author: Maequette :

text:
    Appeal of George A. Springmeier Co.
    Docket No. 4213.
    Promulgated April 2, 1927.

      The petitioner was not a personal service corporation during the years 1919 and 1920.

      James B. O’Donnell, Esq., for the petitioner.

      J. Arthur Adams, Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amounts of $3,405.84 and $2,088.97, respectively. The sole issue is the petitioner’s right to classification as a personal service corporation for the years involved.
    FINDINGS OF FACT.
    For approximately twenty-five years prior to January 1, 1917, George A. Springmeier had been engaged in business at Cincinnati, Ohio, as a factor or agent representing certain manufacturers of shoe factory supplies.
    On or about January 1, 1917, in order to perpetuate his business and to establish other members of his family therein, he caused the petitioner to be incorporated under the laws of the State of Ohio. The total capital stock authorized and outstanding during the years 1919 and 1920, was $10,000, divided into 200 shares of $50 par value, and was held by George A. Springmeier and his brothers and sister, as follows:

    The five shares passing from George A. to Loretta Springmeier in January, 1919, had been acquired by him from the estate of an original stockholder and employee named Clem Pelzer.
    The amount of the capital stock was arbitrarily fixed.
    George A. Springmeier originally had short-term contracts as Cincinnati representative of the manufacturers whose products he sold. Some of these contracts had been renewed and some apparently had simply been continued by the parties. In payment for the 160 shares of the petitioner’s stock originally issued to him, George A. Springmeier turned over to it his agency contracts and such other rights as he had to represent shoe factory supply manufacturers. In addition he paid in certain office equipment, etc., of small value. In payment for the stock issued to them, the other stockholders gave notes to be paid by the crediting of dividends.
    The petitioner’s principal source of income was from commissions on sales. Manufacturers whom it represented shipped small quantities of their products to it for warehousing near the territory in which they were to be sold. When the petitioner made a sale the customer was shipped sufficient goods from this “ Cincinnati stock ” to cover immediate needs. On notice from the petitioner the manufacturer then filled the balance of the order. The entire order was invoiced by the petitioner on the billhead and in the name of the manufacturer, who was furnished a copy thereof. The petitioner kept another copy for its record of the transaction.
    The customer remitted directly to tire manufacturer. The petitioner was not a guarantor of the accounts nor an insurer of the goods.
    At the close of each month the manufacturers computed the petitioner’s commissions, averaging about 5 per cent, and shortly thereafter paid them.
    Freight, drayage, etc., on the small quantities of goods so handled by the petitioner were either prepaid or refunded.
    Among the goods sold by the petitioner were “box toes” made by the Beckwith Box Toe Co., of Dover, N. H. The Beck-with Company refused to warehouse any quantity of its product with the petitioner on an arrangement similar to that of other manufacturers as described above, because frequent style changes would force it to accept losses on such goods.
    During 1919 box toes manufactured in Cincinnati were being offered to the trade by a competitor. The petitioner, to hold its business with customers unbroken in any line, had to be able to furnish service on deliveries of box toes equal to that of its competitors. To accomplish this purpose it became a jobber of box toes.
    In order to avert losses such as were contemplated by the Beckwith Company when it had refused to warehouse with the petitioner, the stock of box toes was kept as small as practicable. Temporary needs of a customer were filled .from the petitioner’s “ jobbers stock ” and the balance of the order, on notice by the petitioner, was shipped by the Beckwith Company and billed in its own name. The petitioner was granted a 10 per cent discount on its “jobbers stock” and a 5 per cent commission on other box toe sales. The petitioner paid drayage, etc., on its stock of box toes.
    The petitioner also did some jobbing in fibre heels, leatherol, cement and cotton stays.

      Fibre beels were delivered by the manufacturer on the petitioner’s order, directly to the customer. The manufacturer then billed the Springmeier Company, which turned the invoice over to the customer for direct payment to the manufacturer. The petitioner in some manner not disclosed derived a profit, but competition of another manufacturer caused the company in 1920 to stop jobbing fibre heels.
    Leatherol is a preparation for softening leather, making it more flexible and comfortable to wear in shoes. It was made under a formula owned by a Cincinnati man and sold on a royalty basis under the Springmeier trade name.
    Cement was bought in Auburn and shipped to Bochester, N. Y., where it was sold under the Springmeier trade name by a leather salesman, who carried it and leatherol as side lines, on a commission basis.
    During 1919, the petitioner bought some cotton stays for the purpose of turning a profit on a rising market.
    The total jobbing sales of the petitioner were:

    The cost of jobbing stock and gross profits from sales thereof, so far as shown, and commission sales and gross profits therefrom, were:

    The petitioner also received income in the form of interest in the amounts of $449.56 during 1919, and $120 during 1920.
    Total business expenses, as shown by petitioner’s return, exclusive of salaries, were: 1919, $5,574.03; 1920, $11,705.25. These expenses included the maintenance of branch offices at Bochester and Chicago during 1919, and at Bochester during 1920.

      For 1919, actual expenses have been offset to the extent of $1,020 by crediting payments of $300 and $720 as “ rent ” paid by two manufacturers the petitioner represented.
    Salaries paid stockholders and salaries and commissions paid employees, were:

    The petitioner’s balance sheets were:

    “ Notes receivable ” represent loans to friends outside tbe course of business and are really the personal transactions of George A. Springmeier carried through the company’s books for convenience.
    “Accounts receivable ” represent unpaid commissions and trade balances. The commissions would he paid approximately 10 days later.
    “ Liberty bonds ” represent the petitioner’s investment of its surplus. They account for the income received as interest.
    The item “Agency contract ” relates to the contracts paid in by George A. Springmeier for his stock.
    The inventory at January 1, 1920, represents principally the stock of box toes. The inventory was abnormally large at that time of the year because of the possibility of transportation delays due to the weather if the petitioner had depended on having orders filled direct by the manufacturer at Dover.
    Late in 1920, the jobbing lines of the petitioner were taken over by George A. Springmeier personally. This accounts for the absence of an inventory at December 31, 1920.

      “Accounts payable ” represent principally payment due the Beck-with Company for box toes. The usual credit extension on the Beckwith account was sixty days.
    “ Notes payable ” represent bank loans which would hare been unnecessary had the petitioner cared to sell its Liberty bonds. The bonds were pledged as collateral for the loans.
    “ Surplus ” was the accumulation of undivided profits since the petitioner’s incorporation.
    With the exception of E. J. Springmeier, who was in the Army for five months and unemployed for one month during 1919, all of the stockholders were actively engaged in the business and devoted their entire time to it during 1919 and 1920. George A. Springmeier secured approximately 80 per cent of the petitioner’s sales. His brothers were also salesmen, and Loretta Springmeier was bookkeeper and office manager.
   OPINION.

Maequette :

Under section 200 of the Revenue Act of 1918, a personal service corporation is one “ whose income is to be ascribed primarily to the activities of the principal owners or stockholders who are themselves regularly engaged in the active conduct of the affairs of the corporation and in which capital (whether invested or borrowed) is not a material income-producing factor; but does not include any foreign corporation, nor any corporation 50 per centum or more of whose gross income consists either (1) of gains, profits or income derived from trading as a principal * *

The necessity for the concurrence of the statutory elements above set forth to entitle a corporation to personal service classification has been so often discussed by the Board that we believe nothing would be gained by repetition in this instance. Appeal of Bryant & Stratton Commercial School, Inc., 1 B. T. A. 32; Appeal of Scheffler Hair Colorine Co., 1 B. T. A. 61; Appeal of Cliver-Wright-Rainey Co., 2 B. T. A. 561. Determination of the classification depends in each instance on an issue of fact. Appeals of Scheffler Hair Colorine Co and Cliver-Wright-Rainey Co., supra.

This petitioner contends that in the main its business was that of a commission merchant, that the jobbing was purely incidental and, referring to the box toes, was largely forced upon it by trade conditions. To a considerable extent our findings evidence these contentions to be facts. But we have held in Appeal of Seaboard Mills, Inc., 5 B. T. A. 575, citing Matteson Co. v. Willcuts, 12 Fed. (2d) 447, that it was not the intention of Congress to grant corporations personal service classification when capital is found to have produced during the year a substantial amount of income, and further, that the fact that capital was employed only in incidental activities of the corporation does not affect this viewpoint.

We believe that in the jobbing operations of the petitioner capital was a material income-producing factor, that it produced a substantial por tion of the petitioner’s income during the years involved in this appeal and, therefore, that the petitioner is not entitled to personal service classification.

Judgment will be entered for the resfondent.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Sullivan Granite Construction Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8790.
    Promulgated April 2, 1927.

      Samuel Freedman, G. P. A., for the petitioner.

