author: Phillips:

text:
    Joy Floral Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8986.
    Promulgated July 29, 1927.
    1. The expiration of the statutory time within which taxes may he determined, assessed and collected bars the remedy but, in the absence of statutory provision to the contrary, does not bar the liability.
    2. In 1924, the Commissioner and the petitioner executed a consent in writing to extend for one year the period within which taxes for the fiscal year ended July 31, 1910, might be determined.
    At the time such consent was executed, the statute had run on any assessment of tax. Held, that the tax might be assessed within the period provided for in such consent. Held, further, that such consent is not void for want of consideration.
    3. Section 1106 of the Revenue Act of 1926 is not retrospective.
    4. The Government is not barred in the enforcement of its claims by any period of limitations unless the claim clearly falls within the limitation.
    5. Where no assessment of the tax was made before the enactment of the Revenue Act of 1924 and the period within which assessment might be made had not then expired, the tax may be collected within six years after assessment.
    6. Premiums paid by a corporation upon insurance on the lives of its officers, such insurance being assigned as security for a loan, are not deductible in computing net income under the Revenue Acts of 1918 and 1921. Section 215 of such acts followed.

      Harry Friedman, Esq., for the petitioner.

      Jos. K. Moyer, Esq., for the respondent.
    This proceeding involves the determination by the Commissioner of deficiencies in income and profits taxes of $1,979.86, $1,745.46, and $298.54 for the respective fiscal years ended July 81, 1919, July 31, 1920, and July 31, 1921. As to 1919 it is alleged that assessment and collection of the tax are barred by limitation. As to 1920 and 1921 it is alleged that error was committed in refusing to allow as a deduction premiums paid on life insurance policies on the lives of officers of the petitioner.
    FINDINGS OF FACT.
    Petitioner is a corporation engaged in business as a florist with its principal office at Nashville, Tenn. Notice of the deficiency, from which this appeal is taken, was mailed to the petitioner on September 11, 1925.
    On or about November 1, 1924, there was mailed to the petitioner from the office of the Commissioner of Internal Revenue a letter reading as follows:

      IT: CA: 2339-9
    Treasury Department,
    Office of Commissioner of Internal Revenue,

      Washington, November 1, 19%.

    Joy Floral Company,

      Nashville, Tennessee.

    Strs : Receipt is acknowledged of your brief signed and sworn to under date of July 18, 1924, in which protest is made against the additional taxes of $1,752.4S and $298.54 for the years 1920 and 1921, respectively, as indicated in office letter dated August 28, 1924.
    A deficiency of $1,979.86 for the year 1919 was indicated in the above-mentioned office letter and as no protest against this amount is included in your brief it is assumed that the deficiency is agreed to.
    You are therefore requested to execute and return to this office within fifteen days from the date of this letter the enclosed agreement form or present exceptions, if any, which you may take thereto.
    If you protest against the determination of the deficiency the Bureau desires to proceed in the regular manner to the consideration of any information submitted by you. However, the statutory period within which the Commissioner may assess additional taxes for the year 1919 will expire presently, and in order to avoid the necessity of making an assessment prior to such consideration, it is requested that you sign and return to this office the enclosed form of waiver.
    In your reply reference should be made to IT: CA: 2332-9.
    Respectfully,
    J. G. Bright,

      Deputy Commissioner.

    (Signed) Oliver Kinsel,

      Assistant Head of Division.

    Thereafter and on or about December 2, 1924, the petitioner duly executed an instrument in writing, which was thereafter executed by the respondent, and which reads:
    Dec. 2, 1924.
    Income and Profits Tax Waiver.
    In pursuance of the provisions of existing Internal Revenue Laws, Joy Floral Co., a taxpayer, of Nashville, Tenn., and the Commissioner of Internal Revenue, hereby consent to extend the period prescribed by law for a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year July 31, 1919, under the Revenue Act of 1924, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes”, approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which assessments of taxes may be made for the year or years mentioned, or the statutory period of limitation as extended by Section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau.
    Toy Floral Co., Taxpayer.

    By (Signed) J. M. Joy, Pres.

    P. H. Blair, Commissioner.

      Thereafter, under date of July' 15, 1925, there was mailed to the petitioner from the office of the respondent a letter reading:
    IT: E: SM Treasury Department,
    MN: B-20014 Office of Commissioner of Internal Revenue,

      Washington, July 15, 1925.

    Joy Floral Company,

      Siasth ancl Church Sts.,

      Nashville, Tennessee.

    Sirs : An audit of your income and profits tax returns for tiie years 1919 to 1921, inclusive, lias resulted in the determination of a deficiency in tax of $4030.88, as shown by Bureau letter dated August 28, 1924.
    You are granted 30 days from the date of this letter within which to present a protest, supported by additional evidence or brief, against this determination of a deficiency. Any additional evidence submitted should be under oath. Upon request submitted within the period mentioned, you will also be granted a hearing in the Bureau with reference to the matter.
    A request for a hearing should contain (a) the name and address of the taxpayer; (b) in the case of a corporation, the name of the State of incorporation ; (c) a designation by date and symbol of the notice or notices with respect to which the hearing is desired; (d) a designation of the year or years involved and a statement of the amount of tax in dispute for each year; (e) an itemized schedule of the findings of the Unit to which the taxpayer takes exception ; and (f) a summary statement of the grounds upon which the taxpayer relies in connection with each exception.
    If, after consideration of any additional evidence submitted and any arguments advanced by you, a deficiency is finally determined by the Bureau to be due from you, you will, in accordance with the provisions of Section 274 of the Revenue Act of 1924, be advised by registered mail of the final determination of the Commissioner as to the amount of the deficiency, and allowed 60 days from the mailing of the letter in which to file an appeal to the United States Board of Tax Appeals in the event you do not acquiesce in such final determination.
    If you acquiesce in the determination of a deficiency as disclosed in this letter and the accompanying statements, you are requested to sign the inclosed agreement consenting to the assessment of such deficiency, and forward it to the Commissioner of Internal Revenue, Washington, D. O., for the attention of IT: E: SM : MN-B-20014. In the event that you acquiesce in a part of the determination, the agreement should be executed with respect to the items agreed' to.
    Respectfully,
    (Signed) C. B. Allen,

      Acting Deputy Commissioner.

    Thereafter and on or about July 27, 1925, the petitioner duly executed an instrument in writing, which was thereafter executed by the respondent, reading:
    Income and Profits Tax AVaiver For Taxable Years Ended Prior to
    January 1, 1922.
    IT: E: SM: MN-B-20014r-5
    7/27/25
    In pursuance of the provisions ot existing Internal Revenue Laws Joy Floral Co., a taxpayer of Nashville, Tenn., and the Commissioner of Internal Revenue hereby, waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year (or years) Fiscal year ended 7/31/19, under existing revenue acts, or under prior revenue acts.
    This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.
    Joy Floeal Co.,

      Taxpayer.

    By (Signed) J. M. Joy, Pres.

    D. H. Blair,

      Commissioner

    Each of such instruments described as “income and profits tax waiver ” were executed more than five years after the date the return was filed for the fiscal year ended July 31, 1919.
    In July, 1920, petitioner borrowed $65,000 from the Life & Casualty Insurance Co., and executed to that company a mortgage upon its plant and green houses as security for the payment of such loan. As additional security the insurance company required that insurance be taken upon the lives of the officers of the petitioner. Endowment policies maturing in ten years, in the respective amounts of $25,000 and $50,000, were issued by the insurance company upon the lives of two officers of the petitioner. Such policies were payable to the petitioner and were assigned by it to the insurance company as security. On July 13,1920, the petitioner paid $4,156.25 as premiums upon said policies and on July 1, 1921, it paid $3,753.50 as premiums upon said policies. The loans were repaid to the insurance company in 1923 or 1924 and no further payments of premiums were thereafter made.
   OPINION.

Phillips:

The first contention of the petitioner is that the consents or waivers filed in 1924 and 1925 are invalid for the reason that they were filed after the period within which the Commissioner could make assessments for the year 1919 had expired and were without consideration.

The Revenue Act of 1918, under which the taxes for 1919 became due, provided that except in the case of false or fraudulent returns with intent to evade tax, the amount of the tax due should be determined and assessed within five years after the return was due or was made, and no suit or proceeding for the collection of any tax should be begun after the expiration of five years from such dates. The Revenue Act of 1921 contained a similar provision, adding: “ unless both the Commisioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax.” The Revenue Act of 1924 provided that such taxes should be assessed within five years with the further provision that—

Seo. 278. (c) Where both the Commissioner and the taxpayer have con-' sented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time, prior to the expiration of the period agreed upon.

There can be no question that at the time the consents were executed, the time within which the tax might have been assessed or collected had expired. Counsel for the petitioner argues: (1) Such expiration of the statute of limitations operated to extinguish the liability of the petitioner; (2) a waiver can not create a right to impose a tax already barred by the law creating the tax; and (3) there was no consideration for the waivers.

