author: TkaMmeix :

text:
    Appeal of ANNA TAYLOR.
    Docket No. 7042.
    Submitted January 30, 1926.
    Decided April 8, 1926.
    A retained royalty right in an oil lease is property. When it, or a part of it, or an interest therein, is sold in 1921, the taxable gain or deductible loss resulting therefrom is based on the cost or the March 1, 1913, value thereof, in accordance with section 202 of the Revenue Act of Í921, and not upon the discovery value.

      Arthur J. Seaton, 2?sg., for the Commissioner.
    Before Trammell and Phillips.
    This is an appeal from the determination of a deficiency in income ax for 1921 in the amount of $4,473.25. The taxpayer contends hat the amount of $32,000, received from the sale of a fractional >art of her royalty interest in oil production from land which she wns and had leased is a return of capital and. not income. . ,

      FINDINGS OP FACT.
    The taxpayer is an individual residing at Haynesville, La. Ir 1890, 1901, and .1905 she and her husband acquired by purchase certain tracts of land in Claiborne Parish, La., described as follows
    N ½ of NE ⅛ of NW ½, Section 14, and SE ⅛ of NE ¼ of Section 15, al in Township 23 North, Range S West, Claiborne Parish, La.
    NW ¾ of NW ¾ of Section 14, Township 23 North, Range 8 West, Clai borne Parish, La.
    SE ⅛ of SW ⅛ of Section 11, Township 23 North, Range 8 West, Clai borne Parish, La.
    Luring 1919, the taxpayer leased the foregoing properties to ont J. E. Smitherman, of Shreveport, La., retaining one-sixteenth royalty interest in all oil to be produced by the lessee.
    In March, 1921, oil was discovered under the property and the fielc became known as the Haynesville oil field. Subsequent to the dis cover}7 of oil, and during 1921, the taxpayer sold a portion of he: retained royalty interest for $32,000. After the sale she retainec a 13/384 royalty interest in all the above-mentioned lands, ex cept the SE ¾ of the SW ½ of section 11, township 23 north range 8 west, in which she only retained a 13/768 interest. For th* fractional interest retained after the sale, the Commissioner ha: allowed a capital sum value of $224,064.20, and has further allowec the taxpayer depletion on said retained fractional interest at the uni rate of $0.97875 per barrel. The Commissioner and the taxpave are agreed on these figures.
   OPINION.

TkaMmeix :

There is no controversy over the facts in this case The question to be determined is whether the basis which is to b applied against the cost of determining the profit or loss from th sale of the royalty interest is the cost or fair market price or valu as of March 1, 1913, or is it to be the value which the seller wouli have had returned to her in the way of deductions for depletion base: on discovery value had she retained the interest instead of selling il

The Commissioner relies upon section 202 of the Nevenue Act o 1921 and the taxpayer relies upon section 214 (a) (10) of the sam Act. It therefore becomes necessary to examine each section for th purpose of ascertaining to what kind of business transactions result ing in income each section is to' apply. The title of section 202 is “ Basis for Determining Gain or Loss.” The title of section 214 is “Deductions Allowed Individuals.” From an examination of th titles and each section separately, it appears that Congress intende to set out in section 202 a basis for determining gain or loss in th case of every sale or other disposition of property.

The question then arises: Did the taxpayer in this case sell or dispose of property ? The admitted facts are that she sold a fractional royalty interest in oil to be produced by the lessee.

The term property ” has frequently been held by the courts to include every interest one may have in any and everything that is the subject of ownership. Frorer v. People, 141 Ill. 171; 81 N. E. 395; Watson v. City of Boston, 209 Mass. 18; 95 N. E. 302.

In the case of Lynch v. Alworth-Stephens Co., 267 U. S. 364; 45 Sup. Ct. 274, the United States Supreme Court had before it the question whether the interest of a lessee in ore deposits was property for the purpose of the deduction allowed by statute on account of the exhaustion, wear and tear of property. The court said:

It is, of course, true that the leases here under review did not convey title to the unextracted ore deposits, United States v. Biwabik Mining Co., 247 U. S. 116, 123; but it is equally true that such leases, conferring upon the lessee the exclusive possession of the deposits and the valuable right of removing and reducing the ore to ownership, created a very real and substantial interest therein. See Hyatt v. Vincennes Bank, 113 U. S. 408, 416; Ewert v. Robinson, 289 Fed. 740, 746-750. And there can be no doubt that such an interest is property. Hamilton v. Rathbone, 175 U. S. 414, 421; Bryant v. Kennett, 113 U. S. 179, 192.

In the disposition of that case, the court said that there was nothing to suggest that the word “ property,” from which the deduction on account of exhaustion was permitted, is used in any' restricted sense. If the interest of a lessee in a mining lease where the title to ore had not been conveyed was property, we think that there can be no basis for holding that the interest which the taxpayer had and which she sold, that is, the right to receive royalties on all oil recovered from the land, is not property. There is nothing to suggest that the term “ property, real, personal, or mixed,” as found in section 202 of the Revenue Act of 1921, should be given a more limited meaning than the term “ property,” for the purpose of exhaustion, contained in section 12 (a) (2) of the Revenue Act of 1916. The taxpayer had the right to receive royalties on oil recovered. She could have enforced and protected that right. She could not have been deprived of it without due process of law. The fact that it was property is further shown from the fact that she sold and conveyed it to another person. The Commissioner has also allowed the taxpayer a deduction on account of the exhaustion of that part of the royalty right which she retained. The same thing can not be property for one purpose and not property for another.

The taxpayer having sold property, whether it be real, personal, or mixed, the transaction comes within the provisions of section 202 of the Revenue Act of 19211 The basis for determining gain or loss on the sale or other disposition of property is the cost or the March 1, 1913, value thereof if acquired prior to that date.

Section-214 of the Revenue Act of 1921, which allows a deductior to taxpayers, for the depletion of oil based on discovery value, excepi in so far as such a deduction reduces the basis, is not applicable tc determine gain or loss from the sale of property. The only basis recognized for determining gain or loss is the cost or the March 1 1918, value of property. Discovery value has no connection or relation to such a basis. Section 211 (b) of the Revenue Act of 1921 provides as follows:

(b) In the case of a boria fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by this section attributable to such sale shall not exceed, for the calendar year 1921, 20 per centum, and for each calendar year thereafter 16 per centum, of the selling price of such property or interest.

The above is a relief provision applicable by its own terms to taxpayers who themselves carry on prospecting or exploration work, and who make discoveries based upon which the property has its principal value. The taxpayer did not cite the above section as being applicable to this appeal, and clearly it has no application. The taxpayer did not make the discovery and does not come within the provisions of the above section. This section, however, throws some light upon this appeal. It indicates that Congress did not consider that section 214 relating to depletion allowances was applicable to gain or loss on the sale of property. If the provisions of section 214 were applicable and the taxpayer had the right to recover the discovery value before reporting any profit from the sale of mining properties, including any interest therein, it would have been unnecessary for Congress to have made provision by section 211 (b) above-quoted.

Having concluded that the taxpayer sold property in 1921, the question then presents itself as to whether she owned this property on March 1, 1913, and, if so, what was its value on that date.

The taxpayer owned the fee title to the property on March 1, 1913. This included all subordinate rights, including the right to seek oil and to recover any oil that might be under the surface of the land, and the right to make a lease giving any other person the right to drill for oil and to recover any that might be found. She authorized, by a lease, other persons to drill for oil in 1919, and as consideration for this lease received the right to receive royalties in the event oil was recovered. No oil had been discovered in this territory in 1913. It was not discovered until 1921. The taxpayer in her brief concedes that the right to drill for oil had no value on March 1,1913. It must follow that the right to receive royalties had no value at that time.

Since the taxpayer sold property, within the meaning of section 202 of the Revenue Act of 1921, in excess of cost, and this property had no value on March 1, 1913, the entire consideration received for such property is taxable gain.

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


source: Caselaw Access Project

author: James:

license: Public Domain

text:
    Appeal of NATIONAL BAKERS’ EGG CO., INC.
    Docket No. 706.
    Submitted May 12, 1925.
    Decided April 8, 1926.
    The taxpayer was the successor of a • corporation with total paid-in capital in cash of $60,000. The taxpayer was organized in 1919, taking over the assets of the predecessor which then had a value of $26,785.23, for which stock of $25,000 was issued. Held, that the invested capital of the taxpayer was limited to the value of property paid in for stock and could not be measured by the invested capital of the predecessor company.