      O. H. Gurl, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income tax for the years 1920 and 1921, as follows:
    1920-$2,273.41
    1921- 8, 601. 01
    Total_ 5, 874.42
    The deficiencies result from the action of the Commissioner in amending the petitioner’s income and profits-tax returns for the years in question from reported net losses to net gains upon the basis of computing the gains at 7 per cent of the bank deposits.
    FINDINGS OF FACT.
    The petitioner is a Massachusetts corporation with its office and place of business at New Bedford. It is engaged in the business of crushing stone and sale of crushed stone, sand, and gravel. Its capital stock was $50,000. Its income-tax returns for 1920 and 1921 show net losses of $7,463.34 and $20,191.87, respectively. On January 9, 1922, the plant suffered a fire and the petitioner’s books of account were burned.
    The petitioner’s tax returns for 1920 and 1921 were compiled by an attorney from figures furnished him by the bookkeeper. The figures for 1920 were taken directly from the petitioner’s books. The figures for 1921 were obtained from a bank in which the petitioner deposited its receipts and on which it drew checks in payment of all accounts.
    A revenue agent in attempting to verify the returns made for the years in question learned that certain items which should have been capitalized bad been charged to expense and also that certain discounts received had been deducted, as expense, as follows:
    1920.
    Cruslior purchased — deducted as material_$2, 23G. 39
    Automobile purchased — deducted as material_ 1,100. 00
    Motors and drills — deducted as repairs_ 1,085.00
    Discounts received- — deducted as expense_ 372. 50
    1921> 5, 393.89
    Automobile — deducted as material- 1, 650.00
    Discounts received — deducted as expense_ 580. 83
    2, 230.83
    The revenue agent discussed the correctness of the returns with the petitioner’s accountant and, as a result of such discussion, determined that the net income should be computed at 7 per cent of the total banks deposits, which amounted for the year 1920 to $182,375.40, and for the year 1921 to $221,479.73. The Commissioner has determined the deficiencies upon the basis recommended by the revenue agent and has determined a net income for 1920 of $12,766.28 and for 1921 of $15,503.58.
    The revenue agent’s report shows a surplus at January 1, 1920, of $6,749.46 and at December 31, 1920, of $1,096.30. The petitioner paid a cash dividend in 1920 of $5,000, and cash dividends in 1921 of $10,000. It paid salaries to its two principal officers of $10,400 in each year.
   OPINION.

Smith :

The original returns of the petitioner for the years 1920 and 1921 were clearly in error. Certain capital expenditures were charged to expense and deducted from gross income. The petitioner’s books of account relating to the years 1920 and 1921 were destroyed as the result of a fire on January 9, 1922. Although the petitioner reported net losses for the years 1920 and 1921 of $7,463.34 and $20,191.87, respectively, the respondent has determined net income for those years, based upon a percentage of bank deposits, of $12,766.28'and $15,503.59, respectively. Although we are satisfied that the original returns are incorrect, the method of determining net income used by the respondent appears to have been entirely arbitrary.

The deficiency notice sent by the Commissioner to the petitioner under date of September 17,1925, shows that the petitioner’s surplus, determined by the revenue agent, at January 1, 1920, was $6,749.46 and at January 1, 1921, was $1,096.30. During the year 1920 the petitioner paid a cash dividend of $5,000. This is some indication that the dividend paid during the year was out of surplus and that the petitioner did not operate at a profit during the year. The petitioner’s income-tax return for 1920, as above indicated, showed a net loss of $7,463.34. The respondent has been able to detect errors in the return of $5,393.89. The net loss was overstated therefore by the amount of $5,393.89. The correction of this error would not indicate that the petitioner operated at a profit during the year 1920. It paid salaries to its two principal officers of $10,400. We are of the opinion that it had no net income for 1920.

Although the petitioner after the destruction of its books of account in January, 1922, obtained from the bank in which it deposited its funds the amount of its deposits and the checks drawn against them, the pay roll, the interest paid, and notes paid, none of this evidence has been submitted to the Board. The petitioner’s return for 1921 shows that dividends were paid during the year amounting to $10,000. Since the petitioner had-practically no surplus at the beginning of the year and since dividends must be assumed to have been paid out of earnings, there is reason to believe that the petitioner had a net income for 1921. The respondent has determined the net income for the year to have been $15,503.58 and in the absence of competent evidence showing that the net income was a different amount or that there was no net income the determination of the Commissioner as to the deficiency for the year 1921 must be and is sustained.

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


author: Van Fossan:

text:
    Davis & Shaw Furniture Co., Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 801.
    Promulgated April 5, 1927.

      A. TL. Laws, Esq., and R. M. Grane, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1917, in the amount of $3,422.01. The deficiency letter appealed from also indicated overassessments of taxes for the years 1918 and 1919 in the respective amounts of $3,064.70 and $949.82. The deficiency and overassessments result from the change in the petitioner’s method of accounting from the accrual basis to the installment basis. It is alleged that the Commissioner erred in making this change effective in the year 1916, when the petitioner elected and sought to make the change effective as of the year 1917. The petition alleges that the three years, 1917, 1918, and 1919, are involved, and the respondent avers that there is no issue as to 1918 and 1919 and that the Board is without jurisdiction as to those two years.
    BINDINGS OK PACT.
    The petitioner is a Colorado corporation with principal offices in the City of Denver.
    For the year 1918 and years prior thereto the petitioner made returns of income upon the accrual basis. In the latter part of 1919 the qietitioner filed amended returns for the years 1917 and 1918, reporting its income upon the installment basis. The amended return for 1917 reported income based upon estimates, since petitioner’s records were inadequate to disclose the exact income for any year prior to 1918 upon the installment basis. Subsequent to the filing of the amended returns, the Commissioner caused several investigations and audits of the petitioner’s records and returns to be made. The Commissioner advised the petitioner that its income might be reported upon the installment basis instead of the accrual basis, but that the change should be made effective as of the year 1916, and requested information relative to the income for 1916,1917, 1918, and 1919. The petitioner was unable to supply the information as to income for 1916 and 1917 with exactness, and the Commissioner requested that as to those years estimates be submitted. The Commissioner thereupon recomputed the taxes for those years and determined for 1917 a deficiency of $3,422.01; for 1918 an overassessment, of $3,064.70; and for 1919 an overassessment of $949.82. The petitioner prosecuted this appeal from this determination.
   OPINION.

Van Fossan:

The petition alleges that the taxes in controversy are income and profits taxes for the years 1917, 1918, and 1919. The determination of the respondent from which this appeal is taken found a deficiency for 1917 and overassessments for 1918 and 1919. The respondent has moved to dismiss the appeal as to 1918 and 1919 on the ground that no deficiencies for those years having been determined, the Board is without jurisdition. It appearing that no deficiencies were determined for 1918 and 1919 and such determination being a condition precedent to the jurisdiction of this Board, the motion of the respondent to dismiss the appeal as to 1918 and 1919 is granted. See Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The only deficiency here in controversy is for the year 1917. The error complained of is that the respondent computed 1916 income upon the installment basis, resulting in increased income and taxes for 1917.

Such evidence as there is before us consists of a narrative of the petitioner’s efforts to substitute the installment for the accrual basis in computing its 1917 taxes, and the ensuing action relative thereto taken by the respondent. No testimony, or other evidence, was offered to show what is the true income and correct tax for 1917, or wherein the computation by the respondent of the income and tax for that year is erroneous. It is not enough for the petitioner to say merely that the respondent changed the method of computing income employed by it in a prior year and that he had no authority so to do. The petitioner’s position in this case is, in effect, that the respondent must accept the basis employed by petitioner, which manifestly is untenable and without support in law. It is the respondent’s duty, and a fortiori he has the authority, to determine and assess the tax upon true net income, and if the petitioner’s method of computation does not clearly reflect the true net income, it is the respondent’s duty, and he has the authority, to. compute the same upon such basis as will most correctly reflect true income. In the absence of specific facts relative to income, the method of computation employed by the petitioner and the method of computation used 'by the respondent, this Board is unable to determine whether or not the respondent’s computation is erroneous.

The burden is upon the petitioner to prove by competent evidence that the respondent erred in his determination of the deficiency. This it has failed to do.

Judgment will ~be entered for the respondent.


text:
    George C. Manly, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 11266.
    Promulgated April 5, 1927.

      George C. Manly pro se.

      W. H. Lawder, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency of less than $10,000 in income taxes for the calendar year 1919. The deficiency results from the disallowance by the Commissioner of the deduction oí $9,000 claimed by petitioner for the year 1919. No evidence was submitted at the hearing and the appeal was submitted upon the petition and answer.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Denver, Colo., and is by occupation a lawyer and law professor, whose practice is specialized in the oil and mining business. The returns of this petitioner filed since 1913 were made upon the basis of cash receipts and disbursements.
    During the year 1917 the petitioner received certain shares of the stock of the Western States Oil & Land Co. as a fee for legal services. Portions of said stock were sold by the petitioner in the years 1917 and 1918 and the profits on said sales were reported by the petitioner in his returns for those years.
    In the year 1919 the Western States Oil & Land Co. increased its capital stock from $100,000 to $1,000,000, consisting of 1,000,000 shares of the par value of $1 each, giving to the holders of the old stock the right to purchase new stock at the rate of 90 cents per share. The petitioner purchased 10,000 shares of the new stock for $9,000, which lie seeks to deduct as an amount “ necessarily expended during the year 1919 in the protection and preservation of a business asset.”
   OPINION.