In Campbell v. Holt, 115 U. S. 620, the Supreme Court had before it substantially similar questions with respect to indebtedness between individuals. In that case, after the statute of limitations had expired on the debt in question, a new constitution was adopted by the State of Texas, setting up a different statute of limitations in civil suits. The defendants insisted that the bar of the statute, being complete and perfect, could not be taken way. In its opinion the court said:

The action is based on contract. It is for hire of the negroes used by the father, and for the money received for the land of his daughter, sold by him. The allegation is of indebtedness on this account, and the plea is that the action is barred by the statute of limitations. It is not a suit to recover possession of real or personal property, but to recover for the violation of an implied contract to pay money. The distinction is clear, and in the view we take of the case, important.
By the long and undisturbed possession of tangible property, real or personal, one may acquire a title to it, or ownership, superior in law to that of another, who may be able to prove an antecedent and, at one time,' paramount title. This superior or antecedent title has been lost by the laches of the person holding it, in failing within a reasonable time to- assert it effectively; as, by resuming the possession to which he was entitled, or asserting his right by suit in the proper court. What the primary owner has lost by his laches, the other party has gained by continued possession, without question of his right. This is the foundation of the doctrine of prescription, a doctrine which, in the English law, is mainly applied to incorporeal hereditaments, but which, in the Roman law, and the codes founded on it, is applied to property of all kinds.
Mr. Angelí, in his work on Limitations of Actions, says that the word limitation is used in reference to “ the time which is prescribed by the authority of the law (auotoritate legis, 1 Oo. Litt. 118) during which a title may be acquired to property by virtue of a simple adverse possession and enjoyment, or the time at the end of which no action at law or suit in equity can be maintained; ” and in the Roman law it is called Proescriptio.
“ Prescription, therefore (he says), is of two kinds — that is, it is either an instrument for the acquisition of property, or an instrument of an exemption only from the servitude of judicial process.” Angelí on Limitations, §§ 1, 2.
# * s}: * * * sj<
It may, therefore, very well be held that, in an action to recover real or personal property, where the question is as to the removal of the bar of the statute of limitations by a legislative act passed after the bar has become perfect, such act deprives the party of his property without due process of law. The reason is, that, by the law in existence before the repealing act, the property had become the defendant’s. Both the legal title and the real ownership had become vested in him, and to give the act the effect of transferring this title to plaintiff, would be to deprive him of his property without due process of law.
But we are of opinion that to remove the bar which the statute of limitations enables a debtor to interpose to prevent the payment of his debt stands on very different ground.
A case aptly illustrating this difference in the effect of the statute of limitations is found in Smart v. Baugh, 3 J. J. Marsh. 364, in which the opinion was delivered by Chief Justice Robertson, whose reputation as a jurist entitles his views to the highest consideration. The action was detinue for a slave, and the defendant having proved his undisturbed possession of the slave for a period of time which would bar the action, but having failed to plead the statute of limitations, the question was whether he could avail himself of the lapse of time. “The plea (said the court) is non detinet in the present tense, and under this plea anything which will show a better right in the defendant than in the plaintiff may be admitted as competent evidence. The plea puts in issue the plaintiff’s right. Five years uninterrupted adverse possession of a slave not only bars the remedy of the claimant out of possession, but vests the absolute legal right in the possessor. Therefore, proof of such possession may show that the claimant has no right to the slave and cannot recover. Consequently it would seem to result, from the reason of the case, that the adverse possession may be proved under the general issue.” Answering the objection that in assumpsit and other actions the statute to be available must be pleaded, and by analogy should be pleaded in that case, he says: “ The same reason does not apply to assumpsit, because the statute of limitations does not destroy the right in foro eonsoientioe to the benefit of assumpsit, but only bars the remedy if the defendant chooses to rely on the bar. Tvme does not pay the debt, but time may vest the right of property.” Again he says: “ This is perfectly true in detinue for a slave, because, in such a case, the lapse of time has divested the plaintiff of his right of property, and vested it in the defendant . . . But it is not so in debt, because the statute of limitations does not destroy nor pay the debt.” “This (he says) has been abundantly established by authority ... A debt barred by time is a sufficient consideration for a new assumpsit. The statute of limitations only disqualifies the plaintiff to recover a debt by suit if the defendant rely on time in his plea. It is a personal privilege, accorded by law for reasons of public expediency; and the privilege can only be asserted by plea.”
The distinction between the effect of statutes of limitation in vesting rights to real and personal property, and its operation as a defence to contracts, is well stated in Jones v. Jones, 18 Ala. 248. See also Langdoll’s Equity Pleading, §§ 118 et seq.
We are aware that there are to be found, in the opinions of courts of the States of the Union, expressions of the idea that the lapse of time required to bar the action extinguishes the right, and that this is the principle on which the statutes of limitation of actions rest.
But it will be found that many of these are in cases where the suits are for the recovery of specific real or personal property, and where the proposition was true, because the right of the plaintiff in the property was extinguished and had become vested in the defendant. In others, the Constitution of the State forbade retrospective legislation. That the proposition is sound, that, in regard to debt or assumpsit on contract, the remedy alone is gone and not the obligation, is obvious from a class of cases which have never been disputed.
1. It is uniformly conceded, that the debt is a sufficient consideration for a new promise to pay, made after the bar has become perfect.
2. It has been held, in all the English courts, that, though the right of action may be barred in the country where the defendant resides or has resided, and where the contract was made, so that the bar in that jurisdiction is complete, it is no defence, if he can be found, to a suit in another country.
We understand very well what is meant by a vested right to real estate, to personal property, or to incorporeal hereditaments. But when we get beyond this, although vested rights may exist, they are better described by some more exact term, as the phrase itself is not one found in the language of the Constitution.
We certainly do not understand that a right to defeat a just debt by the statute of limitations is a vested right, so as to be beyond legislative power in a proper case. * * * No man promises to pay money with any view to being released 'from that obligation by lapse of time. It violates no right of his, therefore, when the legislature says, time shall be no bar, though such was the law when the contract was made. The authorities we have cited, especially in this court, show that no right is destroyed when the law restores a remedy which had been lost.

There is, of course, a substantial difference between an obligation created by contract and one imposed by statute. Nevertheless, we believe this decision has an application to the case before us as laying down the principle to be that, generally, the statute of limitations in the Federal courts affects the remedy but does not discharge the obligation.

There are other decisions of the Supreme Court to the effect that where a statute creates a new liability which did not theretofore exist and also limits the time within which it can be enforced, the time limitation goes to the right created, and not to the remedy. In those cases it was held that the time of limitation was a condition to the liability created. The Harrisburg, 119 U. S. 199; Davis v. Mills, 194 U. S. 451.

Here we have a different situation. The power to impose taxes and the right to collect them is inherent in the Government. In the absence of any statute <5f limitations there is the right to collect such taxes at any time. Is a proper construction of the statute that the limitation upon assessment and collection by a suit or other proceeding is a condition to the liability; that a tax is imposed only if a suit or proceeding is begun within a certain period, and not otherwise ? Or is it more reasonable to construe the statute as imposing a tas in any event, with a limitation upon assessment and collection by a suit or a proceeding after a specified time ? It seems to us that there can be no reasonable doubt that the imposition of the tax is unconditional ; that the provision that the tax may not be assessed or collected by suit or proceeding after a specified time is one of repose, and that despite the fact that assessment may not be made or collection enforced, the tax liability has not been discharged, in the absence of statutory provision such as is contained in the Revenue Act of 1926. See In re Glover-McConnell Co., 9 Fed. (2d) 683; 5 Am. Fed. Tax Rep. 5759.

This conclusion is not in conflict with the decision of the Supreme Court in Bowers v. New York & Albany Lighterage Co., 273 U. S. 346; 6 Am. Fed. Tax Rep. 6541. There the collector, after the statute had run on collection of the tax, distrained and sold property of the respondent to pay the amount claimed. The payment was exacted under distraint at a time when no power to distrain existed. The action of the collector was illegal and the respondent was allowed to recover the amount illegally exacted. The court said in that case:

A reasonable view of tbe matter is that it was tbe intention of Congress by the clause here in question to protect taxpayers against any proceeding whatsoever for tbe collection of tax claims not made and pressed within five years.

There is nothing in that decision from which any inference can be drawn that the expiration of the statute discharged the liability or that the statute might not have been waived had the taxpayer desired so to do.

Section 1106(a) of the Revenue Act of 1926, cited by the petitioner, is not retrospective and in our opinion has no application unless the bar of the statute of limitations was in effect when the act was passed or has arisen subsequently.

We conclude that the tax liability had not been extinguished at the time petitioner executed the consents here in question, although at the time the first was executed the period within which collection could have been enforced had expired, and any collection by a suit or other proceeding would have been illegal and subject5 to a suit to recover the amount collected.

In this situation the Commissioner and the petitioner entered into a consent-in writing that the tax might be assessed and collected at a later date. The" execution of such a consent is expressly authorized by statute as a method of extending the period within which taxes may be determined, assessed and collected. Reaching the conclusion which we do with respect to the character and effect of the statutory limitation and considering that the consents in question are not waivers of the statute but were, entered into pursuant to its express terms for the purpose of extending the time within which taxes might be assessed and collected, we have no doubt that they were effective for that purpose.

It is claimed that these consents are invalid for lack of consideration. In the case of debts, the original indebtedness or contract is sufficient consideration for a new promise to pay. But here it is urged that we have no debt, no liquidated liability, no admission of any liability and no old contract, the original consideration for which can carry through as consideration for a new promise or other agreement and we are asked to find that the consent here in question is void for want of consideration.

Coincident with the benefits of citizenship is the duty to support the Government, by taxes and otherwise. See Cook v. Tait, 265 U. S. 47. The right to do business in the United States as a corporation carries with it the obligation to pay the taxes imposed. This obligation is of at least as high a character as the duty to pay a debt, and the benefits flowihg to the taxpayer, whether individual citizen or corporation, are, we believe, sufficient to support such a consent with respect to taxes as we have before us, if consideration be necessary.