      F. O. Graves, Esq., for the Commissioner.
    Before James, Littleton, and Teussell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the year 1919, amounting to $472.23.
    FINDINGS OF FACT.
    The taxpayer is a New York corporation with its principal office in New York City. It was organized in the year 1919 with capital stock of a par value of $25,000, issued in exchange for tangible property of a value of $26,785.23.
    Prior to the organization of the taxpayer, and in the year 1900, there was organized under the laws of the State of Missouri a corporation with a capital stock of $20,000, paid for in cash. From time to time thereafter the corporation increased its capital stock, always for cash paid in, until, in 1914, the total capital stock of the Missouri corporation amounted to $60,000. In 1919 the Missouri corporation showed operating losses in a total amount of $36,025.63, and this amount of accumulated losses appeared on the balance sheet of the Missouri corporation as an operating deficit. Thereupon, the stockholders of the Missouri corporation caused the organization of the taxpayer and transferred to it all the assets then owned by the Missouri corporation.
    It does not appear whether the stockholders of the two corporations, that organized in Missouri and its successor in New York, were the same just prior to the reorganization and just subsequent thereto.
    In its income-tax return for the year here in question, the taxpayer claimed a total invested capital of $60,000 of capital stock and $6,367.74 of surplus. The Commissioner computed the invested capital of the taxpayer upon the basis of the capital stock of the successor company. From the resulting deficiency the taxpayer brings this appeal.
   OPINION-.

James:

The taxpayer contends that it is entitled to have its invested capital measured by the capital stock of the company operated for 19 years in Missouri. But the taxpayer is not the Missouri corporation; it is the successor New York corporation. So far as the taxpayer here is concerned, its capital stock was issued for tangible property paid in in the amount stated in the findings of fact. We find nothing in the law which warrants the conclusion that Congress intended to ignore corporate reorganizations or to measure the invested capital of existing taxpayers by the invested capital of corporations which have ceased to exist. On the contrary, Congress saw fit to incorporate in the Revenue Act of 1918 one specific provision dealing with the invested capital of corporations which were the result of reorganizations, namely, section 331. That section definitely denies to successor corporations an invested capital in excess of the invested capital of their predecessors merely to protect against reorganizations in fraud of the revenue. In so doing, Congress must be recognized as intending that all other reorganizations would compute their invested capital solely from their own transactions.

This action of Congress is the more significant in the light of the provisions of section 202 (b) of the Revenue Act of 1918, in which it is provided:

When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash- to the amount of its fair market value, if any; but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged.

It thus appears, that, while the individual stockholders of the Missouri corporation may not deduct a loss on account of the conversion of their stock into an amount of stock of a less par value in the taxpayer corporation, Congress, nevertheless, failed to provide anywhere in the Revenue Act of 1918 that the invested capital of the taxpayer in a case of this sort should be computed upon the basis of its predecessor. We can not supply what Congress saw fit to omit.

The deficiency is Sift®.®®. Order will be entered accordingly.


text:
    Appeal of OSMOND K. FRAENKEL, as Executor under the last will and Testament of GEORGE A. KESSLER, Deceased.
    Docket No. 3182.
    Submitted October 28. 1925.
    Decided April 8, 1926.

      Osmond K. Fraenkel for the taxpayer.

      J. Sterling Halstead, Esq., for the Commissioner.
    Before Phillips, Geaupnee, and Teammell.
    This is an appeal from the determination by the Commissioner of a deficiency of $1,478.14 in estate tax, resulting in part from the disallowance of a deduction of $5,850 taken by the estate as a claim against the estate of the decedent.
   FINDINGS OP PACT.

In 1905, George A. Kessler, the deceased, was a customer of the brokerage firm of Ellingwood & Cunningham, doing business in the City of New York, and had on deposit with that firm in excess of $100,000. At that time the affairs of the firm became involved and an assignment for the benefit of creditors was made-to a former partner of the firm. At the time of the assignment the decedent was abroad, and one Samuel Robert, a brother-in-law and business associate of the decedent, who held a general power of attorney from the decedent and acted as his agent during his frequent absences abroad, consulted the decedent’s attorneys, and, at their suggestion, a petition in involuntary bankruptcy was filed against the brokerage firm, the decedent appearing as one of the petitioners.

A creditors’ committee was formed and, after some negotiations, the petition in bankruptcy was withdrawn and the members of the creditors’ committee were substituted as assignees for the benefit of the creditors in the place of the original assignee. Robert had no personal claim against the brokerage firm but became one of the substituted assignees. The other three were either large creditors or attorneys for such creditors.

The assignees entered upon the performance of their duties and, in the latter part of 1911, filed their account and later two supplemental accounts. Objections thereto were filed by one of the creditors. The objection which was considered most serious was the failure of the assignees to collect a large number of accounts which appeared upon the books of the brokerage firm.' These accounts aggregated over $500,000 and had not been collected either because the assignees had believed the debtors to be insolvent, or the claims to be fictitious, or uncollectible for some other reason. Hearings on the objections proceeded before a referee at various dates over a period.of years, and at the same fijme negotiations,were had looking to a settlement of'the difficulties. Because of the years which had elapsed from the date of the assignment, the assignees were meeting with difficulty in establishing the basis for their failure to proceed to attempt collection of these accounts.

The decedent was, from time to time, informed by Robert of the situation which existed and of the objections to the accounting and the possibility that it would be necessary to make some payment in settlement. The decedent instructed Robert to do the best he could by way of settlement .and promised to pay whatever sum Robert might be called upon to pay. At that time it was understood that the payment by each of the assignees would not exceed $6,000.

The decedent died on September 13, 1920, and thereafter, in November, 1923, an agreement was signed between the assignees and the objecting creditor under which each of the assignees paid such creditor $5,850, and the creditor withdrew her objections to the account. The sum of $5,850 was not paid by Robert, but was paid by the executor of the estate of the decedent to the attorneys for the assignees.

Robert had no claim against the brokerage firm. The claim of the decedent against the brokerage firm was the third largest claim. The attorneys for the assignees were the decedent’s attorneys and the same firm which instituted bankruptcy proceedings on behalf of the decedent. Throughout the administration of the assigned estate Robert acted under the advice of these attorneys. He received no compensation for his services as assignee.

.Robert had a claim against the estate of the decedent for the sum of $5,850, which was paid by the executor of the estate.

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


author: James :

text:
    Appeal of LOUISVILLE SEED CO.
    Docket No. 6742.
    Submitted November 18, 1925.
    Decided April 16, 1926.
    The taxpayer was notified of an assessment under section 274 (d) of the Revenue Act of 1924, filed a claim for abatement and the Commissioner notified the taxpayer, “ your claim for abatement * * * will be rejected,” after which the taxpayer carried on negotiations with the Commissioner, and more than 60 days after the letter rejecting the claim for abatement the Commissioner reaifirmed his determination, all of the above transpiring after June 2, 1924. Held, that the Board has no jurisdiction of an appeal filed from the last letter received from the Commissioner more than 60 days after the letter notifying the taxpayer of the rejection of its claim.

      Adrian 0. Humphreys, Esq., for the taxpayer.. ..

      Arthur H. Murray, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Tkussell.
   James :

This appeal was heard on motion of counsel for the Commissioner to dismiss for want of jurisdiction, in that the appeal was not filed with the Board within the timé prescribed by section 279 (b) of the Revenue Act of 1924.

On August 11, 1924, the taxpayer was notified of a deficiency in tax for the fiscal year ended June 30,1919, in the amount of $2,407.98. Under date of September 15,1924, the taxpayer ivas further notified that an assessment of that amount had been made under section 274 (d) of the Revenue Act of 1924, and was advised of its right to file a claim for abatement with respect thereto under section 279 (a) of the Act. Accordingly, the.taxpayer filed a claim for abatement under date of October 1, 1924.

By registered letter dated March 18, 1925, the Commissioner notified the taxpayer that the claim for abatement had been rejected. The letter reads, in part, as follows:

Ton are advised that after careful consideration and review, your application under the provisions of section 328 for assessment of your profits tax as prescribed by section 328 of the Revenue Act of 1918 has been allowed. Your profits tax is based upon a comparison with a group of representative concerns which, in the aggregate, may be said to be engaged in a like or similar trade or business to that of your company.
In accordance with the above conclusions, your two claims for refund of $14,977.33 and your claim for abatement of $2,407.98 will be rejected for $31,270.56.
The Collector of Internal Revenue for your district will be officially notified of the rejection at the expiration of thirty days from the date of this letter.
Upon receipt of notice and demand from that official payment should be made to his office in accordance with the conditions of his notice.

The taxpayer thereupon, on April 7, 1925, filed a protest against the denial of the claim for abatement, to which the Commissioner replied by letter of July 31, 1925, as follows:

Reference is made to your protest dated April 7, 1925, against the action of the Unit as the result of consideration of your application for assessment of profits tax for the year 1919 under the provisions of section 328 of the Revenue Act of 1918, as set forth in Bureau letter dated March 18, 1925.
After careful review of your protest and of all the evidence submitted in support of your contentions, you are advised that the Bureau holds that your profits tax for the year 1919, as set forth in Bureau letter dated March 18, 1925, is similar in amount to the average profits tax assessed against representative concerns engaged in a like or similar business to that of your company. Accordingly, the conclusions set forth in the above-mentioned letter are sustained.

