author: Phillips

text:
    Appeal of CORNELIUS COTTON MILLS.
    Docket No. 12306.
    Submitted May 10, 1926.
    Decided June 28, 1926.
    1. Where the Commissioner determined a deficiency for one year and an overassessment of tax for another, such overassessment not arising from the denial of any claim for abatement of a deficiency, and the petition alleges error only as to the year for which an overassessment was determined, held-, that the Board has no jurisdiction of the appeal.
    2. Section 274 (g) of the Revenue Act of 1926 denies to the Board jurisdiction over such an appeal, and supersedes the decision of the Board in Appeal of M. J. Barry, 1 B. T. A. 156.

      E. A. Mihills, G. P. A., for the petitioner.

      A. H. Murray, Esq., for the Commissioner.
    Before Phillips.
   Phillips

: This appeal comes before us on the motion of the Com» missioner to dismiss for the reason that the Board is without jurisdiction to hear and determine this proceeding.

It appears that on February 3, 1926, the Commissioner mailed to the taxpayer a letter in which he set forth his determination of a deficiency of $2,525.00 for the year 1920 and an overassessment for the year 1921 of $80.55. The overassessment does not arise from the denial of any claim for the abatement of any additional assessment, but from an excessive computation of the tax by the taxpayer on the original return. The petition states that the taxes in controversy are income and profits taxes for the calendar year 1921 and assigns as error the disallowance of a portion of the depreciation claimed on machinery for the calendar year 1921.

It is evident from the foregoing statement that the year 1920, for which the Commissioner computed a deficiency of $2,525, is not involved in the appeal, except' as the taxpayer may be entitled to have such deficiency reduced by a credit of any amount by which the tax was overpaid for 1921. The purpose of the appeal is to secure a determination that the tax for 1921 has been overpaid by more than the amount of $80.55, as determined by the Commissioner.

It was held by the Board in Appeal of E. J. Barry, 1 B. T. A. 156, that in such circumstances the Board should accept jurisdiction of the appeal for the purpose of determining the net amount of the tax to be assessed against and paid by the taxpayer. Since that decision was rendered, the Bevenue Act of 1926 has become effective, which Act provides, in part, as follows:

Sec. 274. (g) The Board in redetermining a deficiency in respect oí any taxable year shall consider such facts with relation to the taxes for other taxable years as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid.

Under this provision of the Act the Board no longer has the jurisdiction exercised in the Barry appeal. The. Board is to have jurisdiction of appeals from the determination of a tax liability for those years for which the Commissioner has determined a deficiency. In determining the correct amount of the deficiency, we may consider such facts with relation to taxes for other taxable years as may be necessary correctly to redetermine the amount of the deficiency involved; for example, in determining the invested capital for the jrear for which the deficiency against a corporation has been determined, we may determine what was the tax liability during a preceding year. We must not, however, determine whether or not the tax for such other years has been overpaid or underpaid, and without authority to make such a determination it necessarily follows that we can not determine that there is a credit to be applied to reduce the deficiency which has been determined by the Commissioner. Apparently each' taxable year must stand upon its own feet, so far as the jurisdiction of the Board is concerned, and the question, whether there has been an overpayment in some year for which a deficiency has not been determined which should be allowed as a credit, is one over which the Board has no jurisdiction. This is now a matter of adjustment to be made by the Commissioner or by the collector, or it may be made the subject of a suit for refund.

While the present appeal was filed prior to the passage of the Revenue Act of 1926, the jurisdiction of the Board is now limited to such jurisdiction as is granted by that Act. (Section 1000, Revenue Act of 1926.) The appeal must be dismissed for lack of jurisdiction in the Board to hear and determine the proceeding.

Order will be entered accordingly.


source: Caselaw Access Project

license: Public Domain

text:
    Appeal of UNITED PAPER CO.
    Docket No. 9612.
    Submitted May 10, 1926.
    Decided June 28, 1926.
    1. The Revenue Act of 1926, section 283 (b), does not give jurisdiction to the Board of an appeal over which it had no jurisdiction under the Revenue Act of 1924.
    2. Where a petition on appeal'was filed with the Board under the Revenue Act of 1924, but more than 60 days after the date when the notice of the determination of the deficiency was mailed to the taxpayer, no appeal is pending at the date of the enactment of the Revenue Act of 1926 and the Board has no jurisdiction to redetermine the deficiency.

      Harry Friedman, Esq., for the petitioner.

      T. M. Wilkins, Esq., for the Commissioner.
    Before Phillips.
   Phillips

: On October 3, 1925, the Commissioner sent to the taxpayer by registered mail notice of the determination of a deficiency of $18,723.85 for 1920. On December 3, 1925, the taxpayer filed with the Board a petition in which it purported to appeal from such determination. On April 5, 1926, the Commissioner moved to dismiss the petition on the ground that the Board is without jurisdiction to hear and determine the appeal, the petition not having been filed within 60 days from the date of the mailing of the deficiency notice.

The petition was filed with the Board under the Revenue Act of 1924. When it was filed, the time within which an appeal might be taken had expired and the Board was without jurisdiction. Appeal of Sam Satovsky, 1 B. T. A. 22; Belmont Smokeless Fuel Co. v. Board of Tax Appeals (Supreme Court of the District of Columbia, decided December 22, 1925.) No order of dismissal had been entered prior to February 26, 1926, the effective date of the Revenue Act of 1926, and it is claimed that the Board has jurisdiction under the provisions of section 283 (b) of that Act, which, so far as material, reads:

If before tlie enactment of this Act any person has appealed to the Board of Tax Appeals under subdivision (a) of section 274 of the Revenue Act of 1924 * * * and the appeal is pending before the Board at the time of the enactment of this Act, the Board shall have jurisdiction of the appeal.

The petition not having been filed within the time prescribed by subdivision (a) of section 274 of the Revenue Act of 1924, it seems clear that there has been no appeal taken under that section. At the time the petition was filed the Board had no jurisdiction to hear and determine any issue, and without such jurisdiction’ the filing of the petition can not constitute an appeal to the Board. An act has been performed which has no validity or significance.

It is said that the Board had jurisdiction to determine its own jurisdiction and to enter an order of dismissal and that, as this had not been done at the time the Revenue Act of 1926 was enacted, the appeal was pending. It has been said further that in such circumstances the Board must, under section 906 (c) of the Revenue Act of 1924, as amended by section 1000 of the Revenue Act of 1926, enter an order specifying the deficiency to be the amount determined by the Commissioner. The argument is that, if such an order must be entered, the appeal is pending until such order is made.

We do not believe the argument sound. Necessarily the Board has the power to determine whether jurisdiction exists and, if not, to make an appropriate record of its determination. This has customarily taken the form of an order. While in form a dismissal, the order is in effect a determination that no appeal has been taken, and there can be no jurisdiction even to dismiss the appeal in the sense in which dismissal is used in the statute. In those cases where the Board determines that it has no jurisdiction of the appeal, it does not provide in its order that the deficiency is the amount determined by the Commissioner.

It is our opinion that no appeal was taken under the Revenue Act of 1924, and that no appeal was pending at the time of the enactment of the Revenue Act of 1926. The motion of the Commissioner to dismiss the petition must be granted.

Order dismissing the ''petition will he entered.


text:
    Appeal of SAMUEL BIRD.
    Docket No. 6721.
    Submitted March 28, 1926.
    Decided June 28, 1926.
    1. Cost of Imperial Russian Government Fifth War Loan bonds allowed as a deduction in 1920 as a debt ascertained by the taxpayer to be worthless and charged off in that year.
    2. Indebtedness evidenced by a bond may be ascertained to be worthless prior to the maturity date of the bond.

      George S. Brengle, Esq., for the petitioner.