There is another ground upon which the petitioner’s contention must be rejected. It is well settled law that no period of limitations will bar a claim of the Government unless the limitation is expressly authorized and the claim falls within it. The Revenue Act of 1924, with which we are principally concerned here, authorized an assessment at any time prior to the expiration of a period agreed upon in writing between the Commissioner and the taxpayer. It would seem, therefore, that the petitioner, although at one time within the statutory bar, is now unable to bring itself within its limits. That the consent to the assessment was executed without consideration seems immaterial, since the Government is not in the position of attempting to set up the agreement to establish the liability or to avoid the statute, but is in the more fortunate position of showing that the period provided by statute in which it may assert its claims has not expired.

It is argued by the petitioner that the statute had run on collection when the 1926 Act became effective, even though the waivers filed were valid. Counsel points out that the second waiver, dated July 27,1925, related only to assessment of the tax and did not extend the time for collections. Such waiver was filed during the period when the Revenue Act of 1924 was in effect. The portions of that Act which are material here provided:

Sec. 277. (a) Except as provided in section 278 and in subdivision (b) of section 274 and in subdivision (b) of section 279—
(2) The amount of income, excess-profits, and war-profits taxes imposed by the Act entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August 5, 1909, the Act entitled “An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes,” approved October 8, 1913, the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, and by any such Act as amended, shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period.
Sec. 278. (c) Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.
(d) Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax. Nothing in this Act shall be construed as preventing the beginning, without assessment, of a proceeding in court for the collection of the tax at any time before the expiration of the period within which an assessment may be made.

That Act provided a period of six years after assessment for collection. The period in which assessment might have been made not having expired when the Revenue Act of 1926 became effective, collection was not barred and the case does not fall within section 278(e) of the latter Act.

There remains for consideration the contention that the first waiver was obtained by misrepresentation, the letter sent from the respondent’s office stating that the statute would presently expire, when in fact it had already expired. Whether or not this contention is well founded seems immaterial, since a second waiver was subsequently filed and it is not argued that such waiver was obtained under any misrepresentation. We conclude, therefore, that assessment and collection of the tax is not barred.

With respect to the years 1920 and 1921, the petitioner alleges that the Commissioner committed error in refusing to allow it to deduct as ordinary and necessary expense of its business amounts paid as premiums upon insurance taken out on the lives of its officers, which insurance was assigned as security to the insurance company from which it had secured a loan. It contends that such premiums were a part of the cost to it of securing a loan and deductible under section 234(a) (1) of the Revenue Acts of 1918 and 1921 providing for the deduction of “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * Section 215 of each of these acts provides that no deduction shall be allowed for:

Premiums paid on any life insurance policy covering the life of auy officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.

Counsel for the petitioner cites those decisions of the courts which hold that doubts in the taxing statute must be resolved in favor of the petitioner. There is an equally well defined rule of construction laid down by the courts to the effect that a general provision of the law must give way before a specific provision. In our opinion the situation presented is not a case of a doubt in the construction of the taxing statute but rather a specific provision in section 215 limiting the application of section 214.

Although the policies were assigned to the creditor as security for the payment of the loan, there would seem to be no reasonable doubt that the petitioner was the beneficiary under such policies, for, whether the proceeds were paid to it or were paid to the creditor in the discharge of its indebtedness, it was the beneficiary to the extent of any payment becoming due. The insurance company was not substituted as beneficiary under the policy, there being only an assignment to it of the proceeds as collateral to the loan and we are satisfied that both in legal contemplation and in fact the petitioner was the beneficiary of such policy. The provision of the law denying the deduction of a premium paid on a policy covering the life of an officer or employee, where the corporation is the beneficiary, contains no exception permitting the deduction in any circumstance. We are of the opinion that the determination of the Commissioner is in accord with the provisions of the law.

It might be pointed out that if we are in error in this conclusion and the petitioner is entitled to deduct so much of the payment as constitutes an ordinary and necessary expense, it would appear that a substantial part of each annual payment goes to build up a surrender value and to that extent constitutes the acquisition of a capital asset. This would be especially true in case of premiums paid under an endowment policy maturing in ten years. Without any evidence before us we could not determine how much of the premium represents the purchase of a capital asset in the nature of a surrender value and how much represents insurance for the year which would not be returned, but considering that annual premiums must build up a policy reserve within ten years equal to the face value of the policy, it can be assumed that a substantial amount of each annual payment became a portion of the reserve which might have been recovered at any time by surrendering the policy.

Reviewed by the Board.

Decision %mll be entered, for the respondent.

SterNhageN concurs in the result.


source: Caselaw Access Project

author: Milliken :

license: Public Domain

text:
    Deltox Grass Rug Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6926.
    Promulgated July 29, 1927.
    1. Special assessment allowed under section 828, as petitioner acquired a mixture of tangibles and intangibles, the respective values for which can not be determined, and as development costs over a long period of time were charged to expense and the accounting method used precludes the restoration of such costs to invested capital.
    2. Where a petitioner, entitled to relief under section 328, introduces uncontroverted evidence showing the average tax of all corporations engaged in the same business, the excess-profits tax should be computed at the rate fixed by the comparatives of record.
    3. The March 1, 1913, value of patents determined for depreciation purposes and the average life of several patents determined and used as the period for depreciation purposes.

      John E. Hughes, Esq., for the petitioner.

      A. R. Mcerrs, Esq., for the respondent.
    This proceeding results from the determination of a deficiency in income and profits tax for the calendar year 1919, amounting to $11,815.42. Petitioner avers error was committed in that the Commissioner failed (1) to allow a deduction from income in 1919 of a reasonable allowance for depreciation of patents based on the March 1, 1913, value thereof and (2) to compute the excess-profits tax for the year 1919 pursuant to the provisions of section 328 of the Revenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is a Wisconsin corporation, organized in 1903, with principal office at Oshkosh, and was engaged in the manufacture and sale of grass rugs. The name of the corporation at organization was the Oshkosh Grass Matting Co. and it was changed, without reorganization, in 1914, to the Deltox Grass Rug Co.
    A tough grass, botanically known as carex stricta, and colloquially as “ wire grass,” grows in commercial quantities in the swamp lands of Wisconsin and Minnesota, and has been "found possessed of properties rendering it peculiarly suitable for manufacture into twine and weaving into rugs. The idea of making twine out of it originated with George A. Lowry, who invented a machine for the purpose, and this machine was used by a corporation known first as the Wisconsin Grass Twine Co. and later as the Crex Carpet Co. An individual, Emil H. Steiger, early realized the value in the swamp lands and he invested in them and engaged in selling wire grass therefrom to the Wisconsin Grass Twine Co. and later to the American Grass Twine Co., a separate corporation. In 1897 or 1898, Steiger became acquainted with two employees of the Wisconsin Grass Twine Co., by name, L. J. Monahan and Conrad Kieren. It was just about this time that Steiger’s business relations with the American Grass Twine Co. became unsatisfactory and he refused to sell the corporation his wire grass lands when it offered him $40 per acre for them. Being-discontented, he was in a receptive mood when Monahan and Kieren made a proposition to him to associate with them in the development of an idea they had for making a straight twine out of the wire grass, Steiger to furnish the required capital and in return to have a one-third interest. Steiger thought well of the proposition and at first a corporation was formed, known as the National Grass Matting Co. Steiger bought in his own name, a factory from the Oshkosh Trunk Co. for the use of the corporation, but the corporation did not operate as it was found impossible to raise capital for the project, and about 1898 the corporation dissolved. For a few years following, Steiger, Monahan and Kieren were engaged in developing a machine which would satisfactorily function in the manufacture of the soft straight twine which they believed would be a great improvement over the twine made by others, which had a very rough surface due to the twisting. By the year 1902, Steiger had invested about $35,000 and such progress had been made that the three associates were able to convince capitalists that the improved machine was commercially practicable. In June, 1902, a partnership known as the Oshkosh Grass Matting Co. was formed, of which Steiger, Mona-han, and Kieren were members and also three other individuals, Leander Choate, K. C. Brown and F. E. Waite. The partnership operated but there are no details available other than the fact that Marshall Field & Co. purchased their entire output. A little over a year later, by a bill of sale dated August 22, 1903, the partnership conveyed to a corporation formed for the purpose and bearing the same name (Oshkosh Grass Matting Co.), all of its property, consisting of machinery, patent rights, manufactured goods, materials, chattels, moneys, credits, choses in action, etc. Included among these assets were six completed spinning machines, one patent issued December 10, 1901, under the serial number 688,789, for a machine for making twine, and all rights under two applications filed in 1901 and 1902 for patents, one for an automatic feeding machine and the other for an improved machine for making twine. The corporation issued to the partners its entire capital stock, par value $50,000, in payment for the assets, capitalized the patent rights at $25,000, and immediately started operations, which included active prosecution of the applications before the Patent Office. A long period of experimentation, of construction and reconstruction, and of expensive patent litigation, followed. One of the applications filed was deemed by the Patent Office to interfere with the rights of other inventors and it became necessary to redesign the improved spinning machine. Monahan and Kieren were engaged for years, at the corporation’s expense, in redesigning the machine. Finally, a patent, under serial number 785,070, for automatic material-feeding devices, was issued on March 14, 1905, and another under serial number 896,655, for a machine for making twine was issued August 18,1908.
    A competitor sued the Oshkosh Grass Matting Co., alleging infringement, and on this account considerable expense was incurred, over a period of several years, before the rights of the Oshkosh Grass Matting Co. were finally sustained. Following this, Waite severed connections with the enterprise, patented a machine of his own, and, when sued by the Oshkosh Grass Matting Co. for infringement, set up in defense that its patents were invalid, thus occasioning additional expense in defense of the rights. In all, Steiger was compelled to put in a large part of his time and to travel over the country and received his salary and expenses. Attorneys’ fees were also incurred, as well as various expenses. Neither this expense nor the cost of the experiments and redesigning or improving, was capitalized. An effort subsequently was made by the vice president and treasurer to segregate the capital items which were expensed in error, but invoices and vouchers are not obtainable and labor pay rolls are not detailed, and it was found impossible to determine the respective amounts. Petitioner has never conveyed an interest in its patents or granted any license thereto. The amount of $25,000 at which the patent rights were entered on petitioner’s books, at organization, was entirely written off prior to January 1, 1919, and the petitioner included no amounts in invested capital in 1919, for patents, trade-mark, or good will. The relations and economic effects of the patents are reflected in the following facts: The automatic feeding device (patent No. 785,700) increased the speed of the machine making twine, about 25 per cent. The improved machine for making twine (patent No. 896,655) supplanted in use the earlier model of 1908.
    In the acquisition of grass lands from stockholders, real values were disregarded. Steiger sold grass lands to the petitioner, on December 24, 1903, being 602.74 acres, for $15,909.90 par value of capital stock of petitioner, these being the lands for which he had refused an offer of $40 per acre. In 1911, he also sold 433.7 acres to petitioner for $12,600. In 1911, Steiger owned a majority of the capital stock of the corporation. The grass lands were of unusual value to petitioner, for it was necessary for the manufacturers of wire grass, twine, and rugs to acquire large tracts of land suitable for growing the wire grass, in order to insure a sufficient supply of the raw material. Grass lands finally became so that their ownership was in the hands of a few corporations but this was not achieved, in full, until 1915 or 1916. The president of the Crex Carpet Co. offered $1,000,000 to Steiger, for the petitioner’s assets, in 1911, and this offer was refused.
    The petitioner’s tangible assets and earnings for five years prior to 1913, were as follows:

