income-tax returns on an accrual basis for a fiscal year ended on March 31. For the fiscal year of the partnership ended March 31, 1919, the petitioner had an agreement with his partners whereby he was allowed $200 a month as a drawing account. At December 31, 1918, he had drawn little or nothing under this agreement, and the amount of $1,600 had been credited to him on the books of the partnership. In making his income-tax return for the calendar year 1918, he included the balance of the undrawn drawing account standing to his credit on the books of the partnership in his gross income for such year, and in due course paid the Federal income tax assessed thereon.
    Some time in 1919, and in the fiscal year of the partnership ended March 31, 1920, Van Landingham purchased the interest of Koda and Tegima in the Golden West Packing Co., which had not been financially successful and was owing substantial amounts of money. It was agreed between the petitioner and Van Landingham, as a condition of the new partnership agreement entered into orally, that Van Landingham would assume and pay the petitioner’s proportionate part of the debts due by the partnership, and that the petitioner would cancel his claim against the partnership for salary accrued and credited to him prior to December 31,1918, in the amount of $1,600. In his income-tax return for 1919, the petitioner deducted such amount from his gross income as a loss sustained during that year. Upon audit of this return, the Commissioner disallowed such deduction and added $1,600 to the petitioner’s gross income for the year 1919 and determined, in part, the deficiency here in question.
    The Golden State Tuna Packing Co. needed additional capital in 1916. To secure such capital the petitioner entered into a written agreement with Van Landingham. The terms of this agreement material to the present issue were that Van Landingham would obtain or assist the petitioner to obtain the required capital, and, for such assistance in securing the money needed for operations, the petitioner agreed to pay the said Van Landingham one-half of all net profits earned by the Golden State Tuna Packing Co. until such time as the notes given for additional capital were paid in full. The petitioner also agreed to render monthly statements of the business to Van Landingham and to pay the latter his share of the profits accruing under the agreement at the end of each calendar year.
    The Golden State Tuna Packing Co. earned substantial profits during the years 1916, 1917, and 1918, and was sold by the petitioner some time in the year 1919. No cash payments were ever made to Van Landingham on account of the agreement whereby additional capital was obtained. Some time in 1919 the petitioner and Van Tjn.ndingha.Tn made a tentative adjustment of their financial relations with each other, which included many items in addition to the petitioner’s obligation to pay Van Landingham half the profits of the Golden State Tuna Packing Co. At the date of this adjustment, the books of the Golden State Tuna Packing Co. showed a capital investment or capital account in the net amount of $38,021.98, and that, at the date of the agreement whereby additional capital was obtained, the net investment account was $5,901.08. On this showing that the profits made during the life of the agreement, hereinafter described, amounted to $32,120.90, the personal account of Yan Landingham was credited with the amount of $16,060.45, and subsequently, with an additional amount of $3,883.60, or a total of $19,944.05.
   OPINION.

Lansdon:

The first question to be determined here is whether the petitioner was entitled to deduct the amount of $1,600 from his gross income for 1919 as a loss sustained during the taxable year. This is the alleged salary which the petitioner asserts that he earned, received credit for, and paid taxes on in 1918, but never received at any time. The petitioner relinquished his right to receive such salary in 1919, but it is in evidence that he received compensation therefor by having his share of the debts of the partnership paid, and there is no evidence that he sustained any loss in connection with this item.

The petitioner’s claim for a deduction from gross income for the year 1919, in the amount of $19,994.05, is based on the assertion that this was a payment made for the purpose of securing additional capital and, as such, was an ordinary and necessary operating expense. Such additional capital was obtained from banks on the joint note of Frymier and Van Landingham pursuant to an agreement which provided that Van Landingham should receive 50 per cent of the profits of the Golden State Tuna Packing Go. as compensation for guaranteeing such notes. This may have been the actual purport of the contract, but to us it has all the appearance of a partnership agreement. It is not necessary, however, to discuss the significance of the agreement. If the alleged expenses were incurred at all they apply to the years 1916, 1917, and 1918, only, since the Golden State Tuna Packing Co. was sold by the petitioner in 1919, and as his property engaged in no operation during that year. The law specifically provides for the deduction of ordinary and necessary expenses from gross income for the year in which such expenses are paid or incurred. The evidence convinces us that the Golden State Tuna Packing Co. kept its books on the accrual basis. It follows, therefore, that ordinary and necessary expenses should have been deducted from gross income for the year such charges accrued. There are no provisions of law under which we may authorize the deduction of expenses accrued in 1916, 1917, and 1918, from gross income of 1919.

Judgment will be entered for the Commissioner.


author: Smith:

text:
    Hotel Grunewald Co., Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1593.
    Promulgated December 10, 1926.
    Tlie cost of goods sold should be deducted from the gross receipts in determining net income.

      John F. Lanigan, Esq., for the petitioner.