      F. 0. Graves, Esq., for the Commissioner.
    Before Phillips and Trammell.
    Taxpayer appeals from the determination of a deficiency of $12,-696.66 for the year 1920, and alleges as error the refusal of the Commissioner to permit the deduction of $20,370, claimed as a debt ascertained to be worthless and charged off by the taxpayer during the taxable year,
    FINDINGS OF FACT.
    The taxpayer is and at all material times was a citizen and resident of the United States, and during the years involved was engaged in the business of writing marine insurance risks, including insurance on shipments to Russian ports.
    On or about August 11, 1916, the taxpayer bought for cash, as an investment, certain 5y¿ per cent bonds of the Imperial Russian Government, known as the Fifth Russian War Loan, of the par value of 100,000 rubles. Said bonds were dated February 14, 1916, matured February 14, 1926, were internal bonds and were payable, principal and interest, in rubles in Russia. The taxpayer paid for them the sum of $29,100, or $291 per thousand ruble bond.
    In the year 1917 the taxpayer sold 30,000 rubles par value of said bonds for $3,000, or $100 per 1,000 rubles.
    The Imperial Russian Government was overthrown in March, 1917, and was succeeded by the Provisional or Kerensky Government. The Provisional or Kerensky Government was overthrown by the Soviet Government in November, 1917.
    The Soviet Government, by a decree issued in January, 1918, repudiated the bond issues and certain other financial obligations of the Imperial Russian Government, including the bonds of the issue held by the taxpayer.
    The Soviet Government, on the overthrow of the Provisional Government, did not immediately become either the de jure or the de facto Government of Russia, being in January, 1918,- in control of only a relatively small part of Russian territory. Counter-revolutionary movements had developed throughout Russia and Siberia, the leaders of these movements, among others, being Admiral Kolchak, Generals Denniken, Wrangel, Yudenitch, and Korniloff. Several of these leaders recognized the validity of the bonds issued bjr the Imperial Russian Government. The Allied Powers gave aid to these counter-revolutionary efforts and in June, 1919, Admiral Kolchak was recognized by the Supreme Council in Paris as the de facto ruler of all Russia. The counter-revolutionary movements were not overcome by the Soviets until the defeat of General Wrangel in November, 1920, and it was not until the year 1920 that it became certain the Soviets were to be in a position to enforce and make good their decree repudiating the debts of the Imperial Russian Government, inciuanig the bonds of the issue held by the taxpayer.
    The Soviet repudiative decree has not been rejected, rescinded or modified. No interest has been paid on such bonds since 1917.
    In October or November, 1920, the taxpayer endeavored in good faith, but without success, to sell the remaining bonds (70,000 rubles par value), through two legitimate brokerage and investment houses in New York City, with which the taxpayer dealt. The taxpai^er could find no market for said bonds.
    The taxpayer, during the j^ears 1916 to 1920, inclusive, knew generally of conditions in Russia and of the action of the Soviet Government in repudiating the debts of the Imperial Russian Government. In the latter part of 1920 the taxpayer ascertained the said bonds, which he then held, and the debt of the Imperial Russian Government evidenced by such bonds, to be worthless.
    In December, 1920, the taxpayer charged off the said Russian bonds (70,000 rubles, par value), as bad debts and thereafter, in his Federal income-tax return for the calendar year 1920, deducted as a debt ascertained to be worthless the actual purchase price of said bonds, to wit, $20,370.
    In computing the deficienc}*- here involved, the Commissioner has refused to allow anj? part of the deduction claimed by the taxpayer.
   OPINION.

Phillips

: The facts presented in this case are substantially similar to those in Appeal of The Murchison National Bank, 1 B. T. A. 617. The sole distinguishing feature is that in that appeal the bonds which evidenced the indebtedness matured in 1919, while here they mature in 1926. While this might be a material distinction in those cases where a deduction is sought, not on the ground that the indebtedness is uncollectible and worthless, but as a loss on the ground that, although collection can be made, the monetary unit in which payment is to be made has become practically worthless (and on this point we express no opinión at the present time), it does not appear that the distinction is material in this case.

Here the government issuing the bonds had been succeeded by a cle facto regime which had expressly repudiated the indebtedness, refused to pay any interest thereon, and was in a position to enforce its repudiation. There were no steps which could be taken to enforce the indebtedness, and it seems that the indebtedness was as worthless in 1920 as it is at the present time. The deduction claimed must be allowed.

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


author: Smith

text:
    Appeal of HOWER & SEAMAN, INC.
    Docket No. 4196.
    Decided July 20, 1926.
    The amount of salaries paid to officers which may be deducted from gross income in tax returns determined.

      R. M. O’Hara, Esq., for the petitioner.

      George G. Witter, Esq., for the Commissioner.
    Before Smith, Littleton, and Teussell.
    The taxpayer has petitioned for the redetermination of deficiencies in income and profits tax for the following taxable periods:
    Ten-month period March 1 to December 31, 1919_$4,126. 98
    Calendar year 1920- 2, 545. 81
    The only question in issue is the amount of salaries paid to the two principal stockholders which is deductible from gross income for each period.
    FINDINGS OF FACT.
    The taxpayer is a Michigan corporation with its principal office at Muskegon. During the years 1918, 1919, and 1920. it was engaged in the purchase and sale at retail of ladies’ ready-to-wear clothing. It operated three stores, one at Muskegon, one at Jackson, and one at Bay City, all in the State of Michigan.
    In its income-tax returns for the fiscal period March 1 to December 31, 1919, and for the calendar year 1920, it claimed, as a deduction from gross income, $25,000 for salaries of its two officers. In the audit of its tax returns the Commissioner disallowed the deduction of $11,666.67 of the amount paid as salaries for the fiscal period named, and $9,000 of the amount claimed as salaries of officers for the calendar year 1920. The taxpayer admits an error of $4,166.67 in the deduction for officers’ salaries for the ten-month fiscal period of 1919.
    The capital stock outstanding at March 1,1919, was $16,000, which was evidenced by 1,600 shares of the par value of $10 each. This stock was owned as follows:
    Shares.
    D’Erwin Hower_ 799
    Harriet G. Hower, wife of D’Erwin Hower_:_ 1
    Samuel L. Seaman___ 800
    In March, 1919, the authorized capital stock was increased to $60,000, $24,000 of which was immediately divided among the stockholders as follows:
    Shares.
    D’Erwin Hower_1,198
    Harriet G. Hower_ 2
    Samuel L. Seaman_1,200
    In December, 1919, D’Erwin Hower and Samuel L. Seaman each subscribed for $10,000 additional capital stock. This stock was paid for in the manner indicated below.
    Only small salaries were paid to the officers prior to 1918. The salaries for the fiscal year ended February 28, 1919, were D’Erwin Hower $4,800 and S. L. Seaman $4,800. On March 12, 1919, at a meeting of the board of directors of the taxpayer, the following salaries were voted “ for the ensuing year ”■ — D’Erwin Hower $12,500; Samuel L. Seaman $12,500. At a meeting of the board of directors held January 12, 1920, salaries were voted for the ensuing year as follows: D’Erwin Hower $12,500; S. L. Seaman $12,500.
    The books of account of the taxpayer show that there was placed to the credit of D’Erwin Hower and Samuel L. Seaman, each, $300 per month during the last ten months of the calendar year 1919, and $400 per month during the calendar year 1920. At December 31, 1919, there was placed to the credit of each of these individuals $9,500, and at December 31, 1920, $7,700. The additional amount placed to the credit of each individual at December 31, 1919, was used principally in paying for $10,000 par value of the capital stock which had been subscribed for by each.
    The sales of the taxpayer for the ten-month period ended December 31, 1919, and for the year ended December 31, 1920, were as follows:
    1919_1_$284,697.38
    1920_ 352,804.78

      The net income of the corporation, as shown by its tax returns for the ten-month period of 1919, and for the calendar year 1920, was as follows:
    1919_$13,878.30
    1920_ 7, 704. 05
    The taxpayer operated a store at Bay City, Michigan. During a portion of the year 1919 it employed a manager for that store at an annual salary of $7,500.
    The taxpayer is engaged in a highly specialized business. It sells the better class of ladies’ ready-to-wear clothing, and the success of the business depends to a very large extent upon the exercise of good judgment in the purchase of goods and the rapid turnover of its merchandise.
    The taxpayer kept its books of account upon the accrual basis.
   ORINION.

Smith

: The taxing statute permits a corporation to deduct from gross income all the “ ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.” Section 234 (a) (1), Revenue Act of 1918.

In the instant proceeding the Commissioner contends that the amounts paid to the principal stockholders ostensibly as salaries were in excess of reasonable amounts for compensation and that they were in eífect a distribution of profits. From a consideration of the entire evidence ive are of the opinion that the amounts voted and paid as salaries constituted ordinary and necessary expenses of doing business and as such are deductible from gross income. It appears, however, that the resolution of the board of directors-of March 12, 1919, authorized the payment of salaries to each officer of $12,500 “ for the ensuing year.” The taxpayer’s return for the ten-month period ended December 31,1919, shows a deduction for salaries of officers of $25,000. The taxpayer admits error in making such deduction and now claims that the amount deducted should have been $20,833.33. The excess deduction of $4,106.67 was properly disallowed by the Commissioner.

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


author: Trammell

text:
    Appeal of UNION TERMINAL COLD STORAGE CO.
    Docket No. 4319.
    Decided July 20, 1926.
    Tlie determination oí the Commissioner that inadequate depreciation had been deducted in prior years is approved in the absence of sufficient evidence to show that it is erroneous.

      Edward Thompson, O. P. A., for the petitioner.

      L. G. Mitchell, Esq., for the Commissioner.
    Before Geattpnee  and Teammell.
    This is an appeal from the determination of a deficiency in income and profits taxes for the year 1919 in the amount of $3,827.97, of which $1,300 is in controversy. The deficiency results from a reduction of invested capital on account of insufficient depreciation in prior years.
    FINDINGS OF FACT.
    The taxpayer is a New Jersey corporation with offices in New York City. Its plant is located in Jersey City, N. J., and it has been engaged in the cold storage business since 1905, handling perishable food products.
    The capacity of the plant is about 4,000,000 cubic feet. It consists of eight buildings, seven of which are used for cold storage of perishable goods, and one for a packing house. Four of the buildings were erected in 1905, two in 1910, and two during the World War. Three of these buildings are frame and the others are brick and reenforced concrete. No evidence was offered as to the cost of the buildings or equipment, and no March 1,1913, value was established.
    The power plant consists of a building 75 by 100 feet, of four to six stories, equipped with piping, exchanger coils, insulation and machinery. Pipes 18 to 20 feet long, are used for condensers and absorbers in liquifying and purifying ammonia, turning ammonia gas into pure anhydras ammonia. The ammonia coolers contain a great many pipes used for circulation of brine which is pumped through the coolers and then out to the warehouse in large pipes and distributed in each building. The pipes are constantly wearing out and causing leaks and have to be renewed. Men are regularly employed repairing brine leaks and replacing leaky pipes. The buildings are insulated to retain the cold. The condensers, absorbers, dehydrator coils and exchanger coils, as well as the insulation, are constantly in need of repairs and are watched very closely. Leaks are repaired and old pipes frequently replaced with new ones. The repairs and renewals of pipes were charged to operating expense. When repairs were needed in the walls, insulation or machinery, they were made in such a way as to keep the buildings and equipment in good condition. Certain replacements and betterments were charged to expense. No depreciation was taken on buildings and equipment from 1905 to 1918. No evidence was submitted to show what depreciation, if any, was taken in 1919.