The taxpayer filed its petition with the Board on September 1, 1925.

At the outset it should be understood that all the proceedings in this appeal were taken after the enactment of the Revenue Act of 1924. There is, therefore, no question of construing section 280 of the Revenue Act of 1924, except in conjunction with all of the steps provided to be taken under the provisions of sections 274 and 279; and there is no question of harmonizing steps taken under the provisions of section 250 (d) of the Revenue Act of 1921, with a determination of tax liability made subsequent to the passage of the Revenue Act of 1924. Our decisions, therefore, in the Appeal of Joseph Garneau Co., 1 B. T. A. 75, and subsequent appeals are not in point here.

All the acts done in this appeal which have a bearing upon the jurisdiction of the Board were done after June 2, 1924. This proceeding, therefore, falls entirely within the provisions of section 279 of the Revenue Act of 1924. It appears that all the provisions of section 279 (a) respecting both the action of the taxpayer and that of the Commissioner have been complied with.

We come then to consider the provision of section 279 (b), which reads as follows:

If a claim is filed as provided in subdivision (a) of this section the collector shall transmit the claim immediately to the Commissioner who shall by registered mail notify the taxpayer of his decision on the claim. The taxpayer may within 60 days after such notice is mailed file an appeal with the Board of Tax Appeals. * * *.

Notwithstanding the confusing language in the letter of March 18, 1925 (and the letter is confusing and unfortunate in its phraseology), the taxpayer was unequivocally notified by that letter of the action of the Commissioner upon its claim for abatement of $2,407.98. It filed no appeal at that time but went forward assuming that that letter was not a final determination and did not finally conclude the matter, and it took upon itself the burden of construing the legal effect of the letter of March 18.

It was in a position to file an appeal from that letter, from the determination set forth therein, and thereafter to pursue such negotiations with the Commissioner as it thought proper. Instead of pursuing this course, it protested to the Commissioner, Avho, on July 31, 1925, advised the taxpayer that he had reviewed the determination set forth in the letter of March 18 and had again arrived at the same result.

But it is significant that the Commissioner in this letter makes no reference to the claim for abatement of $2,407.98, or to any other amount of tax deficiency.

We are unable to escape the conclusion that the letter of March 18, 1925, is the only letter before us which indicates action in conformity with the provisions of section 279.(b) of the Revenue Act of 1924, namely, that the Commissioner shall by registered mail notify the taxpayer of his decision on the claim for abatement. Under that section the taxpayer may, within 60 days after the date of the mailing of such notice of action on its claim, file an appeal with the Board. It is from the decision on the claim that the taxpayer appeals and not from any other communication sent by the Commissioner relative to its tax liability. The appeal was not filed within 60 days from the letter of March 18, 1925, and the motion of the Commissioner to dismiss upon that ground must therefore be, and the same hereby is, granted.


author: Love :

text:
    Appeal of DELAWARE TRUCKING CO.
    Docket No. 3287.
    Submitted August 12, 1925.
    Decided April 16, 1926.
    Evidence held insufficient to establish value of good will acquired in the purchase of a competing business.

      Myron E. Gray, Esq., for the taxpayer.

      B. H. Saunders, Esq., for the Commissioner.
    Before Marquette, Green, Morris, and Love.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1919 to 1921, inclusive. The notice of deficiency shows an overassessment of $124.06 for 1919; a deficiency of $1,232.77 for 1920, and no deficiency for 1921.
    The only assignment of error is that the Commissioner erred in refusing to allow the taxpayer an item of good will in the sum. of $8,680 as invested capital for the years mentioned.
    FINDINGS OF FACT.
    The taxpayer is an Indiana corporation with its principal office at Muncie. Its business is trucking and storing all kinds of merchandise.
    Prior to October 1, 1919, it was engaged in the same business, and prior to that date the Muncie Trucking Co., a partnership, had been engaged in the same business in the same town as a competitor of taxpayer.
    The Muncie Co. and taxpayer catered to the same class of trade, labored under similar conditions, and, among the large patrons, such

      as merchants and factories, each had its permanent patrons, but a certain element of patronage depended on solicitation and competition. The volume of business done by each company was approximately the same. The competition between the two companies was keen and sometimes decidedly unfriendly.
    Pending negotiations for the purchase of the Muncie Co. prior to October 1, 1919, the Delaware Trucking Co. increased its authorized capital stock from $10,000 to $50,000.
    On October 1, 1919, the taxpayer purchased the business of the Muncie Co., paying therefor $15,000 in stock of the taxpayer corporation, and the Muncie Co. went out of business.
    A rough inventory and appraisement of the tangible assets of the Muncie Co., taken at the time of purchase, placed a value thereon of approximately $6,300. H. L. Oliver, who had theretofore owned all the stock of the Delaware Trucking Co., in the purchase of the Muncie Co., did not attempt to segregate the tangible from the intangible assets in that purchase. His main purpose was to get rid of his competitor. In the recapitalization, Oliver received a stock dividend of $25,000.
    At no time had any of the stock of taxpayer been offered for sale or sold.
    The dividends paid by the taxpayer subsequent to the purchase of the Muncie Co. were as follows:
    Per cent.
    1920_ 12
    1921- S
    1922__’_1_'_ 12
    1923__^_ 24
    By reason of the purchase of additional real estate in 1924, no dividends were declared' that year. There had’ been no dividends declared on the Delaware Trucking Co', stock prior to 1919, but from 1913 to 1919 the accumulated surplus amounted to approximately $25,000, against which a stock dividend was issued, as set out above.
   OPINION.

Love :

The Commissioner does not contest any item except the part of the $15,000 paid in stock for the Munice Co. business in excess of the $6,300 allowed by him as the value of the tangible assets. Taxpayer claims the other $8,700 as the value.of good will purchased. The Commissioner denies that there was any valuable good will.

An analysis of the facts in this appeal discloses that no evidence was submitted in regard to the value of the good will included in the assets of the Muncie Co.

It will be noted that the Delaware Trucking Co., with a capital stock of $10,000 from 1913 to 1919, a period of six years, accumulated a surplus of $25,000; that is, an average of $5‘,000 per annum, equal to 50 per cent per annum. After the purchase of. the Muncie Co., and after the increase of capital stock to $50,000, it declared a dividend of 12 per cent the first -year, 8 per cent the second year. 12 per cent the third year, and 24 per cent the fourth year, ah average of 14 per cent; that is, an average of $7,000 per.annum. There was no evidence of prior earnings of the Muncie Co. i ! . ¡

It is true that, by taking over the business i of the Muncie Co., the taxpayer may have- acquired some of the former business and patronage of that company which had a value aside from the tangible assets, but the evidence is too indefinite to fix a value. The burden is upon the taxpayer to establish the actual cash value of the intangible property, but it has failed to furnish sufficient factors upon which we can make a determination of such value, so we must approve the determination of the Commissioner.

Order of redetermination will he entered on 15 days’ notice, wider Bule 50.


author: ■GRAUPNER: Phillips,

text:
    Appeal of THE COLLINS CO.

      Docket No. 4432.

      Submitted January 21, 1926.

      Decided April 16, 1926.
    Under the facts proven, held that the shares of stock of a corporation held by the taxpayer are inadmissible and can not be included in invested capital for the taxable year.

      George H. Day, Esq., for the taxpayer.

      Arthur H. Fast, Esq., for the Commissioner.
    Before Geaupnise and Phillips.
    This is an appeal from the determination of a deficiency in income and, profits taxes for the fiscal year ended May 31, 1920, in the amount of $33,936.92, of which only $1,012.80 is here in controversy. The sole issue is whether the capital stock owned by the taxpayer in another corporation may be included in the taxpayer’s invested capital. The Commissioner held such stock to be an inadmissible asset.
    FINDINGS OF FACT.
    The taxpayer is a Connecticut corporation-having its plant and offices at Collinsville.
    In 1867, the Farmington River Water Power Co., hereinafter called the Farmington Co., was organized under the laws of Massachusetts, with an authorized capital of $100,000, divided into shares of a par value of $100 each, for the purpose of supplying water power to various manufacturers along the Farmington River. On May 24, 1876, the taxpayer subscribed for 560 shares of the stock of this company. The stock was paid for by an assessment of 55 per cent of the amount thereof, paid in May, 1876, and divers other assessments, in 'amounts varying from 1 ½ per cent to 10 per cent. The final assessment was paid on October 14, 1891. Subsequent to its original subscription, the taxpayer acquired additional stock, and in the fiscal year'here involved it owned 630 shares, and its president, its office manager, and its superintendent each owned 1 share.
    The capital stock of the Farmington Co. has, at least during the past 20 years, been held by manufacturing concerns which are consumers of its water power, with the exception of a small minority of shares, which have been held by officers or employees of the manufacturing consumers. The expenses of the Farmington Co. have been met by annual assessments against the stockholders in proportion to the number of shares they held and no other charge has been made against its consumers for water or service furnished.
    At a meeting of the stockholders of the Farmington Co. held in October, 1919, at which an estimate of the amount needed for operation during the ensuing year was presented, 634 shares of stock were present and voted, of which 630 shares were held by the taxpayer, 3 by its officers and employees, and 1 by the president of another power-consuming compan jr.
    The Farmington Co. has never paid dividends.
   OPINION.