      M. N. Fisher, Esq., and Ward Loveless, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits tax for the years 1918 and 1919 in the amounts of $4,222.89 and $7,041.80, respectively.
    The petitioner claims for the years 1918 and 1919: (1) additional depreciation on furniture and fixtures in the respective amounts of $3,442.17 and $3,731.59, being the difference between the depreciation computed at the rates of 8 per cent and 10 per cent, and (2) a deduction for obsolescence of intangible assets, due to prohibition legislation, in the respective amounts of $173,204.80 and $14,846.13. The petitioner claims a further deduction for the year 1919 of $21,006 for “ Room Supplies,” claimed to represent a part of the cost of wines and liquors incident to the conduct of its business in that year.
    FINDINGS OF FACT.
    The petitioner is a corporation organized and existing under the laws of Louisiana and known as the Hotel Grünewald Co., Ltd. During the years 1918' and 1919 and for several prior years, the company conducted a hotel at New Orleans. In connection with the general hotel business, the company also conducted a wholesale and retail liquor business, a catering business, a grocery business, and a laundry. The accounts in connection with each department with respect to operating cost, profits, etc., were kept separately. A firm of accountants with offices in the city was employed for that purpose.
    The liquor department was one of the principal departments of the business. In addition to the well-known brands which it handled, the company bought high-grade imported liquors and wines in bulk and dispensed them to the general trade under its own trademark and labels. The products of the company were widely advertised and were popular with the catering trade in New Orleans and vicinity. A bar was maintained in the hotel for retail trade. The wine and liquor business was begun soon after the hotel began operation in the year 1893 and increased steadily until the advent of prohibition.

      During the year 1919 the petitioner purchased wines and liquors to the amount of $21,006 from Theodore Grünewald for use in its regular business. These purchases were made in three installments and were entered on the petitioner’s books under the caption of “ Room Supplies.” The purchases were necessary to the regular conduct of the petitioner’s liquor business. The profits from the sales thereof were reported as income in the year 1919.
    The petitioner’s wine and liquor business was totally destroyed by operation of the Eighteenth Amendment to the Constitution.
   OPINION.

Smith:

It is conceded by the Commissioner that the petitioner is entitled to depreciation on furniture and fixtures for the years 1918 and 1919 at the rate of 10 per cent.

The petitioner returned as income for 1919 profits on the sales of liquors. In determining the deficiency the Commissioner added to the profits returned $21,006, representing the cost of liquors purchased from one of its stockholders. This was clearly incorrect. By this action the Commissioner overstated the net income in the amount of $21,006.

The petitioner was the owner in 1918 and 1919 of certain trademarks, trade-names, and probably a good will of some value connected with its liquor business, and the usefulness of such trademarks, trade-names, and good will was completely destroyed by the operation of the prohibition amendment to the Constitution. The evidence before us is insufficient, however, to enable us to determine the value, if any, of such assets, or what loss, if any, the petitioner suffered in respect of such assets in either of the years 1918 or 1919 as a result of the prohibition amendment. It becomes unnecessary, therefore, for us to determine whether an allowance may be made under the statute, if a value had been established.

Judgment wül te entered on 15 days’ notice, under Buie 60.


text:
    Hudson M. Knapp, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6143, 10794.
    Promulgated December 10, 1926.
    Where the wife of a member of a partnership in Louisiana dies intestate leaving minor children surviving her the issue of her marriage with the member of the partnership, and such partner informs his partner that it is his wish and desire that his share in the profits of the partnership should thereafter - go one-half to himself and one-half to his two minor children, held, that, in the circumstances in this case, the partner is liable to income tax upon his entire share of the profits of the partnership.

      Victor Canfield, C. P. A., for the petitioner.