      This decision was prepared during Mr, Graupner’s term of office.

   OPINION.

Trammell

: The Commissioner reduced the invested capital of the taxpayer for 1919 upon the ground that it failed to deduct an adequate amount in prior years for the exhaustion, wear and tear of the physical assets used in its business. The taxpayer contends that no reduction should be made on this account for the reason that it had kept up its buildings and equipment by repairs and replacements which had been charged to expense and not capitalized.

The allowance provided by statute for exhaustion, wear and tear of assets used in business is in addition to the deduction allowed for amounts expended for repairs. The fact that assets are constantly being repaired does not prevent exhaustion thereof due to wear and tear, and if proper deductions are not made for such exhaustion, the earned surplus is erroneously stated for the taxable year. A tax-pa}^ may, however, replace certain assets and make permanent improvements on others and erroneously charge such expenditures to expense instead of to capital account, so that the amount of exhaustion due to wear and tear may be balanced by the capital acquisitions or expenditures, in which case its books may properly reflect its earned surplus as of the beginning of the taxable year, although no deductions were taken on account of exhaustion, wear and tear. In this case there is no evidence as to whether this was true or not. On the other hand it is possible that taxpayer may not use a consistent method of charging off depreciation. It may take a small deduction one year, none at all in another year, and a large deduction in another. In such a case the question to be determined, with respect to the earned surplus of the taxable year, is: Was a fair and reasonable amount deducted in prior years, taking the entire amount of deductions as a whole? However, evidence tending to prove that the assets as of the beginning of the taxable year had a value equal to the cost of such assets is not sufficient to establish the fact that an adequate and reasonable deduction was made on account of the exhaustion, wear and tear thereof. The value of assets may actually increase, but this does not mean that they are not gradually being exhausted in use. . •

In his case, while there is some evidence that certain replacements, renewals and betterments were charged to expense, there is no evi-deuce as to the amount of such charges, and we are not in a position to say that such charges or such amounts were sufficient, taken as a whole, to overcome the fact that no deduction whatever was taken on account of exhaustion, wear and tear of assets. The Commissioner has determined that a reasonable deduction on account of depreciation of the physical assets used in the business was $174,585.35. The presumption of the correctness of the determination of the Commissioner is not overcome by the evidence in this case, and accordingly such determination is approved.

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


author: Thammell

text:
    Appeal of MORGAN J. McMICHAEL.
    Docket No. 2221.
    Decided July 20, 1926.
    The basis for determining gain or loss on the sale of stock of an insurance company which had originally been doing business as a mutual company, is the cost and not the value when acquired in 1914, regardless of what factors enter into the value.

      Kenneth Taylor, Esq., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    Before GRAupneR, Teammell, and Phillips.
    This is an appeal from the determination of deficiencies in income tax of $15,013.13 for 1918, and $347.91 for 1919, with an overassessment of $4,151.04 for 1917. The deficiencies result from the refusal of the Commissioner to accept the March 1, 1913, value of stock determined and used by the taxpayer as the basis for determining • gain on the sale thereof.
    FINDINGS OF FACT.
    The taxpayer is an individual residing at Minneapolis, Minn. Prior to 1908 he had been engaged in the life, accident and casualty insurance business in Iowa and Minnesota and, largely as the result of his personal acquaintance, had built up a well-organized agency force. In 1908 the taxpayer, with George W. Curtiss and E. S. Warner, organized the Merchants Life and Casualty Co., a Minnesota mutual insurance company, for the purpose of writing accident and health insurance, principally in Minnesota and Iowa. The taxpayer became president of this company upon its organization and continued to act as such through 1917. When the company was first organized the taxpayer received a small salary and he and his two associates used their own funds in building up the company. Forty-four thousand dollars was thus advanced prior to 1913, of which amount the taxpayer advanced $22,000.
    At the end of 1912 the company had 12,041 policyholders and a surplus of $43,924.26. Thereafter the number of policyholders remained substantially stationary. At the end of 1913 the surplus had increased to $63,016.48.
    On February 2, 1914, the charter of the Merchants Life and Casualty' Co., with the approval of the Insurance Commissioner of Minnesota, was amended to make it a stock company. Under the laws of Minnesota a stock insurance company must have a paid-in capital of at least $100,000 and securities of the value of $100,000 must be deposited with the Insurance Commissioner. The company complied with this requirement. In 1914, 2,000 shares of stock of the par value of $50 were issued. This stock was issued to the original organizers of the company, who paid $50 per share in cash, the taxpayer purchasing 984 shares, George W. Curtiss 492 shares, and E. S. Warner 492 shares. The remaining 32 shares were purchased at par and issued as qualifying shares to directors.
    After the charter had been amended and stock had been sold, the company had a paid-in capital and surplus of $163,016.48 and about 12,000 policyholders. The company then operated as a stock company, with the taxpayer as president. In October, 1917, taxpayer entered into a contract to sell all of the capital stock of the Merchants Life and Casualty Co. for $235,000. After this sale was arranged, the taxpayer acquired the stock of the other stockholders and delivered all the outstanding stock to the purchaser in fulfillment of the sales contract. The payments were made in three installments of $35,000 in 1917, $150,316.66 in 1918, and $49,683.34 in 1919.
    The Commissioner determined that the 984 shares acquired in 1914 cost the taxpayer $69,700 and determined the gain upon that basis. The cost of the 984 shares of stock issued to the taxpayer in 1914 ivas $69,700, of which $47,000 was paid in 1914, and $22,000 represents advances to the old mutual company.

       This decision was prepared during Mr. Graupner’s term oi office.

   OPINION.

Thammell

: This appeal raises the question of the taxpayers’ gain in 1917, 1918 and 1919 from the sale of stock of the Merchants Life and Casualty Co. in 1917. The taxpayer contends that the stock was worth at least as much on March 1, 1913, as it was sold for in 1917, and that no income arose out of the transaction.

The Commissioner contends that the basis for determining gain is the cost of the stock to the taxpayer. The Merchants Life and Casualty Co. was organized under the laws of Minnesota in 1908 as a mutual insurance company. The taxpayer, with others, was active in the organization and operation of the mutual company, and at the end of 1912 the company had 12,041 policyholders and a surplus of $43,924.26. At the end of 1913 the number of these policyholders was about the same and its surplus had increased to $63,016.28. On February 2, 1914, the mutual company was changed to a stock company under section 3510 of the General Statutes of Minnesota, 1913. The capitalization of the stock company was 2,000 shares of the par value of $50 each. Nine hundred and eighty-four shares were acquired by taxpayer at a cost of $69,700, $47,700 of which was paid in cash in 1914, and $22,000 of which was money which the taxpayer had advanced to the old mutual company.

The taxpayer, before the sale of the stock, acquired all the stock of the company held by others and included it all in the sale. The cost of the stock, other than that originally acquired in 1914 on the organization of the stock company, is not in issue and we have no evidence with respect thereto.

The taxpayer contends that the fair market value of the stock acquired in 1914 was at least $117.50 per share, that the excess of the market value over cost represented compensation to him for his services to the company prior to 1914 and that, in any event, the March 1, 1913, value was equal to the selling price and that the taxpayer realized no taxable gain or profit in 1917 or subsequent years in connection with the sale of the stock which was issued to him in 1914.

Since the stock company did not come into existence until after March 1, 1913, it is clear that the stock could not have a March 1, 1913, value which could be used as the basis for determining the gain on a subsequent sale thereof. The taxpayer takes the position that the stock was worth more than the cost above mentioned because of the surplus with which the stock company started business. Admitting the surplus to be established, it does not follow that such value increases the cost of the stock. The cost of the stock and the value may be entirely different. As to whether a portion of the value was allowed the taxpayer by the corporation as compensation for services, that is a question of fact. A corporation may and frequently does issue stock for services rendered, or partly for cash and partly for services. In this case any services performed by the taxpayer were rendered to the mutual company before the stock corporation was organized. The assets and liabilities of that company became the assets and liabilities of the stock company. If there was a liability on the part of the mutual company to pay for any services rendered by the taxpayer, such liability followed the assets. The stock company was created merely by an amendment of the charter of the existing mutual company. But ive have no evidence of any liability having been set up by the mutual company or the stock company for such services, nor have we any evidence that any liability was canceled by the issuance of stock. The taxpayer has not shown that the corporation was under any legal or moral obligation to pay for any service which he performed. If a portion of the stock thereof was issued for services it is not shown by any corporate act and is not reflected on any of the corporate records. We are unable to reach the conclusion that the stock, or any part thereof, was issued for services of the taxpayer.