■GRAUPNER:

It is the contention of the taxpayer that the stock of the Farmington Co. should not be classed as an inadmissible asset because the corporation is a cooperative venture. In support of this contention it urges that because of the method of operation of the Farmington Co., in meeting its expenses by assessment, it has never had earnings, has never paid dividends, and is not so constituted that it could pay dividends, and, consequently, such stock does not come within the terms of section 325 of the Revenue Act of 1918, reading-in part:

The term “inadmissible assets” means stocks, bonds, and other obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income. ⅜ * *

We have held, in the Appeal of Securities Investing Fund, Inc., 1 B. T. A. 279, 284, that—

The words “ the dividends or interest from which is not included in -computing net income ” identify a type or class of investment and that they have no reference to received income.

Under the provisions of section 326 of the Act, the stock can not be included in the invested capital of the taxpayer for the fiscal year involved, because the dividend derived therefrom is not included in computing net income.

There is nothing, as far as the record shows, in the charter of the Farmington Co. to prevent its operation for profit. Under its charter it is privileged to operate in the manner of the ordinary stock corporation organized and operated for-profit. The fact that it elected to operate on a nonprofit basis certainly can have no effect on the type or class of investment to which its capital stock belongs.

Considering these matters in the light of the interpretation above given to the words of the statute, we are of the opinion that the Commissioner’s action in excluding from invested capital the stock of the Farmington Co. held by the taxpayer must be sustained.

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

Phillips,

dissenting: I can not agree with the conclusion which has been reached in the prevailing opinion. In levying the excess-profits tax, the statute lays down a rule for the computation of invested capital the intent of which can not be mistaken. There is to be included in invested capital, speaking in general terms, the investment made by the stockholders, together with the undistributed earnings. All assets representing this investment are divided by the statute into admissibles and inadmissibles. There is to be deducted from invested capital a percentage thereof equal to the percentage which the amount of inadmissible assets is of the amount of the total assets. Inadmissible assets are defined by the statute as follows:

See. 325. (a) * ⅜ * The term “inadmissible assets” means stocks, bonds, and other obligations (other than obligations of the United States), the dividends or interest from which is not included in computing net income, but where the income derived from such assets consists in part of gain or profit derived from the sale or other disposition thereof, or where all or part of the interest derived from such assets is in effect included in the net income because of the limitation on the deduction of interest * * ⅜, a corresponding part of the capital invested in such assets shall not be deemed to be inadmissible assets; * * *.

The plain intent of the statute is to include in invested capital that portion of the assets the income from which is to be included in computing the taxable income, and to exclude from invested capital that portion of the assets the income from which is not to be included in the computation of taxable income. This appears particularly from those clauses which permit a part of the inadmissibles to be included where income is derived from the sale or other disposition thereof, or where the interest therefrom, ordinarily exempt, must be included in the computation of the income.

One of the material elements in the computation of income is the cost of the goods sold. One of the factors which goes into this computation is the cost of the power used in producing these goods. Whether power is secured through the acquisition of a power plant or through the purchase of stock in a cooperative enterprise which owns a plant, the cost of the power necessarily includes the cost ór value of the use of the capital invested. Where, as here, the cost of the goods sold does not inclúde any allowance for a return on the capital invested in a power plant, there is included in the net taxable income, in effect, an amount - equal to a reasonable return upon such capital; in effect, interest or dividends upon such capital investment is included in computing taxable net income. Because the investment took the form of a purchase of stock the dividends upon which would, if paid, be tax exempt, the conclusion is reached that the capital invested is inadmissible. Dividends are not expressly declared or interest paid, it is true, but the effect on the net income is the same as though dividends had been declared or interest paid and such dividends or interest had been included in taxpayer’s income.

If the prevailing opinion be right, if we may not look to the intent of-the law but must give regard only to its words, if we may not regard the substance but only the apparent form, then an error has been made in allowing this taxpayer any deduction whatever for the cost of its water power, for such cost was paid by an- assessment on the stock, a capital transaction. Merely- to state that proposition shows its fallacy, for- who: can doubt that the power cost this taxpayer not only the amount of the assessment but also the use of the investment. There can be no doubt that income from this investment is included in computing the net, income of the taxpayer and, the income from the investment being reflected in the taxable, net income, it is error to classify the investment as'an “ inadmissible asset.”

I do not believe that such a construction does violence even to the words of the statute. The words “ dividends or interest ” are,' I believe, used in the sense of “ income,” and that clause of the definition which reads “ the dividends or interest from which is not included in computing net income” is to be interpreted as “the income from which is not (to be) included in computing net income.”

It is argued that the power company might at any time become a profit-earning corporation. This could only be done-by increasing the charge for power supplied, thereby increasing the taxpayer’s deductible expense. That such is the case shows conclusively that the difference between the rate charged and a profit-making rate is reflected in the taxpayer’s taxable income. When and if the power company charges a rate in excess of the actual cost of production, the situation will b,e changed to the extent that the earnings from the in-Yéstment are no longer reflected in the taxable net income through the expense account, and the investment in the stock will become inadmissible, not only within the definition of the statute but also within its intent. ■ Until that time comes, however, it seems to be necessary only to point out that for 60 years the same uniform custom has been followed by the taxpayer.

On reference to the Board, GReen, Lansdon, and Trusseli. concur in the dissent.


author: Tkammell,

text:
    Appeal of NATIONAL TANK & EXPORT CO.
    Docket No. 3274.
    Submitted July 7, 1925.
    Decided April 16, 1926.
    Jurisdiction.- — Under section 279 of the Revenue Act of 1924, the Board is without jurisdiction to hear and determine an appeal from a jeopardy assessment prior to the rejection of a claim for abatement. Following Appeal of Oakdale Coal Oo., 1 B. T. A. 773.
    Statute op limitations. — A consolidated return for two or more corporations, made in accordance with sections 239 and, 240 (a) of the Revenue Act of 1918, is the return required by law of each of the corporations whose net income and deductions are included therein. The period of limitation- provided by section 277 (a) (2) of the Revenue Act of 1924 began to run on the day following the date of the filing of such consolidated return.
    See Appeal of F. A. Hall Oo., 3 B. T. A. 1172.

      Gordon O. Garson, Esq., for the taxpayer.

      P. S. Grewe, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Trtjssell.
    This appeal is taken from determinations of deficiencies in income and profits taxes asserted in respect to a period of four.months ended April 30, 1918, and the fiscal years ended April 30, 1919, and April 30, 1920, in the amounts of $4,545.32, $11,096.70, and $2,184.79, respectively.
    The taxpayer’s petition alleges three specific errors: (1) Refusal to recognize that the taxpayer and the American Naval Stores Co. were affiliated corporations during all of the periods involved; (2) failure to determine and assess alleged deficiencies within the times prescribed by statute of limitations; (3) failure to credit against alleged deficiencies a payment made by the taxpayer in the amount of $3,500.
    In his answer the Commissioner admitted certain specific allegations of fact.

      BINDINGS OP PACT.
    The taxpayer is a Georgia corporation with principal office at Savannah.
    The deficiency letter covering 1918 was mailed to the taxpayer on February 17, 1925. No deficiency letters covering 1919 and 1920 have been received by the taxpayer, but the Commissioner during March, 1925, commenced summary proceedings for the collection of alleged deficiencies for those years, assessment of same having been made as stated in his letter dated December 29, 1924, above mentioned.
    The taxes in controversy are income and profits taxes for the four-month period ended April 30, 1918, and for fiscal years ended April 30, 1919 and 1920, and in the aggregate are more than $10,000.
    During the entire taxable periods in question, slightly over 73 per cent of the entire outstanding voting capital stock of taxpayer (there having been no nonvoting stock) was owned by the American Naval Stores Co.
    A separate tentative return for the calendar year 1918 was filed by the taxpayer with the collector of internal revenue at Atlanta, Ga., on or before March 15, 1919, showing an estimated amount of tax due of $14,000 and requesting an extension of 45 days within which to file a completed return, which was granted.
    Within said period of extension, a consolidated return of taxpayer and said American Naval Stores Co. was filed for the calendar year 1918, showing no tax due.
    Amended returns for the four-month period ended April 30, 1918, and for fiscal years ended April 30, 1919 and 1920, were filed on or shortly after September 28, 1922, as required by the Commissioner per his letter August 14, 1922, IT: SA: CR: AF-MHS.
    The Commissioner’s letter of December 29, 1924, IT: CA-2333-8, stated that, under section 274(d) of the Revenue Act of 1924, taxes of $11,096.70 for 1919 and $2,184.79 for 1920 had been assessed.
    Notice and demand for payment of these taxes was mailed by J. T. Rose, collector at Atlanta, Ga., January 6, 1925.
    Claims for abatement of these taxes were mailed to said collector in due course.
    The letter from said collector dated January 16, 1925, demanded bond of $14,000 against the claim for abatement of $11,096.70.
    The taxpayer, in a letter dated January 19, 1925, stated the impossibility of furnishing bond.
    At various times during the month of March, 1925, said collector, through his deputy or deputies, filed a notice of lien against the property of taxpayer in Chatham County, Ga., and also served, notice upon the Citizens & Southern Bank, where taxpayer’s funds are deposited, not to pay out further moneys upon taxpayer’s check.