      Henry Bavenel, Esq., for the respondent.
    These are proceedings for the redetermination of deficiencies in income tax for the years 1921 and 1922 in the aggregate amount of $325.70, and for the year 1923 in the amount of $688.22. The proceedings were consolidated for the purpose of hearing and decision. Only one issue is involved, namely, whether the petitioner is liable to income tax in respect of a portion of the profits of the share of the partnership which he desired to go to his minor children.
    FINDINGS OF FACT.
    The petitioner is a resident of Lake Charles, La., and a member of the partnership of Knapp & East. The partnership was organized January 1, 1912, and is engaged in the general contracting business in Lake Charles. The petitioner had a 50 per cent interest in the partnership, which was community property u^der the provisions of the statutes of Louisiana. Petitioner’s wife died intestate June 29, 1921, leaving as survivors her husband, the petitioner, and two infant children, of the age of one month and five years, respectively, both issue of her marriage to the petitioner.
    Subsequent to his wife’s death, the petitioner was appointed tutor for the children. An appraisal was made of the children’s estate, which appraisal shows as part of their estate, “An undivided one-fourth interest in the ordinary partnership of Knapp & East, general contractors, consisting of cash, accounts, equipment, materials, etc., appraised at its net value after deducting all liabilities, $10,094.25.” The recapitulation of the inventory shows:
    Real estate belonging jointly to said minors_$3, 750.00
    Personal property belonging jointly to said minors_ 14, 594.25
    Personal property belonging to Hogan Ileitmond Knapp
    [tlie elder minor]_ 1,874.42
    Total inventory_20, 218. 67
    After his wife’s death, the petitioner notified his partners, the partnership bookkeeper, and also other individuals, that it was his wish and his desire that his 50 per cent share of the profits of the partnership should thereafter go one-half to himself and one-half to his two minor children.
    During the entire continuance of the partnership, each partner had withdrawn only such amounts as were necessary for living expenses. No change was made in this regard after the death of the wife of the petitioner.
    No separate account for the minor children was ever set up on the partnership books. No entries were made in the partnership books evidencing any change in the partnership relationships. No income was ever drawn from the partnership on account of the minor children. The petitioner continued to pay all of the expenses of the minor children out of his own funds. No accounting of any portion of the partnership earnings in favor of the children has ever been made by the petitioner as tutor.
    In the years 1921, 1922, and 1923, the petitioner reported in his income-tax returns only one-fourth of the earnings of the partnership. The Commissioner has amended the petitioner’s income-tax returns by including in gross income one-half of the income of the partnership for each year. The total deficiencies in income-tax herein result from such amendment of the petitioner’s returns.
   OPINION.

Smith:

Petitioner was appointed natural tutor to his two minor children upon the death of their mother June 29, 1921. As such tutor he was required by the statutes of Louisiana to administer the property of his wards for their benefit. Included among such property was an undivided one-fourth interest in the partnership of Knapp & East of a value of $10,094.25. The petitioner chose to leave this money invested in the partnership and indicated to his partner and others that it was his wish and desire that his share of the profits of the partnership should thereafter be divided equally between himself and his two minor children. In his income-tax returns for the years involved in this proceeding the petitioner accounted for one-half of his 50 per cent share of the profits of the partnership and filed returns as fiduciary accounting for the balance of his share of the profits. It is the petitioner’s contention that he is not liable to income tax with respect to the share of the profits of the partnership which he desired should go to his children.

The petitioner does not contend that his minor children became members of the partnership of Knapp & East. It is his contention, however, that, by virtue of the statutes of Louisiana and of his alleged renunciation of his right of usufruct in the property of his children, he is not liable to income tax in respect of one-half of the profits of the partnership credited to him upon the partnership’s books.

The right of usufruct from property of a deceased wife accrues to the husband immediately upon the death of the wife. (Louisiana Laws, Act of March 25, 1844.) The usufructuary may at any time renounce his usufruct. Succession of Dougart, 30 La. 268. Article 555 of the Revised Civil Code of Louisiana (Merrick, 3d ed.) provides:

Alienation of Usufructuary Rights. The usufructuary may enjoy by himself or lease to another, or even sell or give away his right; but all the contracts or agreements which he makes in this respect, whatever duration he may have intended to give them, cease of right at the expiration of the usufruct.

Article 624 provides:

Benunciation Sy Usufructuary; His Creditors’ Opposition to. The creditors of the usufructuary can cause to be annulled any renunciation which he may have made of his right to their prejudice, ^whether it be accompanied with fraud or not, and they are permitted to exercise all the rights of their debtor in this respect.
In all cases the renunciation of the usufructuary can not be inferred from circumstances; it must be express.

In the case of Judice v. Provost, 18 La. Ann. 601, it was held that a usufructuary could not abandon part of the usufruct without abandoning all of it. It was there stated that:

If the usufructuary desires to be relieved from the repairs and charges imposed on him as usufructuary, he must renounce the usufruct as a whole and not in part of the property subject to right of usufruct.

The evidence of renunciation of the petitioner’s right to usufruct with respect to the property belonging to his minor children is not conclusive. Although the minor children inherited other property than the one-fourth interest in the partnership assets, there is no evidence that the petitioner renounced or intended to renounce his right of usufruct with respect to the other property. As tutor he had the administration of the entire property. So far as the evidence shows the partnership carried on business after the death of the petitioner’s wife the same as it had done before. The books of account do not reflect any part of the profits of the partnership as being accumulated or belonging to the minor children.

The petitioner apparently did not comply with the provisions of law of the State of Louisiana with respect to the administration of the property of his wards. Article 347 R. C. 0. provides:

The tutor shall be bound to invest in the name of the minor, the revenues which exceed the expenses of his ward, whenever they amount to five hundred dollars. In default thereof, he shall be bound to pay on such excess the rate of interest allowed by law.

Article 348 R. C. C. provides in part:

The investment of the funds of the minor must be made by public act and secured by mortgage, unless such investment be made in the bonds of the United States of America, or in bonds of the State of Louisiana, or in bonds for the payment of which the faith of the State of Louisiana stands pledged; and this investment in bonds shall only be made under a decree of the court having jurisdiction over the tutorship, nor shall such investment be changed or the bonds alienated, except by a decree of the same court.