The taxpayer doubtless acquired the stock of the corporation at less than its value, but no gain or loss results from buying an article at less than its value until it is realized by sale or other disposition. The taxpayer owned none of the stock prior to March 1, 1913, and as a consequence, the only basis for determining gain or loss on the sale of the stock is cost. Both the cost and the selling price are set out in the findings of fact. The Commissioner determined the taxable gain on the installment basis in proportion as the selling price for the stock was paid, and this method of computation is not in question in this appeal. The initial payment was less than 25 per cent.

Order of redetermination will he entered on 15 days' notice, under Bule 50..


text:
    Appeal of GEORGE W. CURTISS.
    Docket No. 2327.
    Decided July 20, 1926.
    The cost of stock determined for the purpose of determining gain on the sale thereof.

      Kenneth Taylor, Esq., for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    Before GbaupNek, Phillips and Tbammell.
    This is an appeal from the determination of a deficiency in income tax for 1918 in the amount of $1,296.66. The deficiency results from the refusal of the Commissioner to accept value instead of cost as the basis for determining gain on the sale of stock acquired in 1914 and sold in 1911.
    FINDINGS OF PACT.
    The taxpayer is an individual residing at Minneapolis, Minn. About 1908 he became associated with Morgan J. McMichael and E. S. Warner in the Merchants Life and Casualty Co., a Minnesota mutual insurance company writing accident and health insurance, principally in Minnesota and Ioiva. The taxpayer acted as an officer and director of this company from 1910 through 1917.
    The taxpayer and his two associates used their own funds in building up the company. Approximately $44,000 was thus advanced prior to 1913, of which amount the taxpayer advanced one-fourth, or $11,000. At the end of 1912 the company had 12,041 policyholders and a surplus of $43,924.26. Thereafter the number of these policyholders remained Substantially the same. At the end of 1913 the surplus had increased to $63,016.48.
    On February 2, 1914, the charter of the Merchants Life and Casualty Co. was amended to make it a stock company. A stock insurance company, under the laws of Minnesota, is required to have a paid-in capital of at least $100,000, and securities of that amount must be deposited with the Insurance Commissioner. In 1914 the minimum amount of stock required by law was issued in the form of 2,000 shares of the par value of $50 each. This stock was issued for par to the original organizers of the company in the same proportion as that upon which they had advanced money to the company. The taxpayer received 492 shares, Morgan J. McMichael 984 shares, and E. S. Warner 492 shares. The remaining 32 shares were issued as qualifying shares to directors. After the change to a stock company had been approved by the Commissioner of Insurance of Minnesota and the stock had been sold, the company had a ptaid-in capital and surplus of $163,016.48 and about 12,000 policyholders, and it operated as a stock company, with the taxpayer, Morgan J. McMichael and E. S. Warner as officers. The cost of the 492 shares of stock issued to the taxpayer in 1914 was $35,000, of which $24,600 was paid in cash, and $11,000 by credit for advances to the old mutual company. The taxpayer sold these shares in 1917 for $49,947.50. This amount was $14,347.50 in excess of the cost thereof to the taxpayer. The sale price was paid in three installments. The gain received by taxpayer from sale of stock in 1917 was $652.31, in 1918 $10,134.47, and in 1919 $3,560.72.

       This decision was prepared during Mr. Graupner’s term of office.

   OIUNION.

Tram:mell:

This proceeding involves the same question which was presented in the Appeal of Morgan J. McMichael, 4 B. T. A. 266.

Order of redetérmination will he entered on 10 days’ notice under Rule 50.


text:
    Appeal of WOOD & BISHOP CO.
    Docket No. 4990.
    Decided July 20, 1926.

      Gorham H. Wood for the petitioner.

      J. W. Fisher, Esq., for the Commissioner.
    Before Marquette, Morris, and Green.
    This is an appeal from the determination of deficiencies in income and profits taxes for the fiscal years ended January 31, 1920, and 1921, and in income tax for the fiscal year ended January 31, 1922, in the sums of $1,438.31, $8,395.13, and $88.19, respectively, aggregating $9,921.66. The taxpayer alleges error on the part of the Commissioner in disallowing additional salaries in the sum of $21,400 for the fiscal year ended January 31, 1921.
   FINDINGS OP FACT.

The taxpayer is a corporation with its principal place of business at Bangor, Me. The stock of the corporation was closely held.

On February 20,1921, the board of directors determined that additional salaries of $21,400 should be paid for the fiscal year ended January 31,1921, and such salaries were entered on the books of the corporation on April 2, 1921, as of January 31st. The amount of the stock held and the additional salaries voted by the directors for the year 1921 were as follows:

Name. Stock held. Additional salaries.
Charles H. Wood-$15, 000 $3, 000
Edward Wood_ 25, 000 5,000
Gorham H. Wood- 35, 000 7, 000
Henry A. Wood_ 20, 000 4, 000
Dexter S. Smith_ 12, 000 2,400

The Commissioner refused to allow said additional salaries.

The deficiencies are $1,438.34., $8,395.13 and $88.19 for the fiscal years ended January 31, 19W, 1921 and 1922, respectively. Order will be entered accordingly.


author: Tettssell

text:
    FRANKLIN M. MAGILL, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 9885.
    Decided July 20, 1926.
    Expense deductions. — Club-room rentals and taxi fares incurred for the benefit of a corporation but paid by an employee are not proper deductions from the employee’s gross income, in the absence of evidence that the employee’s compensation was fixed in an amount intended to cover such expenses.

      Charles S. MeElroy, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    Before LittletoN and Teussell.
    This is an appeal from the determination of a deficiency in income tax for the year 1923 in the amount of $410.19. The petitioner alleges that the Commissioner erred in disallowing deductions of club expenses and taxi fares as ordinary and necessary business expenses.
    FINDINGS OF FACT.
    The taxpayer is an individual residing at Chicago, Ill. He is a stockholder and secretary and treasurer of the Magill-Weinsheimer Co.
    The taxpayer is a member of the Illinois Athletic Club. During 1918 and 1919 he lived at the club, but, after marrying 'in 1920, he no longer lived there, nor did he have any further personal use for his club room, and so decided to give it up. However, during the time he had lived there his business associates had become accustomed to using his room for business conferences and for entertaining customers, so that the officers of the Magill-Weinsheimer Co. requested the taxpayer to keep his club room for business purposes, but made no provision whatever for reimbursing the taxpayer for the amount of rent paid by him. The club rooms were rented only to members of the club.
    During the year 1923 the taxpayer paid $900 rent for the room, which was used strictly for business purposes. The taxpayer, Wein-sheimer, president, Speil, vice president, and the salesmen of the Magill-Weinsheimer Co. all used the club room regularly throughout the year 1923 for general business conferences, for entertaining-customers, and for working space. Out-of-town customers were invited to sleep and work in the club room without charge, filie officers of the company all had keys to the club room, and the employees could obtain the key from the room clerk.

      The taxpayer, not being the owner of an automobile, hired taxi cabs quite regularly, and has claimed a deduction of $1,200 taxi fares as an ordinary and necessary business expense. Not having kept an accurate account of the amount spent for taxi fares, the taxpayer has estimated that he averaged $4 a day for 300 days. However, he “ taxied ” between his residence and office in the mornings and evenings, the fare one way being about $1.75. In going to and from the office the taxpayer picked up a passenger who was not a customer, but who gave him a great deal of information on certain matters relating to the business. It was necessary for the taxpayer to hire a taxi quite often in entertaining his customers.
   OPINION.

Tettssell

: While there appears to be no doubt that the club- room paid for by this petitioner was used as an accessory to the business of the corporation by which he was employed, and that some unknown portion of the taxi fares incurred by him was for the benefit of his employer, although a considerable share of such taxi fares was apparently for the petitioner’s personal benefit and convenience, there is no evidence in the record to indicate that the basis of the petitioner’s compensation from his employer was fixed with a view of requiring him to meet the club-room expenses or the taxi fares. In the absence of an agreement, such expense items should be adjusted, if at all, between the employer and the employee. The employee can not take advantage of the Federal tax law for the purpose of correcting the omissions occurring in his arrangements with his employer.

The deficiency for the year 19%3 is $J¡,10.19. Order will he entered accordingly.

Phillips dissents.


author: TRUssell:

text:
    Appeal of HALBERT K. HITCHCOCK.
    Docket No. 6107.
    Decided July 20, 1926.
    Patents; basis op deduction fob exhaustion. — The owner of certain patents in the year 1912 granted the exclusive right of user during the life of the latest patent. The basis for the statutory deduction on account of exhaustion held to be the March 1, 1913, value of the contract, and, upon the evidence, the value of that contract found to be the amount of «$100,000.

      Chester A. Gwinn, Esq., for the petitioner.