      For a period of about 30 years the .taxpayer has been engaged in the business of public warehousing and of storing spirits of turpentine. During all of the years 1918, 1919, and 1920, a little more than 73 per cent of all the outstanding capital stock of the taxpayer was owned by the American Naval Stores Co., a corporation existing under the laws of West Virginia, and said American Naval Stores Co. was a large distributing house which controlled several factories or receiving houses and also owned and operated tank cars, naval stores yards, and all the facilities necessary in the general conduct of a naval stores business. It was a dominant company in the naval stores trade at that time and was later prosecuted by the United States Government for a violation of the Sherman Antitrust Act. Through its ownership of 73 per cent of the taxpayer’s capital stock the American Naval Stores Co. named the majority of the board of directors of the taxpayer; and the board of directors so chosen at the regular stockholders’ meetings controlled all the policies and the business of the taxpayer.
    During the periods here under consideration, and for some years prior thereto, the taxpayer had regularly kept its books of account on the basis of fiscal periods ending on April 30th of each year but, under the provisions of revenue acts in force prior to 1918, it had made income-tax returns on the basis of calendar years.
    On or before March 15, 1919, the taxpayer caused to be filed with the collector of internal revenue at Atlanta, Ga., a so-called' tentative return and estimate of corporation income and profits taxes for the year ended December 31, 1918, then estimating the amount of tax due in the sum of $14,000. Said tentative return was accompanied by the taxpayer’s check payable to the collector in the amount of $3,500, and the check was retained by the collector and paid through the Federal Reserve Bank at Atlanta on March 18, 1919. The tentative return also contained a request for an extension of time of 45 days within which to file a completed return, which request was granted by the collector on March 14, 1919. Within the extended period of 45 days, the taxpayer, in' conjunction with the American Naval Stores Co., filed with the collector at Atlanta a consolidated income and profits-tax return, and similar consolidated returns were thereafter filed for the same companies for the calendar years 1919 and 1920. The American Naval Stores Co. kept its books of account on the basis of calendar years, and each of said consolidated returns for the years 1918, 1919, and 1920, showed no taxable net income for any of said years.
    After the filing of the consolidated return for the year 1918 the taxpayer made a claim for the refund of $3,500 paid to the collector in March, 1919, and said claim has heretofore been duly rejected by the Commissioner.

      On or about August 3.4, 1922, the- taxpayer received advice from the Commissioner that it and the American Naval Stores Co. could not be held to be affiliated corporations and that separate returns for the years 1918, 1919, and 1920, would be required of it. In compliance with said advice the taxpayer caused to be prepared separate income and profits-tax returns for its fiscal periods ended on April 30 of each of the above-mentioned years and forwarded the same to the Commissioner on or about September 28, 1922.
   OPINION.

TRUssell : Upon the record of facts admitted and proved as above set forth, the taxpayer rests its appeal.

Respecting the assessments for the years 1919 and 1920, it appears that on or about December 29,1924, the Commissioner made so-called jeopardy assessments for which the taxpayer filed claims for abatement but omitted the furnishing of a bond as required by section 279 (a) of the Revenue Act of 1924; that up to the date of the hearing of this appeal such claims had not been acted upon by the Commissioner nor had the taxes assessed been collected. Under similar statements of fact the Board has held in the Appeals of Oakdale Coal Co., 1 B. T. A. 773, and California Associated Raisin Co., 1 B. T. A. 1251, that the Board is without jurisdiction to consider and determine appeals, and, in accordance with the views of the Board as set forth in the cases just cited, the taxpayer’s petition,in so far as it relates to deficiencies asserted for the periods ended April 30, 1919, and April 30, 1920, is hereby dismissed.

As to the asserted deficiency for the period ended April 30, 1918, notice of which was conveyed to the taxpayer by a deficiency letter dated February 17, 1925, the taxpayer pleads both the statute of limitations as a complete bar, and the allegation that, during the time covered by the alleged deficiency, the taxpayer ivas affiliated with the American Naval Stores Co., and that under the consolidated return made for the two companies no liability to income and profits taxes could be’found.

The Commissioner has specificially admitted that, within 45 days after the 15th of March, 1919, a consolidated income and profits-tax return was made and filed for and on behalf of this taxpayer, together with the American Naval Stores Co. It thus appears that such consolidated return was filed with the proper collector not later than May 1, 1919, and that such return was made in accordance with the requirements of sections 239 and 240 (a) of the Revenue Act of 1918, and article 633 of Regulations 45, as first published, the same being Treasury Department regulations then existing respecting the making and filing of consolidated returns, which article is as follows:

When corporations abe affiliated. — Corporations will be deemed to be affiliated (a) when one domestic corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (S) when substantially all the stock of two or more domestic corporations is owned or controlled by the same interests. The words “substantially all the stock” can not be interpreted as meaning any particular percentage, but must be construed, according to the facts of the particular ease. The owning or controlling of 95 per cent or more of the outstanding voting capital stock (not including stock in the treasury) at the beginning of and during the taxable year will be deemed to constitute an affiliation within the meaning of the statute. Consolidated returns may, however, be required even though the stock ownership is less than 95 per cent. When the stock ownership is less than 95 per cent, but in excess of 50 per cent, a full disclosure of affiliations should be made, showing all pertinent facts, including the stock owned in each subsidiary or affiliated corporation and the percentage of such stock owned to the total stock outstanding. Such statement should preferably be made in advance of filing the return, with a request for instructions as to whether a consolidated return should be made. In any event such a statement should be filed as a part of the return. The words “ the same interests” shall be deemed to mean the same individual or partnership or the same individuals or partnerships, but when the stock of two or more corporations -is owned by two or more individuals or by two or more partnerships a consolidated return is not required unless the percentage of stock held by each individual or each partnership is substantially the same in each of the affiliated corporations.

It thus appears that not later than May 1, 1919, there was made and filed, on behalf of this taxpayer and the American JSTaval Stores Co., a return which complied in all substantial respects with the provisions of law and the Department regulations then in force respecting the making of income and profits-tax returns. Such a return was the return required by law and the statute of limitations began to run on the day following the filing of such return. The date of the Commissioner’s deficiency letter in the instant case is more than five years after the filing of such return, and, in accordance with the views of the Board in the Appeal of F. A. Hall Co., 3 B. T. A. 1172, we are of the opinion that on February 17, 1925, the Commissioner was without authority to assess any deficiency in income and profits taxes for the taxpayer’s period ended April 30, 1918.

The testimony taken at the hearing has established the fact that the taxpayer paid to the collector of its district in March, 1919, the sum of $3,500 as and for income and profits taxes for the period covered by the calendar year 1918. It does not appear, however, from the record of this appeal that the Board has jurisdiction to make any finding as to the Commissioner’s duty in respect to accounting for the amount of such payment.

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

Tkammell,

dissenting: I am unable to concur in the foregoing opinion for the reason that section 239 requires every corporation to file a return. This is modified by section 240, which is applicable only to affiliated corporations. These corporations were not affiliated and it is not claimed in this proceeding that they were affiliated. • The fact that they considered that they were when the consolidated return was filed is not material. The taxpayer does not now contend that the action of the Commissioner in rejecting the consolidated return was not in accordance with law. Not coming within the scope of section 240, the corporations are required by section 239 to file a return. The taxpayer, not having filed a return as required by law, the period of limitation provided in section 277 (a) (2) does not have application. The limitation does not begin to run until a return as required by law is filed by the taxpayer.


text:
    Appeal of ILLINOIS TELEGRAPH NEWS CO.
    Docket No. 4443.
    Submitted October 10, 1925.
    Decided April 10, 1920.

      James J. O’Byrne and B. L. Jennings, Esqs., for the taxpayer.

      J. Arthur Adams, Esq., for the Commissioner.
    Before Marquette, Green, and Love.
    This is an appeal from the determination of a deficiency for the calendar year 1920 in the sum of $3.,261.87. The deficiency arose from the refusal of the Commissioner to classify the taxpayer as a personal service corporation.
   FINDINGS OP PACT.

The taxpayer is an Illinois corporation, organized in 1916, with its pi’incipal place of business at Chicago. It had a capital stock of $200,000, divided into 2,000 shares of the par value of $100 per share.