    For the period from 1908 to 1912, inclusive, the average of the tangible assets was $287,938.13 and the average of the earnings was $86,938.03.
    On March 1,1913, the petitioner possessed three patents, numbered 688,789, 785,070 and 896,655, respectively, and their aggregate fair market value on that date was at least $350,000. An allowance for exhaustion of these patents, at the rate of $38,500 per annum, is reasonable. On the same date, petitioner owned a valuable trade-mark consisting of the word “Deltox” in a triangle and the whole surrounded by a circle, and had built up an established trade and good will.
    In the year 1919, there were, in the United States, three manufacturers, other than the petitioner, engaged in the manufacture and sale of rugs made from aarex striata, the same being the Crex Carpet Co., New York, N. Y.; Waite Grass Carpet Co., Oshkosh, Wis.; and Willow Grass Rug Co., Green Bay, Wis. A fourth, the Wisconsin Grass Rug & Carpet Co., Fond du Lac, Wis., was organized but not yet actively in business. These were the only manufacturers engaged in the same business as that in which petitioner was engaged, and their excess-profits taxes for the taxable year 1919 were determined under section 301 of the Revenue Act of 1918, in the amounts, and based on the data as follows:

      For tbe year 1919, the comparative statistics of the petitioner were as follows: Gross sales, $1,282,361.27; income, $315,764.37 less depreciation of patents, $38,500; net income, $277,264.37; invested capital determined by respondent, $829,627.77; patents and good will, nil; excess-profits tax determined by respondent, $79,246.60; rate of tax, 25.09 per cent.
    Petitioner is entitled to have its excess-profits tax for 1919 determined under section 328 of tire Revenue Act of 1918, by a computation based upon the three comparatives shown above, namely, Crex Carpet Co., Waite Grass Carpet Co., and Willow Grass Rug Co.
    The petitioner filed a waiver dated January 14, 1925, of the time for making any assessment of the amount of income, excess profits, and war profits taxes for the year 1919, until December 31, 1925.
   OPINION.

Milliken :

Respondent avers that the patents owned by petitioner on March 1, 1913, had no fair market value on that date, but has introduced no evidence in support of such averment. A consideration of the evidence convinces us that the patents were of great value. On March 1, 1913, the patents owned by petitioner had been sustained by the courts. See Oshkosh Grass Matting Co. v. Waite Grass Carpet Co., 194 Fed. 885. By that date the grass-rug industry had passed the experimental stage and had taken its place as one of the great commercial industries. Petitioner, with its patents, was able to enter profitably the field of the manufacture and sale of its product. The utility of the patents had been tested and proven. The uncontroverted testimony establishes the fact that one of the patents increased the speed and output over 25 per cent, for in nine months’ time petitioner manufactured what it had theretofore taken twelve months to manufacture, with the resultant savings. An engineer and attorney of qualified experience and ability, placed a minimum value for the several patents on March 1, 1913, of $350,000. Testing the aggregate value of all intangibles as of March 1, 1913, based upon the averages of prior earnings and tangibles and the use of conservative percentage factors, a value is shown largely in excess of the value claimed for the patents. The patents fell short of resulting in a monopoly of the grass-rug industry by petitioner.

Respondent sought to develop the difficulties involved in determining the amount of allowable deduction based on the value of a group of patents where it was impossible to determine the separate values and where their remaining useful periods varied. We have previously held, in such a situation, the deduction is reasonable, if determined on the average life of the several patents. Union Metal Manufacturing Co., 4 B. T. A. 287. Respondent also stressed the fact that petitioner had not claimed depreciation for the patents in original returns filed for 1919. We have passed on this question adversely to his contention. See Appeal of Union Metal Manufacturing Co., supra. From the record, we find the group had a March 1, 1913, value of $350,000, and had an average remaining useful life on March 1, 1913, of 9 years, 1 month, yielding an annual deduction at a rate of 11 per cent and amounting to $38,500 per annum.

The second issue concerns the determination of invested capital and the question whether special assessment under sections 327 and 328 of the Revenue Act of 1918 applies. At organization, petitioner acquired a mixture of tangibles and intangibles under circumstances indicating a value attaching to the latter, although it is not possible l.o satisfactorily determine the amount of value. In the years following organization, lands were deeded to the petitioner for capital stock, by its principal stockholder, without considering the true value of the lands. As a result of a long and difficult period of development costs properly items of capital were charged to expense, by a method of account which now precludes their restoration as capital expenditures. In previous decisions, we have held that the petitioner has a light to a restoration as capital expenditures if the amount thereof is ascertainable. Appeals of Goodell-Pratt Co., 3 B. T. A. 30, and American Seating Co., 4 B. T. A. 649. It follows that the impossibility of determining the true invested capital of the petitioner brings squarely into application provision (a) of section 327 of the Revenue Act of 1918.

In the deficiency letter, the respondent includes the following paragraph:

You are advised that the Bureau holds your application for assessment under the provisions of Sec. 328 of the Revenue Act of 1018, was properly denied on .the ground that a comparison with the concerns as nearly as may be representative in the line of business engaged in by your corporation, does not disclose the exceptional hardship referred to in Sec. 327 of the Revenue Act of 1918.

Petitioner has been able through the industry of its counsel to cause to be of record in this proceeding the data detailed in the findings of fact relative to all of the concerns in the United States engaged in the manufacture and sale of wire grass rugs. At the time of taking of the depositions recording the above facts, and at the hearing of this cause, the respondent was requested to produce data in contradiction to or in support of the evidence adduced, and he failed to respond. From the evidence of record, we are of the opinion that petitioner is entitled to have its tax computed pursuant to the provisions of section 328 of the Revenue Act of 1918.- We are further of the opinion that the comparatives of record, namely, Crex Carpet Co., Waite Grass Carpet Co., and Willow Grass Rug Co., are representative, and should be used in computing the petitioner’s tax under section 328.

Reviewed by the Board.

Judgment will Toe entered on 15 days'1 notice, under Bule 50.


author: Phillips :

text:
    First National Bank of Fort Dodge, Iowa, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8021.
    Promulgated July 29, 1927.

      Harry Friedman, Esq., and W. D. Jamieson, Esq., for the petitioner.

      L. G. Mitchell, Esq., for the respondent.
   Phillips :

In this proceeding the petitioner seeks a redetermination of the income and profits-tax liability for the year 1920, for which the Commissioner has determined a deficiency of $4,400.97. The petitioner alleges error on the part of the Commissioner in determining the gain derived from the sale of certain real estate.

FINDINGS OF FACT.

The petitioner is an Iowa corporation with its principal offices at Fort Dodge, and is engaged in general banking business.

In 1920 it owned a bank building on the corner of Sixth Street and Central Avenue in Fort Dodge which it had acquired in 1908 and which, together with the banking fixtures in the building, it sold in 1920 for $30,000. The building was two stories in height, 26% feet wide and 96 feet deep, and was built about 1886.

The value at March 1, 1913, of the land on which the building was located was $15,000 and the value of the building exclusive of the land but inclusive of fixtures was $15,000. The reasonably expected useful life of the building was 30 years from March 1, 1913.

The Commissioner determined the gain based upon the original cost, as follows:

Sale price-$30,000.00
Depreciation_ 6, 890.21
36, 890.21
$23, 871.00 Cost, building and real estate.
3, 561. 93 Furniture and fixtures_
600.00 Commission paid_
- 28, 032.93
Gain- 8, 85.7.28

The petitioner realized a taxable gain of $2,816.67 upon the sale of said building, computed as follows:

Sale price_$30, 000.00
Less commission_ (¡00.00
Net sale price_ 29, 400. 00
Marcia 1, 1913, value_$30, 000. 00
Less depreciation March 1, 1913, to January 1, 1920_ 3,430.07
- 20,583.33
Gain_ 2, 816. 07

Reviewed by the Board.