      B. G. Simple h, Esq., for the Commissioner.

      Before Trussell and Littleton.
    This is an appeal from the determination of deficiencies in income taxes, to wit, $20548 for the year 1918; $156.77 for the year 1919; $205.13 for the year 1920, and $866.66 for the year 1921, making a total deficiency of $1,433.74. The petitioner claims that the Commissioner erred in his finding of the March 1, 1913, value of a certain leasing contract with the Pittsburgh Plate Glass Co., hereinafter referred to as the Glass Company, for the exclusive right to use certain patents owned by the petitioner, and that the Commissioner erred in not allowing sufficient deduction for exhaustion of the value of the said leasing contract for each of the years in question.
    FINDINGS OF FACT.
    The taxpayer is an individual residing in Pittsburgh, Pa., and his profession is that of consulting engineer.
    During the period from 1904 to May 17, 1912, the petitioner made certain inventions of machinery and processes for the grading and the application of abrasives, for smoothing and polishing plate glass, and acquired United States patents therefor as follows:
    Date of Application. Date of Issue. No. of Patent.
    July 19, 1907_Sept. 21, 1909_ 931441
    July 19, 1907_Sept. 21, 1909- 934442
    July 19, 1907_Sept. 21, 1909_ 934611
    July 19, 1907_Sept. 21, 1909_ 934612
    July 31, 1911_Mar. 18, 1913_ 1056415
    July 31, 1911_Mar. 18, 1913_ 1056416
    May 17, 1912_Mar. 10, 1914_ 1089705
    All of these patents covered machinery and processes relating to the production and polishing of plate glass and have become known in the plate glass industry as the Hitchcock apparatus.
    On November 23, 1910, the petitioner entered into a contract with the Glass Company, under which the Glass Company acquired the right to experiment with the apparatus represented by the first four patents issued in 1909, together with an option to acquire the exclusive user of said patents. On the 13th day of January, 1912, he entered into another contract with the Glass Company, under which that company acquired the right to acquire the exclusive user of the improvements represented by the three patents applied for July 31, 1911, and May 17, 1912, and thereafter issued on March 18, 1913, and March 10, 1914. On September 7, 1912, the Glass Company exercised its option and acquired the exclusive user of all the machines and apparatus and processes represented by the seven patents for and during the period of the life of the latest patent.
    The contract between the petitioner and the Glass Company provided that the Glass Company should pay to the petitioner annually an amount of not less than $5,000 per year, or royalties on a sliding scale in proportion to the amount of plate glass treated by the processes and apparatus.
    During the year 1912, the petitioner received royalties in the amount of $9,002.52, and during the year 1913 he received royalties4n the amount of $9,997.76. During the period from 1912 to 1925, inclusive, the petitioner received total royalties in the amount of $169,979.49, the amount of royalties increasing gradually in proportion to the increased output of the Glass Company’s factories.
    In the month of December, 1912, one of the vice presidents of the Glass Company, acting on behalf of said company, offered to purchase all of these patents outright and thereby cancel the contract for royalty payments, and to pay therefor the sum of $100,000. This offer was rejected by the petitioner as inadequate.
    The Commissioner determined the March 1, 1913, value of the petitioner’s leasing contract on the basis of the earning power of the minimum annual payments of $5,000, finding such value to be $49,315, and allowed an annual deduction for exhaustion in the amount of $3,793.46. The petitioner brought this proceeding for a redetermination of said March 1, 1913, value and the annual allowance for exhaustion thereon.
   OPINION.

TRUssell:

The testimony presented in this proceeding is in the form of depositions taken at Pittsburgh, Pa. At the taking of such depositions the Commissioner objected to testimony given by officers of the Glass Company concerning the value of the patents to the Glass Company and their opinions as to the value of the leasing contract to the petitioner. Like objection was made by the Commissioner to the testimony concerning the amounts of royalty payments received by the petitioner for years subsequent to 1913. All of this evidence, although not to be considered as determinative of the March 1, 1913, value of the leasing contract is, under the rule of Dwight & Lloyd Sintering Co., 1 B. T. A. 179, admissible as corroborative of the values claimed by the petitioner and the offer made by the Glass Company in 1912;

The record of this appeal is replete with evidence which convinces us that the petitioner’s patents cover a mechanical apparatus and process which was revolutionary in the plate glass industry; that they are basic in character; and that immediately upon their completion they had a value far in excess of any amount that the petitioner has, or ever will realize, from their use. The, true value of the patents, however, is not here in issue. The petitioner sold the right to use the patents during their entire life under the terms of written leasing agreements and, therefore, the capital value to him is represented by the value of the leasing contract and not by the patents themselves. It is fully established by the testimony that in December, 1912, the lessee placed a value upon that contract of not less than $100,000 and that the petitioner placed a value thereon in excess of that amount. The best evidence of value of an article at a given time and for which there is no established market is the amount which a prospective buyer may be willing to pay and an amount which a willing seller may choose to accept. The testimony establishes that such amount was not less than $100,000 in December, 1912. This value did not decrease between December, 1912, and March 1, 1913. We are, therefore, constrained to hold that the Commissioner’s computation of March 1, 1913, value, based upon the minimum annual payments provided for by the leasing contract, has been overcome by competent evidence, and we therefore find that, for the purpose of the exhaustion deduction provided for by the Revenue Acts of 1918 and 1921, the value of the petitioner’s leasing-contract on March 1, 1913, was the sum of $100,000, and that for the years here under consideration the petitioner should be allowed a deduction for exhaustion of such value on the basis of the number of years and months between March 1, 1913, and the date of the expiration of the latest patent, March 10, 1931.

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

KorNer, Chairman, and Trammell concur in the result only.


author: GREbn

text:
    Appeal of KENNEDY CONSTRUCTION CO.
    Docket No. 4433.
    Decided July 20, 1926.
    1. Value of assets acquired by corporation in exchange for stock is not proven by evidence that two small blocks of stock were subsequently acquired at par by two stockholders who gave their notes therefor.
    2. The presumption of correctness attaching to a valuation of assets made by the Commissioner may not bo overcome by proving book entries made at the time the assets were acquired in exchange for stock.
    3. Held, that depreciation must be computed in accordance with section 234(a) (7) of the Revenue Acts of 1918 and 1921 and that it is unaffected by sections 326 and 331 of such Acts.

      Jesse L. Cramer, C. P. A., for the petitioner.

      B. C. Simpich, Esq., for the Commissioner.
    Before Marquette, GreeN, Love, and Morris. ■
    The Commissioner determined deficiencies in income and profits taxes for 1920 and 1921, totaling $3,588.98. It is alleged that the Commissioner erred in his computation of depreciation in that he used as a basis for such computation a value of assets materially lower than that claimed.
    FINDINGS OF FACT.
    The petitioner is a West Virginia corporation with its principal place of business at Parkersburg. It was organized in 1919 for the purpose of taking over the assets and business of C. Kennedy & Son, a partnership, composed of John R. Kennedy and R. T. Turley. The principal business of the taxpayer and of its predecessor was the construction of various types of roads. The partnership was dissolved on August 31,1919, and on that day its assets were transferred to the corporation. Upon the receipt of the assets the corporation set out upon its books a credit of $12,500 to the account of each of the partners. The offsetting account was designated “Power and Machinery,” and in it were debts totaling $25,000, made up from the values allocated therein to the various items of machinery and equipment. Thereafter, at some time not disclosed, stock of the par value of the credits was issued to Kennedy and Turley and their accounts were debited therefor.
    In 1920 the corporation acquired additional machinery and equipment from A. E. Brast. Some part of this machinery had been acquired by Brast from Lester Drake & Co., and he was still indebted to that company therefor. Five one-thousand dollar notes payable to Drake & Co. were executed and delivered by the corporation. The “ Power and Machinery ” account was debited $25,000 and Brast’s account was credited with $20,000. This credit was extinguished by the issuance to Brast of stock of an equal par value. The notes above mentioned were subsequently paid.
    During the years 1919 and 1920 the demand for road-building machinery and equipment exceeded the supply and deliveries of machinery purchased were delayed. Prices on this type of machinery and equipment had, during the four or five years preceding 1919, increased from 30 to 100 per cent. None of the machinery and equipment acquired by the corporation was new.
    On August 31,1920, the corporation issued 25 shares of its stock to Kennedy and received in exchange therefor his note for $2,500, and at the same time it issued to J. D. Aukrom a like amount of stock and took his note for a like amount. The note given by Aukrom has been paid but the one given by Kennedy has not.
    The Commissioner placed on the assets acquired from the partnership a value of $10,750, which was the value assigned to them on the books of the partnership. On the assets acquired from Brast he placed a value of $5,000, which was the amount of the notes given therefor.
   OPINION.

GREbn

: Section 234(a) (7) of the Revenue Act of 1918 and the applicable portion of section 234(a) (7) of the Revenue Act of 1921 are identical and read as follows:

Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(7) A reasonable allowance for exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

The basis for the computation of depreciation in the case of property acquired subsequent to March 1, 1913, is its cost. Where property is acquired by a corporation in exchange for its stock, the basis for the depreciation deduction is the value of the stock. Failure to establish this value leaves the taxpayer without a basis for the computation of depreciation.