Van Fossan:

The petition contains much that is immaterial and irrelevant and is argumentative in character. The allegations of fact are indefinite, confusing and ill-designed clearly to present the question at issue. No evidence was submitted at the hearing and such •facts as we have are those set forth in the petition and admitted in the answer.

The facts disclose no basis upon which the deduction claimed can be allowed. Section 214 of the Revenue Act of 1918 enumerates the classes of deductions that may be allowed in computing net income, none of which cover the deduction here claimed. The purchase by the petitioner of additional stock in 1919, although he may have considered such purchase desirable or even necessary to retain his proportionate interest in the corporation, was a capital investment and was in no sense a loss.

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


author: Yan Fossan:

text:
    Wallace State Bank and Wallace Live Stock Loan Co., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4300.
    Promulgated April 5, 1927.
    1. Under the provisions of section 240(a) of the Revenue Act of 1918, the tax shall, in the absence of an agreement of affiliated corporations, be assessed on the basis of the net income properly assignable to each corporation.
    2. The Board has no jurisdiction to determine whether an overpayment of tax should be credited or refunded or whether the credit or refund is barred by the period of limitation provided by statute.

      E. J. Jones, Esq., Ernest B. Fowler, Esq., and G. G. OowneTkj, Esq., .for the petitioners.

      A. II. Fast, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income and profits taxes for the years 1918 and' 1919 totaling $7,866.55. At the hearing the parties stipulated the facts, and, in the event the Board affirmed the Commissioner’s apportionment, the correct tax liability and the deficiencies of each petitioner for each of the years. The only question submitted to the Board was the proper basis for apportioning the tax for each year between the petitioners.
    FINDINGS OF FACT.
    The petitioners are Colorado corporations with principal offices at Monte Vista. Although petitioners were in fact affiliated corporations, they made separate returns of income for the taxable yeart, and paid the tax thereon shown.
    Upon the basis of consolidated returns the correct aggregate tax liability of these petitioners for 1918 is $7,099.12, the amounts previously assessed against them aggregate $3,372.22, and the aggregate deficiency is $3,726.90. Upon the same basis the correct tax liability of these petitioners for 1919 is $4,428.16, the amounts previously assessed against them aggregate $4,311.44, and the net deficiency is $116.72.
    The petitioners have not filed with the respondent an agreement for the apportionment of the 1918 and 1919 taxes between them, and the respondent has proposed to assess said taxes against them upon the basis of the net income properly assignable to each. Apportioning said taxes upon the basis proposed by the respondent, the following results are obtained:
    1. The correct tax liability of the Wallace State Bank for 1918 i.s $5,927.77; the amount previously assessed is $2,524.67, and the deficiency is $3,403.10. The correct tax liability of the Wallace Live Stock Loan Co. for 1918 is $1,171.35; the amount previously assessed is $847.55, and the deficiency is $323.80. The aggregate deficiency is $3,726.90.
    2. The correct tax liability of the Wallace State Bank for 1919 is $3,507.10; the amount previously assessed and paid is $3,799.21, and the overassessment and overpayment is $292.11. The correct tax liability of the Wallace Live Stock Loan Co. for 1919 is $921.06; the amount previously assessed is $512.23, and the deficiency is $408.83. The net deficiency of both petitioners for 1919 is $116.72.
    The petitioners on March 8, 1920, filed separate returns of income for the year 1919 and paid taxes thereon in the amounts and upon the dates as follows:
    WALLACE STATE BANK.
    Original 1919 assessment_$3, 799. 21
    Paid March 15, 1920-$949.80
    Paid May 29, 1920_ 949.80
    Paid Sept. 16, 1920_ 949. 80
    Paid Dec. 2, 1920_ 949. 81
    -- — - 3,799.21
    ■WALLACE LIVE STOCK LOAN CO.
    Original 1919 assessment_ 512.23
    Paid March 15, 1920_ 512.23
    No claim for a refund or credit of 1919 taxes was filed by either of the petitioners or both of them jointly, on or before April 1, 1926, or within four years from the time the taxes for said year were paid. The appeal herein was filed May 19, 1925, more than four years after the last payment made by either of the petitioners on 1919 taxes.
    ^ At the hearing of this appeal the petitioners filed an agreement entered into between themselves and dated October 16, 1926, providing that the total taxes for the years 1918 and 1919, as determined by the Board, shall be apportioned between them in the same ratio as the tax paid by each of them for each said year bears to the total tax paid by both of them for each said year. The percentages thus determined, for each petitioner for the respective years, are:

   OPINION.

Yan Fossan:

In view of the stipulations entered into between the parties we have only one question for consideration, viz.: Has the respondent properly apportioned the taxes for the respective years between the affiliated corporations, or, in other words, may the affiliated corporations, by later agreement, alter the apportionment of taxes made by the respondent pursuant to statute in the absence of such an agreement?

It is stipulated that the petitioners have not filed with the respondent any agreement for the apportionment of the taxes for the years in question. The respondent determined the amount of tax due for each year, and in the absence of any agreement between petitioners, allocated the tax to the petitioners upon the basis of the net income properly assignable to each. This action of the respondent was precisely in accord with the express provisions of section 240(a) of the Revenue Act of 1918 and the taxes were correctly so assessed.

From the stipulation it appears that there is an overassessment for 1919 as to one of the petitioners. The respondent contends, however, that since the facts also disclose that the petitioners have failed to file a claim for refund or credit for such overpayment, or to file their appeal with this Board, within the time limitation set by section 284(e) of the Revenue Act of 1926, which, under the law, is a condition precedent to the refund or credit of such overpayment, this refund or credit is barred.

In the Appeal of Dickerman & Englis, Inc., 5 B. T. A. 633, we held that the Board has no jurisdiction to determine whether an overpayment of tax should be credited or refunded to the taxpayer or to determine whether credit or refund is barred by the period of limitation provided by the statute. We accordingly express no opinion on this point.

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


text:
    Deline Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10653.
    Promulgated April 5, 1927.

      Charles R. Kelley, Jr., C. P. A., for the petitioner.

      W. H. Lawder, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in the sum of $7,465.42 in income and excess profits taxes for the calendar year 1920. It is alleged that the Commissioner erred in refusing to accept the inventory valuation claimed by the petitioner and also in denying the petitioner the right of assessment of its 1920. taxes under the provisions of sections 327 and 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is and during the taxable year was a Colorado corporation with its principal office in Denver, and was engaged in the manufacture of paper and fancy leather boxes. At the close of the taxable year the petitioner took its. inventory at cost and set up the same on its books in the sum of $62,131.75. During the month of January, 1921, the petitioner revised the closing inventory for the year 1920 and set up an alleged corrected inventory in the sum of $58,635.86, the reduction of $3,495.89 being charged on its books to the surplus account. The revised inventory purported to have been taken at market value. This reduction in inventory was based upon letters received from correspondents of the petitioner. The petitioner used in its income-tax return for the taxable year the revised inventory figure. The Commissioner upon examination of the petitioner’s return and records rejected the inventory valuation returned by the petitioner and used the figure originally entered upon petitioner’s books based upon cost.
    During the taxable year petitioner borrowed funds from the bank to conduct its business. Loans were negotiated upon the promissory notes of the petitioner with the individual endorsements of one or more of its principal officers.
   OPINION.

Van Fossan:

Petitioner contends that respondent erred (1) when he rejected its supplemental inventory valuation purporting to have been made at market and determined the tax upon the original inventory taken at cost, and (2) in denying to petitioner the benefits of sections 327 and 328 of the Revenue Act of 1918.

Petitioner opposes the use of its inventory taken at cost and set up on its books at the close of the taxable year upon the ground that the market at that time was unstable and fluctuating and that this inventory was intended only as a temporary or tentative inventory, pending such time as it could ascertain the true market. The revised inventory figure set up in January, 1921, by the petitioner is alleged to have been taken at the market value and purports to be based upon quotations received from the correspondents of the petitioners. There is no evidence, however, to show that the market at the close of the taxable year was unstable or rapidly changing, nor is there any proof whatever of the market value of the merchandise at that time.

When the petitioner contends that the market is lower than cost and desires to avail itself of the right to price its inventory at the lower figure, it must establish by clear proof that it has taken its inventory at market. No such proof is adduced in this case. The inventory valuation employed by the respondent is admittedly taken at cost and was originally set up on its books by the petitioner as its closing inventory. Petitioner has failed to show wherein the respondent has erred in this particular.