The business of the taxpayer consisted of gathering and disseminating current financial and grain news to individual subscribers. A ticker was installed in the office of each subscriber and this ticker was connected with a master transmitter from the taxpayer’s office, which sent out the same stock quotations and news items to all of its subscribers. In case the tickers were out of order by reason of storm or mechanical defects the news was sent by messenger. In some instances special news services were sent by messenger. The subscribers could not use the tickers for any other purpose. For the service and use of the tickers the taxpayer charged from $40 to $60 per month. With the exception of a small amount received from bank deposits, the taxpayer’s sole source of income was from 'subscriptions to its service.

The taxpayer made no profit until the year 1919, at which time one G. D. Eose, formerly a minority stockholder, purchased the capital stock and reorganized the business on a successful basis. He sold small blocks of this stock to the most active employees, allowing them to pay for the same out of dividends and bonus payments. Practically all the stockholders were actively engaged in the business of the taxpayer. All the employees, with the. exception of some messengers and short-time reporters, were stockholders. The amount of the stock held, the salaries, bonuses, and dividends paid, and the character of the employment of the employees for the year 1920, were as follows:

The assets and liabilities of the taxpayer as they appear on its books as of December 31, 1919, were as follows:

A statement of the income ’and operating expenses of the tax-paj^er for the year 1920 is as follows:

INCOME.
News Service — as per tax return_$58, 210.49
Less: Amount included which represents rental charge paid by Ill. Tel. News Oo. of Delaware to Ill. Co.
which is a subsidiary_ 2,400. 00
-- $55, 810. 49
Interest on bank deposits_'_ 96.34
OPERATING EXPENSES.
Salaries and bonus to officers and employees who are
stockholders_ 16, 811. 99
Other salaries and bonus_ 4, 377. 00
Duet rentals_ 575. 52
Leased wires_ 265. 83
News collection expense_$2,174. 25
Less: Salaries and bonus included_ 750.97
-:- 1, 423.28
Operating power_ 527. 80
Office rent_ 895. SI
Royalities on patents paid to president, who is large
stockholder-¿_’_ 999. 96
Rentals paid to subsidiary eliminated in consolidation-$2, 400. 00
Office expenses_1_ 261.98
Telephone and telegraph service_ 225. 67
Repair parts_I_ 3, 723. 27
Paper for tickers_ 1, 967.34
Taxes- * 708.58
Depreciation_ 1, 583.04
Franchise fees_ 1, 000. 00
35, 346.08
Net income_ 20, 560.75

Capital was a material income-producing factor.

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


author: Aeundell: Steenhagen,

text:
    Appeal of SUTHERLAND MANUFACTURING CO.
    Docket No. 4256.
    Submitted September 14, 1925.
    Decided April 16, 1926.
    Upon the evidence, hell, that the taxpayer was not affiliated with Davidson, Hicks & Greene Oo.

      Roscoe Bond, Esq., for the taxpayer.

      Willis D. Nance, Esq., for the Commissioner.
    Before Steknhagen and Artjndell.
    The petitioner appeals from the determination of a deficiency in income and profits taxes for the years 1919 and 1920 in the amount of $17,261.91; The deficiency grows out of the refusal of the Commissioner to affiliate the taxpayer with Davidson, Hicks & Greene Co.
    FINDINGS OF FACT.
    The petitioner was organized on July 13, 1916, under the laws of the State of Tennessee, with its principal office in Nashville. At the time of organization it had a paid-in capital stock of $20,000, represented by shares having a par value of $100 each and held as follows:
    Shares.
    Davidson, Hicks & Greene Co-110
    Glarence Sutherland-‘ — " '-1— 90
    W. V. Davidson held in his name as trustee 106 shares that were owned by Davidson, Hicks & Greene Co. (hereinafter called the Davidson Co.), and one share each was issued in the names of W. V. Davidson, J. N. Hicks, H. M. Greene, and B. G. Hicks, respectively, in order that they might qualify as directors of the Sutherland Manufacturing Co. During the years 1919 and 1920 the stock of the petitioner was held by the same persons in the same proportions as at the date of organization.
    The Davidson Co. was organized in 1908 and succeeded Davidson, Benedict Co. This company was engaged prior to the organization of the petitioner in the wholesale and retail lumber business, with an interior finishing department in which it manufactured such articles as frames, doors, stairways, sash,- etc. For many years immediately preceding the organization of the petitioner, Clarence Sutherland had been the manager of the retail department of the Davidson Co. In 1916 the officers of the latter company decided that the business had grown to such proportions that it was impracticable for one man to look after the rough lumber business and also the manufacturing business, and that better results could be obtained if Sutherland were to devote all of his time to the manufacturing department which was engaged in making interior finishings. This course also provided a plan whereby the retention of Sutherland’s services could be assured by making a more equitable division of the profits, if the new corporation, in fact, was able to make such profits.
    The Sutherland Manufacturing Co. was thereupon organized with W. V. Davidson as president, J. N. Hicks as vice president, H. M. Greene as secretary, and Clarence Sutherland as treasurer and manager, and the same persons, with B. G. Hicks, the son of J. N. Hicks, formed the board of directors. W. V. Davidson, J. N. Hicks, and H. M. Greene were at the same time president, vice president, and secretary, respectively, of the Davidson Co.

      At the time of organization of petitioner, Sutherland owned stock of the par value of $8,500 in the Davidson Co. This stock had been purchased through W. V. Davidson and Sutherland had paid him on account thereof $3,000. A portion of the stock so held by Sutherland was disposed of at the time he acquired an interest in the Sutherland Manufacturing Co., leaving his holdings in the Davidson Co. during the years 1919 and 1920 less than 1 per cent of the outstanding stock of that company.
    With the incorporation of the petitioner the Davidson Co. ceased to operate the interior finishing department of its business and this work was thereafter handled exclusively by the former. At the time the petitioner commenced business it took over from the Davidson Co. certain accounts and also all of the lumber and other material of the interior finishing department, together with the work in process. It rented the interior finishing plant and machinery and also had the use of the lumber yards of the Davidson Co. As the working capital of petitioner was inadequate to carry on its business during the early period of its life, the Davidson Co. financed it by advancing money for pay rolls and by selling it lumber on credit until such time as petitioner was able to finance itself. The assistance rendered enabled it to do a business in double the amount it could have done on its available capital. It was the practice of the two companies in bidding for work to include not only the material handled by the bidding company, but also to include material that might be furnished by both companies and then turn over to the other company the order for such material as the bidding company could not furnish.
    From the date of incorporation to January 16, 1918, petitioner rented its plant from the Davidson Co. for $100 per month and 10 per cent of its profits, which was an amount less than a fair rental therefor. On January 16, 1918, the rental was increased to $300 per month and 10 per cent of the net profits. The value of the plant rented was $30,000. Section 3 of the by-laws of both the petitioner and the Davidson Co. provided as follows:
    No stockholder shall transfer his or her stock to outside parties without first offering same to the executive officers of the company, at their office in Nashville, Tennessee.
    The directors and officers of the petitioner, other than. Sutherland, received no salaries for their services.
   OPINION.

Aeundell:

The Davidson Co. owned 55 per cent of the stock of petitioner and claims that it controlled the 45 per cent owned by Sutherland, thus giving it ownership and control of substantially all of tlie stock. But the record fails to present more than indications of potential control of the stock owned by Sutherland. The Sutherland Manufacturing Co. was organized not alone because it was thought that a branch of the Davidson Co.’s business could thereby be run more efficiently, but also to insure the retention of Sutherland’s services. He was the manager and active head of the petitioner and, so far as the record discloses, was free to vote his stock as his judgment dictated. The fact that Sutherland and the other stockholders worked harmoniously does not establish control by either of the stock of the other.

In the Appeal of Isse Koch & Co., 1 B. T. A. 624, we held that the control required by the statute was an actual control as distinguished from strictly legal control, but that s'uch control must be actually exercised and mere potential control will not suffice. We find no evidence in the record of the exercise of control by the Davidson Co. of the stock owned by Sutherland and we can not assume that it in fact existed. There was, undoubtedly, a close working agreement between the companies and some transactions between them were on an artificial basis, particularly during the early life of petitioner, but mere economic unity does not meet the statutory test. Appeal of Rishell Phonograph Go., 2 B. T. A. 229. The provision in the by-laws that no stockholder shall transfer his stock without first offering it to the executive officers of the company can not serve to give the Davidson Co. control of Sutherland’s stock. He may never desire to sell the stock, but even if he did desire to do so, he was under no obligation to sell to them, though it may be assumed he would do so provided the price offered was equal to what he could secure elsewhere. The evidence of control is not convincing. Appeal of R. A. Tuttle Co., 1 B. T. A. 1218 ; Appeal of Block Street Wharf & Warehouse Co., 2 B. T. A. 183.