We do not believe that the value of the stock of this corporation at the time it was exchanged for the assets is proven by proof of exchange of two small blocks of stock for notes. See Appeal of Automatic Transportation Co., 3 B. T. A. 505. Nor do we believe that, under the circumstances of this appeal, proof of the book entries made at the time of the acquisition of the machinery, etc., is sufficient to overcome the presumption of the correctness of the Commissioner’s findings as to the value of the assets. The answer makes these values a clean-cut, distinct issue. The proof shows that used machinery and equipment were exchanged for stock. No witness gave us his statement of the actual worth of the property.

The taxpayer argues that the issuance of stock at par in exchange for assets is, because of the requirements of the West Virginia statutes, conclusive proof of the value of the assets so acquired. While we are not inclined to disregard entirely proof of such a nature, it is, standing alone, wholly insufficient, and, .to make it of value, it must be supported by other evidence that is clear and convincing. See Appeal of Barnes Coal & Mining Co., 3 B. T. A. 891.

The Commissioner in this appeal contends that the value of assets for the purpose of computing the deduction for depreciation, .is limited by section 326 and section 331 of the Revenue Acts of 1918 and 1921. It seems to us that the basis for the computation must be determined in accordance with section 234(a) (7) of the Revenue Acts of 1918 and 1921, and that invested capital must be determined in accordance with the applicable statutes. It is quite possible, starting from the same fact foundation, by the application of the two different sections, to arrive at two entirely different values for the same piece of property. But these values are not .interchangeable. Our conclusion is that depreciation must be computed in accordance with section 234(a) (7) of both Acts and that it is unaffected by sections 326 and 331 of such Acts. Appeal of Strong, Hewat & Co., 3 B. T. A. 1035.

The Commissioner’s determination of values was apparently made upon the assumption that sections 326 and 331 were controlling, and is erroneous to the extent that the values thus determined are below the true values. The taxpayer has not provided us with a fact basis for a new determination of values, and we are therefore constrained to affirm the Commissioner.

The deficiencies are $1,1¡.S2.1¡.8 for 1920 and $2,166.14- for 1921. Order will be entered accordingly.


text:
    Appeal of SOUTHERN MANUFACTURING CO.
    Docket No. 4155.
    Decided July 20, 1926.

      Claude A. Hope, Esq., for the petitioner.

      Ward Loveless, Esq., for the Commissioner.
    Before Maequette and Love.
    This appeal is from the determination of a deficiency in income and profits taxes for the year 1920, in the amount of $5,889.55, arising from the disallowance of a deduction of $25,100 claimed by the taxpayer on account of a loss alleged to have been sustained by it in that year.
   FINDINGS OF FACT.

The taxpayer is an Alabama corporation with its principal office at Gadsden, and is engaged in manufacturing lumber and building materials. The capital stock of the corporation was closely held, all of it being owned by members of the Gwin family. For many years prior to April, 1920, H. L. Gwin was secretary, treasurer and general manager of the corporation, and as such he had authority to draw checks against its funds.

On or about February 1, 1920, H. L. Gwin, while on his way to Florida to attend a trade convention, met on the train two men who represented themselves to be George V. Holt and John F. Davis. On account of a washout further along the line, the train was detained for about two days at St. Augustine, Fla. While at St. Augustine, Gwin again met Holt and Davis. They rode about the town, visiting the places of interest, and later went to the room of Holt and Davis to discuss a certain timber deal about which they had spoken to Gwin. This deal, Holt and Davis explained, consisted of the purchase of a very valuable piece of timber land which they had an option to purchase for $75,000. They exhibited to Gwin certain papers purporting to be said option and a contract for the resale of the property for $150,000, which papers, to Gwin, appeared to be genuine. They also exhibited testimonial letters from banks in New York and Philadelphia and credentials showing membership in certain fraternal orders to which Gwin belonged. They stated to Gwin that the owner of the land would sell only for cash; that they already had $50,000, and if Gwin would contribute the remaining $25,000 the deal could be put through in a few days, and that they would give him one-third of the profit realized on the transaction. Gwin agreed to put $25,000 into the deal, but stated that he would have to go back to Gadsden, Ala., to procure the money. He returned to Gadsden and there drew from the funds of the taxpayer $25,000, by two checks dated February 6, 1920, and payable to cash, one check being for $15,000 and the other for $10,000. On February 2, 1920, he also drew from the taxpayer’s funds $100 to cover expenses of the trip referred to.

On his way back from Gadsden to St. Augustine, Gwin stopped at Jacksonville, Fla. At the depot restaurant he met Davis and they took the train to St. Augustine together. On the train Davis showed Gwin his $25,000. At St. Augustine, Holt met Davis and Gwin and the three men went to the Granada Hotel. Holt there informed both Gwin and Davis that he had made arrangements with a St. Augustine bank to get his $25,000 in cash. Thereupon, Davis turned his money over to Holt and Gwin did likewise. No receipt was given to Gwin for his $25,000, nor was a memorandum in writing executed and signed covering the transaction and the participation of each party therein. Holt then stated that he was going down to the bank and that at three o’clock the other parties interested in the transaction would also be there and- the deal would be closed. Shortly after Holt left to go to the bank, and while Gwin and Davis were still in the room, someone called over the telephone. Davis answered the telephone and then said to Gwin that it was Holt calling, asking him, Davis, to go down to the bank to identify Holt. Davis left the room but returned shortly and stated that the bank had refused to cash a draft which Holt had for the amount of his contribution to the deal, and that. Holt had gone to Philadelphia to get the money. Davis also stated to Gwin that arrangements had been made to close the deal at the Grand Hotel in Cincinnati, Ohio, and asked Gwin to meet him there the next day. Gwin went to Cincinnati and, after waiting there for several days, discovered that he had been swindled. He thereupon returned to Gadsden.

As soon as lie arrived at Gadsden, Gwin called bis father and brothers together and told them of his experience with Holt and Davis and of his loss of the $25,000. After a discussion of the whole affair, the family finally said to him, “Well, what are you going to do ? ” Gwin replied, “ I am going to do this; if I find they have swindled me and you have lost the money, I will make it good but I want you to give me time to see if I cannot recover it and find some trace of these men.” The family said “All right, that will be all right.”

On or about March 2, 1920, T. B. Gwin, the father of H. L. Gwin, without the knowledge of H. L. Gwin, instructed the taxpayer’s bookkeeper to transfer to him, T. B. Gwin, as trustee for the benefit of the other stockholders of the taxpayer, a certificate for 80 shares of the capital stock of the taxpayer which belonged to H. L. Gwin and which was kept among various corporate papers. This certificate had some time previously, on the occasion of certain loan transactions with one of the local banks, had been endorsed in blank by H. L. Gwin. The taxpayer’s bookkeeper, in accordance with the instructions of T. B. Gwin, wrote above H. L. Gwin’s signature the following words — “ To T. B. Gwin, Trustee for the benefit of Southern Manufacturing Company.” At or about the same time, T. B. Gwin, as president of the taxpayer, requested the local banks not to honor the signature of H. L. Gwin as secretary and treasurer and general manager of the taxpayer. This precipitated the resignation of H. L. Gwin from all of these offices, which resignation became effective immediately. Since then H. L. Gwin has had no connection whatever with the taxpayer.

When H. L. Gwin found out that his certificate for the stock owned by him in the taxpayer had been endorsed to T. B. Gwin as aforesaid, he characterized the endorsement as irregular and not binding upon him. His remark soon came to the knowledge of the family, and thereupon repeated efforts were made by various members thereof to get him to sign some sort of an agreement ratifying the endorsement, which he refused to do. This matter stood until March, 1923. At that time, T. B. Gwin suffered a severe heart attack, which nearly caused his death, and at his insistence H. L. Gwin signed an agreement which had been prepared by direction of T. B. Gwin. This agreement, date March 15, 1923, was as follows:

In order to secure a claim of the SOUTHERN MANUFACTURING COMPANY, a corporation, in the amount of TWENTY FIVE THOUSAND ONE HUNDRED ($25,100) DOLLARS with interest thereon from February 10th, 1920, and to that end I did agree to turn over to T. B. Gwin eighty (80) shares of the capital stock of said Southern Manufacturing Company owned by me to be held by him as Trustee to secure said claim, I do now hereby ratify said transfer to said T. B. Gwin as such Trustee as security for such claim and the payment thereof, until February 10th, 1926. In the event of the death of T. B. Gwin, said stock shall be ■ held by A. L. Gwin as such Trustee with the same powers and for the same purposes.
If the said amount and interest thereon from February 10, 1920, is paid at any time prior to said date, said stock shall be restored to the undersigned free from said trust. If said amount is not paid by said date, said stock shall be transferred by my said Trustee to the Southern Manufacturing Company, in settlement of said claim and interest thereon, and said claim of Southern Manufacturing Company shall be thereby entirely settled and I shall have no further claims on said stock, and my said Trustee shall have authority to execute any transfer or sign any papers to carry out this purpose. IN WITNESS WI-IEIiEOF I have hereunto set my hand on this day aboye named.
(Signed) H. L. Gwin.
Attest A. W. McHougall.

At the time of the transaction herein set forth, H. L. Gwin owned 80 shares of the capital stock of the taxpayer of a value of $200 per share, and a house of a value of about $6,500.