With reference to the petitioner’s claim for relief under sections 327 and 328 of the Act, the evidence is even more unsatisfactory. The only evidence submitted on this point is that the petitioner during the taxable year borrowed some money for the conduct of its business and that the principal officers of the petitioner personally endorsed its negotiable paper upon which the funds were advanced by the bank. There is no proof of abnormal conditions affecting the capital or income of this petitioner that would work an especial hardship upon it, so as to entitle it to have its taxes for the year 1920 computed under section 328. In the absence of such proof we can not find that the petitioner is entitled to have its taxes computed under sections 327 and 828.

Judgment mil be entered for the respondent.


author: Marquette:

text:
    Appeal of Anderson & Co.
    Docket No. 5442.
    Promulgated April 5, 1927.
    No part of tlie sales price of articles sold on the deferred payment basis constituted interest or expense which could be excluded from gross income.

      Joseph Getz, O. P. A., and W. J. Hogan, Esq., for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the Commissioner.
    This is an appeal from the determination of deficiencies in income and profits taxes for 1919 and 1920, of $3,053.18 and $127.78, respectively. The appeal is based on the claim that certain items accrued on the taxpayer’s books were unearned and for that reason improperly included in income.
    FINDINGS OF FACT.
    The taxpayer was incorporated March 7, 1912, under the laws of New York, for the purpose of conducting a business of selling pianos and other musical instruments on the installment plan. Its principal place of business is now located at 291 Livingston Street, in Brooklyn.
    The instruments are sold under a contract requiring a cash payment of approximately 10 per cent of the sale price and payment of the remainder in thirty-six equal monthly installments. The form of contract used is as follows:

      Andesbon & Co.,
    291 Livingston Street,

      Brooklyn, N. Y.,_, 19 — .
    Notice. — All payments must be made direct at the office of Anderson & Co., 291 Livingston Street, Brooklyn, New York.
    If payments are made when due, that is every-at the office of Anderson & Co., 291 Livingston Street, Brooklyn, N. Y. (and no collector has called) there will be no interest added. But in the event that payments are allowed to become delinquent, that is, where the-payments are not paid when due at our office and our collector has called for payments, interest will be charged at the rate of six per cent.
    This_must not be removed or placed on storage without the written consent of ANDERSON & CO. By so doing, the purchaser violates this contract and cancels the insurance, and ANDERSON & CO. shall deem themselves insecure and may take and retain possession of said-
    This is to certify that I,_have received of Anderson & Company, Brooklyn, N. Y., one_No_Wood---which I am at liberty to use with care, keeping it in as good order as when received. I have agreed to purchase said- and will pay the sum of_dollars ($-) in the following manner, viz:-dollars($-) cash on the signing and delivery of a copy of this contract-and_dollars ($-) in regular-payments of_dollars ($_) until the full amount, _dollars ($_) payable at their warerooms, 291 Livingston Street, or sooner, at my option.

    I agree that if default be made in any of the aforesaid payments the full amount of the purchase price shall thereupon become due and payable.
    I have also agreed to make future payments at the office of Anderson & Company, on the_day of each-beginning on_without further notice or demand.
    The sale of said_is conditional upon the punctual payments of said sums, as above stated; the title of ownership to remain in the said ANDERSON & CO., of Brooklyn, N. Y., until all the payments are made in full, at which time there shall be a bill of sale absolute made out and delivered to the said-
    But if default shall be made in said payments, or if the said ANDERSON & CO., of Brooklyn, N. Y., have reasons to deem themselves insecure, or if I shall sell, offer for sale, remove or attempt to remove the said_ from _ without the written consent of said ANDERSON & CO., of Brooklyn, N. Y., then and in that ease they may without notice or demand resume actual possession of said_, and all payments made thereon shall be credited for the use thereof. And I do further agree and promise that if at any time hereafter the within - _is returned to me, or retaken by the said ANDERSON & CO., because of my default in any of the foregoing conditions, that I will pay all installments due and payable at the time of the return or retaking of the aforesaid_
    I also agree to pay all damages sustained if the-be injured at any time by any fault or neglect on my part, and to retain it for use only.
    It is also understood that the purchaser shall keep this instrument insured, loss if any to be payable to ANDERSON & CO., as their interest may appear.
    The above agreement has this day been executed in duplicate and one duplicate has been delivered to me and I have no understanding, verbal or otherwise, differing from it.
    Witness:
    Three references:
    _Residence-
    _Business_
    _Place of business_
    The taxpayer keeps its books and reports its income on the accrual method. When a sale is made, the customer is charged and sales credited with the full amount of the sale price. As payments are made, the customer is credited and cash is charged with the amount of such payments. At the close of the year, total sales are carried into income.
    The gross installment sales for 1919 and 1920 were $128,958.67 and $113,547.03, respectively. The price at which instruments were sold vras cost plus 120 per cent.
    In the event a purchaser pays the balance on his account before it is due under the sales contract, and insists on a discount for such advance payment, a discount is allowed in proportion to the degree of insistence on the part of the customer, but in no case does net discount exceed 30 per cent of the total installments. If the customer does not demand a discount, no discount is allowed.
    On its return for 1919 the taxpayer deducted $9,824.48 as a “ Reserve for Losses.” This amount represented an estimate of prospective losses on gross sales made during that year and was disallowed as a deduction by the Commissioner.
   OPINION.

Marquette:

The taxpayer does not claim that the Commissioner erred in disallowing as a deduction in 1919, the amount set up as a “ Reserve for Losses,” but does claim that a certain per cent of the sale price of each instrument sold on the installment plan was interest on the deferred payments and being interest was not earned until such payments were due, and that such unearned interest was improperly accrued on the books and erroneously included in income for the year of the sale. The same claim is made with reference to other amounts designated by the taxpayer as charges for the collection of deferred payments.

The taxpayer’s secretary and general manager testified that of the 120 per cent added to cost to arrive at sale price, 40 per cent was added for overhead, 40 per cent as interest, 20 per cent to cover charges for collection and the remaining 20 per cent as profit. His explanation is more easily understood if an illustration be used. In the case of an instrument costing $150, the sale price would be $330, of which $30 would be required as a cash payment, leaving $300 to be paid in thirty-six equal monthly installments. The amount allocated to interest, it was explained, would represent 10 per cent on the deferred payments, as follows: $30 or 10 per cent of $300, the amount of the deferred payments as of the beginning of the first year; $20, or 10 per cent of $200, the amount of the deferred payments as of the beginning of the second year; and $10, or 10 per cent of $100, the amount of the deferred payments as of the beginning of the third year. Testimony was also advanced to the effect that it is the custom in the taxpayer’s particular line of business, to arrive at the sale price in the manner explained. This explanation is the sole ground for claiming that the percentages in question were improperly accrued on the books of the taxpayer during the years 1919 and 1920.

If the mere designation of a part of the sale price of an instrument as interest was sufficient to identify such part as interest, there might be some merit in the argument advanced, but terminology alone can not make out of the sale price of an article something that it is not. Interest has a much narrower meaning than is sought to be attributed to it here, for like dividends or profits derived from the purchase and sale of goods, it is merely one form of return on the use of capital. It is defined in Webster’s New International Dictionary as:

The price or rate of premium per unit of time that is paid by a borrower for the use of what he borrows; specif., a rate per cent of money paid for the use of money or the forbearance of demanding payment of a debt; also, the system of permitting or requiring this payment on the money so paid.

In Maryland Casualty Co. v. Omaha Electric Light & Power Co., 157 Fed. 514, interest was defined in a concise manner as “a consideration paid for the use of money or for forbearance in demanding it when due.” In Carlson v. Helena, 39 Mont. 82; 102 Pac. 39, the court said:

Interest is merely an incident to the debt, to he paid from time to time or at the date when the principal falls due, in consideration of the forbearance extending to the debtor, and becomes a part of the debt, or debt at all, only when it has been earned.

The facts in the instant case do not even suggest that the amounts in question constitute interest. The records of the taxpayer make no showing of such interest, and the form of contract used by the taxpayer and its customers discloses that the only interest contemplated between the parties is interest on installments not paid when due, the amount to be computed at the rate of 6 per cent from the installment date until paid. Furthermore, the taxpayer’s explanation that the amount which it now claims as interest represents interest at 10 per cent on the deferred payments over the three-year period, is contradictory in itself. In making such a comp'utation the amounts claimed as interest are also used as a part of the principal on which the interest is computed. The amount allocated to interest for each year is 10 per cent of the amount due at the beginning of each such year, even though one-twelfth of the amount payable during the year is paid at the end of each month. Following the taxpayer’s line of reasoning to its logical conclusion, it appears that a customer would pay interest for the whole year on the first installment, payment of which is in fact deferred for only one-twelfth of that time, and only in case of the twelfth installment wo'uld the customer get full benefit of the forbearance for which he would pay. Interest as a payment for forbearance in demanding money when due logically runs from the date due over the period of forbearance, but in this instance the taxpayer seeks to extend it beyond the period of forbearance to the end of the year in which the installment is due and treats such payment both as a payment for forbearance and as part of the principal.