Decision will be entered on 16 days’ notice, under Rule 60.


author: Makquette :

text:
    Edwin H. Brady, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7434.
    Promulgated July 29, 1927.
    Depreciation of oil-well equipment, on the unit-of-production basis, allowed on the facts herein.

      Charles H. Garnett, Esq., for the petitioner.

      Bruce A. Low, Esq., and Robert A. Littleton, Esq., for the respondent.
    This proceeding is for the redetermination of deficiencies in income and profits taxes for the years 1919 and 1920 in the amounts of $630.86 and $2,128.44, respectively. The only issue raised is as to the amount the petitioner is entitled to deduct in each year as an allowance for the exhaustion, wear and tear of certain oil-lease equipment.
    findings of fact.
    The petitioner is an individual residing at Tulsa, Okla. He is and has been for many years, engaged in the oil-producing business and has owned and operated producing leases in the Kansas and Oklahoma oil fields. In the spring of the year 1919 the petitioner acquired an oil lease known as the Bybee Lease, located in Chautauqua County, Kansas. He developed the lease and in the year 1919 expended $18,425.66 for equipment used thereon, and in the year 1920 he purchased and installed additional equipment at a cost of $4,072.70. The equipment so purchased and installed consisted of casings and tubing, which were under ground, and pull locks, pumping jacks, lead lines, tanks and a power plant, which were used above ground. The equipment above ground may be more conveniently described as a number of pumps operated by a single power plant, and tanks to handle the oil when pumped. The record does not disclose what part of the total expenditure of $22,468.36 was for underground equipment and what part was for aboveground equipment.
    The underground equipment has a useful life of at least ten years. Its salvage value is as great at the end of ten years as it is at the end of one month after installation. The salvage value of the underground equipment involved herein is at least $2,500.
    Repairs to and replacements of the aboveground equipment involved herein have been made from time to time and the cost thereof charged to expense. With such repairs and replacements the useful life of the above ground plant will be at least ten years.
    At the beginning of the year 1919 the oil lease reserves on the Bybee Lease were 34,298 barrels. Production was 4,119 barrels in the year 1919 and 10,610 barrels in the year 1920. The respondent determined that the equipment on the Bybee Lease has a useful life of ten years and he computed the petitioner’s allowance for exhaustion, wear and tear thereof at the rate of 10 per cent for each of the years 1919 and 1920. The petitioner claims an allowance for the exhaustion, wear and tear of said equipment computed on the unit-of-production basis, in the amount of $2,188.55 for the year 1919, and $6,376.40 for the year 1920.
   OPINION.

Makquette :

Under section 214(a) of the Revenue Act of 1918, the petitioner is entitled to deduct from gross income for each of the years 1919 and 1920, a “reasonable allowance” for the exhaustion, wear and tear of the oil-lease equipment described in the findings of fact. The petitioner and the respondent are in accord as to the cost of the equipment but they do not agree as to the method by which the amounts for the exhaustion, wear and tear thereof should be computed. The respondent has determined that the equipment has a useful life of ten years and that in each year of such useful life the petitioner should recover an aliquot part of the cost. The petitioner, however, contends that the allowance should be computed on the unit-of-production basis, that is, the allowance in each year should bear the same ratio to the cost of the equipment that the oil produced in that year bears to the total content of the wells at the time the equipment was installed, and that the “reasonable allowance ” provided by the statute should be computed in that way.

We have carefully considered the evidence presented herein and we are of the opinion that the contention of the petitioner is well founded. It is clear that the physical life of the equipment, as nearly as can be ascertained, is ten years, and the producing life of the lease will probably be the same period. The requirement of the statute is that a “ reasonable allowance ” shall be made for the exhaustion, wear and tear of property used in a trade or business and we think that in this case the unit method of computing the allowance will more nearly conform to that requirement. The life of the property to be depreciated and the productive life of the lease are of the same length and by computing depreciation on the unit-of-production basis the value of the equipment will be recovered as and at the same rate its useful value is exhausted.

Reviewed by the Board.

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


author: Littleton :

text:
    Abraham B. Johnson, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. T. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henry Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Henry Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. F. A. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Wilson Bros. & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8455-8460.
    Promulgated July 29, 1927.
    1. It does not necessarily follow from a mere showing that a corporation purports to be one of the members of a partnership that there was no legal partnership.
    2. A restoration to invested capital of assets previously charged to expense can not be made in the absence of satisfactory evidence as to the cost of these assets.
    3. A claimed loss on abandonment of depreciable assets denied in the absence of evidence as to the terms of the lease on the premises on which the assets were constructed from which the Board might determine the allowable depreciation prior to abandonment.
    4. A refund in 1917 of tentative payments made in 1916 on account of workmen’s liability insurance in the State of Washington, held, to serve as a reduction of operating costs for 1916 and consequently to increase surplus as at January 1, 1917.
    5. Kate of 7 per cent used by the Commissioner for the purpose of the excess-profits credit under section 205 (a), Revenue Act of 1917, approved in the absence of a showing that the Commissioner was in error.

      6. Interests in a vessel, acquired by gift, are subject to depreciation on the basis of their fair market value at the date of acquisition. Additional depreciation based upon a claimed valuation on such dates denied for lack of satisfactory proof as to value.
    7. The fact that a married man, who is a resident of California, owns an interest in a partnership in Washington, a community property State, from which income is derived, does not necessarily prove that the income from the Washington property will be community income when received.
    8. Sale found to have taken place in 1917.

      W. W. Spalding, Esq., for the petitioners.

      Bryce Toole, Esq., for the respondent.
    These proceedings, which were consolidated for hearing and decision, involve the following proposed deficiencies: F. A. Wilson, 1918, $2,296.60, and 1919, $724.55; Henry Wilson, 1918, $6,591.52, and 1919, $2,596.80; Mrs. Henry Wilson, 1918, $576.48, and 1919, $386.59; W. T. Wilson, 1918, $2,271.46, and 1919, $692.90; and Abraham B. Johnson, 1918, $909.02, and 1919, $274.14. The petition of Wilson Bros. & Co. involves action by the Commissioner for 1917, wherein an assessment of $37,049.99 was made in 1923 and claim in abatement was filed by the petitioner. The Commissioner notified the petitioner on September 4, 1925, of a proposal to allow the claim to the extent of $1,659.69, on account of which notice this appeal was duly taken. Similarly, an assessment was made against Abraham B. Johnson for 1917 of $1,476.64, on account of which an abatement claim was filed in 1923. The Commissioner notified the petitioner on September 4, 1925, of a proposal to allow the claim to the extent of $434.34, and the petitioner duly appealed from such proposal. In addition to the foregoing, overassessments not arising from the denial of abatement claims were shown for Henry Wilson and Mrs. Henry Wilson for 1917 in the respective amounts of $4,749.81 and $48, but jurisdiction will be taken of these years insofar as may be necessary for a determination of deficiencies for other years.
    The evidence submitted consists of depositions taken in San Francisco, Calif.
    FINDINGS OF FACT.
    Wilson Bros. & Co. has been operating as a partnership since about 1890 with its office in San Francisco, Calif.
    In 1917, this firm was composed of Charles B. Wilson Estate, Inc., A. B. Johnson, and Henry Wilson, and was engaged in the general lumber, manufacturing and shipping business. The lumbering and sawmill operations were carried on in the State of Washington, where the firm owned property consisting of timberlands, farm, and logged-off lands, wharves, and logging railroads.. The firm also operated a lumber business in San Francisco, Calif., which included a retail lumber yard. In addition, the firm owned and operated steamships.
    The retail lumber yard was operated on premises leased from the Southern Pacific Co., on which Wilson Bros. & Co. erected, maintained and used in its business the following building and equipment:
    1. An office building, containing 1200 square feet of floor space, rebuilt in about the year 1912.
    2. Wharf 40 by 100 feet, containing 4,000 square feet, rebuilt in about the year 1912.
    3. Foundations for piling lumber consisting of approximately 12,000 lineal feet, owned on March 1, 1913.
    4. Plank-gangways consisting of approximately 90,000 square feet, owned on March 1, 1913.
    5. Lumber sheds 50 by 100 feet, rebuilt in 1912.
    6. Two hundred and six lumber buggies or trucks, owned on March 1, 1913.
    The foregoing items did not appear on the books of Wilson Bros. & Co. as assets, since the cost had been charged to expense at the time of acquisition or construction, or charged off prior to the end of the year in which acquired or constructed. The books of account of the firm are incomplete for all years prior to 1917.
    The terms of the lease for the premises on which the retail lumber yard was located are not shown, other than that it provided that the tenant had the right to remove the buildings and appurtenances at the expiration of the lease. In October, 1917, Wilson Bros. & Co. gave up the aforementioned lease and abandoned the property located on the premises with the exception of lumber trucks, which were sold for $1,110 and the amount received therefor included in its sales for that year. The cost of removing the buildings and other improvements would have been greater than the value of the salvage which would have been realized therefrom.
    During the years prior to January 1, 1917, Wilson Bros. & Co. took depreciation on its assets which it considered sufficient to offset sustained depreciation. The Commissioner, in his determination of the invested capital of Wilson Bros. & Co. for 1917, reduced invested capital as at January 1, 1917, by $34,831.75, on the ground that depreciation taken on the books prior to January 1,1917, was insufficient to the foregoing extent.
    On September 28, 1916, Wilson Bros. & Co. executed the following option to sell the S. S. Columbia to the Hammond Lumber Co.:
    We hereby confer upon you an option to purchase the American Steamship “ Columbia” for the sum of $425,000.00, less 2%% commission. The said vessel is now under time charter to W. R. Grace & Company under charter party in writing dated December 21, 1915, upon which charter she entered February 18, 1916, the term of charter being for a period of about one year, ten per cent more or less. This option shall exist for the period of thirty days from the date hereof at the end of which period, if you shall not have exercised same it shall terminate without action on our or your part. Upon the exercise by you of this option you shall pay ten per cent of the said purchase price, the balance to be paid upon delivery of the vessel, which shall be either at San Francisco or Puget Sound, at the option of purchasers. Purchasers shall have the privilege either of purchasing and taking delivery of said vessel before the expiration of said charter party, in which event they shall assume the performance of the completion of said charter party and the undersigned shall be entitled to charter hire until complete purchase price is paid and from thence charter shall inure to the benefit of purchasers, or at the option of purchasers delivery of said vessel may be had upon completion of said charter party, in which event operation under the said charter party shall be for the account of the undersigned.
    You shall have the privilege of assigning this option, provided in the event you elect to receive delivery of said vessel prior to the expiration of said charter party you remain ^ responsible for the performance of said charter party.
    The above vessel is now classed in the American Bureau of Shipping, but in the event purchasers should insist upon highest classification for ocean going vessels in the Bureau Veritas, we will furnish same at our expense — -provided that the undersigned will not contribute more than five hundred dollars to the fees for such classification.
    On October 20, 1916, the option was exercised by the Hammond Lumber Co. in the manner set out in the following letter:

      Referring to option agreement, dated September 28, 1916, between us, we hereby exercise the option therein contained and agree to purchase the American Steamship “ Columbia ” for the sum of $425,000.00, less 2%%, and in accordance with the terms of said option we hereby tender to you our cheek in the sum of $42,500.00, constituting 10% of the gross purchase price, the balance of the purchase price, to-wit: the sum of $371,875.00 net, to be payable by us to you upon delivery of said vessel to us and the passing of the customary and sufficient documents of title with warranty as to the whole of said steamer, together with certificate of highest classification for ocean going vessels of Bureau Veritas, we paying the excess fees, if any, over $500.00 which may be incurred for such classification.
    In the event of the loss or non-delivery of said steamer, then you shall repay to us the said sum of $42,500.00, said steamer to be solely at your risk, but without liability on your part therefor until said steamer is delivered to us.
    We hereby elect to take delivery of said steamer as provided in said option agreement, upon expiration of the charter party referred to therein, allowing you a reasonable time within which to make such repairs as may be necessary, if any, to put said steamer in a sound and seaworthy condition and to effect said Bureau Veritas classification.
    Wilson Bros. & Co. approved and accepted the letter of October 20, 1916. The $42,500 referred to was paid as indicated and the remainder when the ship was delivered in 1917. During the period in controversy as to the sale, A. B. Johnson owned 7/100 of the steamer in question and Henry Wilson, 28/100, and Wilson Bros. & Co. were acting as operating agents.

      During 1916, Wilson Bros. & Co. paid premiums to the State of Washington on account of workmen’s compensation insurance, which the laws of this State require certain employers to carry. At the beginning of 1916, the State fixed an arbitrary rate to be paid for the year and payments were accordingly made by Wilson Bros. & Co. When full information was in the hands of the State, after the close of 1916, it was found that Wilson Bros. & Go. had paid $1,009.23 in excess of the amount which it should have paid for 1916 and this amount was refunded by the State in 1917.
    Henry Wilson, one of the petitioners herein, made a gift of certain interests in ships to each of his sons, F. A. Wilson and W. T. Wilson, petitioners in these proceedings, as follows: In 1916, 2/64 interest in the S. S. 6'vea; in March, 1917, 5/100 interest in the S. S. Idaho; and in January, 1918, a 5/32 interest in the S. S. Oregon. In March 1917, Mrs. Henry Wilson received by gift fr'om her husband, Henry Wilson, a 20/100 interest in the S. S. Idaho.

    On January 2, 1918, F. A. Wilson and W. T. Wilson, were each given a 5/32 interest in the firm of Wilson Bros. & Co., by their father, Henry Wilson, who was at this time one of the members of the firm. At this time Wilson Bros. & Co. owned timber and timber lands in Lewis and Harbor Counties, Washington. The firm also owned sawmills and equipment at Aberdeen, Wash.
    During 1917, 1918, and 1919, Henry Wilson and A. B. Johnson were residents of California, and during these years each was married and living with his wife in California.
   OPINION.

Littleton :

We will consider first the issues raised directly by the petition of Wilson Bros. & Co., a partnership, as follows:

1. Whether Wilson Bros. & Oo. is to be taxed as a partnership in 1917.
2. The failure of the Commissioner to include in invested capital for 1917 certain assets which did not appear on the books of the company.
3. The failure of the Commissioner to allow a loss in 1917 on account of the abandonment of certain assets.
4. The reduction of invested capital in 1917 by what the Commissioner considered inadequate depreciation in prior years.
5. The inclusion as income for 1917, of the sum of $1,009.23, representing a refund to Wilson Bros. & Co. in 1917 of an excessive premium paid by the firm in 1916 on account of workmen’s liability insurance for 1916.
6. The use of 7 per cent instead of 9 per cent in computing the deduction allowable under section 205 (a), Revenue Act of 1917.

The first issue has to do with the status of Wilson Bros. & Co. as a taxable entity in 1917. The firm filed a partnership return for 1917 which was not questioned by the Commissioner as representing its true status. In the petition it is alleged that the firm is a partnership which allegation is admitted by the Commissioner. However, on the basis of evidence presented that the firm during 1917 had a corporation as one of its members, the petitioner contends that there could not have been a partnership for 1917, but only a joint venture, on*the ground that a corporation can not be a member of a partnership.

No evidence was introduced as to the charter of the corporation or the State under which it was incorporated. In effect, therefore, what the petitioner asks is that the Board hold that wherever a corporation purports to be a member of a partnership, no partnership in fact or in law exists and, consequently, a deficiency asserted against such an organization as a partnership should be disallowed.

An examination of the authorities shows that while as a general proposition a corporation may not become a member of a partnership, this rule is subject to important exceptions. Cook on Corporations, vol. 3, p. 2667, makes this statement:

A Corporation Cannot Be a Partner in a Partnership. This is an old principle of law, but it is subject to exceptions. It is held to be an ultra vires act because the stockholders are entitled to have their directors conduct the business without sharing that power with a partner, but if a corporation may organize for any lawful purpose, its articles of incorporation may authorize it to become a partner.

To a similar effect we find the following rule stated in 14 C. J. 291:

The power of a corporation to enter into a partnership depends upon its charter or organic law, there being nothing inherently illegal in such an act, unless by statute it is provided that every corporation shall manage its own affairs separately and exclusively.

In an opinion of the Circuit Court of Appeals, in the case Fechteler v. Palm Bros. & Co., 133 Fed. 462, the court made this statement:

Corporations, unless expressly authorized, have no power to enter into partnership either with each other or with individuals. (Italics ours.)

In Mervyn Investment Co. v. Biber, 184 Cal. 637; 194 Pac. 1037, decided by the Supreme Court of California on January 4, 1921, the court in disposing of a case involving a corporation as a member of a partnership said:

The corporation did through its board of directors assume to exercise this power and for a time operated the business conjointly with Biber. The burden should rest upon it under such circumstances to show that its charter did not permit such a contract. Belch v. Big Store Co., 46 Wash. 1, 89 Pac. 174. It has not done this, so far as this record discloses. Even where a corporation is without authority under its charter to form a partnership with another, it may be held liable as a partner to prevent injustice.

The foregoing authorities are considered sufficient by the Board to justify the conclusion that there is no absolute rule that a partnership of which a corporation is a member is not a partnership and should not be taxed as such. In the absence of more evidence as to the corporation here in question, the action of the Commissioner in treating Wilson Bros. & Co. as a partnership for tax purposes in 1917 will, therefore, not be disturbed.

The only evidence submitted with respect to the claim of the petitioner for an addition to invested capital on account of capital assets which had been charged to expense, was the testimony of one of the partners. He stated that the cost of the assets to be restored was as follows:

Office Building — cost 1906- $3, 000
Moved and rebuilt in 1912 at cost of_ 1, 000
Wharf — cost, 1909_ 6,000
Pile Foundations — cost, 1906_ 2, 880
“ “ “ 1912_ 2,880
Gangways — cost, 1906-1911_ 10, 880
“ “ 1912_ 10,880
Lumber sbeds rebuilt in 1912 at cost of_ 1, 600
Lumber trucks, 106, built 1906-1912, at cost of $35 each_ 3, 710
100 built in 1912 at $35 each_ 3, 500

After computing depreciation on the foregoing amounts at 5 per cent from the date of acquisition, it is contended that the balance should be restored to invested capital for 1917.

By means of various questions, many of which were leading, the partner stated that he knew of his own knowledge that the foregoing costs were the true costs at date of acquisition. The Board is not persuaded to accept such a statement at its full value when the character and the amount of the costs are taken into consideration — such as an office building, $3,000, and a wharf, $6,000, etc. — and the further fact that this witness states that he did not begin work for the partnership until about 1906, and then only as a laborer, which would not likely place him in a position to know of his own knowledge of the costs to which he testified.