The petitioner made no accounting to the court as tutor of his minor children.

In his brief, counsel for the petitioner states:

It is immaterial whether a segregation of income due the children is set up on the books showing their individual or collective interests, because they do not receive such income as persons, but as income through a fiduciary, who is the taxpayer, and as a matter of convenience accounts have not been opened to show any change in division of profits.

In our opinion the evidence does not warrant a conclusion that the petitioner received a portion of his partnership profits as a fiduciary. He had both the legal and the equitable title to those profits. The taxing statute provides:

That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. * * * (Section 218(a), Revenue Act of 1921.)

It is immaterial what the petitioner did with his share of the partnership profits after they had been received by him. Appeal of Ormsby McKnight Mitchel, 1 B. T. A. 143; Ormsby McKnight Mitchel v. Bowers, 15 Fed. (2d), 287.

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

GReen not participating.


author: Milliken:

text:
    Donaghey Real Estate & Construction Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1050.
    Promulgated December 11, 1926.
    1. A claimed loss, due to a judgment rendered against petitioner and another in a suit for personal injury, disallowed in the absence of evidence showing petitioner made the compromise settlement.
    2. The probable useful life of a five-story building of fire proof construction determined to be 33½ years as of March 1, 1913, and depreciation thereon allowed at the rate of 3 per cent.
    3. A salary paid a stockholder was not a reasonable compensation for the services rendered and the. deduction claimed therefor not allowed.

      M. A. Matloclc, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.

      This proceeding results from the determination by respondent of deficiencies in income tax for the calendar years 1920 and 1921, in the respective amounts of $653.04 and $961.02. Petitioner assigns three errors in the determination of the deficiencies in question: (1) That a loss was sustained in the year 1920 in the amount of $500, which respondent has not allowed as a deduction; (2) that the salary of the secretary of the petitioner for the year 1921 in the amount of $3,599.22 has been disallowed as a deduction; and (3) that a reasonable allowance has not been made for depreciation.
    BINDINGS OF FACT.
    Petitioner is a corporation organized and operating under the laws of Arkansas, with principal office at Seventh and Main Streets, Little Rock. It has an authorized capital stock of $100,000, par value of $100 per share. The stockholders during the years in question, and their stockholdings, were as follows:
    Name. Number of shares.
    Bruce Bullion_ 1
    Mrs. George W. Donaghey_700
    George W. Donaghey_229
    George W. Donaghey and Mrs. George W. Donaghey are husband and wife.
    Petitioner owns a building situated at Seventh and Main Streets, Little Rock, Ark., which is five stories high, of fireproof construction, having a concrete foundation, brick walls, and a rubber fabric roof. The first floor of the building is wooden and the four upper floors of the building are concrete. There is a small basement sufficient to house only the heating plant. The building was erected on a site where a brick building had stood, which was destroyed by fire. The foundation was the same as that of the building which was destroyed by fire. The foundation is of concrete and about 2½ feet below the ground level. The brick salvaged from the burned building was used in the construction of the new building. The first story is used for store purposes and the upper stories have been partitioned for offices. The building is not adapted for a modern office building and, by reason of the erection of more modern buildings in Little Rock, is one-fourth vacant. It was stipulated at the hearing that the value of the building on March 1, 1913, was $194,386; the value of the elevators and enclosures was $11,527, and a rate of 5 per cent on the elevators and enclosures should be allowed for the years in question. On March 1, 1913, the building had a useful life of 33ys years.
    In the year 1920 a tenant of the building owned by petitioner was killed by an elevator accident occurring in the building, and the heirs of the deceased brought suit against George W. Donaghey, individual, and the Donaghey Beal Estate & Construction Co. for damages by reason of the death. The petitioner carried insurance to protect itself against such damages. The policy of insurance protected petitioner to an amount not exceeding $5,000 in any one claim. The suit brought was compromised in the year 1920 for $5,000, the insurance company paying $4,500 and George W. Donaghey, $500.
    Mrs. George W. Donaghey was secretary of petitioner during the year 1921 and, during the year, was paid a salary of $3,599.22. The business of the petitioner was the rental and management of the office building located at Seventh and Main Streets, Little Rock, Ark. During the year 1921 a manager for the building was employed at an annual salary of $1,825, his duties consisting of seeing that the building was maintained upon a paying basis and that it was fully rented, collecting rents, seeing that janitor and elevator employees performed their duties, and purchasing supplies for the building. The president of the petitioner, George W. Donaghey, also devoted a large part of his time to the management of the building, receiving a salary in the year 1921 of $5,000 for his services. His duties consisted of interviewing prospective tenants, seeing that tenants were not in arrears in the payment of their rent, and overseeing all improvements and repairs necessary to the efficient operation of the building. Mrs. George W. Donaghey made no leases for space in the building, did not interview prospective tenants, purchased no supplies for the building, took no part in directing any of the improvements or repairs to the building, collected no rents, and employed no help necessary to the efficient operation of the building. When her husband, George W. Donaghey, was out of the city, Mrs. Donaghey signed the necessary checks for the purchase of supplies or for the payment of employees’ wages. She conferred with her husband as to the management and operation of the building, and, in the absence of her husband, went to the building two or three times each month to sign checks.
   ORINION.