The taxpayer’s position is also at variance with its practice where an installment is paid before the payment date fixed by the contract. If any part of the amount of such installment is interest for deferring the payment of such installment, discount should be allowed, as a matter of course, to the extent that the installment is paid before its payment is due. In such cases, however, the taxpayer allows no discount unless demand is made therefor by the customer, and then only in proportion to the degree of the customer’s insistence.

The argument that a part of the sale price in deferred payment sales, or the difference between the cash price and the deferred payment price is interest on the deferred payment is interesting but by no means novel or new. The same argument has often been advanced in suits to recover deferred payments, which suits were defended on the ground that the difference between the cash sale price and the deferred payment sale price was interest and being interest was usurious. In such cases the courts have uniformly held that a cash sale of an object is a different sale from a deferred payment sale of the same object, and the fact that the deferred payment sale price is greater than the cash sale price does not make interest of the difference. Hogg v. Ruffner, 1 Black 115; Luzzatto v. Kaplan, 188 N. Y. S. 522; Holland O'Neal Milling Co. v. Rawlings, 217 Mo. App. 466; 268 S. W. 683; Smith v. Kaufman, 145 Ark. 548; 224 S. W. 978; Davidson v. Davis, 59 Fla. 476; 52 So. 139; Commercial Credit Co. v. Shelton, 139 Miss. 132; 104 So. 75. In Davidson v. Davis, supra, the court said:

The law is well settled that usury can only attach to a loan of money, or to the forbearance of a debt, and that on a contract to secure the price or vjilue of work and labor done, or to be done, or of property sold, the contracting parties may agree upon one price if cash be paid, and upon as large an addition to the cash price as may suit themselves if credit 'be given; and it is wholly immaterial whether the enhanced price be ascertained by the simple addition of a lumping sum to the cash price, or by a percentage thereon. In neither case is the transaction usurious. It is neither a loan nor the forbearance of a debt, but simply the contract price of work and labor done and property sold; and the difference between cash and credit in such cases, whether 6, 10, or 20 per cent., must be left exclusively to the contract of the parties, and no amount of difference fairly agreed upon can be considered illegal.

See also Appeal of Marsh & Marsh, Inc., 5 B. T. A. 902.

With reference to the amount designated as collection charges, the contention of the taxpayer is without merit and the answer thereto is quite clear. In this instance the expense of collecting installments is no different from any other expense of carrying on the business, and certainly no expense can be said to be income. It is true that in any selling business the sale price of an article must be sufficiently high so that such expenses may be met, but such expenses are a matter of deduction and affect income only when incurred. The designation of an arbitrary part of the sale price of an instrument as an amount to cover expenses to be incurred can have no effect on income.

Counsel for the’ taxpayer placed great emphasis on our opinion in Appeal of Chatham da Phenix National Bank, 1 B. T. A. 460, but that case is clearly distinguishable. There the question was whether bank discount which was neither received nor accrued could properly be carried into income. In this case, however, we have seen that the items of interest and discount are not involved, and for that reason there is no possible basis for comparing the two cases.

The total sale price of instruments sold on the deferred payment plan accrued in the year of the sale and since the taxpayer kept its books by the accrual method, which is one of the regularly recognized methods of keeping accounts, Appeal of Henry Reubel, 1 B. T. A. 676, and it does not appear that the books so kept improperly reflect income, the Commissioner’s determination must be approved.

Judgment will be entered for the Commissioner.


author: Love:

text:
    Park Bros. & Rogers, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2460.
    Promulgated April 6, 1927.
    1. Jukisdiction. — TRe Board Ras no jurisdiction to redetermine the tax of a year for wRicR a deficiency Ras not been determined by tbe Commissioner. Revenue Act of 1926, see. 274 (g) ; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.
    2. Affiliation. — Ownership in 1917 of 72.2 per cent of stock of Advance Button Co. by petitioner held not sufficient for affiliation. In 1919, petitioner owned all of the outstanding stock of said company ; held to be affiliated.

      Henry C. Hart, Esq., for the petitioner.

      Marion N. Fisher, Fsg., for the respondent.
    This is a proceeding for the redetermination of deficiencies in tax of $80.80 for 1917 and $2,099.75 for 1919. The errors assigned are (1) an insufiicient allowance of depreciation, and (2) the refusal of the Commissioner to treat the petitioner and the Advance Button Co. as aifiliated in the years 1917, 1918, and 1919. The petitioner abandoned its contentions under the first-mentioned assignment of error.
    FINDINGS OP PACT.
    The petitioner is a Rhode Island corporation, which began business January 1,1917, and has its principal place of business at Providence. Its treasurer, chief executive officer and principal stockholder is Everett I. Rogers of that city. Its business is manufacturing and selling jewelry, including collar buttons, cuff buttons and studs.
    The Advance Button Co. was a corporation of Rhode Island, formed in 1909 with the name Yardley Pearl Works. The name was changed to Advance Button Co. in January, 1918. This corporation was engaged principally in producing imitation pearls, which were used in manufacturing collar buttons, cuff buttons, studs, etc., and its entire output was consumed by petitioner. It operated its business on the same premises on which petitioner carried on its business, and it had the same treasurer and chief executive officer. The assets of the company were liquidated on December 81, 1919.
    During the years under consideration, there were issued and outstanding 54 shares of the capital stock of the Advance Button Co. Of these, petitioner admittedly owned 39 shares. The other 15 shares were issued to and stood in the names of the following persons: Charles P. Thompson, 1 share; W. E. Hammond, 1 share; Arthur Yardley, 13 shares. The three persons last named were employees of petitioner. None of them ever voted the shares of stock standing in bis name. None of them executed a proxy or any agreement in writing conferring upon petitioner the right to vote the stock standing in his name or executed any other written agreement relative thereto. Yardley, after 1917, the exact time is not disclosed, severed his connection with the company and has not been employed by petitioner nor interested financially or otherwise, in either corporation. The Advance Button Co. never declared or paid any dividend on its capital stock. In the latter part of 1917, each of the three individuals named endorsed in blank the said certificate or certificates of stock standing in his name and delivered them to Everett I. Rogers “ as evidence of the surrender by each of all right, title and interest that they each may have had, whether nominal or actual, in said Yardley Pearl Works to said Parks Bros. & Rogers, Inc., and these certificates have been from that time to the present in the custody and control of said Everett I. Rogers; that after (he change of the name of said Yardley Pearl Works to Advance Button Company no certificates of stock of that company have been issued to either Hammond, Thompson or Yardley.”
    The deficiency notice states that a reexamination has been made of the petitioner’s returns for the years from 1917 to 1920, inclusive, and in addition to determining the deficiencies mentioned above it states an overassesment of $72.90 for 1918, no additional tax for 1920, and a “net additional tax” of $2,107.65. The respondent pleads that the Board has no jurisdiction to redetermine the petitioner’s tax liability for the year 1918. A stipulation of facts was filed, and no testimony was offered.
    The petitioner duly filed for the calender years 1917, 1918, and 1919, consolidated returns of petitioner and Advance Button Co. as affiliated corporations, and filed with the Commissioner affiliated schedules for those years. The deficiencies arose in part, from the disallowance of adjusted depreciation claimed on amended returns, and in part from the refusal of the Commissioner to treat the corporations as affiliated.
   ORIN I ON.

Love:

We will first dispose of the question of jurisdiction of the Board to redetermine the tax for 1918. The notice of deficiency states an overassesment for that year, but it shows a “ net additional tax ” for the three years 1917, 1918, and 1919, arrived at by deducting the amount of the 1918 overassessment from the sum of the deficiencies for the other two years. The petitioner urges that the Board may consider the tax liability for 1918 for the purpose of determining whether or not the overassessment should be greater than that determined by the Commissioner, since this would affect the net deficiency for the three years. It relies on Appeal of E. J. Barry, 1 B. T. A. 156, and certain other cases early decided by the Board. Since those decisions were rendered, the Revenue Act of 1926 was passed, which contains the following provision:

Sec. 274. (g) The Board in redetermining a deficiency in respect of any taxable year sliall 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 the Board has no jurisdiction to redetermine the tax for a year for which no deficiency has been found. See Appeal of Cornelius Cotton Mills, 4 B. T. A. 255. The petition is therefore dismissed as to the year 1918.

Until the latter part of 1917, the petitioner owned 39 shares, constituting 72.2 per cent of the outstanding stock of the Advance Button Co. The stipulation filed states the other 15 shares were “ issued to and stood in the names of” three individuals named. While this statement is vague as to ownership, we certainly can not find that ¡jetitioner then owned these shares. We conclude that 72.2 per cent is not “ substantially all,” so that affiliation can not rest on the ground of ownership by petitioner of substantially all of the stock. It further appears, however, that the three individuals referred to were employed by petitioner. Does this fact give petitioner control “ through closely affiliated interests ” of the remaining 15 shares not owned by it? We think not. It does not appear what positions Thompson, Hammond, and Yardley held, or that their holding of this stock had any relation to their employment by petitioner. An employer has not “ control ” of shares of stock held by an employee, by virtue of this relationship solely. See Appeal of Kiddy Shoe Service, Inc., 5 B. T. A. 268; Appeal of Goldstein Bros. Amusement Co., 3 B. T. A. 408. In the latter part of 1917 (date not shown), Thompson, Hammond, and Yardley “surrendered all right, title and interest” in their stock to petitioner. The circumstances or conditions of the surrender are not stated. The presumption is that petitioner thereupon became the owner of these shares. Therefore, from that time on, the two corporations were affiliated; but we can not determine they were affiliated during any part of 1917, for the date upon which the 15 shares were acquired by petitioner is not shown.