Upon a consideration of all the evidence, the Board is not convinced that the costs of these assets were as claimed. The claim that these costs exhausted should be restored to invested capital is therefore denied.

The next question is whether the partnership sustained a loss when, in October, 1917, it abandoned the property referred to under the previous issue. The property in question was constructed on premises leased from the Southern Pacific Co. The lease was not introduced in evidence, nor was anything shown as to its terms other than that the lessee, Wilson Bros. & Co., had the right to remove the assets at the expiration of the lease.

On this state of facts the petitioner asks us to assume that the lease was for so long a time as the partnership might desire to use the property, and that, therefore, in determining the loss, sustained depreciation based on the physical life of the assets should be computed. The Board has said on many occasions that the burden is on the petitioner under such circumstances to show what the true facts are, and that it can not assume facts for the purpose of a conclusion. In view of our decision of the preceding issue and since there is no satisfactory evidence as to the March 1, 1913, value of the assets, we are not warranted in allowing petitioners’ claim for loss.

The fourth issue arises because of a reduction by the Commissioner of petitioner’s invested capital at January 1, 1917, on account of an alleged insufficient depreciation taken in prior years. In addition to showing that depreciation had been consistently taken on its assets, the petitioner showed that its practice was to charge many items of a capital nature to expense, which would tend to show an understatement rather than an overstatement of its true surplus account. No evidence was introduced by the Commissioner tending to show that the surplus as reflected by petitioner’s books is not correct.

The question here presented has been before the Board on various occasions wherein the principle was enunciated that the surplus as reflected by a taxpayer’s books will not be disturbed in the absence of an affirmative showing that the books are not correct. Appeal of Cleveland Home Brewing Co., 1 B. T. A. 87; Appeal of the Russell Milling Co., 1 B. T. A. 194; Appeal of Rub-No-More Co., 1 B. T. A. 228; and Appeal of Western Star Milling Co., 5 B. T. A. 109. Consistent with the foregoing, we must hold that the Commissioner was in error in reducing petitioner’s invested capital in the amount of $34,831.85 at January 1, 1917.

In the fifth issue the petitioner contends that the Commissioner was in error in considering the refund received in 1917 on account of workmen’s liability insurance paid in 1916 to the State of Washington as income for 1917. The type of insurance here in question is required by the State of Washington to be carried by certain classes of employers, and at the beginning of each year a premium rate is fixed as a basis for payments during the year. After the close of the year the State determines whether refunds are to be made or additional payments required. In this case it was found that a refund was due the petitioner, which was paid in 1917. Is this income to the petitioner in 1917, or should it be considered as applicable to the year 1916, and, therefore, serve to increase petitioner’s surplus at January 1, 1917?

We are of the opinion that at December 31, 1916, all factors necessary to a determination of the amount of premiums payable by this petitioner for 1917 had occurred and that the determination of the exact amount to be paid was a mere matter of computation based upon factors then known. All events had happened which would serve to fix the petitioner’s liability at this date. The fact that the State of Washington did not fix the exact amount of liability on this account until after December 31, 1916, does not alter tlm fact that the liability for premiums for 1916 was- a definite liability for that year on the basis of known facts existing at the end of the year.

The Workmen’s Compensation Act, Chapter VII, of the General Statutes of Washington, under which these premiums are paid, contemplates that the amount j>aid during the year shall be tentative only and shall be subject to adjustment after all facts are available at the close of the year.

On the basis of the foregoing, the Board is of the opinion that the refund received in 1917 on account of excess premiums paid in 1916 is not taxable income for 1917, but should serve to reduce operating costs for 1916, and therefore, operate to increase petitioner’s invested capital as at January 1, 1917. Cf. Appeal of Producers Fuel Co., 1 B. T. A. 202.

The last issue raised directly by the petition of the partnership is that the Commissioner erroneously used 7 per cent as a basis of determining the excess-profits credit to which the petitioner is entitled under the provisions of section 205 (a) of the Revenue Act of 1917. No evidence was introduced by the petitioner to show wherein the Commissioner was in error and, consequently, his action in this respect will not be disturbed.

We now pass to a consideration of the questions involved in the petitions of F. A. Wilson and W. T. Wilson with respect to depreciation on their several interests in various vessels. During 1916, each of the aforementioned petitioners acquired by gift a 2/64 interest in the S. S. Svea; in March, 1917, a 5/100 interest in the S. S. Idaho; and in January, 1918, a 5/32 interest in the S. S. Oregon. They ask that depreciation be computed on these interests in the vessels on the basis of their cash value at the date of the respective gifts. The basis of the denial of this depreciation is not set forth in the answer other than that it does not conform to the statute, but the deficiency letter sets forth the following reason:

For the purpose ol depreciation, it is held that an individual interest in an integral unit is not susceptible of divisibilty thereby creating undivided units of different value.

We find nothing in the statute which would warrant a denial of depreciation on the basis of acquisition cost merely because the asset acquired was a part of an integral unit. Interests in steamships as well as interests in other depreciable assets are bought and sold. Under the revenue statutes a taxpayer is entitled to a reasonable allowance for exhaustion, wear and tear of property used m its trade or business, and when the property acquired is a fractional part of a vessel and this is used in the trade or business, which is not questioned in this case, the only reasonable manner for a return of his cost to him is on the basis of a spread of the cost of the interest over the remaining life of the vessel. This provides a means to recover capital outlay before taxing income, which it has been held is the purpose of such an allowance. Appeal of Richmond Dairy Lunch, 1 B. T. A. 876; Appeal of William Harris, Jr., 2 B. T. A. 156; and Appeal of Gladding Dry Goods Co., 2 B. T. A. 336; United States v. Ludey, 274 U. S. 295.

The Revenue Act of 1918 and prior acts are silent as to the basis for determining depreciation on property acquired by gift. We are of the opinion, however, that where property is acquired by gift subsequent to March 1,1913, and prior to January 1, 1921, the capital to be recovered is the fair market value of the property at the date of the gift. Appeal of Harry W. Bockhoff, 3 B. T. A. 560. This is also in accord with rulings of the Board with respect to the basis of determining gain or loss on the sale of property acquired by gift. Appeal of Gilbert Butler, 4 B. T. A. 756; Harry F. Robertson v. Commissioner, 5 B. T. A. 748; Appeal of The Hub, Inc., 3 B. T. A. 1259.

Our next consideration is the fair market value of these ships at the date the petitioners acquired their interests. The greater part of the evidence as to these values is contained in the following statement from the deposition of F. A. Wilson, one of the petitioners who received interests in the property :

The value of the Svea was $250,000, which, was set by the revenue agent at the time of the check. The value of the Idaho was $395,574.46, and the value of the Orejón was $388,888.07. I arrived at these values as follows: The Steamer Idaho is 1834 dead weight tons. The value, at the time of gift, was $215.69 a dead weight ton. The steamer Oregon is 1803 dead weight tons. Her value is $215.69 per dead weight ton. The dead weight tonnage of these boats were set by the United States Shipping Board. I arrived at the figure of $215.69 per dead weight ton in the following manner: the steamer Robert O. Sudden was sold to the French Government, for the firm of Sudden & Christen-son, January 2, 1918, for $550,000. In the latter part of 1917 the steamers Lucinda Hanify, Edna Christenson and Ryder Hanify, were sold to the French Government for $550,000 a piece. Each of these steamers is 2550 dead weight tons, which makes the sale price of $215.69 per dead weight ton. These vessels were similar to the Idaho and Oregon and were built for the Pacific Coast lumber trade the same as the Idaho and Oregon. Therefore, they were similar vessels, the value per ton would be the samé in each case.

Certainly, the Board can not say that the value placed on the S. S. S-vea by a revenue agent is the correct value since his report is not in evidence and we know nothing as to the basis for his conclusion. The evidence is also unsatisfactory in the case of the other two vessels, as insufficient information is furnished to show that the vessels sold were comparable in value to the ones here in question. For example, the date of construction of the vessels sold is not submitted, which date would be important in comparing one vessel with another, even though of the same type. Particularly, is this true when it is considered that these vessels are of a relatively short life as evidenced by a depreciation rate of 11-1/9 per cent which was fixed by the revenue agent and accepted by the petitioners, though later changed by the Commissioner to 7 per cent. The further fact exists that the Idaho was completed at a cost of approximately $200,000 a few weeks prior to the date of the gift here in question, and a valuation is now being asked of $395,574.46, or an increase of almost 100 per cent. While there was certainly an increase in the value of vessels during the early part of 1917, the Board is of the opinion that more conclusive evidence of value should be furnished than that given in this instance by a person who is to benefit by the valuation contended for. The evidence should be such as will enable the Board to form its own opinion of value.

On a consideration of the entire record the Board can not accept the conclusion of the witness as establishing the values of the respective steamships at the dates in question and, therefore, the contention of the petitioners for additional depreciation based upon the claimed value of the ships at the dates of the respective gifts is denied.

This holding likewise disposes of a claim made in the case of Mrs. Henry Wilson, who similarly acquired an interest in the S. S. Idaho at, or about, the same time that the interests were acquired in this vessel by F. A. Wilson and W. T. Wilson.

The next point advanced by the petitioners is that when, on January 2, 1918, Henry Wilson gave to each of his sons, F. A. Wilson and W. T. Wilson, a- 5/32 interest in the partnership of Wilson Bros. & Co., of which he was a partner, there came into being a new partnership by agreement of the parties and by operation of law and that, consequently, in determining the distributive shares of each of the partners in the income of the partnership for 1918 and 1919, there should be a revaluation of the partnership assets at January 2,1918, for depletion and depreciation purposes.