The deficiences are $3,05035 for 1919 and $11^,$11.66 for 19$0. Order will he entered accordingly.

Steenhagen,

dissenting: The evidence taken in its entirety indicates to my mind an affiliatiop. The Sutherland Co. while separately incorporated is still but an organized branch of the complete enterprise. Sutherland testified that he understood, as a layman would, that the Davidson Co. and its board of directors controlled both the business and the stock of the Sutherland Co.; that he had no control, no more power in dictating the company’s policies than if he had owned only 5 per cent of the stock, and that he was manager in the same sense and exercised the same authority over the incorporated branch as prior to its separate incorporation. It should be remembered that the 55 per cent of the stock which he did not own was not scattered and ineffectual but was owned entirely by tire Davidson Co., so that as a stockholder he was powerless against it.

There was complete unity in the enterprise. The Davidson Co. was not merely the progenitor of the Sutherland Co. but it exercised a parental care and responsibility. As Sutherland expressed it, “ We were working for the mutual good of each other.” The practice of each bidding for the whole job in behalf of both worked for their mutual advantage. Sutherland alone drew salary. In addition to this, if Sutherland at any time was discharged he Avas required to offer his stock to the Davidson Co., and, as he said, he had every reason to believe that the old company would take it over. This seems to me to indicate a control by the Davidson Co. of the Sutherland stock either directly or through closely affiliated interests.

The statute seems to me to make it necessary, as I had understood this Board to hold, to examine the facts of each case with a view to a recognition of actual control of the stock during the particular year in question, and'I had not supposed that by control of the stock was meant only ownership or its approximation. Here it seems to me that the Davidson Co. had all the control of this stock an owner could have except title and the right to dividends. The other rights were so completely dominated by the Davidson Co. as to make Sutherland’s so-called ownership a mere form for increasing his salary. This was what Davidson testified was the purpose of the separate incorporation. While I agree that ownership of a majority of voting stock is not of itself equivalent to the statutory ownership or control of substantially all of the stock, I think that actual conditions may be such as to bring such a situation within the statute. This I think is such a case.

On reference to the Board, Ge a other, James, and Phillips concur in the dissent.


text:
    Appeal of GUY I. ROWE.
    Docket No. 3663.
    Submitted February 23, 1926.
    Decided April 16, 1926.

      A. H. Murray, Esq., for the Commissioner.'
    Before Arühdell and Lansdon.
    This is an appeal from the determination of a deficiency in income tax for the year 1923 in the amount of $22.95. It arises from dis-allowance of a deduction for loss alleged to have been sustained by damage to household goods.' ' '
   FINDINGS OF FACT.

The taxpayer is an officer of the Army of the United States, now on duty at Fort H. G. Wright, in the State of New York. While on duty at San Diego, Calif., in 1920, he was ordered to Europe on Government service. He stored his household goods in a Government warehouse at Camp Kearney, and later, when that camp was abandoned, directed the camp quartermaster to turn such goods over to a storage concern in San Diego, where they remained until November 1, 1923, when they were shipped by water and rail to New York. In storage or in transit some of the property was lost, and the remainder was damaged until it was worthless. The taxpayer claims the value of the goods so lost and damaged as a deduction from his income for the taxable year in the amount of $265, alleging that the goods constituted stock in trade used in his profession.

The deficiency is $22.95. Order will be entered accordingly.


author: Lansdon:

text:
    Appeal of ROBERT and GUSTAV THAL.
    Docket No. 960.
    Submitted October 20, 1925.
    Decided April 16, 1926.
    Good will claimed as basis for obsolescence disallowed.

      Bernard Greensfelder, Esq., for the taxpayers.

      Briggs G. Simpich, Esq., for the Commissioner.
    Before Sternhagen, Lansdon, and Arttndell.
    This is an appeal from the determination of deficiencies in income taxes for the year 1920, in the amount of $35,371.94, for Roberu Thai, and of $37,361, for Gustav Thai. It arises from the disal-lowance of deductions claimed for obsolescence of good will resulting from national prohibition legislation.
    FINDINGS OF FACT.
    The taxpayers are residents of St. Louis, Mo. Some time in the year 1892 they entered into a partnership under the firm name of Robert Thai & Co., which has since been operated under such name. They have also used the trade names, Red Cross Manufacturing Co., Crown Beverage Co., and Arlette Fruit Products Co., in their business operations as departments of the partnership.
    From the date of its formation until 1902, the partnership, was engaged in the purchase and sale of vinegar and molasses as jobbers. It then became a wholesale, dealer in fortified cider, an alcoholic beverage, and in various non-alcoholic fruit syrups. It sold fortified cider under the trade names or brands of Bull Dog Brand, Cannon Brand, Army Brand, Navy Brand, Lion Brand, Red Cross Brand, and Premium Brand, none of which was registered in the United States Patent Office, or with any trade association maintained for the protection of trade names, marks, or brands.
    In its business operations the partnership purchased cider in bulk from producers and manufacturers, and, by adding sugar thereto, produced a fermented product with from 10 per cent to 20 per cent alcohol content, which was known to the beverage trade as fortified cider. In July, 1919, it voluntarily discontinued the sale of this product, and since that date has sold no fortified cider, either under any of the trade names heretofore enumerated or otherwise. There is no indication in any of the trade names under which it sold fortified cider, or in any of the advertising matter offered in evidence at the hearing, that any of the products so advertised and sold had any alcoholic content.
    Prior to July, 1919, and at all times subsequent to that date, the partnership has advertised and sold various fruit syrups and nonalcoholic fruit beverages, which it advertised and advertises under the trade names of Vino, Bracer, Red Cross Punch, Namoco, Red Cross Brand Tip, and Red Cross Brand Cordial. None of these trade names is registered in the United States Patent Office or otherwise. Since some time prior to or during 1919, the partnership has also engaged in the business of dealing in aluminum ware at wholesale.
    At the date July 1,' 1919, when it discontinued the manufacture and sale of fortified cider, the partnership had about 5,000 customers. It now has about 1,500 customers, to whom it sells non-alcoholic beverages. Fortified cider was sold at a price of $1.50 per gallon in 1919: sweet cider, containing benzoate of soda to prevent fermentation, now sells for about 50 cents per gallon. Prior to July 1, 1919, fortified cider comprised about 15 per cent of the total beverage sales of the partnership, and fruit syrups and non-alcoholic products made up the remaining 25 per cent.
    On November 8,1919, the Commissioner issued Prohibition Mimeograph Number 5, containing instructions relating to cider and vinegar, addressed to the Federal prohibition officers for their guidance in connection with the enforcement of the National Prohibition Act of October 28, 1919.. He stated that the addition of sugar or other fermentable substances to cider for the purpose of increasing the alcoholic content is in violation of section 3282, Revised Statutes, as amended, and that, after the Eighteenth Amendment to the Constitution of the United States became effective, cider could be manufactured and sold commercially only if the alcoholic content was under one-half of 1 per cent; but that cider and fruit juices manufactured in the purchaser’s home could be sold after the Amendment became effective only to persons having permits to manufacture vinegar.
    During the years 1909 to 1912, inclusive, the capital and net earnings of the partnership were as follows:

   OPINION.

Lansdon:

In this appeal the taxpayers claim deductions from gross income for 1920 on account of obsolescence of good will resulting from war-time and national prohibition legislation. They seek to establish a substantial good will or intangible value in their property at March 1, 1913, by a statement of the invested capital and net earnings employed in and resulting from their business operations for the five years 1909 to 1913, inclusi ve. Even if, without other evidence, the value of intangibles can be properly computed from an analysis of capital and net earnings covering a period of years, the showing made by the taxpayers is wholly insufficient for their purpose. A substantial part of the net earnings, practically one-half, adduced as a basis for intangible value, resulted from operations during the year 1913. Prior to that year no good will value is indicated by the earnings. The increased income for 1913 may have been attributable to the earning power of intangibles developed prior thereto, but the taxpayer offered no evidence upon which we can base such a conclusion.

Several factors essential to the determination of good will value by a scrutiny of financial results are overlooked or ignored by the taxpayers. The business in question was conducted as a partnership. We are unable to determine from the evidence whether the amounts set out as net earnings are remainders after payment of reasonable compensation to partners who devoted their time to the operation of the enterprise. We are also without information as to the value of the tangible assets employed in the business. The amounts set forth are designated as capital, with nothing to indicate their net worth after the deduction of borrowed assets. In the consideration of a similar problem in the Appeal of Edwin Schiele Distilling Co., 3 B. T. A. 873, we have held that earnings of a partnership are subject to reasonable reduction on account of salaries to partners actively employed in the business, and that due consideration must be given to the use of borrowed"capital. After careful consideration of the evidence offered by the taxpayers, we are of the opinion, therefore, that no value of intangibles as of March 1, 1913, has been established. ■

The taxpayers having failed to prove their ownership of any intangibles or good will inherent in their business at March 1, 1913, the Board deems it unnecessary to consider the remaining issues raised.