During 1919 petitioner still held all of the stock of the Advance Button Co., and hence was affiliated with it in that year.

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


author: Phillips :

text:
    Belmont Iron Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10454.
    Promulgated April 6, 1927.

      Lawrence A. Baker, Esq., for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
    The petitioner appeals from the determination by the Commissioner of deficiencies of $34,952.74 and $88,208.60 in income and profits taxes for 1917 and 1918, respectively, alleging several errors, all but one of which were waived at the hearing. The single issue remaining for decision is stated as follows:
    Invested capital at the beginning of 1917 should not be reduced by the arbitrary inclusion of a tentative tax in arriving at the amount of earnings available for dividends paid February 28, 1917.
    FINDINGS OP PACT.
    On February 28, 1917, the petitioner paid a dividend of $300,000. The respondent determined the net income for the year 1917 to be $794,430.83, computed a tentative tax on that amount of $274,420.79, and thereby computed the earnings of the year available for distribution to be $520,010.04. This amount he prorated over the taxable year, determining the earnings available for distribution on February 28, 1917, to be $85,120.69. He determined the balance of such dividend, $214,879.31, to have been paid from surplus and reduced invested capital from and after February 28, 1917, by that amount.
   OPINION.

Phillips :

The decision in this appeal is controlled by the decisión of the Board in the Appeal of L. S. Ayers & Co., 1 B. T. A. 1135, where it was held that in computing invested capital the earnings available for the payment of a dividend are not to be reduced by a theoretical or tentative tax.

Decision will be entered, on W days' notice, under Rule 50.


author: Lansdon :

text:
    J. B. Mosby & Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2781.
    Promulgated April 6, 1927.
    The petitioner and the Richmond Holding Corporation were affiliated' during the taxable period and the taxable years involved.

      R. E. Cabell, Ésq., and James E. Rindfleish, O. P. A., for the petitioner.

      J. Harry Byrne, Esq., for the respondent.

      The Commissioner has asserted deficiencies in income and profits takes for the period from January 1 to January 31, 1918, inclusive, and for the fiscal years ended January 31, 1919 and 1920, in the respective amounts of $757.42, $1,207.05, and $2,339.35. The only issue is whether the petitioner and the Richmond Holding Corporation were affiliated and entitled to make a consolidated income and profits-tax return for each of the taxable periods involved.
    FINDINGS OF FACT.
    The petitioner is a Virginia corporation with its principal office in Richmond, where-it is engaged in the mercantile business. During the taxable periods it had outstanding 860 shares of capital stock of the par value of $100, each.
    The Richmond Holding Corporation is a Virginia corporation, with its principal office in Richmond. Its only business is owning and renting a five-story building to the petitioner. Its capital stock is divided into shares of the par value of $100, each. It had outstanding at January 31, 1918, 1,734 shares; at January 31, 1919, 1,858 shares; and, at January 31, 1920, 1,840 shares.
    During the taxable period and taxable years the stock of the two corporations was held as follows:

    The Richmond Holding Corporation had outstanding only common stock. J. B. Mosby & Co., Inc., had outstanding certain preferred stock which had no voting rights.
    E. A. Dietrich and G. C. Dietrich, Jr., are brothers; Pauline E. Dietrich is the wife of E. A. Dietrich; M. M. Kirschmann, Amelia L. Mattern, and Augusta F. Kohler are. sisters of Pauline E. Dietrich; E. A. Bromm is a brother-in-law of E. A. Dietrich; Lewis Schoolhouse is a friend of E. A. Dietrich; and Peter H. Mayo owned the land upon which the building of the Richmond Holding Corporation was erected, and accepted 50 shares of the stock of such company as part payment thereof. During all the time involved in this controversy, E. A. Dietrich, George C. Dietrich, Jr., and E. G. Hulcher, were president, vice president, and secretary-treasurer, respectively, of both corporations, and during such time the two companies were operated as a single business enterprise.
    At the date of the incorporation of the Richmond Plolding Corporation, the stock thereof was subscribed for in conformity with a verbal agreement that it should be controlled and voted by E. A. Dietrich. All the stockholders of the holding company who were not owners of stock of the petitioner gave proxies to E. A. Dietrich, authorizing him to vote their stock at all stockholders’ meetings. There was also a verbal agreement that E. A. Dietrich guaranteed both the principal and dividends at the rate of 5 per cent per annum of the stock of the holding company. It was a condition of the stock subscription that 5' per cent per annum should be paid as dividends on the outstanding stock of the holding company, and that the interest at the same rate should be paid on a mortgage through which the additional money needed for construction was secured.
    The petitioner caused the Richmond Holding Corporation to be incorporated for the sole purpose of acquiring ground and erecting a building to be used for its business premises. It adopted this plan because, for reasons connected with its credit standing, it did want to take the assets and liabilities created by building operations into its own accounts and balance sheets.
    The petitioner and the Richmond Holding Corporation made consolidated income and profits-tax returns for each of the periods here involved. Upon audit the Commissioner disallowed consolidation and asserted the deficiencies here in question.
   OPINION.

Lansdon :

The evidence is conclusive that substantially all of the stock of the petitioner and of the Richmond Holding Corporation was owned or controlled by closely affiliated interests. The two corporations were entitled to make a consolidated return for the taxable period and each of the taxable years in question. Appeal of Midland Refining Co., 2 B. T. A. 292; Appeal of Wright Cake Co., 2 B. T. A. 58.

Judgment for the petitioner will he entered on 10 days’ notice, under Rule 50.


author: SteRNHagen:

text:
    J. M. Loftis and J. S. Loftis, Administrators, Estate of S. T. A. Loftis, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7581.
    Promulgated April 6, 1927.
    Where the evidence shows that the assets of a branch store, separately operated to conform to the foreign corporation laws of a State, are owned by the taxpayer corporation, a book entry crediting such assets to the principal stockholder is not sufficient to support a finding that such stockholder received a taxable dividend thereof.

      Henry W. Wales, Esq., for the petitioners.