Milliken:

Petitioner sought to have us consider the year 1919, for which the respondent advised it of an overassessment. We have decided that we have no jurisdiction of the year in which no deficiency is determined. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

Petitioner claims a loss of $500 for the year 1920, resulting from the settlement of a damage suit. If the $500 had been paid by the petitioner, there would be no question under the circumstances in this case that it should be allowed to deduct the losses claimed. The evidence shows that the payment was made by George W. Donaghey, individual, who was also joined as co-defendant in the personal injury suit. He may have been acting for the petitioner, but we have no testimony that the corporation paid the same in satisfaction of the damage suit either to the plaintiffs in the suit or to George W. Donaghey. Consequently, having proved no payment, petitioner is not entitled to deduct the sum claimed.

Considering the entire testimony introduced at the hearing of this proceeding and the facts set forth in the findings of fact, we are of the opinion that the building of the petitioner had a useful life of 33⅛ years on March 1,1913, and that the petitioner should be allowed depreciation on this building at the rate of 3 per cent per annum.

In an original petition filed, error was alleged in that the respondent had disallowed salary paid to Mrs. George W. Donaghey for the year 1920 in the amount of $3,300, but at the hearing of this proceeding counsel for the petitioner stated the issue would be waived, and accordingly we make no finding relative thereto. Petitioner, however, avers that it is entitled to a deduction of $3,599.22, representing salary paid to Mrs. George W. Donaghey in the year 1921. It is admitted by respondent that $3,599.22 was paid to her in the year 1921. Section 234 (a) of the Revenue Act of 1921, provides that in computing net income a corporation shall be allowed as a deduction a reasonable allowance for salaries paid as compensation for personal services actually rendered. It becomes necessary to determine if the salary of $3,599.22 paid to the secretary of the petitioner represents a reasonable allowance for personal services actually rendered. The business of the petitioner was that of managing and renting an office building. The building was not expensive or pretentious and was only five stories in height. The income-tax return filed for the calendar year 1921 discloses that rents were received in the sum of $42,025.04, and deductions from gross income claimed by the petitioner for the year amounted to $40,109.26, leaving a net income from the building of $1,915.78, which reported net income was entirely wiped out by the exemption of $2,000, resulting in no taxable income on the return as originally filed. However, upon an audit of the 1921 return by the respondent, net income was determined to be $9,610.20, resulting in the deficiency in question of $961.02. In the net income as redetermined by the respondent, is represented the salary dis-allowance of $3,599.22.

Petitioner employed during the year 1921 a manager for its building and paid him a salary for the year of $1,825. His duties consisted of seeing that the building was economically and efficiently managed — he interviewed prospective tenants, collected rents, purchased supplies and employed labor. George W. Donaghey, president of the petitioner, was paid a salary of $5,000 during the year 1921. His duties consisted of assisting the manager of the building, collecting some accounts, supervising repairs and renovations of the building, sighing the checks necessary for the payment of wages, and purchasing supplies.

Mrs. George W. Donaghey did not interview prospective tenants, make leases, purchase supplies, direct the making of repairs or improvements, or collect the rents. In the absence of her husband she went to the office of the petitioner two or three times a month to sign checks. George W. Donaghey testified that his wife frequently consulted with him as to the management of the building, but also stated on cross examination that it was the custom of his wife to counsel with him concerning all his business affairs and that her consultation did not confine itself to the management of the building of the petitioner. Based upon the services, as shown of record, which Mrs. George W. Donaghey performed, we are -of the opinion that the salary of $3,599.22 was not a reasonable compensation for services performed in the year 1921 and must affirm the action of the respondent on this issue.

Judgment will be ent&red on 15 days’ notice, under Bule 50.


text:
    J. A. Rowland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11476.
    Promulgated December 11, 1926.
    In the absence of competent evidence, the March 1, 1913, value of timberlands, as determined by the Commissioner, affirmed.

      James G. Davis, Esq., for the petitioner.

      Robert A. Littleton, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income taxes for the calendar years 1922, 1923, and 1924, in the respective amounts of $730.15, $2,729.99, and $1,999.11. Several errors were assigned in the original petition, but on the date of hearing counsel for the petitioner stipulated that only two grounds of error were to be assigned and waived other errors alleged in the original petition. The errors alleged are: (1) That depletion has not been allowed the petitioner for the years in question; (2) that a higher March 1, 1913, value should be allowed for timberland sold in 1924.
    FINDINGS OF FACT.
    Petitioner is a resident of Eldorado, Ark., and owned a tract of timberland in section 17, in Union County,, Arkansas. The major portion of the growth of timber on the tract is hard wood. Owners of timberland in the same vicinity as that of the petitioner have been allowed a value of $4 per thousand. A cruise of the timber holdings of the petitioner was made in 1912 by Lemner Brothers, of New Orleans, La.
   OPINION.