On December 31, 1920, the taxpayer charged off on its books as a loss the amount of $25,100, herein referred to, the following entry being made in connection therewith:

The amount of $25,100 so charged off of the taxpayer’s books on December 31, 1920, was deducted in computing its net income for the year 1920. The Commissioner, upon audit of the taxpayer’s return, disallowed the deduction and determined that there is a deficiency in tax for the year 1920 of $5,889.55.

The deficiency for the year 19W is $5,889.55. Order of redetermination will he entered accordingly.


author: Phillips:

text:
    Appeal of FIDELITY & DEPOSIT CO. OF MARYLAND.
    Docket No. 3503.
    Decided July 20, 1926.
    1. Tlie Board Las jurisdiction of an appeal by tlie taxpayer from the determination of a deficiency, the sole object of which appeal is to secure a determination by the Board that the deficiency should be increased.
    2. Evidence in the record reviewed and helé to be insufficient to enable the Board to determine whether the treatment accorded by the Commissioner to certain payments made by the taxpayer was correct or incorrect. In the circumstances, the determination made by the Commissioner must be approved.

      Washington Bowie, Jr., Esq., for the taxpayer.

      Benjamin Saunders, Esq., for the Commissioner.
    Before GeaufNee, Teammell, and Phillips.
    Taxpayer appeals from the determination of a deficiency of $9,-739.24, income and profits taxes for 1920, notice of which determination was sent to the taxpayer, together with notice of an overassessment of income and profits taxes for 1919 of $47,220.07. Taxpayer alleges certain errors in computing depreciation, and error in refusing to allow the taxpayer a deduction for a reserve of $101,086.57, alleged to have been established to meet claims then pending against the taxpaj^er under bonds and policies outstanding in Germany and Austria.
    FINDINGS OF FACT.
    The taxpayer is a Maryland corporation, engaged in the business of writing surety and casualty bonds, with its principal office in Baltimore, and is doing business in all States of the United States and elsewhere. It was doing business in Germany and Austria in April, 1917, at the time the United States entered the World War.
    A part, of its business in Germany and Austria arose under a reinsurance agreement with a German plate-glass insurance company, known as the “ Harmonia ”, under which the taxpayer re-insured the said Harmonia to the extent of 50 per cent of its plate-glass insurance. This insurance agreement expired in October, 1917.
    The taxpayer had included in its annual statement of December 31, 1917, as a part of its general loss reserves, $67,382.06 to meet policy losses in Germany, Austria and Hungary, of which $40,000 was set up to meet the liability under the Harmonia agreement. The taxpayer at the outbreak of the war had deposits and securities in such countries in excess of its liabilities and reserves for liabilities therein. In preparing its statement of December 31, 1917, a part of the value of such foreign assets had been eliminated from the asset accounts by the taxpayer. The insurance examiner for the Insurance Department of the State of Maryland in his report eliminated from assets all property held by the company in enemy countries, and at the same time eliminated from the reserves set up by the company' its liabilities in enemy countries. The assets being in excess of the liabilities, the net result was to reduce the surplus of the company.
    On or about January 2, 1919, the taxpayer received a communication from its European director advising it of the status of the Harmonia account and of certain other liabilities for commissions, interest, etc., owing in Germany and Austria. He advised that the loss reserve of the Harmonia for plate-glass insurance, as of October 1, 1917, was 994,705.52 marks, of which 497,352.76 marks was the share of the taxpayer. He further advised that statements had shown that this reserve was inadequate by approximately 26 per cent and, as the cost of plate glass was constantly rising, it was estimated that the reserve was inadequate by an even greater percentage. The taxpayer thereupon, on or about January 2, 1919, set up on its books a reserve of $75,000, being 500,000 marks at 15 cents per mark, the approximate rate of exchange then existing. This was carried on the statement of the company as “ Reserve for liquidation of foreign business.” Subsequently this reserve was increased to $101,086.57. At the close of the year 1919 this reserve account continued at $101,086.57. Among the disbursements of the company for 1919 appears an item “ Expense account of liquidation of Foreign Business $210,040.07.”
    At the close of the year 1919 the taxpayer carried upon its account a reserve for losses arising under policies of fidelity and casualty insurance of $2,076,852.19, which has been recognized by the Commissioner as a proper reserve for accrued losses in computing the taxpayer’s income for 1919.
    During the year 1920 taxpayer expended $89,924.19 in settlement of its foreign liabilities, which amount was allowed as a deduction by the Commissioner in computing the deficiency for that year. In 1921 it expended approximately $13,000, and since that date has expended other sums. Such expenditures have been charged by it against the reserve existing on December 31, 1919.
    Depreciation allowable as a deduction for the year 1919 is $48,-626.40, instead of $48,220.15 allowed by the Commissioner. Depreciation allowable as a deduction for 1920 is $49,599.67, instead of $48,984.40 allowed by the Commissioner.
    The original return filed by the taxpayer for 1919 set out a tax liability of $130,199.57. The tax determined by the Commissioner in the deficiency letter is $82,979.50, resulting in an overassessment of $47,220.07.

       This decision was prepared during Mr. Graupner’s term of office.

   OPINION.

Phillips:

The facts which are relied upon by the taxpayer to establish jurisdiction in the Board are set out in the findings. As to 1919, it appears that on the original return taxpayer computed a tax liability of $130,199.57, while the Commissioner determined the liability to be $82,979.50, resulting in an overassessment of $47,220.07. It is clear that under section 274 (g) of the Revenue Act of 1926 the Board has no jurisdiction of the appeal so far as it relates to 1919. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The chief assignment of error made by the taxpayer is the refusal of the Commissioner, in computing the amount of increase in its reserves for 1919, to include in the computation the “Reserve for liquidation of foreign business” in the amount of $101,086.57. On the theory that this reserve was not set up for the purpose of meeting policy losses which had accrued, the Commissioner has refused to allow it as a deduction in 1919, but proposes to allow the amounts as deductions when paid, having allowed $89,924.19 in 1920.

It is taxpayer’s contention that its net income and its tax liability for 1919 should be reduced and the overassessment for that year increased, at the same time increasing the net income and the deficiency for 1920. Since we have no jurisdiction to determine the question as to 1919, the sole question for consideration is whether the net income, and, consequently, the deficiency determined by the Commissioner for 1920 should be increased by disallowing the deduction in that year of the amount allowed by the Commissioner.

The reserve of $75,000 set up in January, 1919, appears to have been for the purpose of meeting the losses reported by its European manager to exist as a result of the agreement with the Harmonia Company. This agreement had been entered into in 1912 and terminated in October, 1917. The greater part of the losses arising under that agreement had been reported to the taxpayer prior to the declaration of war, and in 1917, as a part of its general loss reserve, it had set aside $40,000 to meet its obligation under this agreement. The insurance examiners, however, had seen fit to eliminate from taxpayer’s assets and liabilities all assets owned and all liabilities owed in enemy countries. The loss reserve of $2,076,852.19 carried by the taxpayer at the close of the year 1919 does not appear to have included any amount for policy losses incurred in enemy countries. In such circumstances the taxpayer was doubtless justified in setting up a separate reserve for such losses. The reserve which was carried on its books at the close of 1919 was not $75,000, as originally set up on the basis of the information from its European director, but $101,086.57. In the meantime it had paid, out during the year 1919, according to its statement of receipts .and disbursements, $210,-040.07 as “ Expense account of liquidation of foreign business.” We do not know what part of such sum was paid to the Harmonia Company. If the taxpayer’s theory is to be accepted, we must assume that no part of this sum was paid to that company, although the letter from the European manager states that the final settlement with that company is to be made in 1918. There is no convincing testimony in the record that the reserve for the liquidation of foreign business existing at the close of 1919 was to meet policy losses, as claimed by the taxpayer, and was not a reserve to cover the expense of finally winding up taxpayer’s affairs in Europe, as contended by the Commissioner, or to show that the payment of $89,-924.19, made during 1920 and charged against such reserve, was for policy losses occurring and reported prior to 1920 and which should properly have been the subject of a reserve in prior years. The record is insufficient to enable us to determine that the treatment accorded this payment by the Commissioner is incorrect, and for that reason his determination must be accepted.

Both parties to the appeal have proceeded on the theory that, under the Revenue Act of 1918, the net addition to a reserve for losses under fidelity and casualty policies is properly deductible. In our discussion we have assumed, without deciding, that this assumption is correct. See Laws of Maryland, 1914, ch. 631. From a casual examination it would appear that the reserve for outstanding losses required under such law is to" include an amount reasonably sufficient to cover probable expenses, as well as the probable payment in each case. The evidence submitted in this appeal, however, is insufficient to establish that the payment made in 1920 was such that it should have been made from any reserve which was properly set up in a prior year.