      John W. Fisher, Esq., for the respondent.
    This proceeding involves a deficiency in income tax of $35,974.72 for the calendar year 1919, arising from the action of the commissioner in including within income the amount of $70,607.19 alleged to have been paid to decedent as a dividend.
    FINDINGS OF FACT.
    The petitioners are the duly appointed and qualified administrators of the estate of S. T. A. Loftis, deceased, formerly a resident of Chicago, Ill.
    Loftis Bros. & Co., an Illinois corporation, hereafter referred to as the company, was organized in 1906. It is, and has been since its organization, engaged in the business of selling diamonds, watches, jewelry, and kindred articles at retail on the installment basis. Its main office is in Chicago, and from time to time it has established branches in many of the larger cities of the United States.
    In April, 1917, the company, acting through S. T. A. Loftis, its then president, purchased with corporate funds the stock in trade of a bankrupt jeweler in Houston, Tex. To this stock it added some of its own merchandise, and opened a branch store. The company was advised that because of Texas laws in respect of foreign corporations it would be advantageous to hold the business in the name of an individual. The Houston branch was accordingly held in the name of S. T. A. Loftis, but was conducted under the trade name of Loftis Bros. & Co.
    At the same time the company took over, in the name of S. T. A. Loftis, and conducted under the trade name of Stewart &rCo., a pawnbroker business formerly at the same location. This business was discontinued the latter part of 1920, and its accounts were closed off the books in August, 1921.
    The accounts of the Houston store were carried, as were the accounts of all the company’s branches, on the general books of the company. On April 1, 1919, this practice was deviated from and a separate set of books was opened for the Houston store. About $70,000 of assets were transferred from the general books of the company to the set for the Houston store and controlling accounts opened which tied the two sets of books together. This method was not followed in the cases of the other branches, their accounts being continued on the general books of the company.
    The company sent several of its employees to the Houston store, and paid the salaries of the manager and all employees. All amounts received were deposited in a bank in Houston subject to withdrawal only by the company, which uniformly withdrew the funds as they accumulated and deposited them to_ its own credit in its bank in Chicago. No part of these monies was ever credited to the personal account of S. T. A. Loftis on the books of the company. All taxes in connection with the Houston store were paid by the company. The business forms of the Houston store bore the name “Loftis Bros. & Company,” the address of Houston, Tex., and the address of the executive offices at Chicago, and were the same as those used by the other branches of the company. Merchandise was regularly transferred to the Houston store on consignment, and charged to it at cost, the same as to other branches. All executive business, all purchases and plans and details of the advertising campaign, and the payment of all larger expense items, including rent, were handled by the company at Chicago. All of these practices and conditions obtained throughout the entire period from April, 1917, to the date of hearing.
    S. T. A. Loftis died intestate, July 30, 1920. After his death the company continued, as it had in the past, to operate the Houston store as a branch of its business, and used the property. The affairs of the company in respect of the Houston store were not changed in any respect. There had been no change in their method of handling this matter at the time of this hearing.
    From 1911 to the date of decedent’s death, the stockholders of the company were three in number, S. T. A. Loftis, owning 2,998 shares, J. M. Hessel, holding one share, and E. C. Phillips, holding one share.
    No meetings of the board of directors or of the stockholders of the company were held during the period from January 3, 1916, to July 31, 1920. No dividend was expressly declared. The profits of the company were used for the expansion of the business. Salaries were paid as determined by .decedent. The amount of the salaries did not depend upon the profits made by the company.
    On July 25, 1921, Roy L. Provancher entered the employ of the company as an auditor. After making an examination of the boobs of tlie company, including the books recording the business of the Houston store, he concluded that the accounts between the company and the Houston store were not in agreement, and did not reflect the true condition of affairs. Accordingly, for the purpose of eliminating from the company’s surplus that which he considered was also included in the surplus of the Houston business, he made the following entry on the journal of the company under date of August 31, 1921:
    General Journal Youclier No. 219.
    Surplus_$70, 607.19
    Loftis Bros. & Company — Houston-$G8,109.10
    Stewart & Company. — Houston_ 2,198. 09
    To write-off to surplus the values of tlie net assets of Loftis Brothers & Company — Houston, and Stewart &
    Company — Houston, respectively, as of April 1, 1919, upon the occasion of the transferring of these businesses to Mr. S. T. A. Loftis, authorized B. L. Bro-vancher.
    This entry was made without consulting and without the authority of the then president, who had been in active charge of the company since August, 1920, and there had been no meeting of the board of directors at which such an entry was discussed or authorized. The president first learned of this entry in 1924, at the time of the Government audit of the books.
    Provancher was never in the employ of the company during the lifetime of decedent.
    Some time in 1920 the controlling account on the books of the company was given the title of “ S. T. A. Loftis — Houston ” and the corresponding account on the books of the Houston store was given the title “ Loftis Bros. & Company — Chicago.”
    From 1917 on, there has at all times been on the company’s books a personal account of S. T. A. Loftis entitled “ S. T. A. Loftis— Personal.” None of the transactions between the company and the Houston store appear in this account.
    The assets of the Houston store were not inventoried by the petitioners as a part of the estate of decedent. The survivors of decedent have never considered these assets as a part of his estate,
    ' In his income-tax return for 1919 decedent included in his income $54,924.63 received as income from the “ Jewelry and Pawnbroker ” business in “Houston, Texas.”
    Other than as outlined herein decedent had no business in Houston, Tex.
   OPINION.

SteRNHagen:

The respondent has included within the decedent’s income for 1919 the amount of $70,007.19 by treating it as a dividend distribution made by the company to him in that year. To sustain this determination the respondent relies not upon an express declaration of dividend, which admittedly was not made, but upon circumstantial facts Avhich it is said can be reconciled only with the conclusion that such a dividend was in fact made. This circumstantial evidence consists principally of the fact that the decedent during his lifetime included Avithin his 1919 income the profits of the Houston business and that Provancher’s book entry of 1921 took the liouston assets out of the corporate surplus as of April 1, 1919. Reliance is placed by the respondent also upon the fact that the decedent fully controlled the affairs of the corporation during his lifetime and that formal declaration of dividends had never been made. These circumstantial facts are not in our opinion sufficient to establish either that a dividend was declared or that in any other way the decedent received the $70,607.19 in question, particularly in vieAv of the petitioner’s evidence to the contrary.

The corporation with its oavii funds bought the business in Houston. It has never, so far as the record shows, ceased to be the true owner of the business, and as such to stand behind it. During the year in question the Houston business Avas treated as a branch of the company’s business, just as many other branches. The fact that it adjusted itself to the Texas Hays by trading indirectly under a trade name does not destroy the evidence of its acts of ownership. But, hoAveA^er that maj? be, Ave are here concerned with the question whether in 1919 this decedent received the Houston assets, and not with the manner and'style of the conduct of the Houston business. Even although the decedent might have returned the income from the Houston business as his OAvn in 1919, it would still be an open question when and hoAv he became the owner. The fact that an adjusting charge to surplus was made on the corporation’s books in 1921 does not, even if it was authorized, and certainly not if unauthorized, establish such receipt in 1919. While book entries may afford some evidence to support a fact, it is Avell established that they can not of themselves prove a fact otherwise authoritatively denied. Here Provancher’s entry Avas said by him to have been made upon his own initiative without consulting any corporate officer, Avas retroactive to a time which he knew nothing about, and was expressly made only that the balance between the Chicago books and the Houston books might be preserved. Such an entry is as evidence too Aveak to give support to the conclusion that income was received.

We are of opinion from the evidence that the decedent in 1919 did not have the income of $70,607.19 attributed to him by the respondent, and the determination in this respect is reversed.

Judgment will be entered on %0 days' notice, under Bule 50.


author: TRAMmell :

text:
    Wilson Marks, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7132.
    Promulgated April 6, 1927.
    The amount of gross income from commissions determined on the basis of cash receipts and disbursements.

      Wilson Marhs pro se.

      Henry Bam&nel, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency 'in income tax for 1920 in the amount of $2,181.06.
    The deficiency arises from the action of the respondent in increasing- the taxable income reported by the petitioner in his return to the extent of $10,847.10.
    FINDINGS OF FACT.
    The petitioner is a tnuveling salesman. During 1920 and prior thereto he was employed by S. llauh & Co. on a commission basis. During 1920 he earned commissions in the amount of $29,047.85. Of that amount he received in cash $18,200.75. The amount of $10,-847.10 was not actually received by him until 1921.. The entire amount of commissions ivas credited to the petitioner on the books of S. Rauh & Co. as of December 31,1920.
    Prior to 1920 the petitioner had the privilege of drawing on his account. His commissions were available to him at any time. The situation ivas different however in 1920. The petitioner made a request prior to December 31, 1920, for the balance due him as commissions but was told that the books had not been made up and for that reason the balance could not be paid him. The books were closed in the early part of 1921 when the amount was credited as of December 31,1920. He was unable to draw on his account or to receive the amount of his commissions due him until 1921. Prior to 1920 the petitioner had filed his income-tax returns upon the accrual basis and in 1919, he reported a gross income of $31,319.53, but he had received in cash during that year only $15,603.04. The balance making up the $31,319.53, that is, the amount of $15,716.49, was not actually received by the petitioner until 1920,

      The petitioner in 1920 filed his income-tax return on the basis of cash receipts and disbursements. No authority was requested of the respondent to change the basis of reporting income. The income earned in 1919 but actually received in 1920 was not included in the income reported by the petitioner in 1920.
    The petitioner kept no books of account. The only record of the commissions earned and cash received were kept by the company by whom he was employed and the petitioner referred to those books for the purpose of determining the amount earned and received by him.
   OPINION.

TRAMmell :

The petitioner kept no books of account. Ho reported his income for 1920 on the basis of cash receipts and disbursements which, in view of all the facts, is the correct method of reporting his income. See Appeal of John A. Brander, 3 B. T. A. 231. During 1920 he did not receive the amount of $10,847.10 which the respondent has added to his taxable income for that year. Pie received only the amount of $18,200.75 of the earnings for 1920.

From all the evidence, we are of the opinion that the gross income of the petitioner in 1920, on the basis of cash receipts and disbursements, was $18,200.75.

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

Smith dissents.


author: KoRNUR, Chairman:

text:
    Duncan-Homer Realty Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19,692.
    Promulgated April 6, 1927.
    1. In determining gain or loss upon tlie sale of property tlie base should be reduced by tlie amount of depreciation sustained in prior years.
    2. It is immaterial in the year of a sale of property whether a deduction for depreciation is taken and the base reduced by that amount, or that the deduction be disallowed and the base left undisturbed. The result is the same in either event.

      John S. Lloyd, G. P. A., for the petitioner.