Whether there was a new partnership created on J anuary 2, 1918, or whether for some other reason there should be a revaluation on this date, we consider the evidence insufficient to arrive at a valuation on this date for depletion or depreciation purposes, either .for the individuals who acquired their interests in the partnership on this date or for the firm as it existed after this date.

Wilson Bros. & Co. had, on January 2,1918, certain sawmill equipment, and timberlands which were referred to in the depositions as the Grays Harbor timber and the Lewis County timber.

As to the sawmill equipment, F. A. Wilson testified that on J anuary 1,1917, the depreciated cost of these assets was $166,000, and that, in 1917, after consultation with the General Appraisal Co. of Seattle, it was determined that the actual value of these assets was $377,000, which the witness stated he considered of his knowledge to be the actual value on January 2, 1918, and is the value for which the petitioners contend. The appraisal was excluded at the hearing as being incompetent and, therefore, we have only the conclusion of this witness, unsupported by other facts. We can not accept this as sufficient proof of value. See James A. Bradley, 4 B. T. A. 1179.

The evidence is likewise unsatisfactory as to the timber tracts. F. A. Wilson testified that the value of the Grays Harbor timber had a value on January 2,1918, of $10 per thousand which he arrived at from the average price at which logs were selling on this date less the cost of logging. ÜSTo evidence is furnished as to the value of the tract as a w'hole, the total quantity of timber which a cruise did show or would have shown on January 2, 1918, and other similar factors which would be helpful in determining whether the depletion rate as allowed by the Commissioner is reasonable.

Likewise, as to the Lewis County timber, we are told merely that an adjoining tract of timber was sold for $4 per thousand and asked to find that therefore a depletion rate of $4 per thousand should be allowed to the petitioners. No evidence was furnished as to the comparable nature of the two tracts, either as to quantities involved in either tract or as to how the tracts were located.

In the case of both the Grays Harbor and the Lewis County timber, the petitioners arrived at the total depletion claimed by taking the unit factors as shown above and applying them to the total footage logged as determined by the revenue agent.. So many factors enter into a timber valuation, such as accessibility of the timber from a logging and marketing standpoint, character of timber, present and future availability, etc., that we consider the evidence here furnished as wholly insufficient to enable the Board to determine whether the petitioners are entitled to the relief for which they ask. The depletion as allowed by the Commissioner will, therefore, not be disturbed. Atkins Lumber Co., 1 B. T. A. 317; A. B. Nickey & Sons, 3 B. T. A. 173; Boyne City Lumber Co., 7 B. T. A. 36.

The next issue is whether the Commissioner was in error in not treating the incomes of A. B. Johnson and Henry Wilson as community income for the years involved. During these years each was a resident and citizen of California, was married and living with his wife in California, though at the same time each owned an interest in Wilson Bros. & Co., which company had property in the State of Washington from which these petitioners received income.

In the petition the error assigned is that the Commissioner erred in disregarding the laws of California with respect to community property, but subsequent to the filing of the petition and prior to the submission of evidence the Supreme Court in the case of United States v. Robbins, 269 U. S. 315, held that under the laws of California the wife has a mere expectancy while living with her husband and that the income received by him would not be taxable as community income. The petitioners now contend that the error was in not applying the laws of Washington as to community property with respect to the income derived from property within the State of Washington.

In Brookman v. Durkee, 46 Wash. 578; 90 Pac. 914, the Supreme Court of Washington said:

But while the statute, broadly construed, gives countenance to the contention of the respondents, we cannot think it was the intention of the Legislature that no distinction should be made between property acquired wholly within this state by the joint efforts of husband and wife and property acquired by them elsewhere and brought within this state. If it were the intent of the statute that property acquired in another jurisdiction and brought within the state should become community property, its legality might be seriously questioned. It would destroy vested rights. It would take from one of the spouses property over which he or she had sole and absolute dominion and ownership, and vest an interest therein in the other; and if the spouse should be the wife, it would not only take away her absolute title, but would take away from her her right to control and'manage the property, and make it subject to the separate debts of the husband, whether or not she derived any benefit from their contracting, or had any legal or moral obligation to pay them. Therefore, without entering further into the reasons for the rule, we are clear that personal property acquired by either husband or wife in a foreign jurisdiction, which is by law of the place where acquired the separate property of one or the other of the spouses, continues to be the separate property of that spouse when brought within this State; and it being the separate property of that spouse owning and bringing it here, property in this state, whether real or personal, received in exchange for it, or purchased by it, if it be money, is also the separate property of such spouse.

Likewise, see In re Burrows' Estate, 36 Cal. 113; 68 Pac. 488; Thayer v. Clarke, 77 S. W. 1050 (Texas Civil Appeals); Young v. Templeton, 4 La. Ann. 254; 50 Am. Dec. 563.

McKay on Community Property, p. 441, par. 651, makes this statement to a similar effect:

The legal effect of extending the law of separate and community property to nonresidents is to subject their property acquired in the state to the laws of the state, but it does not extend that law to their acquisitions made in another state and under the regime of the laws of that state. When property is brought within a community property state the rights vested by the law under which it was acquired are recognized and protected.

There is no satisfactory evidence in the record from which the Board can determine what portion, if any, of the distributive shares of F. A. Wilson and Henry Wilson of the income of the partnership from sources within the State of Washington was subject to division between them and their wives upon a community property basis. We therefore approve the Commissioner’s determination in this regard. See Julius Shafer, 2 B. T. A. 640.

The final issue in the case is whether A. B. Johnson and Henry Wilson should be taxed in 1916 or 1917 on a profit arising from the sale of the S. S. Columbia. The amount of the taxable income is not in issue, the question being, when did the sale take place ?

On September 28, 1916, while this ship was on a voyage, Wilson Bros. & Co. gave an option to the Hammond Lumber Co. to sell the vessel for $425,000, less 2y2 per cent commission, which option was to run for thirty days. The option provided that the Hammond Lumber Co. could elect to take delivery either during or upon completion of the charter party upon which the ship was then engaged, and if the former was elected, the Hammond Lumber Co. should assume the performance of the charter party, but if the latter, the remainder of the charter party, after exercise of the option, should be for the account of Wilson Bros. & Co.

In accepting the option, the Hammond Lumber Co. elected to take delivery of the vessel upon completion of the charter party and provided further that in the event of loss or nondelivery of the vessel, Wilson Bros. & Co. should repay the $42,500 tendered, the vessel to be solely at the risk of Wilson Bros. & Co. until delivery. The remainder of the purchase price was not to be paid until delivery and “the passing of customary and sufficient documents of title with warranty as to the whole of said steamship.” The vessel was delivered in 1917, at which time the remainder of the purchase price was paid.

Was this a sale in 1916 on the basis of the exercise of the option as shown in the communication of October 20, 1916, or was the sale completed in 1917? In the first place it should be noted that there were certain conditions set out in the acceptance which did not appear in the option, but whether these were sufficient to make of the so-called acceptance a counter offer which would require acceptance we will not decide since it appears that there are other features which preclude this being considered a sale on October 20, 1916.

In the first place neither delivery nor passage of title took place on October 20, 1916. Assuming the most favorable position for the petitioners, namely, that Wilson Bros. & Co. approved and accepted the letter of October 20, 1916, and thereby made it binding between the contracting parties, this of itself did not pass title to the vessel or make of it more than a binding contract to purchase the vessel upon the fulfillment of certain conditions. Admittedly, delivery was not and could not have been effected at this time, and the letter itself provided for a future passing of title when the balance of the purchase price was paid, which was in 1917.

Secondly, both the benefits and burdens with respect to the property remained with the vendor after October 20,1916, the acceptance expressly providing, “ said steamer to be solely at your risk * * * until said steamer is delivered to us.” The vendee did not elect to take delivery until completion of the charter party and, therefore, under the terms of the contract, the benefits and burdens accruing during the remainder of the voyage accrued to the vendor.

We are of the opinion that upon approval and acceptance of the letter of October 20, 1916, by the vendors, there came into being an executory contract under which the parties had rights on which they could sue and be sued, but this, of itself, did not make a sale. Where delivery has taken place, but title has not passed, or where the benefits and burdens of ownership accrue to the vendee prior to the making of delivery and transfer of title, difficulty may arise in. determining whether a sale has been effected, but when delivery has not been effected, title has not been transferred and the benefits and burdens of ownership remain with the vendor, we fail to see how there can be any question that a sale has not yet been completed.

Williston on Sales, vol. 1, p. 3, makes this statement with regard to a sale:

The most fundamental distinction in the law of sales is between a contract to sell in the future and a present sale. The distinction is often expressed by the terms “ executory ” and “ executed ” sales. Whether a bargain between parties is a contract to sell or an actual sale depends upon whether the property in the goods is transferred. If it is transferred, there is a sale, an executed sale, even though the price be not paid.

In De Bary v. Dunne, 172 Fed. 940, the court stated—

A sale is briefly defined as a contract by which property is transferred from the seller to the buyer for a fixed price in money, paid or agreed to be paid by the buyer.

The Board is of the opinion that the Commissioner was correct in treating the sale as having taken place in 1917, and, consequently, his action in taxing the profits accruing therefrom to A. B. Johnson and Henry Wilson in 1917 is sustained.

Reviewed by the Board.

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

Millieen not participating.