It was stipulated that certain errors had been made in the amounts of depreciation. This stipulation is included in the findings of fact. '

The proceeding, so far as relates to 1919, is dismissed and an order will he entered accordingly. The deficiency for 1920 should he recomputed in accordance with the stipulation concerning depreciation. Order of redetermi-nation will he entered on 15 days' notice, under Bule 50.


author: SteRNi-iagen

text:
    Appeal of UNION METAL MANUFACTURING CO.
    Docket No. 2524.
    Decided July 20, 1926.
    1. Tlie doctrine of res adjudioata did not, under tlie Revenue Act of 1924, operate to make a finding of fact in a former ease, involving 1918, as to tlie value of patents, conclusive as to suck fact in a case involving- 1919.
    2. A finding of fact by the Board is entitled to the presumption of correctness and, when introduced in a subsequent case, throws the burden'of going forward on the opposing party.
    3. A deduction of a reasonable allowance for the exhaustion of several patents may be computed by applying the average life of the group to the aggregate March 1, 1913, value of all.

      Jesse I. Miller, Esq., for the petitioner.

      P. S. Or ewe, Esq., for the Commissioner.
    Before Teussell, Littleton and Smith.
    Petition to set aside a deficiency of $4,664.22 for 1919 and to establish petitioner’s right to a deduction for exhaustion of patents.
    FINDINGS OF FACT.
    The petitioner was the owner on March 1, 1913, of eleven patents, which had cost $39,325.41. On March 1, 1913, the fair market value of all the patents was $135,000,■ and the average remaining life of such patents was twelve years, eight months. All of these patents were owned by petitioner during the year 1919.
   OPINION.

SteRNi-iagen

: The petitioner now seeks for 1919 a similar deduction for the exhaustion of patents to that determined by the Board for 1918 in Appeal of Union Metal Mfg. Co., 1 B. T. A. 395. In its petition it sets forth that the facts in respect of the patents are the same as those found in the earlier proceedings. This the respondent denied. At the hearing the petitioner put in evidence the stipulation which both parties had filed in the earlier proceeding in which, among other things, it was agreed that some of the patents had a fair market value of $135,000 and a remaining life of 10 years 5% months. The petitioner also put in evidence the Board’s findings of fact in the prior case and a copy of the Commissioner’s sixty-day notice for 1919. These were received over the respondent’s objection.

The respondent put in evidence the taxpayer’s return for 1918 and the taxpayer’s refund claim for 1918, with supporting papers containing data in respect of the patents in question and showing their cost, dates and alleged value on March 1, 1913. To all this evidence of respondent the petitioner objected on the sole ground “that the doctrine of res adjudicaba precludes the introduction of this proof as competent evidence upon this appeal.” This objection was overruled.

The argument of petitioner’s counsel is devoted to support the point that the value of the patents on March 1, 1913, and their remaining life are matters already formally adjudged by the Board which may not be litigated de novo so as to lead to a different determination of fact. The respondent argues that res adjudicaba is not controlling and that, since the petitioner has not proved the cost and value of each separate patent, no computation of exhaustion can be made and no deduction allowed. To this latter point the petitioner replies that the total value and average life are sufficient to support the statutory deduction of a reasonable allowance.

The argument as to the force of the doctrine of res adjudicaba is deserving of the most careful consideration. It is an ancient doctrine and has been applied to judicial proceedings with unquestionably salutary effect. That it is a wise rule in many cases can not be questioned. But it is in its nature a doctrine of expediency, devised in the belief that the public interest was better served by prohibiting repetitious litigation and assuming the correctness of a decision once rendered than by persisting in the search for truth and accuracy in each case. It has no absolute sanction in all circumstances and, if it does not fit the system in which it is invoked, its limitations may not be ignored.

This Board is a new creature with a special place in the governmental system of settling disputes. With a function in all respects judicial as to such matters as come within the confines of its powers, it is, nevertheless, nominally outside the judicial system. This was especially so under the Revenue Act of 1924, in effect when this hearing was had. Designated by statute as a “ board ” and as “ an independent agency in the executive branch of 'the government ” with a duty to “ hear and determine appeals,” through a membership appointed “ solely on the grounds of fitness to perform the duties of the office,” it appeared to be the final arbiter of all appeals within its limited jurisdiction, for there was no review provided of its determinations. All its cases involved disputes between the taxpayer and the government as to income, profits, estate, and the moribund gift tax. The government was always a defendant. The questions were closely related and an error either in fact or law as to one taxpayer, or as to one year of tax, could affect the tax liability of many others so that it might project itself in an ever-growing circle to bring about great injustice and distort the public revenue. Thus uniformity of precept, which has always been regarded as a desirable achievement, could become an instrument of destruction of justice and defeat its own principal purpose. If the perpetuation of error with such possible results can be avoided without at the same time involving the system in confusion and inefficiency, no adherence to a doctrine should be permitted to prevent its avoidance. And certainly this must be so at least until it is clearly demonstrated by experience of this special tribunal that the doctrine is indispensable. Its necessity should not be assumed while the Board is still at the threshold of its career.

The doctrine of res ad judicata, the matter adjudged, supposes the finality of the determination so that it may put an end to litigation of the same controversy. There is, however, clear evidence in the 1924 Act itself that this was not the legislative intent while that statute was operative. Neither party was bound at his peril to exhaust his proof before the Board. The remedy of trial before the Board before payment was supplemental to the taxpayer’s established remedy by suit in court after payment. This added remedy the taxpayer could avail himself of at his pleasure and to the extent he might desire and still retain his preexisting remedy in court. When he sued in court the Board’s decision had not the force of a judgment, binding unless reversed, but by section 900 (g), “ the findings of the Board shall be prima facie evidence of the facts therein stated.” It was clearly contemplated that, so far as all the courts were concerned, the Board’s decision and findings of fact should not be res adjudícala but should merely be prima facie evidence. If for any reason the Board’s decision were founded in error, whether by inadequate trial or incorrect determination, correction could be made in the courts. But was this the only method? Was it recognized by Congress that although a party need not be bound by the Board’s findings as conclusive after inadequate presentation, the Board itself must be forever prevented from examining the matter ? There is no reason for such a theory. While it is most expedient that there should be but one trial before the Board on a single issue and that the parties should abide the judgment in each case, this can not support a system which would make possible the projection of errors into other proceedings.

The circumstances of this case illustrate, the unwisdom of the adoption of res adjudicaba. In the former case involving 1918 there was presented to the Board for the first time the validity of the Commissioner’s general practice as expressed in A. B. M. 209. From the standpoint of the public revenue it was more important that this question should be tested than that a precise valuation should be determined as the basis for exhaustion of the patents. Hence, the facts were stipulated not to the extent that the stipulation was conclusive, but as evidence, each party reserving the right to introduce further proof. Upon this agreed evidence the Board found the facts and the parties, together with numerous amici curia3, presented arguments on the issues of law. If there be doubt as to the application of res adjudicaba in the ordinary case where an issue of fact is fully litigated, we should be even more hesitant about applying it to facts thus stipulated for argument’s sake.

We conclude therefore that the doctrine of res adjudicaba did not operate to establish the value of petitioner’s patents as found by the Board in the former case. In so far as this conflicts with the decision in Gilliam Mfg. Co., 2 B. T. A. 272, that opinion is overruled.

At the trial the Division left open the door to a full presentation of evidence by overruling some objections and reserving rulings on others. Thus both parties were aware of their opportunity and neither was misled. Both introduced such evidence and we have given it full consideration. The data offered by the Commissioner is sufficient (and there is nothing to impair it) to lead reasonably to the valuation formerly agreed upon, and we have therefore found as a fact that all the petitioner’s patents owned on March 1, 1913, had an aggregate fair market value on that date of $135,000.

When the taxpayer put in the findings of fact formerly made by the Board, the facts so found were prima facie correct and served as evidence. Without more the petitioner had established its case, for, irrespective of the doctrine of res adjudicaba, the Board’s findings are entitled to the weight of the presumption of correctness. The Commissioner had the burden then of going forward and establishing the preponderance. This he undertook to do but we think without success. From the evidence we have computed the remaining life of each patent on March 1, 1913, and by adding the time remaining for all and dividing by the number of patents, we find an average remaining life of 12 years, 8 months, a rate of exhaustion of 7.9%, or an annual deduction for this year of $10,665.00.

The respondent urges that a deduction can not be computed and hence may not be allowed unless each patent is separately valued. If this were true it would effectively preclude, in many cases, the deduction which the statute contemplates, for the difficulty of patent valuation generally would become an impossibility. Congress is not to be supposed tb have allowed a deduction and at the same time intended a method of computation so rarely available as to deprive most taxpayers of the deduction allowed. The statute expressly prescribes a reasonable allowance, and this we think is met by adopting the average method in this instance.

Judgment for the petitioner on the issues raised. Redetermination of the deficiency loill ~be made under Rule 50, on 15 days' notice.


text:
    JOHN M. BERND, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 3340.
    Decided July 20, 1926.

      J. E. Hughes, Esq., for tbe petitioner.

      L. 0. Mitchell, Esq., for tbe respondent.
    Before SteRnhagen, Littleton and Trussell.
    The Commissioner determined a deficiency of $1,322.78 for 1920, arising from tbe determination that tbe farm that tbe petitioner sold in 1920 was, on March 1,1913, worth $30,000. .
   FINDINGS OE' PACT.

On March 1,1913, the petitioner was the owner of a 240-acre farm, which he sold in 1920. On March 1, 1913, the fair market value of this farm was $37,500.

Judgment for the fetitioner. Order of re-determination will he entered on 15 days' notice, under Bule 50.