      Dwight H. Green, Esg., for the respondent.
    The petitioner seeks a redetermination of a deficiency of $618.94 in income tax for the year 1923, asserted by the Commissioner. The proceeding involves the determination of two issues: (1) Whether the petitioner is entitled to a deduction, for the year 1923, for depreciation of certain improved real property sold in that year; and (2) whether the Commissioner erred in reducing the basis for determining the gain arising out of the sale of the property referred to in the first issue, by the amount of the depreciation deducted by the petitioner in the return of the preceding year.
    FINDINGS OF FACT.
    The petitioner is a Pennsylvania corporation with its principal office at Wilkes-Barre, where it is engaged in the business of buying and selling real estate.
    During the year 1923, petitioner sold certain real property which it had acquired in 1922 at a cost of $175,000, for the sum of $265,000. In its return for the year 1922, petitioner claimed, and respondent allowed, a deduction in the amount of $2,500 for depreciation sustained on said property in that year. In its return for the year 1923, petitioner reported a profit of $90,000 from the sale of this property and took a deduction in the s'um of $2,500 for depreciation of said property for that year. For the purpose of determining the gain from the sale of the aforesaid property, the Commissioner reduced the cost of the property by the amount of $2,500, being the amount of the deduction claimed by the petitioner in its return for the year 1922, and allowed by respondent for depreciation of said property. The Commissioner disallowed the deduction of $2,500 taken by the petitioner in the return for the year 1923 for depreciation of the property in question. He allowed a deduction of $48.54 for depreciation of additions made to certain properties in that year.
   OPINION.

KoRNUR, Chairman:

Petitioner contends that under the provisions of section 234 (a) (7) of the Revenue Act of 1918, it is entitled to a reasonable deduction for depreciation of the property sold in 1923; and that respondent erred in reducing the basis for determining the gain from the sale of the property by the amount of the depreciation deducted and allowed for the preceding year. As to the first of petitioner’s contentions, respondent answers that if a deduction for depreciation of the property in question is to be allowed for the year 1923, the basis for determining the gain upon the sale must be correspondingly reduced and no change will be effected in his determination. On the second proposition, respondent submits that for the purpose of determining the gain or loss upon the sale of property, the basis must be reduced by the amornit of the depreciation sustained.

In its returns for the years 1922 and 1923, petitioner took deductions for each of those years in the amount of $2,500 for depreciation of the property sold in the latter year. No question is raised as to the reasonableness of these deductions. Respondent allowed the deduction in the amount claimed for the year 1922. He disallowed the entire deduction made in the year 1923. His action in this latter respect was not because of any question as to the right of the petitioner to make the deduction, nor as to the reasonableness of the amount thereof, but rather, it appears, to shorten the computation of the gain derived from the sale of the property in that year. If respondent’s contention — that the basis for determining the gain from the sale of the property should be reduced by the amount of depreciation sustained — is sound, it can make no difference in the ultimate result whether a separate deduction is allowed for depreciation, for the year of the sale, and the basis for determining the gain correspondingly reduced, or whether the matter of depreciation for the year of the sale is entirely disregarded. If the deduction is allowed, the basis for determining the gain is reduced by the amount thereof and the gain is correspondingly increased. The deduction is offset by the increase in the gain; hence, the net result is the same as would be obtained were the net income, for the year of the sale, computed without regard to the depreciation sustained in that year.

The issue as to whether the basis for determining gain or loss upon the sale of property should be reduced by the amount of depreciation sustained has already been decided adversely to the petitioner. Appeal of Even Realty Co., 1 B. T. A. 355; Appeal of Aaron W. Wolfson, 1 B. T. A. 538; Appeal of Star Sporting Goods Co., 1 B. T. A. 1266; Appeal of Keighley Manufacturing Co., 2 B. T. A. 10; Appeal of Esther Firestone, 2 B. T. A. 309; Appeal of E. O. Fippin, 2 B. T. A. 350; Appeal of Marchetti Roma Cafe Co., 2 B. T. A. 529; Appeal of Walter Frank, 2 B. T. A. 905; Appeal of Life Publishing Co., 2 B. T. A. 1219.

Judgment will be entered for the respondent.


author: Love :

text:
    Leon N. Dibble, Executor, Estate of Louis N. Dibble, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 2528.
    Promulgated April 6, 1927.
    Value of real estate junior mortgages determined.

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

      R. E. Gopes, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency -in estate tax in the amount of $597.32. There is only one assignment of error, which complains of the action of the Commissioner in adjusting the value of a number of second and third mortgage -securities held by petitioner as executor.

      FINDINGS OF FACT.
    The petitioner resides in Springfield, Mass., and is the executor of the estate of Louis N. Dibble, who died J une 23, 1923.
    On the return filed by the petitioner the net value of the estate was fixed at $149,315.24. The Commissioner readjusted that value fixing same at $169,454.22. The increase in net value was brought about by reason of the action of the Commissioner in increasing the value assigned to a number of second and third mortgage securities.
    The character of the several securities, amount of prior mortgage debt, the market value of securities held by petitioner as returned by him, and the market value as adjusted by the Commissioner are shown in the following tabulated statement:

      The market value of the securities listed above on date of death of Louis N. Dibble were as valued by the petitioner in his return, being in the total amount of $71,069.75. The average discount used by him on the mortgages in question was approximately 21% per cent. These mortgages ran from one to ten years.
   OPINION.

Love :

The sole question at issue in the instant case is the value of the second and third mortgages held by the executor, the total balance due on which at date of death of Louis N. Dibble, was $90,605 and which were valued by petitioner in his return at $71,069.75. The Commissioner readjusted the value as shown in the return, to the face value of the balance due.

Edward J. Murphy was appointed by the probate court to appraise the property constituting the estate of Louis N. Dibble. He made such appraisal and made his report to the court, and the same was approved. Murphy has been in the real estate business in Springfield, Mass., where the property in question is located, for thirty-four years, and has bought and sold real estate mortgages, first mortgages, second mortgages, and a few third mortgages. At the time he made the appraisal of the Dibble estate, he was acquainted with the properties involved in the mortgages. As a witness in this case he was shown a certified copy of his report of that appraisal, which he identified, and he testified that the values therein given by him in that report were, in his judgment, the correct market values of the several items therein listed.

In making his return, as executor, the petitioner used the values shown opposite each of the several mortgages involved in Murphy’s report, and as shown in the foregoing tabulated statement.

There are several factors that enter into the appraisal of second real estate mortgages, the amount of the first mortgage as compared with the value of the property mortgaged, the personal responsibility of the payer, and the time the mortgaged debt has tp run.

Murphy qualified as a competent witness on the question of the value of the mortgages here involved, and stating the factors considered and used by him in arriving at his values, so recorded them. The petitioner used the values fixed by Murphy, which we are convinced are correct, and so decide.

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


author: Kokner, Chairman:

text:
    Southern Feed Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 13,587.
    Promulgated April 6, 1927.
    Useful life and cost of auto trucks used in petitioner’s business determined for the purpose of computing the depreciation allowance.

      W. C. Eberwine, for the petitioner.

      A. R. Marrs, Esq., for the respondent.
    Proceeding for the redetermination of a deficiency in income and profits taxes for the year 1921. The deficiency determined by the Commissioner is in the amount of $441.69. For the year 1920, the Commissioner determined an over assessment in the amount of $56.49.
    FINDINGS OP FACT.
    Petitioner, a Florida corporation with its principal office at Miami, was organized in 1915, and, until it ceased business in 1925, was continuously engaged in the retail feed business. Among its customers were race tracks and dairy farms, which varied from 7 to 30 miles in distance from petitioner’s place of business. These tracks and dairy farms often placed large orders with the petitioner for feed; and in preference to making several trips over long distances to these tracks and dairy farms, the delivery trucks were overloaded to complete deliveries in one trip.
    During the year 1919, the petitioner owned and operated in its business three trucks, two of which were Federal trucks which had been acquired in the years 1914 and 1916 at a cost of $2,400 each, and one a Ford delivery truck which it acquired in 1918 at a cost of $714. In 1920, it acquired a secondhand International truck at a cost of $896.19. In 1921, it acquired two Ford delivery trucks at a total cost of $1,415. A Selden truck and a new International truck were acquired in 1922 and 1923, respectively.
    One or more Ford delivery trucks were traded in prior to the time petitioner ceased business. Petitioner went out of business in September, 1925, at which time there were five trucks on hand; an*d shortly thereafter four of the trucks were sold for $1,000.
    During the time it carried on business, petitioner expended considerable amounts, from time to time, in reconditioning and repairing its auto trucks. The auto trucks used in the business during the year 1921, had an average useful life, reckoning the life of each from the date of acquisition, of five years.
   OPINION.

Kokner, Chairman:

The Commissioner has determined no deficiency for the year 1920; hence, we are without jurisdiction to determine the issue pertaining to that year. Appeal of R. P. Hazzard Co., 4 B. T. A. 150; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The only issue raised is the deduction to which the petitioner is entitled for depreciation of auto trucks. The petitioner’s total investment in auto trucks, at the beginning of the year 1921, was $6,410.19. During the year 1921, it acquired two Ford auto trucks of the light delivery type, at a total cost of $1,415. The average useful life of the auto trucks in use at January 1, 1921, based on the life of each truck from the date of acquisition, and of the two auto trucks acquired in 1921, was 5 years. A reasonable allowance for wear and tear of the auto trucks, for the year 1921, is 20 per cent of $6,410.19 plus 10 per cent of $1,415, or a total of $1,423.54.

Judgment will be entered on 10 days’ notice, in accordance with Rule 50.