Milliken:

In petition filed it is alleged that petitioner sold certain timber in 1924, although no proof was introduced that such timber was sold in the year 1924, and that the Commissioner committed error in determining the March 1, 1913, value thereof for the purpose of computing the gain derived from the sale. We are able to find as a fact that the petitioner did own a tract of timber, located in section 17, in Union County, Arkansas, and that the major portion of the growth of the tract was hard wood. We have no evidence before us warranting a finding that petitioner owned such timber on March 1, 1913, or whether the timber in question was acquired subsequent thereto. One witness testified that he owned timber in the same vicinity as did the petitioner, and was asked the following questions by counsel for the Commissioner:

Q. Are you familiar with the timber tract of Mr. J. A. Rowland located in section 17 in Union County, Arkansas?
A. I have never been over it by forties but I know the timber.
Q. You have knowledge of the growth of timber that is on it?
A. I have knowledge of the quality of the timber and a general knowledge of the quantity, but I never made a forty estimate of it.
* * * * * * *
Q. What values did they [the Commissioner] allow you on your timber?
A. Four dollars ($4.00) per thousand.

The petitioner alleges that the Commissioner committed error in determining the March 1, 1913, value of his timber, and ,it is not enough to introduce a witness that has only a general knowledge of the quantity and quality of the timber of the petitioner and who states that the Commissioner allowed him a value of $4 per thousand. We are uninformed whether such last-named value was allowed to the witness for the purpose of computing gain or loss on sale, or depletion, or whether it was a value determined subsequent to March 1, 1913, and furthermore, the value allowed one taxpayer may be no criterion of the value of the property of another taxpayer, where the basis of value, quantities and qualities and dates in question may be entirely different concerning the timber to be valued.

Counsel for the petitioner also sought to introduce a written report of a cruise of his timber made by Lemner Brothers, of New Orleans, La. Counsel for the Commissioner objected to the receipt of the report in evidence, on the ground that the persons making the report had not identified it and were not present for the purpose of cross examination to determine the truth or falsity of the statements that may have been made therein, or for any interrogation as to the basis upon which the report was made. The objection of counsel for the Commissioner was sustained. By reason of the lack of competent evidence we must affirm the action of the Commissioner- as concerns the March 1, 1913, value of the timber of the petitioner.

At the hearing of this case counsel for the respective parties stipulated that the petitioner was entitled to an allowance for depletion of $1,037.87 for the calendar year 1922, $5,733.69 for the calendar year 1923, and $5,202.00 for the calendar year 1924, and such allowance should be taken into consideration in redetermining the deficiencies for the years in controversy.

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


text:
    Charles E. Fenner and Virginia S. Fenner, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2216.
    Promulgated December 14, 1926.
    The amount of debts ascertained to be worthless and charged off within the year, and deductible from gross income, determined.

      E. Barrett Prettyman, Esq., and Isom J. Guillory, Esq., for the petitioners.

      Henry Ravenel, Esq., for the resxiondent.
    This is a proceeding for the redetermination of deficiencies in income tax as follows:

    Only a part of the deficiency for the year 1920 is in controversy and arises from the disallowance by the Commissioner of $62,370.28 of a total deduction for bad debts in the amount of $66,527.99, claimed on the income-tax return of Fenner & Beane, a partnership.
    FINDINGS OF FACT.
    The petitioners are husband and wife. During the calendar year 1920 Charles E. Fenner was a member of the partnership of Fenner & Beane and had a one-half interest therein. This firm was engaged in the cotton brokerage business, with its home office in New Orleans, La. It had branch offices at New York City, at Dallas and Corsicana, Tex., and at several other small points. It also had 15 or 20 correspondents scattered throughout the south. The firm was a member of the New Orleans Cotton Exchange, the New York Cotton Exchange, the Chicago Board of Trade, the Liverpool Cotton Association, the New York Produce Exchange, and the New York Stock Exchange.
    During the year 1920 it had approximately 1,200 active accounts, or customers, for whom it bought and sold cotton future contracts.
    The firm had two classes of accounts: one in which the customers put up in advance cash or collateral as security for margins on the purchase or sale of future contracts, which were called “ original margin accounts,” and the other in which the firm executed the orders for contracts without security from the customers, which were called “ credit accounts.” The latter accounts were carried entirely on the credit of the customer, while on the “ original margin accounts ” the firm was secured only to the extent of the deposit made.
    If the market dropped so that the margin or credit allowance of a customer was exceeded by the drop, the customer was notified to protect his order by the deposit of additional margin. If he failed to do this, the account was closed out by selling or buying for his account a corresponding amount of cotton for the same maturing date. The amount of the loss, if any, upon the transaction in excess of the margin deposit then stood as a debt owing by the customer to Fenner & Beane. The debts hereinafter referred to arose in this manner.
    During 1920 there was a big drop in the price of cotton. Middling-cotton sold for about 35 or 36 cents a pound in January and at 31½ cents in July, and dropped to 12½ cents in December. The' result was that cotton merchants throughout the south who had cotton on hand found themselves in a failing condition, and banks were more or less involved, many of them having loaned money on cotton at 30 cents a pound. Many concerns and individuals went into bankruptcy. The whole south was seriously affected.
    Fenner was the partner of the firm who opened accounts and extended credit to customers and attended to the collection of accounts. When the price of cotton dropped very precipitously in the fall of 1920, the partnership called for additional margins from customers whose accounts were not amply protected, and if the customers did not respond promptly their accounts were closed out. Statements were then sent to customers and demands were made for the amounts owed. In some instances drafts were drawn upon customers and the drafts were not paid. In other instances correspondents of the firm made personal calls upon debtors and endeavored to collect accounts due. Many of the customers lived in States with anti-future laws, that is, laws which refused legal process for the collection of debts arising from dealings in cotton futures. The files of the partnership show the correspondence had with debtor customers. Near or at the close of 1920, Fenner went through these files and from information contained therein reached the conclusion that the accounts of thirty-eight customers, listed below, were worthless and ordered them charged off.