The deficiencies are $35,371.94 as to Robert Thai, and $37,361 as to Gustav Thai. Order will be entered accordingly.


author: ARundell:

text:
    Appeal of CALDWELL MILLING CO.
    Docket No. 1166.
    Submitted November 17, 1925.
    Decided April 16, 1926.
    Revenue Act of 1918, section 234, subdivision (a) (3) (c), construed; tbe provision excluding from taxes deductible from gross income “ those assessed against local benefits of a kind tending to increase the value of the property assessed ” means special or local assessments as a class.

      Phil D. Moreloch and Dudley Doolittle, Esqs., for the taxpayer.

      Briggs G. Simpich, Esq., for the Commissioner.
    Before Steiinhagen, Lansdon, and Arundell.
    The Commissioner determined a deficiency of $81.32 in income and profits taxes for the fiscal year ended June 30, 1920. The deficiency arises from the disallowance by the Commissioner as a deduction from gross income of the sum of $1,131.59 paid in discharge of an assessment against real property of the petitioner for a local street improvement.
    FINDINGS OF FACT.
    The petitioner is a Kansas corporation with its. principal office at Caldwell. It owns lots on both sides of Arapahoe Street in that city, and upon the lots on the east side of the street are situated its mill, grain elevator, and auxiliary buildings. To the south of petitioner’s property Arapahoe Street runs into Main Street. The southerly line of its property is about 50 feet north of Main Street. In 1919 Main Street was paved by the city. By ordinance, the city laid out assessment districts embracing the property declared to be benefited, and the cost of the paving was assessed against such property. In the vicinity of Arapahoe Street', the assessment district embraced property within 150 feet of Main Street, and thus included three lots on the west side and four lots on the east side of Arapahoe Street owned by the petitioner. Between petitioner’s property and Main Street, on the east side of Arapahoe, with a frontage of 50 feet on the latter, are two lots owned by the Chicago, Bock Island & Pacific Railroad Co., which are leased to the former. Its office is located on this plot.
    The pavement on Main Street extended easterly as far as the right of way of the Chicago, Bock Island & Pacific Railroad, which adjoins petitioner’s property on the east and runs in a north and south direction in general parallel to Arapahoe Street. Main Street forms a segment of a road which runs out through the neighboring country, in one direction to South Haven, about 11 miles distant, and to other points. About three years after the pavement of Main Street, this road was paved, and, including the Main Street segment, became part of the Meridian Highway. This road is used by farmers in bringing grain to the petitioner’s mill.
    The population of Caldwell in 1919 was 2,071, and in 1920 it was about the same; in 1925 it was 1,856.
    The market value of the petitioner’s lots in 1920, after the pavement of Main Street, was no greater than it was before the pavement was laid.
   OPINION.

ARundell:

The Revenue Act of 1918, section 234, subdivision (a) (3) (c), allows as deductions from gross income taxes “imposed * * * by the authority of any State or Territory, or any county, school district, municipality, or other taxing subdivision of any State or Territory, not including those assessed against local benefits of a hind tending to increase the value of the 'property assessed.” (Italics ours.) The petitioner contends, in substance, that in order to determine whether any tax comes within the terms of the excluding clause, we must answer the question, “ Did the local benefit for which the tax was imposed increase the value of the property of the particular taxpayer?” If it did not, the tax, according to the argument, is not within the terms of the exclusion and the amount thereof may therefore be deducted in computing net income. Testimony was introduced to show that, in the year following the one in which the improvement was made, the market value of the land was no greater than it was before the improvement was made. In support of its position as to the law, the petitioner points to the fact that in the Revenue Acts of 1909, 1913, 1916, and 1917, the corresponding provision read simply “ not including those [taxes] assessed against -local benefits,” and that in the 1918 Act there was added, to this clause the words “ of a kind tending to increase the value of the property assessed.”

The clause obviously expresses an intention to specify a class or kind of tax which is excepted from those which may be deducted. What we are called upon to decide is whether the tax here sought to be deducted belongs in the class referred to. As a preliminary, however, it is necessary to determine what the class is, for the language requires construction. The term “taxes” is used. There is a class of impositions made upon property in the immediate vicinity of a local public improvement to pay for the improvement, which is known in both popular and legal parlance as special or local assessments. Ordinarily, the terms “ assessments ” and “ tax ” or “ taxation,” as used in constitutions and statutes, are not synonymous, and have been given entirely distinct meanings by the courts. 25 R. C. L. 84, and cases there cited. Special assessments are governed by principles that do not apply universally to taxation. Illinois Central R. R. Co. v. Decatur, 147 U. S. 190. Is the expression “ taxes * * * assessed against local benefits ” standing alone to be interpreted to mean special assessments; and if so, did Congress in adding, in the 1918 Act, the phrase “ of a kind tending to increase the value of the property assessed ” intend to restrict to a particular sort the special assessments that might be deducted ?

Special assessments are laid with reference to the special benefit which the property assessed derives from the expenditure of the money. The whole theory of such an assessment is generally held to be based on the doctrine that the property against which it is levied derives some special benefit from the improvement aside from the mere general advantage resulting to the community at large. “ Taxes proper, or general taxes, proceed upon the theory that the existence of government is a necessity; that it cannot continue without means to pay its expenses; that for those means it has the right to compel all citizens and property within its limits to contribute; and that for such contribution it renders no return of special benefit to any property, but only secures to the citizen that general benefit which results from protection to his person and property, and the promotion of those various schemes which have for their object the welfare of all. ‘ The public revenues are a portion that each subject gives of his property in order to secure or enjoy the remainder.’ ”

Illinois Central R. R. Co. v. Decatur, supra Loan Association v. Topeka, 20 Wall. 655, 664.

We think Congress used the word “ taxes ” in this subdivision in a broad sense, and that when it qualified “ taxes ” by the words “ those assessed against local benefits ” it meant to specify that kind of tax commonly denominated special or local assessments, since the latter have their basis in compensating benefits.

We now come to the phrase mentioned above which was added in the 1918 Act. We have already adverted to the theory that special assessments must be levied with reference to the special benefits conferred upon the owners of the property taxed. In the case of Norwood v. Baker, 172 U. S. 269, 278, 279, the Supreme Court thus declares the rule:

The principle underlying special assessments to meet the cost of public improvements is that the property upon which they are imposed is peculiarly benefited. * ⅜ * The exaction from the owner of private property of the cost of a public improvement in substantial excess of the special benefits accruing to him is, to the extent of such excess, a taking, under the guise of taxation, of private property for public use without compensation. We say “ substantial excess,” because exact equality of taxation is not always attainable, and for that reason the excess of cost over special benefits, unless it be of a material character, ought not to be regarded by a court of equity when its aid is invoked to restrain the enforcement of a special assessment.

So far as our researches disclose, this principle is recognized by almost all of the States, including the State of Kansas. Union Pac. R. Co. v. City of Abilene, 78 Kan. 820; 98 Pac. 224, 227; Gilmore v. Hentig, 33 Kan. 156; 5 Pac. 781. If the assessment were not based upon an increment of benefit to the property assessed, resulting from the improvement, it would, by the great weight of authority, be invalid. This being so, Did Congress, when it added the phrase referred to above, intend to subject special assessments to the test which would be required if petitioner’s contention were sustained, in order to determine their deductibility? Let us consider what the situation would be. The municipality made the improvement, determined an assessment district embracing the property supposed to be benefited and the amount of the supposed benefits, and made assessments accordingly. It must be presumed that the municipality acted under proper legislative authority and in accordance with the grant of authority. It must be presumed further that the property owners, including this petitioner, had an opportunity to present objections to the municipal authorities, and that the courts of Kansas were open to them to correct any error or illegality in the assessment. Those are the forums in which any question affecting the validity of the assessment should be raised. If its invalidity were established, of course the assessment would not have to be paid at all. The assessment was paid and there is no evidence that petitioner or any other property owner made any protest or raised any objection to the improvement or to the assessment. We are asked now — in connection with a claim for a deduction from gross income — to consider facts which tend to show the assessment was unconstitutional, after petitioner has acquiesced in the assessment. A consequence of adopting the construction contended for would be that the question of deductibility of assessments for any local public improvements in the United States would depend upon facts which, if established, might affect the validity of the assessment, and which, if urged in the proper forum, might result in no assessment. We can not ascribe to Congress any such purpose. We are to presume that Congress in framing the Revenue Act of 1918 knew the law relative to special assessments and had regard to the principles underlying their imposition. Welch v. Cook, 97 U. S. 541, 543. We think the phrase in question was added in an attempt to clarify the clause and to distinguish local public improvements, the cost of which is assessed only against the property benefited, from those indirect benefits resulting from improvements such as schools, parks, water works, etc., which are usually paid for out of general taxes.

The tax here sought to be deducted is admittedly a special assessment for a local public improvement.

The deficiency is $81.32. Order will he entered accordingly.