    B. B. Butcher, one of the debtors, resides at Clarksville, Tex., which was an anti-future State. Repeated efforts were made to collect the account by mail and calling on him in 1920, without effect. Attachment proceedings in rem were had against J. N. Wisner, garnishee, New Orleans, in 1921. These proceedings showed no funds. P. E. Dukes, another debtor, living in Branchville, S. C., sent a check in 1920 which proved to be worthless. The partnership solicited business from Dukes after December 31, 1920, and advised him that his new margins were not to be credited against his old account. The partnership hoped in this way to earn commissions which would offset a part of the debt owed. hi. B. Feagin, of Ennis, Tex., gave a note in 1920 which was due in November, 1920, but which was not paid. In 1921 he sent a note dated February I, 1921, which also was not paid. J. P. Green, of Cooper, Tex., surrendered all his property to a bank in October, 1920. Drafts on him were returned unpaid. Garrett & Calhoun, of Augusta, Ga., were cotton merchants. They wrote in December, 1920, that they could not pay. They went into bankruptcy in the early part of 1921. In April, 1921, Fenner & Beane wrote them that they hoped they would work out some plan to get on their feet. D. B. Jennings, of Memphis, Tenn., did not live in an anti-future State. He was indebted to the partnership in the amount of $12,000. An effort was made by the partnership to collect this amount amicably, but without success. The account was placed in the hands of attorneys in February, 1921, who secured a confession of judgment from the debtor, which the attorneys agreed not to file within a certain period of time. The confession of judgment was in fact filed in 1923. The indebtedness of this customer was secured by a note which bore the endorsement of Wells and Gustafson, correspondents of Fenner & Beane, which correspondents lost practically everything they had in 1920. Subsequently, in 1922 or 1923, Wells made some money and has paid $6,000 upon the note guaranteed by him. N. L. Kelly, Sr., of Clinton, Tex., owed the partnership $2,764.37. Fenner & Beane accepted a note of this debtor dated October 23, 1920, which note became due in 1920, but which was not paid at maturity. The note was not secured. On January 3,1921, the firm addressed a letter to an attor-nejr in an attempt to determine whether the account was collectible. J. S. Leibman was a dentist living at Atlanta, Ga. He had no financial means, although his family had large means. The files of the partnership show that a letter was written with regard to this account on January 6, 1921, and subsequently a request was made for an investigation of the debtor. In 1921 a letter was received from one Cronheim, in which Cronheim stated that the debtor had had an interview with him and that he (Cronheim) was of the opinion that the partnership had no case. Lockhart & Co., of Pleasant, Tex., was a firm closely related to the firm of F. G. Moore & Co., of Greenville, S. C. This firm went into bankruptcy in 1921. L. G. Moore & Co., of Greenville, S. C., went into bankruptcy at the same time. H. H. Price, of Athens, Ga., was sued by the partnership in 1921 for the recovery of the debt owed by him. He successfully pleaded the anti-future law of that State. W. T. Slater, of Ennis, Tex., went into bankruptcy in May, 1921. E. T. Wicker, of Greenville, Tex., lost his property in 1920. His account was placed in the hands of an attorney, who early in 1921 advised that litigation would be useless. Late in 1920, or early in 1921, Wicker made arrangements to pay $25 each month on the account. A total of $150 was collected through these monthly payments. F. E. Spier, of Dallas, Tex., became involved in 1920. Early in 1921 attachment proceedings in rem against John F. Clark & Co., garnishees, were brought, but nothing was collected. Spier’s account had been secured by a correspondent of the partnership who became a guarantor of the account. The correspondent was in the employ of the petitioner at the close of 1920 and has remained in its employ to the present time. In 1922 the partnership compromised the account with the correspondent on the basis of 50 cents on the dollar.
    The files of the partnership with respect to amounts owed by many of the smaller debtors were lost and Fenner could give no details regarding them. He knew, however, the financial condition of some of the debtors and knew that some debtors had lost their property in 1920. Attempts had been made to collect all the accounts in 1920, which attempts had failed, and from the evidence in the possession of Fenner at December 31, 1920, he ascertained the accounts to be worthless.
    Early in 1921, Fenner & Beane, being in need of additional capital, interested one Norman, who agreed to become a partner and to invest a certain amount of money in the business. On January 31, 1921, thirty-five of the above accounts which had been charged off to profit and loss were restored to the books of account, and “ profit and loss ” -was credited in the amount of $62,370.28. Three of the accounts charged off at the close of the year, namely, Alf Page, $50; W. O. Taylor, $3,382.71; and W. A. Wilkins, $725, were not restored to the books of account. The thirty-five accounts were restored to the books for the purpose of keeping them active before the partnership and also to enable Norman to judge of their possible value. On December 31, 1921, an entry was 'made on the books as of April 30, 1921, by which $6,732.32 of the uncollected accounts was charged to “ Fenner & Beane in liquidation ” and the balance, $54,353.08, to “ Reserve for notes and accounts receivable.”
    For years prior and subsequent to 1920, Fenner <& Beane have charged to “ profit and loss ” certain debts determined to be worthless; no question has ever been raised -with respect to the correctness of the charge-off, and no amount claimed as a deduction for bad debts in income-tax returns has ever been disallowed by the Commissioner for any year except 1920. The debts charged off the books of account in 1920 in a total amount of $66,527.99, and disallowed by the Commissioner in the amount of $62,370.28, have not been claimed as deductions from gross income in subsequent partnership returns, and all amounts collected from those accounts in subsequent years have been returned as income in the year in which such collections were made.

      Of the accounts charged off at December 31, 1920, only $11,452.65 had been collected np to December 31, 1924. Upon the account of J. S. Leibman, it was discovered subsequent to 1920 that Leibman had another account with the partnership not connected with dealings in cotton, in which there was a balance due Leibman of $394.32. This was applied against his account. The F. E. Spier account was guaranteed by one Morrow, a correspondent of the partnership. He was also indebted to the partnership as endorser in the amount of $10,000 or $12,000. The partnership comprised Morrow’s indebtedness in 1922 or 1923 for $6,000, and $3,774.45 of that amount was credited to Spier’s account.
    The following accounts charged to profit and loss at December 31, 1920, were not ascertained to be worthless within the taxable year:
    D. B. Jennings-$12, 000. 00
    E. T. Wicker_1_ 5,593.22
    E. E. Spier- 5,366. 46
    The balance of the accounts charged off at December 31,1920, were ascertained to be worthless in the calendar year 1920.
   OPINION.

Smith:

The question presented by this proceeding is whether the partnership of Fenner & Beane is entitled to deduct from gross income, in its partnership income-tax return for 1920, $62,370.28 for bad debts which were disallowed as a deduction by the Commissioner in the audit of the return. The provision of the Revenue Act of 1918 which is involved is section 214(a), reading:

That in computing net income there shall be allowed as deductions:
* * * * * * *
(7) Debts ascertained to be worthless and charged off within the taxable year.

The evidence indicates that the partnership of Fenner & Beane attempted during the year 1920 to collect all delinquent accounts. Debtors were sent statements and bills for amounts owing by them, and in some cases drafts were drawn upon the debtors, which drafts were returned unpaid. In other cases the partnership determined through its correspondents the financial status of the debtor and the probability of payment. All but one of the debtors lived in States which had anti-future laws, which prevented the collection by legal proceedings of debts of the character of those owed to the partnership. The evidence shows that, after a careful consideration of these facts, the nature of the claims, and the attendant and surrounding circumstances, the partnership determined the accounts to be worthless and charged them off their books of account. We are satisfied that there was an actual ascertainment of worthlessness of all the debts charged off with the exception of those owed by D. B. Jennings, E. R. Wicker, and F. E. Spier, in the aggregate amount of $22,959.68. The balance of the debts disallowed as deductions from gross income by the Commissioner, amounting to $39,410.60, were ascertained to be worthless at December 31, 1920.

There remains to be considered whether the accounts were “ charged off ” within the meaning of the statute, in view of the fact that they were charged back on the books in 1921. We are of the opinion that this reversal of the entries in the circumstances indicated does not affect the validity of the charge-off. They were charged back on the books merely for the purpose of keeping a record of them. See Appeal of Huning Mercantile Co., 1 B. T. A. 130.

Judgment will he entered on 15 days' notice, under Bule 50.

Van Fossan dissents.